Mayor and City Commission

City of Lawrence, Kansas

 

 

In planning and performing our audit of the financial statements of Lawrence, Kansas, as of and for the year ended December 31, 2004, we considered the City’s internal control in order to determine our auditing procedures for the purpose of expressing an opinion on the financial statements and not to provide an opinion on internal control.

 

However, during our audit, we became aware of several matters that are opportunities for strengthening internal controls and operating efficiency.  (We previously reported on the City’s internal control over financial reporting in our report dated April 15, 2005.)  This letter does not affect our report dated April 15, 2005, on the financial statements of the City of Lawrence, Kansas.

 

We will review the status of these comments during our next audit engagement.  We have already discussed many of these comments and suggestions with various City personnel, and we will be pleased to discuss these comments in further detail at your convenience, to perform any additional study of these matters, or to assist you in implementing the recommendations.  Our comments are summarized as follows:

 

1.       We recommend that the City’s attorney review all tri-party security agreements between the City, the banking institution serving as the depository bank and the banking institution serving as the security agent.

 

Also, governmental units, such as the City, should be aware of the Financial Institutions Reform Recovery, and Enforcement Act of 1989 (FIRREA) that could affect their rights to that collateral.  Under FIRREA, Section 1823(e), a security agreement, including a pledge of collateral for a deposit, is not valid against the FDIC unless it satisfies the following requirements:

 

1.       It must be in writing.

2.       It must be approved by the depository institution’s board of directors or loan committee, and that approval must be reflected in the minutes of the board or committee.

3.       It must be an official record of the depository institution since it was executed.

 

If these provisions are not met, the FDIC may be able to avoid a perfected security interest, and the governmental unit may only have the right to share with other creditors in the pro rata distribution of the assets of the failed institution.  During our next audit of the City of Lawrence, we will be asking for verification of the requirements listed above.

 

In addition to FIRREA discussed above, KSA 9-1405 provides Kansas statutory guidance as to deposit security requirements and incorporates some of the FIRREA requirements mentioned above.  Please become familiar with KSA 9-1402 and 9-1405 and consult with your attorney if you have any legal questions. 


 

2.   Charitable contribution substantiation requirements place a burden on the donee organization.

 

First, any single contribution of cash or property of $250.00 or more must be supported by written substantiation provided by the charity.  A cancelled check will not suffice as evidence of the donation.  There is no prescribed format for the written document; however, it must include:

 

·         The amount of cash and/or description of property donated.  The value of any property received by the charity does not have to be provided by the charity.

 

·         Whether any goods or services were provided in return for the contributions.

 

1.       If the donor did not receive any goods or services from the donee organization in return for the contribution, the donee’s written acknowledgement must state “no goods or services were provided in return for the contribution.”

 

2.   If the donor did receive any goods or services from the donee organization in return for the contribution, the donee’s written acknowledgement must include a description and good faith estimate of the value of the goods or services.

 

Second, quid pro quo contributions of more than $75 must be documented with values disclosed by the charitable organization.  A quid pro quo contribution is one where a donor may receive goods or services in return for part or all of the payment.  Items “sold” at auction would be an example of a quid pro quo contribution.  The organization must inform the donor by written statement, the “the amount of the contribution deductible for federal income tax purposes is limited to excess over the value of the goods or services received by the donor.”  The written statement must also provide the donor with a good-faith estimate of the goods or services given in return for the contribution.  This written statement is not required if the City gave goods or services of insubstantial value.

 

An organization that fails to make the required disclosures for each quid pro quo contribution will incur a penalty of $10 for each such failure, not to exceed $5,000 for a particular fundraising event or mailing.

 

Donations to a municipality are defined as charitable contributions by IRC 170(c)(1).

 

The substantiation rules are burdensome to the donee organization.  However, failure to comply can be costly.  If you have any questions regarding compliance with the rules, please do not hesitate to call.

 

3.   An individual independent of the bank reconciliation process should review and approve the bank reconciliations for timeliness of completion, clerical accuracy and proper supporting documentation.

 

The Governmental Accounting Standards Board (GASB) has adopted some statements which will impact the City in 2005 and in subsequent years.  Following is a summary of those statements from the GASB website press releases: 

 

GASB Statement 40 is titled “Deposit and Investment Risk Disclosures—an amendment of GASB Statement No. 3.”

 

The deposits and investments of state and local governments are exposed to risks that have the potential to result in losses. Statement 40 addresses common deposit and investment risks related to credit risk, concentration of credit risk, interest rate risk, and foreign currency risk. As an element of interest rate risk, this Statement requires certain disclosures of investments that have fair values that are highly sensitive to changes in interest rates. Deposit and investment policies related to the risks identified in this Statement also should be disclosed.

 

 

The Board reconsidered the disclosures required by Statement No. 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements. Portions of that Statement are modified or eliminated. The custodial credit risk disclosures of Statement 3 are modified to limit required disclosures to:

 

 

 

Statement 3 disclosures generally referred to as category 1 and 2 deposits and investments are eliminated. However, this Statement does not change the required disclosure of authorized investments or the requirements for reporting certain repurchase agreements and reverse repurchase agreements, and it maintains, with modification, the level-of-detail disclosure requirements of Statement 3.

 

The provisions of this Statement are effective for financial statements for periods beginning after June 15, 2004. Earlier application is encouraged.

 

GASB Statement 42 is titled “Accounting and Financial Reporting for Impairment of Capital Assets for Insurance Recoveries.” 

