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Staff Report 2405-3095
CITY OF PALO ALTO Finance Committee Regular Meeting Tuesday, December 03, 2024 Agenda Item 1. A.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, 2024 Staff Presentation 4 8 2 7 Finance Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: City Auditor Meeting Date: December 3, 2024 Report #:2405-3095 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, 2024 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 statement for the fiscal year ended June 30, 2024, and 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 City’s financial statement audits for the fiscal year ending June 30, 2024. The City Auditor is providing copies of the following financial statements and reports as prepared by MGO: •Auditor’s Report to the City Council (the “Management Letter”) – Attachment A •Cable TV Franchise, Independent Auditor’s Report and Statements of Francise Revenues and Expenses for the years ended December 31, 2023 and 2022 – Attachment B •Palo Alto Public Improvement Corporation Annual Financial Report for the Year Ended June 30, 2024 – Attachment C •Regional Water Quality Control Plant Independent Auditor’s Report and Financial Statements for the Year Ended June 30, 2024 – Attachment D •Independent Accountant’s Report on Applying Agreed-Upon Procedures Related to the Article XIII-B Appropriations Limit (GANN Limit) for the Year Ended June 30, 2024 – Attachment E 4 8 2 7 •Pedestrian/Bicycle Facilities Grant Metropolitan Transportation Commission Transportation Development Act Funds, Article III, Independent Auditor’s Reports, Financial Statements and Supplementary Information for the Year Ended June 30, 2024 – Attachment F 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 MGO and the Administrative Services Department staff for their hard work and cooperation during the audit. FISCAL/RESOURCE IMPACT There is not fiscal impact resulting from the attached audit reports. STAKEHOLDER ENGAGEMENT MGO conducted 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. CEQ 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 Report 4 8 2 7 Attachment F: Transportation Development Act Funds, Article III, Auditor’s Report APPROVED BY: Kate Murdock, City Auditor CITY OF PALO ALTO, CALIFORNIA Report to the City Council For the Year Ended June 30, 2024 www.mgocpa.com Macias Gini & O’Connell LLP 2121 N. California Boulevard, Suite 750 Walnut Creek, CA 94596 November 8, 2024 Honorable Mayor and the Members of the City Council of the City of Palo Alto Palo Alto, California We are pleased to present this report related to our audit of 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, 2024. This report summarizes certain matters required by professional standards to be communicated to you in your oversight responsibility for the City’s financial reporting process. In addition to the City’s basic financial statements, we audit and separately report on the following financial statements as of and for the year ended June 30, 2024. • City of Palo Alto Regional Water Quality Control Plant • Palo Alto Public Improvement Corporation • Cable TV Franchise Statements of Franchise Revenues and Expenditures • Pedestrian Bicycle Facilities Grant Transportation Development Act Funds, Article III This report is intended solely for the information and use of the 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. It will be our pleasure to respond to any questions you have about this report. We appreciate the opportunity to continue to be of service to the City. Walnut Creek, California TABLE OF CONTENTS Required Communications 1 Exhibits Exhibit A—Recent Accounting Pronouncements 6 1 REQUIRED COMMUNICATIONS Auditing standards generally accepted in the United States of America (AU-C 260, The Auditor’s Communication With Those Charged With Governance) require the auditor to promote effective two-way communication between the auditor and those charged with governance. Consistent with this requirement, the following summarizes our responsibilities regarding the City’s financial statement audit as well as observations arising from our audit that are significant and relevant to your responsibility to oversee the financial and related compliance reporting process. Our Responsibilities With Regard to the Financial Statement Audit Our responsibilities under auditing standards generally accepted in the United States of America and Government Auditing Standards issued by the Comptroller General of the United States have been described to you in our arrangement letter dated June 14, 2024. Our audit of the City’s financial statements does not relieve management or those charged with governance of their responsibilities, which are also described in that letter. Overview of the Planned Scope and Timing of the Financial Statement Audit We have communicated to you the planned scope and timing of our audit in our arrangrment letter dated June 14, 2024 regarding the planned scope and timing of our audit. Accounting Policies and Practices Preferability of Accounting Policies and Practices Under accounting principles generally accepted in the United States of America, in certain circumstances, management may select among alternative accounting practices. In our view, in such circumstances, management has selected the preferable accounting practice. Adoption of, or Change in, Accounting Policies Management has the ultimate responsibility for the appropriateness of the accounting policies used by the City. A summary of the significant accounting policies adopted by the City is included in Note 1 to the financial statements. As described in Note 1 to the financial statements. The City implemented the Governmental Accounting Standards Board (GASB) Statement No. 100, Accounting Changes and Error Corrections—an amendment of GASB Statement No. 62, and requirements of GASB Statement No. 99, Omnibus 2022 related to financial guarantees and the classification and reporting of derivative instruments within the scope of GASB Statement No. 53. The implementation of these statements did not have a significant impact on the City’s financial statements for the year ended June 30, 2024. Significant Accounting Policies We did not identify any significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus. Significant Unusual Transactions We did not identify any significant unusual transactions. 