Audit Committee - Regular Meeting

Sir, it's me. Are ready to go.

Well, this is the Cupertino Audit Committee special meeting of December 1. Can we have a roll call from city staff, please?

Council Member Mohan? Vice Mayor Moore?

Here.

Committee Member Wong?

Here.

Vice Chair Wu? Chair Schmidt?

Here.

All present with Council Member Mohan and Vice Chair Wu absent. Sorry, not all present.

Great. Thank you. So orders of the day, you never know what those are, so we don't have any as far as I know.

That would be if you would like to reorder something. Uh-huh. If you knew somebody would need to leave, or if somebody was absent, you could stack all

your info. Makes perfect sense. Yes. So I don't think we have any changes to the orders of the day, so why don't we move to the approval of the minutes? I presume everyone's read these in advance. So yeah. Yeah. Oh, okay. So why don't we move to a motion on these? Do I you're right.

May we go to public comment?

Oh, on the minutes? Okay. Perfect. Good idea. Thank you for that. Are there any?

We have no comments on Zoom, Sheriff.

Okay. I've been leaving that off on the minutes, but now why don't we

I move that we approve the minutes of the regular meeting of 10/27/2025.

Marvelous. And I'll second that. Great. We've got, council member Mohan that has. He's already we moved to the minutes, and we are now we got a motion to approve, and I just seconded.

Okay.

So let's see.

Any

comments on the minutes? No? Okay. Let's take a vote. All in favor? Aye.

Aye.

We have a unanimous amendment present. Fantastic. There are no postponements. Although part of our agenda is coverage prior. So oral communications, are there any of those, Lindsey?

We have no hands raised on Zoom chair.

Outstanding. Old business, new business. Item number two, which is item number one for us really on action item. Okay. The action item received the OPEB and pension section one zero one five trust performance report for the quarter ending 09/30/2025 and forward to city council.

We've got ours and US Bank and possibly city staff. So

We have Dennis here who will be expanding on or answering some of the questions that were asked at our last meeting. He's done with his report or presentation. We'll answer any questions you may still have.

Super. Okay. Dennis, welcome, and hope you have a great holiday. Thanks for attending our meeting, and I'll hand it over to you.

I did have a great holiday. Thank you. I appreciate that. On the Jonathan, are we walking through the additional materials I sent you?

Yes. We'll just jump right into the the the the three items that we needed to discuss earlier today.

Okay. One of the, one of the items that we wanted to discuss was, I had recommended adding some exposure in the portfolio to diversify into what we call global infrastructure. This initial conversation resulted in questions about global infrastructure investing in data centers. And so we did a little research and very quickly discovered that the global infrastructure fund does not make a heavy investment into the construction companies that are building the data centers. These tend to be much smaller companies.

But the exposure in the global infrastructure fund is in is in the utility companies that are ramping up to to supply the electrical electricity to these to these data centers. And so it's it's kind of a roundabout you know, it's not a direct exposure. It's kind of roundabout in that you have the the electric utilities that are providing the electric service to these data centers. And then you have you know, stepping back from that, you you we looked at, you know, who is who is building these data centers. And the the biggest builders of the data centers were the the the big tech companies, if that makes sense.

So bit of a convoluted discussion. John John, would you like for me to share my screen?

Yes, please.

Would that make sense? Let me see if I can do that. Share screen. There we go. There we go. Let me know when you can see that.

We can see it.

Okay. And then the other part of this conversation was investments in fossil fuels. And so because we had we had touched upon possibly investing in commodities at some point, but so I'll take these two separately. So let's talk about fossil fuels first very quickly because that's easy to kinda handle and get out of the way. Investments in fossil fuels would be made through the equity and commodities funds, but we don't hold any commodities funds right now.

So our investments in any fossil fuel companies would be made through the equity funds. Investments in data centers would be made primarily through equity funds, fixed income, and global infrastructure. So I'll take through. Right now, we hold neither global infrastructure nor commodities. I have recommended that we add commodities to just get a little more diversification.

The equity fund holds roughly 3% in energy. And since we're 65% in in equities, that'd be about 2% of the total portfolio. Since we are indexing equities, the only way to avoid fossil fuels entirely would be, move to a customized portfolio and and away from indexing. And then and then I've I've got a point here. Users, builders, and proponents of data centers comprise a small portion of the equity fund as well.

The MSCI All Country World Index, which is what we are benchmarked to, these are the these are the sector weights in there, and you can see, energy is a very small portion. It's the small green slice. And so it's just it's just not a huge weight. As far as global infrastructure fund, I've got some characteristics of the funds that we recommend here, but this is what I wanted to go through with you. These are the top companies in the global infrastructure fund, and you can see there's quite a few energy companies here because with the buildup for data centers, there's an awful lot of investment taking place in electric production capabilities, in electric grid delivery, and so a lot of big utility companies in the top 10 holdings.

You know, why do we care about electric utilities? Because, again, with global infrastructure, you you look at who's building these things. They're relatively small construction companies. They're not really publicly investable in many cases. They're privately owned.

But this IGF fund, which is the one we recommend using, several of the holdings here are actively involved in powering and supporting these data centers. So NextEra Energy, and you can see there for these it even points out here on the chart which which facilities in some cases they're supporting. Constellation Energy, Duke Energy, Southern, NL, and so on and so forth. So these companies are not building the data centers, but they're providing critical energy infrastructure, which is which is a key ingredient. And we're starting to hear more about, utility electricity usage in these data centers being very high.

Okay. So but then we look at okay. Who's having the data centers built? And it's Apple, Microsoft, Amazon, Apple I'm sorry. Alphabet, Meta, Oracle, Alibaba are the are the biggest builders of the data centers, and these are their respective weights in the index that we're investing against on the equity side.

So then the question comes up, you know, if we if we were to exclude if we were to say, okay. We don't wanna invest in any of these companies, that's a big chunk of the equity universe that we've been investing in. And it it's tough to say exactly what the effect of not investing in those would have been over the last ten years. But I I tried to put something together here. Here are the this shows the the opportunity cost of not investing in the global infrastructure infrastructure fund.

For the OPEB, I came up with, you know, a relatively small opportunity cost, $50,000, which is point 11%. For the pension prefunding, $28,000. You know, just not not an awful lot.

Yeah. This is that is we're getting sorry to interrupt, but I'm we're wondering if possibly you can expand the font on the document on your desktop. If you Sometimes you've got that ability. Is it working?

Yep. Okay. Good.

That's perfect. Thank you.

Okay. So this is one way to look at it, and that is what would be the opportunity cost of not investing in global infrastructure? And I'd call it a push because our expectations Our expectations for global infrastructure are very close to our expectation for stocks, if that makes sense. And you can see here a five year CME is capital markets expectation. On the next five years, we actually expect stocks to do better. In the next thirty years, we expect global infrastructure to do a little better.

Okay?

So no big opportunity cost. In in other words, I'd look at that and say, this is not a critical decision. Now I do have a couple other charts I do wanna I wanted to show you. Let me I I gotta shrink it back down now. So no action is necessary regarding commodities because we don't own any right now.

We don't wanna own any. Avoiding global infrastructure will allow avoiding direct investment in the companies listed. But, again, small investments may still occur through the equity and the fixed income funds. And then if this did become a threshold issue for you and you wanted to avoid investing in either data centers or fossil fuels, we could talk about a customized equity and fixed income portfolio. But as with most things, costs go up pretty dramatically.

Any questions about that? I know I went through it really quickly, but they're pretty simple concepts.

Hi, Sunek.

Just to maybe have the presentation added to the materials for this agenda?

We'll we'll include it.

Well, yeah, I've got a couple of questions that I wasn't completely sure I understand how investing in global infrastructure is gonna actually if if it's approved as an asset class, it sounds like we can only access it through investing in these various large tech stocks. Or or is there a there's a separate fund, I guess, the IGF. What what is in the IGF fund? Is is is it mainly sorry. The font's so small. I can't really tell if you have that on there. What's the top 10 holdings of the IGF, maybe is my question.

Here's the top 10 holdings of the IGF, which is an index fund for global infrastructure. And so you can see it's it's mostly it's mostly big utility companies.

Yeah. Yeah. And it's international, and it's global. Yeah. Okay. That helps me a little clarify. And and I guess, though, the index what's the index that the IGS the performance in this particular fund we would measure against?

I'll have to get the exact name of it. I've I've just seen it on a couple of reports recently. I think it's called the, I'll have to get the name. Let me let me let me have a look. I

I guess the way this work work out and practicing it, if it's approved as an asset class, then there's an index measure you'd start to be reporting, and then we would be comparing the result just like we do for the other asset classes. And and that way, we could decide, if this particular fund is performing like the index. Right. Right. Okay. Got it. Yeah. I'll Any other

I'll get that I'll get that for you while we're on this call.

Sure. Sure. Any other questions, vice mayor?

