CONDUCTING AUDIT OF INFRASTRUCTURE IMPROVEMENTS PLANgrowthandinfrastructure.org/.../2016_proceedings/raftelis-audit.pdf · Raftelis Financial Consultants, Inc. 1 CONDUCTING AUDIT

1Raftelis Financial Consultants, Inc.

CONDUCTING AUDIT OF INFRASTRUCTURE

IMPROVEMENTS PLAN

UNDER ARIZONA SENATE BILL 1525OCTOBER 14, 2016


Biennial Certified Audit Under Arizona SB 1525» This session focuses on the aspects of the process of conducting one of the first

Biennial Certified Audit’s of a municipalities Land Use Assumptions (LUA), Infrastructure Improvements Plan (IIP), and development fees under Arizona Senate Bill (SB) 1525.

» Raftelis Financial Consultants recently completed a Certified Audit for the Scottsdale


Today’s Presenters» Frank Davis – Manager with RFC and served as Project Manager for the Audit

» Andrew Rheem – Manager with RFC and served as Technical Reviewer for the Audit

» Both Frank and Andrew have assisted numerous municipal and county government agencies in calculating and adopting development impact fees nationally and in Arizona under SB 1525 (ARS §9-463.05)


Arizona Impact Fees Under SB 1525


Topics of Today’s Discussion» Background of Arizona Impact Fee Legislation and Requirements of the Certified

Audit

» What is an Infrastructure Improvements Plan?

» Case Study: City of Scottsdale

− RFC’s Approach to Audit

− Findings of Audit

− Lessons Learned


What is SB 1525?» Enacted in 2011

» Required existing impact fees be replaced by fees adopted under new legislation by August 1, 2014

» Required fee structures be based on:

− Adopted LUA Report

− Adopted IIP Report

− Report documenting fee calculation and assessment methodology


Why Perform an Audit?» ARS §9-463.05(G) further requires the municipalities to either:

− (1) Appoint Infrastructure Improvements Advisory Committee (subject to additional statutory requirements).

OR

− (2) Provide for a biennial certified audit of its land use assumptions, infrastructure improvements plan, and development fees.

» Scottsdale Water opted for the biennial certified audit.

− This first biennial audit was for July 1, 2014, through June 30, 2016.


What is an IIP?ARS §9-463.05(K) requires an IIP be prepared by qualified professionals using accepted engineering and planning practices for each service area for which a development fee will be collected. The IIP should include:

1. Description of existing infrastructure and costs to meet existing needs

2. Capacity analysis defining level of current usage and committed capacity

3. Description of costs for expansions attributed to development and based on LUA

4. Table quantifying impact of service unit and equivalency ratio of service units for various land uses


What is an IIP? (Continued)

ARS §9-463.05(K) requires an IIP be prepared by qualified professionals using accepted engineering and planning practices for each service area for which a development fee will be collected. The IIP should include:

5. Projected service units attributable to development and based on LUA

6. Projected demand during forecast period (10 or 15 years)

7. Forecast of revenues generated by new service units from sources other than development fees (state revenue, ad valorem taxes, excise taxes, etc.)


Requirements of Certified Audit» The audit shall be conducted biennially by “qualified professionals”:

− Not employees or officials of the city

− Did not prepare the IIP

− Defined as professional engineer, surveyor, financial analyst, or planner providing services within scope of their license, education, or experience

» Scottsdale City Auditor selected Raftelis Financial Consultants to perform the Biennial Certified Audit


Objective of the AuditTo review the progress of the City’s LUA and IIP, including the collection and expenditures of development fees for identified capital projects in the IIP, and evaluate any inequities in implementing the adopted IIP or imposing the adopted development fees differently from the adopted fee schedules.

Not intended to be an audit of City’s financial statements under generally accepted auditing standards.


Challenges in Performing Audit» SB 1525 is fairly general in describing the objective of the audit

» Previous Audit not available to provide guidance

» How in depth is the review of the progress of the IIP?

» What timeframe should the audit cover?

» What constitutes and “inequity” in implementing the plan or imposing the development fees?

» Should the Audit consider City’s Annual Report on Collection and Use of Development Fees?


CASE STUDY: CITY OF SCOTTSDALE


City charges development fees to recover the costs of providing three public services:

1. Water

2. Water Supply

3. Wastewater

» All fees are based on a city-wide service area

» All fees are assessed based on customer’s meter size

» City elected to provide for biennial certified audits

Scottsdale Development Fees


Audit Process Timeline» Selected RFC to perform audit: January 26

» Submitted initial audit draft report: May 13

» Posted final report for audit Committee: Sept 13

» Audit Committee voted unanimously to accept report: Sept 19

» Posted to City’s audit reports web page: Sept 20

» Public hearing on the report: Oct 10


RFC’s ApproachAudit period covered FY ‘15 and FY ’16:

1. Review actual growth and LUA

2. Evaluate levels of service and capacity available for growth

3. Review collection/expenditure of fees for each necessary public services:

− Are funds segregated?

− Are funds used appropriately as defined by SB 1525?

