HomeMy WebLinkAboutStaff Report 2503-4422CITY OF PALO ALTO
CITY COUNCIL
Monday, June 02, 2025
Council Chambers & Hybrid
5:30 PM
Agenda Item
8.Approval of Contract Amendment No. 2 to Contract Number C21179340 with Baker Tilly
US, LLP in the Amount of $2,126,250 and to Extend Term to June 30, 2026, with Option to
Extend for Two Years, for Internal Auditing Services; Revised Total Not to Exceed is
$5,552,500, CEQA Status – Not a Project. At-Places Supplemental Report
City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: Human Resources
Meeting Date: June 2, 2025
Report #: 2503-4422
TITLE
Approval of Contract Amendment No. 2 to Contract Number C21179340 with Baker Tilly US, LLP
in the Amount of $2,126,250 and to Extend Term to June 30, 2026, with Option to Extend for
Two Years, for Internal Auditing Services; Revised Total Not to Exceed is $5,552,500, CEQA
Status – Not a Project.
RECOMMENDATION
Staff recommends that the City Council approve and authorize the Mayor or designee to
execute Amendment No. 2 to Contract C21179340 with Baker Tilly US (Attachment A) to extend
term to June 30, 2026, with option to extend for two years, in an amount not to exceed
$2,126,250 for internal auditing services. This amendment results in a revised total contract
not-to-exceed amount of $5,552,500.
BACKGROUND
The City Auditor is a City Council appointed position. The City Charter defines the City Auditor’s
role and furthers the City Council’s commitment to internal auditing, transparency, and
accountability in government.
Per City Council direction on February 10, 2020 to consider outsourcing the City Auditor
function, the Council Appointed Officers (CAO) Committee completed a request for proposals
(RFP) process for outsourced internal auditing services. The CAO led the procurement process,
aligned with Council direction, and engaged in a transparent review of scope of work services,
RFP evaluation, and a public interview process as part of the overall effort. Through the
procurement process, the Council selected Baker Tilly to lead the City’s internal audit services.
On September 28, 20201, the Council approved a contract with Baker Tilly US, LLP for internal
audit services in an amount not to exceed $1.3 million for a term beginning October 1, 2020
1 Council Appointed Officers Committee, September 28, 2020:
https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes-reports/reports/city-manager-reports-
cmrs/year-archive/2020-2/id-11624.pdf?t=64761.15
through June 30, 2022. The contract provided the option to extend the term for a period or
periods up to three additional years, through June 30, 2025, by mutual agreement with
compensation to be determined in such years by terms outlined in the contract. Council as
extended the contract through approval of two amendments with the current term ending June
30, 2025.
On May 9, 20222, the Council approved the first contract amendment to provide audit services
for fiscal years 2023, 2024, and 2025.
Baker Tilly US, LLC provides auditing services for the City and the City’s contract with Baker Tilly
specifies the designation of a City Auditor. On May 6, 2024, the Council formally appointed Kate
Murdock as City Auditor.
The CAO Committee met on November 13, 20243 to review and discuss the options availability
for the internal audit services contract and make recommendations to Council on next steps for
future direction of these services. The Committee recommended to the Council that the CAO
Committee Chair refine terms of a contract renewal with Baker Tilly through June 30, 2026 plus
negotiate terms for an option to renew for two years, and to align the review of the City
Auditor performance with other CAO review (passed 3-0).
The City Council then met on December 16, 20244 to review and approve the CAO Committee’s
recommendation and directed the CAO Committee Chair, Mayor Ed Lauing, with technical
support from the Human Resources Department and appropriate staff to renew and refine the
terms of a contract amendment with Baker Tilly though June 30, 2026, plus negotiate terms for
an option to renew for two years, and to align the review of the City Auditor performance with
other CAO reviews (passed 7-0).
