CITY OF FREMONT, CALIFORNIA
R
eport to Those Charged With Governance
F
or the Year Ended June 30, 2023
www.mgocpa.com Macias Gini & O’Connell LLP
2121 N California Blvd. Suite 750
Walnut Creek, CA 94596
1 December 28, 2023
T
o the Honorable Mayor and Members
of the City Council of the City of Fremont
Fremont, California
W
e are pleased to present this report related to our audit of the governmental activities, each major fund, and the aggregate remaining fund information of the City of Fremont (City), as of and for the year ended June 30, 2023. 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.
T
his report is intended solely for the information and use of the City Council and 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.
Wa
lnut Creek, California
2 TABLE OF CONTENTS
Required Communications 3
Exhibit:
Exhibit A— Recent Accounting Pronouncements 10
3 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 financial statement audit s as well as observations arising from our audit s that are significant and relevant to your responsibility to oversee the financial 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 engagement letter dated June 12, 2023. 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 Audits
We conducted our audit s consistent with the planned scope and timing in our engagement letter dated June 12, 2023.
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 pol icies used by the City. A summary of the significant policies adopted by the City is included in Note 1 to the financial statements. As described in Note 1. H. to the financial statements, the f ollowing is a description of Governmental Accounting Standards board (GASB) Statements that the City implemented during the year:
• GASB Statement No. 91 – Conduit Debt Obligations
This statement provides a single method of reporting conduit debt obligations by issuers and eliminates diversity in practice associated with (1) commitments extended by issuers, (2) arrangements associated with conduit debt obligations, and (3) related note disclosures. This statement achieves those objectives by clarifying the existing definition of a conduit debt obligation; establishing that a conduit debt obligation is not a liability of the issuer; establishing standards for accounting and financial reporting of additional commitments and voluntary commitments extended by issuers and arrangements associated with conduit debt obligations; and improving required note disclosures. The statement did not have a significant impact on the City’s financial statements for the year ended June 30, 2023.
• GASB Statement No. 94 - Public-Private and Public -Public Partnerships and Availability Payment Arrangements
This statement is to improve financial reporting by addressing issues related to public-private and public-public partnership arrangements (PPPs). As used in this statement, a PPP is an arrangement in which a government (the transferor) contracts with an o perator (a governmental or nongovernmental entity) to provide public services by conveying control of the right to operate or use a nonfinancial
4 asset, such as infrastructure or other capital asset (the underlying PPP asset), for a period of time in an exchange or exchange -like transaction. Some PPPs meet the definition of a service concession arrangement (SCA), which the Board defines in this stat ement as a PPP in which (1) the operator collects and is compensated by fees from third parties; (2) the transferor determines or has the ability to modify or approve which services the operator is required to provide, to whom the operator is required to provide the services, and the prices or rates that can be charged for the services; and (3) the transferor is entitled to significant residual interest in the service utility of the underlying PPP asset at the end of the arrangement. This statement also pro vides guidance for accounting and financial reporting for availability payment arrangements (APAs). As defined in this statement, an APA is an arrangement in which a government compensates an operator for services that may include designing, constructing, financing, maintaining, or operating an underlying nonfinancial asset for a period of time in an exchange or exchange -like transaction. The statement did not have a significant impact on the City’s financial statements for the year ended June 30, 2023.
• GASB Statement No. 96 – Subscription-Based Information Technology Arrangements This statement provides guidance on the accounting and financial reporting for subscription-based information technology arrangements (SBITAs) for government end users (governments). This statement (1) defines a SBITA; (2) establishes that a SBITA results in a right-to-use subscription asset— an intangible asset—and a corresponding subscription liability; (3) provides the capitalization criteria for outlays other than subscription payments, including implementation costs of a SBITA; and (4) requires note disclosures regarding a SBITA. To the extent relevant, the standards for SBITAs are based on the standards established in Statement No. 87, Leases, as amended. A SBITA is defined as a contract that conveys control of the right to use another party’s (a SBITA vendor’s) information technology (IT) software, alone or in combination with tangible capital assets (the underlying IT assets), as specified in the contract for a period of time in an exchange or exchange -like transaction. The subscription term includes the period during which a government has a noncancelable right to use the underlying IT assets. The subscription term also includes periods covered by an option to extend (if it is reasonably certain that the government or SBITA vendor will exercise that option) or to terminate (if it is reasonably certain that the government or SBITA vendor will not exercise that option). Under this statement, a government generally should recognize a right -to-use subscription asset —an intangible asset —and a corresponding subscription liability. The application of this statement impacted the City’s financial statements and footnote disclosures for the year ended June 30, 2023.
