Minutes – Feb 16, 2017 Audit Review
BERKSHIRE HILLS REGIONAL SCHOOL DISTRICT
Great Barrington Stockbridge West Stockbridge
AUDIT REVIEW MEETING
Du Bois Regional Middle School – Conference Room
February 16, 2017 – 6:00 p.m.
Present:
School Committee: S. Bannon, W. Fields, K. Piasecki, D. Singer, A. Hutchinson
Administration: P. Dillon, S. Harrison
Staff/Public: E. Mooney, Pat Scolanti
List of Documents Distributed:
Independent Auditors’ Report from Melanson Heath
Good Evening. Thank you all for attending. I am Pat Scolanti of Melanson Heath we are presenting the audit for the FY2016. This is the first year that we have done the audit. We have not done it in the past, so I don’t have a lot of historical perspective, but I will give you our results. A little background: We have done Great Barrington for a number of years so they are familiar with our firm. M & H is considered a large regional firm. We have 5 offices, 2 in MA, 2 in NH and 1 in ME. Firm wide we do somewhere around 90 – 100 cities, towns and school districts audits. I have been doing this for almost 28 years, working only with MA municipalities. What I thought I would do, particularly because I haven’t done a presentation to this group before, I will talk about what an audit does and doesn’t do because there I think there are a lot of misconceptions about that, and then speak to the financial statements and point out some numbers and then go over the management letter. I can answer any questions anybody has at any time.
From an overview in terms of what an audit does or doesn’t do, I think there are a lot of misconceptions about what an audit does and this idea that if you have an audit it means that every dollar was spent how it was intended, every law or compliance requirement related to that dollar was adhered, to but that is simply not true. Nobody could afford to have an audit that would give you that level of assurance, 100% assurance. All audits are designed and structured to be done in accordance with what are called generally accepted government accounting/auditing standards. The standards provide a framework that all auditors work under and one of the guiding principles is this concept of materiality. Materiality is a calculated number that we do in accordance with standards and materiality is going to vary depending on the size of your organization. Materiality for the city of Springfield is going to be different than a little town. In the district’s case, your general fund operating budget, which is generally the number we key off of, that budget is about $24 million that translates in the standard world to somewhere around $100,000 materiality for your general fund. That doesn’t say that we don’t look at things below $100,000 because we do. The end result of an audit is our opinion on your financial statements. In those terms, what we say is that they are materiality fairly stated. That guides to a fair extent the areas of transactional activity that happens and we look at, what we spend the most time on, things we pursue, etc.
The other part that we are responsible for as your auditors, is to understand and evaluate the internal controls over your major or material transaction cycles. We spend time understanding what process is over receipts and revenue, over vendor disbursements, over payroll disbursements, over your journal entries because they can have a significant effect of what is reported. Those are the basic standards that we would work under for an audit.
In terms of the financial statements, the financial statements are compiled in accordance with standards that are set by the Government Accounting Standards Board (GASB). GASB sets the rules for how your financial statements are reported. The financial statements basically have five components to them. The first is our audit opinion which is the only thing that is ours in this report. It is our opinion on your financial statements. So the beginning is our audit opinion. That is followed by a required narrative that is called the management discussion and analysis which is required to have certain components to have the purpose of try to explain the changes that happened during the year. Then there are essentially two sets of financial statements and then there are footnotes. Those are the basic five components. Of the two sets of financial statements, the first set is called government-wide financial statements. This was something that GASB came out with 10 years ago, 8 years ago. The purpose of the government-wide financial statements, is to try to take all of your activity, combine it into one consolidated operation and then convert it to what you would look like if you were a business. That is the only place you see your long-term liabilities, your debt, your OPEB obligation, pension, etc. It is also were your see your capital assets. The validity of that, or the usefulness of that, is highly debatable. We have to follow rules that GASB says, but you can make yourself look like a business but you are not a business. You can’t set prices. There are lots of reasons by that might not be useful. I will go over some specific numbers on key number pages. One thing it does do, because your long-term liabilities are recorded there, it does show you the effect if you were to recognize all of those liabilities. Those are government-wide financial statements which have nothing to do with how your budget or how you distinguish your general funds or grants, etc.
