APA Local Government Update Brown Edwards 2018 Annual Governmental Conference

1. APA Local Government Update Brown Edwards 2018 Annual Governmental Conference _____________________________________ January 11, 2018 Rachel Reamy, Local Government Audit Manager Auditor of Public Accounts

2. Overview of Topics • Comparative Report and Transmittal Process • Other Governmental Entities • Quality Control Reviews over Locality audits • Recent Updates to UFRM and Audit Specifications, New Legislation Requirements • Impact of OPEB Implementation for GASB Statements 74 and 75 • Locality Fiscal Distress Analysis and Monitoring WWW.APA.VIRGINIA.GOV

3. Comparative Report Transmittal Training • Transmittal Preparation training • Available web-based training materials for locality/auditors to review or refresh on preparing the transmittal forms http://www.apa.virginia.gov/APA_Reports/crt_training.aspx • We will provide yearly training again for the 2018 transmittal process during August, early September 2018 time frame WWW.APA.VIRGINIA.GOV

4. Comparative Report Transmittal Reminders • Important reminders on transmittal process and reporting requirements are included at following documents on APA’s website: • 2017 Transmittal Forms Update • Reporting Requirements and Distribution • November 30th Code mandated deadline for submission of final, audited CAFR and transmittal form to the APA WWW.APA.VIRGINIA.GOV

5. Comparative Report Transmittal Process • December/January – APA staff perform desk reviews of Transmittals and Annual Financial Reports • APA reports to JLARC each year in mid January those localities who are late in submitting either the audited CAFR and/or transmittal data • February 1 – Code of Virginia deadline for APA to release Comparative Report (typically only have a draft at this point) • February/March –follow up on missing audit reports and transmittals; continue desk review process • March/April – electronic Comparative Report is finalized WWW.APA.VIRGINIA.GOV

6. Other Governmental Entities • Authorities, Boards, Commissions (ABCs) and other Political Subdivisions • Audit and Oversight Provisions • APA Audit Specifications • Requirement – submit audit report to APA 90 days after fiscal year end • Updated contact information for APA’s records • Local Government annual survey- ABCs that are locality’s component units • Now including audited financial reports submitted to APA on Local Government Reports website WWW.APA.VIRGINIA.GOV

7. APA Annual Quality Control Review • Periodic quality control reviews of CPA firms auditing VA localities • Chapter 4 of the Specifications for Audits of Counties, Cities & Towns describes this process • Copy of the final review report is sent to the audit firm, applicable locality, the Board of Accountancy, and VSCPA • Reports located on APA’s website www.apa.virginia.gov> Local Government page> Quality Control Review Reports WWW.APA.VIRGINIA.GOV

8. APA QCR Process and Common Findings • Last year’s 2017 reviews completed over 6 FY16 locality audits at 5 CPA firms • 4 Pass reports • 2 Pass with Deficiencies reports • Common findings: • Improve audit workpaper documentation of testwork and conclusions • Improve testwork and documentation to comply with Uniform Guidance for Single Audit • Currently planning 2018 selection of firms and locality FY17 audits to begin reviews in Spring WWW.APA.VIRGINIA.GOV

9. Increased Focus on Single Audit Compliance • UG requires performance of a federal study of Single Audit quality once every six years • OMBexploring potential to use other data points (QCRs, peer reviews, etc.) to meet the intent of the study • 2016 AICPA Peer Review of Single Audits to enhance oversight prior to federal study • 48% of engagements reviewed found to be “non-conforming” • Common problem areas—identifying direct and material compliance requirements; planning and performance of controls and compliance testing; audit documentation • AICPA GAQC Sept. 2017 webinar, Single Audits: New Insights on Factors Driving Single Audit Quality, available as resource https://www.aicpa.org/news/aicpatv.5600086422001.html WWW.APA.VIRGINIA.GOV

10. Updates to Uniform Financial Reporting Manual (UFRM) • 2017 legislation (Chapter 484) amended Locality reporting requirements, Code of Virginia§15.2-2510 • Locality’s submission to the APA should include a notarized statement • Submit along with audited CAFR on 11/30 or as soon as the results of the audit have been presented to the local governing body • Template notarized statement provided for locality’s reference www.apa.virginia.gov> Local Government page> Annual Guidelines, Manuals, and Other Procedural Documents WWW.APA.VIRGINIA.GOV

11. Updates to UFRM/Audit Specifications • Local Stormwater Utility program reporting requirement (only for applicable localities) • Reporting is specific only to requirements under Code §15.2-2114, refer to further guidance in UFRM at Chapter 2-4 (p. 2-6) • Item 2D of Chapter 836, 2017 VA Acts of Assembly, requires locality to submit report to the APA by October 1 each year, effective with FY17 reporting • Coordinated with DEQ to retain same report format • Stormwater Utility Report template provided at www.apa.virginia.gov> Local Government page> Annual Guidelines, Manuals, and Other Procedural Documents WWW.APA.VIRGINIA.GOV

