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Internal Audit and the Audit Committee - HRSD Minutes/2015/Committees/11-18-15_Fi… · Operations...
Transcript of Internal Audit and the Audit Committee - HRSD Minutes/2015/Committees/11-18-15_Fi… · Operations...
Internal Audit and the Audit Committee
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Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its “objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.”
The Institute of Internal Auditors
What is Internal Auditing?
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Internal Audit Broad focus ▫ Accurate records ▫ Efficiency/effectiveness ▫ Accomplishing objectives ▫ Safeguarding assets ▫ And more!
Diverse skills sets are required
Integral part of the organization
High Level Comparison
Financial Statement Audit Specific focus ▫ Accurate financial statements ▫ Going concern ▫ Reviewing historical data ▫ Compliance with accounting
and other regulations Primarily accounting skills
Independent from the organization
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To help keep bad things from happening
To help assure good things can happen
To help management understand ▫ Where their risks are
▫ Whether the risks are under control
▫ Whether the risks are worth taking
Internal Auditors Assess Risks…
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Internal auditors evaluate the controls that help organizations manage risks ▫ Are controls in place?
▫ Do the controls work?
▫ Are additional controls needed?
▫ Are there unnecessary controls?
▫ Are the controls cost-effective?
Finding Risk is Not Enough
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Determine whether controls are adequate
Suggest improvements to increase efficiency and effectiveness or to lower operating costs
Determine whether policies and procedures are followed
Determine whether laws and regulations are being obeyed
Detect fraud or manipulation of records
Five Critical Tasks
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Board of Directors
Management
External Audit In
tern
al A
udit
Effective Governance
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Key Stakeholders • Audit committee/
board • GM • CFO or individual
to whom IA reports administratively
• Potentially, other chief officers
Secondary Stakeholders • Other business unit
executives • External auditors
and regulators • Investors and
creditors • Citizens and
taxpayers
Tertiary Stakeholders • Employees and
retirees • Potentially, the
general public
Stakeholder Needs
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Keep senior management aware of critical issues
Ensure factual communications of financial, operational and compliance data
Make suggestions based on knowledge of operations throughout the organization
Internal Auditors
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Helps organization achieve a commitment to strong internal controls; emanating from the “Tone at the Top”
Review Internal Audit plans, reports and significant findings
Evaluate the organization’s adherence to established practices relative to ethics, conflicts of interest, misconduct or fraud
Ensure that the organization is properly addressing risk factors
Audit Committee
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Ensure management is appropriately addressing reported audit findings
Ensure sufficient resources are allotted to the internal audit effort
Establish a direct reporting relationship with the external audit team
Report back to the Full Board
Audit Committee
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Contact Information
Joseph Freiburger Audit Director [email protected]
Visit: www.scandh.com
Phone: (800) 921-8490
Email: [email protected]
Hampton Roads Sanitation District Risk Assessment and Proposed Internal Audit Plan
November 18, 2015
Draft: For Discussion Purposes Only
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Introduction Risk Assessment & Plan Development
Purpose SC&H conducted an organization-wide internal audit risk assessment process to identify risks facing HRSD. The risk assessment results served as a key component for developing the two-year internal audit plan. The objectives of the assessment was to align audit resources toward the areas that pose the greatest degree of risk to HRSD regarding achievement of its objectives. Feedback from various members of management and the Commission, along with our industry knowledge and professional experience were also instrumental in determining the areas to be included in the plan for future examination.
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Introduction Risk Assessment & Plan Development
Process 1. Communicated with management our intent with regard to the risk assessment
and plan development process.
2. Reviewed background information (e.g., strategic plan, budget information, organization chart, prior year CAFR, Commission minutes, etc.)