The second set of financial statements are called the funded basis financial statements and those are the ones that are more akin to any financial reports that you would see that are internal. For example, the balance sheet on the fund basis side is similar to the balance sheet that would be submitted to the state to get your E&D certified. Likewise budget vs actual.
Then there are the footnotes that goes to support and explain the numbers in the financial statements and the potential commitments or contingencies. That is generally in your financial statements, and GASB just keeps coming out with different standards and they are not practitioners so they don’t have to worry about how you calculate things.
The pages that I would point out, I am happy to answer any questions about any of this, the pages that I find most useful would be 10. Let’s start with page 10 which is the statement of …… this is essentially the balance sheet on the government-wide basis. This is where all of your activities, regardless if it is a grant, general fund, capitol project related, it is all combined in the one column then converted into full accrual basis which is how a business would record things.
I would have you start at the bottom of the page. The 2nd number up is a barracked number, $8.4 million. Generally speaking, brackets in a financial statement are not good. What that indicates is a deficit in unrestricted net assets. The reason you have a deficit is because what this reflects is all of your long-term unfunded liability. When you look a little further up the page, in the noncurrent liability section, other than the bonds payable, the long-term liability that is driving that deficit are the primarily the OPEB net obligation of $13 million and the net pension liability of $2.8 million. All told, your unfunded long-term liabilities not counting the debt is about $18 million. You have $18 million of liability. The other over that is reflected here at the top of the page under intergovernmental receivables, $7.4 million, that is what is due to you on your MSBA receivable that is intended to offset your debt expense for the next 2024, you are getting $1 million a year. Again, on the fund basis and the way your budget, you don’t count that $7.4 million as revenue, but if you are a business and you have this money owed to you, that’s revenue and that goes to increase your fund balance or your equity position. The
$-8 million in unrestricted is really the result of you starting with $2 million in your general operating. You are adding this $7 million in from a receivable that you are accruing and treating as if it is revenue, and then the effect of recording $18 million worth of unfunded liabilities. All of that is where you come out with your $-8 million. Most places have a negative. Whenever these long-term liabilities are recorded you don’t have a surplus tucked away to cover those liabilities. The negative is not factored into anybody decision making. It is understood what is driving that. That state doesn’t have an issue with it. They don’t even understand it. The state has come to us to give their people presentations.
- Bannon – Is that going to catch up with us ultimately? That is a question that one person in Great Barrington continually talks about. Unfunded pension liabilities….what will they do down the road, this way it is always unfunded so you can kick it down the road?
- Scolanti – That is definitely a part of it. I have a couple of thoughts on that. I want to take the two liabilities separately; the OPEB and the net pension liabilities. Starting with the net pension liabilities, that liability reflects your share of the Berkshire County Retirement System and you are about 6.7% of the system. That is 6 or 7% of their total liability. All pensions systems in MA have been on a funding schedule. They are not fully funded but on a funding schedule. So your assessments are set in a way to address that unfunded liability. So much of both liabilities are depending on the actual assumptions. How much interest is going to be earned, what kind of health trends and so forth as those assumptions change, liabilities change. On some level with both liabilities you are kicking it down the road and it could change. If they change the interest rate, they reduce the estimated interest earnings from 7.75 or 7.6 and that for you guys had an effect of about $700,000. To you, your share of it. That is how big those adjustments can be. They also changed one of their assumptions having to do with how they used it in a mortality table. It was the same table but a different scale. What they are trying to do is match the assumption to the reality.
