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AC 04-25-2022Page 1 City of Cupertino Audit Committee Regular Meeting Minutes April 25, 2022 CALL TO ORDER At 4:00 p.m., Chair Moore called the regular meeting to order at Cupertino City Hall Conference Room A, 10300 Torre Avenue, Cupertino CA 95014. ROLL CALL Committee Members Present: Chair Moore, Vice Chair Angela Chen, Mayor Darcy Paul, Committeemember Song City Staff Present: Jim Throop, Chris Jensen, Kristina Alfaro, Thomas Leung, Beth Viajar Absent: Guests: Kathy Lai (Crowe), Matt Geerdes (Crowe), Carlos Oblites (Chandler), Christopher McCarry (Chandler), Ryan Maxey (US Bank), Richard Rosenthal (US Bank), Jennifer Meza (PARS), Mitch Barker (PARS) ORDERS OF THE DAY APPROVAL OF MINUTES 1. Approve Minutes of Regular Meeting on February 24, 2022 Mayor Paul moved to approve the minutes with edits. Vice Chair Chen seconded. The motion carried unanimously by all members present. 2. Approve Minutes of Regular Meeting on March 28, 2022 Vice Chair Chen moved to approve the minutes with edits. Chair Moore seconded the action. The motion carried unanimously by all members present. ORAL COMMUNICATIONS None. NEW BUSINESS 3. OPEB & Pension Section 115 Trust Performance Report for Quarter Ending March 31, 2022 Barker provided an overview of the quarterly Section 115 Trust client presentation. Rosenthal provided an overview of investment management. Chair Moore asked about the 0% allocation to commodities and why the custom benchmark for the City was 2%. She mentioned that the 2% was probably intended for diversification and asked Page 2 for an explanation regarding the targets and what the 2% target meant. Kristina noted that Rosenthal could explain how the ranges work and how the ranges are used when investing the OPEB assets. Rosenthal noted that the policy was created to allow for latitude across the various different sectors. He noted that the low end of the real estate and commodities range was 0% and provided tactical guidance. They have not held commodities for 3-4 years, and it was good that Cupertino did not hold them as they performed poorly. He noted that they do not recommend commodities as a firm, and therefore, the City does not hold any. Chair Moore asked to have a column added for the actual asset allocation amount next time. Chair Moore said if commodities were 0% and we had no intention of investing in them, why was the target not 0%. Rosenthal noted that it is not that there is no intention. It is a tactical guidance position, but there may be a time when that guidance may change and they may allocate a percentage into commodities. Chair Moore requested the actuals column be added to the benchmark table and have discussion on it next time. Mayor Paul asked how they performed compared to the S&P 500 over time and whether they outperformed. Rosenthal noted that the equities in this portfolio tend to be around 63% of the portfolio. The S&P 500 is one domestic large-cap index, so the City has a custom blended benchmark for all the different asset classes. Mayor Paul asks if it benefitted us versus something simple like dumping all the money into one thing that has been fairly stable over its life. He wanted a metric without casting aspersions as he indicated that there are times they do well and times they get hit. To better understand how they were performing against the S&P 500, Mayor Paul requested a table. Rosenthal noted that a table in the report compares how they do against the S&P 500. Mayor Paul asked for clarification that it is not just the portion of the portfolio in the S&P 500 but the performance of the S&P 500. Rosenthal confirmed. Maxey explained the table. Mayor Paul noted that there are underperformers, and it seemed like we did not benefit when times were good and got hit when times were bad. Chair Moore asked if there was some leeway to change the targeted percentages. She noted that we are above in equities and asked if we had anything in the S&P 500 or if we were using the MSCI. Rosenthal noted that the MSCI is the broadest equity index and captures domestic and international, which is why it was chosen. Within that space, there is domestic large-cap which is essentially the S&P 500. The equity allocation was above its target because there was no commodities exposure. Chair Moore asked if management had considered what was happening in Europe/Ukraine and inflation to strategize due to the foreseeable declining stock markets there. Rosenthal noted that steps had been made in the portfolio to mitigate that downside. In the fixed income space, a short- term bond fund was added to stabilize the positions, given that interest rates are rising, and reduce the high yield fixed income exposure. On the international equity side, funds that were hit hard were moved to an index fund to stop some of that. He noted that the overall asset allocation did not fluctuate that much. The pension funds are managed identically with no notable differences. The only variation would result from inflows and outflows coming at different times. Chair Moore asked why the total portfolio gross of fees and total portfolio net of fees were identical numbers. Maxey noted that the calculation is based on the current market value. Chair Page 3 Moore asked US