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FY 13 Management letter final TOWN OF NANTUCKET, MASSACHUSETTS MANAGEMENT LETTER YEAR ENDED JUNE 30, 2013 Table of Contents Transmittal Letter………………………………………………………………........1 - 2 Overview ........................................................................................................... .... ….3 - 5 Informational Items………………………………………………………….….……6 - 7 Findings and Comments ………………………..….………………………….…….8 - 14 Honorable Board of Selectmen, Audit Committee and Town Manager Town of Nantucket, Massachusetts 16 Broad Street Nantucket, Massachusetts 02554 We have audited the financial statements of the governmental activities, the business type activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information of the Town of Nantucket, Massachusetts (the “Town”) as of and for the year ended June 30, 2013, which collectively comprise the Town’s basic financial statements and have issued our report thereon dated December 5, 2013. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting Management of the Town is responsible for establishing and maintaining effective internal control over financial reporting. In planning and performing our audit, we considered the Town’s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Town’s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Town’s internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. Town of Nantucket, Massachusetts Page 1 of 14 Management Letter This report is intended solely for the information and use of the Board of Selectmen, Audit Committee, Town Manager and others within the organization and is not intended to be and should not be used by anyone other than these specified parties. Roselli, Clark & Associates Certified Public Accountants Woburn, Massachusetts December 5, 2013 Town of Nantucket, Massachusetts Page 2 of 14 Management Letter I. OVERVIEW The Town of Nantucket is a town that has struggled for a number of years to obtain and maintain sound financial management practices. These struggles arguably date back over 20 years and peaked with the financial fallout by the Airport over the past several years. These struggles have been extensively documented through a series of reports including: 1. Department of Revenue Financial Management Review issued July 16, 2012. 2. An organization review of the Department of Finance and two updates by an outside consultant issued September 5, 2008, August 21, 2009 and February 16, 2012 respectively. 3. A forensic audit of the Airport by an outside firm issued June 2012. 4. Risk assessment of the Airport, Public Works and Human Resources by an outside firm issued April 2, 2013. 5. The prior auditor’s management letter and reports on internal control that identified material weaknesses and significant deficiencies issued October 31, 2012. They also led to punitive reporting mandates from the Department of Revenue, as a condition of setting the tax rate for 2013. Beginning in 2010/2011 and continuing into fiscal year 2012 the Town began to make considerable progress on the financial deficiencies as evidenced by the 2012 management letter which documents that many of the identified financial issues have been resolved or have been addressed with a game-plan to resolve. We noted the continued improvement of these issues into fiscal 2013 and congratulate Management, the Audit Committee and the Financial Team for this notable progress. Specifically, prior year material weakness with respect to procurement violations and reconciliation issues regarding cash and receivables have been addressed in a satisfactory manner and will not be identified as weaknesses or conditions in 2013. In addition, the Department of Revenue has lifted its punitive reporting mandates. We have raised new conditions in fiscal year 2013 that we do not believe rise to the level of material weaknesses or significant deficiencies, however these conditions should be addressed with the same vigor to correct that the Town has displayed in the past two to three fiscal years. In addition, in the current year, we have reviewed the Student Activity accounts. These have never been reviewed in detail by an outside firm. There were numerous serious concerns as a result of this review. The concerns are material to the Student Activity accounts themselves, but are not material to the overall Town operations and since the relationship is fiduciary in nature, they have not been identified as material or significant conditions of the Town. In economic terms, the Town continued to maintain a vibrant financial position. As the national and local economies continued to stabilize the Town’s economy has followed suit, however, economic data shows that unemployment rates, while coming off their historical peaks of 2009/2010, continue to be at historical highs, in addition to other indicators that Town of Nantucket, Massachusetts Page 3 of 14 Management Letter suggest the economy has not completely emerged from the recession that plagued the country and area since 2009. This is a signal that a community must remain cautious while preparing its budget. There is a fine balance to maintaining reserves to satisfy rating metrics versus providing the community’s residents adequate levels of services. Many communities have conceded to the pressure of maintaining services in lieu of building reserves and thus are facing the consequences of those decisions, which include possible credit rating downgrades. As discussed, the Town has continued to improve upon its financial condition, a trend that began in 