Good morning and welcome to the November 27th meeting of the Civil Rights Utilities Economic Development Arts Committee.
My name is Lisa Herbold.
I am the chair of the committee as well as the council member representing West Seattle and South Park.
It is 9.35 a.m.
And just a quick overview of today's agenda.
This is our first meeting back in the swing of things after the council's budget deliberations.
We're going to have our monthly edition of the cultural spotlight.
And then as far as the items of business on the agenda, we have three reappointments to the Seattle Music Commission.
We have an ordinance related to fees and charges for cultural spaces owned or operated by the Office of Arts and Culture.
And then we're going to hear from Seattle Public Utilities regarding the 2018 audit plan together with the auditor that SPU works with, Moss Adams.
And with that, let's kick off Cultural Spotlight.
Jenny, you want to tell us what we have in store for us?
Sure.
Good morning.
We are joined here today by Daniel Pak from Totem Star.
Welcome, Daniel.
Aloha, everybody.
Good morning.
Thank you so much for having me back.
Maybe about two years ago, I was here getting appointed as a Seattle Music Commissioner.
So thank you for having me back.
My name is Daniel Pak.
I'm the co-founder and executive director of Totem Star.
Our other co-founder couldn't be here today because he's the music director for Digable Planets, and they're currently on tour with Lauryn Hill.
So representing Seattle in a big way.
So at Totem Star, we provide a safe and encouraging creative sanctuary for young people, AKA the recording studio.
And we're just all about youth voice, leadership, mentorship, and our hook is music production and performance.
Our mission is really to amplify and empower youth voice.
We're really trying to fill the arts education gap while providing young people with life skills that they can take with them.
We're very much like the artist development department of a record label, where we do a lot of one-on-one consultation with artists to hear their story, figure out what they wanna do, maybe listen to achievements they've had, challenges, traumas, whatever they're going through in their life, that's gonna be expressed through their music, and we really try to facilitate them to create some really amazing art.
Here's a shot of a glass house at Youngstown Cultural Arts Center.
So we got three major programs, the studio, the stage, and the story.
The studio is basically after school recording studio sessions that any young people in the city of Seattle can participate in.
take advantage of, all they have to do is go to our website and fill out a new artist inquiry form, and they can get right in.
Right now, I have to say, we have about 85 young people on our waiting list right now, so it's getting a little crazy.
But every day in the studio, Monday through Thursday, from 3 to 7, we see so much self-transformation, we see self-expression, we see self-discovery, and just a lot of community building, as you can see in this amazing picture right here of all our artists having a little little roundtable discussion about you know what we're all trying to accomplish.
The stage, we do quarterly showcases and open mics.
We really try to let our young people shine and have the opportunity to be on a big stage.
They plan them all, they book them, they curate them, they host them.
It's pretty much they take care of everything.
Our next one is Winter Magic.
It's happening next Friday at Youngstown.
So it's free, we always provide dinner.
So please, please, come through.
It's always great to see the greater community come through and support the young people and build community.
Our third program is called The Story, where we bring in touring artists, music professionals, to come and meet our young people in very small, intimate storytelling groups.
Some of our past guests have been Gio from Blue Scholars, Sassy Black, we've had Nikita Oliver, we just had Gabriel Teodros, members of Macklemore's touring band come through.
We even had artists from out of town.
We've had Will Doc Avers from Ozo Motley come through.
We've had Ali Shahid Muhammad from a tribe called Quest come.
So the story really brings the young people together with the really, you know, with the artist who's already doing things.
And they're able to really talk about, you know, what it was like for them when they were a teenager coming up and having these big dreams of music and like, what does it mean to be a musician, to go through that kind of struggle, right?
And of course, we're gonna provide some stats here.
These are actually from 2012, the Seattle Arts Access Survey, the Burke Group did that.
I know that we're so excited to partner with the Creative Advantage.
to really fill the arts education gap.
But it's still big.
And we know that there's a lot of great outcomes when young people have access to the arts.
And we see it on a daily at the studio.
I mean, the transformation, the confidence building.
Their engagement in school, we've had great partnerships with like the Southwest Interagency Academy.
Right now we're providing five internships with the Evergreen State College, Nova High School, and also Big Picture High School down in Burien.
So we have five interns right now.
So it's just a lot of great engagement when young people have access to the arts and are able to express themselves and tell their story.
So yeah, Totem Star is definitely really trying to fill that arts education gap with all these incredible partnerships here in Seattle.
So our young people are very committed.
This is Alyssa King.
She goes by Soulchild L. She took a bus an hour and a half both ways from Bothell just to come to Totem Star, a little studio in West Seattle.
She grew up in the Central District, but she's studying at University of Washington Bothell, and it's crazy what they'll do to come just to get some music, you know?
And our vision, we really want to build a community of young recording artists who contribute to the vibrancy, to the diversity of the Seattle music scene, give young people the life skills they need, communication, collaboration, critical thinking, and to develop a social-emotional awareness in a positive community of their peers, where they're really trying to make a difference and understand who they are.
