City Council - Regular Meeting

Thank you.

Because I'm a stickler for time, it's 7 a.m. or 7 p.m. a.m. would be different. So I will go ahead and call the Finance Committee meeting to order for Monday, September 14th. The first order of business is the review and approval of the July 6th, 2026 Finance Committee meeting. Without objection, they are approved. And then the next docket item, IS A COMMUNICATION AND REVIEW OF THE ANNUAL COMPREHENSIVE FINANCIAL REPORT TO THE CITY OF LAKEWOOD FOR THE AUDIT PERIOD JANUARY 1, 2025 THROUGH DECEMBER 31, 2025, PURSUANT TO LAKEWOOD CODIFIED ORDINANCES 160.03. AND FOR FOLKS THAT FOLLOW THE FINANCE COMMITTEE AND OUR FINANCIAL CONTROLS, WE'LL NOTE THAT EARLIER THIS YEAR, WE AMENDED LAKEWOOD CODIFIED ORDINANCES TO BASICALLY DO AWAY WITH A CITIZEN AUDIT COMMITTEE AND WE ASSIGNED AUDIT COMMITTEE TASKS TO THE FINANCE COMMITTEE OF CITY COUNCIL. SO EVERY YEAR THE CITY HAS AN AUDIT OR EITHER USES THE AUDITOR STATE OR HAS A PRIVATE AUDIT FIRM AUDIT OUR FINANCIAL STATEMENTS AND OUR FINANCIAL CONTROLS AND THEY PRODUCE A REPORT. WE'VE TALKED ABOUT IT A LITTLE BIT THAT Before the audit is released, we can technically do an audit conference that's exempt from the Open Meetings Act. So council members could ask and audit committee members could ask for any questions in a non-public meeting, an executive session if they wish to. Or we could simply wait until the audit is finalized with the auditor of state's office and have a public meeting where we can ask public questions to the auditors and to the finance director about the audit. And we went with the second route here. So the audit is posted on the Auditor State's website. We also got a copy of it on council. So that's a lot of preamble to why we're here tonight. But generally speaking, the audit was clean. And we have Kyle Doherty and Devon Bernard from Zupka and Associates. Did I say that correct? Did I say your names correctly? OK, GREAT. AND SO WE WELCOME THEM HERE THIS EVENING TO ANSWER OUR QUESTIONS. WE ALSO HAVE DIRECTOR MAHONEY AND DIRECTOR VARGO PRESENT. I GUESS, AS I UNDERSTAND IT, THE AUDITORS DON'T HAVE A PRESENTATION TO GIVE, BUT I THINK I WOULD WANT TO TURN IT OVER TO THEM JUST TO KIND OF HEAR HIGH LEVEL WHAT THEIR EXPERIENCES WITH LAKEWOOD, WHAT THE AUDIT REPRESENTS. IN SPEAKING WITH THEM BEFORE THE MEETING, The city of Lakewood has used the firm's Upkin Associates for a couple years for our audit. Sometimes the state auditor does audits with their own staff, and sometimes they provide municipalities and local governments the ability to hire independent auditors, IPAs, independent public accountants, to do this work, which they basically, I'll let them explain, but from what I understand, come and have full range of viewing financial controls, documents, double-checking things that the city has, double-checking ledger's accounts to make sure that everything matches up with what we put out there to ensure that we have the right controls in place. So at this point, I'll turn it over maybe to Director Mahoney or Kyle or Devin to kind of go through the audit and where we're at.

good evening everyone apologize for my uh microphone deficiency there i'm kyle docherty i'm the audit partner at zupkin associates with me is devin bernard he was the senior auditor in charge of the uh the field work of the audit and perform most of the day-to-day work while I was the one in charge of reviewing everything and then the final approval of the auditor's report. So tonight what I was going to do is run through a high level of what our process is and the different reports that we issue. that are part of the annual comprehensive financial report. I'd be happy to answer any questions as I'm going through things. Feel free to interrupt me, or certainly when I'm done, we'll be open to take any questions about the reports or the audit process. So in summary, there's a few different audit reports that we issue, or reports that we issue as part of the audits. The first one is what's titled the Independent Auditor's Report. So that's the main one where we're looking at the financial statements. So the main point there is that we had a clean or unmodified opinion on the financial statements, which means that we believe that they are fairly presented in all material respects. The second report that we issue is our report on internal control over financial reporting and compliance. The main point there is that we did not identify any significant deficiencies or material weaknesses in internal control over financial reporting. And we did not identify any material noncompliance. And the third main report is the report on compliance for each major federal program. So what that is is since the city expended more than $1 million in federal funds, we were required to have a compliance audit done. And so we look at certain federal programs, review those for certain compliance points. We had an unmodified or clean opinion over compliance for those programs, and we did not identify any significant deficiencies or material weaknesses in internal control over compliance. And the last couple of things I'll mention before I get into the more detail is we also would potentially issue a management letter. That's where we would have any comments that aren't a significant deficiency or material weakness in internal control. I'll kind of describe what those mean a little bit later on. But if there was any other matters that we wanted to bring it to attention of management and governance. However, we didn't have any management letter comments for the 2025 audit. And last thing, we have a letter that we issued to the governing body, what we call our required communication letter. It just kind of goes over certain other matters with the audits, if there were any other issues that we encountered or that sort of thing. But we didn't have any issues in performing the audit. So go through each of those a little bit more detail. The independent auditors report, again, that's where we're issuing our main opinion over the financial statements, where we had the unmodified or clean audit opinion. One thing I'll point out is that the way government financial statements are prepared is that they're broken out into what we call opinion units. Essentially, it breaks out each of the major funds of the city's operations. and then lumps together all the other funds into one, what we call opinion unit. So we're actually kind of doing almost several audits of different sets of financial statements simultaneously. So there's like the general fund, other major special funds, and then all the other opinion unit, all the other funds are lumped together as an opinion unit. So again, we had an unmodified opinion over all those different opinion units. We conduct the audit following generally accepted auditing standards as well as government auditing standards. The report also mentions management's responsibilities over the financial statements, ultimately management's responsible for the preparation of the financial statements and for maintaining relevant internal control over financial reporting.

