Russell W. Hinton State Auditor March 15, 2012. W e exist to provide decision- makers with credible management information to promote improvements in.

Role of the State Auditor in Georgia State Government …And a Few Other Things

Russell W. HintonState AuditorMarch 15, 2012

DEPARTMENT OF AUDITS AND ACCOUNTS MISSION STATEMENTDEPARTMENT OF AUDITS AND ACCOUNTS MISSION STATEMENT

We exist to provide decision-makers with credible

management information to promote improvements in

accountability and stewardship in state and local

government.

Organizational Placement in Georgia State Government

STATE OF GEORGIA

Legislative Branch Judicial BranchExecutive Branch

General Assembly

Senate House of Representatives

Department ofAudits andAccounts

Office of theGovernor

Requests for SpecialExaminations

•The art and science of managing people is to keep the ones that hate you away from those that are undecided….

• A fractured quote from Casey Stengel, long-time manager of the Yankees

Organizational Independence While subject to requests for special examinations by the Governor, the Department of

Audits and Accounts is under the authority, direction, and control of the General Assembly.

The State Auditor is elected by the General Assembly.

The Department is deemed a legislative agency for budget purposes and its budget estimate must be included in the Governor’s Budget Report “without revision”.

The State Auditor’s compensation is set by the Legislative Services Committee and Department employees are not subject to the rules and regulations of the State Personnel Administration.

The Appropriations Committee Chairs of the General Assembly may direct the State Auditor to make special examinations and reports.

Accordingly, the Department serves as part of the system of checks and balances between the Executive and Legislative branches of State government.

Key Duties and Responsibilities • Performing audits and other forms of assurance for the

Budgetary Comparison Report (BCR), the State of Georgia Comprehensive Annual Financial Report (CAFR) and the State of Georgia Single Audit Report as well as for various other legislative and budgetary financial reports;

• Conducting annual financial audits and reviews of state agencies, authorities, retirement systems, state colleges, and universities;

• Compiling annual Salaries, Travel, and Per Diem and Fees information submitted by State organizations;

• Conducting performance audits to assist the General Assembly and the Governor in an ongoing review and evaluation of all programs and functions in state government;

Key Duties and Responsibilities

• Conducting claims audits of Medicaid providers to evaluate compliance with Medicaid billing policies and procedures;

• Participating in Medicaid fraud investigations;

• Conducting annual financial and compliance audits of local boards of education and regional educational service agencies;

• Performing desk reviews of financial and compliance audits for cities, counties and non-profit entities conducting business with the State;

• Issuing fiscal notes in conjunction with the Office of Planning and Budget to estimate the financial impact of proposed legislation;

Key Duties and Responsibilities• Preparing certifications on retirement bills and

summaries of actuarial investigations;

• Issuing the Biennial Retirement Report on local retirement systems;

• Issuing the Concurrent Funding Report on all fiscal retirement bills passed during the legislative session; and

• Preparing an equalized property tax digest for public school funding.

• In addition to these general responsibilities, the Department acts in a consultative role to other agencies, as needed, by providing accounting, technological, and operational guidance.

Professional Standards and Quality Assurance• The Department's audit engagements are

conducted in accordance with Government Auditing Standards (the "Yellow Book"), issued by the Comptroller General of the United States, and professional standards promulgated by the American Institute of Certified Public Accountants.

• The accounting principles and reporting standards issued by the Governmental Accounting Standards Board and the Financial Accounting Standards Board, and various state and federal laws and regulations also govern the conduct of the Department in the successful completion of its assigned tasks.

Professional Standards and Quality Assurance• The Department maintains a quality assurance

system to ensure that audit work is conducted in accordance with applicable standards. This system includes supervisory review of all work performed as well as management review of audit reports and supporting documentation.

• The Department also receives an external peer review every three years under the direction of the National State Auditors Association. Audit personnel from other states review our quality control system and documentation for compliance with auditing and accounting standards. The most recent peer review was completed in September 2011 and resulted in an unqualified report without the necessity of a letter of comments.

Our People

• The Department’s staff of professional and administrative personnel is committed to promoting accountability and stewardship in state and local government. The Department’s 271 professional personnel include:

 • 84 CPAs;

• 8 CIAs (Certified Internal Auditors);

• 21 CFEs (Certified Fraud Examiners);

• 11 CISAs (Certified Information System Auditors); and

• 74 personnel who hold other professional designations such as Certified Government Auditing Professional (CGAP), Certified Government Financial Manager (CGFM), and Certified General Real Property Appraiser. Many of our personnel hold more than one professional designation.

