Section I - Required Communications with Those Charged with Governance

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1 November 8, 2017 To the Board of Trustees and Management Kellogg Community College We have audited the financial statements of Kellogg Community College (the College ) as of and for the year ended June 30, 2017 and have issued our report thereon dated November 8, Professional standards require that we provide you with the following information related to our audit, which is divided into the following sections: Section I - Required Communications with Those Charged with Governance Section I includes information that current auditing standards require independent auditors to communicate to those individuals charged with governance. We will report this information annually to the audit and finance committee of the College on behalf of the board of trustees. Section II presents items impacting the higher education industry and the College. These comments are offered in the interest of helping the College be aware of current and upcoming regulatory and reporting changes efficiency ideas. We would like to take this opportunity to thank the College s staff for the cooperation and courtesy extended to us during our audit. Their assistance and professionalism are invaluable. This report is intended solely for the use of the board of trustees and management of Kellogg Community College and is not intended to be and should not be used by anyone other than these specified parties. We welcome any questions you may have regarding the following communications and we would be willing to discuss any of these or other questions that you might have at your convenience. Very truly yours, Plante & Moran, PLLC Vicki L. VanDenBerg, CPA Partner 1

2 Section I - Required Communications with Those Charged with Governance Our Responsibility Under U.S. Generally Accepted Auditing Standards As stated in our engagement letter dated May 18, 2017, our responsibility, as described by professional standards, is to express an opinion about whether the financial statements prepared by management with your oversight are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles. Our audit of the financial statements does not relieve you or management of your responsibilities. Our responsibility is to plan and perform the audit to obtain reasonable, but not absolute, assurance that the financial statements are free of material misstatement. As part of our audit, we considered the internal control of Kellogg Community College. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. We are responsible for communicating significant matters related to the audit that are, in our professional judgment, relevant to your responsibilities in overseeing the financial reporting process. However, we are not required to design procedures specifically to identify such matters. Our audit of Kellogg Community College s financial statements has also been conducted in accordance with Government Auditing Standards, issued by the Comptroller General of the United States. Under Government Auditing Standards, we are obligated to communicate certain matters that come to our attention related to our audit to those responsible for the governance of the College, including compliance with certain provisions of laws, regulations, contracts, grant agreements, certain instances of error or fraud, illegal acts applicable to government agencies, and significant deficiencies in internal control that we identify during our audit. Toward this end, we issued a separate letter dated November 8, 2017 regarding our consideration of Kellogg Community College s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements. Planned Scope and Timing of the Audit We performed the audit according to the planned scope and timing previously communicated to you in our meeting about planning matters on June 21, Significant Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. In accordance with the terms of our engagement letter, we will advise management about the appropriateness of accounting policies and their application. The significant accounting policies used by Kellogg Community College are described in Note 1 to the financial statements. As described in Note 1, the College implemented GASB No. 77, Tax Abatement Disclosures, which requires additional disclosures about tax abatements granted by taxing authorities. Accordingly, the disclosure change has been prospectively applied. 2

3 Section I - Required Communications with Those Charged with Governance We noted no transactions entered into by the College during the year for which there is a lack of authoritative guidance or consensus. There are no significant transactions that have been recognized in the financial statements in a different period than when the transaction occurred. Accounting estimates are an integral part of the financial statements prepared by management and are based on management s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the financial statements were the following: Accounts Receivable Allowance for Uncollectible Accounts - Management s estimate of the allowance for uncollectible accounts is based on past collection history. Compensated Absence Accrual - Management s estimate of the accrual for compensated absences is based on the probability of payment, and has reduced the liability to the expected present value. Michigan Public School Employees Retirement System (MPSERS) Net Pension Liability - Management s estimate of its portion of the net pension liability is based on the audited financial statements received from MPSERS. For each estimate, we evaluated the key factors and assumptions used in determining that it is reasonable in relation to the financial statements taken as a whole. The disclosures in the financial statements are neutral, consistent, and clear. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Disagreements with Management For the purpose of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor s report. We are pleased to report that no such disagreements arose during the course of our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. We did not detect any misstatements as a result of audit procedures. 3

4 Section I - Required Communications with Those Charged with Governance Significant Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, business conditions affecting the College, and business plans and strategies that may affect the risks of material misstatement with management each year prior to our retention as the College s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition of our retention. Management Representations We have requested certain representations from management that are included in the management representation letter dated November 8, Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a second opinion on certain situations. If a consultation involves application of an accounting principle to the College s financial statements or a determination of the type of auditor s opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. 4

