Audit Committee - Regular Meeting

Well, they call the order then. The audit committee of Cupertino meeting on 04/28/2025. Would city staff do a roll call?

Committee member and vice mayor Moore? Here. Committee member Wu? Here. Vice chair and committee council member Mohan? Here. Chair Smith? Here. Great.

Well, we orders of the day. Always, you know, I need to learn what those are, but, we don't have any that I'm aware of. So right on to the approval of the minutes. Everyone have a chance to review them before? See you nodding in the head. So I have no changes. Any other well, let's have a motion approved. How about that?

Moore, I move to approve the minutes.

I will second it.

Great. Got a motion. No. Any discussion? Why don't we take a vote? All in favor?

Aye. Aye.

Unanimous, but if there were any others, you could say, whatever. So we got that approved. There were no postponements that I'm aware. Oral communications. Right. We don't have any. And that brings us to item two on our agenda, which is appoint the audit committee chair and vice chair. I'll hand that over to Jonathan.

So, annually, the the committee takes the opportune or takes the chance to to appoint a new chair and vice chair. Typically, this is done in our first meeting of the year, January. Because we did not have a full, five member committee, we decided to postpone it, to the the second meeting regular meeting, which is this April meeting. Unfortunately, we haven't had that that fifth, member yet. However, we just just, you know, be as close as we can into a full year of a new chair.

Vice chair, we decided to move forward with this this item. Hopefully, we'll have a new chair or a new member, a fifth member at our next meeting, which will take place in July. So at this point, I'll turn it over to you all to discuss.

Sheila?

I'd like to nominate Ino Schmidt for another year as chair. Second that,

K.

Good with that. Yeah.

Yeah. I guess I'm good with that. Thank you. Well, I appreciate the the trust you guys put put in me. There there there is a lot of behind the scenes action going on, I think, that we can contribute something. So I'm thankful this is part of it. I think we should have a vice chair too, and I'm wondering, are you open?

Yeah. Yeah. Okay.

Second year. I'm I've been here for a year. Yeah. I started early early last year. I've seen kinda how things are are ran, and we've had yeah. I'm ready to kinda work with, you know, to kinda bring some some ideas

to the. And there's certainly some meetings that I may not be able to attend, right, that US vice chair will go. So we can talk beforehand, but I'm not sure that's all well understood. Okay. Any other thoughts?

Assuming the there would be a an amendment to the motion. So first motion would

That wouldn't really

share. And then we can put them together. It doesn't need to be separate actions. It's just essentially just be tacking on.

Okay. Yeah. Right. Friendly friendly amendment.

Okay. So what's the What do we need to do?

You should set this one. Public comments. Having it pop up? Right.

We don't have any. It's just convenient. So then we just take a vote, I suppose, unless there's any other comments. So all in favor of the two mentioned nominees, say aye. Aye. Any opposed? Oh, so. Great. Thanks, everyone. Look forward to another prosperous year. Yes. Or whatever. Okay. Second item is the we received the OPEB and pension section one fifteen trust performance reports for March 31 and excited to have our normal representatives here in person, actually. I I did wanna say a few remarks before I turn this over to US Bank and and or city staff.

But I did notice in the report there was some proposed benchmark changes. I'm really happy to see that because we've had, I don't know, maybe going back six months or so, a discussion of of lively discussion with you guys as well as internally here on our committee, and city staff has been involved, I know. So I'm excited to to maybe we can focus our we've got limited time. It's a cram packed agenda. It's always that way, Regisan.

But maybe we can certainly focus on what you were attempting to accomplish by changing these indices and what might be the pros to them. And then I also wanted to add in, maybe you can focus on the fact that one of the reasons we are folk we we are paying attention to these benchmarks is it's often a way to help us suggest refinements in whatever management approach might be appropriate at that point in time. So I always look at, well, what's the variation between what the portfolio did versus what the benchmark did? That's a starting point. I noticed on the equity side, maybe this is the second point of focus you can help us with in your remarks today is that there was almost a three percent underperformance by the equity side versus the I'm gonna take it the new index is what I'm presuming that the underweight is relating to.

So I was trying to figure out why would it be off by 3%, and there may be lots of reasons. But it it looked like a couple come come to mind. One is there seems to be from the charts in in in the package, page eleven, twelve, 13, those pages that there's a possibly an overweight in the portfolio to the low lowest smallest cap stocks versus the index. So, typically, maybe you could help us understand that. That is probably a variation.

And I think there's probably a country overweight to The US in our portfolio or the city's portfolio from what I can tell, but it's not that that part's not so easy. And I was hoping maybe in future we could look at maybe some of these main variances When there's a 3% variance, that's a big enough one of the Internet, you know, concerned with or whatever. But it's also a way for us to manage, I think, what's going on. So so with those remarks, maybe you guys can take it from there, and city staff, you'll you'll jump in to You

wanna just go right in?

Yeah. Good points. Good points. Yeah. Why don't we let's see where we wanna get started here. What makes the most sense?

And we got about fifteen minutes out

of here. Okay.

I don't mean to make you talk too fast. But Right.

Good. Well, let's start on page nine. Quick review. Make sure I'm not skipping anything. Yeah.

Let's let's review the portfolio real quickly. Your OPEB portfolio has roughly a $70.30 allocation, 70 equities plus, real estate, and and then 30% bonds. So let's go now to, your benchmark on page 13. And your benchmarks, we've worked with you on these over time. These are what I call the very broad, and and with no negative connotation, we call these the naive benchmarks.

In other words, really broad. In other words, we're not looking at S and P 500 and, say, a mid cap index and a small cap index and a developed foreign and an emerging foreign. We're looking at one index globally for equities, and we use the the ACWI, we call it. It's the all country world index, and net means net of, of taxes on foreign sourced income. So this is, for all equities.

So anytime our asset allocation is not in line with ACWI, we're going to have run the risk of either outperforming or underperforming. Right? The old the idea of benchmarks, the best explanation I ever heard was it should represent the pond from which you're fishing. And and ACWI does that if you have someone like us who says we take a global approach to the portfolio. We're gonna have US stocks and non US stocks.

But in there, we leave ourselves plenty of room to get off of that benchmark because we set large cap and mid cap and small cap and develop foreign and emerging foreign allocation based on our capital markets expectations. And then all of our projection work with, you know, the the most efficient front, portfolios. So we're going to we're gonna be off of Acui on purpose. And I think that's okay as I look at it. It's it's still the benchmark, the pond from which we're fishing.

We are making an active decision to say, here's what we want in mid and small cap. Okay. Then going down the global ag is the benchmark for fixed income. I am recommending, and I'll get to this in a second, I'm recommending we change this. The global ag is sort of the equivalent bond index for all global bonds.

We haven't held global bonds or sorry. We haven't held any non US bonds for three or four years, and I don't think we're going to. I don't see anything on the horizon. So what that means is the global ag, which is a global bond benchmark, doesn't kinda really represent the pond from which we're fishing because we're not gonna buy non US bonds. Now I'd be happy to keep the global ag if you insist because we look better against it. Non US bonds have been underperforming. So so that's not a self serving recommendation. Then you've got a global REIT index. Again, it's global. I would suggest a US REIT index.

We're not investing in non US real estate. And last, you've got, 2% in the in the S and P GSI, which is Goldman Sachs, commodity index. We don't hold commodities anymore. We used to. And, boy, am I glad we quit holding them because it was not a an additive real estate.

I'm sorry. An additive asset class. And then lastly, cash, FTSE three month T bill. That's your benchmark now, and we're reporting against that. And if you go back now to page four, I've summarized my recommendations on changes.

Right now in the top table, we have equities. I've actually seen this written in several places. It it says MSCI all cap world free index. There's no such thing as an all cap world free index. There are indexes that have the word free in them, and I got into a discussion with my operations fault to, you know, buy all of our benchmarks and make them available. And they said they couldn't find one. So I picked up the phone. I called Morgan Stanley, and I dug around in their organization. And I said, do you have anything called the all cap free? And they said no.

So let's clean that up and and change it to the Acuinet. That's the honestly, that's the benchmark we've been reporting. We've just been mislabeling it. I don't know where that came from. Okay.

I'm recommending for the global ag bond index, 29%. We changed that to The US ag for the reasons that I mentioned just a minute. I'm now rec recommending we have 5% in the REIT index and 2% in the commodity index. I'm recommending we change that to three and a half percent in the REIT index, change it from the global REIT to The US REIT, and I'm recommending that we drop the commodity index because we don't own commodities, and we we put three and a half percent in the S and P FTSE global core infrastructure benchmark. We have added global infrastructure.

So we dropped commodities about three years ago. And about two years ago, not in your portfolio because it's not stated in your policy, but we've added about a three and a half percent position in global infrastructure. Global infrastructure is sort of a new one of these burgeoning new asset classes that we're starting to carve out now. The funds that we are investing in for global infrastructure, I've listened to their pitch a few times. And to boil it down, it's basically a blend of technology and real estate. These guys go around and they buy five g cell towers and they convert them I'm sorry. They buy cell towers. They convert them to five g. So if you had to liquidate them,

what do they own? A pile

of scrap electronics and some little bitty plots of real estate. But it's not really a real estate play, so to speak. It's, capturing the the massive spending that's going on in five g conversions. Also, there's gonna be a huge build out of the electrical grid in the next few decades from everything we're hearing. There's still a lot of unspent money on the last couple of infrastructure bills, massive bridges and construction projects, highway projects.

There's a massive bridge near my hometown over the Ohio River in Cincinnati. They haven't even turned the dirt yet, but it's gonna be a billion dollars, and we're looking at investing in funds that invest in these companies that stand to take advantage of what is still a massive amount of federal spending for global infrastructure in. So those are the changes that I'm recommending and the reasons. Now if we if we're gonna add global infrastructure, we would also need to add that in your policy as an allowable investment, and so that would just be a footnote.

Okay. I

With that and with that recommendation, we were also planning on come circling back to this policy and kind of there were some discussions in one of our previous meetings that there were some concerns with some other language. So we would be able to clean that up and as well as being add this type of access.

Yeah. Just to clarify, we're not really we're not addressing the policy in today's meeting. We're we're going over a quarterly analysis that Understand. But we will get to the policy eventually this year. That's that's on our work plans coming up.

But I I guess I'm I'm just I'm going to rephrase so that as far as I'm concerned, we rely a lot on you guys as professional managers to come up with what you recommend as the best benchmark for what we're trying to accomplish from a risk tolerance and a bunch of other perspectives. So, personally, I don't have a lot. If you say these are good benchmarks, let's go with them from my personal perspective. But but I am a little interested in the pond analogy that you were making. For example, let's go back to the equities question that I kicked this thing off with.

It's helpful for me again to look at the benchmark, see that we're underperforming by 3%, and then sort of step back and say, well, are we taking less risk than the index, or are we are we investing in things that aren't in the index? Here's the the major reason. So pawn becomes interesting. It it looks like the MSCI World Free Index is gonna be if I look on your charts, let's maybe make this interactive again. Your your page 11, you've got some description of I don't know if you restated these for example, maybe we should go to 12 where you've got the the portfolio weights.

