Transcript Slide 1

Russell W. Hinton
State Auditor
March 15, 2012
We exist to provide decisionmakers with credible management
information to promote
improvements in accountability
and stewardship in state and local
government.
STATE OF GEORGIA
Executive Branch
Legislative Branch
Office of the
Governor
General Assembly
Requests for Special
Examinations
Senate
House of
Representatives
Department of
Audits and
Accounts
Judicial Branch
• The art and science of
managing people is to keep the
ones that hate you away from
those that are undecided….
• A fractured quote from Casey Stengel, long-time
manager of the Yankees
 While subject to requests for special examinations by the Governor, the Department of Audits and
Accounts is under the authority, direction, and control of the General Assembly.
 The State Auditor is elected by the General Assembly.
 The Department is deemed a legislative agency for budget purposes and its budget estimate must
be included in the Governor’s Budget Report “without revision”.
 The State Auditor’s compensation is set by the Legislative Services Committee and Department
employees are not subject to the rules and regulations of the State Personnel Administration.
 The Appropriations Committee Chairs of the General Assembly may direct the State Auditor to
make special examinations and reports.
 Accordingly, the Department serves as part of the system of checks and balances between the
Executive and Legislative branches of State government.
• Performing audits and other forms of assurance for the Budgetary
Comparison Report (BCR), the State of Georgia Comprehensive
Annual Financial Report (CAFR) and the State of Georgia Single
Audit Report as well as for various other legislative and budgetary
financial reports;
• Conducting annual financial audits and reviews of state agencies,
authorities, retirement systems, state colleges, and universities;
• Compiling annual Salaries, Travel, and Per Diem and Fees
information submitted by State organizations;
• Conducting performance audits to assist the General Assembly and
the Governor in an ongoing review and evaluation of all programs
and functions in state government;
• Conducting claims audits of Medicaid providers to evaluate
compliance with Medicaid billing policies and procedures;
• Participating in Medicaid fraud investigations;
• Conducting annual financial and compliance audits of local boards of
education and regional educational service agencies;
• Performing desk reviews of financial and compliance audits for
cities, counties and non-profit entities conducting business with the
State;
• Issuing fiscal notes in conjunction with the Office of Planning and
Budget to estimate the financial impact of proposed legislation;
• Preparing certifications on retirement bills and summaries of
actuarial investigations;
• Issuing the Biennial Retirement Report on local retirement
systems;
• Issuing the Concurrent Funding Report on all fiscal retirement
bills passed during the legislative session; and
• Preparing an equalized property tax digest for public school
funding.
• In addition to these general responsibilities, the Department
acts in a consultative role to other agencies, as needed, by
providing accounting, technological, and operational guidance.
• The Department's audit engagements are conducted in
accordance with Government Auditing Standards (the
"Yellow Book"), issued by the Comptroller General of the
United States, and professional standards promulgated
by the American Institute of Certified Public Accountants.
• The accounting principles and reporting standards issued
by the Governmental Accounting Standards Board and
the Financial Accounting Standards Board, and various
state and federal laws and regulations also govern the
conduct of the Department in the successful completion
of its assigned tasks.
• The Department maintains a quality assurance system to
ensure that audit work is conducted in accordance with
applicable standards. This system includes supervisory
review of all work performed as well as management
review of audit reports and supporting documentation.
• The Department also receives an external peer review
every three years under the direction of the National
State Auditors Association. Audit personnel from other
states review our quality control system and
documentation for compliance with auditing and
accounting standards. The most recent peer review was
completed in September 2011 and resulted in an
unqualified report without the necessity of a letter of
comments.
•
The Department’s staff of professional and administrative personnel is committed to
promoting accountability and stewardship in state and local government. The Department’s
271 professional personnel include:
•
84 CPAs;
•
8 CIAs (Certified Internal Auditors);
•
21 CFEs (Certified Fraud Examiners);
•
11 CISAs (Certified Information System Auditors); and
•
74 personnel who hold other professional designations such as Certified Government
Auditing Professional (CGAP), Certified Government Financial Manager (CGFM), and
Certified General Real Property Appraiser. Many of our personnel hold more than one
professional designation.
•
Additionally, the Department has 68 professional personnel who have earned advanced
degrees.
