Role of the State Auditor in Georgia State Government …And a Few Other Things

1. Role of the State Auditor in Georgia State Government …And a Few Other Things Russell W. Hinton State Auditor March 15, 2012

2. DEPARTMENT OF AUDITS AND ACCOUNTS MISSION STATEMENT We exist to provide decision-makers with credible management information to promote improvements in accountability and stewardship in state and local government.

3. Organizational Placement in Georgia State Government

4. The art and science of managing people is to keep the ones that hate you away from those that are undecided…. • A fractured quote from Casey Stengel, long-time manager of the Yankees

5. Organizational Independence • While subject to requests for special examinations by the Governor, the Department of Audits and Accounts is under the authority, direction, and control of the General Assembly. • The State Auditor is elected by the General Assembly. • The Department is deemed a legislative agency for budget purposes and its budget estimate must be included in the Governor’s Budget Report “without revision”. • The State Auditor’s compensation is set by the Legislative Services Committee and Department employees are not subject to the rules and regulations of the State Personnel Administration. • The Appropriations Committee Chairs of the General Assembly may direct the State Auditor to make special examinations and reports. • Accordingly, the Department serves as part of the system of checks and balances between the Executive and Legislative branches of State government.

6. Key Duties and Responsibilities • Performing audits and other forms of assurance for the Budgetary Comparison Report (BCR), the State of Georgia Comprehensive Annual Financial Report (CAFR) and the State of Georgia Single Audit Report as well as for various other legislative and budgetary financial reports; • Conducting annual financial audits and reviews of state agencies, authorities, retirement systems, state colleges, and universities; • Compiling annual Salaries, Travel, and Per Diem and Fees information submitted by State organizations; • Conducting performance audits to assist the General Assembly and the Governor in an ongoing review and evaluation of all programs and functions in state government;

7. Key Duties and Responsibilities • Conducting claims audits of Medicaid providers to evaluate compliance with Medicaid billing policies and procedures; • Participating in Medicaid fraud investigations; • Conducting annual financial and compliance audits of local boards of education and regional educational service agencies; • Performing desk reviews of financial and compliance audits for cities, counties and non-profit entities conducting business with the State; • Issuing fiscal notes in conjunction with the Office of Planning and Budget to estimate the financial impact of proposed legislation;

8. Key Duties and Responsibilities • Preparing certifications on retirement bills and summaries of actuarial investigations; • Issuing the Biennial Retirement Report on local retirement systems; • Issuing the Concurrent Funding Report on all fiscal retirement bills passed during the legislative session; and • Preparing an equalized property tax digest for public school funding. • In addition to these general responsibilities, the Department acts in a consultative role to other agencies, as needed, by providing accounting, technological, and operational guidance.

9. Professional Standards and Quality Assurance • The Department's audit engagements are conducted in accordance with Government Auditing Standards (the "Yellow Book"), issued by the Comptroller General of the United States, and professional standards promulgated by the American Institute of Certified Public Accountants. • The accounting principles and reporting standards issued by the Governmental Accounting Standards Board and the Financial Accounting Standards Board, and various state and federal laws and regulations also govern the conduct of the Department in the successful completion of its assigned tasks.

10. Professional Standards and Quality Assurance • The Department maintains a quality assurance system to ensure that audit work is conducted in accordance with applicable standards. This system includes supervisory review of all work performed as well as management review of audit reports and supporting documentation. • The Department also receives an external peer review every three years under the direction of the National State Auditors Association. Audit personnel from other states review our quality control system and documentation for compliance with auditing and accounting standards. The most recent peer review was completed in September 2011 and resulted in an unqualified report without the necessity of a letter of comments.

12. Our People • The Department’s staff of professional and administrative personnel is committed to promoting accountability and stewardship in state and local government. The Department’s 271 professional personnel include: • 84 CPAs; • 8 CIAs (Certified Internal Auditors); • 21 CFEs (Certified Fraud Examiners); • 11 CISAs (Certified Information System Auditors); and • 74 personnel who hold other professional designations such as Certified Government Auditing Professional (CGAP), Certified Government Financial Manager (CGFM), and Certified General Real Property Appraiser. Many of our personnel hold more than one professional designation. • Additionally, the Department has 68 professional personnel who have earned advanced degrees.