2010. Unassigned balances, which were under $8 million in 2009, stand at almost $14 million at the end of fiscal year 2013. This has resulted in correlative increases to free cash, which was about $1M in 2009 and now amounts to $5.7M. We commend the Town for taking the approach to building reserves. This is one of the key metrics by which the Town’s solvency is evaluated. This is important to the Town since the better the Town’s credit is rated the cheaper it is for the Town to finance capital projects. In fact in 2008 the Town has improved its credit rating from an Aa3 to an Aa2 and continued to maintain this rating in its most recent evaluation earlier this year. We urge the Town to continue this philosophy. Exhibit 1 illustrates this positive trend: Exhibit 1 This recent surge has also allowed the Town to move ahead of the State average in terms of reserve ratio, which is essentially a Town’s unassigned fund balance divided by total general fund budget. Town of Nantucket, Massachusetts Page 4 of 14 Management Letter Exhibit 2 illustrates the growth in reserve ratio: Exhibit 2 Exhibit 3 compares the Town’s reserve ratio to key metric ratios Exhibit 3 Town of Nantucket, Massachusetts Page 5 of 14 Management Letter II. INFORMATIONAL ITEMS A. Other Postemployment Benefits Governmental Accounting Standards Board (“GASB”) No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefit Plans Other Than Pension Plans (“GASB 45”) requires communities to recognize in their financial statements a liability that recognizes postemployment benefits as this benefit is earned by employees. The Town’s most recent valuation reflected a future actuarial-estimated liability of approximately $88.6 million. While this is a future liability, its impact to current operations cannot be ignored. This is especially important in light of the average employment age for Nantucket employees, which is approaching fifty years old. This factor, among others, may make this an unmanageable liability in ten years. The Town’s future annual cost expectation on a pay as you go basis based on state-wide data is expected to increase significantly in the next 10 years. In fact many communities see this cash requirement tripling. The credit agencies have begun to assign an allocation of the credit evaluation to the management of long-term liabilities. OPEB qualifies as such an item, so this is now a very important item on the radar screen for the credit evaluators. The Town has become more active on the OPEB front recently. Subsequent to the close of fiscal year 2010, Town Meeting adopted the provisions of MGL c. 32B s. 20. This allowed the Town to create a Trust such that it may begin to make contributions to decrease the unfunded liability. In fiscal year 2013, the Town Meeting voted to transfer $250,000 into this Trust. While this is a start, we encourage the Town to evaluate other options to become more aggressive in this area. B. Health Insurance Mandate Chapter 69 of the Acts of 2011 was signed into law by the Governor on July 12, 2011. This is an Act relative to Municipal Health Insurance. The Act amends Chapter 32B and as a result of its enactment, Section 26 will be added to Chapter 32B and reads as follows: An appropriate public authority of a political subdivision which has undertaken to provide health insurance coverage to its subscribers under this chapter shall conduct an enrollment audit not less than once every 2 years. The audit shall be completed in order to ensure that members are appropriately eligible for coverage. We understand that the Town is presently in the process of developing a plan to conduct this audit internally and anticipates this to be completed by the end of fiscal year 2014 or early in fiscal year 2015. Town of Nantucket, Massachusetts Page 6 of 14 Management Letter C. Comprehensive Annual Report (CAFR) Presently, the Town compiles an annual financial statement in accordance with generally accepted accounting principles. This meets the minimum financial reporting standards for the Town and its bond investors. We feel the Town is an ideal candidate to compile a CAFR. Such an endeavor qualifies the Town to receive the Government Finance Officers Association Certificate of Achievement for Excellence in Financial Reporting. This is a very prestigious award and in order to be awarded a Certificate of Achievement, a government must publish an easily readable and efficiently organized comprehensive annual financial report. This report must satisfy both generally accepted accounting principles and applicable legal requirements. Only 20 communities in the Commonwealth of Massachusetts have been able to receive this certificate. The publication of a CAFR would represent an important achievement in the ability of the Town to provide enhanced financial information and accountability to its citizens, elected and appointed officials. Preparing the report does not guarantee an increase to the Town’s credit rating however the report would have tremendous investor appeal. Town of Nantucket, Massachusetts Page 7 of 14 Management Letter III. FINDINGS AND RECOMMENDATIONS A. Nantucket Memorial Airport Finding 1: Accounts Receivable Processing The Airport manages its billings and collections using Microsoft Dynamics GP (“Dynamics”) as opposed to the billing and collections modules within MUNIS, the Town’s accounting system. Dynamics, which was formerly known as Great Plains, is a widely used accounting system and has been available to businesses for over twenty years. On its face, the Airport’s use of Dynamics appears reasonable as the