Local Government Accountability

1. FGFOA Annual Conference May 8, 2012 Local Government Accountability

2. Topics for Discussion • Recent Audits • Laws and Rules Update • New Financial Indicators • Suggestions for Improvement Project • Review Questions Most Missed in Desk Reviews • Findings in Local Government Audits

3. Recent Audits • Local Government Audits • Required by law • AG’s own authority • Citizen petition – municipalities • Request by local government • Direction by Legislative Auditing Committee • Released Audits • 2012-081 – Assessment, Collection, and Remittance of Court-related Fines, Fees, and Other Charges, and Selected Reporting of Court-related Activities by Clerks of the Circuit Courts – AG’s own authority • 2012-169– Islamorada, Village of Islands Special Operational Audit – Citizen petition

4. Recent Audits • Audits in Progress • Follow-up on operational audit of Citrus County Hospital Board/Foundation – required by law • City of Lake Worth Sub-regional Sewer System Special Operational Audit – LG request • Northwest Florida Water Management District Operational Audit – required by law • St. Johns River Water Management District Operational Audit – required by law • South Florida Water Management District Audit – required by law • City of Hollywood and Hollywood CRA Special Operational Audit – LAC directed

5. Laws and Rules

6. Chapter 2011-144, Laws of Florida • Local Government Accountability • Changed time frame to submit Section 218.39, FS, audit reports to AG from 12 months to 9 months.Effective for 2010-11 FY audits! • As of 4/8/12, we have received 486 2010-11 FY audit reports (about 35%) • All Annual Financial Reports submitted to DFS via LOGER are due no later than 9 months after the end of the fiscal year. (Section 218.32(1)(e), FS) • Same deadline for unaudited entities

7. Chapter 2011-144, Laws of Florida • Local Government Accountability • Requires AG to notify Legislative Auditing Committee (LAC) of any audit report that indicates an entity has failed to take full corrective action in response to a recommendation that was included in the two preceding audit reports. • LAC may direct the governing body to provide a written statement explaining why full corrective action has not been taken or describing the corrective action to be taken and when it will occur. • If LAC determines that written statement is not sufficient, it may require the governing body’s chair or designee to appear before it. • If LAC determines that the entity failed to take action for which there is no justifiable reason for not taking action, or failed to comply with LAC requests, it may act pursuant to Section 11.40(2), FS.

8. Chapter 2011-144, Laws of Florida • Local Government Accountability • Revised Section 218.503(1)(e), FS, to be consistent with GASB 54. • Budgets must include expected expenditures in a similar level of detail required by the annual financial reports - object code level. (Sections 129.01(1); 166.242(2); 189.418(3), FS) • All original budgets and certain amendments must be posted to the government’s Web site. (Sections 129.03 and .06; 166.241; 189.418, FS)

9. AG Rule Changes – 2010-11 FY Audits • Changed time frame for submitting audit report. • Added requirement for auditors to include finding reference number in referring to uncorrected prior audit findings, and identify those reported for 3rd consecutive audit. • Added requirement for Schedule of Prior Audit Findings for Florida Single Audit Act to include fiscal year in which finding originated. • Auditors of water management districts must indicate whether the district is in compliance with transparency requirements.

10. 2012 Legislation

11. Local Government Financial Reporting System Performance Audit Report No. 2011-196 Financial Emergencies Act – Part V of Chapter 218, FS • Overview of Act: • Section 218.503(1), FS - Specified conditions (shortened version): • Failure to pay, due to lack of funds, short-term loans/bond or loan payments. • Failure to pay, due to lack of funds, uncontested claims from creditors within 90 days. • Failure to transfer, due to lack of funds: (1) withholding taxes of employees or (2) employer and employee contributions for Federal social security or retirement/benefit plan for employees.