− Were development fee funds spent on improvements in the IIP?

− Were fees assessed according to adopted schedules?


Land Use Assumptions (LUA)» City adopted LUA Report on December 13, 2013:

− Covered a 10-year period (2013 through 2023)

− Prepared by Elliott D. Pollack & Co.

− Land use projections translated into equivalent water and wastewater demands by CH2 M Hill and Water Works Engineers

» Fees applied to different customers based on meter size instead of land use types


LUA Audit ResultsProgress of IIPs is consistent with LUA:

» Does not result in any inequities in implementing the plans

» Actual growth is consistent with land use assumptions

» Recent growth has not put a strain on available water and wastewater capacity


» City adopted IIP Report on December 10, 2013

− Covered a 10-year period (2013 through 2023)

− Water IIP prepared by CH2 MHill

− Wastewater IIP prepared by Water Works Engineers

» Both written plans sufficiently address and provide information required by SB 1525

Water and Wastewater IIP


IIP Assumptions Audited1. Compare actual and projected new EDUs added

2. Evaluate appropriateness of defined level of service

3. Assess progress of capacity utilization


Actual and Projected EDU

Based on utility billing information:

» Projections assume compound growth rate» Growth occurs intermittently » Water EDUs added represent 19% of 10-year projection» Wastewater EDUs added represent 13% of

10-year projection» Wastewater anticipated to add more EDUs due to areas

served by septic

Finding:

» Projected demands remain consistent with planning projections and do not result in any inequities in implementing the IIPs or imposing fees

1,843

1,183 1,048

1,831 1,856 1,881

-

500

1,000

1,500

2,000

2,500

FY 2014 FY 2015 FY 2016

Annual Water EDUs Added

Actual Projected

2,066

1,746

363

2,655 2,717 2,780

-

500

1,000

1,500

2,000

2,500

3,000

FY 2014 FY 2015 FY 2016

Annual Wastewater EDUs Added

Actual Projected


Levels of Service

Fiscal Year Gallons per Day % Change

2013 709 100.0%

2015 678 95.7%

2016 693 97.8%

WATER LEVEL OF SERVICE

Fiscal Year Gallons per Day % Change

2013 196 100.0%

2015 185 94.2%

2016 182 92.7%

WASTEWATER LEVEL OF SERVICE

Level of Service represents daily demand of an EDU:

» Based on City production and customer data» Minimal changes in demand per EDU » Water and wastewater use can fluctuate based on

weather and other conditions» Existing levels of service for both water and wastewater

are within 10% of those defined in IIPs

Finding:

» Levels of service identified in IIPs remain appropriate and do not result in any inequities in implementing the IIPs or imposing fees


Assess Progress of Capacity Utilization

Capacity utilization based on production/treatment capacities and MDD and ADD:

» Water production facilities have over 50 MGD of capacity available for new EDUs

» Wastewater treatment facilities have over 19 MGD of capacity available for new EDUs

» Available capacity fluctuates slightly based on changes in demand influenced by weather, etc.

» City has available capacity to meet projected demands during 10-year planning period

Finding:

» Available capacity to serve new EDUs in City’s projection/treatment facilities remains appropriate and does not result in any inequities in implementing the plan or imposing the fees

Water Production Facilities

Facility2013 Capacity

(mgd)

2015 Capacity

(mgd)

2016 Capacity

(mgd)

Total 160.20 160.20 160.20

Less CGTF (12.30) (12.30) (12.30)

Less Reserved Capacity (0.40) (0.40) (0.40)

Total Eligible for New EDUs 147.50 147.50 147.50

Less Max Day Demand (MDD) (94.14) (92.11) (94.86)

Capacity Available for New EDUs 53.36 55.39 52.64

Treatment Facilities

Facility2013 Capacity

(mgd)

2015 Capacity

(mgd)

2016 Capacity

(mgd)

Total 41.92 41.92 41.92

Less Gainey Ranch (1.67) (1.67) (1.67)

Less Average Day Demand (ADD) (20.13) (20.42) (20.25)

Less Reserved Capacity (0.25) (0.25) (0.25)

Capacity Available for New EDUs 19.87 19.58 19.75


Audit of Collection and Expenditures of FeesEvaluated collection and expenditure of fees from 7/1/2014 to 6/30/2016:

» Were the fees collected appropriately for customers?

» Were the fees used on infrastructure included IIPs and/or eligible costs as defined by SB 1525?

» Were the fees appropriately segregated and accounted for by public service area?


