HomeMy WebLinkAboutStaff Report 2312-2401CITY OF PALO ALTO
CITY COUNCIL
Special Meeting
Monday, January 22, 2024
Council Chambers & Hybrid
5:30 PM
Agenda Item
8.Approval of the Office of the City Auditor's Wastewater Treatment Plant Agreement Audit
Report as Recommended by Policy & Services Committee (CEQA Status - Not a Project)
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City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: City Auditor
Meeting Date: January 22, 2024
Report #:2312-2401
TITLE
Approval of the Office of the City Auditor's Wastewater Treatment Plant Agreement Audit
Report as Recommended by Policy & Services Committee (CEQA Status - Not a Project)
RECOMMENDATION
The Policy and Services Committee and the City Auditor recommend that the City Council
approve the Wastewater Treatment Plant Agreement Report.
BACKGROUND
Baker Tilly, in its capacity serving as the Office of the City Auditor (OCA), performed a citywide
risk assessment that assessed a wide range of risk areas, including strategic, financial,
operational, compliance, technological, and reputation risks. The purpose of the assessment was
to identify and prioritize risks to develop the annual audit plan.
During the FY2022 risk assessment (CMR #13914)1, the OCA identified risks associated with
wastewater treatment plant operations.
The committee members approved the attached Wastewater Treatment Plant Agreement
Audit Report at the Policy and Services Committee meeting on December 12, 20232.
MOTION: Mayor Kou moved, seconded by Chair Tanaka, to approve the Wastewater
Treatment Plant Agreement Audit Report and recommend the City Council accept the
report.
MOTION PASSED: 2-0
1 City Council, April 4, 2022; Agenda Item #7; SR #13914,
https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=81749
2 Policy & Services Committee, December 12, 2023, Agenda Item #4, SR #2310-2182,
https://cityofpaloalto.primegov.com/meetings/ItemWithTemplateType?id=3774&meetingTemplateType=2&comp
iledMeetingDocumentId=8676
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ANALYSIS
The objectives of this review were to:
1) Determine whether adequate controls are in place and working effectively to ensure
that costs related to the wastewater treatment plant are properly accounted for and
allocated.
2) Determine whether adequate controls are in place and working effectively to ensure the
compliance with contracts and regulations.
The OCA interviewed City employees and reviewed 39 Regional Water Quality Control Plant
(RWQCP) contracts and amendments the City manages. The OCA also reviewed the transactions
and documents in the audit period (from July 1, 2020, to May 30, 2022) for control testing, such
as billing and compliance monitoring activities.
The attached report summarizes the analysis, audit findings, and recommendations.
The timeline and resource needs for implementation of management’s corrective action plans
are identified by management within the attached report.
The OCA worked primarily with the Public Works Department and the Administrative Services
Department and engaged with additional stakeholders, including the City Manager’s Office and
the City Attorney’s Office, as necessary.
Environmental review is not applicable to this activity.
Attachment A: OCA - Wastewater Treatment Plant Agreement
:
Adriane D. McCoy, City Auditor
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December 12, 2023
City of Palo Alto
Office of the City Auditor
Wastewater Treatment Plant Agreement Audit
Contents
Baker Tilly US, LLP, trading as Baker Tilly, is an independent member of Baker Tilly International. Baker Tilly International Limited is an English company. Baker
Tilly International provides no professional services to clients. Each member firm is a separate and independent legal entity, and each describes itself as such.
Baker Tilly US, LLP is not Baker Tilly International’s agent and does not have the authority to bind Baker Tilly International or act on Baker Tilly International’s
behalf. None of Baker Tilly International, Baker Tilly US, LLP nor any of the other member firms of Baker Tilly International has any liability for each other’s acts
or omissions. The name Baker Tilly and its associated logo is used under license from Baker Tilly International Limited.
EXECUTIVE SUMMARY ................................................................................................. 1
INTRODUCTION ............................................................................................................. 3
DETAILED ANALYSIS ................................................................................................... 6
AUDIT RESULTS ............................................................................................................ 8
APPENDICES ............................................................................................................... 12
1
Executive Summary
Purpose of the Audit
Baker Tilly US, LLP (Baker Tilly), in its capacity serving as the Office of the City Auditor (OCA) for the
City of Palo Alto (the City), conducted a Wastewater Treatment Plant Agreement Audit based on the
approved Task Order 4.15. The objectives of this review were to:
1) Determine whether adequate controls are in place and working effectively to ensure that costs
related to the wastewater treatment plant are properly accounted for and allocated.
