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HomeMy WebLinkAboutStaff Report 2509-5170CITY OF PALO ALTO Policy & Services Committee Special Meeting Wednesday, November 19, 2025 6:00 PM     Agenda Item     1.Office of the City Auditor Presentation of the Building Permit & Inspection Fees Audit Presentation 8 1 4 5 Policy & Services Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: City Auditor Meeting Date: November 19, 2025 Report #:2509-5170 TITLE Office of the City Auditor Presentation of the Building Permit & Inspection Fees Audit and Recommendation to City Council to Accept the Report and Results. RECOMMENDATION The Office of the City Auditor recommends the Policy & Services Committee recommend the City Council accept the results of the Building Permit & Inspection Fees Audit Report. BACKGROUND Baker Tilly Advisory, in its capacity serving as the Office of the CIty Auditor (OCA), performed a citywide risk assessment that evaluated a wide range of risk areas, including strategic, financial, operational, compliance, technological, and reputational risks. The purpose of the assessment was to identify and prioritize risks to develop the annual audit plan. During the FY24 risk assessment, the OCA identified the calculation and assessment of building permit and inspection fees as a potential area of risk and included in the FY25 Audit Plan. ANALYSIS The objectives for the Building Permit and Inspection Fees Audit were to: Determine if the City’s building permit and inspection fees are accurately and consistently applied. Evaluate the administration of the Development Services Program for adequate internal controls to safeguard the City from fraud, waste, and abuse. The City’s Planning and Development Services Department is responsible for administering building permits and inspection services for residential, commercial, and mixed-use development projects. These services ensure that all construction activities within city limits comply with applicable building codes, zoning ordinances, and health and safety regulations. Fees associated with these services such as building permit fees, and re-inspection fees, are 8 1 4 5 intended to support the City’s cost-recovery efforts, maintain efficient service delivery, and ensure fairness and consistency in how applicants are charged. Overall, fee assessments for most major fees were accurately assessed, but some smaller fees were not applied consistently across all transactions. OCA recommends the city evaluate any areas identified by the audit where fees were inappropriately charged to customers and resolve any issues. In addition, OCA recommends the City: o reinstate periodic internal audits of the building permit function to ensure fees are consistently applied and training needs are identified and remediated, o explore the feasibility of simplifying fees and making improvements to the City’s permitting platform to facilitate consistent and more efficient application of fees, o evaluate current training process and consider updating and/or reimplementing the onboarding and training program for new employees, and o ensure staff retain all documentation related to financial processing transactions for greater transparency and accountability. FISCAL/RESOURCE IMPACT STAKEHOLDER ENGAGEMENT 8 1 4 5 ENVIRONMENTAL REVIEW ATTACHMENTS APPROVED BY: November 5, 2025 City of Palo Alto Office of the City Auditor Building Permit and Inspection Fees Audit Contents Baker Tilly Advisory Group, LP and Baker Tilly US, LLP, trading as Baker Tilly, operate under an alternative practice structure and are members of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. Baker Tilly US, LLP is a licensed CPA firm that provides assurance services to its clients. Baker Tilly Advisory Group, LP and its subsidiary entities provide tax and consulting services to their clients and are not licensed CPA firms. Executive Summary ............................................................................................................................ 1 Introduction ........................................................................................................................................ 4 Detailed Analysis ................................................................................................................................. 7 Audit Results ..................................................................................................................................... 10 Executive Summary Purpose of the Audit Baker Tilly Advisory Group, LP (Baker Tilly), in its capacity serving as the Office of the City Auditor (OCA) for the City of Palo Alto (the City), conducted a Building Permit and Inspection Fees Audit based on approved Task Order 4.30 as part of the City’s FY25 Audit Plan. The objectives of this audit were to: • Determine If the City’s building permit and inspection fees are accurately and consistently applied. • Evaluate the administration of the Development Services Program for adequate internal controls to safeguard the City from fraud, waste, and abuse. Report Highlights Finding 1: (Page 10) Overall, fee assessments for most major fees were accurately assessed, but some smaller fees were not applied consistently across all transactions. The City’s Planning and Development Services Department (PDS) provides building permit and inspection services for residential, commercial and mixed- use building projects. The City’s Municipal Fee Schedule establishes the annual fees that will be charged for these services. In FY23 and FY24, there were a total of 4,774 projects reviewed by the Development Services Center and 7,686 building permits issued. The Development Services Center collected approximately $15 million in revenue in FY23 and $17 million in FY24. OCA tested a sample of building permit types and inspection fees for accuracy and consistency. While most major fees were accurately assessed, OCA found several smaller fees were not consistently applied. In a few cases, fee errors resulted in overcharging customers, but most errors resulted in customers being undercharged. Building Permit Fees Out of 60 sampled projects, OCA identified