Finance Committee

TOWN OF MOUNT PLEASANT, SOUTH CAROLINA FINANCE COMMITTEE Monday, December 4, 2017 Municipal Complex, Committee Meeting Room, 3rd Floor 100 Ann Edwards Lane Mount Pleasant, SC 29464 Minutes PRESENT: Tom O’Rourke, Chair; Joe Bustos and Kathy Landing ABSENT: Gary Santos STAFF PRESENT: Eric DeMoura, Town Administrator and Marcy Cotov, Chief Financial Officer ALSO PRESENT: Emily Sobczak, Partner, Greene, Finney & Horton, LLP Mr. O’Rourke called the meeting to order at 10:10 a.m. 1. Approval of Minutes from the November 6, 2017 meeting Mr. Bustos moved for approval; seconded by Ms. Landing. All present voted in favor. 2. Public Comments [None] 3. Presentation of the Town of Mount Pleasant fiscal year 2017 independent audit Mr. O’Rourke stated that he has had the opportunity to work with Greene, Finney & Horton at Charleston County Parks & Recreation, as well as with Ms. Emily Sobczak. He stated that he is pleased they are involved with the Town of Mount Pleasant.  Finance Committee December 4, 2017 Page 2 of 13 Ms. Cotov stated that as of June 30, 2017, the Town had an independent external audit performed. She said that Ms. Sobczak is the lead auditor and will provide a presentation on the Town’s position. Ms. Sobczak stated that she will present the audit results for the fiscal year ended June 30, 2017. She said Greene, Finney & Horton would like to remind everyone, especially new Town Council members, of the Town’s responsibility as the bulk of the responsibility related to the financial statements does lie with the Town. She said the Town is responsible for providing reliable and accurate financial information and in order to do so, one very important aspect is the internal controls. She said having sound policies and procedures that properly address the risks facing the Town to ensure that the financial information that is provided to the auditors is reliable and accurate. She said part of maintaining an effective internal control system is performing regular routine risk assessment, because risks are constantly changing. She said one risk is fraud; however, the Town should also be addressing the risk of error.  Finance Committee December 4, 2017 Page 3 of 13 She said in order to do this, it is important to regularly assess the risks that are facing the Town and review policies and procedures to ensure that they are properly addressing those risks. She said that the Town is responsible for the financial information, which includes the financial statements themselves and the numbers and disclosures that are included. She said that while the auditors assist in preparing the report, the responsibility for that information lies with the Town. She stated that their responsibility is to audit the financial  Finance Committee December 4, 2017 Page 4 of 13 statements and provide an opinion. She stated that they did issue an unmodified opinion this year, which is a clean opinion and one that the Town would want to receive. She stated that in looking at the General Fund results for the year, the general fund balance increased $6.6 million to $40.4 million. She stated that a good gage of fund balance is comparing it to the Town’s operating expenditures. She stated that the Town’s unassigned fund  Finance Committee December 4, 2017 Page 5 of 13 balance of $33.7 million represents 41% of the Town’s 2018 budgeted expenditures. She said that the Town does have a policy of maintaining a minimum of 25% of the operating expenditures. She stated that the Town is in compliance with this policy as of June 30th. She said here are some reasons why it is so important to maintain that healthy fund balance. She stated that one of the most significant revenue  Finance Committee December 4, 2017 Page 6 of 13 sources, which are property taxes, typically do not come in until the end of the calendar year or the beginning of the following year. She said that there is approximately six months of expenditures, where cash flow is needed to carry the Town until the end of the calendar year when property tax revenues begin coming in. She stated that with the number of natural disasters that have occurred in the past few years, the Town does need to have funds available to cover expenses up front, until FEMA reimbursements come in. She said having a healthy fund balance helps the Town to do long term strategic planning as the Town is doing with the infrastructure management plan. She said if the Town was not maintaining a healthy fund balance, they would not be in a position to do some of the projects that are so important to the future of the Town. She stated that looking at the Town’s general fund activity for the year, the Town has revenues of $73 million which was a 6% increase from 2016 and was primarily in the business license and permit revenues, which were higher by approximately $2.5 million. She said there was also significant inter-governmental funding related to FEMA reimbursements to assist with the Hurricane Matthew expenses. She said the revenues were $7.4 million or 11% higher than budgeted and those overages came  Finance Committee December 4, 2017 Page 7 of 13 partly in property and sales taxes, as well as business licenses and permits and inter-governmental revenues, which were not anticipated. She added that general fund expenditures were $63.5 million, which was very consistent with the prior year, with a 1% decrease and 8.5% less than budgeted expenditures. She stated that the Town’s budgeted expenditures, across the board, were under budget in most area due to conservative spending. She stated that the majority of the Town’s expenditures are in salaries and benefits, which was one of the large areas that was under budget for the year.  Finance Committee December 4, 2017 Page 8 of 13 She said that other significant funds are the general obligation bond, Capital Projects fund that had a net decrease in fund balance of $12.4 million as a result of expenditures related to the Town Hall construction and other various projects. She said the TIF bond Capital Projects fund had a net increase in fund balance of $7.7 million due to the property tax revenues received in the TIF fund exceeding the capital costs during the current year. She said those capital costs were primarily related to the new Town Hall. She stated that the Infrastructure Management fund ended with a fund balance of $16 million and received planned transfers from the general fund of $5.1 million. Mr. O’Rourke asked what the Infrastructure Management fund is and if it sits as a separate fund for this purpose. Mr. DeMoura responded in the affirmative and said this is the funding the Town takes from savings to help pay for transportation and stormwater projects. Ms. Sobczak stated that the Town has a policy that dictates that a certain percentage of the unassigned fund balance goes into that fund each year to be used for future infrastructure needs. She said there is also the Internal Service Fund which was created in FY 2016, which relates to the self-insurance plan for healthcare costs. She said that this fund had a net increase in fund balance of $668,000 from the prior year. She stated that in looking at the long term assets and obligations, there are capital assets of $517 million at year end, and includes capital asset additions of $40.8 million. She said the $40.8 million in additions includes both purchase additions, as well as donated infrastructure. She said the most significant completed project in the current year was the Town Hall. She said that Fire Station #6 was also completed during the current year. She stated that there is construction in progress of approximately $8.5 million as of year-end and open outstanding construction commitments related to those projects of $7.7 million. Ms. Landing asked to clarify the donated infrastructure.  