So if I understood this correctly, maybe I didn't, it seems that that adding this asset class doesn't necessarily, mean that we're would get a much better return on stocks, but we have the exposure to potentially some some various assets that we're possibly not interested in supporting or there's there could be countries that we might not be interested in in having our investments go to. So

sorry. That's a fair assessment. I would also like to add that we would be diversifying the the portfolio. So less exposure to it's not that we would have heavy exposure in any one investment. It's just kind of spreading our our investments into multiple options. Now, over time, there's as Dennis had showed in that one slide, it's not a lot of money. Right? However, it's just kind of playing the field and making sure that we've mitigated most risk or as much risk as possible. And this is the direction a lot of investors are investors are going. So it is a new asset class just in general.

And so right now, it might be small. Over time, it might become a more prevalent or more robust investment.

But it seems like you can already invest in Duke Energy and Southern Company already if you want to do that or and there's there's no guarantee when you're investing there that you're supporting solar and wind farms. You might be cost of fuels there.

Correct. Yeah. No. 100%. I was just kind of wanted to make sure that the the full picture or the reasoning why this was being promoted at this time.

Okay.

And Should the council or the audit committee want to steer away from that, certainly, we can we can do that, and we present that recommendation to council.

And if the the council and the audit committee wanted to entertain the idea of having a discussion about fossil fuel or data center investments, That to me sounds kind of like a work program item. Would it rise to that level? Like, I imagine it being you'd you'd need a a thorough discussion here if if that's we make a recommendation to customize the portfolio. It sounds like there's a downside to it at the cost and customizing. And so then so we would have to have a meeting to discuss it and then move that item onto the city council.

Sound like that process?

We would certainly if the direction is to have that broader discussion of where the we're investing in, we'll recommend that the council will be in discussions with a city manager's office to see how that would kinda play out to make sure that we're in alignment. And if the if it raises to a a work program, we can move to that. At this point, I don't know if they can just be discussed at the the dais when this is presented to council. It currently is set or table to to to go on the sixteenth along with the ACFR. If it raises to that that level where there needs to be more broader discussion, we will have to circle back.

However, we would like to get a policy kind of set and then so that it gives Dennis and his team kind of a at least a goal. And then in the interim, if there's a more we wanna refine or limit the investments, we can have that conversation and then kind of work to that that that that goal.

So one thing that's kind of troubling me is that we don't have any, like, direction from the council saying what they what their opinion as a whole is about these types of investments. So without knowing what that group thinks and wants, I I I don't know that we should be recommending to get into that, or, you know, alternatively, we should be recommending that they make that decision, make that call.

We can keep status quo. We we don't need to recommend the global infrastructure. As Dennis said earlier, it's not gonna have a material impact on the portfolio. Right? And then so that we can continue moving forward and he can work within a a poly current policy, we can keep the the the policy set as essentially what how it's being presented or how it was included last year.

And now if if there wants to be a more broader discussion in the type of investments, a little more green, so less than the data centers, no fossil fuel investments, and have that customized portfolio, we'll have to get back and have a cost proposal. What does this mean for the broader portfolio? If there's gonna be a cost in the return, right, how are we able to maintain those investments at that return? This last year was great. We got something you'll see in the app for we've reached a 100% OPEB.

Well, there is actually an OPEB asset on our books. Our our assets exceed our liabilities for other post employment benefits, so that's great. So if we start modifying our investment or what restricting what investments Dennis has, well, then that might pose an issue with meeting those long term goals where we may need this general fund to kinda subsidize some of those costs. So one is cost just to maintain. Right? Another thing is, well, if the portfolio is not performing as well or meeting those needs, well, therefore, we need to subsidize those that that loss of revenue with essentially general fund money so that we kinda maintain a a desired liability.

So this could go after Veronica will comment on that. It's a as a motion to to approve. However, the staff report could include this all this information so they're they're aware as a whole. It's like, here's the downside of not doing this, and Mhmm. And here's all the good stuff that's been happening and just basically what you just said in that staff report.

Yeah. No. Certainly, we would expand on the discussions we had today, and so that it'd be more a thorough staff report than we have today. So there will

be a a

sizable section towards the tail end of the staff report kind of summarizing our discussions today.

And include the report?

We'll include that as an addition.

Yeah. I guess that relates into why I was putting this into context. I thought that the item that we had continued from the last meeting was really reviewing and commenting on the policy document. And and I I noticed here that we've got got it worded that we're approving the performance report, which is, of course, related to it. Maybe I'm looking at the wrong agenda, maybe it's quite possible. But I think what we meant to say on that agenda item was continuing forward the item that we were addressing as the point of meeting. So it's just a misperting there.

Under this yes. That is correct.

So okay. Let's let's assume we're we're looking at policy document for a moment. We what we have in that policy document for many years is a series of asset classes that were possible for the investment manager, Dennis, and team to select from. And then there was this additional asset that was included called global infrastructure. So some of our comments here are as we look at the policy document, we're really looking at, well, what's permitted for Dennis to pick from?

And some of my questions previously in the previous meeting were, well, why aren't we isolating global infrastructure when we could be pulling out three or four of the other asset classes that aren't mentioned at all, but that aren't permitted to be invested in? So I'm almost thinking that adding it specifically is fine if the committee has an appetite for that, but we might at this point just not include it. And maybe we need more research and more information from Dennis, your team as to why I you know, pulling out global infrastructure. It sounds like it has a minimal impact that vice mayor was pointing out. But on the other hand, you thought it was significant enough that it'd be included.

So maybe you should look back on this deck. I'm just throwing this out as an idea. Maybe it's something that needs to be looked at. All the other assets need to be looked at the same way. And, you know, it's just a pie that you select from. Why we're isol why we're highlighting a particular element of it that doesn't have a big impact is is a question still remaining with me, and it sounds like maybe the vice mayor.

Chair, thank you for pointing out. Tell this list noticed because there's nothing in this notice that indicates that we would be changing or discussing the policy. Right. Doing.

Which we should have done. I I guess that's the error. So how do we handle that administrative? Would we address it in January or because we noticed it incorrectly? Or

I'll have a conversation with the city clerk's office and how we would proceed forward if this is, as the staff report and all the attachments were relating to the the item, and I'll send a follow-up email to the the committee, informing them how we'll be moving forward, whether we need to include this as a follow-up meeting in January in our normal meeting or if this is something that can continue to move forward to council.

Okay. Well, I apologize. I didn't you know, Thanksgiving holidays, kudos to the staff for getting our package together. We let's not look at the negatives. Let's look at the positive. But, unfortunately, I'm not sure we can make a decision on this at this point the way it was noticed. I don't think I think we did accept the performance report last time. Correct. So what we didn't accept was the policy document. So we're sort of stuck figuring out how to properly notice that, and we'll take advice from the experts and committee members as you come up with them.

So, Dennis, I appreciate your effort on this. It I guess in the context of this, Jonathan will be in touch with you in the background, and maybe there's a forward discussion that occurs in regard to the asset pie that you end up selecting from. But we can't really discuss more on this, I think, probably at this point. So we'll defer this item until we get more information and more clarification. Thanks for Okay. We're good. Yep. Yep. Sorry we didn't notice this earlier, but at least we're we're on track now.

No worries at all. Look forward to working with you on that.

Yeah. Okay. Fair enough. And I think we had clarifying questions. We completed that. But now, Lindsey, I ask her I guess we have options for public comment on an item that we're no longer addressing.

We have no hands raised on

Alright. So that solves that problem. Alright. So why don't we put this? I think we've we've done. We don't need to take a vote or anything. We've already clarified. So finished with this agenda item way ahead of our expected time. Kudos to us, and we'll move on. In item three, which is receive the fiscal year twenty twenty four, twenty five annual comprehensive financial report known as ACPER and supplemental reports in City Council. So in that regard, we must have a staff report on this. Jonathan, I turn it over to you and and the pund group.

Francis Martin with Pun Group, who will be presenting their, results of the, the fiscal year twenty four, twenty five annual comprehensive financial report.

Welcome, Francis and Mark.

Hello. Good afternoon. My name is Frances Kuo. I'm one of the partners from the Poon Group. I'm actually sitting in for Sofia Kuo. She is the, engagement partner for the audit of the city of Cupertino. And alongside with me is Mark. He's our audit manager for the, city of Cupertino's audit. So thank you for the opportunity to present the audit into the committee here and the city council members. So I have the presentation prepared.

So what we will go through today are the following. So we will have to communicate some of the required communication in accordance with the auditing standard, qualification section two sixty, and go through overview of the financial statements and some financial indicators. And after that, we'll go through key pension and other post employment benefit information and, of course, the financial audit results. So if you remember at the beginning of the audit, we communicate, we send out a communication letter to spell out the, responsibilities. So management's responsibility relation to the audit is they are responsible to prepare and for the fair presentation of the financial statement.

