HomeMy WebLinkAbout2023-12-12 Policy & Services Committee Agenda PacketPOLICY AND SERVICES COMMITTEE
Regular Meeting
Tuesday, December 12, 2023
Council Chambers & Hybrid
7:00 PM
Pursuant to AB 361 Palo Alto City Council meetings will be held as “hybrid” meetings with the
option to attend by teleconference/video conference or in person. To maximize public safety
while still maintaining transparency and public access, members of the public can choose to
participate from home or attend in person. Information on how the public may observe and
participate in the meeting is located at the end of the agenda. Masks are strongly encouraged if
attending in person. The meeting will be broadcast on Cable TV Channel 26, live on
YouTube https://www.youtube.com/c/cityofpaloalto, a n d s t r e a m e d t o M i d p e n M e d i a
Center https://midpenmedia.org.
VIRTUAL PARTICIPATION CLICK HERE TO JOIN (https://cityofpaloalto.zoom.us/j/94618744621)
Meeting ID: 946 1874 4621 Phone: 1(669)900‐6833
PUBLIC COMMENTS
Public comments will be accepted both in person and via Zoom for up to three minutes or an
amount of time determined by the Chair. All requests to speak will be taken until 5 minutes
after the staff’s presentation. Written public comments can be submitted in advance to
city.council@CityofPaloAlto.org and will be provided to the Council and available for inspection
on the City’s website. Please clearly indicate which agenda item you are referencing in your
subject line.
PowerPoints, videos, or other media to be presented during public comment are accepted only
by email to city.clerk@CityofPaloAlto.org at least 24 hours prior to the meeting. Once received,
the Clerk will have them shared at public comment for the specified item. To uphold strong
cybersecurity management practices, USB’s or other physical electronic storage devices are not
accepted.
CALL TO ORDER
PUBLIC COMMENT
Members of the public may speak to any item NOT on the agenda.
ACTION ITEMS
1.Discussion regarding State and Federal Legislative Advocacy and Discussion and
Recommendation on the Annual Legislative Guidelines and Legislative Platform
2.2024 City Council Priority Setting Process Discussion and Recommendations
3.Approval of Office of City Auditor Risk Assessment and Audit Plan (CEQA Status ‐ Not a
Project) Late Packet Report
4.Office of City Auditor Presentation of the Wastewater Treatment Plant Agreement Audit
Report; CEQA Status ‐ Not a Project Late Packet Report
5.Office eport;
3.
4.
5.
CEQA Srt
Approval of Office of City Auditor Risk Assessment and Audit Plan (CEQA Status ‐ Not a
Project)
Office of City Auditor Presentation of the Wastewater Treatment Plant Agreement Audit
Report; CEQA Status ‐ Not a Project
Office of the City Auditor Presentation of the Investment Management Audit Report;
CEQA Status ‐ Not a Project
FUTURE MEETINGS AND AGENDAS
Members of the public may not speak to the item(s)
ADJOURNMENT
PUBLIC COMMENT INSTRUCTIONS
Members of the Public may provide public comments to teleconference meetings via email,
teleconference, or by phone.
1. Written public comments may be submitted by email to city.council@cityofpaloalto.org.
2. For in person public comments please complete a speaker request card located on the
table at the entrance to the Council Chambers and deliver it to the Clerk prior to
discussion of the item.
3. Spoken public comments using a computer or smart phone will be accepted through
the teleconference meeting. To address the Council, click on the link below to access a
Zoom‐based meeting. Please read the following instructions carefully.
You may download the Zoom client or connect to the meeting in‐ browser. If using
your browser, make sure you are using a current, up‐to‐date browser: Chrome 30 ,
Firefox 27 , Microsoft Edge 12 , Safari 7 . Certain functionality may be disabled in
older browsers including Internet Explorer. Or download the Zoom application onto
your smart phone from the Apple App Store or Google Play Store and enter in the
Meeting ID below.
You may be asked to enter an email address and name. We request that you
identify yourself by name as this will be visible online and will be used to notify you
that it is your turn to speak.
When you wish to speak on an Agenda Item, click on “raise hand.” The Clerk will
activate and unmute speakers in turn. Speakers will be notified shortly before they
are called to speak.
When called, please limit your remarks to the time limit allotted. A timer will be
shown on the computer to help keep track of your comments.
4. Spoken public comments using a phone use the telephone number listed below. When
you wish to speak on an agenda item hit *9 on your phone so we know that you wish to
speak. You will be asked to provide your first and last name before addressing the
Council. You will be advised how long you have to speak. When called please limit your
remarks to the agenda item and time limit allotted.
CLICK HERE TO JOIN Meeting ID: 946‐1874‐4621 Phone: 1‐669‐900‐6833
Americans with Disability Act (ADA) It is the policy of the City of Palo Alto to offer its public
programs, services and meetings in a manner that is readily accessible to all. Persons with
disabilities who require materials in an appropriate alternative format or who require auxiliary
aids to access City meetings, programs, or services may contact the City’s ADA Coordinator at
(650) 329‐2550 (voice) or by emailing ada@cityofpaloalto.org. Requests for assistance or
accommodations must be submitted at least 24 hours in advance of the meeting, program, or
service.
1 Regular Meeting December 12, 2023
Materials submitted after distribution of the agenda packet are available for public inspection at
www.cityofpaloalto.org/agendas
POLICY AND SERVICES COMMITTEERegular MeetingTuesday, December 12, 2023Council Chambers & Hybrid7:00 PMPursuant to AB 361 Palo Alto City Council meetings will be held as “hybrid” meetings with theoption to attend by teleconference/video conference or in person. To maximize public safetywhile still maintaining transparency and public access, members of the public can choose toparticipate from home or attend in person. Information on how the public may observe andparticipate in the meeting is located at the end of the agenda. Masks are strongly encouraged ifattending in person. The meeting will be broadcast on Cable TV Channel 26, live onYouTube https://www.youtube.com/c/cityofpaloalto, a n d s t r e a m e d t o M i d p e n M e d i aCenter https://midpenmedia.org.VIRTUAL PARTICIPATION CLICK HERE TO JOIN (https://cityofpaloalto.zoom.us/j/94618744621)Meeting ID: 946 1874 4621 Phone: 1(669)900‐6833PUBLIC COMMENTSPublic comments will be accepted both in person and via Zoom for up to three minutes or anamount of time determined by the Chair. All requests to speak will be taken until 5 minutesafter the staff’s presentation. Written public comments can be submitted in advance tocity.council@CityofPaloAlto.org and will be provided to the Council and available for inspectionon the City’s website. Please clearly indicate which agenda item you are referencing in yoursubject line.
PowerPoints, videos, or other media to be presented during public comment are accepted only
by email to city.clerk@CityofPaloAlto.org at least 24 hours prior to the meeting. Once received,
the Clerk will have them shared at public comment for the specified item. To uphold strong
cybersecurity management practices, USB’s or other physical electronic storage devices are not
accepted.
CALL TO ORDER
PUBLIC COMMENT
Members of the public may speak to any item NOT on the agenda.
ACTION ITEMS
1.Discussion regarding State and Federal Legislative Advocacy and Discussion and
Recommendation on the Annual Legislative Guidelines and Legislative Platform
2.2024 City Council Priority Setting Process Discussion and Recommendations
3.Approval of Office of City Auditor Risk Assessment and Audit Plan (CEQA Status ‐ Not a
Project) Late Packet Report
4.Office of City Auditor Presentation of the Wastewater Treatment Plant Agreement Audit
Report; CEQA Status ‐ Not a Project Late Packet Report
5.Office of the City Auditor Presentation of the Investment Management Audit Report;
CEQA Status ‐ Not a Project Late Packet Report
FUTURE MEETINGS AND AGENDAS
Members of the public may not speak to the item(s)
ADJOURNMENT
1.Written public comments may be submitted by email to city.council@cityofpaloalto.org.
2.For in person public comments please complete a speaker request card located on the
table at the entrance to the Council Chambers and deliver it to the Clerk prior to
discussion of the item.
3.Spoken public comments using a computer or smart phone will be accepted through
the teleconference meeting. To address the Council, click on the link below to access a
Zoom‐based meeting. Please read the following instructions carefully.
You may download the Zoom client or connect to the meeting in‐ browser. If using
your browser, make sure you are using a current, up‐to‐date browser: Chrome 30 ,
Firefox 27 , Microsoft Edge 12 , Safari 7 . Certain functionality may be disabled in
older browsers including Internet Explorer. Or download the Zoom application onto
your smart phone from the Apple App Store or Google Play Store and enter in the
Meeting ID below.
You may be asked to enter an email address and name. We request that you
identify yourself by name as this will be visible online and will be used to notify you
that it is your turn to speak.
When you wish to speak on an Agenda Item, click on “raise hand.” The Clerk will
activate and unmute speakers in turn. Speakers will be notified shortly before they
are called to speak.
When called, please limit your remarks to the time limit allotted. A timer will be
shown on the computer to help keep track of your comments.
4. Spoken public comments using a phone use the telephone number listed below. When
you wish to speak on an agenda item hit *9 on your phone so we know that you wish to
speak. You will be asked to provide your first and last name before addressing the
Council. You will be advised how long you have to speak. When called please limit your
remarks to the agenda item and time limit allotted.
CLICK HERE TO JOIN Meeting ID: 946‐1874‐4621 Phone: 1‐669‐900‐6833
Americans with Disability Act (ADA) It is the policy of the City of Palo Alto to offer its public
programs, services and meetings in a manner that is readily accessible to all. Persons with
disabilities who require materials in an appropriate alternative format or who require auxiliary
aids to access City meetings, programs, or services may contact the City’s ADA Coordinator at
(650) 329‐2550 (voice) or by emailing ada@cityofpaloalto.org. Requests for assistance or
accommodations must be submitted at least 24 hours in advance of the meeting, program, or
service.
2 Regular Meeting December 12, 2023
Materials submitted after distribution of the agenda packet are available for public inspection at
www.cityofpaloalto.org/agendas
POLICY AND SERVICES COMMITTEERegular MeetingTuesday, December 12, 2023Council Chambers & Hybrid7:00 PMPursuant to AB 361 Palo Alto City Council meetings will be held as “hybrid” meetings with theoption to attend by teleconference/video conference or in person. To maximize public safetywhile still maintaining transparency and public access, members of the public can choose toparticipate from home or attend in person. Information on how the public may observe andparticipate in the meeting is located at the end of the agenda. Masks are strongly encouraged ifattending in person. The meeting will be broadcast on Cable TV Channel 26, live onYouTube https://www.youtube.com/c/cityofpaloalto, a n d s t r e a m e d t o M i d p e n M e d i aCenter https://midpenmedia.org.VIRTUAL PARTICIPATION CLICK HERE TO JOIN (https://cityofpaloalto.zoom.us/j/94618744621)Meeting ID: 946 1874 4621 Phone: 1(669)900‐6833PUBLIC COMMENTSPublic comments will be accepted both in person and via Zoom for up to three minutes or anamount of time determined by the Chair. All requests to speak will be taken until 5 minutesafter the staff’s presentation. Written public comments can be submitted in advance tocity.council@CityofPaloAlto.org and will be provided to the Council and available for inspectionon the City’s website. Please clearly indicate which agenda item you are referencing in yoursubject line.PowerPoints, videos, or other media to be presented during public comment are accepted onlyby email to city.clerk@CityofPaloAlto.org at least 24 hours prior to the meeting. Once received,the Clerk will have them shared at public comment for the specified item. To uphold strongcybersecurity management practices, USB’s or other physical electronic storage devices are notaccepted.CALL TO ORDERPUBLIC COMMENT Members of the public may speak to any item NOT on the agenda. ACTION ITEMS1.Discussion regarding State and Federal Legislative Advocacy and Discussion andRecommendation on the Annual Legislative Guidelines and Legislative Platform2.2024 City Council Priority Setting Process Discussion and Recommendations3.Approval of Office of City Auditor Risk Assessment and Audit Plan (CEQA Status ‐ Not aProject) Late Packet Report4.Office of City Auditor Presentation of the Wastewater Treatment Plant Agreement AuditReport; CEQA Status ‐ Not a Project Late Packet Report5.Office of the City Auditor Presentation of the Investment Management Audit Report;CEQA Statis ‐ Not a Project Late Packet Report3.Approval of Office of City Auditor Risk Assessment and Audit Plan (CEQA Status ‐ Not aProject) 4.Office of City Auditor Presentation of the Wastewater Treatment Plant Agreement AuditReport; CEQA Status ‐ Not a Project5.Office of the City Auditor Presentation of the Investment Management Audit Report;CEQA Status ‐ Not a ProjectFUTURE MEETINGS AND AGENDASMembers of the public may not speak to the item(s)
ADJOURNMENT
PUBLIC COMMENT INSTRUCTIONS
Members of the Public may provide public comments to teleconference meetings via email,
teleconference, or by phone.
1.Written public comments may be submitted by email to city.council@cityofpaloalto.org.
2.For in person public comments please complete a speaker request card located on the
table at the entrance to the Council Chambers and deliver it to the Clerk prior to
discussion of the item.
3.Spoken public comments using a computer or smart phone will be accepted through
the teleconference meeting. To address the Council, click on the link below to access a
Zoom‐based meeting. Please read the following instructions carefully.
You may download the Zoom client or connect to the meeting in‐ browser. If using
your browser, make sure you are using a current, up‐to‐date browser: Chrome 30 ,
Firefox 27 , Microsoft Edge 12 , Safari 7 . Certain functionality may be disabled in
older browsers including Internet Explorer. Or download the Zoom application onto
your smart phone from the Apple App Store or Google Play Store and enter in the
Meeting ID below.
You may be asked to enter an email address and name. We request that you
identify yourself by name as this will be visible online and will be used to notify you
that it is your turn to speak.
When you wish to speak on an Agenda Item, click on “raise hand.” The Clerk will
activate and unmute speakers in turn. Speakers will be notified shortly before they
are called to speak.
When called, please limit your remarks to the time limit allotted. A timer will be
shown on the computer to help keep track of your comments.
4.Spoken public comments using a phone use the telephone number listed below. When
you wish to speak on an agenda item hit *9 on your phone so we know that you wish to
speak. You will be asked to provide your first and last name before addressing the
Council. You will be advised how long you have to speak. When called please limit your
remarks to the agenda item and time limit allotted.
CLICK HERE TO JOIN Meeting ID: 946‐1874‐4621 Phone: 1‐669‐900‐6833
Americans with Disability Act (ADA) It is the policy of the City of Palo Alto to offer its public
programs, services and meetings in a manner that is readily accessible to all. Persons with
disabilities who require materials in an appropriate alternative format or who require auxiliary
aids to access City meetings, programs, or services may contact the City’s ADA Coordinator at
(650) 329‐2550 (voice) or by emailing ada@cityofpaloalto.org. Requests for assistance or
accommodations must be submitted at least 24 hours in advance of the meeting, program, or
service.
3 Regular Meeting December 12, 2023
Materials submitted after distribution of the agenda packet are available for public inspection at
ww.cityofpaloalto.org/agendas
Policy & Services Committee
Staff Report
From: Chantal Gaines, Deputy City Manager
Meeting Date: December 12, 2023
Report #: 2309-2059
TITLE
Discussion regarding State and Federal Legislative Advocacy and Discussion and
Recommendation on the Annual Legislative Guidelines and Legislative Platform
BACKGROUND
Staff recommends that the Policy & Services Committee recommend that City Council approve
the 2024 Federal and State Legislative Guidelines / Legislative Platform (Attachment A).