two projects (3%) with inappropriately applied fees. One project was not charged a fire plan check fee resulting in this project not receiving a fire inspection. One project was not charged the New Single-Family fee resulting in $1,305.72 in lost revenue to the City. OCA found several different types of fees were not accurately assessed over the testing period. Some of these errors resulted in overcharging customers but most errors resulted in undercharging customers. SB 1473 – California Building Standards Administration Special Revolving Fund OCA identified that SB1473 fees were inappropriately assessed to demolition the projects were incorrectly assessed the fee. The fee ranged from $1 to $41 across the projects sampled. In total, OCA estimated potential overcharges of less than $1,300 over the course of FY23 and FY24. While this represents a small amount in overcharged fees, charging unauthorized fees can have financial, legal, operational and reputational consequences and the City should take steps to minimize such occurrences. Record Retention Fees The City’s fee schedule requires that all projects with plans pay a records retention fee. In FY23, the fee was $7.04 per plan sheet and in FY24 $7.88 per plan sheet. This fee helps cover the City’s costs in maintaining such records. Out of 60 sampled projects, OCA found that the City had not assessed record retention fees for 15 projects or 25% of sampled projects. For the 15 tested projects missing record retention fees, $184.41 in fees should have been assessed and collected but were not. This represents approximately $15,000 in uncollected record retention fees for FY23 and FY24 when applying this error rate to the entire population of permits. Reinspection Fees Built into the City’s fee structure is an initial and follow-up inspection. Reinspection fees are assessed beginning with the second failed inspection in order to cover the cost of the third inspection, with additional fees required for each subsequent failure. Only 84 re-inspection fees were charged in FY23 and FY24. In collaboration with PDS staff, OCA identified 164 permits during FY23 and FY24 out of 7,686 (approximately 2%) that might have missing re-inspection fees. OCA sampled 30 of the permits and found a total of 6 re-inspection fees that should have been charged but were not. Factors contributing to inconsistent fee assessment OCA identified three primary factors contributing to inconsistent fee assessment. First, OCA noted a general lack of internal controls and oversight of building permit and inspection assessments. Second, staff mentioned the complexity of the fee schedule and how the fees are organized in the City’s cloud-based building platform, Accela. Third, staff mentioned the lack of training available for new employees. Refunds All refunds evaluated were in alignment with the fee schedule, refunding 80% of the original fee amount unless there was a City error necessitating a full refund. However, out of the 10 refunds tested, 5 were missing finalized documentation showing that the refund was processed through accounting, a all final, accounting approved refund documents are included and saved in the appropriate records in Accela. 1. Evaluate any areas identified by the audit where fees were inappropriately charged to customers and resolve any issues. 2. Reinstate periodic internal audits of building permit and reinspection fees on either a monthly or quarterly basis. This should include: a. developing a documented quality control process with assigned responsibilities to ensure this activity is performed consistently moving forward, b. procedures for providing feedback, and if appropriate, additional training to staff when errors are identified, and c. ongoing tracking and monitoring of issues to identify patterns or trends that might require wider training or corrective actions for the department. 1. Explore the feasibility of simplifying fees and improving the Accela platform by: a. considering ways to simplify fee application processes and procedures including revisiting the fee structure itself and identifying opportunities to better communicate standards to customers, b. automating certain fees such as SB1743 as an internal control and to help streamline the assessment process, c. grouping fees by project type to ensure easier application by project coordinators, and d. configuring the software to allow coordinators to select multiple fees at one time. Performing an assessment to determine the time it takes for staff to individually select each permit versus being able to select them in one step might help to establish how much time could be saved by this enhancement and whether it is worth the investment. Such an assessment could also consider other fees for automation that are not specifically addressed through this audit. 3. We recommend the City evaluate the current training process and consider updating and/or reimplementing the onboarding and training program for new employees including comprehensive guidance on fee application, system use, as well as periodic, ongoing training. 4. Ensure staff retain all required documents when processing financial transactions such as permit fee refunds for greater transparency and accountability. Introduction Objective The objectives of this audit were to determine if the City’s building permit and inspection fees are accurately and consistently applied and evaluate the administration of the Development Services Program for adequate internal controls to safeguard the City from fraud, waste, and abuse. Background The City’s Planning and Development Services Department (PDS) is responsible for administering building permits and inspection services for residential, commercial, and mixed-use development projects. These services ensure that all construction activities within city limits comply with applicable building codes, zoning ordinances, and health and safety regulations. Fees associated with these services such as building permit fees, and re-inspection fees, are intended to support the City’s cost-recovery efforts, maintain efficient service delivery, and ensure fairness and consistency in how applicants