City of Charlotte, North Carolina Charlotte Douglas International Airport. Turn Over Review

Transcription

1 Charlotte Douglas International Airport

2 Table of Contents Transmittal Letter... 1 Background Objectives and Approach Observation Matrix Billing and Revenues, to include Rental Agreements and Contract Management Internal Controls, and Project Accounting and Capital Asset Accounting, to include Grant Budgeting & Accounting Contract Facility Charges Airport Special Statements Reconciliation with the Comprehensive Annual Financial Report Expense Reimbursements to the City Debt Management Process Maps

3 McGladrey LLP 4725 Piedmont Row Drive Suite 300 Charlotte, North Carolina O June 11, 2014 City of Charlotte, North Carolina 600 East 4 th Street Charlotte, NC Pursuant to the approved engagement letter dated September 25, 2013 with the City of Charlotte, North Carolina (the City ), we hereby present the of the Charlotte Douglas International Airport (the Airport ), an enterprise fund of the City. Fieldwork commenced October 2013 and was completed January From the completion of the fieldwork through present, we have been working and collaborating with the Aviation Department and City Management regarding their remediation plan of the identified observations. This review targeted the following high-risk core areas identified by management: Billing and Revenues to include Rental Agreements and Contract Management Internal Controls, and Project Accounting and Capital Asset Accounting, to include Grant Budgeting & Accounting Contract Facility Charges Special Statements Reconciliation with the Comprehensive Annual Financial Report Expense Reimbursements to the City Debt Management Our report is organized in the following sections: Background Objectives and Approach Observation Matrix Process Maps This provides an overview of operations and the core high-risk focus areas as identified by management for this. The objectives and focus are expanded upon in this section as well as a review of the various aspects of our approach. This section gives a description of the observations noted during our review, recommended actions as well as management s responses and action plans. This section provides process maps depicting the best practice flow of the identified processes. This engagement was conducted for the limited purpose described in the Objectives section of this report and was not designed to identify fraud, including fraud involving employees, management, those charged with governance, or external entities. Given these limitations, during our engagement we did not identify any such fraud. However, such fraud may exist that has not been identified. While the Airport has been one of the nation s fastest growing and most cost effectively operated airports for 2 decades, we noted matters, including those indicative of the operational stresses that could occur from high growth and lean operations and management over an extended period, which we have included in the following Observation Matrix. We would like to thank all those involved from the City and the Aviation department in assisting us with this. Respectfully Submitted, McGladrey 1

4 Background

5 Background Charlotte Douglas International Airport has been owned and operated by the City of Charlotte for 78 years. The Airport provides service to 142 destinations throughout the world and averages 703 daily departures. The 1.8-million square-foot terminal building contains five concourses and 95 gates. It has more than quadrupled in size since opening in The Airport is 8 th nationwide and 25 th worldwide in passengers. US Airways operates its largest hub at the Airport. The Airport is a major employment center, with nearly 20,000 workers on site. The majority (6,637) are employed by US Airways, with nearly 8,500 additional workers employed by other airlines, tenants and businesses. In addition, there are more than 300 Aviation department employees. This focused on the following 6 high-risk core areas identified by Management: Billing and Revenues to include Rental Agreements and Contract Management The primary sources of revenue at the Airport are fees and charges paid by the airlines and revenues paid by concessionaires providing services to the general public. Signatory airline terminal and airfield rates and charges are governed by 25 or 30 year lease agreements and concession revenues are established by leases of varying methodologies and terms. The airlines are assessed the following categories of fees and charges: rent, airport services, maintenance and operation fees and landing fees. Airline fees and charges are established at a level to recover the related service and facilities costs. Concession revenues are generated either through fixed annual charges or on the basis of a percentage of sales generated by the tenants operations. The Airport distinguishes operating revenues and expenses from non-operating items. Operating revenues, (such as terminal, airfield, concessions, parking and other) and expenses generally result from providing services and producing and delivering goods in connection with the Airport s principal ongoing operations. Non-operating revenues, such as passenger facility charge, contract facility charge and investment earnings result from non-exchange transactions or ancillary services. Airport operating revenues are derived primarily from the terminal area, concessions and parking (~84% as of June 30, 2013) and airport non-operating revenues are derived primarily from passenger facility charges (~61% as of June 30, 2013). Total revenues amounted to $234.9M and $224.2M in fiscal years 2013 and 2012, respectively. The Aviation department recently went through a system conversion to PROPworks, in order to effectively manage their revenue contacts. PROPworks is a comprehensive software program designed to manage the lease, property, and revenue information needed to operate complicated businesses and transportation facilities of all sizes, like the Airport. PROPworks will allow the Aviation department to track agreements and leases, to compile information about business relationships, to bill and invoice tenants or concession operators (collectively lessee(s) ), and to track service providers and concessionaires for compliance with agreements. Currently, the Airport is under agreement with ~200 plus active revenue generating contracts/leases. The Aviation department has one (1) employee, the Revenue Contracts Manager who is responsible for administration of the revenue contracts. 2

6 Background - continued Internal Controls and Project Accounting and Capital Asset Accounting to include Grant Budgeting & Accounting The Aviation department maintains a 5-year capital improvement plan covering all areas of airport infrastructure that is updated on an ongoing basis to reflect the changing physical needs of the Airport. The plan is reviewed by the engineering and planning teams, approved by Airport management, and included in the City s overall capital plan. The Aviation Development department drives the initial capital project process, with the Aviation Finance team involved in some planning aspects, including review of assumptions and identification of funding sources. The City s Central Finance team also consults on the completed project funding plan and pro forma funding analysis. The Aviation Development department includes three project managers, five inspectors, and trade workers. There are two external consultants under contract who work as project managers. The general arrangement is that horizontal projects are handled by the internal project managers, while vertical projects are handled by the external project managers. The project managers responsibilities include: review of monthly pay applications, inspection of work in progress, resolution of contractor billing issues, in-field monitoring of progress and quality, assistance with negotiations, recommendations in areas of expertise, and monitoring compliance with the critical path and other schedules. The types of contracts entered by the Aviation department include professional services and construction contracts. The contract terms vary and may include fixed rates, lump sum amount, cost plus fixed amount, and unit pricing. All pay applications are approved by the Aviation department s Assistant Director for Development. Change orders are approved based on an established authority matrix which requires City Council approval of all change orders of $100,000 or more, and City Manager approval for change orders over $50,000. The Aviation department s capital assets, net of accumulated depreciation, totaled approximately $1.01B as of June 30, These capital assets consist primarily of land, buildings, and runways. Recent project additions include land acquisition, runway improvements, and ticket lobby renovations. The Airport currently has several improvement projects underway, including construction of a new hourly parking deck and rental car facility. Capital assets are depreciated using the straight-line method over the below useful lives assigned based on the asset category: Category Buildings Runways Other Improvements Machinery and Equipment Useful life 25 years 33 years 25 years 4-30 years The Aviation department currently maintains a redundant capital assets system using an Access database program. Aviation department maintains that this is required because the current general ledger system (GEAC) does not provide sufficient detail for reporting. The Aviation department has planned to utilize the City s new ERP system to avoid the need for a redundant database. The Aviation department has received grants from the Federal Aviation Administration, Transportation Security Administration, and the American Recovery and Reinvestment Act. These grants are subject to review by the grantor agencies and there are various reporting requirements and compliance aspects associated with each grant. 3

7 Background - continued Contract Facility Charges In May 2007, City Council adopted an ordinance imposing a CFC of $3.50 per rental car contract per transaction day for all vehicles rented at the Airport, which can be periodically adjusted. On June 2, 2011 the City raised the CFC from $3.50 to $4.00 per transaction day to fund construction, maintenance and operation of current and future car rental facilities. The Airport is in the process of constructing a consolidated rental car facility, with an estimated cost of $85 million, intended to enhance customer service, provide savings to the concessionaires and eliminate rental car concessionaire bus trips to/from the Airport terminal. In November 2011, the Airport issued bonds secured by CFC and rental car concessionaire guarantees with which to build this facility. The agreement requires that the rental car concessionaires remit the monthly CFCs collected on or before the 10 th day of the next succeeding month to U.S Bank National Association, the bond Trustee. CFC s are applied each month in amounts and priority as defined by the automobile rental concession agreements with the concessionaires. CFC revenue amounted to $9.5M and $8.9M in fiscal years 2013 and 2012, respectively. Airport Special Statements Reconciliation with the CAFR Like all government agencies, the City is required to prepare an audited Comprehensive Annual Financial Report (CAFR) for all of its governmental and business-type activities. The CAFR is generally due within 180 days of fiscal year end. In addition to the CAFR, the City files a special set of financial statements for only the City of Charlotte Airport, and submits those annually to the Federal Aviation Authority (FAA). The special statements are prepared after the CAFR, and are based upon CAFR inputs. However, there are differences in the format the information is presented, as well as there are additional schedules included in the special statements that are not required in the CAFR. In addition to these audited financial reports, the FAA requires filing of the following forms on an annual basis: Form , Financial Governmental Payment Report. The FAA requires sponsors to file Form as the annual report on revenue paid to other units of government and on compensation the airport received for services and property provided to other units of government, including in-kind services. Form , Operating and Financial Summary. The FAA requires sponsors to file Form as the annual report of their revenues, expenses, and other financial information. These forms are to be filed within 120 days after the end of their fiscal year. For the City, whose fiscal year ends on June 30, the filing deadline is October 31 of each year. The FAA may grant an extension of 60 days after the filing date if audited financial information is not yet available by the filing due date. No extensions can be granted past June 30 of the calendar year following the sponsor s fiscal year end. 4

