The Peralta Colleges Governing Board
Audit and Finance Committee Minutes
June 9, 2010
Meeting materials are posted on the committee website:
http://www.peralta.cc.ca.us/apps/docs.asp?Q=1660
Present: Trustees Withrow, Riley, and Gulassa, Chancellor Harris, President Inclan, Wise Allen, Tom
Henry, Jim Grivich, Mike Lenahan, Gail Waiters, Sadiq Ikharo, MaryBeth Benvenutti, Helene Lecar,
Karolyn van Putten, Connie Willis, David Betts, Jennifer Seibert, and Brandon Harrison.
1.
Review proposed policy for the budgeting and cash flow management of the OPEB bond
Trust Fund and payment of debt service by the general fund.
Bond counsel reviewed the tactical plan that was presented at the last meeting. The way that we pay
down the bond, bond counsel said both principal and debt need to be paid from the general fund, which
is not feasible, nor reflected in the initial Board approved documents. The initial documents do not
appear to be consistent. The Chancellor, General Counsel, and the finance team will review the
documents for conformity, and get clarification from bond counsel. Tom Henry feels the bond counsel’s
information is consistent with his general knowledge of bond issues. He also concurs that the general
fund won’t be sustained as the bond costs escalate. It was the Board’s understanding that bond fees
would be a flat interest rate, that would pay for retiree health costs. Trustee Withrow feels we should be
reducing our general obligation bond debt. There had been a projection that we’d make 8% from the
bond fund/year, and that the income would be used to pay down the actual retiree health care costs, but
that didn’t materialize, due to previously discussed issues. The District needs to pay down the debt,
which will be painful, but we can’t sustain it long-term. Trustee Withrow agrees that the District needs
to progressively pay it down. The Chancellor shares that we need a logical plan, as may not be able to
pay it annually, perhaps with a policy statement of what to pay over the years. There will be years when
we are in a better position to pay down debt than in other years. Next year’s budget would need to have
an added $4M just to pay the interest. Mike Lenahan shared that we need $8.5 - 9M just to keep even to
pay the debt schedule. Jim Grivich shared that the original debt was $153M, and we didn’t pay interest
for the first 4 years, and now $178M is the new amount due overtime. $13M was set aside in special
reserve fund 2. Mike Lenahan feels the special reserve should be the potential source to pay out funds on
the differential of the SWAPS, which is not in the budget. He is trying to build into the budget what is
doable, but not resolve all of the issues, and build the special reserve fund 2. We have to invest the
differential, and continue to build it up for future years. We are paying about $2.9 million for the total
debt service exclusive of the SWAPS paying this year 09-10 interest on the refinancing. It goes up
exponentially up in the next year, as we’re paying out more than we’re bringing in, with about $3.9M
anticipated for principle and interest in 10-11. Trustee Gulassa shared the original schedule did not
include the refinance. Trustee Withrow asked that the interest and principle payments be kept separate,
and suggests that every five years that we unload some of the bond debt. We have to recognize that
those funds are ours and that we get them back eventually, which needs to be accounted for in our cash
flow process.
Bond counsel feels that the retirement board is responsible for managing the fund, but the Board doesn’t
have documentation supporting this. The Board wants to provide the oversight, with the Chancellor and
the CFO managing and supervising the fund. There was no charter or description of the retirement
Board Audit and Finance Committee Minutes: June 9, 2010
board which the District formed. Jim Grivich doesn’t think a sub-section of the Board can act on the
bond fund, but only the full Board can act. Refinancing was not a prudent plan with the current market.
The best fiscal minds in the state have been grappling with trying to understand this structure. There
may be a point when the Board wants to bring clarity to the data, and there are experts in the field that
can explain it and create a plan. Trustee Withrow wants to continue raising the issues in this committee,
and give parameters to the future problem solvers. The 2010-2011 budget needs to be balanced and
maintain the proper reserve levels.
2.
Review the status of the hiring process for the new CFO.
The Board will consider this item at the June 10th Board meeting.
3.
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, AVC
Alton Jelks, Interim CFO Lenahan and Consultant Tom Henry).
The goal was to give a draft audit to ACCJC on Friday, but that didn’t happen. We’ve addressed 8090% of the issues, except cash reconciliation for 08-09. The county treasurer shows a material cash
difference, which would translate to a qualified audit. Staff is working to close the gap, but the gap has
widened. It seems impossible to reconcile the books. The recovery team will continue to reconcile
cash. Brandon Harrison gave an update on the audit. A verbal status summary will be provided, listing
the material weaknesses and substantial deficiencies. The cash fund is the only significant item. The
auditors will wait for the Board and management to make a decision on the date they want to report.
Fixed assets and enrollment fees have been handled. Technology is not the problem in this case. The
unknown is the problem, such as when thousands of financial aid checks were written but not posted.
Data is illogically and inconsistently filed. The problem needs to be fixed so that it doesn’t continue
into the future. We have the premier cash reconciliation person on the recovery team in the state.
Staffing is not the problem, but rather getting the information from all of the different systems to
interpret what checks have been canceled, voided, and issued. Since Tom Henry has been here, he
hasn’t seen any evidence of fraud. FigMat also has the responsibility to see transactions, bond, and
resources, and their report will show their discoveries with their concerns, with policy and procedure
suggestions. The financial aid information wasn’t entered into PeopleSoft, but is just in the SAFE
system, and that information will be entered. There is a team approach to problem solving, with the
colleges and the recovery team working together toward transparency.
4.