are charged. Building permit and inspection fees are assessed on a cost-recovery basis within the development process and have a direct impact on residents, contractors, and businesses. The public expects these fees to be reasonable, consistently applied, and transparent. Inconsistencies or misapplications whether due to system limitations, staff discretion, or unclear guidance can lead to reputational risk, delays in construction timelines, or a perception of inequity among applicants. In Palo Alto, the permit issuance and fee calculation process is managed through Accela, the City’s electronic permitting system. This system allows for the intake of permit applications, automated fee calculations, scheduling of inspections, and documentation of changes, waivers, and/or refunds. Accela plays a key role in enforcing standardized fee schedules and recording valuation data, but it also allows staff to manually override certain values under specific circumstances. This flexibility can introduce control risks if not adequately monitored. During the audit period covering fiscal years 2023 through 2024, the City issued 7,686 building permits spanning residential remodels, new commercial construction, and other project types. The audit included a review of both plan check and inspection fee components, as well as related surcharges such as the SB 1473 state-mandated fee, technology fees, and record retention charges. In addition, the audit evaluated the processes and controls governing refunds, to ensure that all deviations from the standard fee schedule were properly documented, justified, and approved. The intention of this audit is to provide independent assurance that the Development Services Program is functioning effectively and with appropriate internal controls. 1 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 with Baker Tilly U.S, LLP for internal audit services for October 2020 through June 2022 with an extension through June 2025. City Council appointed Kate Murdock, Audit Manager in Baker Tilly’s Risk Advisory practice, as City Auditor in May 2024. As a result of transitions in the Audit Office and peer review delays due to the COVID pandemic, an external peer review is targeted for 2025. It should be noted that Baker Tilly’s most recent firmwide peer review was completed in November 2024 with a rating of “Pass”. The scope of that peer review includes projects completed under government auditing standards. A report on the next firmwide peer review should be available later in 2024. activities and internal controls that manage the permit lifecycle across all applicable departments. • Interviewed the appropriate individuals to gain an understanding of the organizational structure, processes, and controls related to building permit and inspection fees. • Analyzed policies and procedures as well as the legislative and regulatory requirements to identify the criteria to be used for evaluation of control design and effectiveness. • Conducted on-site walkthroughs to gain an understanding of the building permit process, from initial application through final inspection, to inform our assessment of internal controls and fee application. • Judgmentally selected a sample of 54 permits issued in FY23-24 for testing. The sample included the following permit types: Commercial Remodel or Addition, Demo, Minor, New Commercial Building, New Multi-Family, New Single Family, Residential Remodel or Addition, Use and Occupancy only, and other permits to determine if the City’s building permit and inspection fees are accurately and consistently applied. • Judgmentally selected a sample of 10 refunds for testing which were evaluated for supervisor approval, proper accounting, accuracy of the refund amount, and adequacy of supporting explanations. • Judgmentally selected a sample of Re-inspections for testing to determine if re-inspections were accurately and consistently applied in accordance with the City’s fee schedule and Palo Alto Municipal Code 16.04.110. • Completed audit report of findings, conclusions, and recommendations based on the supporting evidence gathered. Statement This audit activity was conducted from January 2025 to September 2025 in accordance with generally accepted government auditing standards, except for the requirement of an external peer review 1. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings, observations, and conclusions based on our basis for our findings, observations, and conclusions based on our audit objectives. Strengths We noted the professionalism and responsiveness of the PDS throughout the audit. We appreciate the department’s participation in interviews, timely provision of building permit and inspection fee documentation for selected samples, and responsiveness to follow-up information requests. The OCA greatly appreciates the support of the Development Services Program staff involved in conducting this audit activity. Thank you! Detailed Analysis Best Practices: Building Permit and Inspection Fees Criteria that are transparent, efficient, and cost-effective. Leading practices endorsed by the Government Finance Officers Association (GFOA), International Code Council (ICC), California Building Officials (CALBO), and peer cities across the region support consistent fee application, sound internal controls, and public accountability. Benchmarking fee structures, processes, and outcomes against similar jurisdictions is a critical part of evaluating whether a city’s practices remain aligned with both regulatory and public service expectations. Key Best Practices Include: Fee Schedule Transparency and Accessibility Cities should maintain a clearly defined, publicly accessible fee schedule that is easy to interpret and reviewed at regular intervals ideally on an annual or biennial basis to ensure alignment with cost-of-service goals and regulatory changes. Palo Alto’s current fee schedule is easily accessible to the public and outlines multiple fee categories, including plan check fees, inspection fees, and state-mandated assessments such as SB 1473. Use of ICC Valuation Tables and Cost of Services Study Peer cities including Mountain View, Sunnyvale, and