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Cmd032922 audit Edmonds City Council Approved Minutes March 29, 2022 Page 1 EDMONDS CITY COUNCIL ONLINE VIRTUAL FEDERAL GRANT AUDIT EXIT MEETING APPROVED MINUTES March 29, 2022 ELECTED OFFICIALS PRESENT Vivian Olson, Council President Will Chen, Councilmember Neil Tibbott, Councilmember Diane Buckshnis, Councilmember Susan Paine, Councilmember ELECTED OFFICIALS ABSENT Mike Nelson, Mayor Kristiana Johnson, Councilmember Laura Johnson, Councilmember STAFF PRESENT Dave Turley, Administrative Services Director Megan Menkveld, Deputy Admin. Serv. Dir. Sharon Cates, City Attorney’s Office Nicholas Falk, Deputy City Clerk 1. CALL TO ORDER The virtual online Audit Exit Conference was called to order at 3:02 p.m. by Administrative Services Director Dave Turley. 2. FEDERAL GRANTS AUDIT EXIT REPORT TO COUNCIL Mr. Turley introduced City staff and councilmembers. Kelly Collins, director of local audit, introduced Kristina Baylor, program manager; Kirk Gadbois, audit supervisor, State Auditor’s Office (SAO). Ms. Collins advised a more detailed packet was sent to councilmembers electronically . She reviewed: • Results that matter o Increased trust in government o Independent, transparent examination o Improved efficiency of government Mr. Gadbois reviewed the results of the City’s fiscal year 2020 audit. The SAO performed three audits for the City, 1) financial statement audit, 2) accountability audit, and 3) federal grant compliance audit. The City had no reportable issues in the financial statement and accountability audits; one issue was identified with the federal grant compliance audit. He reviewed: Federal Grant Compliance Audit Results January 1, 202o through December 31, 2020 • Adverse Opinion Issued o Opinion issued on the City’s compliance with requirements applicable to its major program Edmonds City Council Approved Minutes March 29, 2022 Page 2 o Audit conducted in accordance with Government Auditing Standards and the Uniform Guidance • Internal Control and Compliance over Major Programs o We reported no significant deficiencies in internal control o We identified deficiencies that we consider to be material weaknesses o We noted instances of noncompliance that are required to be reported • Major Programs Selected for Audit ALN Program or Cluster Title Total Amount Expended 21.019 COVID-19 – Coronavirus Relief Fund $2,123,907 o These costs amount to approximately 86% of the total federal expenditures for 2020 • Allowable Activities & Subrecipient Monitoring – Finding o 2020-001: The City’s internal controls were inadequate for ensuring compliance with federal requirements for allowable activities and costs and subrecipient monitoring (see pages 9-15 of exit packet to review details of this recommendation) o City established grants for businesses negatively impacted by COVID pandemic ▪ State provided funds to the City with the expectation that eligible criteria would be created, businesses would apply and City would verify businesses met the eligibility criteria - City established four eligibility criteria and City verified three of criteria were met, but fourth eligibility criteria, suffering a 30% loss of revenue between 2019 and April/May 2020, was not verified and City relied on self-certification from the business - City hired an external contractor who gathered information from 172 businesses that received funding to determine if they met the 30% revenue loss criteria. Contractor identified a few businesses that did not meet the 30% revenue loss requirement. In reviewing the contractor’s information, SAO identified a few more businesses and 8 businesses did not respond to the contractor’s request for information. Some businesses provided financial information for a full year 2020 and not just the 30% revenue loss for April/May as required by the City’s eligibility criteria - These are identified as potentially unallowable expenditures. o Subrecipient monitoring ▪ City provided federal funds to four nonprofit groups to administer a program to provide assistance ▪ Federal requirements expect the City to, 1) do a risk assessment for each nonprofit and determine how familiar they are with using federal funds, how reliable they are, whether they get federal audits, and what type of monitoring they do to ensure when the City passes funds to the subrecipients, and 2) monitor whether federal funds are being distributing accurately - City did not do risk assessment of the four subrecipients or do adequate monitoring of the subrecipients and their expenditures ▪ These costs were not included in the questioned cost amount because it is acceptable for the City to have subrecipients, but these are identified as unsupported costs in the finding. Financial Audit Results January 1, 2020 through December 31, 2020 • Unmodified Opinion Issued o Opinion issued in accordance with U.S. GAAP o Audit conducted in accordance with Government Auditing