HomeMy WebLinkAboutFY 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.
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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
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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
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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
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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
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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