Fort Walton Beach Council agenda — 03-19-12--special--audit — reading text

During 1992, the Florida Department of Community Affairs determined that the Fort Walton Beach Housing Authority was a dependent special district of the City of Fort Walton Beach. Utilizing the standards set forth in GASB 14, the Fort Walton Beach Housing Authority was not considered as having met sufficient criteria for inclusion within the City's audited financial statements for the year ended September 30, 2012. As a result, the Fort Walton Beach Housing Authority is not included in the City' s annual financial report. During 2011, the Fort Walton Beach Community Redevelopment Agency ( the Agency) became a blended component unit of the City. The City's council members serve as board members of the Agency. The Agency' s governing body is the same as the governing body of the City and the Agency provides services specifically to the Community Redevelopment Area of the City. Due to the nature and significance of the Agency' s relationship with the City, exclusion of the Agency' s financial operations would render the City's financial statements incomplete or misleading. Section 10. 554( 1)( i) 7. a., Rules of the Auditor General, requires a statement be included as to whether or not the local government entity has met one or more of the conditions described in Section 218. 503( 1), Florida Statutes, and identification of the specific condition( s) met. In connection with our audit, we determined that the City of Fort Walton Beach, Florida did not meet any of the conditions described in Section 218.503( 1), Florida Statutes. Section 10. 554( I)( i) 7. b., Rules of the Auditor General, requires that we determine whether the annual financial report for the City of Fort Walton Beach, Florida. for the fiscal year ended September 30, 2012, filed with the Florida Department of Financial Services pursuant to Section 218. 32( I)( a). Florida Statutes, is in agreement with the annual financial audit report for the fiscal year ended September 30, 2012. In connection with our audit, we determined that these two reports were in agreement. Pursuant to Sections 10. 554( 1)( i) 7. c., and 10. 556( 7), Rules of the Auditor General, we applied financial condition assessment procedures. It is management' s responsibility to monitor the City' s financial condition, and our financial condition assessment was based in part on representations made by management and the review of financial information provided by same. Our assessment was performed as of September 30, 2012. 125  3. 1. a Honorable Mayor and City Council Members City of Fort Walton Beach, Florida Management letter (Continued) CURRENT YEAR COMMENTS 2012 -MC-01: DEFINED BENEFIT PENSION PLANS Observation In June, 2012 the GASB adopted two statements, GASB 67 — Financial Reporting for Pension Plans, an amendment of GASB 25 and GASB 68 —Accounting and Financial Reportingfor Pensions, an amendment of GASB 27. " fhe Statements are intended to improve financial reporting through enhanced note disclosures and schedules of supplementary information. The statements are also intended to improve the decision -usefulness of information and enhance value for assessing accountability by requiring recognition of the entire net pension liability and a more comprehensive measure of pension expense. The provisions of the Statement 68 will be effective for the year ended September 30, 2015. This statement will require the recognition of the net pension liability in the full accrual financial statements which represents the total pension liability less the fiduciary net position of the pension plan which is currently presented in the supplementary information as the unfunded AAL (Actuarial Accrued Liability). The approach results in reporting of pension liability and expenses as employees earn their pension benefits by providing services instead of being based on funding requirements. The City of Fort Walton Beach, Florida has funded 100% of the actuarially required contributions of the three defined benefit pension plans over the last ten year period as disclosed in the Schedule of Contributions from the Employer and Other Contributing Entities contained in Schedule A -2 on 81 of the financial statements. However the overall funded status of each plan has declined over the same time period as disclosed in the Schedule of Funding Progress contained in Schedule A -1 on 80 of the financial statements. If the City, as the plans' sponsor, were to adopt the provisions of GASB early, the effect is consequential. Recording the current unfunded AAL of the three plans in the fiscal year ended September 30, 2012 financial statements would reduce unrestricted net assets by approximately $ 232 million which is the actuary's estimate of the City's unfunded pension liability at September 30, 2012. The general employee plan liability would be allocated between governmental and business type activities; however the entire police and fire plan liability would be recorded in govcrnnrental activities. City contribution rates based on the percentage of covered payroll for the three plans have increased 22% for the general employees plan and 35% for both the police and fire plans over the last ten years. During that 10 year time period, the funded status of the plans has dropped from fully funded to 79. 