Audit 08-27-2014 City of Cupertino
Audit Committee Meeting
August 27, 2014
1. CALL TO ORDER
At 4:OOpm August 27th Lisa Taitano called the meeting to order at Cupertino City Hall, 10300
Torre Avenue, Conference Room A
2. ROLL CALL
Community Members Present: Eno Schmidt, Raymond Yin
City Staff Present: Kristina Alfaro, Lisa Taitano
Council Present: Rod Sinks
Absent: Mark Santoro,Angela Chen
Guests: Mark Wong, Grace Zhang (Maze &Assoc.), both left after completing item D
3. APPROVAL OF MINUTES
May 28th meeting minutes to be approved at November 6th meeting
4. ORAL COMMUNICATIONS—
Alfaro provided an update on the publishing of the FY 2014-15 Final Budget
5. WRITTEN COMMUNICATONS—NONE
6. NEW BUSINESS
A. Accept Treasurer's Investment Report for Quarter Ending June 30, 2014
In addition to the report, Taitano offered new presentation of portfolio composition and cash
flow data to support the portfolio's investment strategy. Schmidt requested to add duration data
to the report. Taitano said she could replace average maturity with duration with more time.
Duration required tracking of all cash flows, including interest payments, and they were not
currently tracked by Finance staff. With regard to cash flows,Taitano explained an anomaly
affecting the graph that occurred in the first quarter due to an Apple performance bond that
Apple opted to pay in cash. The bond was refunded back to Apple in the following quarter.
Taitano also explained that shifts in composition of the portfolio were due to large amounts of
cash being invested in LAIF, and increased expenses to pay for capital projects like pavement.
Taitano pointed out the chart showing policy compliance with City's Investment Policy. She
also pointed,out that the average yield was low due to the high cash balance.
Taitano asked the committee what they would like to see with cash flow projections. Schmidt
asked how much cash flow do you have to cover the troughs illustrated in the graph?Taitano
said she can plot cash on hand, including LAIF on the graph. She also commented that she is
trying to get a better handle on Apple inflows and outflows, capital improvement projects, and
the non-routine cash flows.Schmidt asked if there was a City finance policy on cash flow
management. Taitano said no, but she could outline City cash management practices in the
Audit Committee meetings effectively documenting how strategies are formulated.
Yin moved to accept the report. Schmidt seconded'the motion and the motion passed
unanimously.
B. Discussion on internal audit function
Taitano proposed questions to our external auditors, Maze and Associates. Schmidt asked if
there is an internal need for one and why isn't there one? Taitano commented that with small
cities, they can fulfill several different audit functions, such as offer efficiency and effectiveness
of programs and special projects, policy compliance, service level delivery, performance
measurements, contract compliance and procurement, in addition to internal controls. Wong,
from Maze and Assoc., explained that both the City of Sunnyvale and Santa Clara have.an
internal auditor. The Sunnyvale internal auditor does quarterly cash collection observations.An
internal auditor could report to City Council,the Audit Committee, the City Manager or the City
Clerk. Finance risk perspective should be a component to evaluate when deciding to have an
internal auditor.An internal auditor is not needed if internal controls are in place and
management.is monitoring.it,per Wong.Alfaro commented that the new ERP system being
implemented would aid the City to gain efficiencies, allowing staff to monitor and review
internal controls. Go live date was projected to be January 5, 2015. She also commented that
internal policies need updating and once completed, could better integrate compliance review of
City operations.
C. Annual adoption of City Investment Policy
Schmidt raised issues about the OPEB Trust investment authority being referenced in the City's
Investment Policy. Taitano confirmed that the two separate policies should not reference each
other. It was confusing and misleading.
Taitano confirmed for Schmidt that the word, "risk", should be added to page 3,paragraph 4.
The sentence should read, "Maturities of investments will be selected based on liquidity
requirements to minimize interest rate risk and maximize earnings."
Schmidt asked about the non-treasury staff referenced on page five of the City Investment
Policy. Taitano answered that finance staff would initiate the transaction, such as an accountant
or account clerk position and approval would come from a Treasury position such as Taitano
(Deputy Treasurer) or Alfaro (City Treasurer).
On.page 6, Schmidt asked why there was no limitation of the portfolio composition that could
be invested in the Agency investment type. Taitano explained that she does diversify among
Agencies due to the fact that some agencies have direct guarantees by the federal government
and others are only implied guarantees. In practice, maintaining diversification among agencies
is a priority for the portfolio and can be reported to the committee going forward.
Page 7, item number 10, Schmidt asked about medium term corporate notes. Taitano explained
they were notes issued by corporations and typically limited to 2 to 3 year maturities in practice.
State code did, however, allow a 5 years maturity limit. Taitano offered to put together a
composition chart by agencies and said she does not currently invest in corporate notes as the
City does not have adequate staffing to conduct the required credit analysis.
Taitano said she would bring a marked version of the Investment Policy for review and
acceptance to the next meeting scheduled for November 6, 2014.
The committee was not prepared to adopt the investment policy as clean up edits were still
needed. Additionally, Committee Chair Schmidt, had concerns of the long agenda for the
November meeting. Taitano offered to bring the item back to the November committee meeting
with a marked version for ease of review and approval. The revisions would be obtained via
email prior to the meeting to expedite review and approval.
I
D. Audit planning and Fraud Considerations Memo (interview with external auditors)
The City's external auditors (Maze and Associates) reviewed the responsibilities of external
auditors and explained materiality, audit scope, fraud, as well as sample and control testing for
major items. The auditors asked committee members about their awareness of fraudulent
activity. The three committee members did not indicate any item of concern.Alfaro informed
,the committee that City policies were in the process of being updated, including having the
Code of Conduct signed and acknowledged by staff periodically with our new ERP system
purchased and developed by(New World Systems).
E. OPEB Trust Period Performance
Taitano presented a performance report prepared by US Bank; that included a market and
economic update. It reported that equities were impacted by geopolitical issues. Taitano
explained that the portfolio achieved diversification through use of multiple mutual funds with
varying objectives and strategies within varied sectors. Taitano expressed concern in the Fixed
Income area. Values in the sector were going down due to rising interest rates. Schmidt asked
how the City could reduce its exposure. Taitano said the portfolio was underperforming its
benchmarks due to diversification which also helped lower risk. The committee discussed
having Richard Rosenthal of US Bank attend committee meetings either in person or via video
or teleconferencing, such as Apple TV. His attendance was expected in person at the November
meeting so that he could make his annual presentation and answer direct questions from the
committee. Taitano explained she would obtain a detailed statement of holdings and
performance for subsequent distribution to committee members.
7. ADJOURNMENT
Meeting was adjourned at 6:02pm
ary wine
Recording Secretary