ANALYSIS
The below summarizes the terms, compensation, and scope amendments of the second
amendment (attached):
Table 1: Baker Tilly US, LLP Amendment No. 2 Summary
Term This amendment will extend the contract through June 30, 2026, with an option to extend
through June 30, 2027, and a second option to extend through June 30, 2028
2 City Council, May 9, 2022: https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=81861
3 Council Appointed Officer Committee, November 13, 2024, Item #1:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=16375
4 City Council, December 16, 2024, Item #27:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=14537
Table 1: Baker Tilly US, LLP Amendment No. 2 Summary
Compensation Target value of compensation during this extension is $2,126,250. Annual compensation of
the contract was held flat compared to costs in second amendment:
•Year 6 (FY 2026): $708,750
•Year 7 (FY 2027, optional): $708,750
•Year 8 (FY 2028, optional): $708,750
The NTE of the overall contract over the full contract term of eight years is $5,552,500.
Scope
Amendment
Task 3. Selection of External Financial Auditor and Annual Audit Coordination
•City anticipates conducting a Request for Proposals in FY 2027.
Task 6. Evaluation and Benchmarking
•Peer evaluation every three years (from every two years), following guidelines of the
Association of Local Government Auditors
•Cost per audit analysis submitted every other year (from every year), following the
first completed fiscal year, throughout the contract term.
If Council approves this amendment, audit services will continue through June 30, 2026 with an
option to extend through June 30, 2028. The City Auditor is scheduled to go through the annual
CAO evaluation process with the Council Appointed Officers Committee in calendar year 2025,
prior to authorization of further extension beyond June 2026.
FISCAL/RESOURCE IMPACT
As noted above, the annual cost for audit services will be $708,750, unchanged from the prior
amendment, for a new total not-to-exceed of $5,552,500 over the eight-year term of the
contract. Funding for this contract in FY 2026 is included in the Proposed Budget and future
year contract cost is subject to the annual appropriation of funds.
STAKEHOLDER ENGAGEMENT
Selection of the City Auditor was done via the City’s competitive solicitation process and was
discussed in public CAO Committee meetings in 2020. The City Council discussed the contract
extension in a public meeting on December 16, 2024.
ENVIRONMENTAL REVIEW
This activity is not a project under the California Environmental Quality Act (CEQA) as defined in
CEQA Guidelines, section 15378.
ATTACHMENTS
Attachment A: Contract C21179340 Amendment No. 2 with Baker Tilly US, LLP
APPROVED BY:
Sandra Blanch, Human Resources Director
Vers.: Aug. 5, 2019
Page 1 of 12
AMENDMENT NO. 2 TO CONTRACT NO. C21179340
BETWEEN THE CITY OF PALO ALTO AND
BAKER TILLY US, LLP
This Amendment No. 2 (this “Amendment”) to Contract No. C21179340 (the “Contract”
as defined below) is entered into as May 12, 2025, by and between the CITY OF PALO ALTO, a
California chartered municipal corporation (“CITY”), and BAKER TILLY ADVISORY GROUP, LP, a
Illinois Limited Liability Partnership, located at 205 Michigan Avenue, Suite 2800, Chicago, IL
60601 (“CONSULTANT”). CITY and CONSULTANT are referred to collectively as the “Parties” in
this Amendment.
R E C I T A L S
A. The Contract (as defined below) was entered into by and between the Parties
hereto for the provision of performing internal auditor services in accordance with City Charter
and Municipal Code requirements, as detailed therein.
B. The Parties now wish to amend the Contract in order to extend by an additional
One (1) year with an option to extend for an additional Two (2) years of the Contract term in
which Services will be provided and, therefore, increase compensation by Two Million One
Hundred Twenty Six Thousand Two Hundred Fifty Dollars ($2,126,250), from an amended not-
to-exceed amount of Three Million Four Hundred Twenty Six Thousand Two Hundred Fifty Dollars
($3,426,250) to a new not-to-exceed amount of Five Million Five Hundred Fifty Two Thousand
Five Hundred Dollars ($5,552,500), as detailed herein.
NOW, THEREFORE, in consideration of the covenants, terms, conditions, and provisions
of this Amendment, the Parties agree:
SECTION 1. Definitions. The following definitions shall apply to this Amendment:
a. Contract. The term “Contract” shall mean Contract No. C21179340
between CONSULTANT and CITY, dated October 1, 2020, as amended by:
Amendment No.1, dated April 18, 2022
b. Other Terms. Capitalized terms used and not defined in this Amendment
shall have the meanings assigned to such terms in the Contract.
