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2023-02-17 Special Meeting Audit Exit Edmonds City Council Approved Minutes February 17, 2023 Page 1 EDMONDS CITY COUNCIL SPECIAL MEETING MINUTES AUDIT EXIT CONFERENCE APPROVED MINUTES February 17, 2023 ELECTED OFFICIALS PRESENT Mike Nelson, Mayor Vivian Olson, Councilmember Will Chen, Councilmember Dave Teitzel, Councilmember Jenna Nand, Councilmember ELECTED OFFICIALS ABSENT Neil Tibbott, Council President Diane Buckshnis, Councilmember Susan Paine, Councilmember STAFF PRESENT Dave Turley, Administrative Services Director Scott Passey, City Clerk 1. CALL TO ORDER The special Edmonds City Council meeting was called to order at 2:03 p.m. in the Council Chambers, 250 5th Avenue North, Edmonds, and virtually. 2. AUDIT EXIT REPORT BY THE STATE AUDITOR’S OFFICE Mr. Turley, Mayor Nelson, and Councilmembers introduced themselves. Kristina Baylor, Audit Manager, SAO, introduced State Auditor’s Office staff, Kirk Gadbois, Assistant Audit Manager; Daryl Yuzon, Audit Lead; and Wendy Choy, Assistant Director of Local Audit. Ms. Baylor advised a packet of materials with details regarding the audit was sent to councilmembers and the mayor before today’s meeting. This exit conference provides audit results for the 2021 fiscal year. She reviewed: • Results that matter o Increased trust in government o Independent, transparent examinations o Improved efficiency and effectiveness of government Ms. Baylor advised the SAO conducted three separate audits for the City for 2021. Financial Statement Audit Mr. Gadbois reviewed • Financial Audit Results: January 1, 2021 – December 31, 2021 o Unmodified opinion issued  Opinion issued in accordance with U.S. GAAP  Audit conducted in accordance with Government Auditing Standards o Internal Control and Compliance over Financial Reporting Edmonds City Council Approved Minutes February 17, 2023 Page 2  We reported no significant deficiencies in internal control  We identified deficiencies that we consider to be material weaknesses that lead to material misstatement on the financial statements (see Revenue Recognition – Finding below)  We noted no instances of non-compliance that were material to the financial statements of the City o Revenue Recognition – Finding  2021-001: The City did not have adequate internal controls ensuring accurate reporting of grant funds received in advance and the elimination of interfund reimbursements in their financial statements (see pages 10-13 of the exit packet to view details of this recommendation) - The City did not have a process to ensure all reimbursements and recharged expenditures were properly eliminated for financial reporting which caused an overstatement in revenues and expenditures in a few instances. The City corrected these issues for the financial report. - Another issue discovered was how grant funds were recorded on the statements. The City receives federal grants annually; usually when the City spends federal dollars, the City makes an expenditure and submits a reimbursement request for federal reimbursement. In 2021, the federal government provided frontloaded ARPA funds to the City of approximately $6 million. The City needed to record that money as unearned revenue until the expense is properly recorded. The City did not do that and the statements had to be corrected to record unearned revenue for the amount that had not been expended. o Required Communications  Uncorrected misstatements have been provided for review - Small, immaterial items that do not affect the readability of the statements. Not uncommon at the end of a gap audit. These were provided to management to be fixed for next year’s reports o The audit addressed the following risks, which required special consideration  Management override of controls - No recommendations as a result of review. Federal Grant Compliance Audit • Federal Grant Compliance Audit Results: January 1, 2021 through December 31, 2021 o Adverse Opinion Issued  Opinion issued on the City’s compliance with requirement applicable to its major program  Audit conducted in accordance with Government Auditing Standards and the Uniform Guidance o Internal Control and Compliance over Major Programs  We reported no significant deficiencies in internal control  We identified deficiencies that we consider to be material weaknesses  We noted instances of noncompliance that rare required to be reported o Major Programs Selected for Audit ALN Program or Cluster Title Total Amount Expended 21.027 COVID-19 – Coronavirus State and Local Fiscal Recovery Funds $1,219,058  These costs amount to approx. 