3. Conducted interviews with 17 participants to gain insight into the HRSD operations and key initiatives.
4. Identified areas of risk.
5. Defined the risks and developed the definition of risk rankings (High, Moderate, Low)
6. Developed the Audit Universe.
7. Populated the SC&H risk assessment and Internal Audit plan module with audit areas and risk rankings.
8. Prepared suggested internal audit plan based on the methodology.
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Risk Ratings & Definitions
Risk DefinitionStrategic 1. Inability to meet business goals, objectives or strategy due to:
a. An ineffective or inefficient business model; b. An improper or ineffective organizational structure; orc. Improper or ineffective strategic planning
Legal and Regulatory 1. Noncompliance with legal or regulatory requirements can result in fines, penalties, or other adverse impact to HRSD2. Pressure to maintain accreditation status3. Failure to monitor use (internal and external) of intellectual property
Environmental, Health, and Safety
1. A condition or vulnerability that has an adverse effect on the environment or negatively impacts the health of employees and/or local citizens2. Failure to ensure adequate security and safety of the employees and facilities
Information Technology 1. Technology used does not effectively support the current and future needs of HRSD2. Compromise to the integrity, access and/or availability of data or operating systems3. Potential for system failure and lack of business continuity/data recovery
Customer Service / Delivery
1. Failure to provide service to customers (internal or external) in a timely and effective manner2. Failure to respond to customers (internal or external) in a timely or effective fashion3. Failure to respond and resolve billing discrepancies/issues in a timely manner4. Failure to maintain service during emergency situations
Fraud 1. Susceptibility to theft, waste, and abuse of HRSD resources2. Assets and information that is vulnerable to theft or manipulation
Personnel / HR 1. Lack of proper skill set, resources, training or succession planning2. Lack of formalized / standard policies and procedures3. Inconsistent / incomplete employee (or contractor) on-board / off-boarding practices
Information and Communication
1. Inaccurate, inconsistent, or untimely information or communications to customers, both internal and external, to HRSD
RISK EVALUATION: LIKELIHOOD
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Risk Ratings & Definitions
Risk DefinitionReputation 1. Improper instructions, communication, and interactions with customers (internal or
external), regulators, or constituents that may result in negative public perception and/or could harm the reputation of HRSD
Business Operations 1. A condition or issue that prevents the operations from functioning effectively, efficiently, or from meeting internal/external goals and objectives2. A vulnerability due to volume and/or complexity of transactions and/or activities
Financial 1. Circumstances that could result in significant financial implications to HRSD2. Failure to meet financial obligations or requirements3. Failure to comply with funding/creditor requirements thus impairing future funding4. Failure to maintain rate structure necessary to operate business
RISK EVALUATION: IMPACT
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Likelihood & Impact Definitions LIKELIHOOD
Rank Rating1 Low
2 Moderate
3 High Immediate and high degree of vulnerability such that it is critical that the risk be managed and controlled in order for this area to achieve its objectives. If not properly controlled, that area could have a serious, long-term or detrimental effect on operations, and the achievement of organizational goals and objectives.
DescriptionThe threat of a serious event occurring is either non-existent or remote. The area should be managed but the level of risk response is limited.Risk present should be addressed and controlled but the probability is not as severe as defined above. If not properly controlled, the area could effect operations, but achievement of organizational goals and objectives will still be met.
IMPACTRank Rating
1 Low
2 Moderate
3 High
Indicates that the resulting consequences of an event would be negative and must be managed but would not have a substantial effect on finances or on-going operations.If an event occurs, the financial ramifications would be severe and/or operations would suffer long-standing consequences.
Indicates that the event occurring would have little or no impact financially or operationally.
Description
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Audit Universe Summary
Department Audit Area Ove
rall
Like
lihoo
d
Ove
rall
Impa
ct
Ove
rall
Risk
Last
Aud
ited
Audi
t Yea
r?
Engineering Design & Construction: CIP Project Management H H H N/A Year 1Engineering Design & Construction: Procurement Process H H H N/A TBDEngineering Design & Construction: Emergency Repairs H H H N/A TBDFinance & Accounting Accounting: Debt Management H H H N/A TBDFinance & Accounting Customer Care: Billing H H H N/A Year 2Information Technology IT: Applications (e.g. ERP, GIS, SCADA, CMMS, CC&B) H H H N/A TBDInformation Technology IT: Disaster Recovery H H H N/A TBDOperations Electrical & Energy Management H H H N/A TBDOperations Treatment Plants H H H N/A Year 2Water Quality Regulatory/Reporting (Water, Air, Solids) H H H N/A Year 2Enterprise-Wide Business Continuity & Disaster Recovery (Operations) H H H N/A Year 2Finance & Accounting Accounting: Cash Management and Investments M H H N/A TBDFinance & Accounting Procurement: Process M H H N/A Year 1Information Technology IT: Network Security M H H N/A TBDOperations Inventory M H H N/A Year 1Talent Management Safety M H H N/A TBDEngineering Asset Management M M M N/A TBDEngineering Planning & Analysis M M M N/A TBDFinance & Accounting Accounting: General Accounting & Financial Reporting M M M N/A TBDFinance & Accounting Accounting: Payroll M M M N/A TBDFinance & Accounting Accounting: Accounts Payable M M M N/A TBDFinance & Accounting Accounting: Fixed Assets M M M N/A TBDFinance & Accounting Accounting: Revenue / Accounts Receivable M M M N/A TBDFinance & Accounting Accounting: Grants Management M M M N/A TBDFinance & Accounting Customer Care: Mail Center & Payments M M M N/A TBDFinance & Accounting Procurement: P-Card Administration M M M N/A TBDFinance & Accounting Procurement: Contract Management M M M N/A TBD
RISK RANKINGS HISTORYAUDIT DETAILS
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Audit Universe Summary
Department Audit Area Ove
rall
Like
lihoo
d
Ove
rall
Impa
ct
Ove
rall
Risk
Last
Aud
ited
Audi
t Yea
r?
