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HomeMy WebLinkAbout2014 - LBWL Lansing Board of Water and Light Revised 27245 AU 260, 0614 Final Plante Plante&Moran,PLLC 1111 Michigan Ave. East Lansing,MI 48823 moran 85 Tex 517.332 0 Fax,517.332,8502 plantemoran.com September 4, 2014 To the Board of Commissioners Lansing Board of Water and Light We have audited the following financial statements (collectively referred to as the "BWL") as of and for the year ended June 30, 2014 and have issued our report thereon dated September 4, 2014: • Board of Water and Light - City of Lansing, Michigan • Lansing Board of Water and Light Retiree Benefit Plan and Trust • Lansing Board of Water and Light Employees' Defined Contribution Pension Plan • Plan for Employees' Pension of the Board of Water and Light - City of Lansing, Michigan - Defined Benefit Plan Professional standards require that we provide you with the following information related to our audit which is divided into the following sections: Section I - Required Communications with Those Charged with Governance Section II - Informational Items Section I includes information that current auditing standards require independent auditors to communicate to those individuals charged with governance. We will report this information annually to the Board of Commissioners at the BWL. Section II contains updated informational items that we believe will be of interest to you. We would like to take this opportunity to thank the BWL's staff for the cooperation and courtesy extended to us during our audit. Their assistance and professionalism are invaluable. This report is intended solely for the use of the Board of Commissioners and management of the Lansing Board of Water and Light and is not intended to be and should not be used by anyone other than these specified parties. Praxitv: MEMBER GLOBAL ALLIANCE OF INDEPENDENT FIRMS To the Board of Commissioners September 4, 2014 Lansing Board of Water and Light We welcome any questions you may have regarding the following communications and we would be willing to discuss any of these or other questions that you might have at your convenience. Very truly yours, Plante & Moran, PLLC 1 Douglas D. Rober, CPA Partner 2 To the Board of Commissioners September 4, 2014 Lansing Board of Water and Light Section I - Required Communications with Those Charged with Governance Our Responsibility Under U.S. Generally Accepted Auditing Standards As stated in our engagement letter dated July 8, 2014, our responsibility, as described by professional standards, is to express an opinion about whether the financial statements prepared by management with your oversight are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles. Our audit of the financial statements does not relieve you or management of your responsibilities. Our responsibility is to plan and perform the audit to obtain reasonable, but not absolute, assurance that the financial statements are free of material misstatement. As part of our audit, we considered the internal control of the BWL. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. We are responsible for communicating significant matters related to the audit that are, in our professional judgment, relevant to your responsibilities in overseeing the financial reporting process. However, we are not required to design procedures specifically to identify such matters. Planned Scope and Timing of the Audit We performed the audit according to the planned scope and timing previously communicated to you in our letter about planning matters delivered on August 6, 2014. Significant Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. In accordance with the terms of our engagement letter, we will advise management about the appropriateness of accounting policies and their application. The significant accounting policies used by the BWL are described in Note I to the financial statements. As described in Note 16, the BWL adopted GASB No. 65 and GASB No. 67 during the fiscal year ended June 30, 2014. GASB No. 65 reclassified certain items that were previously reported as assets and liabilities and instead classifies them as deferred inflows of resources and deferred outflows of resources and also required that bond issuance costs be expensed immediately. As a result of implementing this statement, assets and liabilities have been properly reclassified in the financial statements and unamortized bond issuance costs were written off. GASB No. 67 required changes to the actuarial valuations resulting in a different measurement of the liability of the employer to plan members for benefits provided through the pension plan. As a result, the disclosures within the footnotes of the Plan for Employees' Pension of the Board of Water and Light - City of Lansing, Michigan - Defined Benefit Plan statements have changed considerably along with the related schedules in the required supplemental information. 3 To the Board of Commissioners September 4, 2014 Lansing Board of Water and Light We noted no transactions entered into by the BWL during the year for which there is a lack of authoritative guidance or consensus other than the income statement reporting related to the change in certain regulatory assets from year to year. The BWL board approved in prior reporting years regulatory assets/liabilities for the BWL's energy cost adjustment (ECA), fuel cost adjustment (FCA), and power cost adjustment (PCA) which impact the amounts billed to customers to reflect the difference between the BWL's actual material costs and the amounts incorporated into rates. The BWL records the year-to-year change in the ECA, FCA, and PCA within revenue. GASB 62 paragraph 480 indicates that a regulated entity should capitalize incurred costs that would otherwise be charged to expense if it is probable that "future revenue" equal to the capitalized cost will result from inclusion of that cost for rate-making purposes, and that future revenue will permit recovery of the previously incurred cost. The standard is not explicit in the schematics of the accounting for such transactions on the income statement side (whether the adjustment to the capitalized cost from one year to the next should be recorded to revenue or expense). The BWL's position, largely based on what they have indicated is industry practice, is that the adjustment should be recorded to revenue, as the additional costs over and above the amounts built into rates relate to service already provided and therefore amounts earned, even if the billing rate does not reflect the additional costs until the following period. Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the financial statements were unbilled accounts receivable, environmental remediation, capitalized indirect costs, and the use of regulatory assets and liabilities. Management's estimate of unbilled accounts receivable is based on the number of days unbilled and the average daily usage from the previous month's meter readings. We evaluated the key factors and assumptions used to develop unbilled accounts receivable in determining that it is reasonable in relation to the financial statements taken as a whole. Management's estimate of the environmental remediation valuation is based on studies performed by the BWL's environmental engineers and third-party consultants. We evaluated the key factors and assumptions used to develop the environmental remediation valuation in determining that it is reasonable in relation to the financial statements taken as a whole. Capitalized indirect costs are based on budgetary information estimated by finance and accounting personnel. We evaluated the key factors and assumptions used to develop the capitalized indirect costs in determining that they are reasonable in relation to the financial statements taken as a whole. 