12. Local Government Financial Reporting System Performance Audit Report No. 2011-196 Financial Emergencies Act – Part V of Chapter 218, FS • Overview of Act: • Section 218.503(1), FS - Specified conditions (shortened version): • Failure to pay for one pay period, due to lack of funds, wages and salaries owed to employees or retirement benefits owed to former employees. • A fund balance deficit in total or for that portion of a fund balance not classified as restricted, committed, or nonspendable, or a total or unrestricted net assets deficit, as reported on the fund financial statements of entities required to report under governmental financial reporting standards or on the basic financial statements of entities required to report under not-for-profit financial reporting standards, for which sufficient resources of the local governmental entity, charter school, charter technical career center, or district school board, as reported on the fund financial statements, are not available to cover the deficit. (as revised by 2011 legislation)

13. Local Government Financial Reporting System Performance Audit Report No. 2011-196 Financial Emergencies Act – Part V of Chapter 218, FS • Condition specified in Section 218.503(1)(e), FS, has not been an effective indicator of a “financial emergency.” • 91 percent of local governments and 92 percent of charter schools reported as meeting a condition specified in Section 218.503(1), FS, met only condition (1)(e) since enactment of Chapter 2004-305, Laws of Florida through 2007-08 fiscal year. • None have been determined to need State assistance (i.e., state of financial emergency). • Meeting condition in (1)(e) may indicate deteriorating financial condition. No State assistance = entity must resolve. • Auditors must notify governing body if deteriorating financial conditions exist.

14. SB 368 (2012) – Financial Emergencies 2012-38, Laws of Florida • Eliminates Section 218.503(1)(e), Florida Statutes. • Places the provision currently in Section 218.503(1)(e), Florida Statutes, under Section 218.39(5), Florida Statutes, and requires auditors to notify each member of governing body if the condition exists for that entity. • Effective for audit reports issued July 1, 2012, or later.

15. Local Government Financial Reporting System Performance Audit Report No. 2011-196 Financial Emergencies Act – Part V of Chapter 218, FS • Section 218.503(3), FS, requires the Governor or Commissioner of Education (or designee) to contact the local government or district school board to determine what actions have been taken to resolve the condition. • Entities do not always respond timely to Governor’s requests for information. • Law does not provide for a time frame within which entity must respond (or penalties for failure to respond).

16. Chapter 2012-38, Laws of Florida Financial Emergencies • Revises Section 218.503(3), Florida Statutes, to: • Require local governments or district school boards to provide information requested by the Governor or Commissioner of Education within 45 days after the date of the request. • If the local government or district school board does not comply, the Governor or Commissioner of Education shall notify the Legislative Auditing Committee, who may take action pursuant to Section 11.40, Florida Statutes. • Provides a mechanism for the Governor to suspend from office members of a governing body that fail to resolve a state of financial emergency.

17. Chapter 2012-126, Laws of Florida Water Management Districts • Deletes 2011-12 FY limits on amount of ad valorem tax revenue that may be raised by each WMD and removes provision requiring that the maximum property tax revenue for WMDs revert to the amount authorized in the prior year if the Legislature does not set the amount. • Creates Section 373.535, Florida Statutes, relating to preliminary budgets that must be provided to the Senate President, House Speaker, and chairs of certain legislative committees for review and comment. If legislation is not enacted regarding a WMD’s millage rate or property tax by July 1, the WMD may proceed with budget development. • Budget amendments > $1 million must be approved by the Executive Office of the Governor (EOG). • Removes Legislative Budget Commission’s (LBC) authority to approve budget but authorizes EOG to approve. • LBC can reject certain aspects of budget proposal (e.g., single land purchase > $10 million or cumulative land purchases > $50 million) • Clarifies that the “monthly financial statement” required by Section 373.536(4)(e), Florida Statutes, is to be in a format prescribed by the Department of Financial Services.

18. HB 1089 (2012) – Public Records Exemptions • Expands public records exemptions for current and former county tax collectors and investigators or inspectors of the Department of Business and Professional Regulation (DBPR), their spouses, and their children. • Information exempt: • Home address & telephone # of county tax collector. • Home address, telephone #, and photo of current or former DBPR investigator or inspector. • Name, home address, telephone #, and place of employment of spouse and children of tax collector, investigator or inspector. • Name and location of schools and day care facilities attended by the children of tax collector, investigator, or inspector.