Information Technology IT: Data Management and Operations M M M N/A TBDInformation Technology IT: SDLC and Change Management M M M N/A TBDInformation Technology IT: Access Provisioning/De-Provisioning M M M N/A Year 2Information Technology IT: Governance M M M N/A TBDInformation Technology IT: Vendor and Contractor Management M M M N/A TBDInformation Technology IT: Data Center Physical Security and Environmental Controls M M M N/A TBDOperations Support Systems: Facilities Management M M M N/A TBDOperations Support Systems: Fleet M M M N/A TBDOperations Water Technology & Research M M M N/A TBDTalent Management HR: Recruiting/Onboarding/Offboarding M M M N/A TBDTalent Management HR: Compensation and Benefits M M M N/A Year 1Water Quality Quality Assurance (Accreditation) M M M N/A TBDEnterprise-Wide Corporate Governance M M M N/A TBDEnterprise-Wide Corporate Policies and Procedures M M M N/A TBDEnterprise-Wide Insurance (Risk Management) H L M N/A TBDFinance & Accounting Accounting: Budgeting M L L N/A TBDFinance & Accounting Customer Care: Call Center L M L N/A TBDFinance & Accounting Customer Care: A/R & Delinquent Accounts M L L N/A TBDInformation Technology IT: Mobile M L L N/A TBDOperations Support Systems: Machine Shop and Carpentry Shop L M L N/A TBDTalent Management HR: Strategy M L L N/A TBDTalent Management Organizational Development & Training M L L N/A TBDWater Quality Permitting Operations M L L N/A TBDEnterprise-Wide Physical Security M L L N/A TBDEnterprise-Wide Media & Public Relations M L L N/A TBDEnterprise-Wide Legal Operations (Managing Attorneys) L L L N/A TBD
RISK RANKINGS HISTORYAUDIT DETAILS
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Risk Ranking Matrix
High 0 5 11
Moderate 2 25 0
Low 1 8 1
Low Moderate High
112616
Grand Total 53
IMPA
CT
LIKELIHOOD
Total by color:
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Proposed Internal Audit Plan Year 1
Department Audit Area Ove
rall
Like
lihoo
dO
vera
ll Im
pact
Ove
rall
Risk
Audi
t Yea
r
Estim
ated
Ho
urs
Estim
ated
Fe
es
* Assess risks surrounding:-- Contract compliance-- Project productivity (e.g. results)-- Project/system inputs & outputs
-- Project spend-- Staffing utilization-- Operational efficiencies
* Assess risks surrounding:-- Compliance (e.g. VPPA)-- Process/system inputs & outputs
-- Staffing utilization-- Operational efficiencies
* Assess risks surrounding:-- Process/system inputs & outputs-- Physical inventory completeness and accuracy-- Utilization (e.g. departmental/location sharing)
-- Staffing utilization-- Operational efficiencies
Talent Management
HR: Compensation and Benefits
* Evaluate the health plan process from start to finish* Assess risks surrounding:-- Health plan funding adequacy and rate of return-- Process/system inputs & outputs-- Regulatory compliance
-- Staffing utilization-- Operational efficiencies
M M M Year 1 250 40,875
All Perform Risk Assessment and Develop Plan
N/A N/A N/A Year 1 292 48,440
All Administration N/A N/A N/A Annual 50 8,175 All Special Projects N/A N/A N/A Annual TBD TBD
Year 1 (Audits and Admin) 1,200 196,200 Risk Assessment 292 48,440
Total 1,492 244,640
Finance & Accounting
* Evaluate the procurement process from start to finish (all or components) 49,050 300 Year 1HH
Operations 49,050 300 Year 1* Evaluate the inventory process from start to finish HHMInventory
MProcurement
Management requests; special projects/investigations/consulting assignments
Preliminary Audit Topics (Scope / Objectives)
RISK ANALYSIS AUDIT PLAN
Identified internal environment, performed activities to complete the risk assessment, compiled results, and developed the draft audit plan.Board meetings; management team meetings; status reporting; etc.
