BOARD OF DIRECTORS SPECIAL MEETING

Transcription

1 BOARD OF DIRECTORS SPECIAL MEETING Wednesday, March 28, 2018 at 5:00 pm Behavioral Health Center, Room 225, 201 Mulholland Bay City, MI AGENDA PAGE 1. CALL TO ORDER & ROLL CALL 2. PUBLIC INPUT (3 Minute Maximum Per Person) 3. FINANCIAL STATEMENT AUDIT AND COMPLIANCE AUDIT REPORTS FOR FISCAL YEAR Consideration of motion to adopt the financial statement audit report for fiscal year ending September 30, 2017 See pages Consideration of motion to adopt the compliance audit report for fiscal year ending September 30, 2017 See pages ADJOURNMENT

2 March 14, 2018 Management and the Board of Directors BayArenac Behavioral Health Authority Bay City, Michigan We have completed our audit of the financial statements of the governmental activities and the major fund of BayArenac Behavioral Health as of and for the year ended September 30, 2017, and have issued our report dated March 14, We are required to communicate certain matters to you in accordance with auditing standards generally accepted in the United States of America that are related to internal control and the audit. The following appendices to this letter sets forth those communications as follows: I. Auditors Communication of Significant Matters with Those Charged with Governance In addition, we have identified additional matters that are not required to be communicated but we believe are valuable for management: II. Matters for Management s Consideration We discussed these matters with various personnel in the Authority during the audit and have already met with management. We would also be pleased to meet with you to discuss these matters at your convenience. These communications are intended solely for the information and use of management, the Board of Directors, and others within the Authority, and are not intended to be and should not be used by anyone other than those specified parties. Saginaw, Michigan Page 2 of 77

3 Appendix I Auditors Communication of Significant Matters with Those Charged with Governance Professional standards require that we provide you with information about our responsibilities under auditing standards generally accepted in the United States of America, Government Auditing Standards and Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) as well as certain information related to the planned scope and timing of our audit. We have communicated such information in our engagement letter dated November 1, Professional standards also require that we communicate to you the following information related to our audit. Significant Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the organization are described in Note 1 of the financial statements. The Government has adopted Governmental Accounting Standards Board Statement (GASB) No. 74 Financial Reporting for Postemployment Plans Other Than Pensions. The GASB is effective October 1, Statement No. 74 improves the financial reporting of postemployment plans other than pensions through enhanced note disclosures and schedules of required supplementary information. We noted no transactions entered into by the organization during the year where there is lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. Accounting estimates are an integral part of the financial statements prepared by management and are based on management s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting BayArenac Behavioral Health s financial statements were: The useful lives of its capital assets. Useful lives are estimated based on the expected length of time during which the asset is able to deliver a given level of service. Net pension liability, and related deferred outflows of resources and deferred inflows of resources. The estimate is based on an actuarial report. Other postemployment benefits. The estimate is derived from a calculation including factors such as: life expectancy, historical insurance cots, probability of retirement, and the applicable federal interest rates in effect at the time of the calculation. We evaluated the key factors and assumptions used to develop these estimates in determining that they are reasonable in relation to the financial statements taken as a whole and free from bias. Disclosures in the financial statements are neutral, consistent and clear. Accounting Standards and Regulatory Updates Accounting Standards The Governmental Accounting Standards Board has released the following Statements: Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions establishes standards for recognizing and measuring liabilities, deferred outflows of resources, 2 Page 3 of 77

4 deferred inflows of resources, and expense/expenditures. For defined OPEB plans, this Statement identifies the methods and assumptions that are required to be used to project benefit payments, discount projected benefit payments to their actuarial present value, and attribute that present value to periods of employee services. It also requires additional note disclosures and required supplementary information. Statement No. 75 is effective for the fiscal year ending September 30, Statement No. 81, Irrevocable SplitInterest Agreements is to improve accounting and financial reporting for irrevocable splitinterest agreements by providing recognition and measurement guidance for situations in which a government is a beneficiary of the agreement. Statement No. 81 is effective for the fiscal year ending September 30, Statement No. 83, Certain Asset Retirement Obligations establishes criteria for determining the timing and pattern of recognition of a liability and a corresponding deferred outflow of resources for asset retirement obligations (AROs). An ARO is a legally enforceable liability associated with the retirement of a tangible capital asset. The requirements of this Statement are effective for the fiscal year ending September 30, Statement No. 84, Fiduciary Activities improves the guidance regarding the identification of fiduciary activities for accounting and financial reporting purposes and how those activities should be reported. The criteria generally is on (1) is the government controlling the assets of the fiduciary activity and (2) the beneficiaries with whom a fiduciary relationship exists. The four fiduciary funds that should be reported, if applicable: (1) pension (and other employee benefit) trust funds, (2) investment trust funds, (3) privatepurpose trust funds, and (4) custodial funds. Custodial funds generally will report fiduciary activities that are not held in a trust or similar arrangement that meets specific criteria. The requirements of this Statement are effective for the fiscal year ending September 30, Statement No. 85, Omnibus 2017 addresses practice issues that were identified during implementation and application of certain GASB Statements. This statement covers issues related to blending component units, goodwill, fair value measurement and application, and postemployment benefits (pensions and other postemployment benefits), which is effective for the fiscal year ending September 30, Statement No. 86, Certain Debt Extinguishment Issues is to improve consistency in accounting and financial reporting for insubstance defeasance of debt. The statement provides uniform guidance for derecognizing debt that is defeased in substance, regardless of how cash and other monetary assets placed in an irremovable trust for the purpose of extinguishing that debt were acquired. The effective date is for the fiscal year ending September 30, Statement No. 87, Leases is to improve accounting and financial reporting for leases. It establishes a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset. The effective date is for the fiscal year ending September 30, The Authority is evaluating the impact the above GASBs will have on its financial reporting. Regulatory and Other Updates Chart of Accounts The Michigan Department of Treasury released a new version of the uniform chart of accounts in April Significant changes were made which expanded the breadth of information now available to governmental entities. We encourage your organization to review the uniform chart of accounts to ensure the accounting records are in compliance with the guidelines set forth in the expanded version. The uniform chart of accounts is available on the Michigan Department of Treasury s website at 3 Page 4 of 77

5 If questions arise from your review of this information please contact us for assistance. Cybersecurity Posture Cybersecurity posture, an overall measure of cybersecurity strength, is more prevalent than ever as organizations continue to face cybersecurity risks. Billions of s are sent every day, some of which contain attachments with malicious files or malicious embedded links aimed at negatively impacting unsuspecting organizations. A recent study showed as many as four out of five US Companies have suffered from an attack. Not only can a successful attack cost thousands of dollars and put a strain on IT resources while remediation efforts are underway, but sensitive information may be breached. Risk assessment is a first step in mitigating cybersecurity risks and improving your organization s overall cybersecurity posture. The National Institute of Standards and Technology published Framework for Improving Critical Infrastructure Cybersecurity, which enables organizations, regardless of size, degree of cybersecurity risk, or cybersecurity sophistication, to apply the principles and best practices of risk management to improving the security and resilience of critical infrastructure. The framework is designed to cover five areas including identification, protection, detection, responsiveness and recovery. The publication can be found at Placing significant emphasis on evaluating your organization s cybersecurity posture, and channeling sufficient resources towards proper risk assessment, implementation, and education will reduce the likelihood of a cybersecurity threat, and help lessen the impact of a breach. Unclaimed Property Beginning in 2018, the State of Michigan will require the filing of zero balance reports for businesses and governmental agencies who hold property on behalf of others, such as uncashed payroll or vendor checks and other items comprising unclaimed property. This is a revision from the most recent change in 2012, which only encouraged, but did not require, reporting of zero unclaimed property situations. Under the negative attestation requirement, businesses and governmental agencies must ensure they are filing even in situations where entities have no unclaimed property. Current rules require unclaimed property to be identified as of March 31 st of each year and reported to the State on or before July 1. Property that has reached its applicable dormancy period (generally one year or three years) as of March 31 must be remitted with and reported on Michigan State Form 2011, Michigan Holder Transmittal for Annual Report of Unclaimed Property and the appropriate annual reporting form (there are separate forms for cash & safe deposit boxes and for securities). If the holder (business or government entity) has more than ten items to report, they must use electronic media for the annual report. The due date for this filing is July 1 (or the next work day if the 1 st is on a weekend). These rules remain unchanged, except that beginning in 2018, the negative attestation requirement will go into effect. Free software is available on the State of Michigan web site at The web site is a valuable resource for information regarding the law, filing requirements and related penalties, including the 33 page Manual for Reporting Unclaimed Property. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. 4 Page 5 of 77

6 Corrected and Uncorrected Misstatements Professional standards require that the auditor accumulate all known and likely misstatements identified during the audit, other than those the auditor believes to be trivial, and communicate them to the appropriate level of management. There were no misstatements detected as a result of audit procedures that were more than trivial. There were no uncorrected misstatements that were more than trivial. Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction that could be significant to the financial statements or the auditors report. We are pleased to report we had no disagreements with management during the audit. Management Representations We have requested certain representations from management that are included in the management representation letter dated as of the date of the audit report. Management s Consultations with Other Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a second opinion on certain situations. If a consultation involves application of an accounting principle to the Authority s financial statements or a determination of the type of auditor s opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the Authority s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. Emphasis of Matters in Independent Auditors Report The Authority made an adjustment to the net pension liability in the current year, which we thought to be fundamental to the users understanding of the financial statements. Our report will therefore include the following emphasis of matter paragraph: Emphasis of Matter Prior Period Adjustment As discussed in Note 11 to the financial statements, the Authority has decreased its beginning net position in the statement of activities by $8,556,709 as a result of a correction of an error in the allocation of Bay County Employees Retirement System s assets among group members. Our opinion is not modified with respect to this matter. 5 Page 6 of 77

7 Other Reports Other information that is required to be reported to you is included in the: 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. Please read all information included in that report to ensure you are aware of relevant information. Report on Required Supplementary Information With respect to the required supplementary information accompanying the financial statements, which includes management s discussion and analysis, budgetary comparison information, and pension and OPEB schedules, we applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. Report on Other Supplementary Information With respect to the supplementary information accompanying the financial statements, which includes the Supporting Schedule of Personnel Costs and the Supporting Schedule of Operating Expenditures, we made certain inquiries of management and evaluated the form, content, and methods of preparing the information to determine that the information complies with accounting principles generally accepted in the United States of America, the method of preparing it has not changed from the prior period, and the information is appropriate and complete in relation to our audit of the financial statements. We compared and reconciled the supplementary information to the underlying accounting records used to prepare the financial statements or to the financial statements themselves. 6 Page 7 of 77