13. Organizational Structure The Department was created by the General Assembly in 1923 and its general authorities are established in O.C.G.A. Title 50, Chapter 6. The Department consists of the Office of the State Auditor and ten areas of operations: • State Government • Performance Audits • Healthcare Audits • Technology and Risk Assurance • Education Audit • Nonprofit and Local Government Audits • Sales Ratio • Office of Quality Assurance • Information Technology, and • Administrative

14. Organizational Structure • The State Government Division serves as the principal auditor of the CAFR, BCR and the Single Audit Report. Division personnel perform a combination of financial statement audits, agreed-upon procedures engagements, and management reviews of state agencies, pension funds, and other organizational units. Division personnel also conduct special financial audits and reviews as requested by the Governor, the House of Representatives, or the Senate. The Division’s forensic audit unit conducts investigations of suspected fraud cases. • The Education Audit Division conducts annual financial audits of county and municipal school systems. Division personnel also conduct audit work at the state’s colleges and universities sufficient to render an opinion on the higher education component of the CAFR and the Single Audit Report. The Division performs a combination of financial statement audits, agreed-upon procedures engagements, and financial management reviews at the state’s colleges, universities and technical colleges.

15. Organizational Structure • ThePerformance Audit Operations Division conducts performance audits and special examinations of state programs. The audits may be internally generated or may be conducted in response to requests received from the Governor or the House and Senate Appropriations Committees. The Division also conducts follow-up reviews to determine what actions have been taken in response to previous reports. • Healthcare Audits ~ Conducts cost report audits of nursing homes for use by the Department of Community Health (DCH) in setting the nursing home reimbursement rates. The Division also conducts audits of provider claims to determine if they were appropriate, and performs internal program audits for DCH. • Technology and Risk Assurance ~ Assesses IT risk and the effectiveness of the information technology control environment for the state. Division personnel evaluate IT general and application controls to support financial and performance auditors in planning and determining the nature, timing and extent of audit procedures to be performed in various engagements, as well as providing timely recommendations to management for needed improvements in IT-related controls.

16. Organizational Structure • Nonprofit and Local Government Audits ~ Reviews financial audit reports of county and municipal governments for compliance with generally accepted accounting principles (GAAP) and ensures they have prepared corrective action plans to address the reports’ findings and recommendations • Sales Ratio ~ Prepares the Statewide-Equalized Adjusted Property Tax Digest. Division personnel determine the ratio of assessed value of property to the sales price to ensure that the property is being assessed equitably • The Office of Quality Assurance performs independent reviews of the audit work conducted by the Department’s operating divisions to ensure that the work is conducted in compliance with applicable government auditing standards. • Administrative ~ Prepares the Department’s annual budget and financial statements, makes the Department’s purchases, maintains the Department’s personnel records, and prepares and updates the Department’s general policies and procedures.

17. Department of Audits and Accounts Regionalization • Atlanta • Athens • Augusta • Macon • Statesboro • Douglas • Leesburg (Albany) • Calhoun

18. And A Few Other Things… • Fiscal Condition of the State of Georgia • Transparency in Government Act • Illegal Immigration Reform and Enforcement Act (HB87)

19. Georgia’s Bond Rating: AAA with Stable Outlook • Keys to Maintaining AAA • Economic Recovery • Fully Fund Pension ARCs • Continue to Rebuild Revenue Shortfall Reserve • Structurally Balance Budget • Reduce OPEB Liability • Moderate Bond Package

20. Georgia’s Bond Rating: AAA with Stable Outlook • Moody’s November 2, 2011 • “What could move the rating down? • Continued Negative Fund Balance Status • Deterioration in Economic Position Without Plan to Offset Revenue Declines • Renewed Reliance on Non-Recurring Fiscal Measures • Failure to Address Large, Unfunded Retiree Health Benefit Liability or Substantial Deterioration in Pension Funded Status

21. Revenue Shortfall Reserve: Statutory Provisions • State law provides for the establishment of reserves through the sound management of excess revenue collections as follows: • Excess collections of up to 4% (but no greater than 15%) must be set aside in the Revenue Shortfall Reserve; • Up to 1% of the net revenue of the preceding year may be appropriated from the Revenue Shortfall Reserve by the General Assembly for funding increased K-12 educational needs in the mid-year adjustment; and • Funds in the Revenue Shortfall Reserve that are in excess of 4% of the previous year’s net revenue may be available, upon recommendation of the Governor, for appropriation in the fiscal year. • Senate Bill 421 of the 2010 General Assembly session raised the ceiling on the Revenue Shortfall Reserve from 10% to 15% of prior year revenues.

