Department of Administration State Accounting Division Local Government Services Bureau Legislative Update

1. Department of AdministrationState Accounting DivisionLocal Government Services BureauLegislative Update June 2009 Presented by: Paul Christofferson,CPA, State Accounting Division Administrator Kay Gray, Bureau Chief Darla Erickson, Fiscal Accounting Manager Accounting Fiscal Officers Magda Nelson – Kalispell Linda Willett - Billings Christy Hovious – Glendive Jamie Cain - Helena

2. Local Government Services Bureau • Technical resource for government accounting: • Phone, email or on-site assistance with preparation of: • Annual financial report • Year-end closing entries • Mill levy calculations • Budgets • Maintains and assists with BARS Chart of Accounts: • Revenue/expenditure coding questions • Assignment of fund numbers • Records retention and disposal requests and questions please call Beth Ritano 841-2912 • Administrator of Section 218 Social Security Agreements (Beth Ritano 841-2912)

3. Local Government Services Bureau Assistance resources Resources & forms provided by LGSB: • BARS Chart of Accounts & updates • Accounting Policy and Procedures Manual • Annual Financial Report • Major Fund Calculator • Budget Document • Mill Levy Determination Form • Permissive Medical Mill Levy Form Above items are available on the website: http://doa.mt.gov/lgsb/

4. GASB Statement 54, SAS 112/115 and OPEB Overview Presented By: Paul Christofferson, CPA State Accounting Division Administrator

5. GASB Statement No. 54Fund Balance Reporting and Governmental Fund Type Definitions Effective for financial statements for periods beginning after June 15, 2010 (State - FY 2011)

6. What is Fund Balance? Most used information • (GASB research) • Goal: Report government’s available liquid resources • Problem: Inconsistent reporting among governments

7. GASB Determined: • Governmental funds - substantial difference in fund balance reported by governments • Governments - lack understanding of fund balance reporting requirements under GAAP • Users • variation in interpretation of fund balance information • confusion about nature of info & GAAP reporting requirements

8. Improved Financial Reporting • Providing more understandable fund balance categories & classifications • Now “restricted” component of fund balance Eliminated “reserved” component • Enhance consistency between information reported in government-wide statements & information in governmental fund financial statements • Avoid confusion about relationship between reserved fund balance & restricted net assets.

9. Fund Balance Reclassifications Apply retroactively by restating fund balance for all prior periods presented

10. Fund Balances – Classifications • Nonspendable – Inventories, Endowment principal • Restricted – specific purpose • external providers (grants) or legislation • Committed – specific purpose • formal action of government’s highest authority • Assigned – amount not restricted/limited in funds other than general fund • Unassigned – any purpose in general fund

11. Governmental Fund Clarification • Still Government Choice Concerning Funds (Which to Use or Not Use) • Continue to use any funds government believes needed to provide useful info • If government laws differ from standard (No Change) – • Financial reporting under GAAP • Legal requirements may be included in supplemental schedules

12. More Fund Clarifications • General Fund – Used for any purpose • Only fund with unassigned balance • Other funds – unassigned balance if a deficit i.e. overspending for specific purposes (amounts were restricted, committed, or assigned) • Debt Service Fund – required only if legally required or amounts accumulated for future payment of principal & interest

13. More Fund Clarifications • Special Revenue Funds – only revenue source restricted/limited to certain purpose • Capital Projects – capital outlays in general

14. Encumbrances • Encumbrance = was not limited (specific) purpose • Not reported as separate line on face of balance sheet • Encumbering does not further limit purposes for use • If encumbering process meets definition & criteria for committed fund balance • Can report as committed (if assigned/unassigned amount) • Reported with other amounts committed to same purposes • Not as “committed for encumbrances” • If government has significant encumbrances • Disclose under standards for significant commitments

15. Additional Note Disclosures • Accounting policies – order of spending when multiple resources available (restricted/limited/assigned/unassigned) • Processes that impose limitations on fund balances • Purpose for major special revenue funds