Airport’s operations are significantly different than the operations of a general government, which is how MUNIS was designed. However, the outstanding receivables per MUNIS and per the Dynamics system do not agree as of June 30, 2013. Variance Between Accounting Systems – We requested a detailed accounts receivable aging report from the Airport as of June 30, 2013 on September 30, 2013. When we compared the details in this report with the amount recorded in the Town’s accounting records, there was a $63,818 difference. Furthermore, seventeen (17) new customer accounts were present in the year-end report presented to us on September 30, 2013 versus the report prepared by the Airport and provided to the Town, which was in turn recorded into the MUNIS system. As a detailed accounts receivable aging report was not provided to the Town by the Airport (only a summary report was provided), we could not determine the individual invoices and/or payments that led to this difference. After further inquiry, we learned that subsequent to year-end the Airport staff, through their outside consultant, made adjustments to the receivable balances. However, these adjustments were not included by the Town in the general ledger submitted to the Department of Revenue for certification. Therefore it appears as though the balance sheet submitted for certification to the Department of Revenue had incorrect receivable balances included within it for the Airport. Credit Card Transactions Included in Accounts Receivable – The manner in which the Airport records credit card sale transactions in-transit at month end results in a receivable being recorded in the Dynamics accounting system. This is not the correct accounting as these are deposits in-transit and therefore should be cash at the end of each month. Credit card transactions at year-end were reported differently by the Town and the Airport. The Town reported a deposit in-transit cash item of $206,000 and a receivable balance of $373,057. The Airport reported a receivable balance of $453,622 and did not report an in-transit cash item. It is not clear if the Town Town of Nantucket, Massachusetts Page 8 of 14 Management Letter reduced the receivable balance when it reported the in-transit cash item or if it was left intact. Regardless, the amounts do not balance and also contribute to the variance previously discussed. Since the outstanding receivable balances were in variance, it would appear that reconciliations between the Town and the Airport at year end were not performed. We recommend that the Town and the Airport reconcile accounts receivable and in-transit credit card transactions with each other quarterly. Multiple Accounts for Same Customer – Many Airport customers are billed by the Airport for different types of selling items (i.e., aviation fuel versus facility rent). The Dynamics system was designed to have multiple customer accounts in billings and collections for the same end customer. For example, Island Airlines has four accounts: two are used for lease transactions, one for gasoline transactions and one for aviation fuel transactions. The use of multiple accounts for the same end customer greatly increases the likelihood of posting transactions to the wrong customer account. The Airport acknowledges that consolidation of accounts would make the process more manageable and decrease the likelihood of errors however the accounts are set up in this matter to facilitate the aeronautical fee and rate setting process in accordance with federal aviation regulations. The Airport should still endeavor to conduct an analysis of these accounts and consolidate where possible. Finding 2: Accounting Personnel Recently, the Airport experienced significant turn-over in key financial positions. Individuals were hired and further turn-over occurred. As a result the Airport was left with an office manager whose skill set is more operational based than accounting based. Consequently, the day-to-day management of the Airport appears to be adequately performed however there are limitations in the accounting function. The Airport’s operations have enough complications that this skill set is needed, therefore, the Airport engages a third-party accountant to assist it in its back office accounting as a stop-gap measure. We believe that this engagement should continue and be broadened to include more regular account reconciliations and analyses and reconciling with the Town on a periodic basis. In addition, accounting training is needed for the Airport’s business managers. Finding 3: Capital Asset Maintenance The Airport maintains a detailed fixed asset register that permits it to depreciate its capital assets. There are many fully depreciated items within this fixed asset Town of Nantucket, Massachusetts Page 9 of 14 Management Letter register that are likely no longer in use. For example, there are fully depreciated computers purchased over fifteen years ago. Maintaining (and also deleting) fully depreciated assets that are no longer in service does not have an effect on the Airport’s net position. However, including the costs of these items in the Airport’s gross fixed assets can be misleading to the reader of the Airport’s financial statements. We recommend that the Airport evaluate the validity of its fixed asset register, paying particular attention to items aged over ten years. Assets that cannot be located or when located are determined to be obsolete and no longer in use should be purged from the fixed asset register. Provided these assets are fully depreciated, purging these