ANALYSIS
As part of the City’s state and federal legislative advocacy program, staff and the City’s
contracted federal and state advocates work to identify and analyze potentially impactful
legislation and communicate the City’s public advocacy positions to legislators. The program is
guided by the Advocacy Process Manual, last approved by City Council on January 13, 2020
(CMR #10772). In addition to the Manual, the City maintains a City Council-approved set of
legislative guidelines that provide additional City Council policy direction to staff and the City’s
state and federal legislative advocates. The legislative guidelines are used by staff in
consultation with the Mayor to respond to bills and other issues that emerge throughout the
year. They allow for efficiency in the fast-paced legislative environment.
The guidelines were last discussed at the Policy & Services Committee in October 20221 and
subsequently at City Council during discussions of the contract for federal and state advocacy.
Legislative Guidelines
The Legislative Guidelines enhance and add content to the City Council’s overarching priorities;
they do not supplant them. The guidelines provide direction to staff and the City’s legislative
advocates on issues that are both (a) important to the City Council, and (b) likely to become a
legislative issue in 2024. The guidelines are not rank ordered and are intentionally reasonably
1 October 11, 2022 Policy and Services Agenda: Item 1:
https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=8496
Item 1
Item 1 Staff Report
Packet Pg. 4
broad rather than specifically narrow to allow for a flexible and quick response. Further, the
guidelines are not proactive instructions; they act as a means by which staff and advocates can
respond to federal and state government action, without returning to the City Council each
time a bill is introduced or amended.
The draft 2024 guidelines are a compilation of the current, approved guidelines, City Council’s
2023 priorities, and policy issues staff and the City’s legislative advocates have heard interest in.
Attachment A is an updated Legislative Guidelines with feedback from the City Council
Legislative Matters Ad Hoc Committee. The recommendation from the Policy and Services
Committee will be taken to the full City Council in January 2024 for discussion and adoption.
Legislative Update
The City’s legislative advocates in Sacramento and Washington, D.C. (Townsend Public Affairs)
will be present to provide advocacy updates and information about the coming weeks and
months in Sacramento and D.C. if there are questions from the Committee.
FISCAL/RESOURCE IMPACT
There is no additional funding needed for this report. The City Council budgets annually for the
legislative advocacy services and these efforts are led by staff in the City Manager’s Office with
stakeholder support across departments on key issues.
ENVIRONMENTAL REVIEW
The City’s legislative advocacy activities are not a project under section 15378(b)(25) of the
California Environmental Quality Act Guidelines (administrative activities that will not result in
direct or indirect physical changes in the environment).
ATTACHMENTS
Attachment A: 2024 Draft Legislative Guidelines
Item 1
Item 1 Staff Report
Packet Pg. 5
The City of Palo Alto’s 20243 Federal and State Legislative Guidelines
Page 1 of 5
These Guidelines reflect and activate the City Council’s priorities; they do not supplant
them. They work to guide staff and the City’s legislative advocates on issues that are
important to the City Council, and likely to become a legislative issue. These Guidelines are
not rank- ordered and are meant to allow for a flexible and quick response by staff and
advocates, without the need to return to the City Council to seek guidance. The Guidelines
work in conjunction with the City Council-approved Advocacy Process Manual and the City
Council action to do “Strategic Weighing in on Issues of Interest” (June 22, 2021 CMR 12344;
Minutes). The City Council’s annual priorities are also guidance for the City’s legislative
platform.
The below Foundational Principles represent the ideals that form the core of the City’s
policy agenda. The Legislative Guidelines all rise from and strengthen four foundational
principles:
1.Promote Local Fiscal Sustainability:
Support measures that promote fiscal stability, predictability, financial independence, and
preserve the City’s revenue base and maximum control over local government budgeting.
Also Pprotect local revenue sources and prevent unfunded mandates.
2.Support Funding Opportunities:
Protect, seek, and increase funding for programs, projects, and services; pursue grants. Seek
opportunities that allow the City to compete for regional, state and federal funding. Support
funding for programs including, but not limited to, economic development, infrastructure
investment, housing, transportation projects (such as road improvements, rail grade
separations, bicycle and pedestrian safety, multi-modal transportation systems and transit-
oriented development), air quality, water quality and local water reliability, parks and
recreation, historic preservation, natural resources, hazard mitigation, public safety and
public health.
3.Preserve Local Control:
Preserve and protect the City’s powers, duties, and discretion to enact and engage in local
processes and policy making concerning local affairs and oppose efforts and legislation from
state and regional bodies that preempt local authority. Advocate for longer lead times for
implementation of new legislation that impacts Palo Alto. Protect and increase local
government discretion. Oppose items that preempt or reduce the authority or ability of
local government to determine how to effectively operate local programs, services,
activities, and governance.
4.Protect the health and safety of the community:
Support policies and funding that enrich the quality of life for the Palo Alto community with
services that provide for a safe, fulfilling, and vibrant life. Support policies that promote
equity.
Item 1
Attachment A - 2024
Draft Legislative
Guidelines
Packet Pg. 6
The City of Palo Alto’s 20243 Federal and State Legislative Guidelines
Page 2 of 5
The Legislative Guidelines create the framework for organizing the City’s policy interests,
while guiding staff and contracted lobbyists in their advocacy efforts on behalf of the City.
The items below provide direction for the City’s efforts when addressing reasonable
government actions.
Transportation
The City supports government action that:
• Deters single occupancy drivers and alleviates local traffic congestion
• Supports local and regional public transportation
• Regulates technology that diverts traffic into residential neighborhoods
• Provides funding for rail grade separations, rail efficiency improvements, and other
means of reducing the local impacts of regional transportation systems
• Streamlines funding between the state, federal, and local governments that help reduce
the amount of time and resources it takes to fund and complete transportation projects.
• Sustains local, regional, and state funding sources for the development and maintenance
of transportation and does not condition receipt of funds on non -transportation related
factors
• Supports expansion and/or maintaining of public transit options throughout Palo Alto,
especially funding for transit
• Supports state legislation that maximizes local control related to land use requirements
near transit (especially if it impacts the City’s approach to planning for complete
communities)
Climate and Environment
The City supports government action that:
• Reduces GHG emissions and supports progress toward GHG reduction and carbon
neutrality goals
• Reduces airplane noise, health impacts, and/or airplane emissions
• Promotes residential, commercial, and vehicle electrification programs
• Promotes workforce development to provide increased workforce needed for
electrification and grid modernization
• Promotes the use of renewable resources, water conservation, and the flexible use of
existing resources
Item 1
Attachment A - 2024
Draft Legislative
Guidelines
Packet Pg. 7
The City of Palo Alto’s 20243 Federal and State Legislative Guidelines
Page 3 of 5
• Continues sSupports for a statewide ban on polystyrene containers and packaging
materials
• Provides opportunities for staff, in partnership to work with the San Francisquito Creek
Joint Powers Authority and other regional stakeholders, to advance in efforts to improve
the creek’s watershed and floodplain
• Supports efforts to protect local communities from sea level rise and other impacts of
climate change
• Supports proper disposal responsible processing of recyclables once removed from Palo
Alto and other communities, including promoting processing facilities and recyclables
markets within the United States
• Strengthen and modernize the State and Local electric grids
• Supports the protection of our natural environment, including open space, trees/tree
canopy, and biodiversity
Financial
The City supports government action that:
• Supports the long-term stability of CalPERS and the ability of local governments to
mitigate and manage with flexibility its pension obligations
• Protects the funding sources and levels of City services for the sustainable delivery of City
services
• Provides for COVID-19 related expenses and revenue losses
• Supports the continued deductibility of tax-exempt municipal bonds and the restoration
of Advance Refunding of Tax-Exempt Municipal Bonds
• Supports the lowering or maintaining of voter thresholds for local revenue measures
• Supports maximum flexibility for local government in contracting and contract
negotiations
• Supports efforts to attract and retain resources for current and future smaller
businesses in Palo Alto
• Preserves local discretion in the assessment, collection, and usage of development fees
Governance, Transparency, and Human ResourcesPublic Employment
The City supports government action that:
• Preserves local government’s ability to manage its own employment issues, including, but
not limited to hiring, evaluating, disciplining, and/or terminating and negotiating collective
bargaining agreements with employees’ representatives
• Supports reasonable regulatory efforts surrounding policies regarding cybersecurity,
drones, shared mobility services, returning to Obama-era net neutrality regulations,
and smart city initiatives
Item 1
Attachment A - 2024
Draft Legislative
Guidelines
Packet Pg. 8
The City of Palo Alto’s 20243 Federal and State Legislative Guidelines
Page 4 of 5
• Protects individual privacy and allows the City to safeguard customer information
• Maintain existing records collection and retention requirements
• Promote teleconferencing flexibilities under the Ralph M. Brown Act
• Allows the City to support the collaborative work of regional partners, trade associations,
other local governments and organizations, and Joint Powers Authorities
• Provides for the equal treatment of all individuals
Technology
The City supports government action that:
• Supports reasonable regulatory efforts surrounding policies regarding cybersecurity,
drones, shared mobility services, returning to Obama-era net neutrality regulations,
and smart city initiatives
Housing
The City supports government action that:
• Supports reasonable housing policies that recognize local autonomy to maintain the
local public process and preserve local government’s ability to determine land use
policies and development standards
• Provides funding for (a) affordable housing, (b) homelessness, and (c) infrastructure
(such as parks, utilities, roads, and transit) required to support the increased housing
production and keep pace with local development goals
• Promotes the development and enhancement of safe and affordable housing and
accessible housing within the City for all economic segments of the population
• Promotes funding and tax incentives for the identification, acquisition, maintenance,
adaptive reuse, and restoration of historic sites and vacant structures
• Fosters reasonable ratios between jobs and housing
• Supports the development and implementation of efficient and environmentally
sustainable land use and building practices
• Supports the provision of greater lead times (extended effective dates of state
legislation) for local jurisdictions to implement state legislation which offers Palo Alto the
opportunity to apply new land use and housing requirements within the local context
PolicePublic Safety
The City supports government action that:
• Supports efforts which seek to modify policing services, including but not limited to
alternative public safety models and funding to address community mental health
issues, expansion of requirements regarding police data and rules regarding prior
Item 1
Attachment A - 2024
Draft Legislative
Guidelines
Packet Pg. 9
The City of Palo Alto’s 20243 Federal and State Legislative Guidelines
Page 5 of 5
employment information transparency, and expansion of data and communications
including radio encryption.
• Provides for greater public safety support resources especially related to organized
retail theft operations
• Reduces weapons-related violence via the enactment of common-sense firearm
reforms
• Enhances fire and emergency training and response capabilities. Mitigate fire safety
risks. Advocate for funding and policy to mitigate wildfire risks and funding for fire
services in general
• Updates, implements, and refines processes, services, and programs affecting the City.
This includes, but is not limited to, public safety reform efforts and streamlining
reporting mandates
• Support legislation that would address ongoing safety concerns and help prevent acts of
violence motivated by hate, including improving data collection and reporting
Other
The City supports government action that:
• Updates, implements, and refines processes, services, and programs affecting the City.
This includes, but is not limited to, public safety reform efforts and streamlining
reporting mandates
• Protects individual privacy and allows the City to safeguard customer information
• Provides for the equal treatment of all individuals
• Allows the City to support the collaborative work of regional partners, trade associations,
other local governments and organizations, and Joint Powers Authorities
Item 1
Attachment A - 2024
Draft Legislative
Guidelines
Packet Pg. 10
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6
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1
Policy & Services Committee
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: City Manager
Meeting Date: December 12, 2023
Report #:2311-2280
TITLE
2024 City Council Priority Setting Process Discussion and Recommendations
RECOMMENDATION
Staff recommends that the Policy and Services Committee discuss and forward for Council
approval of a modified priority setting session as outlined in Option 3 for the 2024 Annual
Retreat, tentatively scheduled for January 29, 2024 and suspension of the Council Protocols and
procedures for the annual retreat to support this.
BACKGROUND
In October 20121, the City Council approved Priority Setting Guidelines and outlined the role for
the Policy & Services Committee in this process. Per the Guidelines (Attachment A), a priority is
defined as a topic that will receive particular, unusual and significant attention during the year.
Additionally, there is a goal of no more than three priorities per year, generally with a three-
year term.
The 2023 Priorities, as selected at the City Council’s Annual Retreat on January 28, 20232 are:
•Economic Recovery and Transition
•Climate Change and the Natural Environment: Protection and Adaptation
•Housing for Social and Economic Balance
•Community Health and Safety
Additionally, in November 20223, the Council adopted value statements to aid in future retreats
and priority setting processes:
1 City Council Meeting 10/1/2012 https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes-
reports/reports/city-manager-reports-cmrs/year-archive/2012/mini-packet-3156.pdf
2 City Council Retreat 1/28/2023 https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=1492
3 City Council Meeting Minutes 11/07/2022 https://www.cityofpaloalto.org/files/assets/public/v/2/agendas-
minutes-reports/agendas-minutes/city-council-agendas-minutes/2022/20221107/20221107amccsm.pdf
Item 2
Item 2 Staff Report
Packet Pg. 11
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6
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1. We will make decisions that balance revenues and expenses, now and in the future.
2. We will make decisions that are environmentally sustainable, now and in the future.
3. We will integrate equity into our decisions, considering how decisions affect people
differently based on their identity or circumstances.
4. We will make decisions that create a healthy, safe and welcoming community for all.
5. We will safeguard public trust through transparent practices and open communication.
6. We embrace innovation.
As set forth in the Priority Setting Guidelines, “If needed, the Policy and Services Committee,
each year at its December meeting, shall make recommendations about the process that will be
used at the Annual Retreat paying particular attention to the number of priorities suggested by
Council members. The recommended process is to be forwarded to Council for adoption in
advance of the Council retreat.” This report outlines various retreat process options for the
Policy & Services Committee to discuss and consider.
ANALYSIS
The Priority Setting Guidelines define the meaning of a Council priority and lay out the purpose,
process, and general parameters for the Council’s annual priority-setting process. Consistent
with these guidelines, staff has reached out to the Council to identify their recommendations
for 2024 priorities to be considered by the Council. That information is due back to the Council
in mid-January for consideration prior to the retreat.
In response to feedback from the 2023 goal-setting process and subsequent discussions, staff is
recommending the Policy & Services Committee consider modifications to the 2024 Council
Annual Retreat to shift discussion towards longer-term strategic issues and initiatives. 2024
represents a unique year for discussion of Council priorities and strategies to advance them,
given no Council turnover from the prior year and extensive ongoing efforts on several
priorities.
Staff has outlined three options for consideration:
Option 1
Continue with the Council-adopted, traditional process for establishing annual Priorities, which
includes a) community survey feedback, b) suggestions from individual council members, c)
public comment, and the generation of new 2024 Priorities. The retreat would use the current
four Priorities as a baseline discussion at the January retreat and explore additional Priorities
not contemplated among the Priorities as codified.
Option 2
Engage in a traditional strategic planning process that includes inputs from a variety of
stakeholders that provides for the development of a mission and vision statement,
development of a list of strategic priorities (similar to the current goal-setting process),
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development of a dashboard of measurable initiatives (similar to the current City goals
dashboard) linked to the city work plan. Typical strategic plans take a longer horizon (5-20
years). These work sessions are typically spread over two or more meetings and include
extensive public outreach and engagement activities. Should the Council choose to
recommend this option, staff recommends rescheduling the planned January retreat to allow
for a longer planning period and a more extended work session for the Council.
Option 3
th.
FISCAL/RESOURCE IMPACT
STAKEHOLDER ENGAGEMENT
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be provided with individual Councilmember suggestions for annual priorities received by
December 1st. The public will also have an opportunity to provide feedback during the Council
retreat, as well as send direct emails to Council.
ENVIRONMENTAL REVIEW
ATTACHMENTS
APPROVED BY:
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City Council Protocols and Procedures Handbook
33
Any questions received after 5 p.m. on the Wednesday before the meeting may be responded to
via e-mail, or alternatively, will be responded to at the Council meeting.
