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MINUTES/FINANCE/DEVELOPMENT COMMITTEE
Wednesday, December 3, 2003 - 4:00 p.m._____________

Members present: Christensen, Hamerlik, Glassheim, Gershman
(Also present were: Curt Kreun, John Schmisek, Saroj Jerath, Keith Lund, Greg Hoover, Terry Hanson, Al Grasser, Ron Johnke, Joe Martin (Brady Martz).

ITEMS FOR CONSIDERATION:

1. SAS 99 consideration of fraud in a financial statement audit - Brady Martz presentation
Mr. Johnke and Mr. Martin stated this was follow-up of when they presented the CAFR last July and had mentioned there is a new auditing standard that is effective for this year end and part of that would be to talk to the auditing committee before they began the audit, they are scheduled to start the preliminary fieldwork in a couple weeks; part of the new auditing standard is called consideration of fraud in a financial statement audit and part of the requirements of this auditing standard is that they meet with the auditing committee and go through certain questions, that the committee received a packet ahead of time and listed 6 questions they will go through and discuss. He stated they would like to go through slide presentation which will show what is changed - the auditor's responsibility under the old professional auditing standards and what is under the new auditing standard - old auditing standard was SAS 82 and now SAS 99 and will review so committee will know what standards require auditors to do and their responsibilities so there is not an expectation gap between requirements and what committee expecting auditors to do.

Mr. Martin stated the objectives of their discussion today was to get an understanding of the nature of fraud and the auditor's responsibility to detect fraud, review the new pronouncement and show committee what has changed and to get some feedback as what the committee thinks the fraud risks are, what programs are in place to prevent or deter it or detect it and to answer committee's questions.

He stated fraud is an intentional act and involves deliberate concealment of the facts and as auditors what they are specifically interested in is fraud that would materially mis-state the financial statements and that there could be fraud going on that someone could call in sick while not really sick or could be using some equipment for personal use - those are concerns and they could look at those but as far as the standard goes, what they are really getting at is things that could materially mis-state the financial statements - could involve management, employees or third parties, could involve one individual or collusion.

He reviewed 2002 report to the nation on occupational fraud and abuse, with compiled results of 663 occupational fraud cases covering over $7 billion in losses, that misstatements related to fraud fall into two categories: 1) fraudulent financial reporting - intentional misstatements or omissions of amounts or disclosures designed to deceive financial statement users and/or involving theft and embezzlement of an entity's assets, and 2) misappropriation of assets with over 80% of occupational fraud cases involved misappropriation of assets. He noted fraud triangle: incentive, rationalize, opportunity; and the auditor is responsible for fraud as it relates to material misstatements in the financial statements; that the auditor is required to assess the risks of material misstatements dues to fraud, design, audit procedures.

He stated that the audit committee's responsibility is if there are significant weaknesses in the design or effectiveness of internal controls and need to report those to the board and if any instance or suspicion of fraud involving management to communicate that to the board, or of lower level employees or third parties. He stated the board's (audit committee) responsibility - insure that management has designed and implemented a system of internal controls, appropriate monitoring systems in place to make sure that the internal control system is operating effectively. He stated that antifraud programs and controls are in place to prevent fraud from happening and to even detect fraud. Prevention and deterrents are the best because detecting fraud is coming in after the fact, more cost effective if can put in controls to prevent it from happening; most instances of fraud happened because of insufficient controls.

Mr. Martin noted some antifraud programs and controls: active board, active audit committee, internal audit, making sure that everybody in the organization from top on down practices ethical behavior and sets code of conduct, set up hotlines, bank reconciliation,

He stated what has changed with the new fraud standards - that under the old auditing standards the auditors did inquiries but didn't have any guidance as to what they were supposed to do, made inquires and see if controls in place but under the new standards that is not enough - need to get audit committees involved, talk to them before doing the audit - need to get outside the accounting department/finance department because lot of times the audit is focused in finance and with new auditing standard is going to go out and make inquiries of other outside the finance department - talk to maintenance, central garage, public works, etc. as there may be some abuses out there that could be potentially material to the financial statement. He stated the old process was to analyze broad risk factors, made inquiries, did a risk assessment and then responded and under the new process have added some things - brainstorming session, auditors are required to get together as a group and talk among themselves and ask questions - and come up with a list of things that could possibly go wrong and then assess what controls the City has in place to make sure those things aren’t happening.