We can see that there's a little blue box for the 250,000,000 to 2,000,000,000, and I'm gonna call those things small caps. Mhmm. A lot of people call the 2,000,000,000 to 10,000,000,000. You know, pretty small caps nowadays to me. I can't fathom these numbers, but clearly, blue chart here, I guess you're comparing it to the NS the new one that you're proposing here. Right? Am I am I getting that right? The the ACWI, the new proposed index is what the little gray the what

is it? It's the same before and as proposed. The same as it's the Okay.

Yeah. Okay. Because the the previous one didn't exist.

The previous one, we were using the aqui as I got to

the bottom of it. It I don't know how that happened, but let's not go to right now. So so we're we're actually comparing what the index here is on this little chart on the bottom right side of page 12. Page 12 maybe, Jen. Yep. Down there. And so it looks like we're so this is my pond question to go to what your your introduction was. Are are we saying even though the index itself doesn't have much, it doesn't have any that's below, let's say, I'm guessing that the index has got most of it in the 10,000,000,000 range, not even in the lower 2,000,000,000 range. It's gonna it's not gonna have much of this lower stuff. So what what does PON mean when you're talking about

Well, that's good question. That's what I meant when I said before that ACWI is the global benchmark. It's all the stocks in the world. Yeah. As you can see by this chart, it is much more heavily weighted towards large cap Right. Than the portfolio. And the way we allocate large, mid, small, developed, and emerging foreign in the portfolio isn't based on ACWI. It's based on our capital markets expectations.

Okay. And

and I think I think that's fair. I mean, I like to just point out your equities were three percentage points below ACWI in the first quarter of this

year. Twelve months trailing. Yeah. So let's look at that because that's where my our questions are coming.

I'm sorry. I was looking at the wrong column. Yes. Twelve months trailing. You're right. So twelve months Yeah.

Pretty long period of time, and 3% underperformance of our best benchmark. If I'm having to stand up in public and explain, you know, that's not really what we're targeting, but, you know, we underperformed by 3%. That's that's a significant twelve month variance.

It is. And and it's due to the tremendous volatility in the first quarter of this year where the S and P 500 is down four and a half percent and EFA, which is Europe, Australia, and Far East, is up three, I think. We have it on here.

But, again, this is the twelve month period. So if one quarter can certainly distort things, but, you know hey. Right? Okay. That's that's good to know. Yeah. So do we have any as a committee, do we have any what what? Let me rephrase just because I'm talking too much and we wanna get an interactive exchange here. But is when you say it's your corporate capital group that comes up with these, is there any leeway for us to say we'd like to get closer to that index? Would you recommend that? Or or no, you want us to keep with is there a corporate capital index that's a better benchmark that we should be monitoring? I come back to what if if this isn't such a great index or benchmark, then is there a better one?

Yeah. I think another thing that really jumps out of the page is that there's a big delta between the blue bar and the Right. Inner. Like, that between the big big cap, like, than 50 bill is it more than 50,000,000,000? Yep. Mhmm. Yep. And then the the two bars as follows. Like, it's a pretty really big delta. Like

No. It is. Success.

Yep. And and you mentioned that something along the line

of your

investment expectation. Like, what is, what is your philosophy there, like, behind those?

So every January, we and and just about everybody who does what we do, because I read them. We publish our capital markets expectations. We basically say, look. Given everything we know about the valuation of securities right now, the demographic changes, and everything we can wrap our hands around as far as, important policies, here are our expectations for every asset class, and these are generally very long term. So we publish a five year and a thirty year, and we publish this every January.

And, again, pretty much everybody else does, and I I I read ours, and then I read everybody else's. And and this can be done a variety of ways. Usually, it's done with a you start with a risk free rate, and you add a risk premium for each asset class. So that and then what we do is we look forward and we say, we also have to predict the volatility of each asset class and the correlation between them so that we can project portfolios. And we can say, we think this will be a portfolio with with this kind of return and this kind of variability, standard deviation of the periodic returns.

And then we graph those out. We draw a line between them. That's our efficient frontier. And we say, this is where for a client who wants to be seventy thirty, this is how we wanna allocate large cap to the mid cap to small cap to develop foreign to emerging foreign. And also with investment grade intermediate term fixed income and high yield bonds. That's how we create the asset allocation process. And I I can send you that. That's about a 20 page document every January. I can send you that capital markets.

Do you kind of rebalance the portfolio based on that? Is that only once every January?

That's once a year. Now we're very long term in our asset Okay. Allocation. So we do that once a year so that we know, again, for a seventy thirty portfolio, how much do you want in this asset class or not? Then what we do throughout the year is we make very small one or 2% tactical changes two or three times a year. Two or three times. We are not a tactical asset allocator. And and we'll say, look. There's a tremendous valuation, you know, going into the end of last year. The US large cap market was at 20 times earnings.

The the developed foreign market was at 12 times earnings. So the developed foreign markets have tremendous value relative to The US market. And now it just so happens in the first quarter of this year, the non US market did much better, know? Because the valuation sort of sets the stage for that. You need a catalyst that

So maybe I can bring you we were around when we went more detail of you know, we could do it again in the future if there's an appetite. So result of this port I look at the inception to date number because that feeds a lot into the actuarial assumption that that are gonna hit the financial statements of of the city down the road here. And if we keep underperforming, for example, we we picked a a middle of the room portfolio that was seventy thirty that basically targeted a 77% over a long period of time. You could expect that kind of a return. They did.

They did. But that's about what it is. So I guess in the interest of time, I'd like to maybe interact a bit more with you guys. Any questions from the Sheila or Kitty that you haven't sent

me anything yet. If you

have something, you've never asked it.

I had a quick question. I I when we discussed this maybe several months ago, we was going to get out completely from the commodities market. And I know it's a very small percentage. It's 2%.

It's 2% of your benchmark.

Yeah. I don't think we're Yeah.

We don't we don't have any commodities.

Yeah. The actual

is gotten out of it completely. Yep.

Yeah. It it was possible, but it's not Yeah.

Think that table with two polyps, like, you add actuals. Like, there's a current

Yeah.

Current, like, allocations for those.

Right. And and it's on around page 13. But so it sounds like it let's suppose somebody you must get this question. What? MSCI is a world big index for a reason. It's because it's got everything in it. Mhmm. And what what if as a a client we were hoping to achieve what that index does rather than whatever the capital markets internal group that you're I mean, is that even possible, or or there's

It is possible. We can

Well, how

we replicate the ACWI index with your asset allocation.

See, for a while, I think I was thinking that that was what was happening behind the scenes, and then you would come to us and hey, get it. There's been a person you know, personnel change. I'm not saying you, Dennis, necessarily

I understand.

Of course, but that that you know, maybe this committee could look at, well, what are the capital market differences between the ASPE index and the capital markets? And then if we don't have an appetite, for example, to vary by 3% consistently, I don't have an appetite to do that, for example, as an individual, then maybe we could talk about how do we get closer to that index.

We can definitely do that. Now you're ahead of the index on your equities for the long periods for for five years and and ten years.

Yes. That's very good. I'm happy to see that.

And and for the last five and ten years, The US market has strongly outperformed non US markets just until recently.

Yeah. I see on the total equity just to that, on a five year period, I guess the portfolio was at 15.34.

Right.

And the index was at 15.18, which is you know, that's very close. I like that because I don't have to explain to anybody why are we different. So but on a short term one year basis, it's it's off by a lot, and it's, I guess, overperforming on inception to date. But I gotta say I'm a little skeptical on the inception to date because we've had a couple managers over that period of time, and that that's yeah. But but, anyway Understand. But maybe we could so can we focus this on I I think we've hit on something that I didn't I personally wasn't aware of that there is some variation in the capital markets model that we signed up for versus the benchmark that we've been using.

And Well, you're right. And and, again, that calls into question, and I'm glad we're having this discussion, the whole purpose of the benchmark.

Right.

Right. Is the benchmark there just to provide some perspective against which we can look at performance and say, gosh. I don't know. Was that good or bad? Or or is it there because that's what we're trying to achieve? Good

question. Right. What do you think?

I think it should be the former. And the reason for that is we put a lot of work into the asset allocation work. And if you said, don't use that asset allocation work. Just just replicate ACUI. We can do that.

Maybe we need to go back to fundamentals and focus more on that asset allocation model, get get to the long term returns. But it I mean, to me, the index, if if we all are using that as a benchmark, that's that's a good benchmark. That by the as as opposed I can't pull up the capital markets performance other other than looking at my our per portfolio. So it's a little less of a benchmark in my mind.

What what we frequently do is is we will use blended benchmarks just like yours. You've got four or five, but we will use S and P 500 for large, S and P 600 or Russell mid cap for mid, and Russell 2,000 for small. And just use those and instead of using Acqui, and then we'll use MSCI EAFE for developed foreign, MSCI emerging markets for emerging foreign. We'll blend those together. I think that gets a more true comparison of what we're trying to achieve. That's what we typically do. We don't use Acqui very much.

Well, then why are hate to be an outlier when we're in a public arena like we are. It's okay if it outperforms, but when it underperforms, not so good. Maybe maybe there's Jonathan, what do you think? Is there maybe room for going back to the drawing board a bit since these are not in in cement or stone, the benchmarks, we've got a benchmark that follows closer to what the capital allocation model seems to indicate

Yeah.

Then then then I'd feel more comfortable. Right now, I don't have that.

Because you can see by the the bar charts, Acqui is on the bottom right of page 12, Acqui is way more large cap than we are.

Well, yes. We've all just agreed with that. Yes.

Yeah.

Yes. So we're gonna have a building difference there unless we adjust that.

So we can do either one. We can we can move the portfolio to Acqui, or we can change the benchmarks to match the portfolio allocation. If we if we move the portfolio to Acqui, in essence, you're telling us how to manage the portfolio. And I all things being equal, I would rather come in and say you're getting our best thinking. And then so that's, you know, that's where we need to

So, Kira, I'd I'd make the argument that if we expand it to kind of where it's more indicative of what we're investing in, we're gonna be separating that that app into individual pieces. Right? And then you're gonna have to follow it. Instead of having five different types of investments, you're gonna be breaking that up into eight or nine depending on how far you wanna break at that equity's portion. Right?

Or you can just keep it the way it is, and you said, this is kind of where we wanna go with it, or it's it's a good comparison. Not necessarily what will follow, but this is I don't think there's a good way of kinda blending the two. Right? We're either gonna expand the have some investments, and you're gonna have to, compare yourself to those, or you're gonna kinda keep it more general and kind of overall how are we doing across those various

I hear you. So how about this as a as a compromise for what we're saying? We use the best thinking that US Bank can do, which is this capital market portfolio we've signed up for. But you explain in very lame and easy terms variance analysis as we accountants talk about. So for example, there's a difference between because you we've taken a bet on small caps. That accounts for two percent of maybe the variance.

The variance.

Yeah. Just an attribution now.

An attribution. Exactly. If you could give us that, then I think we're Absolutely. Then then we can say, okay. Well, that's all.