2) Determine whether adequate controls are in place and working effectively to ensure the
compliance with contracts and regulations.
Report Highlights
Finding 1: Invoice and Payment Due Dates
(Page 8) The OCA judgmentally selected eight invoices from the FY21 and FY22 quarterly/annual
invoices sent to five partner agencies to include diverse samples and reconciled the
invoices and supporting documents as well as the payment information against the
billing and payment requirements in the agreements. Six invoices were sent to the
partner agencies eight days to two and a half months late, and one payment was
received more than 100 days late due to incomplete supporting documents sent to the
partner agency.
Each agreement with a partner agency includes billing and payment requirements as
summarized in Table 1 in the Detailed Analysis section. The languages and
requirements differ among the Regional Water Quality Control Plant (RWQCP)
agreements, especially for amendments including additional capital project costs. The
variety and inconsistency of billing and payment requirements among multiple
agreements may cause the agencies to be susceptible to noncompliance, errors, slower
cash inflows, and inefficiency.
Key Recommendations
The City’s management should evaluate all billing and payment requirements in the
existing contracts to determine whether there is any reason preventing the agencies
from making the requirements and language in the RWQCP contracts more consistent. .
If there is no reason, management should standardize billing and payment requirements
for all RWQCP contracts in order to improve the efficiency of billing and monitoring of
payments and ensure compliance with the requirements.
Additionally, the City’s management should formalize the internal controls and processes
to ensure timely submission of invoices with adequate supporting documents and
partner agencies’ compliance with payment requirements.
Finding 2: Industrial Waste Surveys
(Page 9) The City has the Industrial Waste Pretreatment Program (IWPP) in which the City’s staff
members perform permitting, monitoring, and enforcing Industrial Waste Discharge
Permits for the entire RWQCP service area (except for the City of Mountain View
operating portion of the IWPP). The agreements require the partner agencies to update
the industrial waste survey (IWS) and provide the update annually to the City. However,
the City currently does not receive the surveys. The surveys are updated informally by
discussing new facilities during quarterly coordination meetings or receiving e-mail
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EXECUTIVE SUMMARY
updates on auto and dental facility lists. For some partner agencies, the IWS is not
routinely requested or required in the agreement. As the City’s RWQCP management
meets with partner agencies periodically to discuss the IWS-related items, this process
is being used in place of requiring formal IWS updates from each partner agency.
Without submitting annual IWS updates to the City, the partner agencies are non-
compliant with this requirement in the agreements.
Key Recommendations
The City’s Public Works management should obtain the necessary IWS updates from all
partner agencies to ensure compliance with pretreatment laws, regulations, and
discharge permits until the contracts are amended. Management should evaluate the
adequacy of the current informal survey update practice for effective administration and
operation of the IWPP and either enforce the current agreement requirements or amend
the language in the contract as necessary to refine the partner agencies’ responsibilities.
Finding 3: Compliance Monitoring
(Page 10) The OCA noted that the timeliness of payments from the partner agencies is not being
monitored even though some contracts include a delinquent payment clause that
requires interest to be accrued on the unpaid balance. For other requirements in
contracts, individual requirements are monitored and performed by different individuals.
However, there are currently no policies and procedures to formalize the compliance
monitoring processes for RWQCP contracts and no centralized monitoring mechanism
to ensure all contract requirements are executed as intended.
As listed in the Scope section of this report, RWQCP has 39 contracts and amendments
with several partner agencies. Keeping track of agreement requirements and monitoring
compliance with them are necessary for successful construction, operation, and
maintenance of RWQCP due to various reasons such as:
The billing and payment requirements differing among agreements and vary based
on the type of costs.
An addendum being added for a new project with different debt service billing and
payment requirements.
Compliance with regulations and permits that is essential to carry out RWQCP’s
mission.
Cost allocation depending on capacity rights, certain cost and wastewater data, debt
service schedules, and other allocation methods that are described and updated in
the contracts for each type of cost and revenue.
