The Audit Board of the City of Orlando met on Friday, November 5, 2004 in the Agenda
Conference Room on the second floor of Orlando City Hall.
BOARD MEMBERS:
Richard D. Adamczyk
Richard F. Chambers, Chair
Stephen Clapp, Vice Chair
Gregory A. Tate
Present
Present
Present
Present
[1/0]
[1/0]
[1/0]
[1/0]
OTHERS PRESENT:
G. Michael Miller, Chief Financial Officer
Deborah D. Girard, Management, Budget and Accounting Director
George McGowan, Audit and Evaluation Manager
Donald “Chip” Jones, Jr., Partner, KPMG
Lance M. Stemples, Senior Manager, KPMG
Annette Madden, Recording Secretary
1.
OPENING REMARKS
Chair Stephen Clapp called the meeting to order at approximately 2:00 p.m. He
acknowledged that new KPMG management, Donald “Chip” Jones, Jr., Partner, and Lance
M. Stemples, Senior Manager, were present at the meeting.
2.
APPROVAL OF MINUTES
Mr. Clapp requested comments or questions on the minutes of the September 21, 2004
meeting. No corrections or changes to the minutes were made and the minutes stand
approved as written.
3.
OTHER BUSINESS – ELECTION OF AUDIT BOARD CHAIRMAN AND VICE
CHAIRMAN
Mr. Clapp stated that he and Mr. Richard Chambers discussed the elections since the
Board’s September 21 meeting. At that meeting Mr. Chambers declined to be nominated to
serve as Chairman for the current year because he thought he might have a conflict of
interest. That matter has since been clarified and Mr. Chambers is able to serve full time
on the Board for the coming fiscal year.
Mr. Clapp stated he would like to step down as Chairman and moved to nominate Mr.
Chambers to assume the Chairman’s role. Mr. Gregory Tate then stated that he too would
like to step down as Vice Chairman and moved to nominate Mr. Clapp as Vice Chairman.
The Board unanimously accepted the motions to elect Mr. Richard Chambers
as Chairman and Mr. Stephen Clapp as Vice Chairman of the Audit Board.
4.
PRESENTATION OF FY 2004 – 2005 ANNUAL AUDIT PLAN – DONALD “CHIP”
JONES, JR. AND LANCE STEMPLES, KPMG
Mr. Stemples distributed a report outlining KPMG’s 2004 Audit Strategy and Plan. Mr.
Jones noted that the City’s Audit Board is unique to government and recognized how
important it is that citizens have the assurance that an audit is being performed, that
internal controls are in place and that issues are disclosed to an oversight body like the
Board. Mr. Jones and Mr. Stemples also outlined their professional background,
highlighting their governmental auditing experience.
Page 2
Mr. Jones listed the members of the KPMG audit team. He stated that Dave Dennis,
formerly the Engagement Partner, is now the Client Service Partner. He reported that
technology controls are very important to the audit and stated that Peter Armstrong,
Information Risk Management Partner, will coordinate the IT work. Diane Zhu, who
worked on the audit for the past two years, will continue as the Senior Associate on the
audit and the Concurring Review Partner is Milford McGuirt of KPMG’s Atlanta office. Mr.
Jones noted that Dan O’Keefe and Luis Harris continue as subcontractors on the City’s
audit.
Mr. Jones stated that interim fieldwork was completed in July 2004. KPMG plans to
complete the year-end fieldwork by late December 2004 or at the latest, mid-January
2005. He stated that KPMG will adhere to the City’s previously established CAFR
timetable.
Mr. Stemples reported that as a result of the interim work and discussions with City staff,
KPMG has determined the significant audit issues for review this year, which include the
recent Florida hurricanes and information risk management. In addition, new accounting
pronouncements that may impact the City’s financial statements are planned for review.
Mr. Stemples stated that he believes the biggest audit issue this year relates to the recent
hurricanes and reporting impairment of significant fixed assets, FEMA reimbursements
and clean up costs.
In response to Mr. Chambers question regarding hurricane cleanup costs, Ms. Girard
stated that the City’s fixed assets are covered through self-insurance as well as third party
excess insurance (with a “wind” deductible as a percentage of the asset value). She stated
that based on recent correspondence, costs are anticipated to be reimbursed as follows:
FEMA 90%, State of Florida 5%, and City 5%. Ms. Girard stated that the City Public Works
Director has estimated damages at approximately $50 – 60 million, with a significant
portion of the damage (over $30 million) related to debris removal. She stated that the
City’s 5 % (approximately $3 million) will be funded through fund balance or other
mechanisms. Ms. Girard explained the FEMA process for obtaining funds and how the City
is accounting for hurricane-related expenditures. The risk is that FEMA will deem City
expenditures unallowable. In that case, the City would be required to absorb the entire
expenditure. She also mentioned cash flow issues related to the billing and reimbursement
process and that Mr. Miller could provide more information on cash flow since he was
addressing that issue.
