Staff Report with attachments
PREPARED BY: Stephen Conway
Finance Director
Reviewed by: Town Manager, Assistant Town Manager, Town Attorney, and Finance Director
110 E. Main Street Los Gatos, CA 95030 ● (408) 354-6832
www.losgatosca.gov
TOWN OF LOS GATOS
COUNCIL AGENDA REPORT
MEETING DATE: 06/21/2022 ITEM NO: 4
DATE: June 14, 2022
TO: Town Council
FROM: Laurel Prevetti, Town Manager
SUBJECT: Receive Fiscal Year 2020/21 Federal Single Audit Report and Corrective Action
Plan
RECOMMENDATION:
Staff recommends that the Town Council receive the Federal Single Audit Report and Corrective
Action Plan for Fiscal Year (FY) 2020/21.
BACKGROUND:
On May 9, 2022, staff presented the Town’s Federal Single Audit for FY 2020/21 Single Audit
Report to the Town’s Finance Commission. In performing the Single Audit for FY 2020/21, the
Town’s independent auditor, Badawi and Associates, concluded that the rent forgiveness
provided by the Town constituted “lost revenue” and thereby a “questioned cost” which under
their interpretation of the federal guidelines would not be eligible for federal Coronavirus Aid,
Relief, and Economic Security (CARES) Act reimbursement funding. Losses in revenues due to
the pandemic, such as a decline in sales taxes or property tax, was not eligible under the federal
CARES Act rules.
Based on the Town’s understanding of the initial Treasury guidance released April 22, 2020
regarding the CARES Act eligible uses, rent forgiveness support was classified as eligible under
the Small Business Assistance category of expenditures. As such, the Town Council opted to
assist certain Town lessees by forgiving their rent (a voluntary write-off of rents due to the
Town) to support these entities during the height of the pandemic.
The questioned cost determination of rent forgiveness is identified as significant deficiencies in
internal control over compliance that the auditor considered as a material weakness in the
Single Audit Report (Attachment 1) and requires corrective action by the Town.
PAGE 2 OF 2 SUBJECT: Receive FY 2020/21 Federal Single Audit Report and Corrective Action Plan DATE: June 21, 2022
BACKGROUND (continued):
The auditor made this judgment based upon the fact that $94K of the $388K submitted for
CARES Act reimbursements to the State Department of Finance was for rental assistance
subsidies (rent forgiveness) for which the auditor determined was a material amount of the
total $388K claimed under the CARES Act. The Finance Commission discussed the finding and
stressed the importance of rectifying the issue and apprising Council of the finding.
DISCUSSION:
Accompanying the Single Audit Report is a required supplemental corrective action plan
(Attachment 2) for federal agency review that must be submitted if the audit report had a
finding. The affected Federal awarding agency or pass-through entity will review the report and
if necessary, will follow up with Town staff on the acceptability of the Town’s corrective action
plan or any alternative actions it expects staff to implement.
Upon feedback received from the Finance Commission on the possibility of re-submitting the
CARES Act claim using an alternative eligible cost to replace the waiver of rents, staff contacted
the State Department of Finance. Upon staff’s request, the Department of Finance allowed
staff to correct, resubmit, and reallocate the questioned costs amount of $94,988 from
business support (rent waivers) to public safety payroll costs. Staff received written approval of
the reallocation as corrected in the State’s coronavirus reporting worksheet on June 1, 2022.
The attached revised Corrective Action Plan was updated to include the re-submission of
replaced public safety costs to be substituted for rent waivers as approved by the State
Department of Finance. Staff and its independent auditor believe that the nature of the finding
and the revised corrective action plan as proposed have a positive result for the Town and that
no further action or adverse outcomes would be required by the Federal agency reviewing this
report.
CONCLUSION:
Upon approval by Town Council the Single Audit and Corrective Action Plan will be filed
electronically by the auditor with certification by Town staff. The due date for filing is
September 30, 2022.