Excuse me, Mr. Daugherty, when you say management, do you mean like the city? Yeah, so that, yes. Thank you.

And our responsibility as auditors is to obtain what we call reasonable assurance over the financial statements. So we're not performing enough procedures to gain absolute assurance that every single number and item in the financial statements is 100% accurate. The nature of auditing is that we do a risk-based approach. We look at areas that we feel might be more subject to having misstatements. We review internal control to determine what areas we want to have more focus in. And we design our audit procedures based on those risks. So we're looking at the major areas of the financial statements that are material Again, we gain an understanding of internal control. We evaluate accounting policies and estimates for reasonableness. So we put all those things together, and we decide what our audit procedures are going to be, and we perform the audit accordingly. Last part of the independent auditors report I'll mention is there's a few other sections of that report that describe other sections of the annual comprehensive financial report. These different areas have a little bit different level of audit procedures performed on them, so I'm not going to go through that in detail, but I just wanted to point that out. There's a few other areas called required supplementary information, supplementary information, and other information. So our procedures are a little bit different on those areas as opposed to the main body of the financial statements, but the audit report describes what the extent of our procedures are for those different areas. The next report is our report on internal control over financial reporting and compliance. So in performing the audit, our goal is to gain an understanding of internal control. And if we deem it necessary to test internal control, we'll do so to get that level of assurance that we need over the financial statements. But our ultimate goal does not include offering an opinion over internal control. So if we did identify any significant deficiencies or material weaknesses as we define them in internal control, those are basically like if there's a problem with internal control that there's a high likelihood that there could be an issue with the financial statements. If we identified anything like that, we would include that in the report and identify it. However, we did not identify any significant deficiencies or material weaknesses in internal control. So the report does, sorry.

I'm sorry to interrupt you. Can you just say a little bit more about that? Like what would you identify as an internal control issue? Like you find out that Director Mahoney doesn't have a degree or would it be, I mean?

Yeah, so it'd be a little bit more like, say, like a big one would be separation of duties, as we call it. That's where you would have different people within, say, the finance department performing different aspects of recording the transaction. Maybe, say, like for payables, you have one person processing an invoice, one person actually preparing the check to go out, and one person doing a bank reconciliation. So you have separation over these different aspects of the process so that one person doesn't have too much control over it. So checks and balances, basically, within. Absolutely. Thank you. Thank you. I appreciate that. So that's one of the main ones that we look for in internal controls. So there's a lot of different pieces and parts of that. So again, our goal is to gain an overall understanding of the major internal controls. And then if there's ones that we deem need to be tested to get that level of audit assurance that we need over the financial statements, we'll also test internal controls for those particular areas.

Thank you.

And kind of similarly for compliance, we do review compliance for certain areas. If not, compliance could potentially have a direct and material effect on the financial statements. So we're not doing an overall test of all compliance that the city is responsible for, but just the ones that we have identified as significant to the financial statements. The state also provides us with what they call their Ohio compliance supplement, which the state auditor's office has prepared, and they have their audit teams as well as firms like ours follow to test areas that they feel are significant in terms of compliance. budgetary information and controls. There's new things they'll have us look at related to cyber insurance policies and whatnot. So a lot of different areas of compliance that we are potentially looking at. So similar as with internal control, we did not identify any material instances of noncompliance that we need to report, but we're not offering an overall opinion on compliance in that regard. And the last report that we have is our report on compliance for each major federal program, the internal control over compliance, and the schedule of expenditures of federal awards. So what that all is is related to federal expenditures. And since the city expended more than $1 million of federal funding in 2025, we're required to have what's called a single audit. That's an audit over compliance for those federal programs. So we go through a specific process that's identified in the federal guidelines to determine what programs we're going to review for compliance. And then there's a compliance supplement that we follow that identifies the major compliance points for those programs. And we perform the audit based on that compliance supplement. So there were two major federal programs that we had for 2025. That was the Community Development Block Grants and the Home Investment Partnership Program Grant. So those were the two major programs that we reviewed specifically for compliance. And we had a clean opinion over compliance for those programs. So we're saying that the city complied with all the direct and material compliance requirements that are identified in the federal compliance supplement. The basis for our opinion, management's responsibilities, and our responsibility as auditors for the audit of compliance is very similar to what I talked about with the audit of the financial statements themselves. I won't go through all that detail again, but it's a similar level of responsibility for the auditors and for management. Management has ultimate responsibility over complying with federal guidelines for those programs. For internal control, it's a very similar language as the internal control report for financial reporting. For internal control over compliance, we similarly will review internal control related to compliance for the purpose of providing the opinion on compliance. But we're not doing an overall audit of internal control, so we don't have an opinion on internal control. But we did not find any significant deficiencies or material weaknesses in internal control over compliance. And the last part of that report is the report on the schedule of expenditures of federal awards. So there's a table in the report that basically identifies all the federal grant programs that the city had and the dollar amounts that were expended in 2025. So we review that to make sure it's fairly stated in all material respects in comparison to the information that we gained in performing the financial statement audit. So that one does get an opinion on it that it is fairly stated in all material respects in relation to the financial statements as a whole. So those three reports, again, the main financial statement opinions, the report on internal control compliance, and then the federal compliance report are the three main things that go into or the results of our audit procedures. Last couple of things I'll mention again is we would potentially, for audits, have a separate management letter if there were any other control deficiencies or other issues, misstatements or anything that we wanted to identify that didn't have to go into the audit report itself, but we wanted to bring it to the attention of the governing body and management. We would have those in a management letter. But we didn't have any management letter comments for the 2025 audit. And the last thing is our required communication letter. And we submitted that to the city along with the draft of the audit report when we were wrapping up the audit. That just goes over a few things like qualitative aspects of accounting practices that we review, if we had any difficulties in performing the audit, if there were any significant misstatements in the financials, or if we had any disagreements with management or any other difficulties.