And that financial statement also included the design implementation and maintenance of the internal control to make sure that the financial statement are free from material misstatement, whether due to fraud or error. And, also, management is required to, evaluate whether there are any condition, that consider in aggregate could have a, substantial doubt about city's ability to continue as going council. So these are the management's responsibility as we communicated earlier on. But for us as auditor, our responsibility is to opine on financial statement that's been prepared by management with your oversight that they are fairly presented in comatose respect. And during the audit process, we also evaluate the internal control and using the evaluation internal control determine our other procedures.

We also evaluate appropriateness of accounting policy and also the significant accounting estimate used to prepare by the, to prepare the financial statement. And these estimate are made by management. We also concluded, based on our judgment, whether there's any condition that raised substantial doubt about the city's ability to continue its going concern. And, of course, we are here to communicate with those charter governance. And as part of the communication, not only we're sending out the communication letter, but we also really encourage a two way communication that having this, face to face meeting through through Zoom, that can have this open communication in case you have any question related to the audit process.

So part of required communication, as we conclude in audit, we will talk about the ethic and independence requirement that we actually comply with all the relevant, requirement regarding independence. So in the financial statement, there are so many significant accounting policy. They are described in note one to the financial statement and several estimate including the fair value investment, depreciation, and amortization of capital assets, and these are estimated useful life, and pension and other post employment benefit liability as they are, involving the actual area assumption and methodology to come out the estimate of the liability amount. And, of course, this year is the implementation year for compensated absences, in accordance GASB statement number one zero one. So that also involve in some significant estimate as to more likely than not, how the liability will be used or be paid in the future.

So couple of disclosure that I mentioned earlier, the policy pension, OPAP, and your net position and fund balances, the commitment contingencies, some of the concentration of the risk, stewardship compliance and accountability about your expenditure in comparison with your appropriation limits, and then also the fund balance disclosure and some dis restatement and property adjustment at the beginning of the position. And the misstatement is that we actually report a no material, uncorrected misstatement, to the financial statement. Part of the required communication is in case there's any consultation with accountants. So during the audit process, management might decide that we have some, accounting treatment that we're not so sure that they wanna consult with other accountant, to to get some ideas. So to our knowledge, there's no such consultation with the other accountant related to audit or other accounting matters.

We also did not encounter significant dealing with dealing with management during the course of the audit, and we also did not have disagreement with management in terms of accounting treatment or other procedures performed. So in the next couple of slides, I'll go through the financial statement overview. As you know, the financial statement does include agenda packet as a 190 pages long. So we summarize the key pages, financial information so that it's a little easier for you to read. So for the government as a whole, combining the governmental activities and the business activity.

So the total net position, which is the equity of the city as a whole, is $460,000,000. As as as presented on the very right hand column at the bottom, 460,000, $460,000,000. Included in the net position, the biggest portion of that is the net investment in capital asset. So that include all the investment in capital asset, your infrastructure, your street, your building, the land, and all the one hub business activity related infrastructure. That's the asset.

That's a big investment that the city invested in. And that amount net with the related debt used, to acquire or to build those asset in in any related, like, capital asset related liability. So big investment of the city will be $212,000,000 in net investment in capital assets. And as a whole, the restricted net position at $77,000,000, which are restricted because there's external restriction, whether because of the grant or the funding requirement or the regulation and laws require the specific purpose of the use of the fund. And with the remaining unrestricted net position, a $170,000,000 at the end of the year of 06/30/2025.

Next, let's look at the operation, the city as a whole. So the for the government wide act statement of activity, there's increase of 30,000,000 as present on the very right hand call column at the bottom, increase of $30,000,000 of the net position. So included in the increase are the pro web revenue of $42,000,000. So that the $42,000,000 includes a charge for service, which is the service provided to the citizen, whether it's governmental activity for public safety, parking rack, or related to your enterprise activity. That's a charge for the, for the rate payer.

And then adding to the revenue is the operating grants and contributions. So these are the grant funding that are for operating purpose. So you have $7,000,000 operating grants and contribution plus another $6,000,000 of a capital grant that provide a total revenue of $42,000,000. And the expenses incurred during the year at $103,000,000. So your net cost of service, which is the services to provide all these, program and activity for the city at $61,000,000.

And you see there the the net cost is $61,000,000 is covered by the general revenue. So included in the general revenues are the nonrestrictive tax revenue, your property taxes and sales tax and, nonrestrictive investment earning. So those are the general revenue that's been used to cover the cost of services. So at the end of the year, for, the fiscal year ended 06/30/2025, the net increase in net position at 30, $30,000,000. So another, ratio that we, evaluate when we review the financial statements, we we are looking at the cost of service in comparison to the tax revenue.

So these are the tax revenue nonrestrictive tax revenue that the city generated to prove to provide us to support the services, that's been given to the citizens. So at the ratio of 82%, so that means 82% of your tax revenues are used to provide for the programs. So in comparison to 84%, to provide the services to the citizen. So it's a it's a percentage that shows how much of the tax revenue is being used to provide services. So whether the ratio is higher or lower, that's because that's city's policy or city's direction in determining how much of tax revenue revenue will be saved for future, activities or for some of the maintenance costs that's in the future.

So this is, a ratio that we look at during audit process. And next, we go through the, general fund. As a general fund is the main operating fund for the city. So looking at the fund balance, which is at the end of the year, comparing 2025 to 2024, the total fund balance a $181,000,000 compared to $166,000,000. So there's roughly $60,000,000 increase in fund balance.

And as you can see, there are many different categories of fund balances. So the non spendable fund balance, a big part of that is related to advances to other funds. And the restricted fund balance portion of restricted fund balance is, for your, one fifteen trust and also related to the the PAC operation. And also the committed fund balance are the fund balance that city council decided to commit it for future use. So there's a specific purpose that's being designated by the council.

And the assigned fund balance related to some of the conferences and some of the project that's being assigned by management with the ending unassigned fund balance at $56,000,000 at 06/30/2025. So I'm look so now looking at the operating, operation operation for the year ended 06/30/2025 compared to 2024. So total revenue generated for General Fund at 111, million dollars. Net other expenditure incur $86,000,000, so the revenue is overexpenditured by 25 millions in comparison to 34 millions in 2024. And other financing sources or uses are related to transfers in and out or any financing arrangement that the city had.

So the total change in fund balance was an increase of $15,000,000 for 2025 in comparison to $27,000,000 increase for 2024. So another ratio analysis that we look at is to review the unassigned fund balance or the non restricted fund balance, which is the committed assigned and unassigned fund balance in comparison to your annual expenditure. So the higher ratio you have, that means you have more unrestricted resources for future expenditure. So when you compare when you look at 2025, the ratio of unassigned fund balance, which is the balance that can be used for the city's discretionary at 65%. But if you look at the balance that's committed, assigned, and unassigned because all these are, commitment assignment coming within the city, not through external restriction so the city can make a decision on how the balances can be used.

So when you look at the nonrestricted fund balance in comparison to the annual expenditure, it's actually a 176% for 2025 and compared to 2024, a 183%. Now moving on to, key pension and other post employment benefit information. So pension, which is the GASB 68 pension standard, so it's related to the city's CalPERS plan, miscellaneous agent plan. So if you look at the net pension liability, it was at $56,000,000 in comparison to 58,000,000. So there are some, $2,000,000 decrease in the pension liability, for the funding ratio of 70%, at the 2025.

And during the fiscal year 2025, the city contributed toward a pension plan of seven, 17, almost $18,000,000 into the fund compared to the prior year, $7,000,000. Now looking at the other post employment benefit as discussed earlier, the the city actually had net OPEB asset for 2025 in comparison to 2024 that there's a OPEB liability. So you can see in the middle column, 2025. So $1,200,000 OPEB asset because your plan asset that's been set aside, the, the plan fiduciary net position is higher than the OPEB liability. That's why you you have you have a OPAP asset at the 2025 with a funding ratio over a 100% or 103.04%.

And the contribution made during the year, more specifically related to the retiree health benefit payments and some of the implied subsidy, a $2,300,000 for 2025 in compares in comparison to 2024 of $723,000. So with that, we will discuss the financial audit results. So at the conclusion of audit, after we go through the internal control evaluation, evaluating the account balances, we are concluding and issuing a modified opinion. So what does that mean? For a modified opinion, so that means the financial statements are fairly presented in all material step.

And as I mentioned, there there are are different accounting policy that describing no one to the financial statements. So these accounting, significant accounting policy have been consistently applied by management to prepare those account balances. And the estimates are reasonable, and all the disclosure are properly reflected in the financial statement. And some of the result is that we don't have, disagreement with management as we had mentioned earlier, and we did not report material weakness in internal controls over financial reporting and no no accounting issues noted as well. So with that, conclude my presentation, and I'm more than happy to answer any question you may have.

Just on that, I'm sitting for Sofia because she had a a emergency. So, but I have, Mark here as well. So in case you have any question, we'll do our best to answer any question you may have.

Okay. Thank you, Francis, and our so wish, Sofia all the best with her emergency addressing that. So please pass on our regards.

Thank you.

Jonathan, staff has a comment.

I would like to add one

one

last that the what the city is going to be performing or compiling is a popular annual financial report this year. Think of this as a budget at a glance, but for the annual comprehensive financial report.