4 %, 71. 4 %, and 61. 7% for the general, police and fire plans, respectively. The City benefited from very low contribution rates from 1982 to 1999 when strong stock market returns made it virtually cost -free to provide retirement benefits. With the volatility in the economy over the past decade and the impact on required funding many plan sponsors are exploring options to stabilize pension costs and expenses. Recommendation Controlling pension expenses and volatility is a complex problem. Retirement plans need to be attractive to employees and competitive as a retention tool for key personnel. We recommend the City of Fort Walton Beach, Florida as the plans sponsor review alternatives as it relates to the existing benefit structure in an effort to stabilize current and future pension costs and liability while providing benefits that meet the objectives of employees covered by the plans. Management' s Response The City is in the process of reviewing the current benefit structure of each of the three defined benefit plans, and has enlisted the assistance of plan actuaries, boards, and legal counsel to assist management in this process. 126 Packet P .  31. Honorable Mayor and City Council Members City of Fort Walton Beach, Florida Management Letter (Continued) CURRENT YEAR COMMENTS (CONTINUED) 2012 -MC-02: GOLF ENTERPRISE FUND Observation The Golf Fund reported a net loss of approximately $ 265, 000 for the year ended September 30, 2012 and has deficit unrestricted net assets of approximately $ 99, 000 at September 30, 2012. The loss is primarily the result of an improper chemical application substantially impacting course play. The fund generated positive cash flow from operating activities of approximately $ 110, 000; however that is not sufficient to cover the fund' s debt payments to creditors and the advance repayment to the General Fund. As a result, the cash position of the fund decreased by $ 169,000 and it was necessary for the Golf Fund to borrov. 30,000 from the General Fund to prevent a deficit cash balance at year end. Recommendation We recommend that City management continue to closely monitor the fiscal operations of the Golf Fund. If the fund continues operating at a loss, the City should consider temporarily suspending the repayments of the general fund advance or make additional budget transfers to eliminate the deficit fund balance. Management' s Response The City recognizes that the Golf Fund continues to struggle. Over the past few years, steps have been taken to improve cash flow by increasing revenues and decreasing expenses. The loss in the current year was primarily due to the condition of the course, as an improper chemical application severely affected this. ' I he condition of the course has improved significantly over the last several months. Management will continue to monitor the Fund and will make a decision during the FY 2013 - 14 budget cycle as to any supplemental funding needs of the Fund. 2012- MC -03: ANTI F - RAUD PROGRAM Observation The City maintains a strong ethical culture and positive environment to deter fraud and promote ethical behavior. None the less, fraud can occur in any entity and the City would benefit by formally reviewing its fraud prevention, detection and reaction programs on an annual basis. Formalized fraud prevention programs can have a dramatic impact on the bottom line, both in terms of fraud prevention and the more difficult to calculate reputational damage. Recommendation City Council and senior management would strengthen its anti -fraud program with the adoption of the following: Periodic documented fraud risk assessments A written fraud response plan Training for City employees on warning signs of fraud and what to do if they suspect fraud is occurring Implementation of a whistleblower policy The Association of Certified Fraud Examiners has a fraud risk assessment tool that could be used by senior management to accomplish these recommendations. 127 P>5;ltgt.Pg. 165;rf,  3. 1. a Honorable Mayor and City Council Members City of Fort Walton Beach, Florida Management Letter (Continued) CURRENT YEAR COMMENTS ( CONTINUED) oa 2012- MC -03: ANTI-FRAUD PROGRAM (CONTINUED) Management' s Response u While there have been no reported incidents of ethics or fraud violations at the City of Fort Walton Bcach, 5 the Senior Management team is being proactive in reviewing all policies and procedures and drafting a new Code of Ethics for employees. As part of the City' s Administrative Policy overhaul, it is imperative n that the City adopt a new Employee Code of Ethics and address the issue of reporting and addressing fraud. The City will research the various anti -fraud programs throughout the State and develop a