(c)Staff will not engage in “dialogues” with individual Council members regarding questions;
however, follow-up questions to initial questions will be responded to at the Council meeting.
(d)Staff will give highest priority to responding prior to the Council meeting via e-mail only on items on
the Consent Agenda. Questions which address the policy aspects of the item on the Council
agenda will not be responded to prior to the meeting, although Staff welcomes such questions in
advance of the meeting in order to prepare for the Council and public discussion. Technical and
clarifying questions on non-Consent Calendar items will be responded to as time permits.
(e)If the staff will be responding to a Council members Consent Agenda question at the meeting
rather responding to the question via e-mail, Staff will inform the Council member as early as
possible after receipt of the question(s).
(f)Questions and all staff-prepared responses will be forwarded to all Council members as well as
posted online for public review of Council agenda questions and staff responses. Staff will include
the name of the Council member posing the questions in the “subject” field of the e-mail
response.
(g)Copies of all Council member agenda questions and staff responses will be emailed to the Council
p and posted publicly on the meeting agenda. If staff responses are not released until the meeting
date, they will be provided in printed form at the dais.
* * *
SECTION 7 – COUNCIL VALUES AND ANNUAL COUNCIL PRIORITIES
(a)Council Values
In November 2022, the Council adopted a set of values as described here:
The Palo Alto City Council holds these values to help guide decisions that:
1)Balance revenues and expenses, now and in the future.
2)Are environmentally sustainable.
3)Integrate equity into our decisions, considering how decisions affect people differently
based on their identity or circumstances.
4)Make decisions that create a healthy, safe and welcoming community for all.
5)Safeguard public trust through transparent practices and open communication.
6)Embrace innovation.
ATTACHMENT AItem 2
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City Council Protocols and Procedures Handbook
34
(b) Annual Council Priorities
Priorities Background and Definition
The City Council adopted its first Council priorities in 1986. Each year the City Council reviews its
priorities at its Annual Council Retreat. On October 1, 2012 the City Council formally adopted the
definition of a Council priority, and the Council’s process and guidelines for selection of priorities.
There is a goal of no more than three to four priorities per year and priorities generally have a two-
to three-year time limit. Council can identify two to three specific objectives within a priority.
A Council priority is defined as a topic that will receive particular, unusual and significant attention
during the year. This varies from a Council value which is defined as an enduring goal and
intention to guide the work of the City Council. The values (shared above) allow the City Council
to maintain these enduring intentions while also selecting annual priorities that reflect shorter-
term projects and goals.
Purpose
The establishment of Council priorities will assist the Council and staff to better allot and utilize
time for discussion and decision making.
Process
In advance of the annual Council Retreat, staff will solicit input from the City Council on the
priorities to be reviewed and considered for the following year.
1) Council members may submit up to three priorities.
2) Priorities should be submitted no later than December 1.
3) As applicable, the City Manager will contact newly elected officials for their input by
December 1.
4) The City Manager and the City Clerk will solicit for the public to share proposed priorities
prior to the Council retreat. The Policy and Services Committee shall recommend to the
Council which suggestions if any shall be considered at the City Council retreat.
5) Staff will collect and organize the recommended priorities into a list for Council
consideration and provide to Council in the packet for the City Council retreat.
6) If needed, the Policy and Services Committee, each year at its December meeting, shall
make recommendations about the process that will be used at the Annual Retreat paying
particular attention to the number of priorities suggested by Council members. The
recommended process is to be forwarded to Council for adoption in advance of the Council
retreat.
* * *
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Policy & Services Committee
Staff Report
Report Type: ACTION ITEMS
Lead Department: City Auditor
Meeting Date: December 12, 2023
Report #:2311-2306
TITLE
Approval of Office of City Auditor Risk Assessment and Audit Plan (CEQA Status - Not a Project)
BACKGROUND
This will be a late packet report released no later than December 7, 2023.
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Policy & Services Committee
Staff Report
Report Type: ACTION ITEMS
Lead Department: City Auditor
Meeting Date: December 12, 2023
Report #:2311-2307
TITLE
Office of City Auditor Presentation of the Wastewater Treatment Plant Agreement Audit
Report; CEQA Status - Not a Project
BACKGROUND
This will be a late packet report released no later than December 7, 2023.
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Policy & Services Committee
Staff Report
Report Type: ACTION ITEMS
Lead Department: City Auditor
Meeting Date: December 12, 2023
Report #:2311-2308
TITLE
Office of the City Auditor Presentation of the Investment Management Audit Report; CEQA
Status - Not a Project
BACKGROUND
This will be a late packet report released no later than December 7, 2023.
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Policy & Services Committee
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: City Auditor
Meeting Date: December 12, 2023
Report #:2310-2174
TITLE
Approval of Office of City Auditor Risk Assessment and Audit Plan (CEQA Status - Not a Project)
RECOMMENDATION
The City Auditor recommends that the Policy and Services Committee recommend City Council
approve the following reports:
1) Fiscal Year 2023/24 Risk Assessment Report
2) Fiscal Year 2023/24 Audit Plan Report
3) Task Orders identified in the Audit Plan Report
o TASK ORDER FY24-4.21 Purchasing Card Program
o TASK ORDER FY24-4.22 ADA Compliance Review
o TASK ORDER FY24-5 Various Reporting & City Hotline (Modified)
EXECUTIVE SUMMARY
Baker Tilly interviewed City Council members and executive leadership across 14 departments
within the City. In addition, selected directors and managers were asked to complete a survey
that provided their view of top risk areas to their departments and the City as a whole. Baker
Tilly analyzed the results of the survey and other data and information gathered.
The risk assessment involved scoring and ranking the 97 auditable units to identify the audit
areas with high to moderate risks. The FY2023/24 Audit Plan was prepared based on the results
of the risk assessment, conversations with leadership, and other matters.
BACKGROUND
The Palo Alto Municipal Code (Section 2.08.1301) requires the City Auditor prepare and submit
an annual audit plan to the City Council for review and approval. In its capacity serving as the
1 https://codelibrary.amlegal.com/codes/paloalto/latest/paloalto_ca/0-0-0-60361
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City Auditor function, and in accordance with Baker Tilly’s agreement with the City2, Baker Tilly
performed a citywide risk assessment (Task 2 of the agreement). The purpose of the
assessment was to identify and prioritize risks in order to develop the annual audit plan (Task
1). During the risk assessment, Baker Tilly assessed a wide range of risk areas, including
strategic, financial, technology, human capital, operational, reputational, economic, and
compliance risk categories.
ANALYSIS
FISCAL/RESOURCE IMPACT
STAKEHOLDER ENGAGEMENT
ENVIRONMENTAL REVIEW
2 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
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ATTACHMENTS
Late Packet Attachment A: OCA – F2023 Risk Assessment Report
Late Packet Attachment B: OCA – FY2024 Annual Audit Plan
APPROVED BY:
Adriane D. McCoy, City Auditor
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December 12, 2023
City of Palo Alto
Office of the City Auditor
FY2023 Annual Risk Assessment
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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.
INTRODUCTION ............................................................................................................. 1
RISK ASSESSMENT APPROACH ................................................................................. 2
SURVEY RESULTS ........................................................................................................ 3
RISK ASSESSMENT RESULTS ..................................................................................... 5
APPENDICES ................................................................................................................. 9
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Introduction
Overview
According to City Ordinance of the City of Palo Alto (the City), the mission of the Office of the City Auditor (OCA)
is to promote honest, efficient, effective, economical, and fully accountable and transparent city government. To
fulfill this mission, the OCA conducts performance audits and performs financial/operational analyses of
city departments, programs, services, or activities as approved by the City Council. (Section 2.08.130). In its
capacity serving as the City Auditor function, and in accordance with Baker Tilly’s agreement with the City (Task
#1 of the agreement), Baker Tilly US, LLP (Baker Tilly) conducted the fiscal year(FY) 2023 citywide risk
assessment in order to develop the FY2024 annual audit plan (Task #2).
The California Government Code Section 1236 requires all cities that conduct audit activities to conduct their
work under the general and specified standards prescribed by the Institute of Internal Auditors (IIA) or the
Government Auditing Standards (GAO) issued by the Comptroller General of the United States, as appropriate.
According to the IIA Standard 2010, the head of internal audit function “must establish a risk-based plan to
determine the priorities of the internal audit activity, consistent with the organization’s goals” and consider the
input of senior management and a governing board.
The purpose of the risk assessment is to develop an internal audit plan that assigns internal audit resources to
the activities that add the most value to the City. The risk assessment process involves identifying, measuring,
and prioritizing risks associated with the audit universe (list of specific departments, functions, processes,
programs, etc. that can be subject to an audit). Risk is defined as “the possibility of an event or condition
occurring that will have an impact on the ability of an organization to achieve its objectives.”1
Our risk assessment involved collaboration with City Council and executive leadership from 14 main
departments across the organization. This report summarizes our risk assessment methodology, analysis, and
results. The FY2024 annual audit plan is based on the results of this risk assessment.
Through the risk assessment, we observed certain strengths of the City. Key strengths include:
Commitment to public service
High value on efficient and effective government
Focus on long term strategy
Dedicated and highly professional management and staff
Demonstrated history of innovation and commitment to sustainability
Risk Assessment Process Considerations
The starting point of the internal auditing is to conduct a risk assessment that is the basis for determining the
internal audit activities. However, it is not a one-size-fits-all process. The scope and complexity of risk
assessment are affected by various factors such as the maturity level of the internal audit function’s products
and services, the organization’s enterprise risk management efforts, coordination with other monitoring and risk
management functions, and the stakeholders’ expectations. As every organization is subject to changing
environment, the results of the annual risk assessment represent the information considered at the time of the
assessment.
In addition to the annual macro-level risk assessment, the internal audit function is required to perform an
engagement-level risk assessment when starting each audit listed in the approved audit plan. The IIA Standard
2200 states, “Internal auditors must develop and document a plan for each engagement, including the
engagement’s objectives, scope, timing, and resource allocations. The plan must consider the organization’s
strategies, objectives, and risks relevant to the engagement.”
1 Rick A. Wright Jr., CIA, “The Internal Auditor’s Guide to Risk Assessment” The Institute of Internal Auditors Research Foundation (IIARF),
2018
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Risk Assessment Approach
Baker Tilly’s risk assessment approach consisted of four phases as illustrated in the graphic below.
2023 RISK ASSESSMENT PHASES
Planning
Prepared risk assessment survey questions and the online survey tool.
Scheduled the interviews with City Council members and Executive Leadership Team (ELT)
members.
Information
Gathering
Reviewed the key documents such as City Council Priorities and the progress report, the
budget documents, the annual comprehensive financial report, departmental strategic plans,
employee turnover, the information on the City’s website and other relevant documents.
Distributed a link to the online survey to the selected 51 managers. The survey responses
were downloaded in Excel spreadsheet.
Interviewed all City Council Members and ELT members (25 individuals) to identify the
events and conditions that may affect the achievement of objectives.
Updated the risk assessment matrix with the information gathered.
Analysis
Analyzed the survey responses.
Scored the auditable units (listed in Appendix A) in the risk assessment matrix based on the
likelihood and the impact2 of potential adverse events.
o Each of the auditable units received scores for various risk factors related to the
likelihood or impact (defined in Appendix B).
o Risk factor scores were summed to create a single score for the auditable unit.
Identified potential internal audit activities for the auditable units with high risk scores.
Reporting Summarized the approach and results of the risk assessment
Baker Tilly conducted an initial comprehensive risk assessment in FY2021 by interviewing all Council Members
and Executive Leadership Team (ELT) members to create a risk assessment matrix. For the FY2022 risk
assessment, surveyed all ELT members and some additional members of management and conducted
interviews with available Council Members as well as key ELT members representing areas of perceived high
risk (e.g., Information Technology, Human Resources). For the third year risk assessment, all Council Members
and ELT members were interviewed, the selected 51 managers were surveyed, and the risk assessment matrix
was redeveloped for a comprehensive picture of the risk landscape, which will be continuously improved.
Our risk assessment primarily measured inherent risk (the risk without mitigating controls/factors) for each risk
factor although we also considered specific risks based on the City’s processes, controls, and other factors we
learned through internal audit activities. Using the information gathered, we identified risks and determined the
likelihood and impact of the risks.
2 Likelihood is the possibility that an event will occur. Impact is the extent to which an event might affect an organization.
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Survey Results
Baker Tilly team conducted an online risk assessment survey to gather management’s insights for all City
departments and received 47 responses (92% response rate). The survey questions are listed in Appendix C.
Changes over the past 12 months
All organizations are subject to changing environments that can influence risk to organizations. The COSO 3
Internal Control – Integrated Framework4 highlights the influence of change in one of the 17 principles. Principle
9 states, “the organization identifies and assesses changes that could significantly impact the system of internal
control.” The survey participants were asked to select all significant changes for their team or department during
last 12 months.
Policies and Procedures
Policies and procedures provide a
roadmap for daily operations to ensure
compliance with laws and regulations,
give guidance for decision-making, and
establish the standards and internal
controls.
The survey participants were also asked
to select the current state of the policies
and procedures necessary to perform
their job responsibilities.
3 The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is sponsored jointly by five major professional
associations headquartered in the United States: the American Accounting Association (AAA), the American Institute of Certified Public
Accountants (AICPA), Financial Executives International (FEI), the Institute of Internal Auditors (IIA), and Institute of Management
Accountants (IMA). https://www.coso.org/
4 Internal Control – Integrated Framework provides principles-based guidance for designing and implementing effective internal controls.
This framework has become the most widely used internal control framework in the U.S. https://www.coso.org/guidance-on-ic
Changes for team or department # of Response
New/additional staff 33
Unfilled positions 28
Change in workload 23
New software 19
Change in organizational structure 17
New workflows or business processes 13
New or significant changes in information technology systems 13
Change in compliance requirements (due to changes in policies/contracts/laws/regulations) 11
New vendors and contractors 11
Significant changes in processes or controls 7
Workforce reduction 7
Increased undesirable performance or instances (such as injuries/complaints/customer dissatisfaction/etc.) 6
Change in goals/objectives/performance measures 6
Change in culture 3
Other 4
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SURVEY RESULTS
Barriers to meeting goals and objectives in FY2024
The COSO Enterprise Risk Management—Integrating with Strategy and
Performance5 provides insight into the links between strategy, risk, and
performance through 20 principles. Principle 10 states, “the organization
identifies risk that impacts the performance of strategy and business
objectives.”
The survey participants were asked about their team/department’s periodic
reporting on significant goals and compliance requirements to monitor the
performance. The pie chart shows the results.
The survey participants were also asked what can possibly prevent their
team/department from meeting its goals and objectives in 2024. The
results are summarized below.
Top risk areas selected by the survey participants
The survey participants were asked to select and rank the top five
risk areas from 31 risk areas listed in the survey. Based on the
number of selection and the ranking given by them, the top 15 risk
areas were identified.
For the risks they selected:
59.6% of the participants think the City management is aware
of the risk, but more efforts are needed to help mitigate the risks.
34.0% of the participants think the City management is aware
of the risks and has implemented activities to help mitigate the
risks.
6.4% of the participants think the City management is either not
aware of the risks or have not developed sufficient activities to help
mitigate the risks.
5 Enterprise Risk Management—Integrating with Strategy and Performance addresses the need for organizations to improve their approach
to managing risk to meet the demands of an evolving business environment. https://www.coso.org/guidance-erm
Rank Risk Area
1 Citizen Demands
2 Succession Planning
3 Economy
4 Human Capital Management
5 Human Resources
6 Procurement/Sourcing
7 Security
8 Regulatory
9 Reputation
10 Resource Allocation
11 Efficiency
12 Document Retention
13 Leadership and Authority
14 Technologies
15 Strategic Change
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RISK ASSESSMENT RESULTS
Risk Assessment Results
Department Descriptions and Key Risk Areas
When identifying risk areas throughout the City, Baker Tilly considered each department and associated risks.
