Key Business & Financial Considerations for Tribes in the Year Ahead…
2022 will continue to challenge tribal leaders recovering from the COVID-19 pandemic—which has affected everything from operations to accounting, applicable funding regulations, and standards that have been (and will be) adopted to assist with ongoing impacts. REDW’s trusted business and financial advisors are stepping forward to share in-depth insights of key finance, accounting, and business issues for tribal CFOs and leaders as you manage through 2022 and beyond.
As expert tribal advisors—with more than three decades serving tribes and their entities—we have a keen perspective about many new or recently enacted federal regulations, as well as some important operational processes. Below, our experts share important checklists for tribal CFOs, CIOs, investment committees, and other professionals in leadership positions.
CHALLENGES OF MOVING TO REMOTE OPERATIONS
In the past couple of years, COVID has pushed many organizations to allow their employees to work part or full time from their homes, and many tribal entities have moved (or are considering moving) to the cloud. There has been a big push to invest American Rescue Plan Act (ARPA) funds to update technology or provide internet accessibility to remote communities.
Also part of these digital growing pains, many tribes are facing difficulty in finding local IT experts to manage their networks, software, and hardware—and so they have to rely on contractors to manage their IT needs. We’re also seeing a lack of security controls around some organization networks— a lack which makes them vulnerable to hackers.
CONSISTENT JOB TRAINING
Job mobility with tribal entities is a common issue; many employees tend to move a lot between local organizations, creating the need for employers to provide consistent training to prevent growth of knowledge gaps. Tribal entities and organizations need to continue investing in the training and education of their current and future employees.
BUSINESS GROWTH & SUPPORTING SOFTWARE
More and more tribal organizations are trying to diversify their assets by adding new business, which is sometimes unrelated to their primary activities. Additions like these create a need for specialized software to supplement the new activity, which then requires software that is compatible with current systems, and, in some cases, forces organizations to switch to more open software platforms that allow them to integrate a larger variety of platforms.
BUSINESS DATA INTELLIGENCE & PROCESS AUTOMATION
Many tribes are challenged to produce meaningful, real-time data in an easy-to-understand format directly from their system(s). The REDW Software team constructs interactive dashboards for various data analytics, including budget, forecasting, and key performance indicators (KPIs). Our team can combine data from various systems, in real-time, and synthesize it into one data report or dashboard for your organization’s decision-makers. Also exportable as charts, graphs, and in Microsoft Excel format, these reports and dashboards are accessible from any device, anywhere.
Moving to cloud-based (or remotely-accessed) accounting software applications, electronically approved procurement/payables, and payroll/human resource initiatives will require more updated internal processes. These changes require implementation of new controls in accounting processes, software design, and related policies. We offer a full suite of solutions from industry leaders in business management software. We’ll also implement the software company-wide, train your staff to use it effectively, and provide ongoing technical support as you need it.
Contact REDW Principal and Software Solutions Practice Leader Akm Mustafa Kamal, CPA, MBA.
Accounting & Finance
GASB REVISED EFFECTIVE DATES
GASB 87, Accounting for leases, fiscal year beginning after 6/15/2021
This statement increases the usefulness of governments’ financial statements by requiring recognition of certain lease assets and liabilities for leases that previously were classified as operating leases, and recognized as inflows of resources or outflows of resources based on the payment provisions of the contract. It establishes a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset.
GASB 89, Accounting for Interest Cost Incurred before the End of a Construction Period, fiscal year beginning after 12/15/2020
For incurred interest on construction projects, an accounting change that the interest may no longer be capitalized, and will be incurred as an expenditure (governmental funds/current resource measured funds) or expense (business-type/economic resource measured funds).
Statement 91, Conduit Debt Obligations, fiscal year beginning after 12/15/2021
For conduit debt with 3 separate parties involved, dated accounting and disclosure guidance is required.
Statement 93, Replacement of Interbank Offered Rates
-All requirements except paragraph 11b, 13, and 14; fiscal years beginning after 6/15/2020
-Paragraph 11b; fiscal years beginning after 12/31/2021
-Paragraphs 13 and 14; fiscal years beginning after 6/15/2021
The Interbank Offered Rates, notably the London Interbank Offered (LIBOR) Rates, are under global reform with LIBOR expected to cease. The Standard covers debt and related derivatives/hedges, and related accounting LIBOR requirement debt instruments are changed or replaced.
