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TABLE OF CONTENTS
Required Communications 1
Exhibits
Exhibit A—Recent Accounting Pronouncements 8
1 REQUIRED COMMUNICATIONS
Auditing standards generally accepted in the United States of A merica (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 fin ancial statement audits as well as observations arising from our audits that are significant and r elevant to your responsibility to oversee the financial and related compliance reporting process.
Our Responsibilities With Regard to the Financial Statement Audits Our responsibilities under auditing standards generally accepte d in the United States of America and Government Auditing Standards have been described to you in our engagement letter dated July 1, 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 Audits We conducted our audits consistent with the planned scope and t iming in our engagement letter dated July 1, 2024.
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 a lternative accounting practices. I n 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 appropriaten ess of the accounting policies used by the City. A summary of the significant policies adopted by the Cit y is included in Note I to the financial statements. As described in Note I.E. 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 statemen ts did not have a significant impact on the City’s financial statements for the year ended June 30, 2024.
During the year ended June 30, 2024, the City adopted a policy for the establishment of a rate stabilization reserve to allow San José Clean Energy to defer revenues to fut ure years in accordance with GASB Statement No. 62. At June 30, 2024, the deferred inflows of re sources - rate stabilization reserve is $50.0 million.
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 inte gral 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 assumptio ns 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 m easure fair value and the primary valuation methodologies used for fin ancial instruments measured at fair value on a recurring basis:
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.
MGO compared investment values from quoted market information and using pricing applications and models obtained from the custodian bank, fiscal agents or other sources and determined that they were reasonable.
Estimated allowance for
losses on accounts
receivable
Estimated allowance for losses on accounts receivable was based on historical experience.
MGO evaluated the methodologies and assumptions used in estimat ing the allowance for losses and tested subsequent cash receipts of significant accounts receivable.
Estimated allowance for
losses on loans receivable
Estimated allowance for loans receivable is comprised of an all owance for risk and an allowance for present value discount. The allowance for risk was based on the consideration of the changes in the portf olio character, evaluation of current economic conditions and such o ther factors that, in management’s judgment, deserve recognition in estimating potential loan losses. The allowance for risk takes i n t o consideration maturity dates, interest rates, and other relevan t factors.
The allowance for present value discount gives recognition to t he economic cost of providing loans at interest rates below market and
3 represents management’s estimate of the present value of projec ted net cash flows to the City from the loan portfolio.
MGO evaluated the methodologies and assumptions used in estimat ing the allowance and determined whe ther they are consistent with t he City’s Loan Loss Reserve Polici es and Procedures and performed analytical procedures to determi ne the estimated allowance for losses was reasonable.
Depreciation and
amortization of capital
assets, including
depreciation/amortization
methods and useful lives
assigned to
depreciable/amortizable
property
Useful lives, or in the case of intangible right-to-use lease a nd subscription-based information t echnology arrangement assets, t he shorter of useful lives or the lease/subscription term, for depreciable/amortizable capital assets were determined by management based on the nature of the capital asset. Depreciation/amortiza tion 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/amortization expense and determined the estimates were reasonable.
Accrual of compensated
absences
Accrual of compensated absences was based on accrued eligible h ours of vacation, sick leave and other compensatory time at current pay rates for eligible employees.
MGO agreed the unused hours and pay rates at year-end to payrol l reports and recalculated the repor ted balances to determine the y were reasonable.
Accrual and disclosure of
self-insurance claims
liabilities
Estimated liabilities for workers’ compensation claims were bas ed on management’s estimate obtained from information derived from Intercare’s (a third-party administrator) claims database system adjusted for a discounted projection of the ultimate cost of known claim s and unreported claims at 1.5%. Estimated liabilities for general liability and other claims were determined by the City Attorney’s judgment about the ultimate outcome of the claims.
MGO evaluated the methodologies and assumptions used to develop the workers’ compensation claims es timate through data testing. Fo r general liability and other claims, MGO obtained legal confirmation and obtained evidence relevant to the period in which the underlyin g cause for legal action occurred, the degree of probability of an unfa vorable outcome and the amount or range of potential loss.
Accrual and disclosure of
pollution remediation
obligations
Accrual and disclosures of pollution remediation obligations we re determined by the City’s engin eers and its environmental consul tants’ judgments about the ultimate outcome of the obligations.
MGO evaluated the methodologies and assumptions used to develop the obligations, reviewed the assumptions used for reasonableness, and determined whether the estimate is supported and reasonable.