2 Management’s Judgments and Accounting Estimates Accounting estimates are an integral part of the preparation of financial statements and are based upon management’s current judgment. The process used by management encompasses their knowledge and experience about past and current events, and certain assumptions about future events. You may wish to monitor throughout the year the process used to determine and record these accounting estimates. The following summarizes the significant accounting estimates reflected in the City’s financial statements. Significant Accounting Estimates 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 investments in U.S. treasury notes are classified as level 1 and are valued based on quoted prices in an active market for identical assets. The City’s investments 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. The City uses the straight-line method for depreciation. 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 liabilities, contributions, expenses, and other related balances The balances were estimated based on actuarial valuations, which incorporate actuarial methods and assumptions adopted by the City, performed by the California Public Employees’ Retirement System’s independent actuaries. 3 Significant Accounting Estimates Other postemployment benefits (OPEB) liabilities, contributions, expenses, and other related balances The balances were estimated based on actuarial valuations, which incorporate actuarial methods and assumptions adopted by the City, performed by the City’s independent actuary. 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. Audit Adjustments and Uncorrected Misstatements In the course of the audits, there were no misstatements identified through the course of audit procedures and corrected by management that were material to the City’s financial statements. There were no uncorrected misstatements. Uncorrected misstatements or matters underlying these uncorrected misstatements could potentially cause future-period financial statements to be materially misstated, even if we have concluded that the uncorrected misstatements are immaterial to the financial statements under audit. Observations About the Audit Process Disagreements With Management We encountered no disagreements with management over the application of significant accounting principles, the basis for management’s judgments on any significant matters, the scope of the audit or significant disclosures to be included in the financial statements. Consultations With Other Accountants We are not aware of any consultations management had with other accountants about accounting or auditing matters. Significant Issues Discussed With Management No significant issues arising from the audit were discussed or were the subject of correspondence with management. Significant Difficulties Encountered in Performing the Audit We did not encounter any significant difficulties in dealing with management during the audit. Difficult or Contentious Matters That Required Consultation We did not encounter any significant and difficult or contentious matters that required consultation outside the engagement team. 4 Shared Responsibilities for Independence Independence is a joint responsibility and is managed most effectively when management, audit committees (or their equivalents), and audit firms work together in considering compliance with American Institute of Certified Public Accountants (AICPA) and Government Accountability Office (GAO) independence rules. For MGO to fulfill its professional responsibility to maintain and monitor independence, management, the Board of Commission, and MGO each play an important role. Our Responsibilities 1) AICPA and GAO rules require independence both of mind and in appearance when providing audit and other attestation services. MGO is to ensure that the AICPA and GAO’s General Requirements for performing non-attest services are adhered to and included in all letters of engagement. 2) Maintain a system of quality management over compliance with independence rules and firm policies. The Authority’s Responsibilities 1) Timely inform MGO, before the effective date of transactions or other business changes, of the following: a) New affiliates, directors, or officers. b) Changes in the organizational structure or the reporting entity impacting affiliates such as subsidiaries, partnerships, related entities, investments, joint ventures, component units, jointly governed organizations. 2) Provide necessary affiliate information such as new or updated structure charts, as well as financial information required to perform materiality calculations needed for making affiliate determinations. 3) Understand and conclude on the permissibility, prior to the Authority and its affiliates, officers, directors, or persons in a decision-making capacity, engaging in business relationships with MGO. 4) Not entering into arrangements of nonaudit services resulting in MGO being involved in making management decisions on behalf of the Authority. 5) Not entering into relationships resulting in close family members of MGO covered persons, temporarily or permanently acting as an officer, director, or person in an accounting, financial reporting or compliance oversight role at the City. Management Representations We have requested certain written representations from management, which are included in the management representation letter dated November 8, 2024. Other Information in Documents Containing Audited Financial Statements Pursuant to professional standards, our responsibility as auditors for other information in documents containing the City’s audited financial statements 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 applied certain limited procedures to the management’s discussion and analysis and the pension and other postemployment benefits related schedules, which is required supplementary information (RSI) that supplements the 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 5 responses to our inquiries, the financial statements, and other knowledge we obtained during our audit of the financial statements. We did not audit the RSI and do not express an opinion or provide any assurance on the RSI. Supplementary Information We were engaged to report on the following supplementary information, which accompany the financial statements but are not RSI: Combining Statements of nonmajor funds Schedule of Expenditures of Federal Awards (included in the Single Audit Section) Other Information The other information in the Annual Comprehensive Financial Report (ACFR) comprises the introductory and statistical sections. 