He noted the following inquiries the new auditing standard is requiring them to make of the auditing committee.

2 Questions for Committee Response:
a) What are the audit committee's views regarding the entity's fraud risk?
b) Does the committee have knowledge of fraud or suspected fraud?
c) What oversight role does the committee have in relation to fraud?
d) What protocols have been established between the audit committee and management
to keep the audit committee informed of fraud?
e) Were any matters related to fraud reported to the audit committee?
f) What action did management and the audit committee take?

Chairman Christensen stated they were not prepared to respond to this, they have information and should get a report from the department heads, Mr. Schmisek or Mrs. Jerath, and would suggest that each department head give them a report of various risk and would suggest that the auditors meet with various department heads rather than the committee. It was noted that many departments handle cash - health, police, Alerus, landfill - probably 6 or so. Mr. Johnke stated that part of the standard requires them to do plan to get outside the finance department.

Council Member Glassheim stated that with the new national standards their responsibility is to make sure that there are appropriate structures in place. The city auditor stated they can give the committee a report on what internal controls are in place as far as cash handling, inventories, etc. that they do on a routine basis, and committee to determine if there is a gap or not.

Hamerlik asked how much of this is prevent future rather than find out the past. Mr. Martin stated this is a deterrent and prevention is what you are after - to take away the opportunities and internal control structure is your primary safeguard for the assets and want to have as good as possible and of enforcing standards.

It was noted that the auditors had about five more points to cover and but could leave those and over a period of time look at them, but these are the items they need to think about and address, committee's job is to make sure that management has these things in place that operate effectively.

It was noted policy would be something they would want to establish and have a formal process and if there is procedure for an employee if something not being done right, and should have an avenue for those employees to communicate to and express those concerns without fear of retaliation, etc. and that maybe part of a process or procedure to put in place to communicate to upper level of management.

Christensen stated that if committee agrees they should get an assessment from staff (city auditor and deputy city auditor) of where checks and cash are handled and summary of what they believe the controls that exist, that the auditor's review the report from financial managers and meet with them and go over that and give committee a review of their perception as to accuracy and adequacy and before you do that have an on sight review and get a review of our potential for fraud - and meet with finance and develop a protocol for review and then translate into committee's oversight role re. relation to fraud. He stated once they get that they should review that and make a report to the executive (Rick Duquette and the Mayor) of what they have seen and convene in executive session - would like broad scope so get a good foundation in place and if cost extra, tell city auditor.

Christensen asked what timeframe is for this as begin review for 2003; Mr. Johnke stated some things they do as routine but other things they need to look at - inventory at the garage, equipment usage, inventories at other areas - anything that is susceptible to theft - financial reporting fraud are probably not high risk - financial dollars before get to financial statement, landfill - main area is cash, after that inventories, equipment purchases, supplies, etc.

Christensen asked how many people have access to credit cards in the city and is something he would like a report; the city auditor stated there are very few credit cards but have talked about a larger process and are trying to develop a process and bring for review - can set daily limits and help in the payment of checks - write one check for many purchases but when do it want to have all the procedures in place.

Mr. Martin stated another one brought up is use of cell phones, personal use of cell phones - some places have policy to pay minimum fee and if extra minutes over that the employees are responsible for them. Another item was frequent flyer miles.

Christensen stated he was looking at minutes and there were some issues about changing our reporting procedures and the city auditor was going to work on a better system for reporting transfers in and out of various funds - get that at the end of the year and having a better feel for having the money from the enterprise funds was being used to fund other departments of the general government - more detail so know what is going on. The city auditor stated they could send reports out - normally do once a year - basically in the budget.

Committee will meet when have additional information.

3. Fannie Mae loan.
Christensen stated we're moving towards borrowing money from Fannie Mae, (Fannie Mae recently approved $5 million revolving line of credit, subject to acceptance by the City - if borrow some money with attorney's fees - $75,000 of expenses to do this deal and for the money we don't take down, we pay 1.5 basis pay for unborrowed funds - question is what are the initial intended uses of the money, remembering that this money has to be full face and credit of the City of Grand Forks as a G.O. bond - an issue we have to be very careful with - and asked what the first draw down would be for.