Well

This is will be provided to CS or GFOA for their review. There is no standard template or but there are a lot of we what we compiled is a lot of other cities is not too many cities do this, but they're pathers, and we kind of mirrored ours to theirs. And we'll kind of today, this year is gonna be kind of a gauge as to how we can compile this. Our Irene, our intern, who also helped us with our cash flow model, she she's been working diligently to to compile this, and we've been working together to modify it so that we can kind of get the the the most relevant information from our actor and compile it into this 10 page document that kind of shows there's a lot of visuals. And so kind of it it's quick.

And so your person coming from library can kinda get a quick glance of how is the city doing. So that is going to be new this year, and we'll be once we have that compiled, hopefully, we'll send it off to the council or at least inform them that this is available. And as we submit it to GFOA, they'll provide comments. And then next year, we'll go ahead and refine it. And so, hopefully, we'll be able to get the an award for this as well.

Yep. Speaking is pretty odd, and we'd like to see that, of course, as well. When you have it, we can squeeze it into one of our financial reports that we have. I didn't realize they could be simplified, so that's great. Yeah. Folks, so back to our our comments and questions from committee members. I certainly have a call around the table if anybody has would like to start us off. Sure.

You know, in years past, and and maybe I'm mistaken, but this unmodified opinion somehow be stated clearly in the the management discussion letter?

I believe it's stated in the section right before the MD and A. So there's a letter from the auditor.

So it's there? No. Yep. Normally, would it be in the manage it's it's okay.

As long as it's based on the way. From the auditors.

Yeah. The auditors are make that opinion. Right. We can certainly restate it, but I think that is certainly something that it's it's their work that are reflective of how we And so So

on page one, their opinion and draft one.

Yeah. So that's that's something that people would look at.

K. Thank you. I was looking for that.

Okay. Other and you you mentioned that, I think, in your letter, Jonathan, that there were two things that two reports that hadn't come in as yet?

Correct. This is the referring to the

Required related party in progress questionnaires.

Yes. Those go to three individuals, so two elected officials and our city manager. As of when I had sent that email, we had only received one response. We did receive a response later Wednesday afternoon from one of them, and then we received the last one this morning.

And who is responding?

So they are sent to the mayor, vice mayor, and the city. It's done every year.

Who wasn't? Mine would've

been Your we did receive

yours. I

was and I was stuck on that one. I hope it worked out.

Yeah. It was perfectly fine. Yeah. I I didn't wanna speak for the auditors, but, yeah, they they

it was fine. Okay.

That was right. So we received, all the letter that were requested. So right now, we are reviewing through the the responses. So I I personally have not seen yet, but I know that, from communicating with the team, we received all these communication from the elected official and the city manager.

As of today.

Okay. So we're not waiting for any?

At this point, we're not waiting.

It's this one is it still needs

to be reviewed by the pun group. It's not to say that there won't be any changes. If there are, we certainly will report back to the audit committee that there was a material something material. Again, not looking at you. This is the other two individuals.

Oh, you're not looking at me?

Yeah.

No. I'm just No. Well, can ask about that? Because is is confidential? I mean, well, like, my letter is not confidential. That's

You kinda look at it as your Form 700. Right? And so it's more of your personal dealings with the city. So did you sell property to the city? Was everything kind of at arm arm's length? Not so much yes. You there is an item kind of relating to your property, but this it's really not what they're looking for.

Oh, okay.

But you were your your response was more detailed, transparent than than really what they were asking.

So, if I could elaborate, so the the purpose of having those communication, as I mentioned earlier, we really encourage a two way communication. So there are so many forms and we do communication. One is we send out the communication letter discussing, you know, our responsibility, the management responsibility, and then also including this format of a a two way communication. But also as required by the auditing standard, we are required to communicate and inquire with the, those charter governance about their knowledge of fraud or allocation of fraud or anything unusual and also their knowledge of related party transaction that will potentially have any impact to the financial statement. And so what we are what we are doing with the response, from the communication is that if even if there's any, indication there could be potential allocation or no fraud or related party transaction, then we have to do further evaluation to see what will be the impact to the financial statement and whether they are reported, correctly or properly reflected in the financial statement in all material respect.

So there's a lot of evaluation and then talking with management. Let's say if there's any responses that we need to go further into, then we will also evaluate. What is the risk of that response potentially can impact the financial statement because of the incidents that's been reported to us? So so far, we haven't known anything to that magnitude that would impact the financial statement amount. But as I mentioned earlier, so we since we just received the last letter today, so we are still going through the evaluation. So, if but if there's anything that might impact the statement, then we'll coordinate with, with the finance team and then make further evaluation. We'll probably get more other documentation, but we won't be in communication related to that.

Sheila, any more questions? We were with you at this point. Questions for the.

Not not for now.

Not for now. Great. Any others from your the other two members? It looks like vice mayor's got So

I don't know if this is really part of the FAR, but with regards to our enterprise funds, do we know which ones are self sustaining and which ones are subsidized? And then is that something that we should be having a strategy towards for some of the enterprise funds?

That may be a staff question.

K.

I'll go first. Sure. So I think some our of enterprise funds related to recreation. The council has decided to subsidize those

fee. Right.

So those are the ones that are gonna so if we were looking to cost recover, we'd to go back to city council and say, would you like to charge the full That generally becomes operational because for a lot of the rec activities, like the sports act, there's other gyms and places they can go get that member get that membership. It's more of a like, it's market data that drives what those rates are. So that's a consideration. The the first step would be for council to give us direction to come back and tell you, hey. We do we did do the study just two years ago.

Here's what the total cost that would be, and this is what it would do to the fees and see if that's something you wanted to proceed with. I think the bulk of them that are not self sustaining are the rec recreation programs, and then I believe there is oh, what is the other five five twenty.

Senior center? Or

Not the sports center. It's the I get this one in the two thirty confused all the time for public works. It's For enterprise? Yes.

So so we have the BlackBerry Farm. Uh-huh. We have

Sports center?

The sports center, the rec center.

Mhmm.

And then the research recovery.

Thank you. Research recovery is the one that believe

That one's self sustaining.

That one

is cost cost recovery.

And we could see that if we looked into the financial statements, so maybe a follow-up would be to help once we are tender those page numbers or something.

Sorry. He will be fine.

With regards to the overfunding on the on OPEB, could that be explained a little more? Did did we increase it was over 2,000,000. Did we increase it too much? Or

so what does it what does that mean? That's a combination of multiple factors. So one, what drove that one the most was how well the the the portfolio did. Right? And so it did drive the the the the assets to a higher level in in addition to the the $2,300,000 that the general fund paid for those retirement benefits. So the city does have the option to draw down the portfolio to pay those retiree benefits. However, that that needs to go through the the the budget process. Right? And we did this a couple years ago where we took it to counsel. We asked them this is during the the whole CDTFA audit to draw down those those balances.

10,000,000?

The 10,000,000 was last year relating to the additional discretionary discretionary payment to to CalPERS. This one's a little different. This is back when we had the CDTFA audit, and to help preserve some of the fund balance within the general fund, we made the conscious decision to drop draw on the portfolio from PARs to pay for those retiree benefits instead of relying on the general fund to pay for those benefits. Essentially, a transfer in or a cost of service from the inter from the OPEB fund or the which is a internal service fund. And so that there would be a cost or charge for service from there to the general fund or a transfer.

It might be easier for you to understand. A transfer in from the general fund to the to the retiree fund.

So it's all, like, be contributing year because of what's that? What's that?

It it the the market fluctuates. So what's last year, if we maintain this this I guess we have to look in the long haul. Right? If they're gonna maintain this return, and there's possibility that, yes, we do not need to transfer in. However, that needs to be taken to counsel, and this is probably something that we'd wanna do as part of midyear, whether we would want to transfer funds in or

Normally, we budget an actual done. Annually, we budget, but mid level of that for two. So

it could be you're asking for 400,000 or something.

Yeah. It could be some we'll look at some sort of offset that would make the the most sense when we're looking at this asset, figuring out what we should be

entering over or not. And is there a target percentage that they're trying for? And, you know, how do we compare to other cities that are doing this?

Last I recall, we were one of two cities that actually had a full funded

In the county?

Or In the state.

We're fortunate fortunate in that we do not have public safety. That is the driving factor here. Had we had public safety in our within the city or we employ them, that would be a different story. And I think for that reason, the city has made a, I guess, a smart decision in funding some of the the the fund itself with general fund monies, and we don't have that that additional liability that we would have to incur.

In fact, when the sale Poone Ridge Avenue occurred, a large portion, I wanna say, about 8,000,000 was put to actually, at that point, reduce our unfunded liability to zero. So that's another reason why it's so

well

funded.

It's not a big

the next sale happened in the big of the fund scheme one time scheme.

And the sheriff's contract, I would assume, is in

Yes. This is for last fiscal year, so those costs are

Okay. And we might be looking at a big increase in that this year. So

For next fiscal year, I don't. I think that's would go into next. Okay.