• GASB Statement No. 99 – Omnibus 2022
The objectives of this statement are to enhance comparability in accounting and financial reporting and to improve the consistency of authoritative literature by addressing: (1) Classification and reporting of derivative instruments within the scope of St atement No. 53, Accounting and Financial Reporting for Derivative Instruments, that do not meet the definition of either an investment derivative instrument or a hedging derivative instrument; (2) Clarification of provisions in Statement No. 87, Leases, as amended, related to the determination of the lease term, classification of a lease as a short -term lease, recognition and measurement of a lease liability and a lease asset, and identification of lease incentives; (3) Clarification of provisions in Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements, related to (a) the determination of the public -private and public- public partnership (PPP) term and (b) recognition and measurement of installment payments and the transfer of the underlying PPP asset; (4) Clarification of provisions in Statement No. 96, Subscription- Based Information Technology Arrangements, related to the subscription-based information technology arrangement (SBITA) term, classification of a SBITA as a short -term SBITA, and recognition and measurement of a subscription liability; (5) Extension of the period during which the London Interbank Offered Rate (LIBOR) is considered an appropriate benchmark interest rate for the qualitative evaluation of the effectiveness of an interest rate swap that hedges the interest rate risk of taxable debt; (6) Accounting for the distribution of benefits as part of the Supplemental Nutrition Assistance Program (SNAP); (7) Disclosures related to nonmonetary transactions; (8) Pledges of future revenues when
5 resources are not received by the pledging government; (9) Clarification of provisions in Statement No. 34, Basic Financial Statements — and Management’ s Discussion and Analysis— for State and Local Governments, as amended, related to the focus of the government -wide financial statements; (10) Terminology updates related to certain provisions of Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position; and (11) Terminology used in Statement 53 to refer to resource flows statements.
The required effective dates of this Statement are as follows: Items (5), (6), (7), (8), (9), (10), and (11) were implemented starting FY 2022; items (2), (3), and (4) related to leases, PPPs, and SBITAs were implemented for FY 2023 reporting purposes. The required changes are reflected in the City’s financial statements and notes to the statements, as necessary . Item (1), which is related to financial guarantees and the classification and reporting of derivative instruments within the scope of Statement No. 53 is required to take effect for financial statements starting with the year ending June 30, 2024, however, the City chose to implement the full Statement for the year ended June 30, 2023. The statement did not have a significant impact on the City’s financial statements for the year ended June 30, 2023.
• GASB Statement No. 100 – Accounting Changes and Error Corrections – an Amendment of GASB Statement No. 62
The objective of this statement is to enhance accounting and financial reporting requirements for accounting changes and error corrections to provide more understandable, reliable, relevant consistent, and comparable information for making decisions or assessing accountability. The application of this statement did not have a significant impact on the City’s financial statements for the fiscal year ended June 30, 2023.
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.
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 is summary information about the process used by management in formulating particularly sensitive accounting estimates and about our conclusions regarding the reasonableness of those estimates:
Significant Accounting Estimates
Measurement of
investments at fair value
The City’s investments are accounted for in accordance with the provisions of GASB Statement No. 72, Fair Value Measurement and Application, and accordingly, its fair value measurements are categorized within the fair value hierarchy established by the standard.