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. Our responsibility for other information included in the ACFR is to read the information and consider whether its content or the manner of its presentation is materially inconsistent with the financial information covered by our auditor’s report, whether it contains a material misstatement of fact or whether the other information is otherwise misleading. We read the City’s introductory and statistical sections, and did not identify material inconsistencies with the audited basic financial statements. Internal Control and Compliance Matters We have separately communicated on internal control and compliance over financial reporting identified during our audit of the financial statements and major awards, as required by Government Auditing Standards and when applicable, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards at 2 CFR 200 (Uniform Guidance). This communication is included with the Single Audit Section of the ACFR. 6 EXHIBIT A Recent Accounting Pronouncements 7 RECENT ACCOUNTING PRONOUNCEMENTS The following accounting pronouncements have been issued as of November 8, 2024, but are not yet effective and may affect the future financial reporting by the Authority. Pronouncement Summary GASB Statement No. 101, Compensated Absences The objective of this Statement is to better meet the information needs of financial statement users by updating the recognition and measurement guidance for compensated absences. That objective is achieved by aligning the recognition and measurement guidance under a unified model and by amending certain previously required disclosures. Statement No. 101 is effective for the City’s financial statements for the year ending June 30, 2025. GASB Statement No. 102, Certain Risk Disclosures The objective of this Statement is to provide users of government financial statements with essential information about risks related to a government’s vulnerabilities due to certain concentrations or constraints. Statement No. 102 is effective for the City’s financial statements for the year ending June 30, 2025. GASB Statement No. 103, Financial Reporting Model Improvements The objective of this Statement is to improve key components of the financial reporting model to enhance its effectiveness in providing information that is essential for decision making and assessing a government’s accountability. This Statement also addresses certain application issues. Statement No. 103 are effective for the City’s financial statements for the year ending June 30, 2026. GASB Statement No. 104, Disclosure of Certain Capital Assets The objective of this statement is to establish requirements for certain types of capital assets to be disclosed separately for purposes of note disclosures, and to establish requirements for capital assets held for sale and note disclosures for those capital assets. Statement No. 104 are effective for the City’s financial statements for the year ending June 30, 2026. CABLE TV FRANCHISE Independent Auditor’s Report and Statements of Franchise Revenues and Expenses For the Years Ended December 31, 2023 and 2022 CABLE TV FRANCHISE Independent Auditor’s Report and Statements of Franchise Revenues and Expenses For the Years Ended December 31, 2023 and 2022 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, 2023 and 2022, 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, 2023 and 2022, 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. Responsibilities of Management 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 8, 2024 2023 2022 Revenues: Franchise fees $ 1,430,110 $ 1,548,870 Expenses: Franchise administration 8,971 6,728 Consulting fees - - Total expenses 8,971 6,728 Net revenues $ 1,421,139 $ 1,542,142 Amount Percent Amount Percent Allocated Net Revenues: City of Palo Alto $ 670,814 47.2% $ 732,658 47.5% City of Menlo Park 376,315 26.5% 410,245 26.6% City of East Palo Alto 133,381 9.3% 150,310 9.8% Town of Atherton 133,080 9.4% 135,934 8.8% County of Santa Clara 80,757 5.7% 85,519 5.5% County of San Mateo 26,792 1.9% 27,476 1.8% Total allocated net revenues $ 1,421,139 100.0% $ 1,542,142 100.0% CABLE TV FRANCHISE Statements of Franchise Revenues and Expenses For the Years Ended December 31, 2023 and 2022 2023 2022 See accompanying notes to the financial statements. 3 CABLE TV FRANCHISE Notes to the Financial Statements For the Years Ended December 31, 2023 and 2022 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 of Palo Alto (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 Custodial 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, 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, 2023 and 2022 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, 2023 and 2022, the remaining balances on deposit with the City, including balances from other funding sources, were $1,685,064, and $1,485,453 respectively. These balances include interest receivable of $8,876 and $6,965 at December 31, 2023 and 2022, respectively. PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Annual Financial Report For the Year Ended June 30, 2024 PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Annual Financial Report For the Year Ended June 30, 2024 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 This Page Intentionally Left Blank www.mgocpa.com Macias Gini & O’Connell LLP 2121 N. California Boulevard, Suite 750 Walnut Creek, CA 94596 1 Independent Auditor’s Report Board of Director of the Palo Alto Public Improvement Corporation 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, 2024, 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, 2024, 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 The Corporation’s 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 8, 2024 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, 2024 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). 