So then would that would we expect to see that sentence written about that? It say it's a $4,000,000 increase, would that trigger a a comment in the

It wouldn't trigger a a comment as far as OPEB relating because it

Oh, no. No. No. I mean, like

I didn't check the question.

If anything, we may see it in the MD and A or the transmittal letter. It's not it wouldn't be part of the financials financials looks in arrears or the the transmittal letter in Indian more from the transmittal letter, kinda give you an idea of some of the the things in the the horizon.

So it possibly could show up in the next but

It it could show up next in the current fiscal year, but not in the financials in the financial section, which is where you see the numbers and the notes and the the one. It'd be in the one of the first sections. Right? K. No money or dollar really assigned to it. Certainly, in next year's act for so of 2627, you'd see that reflected, and you'd see a a more thorough analysis performed on that, that it did increase from one year to the next and by x amount of dollars or percentage.

And sort of a side note, I took the whole or put it into chat g t. I had go through and the q one report on the two edition of AI, seeing the duties, powers, and functions. I think it's a really smart smart idea.

For our future topic and the future audit committee. Alright. So very good. So you've got your questions. Will, you have some for this segment?

No. I I I think it it's a a pretty clean audit. I I think with the the city staff, I think it's been a lot of hard work to and it good to see a good outcome. Just I I think if we were, if the the artist just sheds a bit of light or or some comment on the prior period adjustment, the the one for $5,000,000. And and number two is you presented some ratios in your presentation.

I I saw year on year comparison that fairly consistent, but I don't know whether the auditors actually had a benchmark and what what were expectations for those ratios? Sure.

I can, go through the ratio first. So the one of the ratio I mentioned earlier, first is on the, net cost of service to the tax revenue. So it's actually pretty comparable to a lot of the local government of your sizes of your size. And, so it's also depending on the, the council decision on your spending policy and also whether you are trying to build out more reserves. So you are saving some of the tax revenue for a future, you know, for maintenance or any infrastructure projects.

So you do see the ratio fluctuate, but 82, 84%, the the consistency of the ratio, and then that's also relatively consistent to a lot of government agency that's we consider in the pretty healthy condition. So, I don't that's why it's not being flat as an issue to me when I was reviewing the financial statement and also reviewing the PowerPoint presentation for today's meeting. And then the second ratio that I mentioned earlier related to this, your unassigned fund balance. And for the most, for so there's really not a benchmark, but GFOA was the government financial officer, association. So they are the, the the organization that give out the rating for the f, for the financial statement, whether you are receiving a award for for excellence in financial reporting, and there's also they are also the organization that has a lot of best practices and then writing on the white paper.

So one of their recommendation for your fund balance is that you want you also have about 25% of your, fund balance that's that can be, that that can be used for future expenditure in case you don't have any resources coming in. Right? But right now, when you are looking at, your fund balance in relative, comparison to the expenditure, so what they are recommending is that non restricted, which include the committed, assigned, and unassigned because those are considered nonrestricted. You're actually exceeding that. You're a 176%.

So that means you're already exceeding the best practice recommended by GFOA at 25. So 25% is roughly three three months reserve. If you don't have any new revenue coming in, you can still continue for three, four months. That's what the recommendation is. So right now, you're at a 176% for an unrestricted, fund But if you're looking at the, just the unassigned that you have no purposes as assigned to the fund balance, it's still at a very high percentage at 65%.

And then the other ratio that we show earlier are related to the pension ratio and then OPEB ratio. So pension is also very consistent with a lot of government agency roughly at 80%. Most of most of the government agency, I think they are roughly around 70%, a little higher or lower. So you are at 70%, for twenty twenty five and sixty eight percent for 2024. It's also very focused then with other government agency in the CalPERS plan. The OPAP plan, as mentioned earlier, it's actually over, it's over a 100%, which is little on the rare side. You you do see a lot of government agency. They barely have any OPAP trust that's been set aside. So, basically, the only thing they have are liabilities. So those are the extreme.

But most of the government agencies see that some are 30 some percent, some 50 some percent. You don't often see, hover over a 100% funding ratio. But as been, explained earlier by Jonathan, you know, we do have a very exceptional investment year, especially based on the measurement period because we're looking at the OPEB. Your measurement period is based on 06/30/2025, which when you look at CalPERS, CalPERS is actually one year behind. So it's based on 06/30/2024.

And as you all know, investment earning investment market performance was exceptional exceptionally well, you know, back in, the June, 2025 time frame. So you do have almost, like, $45,000,000 increase in investment portfolio, for the plan. That's why you see our plan is actually being overfunded right now, but, you know, can't really estimate what the market will be next year, so that kind of fluctuate. That's also one of the reasons, that, when Gatsby put out the announcement related to pension or OPEB liability, the way you recognize the investment earning is actually over five year time frame. So they are trying to smooth out the impact to your financial statement.

So when you're looking at investment earning, you have the projection how much it would be in the actual market performance. So the difference between the actual market performance and the expected earning, that difference could be a gain or losses that gets amortized over five year time frame. So kinda smooth it out over five year time frame. So that's one of the reason, yes, we have this pronouncement to make sure that it doesn't really impact the financial statement to fluctuate so much. So I think those are the couple ratios I mentioned in my presentation. So any the hopefully, I answer your questions.

I think there was the other question.

So the other question is related to, a correction on, some of the amount that need to be included related to, the water infrastructure, so that and as well as the construction in progress related to the water infrastructure. So these are the property and asset that's been leased out. So there are some improvement cost that's been added to those property. It wasn't being captured in the past year. And management actually go through their analysis, looking to the capital asset and realizing all this piece of information is missing from the prior year. So those are being corrected during this year's audit and and present as a correction here for a beginning balance adjustment.

Fine. Thank you.

Okay. Yeah. I guess maybe a follow-up for me on on the, the water issue. Overall comment context is great clarification in the actor and from my perspective and referencing. A lot of times I look at prior period adjustment, and then there's no more reference to it on the numbers from last year.

So I get very confused as to what really changed and what they so I thought, nice job to the team in getting that in there. But it did pass my mind when I was reading it is it almost sounds out of the goodness of either Sunnyvale or San Jose. They they did these improvements for the city at Cupertino, and then, you know, there's no real impact. They walked away. How do we get more of those kinds of things?

Well, currently, we have a 12

So this is one of the prior period adjustments was about 6,000,000, and it was because maybe Jonathan, in two sentences, you can describe it better than I can, but I'm a little confused. It seemed like another city provided great improvements to the water service, and it's an asset for the city now because they did it did it. And and it just sounds like there is no cost. That's pretty amazing.

Or their Public Works was able to negotiate contracts with San Jose Water Utility, who, as part of the contract, they are not just to maintain but also provide updates to our water infrastructure. So instead of just using it, letting it dilapidate, and then giving it back to us in a in a condition that was far less than than what it what it was in our initial lease, there was discussions, and they negotiated that. Apart from the $6,000,000 up until last fiscal year, there was an additional amount of, I believe, this point, about $1,800,000 annually over the course of the next twelve years that they will be providing in both system upgrades or maintenance costs.

Will those be assets added as they differ? So we haven't got the present value of the future assets. That's that's it's pretty amazing, though. Good good job negotiating.

Can you talk to Public Works about

that one? That

was all Bring

them in.

That's nice.

I'm sorry. Wasn't there a lump sum?

Yes. That is being amortized. That was about 22,000,000, I wanna say. That's being amortized in the straight value over twelve years. So that's in addition

In addition to 1,000,000 every

year for 12. 1 point eight. Yeah. And so this is something that we'll be receiving as we'll be recognizing that revenue. The city received that 22,000,000 in October 24, and we're doing a straight line amortization. So every year, you'll see a bit $1,800,000 in revenue recognition.

Yeah. I see.

Correct.

Oh,

well, the the funds are Ordans. They're not in unassigned. They're they'll be essentially moved away from the the point

is that they don't they can be used for general purpose Correct. Versus just for the the infrastructure. Correct. The

It increased the budget.

And that that helped balance our budget this year. Yeah.

Marvelous. So thanks for the clarification, Will, on asking that question. So I have a couple of questions. Other questions. I guess the typical thing that we like to see is the even though it's, it's, we we can't rely on it as a report on internal controls, you you as, the pun group issue an audit for a report on internal controls. I didn't get in the package. And if we could just have that as a a follow-up. I did see there's no material weakness identified, so I presume you would have called it out if there were something. But sometimes there's minor things in there that we always like to close the loop. So if each of the audit committee members could get a copy of that final report, that would be great.

Sure. So Okay. So we will we will be able to issue the re so, typically, we issue that, report that we call the, guidance report, the governmental, government auditing standard report. So what we can do is we can either issue, with a single audit report, which is a required component, to the single audit report. But at the same time, we also issue it separately as we are issuing the financial statement audit report.