The following levels indicate the hierarchy of inputs used to measure fair value and the primary valuation methodologies used for f inancial instruments measured at fair value on a recurring basis:
6 Significant Accounting Estimates
o Level 1 – Investments whose values are based on quoted prices (unadjusted) for identical assets in active markets that a government can access at the measurement date.
o Level 2 – Investments whose values are based on inputs – other than quoted prices including prices included within level 1 – that are observable for an asset, either directly or indirectly.
o Level 3 – Investments whose values are based on
unobservable inputs for an asset and may require a degree of professional judgment.
All the City’s investments are measured using level 2 inputs, except for investments in U.S Treasuries which are measured using level 1 inputs, and California Local Agency Investment Fund, money market mutual funds, and equity mutual funds which are not subject to fair value hierarchy.
MGO compared investment values from quoted market information and using pricing applications and models obtained from custodian bank, fiscal agents or other sources and determined that they were reasonable.
Depreciation and
amortization of capital
assets, including
depreciation/amortization
methods and useful lives
assigned to
depreciable/amortizable
property
Useful lives for depreciable capital assets were determined by management based on the nature of the capital asset. Depreciation was calculated based on the straight-line method.
MGO assessed the reasonableness of the useful lives based on the nature of the capital assets and performed substantive analytical procedures on depreciation expense and determined the estimates were reasonable.
Estimated allowance for
losses on notes and loans
receivable
The allowance for losses on notes and loans receivable was based on management’s estimate regarding the likelihood of collectability.
MGO assessed the reasonableness of the allowances based on the nature of the notes and loans receivable and performed substantive analytical procedures on the balances and determined the estimates were reasonable.
Accrual of compensated
absences
The accruals of compensated absences are based on accrued eligible hours of vacation and other compensated leave for eligible employees.
MGO assessed the reasonableness of the accrual based on the nature of the compensated absences and performed substantive analytical procedures on the balances and determined the accrual was reasonable.
Net pension and Other
Post-Employment Benefits
(OPEB) liabilities,
The pension balances are based on actuarial valuations performed by the California Public Employees’ Retirement System’s independent
7 Audit Adjustments and Uncorrected Misstatements
There were no uncorrected or corrected misstatements that were material to the financial statements.
Departure From the Auditor’s Standard Report
There were no departures from the Auditor’s Standard Report.
Significant Accounting Estimates
contributions, expenses,
and other related balances
actuaries. The OPEB balances are based on actuarial valuations performed by the City’s OPEB actuary, Foster & Foster.
MGO agreed the calculations to the actuarial valuations developed through CalPERS and Foster & Foster and tested the reasonableness of allocations to various City funds.
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 t he 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.
MGO reviewed the actuarial valuations and the related assumptions used in the City’s calculations for these liabilities, and determined them to be reasonable.
Pollution remediation
obligations
The accruals of pollution remediation obligations are based on analyses performed by the City’s management.
MGO assessed the reasonableness of the accrual based on the nature of the remediation projects and performed substantive analytical procedures on the balances and determined the accrual was reasonable.
Discount rate used for the
calculation of lease
liability, lease receivable,
and SBITA liability
The discount rates for the calculation of the lease receivable are based on the City’s bank prime loan rate in effect on the lease inception date as shown in the Federal Reserve Board Selected Interest Rates – H.15 report.
The discount rates for the calculation of the SBITA liability are based on the money market update (MMD) tax-exempt General Obligation rates at SBITA inception date.
MGO evaluated the City’s methodology and assumptions behind the estimates and verified on a test-basis that the discount rates had been appropriately applied in the City’s calculation of the lease and SBITA balances.
8 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 City’s 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.
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 Commissioners, 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 City’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, and 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 City 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 City.
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.
9 EXHIBIT A
Recent Accounting Pronouncements
10 RECENT ACCOUNTING PRONOUNCEMENTS
The following accounting pronouncements have been issued as of the date of this communication but are not yet effective and may affect the future financial reporting by the City.
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 mod el and by amending certain previously required disclosures.
Statement No. 101 is effective for the City’s year ending June 30, 2025.
GASB Statement No.
102, Certain Risk
Disclosures
The objective of this statement is t o 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 year ending June 30, 2025.