16. Default Policy For Order of Use • Restricted • Committed • Assigned • Unassigned

17. Economic Stabilization Amounts • Rainy-day/contingencies (emergencies) • GASB treats as special purpose • Restricted/limited fund balances in general fund • Identify circumstances (should not recur) in notes – authority, provisions for additions, when spend

18. Formal MinimumFund Balance • If this exists – explain in footnotes (not a separate fund)

19. SAS 112/115 • Originally issued as SAS 112 Communicating Internal Control Related Matters Identified in an Audit • Superseded by SAS 115 (Same Title)

20. Old Definitions Material Weakness Reportable Condition Management Letter Comment New Definitions Material Weakness Significant Deficiency Other Control Deficiency Effect of the SAS 112/115 Definitions

21. AICPA Issues SAS 115 • Communicating Internal Control Related Matters Identified in an Audit • Conforms to Standards for Attestation Engagements (SSAAE) • Aligns definitions to PCAOB (Public Accounting Oversight Board) and International Standards • Supersedes SAS 112 • Effective for periods ending on or after December 15, 2009. Early implementation is permitted

22. SAS 115 Definition“Control Deficiency” • Deficiency – when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis – Material weakness – Significant deficiency

23. Types of Deficiencies • Deficiency in design – Control is missing – Not properly designed, so that if control operates as designed, the control objective would not be met • Deficiency in operation – Control does not operate as designed – Person performing the control does not possess the authority or competence to the perform the control effectively

24. Deficiencies in theDesign of Controls • Inadequate design over preparation of financial statements • Inadequate design over a significant amount or process • Inadequate documentation of internal control components

25. Deficiencies in theDesign of Controls (Continued) • Insufficient control consciousness • Absent or inadequate segregation of duties • Absent or inadequate controls over safeguarding of assets • Inadequate design of IT general and application controls • Employees or management who lack qualifications and training to fulfill assigned functions

26. Deficiencies in theDesign of Controls (Continued) • Inadequate design of monitoring controls to assess design and operating effectiveness of internal controls over time • Absence of internal process to report internal control deficiencies to management timely

27. Failures in the OperationOf Internal Control • Failure in operation of effectively designed controls • Failure on information and communication I/C component to provide complete and accurate output • Failure of controls designed to safeguard assets from loss, damage, or misappropriation

28. Failures in the OperationOf Internal Control (Continued) • Failure to perform reconciliations • Undue bias or lack of objectivity by those responsible for accounting decisions • Misrepresentation by entity personnel to the auditor

29. Failures in the OperationOf Internal Control (Continued) • Management override of controls • Failure of an application control caused by a deficiency in the design or operation of an IT general control • Observed deviation rate that exceeds the auditor’s expected deviation in testing the operating effectiveness of a control

30. SAS 115 Definition“Material Weakness” Material Weakness – deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected and corrected on a timely basis

31. SAS 115 Definition“Significant Deficiency” Significant Deficiency – deficiency, or combination of deficiencies, in internal control that, in the auditor’s professional judgment, is less severe than a material weakness, yet important enough to merit attention by those charged with governance

32. Severity of a Deficiency… • Depends on: – The magnitude of the potential misstatement; and – Whether there is a reasonable possibility that the controls will fail to prevent, or detect and correct a misstatement. • Does not depend on: – Whether a misstatement actually occurred.

