City of Independence, Missouri. Report to the Honorable Mayor and City Council December 20, 2016

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1 City of Independence, Missouri Report to the Honorable Mayor and City Council December 20, 2016

2 December 20, 2016 To the Honorable Mayor and Members of the City Council City of Independence, Missouri Independence, Missouri 4801 Main Street Suite 400 Kansas City, MO O F We are pleased to present this report related to our audit of the basic financial statements of the City of Independence, Missouri (the City) as of and for the year ended June 30, This report summarizes certain matters required by professional standards to be communicated to you in your oversight responsibility for the City s financial reporting process. This report is intended solely for the information and use of the City Council and management and is not intended to be, and should not be, used by anyone other than these specified parties. It will be our pleasure to respond to any questions you have about this report. We appreciate the opportunity to continue to be of service to the City of Independence, Missouri.

3 Contents Required communications 1-2 Summary of significant accounting estimates 3-5 Summary of uncorrected misstatements 6-7 Exhibit A Significant written communications between management and our firm Representation letter Written communications of control deficiencies

4 Required Communications Generally accepted auditing standards (AU-C 260, The Auditor s Communication With Those Charged With Governance) require the auditor to promote effective two-way communication between the auditor and those charged with governance. Consistent with this requirement, the following summarizes our responsibilities regarding the basic financial statement audit as well as observations arising from our audit that are significant and relevant to your responsibility to oversee the financial reporting process. Area Our Responsibilities With Regard to the Financial Statement Audit Overview of the Planned Scope and Timing of the Financial Statement Audit Accounting Policies and Practices Comments Our responsibilities under auditing standards generally accepted in the United States of America and Government Auditing Standards issued by the Comptroller General of the United States have been described to you in our arrangement letter dated July 19, Our audit of the financial statements does not relieve management or those charged with governance of their responsibilities, which are also described in that letter. We have issued a separate communication regarding the planned scope and timing of our audit and have discussed with you our identification of and planned audit response to significant risks of material misstatement. Preferability of Accounting Policies and Practices Under generally accepted accounting principles, in certain circumstances, management may select among alternative accounting practices. In our view, in such circumstances, management has selected the preferable accounting practice. Adoption of, or Change in, Accounting Policies Management has the ultimate responsibility for the appropriateness of the accounting policies used by the City. In the current year, the City adopted the following Governmental Accounting Standards Board (GASB) Statement: GASB Statement No. 72, Fair Value Measurement and Application. This statement addresses accounting and financial reporting issues related to fair value measurements and provides guidance for: determining a fair value measurement; applying fair value to certain investments; and disclosures related to all fair value measurements. The adoption of this Statement added additional disclosures to the financial statements. Significant or Unusual Transactions We did not identify any significant or unusual transactions or significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus. Management s Judgments and Accounting Estimates Summary information about the process used by management in formulating particularly sensitive accounting estimates and about our conclusions regarding the reasonableness of those estimates is in the attached Summary of Significant Accounting Estimates. 1

5 Area Audit Adjustments Uncorrected Misstatements Disagreements With Management Consultations With Other Accountants Significant Issues Discussed With Management Significant Difficulties Encountered in Performing the Audit Accounting Pronouncements Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Significant Written Communications Between Management and Our Firm Comments There was one audit adjustment made to the original trial balance presented to us to begin our audit. This entry was in the Power and Light Enterprise Fund to record capitalized interest for approximately $840,000. Uncorrected misstatements are summarized in the attached Summary of Uncorrected Misstatements. We encountered no disagreements with management over the application of significant accounting principles, the basis for management s judgments on any significant matters, the scope of the audit, or significant disclosures to be included in the basic financial statements. We are not aware of any consultations management had with other accountants about accounting or auditing matters, other than the auditors who completed the audit of a certain component of the City as indicated in our Independent Auditor s Report. No significant issues arising from the audit were discussed with or were the subject of correspondence with management. We did not encounter any significant difficulties in dealing with management during the audit. Please refer to Note 1(r) of the financial statements for new accounting pronouncements that have been recently issued that may affect the City s financial reporting in future periods. We have separately issued a report on internal control over financial reporting and on compliance and other matters based on an audit of the basic financial statements, as required by Government Auditing Standards. This communication is included within the City s Compliance Report for the year ended June 30, Copies of significant written communications between our firm and the management of the City, including the representation letter provided to us by management, are attached as Exhibit A. 2