 

This Statement establishes accounting and financial reporting standards for impairment of capital assets. A capital asset is considered impaired when its service utility has declined significantly and unexpectedly. This Statement also clarifies and establishes accounting requirements for insurance recoveries.

 

Governments are required to evaluate prominent events or changes in circumstances affecting capital assets to determine whether impairment of a capital asset has occurred. Such events or changes in circumstances that may be indicative of impairment include evidence of physical damage, enactment or approval of laws or regulations or other changes in environmental factors, technological changes or evidence of obsolescence, changes in the manner or duration of use of a capital asset, and construction stoppage. A capital asset generally should be considered impaired if both (a) the decline in service utility of the capital asset is large in magnitude and (b) the event or change in circumstance is outside the normal life cycle of the capital asset.

 

Impaired capital assets that will no longer be used by the government should be reported at the lower of carrying value or fair value. Impairment losses on capital assets that will continue to be used by the government should be measured using the method that best reflects the diminished service utility of the capital asset. Impairment of capital assets with physical damage generally should be measured using a restoration cost approach, an approach that uses the estimated cost to restore the capital asset to identify the portion of the historical cost of the capital asset that should be written off. Impairment of capital assets that are affected by enactment or approval of laws or regulations or other changes in environmental factors or are subject to technological changes or obsolescence generally should be measured using a service units approach, an approach that compares the service units provided by the capital asset before and after the impairment event or change in circumstance. Impairment of capital assets that are subject to a change in manner or duration of use generally should be measured using a service units approach, as described above, or using deflated depreciated replacement cost, an approach that quantifies the cost of the service currently being provided by the capital asset and converts that cost to historical cost.

 

Impairment losses should be reported in accordance with the guidance in paragraphs 41 through 46, 55, 56, 101, and 102 of Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, and paragraphs 19 through 24 of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. If not otherwise apparent from the face of the financial statements, the description, amount, and financial statement classification of impairment losses should be disclosed in the notes to the financial statements. If evidence is available to demonstrate that the impairment will be temporary, the capital asset should not be written down.

 

Impaired capital assets that are idle should be disclosed, regardless of whether the impairment is considered permanent or temporary.

 

An insurance recovery associated with events or changes in circumstances resulting in impairment of a capital asset should be netted with the impairment loss. Restoration or replacement of the capital asset using the insurance recovery should be reported as a separate transaction. Insurance recoveries should be disclosed if not apparent from the face of the financial statements. Insurance recoveries for circumstances other than impairment of capital assets should be reported in the same manner.

 

The provisions of this Statement are effective for fiscal periods beginning after December 15, 2004. Earlier application is encouraged.

 

The Governmental Accounting Standards Board (GASB) has issued Statement No. 44, Economic Condition Reporting: The Statistical Section. Statement 44 enhances and updates the statistical section that accompanies a state or local government’s basic financial statements to reflect the significant changes that have taken place in government finance, including the more comprehensive government-wide financial information required by GASB Statement 34.

 

The statistical section comprises schedules presenting trend information about revenues and expenses, outstanding debt, economics and demographics, and other subjects. These schedules are intended to provide financial statement users with contextual information they need to assess a government’s financial health.

 

Statement 44 updates the statistical section schedules to include, for example, requirements for governments to report the broad array of debt they now issue in addition to general obligation bonds that were previously reported. The Statement also replaces prior standards, which were oriented toward general purpose local governments, with clearer guidelines that can be implemented by any type of governmental entity. Statement 44 further improves the understandability and usefulness of statistical section information by requiring governments to augment their schedules with notes regarding sources, methodologies, and assumptions, and narrative explanations of unfamiliar concepts, atypical trends, and anomalous data that users would not otherwise understand. Statement 44 is effective for periods beginning after June 15, 2005.

 

GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, addresses how state and local governments should account for and report their costs and obligations related to postemployment healthcare and other nonpension benefits. Collectively, these benefits are commonly referred to as other postemployment benefits, or OPEB.

 

The statement generally requires that state and local governmental employers account for and report the annual cost of OPEB and the outstanding obligations and commitments related to OPEB in essentially the same manner as they currently do for pensions. Annual OPEB cost for most employers will be based on actuarially determined amounts that, if paid on an ongoing basis, generally would provide sufficient resources to pay benefits as they come due. The provisions of Statement 45 may be applied prospectively and do not require governments to fund their OPEB plans. An employer may establish its OPEB liability at zero as of the beginning of the initial year of implementation; however, the unfunded actuarial liability is required to be amortized over future periods.

 

Statement 45 also establishes disclosure requirements for information about the plans in which an employer participates, the funding policy followed, the actuarial valuation process and assumptions, and, for certain employers, the extent to which the plan has been funded over time.

 

According to project manager Karl Johnson, “When implemented, Statement 45 will provide those who use government financial reports with improved information about the cost of providing postemployment benefits, the commitments that governments have made related to those benefits, and the extent to which those commitments have been funded.”

 

Statement 45 is effective in three phases based on a government’s total annual revenues. The largest employers would be required to implement the requirements of Statement 45 for periods beginning after December 15, 2006. Medium-sized employers have one additional year to implement the standards, and the smallest employers have two additional years. Earlier implementation is encouraged.

 

GASB Statement 45 may apply to any Kansas government that provides retirees access to its group health insurance plan pursuant to KSA 12-5040.  This is because this statement considers the rate differential between younger and older employee retirees to be an employer paid subsidy. 

 

This report is intended for the use of the mayor, city commission and management of Lawrence, Kansas and should not be used by anyone other than these specified parties.

 

June 15, 2005