It is important to identify compliance issues and resolve them in a timely manner.
Without policies and procedures and a formal monitoring mechanism, the City cannot
ensure that all contract requirements are met to successfully construct, operate, and
maintain RWQCP or collect interest penalties that are due to the City.
Key Recommendations
The City’s management should establish RWQCP policies and procedures to implement
a formal monitoring mechanism that will ensure contract requirements are met. Roles
and responsibilities and the expectations of various City departments should be clearly
defined.
When an issue or a potential issue is identified, appropriate actions should be taken in a
timely manner. The policies and procedures should provide guidelines for appropriate
actions such as communication/escalation and contract amendments.
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Introduction
1 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance-
committee/2022/20221129/20221129pfcsm-linked.pdf
Objective The objectives of this review were to:
1) Determine whether adequate controls are in place and working effectively to
ensure that costs related to the wastewater treatment plant are properly
accounted for and allocated.
2) Determine whether adequate controls are in place and working effectively to
ensure the compliance with contracts and regulations.
Background The “Basic Agreement Between the City of Palo Alto, the City of Mountain View
and the City of Los Altos for Acquisition, Construction and Maintenance of a Joint
Sewer System” (Basic Agreement) was executed in 1968. As the City of Palo
Alto (the City) is the owner of the joint sewer system and the Administrator of the
Basic Agreement, its Public Works department is responsible for operations and
capital projects of the Regional Water Quality Control Plant (RWQCP) that treats
wastewater before it is discharged to San Francisco Bay. The Basic Agreement
has been amended in the following years, which included the Addendum No.
Eight to the Basic Agreement that extended the contract term to December 31,
2060.
These three communities are entitled to use the proportion of the capacity of the
joint sewer system based on the capacity rights defined in the contracts. The
costs of acquisition, construction, maintenance, and operations as well as
revenue from services and sales are shared in proportion as specifically
described for each cost category and each project in the contracts.
The City also entered into separate agreements with the East Palo Alto Sanitary
District, the Town of Los Altos Hills, and Stanford to share the City’s
proportionate share of the cost and use. The costs of operating and maintenance
and major capital improvement projects are paid by each community based on
allocation formula and schedules described in the contracts.
As the Administrator of the Basic Agreement as well as three separate
agreements, the City sends bills to the five communities noted above in advance
on a quarterly basis. The billing amount is based on the estimated annual costs
of the operation and maintenance. The City adjusts one of the quarterly bills in
the subsequent year to offset the difference between the billed amounts and
actual costs.
The Basic Agreement requires that the City’s independent auditor conduct an
audit of the RWQCP financial statements each year to express an opinion on the
fair presentation of the net expenditures and quarterly billings in accordance with
the financial reporting provisions of the Basic Agreement. The audited RWQCP
Financial Statements for the year ended June 30, 20221, shows the following
percentages used to allocate costs and revenues:
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INTRODUCTION
The agreements and subsequent amendments include the following to be used
for allocation of the costs of capital improvement projects:
Scope The OCA reviewed the following 39 RWQCP contracts and amendments the City
manages:
Basic Agreement, Supplementals, and subsequent Addendums No. One
through No. Ten
First Amended and Restated Contract No. C059999 Between the City of Palo
Alto and the City of Mountain View for Implementation and Operation of the
SWRCB Water Recycling Project (June 18, 2007) and subsequent
Amendment No. 1
Agreement Between the City of Palo Alto and the Town of Los Altos Hills for
Sewage Transportation, Treatment and Disposal (March 18, 1968) and
subsequent Amendments No. 1 through No. 7
Contract No. C869 Between the City of Palo Alto and the Board of Trustees
of the Leland Stanford Junior University (November 30, 1956) and
subsequent Amendments No. One through No. Seven
Second Amended and Restated Agreement Between the City of Palo Alto
and the East Palo Alto Sanitary District for Wastewater Treatment and