Finance Committee December 4, 2017 Page 9 of 13 Ms. Sobczak said that this primarily relates to when new developments are constructed and developers pay for roads and drainage and when completed, those assets are donated to the Town, who is then responsible for maintaining those assets. She stated that on long term obligations, the Town has $48.5 million as of June 30, 2017, which is a decrease of approximately $7.6 million from the prior year. She said long term bonds and premiums are included, as well as capital leases of $37.5 million.  Finance Committee December 4, 2017 Page 10 of 13 She said there are also compensated absences which is vacation accrual, earned, but unused vacation of $1.5 million. She added that there are infrastructure credits outstanding at $6.8 million and a net OPEB liability of $2.7 million as of June 30, 2017. She said the scheduled debt service payments including both principal and interest are $5.3 million for fiscal year 2018 and on the government wide statement of net position, the Town is still required to report the net pension liability related to participation in the state retirement system. She added that this liability is $54.2 million as of year-end, which the Town has no control over, as it is determined by the state’s actuarial report for the retirement system. She said that this does not affect the Town’s cash flows or fund level statements, although the contribution rates related to the retirement plan are continuing to increase and the employer rates will continue to increase for at least the next several years, while attempting to bring this liability down. Ms. Sobczak stated that the Town implemented GASB#77 during the current year which relates to tax abatements; therefore, agreements entered into by the County that offer incentives for businesses coming to the area. She said these agreements result in businesses paying (for example), a fee in lieu of taxes, which results in them paying less than they would if they were paying based solely on the millage rate and assessed values. She said that this had very little impact on the Town,  Finance Committee December 4, 2017 Page 11 of 13 because there are not many abatements affecting the Town. She said that total abatements for fiscal year 2017 were approximately $14,000. She said that this was simply a disclosure in the 2017 financial report. She said for FY 2018, GASB #75 will be implemented, which relates to the retiree healthcare plan (OPEB plan), which will required a change in how the liability is calculated and reported for the plan. She said currently, the Town is only required to report a liability related to the OPEB plan for the difference between the actuarial required contribution for the year and the amount actually contributed. She said the cumulative difference is reported as a net OPEB liability. She said in FY 2018, the Town will be reporting the full unfunded actuarial liability, which is the long-term liability. She stated that this will increase the liability that is being reported; however, similar to the net pension liability, this is only going on the government wide statement of net position and does not affect the fund level statements and does not change the actual terms or circumstances of the plan, only a change in the accounting of the liability. Ms. Sobczak stated that each year, the accounting firm issues a second opinion, in addition to the opinion in the front of their report, which is in accordance with government auditing standards, also referred to as the “Yellow Book” opinion. She said if they identify material misstatements during the audit, material weaknesses or significant deficiencies in the Town’s internal controls, those items would be reported as findings in  Finance Committee December 4, 2017 Page 12 of 13 that opinion. She added that they have no items of this nature to report this year, which reflects favorably on the hard work of the Finance Department. She said in any one fiscal year, if federal expenditures exceed $750,000 an additional compliance audit would be required, referred to as a single audit, which was not required of the Town in fiscal year 2017. She said they do anticipate that being required for fiscal year 2018. Ms. Sobczak stated that in addition to the Town’s financial report, the accounting firm also issues a management letter each year, which includes standard communications from the auditing firm to Town management and Council members. She said there were no written recommendations or comments to report this year, as this is a result of management and staff taking prior recommendations seriously and making changes when they were needed and reviewing Town policies to ensure they are enforced. She said the Town also does a superb job with the financial closeout. Mr. O’Rourke stated that he is not sure that anything is more important than protecting the public’s money. He said that he has been very encouraged in the brief three weeks on Town Council, meeting with Ms. Cotov. He is not sure if the public understands the significance of the Town receiving an audit with no significant findings and nothing in the  Finance Committee December 4, 2017 Page 13 of 13 management letter. He said that the Town is efficient as it can possibly be from an audit team that is well established. He commended staff for this. He said that what is also important is the Town takes care of the OPEB situation internally with a separate fund for healthcare is revolutionary. He said that the public should be very pleased, as he is very proud of Town staff. He said that there is a significant fund balance and the cash flow becomes an issue when receiving taxes, and asked if the Town needs a tax anticipation note. He asked if the Town uses the fund balance for this, and then pays themselves back. Ms. Sobczak responded in the affirmative and added that the Town also has significant revenues from business licenses as well, which also helps with the cash flow through the second half of the calendar year. She said not having the issue of short-term debt saves the Town money. 4. Adjourn There being no further business, meeting adjourned at 10:29 a.m. Respectfully submitted, Barbara Ashe December 4, 2017