Mr. Jones stated that in addition to the accounting issues for hurricane-related
expenditures, from KPMG’s perspective, FEMA’s reimbursement is a major grant program
that must be audited. Based on year end timing, there are a lot of cut off issues that will
need scrutiny as to how they will be recorded. In addition, if all the hurricane-related costs
are recorded in the current fiscal year, it is a significant “accounting estimate” that will
require testing.
Mr. Jones also noted that KPMG will be considering the impact of future accounting
pronouncements, including GASB Statement No. 43, Financial Reporting for
Postemployment Benefit Plans Other Than Pension Plans, and GASB Statement No. 42,
Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance
Recoveries.
Page 3
Mr. Chambers questioned if this is the last year of the contract for the external auditor. Ms.
Girard responded yes. She stated that the City will issue an RFP for audit services in early
2005. Mr. Chambers stated that he understood from comments made during the previous
Audit Board meeting that one Audit Board member had been asked in the past to
participate in the selection process. He asked if that would continue and he asked the
Board members to consider whether they have an interest in serving on the Audit Selection
Committee.
5.
FY 2005 BUDGET PRESENTATION – DEBORAH D. GIRARD, MANAGEMENT,
BUDGET AND ACCOUNTING DIRECTOR
Ms. Girard made a presentation on the economic forecast that had been performed to
develop the current year budget and to predict budget scenarios for the following four
years. She indicated that this type of forecasting was a new process for the City. She
explained that, as a starting point, departments were asked to project their revenues for
the coming year. They were also asked to project long range and significant one-time
expenditures. Staff utilized these estimates and, with conservative assumptions,
projected revenues and expenditures going forward. For the current budget year, this
resulted in a forecasted gap of approximately $27 million. The City was able to
proactively utilize this forecasted information to develop the current year budget. City
staff analyzed selected revenue sources and determined the last time rates had been
revised. After analysis, rate changes were made to occupational license fees and to the
communication services tax. A dividend was also charged to enterprise operations for
the use of City roads and other City assets in the delivery of their services. This
amounted to approximately 7% of their income. In addition, excess risk management
funds were returned to the General Fund. Finally, a fund balance allocation of $7
million was made to narrow the revenue/expenditure gap.
In addition to analyzing revenues, departments were asked to seek additional
opportunities to reduce expenditures. After both revenues and expenditures were adjusted,
the revised gap was reduced to approximately $5.1 million. Ms. Girard explained that
certain other governments budgeted for personnel attrition. Since the remaining gap
approximated the current years vacancy and turnover savings, the remaining gap was
allocated to each department as a budgeted attrition allowance. That is, the City budgeted
salaries at approximately 97% of projected personnel costs, knowing that with turnover
and attrition the target would be achievable based on current year activity.
Ms. Girard stated that the first year’s projection was brought forward four more years,
showing a deficit every year going forward. The recurring deficit going forward is in the $15
– $20 million range. Ms. Girard pointed out the danger in the current year budget of using
one-time revenues to fund recurring expenditures. She indicated that was a short-term
measure to provide the City with an opportunity to develop a long term strategy. Ms.
Girard stated that City management is aware that there is clearly a structural imbalance in
terms of the rate of growth in revenues versus the rate of growth in expenditures. The City
is working on alternatives and additional revenue sources to eliminate this structural
imbalance.
Mr. Chambers referred to the $3 million Ms. Girard indicated that the City may have to
absorb from the hurricanes. He asked if it would be in addition to the gap noted earlier
and Ms. Girard stated that it would be in addition, as the forecast was completed prior to
the three hurricanes. She also noted that the OPEB liability, to be discussed next by Mr.
Page 4
Miller, was not included in the forecast since the actuarial reports were received after the
budget forecast was completed.
6.
OTHER POSTEMPLOYMENT BENEFITS (OPEB) – G. MICHAEL MILLER, CHIEF
FINANCIAL OFFICER
Mr. Miller presented information to the Board regarding the Other Post Employment
Benefits (OPEB). He stated that these presentations were also made to several union
groups. Mr. Miller stated that starting in the late sixties, early seventies, the City has
provided for retiree healthcare. The program says that an employee that has been with the
City 10 years gets 50%, 15 years 75% and 20 years 100% of their healthcare costs covered
by the City.