The Department was created by the General Assembly in 1923 and its
general authorities are established in O.C.G.A. Title 50, Chapter 6.
The Department consists of the Office of the State Auditor and ten
areas of operations:
•
•
•
•
•
•
•
•
•
•
State Government
Performance Audits
Healthcare Audits
Technology and Risk Assurance
Education Audit
Nonprofit and Local Government Audits
Sales Ratio
Office of Quality Assurance
Information Technology, and
Administrative
• The State Government Division serves as the principal auditor of the
CAFR, BCR and the Single Audit Report. Division personnel perform a
combination of financial statement audits, agreed-upon procedures
engagements, and management reviews of state agencies, pension funds,
and other organizational units. Division personnel also conduct special
financial audits and reviews as requested by the Governor, the House of
Representatives, or the Senate. The Division’s forensic audit unit conducts
investigations of suspected fraud cases.
• The Education Audit Division conducts annual financial audits of county
and municipal school systems. Division personnel also conduct audit work
at the state’s colleges and universities sufficient to render an opinion on the
higher education component of the CAFR and the Single Audit Report. The
Division performs a combination of financial statement audits, agreed-upon
procedures engagements, and financial management reviews at the state’s
colleges, universities and technical colleges.
•
The Performance Audit Operations Division conducts performance audits and special
examinations of state programs. The audits may be internally generated or may be
conducted in response to requests received from the Governor or the House and Senate
Appropriations Committees. The Division also conducts follow-up reviews to determine
what actions have been taken in response to previous reports.
•
Healthcare Audits ~ Conducts cost report audits of nursing homes for use by the
Department of Community Health (DCH) in setting the nursing home reimbursement rates.
The Division also conducts audits of provider claims to determine if they were appropriate,
and performs internal program audits for DCH.
•
Technology and Risk Assurance ~ Assesses IT risk and the effectiveness of the
information technology control environment for the state. Division personnel evaluate IT
general and application controls to support financial and performance auditors in planning
and determining the nature, timing and extent of audit procedures to be performed in
various engagements, as well as providing timely recommendations to management for
needed improvements in IT-related controls.
• Nonprofit and Local Government Audits ~ Reviews financial audit
reports of county and municipal governments for compliance with generally
accepted accounting principles (GAAP) and ensures they have prepared
corrective action plans to address the reports’ findings and
recommendations
• Sales Ratio ~ Prepares the Statewide-Equalized Adjusted Property Tax
Digest. Division personnel determine the ratio of assessed value of property
to the sales price to ensure that the property is being assessed equitably
• The Office of Quality Assurance performs independent reviews of the
audit work conducted by the Department’s operating divisions to ensure that
the work is conducted in compliance with applicable government auditing
standards.
• Administrative ~ Prepares the Department’s annual budget and financial
statements, makes the Department’s purchases, maintains the Department’s
personnel records, and prepares and updates the Department’s general
policies and procedures.
•
•
•
•
•
•
•
•
Atlanta
Athens
Augusta
Macon
Statesboro
Douglas
Leesburg (Albany)
Calhoun
• Fiscal Condition of the State of Georgia
• Transparency in Government Act
• Illegal Immigration Reform and Enforcement Act (HB87)
•
•
•
•
•
•
•
Keys to Maintaining AAA
Economic Recovery
Fully Fund Pension ARCs
Continue to Rebuild Revenue Shortfall Reserve
Structurally Balance Budget
Reduce OPEB Liability
Moderate Bond Package
• Moody’s November 2, 2011
• “What could move the rating down?
• Continued Negative Fund Balance Status
• Deterioration in Economic Position Without Plan to Offset
Revenue Declines
• Renewed Reliance on Non-Recurring Fiscal Measures
• Failure to Address Large, Unfunded Retiree Health Benefit
Liability or Substantial Deterioration in Pension Funded Status
Revenue Shortfall Reserve: Statutory Provisions
State law provides
for the establishment of reserves through the sound
management of excess revenue collections as follows:
Excess collections of up to 4% (but no greater than 15%) must be set aside in
the Revenue Shortfall Reserve;
Up to 1% of the net revenue of the preceding year may be appropriated from
the Revenue Shortfall Reserve by the General Assembly for funding increased
K-12 educational needs in the mid-year adjustment; and
Funds in the Revenue Shortfall Reserve that are in excess of 4% of the
previous year’s net revenue may be available, upon recommendation of the
Governor, for appropriation in the fiscal year.