Their story really matters.
Their stories really matter.
Here's a great picture of Jose Manuel Raymundo.
We're doing a little songwriting session up at their control booth at Youngstown.
I really had to hone in on my very small Spanish to really work on this session with him.
And here's some quotes from our young people that have gone through it.
Totem Star has helped me recognize my true talent.
It's impacted me in such a positive way in which I can really improve myself.
Very dope community, a place where I feel like I belong.
Helps me develop as an artist because I can engage in hands-on activities and have very good conversations, which is my main way of learning.
And I just love this shot of Jayla and the other members of Royalty.
Some of them have also come through the residency program, which is also an amazing program that we are about to partner with in the winter.
Totem Star has given me a community in which I thrive and I'm able to enrich my musical abilities by meeting new people and learning from them.
Totem Star is a place where all can belong at the same time.
There's diversity, there's community that isn't focused on a front.
It's real genuine love and support and people who come through with opportunities and share stages with you.
Here's a picture of Zoe Roberts.
She started coming to Tombstone when she was 12. Here's Saturn Star.
We just launched the All Access Fridays program where we have teaching artists who represent women, femme, non-binary, trans, queer, LGB plus communities where our young people can feel represented by leadership that really represents their story.
So that's been a really cool thing, a cool pilot program to launch.
Is that also at Youngstown?
Also at Youngstown.
This is royalty again.
The thing about this picture that really gets me is all four of them have come from different neighborhoods, different parts of the city, different backgrounds, different stories, but they all came together through Totem Star to create a beautiful Good morning.
A beautiful, just a beautiful music group and their song, their songs, they're just kind of breathtaking.
Here's Mary Ellworth, homeschool, came through with her mom and dad.
Really, really, really special.
I think she's in Europe backpacking right now.
Here's Zosia Dunbar.
He's from Augusta, Georgia, but he's actually right now just graduated from West Seattle High and he's being mentored by Darius Rucker's drummer from Hootie and the Blowfish.
Um, here's Cobb.
Cobb's at Whitworth right now.
Another picture of Zoe.
LaShonna Seal-Kane, aka Kid Leo.
She just hosted our annual fundraiser at Youngstown.
Her charisma is unmatched.
Her ability to hold a room together is just phenomenal.
And she's gonna join us again this year.
She's a senior at Nova.
So this is her last year.
So she's kind of sort of passing the torch down.
We put her in a new mentorship role of kind of mentoring all the younger artists that are coming up.
So she's just amazing.
Here's a typical afternoon at Youngstown, jamming on the stage.
All them, they're all from different places, all from different parts of the city.
It's pretty remarkable.
Monica, she goes to Gonzaga now.
Here's Max Moody, he's one of the most dynamic performers I've ever seen.
Another shot of royalty.
Justice White came to Totem Star.
He wouldn't look us in the eye.
He was completely shy.
He didn't want to talk to anyone.
Now, three years later, he's bringing hordes of artists into the studio.
The studio's packed.
He's just creating his own community of songwriters and producers.
It's just amazing to see what happens when you just give young people a safe and encouraging creative sanctuary, and when you let them express themselves and tell their story, it really supports our vision in a more just society where...
Music is the universal language.
Thank you so much for having me.
Absolutely.
Daniel, can you just talk a little bit about your beginnings?
I know you started in 2010. You started out as a mobile recording studio.
But the folks who came together to create Totem Star were a unique collection of people with a unique set of experiences.
Can you talk a little bit about that?
Yeah.
So I think I turned the mic off.
It's right on the base, or not on the base, on the stem.
So I think it's about 2006. I was volunteering for a program called the Service Board and I realized, that was the first time I realized after talking to these young people that they didn't have music programs in their schools.
One in particular was Kelly Anderson and she wanted to learn the guitar and she kept telling me how there's just never an opportunity for it and Chief Sealth High School at the time didn't have a jazz program.
And so that was the first time I've heard that.
And so I was like, well, that's not fair.
At my house, in my basement, I have drums, guitars, bass, because I'm a singer, songwriter, producer myself.
And so I thought, wow, we've got to make something happen.
So I was introduced to Randy Engstrom at Youngstown Cultural Arts Center.
And he pretty much heard my story and gave me one of the classrooms in the Southwest Interagency Academy.
And every Saturday for two years, I'd bring my whole back line and set it up and we'd have a five hour jam session with all the TSP kids.
And that eventually led to me being introduced to like ArtsCore, which is an amazing organization.
I've been with them for 12 years, and then also Rock School.
And at Rock School, Thaddeus Turner, the other co-founder, was also teaching.
So we used to do these summer camps where we'd take 30 young people, split them up into six bands, and then for after two weeks, we'd do a performance at like the Vera Project.
And so, After doing that for a while, we got a call from the Juvenile Rehabilitation Administration.
They said they had 10 young people coming out of detention, and they had a budget for an eight-week, 240-hour work training program.
And so we jumped on it, and we, for that first summer, we weren't even called Totem Star at the time.