12. Updates to Audit Specifications • 2017 legislation changes related to auditor communication of other internal control deficiencies or financial matters (i.e.: management letter) must be made in writing (SPECS 2-9) • Provide copy of management letter to the APA • Management letters are now published on APA’s website • Please redact any sensitive information (FOIA exempt) included in letter before sending to APA • APA has noted sensitive information in FY16 and FY17 management letters related to Information Systems control deficiencies WWW.APA.VIRGINIA.GOV

13. Updates to Audit Specifications • Updates to Retirement Systems for GASBS 74 OPEB implementation (SPECS 3-7) • Required audit procedures focused on VRS administered OPEBs for Group Life Insurance (GLI) and Line of Duty Act (LODA) • Census data elements • Employer reporting requirements and access to myVRSNavigator • Auditor attestation report to APA only for LODA, communicate any deficiencies noted for GLI WWW.APA.VIRGINIA.GOV

14. Preparing for Upcoming OPEB Implementation • GASB Statement 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans • Applicable to VRS and other independent OPEB’s financial statements • Effective FY2017 • GASB Statement 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions • Applicable to Local Government’s financial statements • Effective FY2018 WWW.APA.VIRGINIA.GOV

15. Preparing for Upcoming OPEB Implementation • OPEB standards closely mirror GASB 67/68 pension accounting • Funding and accounting are separated • Liability discount rate will be based on a projection of how long dedicated assets (plus future contributions) will cover current plan members’ future benefit payments • Unfunded OPEB liability will now be reported on face of the financial statements • Expanded note disclosures and RSI WWW.APA.VIRGINIA.GOV

16. Commonwealth Sponsored OPEBs WWW.APA.VIRGINIA.GOV

17. Commonwealth Sponsored OPEBs • VRS and DHRM now administrating LODA • “Non Participating” Employers • Provide Line of Duty benefits but NOT through the VRS administrated trust • Keep in mind locality must determine its own liability for GASB 75 reporting • Purchase of insurance to fully fund the statutory required benefits, likely considered “insured plans” in GASB 75, para. 11 WWW.APA.VIRGINIA.GOV

18. APA Audit Process and VRS Reporting for Commonwealth Sponsored OPEBs WWW.APA.VIRGINIA.GOV

19. Other Commonwealth Sponsored OPEB • Pre-Medicare Retiree option of The Local Choice (TLC) Health Benefits Program • Administered by the Department of Human Resource Management (DHRM) • APA Audit team currently determining GASB 75 impact and discussing with DHRM to ensure adequate information is timely disseminated to localities for FY18 WWW.APA.VIRGINIA.GOV

20. Preparing for Non-Commonwealth OPEBs • Local Governments participate in their own or other, external OPEB plans • APA will not be involved in providing audit assurance or financial reporting information for non-Commonwealth OPEBs • Ensure you are planning and discussing with OPEB’s Plan Administer and the Plan’s auditors • Audit assurance/opinions provided? • Timing and method of communicating financial reporting information for locality’s FY18 financial statements? WWW.APA.VIRGINIA.GOV

21. Locality Fiscal Stress Monitoring and Oversight • APA worked with the General Assembly to review current locality requirements and determine how best to expand locality oversight to address fiscal stress indicators and implement a monitoring process • New locality fiscal stress analysis and monitoring language created in 2017 budget session • Requirements at Chapter 836 of 2017 Acts of Assembly,§4-8.03 WWW.APA.VIRGINIA.GOV

22. APA New Requirements – Chapter 836, §4-8.03 Identifying Potential Fiscal Distress • APA to establish workgroup to develop criteria for a preliminary determination to identify potential fiscal distress • Workgroup members: • Secretary of Finance • Staff Directors for HAC and SFC • Governor’s Deputy Chief of Staff • Commission on Local Government • Virginia Association of Counties • Virginia Municipal League WWW.APA.VIRGINIA.GOV

23. APA New Requirements – Chapter 836, §4-8.03 Identifying Potential Fiscal Distress • APA to establish a prioritized early warning system • APA to notify localities where we make a preliminary determination of fiscal distress • Based on request of local governing body or CEO, APA may conduct a review and request additional information to determine extent of fiscal stress • Based on results of review, APA shall notify the Governor and chairs of the money committees if APA is of the opinion that state assistance, oversight or targeted intervention is needed WWW.APA.VIRGINIA.GOV