22. Revenue Shortfall Reserve

23. Mechanisms for Rebuilding the Revenue Shortfall Reserve and Ensuring Budgetary Balance • In periods of strong revenue growth, the Governor may elect to use very conservative revenue estimates to restrain spending and add to reserves. • House Bill 1405 established the Special Council on Tax Reform and Fairness to recommend changes to Georgia’s tax structure. The Council reported its findings in January 2011 for the legislature’s consideration. • The Council was comprised of 11 individuals: one elected official (Governor Perdue), four economists, the chairpersons of the Georgia Chamber of Commerce and the National Federation of Independent Business, and four business representatives appointed by the Lt. Governor and Speaker of the House. • House Bill 1405 created a Special Joint Committee on Georgia Revenue Structure to cause to be introduced one or more bills which would incorporate the recommendations of the Council, without changes. The bill, or bills, were to be reported directly for an up or down vote, without amendment. Political will for this approach faltered and the bill went Nowhere. • In FY 2012, the State anticipates using a combination of recurring revenue sources and expenditure reductions to replace ARRA and other one-time sources of revenue.

24. Tax Expenditure Report ~ SB206 • Required DOAA to prepare tax expenditure review for inclusion in the Governor’s annual budget report filed with the General Assembly in early January. • Defines “tax expenditure” as: • “any statutory provision which exempts, in whole or in part, any specific class or classes…from the impact of established state taxes…deductions, allowances, exclusions, credits, preferential tax rates , exemptions…expenditure of state tax proceeds to local governments for homeowner tax relief grants or local assistance grants” • Report should include tax revenue foregone for a three year period: • Fiscal year applicable to previous budget report, • Current fiscal year, and • One fiscal year forward. • Requires information necessary for report to be tracked and compiled by Department of Revenue, though permits estimation and restricts DOR’s ability to impose additional reporting requirements on taxpayers. • Contracted with Georgia State University Fiscal Research Center for production of first report…long way to go.

25. Pensions • The funded status of the two major retirement systems according to the most recent actuarial valuation date, is as follows: • 200820092010 • Employees Retirement System funded ratio: 89.4% 85.7% 80.1% • Teachers Retirement System funded ratio: 91.9% 87.2% 85.7% • Since the previous valuation for TRS, the Board of Trustees has adopted a valuation rate of return smoothing methodology effective July 1, 2010 which had a positive impact on the funded ratio. • The new methodology is designed to reduce contribution volatility by requiring increased contributions during periods of rising revenues and investment returns while maintaining the current contribution rates during periods of declining revenues and depressed returns. • Budgetary increases for FY2013 annually required contributions for TRS and ERS are $71 million and $63 million, respectively.

26. Underlying Principles • Pensions are part of the exchange between employees and employers • Pension plans are part of total compensation • Employer incurs a pension obligation as a result of the “employment exchange” • Cost (expense) should be recognized in the period services are provided • The pension plan is primarily responsible for paying pension benefits to the extent the plan has sufficient assets • The employer is primarily responsible for paying benefits to the extent the plan does not have sufficient assets

27. Underlying Principles • Difference between the total pension liability and the plan net position is the liability on the financial statements of the government • Cost allocation (annual expense) is developed on an accounting basis, not a funding or contribution basis • Totally different from current GASB standards. • Disconnect between accounting numbers and funding numbers. Cannot fund using GASB expense. • Will require significant rethinking and retraining for most of us.

28. Some Definitions • Total Pension Liability (TPL) – accrued liability using Entry Age Normal funding method • Net Pension Position (NPP) – basically market value of assets • Net Pension Liability (NPL) – TPL minus NPP • Annual Required Contribution (ARC) – the annual amount to recognize in developing the annual pension contribution under current GASB 25, to be replaced with: • Pension Expense – annual amount to recognize as pension expense under proposed standard.