Based on the concerns described by interviewees and survey respondents, departments’ functions, and their
inherent risks, Baker Tilly identified the auditable risk areas for each department. Below is an overview of the
City’s departments and their key risk areas.
Administrative Services
The Administrative Services Department provides financial and
analytical support to the City. Departmental functions include
finance and accounting, purchasing, administration, budget, real
estate, and others.
Key Risk Areas
Purchasing card program
Vendor master file
Property management
Grant management
City Attorney’s Office
The City Attorney’s Office provides legal services to the City,
including providing legal advice and training to City leaders,
negotiating on behalf of the City, drafting contracts and other
legal documents, investigating claims, and defending the City in
litigation
Key Risk Areas
Identification of legal risks
Contracts and legal documents
City Clerk’s Office
The City Clerk serves as a liaison between the public and City
Council. Office functions include Public Records Act requests,
public hearings, local elections, board and commission
recruitments, record management, and others.
Key Risk Areas
Election administration
Record management
Council meeting management
City Manager’s Office
The City Manager’s Office provides leadership to the City
departments and is responsible for facilitating City Council
legislative actions, managing special interdepartmental projects,
and more. The Communications Office is housed under the City
Manager’s Office and is the primary correspondent between the
City and the public.
Key Risk Areas
Citywide risk management
Economic development
Office of Transportation
The Office of Transportation works to enhance quality of life and
improve the safety of the users of all modes of transportation.
The Office is responsible for sustainable transportation systems,
manage parking, and oversees the City’s traffic and
transportation capital improvement projects.
Key Risk Areas
Intersection safety improvements
Federal Railroad Administration (FRA)
Quiet Zone
Parking permit revenue
Community Services Department
The Community Services Departments offers a variety of
services administered through the following three divisions and
the Office of Human Services: Arts and Sciences; Open Spaces,
Parks, and Golf; and Recreation.
Key Risk Areas
Human Services Resource Allocation
Process (HSRAP)
Junior Museum and Zoo (JMZ)
Operation
Contract management
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RISK ASSESSMENT RESULTS
Fire
The Fire Department oversees emergency response such as
ambulance transports and fire response/rescue, emergency
protection services such as fire prevention, and hazardous
materials planning. The department highlights safeguarding the
community and compassionate care.
Key Risk Areas
Emergency Preparedness (Foothills
Fire Master Plan)
Safety and Wellness
Human Resources
The Human Resources Department is responsible for recruiting,
developing, and retaining a well-qualified and professional
workforce. The Department ensures compliance with relevant
labor laws, adheres to record keeping practices, and serves as a
strategic partner for executive decision making.
Key Risk Areas
Recruitment
Succession Planning
HR Strategy & Risk Management
Workplace Safety
Information Technology
The Information Technology Department's provides innovative
technology solutions that support City departments. The
department oversees IT project management, operations,
enterprise systems, and security services.
Key Risk Areas
- PCI/DSS Compliance
- AMI Implementation
- ERP Upgrade
Library
The Library Department operates five libraries throughout the
City, each offering unique resources. The Library provides
educational programming, multi-cultural events, and large and
diverse book, information and technology resources.
Key Risk Areas
Operations
Events and Programming
Office of Emergency Services
The Office of Emergency Services is designed to prevent,
prepare for, and recover from various hazards. The Office is
responsible for overseeing various risk management programs.
Key Risk Areas
Emergency preparedness (Foothills Fire
Mitigation Program)
Planning and Development Services
The Planning Department supports the City in land use
development, planning, transportation, housing and
environmental policies, and plans and programs that “maintain
and enhance the City as a safe, vital, and attractive community”.
Key Risk Areas
Building Permit & Inspection
Zoning Ordinance
Code Enforcement
Long Range Planning
Police
Palo Alto’s Police Department oversees technical services such
as dispatch and record management, field services such as
patrol and emergency response, and animal control. The Police
Department also places a high value on community relations.
Key Risk Areas
Crime Reduction
Psychiatric Emergency Response Team
(PERT) Program
Safety and Wellness
Training
Public Works
The Public Works Department is broken into four divisions:
Engineering, Airport, Public Services, and Environmental
Services. The Divisions are responsible for a variety of tasks
Key Risk Areas
Wastewater treatment capital program
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RISK ASSESSMENT RESULTS
Overall Risk Scoring Distribution
Baker Tilly structured the audit universe based on the department/division/program from the budget document
and management’s feedback, which resulted in 96 auditable units (Appendix A). We scored them based on the
information gathered for each risk factor related to the likelihood, impact, or fraud. Appendix B lists the risk
factors, definitions, and scoring method. The maximum score for an auditable unit is 30. The following chart
shows the distribution of overall risk scoring.
Baker Tilly rated the auditable units as follows:
High Risk – Scores 14 and above
Moderate Risk – Scores more than 9 and less than 14
Low Risk – Scores below 9
Listed in the following page are the auditable units with a score over 13 (out of 30) based on our scoring. The list
includes 27 functions rated as high risk (with a score between 14 and 30) and 13 functions rated as moderate
risk (with a score between 13 and 14). In determining the audit activities to be performed in FY2024, we further
review specific risks and functional areas and consider risk-based priorities as well as other factors such as
requirements by law or regulation, timing of activities, special projects, and requests from City Council and
management. The proposed audit plan will be included in a separate FY2024 Annual Audit Plan Report.
7
26
43
16
4
SCORE ≤ 5 5 - 10 10 - 15 15 - 20 > 20
including design and implementation of capital projects,
maintenance of City-owned and leased structures, and
management of the solid waste programs.
The Americans with Disabilities Act
(ADA) compliance
Flood protection capital project
Airport Operations
Utilities
The Utilities Department owns and operates electric, gas, water,
wastewater and fiber optic services to the City. The City
purchases all their power from external sources. The mission of
the Department is to “provide safe, reliable, environmentally
sustainable and cost effective services.”
Key Risk Areas
Power Purchase Agreements
Utility Billing
Rate Setting and Adjustment
Utility Asset Management
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Department Function Risk Area Total Risk Score
Planning and Development Services Building Building Permit & Inspection Process 22.8
Public Works Wastewater Treatment Wasterwater Treatment Capital Program 22.4
Planning and Development Services Development Services Building Permit & Inspection Process 20.5
Public Works Structures and Grounds ADA Compliance / Flood protection capital project 20.0
Administrative Services Purchasing Purchasing Card Program / Vendor Master File 18.6
Police Field Services Psychiatric Emergency Response Team (PERT) Program 18.2
Utilities Electric Administration Power Purchase Agreement 18.2
Community Services Administration and Human Services Human Services Resource Allocation Process (HSRAP) 18.0
Community Services Arts and Sciences Junior Museum and Zoo (JMZ) Operation 18.0
Community Services Recreation and Cubberley Contract Management 18.0
Police Technical Services 911 Operations 17.2
Community Services Animal Shelter Contract Management 16.9
Fire Emergency Response Emergency Preparedness (Foothills Fire Master Plan) 15.8
City Manager Administration and City Management Citywide Risk Management 15.6
Fire Administration Safety and Wellness 15.6
Planning and Development Services Planning and Transportation Code Enforcement 15.4
Office of Transportation Programs Intersection safety improvements 15.4
Utilities Electric Engineering (Operating) Utility Asset Management 15.3
Public Works Airport Airport Operations 15.1
Human Resources Administration, Employee Org Development and HR Systems HR Strategy / Succession Planning 15.1
Police Police Personnel Selection Recruitment and retention 14.9
Administrative Services Treasury / Revenue Collection / Warehouse Investment Management 14.9
Administrative Services Real Estate Property Management 14.7
Public Works Engineering Services Animal Shelter Renovation 14.3
Community Services Open Space, Parks and Golf Emergency Preparedness (Foothills Fire Master Plan) 14.1
Information Technology Operations PCI/DSS Compliance 14.1
Administrative Services Accounting Grant Management 14.0
Office of Emergency Services Emergency Services Emergency preparedness (Foothills Fire Mitigation Program) 13.9
Utilities Electric Customer Service Utility Billing 13.9
Information Technology Project Services AMI Implementation 13.8
Library Administration Business Operations (Donations and grants; Inventory
Management; Fines, Purchasing, etc.)13.8
Human Resources Risk Mgmt., Safety, Workers' Compensation HR Risk Management / Workplace Safety 13.8
Police Law Enforcement Services Evidence 13.8
Utilities Water Customer Service Utility Billing 13.6
City Manager Economic Development Economic Development 13.4
Human Resources Recruitment Recruitment Process 13.3
Utilities Electric Resource Management Rate setting and adjustments 13.2
Public Works Administration Safety and Wellness 13.0
Utilities Gas Customer Service Utility Billing 13.0
Utilities Fiber Optics Customer Service Utility Billing 13.0
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Appendix A: Resumes
Appendices
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Appendix A: Audit Universe
City Attorney’s Office
Administration
Consultation and Advisory
Litigation and Dispute Resolution
Official and Administration Duties
City Clerk’s Office
Administration
Administrative Citations
Council Support Services
Election/Conflict of Interest
Legislative Records Management
City Manager’s Office
Administration and City Management
Economic Development
Public Communication
Administrative Services Department
Accounting
Administration
Office of Management and Budget
Printing and Mailing
Purchasing
Real Estate
Treasury/Revenue Collection/Warehouse
Community Services Department
Administration and Human Services
Animal Shelter
Aquatics
Arts and Sciences
Open Space, Parks and Golf
Recreation and Cubberley
Fire Department
Administration
Emergency Response
Environmental Safety Management
Records and Information Management
Training and Personnel
Human Resources Department
Administration, Employee Org Development and HR Systems
Benefits and Compensation
Employee and Labor Relations
Recruitment
Risk Management, Safety, Workers’ Compensation
Information Technology Department
Enterprise Systems
Office of the CIO
Operations
Project Services
Library Department
Administration
Collection and Technical Services
Public Services
Office of Emergency Services
Emergency Services
Office of Transportation
Administration
Parking Districts
Programs
Special Revenue Funds
Planning and Development Services Department
Administration
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Building
Development Services
Planning and Transportation
Special Districts
Police Department
Administration
Animal Control
Field Services
Investigations and Crime Prevention Services
Law Enforcement Services
Parking Services
Police Personnel Selection
Technical Services
Traffic Services
Department of Public Works
Administration
Airport
Engineering Services
Refuse
Storm Drainage
Streets
Structures and Grounds
Sustainability
Trees
Vehicle Replacement and Maintenance
Wastewater Treatment
Utilities Department
Electric Administration
Electric Customer Service
Electric Demand Side Management
Electric Engineering (Operating)
Electric Operations and Maintenance
Electric Resource Management
Fiber Optics Administration
Fiber Optics Customer Service
Fiber Optic Operations and Maintenance
Gas Administration
Gas Customer Service
Gas Demand Side Management
Gas Engineering (Operating)
Gas Operations and Maintenance
Gas Resource Management
Wastewater Collection Administration
Wastewater Collection Customer Service
Wastewater Collection Engineering (Operating)
Wastewater Collection Operations and Maintenance
Water Administration
Water Customer Service
Water Engineering (Operating)
Water Operations and Maintenance
Water Resource Management
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Appendix B: Risk Factor Definition
Factor Definition Weight
Magnitude
A measure of materiality based on pervasiveness or volume of dollars or transactions; Scores based on the budgeted
expenditure amount
Extreme - 5: $50M or more
Material - 4: $10M or more; Less than $50M
Significant - 3: $3M or more; Less than $10M
Moderate - 2: $1M or more; Less than 3M
30%
Customer /
Resident
Experience
Negative experience by customers and residents, such as perceived or actual safety concerns and unsatisfactory
services, impacts negatively on the reputation / credibility of the organization
Extreme - 5: Direct impact on health and safety
Material - 4: Direct impact on transparency
Significant - 3: Direct impact on customer satisfaction/City's reputation
Moderate - 2: Indirect impact on customer satisfaction/City's reputation
Inconsequential - 1: Immaterial impact on reputation / credibility
35%
Achievement of
Organizational
Goals
The greater the effect that a department or process has on the organization meeting strategic objectives and goals,
the greater the related risks
Extreme - 5: Directly relates to the City Council Priorities
Material - 4: Supports the function/process directly related to the City Council Priorities
Significant - 3: Has performance/workload measures related to City Council Priorities
Moderate - 2: Somewhat relates to the City Council Priorities
Inconsequential - 1: Does not relate to City's City Council Priorities
35%
100%
Complexity
A measure of the difficulty in performing a process or function. As a process or function becomes more complex, the
greater the opportunity for errors
5 - Very high complexity
4 - High complexity
3 - Medium complexity
2 - Low complexity
1 - Very low complexity
25%
Policies and
Procedures
Policies and Procedures are a complete set of written instructions that guide personnel in the successful execution of
their duties and the duties of the office for which they work. If the policies and procedures are adequate and up-to-
date, a risk is lower
5 - No or little written P&P
4 - Some written P&P
3 - Basic P&P requiring improvements
2 - Adequate but outdated P&P
10%
Regulatory
Compliance
Measures the existence of and potential noncompliance with, government regulations and other applicable laws,
standards, and policies/procedures
5 - Requirements to meet more than a few laws/regulations and professional standards specific to the division's
responsibilities
25%
Monitoring
Consider the existence of monitoring activities, including the results of last audits by Internal Auditor, External Auditor,
Regulators, etc. and other known deficiencies
5 - Overall, there is no mechanism to monitor the status of performance goals/compliance requirements
3 - For only some of significant performance goals/compliance requirements, there is a periodic reporting process to
ensure performance goals/compliance requirements are met
1 - For all significant performance goals/compliance requirements, there is a periodic reporting process to ensure
performance goals/compliance requirements are met
10%
Specific Risks
Consider the existence of specific risk events/conditions and their significance
5 - Identified risk event(s)/condition(s) seem to significantly affect the likelihood
3 - Identified risk event(s)/condition(s) seem to have some impact on the likelihood
1 - No or very minor risk event(s)/condition(s) have been identified
30%
100%
Fraud Schemes
Consider the susceptibility to fraud, which is the opportunity for employees/vendors/customers/fraudsters to
misappropriate resources or defraud the organization*
5 - High Risk
3 - Moderate Risk
1 - Low Risk
100%
100%
HIGHEST TOTAL SCORE 30
* Considered fraud schemes listed in the Fraud Tree provided in the “Occupational Fraud 2022: A report to the Nations” by Association of Certified
Fraud Examiners. Also considered are cyber fraud schemes.
Impact Factors (the effect on the organization)
HIGHEST TOTAL SCORE FOR IMPACT: 5
Likelihood Factors (the probability of the risk occurring)
HIGHEST TOTAL SCORE FOR LIKELIHOOD: 5
Other Risk Factor
HIGHEST TOTAL SCORE FOR OTHER: 5
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Appendix C: Survey Questions
The Office of City Auditor is conducting the 2023 Risk Assessment to identify and prioritize risks in order to
update the annual audit plan. As part of our 2023 Risk Assessment, we are conducting a survey. This survey is
used primarily to collect information related to changes in operations, emerging issues and risks the City faces,
and to gather your perspective on key risks faced by your department. Your candid responses would be greatly
appreciated to assess the risks that prevent the City of Palo Alto from achieving its mission, goals, and
objectives.
Questions 1-7 remain the same for both options.
