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HomeMy WebLinkAboutStaff Report 2309-20411.Discussion and Recommendation to the City Council to Accept the Macias Gini & O'Connell's Audit of the City of Palo Alto's Financial Statements as of June 30, 2023 Presentation 3 1 5 4 Finance Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: City Auditor Meeting Date: November 28, 2023 Report #:2309-2041 TITLE Discussion and Recommendation to the City Council to Accept the Macias Gini & O'Connell's Audit of the City of Palo Alto's Financial Statements as of June 30, 2023 RECOMMENDATION The City Auditor recommends that the Finance Committee review and forward to the City Council for approval the City of Palo Alto’s audited financial statements for the fiscal year ended June 30, 2023, and the accompanying reports provided by Macias Gini & O’Connell LLP. EXECUTIVE SUMMARY The City Charter requires that the City Council, through the City Auditor, engage an independent public accounting firm to conduct the annual financial audit. The selected firm reports the results of the audit, in writing, to the City Council. Macias Gini & O’Connell LLP (MGO), a certified public accounting firm, conducted the audits of the City’s financial statements for the fiscal year ended June 30, 2023. The City Auditor is providing copies of the following financial statements and reports as prepared by the MGO: •Auditor’s Report to the City Council (the “Management Letter”) – Attachment A •Cable TV Franchise, Independent Auditor’s Report and Statements of Franchise Revenues and Expenses for the Years Ended December 31, 2022 and 2021 – Attachment B •Palo Alto Public Improvement Corporation Annual Financial Report for the Year Ended June 30, 2023 – Attachment C •Regional Water Quality Control Plant Independent Auditor’s Report and Financial Statements for the Year Ended June 30, 2023 – Attachment D •Independent Accountant’s Report on Applying Agreed-Upon Procedures Related to the Article XIII-B Appropriations Limit for the Year Ended June 30, 2023 – Attachment E 3 1 5 4 Note that the Annual Comprehensive Financial Report (ACFR) and the reports collectively known as the Single Audit, are presented as a separate item on this agenda and include the following Independent Auditor’s reports: •Independent Auditor’s Reports on Financial Statements (ACFR) •Independent Auditor’s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements in Accordance with Government Auditing Standards (Single Audit) •Independent Auditor’s Report on Compliance for Each Major Federal Program; Report on Internal Control over Compliance; and Report on the Schedule of Federal Awards Required by Uniform Guidance (Single Audit) The MGO issued a clean opinion on each audit report and reported no findings within the Agreed-Upon Procedures report. The City Auditor would like to express appreciation to the MGO and the Administrative Services Department staff for their hard work and cooperation during the audit. FISCAL/RESOURCE IMPACT There is no fiscal impact resulting from the attached audit reports. STAKEHOLDER ENGAGEMENT MGO conducted the audits in coordination with the Administrative Services Department and the City Auditor. ENVIRONMENTAL REVIEW Council action on this item is not a project as defined by CEQA because the audit activities do not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment. CEQA Guidelines section 15378(b)(4). ATTACHMENTS Attachment A: Auditor’s Report to the City Council Attachment B: Cable TV Franchise Auditor’s Report Attachment C: Public Improvement Corporation Annual Financial Report Attachment D: Regional Water Quality Control Plant Auditor’s Report Attachment E: GANN Limit Agreed Upon Procedures Report APPROVED BY: Adriane D. McCoy, City Auditor CITY OF PALO ALTO, CALIFORNIA Report to the City Council For the Year Ended June 30, 2023 CITY OF PALO ALTO, CALIFORNIA Report to the City Council For the Year Ended June 30, 2023 Table of Contents Page Transmittal Letter ........................................................................................................................................... i Required Communications ............................................................................................................................ 1 www.mgocpa.com Macias Gini & O’Connell LLP 2121 N California Blvd. Suite 750Walnut Creek, CA 94596 i Honorable Mayor and the Members of the City Council of the City of Palo Alto Palo Alto, California We have audited the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of City of Palo Alto, California (City), as of and for the year ended June 30, 2023, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements. Professional standards require that we communicate to you the information related to our audit discussed on pages 1 through 5. In planning and performing our audit of the basic financial statements of the City as of and for the year ended June 30, 2023, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States (Government Auditing Standards), we considered the City’s internal control over financial reporting (internal control) as a basis for designing audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City’s internal control. Accordingly, we do not express an opinion on the effectiveness of the City’s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. A reasonable possibility exists when the likelihood of an event occurring is either reasonably possible or probable as defined as follows: •Reasonably possible. The chance of the future event or events occurring is more than remote but less than likely. •Probable. The future event or events are likely to occur. Our consideration of internal control was for the limited purpose described in the second paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that were not identified. The purpose of this communication, which is an integral part of our audit, is to describe, for management and those charged with governance, the scope of our testing of internal control and the results of that testing. Accordingly, this communication is not intended to be and should not be used for any other purpose. This report is a matter of public record and this does not limit the distribution of this report. Walnut Creek, California November 9, 2023 ii This page is left intentionally blank. CITY OF PALO ALTO, CALIFORNIA Report to the City Council For the Year Ended June 30, 2023 1 REQUIRED COMMUNICATIONS We have audited the basic financial statements of the City as of and for the year ended June 30, 2023, and have issued our report thereon dated November 9, 2023. Professional standards require that we advise you of the following matters relating to our audit. Our Responsibility in Relation to the Financial Statement Audit As communicated in our engagement letter dated April 19, 2023, our responsibility, as described by professional standards, is to form and express opinions about whether the financial statements that have been prepared by management with your oversight are presented fairly, in all material respects, in accordance with accounting principles generally accepted in the United States of America. Our audit of the financial statements does not relieve you or management of your respective responsibilities. Our responsibility, as prescribed by professional standards, is to plan and perform our audit to obtain reasonable, rather than absolute, assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, as part of our audit, we considered the internal control of the City solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. We are also responsible for communicating significant matters related to the audit that are, in our professional judgment, relevant to your responsibilities in overseeing the financial reporting process. However, we are not required to design procedures for the purpose of identifying other matters to communicate to you. Planned Scope and Timing of the Audit We conducted our audit consistent with the planned scope and timing we previously communicated to you. Compliance with All Ethics Requirements Regarding Independence The engagement team, others in our firm, as appropriate, our firm, and our network firms have complied with all relevant ethical requirements regarding independence. Qualitative Aspects of the City’s Accounting Practices Significant Accounting Policies Management has the responsibility to select and use appropriate accounting policies. A summary of the significant accounting policies adopted by the City is included in Note 1 to the basic financial statements. As described in Note 1(n) to the City’s basic financial statements, the City implemented Governmental Accounting Standards Board (GASB) Statement No. 96, Subscription-Based Information Technology Arrangements (SBITA). The application of this statement impacted the City’s financial statements and footnote disclosures for the fiscal year ended June 30, 2023. CITY OF PALO ALTO, CALIFORNIA Report to the City Council For the Year Ended June 30, 2023 2 The City also implemented the following GASB Statements: Statement No. 91, Conduit Debt Obligations; Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements; and certain requirements of Statement No. 99, Omnibus 2022. The implementation of these statements did not have a significant impact on the City’s financial statements for the fiscal year ended June 30, 2023. No matters have come to our attention that would require us, under professional standards, to inform you about (1) the methods used to account for significant unusual transactions and (2) the effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus. Significant Accounting Estimates Accounting estimates are an integral part of the financial statements prepared by management and are based on management’s current judgments. Those judgments are normally based on knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ markedly from management’s current judgments. The most sensitive accounting estimates affecting the City’s basic financial statements were: • Fair value of investments. The City’s investments are generally carried at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The City’s investments are primarily classified as level 2 of the fair value hierarchy established by GASB Statement No. 72 and are valued using prices determined by the use of matrix pricing techniques maintained by the pricing vendors for these securities. The City’s investment in the money market mutual funds, California Local Agency Investment Fund and California