Auditor of Public Accounts Local Government Update

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1 Auditor of Public Accounts Local Government Update APA Local Government Update VGFOA 2018 Spring Conference May 25, 2018 Rachel Reamy, CGFM, Local Government Audit Manager Auditor of Public Accounts

2 Overview of Topics Quality Control Reviews over Locality audits 2018 Updates for Locality audits and reporting Local Fiscal Distress Analysis and Monitoring Update on Pension and OPEB from Kristy Scott, APA audit supervisor for the VRS audit Page 2

3 QUALITY CONTROL REVIEWS OVER LOCALITY AUDITS Page 3

4 APA Annual Quality Control Review Periodic quality control reviews of CPA firms auditing VA localities Chapter 4 of the Specifications for Audits of Counties, Cities & Towns describes this process Copy of the final review report is sent to the audit firm, applicable locality, the Board of Accountancy, and VSCPA Reports located on APA s website Local Government page> Quality Control Review Reports Page 4

5 APA QCR Process and Common Findings Last year s 2017 reviews completed over 6 FY16 locality audits at 5 CPA firms 4 Pass reports 2 Pass with Deficiencies reports Common findings Improve audit workpaper documentation of testwork and conclusions Improve testwork and documentation to comply with Uniform Guidance for Single Audit 2017 reviews being performed now, May - June 6 CPA firms, selected 8 FY17 locality audits Page 5

6 2018 UPDATES FOR LOCALITY AUDITS AND REPORTING Page 6

7 Updates to FY18 Audit Specifications Expecting no major changes needed to FY18 Audit SPECS Primarily making updates for clarification purposes Potential minor updates to OPEB census data testing (Section 3-7) Anticipate final release of FY18 SPECS early June, pending updates from state agencies Page 7

8 Updates to Uniform Financial Reporting Manual No major changes expected to the Uniform Financial Reporting manual for FY18 No new reporting requirements for localities Incorporate guidance for VRS OPEBs similar to guidance for Pensions in Chapter 6 Key reminders from prior year 2017 changes Stormwater reporting to the APA due October 1, template report available on APA website Code of Virginia requires local officials to submit notarized statement to APA after the Auditor has presented the CAFR/audit results to governing body Page 8

9 LOCAL FISCAL DISTRESS ANALYSIS AND MONITORING Page 9

10 Local Fiscal Distress Monitoring Chapter 836 of the 2017 Virginia Acts of Assembly, Item Used a model to calculate 10 ratios using audited data from the localities FY14-FY16 CAFRs The model ranks each locality s performance by ratio and converts into percentile rankings The model calculates an average of the percentile rankings to determine an overall Financial Assessment Model (FAM) percentage or score for each locality Page 10

11 Local Fiscal Distress Monitoring Process Used the FY16 FAM score results and qualitative factors to determine need for additional follow up with a locality During 2017, applied the model to 38 Cities, 95 Counties, and 38 Towns (required to report annually) Identified 6 localities based on ratios and trends Cities of Bristol and Richmond Counties of Giles, Northumberland, Page and Richmond 2 localities still not submitted CAFRs Cities of Hopewell and Manassas Park Page 11

12 FAM Score Trends Localities Identified for Follow Up In % 40.0% 32.0% 24.0% 16.0% 8.0% 0.0% Bristol Richmond City Giles Northumberland Page Richmond County FY % 13.2% 43.2% 33.4% 21.1% 5.8% FY % 13.1% 29.1% 23.3% 15.6% 8.2% FY % 13.8% 16.5% 15.9% 11.2% 7.3% Page 12

13 Intent of the Financial Assessment Model Only purpose of the FAM score in the model is for APA s internal assessment to set a cut-off threshold in making a preliminary determination of potential distress No significance in emphasizing each localities FAM scores compared to other localities Analysis is not intended to rank one locality better or worse against another locality Not meant to give an evaluation nor a rating of financial health to those localities that have a higher FAM score above the 16 percent threshold Page 13