District Outfall (May 17, 2021)
City of Mountain View 40.22%
City of Los Altos 11.58%
City of Palo Alto 32.37% 48.20%
East Palo Alto Sanitary District 7.29%
Stanford University 6.19%
Town of Los Altos Hills 2.35%
Maintenance and Operation Costs &
Joint System Revenue
Source: Note 2 - Summary of Significant Accounting Policies
City of Palo Alto Regional Water Quality Control Plant
Independent Auditor's Report and Financial Statements
For the Year Ended June 30, 2022
City of Mountain View 37.89%
City of Los Altos 9.47%
City of Palo Alto 38.16% 52.64%
East Palo Alto Sanitary District 7.64%
Stanford University 5.26%
Town of Los Altos Hills 1.58%
Debt Services Expenditures
This table does not apply to the Refunding 1990 Series A Bonds
Source: EXHIBIT H - Annual Average Flow Capacity Rights
Second Restated and Amended Agreement Between the City of Palo Alto and the East
Palo Alto Sanitary District for Wastewater Treatment and District Outfall
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INTRODUCTION
2 Government auditing standards require an external peer review at least once every three (3) years. The last peer review of
the Palo Alto Office of the City Auditor was conducted in 2017. The Palo Alto City Council approved a contract from October
2020 through June 2022 with Baker Tilly US, LLP (Baker Tilly) and appointed Kyle O’Rourke, Senior Consulting Manager in
Baker Tilly's Public Sector practice, as City Auditor. Given the transition in the City Audit office, a peer review was not
conducted in 2020 and will be conducted after the third year of Baker Tilly’s contract.
Partnership Agreement to Advance Resilient Water Reuse Programs in
Santa Clara County between the City of Palo Alto, the City of Mountain View,
and the Santa Clara Valley Water District (Valley Water Agreement)
(December 10, 2019)
Effluent Transfer Agreement Between the City of Palo Alto and City of Los
Altos (June 7, 2021)
The OCA reviewed the transactions and documents in our audit period (from July
1, 2020, to May 30, 2022) for control testing.
Methodology To achieve the audit objectives, the OCA performed the following procedures:
Interviewed the appropriate City employees to understand the roles and
responsibilities and processes related to the contract administration.
Reviewed the contracts to identify the contract requirements to be tested for
the City’s compliance monitoring activities.
Reviewed the documents (such as supporting documents for billing, reports,
and meeting minutes) showing cost allocations and compliance monitoring
activities.
Compliance
Statement
This audit activity was conducted from June 2022 to October 2022 in accordance
with generally accepted government auditing standards, except for the
requirement of an external peer review2. Those standards require that we plan
and perform the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
Organizational
Strengths
During this audit activity, we observed that invoices to partner agencies are
itemized and accompanied by cost allocation calculations based on a flow report
and schedules, which makes it easier for each partner agency to confirm the
rates.
The Office of the City Auditor greatly appreciates the support of the Public Works
Department and Administrative Services Department in conducting this audit activity.
Thank you!
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Detailed Analysis
RWQCP
Contracts
The Basic Agreement was
originally signed in October
1968 and has been amended
10 times (as of June 2022). It
requires that the City act as the
Administrator to administer the
contract.
The significant sections of the
Basic Agreement include:
Design, ownership, and
capacity rights of the
joint system
Acquisition and
construction of the joint
system
Sharing of the costs of
acquisition and
construction,
reconstruction, and
maintenance and
operation
Payment of the costs
Revenue from services
and sales of wastewater for reuse
The Supplementals to the Basic Agreement and separate agreements with
other partner agencies include the requirements pertaining to:
Pretreatment program to comply with federal, state, or local regulations
and applicable discharge permits
Capital projects and financing (The major projects planned are listed in
Appendix A.) The audited RWQCP Financial Statements for the year
ended June 30, 2022¹, lists the following bonds and loans financing
RWQCP capital projects:
o 1999 Utility Revenue Refunding Bonds (1999 Wastewater
Treatment New Project & Refunding of 1990 Series A Bonds)
o 2009 State Water Resource Loan
o 2017 State Water Resource Loan
The OCA reviewed the requirements in 39 RWQCP agreements and
amendments within the audit scope (see the Scope section of this report) and
summarized the various requirements related to billings and payments in Table
1 in the following page.
