Section I - Required Communications with Those Charged with Governance

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1 November 11, 2016 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, 2016 and have issued our report thereon dated November 11, 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 governance committee of the College. Section II presents primarily 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 and 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 June 14, 2016, 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 Kellogg Community 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 11, 2016 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 14, 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 changed accounting policies related to Governmental Accounting Standards Board Statement No. 72, Fair Value Measurement and Application. Accordingly, the accounting change has been retrospectively applied to prior periods presented as if the policy had always been used. We noted no transactions entered into by the College during the year for which there is a lack of authoritative guidance or consensus. 2

3 Section I - Required Communications with Those Charged With Governance 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 11, 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 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 U.S. Department of Education s Cash Management Rules - NACUBO, in conjunction with Tuition Management Systems, has created a compliance checklist to assist institutions in complying with the Department of Education's revised cash management regulations that are effective at July 1, The checklist identifies key requirements of the new rules based on implementation date. General provisions that apply to all Title IV institutions, as well as provisions for institutions that have arrangements with banks and third-party servicers processing Title IV funds, are included. Regulatory citations are included within the checklist, along with a listing of suggested campus offices that should be involved when ensuring compliance. Additionally, regulatory disclosure requirements that need to be updated on a regular basis are highlighted. The compliance checklist can be found at ttp:// The Department of Education provided informal guidance that all Title IV funds must be run through an interest-bearing account (even if on reimbursement method) or a bank account with an Earnings Credit Rate (ECR) as a substitute. White Collar Overtime Regulations - Under the Fair Labor Standards Act (FLSA), an employee is generally entitled to minimum wage and overtime payment unless the employee satisfies a white collar worker exemption. Salaried employees that perform certain duties, such as executive, administrative, and professional employees, are referred to as white collar employees. The Department of Labor new white collar overtime regulations will take effect by December 1, Under the updated regulations, a white collar employee must earn a salary of at least $913 per week ($47,476 per year) and satisfy the duties test in order to be exempt from the overtime pay rules. This means that any white collar employee making less than $47,476 will generally be entitled to be paid overtime, regardless of job duties. The salary level threshold will be increased every three years to remain consistent with the 40th percentile of full-time salaried workers in the lowest-wage Census region. The regulations have a special exemption for those that are bona fide teachers, or who have a primary duty of teaching. Teachers (as well as practicing doctors and lawyers) are considered to be exempt professionals even though they may not meet the required salary level threshold. In addition, the regulations provide another exemption for academic administrative employees. Depending on the facts and circumstances, an academic administrative employee may include a vice-principal of a school or even an academic counselor. Academic administrative employees must be paid a salary that is equal to or greater than the salary for entry-level teachers in the same educational institution in order to be considered an exempt employee. However, there are likely many employees with duties not unique to an educational setting that may now become eligible for overtime due to the salary level increase, such as managers in food service or transportation areas. We urge you to evaluate your staff compensation levels to determine which employees may now be subject to the new overtime regulations. The time to implement these rules and/or any changes in your compensation practices is quite short, so prompt review of your employee information is essential. 5

6 Tax Abatement Disclosures - In August 2015, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 77, Tax Abatement Disclosures. Under GASB 77, colleges will be required to disclose a brief description of the abatement, including the names of the governments entering into the tax abatement agreement and the specific taxes being abated, and the gross dollar amount, on an accrual basis, by which the College s tax revenue was reduced during the reporting period as a result of the tax abatement agreement. The provisions of this statement are effective for financial statements for the year ended June 30, Accounting for OPEB - 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 cost-sharing plans around the country. Institutions will see a significant liability reflected on their balance sheets 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 institution s financial statement. The institution 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, GASB Leases Exposure Draft - In January 2016, GASB issued an exposure draft based on the preliminary views that reexamines issues associated with lease accounting and considering improvements to existing guidance. Under the proposal, public colleges and universities that are lessees would report the following in their financial statements for all leases that exceed 12 months in duration: An asset that represents the government's right to use the leased asset A corresponding liability for lease payments 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 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 proposed effective date is for financial statements for the year ended June 30,

7 GASB Financial Reporting Model Reexamination - In September 2015, the GASB added a project to its agenda to reexamine the blueprint of state and local government financial reporting. The project is meant to result in improvements to the financial reporting model, including 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 No. 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 in 2014 that include asset retirement obligations, debt refundings, and other extinguishments of debt, financial reporting model, and going-concern disclosures. IRS Issues Tax Identification Number Notifications - The IRS began penalizing colleges and universities for filing Forms 1098-T with incorrect or missing tax identification numbers (TIN) in August 2013 (for tax year 2011). On June 29, 2015, Congress enacted the Trade Preferences Extension Act of The act includes a safe-harbor provision for eligible educational institutions for tax years beginning in Under the act, penalties will not be imposed on educational institutions that fail to report a student tax identification number on Form 1098T provided the institution certifies, at the time of filing, that it has complied with regulations governing the solicitation of the taxpayer identification numbers. For the 2016 tax year, institutions will need to certify that they have complied with the regulations governing the solicitation of the taxpayer identification number. In order to certify the institution has complied with the regulations, the institution must request the tax payer identification number in writing, on or before December 31 of each year, and must inform the individual that the law requires the individual to furnish a tax identification number. 7