19. Retirement (FRS) Chapter 2012-146, Laws of Florida: • Establishes employer contribution rates. • Changes amount paid into Investment Plan effective July 1, 2012 – results in a 30% overall reduction in contributions. HB 7079 (2012): • Clarifies that the provisions in chapter 121, FS, are applicable to Parts II and III • Defines normal retirement for Investment Plan members the later of the date under the Pension Plan or date the member is vested in the Investment Plan. • Clarifies that members first hired on or after 7/1/11 may defer joining DROP until age 55 for Special Risk and age 60 for all others.

20. New Financial Indicators • Target: for 2011-12 audits • Some using government-wide data • Includes pension and OPEB indicators

21. New AG Procedure • AG Requirements • Review all local government reports submitted pursuant to Section 218.39, FS. (Section 11.45(7)(b), FS) • Completeness reviews – all reports • Comprehensive reviews – samples of 60: • Pension note requirements • Florida Single Audit • Federal Single Audit • More comprehensive overall • OPEB (new)

22. New AG Procedure AG Requirements Request any significant items omitted from audit reports submitted. (Section 11.45(7)(b), FS) • Letter sent to local government and local government’s auditor. • Local government has 45 days to respond. • Notification to Legislative Auditing Committee for entities that fail to provide missing items requested.

23. New AG Procedure • Similar to GFOA’s “Listing of Comments and Suggestions for Improvement” • Provided to entities based on selected questions from the prior year’s reviews but includes all items noted in all reviews for entity • No response for current year required • Suggested for future financial statements/ notes/audits • Your feedback is welcomed

24. New AG Procedure • Letters sent to entity and entity’s auditor • For 2009-10 FY reviews, 129 letters sent to: • 20 counties, 79 municipalities, and 30 special districts • 84 individual types of suggestions for improvement • Suggestions for individual entities ranged from 1 to 9 items

25. New AG Procedure - Review Questions Most Missed in Desk Reviews • Notes to Financial Statements • U.S. dollar balances for investment exposed to foreign currency risk organized by currency denomination or investment type. (GASB Sections 2300.106c, I50.134) • Authority under which the defined benefit plan’s benefit provisions were established or may amended not disclosed. (GASB Section P20.117a.2) • Authority under which the defined benefit plan employer obligations to contribute were established or may amended not disclosed. (GASB Section P20.117b.1)

26. New AG Procedure - Review Questions Most Missed in Desk Reviews • Notes to Financial Statements • Post-employment benefit increases used in the actuarial assumptions of a defined benefit plan not disclosed. (GASB Section P20.118d.3.(c)) • Actual contributions made to a defined contribution plan by plan members and by employers not disclosed. (GASB Section P20.124d)

27. New AG Procedure - Review Questions Most Missed in Desk Reviews • Federal Awards/State Financial Assistance Total amount expended for each Federal award program or SFA project not provided on schedule for those that reported more than one line item per CFDA or CSFA. (OMB Circular A-133 s. __.310 (3); DFS Rule 69I-5.003(1)(c)) • 62% of 52 applicable for Federal, and • 48% of 46 applicable for State

28. New AG Procedure - Review Questions Most Missed in Desk Reviews Notes to F/S

29. New AG Procedure - Review Questions Most Missed in Desk Reviews • Auditor’s Reports • Schedule of findings and questioned costs does not show the correct dollar threshold used to distinguish Type A and Type B State projects. (OMB Circular A-133 s. ___.520; DFS Rule 69I-5.008) • For example, from OMB:

30. New AG Procedure - Review Questions Most Missed in Desk Reviews • Auditor’s Reports If a local government’s Schedule of Expenditures of Federal Awards indicates the following: U.S. Dept. of Transportation $10,000,000 U.S. Dept. of Homeland Security 350,000 U.S. Dept. of Environmental Protection 4,650,000 Total $15,000,000 Type A Programs are: a. Those that total or exceed $300,000 b. Those that total or exceed $450,000 c. None of the above

31. New AG Procedure - Review Questions Most Missed in Desk Reviews • Auditor’s Reports • Report on compliance and internal control cited the Executive Office of the Governor, rather than the Florida Department of Financial Services as the authority for the State projects compliance supplement. (See Section 215.97(2)(c), FS)

32. New AG Procedure – Potential Issues Budgets Florida law applicable to all local governments requires budgets to be prepared and requires that the budget regulate expenditures of the local government. It is unlawful for a local government to expend or contract for expenditures in any fiscal year except in pursuance of budgeted appropriations.

