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AC 01-24-2022Page 1 City of Cupertino Audit Committee Special Meeting Minutes January 24, 2022 CALL TO ORDER At 4:00 p.m., Chair Liang called the special meeting to order. This was a teleconference meeting with no physical location. ROLL CALL Committee Members Present: Chair Daisy Liang, Vice Chair Angela Chen, Mayor Darcy Paul, Councilmember Moore City Staff Present: Kristina Alfaro, Zach Korach Absent: Committee Member Song, Vice Mayor Chao Guests: Chris McCarry from Chandler, Rick Rosenthal from US Bank, Ryan Maxey from US Bank, Jennifer Meza - PARS 1. APPROVAL OF MINUTES Vice Chair Chen moved to approve the regular meeting minutes of December 13, 2021. Councilmember Moore seconded and the motion carried unanimously by all members present. ORAL COMMUNICATIONS None. NEW BUSINESS 2. Treasurer’s Report for Quarter Ending December 31, 2021 – 63 minutes Zach Korach updated the Committee on California Government Code Section 41004 and the establishment and submission of monthly reports of city receipts, disbursements, and fund balances; noting that it appears to have been oversight and the code was amended early 2018. Korach reached out to several jurisdictions in Santa Clara County and only one was identified as maintaining compliance, moving forward staff plan to maintain compliance on a prospective basis. Mayor Paul asked for clarification. Korach noted that this report is separate from the Treasurer’s report, the quarterly Investment reports are governed by Government Code Section 53646, and that there is no preferred practice in presenting and compiling the information for monthly basis. Mayor Paul expressed concern regarding the process of compliance and wants to figure out a workflow process for these obligations. Korach clarified that staff was unaware of this code provision and intends to maintain compliance as soon as possible. Councilmember Moore read Government Code 2.24.030 and redirected that this item is to speak on the Treasurer’s report. Chair Liang noted that at the last meeting she requested to review bank reconciliation and have it submitted to the Committee. Mayor Paul asked how staff will properly notice this issue for discussion and roll it out for the council and public. Mayor Paul and Councilmember Moore said they will save this for future agenda meeting segment. Page 2 Korach turned it over to Chris McCarry from Chandler to present the City’s portfolio. Chris noted that there continues to be market volatility due to COVID, with each new wave of the virus the impact on the economy has lessen and we are returning to pre-pandemic levels. Pricing pressures have caused the Feds to adjust their policy and have increased the tapering of their asset purchases. Chandler and the Market anticipates three or four rate rises in 2022. McCarry noted that the portfolio is in compliance with California code as well as with the City’s investment policy. Mayor Paul inquired about the percentage decrease over 12 months. McCarry confirmed and noted that it is an unrealized gain built into the portfolio. Mayor Paul asked what is 1% of the portfolio and McCarry answered $139,000. Chair Liang asked what the return is and McCarry answered -0.97% and an unrealized gain of $163,000. Korach noted that the attachments are supporting documents pertaining to the Treasurer’s staff report. Chair Liang questioned the CD’s $15 million transfer. Korach clarified that on a quarterly basis staff provides additional investment or cash equivalent balance information outside of what our vendors provide, and this allows for oversight of the city’s cash flow. Chair Liang asked if there are any new special project or capital improvement projects proposed in 2022. Zach noted that the information is not available yet and the $10 million in park dedication in-lieu fund is restricted for parks. Mayor Paul brought up the issue of appropriating the allocation of funds for projects before Council or public input. Korach clarified fund restrictions and that because no capital projects have been proposed pertaining to the park dedication fund, no determination was made. Councilmember Moore asked if a policy could be presented regarding the geography and beneficiary of the in- lieu fees and that the paragraph located at the top of page 12 to be simplified. Councilmember Moore also asked for a policy related to the handling of money within this budget as a future agenda item. Vice Chair inquired about discussion on ending fund balances from the previous year and if the statement balance is above or beyond fund balance. Korach noted that the Annual Comprehensive Financial Report has a detailed footnote disclosure pertaining to fund balances across the city as of June 30, 2021, and fund balance analysis are also located in the city’s quarterly budget financial reports. Vice Chair Chen asked if the staff report is accepted, will they also be approving the $15 million transfer. Korach confirmed that the transaction was brought forward to the committee for approval before the transfer would be made. Councilmember Moore took issue with the staff report and that the recommendation is unclear as it doesn’t highlight the requests. Mayor Paul seconded the issue. Mayor Paul motioned for approval of the staff recommendation except for the $15 million transfer and for the Audit Committee to recommend to City Council the topic of the in-lieu fee for park dedication from the West Port Project be considered at their first available meeting. Councilmember Moore suggested that we do not accept the Treasurer’s report and for it to return with changes made. Mayor Paul amended his motion to not accept the Treasurer’s report and referred the park dedication fee for the Westport project to City Council. Councilmember Moore seconded the action. Mayor Paul inquired if there were time sensitivity related to approval of this report. Korach referenced Government Code Section 53646 Section B-1 that states that the Treasurer or Chief Fiscal Officer may render quarterly reports to the legislative body of the local agency and submitted within 30 days following the end of the quarter covered by the report. Staff has always maintained compliance and bring this item back to the February meeting. Chair Liang wanted to confirm that the report Page 3 will not be accepted and brought back to the next meeting and asked for roll call. Motion was carried unanimously by all members present except for Committeemember Song. 3. US Bank Performance Report for Quarter Ending December 31, 2021 – 13 minutes Rick from US Bank presented on the