Attachments:
1. FY 2020-21 Single Audit
2. FY 2020-21 Corrective Action Plan
Los Gatos, California
Single Audit Reports
For the year ended June 30, 2021
ATTACHMENT 1
Town of Los Gatos
Single Audit Reports
For the year ended June 30, 2021
Table of Contents
Page
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
Report on Compliance for Each Major Program and on Internal
Control over Compliance Required by the Uniform Guidance and on the Schedule of
Expenditures of Federal Awards ................................................................................................................... 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
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
INDEPENDENT AUDITOR’S REPORT
To the Honorable Mayor and Members of the Town Council
of the Town of Los Gatos
Los Gatos, 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, the financial statements of the governmental
activities, each major fund, the aggregate remaining fund information, and the budgetary comparison
for the General Fund of the Town of Los Gatos, California (Town), as of and for the year ended June 30,
2021, and the related notes to the financial statements, which collectively comprise the Town’s basic
financial statements and have issued our report thereon dated December 31, 2021.
Internal Control Over Financial Reporting
In planning and performing our audit of the financial statements, we considered the Town’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 Town’s internal
control. Accordingly, we do not express an opinion on the effectiveness of the Town’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 may exist that have not been identified.
To the Honorable Mayor and Members of the Town Council
of the Town of Los Gatos
Los Gatos, California
Page 2
Compliance and Other Matters
As part of obtaining reasonable assurance about whether the Town’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.
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.
Badawi & Associates, CPAs
Berkeley, California
December 31, 2021
2
REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND REPORT ON
INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH THE UNIFORM GUIDANCE
AND ON THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS
INDEPENDENT AUDITOR’S REPORT
To the Honorable Mayor and Members of the Town Council
of the Town of Los Gatos
Town of Los Gatos, California
Report on Compliance for Each Major Federal Program
We have audited the Town of Los Gatos, California (Town)’s compliance with the types of compliance
requirements described in the OMB Compliance Supplement that could have a direct and material effect on
each of the Town’s major federal programs for the year ended June 30, 2021. The Town’s major federal
programs are identified in the summary of auditor’s results section of the accompanying schedule of
findings and questioned costs.
Management’s Responsibility
Management is responsible for compliance with federal statutes, regulations, and the terms and conditions
of its federal awards applicable to its federal programs.
Auditor’s Responsibility
Our responsibility is to express an opinion on compliance for each of the Town’s major federal programs
based on our audit of the types of compliance requirements referred to above. We conducted our audit of
compliance in accordance with auditing standards generally accepted in the United States of America; the
standards applicable to financial audits contained in Government Auditing Standards, issued by the
Comptroller General of the United States; and the audit 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). Those standards and the Uniform Guidance require that we plan and perform
the audit to obtain reasonable assurance about whether noncompliance with the types of compliance
requirements referred to above that could have a direct and material effect on a major federal program
occurred. An audit includes examining, on a test basis, evidence about the Town’s compliance with those
requirements and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal
program. However, our audit does not provide a legal determination of the Town’s compliance.
3
To the Honorable Mayor and Members of the Town Council
of the Town of Los Gatos
Los Gatos, California
Page 2
Basis for Qualified Opinion on CFDA 21.019 Coronavirus Relief Fund
As described in the accompanying schedule of findings and questioned costs, the Town did not comply
with requirements regarding CFDA 21.019 Coronavirus Relief Fund as described in finding numbers
2021-001 for Activities Allowed or Unallowed, and Allowable Costs and Cost Principles. Compliance
with such requirements is necessary, in our opinion, for the Town to comply with the requirements
applicable to that program.
Qualified Opinion on CFDA 21.019 Coronavirus Relief Fund
In our opinion, except for the noncompliance described in the Basis for Qualified Opinion paragraph,
the Town complied, in all material respects, with the types of compliance requirements referred to
above that could have a direct and material effect on CFDA 21.019 Coronavirus Relief Fund for the year
ended June 30, 2021.