AUDIT DETAILS
Design & Construction: CIP Project Management
Engineering * Evaluate a sample of projects from start to finish (or current state) 49,050 300 Year 1HHH
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Proposed Internal Audit Plan Year 2
Department Audit Area Ove
rall
Like
lihoo
dO
vera
ll Im
pact
Ove
rall
Risk
Audi
t Yea
r
Estim
ated
Ho
urs
Estim
ated
Fe
es
* Evaluate the billing process from start to finish* Assess risks surrounding:-- Billing completeness and accuracy-- Process/system inputs & outputs-- Jurisdictional compliance
-- Process redundancies (e.g. 4 Model process)-- Staffing utilization-- Operation efficiencies
* Assess risks surrounding:-- Plant management-- Chemical purchasing-- Warehousing
-- Physical security-- Systems interfacing
* Assess risks surrounding:-- Monitoring-- Reporting
-- System inputs/outputs-- Permits
* Assess risk surrounding:-- Response-- Mitigation-- Recovery
* Assess risks surrounding-- System/application access-- Passwords-- Account usage
-- System/application maintenance
All Update Risk Assessment and Develop Plan
N/A N/A N/A Annual 234 38,752
All Administration N/A N/A N/A Annual 50 8,175 All Special Projects N/A N/A N/A Annual TBD TBD
Year 2 (Audits and Admin) 1,200 196,200 Risk Assessment 234 38,752
Total 1,434 234,952
AUDIT PLAN
Preliminary Audit Topics (Scope / Objectives)
Annual refresh and reassessment: Review the existing Audit Universe to determine whether any organizational changes impact the processes identified or ratings.
AUDIT DETAILS
Customer Care: BillingFinance & Accounting
HHH 49,050 300 Year 2
HH
Board meetings; management team meetings; status reporting; etc.Management requests; special projects/investigations/consulting assignments
RISK ANALYSIS
HTreatment PlantsOperations * Evaluate a sample of treatment plants for consistent and adequate processes
36,788 225 Year 2HHHRegulatory/Reporting (Water, Air, Solids)
Water Quality * Evaluate HRSD's ability to effectively meet applicable regulatory requirements
44,963 275 Year 2
Business Continuity & Disaster Recovery (Operations)
Enterprise-Wide
32,700 200 Year 2HHH* Evaluate emergency plans and procedures
IT: Access Provisioning/De-Provisioning
Information Technology
* Evaluate the system access process from start to finish 24,525 150 Year 2MMM
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Discussion and Questions
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Contact Information
Joe Freiburger, Director (703) 287-5989 [email protected]
Scott Heflin, IT Principal (703) 287-5973 [email protected]
Matthew Simons, Principal (410) 403-1561 [email protected]
Jackie Kosovich, Senior (703) 287-5975 [email protected]
Fiscal Year - 2015 Comprehensive Annual
Financial Report (CAFR)
Finance Committee November 18, 2015
• Lee Acors - Chief of Accounting • Kathy Stephanitsis - Accounting Manager • Kassandra Pagan - Financial Analyst • Helen Mayhue - Financial Analyst • Jane Campagna - Financial Analyst • Bettye Platt - Accounts Payable Supervisor • Lisa Pruitt - Payroll Technician • Charmaine Simmons - Accounts Payable Associate • Ingrid Conde - Accounts Payable Associate • Danielle Raleigh - Accounting Coordinator • Ramona Bradshaw – Customer Care Manager • KPMG