8 Background - continued Expense Reimbursements to the City The City prepares an annual Cost Allocation Plan (CAP) in order to allocate general and administrative overhead costs to the other departments of the City. The support departments and other designated costs that are allocated include the following: Budget and Evaluation Finance Shared Services Human Resources City Attorney Equipment Depreciation/Financing City Manager Facility Costs Engineering Building Maintenance Employee Costs and Retiree Insurance Engineering CMGC Road Use Tax These costs are allocated in a two-step process, first distributing the total support costs to all departments, and then distributing the allocations from step one to the support departments to the service departments. The method used to allocate the costs and calculate the amount allocated varies for each support department, and is notated within the approved CAP. The Airport is considered a service department, and support costs are allocated to the Airport as stipulated in the CAP. The CAP for FY2013 allocated $84.7 million in costs to all City Departments. Debt Management The Airport, in conjunction with the City, issues bonds in order to fund capital expansion and improvement projects. These projects can also be partially funded by grants and other revenue sources. As of June 30, 2012, the Airport had $860.1 million in revenue bonds outstanding. There were 15 different series of bonds outstanding, several with unspent proceeds for ongoing and future projects. Debt payments each year for the Airport are approximately $59 million. There are multiple levels of debt issued, with varying interest rates and allowable uses. The City and the Airport work very closely with bond counsel and governing bodies, including the IRS, to ensure that the bond proceeds are used properly and in accordance with all governing documents and regulations. 5

9 Objectives and Approach

10 Objectives and Approach Objectives The overall objective of the was to gain an understanding of the processes, procedures and the control environment of high-risk core areas identified by management. We performed a high level analysis and review, and made recommendations for improvement where considered necessary. Approach Our audit approach consisted of the following phases: Understanding and Documentation of the Process This phase of our review consisted primarily of inspection and inquiry in an effort to obtain a foundational understanding of the high-risk core areas. We met with representatives from the Aviation department and the City to discuss the scope and objectives of the, obtained preliminary data, and established working arrangements. We also obtained copies of reports and other documents deemed necessary. We then conducted facilitated sessions and interviews with representatives from the Aviation department and City within the high-risk core areas identified by management. We documented our understanding of the high-risk core areas in a process map/flowchart, where applicable, which was subsequently validated by the parties noted above. Process and Control Review During this phase we assessed whether the controls are properly designed and made recommendations on how to improve internal controls where deficiencies were identified. The following procedures were conducted as a part of this phase of our review: Control design gap identification, where applicable; Identification of opportunities for new/modified controls for process improvement and/or efficiency gains; and Development of recommendations for additional or improved controls. Compliance and Controls Review During this phase, we performed high-level sample testing of compliance and processes. Our procedures included the following: Revenue and Billing Our review was limited to sampled terms and conditions of the selected contract, as well as the revenue terms and conditions as it applied to the invoices selected. Not all revenue aspects and terms and conditions of each selected contract were tested in this review. We selected a sample of eight revenue contracts and two invoices from each revenue contract (one invoice from FY 2013 and one invoice from FY 2014) for testing. We developed a testing matrix based on the relevant terms and conditions of the agreements; Reviewed lessees performance compliance with the certain terms and conditions of the contract; Conducted walkthroughs with the respective contract owners to obtain an understanding of their contract monitoring process; and Compared the selected invoices to the contract to review for completeness and accuracy. 6

11 Objectives and Approach - continued Approach - continued Internal Controls and Project Accounting and Capital Asset Accounting to include Grant Budgeting & Accounting Obtained the contracts for a sample of two construction projects and verified the contracts were properly executed; Conducted walkthroughs with the project managers of the two selected projects to understand their monitoring and review processes; For the two selected projects, verified that all pay applications were on file, supported with documentation, and contained proper approval documentation; For a sample of two pay applications under each selected project, agreed amounts to the contract and schedule of values and recalculated mathematical accuracy of the pay application; For one pay application under each selected project, recalculated the mathematical accuracy of the schedule of values; Reviewed one change order for each of the selected construction projects to verify: proper approval, mathematical accuracy of underlying schedules, compliance with contract terms and conditions, and that the change order amounts were properly reflected in the pay applications in our sample; and Reviewed the closeout file for one selected completed construction project for completeness of documentation. Contract Facility Charge Obtained and reviewed a sample of CFC payments made by the rental car concessionaires into to the trust accounts; Tested selected rental car concessionaires compliance with the CFC terms and conditions of the contract; Tested payments received into the City s CFC trust account as compared to the rental car concessionaires monthly activity reports; and Performed a walkthrough of CFC revenue payments/transfers from the CFC fund account to an approved use of the CFC fund. Airport Special Statements Reconciliation with the CAFR Reviewed FAA Compliance Manual for financial reporting requirements; Discussed reconciliation process or lack thereof with City and Aviation department personnel; Obtained and reviewed fiscal year ended June 30, 2012, audited Comprehensive Annual Financial Report ( CAFR ); Obtained and reviewed fiscal year ended June 30, 2012, City of Charlotte Airport Enterprise Fund financial statements ( special statements ); Compared CAFR and special statements for accuracy and developed listing of reconciling items. Expense Reimbursement to the City Interviewed City Budget personnel on the process for developing the Cost Allocation Plan ( CAP ); Obtained copy of the CAP for FY 2013 and selected three departments for additional testing; Interviewed the sampled departments to understand how their charges are accumulated and the methodology for allocation in the CAP; Obtained support for the FY2013 CAP for the selected departments and compared to the CAP for accuracy, as well as evaluated the allocation methodology for reasonableness. 7

12 Objectives and Approach - continued Approach - continued Debt Management Interviewed City Finance and Aviation department staff to understand the process for issuing debt, setting up projects funded by debt, and tracking those projects; Obtained a copy of the Financial, Debt Management and Accounting Policy for the Airport and discussed the 2011 series debt in relation to that policy with personnel; Obtained a listing of all projects funded by the debt, selecting one for additional testing; For the selected project, obtained copy of project cost listing and support for all invoices coded to that project, to determine whether the support was properly coded to that project. Reporting For each of the high-risk core areas reviewed, we identified observations and recommendations for improvement where considered necessary. The observation matrix section provides the detail of the observations identified and recommendations for remediation. We have assigned relative risk factors to each observation identified. This is the evaluation of the severity of the concern and the potential impact on the operations. There are many areas of risk to consider including financial, operational, and/or compliance as well as public perception or brand risk when determining the relative risk rating. Items are rated as High, Moderate, or Low. High Risk Items are considered to be of immediate concern and could cause significant operational issues if not addressed in a timely manner. Moderate Risk Items may also cause operational issues and do not require immediate attention, but should be addressed as soon as possible. Low Risk Items could escalate into operational issues, but can be addressed through the normal course of conducting business. We have reviewed the results with the City s Finance Director, Deputy Finance Director, Aviation Director, Aviation Finance Director and other members of the City and the Aviation department s management. Included within the observation matrix is Management Response with the targeted implementation date for remediation of recommended action items. We recommend that the City have follow-up procedures performed for those observations where the remediation target dates have been reached, and ample time has passed under the new process/control to verify and report the implementation status of the recommendations to the previously reported observations. Follow-up is meant to validate, on a sample basis, the effectiveness of the remediated controls of the previously reported observations. 8