Unmodified Opinion on Each of the Other Major Federal Programs
In our opinion, the Town, complied, in all material respects, with the types of compliance requirements
referred to above that could have a direct and material effect on each of its other major federal
programs identified in the summary of auditor’s results section the accompanying schedule of findings
and questioned costs for the year ended June 30, 2021.
Other Matters
The Town’s response to the noncompliance findings identified in our audit is described in the
accompanying schedule of findings and questioned costs. The Town’s response was not subjected to
the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on
the response.
Report on Internal Control Over Compliance
Management of the Town is responsible for establishing and maintaining effective internal control over
compliance with the types of compliance requirements referred to above. In planning and performing
our audit of compliance, we considered the Town’s internal control over compliance with the types of
requirements that could have a direct and material effect on each major federal program to determine
the auditing procedures that are appropriate in the circumstances for the purpose of expressing an
opinion on compliance for each major federal program 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
on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on
the effectiveness of the Town’s internal control over compliance.
4
To the Honorable Mayor and Members of the Town Council
of the Town of Los Gatos
Los Gatos, California
Page 3
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 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 the first
paragraph of this section and was not designed to identify all deficiencies in internal control over
compliance that might be material weaknesses or significant deficiencies and therefore, material
weaknesses or significant deficiencies may exist that have not been identified. We did identify certain
deficiencies in internal control over compliance, described in the accompanying schedule of findings
and questioned costs as item 2021-001, that we consider to be a material weakness.
The Town’s response to the internal control over compliance findings identified in our audit is
described in the accompanying schedule of findings and questioned costs. The Town’s response was
not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we
express no opinion on the response.
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,
the aggregate discretely presented component units, each major fund, and the aggregate remaining
fund information of the City, as of and for the year ended June 30, 2021, and the related notes to the
financial statements, which collectively comprise the City’s basic financial statements. We issued our
report thereon dated December 31, 2021, which contained unmodified opinions on those financial
statements. Our audit was conducted for the purpose of forming opinions on the financial statements
that collectively comprise the 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
To the Honorable Mayor and Members of the Town Council
5
of the Town of Los Gatos
Los Gatos, California
Page 4
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.
Badawi & Associates, CPAs
Berkeley, California
April 25, 2022, except for the schedule of expenditures
of federal awards, which is as of December 31, 2021
6
Town of Los Gatos
Schedule of Expenditures of Federal Awards
For the year ended June 30, 2021
Federal
Catalog Pass-through Program
Grantor Agency and Grant Title Number Number Expenditures
U.S. Department of Transportation:
Highway Planning and Construction Cluster
Passed through State of California
Highway Planning and Construction 20.205 HSIPL-5067(021)120,220
Highway Planning and Construction 20.205 CML-5067(022)245,253
Subtotal Highway Planning and Construction Cluster 365,473
Total U.S. Department of Transportation 365,473
Department of Homeland Security:
Emergency Management Performance Grants 97.042 2,365
Passed through County of Santa Clara
Fire Management Assistance Grant 97.046 FM-5336-CA 12,627
Total Department of Homeland Security 14,992
Department of Justice:
Bulletproof Vest Partnership Program 16.607 1,309
Total Department of Justice 1,309
Department of the Treasury:
Coronavirus State and Local Fiscal Recovery Funds 21.027 200,911
Passed through State of California
COVID19 - Coronavirus Relief Fund 21.019 n/a 388,181
Total Department of the Treasury 589,092
Total Expenditures of Federal Awards 970,866$
See accompanying Notes to Schedule of Expenditures of Federal Awards.
7
Town of Los Gatos
Notes to the Schedule of Expenditures of Federal Awards
For the year ended June 30, 2021
A. Reporting Entity
The financial reporting entity consists of (a) the primary government, Town of Los Gatos, California
(Town), (b) organizations for which the primary government is financially accountable, and (c) other
organizations for which the primary government is not accountable, but for which the nature and
significance of their relationship with the primary government are such that exclusion would cause the
reporting entity's financial statements to be misleading or incomplete.
