Indicates Matter Stricken

Indicates New Matter

 

Committee Report

May 4, 2023

S. 31

Introduced by Senators Hutto and K. Johnson

 

S. Printed 05/04/23--H.

Read the first time March 02, 2023

 

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The committee on house ways and means

To who was referred a Bill (S. 31) to amend the South Carolina Code of Laws by amending Section 5-7-240, relating to independent audits of municipal financial records and transactions, so as to allow, etc., respectfully

Report:

That they have duly and carefully considered the same, and recommend that the same do pass with amendment:

 

Amend the bill, as and if amended, by adding an appropriately numbered SECTION to read:

SECTION X. Section 4-9-150 of the S.C. Code is amended to read:

 

    Section 4-9-150. The council shall provide for an independent annual audit of all financial records and transactions of the county and any agency funded in whole by county funds and may provide for more frequent audits as it considers necessary.  Special audits may be provided for any agency receiving county funds as the county governing body considers necessary.  The audits must be made by a certified public accountant or public accountant or firm of these accountants who have no personal interest, direct or indirect, in the fiscal affairs of the county government or any of its officers.  The council may, without requiring competitive bids, designate the accountant or firm annually or for a period not exceeding three years.  The designation for any particular fiscal year must be made no later than thirty days after the beginning of the fiscal year.  The report of the audit must be made available for public inspection.  A copy of the report of the audit must be submitted to the Comptroller GeneralState Treasurer no later than January first each year following the close of the books of the previous fiscal year. Upon a showing of proper cause, as determined by the State Treasurer, the State Treasurer shall grant a county an extension of ninety days. To be considered, a request for extension must be signed by the chair of the council before the deadline for filing.

    If the report is not timely filed with the State Treasurer by January first, or within the time extended for filing the report, funds distributed by the Comptroller GeneralState Treasurer to the county in the current fiscal year must be withheld pending receipt of a copy of the report.

Renumber sections to conform.

Amend title to conform.

 

BRUCE BANNISTER for Committee.

 

statement of estimated fiscal impact

Explanation of Fiscal Impact

 

State Expenditure

This bill eliminates the annual audit requirement under §5-7-240 for municipalities in the state with less than $500,000 in annual revenue.  In lieu of an audit, these municipalities may elect to compile financial statements.  This compilation must be provided annually if the municipality has a court system or every three years if the municipality does not have a court system.  The compilation of statements must be prepared by a certified public accountant in accordance with agreed upon procedures as established by STO and approved by OSA.

 

State Treasurer's Office. This bill requires STO to establish procedures for financial statement compilation for municipalities with total annual revenues of less than $500,000.  In addition, this bill may increase in the number of LGF distributions from STO to municipalities currently on the STO's delinquent audit list, if compliance with the financial statement compilation requirement is more common than the audit requirement.  STO currently withholds all LGF distributions to municipalities that have not complied with the annual audit requirement in a given fiscal year, totaling approximately $500,000 since FY 2018-19.  STO indicates that the development of procedures for financial statement compilation and increased LGF distributions will be managed by existing staff and appropriations and will have no expenditure impact.

 

Office of State Auditor.  This bill requires approval from OSA of procedures established by STO for financial statement compilation for municipalities with total annual revenues of less than $500,000.  OSA indicates that this will be managed by existing staff and appropriations and will have no expenditure impact.

 

State Revenue

This bill eliminates the annual financial record audit requirement under §5-7-240 for municipalities in the state with less than $500,000 in total annual revenue.  In lieu of an audit, these municipalities may elect to compile financial statements.  This compilation must be provided annually if the municipality has a court system or every three years if the municipality does not have a court system.  The compilation of statements must be prepared by a certified public accountant in accordance with agreed upon procedures.  The $500,000 limit for conducting an audit will increase with inflation.  The bill also increases the limit that municipalities may retain from court fines and fees collected pursuant to §14-1-208(A) from $1,000 to $2,000 to pay the expenses associated with the preparation of the Uniform Supplemental Schedule Form required to be submitted with the audit or compiled financial statement.  Under this code section, a person who is convicted of, or pleads guilty or nolo contendere to, or forfeits bond for an offense, tried in municipal court must pay an amount equal to 107.5 percent of the fine imposed as an assessment.  This assessment, less the amount retained by the municipality, must be remitted to the State Treasurer and distributed in specified amounts.