I think we called ourselves Making the Band because there was a Puff Daddy show on TV that was pretty catchy at the time.
But we worked with 10 young people at Rainier Community Center.
We started with 10 right after the 4th of July, and we ended with 10 towards the end of August, which is pretty, which I think is pretty remarkable.
And we found out only three weeks later that a third of them had been booked back into detention.
And that's when it hit us that, you know, having a studio, having a safe place where young people can come and just express themselves and be free.
I mean, we had Bloods and Crips in the same studio.
They were laughing.
joyful, making music, you know, having a good time.
And it was amazing to see that happen.
After that first year, Kate Becker encouraged us to apply for a grant from the Seattle Youth Violence Prevention Initiative.
First grant we've ever written.
And we got it.
And from that point on, we started doing, for the next three years, we started doing these programs, like, eight weeks at Rainier Community Center, eight weeks at Downtown Y, eight weeks at YouthSource Renton.
And the thing about that is we just felt like we're getting to create these amazing relationships with young people for eight weeks, and then the funding is out, and it's, you know, it's bye-bye and good luck.
And that's not the way to work with young people.
And so we applied for our first unrestricted grant.
And with that, we came right back to the same place that it all started, Youngstown Cultural Arts Center.
And at the time, David Bestock was the new ED, and he said, no one's using the recording studio.
He let us in, and we've been there ever since.
And currently, we're definitely looking to expand.
And we have, like I said, we have a waiting list of over 80 young people.
Our budget has increased over the years, and so we're really trying to partner with a lot of people in the community, maybe even developers, to maybe come up with some space where Totem Star can have a really solid headquarters, and then our vision is to have a headquarters maybe in Chinatown, ID, and then maybe some satellites in Youngstown, Central District, North Seattle, maybe even one down in Burien.
We have a ton of young people coming up from Burien, so maybe we should talk to the Burien City Council too.
Well, it's been quite a journey, and it's nice to see how an idea, a spark, can grow, and that you have been able to touch the lives of so many young people.
Let's try again, see if we can get a little action on this.
So this is coming up on Friday the 7th, also at Youngstown in West Seattle.
And it is an all-ages event.
The doors open at 530 and it goes from 6 to 8. And one other event I guess I should mention is that there's The 70th anniversary of the Universal Declaration of Human Rights is coming up at the observation at the Gates Foundation.
And it will prominently feature performances by the youth that you guys work with.
Absolutely.
Great.
Well, thank you for joining us.
Thank you for having me.
Captain Ryan, thank you as well for joining us.
Do you have anything?
Good to see you again.
Good to see you, too.
It's so amazing to hear the stories, what you can do through music and a little love.
It's great.
It's a joy.
I even brought some T-shirts and some CDs for you all.
Thank you so much.
As long as their value is less than $25.
Thank you so much.
For the record.
All right.
With that, let's move on to public comment.
Do we have anybody signed up?
Nobody signed up for public comment?
Fantastic.
And then, I mean, not fantastic that nobody's here for public comment, but fantastic.
We'll move on.
We'll have a read into the record items one through three, all reappointments to the Seattle Music Commission.
Again, item one is appointment 1170, reappointment of Jerry Everard as member of Seattle Music Commission for a term to August 31, 2021. Item two is appointment 1171, reappointment of Charlize J. Metcalf as member of Seattle Music Commission for a term to August 31, 2021. Item three is appointment 1172, reappointment of Reese Tanimura as member of Seattle Music Commission for a term to August 31, 2021. Thank you, Neal.
And these folks are all reappointments.
So we do not insist that they attend their confirmation here at Council, but we are joined by Director Kate Becker of the Office of Film and Music, and I believe you will present these three reappointments, talk a little bit about the Music Commission.
These, I believe, are also their Council reappointments, correct?
Yes.
So the City Council is the nominating authority for these three.
Fantastic.
Thank you so much for having me.
I'm here with my esteemed colleague, Mellie Darby, who you appointed to the Music Commission.
She's currently serving as our Interim Creative Economy Advocate while Alex Rose is out on a long maternity leave.
So, yes, the Music Commission started in 2010, founded in part with the help of you, Councilmember Herbold and you, Newell, under the leadership of Councilmember Licata's office.
And we are eight years into a City of Music vision that is a 10-year strategy to really make our city a city of musicians, a city of live music, and a city of music business.
The Music Commission is really the force behind executing that City of Music vision, and I can't say enough about the good work that they are doing.
They're an incredibly dedicated and productive group of volunteers.
I encourage you all to come visit us at the Music Commission sometime.
We'd love to have you.
Reese Tanimura has served as our chair for the last couple of years, and she has done a fantastic job of leading the Music Commission.
Some of the initiatives she has helped lead include this Youth Roundtable Series that we've been doing this year, which has been fantastic and really helped us get the voice of emerging musicians and music business owners at the table with us.
Jerry Everard is also an esteemed music commissioner who has led some work around working with developers and helping to develop cultural space inside of new developments.
