Audit Committee

MINUTES Audit Committee of Roanoke City Council Location: Council Conference Room Noel C. Taylor Municipal Building, Room 451 South Date: September 2, 2015 Time: 4:00 p.m. to 4:55 p.m. Attendees: Audit Committee Member Present (Y/N) Ray Ferris (Chair) Y Court Rosen Y Anita Price Y David Bowers (ex-officio) Y Drew Harmon, Municipal Auditor Dawn Hope Mullins, Assistant Municipal Auditor Cari Spichek, Senior Auditor Ann Clark, Senior Auditor Wayne Parker, Senior Auditor Chris Morrill, City Manager Sherman Stovall, Assistant City Manager – Operations Brian Townsend, Assistant City Manager – Community Development Dan Callaghan, City Attorney Barbara Dameron, Director of Finance Andrea Trent, Assistant Director of Finance Chris Chittum, Director of Planning, Building and Development Keith Holland, Community Resources Program Administrator 1. Call to Order: Mr. Ferris called the meeting to order at 4:00 p.m. and welcomed everyone. 2. Other Post-Employment Benefits Presentation: Ms. Dameron and Ms. Trent delivered a presentation on Other Post-Employment Benefits (OPEB) and the effect of new financial reporting standards on presenting this liability. Ms. Dameron discussed the Governmental Accounting Standards Board (GASB), which establishes and improves governmental accounting and financial reporting standards. These standards form the framework that accountants use as guidelines for recording and reporting transactions. In addition, these standards try to ensure proper disclosure. September 2, 2015 Page 2 of 6 Their goal is to establish consistency in financial reporting for comparison purposes. In June 2015, GASB approved Statement 74, Financial Report for Postemployment Benefit Plans Other Than Pension Plans, and Statement 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. The first statement deals with Plan accounting and is effective for fiscal years beginning after June 15, 2016. The second relates to employer accounting and is effective for fiscal years beginning after June 15, 2017. The unfunded OPEB liability will be reported on the balance sheet and the liability discount rate will be determined based on how long dedicated assets plus future contributions will cover current plan members’ future benefit payments. The new standards necessitate expanded note disclosures and required supplementary information. Additionally, the City will no longer look at the required annual contribution to determine funding levels. Funding and accounting will be officially divorced. As a result, this is a good time to think about developing new policies related to OPEB funding. Ms. Trent discussed specific benefit information. People seem to look at OPEB as pension. It really is everything except the pension. The City already acknowledges pension activity and balances with its own Comprehensive Annual Financial Report (CAFR), which includes all the required disclosures. To address OPEB, Finance has had to look at other items offered to employees after retirement. At the City, there are three components related to OPEB. The first is health insurance for retired employees. This is offered in order to attract and retain employees. Health insurance for employees is a state mandate. Additionally, if you have more than 100 employees and offer them health insurance, then you also have to offer it to retirees. However, the employer does not have to pay for it. The City allows retirees to stay in the group plan with active employees letting their claims be blended with those of the active group. This provides greater affordability for retirees. The City does not pay for retiree health insurance, but by allowing the blending of claims cost an imputed benefit is received by the retiree, which creates the OPEB liability. Mr. Rosen asked if this practice raises the cost for active employees. Ms. Trent responded that is does slightly raise the cost of active employee healthcare coverage. However, the City pays the greatest portion of active employee healthcare, in excess of 90% for those with single coverage. Additionally, employees must have worked at the City for 15 years to qualify for coverage as a retiree. Mr. Ferris asked who sets the rate for retirees. Ms. Trent replied that the City utilizes a consultant to help set rates, looking at the total costs. The Employee Health Clinic helps keep health care costs contained. Mr. Morrill commented about what a big expense this is for localities that provide free health insurance for employees and retirees. Ms. Trent responded that localities as a whole have ratcheted back their programs for affordability purposes. Mr. Rosen asked if the City looks at three (3), five (5), or 10 year demographics. Ms. Trent responded that Finance has long-term historical trends; this is part of the claims analysis and is reviewed when making future projections. Mr. Rosen noted that he is familiar with some entities whose workforces are skewed with baby boomers, and, as a result, younger workers cannot afford insurance. Ms. Trent advised the committee that the Affordable Care Act is really changing the dynamics of what healthcare looks like. If your employer offers you affordable care and you do not take it, then you must get it somewhere else. What the City offers is affordable. Mr. Rosen cautioned that we have to make sure what the government thinks is affordable, is the same as we think is affordable. Ms. Trent replied that the government only looks at the single tier. That has changed what we look at for demographics. What used to be the September 2, 2015 Page 3 of 6 norm is now not the norm. The single premium is very affordable. Comparable to other localities, the City is not an outlier with premiums. The second area connected to the City’s OPEB liability relates to benefits stemming from the Line of Duty Act (LODA). If public safety employees are injured or pass away due to a work incident, then the locality is required to provide certain benefits to the family. This responsibility used to be borne by the Commonwealth. Mr. Ferris asked if we have this money reserved internally in case it is needed. Ms. Trent responded that the City has a trust fund with VML/VACO, for which we provide funding. The trust has a seven percent (7%) assumed rate of return. The City is building funds to cover potential future liabilities. The City does not have insurance to cover LODA claims. However, LODA benefits include healthcare for life for dependent wife and children. Mr. Ferris noted that a trust can be exhausted. Ms. Trent replied that the City will build up enough over time to cover potential costs. If something happened tomorrow, the City would have to fund the LODA costs. The City has had less than ten (10) cases under this act. The City does not have additional reserves set aside for potential current LODA costs. The third OPEB item relates to life insurance provided to retirees. The City participates in a group life insurance program sponsored by the Virginia Retirement System (VRS). Current employees have a life insurance benefit of two times their base salary. Upon retirement, this benefit is reduced