But we had none of those sorts of issues in performing the audit.

So we didn't have anything negative to report in that communication letter. So that's pretty much all the audit reports that I wanted to go over with you. Again, Devin and I would be happy if you have any questions about those reports or the audit process or what we do and how we do it. We'd be happy to answer any of your questions at this point.

Thank you, Mr. Dougherty. And I'll open it up to my colleagues. I have some questions as well, but I would like to help tease out the process a little bit. I think you did a really good job of describing it from a high level. Now, I think that Mr. Bernard was on site here, like kind of going into people's offices and asking for quotes or, hey, can you give me this ledger? Can you kind of explain that process and when it starts and when it ends? Because the four of you up there have probably gone through a lot of audits. But us up here and the public, we want to help them understand what it looks like on the ground and kind of how it feels.

Yeah, so I mean, the overall audit takes place generally, I'd say, over about six months. We'll start the audit planning process in January. Once the city has kind of closed the books for the prior fiscal year that we'll be auditing, as the cash basis reports that we use, the record of all the revenues coming in, all the expenditures going out, we'll get those reports and start planning our audit around, you know, what balances we need to look at, what the significant activity for the year was. Then, Devin, you could probably answer when specifically we came out to start field work.

Yeah, first time in February, and then we swing back around prior to the gap coming out, so around late.

Devin, can you check and see if your microphone is on?

Can you hear me now? There you go.

Sounds good. Yes, our first trip out was towards the end of February. And then we usually make a second round with our bigger cities, just because we have a lot of areas that we tend to cover. So that was around early May, end of April. And those tend to be about a week at a time that we're on site.

So the audit team will come and look at documentation on site to review individual transactions. We do what we call sampling, where we'll look at, say, you've got particular accounts with a bunch of transactions in it. We'll pull a sample of those so that we will review those for accuracy, make sure that the invoices are matching with the amount that's getting reported in the city's ledger, make sure that the check amount is correct. make sure that the proper people are signing off on things. So that's the detail work that we do primarily in the beginning of the audit. And then we'll also do our compliance testing. We'll do a significant portion of that in those first few times that we visit the city. And the audit's kind of broken up into two phases overall. So there's all this initial work that we do reviewing accounts and reviewing compliance that we do in the beginning, while the city's in the process of actually preparing the financial statements that will ultimately providing the opinion on. So that the unaudited financial statements are due to the auditor state's office at the end of May. And then once we have those financial statements and they've been filed with the state, we review that, see what other areas we need to test, what other balances we need to look at from the financials that we haven't already looked at from our initial field work and do some additional testing over financial statement balances as needed. And we go through the entire report, make sure things are tying out to the supporting documentation, make sure that the report is consistent in and of itself. Lakewood does an annual comprehensive financial report, which is a bit more significant than the basic financials that are the main requirement. there's uh some additional stuff we have to do with that it's a 200 plus page document that we're we're reviewing the city's preparing so so that's kind of the last leg of what we're doing is reviewing that document and um perhaps it's more for director mahoney but um i i believe we are in the process of or did acquire new software to manage

our financial reports and accounting system internally, was that helpful or less helpful for the audit? Or am I incorrect?

It will be. We're planning to go live beginning of January. So this next year, the audit will still be the same as it has been in the past on our antiquated finance system. And then starting with the 27 audit, it'll be... Much nicer for the auditors. They'll have a login that they can log in and see, you know, read only of everything. And, yeah.

Is that Tyler Technologies we're using?

OK. We will, fingers crossed, we will be the first city that is live on their newest version of their software.

That scares me.

A little bit. Me, too. But that's okay. This is my third time. We've gotten a lot of incentives because of that. We have dedicated people, which you don't get when you have a regular implementation.

Yeah, I assume that makes the audit easier. You can pull up a lot of the information electronically.

Yeah, the goal will be, and these guys don't know that yet, but to have invoices attached to POs and things like that so you won't have to pull paper. It'll be all electronic.

Excellent. Any, my colleagues have any questions or concerns?

Just at a high level.

Yeah, Council President Striebig.

In reading through your materials, and I think I asked this question last year, but I can't remember. These generally accepted standards of the United States of America and the government auditing standards, are there other standards that can be used? I mean, it seems like if you're working with auditing federal programs that you would have to use their auditing systems.

Yes. So for the financial statement audit, so what we're referring to there, those generally accepted auditing standards, those are from the AICPA that we follow. So that would be true of any financial statement audit would follow those standards. Now, since the city, of course, is a unit of government, we also have to follow government auditing standards. So that's a FEDERALLY PREPARED SET OF STANDARDS THAT WE FOLLOW IN ADDITION TO THE BASIC AUDITING STANDARDS FROM THE AICPA. SO THAT'S REQUIRED FOR ANY GOVERNMENT AUDIT. AND THEN FOR THE AUDIT OF COMPLIANCE FOR FEDERAL PROGRAMS, THERE IS WHAT THEY CALL THE UNIFORM GUIDANCE. IT'S TITLED TO LIKE CHAPTER 200, I THINK, OF THE U.S. Code of Regulations. So that has a whole other set of standards that we have to follow in performing the audit of compliance for federal programs. So, yeah, there's a lot of different standards that we have to adhere to in performing the audit and all the different pieces of it.

Do you have choices or this is the one that?

So no, that's set in stone that we have to follow those particular standards. And we do have leeway for certain aspects in performing the audit where we get to utilize our judgment in determining what specific areas we determine to be material, but especially like that. The standards that we follow for the federal grant programs, those are pretty specific as far as deciding how we determine what programs we'll be looking at and what compliance areas we need to look at in regards to those programs.

Thank you. I was always amazed. when looking at statistics and things of this nature, that if you wanted the answer to be different, you would just use a different standard. And that's something to consider. But thank you for that. I appreciate it.

If you'd like.