Asset Management Program are not subject to the fair value hierarchy. • Estimated allowance for losses on notes and loans receivable. The allowance for losses on notes and loans receivable is based on the types of loans (e.g., forgivable, deferred, grant, or amortizing) and management’s estimate regarding the likelihood of collectability based on loan provisions and collateral. • Depreciation estimates for capital assets, including depreciation methods and useful lives assigned to depreciable assets. The estimated useful lives of capital assets were determined based on the nature of the capital assets and management’s estimate of the economic life of the assets. • Landfill post-closure liability. The City has estimated, based on a study conducted by consultants, the post-closure costs of the Palo Alto landfill based on what it would cost to perform all currently mandated post-closure care. Actual post-closure care costs may be higher due to inflation variances, changes in technology, or changes in State or federal regulations. • Net pension and Other Postemployment Benefits (OPEB) liabilities, contributions, expenses, and other related balances. These balances for pension and OPEB are based on actuarial valuations, which incorporate actuarial methods and assumptions adopted by the City, performed by the California Public Employees’ Retirement System’s and the City’s independent actuaries, respectively. CITY OF PALO ALTO, CALIFORNIA Report to the City Council For the Year Ended June 30, 2023 3 Claims loss reserve. The City is exposed to a variety of risks of loss due to general liability, workers’ compensation and other claims and records an estimate of these losses based on actuarial studies performed by third party actuaries. These studies are prepared based on the City’s prior claims history, which is used as a basis for extrapolating losses for known and incurred but not reported claims. Actual loss experience may vary from these estimates. • Discount rate used for the calculation of lease liability, lease receivable, and SBITA liability. The discount rate used for the calculation of the lease liability, lease receivable, and SBITA liability are based on the City’s estimated incremental borrowing rate using AAA General Obligations interest rates. We evaluated the key factors and assumptions used to develop the accounting estimates described above and determined that it is reasonable in relation to the basic financial statements taken as a whole and in relation to the applicable opinion units. Financial Statement Disclosures Certain financial statement disclosures involve significant judgment and are particularly sensitive because of their significance to financial statement users. The most sensitive disclosures affecting the financial statements were the disclosure of Pension Plans in Note 12, Other Post-Employment Benefits (OPEB) in Note 13, and Commitments and Contingencies in Note 17. Significant Difficulties Encountered during the Audit We encountered no significant difficulties in dealing with management relating to the performance of the audit. Corrected and Uncorrected Misstatements For purposes of this communication, professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that we believe are trivial, and communicate them to the appropriate level of management. Further, professional standards require us to also communicate the effect of uncorrected misstatements related to prior periods on the relevant classes of transactions, account balances or disclosures, and the financial statements as a whole and each applicable opinion unit. Management has corrected all identified misstatements. In addition, professional standards require us to communicate to you all material, corrected misstatements that were brought to the attention of management as a result of our audit procedures. None of the misstatements identified by us as a result of our audit procedures and corrected by management were material, either individually or in the aggregate, to the financial statements taken as a whole or applicable opinion units. Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a matter, whether or not resolved to our satisfaction, concerning a financial accounting, reporting, or auditing matter, which could be significant to the City’s financial statements or the auditor’s report. No such disagreements arose during the course of the audit. CITY OF PALO ALTO, CALIFORNIA Report to the City Council For the Year Ended June 30, 2023 4 Representations Requested from Management We have requested certain written representations from management, which are included in the letter dated November 9, 2023. Management’s Consultations with Other Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters. Management informed us that, and to our knowledge, there were no consultations with other accountants regarding auditing and accounting matters. Other Significant Matters, Findings, or Issues In the normal course of our professional association with the City, we generally discuss a variety of matters, including the application of accounting principles and auditing standards, operating and regulatory conditions affecting the entity, and operational plans and strategies that may affect the risks of material misstatement. None of the matters discussed resulted in a condition to our retention as the City’s auditors. Other Information in Annual Comprehensive Financial Report Pursuant to professional standards, our responsibility as auditors for other information, whether financial or nonfinancial, included in the annual comprehensive financial report, does not extend beyond the financial information identified in the audit report, and we are not required to perform any procedures to corroborate such other information. However, in accordance with such standards: Required Supplementary Information We have applied certain limited procedures to the management’s discussion and analysis, the schedules of changes in net pension liability and related ratios, the schedules of pension contributions, the schedule of changes in net OPEB liability and related ratios, the schedule of employer OPEB contributions, which are required supplementary information (RSI) that supplements the basic financial statements. Our procedures consisted of inquiries of management regarding the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Supplementary Information We were engaged to report on the combining and individual fund financial statements and schedules and the schedule of expenditures of federal awards, which accompany the financial statements but are not RSI. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. The information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. CITY OF PALO ALTO, CALIFORNIA Report to the City Council For the Year Ended June 30, 2023 5 Other Information We were not engaged to report on the introductory and statistical sections, which accompany the financial statements but are not RSI or supplementary information. Our opinions on the basic financial statements do not cover the other information, and we do not express an opinion or any form of assurance thereon. In connection with our audit of the basic financial statements, our responsibility is to read the other information and consider whether a material inconsistency exists between the other information and the basic financial statements, or the other information otherwise appears to be materially misstated. Our responsibility also includes communicating to you any information which we believe is a material misstatement of fact. Nothing came to our attention that caused us to believe that such information, or its manner of presentation, is materially inconsistent with the information, or manner of its presentation, appearing in the financial statements. Modification of the Auditor’s Report Our report includes an emphasis of matter paragraph to reference to Note 1 to the basic financial statements for the City’s implementation of GASB Statement No. 96, Subscription-Based Information Technology Arrangements. Our opinion is not modified with respect to this matter. CABLE TV FRANCHISE Independent Auditor’s Report and Statements of Franchise Revenues and Expenses For the Years Ended December 31, 2022 and 2021 CABLE TV FRANCHISE Independent Auditor’s Report and Statements of Franchise Revenues and Expenses For the Years Ended December 31, 2022 and 2021 Table of Contents Page Independent Auditor’s Report ....................................................................................................................... 1 Financial Statements: Statements of Franchise Revenues and Expenses ................................................................................... 3 Notes to the Financial Statements ........................................................................................................... 4 www.mgocpa.com Macias Gini & O’Connell LLP 2121 N. California Boulevard, Suite 750 Walnut Creek, CA 94596 1 Independent Auditor’s Report Honorable Mayor and Members of the City Council of the City of Palo Alto Palo Alto, California Opinion We have audited the Statements of Franchise Revenues and Expenses (financial statements) of the Cable TV Franchise (Franchise) for the years ended December 31, 2022 and 2021, and the related notes to the financial statements, which collectively comprise the Franchise’s financial statements as listed in the table of contents. In our opinion, the accompanying financial statements referred to above present fairly, in all material respects, the revenues and expenses of the Franchise for the years ended December 31, 2022 and 2021, in accordance with the financial reporting provisions of the Amended and Restated Joint Exercise of Powers Agreement signed on June 9, 2009, between the City of Palo Alto, the City of East Palo Alto, the City of Menlo Park, the County of San Mateo, the County of Santa Clara, and the Town of Atherton, as described in Note 1 to the financial statements (Agreement). Basis for Opinion We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Franchise, and to meet our ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Emphasis of a Matter As discussed in Note 1 to the financial statements, the financial statements are prepared in accordance with the financial reporting provisions of the Agreement, which is a basis of accounting other than accounting principles generally accepted in the United States of America and are not intended to be a complete presentation of the Franchise’s financial position or results of operations. Our opinion is not modified with respect to this matter. Management’s Responsibilities for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with the financial reporting provisions of the Agreement, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. 