Senate Bill 421 of the 2010 General Assembly session raised the ceiling on the
Revenue Shortfall Reserve from 10% to 15% of prior year revenues.
Revenue Shortfall Reserve
Revenue Shortfall Reserve as of June 30, 2010
$268,179,869
1% mid-year adjustment for K-12, appropriated in Amended FY 2010
(152,157,908)
Resulting Revenue Shortfall balance
116,021,961
FY 2011 excess revenues over estimate
329,273,091
Audited agency lapse of surplus funds
48,679,138
Revenue Shortfall Reserve as of June 30, 2011
$493,974,190
Note: 1% mid-year adjustment for K-12,
available for appropriation in Amended FY 2012
$165,586,475
Mechanisms for Rebuilding the Revenue Shortfall Reserve and
Ensuring Budgetary Balance
In periods of strong revenue growth, the Governor may elect to use very conservative revenue
estimates to restrain spending and add to reserves.
 House Bill 1405 established the Special Council on Tax Reform and Fairness to
recommend changes to Georgia’s tax structure. The Council reported its findings in
January 2011 for the legislature’s consideration.
 The Council was comprised of 11 individuals: one elected official (Governor Perdue), four
economists, the chairpersons of the Georgia Chamber of Commerce and the National
Federation of Independent Business, and four business representatives appointed by the Lt.
Governor and Speaker of the House.
 House Bill 1405 created a Special Joint Committee on Georgia Revenue Structure to cause
to be introduced one or more bills which would incorporate the recommendations of the
Council, without changes. The bill, or bills, were to be reported directly for an up or down
vote, without amendment. Political will for this approach faltered and the bill went
Nowhere.
In FY 2012, the State anticipates using a combination of recurring revenue sources and
expenditure reductions to replace ARRA and other one-time sources of revenue.
• Required DOAA to prepare tax expenditure review for inclusion in the
Governor’s annual budget report filed with the General Assembly in early
January.
• Defines “tax expenditure” as:
• “any statutory provision which exempts, in whole or in part, any specific class or classes…from the
impact of established state taxes…deductions, allowances, exclusions, credits, preferential tax rates ,
exemptions…expenditure of state tax proceeds to local governments for homeowner tax relief grants or
local assistance grants”
• Report should include tax revenue foregone for a three year period:
• Fiscal year applicable to previous budget report,
• Current fiscal year, and
• One fiscal year forward.
• Requires information necessary for report to be tracked and compiled by
Department of Revenue, though permits estimation and restricts DOR’s
ability to impose additional reporting requirements on taxpayers.
• Contracted with Georgia State University Fiscal Research Center for
production of first report…long way to go.
Pensions
•
The funded status of the two major retirement systems according to the most
recent actuarial valuation date, is as follows:
•
•
Employees Retirement System funded ratio:
Teachers Retirement System funded ratio:
2008
89.4%
91.9%
2009
85.7%
87.2%
2010
80.1%
85.7%
•
Since the previous valuation for TRS, the Board of Trustees has adopted a
valuation rate of return smoothing methodology effective July 1, 2010 which had
a positive impact on the funded ratio.
•
The new methodology is designed to reduce contribution volatility by requiring
increased contributions during periods of rising revenues and investment returns
while maintaining the current contribution rates during periods of declining
revenues and depressed returns.
•
Budgetary increases for FY2013 annually required contributions for TRS and
ERS are $71 million and $63 million, respectively.
• Pensions are part of the exchange between
employees and employers
• Pension plans are part of total compensation
• Employer incurs a pension obligation as a result of the
“employment exchange”
• Cost (expense) should be recognized in the period services
are provided
• The pension plan is primarily responsible for
paying pension benefits to the extent the plan has
sufficient assets
• The employer is primarily responsible for paying
benefits to the extent the plan does not have
sufficient assets
26
• Difference between the total pension liability and
the plan net position is the liability on the financial
statements of the government
• Cost allocation (annual expense) is developed on
an accounting basis, not a funding or contribution
basis
• Totally different from current GASB standards.
