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Home My WebLink AboutAgenda - Mail Packet - 6/19/2018 - City Council Finance & Audit Committee Agenda - June 18, 2018Finance Administration 215 N. Mason 2nd Floor PO Box 580 Fort Collins, CO 80522 970.221.6788 970.221.6782 - fax fcgov.com AGENDA Council Finance & Audit Committee June 18, 2018 10:00 am - noon CIC Room - City Hall Approval of Minutes from the May 21P st P Council Finance Committee Meeting. 1. Thrive / Waterfield Metro District Request 30 minutes J. Birks 2. Historical Mid Cycle Appropriation Review 20 minutes M. Beckstead 3. CEF Update 15 minutes J. Poznanovic 4. Parking Sensor Project 30 minutes D. Klingner 5. CFC Auditor Selection 15 minutes T. Storin Council Finance Committee Agenda Planning Calendar 2018 RVSD 06/12/18 mnb Jun 18th Thrive / Waterfield Metro District Request 30 min J. Birks Historical Mid Cycle Appropriation Review 20 min M. Beckstead CEF Update 15 min J. Poznanovic Parking Sensor Project 30 min D. Klingner CFC Auditor Selection 15 min T. Storin Jul 16th Audit Results Review 20 min T. Storin HR Benefits Discussion 30 min T. Roche Aug 20th Metro District Requests - 3 60 min J. Birks Sep 17th Future Council Finance Committee Topics: Phase II Fee Discussions – Development Review Fees & Wet Utilities Audit Firm Selection – September COUNCIL FINANCE COMMITTEE AGENDA ITEM SUMMARY Staff: Josh Birks and Patrick Rowe Date: June 18, 2018 SUBJECT FOR DISCUSSION Preview of Proposed Metro District at Waterfield Development EXECUTIVE SUMMARY Thrive Home Builders is exploring the feasibility of constructing approximately 500 homes on property generally located at the northwest corner of Vine Drive and Timberline Road. The project could include as many as 50 lots dedicated for affordable construction. In addition, the project is evaluating the cost of delivery all units as US Department of Energy Certified Zero Energy Ready. As part of the evaluation, Thrive would like to consider using a Title 32 Metropolitan District to offset basic infrastructure costs enabling the delivery of energy efficient and affordable homes. The presentation will provide an overview of Thrive Home Builders, their approach to development, and a conceptual look at the proposed project and metro district. GENERAL DIRECTION SOUGHT AND SPECIFIC QUESTIONS TO BE ANSWERED 1. Does the committee support the continued consideration of a Metro District to support the proposed Waterfield project? BACKGROUND/DISCUSSION Thrive Home Builders (“Thrive”) is evaluating a significant project in Fort Collins, generally located at the northwest corner of Vine Drive and Timberline Road (see Attachment 2 – Project Vicinity Map). The project would construct approximately 500 homes in a new urbanist layout - alley loaded and walkable design. The project is evaluating the ability to deliver up to 50 affordable homes as well as constructing all 500 homes as U.S. Department of Energy Certified Zero Energy Ready homes. Thrive is a Colorado grown company that has operated in the metro-Denver area for the past 20 years. Thrive is committed to building healthy, efficient, and local homes. They achieve this goal by:  UHealthyU – All homes are constructed to the Environmental Protection Agency’s Indoor airPLUS program standards, include active radon ventilation systems, using advanced moisture management practices to reduce the likelihood of mold, and use low Volatile Organic Compound (“VOC”) products.  UEfficient U– All homes are constructed to the U.S. Department of Energy Zero Energy Ready Home standard, achieve Energy Star Certified status, and include a RESNET HERS score – an independent energy rating that validates energy efficiency level.  ULocal U– Locally-sourced products are used when available – an example is blue-stained beetle kill pine. Thrive also builds affordable homes. Thrive has been building affordable homes, meeting the Denver Inclusionary Housing guidelines including a deed restriction, for the past 12 years at the Stapleton Airport Redevelopment. Thrive has built over 380 affordable homes in the Stapleton project. In addition, they have constructed approximately 500 for-sale homes targeted at 80 percent of Area Median Income (“AMI”) at Belle Creek. In both projects, these homes deliver the same Zero Energy Ready features as Thrive uses in market rate housing, including trademark double walls, the ability to add solar panels, and other zero energy ready features. PROJECT OVERVIEW Thrive is evaluating a project to construct approximately 500 homes on 71 acres (net of the school site; 113 acres total) at the northwest corner of Vine Drive and Timberline Road (see Attachment 2 – Project Vicinity Map). The project, called Waterfield, will follow Thrive’s commitment to healthy, efficient, and local home construction, including all their normal standards and include raw water irrigation, comply with watersense standards, and re-plat the project to provide urban design and density, alleys, and walkable features (see Attachment 3 – Thrive & Waterfield Background Materials). METRO DISTRICT The Waterfield project has not currently entered the planning or development review process. Thrive has requested this early check-in with the Council Finance Committee because of their intent to apply for a Title 32 Metropolitan District (“Metro District”) to offset infrastructure costs. The Metro District would be used to construct critical public infrastructure and other site costs reducing the overall development costs. By funding infrastructure costs with Metro District revenue, the project could deliver:  Approximately 50 affordable homes,  Zero Energy Ready certified homes throughout the project,  A Watersense compliant project,  New urbanist style design and density (nearly 498 homes planned compared to the current plat of 190 single family homes plus 9.9 acres of unplatted MMN zoned property), and  Use of raw water for yard and common area irrigation. These public benefits do not come without cost. Thrive has provided an estimate of the cost differential between their proposed project and the current code minimum requirements (see Attachment 4 - Thrive vs. Code Builder Cost Analysis). This analysis estimates a difference in cost of approximately $46.4 million. When considering just lot preparation costs the total cost of Thrive’s approach is $68,000 per lot compared to a code minimum of $52,000 (See Attachment 3 - Thrive & Waterfield Background Materials) or a differential of approximately $16,000 per lot. A Metro District could help to reduce this differential significantly. Metro District revenues would be used to offset all or a portion of the cost differential by constructing critical public infrastructure and other infrastructure, and funding site preparation. Some portion of these costs may not comply with the current policy prohibiting the use of Metro District funds to construction “basic” infrastructure. However, the revised policy to be considered by City Council later this year allows for funding “basic” infrastructure if sufficient public benefit is delivered by the overall project proposal. A comparison of the proposed use of Metro District revenues the currently adopted and proposed policy is provided below in Table 1. Table 1 Metro District Policy Comparison Project Current Proposed Mill Levy Caps UTBD 40 Mills 50 Mills Basic Infrastructure Partially Not favored To enable public benefit Eminent Domain Will Comply Prohibited Prohibited Debt Limitation Will Comply 100% of Capacity 100% of Capacity Dissolution Limit Will Comply 40 years Removed (Plan Specific) Citizen Control Will Comply As early as possible As early as possible Multiple Districts Yes Projected over an extended period Projected over an extended period Commercial/ Residential Ratio 100% Residential 90% to 10% N/A The conceptual use of a Metro District at Waterfield does not comply with the City’s existing policy. However, it represents an example of the type of project that would comply with the proposed policy revisions to be considered by City Council later this year. Given the significant cost of completing the development review process and the estimated cost differential to develop the project as currently conceived by Thrive, the applicant requested this early preview to gain initial feedback. ATTACHMENTS 1. Staff Presentation 2. Project Vicinity Map 3. Thrive & Waterfield Background Materials (Applicant Supplied) 4. Thrive vs. Code Builder Cost Analysis (Applicant Supplied) 1 Waterfield Metro District Request Preview Josh Birks 7-10-18 Questions for Council  Does the committee support the continued consideration of a Metro District to support the proposed Waterfield project?? 