The Peralta Colleges Governing Board Audit and Finance Committee Minutes March 11, 2010 Present: Trustees Withrow and Gulassa, Presidents Herring and Adams, Wise Allen, Connie Willis, Jennifer Seibert, Minh Lam, Tom Henry, James Grivich, Joseph J. Bielanski, Jr., Pieter deHaan, MaryBeth Benvenutti, Sadiq B. Ikharo, Shirley A. Coaston, Ryan Burial, Laney Tower, Karolyn van Putten, Helene Lecar, Helene Maxwell, David Betts, Heidi White, Jeff Heyman, Debbie Budd, Linda Sanford, Bob Grill, and Reginald James. 1. Review the status of the external audit for fiscal year 2009 and discuss the issues involved and strategies and timeline to address material and significant deficiencies and recommendations. (Vice Chancellor Ikharo, Vice Chancellor Allen, Heidi White and Tom Henry). There is a weekly review on the status of the budget, and an update will also be given at each of these meetings. Tom Henry gave an update on the current status from the recovery team. Materials are being provided to help to complete the audit, and they are optimistic that one will be completed soon. Every District in the state is required by statute to be audited yearly. Trustee Withrow added that there are some material deficiencies that will go back to the last 3-4 years. Heidi White reported on the audit, and next year’s strategy. They have the next 3 weeks available to finish the audit. Trustee Withrow asked Heidi to inform him, the Chancellor, and Tom Henry if she sees outstanding items and corrective paths in her report. Our external auditors make a report to the State and Federal Dept. of Ed. reporting agencies. March 31st is a key deadline date for the Feds, with a possibility of a 2-4 week extension, and our lobbyist can assist with this. Any issues of concern will be corrected as soon as possible. We could be put on a watch list, with possible penalties, or removal of funding if we didn’t meet the deadlines, but we’ve never been late before. 2. Review and discuss preparations for the forthcoming Accreditation Visit as it relates to financial and IT issues. (Tom Henry, Chancellor Harris, Vice Chancellor Allen, and Associate Vice Chancellor Lam) All community colleges are required to be accredited on a regular basis on a six year cycle. The 07-08 audit reflected material deficiencies, which are of concern to the accrediting agency. They will probably visit the District in mid-April. The process and timeline was presented to the group. Trustee Gulassa asked how Tom feels going forward with the accreditation team. It is a formidable process, but e feels that having an audit and financial closure, which should all be done prior to June, will put us in a better position. They will need the data for our decision making structure and evidence to support our report. Most districts are struggling with this, due to the aggressive stand that AACC is taking with this scrutiny. We initiated intervention outside of our District to address issues, which will be seen as a favorable step. Trustee Withrow asked for clarification on the 2 year sanction rule, which was explained. The 2 year rule has been bent, especially when an institution gets outside intervention. The general rule is that a District needs to be removed from sanctions or else they are shut down. Accreditation is Board Audit and Finance Committee Minutes: March 11, 2010 a progressive model with levels of sanctions, including warning, probation, and show cause (the most severe), and the models were explained. Warning means the organization has the capacity and will to solve the problems, and the institution will have ample time to correct any problems. Dr. Ikharo feels we should make plans to eventually be able to take over work currently done by our consultants. This will also be a concern to the accreditation team. ACCJC will look at sustainability. The worst thing that consultants can do is to do the work and leave without necessary training and support. Interims may be needed to help with stability and consistency. In time, the consultants will leave. It has helped tremendously to have the recovery team onboard to improve our systems. There is an HR crisis and knowledge-void in the state, and there are more positions than qualified individuals, so we are not unique to bring in consultants. If it took 3-4 years to get to this situation, then it could be estimated to take the same amount of time to recover. Systemic changes take a long time, and we don’t have enough people to do the work, with the state asking staff to do more with less. We are very lucky to have Tom Henry here to help us. This won’t be easy, and everyone needs to work together to solve the problems with our structural deficit. Trustee Gulassa shares that there is resentment when added managers need to be hired, and he welcomes personnel options from Tom Henry overtime. 3. Review and discuss the proposed Budget for FY 2010 and FY 2011. (Tom Henry, Vice Chancellor Allen and Chancellor Harris) The Chancellor gave an update on the budget. Increased costs of fringe benefits are anticipated to be $21.6 for health benefits, and $28M on overall benefits. We are looking at April for additional cuts in areas such as travel, supplies, and a hiring freeze for the rest of this fiscal year. The 2010-11 budget will proceed to the planning and budget committee after the state budget is announced. It is felt that growth with go away, as well as a negative COLA, with increased health and welfare fees. We’re preparing between a 3-10% budget cut for next year, with the colleges are looking at 3 scenarios. We have a structural deficit, and retiring health costs of $7M for this year. $3.3M increase in health benefits are anticipated next year, with a 15% increase. $249M is our full budget. The 09-10 budget will probably go to the Board on April 27th for adoption. 85% of our budget is benefits and salary. Opportunities for savings are being discussed with our unions. The state has downsized community colleges. It’s hard to maintain our current structure of 4 colleges. This committee previously examined the issue, feeling that smaller colleges actually receive more FTES due to having four colleges. We get a small multi-college bonus from the State. Trustee Withrow feels we need to operate as if we are structured as one college, to consider sharing functions or for certain colleges to take the lead on certain projects. We are an undermanaged district with no redundancy. We need to grow other sources of funding, other than general funds, such as fee-based classes, and increase international student recruiting. 