He's also a voice of business at the table, which is very, very valuable.
And then Charlize Metcalf, the longtime DJ of Audio Oasis on KEXP, has become the education manager at KEXP and brings a good strong voice both to the music commission and she's got her radio voice as well.
Perhaps mention to Jerry next time you see him that Totem Star is looking to partner with a developer.
Oh yes, indeed.
And also Reese is also the Managing Director at Northwest Folklife and we see lots of Reese here at City Council advocating for folklife and for the music community.
And this is really great information on all of these appointments to bring forward.
You had mentioned that the Music Commission is in the eighth year of its 10-year vision.
Yes.
When you say that, you mean that you created a 10-year sort of strategic plan?
A roadmap, yeah.
A roadmap, there you go.
And we're eight years in.
We are eight years in, so next year, the Music Commission will be working hard on establishing another 10-year vision for our city of music.
So that is in our work plan for 2019. Good to know.
All right.
Well, we'll try to keep abreast of your work and help out to the extent that we can.
I have no questions.
Council Member Bryan?
No?
No.
Okay.
Well, then I will move Appointment 01-170, Appointment 01-171, Appointment 01-172.
second those all those in favor vote aye aye none opposed none abstaining and the three appointments will move on to full council on monday thanks so much thank you all so much Item number four.
Item four is Council Bill 119408, an ordinance relating to the Office of Arts and Culture, authorizing the director of the Office of Arts and Culture to set fees and charts for all cultural spaces owned or operated by the Office of Arts and Culture and amending Seattle Municipal Code Section 3.14.815.
Thank you, Noel.
Greetings and welcome.
Good morning.
Good morning.
Start with a round of introductions, please.
Good morning.
Calandra Childers, Deputy Director of the Office of Arts and Culture.
Amanda Stoddard, Policy Coordinator for the Office of Arts and Culture.
Randy Engstrom, Director of the Office of Arts and Culture.
Fantastic.
Thank you.
Who would like to kick us off?
I can give you the really short version, which is that, as you know, in 2013, the Langston Youth Performing Arts Institute was moved into our office, and as a function of that move, we were given the authority to set the rates related to the rental of the facility, which is great, and we do that.
Now that we have King Street Station coming online, as well as potentially a few other facilities that could come under our management, we realized we needed to change the legislation that allowed us to set rates so that we could actually rent the facility out should that be our chosen course of action.
And so, in short, the legislation currently limits you to charging fees for Langston Hughes.
This legislation allows you to charge fees only for King Street, or is it more expensive?
No, it's more expensive.
It puts it under the umbrella of cultural facilities versus Langston Hughes specifically, because while we have those two facilities for certain, we're also working with City Light around some space they have at the new Denny substation, and in some early conversations with the waterfront office about some space they are interested in utilizing for cultural activity as well.
So the legislation as written gives you the flexibility to charge rent and collect rental income from future facilities as they come online for your operation and control.
That's great.
Council Member O'Brien?
That's great.
This looks pretty straightforward.
We are going to be visited by folks over at Langston Hughes in a subsequent meeting.
On the 11th.
And is that connected to another piece of legislation?
Is that correct?
It's not necessarily connected to legislation.
It's sort of the closure and the look forward around what has been a six-year evolution of incubating the nonprofit organization that's carrying forward the mission.
So it doesn't require legislation, but we wanted to come back and sort of share the story.
Yes, and we want to hear the story and want to hear from the new director.
Yeah, from Tim.
Fantastic work he's been doing.
I love all these connections that you guys have with folks who are out working in the community and the history with those folks like we just heard from Totem Star as well.
So with that, if there are no further questions, I will move passage of Council Bill 119408. Second.
All those in favor, vote aye.
Aye.
None opposed.
None abstaining.
And this too will move on to full council on Monday.
Thanks so much.
Thank you.
Great seeing you guys.
Jenna, item five is the Seattle Public Utilities 2018 Audit Plan.
Greetings.
Welcome.
Thank you.
I believe we have a slide presentation.
And we're going to cover the scope of our audits and the areas that we deem to be the most important and where we spend the most audit effort.
And one thing that I would ask you, if you have areas that you would like us to bake into the audit scope, this is a great time to bring it up because we are just completing our planning.
In fact, this meeting really does seal the planning efforts for the audit.
And I'll talk about the rest of the phases in just a moment.
But we'd love your input if you have any areas of special interest.
Thank you for inviting that input.
So just to start off, our role as auditor, and believe me, you have a parade of auditors that come through not only Seattle Public Utilities but also the city.
And our role as auditor is to audit the financial statements.
We do work very closely with the state auditor.
The state auditor audits the city's financial statements.
And to the extent that there are any federal programs that SPU receives, they would also be in charge of auditing those programs.
So our role really is limited to the fairness of presentation of the financial statements.
And of course, our opinions attached to those financial statements are used in your bond offerings, and any other external uses that citizens or anyone that might request audited financial statements.
So that's where they're used.
In recent years, that has been to a benefit to the city.