Standards • Internal Control and Compliance over Finance Reporting o We reported no significant deficiencies in internal controls o We identified no deficiencies that we consider to be material weaknesses o We noted no instances of noncompliance that were material to the financial statements of the City Edmonds City Council Approved Minutes March 29, 2022 Page 3 o Note: Statement on page 17, “Given these limitations, we did not identify any significant deficiencies or material weaknesses, but some may exist that are not identified.” is not related to COVID or Edmonds in particular; sentence is included because the SAO takes a risk-based approach and looks at certain accounting systems and tests certain transactions but not everything. • Required Communications o Uncorrected misstatements have been provided for review o There were no material misstatements in the financial statements corrected by management during the audit • Annual Comprehensive Financial Report (ACFR) o Certificate of Achievement for Excellence in Financial Reporting ▪ Optional award program offered from the GFOA ▪ Requires preparation and subsequent audit review of additional financial schedules ▪ Letter dated June 30, 2021 Councilmember Buckshnis thanked the SAO for the report and said she enjoyed reading it. She referred to the grant funding internal controls which he stated were inadequate and noted he also mentioned the CARES Act and the four subrecipients. She asked if that was the City’s community fund which included the senior center. Mr. Gadbois answered the four were Wellspring, Homage, Washington Kinds in Transition and the food bank. Councilmember Chen commented he also enjoyed reading the audit report which was very well written and represented a lot of hard work. He thanked the SAO for pointing out deficiencies so the City can improve. He referred to the finding related to the fourth criteria for businesses, a 30% revenue loss, which was not met as well as the lack of monitoring and no risk assessment for the four nonprofits and asked if those expenditures are not allowable, do the businesses and nonprofits have to return the funds or how would that be handled. Mr. Gadbois answered the SAO is the reporting agency; the report will be sent to the Department of Commerce (DOC), the pass-through agent who provided the money to the City, and there will be an audit resolution process where the DOC will review the report, likely contact the City for further information, and make a decision on next steps. Councilmember Chen referred to the 8 businesses that did not respond to the request for information and the 29 businesses that did not meet the eligibility criteria and asked if those businesses were disclosed or kept confidential. Mr. Gadbois answered everything is public, but the businesses are not listed in the report. The City knows which businesses did not respond and which ones were ineligible based on the information provided to the SAO and staff could provide that information. Councilmember Chen asked Mr. Turley to send that list to the council. Councilmember Paine referred to the lack of a risk assessment of the nonprofits and lack of monitoring and asked if there was some recognition that this was a novel event and that the City had never considered how to give money directly to businesses and nonprofits. Mr. Gadbois answered yes, that is recognized in the cause of decision, that this was a unique event and in an effort to preserve its local economy, the City acted quickly in providing assistance payments to businesses and nonprofits. It was a unique event that required immediate disbursement of funds, but that does not relieve the City of the requirement to follow the subrecipient monitoring. Councilmember Paine asked who makes the decision about how to handle funds that were distributed. Mr. Gadbois answered the DOC will advise the City of any next steps and the City will determine what to do next. Councilmember Paine said she also enjoyed reading the audit report, finding it very readable. Councilmember Buckshnis advised the Council Finance Committee will review the audit findings. She relayed some people have asked for audit report, but it was her understanding it would not be distributed Edmonds City Council Approved Minutes March 29, 2022 Page 4 until April 1st. Mr. Gadbois said the report was provided to councilmembers in advance because they did not want citizens to have access to it before the council. The reports will be released to the public on March 31st. Councilmember Buckshnis asked if the SAO found a lot of exceptions related to the CARES Act and in other cities because this was such a new program with many restrictions. Mr. Gadbois answered yes, this was a brand new federal program that was issued very quickly. Edmonds is not unique; many governments around the state have similar issues; not all, because some cities and government decided they only wanted to use the funds for payroll, purchase