1. Please provide your name, title, department, and email address:
Name
Title
Department
o City Council
o City Attorney
o City Manager’s Office – Other than Transportation
o City Manager’s Office – Transportation
o Administrative Services
o City Clerk’s Office
o Community Services
o Emergency Services
o Fire
o Human Resources
o Information Technology
o Library
o Planning
o Police
o Public works
o Utilities
Email address
2. Describe any significant changes for your team or department during last 12 months. Select all that
apply.
New software
New workflows or business processes
Significant changes in processes or controls
New or significant changes in information technology systems
Change in organizational structure
Change in culture
Workforce reduction
Unfilled positions
New/additional staff
New vendors and contractors
Change in workload
Change in compliance requirements (due to changes in policies, contracts, laws, or regulations)
Change in goals, objectives, or performance measures
Increased undesirable performance or instances (such as injuries, complaints, customer dissatisfaction,
etc.)
Change in any risks previously identified for your team/department
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Other (please specify)
3. Describe the complexity of the key processes in your team or department:
Complexity is a measure of the difficulty in performing a process or function. As a process or function
becomes more complex, the greater the opportunity for errors.
Very high complexity
High complexity
Medium complexity
Low complexity
Very low complexity
Please provide any comment related to complexity, if any.
4. Are there adequate and up-to-date documented policies and procedures to perform your job
responsibilities?
Yes, documented policies and procedures are adequate and up-to-date
Documented policies and procedures are adequate but not updated regularly
Documented policies and procedures need improvement
No – Please describe how the responsibilities and requirements are communicated in a clear and
consistent manner.
5. Please select the compliance requirements with applicable Federal/State/Local laws and regulations
and professional standards (e.g. CEQA, NERC, OSHA, EMT licensure/certification) for each of
divisions/functions of your department listed below:
More than a few laws/regulations and/or professional standards specific to the division's responsibilities
need to be met
One or two laws/regulations and/or professional standards specific to the division's responsibilities need
to be met
No requirement to meet any laws/regulations or professional standards specific to the division's
responsibilities
6. Describe what can possibly prevent your team/department from meeting its goals and objectives in
2024. Select all that apply.
Financial constraints
Staffing constraints
Limited skills, knowledge, experience, training
Technology issue
Inefficiency in process and/or communication
Ambiguity in roles and responsibilities
Lack of, or ineffective, internal controls
Community pressure
State/Federal regulations
Other (please specify)
7. Describe the activities to monitor the achievement of the goals in your team or department:
Example – Periodic reporting, periodic meetings, spot checks by management, periodic audits by external
organizations such as consultants and the Federal government, etc.
For all significant performance goals/compliance requirements, there is a periodic reporting process to
ensure performance goals/compliance requirements are met
For only some of significant performance goals/compliance requirements, there is a periodic reporting
process to ensure performance goals/compliance requirements are met
Overall, there is no mechanism to monitor the status of performance goals/compliance requirements
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Please provide comments related to monitoring the achievement of your department’s goals, if any.
To help us identify potential risks, please list your team/department’s Strengths, Weaknesses,
Opportunities, and Threats (SWOT) for achieving its missions, goals, and objectives. Typically,
strengths and weaknesses are internal aspects of team/department/organization, while opportunities
and threats are found externally.
8. Describe up to three STRENGTHS of your team or department:
Strengths refer to the resources or capabilities that help the team/department accomplish its mission and
serve the public. These can be things like competitive advantages, available resources, engaged
community, strong balance sheet, utilized technology and so on.
9. Describe up to three WEAKNESSES of your team or department:
Weaknesses refer to the areas where the team/department needs to improve to accomplish its mission.
These can include things like deficiencies in resources and capabilities, inefficient use of available
technologies, barriers or inability to collaborate among different departments, lack of effective
communication, mission or direction, high levels of debt, financial or human resources constraints and so
on.
10. Describe up to three OPPORTUNITIES for your team or department:
Opportunities are any area where the team/department can grow. They are often related to the
organization’s strengths. Outside factors that affect the organization in a favorable way can include things
like; offering more products or services to citizens, lower costs through new technology and so on.
11. Describe up to three THREATS for your team or department:
Threats include the local or national economy, laws and regulations and any other external issue that can
harm or affect the team/department successfully meeting goals. Common threats include things like rising
costs for housing/living, increasing competition, tight labor supply, billing rates and so on.
12. Using the bulleted list within the risk framework below, please select what you consider to be the top
five enterprise risks to the City of Palo Alto.
Environmental (factors external to the organization)
• Reputation - The opinions and perceptions of the public and customers toward the organization.
• Regulatory - Laws and standards, which the organization must comply with in its operations.
• Citizen Demands - The effect that current citizens demands have on the decisions made by management for aligning tactical
plans with the business strategy and the allocation of resources.
• Economy - The effect that current external conditions have on the decisions made by management for aligning tactical plans
with the business strategy and the allocation of resources.
• Legal - The potential for an unforeseen event to cause civil or criminal litigation for the organization or its elected leaders,
directors, officers, and employees.
• Technologies - The evolution of technology both within and outside of the organization’s industry.
Strategy (planning and decision-making)
• Strategic Change - The ability of the organization to modify its processes in order to either align with its current strategy and
business model or to achieve a different strategic goal.
• Investments - The portfolio of both intangible and tangible investments held by the organization, and the implications of these
assets on the resources, financial viability, and operations of the organization. The effect on liquidity the ability of current
assets to meet current liabilities when due.
• Planning and Budgeting - Details of the organization’s goals and the financial management necessary to achieving those
goals.
• Financial - The goals of the organization in terms of the structure of its assets and liabilities, including the financing capability
based on its credit worthiness, the ability to receive credit and the use of credit lines to achieve its business objectives.
• Inter-government Relations - The relationship of the organization with other government agencies that have regulatory and
oversight responsibilities and shared services or citizens.
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• Compliance Management - The continuous monitoring of the organization’s ability to operate within regulatory requirements
and community standards.
• Resource Allocation – The process for assigning and managing assets that support the organizations strategic goals.
Organization (attributes of departments)
• Governance - The role, composition, and major activities of the governing body of the organization in providing direction and
oversight for the organization
• Empowerment and Values - The ability of senior members of the organization to effectively delegate power or authority to
other members of the organization.
• Communication - The methods of communication commonly used in the organization and the effectiveness of this
communication on the operations of the organization.
• Ethics and Code of Conduct - The set of rules outlining the ethical practices expected of management and employees of the
organization.
• Leadership and Authority - The members of the organization who hold power and their ability to exercise this power
effectively.
• Organizational Structure - The configuration of units and workflows to align the behavior of the units to the higher-level goals
of the organization.
• Succession Planning - The planning and processes to ensure that there are highly qualified people in key leadership
positions today and in the future.
• Human Capital Management - The set of practices an organization uses for recruiting, managing, developing, and optimizing
employees, including performance management (The process of creating expectations for performance, monitoring progress,
and measuring the results) and training (The ability for employees to gain and develop necessary tools to ensure effective
operations).
• Safety - The organization strives to provide a safe working environment by effectively mitigating the risks to the safety of its
employees.
Process and Operations (functional effectiveness and policies and procedures) Externa
• Contracts - Contracts are adequately structured to address and mitigate risks.
• Efficiency - Processes are up-to-date and efficient, resulting in efficient operations and output.
• Accounting - The timely and accurate tracking of the financial position of the organization.
• Payroll - The policies, processes, and systems in place to ensure that employee compensation is reliable, timely, and
accurate.
• Fraud - The organization uses internal controls to prevent and/or detect fraud.
• Procurement/Sourcing – The ability to acquire the necessary goods and services for operation and the process of vetting,
selecting and managing supplier, vendors and contractors.
• Human Resources - The knowledge, skills and experiences, and resources among personnel, which allow for the execution
of the organization’s business plan and achievement of its critical success factors.
• Information Systems - The facilities, systems, and connectivity in place to support data processing.
• Vendor Management - The need for the organization to continuously monitor the quality and reliability of vendors it uses in
the course of its business.
• Change Management - Management adapts appropriately to the evolution of the processes and operations of the
organization.
Information (data governance)
• Data Integrity - Data used for making management decisions, recording information, and reporting financial activity is
accurate, complete, and reliable.
• Access - The right to view or manipulate data is carefully granted and monitored to prevent the mishandling of data
• Retention - The policies used by the organization to determine document retention in terms of the form of documents, how
these documents are stored, and for how long these should be maintained.
• Availability - Relevant critical information is available when needed in order to maintain the organization’s critical operations
and processes, including when a disaster or unplanned disruption occurs
• Privacy - Organization policies are in place to ensure the correct treatment of sensitive information held by the organization.
• Security – Any event that could result in the compromise of organizational data. (I.e. unauthorized use, loss, damage,
disclosure or modification of organizational data).
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13. Please use the click and drag feature to rank the five enterprise risks that you selected into a priority
order, with #1 being the highest.
14. Please describe why you selected them as the top five risks.
15. How well does the City of Palo Alto manage activities to mitigate these risks?
Well – the City management is aware of the risk and has implemented activities to help mitigate this risk
Somewhat well – the City management is aware of this risk, but more effort/activities are needed to help
mitigate this risk
Not well – the City management is either not aware of this risk or hasn’t developed sufficient activities to
help mitigate this risk
16. Are there any other risks that could affect operations that were not included in the risk framework?
17. Please list any potential internal audit activities you recommend based on the risks you identified.
The projects can be consultative/advisory in nature, or provide assurance:
Internal Audit – an objective examination of evidence for the purpose of providing an independent
assessment on governance, risk management, and control processes for the organization.
Advisory and related client service activities, the nature and scope of which are intended to add value
and improve an organization’s governance, risk management, and control processes without the
internal auditor assuming management responsibility.
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December 12, 2023
City of Palo Alto
Office of the City Auditor
FY2024 Annual Audit Plan
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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.
INTRODUCTION ............................................................................................................. 1
RISK ASSESSMENT RESULTS ..................................................................................... 3
PROPOSED AUDIT PROJECTS FOR FY2024 .............................................................. 4
APPENDICES ................................................................................................................. 6
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Introduction
Introduction
The purpose of the audit activities performed by the Office of the City Auditor (OCA) for the City of Palo Alto (the
City) is “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”, according to the Palo Alto Municipal Code (Section 2.08.130).
It requires the City Auditor prepare an annual audit plan for the City Council’s approval at the beginning of each
fiscal year.
In accordance with the Task #1 and Task #2 of the Baker Tilly agreement (City of Palo Alto Contract No,
C21179340), Baker Tilly US, LLP (Baker Tilly) performed the initial risk assessment after having started to serve
as the OCA in October 2020 and submitted in early 2021 the FY21-FY22 annual audit plan. For the second
year, the OCA updated the initial risk assessment and submitted the FY22-FY23 audit plan. This report includes
the proposed FY23-FY24 audit plan.
The Task #4 of the agreement requires execution of the approved annual audit plans and preparation of a task
order for each project listed in the plan. The OCA will seek approval of contract task orders iteratively during
FY24 in order to remain agile and accommodate changes to the plan as time passes.
Conformance with Local Ordinances and Standards
Section 2.08.130 of the Palo Alto Municipal Code defines that the mission of the OCA is to promote honest,
efficient, effective, economical, and fully accountable and transparent city government. Audits are to be
conducted and nonaudit services provided in accordance with Government Auditing Standards, as established
by the Comptroller General of the United States, Governmental Accountability Office.
The following duties of the City Auditor exist regarding the plan and scope of internal audits.
Palo Alto City Charter
Article IV Sec. 12 requires the City Auditor to perform the following:
– Conduct audits in accordance with a schedule approved by the City Council and may conduct
unscheduled audits from time to time.
– Conducts internal audits of all the fiscal transactions of the City.
Title 2 Administrative Code
Section 2.08.130 requires the City Auditor to perform the following:
– Prepare an annual audit plan for city council approval.
– Identify the preliminary objectives of each audit to be performed, reflecting the purpose of the
engagement and a preliminary description of the areas that may be addressed.
– Conduct performance audits and perform nonaudit services of any city department, program, service,
or activity as approved by the city council.
California Government Code
Section 1236 requires all cities that conduct audit activities to conduct their work under the general and
specified standards prescribed by the Institute of Internal Auditors (IIA) or the Government Auditing
Standards (GAO) issued by the Comptroller General of the United States, as appropriate.
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INTRODUCTION
Audit Activity Type
The OCA will conduct performance audits and perform financial/operational analyses of any City department,
program, service, or activity as approved by the City Council in accordance with the Baker Tilly agreement.
Performance Audits
According to the Government Auditing Standards (GAO-18-568G, Section 1.21 and 1.22, page 10-12),
performance audits provide objective analysis, findings, and conclusions to assist management and those
charged with governance and oversight with, among other things, improving program performance and
operations, reducing costs, facilitating decision making by parties responsible for overseeing or initiating
corrective action, and contributing to public accountability. Performance audits may include the following four
(4) audit objectives:
– Program effectiveness and results
– Internal control design and effectiveness
– Compliance with laws, regulations, and policies
– Prospective analysis
Audit Planning Considerations
While maintaining its independence and objectivity in accordance with standards, the City Auditor considers a
variety of matters when developing the Annual Audit Plan, including but not limited to:
– Risk assessment – the OCA performed a risk assessment and summarized the results in a separate
report (Task #2). Generally speaking, audit activities target high(er) risk areas. The results are shown
the following page.
– Ability to add value – audit seeks to add value through independent and objective analysis.
– City Council – the City Auditor reports to the City Council and seeks input on audit priorities.
– Coverage and Prior Audits – the City Auditor considers prior audits conducted by the OCA, the financial
audit, and other audit and consulting reports recently issued.
– “Ripeness” and On-Going Initiatives – certain risk areas may be addressed through operational
activities, which could mean they are not be ripe for audit to add value.
– Scheduling – the City Auditor takes into consideration the timing of an audit and other on-going
initiatives that directly relate. Putting an undue burden on City staff may exacerbate the risk at hand or
other interrelated risks.
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Risk Assessment Results
The OCA performed a citywide risk assessment to plan for FY2024 audit activities and documented the
methodology and the detailed results in a separate Risk Assessment Report. In summary, we identified the
following areas rated as High or Moderate risks. In determining the audit activities to be performed in FY2024,
we further reviewed these risks and functional areas and considered the matters listed in the previous page.