Thanks, Mr. Chairman. Thank you to the finance department and the law director and the auditors. I WAS TRYING TO DO SOME RESEARCH. WHAT'S THE CUTOFF? WE ARE AUDITED ANNUALLY, I BELIEVE. IS THAT BECAUSE WE'RE GREATER THAN $5 MILLION IN BUDGET OR IS IT BECAUSE WE HAVE FEDERAL GRANTS OR WE RECEIVE FEDERAL FUNDS OR SOME OTHER REASON?

The state requires annual financial statements to be prepared. There are certain governments that have a biannual audit where the audit would be performed every two years, but it's still over two separate sets of financial statements. So it's just a timing thing, basically, as far as when the audit's occurring. So the annual audit is required as a unit of government in ohio the ohio revised code requires that the audit be completed okay i was just curious if the cutoffs having 5001 residents or five million and one dollars yeah the so the um the state does have um i mean let's say for you know pretty much any um cities required to have the regular audit Completed on certain smaller Units of government may have may qualify for what the state calls a basic audit where they do a lot less Procedures, but it's a very I can cite the exact number off the top of my head, but it's a very low amount of revenues and expenditures to qualify for that so Most units of government.

I'm in the weeds there does mostly my curiosity more substantively the Two federal programs that you chose selected to review, do you select the same ones every year or do you rotate them and why those two? I have an educated guess, sounds like both are HUD dollar.

Yeah, there's a specific process that we follow for determining what the major programs are. So for any government, there's a potential for rotation of different programs or for potentially even doing the same program year after year. It just depends on what the federal dollar amounts are and when the last time a particular program was audited. So the threshold can change depending on how much total federal dollars a government receives, but typically it's a $1 million threshold for what we consider to be a Type A program. Type A programs need to be audited at least once every three years.

So but is there discretion in who's deciding? Is that you, or is it the city, or is it the state auditor?

So it's up to, like if we have any potential opportunity to choose which programs, that's up to the auditor's discretion for determining that. Typically, if you have regular type A programs that are exceeding that threshold, those do need to be audited at least once every three years. Then we also do need to test a minimum dollar amount of total federal expenditures. Depending on certain criteria, that's either 20% of federal expenditures or 40% of federal expenditures. WE TAKE ALL THESE DIFFERENT FACTORS INTO CONSIDERATION. THERE'S OFTEN TIMES WHERE WE HAVE TO TEST A PARTICULAR PROGRAM. MAYBE IT'S A NEW TYPE A PROGRAM TO THE CITY THAT EXCEEDS A MILLION DOLLARS. SO WE HAVE TO TEST THAT UNDER THE STANDARDS. IF IT'S A PROGRAM THAT'S BEEN AUDITED PREVIOUSLY, THERE'S MORE DISCRETION THERE POTENTIALLY.

SO IS THE IDEA THAT OVER A PERIOD OF three years or five years or ten years, in which time frame, I'm curious, the auditors or the independent auditors would make the full circuit of federal dollars or programs or both in regular use by a city government?

Yeah, so if you had the same programs year after year and similar dollar amounts, you'd have at least that three-year rotation for all those programs. programs that exceeded that threshold. The smaller programs, like for any programs that are below that threshold, we potentially have to look at some of those to meet that minimum dollar amount that we need to test. We have situations where there's no Type A programs, as we call them, so we have discretion in choosing what programs we need to test. Usually that's, you know, we'll look at the significant dollar amount ones and making that determination.

And presumably the federal government sees the audits or they check the audits before they, as part of their due diligence in transmitting an award of funds.

Yeah, so as part of the audit completion, there's what's called the Federal Audit Clearinghouse, the FAC, where the audit report is submitted. Part of that is there's a separate report that's filed that basically summarizes all the dollar amounts of the programs, what the type A programs were, which programs were audited. So that gets submitted to the federal government for their review.

And it's not as if they give us a positive bill of health, but if we ever were mismanaging, then they might say, hey, wait a minute, prior to awarding funds to this local government. But that's not the world we're in. I'm just trying to understand.

Right. Absolutely. They would look at the results of the audit. And if they saw that there were significant issues with internal controls, significant issues with compliance, certainly that would be a possibility for federal grant not being awarded in the future. Okay.

And just a couple quick more questions. A set of matters that you evaluate and then report on to the city and to really, actually you're not reporting to us, you're reporting to the state, correct, ultimately?

Yeah, the audit report is addressed to city council, but yeah, we're providing that report to the state auditors.

Ultimately, that's the keeper of the public. So you, in that report, you're evaluating

certain questions are those the same or different than what a Moody's might do which would evaluate hey are you spending too much and is that going to affect your credit rating yeah that's a definitely good question because what we're looking at is essentially a point in time in the past to say here's what the city's reporting as you know their balance sheet here's the accounts Here's the revenues and expenditures that occurred. And we're reviewing that in terms of is that information accurately reported? Where something like Moody's, they're looking at it in terms of for fiscal health or financial health for applying a credit rating to the city. So we're not looking at it in terms of necessarily is the city in good financial health? That's certainly part of our consideration in planning and performing the audit, but Our report is not saying that the financial health of the oddity is necessarily good or bad. It's just that this set of financial statements is being reported.

You're checking on whether we've accurately called balls and strikes, recorded the game, consistent strike zone. Somebody else will give the scouting report that says this team has a tendency to do this or that.

Yeah, that's a fair comparison.

So the final point or question I want to make is, so first of all, congratulations to the city's finance department's long record of very strong outcomes in the auditing profession and fulfilling our responsibilities to the state and really ultimately to the taxpayers. So maybe in some ways, It's kind of a good, boring assignment to draw with Lakewood, I hope, is that you're giving us a physician's checkup and we've been a healthy patient. Do you, short of a management letter, which is a term of art, a material, essentially either a traffic ticket or an arrest, one of the two, short of that, do you have OR MIGHT YOU MAKE FROM TIME TO TIME RECOMMENDATIONS TO OUR CITY GOVERNMENT FOR BEST PRACTICES THAT ARE NOT FOR MATERIAL PROBLEMS, BUT THEY COULD BE REFINEMENTS. YOU MAY WANT TO CONSIDER THIS APPEAR AS THIS PRACTICE IN SOME OTHER PART OF THE STATE THAT MAY BEAR UPON YOUR OPERATIONS.