2 Thrive Home Builders Background  Experienced Net Zero Energy Homebuilder  Experienced Affordable Housing Homebuilder Comparable Projects  Belle Creek – 1,000 units; 50% at 80% Area Median Income (AMI)  No public subsidy, no public mandate  Stapleton – Currently only private builder meeting requirements for Affordable units – 12 years experience, XX units built 3 Thrive Approach Efficient Zero Energy Ready Energy Star Certified RESNET Score Healthy Indoor airPlus Active Radon Systems Advanced moisture management Low VOC materials Local Beetle Kill Other Local Materials 4 Project Description  New Urbanist Alley Load project  Increased density  498 units vs. 190 units + 9.9 ac MMN  50 affordable units 5 Policy Comparison – Key Provisions 6 Project Current Proposed Mill Levy Caps TBD 40 Mills 50 Mills Basic Infrastructure Partially Not favored To enable public benefit Eminent Domain Will Comply Prohibited Prohibited Debt Limitation Will Comply 100% of Capacity 100% of Capacity Dissolution Limit Will Comply 40 years Removed (Plan Specific) Citizen Control Will Comply As early as possible As early as possible Multiple Districts Yes Projected over an extended period Projected over an extended period Commercial/ Residential Ratio 100% Residential 90% to 10% N/A Metro District Impact 7 (Analysis Supplied by Applicant) Public Benefits Environmental Sustainability GHG Reduction Water/Energy Conservation Multimodal Transportation Enhance Resiliency Increase Renewable Capacity Critical Public Infrastructure Existing significant infrastructure challenges On-site Off-site Smart Growth Management Increase density Walkability/Pedestrian Infrastructure Availability of Transit Public Spaces Mixed-Use Strategic Priorities Affordable Housing Infill/Redevelopment Economic Health Outcomes 8 Questions for Council  Does the committee support the continued consideration of a Metro District to support the proposed Waterfield project?? 9 Waterfield Vicinity Map Provides a view of the area surrounding the project 1 mi N ➤➤ N © 2018 Google © 2018 Google © 2018 Google About Thrive Home Builders Nationally acclaimed Builder • Of affordable housing • Of Net Zero housing • Professional Builder magazine’s Builder of the Year • Belle Creek: 1000 units, 50% at 80% AMI or less. • Service enriched with day care, computer lab, rec center and charter school in the Family Center. • ULI Top X Affordable Communities in America. • PCBC Gold Nugget Award, Best in the West. All accomplished with no public money and under no public mandate. We did it with a metro district. Affordable Housing Affordable Housing • Denver’s largest for profit builder of “for sale” affordable housing. • Only private builder meeting Stapleton’s ambitious affordable housing goals. Smart Growth Current Waterfield Plan • 190 Lots • 10 acre TH site Smart Growth Proposed Waterfield Plan • 498 units • New urbanist “alley” plan Critical Transportation Improvements • Suniga transects Waterfield for about a half mile. • Suniga/Timberline intersection will be constructed. • Merganzer will be realigned. • Turnberry right of way will be established. New request for Turnberry ROW Realignment of Merganzer Suniga Road Timberline Critical Transportation Improvements Enhanced Suniga Road Cross Section Net Zero We are Colorado’s largest and most experienced builder of Net Zero Homes. Net Zero • First US DOE Zero Energy Ready Home program builder in Colorado, 2013 • US DOE Housing Innovation Grand Award Winner 6 times in the last 5 years. Healthy Homes • Most EPA Indoor airPLUS homes in Colorado • EPA Indoor Air Quality Leadership Award, 2016 and 2017 A metro district will enable Waterfield to achieve Ft. Collins’ aspirations. We wish it weren’t so, but….. • We know affordable homes require subsidy, because we build them everyday. • We know net zero homes cost more, because we build them every day. • “Backbone” transportation facilities are expensive. A metro district enables Waterfield to become a great example of the Ft. Collins of tomorrow that you envision. How a Metro District Helps Old Plan New Plan Total Number of Units 390 498 Affordable Units 10% 0 50 Subtotal Market Rate Units 390 448 Zero Energy Ready Units 100% 0 498 Net Zero Units 10% 0 50 How a Metro District Helps Per Unit Costs Old Plan New Plan Land, Development and Water $ 49,406 $42,533 Critical Transportation Infrastructure 2,462 1,928 Water Conservation (EPA WaterSense) 0 3,050 Zero Energy Ready Premium 0 9,000 Affordable Housing Subsidy 0 7,254 Net Zero Premium 0 3,906 Subtotal Per Unit Costs $51,867 $67,672 Metro District Proceeds 0 -14,970 Net Costs after Metro District $50,502 $55,989 Code Minimum Thrive Waterfield Development Onsite 1 $16,385,326 $16,385,326 Critical Public Infrastructure Suniga $1,805,584 $1,805,584 Vine $457,857 $457,857 Merganser $360,393 $360,393 Timberline $436,257 $436,257 Dewatering $537,560 $537,560 Underdrain $237,888 $237,888 Urban design 2 None $1,913,450 Sustainability Energy efficiency 3 2015 Building Code Zero Energy Ready Hard Costs (491 units) $85,549,385 $123,810,069 Water Conservation 4 None $1,497,550 Strategic Priorities Affordable Housing (50 lots) 5 None $4,727,805 Subtotal $105,770,250 $152,169,739 1 Onsites include landscape, raw water, irrigation 2 Currently, as platted, there is no urban design or alleys; in order to achieve urban design and density, we must add alleys and re‐plat 3 4 Watersense costs an additional $3,050 per lot 5 The acquisition and development cost per lot is $94,556 multiplied by 50 lots dedicated to affordability is $4,727,805. THRIVE VS. CODE BUILDER Results from a third party study, a 2015 code builder builds at $88.53/sf (or $174,235 for a 1,968 sf home) and Thrive builds at $128.13/sf (or $252,159 for a 1,968 sf home) This does not include the cost of permits and fees which is about $42,000 per lot, which would bring the total per lot cost to $136,556 or $6,827,800 total FINANCIAL SERVICES 1 Historical Appropriations Outside BFO Q2 2018 Historical Budget Ordinances * As of 3/31/2018 2 Total Number of Ordinances Source 2013-2014 2015-2016 2017-2018 YTD Grant/Unanticipated Revenue 44 28 25 Other* 7 4 2 Reserves 25 35 38 Grand Total 76 67 65 Total $ Amount of Ordinances Source 2013-2014 2015-2016 2017-2018 YTD Grant/Unanticipated Revenue $24,736,035 $6,350,460 $12,756,406 Other 12,423,022 24,608,577 8,472,614 Reserves 33,211,588 30,585,897 17,417,436 Grand Total $70,370,645 $61,544,934 $38,646,456 * Transfers, Bonds, Loans, Rebates • No increase in the # of off cycle ordinances overall • Increase in # of ordinances from Reserves – 25 to 38 • Decrease in $ amount of ordinances overall • Decrease in $ of ordinances from Reserves - $33.2M to $17.4M • Couple of large projects causing distortion * As of 3/31/2018 3 • General Fund Reserves - # ordinances mostly flat, $ are down • Utility use of reserves distorts the overall picture – UAB & Michigan Ditch • Increase in Transportation and CEF ordinances (# & $) • Several projects required timely funding Ordinances that used Reserves # $ # $ # $ General Fund 13 $6,596,223 17 $10,566,003 12 $3,413,800 Transportation and TCEF 1 50,000 6 5,114,723 11 5,787,375 Utilities (incl. new Utilities building in 2014 6 24,371,665 7 9,000,183 6 1,016,356 Capital Expansion Funds 0 - 1 1,638,000 4 3,842,000 Keep Fort Collins Great 3 385,000 0 2 776,357 All Others 2 1,808,700 6 4,266,988 4 2,581,548 Grand Total 25 $33,211,588 37 $30,585,897 39 $17,417,436 % of Total 47% 50% 45% Without Utilities 19 $8,839,923 30 $21,585,714 33 $16,401,080 SourceYTD 2013-2014 2015-2016 2017-2018 * As of 3/31/2018 4 Back-Up * As of 3/31/2018 5 2013 2014 2015 2016 2017 2018 GENERAL FUND URA Reimbursement - Capstone Project 5,000,000 Police Dispatch Radio Replacement 250,000 Police Scene Response Vehicle 171,476 Waste Reduction and Diversion Projects 135,560 Waste Innovation Program 150,000 111,000 Multi-Jurisidictional No. Colo. Drug Task Force 236,160 Housing Authority's Redtail Ponds Project 233,781 West Nile Virus Management 206,592 High Security Enhancements 190,360 Lincoln Corridor Improvements Project 5,259,119 Design of the Police Regional Training Facility 810,000 Avago Rebate 467,663 413,781 397,716 Supplemental Costs for Foothills Activ. Center w.APP 404,000 Woodward Reimbursement 180,994 CAP Projects 2,505,510 Police Collective Bargaining Health Savings Plan 225,000 Pool Chlorination System 200,000 Fee Waiver for Horsetooth Affordable Housing 179,845 Elections - November 2017 150,000 Idea 2 Product 3D Printing Community Center 150,000 Storm Cleanup 143,563 Broadband Strategic Support 80,000 Broadband Start-up costs 1,800,000 Muni Court Security 159,832 Other 98,100 74,194 69,936 30,000 39,560 52,284 Total General Fund 5,655,136 941,087 7,191,712 3,374,291 1,290,684 2,123,116 * As of 3/31/2018 6 UTILITIES 2013 2014 2015 2016 2017 2018 800 MHZ Radios 1,460,665 Pre-Sedimentation Basin (High Park Fire related) 1,250,000 Water Main Replacement 600,000 Restore River Frontage near Block One 50,000 New Utilities Building 18,911,000 Replacement of Waterline 2,100,000 Water Distribution Infrastructure Replacement Projects 745,000 Michigan Ditch Tunnel Project 6,300,000 Boxelder Creek Flood Mitigation 979,700 CAP Projects 975,483 McClellands Creek in the new Twin Silo Park 454,500 Boxelder Basin Regional Stormwater Authority Payment 330,000 Resources for Broadband Strategic Support 80,000 Storm Cleanup 2,556 Cyber Security & System Enhancements 149,300 Total Utilities 3,360,665 21,011,000 745,000 8,255,183 867,056 149,300 * As of 3/31/2018 7 TRANSPORTATION AND TCEF FUNDS 2013 2014 2015 2016 2017 2018 Restore River Frontage near Block One 50,000 Timberline Rd - Drake to Prospect, BOB Interection Improv 1,500,000 Reimbursement of the Construction of Roadway Improv 1,250,000 Lincoln Neighborhood Improvements Projects 1,106,000 Lemay and Vine Intersection 244,723 Sharp Point/Nancy Grea Connection Project 984,000 I-25 Traffic Consulting 30,000 Lemay and Vine Intersection Project 1,400,000 Horsetooth and College 1,100,000 Regional Contribution to I-25 455,947 453,158 Elizabeth and Shields Underpass Improvement Project 280,000 Funding Advocacy for Interstate 25 30,000 Storm Cleanup 21,543 Harmony & Strauss Cabin 891,000 East Prospect Road Improvements 598,680 South Timberline Road Improvements Project 548,287 Harmony & Strauss Cabin 8,760 Total Transportation 50,000 0 4,100,723 1,014,000 3,287,490 2,499,885 * As of 3/31/2018 8 Capital Expansion Fund 2013 2014 2015 2016 2017 2018 Southeast Community Park 1,638,000 Transfer of Funds to PFA 1,392,000 East District Maintnenance Facility 430,000 East Community Park 220,000 Sidehill Park & other Park projects 1,800,000 Total Park Planning 0 0 0 1,638,000 3,842,000 0 COUNCIL FINANCE COMMITTEE AGENDA ITEM SUMMARY Staff: Mike Beckstead, CFO Jennifer Poznanovic, Revenue & Project Manager Date: June 18, 2018 SUBJECT FOR DISCUSSION Fire Capital Expansion Fee Update EXECUTIVE SUMMARY Consulting firm Duncan Associates discovered there was a cell reference error in their formula used for the City’s 2017 Capital Expansion Fee (CEF) Study. This error caused the Fire CEFs to be overstated by 19%. CEFs require City Council approval and City Council approved 75% of the proposed fee increases. CEF fee increases went into effect on October 1, 2017. Given the error in the Fire CEF calculation, current Fire CEFs are 90% instead of 75% of the corrected 2017 proposed fee level. If the City is to issue refunds and lower the Fire CEFs to 75% of the corrected proposed fee increases, the current impact is approximately $76,000 in refunds across approximately 370 permits that have been issued in full. GENERAL DIRECTION SOUGHT AND SPECIFIC QUESTIONS TO BE ANSWERED • Which option does Council Finance Committee support? 1. Refund & Adjust Fees - Adjust fees consistent with corrected calculations – required Ordinance - Appropriate funds from Fire CEFs for reimbursement permits paid back to October 1, 2017. 2. Continue with current fees - Step I and step II of Fire CEF increases = 90% of the 2017 proposed fee level • If Option 1, does Council Finance Committee support resolving both issues at the next available Council meeting? BACKGROUND/DISCUSSION In 2016, the City of Fort Collins contracted with consulting firm Duncan Associates to analyze methodology and update CEFs. CEFs require City Council approval and City Council approved 75% of the proposed fee increases. These fee increases went into effect October 1, 2017. Earlier this year, the Poudre Fire Authority (PFA) contracted with Duncan Associates to update their Fire Capital Expansion Fees (those that are not directly related to the City). Duncan Associates used data collected from the City’s 2017 Capital Expansion Fee Study as a basis for starting the PFA study. During their analysis, Duncan Associates discovered there was a cell reference error in their formula used for the City. This error caused the Fire CEFs to be overstated by 19% in the CEF Study. In the tables below, “Net Cost per Functional Population” of $422 was calculated using “Net Replacement Cost” instead of “Net Replacement Cost Attributable to City”. Correcting this error would result in a “Net Cost per Functional Population” of $354. Duncan Associates confirmed that all other fees were calculated correctly. Given the error in the Fire CEF calculation, current Fire CEFs are 90% instead of 75% of the corrected 2017 proposed fee level. The next fee increase is anticipated for 2019 and would be updating all CEFs (Neighborhood Parks, Community Parks, Fire, Police and General Government) from 75% (step I) to 90% (step II) of the 2017 proposed fees. If the City is to issue refunds and lower the Fire CEFs to 75% of the corrected proposed fee increases, the current impact as of June 12, 2018 is approximately $76,000 in refunds across approximately 370 permits that have been issued in full. Fees are paid upon issuance of building permit and there are currently approximately 120 applications. Numbers continue to grow as fees have not yet been changed. Staff time estimated to issue 500 refunds is approximately 40 minutes per refund across two departments. 