Contact REDW Principal and National Tribal Practice Leader Wesley Ryan Benally, CPA, or Principal Christopher Bitakis, CPA, CGFM, CGMA.
Client Advisory & Accounting Services
Streamline Digital Platforms — In the age of remote work and having access to mass amounts of data, having a handle on digital platforms is essential. Make sure your data is secure across all platforms, and ensure that you know which platforms are in use and to what extent they are being utilized. Find ways to integrate the platforms, where possible, to streamline processes.
Build Financial Models that enable you to plan and quickly respond in these constantly changing situations. Build a model that brings in real-time data. This will give you the ability to see what is going on long before the financials come out, and also to make swift changes and necessary decisions. In your model, include assumptions and give yourself the ability to look at different future outcomes. Keep your models simple and easy to update.
Make it your goal to use systems, not spreadsheets as you progress to the next level. Systems help ensure simplicity and to ease maintenance of an ongoing model.
HUMAN CAPITAL: RECRUITING & RETAINING TOP TALENT DURING THE “WAR ON TALENT”
- It is time to embrace flexible work options. Today’s workforce expects a work-from-home (WFH) option. Remote opportunities will continue to evolve and solidify their existence in the workplace.
- Establish change management to set employees up for success as well as your organization. Identify tools and resources to provide leadership with trust and comfort. Track and measure performance and output.
- Establish your organization’s culture on flexible work options by providing clear definitions and expectations in your employee handbook’s policies and procedures. Find opportunities to reinforce and affirm your organization’s WFH culture.
- With the influx of funds, don’t get lost in the challenge of expending funds and miss reporting requirements or fall behind on compliance updates.
- Create a standardized process and schedule to share the review and implementation of compliance responsibilities.
- Proactively seek out webinars to ensure exposure to changes in regulatory requirements.
- Form relationships with your counterparts (who receive your compliance and regulatory reporting) so you can ask questions, get updates, and request flexibility, if needed.
COST MANAGEMENT – FINANCIAL PLANNING & ANALYSIS – TAKING OWNERSHIP OF YOUR INDIRECT COST
Understand and participate in your Indirect Cost Rate Proposals (IDCRP). Your involvement will result in more intuitive strategic planning, provide opportunities to leverage cost management, find previously missed opportunities, and identify cost-saving options.
- Leverage rate in lieu of Tribal Match on grants
- Charge multiple rates (for example, charge a lower rate to programs that operate solely on tribal revenue)
- Identify allowable support departments and expenses that could have been missed
Consider the Multiple Method indirect cost rates:
- Reflects a more accurate picture of the services/costs associated with the support provided by the indirect pool
- Provides the true cost of services within the organization
- Helps achieve maximum reimbursement
- Assists in developing budgets
Contact REDW Principal Christopher A. Henderson, CPA/CITP.
BUILD A SECURITY-AWARE CULTURE
A culture of security awareness is vital to protecting your tribe’s information, ensuring it is safe from hackers and data ransoms. We’re still dealing with the COVID-19 threat vector fake emails regarding pandemic payments, outbreaks, WHO and CDC data, along with everyday phishing and social engineering attempts—such as phony video conference meetings, wire transfers, gift card requests, fake invoices, document downloads, voice messages, and parcel shipments.
A formal and continuous security awareness education program should include:
- A security awareness education policy
- Interactive training modules assigned to employees bi-monthly (every other month)
- Phishing your team monthly, with remedial training for “hooked” employees
- Assessments and quizzes
- Providing educational materials such as current cybersecurity events, posters, and videos
REVIEW YOUR CYBERSECURITY PLAYBOOKS & SECURITY CHECKS
2022 is the perfect time to review Disaster Recovery (DR) and Cybersecurity Incident Response Plans (CSIRP) to update any outdated systems or network information. DR and CSIRP teams should also be updated and trained on each plan, and plans should also be tested regularly with their respective teams. Schedule testing time in advance (for the entire year) so testing doesn’t fall through the cracks.
Bad actors create playbooks… so should you. Be proactive and create a playbook identifying multiple security incidents such as virus/malware attacks, data breach, inaccessible systems, and Distributed Denial of Service (DDoS); document and test the response steps for each scenario.