Power and Duties of the Administrator*
a) Supervise and administer the contract
between the parties for the operation and
maintenance of the Joint System.
b) Maintain and operate the Joint System
and preserve it is good repair and working
order, all in accordance with recognized
sound engineering practice.
c) Maintain records of all revenues and
expenditures incurred in connection with
operation and maintenance of the Joint
System. The accounting system shall be
based on “Uniform System of Accounts for
Waste Water Utilities” as published by the
Water Pollution Control Federation.
d) Arrange for an independent annual audit
of the accounts of the Joint System.
e) Measure and keep accurate records of the
measurements of sewage flow.
* Paragraph 11, “Basic Agreement Between the
City of Palo Alto, the City of Mountain View and
the City of Los Altos for Acquisition,
Construction and Maintenance of a Joint Sewer
System” executed October 10, 1968
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DETAILED ANALYSIS
Table 1: Requirements for Billing and Payments
Partner
Agency
Contract Requirements
Bill Amount Billing Due Date Payment Due De
Ture-up* Billing
(*Offset of the
difference between the
billed amounts and
actual costs
Interest on
the
excess/deficit
payments
over/under
actual costs
Interest
on
delinquent
payments
City of
Mountain
View
One-fourth of
proportionate
share of the
cost of
maintenance
and operation
as estimated by
February 15th
July
October (debt payment)
January
April (debt payment)
[Dates are not specified]
Maintenance and Operation
• August 15
• November 15
• February 14
• May 15
Project Costs
• 30 business days of receipt of
the quarterly billing statement
• 10 business days of receipt of
the quarterly billing statement for
Ultra-Violet Treatment Project
October Yes No
City of
Los Altos
One-fourth of
proportionate
share of the
cost of
maintenance
and operation
as estimated by
February 15th
July
October (debt payment)
January
April (debt payment)
[Dates are not specified]
Maintenance and Operation
• August 15
• November 15
• February 15
• May 15
Project Costs
• 30 business days of receipt of a
quarterly billing statement
• 10 business days of receipt of a
quarterly billing statement for
Ultra-Violet Treatment Project
October Yes No
East Palo
Alto
Sanitary
District
One-fourth of
proportionate
share of the
cost of
maintenance
and operation
as estimated by
July 1
July 31
October 31
January 31
May 1
[“Not later than thirty
(30) days after July 1,
October 1, January 1,
and April 1, of each
year”]
Maintenance and Operation
Later of:
• August 15 /November 15
/February 15 /May 16, or
• 25 business days of receipt of a
quarterly billing statement
Project Costs
• 30 business days of receipt of a
quarterly billing statement
• 10 business days of receipt of
the quarterly billing statement for
Ultraviolet Disinfection Facility
Project
• October to reflect the
actual costs for
immediately prior fiscal
year
• April to reflect the
estimated costs to be
incurred between April 1
and July adjusted the
actual costs for the first
three quarters of fiscal
year prior to April 1
Yes Yes
Stanford
University
Based on the
schedule of
payments
August 1st
Bond
• December 1
Project Costs
• 30 business days of receipt of
an annual billing statement for
Ultra-Violet Treatment Project
and Outfall Project and the
Primary Sedimentation Tank
Rehabilitation Project
• 10 business days of receipt of
an annual billing statement
Upon completion of the
project and certification of
the costs
No Yes
Town of
Los Altos
Hills
Based on the
schedule of
payments
August 1st
Bond
• December 1
Project Costs
• 30 business days of receipt of
an annual billing statement for
Ultra-Violet Treatment Project
and Outfall Project and the
Primary Sedimentation Tank
Rehabilitation Project
• 10 business days of receipt of
an annual billing statement
Upon completion of the
project and certification of
the costs
No Yes
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Audit Results
Finding 1:
Invoice and
Payment Due
Dates
The City sends invoices on a quarterly basis to three partner agencies (City
of Mountain View, City of Los Altos, and the East Palo Alto Sanitary District)
and on an annual basis to two partner agencies (Stanford University and
Town of Los Altos Hills). Out of 26 invoices the City sent to these five
partner agencies, The OCA judgmentally selected eight invoices to include
at least one invoice prepared for each quarter in our audit period and at least
one invoice for each partner agency and reviewed the invoices and
supporting documents as well as the payment information against the billing
and payment requirements in the agreements.