SECTION 2. Section 2, “TERM” of the Contract is hereby amended to read as follows:
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“The term of this Agreement shall be from October 1, 2020 through June 30, 2026 with
the option to renew for an additional two (2) year extension, unless terminated earlier
pursuant to Section 19 of this Agreement.”
SECTION 3. Section 4, “NOT TO EXCEED COMPENSATION” of the Contract is hereby
amended to read as follows:
“The total compensation to be paid to CONSULTANT for performance of the Services,
including As Required Services (per Section 1) and any reimbursable expenses, shall not
exceed Five Million Five Hundred Fifty-Two Thousand Five Hundred Dollars ($5,552,500),
as detailed in Exhibit B (Compensation).
CONSULTANT agrees to complete all Services, including As Required Services and any
reimbursable expenses, within this amount. The applicable rate schedule is set out at
Exhibit “B-1”, entitled “SCHEDULE OF RATES,” which is attached to and made a part of
this Agreement. Any work performed or expenses incurred for which payment would
result in a total exceeding the maximum amount of compensation set forth herein shall
be at no cost to the CITY.”
SECTION 4. Section 13, “PROJECT MANAGEMENT” of the Contract is hereby amended to
read as follows:
“CONSULTANT will assign Chris Kalafatis, Email: Chris.Kalafatis@bakertilly.com, as the
Project Manager to have supervisory responsibility for the performance, progress, and
execution of the services and Kate Murdock, Email: Kate.Murdock@bakertilly.com, as the
assigned City Auditor to represent CONSULTANT during day-to-day work on the Project.
If circumstances cause the substitution of the Project Manager as designated City Auditor
or any other key personnel for any reason the appointment of a substitute beyond a
period of 90 days will be subject to the prior written approval of the CITY’s Project
Manager. Further, the City Council will interview and approve by resolution the
appointment of any substitute City Auditor as specified here in Exhibit A (Scope of
Services). CONSULTANT at the CITY’s request shall promptly remove personnel who CITY
finds does not perform the Services in acceptable manner, are uncooperative, or present
a threat to the adequate or timely completion of the Project or a threat to the safety of
persons or property
CITY’s Project Manager is the Chair of the City Council's Policy and Services Committee or
other City Council designee as identified to CONSULTANT in writing, The CITY’s Project
Manager will be CONSULTANT’s point of contact with respect to performance, progress
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and execution of Services under this Agreement. City Council may designate an
alternative CITY Project Manager upon approval of the Annual Audit Plan described in
Exhibit A (Scope of Services), approval of City Council appointments, or any other time it
is so acted upon by City Council.”
SECTION 5. The following exhibit(s) to the Contract is/are hereby amended or added, as
indicated below, to read as set forth in the attachment(s) to this Amendment, which is/are
hereby incorporated in full into this Amendment and into the Contract by this reference:
a. Exhibit “A” entitled “SCOPE OF SERVICES, AMENDED, REPLACES PREVIOUS.
b. Exhibit “B” entitled “COMPENSATION”, AMENDED, REPLACES PREVIOUS.
c. Exhibit “B-1” entitled “SCHEDULE OF RATES”, AMENDED, REPLACES
PREVIOUS.
SECTION6. Legal Effect. Except as modified by this Amendment, all other provisions of
the Contract, including any exhibits thereto, shall remain in full force and effect.
SECTION7. Incorporation of Recitals. The recitals set forth above are terms of this
Amendment and are fully incorporated herein by this reference.
(SIGNATURE BLOCK FOLLOWS ON THE NEXT PAGE.)
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SIGNATURES OF THE PARTIES
IN WITNESS WHEREOF, the Parties have by their duly authorized representatives
executed this Amendment effective as of the date first above written.