We can also issue that stand alone report in in conjunction with the, with the effort. So if that's the preference of the city, we can issue that report earlier before we issue a single audit report. But you will see the exactly same copy, assuming there's no nothing no no new issue noted during the single audit. Right. You see a same report in the single audit report, but we can issue them separately earlier, during the time when we're issuing the effort.

Yeah. I think I I'm used to seeing it separately if that's possible rather than part of audit. But okay. Good. So second question was, you know, periodically and and, again, the audit committee is tasked with looking at the ACRA.

I think it's one of the most important responsibilities it has. So periodically, it's good to just understand maybe what the Pun Group looks at that the debt, capital investments are 212,000,000. It's approximately 50% of the city's entire asset class. So I wonder if you could just briefly describe what your audit procedures are in regard to, confirming that number. I presume there's a subledger or maybe multiple subledgers over the years after this these situations.

Sure. So I assume you've reconciled or seen the city's reconciliation of the subledgers to the general ledger. And then what else, in a high level do you guys do?

So, just kinda to, explain how the number is calculated. So as I mentioned earlier, the net investment in capital asset composed of your old capital asset, right, your infrastructure, your asset, and then net with the related debt. So that debt could be retention payable, you know, because retention payable is a type of liability related to the construction. So we have to net out the retention payable. We also the also have to net out any outstanding debt that's that's issued to construct or to acquire those assets, which you have, about 11 almost $12,000,000 debt related to to finance the capital asset.

And if there's any issuance premium, what discount in your case is the issue with premium? And in addition to the, the the debt that's used to finance the asset, you also have lease liability and subscription liability. So all these number add up to be your investment in capital asset. So as part of the audit procedure, we look at them all separately. So first, we'll look at the capital assets.

So as you mentioned, the sub ledger of the capital asset include the roll forward schedule and individual capital asset category detail listing, including the depreciation. So since we were auditor, about two years ago, we would get the beginning balance from review predecessor auditor work paper by looking at, do they have sufficient work to test the transaction in the past so that we can have a good beginning balance that we can rely on. And then going forward basis, we annual on an annual basis, the city provide a subledger that reconciles the general ledger, and we also do capital allocation to see out all the capital project, you know, capital expenditure that incurred during the year. They're reconciling to a capital asset addition, how much has been added during the year, and then also evaluating the classification of those project, whether the completed CIP to the fixed asset or directly purchasing assets. So those we perform testing on to come with the ending asset balances.

And then we'll also do analytical procedures on the depreciation or the amortization so that you come out the net asset amount. Right? So your net book value, which is the asset of all these capital assets, net of the accumulated depreciation and accumulated amortization. So that's your net book value of the capital asset, which we'll do audit on the annual basis, reconciling the analytical procedure and reconciling the capital outlay. So we have a good balance for the capital asset.

And then the second step is looking at all these liability that I mentioned earlier, where it's retention payable, and then also you have the, financing arrangement that you have to make the annual debt payments or look at the payment, how much has been made on annual basis to come up to reconcile to ending, debt balance and also the amortization of your bond premium. So to make sure that those debt, balances are correctly reflected, and then we just work through the calculation to make sure that the balance reconcile and then you have the correct, net investment in capital asset. And that that not only present that in the note to the financial statement, but also reconcile to the financial statement in the front of the financial statement.

So how in your opinion, this may be a question for Mark. How how is the city's audit reporting system working in terms of the audits procedures you just described? Are you able to get a lot of reports that help you delve in-depth into your questions? Or does there are some reports missing because we that may not have the most up to date software. Any comments you've got are helpful. Need to understand what how you go about it from the detailed records.

So I even though I have not worked on the engagement personally, but, Sofia actually actually is the same office. So it's Marvell. I'm in the same office, so I do talk to them from time to time. But my understanding is that during the overall audit process, the staff is very supportive. So I do know that Mark is on the call with the finance team all the time to get the documentation, documentation, roll forward schedule, and Mark can probably talk about if she has an issue with the accounting software or with this Excel spreadsheet as we maintain related to the capital asset.

But from my understanding and discussing, you know, our weekly, scheduling call, I don't I didn't hear much of the issue that's being, coming out from doing an audit for the city of Cupertino or more specifically related to capital asset maintenance of capital asset. It's not really an issue that's being brought to my attention. But if on, but that's that's based on my understanding because we do have weekly scheduling talk calls for our entire office to talk about any issue that we encounter with a schedule issue or other issue or client issue. That it's not something that I've heard in the past few few past few months.

Yeah. You I'm glad you touched on the concept of an Excel sheet because I do remember years ago that that came up from one of the audit team. So is an Excel sheet part of the underlying documents for the the capital assets?

I can answer that in yes.

Yes. It

is. The answer is yes. Oh, amazing. So it just it's any comments from staff in regard to is that the most modern way of keeping track of large numbers like this?

Certainly not the most modern. However, we are in the process of getting a new ERP system. And with that, we will be bringing that that whole spreadsheet onto the new ERP and so that it becomes automated. So not so that our accounts payable or our purchase orders could be tied into a capital asset. And so it becomes more streamlined. You're less likely to have an issue where an asset could be missed. And so that just kinda goes with getting an updated software that's a bit more robust to address those those. Perfect.

And that helps me. And so is that already been committed, or it's in process? So I forget with the ERP.

It's been committed.

Approved. And approved. Perfect. So we'll

be go to council in the the coming month or two with staff's decision as to what solution we'll be recommending.

Great. I guess the fund group that'll have a different set of software to look at next year.

I I I was just I take the time to the implementation and the timing and then the upload and everything because, we have seen, other clients, implementing a new ERP system, whether with a different module, with just the accounting and the phase into different module. So that's a really it is really big undertaking that will take a lot of resources and time, but, of course, you know, the planning and the whether to have the consultant or internally have a dedicated team really focused on doing all the implementation is very important because you don't wanna go into implementation and realizing maybe this is not the best software for the city, so that initial evaluation is really, really important.

Right. Sounds good. I appreciate your your, responses. We have some more questions. Vice mayor?

Going back to the percentages that you were sharing, the 25% of of of the fund was recommended, and we're at a 176% that there's a recommendation of three months reserve. And I'm I'm I'm sure we are we are over that. So kind of wondering what the impact of that data actually is. How do we compare to surrounding cities? Are we missing, a policy that's it sounds like we we have a lot of of funds built up, and we got a lot of reserves.

And how do we with our neighbors? And and is it too much? And what's the risk if keeping that? Because, like, construction cost continues to rise. Are we going to be falling behind that by keeping this money tied up?

So from, from our audit perspective, of course, the city should have a very robust fund balance policy. Right? So when I look at your fund balance classification, you do have a economic uncertainty, reserve that's been committed at $24,000,000. So that's a policy that the city council decide that we wanna have this buffer, right, in case something happen. We have this $24,000,000 economic uncertainty, and then you can you will spell out what could be the criteria that you can start drawing down the phone from there, and you also have some other reserve there.

So you can have different category and different reason for the reserve so that that will bake that into the committed balance. And, of course, because the city does generate some revenue and then you have your budget expenditure, you also wanted to be able to build a healthy reserve. So you will commit those for different category that based on the city's discretion. Right? So you do have the restrict about that you put aside for the parts plan, for the one one fifteen trust.

But other than that, basically, you know, you do have a lot of fund balances. So I'm pretty sure the city city have a lot of project that you plan to do that you wanted to put in different category, but it's really a city's policy and also the council members, you know, your appetite about what how strong of a reserve you wanna have and how much you wanted to go back, invest back to the city. It's really your policy that we don't have a recommendation, but at least you are meeting the minimum requirement that's being recommended by GFOA. But beyond that, it's really your risk appetite, how much reserve you wanna bill in case something happen.

Thank you. And that that's been a question question for a while of mine, and I've wondered who who is best to advise on where the upper limit is moving forward. Who who do we go to for that?

I'm sure we can have conversations with with Moss Adams, who's our integral

Baker Till.

Baker Tilley now, who would who would provide guidance on how best use. However, they will not make the recommendation. You should spend it on x, y, and z. They would just compare you to one GFOA, what is their their best practice, which is 25%, and then they will provide some sort of comparison. So compare us to maybe Morgan Hill or Saratoga in other cities or agencies around our area, similar.

The the challenge is is also comparing ourselves to other cities without public public safety. Right? Because that's also plays a big factor in how much funds you should have available. Again, GFOA doesn't really discriminate whether you have a public safety or not. It's just 25%. Right? So there's a a few other considerations you would want to make when you're kind of shooting for a desired fund balance. And it's not to say, let's go out and spend all the money tomorrow, but it it's kind of have a plan for it. Most of it where it's gonna end up planning and committed because you've this essentially earmarked it for capital improvement or some sort of other

desire from the the council. Another possible resource is the actuaries that so I think every two years, there's an update on the pension side. So a lot of the OPEB stuff, I think, is also an actuarial type of guesstimate scientific study. So you could ask Moss Adams to work closely with an actuarial firm, the one that probably does the work anyways with the city and come up with some specific questions. But maybe we should take this into our next agenda item just in a minute here. So but great questions. I think we should

Just just one. There is a budget forecast that that does, so that's presented as far as the budget structure.

