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Attachment 2Subject: FW: meeting follow up From: Tduryea(aaol.com [mailto:Tduryea@aol.com] Sent: Thursday, January 19, 2017 7:05 PM To: Laurel Prevetti Cc: Stephen Conway Subject: Re: meeting follow up Thanks. Yes, I just received it and am printing out the 132 page document. I will put my response to the first email with the link that I was in the process of writing in this email instead. Here it is: Thank you for the link. I just sent an email to Steve asking for the timing of issuing this report. I would have attend the Finance Committee meeting but I will be picking my wife up at the San Francisco airport who will be returning from the Women's March this Saturday in Washington DC. There is little time to review the 100 plus page CAFR so it would be difficult to ask relevant questions in any case. I have just a couple comments below. Picking up on your idea we discussed last Friday that the TC is effectively the Town's Board of Directors, I do have questions that members of the Town Council Finance Committee should ask the Independent Auditors. These are questions a Board's Audit Committee would normally ask the outside CPA. The questions all mostly form, but it's important for the Council to ask these questions to show they are fulfilling their responsibilities and holding the Auditor accountable. I'm not sure of the deadline to get them in prior to the Finance Committee, so I'll include them here: * Did the Town Staff give you full cooperation in the conduct of your audit? * Did the Town Staff impose any restrictions on the scope of your audit? * Were they any adjustments you recommended in the financial statements or to the audited report that the Town did not make? * Did you find any material inadequacies in internal control? Based on a super quick review, I congratulate you and Steve for managing the Town finances in a way that increased the Town's total Net Position $3.1M and the Unrestricted Reserves $2.7M. I am still trying to understand the OPEB and how that is being funded so I look forward to Steve getting back to me on my question. I see we are funding that faster than required by the ARC. I don't understand why we are funding the OPEB faster than required rather than the Misc and Safety Pension Plans (assuming I understand the 2016 CAFR with a total of 5 minute review of 100 plus pages). With your link, I now have something to do tonight if I have trouble sleeping :-) Terry ATTACHMENT 2 1 Subject: Attachments: FW: Questions regarding the 2016 CAFR The Town of Los Gatos 2016 CAFR.docx From: Phil Koen [mailto:pkoenn:monte ropartners_con1] Sent: Sunday, January 22, 2017 9:21 AM To: Stephen Conway Cc: Laurel Prevetti; sheldon di anal .coin; Robert Schultz Subject: Questions regarding the 2016 CAFR Steve, I have attached a document which details a number of questions regarding the 2016 CAFR. I know that you are planning on discussing the 2016 CAFR with the Finance Committee this coming Monday. Please pass these question to the Finance Committee so they are aware of my questions. I would also appreciate confirmation that this has occurred. Before the Finance Committee can forward the 2016 CAFR to the TC for adoption by resolution, I believe the attached questions need be addressed. In addition to asking for additional information and disclosure on certain items, the attached document also identifies a number of errors in the CAFR that need to be corrected. Let's take the time to get this document correct. This is an important document and deserves all of our efforts to improve its accuracy and disclosure. Phil Koen i The Town of Los Gatos 2016 CAFR Review Questions Page 34 In 2015 CAFR long term employment benefit was $3,212,390. In 2016 CAFR it is reported as $2,694,576. Why has the balance decreased? In 2015 CAFR long term compensated absences was $2,176,890. In 2016 CAFR is reported as $2,089,841. Why has the balance decreased? Please reconcile the Internal Service Fund Net Position of $6,632,958 to the Net Position of $6,635,429 reported on page 101. Please reconcile the long term compensated absences of $2,089,841 to the amounts reported on page 53. Total compensated absences is reported to be $2,339,841 and the current portion is $1,771,402. On page 33 the current portion is reported to be $250,000 for all governmental funds. Please reconcile deferred outflows of resources of $7,867,905 and deferred inflows of $10,091,190 to amounts shown in footnote 9. Page 36 Please reconcile capital expenditures of $3,107,570 to the $3,241,657 reported on schedule 4 on page 116. Page 58 In footnote 1 paragraph G, please discuss the implementation of GASB 77 and 78 and impact on the Town, if any. Additionally please discuss the upcoming accounting and reporting changes from GASBs 73, 74, 75, 80, 81, 82 and their potential impact on the Town, if any. These changes are discussed in other municipalities CAFR's and would assist the reader in understanding their potential impact. Page 70 Please reconcile employer pension expense of $4,121,904 to the $4,563,036 reported on page 71. Please provide a summary of changes for the Safety Plan similar to what is reported for the Miscellaneous Plan on page 71, and reconciles the 2016 Net Pension Liability of $14,468,906 to the 2015 Net Pension Liability of $17,788,690. Please explain the difference between the reported Net Pension Liability of $14,468,906 to