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HomeMy WebLinkAboutStaff Report 2601-5817CITY OF PALO ALTO CITY COUNCIL Special Meeting Monday, March 16, 2026 Council Chambers & Hybrid 4:30 PM     Agenda Item     9.Accept the Single Audit Report audited by Macias Gini & O’Connell for the year ended June 30, 2025, Fiscal Year 2025; CEQA Status – Not a Project. City Council Staff Report From: City Manager Report Type: CONSENT CALENDAR Lead Department: Administrative Services Meeting Date: March 16, 2026 Report #:2601-5817 TITLE Accept the Single Audit Report audited by Macias Gini & O’Connell for the year ended June 30, 2025, Fiscal Year 2025; CEQA Status – Not a Project. RECOMMENDATION Office of the City Auditor and Staff recommend that the City Council accept the following audit reports for the fiscal year ended June 30, 2025, prepared by Macias Gini & O’Connell (“MGO”). These reports are collectively referred to as the Single Audit. 1. 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. 2. 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 the Uniform Guidance. BACKGROUND At its December 2, 2025, meeting1 the Finance Committee reviewed and recommended that the Council accept the City of Palo Alto's audited financial statement for the fiscal year ended June 30, 2025, and accompanying reports provided by Macias Gini & O'Connell LLP. At that time, guidance necessary for the completion of the Single Audit had not yet been released by Federal Office of Management and Budget. The Single Audit report has since been 1 Finance Committee, December 2, 2025; Agenda Item #1; CMR #2510-5389, https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=84150&dbid=0&repo=PaloAlto&searchid=cbb6b9b 3-da43-4ce1-8bcf-0720eae7f541&cr=1 completed, thus the recommended action within this report. MGO reports the following within the Single Audit Report:  Unmodified (“clean”) opinions as it pertains to both the Financial Statements and to Federal Awards No material weaknesses or significant deficiencies in internal controls over financial reporting or over major programs  No findings or costs questioned 3, the City Council approved the following audit reports prepared by MGO: ANALYSIS FISCAL/RESOURCE IMPACT 3 City Council Meeting, December 15, 2025; Agenda Item #13; CMR #2511-5452 STAKEHOLDER ENGAGEMENT ENVIRONMENTAL REVIEW ATTACHMENTS APPROVED BY: CITY OF PALO ALTO Single Audit Reports For the Year Ended June 30, 2025 CITY OF PALO ALTO Single Audit Reports For the Year Ended June 30, 2025 Table of Contents Page 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 ............................................................. 1 Independent Auditor’s Report on Compliance For Each Major Federal Program; Report on Internal Control Over Compliance; and Report on Schedule of Expenditures of Federal Awards Required by the Uniform Guidance .................................. 3 Schedule of Expenditures of Federal Awards ............................................................................................... 7 Notes to the Schedule of Expenditures of Federal Awards ........................................................................... 8 Schedule of Findings and Questioned Costs ................................................................................................. 9 Summary Schedule of Prior Audit Findings ............................................................................................... 10 www.mgocpa.com Macias Gini & O’Connell LLP 2121 N. California Boulevard, Suite 750 Walnut Creek, CA 94596 1 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 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 governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Palo Alto, California (City), as of and for the year ended June 30, 2025, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements, and have issued our report thereon dated October 31, 2025. 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 financial reporting (internal control) as a basis for designing audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City’s internal control. Accordingly, we do not express an opinion on the effectiveness of the City’s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. A 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 City’s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the financial 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. 2 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 October 31, 2025 www.mgocpa.com Macias Gini & O’Connell LLP 2121 N. California Boulevard, Suite 750 Walnut Creek, CA 94596 3 Independent Auditor’s Report on Compliance for Each Major Federal Program; Report on Internal Control Over Compliance; and Report on Schedule of Expenditures of Federal Awards Required by the Uniform Guidance Honorable Mayor and Members of the City Council City of Palo Alto, California Report on Compliance for Each Major Federal Program Opinion on Each Major Federal Program We have audited the City of Palo Alto, California’s (City) compliance with the types of compliance requirements identified as subject to audit in the OMB Compliance Supplement that could have a direct and material effect on each of the City’s major federal programs for the year ended June 30, 2025. The City’s major federal programs are identified in the summary of auditor’s results section of the accompanying schedule of findings and questioned costs. In our opinion, the City complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30, 2025. Basis for Opinion on Each Major Federal Program We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America (GAAS); the standards applicable to financial audits contained in Government Audit Standards issued by the Comptroller General of the United States (Government Audit Standards); and the audit requirements of Title 2 U.S. Code of Federal Regulation Part 200, Uniform Administrative