I think some of the stuff

you voiced over, like, the global equity outside The US overperformed The US equity q one, but that was not the, you know, it's not the norm. It's the anomaly.

It's

it's not what happened over the last ten years, but, I mean, nothing beat large cap US stocks over the last ten year. In other words, diversification didn't pay off. And all of a sudden in the first quarter of this year, it paid off in a huge way. The the the delta was enormous.

And you can see, Hanyan, on on that chart on the left, on the bottom, the portfolio is underweight to the information technology, which is basically US by a big chunk.

It's like

a on the small caps wherein we're we're underweight. So that's another indicator of a difference in

because we have more real estate. See the Yeah. A little bit more there.

Unfortunately, the percentage, that doesn't impact the portfolio. But in the interest of time, we really have to move on. I apologize. But this does seem like a good discussion. Katie, please.

Yeah. So do we have the global infrastructure, the SSP, FTSE global core infrastructure fifty fifty? Do we have that No. In this chart here to look at? Okay.

No. We haven't invested in it.

I guess

it's not allowed in your policy.

Okay. So It's not mentioned in your policy. Yeah. So before we we're not gonna be looking at the investment policies until October. So I would, you know, of course, be reluctant to agree with this without having any idea how they're performing. And I think it's the, you know, I think it's the global infrastructure in the S and P US, the REIT index.

Unfortunately, of those are small relative to the whole portfolio. So that the good news is the the 63 and the 29 are gonna drive most of the portfolio performance. But this attribution analysis that you're talking about, Dennis Yeah. Can you guys come up with that?

Oh, yeah.

Then we can talk specifics with, vice mayor more down the road because we'll be able to see how each even if it's a small chunk of the portfolio with what the attribution and the return is.

You bet.

Sharon, I'm while the the one year between the the act we and our and our total equity does have a 3% difference there, I don't want us chasing returns if it's an anomaly based on the new president and and other other things. So I look forward to us going back to this policy.

Good. I look forward to that as well as attribution analysis maybe in our July meeting, you know, if if you guys can work on that and Sure. Maybe we'll have a turnaround. That's something else. Otherwise, I think our motion our our action here is to accept the report. So I think we're pretty close to doing that. Yes. Okay. Yeah. Much appreciate your in person help with us, and wish we had more time to delve more in-depth, but I have these ongoing conversations. Absolutely. And get closer to where we need to be. Yep. Much appreciated your comments. Thank you. My pleasure. Alright. Why don't we because we are a little bit under the time constraint here as usual, but

item

four is the receive the internal audit and the fraud, waste, and abuse programs from the auditors, Moss Adams, who I guess are on the line.

Right. I just want to, point out there was a an attachment that was left out of the agenda packet, which was the validation report. We're in the process of getting that printed and provided to you as a a desk item. So it's just, something that's we'll be provide y'all, going forward. It's still relatively new to the community to provide us a supplemental, report. So with that, I can turn it over to else. Thank you.

Oh, Chelsea.

Hi there. Nice to see you all tonight. Really excited to go over the internal audit status report. So this was from the last time we spoke, January 21 through April 21. So the first projects that we have on our list here is the grant management internal control review, and I'm happy to report that we actually had the kickoff meeting for this project today.

So we are going to hit the ground running on this project and start our analysis here shortly. So hope to have something to report to you all soon about that project. Going into, the next project, which is the special revenue fund process review, this one really is gonna be, taking place from August 2024 all the way through July 2025. And the reason there's been some delays due to staff capacity on this one. So I think that we are starting to gain momentum on this project.

We have begin begun our development of preliminary observations. And so for next time, we're hoping to complete our analysis and test work for this project, finalize our observations, and develop that draft report. Next on our list here is the recommendation and the validation process establishment. Really excited for you all to hear the progress that we've made from my colleague Maria here in a bit. But, you know, this is this was a whole fiscal year, project, and it's it's a big one because we have developed the initial tracking spreadsheet, as well as requested the documentation needed to begin that validating those those recommendations.

So we're gonna continue to validate those recommendations, and make sure that the city staff reports are implemented to determine those statuses. So excited to talk about that one with you guys here in in a bit. And I think with that or I I guess I'm a little confused. Are we wanting to talk about that now, or are we going to wait in a bit?

Can you touch on that one now?

Now? Okay. Well, then I will bring give it to Maria.

And we're talking just

about this now. Right. Okay. Thanks. Hi, Maria.

Hi. Good to see everyone. Yes. So I can share a little bit more about this. As Chelsea mentioned, we started this project really to be able to give the city a snapshot into looking at the number of recommendations that have been made related to audits in the past and the great progress the city has made to implement those recommendations over time.

So what this report shows you, I'll kind of walk through it in a little bit of detail since it's the first time you are seeing it. We did include any internal audits that have been done since we started working with the city in 2019. We also included external audits in this process. And so what you can see is that there are 78 total recommendations that the city has been given over these years, and we were able to actually review documentation and validate that 45 of those recommendations have been completed, which is really great news and shows substantial amount of progress from management at the city to implement those recommendations and reduce risks in those areas. There might be some more recommendations that are currently implemented.

There's we sort of haven't gone through all of the documentation, so we're working through with the city to let the city know what we're looking for and what we need to validate some additional recommendations and sort of doing that iterative process to validate a handful more recommendations. So what that means is I hope that in our next audit committee meeting, we're able to show even more progress given that ongoing work. So this will be an ongoing status report. Again, just a snapshot to sort of let you see the progress that's being made on these recommendations over time and really be able to show the impact of this work. Any questions I can answer?

Yeah. Maria, maybe just I'm sorry. I'm I'm a little slow. Everybody knows. But we've got on the screen a nice summary chart, and I'm I'm wondering if we can maybe review what the columns mean. The total recommendations, I think, are pretty obvious. I guess that's what came from each of the list of reports. So I get that. Then the open recommendations not yet completed by the city. What's that column again? What what's that mean in terms of open?

Yeah. Great question. So, really, that just means that those are in progress. Again, there's some of those, maybe a handful of that 33 that we are just working with the city to validate. So there might be a handful of those that actually are complete, but we just haven't validated them yet since we just started this process.

And we, again, we were able to get through 45, but there are a handful more. But the remaining ones are ones that are just in in progress likely. Oftentimes, there are different priority levels for when to implement these recommendations. So it doesn't mean anything necessarily bad or a negative indicator or anything like that. I think, generally, what we are looking for is to see the continued progress of those recommendations being closed and for any high priority ones to be closed as well.

And then, again, that column c, those are ones that we have validated. So we validated 45 since January, and this is the first time we're reporting. So in column d where it says reportable recommendations, you're gonna see that full number of 45. But in future quarters, when we report this again, you'll see a smaller number there, and that will just show you what the difference is between, the total number we validated, which would be in column c, and the number we validated since we reported to you last so that you'll be able to see that progress.

Great. Thanks for clarifying.

Absolutely.

Any other questions? Quick question about Yeah.

What, open recommendations are. So, it's, recommendations not yet completed by the city, and it could also be recommendations not yet validated by by you.

Yes. Exactly.

So it doesn't necessarily mean the city hasn't gotten to it. These the third okay. Thank you.

Mhmm. Absolutely.

I guess as a theoretical question, Maria, some of the recommendations could have had less of a time restriction on them. They were, like, future looking, let's say, internal control changes or something. So when you validate, you're validating to a historical point in time, like, right now or when you started or how do we look at questions like that?

Yeah. We're basing it on the current time, so whether or not they're validated now when we're looking to validate them. Is that what did I understand that question correctly?

Yeah. I guess so. Even though now, tomorrow, it's it's quickly out of date. So how how current are is the validation call? Maybe that's another way. There it's gonna be different dates and time and different kinds of recommendations.

It's gonna be as late. It's, validated as of April 7.

Okay. Gotcha. So next quarter, we're we'll see something with a different date. Then so does that mean all of them are so let's say

So I think to I think to answer your question, so I can totally I think I think I understand where you're going with this. So it's it's validated based on that point in time, and, certainly, things do change in the city. And that's why it's really important. We do an enterprise risk assessment, as you know, every few years with the city, and so that's an opportunity for us to look at risks again. So there might be something on here several years from now that we look at again, right, because things do change.

And so that's how I would say we sort of do that ongoing risk monitoring. But in terms of this reporting, it's what was the recommendation at the time? Is it validated at the time we're reviewing it? Yes or no? And then later again, that risk may come up or be reviewed again in the future.

Gotcha. That's that's what that was my question. Thanks. So it was valid in some point in time in the past.

Right. Yeah. I see what you're saying. Mhmm.

Yep.

Yes. Thank you. So this is the informational item to receive the internal audit and fraud, waste, and abuse program update. Correct? Yes. K. So this is what we were handed was the internal audit work program review, which is item five.

Well, it's also this column in their report.

Okay. So my expectation was to hear

more. Our mistake. The the title is incorrect on the the desk. It is relating to number four. Just the wrong title. Four. Okay. The work program is related to next year's Next year's Yes.

The next okay. Got it. So I guess I'm not quite sure how these recommendations the the the findings and recommendations kind of fit in with the fraud, waste, and abuse

It's separate.

Program. We

did speak

to internal audit plan and fraud waste abuse. So covering anything that was in the internal audit plan for the current year, which just is one of the items that was to go in the recommendation that had been previously made. That was part of the audit plan in the current year.

Okay. What we could

do if you'd like in the next meeting, we can separate the two so that's a little more clear. We were trying to consolidate and see that it was already a packed, meeting, try to Okay. Get out here by 06:00. So we if if that's the the the to make it easier in future, meetings, we'll we'll separate the two.

Understood. Okay. So are we gonna be looking at the the complaint report? That was the the first re oh, no.

No. It's the second page, Joan. That second

page.

We we didn't get through this to the Yeah. We didn't finish the status report before

There it is.

I jumped over. So yep. Chelsea, go ahead.

Perfect. Thank you so much. So getting back to, the status. Thank you so much, Maria, for talking about those that recommendation validation process. It's great to kinda connect the two.

The last one on that list, really quick before going on, to this page, I just wanted to point out that, you know, another part of our internal audit program is our ongoing internal audit services. And part of that is us being here today as well as helping with the fraud, waste, and abuse hotline and help monitoring that. So that brings us to page number two, which is what we're looking at right now, the fraud, waste, and abuse hotline statistics. So the first table that is showing us, what happened current so from the January to April timeline, from the last time we met, there was four complaints that had come in. Two currently are under review and two have been closed.

All four complaints were, referred to appropriate city officials, and these really involved compliance and ethics. I know, you know, after receiving feedback from you all last time, we did make two additional tables. So you'll see right below the the first table, one showing the hotline statistics, the lifetime. So the hotline started, in October 2022. We have had 33 complaints, in that span.

26 reports have been closed, and seven are still open. So the last table at the bottom right of this page shows, those days outstanding. So currently, these you know, the city is still working through them, and so I did wanna provide that statistic for you all since you had asked. I will open up for any questions or comments.

Super. Kitty's got one.