6 Summary of Significant Accounting Estimates Accounting estimates are an integral part of the preparation of financial statements and are based upon management s current judgment. The process used by management encompasses their knowledge and experience about past and current events and certain assumptions about future events. You may wish to monitor throughout the year the process used to determine and record these accounting estimates. The following describes the significant accounting estimates reflected in the City s June 30, 2016 basic financial statements. Estimate Depreciable Useful Life and Salvage Value of Capital Assets Incurred But Not Reported (IBNR) Liability for Worker s Compensation and Health Accounting Policy The depreciable useful life of capital assets is set at the estimated useful life of the related asset. Salvage value is based upon an estimate of what the value of the property will be when the City is through using the asset. Management s Estimation Process The determination is made at the time the asset is placed into service and invoices various judgements and assumptions based on prior experience. Under the accrual basis The City engages an of accounting, the City actuary to compute the records an estimate for IBNR based on the data self-insurance liabilities provided by the City of based on actual claims outstanding claims, history outstanding at year-end of claims, and various and an amount for judgements and claims that have been assumptions. incurred but not Management reviews the reported. actuarial results. Basis for Our Conclusions on Reasonableness of Estimate We analyzed management s methodology for assigning useful lives to capital assets, tested the capital asset records and believe the estimates used by management of the City are reasonable. We tested the propriety of the information provided to the actuary. We believe the estimates used by management are reasonable. Fair Value of Investments The City records its investments at the estimated fair value. If available, quoted market prices are used to value instruments. Securities traded on a national or international exchange are valued at the last reported sales price at current exchange rates. Where marketable securities are not listed on an exchange, quotations are obtained from brokerage firms or national pricing services. Investments that do not have an established market are reported at estimated fair value. We tested the proprietary of information underlying management s estimates, using a thirdparty independent pricing source. Based on our procedures, we conclude that management s estimate is reasonable. 3

7 Estimate Other Postemployment Benefit Plan (OPEB) Assumptions Allowance for Doubtful Accounts Unbilled Revenue Accounting Policy Management s Estimation Process The City has an The City utilizes the actuarial valuation services of an actuary to performed to determine determine the City s the annual required Annual Required contribution. Any Contribution. Management difference between the and the actuary determine annual required the appropriateness of the contribution and actual actuarial assumptions to contribution made is be utilized. The actuary recorded as an asset or then performs the obligation in the calculation, which is government-wide and reviewed and approved by proprietary fund management of the City. financial statements of the City. The City records accounts receivable at its net realizable value. The City records a receivable for the estimated amount of revenue related to unbilled power and light, water, and sanitary sewer at the end of the year. The allowance for doubtful accounts is based on management s estimate of collectability of identified receivables, as well as aging of customer accounts. The allowance is adjusted as information and specific accounts become available. The City also compares current allowance amounts to prior-year collection or write-off experience. The estimate is based on past history and cycles billed prior to the end of the year. Basis for Our Conclusions on Reasonableness of Estimate We obtained actuarial calculation reports and concluded the estimates used by management are reasonable. We tested the underlying information supporting this allowance, including the most recent aging reports and collection experience. We concluded that management s estimate is reasonable. We tested the information used to calculate the estimated receivable and concluded that management s estimates are reasonable. 4

8 Estimate Net Pension Liability (NPL) Accounting Policy The City s net pension liability and related deferred inflows and outflows of resources and pension expenses from participating as a member of the Missouri Local Government Employees Retirement System (LAGERS) are recorded in the full accrual statements in accordance with GASB Statement Nos. 68 and 71. Management s Estimation Process LAGERS uses an actuary to calculate the NPL and expense based on assumptions and estimates established by LAGERS Board and management from past history and investment returns. City management reviews the actuarial results and considers the appropriateness of the assumptions used by LAGERS. Basis for Our Conclusions on Reasonableness of Estimate We analyzed management s methodology, tested the underlying data, obtained the calculation and actuarial report. We concluded that management s estimates are reasonable. 5