San Jose utilize the International Code Council’s (ICC) Building Valuation Data as a standardized basis for estimating construction costs, which informs the calculation of plan review and inspection fees. Industry best practices recommend updating these valuation tables annually and applying them consistently across all permit types. Palo Alto annually updated valuation tables aligning with industry best practices until FY2026. Since the timeframe of the audit, the Planning and Development Services Department has completed and implemented a cost of services study and developed an alternative fee methodology after determining the ICC valuation tables were too complex to accurately apply to commercial construction projects. The new hybrid model uses square footage for residential fees and an expanded valuation tier system for commercial projects, creating a more equitable structure that more accurately reflects project complexity and the associated costs of plan review and inspection services. This update also aligns with industry best practices of updating fees through a cost of services study every five to eight years. Benchmarking Against Peer Jurisdictions Benchmarking against peer cities helps assess whether Palo Alto’s fees are competitively positioned and cost-recovery goals are reasonable. For example, plan check fees for typical residential remodels in Palo Alto were found to be within 5– 15% of those charged by Mountain View and Sunnyvale. Inspection fees per permit were slightly higher than those in San Jose. 2 Significant changes were made to the Palo Alto FY2026 Fee Schedule and some of the benchmarked fees above may no longer apply. Table 1: FY2024 Development Services Fees Benchmarked 2 = Fee/fee structure similar to Palo Alto = Fee/fee structure differs from Palo Alto Fee Category Palo Alto Mountain View Sunnyvale San Jose Plan Check Fee • Based on ICC valuation • Sliding scale of permit fee • Based on ICC valuation • ~70% of permit fee • Based on ICC valuation • 65–75% of permit fee • Based on ICC valuation • Sliding scale of permit fee Building Permit Fee • Based on ICC • Tiered structure as project value increases • Based on ICC • Based on ICC • Based on ICC • Residential adjusted lower Inspection Fee • Typically included in permit fee • Typically included in permit fee • Separate line item, based on inspection hours • Flat fee for typical inspections Technology Surcharge • Incorporated into the fee schedule • 4–6% surcharge applied to all permits • 5% surcharge with cap • 3% surcharge • Waived for low- income or ADA retrofits SB 1473 Fee • Charged per CA BSC standard • Charged per CA BSC standard • Charged per CA BSC standard • BSC standard • Auto calculated Record Retention Fee • FY24 $7.56 Per Plan Sheet • Flat rate ($5– $20) • Often bundled into tech surcharge • Sometimes included in admin fee Permit Valuation Basis • ICC tables • Exceptions with approval • ICC tables • Exceptions with approval • ICC tables • Exceptions with approval • ICC tables • Exceptions with approval Refund Policy • Standard form & supervisor approval required • Standard form & supervisor approval required • Standard form & supervisor approval required • Standard form & supervisor approval required • Online request Public Fee Calculator Not available Not available Not available • Yes, robust estimator with plan set details 3 https://statescoop.com/san-jose-ai-permitting/ 4 https://sunnyvaleca.legistar.com/LegislationDetail.aspx?FullText=1&G=FA76FAAA-7A&GUID=8BB4D40E- 185A-4BC3-B6EA-9CC97BE43861&ID=7419969&Options=&Search= 5 https://developmentpermits.mountainview.gov/about-permits/fees/planning-permit-fees/planning-cost-recovery- fees 6 https://permits.sanjoseca.gov/fee-estimator/building Automated Fee Enforcement Through Permit Systems Accela and other e-permitting systems should be configured to calculate fees automatically based on input valuation and permit type. Manual overrides should be limited to authorized personnel and logged with justification and supervisory approval. Some peer cities, such as San Jose, have implemented audit flags within their permitting software 3 to detect inconsistencies in valuation entries or fee waivers. Standardized Refund and Adjustment Workflows Cities should have formal, written policies for granting refunds or fee adjustments, with clear documentation standards. Benchmark cities typically require a refund request form, written justification, and supervisor sign-off before processing. In contrast, inconsistent practices can lead to errors or public perception of favoritism. The City of Palo Alto currently follows the practices of benchmark cities. Peer Comparison of Staffing and Cost Recovery Cities like Sunnyvale 4 and Mountain View 5 regularly assess whether their Development Services programs are meeting cost-recovery targets and whether staffing levels align with workload demands. Palo Alto conducts similar assessments through its annual fee review and budget process. These evaluations are used to inform fee increases or process improvements. Public-Facing Permit Calculators and Estimators To improve transparency and reduce disputes, San Jose offers an online permit fee estimator 6. This tool allows applicants to enter basic project information and receive a preliminary estimate of fees owed enhancing trust and reducing back-and-forth with staff. Audit Results Finding 1: Overall, fee assessments for most major fees were accurately assessed, but some smaller fees were not applied consistently across all transactions. As discussed in the Background section of this report, the City’s Planning and Development Services Department (PDS) provides building permit and inspection services for residential, commercial and mixed-use building projects. The City’s Municipal Fee Schedule establishes the annual fees that will be charged for these services. The PDS is responsible for ensuring these fees are accurately and consistently applied. Building permit applications are typically submitted through the City’s online platform, Accela. Project coordinators review applications and determine which fees should be assessed based on the scope of the work being