 • Additionally, the Department has 68 professional personnel who have earned

advanced degrees.

Organizational Structure

The Department was created by the General Assembly in 1923 and its general authorities are established in O.C.G.A. Title 50, Chapter 6. The Department consists of the Office of the State Auditor and ten areas of operations:

• State Government • Performance Audits• Healthcare Audits • Technology and Risk Assurance• Education Audit• Nonprofit and Local Government Audits • Sales Ratio• Office of Quality Assurance • Information Technology, and • Administrative

Organizational Structure

• The State Government Division serves as the principal auditor of the CAFR, BCR and the Single Audit Report. Division personnel perform a combination of financial statement audits, agreed-upon procedures engagements, and management reviews of state agencies, pension funds, and other organizational units. Division personnel also conduct special financial audits and reviews as requested by the Governor, the House of Representatives, or the Senate. The Division’s forensic audit unit conducts investigations of suspected fraud cases.

• The Education Audit Division conducts annual financial audits of county and municipal school systems. Division personnel also conduct audit work at the state’s colleges and universities sufficient to render an opinion on the higher education component of the CAFR and the Single Audit Report. The Division performs a combination of financial statement audits, agreed-upon procedures engagements, and financial management reviews at the state’s colleges, universities and technical colleges.

Organizational Structure

• The Performance Audit Operations Division conducts performance audits and special examinations of state programs. The audits may be internally generated or may be conducted in response to requests received from the Governor or the House and Senate Appropriations Committees. The Division also conducts follow-up reviews to determine what actions have been taken in response to previous reports.

• Healthcare Audits ~ Conducts cost report audits of nursing homes for use by the Department of Community Health (DCH) in setting the nursing home reimbursement rates. The Division also conducts audits of provider claims to determine if they were appropriate, and performs internal program audits for DCH.

• Technology and Risk Assurance ~ Assesses IT risk and the effectiveness of the information technology control environment for the state. Division personnel evaluate IT general and application controls to support financial and performance auditors in planning and determining the nature, timing and extent of audit procedures to be performed in various engagements, as well as providing timely recommendations to management for needed improvements in IT-related controls.

Organizational Structure• Nonprofit and Local Government Audits ~ Reviews financial audit

reports of county and municipal governments for compliance with generally accepted accounting principles (GAAP) and ensures they have prepared corrective action plans to address the reports’ findings and recommendations

• Sales Ratio ~ Prepares the Statewide-Equalized Adjusted Property Tax Digest. Division personnel determine the ratio of assessed value of property to the sales price to ensure that the property is being assessed equitably

• The Office of Quality Assurance performs independent reviews of the audit work conducted by the Department’s operating divisions to ensure that the work is conducted in compliance with applicable government auditing standards.

• Administrative ~ Prepares the Department’s annual budget and financial statements, makes the Department’s purchases, maintains the Department’s personnel records, and prepares and updates the Department’s general policies and procedures.

Department of Audits and Accounts Regionalization

• Atlanta• Athens• Augusta• Macon• Statesboro• Douglas• Leesburg (Albany)• Calhoun

And A Few Other Things…

• Fiscal Condition of the State of Georgia• Transparency in Government Act• Illegal Immigration Reform and Enforcement Act

(HB87)

Georgia’s Bond Rating: AAA with Stable Outlook• Keys to Maintaining AAA• Economic Recovery• Fully Fund Pension ARCs• Continue to Rebuild Revenue Shortfall Reserve• Structurally Balance Budget• Reduce OPEB Liability• Moderate Bond Package

Georgia’s Bond Rating: AAA with Stable Outlook

• Moody’s November 2, 2011• “What could move the rating down?