8 Appendix II Matters for Management s Consideration In planning and performing our audit of the financial statements of BayArenac Behavioral Health Authority as of and for the year ended September 30, 2017, we considered BayArenac Behavioral Health Authority s internal control over financial reporting (internal control) as a basis for designing our audit procedures 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 Authority s internal control. Accordingly, we do not express an opinion on the effectiveness of the Authority s internal control. However, during our audit we became aware of the following matters for management s consideration that are opportunities for strengthening internal controls. This letter does not affect our report dated March 14, 2018, on the financial statements of BayArenac Behavioral Health Authority. Our comments and recommendations regarding those matters are: Ability to Pay As a part of the compliance examination, we tested consumer s ability to pay. We discovered four instances when ability to pay was not determined for the period that the consumer was serviced. In each case, the ability to pay determination should have been completed by providers. Our sample did not identify in cases in which the forms were missing or incomplete when the determination was the Authority s responsibility. We recommend the ability to pay forms are fully completed and timely in all cases. We recommend the forms are retained with all other consumer information. Timesheet Approval As a part of our payroll tests, we reviewed various timesheets prepared by employees and approved by supervisors of the Authority. We noticed several instances of supervisors signing off on timesheets with dates prior to the end of the pay periods covered by the timesheets. Because supervisors should be signing off to attest employees worked the hours indicated on the timesheets, we feel all time sheets should be approved only after the time worked has occurred. We recommend recommunicating the importance of reviewing and approving timesheets to all supervisors. We recommend all time sheets are approved only after the pay period is finished. 7 Page 8 of 77

9 BayArenac Behavioral Health Authority Financial Statements September 30, 2017 YEO & YEO CPAs & BUSINESS CONSULTANTS Page 9 of 77

10 Table of Contents Section Page 1 Independent Auditors Report Management s Discussion and Analysis Basic Financial Statements Governmentwide Financial Statements Statement of Net Position 3 1 Statement of Activities 3 2 Fund Financial Statements Governmental Funds Balance Sheet 3 3 Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Position 3 4 Statement of Revenues, Expenditures and Changes in Fund Balance 3 5 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balance of Governmental Funds to the Statement of Activities 3 7 Notes to the Financial Statements 3 8 Page 10 of 77

11 Section Page 4 Required Supplementary Information Statement of Revenues, Expenditures and Changes in Fund Balance Budget and Actual General Fund Bay County Employees Retirement System Schedule of Employer Contributions Schedule of Changes in Net Pension Liability (Asset) and Related Ratios Schedule of Employers Net Pension Liability (Asset) Bay County Retiree Health Care Plan Other Postemployment Benefits Schedule of Employer Contributions Schedule of Funding Progress Schedule of Investment Returns Other Supplementary Information Supporting Schedule of Personnel Costs Supporting Schedule of Operating Expenditures 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 5 3 Page 11 of 77

12 Independent Auditors Report Board of Directors and Management BayArenac Behavioral Health Authority Bay City, Michigan Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities and the major fund of BayArenac Behavioral Health Authority, as of and for the year ended September 30, 2017, and the related notes to the financial statements, which collectively comprise the Authority s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 1 1 Page 12 of 77

13 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities and the major fund of BayArenac Behavioral Health Authority, as of September 30, 2017, and the respective changes in financial position for the year then ended in accordance with accounting principles generally accepted in the United States of America. Prior Period Adjustment As discussed in Note 11 to the financial statements, the Authority has decreased its beginning net position in the statement of activities by $8,556,709 as the result of a correction of an error in the allocation of the Bay County Employees Retirement System s assets among group members. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis, budgetary comparison information, pension and other postemployment benefit schedules, as identified in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information, because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Supplementary Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise BayArenac Behavioral Health Authority s basic financial statements. The other supplementary information, as identified in the table of contents, is presented for purposes of additional analysis and is not a required part of the basic financial statements. The other supplementary information, as identified in the table of contents, is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. The other supplementary information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements 1 2 Page 13 of 77

14 or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the other supplementary information, as identified in the table of contents, is fairly stated, in all material respects, in relation to the basic financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated March 14, 2018 on our consideration of BayArenac Behavioral Health Authority's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is solely to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of BayArenac Behavioral Health Authority s internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering BayArenac Behavioral Health Authority s internal control over financial reporting and compliance. Saginaw, Michigan March 14, Page 14 of 77

15 BayArenac Behavioral Health Authority Management s Discussion and Analysis For the Year Ended September 30, 2017 This section of the BayArenac Behavioral Health Authority (the Authority ) annual financial report presents management s discussion and analysis of financial performance for the year ended September 30, This discussion and analysis is designed to assist the reader in focusing on significant financial issues and activities, and to identify significant changes in financial position and results of operations. Please read this section in conjunction with the auditor s report and with our financial statements, notes to financial statements and supplemental information taken as a whole. During fiscal year 2014, the Authority became a member of MidState Health Network (MSHN), the newly formed, designated Prepaid Inpatient Health Plan (PIHP) for a twentyone county region consisting of Arenac, Bay, Clare, Clinton, Eaton, Gladwin, Gratiot, Hillsdale, Huron, Ingham, Ionia, Isabella, Jackson, Mecosta, Midland, Montcalm, Newaygo, Osceola, Saginaw, Shiawassee and Tuscola counties. The Authority subcontracts for Medicaid services and supports through an agreement with MSHN while State General Fund revenue and other grants and earned contracts continue to be sourced directly from the State and are exclusively related to Arenac and Bay counties. Effective October 1, 2015, MSHN no longer subcontracted with the Authority for the provision of substance use disorder services in a twelve county area which included, Arenac, Bay, Clare, Gladwin, Huron, Isabella, Mecosta, Midland, Montcalm, Osceola, Shiawassee and Tuscola counties. MSHN began contracting directly with substance use disorder providers for those services. OVERVIEW OF FINANCIAL STATEMENTS Basic financial statements, in accordance with generally accepted accounting principles (GAAP) according to GASB 34, require the presentation of two types of financial statements. These are governmentwide financial statements and fund financial statements. Governmentwide financial statements include the statement of net position and the statement of activities. These provide both longterm and shortterm information, and present a broad view of the overall financial status in a manner similar to a private sector business. Information presented in these statements is on the accrual basis of accounting. Longterm assets are capitalized and depreciated. Longterm debt is recorded as a liability. Revenues are recorded when earned and expenses recorded when incurred, without regard to the timing of cash receipts or disbursement. The statement of net position includes all assets and deferred outflows of resources and liabilities and deferred inflows of resources, with the difference between those reported as net position. Overtime, increases or decreases in net assets may serve as a useful indicator of improving or deteriorating financial position. The statement of activities presents information showing how net assets changed during the year as a result of operating activity. Fund financial statements contain individual groups of related accounts and are used to report current assets, current liabilities, fund balance, revenues and expenditures for specific activities or funds segregated for legal requirements or other governmental objectives. These are presented in more detail as compared to the governmentwide statements. The fund financial statements are reported on the modified accrual basis of accounting. Only those assets that are measurable and currently available are reported. Liabilities are recognized only to the extent that they 2 1 Page 15 of 77

16 BayArenac Behavioral Health Authority Management s Discussion and Analysis For the Year Ended September 30, 2017 are normally expected to be paid with current financial resources. Purchased capital assets are reported as expenditures in the year of acquisition. Issuance of debt is recorded as a financial resource with current year payment of principal and interest recorded as expenditures. Fund financial statements are divided into two categories. These are governmental fund financial statements and proprietary fund financial statements. Governmental fund financial statements show how the community mental health supports and services programs were financed in the short term as well as what remains for future spending. SUMMARY OF NET POSITION The following summarizes the assets, liabilities and net position on an authoritywide basis as of September 30, 2017 and Summary of Net Assets As of September 30, 2017 & 2016 (In $000s) Assets Current assets $ 6,727 $ 5,894 Restricted assets 1,282 1,183 Net OPEB asset Net Pension asset 0 7,576 Capital assets 3,954 3,703 Total assets 12,815 18,870 Deferred outflows of resources 4,905 3,891 Total assets and deferred outflows of resources 17,720 22,761 Liabilities Current liabilities $ 5,543 $ 4,533 Noncurrent liabilities 4,132 1,607 Total liabilities 9,675 6,140 Deferred amount on net pension liability Total liabilities and deferred inflows of resources 10,181 6, Page 16 of 77

17 BayArenac Behavioral Health Authority Management s Discussion and Analysis For the Year Ended September 30, 2017 Net Position Investment in capital assets 3,141 3,122 Restricted net position 0 7,576 Unrestricted 4,398 5,296 Total net position $ 7,539 $ 15,994 Total Net Position decreased $8.5M due to a correction in the allocation of the Bay County Employees Retirement System s assets among group members. Current financial position is defined as the excess of current assets over current liabilities. When current assets exceed current liabilities this is an indicator of financial strength and an increase in current financial position is an indicator of improving financial position. The current financial position (excess of current assets over current liabilities) was a positive $1.2 million, a decrease of $180 thousand from the prior year. Current assets consist of cash and investments, accounts receivable, amounts due from others and prepaid expenses. These are available for current operations and to pay current obligations. Current liabilities include accounts payable, accrued payroll, related taxes and benefits, amounts due to others and deferred revenue. Restricted assets consist of cash, investments and accrued interest receivable. These assets are restricted for payment of compensated absences and restricted for capital purposes. Restricted assets of $1.3 million have increased 8.4% from the prior year. Assets restricted for capital purposes (funded depreciation) was established in fiscal Annual funding of this account is optional and is not to exceed the amount of depreciation expense recorded for the fiscal year. The maximum amount of this account is not to exceed the total of accumulated depreciation on capital assets. For fiscal 2017, the Authority s annual depreciation expense was $173 thousand, which represents depreciation expense on assets purchased after October 1, The Authority did not fully fund this amount for fiscal Capital assets consist of property and equipment having an estimated useful life of more than one year. In fiscal 2017, $424 thousand was expended for capital acquisitions. Depreciation expense on previously existing and newly acquired capital assets was $173 thousand. The net change in capital assets was a decrease of $335 thousand for the year. When capital expenditures exceed depreciation expense, the net increase represents an investment or expansion of capital resources. Conversely, a net decrease represents a reduction in capital resources available for the future. As of yearend, the net book value of capital assets was 59.1% of the original book value, as compared to 58.2% in the prior year. This percentage is a measure of the relative age of property and equipment. If property and equipment is relatively new, this percentage will be high. Conversely, if the percentage is low, it means that property and equipment is relatively old. 2 3 Page 17 of 77