performed. OCA tested a sample of building permit types and inspection fees for accuracy and consistency. In FY23 and FY24, there were a total of 4,774 projects reviewed by the Development Services Center and 7,686 building permits issued. The Development Services Center collected approximately $15 million in revenue in FY23 and $17 million in revenue in FY24. Most major fees were accurately assessed, but some smaller fees were not consistently applied. OCA sampled 60 building permits from several different project types including: Commercial Remodel or Addition, Demolition, New Commercial Building, New Multi-Family, New Single Family, Residential Remodel or Addition, Use and Occupancy, and Minor. OCA judgmentally selected projects that had similar descriptions in order to determine if the same types of projects were assessed the same fees. While most major fees were accurately assessed, OCA found several smaller fees were not consistently applied. Some of these errors resulted in overcharging customers but most errors resulted in undercharging customers. Building Permit Fees Aside from SB1473 and Record Retention fee errors, OCA identified 2 projects out of 60 or 3% with missing fees. For one “Minor” building project, PDS staff confirmed that the project was not assessed a fire plan check fee. As a result, it appears this project did not receive a fire inspection. OCA found one error in the “New Single Family” home projects we evaluated. This project was not assessed the “New Single Family” fee of $1,305.72 as listed in the FY24 Fee Schedule. Staff confirmed that this was in error, and the project should have been charged this fee. Due to how could not provide an accurate estimate of uncollected building permit fees. SB 1473 – California Building Standards Administration Special Revolving Fund SB 1473 took effect in January 2009 and was established as a surcharge on both residential and non-residential building permits by the California Building Standards Commission. This surcharge fee has a rate of four dollars ($4) per one hundred thousand ($100,000) building valuation and is applied in increments of $25,000 with $1 being the minimum fee charged. The state requires that fees are submitted quarterly to the California Building Standards Commission. The bill also provides that a city may retain up to ten percent of the collected fees for administrative costs and code enforcement education. The PDS management confirmed that SB1473 fees are only applied to building permits and do not apply to standalone permits such as electrical, fire, or demolition. OCA’s testing found that some demolition permits were wrongly assessed the SB1473 fee. In FY23 and FY24 there were 224 demolition permits issued. OCA tested a sample of 13 permits. Out of the 13 demolition permits sampled, OCA found that 5 of the 13 or 38% had been charged the fee. On these permits, the SB1473 permit fee ranged from $1 to $41 with an average fee charge of $14.80 . If this error rate was found in the larger population of demolition permits, potentially 86 permits were erroneously charged the fee. Using the average amount of over- assessed fees, the City may have overcharged approximately $1,272.80. While this represents a small amount in overcharged fees, charging unauthorized fees can have financial, legal, operational and reputational consequences and the City should take steps to minimize such occurrences. Record Retention Fees The City’s fee schedule requires that all projects with plans pay a records retention fee. In FY23, the fee was $7.04 per plan sheet and in FY24 $7.88 per plan sheet. This fee helps cover the City’s costs in maintaining such records. Out of 60 samples, OCA found that the City had not assessed record retention fees for 15 projects or 25% of sampled projects. For the 15 projects where record retention fees were not assessed, $184.41 in fees (an average of $12.29 per project) should have been assessed and collected but were not. If we assume an error rate of 25% for the entire population of 4,774 projects in FY23 and FY24, 1,194 projects may not have been correctly assessed record the projects OCA sampled, OCA estimates the City may have underassessed $14,674.26 in record retention fees. While this represents less than a tenth of a percent of the total revenue collected by the Development Center each year, it is important to ensure fees are consistently and fairly assessed. OCA did note that based on the updated FY2026 fee model, record retention costs have been incorporated into the technology costs and therefore, the City no longer collects a separate record retention fee. Reinspection Fees Built into the City’s fee structure for residential projects are initial and follow-up inspections. Reinspection fees are assessed beginning with the second failed inspection in order to cover the cost of the third inspection, with additional fees required for each subsequent failure. Re-inspection fees not only cover the additional cost of the work performed by the City but also serve to disincentivize the customer from using City services in a way not intended. While these fees are an important tool for the Program to ensure efficient and timely review, it is important to note that there is flexibility in how they are applied and staff judgement in applying these fees is key to their administration. These fees do not apply to commercial and multi-family construction projects which have re- inspection fees built into the permit fees. Based on reports provided by staff, OCA found the City only charged 84 reinspection fees during FY23 and FY24. OCA sampled 10 of these projects where re-inspection fees were charged to see if the fees had been applied accurately and found no errors. In collaboration with PDS staff, OCA identified 164 permits during FY23 and FY24 out of 7,686 (approximately 2%) that might have missing re-inspection fees. OCA sampled 30 of these permits and found a total of 6 re-inspection fees that should have been charged but were not. It is difficult to put these numbers in context given that each permit is different and might have a different likelihood of needing a reinspection. However, assuming that