Okay. So the days outstanding, you've got five that are about a year or more, and that seems unacceptably long. What is accounting for that? And is it is it a city issue? It's you know, who's doing whatever investigation on this? It it sounds like the council needs to, be made aware of it. Any thoughts on that?

Yeah. So all seven of those reports and, you know, including those five that have been over that are, you know, over a year old, they have all been referred to appropriate city officials. Currently, those are sitting with the city attorney, and I know that there has been, you know, some there's been some turnover recently with the city attorney's position. We have reached out to the city attorney, and, you know, the city attorney is aware of these seven outstanding reports right now.

Okay. So we do have a new city attorney, but it looks like the prior city attorney sat on these outstanding reports and didn't do anything.

I would not, make that assumption. Investigations do take time, particularly if they're related to upper level management or elected officials. Typically, an external investigator is engaged. So, we don't actually know the details of the investigations in progress, but they tend to take quite some time. We are trying to get more information from the city attorney.

So who has the authority then to find that information out? Is is it something that the city council can, in closed session, say we wanna have an actual, you know, status update on each and every one of these? Do you have somebody actually working on it, or is it just know, gathering dust somewhere? Is it is it your authority? Is it the council's authority? Who gets to find that information out?

I would say both. So we're trying to follow-up with the city attorney and understand understand the status of these, where they are in the process, and I think it's appropriate for counsel to also ask the city attorney what the status is. As a reminder, the details because of California whistleblower law, because we don't wanna compromise any investigations wouldn't be made public or shared unless you're on a need to know basis, but the status report is totally appropriate. And, if I were in your place, I would ask. Yeah.

Thank you.

Super. Any other questions on this element? I think we're good. Appreciate your, adding those extra charts in. I think it's much more for us. It's very responsive. Thank you.

Thank you.

Guys, stay on the screen. I think we're our action item here is to receive these reports, and I think we we received them. I appreciate it. Quarterly activity here. You guys are also up on the item five, which is now the internal audit work program.

I'd like to just make a couple of quick remarks before we get into this section too. I've separately had the chance to talk with Chelsea and Colleen, and and I think it's very helpful to get your experience on the role of of the audit committee. We we're we were just talking earlier at this meeting that we've got a fifth member who's yet to

be

identified. Usually, the fifth member's already on board, but, it's a matter of course that we have turnover in the committee. That's some of that's what we have to deal with. But I'm thinking, a little bit more clarification on what your experience has been is is is helpful. We also have questions from the public. What's the audit committee doing? I know I've got a few of those kinds of questions. It is helpful to have a a benchmark. The government finance officers association's got some best practices that some of your reports have alluded to. I know I've alluded to them when I stood in front of city council, and so that's best practices that we like to hold ourselves to.

And I was rereading it, and I noticed that in there, it says the committee itself should look at its scope every five years or if not sooner. So I just wanted to preface that with I I think what we were what I was thinking and we're asking you guys to do is just give brief thoughts on on what the scope of our of a of a best practice audit committee is, and then maybe our future meeting, the next meeting maybe in July or later if it's appropriate, have a little bit more in-depth description that that might be, you know, not a long involved, but, again, what are the resources out there? What have you guys seen? What what what are we currently looking at? And, again, I I think I've talked with city staff who's open to that as well.

So I I wanted to preface this section because you are reviewing your your work program for the year. This is kind of an extra extra little added on cherry for us as the audit committee. But thanks again for you guys coming, and let me turn it over to you.

Great. Thanks so much. And would you all like us to share our screen, or are you gonna or would you like to put the presentation back up?

Yeah. If you could share your screen, but Janet maybe is the expert here. What works better?

Alright. So,

for those of you who've

been on the committee for some time, we're back again to plan for next fiscal year. We're getting toward the end of this fiscal year. And so we'll do a little bit of an overview of our internal audit function, as Eno mentioned, the committee's role. And then, Chelsea's gonna present our proposed work plan for this coming fiscal year. Our goal is to get that approved by council before the fiscal year starts.

We have a lot of work that we like to accomplish, so we like to be off and running, July 1. If you could go to the next slide, please, Janet. So as a reminder, the city retained us beginning in 2020 to serve as the city's designated internal auditor. We focus on ultimately reducing the city's risk. So we look at internal controls, look at operational efficiency and effectiveness, alignment with best practices, and compliance all in the surface of reducing risk so that you can serve your community more effectively.

We do our work for you primarily under AICPA consulting standards or generally accepted government auditing standards. And what that means is everything has to have sufficient and appropriate evidence in order for us to make the recommendation and that the recommendations have to be feasible. On the next slide, you'll see the IIA's three lines model, and we really like this in terms of being able to really communicate what's our role, what's your role, what's management's role. So the Institute for Internal Auditors put together this lovely graphic. It's basically a three legged stool.

That is how we I how we are transparent and accountable, how we are good stewards of public funds. So the governing body council and audit committee operating on behalf of council is really identifying the what. What do we want management to do? What do we want internal audit to look at? And you are ultimately accountable to the community, to your residents, and to the public.

Management is then the how. So you say what, management determines based on their expertise how we interpret things. And then we, as your internal auditor, we provide that objective and independent assurance that your strategies are actually being achieved, the policies that you lay out are being achieved, and that things are again being done in an efficient and effective way, and you're being good stewards of public funds. You'll see on the right hand there your external assurance providers. And Sofia's here.

She's your, she's your dentist. Right? They come in once a year, and they check and see how well did we do things, and they're backwards looking. Internal audit is kinda today, current current state. And then we work together to identify any opportunities for improvement, any kind of major risks and controls that we're seeing.

So as the audit committee, what you are really tasked with is looking in-depth at our internal audit reports, being that liaison to counsel and saying, here are things that we really wanna focus on. In a resource constrained environment, there are only so many things that staff can implement. There are only so many things that we can look at. So what are the most important things? That perspective of being on the audit committee is really critical in terms of focusing council's work every year and focusing staff's work and focusing your strategic plan over the course of several years.

So on the next slide, you'll see what goes into our internal audit work program. We take a couple of different, things into account. We watch council meetings. We look at resident feedback. We look at kinda what's happening in the news to see what's happening in that external environment. We talk to staff as we're doing our work. We go in and talk to folks about how things are going. We review data and performance metrics, and then we conduct enterprise assessments. So you'll recall we conducted an enterprise risk assessment just recently, and then the city had an internal controls review done, several years ago before we started working with the city. We used those results to help drive our assessment of risk and prioritization.

Then we, again, take those opportunities at what's most important to look at. And as we've talked about a couple of times, we also track implementation. So we've just started that recommendation, validation, and tracking as well as corrective actions that are taken on behalf of staff. And then we monitor the fraud, waste, and abuse hotline. And then on the next slide, we have just kind of that picture of what do we look at.

Right? So over the course of several years, we want the internal audit function to really look citywide holistically from a risk based perspective. What's the most important thing for us to look at. So down at the bottom, you'll see a big list of city functions. We kinda check try to check off all those boxes over the course of several years through those middle boxes, again, that risk controls and performance so that we are addressing things from the most holistic, perspective possible. And I'm going to hand it over to Chelsea now to talk about what we've done in recent years and what our plan is for next year.

Thank you so much, Colleen. So going on to the next slide, this is a great graphic because it really shows everything that we've done so far, at the city. So as you see, we have done, multiple internal control projects. We have also done performance and efficiency projects, five to date, currently working on that special revenue fund process. We reviewed over a 139 policies within the city, had 33 reports at the ethics hotline.

We've delivered 52 recommendations, and I think, a really good highlight also is that enterprise risk assessment. As Colleen mentioned, this really is a key component into what makes our internal audit programs, and we did that in 2021 and again in 2024. So we've made a lot of progress, at the city. So next slide. This also just gives you a graphic of the departments that we've covered, through those different programs and projects over the years.

So the administrative services, we've hit procurements. You know, we've looked at finance policies and procedures, the budget process review. We're currently working on that grant management internal control review as well as the special revenue fund process. The city manager's office, this was huge. This was really the development of the fraud, waste, and abuse program, as well as public works.

So we have looked at the capital program in 2022 as well as the library construction audit in 2023. That doesn't stop there. You know, we did look at those enterprise risks risk projects, and those assessments really cover all the different departments within the city. We've had enterprise leadership as well. Policies and procedures, we did those in 2024, and those at all the different departments within the city, as well as the recommendation validation that Maria shared with you a couple of couple of minutes ago.

So really great progress made within the departments. So next slide. So as Colleen had mentioned, you know, there's a lot of different inputs, when when thinking about our internal audit projects, looking at those results from the enterprise risk assessment, receiving feedback from both of those employees as well as residents, and looking at performance metrics. So through those results, you know, there was a there was a long list, as you can see, of different types of internal audit projects, that we could perform for this next fiscal year, looking at performance projects, permitting efficiency study, a CIP implementation, as well as internal control and compliance projects. So we'll talk about this in a bit, but the council wide policy review inventory similar something similar to what we had done when we looked at all the departments within the city as well as the finance policies and procedures, but taking a deeper dive in those council wide policies.

A citywide internal control review, look a review and recommendation of the investment and cash flow policy as well as credit card testing. And then, obviously, very important to keep up, that recommendation and validation. So that's really program management, making sure that these recommendations are coming into place as well as that ongoing internal audit services. So a lot of different projects to come and look through. But if we go to the next slide, we have proposed to you, you know, four projects that we think will be really meaningful for the city at this time and place.

So number one has actually already been approved by the city council, and that is the council wide policy review. So this will be very similar, reviewing and providing recommendations to align council policies with best practices. The second, internal audit project that we wanna focus on is a citywide internal control review. This is very similar to an enterprise risk assessment where, you know, we're looking at the different inputs and outputs within the enterprise or the city. This is really doing a deep dive at those internal controls, specifically within the finance realm, you know, just to conduct what's the inter city's internal control framework, and really what are those important internal controls that are in place to protect city assets and resources.

The third proposed project is looking at a review and recommendation of the investment and cash flow policy. So reviewing, comparing to best practice recommendations over the city's investment and cash flow policy. And then last but not least, our ongoing internal audit services. So like I mentioned before, that is, you know, us attending our audit committee and council meetings, preparing those status reports, monitoring the fraud, waste, and abuse hotline, as well as that recommendation and validation process, continuing that process and seeing the the status and success that the city has made. So next slide, I think, after this, we do provide you all with some resources.

So, these resources really complement what Colleen mentioned in what makes, you know, the internal audit program, the different types of best practices needed, but, obviously, opening up the floor to any questions or comments for you all.

Kelsey, I'm just wondering. Is that you or Pauline in that kayak that's going down?

I wish. You know, that's a great marketing technique. I like that.

Yeah. It's a great great presentation. Any thoughts, questions for Mark and Min?

On the slide nine, like, I see this, like, sixteen weeks, 40,000, and then eight weeks, 10,000. Like, what is the dip what is driving the the difference in the weekly rate? Like, is it just, you're you're more staff on number one? That's like, if I just do the math, like, 40,000 for sixteen weeks, that's higher weekly rate than eight weeks, 10,000. Like

Yeah. We don't staff people full time by week. It's really per project. And so it's an estimate of how long the project will take that's based on the amount of data we collect, analysis we do, as well as staff time and capacity. And so it really is we we charge the city an hourly rate based on our different staff levels, so it's also a different blend of staff. But it's not one to one based on the different type of project.