• Continued Negative Fund Balance Status• Deterioration in Economic Position Without Plan to Offset

Revenue Declines• Renewed Reliance on Non-Recurring Fiscal Measures• Failure to Address Large, Unfunded Retiree Health

Benefit Liability or Substantial Deterioration in Pension Funded Status

Revenue Shortfall Reserve: Statutory Provisions

State law provides for the establishment of reserves through the sound management of excess revenue collections as follows:

Excess collections of up to 4% (but no greater than 15%) must be set aside in the Revenue Shortfall Reserve;

Up to 1% of the net revenue of the preceding year may be appropriated from the Revenue Shortfall Reserve by the General Assembly for funding increased K-12 educational needs in the mid-year adjustment; and

Funds in the Revenue Shortfall Reserve that are in excess of 4% of the previous year’s net revenue may be available, upon recommendation of the Governor, for appropriation in the fiscal year.

Senate Bill 421 of the 2010 General Assembly session raised the ceiling on the Revenue Shortfall Reserve from 10% to 15% of prior year revenues.

Revenue Shortfall Reserve

Revenue Shortfall Reserve as of June 30, 2010 $268,179,869

1% mid-year adjustment for K-12, appropriated in Amended FY 2010 (152,157,908)

Resulting Revenue Shortfall balance 116,021,961

FY 2011 excess revenues over estimate 329,273,091

Audited agency lapse of surplus funds 48,679,138

Revenue Shortfall Reserve as of June 30, 2011 $493,974,190

Note: 1% mid-year adjustment for K-12, available for appropriation in Amended FY 2012 $165,586,475

Mechanisms for Rebuilding the Revenue Shortfall Reserve and Ensuring Budgetary Balance

In periods of strong revenue growth, the Governor may elect to use very conservative revenue estimates to restrain spending and add to reserves.

House Bill 1405 established the Special Council on Tax Reform and Fairness to recommend changes to Georgia’s tax structure. The Council reported its findings in January 2011 for the legislature’s consideration.

The Council was comprised of 11 individuals: one elected official (Governor Perdue), four economists, the chairpersons of the Georgia Chamber of Commerce and the National Federation of Independent Business, and four business representatives appointed by the Lt. Governor and Speaker of the House.

House Bill 1405 created a Special Joint Committee on Georgia Revenue Structure to cause to be introduced one or more bills which would incorporate the recommendations of the Council, without changes. The bill, or bills, were to be reported directly for an up or down vote, without amendment. Political will for this approach faltered and the bill went Nowhere.

In FY 2012, the State anticipates using a combination of recurring revenue sources and expenditure reductions to replace ARRA and other one-time sources of revenue.

Tax Expenditure Report ~ SB206• Required DOAA to prepare tax expenditure review for inclusion in

the Governor’s annual budget report filed with the General Assembly in early January.

• Defines “tax expenditure” as:• “any statutory provision which exempts, in whole or in part, any specific class or classes…

from the impact of established state taxes…deductions, allowances, exclusions, credits, preferential tax rates , exemptions…expenditure of state tax proceeds to local governments for homeowner tax relief grants or local assistance grants”

• Report should include tax revenue foregone for a three year period:• Fiscal year applicable to previous budget report,• Current fiscal year, and• One fiscal year forward.

• Requires information necessary for report to be tracked and compiled by Department of Revenue, though permits estimation and restricts DOR’s ability to impose additional reporting requirements on taxpayers.

• Contracted with Georgia State University Fiscal Research Center for production of first report…long way to go.

• The funded status of the two major retirement systems according to the most recent actuarial valuation date, is as follows:

• 2008 2009 2010 • Employees Retirement System funded ratio: 89.4% 85.7% 80.1%

Teachers Retirement System funded ratio: 91.9% 87.2% 85.7%

• Since the previous valuation for TRS, the Board of Trustees has adopted a valuation rate of return smoothing methodology effective July 1, 2010 which had a positive impact on the funded ratio.

• The new methodology is designed to reduce contribution volatility by requiring increased contributions during periods of rising revenues and investment returns while maintaining the current contribution rates during periods of declining revenues and depressed returns.

• Budgetary increases for FY2013 annually required contributions for TRS and ERS are $71 million and $63 million, respectively.

Pensions

Underlying Principles• Pensions are part of the exchange between

employees and employers• Pension plans are part of total compensation• Employer incurs a pension obligation as a result of

the “employment exchange”• Cost (expense) should be recognized in the period

services are provided

• The pension plan is primarily responsible for paying pension benefits to the extent the plan has sufficient assets

• The employer is primarily responsible for paying benefits to the extent the plan does not have sufficient assets

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Underlying Principles• Difference between the total pension

liability and the plan net position is the liability on the financial statements of the government

• Cost allocation (annual expense) is developed on an accounting basis, not a funding or contribution basis• Totally different from current GASB standards.• Disconnect between accounting numbers and

funding numbers. Cannot fund using GASB expense.