The review of eight invoices revealed the following:
Two invoices that are required to be sent annually on or before
August 1st were dated October 15, 2021, and October 16, 2022,
respectively.
Two quarterly invoices were sent in January and another two
quarterly invoices were sent in July as required by the Basic
Agreement. However, they were dated about eight to nineteen days
later than management’s intended invoice dates, January 1st and July
1st respectively. The agreements require payments by February 14th
and August 15th for a January invoice and a July invoice,
respectively.
One payment that was required to be deposited by August 15th was
received on October 28th, which was over 100 days late due to
incomplete supporting documents sent to the partner agency.
Each agreement with a partner agency includes billing and payment
requirements as summarized in Table 1 in the Detailed Analysis section.
The languages and requirements differ among RWQCP’s agreements,
especially for amendments including additional capital project costs. Some
agreements require a payment within 30 business days of receipt of an
invoice while others require a payment within 10 business days. Billing due
dates also differ among the agreements. Billing for three partner agencies is
due quarterly in January, April, July, and October while billing for two partner
agencies is due once a year in August.
The variety and inconsistency of billing and payment requirements among
multiple agreements may cause the agencies to be susceptible to
noncompliance, errors, slower cash inflows, and inefficiency.
Recommendation The City’s management should evaluate all billing and payment
requirements in the existing contracts to determine whether there is any
reason preventing the agencies from making the requirements and language
in the RWQCP contracts more consistent. If there is no reason,
management should standardize billing and payment requirements for all
RWQCP contracts in order to improve the efficiency of billing and monitoring
of payments and ensure compliance with the requirements.
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AUDIT RESULTS
Additionally, the City’s management should formalize the internal controls
and processes to ensure timely submission of invoices with adequate
supporting documents and partner agencies’ compliance with payment
requirements.
Management
Response
Responsible Department(s): Public Works Department; Administrative
Services Department
Concurrence: Agree
Target Date: July 25, 2025
Action Plan:
The City agrees that it would be beneficial to make billing practices
consistent between agencies. The City has made changes to improve the
clarity of quarterly and annual bills by including the due date and potential
late fees. The City will modify existing partner agreements as other updates
are made to clarify the billing frequency and ensure standardization amongst
all the partners, with a target date of July 2025 based on current capital
project schedules.
Finding 2:
Industrial Waste
Surveys
The City has the Industrial Waste Pretreatment Program (IWPP) in which
the City’s staff members perform permitting, monitoring, and enforcing
Industrial Waste Discharge Permits for the entire RWQCP service area
(except for the City of Mountain View operating portion of the IWPP). The
contracts with partner agencies describe the Sewer Use Ordinance that is as
stringent as the Federal Pretreatment Regulations and enforced via permits.
The costs of the program are shared among the partner agencies and
included in their quarterly or annual invoices.
The contracts require the partner agencies to update the industrial waste
survey (IWS) and provide the update annually to the City. However, the City
currently does not receive the surveys. The RWQCP management explains
that the City does not have all FY21 survey updates because the
Pretreatment Program Manager in the beginning of FY21 who would have
requested and received the survey updates via email is no longer employed
by the City. Currently, the surveys are updated informally as follows:
For two partner agencies, new facilities are discussed during
quarterly coordination meetings.
For one partner agency, e-mail updates on auto and dental facility
lists are received.
For one partner agency, the IWS is not currently routinely requested
although the staff is working on improving the practice.
One partner agency is not required to update the IWS in the
agreement.
As the City’s RWQCP management meets with partner agencies periodically
to discuss the IWS-related items, this process is being used in place of
requiring formal IWS updates from each partner agency.
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AUDIT RESULTS
Without submitting annual IWS updates to the City, the partner agencies are
non-compliant with this requirement in the agreements.
Recommendation The City’s Public Works management should obtain the necessary IWS
updates from all partner agencies to ensure compliance with pretreatment
laws, regulations, and discharge permits until the contracts are amended.
Management should evaluate the adequacy of the current informal survey
update practice for effective administration and operation of the IWPP and
either enforce the current agreement requirements or amend the language
in the contract as necessary to refine the partner agencies’ responsibilities.