33. Factors that Affect the Magnitudeof a Misstatement • Financial statement amounts or total of transactions exposed to the deficiency • Volume of activity in the account balance or class of transactions exposed to the deficiency

34. Risk Factors • Risk factors affect the possibility that a deficiency will result in a misstatement – Nature of accounts, transactions, disclosures, and assertions involved – Susceptibility of asset or liability to loss or fraud – Susceptibility, complexity, or extent of judgment – Interaction of control with other controls – Interaction among the deficiencies – Possible future consequences

35. Compensating Controls • Can limit the severity of a deficiency • Can mitigate the effects, but does not eliminate the deficiency • Auditor is not required to consider the effects of compensating controls when communicating significant deficiencies or material weaknesses, but if (s)he does: – Evaluate the design of compensating controls – Determine whether the compensating controls are implemented

36. Questions?

37. GASB 43 & 45OPEB Plans • Stmt 43 → trustee/administrator of plan (trust/agency fund) – reporting requirements • Stmt 45 → measurement of liability & expense/expenditure for employer

38. Defined Benefit OPEB & Defined Contribution Plans • Defined benefit – Specify benefits to be provided at/after employment • Specified in $ or type/level of coverage • Defined contribution • Provide individual account for each member • Specify contribution to each member’s account • May be both defined benefit & defined contribution (account as defined benefit)

39. OPEB Plans • Postemployment healthcare benefits, either separately or through a defined benefit pension plan (medical, dental, vision, etc.) • If provided through a defined pension plan – considered OPEB not part of pension • Other forms of postemployment benefits, when provided separately from a defined benefit pension plan (life insurance, disability, long-term care, etc.) • Considered pensions if provided through a defined benefit pension plan

40. GASB Statement No. 43 Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans Applies to trust, agency fund, fiduciary component unit, separately reported plan of public employee retirement system (PERS) Effective for all governments after 12-15-07

41. GASB Statement 43 Applicability to GASB 45 Plans • Plan Definition • Plan Accounting - Not administered as Trust – Required State to report underlying activity in an agency fund for implied rate subsidy.

42. OPEB Plans (Not Administered as Trusts) Cost-sharing multiple-employer plan (Agencies considered separate employers) • Pooling (cost-sharing) for all employers – single actuarial valuation & same contribution rate for all employers • Report fund as agency fund • Assets & liabilities (No net assets) • Assets > Liabilities = Liabilities to participating employers

43. GASB Statement No. 45 Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions Effective Date After 12-15-07 Phase 3 Governments After 12-15-08

44. Purpose of Statement • Currently use pay-as-you go method for OPEB & financial reporting • Change to recognize cost of OPEB in periods employees provide service • Recognize unfunded obligations Consistent terms/requirements with Statement 43

45. GASB Member Dissent • Dissent (Paul Reilly – GASB member) • Requirement – account for health insurance premium rate differentials (implied rate subsidy) as OPEB (even if employer provides no other OPEB benefits) • Note – An implied rate subsidy exists whenever a plan participant does not pay his/her full cost. This exists for the State as a result of allowing retirees to participate at a rate that does not fund all of their costs (subsidized by current employees and the State).

46. Mr. Reilly’s Concerns • Reflects “What-if” situation (charging different premium for retirees) • Governments will carry net OPEB obligation that will never be liquidated • Negative impact on reliability & usefulness of FS

47. State Dissent • State of Texas passed Legislation allowing governments to choose not to follow Statement 45 • Montana memo to GASB requesting reconsideration • Issue Paper

48. Other Issues Discussed Include • Normally not a legal liability • Establishment of a trust to fund an implied rate subsidy may create a legal liability • Funding an implied rate subsidy does not make sense. The government would be setting aside moneys that would never be spent on a “pay as you go” basis. • Equity issues – The retirees paid additional premiums to fund retiree costs while they were directly employed.

49. Employer Reporting Requirements for OPEB (Overview) • All state & local governments • Employer reporting for defined benefit and defined contribution plans (whether stand-alone reporting (separately issued) or included in FS of another governmental entity) • OPEB expense/expenditures; OPEB liabilities/assets • Note disclosures & Required supplementary information • See Statement 43 for trust/agency funds of employer reporting

50. Defined Contribution Plans Required Annual Contribution • Governmental Funds – expenditures (modified accrual basis) • Proprietary & fiduciary funds – expenses (accrual basis) • Government-wide statements – accrual basis • OPEB liability/asset results from difference in required contribution & payment • Do not offset OPEB liabilities/assets to different plans in financial statements