Audit Committee - RCPS

Minutes of the Roanoke City School Board Audit Committee November 5, 2018 Audit Committee Members: Bill Hopkins, Committee Chair - Present Laura Rottenborn, Committee Member - Present Others Present: Dr. Dan Lyons, Deputy Superintendent Kathleen Jackson, Chief Financial Officer Donna Caldwell, Director of Accounting Jeremy Howard, Coordinator of Occupational and Student Health John Aldridge, Partner - Brown Edwards & Company Drew Harmon, Municipal Auditor, City of Roanoke Cari Spichek, Senior Auditor, City of Roanoke Brian Pendleton, Senior Auditor, City of Roanoke 1. Call to Order Mr. Hopkins called the meeting to order at approximately 11:00 AM. 2. Presentation of Audit Results for the June 30, 2018 Comprehensive Annual Financial Report DRAFT and School Activity Funds John Aldridge handed out the following reports: • Roanoke City Public Schools School Activity Funds “Comments on Internal Control and Other Suggestions for Your Consideration” • Roanoke City Public Schools School Activity Funds “Financial Report” • School Board of the City of Roanoke, Virginia (A Component Unit of the City of Roanoke, Virginia) “Comments on Internal Control and Other Suggestions for Your Consideration” • Required Communication with those Charged with Governance – for the Statement of Cash Receipts and Expenditures for RCPS School Activity Funds • Required Communication with those Charged with Governance – for the Financial Statements of the governmental activities, each major fund, and the remaining fund information of the School Board of the City of Roanoke, Virginia • School Board of the City of Roanoke, Virginia Component Unit of the City of Roanoke, Virginia Comprehensive Annual Financial Report For the Fiscal Year Ended June 30, 2018 Mr. Aldridge first spoke about the CAFR. He pointed out that on pages 11 and 12 were the Association of School Business Officials International Certificate of Excellence in Financial Reporting and the Government Finance Officers Association Certificate of Achievement for Excellence in Financial Reporting, respectively. He noted that the School Division should be proud of these accomplishments. Mr. Aldridge then referred the group to page 18 which states Brown Edwards’ unmodified opinion, which he explained was a “clean” opinion – the best the school could receive. Page 1 of 5 Audit Committee Minutes November 5, 2018 On page 27, the Statement of Net Position, he discussed GASB 75 which addresses other post- employment benefits. He stated that other post-employment benefits now have to be reported as a liability on the financial statements. The approximately $16 million liability is included in the $146,854,567 line item “Net Pension and Other Post-Employment Benefits liability. Mr. Aldridge also referred to the detailed footnote on page 44, which explains the change. He noted that this liability doesn’t affect the day-to-day operations of the Division. Mr. Aldridge asked the group to look at page 28 at the Statement of Activities and noted that these statements represent full accrual accounting. He pointed to the far right column, noting that the only function that essentially paid for itself was food services. Mr. Aldridge reviewed the footnote for the pension and other post-employment benefits on page 44. He noted that the left side shows the items reported in the past and the right side shows the new items. He briefly described the Group Life Insurance (GLI) and Health Insurance Credit (HIC) items. Next, Mr. Aldridge moved on to page 75, the Budgetary Comparison Schedule for the General Fund, where he noted that revenues were slightly less than expected ($788,000). Expenses came in below estimates by $9.4 million. The net effect was to increase fund balance by $931,000. Ms. Rottenborn DRAFT asked where the revenue shortfall was, to which Ms. Jackson responded that about $1 million was related to State revenues. She noted that the last month of sales tax remitted was about ½ the usual amount due to a change in State policy. Those funds will be received in the current fiscal year. Mr. Aldridge then moved on to page 99 of the report showing the changes in fund balance over the past ten years. He pointed out that over the 10 year period, the City has increased its funding by almost $20 million while the State has only increased its funding by $10 million and the Federal government by around $4 million over the same period. Mr. Hopkins noted that the State had actually reduced its funding at several points over that ten year span. Mr. Aldridge noted that the School Division has fund balance to cover approximately 1.39 months of expenses. Ms. Rottenborn asked how many months of expense is recommended for schools to have in fund balance. Mr. Aldridge responded that for local governments having in the range of five (5) months might be the goal. Based on RCPS retaining its own fund balance, a goal of two (2) months would be good. Mr. Aldridge then went to page 117-118, “Schedule of Expenditures of Federal Awards.” He pointed out that they have to audit at least 20% of federal dollars expended, which they covered with the School Lunch and Title II grants this year. Any program spending more than $750,000 of federal funds in a year must be audited at least once every three years. There were no material weaknesses or findings noted and the division retains its designation as a low risk auditee. Ms. Rottenborn asked if the Board should be concerned about being too conservative when budgeting. Particularly in the area of instruction which has consistently spent several millions less than budgeted for several years. Ms. Jackson briefly discussed the budgeting process and noted that part of the Page 2 of 5 Audit Committee Minutes November 5, 2018 savings came from approximately a million dollar drop in the health care liability. Ms. Rottenborn asked if the $5.7 million saved in instruction could be broken out as to the nature of the savings. Ms. Jackson felt certain that more detail could be provided. Mr. Harmon noted that on a percentage basis instruction was within 5% of budget. The committee briefly discussed salary lapse and benefits costs. Ms. Rottenborn suggested that information about the source of the savings be available for the Board meeting on Monday. She anticipates there will be interest in this issue. Next, Mr. Aldridge discussed the letter given to the committee that covers the required communications from the auditors. He noted that the Schools are responsible for its financial statements and that his firm is responsible for auditing