13 Observation Matrix

14 Billing and Revenue, to include Rental Agreements and Contract Management Rating Observation Recommendation Management s Response High 1. Contract Administration Aviation records show that over 200 revenue contracts are As previously noted, the Aviation administered. The Aviation department has one (1) employee, the Revenue Contracts Manager who is responsible for administration of the revenue contracts. We selected a sample of eight revenue contracts and two invoices from each revenue contract (one invoice from FY 2013 and one invoice from FY 2014) for testing. We also reviewed a sample of required periodic reporting documentation as stipulated in the revenue contracts. Our review was limited to sampled terms and conditions of the selected contract, as well as the revenue terms and conditions as it applied to the invoices selected. Not all revenue aspects and terms and conditions of each selected contract were tested in this review. We noted the following: Independent Validation Through discussions with the Aviation management and staff, we noted that they do not independently validate or verify the underlying supporting documentation received from the lessee, which is the basis of invoicing for some lease terms. For example, some lessee invoices are based on a percentage of sales or profits. Monitoring Through our sample testing we noted the following contract compliance issues in three of the eight contracts tested: Hertz Rent-A-Car and Enterprise Rent-A-Car: The contract stipulates that the lessee is to provide year to date gross revenues on a monthly basis. Per review of the lessee s monthly statements, only the previous month s results are provided. The contract requires that the lessee submit certified annual statements of gross revenues and compliance with CFC provisions. The Aviation department could not provide documentation of receipt of these 2 reporting requirements. department recently went through a system conversion to PROPworks, in order to effectively manage their revenue contacts. PROPworks will allow the Aviation department to effectively track agreements and leases, to compile information about business relationships, to bill and invoice tenants or concession operators, and to track service providers and concessionaires for compliance with agreements. We recommend the Aviation department perform the following: Inventory active revenue contracts to determine completeness of contract document files and followup on identified issues. Review contracts for outdated, irrelevant, or unenforceable terms, conditions, or clauses and consider them for removal. Compare the active contracts to invoicing parameters to determine accuracy and completeness of invoices and follow-up on identified issues. Utilizing PROPworks, populate contract terms, timing of price escalations, and timing of periodic review of contracts. Response: Aviation agrees with recommendation. As a point of clarification, the Aviation department has one dedicated revenue contract manager, but multiple other employees responsible for managing certain revenue contracts. The Aviation department is evaluating procedures for its revenue contracts based, in part, on the recommendations contained herein. The Aviation department is currently moving to a centralized model for managing its revenue contacts. In response to this initiative, Aviation is creating an Airport Business Office which will be responsible for revenue contract management, leasing, tenant negotiations, economic and business development, among other things. The total scope of the Airport Business Office is under development. 9

15 Billing and Revenue, to include Rental Agreements and Contract Management - continued Rating Observation Recommendation Management s Response High 1. Contract Administration continued Contract Approval and Documentation Utilizing PROPworks tickler We noted the following contract approval and documentation issues with three of the eight revenue contracts reviewed: Hertz Rent-A-Car: The 2nd Amendment to the contract, dated August 2005, was not signed by the Aviation system functionality, populate the documents and timing of lessee reporting required per the contract terms. department or the lessee. Utilizing PROPworks, if possible, Continental Airlines: The Aviation department was maintain copies of required lessee unable to locate the contract or amendment to reporting documentation, including substantiate the housekeeping services billings. The Paradies Shops, LLC: The trash removal costs are evidence of review by the contract administrator. not documented in the contract or amendments. The Enforce lessee reporting and trash removal costs are documented in a letter signed by the Aviation department and sent to the lessee. documentation requirements, and performance of timely follow-up. Establish contract administration procedures. The absence of consistent, periodic monitoring and validation of underlying support by the Aviation department limits their ability to comply with responsibilities under lease and concession terms and conditions. Failure to perform monitoring and validation opens the opportunity for control weakness and prevents the deterrent effect such tests would have. Implementation of the above recommendations will enhance monitoring of contract activities and help determine that terms of contracts are adhered to. Validation/Monitoring & Contract Approval/Documentation: As noted in the recommendation, Aviation recently implemented PROPworks, which is a contract management and invoicing system in connection with the City s ERP initiative. PROPworks was activated on July 1, 2013 and is being utilized to enhance contract management and for all Airport invoicing. Aviation is currently populating PROPworks with contract terms including price escalations and reporting requirements. Aviation will also utilize PROPworks tickler system to maximize contract management functionality. 10

16 Billing and Revenue, to include Rental Agreements and Contract Management - continued Rating Observation Recommendation Management s Response High 1. Contract Administration continued Invoicing It is our understanding the Aviation Invoicing: We noted the following billing discrepancies per our review of department is in process of followingup Noted observation regarding DHL the lessee invoices as compared to the associated revenue on these identified invoicing issues. contract has been confirmed and contracts: DHL Global Business Services: resolved. Aviation has invoiced DHL for ground rent identified in Observation. Section 4.02(b) of the revenue contract states that facility Furthermore, DHL has executed a letter rent shall be an amount equal to the annual amortization of acknowledgement confirming 25 year of the total cost of the Airport s improvements over an amortization term used to calculate amortization period of 20 years. Per our re-calculation, facility rental. the monthly rental amount should be ~$35,397 Estimated Completion Date: The (~$424,766 annually). The City s rental calculation used creation of the Aviation Business Office; a 25-year amortization period, under which rentals have establishment of contract administration been billed at $31,760 monthly ($381,120 annually) since procedures; and completion of the contract inception date of June 21, This PROPworks contract management amounts to an estimated monthly difference of ~$3,634. module updates are anticipated to be The estimated shortage in billings to date is ~$323,700, complete by the end of Calendar Year which would result in ~$1,032,078 in over billings at the end of the contract. Section 4.01(c) of the contract states that the ground rent Responsible Party: Aviation amount will escalate every 5 years on the anniversary department date of building occupancy, which was June 21, The ground rent has not been updated since the original occupancy date of June 21, We re-performed the rent calculation using historical Consumer Price Index figures (CPI-U), and estimated the shortage in billings to be ~$7,000 for the period from June 21, 2011 to November 21,

17 Billing and Revenue, to include Rental Agreements and Contract Management - continued Rating Observation Recommendation Management s Response High 2. Right to Audit Clause Through our testing of the revenue contracts we noted that three of the eight revenue contracts sampled did not include a right to audit clause and the Aviation department has not previously exercised their right to audit.. We recommend that the Aviation A right to audit clause is a good business practice for all types of organizations, of all sizes. They support compliance and allow for business partner oversight. Carrying out regular audits tends to build greater trust with contract relationships. Also, it sends the message that the Aviation department will be monitoring to determine compliance with the contracting entity s ethics or business standards and that the entity is complying with the agreed upon contractual relationship. department perform the following: Review all active revenue contracts to determine which revenue contracts are lacking a right to audit clause and modify where deemed necessary. Work with Airport Counsel to determine if a right to audit clause can be executed on revenue contracts that have expired and are currently month to month. Consider exercising right to audit clauses on a periodic basis. Response: Aviation agrees with proposed recommendation. All revenue contracts will include a right to audit clause. Aviation Revenue Management/Airport Business Office will conduct annual review and sample of revenue contracts for consideration of exercising right to audit. Estimated Completion Date: Effective Immediately Responsible Party: Aviation department 12

18 Internal Controls and Project Accounting and Capital Asset Accounting, to include Grant Budgeting & Accounting Rating Observation Recommendation Management Responses High 3. Policies & Procedures Based on interviews with Aviation management and staff, we noted that there are no formal, documented policies and procedures for the following: Pay application review process. Project Management Bidder selection Process Grant Compliance Reporting Change Order Process Lack of documented policies and procedures increases risk of errors and omissions, which could jeopardize the grant funding. Further, centralized, standardized, and documented policies and procedures provide vital information to employees in the event of absences, employee turnover, or other occurrences. Grant application / funding process, which includes requiring / facilitating Aviation Finance department s involvement early in the process with development in the identification and analysis for funding the respective live and ready capital projects. Including Aviation Finance department earlier in the grant funding / budgeting process is vital in providing a full and detailed funding analysis to determine the financial viability of the respective projects. This is especially vital since for most grant (AIP) funded projects, Aviation is responsible for 25% of the project cost. Further, centralized, standardized, and documented policies and procedures provide vital information to employees in the event of absences, employee turnover, or other occurrences. We recommend that the Aviation department develop policies and procedures for the following: Pay application review process, to facilitate the collaborative participation of both Development and Aviation Finance staff in the process. Further, management and staff should utilize a checklist to document reviews and reconciliations performed throughout the pay application review process. This checklist will serve both as documentation of work performed and as a reference to employees, helping ensure proper review and support of all payments pursuant to contract terms and conditions. See also recommendations #5. Project management process. Further, management and staff should utilize a checklist to document key procedures from project initiation to project closeout. This checklist will serve both as documentation of work performed and as a reference to employees, helping ensure proper compliance with project management requirements and duties as outlined in internal policies and in compliance with the Owner s project management responsibilities stipulated in the contract. Response: Aviation concurs with the recommendation that it should develop policies and procedures governing the processes identified herein to ensure efficient and effective operations and minimize the impact of staff absences and/or turnover. The Aviation department has recently implemented a contract procurement process which tracks the flow of all Aviation department contracts from inception to execution. Aviation Development has integrated this form into its contract workflow. Aviation also agrees with the continued collaborative participation with both Development and Aviation Finance departments and to develop and utilize a checklist to document reviews and reconciliations performed throughout the workflow process. 13

