$30 million adds up

Here’s the good news:

“No instances of noncompliance material to the financial statements of the city were disclosed during the audit.”

That was one paragraph — a crucial paragraph, to be sure! — from the 2016 audit of the city of Sarasota’s 2016 Comprehensive Annual Report.

Which explains why City Auditor and Clerk Pamela Nadalini wasn’t overly alarmed by the $30 million worth of accounting errors that auditors found in the books of the city’s three pension plans.

No money was lost. As the auditor’s narrative vaguely explains in the accompanying text, the errors made the financial statements for the city’s three pension plans inaccurate, having the effect of the city not really knowing the correct total of its pension liabilities.

Nadalini attributed the errors to the shoddy work of one employee. And she responded to the auditor with the corrective steps her office is implementing. 

It’s not a five-alarm crisis. Nonetheless, it’s a serious matter. For one, city taxpayers and commissioners want to have confidence that the people watching taxpayers’ money know what they’re doing and are doing it right.

Second, when you see how much annual taxpayer money goes to fund the pensions, plus the amount of the city’s unfunded liabilities, it’s a cliche, but every penny counts.

Look at the table below. It should be eye-opening to Sarasota taxpayers that, even though Sarasota and Bradenton have essentially the same population, the total pension liabilities and how much taxpayers are contributing each year to fund their cities’ pension plans are dramatically different. Sarasota’s unfunded pension liabilities are 3.5 times greater than Bradenton’s, and Sarasota taxpayers are contributing 4.5 times more each year than Bradenton taxpayers to fund the pension plans.

If calculations are off $30 million one way or another, that can have a material effect on how much taxpayer money must go toward pensions and not toward city services.

WHAT WENT WRONG IN PENSION ACCOUNTING

Here’s what the city’s independent auditor, Purvis, Gray & Co. LLP, said about the errors found in the city of Sarasota’s 2016 Comprehensive Annual Report:

DEFINITIONS

“A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. 

A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. 

MATERIAL WEAKNESSES

Financial Reporting

Condition: Misstatements were detected in our audit of the Fund’s financial statements for the fiscal year ended Sept. 30, 2016.

Cause: During our audit for the year ended Sept. 30, 2016, several adjustments were required for the fair presentation of the financial statements to correct items that were erroneously or not recorded, to correct prepaid expenses and liability balances and to accrue revenues. In aggregate, entries of the approximately $571,000 were required to correct balance sheet and related income statement accounts of the General Employees’ Plan, $3.4 million for the Police Officers’ Plan and $2.1 million for the FireFighters’ Plan.

Management’s Response: We fully understand and agree that it is imperative our financial statements properly reflect all activity of the Plan’s operations and accurately reflect the Plan’s financial position. The Pension Administration Division will post all transactions and implement a monthly financial statement soft close and review process that will help to identify and capture unrecorded receivables, liabilities, revenues and expenses.

Investment Reconciliation

Condition: Ending balances on supporting spreadsheets maintained by management did not agree to statement balances or general ledger accounts.

Cause: Journal entries totaling $8.5 million were necessary to correct investment balances for the fiscal year ended Sept. 30, 2016, for the General Employees’ Plan, $11.3 million for the Police Officers’ Plan and $4.8 million for the Firefighters’ Plan.

Management response: The current policies and procedures over investment reconciliations were not followed during the year. Immediate corrective action is being taken to properly reconcile the investments on a monthly basis, as per our policy. We will also adjust our investment reconciliation spreadsheet as needed to enhance the clarity and completeness of the data presented on a month to month basis. Investment activity will be recorded and reconciled in our accounting software to ensure the Plan’s investments are properly stated. These monthly investment reconciliations will be reviewed and agreed to their respective investment manager statements, custodian statements and our general ledger. The Pension Administration staff will also attend additional training over accounting for investments to strengthen investment and accounting knowledge.

SIGNIFICANT DEFICIENCY

2016-001 Actuarial Reporting

Condition: Fund participant data was not submitted to the actuary prior to the beginning of our fieldwork (Nov. 28, 2016). The Fund participant data was submitted during our fieldwork; however, there were multiple errors identified during our testing which required Fund resubmissions of information and corrections to the actuary’s records.

Cause: Management did not properly close the previous fiscal year in the actuarial databases maintained on site. Consequently, participant information was not updated throughout the fiscal year ended Sept. 30, 2016.

Effect or Potential Effect: Errors in participant data can adversely impact the calculation of the total pension liability.

Management’s Response: While the actuarial software was not closed out from the fiscal year ended Sept. 30, 2015, census data for both active and retired Plan participants was maintained in Pension Administration throughout the fiscal year. Once an accessible version of the actuarial software was made available, Pension Administration was able to upload the relevant and necessary data for the fiscal year ended Sept. 30, 2016.