9 Summary of Uncorrected Misstatements During the course of our audit, we accumulated uncorrected misstatements that were determined by management to be immaterial, both individually and in the aggregate, to the financial position, results of operations, and cash flows and to the related basic financial statement disclosures. Following is a summary of those differences. Debit (Credit) to Correct the Misstatements Governmental Activities Assets Liabilities Net Position Revenue Expense Description: Carryover impact from previous years $ - $ - $ 606,000 $ (307,000) $ (299,000) Current misstatement, factual misstatements: Underaccrual of sales tax 40,000-76,000 (116,000) - Underaccrual of excise tax 57,000 - (34,000) (23,000) - Underaccrual of accounts payable - (91,000) ,000 Current misstatement, projected misstatement: Underaccrual of accounts payable - (175,000) ,000 Subtotal $ 97,000 $ (266,000) 648,000 $ (446,000) $ (33,000) Effect of current year passed adjustments on net position (479,000) Total $ 169,000 Debit (Credit) to Correct the Misstatements Business-Type Activities Assets Liabilities Net Position Revenue Expense Description: Carryover impact from previous years $ - $ - $ 17,000 $ - $ (17,000) Current misstatement, factual misstatements: Underaccrual of accounts payable - (110,000) ,000 Current misstatement, projected misstatement: Underaccrual of accounts payable - (185,000) ,000 Subtotal $ - $ (295,000) 17,000 $ - $ 278,000 Effect of current year passed adjustments on net position 278,000 Total $ 295,000 Debit (Credit) to Correct the Misstatements General Fund Assets Liabilities Fund Balance Revenue Expenditure Description: Carryover impact from previous years $ - $ - $ 205,000 $ (128,000) $ (77,000) Current misstatement, factual misstatements: Underaccrual of sales tax 33, (33,000) - Underaccrual of excise tax 57,000 - (34,000) (23,000) - Underaccrual of accounts payable - (91,000) ,000 Current misstatement, projected misstatement: Underaccrual of accounts payable - (175,000) ,000 Subtotal $ 90,000 $ (266,000) 171,000 $ (184,000) $ 189,000 Effect of current year passed adjustments on fund balance 5,000 Total $ 176,000 6

10 Debit (Credit) to Correct the Misstatements Net Position/ Expense/ Aggregate Remaining Funds Assets Liabilities Fund Balance Revenue Expenditure Description: Carryover impact from previous years $ - $ - $ 401,000 $ (179,000) $ (222,000) Current misstatement, factual misstatements: Underaccrual of sales tax 7,000-76,000 (83,000) - Subtotal $ 7,000 $ - 477,000 $ (262,000) $ (222,000) Effect of current year passed adjustments on net position/fund balance (484,000) Total $ (7,000) Debit (Credit) to Correct the Misstatements Power and Light Fund Assets Liabilities Net Position Revenue Expense Description: Carryover impact from previous years $ - $ - $ - $ - $ - Current misstatement, factual misstatements: Underaccrual of accounts payable - (23,000) ,000 Current misstatement, projected misstatement: Underaccrual of accounts payable - (71,000) ,000 Subtotal $ - $ (94,000) - $ - $ 94,000 Effect of current year passed adjustments on net position 94,000 Total $ 94,000 Debit (Credit) to Correct the Misstatements Sanitary Sewer Fund Assets Liabilities Net Position Revenue Expense Description: Carryover impact from previous years $ - $ - $ - $ - $ - Current misstatement, factual misstatements: Underaccrual of accounts payable - (87,000) ,000 Current misstatement, projected misstatement: - Underaccrual of accounts payable - (114,000) ,000 Subtotal $ - $ (201,000) - $ - $ 201,000 Effect of current year passed adjustments on net position 201,000 Total $ 201,000 7

11 Exhibit A Significant Written Communications Between Management and Our Firm

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20 December 20, 2016 To Management and the Honorable Mayor and Members of the City Council of the City of Independence, Missouri 4801 Main Street Suite 400 Kansas City, MO O F In planning and performing our audit of the financial statements of the City of Independence, Missouri (the City) as of and for the year ended June 30, 2016, in accordance with auditing standards generally accepted in the United States of America, we considered the City s internal control over financial reporting (internal control) as a basis for designing audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City s internal control. Accordingly, we do not express an opinion on the effectiveness of the City s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A deficiency in design exists when (a) a control necessary to meet the control objective is missing, or (b) an existing control is not properly designed so that, even if the control operates as designed, the control objective would not be met. A deficiency in operation exists when a properly designed control does not operate as designed or when the person performing the control does not possess the necessary authority or competence to perform the control effectively. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Certain deficiencies in internal control that have been previously communicated to you, in writing, by us or by others within your organization are not repeated herein. Following are descriptions of other identified deficiencies in internal control that we determined did not constitute significant deficiencies or material weaknesses: Cutoff procedures to identify liabilities as of year-end In order to determine expenditure accruals at year-end, the City reviews all invoices received for approximately three weeks after year-end. The Finance Department also sends communications to other departments requesting information on any outstanding invoices they are aware of pending from vendors. We noted several expenditures that should have been accrued as of year-end and were not.