19 Internal Controls and Project Accounting and Capital Asset Accounting, to include Grant Budgeting & Accounting - continued Rating Observation Recommendation Management Responses High 3. Policies & Procedures - continued Bidder selection process that require Estimated Completion Date: Aviation the collaborative participation from estimates development and the following Aviation departments implementation of recommended including Development, Finance, checklists by the end of calendar year Procurement and Legal staff in the process. Further, management and staff should utilize a checklist to Responsible Party: Aviation document bid process milestones department performed throughout the bidder selection process. This checklist will serve both as documentation of work performed and as a reference to employees, helping ensure proper compliance with internal policies and applicable procurement state statutory and federal and / or state grant requirements. Grant compliance reporting process. Further, management and staff should utilize a checklist to document key procedures from grant pre-application to grant closeout. This checklist will serve both as documentation of grant monthly and quarterly reporting timeline with key activities performed and as a reference to employees, helping ensure proper compliance with grant reporting required data criteria and deadlines. 14

20 Internal Controls and Project Accounting and Capital Asset Accounting, to include Grant Budgeting & Accounting - continued Rating Observation Recommendation Management Responses High 3. Policies & Procedures - continued Change order process which documents the key steps of the process and also comply with the changes in work provision in the contract documents. These change order policies and procedures should take into account recommendations #6. Further, management may want to establish a checklist as part of the change order form, that includes, but not limited to: o Nature/purpose of the change o Entitlement Determination o AE drawings / input as needed o Engineer input, as needed o Cost, including support o Impact on project schedule Grant application / funding process that facilitate the collaborative participation of both from the Aviation department s Development and Finance staff in the decisionmaking process. Further, management and staff should utilize a checklist to document reviews and cash flow and other analysis performed. This checklist will serve both as documentation of work performed and as a reference to employees, helping to ensure the financial viability of the respective projects to be funded. 15

21 Internal Controls and Project Accounting and Capital Asset Accounting, to include Grant Budgeting & Accounting - continued Rating Observation Recommendation Management Responses High 4. Capital Projects & Grants Shadow Capital Projects Cost Report Based on interviews with Aviation management and staff, due to various limitations of the City s general ledger system ( GEAC ), Aviation management and staff developed a duplicative, redundant system - their own shadow system (with ACCESS) to track capital project expenditures and funding. For example, GEAC has limitations as it relates to the tracking of grant funding vs. budgeted and actual disbursements by project. GEAC does not allow for the tracking of multiple grants to one project. Further, GEAC does not provide Aviation management and staff with the visibility needed to track project disbursements / expenditures real time in terms of measuring actual expenditures vs. budget etc. Management indicated that the amounts as manually input into this shadow project cost system do not reconcile to the amounts recorded in the GEAC system due to various factors including timing differences and expenditures directly charged to GEAC that are not communicated to Aviation Finance department as well as various accrual and reversing journal entries. Based on conversations with Aviation management, we understand that a new ERP system (MUNIS) is being implemented and is projected to go live during calendar year We recommend that in collaboration with appropriate City management and staff and the ERP implementation team that Aviation management and appropriate staff should continue to be included and significantly involved in this ERP implementation process. This is especially vital as it relates to the capability and configuration of the capital project accounting and grants module to ensure that it best meets the functionality Aviation management needs to avoid continuing to run a duplicate, redundant and costconsuming capital cost projects system. Response: Aviation is fully integrated with City Finance and the ERP team in connection with the implementation of the City s ERP initiative. Aviation participates in regular ERP coordination meetings and conducts internal weekly review and status meetings and maintains a Readiness Checklist to ensure successful project implementation. Aviation is involved with the development and configuration of the capital project and grant accounting module to be implemented in connection with the ERP initiative. The implementation of Munis ERP will negate the need for Aviation to avoid running a duplicate project capital cost report. Estimated Completion Date: ERP Munis is currently projected to go-live in July Responsible Party: Aviation department 16

22 Internal Controls and Project Accounting and Capital Asset Accounting, to include Grant Budgeting & Accounting - continued Rating Observation Recommendation Management Responses High 5. Pay Applications Review and Approval Pay Application Review Based on interviews with Aviation management and staff, management does not review the mathematical accuracy of the monthly pay applications as part of the review process. In our review of two pay applications for the Rental Car Facility ( RCF ) and Hourly Parking Deck project, we noted that there is a complex detailed schedule of values that includes multiple funding sources that need to be allocated based on contractually agreed upon percentages. We did note some mathematical inaccuracies in the four pay applications selected for the two construction projects tested, as follows: RCF and Hourly Parking Deck: Pay Application 7: The percent complete calculations on the schedule of values do not include the stored material amounts. This caused the percent complete to be understated for 8 line items. On the schedule of values, the "Work completed This Period," "Balance to Finish," and "Retainage" totals do not include the last line item on the original contract section (Gasoline Fueling System Labor, under Division 33 - Utilities). This caused the retainage amount to be understated by $683.57, which affected the total amount due by this same amount. Pay Application Review/Approval/ Sign Off s We recommend that the Aviation department implement controls in the pay application review process that includes: Recalculating the roll-up of the schedule of values for each monthly pay application for accuracy of the amounts being billed; In the case of multiple funding sources, this will mitigate the risk of misappropriation of funds to the relevant costs; and Documentation of the review and approval steps in the pay application review process. Retainage Percentage not Consistent with Contract Terms We recommend that the Aviation department implement a control in the pay application review process that includes reviewing the retainage amount for each monthly pay application for accuracy and consistency with the contract terms. Response: Pay Application Review: Aviation agrees with this recommendation. After approval of the Schedule of Values submitted by the contractor, the final format for pay applications will be created individually for each project by the Aviation project manager. To ensure that formulas and or change order work is not edited by the contractor, the project manager will create an excel pay application with all line items and formulas and password protect the pay application for contractor use. If the pay application needs to be edited, the Aviation project manager will revise the pay application, password protect it, and resend to contractor for their use. 17

23 Internal Controls and Project Accounting and Capital Asset Accounting, to include Grant Budgeting & Accounting - continued Rating Observation Recommendation Management Responses High 5. Pay Applications Review and Approval continued Pay Application Review - continued RCF and Hourly Parking Deck - continued: Pay Application 7 - continued: The cost allocation calculations were not completed for the last line item of the original contract section (Gasoline Fueling System Labor, under Division 33 - Utilities). The percent complete is not calculated correctly for two change order line items ( ASI-001 Owner Contingency and Bulletin-007 Revisions to RCF deck fueling system ). The balance to finish is not correct for the last line item of the change order section ("Bulletin-007 Revisions to RCF deck fueling system"), which also affected the total change orders amount. We noted that the above errors were corrected on the subsequent pay application in our sample (22).Pay App 22: Retainage was not calculated on the change orders. This caused the retainage to be understated by $46,732. Runway Reconstruction: Pay App 9: The Schedule of Values shows the total contract sum as $24,602,357.68; the pay application shows $24,099, We were not able to reconcile these two figures. Lack of review of mathematical accuracy in the Schedule of Values or inaccurate allocation of the costs among funding sources can lead to inaccurate billings and / or misappropriation of funding sources. Estimated Completion Date: Aviation estimates development and implementation of recommended checklists by the end of calendar year Missing review/approval sign-offs and retainage percentage recommendations will be effective immediately. Responsible Party: Aviation department 18