30% of our revenue comes from out-of-state students at $30M. The Chancellor hopes that a budget document is available by mid-April. Budget development is very difficult in an unsure environment. Mr. Grivich has confidence that 95% of the numbers are accurate. Spending and revenue estimates are holding to what was presented in the proposed budget. Page 2 of 4 Board Audit and Finance Committee Minutes: March 11, 2010 Student receivables are possibly $5.1M as revenue, which may be uncollectable. We need to maintain 5% of our budget as a minimum reserve, which is still unknown. There are cash reserves as well as accounting reserves. A policy may proceed to make all students pay all of their fees with a hard hold. The Chancellor will make it a high priority to make the actual amount of the reserve known. 4. Review and discuss the Budget Variance Report (Burn Rate) for FY 2010. (Tom Henry, Vice Chancellor Allen and Chancellor Harris) The recovery team has been working on the variance report, which has been updated weekly. We are within a ballpark of knowing the bottom line, but we are deficit spending. Speaker Maxwell asked if the process can be sped-up so that respective corrections can be made at the colleges. Mr. Grivich is working on a variance report on each site to help with this. We have a deficiency in our budget monitoring to post periodic budget updates, but they are close to publishing this information. The State cut the categoricals tremendously, but we continue to fund our mandated costs. Once we do have a final budget, we will need to follow that strictly, which will limit spending. Every community college district is preserving cash right now, and putting the brakes on object codes 4, 5, and 6. We have encroached spending from the general fund into categorical programs. He is also reconciling our bond funds accounts, and he suggests that projects continue through June, but that we not continue business beyond that if not needed. The District does provide some fund 1 monies to the categorical programs. We made a 2% cut for this fiscal year. There may have to be layoffs if we need to make a 5% cut. 5. Review and discuss a schedule for the Inspector General (IG) to audit the status of the implementation and operational conformance to Board Policies, irrespective of whether formalized administrative procedures have been established. (Gail Waiters) A legislative compliance audit was suggested to the committee by the IG, and a handout was distributed. It will verify the existence of administrative procedures (APs), and then see that they comply with the board policy (BP), assign responsibility to a manager, and may provide some basic training and compliance roles. She’s identified some critical policies. The audit and finance committee would review the compliance issues, and policy review committee would recommend the Board policies. The policy review committee is undergoing some changes to its operations, and those changes and will be discussed at their next meeting. The chair of the policy review committee, Trustee Gulassa, asked for as much corrective feedback from the IG as possible. Trustee Gulassa feels this is very important to have the right policies, AP, and compliance issues in place. The IG will handle the compliance element, and the General Counsel will work on APs with the Chancellor. The IG reviews the AP to ensure that it is consistent in the spirit of the BP. There is also a routing procedure through the shared governance committees. LACCD has 8 full-time staff to write policies and procedures, which is hard with limited staff and resources. 6. Review and discuss a proposal to close out some or all of the SWAPS that were established to hedge against interest rate variances associated with the OPEB bonds. (Mark Harris, Chancellor Harris and Vice Chancellor Allen) Page 3 of 4 Board Audit and Finance Committee Minutes: March 11, 2010 Chancellor Harris gave an update on the OPEB bonds. Retiree health benefit costs will exceed the fund amount. Without the bond, we’d be up to $12M in these costs. It is a 45 year obligation, broken into 5 year series, to pay for the lifetime health care expenses of employees in a pool hired before 2004, with increased costs coming from our general funds. Health care benefit costs are increasing quickly, plus the state crisis, which are anticipated to continue until 2014. We are not touching our employee or faculty base at this time. Furloughs are preferred. The trustees don’t feel we can live with an 18% health care fee increase within the current Peralta structure, and would suggest co-pay and deductible fee increases. We are also paying almost 3000 unfunded FTES of $12M this year. The Trustees requested a plan to work with the interest rate swaps, with a profile of different possible scenarios, and its impact. 7. Review a proposal to have the formal minutes of the Audit and Finance Committee agendized as an action item for each of the regular bi-monthly Board meetings for the next twelve months, to allow for full governing Board and public discussion of all of the issues that have been raised. This would allow the full Board and public to be able to discuss these same agenda items on a regular basis. Trustee Gulassa suggested a future general assembly meeting with an objective report from those who are bringing the budget up to date. The Chancellor suggested topics of the 09-10 budget, 10-11 budget effects, and some of the issues presented today. It could occur after Spring break in April or May. This will also help to prepare the educational community for issues related to accreditation. Next meeting: Tentatively scheduled for April 14th 3 – 5 p.m. District Boardroom. Meeting materials are posted on the Peralta website: http://www.peralta.cc.ca.us/apps/docs.asp?Q=1725 Respectfully submitted, Roxanne Epstein repstein@peralta.edu 466-7203 Page 4 of 4