• Disconnect between accounting numbers and funding
numbers. Cannot fund using GASB expense.
• Will require significant rethinking and retraining for most
of us.
27
• Total Pension Liability (TPL) – accrued liability using
Entry Age Normal funding method
• Net Pension Position (NPP) – basically market value of
assets
• Net Pension Liability (NPL) – TPL minus NPP
• Annual Required Contribution (ARC) – the annual
amount to recognize in developing the annual pension
contribution under current GASB 25, to be replaced with:
• Pension Expense – annual amount to recognize as
pension expense under proposed standard.
28
Current GASB
Exposure Draft
Implications
Pension expense reported by
employer is ARC with few
adjustments.
Pension expense is NOT related
to funding amount. Expense is
change in net pension liability
each year with some adjustments
for deferred recognition.
More volatile expenses shown on
employer’s income statement.
Difference between ARC and
actual contributions becomes a
liability on employer’s books (Net
Pension Obligation).
Net Pension Liability (unfunded
liability on market value basis for
most) is liability on employer’s
books.
Unfunded liability placed
prominently on employer’s
balance sheet. Disconnect
between funding and accounting
numbers.
Actuarial cost method and
smoothing method used by plan
for funding calculations is used in
ARC calculations.
All plans must use Entry Age
Normal actuarial cost method.
Expense utilizes a 5 year
smoothing of investment gains
and losses.
Entry Age Normal already used
for TRS valuations. Pension
expense for accounting will be
more volatile than the required
funding.
29
Current GASB
All projected benefit payments
are discounted using one rate –
the long term expected
investment rate of return.
Exposure Draft
Blended rate consisting of:
1. Investment return
assumption
2. Municipal bond rate
•
•
Higher rate (assumed rate of
return) can be used only for
period during which assets are
sufficient to cover benefit
payments (prior to projected
exhaustion date).
Lower municipal bond rate
must be used to discount
benefit payments after
projected exhaustion date.
Implications
• Use of lower discount rate
would mean higher liabilities and
pension expense on employer’s
financial statements.
• Most troublesome for plans
with fixed contribution rate or
plans contributing less than the
full actuarial contribution rate.
• Requires a projection of assets
to determine exhaustion date, if
any.
30
Current GASB
Exposure Draft
Implications
Unfunded liabilities can be
amortized over a maximum of 30
years which may be an “open”
amortization period.
Amortization periods would be
significantly shorter and cost
recognized more quickly.
Potentially higher, more volatile
pension expense.
Unfunded liabilities created by
plan changes that affect active
liabilities, such as benefit
improvements, can be amortized
over a maximum of 30 years.
Unfunded liabilities for active
lives must be amortized over the
average weighted working career
for active employees. If result
from benefit change, recognize
immediately.
Benefit changes more difficult to
enact since immediate/near term
costs will be much higher.
Unfunded liabilities created by
plan changes that affect retirees,
such as mortality assumptions,
can also be amortized over a
maximum of 30 years.
Unfunded liabilities for retirees
must be recognized immediately
with no amortization allowed.
Ad hoc COLA liabilities are
immediately recognized as are
changes in mortality assumptions
which could cause spikes in costs
which flow through to financial
statements .
31
Current GASB
Exposure Draft
Implications
Permits use of smoothed market
value (actuarial value).
Market value of assets, not
actuarial value, is used in
determining the net liability.
Market declines or increases
would be recognized more
quickly.
Gain/loss on actuarial value of
assets flows through to unfunded
liability and is amortized over
maximum of 30 years.
Allows deferred recognition of
investment gains/losses over 5
years in determining pension
expense.
More volatility in pension
expense.
Significant asset gains could
result in pension income rather
than pension expense and yet
contributions may still be
required for funding.
32
Current GASB
• Annual Required Contribution
(ARC) served as a “de facto”
contribution standard.
• Employer liability exists only
when employer contributions are
less than ARC.
• Current GASB standards are
used to measure how well the
plan is funded and whether
contribution levels are on track.
Exposure Draft
• Focus ONLY on accounting –
not funding – for pension costs.
• No calculation or standard for
appropriate funding levels or
contribution levels.
• Total disconnect between
accounting and funding numbers.
Implications
• Will be two sets of numbers
which could lead to confusion
regarding the “true cost” of
pensions.
