At a Finance Committee meeting on March 2, 2015, the audit firm Carr Riggs & Ingram made a draft report of its FY2014 audit of city finances. The auditor’s remarks are summarized below, with brief notes from the meeting, and five charts, see below.
The report is not complete, however, until the city submits its Management Discussion and Analysis, at which point the audit should be presented to the whole council at a public meeting. [Update: The Finance Director said there would be no additional presentation. The draft presentation will stand without change when they have finished reviewing the MD&A document.]
Until the MD&A is available, and since the draft document is 30+ pages, presented here are the bulleted remarks from the auditor, copies of the five financial charts, and a link to the city Finance Director’s “Litmus Test” report, and Excel file, showing how well the financial statements compared with city-adopted Fiscal Policies. The Capital Fund reserves have been red-flagged as being out of compliance without a transfer of funds.
FROM THE AUDITOR
- The auditor presented an “unqualified audit opinion,” the most common and highest possible, meaning the auditor had no reservations about the city’s presentation of financial information, that it is credible and a true statement of fact.
- The statements show that the city ended FY2014 with a $410,000 surplus after paying one-time bonuses to employees. The surplus was higher than anticipated because of maintaining vacant employee positions and better-than-expected revenue for that year.
- The city has a gross 315 days of operating expenses available. A rule of thumb is to have at least 90 days available. After adjusting for revenues already committed, the city has 140 days of operating expenses available, which is still “healthy” according to that rule of thumb, he said.
- Of continuing concern, and of no surprise to the auditors or council, is the level of “Unfunded Liabilities” for employee pensions. For the latest actuarial period available — through 2013–the “actuarial value” of city assets was $52.4 million versus $85.6 million of liability, resulting in an Unfunded Liability of $33.3 million, or 61.1 percent.
- Under “Post-Employment Benefits,” the city has $1.1 million of unfunded liabilities. The auditor said other cities the firm works with are in similar positions.
- Next year, under accounting standards, the Unfunded Liabilities will be subtracted from the city’s net position on the audit report. (This upcoming accounting change has been publicized yearly to clients over several years now.) For example, the 2014 Statement of Net Position is $80,618,875. Next year that number will drop by about $30 million. “It will be a huge shock to the lay reader,” he said.
- The auditor highly recommended, with a caution, setting up an irrevocable trust and contributing to it to meet the increasing financial demands of the defined pension plans. That said, the city must be careful about contributing money to such a fund, because it could not be withdrawn to cover other expenses. School boards face the same change in accounting standards that will starkly reveal financial vulnerabilities.
- Other concerns–Every year the auditors note that there should be more segregation of Homewood’s financial duties, i.e., the Finance Director is directly responsible for too many tasks. Until more staff are hired, the auditor said the council can counterbalance this weakness by being aware of it, and holding frequent oversight meetings.
FROM THE CITY FINANCE DIRECTOR
Fiscal policy analysisFYE2014 Finance Director Melody Salter presented a printed spreadsheet report, linked here, showing how well the city’s positions compare to its Fiscal Policies. A little background: In 2013, the city council, at the mayor’s request, changed some of those policies, such as shortening the timeline for preparing the budget and presenting it to the council, eliminating a yearly public forum for capital projects, etc. One of the changes was to reduce the required minimum balance in the Capital Fund Reserves from $1 million to $750,000. According to the Litmus Test, the city is falling short of the new standard.
Ms. Salter has red-flagged this item, saying the city will have $205,404 in the fund if it spends as budgeted through the end of this budget year, on Sept. 30, 2015. Please follow the link above to see all her notes.
(You can find audits up through FY2013 on the city’s website, under Your Government, Financial Reports.)