assets will not have any impact on the Airport’s net position. B. Payroll The Town’s payroll process has several flaws that should be addressed: 1. The payroll warrant equals the cash requirements report printed from MUNIS not the gross payroll plus employer portion of taxes that is effectively being expended with the processing of the payroll for that period.. This causes a significant break in the audit trail of information and creates the following issues when attempting to reconcile payroll activity to the postings in the general ledger: a. We were unable to perform the audit step of reconciling quarterly payroll amounts reported to the Commonwealth back to the signed payroll warrants; most likely due to the existing methodology. b. We were unable to perform the audit step of tracing an employee’s gross salary paid, into the amount posted to their specific, applicable wage line item on the general ledger; this could allow for mispostings to inaccurate budget lines for wages. c. The payroll warrant only includes total pay per employee and does not distinguish between regular pay, overtime etc. which places limitations on the degree of internal control in place. 2. Most departmental payroll transmittal sheets do not include a section for employee pay rates. Further, the design of the sheets requires departments to manually write hours on the sheets which then need to be re-entered into MUNIS by the town payroll clerk for processing; therefore, departments submit payroll sheets with no employee, department, or general ledger account line item wage totals for the period. We determined because of this transmittal Town of Nantucket, Massachusetts Page 10 of 14 Management Letter sheet limitation, the payroll clerk does not always record time properly as anticipated by the departments, often confusing regular pay with sick and vacation pay, for example. Because proof totals do not exist for each employee’s payroll; there is no control in place to assist the payroll clerk in verifying her own entries. This process is redundant, inefficient and prone to inaccuracies. 3. As a result of item #1 above, we further identified that the difference in the “cash requirements” report total used for the payroll warrant and the total payroll being actually distributed is related to a portion of the very many employee payroll withholding amounts in existence. However, while some of these withholdings are paid out immediately via bank wires or checks, it is possible that other withholdings may be printed out on checks but held and paid out on a later date, or even just electronically withheld in the MUNIS system with no wire or check being generated. How the withholding is processed and programmed into MUNIS would be a key factor in which withholdings are parts of the “cash requirements” total and which ones are not. Town personnel began investigating this situation upon our initial identification but to our knowledge, as of yet, are unable to fully identify those withholding amounts that are believed to be causing the difference between total wage amounts and the cash requirements amount. We believe that the amounts should be fully identified so as to maintain a clear understanding of the payroll process by Town personnel. Furthermore, we believe that the payroll warrant total signed and approved by Town personnel should be changed to equal the total wages being paid out plus only the employer portion share of Medicare, as that is the true cost of payroll earned by the employees each period, not some amount netted down for timing issues for certain withholdings or other employer benefit costs due as a vendor payment. 4. Most importantly, the Town includes a receivable on its balance sheet captioned “IRS Garnishment” in the amount of $423,212. It was communicated to us that this represents money garnished from the Town’s bank accounts during fiscal 2013, related to income tax withholding disputes with the IRS several years ago. The Town has spent a countless amount of hours to resolve this to no avail. The issue surfaced because withholdings remitted to the various agencies did not match the payroll reports submitted. This could be the result of the methodology of reporting payroll previously discussed. It may make sense to involve a tax attorney to try to resolve this, since this is a large sum of money to leave unresolved. 5. Finally, the Town still has some deficits in its withholding accounts. This is a comment from prior years that lingers. The Town is making best efforts to resolve this. Town of Nantucket, Massachusetts Page 11 of 14 Management Letter C. Posting of Water and Sewer Receipts The following issues were discovered during our testing of receipts for water and sewer: 1. Currently receipts for Sewer and Siasconset Water funds are posted to the Wannacomet Water fund when received and a liability is set up. Monthly, the amounts are then posted to the proper funds and the liability is relieved. We suggest these receipts are posted directly to the funds to avoid the inefficiencies of the current methodology. 2. We discovered that the system posted a refund that was intended for Siasconset Water to the Wannacomet Water fund by accident. It is not clear why this occurred, but this should be investigated to determine if this is human error or more concerning, a systemic problem. 3. Other revenues are presently not broken out at the departmental level for water and sewer, but are broken out in MUNIS. Since it appears the data is available, we suggest other revenues are also further broken out at the individual departments. 