62% of the total federal expenditures for 2021. o Single Audit Finding Edmonds City Council Approved Minutes February 17, 2023 Page 3  2021-002: The City’s internal controls were inadequate for ensuring compliance with federal requirements for allowable cost, suspension and debarment, and subrecipient monitoring. - When passing money to recipients like businesses or citizens, the City relied on self- attestation forms completed by businesses/individuals applying for the funds and did not obtain supporting documents. - Issues identified with sub-recipient monitoring. When passing funds to sub- recipients, the City must perform a risk assessment of the sub-recipient and perform monitoring and review procedures to ensure the sub-recipients are spending the money appropriately and accurately. The City did not perform adequate monitoring procedures of sub-recipients. - A new issue found this year that was not applicable last year was with suspension and debarment, ensuring vendors and recipients who receive over $25,000 in federal funds are not suspended or debarred from receiving federal funds. Before sending more than $25,000 to these recipients, the City would need to check the federal online database to ensure they are not debarred from receiving federal funds. The City did not do this check for vendors who received over $25,000 - The state audit typically does not occur until halfway through the next year so this was identified summer/early fall 2021. The City has taken steps to address these issues beginning at the end of 2021. The SAO is optimistic this be corrected for next year’s audit. With regard to entities or individuals who are debarred, Councilmember Nand asked whether there was a conflicts database the City can use to look up names. Mr. Gadbois answered yes, the federal government has an online database. Councilmember Nand asked if the list was easily accessible by a layperson. Mr. Gadbois answered yes, it is www.sam.gov, the state suspension and debarment list. Councilmember Nand observed that would not be too administratively burdensome to incorporate. Mr. Gadbois described the three ways for determining if vendors are suspended or debarred which include self-attestation, checking the online list, and language in the contract stating by entering into the agreement, the vendor is self- certifying they are not suspended or debarred from receiving federal funds. Councilmember Nand commented the City could do all three to ensure a vendor is not suspended or debarred. Mr. Gadbois continued: o Summary Schedule of Prior Audit Findings  Status of City’s Corrective Action Taken: Partially corrected.  Specific corrective actions taken are described in schedule on pages 20-21 of packet. Councilmember Olson referred to the risk assessment and the audit of subcontractors and the timing lag based on the results of last year’s audit. She asked if things were done correctly from the time that change was implemented, noting the City hired a contractor who has been doing the subcontractor auditing. Mr. Gadbois answered the SAO did not look at 2022. Risk assessments were performed of the four and monitoring procedures were done for two of the four. At the time of the audit, that was not fully complete. Accountability Audit Mr. Yuzon reviewed: • Accountability Audit Results: January 1, 2021 through December 31, 2021 o Results in Brief  This report describes the overall results and conclusions for the area we examined.  In those selected areas, City operations complied, in all material respects, with applicable state laws, regulations, and its own policies, and provided adequate controls over the safeguarding of public resources Edmonds City Council Approved Minutes February 17, 2023 Page 4  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 Using a risk-based audit approach, for the City, we examined the following areas during the period  Cash receipting – timeliness and completeness of deposits, voids and adjustments and trust account activity at the Municipal Court  Payroll – bonus and incentive payments, leave balances and accruals  Procurement – job order contracts  Annual financial report – internal service funds revenue reporting  Accounts receivable – collection of leasehold excise taxes  Financial condition – reviewing for indications of financial distress  Open public meetings – compliance with minutes, meetings and executive session requirements Councilmember Teitzel relayed the City has received questions from citizens about how leasehold excise taxes are collected. He asked whether the SAO considered whether they are just being collected properly or if they are being assessed properly. Mr. Gadbois acknowledged there were a couple citizen hotline comments. The SAO looked at leasehold excise tax, but their review is limited to is the City collecting the taxes. The SAO saw receipts from businesses and taxes remitted to Washington State Department of Revenue and did not notice instances where leasehold excise taxes were not collected. There were concerns raised by citizens whether the City is charging the correct or market rate; the SAO does not look at the rates being charged, that is best handled by the Department of Revenue. Citizen Hotline Referrals Mr. Gadbois reviewed: • 2022 Budget Meeting Announcements o Concerns related to the 2022 budget meeting announcements in October 2021 and meetings held in November 2021 o SAO review focuses on what is required by state law and whether the City complied with those requirements  In October 2021 an announcement was posed on the city hall door and a week later the announcements were updated with a new timeline/schedule. The schedule posted a week later matched what was advertised in the Everett Herald. State law requires the newspaper advertisements, does not require notification at city hall. Meetings were held on advertised dates.  Regarding concerns with the November 16th meeting that was adjourned and resumed the next day, that is allowed by state law.  