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 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 were 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 were issued to fund the construction of the new public safety building. As of June 30, 2024, 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 $4.5 million for fiscal year 2024, an increase of $0.2 million from the prior year. The interest on leases from the City of Palo Alto was $4.5 million, an increase of $1.6 million from the prior year. The increase is mainly due to the one-time usage of cash and investments held by the Corporation for interest payments in prior year. The Corporation ended fiscal year 2024 with total assets of $152.4 million, a decrease of $3.4 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 $151.5 million of investment in leases to the City of Palo Alto. The total liabilities were $152.3 million, a decrease of $3.4 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, 2024, the Corporation reported a $0.1 million restricted net position. At the fund level, the Corporation’s revenues exceeded expenditures by $17,000. As of June 30, 2024, 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, 2024 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 COP 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, 2024, the Corporation has the following outstanding debt (excluding premium): 2018 COPs, 2019A and 2019B COPs, and 2021 COPs with outstanding principal balances of $8.0 million, $34.4 million and $99.4 million, respectively. ECONOMIC OUTLOOK AND MAJOR INITIATIVES The economy of the City and its major initiatives for the coming year are discussed in detail in the City’s Annual Comprehensive Financial Report. CONTACTING THE CORPORATION’S FINANCIAL MANAGEMENT These basic financial statements are intended to provide citizens, taxpayers, investors, and creditors with a general overview of the Corporation’s finances. Questions about these financial statements should be directed to the Finance Department of the City of Palo Alto, 250 Hamilton Avenue, Palo Alto, CA 94301. Assets Cash held for operations 97,168$ Cash and investments held by trustee 4,876 Lease interest receivable 801,133 Investment in leases to the City of Palo Alto 151,459,015 Total assets 152,362,192 Liabilities Interest payable 801,133 Long-term debt: Due in one year 3,578,253 Due in more than one year 147,880,762 Total liabilities 152,260,148 Net Position Restricted for debt service 102,044$ PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto) Statement of Net Position June 30, 2024 See accompanying notes to financial statements. 5 Expenses Interest and fiscal agent charges 4,447,773$ Program revenues Interest on leases from the City of Palo Alto 4,448,620 Net program revenues 847 General revenues Investment earnings 15,846 Change in net position 16,693 Net position, beginning of the year 85,351 Net position, end of the year 102,044$ PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto) Statement of Activities For the Year Ended June 30, 2024 See accompanying notes to financial statements. 6 Assets Cash held for operations 97,168$ Cash and investments held by trustee 4,876 Lease interest receivable 801,133 Investment in leases to City of Palo Alto 151,459,015 Total assets 152,362,192$ Deferred Inflows of Resources Unavailable lease receipts from the City of Palo Alto 152,260,148$ Fund balance Restricted for debt service 102,044 Total deferred inflows of resources and fund balance 152,362,192$ Reconciliation of fund balance to net position Fund balance restricted for debt service 102,044$ Long-term receivables are not available to pay for current period expenditures and are considered unavailable on the governmental fund balance sheet. 152,260,148 Some liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported in governmental funds. Interest payable (801,133) Long-term debt due within one year (3,578,253) Long-term debt due in more than one year (147,880,762) Net position of governmental activities 102,044$ PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto) Balance Sheet June 30, 2024 Debt Service Fund See accompanying notes to financial statements. 7 Revenues: Lease receipts from the City of Palo Alto: Principal 3,025,000$ Interest 4,880,640 Other 847 Investments earnings 15,846 Total revenues 7,922,333 Expenditures: Debt service: Principal repayment 3,025,000 Interest and fiscal agent charges 4,880,640 Total expenditures 7,905,640 Net change in fund balance 16,693 Fund balance, beginning of the year 85,351 Fund balance, end of the year 102,044$ Reconciliation of net change in fund balance to change in net position Net change in fund balance - debt service fund 16,693$ 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. 3,025,000 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 24,614 Amortization of bond premium 408,253 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 (3,025,000) Lease receipt for interest payment (24,614) Impact of bond premium amortization on lease receipt (408,253) Change in net position of governmental activities 16,693$ 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, 2024 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, 2024 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, 2024. 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, 2024 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, 2024, 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, 2024, 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, 2024 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 4,876$ 31 days (b) 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, 2024, the Corporation’s investments in money market mutual funds are rated AAAm by Standard & Poor’s. (c) 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. (d) 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 and bond indentures, including the cash held for operations invested in the City’s investment pool. The City’s 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, 2024 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 $3 million or 10% of outstanding commercial paper of any one institution. (*) The maximum maturity is based on the Investment Policy that is approved by the City Council and is less restrictive than the California Governmental Code. Authorized Investment Type California State and Municipal and other 49 State Issued Bonds Callable and multi-step securities are limited to no more than 25% of the par value of the portfolio, provided that: 1) the potential call dates are known at the time of purchase, 2) the interest rates at which they "step- up" are known at the time of purchase, and 3) the entire face value of the security is redeemed at the call date. PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2024 13 NOTE 4 – LONG-TERM DEBT The Corporation’s long-term debt activities are presented below: Balance Balance Amount due July 1, 2023 Retirements June 30, 2024 in one year Certificates of Participation 2018 Capital Improvement Project 2.20-4.22%, due 11/1/2047 8,185,000$ 200,000$ 7,985,000$ 205,000$ 2019 California Ave. Parking Garage Series A & B 2.5%-5%, due 11/1/2048 35,055,000 690,000 34,365,000 720,000 2021 Public Safety Building 2%-5%, due 11/1/2050 101,505,000 2,135,000 99,370,000 2,245,000 Add: Unamortized Premium 10,147,268 408,253 9,739,015 408,253 Total 154,892,268$ 3,433,253$ 151,459,015$ 3,578,253$ 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 