33. New AG Procedure – Potential Issues Budgets GASB Section 2300.106h requires that significant violations of finance-related legal or contractual provisions and actions taken to address such violations be disclosed in the notes to the financial statements. Therefore, significant violations of law for material overexpenditures at the legal level of budgetary control, including actions taken to address the violations, must be disclosed in the notes to the financial statements. 12 of 60 reports reviewed reported significant overexpenditures – no mention in notes

34. Local Government Audit Issues • Selected types of problems noted in • Auditor General • local government audits?

35. Employee Staffing & Training • Inadequate separation of duties • Insufficient expertise to perform duties competently • Training not provided as necessary • High turnover, exit interviews

36. Written Policies & Procedures • Lack of written policies and procedures • Should clearly define responsibilities • Help ensure: • Adequate internal controls • Compliance with applicable laws • Assists in training new employees

37. Written Policies & Procedures • Fraud • Budgets • Collections • Capital Assets • Payroll Processing • Personnel Administration • Risk Assessment • Procurement • Disbursements • Grant and Contracts Administration • Travel • Vehicle Usage

38. Budget Compliance Audit Considerations • Budget adoption • Ordinance or Resolution? • All funds included? • Prior year balances included? • Budget amendment • Budgetary control

39. Budgetary Control • Legal level of budgetary control • Adopted Budget • Statutory or Other Legal Requirements • Governing Board Policy • Budget comparison

40. Cash • Untimely bank account reconciliations • Inadequate bank account reconciliations • Checks used out of sequence • Unexplained/unsupported reconciling items • Stale-dated checks not reported/remitted • Unclaimed property per Chapter 717 • Must report, remit moneys, to FDFS by May 1 each year for checks outstanding over 12 months • Penalty

41. Cash • Bank transfers • No written contract • No approvals necessary • No dollar amount limit on transfers • No limit as to where funds can be transferred

42. Tangible Personal Property • No G/L control accounts • Not reconciled to subsidiary records • No subsidiary records • Often kept by audit firm • Inadequate Capital Assets records • Sufficient information missing (property #, serial #, location, etc.) • Some property not included on TPP records • Records not updated for deleted items

43. Tangible Personal Property • TPP items not tagged or marked • Noncompliance with Chapter 274, FS or Department of Financial Services Rule

44. Debt Management • No written policies and procedures • Did not determine amount needed • Did not explore various financing options • Pay-back period • Financing costs • Did not consider refinancing when advantageous • Exceeded debt capacity

45. Restricted Resources • Grants • Grant funds not expended within term of grant • Failure to timely apply for extensions • Failure to Separately Account for Grant Expenditures • Donations • Not recorded • Not recorded at fair value

46. Restricted Resources • Bond covenant restrictions • Use of proceeds contrary to authorizing documents • Required reserves not maintained • Dedicated taxes, fees and assessments • Undocumented use of employee time • Loaned for other purposes • Expenditures of interest did not follow principal uses

47. Revenues & Cash Receipts • Receipts control • No prenumbered receipts • Untimely Deposits • No reconciliation of receipts to deposits/licenses or permits issued • No security over cash collections • Charges to customers • Contrary to State Law • Not approved by governing body – Utility rate changes • Not timely collected

48. Payroll/Personnel • Hiring practices • No verification of employment history & education • No background checks • Compensation • No legal authorization • Employee Compensation Plan • Salary advances (article VII, s. 10, constitution) • Employee bonuses • Severance pay

49. Payroll/Personnel • Compensation (continued) • Independent contractor vs. employee • Council/Commission Members are employees • 24-hour use of vehicles • Moving expenses • Travel allowances

50. Expenditures • Legal • Not in accordance with purchasing policies • Public purpose • Food/entertainment • Flowers • Employee Christmas celebrations • Retirement gifts • Adequacy of documentation • Invoices/receipts missing • Lack of proper approvals prior to purchase