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05/10/2011 Finance Committee MinutesFINANCE COMMITTEE MEETING MINUTES May 10, 2011 Present: Councilmember Petso Councilmember Bernstein Councilmember Buckshnis Staff: Jim Tarte, Interim Finance Director Deb Sharp, Accountant Carl Nelson, CIO Sandy Chase, City Clerk Public: Ron Wambolt Bob Rinehart Roaer Hertrich Councilmember Petso called the meeting to order at 5:00 p.m. A. Quarterly Budget Report Councilmember Petso asked if a monthly budget report through April was available. Mr. Tarte advised there was not. Councilmember Petso requested it be provided on next week's Consent Agenda. Councilmember Buckshnis inquired about changing from modified working capital to a modified accrual accounting method. Mr. Tarte explained that would be a very significant change in the way the City recognizes revenue and expenses; it is not necessarily more accurate, both are accurate, it depends on how the readers wants to see information. Councilmember Buckshnis pointed out the modified working capital approach is not recognized in CPA or GFOA standards. Councilmember Buckshnis expressed concern with using $2.176 million, the beginning 2010 working capital, throughout the year, reiterating her preference for a cash flow account like Lynnwood, Mukilteo and other cities use. Ms. Sharp responded to several questions from Councilmembers Buckshnis and Councilmember Petso regarding specific expenditures in the quarterly report related to REET, City Attorney, ECA debt, and plan check fees. With regard to the City Attorney, Mr. Tarte explained the $509,000 is comprised of $156,000 for the Prosecutor and $350,000 for the City Attorney (established before the final contract was negotiated with the Lighthouse Group, actual contract is $32,000/month or $384,000/year). He estimated the yearend City Attorney expense will be $425,000 rather than $350,000 due to ten months with Lighthouse and two months with Ogden Murphy Wallace. There is also a $13,000/month charge for the Prosecutor, raising the total City Attorney expense to approximately $575,000. Mr. Tarte reported sales tax revenue as of March is 26% of the budgeted amount. Councilmember Petso observed overtime is over 25% for the quarter. B. Update on Financial Policies and Reporting Councilmember Buckshnis expressed concern with the number of "title not found" entries in the December 31, 2010 report. She is also interested in the amount spent on Haines Wharf Park. Councilmember Petso inquired whether Council approval was required if expenditures exceeded the amount appropriated for a project. Ms. Sharp recalled a budget amendment was done for Haines Finance Committee Minutes, Wharf. Councilmember Petso inquired about a $25,000 expenditure from the Parks Trust Fund. Ms. Sharp explained the Park Trust Fund is for the Flower Program, Yost Pool and Beach Rangers. There was a $25,000 budget amendment in September for Yost Pool from the funds donated to the pool. Councilmember Petso commented it was her understanding the use of the Park Trust Fund was interest only. Ms. Sharp recalled the funds were restricted for the use the donors intended. Councilmember Buckshnis referred to Ordinance 3466 that states the Council will deliberate on the reasons for using the Park Trust Fund. Councilmember Petso inquired about "title not found" on the December 31, 2010 "data dump" report. Ms. Sharp explained it is the result of how the report is sorted and coded; those items need to be titled in Eden. In the past the data in that report has been manually entered into an Excel spreadsheet. She assured it was a reporting issue only. Mr. Tarte explained the first quarter 2011 report represents approximately 10-12 man hours; the data dump is raw data generated by Eden and takes approximately 20 minutes. He asked whether the Finance Committee wanted staff to dedicate the time to prepare the December 31, 2010 report. Councilmember Buckshnis suggested staff provide an explanation of the 15 irregularities she identified. She suggested the December 31, 2010 data dump report be removed from the City's website. Councilmember Petso inquired about the $800,0004900,000 expenditure for benefits in non - departmental where there are no wages. Ms. Sharp answered that was the Fire Department payout for vacation and sick leave. When employees retire, it is also budgeted in that account and transferred to the appropriate department when they actually retire. Councilmember Buckshnis suggested all fund balances be included in the report including the reserve funds. She inquired about the balance in the Council Contingency Reserve. Ms. Sharp explained Council -authorized expenditures draw down the $93,000 balance. When the Council budgeted $25,000 in 2011, that authorized $25,000 in expenditures but did not add that amount to the fund. Councilmember Buckshnis asked how the Council Contingency Reserve was replenished. With regard to policies, Councilmember Petso invited Mr. Tarte to comment on the type of policies the Council should implement. She suggested a policy requiring a quarterly reporting of interfund loans and intergovernmental loans. Mr. Tarte observed the Council was interested in citizen friendly reports which he agreed was a great idea. He suggested the City mirror the citizen -friendly reports provided by other cities. He suggested getting the reports prepared to the Council and citizens' satisfaction first before discussing a change in the accounting method. A change in the way the numbers are reported is not something to be taken lightly and may require the State's permission. In response to a question asked at a previous Council meeting