18 BayArenac Behavioral Health Authority Management s Discussion and Analysis For the Year Ended September 30, 2017 Noncurrent liabilities consist of the liability for compensated absences and longterm debt. Compensated absences include vested earned time off obligations. Longterm debt consists of a mortgage obtained to purchase and renovate property on Madison Avenue. Unrestricted net position at the end of the year was $4.4 million, as compared to $5.3 million from the prior year. Unrestricted net position was 34.3% of total assets, up from 28.1% in the prior year. GASB 68 reporting requirements which were implemented in fiscal year 2015 has a large impact on unrestricted net position. SUMMARY OF ACTIVITIES The following summarizes the revenue, expenses and change in net position on a governmentwide basis for the years ended September 30, 2017 and Summary of Activities For the years ended September 30, 2017 and 2016 (In $000s) Revenue Medicaid specialty supports and services Arenac & Bay counties $ 39,918 $ 38,392 Autism 2,876 1,263 State general fund priority populations 1,121 1,196 Program service revenue Grants and earned contracts 1,882 1,644 County appropriation Interest revenue Other local income $ 459 $ 465 Total revenue 47,331 44,069 Expense Personnel expense 15,564 15,335 Operating expense 30,948 27,096 Local funds contributed to State Depreciation Total expense 47,230 43,156 Change in net position $ 101 $ Page 18 of 77

19 BayArenac Behavioral Health Authority Management s Discussion and Analysis For the Year Ended September 30, 2017 Excess of revenue over expenses from activities for the current year was $101 thousand or.2% of revenue. Revenue for the year was $47.3 million, an increase of $3.3 million or 7.4% from the prior year. Medicaid specialty supports and services revenue of $42.8 million represents 90.0% of total revenue and increased $3.1 million or 7.9% compared to the prior. State general fund priority population revenue (formula funding) of $1.1 million represents 2.4% of total revenue and decreased $75 thousand or 6.3% compared to the prior year. This funding is established by MDHHS as a part of the legislative appropriation process under the Michigan Mental Health Code and is used to provide supports and services to indigent priority populations, including state facility utilization and other allowable expenses. There was a lapse of state general funds to MDHHS in the current year of $69,484 and carryforward of sate general funds was $59,297. Program service revenue of $265 thousand includes charges for services for consumers not covered by Medicaid risk contracts or state general fund revenue sources. These represent.6% of total revenue and have decreased $40 thousand or 13.1% from the prior year. Grants and earned contract revenue of $1.9 million includes revenue sources for which the use of funds is restricted to a specific purpose. These represent 4.0% of total revenue and have increased $238 thousand or 14.5% over the prior year. County appropriation revenue, interest income and other local income of $1.3 million are available to meet state matching fund requirements. These revenues have remained constant from the prior year Total expense of $47.2 million has increased $4.1 million or 9.4% compared to the prior year. Personnel expense of $15.6 million is 33.0% of total expense and has increased $229 thousand 1.5%. Operating expense of $30.9 million is 65.5% of total expense and has increased $3.9 million or 14.2%. BUDGETARY HIGHLIGHTS Medicaid Autism revenue was originally budgeted at $2.5 million as compared to $3.1 million in the final budget. The final budget reflected an increase in eligible children who were approved for that benefit. Actual Medicaid subcontract revenue was $1.9 million less than budgeted as a result of the Authority striving to expend at a level of per member per month funding. FUTURE OUTLOOK The MDHHS continues with their efforts to improve the coordination of supports and services for Medicaid eligible individuals with both behavioral health and physical health care needs. The next step toward this effort is legislative boilerplate requiring MDHHS to develop and implement up to 2 5 Page 19 of 77

20 BayArenac Behavioral Health Authority Management s Discussion and Analysis For the Year Ended September 30, 2017 three pilots and one demonstration model to test the integration of publicly funded behavioral health and physical health services. This involves CMHSPs contracting and/or partnering with Medicaid health plans who would hold a contract directly with the State to provide Medicaid services in the geographic area of the pilot project. The intent is to improve health outcomes, maximize efficiencies, minimize unnecessary costs and achieve material increases in behavioral health services for Medicaid beneficiaries. These pilots are anticipated to be in place by October 1, 2018 with all realized cost savings reinvested in services and supports for individuals having or at risk of having a mental illness, an intellectual or developmental disability, or a substance use disorder. As this initiative progresses, the Authority will continue to implement strategic actions that balance the requirements of all funds including Medicaid, Healthy Michigan and State General Funds with the needs of the residents of Bay and Arenac Counties. The Authority continues to advocate for state policy initiatives that preserve County and CMHSP public safety net obligations under the law and strives to achieve the best possible outcomes for the persons served. * * * * * * * As always, questions, comments and suggestions are welcomed from interested parties and the general public. These can be directed to Marci Rozek, Chief Financial Officer, at 201 Mulholland, Bay City, MI Marci Rozek can be reached at (989) Page 20 of 77

21 BayArenac Behavioral Health Authority Statement of Net Position September 30, 2017 Assets Current assets Cash and cash equivalents $ 3,720,229 Accounts receivable, net 376,476 Due from other governmental units 2,228,103 Prepaid items 402,764 Total current assets 6,727,572 Noncurrent assets Cash and cash equivalents restricted 1,282,289 Net OPEB asset 851,551 Capital assets nondepreciable 768,737 Capital assets depreciable, net 3,184,910 Total noncurrent assets 6,087,487 Total assets 12,815,059 Deferred outflows of resources Deferred amount related to net pension liability 4,904,929 Total assets and deferred outflows of resources 17,719,988 Liabilities Current liabilities Accounts payable 2,812,138 Accrued wages and other payroll liabilities 454,892 Unearned revenue 60,848 Due to other governmental units 2,077,715 Current portion of longterm debt 137,524 Total current liabilities 5,543,117 Noncurrent liabilities Net pension liability 2,390,601 Long termdebt, net of current portion 674,847 Compensated absences 1,066,392 Total noncurrent liabilities 4,131,840 Total liabilities 9,674,957 Deferred inflows of resources Deferred amount related to net pension liability 506,173 Total liabilities and deferred inflows of resources 10,181,130 Net position Net investment in capital assets 3,141,276 Unrestricted 4,397,582 Total net position $ 7,538,858 See Accompanying Notes to the Financial Statements 3 1 Page 21 of 77

22 BayArenac Behavioral Health Authority Statement of Activities For the Year Ended September 30, 2017 Program Revenues Net (Expense) Operating Revenue and Charges Grants and Changes in Functions Expenses for Services Contributions Net Position Governmental activities Health & welfare mental health $ 47,196,103 $ 44,711,215 $ 2,475,518 $ (9,370) Interest on longterm debt 34,116 (34,116) Total governmental activities $ 47,230,219 $ 44,711,215 $ 2,475,518 (43,486) General revenues Unrestricted investment earnings 22,337 Other 122,244 Total general revenues 144,581 Change in net position 101,095 Net position beginning of year 15,994,472 Prior period adjustment (8,556,709) Net position beginning of year (restated) 7,437,763 Net position end of year $ 7,538,858 See Accompanying Notes to the Financial Statements 3 2 Page 22 of 77

23 BayArenac Behavioral Health Authority Governmental Funds Balance Sheet September 30, 2017 Assets Cash and cash equivalents $ 3,720,229 Accounts receivable, net 376,476 Due from other governmental units 2,228,103 Prepaid items 402,764 Cash and investments restricted 1,282,289 Total assets $ 8,009,861 Liabilities Accounts payable $ 2,812,138 Accrued wages and other payroll liabilities 454,892 Unearned revenue 60,848 Due to other governmental units 2,077,715 Total liabilities 5,405,593 Fund balances Nonspendable Prepaid items 402,764 Assigned Compensated absences 1,066,392 Unassigned 1,135,112 Total fund balances 2,604,268 Total liabilities and fund balances $ 8,009,861 See Accompanying Notes to the Financial Statements 3 3 Page 23 of 77

24 Total fund balance governmental funds $ 2,604,268 Amounts reported for governmental activities in the statement of net position are different because BayArenac Behavioral Health Authority Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Position September 30, 2017 Capital assets used in governmental activities are not financial resources and therefore are not reported in the funds Capital assets not being depreciated 768,737 Capital assets net of accumulated depreciation 3,184,910 The net OPEB asset is not a current financial resource and is therefore not reported in the funds 851,551 Deferred outflows (inflows) of resources Deferred inflows of resources resulting from net pension liability (506,173) Deferred outflows of resources resulting from net pension liability 4,904,929 Some liabilities are not due and payable in the current period and therefore are not reported in the funds. Those liabilities consist of Net pension liability (2,390,601) Longterm debt (812,371) Compensated absences (1,066,392) Net position of governmental activities $ 7,538,858 See Accompanying Notes to the Financial Statements 3 4 Page 24 of 77

25 BayArenac Behavioral Health Authority Governmental Funds Statement of Revenues, Expenditures and Changes in Fund Balance For the Year Ended September 30, 2017 Revenues State and federal funding Department of Health and Human Services Contract General Fund $ 1,120,960 Other state and federal funding 229,957 Total state and federal funding 1,350,917 Contributions local units County appropriations 787,054 Charges for services Medicaid subcontract 39,806,874 Medicaid other 111,527 Autism 2,876,151 Client and third party pay 265,035 Other earned contract revenue 1,651,628 Total charges for services 44,711,215 Interest 22,337 Other revenue 122,244 Total revenues 46,993,767 See Accompanying Notes to the Financial Statements 3 5 Page 25 of 77

26 BayArenac Behavioral Health Authority Governmental Funds Statement of Revenues, Expenditures and Changes in Fund Balance For the Year Ended September 30, 2017 Expenditures Health & Welfare Mental Health Current Personnel costs $ 15,564,305 Operating expenditures 31,262,207 Debt service Principal 128,025 Interest 34,116 Capital outlay 423,657 Total expenditures 47,412,310 Excess (deficiency) of revenues over expenditures (418,543) Other financing sources (uses) Issuance of debt 360,000 Net change in fund balance (58,543) Fund balance, beginning of year 2,662,811 Fund balance, end of year $ 2,604,268 See Accompanying Notes to the Financial Statements 3 6 Page 26 of 77