the Unfunded Accrued Liability of $17,003,013 reported on page 8 of the CALPERS Actuarial Valuation of the Safety Plan as ofJune 30, 2015. Page 71 Please explain the change in the proportion of Safety Plan Share Percentage Share reported in the 2015 CAFR for June 30, 2014 of .4742% to .2859% for the same period reported in the 2016 CAFR. What is the source of these percentages and why did it change? Please reconcile employer contributions of $1,941,765 to $1,968,043 reported on page 70. Please explain the changes in assumptions of $1,513,132 which reduced the 2016 Total Pension Liability. Page 72 Please explain the source of the change in employer's proportion which created the $4,212,383 in deferred outflows and the $7,029,235 in deferred inflows for the Safety Plan. This change has a material impact on the financial statements. Page 85 Please reconcile all numbers reported for 2015 in the 2016 CAFR to the numbers previously reported in the 2015 CAFR. Page 86 Please reconcile all numbers reported for 2015 in the 2016 CAFR to the numbers previously reported in the 2015 CAFR. Page 115 Please correct the Total all Other Governmental Fund for years 2011, 2012 and 2013. There are a number of errors in this schedule. Page 131 We note that Staff previously reported that bank accounts had not been reconciled on a timely basis for at least 6 months. Why is this not considered a material weakness in internal control? The test of a material weakness is, if this control was not in place, would the lack of the control give rise to a reasonable possibility that a material misstatement of the entity's financial statements could occur and not be corrected in a timely manner. We also note that the Town produced and issued materially incorrect Treasurer's Report for two fiscal quarters as a result of not reconciling their bank accounts. Based on the facts, if this issue is not a material weakness in internal control, would this be considered a significant deficiency? How did the auditor adjust their testing procedures or risk assessment based on this breakdown in internal control? From: Janette Judd Sent: Monday, January 23, 2017 9:31 AM To: jvannada@gmail.com Cc: Laurel Prevetti; Stephen Conway Subject: FW: A Good Article on the necessity of digging into the details of CAFR's cc: Town Council Town Manager Good morning Jak, Thank you for your e-mail, received by the Mayor, Town Council, and Town Manager. By copy of this message the Manager's office has also forwarded the message to Steve Conway, Director of Finance and Administrative Services. Steve can be reached at (408) 354-6828 or SConway@LosGatosCA.gov should you have additional comments or questions. Once again thank you for contacting the Town of Los Gatos. Best regards, Jarrett& Janette Judd • Executive Assistant Town Manager's Office • 110 E. Main St., Los Gatos CA 95030 Ph: 408.354.6832 • JJudd@LosGatosCA.gov www.LosGatosCA.gov • https://www.facebook.com/losgatosca Please note upcoming Town closures: Mon. Feb. 20, 2017 — Presidents Day Holiday From: ivannada@gmail.com [mailto:jvannada@gmail.com] Sent: Monday, January 23, 2017 8:51 AM To: Council Subject: A Good Article on the necessity of digging into the details of CAFR's https://www.google.com/amp/www. governing.com/topics/finance/gov-are-annual-financial-reports- useless.html%3FAMP?client=safari jak vannada Los Gatos Community Alliance 1 Are Comprehensive Annual Financial Reports Useless? Page 1 FINANCE Are Comprehensive Annual Financial Reports Useless? For all their charts and graphs, CAFRs don't tell public officials -- or the public -- anything about fiscal sustainability or whether a locality's finances might be trending south. BY JONATHAN WALTERS I SEPTEMBER 2012 Gerard Van der Leun/Flickr CC They're dense. Only the hardiest of souls would dig into a city or county comprehensive annual financial report (CAFR), called "kafers" by those hip to the inner workings of public finance and auditing. http://www.governing.cornitopics/finance/gov-are-annual-financial-reports-useless.html 1/23/2017 Are Comprehensive Annual Financial Reports Useless? Page 2 Characterized by a mind -numbing array of charts, graphs and number columns, CAFRs include such heart -palpitating headings as, "Expenditures and Changes in Fund Balances of Governmental Funds" and "Statement of Activities For the Year Ended September 30, 2006." That latter and particularly mundane title can be found on page 10 of the Jefferson County, Ala., CAFR. Sept. 30, 2006, however, is anything but an ordinary date in the history of Jefferson County's finances. By that date, the county was well on its way toward experiencing the largest local government fiscal meltdown in U.S. history. Yet even a trained auditor reading the 2006 CAFR would conclude that the county's finances were OK. That, of course, is more than a little surprising inasmuch as the financial misconduct that eventually led to the county's defaulting on billions of dollars in sewer upgrade bonds had been in full swing for a decade. In other words, the scandal that would sweep a host of public officials into jail and the county into a financial sinkhole had been whirlpooling along for nearly a dozen years. Those years had been covered by as many CAFRs, apparently without a hint of what was actually going down with the county's finances. Indeed, the only concern expressed by the 2006 CAFR related to the county sewer system was on the fourth -to -last page of the 128-page report: a short note indicating that the county might not be properly billing every customer who was tapped into the county's gold-plated new sewer system. "You look at the Harrisburgs and the Scrantons and the Jefferson Counties and you naturally ask, 'How did we not know this was coming five or 10 years in advance?"' says Joe Stefco, who follows public finance for the Rochester, N.Y.