B. Basis of Accounting
Funds received under the various grant programs have been recorded within the general, special
revenue, and capital projects funds of the Town. The Town utilizes the modified accrual basis of
accounting for the general, special revenue, and capital projects funds. Expenditures of federal awards
reported on the Schedule of Expenditures of Federal Awards (Schedule) are recognized when incurred.
C. Relationship of Schedule of Expenditures of Federal Awards to Financial Statements
The accompanying Schedule presents the activity of all federal financial assistance programs of the
Town. Federal financial assistance received directly from federal agencies as well as federal financial
assistance passed through the State of California and the County of Santa Clara is included in the
Schedule.
The Schedule was prepared only from the accounts of various grant programs and, therefore, does not
present the financial position or results of operations of the Town.
D. Pass-Through Entities’ Identifying Number
When federal awards were received from a pass-through entity, the Schedule shows, if available, the
identifying number assigned by the pass-through entity. When no identifying number is shown, the
Town determined that no identifying number is assigned for the program or the Town was unable to
obtain an identifying number from the pass-through entity.
E. Indirect Costs
The Town did not elect to use the 10% de minimis indirect cost rate.
8
Town of Los Gatos
Schedule of Findings and Questioned Costs
For the year ended June 30, 2021
Section I – Summary of Auditor’s Results
Financial Statements
Types of auditors’ report issued on whether financial statements
audited were prepared in accordance with GAAP: Unmodified
Internal control over financial reporting:
x Material weakness(es) identified? No
x Significant deficiency(ies) identified? None noted
Any noncompliance material to the financial statements noted No
Federal Awards
Internal control over major programs:
x Material weakness(es) identified? Yes
x Significant deficiency(ies) identified? None noted
Type of auditor’s report issued on compliance for major programs Qualified
Any audit findings disclosed that are required to be reported in
accordance with section 200.516(a) Yes
Identification of major programs:
Dollar threshold used to distinguish between type A and type B program $750,000
Auditee qualified as low-risk auditee under
section 200.520? No
9
Town of Los Gatos
Schedule of Findings and Questioned Costs, Continued
For the year ended June 30, 2021
Section II – Current Year Findings
No financial statement findings were noted.
Section III- Federal Award Findings and Questioned Costs
Finding: 2021-001
Awarding Agency Department of the Treasury
Passed through State of California (State)
Program Coronavirus Relief Fund
AFN# 21.019
Criteria:
Per 2 CFR section 225 App. A, Paragraph C.1.d, “to be allowable under Federal awards, costs must
meet the following general criteria:
Conform to any limitations or exclusions set forth in these principles, Federal laws, terms and
conditions of the Federal award, or other governing regulations as to types or amounts of cost
items.”
Condition:
During our audit, we noted that per the Coronavirus Relief Fund (Fund) program guidance in the
Federal Register dated January 15, 2021, revenue replacement is not a permissible use of Fund
payments. On April 21, 2020, the Town Council approved a waiver of rent and utilities for a set of non-
profit lessees. When preparing a listing of grant expenditures for reporting to the State, the Town chose
to use their rent and utility waivers as a qualifying expenditure.
Cause:
The Town did not equivalate rental waivers and lost revenue replacement. The Town staff’s
interpretation of lost revenue was understood to be unavoidable losses of revenue due to the
pandemic.
Questioned Costs:
During our testing, we determined that $73,054 of federal expenditures were not allowable costs or
allowable activities with total questioned costs of $94,998.
Context and Effect:
The Town was not in full compliance with neither the allowable costs and cost principles, nor the
allowable activities compliance requirements of the program.