Management
Response
Responsible Department(s): Public Works Department
Concurrence: Agree
Target Date: September 2024
Action Plan:
The City agrees that the City should obtain necessary Industrial Waste
Survey updates from all partner agencies in a more formalized way. Starting
in FY25, the City will send out formal requests to all Partner Agencies to
review and approve/edit the Industrial Waste Surveys for their jurisdictions.
This requirement will be evaluated for any needed revisions whenever as
the Partner Agreements are reopened for other reasons.
Finding 3:
Compliance
Monitoring
The OCA noted that the timeliness of payments from the partner
agencies is not being monitored even though some contracts include a
delinquent payment clause that requires interest to be accrued on the
unpaid balance. For other requirements in contracts, individual
requirements are monitored and performed by different individuals.
However, there are currently no policies and procedures to formalize the
compliance monitoring processes for RWQCP contracts and no
centralized monitoring mechanism to ensure all contract requirements
are executed as intended.
The RWQCP operations, finances, and staff (over 55 staff members) are
overseen by the Water Quality Control Plant Manager in the Water
Quality Control Plant group of the City’s Public Works Department who
also works with the Industrial Waste Pretreatment Program (IWPP) staff
members and the accounting team of the Administrative Services
Department.
As listed in the Scope section of this report, RWQCP has 39 contracts
and amendments with several partner agencies. Keeping track of
agreement requirements and monitoring compliance with them are
necessary for successful construction, operation, and maintenance of
RWQCP due to the following:
Some contracts are old and have multiple amendments.
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AUDIT RESULTS
3 “The mission of the Regional Water Quality Control Plant (RWQCP) is to protect San Francisco Bay by cleaning and
treating wastewater before it is discharged to San Francisco Bay.” https://cleanbay.org/our-programs/regional-water-quality-
control-plant/#RWQCP
The billing and payment requirements differ among agreements
and vary based on the type of costs.
An addendum continues to be added for a new project with
different debt service billing and payment requirements.
Compliance with regulations and permits as described in the
agreements is essential to carry out RWQCP’s mission3.
Cost allocation depends on capacity rights, certain cost and
wastewater data, debt service schedules, and other allocation
methods described and updated in the agreements for each type
of costs and revenue.
It is important to identify compliance issues and resolve them in a timely
manner. Without policies and procedure and a formal monitoring
mechanism, the City cannot ensure that all contract requirements are met
to successfully construct, operate, and maintain RWQCP or collect
interest penalties that are due to the City.
Recommendation The City’s management should establish RWQCP policies and procedures
to implement a formal monitoring mechanism that will ensure contract
requirements are met. Roles and responsibilities of various City
departments, functions, and employees and the expectations should be
clearly defined.
To implement a monitoring mechanism, the City’s Public Works
management should assign specific requirements to be monitored or
performed to the appropriate staff members or teams, if necessary, and
have an individual responsible for overall compliance verify compliance with
all requirements periodically.
When an issue or a potential issue is identified, appropriate actions should
be taken in a timely manner. The policies and procedures should provide
guidelines for appropriate actions such as communication/escalation and
contract amendments.
Management
Response
Responsible Department(s): Public Works Department
Concurrence: Agree
Target Date: December 31, 2023
Action Plan:
The City has drafted an internal Standard Operating Procedure to formally
monitor tracking and receipt of payments from partner agencies and will
complete reviews and distribution.
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AUDIT RESULTS
Appendix A: Resumes
Appendices
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Appendix A: Summary of FY23-FY27 Capital Budget in Wastewater Treatment
Fund
According to the City of Palo Alto Fiscal Year 2023 Adopted Capital Budget4,
Six agencies using RWQCP serve 250,000 residents.
Expenditures of approximately $289.0M are programmed for the Wastewater Treatment Fund, which is
53 % of the City’s 2023-2027 Capital Improvement Program Projects ($193.2M are allocated in
FY2023).
The costs are recovered from the Palo Alto Wastewater Collection Fund and five partner agencies.
Total ten projects are programmed:
A. Buildings and Facilities
1. New Laboratory and Environmental Services Building (Fiscal Year 2023: $2.6 million; 5-
Year CIP: $23.7 million).