•Lack of universal funding
benchmark.
• Actuaries, Boards , legislatures
will have to develop funding
policy.
• More volatility could create
problems for employers.
33
OPEB/SHBP
•
The State Health Benefit Plan (SHBP) is administered by the Department of Community Health and
covers state employees, public school teachers and other public school employees, retirees and their
dependents and other individuals covered under State law.
•
Legislation enacted in 2009 created two separate OPEB funds
• State Employee OPEB Fund (O.C.G.A. 45-18-25)
• School Personnel OPEB Fund (O.C.G.A. 20-2-875)
•
As separate and distinct cost sharing multiple employer plans, both OPEB funds separately value their own
OPEB liabilities, report the results, and make GASB 43 disclosures. The unfunded actuarial accrued
liability (UAAL) as of 6/30/10 and the FY13 ARC for the respective plans follow:
UAAL
ARC
State Employees
$4.48 billion
$339 million
School Personnel
$11.25 billion
$982 million
•
In FY 2010, the State utilized $171 million from the OPEB trust fund to meet retiree health care costs in
FY 2010. There are no planned contributions beyond annual pay-go amounts for the OPEB funds for FY
2011 or FY 2012.
•
State employees will see premium increases of 11.2 -17.2% for Plan Year 2012, following increases of
10% for Plan Year 2011.
• O.C.G.A. 50-6-32
Transparency in Government Act
• The Department of Audits and Accounts developed and and
continue to operate a single searchable website accessible by the
public, at no cost, that provides financial information and reports
on the operations of state government and local boards of
education.
• Open.Georgia.gov
• All agencies of state government shall provide to the
Department of Audits and Accounts such information as
is necessary to accomplish the purposes of this Code
section.
• Nothing in this Code section shall require the disclosure
of information which is considered confidential by state
or federal law.
• Will continue to identify subsystems providing adequate
detail for compliance with SB 300.
• Clarify implications of applicability to organizations
named in Appropriations Act.
• Data security issues.
• Data confidentiality issues.
• Expansion of reporting requirements has caused legitimate concerns
with regard to certain proprietary information for certain authorities.
Working through those issues.
• Will be necessary to identify those organizations not reporting on the
OpenGeorgia website, lest the public be mislead.
• OpenGeorgia was rated lower than expected by a paper entitled
“Following the Money” .
• Suggestions for Improvement:
• Add link to ARRA Website ~ Not a Problem
• Add information on tax credits for specific companies ~ Note Tax Expenditure
Report, Specific Companies Not Available
• Add link to economic development efforts ~ Working on It
• Link amounts reported to PDF of actual contract ~ We Ain’t There Yet
• Act provides significant sanctions against public
employers and individual employees for willful violation
of the Act.
• Created the Immigration Enforcement Review Board
with quasi-judicial powers to accept complaints from
citizens, businesses etc. regarding noncompliance by
public employers or its employees.
• By December 31, 2011, public employers must submit a report to the
State Auditor indicating compliance with the Act in regards to contracts
for “physical performance of services.” Compliance means the entity
obtained affidavits from all contractors performing such work that the
firm utilized the E-Verify system to determine immigration status of its
employees.
• Reporting instructions were disseminated to approximately 2400 “public
employers” in the State of Georgia.
• Chaos ensued.
• Upon funding being provided, State Auditor required to conduct annual
compliance audits on at least 50% of reporting agencies and publish
results annually.
• By December 31, 2012, public employers must submit a report to the
State Auditor indicating compliance with the Act in regards to issuance
of “public benefits” as defined by the Attorney General. Compliance
means that any county or municipality renewing a business license,
occupation tax certificate or “other document required to operate a
business” to employers with more than 10 employees on January 1
received an affidavit from such employer affirming registration and use
of the federal work authorization program.
• “Public Benefit “ has very broad interpretation.
• Chaos ongoing…..
• Upon funding being provided, State Auditor required to conduct annual
compliance audits on at least 20% of reporting agencies and publish
results annually.
• Questions/Comments????
Russell W. Hinton, CPA, CGFM
State Auditor
270 Washington Street, S.W.
Suite 1-156
Atlanta, Georgia 30334-8400
Voice: (404) 656-2174
[email protected]