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Audit 11-06-2013City of Cupertino Audit Committee Special Meeting Minutes November 6, 2013 1. CALL TO ORDER At 4:03 p.m. Finance Director Woo called the meeting to order at Cupertino City Hall, 10300 Torre Avenue, Conference Room A. 2. ROLL CALL Community Members Present: Angela Chen, Eno Schmidt, Raymond Yin Council Members Present: Mark Santoro (at 4:05 pm),. Rod Sinks (at 4:05 pm) City Staff Present: David Brandt, Kristina Alfaro, Jaqui Guzman, David Woo Absent: None 3. APPROVAL OF MINUTES Community Member Schmidt motioned to approve the minutes of the special meeting of August 15, 2013. Community Member Yin seconded and the motion passed 3 -0 with Councilmembers Santoro and Sinks absent. 4. ORAL COMMUNICATIONS - NONE 5. WRITTEN COMMUNICATIONS - Woo distributed answers to questions posed by Community Member Schmidt about Agenda Item 6A. 6. NEW BUSINESS A. Accept Annual Financial Reports for Fiscal Year 2012 -13 Mark Wong, Vice President at Maze and Associates, presented the firm's opinion about the City's Comprehensive Annual Financial Report (CAFR). He also summarized the firm's Memorandum on Internal Control and Required Communications, its Final Accounting Issues Memo, and the Independent Accountant's Report on Applying Agreed -Upon Procedures for the City's Investment Policy. Woo mentioned that the 2012 -13 financial results of the City will be discussed in Agenda Item 6B. Santoro commented that the CAFR transmittal letter needed to add comparative business -to- business sales tax percentages for California and the Bay Area and that the discussion of revenues from Apple Campus 2 needed to more clearly say that revenues are riot all in cash, that the amount actually received may be less, and that some of the monies are used to cover City . expenditures. Woo replied that the letter could be modified for these. Santoro also asked about the timing'of this letter with the approval process of the City of Cupertino Audit Committee Special Meeting Minutes November 6, 2013 Campus development. Woo said that it was planned for the November 19 council meeting or because of the revisions, the December 17 meeting. Woo, Mark Wong and various Committee members went over the written communications containing Woo's answers to the questions posed about the CAFR, Final Accounting Memo and Investment Policy review. The discussion included the significance of the information technology issues, the detection of the improper accrual of utility charges and their materiality, current and future pension disclosure impacts, the purchasing policy consistency with the municipal code, the liability versus reserve recording of the sales tax reallocation, and Council's accounts payable approval after check issuance. After Committee discussion, Woo agreed to add library circulation statistics on the next CAFR and Woo and Wong agreed to add yield and length to maturity testing to the. investment policy review procedures. Schmidt motioned to accept the annual financial reports for fiscal year 2012 -13. Community member Chen seconded and the motion passed unanimously 5 -0. B. Accept Budget Report for First Quarter of Fiscal Year 2013 -14 Assistant to the City Manager and Budget Manager Alfaro. presented the report's new format, new compilation process, ,and new purpose. She also presented the actual revenue, expenditure, and fund reserve results versus the budget for fiscal year 2012 -13 and the first quarter of 2013 -14. Budget changes during the first quarter 2013 -14 and possible mid -year budget changes were .also presented. Committee members and City staff discussed reserves for the sales tax reallocation. Chen asked for the total of the possible mid -year. adjustments. Yin. motioned to accept the budget report for first quarter of fiscal year 2013 -14. Chen seconded and the motion passed unanimously 5 -0. C. Accept Treasurer Investment Report for Quarter Ending September 2013 Woo discussed the PARS retiree health trust results driven by the strong stock market. He reported that the, investment advisor had reduced and underweighted the equity position of the trust because of his opinion that equities are overvalued. Councilmember Sinks disagreed with the move from equities into bonds and expressed a desire to change the investment advisor based on this and other discussions with the advisor at previous meetings. City of Cupertino Audit Committee Special Meeting Minutes November 6, 2013 Schmidt and Sinks recalled how the advisor has not reduced the intermediate - term bond allocation in light of rising; :interest rates. Santoro remembered the past dissatisfaction over HighMark keeping some mutual funds in the portfolio that weren't performing well. Woo said that an option would be to stay with PARS but to ask them to change the investment advisor, but that may be hard to accomplish because they are the advisor for other plan participants, however the City is a large participant and PARS should be interested in keeping us. Another option would be to work with a different person from the same investment advisory firm. If PARS doesn't change the advisor, the City could look at another trust provider. The Council would have to approve a new trust provider but not a new investment advisor. Staff would ask PARS to get a new investment advisor. The Committee agreed to the creation of an Audit Committee subcommittee to approve the new investment advisor in the PARS plan. The subcommittee would not need full Committee approval of the new advisor as long as the City is keeping with PARS. Schmidt and Sinks volunteered to be on the subcommittee. Sinks motioned to direct the subcommittee and staff to obtain a new investment advisor under the PARS retiree health trust. Yin seconded and motion passed unanimously 5 -0. 7. OLD BUSINESS — NONE 8. OTHER COMMITTEE UPDATES /REPORTS - NONE 9. ADJOURNMENT The meeting was adjourned at 6:15 p.m. Sheila Mohan Interim Finance Director