I was interested to read in todays Boston Globe that Merrill Lynch has agreed to repay the City of Springfield for nearly $14 million in investment losses, as well as the City’s legal fees. The losses were reportedly related to “collateralized debt obligations,” which are securities linked to bonds and loans, including subprime mortgages, according to the Globe.

Interestingly, these reports are coming on the heals of several recent investment related reports and advisories that TLB has been monitoring on behalf of its clients. As well as downgrades from rating agencies on some government investment pools.

November 30, 2007, Standard & Poor’s issued a report entitled “S&P Rated Local Government Investment Pools Weathering Storm.”

On December 5, 2007, the Boston Globe ran an article with the headline “Volatile holdings part of state fund - SIV’s add risk as communities seek to increase income,” referring to the MMDT cash portfolio.

This was followed by a frequently asked questions report by S&P on December 10, 2007, related to local government investment pools and a separate question and answer piece issued by Fidelity on the MMDT cash portfolio and its perspectives on Structured Investment Vehicles. S&P also issued a separate report entitled “U.S. State and Local Government Investments and Recent Market Disruption,” on December 10, 2007.

Just recently, I received the 2007/2008 investment circular from the MMDT on the cash portfolio and the MMDT short-term bond fund.

TLB has been adding additional procedures to its municipal audits to ensure our clients are meeting the disclosure requirements of GASB 40, have an investment policy, are following and monitoring adherence to the investment policy and that city and town treasurers understand to what extent municipal investments may be at risk.

TLB will be adding future posts on a treasurers responsibility for deposits and investments under Massachusetts General Laws, and otherwise. But, in the meantime, there is no time like the present to review where your community stands. If you have any questions regarding the recent reports, on investment policies or municipal investments in general please contact Rich Bienvenue at (508) 255-2240 or via e-mail rich@tlbcpa.net

Posted by Rich Bienvenue

TLB provides auditing and financial services to Massachusetts municipalities - please ask us how we can help you!

Representatives of the Government Accounting and Auditing Committee of the Mass. Society of CPA’s sought clarification from the MWPAT regarding this issue.  According to Scott Jordan of the MWPAT, the Trust recieves federal funds through the Clean Water and Drinking Water State Revolving Fund Program.  These federal funds are invested and the MWPAT issues bonds, supported by the investments.  From these bond issues the MWPAT then provides loans to local communities.

The MWPAT recently received guidance from the U.S. EPA indicating that this funding is subject to Single Audit requirements, and furthermore, sub-recipients (including loan recipients) would also be subject to Single Audit requirements.  In order to more easily administer the MWPAT’s monitoring requirements and to minimize the impact on local communities the MWPAT has elected to specifically identify the federal funds loaned for fiscal year 2007 as those loans pertaining to the Massachusetts Water Resources Authority (MWRA).

It is expected that the MWPAT will take a similar position, if it is possible, in future years.  However, if loans to the MWRA do not equal or exceed the amount of federal awards to the MWPAT in a particular year then the MWPAT will then have to specifically identify other loan sub-recipients as having received federal financial assistance subject to Single Audit requirements.  As an alternative to the specific identification of the federal assistance loans, the MWPAT could elect to have the federal assistance allocated to all loans - although this does not seem to be an attractive option.

Because of the possibility of a MWPAT loan being at least partially funded by federal awards, MWPAT is expecting to add language to its loan documents notifiying the sub-recipient that a portion of the loan maybe federal financial assistance and the MWPAT will notify the community if there is a Single Audit requirement.

Local communities need to be aware of these new requirements and limitations from the MWPAT.  Notification of the federal funding of any particular loan is likely not to occur until after the end of the fiscal year in which the loan was received.  Posted by Rich Bienvenue.

Whether an encumbrance is valid or not is ultimately a legal determination that potentially could require the consideration of a number of factors, provisions of Massachusetts General Laws and the facts and circumstances surrounding each individual encumbrance. However, in general the basic requirement to be met is that a binding contractual commitment or obligation must exist as of June 30 between the Town and a vendor.

 In a 1992 letter to a local community from the DOR (DOR file #92-1012) the DOR opines, in part,

“The annual operating budget for each town department is authorization only to expend for obligations incurred during that fiscal year. Appropriated funds may be encumbered at the end of a fiscal year when goods or services cannot actually be delivered prior to June 30th, provided that a commitment to purchase them has been made during that fiscal year.  Ordinarily evidence of that commitment may be made by means of a purchase order, accepted bid or signed contract.”