Yes, yes, of course.
You have very good bond rating.
I do want to talk a little bit about the concept of materiality and just how we do our audits.
An audit never looks at 100% of transactions.
We take a risk-based approach.
And Jordan's going to cover that in just a moment.
the areas that we really focus our time.
So we spend quite a bit of time in the planning phase looking at the significant transactions throughout the year, looking at the operations, determining where we're going to spend our time and what that focus will be.
And one thing increasingly that is becoming more and more important to the heart of our audit is information technology.
So the automated controls within the computer.
So we do work very closely hand-in-hand with our own information technology specialists who are part of our audit team.
And they spend well over 100 hours just digging into those general computer controls, the access controls, and then the specific application controls that go hand in hand with what we believe to be your larger accounts and the riskier areas that the utility is involved in from an accounting perspective.
And so the areas of focus, whereas in some instances you may have, Common areas of focus that you look at every year because they're identified as high risk, you also might have new things coming on precisely because of the newness of technology or perhaps an awareness of emerging issues from work that you've been doing with other utilities.
Exactly.
And one example is cybersecurity.
That, of course, has become even more important, guarding the data.
making sure there are strong access controls and change management controls to the utilities system.
So that is an area we do spend a significant amount of time on.
And we do issue, I'm jumping down a little bit here on the reports that we issue, one thing that we do like to do every year is we issue a best practices letter.
And that does include our information technology points where we think there might not be a deficiency, but there are things that we see that are best practices that could to help improve the structure or improve the safety of the data.
And so we do provide that in written form to management at the end of the audit.
So they're not specifically findings, but they're recommendations.
Exactly, exactly.
We do make a differentiation between our report on internal controls, which if we were to find any significant deficiencies material weaknesses, we would bring that to your attention.
And we're not going to wait until the end of the audit.
If we find something along those lines, we'll come to you and senior management as soon as we find that type of item.
And we have not had to issue that report in recent years.
We have not found any of those types of items in the past couple of audits.
And then the other reports that we will be issuing is separate opinions on the financial statements for water, drainage and wastewater, and solid waste.
As I mentioned, we're just completing our audit plan.
We did most of our planning procedures in October.
And we've also completed most of our internal control testing.
With some of the new system changes in the last year, we have had to really take a fresh look at many of the systems and learn what those key controls are and then devise new ways to test them.
So that has been a little bit more time consuming than in the past.
actually this week, hoping to wrap up a lot of our testing of the revenue systems, expenditures, payroll, and the work order system.
We'll come back into the field in March and complete our audit during the month of March, early April, where we do the bulk of our audit procedures.
And we'll be back in front of this committee at the conclusion of our audit, usually right around the end of April, early May.
And so is the internal control testing, is that of SPU's control or is it work that's done prior to the audit and results in testing of Moss Adams internal controls?
No, it's all SPUs, internal controls.
So we look at the controls over payroll.
We look at the controls over revenues, cash disbursements.
As Jordan will mention, we conduct interviews of project managers to really get to the heart of what are the big projects that are being worked on at the utilities and what are the controls.
that are going into that.
We try to get a lot of our audit evidence from the internal control system, because you need to have a very strong set of internal controls to assure that that financial data and the financial reporting is accurate.
So we spend quite a bit of time on that in the fall prior to year end.
Great.
Thank you.
I mentioned the risk assessment.
And again, Jordan will cover these in a little bit more detail.
Revenue recognition is always something in almost any entity that just comes with it some extra risk.
Is the revenue recognized in the right time frame?
Is the revenue collectible?
So we really look at all aspects of wholesale and retail sales.
Being a utility, regulatory charges are unusual.
There's a lot of deferrals that utilities take that other entities are not allowed to take.
It does help match your revenues and expenditures more closely because utilities are very rate regulated and rate based, and so oftentimes you'll have to load up your expenditures to match when those rate increases are going to occur.
So it becomes very complicated looking at those deferral layers.
We spend quite a bit of time on that, working with management to determine that we believe those regulatory deferral layers are appropriate and rolling out into the financial statements appropriately.
Explain that concept again, a deferral layer?
So for example, if you know that you will be having a rate increase in two years and you're incurring some larger expenses now, the utility is allowed to defer a certain amount of expenses and not put them in their income statement.
And so it sits on the balance sheet.
And then when the rate increase comes through, then the expenses are recognized at the same time as that rate increase.
So as you can see, it can add up very quickly to be a lot of layers of things on the balance sheet that are being tracked.
And there are limits to the number of layers, if you will?
There's really not a limit to the layers.
So we always try to work with management and remind them, you don't want to have too many layers because you're going to be paying for it down the road.
And they've, I think, had a very good balance.
in recent years of what is deferred and what they're able to just take immediately into their income statement.
And it is an accounting mechanism that's unique to utilities.
So that is unique.
The timing of how we recognize revenue and expenses, I can imagine there's always some discretion there.
There is some.
But usually pretty clear guidelines.
Yes, very clear.
And in fact, it needs to go into the budget.