30 minutes per refund in Community Development and Neighborhood Services and 10 minutes per refund in Accounting. This is approximately 330 hours or 40 days. Current Fire CEFs are at 90% instead of 75% of the corrected 2017 proposed fee level. Staff recommends to continue Fire CEFs at the 90% fee level instead of the 75% fee level. ATTACHMENTS Attachment 1: PPT slide deck – CFC Fire CEF Update 2018-06-18 1 Fire Capital Expansion Fee Update June 18, 2018 Capital Expansion Fees - Background 2 • Capital Expansion Fees (CEFs) require City Council approval • In 2016, the City of Fort Collins contracted with Duncan Associates to analyze methodology and update fees • Council approved 75% of proposed fee increases effective October 1, 2017 Land Use Type Unit N'hood Park Comm. Park Fire Police Gen. Gov't Total Residential, up to 700 sq. ft. Dwelling $1,721 $2,430 $502 $236 $574 $5,463 Residential, 701-1,200 sq. ft. Dwelling $2,304 $3,253 $679 $319 $774 $7,329 Residential, 1,201-1,700 sq. ft. Dwelling $2,516 $3,552 $739 $347 $845 $7,999 Residential, 1,701-2,200 sq. ft. Dwelling $2,542 $3,589 $751 $352 $858 $8,092 Residential, over 2,200 sq. ft. Dwelling $2,833 $4,001 $836 $392 $955 $9,017 Commercial 1,000 sq. ft. 0 0 $633 $297 $1,451 $2,381 Industrial/Warehouse 1,000 sq. ft. 0 0 $148 $69 $342 $559 Land Use Type Unit N'hood Park Comm. Park Fire Police Gen. Gov't Total Residential, up to 700 sq. ft. Dwelling $1,343 $1,751 $377 $177 $431 $4,079 Residential, 701-1,200 sq. ft. Dwelling $1,797 $2,342 $509 $239 $581 $5,468 Residential, 1,201-1,700 sq. ft. Dwelling $1,962 $2,558 $554 $260 $634 $5,968 Residential, 1,701-2,200 sq. ft. Dwelling $1,983 $2,585 $563 $264 $644 $6,039 Residential, over 2,200 sq. ft. Dwelling $2,210 $2,881 $627 $294 $716 $6,728 Commercial 1,000 sq. ft. 0 0 $475 $223 $1,088 $1,786 Industrial/Warehouse 1,000 sq. ft. 0 0 $111 $52 $257 $420 Fees proposed in 2017 Fees effective as of October 1, 2017 Fire CEFs - Background Fire Capital Expansion Fees 3 • Council approved 75% of proposed fee increases • Current fees effective as of October 1, 2017 *Prior Fees effective January 1, 2017 - September 30, 2017 Land Use Type Unit Prior Fees 2017 Proposed Current Residential, up to 700 sq. ft. Dwelling $281 $502 $377 Residential, 701-1,200 sq. ft. Dwelling $357 $679 $509 Residential, 1,201-1,700 sq. ft. Dwelling $395 $739 $554 Residential, 1,701-2,200 sq. ft. Dwelling $410 $751 $563 Residential, over 2,200 sq. ft. Dwelling $440 $836 $627 Commercial 1,000 sq. ft. $339 $633 $475 Industrial/Warehouse 1,000 sq. ft. $80 $148 $111 Overcharging for Fire CEFs 4 • Earlier this year, the Poudre Fire Authority contracted with Duncan Associates to update their Fire CEFs • Duncan Associates discovered there was a cell reference error in their formula used for the City’s Fire CEFs • “Net Cost per Functional Population” of $422 was calculated using “Net Replacement Cost” instead of “Net Replacement Cost Attributable to City” • Correcting this error would result in a “Net Cost per Functional Population” of $354 Fire Facility Building Replacement Cost $49,278,152 Fire Facility Land Cost $5,122,359 Fire Vehicle Replacement Cost $14,126,633 Total Replacement Cost $68,527,144 – Outstanding Station 4 Lease Purchase Payments -$2,043,237 Net Replacement Cost $66,483,907 x City Share of Fire District Calls 84.0% Net Replacement Cost Attributable to City $55,846,482 ÷ Existing Functional Population (24-Hour) 157,626 Net Cost per Functional Population $422 Fire Facility Building Replacement Cost $49,278,152 Fire Facility Land Cost $5,122,359 Fire Vehicle Replacement Cost $14,126,633 Total Replacement Cost $68,527,144 – Outstanding Station 4 Lease Purchase Payments -$2,043,237 Net Replacement Cost $66,483,907 x City Share of Fire District Calls 84.0% Net Replacement Cost Attributable to City $55,846,482 ÷ Existing Functional Population (24-Hour) 157,626 Net Cost per Functional Population $354 Table 18. Existing Fire Cost per Service Unit Table 18. Existing Fire Cost per Service Unit - Corrected Overcharging for Fire CEFs 5 • The error resulted in the City’s fee amount to be overstated by 19% • Staff asked Duncan to confirm that all other fees were calculated correctly ‒ Confirmed Yes • Current Fire CEFs are 90% of Proposed Corrected fees Land Use Type Unit 2017 Proposed Proposed Corrected Current Current Corrected Residential, up to 700 sq. ft. Dwelling $502 $421 $377 $316 Residential, 701-1,200 sq. ft. Dwelling $679 $570 $509 $428 Residential, 1,201-1,700 sq. ft. Dwelling $739 $620 $554 $465 Residential, 1,701-2,200 sq. ft. Dwelling $751 $630 $563 $473 Residential, over 2,200 sq. ft. Dwelling $836 $701 $627 $526 Commercial 1,000 sq. ft. $633 $531 $475 $398 Industrial/Warehouse 1,000 sq. ft. $148 $124 $111 $93 Fire Capital Expansion Fees 75% of Proposed Impact & Cost 6 Impact as of June 12, 2018 • Approximately 370 permits issued in full with $76,000 to be refunded • Approximately 120 applications - fees are paid upon issuance of building permit • Numbers continue to grow as fees have not yet been changed Staff time estimate for 500 refunds • Approximately 40 minutes per refund: ‒ 30 minutes in PDT ‒ 10 minutes in Accounting • Approximately 330 hours/ 40 days Options 7 1) Refund • Adjust fees consistent with corrected calculations – required Ordinance • Appropriate funds from Fire CEFs for reimbursement permits paid back to Oct. 1 2) Continue with current fees • Step I and step II of Fire CEF increases = 90% of the 2017 proposed fee level ‒ Step II across all CEFs anticipated for 2019 Recommendation • Continue Fire CEFs at 90% fee level instead of the 75% fee level ‒ No further action required Next Steps 8 Council Direction Sought: • Which option does Council Finance Committee support? • If Option 1, does Council Finance Committee support resolving both issues at the next available Council meeting? COUNCIL FINANCE COMMITTEE AGENDA ITEM SUMMARY STAFF: Dean Klingner, Interim Director, Transfort and Parking Services DATE: June 18P th P, 2018 SUBJECT FOR DISCUSSION Downtown Parking Sensor and Technology Project Financial Update EXECUTIVE SUMMARY The purpose of this item is to discuss an upcoming Council item to combine previously appropriated funds and appropriate additional funds from Parking Reserves into a single capital project fund to complete the Downtown Parking Sensor and Technology project and to appropriate 1% of the project to Art in Public Places. The project includes installing sensors and new payment technology in the three downtown parking structures and in approximately 3000 on-street parking spaces. This technology will allow Parking Services to collect occupancy and turnover rate data to improve management of Downtown parking. The sensors will link to the 38TFC Parking application38T and show where available parking spaces are located. Phase I was completed in 2017 and installed the sensor and payment technology in the Firehouse Alley Parking Structure. Funds for the remainder of the project include: $750k in General Fund (appropriated in 2017 for this purpose as a part of Ordinance 154, 2017); 2017-18 Budget Offer 73.3 ($84,692, and $90,083); and Parking Fund Reserves. The estimated cost for the project is $1.2M. Installation of parking sensors in the Old Town Parking Structure and the Civil Center Parking Structure has been initiated with the previously appropriated funds. The additional funds are necessary to complete the on-street portion of the project. The anticipated project completion date is by the end of 2018. GENERAL DIRECTION SOUGHT AND SPECIFIC QUESTIONS TO BE ANSWERED Does the Council Finance Committee support this item going forward on the Consent agenda, June 19P th P, 2018? BACKGROUND/DISCUSSION The Downtown Plan, adopted in 2017, includes a comprehensive parking dialogue and several policies related to communication and improved parking management. The parking sensor technology effort stitches together some