To pay or not to pay? Proactively decide what the organization will do if infected with ransomware. The FBI advises organizations to not pay, and there is no guarantee you will get the data back.
Cover your bases:
- Perform annual penetration tests and run monthly vulnerability scans to identify and secure hidden network vulnerabilities that cybercriminals are searching for to gain access into your network.
- Confirm IT best practices are in place. Perform an annual IT Risk Assessment or update the current Risk Assessment to evaluate overall technology and architecture, and determine how to mitigate all high-risk items. Engage a third-party to perform an IT Audit for the organization to help identify any best practice gaps or process improvements to mitigate IT risk.
- As many organizations are switching over to hosted services and/or utilizing managed service providers, consider implementing a robust vendor management process for third-party providers. Ask your vendors what security practices are in place to protect your network and data, and review their SOC reports if applicable. Additionally, ensure a confidentiality agreement is in place.
UPDATE SECURITY POLICIES & OUTDATED TECHNOLOGY
As IT practices continue to pivot, remember to create, review and update IT Security Policies and Procedures, and ensure they are current with industry best practices. Be sure to share updates with all employees. Have employees annually acknowledge your Technology Acceptable Use policy.
Replace all Windows 7 computers as they haven’t been supported by Microsoft since January 2020 and are a security risk. Ensure all systems and software are patched regularly with the most current software version and security updates to reduce the risk of being compromised.
Evaluate your current cyber-liability insurance policy or speak with a reputable broker if your organization does not have this insurance. Insurance companies are changing the coverage.
SHAPE-UP EMPLOYEE OPERATIONS & ACCESS
Organizations will continue to allow employees to work remotely, so ensure that remote workers are connecting to the business network with a secure virtual private network (VPN) connection or a virtual desktop interface (VDI) connection. Ensure the IT team is actively monitoring remote access as well as network access.
As employees continue to work remotely, data security is top of mind. Implement a Mobile Device Management solution and policy to assist with security controls, such as tracking and remotely wiping laptops, smart phones, and tablets, should a device be lost or stolen.
Implement Multi-Factor Authentication (MFA) as an added layer of security to prevent hackers from gaining access to your organization with compromised credentials. MFA helps to protect network and email, financial accounts, social media accounts and mobile devices, and as mentioned above, a great security feature to include with a remote connection.
Revisit logical access controls, and ensure users have access to only the data and applications they need to perform their job. Review user software accounts (in the cloud and on-premise) as well as network accounts; disable accounts that are no longer being used. Least privilege access is key to help mitigate data compromise.
CREATE MULTIPLE BACKUP COPIES OF YOUR DATA
Data backup and restoration procedures must be kept up-to-date, and tested regularly. This will help to ensure that if your data becomes encrypted with ransomware you’ll avoid paying cyber criminals –and avoid the possibility of being targeted again. Having data backup copies in multiple locations (i.e., a copy on site and one copy replicated to cloud storage) will help mitigate the loss of data should you fall victim to a ransomware attack. However, take note—data backup will not protect the organization from double extortion ransomware.
Contact Jennifer Moreno, CISA, IT & Cybersecurity Consultant, 505.998.3239.
Healthcare organizations are seeing an unprecedented shortage of providers and frontline staff. Tribal healthcare organizations have been hit especially hard. To attract and retain qualified staff, tribal healthcare organizations must offer creative compensation arrangements, retention agreements, bonuses, stipends, and flexible scheduling, among other things. It’s important that these additional costs are supported by updated human resources policies and procedures, as well as market compensation studies.
COVID RELIEF FUNDS
Federal legislation such as the CARES Act, Provider Relief Fund, and American Rescue Plan Act (ARPA) have injected much-needed financial assistance into tribal healthcare organizations. These funds come with complicated compliance and reporting requirements.
HEALTH BOARD ROLES & RESPONSIBILITIES
As the healthcare industry continues to evolve and become more complex, it is critically important that tribal health boards understand the important factors impacting their organizations. A broad range of experience and training for health boards will be increasingly important for tribal healthcare organizations to grow and thrive.
The new lease accounting standards will put almost all leases on the balance sheet for the first time. The GASB standard is effective for FY2022, while the FASB standard will be effective for FY2023. Healthcare organizations have numerous contracts and equipment leases that need to be evaluated and tracked to comply with this new standard.