2 Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements. In performing an audit in accordance with GAAS, we: • Exercise professional judgment and maintain professional skepticism throughout the audit. • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Franchise’s internal control. Accordingly, no such opinion is expressed. • Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit. Restriction on Use This report is intended solely for the information and use of the governing bodies and management of the City of Palo Alto, the City of East Palo Alto, the City of Menlo Park, the County of San Mateo, the County of Santa Clara, and the Town of Atherton, and is not intended to be and should not be used by anyone other than these specified parties. Walnut Creek, California November 9, 2023 2022 2021 Revenues: Franchise fees $ 1,548,870 $ 1,584,671 Expenses: Franchise administration 6,728 17,973 Consulting fees - 5,882 Total expenses 6,728 23,855 Net revenues $ 1,542,142 $ 1,560,816 Amount Percent Amount Percent Allocated Net Revenues: City of Palo Alto $ 732,658 47.5% $ 736,062 47.2% City of Menlo Park 410,245 26.6% 416,541 26.7% City of East Palo Alto 150,310 9.8% 161,394 10.3% Town of Atherton 135,934 8.8% 135,938 8.7% County of Santa Clara 85,519 5.5% 84,596 5.4% County of San Mateo 27,476 1.8% 26,285 1.7% Total allocated net revenues $ 1,542,142 100.0% $ 1,560,816 100.0% CABLE TV FRANCHISE Statements of Franchise Revenues and Expenses For the Years Ended December 31, 2022 and 2021 2022 2021 See accompanying notes to the financial statements. 3 CABLE TV FRANCHISE Notes to the Financial Statements For the Years Ended December 31, 2022 and 2021 4 NOTE 1 – JOINT OPERATING AGREEMENT AND BASIS OF ACCOUNTING In July 1983, a Joint Exercise of Powers Agreement was entered into by and between the Cities of Palo Alto, Menlo Park, East Palo Alto, the Counties of San Mateo and Santa Clara, and the Town of Atherton (Members) for the purpose of obtaining a state-of-the-art cable service for residents, businesses, and institutions, within each of their jurisdictions in the most efficient and economical manner possible. In October 1988, the Members entered into a Joint Operating Agreement in which the City was granted the power and the authority to administer and coordinate the activities of the franchise and exercise the rights and responsibilities of the City pursuant to the Franchise Agreement. The activities are administered by the City and are accounted for within the City’s Agency Fund. The program is accounted for using the accrual basis of accounting. Under the accrual basis of accounting, revenues are recorded when earned and expenses are recognized when the liability is incurred. On August 9, 2000, the City of Palo Alto (City), acting on behalf of the Members, signed a Franchise Agreement with TCI Cablevision of California, Inc., a wholly owned subsidiary of AT&T Broadband (AT&T), a third-party contractor, which was granted a non-exclusive franchise to construct, operate, maintain and repair a cable television system within the Members jurisdictions. In 2002, the Franchise Agreement was transferred from AT&T to Comcast Corporation (Comcast). TCI Cablevision of California, Inc. also signed an asset purchase agreement with Cable Communications Cooperative of Palo Alto, Inc. (CCCOPA), the former cable television system operator/owner, and acquired the system. On January 1, 2007, the Digital Infrastructure and Video Competition Act (DIVCA) went into effect. Under DIVCA, cable and video service franchises are now granted exclusively by the California Public Utilities Commission (Commission) rather than by local franchising entities. On March 30, 2007, the Commission granted AT&T a statewide franchise. Comcast was allowed to seek a State franchise after January 1, 2008, when another State franchise holder (in this case AT&T) entered the local market. On January 2, 2008, the Commission granted Comcast a State franchise. On June 9, 2009, the Members approved an Amended and Restated Joint Exercise of Powers Agreement, in substitution of the existing Joint Exercise of Powers Agreement and the Joint Operating Agreement, to reflect changes in the law due to DIVCA and to continue to allow the City to administer the cable and video franchise enforcement and monitoring process for State franchise holders. The accompanying financial statements are prepared in accordance with the financial reporting provisions of the Amended and Restated Joint Exercise of Powers Agreement between the Members, which is a basis of accounting other than accounting principles generally accepted in the United States of America, and are not intended to be a complete presentation of the Franchise’s financial position or results of operations. As compensation for services under the State franchise agreements, AT&T and Comcast pay annual franchise fees in an amount equal to 5% of annual gross revenues, considering a reasonable adjustment for bad debts. From these fees the City is first reimbursed for out-of-pocket franchise administration costs. The remaining fees are distributed to each Member according to the percentage of revenues derived from the residents and businesses in each of the entities compared to revenues in total. CABLE TV FRANCHISE Notes to the Financial Statements (Continued) For the Years Ended December 31, 2022 and 2021 5 NOTE 2 – PRIOR FRANCHISE SETTLEMENTS A prior Franchise Agreement with CCCOPA was set to expire on March 24, 2001. On June 21, 1999, the City hired a cable communications consultant and retained the services of a law firm to assist in the franchise renewal process. On July 31, 2000, CCCOPA reimbursed the City $185,000 toward the actual costs incurred as part of the franchise renewal efforts. On July 24, 2000, the City reached a settlement with CCCOPA in the amount of $220,000 to resolve outstanding claims resulting from CCCOPA’s alleged failure to fully perform under the prior Franchise Agreement. On November 22, 2004, the City reached a settlement agreement with Comcast regarding cable plant construction claims in the amount of $175,000. This money was to be used towards the institutional network connection costs. In 2006, the City conducted a franchise compliance audit performed by the City Auditor’s Office. A settlement was reached in the amount of $155,391. In addition, CCCOPA paid the City a $250,000 grant to acquire, install, and/or maintain equipment to be used in connection with an institutional network defined in the Franchise Agreement. In 2016, the City Auditor discovered that AT&T and Comcast did not consistently calculate the fees due in accordance with DIVCA and the municipal code of each of the cable joint powers members. As a result of the audit, the City received a settlement from AT&T in the amount of $75,647 in 2016. Additionally, the City received a settlement from Comcast in the amount of $25,000 in 2019. The settlements and grant have been deposited and are being held by the City and earning interest. The City has since spent a part of the balance on various projects including installing and maintaining the institutional network equipment. As of December 31, 2022 and 2021, the remaining balances on deposit with the City, including balances from other funding sources, were $1,485,453, and $1,329,242 respectively. These balances include interest receivable of $6,965 and $4,881 at December 31, 2022 and 2021, respectively. In April 2023, franchise fees for the quarter ended December 31, 2022 of $381,076 were distributed to the Members. PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Annual Financial Report For the Year Ended June 30, 2023 PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Annual Financial Report For the Year Ended June 30, 2023 Table of Contents Page Independent Auditor’s Report ................................................................................................................... 1 Management’s Discussion and Analysis (Unaudited) .............................................................................. 3 Basic Financial Statements Government-wide Financial Statements: Statement of Net Position ................................................................................................................... 5 Statement of Activities ....................................................................................................................... 6 Debt Service Fund Financial Statements: Balance Sheet ..................................................................................................................................... 7 Statement of Revenues, Expenditures and Changes in Fund Balance ................................................ 8 Notes to the Basic Financial Statements .................................................................................................. 9 www.mgocpa.com Macias Gini & O’Connell LLP 2121 N. California Boulevard, Suite 750 Walnut Creek, CA 94596 1 Independent Auditor’s Report The Honorable Mayor and Members of the City Council of the City of Palo Alto, California Opinions We have audited the financial statements of the governmental activities and the major fund of the Palo Alto Public Improvement Corporation (Corporation), a component unit of the City of Palo Alto, California (City), as of and for the year ended June 30, 2023, and the related notes to the financial statements, which collectively comprise the Corporation’s basic financial statements as listed in the table of contents. In our opinion, the accompanying financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities and the major fund of the Corporation as of June 30, 2023, and the respective changes in financial position thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Basis for Opinions We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Corporation and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Responsibilities of Management for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Corporation’s ability to continue as a going concern for twelve months beyond the financial statement date, including any currently known information that may raise substantial doubt shortly thereafter. 2 Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinions. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements. In performing an audit in accordance with GAAS, we: • exercise professional judgment and maintain professional skepticism throughout the audit. • identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. • obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control. Accordingly, no such opinion is expressed. • evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. • conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Corporation’s ability to continue as a going concern for a reasonable period of time. We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control–related matters that we identified during the audit. Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis be presented to supplement the basic financial statements. Such information is the responsibility of management and, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with GAAS, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Walnut Creek, California November 9, 2023 PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Management’s Discussion & Analysis (Unaudited) For the Year Ended June 30, 2023 3 The Palo Alto Public Improvement Corporation (Corporation), a component unit of the City of Palo Alto (City), follows the provisions of Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements - and Management’s Discussion and Analysis - for State and Local Governments. The Corporation is controlled by the City and was organized to assist the City in financing public improvements. The Corporation issues debt and turns the proceeds of the debt over to the City under lease agreements that provide a revenue source for the repayment of this debt. The Corporation has three outstanding debts and has turned over the proceeds to the City, which pledged certain lease payments as collateral for this debt as discussed in Note 4 to the financial statements. FINANCIAL HIGHLIGHTS GASB Statement No. 34 requires the issuance of government-wide financial statements as well as fund financial statements. The government-wide financial statements report the balance of the Corporation’s long-term debt while the individual fund statements do not. In fiscal year 2018, the City issued 2018 Capital Improvement Project and Refinancing Certificates of Participation (2018 COPs) in the amount of $9.0 million to refinance the 2002B Downtown Parking Improvements Certificates of Participation remaining balance of $0.8 million, and also to fund the Palo Alto Municipal Golf Course renovations. In fiscal year 2019, the City issued the 2019 California Avenue Parking Garage tax exempt Series A and taxable Series B Certificates of Participation (2019A and 2019B COPs) in the amount of $26.8 million plus $4.9 million premium, and $10.6 million, respectively. The 2019A and 2019B COPs are issued to fund the construction of the new California Avenue parking garage. In fiscal year 2021, the City issued the 2021 Public Safety Building Certificates of Participation (2021 COPs) in the amount of $101.5 million plus $6.5 million premium. The 2021 COPs are issued to fund the construction of the new public safety building. As of June 30, 2023, the Corporation has the following outstanding debt: the 2018 COPs, 2019A and 2019B COPs, and 2021 COPs. At the government-wide level, the interest and fiscal agent charges were $4.3 million for fiscal year 2023, a decrease of $0.5 million from the prior year. The decrease is mainly due to decrease of outstanding long-term debt. The interest on leases from the City of Palo Alto was $2.9 million, an increase of $1.2 million from the prior year. The increase is mainly due to the decrease in usage of cash and investments held by the Corporation for interest payments. The Corporation ended fiscal year 2023 with total assets of $155.8 million, a decrease of $3.0 million from the prior year. Total assets consisted of $0.1 million in cash and investments, $0.8 million of lease interest receivable from the City of Palo Alto, and $154.9 million of investment in leases to the City of Palo Alto. The total liabilities were $155.7 million, a decrease of $1.5 million from the prior year. The decrease of assets and liabilities resulted from scheduled principal and interest payments of the 2018 COPs, the 2019A and 2019B COPs, and the 2021 COPs. As of June 30, 2023, the Corporation reported a $0.1 million restricted net position. At the fund level, the Corporation’s expenditures exceeded revenues by $1.4 million due to interest payments of the 2021 COPs using cash and investments held by the Corporation. As of June 30, 2023, the Corporation had one fund, the Debt Service Fund, which reported a $0.1 million restricted fund balance. PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Management’s Discussion & Analysis (Unaudited) (Continued) For the Year Ended June 30, 2023 4 OVERVIEW OF THE CORPORATION’S BASIC FINANCIAL STATEMENTS The annual financial report is comprised of two parts: 1) Management’s discussion and analysis (this part), 2) The basic financial statements, which include the government-wide and the fund financial statements, along with the notes to these financial statements. The basic financial statements comprise the government-wide financial statements and the fund financial statements. These two sets of financial statements provide two different views of the Corporation’s financial activities and financial positions, both short-term and long-term. The government-wide financial statements provide a long-term view of the Corporation’s activities as a whole, and comprise the statement of net position and the statement of activities. The statement of net position provides information about the financial position of the Corporation as a whole, including all its long-term liabilities on the full accrual basis, similar to that used by corporations. The statement of activities provides information about all the Corporation’s revenues and expenses on the full accrual basis, with the emphasis on measuring net revenues or expenses of the Corporation’s program. The statement of activities explains in detail the change in net position for the year. The fund financial statements report the Corporation’s operations in more detail than the corporate-wide statements and focus primarily on the short-term activities of the debt service fund. Fund financial statements measure only current revenues and expenditures; current assets, liabilities and fund balances; and they exclude capital assets and long-term debt. Together, these statements along with the notes to the financial statements are called the basic financial statements. DEBT ADMINISTRATION The Corporation issues debt in the form of Certificates of Participation (COPs) to be repaid from future lease receipts from the City. Legally, these COPs issues are the Corporation’s debt only; the City is liable only for the payment of the amounts set forth in the lease securing each debt issue. As of June 30, 2023, the Corporation has the following outstanding debt (excluding premium): 2018 COPs, 2019A and 2019B COPs, and 2021 COPs with outstanding principal balances of $8.2 million, $35.0 million and $101.5 million, respectively. ECONOMIC OUTLOOK AND MAJOR INITIATIVES The economy of the City and its major initiatives for the coming year are discussed in detail in the City’s Annual Comprehensive Financial Report. CONTACTING THE CORPORATION’S FINANCIAL MANAGEMENT These Basic Financial Statements are intended to provide citizens, taxpayers, investors, and creditors with a general overview of the Corporation’s finances. Questions about these financial statements should be directed to the Finance Department of the City of Palo Alto, 250 Hamilton Avenue, Palo Alto, CA 94301. Assets Cash held for operations 80,241$ Cash and investments held by trustee 5,110 Lease interest receivable 825,747 Investment in leases to the City of Palo Alto 154,892,268 Total assets 155,803,366 Liabilities Interest payable 825,747 Long-term debt: Due in one year 3,433,253 Due in more than one year 151,459,015 Total liabilities 155,718,015 Net Position Restricted for debt service 85,351$ PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto) Statement of Net Position June 30, 2023 See accompanying notes to financial statements. 5 Expenses Interest and fiscal agent charges 4,317,085$ Program revenues Interest on leases from the City of Palo Alto 2,853,990 Net program revenues (1,463,095) General revenues Investment earnings 16,276 Change in net position (1,446,819) Net position, beginning of the year 1,532,170 Net position, end of the year 85,351$ PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto) Statement of Activities For the Year Ended June 30, 2023 See accompanying notes to financial statements. 6 Assets Cash held for operations 80,241$ Cash and investments held by trustee 5,110 Lease interest receivable 825,747 Investment in leases to City of Palo Alto 154,892,268 Total assets 155,803,366$ Deferred Inflows of Resources Unavailable lease receipts from the City of Palo Alto 155,718,015$ Fund balance Restricted for debt service 85,351 Total deferred inflows of resources and fund balance 155,803,366$ Reconciliation of fund balance to net position Fund balance restricted for debt service 85,351$ Long-term receivables are not available to pay for current period expenditures and are considered unavailable on the governmental fund balance sheet 155,718,015 Some liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported in the Fund: Interest payable (825,747) Long-term debt due within one year (3,433,253) Long-term debt due in more than one year (151,459,015) Net position of governmental activities 85,351$ PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto) Balance Sheet June 30, 2023 Debt Service Fund See accompanying notes to financial statements. 7 Revenues: Lease receipts from the City of Palo Alto: Principal 860,000$ Interest 3,506,931 Other 218 Investments earnings 16,276 Total revenues 4,383,425 Expenditures: Debt service: Principal repayment 860,000 Interest and fiscal agent charges 4,970,244 Total expenditures 5,830,244 Net change in fund balance (1,446,819) Fund balance, beginning of the year 1,532,170 Fund balance, end of the year 85,351$ Reconciliation of net change in fund balance to change in net position Net change in fund balance - debt service fund (1,446,819)$ Amounts reported for governmental activities in the statement of activities are different because: Repayment of bond principal is an expenditure in the governmental funds, but in the statement of net position the repayment reduces long-term liabilities. 