PPE, etc. Mr. Gadbois continued his review: Accountability Audit Results 1/1/20 – 12/31/20 • Results in brief o This report describes the overall results and conclusions for the areas we examined o In those selected areas, City operations complied, in all material aspects, with applicable state laws, regulations, and its own policies, and provided adequate controls over the safeguarding of public resources o In keeping with general auditing practices, we do not examine every transaction, activity, policy, internal control, or area. As a result, no information is provided on the areas that were not examined. o Some housekeeping items were identified that have been communicated to staff. • Using a risk-based audit approach for the City, we examined the following areas during the period: o Accounts receivable – utility billing, adjustments and collections ▪ Received a citizen hotline concern about rates being used for stormwater billing - SAO conducted full utility billing system review, identified no significant issues other than a couple best-practice issues. - Related to the citizen’s concern, the ordinance related to utility billings identifies which rates are used for water billing, but sections regarding stormwater and sewer billing do not identify specific rates to be used. Minor exit item to redo that ordinance to provide some language in the stormwater and sewer sections regarding rates to be used in billings. o Payroll – leave balances and accruals and end of employment payments o Court financial activities – evaluated design of controls for bank reconciliation process o Compliance with rental agreement contract terms including rent waivers during the COVID- 19 pandemic ▪ City waived lease payments to some nonprofits. - SAO reviewed in detail and did not identify any issues as a result. o Financial condition – reviewing for indications of financial distress o Open public meetings – compliance with minutes, meetings and executive session requirements ▪ Did not identify any issues with meeting minutes or how executive session are held. One exit item shared with City regarding meetings; if a quorum of councilmembers is present, it must be publicly announced and advertised. State law does not differentiate between in- person, Zoom, phone or email meetings/conversations. The law states if there is discussion of City business and a quorum of councilmembers is present, it must be an open public meeting. Councilmember Chen referred to page 3 of the audit packet, minor finding #8 related to transfer between funds and asked if the SAO recommended as a general practice not to transfer funds between funds. Mr. Gadbois answered the City can definitely transfer funds; it is a very common practice. This comment was related to cost allocations, when funds are transferred between restricted and unrestricted funds, ensuring Edmonds City Council Approved Minutes March 29, 2022 Page 5 there was adequate support and that it could be traced back to the original fund. He recalled in this case the City self-identified that its ER&R fund had more money in it than originally anticipated was needed so funds were to be transferred back to the original fund, but there was not adequate documentation regarding where it should have been transferred. Councilmember Buckshnis asked about dates where compliance with OPMA was reviewed. Mr. Gadbois answered they primarily looked at 2020. They read the minutes up through present looking for subsequent event, but are primarily looking for material items. The main scope of the OPMA review was the audit year. Councilmember Chen referred to packet page 16, under the paragraph titled internal control over financial reporting, where it states we do not express an opinion on the effectiveness of the city’s internal controls. Mr. Gadbois answered they give an opinion on the City’s financial statements but not on internal controls. Auditing standards require they report on any significant deficiencies or material weaknesses if any are identified, but not on internal controls. Mr. Turley said he had a hard time believing how many people enjoyed reading the exit packet. Most of the audit process is absolute torture, reviewing records and minutia. The auditor’s office comports themselves very professionally. Exit items are his favorite part of the audit, because they provides tips on making small improvements. Councilmember Chen observed the SAO charges the City $100,000 to perform audit. He asked why the City has to pay for a service the state provides. Ms. Collins answered every government is responsible for the accountability of their own public funds. In Washington, the SAO is created through the state constitution to audit local governments. Audit needs differ such as not every entity requires a federal or financial audit and audit costs differ based on the size of the operation and their needs. Well run cities’ audit costs can be lower but if there are a lot of