Audited of Collection and Expenditures1. Collection of development fees based on meter size

2. Expenditure of fees

3. Accounting of fees and fund balances


Collection of Development Fees

Collection of fees from customers based on meter size and customer classification:

» City tracks both collection of fees for new EDUs and refunds provided for incremental changes in demand associated with redevelopment

» Data included address, fee amount, meter size, customer classification, and date of payment

» Sold more EDUs to water and water supply due to irrigation meters

Developoment Fees # of EDU Receipts

Water 2,120 $5,778,162

Water Supply 2,120 $1,354,538

Wastewater 1,898 $3,876,721

Finding:

» The collection of fees was applied appropriately to new customers and does not result in any inequities in implementing the plan or imposing the fees


Expenditure of Development Fees

Water Water Supply Wastewater Water Water Supply Wastewater

(626) (627) (628) (626) (627) (628)

Cross Roads East Water 1,408$

Wastewater Collection System Improvements (119,704)$

Well Sites 134,031$ (134,031)$

Zone 14/16 Water Improvements Phase 3 74,006$ 283,749$

Total - Improvements Projects 208,037$ -$ (119,704)$ 151,126$ -$ -$

Impact Fee Biennial Audit 8,847$ 8,847$ 9,115$

Debt Service - Principal 2,118,788$ 407,774$ 4,084,403$ 2,242,400$ 438,883$ 4,315,940$

Debt Service - Interest 3,416,369$ 808,745$ 4,814,336$ 2,137,747$ 563,909$ 4,219,278$

Total Non-Project Payments 5,535,157$ 1,216,519$ 8,898,739$ 4,388,994$ 1,011,639$ 8,544,333$

Total Expenditures 5,743,194$ 1,216,519$ 8,779,035$ 4,540,119$ 1,011,639$ 8,544,333$

July 2015 - June 2016July 2014 - June 2015

Project Name

Finding:

» The expenditure of fees was used for eligible projects and costs associated with providing service to new customers and does not result in any inequities in implementing the plan or imposing the fees

Expenditure of fees on IIP projects and eligible costs of providing service:

» City made adjustments for use of funds on certain projects that were not eligible» Costs of audit and financing of facilities with available capacity are eligible for

development fees under SB 1525


Accounting for Development Fees

Segregated funds into separate accounts:

1. City made adjustments to funds to address changes to accounting practices associated with capital funds

2. Refunds provided for incremental changes in demand associated with redevelopment

3. Prepaid modifications represent adjustments provided to customers that previously paid fees under previous assessment approach

Development Fee Fund Balances Two-Year Total

626 Water Development Fees

Beginning Balance ($118,394,091)

Adjustment (1) $15,603,367

Receipts $5,854,512

Refunds (2) ($76,350)

Prepaid Fee Modifications (3) ($726,023)

Expenditures ($10,283,314)

Ending Balance ($108,021,899)

627 Water Supply Fees


Adjustment (1) ($14,806,256)

Receipts $1,367,054

Refunds (2) ($12,516)

Prepaid Fee Modifications (3) ($189)



628 Wastewater Development Fees


Adjustment (1) $7,732,825

Receipts $3,941,747

Refunds (2) ($65,026)

Prepaid Fee Modifications (3) ($79,779)




Accounting for Development FeesThe City appropriately accounted for the monies received from development fees in separate funds and only used those monies for the purposes authorized by statutes. The City’s collection and expenditure of development fees does not result in any inequities in implementing the plans or in imposing the development fees.


Lessons Learned» Municipalities and auditors may differ in how they view the objective of the audit

− Type of public services recovered

− Magnitude and timing of projects included in the plan

» The depth of review of IIP assumptions may differ

» Biennial audit should cover a full two fiscal year period

» Using development fee funds for ineligible expenses could constitute an inequity in implementing the plan


Lessons Learned» Significant variances in key assumptions could constitute an inequity in

implementing the plan

− Project cost versus planned cost of project

− More rapid growth than anticipated may result in lack of available capacity

» Assessing the fee incorrectly to land use types could constitute an inequity in imposing the fee

» Annual Report on Collection and Use of Development Fees should not be considered as part of Audit


Frank Davis Manager,Raftelis Financial Consultants, Inc.2803 Fruitville Road,Suite 131,Sarasota, FL 34237 P: 941.349.1040E: [email protected]

Andrew Rheem, Manager,Raftelis Financial Consultants, Inc.5619 DTC Parkway, Suite 175, Greenwood Village, CO 80111P: 303.305.1137E: [email protected]


RFC IS A REGISTERED MUNICIPAL ADVISOR WITH THE MSRB AND SEC UNDER THE DODD-FRANK

ACT AND IS FULLY QUALIFIED AND CAPABLE OF PROVIDING ADVICE RELATED TO ALL ASPECTS OF

UTILITY FINANCIAL AND CAPITAL PLANNING, INCLUDING THE SIZE, TIMING, AND TERMS OF

FUTURE DEBT ISSUES. Any opinion, information, or recommendation included in this presentation, related to the size, timing, and

terms of a future debt issue may be relied upon only for its intended purpose. This information is not intended as a

recommendation to undertake a specific course of action related to the issuance of debt, or to indicate that a

particular set of assumptions for the size, timing and terms of issuing debt will be available at the time debt is

actually issued.

Documents

CONDUCTING AUDIT OF INFRASTRUCTURE IMPROVEMENTS PLANgrowthandinfrastructure.org/.../2016_proceedings/raftelis-audit.pdf · Raftelis Financial Consultants, Inc. 1 CONDUCTING AUDIT