• Will require significant rethinking and retraining for most of us.

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Some Definitions• Total Pension Liability (TPL) – accrued liability

using Entry Age Normal funding method• Net Pension Position (NPP) – basically market

value of assets• Net Pension Liability (NPL) – TPL minus NPP• Annual Required Contribution (ARC) – the annual

amount to recognize in developing the annual pension contribution under current GASB 25, to be replaced with:

• Pension Expense – annual amount to recognize as pension expense under proposed standard.

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Impact on Employer Financial Statements

Current GASB Exposure Draft Implications

Pension expense reported by employer is ARC with few adjustments.

Pension expense is NOT related to funding amount. Expense is change in net pension liability each year with some adjustments for deferred recognition.

More volatile expenses shown on employer’s income statement.

Difference between ARC and actual contributions becomes a liability on employer’s books (Net Pension Obligation).

Net Pension Liability (unfunded liability on market value basis for most) is liability on employer’s books.

Unfunded liability placed prominently on employer’s balance sheet. Disconnect between funding and accounting numbers.

Actuarial cost method and smoothing method used by plan for funding calculations is used in ARC calculations.

All plans must use Entry Age Normal actuarial cost method. Expense utilizes a 5 year smoothing of investment gains and losses.

Entry Age Normal already used for TRS valuations. Pension expense for accounting will be more volatile than the required funding.

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Potentially Lower Discount Rates Would Increase

Liabilities

Current GASB Exposure Draft Implications

All projected benefit payments are discounted using one rate – the long term expected investment rate of return.

Blended rate consisting of:1. Investment return

assumption2. Municipal bond rate

• Higher rate (assumed rate of return) can be used only for period during which assets are sufficient to cover benefit payments (prior to projected exhaustion date).

• Lower municipal bond rate must be used to discount benefit payments after projected exhaustion date.

• Use of lower discount rate would mean higher liabilities and pension expense on employer’s financial statements.

• Most troublesome for plans with fixed contribution rate or plans contributing less than the full actuarial contribution rate.

• Requires a projection of assets to determine exhaustion date, if any.

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Amortization Periods Shortened

Current GASB Exposure Draft Implications

Unfunded liabilities can be amortized over a maximum of 30 years which may be an “open” amortization period.

Amortization periods would be significantly shorter and cost recognized more quickly.

Potentially higher, more volatile pension expense.

Unfunded liabilities created by plan changes that affect active liabilities, such as benefit improvements, can be amortized over a maximum of 30 years.

Unfunded liabilities for active lives must be amortized over the average weighted working career for active employees. If result from benefit change, recognize immediately.

Benefit changes more difficult to enact since immediate/near term costs will be much higher.

Unfunded liabilities created by plan changes that affect retirees, such as mortality assumptions, can also be amortized over a maximum of 30 years.

Unfunded liabilities for retirees must be recognized immediately with no amortization allowed.

Ad hoc COLA liabilities are immediately recognized as are changes in mortality assumptions which could cause spikes in costs which flow through to financial statements .

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Asset Valuation Method

Current GASB Exposure Draft Implications

Permits use of smoothed market value (actuarial value).

Market value of assets, not actuarial value, is used in determining the net liability.

Market declines or increases would be recognized more quickly.

Gain/loss on actuarial value of assets flows through to unfunded liability and is amortized over maximum of 30 years.

Allows deferred recognition of investment gains/losses over 5 years in determining pension expense.

More volatility in pension expense.

Significant asset gains could result in pension income rather than pension expense and yet contributions may still be required for funding.

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Accounting and Funding are Decoupled

Current GASB Exposure Draft Implications

• Annual Required Contribution (ARC) served as a “de facto” contribution standard.

• Employer liability exists only when employer contributions are less than ARC.

• Current GASB standards are used to measure how well the plan is funded and whether contribution levels are on track.

• Focus ONLY on accounting – not funding – for pension costs.

• No calculation or standard for appropriate funding levels or contribution levels.

• Total disconnect between accounting and funding numbers.

• Will be two sets of numbers which could lead to confusion regarding the “true cost” of pensions.