CITY OF PALO ALTO
_____________________________________
City Manager
APPROVED AS TO FORM:
_____________________________________
City Attorney or Designee
BAKER TILLY US, LLP
Officer 1
By: ____________________________
Name: _________________________
Title: __________________________
Officer 2 (Required for Corp. or LLC)
By: ____________________________
Name: _________________________
Title: __________________________
Attachments:
- EXHIBIT A: SCOPE OF SERVICES, AMENDMENT NO.2 (AMENDED, REPLACES
PREVIOUS)
- EXHIBIT B: COMPENSATION, AMENDMENT NO.2 (AMENDED, REPLACES PREVIOUS)
- EXHIBIT B-1: SCHEDULE OF RATES, AMENDMENT NO.2 (AMENDED, REPLACES
PREVIOUS)
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Ashley Deihr
Principal
Risk Advisory Public Sector Leader
Chris Kalafatis
Vers.: Aug. 5, 2019
Page 5 of 12
EXHIBIT “A”
SCOPE OF SERVICES, AMENDMENT NO.2
(AMENDED, REPLACES PREVIOUS)
Background
In accordance with City Charter and Municipal Code requirements, the Palo Alto City Council
must appoint a City Auditor who serves at the will of the Council, and who executes annual
Council-approved internal audit plans through the Office of the City Auditor.
Mission of the Office of the City Auditor
The mission of the office of the city auditor is to promote honest, efficient, effective,
economical, and fully accountable and transparent city government. This mission is fulfilled by
conducting annual performance audits and financial/operational analyses of city departments,
programs, services or activities.
These audits are intended to ensure that city management is using its financial, physical, and
informational resources effectively, efficiently, economically, ethically, and equitably, and in
compliance with laws, regulations, contract and grant requirements, and city policies and
procedures.
Internal Auditor Scope of Services
This section contains the scope of internal audit services to be performed by CONSULTANT as
required by the City Charter and Municipal Code, including the required duties of, and audit
tasks performed by, the CONSULTANT’S City Auditor.
Service Requirements of the City Auditor
The City Auditor shall:
• Ensure that city departments and officers responsible for accounting and financial
management activities comply with statutory requirements and accounting standards.
• Perform internal audits of all the fiscal transactions and operations of the City, in
accordance with annual audit plans approved and directed by the City Council, that
include:
• Conducting performance audits of city departments, programs, services or activities,
• Examination and analysis of fiscal procedures and expenditures,
• Provision of other analyses of financial and operational data, and
• Periodic unscheduled audits.
As Required Internal Audit Tasks
The following 6 tasks represent the core services to be provided by CONSULTANT. These As
Required Services must be authorized by CITY’s representative through the approval of Task
Orders prepared by CONSULTANT, in further accordance with Section 4 of this Agreement (Not
To Exceed Compensation) and Exhibit A-1 thereto (Professional Services Task Order).
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Task 1. Citywide Risk Assessment:
Beginning with year 1 and continuing at a minimum every other year thereafter, prepare a
citywide risk assessment following the same review and approval requirements described in
Task 2. The risk assessment process will be the primary determinant of subsequent audit
activity.
Task 2. Preparation of Annual Audit Plan:
Prepare an annual audit plan for review by the City Manager and appropriate City Council
committee(s), and approval by the City Council, that identifies preliminary objectives of each
audit to be performed, the schedule for each audit, and the estimated not to exceed resources
and costs for each audit. The City Auditor shall consult with the City Attorney as necessary
when developing audit plans. The annual audit plan will be largely based on the risk assessment
required in Task 1.
Task 3. Selection of External Financial Auditor and Annual Audit Coordination (Amendment
No.2): Coordinate the annual external financial audit in each year of the contract term.
Pursuant to the City Charter, the City Auditor shall oversee the selection process for the annual
external financial auditor. The City anticipates conducting a Request for Proposals for this
purpose in 2026 (during contract year FY 2027).
Task 4. Execute Annual Audit Plan:
Conduct a minimum number of internal audits in accordance with each approved annual audit
plan based on the risk assessments. Each internal audit will commence only upon the City’s
approval of a Task Order (which may be at the task or sub-task level) as required by this
Agreement. Each internal audit requires the preparation of a written report for review by the
City Manager, City Attorney and appropriate Council committee, and review/approval by the
City Council as required.
Task 5. Preparation of Quarterly Reports, Annual Status Report, Provision of City Hotline, and
Other Ongoing Office Administrative Functions:
Prepare and issue quarterly reports describing the status and progress toward audit
completion, to be provided as information reports to the City Council and reviewed by the
appropriate committee, unless other reporting methods are directed by Council.