K. Okay.

So thank you for the report. With regards to the, the CIP implementation, what is it exactly that you're going to be looking at?

So we don't recommend that for next fiscal year given our budget, but it was a potential project that came up, during conversations with council members particularly. So there is interest in, the capital program study that we did a couple of years ago, helping with implementation support. So developing policies and procedures, helping to facilitate an update of the capital planning process, roles and responsibilities, things like that. So that's a potential project, but not one that we necessarily recommend for next fiscal year just based on budget.

Okay. Thank you. Is would any of this for for your recommended projects, would any of it cover vehicle replacements at all, the vehicle replacement policies that we have?

Probably not. That would be kind of a operational citywide policy, which would have been in the policy inventory and analysis that we just presented to you all last month.

Okay. Thank you. And then also, would anything cover the credit cards and, including Home Depot and other charge accounts that we have?

Yeah. So you see on this potential list, we have credit card testing as a potential project that we could do as well.

Okay. So with regards to that testing, we have the, like like, something that functions as a P Card, but we also have the Home Depot account, and there's a there's another account that's able to be charged off of. Would you be looking at all of the potential charge accounts?

Yeah. If we were to do that project, we would gather all P Cards, all related credit cards as our sample population, and then we would conduct testing to see if the purchases are in alignment with city policy.

Okay. Great. Thank you.

I had one question about the the spreadsheet the the chart that shows departments covered. Sort of footnoting that that page, you have something called enterprise leadership, which in '23, which I'm assuming took was took place in 2023. Is that what the '23 represents?

Yeah. Correct. We did a study that looked at the city's governance environment as well as how departments, and the city manager's office made decisions, and we did present that to this committee and council. You may not have been on this committee at that time.

Oh, I I think I was. Right. But but my question is, is that something you would do once a year? What what is the recommended

Well, it would really be up to you all if you wanted to redo that study. What we are currently engaged in is validating that the recommendations have been implemented. So you saw on that chart that Maria presented that several of them have been implemented or or are in progress. And I would say for a study like that, unless there's a significant event, we probably wanna do that maybe once every five years if you have interest.

Okay. So once in five years would be the norm?

I think so. Yeah. And some folks are kinda one and done. Right? But depending on how much is happening or how how much interest you all have in your governance and leadership environment, we can definitely do that more often.

Thank you.

I've got a question about the citywide internal control review that that seems right up the audit committee type of, the traditional audit committee. I'm not sure it's within our scope the way way it's written right now on the municipal code. But when I look at the GFOA standard best practices, they've got a a pretty blanket audit committees look at internal controls.

Mhmm.

And that that's a lot like what I see in industry, which I'm even more familiar with. But can you amplify a bit on what I m two is gonna do? I know you talked a little bit about it, but it seems like a really, good project.

Yeah. Absolutely. You know, this one is really great. It looks at the internal controls, and it's really usually I like to think of what you think would be material on your balance sheet and income statement. So the processes that make up those material accounts.

So, obviously, looking at cash internal controls, revenue and AR internal controls, What are our internal controls around fixed assets, and how do how does the city, you know, really protect those assets, you know, and and how does that work? And so, really, we we look at current policies as well as processes, gaining an understanding with interviews, with different stakeholders involved with, you know, protecting city assets. And then once we understand those internal controls, we do do some testing of those internal controls so that we can see that, you know, what we believe the internal controls that are in place, and we'll we'll actually test those internal controls out for recommendations. And then we provide the city our report really is like a table that provides, you know, recommendations, and we also provide, you know, the likelihood of risk and impact of risk for those, you know, recommendations or findings that that come out of out of our project.

That's very help You know Go ahead.

Recall that the city had a internal controls review done back in 2019. It actually was kind of the start of, having an outsourced internal audit function was having that project done. Since then, there has been a tremendous amount of change made in terms of city policies and processes. Staffing is really different, and so we really think this is the right time to then level set again where are there control challenges, where control's strong, so then we can really focus our work.

Yeah. I'd I'd like just to observe, and maybe you can comment later in in today's meeting, looking at a letter we've all already all read it, the that the external auditors issue is as part of their external audit, but it's only done in connection with their financial statement audit, and we can't really rely on it quite in the way that you you guys are gonna be providing. It sounds like a a much more user friendly internal audit or internal control review that that is different than what the external auditors produce.

Absolutely. Yes.

Great. So I I is there anything these projects have all been not quite approved that when we forward this report, city council then makes the decision whether to continue or city staff is already on board with these, I presume, since you wouldn't bring them to us without having had some discussion already with city staff.

Correct. Yeah. So we Moss Adams and and staff discussed what what's both what they are able to take on as well as our own staff. Right? So we can't pile on even though we would like to, pile on more projects than what we we have in capacity.

And and so we felt that this was a good blend of what, you know, the city's objectives are. It's not to say that this is the final list. Like last year, I think we had one additional, last minute, recommendation by the audit committee. When we went to council, we proposed we we presented this is the audit committee's recommendation, but staff does not doesn't have the capacity to add that additional project. And so, therefore, we recommend, like, Moss Adams and these are the the staff had recommended at the audit committee.

That's very helpful. Right? Reason I'm asking these questions is our action item is to forward this report to city council so we can forward it with our comments or or however else we wanna go. Katie, you've got a question.

Real quick. For Chelsea, for item two, you mentioned fixed assets. What how are you defining that?

So that would be, you know, the capital assets that the that the the city has on their financial statements. So, you know, you can clearly look at the definition. If you look at the financial statements in the footnotes, it will, you know, give you a definition of what the city deems as fixed assets or capital assets.

So is that something we could receive offline from staff? I'm sorry. Can you The from our financial statements, there's a definition of fixed assets. So my question is well, what I wanted to get at was whether or not the vehicles that we have, is that being counted, or is it something else and whatever definitions you're using in the financial statements? Sure.

Let me provide you with our current capital pass asset policy states. We are in the process of updating that. So shortly, our we should be able to provide that to you, but I'm hoping that Greg Greg, our purchasing manager, who took the lead on that, would be able to complete it by then. And what he's been working closely with finance staff and and and public work staff to to to refine some of

the

the definitions and and how they are applied.

So we could we'll we will receive the audit. We'll receive what we have and Correct. You know, if there's something there that's being updated. Okay. Thank you.

What I'm thinking we might as a committee do is have a motion that reinforces our committee view that these projects recommended projects should be approved by city council. Suppose something like that. I I don't know what good our our what we're dealing with the recommendation really is, but that's one way we can approach this. What do you think?

Just approve the recommended action, which

is Which is to forward the whole report. Yeah. When these are recommended projects, so I guess by

next year.

By default, that means we agree with the recommendation.

The first item says already approved by city council. Right? So the second one needs more clarification on what is fixed asset versus capital asset.

We could do that unless

I think assets are just in general. Right? So assets could be capital assets as well as cash. Right? Right. So it's more general. Okay. Whatever's from and Paul and Chelsea, correct me if I'm wrong. It's more of the materials. Right? What what is material? If we're cash is quite material, it's a very crunchy capital assets, but how are we gonna inventory pencils that are we gonna put our resources towards that? And so I think that's really what they're doing focusing.

Good. So why don't we have a motion?

Moore, I move the recommended action that we receive the internal audit work program and forward to the city council for approval.

There is a second. Second. Alright. Any more discussion? I think we're good. All in favor of I'm sorry. We

just need to say public comment. Sorry. It's just No one from the public. Great. Right? Still

remembering it.

Yeah. Yeah.

Okay. So now we're gonna change the so

So after the recommended motion

I know. I've got my cheat sheet.

We were a little backwards. I just just wanted to get it on there and sneak it in right before.

I've got my cheat sheet. I'm sort of refusing to have public comment when there's no one from the public here. But okay. Thanks, though.

We can to you about we can say

thanks, Patrick.

Please do. Mark, if we still need to ask him.

I'm gonna violate the rule. But okay. Appreciate your thoughts.

And there

no one online?

They don't take we don't take online

Oh, they can't ask about the commit.

They just watch. Right. Right.

Right. So all you out there in the audience, feel free to forward an email to city staff in particular or us. But in the meantime, we're at the motion. We're about to vote on it.

Okay.

So all in favor of the motion, aye. Aye. Unanimously. So very good. Thank you, Chelsea, Colleen, and Maria. And we will see you again next quarter, if not sooner.

So Hey. Quick quick question.

What is our contract amount with them?

It's set for a 100,000 per year, so we'll have to cancel who's available to the contract.

Because how much was that?

It's one point.

Okay. So item six, our our current next item here is the annual review of the city's investment policy. And I hope we've all read that because it's got some good stuff in it. And I think I just turned this over to Jonathan. Why don't you practice through it? I'm not sure. Is Carlos online?

He is. I'll have a break in,

then I'll

hand it off to to Carlos to finish up. So the the investment policy is brought to council or first brought to audit committee each year before providing it to the city council for approval, and it typically, covers the the listing time period to the the end of the following year. That's one of the the changes we had last year, so it'd cover from when it was adopted till the end of the the fiscal year, which which is now June, thirtieth twenty twenty five. The objective, the policy is, safety, ensuring the preservation of BP assets, liquidity to meet the the operational needs of the the city as well, followed by you. Chandler has made a a handful of, recommended, changes, which include best practices enhancements as well as some minor clarifying language.

That, I'll turn it over to parts.

Thank you very much, Jonathan. Good evening, everybody. Can you hear me okay? Yes. Excellent. So as Jonathan stated, we did update the investment policy. We collaborated with staff to do that. This is an activity that we undertake every year. That's something that we did upon the engagement of of our services. We did a deep dive on the policy. And every year, we come back and revisit. And and collaborating with staff, we come back and look at different sections whether they need to be updated or not. Code changes almost every year. Not every year, but almost every year. And not all the changes that code, implements are necessarily advisable, but they mostly are, and we capture those wherever possible.

Oftentimes, we get consulted, by lawmakers when it comes time to update the or to update California government code, so you're always getting the latest and greatest. Having said that, the city's policy is robust. It's in very good shape. It continues to do its job of safeguarding the city's investments and funds. It is still designed to deliver safety, liquidity, and return as its objectives.

There are some minor changes for this year. I I will summarize them. And then if you'd like to get into the into the weeds, into the actual red line, I'm happy to answer any questions. The first is that we we recommend that the city include just a phrase, a catchphrase that states that credit quality, minimum credit quality requirements applies at time of purchase. You may not be aware, but California government code, as it as it pertains to your investments, always applies at time of purchase.

So, for example, if, if a security gets downgraded beneath the minimum credit quality, California government code doesn't require you to immediately sell it. It only requires that when you purchased it, it met the minimum credit requirement. We we like to do that because we want the city and with our advice to be in charge of deciding when to sell out of a security and whether it's advantageous or not. Obviously, the point is to try not not have any securities that get downgraded, but we wanna have a policy that basically takes into account any contingency. You currently own federal agency securities.