4 To the Board of Commissioners September 4, 2014 Lansing Board of Water and Light Management's use of regulatory assets and liabilities is based on board approval for these types of transactions. We ensured all transactions for which regulatory accounting was applied had board approval in a prior year and there were no new items approved for the current year. We evaluated the key factors and assumptions used to calculate the balances related to the regulatory assets and liabilities in determining that they are reasonable in relation to the financial statements taken as a whole. The disclosures in the financial statements are neutral, consistent, and clear. Certain financial statement disclosures are particularly sensitive because of their significance to financial statement users. The most sensitive disclosures affecting the financial statements were recoverable costs (see Note 6) and commitments and contingencies (see Note 9). The disclosures in the financial statements are neutral, consistent, and clear. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Disagreements with Management For the purpose of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor's report. We are pleased to report that no such disagreements arose during the course of our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. We did not detect any misstatements as a result of audit procedures. There was a reclassification of the insurance proceeds received, net of any impairment loss, through June 30, 2014 in the amount of $10,099,712 related to the Wise Road Water Conditioning Plant from an offset to capital assets to a regulatory liability. Significant Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, business conditions affecting the BWL, and business plans and strategies that may affect the risks of material misstatement with management each year prior to retention as the BWL's auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition of our retention. Management Representations We have requested certain representations from management that are included in the management representation letter dated September 4, 2014. 5 To the Board of Commissioners September 4, 2014 Lansing Board of Water and Light Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the BWL's financial statements or a determination of the type of auditor's opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. 6 To the Board of Commissioners September 4, 2014 Lansing Board of Water and Light Section II - Informational Items New Rules Governing Management of Federal Programs In December 2013, the Office of Management and Budget (OMB) issued long-awaited reforms to the compliance requirements that must be followed by non-federal entities receiving federal funding. All entities receiving federal dollars will need to understand the changes made as a result of these reforms and may be required to make some changes to your internal procedures, processes, and controls. These reforms impact three key areas of federal grants management: I. Audit Requirements - For fiscal years beginning on or after January 1, 2015, the threshold for obtaining a federal awards audit will increase from the current threshold of$500,000 of annual federal spending to $750,000. There will also be significant changes to the criteria for qualifying as a low-risk auditee and a reduction in the number of major programs required to be tested for some clients. The BWL has been below the current $500,000 threshold in recent years. However, from time to time, depending upon the level of federal spending, the BWL may still be subject to an audit requirement even at the new higher$750,000 threshold. 2. Cost Principles - Effective December 26, 2014, the grant reforms related to cost principles go into effect. Not only were certain changes made to allowable costs under this new guidance, but there were significant changes in the area of time and effort reporting and indirect costs. 3. Administrative Requirements - Also effective December 26, 2014, non-federal entities receiving federal funding must adhere to new rules related to administering federal awards. Most notably, these requirements may impact the BWL's procurement systems, including maintaining written conflict of interest policies and disclosures. These revisions are clearly the most significant change to occur to federal grants management in recent history. Entities receiving federal funding will need to carefully digest these changes. Plante & Moran, PLLC has many experts in these rules who can assist you in understanding the changes and how they impact the BWL. As we continue to delve into these new rules, we will keep you informed and updated. New Pension Standards Beginning with the BWL's June 30, 2015 year end, one new accounting standard issued by the Governmental Accounting Standards Board (GASB) will significantly impact the BWL's financial statements. GASB Statement No. 68, Accounting and Financial Reporting for Pensions, significantly revise the current accounting and reporting requirements for pensions from an employer perspective. GASB Statement No. 67, Accounting and Financial Reporting for Pension Plans, was implemented for the June 30, 2014 year end. 7 To the Board of Commissioners September 4, 2014 Lansing Board of Water and Light Employers providing defined benefit pensions to its employees must now recognize their unfunded pension benefit obligation as a liability for the first time, and must more comprehensively and comparably measure the annual costs of pension benefits. The statement also enhances accountability and transparency through revised and expanded note disclosures and required supplementary information (RSI). As a result of implementing the new standard, there will be several new disclosures and schedules within the BWL's financial statements. Significant coordination between the BWL, the actuary, and Plante & Moran, PLLC will be required in order to implement these pronouncements effectively. GASB Statement No. 68 is required to be adopted for BWL's June 30, 2015 year end. We are happy to work with the BWL over the next year to ensure smooth implementations of the new standard. We also encourage BWL personnel to view the free webinars available on Plante & Moran, PLLC's website, if you have not already done so. Potential Changge in Audited Financial Statement Due Date Senate Bill 949 of 2014 was recently introduced. Among other things, the bill changes the due date for audits. • The audit deadline would be moved to 150 days from 180 days (effective for fiscal years ending after June 30, 2014). • If the deadline cannot be met, the State can move in and either perform or contract for and charge the local unit for the audit services. • There would be a requirement that budgets conform to the Uniform Chart of Accounts. • The biennial audit exception for units under 4,000 population would be removed. • Very specific language is added to say a unit cannot adopt or operate under a deficit budget, nor incur an operating deficit. 8