Bank to point out where the fees were listed. Rosenthal noted that the administrative and trustee fees were not listed in this report. Maxey said they did not flow into the reports, but they can pull that information on another page for the committee. Rosenthal noted that the fees were included on page 8 or page 15 under withdrawals. The amount there captured the fees. It is a static fee based on the market value of the portfolio. Chair Moore asked if they could double-check the withdrawal of fees at $28 million. Rosenthal stated it was a one- time situation where the previous account was closed and moved into a new account. All other years are an accurate representation of the fees. Leung agreed with Rosenthal. Barker noted that this was a tiered fee schedule, and as assets grow, the fees will go down. Vice Chair Chen questioned the selection of average quality of triple B minus bonds and would like to understand why. Rosenthal stated it was the weighted average quality of all the funds listed below. The funds at the top were considered investment grade and below that a high yield component. When the exposure is dollar-weighted, the average is triple B minus which is considered the low end of investment grade. Vice Chair Chen asks if there was higher risk for choosing these investments. Rosenthal noted that the bond funds in the portfolio have a particular purpose. There are two total return bond funds that allow the manager flexibility to navigate across the bond markets and were offset by a US bond index fund and a short-term bond fund, and an allocation to high yield bonds. It is a very fair and reasonable allocation. He stated that the portfolio is managed in a way so that it is well diversified. 4. Treasurer’s Investment Report for Quarter Ending March 31, 2022 Leung provided an overview of the California government code. Oblites provided an in-depth investment report. He noted that the portfolio is subject to California government code and all associated sections. It is a portfolio designed for safety and liquidity and, once they are met, for return. The majority of the return comes from yield or interest, and the value of principal can go up and down as well. Oblites continued to go over the investment report. Mayor Paul asked, in the interest of time, if he could wrap up. Oblites noted inflationary pressures have devalued the portfolio, and future earnings will be higher with the shift in market rates. If we hold things to maturity, the City would get its principal back. From a credit standpoint, there is nothing concerning. It is a well-diversified portfolio, and they believe that they should continue as they will get high yields down the line. Chair Moore wanted to see the chart with the -$7.2 million and asked if Chandler could provide this and continue to provide it moving forward. Chandler said they would provide it. Mayor Paul motioned to approve, and Vice Chair Chen seconded. The motion carried unanimously by all members present. 5. Review and consider accepting City Investment Policy Leung provided an overview of the City Investment Policy. Oblites stated there were no changes to the California Government code this year. The City’s policy is a strong policy and they recommended no changes, and they would continue to monitor the code. Chair Moore noted that the old acronym CAFR needed to change to ACFR. Mayor Paul moved the motion, Vice Chair Chen seconded the motion. The motion carried unanimously by all members present. 6. Interim Audit and AUP Engagements Page 4 Leung noted there was no action at this time and to have this item continued to the next meeting. Chair Moore moved to approve; Mayor Paul seconded the motion. Mayor Paul asks for a summary of the Interim Audit and AUP Engagements. Leung noted that it is for audit year 2022, but we have not engaged an external auditor, so there is nothing to report. Chair Moore asked if it was for the ACFR, and Leung confirmed it was. The motion carried unanimously by all members present. 7. Previous Fiscal Year Management Letter Items and Management Responses Lai presented the Single Audit and Management Letter. She noted that management needed more time as the audit guidance related to the grant received was delayed. Lai reports that they issued a clean report and no recommendations relative to internal control over compliance that rose to the level of modifying the report. Lai discussed the internal control recommendation related to procurement provided in the management letter. She noted that there weren’t references to federal requirements under the uniform guidance. She recommended that management document federal guidance within the procurement policy similar to how the state and local procedures were documented. Chair Moore asked Crowe to reference that specific page in the report. Geerdes brought up the letter. Chair Moore asked for clarification as to the recommendation. Lai noted that the letter had references to city and state guidance. The City needed to include guidance for federal funding. Chair Moore wondered if this should come as a recommendation from the Audit Committee to Council or if it was strictly an internal policy. Throop noted that it would be best to come forward with the rest of the procurement process and then brought