regarding an increase in supplies shown in the forecast, Mr. Tarte advised that was a coding error. It was the consensus of the Finance Committee that all funds and revenues be listed in the report. Mr. Tarte provided a diagram of how the Finance Department's operates, explaining there are two primary functions, 1) collection and payments, and 2) financial reporting and analysis. He acknowledged there is room for improvement in financial reporting and analysis and the Finance Department is not keeping up with what has been provided historically. There is also room for improvement in the separation of duties. Mr. Tarte identified the employees in the Finance Department, four Accounting Technicians, one Accountant/CPA and one Finance Director, and described how they are allocated to each function. He summarized it would be difficult to accomplish the reporting the Council desires with six FTEs and when only two of the FTEs are accountants. The reason the Council does not receive reports is not because the Finance Department does not want to prepare them, it is because they are focused on Finance Committee Minutes, Page 3 the collection and payment functions and reports required by the State. In 2007 there were 8-9 employees in the Finance Department; employees who left were not replaced. He recommended the City fund three additional positions in the Finance Department: an Accountant/CPA, an Assistant Finance Director and an Accounting Technician. Mr. Tarte relayed the City receives the most complaints about customer service on utility accounts; there is only one person sending out 13,000 utility bills, handling shut off notices and customer service. Councilmember Buckshnis suggested the additional Accounting Technician allocated to utilities could be funded from the Utility Fund. (Councilmember Buckshnis left the meeting at 6:18 p.m.) Councilmember Petso asked whether operational changes could be made to improve segregation of duties without hiring more employees. Mr. Tarte said no; segregation of duties requires additional employees as tasks then take more time. Another issue is there is no backup for the person who processes payroll. Councilmember Petso asked why the auditor does not comment on the segregation of duties. Mr. Tarte explained the auditor has a materiality level; they do not look at things less than a certain amount. Cash handling amounts may be below that materiality level. Councilmember Petso summarized the Council can adopt all the policies they want regarding reporting but it cannot be accomplished without additional staff. Mr. Tarte agreed it is an operational issue, not an ordinance issue. Mr. Tarte pointed out the annual report to the State is due on May 31 and the City can be fined if that is not provided. Although he would like to prepare the 4th quarter 2010 report, prepare the month report for April and answer Councilmember Buckshnis' questions regarding titles not found, the annual report takes priority. He will attempt to prepare the April monthly report for the May 17 Consent Agenda. In June he plans to have staff begin preparing reports and other data for the auditors who arrive in July. The budget process also begins in July. Councilmember Bernheim asked how long it would take to see positive results if one additional full- time person were hired in the Finance Department. Mr. Tarte estimated approximately two months. Councilmember Bernheim suggested reducing staff in Planning and replacing them with staff in Finance. Councilmember Petso suggested the Utility Fund could also fund a position in the Finance Department. Councilmember Bernheim expressed concern that without reports there was no comprehensive view of the City's finances. Mr. Tarte commented the Annual Washington State Auditor's Office Financial Statement and Audit Report and the City's receipt of the GFOA Certificate of Achievement in Excellence in Financial Reporting for the past several years validates that the City is meeting the minimum expectations of Washington State as well as the elevated expectations of the GFOA. He agreed with the Council's desire for improved reporting and information but felt there was sufficient financial reporting for the Council to make a decision regarding whether the City needs a levy. Councilmember Bernheim clarified the City's financial reporting, if a person knows how to read it, is accurate and meaningful. Councilmember Petso asked for a copy of the Annual Washington State Auditor's Office Financial Statement and Audit Report. Councilmember Petso relayed Councilmember Buckshnis' request that she draft a revised policy on the use of the Emergency Reserve to broaden its use to include any financial emergency. Councilmember Bernheim commented the Council could revise the definition if the funds were Finance Committee Minutes, Page 4 needed. He supported changing the definition but preferred not to distract the Council on that issue now. Councilmember Bernheim found Mr. Tarte's comments refreshing. He recognized that changing the policies would accomplish little unless the Finance Department was adequately staffed. C. Public Comments Roger Hertrich, Edmonds, expressed his appreciation for Mr. Tarte's involvement. He understood that the Finance Department needs 2-3 more employees and suggested the Utility Fund pay for one of the employees and another position be funded from the Planning budget. Bob Rinehart, Edmonds, commented the Finance Committee has done a wonderful job and has worked hard at communicating with the public. Mr. Tarte advised that a Finance Department staff member will attend future Finance Committee meetings. Adjournment— The meeting adjourned at 6:45 p.m.