Committee Minutes

MINUTE-Finance/Development Standby Committee
Wednesday, July 30, 2003 - 8:00 a.m.______________

Members present: Christensen, chair, Glassheim, Hamerlik.

Also present: John Schmisek, Saroj Jerath, Candi Stjern; and Ron Johnke and Joe Martin, representatives of Brady Martz firm.

1. Independent Auditor's Report on the Comprehensive Annual Financial Report
(CAFR) for 2002._____________________________________________________
The city auditor reported they had handed out the Comprehensive Annual Financial Report a few weeks ago to all council members and some documentation on audit committees and the importance of their role becoming stronger in government, and that this committee is meeting as the audit committee along with representatives from Brady Martz.

Mr. Martin stated they would go through the CAFR, the audit committee letter and the manage-ment letter that he distributed. He stated they would review comments on CAFR and Federal Reports submitted. He stated that the letter of transmittal which the finance office puts together and highlighted some of the major initiatives in the city, financial section which is their opinion on the financial statements, that financial statements are the responsibility of management and are prepared by them, and auditor's job is to come in and express an opinion on those, that this opinion is an unqualified opinion which is the best opinion you can have, and are saying the financial statements are presented in accordance with generally accepted accounting principles. He stated as part of this opinion they make reference to government auditing standards, this audit was conducted in accordance with Government Auditing Standards which means they have to test for compliance with the laws and regulations, contracts and grants. He stated in a separate cover is the federal audit and there are two letters in there, letter on the government auditing standards and letter on OME Curricular A-33, single audit which is the federal testing, and in there would see that major programs were tested (Community Development, FEMA, State Revolving Loan Funds) major dollars were the one they had to apply their detailed audit procedures, test the disbursement, internal controls and if any instances of non-compliance noted they would be indicated in the letters - didn't find findings or instances of non-compliance in any of that federal testing.

He reviewed the sections of the audit, with some questions by the audit committee.

Christensen asked when they see receivable from entity or enterprise fund to another and it doesn't appear there will be any progress in making payment of it, when do they book it as a loss
$630,000 or $640,000 from the Alerus to us. Mr. Martin stated as soon as you realize that they are not going to pay it back, make it as transfer. The city auditor stated that as a management team make a decision at some point that it is not going to be collectible and write it off; they have established is that they will carry about two years worth of those receivables and anything prior to that will write off - that looking forward into next year's budget in 2004 they do see some potential and it is because we're going to pay the signage and the special assessments out of the capital fund, where they should have been first and potential in next year's budget of $185,000 profit based on the budget, and if that occurs their intention is to collect money back from them at the end of 2004, and they are aware of that. Christensen asked when they would sell the bonds to pay for the signs. Mr. Schmisek stated they are including that coming out of the increased sales tax dollars that are going into the debt service fund, won't sell bonds. Ms. Jerath stated that next year in financial statements which they will be preparing according to GASB34 that will show the net assets of the City which will take care of the loss of one and gain to other or vice versa and will show up because the reporting model will show the net assets of the city after gains and losses.

Rick Duquette reported present.

Christensen asked when auditors are setting up our reporting for next year, appreciate going forward with more detail towards transfers in and transfers out. There should be schedule in the notes. He stated he wanted to know much money comes out of these enterprise funds that is used to fund other branches of general government. The city auditor reported they could give that on a routine basis. Christensen stated he wanted it set up so they can get info at any time because there is some conversation going on about funding government and decreasing their mill levies, and when look at enterprise funds see profit of about $4 million, and knows that Fargo allocates money from its enterprise funds to its general funds and wants to continue the dialogue and wants data (along with all council members), and there will be conversation on how we fund general government. The city auditor stated they would report that info to council, and would like that as a recommendation to management, and a better system of reporting transfers in and transfers out so that they can tie that each month or each quarter.

Christensen stated there is reporting about Pension Fund and it is under funded and asked what they recommend management do to deal with deficit in pension account which is approx. 43% under funded. He stated the assumption that is being used is probably aggressive at 8.5% annual return. The city auditor reported that was based on policy adopted by the Pension Committee. Christensen stated they were challenging that policy because he doesn't believe that 8.5% is appropriate in light of th4 fact that the federal government won't allow anybody to go over 9%, close to what they wont' allow, and would like recommendation from the auditors as to what may be an appropriate assumption or dialogue between audit committee and pension committee so they begin the process of funding for that because 25% of our staff is 55 or older and anticipate that 25% of that staff will be retiring in the next 10 years. Hamerlik asked if that should come from the auditors or from the Pension Committee through their consultants. The city auditor stated that they need to clarify - that if look at schedule of funding progress, the funded ratio is 88.7% funded, 45.7% is the percentage of payroll the pension covers; the funding ratio is 88.7% funded and only 12% unfunded at this point. He stated that the Pension Committee gets our report and watches it every year and part of it has been the interest earnings. He stated the Pension Committee has done some things - they have asked for a 5-year smoothing in both gains and losses to try to smooth this out so don't have big ups and downs. He stated they are also doing is the unfunded liability, that they looked at the unfunded liability and because shut down the defined benefit plan, then set a policy that they would cover the unfunded liability over (average age was 42) and set timeline up to 62 and during that timeline will recover that unfunded liability - with a decreasing amount every year, now trying to cover the unfunded liability, was within 15 years and that is not norm in pension plans - norm is 20 to 30 years, and have asked actuary to recalculate it to what would be normal as they were aggressive on that and that will change to part of what the funding is needed and amount contributing each year to be a more stable and realistic amount - are looking at that.