Prepare and issue an annual report in the first quarter of each fiscal year on the status of
recommendations made in completed audits, to be provided as an information report to the
City Council and reviewed by the appropriate committee, unless other reporting methods are
directed by Council.
Maintain and respond to the City’s employee “hotline” function provided through voicemail,
email or written submissions. Coordinate referrals as appropriate to other City offices,
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departments or divisions and incorporate relevant referrals into future risk assessments, audit
plans or audit activity as appropriate.
Task 6. Evaluation and Benchmarking (Amendment No.2)
Undergo a peer evaluation following the guidelines of the Association of Local Government
Auditors or the Institute of Internal Auditors (IIA) every three years (i.e., at the beginning of the
initial contract term, then every three years thereafter throughout the contract term), or as
required by the City Council, so that performance of the internal audit function can be
objectively assessed.
Prepare a cost per audit analysis following the first completed fiscal year, to be submitted at
the beginning of the second fiscal year and every other year thereafter throughout the contract
term.
The cost per audit analysis will be used to evaluate the cost effectiveness of services provided
by the CONSULTANT. This evaluation will be incorporated into ongoing performance
assessments as required and will help ensure that fees for service provision throughout the
duration of the Agreement are objectively determined and mutually agreed upon.
Last, the City Council will perform periodic Closed Session performance evaluations with the
designated City Auditor as allowed by law and performed with the other City Council
appointees (the City Manager, City Attorney and City Clerk). The appointed City Auditor will
have a 6-month evaluation, and then annually thereafter throughout the initial contract term
and any extensions granted by the City Council.
Internal Auditor Services – Designation of City Auditor, Minimum Experience Requirements
and Auditing Standards
Consistent with City Charter and Municipal Code provisions, the City Council must appoint a
City Auditor who serves at the will of the Council, and who executes annual Council-approved
internal audit plans through the Office of the City auditor.
Designation of City Auditor
The CONSULTANT has designated Kyle O’Rourke to fulfil the role of City Auditor, whose
designation received City Council approval and appointment, and whose appointment is subject
to at-will modification by the Council.
In accepting this appointment and its associated responsibilities and requirements, the
CONSULTANT agrees to the following stipulations and reserved rights of the CITY in the event
the City Auditor vacates the appointment for whatever reason:
• CONSULTANT must designate a temporary replacement not to exceed 3 months if the
City Auditor vacates the appointment without enough time for Council to appoint a
replacement.
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• Any subsequent appointment of a City Auditor be conducted in the manner specified by
the City Council, subject to applicable laws.
• Continued appointment of the City Auditor is based on and subject to acceptable
performance.
During the term of this Agreement, CONSULTANT may propose an alternative City Auditor for
Council consideration should it become necessary to do so.
Minimum Experience Requirements
The CONSULTANT and City Auditor must have at least 5 years of experience performing internal
audit services to local, state, federal or quasi-public entities, with a focus on performance
auditing.
Auditing Standards
The appointed City Auditor must be a Certified Public Accountant (CPA) or Certified Internal
Auditor (CIA) in good standing and must maintain such certification at all time during the term
of the Agreement.
All staff members of CONSULTANT assigned to internal auditor services under this Agreement
must be able to conduct or assist in conducting internal audits in accordance with Government
Accounting Standards, as established by the Comptroller General of the United States,
Governmental Accountability Office.
Maintenance of Independent Contractor Status
Proposers must maintain independent contractor status at all times during the Agreement
term.
Best Value Service Provision
The City Council has awarded this contract to the CONSULTANT based on its ability to deliver
cost effective and efficient internal auditor services that represent the best possible value in
exchange for public funds. Continued service provision is dependent on a number of evaluative
factors to help determine that the CITY receives the best possible value for internal audit
services during the term of this Agreement. These include, but are not limited to, acceptable
pricing; cost effective and service provision provided by the City Auditor and CONSULTANT; and
favorable City Auditor performance evaluations.
Additionally, budget constraints and economic conditions are factors that shall be considered in
determining acceptable pricing and funding.
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EXHIBIT “B”
COMPENSATION, AMENDMENT NO.2
(AMENDED, REPLACES PREVIOUS)
The CITY agrees to compensate the CONSULTANT for the Services (including As Required
Services) performed in accordance with the terms and conditions of this Agreement, and as set
forth in the budget schedule below. Compensation shall be calculated based on the hourly rate
schedule attached as Exhibit B-1 up to the not to exceed budget amount for each task set forth
below.