GROWTH & EXPANSION
The growing healthcare needs of tribal communities along with the infusion of federal dollars have created opportunities to expand facilities and services. Careful planning and forecasting is critical to ensure the success of these new projects.
Contact REDW Principal Chris Tyhurst, CPA.
TRIBAL TAX & PROTECTING TRIBAL SOVEREIGNTY
The U.S. Supreme Court states that the power to tax transactions occurring on trust lands, and significantly involving a tribe or its members, is a fundamental attribute of sovereignty. For tribes to be able to exercise this power to tax to its fullest, tribes need to strive to be the only taxing authority for all business and economic activity occurring on and within their respective reservations. Tribes need to be aware of what a state can and cannot tax on both trust and fee lands. This awareness will allow a tribe to be able to adapt quickly to tax law changes, write, and then enforce the tribal tax and collections.
TRIBAL TAX & ENHANCING TRIBAL SOVEREIGNTY
Education (internal and external to a tribe) is key to enforcing tribal tax law and collections. Focusing on educating the community, taxpayers (doing business on tribal land), and even tribal government members about the tax laws will assist in the enforcement and collecting of tribal taxes. Pairing a strong understanding of tribal tax laws along with their establishment will assist a tax administration team to better enforce and collect taxes, and therefore increase tax revenues.
In addition, look for ways to advocate for your tribe’s strategic priority area by knowing and participating in the IRS or Treasury Tribal Advisory Committee (TTAC) consultations. These are dependable resources to learn what opportunities are available. Additional resources can be found in the Tribal Government section of the IRS website, where notices are published for training webinars or changes to the tax law. TTAC also has published reports and provided additional tribal tax resources.
AREAS FOR OPPORTUNITY TO LOOK FOR IN 2022
Here are a few examples of how tribes can explore adopting laws to take advantage of the most recent changes in tax court cases:
Taxation of Online Sales. The U.S. Supreme Court recently overturned a 1992 precedent that barred states from requiring an out-of-state seller with no physical presence to collect sales tax on a sale to a resident of the state. Now, physical presence is no longer required for a state to impose a sales tax on sellers, which can allow states to collect sales taxes from remote sellers. Tribes have the inherent sovereign power to impose taxes as recognized by the U.S. Constitution as tribal governments. Tribes should explore adopting laws similar to state economic nexus laws that requires remote sellers to remit and collect sales tax if they had aggregate sales of tangible personal property or services within tribal territory over stated thresholds. An economic nexus law can enable a tribe to increase tax revenues by collecting sales tax on sales delivered onto trust lands from remote sellers. New tax revenues could benefit tribal public services and enhance economic activity and tribal management over reservation lands.
Indian Employment Credit “Tax Extenders”. The federal government just extended the tax credit available to employers who hire Native Americans or their spouses who live on or near a reservation and worked for an employer on that reservation through 2021. The credit, which incentivizes employers who hire Native Americans, gives employers a tax credit on a portion of the qualified wages and employee health insurance costs paid to an enrolled member of a Native American tribe or the enrolled member’s spouse. There are national efforts to make this permanent, but that hasn’t happened yet, so stay tuned for updates with Congress.
Oklahoma’s Investment/New Job Tax Credit package provides growing manufacturers a significant tax credit based on either an investment in depreciable property, or on the addition of full-time-equivalent employees engaged in manufacturing, processing, or aircraft maintenance. In order to promote economic development on trust land, and increase tax revenues, tribes can offer incentives to businesses who locate to trust land, similar to many states that offer credits and incentives.
AREAS OF COMPLIANCE TO LOOK FOR IN 2022
Employee Retention Credits. Eligible employers can claim the employee retention credit, a refundable tax credit equal to 50 percent of up to $10,000 in qualified wages (including health plan expenses), paid after March 12, 2020 and before December 31, 2020. For the period between January 1, 2021 through September 30, 2021 the refundable tax credit is equal to 70% of up to $10,000 qualified wages, per quarter. Any tribal government or tribal entity that carries on a trade or business may be an Eligible Employer for purposes of the Employee Retention Credit, if it otherwise meets the requirements for the credit.