Pension, at least in this state, has been recognized of funding that liability through these adjustments. Once the pension liability is funded the state will institute in some way some way to address this OPEB unfunded liability. I don’t know how they would do that but that is a school of thought. At some point when the pension is fully funded, which is going to happen at some point, you will have some money that you can then put aside toward OPEB or at least begin addressing.
- Hutchinson – What is OPEB? P. Scolanti – OPEB. Other Post-Employment Benefits. It is primarily what we are talking about for health insurance for retirees. S. Bannon – This is all subject, it has that little clause, subject to appropriate by the legislature? P. Scolanti – Well not really because it is by virtue of your Chapter 32B. You are committed to paying for the benefits and health insurance of your retirees once they hit 10 years. Is that right? S. Harrison – yes and you have accepted … P. Scolanti – How much you contribute whether it is, lowest is 50%, if you are at that low point, if you accept legislature that requires your retirees to go on Medicare when possible. S. Harrison – It is mandatory now.
As you can see it is $13 million. Now the $13 million is only a portion of your actual liability. The reason the OPEB liability is so much bigger than your net pension liability is because you don’t pay pension on your teachers. Mass Teachers pay that. You don’t pay that but you pay the health insurance for everyone so you have to consider how many people. This liability reflects everyone that is retired now and everyone that is working now. What the likelihood of the future costs associated with those people, so people that have been here for five years or 12 years, they may have 30 years to go before they may take this benefit, but the cost of that is factored into what the actuary thinks the total liability is going to be. S. Bannon – no one talked about that liability before, it’s always been there… P. Scolanti – exactly. It is just now being required to be reported. To me that was the purpose of GASB issuing the statement that you have to put the liability on here because it exists. It absolutely has gotten people talking. In the pension liability which just was recorded for the first time in FY15 as a result of a GASB standard. First came the OPEB standard that said you have to record this liability then came the pension. The difference is the pension liability standard is written so that the entire liability is recorded on the balance sheet. That is different from the old OPEB that is still in effect now. It is going to change in FY18 but as of right now and next year, that liability, the $13 million is not your total liability. The $13 million is increased incrementally each year. The calculation for that is you have an actuary come in and calculate your year-end liability which in your case is about $54 million according to the last actuarial. They come up with the $54 million using things like interest rates, health cost trends, all of those actuarial assumptions. They say it is $54 million and over a 30 year funding schedule you have to pay x dollars each year. In your case it is about $4.2 million. You are now paying some portion of your regular health insurance bill which is going toward your retirees just by nature. The actuary, based on information provided by the district, recognized that you added funding some of it and you are funding now about $1.7 million about 40% which is typical. That difference each year is what is getting added to the OPEB liability. In this case it would increase by $2.5 million. There is a difference between what the actuary says you should pay and what you are paying. It is increasing incrementally. In FY18, the latest GASB standard that came out said after they did the pension standard they came out and said it’s kind of stupid to record this incrementally because you have the whole liability, so the whole liability should be on your balance sheet. Anybody who is not in deficit now will be in FY18 including Great Barrington because in your case instead of it being $13 million it is going to be $54 million. They are crazy numbers. That is what the standard says. I have heard a lot of discussion about that OPEB number, because in reality you are on a pay-as-you-go basis and will continue that way so having a liability there is a recognition. The good news is while you are in deficit of $8.4 million that reflects basically $18 million for the unfunded liabilities plus the $7 million of receivables that you wouldn’t normally record so that net of $11 million is driving the $8 million deficit.