Currently, the City’s pension concepts under GASB 25 and 27 allow a systematic and
reasonable approach to funding this liability over time. At present this does not cause the
City to account for an entity-wide OPEB liability. The pension funds are shown on the fund
based financial statements but they do not roll into the entity-wide on the governmental
statements.
The current amount of the unrecorded OPEB liability is $139 million. The new GASB
statement allows funding the liability forward over a thirty year basis. Mr. Miller stated
that the City of Orlando, starting in 2007-08, has, beyond the budget difficulties presented
earlier, the need to address an $8.8 million annual contribution toward the OPEB liability.
Mr. Miller said that if the City can find a new and recurring revenue stream of $25-30
million, the unfunded liability and other funding gaps will go back into balance. But it has
to be a recurring adjustment and also be reasonably reliable for 15 – 25 years at a
minimum to effectively fix this structural problem.
Mr. Chambers asked a question about the structure of the City’s post-employment
benefits. Mr. Miller stated that Florida law states that you have to allow your retirees to
participate in your healthcare system at a non discriminatory rate. Ms. Girard stated that
this means that you can’t charge them more than active employees are charged, but we
could charge up to the amount we charge our active employees.
Mr. Miller said that the issue is a question of what each union contract should allow for
OPEB. This presentation was made to City managers and the unions, and raises the policy
question of whether the City can fund OPEB at the current level indefinitely or should this
policy change. For an alternative policy you have to negotiate with each of the unions
because it is in their union contracts as terms and conditions of employment. It isn’t
necessarily a quick or short term implementation process.
Mr. Miller stated that the current date the City is looking to change new employee
participation in OPEB is January 1, 2006. That is, anyone hired after that date would not
have the currently offered retirement healthcare benefit. The City has taken the stand that
we can only change the policy prospectively forward as of the point of employment.
Ms. Girard stated that the City went through a plan design review of the healthcare plan
this year and it has been changed as a result. The City reviewed various elements within
the plan to determine which benefits most significantly impacted the cost of healthcare.
Page 5
Mr. Chambers stated that there are a lot of creative things going on by government
agencies with retirement plans that are designed to control costs.
Mr. Miller noted that the unions were concerned because the City was funding downtown
development projects and, therefore, should have money for funding OPEB and other
union benefits. Mr. Miller explained how CRA projects are funded using restricted
revenues not available to fund general government programs. Mr. Miller provided
background information on the various development projects in the downtown area.
Mr. Chambers stated that the Board would like for Mr. Miller to conduct a CAFR
educational session in the future.
7.
COMPLETED PROJECTS, ADDITIONAL REVENUES, STATUS OF AUDIT AND
EVALUATION FY 2004 PLAN OF OPERATION, AND PRESENTATION OF PROPOSED
FY 2005 PLAN OF OPERATIONS – GEORGE MCGOWAN, AUDIT AND EVALUATION
MANAGER
Mr. Chambers stated that the Audit and Evaluation report is usually left to the end of the
agenda and staff has to rush through its presentation. He stated that he would like to rotate
the Audit and Evaluation to the front of the agenda for the next meeting.
Mr. McGowan reported on the completed projects and projects in process from May
through October 2004. He stated that the Office completed 12 reports, most of which
were follow up reports. Mr. McGowan stated that the Office accelerated its follow up
process and the most recent of these reports were performed after 12 months at the
Board’s request. Mr. Chambers stated that he was pleased that the implementation rates
appear to have improved over past years and congratulated the Office and management.
Mr. McGowan reviewed some of the details of the audits completed during this
timeframe.
Mr. Chambers asked about the visibility and media coverage regarding the review of
Fire Department Time Reporting Practices. Mr. McGowan stated there were no
difficulties with the cooperation of the Fire Department during this review. The Fire
Chief was forthcoming regarding a very sensitive issue. Mr. Chambers stated that if
there are ever issues of this nature the Office of Audit and Evaluation should know that
they can come to the Board for assistance. He stated that it is very important to the
Audit Board that the Office have objectivity and independence as the Office reviews
sensitive issues.
Mr. McGowan reported on projects in progress, including the review of Homeland
Security. Police and Fire officials have asked that the Homeland Security report and its
related workpapers not be made a public record under Florida Statute 119. This is for
security purposes and the City’s Legal staff has been consulted about how to do that
properly. Orange County did this when they audited the Sheriff’s office so we are
learning from them about how to follow the statute. Mr. McGowan stated that he has
also consulted with the members of N.A.L.G.A. regarding the Yellow Book implications
of having a project that is not published and is not a public record.
Mr. Chambers asked if the Office could make an abstract of the work available for public
release which would simply be a report that would characterize the overall conclusions
Page 6
without being specific. Mr. McGowan stated that he has talked about that possibility
with both the auditor on this engagement and our Yellow Book contacts. He stated that
this is still under discussion.