2. Plant Master Plan (Fiscal Year 2023: $0.2 million; 5-Year CIP: $2.1 million)
B. System Improvements
1. Plant Repair, Retrofit, and Equipment Replacement (Fiscal Year 2023: $ 10.5million; 5-
Year CIP: $26.2 million)
2. Advanced Water Purification Facility (Fiscal Year 2023: $17.1 million; 5-Year CIP: $17.1
million)
3. Headworks Facility Replacement (Fiscal Year 2023: $4.8 million; 5-Year CIP: $48.8
million)
4. Horizontal Levee Pilot (Fiscal Year 2023: $0.2 million; 5-Year CIP $0.7 million)
5. Joint Intercepting Sewer Rehabilitation (5-year CIP $12.6 million)
6. Outfall Line Construction (Fiscal Year 2023: $10.6 million; 5-Year CIP: $10.6 million)
7. Primary Sedimentation Tank Rehabilitation (Fiscal Year 2023: $2.6 million; 5-Year CIP:
$2.6 million)
8. Secondary Treatment Upgrades (Fiscal Year 2023: $144.7 million; 5-Year CIP: $144.7
million)
4 https://www.cityofpaloalto.org/files/assets/public/administrative-services/city-budgets/fy2023-city-budget/adopted-
fy23/capital-budget_final-4-online-version.pdf
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Appendix B: Management Response
Findings and Recommendation Responsible
Department(s)
Agree, Partially Agree, or Do Not Agree and Target Date and Corrective Action
Plan
Finding 1: Invoice and Payment Due Dates
The City’s management should evaluate all billing and payment
requirements in the existing contracts to determine whether there is
any reason preventing the agencies from making the requirements
and language in the RWQCP contracts more consistent. If there is
no reason, management should standardize billing and payment
requirements for all RWQCP contracts in order to improve the
efficiency of billing and monitoring of payments and ensure
compliance with the requirements.
Additionally, the City’s management should formalize the internal
controls and processes to ensure timely submission of invoices with
adequate supporting documents and partner agencies’ compliance
with payment requirements
Public Works /
Administrative
Services
Concurrence: Agree
Target Date: July 2025
Action Plan:
The City agrees that it would be beneficial to make billing practices
consistent between agencies. The City has made changes to improve
the clarity of quarterly and annual bills by including the due date and
potential late fees. The City will modify existing partner agreements
as other updates are made to clarify the billing frequency and ensure
standardization amongst all the partners, with a target date of July
2025 based on current capital project schedules.
Finding 2: Industrial Waste Surveys
The City’s Public Works management should obtain the necessary
IWS updates from all partner agencies to ensure compliance with
pretreatment laws, regulations, and discharge permits until the
contracts are amended. Management should evaluate the adequacy
of the current informal survey update practice for effective
administration and operation of the IWPP and either enforce the
current agreement requirements or amend the language in the
contract as necessary to refine the partner agencies’ responsibilities.
Public Works Concurrence: Agree
Target Date: September 2024
Action Plan:
The City agrees that the City should obtain necessary Industrial
Waste Survey updates from all partner agencies in a more formalized
way. Starting in FY25, the City will send out formal requests to all
Partner Agencies to review and approve/edit the Industrial Waste
Surveys for their jurisdictions.
Finding 3: Compliance Monitoring
The City’s management should establish RWQCP policies and
procedures to implement a formal monitoring mechanism that will
ensure contract requirements are met. Roles and responsibilities of
various City departments, functions, and employees and the
expectations should be clearly defined.
To implement a monitoring mechanism, the City’s Public Works
management should assign specific requirements to be monitored or
Public Works Concurrence: Agree
Target Date: December 31, 2023
Action Plan:
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Findings and Recommendation Responsible
Department(s)
Agree, Partially Agree, or Do Not Agree and Target Date and Corrective Action
Plan
performed to the appropriate staff members or teams, if necessary,
and have an individual responsible for overall compliance verify
compliance with all requirements periodically.
When an issue or a potential issue is identified, appropriate actions
should be taken in a timely manner. The policies and procedures
should provide guidelines for appropriate actions such as
communication/escalation and contract amendments.
The City has drafted an internal Standard Operating Procedure to
formally monitor tracking and receipt of payments from partner
agencies and will complete reviews and distribution.