And if there are any type of unusual deferrals, it does need to be blessed essentially by city council.
So when you're seeing that budget come through, you will be able to see where those deferral layers are in that budget and it is under your control to approve that.
And are they typically related to capital expenses where the benefits going to be coming on in later years too or is it?
It can be anything from expenses that the utility is incurring for a project that they're not sure is going to take place.
A lot of times there are surveys and investigative studies that are done to say, okay, are we going to build this additional asset?
We don't know for sure or not, so it might just stay on the balance sheet until it is determined if it's going to be expensed.
There's other areas, for example, I'll give you one, and again, leaping ahead into the presentation later, there's a new accounting standard coming out effective next year, not this year, but next year, that will disallow you to take your interest expense from your bonds.
capitalize that into the projects.
And that's just been, I mean, every governmental entity has been able to do that.
And it's just been accepted that you're issuing your bonds to build plant.
So, of course, the interest expense should go into that cost.
Well, starting in 2019, that will no longer be allowed by the Governmental Accounting Standards Board.
However, utilities, because they have regulatory accounting, they will be able to make the decision that they might want to use regulatory accounting and continue the practice of capitalizing the interest.
So that is something that we're working with the utility now to determine does this make sense for SPU, that they want to continue capitalizing that interest into the projects.
And really, it smooths out your earnings.
For example, you didn't issue any bonds this year.
So you didn't have any interest.
expense necessarily for new bonds.
And the same with issuance costs.
You didn't have to have a spike in your issuance costs that you took into expense.
So next year, if you do issue bonds, now you've got increased interest expense.
You'll have issuance costs that went along with those bonds.
Regulatory accounting allows you to match that with the related rate revenues coming in later.
So you can make that decision to make that a deferral layer.
So you're referring to regulatory accounting versus the GAO.
Are you saying that it's a different oversight structure?
No, it's allowed by the Governmental Accounting Standards Board, and it's always been allowed for utilities.
dating back 30, 40 years.
This has been a mechanism that is allowed by, for utilities under generally accepted accounting principles.
So they're disallowing it for non-utility practices.
Correct.
And continuing to allow it for utility practices.
It's almost like, regulatory accounting is a little bit of, it's a mechanism recognizing that utilities have a unique regulatory structure in that they can't always be super nimble about getting that rate increase in place immediately.
And sometimes, and you look in the private sector, an investor-owned utility has to go through the state regulatory body to get their rate increases.
It can take three, four years to get their rate increases.
So that's where it comes from.
As a city council, you can be much more nimble about your rate increases using your budget as a technique.
It might not seem nimble, but it is compared to the investor of utilities.
Exactly, exactly.
So that's why it's allowed.
It's really a matching principle thing in accounting where you can really try to make sure those expenses and those revenues are together.
Thank you.
We're currently not doing regulatory accounting.
Is that?
You are.
There are a few layers in there for the utilities.
Yes.
So it's not a significant shift that will be required.
It's just a policy decision.
It'd be one more item to add into that layer.
Exactly.
And you'd mentioned before that when it comes to the deferral layers, that there are no limits.
When you say there are no limits, do you mean according to county practices there aren't established limits?
Correct.
It's a management and a governing board decision about what would be potentially deferred as opposed to run through the income statement in the current year.
But you, in your capacity as auditor, would not ever say, you know, we feel that good accounting practices would signal that you should take a look at the amount of that you're deferring from putting on your books because it looks like you're creating some risks.
That would not be a finding that you would find.
We do watch it.
We watch it very carefully.
We do trace every deferral back to the budget.
We trace it back to the allowability and the decision by management to make that deferral.
and then we watch to see that they roll out appropriately within the income statement.
Many deferrals have just a very short life, perhaps even three, two, three, four years.
So they're quickly run through the income statement.
It's not necessarily something that takes, you know, decades to roll out.
And then again, we develop our final audit plan based on the results of those tests.
So as soon as we're done completely with our internal control testing and hearing any input that you may have, we will be finalizing our audit plan.
And Jordan, if you want to cover some of the areas of audit effort in a little bit more detail.
Sure.
Maybe you can skip the deferrals.
We covered that one.
We did.
We did.
So one of the main areas that we look at, which is why it's first, is the utility plant and related accounts, because something a utility has a lot of is plant assets.
So we review the capitalization policies that those are being followed as written.
We look at management's impairment assessments.
We will look at the work order system.
So that goes back to what Lori was saying about looking at controls in addition to sampling and detail testing transactions.
Moving on from that, oh, actually with those utility and plant, we, as Lori said, actually talk to project managers about specific projects.
So we really get to know some of the larger projects going on and what goes into those.
For bond-related accounts, we'll look at any setup of new issuances, any amortization of existing accounts.
So it sounds like there hasn't been a lot of new issuance this year.
We will also be looking at compliance with any covenants for any debt agreements.
or any bond covenants.
We'll be looking at debt refunding and defeasance as well as arbitrage calculations related to bonds.