These are securities issued by government sponsored enterprises and agencies of the federal government. You currently limit yourself to 25% per federal agency issuer. There's a handful of them. They're considered very safe. We are recommending that you up that to 30%.

California government code currently has no issuer concentration limit. In fact, you could by code, you could buy one federal agency bond with your entire investment program and let it sit there. That that's not prudent. So we helped the the city develop a limit of 25%. Given the relative safety, and and just how liquid they are, we are comfortable going up to 30, and that's a best practice.

That's not anything out of code. Thirdly, you currently are allowed to purchase and do own pass through securities known as asset backed securities. These are bonds where your principal and interest payments are made back to you, from pools of receivables, pools of loans. They're very safe. They're highly rated.

They're rated in the oh, the ones you own are rated triple a. But every once in a while, this this the paragraph that allows these is revisited. And a little while ago, not not too long ago, lawmakers revisited this paragraph, and they carved out pass through securities, that are that are issued by federal agencies. And the question becomes, are pass through securities issued by federal agencies governed by the code paragraphs that discuss federal agencies or by the code paragraph that addresses asset backs and mortgage backs and all other pass through securities. So code recently changed.

Senate Bill eight eight two classified mortgage backed securities that are issued by federal agencies as a federal agency. Your investment program has always treated them that way, and your policy was written to kinda capture it that way. We firmed up the language to make it very explicit, so now it mirrors code a little better. You have language permitting money market mutual funds. You utilize them in two ways.

Number one is a sweep vehicle for these investments, which, reside at the city's custodian. You also utilize them as a cash deposit tied to your bank account so that when you're not using that cash, you can earn a little bit more yield. That's been a good yield maker for you, over for some time. You have minimal language that addresses the use of money market mutual funds. We've updated that language to better mirror what's actually in code.

It's a little bit more descriptive. And then lastly, the the policy had never included local government investment pools. These are pools of of investments that are run as joint powers authority. They're allowed under California government code fifty three six zero one paragraph p, if my memory serves me right. And they are typically a a a liquidity vehicle, a place to be able to park cash for the short term.

They look a lot like a money market mutual fund. The ones that exist in California are highly rated. They're well governed. The the money managers that manage them, that they've been hired by the JPA to manage them, they they're they're generally considered pretty strong managers. And and the management, the the the the boards that govern these, well, they're made up of public finance officials just like the people that, like like like on your staff and other treasure tax collectors and people that are really knowledgeable.

They're a good alternative to liquidity vehicles, and we think that's prudent that you have it in your investment policy. That is, oh, one more. I didn't include it in my memo, but there is one more. California government code recently changed with senate bill fourteen eighty nine. The staff reco the the staff report captures this in your board packet or in your committee packet.

Senate bill fourteen eighty nine placed a limit on trade settlement periods. Here's what this means. Sometimes, especially with municipal bonds when they're purchased, sometimes the the settlement the way that it works is you enter into the trade, and then the money doesn't get, exchanged until a few days later. Some municipal bonds, when they're traded, have a settlement period that's called TBD to be determined. And and code doesn't want you to have to be sitting around waiting for that trade to settle for too long.

So they placed a forty five day limit on that trade settlement. We incorporated that in your investment policy pursuant to senate bill fourteen eighty nine, and and we think it's prudent for you to have. Those are the changes that we have for this year. Perhaps you have some questions for me.

Yeah. Why don't we cover those? I should we just go right into the red line investment policy? I think we've we've got some additional stuff there. Did Carlos or Jonathan, you wanna track us through the investment policy, or we can just take questions at this point?

We'll take questions on the individual Perfect.

I know I've got a few, but why don't I throw it open? Any committee members, any clarifying questions of what Carlos said or on the investment policy itself?

Katie? So thank you, Carlos. For item 16, the local government investment pools, that would include something like California class?

Exactly. That's exactly right. Cal right now, the the pools in California that would fall under this qualification would be, Cal, Caltrust, which has been around for quite a while, CAMP, the California asset management program, California CLASS. And you you may or may not be aware. I may have mentioned it a few meetings ago. Chandler is about to launch one of these as well. We're not there yet, but there are some that are available right now, and it is prudent to have, have them allowed in under the policy.

Okay. Thank you. So I've heard that our Wells Fargo account we have a government account that's making 3%. And when I'm looking at California class, it's at 4.4%. So I don't what I'm not seeing in this investment policy, and I don't know where this this policy should exist, is how much money should we be keeping in the the the the government interest bearing checking account versus moving it into something like the California class or or one of these others that you're mentioning that I have not heard of yet. So where

So so nothing like that is in the policy, and we don't necessarily recommend it. And the reason for that is because we recognize that funds that flow through the bank account are very fluid. They're very fluid. Sometimes the balances are high. Sometimes the balances are are lower.

It depends on the on the season, especially when you when you're collecting sales tax getting passed through or property taxes from the county or maybe, development fees and all the revenues that you have. Not only that, but it it sometimes these pools don't outperform the money market mutual fund that you have. It really varies. So when you lock yourself into actual set dollar amounts, especially when you have a program that may be shrinking or growing, it can put some interesting, parameters on there that are not desirable for the operation, and management of the of the investment program. Obviously, that's a component that we, as your investment adviser, do not manage.

That movement of cash is really subject to the cash needs. So so that's why, usually, there are not policies written around that. What you do have instead is you wanna make sure that they're included. The options are included so that staff can be nimble enough to be able to jump from one to the other. And you did not have local government investment pools. I'm trying to remember the reason why it wasn't there, but it should be there. We had a discussion with staff, and staff agreed that it's time to add it.

Pardon? To add what exactly? Or just just the mention of the the investment pools, just to mention it. So I there was from there is from the the state treasurer some information about the cash sweeping and having a a policy regarding the sweeping of cash out so that you're not holding so much in a lower interest account, and then you have a policy to continue to move it into something that's gonna bear more interest. You know, as we as we knew early last year, we had an account that was growing, not making any interest.

So it it would be great if we had some policy sitting somewhere to just I mean, for for the public to ensure that that we're always trying to to go for the highest and safest

as well yield that we can. So I I perhaps staff could make a suggestion on how that sort of a policy could happen within our work program. Certainly. So last year when we were discussing with Wells Fargo, our bank institution, that was an option, whether we wanted to sweep the funds into, each night, and we would earn interest on it. Depending on the market, it could generate more than 3%.

However, that would go into a money market fund, which is also a, where Tremler invested. So if we have a large amount of money in our checking account and it gets swept, and then we also have funds sitting in our investment. You don't necessarily know the left hand and what the right hand is doing, and we could if we have a limit, which we currently do at 20%, we could be in violation. So at any given night, we could have a greater amount of total investments reaching in excess of 20%. For that reason, another option to the city was this this this government checking account, which we generate 3%.

And on top of that, it's also secured. It's insured by the FDIC. So if if there was any issues with with not saying that there would be large bankruptcy or anything of the sort where we lose money, this was to us the best approach. It was both safe. It had some a safety component. It was very liquid, and it was also yielding a 3% return, much different than what it put as a checking account we previously had.

Okay. Thank you. I guess to that point, I would want to see that written down somewhat. Yeah. Make it more concrete that that's what we're doing. And and the benefit there is that the public gets that explanation. Because they might they probably don't even know that it's, you know, it's I'm checking the current right now.

I I they I feel like we did it as info memo, or did we just touch touch on one of the recording reports? We'll take a look and see if we can kind of hypothesize that a bit more.

It's a bit off topic, but I did try to go find out with the informational memos because we have the the monthly treasurer support, monthly investment report. I couldn't see the I wanted to know what the statement balance was for the most recent month, and I could not see it in those reports. Doesn't mean it's it's not there, but I used to be able to there's certain there's certain times, maybe it's quarterly, where I can find the account balances for all the accounts. It might be a quarterly report. I don't know.

Just a brief moment. New to this quarter, we started providing our all our balances to Chandler. And in their investment reports, they I don't let me do Carlos, do know what page that is? On there?

I I I don't because we this was, the report that we were that we, that we passed on to you, but I know that the board excuse me, that the committee, did not include it in in the agenda because it it you had a tight agenda. Oh, I see. You've got it up. Okay. So if you roll through, in into the investment section, just keep going. Yep. Key oh, it's you're gonna be several pages in. Yep. Keep going. Keep going.

Is it all of our accounts?

Keep going. Keep going. So you you so we passed, information on the main portfolio. Back up. Back up a little bit. Actually, I'm not seeing it. So I'm you you may have the old version here. The updated version that Katie sent you should have I just know that you probably don't have it with in front of you because it wasn't gonna be discussed tonight. But there is a page, if I can help you out here, there is a page, where where it details all the other balances that the city has that Chandler does not manage on behalf of the city, but we're reporting on it. It's So not in that particular report.

You should have a copy of it, Jonathan. If not, I'll make sure that you get it. But but you'll see that going forward. It's something that the city city staff is reporting to Chandler, and we're including it. And you'll be able to see it immediately and discern it apart from the managed portfolio securities. And that includes the cash.

So what we'll start doing I will update it so when it goes to council, we'll have that updated. At the same time, we'll provide it to the audit committee. There is going to be a slide in in challenge report that includes all our balances, both Wells Fargo, Lake. And so you can go to one place and see all our available balances, at least at the quarterly basis.

Janet circulated that outside our meeting, so I think we've got so many chance to read that in advance of next quarter. But let let me move us a bit into the investment policy itself, which one of our action items here is to forward that through city council. I'd like to make sure we get to it. So let me jump in, and I'm sure other committee members will will help me. But just above the prudent section on page two of 19, there's a reference to the other two investment policies that are related, the OPEB and the pension trust forms.

And and I really think the wording might be a little clarified to spell those two out. I mean, right now, it reads the trusts are governed by separate investment policy. That's very good. But I there's two investment policies. There's not entitled investment policy statement city of Cupertino Investment Trust.

You know, that that's a little bit, nebulous to me. So if if city staff and and is not opposed, I'd suggest we spell out that there's an OPEB policy and there's a pension trust policy statement and mention them directly by name, it'll be a little bit more clear than an investment policy statement city of Cupertino Investment Trust because I don't think we actually look at one of those, but maybe we will. Secondly, the the in that same sentence, the audit committee last year on 10/31/2024 approved the OPEB and the pension trust policy, we could certainly update that. And and I don't know when city council actually approved it. It could have been December 5 or December 3.

Great. We got Kitty's got the exact date as well. So we can update those two dates so that we're not a couple of years behind on that. I think that's a very relevant thing. And if you got all those, then I've got another two questions for you.

So page five of 19, we talk about the AUP, which is very apropos to later, the pun group. If we get to it, we're gonna talk even faster. Will will talk to us more about it. But if you look at the third paragraph on page five of 19 of the investment policy, and I'm actually doing it too, under internal control. So it's it's that third paragraph.