27 BayArenac Behavioral Health Authority Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balance of Governmental Funds to the Statement of Activities For the Year Ended September 30, 2017 Net change in fund balances total governmental funds $ (58,543) Amounts reported for governmental activities in the statement of activities are different because: Governmental funds report capital outlays as expenditures. However, in the statement of activities, the cost of those assets is allocated over their estimated useful lives as depreciation expense. Add: capital outlay 423,657 Depreciation expense (172,734) Expenses are recorded when incurred in the statement of activities. Increase (decrease) in accrual for net other post employment benefit obligation 337,547 Decrease (increase) in accrual for compensated absences 78,734 Bond proceeds are reported as financing sources in the governmental funds and thus contribute to the change in fund balance. In the statement of net position, however, issuing debt increases longterm liabilities and does not affect the statement of activities. Similarly, repayment of principal is an expenditure in the governmental funds but reduces the liability in the statement of net position. Issuance of debt (360,000) Principal repayments 128,025 The statement of net position reports the net pension liability and deferred outflows and deferred inflows of resources related to the net pension liability and pension expense. However, the amount recorded on the governmental funds equals actual pension contributions. Net change in net pension liability (1,409,688) Net change in the deferred inflows of resources related to the net pension liability 120,519 Net change in the deferred outflows of resources related to the net pension liability 1,013,578 Change in net position of governmental activities $ 101,095 See Accompanying Notes to the Financial Statements 3 7 Page 27 of 77

28 BayArenac Behavioral Health Authority Notes to the Financial Statements September 30, 2017 Note 1 Summary of Significant Accounting Policies The accounting policies of BayArenac Behavioral Health Authority (the Authority ) conform to accounting principles generally accepted in the United States of America as applicable to governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standardsetting body for establishing governmental accounting and financial reporting principles. The following is a summary of the significant accounting policies used by the Authority. Reporting Entity The Authority operates under the provisions of Act 258 Public Acts of 1974 (the Michigan Mental Health Code), as amended. The Authority arranges for and provides supports and services for persons with developmental disability, adults with severe mental illness, and children with serious emotional disturbance. These supports and services are made available to residents of Arenac and Bay counties who meet eligibility and other criteria. As the community mental health services program for Arenac and Bay counties, the Authority also serves to represent community members, assuring local access, organizing and integrating the provision of services, coordinating care, implementing public policy, ensuring interagency collaboration, and preserving the public interest. The Authority is a member of the MidState Health Network (MSHN). This affiliation is composed of the community mental health services programs serving Arenac, Bay, Clare, Clinton, Eaton, Gladwin, Gratiot, Hillsdale, Huron, Ingham, Ionia, Isabella, Jackson, Mecosta, Midland, Montcalm, Newaygo, Osceola, Saginaw, Shiawassee and Tuscola counties and was formed under the authority of the Intergovernmental Transfer of Functions and Responsibilities Act. responsibility, fiscal dependency, and whether the financial statements would be misleading if data were not included. The Authority has no component units. GovernmentWide and Fund Financial Statements The governmentwide financial statements (i.e. the statement of net position and the statement of activities) report information on all of the nonfiduciary activities of the Authority. For the most part, the effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from businesstype activities, which rely to a significant extent on fees and charges for support. The statement of activities demonstrates the degree to which the direct expenses of a function are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function. Program revenues include charges to consumers who purchase, use or directly benefit from services provided by a given function. Program revenues also include grants and contributions that are restricted to meeting the operational or capital requirements of a particular function. Other items not properly included among program revenues are reported instead as general revenues. Resources that are dedicated internally are reported as general revenues rather than as program revenues. Net position is restricted when constraints placed on them are either externally imposed or are imposed by constitutional provisions or enabling legislation. Internally imposed designations of resources are not presented as restricted net position. In accordance with U.S. GAAP these financial statements present all of the Authority s funds. The criteria established by the GASB for determining the reporting entity include oversight 3 8 Page 28 of 77

29 Measurement Focus, Basis of Accounting and Financial Statements Presentation GovernmentWide Financial Statements The governmentwide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. Governmental Fund Financial Statements The governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the Authority considers revenues not related to charges for service to be available if they are collected within 60 days of the end of the current fiscal year end. Charges for service revenues are considered available upon the occurrence of the event. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. Modifications to the accrual basis of accounting include: Employees vested annual leave is recorded as expenditures when utilized. The amount of accumulated annual leave unpaid at September 30 has been reported only in the governmentwide financial statements. Interest on general longterm obligations is recognized when paid. Debt service expenditures and claims and judgments are recorded when payment is due. Fund Accounting The financial statements of the Authority are recorded in individual funds, each of which is deemed to be a separate accounting entity. BayArenac Behavioral Health Authority Notes to the Financial Statements September 30, Page 29 of 77 The Authority uses fund accounting to report on its financial position and results of operations. Fund accounting is designed to demonstrate legal compliance and to aid financial management by segregating transactions related to certain government functions or activities. A fund is a separate accounting entity with a selfbalancing set of accounts. The Authority reports the following major governmental funds: Governmental Funds General Fund This fund is the Authority s primary operating fund. It accounts for all financial resources of the Authority, except those required to be accounted for in other funds. Adoption of New Accounting Standards Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans addresses the other postemployment benefit plans (OPEB), defined benefit and defined contribution, administered through trusts. This Statement will improve the financial reporting primarily through enhanced note disclosures and schedules of required supplementary information that will be presented by OPEB plans that are administered through trusts. This information will enhance the transparency by providing information about measures of net OPEB liabilities and explanations of how and why those liabilities changed from year to year. Statement No. 74 is effective for the fiscal year ending September 30, Upcoming Accounting and Reporting Changes Statement No. 75 Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions establishes standards for recognizing and measuring liabilities, deferred outflows of resources, deferred inflows of resources, and expense/expenditures. For defined OPEB plans, this Statement identifies the methods and assumptions that are required to be used to project benefit payments, discount projected benefit payments to their actuarial present value, and attribute that present value to periods of employee services. It

30 BayArenac Behavioral Health Authority Notes to the Financial Statements September 30, 2017 also requires additional note disclosures and required supplementary information. Statement No. 75 is effective for the fiscal year ending September 30, Statement No. 81, Irrevocable SplitInterest Agreements. The objective of this Statement is to improve accounting and financial reporting for irrevocable splitinterest agreements by providing recognition and measurement guidance for situations in which a government is a beneficiary of the agreement. Statement No. 81 is effective for the fiscal year ending September 30, Statement No. 83, Certain Asset Retirement Obligations establishes criteria for determining the timing and pattern of recognition of a liability and a corresponding deferred outflow of resources for asset retirement obligations (AROs). An ARO is a legally enforceable liability associated with the retirement of a tangible capital asset. The requirements of this Statement are effective for the fiscal year ending September 30, Statement No. 84, Fiduciary Activities improves the guidance regarding the identification of fiduciary activities for accounting and financial reporting purposes and how those activities should be reported. The focus of the criteria includes the following: (1) is the government controlling the assets of the fiduciary activity and (2) the beneficiaries with whom a fiduciary relationship exists. The four fiduciary funds that should be reported, if applicable: (1) pension (and other employee benefit) trust funds, (2) investment trust funds, (3) privatepurpose trust funds, and (4) custodial funds. Custodial funds generally will report fiduciary activities that are not held in a trust or similar arrangement that meets specific criteria. The requirements of this Statement are effective for the fiscal year ending September 30, component units, goodwill, fair value measurement and application, and postemployment benefits (pensions and other postemployment benefits), which is effective for the fiscal year ending September 30, Statement No. 86, Certain Debt Extinguishment Issues is to improve consistency in accounting and financial reporting for insubstance defeasance of debt. The statement provides uniform guidance for derecognizing debt that is defeased in substance, regardless of how cash and other monetary assets placed in an irremovable trust for the purpose of extinguishing that debt were acquired. The effective date is for the fiscal year ending September 30, Statement No. 87, Leases is to improve accounting and financial reporting for leases. It establishes a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset. The effective date is for the fiscal year ending September 30, The Authority is evaluating the impact that the above GASB Statements will have on its financial reporting. Budgetary Data The Authority s General Operating Fund budget is under formal budgetary control and follows both the Authority s and Michigan Department of Health and Human Services annual budget process in establishing the budgetary data presented in the financial statements. The annual fiscal budget is adopted on a basis consistent with accounting principles generally accepted in the United States of America and the requirements of Michigan Department of Health and Human Services. All appropriations lapse at yearend. Statement No. 85, Omnibus 2017 addresses practice issues that were identified during implementation and application of certain GASB Statements. This statement covers issues related to blending 3 10 Page 30 of 77

31 BayArenac Behavioral Health Authority Notes to the Financial Statements September 30, 2017 Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, deferred outflows, liabilities, deferred inflows and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Deposits and Investments The Authority s cash and cash equivalents are considered to be cash on hand, money market funds, demand deposits and/or certificates of deposit which mature within 90 days. The Authority considers all highly liquid investments with original maturities of 180 days or less to be cash equivalents. d) Banker s acceptances of United States banks. e) Obligations of the State of Michigan and its political subdivisions that, at the time of purchase are rated as investment grade by at least one standard rating service. f) Mutual funds registered under the investments company act of 1940 with the authority to purchase only investment vehicles that are legal for direct investment by a public corporation. g) External investment pools as authorized by Public Act 20 as amended through December 31, The Authority s investment policy allows for all of these types of investments. A specific amount of cash has been restricted for future payments of compensated absences, depreciation reserve and risk management reserve. Statutory Authority Michigan law authorizes the Authority to deposit and invest in: a) Bonds, securities, other obligations and repurchase agreements of the United States, or an agency or instrumentality of the United States. b) Certificates of deposit, savings accounts, deposit accounts or depository receipts of a qualified institution. c) Commercial paper rated at the time of purchase within the two highest classifications established by not less than two standard rating services and that matures not more than 270 days after the date of purchase Page 31 of 77 Receivables Accounts receivable in all funds report amounts that have arisen in the ordinary course of business and are stated net of allowances for uncollectible amounts of $0 as of September 30, Due from other governmental entities consist primarily of amounts due from the MidState Health Network. Inventories The Authority does not recognize as an asset inventories of supplies. The cost of these supplies is considered immaterial to the financial statements and the quantities are not prone to wide fluctuation from year to year. The costs of such supplies are expensed when purchased.

