TOWN OF NORTH ATTLEBOROUGH, MASSACHUSETTS

Management Letter

Year Ended June 30, 2019

TOWN OF NORTH ATTLEBOROUGH, MASSACHUSETTS

MANAGEMENT LETTER YEAR ENDED JUNE 30, 2019

Table of Contents

Transmittal Letter ...................................................................................... 1

Overview .................................................................................................... 2 Informational Items ................................................................................. 3 – 6 Findings and Recommendations ................................................................ 7

Honorable Town Council North Attleborough, Massachusetts In planning and performing our audit of the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the Town of North Attleborough, Massachusetts (the “Town”) as of and for the year ended June 30, 2019, in accordance with auditing standards generally accepted in the United States of America, we considered the Town’s internal control over financial reporting (internal control) as a basis for designing audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Town’s internal control. Accordingly, we do not express an opinion on the effectiveness of the Town’s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. Our consideration of internal control was for the limited purpose described in the first paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses. Given these limitations during our audit, we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. This communication is intended solely for the information and use of management, the Board of Selectmen, and others within the Town, and is not intended to be, and should not be, used by anyone other than these specified parties.

Roselli, Clark & Associates Certified Public Accountants Woburn, Massachusetts January 23, 2020

OVERVIEW The U.S. economy continues to be strong as evidenced by low unemployment rates, rising wages, consumer confidence and an increasing workforce. International trade issues and tariffs appear to be the greatest threat to the nearly eleven years of consecutive economic growth. On a more local level, the Federal Reserve Bank of Boston reports that the June 2019 Massachusetts unemployment rate was approximately 3%, which is far lower than the nationwide 3.7% rate. Average home price in Massachusetts increased approximately 3% year-over-year in fiscal year 2019. Real estate values are at record highs in much of Massachusetts, including many neighborhoods in the Town of North Attleborough (the “Town”). The Town’s financial condition at June 30, 2019 has improved greatly, as measured by the budgetary flexibility in its general fund. Budgetary flexibility is often measured by comparing the assigned and unassigned fund balances in the general fund to the current year’s total general fund expenditures (inclusive of transfers out). Credit rating bureaus often refer to this as a “reserve ratio.” At June 30, 2019, the Town’s reserve ratio was approximately 10%, which is a significant increase from its prior year reserve ratio of just under 7%. Credit rating bureaus would generally consider the Town’s reserve ratio to be good. Currently, Standard & Poor’s Rating Service assigns an AA credit rating to the Town’s general obligation bonds, which is its third highest rating and signifies that the Town has a very strong capacity to meet its financial commitments and its general obligation bonds are of “high grade.” In its governmental funds financial statements, which most closely resembles the Town’s statutory accounting records, the Town’s unassigned fund balance in its general fund approached $9.0 million at June 30, 2019 and its total fund balance was nearly $9.8 million. This is a significant improvement to the prior year’s balances as the Town completed an approximate $6.5 million Proposition 2 ½ override in April 2018. The Town enters fiscal year 2020 with over $3.9 million in certified free cash. The largest future obligations affecting the Town pertain to its net pension and other postemployment benefits, or OPEB, liabilities. In fiscal year 2019, these liabilities increased significantly.

• The net pension liability increased over $22.4 million as this liability was measured as of December 31, 2018. The S&P 500 returned -6% in calendar 2018, which greatly affected this liability. Fortunately, domestic equity markets rebounded greatly in calendar year 2019 and appear to be poised to return over 20%, for which the Town expects to experience a significant improvement in its net pension liability.

• The net OPEB liability increased $19.6 million in fiscal year 2019. Approximately $16.0 million of this increase was due to a 1.0% decrease in the discount rate used to determine the total OPEB liability.

The North Attleborough Contributory Retirement System expects to be fully funded by June 30, 2032. The Town expects that its annual pension appropriations will decrease significantly once the retirement system is fully funded and currently plans to direct a significant portion of these savings to its OPEB Plan. The remainder of the report reflects informational items and findings and recommendations. This discussion is intended to provide the Town and its management with recommendations for improvement in accounting and financial operations. The Town should review these recommendations and, if determined to be cost-effective, implement these improvements.