Department Function Risk Area Total Risk
Score
Planning and Development
Services Building Building Permit & Inspection Process 22.8
Public Works Wastewater Treatment Wasterwater Treatment Capital Program 22.4
Planning and Development
Services Development Services Building Permit & Inspection Process 20.5
Public Works Structures and Grounds ADA Compliance / Flood protection capital project 20.0
Administrative Services Purchasing Purchasing Card Program / Vendor Master File 18.6
Police Field Services Psychiatric Emergency Response Team (PERT) Program 18.2
Utilities Electric Administration Power Purchase Agreement 18.2
Community Services Administration and Human Services Human Services Resource Allocation Process (HSRAP) 18.0
Community Services Arts and Sciences Junior Museum and Zoo (JMZ) Operation 18.0
Community Services Recreation and Cubberley Contract Management 18.0
Police Technical Services 911 Operations 17.2
Community Services Animal Shelter Contract Management 16.9
Fire Emergency Response Emergency Preparedness (Foothills Fire Master Plan) 15.8
City Manager Administration and City Management Citywide Risk Management 15.6
Fire Administration Safety and Wellness 15.6
Planning and Development
Services Planning and Transportation Code Enforcement 15.4
Office of Transportation Programs Intersection safety improvements 15.4
Utilities Electric Engineering (Operating) Utility Asset Management 15.3
Public Works Airport Airport Operations 15.1
Human Resources Administration, Employee Org
Development and HR Systems HR Strategy / Succession Planning 15.1
Police Police Personnel Selection Recruitment and retention 14.9
Administrative Services Treasury / Revenue Collection /
Warehouse Investment Management 14.9
Administrative Services Real Estate Property Management 14.7
Public Works Engineering Services Animal Shelter Renovation 14.3
Community Services Open Space, Parks and Golf Emergency Preparedness (Foothills Fire Master Plan) 14.1
Information Technology Operations PCI/DSS Compliance 14.1
Administrative Services Accounting Grant Management 14.0
Office of Emergency Services Emergency Services Emergency preparedness (Foothills Fire Mitigation Program) 13.9
Utilities Electric Customer Service Utility Billing 13.9
Information Technology Project Services AMI Implementation 13.8
Library Administration Business Operations (Donations and grants; Inventory
Management; Fines, Purchasing, etc.)13.8
Human Resources Risk Mgmt., Safety, Workers'
Compensation HR Risk Management / Workplace Safety 13.8
Police Law Enforcement Services Evidence 13.8
Utilities Water Customer Service Utility Billing 13.6
City Manager Economic Development Economic Development 13.4
Human Resources Recruitment Recruitment Process 13.3
Utilities Electric Resource Management Rate setting and adjustments 13.2
Public Works Administration Safety and Wellness 13.0
Utilities Gas Customer Service Utility Billing 13.0
Utilities Fiber Optics Customer Service Utility Billing 13.0
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PROPOSED AUDIT PROJECTS FOR FY2024
Proposed Audit Projects for FY2024
Summary
The proposed audits and follow-up project for FY2024 are listed in the next page. The projects were selected
from the auditable units that were rated as High or Moderate in the results of our risk assessment and selected
based on some factors such as risk rating, the pervasiveness of the process or control, the audit coverage, the
timing of projects, and the value-adding activities that help the City enhance the ability to manage risks,
strengthen accountability, and improve efficiency and effectiveness.
The preliminary audit objectives are described for each audit listed. These objectives and scope will be further
defined based on the result of the engagement level risk assessment performed at the beginning of each audit.
Amendments to this audit plans may need to be proposed during FY2024 in response to changes in the City’s
environment such as organizational structure, operations, risks, systems, and controls.
For each audit, a task order is submitted to the City Council for approval before an audit is commenced. We
prepared three task orders which are included in Appendix. The OCA is seeking approval from the City Council
for three project that are projected to start in January 2024. Those audits are marked “X” in the Seeking
Approval column.
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Proposed Audit Plan for FY2024
Seeking
Approval Function Project Title Audit Objectives Timeline
FY24
Estimated
Hours
FY24 Cost
Public Works
Public Safety Building -
Construction Audit
(Task Order 4.8)
? Monthly invoice review
? Change order testing
? Contingency and allowance testing
? Lien waiver control
? Compliance with insurance requirements
? Closeout testing
? Verify the City’s implementation and adherence to documented project
controls
March 2021 -
March 2024 87 $19,734
X Administrative
Services Purchasing Card Program
? Determine whether procurement cards are used appropriately in
compliance with the City's policy and pertinent laws and regulations
? Evaluate the administration of the Purchasing Card Program for
adequate internal controls to safeguard the City from fraud, waste, and
abuse
January - June
2024 415 $76,540
X Public Works ADA Compliance
Determine whether improvements have been made to make facilities,
programs, and services accessible in accordance with the Transition Plan
and Self-Evaluation Final Study to ensure compliance with the Americans
with Disabilities Act (ADA) of 1990
January - June
2024 385 $73,110
Human Resources Recruitment and Succession
Planning
? Determine the efficiency and effectiveness of the recruitment and hiring
process
? Determine whether a formal succession plan and related policies
proceudres are in place
January - June
2024 290 $58,890
Citywide Grant Management Determine whether the City has adequate interal controls to efficiently and
effectively manage the grant lifecycle
January - June
2024 315 $60,330
Multiple departments Emergency Preparedness Determine whether the City if working to prevent wildfire and adequately
prepared to respond to wildfire
January - June
2024 385 $73,110
Utilities Utility Billing
? Determine whether the internal controls over the utility billing process are
adequate and working effectively to ensure billing is accurate and in
compliance with the City's policy and regulations.
? Determine whether billing adjustments are properly supported and
approved
January - June
2024 385 $72,010
Information
Technology
Payment Card Industry Data
Security Standard (PCI DSS)
Determine whether the internal controls over the payment card processing
are adequate and working effectively for the City and any thrid party service
providor
January - June
2024 370 $69,680
X Citywide Follow-up on Corrective
Actions
Follow up on previous OCA audit reports to ensure corrective actions
included in management responses in each audit report are completed
[This activity will be performed under Task 5 (an annual report on the status
of recommendations made in completed audits)]
December 2023
- June 2024 140 $30,592
TBD Ad Hoc Requests TBD TBD TBD $0
2,772 $533,996
$534,250
$254
FY23 - FY24 Budget
FY24 Ad Hoc / Contingency
FY24
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Appendix A: Resumes
Appendices
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PROFESSIONAL SERVICES TASK ORDER
TASK ORDER FY24-4.21 Purchasing Card Program
Consultant shall perform the Services detailed below in accordance with all the terms and conditions of the
Agreement referenced in Item 1A below. All exhibits referencedFY24 in Item 8 below are incorporated
into this Task Order by this reference. The Consultant shall furnish the necessary facilities, professional,
technical and supporting personnel required by this Task Order as described below.
CONTRACT NO. C21179340
OR PURCHASE ORDER REQUISITION NO. (AS APPLICABLE)
1A. MASTER AGREEMENT NO. (MAY BE SAME AS CONTRACT / P.O. NO. ABOVE): C21179340
1B. TASK O RDER NO.: FY23-4.22
2. CONSULTANT NAME: Baker Tilly US, LLP
3. PERIOD OF PERFORMANCE: START: January 1, 2024 COMPLETION: June 30, 2024
4 TOTAL TASK ORDER PRICE: $69,940
BALANCE REMAINING IN MASTER AGREEMENT/CONTRACT TBD
5. BUDGET CODE_______________
COST CENTER________________
COST ELEMENT______________
WBS/CIP__________
PHASE__________
6. CITY PROJECT MANAGER’S NAME & DEPARTMENT:
Greg Tanaka, Chair of the City Council’s Policy and Services Committee
7. DESCRIPTION OF SCOPE OF SERVICES (Attachment A)
MUST INCLUDE:
SERVICES AND DELIVERABLES TO BE PROVIDED
SCHEDULE OF PERFORMANCE
MAXIMUM COMPENSATION AMOUNT AND RATE SCHEDULE (as applicable)
REIMBURSABLE EXPENSES, if any (with “not to exceed” amount)
8. ATTACHMENTS: A: Task Order Scope of Services B (if any): N/A
I hereby authorize the performance of the
work described in this Task Order.
APPROVED:
CITY OF PALO ALTO
BY:____________________________________
Name __________________________________
Title___________________________________
Date ___________________________________
I hereby acknowledge receipt and acceptance of
this Task Order and warrant that I have authority to
sign on behalf of Consultant.
APPROVED:
COMPANY NAME: ______________________
BY:____________________________________
Name __________________________________
Title___________________________________
Date ___________________________________
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Attachment A
DESCRIPTION OF SCOPE OF SERVICES
Introduction
Attachment A, the Description of Scope of Services, contains the following four (4) elements:
Services and Deliverables To Be Provided
Schedule of Performance
Maximum Compensation Amount and Rate Schedule (As Applicable)
Reimbursable Expenses, if any (With “Not To Exceed” Amount)
Services & Deliverables
Baker Tilly’s approach to conducting an internal audit of Purchasing Card Program involves
three (3) primary steps:
Step 1: Audit Planning
Step 2: Control Review and Testing
Step 3: Reporting
Step 1 – Audit Planning
This step consists of the tasks performed to adequately plan the work necessary to address
the overall audit objective and to solidify mutual understanding of the audit scope,
objectives, audit process, and timing between stakeholders and auditors. Tasks include:
Gather information to understand the environment under review
o Understand the organizational structure and objectives
o Review the City code, regulations, and other standards and expectations
o Review prior audit results, as applicable
o Review additional documentation and conduct interviews as necessary
Assess the audit risk
Write an audit planning memo and audit program
o Refine audit objectives and scope
o Identify the audit procedures to be performed and the evidence to be obtained
and examined
Announce the initiation of the audit and conduct kick-off meeting with key
stakeholders
o Discuss audit objectives, scope, audit process, timing, resources, and
expectations
o Discuss documentation and interview requests for the audit
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Step 2 – Control Review and Testing
This step involves executing the procedures in the audit program to gather information,
interview individuals, and analyze the data and information to obtain sufficient evidence to
address the audit objectives. The preliminary audit objective is to determine whether (1)
Determine whether procurement cards are used appropriately in compliance with the City's
policy and pertinent laws and regulations; (2) Evaluate the administration of the Purchasing
Card Program for adequate internal controls to safeguard the City from fraud, waste, and
abuse. Procedures include, but not limited to:
Interview the appropriate individuals to gain an understanding of the organizational
structure, processes, and controls related to the Purchasing Card Program.
Review 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.
Select a sample of the P-Card transactions
Compare the process and controls against the best practices.
Step 3 – Reporting
In Step 3, the project team will perform tasks necessary to finalize audit working papers,
prepare and review a draft report with the stakeholders, and submit a final audit report. Tasks
include:
Develop findings, conclusions, and recommendations based on the supporting
evidence gathered
Validate findings with the appropriate individuals and discuss the root cause of the
identified findings
Complete supervisory review of working papers and a draft audit report
Distribute a draft audit report and conduct a closing meeting with key stakeholders
o Discuss the audit results, finings, conclusions, and recommendations
o Discuss management responses
Obtain written management responses and finalize a report
Review report with members of City Council and/or the appropriate Council
Committee
Deliverables:
The following deliverable will be prepared as part of this engagement:
Audit Report
Schedule of Performance
Anticipated Start Date: January 1, 2024
Anticipated End Date: June 30, 2024
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Maximum Compensation Amount and Rate Schedule
The not-to-exceed maximum, inclusive of reimbursable expenses (as summarized below) for this
Task is $69,940. The not-to-exceed budget is based on an estimate of 375 total project hours, of
which 15 are estimated to be completed by the City Auditor.
Reimbursable Expenses
We plan to complete all work remote including all interviews and documentation review.
However, during the planning and fieldwork phases of this audit, the City and Baker Tilly may
mutually determine it will be beneficial to perform a portion of the work on-site. Given this
possibility, Baker Tilly could incur reimbursable expenses for this Task.
The not-to-exceed maximum for reimbursable expenses for this Task is $6,500.
The following summarizes anticipated reimbursable expenses:
Round-trip Airfare – $2,000 (1 round trip flights x 2 auditors)
Ground Transportation (car rental or Uber/taxi) - $800
Hotel accommodation - $3,000 (2 rooms x 4 nights)
Food and incidentals – $700
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PROFESSIONAL SERVICES TASK ORDER
TASK ORDER FY24-4.22 ADA Compliance Review
Consultant shall perform the Services detailed below in accordance with all the terms and conditions of the
Agreement referenced in Item 1A below. All exhibits referenced FY24 in Item 8 below are incorporated
into this Task Order by this reference. The Consultant shall furnish the necessary facilities, professional,
technical and supporting personnel required by this Task Order as described below.
CONTRACT NO. C21179340
OR PURCHASE ORDER REQUISITION NO. (AS APPLICABLE)
1A. MASTER AGREEMENT NO. (MAY BE SAME AS CONTRACT / P.O. NO. ABOVE): C21179340
1B. TASK O RDER NO.: FY23-4.23
2. CONSULTANT NAME: Baker Tilly US, LLP
3. PERIOD OF PERFORMANCE: START: January 1, 2024 COMPLETION: June 30, 2024
4 TOTAL TASK ORDER PRICE: $73,110
BALANCE REMAINING IN MASTER AGREEMENT/CONTRACT TBD
5. BUDGET CODE_______________
COST CENTER________________
COST ELEMENT______________
WBS/CIP__________
PHASE__________
6. CITY PROJECT MANAGER’S NAME & DEPARTMENT:
Greg Tanaka, Chair of the City Council’s Policy and Services Committee
7. DESCRIPTION OF SCOPE OF SERVICES (Attachment A)
MUST INCLUDE:
SERVICES AND DELIVERABLES TO BE PROVIDED
SCHEDULE OF PERFORMANCE
MAXIMUM COMPENSATION AMOUNT AND RATE SCHEDULE (as applicable)
REIMBURSABLE EXPENSES, if any (with “not to exceed” amount)
8. ATTACHMENTS: A: Task Order Scope of Services B (if any): N/A
I hereby authorize the performance of the
work described in this Task Order.
APPROVED:
CITY OF PALO ALTO
BY:____________________________________
Name __________________________________
Title___________________________________
Date ___________________________________
I hereby acknowledge receipt and acceptance of
this Task Order and warrant that I have authority to
sign on behalf of Consultant.
APPROVED:
COMPANY NAME: ______________________
BY:____________________________________
Name __________________________________
Title___________________________________
Date ___________________________________
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Attachment A
DESCRIPTION OF SCOPE OF SERVICES
Introduction
Attachment A, the Description of Scope of Services, contains the following four (4) elements:
Services and Deliverables To Be Provided
Schedule of Performance
Maximum Compensation Amount and Rate Schedule (As Applicable)
Reimbursable Expenses, if any (With “Not To Exceed” Amount)
Services & Deliverables
Baker Tilly’s approach to conducting an internal audit of ADA (Americans Disabilities Act)
Compliance involves three (3) primary steps:
Step 1: Audit Planning
Step 2: Control Review and Testing
Step 3: Reporting
Step 1 – Audit Planning
This step consists of the tasks performed to adequately plan the work necessary to address
the overall audit objective and to solidify mutual understanding of the audit scope,
objectives, audit process, and timing between stakeholders and auditors. Tasks include:
Gather information to understand the environment under review
o Understand the organizational structure and objectives
o Review the City code, regulations, and other standards and expectations
o Review prior audit results, as applicable
o Review additional documentation and conduct interviews as necessary
Assess the audit risk
Write an audit planning memo and audit program
o Refine audit objectives and scope
o Identify the audit procedures to be performed and the evidence to be obtained
and examined
Announce the initiation of the audit and conduct kick-off meeting with key
stakeholders
o Discuss audit objectives, scope, audit process, timing, resources, and
expectations
o Discuss documentation and interview requests for the audit
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Step 2 – Control Review and Testing
This step involves executing the procedures in the audit program to gather information,
interview individuals, and analyze the data and information to obtain sufficient evidence to
address the audit objectives. The preliminary audit objective is to determine whether
improvements have been made to make facilities, programs, and services accessible in
accordance with the Transition Plan and Self-Evaluation Final Study to ensure compliance
with the Americans with Disabilities Act (ADA) of 1990. Specifically, we will determine
whether (1) necessary remediation work, projects, or programs are included in the annual
capital budget to meet the ADA Transition Plan Schedules; (2) the progress of the
remediation efforts and any change in laws and regulations are assessed periodically to
ensure continued improvements in ADA compliance; (3) the City monitors the contractor’s
compliance with the contractual requirements to ensure that the City receives necessary
services. Procedures include, but not limited to:
Interview the appropriate individuals to gain an understanding of the organizational
structure, processes, and controls related to the ADA compliance efforts.
Review 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.
Review the relevant documents such as ADA Transition Plan, ADA Self-Evaluation
Report, the Transition Plan Schedule, progress assessment reports, and the contract
with the consultants.
Compare the process and controls against the best practices.