32 BayArenac Behavioral Health Authority Notes to the Financial Statements September 30, 2017 Prepaid Items Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items in both governmentwide and fund financial statements. Restricted Assets Cash and cash equivalents has been restricted for future payment of the compensated absences liability and other capital purposes. Capital Assets Capital assets, which include property, plant and equipment, are reported in the governmental column in the governmentwide financial statements. Capital assets are defined by the Authority as individual assets with an initial cost equal to or more than $5,000 for acquisitions on or after October 1, 2002 and $1,000 for acquisitions before October 1, 2002 and an estimated useful life in excess of one year. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair value at the date of donation. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized. The Authority does not have infrastructure type assets. Major outlays for capital assets and improvements are capitalized as projects are constructed. Interest incurred during construction of capital assets is not capitalized. No interest expense was incurred during the current year. Capital assets of the Authority are depreciated using the straight line method over the following estimated useful lives: Assets Years Equipment and furnishings 5 Computers 3 5 Vehicles 5 Leasehold improvements 7 30 Buildings Software development Deferred Outflows of Resources A deferred outflow of resources is a consumption of net position by the Authority that is applicable to a future reporting period. The Authority reports deferred outflows of resources as a result of pension earnings. This amount is the result of a difference between what the plan expected to earn from the plan investments and what the plan actually earned. This amount will be amortized over the next four years and included in pension expense. The Authority also reported deferred outflows of resources for pension contributions made after the measurement date. This amount will decrease the net pension liability in the following year. Changes in assumptions and experience differences relating to the net pension asset are deferred and amortized over the expected remaining lives of the employees and retirees in the plan Capital assets utilized in the governmental funds are recorded as expenditures in the governmental fund financial statements. Depreciation expense is recorded in the governmentwide financial statements Page 32 of 77

33 BayArenac Behavioral Health Authority Notes to the Financial Statements September 30, 2017 Incurred But Not Reported Claims Liability The amounts recorded in current liabilities include amounts for incurred inpatient, residential and community provider claims liability based on management s estimate. The Authority may not be billed for these until several months after the date of service. Therefore, the liability is not liquidated within the normal 60day period after yearend. Also, the actual cost may vary from the estimated amount for a variety of reasons that include, but are not limited to, retroactive consumer eligibility or cost recovery from other third party payers. Unearned Revenue Unearned revenue arises when resources are received by the Authority before it has a legal claim to them. In subsequent periods, when the revenue recognition criterion is met, or when the Authority has a legal claim to the resources, the liability for unearned revenue is removed from the fund financial statements and governmentwide financial statements, and revenue is recognized. Compensated Absences The Authority s policy allows full time employees to accumulate earned time off at various rates, depending on the employees length of service with the Authority. Governmental fund financial statements record expenditures when employees are paid for these compensated absences. The governmentwide financial statements record expenditures and the related liability when these compensated absences are earned by employees. Longterm Obligations In the governmentwide financial statements, longterm debt and other longterm obligations are reported as liabilities in the applicable governmental activities statement of net position. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the 3 13 Page 33 of 77 actual debt proceeds received, are reported as debt service expenditures. Pensions and Other Postemployment Benefit (OPEB) Costs For purposes of measuring the net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the Bay County Employees Retirement System (BCERS) and additions to/deductions from BCERS fiduciary net position have been determined on the same basis as they are reported to BCERS. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value. The Authority receives actuarialbased calculations to compute the annual required contributions (ARC) necessary to fund the obligations over the remaining amortization periods. In the governmental funds, pension and OPEB costs are recognized as contributions are made. For the governmentwide statements, the Authority reports the full accrual cost equal to the current year required contributions, adjusted for interest and adjustment to the ARC on the beginning of the year underpaid amount, if any. Deferred Inflows of Resources A deferred inflow of resources is an acquisition of net position by the Authority that is applicable to a future reporting period. For governmental funds this includes unavailable revenue in connection with receivables for revenues that are not considered available to liquidate liabilities of the current period. The Authority reports deferred inflows of resources as a result of pension earnings. This amount is the result of a difference between what the plan expected to earn from the plan investments and what the plan actually earned. This amount will be amortized over the next four years and is included in pension expense. Changes in assumptions and experience differences relating to the net pension asset are deferred and amortized over the expected remaining lives of the employees and retirees in the plan.

34 BayArenac Behavioral Health Authority Notes to the Financial Statements September 30, 2017 Fund Balance Fund Balance In the fund financial statements, governmental funds report fund balance in the following categories: Nonspendable assets that are not available in a spendable form. Restricted amounts that are legally imposed or otherwise required by external parties to be used for a specific purpose. Committed amounts constrained on use imposed by the Authority s highest level of decisionmaking, its Board of Directors. A fund balance commitment may be established, modified, or rescinded by a resolution of the Board of Directors. Note 2 Budgetary Information The budget presented does not include principal payments on debt, which was $128,025. Although the Authority has encountered budget violations, actual spending did not exceed anticipated expenditures. Note 3 Deposits and Investments The Authority s deposits and investments were reported in the basic financial statements in the following categories: Cash and cash equivalents $ 3,720,229 Cash and cash equivalents restricted 1,282,289 Total $ 5,002,518 Assigned amounts intended to be used for specific purposes, but are neither restricted nor committed. The Board of Directors has authorized the Chief Financial Officer to assign fund balance on behalf of the Authority. Unassigned all other resources; the remaining fund balances after nonspendable, restrictions, commitments and assignments. When an expenditure is incurred for purposes for which both restricted and unrestricted fund balance is available, the Authority s policy is to consider restricted funds spent first. When an expenditure is incurred for purposes for which committed, assigned, or unassigned amounts could be used, the Authority s policy is to consider the funds to be spent in the following order: (1) committed, (2) assigned, (3) unassigned Page 34 of 77 The breakdown between deposits and investments for the Authority is as follows: Deposits $ 4,999,828 Cash on hand 2,690 Total $ 5,002,518 Interest rate risk State law limits the allowable investments and the maturities of some of the allowable investments as identified in Note 1 of the summary of significant accounting policies. The Authority s investment policy does not have specific limits in excess of State law on investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates. The maturity periods for each investment are identified above for investments held at year end. Credit risk State law limits investments to specific government securities, certificates of deposits and bank accounts with qualified financial institutions, commercial paper with specific maximum maturities and ratings when purchased, bankers acceptances of

35 BayArenac Behavioral Health Authority Notes to the Financial Statements September 30, 2017 specific financial institutions, qualified mutual funds and qualified external investment pools as identified in Note 1 of the summary of significant accounting policies. The Authority s investment policy does not have specific limits in excess of State law on investment credit. The ratings for each investment are identified above for investments held at year end. Custodial credit risk deposits Custodial credit risk is the risk that in the event of a bank failure, the Authority s deposits may not be returned. State law does not require and the Authority does not have a policy for deposit custodial credit risk. As of September 30, 2017, $4,353,904 of the Authority s bank balance of $5,471,352 was exposed to custodial credit risk because it was uninsured and uncollateralized. Note 4 Due from Other Governmental Units As of September 30, this receivable consisted of the following: 2017 State of Michigan $ 21,829 Affiliates 56,052 Other governmental units 2,150,222 $ 2,228,103 Custodial credit risk investments For an investment, this is the risk that, in the event of the failure of the counterparty, the Authority will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. State law does not require and the Authority does not have a policy for investment custodial credit risk. As of September 30, 2017, there were no amounts exposed to custodial credit risk because it was uninsured and uncollateralized. Concentration of credit risk State law limits allowable investments but does not limit concentration of credit risk as identified in Note 1 of the summary of significant accounting policies. The Authority s investment policy requires diversification by security type and institution. With the exception of U.S. Treasury securities and authorized investment pools, no more than onethird of the total investment portfolio will be invested in a single security type or with a single financial institution. All investments held at year end are reported above Page 35 of 77

36 BayArenac Behavioral Health Authority Notes to the Financial Statements September 30, 2017 Note 5 Capital Assets A summary of changes in capital assets is as follows: Beginning Ending Balance Increases Decreases Balance Capital assets not being depreciated Land $ 717,737 $ 51,000 $ $ 768,737 Construction in progress 50,442 20,583 71,025 Total capital assets not being depreciated 768,179 71,583 71, ,737 Capital assets being depreciated Equipment and furniture 217,967 6, ,774 Buildings 1,911, ,074 2,263,754 Building improvements 479,906 10, ,824 Vehicles 697,571 48, ,887 Leasehold improvements 1,402,595 71,025 1,473,620 Computers 881,802 22, ,683 Total capital assets being depreciated 5,591, ,099 87,078 5,927,542 Less accumulated depreciation for Equipment and furniture 215,838 1,610 6, ,255 Buildings 501,291 58, ,431 Building improvements 120,943 21,117 10, ,978 Vehicles 613,959 33,411 48, ,686 Leasehold improvements 323,143 58, ,599 Computers 881,802 22, ,683 Total accumulated depreciation 2,656, ,734 87,078 2,742,632 Net capital assets being depreciated 2,934, ,365 3,184,910 Capital assets, net $ 3,702,724 $ 321,948 $ 71,025 $ 3,953,647 Depreciation expense was charged to the Health & Welfare Mental Health Program Page 36 of 77

37 BayArenac Behavioral Health Authority Notes to the Financial Statements September 30, 2017 Note 6 Due to Other Governmental Units As of September 30, this liability consists of the following: 2017 State of Michigan $ 367,556 MidState Health Network 1,710,159 Note 7 Long Term Liabilities $ 2,077,715 The September 30, 2017 balance of longterm debt was comprised of mortgages payable and compensated absences. The mortgages are secured by real property acquired with the proceeds of the mortgages. The obligations are as follows: Beginning Ending Due Within Balance Additions Decreases Balance One Year Governmental activities Mortgages payable $ 580,396 $ 360,000 $ 128,025 $ 812,371 $ 137,524 Compensated absences 1,145,126 1,131,956 1,210,690 1,066,392 Total $ 1,725,522 $ 1,491,956 $ 1,338,715 $ 1,878,763 $ 137,524 Annual debt service requirements to maturity for the mortgage payable are as follows: Year Ending September 30, Principal Interest 2018 $ 137,524 $ 30, ,127 24, ,051 17, ,652 10, ,211 9, ,777 38, ,261 23, ,768 6,915 $ 812,371 $ 160,468 The Authority is required to maintain debt coverage ratio of not less than 1.25 times. The entire vested amount of compensated absences is considered longterm as the amount expended each year is expected to be offset by annual leave time earned for the year. Note 8 Leases The Authority has entered into various operating leases for the use of real and personal property. Operating leases do not give rise to property rights or lease obligations, and therefore, the lease agreements are not reflected in the financial statements. Lease expense for the fiscal year was $299, Page 37 of 77