Acknowledgements
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• Fiscal Year - 2015 Items of Interest: – Revenues & Water Consumption – Inventory – Net Pension Liability – Advanced Bond Refunding
• Financial Statement Overview • Key Financial Policy Indicators • Conclusion
Agenda
3
4
Revenues and Water Consumption
Revenues by Source
5
Operating revenues
95%
Facility charge revenue
3%
Investment income, net
1% Bond interest
subsidy 1%
Water Consumption is directly tied to our revenues
Water Consumption & Plant Flow
6
-
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
180.00
200.00FY
2001
FY20
03
FY20
05
FY20
07
FY20
09
FY20
11
FY20
13
FY20
15
Flow
, (M
GD
)
Water Consumption
Plant Flow
Water Consumption, Plant Flow, and Population
7
1,350,000
1,450,000
1,550,000
1,650,000
1,750,000
1,850,000
1,950,000
-
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
180.00
200.00FY
2001
FY20
03
FY20
05
FY20
07
FY20
09
FY20
11
FY20
13
FY20
15
Popu
latio
n
Flow
, (M
GD
)
Water Consumption
Plant Flow
Water Consumption declined by 6.9% Population increased by 9.1%
Population HRPDC
Water Consumption Declining with New Accounts
8
50
60
70
80
90
100
110
120
130
140
440,000
445,000
450,000
455,000
460,000
465,000
470,000
FY20
11
FY20
12
FY20
13
FY20
14
FY20
15
Wat
er C
onsu
mpt
ion,
(MG
D)
No
of H
RSD
Acc
ount
s
Last Five Years
Water Consumption declined by 5.9% New Accounts increased by 5.2%
Water Consumption
No of HRSD Accounts
Inflection Point - 1992 Energy Policy Act
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Age of Hampton Roads Housing Stock
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72%
28%
Built 1990 or earlierBuilt after 1990
• Significant proportion built before 1990
• More high-efficiency retrofits coming? – Economy dependent
• Offsets + New accounts
– Water conservation – High-efficiency retrofits
2013 American Community Survey
Wastewater Treatment Charges – Budget vs Actual
11
Actu
al
Actu
al
Actu
al
Actu
al
Actu
al
Actu
al
Budg
et
Budg
et
Budg
et
Budg
et
Budg
et
Budg
et
$0
$50
$100
$150
$200
$250
FY2010 FY2011 FY2012 FY2013 FY2014 FY2015
Reve
nues
, ($,
000'
s)
YOY Actual % Revenue Increase
7.1% 9.4% 6.2% 2.3% 6.1% 4.8%
Assumed 4% water consumption decline FY2010-FY2015 Actual Annual Increase 6.0%
FY2010-FY2015 Total Increase 41.5%
Financial Planning
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-
30
60
90
120
150
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
FY20
01
FY20
06
FY20
11
FY20
16
FY20
21
FY20
26
FY20
31
FY20
36
Flow
, (M
GD
)
Popu
latio
n
Historical & Projected
Water Consumption
Population HRPDC
34% decline in gal/capita/day consumption by 2040
Water Consumption Regression Statistics – annual decline - 5 year period (2011-2015) = -1.1% - 10 year period (2006-2015) = -1.3%
$-
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
-
2,000
4,000
6,000
8,000
10,000
12,000
2000 2002 2004 2006 2008 2010 2012 2014
Faci
lity
Cha
rge
Rev
enue
No.