of these policies into one cohesive project and parking system in Downtown. With the introduction of the FC Parking App and sensors, the parking public will be able to find available parking in ~3,000 on-street spaces, 3 parking structures, and 3 parking lots. Additionally, the app allows payment in the parking structures and will facilitate the Pay-to-Stay option on-street. The following Downtown Plan policies are being implemented with this project: • Policy TP 2b: Parking Utilization Data -- Implement a system to collect parking utilization data on occupancy and turnover, and communicate parking availability to the public. • Policy TP 2c: Parking Enforcement Adjustments -- Explore adjusting enforcement of 2- hour limited parking spaces to weekends and evenings after5 p.m., and permit an extension of the 2-hour limit. • Policy TP 3a: Real-Time Travel Information -- Explore opportunities to continue, enhance and add real-time travel information (e.g., transit, parking availability). The opportunity to implement new technology in Downtown came with the development of the Firehouse Alley Parking Structure. Utilizing our existing license plate recognition (LPR) technology, which is used to enforce on-street time limits, we can remove the gates on the parking garages and install a pre-pay system with the options of paying at a pay station or by the FC Parking App. The removal of the gates eliminates delays exiting the garages and gate repair and maintenance, and reduces staffing needs at the structures. Financial Summaries UFunding $750,000 Previously Appropriated, Ordinance 154, 2017 $90,083 Previously Appropriated, 2017-18 Budget Offer 73.3 $359,917 Proposed to be Appropriated from Parking Reserves* $1,200,000 Project Total * Includes $84,622 previously appropriated with 2017-18 Budget Offer 73.3, but returned to Parking Reserves UInstallation Expenses $466,000 Civic Center Parking Structure Technology Retrofit $256,000 Old Town Parking Structure Technology Retrofit $466,000 $12,000 Installation of on-street sensors and support technology Art in Public Places $1,200,000 Project Total *$191,000 Firehouse Alley Parking Structure technology; completed in 2017 and funded as a part of the construction UOn-Going Annual Expenses $140,000 On-Street Sensors and supporting technology $60,000 Parking Structures (all three) -$46,000 Savings from Parking Gates and Pay Machine Maintenance $154,000 Total Estimated on-going costs *Attrition of Parking Attendants has resulted in additional operational savings 1 Downtown Parking Sensors Project Dean Klingner June 18, 2018 2 Parking Sensors Purpose: • Provide occupancy & turnover data • Show availability via FC Parking App Scope: • ~3,000 on-street spaces • 3 parking structures • 3 parking lots Laurel St. Cherry St. Meldrum St. Mulberry St. Peterson St. 3 Parking Sensors Sensor Installation: • Flush with pavement surface • Hole depth: 5.3 – 5.5 in. • Hole diameter: 2.5 in. Gateway Installation: • Street lights • 1 per 30 sensors Implementation Timeline: • July – Oct 2018 • 1 – 3 days per block face • Approx. 60 spaces per day 4 Structure Technology Occupancy Signage Sensors • Integrated w/ FC Parking App • Light indicators above spaces Gate Removal Pay Stations • Pay first • Pay with phone App or at a pay station Forthcoming Projects Extended Hours of 2-Hour Enforcement • Evenings & Weekends Pay-to-Stay (after 2 hours) • FC Parking App 5 Cost Summary Item Cost Civic Center Parking Structure $466k Old Town Parking Structure $256k On-Street Spaces $466k Art in Public Places $12k 1% of total project Total $1.2M *Firehouse Alley Parking Structure $191k Completed in 2017 6 Funding Summary Funding Source Amount Notes General Fund $750,000 Previous Appropriated (Ord. 154-1017) 2018 Budget Offer $90,083 Proposed from Parking Reserves $359,917 2017 amount ($84.6k) was returned to Parking Reserves Total $1.2M 7 On-Going Annual Expenses Item Amount On-street sensors $140k Old Firehouse, Civic Center & Old Town Parking Structures $60k Savings from Parking Gates and Pay Machines -$46k Total $154k *Attrition of Parking Attendants has resulted in additional operational savings. 8 9 Thank THANK you. YOU COUNCIL FINANCE COMMITTEE AGENDA ITEM SUMMARY Staff: Travis Storin, Accounting Director John Voss, Controller Date: June 18, 2018 SUBJECT FOR DISCUSSION Selection of independent auditor for City, PFA, and Library EXECUTIVE SUMMARY The purpose of this item is to solicit consensus from the Committee regarding: • The process for selecting an independent auditor for an up-to five-year period • Potential Code modifications to resolve public disclosure limitations and increase transparency with respect to audit selection • Perspective on the candidacy of incumbent firms A Request for Proposal (RFP) will be issued this summer for audit services. The process is designed to ensure that the selected firm meets the City’s requirements and has the knowledge, experience, and reputation in auditing similar entities. An annual external audit by an independent CPA firm is required by Statute, Charter, debt covenants, and virtually all grant agreements. GENERAL DIRECTION SOUGHT AND SPECIFIC QUESTIONS TO BE ANSWERED Staff seeks input on: • Evaluation criteria for selection of the independent auditor • Desired modification to historical processes for selection, if any • Support for Code amendment to allow Committee participation in an open public meeting BACKGROUND/DISCUSSION Code Amendment Current City Code precludes the Committee from holding a meeting to interview service providers. Code Section 8-158(f) limits public disclosure of interview information, while City Charter Article II, Section 11 and Code Section 2-31 preclude the use of executive session for this purpose. In order to allow the interview process to remain with the Committee, Staff recommends modifying Section 8-158(f) for audit services specifically to allow the interviews to be conducted in public before the Committee. Auditor Rotation Multi-year contracts are limited to 5 years by City Code. The City does not have a mandatory auditor rotation policy and would allow evaluation of the incumbent. GFOA best practice guidance acknowledges that private sector and publicly-traded, SEC filing entities have rotation practices mandated by regulatory authorities or their own bylaws. In the public sector, GFOA cautions that sometimes it is difficult to get enough qualified responses if the incumbent is disallowed. The below table shows a 30-year history of audit firms the City has engaged. 