Results: City met all requirements in state law, concerns were not substantiated • Biennial Budgets o Concern about why the City is not budgeting on a biennial basis as required by City Code  Cities are allowed to budget annually or biennially. Edmonds changed to a biennial budget about a decade ago and a few years later changed back to annual budgeting process. When the City used a biennial budgeting process, language was included in the code regarding a mid-biennial review. When the City changed back to the annual budget, that language remained in the code. Because the City does an annual budget, that language is basically moot and does not violate state law.  Results: Concern was not substantiated. • Leasehold Excise Tax – public rights-of-way o Concern the City may not be assessing leasehold excise tax from lessees of public rights-of way related to streateries Edmonds City Council Approved Minutes February 17, 2023 Page 5  SAO verified the City was charging leasehold excise tax and remitting to DOR  Concern regarding leasehold excise tax rates are best reviewed by the State DOR  Results: Concern was not substantiated • Council Approval of Payments o Concern the city council did not properly approve claim checks and wire payments during the December 6, 2022 meeting  At the December 6, 2022 meeting, approval of expenditures was removed from the Consent Agenda and never added back to the agenda to be voted on during the meeting and was overlooked at subsequent meetings. Instead the council president approved the expenditures.  State law and ECC requires council approval of expenditures, it cannot be delegated to the council president  Results: Concern was substantiated. See exit item Other Recommendations • Exit Recommendations o Provided for management’s consideration o Involve control or compliance issues that are insignificant or have an immaterial effect entity, or financial statements o Not referenced in the audit report • Executive Sessions o Instances when documentation in meeting minutes and/or video did not demonstrate compliance with the Open Public Meetings Act. • Center for Government Innovation Resources o Resources  Strengthening Internal controls  Minimizing cybersecurity risks  564-999-0818  center@sao.wa.gov  hhtp://sao.wa.gov Ms. Baylor reviewed: • Closing remarks o Actual audit costs are expected to be approximately $1500 more than originally estimated due to issues identified during the audit and because of extensions to the overall timeline. This was communicated to Dave Turley during the audit o Next audit: Spring 2023  Accountability for public resources  Financial statements  Federal programs o An estimated cost for the next audit has been provided in the exit packet. • Next Steps o Report Publication  Audit reports are published on SAO website in next 1-2 weeks  Sign up to be notified by mail when audit reports are posted to our website: http://sao.wa.gov/about-sao/sign-up-for-news-alerts o Audit Survey  When audit report is released, a link to the audit survey will be provided. The SAO values the City’s opinions on our audit services and hope you provide feedback. The link can be forwarded to anyone involved in the audit process. Edmonds City Council Approved Minutes February 17, 2023 Page 6 Ms. Baylor thanked City staff for their hard work and dedication. Mr. Gadbois commented nothing makes them happier than a clean audit. This year’s audit did identify some issues that were communicated to management. He appreciated staff’s willingness to remain positive throughout the audit process and when issues were communicated to staff, questions were about to improve. He appreciated audit clients wanting to do better, improve and do things correctly. He also appreciated the council’s questions about ways to improve. He gave a big thanks to Mr. Turley who did a great job keeping the audit moving forward. He recognized the stages in an accountant’s year: closing out the books and year end activities at the beginning of the year, followed by financial statement preparation, the audit season, the budget and yearend, along with handling all the other things that come up. With the timeline and length of this audit, audit season overlapped with the budget and he appreciated Mr. Turley’s help with providing information to keep the audit moving. Councilmember Chen expressed his appreciation for the auditors and pointing out opportunities for improvement. He echoed the SAO’s sentiments about how great City staff functions under increased workloads, budgeting, the audit and day-to-day operations. The City’s finance director has broad responsibilities including managing staff. He commended the finance director and finance department. He recognized there are opportunities for improvement and staff will work together to address those issues. Councilmember Chen relayed a citizen’s question about the management letter and asked if that was part of this packet. Mr. Gadbois assumed he was referring to the exit recommendations which are on pages 45- 48 of the exit packet. The exit packet was sent out to all councilmembers, the mayor and Mr. Turley; citizens would not receive that and they are not published in the audit report because they are typically minor, housekeeping things. Councilmember Chen asked if they are published on the audit website. Mr. Gadbois answered exit recommendations are not published on the audit website; they are typically recommendations related to minor things that do not rise to the attention of council. He shared some of the exit items in this exit conference because they directly related to council. Councilmember