of B
ldg
Perm
its
Building Permits and Facility Charge Revenue
Total Bldg Permits Facility Charge Revenue
Facility Charges tied to Local Economy
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Only 3.14% of Total Revenues
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Inventory
• FY2014 CAFR - Auditor issued a “Material Weakness” to be corrected by June 30, 2015 – Parts expensed upon purchased – Parts should be inventoried, then expensed upon
use • In FY2015, Operations and Finance:
– Thorough inventory control audit – Confirmed counts – Assigned costs
• KPMG performed a successful fiscal year-end test count
Inventory - Summary
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• Inventory managed in Computerized Maintenance Management System (CMMS)
• Each Work Center has “Gate Keeper” – Securing high value parts – Check in/out procedures
• Parts are tagged with barcodes/CMMS part number
• Costs are assigned when new parts are placed in inventory
• Monthly internal audits (10% of inventory) • Facilitates inventory sharing
Inventory – Moving Forward
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• Balance sheet positive • Current Assets increased
– FY2014 $25.1M – FY2015 $27.6M
• Income statement positive • Operating Expense declined
– FY2014 -$2.14M – FY2015 -$2.41M
Inventory Financial Statement Impacts
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GASB 68 – Net Pension Liability
• Purpose – Assess pension promise made to employees – Ensure future financial viability
• Begins with June 30, 2015 financial statements • Shows as long-term liability • Virginia Retirement System (VRS) performs the
calculations • 1,412 employees covered (750 active)
Net Pension Liability = Total Pension Liability less
Fiduciary Net Position
Background
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• Actuarial valuation for the total present value of projected pension benefits as of June 30, 2013
• Actuarial Assumptions – Projected service – Projected salary growth – Rates of withdrawal – Rates of retirement – Rates of disability – Mortality rate
• Discount rate = long-term investment rate of return = 7%
(assuming a positive net position – otherwise blended discount rate)
Total Pension Liability
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• Market value of pension assets at the “Measurement Date” – June 30, 2014
Fiduciary Net Position
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Total Pension Liability (TPL) = $197,927,819 - Fiduciary Net Position (FNP) = $170,464,318 Net Pension Liability (NPL) = $27,463,501 (as of 6/30/14)
• FY2015 Funded Ratio (FNP/TPL) = 86.12% • Discount Rate Sensitivity (+/- 1%)
– 6.0%, FNP = $56,632,423, (FNP/TPL) = 71.4% – 8.0%, FNP = $3,371,943, (FNP/TPL) = 98.3%
• Net Pension Liability declined by $12.7M from FY2014 to FY2015 ($40.2M down to $27.5M)
• FY2014 Funded Ratio = 78.6%
Net Pension Liability
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• 2015 Average funded status of 84.3% • 96% have a funded status of 70% or more
VRS Comparison
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• Interperiod equity - Recognized outside of period • Accurately portrays net position • Deferred Outflows of Resources (Assets)
– Employer pension contributions made after the June 30, 2014 Measurement Date up to June 30, 2015
– $4.207M – Reduces Net Pension Liability for June 30, 2016
financial statement • Deferred Inflows of Resources (Liabilities)
– Net difference between projected and actual earnings on pension plan
– $10.4M, amortized $2.6M for four years
Deferred Inflows and Outflows of Resources
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25
Advance Bond Refunding
• Lowers interest rate • Only refund once • Financial Policy – must achieve a weighted
average aggregate efficiency of 70% • Issue new bonds, place the money in escrow
– proceeds used to pay the debt service on the refunded bonds
• Refunded bonds are not considered outstanding (Legally Defeased)
Advanced Bond Refunding/Refinancing
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• Issued $111.3M in revenue bonds • Refunded portion of Series 2008, 2011, and
2012A • Debt service savings = $14.9M
– Present Value savings = $11.1M • Deferred Outflow of Resources
– Difference between the reacquisition price and the net carrying amount of the old debt (Principal & Premium)
– Deferred loss = $12.38M – Amortized over 15 years as interest expense
FY2015 Advanced Refunding (cont.)
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28
Financial Statement Overview
Summary Statements of Net Position
29