Keith Lund, Urban Development, stated the two programs they are asking to use Fannie Mae funds for are down-payment of closing costs for assistance program for 80 to 120% of median income - draw down funds needed to make loans to home buyers to families between 80 to 120% of area median income (which is based on family size, max. income for family of four is $65,000 and for anybody within the limits). House prices are $135,250. It was noted they have two affordable housing projects now (Greenberg's and Crary's) and projection of number of units bringing on - perhaps 40 total.

Gershman reported present.

Terry Hansen, Housing Authority, stated that Fannie Mae's requirements are limiting it to
10% of the loan which would be $500,000 of this loan, which is negotiable with Fannie Mae.
Mr. Lund stated it is negotiation and have extended our interest in raising that cap - the program is $7500 per household as max. loan at 5% and amortize it for 10 years and they make monthly payments for 5 of those years with a balloon after the fifth year. Assuming the average loan would be about $6500 and balloon would be about $3800, and if can't afford to pay the balloon, they will go get a home equity loan for that portion; one of the things that is missing, initially this program available to a new constructed home is the $75,000 tax exemption for the first 2 years.

Mr. Lund stated not giving the total was a way to stretch the program as working with a limited amount of funding and hold the program to $1.5 million. Mr. Hansen stated they would be doing an injustice to the existing home owners because if everybody go after the new home construction with this program and when people want to sell their houses, wouldn't look at existing houses because could get additional break out of loan. Mr. Lund stated exemption is on the books today and that unfair competition exists today.

Mr. Lund stated need $1.5 million but with earlier payoffs need a little over $1 million of the $5 million for this program. Mr. Hanson stated that if have to cover it for a short time until Fannie Mae allowed renewing in 5 years and refinancing - Fannie Mae has in their agreement the method of payback and have to have that in mind - they program it out and how get paid out and if we have other uses for these funds, make money on that as well; this is at general obligation of the City but because of the interest rate and because very little strings that the City would have the funds available to do a lot more than if use CDBG funds or use City tax dollars.

Gershman stated he has been approached since they started talking about affordable housing, by people that are interested, and if there is one piece of paper that he could give to individuals and thinks that council people should have that one sheet of paper to give out to individuals -put it all together.

Hamerlik asked what rating would be; the city auditor stated they would have to put more information together - will be general obligation of the City of Grand Forks and council needs to know that if we don't have the money, obligation means tax money and we have to levy the tax - could pay out of reserves. Kreun stated that this has been programmed out that there is minimal manageable risk involved because of the interest we are going to make, the return we're going to make money on.

Mr. Hansen stated people are not buying house value but buying house payments based on the interest rate today, which is over inflating the value of existing housing, and that is one of the things this program would do, that we are providing the incentives of the construction of homes if those people that live in $70,000 homes will be able to afford and move into.

Mr. Hansen stated these programs may have tendency to try to drive prices down, and that was one of the complaints with Congressional housing as they built 225 houses and made an effect on the housing market, that hear from surveys, etc. that housing is too high and what do you do to control the increase in housing - supply and demand. Gershman stated that the red mark we got from the last BRAC was lack of affordable housing and we are worse now and BRAC is starting again.

It was noted that this program is for first-time home buyers, want to increase home ownership.

Christensen stated the issue is a $5 million dollar loan, how much is going to be drawn down, maybe $75,000 for 100 homes, and would like people who buy the new homes to not have to take the credit of the $75,000 tax break and reduce the $7500, want to make the program work.

Christensen asked what they would do with the other $4 million. Other uses noted: the infrastructure in affordable housing developments that the City would be funding anyway, the City has agreed to defer special assessments for 2 years to the homeowner and is a 24-month payback in 3 years before special assessments will be certified and the bond funds will pay off Fannie Mae; use this for the short term borrowing for the 24 month period and refinance with normal bond sale; that they are lowering services fees.

Mr. Hanson stated estimate for Promenade is $1.7 million for infrastructure - 85 units (Promenade owned by Housing Authority), and hope to find other sources to pay some of the special off within the 2 years and proposal is providing housing for 51% of the residents with 80% or less than LMI but would be home ownership. The Housing Authority has a housing program for down-payment of closing cost, the voucher program and other counseling programs that they can help home ownership for those people with 80% or less but problem they have is don't have homes at dollar limits that they can afford to buy - build homes that they can afford to buy at the rates that we can afford to subsidize through HA, through voucher program or down payment program. and what they want to propose is that to use resources available, CDBG or otherwise, to reduce the amount of special assessments that go into Promenade - the City will front all of the infrastructure but rather than passing on a lesser amount. He stated one of the things he is concerned about in the Greenberg and Crary are putting in is that 2 years when those specials are due will be twice the amount because funding 100% of specials rather than 50%; and developer doesn't have to pass that on so homeowners get into a lower cost but 2 years down the road rather than $140/mo will be $250/mo. Mr. Lund stated there is some sort of disclosure form that the developer would have the buyer sign - and declare that there are larger special assessments as result of those benefits. Notification is critical - developers are private enterprise. In Promenade they are looking to subsidize those assessments and in return for that, the Housing Authority will insure the City that 51% of the houses will be LMI and the other 49% will be sold to the 80% to 120% or anybody else and they pay their specials.