38 BayArenac Behavioral Health Authority Notes to the Financial Statements September 30, 2017 The following is a schedule of future minimum rental payments required under the operating leases that have initial or remaining noncancelable lease terms as of September 30, 2017: Year Ending September 30, Note 9 Risk Management Amount 2018 $ 218, , , , , , , ,600 $ 3,016,207 Michigan Municipal Risk Management Authority (MMRMA) The Authority participates in the public entity risk pool Michigan Municipal Risk Management Authority (MMRMA) for auto and general liability, property and vehicle physical damage coverage. MMRMA, a separate legal entity, is a selfinsured association organized under the laws of the State of Michigan to provide selfinsurance protection against loss and risk management services to various Michigan governmental entities. depleted, the payment of all unpaid losses of the Authority is the sole obligation of the Authority. MMRMAs coverage limits are $15,000,000 for liability, $1,500,000 for vehicle physical damage, and $350,000,000 for combined aggregate property coverage. There is a $250 deductible per vehicle for vehicle physical damage and $1,000 per occurrence for property and crime. There have been no significant changes in insurance coverage in the past two years. There have been no claim settlements that have exceeded excess insurance limits. Travelers Casualty and Surety Company of America The Authority has crime coverage through Travelers Casualty and Surety Company of America. The coverage limit is $4,000,000. If a covered loss exceeds the coverage limit, all further payments for such loss are the sole obligation of the Authority. Managed Care Risk Contracts The Authority has a managed care risk contract with the State of Michigan for State General Fund Formula Funding for priority populations. The State General Fund risk contract covers only the Authority's specific service area. The Authority is at risk if, in any one fiscal year, it finds it necessary to expend more than current resources to provide contractually obligated supports and services for eligible individuals. The Authority is required to cover these excess costs with unrestricted fund balance. As a member of this pool, the Authority is responsible for paying all losses, including damages, loss adjustment expenses and defense costs, for each occurrence that falls within the member s selfinsured retention. If a covered loss exceeds MMRMA s limits, all further payments for such loss are the sole obligation of the Authority. If for any reason, the MMRMA s resources available to pay losses are 3 18 Page 38 of 77 Note 10 Employee Retirement and Benefit Systems Defined Benefit Pension Plan Plan description The Authority participates in the Bay County Employees Retirement System (the Plan ), an agent multipleemployer defined benefit pension plan that covers substantially all of the employees of the Authority. The Plan provides retirement,

39 BayArenac Behavioral Health Authority Notes to the Financial Statements September 30, 2017 disability, and death benefits to plan members and their beneficiaries. The Plan s financial statements may be obtained upon request of the County of Bay, Michigan. Benefits provided Benefits provided include plans with multipliers ranging from 2 to 2.5. Normal retirement age is 55 to 62 with early retirement at 55 with 8 to 10 years of service. Final average compensation is calculated based on 5 years. Member contributions of 4%. Employees covered by benefit terms At the December 31, 2016 valuation date, the following employees were covered by benefit terms: Retirees or beneficiaries currently receiving benefits 122 Inactive plan members entitled to, but not yet receiving benefits 29 Active plan members 220 Contributions The employer is required to contribute amounts at least equal to the actuarially determined rate, as established by the Bay County Retirement System Board of Trustees. The actuarially determined rate is the estimated amount necessary to finance the cost of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The employer may establish contribution rates to be paid by its covered employees. Employer contributions were 11.36% based on annual payroll from October 1, 2016 to December 31, 2016 and 8.95% from January 1, 2017 to September 30, 2017 for open divisions. Net pension liability The employer s net pension liability was measured as of December 31, 2016, and the total pension liability 371 used to calculate the net pension liability was determined by an annual actuarial valuation as of that date. Actuarial assumptions The total pension liability in the December 31, 2016 annual actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement include: 1) Inflation 2.5%; 2) Salary increases 4.00% to 6.25% in the longterm 3) Investment rate of return of 7.25%, net of investment expense, including inflation. Although no specific price inflation assumptions are needed for the valuation, the 4.25% to 7.25% longterm wage inflation assumption would be consistent with a price inflation of 34%. Mortality rates used were based on the following: Healthy preretirement: RP2014 Employee Generational Mortality Tables, with bluecollar adjustments and extended via cubic spline. This table is adjusted backwards to 2006 with the MP2014 scale, resulting in a base year of 2006 with future mortality improvements assumed each year using MP2016. Healthy postretirement: RP2014 Healthy Annuitant Generational Mortality Tables, with bluecollar adjustments and extended via cubic spline. This table is adjusted backwards to 2006 with the MP2014 scale, resulting in a base year of 2006 with future mortality improvements assumed each year using MP2016. Disability retirement: RP2014 Disabled Generational Mortality Tables, extended via cubic spline. This table is adjusted backwards to 2006 with the MP2014 scale, resulting in a base year of 2006 with future mortality improvements assumed each year using MP2016. The actuarial assumptions used in valuation were based on the results of the most recent actuarial experience study Page 39 of 77

40 BayArenac Behavioral Health Authority Notes to the Financial Statements September 30, 2017 The longterm expected rate of return on pension plan investments was determined using a model method in which the bestestimate ranges of expected future real rates of return (expected returns, net of investment and administrative expenses and inflation) are developed for each major asset class. These ranges are combined to produce the longterm expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. The target allocation and best estimates or arithmetic real rates of return for each major asset class are summarized in the following table: Longterm Target expected real Asset class Allocation rate of return Domestic equity 50.0% 7.50% International equity 20.0% 8.50% U.S. fixed income 23.0% 2.50% Real estate 7.0% 4.50% Discount rate The discount rate used to measure the total pension liability is 7.25%. The projection of cash flows used to determine the discount rate assumes that employer and employee contributions will be made at the rates agreed upon for employees and the actuarially determined rates for employers. Based on these assumptions, the pension plans fiduciary net positon was projected to be available to pay all projected future benefit payments of current active and inactive employees. Therefore, the longterm expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. Total Pension Liability Service cost $ 1,132,527 Interest on the total pension liability 3,579,804 Difference between expected and actual experience of the total pension liability (121,814) Changes of assumptions 2,135,064 Benefit payments and refunds (2,971,277) Net change in total pension liability 3,754,304 Total pension liability beginning 48,650,093 Total pension liability ending (a) $ 52,404,397 Plan Fiduciary Net Position Employer contributions $ 1,243,668 Employee contributions 515,921 Pension plan net investment income 3,610,840 Benefit payments and refunds (2,971,277) Pension plan administrative expense (54,536) Other* (8,556,709) Net change in plan fiduciary net position (6,212,093) Plan fiduciary net position beginning 56,225,889 Plan fiduciary net position ending (b) $ 50,013,796 Net pension liability (ab) $ 2,390,601 Plan fiduciary net position as a percentage of total pension liability 95.44% Covered employee payroll $ 10,692,948 Net pension liability as a percentage of covered employee payroll 22.36% 3 20 Page 40 of 77

41 BayArenac Behavioral Health Authority Notes to the Financial Statements September 30, 2017 *Other represents a change in the asset distribution among the various plan groups. Because this is a correction of an error, the Authority has restated its beginning net position by this amount. Sensitivity of the net pension liability to changes in the discount rate The following presents the net pension liability of the employer, calculated using the discount rate of 7.25%, as well as what the employer s net pension liability would be using a discount rate that is 1% point lower (6.25%) or 1% higher (8.25%) than the current rate. Current 1% decrease discount rate 1% increase Total pension liability $ 59,149,847 $ 52,404,397 $ 46,795,947 Fiduciary net position 50,013,796 50,013,796 50,013,796 Net pension liability (asset) $ 9,136,051 $ 2,390,601 $ (3,217,849) Pension expense and deferred outflows of resources and deferred inflows of resources related to pensions For the year ended September 30, 2017, the employer recognized pension expense of $927,274. The employer reported deferred outflows and inflows of resources related to pensions from the following sources: Deferred Deferred outflows of inflows of Total to resources resources Total Amortize Differences in experience $ $ (506,173) $ (506,173) $ (506,173) Differences in assumptions 1,843,157 1,843,157 1,843,157 Excess (deficit) investment returns 2,318,642 2,318,642 2,318,642 Contributions subsequent to the measurement date* 743, ,130 Total $ 4,904,929 $ (506,173) $ 4,398,756 $ 3,655,626 *The amount reported as deferred outflows of resources resulting from contributions subsequent to the measurement date will be recognized as a decrease in the net pension liability for the year ending Amounts reported as deferred outflows and inflows of resources related to pensions will be recognized in pension expense as follows: Year ended, 2018 $ 927, , , , ,940 Thereafter 361,732 $ 3,655,626 Other PostEmployment Benefits (OPEB) Plan administration The Authority participates in the Bay County Voluntary Employees Beneficiary Association (VEBA) trust (the Plan ). The plan is an agent multipleemployer defined benefit public retiree healthcare plan established effective October 1, The Authority provides retiree health care benefits to eligible employees and their spouses, as defined in the employee handbook. The benefits are provided under and may be amended by the Authority Board of Directors with the approval of the County Board of Commissioners. The Plan does not issue standalone financial statements and is included in the financial report of the County of Bay, Michigan. Basis of accounting The Plan s financial statements are prepared using the accrual basis of accounting. Plan member contributions are recognized when due and the employer has made a formal commitment to provide contributions. Benefits and refunds are recognized when due and payable, in accordance with the terms of the Plan. Administrative costs are financed through investment earnings Page 41 of 77