4. Presently, Wannacomet Water utilizes e-billing and other advanced methods of collection. We suggest that this technology is shared with the Collector’s office in further advancing collections throughout the Town. D. Health Insurance Trust Payments We determined that the May and June 2012 health insurance payments were not made until July 2012. These two invoices totaled $1.8 million and required a prior period adjustment and also resulted in the beginning fund balance being a deficit once restated. While it is technically not proper, but often customary to allow the June payment to be charged to July, it is never proper to allow the May payment to be charged to a subsequent year. This did not occur at the end of fiscal 2013, so it seems like a better cut-off process was in place, but the Town should investigate why this happened and assure that measures are in place to prevent this occurrence in the future. E. Limited Internal Audit Process We discovered that there is no reconciliation process between those departments that handle cash (i.e. building permits, dog licenses, school lunch, etc.) with either the Treasurer or Town Accountant’s records. While these revenues are not as significant as the overall revenues, there should still be a process by which these departments are held accountable. Town of Nantucket, Massachusetts Page 12 of 14 Management Letter Some large municipalities have established an internal audit position that would establish as one of their duties, procedures to hold cash handling departments accountable. We understand that the Town may create such a position and we would support such direction. Until such a position has been vetted and created, we suggest the Town consider following the provisions of Chapter 41 of the MGL that allows the Town Accountant or equivalent position the ability to examine books and records of any department on a periodic basis, and at least once on an annual basis. Based on this, we suggest that the Town Accountant internally cycle audit the cash handling departments. A different department should be chosen each month, and the cash handling for that month should be reconciled independently. For example, in the area of dog licenses, the number of licenses issued multiplied by the amount per sticker should be reconciled back to the cash turned over to the Treasurer and recorded in the general ledger. This should not be limited to cash handling only since presently, the Airport and School Department do not reconcile with Town Hall and the records of those two significant departments should be reconciled at least quarterly to the Town records. In addition, we understand that the Town is seeking to include as part of the annual audit process, 2 to 3 departmental cash handling audits per year and cycle these each year so that at the end of a 5 year period most cash handling areas have been reviewed. Such a process could provide an excellent deterrent against fraud. F. Capital Assets For a number of years, the Town had not captured and recorded capital assets properly. During 2013, the Town conducted a significant undertaking to challenge all of its capital asset records and make adjustments where deemed appropriate. This was a significant task, as original deeds, invoices and contracts etc. were all reviewed in an effort to conform the records to appropriate balances. In the end, we also assisted the Town by helping convert all excel spreadsheets to a capital asset based software for easier administration in the future. A prior period adjustment of approximately $4 million was required to correct prior period activity. We applaud the staff’s efforts in that regard and suggest the Town maintain such records contemporaneously on a prospective basis. G. Cash Reconciliations 1. The general depository account has numerous reconciling items that are greater than a year old and net to an immaterial amount. In order to make the Town of Nantucket, Massachusetts Page 13 of 14 Management Letter reconciliation process more efficient, we suggest the Treasurer clean up these reconciling items by making the necessary adjustments to the cash book. 2. The Health Insurance Trust bank account has about $3.5 million in cash at year-end which is significantly in excess of the general fund balance of under $1 million. This is due to transactions being processed through the main bank account and not yet adjusted to equal the general ledger. We suggest the Treasurer review this and other accounts in which this exists and make the necessary adjustments. 3. The Treasurer should consider consolidating bank accounts since there are presently numerous bank accounts that may not be needed. This will make the cash oversight and administrative process more efficient. H. Purchase Order System The Town currently utilizes a purchase order system to enhance internal control in the purchasing process. We discovered the Town uses this system for any purchase including $1. This is an extremely inefficient use of resources and despite the solid control it promotes, could be counterproductive. We suggest the Town evaluate increasing this amount to a more productive level of possibly $500 or $1,000. In addition, the Town continues to experience situations where purchase orders are dated after the invoice date, inferring that amounts are being committed after the purchase which defeats the purpose of a purchase order system. This is a comment that has been in the last management letters and is improving but still an issue. Town of Nantucket, Massachusetts Page 14 of 14 Management Letter