5 Accounting for OPEB (Cost-sharing Plans) - In June 2015, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. Under GASB 75 and similar to GASB 68 (pensions), the College, as a cost-sharing employer, will be required to recognize its proportionate share of the collective unfunded net other postemployment Benefits (OPEB) liability, OPEB expense, and deferred OPEB outflows (inflows) of the State s retirement system plan within its financial statements. This will be a significant change for every participating employer in all costsharing plans around the country. Institutions will see a significant liability reflected on their statement of net position (balance sheet) along with an impact to OPEB expenses and a corresponding reduction to unrestricted net position. There are also expanded disclosures and required supplemental information to be added to the College s financial statement. The College will also be required to track certain components of the net OEPB liability (deferred inflows/outflows) and amortize over the appropriate periods in accordance with the standard. The College has not yet determined what its share of the unfunded net OPEB liability is but it is expected to be significant and material to the College s financial statements. The provisions of this statement are effective for financial statements for the year ending June 30, Irrevocable Split-interest Agreements - In March 2016, the Governmental Accounting Standards Board (GASB) issued Statement No. 81, Irrevocable Split-interest Agreements. The standard outlines recognition criteria for split-interest agreements donated directly to a public institution, as well as funds held in trust by others for the benefit of the institution. Examples of these types of arrangements include charitable lead trusts, charitable remainder trusts, charitable annuity gifts, and life-interests in real estate. There are two common situations, when an institution holds the gift assets and when another entity (bank) holds the assets in trust. When the institution has received the assets and is also a beneficiary of an irrevocable split-interest agreement, the institution would recognize assets, liabilities, and deferred inflows of resources when the agreement is executed and the resources are received, which is a change from current practice where the asset, liability, and revenue is recognized at receipt of the gift. When another entity (bank) holds the assets in trust, current standards preclude the institution from recognizing interests in a trust for which the institution is not the holder or intermediary; such arrangements are commonly known as "funds held in trust by others." The standard now changes this to recognizing an asset and a related deferred inflow or outflow. The effective date is for the financial statements for the year ending June 30, Certain Debt Extinguishment Issues - In May 2017, the Governmental Accounting Standards Board (GASB) issued Statement No. 86, Certain Debt Extinguishment Issues. It specifically relates to an in-substance defeasance of debt when the institution contributes its own funds to the trust set up to make the future debt payments until the bonds mature or are called (instead of new bond funds to put in the trust). If an institution fully funds a defeasance with its own funds, the standard requires disclosures in the notes consistent with defeasance funded with new bond proceeds. The disclosures should describe the amount of debt, the amount of cash placed with escrow agent, reason for defeasance, and cash flows required to service the defeased debt, and in future years the remaining balance on the debt defeased. This has very limited application and should be reviewed for future in-substance defeasance of debt. The requirements of this statement are effective for reporting periods beginning after June 15, 2017, or June 30,

6 Leases (Lessee) - In June 2017, the Governmental Accounting Standards Board (GASB) issued Statement No. 87, Leases. Public institutions will report the following in the financial statements for all leases that exceed 12 months in duration or if it transfers ownership of the underlying asset: Lease liability should be measured at the present value of payments expected to be made during the lease term Lease asset should be measured at the amount of the initial measurement of the lease liability Amortization expense related to the lease asset (recognizing the asset amount as an expense over the term of the lease). Interest expense related to the lease liability If the lease transfers ownership of the underlying asset, the institution will record the transaction as a financed purchase (asset and long-term debt). The notes to the financial statements would include a description of leasing arrangements, the amount of lease assets recognized, and a schedule of future lease payments to be made. The effective date is for reporting periods beginning after December 15, 2019, or June 30, Fiduciary Activities - In January 2017, the Governmental Accounting Standards Board (GASB) issued Statement No. 84, Fiduciary Activities. It establishes criteria for identifying and reporting fiduciary activities. An activity meeting the proposed criteria would be required to be reported in a fiduciary fund in the basic financial statements. This could have a significant impact on the College, potentially changing how student groups (student activity funds) and/or funds held for other organizations are reported, essentially moving qualified funds to separately reported statement of fiduciary net position. It is important to review the requirements of this statement to determine the potential impact, if the activity is significant or material. The requirements of this statement are effective for reporting periods beginning after December 15, 2018, or June 30, GASB Financial Reporting Model Re-examination - In September 2015, the GASB added a project to its agenda to re-examine the blueprint of state and local government financial reporting. The project is meant to result in improvements to the financial reporting model, including GASB Statement No. 34, Basic Financial Statements - and Management s Discussion and Analysis - for State and Local Governments, and other related pronouncements. When it was issued in 1999, Statement 34 set the formats and measurement focuses of financial statements in place today, ushered in important innovations to general purpose external financial reporting, and made it possible to more fully assess a government s overall financial health. The objective of these improvements would be to enhance the effectiveness of the model in providing information that is essential for decision-making and enhance the ability to assess a government s accounting and address certain application issues, based upon the results of the pre-agenda research on the financial reporting model. GASB Other Projects - The Governmental Accounting Standards Board (GASB) is reviewing other pre-agenda research activities that include financial reporting model, revenue and expense recognition, capitalization of interest cost, certain debt disclosures, and going concern disclosures. 6

