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AC 02-24-2022Page 1 City of Cupertino Audit Committee Regular Meeting Minutes February 24, 2022 CALL TO ORDER At 4:04 p.m., Vice Chair Chen called the regular meeting to order. This was a teleconference meeting with no physical location. ROLL CALL Committee Members Present: Vice Chair Angela Chen, Mayor Darcy Paul, Councilmember Moore, Committeemmber Song City Staff Present: Zach Korach, Jim Throop, Chris Jensen, Thomas Leung Absent: Chair Daisy Liang Guests: Matt Geerdes (Crowe), Kathy Lai (Crowe), Mark Steranka (Moss Adams), Colleen Rozillis (Moss Adams) 1. APPROVAL OF MINUTES Vice Chair Chen moved to approve the regular meeting minutes of January 24, 2022 and January 25, 2022. Mayor Paul seconded and the motion carried unanimously by all members present with Committee Member Song abstaining. ORAL COMMUNICATIONS None. NEW BUSINESS 2. Appointment of Audit Committee Chair and Vice Chair Mayor Paul nominated Councilmember Moore as Chair and Vice Chair Chen seconded the motion. The motion carried unanimously by all members present. Mayor Paul nominated Vice Chair Chen to continue as Vice Chair. Councilmember Moore seconded and the motion carried unanimously by all members present. Vice Chair Chen handed the meeting over to Chair Moore. 3. Audit Committee Regular Meeting Frequency Korach noted that pursuant to the California Government Code and Cupertino Municipal Code that the Treasurer’s Monthly report does fall under the Audit Committee to review, and staff recommends increasing the number of regular meetings from 8 to 12 meetings to accommodate the submission of the monthly report. Staff has amended three other proposed meeting dates referencing the Treasurer’s Quarterly report to pertain to the City’s Investment Report because they do not fall under the Audit Committee and recommends, as have been submitted in past practice, that it be submitted directly to City Council. Korach also notes that Section 115 trust Page 2 performance reports will be provided on a quarterly basis and submitted directly to the City Council. Chair Moore asked that the OPEB and Section 115 reports stay at the Audit Committee even though it doesn’t fall under the Committee’s duties, powers, and responsibilities. Mayor Paul questions the recommendation and Korach clarifies that it is a revision to act in accordance with the City’s municipal code and California Government Code. The monthly Treasurer’s report refers to the receipts, disbursements, and fund balances and the investment reports do not fall under the purview of the Audit Committee. Mayor Paul disagrees with the interpretation of the municipal code from staff. Chair Moore maintains that we keep the quarterly reports under the Audit Committee. Mayor Paul acknowledged that there was an obligation in the code that was not met in the past, but Staff should have explained the new requirement as well as include it in the staff report. Mayor Paul expressed that it was inappropriate not to include in the staff report that staff in the prior Audit Committee meeting had indicated that the requirement was a relatively new one when it was in fact a long-standing requirement. Mayor Paul also suggested that the Audit Committee should work with staff on what can be feasibly delivered on a monthly basis. Chair Moore agreed noting that there was no change of recent time to the reporting requirements and OPEB and Section 115 Trust reports are done by outside consultants so it may not be a significant load on staff. City Attorney Jensen notes that we should look at the different authorizations and appropriate City Council delegation of authority. Mayor Paul asked for clarification. City Attorney Jensen wants to ensure there is appropriate delegation of authority as based on Audit Committee member comments the intent is for them to retain authority. Mayor Paul asked if this is to make sure that there is a resolution to delegate authority for review and City Attorney Jensen confirms. Chair Moore identifies the fund balances would include the OPEB and Section 115 trust reports or the receipts being reported would be considered. Mayor Paul wants to understand what staff can deliver. Chair Moore clarifies that an action should be included in the recommendation. Committeemember Song inquired for preventive methods. Chair Moore notes that this may come from our whistleblowing item in the future from Moss Adams reports. Vice Chair Chen requests to move the March meeting to the last Monday in March. No comments from the public. Mayor Paul motioned to accept the item with the change of the March meeting. Vice Chair Chen seconded, and the motion carried unanimously by all members present. 4. Treasurer’s Report for Quarter Ending December 31, 2021 Chair Moore notes that the recommended action is to receive the Treasurer’s Report for Quarter Ending December 31, 2021. Korach notes that a modification was made on page 8 that references the Investment authority delegated to the City’s Treasurer. Korach notes that the $10 million the City received is still available and only at City Council’s direction to be classified or appropriated for a specific purpose within the restrictions of the City’s Special Revenue Fund Park Dedication. No comments from the public. 5. Review of FY 2020-21 ACFR and Supplemental Reports Lai notes that based on their testing, they intend to issue an unmodified opinion which is the highest level of assurance the City can receive. The opinion will state that the financial statements are fairly stated in accordance with Generally Accepted Accounting Principles (GAAP). Lai mentions that there is an emphasis of matter paragraph as it is very standard when you have a Page 3 new accounting standard that has impact to the accounting and financial reporting. This year’s standard is the GASB Statement 84, fiduciary activities related to accounting and financial reporting for fiduciary activities such as investment trust funds, OPEB trust funds, and etc. Lai turns it over to Geerdes to discuss the Investment AUP, GANN AUP, and Storm Drain AUP. Geerdes notes that these AUPs are not designed to provide assurance of any form, it was done so at the request of management. Geerdes did not notice any exceptions or findings and upon receipt of the management representation letter they will finalize the AUP. Lai notes that the Single Audit or Uniform Guidance Audit is not included in the report as the Office of Management and Budget was overwhelmed and the audit guidance was released late. Lai confirms that the American Rescue Plan Act funds will be included in next year’s single audit; this year they are reviewing the Coronavirus Relief Funds and Highway Planning and Construction grants but are awaiting key materials from management. Once they receive the materials they will come back with the draft