Solely for purposes of the Employee Retention Credit, a tribal government is treated as carrying on trade or business activities, and all activities conducted by the tribal government will be considered part of those trade or business activities. In addition, solely for purposes of the Employee Retention Credit, any entity that a tribal government reasonably believes shares the same tax status as the tribal government (tribal entity employer) is treated as carrying on trade, or business activities, and all activities conducted by the tribal entity employer will be considered part of those trade or business activities. Section 162 standards would not apply since tribal governments are not subject to income tax.
Payroll Tax Credits from the Coronavirus Relief Act & American Rescue Plan Act (ARPA or ARP). Employers that adopted paid emergency sick leave policies, for those under the federal Families First Coronavirus Relief Act during the COVID-19 pandemic, may continue that leave voluntarily after December 31, 2020; the payroll tax credits related to the related wages of those employees for that leave was extended Business Activity tax through the quarter ending March 31, 2021, within the December 2020 Coronavirus Relief Fund Extension legislation. Sections 3131 through 3133 of the Code were enacted by the ARP, on March 11, 2021, to allow Eligible Employers to claim refundable tax credits that reimburse them for the cost of providing qualified sick and family leave wages with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021 (either for the employee’s own health needs or to care for family members). Employees may receive up to ten days of paid sick leave and up to 12 weeks of paid family leave. Certain self-employed individuals in similar circumstances are entitled to similar credits.
Gaming Industry Reporting. As the gaming industry continues to evolve, staying current on reporting (withholding, wagering, occupational taxes) will be critical. Certain fantasy reports have reporting requirements while other types may not. Utilizing resources provided by the IRS as well participating in education opportunities will be helpful in avoiding any reporting pitfalls.
Excise Tax Credits. A variety of Excise Tax credits and refunds are available for transactions involving tribal governments or businesses operating on reservation land. Examples of credits include fuel tax credits and tire tax credits. Certain exemptions are also available.
Contact REDW Principal James Ortiz, State and Local Tax.
Wealth Management & Investment
- Inflation is at the top our list for tribal CFOs to consider in 2022. With the most recent Consumer Price Index reading of 7.9%, this is the highest inflation we have seen in the United States since 1975. With higher inflation, this will certainly impact your operations from costs of goods and services to wages for your employees. In addition, higher inflation has a significant impact on maintaining your purchasing power with your cash at the bank.
- Low interest rates are creating another dilemma when combined with higher inflation. The Federal Reserve has provided monetary stimulus to our economy by keeping interest rates artificially low. The current Fed Funds Rate is approximately 0.50%, which creates extremely low rates for short term savers like tribes. Add inflation to the mix, and many tribes are actually losing money via purchasing power at a rate up to 7%.
- Many tribes have received their American Rescue Plan Act (ARPA) Funds, but have yet to use some or all of the funds. Fortunately, the guidelines allow tribes and governments to invest these funds in government securities to gain interest on these accounts. Furthermore, the interest gained on these funds do not have to be used for ARPA designations, rather they can be used to defray other administrative costs. Tribal CFOs should consider investing some of their funds that are not needed in the short term in order to obtain new funds for other tribal uses. This could mean thousands, if not more, of extra funds that that tribe wouldn’t otherwise have.
- Expect volatility in your investment portfolios in 2022. Since the significant volatility we experienced in March of 2020, the stock market has not had a meaningful correction until recently. With the Federal Reserve on the path to increasing interest rates, the extra money they were putting in the system will start to come out. With less money in the system and being in the midst of a correction, we expect more volatility going forward. Tribal CFOs should prepare for a bumpy ride and help tamper expectations with Tribal Councils and investment committees.
- As always, rebalancing is key to maintaining risk and taking gains when certain assets experience high returns. In 2021, U.S. stock portfolios increased significantly with gains over 20%. As a prudent investor, tribal CFOs, tribal councils, and investment committees should trim back some of the U.S. stock exposure and rebalance to other assets in the portfolio’s allocation. This will help to keep the portfolio’s risk and return in line to meet long-term objectives.
Contact REDW Wealth Principal and Wealth Management Practice Leader Paul Madrid, CFA®, CFP®, AIFA®.
The REDW tribal experts are here to assist you in any of these areas, and many others not covered in this article. To learn more about how any of these issues may apply to your tribe, or more specifically to your tribal entities, please contact REDW Principal and National Tribal Practice Leader Wesley Ryan Benally, CPA.