FY2015 vs FY2014
(in thousands) FY2015 FY2014
(adjusted)
Variance Favorable
(Unfavorable) Percent Capital assets $ 1,101,351 $ 1,013,958 $ 87,393 8.6% Current assets and noncurrent investments 291,573 367,381 (75,808) -20.6% Total assets $ 1,392,924 $ 1,381,339 $ 11,585 0.8%
Long-term liabilities $ 724,251 $ 716,563 $ 7,688 1.1% Current liabilities 118,035 109,829 8,206 7.5% Total liabilities $ 842,286 $ 826,392 $ 15,894 1.9%
Investment in capital assets, net of related debt $ 385,597 $ 351,191 $ 34,406 9.8% Restricted for debt service 22,070 24,064 (1,994) -8.3% Restricted for debt service reserve fund 44,118 45,207 (1,089) -2.4% Unrestricted 105,040 134,485 (29,445) -21.9% Total net position $ 556,825 $ 554,947 $ 1,878 0.3%
Inventory = $27.6
69% of Net Position
Net Pension Liability = $27.5M
Summary Statements of Revenues, Expenses and Changes in Net Position
30
2015 vs. 2014
(in thousands) Revenues FY2015
FY2014 (adjusted)
Variance Favorable
(Unfavorable) Percent Operating Revenues $ 225,561 $ 215,181 $ 10,380 4.8% Facility charge revenue 7,428 6,640 788 11.9% Investment income, net 1,409 1,450 (41) -2.8% Bond interest subsidy 2,444 2,364 80 3.4% Total revenues 236,842 225,635 11,207 5.0% Expenses Operating expenses: Wastewater treatment 114,137 109,149 4,988 4.6% General and administrative 38,678 33,012 5,666 17.2% Depreciation 41,871 42,761 (890) -2.1% Total operating expenses 194,686 184,922 9,764 5.3% Non-operating expenses: Bond issuance costs 768 0 768 Interest expense 22,958 25,650 (2,692) -10.5% Total non-operating expenses 23,726 25,650 (1,924) -7.5%
Total expenses 218,412 210,572 7,840 3.7%
Income before capital contributions 18,430 15,063 3,367 22.4% Capital contributions: State capital grants 19,519 13,888 5,631 40.5% Change in net position 37,949 28,951 8,998 31.1% Total net position - beginning, as restated 518,876 525,996 (7,120) -1.4% Total net position - ending $ 556,825 $ 554,947 $ 1,878 0.3%
8% rate increase
Consent Decree work
VIP and Army Base Triton Court PS
Refunding
$1.8M Pension Expense
Summary Statement of Cash Flows
31
2015 2014 Net Cash provided by Operating Activities $ 74,995 $ 70,786 Net Cash used in Capital and Related Financing Activities (158,270) (106,998) Net Cash provided by Investing Activities 370 (4,550) Net Increase (Decrease) in Cash Flows $ (82,905) $ (40,762) Cash and Cash Equivalents at the Beginning of Year 177,181 217,943 Cash and Cash Equivalents at the End of Year $ 94,276 $ 177,181
32
Key Financial Policy Indicators
Debt Service Coverage Ratio (DSCR)
33
Senior Coverage Policy = 1.50
Total Coverage Policy = 1.25
Fitch 2015
Senior
Total
AAA 4.4 2.8
AA 2.5 2.0 A 2.4 2.0
All 2.6 2.1
Large 2.3 1.7
2.51
2.30
1.94 1.86
1.76
1.90
1.67 1.67
1.37 1.43
1.36
1.46
1.00
1.20
1.40
1.60
1.80
2.00
2.20
2.40
2.60
FY2010 FY2011 FY2012(adjusted)
FY2013(adjusted)
FY2014(adjusted)
FY2015
Senior Coverage Total Coverage
Before Update
Total Coverage Policy = 1.40 Updated March 2015
Revised up due to inventory
Revenue for Debt Service (DS) + Depreciation + Operating Income + Facility Charges + Investment Income + Change in Investments - Bond Issuance Costs
Rev for DS $53.0M $64.9M $64.0M $70.0M $83.3M $83.5M
DS $21.1M $28.3M $33.0M $37.6M $43.8M $47.3M DS $31.8M $38.9M $46.7M $48.8M $56.9M $61.4M
Senior Total
Total Days Cash on Hand
Fitch 2015 Medians
Total
AAA 481
AA 442
A 366
All 432
Large 296
293
347 362
394
342 309
-
50
100
150
200
250
300
350
400
450
FY2010 FY2011 FY2012 FY2013 FY2014 FY2015
Days
Total Days Cash on Hand
Total Days Cash on Hand Policy Minimum Policy Maximum
Max Policy = 365 Days
Min Policy = 270 Days
Funding Debt Service Reserve Fund
Cash $102M $125M $138M $153M $129M $133M Net O/M $349k $361k $383k $387k $419k $389k per day
• Financial health is sound – Net position is positive and increasing
• Continue to monitor water consumption trends • Inventory issue is resolved
– Positive impact on balance sheet & reduced expenses
• Net pension liability – Offset by inventory – Potential to vary widely based on market conditions
• Advanced refunding saved $14.9M – Continue to monitor other bonds for potential
refundings
Conclusion
35
36
Questions?
This presentation to the Finance Committee is intended solely for the information and use of the Finance Committee and management and
is not intended to be and should not be used by anyone other than these specified parties. This presentation is not intended for general
use, circulation or publication and should not be published, circulated, reproduced or used for any purpose without our prior written
permission in each specific instance.