10
Town of Los Gatos
Schedule of Findings and Questioned Costs, Continued
For the year ended June 30, 2021
Section III- Federal Award Findings and Questioned Costs, Continued
Finding: 2021-001, Continued
Recommendation:
We recommend the Town double-check for disallowed costs and activities when administering new
grant programs.
Management Response:
The Town’s independent auditor has opined that the Town’s efforts to provide economic relief in the
form of waivers of rent (rent forgiveness) to a number of non-profits and other entities should be
considered as “lost revenue” and therefore disallowable because lost revenue is precluded as an
expenditure for the CARES act . Based on the Town’s understanding of the CARES act rent forgiveness
support was classified as eligible under the Small business assistance category of expenditures. As
such, the Town Council opted to assist these groups by forgiving their rent (a voluntary write-off of
rents due to the Town) to support these entities during the height of the pandemic. If the Federal
Government determines that this cost were to be disallowed, the Town has significant other qualifying
expenditures in categories such as payroll for public safety that could be substituted for the small
business rental assistance.
In response to the questioned finding on waivers of rent, staff received approval from the State of
California Department of Finance to re-allocate the questioned costs amount of $94,988 from business
support (rent waivers) to public safety payroll. The department reviewed the Town’s submittal and on
June 1, 2022 the Town received the department’s approval of the re-allocation as corrected in the State’s
Corona Virus Fund Reporting worksheet.
Section IV – Prior Year Financial Statements Findings
No financial statement findings were noted.
Section V – Prior Year Findings and Questioned Costs – Major Federal Award Program Audit
No findings or questioned costs were noted.
11
Finance Department • 110 E. Main St., Los Gatos, CA 95030
408.354.6828 • www.losgatosca.gov • www.facebook.com/losgatosca
TOWN OF LOS GATOS
CORRECTIVE ACTION PLAN
SINGLE AUDIT
FOR THE YEAR ENDED JUNE 30, 2021
CORRECTIVE ACTION PLAN
FINANCIAL STATEMENT FINDINGS ‐ CURRENT YEAR
Finding Reference Number: 2021‐
001
General Fund Financial Position (Material Weakness)
Name(s) of the contact person: Stephen Conway, Director of Finance
Corrective Action Plan: Based on the Town’s understanding of the initial
guidance released April 22, 2020 regarding CARES act
eligible uses, rent forgiveness support was classified as
eligible under the Small business assistance category of
expenditures. As such, the Town Council opted to
assist certain Town lessees by forgiving their rent (a
voluntary write‐off of rents due to the Town) to
support these entities during the height of the
pandemic.
If the Federal government subsequently determines
that this cost were to be disallowed, the Town has
significant other qualifying expenditures in categories
such as payroll for public safety that could be
substituted for the small business rental assistance.
In response to the questioned finding on waivers of
rent, staff received approval from the State of
California Department of Finance to re‐allocate the
questioned costs amount of $94,988 from business
support (rent waivers) to public safety payroll. The
department reviewed the Town’s submittal and on
June 1, 2022 the Town received the department’s
approval of the re‐allocation as corrected in the State’s
Corona Virus Fund Reporting worksheet.
ATTACHMENT 2
Finance Department • 110 E. Main St., Los Gatos, CA 95030
408.354.6828 • www.losgatosca.gov • www.facebook.com/losgatosca
TOWN OF LOS GATOS
CORRECTIVE ACTION PLAN
Anticipated Completion Date:
Because of significant other CARES act qualifying
expenditures that can be substituted for the
questioned cost, effective immediately the Town of
Los Gatos will refrain from claiming the Town Council
approved expense write‐offs of rental revenues due to
the Town from lessees as an eligible use of Federal
funds. This decision was made under the advice from
the Town ’s independent auditor and staff’s review of
the updated discussion of eligible expenditures and
eligibility of lost revenues as was recently released in
the January 15, 2021 Federal Register Department of
the Treasury Corona Relief Fund for States, Tribal
Governments, and Certain Eligible Local Governments.