24 Internal Controls and Project Accounting and Capital Asset Accounting, to include Grant Budgeting & Accounting - continued Rating Observation Recommendation Management Responses High 5. Pay Applications continued Missing Review/Approval Sign-Off s We noted the following approval or review sign-offs were not documented on the pay applications for the 2 selected projects: Rental Car Facility and Hourly Parking Deck pay applications 5 and 9 did not contain evidence of Project Manager approval or review. Runway Reconstruction pay applications 2 and 9 did not contain evidence of Assistant Director for Development approval or review. Lack of required sign-offs prevents accountability and represents a weakness in internal controls over review and verification of the pay application accuracy. Retainage Percentage Not Consistent with Contract Terms The retainage percentage on application and certificate for payment 9 for the Runway Reconstruction project was 2%, which is not consistent with the contract terms. Section of the contract Terms and Conditions covers retainage, and states the following: "From the total of the amount determined to be payable on a partial payment, ten (10%) percent of such total amount will be deducted and retained by the Owner until the final payment is made. When not less than 95 percent of the Work has been completed the Engineer may, at his/her discretion and with the consent of the surety, prepare an estimate from which will be retained an amount not less than twice the Contract value or estimated cost, whichever is greater, of the Work remaining to be done." Withholding retainage at the contractually stipulated percentages provides the Owner with financial leverage to ensure the project is completed timely and according to plans and specifications. By forgoing this practice and electing to significantly reduce the percent retained, the Owner weakens its overall position with respect to its fiscal and operational relationship with the Construction Manager. Response - continued: Missing Review/Approval Sign-offs: Aviation agrees with recommendation. Aviation will address this observation as follows: (1) once finalized by the project manager and contractor, the project manager will sign the pay application signifying her review and approval of the contracts; and (2) the pay application will then be forwarded to either the Assistant Aviation Director Development, Deputy Aviation Director or Aviation Director (depending on availability) for final review and execution. Retainage Percentage no Consistent with Contract Terms: Aviation acknowledges the tested contract s retainage provision was misapplied in this instance. Development, in cooperation with Legal, will ensure that the retainage provision is properly applied moving forward. Furthermore, in November 2013 Aviation has hired a full-time project cost and grant accountant who will assist in the review and accurate confirmation of retainage. Estimated Completion Date: Effective immediately. Responsible Party: Aviation department 19

25 Internal Controls and Project Accounting and Capital Asset Accounting, to include Grant Budgeting & Accounting - continued Rating Observation Recommendation Management Responses High 6. Change Order Process Approval Thresholds We noted that City Council review and approval is required for change orders greater than $100,000. Response: The Aviation Department will work with the City regarding the City Council threshold requirement. Mark-up not specified in contract We selected 2 projects for review. For the RCF and Hourly Parking Deck project, we reviewed the 5 change orders executed or proposed to date. We noted that for all proposed change orders, mark-up was included, but no amount or percentage was specified in the contract Lack of documentation related to mark-up for additive change orders can lead to unauthorized and / or excessive charges. Approval Thresholds We recommend that the requirement of City Council review and approval of change orders greater than $100,000 be increased to a threshold amount more appropriate to maintain efficiency of operations. Mark-up not specified in contract We recommend that the Aviation department require the documentation of contractor and subcontractor markups in the contract documents. This will mitigate the risk of unauthorized and / or excessive markup fees for change orders. If the change order enlarges the project budget by adding additional scope, labor or materials, Aviation would present the Change Order to the City Manager or Charlotte City Council as required by the City s procurement policy. 20

26 Internal Controls and Project Accounting and Capital Asset Accounting, to include Grant Budgeting & Accounting - continued Rating Observation Recommendation Management Responses High 6. Change Order Process - continued Proposed Change Order - Purpose, Entitlement and Supporting Documentation Response - continued: Mark-Up: We selected 2 projects for review. For the RCF and Hourly Aviation agrees with the Parking Deck project, we reviewed the five change orders executed or proposed to date. We noted that for all proposed change orders, the entitlement determination, cost support, recommendation. Aviation will include a suitable mark-up provision consistent with the recommendation. including AE review and input is not included in the proposed change order ( PCO ) documentation reviewed by the Aviation Assistant Director and / or Deputy Director, Aviation Director, City Manager and City Council as applicable for authority threshold approval requirements. Lack of documentation related to entitlement and detailed cost support for additive change orders can lead to unauthorized and / or inappropriate charges. Proposed Change Order - Purpose, Entitlement and Supporting Documentation We recommend that the Aviation department require the following as part of the change order forms and process: Inclusion of clear description and documentation as to the purpose and nature of the change in the determination of entitlement Making the PCO support related to submittal of the proposed change order available electronically (such as via Sharepoint,etc) for the various levels of review from the Aviation Assistant Director and / or Deputy Director, Aviation Interim Director, City Manager and City Council as required by the approval thresholds This will mitigate the risk of unauthorized and / or unsupported charges through the review and approval by the appropriate authority from Aviation Interim Director to City Council. Change Order Process: Aviation s standard form change order requires a brief description of the work captured in the change order. Failure to include a description in this case would have been an oversight. Aviation agrees that entitlement determination, cost support and AE review are necessary in connection with change orders. However, Aviation does not believe that change orders include back up documentation when delivered to management for execution. All backup documentation is filed for easy access in the event additional information is required. The project manager (who has the greatest knowledge of the project) prepares each change order and serves as a staff resource for the Aviation Director, City Manager or Charlotte City Council prior to consideration and approval of the change order. 21

27 Internal Controls and Project Accounting and Capital Asset Accounting, to include Grant Budgeting & Accounting - continued Rating Observation Recommendation Management Responses High 6. Change Order Process - continued Response - continued: Change Order Process - continued: Development does not believe that attaching back up documentation to the change order would be effective because the party responsible for execution does not typically have the time or depth of understanding of the relevant project to sort through voluminous back up documentation. The staff resource can answer any and all questions quickly and comprehensively as needed. Estimated Completion Date: Effective immediately. Responsible Party: Aviation department 22

28 Contract Facility Charge Rating Observation Recommendation Management s Response Moderate 7. Automobile Rental Concession Agreements Concessionaire Compliance with Contract Terms and Concessionaire Compliance with Response: Aviation agrees with Conditions The automobile rental concession agreements require that the rental car concessionaires remit the monthly CFCs collected on or before the 10 th day of the next succeeding month to U.S Bank National Association, the bond Trustee. We selected 2 automobile rental concession agreements and 2 months of CFC remittances to the trustee noting the following: Contract Terms and Conditions recommendation. Aviation Although the rental car concessionaires currently submit monthly CFC activity summaries, this is not a requirement per review of the automobile rental concession agreements dated November 1, However, this is a requirement per review of City Ordinance Section 4-38 dated July 1, Neither rental car concessionaire selected had submitted their remittances to the trustee on or before the 10 th day of the succeeding month, as required by the automobile rental concession agreements. For one month, one rental car concessionaire did not submit their remittance to the trust until the 2 nd succeeding month. The Aviation department receives monthly CFC summaries from the rental car concessionaires; the City s Central Finance department receives the monthly CFC trust statements, posts the CFC to the general ledger and performs the bank reconciliation. Although we did not note any exceptions of rental car concessionaire remittances to the trustee as compared to the monthly CFC activity summaries provided by the rental car concessionaires, there is no internal verification/reconciliation of the CFC activity summaries to the CFC trust statements performed by the City s Central Finance department nor the Aviation department. We recommend that the Aviation department: Update the automobile rental concessionaire agreements, by way of letter of agreement, memorandum of understanding or the like, to include the requirement that the rental car concessionaires submit monthly CFC activity summary reports and reporting detail showing the length of the rental period for each transaction, for monthly review. Develop a standardized concessionaire monthly reporting form that provides sufficient detail to determine if gross receipts and other necessary items are correctly reported and include the form as an appendix to the agreement with the concessionaires. Review the CFC activity summary reports against the reporting detail provided by the rental car concessionaires and spot check to determine if CFCs are computed in accordance with the automobile rental concession agreement. management has discussed this with senior managers of the prospective rental car companies. These representatives expressed doubt as to whether the findings are reflective of a systemic failure to comply with reporting requirements. Given the press of time in formulating this response, Airport Management has not conducted an independent investigation to determine and document the scope of such observed irregularities. Nevertheless the Rental Car Companies agreed to execute a letter provided by Airport management reciting the reporting requirements and agreeing to strictly comply with them going forward. Airport management is in the process of preparing such a letter and will send it to the rental car concessionaires and follow up with them on its execution and return. Management will also instruct its contract manager to periodically review monthly reports for completeness and adherence to requirements and will enforce the rental car companies reporting requirements. 23