Downtown Parking Improvement Project Certificates of Participation 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 plus $6.5 million premium for the construction of the new public safety building. Principal payments are due annually on November 1 and interest payments semi-annually at various rates on May 1 and November 1. The 2021 COPs are secured by lease revenues received by the Corporation from any City’s General Fund revenue source. PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2024 14 NOTE 4 – LONG-TERM DEBT (Continued) Future annual debt service on the outstanding debt is shown below: For the Year Ending June 30, Principal Interest Total 2025 3,170,000 4,729,196 7,899,196$ 2026 3,335,000 4,569,844 7,904,844 2027 3,495,000 4,402,268 7,897,268 2028 3,675,000 4,226,076 7,901,076 2029 3,865,000 4,040,594 7,905,594 2030-2034 22,180,000 17,292,031 39,472,031 2035-2039 26,485,000 12,950,680 39,435,680 2040-2044 30,650,000 8,726,392 39,376,392 2045-2049 35,065,000 3,750,799 38,815,799 2050-2051 9,800,000 221,738 10,021,738 141,720,000$ 64,909,618$ 206,629,618$ 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, 2024 CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Independent Auditor’s Report and Financial Statements For the Year Ended June 30, 2024 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, 2024, 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, 2024, 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. Responsibilities of Management 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 City of Palo Alto, the City of Mountain View, the City of Los Altos, the East Palo Alto Sanitary District, Stanford University, and the Town of Los Altos Hills, and is not intended to be and should not be used by anyone other than these specified parties. Walnut Creek, California November 8, 2024 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 1,312,595$ 515,981$ 133,097$ 663,517$ Public outreach 114,429 44,982 11,603 57,844 Permitting and enforcement 1,398,273 400,154 22,124 975,995 Operations and maintenance 19,246,690 7,565,875 1,951,615 9,729,200 System improvement CIP (Note 3) 7,156,302 2,941,799 752,612 3,461,891 Total Direct Expenditures 29,228,289 11,468,791 2,871,051 14,888,447 Indirect Administrative Expenditures (Note 4): Source control program 1,133,728 445,668 114,960 573,100 Public outreach 2,024 796 205 1,023 Permitting and enforcement 412,782 369,373 20,422 22,987 Operations and maintenance 4,837,366 1,901,568 490,509 2,445,289 Total Indirect Administrative Expenditures 6,385,900 2,717,405 626,096 3,042,399 Debt Service Expenditures (Note 5): Refunding 1990 Series A Bonds 284,111 144,896 22,161 117,054 1999 Wastewater Treatment New Project 541,530 205,186 51,283 285,061 2009 State Water Resource Loan 560,629 212,422 53,092 295,115 2017 State Water Resource Loan 1,090,832 413,316 103,302 574,214 Total Debt Service Expenditures 2,477,102 975,820 229,838 1,271,444 Operational Transfer Operational transfer to Technology Fund 16,400 6,447 1,663 8,290 Total Expenditures 38,107,691 15,168,463 3,728,648 19,210,580 Deduct Joint Systems Revenues (Note 6) (813,615) (286,939) (174,125) (352,551) Net Expenditures 37,294,076$ 14,881,524$ 3,554,523$ 18,858,029$ For the Year Ended June 30, 2024 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, 2023 3,189,611$ 672,526$ October 1, 2024 3,515,586 952,111 January 1, 2024 3,296,421 897,681 April 1, 2024 6,395,998 1,635,328 Total billings 16,397,616 4,157,646 Less: Advance billings (1,844,658) (439,966) Total net billings 14,552,958 3,717,680 Net expenditures 14,881,524 3,554,523 Excess (deficit) of total billings over (under) net expenditures (328,566)$ 163,157$ For the Year Ended June 30, 2024 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, 2024 5 NOTE 1 – THE REPORTING ENTITY In 1968, the Cities of Mountain View and Los Altos retired their treatment plants and became partners with the City of Palo Alto (City) to construct a regional treatment plant. Construction started in 1970 and was completed in 1972 at a cost of $11 million. Since 1972, the Regional Water Quality Control Plant (the Plant) has been treating wastewater, which has significantly reduced the number of pollutants entering the San Francisco Bay. Initially, the Cities of Mountain View and Los Altos were the only partner agencies participating jointly in the cost of operating and maintaining the Plant. The City’s total usage of the treatment plant was not fully utilized and as a result, the City entered into separate subcontracts distributing some of its allocated use to other partner agencies. Currently, the City, the City of Los Altos, the City of Mountain View, and the subcontracting agencies: the East Palo Alto Sanitary District, Stanford University, and the Town of Los Altos Hills (Partner Agencies) share in the proportional operating and maintenance costs of the Plant. These partners regularly work with the City to foster positive relationship and ensure the Plant operates successfully. The Partner Agencies 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 Partner Agencies 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 Partner Agency agreed to pay its share of the project costs, in proportion to the capacity it owns in the Joint Sewer System. The Partner Agencies 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. In November 2022, the Partner Agencies approved the construction of secondary treatment upgrades (STU). The Partner Agencies also authorized the City to receive State Revolving Fund Loan from the SWRCB to fund the costs of the project. In December 2023, the Partner Agencies approved the construction of the joint intercepting sewer rehabilitation (Phase 1) project. Each Partner Agency agreed to pay fixed cost shares of the project costs. These large capital improvement programs are being implemented to replace aging infrastructure and upgrade treatment systems to comply with the new regulations. CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Notes to the Financial Statements For the Year Ended June 30, 2024 6 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 Partner Agencies 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. The percentages used for the year ended June 30, 2024 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 39.31% 10.14% 50.55% CIP and joint system revenues Joint intercepting sewer rehabilitation costs 62.50% 15.00% 22.50% Permitting and enforcement 42.49% 2.35% 55.16% 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% CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Notes to the Financial Statements For the Year Ended June 30, 2024 7 The City is allocated 50.55% 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 2024 allocations are as follows: East Palo Alto Sanitary District 5.56% Stanford University 6.35% Town of Los Altos Hills 1.98% Remaining City percentages 36.66% Total 50.55% 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 projects 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. Unused authorized amount will be carried forward to future years. For fiscal year 2024, the adjusted pay-as-you-go capital additions (minor capital) authorized is $3,903,738. Actual minor capital additions amounted to $6,129,596 for fiscal year 2024. As of June 30, 2024, the commitments for minor capital additions, including unspent capital additions, is $15,935,953, of which encumbrances in the amount of $6,077,703 have been carried forward to fiscal year 2025. 