29. Impact on Employer Financial Statements

30. Potentially Lower Discount Rates Would Increase Liabilities

31. Amortization Periods Shortened

32. Asset Valuation Method

33. Accounting and Funding are Decoupled

34. OPEB/SHBP • The State Health Benefit Plan (SHBP) is administered by the Department of Community Health and covers state employees, public school teachers and other public school employees, retirees and their dependents and other individuals covered under State law. • Legislation enacted in 2009 created two separate OPEB funds • State Employee OPEB Fund (O.C.G.A. 45-18-25) • School Personnel OPEB Fund (O.C.G.A. 20-2-875) • As separate and distinct cost sharing multiple employer plans, both OPEB funds separately value their own OPEB liabilities, report the results, and make GASB 43 disclosures. The unfunded actuarial accrued liability (UAAL) as of 6/30/10 and the FY13 ARC for the respective plans follow: • In FY 2010, the State utilized $171 million from the OPEB trust fund to meet retiree health care costs in FY 2010. There are no planned contributions beyond annual pay-go amounts for the OPEB funds for FY 2011 or FY 2012. • State employees will see premium increases of 11.2 -17.2% for Plan Year 2012, following increases of 10% for Plan Year 2011.

35. Transparency in Government Act • O.C.G.A. 50-6-32 Transparency in Government Act • The Department of Audits and Accounts developed and and continue to operate a single searchable website accessible by the public, at no cost, that provides financial information and reports on the operations of state government and local boards of education. • Open.Georgia.gov

36. Transparency in Government Act • All agencies of state government shall provide to the Department of Audits and Accounts such information as is necessary to accomplish the purposes of this Code section. • Nothing in this Code section shall require the disclosure of information which is considered confidential by state or federal law.

37. Transparency in Government Act • Will continue to identify subsystems providing adequate detail for compliance with SB 300. • Clarify implications of applicability to organizations named in Appropriations Act. • Data security issues. • Data confidentiality issues.

38. Transparency In Government Act • Expansion of reporting requirements has caused legitimate concerns with regard to certain proprietary information for certain authorities. Working through those issues. • Will be necessary to identify those organizations not reporting on the OpenGeorgia website, lest the public be mislead. • OpenGeorgia was rated lower than expected by a paper entitled “Following the Money” . • Suggestions for Improvement: • Add link to ARRA Website ~ Not a Problem • Add information on tax credits for specific companies ~ Note Tax Expenditure Report, Specific Companies Not Available • Add link to economic development efforts ~ Working on It • Link amounts reported to PDF of actual contract ~ We Ain’t There Yet

39. Illegal Immigration Reform and Enforcement Act (HB87) • Act provides significant sanctions against public employers and individual employees for willful violation of the Act. • Created the Immigration Enforcement Review Board with quasi-judicial powers to accept complaints from citizens, businesses etc. regarding noncompliance by public employers or its employees.

40. Illegal Immigration Reform and Enforcement Act (HB87) • By December 31, 2011, public employers must submit a report to the State Auditor indicating compliance with the Act in regards to contracts for “physical performance of services.” Compliance means the entity obtained affidavits from all contractors performing such work that the firm utilized the E-Verify system to determine immigration status of its employees. • Reporting instructions were disseminated to approximately 2400 “public employers” in the State of Georgia. • Chaos ensued. • Upon funding being provided, State Auditor required to conduct annual compliance audits on at least 50% of reporting agencies and publish results annually.

41. Illegal Immigration Reform and Enforcement Act (HB87) • By December 31, 2012, public employers must submit a report to the State Auditor indicating compliance with the Act in regards to issuance of “public benefits” as defined by the Attorney General. Compliance means that any county or municipality renewing a business license, occupation tax certificate or “other document required to operate a business” to employers with more than 10 employees on January 1 received an affidavit from such employer affirming registration and use of the federal work authorization program. • “Public Benefit “ has very broad interpretation. • Chaos ongoing….. • Upon funding being provided, State Auditor required to conduct annual compliance audits on at least 20% of reporting agencies and publish results annually.

42. Questions/Comments????

43. Russell W. Hinton, CPA, CGFM State Auditor 270 Washington Street, S.W. Suite 1-156 Atlanta, Georgia 30334-8400 Voice: (404) 656-2174 hintonrw@audits.ga.gov