for every 30 permits, one would find 6 re-inspections that were not charged a fee, this results in a rate of 1 re-inspection per every 5 permits. Assuming a population of 164 permits (as noted above), this results in potentially 33 re-inspection fees that were not collected during FY23 and FY24. In the FY2023 Fee Schedule, each “primary” re- inspection costs $172.95 and each “secondary” re-inspection costs $93.03. Assuming FY23 fees, at the low end, this represents approximately $3,070 in uncollected fees and at the high end approximately $5,707. OCA was unable to determine how many re-inspections should have been assessed a fee as there is currently no definitive labeling inspection and a fee should be applied. PDS management agreed that additional guidance would help ensure that these fees are more consistently and accurately applied. When a customer is informed of issues at the initial inspection, it is up to the customer to identify if they need additional resources to work to fix the problem and ensure they meet building codes. Re-inspections result in additional use of staff time and the more re-inspections the City is forced to perform, the more staff time is consumed with less available time to move other projects forward. Failing to apply fees consistently can present financial, legal and operational risks including lost revenue and possible exposure to lawsuits due to unfair treatment. Factors contributing to inconsistent fee assessment Through interviews with staff in PDS and observations of the building permit and inspection processes, OCA identified three primary factors contributing to inconsistent fee assessment. First, OCA noted a general lack of internal controls and oversight of building permit and inspection assessments. Second, staff mentioned the complexity of the fee schedule and how the fees are organized in the City’s cloud-based building platform, Accela. Third, staff mentioned the lack of training available for new employees. Lack of Oversight and Internal Controls According to PDS management and staff, the City discontinued regular internal audits of building permit and inspection fees during the COVID-19 pandemic and has not been able to resume these checks. According to management, this function was previously supported by the Development Center Manager and following the pandemic, the position’s priorities were realigned to focus on customer service initiatives. These efforts included expanding appointment availability to accommodate walk-in, virtual, and in- person customers. Additionally, management reported that the manger’s oversight was expanded to include both project coordination and planning staff located at the Development Center to enhance customer service and technical expertise at the counter. OCA noted that the Accela system has the capability to flag projects at random or to flag projects based on defined criteria established by the user agency. For example, San Jose reports that they have configured the system to flag projects with inconsistent valuations and when fees are waived. Staff also indicated that while they can consult with other project coordinators, the Development Center Manager, and the Chief Building Official on permitting questions, there is no formal, regular Development Center Manager provides ongoing informal training, which includes discussion on application processing questions form the project coordinators. In addition, these meetings occasionally include guest speakers from other partner departments to expand permitting knowledge during weekly program meetings. Without periodic review of staff work and building permit and inspection fee assessments, management is unable to determine if fees are being consistently and accurately assessed and misses the opportunity to correct staff errors early, making it more likely that mistakes are carried forward into future fee assessments. Complexity of the Fee Schedule and Accela Configuration According to PDS management, the City’s fee schedule has multiple components, and its application varies based on the specific requirements of each project. The schedule includes more than 18 different fee categories (e.g., Building Permit, Construction & Demolition, Electrical, Green Building, etc.) Within each fee category, there are numerous different fees that might apply to a project. The complexity of the fee schedule reflects the complexity of construction process itself. There are thousands of building projects constructed in Palo Alto each year and even two projects that may seem similar – for example, two new single-family homes, there will be many unique aspects of each project such as solar panels, a pool, a garage, etc. While the fee schedule was recently updated with a cost of services study, staff indicated that although some areas such as the residential square footage model were simplified, the schedule and process for assessing fees remains complex making it difficult to ensure consistency. In addition, staff concurred that developing standard operating procedures for fee applications will provide more transparency for customers and reduce potential frustrations. Future fee studies should explore ways to further simplify the schedule and alternate methods for communicating standards and requirements to customers, such as through a public facing fee calculator. Accela is designed to streamline and automate building application, permitting and inspection processes and the platform is used by many cities and counties in California. While staff indicated there are many positive aspects to the City’s use of the platform, one area that is challenging is how fees are configured in the system. Currently, fees are not grouped by project category and staff are forced to scroll through the entire system to locate fees. Many building projects that come through the City’s Development Services Center are complex and require multiple fee assessments. multiple screens and scroll down various permit lists to locate the appropriate fee and then repeat this process for each new fee. Staff stated that if fees were grouped, with a list of fees that are typically assessed for that type of