860,000 Interest accrued on long-term debt and amortization of bond premium do not require the use of current financial resources and therefore are not reported as expenditures in governmental funds. Change in interest payable 244,907 Amortization of bond premium 408,252 Some amounts reported in the statement of revenues, expenditures and changes in fund balances reflect the timing of collection of assets which are not includable as revenues on the statement of activities. Lease receipt for bond principal repayment (860,000) Lease receipt for interest payment (244,907) Impact of bond premium amortization on lease receipt (408,252) Change in net position of governmental activities (1,446,819)$ PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto) Statement of Revenues, Expenditures and Changes in Fund Balance For the Year Ended June 30, 2023 Debt Service Fund See accompanying notes to financial statements. 8 PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Notes to the Basic Financial Statements For the Year Ended June 30, 2023 9 NOTE 1 – DESCRIPTION OF REPORTING ENTITY The Palo Alto Public Improvement Corporation (the Corporation) was incorporated in September 1983 under the General Nonprofit Corporation Law of the State of California to acquire, construct and lease capital improvement projects. The Corporation is exempt from federal income taxes under Section 501(c)(4) of the Internal Revenue Code. The Corporation provides financing of public capital improvements for the City through the issuance of Certificates of Participation (COPs), a form of debt which allows investors to participate in a stream of future lease payments. Proceeds from the COPs are used to construct projects which are leased to the City for lease payments which are sufficient in timing and amount to meet the debt service requirements of the COPs. The Corporation is an integral part of the City of Palo Alto, California (City). It primarily services the City and its governing body is composed of the City Council. Therefore, the financial data of the Corporation has also been included as a blended component unit within the City’s annual comprehensive financial report for the year ended June 30, 2023. NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation Government-wide Statements: The statement of net position and the statement of activities include the financial activities of the Corporation. Eliminations have been made to minimize the double counting of internal activities. The statement of activities presents a comparison between direct expenses and program revenues for each function of the Corporation’s activities. Direct expenses are those that are specifically associated with a program or function and, therefore, are clearly identifiable to a particular function. Program revenues include (a) charges paid by the recipients of goods or services offered by the programs, and (b) grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Revenues that are not classified as program revenues, including investment earnings, are presented as general revenues. Fund Financial Statements: The fund financial statements provide information about the Corporation’s funds. The emphasis of fund financial statements is on major individual funds, of which the Corporation only reports one debt service fund. (b) Major Fund Major funds are defined as funds that have either assets, liabilities, revenues or expenditures equal to ten percent of their fund-type total and five percent of the grand total. The Corporation has one fund which is reported as a major governmental fund in the accompanying financial statements as follows: Debt Service Fund – This fund accounts for debt service payments on the Corporation’s long-term debt. PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2023 10 NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (Continued) (c) Basis of Accounting The government-wide financial statements are reported using the economic resources measurement focus and the full accrual basis of accounting. Revenues are recorded when earned ad expenses are recorded at the time liabilities are incurred, regardless of when the related cash flows take place. Governmental funds are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Under this method, revenues are recognized when measurable and available. The City considers revenues susceptible to accrual to be available if the revenues are collected within ninety days after year-end. Expenditures are recorded when the related fund liability is incurred, except for principal and interest on long-term debt, claims and judgments, and compensated absences, which are recognized as expenditures to the extent they have matured. (d) Investment in Leases Improvements financed by the Corporation are leased to the City for their entire estimated useful life and will become the City property at the conclusion of the lease on November 1, 2050. The Corporation therefore records the present value of the lease and considers the leased improvement to have been sold for this amount when leased. (e) Net Position The government-wide financial statements utilize a net position presentation. Net position is further categorized as net investment in capital assets, restricted and/or unrestricted. As of June 30, 2023, the entire net position was considered restricted. Restricted Net Position – This category presents external restrictions imposed by creditors, grantors, contributors or laws or regulations of other governments and restrictions imposed by law through constitutional provisions or enabling legislation. (f) Deferred Inflows of Resources A deferred inflow of resources is defined as an acquisition of net asset or fund balances applicable to a future reporting period and will not be recognized as an inflow of resources (revenue) until that time. On the governmental fund balance sheet, the lease receipts from the City corresponding to the debt are recorded as deferred inflows of resources since the balances are not current financial resources. (g) Fund Balances At June 30, 2023, the Corporation’s governmental fund’s fund balances include the following classification: Restricted Fund Balance – includes amounts that can be spent only for the specific purposes stipulated by external resource providers, constitutionally or through enabling legislation. Restrictions may effectively be changed or lifted only with the consent of resource providers. PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2023 11 NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (Continued) (h) Estimates The preparation of basic financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. NOTE 3 – CASH AND INVESTMENTS HELD BY TRUSTEE (a) Interest Rate Risk Interest rate risk is the risk that a change in market interest rates will adversely affect the fair value of an investment. Normally, the longer it takes an investment to reach maturity, the greater will be that investment’s sensitivity to changes in market rates. Information about the sensitivity of the fair values of the Corporation’s investments to market interest rate fluctuations is provided by the following table that shows the distribution of the Corporation’s investments by maturity: Investment Type Amount Maturity Date Money Market Mutual Fund 5,110$ 22 days Credit Risk Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. As of June 30, 2023, the Corporation’s investments in money market mutual funds are rated AAAm by Standard & Poor’s. (b) Fair Value Hierarchy The City categorizes its fair value measurements within the fair value hierarchy established by generally accepted accounting principles. The hierarchy is based on the valuation inputs used to measure fair value of the assets. Level 1 inputs are quoted prices in an active market for identical assets; Level 2 inputs are significant other observable inputs; and Level 3 inputs are significant unobservable inputs. The Corporation’s investments in money market mutual funds are not subject to the fair value hierarchy. (c) Investment Policy The Corporation must maintain required amounts of cash and investments by trustee under the terms of certain debt issues. These funds are unexpended bond proceeds or are pledged as reserves to be used if the Corporation fails to meet its obligation under these debt issues. The California Government Code (Code) requires these funds to be invested in accordance with bond indentures or State statutes. All these funds have been invested as permitted under the Code. The Investment Policy is described in detail in the City’s Annual Comprehensive Financial Report. PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2023 12 NOTE 3 – CASH AND INVESTMENTS HELD BY TRUSTEE (Continued) The table below identifies the investment types that are authorized by the City’s Investment Policy. The table also identifies certain provisions of the City’s Investment Policy that address interest rate risk, credit risk and concentration of credit risk. Maximum Maturity Minimum Credit Quality Maximum Percentage of Portfolio Maximum Investment in One Issuer U.S. Government Securities 10 years (*) N/A No Limit No Limit U.S. Government Agency Securities 10 years (*) N/A No Limit (A) No Limit Certificates of Deposit 10 years (*) N/A 20% 10% of the par value of portfolio Bankers Acceptances 180 days N/A 30% $5 million Commercial Paper 270 days A-1 15% $3 million (B) Local Agency Investment Fund N/A N/A No Limit $75 million per account Short-Term Repurchase Agreements 1 year N/A No Limit No Limit City of Palo Alto Bonds N/A N/A No Limit No Limit Money Market Deposit Accounts N/A N/A No Limit No Limit Mutual Funds N/A N/A 20% 10% Negotiable Certificates of Deposit 10 years (*) N/A 10% $5 million Medium-Term Corporate Notes 5 years AA 10% $5 million 10 years (*) AA/AA2 40% No Limit Supranational 5 years AA/AA2 20% 10% of the par value of portfolio (A) (B) The lesser of $3 million or 10% of outstanding commercial paper of any one institution. (*) The maximum maturity is based on the Investment Policy that is approved by the City Council and is less restrictive than the California Governmental Code. Authorized Investment Type California State and Municipal and other 49 State Issued Bonds Callable and multi-step securities are limited to no more than 25% of the par value of the portfolio, provided that: 1) the potential call dates are known at the time of purchase, 2) the interest rates at which they "step- up" are known at the time of purchase, and 3) the entire face value of the security is redeemed at the call date.   PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2023 13 NOTE 4 – CERTIFICATES OF PARTICIPATION The Corporation’s long-term debt activities are presented below: Balance Balance Amount due July 1, 2022 Retirements June 30, 2023 in one year Certificates of Participation 2018 Capital Improvement Project 2.20-4.22%, due 11/1/2047 8,380,000$ 195,000$ 8,185,000$ 200,000$ 2019 California Ave. Parking Garage Series A & B 2.5%-5%, due 11/1/2048 35,720,000 665,000 35,055,000 690,000 2021 Public Safety Building 2%-5%, due 11/1/2050 101,505,000 - 101,505,000 2,135,000 Add: Unamortized Premium 10,555,520 408,252 10,147,268 408,253 Total 156,160,520$ 1,268,252$ 154,892,268$ 3,433,253$ On June 1, 2018, the City issued the 2018 Capital Improvement Project and Refinancing Certificates of Participation (2018 COPs) in the amount of $9.0 million to fully refinance the 2002B COPs and to fund the renovation of the Palo Alto Municipal Golf Course. Principal payments are due annually on November 1 and interest payments semi-annually at various rates on May 1 and November 1. The 2018 COPs are secured by lease revenues received by the Corporation from any City’s General Fund revenue source. On March 21, 2019, the City issued the 2019 California Avenue Parking Garage tax exempt Series A and taxable Series B Certificates of Participation (2019A and 2019B COPs) in the amount of $26.8 million plus $4.9 million premium, and $10.6 million, respectively, for the construction of the new California Avenue Parking Garage. Principal payments are due annually on November 1 and interest payments semi-annually at various rates on May 1 and November 1. The 2019A and 2019B COPs are secured by lease revenues received by the Corporation from any City’s General Fund revenue source. On March 24, 2021, the City issued the 2021 Public Safety Building Certificates of Participation (2021 COPs) in the amount of $101.5 million for the construction of the new public safety building. Principal payments are due annually on November 1 and interest payments semi-annually at various rates on May 1 and November 1. The 2021 COPs are secured by lease revenues received by the Corporation from any City’s General Fund revenue source. PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2023 14 NOTE 4 – CERTIFICATES OF PARTICIPATION (Continued) Future annual debt service on the outstanding debt is shown below: For the Year Ending June 30, Principal Interest Total 2024 3,025,000$ 4,880,641$ 7,905,641$ 2025 3,170,000 4,729,196 7,899,196 2026 3,335,000 4,569,845 7,904,845 2027 3,495,000 4,402,269 7,897,269 2027 3,675,000 4,226,077 7,901,077 2029-2033 21,250,000 18,233,120 39,483,120 2034-2038 25,660,000 13,783,387 39,443,387 2039-2043 29,775,000 9,618,640 39,393,640 2044-2048 34,540,000 4,801,870 39,341,870 2049-2051 16,820,000 545,216 17,365,216 144,745,000$ 69,790,261$ 214,535,261$ Events of Default and Acceleration Clauses Generally, the Corporation is considered to be in default if the Corporation fails to pay the principal of and interest on the outstanding long-term debt when become due and payable. If an event of default has occurred and is continuing, the principal of the long-term debt, together with the accrued interest, may be declared due and payable immediately. CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Independent Auditor’s Report and Financial Statements For the Year Ended June 30, 2023 CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Independent Auditor’s Report and Financial Statements For the Year Ended June 30, 2023 Table of Contents Page Independent Auditor’s Report ................................................................................................................... 1 Financial Statements: Statement of Net Expenditures ............................................................................................................... 3 Statement of Quarterly Billings .............................................................................................................. 4 Notes to the Financial Statements ........................................................................................................... 5 www.mgocpa.com Macias Gini & O’Connell LLP 2121 N. California Boulevard, Suite 750 Walnut Creek, CA 94596 1 Independent Auditor’s Report The Honorable Mayor and Members of the City Council of the City of Palo Alto Palo Alto, California Opinion We have audited the Statements of Net Expenditures and Quarterly Billings (financial statements) of the City of Palo Alto Regional Water Quality Control Plant (Plant), an enterprise operation of the City of Palo Alto, California (City), for the year ended June 30, 2023, and the related notes to the financial statements, which collectively comprise the Plant’s financial statements as listed in the table of contents. In our opinion, the accompanying financial statements referred to above present fairly, in all material respects, the net expenditures and quarterly billings of the Plant for the year ended June 30, 2023, in accordance with the financial reporting provisions of the Basic Agreement between the City of Palo Alto, the City of Mountain View and the City of Los Altos for the Acquisition, Construction and Maintenance of a Joint Sewer System, dated October 10, 1968, as amended by addenda dated December 5, 1977, January 14, 1980, April 9, 1985, May 30, 1991, July 31, 1992, March 16, 1998, April 15, 2009, October 17, 2016, March 4, 2019, and May 17, 2021 (Basic Agreement), as described in Note 2 to the financial statements. Basis for Opinion We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the City and the Plant, and to meet our ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Emphasis of a Matter As discussed in Note 2 to the financial statements, the financial statements are prepared in accordance with the financial reporting provisions of the Basic Agreement, which is a basis of accounting other than accounting principles generally accepted in the United States of America and are not intended to be a complete presentation of the Plant’s financial position or results of operations. Our opinion is not modified with respect to this matter. Management’s Responsibilities for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with the financial reporting provisions of the Basic Agreement, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. 2 Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements. In performing an audit in accordance with GAAS, we: • Exercise professional judgment and maintain professional skepticism throughout the audit. • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Plant’s internal control. Accordingly, no such opinion is expressed. • Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit. Restriction on Use This report is intended solely for the information and use of the governing bodies and management of the Cities of Palo Alto, Mountain View and Los Altos, and is not intended to be and should not be used by anyone other than these specified parties. Walnut Creek, California November 9, 2023 CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Statement of Net Expenditures City of City of City of Total Mountain View Los Altos Palo Alto Direct Expenditures: Source control program 1,524,211$ 611,361$ 165,834$ 747,016$ Public outreach 103,817 41,641 11,295 50,881 Permitting and enforcement 1,227,119 373,304 20,915 832,900 Operations and maintenance 18,298,640 7,339,586 1,990,892 8,968,162 System improvement CIP (Note 3) 3,528,034 1,415,094 383,850 1,729,090 Total Direct Expenditures 24,681,821 9,780,986 2,572,786 12,328,049 Indirect Administrative Expenditures (Note 4): Source control program 1,048,197 420,432 114,044 513,721 Public outreach 2,543 1,020 277 1,246 Permitting and enforcement 523,034 344,588 19,306 159,140 Operations and maintenance 4,661,265 1,869,633 507,146 2,284,486 Total Indirect Administrative Expenditures 6,235,039 2,635,673 640,773 2,958,593 Debt Service Expenditures (Note 5): Refunding 1990 Series A Bonds 283,833 144,755 22,139 116,939 1999 Wastewater Treatment New Project 541,934 205,339 51,321 285,274 2009 State Water Resource Loan 549,037 208,030 51,994 289,013 2017 State Water Resource Loan 1,090,850 413,323 103,304 574,223 Total Debt Service Expenditures 2,465,654 971,447 228,758 1,265,449 OPERATIONAL TRANSFER Operational Transfer to Technology Fund 26,900 10,790 2,927 13,183 Total Expenditures 33,409,414 13,398,896 3,445,244 16,565,274 Deduct Joint Systems Revenues (Note 6) (716,290) (253,811) (164,648) (297,831) Net Expenditures 32,693,124$ 13,145,085$ 3,280,596$ 16,267,443$ For the Year Ended June 30, 2023 See accompanying notes to the financial statements. 3 CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Statement of Quarterly Billings City of City of Mountain View Los Altos Billings by Quarter, Beginning: July 1, 2022 3,139,059$ 675,924$ October 1, 2022 3,418,869 837,020 January 1, 2023 3,191,536 780,878 April 1, 2023 2,799,595 661,366 Total billings 12,549,059 2,955,188 Net expenditures 13,145,085 3,280,596 Excess of total billings over net expenditures (596,026)$ (325,408)$ For the Year Ended June 30, 2023 See accompanying notes to the financial statements. 