7 MPSERS Reform - A new act (Public Act 92 of 2017) was signed into law on July 13, 2017, which changes the Public School Employees Retirement Act. It does not change pension or retiree health (OPEB) benefits for those already retired, for employees hired before July 1, 2010, or Pension Plus employees hired before January 31, Changes include the following: Elimination of service credit purchases for members who were hired before July 1, 2010; last chance to purchase credits is September 29, 2017 Enhanced contributions for DC participants hired after September 4, 2012, including a 4 percent employer mandatory contribution and 100 percent employer match of up to 3 percent for employee contributions on their wages DC plan becomes default option for new employees hired on or after February 1, 2018 New hybrid plan begins February 1, 2018, similar to Pension Plus with a pension component and a savings component. It will have more conservative assumptions in calculating the liability and benefits. (MPSERS) ORS 3 Percent Healthcare Contribution - Effective July 1, 2010, Public Act 75 required participating institutions to withhold 3 percent from each employee s compensation and forward it to the Michigan Office of Retirement Services (ORS) for deposit into a healthcare trust. In 2012, the Michigan legislature passed Public Act 300, which changed employee retirement and retiree medical alternatives. Under the retiree medical alternative, an employee could elect to continue the 3 percent contribution. Initially, there was much uncertainty regarding the taxation and withholding requirements related to the 3 percent contribution. Law firms have provided guidance that the required contribution is not subject to federal, state, or FICA taxation, and therefore is not subject to withholding; Plante & Moran, PLLC supports this conclusion. However, many institutions withheld FICA taxes as a result of the tax treatment uncertainty. Some of these institutions have filed FICA refund claims with the IRS, and some have not. Some institutions continue to withhold FICA taxes pending (1) final conclusion of the appeals process related to the constitutionality of the withholding and (2) IRS determination of the 3 percent contribution tax treatment through a private letter ruling request. At this time, each institution s tax treatment of the 3 percent contributions should generally have merit and support; the basis for the College s decision on this issue should be documented in its files. In April 2011, the Michigan Court of Claims ruled withholding of the 3 percent contribution, required under Public Act 75, is unconstitutional. However, the court required institutions to continue withholding and forwarding the funds to ORS, but provided that the funds were to be placed in a special escrow account and the funds cannot currently be used to pay benefits. In August 2012, the Michigan Court of Appeals affirmed the decision by the Court of Claims. This decision was appealed to the Michigan Supreme Court. Also, Public Act 300 was challenged in the Michigan courts. In January 2014, the Michigan Court of Appeals ruled that the Public Act 300 changes made to employee contribution options under MPSERS did not interfere with faculty union contracts. This decision was appealed to the Michigan Supreme Court. On April 8, 2015, the Michigan Supreme Court upheld the constitutionality of Public Act 300 and the 3 percent retiree healthcare contributions made by institution employees beginning with the first payroll in February

8 On June 30, 2015, the Michigan Supreme Court remanded the Public Act 75 issue to the Michigan Court of Appeals with direction to reconsider Public Act 75 in light of the Supreme Court s ruling on Public Act 300. In June 2016, the Michigan Court of Appeals ruled Public Act 75 was unconstitutional and ordered return of the 3 percent contributions, with interest, to employees. On July 19, 2016, the State of Michigan filed a request with the Michigan Supreme Court to hear an appeal of the June 2016 decision by the Michigan Court of Appeals. On May 31, 2017, the Michigan Supreme Court agreed to hear the State s appeal. Consequently, the constitutional status of 3 percent contributions made prior to the first payroll in February 2013 remains unclear. During 2016, the Internal Revenue Service (IRS) flip-flopped on the tax treatment of the 3 percent contributions. During the first few months of 2016, the IRS informed some Michigan participating employers that the Public Act percent contributions were subject to income and FICA tax withholding. By August 2016, the IRS reversed its position and was regularly issuing refunds of FICA taxes paid on 3 percent contributions. We are aware the IRS has consistently refunded FICA taxes on 3 percent contributions for the period from the first payroll in 2013 through December 31, Also, some participating employers have applied for and received FICA tax refunds for 3 percent contributions withheld in The IRS denied a request by the State of Michigan for a private letter ruling on the taxation of the 3 percent contributions under both Public Act 75 and Public Act 300 because the State was not the employer of employees subject to the 3 percent contributions. Consequently, a Michigan school district is requesting an IRS private letter ruling on the taxation of the 3 percent contributions. Also, the IRS has informed some districts that a decision about taxation of Public Act 75 3 percent contributions will be held in abeyance pending final resolution of the validity of these contributions in the Michigan courts. Participating employers had until April 15, 2017 to file amended Forms 941 to recoup 2013 FICA tax collected and paid to the IRS, if necessary. Alternatively, an institution can file a protective claim to extend the deadline for filing a refund request for FICA collected. Protective claims for 2013 were required to be filed with the IRS by April 15, A protective claim for FICA paid in 2014 is required to be filed with the IRS by April 15, There are specific steps required to claim these refunds, so we recommend the College ask for assistance, if necessary. 8