Sure. There's certainly instances, and certainly while the audit team's performing the audit, certainly discussions are being made with the finance department if we're seeing anything that we would suggest as a best practice and whatnot. Really, anyone, any of those that are more than just trivial, I'd say, like we would have those in the management letter as recommendations, The management letter would cover if we had any, I'd say not significant enough to get in the audit report again, but if we did have some sort of internal control issue that we're like, hey, we really think you should address this. budgetary compliance issue that was not severe, but we wanted to bring to your attention. We would have those sorts of things in the management letter. But we also would potentially have other matters that we more informally discuss in performing the audit or at the conclusion of the audit. Kind of like, hey, here's some Things you might want to consider doing. They're not significant enough for us to put in writing, but considerations.

Okay, so that's part of the value of conducting the audit is that professional-to-professional review and discussion. And so has, in your experience, Lakewood been a good counterpart in those types of conversations, if any, have come up?

Yeah, and I mean, that's true of any of our clients. I'd say that, you know, there's usually some smaller recommendations that we're potentially making during the course of the audit. I can't think of any that I don't have any right in front of me that, you know, any recommendations that we specifically made to the City of Lakewood in performing the audit. Devin, I don't know if you could think of any from performing field work or anything, I can't say there was anything significant that comes to mind from my room.

Nothing major to note. Obviously, we had our, I would say we had our Ears pinned up a little bit just going from John taking over for Keith as far as things in the audit. But it seemed like that transition was rather smooth for us, smooth for John, and then smooth for us in return. So yeah, any comments that we would have had or recommendations were rather seamless as far as day-to-day conversation of us talking to them. Yeah, I don't have any of note to bring to attention at the moment.

Okay.

Well, thank you. No problem.

I'm reaching, you know, deep into the bag of tricks to try to come up with something substantive here, and we're passing. It's a great report, so we appreciate it. Thanks.

Councilperson Bixenstein.

Thank you, Chair Baker, and thank you, Kyle and Devin, for the presentation this evening. This question might be more appropriate for Director Mahoney, but we live in an era where there can be a distrust in government at all levels, and sometimes i'll hear some variation of you can't possibly expect me to believe the city's being careful with our money or you know something along those lines and and yet you know what i'm hearing this evening is there really is significant processes in place there's significant oversight and there's significant transparency and so i realize most community members aren't going to and all likely are not going to watch this presentation and all likelihood won't look at this annual comprehensive financial report. But I just wonder if you have any advice or best practices on how we can help convey, you know, not that having a reasonable level of skepticism is inappropriate, but how we can help convey to community members that there really is a lot of oversight and transparency in place.

Yeah, I don't know how to explain that to a non-accountant, I guess. And often, I think I probably see the same posts on Facebook and things, and I'm so tempted to answer, but I don't. Yeah, I don't know a good way other than to point them to all the audit reports are available online. And so they can see, going back many years, the audit and the results of that. i guess you know the only comment i could say and it's just kind of uh funny but my husband always says if i was as careful with our own money as the city's money we we might be retired by now but so um Yeah, I mean, we do take a lot of pride in making sure we do things correctly. And that was one of the reasons why I looked into a new finance system is because this system is 25, 30 years old. And hopefully, it will be easier for a citizen to be able to look at things, although we're pretty good about posting monthly the reports. and if anyone ever has any questions, if you ever come across a constituent, I'm always happy to talk to them, so just point them my way. I'll tell them the truth. I'm not a very good liar, so.

Well, thank you, and sorry for putting you on the spot.

No, that's okay.

Thank you, Councilperson Hammond-Steiner.

Thank you, Chair Baker. And I just want, so both of my questions that I had were both asked by Councilman Bullock and Councilman Bixenstein. And so along that line, you know, to piggyback off what he was talking about, how do you communicate this to the public? What a clean audit means? And it does go back to MOST OF THE GENERAL PUBLIC IS NOT GOING TO UNDERSTAND FINANCES AND WHAT THIS ALL MEANS. BUT HAVING WORKED IN HIGHER EDUCATION FOR OVER 20 YEARS AND GOING THROUGH THE AUDIT PROCESS ON THE OTHER SIDE, BEING ASKED ABOUT PROVIDING DOCUMENTATION, I THINK PART OF THAT IS OUR JOB AS COUNCIL PEOPLE TO RELAY THAT AND COMMUNICATE THAT. AND SO PARTLY WHY I'M HERE, EVEN THOUGH I'M NOT ON THE FINANCE COMMITTEE, IS SO THAT I CAN BETTER UNDERSTAND our finances and the process that we go through so I can communicate, here's what a clean audit means. And that it's really, really hard to have a clean audit. I don't think, and I don't know if you would agree with that, is it hard? I don't know.

Because I'm- Yes, I get to work with the two entities that always get the award every year. So the Metro Parks and the City of Lakewood. Yeah, yeah.

Four percent. Four percent of the state.