issues, audit costs can be much higher. She summarized Washington is not set up to fund audits. The SAO operates more like a CPA firm with cities paying for the local government audit. At the state level, state agency audits are funded through the state and performance audits have a different funding stream. There are different funding streams depending on the type of government being audited and the type of audit being conducted. For example, cybersecurity audits are done at no cost and are funded via a small portion of sales tax. It is an incentive for governments to have good controls to hopefully keep audit costs down. Federal audits can be funded through federal grants. Mr. Turley said he used to work for a CPA firm in another state that audited cities and towns. In Washington, the SAO audits all the cities in the state; other states do not have that requirement. In other states, a city contracts with a professional CPA firm and would likely pay four times the rate that is paid to the SAO. The City receives a really good audit from the SAO because that is all they do; they are experts and are very inexpensive. Ms. Collins agreed it was a good value for the dollar. Councilmember Chen expressed his appreciation for the SAO’s hard work and said small findings were better than big deficiencies. Ms. Baylor reviewed: • Closing Remarks o Auditor costs are in alignment with our original estimate ▪ Next audit: May 2022 ▪ Accountability for public resources ▪ Financial statement ▪ Federal programs o An estimated cost for the next audit has been provided in our exit packet • Report publication Edmonds City Council Approved Minutes March 29, 2022 Page 6 o Audit reports are published on our website o Sign up to be notified by email when audit reports are posted to our website: https://sao.wa.gov/aboutn-sao/sign-up-for-news-alerts/ o Audit survey ▪ When your report is released you will receive an audit survey from use. We value your opinions on our audit services and hope you provide feedback. Mr. Gadbois thanked City finance staff for working with them on the audit which started in late April 2021. The audit lasted a little longer than normal, but throughout the entire audit the City was very open to communicating with the SAO and worked hard to provide the information they needed. He expressed his appreciation to Mr. Turley, Ms. Menkveld and the entire finance team. Councilmember Chen expressed appreciation to the auditors as well as Mr. Turley, Ms. Menkveld and the rest of the finance team for working with the auditors to produce such a wonderful report. He recalled when he was an auditor, no one liked him and was amazed City staff liked the auditors. He asked the auditors to look into the future; the state has been making a lot of effort related to diversity, equity and inclusion. With that effort, one of the key tools is equitable spending for municipal and state government. The beginning of the audit report states, “Our mission is to provide citizens with independent and transparent examination of how state and local governments use public funds and develop strategies that make government more efficient and more effective.” He did not find any verbiage in that mission about equity, diversity and inclusion and envisioned in the future the state audit mission and standards would reflect that. One of the ways government can ensure diversify, equity and inclusion is by looking at how the funds collected from taxpayers are spent to reflect that value. He asked the timeline for changing that standard. Ms. Collins answered there hasn’t been discussion of that as an area of audit focus. Federal guidelines dictate the grant audits as well as the financial audits; accountability is related to safeguarding public funds. The area Councilmember Chen described would be more of a performance audit. She offered to discuss Councilmember Chen’s ideas with him and that take forward to their division regarding performance audits. Councilmember Chen agreed that was a much bigger issue and should come from the legislature and may require a state initiative. He noted the City is hiring a full time DEI position. Councilmember Paine thanked the audit team for spending time with the council today. It was a concise, precise report and it was great to have the feedback. The City is developing policies and practices related to DEI. She has some experience with performance audits as a former school board member. Councilmember Buckshnis echoed what other councilmember have said. She pointed out there will more grant funds available via the infrastructure bill and she recalled discussion about establishing policies, procedures and training. She asked if the scope of the 2021 audit related to those funding packages would be as robust as the 2020 audit. Mr. Gadbois answered yes, if they are selected as part of the federal grant compliance audit. 3. ADJOURN With no further business, the council meeting was adjourned at 3:55 p.m.