4 CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Notes to the Financial Statements For the Year Ended June 30, 2023 5 NOTE 1 – THE REPORTING ENTITY The Cities of Palo Alto, Mountain View and Los Altos (the Members) participate jointly in the cost of maintaining and operating the Regional Water Quality Control Plant and related system (the Plant). The Members share the original costs of acquisition and construction of the Plant in the same proportions as the allocation of capacity rights to them. The City of Palo Alto (the City) is the owner and administrator of the Plant. The Cities of Mountain View and Los Altos are entitled to use a portion of the capacity of the Plant, as set forth in the Basic Agreement between the City of Palo Alto, the City of Mountain View and the City of Los Altos for the Acquisition, Construction and Maintenance of a Joint Sewer System dated October 10, 1968, as amended by addenda dated December 5, 1977, January 14, 1980, April 9, 1985, May 30, 1991, July 31, 1992, March 16, 1998, April 15, 2009, October 17, 2016, March 4, 2019, and May 17, 2021 (collectively, the “Basic Agreement”). The Basic Agreement will terminate on December 31, 2060, unless a written notice of withdrawal is tendered ten years preceding the date of withdrawal. On May 17, 2021, the Members approved the construction of a new outfall and related improvements to existing discharge infrastructure and the rehabilitation of the primary sedimentation tanks including electrical upgrades. Each Member agreed to pay its share of the project costs, in proportion to the capacity it owns in the Joint Sewer System. The Members also authorized the City to receive State Revolving Fund Loan from the State Water Resources Control Board (SWRCB) or pursue other project financing to fund the costs of the projects. NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Plant is an enterprise that is operated by the City and its operations are accounted for as an enterprise fund in the City’s basic financial statements. The financial statements are prepared in accordance with the financial reporting provisions of the Basic Agreement, which is a basis of accounting other than accounting principles generally accepted in the United States of America. The accompanying financial statements are intended to present the Plant’s net expenditures and quarterly billings by the Plant to the Cities of Mountain View and Los Altos pursuant to the agreement of the Members as described above and are not intended to be a complete presentation of the Plant’s financial position or results of operations. Additionally, the capital cost and the outstanding debt of the Plant are not presented in these statements but are presented in the basic financial statements of the City. Plant expenditures, joint system revenues, debt service and industrial waste compliance expenditures are shared by the Members based on agreed upon allocation percentages. The expenditures, including indirect administrative expenditures (see Note 4), are allocated to each of the Members based primarily on their respective percentages of the annual sewage flow and treatment needed for suspended solids, chemical oxygen demand and ammonia. Revenues from services, fines and penalties are allocated to each of the Members in the same proportions as those of expenditures. Debt service payments are allocated based on percentages established at the time of bond issuance. Industrial waste compliance (public outreach and permitting and enforcement) charges are allocated to Members primarily based on upon the number of industries and efforts required to maintain compliance with sewage use ordinances and other regulations from Environmental Protection Agency. CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Notes to the Financial Statements For the Year Ended June 30, 2023 6 NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The percentages used for the year ended June 30, 2023, to allocate expenditures and revenues were as follows: City of City of City of Mountain View Los Altos Palo Alto Public outreach, source control program, operations and maintenance, system improvement 40.11% 10.88% 49.01% CIP and joint system revenues Permitting and enforcement 41.02% 2.30% 56.68% Debt services expenditures: Refunding 1990 Series A Bonds 51.00% 7.80% 41.20% 1999 Wastewater Treatment New Project 37.89% 9.47% 52.64% 2009 State Water Resources Loan 37.89% 9.47% 52.64% 2017 State Water Resources Loan 37.89% 9.47% 52.64% The City is allocated 49.01% of total usage of the treatment plant. The City does not fully utilize its percentage allocation. Therefore, the City has entered into separate contracts to allocate portions of its excess to other entities. Fiscal year 2023 allocations are as follows: East Palo Alto Sanitary District 5.53% Stanford University 6.47% Town of Los Altos Hills 2.04% Remaining City percentages 34.97% Total 49.01% The agreement the City has with the above entities has no effect on the partnership agreement between the Members. Billings are made in advance and are based on the adopted budget for the plant and estimated sewage flow. Excess (deficit) billings over (under) net expenditures are offset against the payments during the second quarter of the subsequent fiscal year. NOTE 3 – SYSTEM IMPROVEMENT CAPITAL IMPROVEMENTS PROGRAM (CIP) The basic agreement between the Members, dated October 10, 1968, provides that the administrator of the Plant is responsible for capital additions. These capital additions should be for the replacement of obsolete or worn-out units, or minor capital additions to improve the efficiency of the Plant’s operations. Per the addendum to the agreement dated March 16, 1998, the Members agreed that capital additions should not exceed $1.9 million in 1998-99 (base year). For future years, the base year amount will be adjusted annually based on increases to the Consumer Price Index-Urban Wage Earners and Clerical Workers for the San Francisco-Oakland-San Jose area. For fiscal year 2023, the adjusted capital additions limit is $3,790,122. The system improvement CIP direct expenditures of $3,528,034 for fiscal year included minor System Improvement CIP expenditures of $2,721,113. As of June 30, 2023, the commitments for minor capital additions, including unspent capital additions, is $11,919,696 which have been carried forward to fiscal year 2023. CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Notes to the Financial Statements For the Year Ended June 30, 2023 7 NOTE 4 – INDIRECT ADMINISTRATIVE EXPENDITURES Indirect expenditures include those costs allocated from the City’s General Fund administrative services, which supports all operating departments of the City. Other indirect expenses are administrative charges from the City’s Internal Services Funds. These allocations are applied on a uniform basis throughout the City. The allocations are applied in accordance with the subsequent letter of agreement dated April 9, 1985. NOTE 5 – DEBT SERVICE EXPENDITURES Debt service expenditures include principal repayments, interest expense and amortization of bond discount reduced by any interest income earned from investments with the fiscal agent, related to the 1999 Series A Bonds (split for the portions used for the “New Project” and refunding of the 1990 Series A Bonds) and the 2009 and 2017 State Water Resources loans. In June 1999, the City, City of Mountain View, City of Los Altos, Town of Los Altos Hills, East Palo Alto Sanitary District, and Stanford University agreed to issue bonds (1999 Series A Bonds) to finance the rehabilitation of the Wastewater Treatment System’s two sludge incinerators and to refund the 1990 Series A Bonds. In October 2009, the City and the SWRCB executed an agreement for the 2009 State Water Resources Loan to finance the Ultraviolet Disinfection Project. In June 2017, the City and the SWRCB executed an agreement for a State Water Resources Loan for an award up to $30 million, 30 years at 1.8% to finance the project replacing the sewage sludge “bio-solids” incinerators at the Plant. On September 13, 2017, the City and the SWRCB amended the original agreement of the 2017 SRF loan to lower the total amount to $29.7 million and the due date of the last debt service payment be May 31, 2049. Under the terms of the amended agreement, a portion of the loan amount, $4.0 million, is federally funded and the obligation balance was adjusted.   The new facility will dewater the bio-solids and allow it to be loaded onto trucks and taken offsite for further treatment until further treatment units can be built onsite. The Plant provides treatment and disposal for wastewater for the City, City of Mountain View, City of Los Altos, Town of Los Altos Hills, East Palo Alto Sanitary District, and Stanford University. Though the City is the recipient of the loan, the City’s agreement with the partner agencies oblige them to pay their proportionate share of the principal and interest of this loan. The City’s share of the loan payment is 38.2% with the partner agencies paying 61.8%. In July 2021, the SWRCB and the City executed a direct loan agreement for an award up to $17.5 million to finance the rehabilitate and upgrade the Plant’s primary sedimentation tanks and ancillary systems. During the year ended June 30, 2023, the loan amount was increased to $19.4 million. Per the SWRCB agreement, the first debt service payment of this loan is estimated to be due on March 31, 2025, one year after the completion of the construction. In May 2022, the SWRCB and the City executed a direct loan agreement for an award up to $168.7 million to finance the Secondary Treatment Upgrades project to produce treated effluent with reduced total nitrogen content, increase treatment capacity, and rehabilitate aging infrastructure. Per the SWRCB agreement, the first debt service payment of this loan is estimated to be due on December 31, 2028, one year after the completion of the construction. CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Notes to the Financial Statements For the Year Ended June 30, 2023 8 NOTE 5 – DEBT SERVICE EXPENDITURES (Continued) The principal amount of the debt outstanding as of June 30, 2023, excluding 2021 and 2022 State water resources loans, are allocated as follows: 1999 Wastewater Refunding of 2009 2017 Treatment 1990 Series A State Water State Water New Project Bonds Resources Loan Resources Loan Total City of Palo Alto 192,707$ 66,797$ 1,514,073$ 8,590,824$ 10,364,401$ City of Mountain View 191,345 136,266 1,503,361 8,530,040 10,361,012 City of Los Altos 47,824 20,841 375,741 2,131,947 2,576,353 East Palo Alto Sanitary District 38,582 31,796 303,131 1,719,966 2,093,475 Stanford University 26,563 10,955 208,701 1,184,165 1,430,384 Town of Los Altos Hills 7,979 534 62,690 355,700 426,903 Total 505,000$ 267,189$ 3,967,697$ 22,512,642$ 27,252,528$ 1999 Utility Revenue Refunding Bonds NOTE 6 – JOINT SYSTEM REVENUES The Plant’s joint system revenues for the year ended June 30, 2023 total $716,290 which consisted of the following: Septic hauling services 353,444$ Valley Water 221,665 Other miscellaneous revenues 68,988 Salt water marsh services 7,500 Interdepartment services 22,225 Utility service to other utility funds 38,503 Others 3,965 716,290$ NOTE 7 – RELATED PARTY TRANSACTIONS During fiscal year 2023, the Plant paid the City $2,751,279 for utility costs. Such costs are included in the Statement of Net Expenditures as source control program, permitting and enforcement, and operations and maintenance expenditures. Vehicle replacement charges of $58,000 were paid to the City’s Vehicle Replacement and Maintenance Internal Services Fund, which is included in the Statement of Net Expenditures as operations and maintenance expenditures. CITY OF PALO ALTO, CALIFORNIA Independent Accountant’s Report on Applying Agreed–Upon