Step 3 – Reporting
In Step 3, the project team will perform tasks necessary to finalize audit working papers,
prepare and review a draft report with the stakeholders, and submit a final audit report. Tasks
include:
Develop findings, conclusions, and recommendations based on the supporting
evidence gathered
Validate findings with the appropriate individuals and discuss the root cause of the
identified findings
Complete supervisory review of working papers and a draft audit report
Distribute a draft audit report and conduct a closing meeting with key stakeholders
o Discuss the audit results, finings, conclusions, and recommendations
o Discuss management responses
Obtain written management responses and finalize a report
Review report with members of City Council and/or the appropriate Council
Committee
Deliverables:
The following deliverable will be prepared as part of this engagement:
Audit Report
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Schedule of Performance
Anticipated Start Date: January 1, 2024
Anticipated End Date: June 30, 2024
Maximum Compensation Amount and Rate Schedule
The not-to-exceed maximum, inclusive of reimbursable expenses (as summarized below) for this
Task is $73,110. The not-to-exceed budget is based on an estimate of 385 total project hours, of
which 15 are estimated to be completed by the City Auditor.
Reimbursable Expenses
We plan to complete all work remote including all interviews and documentation review.
However, during the planning and fieldwork phases of this audit, the City and Baker Tilly may
mutually determine it will be beneficial to perform a portion of the work on-site. Given this
possibility, Baker Tilly could incur reimbursable expenses for this Task.
The not-to-exceed maximum for reimbursable expenses for this Task is $6,500.
The following summarizes anticipated reimbursable expenses:
Round-trip Airfare – $2,000 (1 round trip flights x 2 auditors)
Ground Transportation (car rental or Uber/taxi) - $800
Hotel accommodation - $3,000 (2 rooms x 4 nights)
Food and incidentals – $700
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PROFESSIONAL SERVICES TASK ORDER
TASK ORDER FY24-05 Various Reporting & City Hotline (Modified)
Consultant shall perform the Services detailed below in accordance with all the terms and conditions of the
Agreement referenced in Item 1A below. All exhibits referenced in Item 8 below are incorporated into this
Task Order by this reference. The Consultant shall furnish the necessary facilities, professional, technical
and supporting personnel required by this Task Order as described below.
CONTRACT NO. C21179340
OR PURCHASE ORDER REQUISITION NO. (AS APPLICABLE)
1A. MASTER AGREEMENT NO. (MAY BE SAME AS CONTRACT / P.O. NO. ABOVE): C21179340
1B. TASK O RDER NO.: FY24-05
2. CONSULTANT NAME: Baker Tilly US, LLP
3. PERIOD OF PERFORMANCE: START: July 1, 2023 COMPLETION: June 30, 2024
4 TOTAL TASK ORDER PRICE: $120,592 90,000
BALANCE REMAINING IN MASTER AGREEMENT/CONTRACT TBD
5. BUDGET CODE_______________
COST CENTER________________
COST ELEMENT______________
WBS/CIP__________
PHASE__________
6. CITY PROJECT MANAGER’S NAME & DEPARTMENT:
Greg Tanaka, Chair of the City Council’s Policy and Services Committee
7. DESCRIPTION OF SCOPE OF SERVICES (Attachment A)
MUST INCLUDE:
SERVICES AND DELIVERABLES TO BE PROVIDED
SCHEDULE OF PERFORMANCE
MAXIMUM COMPENSATION AMOUNT AND RATE SCHEDULE (as applicable)
REIMBURSABLE EXPENSES, if any (with “not to exceed” amount)
8. ATTACHMENTS: A: Task Order Scope of Services B (if any): N/A
I hereby authorize the performance of the
work described in this Task Order.
APPROVED:
CITY OF PALO ALTO
BY:____________________________________
Name __________________________________
Title___________________________________
Date ___________________________________
I hereby acknowledge receipt and acceptance of
this Task Order and warrant that I have authority to
sign on behalf of Consultant.
APPROVED:
COMPANY NAME: ______________________
BY:____________________________________
Name __________________________________
Title___________________________________
Date ___________________________________
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Attachment A
DESCRIPTION OF SCOPE OF SERVICES
Introduction
Attachment A, the Description of Scope of Services, contains the following four (4) elements:
Services and Deliverables To Be Provided
Schedule of Performance
Maximum Compensation Amount and Rate Schedule (As Applicable)
Reimbursable Expenses, if any (With “Not To Exceed” Amount)
Services & Deliverables
Baker Tilly will provide the following services in Task 5:
Quarterly Reports
Annual Status Report
Provision of the City Hotline
Office Administrative Functions, including quarterly follow-up activities and testing of
corrective actions for the completed audits
Deliverables:
Legislative documents will be prepared to present the financial statements and reports
prepared by an external auditor to the Finance Committee
Quarterly Reports (4 in FY24)
Annual Status Report
Schedule of Performance
Anticipated Start Date: July 1, 2023
Anticipated End Date: June 30, 2024
Maximum Compensation Amount and Rate Schedule
The not-to-exceed maximum, inclusive of reimbursable expenses (as summarized below) for this
Task is $120,592 90,000. The not-to-exceed budget is based on an estimate of 440 300 total
project hours, of which 170 are estimated to be completed by the City Auditor.
Reimbursable Expenses
Baker Tilly anticipates several site visits by the City Auditor throughout FY2024 planning one
on-site fieldwork week. Given this possibility, Baker Tilly could incur reimbursable expenses
for this Task.
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The not-to-exceed maximum for reimbursable expenses for this Task is $19,500 19,000.
The following summarizes anticipated reimbursable expenses:
Round-trip Airfare – $6,000 (6 round trip flights)
Ground Transportation (car rental or Uber/taxi) - $2,400
Hotel accommodation - $9,000 (24 nights)
Food and incidentals – $2,100 1,600
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4
1
3
Policy & Services Committee
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: City Auditor
Meeting Date: December 12, 2023
Report #:2310-2182
TITLE
Office of City Auditor Presentation of the Wastewater Treatment Plant Agreement Audit
Report; CEQA Status - Not a Project
RECOMMENDATION
The City Auditor recommends that the Policy and Services Committee recommend the City
Council approve the Wastewater Treatment Plant Agreement Audit 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 (ID#13914)1, the OCA identified risks associated with
wastewater treatment plant operations.
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
1 https://www.cityofpaloalto.org/files/assets/public/v/8/agendas-minutes-reports/agendas-minutes/city-council-
agendas-minutes/2022/20220404/20220404pccsmamendedlinked1.pdf
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3
and documents in our audit period (from July 1, 2020, to May 30, 2022) for control testing, such
as billing and compliance monitoring activities.
FISCAL/RESOURCE IMPACT
STAKEHOLDER ENGAGEMENT
ENVIRONMENTAL REVIEW
ATTACHMENTS
APPROVED BY:
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December 12, 2023
City of Palo Alto
Office of the City Auditor
Wastewater Treatment Plant Agreement Audit
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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
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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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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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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.
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4
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7
Policy & Services Committee
Staff Report
From: City Auditor
Report Type: ACTION ITEMS
Lead Department: City Auditor
Meeting Date: December 12, 2023
Report #:2310-2183
TITLE
Office of the City Auditor Presentation of the Investment Management Audit Report; CEQA
Status - Not a Project
RECOMMENDATION
The City Auditor recommends that the Policy and Services Committee recommend the City
Council approve the Investment Management Audit 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 (ID#13914)1, the OCA identified risks associated with
Investment Management.
ANALYSIS
The objectives of this review were to:
1) Determine whether adequate controls are in place and working effectively to ensure
that investments are properly managed in accordance with the investment policy.
2) Assess the efficiency and the effectiveness of the investment portfolio management
against the best practice.
1 https://www.cityofpaloalto.org/files/assets/public/v/8/agendas-minutes-reports/agendas-minutes/city-council-
agendas-minutes/2022/20220404/20220404pccsmamendedlinked1.pdf
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4
1
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The OCA evaluated the processes and controls that safeguard the City’s investment of pooled
idle cash to which the City’s Investment Policy is applied to and tested the selected controls by
reviewing a sample of investment activities between July 1, 2020, to March 26, 2023.
FISCAL/RESOURCE IMPACT
STAKEHOLDER ENGAGEMENT
ENVIRONMENTAL REVIEW
ATTACHMENTS
APPROVED BY:
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December 12, 2023
City of Palo Alto
Office of the City Auditor
Investment Management Audit
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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 .......................................................................................................... 10
APPENDICES ............................................................................................................... 16
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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 an Investment Management Audit based on the approved Task
Order 4.17. The objectives of this review were to:
1) Determine whether adequate controls are in place and working effectively to ensure that
investments are properly managed in accordance with the investment policy.
2) Assess the efficiency and the effectiveness of the investment portfolio management against the
best practice.
Report Highlights
Finding 1: Segregation of duties and oversight of investment activities
(Page 10) The City’s Administrative Services Department (ASD)’s Treasury Division includes the
investment function. The day-to-day operations of the investment function are
performed by the Manager of Treasury, Debt, Investment (Manager). The Assistant
Director of ASD (Assistant Director) oversees the function and has delegated the
responsibility for managing the investment program to the Manager and authorized
him to enter into the investment within the parameters set in the City’s Investment
Policy.
The Manager performs all tasks to manage the investment program as well as
initiating wire transactions among all responsibilities of the Treasury Division. While an
approval is required prior to sales of investments, formal independent reviews of
investment purchase decisions prior to purchases are not in place. When the Manager
is out of office, there is no backup personnel to buy/sell securities. The limited staffing
of the Treasury Division and untimely authorization of investment activities cause a
concern for the inadequate segregation of duties in the investment function even
through there are some segregations of duties: the purchased investments are
required to be delivered to the City’s safekeeping custodian and recorded in the City’s
accounting system by the Accounting team.
Without adequate segregation of duties, the City has a higher risk of not preventing
and detecting errors and fraudulent transactions in a timely manner. As mitigating
controls, increased monitoring and oversight of the investment function are required.
Key Recommendations
The City should implement a formal process for a review and approval of investment
activities by the Assistant Director and, if required, the Director prior to placing an
order to buy or sell securities. Approvals should be documented.
Additionally, the City should reassess the City’s Investment Policy to ensure that the
City will comply with the requirement to perform a monthly performance review
described in the City’s Investment Policy and address Section 53607 of California
Government Code that requires submission of a monthly report of investment
transactions to the City Council.
Furthermore, the City should continue the efforts to adjust the staffing of the
investment function to assign responsibilities to ensure adequate internal controls are
in place for prevention of the loss of public funds arising from errors, imprudent
actions, and fraud.
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Finding 2: Supporting documents for investment activities
(Page 13) The OCA reviewed 58 out of 850 investment activities from July 1, 2020, to March 26,
2023, and noted inadequate or lack of supporting documents related to the following:
Manager’s investment decisions
Quotations from authorized brokers and dealers
Qualification of brokers and dealers
Broker’s acknowledgement of the applicable California Government Code
sections and the City’s Investment Policy
Adequate supporting documents for investment decisions and transactions are
important for transparency and accountability. The supporting documents provide the
necessary information to demonstrate the validity, accuracy, and compliance to the
approvers of the decisions and transactions and the oversight functions such as
auditors and an oversight committee.
Key Recommendations
The City’s ASD should implement a procedure to assemble and maintain adequate
supporting documents such as the cash flow forecasts and evaluation of quotations
for each investment decision and transaction to enable the approvers to review and
approve them prior to purchases/sales and to allow the oversight functions to evaluate
the validity, accuracy, and compliance when needed.
Additionally, the City should update the City’s Investment Policy to require the brokers
and dealers who wish to sell and buy securities to the City to provide documentation
showing their financial condition and relevant registration. The City should also require
them to certify in writing that they reviewed the applicable California Government
Code sections and the City’s Investment Policy. An annual review should be also
conducted to maintain the List of Authorized Brokers and Dealers with the recent
status.
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Introduction
1 Section 53600.3: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=53600.3.&lawCode=GOV
Objective The objectives of this review were to:
1) Determine whether adequate controls are in place and working effectively to
ensure that investments are properly managed in accordance with the
investment policy.
2) Assess the efficiency and the effectiveness of the investment portfolio
management against the best practice.
Background The City of Palo Alto (City) invests idle cash pooled from all sources and all
funds in accordance with the California Government Code and the City’s
Investment Policy.
California Government Code states that trustees who are governing bodies or
individuals authorized to make investment decisions on behalf of local agencies
investing public funds are subject to the prudent investor standard that requires a
trustee to act with care, skill, prudence, and diligence under the circumstances
then prevailing that a prudent person acting in a like capacity and familiarity with
those matters would use in the conduct of funds of a like character and with like
aims, to safeguard the principal and maintain the liquidity needs of the agency.1
The City follows the prudent investor standard and defines the following
investment objectives in the City’s Investment Policy:
1. Ensure the safety of the public funds
2. Maintain the liquidity to meet the City’s financial obligations
3. Achieve a reasonable yield on the City’s investment portfolio
The City’s Administrative Services Department (ASD) is responsible for cash
management and investment activities. The Assistant Director of ASD who is
authorized to make all investment transactions and responsible for managing the
investment program oversees the activities while the Manager of Treasury, Debt,
Investment (Manager) performs the day-to-day responsibilities, including
purchasing and selling securities, recording investment transactions, maintaining
the cash flow forecast, revenue analysis, and revenue projection spreadsheets.
The Note 3 in the City’s Annual Comprehensive Financial Report (ACFR) as of
June 30, 2022, shows that cash and investments available for operations were
$553M as shown in Table 1:
Table 1 – Cash and Investment Classification (in thousands)
Source: page 64, Note 3, City of Palo Alto FY2022 Annual Comprehensive Financial Report
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INTRODUCTION
The City’s investment Policy describes limitations on types, maturity periods, and
amounts of investments in accordance with the Section 53601 of the California
Government Code. These limitations are summarized in the Note 3 in the City’s
ACFR as of June 30, 2022 (Table 2 below).
The ASD’s goals and key performance measures in the FY2023 Adopted
Operating Budget include the following investment-related goal and key
performance measure:
The ASD submits a quarterly report to the City Council that provides the
information on the City’s investment portfolio (Appendix A) as required by the
Section 53646 of the California Government Code.
Table 2 – Investments Authorized by the Investment Policy and Debt and Trust Agreements
Source: page 65, Note 3, City of Palo Alto FY2022 Annual Comprehensive Financial Report
See the footnotes at
https://www.cityofpaloalto.org/files/assets/public/v/1/administrative-services/financial-reporting/comprehensive-annual-financial-
reports-cafr/current-2011-cafrs/2022-acfr-final/city-of-palo-alto-acfr-fy2022-final-secured-2.pdf
Goal: Ensure public funds and assets are invested prudently and are well-managed.
Objectives:
• Ensure sufficient cash is always available to meet current expenditures.
• Maintain a reasonable rate of return on investments while prioritizing the safety and liquidity
needs.
• Invest in sound Environmental, Social, and Governance (ESG) securities, which include green
and sustainable bonds, when available and appropriate, in alignment with the Investment Policy.
Key Performance Measure:
FY2020 Actuals FY2021 Actual FY2022 Estimated FY2023 Adopted Budget
Annual percentage yield on
investments 2.22% 1.72% 1.70% 1.80%
Source: page 208, City of Palo Alto FY2023 Adopted Operating Budget
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INTRODUCTION
2 The Investment Policy does not cover funds held by the California Public Employees Retirement System (CalPERS), the California
Employers’ Retiree Benefit Trust (CERBT), Deferred Compensation program (ICMA, Hartford), the Authority for California Cities Excess
Liability (ACCEL), and the Public Agency Retirement Services (PARS) Section 115 IRREVOCABLE Trust.
3 Judgmental sampling is a non-statistical sampling that involves selecting a sample based on auditors’ experience, knowledge, and
professional judgment and is appropriate when auditors do not need to draw conclusions about the population.