project, it would save on time and also help with consistency as users would have a list to choose from rather than having to remember and look up each individual fee that might apply. In addition, staff stated that if the system could be configured to allow the project coordinator to select multiple fees at one time that would also save time rather than having to open the list for each fee selection. OCA spoke with the PDS Accela technical expert, and it appears that some, if not all, of the changes above could be implemented with support. The City contracts with a vendor that specializes in Accela configurations when changes need to be made to the system. The City will need to determine if the cost of making these changes is feasible. OCA also noted that some fees could be automated in the system. For example, record retention fees should be charged on every project. If there were a field prompting project coordinators to enter the number of plan pages when entering other essential project information, the system could automatically calculate this per page fee and not require any additional steps. In addition, the SB1473 fee applies to certain types of projects and could be automatically added to these project types. Training Staff reported that they attend training twice a year through CALBO, the California Building Officials. However, staff also reported that there isn’t a formal training process for new hires. According to staff, the City had a more formalized onboarding and training program for new project coordinators prior to the Covid 19 pandemic. According to management, changes to processes and procedures driven by new system requirements for application processing necessitated updates to formal training materials and standard operating procedures following the pandemic. Management asserted that development of these updated procedures and training programs is needed to align with current practices. Currently, new project coordinators are primarily trained by shadowing another project coordinator, however there are some downsides staff noted to this approach. The coordinator being shadowed may not be assigned the breadth of different project types during the shadow period leaving gaps in knowledge for the new individual. The coordinator is providing training in the moment but also tasked with performing their primary job function and for decisions being made. Staff indicated a more formal and dedicated training program would be helpful. According to the ICC Code of Ethics, code professionals have a duty to maintain and improve their competence. ICC training standards reinforce that jurisdictions should ensure staff are properly trained and supported to administer building codes and related fee structures. Sufficient, ongoing training can help minimize the risk of errors, inconsistent application of fees and strengthen compliance with building codes. Additional areas for improvement As part of this audit, OCA also evaluated the refund process. In FY23 and FY24 there were a total of 107 refunds issued. OCA randomly selected refunds for testing, as well as judgmentally selecting a few of the larger refunds. Refunds were tested for evidence of supervisor/manager approval, to ensure the amount aligns with the refund receipt and was appropriately processed through accounting, and that the amount refunded was in alignment with the fee schedule. All refunds evaluated were in alignment with the fee schedule, refunding 80% of the original fee amount unless there was a City error necessitating a full refund. However, out of the 10 refunds tested, 5 lacked the required documentation as outlined in the department procedure, which requires uploading the final refund documentation signed by a Senior Management Analyst. In these cases, staff had uploaded the refund documents initially sent to Accounting, but did not replace them with the finalized, signed versions once processing was complete. Staff should ensure that all final refund documents are included and saved in the appropriate files in Accela 1. Evaluate any areas identified by the audit where fees were inappropriately charged to customers and resolve any issues. 2. Reinstate periodic internal audits of building permit and reinspection fees on either a monthly or quarterly basis. This should include: a. developing a documented quality control process with assigned responsibilities to ensure this activity is performed consistently moving forward, b. procedures for providing feedback, and if appropriate, additional training to staff when errors c. ongoing tracking and monitoring of issues to identify patterns or trends that might require wider training or corrective actions for the department. 3. Explore the feasibility of simplifying fees and improving the Accela platform by: a. considering ways to simplify fee application processes and procedures including revisiting the fee structure itself and identifying opportunities to better communicate standards to customers, b. automating certain fees such as SB1743 as an internal control and to help streamline the assessment process, c. grouping fees by project type to ensure easier application by project coordinators, and d. configuring the software to allow coordinators to select multiple fees at one time. Performing an assessment to determine the time it takes for staff to individually select each permit versus being able to select them in one step might help to establish how much time could be saved by this enhancement and whether it is worth the investment. Such an assessment could also consider other fees for automation that are not specifically addressed through this audit. 4. We recommend the City evaluate the current training process and consider updating and/or reimplementing the onboarding and training program for new employees including comprehensive guidance on fee application, system use, as well as periodic, ongoing training. 