Procedures Related to the Article XIII-B Appropriations Limit For the Year Ended June 30, 2023 www.mgocpa.com Macias Gini & O’Connell LLP 2121 N California Blvd. Suite 750Walnut Creek, CA 94596 1 Independent Accountant’s Report on Applying Agreed-Upon Procedures Related to the Article XIII-B Appropriations Limit Honorable Mayor and the Members of the City Council, of City of Palo Alto, California We have performed the procedures enumerated below to the accompanying Appropriations Limit Worksheet of the City of Palo Alto, California (City) for the year ended June 30, 2023. The City’s management is responsible for the appropriations limit calculation for the year ended June 30, 2023. The City has agreed to and acknowledged that the procedures performed are appropriate to meet the intended purpose of assisting the City in evaluating the appropriations limit calculation in accordance with the requirements of Section 1.5 of Article XIIB of the California Constitution. The procedures are recommended by the California Committee on Municipal Accounting (as presented in the CCMA White Paper titled Agreed-upon Procedures Applied to the Appropriations Limit Prescribed by Article XIII-B of the California Constitution). This report may not be suitable for any other purpose. The procedures performed may not address all the items of interest to a user of this report and may not meet the needs of all users of this report and, as such, users are responsible for determining whether the procedures performed are appropriate for their purposes. The procedures and associated findings are as follows: 1.We obtained the completed worksheets setting forth the calculations necessary to establish the City’s appropriations limit and compared the limit and annual adjustment factors included in those worksheets to the limit and annual adjustment factors that were adopted by resolution of the City Council. We also compared the population and inflation options included in the aforementioned worksheets to those that were selected by a recorded vote of the City Council. Finding: The City applied an incorrect population adjustment factor for the calculation of the current year appropriations limit. The population factor used by the City for the calculation was 1.000007. The change in population of the City, as provided by the State of California’s Department of Finance was 0.07% and thus the population adjustment factor should be 1.0007. Total adjustment factors should be 1.0763 and the total adjustment amount should be $14,420,000. 2.For the accompanying Appropriations Limit Worksheet, we added the prior year appropriations limit to the total adjustments and compared the resulting amount to the current year appropriations limit. Finding: As discussed in the finding of procedure 1 above, the City applied an incorrect population adjustment factor for the calculation of the current year appropriations limit. If the City applied the correct population adjustment factor, the total adjustment amount should be $14,420,000 and the current year appropriations limit should be $203,450,000, which is $150,000 higher than the current year adopted appropriations limit. The City’s actual revenue did not exceed the proper appropriation limit of $203,450,000. 2 3.We agreed the current year information presented in the accompanying Appropriations Limit Worksheet to the appropriate supporting worksheets described in No. 1 above. Finding: See findings of procedures 1 and 2 above. 4.We agreed the prior year appropriations limit presented in the accompanying Appropriations Limit Worksheet to the prior year appropriations limit adopted by the City Council. Finding: The prior year appropriations limit adopted by the City Council was $190,160,000, which is $1,130,000 higher than prior year appropriations limit presented in the accompanying Appropriations Limit Worksheet. The difference represents an amendment to the prior year appropriations limit due to the application of an incorrect population adjustment factor for the calculation of the prior year appropriations limit. We were engaged by the City to perform this agreed-upon procedures engagement and conducted our engagement in accordance with attestation standards established by the American Institute of Certified Public Accountants. We were not engaged to and did not conduct an examination or review, the objective of which would be the expression of an opinion or conclusion, respectively, on the appropriations limit calculation for the year ended June 30, 2023. Accordingly, we do not express such an opinion or conclusion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. No procedures have been performed with respect to the determination of the appropriations limit for the base year, as defined by Article XIII-B of the California Constitution. We are required to be independent of the City and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements related to our agreed-upon procedures engagement. This report is intended solely for the information and use of City Council and the City’s management, and is not intended to be and should not be used by anyone other than these specified parties. Walnut Creek, California November 9, 2023 CITY OF PALO ALTO, CALIFORNIA Appropriations Limit Worksheet For the Year Ended June 30, 2023 3 2021-2022 appropriation limit, as adopted 189,030,000$ Adjustment factors: Population (1)1.000007 Inflation (2)1.0755 Total adjustment factors (rounded) (3)1.0755 Total adjustments (rounded)14,270,000 2022-2023 appropriation limit, as adopted 203,300,000$ (1)The population factor may be based on the change in population of 1) the City or 2) the County of Santa Clara, as provided by the State of California’s Department of Finance. The population factor adopted by the City for the current year appropriation limit represents the change in population of the City. However, the City applied an incorrect population adjustment factor for the calculation of the current year appropriations limit. See findings in the Independent Accountant’s Report. (2)The inflation factor may be based on 1) the change in per capita personal income for the State of California, as provided by the State of California’s Department of Finance; or 2) the change in the assessed valuation due to new non-residential construction within the City. The inflation factor adopted by the City for the current year appropriation limit represents the change in per capita personal income. (3)The total adjustment factor is calculated by multiplying the population factor by the inflation factor. Baker Tilly US, LLP, trading as Baker Tilly, is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. © 2022 Baker Tilly US, LLP. City of Palo AltoOffice of the City Auditor (OCA) Finance Committee Meeting November 28, 2023 2 Financial Audit Responsibilities Overview Article IV, Section 13 of the City Charter requires the following: ‘… the city council shall engage an independent certified public accounting firm to conduct an annual external audit and report the results of this audit in writing to the city council.’ Title II, Chapter 2.08 of the City Code requires that the City Auditor coordinate the annual external financial audit. 3 Financial Audit Results Purpose: – Obtain reasonable assurance that financial statements are fairly stated Results: – Unmodified opinion across all reports – financial statements are prepared in all material respect and comply with accounting standards being used as well as applicable regulation FY 2022-23 Audit Results Presented by Benjamin Lau, CPA, Partner The following presentation was prepared as part of our audit of the City of Palo Alto (the “City”) for the year ended June 30, 2023, and is limited in its overall information, and is intended solely for the information and use by those charged with governance oversight, management and as necessary, those charged with financial reporting oversight role of the City. This communication is not intended and should not be used by any other party, committee or person other than these specified parties. © 2023 MACIAS GINI & O'CONNELL LLP •Audit Report on the Basic Financial Statements (ACFR) for the Year Ended June 30, 2023 •Single Audit Reports for the Year Ended June 30, 2023 •Cable TV Franchise Statements of Revenues and Expenses for the Years Ended December 31, 2022 and 2021 •Palo Alto Public Improvement Corporation Financial Statements for the Year Ended June 30, 2023 •Regional Water Quality Control Plant Financial Statements for the Year Ended June 30, 2023 •Agreed Upon Procedures Related to Article XIII-B Appropriations Limit for the Year Ended June 30, 2023 MGO Presentation to the City of Palo Alto Scope of Services © 2023 MACIAS GINI & O'CONNELL LLP •Purpose - To obtain reasonable assurance that amounts are fairly stated •Applicable Framework - Generally accepted accounting principles (GAAP) or Special-purpose framework - Generally accepted auditing standards (GAAS) - Government Auditing Standards (GAGAS) MGO Presentation to the City of Palo Alto MGO Audits © 2023 MACIAS GINI & O'CONNELL LLP •Basic Financial Statements (ACFR) - Unmodified Opinions - Emphasis of Matter – Implementation of GASB Statement No. 96, Subscription-Based Information Technology Arrangements •Single Audit Reports (Federal Award Compliance) - Unmodified Opinions - No noncompliance for each major federal program (2 major programs for FY 2023) - No material weaknesses or significant deficiencies in internal controls over compliance •Other Reports - Unmodified Opinions - No material weaknesses or significant deficiencies in internal controls over financial reporting MGO Presentation to the City of Palo Alto FY 2022-2023 Audit Results © 2023 MACIAS GINI & O'CONNELL LLP Report to the City Council •Required Communications 1. Our Responsibility in Relation to the Financial Statements Audit 2. Planned Scope and Timing of the Audit 3. Compliance with All Ethics Requirements Regarding Independence 4. Qualitative Aspects of the City’s Accounting Practices 5. Significant Difficulties Encountered during the Audit 6. Corrected and Uncorrected misstatements 7. Disagreements with Management 8. Representations Requested from Management 9. Management Consultations with Other Accountants 10. Other Significant Matters, Findings, or Issues 11. Other Information in Annual Comprehensive Financial Report 12. Modification of the Auditor’s Report MGO Presentation to the City of Palo Alto FY 2022-2023 Audit Results © 2023 MACIAS GINI & O'CONNELL LLP Questions? We are excited to explore the opportunities.