Yes, and it's really hard because you're being asked very specific questions. and getting, you know, what is this backup? What is this documentation? What is this? And the minute that you're not doing something consistently, that's raising those red flags. And so now that audit, they're starting to pull back those strings, and they're saying, where is this? And that is where they're finding where the issues are in an organization. So a clean audit is great, because it's saying, yes, you're doing things wonderful, but at the same time, if we did have some material weaknesses, that didn't mean that we're, you know, a horrible, awful organization. Again, it probably depends on what those material weaknesses are and what it is and what happened, right? Because then you also have to come up with a corrective measure. How are you going to correct this action? And really organizations don't want to have material weaknesses because then when you go, you then become a risk to other organizations. So now other organizations don't even want to work with you and participate and provide federal grants to you, like pass through funds for you, because now you're all of a sudden in a risk, and no organization wants that. But yes, getting a clean audit is very hard. to do because of all the documentations, because of all the questions that are asked, because of the detailed information and the backup that is needed for this. And a lot of times, you know, we are just humans working in these systems and humans make mistakes. And so mistakes can happen. And mistakes aren't bad as long as you aren't continually make to make them and as long as you can justify and understand, well, why did you make that mistake and let's make sure we're not going to make that same mistake again. SO I THINK IT'S ON US AS COUNCIL PEOPLE TO SORT OF BE ABLE TO TRANSLATE WHAT A CLEAN AUDIT MEANS. AND SO I TOOK SOME NOTES. IT JUST MEANS THAT THERE WERE NO DEFICIENCIES IN OUR INTERNAL SYSTEMS AND MECHANISMS, AND WE WERE ABLE TO PROVIDE ALL OF THE AUDITORS QUESTIONS AND PROVIDE THAT DOCUMENTATION AND BACKUP. AND SO WHEN, YOU KNOW, RESIDENTS SAY, WELL, YOU KNOW, LAKEWOOD CITY COUNCIL IS RUNNING AMOUNT WITH OUR MONEY, WELL, IF WE WERE, I'M PRETTY SURE THE AUDITORS WOULD HAVE FOUND SOMETHING, RIGHT? LIKE, IF WE WERE DOING REALLY NEFARIOUS BAD THINGS, THEY WOULD HAVE FOUND SOMETHING AND STARTED PEELING AWAY THAT ONION AND THOSE STRINGS, AND THEN ALL OF THOSE WOULD HAVE COME OUT. SO I SAY ALL THAT TO SAY I THINK IT'S OUR JOB AND NOT SO MUCH YOUR JOB, DIRECTOR MAHONEY. IT'S MAYBE PART OF YOUR JOB TO HELP EDUCATE US AND ANSWER OUR QUESTIONS, AND IT'S OUR JOB TO BE EDUCATED AND INFORMED AND WORK WITH OUR RESIDENTS.

THANK YOU, EVERYONE. AND I, UM, SO I HAVE A COUPLE QUESTIONS, AND THEY'RE MORE SO, YOU KNOW, I THINK I UNDERSTAND THE INTERNAL CONTROLS, OUR PROCESSES. I LOVE DIGGING INTO THOSE ISSUES. I THINK, YOU KNOW, DIRECTOR BARGO'S HOLDING HIS HEAD RIGHT NOW BECAUSE WE WENT THROUGH THE BOARD OF CONTROL ISSUE AND, LIKE, FIGURING OUT WHEN YOU GET A QUOTE AND A BID AND ALL THOSE THINGS. AND IT SOUNDS LIKE THOSE NEW CONTROLS ARE WORKING JUST FINE BECAUSE IF THEY WEREN'T, THEY'D BE HIGHLIGHTED IN THE MANAGEMENT LETTER. SO WE FREED UP STAFF TO HAVE A LITTLE BIT MORE BECAUSE CONTROL IS GOOD, BUT ONCE YOU CONTROL THINGS TOO MUCH, YOU STIFLE THE ABILITY FOR STAFF TO ACCOMPLISH THEIR GOALS OR WHAT WE INTEND TO HAVE THE CITY SPEND MONEY ON THE BEHALF OF OUR RESIDENTS FOR TO GET THE NEW TIRE FOR THE TRUCK THAT NEEDS IT TO GO AND PAW THE ROADS OR WHATEVER. AND SO WHAT I'M INTERESTED IN IS KIND OF HOW WE SIT WITH SOME OF OUR PEERS. AND SO THIS RELATES A LITTLE BIT TO LIKE OUR UNENCUMBERED FUND BALANCE AND THEN OUR DEBT LOAD. HOW DO WE LOOK IN COMPARISON TO OUR PEER COMMUNITIES? AND THAT'S PROBABLY SOMETHING THAT, LIKE, WENT INTO A MATERIALITY REVIEW FOR YOU. LIKE, IS IT MATERIALLY WRONG OR IS IT A SIGNIFICANT ISSUE? BUT WHEN I LOOK AT OUR DEBT, RIGHT, WE'RE, I THINK WE'RE 165 MILLION BONDS, NOTES, AND LOANS AT THE END OF THE YEAR. And it was 126, like, five years ago. And so what does that look like? Is that an issue for an auditor, or is that something that is just noted and as long as we record it properly, it's fine?

I'd say, like, for that issue specifically, it's more of, you know, we're reviewing those balances for accuracy. The one thing I'll point out that came to mind as we were everyone else was talking is, as I mentioned earlier, our goal is to make sure that that set of financial statements is accurately presented. Now, the State Auditor's Office, they do also, when they get all the financial information that's input into their system, from the city. They review certain, what they call financial health indicators. And that's not part of what we look at, so I can't speak to specifically what those are. But they do look at things such as like a debt load and what the bottom line net position of the city is and certain other more analytical analysis of certain numbers from the financial statements. And if there were too many of those things that looked like they were going in a bad direction, they would potentially look at putting the government in what they call fiscal caution or fiscal watch. So, those are things that can be looked at on the state auditor's website to see like what those health indicators are from what they look at for any city. So, again, it's not something that we're specifically looking at in terms of financial health necessarily. Now, there could be, you know, certainly something where we see balances that look unusual or particularly risky. We will focus on those when we're performing our audit procedures. Certainly, if there's a potential for looks like things are going in a bad direction or something, that might pose a risk factor for the audit in terms of, okay, maybe there's an additional risk of somebody trying to inflate revenue to make things look better than they really are, that sort of thing. That would change our audit approach.

guess a long-winded answer but um and so you know we're more focused on making sure that those financial statements are accurately presented but there could be certain other risk factors that come in yeah so when we're looking at our you know enterprise funds and our bonding for water and sewer that's it's it's not you're looking for red lines that may trip the state auditor for fiscal emergency in certain areas but generally speaking you know Love bond council when they come, love our banker, but bond council and bankers love for us to take out additional debt. And so we're up here to figure out whether it's the right move for the city, right? And sometimes it's challenging to see and kind of understand those forecasts and what they look like. And just because you can borrow something doesn't mean you should. And how does that, you know, and we're, we're experiencing, and the audit shows it because our financial statements show it, right? Significant increases in property tax collections, increases in income tax collections. Those are all good things. Are they sustainable? Where do they go? But it sounds like you aren't going to be giving us much indication on those things. You're more so saying that, like, we collected what we said we collected, and it's accurate, and so therefore we can use this to analyze the forecast of whether or not we should take out more debt or less debt, or how we should plan our financial affairs.