5. Ensure staff retain all required documents when processing financial transactions such as permit fee refunds for greater transparency and accountability. Response Planning & Development Services Concurrence: Agree Target Date: 4th Quarter Fiscal Year 2026 Action Plan: 1. PDS is reviewing appropriate actions to address the areas identified by the audit where fees were inappropriately charged and will implement remediating actions as appropriate. (Target Date: Q2 FY 2026) 2. PDS will develop a documented quality control process to ensure that periodic internal audits of building permit and reinspection fees take place. This will include exploring technical solutions with Accela to flag permits for review as well as quarterly review of a randomized sample of permits. Concurrently, PDS will provide feedback and additional training when errors are identified and will also longitudinally track errors to identify trends and patterns. (Target Date: Q4 FY 2026) 3. PDS will explore the following via a request for proposals (RFP) for the Permitting and Land Use Management system: a. standard operating procedures for fee application by project type; b. providing clear guidance to applicants on how to calculate project valuations to create further equity in fee application; c. conducting additional analysis with a fee consultant to refine how fees are applied to projects with multiple standalone components, such as exploring the use of a fee multiplier; d. adding a permit fee estimation tool for simple projects to help applicants better understand permitting fees and project costs early in the process, increasing transparency and accountability in staff application of fees; and e. Assess tradeoffs of implementing technical solutions within Accela and feasibility of those enhancements to enhance the internal controls of the platform, including automating certain fees, grouping other fees, and configuring the software to better reflect the standard ‘use cases’ by project coordinators to minimize errors. 4. Staff agree an assessment of the current process and development of a onboarding and training program for staff including updating standard operating procedures for fee application by permit type and system navigation. (Target Date: Q4 FY 2026) 5. PDS staff will review existing refund procedures with administrative staff and retain all required final documents when processing financial transactions. Currently, all refunds are processed through accounting and have the proper documentation and signature approvals. Accela records should also be updated to maintain final signed copies rather than drafts. Additionally, staff will seek to consolidate refund transactions and establish a process to periodically audit refunds; regular review of transactions such as refunds will enhance compliance and internal controls. (Target Date: Q4 FY 2026) Baker Tilly Advisory Group, LP and Baker Tilly US, LLP, trading as Baker Tilly, are members of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. Baker Tilly US, LLP is a licensed CPA firm that provides assurance services to its clients. Baker Tilly Advisory Group, LP and its subsidiary entities provide tax and consulting services to their clients and are not licensed CPA firms. City of Palo AltoOffice of the City Auditor (OCA) Policy & Services Committee Meeting Building Permit & Inspection Fees Audit, November 5, 2025 Presenter: Kate Murdock, City Auditor, Baker Tilly November 19, 2025 2 Audit Objective •Determine if the City’s building permit and inspection fees are accurately and consistently applied, and •Evaluate the administration of the Development Services Program for adequate internal controls to safeguard the City from fraud, waste, and abuse. 3 Background •Planning & Development Services Department (PDS) administers building permits and inspection services for residential, commercial and mixed-use development projects •Fees support the City’s cost-recovery efforts, efficient service delivery, and ensure fairness and consistency •Accela is the City’s electronic permitting system and helps manage permit issuance and fee calculation •City issued 7,686 building permits during FY23 and FY24. 4 Finding 1: Fee Assessment Consistency Finding Overall fee assessments for most major fees were accurate, but some smaller fees were not applied consistently across all transactions. •Some building permit and inspection fees were not consistently assessed: Building Permit – 3% of sampled projects were missing appropriate fees SB 1473 - 38% of sampled demolition permits were assessed the fee in error Record Retention – 25% of sampled projects were not assessed this fee Reinspection – for a subset of permits, 1 in 5 reviewed had a missing reinspection fee 5 Finding 1: Factors Contributing to Inconsistency Finding Some building permit and inspection fees are not consistently applied resulting in the City under assessing some fees and over assessing others •Factors contributing to inconsistent fee assessment: Discontinued regular internal audits and reviews of building permits and inspection fees during COVID Complex fee schedule Configuration of fees in Accela – fees are not grouped by project category Lack of formal onboarding and training for new hires 6 Finding 1: Fee Assessment Consistency Recommendations We recommend the City: Evaluate any areas identified by the audit where fees were inappropriately charged and resolve any issues Reinstate periodic internal audits on either a monthly or quarterly basis Explore the feasibility of simplifying fees and improving the Accela platform Evaluate current training processes and consider updating/re-implementing the onboarding and training program for new employees Ensure staff retain all required documents when processing financial transactions Questions? Baker Tilly Advisory Group, LP and Baker Tilly US, LLP, trading as Baker Tilly, operate under an alternative practice structure and are members of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. Baker Tilly US, LLP is a licensed CPA firm that provides assurance services to its clients. Baker Tilly Advisory Group, LP and its subsidiary entities provide tax and consulting services to their clients and are not licensed CPA firms. The name Baker Tilly and its associated logo is used under license from Baker Tilly International limited. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. © 2024 Baker Tilly Advisory Group, LP