1983 Ericson, Hunt, Spelman 1995 Bondi 2007 Bondi 1984 Ericson, Hunt, Spelman 1996 Bondi 2008 McGladrey & Pullen 1985 KPMG 1997 Bondi 2009 McGladrey & Pullen 1986 KPMG 1998 Bondi 2010 McGladrey 1987 KPMG 1999 Bondi 2011 McGladrey 1988 Price Waterhouse 2000 Bondi 2012 McGladrey 1989 Price Waterhouse 2001 Bondi 2013 McGladrey 1990 Price Waterhouse 2002 Bondi 2014 McGladrey 1991 Price Waterhouse 2003 Bondi 2015 McGladrey 1992 Price Waterhouse 2004 Bondi 2016 RSM (McGladrey) 1993 Bondi 2005 Bondi 2017 RSM (McGladrey) 1994 Bondi 2006 Bondi Timeline and Process Staff proposes to release a Request for Proposal (RFP) in July. The proposed evaluation criteria, all to be equally weighed at 25% and in no particular order, would be: • Scope of proposal • Assigned personnel qualifications • Cost and work hours • Firm capability & reputation A staff committee, including staff members from City, Library and PFA would evaluate written proposals and recommend the top 2-3 firms for presentation to the Finance Committee. Interviews would be conducted at the September Finance Committee meeting with the City Purchasing Director serving as Purchasing Agent and facilitator. The Committee’s recommendation would be presented to the full Council for adoption via Resolution, thereby authorizing the Purchasing Agent to enter into an agreement with the awarded firm for the 2018 fiscal year audit, renewable annually through the 2022 audit. ATTACHMENTS 1. Powerpoint Presentation 2. GFOA Best Practice: Audit Procurement 3. GFOA Article: Understanding the Audit CFC Auditor Selection Travis Storin, Accounting Director John Voss, Controller 6-18-18 2 Background • Article II, Section 17 of Charter requires that Council shall provide for an independent audit at least annually • Also required by State, granting agencies, and debtholders • Current contract is in its fifth and final year, necessitating a competitive selection • Historically, Finance Committee has served as the interview panel and Council has made its selection by Resolution Proposed City Code Amendment 3 • Code Section 8-158(f) limits public disclosure of offerors’ information, information discussed by evaluation committee, and City rating sheets • Code Section 2-31 and Article II Section 11 of the Charter preclude the use of executive session in this case Staff recommends modification to 8-158(f) to allow interview process to remain in Finance Committee’s/Council’s purview for audit services Audit firm rotation 4 1983 Ericson, Hunt, Spelman 1995 Bondi 2007 Bondi 1984 Ericson, Hunt, Spelman 1996 Bondi 2008 McGladrey & Pullen 1985 KPMG 1997 Bondi 2009 McGladrey & Pullen 1986 KPMG 1998 Bondi 2010 McGladrey 1987 KPMG 1999 Bondi 2011 McGladrey 1988 Price Waterhouse 2000 Bondi 2012 McGladrey 1989 Price Waterhouse 2001 Bondi 2013 McGladrey 1990 Price Waterhouse 2002 Bondi 2014 McGladrey 1991 Price Waterhouse 2003 Bondi 2015 McGladrey 1992 Price Waterhouse 2004 Bondi 2016 RSM (McGladrey) 1993 Bondi 2005 Bondi 2017 RSM (McGladrey) 1994 Bondi 2006 Bondi City does not have any policy or Code language pertaining to a mandatory rotation policy; practices vary in local government Proposed Timeline & Criteria 5 RFP Issued July • Proposed Criteria: 1) Scope of proposal, 2) assigned personnel qualifications, 3) cost and work hours, 4) firm capability & reputation Staff Evaluation & Code Amendment August • Team of various staff individuals to evaluate written proposals and narrow to finalists • Staff to bring forward ordinance with recommended changes to Code Finance Committee Interviews September • Public interviews of up to 3 finalists • Supported by City Staff as the purchasing agent for scoring, timekeeping, and communications with candidates Committee Direction 6 • Does the Committee support the proposed amendment to Code to allow public disclosure of proposals for audit services specifically? • Does the Committee support allowing proposal by the incumbent? • Does the Committee support the proposed process and timeline? 6/12/2018 Audit Procurement http://www.gfoa.org/print/42 1/2 The Government Finance Officers Association (GFOA) has long recommended that state and local governmental entities obtain independent audits of their financial statements performed in accordance with the appropriate professional auditing standards. Properly performed audits play a vital role in the public sector by helping to preserve the integrity of the public finance functions and by maintaining citizens confidence in their elected leaders. GFOA makes the following recommendations regarding the selection of auditing services: The scope of the independent audit should encompass not only the fair presentation of the basic financial statements, but also the fair presentation of the financial statements of individual funds and component units. The cost of extending full audit coverage to the financial statements of individual funds and component units can be justified by the additional degree of assurance provided. Nevertheless, the selection of the appropriate scope of the independent audit ultimately remains a matter of professional judgment. Accordingly, those responsible for securing independent audits should make their decision concerning the appropriate scope of the audit engagement based upon their particular governments specific needs and circumstances, consistent with applicable legal requirements. Governmental entities should require in their audit contracts that the auditors of their financial statements conform to the independence standard promulgated in the General Accounting Offices Government Auditing Standards even for audit engagements that are not otherwise subject to generally accepted government auditing standards. Governmental entities should enter into multiyear agreements of at least five years in duration when obtaining the services of independent auditors. Such multiyear agreements can take a variety of different forms (e.g., a series of single-year contracts), consistent with applicable legal requirements. Such agreements allow for greater continuity and help to minimize the potential for disruption in connection with the independent audit. Multiyear agreements can also help to reduce audit costs by allowing auditors to recover certain "startup" costs over several years, rather than over a single year. Governmental entities should undertake a full-scale competitive process for the selection of independent auditors at the end of the term of each audit contract, consistent with applicable legal requirements. Ideally, auditor independence would be enhanced by a policy requiring that the independent auditor be replaced at the end of the audit contract, as is often the case in the private sector. Unfortunately, the frequent lack of competition among audit firms fully qualified to perform public-sector audits could make a policy of mandatory auditor rotation counterproductive. In such cases, it is recommended that a governmental entity actively seek the participation of all qualified firms, including the current auditors, assuming that the past performance of the current auditors has proven satisfactory. Except in cases where a Audit Procurement BACKGROUND: RECOMMENDATION: BEST PRACTICE 6/12/2018 Audit Procurement http://www.gfoa.org/print/42 2/2 203 N. LaSalle Street - Suite 2700 | Chicago, IL 60601-1210 | Phone: (312) 977-9700 - Fax: (312) 977-4806 multiyear agreement has taken the form of a series of single-year contracts, a contractual provision for the automatic renewal of the audit contract (e.g., an automatic second term for the auditor upon satisfactory performance) is inconsistent with this recommendation. Professional standards allow independent auditors to perform certain types of nonaudit services for their audit clients. Any significant nonaudit services should always be approved in advance by a governmental entitys audit committee. Furthermore, governmental entities should routinely explore the possibility of alternative service providers before making a decision to engage their independent auditors to perform significant nonaudit services. The audit procurement process should be structured so that the principal factor in the selection of an independent auditor is the auditors ability to perform a quality audit. In no case should price be allowed to serve as the sole criterion for the selection of an independent auditor. References: CPA Audit Quality: A Framework for Procuring Audit Services, General Accounting Office, August 1987. Audit Management Handbook, Stephen J. Gauthier, GFOA, 1989. An Elected Officials Guide to Auditing, Stephen J. Gauthier, GFOA, 1992. Governmental Accounting, Auditing and Financial Reporting (GAAFR), Stephen J. Gauthier, GFOA. Better Understanding the Financial Statement Audit STEPHEN J. GAUTHIER For most local governments, the annual ﬁnancial state- ment audit is