Focus of Fiscal Distress versus Fiscal Health Fiscal Distress Generally based on cash flow and immediate short term issues Often evaluated using ratios focused on cash and fund balance/reserves

14 Focus of Fiscal Distress versus Fiscal Health Fiscal Distress Generally based on cash flow and immediate short term issues Often evaluated using ratios focused on cash and fund balance/reserves Fiscal Health Based on long-term sustainability of a local government's finances and operations Measured in terms of assets; revenue and spending per capita; ability to provide services; and structural deficit or surplus Page 14

15 Local Fiscal Distress Monitoring Follow Up Process Performed follow up process through use of our Financial Assessment Questionnaire for localities that chose to respond Scheduled meetings with locality officials to discuss responses and additional information Made a determination of whether there is a need to report to the Governor and Chairs of the money committees that the locality needs assistance Letter sent to each locality to summarize the results of our follow up Page 15

16 2017 Follow Up Results After further review, concluded 4 localities did not appear to be in a situation of fiscal distress that warrants further Commonwealth assistance City of Richmond Counties of Giles, Northumberland & Richmond One locality declined to participate County of Page Deferred follow up for Manassas Park and Hopewell Stressed more important to finalize FY16 and FY17 CAFRs than to respond to our questionnaire Page 16

2017 Follow Up Results City of Bristol APA sent formal notification to the Governor, Secretary of Finance, and Chairs of money committees recommending the potential need for Commonwealth assistance

17 2017 Follow Up Results City of Bristol APA sent formal notification to the Governor, Secretary of Finance, and Chairs of money committees recommending the potential need for Commonwealth assistance Primary issues identified in our ratio analysis and follow up discussions with the City Issues specific to solid waste disposal fund Debt and future revenues related to The Falls commercial development project Page 17

18 2017 Follow Up Results City of Bristol Governor, Secretary of Finance and Money Committees consulted and made formal decision in April 2018 to provide assistance Funding provided to reimburse actual costs incurred, up to $100,000, for the City to hire outside consultants Independent assessment over the continued operations of City s landfill Assistance to facilitate the development of a long-term financial forecast Page 18

19 APA Report on Fiscal Distress Monitoring Process Issued a comprehensive report March 2018 describing last year s process, results of our specific follow up with localities, and plans to refine our analysis to further enhance the early warning monitoring system for future years Report available on APA s website Full report 2 page Executive Summary ExecutiveSummary.pdf Page 19

20 APA Future Revisions to Enhance Model Reexamine the ten ratios currently calculated Incorporate additional ratios Ratio measuring the change in overall net position from year to year Operations ratio, measures whether a locality s annual revenues were sufficient to pay for annual operations Ratios specific to debt service Account for how locality issues debt on behalf of its school system to finance school owned capital assets Page 20

21 APA Future Revisions to Enhance Model Include assessment of demographic and economic factors Unemployment rate, poverty rate, and population growth or decline Commission on Local Government s fiscal stress rankings on locality revenue capacity and effort Virginia Department of Education s Composite Index and Required Local Effort/Required Local Match Page 21

22 Components of the Model for Early Warning System Perform Ratio Analysis Evaluate Qualitative and Demographic Factors Analyze to Make Preliminary Determination of Potential Distress Page 22

23 APA Future Revisions to Enhance Model Improve current process for evaluating and comparing all localities using a ranking methodology in the model Consider multiple tiers in model to group and analyze localities that are comparable to each other based on overall revenues and expenditures and similar demographic factors Reconsider application of the overall composite FAM score Use more qualitative measure instead of an absolute quantitative or numerical score Follow-up needed or No Follow up needed Page 23

24 Qualitative Measure for Identifying Preliminary Determination Follow Up Review Needed Complete assessment questionnaire Engage in further discussions No Follow Up Needed Page 24

25 Auditor of Public Accounts Local Government Update APA Local Government Update- Pension and OPEB VGFOA 2018 Spring Conference May 25, 2018 Kristy Scott, CPA, CISA - VRS Auditor In-Charge Auditor of Public Accounts