The city auditor reported that some of the things that are done have started us back on a recovery, and if look back to January 1995 that was when some of the changes were recommended to council for the changes in interest earnings, changes instead of a 5-year average paid calculation, went to a 7-year paid calculation and the same time as increased the employers and employees contribution factors to try to bring this back up. He stated next year maybe better because the quarterly reports and starting to come back. Hamerlik stated they changed all the assumptions at that same time and when they moved the new employees over to the defined contribution rather than defined benefit plan will help solve that problem. The city auditor stated that this is a key element of the financials of the city and has to be absolutely monitored.

There was some discussion re detail on enterprise funds. shows cash flows. The city auditor reported at the full budget presentation next week, they will be giving actual cash numbers that they are starting out with and will have operating cash, and that cash number is considerably higher than what showing at the end of the year because have receivables from the State of ND of about $4.5 million and would have received those into this year so operating cash is up at $7-8 million number. He stated they will be talking about a policy that can they move some of that into a restricted and reserved account for the water treatment facility - and that they had said they would do that and council agreed when they borrowed the money to buy the land for the Alerus because where the Alerus was going to pay that out of their debt was into the construction account so that in 4 to 5 years back with all the funds we need in there plus are going to ask for a policy that every year any money in the operating cash over and above 25% or 3 months worth of operating expenditures, can transfer to that capital account for water treatment facilities so they know what that long term plan is and everyone knows they are doing that. He stated they will also be asking in the other utility funds the same thing, that when they end a given year if they are above 25% cash or more than the operating, would like to start moving that into the capital accounts. He stated whenever the powers decided in last hundred years to fund capital on on-going or debt service basis that eliminated basically the funding on depreciation basis because we fund our capital either cash or through debt service - to switch now and need to look at it to say what is the depreciation basis where we can take that cash out on an annual basis and fund it and put it in capital account, and is approach should look at and get away from the bumps in the budget - only bump would be if had a major new capital expenditure that had to fund - major policy decision.

Glassheim stated in depreciation if there are two separate things - one is depreciation in terms of maintenance and upkeep and other is building new capital when have to replace that. The city auditor stated that the general maintenance and operation they budget that on maintenance/operation line items based on what the department says they have to do annually and the real key is when you reach an expenditure that has to be over a certain dollar amount and expenditure is meant to last more than one year so putting an asset in that will improve the building, extends its useful life, etc. and consider that an asset and capital expenditure - and that is what depreciation should fund and should be setting aside for replacement. Christensen stated another issue they have to address is how much money you fund today for future major capital expenditures because that can be paid for with bonds (water plant - on-going federal mandate) and issue is if build cash reserve so have down payment and are wearing out that water plant so should be paying for what we are wearing out.

Hamerlik questioned accounts receivable at the Alerus, had accounts and allowances for the uncollectable, and for review say what they have done out there because that was of concern. The city auditor stated that was a concern because there was no penalty for not paying bill, didn't have any guidelines as to when put a penalty on and now anything beyond 30 days will charge 1.5% penalty and in 60 days comes to the Commission itself as a report who is delinquent in their bills and becomes public in the meeting. Hamerlik stated there is subcommittee of finance made up of Mr. Newman and Mr. Evenson along with Charlie Jeske who are watching those accounts. It was noted there were vendor fees, box fees, fees for users of the facility and set up tougher guidelines of putting on penalty and if reach 60 day timeline come to the Commission and meeting. Hamerlik stated after they used facility and came from outside source and were a little lax, and now being taken care of.

