Finance commission recommends council receive Menlo Park's audited 2025 financial report after auditors flag interest-allocation error

The Menlo Park Finance and Audit Commission voted unanimously Jan. 15 to recommend that the City Council receive the city's Annual Comprehensive Financial Report (ACFR) for the fiscal year ended June 30, 2025.

Assistant Administrative Services Director Penny Lee told the commission that independent auditors issued an unmodified, or 'clean,' opinion on the city's financial statements. "The independent auditors issued an unmodified opinion commonly referred to as a clean audit," Lee said, calling the ACFR the city's official audited record of financial performance.

Why it matters: while the overall government-wide net position grew by about $16.1 million in 2025, auditors identified a compliance issue with how the city allocated investment earnings. The auditors found the city's practice had limited interest and unrealized-gain allocations to a subset of funds rather than allocating proportionally across all funds as GASB 31 requires. City staff corrected the approach and recorded prior-period adjustments that, together, reduced the general fund and contributed to a $1.6 million net operating deficit in FY2025.

Details and figures: staff said part of the growth in government-wide net position reflected one-time increases in specific funds, including a roughly $6.7 million in-lieu payment for community amenities and a $10.5 million rise in a municipal water capital fund. At the fund level, the general fund reported an ending balance of about $33.6 million. Revenues rose roughly $6.0 million to $82.5 million, driven by higher property, sales and transient-occupancy taxes; expenditures rose about $15.1 million year over year, affected in part by the absence of prior-year ARPA support, a voluntary $2.0 million prepayment to CalPERS and start-up costs for the Belhaven campus.

On the accounting adjustment, Lee said the city made prior-period adjustments dating back to earlier fiscal years to conform allocations to GASB 31. Those corrections included a $2.0 million reduction to the general fund's beginning balance and additional adjustments that together reduced recognized interest income and unrealized gains allocated to the general fund, producing the $1.6 million net deficit in 2025.

Audit team explanation: audit engagement manager Mark Gu, who joined the meeting remotely, told commissioners the issue was identified during this year's audit work after the auditors focused testing on revenue and related allocations. "This year we focused on the revenue test of control and the bank statement test of control," Gu said, explaining auditors rotate substantive and control testing across cycles and select areas based on population, materiality and risk. He said the interest-allocation difference was significant enough this year to warrant adjustment and disclosure.

Commissioner questions: commissioners pressed staff on the city's fund-balance policy and the conditions under which the council could use economic-stabilization reserves. Staff said the policy sets target ranges (about 20'25% of general fund operating expenses across contingency and economic-stabilization buckets) and that any use of those reserves requires city council approval; examples of qualifying events include catastrophic disasters or revenue shortfalls exceeding 5% of the adopted general fund revenue budget.

Follow-up and next steps: after discussion and questions, the commission approved a motion (moved by Commissioner Bellamy and seconded by Commissioner Almond) to recommend that the City Council receive the ACFR. The recommendation does not itself adopt policy; it forwards the audited report to the council for formal receipt and any subsequent action.

The commission heard no public comments on the ACFR and listed its next regular meeting for April 16, 2026.