•Lack of universal funding benchmark.

• Actuaries, Boards , legislatures will have to develop funding policy.

• More volatility could create problems for employers.

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• The State Health Benefit Plan (SHBP) is administered by the Department of Community Health and covers state employees, public school teachers and other public school employees, retirees and their dependents and other individuals covered under State law.

• Legislation enacted in 2009 created two separate OPEB funds• State Employee OPEB Fund (O.C.G.A. 45-18-25)• School Personnel OPEB Fund (O.C.G.A. 20-2-875)

• As separate and distinct cost sharing multiple employer plans, both OPEB funds separately value their own OPEB liabilities, report the results, and make GASB 43 disclosures. The unfunded actuarial accrued liability (UAAL) as of 6/30/10 and the FY13 ARC for the respective plans follow:

• In FY 2010, the State utilized $171 million from the OPEB trust fund to meet retiree health care costs in FY 2010. There are no planned contributions beyond annual pay-go amounts for the OPEB funds for FY 2011 or FY 2012.

• State employees will see premium increases of 11.2 -17.2% for Plan Year 2012, following increases of 10% for Plan Year 2011.

OPEB/SHBP

UAAL ARC

State Employees $4.48 billion $339 million

School Personnel $11.25 billion $982 million

Transparency in Government Act• O.C.G.A. 50-6-32

Transparency in Government Act• The Department of Audits and Accounts developed and

and continue to operate a single searchable website accessible by the public, at no cost, that provides financial information and reports on the operations of state government and local boards of education.

• Open.Georgia.gov

Transparency in Government Act• All agencies of state government shall provide to

the Department of Audits and Accounts such information as is necessary to accomplish the purposes of this Code section.

• Nothing in this Code section shall require the disclosure of information which is considered confidential by state or federal law.

Transparency in Government Act• Will continue to identify subsystems providing

adequate detail for compliance with SB 300.

• Clarify implications of applicability to organizations named in Appropriations Act.

• Data security issues.

• Data confidentiality issues.

Transparency In Government Act

• Expansion of reporting requirements has caused legitimate concerns with regard to certain proprietary information for certain authorities. Working through those issues.

• Will be necessary to identify those organizations not reporting on the OpenGeorgia website, lest the public be mislead.

• OpenGeorgia was rated lower than expected by a paper entitled “Following the Money” .

• Suggestions for Improvement:• Add link to ARRA Website ~ Not a Problem• Add information on tax credits for specific companies ~ Note Tax Expenditure

Report, Specific Companies Not Available• Add link to economic development efforts ~ Working on It• Link amounts reported to PDF of actual contract ~ We Ain’t There Yet

Illegal Immigration Reform and Enforcement Act (HB87)• Act provides significant sanctions against public

employers and individual employees for willful violation of the Act.

• Created the Immigration Enforcement Review Board with quasi-judicial powers to accept complaints from citizens, businesses etc. regarding noncompliance by public employers or its employees.

Illegal Immigration Reform and Enforcement Act (HB87)• By December 31, 2011, public employers must submit a report

to the State Auditor indicating compliance with the Act in regards to contracts for “physical performance of services.” Compliance means the entity obtained affidavits from all contractors performing such work that the firm utilized the E-Verify system to determine immigration status of its employees.

• Reporting instructions were disseminated to approximately 2400 “public employers” in the State of Georgia.

• Chaos ensued.

• Upon funding being provided, State Auditor required to conduct annual compliance audits on at least 50% of reporting agencies and publish results annually.

Illegal Immigration Reform and Enforcement Act (HB87)• By December 31, 2012, public employers must submit a report to the

State Auditor indicating compliance with the Act in regards to issuance of “public benefits” as defined by the Attorney General. Compliance means that any county or municipality renewing a business license, occupation tax certificate or “other document required to operate a business” to employers with more than 10 employees on January 1 received an affidavit from such employer affirming registration and use of the federal work authorization program.

• “Public Benefit “ has very broad interpretation.

• Chaos ongoing…..

• Upon funding being provided, State Auditor required to conduct annual compliance audits on at least 20% of reporting agencies and publish results annually.

• Questions/Comments????

Russell W. Hinton, CPA, CGFMState Auditor

270 Washington Street, S.W.Suite 1-156

Atlanta, Georgia 30334-8400Voice: (404) 656-2174

[email protected]