Mr. Johnke stated there are some other communications they have - one is Sass 61 letter which is letter on auditing standards that they have to communicate with management of anything they found during audit - nothing unusual; and in management letter that goes out they had couple of minor items - 1) payroll processing - requires additional work on their part for detection of fraud in financial statements and along with that one of the responsibilities they have is to communicate with the audit committee before the audit, during the audit and after the audit as on-going dialogue of what happening and emphasis on the statement is that management is responsible for the financial statements, to design internal control systems and they are hired to come in and say if these things are working or any indications of fraud, etc. He stated there should be a dialogue going on along with the audit process starts, if see any issues, anything happening that should look at, whether audit related or operational type issues and will have to be addressed by the audit committee and the auditors. He stated one of these issues is where payroll person should be, whether in finance department or in Human Resources, should look at that to see if it makes sense to have in HR when more appropriate to have in finance department under control of city and asst. city auditors - policy decision on where should be.

The city auditor stated they did have the payroll person in our office and had a title change and moved to HR, said that was fine and since taking position take the payroll duties, and have now looked at that - finance department has lost control of internal audit had over transactions that are happening in payroll, and are going to allow HR to do input on payroll (rates, new people, etc.) but when running payroll, want copies of all the action sheets sent to auditing and will run payroll checks and distribute checks, and will have person in our office assigned to do that, and that gives us the documents of payroll to make sure all transactions are signed off and right pay rates put in, etc. but don't have a person where can take back all that input, that they can put that in and we can run and verify it. They will not ask for an additional person - not time consuming to run payroll and distribute. Christensen stated we agree with the recommendation and direct staff to implement.

Mr. Johnke stated last issue is GASB 34, that will see change in reporting model, financial statements will look different and have individual fund statement in there before, but trying to bring it to more of a business reporting mode. - have accruals, infrastructure and have all streets. Christensen stated he would appreciate that transfers in and out, additional detail. Mr. Johnke stated the engineering department has tried to get historical cost information on roads and streets and infrastructure and is well on its way if not complexly done - model will change, and that Ms. Jerath has been doing some work on it and will be taking the 2002 statement and do a trial run and convert it over to the new format and by 2003 that will be ready to go.

Christensen asked if go out for bids each year on auditing firm - the city auditor state we're in the last year of a 3-year bid process for 2003 and did on a quote because council approved doing that because we were in CDBG money and had audit firm that was familiar with it. He stated they will be coming back to the committee and ask if wish them to rebid or take quotes and keep same firm. Hamerlik stated 3 years ago were looking to go with quote and opening it up but because of their expertise and now with new GASB 34 if that makes them more qualified and do faster than outside firm but renewed for 3-year period thinking they would open it up again but don't have to do that. Christensen stated staff should get a feel for fees but doesn't want to change firms as going through this deal - Hamerlik stated there are other firms in town.

Ms. Jerath stated the experience of the firm with implementation of GASB 34 is very important for the auditing firm. Mr. Schmisek stated that Saroj has been working on this for approx. year and maybe 2 years on implementation of process, and in the transfer to GASB 34, and need to comment and compliment our engineering department (Cindy Voigt) and have had excellent support from them in going back and helping review past costs and getting set up to do this and without that would never get infrastructure information, have done absolutely wonderful job getting us to the point where we're at now.

Mr. Johnke stated they handed out some literature that they have put together and will communicate the audit committee's responsibilities are and there is a section on what you should look for in hiring auditors, criteria and material and how to do that, as well as regulatory issues, what responsibilities are, guidelines; and has lot of information.

The city auditor stated they will ask audit committee to receive and file this report for submission to ND State Auditor's Office and recommend final payment subject to their review, and at next Committee of the Whole meeting is his office will come back for future audit - and how you want to handle it and put it on COW but suggest having it referred to this committee for more in-depth discussion. Christensen stated that would be appropriate and have meeting in November

Glassheim asked if any of their work do anything in terms of FEMA challenge, or FEMA appeals. Ms. Jerath stated that was not financial as well as scope of work, whether work was eligible or not. Mr. Duquette stated the dispute is a matter of work that was done or not, and lot is based upon photographs of actual pipes, etc. and coming down to technical dispute, that he and Mr. Swanson and maybe couple engineers will be going out to Denver shortly to provide that case.

Hamerlik moved to receive and file the report and submit it to the North Dakota State Auditor's Office for review and make final payment upon their review. Glassheim seconded. Motion carried.

Glassheim moved that we approve the actions management is proposing to take in the letter from Brady/Martz. Hamerlik seconded the motion. Motion carried.

Mr. Martin stated that next fall should probably get together and talk about SAS99, fraud standard and audit committee's responsibilities and auditor responsibilities and management's responsibilities and have dialogue of concerns. Christensen stated when changing financial reporting based upon 2003, when get that done, reconvene this committee and walk them through it. Ms. Jerath stated when 2002 is converted into new reporting model then compare this to the new model and what changes are. Mr. Johnke stated when going through that and if have any questions, call them.

ADJOURN

It was moved by Glassheim and Hamerlik to adjourn. Motion carried.

Alice Fontaine
City Clerk