-based Center for Governmental Research. And for that matter, one might question where the red flags were on Stockton, Compton or San Bernardino, Calif., or even Central Falls, R.I.? The question of how officials failed to foresee such colossal fiscal calamities is naturally linked with the question of who ought to be blamed for such blindness. In Jefferson County's case, looking beyond the actual perpetrators, it would be natural to blame the person who signed off on the CAFRs, including the very last one released before the scandal splashed across the national news, the Sept. 30, 2006 report. In that case, the seeming culprit would be Ronald L. Jones, chief examiner for http://www.governing.corn/topics/finance/gov-are-annual-financial-reports-useless.html 1/23/2017 Are Comprehensive Annual Financial Reports Useless? Page 3 the Alabama Department of Public Accounts, who expressed no concern whatsoever about the contents of the county's CAFR. Blaming Jones, however, wouldn't really be fair. "Comprehensive" may have the ring of authority to it, suggesting that CAFRs are some sort of exhaustive and accurate look at a government's true financial health. Certainly trying to lift one off a desk would suggest that there's nothing the report could possibly have missed by way of financial accounting and investigation. But all CAFRs really are is a snapshot of a government's finances at a given point in time; at best, they're a look backward for a year. "It's a thorough documentation of financial actions over the course of a fiscal year," says Sam Tyler, president of the Boston Municipal Research Bureau. "But it's a year after the fact." For all their charts and graphs, CAFRs don't tell public officials -- or the public -- anything about fiscal sustainability or whether a locality's finances might be trending south. That's just as true for those localities teetering toward insolvency for mundane reasons -- like lousy fiscal management or just unhappy circumstances -- as it is for those that have been fleeced by a crowd of bad actors (or as in the recent case of Dixon, Ill., merely one bad actress). That's the key point worth making, say those who want to improve government financial reports. They want the information to offer earlier warnings of fiscal trouble ahead. What might push a local government into deep fiscal despair probably won't be a scandal like Jefferson County's or Bell, Calif.'s. What actually sinks city and county finances is that slow, steady accretion of bad -- and hidden -- fiscal news that either nobody is getting or no one wants to hear. That news invariably takes the form of commitments to future spending, like bond and pension obligations, as well as other liabilities, such as deteriorating or outdated infrastructure versus the jurisdiction's revenues to cover those commitments and liabilities. What really cripples municipal finances comes on relatively slowly -- then avalanches. By the time anyone figures out something's wrong, it's often too late for any moderate corrective action; only bankruptcy, state oversight or emergency fiscal managers will do. http://www.governing.com/topics/finance/gov-are-annual-financial-reports-useless.html 1 /23/2017 Are Comprehensive Annual Financial Reports Useless? Page 4 What do I do with a CAFR?" asks Cameron Smith, who, as policy director for the Alabama Policy Institute, has spent a considerable amount of time sifting through the wreckage of the Jefferson County crash. Even if there was truly damning information contained in a CAFR, it would be hard to find, says Smith. He sees CAFRs as a potentially insidious exercise in "flood[ing] the market with data that no one knows what to do with." Some of the best auditors in the country find even their own jurisdiction's CAFRs daunting. Mike Eglinski, performance auditor for Lawrence, Kan., says he remembers the day four years ago when the Lawrence CAFR landed on his desk for the first time. "What am I going to with this?" Eglinski remembers asking himself. "It's half an inch thick, 121 pages long and there could easily be something fascinating and important on page 79 right in the middle of the page," which, he hastens to add, even the most astute and conscientious auditor might miss for the sheer density of the surrounding 120 pages. "And some of the things you'll read, you can't tell whether it's a good thing or a bad thing. Is it up or is it down?" The questions about CAFRs now being debated in the publicsector finance and auditing community are very much along the lines of Smith's and Eglinski's: What, in the larger sense, should we make of CAFRs? What should we do with them? Can they be made more useful? The focus of the debate on these questions currently revolves around a proposal floated earlier this year by the Governmental Accounting Standards Board (GASB) to include more "forward -looking" information in CAFRs based on current policy and known facts. It is a very preliminary proposal for how CAFRs might be made more useful