Latest OSC Audit: Focus Shift to Financial Oversight of LOSAP

This week, the Office of the New York State Comptroller (OSC) issued a press release regarding several audits that were concluded in late December 2023. One was report 2023M-132, which focused on the financial condition of a fire district. Follow this LINK to read the full report. For our purposes, the individual district is not material to this post – we simply want to highlight the significant takeaways from the report.

This audit report is significant because it shows a shift in focus by the OSC that we speculated may occur after the OSC decided to implement GASB 84 for fiscal years beginning after December 15, 2020. For more reading about GASB 84 and how we thought it would impact LOSAP reporting, you can read our October 2021 blog post HERE.

There are several lessons to learn from this audit report; the two key takeaways are:

1. Now that LOSAP assets are reported as part of the general fund, the activities of the LOSAP (contributions, benefits, earnings, etc.) should be reconciled and managed similarly to the operating account or other general funds.
   
2. The OSC actually commented on the financial condition (funded ratio) of the LOSAP.

As stated in the Key Findings of the report, “[t]he Board did not ensure that financial reports it received were timely, accurate, and contained the necessary information it needed to properly monitor the District’s financial condition and fund balance.” The report focuses on issues surrounding budgeting, cash-flow/expenditure management, and fund balance.

These are not new topics for the OSC to scrutinize. What is new is that LOSAP is sprinkled in among the report findings, and not as a separate item as was the pattern in prior audits. Hence, the impact of LOSAP assets being part of the general fund has now made it a focus of the OSC when reviewing fire district financial activities. This means the following Key Recommendations apply to the management of the district, as well as the LOSAP:

1. Ensure the Treasurer provides adequate financial reports.
2. Monitor expenditures and available fund balance.
3. Adopt a comprehensive written fund balance policy and long-term financial and capital plans.

Regarding LOSAP, the report makes a few comments/observations:

“To monitor LOSAP’s financial activity and its impact on the general fund budget, the Board and Treasurer should request that the program administrator provide periodic reports during the year and the accounting firm updates the records to reflect both the District’s contribution to the program and the benefits and fees paid rather than making adjustments to the records after year end.”

Board members and treasurers should be receiving, at a minimum, quarterly investment statements. If the district sponsors a defined benefit (DB) plan with recurring monthly distributions, monthly statements are most appropriate. For DB plans, a payment register detailing the payments made to each participant each month should be provided. If one-time payments are made, then the third-party administrator should supply a letter or documentation that provides details of that distribution. These registers, reports, and letters can then be used to reconcile the withdrawals made from the LOSAP funds. Fees should also be clearly disclosed.

The value of securities or insurance products should be provided both on a market-basis and a par-value-basis. In other words, a bond or annuity may have a par-value of $100,000 but it would have a market value that is different if that bond or annuity was not held to maturity. This difference might reflect market conditions or surrender penalties.

The report then states:

“In addition to higher debt service costs, the Board’s contributions to the District’s LOSAP may be higher in future years. As of April 2022, the District’s LOSAP assets were only 40 percent of the plan’s outstanding liabilities. Because the Board did not contribute to the plan in 2022, we project that the plan’s level of funding could be lower in the 2023 plan year, and the Board may need to make larger contributions to adequately fund the plan going forward.”

To our knowledge, this is the first time an OSC audit has addressed the funding level of a LOSAP, and the impact that funding levels have on future contributions and budgets. The footnotes of the report do not state if the actuarial assumptions were reviewed and if they were appropriate. The stated funded ratio of 40 percent is relative to those assumptions and should not necessarily be judged without additional context. However, the OSC did note it reviewed LOSAP actuarial reports and year-end activity reports.

In the past, when an OSC audit focused on LOSAP it has been mainly on the point system and whether-or-not districts properly awarded points. The financial impact of improperly awarding points, which could result in a handful firefighters being awarded a LOSAP benefit/contribution incorrectly, would likely be a mere fraction of the financial impact of a poorly funded plan. There was one audit where the financial oversight of the LOSAP was reviewed, but the LOSAP was a specific focus of that audit. That is a key difference with this audit report, where LOSAP is treated like a part of everyday financial activities of the district and not a separate item that was traditionally a footnote to the financials.

In the “What Do We Recommend?” section of the report, the OSC recommended:

1. The Board should ensure the Treasurer provides adequate financial reports for each fund, which include timely information about the District’s LOSAP.
2. The Board should ensure the District makes at least the minimum annual LOSAP contribution recommended by the program administrator.
3. The Treasurer should work with the accounting firm to ensure separate accounting records are maintained for each fund (Firefly note – this means LOSAP, too), group of accounts and financial reports, and present financial information separately to the Board for each fund.
4. The Treasurer should obtain timely financial information for the District’s LOSAP from the program administrator and ensure the accounting records are updated for the activity periodically throughout the year.

If your treasurer or board is not receiving periodic, accurate reporting from your administrator or investment advisor, contact Firefly to see how we can help improve the transparency and information flow for your LOSAP.

In closing, here are a few additional items for readers to consider, taken both from this audit report as well from other audits and Firefly best-practice recommendations:

1. The OSC pointed out that the district did not make the contribution, and the impact that has on the funding health of the LOSAP.
2. The OSC mentioned the purchasing of annuities. Based on the context, we assume they were individual annuities to fund benefits. Purchasing individual annuity contracts for a LOSAP is extremely problematic for many reasons, which we can review if you contact us.
3. For DB plans, this report does not state whether or not the district has access to the actuary determining the contribution. However, the report does say a great deal about long-term planning and budgeting. That is exactly what the actuary should be doing for the LOSAP. We believe every board should be receiving direct guidance from an actuary.
4. This report mentions the need for written policies for various purposes including managing reserves (which includes LOSAP). Although not mentioned in this report, many other recent reports have focused on the need for an Investment Policy. You can read our recent article on this topic HERE.

Current clients of Firefly are receiving the information needed to properly monitor and account for the LOSAP asset transactions and are likely already implementing these best practices. Additionally, all DB clients of Firefly have direct access to actuarial guidance.

As always, we are here to help. Please contact us with any questions about how LOSAP reporting and monitoring can be improved.