Right, absolutely. Because, yeah, the audit is definitely a backwards-looking procedure, whereas budgeting and looking ahead and determining what the direction of the city is, that's outside of our purview of what we're doing is in the financial statement audit.

Now, what I will say is there – so cities do things a lot of ways, and I'm sure a lot of your clients have different controls in place that – You know, like I said, you can control something all the way over here where it's very difficult to accomplish a task, or you can have minimum controls and you can accomplish a task faster, but perhaps there's more risk of malfeasance or, you know, something going wrong. So are there best practices that you see some pure cities doing that we could implement at Lakewood? Like not, it's something that we're not deficient on, but something that you see would help us have better controls and be more of a steward of the tax dollars here in Lakewood.

And that's something that, like, if we did have any more significant issues that we identified, it would have come up in a management letter. I mean, certainly it's something we can keep in mind for future conversations with the city if there's more things that we're seeing that we could recommend for, you know, whether it's internal control or other operational aspects. But right now, off the top of my head, I don't have anything that I could recommend. offer specifically but it is something that we consider certainly as you know we we see a lot of different governments and different ways of doing things now you know the general controls are pretty consistent across the board as far as what we see but you know certainly yes certain people do things different ways and there are different levels of you know how much control you want to have how much risk you want to and is it too much control or is it not enough? You know, there's that middle ground that you're looking for for efficiency as well as accuracy and doing things correctly. But, yeah, it's certainly any, if the city has any questions about like, hey, we're thinking about doing things a certain way, what do you think? You know, that's certainly something that we'd be open to having a conversation about. And as we're performing the audit, again, you know, anything that we do see, we'll certainly bring that up, whether it's, you know, in terms of informal recommendation or in the conclusion of the audit, you know, in the actual report or the management letter.

Great. Because I'm not just happy with us being in the top 4%. I want us to be in the top 1% of that 4%, Director Mahoney. So I'm always looking for ways for us. And I think as we talk to our residents, right, POLICY AND WHERE WE SPEND MONEY COMES FROM HERE. FINANCE DEPARTMENT EXECUTES IT. IF THE MAYOR SAYS LET'S SPEND THE MONEY AND THEN THE AUDITORS CHECK TO SEE THAT WE SPEND IT APPROPRIATELY AND WITH APPROPRIATE CONTROLS. SO IF THEY'RE MAD ABOUT WHAT WE'RE SPENDING MONEY ON, THEY SHOULD YELL AT US AND THEY SHOULD GIVE US INPUT AND WE SHOULD CONSIDER WHAT THEY WANT US TO SPEND MONEY ON INSTEAD OF WHAT WE SPEND MONEY ON. SO THOSE ARE ALL POLICY DECISIONS AND THOSE FALL SQUARELY WITHIN THE ELECTED LEADERS IN THE CITY. BUT IT IS GOOD TO KNOW THAT We have a third-party independent auditor that tells us that our finance department is doing a good job of controlling the funds that we have, and we can be confident that they are spent in the way in which we direct them to be spent, which is how government should work. Any other thoughts? Council President Striebeck.

Thank you. I did one real specific question, Director Mahoney. In your MDNA report on page 16, if you want to find that, the fourth paragraph from the bottom of the page starts with the Lakewood Hospital Fund. it goes on to talk about an item and a note to see note 2h which i couldn't find for further information could you just um talk about that for a minute about what that item was and that um that amount and the decrease and what that that whole paragraph really means i'm getting there thank you I wasn't quite sure where to find note 2H. There was a lot of detailed financial sheets after that, and I didn't see anything at the very end of the report.

Well, the main thing from the Lakewood Hospital Fund was that grant, not grant, the loan. Is that where we pay for the loan out of? I'm not sure what to.

It says the decreases due to the special item expense for the loss on sale of asset held for.

Oh, that's the downtown development.

Yeah, I wasn't sure what all that meant.

So that just means the that was the sale of the downtown development site. And then also the the loan for the parking garage that was out of that fund.

Yeah, I believe in fiscal year 2025, the Lakewood Hospital Fund decreased by $855,000, or by that amount of money, $8 million, because of the development closing. I believe we issued a loan as well as transferred the property.

That's correct, yes. Thank you.

And the loan is forgivable with certain- It is.

It's only a million is forgivable. I actually just did the amortization schedule. And it's a 10-year, 30-year amortization, but payable in 10 years. And so although a million is forgivable, we still will earn $1.5 million in interest on that loan. So it was a, I mean, there is $6 million, $5 million? either a $5 million or $6 million loan, and at a 3.5% interest rate. So we still will be earning money on that loan, even though a million will be forgivable at the end.

Thank you.

Councilperson Bullock. That's a follow-on to that that sets up a question I was going to ask about your favorite and mine, cash versus accrual basis. So I think what I heard you say, in 25, because the deal closed, the loan executed, the property transfer was made, Are we saying we're recognizing those, I suppose, our expenditures or at least their write downs, whatever the proper term is, on the city's books at that moment in time? And even though the loan will extend for 10 fiscal years into the future, right?

Well, the cash is outlaid as of now. But yes, part of it was accrued as of the end of February. So the cash was not fully expended until about a month or so ago.

Of 25?

Of 26.

Okay.

But the sale of the asset happened in 25.