Have

a policy policy also in the policy book on reserves and fund balance as well.

So many things that we don't know. We should alright. I what I'm driving to now is, Lindsay, are there any public comments on this item?

We have no hands raised on Zoom chair.

Great. So why don't we bring it back to the committee and any other last comments? I got a couple comments on this report, and then more than happy to pick up the report to the city council. But first of all, in the transmittal letter, I was very happy to see, and and thank you finance team and specifically Christina for including the audit committee members and helping to bring the, possible, well, in in helping, what's the exact word here, conduct the city's financial operations in a responsible manner. So I I do think that is a role of the audit committee, and and thanks for calling us individually, members of the committee out for that.

And, secondly, I thought it was a very high quality report this time, so that goes to Ponne well as to the city staff. In prior years, I've had any number of behind the scenes comments, and I didn't feel that urge this time. So what that it's hard to objectify something like that, but it's a personal opinion. So I think, the awards that g o getting from GOFA are certainly award past year's report that I can see in draft form. Okay.

Any other comments? And we'll forward this to city council assuming there are no it's in final draft form. So if there are changes, you'll notify us of them so we could, deliberate with you guys in the future meetings. Otherwise, it's on the city council. And thank you, Francis and Mark. Even though we didn't hear from you, Mark, we we know you were there in case we needed it.

Thank you. I appreciate all the support from the city as well. Thank you.

Great. Thank you. Marvelous. But I do mean that. I say I've been through how many? 13 of these things, and they are complicated documents that you guys know so well. Mean, of course, you put them together. Boy, it's nice to be able to rely on on the I think the new MDNA portion is really well done. So our our last agenda item here is an informational item, although we received the '26 schedule and work plan and discussed it. So, Jonathan, why don't you that.

Yeah. Great. We could expand. That's that's that's readable.

There's a fifth column here, and that's just the special meeting on Perfect. November, December. So we'll stick to what our routine and our periodic items are. So starting with January, which we already know, there are a couple additions, and there was something that was left off. So, we have our periodic reports.

So our minutes are in our investment reports along with our internal audit update. Something that we would be including here would be one, the municipal code update that was as you may remember, this went to council earlier last year. It was then forwarded to city council. It went to the audit committee earlier last year. Shortly afterwards, it went to audit to the city council who, in turn, turned it back to the audit committee to do some additional review.

We'll be providing a staff report on their their recommendations and items to focus in. Additionally, we'll include an item on here for the popular annual financial report as well as the OPIP and pension policy review possibly depending on what the city attorney's office recommends.

So you're suggesting that the item that kinda ping pong back and forth is gonna be on in January meeting?

Yeah. This is the the policy's noticed correctly.

So you're talking about OPEB?

The OPEB and pension policy investment policy.

Right. Right. I got that. And then I thought there was another one with municipal code.

Yes. Oh, my mistake. Yes. The municipal code update. And so this is discussing the committee's roles and responsibilities, whether expanding that or keeping them the same or the frequency in which the the meeting meets. I think that was the

the Gotcha. One

that that the the the council wanted us to discuss whether

I remember it took us thirty minutes just to do the first go around on that one. So maybe we're are we anticipating, like, a three hour meeting maybe or a four hour meeting?

I've I'll I will chat with our our city clerk's office because we are restricted as to how long we could stay here, and it's typically 06:00. That's what

I would

have coordinate with staff at the facility whether to see if we can extend it beyond that that 06:00 mark

very early. Hope we don't have to do that. I would see somewhat in jest so that the public's aware of my my views on this. We did do a thorough discussion, I thought, in the past meeting, so I would think the staff report will guide us into whatever given updated information and deliberation we should make so it could be maybe streamlined in comparison with our pre previous deliberations. But I also bring it up in a sense that there's been some discussion that the second item on the OPEB that we could do some of this using a consent calendar idea.

And and I honestly think that's a great idea if there's an appetite among the committee members. That may not be appropriate every quarter. We might, like, have more questions for Dennis because we are addressing the policy. We're bringing back the policy document we didn't finish, so that might not be a good example in January. But there are a number of, you know we've we've looked at this every three months, and I know that's hard coded into the policy, or somebody needs to look at these every three months. But we can do that through a consent item, I think. Council members you guys do that sort of thing on the council all the time. Any any thoughts on pros and cons of doing some of these items as a consent item?

There are no real cons because if we had questions, you'd take it out. Out.

Okay. I have no real cons. Okay. Well, that's got me let's put that on the table as an idea to consider. So how that could be implemented is maybe starting in April, July, and then October, we can maybe maybe staff look at what's the right way to put the OPEB one and pension one one five into a consent item.

There are some other possibilities as well, like the internal audit fraud and waste report. Now that we we obviously wanna have it, but if I'm just talking about the table that they present, not the other internal audit stuff that gets reported to us. So unless there is a big blow up in the numbers on the table or something, we can just consent to agree to that. But I see you not necessarily thinking that's a good idea.

I'm not sure where to put this issue. But we there were 10 open cases, and some of them were

Right.

Two years. Right. And then in order to open those cases, you need to have basically budget for an investigation into it, which drives up

Okay.

Attorney costs, and there's 10 of them. Now I don't know how much each one of those would cost. Potentially, if you were to say we're gonna look at all of them Yeah. 300, 400,000. I don't know. That could probably

That that to be, you what kind of investigation needs to be done. When you need to hire, it's going to vary. I think part of when not to speak out of turn for Baker Tilly is I think the hope is internally they can be investigated, just mitigating some of the cost. But we do have a contract city attorney. So I don't know if that's any of the work there. In house city attorney could do to help mitigate costs. Or I think the the with some of the reports that are still outstanding, I don't know staff something at staff level.

I see what you mean. There's some items in there. But, again, I I can see that once that was maybe put aside or addressed, then the normal reporting that comes in the table is pretty vanilla unless there's a big blow up on like, there's 30 reports in a month or a quarter or something. It's really not like, we can't even see the the the detail on it. So I and this is more information that maybe there's 10 that we could that you probably got through city council.

The last We their last report.

The last report provided that sort of information?

We had The numbers. Group.

Yeah. They told us they're number, but it didn't say the amount of No. Of how to resolve them. I I didn't know.

Was they're

not being solved.

They're okay. Okay. So let's not take that one off right away, but let's go let's go through these as a general idea. Maybe there's some that are appropriate for consent and others that aren't. I don't think the treasurer's investment report is necessarily a consent item.

It's that sort of if things change, it's financially It's important. It's okay. I I guess the report part that Carlos presents, he's a useful resource, but what I'm trying to do is minimize the general market information that's very important that somebody, the the city staff is looking over it, Carlos is looking over it, Dennis is looking over it, but I don't think we need to be looking over it other than maybe a special meeting. So maybe we can split up Carlos's report out of the well, maybe Sydney's the best way to address. I'm throwing ideas out, guys, to make our meetings more efficient.

So feel free to a good comment here, but maybe maybe Carlos is available for q and a. He's very helpful, but we don't necessarily need his 50 page report. It could just be presented to us as part of the package, and then we consent to receive it. But we have still your report where you present the treasurer's report.

What we can do is provide the reports as we've been, including them in a we can include it as part of a consent item. We can pull them, and you can ask your questions, and they can elaborate a bit more. Or if there's key items or key points that they that it feel like it's relevant or just worth mentioning, they can kind of expand a bit more. It So kinda gives you a bit more of an opportunity to get we'll ask your questions and get a little more information that otherwise would have been just Right. Your best part of consent.

That sounds good in the way you describe it there somehow. I like that. If we can achieve more interaction of the committee with what interests the committee individuals, that saves us some time rather than Carlos telling us what the interest rates are. Not that I don't like that, Carlos, if you're listening to catch up on, but better we're so pressed for time, and I think we can do better. So what I'm trying to do is certainly create more time for the internal audit in interaction.

So suppose there were a municipal change, and and at some point, we do help provide input into the internal audit program. Because we have where is that on our our 2026? Maybe we didn't put that on there.

Audit work program is April 27.

Okay. So take that one as an example. By then, possibly, we've got this municipal code thing completely smoothed out or maybe we don't. But at any rate, there's input from each of us on I've heard vice mayor have some marvelous ideas. I think a number of them have come up, I've sort of lost track of them.

We could ask, Baker, tell you what we talked with you guys about as as projects. But it'd be nice to have some clear action why we're we're kicking these, what's the pros and cons. So it's kinda like this act for where we would have a lot of give and take with the fund group. I thought that was pretty informative. We got a different But how can we carve out enough time so that we can make that I don't know. What's everybody think is enough time for that with the internal audit group? It's a major element. Do they do three year plans? I forgot already. Was it just a one year?