Chen observed that was the recommendation letter and asked about the management letter. Ms. Baylor assumed he was referring to the management letter representation template in the last few pages of the packet, explaining that is a standard letter they request City management provide to the SAO at the end of the audit. It contains assertions that all the information provided to the auditors was true and factual and nothing was withheld. The packet contains a template of the letter; the SAO has received the signed letter from Edmonds management. Councilmember Teitzel complimented the auditor on the presentation, finding it very thorough and easy to understand. He echo Councilmember Chen’s compliments of the City’s finance team. He recognized doing the audit late last year was a heavy lift along with the budget. Councilmember Teitzel posed a hypothetical question, what is the penalty if the SAO conducts an audit that has a major finding and that major finding is not corrected in a prompt manner. Mr. Gadbois answered the SAO is a reporting agency, they do not impose fines or criminal penalties. There could be penalties imposed by external users of the SAO’s reports such as bonding agencies or banks or the federal government might impose additional restrictions on grants. Entities who receive more findings than others may be required to submit monthly or quarterly financial reports instead of annual or semi-annual reports. Cities with federal findings are required to have a higher percentage of federal funds audited each year until they become low risk. With regard to the approval of expenditures and delegation to the council president, Councilmember Olson said she had not read the audit report prior to the meeting so had not asked questions of staff yet. She believed there was language in the code where approval of expenditures can be delegated to the Edmonds City Council Approved Minutes February 17, 2023 Page 7 council president for example during a week when the council does not hold a meeting. She asked if that was consistent with state law. Mr. Gadbois explained the City code requires the council formally approve all expenditures. Mr. Turley clarified what happened in the instance cited by the auditor is the council pulled the entire consent agenda which meant the claim checks on the consent agenda were not approved. Staff assumed council would put the consent agenda back on a future agenda for approval, but that did not happen so the checks were not formally approved. Once that was identified, they were added to a future agenda. That is different than what Councilmember Olson was asking; typically on the 5th Tuesday when there is no council meeting, the claims are sent to the council president for review and although the council president does not approve them, they okay releasing them a week early before they go to council on the consent agenda. The approval for early release is in the City’s code. The issue is ensuring they are included on a later agenda for approval by full council. Mr. Gadbois agreed and referred to ECC 2.25.030.C which describes how the council president is designated as the auditing committee for the city council. The council president shall review the documentation for supporting claims for approval by the city council at its next regular public meeting. Formal approval still needs to occur and typically the council does that as part of the consent agenda. Councilmember Chen referred to the Federal Grant Compliance Audit, and the finding about the City checking the debarment list for recipient who receive over $25,000 and the finding that the City did not do that. He asked about the scope of that finding, whether it was 10, 2 or 1 of the recipients. Mr. Gadbois answered there was only one vendor that received over $25,000 and four subrecipients that needed to be checked, total of five. Mr. Turley explained the rules state the City is to check for suspension and debarment before funds are issued. When this came to the City’s attention, the City verified that none of the vendors were suspended or debarred after the fact. Councilmember Chen vendor observed although the list was not checked before the funds were disbursed, the vendor who received the funds turned out to be okay. Mr. Gadbois commented if the City had spent the funds and then found out the vendor was suspended or debarred, those would be questioned costs in the audit report and likely the federal government would want the funds recouped. In this case, none of the vendors or subrecipients were suspended or debarred so the costs were not questioned. Councilmember Chen referred to the earlier discussion about not publishing the recommendation letter from the auditors to citizens, commenting the City was obligated to provide it if a citizen requested it. He asked if the SAO had any recommendation for how to handle that. Mr. Gadbois said if a citizen wanted to see it, they could request it from the SAO or from the City or the City could make it available to citizens. The issues in the recommendation letter are very minor things such as reviewing toll charges and are not typically brought to the council’s attention. Mr. Gadbois invited councilmember and/or staff to reach out to him, Ms. Baylor or Ms. Choy with any questions or concerns 3. ADJOURN With no further business, the Council meeting was adjourned at 3:01 p.m. ____ SCOTT PASSEY, CITY CLERK