Okay. But regardless of the... Okay. So given the accounting basis and what Councilwoman Striebeck just said, the audited 25 books recognize the amounts you just discussed, right?

That's correct.

Okay.

Because the obligation occurred in 25?

That's through February. So not all of the loan was recorded. Sales, the asset was.

So the portion that fell in the time frame was recognized. The asset itself, I don't have the reference in front of me. So if the city sold a piece of equipment or a piece of real estate in a given fiscal year, let's say 2025, is that whatever the valuation is of that property, when it's transferred. In this case, it was transferred for a dollar, I think, right, as kind of a co-investment in that. That was part of our economic development investment in that development. So that was appropriate. But we then recognize on our books whatever the fullest price was prior to the transfer, and then we say, we captured back the sale price, right? Do I have that conceptually correct? Let's say we sold a truck, ignoring the property.

If we sold a truck, we would record a gain or loss on the sale of the asset.

Okay. But the point is, though, that the starting basis for the vehicle that was sold

Would be the depreciated.

Would be whatever it was, and it varies by vehicle. But the city knows what that number is, or we have a reasonable estimate, and then we compare that to the actual sale price. That's correct. Okay.

For a truck, yes.

I guess I'm trying to play the part of it. Well, I'm about to get to that. So then what I'm reading here is, State requires us to budget in cash. Is that accurate? But we audit in?

We budget in cash. We do a GAAP conversion at the end of the year. And the audit, well, the CAFR, sorry, AFCR is in GAAP.

Okay. And so I got onto that because Mr. Dougherty made reference to receiving cash basis So why does the state do it that way or require us to do it that way? Meaning budget, I get the accrual, but why budget and cash instead of accrual and then have to do the conversion? That seems, is that less work or is that more work?

Do some cities go accrual the whole year?

I could chime in there. I don't believe there's at least not any cities that I'm aware of that operate day-to-day on an accrual basis. Just the way that governmental accounting and fund accounting works, that day-to-day operation is done on a cash basis. and then you go through that this process of identifying accrual entries and preparing your gap or generally accepted accounting principles accounting basis for your financials and certainly it's I think it's mostly driven by the budgetary requirements I'd say that you're operating on the cash basis it's You know, dollars coming in, dollars going out on your day-to-day, and then the higher revised code requires those accrual basis financial statements to be prepared and filed.

Okay. I mean, I'm not trying to become an accountant here, but from your experience, does that system that the state has in place make some sense that we would do it that way and then convert it? We'd budget in the present. in cash, but then when we do audit, looking back in time, we have to reconcile everything essentially and convert it to.

Makes sense to me. I've been doing it for 35 years, so, yeah.

I'd say for governments that that cash basis of operation is kind of really the, really, regular focus of your day-to-day as opposed to trying to figure out and operating on that manner. The financial statements themselves are, I mean, it's a very complicated document with, you know, at this point over 100 different governmental accounting standards that have to be followed in preparing those. And there's even within that, there's two different bases of accounting technically within the financial report itself. I'd say even not only for the budgeting purpose, but just being able to look at your revenues and expenditures on a cash basis is a lot more understandable for budgeting purposes for people to review and understand what the ins and outs are of the city. The accrual basis financial statements as they are is just a very complex process that you go through to prepare those and Certainly not something that can be picked up and reviewed and understood without a good accounting background. So, yeah, I'd say, you know, that day-to-day cash basis of operation makes sense from a fiscal.

Okay. Well, I appreciate the explanation. I guess what I'm driving at, Mr. Chair, is the question that you're trying to get your hands around, which is what's affordable and how we know what's affordable. is informed and inflected by cash versus accrual. And we only get accrual for last year and we're in the current year and planning for the next year in cash. And there are kind of day-to-day decisions all the time that are made administratively about can we afford to fill an FTE or not, you know, for example. And, you know, can we afford the, benefits package or something. So I think these are valid questions, and at least we're rolling up our sleeves and digging in. Thank you.

Yeah, and that's why we're going to try to have whatever, if it's through August or September, the city's financial position before we get into the budget so we can understand that. Because whether we hit our mark or the city has done well in managing money, then you have a bigger unencumbered balance at the end of the year that affects your debt. what you want to do. So I'm trying to use your data as a data point, and all of us are up here, and how we should then go out and figure out what we buy with cash and what we bond out. And it's always been an issue, at least in my time on council, where we have a lot of capital needs. Sometimes money is cheaper than It is now. And so that's maybe a good time to borrow. And sometimes money is expensive and money seems to be expensive now and things are expensive. So all of this informs kind of how we think about this. But we appreciate your work. And so thank you for coming this evening. There are not any more questions. And then Director Mahoney, please, you know, for your team and for you, you know, give them plaudits because this really does help us do our job, helps us explain to folks that, If they're mad about what we're spending money on, they should yell at us, not you guys, because we make the policy decisions about where we're spending money. So if there's no further- I just have one comment.

Councilwoman Strieber gets on page 47, talks about the assets and the loss on the sale of the Lakewood Hospital site.

Thank you.

I appreciate that. And just one other thing is it's not just the finance department that enables a city to have a clean audit. It starts with every department making sure their purchase orders are put in before they go to purchase anything. That was always a big thing in my past that we could never get fully the auditor of state award because somebody would have an invoice dated after the PO date. And especially since Keith's retirement, like Devin talked about, the finance department really has stepped up, Jessica and John especially. And yeah, they've taken over pretty seamlessly from where Keith did most of the work. So yeah, appreciate them.

Well, thank you. And then I will... GO AHEAD AND I GUESS MAKE A MOTION TO RECEIVE AND FILE THE AUDIT REPORT. I THINK WOULD BE THE APPROPRIATE MOTION. IS THERE A SECOND? SECOND. MOTION MADE. ANY DISCUSSION? THANK YOU. ALL IN FAVOR SAY AYE. AYE. WITH NO FURTHER INFORMATION FROM THIS COMMITTEE, WE ARE ADJOURNED. THANK YOU.