An annual agreed upon procedures engagement, all fine and dandy, and we're gonna actually look at the actual evidence of that later. It will be conducted by the auditor to assist management in determining the city's compliance with this investment policy. So compliance is the keyword in this paragraph. When we go to look at the Pung Group's actual AUP, they say it was done for the purpose of increasing understanding of the investment policy. And to me, understanding versus compliance are a couple of big big different meaning words.

I'd say so my question is, do we wanna can we conform those two at least in future years so that the pun group is either look is ultimately looking at whatever word we pick here for this third paragraph, and we've had compliance in there for years. I see Sophie is is here. So do you have anything to add on understanding versus compliance?

I think the agree upon procedure usually is really the determined procedure by management and us. So the Right. We can we can work on it and then just change the wording subsequent subsequent years, and then so that can be in line with the investment plan.

So you're so in in sum, you're okay if we keep compliance in here, which I personally prefer. The the understanding is nice, but I'd rather have compliance. So okay. It's okay with you guys. So then I don't have a change to the way it's worded right now.

So that that's an easy easy fix. And then the last one I've got is a question on the investment policy is on page 13 of 19. So the policy talks about duration, one of my favorite topics for everybody that has known me for many years. And so this is gonna go right into Carlos' wheelhouse probably, but the duration of the portfolio will generally be approximately equal to the duration, typically plus or minus 20% of a market benchmark, an index selected by the city based on the city's investment objectives, constraints, and risk tolerances. So my question for Carlos is where in the Chandler material is that duration tracked?

If it is, so we as an audit committee could say, well, yeah, that part of the investment policy is being monitored by Chandler, for example. You know? Are you still there? Great. Perfect.

Yes. The the answer is yes. We do provide it. Yes. We do track it. If you think of all the reason if let's back up for a second to be quick because I know you guys are trying to get out of here. Duration Yeah. Sorry. Of of of all the per of all the of all the, influences on risk and return in the portfolio, in a fixed income portfolio, duration is the greatest. And duration doesn't just mean average maturity.

There's it's an actual it's an actual function. It's a it's a calculus function, actually. But we monitor duration very closely, because it's the biggest determinant of risk and return in the portfolio. We constrain it, and we measure it because it's a risk measure versus a a similar duration benchmark. We provide that duration number to you in the quarterly reports that we submit to you, and it's compared to the duration of the benchmark to where you can easily discern whether we're in compliance or not.

And we also we we don't provide the duration of the benchmark, but you see you do see the every month, but you do see the duration of the portfolio every month in the statements. And both both of those are provided to you very regularly.

Perfect. I what what I guess is I've missed that. So maybe after our meeting, staff could or you could forward the page on that because it's not really part of our meeting today. Unfortunately, we don't get to go through your report. But I'd like to look at that page so that I can in future quarterly sessions, we can say, here's what, Eno was asking about asking about back in April. Super. Thank you, Charles.

Sure. Staff has that report, and, and they should be able to give it to you. And, and I will make sure to highlight it next time that I that I present it.

Yeah. We definitely get the report, but it's the element of this duration that's in the investment policy that I've never focused on before, and I'd like to see it. So so, Jonathan, if you could help us with that, that'd be marvelous. Okay. We are under the gun here. So I know we probably all have more questions, but we should forward or have a motion to subject to the mind changes of the investment policy, I think. I haven't heard others. Did anybody have any more? So subject to mind changes, if somebody wanna make a motion to approve the policy in draft form subject to the changes that the committee has discussed today.

More so moved.

Or a second? A second.

Few more seconds. Very good. Oh, and I forgot the public comment, by the way. So for the members that aren't here, thank you for not, being here so that we would violate the rules if you had him here. So sorry if I didn't phrase that properly. Okay. Any more discussion on the motion? Great. Let's take a vote. All in favor? Aye.

Aye.

Unanimous. Thanks, everybody. Thank you, Carlos. City staff.

Have a good night. Thank you.

Yep. So we are gonna get the last two items done, I'll bet you. Item seven is receiving all kinds of AUPs, which I'm excited to do, but it may take us a moment. So we're sorry that we we we got them on the end, but Jonathan and and Sophie, is there a way to get us through this in less than fifteen minutes, which was our budget? But

Oh, I can provide a quick update and things of of worth commenting. So, yes, there is a single audit performed, and this is performed each year when the city spends $750,000 in funds. The city can receive more than that. It it it's the trigger is when the city's check, whether it's received in advance or submitted for reimbursement. And so in apart from that, we also had in the investment, which we were just discussing, a a storm drain, and lastly, the.

The all three AUPs came back with no findings. However, the single audit did have a couple findings relating more on the process or procedures, not so much on the financial side. And this is largely due to staff turnover, in public works. And although it was the not to say that the city did not perform it, we just cannot verify that that it did. So one of which is, where the city, researches whether a vendor or whoever's providing a, a service or instruction has either been disbarred with SAM, which is the system of award management, which is conducted by the federal government.

So if they have been banned, we the city cannot perform a or contract with them to perform that rat service, with the federal funds. And then the second was, as part of the the project, there's a, essentially, a checklist that needs to be performed at the end of each project. The the checklist was came back. We did perform those. There's a there's was the checklist was just never signed by the by the the the public works, for the the vendor.

It was subsequently provided. However, it was not timely, and therefore, it was, a finding. The city has made those corrections in

the current fiscal year, so that should not

be an ongoing, finding. And we will have another single audit because the city is currently, is projected to spend over 750,000 in federal funds for fiscal year 2021. With that, I can pass it on to Sofia who would put a a bit more. Or what?

Thank you, Jonathan. So you saw my notes. Right? Yeah. That's, basically, Jonathan has already summarized summarizes that what I was going to say. So I I know we are presenting just file and receive the items. So the first one is single order, like Jonathan mentioned, if the city spent if the local government spends more than 750. So it's based on expenditures, not based on the money received. And the city, was subject to a single audit for fiscal year 06/30/2024. The city spent overall 1.2 federal dollars.

And, so just recap, the findings were related to internal control, so there were no compliance findings. They are just really internal control of the city's process. So we have been working closely with the city to make sure the process is in place and then also, the responsible personnel follow through so that we don't have, the same issue next year. And, so the other three agree upon procedures, gain limit, and the investment AUP as well as STONGENT AUPs, we can, we can with, no findings on those agree upon procedures. And I wouldn't go into details about all the procedures that we performed, but I will be open to, and I'm more than willing to answer any questions that you may have.

Let me kick it off with one question. I I, was able to use, chat GPT or AI and asked, is it a requirement to do a storm drain AUP? And and Chat GPT comes back and says it's not actually in the legislation. So I was wondering if city staff or the PUN group can comment on why are we doing it.

I would have to speak with, Ursula, who is our environmental man.

I believe when they passed, this was a tax. So that's part of it passing at one of the

Line there.

Stipulations, how it was written was this, would be an audit.

Okay. So so we're at ADP or something. Okay. So it's somewhat of an exception, but Cupertino shows up as being one of the cities that does actually do it even though there are other cities that have storm drains that don't do it. So okay. Thank my question.

How they passed over to reveal. Yeah. That will

Well, this question comes up every year.

Does it? Every year, we forget. Yeah. I know. Exactly. Any do you have a question?

Yes. So I I was looking at the the the federal awards findings. So I believe what you're saying is that it's it's a matter of the city not doing a check, not that they did a check and found it later on and found that they were using suspended or debarred companies. So we don't know if they like, what was the results if he had?

So during the, the single audit, we staff and the pund group checked to see if this vendor was disbarred, and they were not. And so but that is a specific instance. It should have been performed when the the the contract was awarded or before the contract's awarded.

Okay. And, yeah. So I actually went to the SAM website, and I, you know, I I applaud you for being Sorry. I could not. So and then with the the quality reports, that that was a matter that they need to be done as the project was progressing. And they did it according to this report after the project completion, so they want to check. Is this a is this an issue with the you mentioned staff.

Is this something that they need another person to own these types of reporting issues. So this is one of the the tasks that CIP performs by CIP's the the CIP department or division. And so since then, we've had, quite a bit of, meeting a handful of meetings to discuss of what was performed, what should be performed, whatever the the the requirements, both, because it's not necessarily a something that's performed every year. It's just as needed. And, so they've been educated on what the process is and, discussing it with, Sofia is this, this these particular findings are not uncommon, especially for, if the the cities or agencies do not perform use funds frequently.

And so if you have someone that's subsequently new to the position and and hasn't, been acquainted with the that that process, it it it could be a finding. The problem is or the the solution is just don't do it again. Learn from it. And so we'll have that that that, that should not be finding this current here.

Pardon me. Are these federal funds left over from COVID? Like, what were these?

I they're having to do with the highway planning construction from the California Department of Transportation. So, essentially, the

Cal Caltrans.

Caltrans. Thank you. They provided the funds, but people those funds were essentially passed through for that. And so the federal the federal government provided it to Caltrans. Caltrans provided it to us, and it falls under the under that that general federal funds.

And can you say what project it was? I was trying to figure that part out as well. I I have no idea. Right.

We can we can get back to you on that one. I don't wanna misspeak unless you know

Yeah. It's Nicole and Roland. Phase three.

Yeah. Phase three.

Five one.

Yes. Thank you. Let's

raise your mom or senior account.

That's that's all my questions. Do Any questions?

Okay. I think we're in good shape then. Why don't this one's an easy one. I will say that we have received these. Thank you very much, Sofia. Glad to look forward to oh, I did have one question. I'm sorry to while you're there, you guys are in interim for the external audit, and everything's running smoothly. You're you're able to move forward as planned?

Yes. So we are doing the planning phase, which internally, we are planning for '25, and then we are going to kick off in May with the city. So but right now, it's internally we are planning phase. We just like, Mosada mentioned. They mentioned about different areas. They mentioned cash. They mentioned and then capital assets. Those are the area that we need to evaluate internally and to determine the significant audit areas, and then we will go to the city. And then the interim field work is already scheduled in May.

The reason I bring this up for everyone is is interim requires the external auditors to rely somewhat on internal controls. And this is one of the first years because of timing, staff turnover, external auditor turnover that maybe we'll be able to take advantage of that benefit as I understand it. So great.

Yes. Of course. Because starting in May, that gives us and the city an opportunity to re review the internal controls. If we see something, of course, we say something, and then the city has the chance to correct before June 30.

Right. Right. Good. Very good. Thank you. You. So that brings us to item eight, updated budget format implementation action plan. And, Christina?

I will be brief. We took, Baker's healthy the organizations action plan. And what we tried to do is anything that was a priority one, allowing it to, either in the current fiscal year budget or to take care of it in fiscal year '26. And on the priority twos, we made those at fiscal year from seven. Priority three is a fiscal year of '28.

This follows for the item of the item related to performance measures. Counsel in their motion when this went to them, one that got brought back in October for review. We would like to counter that. We would like to do a strategic plan first. So in the budget that will be published in just a few days, there will be an ask for a strategic plan, and our goal is to that strategic plan and then performs measures after to make sure strategic bold revisions that the council made.