42 BayArenac Behavioral Health Authority Notes to the Financial Statements September 30, 2017 Plan membership At December 31, 2015, the date of the most recent actuarial valuation, the plan membership consisted of the following: Inactive plan members or beneficiaries currently receiving benefit payments 69 Inactive plan members entitled to but not yet receiving benefit payments 120 Active plan members Benefits provided Upon retirement, an eligible retiree and his or her spouse may be provided with health insurance coverage based on credited years of service. Each credit year of service equates to a 5% employer paid health insurance premium with the employee being vested after 8 years of service. Health insurance benefits will not be provided to deferred retirees, but only to those who will be drawing retirement benefits immediately upon retirement form the Authority, according to the approved vesting schedule. Contributions the Plan requires the Authority to pay the insurance premium/claim costs of the retiree and spouse until death. Actively employed plan members and retirees are currently not obligated to make contributions to the Plan. The Authority obtains health care coverage for retirees through private insurers. Upon eligibility for Medicare, the Authority pays the difference between the Plan costs and the amount covered by Medicare. The Authority has no obligation to make contributions in advance of when the insurance premiums or claims are due for payment (in other words, this may be financed on a payasyougo basis). The Authority, at its discretion, contributes amounts that are determined annually using the actuarially determined amount necessary to fund the Plan as a reference but not as a definitive requirement. Investment policy The Plan s policy in regards to the allocation of invested assets is established and may be amended by the County Board of Commissioners by a majority vote of its members. It is the policy of the Board to pursue an investment strategy that reduces risk through the prudent diversification of the portfolio across a broad selection of distinct asset classes. The policy requires that no manager hold more than 5% of its portion of the total fund in any single company and no more than 5% may be held in any single common stock. The Plan s investment policy discourages the use of cash equivalents, except for liquidity purposes, and aims to refrain from dramatically shifting asset class allocations over short time spans. The following was the Board s adopted asset allocation policy as of September 30, 2017: Asset Class Target Allocation Domestic Equity 53% International Equity 5% Broad Market Fixed Income 42% Cash 0% Rate of return For the year ended September 30, 2017, the annual moneyweighted rate of return on investments, net of investment expense, was 11.01%. The moneyweighted rate of return expresses investment performance, net of investment expense, adjusted for the changing amounts actually invested Page 42 of 77

43 Annual OPEB cost and net OPEB obligation For the year ended September 30, 2017 the Authority estimated the cost of providing retiree health care benefits through an actuarial valuation as of December 31, The valuation computes an annual required contribution, which represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities over a period not to exceed 30 years. This valuation s computed contribution and actual funding are summarized as follows: Annual required contribution (recommended) $ Annual OPEB cost Amount paid on retiree health insurance premiums (337,547) Increase in net OPEB obligation (asset) (337,547) OPEB obligation (asset) beginning of year (514,004) OPEB obligation (asset) end of year $ (851,551) The Authority s annual OPEB cost, the percentage of annual OPEB cost contributed to the Plan, and the net OPEB obligation (asset) for the current and preceding two years were as follows: Fiscal Year Ended Annual OPEB Cost Percentage of Annual OPEB Cost Contributed BayArenac Behavioral Health Authority Notes to the Financial Statements September 30, 2017 Net OPEB Obligation (Asset) 2015 $ 195, $ (219,492) , (514,004) 2017 N/A (851,551) 3 23 Page 43 of 77 Funded status and funding progress The funded status of the Plan as of December 31, 2015 (the most recent valuation date) was as follows: Actuarial accrued liability (AAL) $ 8,502,548 Actuarial value of plan assets 14,398,127 Unfunded actuarial accrued liability (UAAL) $ (5,895,579) Funded ratio 169.3% Annual covered payroll $ 10,802,445 UAAL as a percentage of covered payroll 54.6% Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with the past expectation and new estimates are made about the future. The schedule of funding progress, as presented as required supplementary information following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. Actuarial methods and assumptions Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the

44 effects of shortterm volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the longterm perspective of the calculations. In the December 31, 2015 actuarial valuation, the individual entryage actuarial cost method was used. Significant actuarial assumptions used in determining the Plan s unfunded accrued liability included (a) a rate of return on the investment of present and future assets of 7.5% per year compounded annually, (b) projected salary increases of 3.5% per year compounded annually, attributable to inflation, and (c) additional projected salary increases ranging from.75% to 3.75% per year, depending on age, attributable to seniority/merit. The actuarial value of assets is determined using techniques that spread the effects of shortterm volatility in the market value of investments over a multiple year period. The UAAL is being amortized as a level percentage of projected payroll on a closed 30 year basis. The remaining amortization period at December 31, 2015 was 22 years. Note 11 Prior Period Adjustment The Authority has decreased its beginning net position in the statement of activities by $8,556,709 as the result of a correction of an error in the allocation of the Bay County Employees Retirement System s assets among group members. BayArenac Behavioral Health Authority Notes to the Financial Statements September 30, Page 44 of 77

45 BayArenac Behavioral Health Authority Required Supplementary Information Statement of Revenues, Expenditures and Changes in Fund Balance Budget and Actual General Fund For the Year Ended September 30, 2017 Variance Budgeted Amounts Between Actual and Original Final Actual Final Budget Revenues State and federal funding Department of Health and Human Services Contract General Fund $ 1,319,781 $ 1,399,744 $ 1,120,960 $ (278,784) Other state and federal funding 297, , ,957 23,995 Total state and federal funding 1,617,058 1,605,706 1,350,917 (254,789) Contributions local units County appropriations 787, , ,054 Charges for services Medicaid subcontract 41,450,000 41,450,000 39,806,874 (1,643,126) Medicaid other 86, , , Autism 2,504,530 3,095,012 2,876,151 (218,861) Client and third party pay 286, , ,035 (15,283) Other earned contract revenue 1,272,858 1,576,023 1,651,628 75,605 Total charges for services 45,600,288 46,512,353 44,711,215 (1,801,138) Interest 15,725 20,000 22,337 2,337 Other revenue 138,725 99, ,244 23,094 Total revenues 48,158,850 49,024,263 46,993,767 (2,030,496) 4 1 Page 45 of 77

46 BayArenac Behavioral Health Authority Required Supplementary Information Statement of Revenues, Expenditures and Changes in Fund Balance Budget and Actual General Fund For the Year Ended September 30, 2017 Variance Budgeted Amounts Between Actual and Original Final Actual Final Budget Expenditures Health & welfare mental health Current Personnel costs $ 15,357,996 $ 15,848,712 $ 15,564,305 $ (284,407) Operating expenditures 30,273,187 32,240,793 31,262,207 (978,586) Debt service Principal 128, ,025 Interest 31,195 34,116 34,116 Capital outlay 563, ,657 (139,719) Total expenditures 45,662,378 48,686,997 47,412,310 (1,274,687) Revenues over (under) expenditures 2,496, ,266 (418,543) (755,809) Other financing sources (uses) Issuance of debt 360, ,000 Excess of revenues and other sources over (under) expenditures and other uses 2,496, ,266 (58,543) (395,809) Fund balance, beginning of year 2,662,811 2,662,811 2,662,811 Fund balance, end of year $ 5,159,283 $ 3,000,077 $ 2,604,268 $ (395,809) 4 2 Page 46 of 77

47 BayArenac Behavioral Health Authority Required Supplementary Information Bay County Employees' Retirement System Schedule of Employer Contributions September 30, 2017 Actual Actuarial Annual Contribution Contribution Valuation Determined Actual Deficiency Covered as a % of Date Contribution Contribution (Excess) Payroll Covered Payroll 12/31/2012 $ 1,389,775 $ 1,389,775 $ $ 13,748, % 12/31/2013 1,078,379 1,078,379 10,392, % 12/31/2014 1,037,841 1,037,841 10,219, % 12/31/2015 3,010,074 3,010,074 10,577, % 12/31/2016 1,243,668 1,243,668 10,692, % Note: Actuarially determined contribution amounts are calculated as of December 31 each year, which is 9 months prior to the beginning of the fiscal year in which contributions are reported. Methods and assumptions used to determine contribution rates: Actuarial cost method Entryage normal Amortization method Level percentofpayroll Remaining amortization period 28 years closed, 10 years closed for Early Retirement Incentive Program (ERIP) starting with the contribution for calendar year beginning January 1, 2015 Asset valuation method 5Year smoothed market Wage inflation 3.50% Price inflation 3.00% Salary increases 4.25% to 7.25% including inflation Investment rate of return 7.50% Retirement age Agebased table of rates that are specific to the type of eligibility condition Mortality RP2000 Mortality Combined Healthy Tables, projected 20 years with U.S. Population Scale BB (multiplied by 75% for preretirement mortality and 110% for postretirement mortality for both males and females) 4 3 Page 47 of 77

48 BayArenac Behavioral Health Authority Required Supplementary Information Bay County Employees' Retirement System Schedule of Changes in Net Pension Liability (Asset) and Related Ratios September 30, 2017 Fiscal year ended September 30, Total Pension Liability Service cost $ 1,132,527 $ 1,136,567 $ 1,210,632 Interest on the total pension liability 3,579,804 3,454,353 3,381,797 Difference between expected and actual experience of the total pension liability (121,814) (670,788) Changes of assumptions 2,135,064 Benefit payments and refunds (2,971,277) (2,861,173) (2,973,217) Net change in total pension liability 3,754,304 1,729, ,424 Total pension liability beginning 48,650,093 46,920,346 45,971,922 Total pension liability ending (a) $ 52,404,397 $ 48,650,093 $ 46,920,346 Plan Fiduciary Net Position Employer contributions $ 1,243,668 $ 3,010,074 $ 1,037,841 Employee contributions 515, , ,008 Pension plan net investment income 3,610, ,588 4,118,214 Benefit payments and refunds (2,971,277) (2,861,173) (2,973,217) Pension plan administrative expense (54,536) (55,795) (42,121) Other* (8,556,709) Net change in plan fiduciary net position (6,212,093) 978,176 2,591,725 Plan fiduciary net position beginning 56,225,889 55,247,713 52,655,988 Plan fiduciary net position ending (b) $ 50,013,796 $ 56,225,889 $ 55,247,713 Net pension liability (asset) (ab) $ 2,390,601 $ (7,575,796) $ (8,327,367) Plan fiduciary net position as a percentage of total pension liability (asset) 95.44% % % Covered employee payroll $ 10,692,948 $ 10,577,562 $ 10,219,867 Net pension liability (asset) as a percentage of covered employee payroll 22.36% (71.62%) (81.48%) Note: GASB Statement No. 68 was implemented for the fiscal year ended September 30, 2015 and does not require retroactive implementation. Data will be added as information is available until 10 years of such data is available. * 2017 decrease due to correction of an error in the asset allocations among groups within the plan. 4 4 Page 48 of 77

49 BayArenac Behavioral Health Authority Required Supplementary Information Bay County Employees' Retirement System Schedule of Employers' Net Pension Liability (Asset) September 30, 2017 Net pension Fiscal year Plan net position liability (asset) Ending Total pension Plan net Net pension as a % of total Covered as a % of September 30, liability position liability (asset) pension liability payroll covered payroll 2015 $ 46,920,346 $ 55,247,713 $ (8,327,367) % $ 10,219, % ,650,093 56,225,889 (7,575,796) % 10,577, % ,404,397 50,013,796 2,390, % 10,692, % *GASB Statement No. 68 was implemented for the fiscal year ended September 30, 2015 and does not require retroactive implementation. Data will be added as information is available until 10 years of such data is available. 4 5 Page 49 of 77