November 18, 2015
Hampton Roads Sanitation District
Audit ResultsJune 30, 2015
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Agenda
Page(s)Audit results 2–4Other required communications 5–7
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Audit results
Auditors’ report ■ We plan to issue an unqualified (”clean”) opinion on HRSD’s financial statements.
■ Emphasis of matter paragraph included in the audit report related to the following:
– adoption of GASB Statement No. 68, Accounting and Financial Reporting for Pensions (GASB 68)
– adoption of GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date
– immaterial correction of 2014 financial statements related to spare parts inventory adjustments
■ Other matter paragraphs discussing our responsibility for information in the CAFR outside of the financial statements and notes
Accounting policies
■ See Note 2 to the financial statements for HRSD’s significant accounting policies.
■ After a detailed analysis of spare part inventory balances and related activity, HRSD updated its accounting for spare parts inventory. This analysis resulted in the following adjustments:
As previously reported Adjustment As adjusted
(in 000s)
6/30/13 Net Position $502,989 $23,007 $525,996
2014 Wastewater Treatment Expenses $111,287 $(2,138) $109,149
6/30/14 Spare Parts Inventory $0 $25,145 $25,145
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Audit results (continued)
Accounting policies (continued)
■ HRSD adopted GASB 68, Accounting and Financial Reporting for Pensions and GASB 71, Pension Transition for Contributions Made Subsequent to the Measurement Date, by recognizing the District’s proportionate share of the Virginia Retirement System (VRS) net pension liability and related pension expense and deferred inflows and outflows of resources. The adoption resulted in the recognition of a $27.5 million liability as of 6/30/2015 in addition to 2015 pension expense of $1.8 million. Deferred inflows and outflows of resources were also recorded for $4.2M and $10.4M, respectively, as of 6/30/2015.
■ We noted all other accounting policies for HRSD have been consistently and appropriately applied.
Uncorrected Audit Misstatement
■ There were three uncorrected audit misstatements related to the following:
– $969 thousand projected overstatement of wastewater treatment revenues based on errors discovered during statistical sampling procedures. The errors specifically related to revenues recognized during the wrong period.
– $842 thousand projected overstatement of wastewater treatment expenses based on errors discovered during statistical sampling procedures. The errors specifically related to inventory pricing.
– $433 thousand overstatement of depreciation expense as the result of historical non-GAAP policies over capitalized bond interest
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Audit results (continued)
Accounting estimates
■ Unbilled revenue is estimated based upon a combination of historical trends and actual consumption data through June 30, 2015, adjusted for changes in wastewater treatment rates, and actual billings subsequent to June 30, 2015.
■ The estimate of the allowance for uncollectible accounts receivable is based on historical results and adjusted for current factors and is considered to be adequate to cover all uncollectible AR as of period end.
■ Pension liabilities and expenses are based on estimates developed by third party actuaries hired by the Virginia Retirement System (VRS).
■ Depreciation expense is based on the estimated useful lives of assets.
Pending matters/ Upcoming accounting pronouncement
■ Auditor attestation reporting required for entities participating in the Virginia Retirement System (VRS). The reporting to the Auditor of Public Accounts is expected to be completed during November and will have no impact on the issuance of our audit report on HRSD’s financial statements. This requirement is due to new GASB reporting requirements on governmental pension plans.
■ As it relates to HRSD’s financial statements, GASB Statement No. 72, Fair Value Measurement and Application, is applicable for fiscal year 2016 and will affect how investments are measured at fair value. The standard also expands fair value measurement disclosures.
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Other required communications
Significant Deficiencies or Material Weaknesses No matters to report
All other deficiencies in ICFR noted during our audit that are of sufficient importance to merit management's attention have been communicated to management.
Related-party transactions No matters to report
Litigations, claims, and assessments No matters to report
Illegal acts or fraud No matters to report
Noncompliance with laws and regulations No matters to report
Significant difficulties encountered duringthe audit
No matters to report
Disagreements with management No matters to report
Management’s consultation with otheraccountants
No matters to report
Significant issues discussed, or subject to correspondence, with management
No matters to report
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Other required communications (continued)
Scope limitation No matters to report
Other findings or issues relevant regarding oversight of the financial reporting process
No matters to report
Confirmation of Auditor Independence There are no nonaudit services or other relationships that may reasonably be thought to bear on independence and we confirm we are independent with respect to HRSD, as that term is defined by the professional standards.
Material written communications between KPMG and management
1) Engagement Letter2) Management Representation Letter
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