report. No comments from the public. Vice Chair Chen questions the transmittal letter and the $9.7M ARPA funding that was allocated to revenue losses, but the reports indicate a revenue surplus. Lai notes that the final rule allowed organizations to take advantage of a $10 million presumed revenue loss and clarified that under the federal guidance the City was given a standard allowance of $10 million but it wasn’t considered as expended in Fiscal Year 2021, so it is sitting in the financial statements as unearned revenue. Vice Chair Chen questions the unrestricted fund balance of $92 million. Geerdes clarifies that it is the total unrestricted net position between the governmental activities ($83 million) versus the business type activities ($9.3 million) which is the resource recovery. Geerdes notes that footnote #7 is the fund balances at the fund level of reporting and when totaled it is $167 million, $49 million of that is unassigned or unrestricted at modified accrual reporting. The $92 million is at a full accrual reporting and includes items that have a different basis of accounting reporting. He notes that the unrestricted fund balance is located in the General Fund because accounting rules state that unrestricted fund balances are not allowed to be in special revenue funds or capital funds because those funds are for a restricted, special assigned purpose. He further clarifies that on page 57 there is a description of the unassigned fund balances and that it is available for any purpose but that it is subject to appropriation and any expenditure needs to be in accordance with the budget and appropriation laws and regulations. Chair Moore questioned the appropriation amounts between two different departments and if they can be altered. Lai confirms that it is out of their scope. Chair Moore requests in the heading for Audit Committee items if it is an action or informational item. Chair Moore also requested for Attachment B to follow Huntington Beach’s calculation format as it was simple and explained to the public the background of GANN. Korach identifies this item as an informational item and City Attorney Jensen confirms there is no requirement that the committee take action on this item. 6. Internal Audit – Procurement Review Rozillis notes that the engagement began in September and was completed in January with the purpose to look at the City’s procurement structure, function, how well it served the City, analyze staffing, identify opportunities for performance improvement, compare procurement principles with the City’s practice in terms of ethics and equity. Rozillis notes that the primary recommendation is the city having a decentralized procurement environment and they met with dozens of organizations to conduct interviews and focus groups with those involved in Page 4 procurement. She notes that staff is looking forward to the results of the study and implementing improvements in procurement. Rozillis notes 10 recommendations with the primary being an increased level of centralization and oversight of procurement leadership. There are two categories for their observations and recommendations, the first is enterprise considerations. These are things that can be done citywide such a matrix to identify clarity in roles and responsibilities, updated policy and procedures, alignment of procurement practices with State law, and consistent training. The second is policies and procedures; being able to modernize processes, technology support, training, and self-service tool kits. No comments from the public. Vice Chair Chen questions the one time and ongoing resources for the recommendations and how the City can prioritize the workplan. She notes that there are no resources allocated to the procurement process but there is staff in each department working in procurement, is there a way to rearrange resources to save the City money? Rozillis recommends that the City decide what type of model they want to move forward with as well as what staffing would look like, then identifying the portions of FTEs, and finding how to maximize the use of systems and adjust the City’s policy and procedures. Vice Chair Chen asks where should the City start. City Manager Throop mentions that he can pull a department head meeting to discuss this report and bringing a recommendation forth to Council. City Manager Throop notes that it is odd that the City is decentralized and recommends centralization with including a procurement officer and a purchasing technician. Vice Chair Chen is concerned about the ongoing resources that City has and wants to evaluate reallocating resources for procurement. Chair Moore requests that we add the City of Campbell to the table to look at their procurement operation and have an implementation plan added to the agenda for Audit Committee before it goes to City Council. Mayor Paul requests clarity on the structure of the procurement process for the public and what are the potential issues are for a decentralized process. Rozillis clarifies that they did a risk assessment of decentralized, centralized, and shared services models. Committeemember Song recommends that management comes up with suggestions for procurement. Chair Moore requests for information related to credit cards and how they assigned to the budget and codes or policy that are associated with credit card use. Korach provides an overview of the Credit Card use policy and notes that Finance receives a master statement for all the credit cards and will reconcile department statements as well as transaction are tied to a GL account number. Committeemember Song requests for a public report for purchases made. Korach notes detailed accounts payable reports are submitted to the City Council. 7. Budget Format Review Continued to the 3/28/2022 meeting – with appointment of the subcommittee. 8. Treasurer’s Report Definition and Process Chair Moore requests for the City Attorney Jensen to review the code for the Committee to continue to have jurisdiction over the reports. No public comments. Chair Moore requests for the GANN reporting and calculation to be clearly defined and model it after Huntington Beach. City Manager Throop notes that staff will include it in the budget book. 9. External/Internal Audit Process and Timing Page 5 Mayor Paul motioned for this to be continued to the 3/28/2022 meeting. Vice Chair Chen seconded. The motion carried unanimously by all members present. OLD BUSINESS None. STAFF AND COMMITTEE REPORTS 10. Staff report out on City Council Workshop on Commissions and Committees Workshop Mayor Paul motioned for this to be continued to the 3/28/2022 meeting. Vice Chair Chen seconded. The motion carried unanimously by all members present. FUTURE AGENDA SETTING None. ADJOURNMENT The meeting adjourned at 6:00 p.m. Recording Secretary: Janet Liang, Administrative Assistant