26 Objectives: The Intended Takeaways Focus on GASB 75 Refresher on importance of VRS to members, employers, and employer auditors GASB 75 is effective for employers for FY18: same concepts as GASB 68, but more plans (VRS & Non-VRS) High-level understanding of what VRS and its auditors do centrally High-level understanding of responsibilities of VRS employers and their auditors Page 26

27 Agenda Overview of VRS Significance of VRS GASB 75: plans, accounting considerations, and available resources VRS and its auditors Employers and their auditors Considerations for employers and their auditors Page 27

28 Agenda Overview of VRS Significance of VRS GASB 75: plans, accounting considerations, and available resources VRS and its auditors Employers and their auditors Considerations for employers and their auditors Page 28

29 Overview of VRS Independent agency Administers multiple pension and other-post employment benefit plans (OPEBs). Provides oversight, but limited administrative and investment responsibility for several other plans and entities. Employer and Member Support Page 29

30 Overview of VRS: Relative Size $75 billion portfolio 20 th largest public or private pension system in the U.S. and 44 th largest in the world. Approximately 678,000 members, retirees, and beneficiaries Page 30

31 Agenda Overview of VRS Significance of VRS GASB 75: plans, accounting considerations, and available resources VRS and its auditors Employers and their auditors Considerations for employers and their auditors Page 31

32 Significance of VRS: Who does it impact? Members and beneficiaries Commonwealth of Virginia Page 32

33 Members and Beneficiaries: $ for the Future Net Investment Income $8.2 Billion Member Contributions $1.1 Billion Employer Contributions $2.6 Billion Page 33

. Have their assets frozen where benefit payment may be

34 Members and Beneficiaries: Harsh Realities Pension system failures and that are in danger.. Have their assets frozen where benefit payment may be delayed or never paid Members and beneficiaries are paying the ultimate price Page 34

35 Commonwealth of VA: Under Scrutiny Media coverage Reputation Budget Bond Ratings Page 35

36 Agenda Overview of VRS Significance of VRS GASB 75: plans, accounting considerations, and available resources VRS and its auditors Employers and their auditors Considerations for employers and their auditors Page 36

37 GASB 75: What does it apply to? Other postemployment benefits (OPEB). Benefits (such as death benefits, life insurance, disability, and long-term care) that are paid in the period after employment and that are provided separately from a pension plan, as well as healthcare benefits paid in the period after employment, regardless of the manner in which they are provided. OPEB does not include termination benefits or termination payments for sick leave. [GASBS 75, 246] Page 37

38 GASB 75: What does its implementation mean? An analogy: GASB 75 is for OPEBs what GASB 68 is for Pensions Implementation for employers effective for FY18 financial statements Impacts: Face of the financial statements, disclosures, and required supplementary information Page 38

GASB 75: Accounting Considerations OPEB standard closely mirrors GASB 68 pension accounting Funding and accounting are separated Liability discount rate will be based on a projection of how long

39 GASB 75: Accounting Considerations OPEB standard closely mirrors GASB 68 pension accounting Funding and accounting are separated Liability discount rate will be based on a projection of how long dedicated assets (plus future contributions) will cover current plan members future benefit payments Unfunded OPEB liability will now be reported on face of the financial statements Expanded note disclosures and RSI Page 39

40 VRS OPEB Plans for Localities Other Postemployment Retiree Health Insurance Credit (RHIC) Other Employment Group Life (GLI) Virginia Local Disability Program (VLDP) 4 Single Employer Plans-Social Service Employees, Registrars, Constitutional Officers, and State 1 Cost sharing Plan- Teachers Approximately 90 Multi-Agent Plans- Localities Cost Sharing plan includes Teachers, Localities, and State Cost Sharing plan includes Teachers and Localities, treated separately for allocation purposes Page 40