Mr. McGowan stated that the Office is also doing a control self assessment of the City’s
Families, Parks and Recreation Department, specifically the Recreation Division and their
cash controls. Instead of writing an audit report the Office is presenting and gathering
information from groups of employees and we are at the stage now where a PowerPoint
presentation will be made to the Director and then to staff of the things that they have
raised as control issues. Mr. McGowan stated that this is a unique process for the Office
and an alternative way of presenting a report.
Mr. Chambers asked if there are any projects planned in response to the hurricanes or
weather issues over the last few months. Mr. McGowan stated that the Office anticipates
that there may be requests, however, nothing is planned at this time. The Office was asked
to participate in a task force regarding the hurricane response by the City. He stated that it
is anticipated that the Office may consider this as a project when it performs the risk
assessment for next fiscal year.
Mr. McGowan reported that the Office brought in $601,000 in revenue audit findings for
FY 03-04, double the Office’s goal. Mr. Chambers stated that you cannot argue with this
return on investment and he reiterated that the Board expressed concern a year ago when
we looked at the reductions to the Office’s staff. This is an area which was impacted and he
encouraged Ms. Girard and Mr. Miller to be an advocate for what the potential return on
investment is for a revenue auditing activity.
Mr. McGowan reported on the FY 04 Plan of Operations and introduced the FY 05 Audit
and Evaluation Plan of Operations. He stated that the Office plans to conduct six major
projects during the year. Mr. McGowan explained the Office’s formal risk assessment
process used to determine the audit plan. Mr. Chambers asked if the plan has been
approved. Mr. McGowan stated that the plan was approved by Ms. Davis and the Mayor.
He stated that this is the Board’s opportunity to comment on the plan. Mr. Chambers
requested that staff walk the Board through the risk assessment process, possibly in the
spring of next year so that the Board can share their thoughts on the process. Mr.
McGowan stated that the office would provide more details about the process during the
spring meeting, and include the information as an attachment to the Board’s meeting
package.
Mr. McGowan reported that the Office plans to add a new phase to the risk assessment
process. He stated that this will involve utilizing an internal control questionnaire to be
sent to the departments and to make use of the information gathered to determine the
projects the department itself feels would be beneficial. Mr. McGowan stated that the
Office is scheduled to have its next peer review in January 2005 and may get ideas
regarding the assessment process as a result of that review. Mr. McGowan stated that the
Office will share the peer review report with the Board at the next Audit Board meeting.
Mr. Clapp recommended that the Office of Audit and Evaluation include in its audit plan
work related to the hurricanes, i.e., money expended, FEMA grants, etc.
Page 7
Mr. McGowan stated that the Office’s website has been modified and that in addition to
being able to obtain all the Office reports, a page was added called “quality control.” The
page has a link to the Yellow Book, information on the latest peer review, and links to the
Audit Board’s minutes.
Mr. McGowan stated that one seat is available on the Board. The Board’s liaison to the
Nominating Committee has received applications and the Board will probably have
another member by its January meeting.
Mr. Clapp asked if the City compares its benefit plans to other government and private
sector entities. He stated that he senses that there are some stark differences between the
two.
Ms. Girard stated that the Human Resources Department takes the lead on the City’s
benefit plans, however, she stated that when the City reviewed the health plan a survey of
other governments was performed to determine how the City’s plan compares. She stated
that one reason the elimination of the retiree health benefit for new employees was
approved is because in Florida many governments do not pay 100% of retirees’ insurance
due to cost factors. She stated that she will provide the Board’s suggestions to the Human
Resources Director. Mr. Clapp stated that many changes are being made in the corporate
world regarding pensions and other portions of benefit packages that affect the operating
expenses on both a short and long term basis. He stated that these changes should also be
considered for application to government workers. Mr. Miller stated that since most of the
City’s employees are unionized, changing benefit programs would not be easily
implemented.
8.
OTHER BUSINESS – CONSIDERATION OF AUDIT BOARD ANNUAL AGENDA;
DETERMINATION OF MEETING DATES
The Board discussed the timing and topics for the 2004-05 meetings and agreed to
schedule four additional meetings as follows:
Monday, January 31, 2005
Monday, March 21, 2005
Friday, May 20, 2005
Friday, August 12, 2005
2:00 p.m.
2:00 p.m.
2:00 p.m.
2:00 p.m.
Conference Room R
Conference Room R
Conference Room R
Conference Room R
There being no other business, the meeting adjourned at 4:25 p.m.
Respectfully submitted,
Richard Chambers
Chairman
Annette Madden
Recording Secretary