Mr. Hansen stated if these are two areas that funding can be used for - infrastructure in affordable housing districts and the down-payment closing costs but these funds would also be available to the City for other infrastructure projects where funding their portion of it, if beneficial to the City to fund, rather than bond issues, and be used as a float until he can pool a number of infrastructure projects and save interest. Mr. Lund stated they are asking for two uses today and would use for approval of any further initiatives as well as to approach Moody's to insure that they approve of that and our bonding rating upheld. The city auditor stated if they sign up for that whole amount, they will put together a cash flow scheme and get it to Moody's and show expected draw-down to see what they have to say. Mr. Hansen stated these funds could be used as income financing for acquisition and demolition of Grossman block - interim construction loans for development and also used for rental properties - Fannie Mae allows for rental properties but not sure if City would want to do that. He stated that if only request 2-year loans today, that in two years go back and ask for that again - that this is an opportunity for the City to have access to relatively inexpensive financing for some housing projects that they could use to address for affordable housing issues we have with the primary purpose to increase our home ownership. Mr. Schmisek stated that when that study was done and compared us with universities and air bases , we were in line with them.

Mr. Hansen stated they are readily accessible funds, Section 108 might be used for Grossman or Promenade because Section 108 can sit out there over 20 years and can use CDBG program income to pay that off over the next 10 years.

Mr. Hoover asked what they want to see for council as come forward with vote on this. Kreun stated to basically lay out the question - need $2.5 million tonight. Engineering might have what Crary and Greenberg need; he stated the two reasons they received from realtors was how they were going to be affected because they thought only for new homes and is up to city council and if want more incentives for 2 years. Hoover stated people in existing homes will move up and the realtors will have homes to sell. Gershman stated a one year trial might not be enough but for affordable housing - create some interest and maybe need two years - that this is what do for two years and revisit it, and if realtors say it destroyed the housing market - which it is not going to do, there is no place for people to go as there is no home stock - and if we build homes to sell they will have houses to sell.

Christensen stated we need to help the young people get their homes and wants more than 2 years - and try to have a simple plan coming forward where could draw down from $1 million to $1.5 million over next 3 to 5 years as we build out our affordable stock - and has to be in place for 5 to 10 years so developers have consistency. Hamerlik stated we need education program for current residents because complaints were of the $75,000 that we are helping those people who can most afford building a new house. Mr. Hansen stated the council's response to that is 1) there is a cap on the price of the home which is $135,000 and 2) there are a number of programs to help those people if they can't afford it to help them afford it. - Need education to the public what it will do for the whole city.

Christensen asked what incentives for to buy an LMI home; Mr. Lund stated that a person buying any home in town earning 80% or less of area median income we have two programs that are available - down payment and closing cost assistance program with a cap of $5,000 that the City will pay through CDBG funds, 50% of the lender required down-payment and all closing costs. The second program is the home-ownership assistance program. Mr. Hansen stated in addition to that if you honor voucher today, you can use either the 12-month of your assistance to and use as down payment in addition to that and use a combination of voucher payment and 30% of your income to make the house payment up to 15 years depending on your income. Gershman stated he would like to have a housing fair and get everyone there (bankers, realtors, developers, builders, City).

Committee motion: That we allocate between $500,000 and $1,500,00 of this money for our affordable housing projects for incentives, $3.5 million for special assessments in our three existing affordable housing projects to help with special assessments ($1.7 million for Promenade and $ (info from engineering) for the other two affordable housing units) and anticipate in two years that that portion of the loan will be paid back by special assessments levied against those additions, and the balance of the money will be reserved for future projects, one of which may include some redevelopment of substandard housing in the inter-city.

The meeting was adjourned at 6:20 p.m.

Alice Fontaine
City Clerk