the statements. There were no difficulties encountered during the audit and no disagreements with management. He noted that the included representation letter was signed by Dr. Bishop, Ms. Jackson and Ms. Caldwell on behalf of the School Division. Mr. Aldridge then asked the group to look at the “Comments on Internal Control and Other Suggestions for Your Consideration” report. He stated that there were no new comments, and that last year’s comment on fixed asset inventory was resolved. He noted that the issue regarding the hosted 3rd party software super user/system administrator issue on page 4 may be resolved with the new software anticipated to be in place next year. Mr. Aldridge asked where the division was in that process to which DRAFT Ms. Jackson responded that they would be meeting with the winning vendor on Tuesday, November 13, to negotiate a contract. The original target was to have the system in place by July 1, 2019. That may be pushed to a later date. Mr. Aldridge noted that a January 1 go live can be better due to payroll reporting. Page 5 of the comments letter addressed lessor accounting and changes regarding leasing equipment. Mr. Aldridge spoke about the WayFair case and projections nationally that sales tax receipts may increase between $8 billion to $24 billion. A brief discussion of the possible impacts in Virginia were discussed. The General Assembly will have to write legislation to collect the tax. There would be challenges related to enforcing Virginia tax law in all states. There would also be challenges for vendors trying to apply tax rules from all 50 states. These types of issues may cause Congress to intervene. On page 13, Mr. Aldridge pointed to the second paragraph under State and Local Pensions regarding the recent National League of Cities survey finding that the cost of employee/retiree pensions ranks 3rd as the most negative factor affecting city budgets. He also pointed out that the U.S. averages 1.53 current state or local government workers to 1 retiree. Mr. Aldridge then noted the importance of cybersecurity, and stated that his team has a Certified Information Security Auditor on staff that could look at IT risks / controls for the division. Mr. Aldridge then talked about the School Activity Funds Audit, noting that RCPS is the only division that he audits whereby receipts are collected in the individual schools and checks are disbursed by Central Administration. He stated that it was a good practice to do it that way. He noted the balances Page 3 of 5 Audit Committee Minutes November 5, 2018 in each schools fund as of June 30, 2018, and observed that there was a wide variation between elementary schools. Findings related to the School Activity Funds are summarized in the “School Activity Funds Comments on Internal Control and Other Suggestions for your Consideration” report. Mr. Aldridge noted that some teachers are still keeping money in their room overnight, which is a concern. He noted some large “IOU’s” in petty cash, one which was outstanding for 60 days, and one large deposit to petty cash with no support. Overall, Mr. Aldridge stated that there was “nothing alarming” regarding the audit of school activity funds. Ms. Rottenborn asked if there was a pattern of schools / bookkeepers with repeated findings each year. Mr. Aldridge responded that there were. Ms. Rottenborn suggested that RCPS Administration have a discussion with the leadership at these schools so that the issues do not continue. As there were no further questions from the group, Mr. Hopkins thanked Mr. Aldridge for his report. The audit was received and filed as presented. It will be presented to the full Board on Monday, November 12. DRAFT 3. Audit Report – Workers Compensation Follow-Up Mr. Hopkins asked if anyone had any questions. Hearing none, the report was received and filed. 4. Audit Report – Transportation Follow-Up The audit addressed several action plans from two previous audits of transportation. Mr. Harmon noted that the primary focus at this point should be on development of the upcoming RFP for transportation services. He suggested there are two key items the RFP should address. The first is a requirement that the vendor provide all of the data school divisions are required to report to the Virginia Department of Education. This includes operating costs, capital costs, and special trip miles. The second suggestion would be pricing based on operating costs per mile rather than the flat rate pricing currently used. This would enable the Division to compare costs with other school transportation departments in Virginia. Mr. Hopkins asked when the school division will be submitting the RFP. Ms. Jackson responded that an RFP should be ready by January 2019. Ms. Rottenborn asked if the action plans would address the operational issues cited in the report. Mr. Harmon responded issues should improve if action plans are effectively implemented. Ms. Rottenborn expressed concern about the volume of deadhead miles shown in the report. Mr. Harmon noted that route design is a complex issue and something that should be looked at in a future audit. Deadhead miles have historically been 35% to 40% of the Division’s miles over the last 10 years Page 4 of 5 Audit Committee Minutes November 5, 2018 The bus garage is in the northeast, near the County line, which contributes to the number of deadhead miles while driving to routes on the other side of the City. Mr. Harmon noted that deadhead miles were significant even when the bus garage was more centrally located near the Human Services building on Williamson Road. Mr. Hopkins asked if the plan was to clear everything up with the new RFP. Mr. Harmon responded that the requirements in the RFP will be crucial to enabling better management of transportation costs. Mr. Hopkins noted that the role of the Director of Transportation also needs to be evaluated. Mr. Hopkins asked if there were any other comments or questions. Hearing none, the report was received and filed. 5. Other Business Mr. Hopkins confirmed with Mr. Harmon the following: • Time and Attendance Follow-Up Audit is in draft • Food Services Audit is in progress • DRAFT Career and Technical Education is tentatively scheduled to begin in January 2019 • Audit Committee is considering contracting for an audit of Information Technology Mr. Harmon confirmed that the next Audit Committee meetings are scheduled for March 21, 2019, and June 20, 2019. There were no further questions or comments. 6. Adjournment Mr. Hopkins adjourned the meeting at 12:10 PM. Page 5 of 5