Furthermore, the DOR opines that school committees have wide latitude under MGL Ch 71, S 49A and under MGL Ch 71, S 34 to expend money at the end of a fiscal year – including for items intended for use in the following fiscal year.  This treatment was supported by the Massachusetts appeals court case Wilmington v. Town Accountant of Wilmington (19 Mass. App. Ct. 964 (1985)). 

It is important to note that a binding contractual commitment is not evidenced by a completed purchase order in and of itself – a binding contractual commitment must exist, in fact, verbal or otherwise. DOR letter 92-1012 provides in part,

 “…there appears to be a dispute about whether there was a binding agreement to purchase the items in question. Although a purchase order may be evidence of such a binding commitment, it is not necessarily conclusive evidence if there is actually no contractual obligation to purchase the items.  If verbal agreement to provide the goods was reached with the vendors prior to the end of the fiscal year, as the purchase orders suggest, then that would be sufficient to encumber the funds until delivery was made.  However, if the town accountant is correct, and there was no commitment on the part of the town to the vendor nor any obligation on the part of the vendor to provide the goods, prior to July 1, 1992, then the purchase orders are insufficient to encumber the funds from the fiscal 1992 budget.”

Please contact TLB if we can provide you additional information or support on issues surrounding encumbrances. – posted by Rich Bienvenue

Since the inception of the Medicare Part D reimbursement it has been widely assumed that this federal reimbursement was not considered a federal award for purposes of determining Single Audit Act requirements.  The belief was the reimbursement was exempt under the OMB Circular A-133 medicaid/medicare services exemption or was considered a vendor type payment.  However, recently some audit firms have been advising their clients to include these federal awards on their Schedule of Expenditure of Federal Awards (SEFA) report.  We believe this guidance is being issued in response to a recently issued A-133 compliance supplement which referred to a Medicare Part D program.

TLB contacted the Department of Health and Human Services Technical Assistance department and according to HHS, this question had not been previously considered and was recently put under review by federal government lawyers.  Although the technical assistance people seemed to agree with our interpretation of the rules, an official decision has not yet been determined.  TLB also noted the compliance supplement noted above refers to a state program, not the Medicare D plan sponsor reimbursement program, which has a CFDA number of 93.770, and does not have any compliance supplement.  A review of the CFDA report for 93.770 only refers to the Center for Medicaid & Medicare Services (CMS) audit requirements and does not reference any requirements under the Single Audit Act.

So, what should an organization do?  The general advice governing potential federal awards is to include amounts for which you are unsure on your entities SEFA.  By doing so an entity avoids having to reissue the SEFA report in the event that it is subsequently determined to be a federal award.  In some circumstances this option is not attractive.  Depending on the amount a municipality has received, the Medicare D reimbursement may be considered a major program.  Even if less than $300,000 has been received, it is our opinion that Medicare D should be considered a high-risk, type B program - which would require testing as a major program. 

Based upon our review of the Medicare D legislation, HHS regulations and the CMS Medicare D audit guide, we project the testing and audit work that would potentially be needed to address Single Audit Act requirements to be extensive - adding significant time to complete audits that have already begun, or completed, and would add a substantial additional cost to these audits. 

An additional complication arises from municipal participation in joint purchase groups (health groups).  Some health groups have applied to CMS as the “plan sponsor,” on behalf of its members.  If it is determined that Medicare D is subject to Single Audit Act requirements, then these joint purchase groups would likely be required to have a so-called Single Audit with Medicare D as the only federal program.  Most Massachusetts health groups formed under MGL Ch. 32B do have an audit, and TLB performs audits for these clients in accordance with Government Auditing Standards, however, others are not performed in accordance with these standards.  Furthermore, TLB is aware of some health groups who are not audited at all.  TLB also posed a not yet considered question to HHS regarding health groups, that is - since municipalities are receiving the benefit of Medicare D from a health group in the form of reduced premiums, does this equate to a subsidy that would be required to be measured and included on each members SEFA?  HHS told us that it will include this question in its evaluation.

Finally, TLB advises all municipalites receiving Medicare D reimbursements to become aware of the audit and compliance requirements of CMS, which are comprehensive.  CMS has stated that it is expecting to perform audits (separate from any Single Audit requirement) of approximatley one-third of Medicare D plan sponsors each year, focusing on Medicare fraud prevention and detection.  This sounds like to us that you should expect your entity to undergo an audit of its Medicare D billings at least once every three years.  Contact TLB Partner, Rich Bienvenue if you would like further information on the CMS audit process and requirements.

As always, please post your comments or contact us if you have any questions or any further information on this subject. RB