29 Contract Facility Charge - continued Rating Observation Recommendation Management s Response Moderate 7. Automobile Rental Concession Agreements continued Concessionaire Compliance with Contract Terms Concessionaire Compliance and Conditions continued A full reconciliation of the supporting documentation to the CFC trust statements and general ledger offers checks/balances and a means to detect errors in the CFCs remitted. Failure to perform a timely review to supporting documentation may cause delays in the identification of potential issues and / or irregularities. Use of CFC Per Automobile Rental Concession Agreement Currently, remaining CFCs are used to pay the monthly facility rent charges for the rental car concessionaires. This is allowed per 6 e) of the City Ordinance. The City shall use the proceeds of the CFC to compensate the City for any amounts due the City from and not other paid by the Tenant RACs pursuant to the concession agreements and facility leases in effect between the City and the Tenant RACs. This provision is not defined in the 2 selected automobile rental concession agreements dated November 1, with Contract Terms and Conditions continued Obtain the monthly trust statement, bank reconciliation and general ledger detail from the City s Central Finance department and compare and reconcile the monthly CFC activity reports received from the rental car companies. Use of CFC Per Automobile Rental Concession Agreement We recommend that the Aviation department modify the automobile rental concession agreements and/or City Ordinance for CFC to correspond with current concessionaire business practices, where needed. Response - continued: (1) Management will develop a standardized monthly reporting form for the concessionaires to use in complying with their reporting requirements. (2) Management will conduct regular periodic testing of the monthly reports to measure compliance with reporting requirement and to determine whether CFCs are being calculated correctly. (3) Management will conduct regular periodic testing of the monthly reports to measure compliance with reporting requirement and to determine whether CFCs are being calculated correctly. (4) In March 2014, City Finance provided Aviation with monthly CFC deposit statements from the Trustee from July 2013 through February Finance will continue to provide copies of CFC deposit statements from the Trustee. Aviation will review the monthly Trustee statements and identify any discrepancies with CFC Reports received from the Rental Car Companies. (5) Aviation proposes to address recommendation regarding use of CFC in rental car concession agreement via letter acknowledgement rather than formal amendment to the Rental Car Concession Agreement. Estimated Completion Date: Rental car letter acknowledgement will be provided to Rental Car Concessionaires by June 30, Responsible Party: Aviation department 24

30 Airport Special Statements Reconciliation with the CAFR Rating Observation Recommendation Management s Response Moderate 8. Reconciliation of CAFR to Airport Enterprise Fund Financial Statements During the course of our review, we noted that there is no formal reconciliation between the City s audited CAFR and the stand-alone financial statements of the Airport ( special statements ), which are submitted annually to the FAA. We did note the City maintains a series of folders and support for specific items within the CAFR and stand-alone statements, and that the both statements are audited and agree in the aggregate. The key reconciling items noted relate to the following: Statement of Revenues, Expenses and Changes in Net Assets included in the special statements, where the breakdown of operating expenses into service areas agrees in total to the CAFR (page 44) but the categories vary from the City s trial balance and the differences are not explained. We were unable to reconcile the items by reviewing the City s trial balances. Schedule of Changes in Net Assets Included and Excluded Centers is not a statement required in the CAFR but is submitted with the special statements. As such, the City s trial balance activities must be parsed in order to accumulate the data. Given the variances in operating expenses noted above, the included/excluded amounts could not be determined. Schedules of Cash Deposits and Withdrawals are not statements required in the CAFR, but are submitted with the special statements. As such, the City s trial balance activity must be parsed in order to accumulate the data. Total ending balances included on the schedules does not agree to the cash and investments reported on the Statement of Net Assets, which agrees to the audited CAFR. These variances should be reconciled. It should be noted that our procedures did not include reconciliation of the CAFR and special statements to the FAA required financial reports described in the next issue. We recommend that the City s Central Finance and Aviation departments perform a reconciliation between the audited CAFR and the stand-alone special statements of the airport. The reconciliation should include a summary of variances and where the amounts were obtained, and any schedules that are included in the special statements that are not part of the audited CAFR should be tied to the City s final adjusted / audited trial balance. This could be accomplished by utilizing the new ERP system s chart of accounts to include special segment codes or other designators in order to accumulate the cost allocations for the special statements and reduce the need to reenter all transactions into a secondary system for reporting purposes. Both reports include a footnote disclosure for the definition and calculation of the passenger facility charges revenue. Due to the significance and complexity of airport operations, the City should also consider including a footnote disclosure in both reports related to the contract facility charges revenue and the non-airline terminal revenue distribution expenses, for informational purposes. Response: Aviation generally agrees with recommendation. Aviation is collaborating with the City s Central Finance department in developing a plan to address this recommendation. Aviation is requesting clarification on certain portions of recommendation. Estimated Completion Date: In conjunction with the FY 2015 audit. Responsible Party: Aviation department in conjunction with the City s Central Finance department 25

31 Airport Special Statements Reconciliation with the CAFR - continued Rating Observation Recommendation Management s Response Low 9. Timing of Submission and Reconciliation of Financial Reports to the FAA We noted during our review that the FAA Compliance Manual requires their Forms and to be submitted within 120 days of fiscal year end. We recommend that the Aviation Per discussion with the Aviation department s Finance Manager, these forms are historically completed based upon the audited CAFR and special enterprise fund financial statements of the airport. The CAFR and the special statements, however, are not required to be completed until 180 days after fiscal year end. This timing requires the airport to obtain a filing extension from the FAA each year. These extensions are generally for 60 days. It should be noted that the FAA requires the forms to be completed by the deadline and notated as unaudited if the audited financial statements have not been received. Later, if the audited financial statements report significant changes, there is a process for amending the forms. department, in conjunction with the City s Central Finance department, evaluate the benefits of filing the FAA required financial forms utilizing unaudited statements, and then reconciling the statements once the CAFR and special statements are issued. At a minimum, the procedures for preparing the Forms and should be documented and reconciled to the special statements and/or CAFR each year. Response: Aviation agrees with recommendation. Aviation has initiated the compilation of revenue and expense data needed for FAA Financial Reports using unaudited revenues and expenses from the general ledger. Aviation will prepare reconciliation between FAA Financial Reports and the Special Statements and/or CAFR. Aviation is consulting with City s Central Finance department and Bond Counsel to confirm whether any limitations exist with respect to posting unaudited financial information due to potential concerns from existing and prospective investors of Airport revenue bonds who may use this information for credit evaluation. Estimated Completion Date: May 12, 2014 Responsible Party: Aviation department in conjunction with the City s Central Finance department and Bond Counsel 26

32 Expense Reimbursement to the City Rating Observation Recommendation Management s Response High 10. Methodology Documentation and Monitoring During our interviews and review of support for a selected sample Response: The City agrees with of services allocated, we noted the following with respect to the City s overall Cost Allocation Plan process: this recommendation. City Budget and Evaluation will collaborate with Ownership of the CAP the City s Central Finance 1. The Budget & Evaluation Department accumulates the CAP department to develop and data into a final report for approval, but is not responsible for implement procedures to document the accuracy of the data. Each allocated agency works with and monitor the CAP. the Budget & Evaluation Department to establish a methodology, then calculates their own allocation on using the agreed-upon methodology. The agency enters data into the Clarity system for inclusion in the overall plan. The support for the calculation and methodology is not consistently reviewed outside of each agency, but the output is reviewed by the Budget & Evaluation Department prior to being published in the annual cost allocation plan. Consistent Documentation of Personnel Activity Costs 2. The agencies that allocate charges based upon an estimate of the staff time spent supporting each department are not consistent in the way the time estimate data is collected and documented. There is no prescribed format for time and effort tracking and there is no standardized monitoring or analysis of the amounts reported. Federal guidelines, under OMB Circular A-87, Attachment A, require an accurate tracking of staff time spent in indirect activities for the purposes of cost allocation for federal programs, and FAA guidelines require the City s CAP follow OMB Circular A-87. Documentation of CAP Methodologies by Department 3. We reviewed the methodology and support for $20 million (24%) of the CAP for FY 2013, consisting of Finance, Information Technology and Procurement, noting that the allocation methodologies for those agencies appear to be based upon reasonable units of measurement, but that the supporting documentation, as noted above, is not consistent and not always available. The allocation amounts are based upon budgeted amounts and are also not evaluated against actual amounts, as described below. We recommend the following related to oversight and monitoring of the CAP: 1. The CAP should be owned by the City s Budget & Evaluation Department, to include documentation and evidence of the agreed-upon approval by Budget and each agency of how each allocation is performed, and including a description of each indirect account that is allocated. Each agency should still be responsible for calculating and entering the data into Clarity, but the support should be provided and reviewed by the City s Budget office for reasonableness and accuracy. 2. A prescribed format and reporting period for time and effort tracking should be developed, approved and consistently implemented to provide sufficient support for staff time estimates. OMB Circular A-87 outlines how this should be done. The City s PeopleSoft is currently used for assigning time staff time to projects and formal procedures and employee training can be used to complete these tasks. 3. CAP support should be retained under the same document retention requirements for public records requests, or other regulatory requirements as applicable, if different for the Aviation department. Estimated Completion Date: Draft procedures are estimated to be in place by October 31, Responsible Party: Aviation department in conjunction with the City s Central Finance department and City Budget and Evaluation 27