to Council. Chair Moore would like staff to inform Moss Adams. Throop confirmed that staff will. Chair Moore asked for follow-up to make sure that Moss Adams was aware of this and to have the procurement policy updated. Alfaro noted that staff will add the federal guidance and bring the completed policy forward. Chair Moore noted the CDBG item, and there was some issue with the CDBG grants and if that would be relevant to the single audit. Throop replied that it did not relate to the single audit. Chair Moore would like us to inform Moss Adams. Alfaro noted that staff will be coming in July with a calendar for the audit committee to create a new internal audit committee work program. Mayor Paul noted that the single audit draft references the CDBG grants and wanted to know if those funds were implicated in the letter from HUD. Throop noted that the City was waiting on a response from HCD and it shouldn’t affect the single audit at this point. Mayor Paul asked what the ideal timing for approval would be. Lai noted they were unaware of the HUD letter, and they did not select CDBG funds as the other two programs were higher dollar amounts. She asked if they could review the communications with HUD. Mayor Paul inquired as to what the ideal timing would be. Lai noted that the single audit would occur in the fall and reports would be issued in December, technically through March 31st as the ultimate deadline. However, due to the pandemic, the OMB and different federal agencies that administered funding have been delayed in providing guidance with the deadline extended to September. Mayor Paul asked if we were having challenges getting this out pre-pandemic. Lai noted that the single audit had never been required because the level of federal expenditures has been below the $75,000 threshold. This is the first year they had to do it. Chair Moore confirmed that staff would be providing Crowe with the HCD documentation they are requesting. Chair Moore thought that the City received $4 million and will be receiving another $4-5 million. Geerdes confirmed and stated the single audit is driven by expenditures. Page 5 8. Monthly Treasurer's Report for March 2022 Leung provided an overview of the receipts, disbursements, and cash balances for March 2022. Chair Moore mentioned that she and Mayor Paul were on the subcommittee to go over the format of the monthly report, and the comments may be reserved until they bring it back to Council. Mayor Paul requested to schedule time with staff to figure out what the discussion looks like. Alfaro noted that staff is working on reviewing the proposed budget document and if a meeting could be scheduled after May 1st. Leung provided an overview of how to review revenues and expenditures through OpenGov. Alfaro noted that OpenGov allows us to create saved views, so if there is a view that the committee would like, staff could create it. Mayor Paul noted that in the past, the data in OpenGov has not been updated directly and wanted to know how the data in OpenGov was tied to the City’s financial data. Is it updated in real-time, a separate updating process, or a hybrid? Leung noted that it was a hybrid. Under the title of the report, it would show you when the data was last updated. Monthly reports are updated monthly, and the annual reports are updated daily. Mayor Paul asked how it was updated. Leung noted that software updated it regularly, as there was an integration between New World and OpenGov. Mayor Paul asked if there were aspects of OpenGov that were not updated that way and what types of data did that comprise. Leung noted that the staffing report was not updated like that, and it was updated annually with our annual budget. Throop noted that it was whenever Council adopted the budget. Mayor Paul asked if a summary of OpenGov data and how they went online, as well as the sources, could be readily provided and requested that we have that documentation for public consumption. Leung confirmed that it can be readily provided. Chair Moore agreed and would like to put it under future agenda settings as a report back. Vice Chair Chen asked if she could tie OpenGov to the monthly actuals from the report. Leung confirmed. Mayor Paul moved items 8 and 9 to the next audit committee meeting. Chair Moore seconded the motion. The motion carried unanimously by all members present. 9. Audit Committee 2022 Schedule and Work Plan Continued to May 23, 2022. OLD BUSINESS None. STAFF AND COMMITTEE REPORTS FUTURE AGENDA SETTING Chair Moore noted that the committee wanted to see the OpenGov data sources and hear about alternate software packages, which would make it easier to have a connection to the systems. Chair Moore also asked for an update on the Moss Adams report. Throop noted that nothing was sent back to the City, and the City was awaiting a response. Chair Moore also requested a staff report and presentation on the public records request she made in regard to Chamber from 2015 to 2021, as there were issues related to policy that she would like explained. However, she was Page 6 not sure if it was within the Audit Committee’s purview. Throop would check in with the City Attorney. ADJOURNMENT The meeting adjourned at 6:00 p.m. Recording Secretary: Janet Liang, Administrative Assistant