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. CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Notes to the Financial Statements For the Year Ended June 30, 2024 8 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. The 1999 Series A Bonds matured on June 1, 2024. 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 approved 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 July 31, 2025. At June 30, 2024, the outstanding 2021 State water resources loan was $14.0 million. 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. In August 2024, the approved loan amount was increased to $192.8 million. Per the SWRCB agreement, the first debt service payment of this loan is estimated to be due on July 28, 2029. At June 30, 2024, the outstanding 2022 State water resources loan was $60.4 million. CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Notes to the Financial Statements For the Year Ended June 30, 2024 9 NOTE 5 – DEBT SERVICE EXPENDITURES (Continued) The principal amount of the debt outstanding as of June 30, 2024, excluding 2021 and 2022 State water resources loans, are allocated as follows: 2009 2017 State Water State Water Resources Loan Resources Loan Total City of Palo Alto 1,341,375$ 8,328,804$ 9,670,179$ City of Mountain View 1,331,883 8,269,874 9,601,757 City of Los Altos 332,883 2,066,923 2,399,806 East Palo Alto Sanitary District 268,556 1,667,507 1,936,063 Stanford University 184,896 1,148,048 1,332,944 Town of Los Altos Hills 55,539 344,851 400,390 Total 3,515,132$ 21,826,007$ 25,341,139$ NOTE 6 – JOINT SYSTEM REVENUES The Plant’s joint system revenues for the year ended June 30, 2024 total $813,615 which consisted of the following: Septic hauling services 307,020$ Valley Water 229,865 Other miscellaneous revenues 182,506 Salt water marsh services 7,500 Utility service to other utility funds 83,983 Others 2,741 813,615$ NOTE 7 – RELATED PARTY TRANSACTIONS During fiscal year 2024, the Plant paid the City $2,785,779 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 $306,112 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. 10 This page is left intentionally blank. 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, 2024 www.mgocpa.com Macias Gini & O’Connell LLP 2121 N. California Boulevard, Suite 750 Walnut 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, 2024. The City’s management is responsible for the appropriations limit calculation for the year ended June 30, 2024. 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: No exceptions were noted as a result of our procedures. The City applied an incorrect population adjustment factor for the calculation of the prior year appropriations limit. If the City applied the correct population adjustment factor, the prior year appropriations limit should be $203,450,000, which is $150,000 higher than the prior year adopted appropriations limit. If the City applied the correct prior year appropriation limit for the calculation of the current year appropriation limit, the total adjustment amount would remain $8,500,000, which is the amount used for the calculation of the current year adopted appropriation limit. 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: No exceptions were noted as a result of our procedures. The City applied an incorrect population adjustment factor for the calculation of the prior year appropriations limit. If the City applied the correct prior year appropriations limit of $203,450,000, the current year appropriation limit should be $211,950,000. 2 3. We agreed the current year information presented in the accompanying Appropriations Limit Worksheet to the appropriate supporting worksheets described in No. 1 above. Finding: No exceptions were noted as a result of our procedures. See findings of procedures 1 and 2 above. 4. We agreed the prior year appropriations limit presented in the accompanying Appropriations Limit Worksheet to the prior year appropriations limit adopted by the City Council. Finding: No exceptions were noted as a result of our procedures. See finding of procedures 1. We were engaged by the City to perform this agreed-upon procedures engagement and conducted our engagement in accordance with attestation standards established by the American Institute of Certified Public Accountants. We were not engaged to and did not conduct an examination or review, the objective of which would be the expression of an opinion or conclusion, respectively, on the appropriations limit calculation for the year ended June 30, 2024. Accordingly, we do not express such an opinion or conclusion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. No procedures have been performed with respect to the determination of the appropriations limit for the base year, as defined by Article XIII-B of the California Constitution. We are required to be independent of the City and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements related to our agreed-upon procedures engagement. This report is intended solely for the information and use of City Council and the City’s management, and is not intended to be and should not be used by anyone other than these specified parties. Walnut Creek, California November 8, 2024 CITY OF PALO ALTO, CALIFORNIA Appropriations Limit Worksheet For the Year Ended June 30, 2024 3 2022-2023 appropriation limit, as adopted 203,300,000$ Adjustment factors: Population (1)0.997500 Inflation (2)1.0444 Total adjustment factors (rounded) (3)1.0418 Total adjustments (rounded) 8,500,000 2023-2024 appropriation limit, as adopted 211,800,000$ (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 County of Santa Clara. (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. CITY OF PALO ALTO, CALIFORNIA Pedestrian/Bicycle Facilities Grant Metropolitan Transportation Commission Transportation Development Act Funds, Article III Independent Auditor’s Reports, Financial Statements and Supplementary Information For the Year Ended June 30, 2024 CITY OF PALO ALTO, CALIFORNIA Pedestrian/Bicycle Facilities Grant Metropolitan Transportation Commission Transportation Development Act Funds, Article III For the Year Ended June 30, 2024 Table of Contents Page Independent Auditor’s Report ................................................................................................................... 