50 BayArenac Behavioral Health Authority Required Supplementary Information Bay County Retiree Health Care Plan Other Postemployment Benefits September 30, 2017 Schedule of Employer Contributions Annual Percentage Year Required Actual of ARC Ended Contribution Contribution Contributed 2013 $ 422,917 $ 422, % , , % , , % , , % ,547 N/A Schedule of Funding Progress Actuarial UAAL as Actuarial Accrued Unfunded a Percentage Actuarial Value of Liability AAL Funded Covered of Covered Valuation Assets (AAL) (UAAL) Ratio Payroll Payroll Date (a) (b) (ba) (a/b) (c) ((ba)/c) 12/31/2011 $ 9,779,544 $ 9,230,499 $ (549,045) 105.9% $ 14,000, % 12/31/ ,145,578 11,156,717 (1,988,861) 117.8% 10,234, % 12/31/2015* 14,398,127 8,502,548 (5,895,579) 169.3% 10,802, % * Most recent actuarial valuation 4 6 Page 50 of 77

51 BayArenac Behavioral Health Authority Required Supplementary Information Bay County Retiree Health Care Plan Schedule of Investment Returns September 30, 2017 Fiscal Year Ended Annual September 30, Return %* % * Annual moneyweighted rate of return, net of investment expenses. Note: GASB Statement No. 74 was implemented for the fiscal year ended September 30, 2017 and does not require retroactive implementation Data will be added as information is available until 10 years of such data is available. 4 7 Page 51 of 77

52 BayArenac Behavioral Health Authority Supporting Schedule of Personnel Costs For the Year Ended September 30, 2017 General Operating Fund Personnel costs Salaries and wages $ 11,195,214 Fringe benefits 4,332,956 Board per diem 36,135 Total personnel costs $ 15,564, Page 52 of 77

53 BayArenac Behavioral Health Authority Supporting Schedule of Operating Expenditures For the Year Ended September 30, 2017 General Operating Fund Operating expenditures Advertising $ 16,619 Communications 356,283 Consumer related 123,463 Contractual services 1,249,766 Education and training 35,287 Insurance 61,118 Licenses and fees 6,216 Local funds paid to State 545,160 Memberships and dues 18,981 Postage 13,663 Publications 2,079 Purchased services 359,465 Recruitment 24,200 Rental equipment 10,279 Rental expense buildings and other 228,929 Rental expense State leases 5,752 Repairs and maintenance 169,015 Software license maintenance 573,176 Supplies and small equipment purchases 257,060 Transportation and vehicle expense 67,973 Travel and conferences 200,658 Utilities 79,772 Ancillary services PT, ST, OT, RN, Dietary 223,934 Case management and support coordination 1,351,999 Community inpatient services 3,479,506 Outpatient services 1,749,132 Residential home services 17,724,580 Skill building / supportive employment 2,258,415 State inpatient services 69,727 Total operating expenditures $ 31,262, Page 53 of 77

54 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 Independent Auditors Report Management and the Board of Directors BayArenac Behavioral Health Authority Bay City, MI We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activities and the major fund of BayArenac Behavioral Health Authority as of and for the year ended September 30, 2017, and the related notes to the financial statements, which collectively comprise BayArenac Behavioral Health Authority s basic financial statements, and have issued our report thereon dated March 14, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered BayArenac Behavioral Health Authority's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of BayArenac Behavioral Health Authority s internal control. Accordingly, we do not express an opinion on the effectiveness of BayArenac Behavioral Health Authority 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 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. 5 3 Page 54 of 77

55 Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether BayArenac Behavioral Health Authority's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Saginaw, MI March 14, Page 55 of 77

56 BayArenac Behavioral Health Authority CMH Compliance Examination September 30, 2017 YEO & YEO CPAs & BUSINESS CONSULTANTS Page 56 of 77

57 Table of Contents Independent Accountants Report 1 Schedule A Compliance Requirements 2 Schedule B Schedule of Findings 4 Schedule C Schedule of Prior Year Findings 5 Schedule D Comments and Recommendations 6 Corrective Action Plans 8 Page Examined FSR Schedules and Contract Reconciliation and Cash Settlement 10 Page 57 of 77

58 Independent Accountants Report BayArenac Behavioral Health Authority Bay City, Michigan and Michigan Department of Health and Human Services Lansing, Michigan We have examined BayArenac Behavioral Health Authority s compliance requirements related specifically to Michigan Department of Health and Human Services contracts with Prepaid Inpatient Health Plans and Community Mental Health Services Programs of BayArenac Behavioral Health Authority as of and for the year ended September 30, Management is responsible for BayArenac Behavioral Health Authority's compliance with those requirements. Our responsibility is to express an opinion on BayArenac Behavioral Health Authority's compliance based on our examination. Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. Those standards require that we plan and perform the examination to obtain reasonable assurance about whether BayArenac Behavioral Health Authority complied, in all material respects, with the specified requirements referenced above. An examination involves performing procedures to obtain evidence about whether BayArenac Behavioral Health Authority complied with the specified requirements. The nature, timing and extent of the procedures selected depend on our judgement, including an assessment of the risks of material noncompliance, whether due to fraud or error. We believe that the evidence we obtained is sufficient and appropriate to provide a reasonable basis for our opinion. Our examination does not provide legal determination on BayArenac Behavioral Health Authority s compliance with specified requirements. In our opinion, BayArenac Behavioral Health Authority complied, in all material respects, with the aforementioned requirements for the year ended September 30, This report is intended solely for the use of the Board and management of BayArenac Behavioral Health Authority and others within the organization and Michigan Department of Health and Human Services and is not intended to be and should not be used by anyone other than these specified parties. Yeo & Yeo, P. C. Saginaw, Michigan March 22, 2018 Page 58 of 77

59 The following compliance requirements were considered in the compliance examination. 1. FSR Reporting The following shows the reconciliation between the FSR and the general ledger. Revenue per the FSR $ 47,069,726 Act 423 revenue and cash difference 52,822 General Fund carryforward (59,297) General Fund lapse to MDHHS (69,484) Revenues per Statement of Revenues, Expenditures, and Changes in Fund Balance $ 46,993,767 Expenditures per the FSR $ 46,740,150 Depreciation expense (172,734) Capital outlay 423,657 Change in compensated absences 78,734 Debt principal payments 128,025 Prior Medicaid settlement 214,480 Less: rounding (2) Expenditures per Statement of Revenues, Expenditures, and Changes in Fund Balance $ 47,412,310 a. Expenditure reporting b. Cost Allocations c. Reimbursements to subcontractors, less than armslength transactions, sale and leaseback arrangements d. Capital asset purchases e. Revenue reporting f. Distributions of salaries and wages 2. CRCS Reporting 3. Real Property Disposition 4. Administrative Cost Report 5. Procurement 6. Rate Setting and Ability to Pay 7. Internal Service Fund (ISF)* Page 59 of 77

60 8. Medicaid Savings and General Fund Carryforward 9. Match Requirement 10. Fee for Service Billings (CWP and SED Waiver Program) 11. CMHS Block Grant Activities Allowed or Unallowed* 12. CMHS Block Grant Cash Management* 13. Subrecipient Monitoring* *No such activity in fiscal year 2017 to consider in compliance examination. Page 60 of 77

61 Medicaid, General Fund, and CMHS Block Grant Programs Type of examination report issued: Unmodified Material weaknesses in internal control Yes X No Material noncompliance with the provisions of laws, regulations or contracts Yes X No Known fraud Yes X No Page 61 of 77

62 No prior year findings identified. Page 62 of 77

63 In planning and performing our audit of the financial statements of BayArenac Behavioral Health Authority (the Authority ) as of and for the year ended September 30, 2017, we considered BayArenac Behavioral Health Authority s internal control over financial reporting (internal control) as a basis for designing our audit procedures 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 Authority s internal control. Accordingly, we do not express an opinion on the effectiveness of the Authority s internal control. However, during our audit we became aware of several matters for management s consideration that are opportunities for strengthening internal controls. This letter does not affect our report dated March 22, 2018, on the financial statements of BayArenac Behavioral Health Authority. Our comments and recommendations regarding those matters are: Timesheet Approval Specific requirement: Management is responsible for the proper design, implementation and maintenance of internal controls. Condition found: The Authority s employees and supervisors are signing off and approving timesheets prior to the end of the period the timesheet covers. Examination adjustments: N/A none. Information to provide proper perspective regarding prevalence and consequences: Actual time worked could be different from what is approved and result in fewer or greater expense. The possible asserted effect: Employees actual hours worked could be different than what was approved since the sign off date was prior to the work date. Recommendation: We recommend the Authority review its policies, procedures and key controls over the payroll process and suggest that timesheets are only approved for actual time worked, not estimated time worked. Views of responsible officials when there is a disagreement with the finding: Management considered the comments and recommendation regarding time sheet approval and finds current practice acceptable. Supervisors currently inform payroll of any adjustments according to established policy, which has proven to be the most efficient method for timely payroll processing. A corrective action plan has been developed to assure time sheet approve occurs at a maximum of 2 days prior to the end of the pay period. This involves an additional oversight function to be performed by payroll staff. Planned corrective action: See attached corrective action plans beginning on page 8. Responsible party for the corrective action: Marci Rozek, CFO. Anticipated completion date: June 30, 2018 Page 63 of 77

64 Ability To Pay Specific requirement: A consumer s ability to pay is required to be determined before the start of service, or shortly thereafter if not practical to make the determination before the start of service (MCL ) and individuals who continue to receive service must have an annual determination (MCL ). Condition found: The Authority subcontracts with providers who are responsible for determining ability to pay for their consumers. We discovered four instances out of 40 when ability to pay was not determined for the period the consumer was serviced. Our sample did not identify any cases in which the forms were missing or incomplete when the determination was the Authority s responsibility. Examination adjustments: N/A none. Information to provide proper perspective regarding prevalence and consequences: Funding may be withheld or modified if proper compliance is not adhered to. The possible asserted effect: Individuals may be serviced without charge when the individual may have an ability to pay. Recommendation: We recommend the ability to pay forms are completed timely in all cases and that the forms are retained with all other consumer information. We understand that the Authority has a process to sample ability to pay forms of providers and suggest that the Authority consider whether the sample size is sufficient. Views of responsible officials when there is a disagreement with the finding: N/A no disagreement. Planned corrective action: See attached corrective action plans beginning on page 8. Responsible party for the corrective action: Marci Rozek, CFO. Anticipated completion date: June 30, 2018 Page 64 of 77

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