as much a part of the yearly round of pub- lic ﬁnance as the approval of the operating budget. Despite its routine character,however, the ﬁnancial statement audit appears to remain something of mystery to most outside the auditing profession.This article will attempt to dispel the cloud of mystery by ﬁrst brieﬂy reviewing the nature and purpose of the ﬁnancial statement audit and then examining ten speciﬁc points of misunderstanding commonly encoun- tered in practice. NATURE AND PURPOSE Anyone entrusted with responsibility for managing ﬁnan- cial resources on behalf of others should provide a full accounting of that stewardship. For state and local govern- ments, such an accounting ideally takes the form of ﬁnancial statements prepared in conformity with generally accepted accounting principles (GAAP). It is easy,of course, to imagine circum- stances where those giving an accounting of their stewardship might be tempted to be less than forthcoming, or worse. Accordingly, those who must rely on ﬁnancial statements to make decisions have traditionally sought the assurance of a disinterested third party to justify that reliance. That third party, of course, is the independent auditor. Role of Management. Since management is responsible for the stewardship of ﬁnancial resources,it is also primarily responsible for preparing the ﬁnancial statements that give an accounting of that stewardship. Even when management seeks outside help to prepare the ﬁnancial statements, it remains responsible for their contents, just as taxpayers remain responsible for their tax returns,even if the returns are prepared by paid tax professionals.Thus,managers must take ownership of their ﬁnancial reporting. Generally accepted auditing standards (GAAS) require that managers do so explicitly in the form of a management representation letter. Role of Internal Control. It would be hard to place conﬁ- dence in an approval process that amounted to little more than afﬁxing initials to documents without ﬁrst examining them. So too,it would hardly be meaningful for management to assume responsibility for the data presented in ﬁnancial statements if management did not have some reasonable basis for doing so.That reasonable basis can be provided only by a comprehensive framework of internal control. Role of the Governing Body. While management is primarily responsible for ﬁnancial reporting (including the comprehensive framework of internal control used to gener- ate the ﬁnancial statements), the governing body remains ultimately responsible for ensuring that management meets its responsibilities in this regard.Typically,an audit committee, comprising members of the governing body, provides the necessary oversight. Objective of Fair Presentation. Precision comes at a price.That price can be justiﬁed only if the resulting beneﬁts exceed their cost. In real life, few decisions require that amounts in ﬁnancial statements be exact “down to the penny.” Thus, the goal of ﬁnancial statements is fairness rather than absolute accuracy.That is,the objective of ﬁnancial reporting 46 Government Finance Review | June 2009 era, poor ﬁnancial condition is in no way inconsistent with fair ﬁnancial statement presentation. No. 2: Financial statement audits are not designed to detect all instances of fraud, abuse, and program non- compliance (i.e., smaller items may be expected to ﬂy under the radar screen). Many people assume that the prin- cipal goal of a ﬁnancial statement audit is to uncover fraud, abuse, and instances of program noncompliance.In fact,the discovery of such items is only incidental to the purpose of a ﬁnancial statement audit. As already explained,the true purpose of a ﬁnancial state- ment audit is to achieve reasonable (rather than absolute) assurance that the ﬁnancial statements are fairly (rather than accurately) presented. Accordingly, the audit is designed to detect only those instances of fraud,abuse, or program non- compliance that would be material (i.e.,signiﬁcant enough to affect decisions made based on the ﬁnancial statements). Needless to say, many, if not most,instances of fraud, abuse, and program noncompliance fail to reach this threshold and thus “fall between the cracks”of a ﬁnancial statement audit. The independent auditors will, of course, report any instances of fraud, abuse, and program noncompliance that they do encounter while performing the audit (unless it is clearly inconsequential), regardless of materiality. Still, the ﬁnancial statement audit is not designed to identify immateri- al instances of fraud,abuse,and program noncompliance,nor is it likely to do so. No. 3: Size is not the sole consideration in judging materiality (i.e., big things can come in small packages). Sometimes a government’s managers and its auditors will disagree as to whether a speciﬁc item should be treated as material. Such disagreements arise, as often as not, from a mistaken notion that size is the sole criterion for judging materiality.As discussed earlier,however,an item is considered to be material based on its potential for changing a decision. Clearly a relatively small amount could have just that effect in the right circumstances (e.g., the difference between a surplus and a deﬁcit,the difference between a positive and a negative trend, a legal or contractual violation). That is, materiality has a qualitative as well as a quantitative dimen- sion.Viewed another way,the very fact that the materiality of an item is being debated would seem to be an argument in favor of its importance (i.e.,materiality) to someone. No. 4: Quantitative materiality needs to be assessed in relation to individual major funds and to each of the gov- ernment-wide activity columns (the big picture is not good enough). Private-sector business enterprises do not use fund accounting; therefore,quantitative materiality is assessed in relation to the enterprise’s ﬁnancial statements “taken as a whole.” Conversely, in the public sector, quantitative materiality is assessed separately for each major fund (and for nonmajor funds in the aggregate). It also is assessed separately for the governmental activities and business-type activities columns reported in the government-wide ﬁnancial statements. As a result,an amount that might not have been material from the perspective of the government “taken as a whole”may be material from the narrower vantage point of an individual major fund or activity column. No. 5: You cannot assess the reliability of data yet bility of the underlying system that generates the data (e.g., validate the amount reported as vendor payables by testing the reliability of the processing of transactions in the pur- chasing system).Auditors describe the ﬁrst approach as sub- stantive testing and the second as the testing of controls. There was a time in the not-so-distant past when auditors could choose to rely on the substantive testing to the virtual exclusion of tests of controls.More recently,the audit profes- sion has concluded that auditors can never simply bypass the testing of controls.The basic notion behind the change is that no amount of substantive testing can counterbalance the unreliability inherent in data generated by a system that is fundamentally ﬂawed (i.e., just as it would be hard to justify relying on the assertions of an individual known to be dis- honest, incompetent, or otherwise unreli- able).Thus, the independent auditor must always assess the reliability of the internal controls that support ﬁnancial reporting. No. 6: Auditors must report control weaknesses even if those weaknesses had no effect on the fair presentation of the ﬁnancial statements (you can- not afford to ignore cracks in a dam). It