33 Expense Reimbursement to the City - continued Rating Observation Recommendation Management s Response High 11. CAP Approval Chapter 15 of the FAA Airport Compliance Manual allows the In addition to the methodology Response: City agrees with this City to allocate certain indirect costs to the airport. The documentation and process recommendation. City Budget and manual states: In an acceptable cost allocation plan, the improvements described elsewhere, Evaluation will submit proposed CAP to sponsor allocates costs in a manner consistent with we recommend that the City obtain the Federal Transit Administration for Attachment A to Office of Management and Budget (OMB) Circular A-87 except substitute the phrase airport revenue for the phrase grant award wherever the latter phrase occurs in Attachment A. approval of the overall cost allocation plan. approval. The City s CAP has not been approved by the City s federal cognizant agency for approving indirect cost allocation plans in relation to federal grant awards. The methodologies and documentation for these cost allocations can vary from the federal guidance, but variances must be approved by the City s federal cognizant agency, which is the federal agency responsible for reviewing, negotiating, and approving cost allocation plans or indirect cost proposals. According to the City s Budget office, the City s cognizant agency is the Federal Transit Administration. Approval of the CAP can also serve as documentation for the allocation of direct and indirect costs to federal award programs, as allowable by those programs. This approval should be obtained in accordance with OMB Circular A-87, evaluated by the City s cognizant agency (Federal Transit Administration), and submitted to the FAA for informational purposes. Estimated Completion Date: City Budget and Evaluation will provide a CAP to the FTA by October 31, 2014, to seek approval for the FY2016 Budget cycle Responsible Party: City Budget and Evaluation 28

34 Expense Reimbursement to the City - continued Rating Observation Recommendation Management s Response Moderate 12. Basis for Cost Allocation Plan OMB Circular A-87 requires certain documentation and We recommend that actual Response: The City agrees with this periodic true-up (after the fact analysis) of indirect cost expenditures be used as the basis for recommendation. In collaboration with allocations against actual amounts, in order to determine the CAP. Aviation, Finance, and other City whether the amounts allocated were correct. Under OMB departments, City Budget and Circular A-87, estimates do not qualify as support for While the City continues to use the Evaluation will use actual expenditures charges, but can be used for interim accounting purposes. If that occurs, the agency must: Use a reasonable method for establishing the estimates; Compare actual costs to budgeted distributions at least quarterly; and Reflect adjustments accordingly to reflect changed circumstances. budgeted amounts, we recommend the quarterly comparisons are made, with adjustments as needed, in accordance with the guidance. as basis for CAP pursuant to OMB Circular A-87. Estimated Completion Date: TBD The City s CAP is based upon amended budgeted amounts, rather than actual amounts. The CAP for FY 2013 was based upon final amended budgets for FY 2011, approved during FY 2012, and implemented in FY As such, the between budget and actual variances may not be material. The City does not modify the CAP during the year, and there has not been a comparison of actual costs against the CAP since FY 2011, per discussion with the Budget office. As such, the City is not routinely performing a true-up analysis of indirect allocations. Responsible Party: Aviation department in conjunction with the City s Central Finance department, City Budget and Evaluation and other application City departments 29

35 Debt Management Rating Observation Recommendation Management s Response High 13. Bond Funded Project Invoice Support, Coding and Tracking In order to evaluate whether the bond proceeds were properly used, we selected one project and tested the supporting documentation for validation that charges were coded to the correct project. The project selected was East Terminal Expansion #55509, which was substantially complete at the time of testing. This project was fully funded by the 2011 Series B bonds. Response: During our testing, we noted the following: One invoice for $695 was for a different project, but was improperly coded to One vendor routinely performs project management for multiple projects at the airport. The vendor s invoices were initially coded to a generic Project Management project cost center, and then later allocated to specific projects. For the project selected, 7.61% of the total costs were allocated, but there is no support for how the allocation was determined and calculated. The contract did not specify an allocation, and should be based on actual time spent. One vendor billed more than one project on the invoice and Aviation used square footage for the allocation. One invoice for $3, was properly coded, but did not include a stamp for approval of the payment and coding. Multiple instances where the supporting invoice did not reference East Terminal Expansion, making it unclear whether the invoice was properly coded. Where a purchase order or contract number was provided, we obtained a copy of the additional documentation and determined that the project was East Terminal Expansion. There were 4 payments, totaling $29,658.69, that were direct payments and additional support (such as a PO or contract) was not available for testing. The prime contractor on the project did not provide subcontractor invoice support in order to validate that the subcontractor properly billed for the correct project. In order to facilitate compliance with the bond resolution and tracking of the use of proceeds in accordance with IRS guidelines, we recommend that project invoices include billing for one project only, include any relevant purchase order and contract information, and supporting documentation for amounts billed. Specifically related to Direct Payments that do not have a corresponding purchase order or contract, the invoices should include additional details either from the vendor or the Aviation department on how it was determined that the invoice was for the selected project, especially in instances where the description of the work does not match the airport s internal project description. Further, the Aviation department and/or the City s Central Finance department should consider periodically sampling project invoices from the project cost reports and verify that the amounts were coded to the correct project and that supporting documentation is sufficient. Invoicing: Aviation generally agrees with recommendation. In the circumstance where a contractor is involved with more than one project, Aviation will request current contractors provide Aviation with individual invoices for each discreet project. If contract terms or circumstances prevent individual invoices, Aviation will request contractor provide invoice with line-item detail for each discreet project. Aviation Finance will periodically sample project invoices and verify that amounts coded to the correct project. In November 2013 Aviation has hired a full-time project cost and grant accountant who will assist in the sampling of invoices to confirm project coding. 30

36 Debt Management Rating Observation Recommendation Management s Response High 13. Bond Funded Project Invoice Support, Coding and Tracking - continued Response - continued: Direct Payments: The implementation of the Munis ERP does not allow for the use of Direct Payments to pay vendors. For nonconstruction contracts/purchase orders, Munis will require a three way match (Purchase Order or Contract /Invoice/Receiving Confirmation) to pay vendor. Current direct payments will require requisition entry and purchase order conversion. Change orders for construction contracts will require requisition and purchase order conversion, but will not require the three way match. Estimated Completion Date: Aviation will develop an invoice sampling and testing schedule by the end of June Responsible Party: Aviation department 31

37 Debt Management - continued Rating Observation Recommendation Management s Response Moderate 14. Financial, Debt Management and Accounting Policy for the Airport Project Review and Tracking Procedures Project Review and Tracking Response: Project Review and During our discussions with management, and review of the Procedures Tracking Procedures: Financial, Debt Management and Accounting Policy for the We recommend that the City s Aviation Finance will periodically Airport, we noted that invoices are not periodically sampled and Central Finance department sample project invoices and verify tested for proper project coding for projects funded by bonds or periodically sample invoices for correct project funding source. In grants. Given the nature of the various funding sources and the extent of projects underway at the airport, additional scrutiny should be paid to these expenses. projects that are funded with debt proceeds or grant funds, and test whether the expenses were coded to the proper projects, and have adequate support. Like all City departments, the Aviation department is responsible for coding/assigning vendor invoices to the correct projects. Although invoices are selected for testing during the annual external audit, the depth of the testing does not trace the expenses back to the specific funding source (i.e., which series of bonds was used). The City and the Aviation department do review total expenditures by project on a monthly basis, and compare the totals against the project budgets. There are projects that are served by more than one vendor, and there are vendors that serve more than one project, increasing the risk that the vendor invoices do not contain adequate detail in order to allocate the costs to the correct project. Unused Bond Proceeds During review of the of airport special statements, we noted there are multiple series of bonds with unused proceeds yet to be spent, including from 2004, 2007, 2010 and 2011 series bonds. The City s Financial, Debt Management and Accounting Policy for the Airport requires bond funds to be spent within 3 years, or a written memorandum of explanation to the City s Finance Director must be prepared by the Aviation department, and Bond Counsel would be consulted as appropriate. A memorandum of understanding has not been prepared for any of the unspent bond proceeds that are not currently attached to committed projects. Further, we recommend the City s Financial, Debt Management and Accounting Policy be updated to include this task, including the frequency of testing. Unused Bond Proceeds We recommend that the Aviation department and the City s Central Finance department prepare a summary memorandum of the bond proceeds that are unspent, the original planned uses and the allowable uses, based upon IRS rules and regulations, and the options available to the Airport/City for the future use of those funds. We further recommend that, based upon the summary, management confer with Bond Counsel and develop an action for the appropriate future use of those funds. November 2013 Aviation has hired a full-time project cost and grant accountant who will assist with the sampling of invoices. Furthermore, implementation of Munis ERP will provide a project cost and grant module that will provide for more accurate management and accounting of project funding sources, including those funded with general airport revenue bonds. Unused Proceeds: Aviation agrees with recommendation. In collaboration with City Finance Treasury, Aviation will prepare a summary of the bond proceeds that are unspent and develop a plan for use of unused bond proceeds. Said plan will be prepared in accordance with the City s Financial Debt Management and Accounting Policy. City Finance Treasury will consult with Bond Counsel on Aviation s proposed plan for unused bond proceeds 32