24. New Requirements – Chapter 836, §4-8.03 State Assistance, Oversight or Intervention • After receipt of notification by APA indicating fiscal distress in a particular locality, Governor and Chairmen of HAC and SFC will create a plan for either assistance, oversight, or state intervention prior to any expenditure of funds from the cash reserve. • Plan to specify the purpose of intervention • Further assess, help stabilize, or remediate the situation • Estimated duration, and anticipated resource needs (dollars and personnel) WWW.APA.VIRGINIA.GOV

25. APA New Procedures in FY2017 Financial Ratio Model • APA used model to calculate 10 ratios using audited data from the localities’ FY14-FY16 CAFRs • The model ranks each locality’s performance by ratio and converts into percentile rankings • The model uses an average of the percentile rankings to determine an overall Financial Assessment Model (FAM) percentage or “score” • FAM score calculates based on comparison of all localities’ ratio results to each other for each FY • APA used the FAM score to evaluate and make a preliminary determination for need to follow-up with a locality WWW.APA.VIRGINIA.GOV

26. Ratios Used – from Governmental Activities and Business Type Activities Funds in Gov’t Wide Statements • Compare unrestricted reserves net of current liabilities to normal revenues - ability to make up revenue shortfalls • Compare unrestricted reserves to current liabilities - ability to pay current liabilities without need for additional revenue • Compare unrestricted reserves to total liabilities -ability to pay total liabilities without need for additional revenue • Compare revenues plus unrestricted reserves to expenses plus liabilities – ability to meet future obligations • Compare unrestricted net position to total expenses – ability to fund expenses in event of revenue shortfall • Compare total assets to total liabilities – measures the degree to which the assets are being financed with debt WWW.APA.VIRGINIA.GOV

27. Ratios Used – from General Fund Balance Sheet and Income Statement • Compare liquid assets to total liabilities – ability to pay liabilities without needing additional revenues • Compare total expenditures to total liabilities – measure how well locality is paying its general fund bills • Compare assigned and unassigned fund balances to total expenditures – measures ability to fund expenditures from reserves in event of a revenue shortfall • Compare total fund balance to total revenues – measures sufficiency of reserves relative to revenue WWW.APA.VIRGINIA.GOV

28. Financial Ratio Model Evaluation Scale • APA used the FY16 FAM score result to determine need for additional follow-up with a locality • APA set a threshold/cutoff point to perform follow up review - for 2016, set at less than or equal to 16% • APA also selected localities based on trends or other qualitative factors • Identified 6 localities based on current FAM score and 2 localities due to delinquent CAFR filings for further follow-up WWW.APA.VIRGINIA.GOV

29. Notification to Locality • For localities that have a FAM score that causes concern, notification letter sent to Governing body and Management • Described FAM calculation process and the cause for concern • Described APA’s follow up process using the questionnaire and locality’s option to participate • Sent notification letters to all other localities to update on the new process and notify they did not fall below our threshold • Option to use ratio calculations and questionnaire for self-assessment WWW.APA.VIRGINIA.GOV

30. APA Follow-up Questionnaire to Locality • To identify other qualitative, policy and/or management type factors potentially impacting the Locality’s ratio results in the model • Budget process • Debt and Borrowing • Expenses and Payables • Revenue and Receivables • Other Areas • Vacancies in key positions? • New systems or technology issues? • Results of annual audit WWW.APA.VIRGINIA.GOV

31. APA Current Follow-up Process • Review completed questionnaire responses for “follow-up” localities that choose to respond • Meet with locality officials to discuss responses • Make a determination of whether there is a need to report to the Governor and Chairs of the money committees that a locality may need assistance • Send final letter summarizing APA’s follow-up process is complete • Finalize with report to General Assembly summarizing follow-up at all localities and APA’s considerations and plans to refine the model in 2018 WWW.APA.VIRGINIA.GOV

32. APA Future Actions Refine Criteria and Early Warning System/Model • Refine criteria this year as APA considers feedback from localities and workgroup members • Consider adjustments for other unique factors impacting ratio calculations • Incorporate CLG’s fiscal stress rankings on locality revenue capacity/effort • Incorporate more qualitative and environmental criteria along side the financial ratio calculations • Evaluate “scoring” process/how model identifies locality that meets initial determination of potential distress for APA’s further review WWW.APA.VIRGINIA.GOV

33. APA Local Government Contact Information • Rachel Reamy, Local Government Audit Manager • 804.225.3350, ext. 360 • rachel.reamy@apa.virginia.gov • Please use general email for reporting requirement submissions • localgovernment@apa.virginia.gov • APA website, Local Government page http://www.apa.state.va.us/Local Government.aspx WWW.APA.VIRGINIA.GOV

34. Questions WWW.APA.VIRGINIA.GOV