in recognizing potential financial trouble. Details for how that might be done have yet to be worked out, but would involve some sort of out -years projections model that would take into consideration significant projected spending obligations in relation to projected revenues. The proposal already is taking a lot of flak from the public -sector finance community. This is not an unfamiliar position for a GASB proposal. Finance officers often complain that the board is overly meddlesome when it comes to telling governments what they ought to reveal about their long-range fiscal prospects. http://www.governing.com/topics/finance/gov-are-annual-financial-reports-useless.html 1/23/2017 Are Comprehensive Annual Financial Reports Useless? Page 5 "Unless someone has a crystal ball and is smarter than anyone born today, no one can predict with certainty in five years what the fiscal condition of a state or locality is going to be," says Jeff Esser, executive director of the Government Finance Officers Association, which has come out against the new GASB standard. "The Federal Reserve can't do it with the U.S. or the global economy, and I don't know of anyone who can do it for state or local economies." Esser has a lot of company in his skepticism around GASB's idea for a more meaningful CAFR. Utah Deputy State Auditor Joe Christensen, in a Feb. 13, 2012, comment letter, argues that any such projections would be way too subjective to be meaningful, and that any benefit derived from such attempts would not be worth the cost. "It really comes down to the fact that auditors and financial people are used to dealing with informatioun that comes from the past," says Christensen, who has been a public -sector auditor for 26 years. "Shifting from historic financial statement to projections is something that auditors aren't comfortable with." Tyler at the Boston Municipal Research Board sees this as myopia. He, like Stefco in Rochester, notes the number of cities nationally that are now in or very near bankruptcy. "There's plenty of evidence out there that a number of cities could have used this information to see that they were headed in the wrong direction," Tyler says. Furthermore, Tyler notes, some jurisdictions are already doing projections, including Boston, where the budget office does an annual, internal three -year -out budget. "If a state or a city is well managed, they're already doing it," Tyler says. "We just wish that the information was more public. But CAFR doesn't require that, and it would be helpful if there was a requirement." While the debate over CAFR and budget projections continues, some in the public sector aren't waiting around for the financial world to figure out how to make CAFRs more useful. They're doing it themselves. One of those people is Lawrence's Eglinski. http://www.governing.com/topics/finance/gov-are-annual-financial-reports-useless.html 1/23/2017 Are Comprehensive Annual Financial Reports Useless? Page 6 Rather than succumb to the brain numbness delivered by the Lawrence CAFR, Eglinski decided he needed some context, so he started doing two things: Looking at past Lawrence CAFRs and collecting CAFRs from cities with similar characteristics to Lawrence. "It takes comparison and looking at CAFRs over time," Eglinski says, for them to begin to reveal important trends. By going through several years' worth of Lawrence CAFRs, for example, Eglinski noticed that revenues for municipal trash collection previously had covered the city's costs of collection and disposal, but were no longer doing so. Eglinski put this in the "risk" category and alerted city officials to focus on turning it around. Changes in staffing and equipment have moved the program back into the black. Eglinski also noticed a troubling trend around Lawrence's own sewer and water system: More and more revenues from sewer and water fees were being diverted to the general fund, which he worried might threaten system upkeep. By comparing Lawrence's CAFR to other cities, Eglinski says he's helped elected officials ask much better questions about the cost of longer -term obligations, like the potential cost of the city's promises for pensions and other post -employment benefits (OPEB). "You'll see cities that have 10 or 20 times larger OPEB obligations, so the question is whether that city's governing body knows that, but you only learn that through comparison." That's pretty much where the Alabama Policy Institute has arrived. Policy director Smith says the institute has spent "a tremendous amount of resources trying to chew through the information in a couple of Jefferson County CAFRs pre - meltdown." So far, he says, there haven't been any striking revelations that would have suggested disaster. The institute is also doing a multi -jurisdictional CAFR analysis to see whether such comparisons might yield valuable intelligence about whether one jurisdiction might be in a more precarious fiscal position than another. But absent some more predictive, digestible reporting model, it's clear that slogging away in the trenches is the only way to make CAFRs more meaningful. "It's information that on its own certainly isn't going to identify problems," says Eglinski. "The CAFR is a document that people understand is significant. It's just hard to figure out what in it is critical." http://www.governing.com/topics/finance/gov-are-annual-financial-reports-useless.html 1/23/2017