Review and discuss the proposed Budget for FY 2011. (Consultant Tom Henry, Interim
CFO Lenahan, Vice Chancellor Allen and Chancellor Harris)
Jim Grivich gave a big picture of what is seen today. For the last few years, we’ve been spending more
that we’re taking in. There is a legal requirement of 3% reserves, which we’ve meet, with an expected
requirement of 5% reserves, which we don’t meet. We became used to a state budget with COLA and
growth from the past. Three years ago, things changed, and those standards were taken away. The
situation magnified this fiscal year, with projections of a $6M deficit that cut our fund balance in half.
We’ve been aggressive with possible reductions. If we do nothing, our health benefit costs will go up
10%, PERS and STRS rates will increase, and OPEB bond interest repayment will increase. The
Chancellor shares these projections are based upon the state budget and future speculation. The
Chancellor suggested that the Board may want to wait until the state budget is issued in September
before evaluating further cuts. If we make further cuts now, it would mean more layoffs, since our
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Board Audit and Finance Committee Minutes: June 9, 2010
expenses are 85% personnel. Trustee Withrow feels the Board is charged with the agency’s fiscal
responsibility, and that they may need to cut more personnel. Tom Henry feels this is an optimistic
budget, with the state being in a budget crisis, and he feels that education will ultimately take a hit. Tom
sees more people losing jobs and homes, which is less revenue going to the state. He advises 3, 5, and
10% budget scenarios, and that we should have a contingency plan. The colleges have been asked for
added 2% in cuts at the 5% level, which has been very difficult, impacting administrators and all levels
of the operation.
Tom Henry isn’t concerned about the accreditation meeting, since we have the will and capacity to
correct. The January WASC hearing is more critical, as fiscal stability impacts everything. They allow
two years on sanctions. There was a meeting today with the State Chancellor’s office and the Board
leadership. Evidence of state collaboration can extend the two year term on any possible sanctions.
OPEB, health care, and other expenses went up considerably in 2010. Proposed 2.2% growth is not
included in the preliminary budget. Facilities expects $600,000 from PG&E savings, with $5M ultimate
savings overtime. CalTrans may pay us if they don’t use the Laney parking lot easement by next year.
There has been progress being made in IT to track expenditures. Minh Lam now reports to the CFO.
We haven’t corrected the system analysis, but information gathering has been corrected. PERS
employer contribution will increase next year as part of employee benefits. Benefits are now 40% of our
salaries. Our retirement system is the same. Medical benefits are out of whack, where our plans cost
significantly more than others. PeopleSoft is a very robust and sophisticated system. We’re trying to
wean ourselves from CIBER consultants, which will take some time. We need employees to run a
bundle monthly and know how to interpret and integrate data in the finance area. Our payroll and BI
educational systems work well. Trustee Withrow will recommend to the Board that they be realistic on
both revenues and expenditures, that proper cuts be made for financial stability with responsible action.
The state anticipates a $20B deficit for the next 5 years as our state job creation is lagging. Trustee
Gulassa asked for a hard look at 5% contingency plan in cuts, as well as the 3% plan. The classified
staff hopes that furloughs will be considered rather than lay-offs as one of the contingencies. Trustee
Riley doesn’t want us to limit any of our student access programs. Recovery takes time with systemic
problems, and we need to be in a place where staff sustains the work, which will take time. Sadiq
Ikharo feels that general services and IT need to work closer on fixed assets data going forward toward
future audits, and that discussions need to occur prior to the consultants leaving. Everyday we are reprioritizing toward fiscal stability. Perception changes before reality changes.
Sue Song is a temporary finance executive assistant, and Dominique will be helping with the student
financials. An internal auditor position is posted. A Director of Budget is also needed. A chief
accountant has also started.
5.
Review and discuss the Budget Variance Report (Burn Rate) for FY 2010. (Consultant Tom
Henry, Interim CFO Lenahan, Vice Chancellor Allen and Chancellor Harris)
6.
Review and discuss a schedule for the Inspector General to audit the status of the
implementation and operational conformance to Board Policies. (Gail Waiters)
This will be handled in the Board policy review committee. Whether the policy and procedure are
consistent or not would be best handled in the policy review committee.
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Board Audit and Finance Committee Minutes: June 9, 2010
Policies are driven by external law, and we need to prioritize policies, such as a bond fund policy. The
Board needs feedback if there is not uniform policy compliance. There are only a few league
recommended policies, and their table of contents was distributed. Gail Waiters advises that only
legally required policies be created. Other important policies could also be included. In the overall
scope of things, we don’t have standard operating procedures. Anything with a financial responsibility
needs an administrative procedure (AP). Jim Grivich shared the state doesn’t have a lot of financial
information, but just uses the CA Code of Records, and the budget and accounting manual, that governs
our financial activities as the primary source. A simple policy can state that we follow those principles.
There is a policy about budget preparation and financials, but the issue is if anyone knows what is in the
policy and if anyone follows it. There are no Administrative Procedures for the financial policies.
Feedback should be given to the committee and Board if a policy should be prioritized where there is
inconsistent implementation and it is legally required. The key is if the policy is being implemented or
not. Gail Waiters can look at the APs in place and give the committee her assessment if they are
consistent with the policy intent, and she’d need management data to see if it’s being implemented
properly. Financial aid procedures were followed, but the new system went live without a parallel,
back-up system. The Chancellor will delegate the AP function.
7.
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)
This item was tabled until the next meeting.
8.
Review and discuss the proposed extension of the Financial Advisor contract with the
Pineapple Group. (Chancellor Harris, Vice Chancellor Allen and Mark Harris)
This item was tabled until the next meeting.
Next Meeting: July 21, 2010 5 – 7 p.m.
Respectfully submitted,
Roxanne Epstein
repstein@peralta.edu
466-7203
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