41 VRS OPEB Plans for Localities Other Postemployment Line of Duty Death and Disability (LODA) Cost Sharing plan for Participating Employers only, includes Local Governments and State Line of Duty Non Participating Employers Provide Line of Duty benefits but NOT through the VRS administrated trust Keep in mind locality must determine its own liability for GASB 75 reporting in these cases. Purchase of insurance to fully fund the statutory required benefits, likely considered insured plans in GASB 75, para. 11 Page 41

42 Resources: APA Audit Process and Reporting for VRS OPEB Plans APA audit assurance provided similar to audit work for GASB 68 APA to issue multiple opinions for OPEB plans VRS to publish OPEB schedules and templates for journal entries, disclosures/rsi Page 42

43 Resources: APA Opinions Relevant to Localities Census Data Examination report: in the context of VRS management s assertions, opining on completeness and accuracy of census data sent to the actuary. Cost-Sharing Plans (RHIC Teachers, GLI, LODA) Opinion over employer allocations, net OPEB liability, OPEB expense, deferred inflows, and deferred outflows. Multiple Agent Plans (RHIC Localities) Opinion over schedule of changes in fiduciary net position. No Opinions Due to Plan Size RHIC for Constitutional Officers, Registrars, and Social Service Employees. VLDP Page 43

44 Other Commonwealth Sponsored OPEB Aside from VRS Pre-Medicare Retiree option of The Local Choice (TLC) Health Benefits Program Administered by the Department of Human Resource Management (DHRM) On 4/23/18 DHRM sent formal communication to impacted locality employers. Determined that TLC was not part of a cost sharing plan Not planning to provide a break down of employer by employer information for financial reporting. This will be each employer s responsibility. Page 44

45 Considerations for Non-Commonwealth OPEBs Local Governments participate in their own or other, external OPEB plans APA not involved in providing audit assurance or financial reporting information for non- Commonwealth OPEBs Ensure you have planned and are discussing with OPEB s Plan Administer and the Plan s auditors Audit assurance/opinions provided? Timing and method of communicating financial reporting information for locality s FY18 financial statements? Page 45

46 Agenda Overview of VRS Significance of VRS GASB 75: plans, accounting considerations, and available resources VRS and its auditors Employers and their auditors Considerations for employers and their auditors Page 46

47 VRS and its Auditors: Significant Areas Contributions Benefit Payments Investments Actuarial Services Information System Security Accumulation/Transfer of Census Data Retiree/Inactive Member Census Data VRS Financial Statements, GASB 68 Schedules, GASB 75 Schedules Page 47

48 Agenda Overview of VRS Significance of VRS GASB 75: VRS plans, accounting considerations, and available resources VRS and its auditors Employers and their auditors Considerations for employers and their auditors Page 48

49 VRS Employers and their Auditors: Significant Areas Contributions Active Member Census Data myvrsnavigator Access Financial Reporting for VRS pensions and OPEBs within their financial statements. Page 49

50 Agenda Overview of VRS Significance of VRS GASB 75: plans, accounting considerations, and available resources VRS and its auditors Employers and their auditors Considerations for employers and their auditors Page 50

51 VRS Employers & their Auditors: Considerations Bad Active Member Data, Big Problems VRS Actuary projects liabilities based on bad data Contribution rates are skewed Funding of the plans is impacted Page 51

52 VRS Employers & their Auditors: Considerations Contributions Are contributions accurate? o Underfunding/Overfunding Are contributions being paid timely? o Investment o Employer payables Page 52

53 VRS Employers & their Auditors: Considerations Financial Reporting Page 53

54 APA Local Government Contact Information Rachel Reamy, Local Government Audit Manager , ext. 360 Please use general for reporting requirement submissions APA website, Local Government page Government.aspx for employer auditor related questions for VRS Page 54

55 Questions Page 55

2016 VGFOA Fall Conference APA Update APA Local Government Update

2016 VGFOA Fall Conference APA Update APA Local Government Update October 27, 2016 Rachel Reamy, Audit Manager Auditor of Public Accounts Overview of Topics 2016 Comparative Report Transmittal process