That's the one that's the one that's gonna be a little bit off where it's a priority, one, but we've kind of moved it to the latter half of this fiscal coming into fiscal year twenty seven. But other than that, we did try to prolong everything. I'm happy to report as well that the, outstanding, capital improvement plan for fiscal year twenty five has been published in April along with the, outstanding budget at a glance for fiscal year twenty five was also published just last Friday. And special projects policy has also already gone and been approved by city council.

I know from my memory of our last meeting when Baker Tilly came that the budget at a glance was something that came up, and so it's good to hear that that's back out. Any questions from me?

What is the definition of strategic plan? Is that three years, five years? Like, what is that time horizon?

I believe it's generally at least five. I'm trying to think back. Moss Adams has called this out as an area, and there are a audits. So let's say two or three cities should have one of these. So it will likely be a minimum of five, but I think some of that will also rest on the council community opportunity with how long we'd like to see that plan be.

My overall comment is there's a lot of changes, a lot going on with the budget format. So, anyway, we haven't had the presentation at our last meeting. I would be we we'd have to ask a whole lot more questions, but very helpful. Are we good? Because this one, I don't know. It's kind of we're forwarded to city council. We did have actually a list of items on our last meeting with Baker Tilly when we forwarded this. So I think we should almost have a motion, but we don't have to appetite for how do we forward it to city council? Two members of city council are sitting here. You guys can relay that we had no no changes at this meeting, at least. We don't need a motion, in other words, by masking.

Well, it it was better than We we we We we do. I think we would need it. Yeah. We would need a motion.

Alright. Let's is there a motion?

So I move that we receive this these changes and forward them to city council.

Second. Seconded. Alright. Any more discussion? I don't think we do. No. We're all good. It's, all in favor of the motion, aye.

Aye.

It's unanimous of the four of us here. Very good. Okay. Thanks. Very efficient presentation, Christina, by the way. That's now we've got maybe a negative two minutes, and we'll cover item nine, which is our work plan, which I looked over. It's had everything in there, I think, that I would expect. Any other comments? I

will be asking us to come back for a special meeting. I would have to see what your your availability would be is to circle back if we can for the quarterly treasurer's investment report ending 03/31/2025 as it was mistake left out of the there was a glitch in the system, so it was not included in the staff report. So I'd love to be able to that's in. We'll have you all, review it, provide any questions that you may have, and then forward it to counsel before, more than within that forty five day window. And so, I would like to we can do this afterwards, but I just wanted

As a point of clarification past where we've been meeting the forty five day, deadline, you you have circulated the report to us, or maybe I'm getting it mixed up with ACRA ports, but you've sent it to what you've already done, sent it to the four of us. We're individually probably. I've already sent some comments. Is is that not you would prefer to have a more interactive two hour special design interchange.

Or should it I I actually

That's just clear.

Or, like, have twenty minutes or thirty minutes of your time to to as it does not need to be a a full twenty two hour I'm sorry. Two hour production.

Wait. I can't I'm open to it. I'm just trying to clarify. Okay. And thoughts from everybody on that change?

That's okay. So what we would be doing is we would try to meet the minimum, a three person quorum. And if anyone is unable to to attend, I would, I would ask them to to if they have any questions to provide those responses or questions, and we'll go ahead and, provide responses to those during the meeting. I have

a question on the work plan. I saw a budget format review tentative for October. So that's six months from now. Is there opportunity to see that sooner, like a a preview of that? Like We

kinda like That's for the

next special.

So it's for that's for

Well,

the starting July to next year.

It's twenty sixth. Twenty seventh. We

and we have a special meeting February on

February 18.

February 18, we've covered a lot of the big fertility presentation. So probably we gotta delay it until October. Getting you out of

So for a couple of items, there was Sherry mentioned looking at the scope of the audit committee, and I don't know where that fits into the budget. But while we're looking at that, I noticed that on the redone website, we've got maybe we have this before, but I like that all the financial policies are grouped together. However, I'm seeing, like, I wanna say maybe twelve, fifteen. There's a lot of policies, and we just have seems like we just look at three, the investment in OPEB and section one fifteen. And I'm so I'm wondering if we could be looking at all of our financial policies at some point.

Maybe that's a scope question. Uh-huh.

Well, let me the way I was envisioning since I introduced boss Adams as have you I was hoping they and I think Beth was getting on board on this that we could have a ten to fifteen minute or less description from Moss Adams' perspective of what was so like, we'd following that GFOA best principles. So from there, I was thinking maybe if there is an appetite, we might need special meetings on the scope. It's in a lot of discussion or well, I can't really foretell how our discussion on that would go, but I'm I'm certainly open to including an eye a a separate eye. But we're I was expecting for her being in Moss Adams next quarter presentation of their internal audits program because the way I look at internal audit is, well, there's a lot of stuff that we could ask them to do, and and they're doing a great job by personal opinion. So to the extent that the audit committee is comprised of whatever we are, it may be that there's a trade off between external audit, city staff, internal audit, audit committee doing a variety of things, and where do where do we put that off in the right way?

That's a so long winded answer to your question. So are you suggesting with another point is I've seen on city council that there is a work item about the audit committee's charter. So to to some extent, I was thinking, because I haven't talked to anyone else about that. I'll take you wherever and city staff, what what does this mean? And I think you guys are still exploring what it means too. So to the extent that our discussion of what the scope of the committee is can be helpful to whatever that work plan item is, that that would be helpful. So that might be an issue for us as well.

If our staff's perspective, we wanna try to kinda get that past budget season to come in July with the with the if I get the official one, we just forget we I think it's the TBD list. That's the one that includes it. And so our goal was similar to how we changed the when we update we actually did make some updates to audit committee back in 2022, maybe. I think we brought that to audit committee first to get their feedback and then brought that back to city council. Our goal was to follow a similar process, because we wanna make sure we get input from the committee.

We want to get back to by the changes. We're so that everything is there. This may align well. Moss Adams has some recommendations as well to be able to kind of say, hey. Here's kind of what the auditors are saying. Here's what audit committee is saying. Like, here's what staff is saying, and then ask me to come.

I'm not sure we've answered the point. It's well take maybe it's another thing to be reevaluated when we next look at this.

Talk to Miles Adams and see if he would be available for our next regular meeting on July 28. Right. That's a talking item.

Would that That was my initial thought was they'd make some ten minute presentation because they've seen other audit committees in other cities in our area. They know g a GOFA, but I don't know if that was what you're

I think so. Think so. Just to have somebody take a look at what we're doing and and making sure that we are what we're doing makes sense. But I'm I'm kind of wondering looking back at the financial policies if it can be stretched, that that actually fits within our duties, powers, and functions.

I I might add. Moss Adams did do an audit years ago, maybe less, where they actually reviewed all financial policies in in accordance with best practices. So I think at that time when Moss Adams was looking at the policies, there was a desire by this committee to look at the policies. And Moss Adams sort of said, you know, I think just to make sure they have been updated appropriately and we're following best practices. And Moss Adams said, we're actually the best experts to look at that and make sure they're abiding by our recommendations.

So Moss Adams actually reviewed all of our financial policies to make sure they were in accordance with what that audit had recommended. Did that have a this committee had previously kind of leveraged the auditors to say they have some of those expertise. They're able to go in and look at those items. But all the policy there is the special, policy would have been reviewed by Moss Adams as part of their ongoing review. I think they have listed on the annual call.

That was in around '22, but that's the exact kind of interplay that I'm I'm looking to make sure we're all aware of that we can leverage. So if there was a report, maybe might have missed it. Yeah. I'm not that might be addressing your question.

Right. Well, I think I think it could be something that would come back on a kind of a regular basis that we would look we can look at what they had to say about it, but, know, I don't I don't generally look at some of these regularly as they come through the budget. So this would all of these financial policies be in our budget book?

I think the one that's currently online is, I think it is the live it is the live agenda with if they feed not a live feed, if it's a a live as we're doing the baker tilting recommendations, one of them is put all your financial policies that are in the book, put them online. Yeah. So I'm not sure that might have been, might have gotten to where that page before you've seen the QR code in the budget. So that meant to be all the policies. These are all more, policies that were in the book versus Moss Adams book, not only those policies, but any internal policies we had as well.

So that that is kind of all the external facing ones, and then we have our internal facing ones, which are gonna be in our I see big because I'm pretty sure it's going to be big internal policy book. And so though all of those will be so they're just a little bit separated with front forward facing versus back of the house, which are really want kind of, you know, have let's say, a sausage gets made, it's our baked in a of how it would do. So when I say those are the ones you see on the website are complete to the ones that should be outward facing but not inclusive of all financial policies that exist in the city. There's some internal ones as well.

Understood. Also, with regards to, our our assignment to look at, budget format, we haven't been looking at the capital budget. We just look we've been looking and focusing on the operational budget always, you know, for for a number of years. So I'm hoping that at some point, we're gonna be looking at that capital budget. Yes.

And because I think I I think that there's some extra items that we have in there that they're they're nice to have, but not necessarily need them. And it could be that some things like the prioritization part needs to be expanded and made more transparent because right now, I I can't really tell how things are being prioritized. Something like a weight of interest that we can point to and see how things are stored, kind of like how VTA will sort things. I think that might be helpful. And I and I understand that when we go

to

that matrix format, we might end up with a different

result Or

how things now. But it would be nice to have a discussion about how they're picking and choosing.

Our goal is to bring us it's gonna be from a low budget format. We're moving into the open side of doing that software to do the budget for the IEP recommendations. We're even in the last step. So the documents should look very similar to each other. So what the format changes for budget will also be format. Yeah. So we already spoke to, Chad, director of public works and speaking our CNC manager that said, hey.

We're gonna

kinda drag you along with us as we talk format for the budget over this next year.

Great. I really appreciated the budget, workshop meeting that we had. I can we we can probably all see that moving towards the more online OpenGov connection is gonna have some challenges for members of the public to get there. They see it during that meeting. But, also, it's like, how since we don't look at what's actually in the budget, how will the the public have a meeting to actually get their hands on the numbers there and and be talking about them? Because we've had a budget, but it wasn't really, like, talking about how what numbers are. So we

have the budget is set to print for this next fiscal year on May 1, and then we have a study session with the council members that goes on May 9. And then we'll have the budget study session, its own study session, just the budget on May 15. And so at that point, we'll be talking about the numbers, recommendations, and updated forecasts, follow all of that.

K. So if you're a member of the public, which one of these meetings is most important to go to?

Fifteenth. Okay. And then I would say also, electing the first meeting in June, which is tentatively scheduled for budget adoption. So first meeting will kinda set the stage. We'll get council feedback that, and then the last meeting is what we'll actually wanna get adopted. Those would be the two other.

Thank you.

I wonder if that's a question we can ask Moss Adams. Like, is that in the audit committee scope to just look at the format or actually, like, the budget? It's like just just curious, you know, what is boss Adam's, like, point of view on that? Like And for Because people think about audit committees, oh, they're gonna talk about the money, like, the budget, like, but they come with so he's looking at how it's presented, like, format itself.

Good good point, and let's raise it in July. Don't wasn't it?

Yeah. I think a lot of cities have a budget and a finance committee and we seem to have some

Okay. Mesh. We're a little bit overtime, but I think very productive. Thanks everybody for coming, and we're adjourned.