21 City of Independence, Missouri December 20, 2016 Page 2 Generally accepted accounting principles (GAAP) requires all expenditures be recognized in the period they are incurred regardless of when the invoice is received. While it is acceptable to establish a policy such as a three-week accrual period, implementation of the policy should not result in financial statements that are materially different than what GAAP financial statements would be. The expenditures that should have been accrued were considered not to be a material misstatement of the financial statements and were not posted to the general ledger. Instead the estimated amount of underaccrued liabilities, capital asset additions and expenditures as a result of our audit procedures are listed on the summary of uncorrected misstatements. We recommend the City establish additional procedures to ensure accruals and capital asset additions are recorded based on the date the expenditure is incurred, and that reviews are performed after the three-week cutoff period for any additional accruals that could be material to the basic financial statements. Capitalized Interest During the current year audit, we noted that no capitalized interest had been recorded in the Power and Light fund despite there being outstanding bonds within the fund. Management had noted that no drawdowns had been made on the debt since fiscal year GAAP requires interest to be capitalized as long as the following three criteria are met: 1) capital outlay for assets is being made; 2) activities to ready the asset for its intended use are in progress; and 3) interest costs are being incurred. Management recorded an entry for approximately $840,000 and that entry is reflected in the financial statements. We recommend the City establish procedures to ensure that interest is being properly capitalized for all funds with outstanding debt that are incurring interest and adding capital assets. In addition, this letter includes comments and suggestions with respect to matters that came to our attention in connection with our audit of the financial statements of the City as of and for the year ended June 30, These items are offered as constructive suggestions to be considered part of the ongoing process of modifying and improving the City s practices and procedures. Uniform Grant Guidance Update The Office of Management and Budget (OMB) issued Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards on December 26, This Uniform Grant Guidance supersedes and streamlines requirements from eight different grant circulars into one set of guidance contained in Title 2 of the CFR, Subtitle A, Chapter II, Part 200. The new administrative requirements and cost principles included in this new guidance is applicable for all new federal awards made after December 26, 2014 and to additional funding to existing awards (also known as funding increments) after December 26, One of the new requirements is over procurement policies and processes. There are many resources available to assist with implementation of this new guidance. New Single Audit requirements related to this guidance are effective for the current fiscal year but the new procurement requirement has been extended for a year. RSM would recommend the City put a procurement policy into place regarding the new requirements. All entities receiving federal funding should be familiar with this new Uniform Grant Guidance and have a plan in place to become compliant. Continuing Disclosure Requirements The SEC recently issued a press release announcing enforcement actions against 71 municipal issuers and other obligated persons for violations in municipal bond offerings. The SEC found that from 2011 to 2014, the 71 issuers and obligated persons sold municipal bonds using offering documents that contained materially false statements or omissions about their compliance with continuing disclosure obligations. Continuing disclosure provides municipal bond investors with important information, including annual financial reports, on an ongoing basis. The SEC s 2012 Municipal Market Report identified issuers failure to comply with their continuing disclosure obligations as a major challenge for investors seeking information about their municipal bond holdings.

22 City of Independence, Missouri December 20, 2016 Page 3 The parties settled the actions without admitting or denying the findings and agreed to cease and desist from future violations. Pursuant to the terms of the initiative, they also agreed to undertake to establish appropriate policies, procedures, and training regarding continuing disclosure obligations; comply with existing continuing disclosure undertakings, including updating past delinquent filings, disclose the settlement in future offering documents, and cooperate with any subsequent investigations by the SEC. We suggest that management consider working with bond counsel to determine whether the City is in compliance with existing continuing disclosure requirements and that it established appropriate policies, procedures, and if necessary, training regarding continuing disclosure obligations. This communication is intended solely for the information and use of the City Council and management and is not intended to be, and should not be, used by anyone other than these specified parties.

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