 

Of the 271 municipalities in the state, Judicial estimates that approximately 200 have court systems.  If we assume that every municipality with a court system will retain an additional $1,000 in municipal court fines received pursuant to §14-1-208(A) for the purposes of performing an audit or compilation of financial statements, this will reallocate approximately $200,000 of court assessments revenue statewide.  Pursuant to §14-1-208(C), 11.53 percent of these fines and assessments must be remitted to the General Fund, 11.16 percent may be retained by municipalities, and the remaining 77.31 percent must be distributed to various Other Funds sources for victim services.  Therefore, under the increased retention amount for conducting an audit or financial statement compilation, this bill may reduce revenue generated by municipal court fines and assessments for the General Fund by up to $23,060 and Other Funds by up to $154,620 beginning in FY 2023-24.

 

Local Expenditure

This bill eliminates the annual financial record audit requirement under §5-7-240 for municipalities in the state with less than $500,000 in total annual revenue.  In lieu of an audit, these municipalities may elect to compile financial statements.  This compilation must be provided annually if the municipality has a court system or every three years if the municipality does not have a court system.  The compilation of statements must be prepared by a certified public accountant in accordance with agreed upon procedures.  The $500,000 limit for conducting an audit will increase with inflation.  The bill also increases the limit that municipalities may retain from court fines and fees from $1,000 to $2,000 to pay the expenses associated with the preparation of the Uniform Supplemental Schedule Form required to be submitted with the audit or compiled financial statement.

 

This bill does not define total revenue for the purposes of determining whether a municipality is eligible to compile financial statements in lieu of an annual audit.  According to RFA's 2021 Local Government Finance Report, the number of reporting municipalities with revenue of less than $500,000 ranges from 48 to 58 depending on how total revenue is determined.  Based on the report, 48 responding municipalities reported total revenues of less than $500,000 when including all utility revenue.  The number of responding municipalities with less than $500,000 in revenue increases to 55 when excluding enterprise utility funds but including all General Fund utility revenue, and further increases to 58 when excluding all utility fund revenue.  However, 73 municipalities in the state did not submit financial information for the Local Government Finance Report, indicating that total revenues for those municipalities may fall below the $500,000 threshold set by the bill.  Therefore, we estimate that between 48 and 121 municipalities in the state will have total annual revenues of less than $500,000 in FY 2023-24 and will be eligible for financial statement compilation under this bill beginning in FY 2024-25 in lieu of an annual audit. 

 

According to the MASC, the annual cost of an audit for a municipality with less than $500,000 in revenue varies, but is estimated to be approximately $5,000.  The cost of compiling financial statements in lieu of an audit would vary based on the complexity of the municipality's finances, and would be between $500 and $2,000 per year.  Thus, expenditure savings would range from $3,000 to $4,500 annually for each qualifying municipality.  Expenditure savings would increase to up to $5,000 for approximately 71 municipalities in the state without a court system in FY 2025-26 and FY 2026-27, as those municipalities would be exempt from all financial reporting requirements until FY 2027-28.  Local expenditure savings would be further bolstered by the additional court fine revenue retained by the municipality under this bill.

 

However, based on the STO's delinquent audit list for municipalities, 31 municipalities have not submitted an annual audit to STO for the last two applicable fiscal years.  If these municipalities are not currently conducting audits, it is unknown whether these municipalities would comply with the financial statement compilation requirement of this bill and therefore reap the expenditure savings benefit.  MASC reports that in some cases, performing a professional audit is cost prohibitive for small municipalities, while compiling financial statements may be more feasible.  However, it is unknown how many of the municipalities on STO's delinquent audit list would fall in this category, and therefore, actual local expenditure savings as a result of the bill are undetermined.

 

 

Frank A. Rainwater, Executive Director

Revenue and Fiscal Affairs Office

 

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A bill

 

TO AMEND the south carolina code of laws by amending SECTION 5-7-240, RELATING TO INDEPENDENT AUDITS OF MUNICIPAL FINANCIAL RECORDS AND TRANSACTIONS, SO AS TO ALLOW MUNICIPALITIES WITH LESS THAN $500,000 IN TOTAL REVENUES TO PROVIDE A COMPILATION OF FINANCIAL STATEMENTS; AND BY AMENDING SECTION 14-1-208, RELATING TO MUNICIPAL COURT AUDITS, SO AS TO MAKE CONFORMING CHANGES.