CONSULTANT shall perform the tasks and categories of work as outlined and budgeted below.
The CITY’s Project Manager may approve in writing the transfer of budget amounts between
any of the tasks or categories listed below provided the total compensation for Services,
including As Required Services and any reimbursable expenses do not exceed the amounts set
forth in Section 4 of this Agreement.
Budget Schedule for FY 2021 and FY 2022
Task FY 2021 FY 2022
Subtotal -
Task 3: Selection of External Financial
Task 5: Preparation of Quarterly Reports,
Annual Status Report, Provision of City
Hotline, and Other Ongoing Office
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Budget Schedule for FY 2023, FY 2024 and FY 2025, Amendment No.1
Task FY 2023 FY 2024 FY 2025
Subtotal -
Financial Auditor and Annual Audit
Reports, Annual Status Report,
Provision of City Hotline, and Other
Ongoing Office Administrative
Budget Schedule for FY 2026, FY 2027 and FY 2028, Amendment No.2
Task FY 2026
FY 2027 FY 2028 Subtotal -
Financial Auditor and Annual Audit
Reports, Annual Status Report,
Provision of City Hotline, and Other
Ongoing Office Administrative
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Total Not-to-Exceed Amount Across All Fiscal Years
Task
Subtotal - Subtotal - Subtotal -
Financial Auditor and Annual Audit
Reports, Annual Status Report,
Provision of City Hotline, and Other
Ongoing Office Administrative
REIMBURSEABLE EXPENSES
The administrative, overhead, secretarial time or secretarial overtime, word processing,
photocopying, in-house printing, computing, telecommunications, insurance other ordinary
business expenses are included within the scope of payment for Services and are not
reimbursable expenses.
CITY shall reimburse CONSULTANT at cost for travel to or from the San Francisco Bay Area and
shall be identified by CONSULTANT as separate line items on the applicable Task Order.
CONSULTANT travel and meal expenses are subject to the City’s Travel Policy. CONSULTANT
shall identify a fixed “not to exceed” figure for anticipated reimbursable expenses, subject to
the City of Palo Alto’s approval of such Task Order.
All requests for reimbursement of expenses, if any are specified as reimbursable under this
section, shall be accompanied by appropriate supporting documentation and information for
mileage, airfare, and lodging.
Should CONSULTANT’s actual incurred expense exceed the “not-to-exceed” figure,
CONSULTANT and the CITY shall meet in good faith to determine the extent to which
CONSULTANT shall be reimbursed by the CITY for the excess.
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EXHIBIT “B-1”
SCHEDULE OF RATES, AMENDMENT NO.2
(AMENDED, REPLACES PREVIOUS)
Compensation for services rendered under this agreement shall be calculated based on the
following hourly rate schedule for the fiscal year in which the services are rendered, which shall
remain fixed during the applicable period of fiscal years specified below.
Hourly rates for any subsequent renewal term or terms shall be negotiated to the mutual
agreement of the parties.
Schedule of Rates (Hourly):
Staff Level
FY 2021 &
FY 2023,
FY 2024, &
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Item No. 8. Page 1 of 1
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City Council
Supplemental Report
From: Sandra Blanch, Human Resources Director
Meeting Date: June 2, 2025
Item Number: 8
Report #:2506-4759
TITLE
Approval of Contract Amendment No. 2 to Contract Number C21179340 with Baker Tilly US, LLP
in the Amount of $2,126,250 and to Extend Term to June 30, 2026, with Option to Extend for
Two Years, for Internal Auditing Services; Revised Total Not to Exceed is $5,552,500, CEQA
Status – Not a Project.
BACKGROUND
As stated in the staff report, on December 16, 2024, the City Council authorized the CAO
Committee Chair to negotiate the contract extension with Baker Tilly. Since this work extended
into 2025, Council Member Greer Stone as the 2025 CAO Committee Chair completed the
review of the recommended contract between the City and Baker Tilly and approved it to be
finalized and scheduled for Council approval.
APPROVED BY:
Sandra Blanch, Human Resources Director