Page 12 – this is your balance sheet under the fund basis. This is what is akin to the reports that you would receive internally from the district. We didn’t make any correcting journal entries. We always make adjusting auditor adjustments for timing and other generally accepted accounting principles, but there were no correcting entries. It is the same as what you would receive internally. The first column is the general fund. I start from the bottom, so the third number up, $982,000 is your unrestricted surplus. That would be the starting point for your E&D certification, your unrestricted surplus. For example, if FY17 budget the district committed $125,000 of E&D to reduce assessments. That 125 is out of that $982,000. That number compared to the prior year almost doubled. It increased by about $500,000. That was driven by the results of the budget actual. That is what is driving that increase. Also the $900,000 figure is about 4% of your general fund budget which is very healthy. School districts as you know are limited to 5% before they have to refund any access to the member towns. Typically, in a healthy school district that is what we see. It was a very big increase. Turn to page 16 which is the budget actual. The top half of the page being new revenues and how you did compared to budget and the bottom half of the page is your expenditures. The variance column is whether you did better than budget on your revenues or your expenditures. That is the positive and negatives. On the revenue side, you did do better than budget by $59,000 which is .25% of your total budget. That is typical for a school district, because there is very limited revenue sources that aren’t known. Most of your revenues and assessments are coming from state aid which you already know. The positive variances there are really from either the things that are unexpected or things you deliberately budget lower. For example, the $36,000 on the intergovernmental line is primarily from Medicaid reimbursements. Those are small things but you ended positively so that’s good. The real bump in your restricted surplus figure, what is contributing to that is in the expenses that were underspent by $565,000 in total which is about 2% of the budget. That is a very big percentage. Obviously, the biggest number there is $475,000 in administrative and admin benefits. The category of that is a little misleading. What happens internally is the contingency line is what Sharon uses because Sharon has a very detailed budget monitoring process. As budgets are either underspent or overspent, transfers will be made from this contingency line to wherever they are needed in the budget. What you end up with at the end of the year are very small variances in other lines and then what is underspend gets closed out to the contingency budget line. Even though this variance shows up in this Admin and benefits line, it’s really driven by closeouts from other lines primarily utility and salt and sand budget. That was about $230,000. It was a light winter. The other was health insurance. The closeout of that was about $233,000. That was the result of conservative budgeting. Often times when the community sets a budget, they could assume a family plan level for all employees, but that is your insurance that you going to make your budget and not be short. If you need to move money around, you have some flexibility. S. Harrison – this year we went from the value plus plan to a deductible plan so when we did the budget, we used the higher rate plan, so we may again this year not have that much in there.
Those are the important numbers in the financial statement. I would be happy to answer any questions you might have. It was a very different presentation just pretty much based on the financial statements. All of the information is there but printed differently.
- Fields – So your assessment of our fiscal situation is? P. Scolanti – This year…healthy. Very healthy. 4% is very respectful. I would want to see you there every year. School districts are in a tough position. You are trying to run it in a thoughtful way and that leaves a surplus for expected situations.
- Fields – So we lost money on investments? I didn’t know we invested? P. Scolanti – No, you didn’t lose. The $6,000 is you, anticipated $10,000 but only took in $4,000. That is not how much you took in or lost. It is a difference between what you thought you were going to do and what you actually did.
In terms of definitions and comments, if you had an issue in internal control or a weakness that was really huge, it would be considered a material weakness. Right below that are things that aren’t that bad but are important and those are called sufficient efficiencies, and below that in terms of gradation, are simply recommendations for improvements, etc. All of the comments for the district are of that nature.
There is one compliance issue and that is the first management letter that has to do with our compliance testing on the Title I program. The district wrote a very comprehensive response to the comment and I understand…S. Harrison – I didn’t write that one; P. Dillon – I didn’t write it either.