Moving forward, we look at cash investments.
And this is an area where we work very closely with the state auditor as this is a very centralized process.
The city pretty much controls cash.
We'll also be looking at accounts receivable.
That includes the utility billing system as well as other types of receivables.
We will also look at liabilities and contingencies to include environmental pollution and remediation liabilities and any potential litigation claims, potential or existing litigation claims.
And of course, those are accounts that are very determined by management estimates, of course, in conjunction with the city attorney and others within the city.
And so because there is so much judgment involved in those, development of those accrued liabilities.
We do spend quite a lot of time digging into those as well.
And so what exactly are you looking for?
Well, for example, for the environmental remediation, there are very specific governmental accounting standards that must be followed.
There's triggering events that indicate when an item must be accrued for.
Also, you know, the EPA gets involved when it's a Superfund site.
We're looking at the record of decision that comes down from the EPA.
And then we're looking at the range.
There's usually a low to a high.
Is the utility taking a stance they want to be more in the middle or more conservative and take the full amount that they can best guess?
And then every year those estimates are updated because things change and you get different information from the EPA.
You have other potential responsible parties that are involved that are helping to pay for it.
So there's a lot that goes into that environmental remediation area.
And for the attorneys we rely, for the litigation we rely quite heavily on the attorneys to give us their best estimate.
Is there any look back on that to see just like historically how well we've done?
There is.
And that is part of our analysis.
So we do a historical look to see, okay, did everybody guess right on that one?
Obviously, we're chronically underestimating it.
Exactly.
Yeah, we do look at history.
And we do that really for all the estimation accounts, the allowance for bad debts, the, you know, depreciation.
We're really looking to see, okay, is the methodology sound?
And we can see that based on historical perspective.
Great.
All right.
Moving forward, we did cover the regulatory accounts in pretty good detail.
So other than that, we're also looking at operations to include retail and wholesale sales.
So that's the revenue portion.
We're going to be looking at operating expenses and capital and operating contributions and grants as well.
Net position classification is another area we spend a good amount of time on, otherwise known as the equity accounts.
And then finally, we are going to be looking at management's discussion and analysis and any note disclosures just to ensure accurate presentation.
What do you mean by retail and wholesale sales?
Yeah, definitely.
So the utility actually does what we consider retail is sales to customers on an individual basis.
So your house, your house, what services are provided.
Whereas the wholesale, the utility also provides water services to other water districts.
So they're actually providing it as a sale to another water district who then distributes it to its individual customers.
So that's a large portion of the revenue for the utility.
So we do spend a good amount of time.
And what are you looking at as it relates to both the individual and the wholesale?
sales?
Yeah, for the wholesale, we look at the billing and agree that back to the contracts, make sure that it's reasonable, that there are controls around that.
We also look at historical sales, comparing the prior year, what the amounts are.
For retail, we're looking at more of a high level where we disaggregate the revenue from different types of customers and look at metrics like usage and compare that to the revenue and the rates based on the rates, what we would expect revenue to be.
So that's the majority of what we do for those.
I feel like it's important.
Is there anything I missed?
I think during the interim phase, which we just completed the system testing, we actually take a sample of customers and we recalculate their bills and we make sure they're in the right customer class and that they were billed the correct amount.
So you're looking for accuracy based on rates?
Yes.
And given that our billing system is now an integrated system for SPU and Seattle City Light, are you only looking at the SPU site?
Yes.
Although when you're looking at the controls, it is almost by accident covering the other entity as well.
But when we do our sample, the sample consists solely of SPU customers.
So, but even though maybe the bills for Seattle City Light, you're not looking at those for accuracy on either the retail or the wholesale side, you are sort of giving Seattle City Light a review of their policies, their billing policies.
And actually, it's a good point that you bring up that Seattle City Light does have a different external auditor, but we work jointly with them on many of the shared systems, especially in the IT area where our technology auditors do share information.
They've actually had joint meetings.
and really working together on looking at those systems.
So it's not as though the IT system at the city has to work separately with us and then separately with the state auditor and then separately with the other auditors.
They do try to really convene joint meetings and pull together the information for those joint systems.
So we do try to really work hand in hand as much as possible to be most efficient.
I have a question on the retail side operations, and I'm not sure if this is in the scope of what you all do, but there's a number, how we collect payments from customers, my sense is there's a variety of ways we can do that.
One is just do you send in a check or do you pay by credit card or do you do some sort of electronic fund transfer or something?
And depending on the system at the city, we're not very consistent across different lines of business, utility and otherwise.
Sometimes we charge a premium, there's an extra charge if you use a credit card or if you do EFT.
And I'm always curious where the current kind of technology and cost analysis and risk analysis is around that.
Someone on a credit card who's set up on regular payment, I assume there's a fairly high probability that we will collect the amount in full and it's, there's not a lot of processing costs on the cities for manual labor.
Whereas receiving checks, someone's got to open the envelope and, you know, I don't know exactly how that happens, but I imagine it's somewhat time consuming.