INFORMATIONAL ITEMS Network Security Ransomware is an insidious type of malware that encrypts, or locks, valuable digital files and demands a ransom to release these files. The most common ransomware attack involves a victim opening an emailed file or clicking an attachment that appears legitimate like an invoice, but actually contains the malicious ransomware code. As these emails often appear to be legitimate, the victim is unknowingly baited into executing the ransomware code. The frequency of ransomware attacks on U.S. municipalities continues to rise. The Associated Press reported in August 2019 about a coordinated ransomware attach that affected more than twenty local governments in Texas on a single day by what was then believed to be perpetrated by a single source. Ransomware attacks are opportunistic; the size of the victim organization and its available resources are not leading indicators to an attack. Once penetrated, ransomware attackers can cause a municipality’s technology resources to come to a standstill. Effective protection first requires a commitment from a municipality’s leadership to dedicate the necessary resources to best protect the community. Technology personnel (internal and/or outsourced) must continuously exercise diligence in this area. Finally, this commitment then extends to all municipal employees who, whether they like it or not, are part of ransomware prevention/protection. The U.S. FBI recommends that organizations provide ransomware training for their employees and employ robust technical prevention controls. The FBI also recommends developing a business continuity plan in the event of a ransomware attack. More detailed recommendations by the FBI Cyber Division can be found on the FBI’s website. The Town’s technology plans incorporate a number of prevention and protection measures including deploying anti-virus and anti-malware software, managing network permissions and access, regularly backing up digital data and requiring users to rotate passwords periodically. We recommend that the Town perform a more in-depth analysis of its network security to mitigate the risk a ransomware attack would have on it. Additionally, the Town should consider end user training as an unacceptably high percentage of ransomware attacks are introduced through end user errors. New Lease Accounting Standard In June 2017, the GASB released a new accounting standard relative to leases that will dramatically change the manner in which governments account and report lease transactions. This new accounting standard will apply to the Town’s fiscal year 2021 financial statements. Under this new accounting standard, many lease obligations that were previously accounted for by the Town as an expenditure similar to rent expense will be recognized as an asset with a corresponding liability (similar to debt). Additionally, if the Town leases property to another party, the Town will report a receivable for the present value of the future lease payments and a corresponding deferred inflow of resources. GASB Statement No. 87 defines a lease as a contract that conveys control of the right to use another entity’s nonfinancial assets (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction. Examples of nonfinancial assets include buildings, land, vehicles and equipment. Any contract that meets this definition should be accounted for under this new accounting standard.

To effectively implement this accounting standard, the Town will need to perform the following for its lease obligations:

1. Identify all material leases. At first pass, this appears to be a straight-forward process. However, some lease arrangements, as defined under the accounting standard, may not use the term “lease” in the agreement or other paperwork. Furthermore, not every agreement that is labeled a lease will meet the accounting standard’s definition of a lease. The Town should perform the following:

a. Scan disbursement details to identify recurring payments in similar amounts to third parties. This may be indicative of a leasing arrangement.

b. Meet with departments that are most likely to lease equipment like technology, public works and police departments. Inquire about the existence of leases and correspond the results of these inquiries with the procedures in a.

c. Materiality will play a role in this analysis. A lease arrangement for a Town’s postal meter will not have as great an impact as its lease of a fleet of police cruisers. The Town should work with its auditors to identify a dollar threshold for this analysis.

2. Gather the lease agreements/contracts for the Town’s leases. Create a central repository for lease

agreements either in paper or electronic format.

3. Create a database or spreadsheet of the key lease terms, which will include the lessor name, payment terms, description of the lease and renewal options, if any.

Once this data has been accumulated, work with your auditor to determine the best manner to calculate the lease figures. If the Town is receiving regular, periodic payments from another party for that party’s use of the Town’s property, a similar process needs to be followed to account for the Town as a lessor. A similar lease accounting standard was recently adopted for nongovernment accounting with public companies adopting this lease standard beginning in calendar year 2019. There are numerous publications on the difficulties public companies experienced in this implementation. One of the most common problems many public companies faced was not starting this process early enough. We encourage the Town to begin this process as early as possible. Assignment of Delinquent Accounts The Town maintains approximately $85,000 in personal property tax receivables aged over five years, some of which date back as far as 1999. Additionally, there are over $386,000 in outstanding motor vehicle excises taxes receivable going as far as 1991. In the audited financial statements, allowances for uncollectible accounts have been reported that cover these amounts as the likelihood of collection is low. With respect to the old personal property tax receivables, many municipalities have sold past due personal property tax balances to third party collection agencies. Others have written off uncollectible amounts that these collection agencies will not purchase. Under Section 71 of Chapter 59 of Massachusetts General Laws (“MGL”), should the tax collector believe that personal property taxes committed to him/her are uncollectible because of death, absence, poverty, insolvency of other similar circumstances, the tax collector may notify the Board of Assessors that said personal property taxes are uncollectible.