1 Financial Statements Balance Sheet ................................................................................................................................... 3 Statement of Revenues, Expenditures, and Changes in Fund Balance ........................................... 4 Notes to the Financial Statements .................................................................................................... 5 Internal Control and Compliance Section Independent Auditor’s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards and the Transportation Development Act ............................................... 7 www.mgocpa.com Macias Gini & O’Connell LLP 2121 N California Blvd. Suite 750Walnut Creek, CA 94596 1 Independent Auditor’s Report Honorable Mayor and Members of the City Council City of Palo Alto, California Report on the Financial Statements Opinion We have audited the financial statements of the Pedestrian/Bicycle Facilities Grant (Grant) made to the City of Palo Alto, California (City), by the Metropolitan Transportation Commission, under the Transportation Development Act Funds, Article III, as of and for the year ended June 30, 2024, and the related notes to the 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 financial position of the Grant as of June 30, 2024, and the changes in financial position for the year then ended in accordance with accounting principles generally accepted in the United States of America. Basis for Opinion We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS) and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States (Government Auditing Standards). 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 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 opinion. Emphasis of Matter As discussed in Note 2(a) to the financial statements, the financial statements present only the Grant and do not purport to, and do not, present fairly the financial position of the City as of June 30, 2024, and the changes in its financial position for the year then ended in accordance with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. Responsibilities of Management for the Financial Statements The City’s 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. 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 and Government Auditing Standards 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 and Government Auditing Standards, 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 City’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. Other Reporting Required by Government Auditing Standards and the Transportation Development Act In accordance with Government Auditing Standards and the Transportation Development Act, we have also issued our report dated November 8, 2024, on our consideration of the City’s internal control over the Grant’s financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is solely to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the City’s internal control over the Grant’s financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and the Transportation Development Act in considering the City’s internal control over the Grant’s financial reporting and compliance. Walnut Creek, California November 8, 2024 CITY OF PALO ALTO, CALIFORNIA Pedestrian/Bicycle Facilities Grants Metropolitan Transportation Commission Transportation Development Act Funds, Article III Balance Sheet June 30, 2024 Assets Due from the Metropolitan Transportation Commission 92,583$ Liabilities and Fund Balance Liabilities Due to the City of Palo Alto 92,583$ Fund balance Restricted - Total liabilities and fund balance 92,583$ See accompanying notes to the financial statements. 3 CITY OF PALO ALTO, CALIFORNIA Pedestrian/Bicycle Facilities Grants Metropolitan Transportation Commission Transportation Development Act Funds, Article III Statement of Revenues, Expenditures, and Changes in Fund Balance For the Year Ended June 30, 2024 Revenues TDA Article III Grant 176,715$ Expenditures Capital outlay 176,715 Change in fund balance - Fund balance - beginning of year - Fund balance - end of year -$ See accompanying notes to the financial statements. 4 CITY OF PALO ALTO, CALIFORNIA Pedestrian/Bicycle Facilities Grant Metropolitan Transportation Commission Transportation Development Act Funds, Article III Notes to the Financial Statements For the Year Ended June 30, 2024 5 NOTE 1 – DESCRIPTION OF REPORTING ENTITY The accompanying financial statements are prepared from the accounts and financial transactions of the City of Palo Alto, California (City) for Pedestrian/Bicycle Facilities Grant (Grant) projects funded under the Transportation Development Act of 1971 (TDA) Article III of the State of California, which include the construction of pedestrian and bicycle paths. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation The Grant has been accounted for in the Capital Project Fund, which is a major governmental fund type and is included in the City’s basic financial statements. The Capital Project Fund accounts for resources used for acquisition and construction of capital facilities by the City, with the exception of those assets financed by proprietary funds. The financial statements present only the Grant and do not purport to, and do not, present fairly the financial position of the City as of June 30, 2024, and the changes in its financial position for the year then ended in accordance with accounting principles generally accepted in the United States of America. (b) Basis of Accounting The accompanying financial statements have been prepared on the modified accrual basis of accounting. Under the modified accrual basis of accounting, expenditures are recorded when the related governmental fund liabilities are incurred. Grant revenues, which are received as reimbursement for specific purposes or projects, are recognized when they become measurable and available. The City considers revenues susceptible to accrual to be available if the