year-end performance results. Items that had growth in 2020 started to become rocky in 2021. Rick and Zach analyzed what the 2021 projected return could have been based on US Banks capital market assumption which was 5.25% expected rate of return and US Bank was able to double it. Chair Liang inquired about the rate of return and if we have met our goal. Rick confirmed that the rate of return was exceeded in every period and equity has a huge impact on the portfolio and the market has shifted to a defensive posture. Mayor Paul moved to accept the report and that item 4 be continued within 24 hours and directed staff to check in with the City’s Attorney’s Office. Councilmember Moore seconded and asked that the monthly reporting to be an agenda item for the next meeting. Korach informed the Committee that item 4 has no attachments as staff wanted to bring the City’s externals auditors to the meeting today to provide an introduction and a briefing to the Committee on what to expect when the drafts become available for the Committee’s review. Motion was carried unanimously by all members present except for Committeemember Song. 4. FY 2020-21 AFCR and Supplemental Reports – Continued to 1/25/2022 Audit Committee continuation meeting OLD BUSINESS None. STAFF AND COMMITTEE REPORTS None. FUTURE AGENDA SETTING None. ADJOURNMENT The meeting adjourned at 5:30 p.m. Recording Secretary: Janet Liang, Administrative Assistant Page 1 City of Cupertino Audit Committee Special Meeting Minutes January 25, 2022 CALL TO ORDER At 4:00 p.m., Vice Chair Chen called the special meeting to order. This was a teleconference meeting with no physical location. ROLL CALL Committee Members Present: Chair Liang, Vice Chair Chen, Mayor Paul, Councilmember Moore City Staff Present: Jim Throop, Kristina Alfaro, Zach Korach Absent: Vice Mayor Chao, Committee Member Song Guests: Kathy Lai and Matt Geerdes from Crowe APPROVAL OF MINUTES None. ORAL COMMUNICATIONS None. NEW BUSINESS 4. FY 2020-21 ACFR and Supplemental Reports (Continued from 1/24/2022 meeting) – 49 minutes Korach reported that there are no attachments as the draft is currently being reviewed and plan to bring it to the February Audit Committee meeting. Lai informed the Committee that Crowe is engaged to do a financial audit of the city to determine whether financial statements are in accordance with the Generally Accepted Accounting Principles (GAAP). Lai mentioned that there were over $2 million expended in federal grants for June 30, 2021 and identified the Coronavirus State and Local Fiscal Recovery Funds (CLFRF) and Highway Planning and Construction (HPC) as programs they are testing. Lai advised looking at their audit unmodified opinion and that is where it will state that the financial statements are fairly stated in accordance with generally accepted accounting principles, and this indicates good news. Lai noted that their procedures for the investment AUP and GANN AUP are complete, no findings were noted, and the reports are being reviewed. Councilmember Moore inquired as to how we would go about having an audit of the budget. Lai noted that their scope is related to their actuals and if it’s reported in accordance with the GAAP. City Manager Throop reported that the budget is built to standards of a City Council and the GFOA will review the budgets to make sure they align with accepted procedures and best practices for budgets. Korach confirmed that the city applies for both the GFOA and the CSMFO budget award for excellence and has received it every year. Korach recommended working with internal auditors on performance audits with the Audit Committee, City Council, Page 2 and future inclusion in the internal audit work plan. Mayor Paul suggested that we have an internal award system to see whether the Audit Committee is satisfied with that level of compliance. Mayor Paul asked Crowe for a timeline of point items for the year to supplement the slides presented. Vice Chair Chen inquired about Intra Fund Transfers (IFTs) and if they were documented in the footnotes and if Crowe checks on IFTs on compliance. Lai noted that IFTs are reflected in the operating statement for the respective funds and more details can be found in a separate footnote which is subject to their audit. Geerdes added that there is an extensive schedule that documents specifically what fund transfers between the two as well as a description on what it was for. Lai clarified that it is footnote 4. Zach noted that every transfer that is made has to be tied to an appropriation that is authorized in the adopted budget or subsequent budget actions approved by City Council. Vice Chair Chen questioned the IFT loans and if the footnotes journal the IFT transfers that are made after the budget. Lai says they do not have that level of detail, GAAP does not require that detail, and will research the budgetary and review and approval process. Councilmember Moore questions how much transfers can happen and what the limitations are as the City’s processes are too flexible. Alfaro stated that the City of Cupertino’s policy is aligned with the majority of other cities in Santa Clara County. Chair Liang inquired as to what the current policy for Intra-Fund transfers between accounts. Alfaro stated that transfers in the same fund can be approved administratively by the City Manager this includes between departments and line items. Intra-Fund transfers and transfers that result in an increase to the budget are approved by City Council and the policy is located in the financial policies in the budget book. Mayor Paul asked what the process is to change that policy and requested for two quarters worth of information. Councilmember Moore questioned the $593,000 in the City Manager’s discretionary fund and the 2.5% that is built into the department’s budget. City Manager Throop clarified that the dollar amounts in the general fund and budget are different. Korach mentioned that the draft reports are still in draft form and will be agendized for the before the next regular February meeting. Mayor Paul moved to not accept any reports under this item. Chair Liang seconded. Motion was carried unanimously by all members present except for Committeemember Song. OLD BUSINESS None. STAFF AND COMMITTEE REPORTS Mayor Paul requested information on subcommittees for the Audit Committee and its committee members. Korach noted that there is a budget subcommittee with Councilmember Moore and Chair Liang as members. FUTURE AGENDA SETTING None. ADJOURNMENT The meeting adjourned at 5:30 p.m. Page 3 Recording Secretary: Janet Liang, Administrative Assistant