 

Be it enacted by the General Assembly of the State of South Carolina:

 

SECTION 1.  Section 5-7-240 of the S.C. Code is amended to read:

 

    Section 5-7-240. (A) The council of each municipality having total recurring revenues at or above the threshold in Section 5-7-240(D)shall provide for an independent annual audit of all financial records and transactions of the municipality and any agency funded in whole by municipal funds and may provide for more frequent audits as it deems necessary. Special audits may be provided for any agency receiving municipal funds as the municipality deems necessary. Such audits shall be made by a certified public accountant or public accountant or firm of such accountants who have no personal interest, direct or indirect, in the fiscal affairs of the municipal government or any of its officers financial statements. The council may, without requiring competitive bids, designate a certified publicsuch accountant or public accounting firm annually or for a period not exceeding four years, provided, that the designation for any particular fiscal year shall be made no later than thirty days after the beginning of such fiscal year. The report of the audit or compilation shall be made available for public inspection. The council may in its discretion accept independent audits of municipal agencies and departments and include such audits in its general report of the audit of the municipality.

    (B) The council of each municipality having total recurring revenues below the threshold in Section 5-7-240(D) may elect to provide for either an audit of financial statements or a compilation of financial statements in lieu of an audit as follows:

       (1) annually for municipalities that have a court system; or

       (2) at least once every three years for municipalities that do not have a court system.

    (C) The audit or compilation must be performed by an independent certified public accountant or a firm of certified public accountants.  The report of the audit or compilation shall be made available for public inspection. Financial statements of municipalities with a court system must include the requirements of  Section 14-1-208.

    A municipality that exceeds the threshold in the current fiscal year but was below the threshold in the previous fiscal year must begin submitting audited financial statements annually beginning no later than the fiscal year following the year in which its total revenues exceed the threshold.

    (D)  Beginning with the municipality fiscal year which begins after January 1, 2024, the reporting threshold is $500,000 of the total recurring revenue of a municipality. As soon as practicable at the beginning of each subsequent calendar year, the Revenue and Fiscal Affairs Office must determine the increase or decrease in the ratio of the Consumer Price Index to the index as of December 31 of the previous year and the threshold must be increased accordingly. If the average of the twelve-month consumer price index experiences a negative percentage, the average is deemed to be zero. For purposes of this subsection, "Consumer Price Index" means the Consumer Price Index for All Urban Consumers as published by the United States Department of Labor, Bureau of Labor Statistics.

 

SECTION 2.  Section 14-1-208(E) of the S.C. Code is amended to read:

 

    (E) To ensure that fines and assessments imposed pursuant to this section and Section 14-1-209(A) are properly collected and remitted to the State Treasurer, the annual independent external audit required to be audit or compilation performed for each municipality pursuant to Section 5-7-240 must include a review of the accounting controls over the collection, reporting, and distribution of fines and assessments from the point of collection to the point of distribution and a Uniform Supplemental Schedule Form detailing all fines and assessments collected at the court level, the amount remitted to the municipal treasurer, and the amount remitted to the State Treasurer.

       (1) To the extent that records are made available in the format determined pursuant to subsection (E)(4), the Uniform Supplemental Schedule Form developed by the Office of the Attorney General, South Carolina Crime Victim Services Division, must be used by all counties and municipalities to report their crime victim services funds and must include the following elements:

           (a) all fines collected by the clerk of court for the municipal court;

           (b) all assessments collected by the clerk of court for the municipal court;

           (c) the amount of fines retained by the municipal treasurer;

           (d) the amount of assessments retained by the municipal treasurer;

           (e) the amount of fines and assessments remitted to the State Treasurer pursuant to this section; and

           (f) the total funds, by source, allocated to victim services activities, how those funds were expended, and any balances carried forward.

       (2) For municipalities required to provide for an annual audit of financial statements pursuant to Section 5-7-240, the Uniform Supplemental Schedule Form must be included in the external auditor's report as required by generally accepted auditing standards when information accompanies the basic financial statements in auditor submitted documents.

       (3) For municipalities allowed to provide for a compilation of financial statements pursuant to Section 5-7-240, the Uniform Supplement Schedule Form must be included in the compilation report as supplemental information. In addition, the municipality is required to engage the external accountant to perform agreed upon procedures related to the supplemental schedule as established annually by the Office of the State Treasurer and approved by the Office of the State Auditor.

    (4) Within thirty days of issuance of the audited or compiled financial statement, the municipality must submit to the State Treasurer a copy of the audited or compiled financial statement and a statement of the actual cost associated with the preparation of the Uniform Supplemental Schedule Form required in this section and, if applicable, the agreed upon procedures. Upon submission to the State Treasurer, the municipality may retain and pay from the fines and assessments collected pursuant to this section the actual expense charged by the external auditor for the preparation of or accountant associated with the Uniform Supplemental Schedule Form required in this subsection, not to exceed one two thousand dollars each year.

    (4)(5) The clerk of court and municipal treasurer shall keep records of fines and assessments required to be reviewed pursuant to this subsection in the format determined by the municipal governing body and make those records available for review.

 

SECTION 3.  This act takes effect upon approval by the Governor.

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