revenues are collected within ninety days after year-end, except for property taxes, which are available if collected within sixty days after year-end. (c) Fund Balance The City reports fund balance for governmental funds in specific classifications (nonspendable, restricted, committed, assigned and unassigned) based on the extent to which the City is bound to the constraints on the specific purposes for which funds can be spent. The Grant only receives restricted revenues. No fund balance was reported as of June 30, 2024. (d) Due to the City of Palo Alto Cash has been advanced to the Grant projects for expenditures paid by the City’s Capital Projects Fund for the benefit of the TDA Article III projects. The Grant projects are obligated to immediately repay these advances upon receipt of reimbursement from the Metropolitan Transportation Commission. CITY OF PALO ALTO, CALIFORNIA Pedestrian/Bicycle Facilities Grant Metropolitan Transportation Commission Transportation Development Act Funds, Article III Notes to the Financial Statements For the Year Ended June 30, 2024 6 NOTE 3 – INTEREST EARNED ON ALLOCATED FUNDS The City incurred and paid expenditures prior to the receipt of the grant reimbursements and as a result, no interest was earned on Grant funds. NOTE 4 – PROJECTS The major projects funded in part by the Grant during the fiscal year ended June 30, 2024 were as follows: Expenditures incurred Allocation Allocation for the year ended Project Title Number Amount June 30, 2024 Bicycle and Pedestrian Transportation Project Update 22001053 334,852$ *84,132$ Bicycle and Pedestrian Transportation Project Update 24001113 250,720 92,583 Total 585,572$ 176,715$ * During the year ended June 30, 2024, the remaining allocation amount of $250,720 was rescinded. www.mgocpa.com Macias Gini & O’Connell LLP 2121 N California Blvd. Suite 750Walnut Creek, CA 94596 7 Independent Auditor’s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Governmental Auditing Standards and the Transportation Development Act Honorable Mayor and Members of the City Council City of Palo Alto, California We have audited, in accordance with the 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), the financial statements of the Pedestrian/Bicycle Facilities Grant (Grant) made to the City of Palo Alto, California (City), by the Metropolitan Transportation Commission, Transportation Development Act Funds, Article III, as of and for the year ended June 30, 2024, and the related notes to the financial statements, and have issued our report thereon dated November 8, 2024. Report on Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the City’s internal control over the Grant’s financial reporting (internal control) as a basis for designing audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion 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 significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. 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 or significant deficiencies may exist that were not identified. Report on Compliance and Other Matters As part of obtaining reasonable assurance about whether the Grant’s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, including the applicable statutes, rules and regulations of the Transportation Development Act, including Section 6666 of Title 21, of the California Code of Regulations, and the allocation instructions and resolutions of the Metropolitan Transportation Commission, noncompliance with which could have a direct and material effect on the financial 8 statements. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards or the Transportation Development Act. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Walnut Creek, California November 8, 2024 Baker Tilly Advisory Group, LP and Baker Tilly US, LLP, trading as Baker Tilly, are members of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. Baker Tilly US, LLP is a licensed CPA firm that provides assurance services to its clients. Baker Tilly Advisory Group, LP and its subsidiary entities provide tax and consulting services to their clients and are not licensed CPA firms. City of Palo AltoOffice of the City Auditor (OCA) Finance Committee Meeting City of Palo Alto Audited Financial Statements Presenter: Kate Murdock, City Auditor December 3, 2024 2 Financial Audit Overview •Article IV, Section 13 of the City Charter requires “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 F I N AN C I AL AU D I T R E S U LT S •Obtain reasonable assurance that financial statements are fairly stated Purpose Results •Unmodified opinion across all reports – financial statements are prepared in all material respects and comply with accounting standards being used as well as applicable regulations FY 2023-24 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, 2024, 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, 2024 •Single Audit Reports for the Year Ended June 30, 2024 •Cable TV Franchise Statements of Revenues and Expenses for the Years Ended December 31, 2023 and 2022 •Palo Alto Public Improvement Corporation Financial Statements for the Year Ended June 30, 2024 •Regional Water Quality Control Plant Financial Statements for the Year Ended June 30, 2024 •Pedestrian/Bicycle Facilities Grant, Metropolitan Transportation Commission, Transportation Development Act Funds, Article III for the Year Ended June 30, 2024 •Agreed Upon Procedures Related to Article XIII-B Appropriations Limit for the Year Ended June 30, 2024 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 •Single Audit Reports (Federal Award Compliance) -Unmodified Opinions -No noncompliance for each major federal program (2 major programs for FY 2024) -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 2023-2024 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. Accounting Policies and Policies and Practices a. Preferability of Accounting Policies and Practices b. Adoption of, or change in, Accounting Policies c. Significant Accounting Policies d. Significant Unusual Transactions e. Management’s Judgments and Accounting Estimates f. Audit Adjustments and Uncorrected Misstatements 4. Disagreement with Managements 5. Consultations with Other Accountants 6. Significant Issues Discussed with Management 7. Difficult or Contentious Matters That Required Consultation 8. Shared Responsibilities for Independence 9. Representations Requested from Management 10. Internal Control and Compliance Matters MGO Presentation to the City of Palo Alto FY 2023-2024 Audit Results © 2023 MACIAS GINI & O'CONNELL LLP Questions? We are excited to explore the opportunities.