is possible,of course, to leave the front door of the house open wide upon leav- ing for work in the morning and still come home at night to ﬁnd that nothing has been stolen. Such an outcome does not diminish the seriousness of the risk posed by leaving the door of a house wide open all day long with everyone gone. Likewise, auditors are required to disclose signiﬁcant deﬁciencies as part of the audit even if it can be clearly established that no harm actually resulted from those deﬁciencies. No. 7: Auditors are not allowed to perform any task that would compromise their independence (you cannot be both judge and defense attorney). A government’s inde- pendent auditors possess a wealth of experience and expert- ise that managers understandably wish to draw upon. Accordingly, auditors routinely provide clients with profes- sional advice on a broad range of topics.All the same,audi- tors must refrain from placing themselves in the position of having to audit their own work, which would occur if they were to perform managerial tasks (e.g., approving payroll, making journal entries) or a special assignment whose work product fell within the scope of the audit (e.g., selection or implementation of general ledger software). Thus, the inde- pendent auditors are severely restricted in the types of non- audit work they may perform for a governmental client. No. 8: Audit fees cannot be the principal factor in selecting an audit ﬁrm (you often get what you pay for). The quality of professional services will naturally vary with the professional that performs them.GAAP for state and local governments are substantially different from private-sector GAAP, just as public-sector auditing typically requires expert- ise well beyond GAAS (e.g., Government Auditing Standards, also known as the “Yellow Book”or generally accepted govern- ment auditing standards—GAGAS, and the Single Audit). Therefore, in the audit procurement process, it is essential that a government 48 Government Finance Review | June 2009 No. 10: Mandatory auditor rotation may pose special risks in the public sector (do not force yourself into a bad decision). Many people believe that periodically chang- ing audit ﬁrms offers real advantages such as a fresh outlook and greater independence from management. Accordingly, many private-sector business enterprises and not-for-proﬁts mandate that a new audit ﬁrm be selected periodically. The potential beneﬁts of auditor rotation depend on the presence of a sufﬁcient number of qualiﬁed ﬁrms being inter- ested in performing the audit.Unfortunately,such is often not the case in the public sector, where the highly specialized character of governmental GAAP and governmental auditing standards often severely restrict the number of qualiﬁed ﬁrms in a given location.Accordingly,a policy of mandatory auditor rotation, when applied to state and local governments,could force a government into the position of hiring a less-than fully qualiﬁed replacement for its current independent auditor. Given these facts, the best course of action for most governments is to mandate an aggressive procurement effort at the end of the audit contract to maximize the possibility for auditor rotation, without precluding the current audit ﬁrm from participating. Furthermore, many of the potential beneﬁts of auditor rotation could be achieved by rotating the personnel assigned to the engagement within the current auditing ﬁrm. CONCLUSIONS There is no reason for the ﬁnancial statement audit to remain a mystery for managers and others outside the audit- ing profession.Gaining a better understanding of the ﬁnancial statement audit and the principles that underlie it should help all concerned to better cooperate toward the common goal of greater accountability.❙ STEPHEN J. GAUTHIER is director of the GFOA’s Technical Services Center in Chicago, Illinois. Work face-to-face with a Top 10 CPA and advisory ﬁ rm and experience round-the-clock commitment to ideas from nearly 200 professionals trained in the not-for-proﬁ t and government industry. Learn more at www.bkd.com. 10 experience ideas experience top ﬁrst determine whether a ﬁrm possesses the requisite expertise and experience to perform a quality audit before consider- ing price. Unfortunately, it is easy for gov- ernments to allow price to trump all other considerations in the auditor selection process, which often has led to substan- dard audits.A substandard audit is not a bargain at any price. No. 9: It is in the government’s best interest to sign a multi-year audit con- tract (why pay more for the same thing?). In an initial audit of a set of ﬁnan- cial statements, the new auditors must incur substantial costs to gain an understanding of and doc- ument the environment in which the government operates and its framework of internal control.In subsequent years,the auditor typically needs only to update that understanding and documentation. In a competitive, multi-year audit con- tract process,proposing audit ﬁrms can spread the initial cost over the entire term of the contract to arrive at the lowest pos- sible bid.Conversely, if a government contracts for the ﬁnan- cial statement audit only one year at a time,proposing ﬁrms must include the entire initial cost as part of the fee for that year or risk incurring a loss should the ﬁrm’s contract not be renewed. Accordingly, the Government Finance Officers Association recommends that governments minimize poten- tial audit costs by entering into multi-year audit contracts of no less than ﬁve years. June 2009 | Government Finance Review 47 Even when management seeks outside help to pre- pare the ﬁnancial statements, it remains responsible for their contents, just as taxpay- ers remain responsible for their tax returns, even if the returns are prepared by paid tax professionals. ignore the system that generates the data (it is risky to trust unreliable people, even when they appear to be telling the truth). There are two fundamental approaches an auditor can take to determine the reliability of data presented in ﬁnancial statements. One approach is to directly test a given item (e.g., conﬁrm the amount reported as cash on deposit with the bank).The other approach is to test the relia- is a presentation that is free from material misstatement (i.e., an error of such signiﬁ- cance that it could affect decisions made based on it). Concept of Reasonable Assurance. Considerations of cost beneﬁt also affect the work of the independent auditor. It would typically be impractical for the independent auditor to examine each and every transaction. Instead, auditors seek reasonable assurance that amounts are fairly presented by testing samples of items. TEN COMMON POINTS OF MISUNDERSTANDING No. 1: Fair presentation is not equivalent to ﬁnancial health (i.e., a good picture is not necessarily a pretty pic- ture). People frequently criticize the independent auditors when they ﬁnd out that a government currently experiencing ﬁnancial difﬁculties received an unqualiﬁed (i.e., “clean”) opinion on the fair presentation of its ﬁnancial statements.Yet there is no inconsistency between a government receiving an unqualiﬁed opinion on the fairness of its ﬁnancial statements and that same government experiencing ﬁnancial difﬁculties. The ﬁnancial statement audit is designed to vouch for the reliability of the ﬁnancial statements,not the soundness of the ﬁnances they portray. Just as the image of something unat- tractive in a photograph is no indication of a defective cam- June 2009 | Government Finance Review 45 Despite its routine character, the ﬁnancial statement audit appears to remain something of mystery to most outside the auditing profession.