Within thirty days, the Board of Assessors must act on this request; such action may include abatement of all or portions of the uncollectible personal property taxes. With respect to the old motor vehicle excise taxes receivable, these amounts are likely uncollectible and there doesn’t appear to be much of a market for the sale of these receivables. Under Section 7 of Chapter 60A of MGL, if a tax collector is satisfied that an excise is uncollectible by similar reasons described above, the tax collector may notify the Board of Assessors that said excise taxes are uncollectible. Within thirty days, the Board of Assessors must act on this request; such action may include abatement of all or portions of the uncollectible excise taxes. We recommend that the Tax Collector evaluate the quality of the personal property details in his possession. After this evaluation, the Tax Collector should contact a number of third-party collection firms specializing in this area. Finally, personal property and motor vehicle excise accounts that cannot be sold and are determined to be uncollectible for the reasons listed above should be written off. Maximizing Investment Returns Over the past ten years, the interest earned on bank deposits have not kept pace with inflation. However, there are a growing number of banks and financial institutions like the Massachusetts Municipal Depository Trust, or MMDT, that are financially stable and offer very liquid short-term investments with annual interest rates approaching 2%. A review of the Town’s bank deposits at June 30, 2019 reveals that a significant portion of its deposits are in depository accounts bearing interest at 1% or less per annum. We recommend that the Town Treasurer evaluate the Town’s depository balances and accounts and evaluate the possible benefits of reallocating portions of the Town’s excess funds to stable financial institutions that offer very liquid short-term investments. De Minimus Property Tax Exemptions As reported in our two previous letters to management, the Town annually assesses property taxes for each tax entity for which the Town has reported taxable personal property. A large number of these personal property tax accounts have valuations less than $10,000. At the current enacted property tax rates, these personal property tax accounts have minimal annual assessments. In many instances, the cost to assess, collect and follow-up on these “de minimus” accounts can exceed the actual property tax assessment itself. Massachusetts General Law permits the exemption of deminimus property tax assessments for personal property assessments of up to $10,000. There are over 100 Massachusetts communities who are currently employing this practice, which does not reduce the amount of total property tax assessments in any given tax year; the remaining property tax accounts absorb these deminimus accounts, which will likely amount to an insignificant additional amount to these tax payers but will greatly increase efficiency within the Tax Collector Office. We understand that this matter was brought before the Board of Assessors prior to the change in governing format, who rejected this exemption matter. As the Town has changed its governing format beginning July 1, 2019, we recommend that the Town Council more closely evaluate this matter; the City Council can approve this exemption with a majority vote.

Accounting and Financial Policies and Procedures Manual The Town has a series of accounting and financial policies put together from a variety of different departments, some of which were initially approved in the early 2000’s. A comprehensive, current accounting and financial policies manual does not exist. Formal policies and procedures play a critical role in any internal control system. Furthermore, in periods of personnel transition for which the Town has experienced over the past several years, such policies and procedures can prove invaluable and assist in these often-difficult transitions. Furthermore, as the Town’s governing format changed effective July 1, 2019, this is a good time to develop an up-to-date manual. We recommend that the Town endeavor to establish a comprehensive set of accounting and financial operations policies and procedures over the course of the next two fiscal years. Accountant/Treasurer Review of Unspent Bond Proceeds The Town Accountant and Treasurer have not completed a review of unspent bond proceeds since December 2017. There are federal arbitrage rules that may affect the tax status of the Town’s general obligation bonds if material unspent remaining proceeds exist (IRS Publication 5271). While most (if not all) of this data is available in the Town’s MUNIS accounting system, face-to-face meetings to review these details can prove invaluable and eliminate confusion. We recommend that an annual review of these balances be performed in advance of the Town’s continuing disclosures deadline. Inactive Capital Projects and Special Revenue Funds There are a number of inactive capital projects and special revenue funds that require attention as their balance have been unchanged for several years.

• We noted eighteen capital project balances funded with Town resources with fund balances totaling over $568,000 with no 2019 activity; some of these balances date as far back as 2008.

• We noted twelve capital project balances funded with debt totaling over $192,000 with no 2019 activity; some of these balances date as far back as 2007.

• We noted that there are seven school grant accounts with fund balances totaling nearly $21,000 for 2018 and earlier awards.

We recommend that the Town Accountant evaluate these inactive accounts and take the appropriate actions to eliminate/spend these balances.

FINDINGS AND RECOMMENDATIONS Third Party Billing of Water and Sewer In our two previous letters to management, we reported that the Town utilizes the services of a third party to bill its water and sewer user charges. However, collection for these services is performed by the Town. This third-party processor charges approximately $120,000 annually, which includes service fees, software maintenance and support. Few Massachusetts municipalities outsource these functions; the majority of Massachusetts water and sewer operations perform these services in-house. The Town’s MUNIS system is more than capable of performing these activities and is used by dozens of Massachusetts communities for these activities. Given the annual fee associated with these services, we recommend that the Town bring these services in-house. Ambulance Receivables In our two previous letters to management, we reported that the gross receivable for the Town’s ambulance service has been steadily increasing over the past several years. The following table presents a three-year trend of gross ambulance receivables and total ambulance receivables aged over 120 days:

The Town’s fire department indicated that it was approximately ten years since it last performed a comprehensive analysis of outstanding receivables with its third-party ambulance billing and collections agency. Furthermore, the fire department was unaware of the existence of a formal ambulance receivable write off policy. We continue to recommend that the Town develop an ambulance receivable review and write off policy, which includes a requirement for annual (at a minimum) reviews of past due balances and a process by which uncollectible accounts can be written off.

* * * * * *

Gross Aged OverReceivable 120 Days

June 30, 2019 2,208,246$ 1,738,599$ June 30, 2018 1,946,037 1,499,413 June 30, 2017 1,469,204 1,174,642