38 Debt Management - continued Rating Observation Recommendation Management s Response Moderate 14. Financial, Debt Management and Accounting Policy for the Airport - continued Estimated Completion Date: Aviation will develop an invoice sampling and testing schedule by the end of calendar year Aviation will meet with the City s Central Finance Treasury by the end of calendar year 2014 to define scope of unused bond expenditure plan. Aviation will complete plan for use of bond funds for Bond Counsel review by end of calendar year Responsible Party: Aviation department in conjunction with the City s Central Finance - Treasury 33

39 Process Maps

40 Process Map Billing and Revenues to include Rental Agreements and Contract Management Revenue and Billing Page 1 of 1 City of Charlotte, North Carolina: Charlotte Douglas International Airport Contract Administrator START Prepares billing advice Review nonrecurring invoices to applicable supporting documentation On periodic basis, compare the active contracts to invoicing parameters to determine accuracy and completeness of invoices and follow-up on identified issues Review monthly/ annual/periodic required reporting Aviation A/R Accountant Generate invoice in PROPworks based on billing advice Send invoices (electronically via or mailing hardcopies) Approve credit memo in PROPworks END Aviation Finance Department Resolve invoice disputes Issue credit memo in PROPworks Send credit memo to customer Receives payments and reconciles information to PROPworks Yes Yes No Customer Submit applicable documentation for billing advice preparation nonrecurring invoices Receives invoice Dispute invoice? Credit memo needed? No Submit monthly/ annual/periodic required reporting Note: The Aviation Department has documented process maps/workflows of the following areas: PROPworks overview, invoice payment by phase, invoice dispute, and new customer, contract or agreement. Process Step Legend: Automated Control Key Control 34

41 Process Map Billing and Revenues to include Rental Agreements and Contract Management - continued Contract Administration Page 1 of 1 City of Charlotte, North Carolina: Charlotte Douglas International Airport Aviation Finance Department Enter contract information into PROPworks (Note 1) Update PROPworks for changes or amendments Process invoices from billing advices Aviation Director START Approve contract Approve contract amendment END Aviation Department Contract executed Contract amended Aviation Revenue Contracts Administrator File hardcopy of contract and attach electronic copy in PROPworks Monitor compliance with contract requirements (Note 4) Review reports received from lessees for reasonableness Resolve reporting and other contract requirement issues Monitor changes in circumstances affecting contract (Note 2) Review and act on reminders from PROPworks system (Note 3) PROPworks System Electronic copy of contract is uploaded to PROPworks PROPworks is utilized for tracking contract requirements and other tickler items (Note 1) PROPworks system sends prompts based on information entered Note 1: Contract information includes all contract terms and information requiring future update or monitoring. For example, expiration dates, square footage reviews, index-based rate updates, should be entered into PROPworks to enable system monitoring and automated reminder functionality. Note 2: Changes in circumstances affecting the contract include early termination, square footage changes, etc. Note 3: The Contract Administrator should involve other finance or business office employees as needed to ensure updates are made in accordance with the contract terms. For example, if a reminder is received that a contract is set to expire, the Contract Administrator will ensure that appropriate parties are involved with drafting and executing a renewal or new contract. Note 4: The Contract Administrator should ensure that required reports are received and that the reports meet the information requirements stated in the contract. Process Step Legend: Automated Control Key Control 35

42 Process Map Project Accounting and Capital Asset Accounting, to include Grant Budgeting & Accounting Pay Application Processing, Review and Approval Internal Project Manager Page 1 of 1 City of Charlotte, North Carolina: Charlotte Douglas International Airport Contractor START Generates Pay Application pencil copy Concurs on percentage of completion to be paid Invoice Finalized Inspectors Receives pencil copy of invoice Reviews invoice for percent completion. Inspectors approve invoice, documented by sign-off* Compares the finalized invoice to pencil copy and verify the amounts match to the PM Project Manager Receives copy of invoice Project manager approves invoice, documented by signoff Contracts Coordinator for Development Receives invoice Reviews invoice for proper signatures, certifications, correct funding, reporting requirements met Submits original invoice with support to Aviation Finance Department and files copy of invoice Assistant Director for Development Attends weekly construction meetings Receives invoice Reviews and approves invoice Aviation Finance Department Receives approved invoice Reviews retainage, amount due, funds availability Inputs invoice information into CIP Database Sends hard copy of invoice to City Finance via interoffice mail Final invoice review and approval City Finance Department Scans invoice into ImageNow system Pays invoice END Process Step Legend: Automated Control Key Control 36

43 Process Map Project Accounting and Capital Asset Accounting, to include Grant Budgeting & Accounting - continued Pay Application Processing, Review and Approval External Project Manager Page 1 of 1 City of Charlotte, North Carolina: Charlotte Douglas International Airport Contractor START Generates Pay Application pencil copy Concurs on percentage of completion to be paid Project Manager, Architect Receives invoice Reviews invoice for percent completion. Invoice Finalized Project manager approves invoice, documented by sign-off (Note 1) Contracts Coordinator for Development Receives invoice Reviews invoice for proper signatures, certifications, correct funding, reporting requirements met Submits original invoice with support to Aviation Finance Department and files copy of invoice Assistant Director for Development Attends weekly construction meetings Receives invoice Reviews and approves invoice Aviation Finance Department Receives approved invoice Reviews retainage, amount due, funds availability Inputs invoice information into CIP Database Sends hard copy of invoice to City Finance via interoffice mail Final invoice review and approval City Finance Department Scans invoice into ImageNow system Pays invoice END Note 1: Architect does not sign off to note approval or certification for payment. Process Step Legend: Automated Control Key Control 37

44 Process Map Project Accounting and Capital Asset Accounting, to include Grant Budgeting & Accounting - continued Change Order Processing, Review and Approval Page 1 of 1 City of Charlotte, North Carolina: Charlotte Douglas International Airport START Contractor Submits change order request Signs off on the change order Project Manager Receives proposal and payment request Reviews change order proposal Initiates change order form and consults with Architect and/or Engineer, as applicable Assistant and Deputy Directors for Development Reviews change order and supporting documentation (Note 1) Verbally approves change order Aviation Finance Department Logs change order, verify funding, complete encumbrance forms Logs in final change order Contracts Coordinator for Development Reviews request for encumbrances, proper approvals Receives final change order for filing END City Finance Department Fully executes Aviation Director Change order >=$100,000? Yes Reviews change order and supporting documentation with internal staff Approves change order City Council No Reviews change order and supporting documentation and approve change order City Manager Change order >$50,000? Yes Reviews change order and supporting documentation and approve change order No Note 1: Change order supporting documentation may include: entitlement determination, cost support, and architect/engineer review and input. Process Step Legend: Automated Control Key Control 38

45 Process Map Contract Facility Charge Contract Facility Charge Page 1 of 1 City of Charlotte, North Carolina: Charlotte Douglas International Airport Rental Car Customer Start Customer executes rental car agreement and drives car off of lot Customer returns rental car Rental Car Concessionaires Aviation Finance Department City Finance Department Executed agreement that includes CFC remittance procedures required reporting System calculates applicable CFC based on pickup and drop off parameters Submit monthly activity reports to Aviation Finance Department Review monthly activity reports for reasonableness Reconcile Trustee bank statement to the general ledger and posts accordingly Remit preceding month s CFC revenue to the Trustee by 10 th of succeeding month Follow-up with concessionaire as deemed necessary Submit reconciliation to Aviation Finance Department Compare concessionaire monthly reporting to Trustee statement and general ledger End Remaining CFC utilized for approved expenditures Process Step Legend: Automated Control Key Control 39

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