over a three-year period to 50% of the final base salary. This remaining portion creates an OPEB liability. We do not yet know the dollar amount of this liability. VRS will allocate liability to the City, just as our portion of teachers’ pension liability is allocated. It is not expected to be an extraordinary amount. Examples of current disclosures are included in the slides provided to the committee. Based on prior GASB requirements, much of the data is already reported. The disclosure will change based on new requirements. The difference will be placement of the data in the statements and exhibit formatting. Healthcare costs for retirees was discussed. Retirees pay the blended rate if they qualify for that benefit. Even with a blended cost, it is a big expense. They qualify for the blended rate until age 65. Ms. Price commented that health care costs are the reason why people are working more and more past age 65. Mr. Rosen asked if retiree plus spouse and retiree plus child rates are the same. Ms. Trent responded that there is a retiree plus one option. Related to dental insurance, there is no blending of rates. Retirees pay the true rate cost. Health care is the only insurance offered to retirees with a blended rate. Mr. Morrill asked for some clarification related to the retiree monthly supplement. Ms. Trent explained that if an employee has 20 years of service, he or she is eligible for a $378 monthly supplement to help offset health care costs. With the retirement health savings account (RHS), which replaced the supplement, the employee contributes one percent (1%) and the City matches that contribution. This option provides tax free dollars to the retiree. Mr. Ferris asked how much an employee can contribute. Ms. Trent replied that it is just the one percent (1%). For new employees, this is the only option. Existing employees had a one-time choice of whether to stay with supplement or go with the RHS. September 2, 2015 Page 4 of 6 Ms. Trent summarized pension plan and other retiree benefits for the committee. Sheriff’s Office retirees have a little different set of benefits and they participate in VRS. Overall, their benefits are pretty much the same as those of other City retirees. Mr. Ferris thanked Ms. Dameron and Ms. Trent for an excellent report and noted the he appreciated the detailed information. The presentation was received and filed without objection. 3. APA Report on Clerk of the Circuit Court: Mr. Harmon presented the Virginia Auditor of Public Accounts (APA) audit results. He stated that the audit was completed according to Virginia APA requirements and that there were no findings. The report was received and filed without objection. 4. Home Rehabilitation Program Review: Auditing concluded that the rehabilitation project reviewed was consistent with the program objectives stated in the City’s guidelines, however; the project was not financially feasible. The costs of this project substantially exceeded the established guidelines and costs of previous projects. While the guidelines allowed city personnel to waive the maximum cost, the justification for the waiver was not documented. The auditors also concluded that payments to the rehabilitation specialist who oversaw the project exceeded the amounts provided for in the original contract. A new contract was signed on a sole source basis that did not properly consider amounts previously paid for work already completed. Mr. Rosen asked if there was only one company that bid on this rehabilitation project. Mr. Harmon confirmed that only one bid was received. The procurement was advertised and a pre-bid walk-through was completed with potential vendors. Auditing contacted companies who were at the walk through but had not submitted a bid. One replied that the project was too large and the other company did not respond. In response to the audit, city management plans to review the home rehabilitation program guidelines each time a new target area is established. Program objectives and caps will be adjusted to fit the unique characteristics of each area. Mr. Rosen asked if cost/benefit analyses will be prepared for home rehabilitations going forward. Mr. Morrill responded that the city tries to identify where grant dollars may spur the most investment. He cited the West End area as being the most successful example of the city’s approach so far. While it makes sense to have guidelines, cost/benefit analyses may not be appropriate for every housing project. It’s the larger neighborhood impact that the City is hoping to accomplish that is the benefit. September 2, 2015 Page 5 of 6 Mr. Harmon referred the committee to the city’s strategic housing plan noting that it stresses the need for public dollars to be invested where they can leverage private investment. There was no indication that potential benefits such as increased private investment were expected as part of this rehabilitation project. Mr. Rosen understood the City Manager’s point related to cost/benefit analysis. There is a market cap on what a house will sell for in a given neighborhood. Mr. Rosen likes that TAP is now involved and commented that the action plan looks great. The review was received and filed without objection. 5. Annual Report: Mr. Harmon noted that it was a challenging year due staff turnover and extended absences. The office was able to complete all required annual audits but was unable to undertake or complete any performance audits. The report was received and filed without objection. 6. Hotline Update: Mr. Harmon noted that only three (3) reports were received year-to-date. Mr. Harmon referred the committee to page four (4) of the update, which includes information on reports received (by month) since inception. There have been 44 reports to the hotline since it was created in April 2012. Mayor Bowers asked if the hotline continues to be an effective means of filing complaints and a benefit to the city. Mr. Harmon responded that the literature shows hotlines are effective and that it is to be expected that activity would fluctuate. The Code of Virginia requires that the city have a hotline that provides for anonymous reporting, which our service does provide. The annual cost for the hotline service is approximately $4,200. Mr. Harmon noted that he would be researching hotline and compliance services later this year and reevaluating our current provider. Mayor Bowers asked how it was possible to follow up with anonymous reporters. Mr. Harmon described the features of the hotline, including the ability for auditors to post questions in the system and for the reporters to view and respond to them through the system. The Mayor asked if Auditing had received any negative comments related to the hotline. Mr. Harmon could not recall having received any negative comments about the hotline. The update was received and filed without objection. 7. Other Business: September 2, 2015 Page 6 of 6 Mr. Harmon reviewed the Audit Committee meeting schedule for December 2015: - December 2nd at 4:00 p.m. - December 21st at 1:00 p.m. Adjournment: Mr. Ferris adjourned the meeting at 4:55 p.m.