Measurement of the
pension contributions, net
Pension plans’ employer and empl oyee contributions requirements, net pension liability, and related deferred outflows and inflows of resources
4 Audit Adjustments and Uncorrected Misstatements
Professional standards require us to communicate to you all mat erial, corrected misstatements that were brought to the attention of management as a result of our audit procedures. There were no corrected misstatements identified by us as a result of our audit procedures.
Uncorrected misstatements or matters underlying these uncorrect ed 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. We are not aware of any uncorrected misstatements other than misstatements that are clearly trivial.
pension liability, pension
expense, and pension-
related deferred outflows
and inflows of resources
were based on actuarial valuations prepared by the City’s Retir ement Systems and CalPERS.
MGO agreed the calculations to actuarial valuations prepared by t h e Retirement Systems and CalPERS and tested the reasonableness of allocations to various City funds.
Measurement of the other
postemployment benefits
(OPEB) contributions, net
OPEB liability, OPEB
expense and OPEB-related
deferred outflows and
inflows of resources
OPEB plans’ employer and employ ee contributions requirements, n et OPEB liability, and related defe rred outflows and inflows of re sources were based on actuarial valuations prepared by the City’s Retir ement Systems.
MGO agreed the calculations to actuarial valuations prepared by t h e City’s Retirement Systems and tested for reasonableness the allocations to various City funds
Discount rate used for the
calculation of the lease and
PPP receivables, and the
lease and subscription
liabilities
The discount rate used for the calculation of the lease and PPP receivables, and the lease and subscription liabilities are bas ed on the City’s estimated incremental borrowing rate using the national average fixed-rate loan index on the date of commencement
MGO evaluated the methodologies and assumptions used in making the accounting estimate and performed substantive procedures to determine that the discounted value was reasonable.
Rate stabilization reserve
deferral for San José Clean
Energy
The City adopted a policy for th e establishment of a rate stabi lization reserve to allow San José Clean Energy to defer revenues to future years in accordance with GASB Statement No. 62. The reserve is funded and a matching amount of cash is restricted. The reserve amount ma y periodically be adjusted based on the criteria stated in the policy.
MGO evaluated the methodologies and assumptions used in estimat ing the reserve amount and determined whether they are consistent with the City’s reserve policy and performed analytical procedures to de termine whether the estimate is supported, reasonable, and calculated i n accordance with the City’s reserve policy.
5 Other Information Included in Annual Comprehensive Financial Report Our responsibility for other infor mation included in the annual comprehensive financial report is to read the information and consider whether its content or the manner of its presentation is materially inconsistent with the basic financial inform ation covered by our auditor’s r eport, whether it contains a material misstatement of fact or whether the other information is otherw ise misleading. We read the City’s introductory and statistical sections. We did not identify mate rial inconsistencies with the audited basic financial statements.
Observations About the Audit Process
Disagreements With Management
We encountered no disagreements with management over the applic ation of significant accounting principles, the basis for management’s judgments on any signifi cant 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 fro m 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.
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 consid ering 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 Mayor and City Council, 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 man agement over compliance with in dependence rules and firm policies.
6 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, rel ated entities, investments, join t 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 i n MGO being involved in making management decisions on behalf of the City.
5. Not entering into relationships resulting in close family membe rs of MGO covered persons, temporarily or permanently acting as an officer, director, or p erson in an accounting, financial reporting or compliance oversight role at the City.
Management Representations
We have requested certain written representations from manageme nt, which are included in the management representation letter dated November 22, 2024.
Internal Control and Compliance Matters
We have separately communicated on internal control and compli ance over financial reporting identified during our audit of the financial statements, as required by Government Auditing Standards.
The financial and compliance audit of the City’s major federal awards in accordance with the Uniform Administrative Requirements, Cost Principles, and Au dit Requirements for Federal Awards at 2 CFR 200 (Uniform Guidance) is in process and will be issued no later than March 31, 2025.
7 EXHIBIT A
Recent Accounting Pronouncements
8 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 informati on needs of financial statement users by up dating the recognition and measu rement guidance for compensat ed absences. That objective is achieved b y aligning the recognition and measurement guidance under a unified model and by amending certain previously required disclosures.
Statement No. 101 is effective fo r the City’s financial stateme nts 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 fo r the City’s financial stateme nts 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 t h e financial reporting model to enhance its effectiveness in provi ding information that is essential for decision making and assessing a government’s accountability. This statement also addresses cert ain 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 fo r certain types of capital assets to be di sclosed separately for purposes of note disclosures, and to establish requirements for capital assets h eld 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.