I think it's a one year. Okay. So maybe our thinking from an audit committee could be more like, well, what can't get it all done because we don't want to budget it so we could have two or three items stacked in there that we're all excited about. So we're looking at three years down the road instead of just one year. But, anyway, my 2¢ on that, I think. Okay. Anything else we could streamline across here? I know I interrupted you, Jonathan, but it's just the nature of me sometimes.

But we use the the the routine reports. So minutes, the two investment reports, and the internal audit and fraud, waste, and abuse updates. Should there be any questions or if the count the the committee wants to pull any of these items, the consultants, whether that's Chandler or Carlos with Chandler or Dennis or Baker Tilly, they could present or just go straight into responding to any questions the committee may have.

Does that have it everybody? If you come up with any more ideas of Streamline, feel free to send Jonathan an email. We don't wanna violate any rules, but, Jonathan, I could feedback. I guess we need elections. Where is that

on here? That that is in January 6. It's the first.

Point on committee chair. Okay. Perfect. Got that.

So Yeah.

We didn't do that this past year until, like, the middle of the year. We we were running short on people or something. So we didn't we won't we can do that early on. It's okay. Any other comments, changes, suggestions, questions?

When we look at the April 27 meeting, the annual review of the investment policy, I don't know if that is one where we would be looking at what an upper end fund balance policy like, or just see, you know, what is that that done? Is it a reserve policy? What's it called?

I'd I'd I'd separate the two. So the investment policy is more geared towards your investment restrictions. So what what what grade, what the length of time, and whatnot. So that's more of what char Carlos is is working on those investments. As far as fund balance reserves, that would be a separate policy.

And, typically, that's taken to is included as part of a a attachment to the to the budget. However, the last time it was updated was during the when we took the reserve for the ace the CDTFA. CDTFA audits, and we converted of the 74 and a half million dollars to 64 and a half for future use reserve and $10,000,000 for the additional discretionary payment to to CalPERS. And so that's when we did that update. So it's been static since then.

Should we if there's a desire by the audit committee to kinda move forward, I think we would first have to address it as part of the the municipal code update to expand your Response. Responsibilities to include that policy. If it's not explicitly already stated, which I don't believe it

The new city investment policy.

Investment policies, internal controls. There's

I think it falls under investment policy umbrella. I mean, I would personally, I would want to have the audit committee weigh in on it as it's yeah. And and the issue of have the audit committee make a recommendation about it, just basically endorsing it yet and saying, you know, that we think this is a safe thing, you know, to keep this much here, and why and why not?

They just thought about that by this thing. Just to make sure I don't have a problem bringing it back of the fund, make sure we stay within the scope because I would agree with Jonathan. It's more of a a it's a affiliate budget policy. So you have excess funds, what you want to do with those funds, not necessarily how you want to invest them because they already are invested. The the that's the investment policy looks at all the funds the city has. Right? But the reserve policy specifically says how much should you have on hand to do these things that we've said and was that it's got money for. How do we wanna handle that? So to me, it really is more

of a budget issue.

I just wanted to see if I'm not sure if we're staying within the scope of the audit committee. So maybe if I can do a check-in with the city attorney and

do a follow-up

with the committee and then figure out what's c what city attorney's office, how we can proceed.

Yeah. I could see that because we the typical thing in industry is, you know, when I have the auditor doing operational stuff and then doing a review of that. So this this could be a conflict. But one one thought to add into the mix is since we're looking at internal audits programming, April, that and if it were this you're trying to get inputs into a policy decision, then that that's something that, like, Jonathan had said before, the the fertility could be involved. And so we can put that as one high priority as an audit committee where they're providing in place.

I agree with that. The other thing I do wanna add is that this policy is very much driven on what council wants to accomplish and do. So if the desire is more to hold on to the money, the desire is more to spend the money working at a long term CIP. Are there any projects that we wanna say we wanna invest for that? Usually, we wanna set those aside so that I think a lot of what we so one of the Jonathan said, you're gonna see Baker Tilley come back with this.

Well, you know, Sarasota has this, and they have that, but they had it for these reasons. It's really a policy decision. This council want to do with it, and that's going to drive how Cupertino's policy looked like a long time ago. We had much higher, committed fund balance because of our, reliance on one major producer of a lot of our taxes. And so we have it a lot higher than others, but it also can depend on the council's appetite to do more infrastructure or if that if those dollars wanna go to somewhere else, unpacking that, knowing what we wanna do, that will help us understand how we set up our reserve policy.

So since you do every quarter budget review, is this something that you could separate out second quarter? You'll do the first quarter now. I didn't

changes to that forecast. I mean, mid

June I know.

I'm saying could we add it as a separate subsect of

the to bring it back to council, but I think I think what I'm hearing is that you want it with with more of, like, a third party funds on it. My understanding that.

Alright. Well, my behind all this is just the thought that we wanna be for me, we wanna be very conservative, and I wouldn't wanna see because I won't be here forever. I don't wanna see a council decide that, look at all this money. Let's go spend it.

Yeah.

And and then I'm, you know, watching on the you what? And and that there'd be something that said, you know, just because GFOA has got these low percentages and number of months that you need to have Mhmm. That's that's fine, but we believe this and hold on.

But but that's you can just look at the 25% or whatever the cheapest. Let's set it aside and say, okay. Let's suspend the remaining benefit. Yeah.

Our our number is actually bigger than Yeah. Always.

And and plus Is it We would know what the specific items that we would need to set

So if it's not in the and to move anything into the committed council has to give us that authority to say we wanna take this money. So similarly, when we took the the CDTFA reserve, it created the mortgage insurance that went to council to move the money around. To use any unassigned fund balance, that has to go to council to get their authority. So it there are several check-in points. But if a council wish to, even with the policy there, what they would do is they would direct us to rewrite the policy or reduce those funds and remove that remove that committed assignment, right, that the committed reserve.

And so the policy is more for guidance, like what we can and can't do. But the policy, as you're asking now, can be brought forth and can be changed should council desire to do so. It's always been our stance in terms of the, economic uncertainty reserve that we should have a higher reserve just based on the revenue makeup of our city. And so we still stand by that and say, hey. This number should really stay where it's at. I think at the crux of everything is what to do with the other side. Right? Because that and the side has got a huge balance on it. Whether and and to me, that's gonna be really driven by remember, this is onetime money. Does council wanna hold on to it?

Do they feel like there's infra onetime infrastructure needs that the we should be focusing this dollar longer? That becomes a policy question for council on that last piece. Currently, our policy says anything above a half 1,000,000 in unassigned should go to the CIP reserve. We've kinda held off on making that recommendations because there's been a lot of stuff influx that we don't wanna move it and then have to potentially move it back or or kind of reallocate it now that we've kinda hit the a bit of our, kind of we're past COVID. We're past CBTSA.

We can see what the share of conflict is gonna do to our forecast. Right? I think once that last piece drops, we might be better suited to say, kind of, here's what the forecast looks like in the future. These are the dollars we're gonna have on hand. Council may wanna consider moving these funds into CIP. That's usually the place that makes the most sense unless there's something else specific not related to infrastructure that council wanted to set those funds aside. That makes sense. And then, again, it's just more of a council policy decision versus really a paper tool. We can tell you what everybody else is doing, what your employees' recommendations are. But I think it's really gonna come down to council's desire for kind of the long term what you might wanna do with those funds.

And I'm not challenging either. Many good points made here. One of the ways you could tailor a quest to paper telling would be, here's the what the most conservative goalposts. I'm just using but it's how you phrase their project is also a way to come back with the goalposts.

Mhmm.

That that's why we might wanna have enough time to deliver it on, you know, these kinds of projects That's the opportunity there. Well, not that we can solve it here or many people, but I agree. We I don't we as a committee can't make calls to decision and much less on on something that's in the city council's arena. So we have to be aware of that.

Could it be, chair, that we have set roll May, like, May meeting in case this April 27 meeting can't be completed. Can we

We can surely do that, but I'd rather make this suggestion. I think Jonathan and staff had a chance to come back because we've given quite bit, and we got the consent calendar. We've got the uncertainty of how open policy is gonna be exactly handled. That might need a special meeting also. I don't know. But how much can we so summarizing, how much could we squeeze out by still being very efficient but making us do a lot of homework behind the scenes. That's what consent really does. Right? So I think we could do this with our committee makeup. And then maybe we need more, you know, more clarity on special meetings, like vice mayor suggested, but I almost suggest maybe what we should on here are work plan.

Usually, we look at the work plan every time, so that's another one that's probably not on here in the eighth in January or not. We don't have time to look at the work plan every time. That's for sure.

It it the work work plan is included in all our even though it's not explicitly stated here, we always include it at the end of each meetings. But it's in the horizon.

That'd be okay rather than walking in May necessarily. We'll readdress it in the future. Okay. Any other comments? Will, you're okay?

Yeah. I'm

good. Okay. We gotta give you more assignments next year. Special committees preparing for each of these items. Alright. On that happy note, thanks, everybody. I think we're done. Right? That's our last.

Oh, How

did you forget that?

We have no meals or any songs.

We have. Was fine, you guys. That's the best kind of

Then then we are at third.