Finance Committee, draft 2013 audit discussion, Feb. 18, 2014

    CITYHALL   Sometime in March, auditors will present the final audit report for FY2013 to the city council. For now, the Finance Committee began  digesting a draft presentation made Feb. 18 by Carr, Riggs & Ingram accounting firm. Here are the highlights, as presented, and a follow-up remarks from the committee and auditor. Click here for selections of the draft report under discussion.

  • The city’s finances received an “Unqualified Opinion,” from auditors, the best possible, and one meaning the opinion is presented without any reservations.
  • There was $279,000 in net income left at year end and a $26.3 million fund balance after posting $37.9 million in revenues (mostly from taxes) against $30.3 million in expenditures (mostly in public safety) and allocating $7.5 million to the school board. (Table following p. 7)
GASB, the Government Accounting Standards Board, is changing the way governments must report employee pension obligations.

GASB, the Government Accounting Standards Board, is changing the way governments must report employee pension obligations.

  • Pension problems persist  The city in 2012 (the last year calculated) had $30 million in unfunded liability for its defined benefit retirement fund–a figure almost double the amount from 2007 ($16.6 million) and described by the auditor as “growing on steroids.”  Unfunded liability is calculated by subtracting the value of available assets from the amount the fund will need to pay benefits. The numbers are based on projected numbers of employees retiring, their salary rates, rate of inflation and so on. (p. 21) **
  • The auditor was concerned that fund contributions keep up in order to close the gap over time. As he pointed out, the $30 million figure is only a footnote in the 2013 audit report, but that figure will be counted as debt on the balance sheet when new accounting rules go into effect in 2015. Homewood is not alone in facing that unpleasant accounting reality, he said.
  • There is also a $1.1 million unfunded liability in retirement health benefits. Mr. Moody commented that medical benefits were NOT a part of a guaranteed defined-benefit plan and could therefore be rescinded if the city ran into financial trouble. (p. 23)
  • On a positive note, the city has 143 days of operating expenses available—a number much higher than many cities. Ninety days is a minimum.

Asking for further explanation about the pension liability, Mr. Wright was told that retirees were living longer and retiring earlier combined with low investment returns in the retirement system. Mr. Hawkins commented that the gap was based on a “worst case scenario” in which all vested employees retired at the same time.

In conclusion, the report will also carry some routine but important cautions about the city’s financial procedures. The rep said the city should have three more accounting staff to provide enough checks and balances (no pun intended) to prevent fraud and other problems. Although the finance director’s honesty is unquestioned, the best practice is to divide duties among more people, he said.

The final audit will be presented to the council at a meeting in March 2014. The draft document is missing some required attachments.  To read a selection of audit pages that document this discussion, click here.

**Councilman Fred Hawkins said this report missed one explanation provided by the auditor, that the increase was due in part to a change in “the way numbers are reported statewide.”

 

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