And I'm always curious, as technology changes and fees change on different systems, if we have the right mix and if we're sending the right signal to customers.
For instance, if we really want people to be signed up on a credit or debit card on AutoPay, But we're also charging a $2 a month charge for that.
And so we're discouraging it when it actually saves us money and is more reliable.
I'm interested on just that mix of things and making sure that as things change, we're staying up to date.
And similarly, if it costs $1 to process a check because it's very labor intensive, and there's misprints that have to be redone, and occasionally they bounce, do we have the right incentives there?
And then, I don't know.
curious what you see there if that's something you guys look at or is it beyond the scope?
It's not really part of the scope of our audit but I certainly would say that with all of our utility clients we constantly see a greater number of the electronic fund transfers and somewhat use of credit cards and just the use of checks.
Remember, it wasn't too long ago, there would be a line of people trying to pay in cash at the cash box area.
So you almost had to have a teller on hand at all times.
And we're really seeing a dramatic shift, especially over the last few years in that method of payment.
What we do not get into is, you know, what is the most efficient way for the city to collect that in the operational decisions.
You're more looking at whatever method we choose.
We just want to see it come in.
Exactly.
From what I've heard from people I've talked to at the utility, it's all about making it easy for the customer.
You know, what does the customer want and how can they accommodate those payments to make sure that no one gets cut off from service when that's at all avoidable.
So this is a lot of heavy writing, and there's a second page.
The GASB, the Governmental Accounting Standard Board, has been very busy and issuing a lot of statements.
I'm not going to go through all of these.
I am going to point out that there's a few that are going to be effective for this fiscal year, for 2018, and management is already on top of these.
The primary one is the accounting and financial reporting for post-employment benefits, such things as healthcare.
subsidies, health care amounts, past retirement.
And if you recall the last couple of years, the pension standard was the big one a couple of years ago, where all of a sudden now the entire net pension liability needs to be on the financial statements.
And this is really its twin sister with respect to any other type of post-employment benefits that come along, have to now be shown on the balance sheet.
There's not a lot that SPU management has to do as far as the calculation.
They receive this calculation from the city and the city's actuaries, and then it will be posted.
So they're going to be ensuring that it gets properly put into the balance sheet and the related expense gets accounted for.
And, of course, we'll be right behind them auditing that.
But I think everyone's on top of this one.
Some of the other ones effective in 2018 really don't have much impact.
They address certain note disclosure improvements.
And this last one on this page, 86, is covering if you were to ever refund debt with cash.
operating cash, there are some additional disclosures that need to be made.
So that potentially might be effective in the future, but not for this year.
There's a whole other page.
So the, some of these I think were included in last year's presentation.
Yes.
Are those the ones that are effective for 2018?
Those are the ones that have already, the utilities have already been working on?
Yes, that's true.
And then, of course, you're seeing a lot more coming through that will be effective in 2019 and 2020. Probably the two biggest is the one I've already mentioned, which is GASB 89. The interest cost incurred before the end of the construction period will no longer be allowed to be capitalized.
and unless regulatory accounting is invoked.
And then leases, that's not effective until 2020, but the utilities are starting to look at this now.
This is very similar to what's going on in the private sector where leases can no longer be run through the income statement, rather needs to be recognized on the balance sheet.
So that will be, potentially could have some impact.
We're working with management We'll have a much better idea a year from now what that impact will be in 2020.
And who decides when the effective date is?
Is that something that's negotiated or is that sort of a standard period of time that are given all utilities?
Yeah, no, that is the standard that is decided by the Governmental Accounting Standards Board.
So they determine how much lead time everybody gets to have these implementations.
And they normally try to give a couple of years for the more complicated matters.
And so the purpose of you identifying them here is to signal that you are monitoring that implementation.
Yes, exactly.
And making your best.
determination of whether or not the utility is on track for meeting these deadlines.
Yes, and we will be offering a training in two weeks to the utility staff and management that will cover these new accounting pronouncements as well.
We do a formal continuing education training in addition to some more informal meetings throughout the year that we work with them.
I look at the number of these I have a question for you.
It seems like there's a lot of changes happening and how we're still on change number 90. Is it a relatively new numbering standard?
didn't become into existence until the mid-80s.
So they have a ways to catch up to FASB.
But trust me, there's a lot of us in the business that feel this is way too many.
They've been busy lately.
Yeah, it's a long list.
Yes.
I have no further questions.
What is your timeline, as I ask another question, what is your timeline for getting feedback or input from the council?
Really any time.
I mean, we're not coming back out into the field until March, and we can be very flexible and nimble with our audit plan.
So anything that comes to you or comes to mind that you would like just to look at or would like to discuss with us, we're available any time.
Okay, great.
Thank you.
All right.
Well, thank you so much for working on this, and thanks to SPU for their collaboration with you.
It's always a pleasure to have you join us.
Thank you.
Thank you.
All right.
Well, with that, it's 10.30 AM, and the meeting is adjourned.
That was right on time.
Yay.
We'll get you information on what these are.
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