- Scolanti – We are doing federal grant audits because your total federal expenses are over $750,000 which means your financials have to be audited, and this by the federal civil act. Your financial statement have to audited, and certain grants have to be audited. So when we do those grant audits we do them in accordance with criteria that is set by the Feds, the Department of Education. While I don’t have a doubt that your Title I program is probably operating very efficiently and servicing all the students you need to, the finding is about the fact that the middle school had a targeted assistance type of grant. So in order for you to receive this money, you have agreed to provide Title I services to students who are eligible and only to those students that are eligible. That is different than a school-wide program which your elementary school ran which is all students receive services because every student could qualify. There is no distinction between the students. We had to test the eligibility for the middle school and there typically is a rank order or listing. In order to determine if a student is eligible for Title I services, means that they have an education need and you have composite scores from MCAS or other testing, Parent/Teacher recommendations, etc. You have a responsibility to evaluate the student, you come up with some sort of scoring and you determine most needy to least needy. You identify the student that you are going to provide services for. There was no rank order or listing that we were given and because you are able to serve all the students that need services. When we were able to get the list, we tested them and looked at the scores. One that we tested actually ranked advanced. That student should not have been eligible for Title I services. Our issue is that there was one on the list that wasn’t eligible. It is a clear explanation about how you are using the money. S. Bannon – I think the response to this is the most defensive I have ever seen. P. Scolanti – I would have had a discussion if the response was “you are completely wrong and we don’t agree” but it doesn’t say that. B. Fields – Actually they say that they like the way that we use it but the mandate of having a rank order is just an example of another stupid mandate that comes down from the top and doesn’t realize how we operate. I won’t go off on that again. P. Scolanti – I actually liked the response a lot and I understand it. What I wanted to make sure that you understood is that we are testing compliance under federal guidelines and if you don’t meet it, you don’t meet it.
The second issue is, one of the things that we were required to do under audit standards is test journal entries and look at controls over them. We selected 25 entries and looked at them. 11 of them we could tell were prepared by the accountant but you couldn’t see the documentation of it being reviewed but they probably were. If the tree falls in the forest kind of thing. If we don’t see evidence of it, did it really happen? So the first one has to do with approval documentation, the second just so happened because of the turnover and what was going on there with the business office and the treasurer ended up posting a journal entry which is a huge no-no from our prospective because you need that segregation of duties. That has to be there. So there was a case of that. The system should not let the treasurer make a journal entry.
The third issue has to do with modifying scholarship fund accounting. This was something we thought was worth considering. There is nothing wrong with how it is being done now. It has to do with how a scholarship is being recorded as an expense to you. From our prospective it made more sense to when you award it, to reserve that money, set it aside and record it as an expense only once the student has met the criteria. I think by changing the banks and having what is explained in the response, having these different pools of money you are doing the same thing.
The fourth one has to do with the short term borrowing that the district has to do for cash flow purposes and basically the district has a short-term note out there for $2.5 million all year. It is not highly unusual for a school district to have a note out but it is not generally a good financial indicator when that note has to be out for the entire year. It means you are never in a position, in theory, that you have enough in cash. I know that is not the case. I understand but it is not an efficient thing to do. The bigger consideration is the timing of the member assessments and the fact that from my experience, I looked at five other school districts to see when they are due and pretty consistently, the other school districts are due about a month earlier than they are here. That month makes a difference in terms of the cash flow, and that is not to say that if you did change it, you wouldn’t need to borrow short term but maybe just for a short period of time which would give a better indication of your financial position. S. Bannon – we weren’t able to change that in the Regional Agreement, right? S. Harrison – It is in the Regional Agreement to change that. P. Scolanti – Normally we would recommend you should change your regional agreement but we knew it was being worked on. It will help and be more consistent with other school districts.
The last comment has to do with preparing for, as was mentioned last year or the year before, the cost principles related to federal grants has changed and expanded dramatically. Any grant recipient was to have pretty extensive policies and procedures, and the one thing was not addresses or was deferred had to do with procurement and the rules over those. The feds said you have to follow all of these except procurement. They are going to defer for two years so as of this point those new rules are supposed to go into effect for FY18. They are being hotly contested right now what the final rule is going to be and if it will be ready for FY18 is up in the air. Our issue is that most communities follow Mass Law Chap 30B which is pretty restrictive, but the procurement rules are even more restrictive. Just something to be aware of.
Adjourned 7:51pm
Submitted by:
Christine M. Kelly, Recorder
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Christine M. Kelly, Recorder
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School Committee Secretary