Requirements, Costs Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Our responsibilities under those standards and the Uniform Guidance are further described in the Auditor’s Responsibilities for the Audit of Compliance section of our report. We are required to be independent of the City and to meet our other ethical responsibilities, in accordance with 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 opinion on compliance for each major federal program. Our audit does not provide a legal determination of the City’s compliance with the compliance requirements referred to above. Responsibilities of Management for Compliance Management is responsible for compliance with the requirements referred to above and for the design, implementation, and maintenance of effective internal control over compliance with the requirements of laws, statutes, regulations, rules and provisions of contracts or grant agreements applicable to the City’s federal programs. 4 Auditor’s Responsibilities for the Audit of Compliance Our objectives are to obtain reasonable assurance about whether material noncompliance with the compliance requirements referred to above occurred, whether due to fraud or error, and express an opinion on the City’s compliance based on our audit. 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, Government Auditing Standards, and the Uniform Guidance will always detect material noncompliance when it exists. The risk of not detecting material noncompliance 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. Noncompliance with the compliance requirements referred to above is considered material if there is a substantial likelihood that, individually or in the aggregate, it would influence the judgment made by a reasonable user of the report on compliance about the City’s compliance with requirements of each major federal program as a whole. In performing an audit in accordance with GAAS, Government Auditing Standards, and the Uniform Guidance, we:  Exercise professional judgment and maintain professional skepticism throughout the audit.  Identify and assess the risks of material noncompliance, 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 City’s compliance with the compliance requirements referred to above and performing such other procedures as we considered necessary in the circumstances.  Obtain an understanding of the City’s internal control over compliance relevant to the audit in order to design audit procedures that are appropriate in the circumstances and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion of the effectiveness of the City’s internal control over compliance. Accordingly, no such opinion is expressed. We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and any significant deficiencies and material weaknesses in internal control over compliance that we identified during the audit. Report on Internal Control Over Compliance A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in Auditor’s Responsibilities for the Audit of Compliance section above and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies in internal control over compliance. Given these limitations, during our audit we did not 5 identify any deficiencies in internal control over compliance that we consider to be material weaknesses as defined above. However, material weaknesses or significant deficiencies in internal control over compliance may exist that were not identified. Our audit was not designed for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, no such opinion is expressed. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Report on Schedule of Expenditures of Federal Awards Required by the Uniform Guidance We have audited the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City, as of and for the year ended June 30, 2025, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements. We issued our report thereon dated October 31, 2025, which contained unmodified opinions on those financial statements. Our audit was performed for the purpose of forming opinions on the financial statements that collectively comprise the City’s basic financial statements. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by the Uniform Guidance and is not a required part of the basic financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of federal awards is fairly stated, in all material respects, in relation to the basic financial statements as a whole. Walnut Creek, California February 12, 2026 6 The page intentionally left blank CITY OF PALO ALTO Schedule of Expenditures of Federal Awards For the Year Ended June 30, 2025 Grantor Assistance Identifying Listing Federal Subrecipients Grantor/Pass-Through Grantor/Federal Program Title Number Number Expenditures Expenditures U.S. Department of Housing and Urban Development Direct: CDBG - Entitlement Grants Cluster: Community Development Block Grants/Entitlement Grants Not Available 14.218 1,118,020$ 504,669$ COVID-19 - Community Development Block Grants/Entitlement Grants B-20-MW-06-0020 14.218 2,265 2,265 Subtotal - CDBG - Entitlement Grants Cluster 1,120,285 506,934 Total U.S. Department of Housing and Urban Development 1,120,285 506,934 U.S. Department of the Interior Direct: Water Recycling and Desalination Construction Programs R24AC00299-00 15.504 19,466 - Total U.S. Department of the Interior 19,466 - U.S. Department of Justice Direct: Bulletproof Vest Partnership Program Not Available 16.607 16,644 - Total U.S. Department of Justice 16,644 - U.S. Department of Transportation Direct: Airport Improvement Program, Infrastructure Investment and Jobs Act Programs, and COVID-19 Airports Programs 3-06-0182-022-2023 20.106 87,310 - Railroad Crossing Elimination 69A36524420450RCECA 20.327 255,747 - Natural Gas Distribution Infrastructure Safety and Modernization Grant Program 693JK3254000NGDI 20.708 179,472 - Safe Streets and Roads for All 693JJ3240117 20.939 49,474 - Pass-through from State of California Department of Transportation: Highway Planning and Construction 75LX335-00180000017 20.205 818,203 - Highway Planning and Construction BRLS-5100(017) 20.205 96,125 - Highway Planning and Construction 423000278 20.205 133,341 - Pass-through from Metropolitan Transportation Commission: Highway Planning and Construction Not Available 20.205 436,735 - Subtotal - Highway Planning and Construction 1,484,404 - Total U.S. Department of Transportation 2,056,407 - U.S. Environmental Protection Agency Pass-through from San Francisco Bay Water Quality Improvement Fund: Geographic Programs - San Francisco Bay Water Quality Improvement Fund 98T20101 66.126 166,429 - Total U.S. Environmental Protection Agency 166,429 - U.S. Department of Energy Direct: Energy Efficiency and Conservation Block Grant Program (EECBG) Not Available 81.128 75,539 - Total U.S. Department of Energy 75,539 - U.S. Department of Health and Human Services Direct: Congressional Directives H79FG000738 93.493 417,265 - Total U.S. Department of Health and Human Services 417,265 - U.S. Department of Homeland Security Direct: Staffing for Adequate Fire and Emergency Response (SAFER) EMW-2020-FF-01734 97.083 687,808 - Pass-through from California Governor's Office of Emergency Services CalOES: Disaster Grants - Public Assistance (Presidentially Declared Disasters) FEMA-4683-DR-CA 97.036 727,497 - Disaster Grants - Public Assistance (Presidentially Declared Disasters) FEMA-4699-DR-CA 97.036 280,683 - Subtotal - Disaster Grants - Public Assistance (Presidentially Declared Disasters)1,008,180 - Pass-through from the County of Santa Clara: Emergency Management Performance Grants EMF-2023-EP000006 97.042 19,411 - Total U.S. Department of Homeland Security 1,715,399 - TOTAL EXPENDITURES OF FEDERAL AWARDS 5,587,434$ 506,934$ See accompanying notes to the Schedule of Expenditures of Federal Awards. 7 CITY OF PALO ALTO Notes to the Schedule of Expenditures of Federal Awards For the Year Ended June 30, 2025 8 NOTE 1 – REPORTING ENTITY The Schedule of Expenditures of Federal Awards (the Schedule) includes expenditures of federal awards for the City of Palo Alto, California (City), and its component unit as disclosed in the notes to the basic financial statements. The information in the Schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). NOTE 2 – BASIS OF ACCOUNTING Basis of accounting refers to when revenues and expenditures or expenses are recognized in the accounts and reported in the financial statements, regardless of measurement focus applied. The Schedule is presented using the modified accrual basis of accounting for program expenditures accounted for in governmental funds and the accrual basis of accounting for program expenditures accounted for in proprietary funds Expenditures of federal awards reported in the Schedule are recognized when incurred and all eligibility requirements have been met. Such expenditures are recognized following the cost principles contained in 2 CFR 200, Subpart E (Cost Principles), wherein certain types of expenditures are not allowable or are limited as to reimbursement. The City did not elect to use the 10% de minimis cost rate allowed under the Uniform Guidance. As a result of the COVID-19 pandemic, many new federal programs have been established and funding has been added to existing federal programs. Expenditures funded from the following acts are denoted by the prefix COVID-19 in the federal program title in the Schedule (as applicable): • Coronavirus Preparedness and Response Supplemental Appropriations Act • Families First Coronavirus Response Act • Coronavirus Aid, Relief, and Economic Security Act (CARES Act) • Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA) • American Rescue Plan Act (ARP) NOTE 3 – DIRECT AND INDIRECT (PASS-THROUGH) FEDERAL AWARDS Federal awards may be granted directly to the City by a federal granting agency or may be granted to other government agencies which pass-through federal awards to the City. The Schedule includes both of these types of federal award programs when related expenditures are incurred. NOTE 4 – RELATIONSHIP TO BASIC FINANCIAL STATEMENTS Expenditures of federal awards are reported in the City’s basic financial statements as expenditures in the governmental funds or as expenses/capital assets in the proprietary funds. Federal award expenditures agree or can be reconciled with the amounts reported in the City’s basic financial statements. CITY OF PALO ALTO Schedule of Findings and Questioned Costs For the Year Ended June 30, 2025 9 Section I Summary of Auditor’s Results Financial Statements Type of auditor’s report issued on whether the financial statements audited were prepared in accordance with U.S. GAAP: Unmodified Internal control over financial reporting:  Material weakness(es) identified? No  Significant deficiency(ies) identified? None reported Noncompliance material to the financial statements noted? No Federal Awards Internal control over major programs:  Material weakness(es) identified? No  Significant deficiency(ies) identified? None reported Type of auditor’s report issued on compliance for the major federal programs: Unmodified Any audit findings disclosed that are required to be reported in accordance with Uniform Guidance? No Identification of major federal programs: Assistance Listing Numbe s Name of Federal Program or Cluste 14.218 97.036 Community Development Block Grants / Entitlement Grants Disaster Grants – Public Assistance (Presidentially Declared Disasters) Dollar threshold used to distinguish between type A and type B programs: $750,000 Auditee qualified as a low-risk auditee? Yes Section II Financial Statements Findings None reported. Section III Federal Awards Findings and Questioned Costs None reported. CITY OF PALO ALTO Summary Schedule of Prior Audit Findings For the Year Ended June 30, 2025 10 No prior audit findings were reported.