4 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.
Scope The OCA evaluated the processes and controls that safeguard the City’s
investment of pooled idle cash to which the City’s Investment Policy is applied
to2 and tested the selected controls by reviewing a sample of investment
activities between July 1, 2020, to March 26, 2023 (audit period).
Methodology To achieve the audit objectives, the OCA performed the following procedures:
Reviewed the pertinent laws, policies, and guidelines related to investments.
Gathered the City’s financial and management reports related to investments.
Interviewed the appropriate individuals to understand the roles and
responsibilities, processes, and controls related to investment activities.
Judgmentally3 selected a sample of investments purchased and sold during
our audit period in order to cover all three fiscal years in our audit period, all
brokers used, all types of investments, and all approval workflow types.
Reviewed supporting documents for controls performed and approvals for the
selected investment activities.
Used the California Debt and Investment Advisory Commission (CDIAC) and
the Government Finance Officers Association (GFOA) as best practices.
Compliance
Statement
This audit activity was conducted from March 2023 to June 2023 in accordance
with generally accepted government auditing standards, except for the
requirement of an external peer review4. 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 the dedicated Manager of Treasury,
Debt, Investment maintained the detailed spreadsheets to monitor the cash flow
forecast and keep track of the compliance with the investment restrictions. We
also observed the adequate supporting documents maintained by the detail-
oriented Accounting team who posts the investment transactions in the City’s
accounting system and reconciles the transactions.
The Office of the City Auditor greatly appreciates the support of the Treasury and Accounting
Divisions of the Administrative Services Department in conducting this audit activity.
Thank you!
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Detailed Analysis
Investment
Policy
The City’s Investment Policy describes the following internal controls over the City’s
investment activities:
Roles and Responsibilities
The Director of ASD/Chief Financial Officer (Treasurer)
o Must approve any sale of securities from the City’s portfolio
The Assistant Director of ASD
o Is charged with the responsibility to manage the investment portfolio
o Needs to approve a transfer more than total of $10 million a day from the
City’s general account to any one financial institution
Manager and Analyst
o Are directed and supervised by Assistant Director of ASD
o Prepare the quarterly report and record investment transactions (type of
investment, amount, yield, and maturity)
Custodian
o All securities (with a few exceptions listed in the City’s Investment Policy)
must be delivered to the City’s safekeeping custodian
List of Authorized and Prohibited Investments
The investments authorized by Section 53601 of California Government Code are
reflected in the City’s Investment Policy
List of Authorized Brokers and Dealers
Brokers and dealers meeting the City’s two requirements must be approved by
the Assistant Director before they are added to the City’s List of Authorized
Brokers and Dealers
Brokers and Dealers will be removed from the list if a history of problems is
developed
Reporting
On a monthly basis, the ASD reviews performance against the City’s Investment
Policy
On a quarterly basis, the ASD reports investment activities, including the
portfolio’s performance and compliance with the City’s Investment Policy to the
City Council, as well as a detailed list of all securities and the City’s ability to meet
expenditure requirements over the next six months
Policy Review
Annually, the ASD presents a proposed investment policy to the City Council
during the annual budget process
The Appendix B is the flowchart showing the current processes and controls in place.
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DETAILED ANALYSIS
5 https://www.treasurer.ca.gov/cdiac/LAIG/guideline.pdf
6 For example, the Investment Advisory Committee is mentioned in the investment polices of City of San Diego and City of Burbank; The
Investment Committee is mentioned in the investment policies of City of Riverside and City of Beverly Hills.
Best Practices
and
Benchmarking
The California Debt and Investment Advisory Commission (CDIAC) provides
guidance to local governments in California to improve the public finance practice.
The CDIAC’s publication, Local Agency Investment Guidelines 5, includes the
following recommendations.
The Annual Investment Policy
Although the California Government Code does not specify the elements of an
investment policy for local governments other than counties, it should include at
least the following elements required of counties:
List of authorized investments with percentages by type of security and the
maximum terms
The manner of calculating and apportioning the authorized costs of
investing, etc.
Limits on the receipt of honoraria, gifts, and gratuities
Criteria for selecting brokers and dealers
A requirement that the treasurer provide an investment report
Reporting
The treasurer or designated official should provide the local government’s
legislative body a quarterly investment report that provides the status of the current
investment portfolio. The quarterly investment report should include the following:
A listing of individual securities held at the end of the reporting period by
authorized investment category
Average life and final maturity of all investments listed
Coupon, discount, or earnings rate
Par value, amortized book value and market value
Percentage of the portfolio represented by each investment category
A description of the funds, investments, and programs managed by
contracted parties
A statement of compliance with the investment policy or an explanation for
non-compliance
A statement of the local agency’s ability to meet its pool’s expenditure
requirements for the next six months
In addition to a quarterly investment report required by California Government
Code 53646, the treasurer should submit a monthly report of investment
transactions to the legislative body even though the California Government Code
53607 does not specify the contents of the monthly report of transactions.
Treasury Oversight Committee
Local governments should consider whether an oversight committee is
appropriate. Some cities6 have treasury oversight committees even though the law
does not require them to have such a committee. The more discretion the
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DETAILED ANALYSIS
7 https://www.gfoa.org/materials/investment-policy
8 https://www.gfoa.org/materials/government-relationships-with-securities-dealers
9 https://gfoaorg.cdn.prismic.io/gfoaorg/76b137b8-17e3-42bd-ae9f-7f7be8be50bd_GFOA_sample_investment_policy.pdf
10 Based on the “Revenues broken down by City”, California State Controller’s Office
https://cities.bythenumbers.sco.ca.gov/#!/year/2021/revenue/0/entity_name
treasurer has in making investment decisions, the greater the need for oversight
procedures. The role of the oversight committee should be clearly specified.
The Government Finance Officers Association (GFOA) Investment Policy Best
Practices recommends that the investment policy include the following elements7:
A. Scope and investment objectives
B. Roles, responsibilities, and standards of care – “Standards of care should
include language on prudence……. due diligence, ethics and conflicts of
interest, delegation and authority, and knowledge and qualifications.”
C. Suitable and authorized investments
D. Investment diversification
E. Safekeeping, custody, and internal controls – “Develop guidelines to
enhance the separation of duties and reduce the risk of fraud.”
F. Authorized financial institutions, depositories, and broker/dealers – See the
additional information provided by the GFOA below.
G. Risks and performance standards
H. Reporting and disclosure standards
The GFOA provides recommendations pertaining to selecting securities dealers for
an approved vendor list in its website8 and includes the following in its Sample
Investment Policy9:
“All financial institutions and broker/dealers who desire to become qualified for
investment transactions must supply the following as appropriate:
Audited financial statements demonstrating compliance with state and
federal capital adequacy guidelines
Proof of Financial Industry Regulatory Authority (FINRA) certification (not
applicable to Certificate of Deposit counterparties)
Proof of state registration
Completed broker/dealer questionnaire (not applicable to Certificate of
Deposit counterparties)
Certification of having read and understood and agreeing to comply with
the [entity's] investment policy.
Evidence of adequate insurance coverage.
An annual review of the financial condition and registration of all qualified financial
institutions and broker/dealers will be conducted by the investment officer.”
The OCA compared the City’s Investment Policy as well as the investment policies
of the six California cities that have relatively similar revenue amounts as the City10
to the GFOA Sample Investment Policy (using the elements A through H listed
above) for the benchmarking purpose (see Table 1 below). The GFOA states that
its Sample Investment Policy is presented as a model to help entities customize a
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DETAILED ANALYSIS
policy to fit their needs, constraints, and capabilities, not to supplant an existing
policy.
Table 1: Comparison of Investment Policies
GFOA Recommended Elements Investment Policy for the City of:
Palo Alto Sacramento San Diego Riverside Burbank Berkeley Beverly Hills
A. Scope & objectives √ √ √ √ √ √ √
B. Roles & standards of care ▲
Note 1 √ √ √ √ √ √
C. Authorized investments √ √ √ √ √ √ √
D. Investment diversification ▲
Note 2 √ ▲ ▲ √ √ ▲
E. Safekeeping & internal controls ▲
Note 3 √ √ √ √ √ √
F. Authorized broker/dealers ▲
Note 4 ▲ ▲ √ √ √ √
G. Riks & performance standards ▲
Note 5 √ √ ▲ √ √ ▲
H. Reporting standards ▲
Note 6 ▲ ▲ ▲ ▲ ▲ √
√ = All elements are covered in the policy
▲ = One or more elements are not covered
Note 1: Ethics and conflicts of interest is not discussed while other cities include a section
Note 2: Although dollar and/or percentage limits on securities are listed, an overall diversification strategy/approach is not discussed.
Note 3: Although safekeeping and custody are discussed, some requirements related to "Delivery Versus Payment" and internal controls
are not discussed.
Note 4: Although a list of authorized broker/dealers are maintained, the information and documentation required from them for
authorization are limited.
Note 5: The benchmark(s) to be used for the portfolio performance measurement is not established.
Note 6: Two reporting requirements by California Government Code are not clearly addressed.
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Audit Results
11 The trade date is the day a trader/investor place an order to buy or sell a security.
12 According to the data provided by the management, during FY21, there were 18 settlement netting (totaling $24.3M purchase settlement)
that were processed without approval and, during FY22, there were14 settlement netting (totaling $11.6M).
Finding 1:
Segregation of
duties and
oversight of
investment
activities
The City’s Administrative Services Department (ASD)’s Treasury Division
includes the investment function. The day-to-day operations of the
investment function are performed by the Manager of Treasury, Debt,
Investment (Manager). The Assistant Director of ASD (Assistant Director)
oversees the function and has delegated the responsibility for managing the
investment program to the Manager and authorized him to enter into the
investment within the parameters set in the City’s Investment Policy. The
Manager also enters the investment transactions in the City’s investment
management software, maintains the cash flow forecast, revenue analysis,
and revenue projection spreadsheets, and executes wire transactions. At the
time of this audit in FY2023, there was no Senior Management Analyst who
performed any of these tasks under supervision of the Manager.
The OCA reviewed 58 out of 850 investment activities from July 1, 2020, to
March 26, 2023, and noted the following:
None of purchased investments (45 of 58 investment activities
reviewed) had the evidence of approval by the Assistant Director or
other authorized personnel prior to the trade dates11.
Although the Assistant Director can check the reasonableness of
investment activities using cash flow spreadsheets at the time the
Manager notifies the custodian bank and the Assistant Director of an
investment purchase (within a day or so of a purchase), there is no
evidence of a review because a response from the Assistant Director
is expected only when there is a question or an issue, which did not
happen for the 45 purchased investments that were reviewed (or for
the remaining investments in the audit period).
The Manager prepares the final paperwork for each purchase
(Memorandum) that requires a signature by the Assistant Director for
securities under five years and by both the Assistant Director and the
Director of ASD for securities over five years. The memorandums for
all 45 purchased investments we reviewed were signed by the
required authorized personnel four to 170 days (average 65 days)
after the trade dates.
Wire transfers to the custodian bank initiated by the Manager are
approved by the Assistant Director after an order to buy a security is
placed. However, three of 45 purchased investments we reviewed
did not have any approval because there were no outgoing wire
transfers for these purchases due to settlement netting12 that nets
incoming security maturity and interest earnings against a security
purchase. As an independent review of a wire transaction is the only
documented review the City has formally implemented in the
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AUDIT RESULTS
investment purchasing process, there was no independent review of
these three purchased investments until the memorandums were
signed 11 to 130 days (average 72 days) after the trade dates.
The proposed sale of investments made by the Manager in July 2022
was approved by a designee of the Director of ASD on July 7, 2022.
The detailed listing of the sold investments shows 13 securities
totaling $10.7M (par value) were sold with a net gain of $3.5K on July
12, 13, and 14, 2022, which was accurately reported in a quarterly
report (Investment Activity Report for the Fourth Quarter, Fiscal Year
2022). However, the approval e-mail dated July 7, 2022, from a
designee of the Director of ASD listed only five of 13 securities sold.
According to the Manger, changes had to be made to the approved
list of proposed securities to be sold due to the daily changes in
market values of securities. The Manager sent e-mails to update a
designee of the Director of ASD and the Director of ASD on July 7, 8,
and 13, but there was no documentation of the final approval.
Additionally, a monthly review of performance has not been performed by
the ASD as described in the City’s Investment Policy for many years,
according to the Manager. The City does not have other oversight
mechanism such as an investment advisory committee. Another reporting
requirement is submission of a monthly report of investment transactions to
the legislative body, which is required by Section 53607 of the California
Government Code. However, this reporting requirement is not mentioned in
the City’s Investment Policy.
As described above, the Manager performs all tasks to manage the
investment program as well as initiating wire transactions among all
responsibilities of the Treasury Division. While an approval is required prior
to sales of investments, formal independent reviews of investment purchase
decisions prior to purchases are not in place. When the Manager is out of
office, there is no backup personnel to buy/sell securities. The limited
staffing of the Treasury Division and untimely authorization of investment
activities cause a concern for inadequate segregation of duties in the
investment function even through there are some segregations of duties: the
purchased investments are required to be delivered to the City’s
safekeeping custodian and recorded in the City’s accounting system by the
Accounting team.
Segregation of duties is a key internal control that disperses responsibilities
of a process to more than one individual. Without adequate segregation of
duties, the City has a higher risk of not preventing and detecting errors and
fraudulent transactions in a timely manner. As mitigating controls, increased
monitoring and oversight of the investment function are required.
According to the Assistant Director, the efforts to assign more employees to
perform some of the cash management function tasks currently performed
by the Manager were initiated at the end of our fieldwork of this audit.
Recommendation The City should implement a formal process for a review and approval of
investment activities by the Assistant Director and, if required, the Director
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AUDIT RESULTS
prior to placing an order to buy or sell securities. Approvals should be
documented.
Additionally, the City should reassess the City’s Investment Policy to ensure
that the City will:
Comply with the requirement to perform a monthly performance
review described in the City’s Investment Policy. The City can take
this opportunity to assess the suitability of an investment advisory
committee to execute a monthly performance review to ensure
appropriate investment decisions are made in compliance with the
laws, regulations, and the City’s Investment Policy.
Address the Section 53607 of the California Government Code that
requires submission of a monthly report of investment transactions to
the City Council.
Furthermore, the City should continue the efforts to adjust the staffing of the
investment function to assign responsibilities to ensure adequate internal
controls are in place for prevention of the loss of public funds arising from
errors, imprudent actions, and fraud. The new staff members should receive
adequate training and a procedure manual to perform their job
responsibilities, and succession planning should be reviewed and updated
for the key positions.
Management
Response
Responsible Department(s): Administrative Services Department
Concurrence: Agree
Target Date: February 2024
Action Plan:
The City agrees that a formal process for review and approval of investment
activities by the Assistant Director will provide oversight of investment
activities and transactions. A workplan has been developed for the team
and will be amended to include clear approval processes for the purchase or
sale of securities in advance of the transaction, however, staff does
anticipate some authority to continue to be granted for real time transactions
within approved guidelines and limits. Expected implementation is targeted
for January 2024.
The City concurs with the City Auditor’s recommendation that a monthly
informational report of investment transactions be made available to the City
Council, as required by California Government Code section 53607, and will
implement this practice in January 2024.
The City agrees with segregation of duties in this function will provide
adequate internal controls, additional oversight, and back fill for these
activities when the key staff is on leave. A workplan for this was provided in
early 2023 and under the guidance of an Assistant Director, has
continuously worked on transitioning certain duties to ASD’s analytical staff
and administrative support staff. The workplan will be reviewed and
amended to ensure documented adequate training and a procedure manual
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AUDIT RESULTS
13 The General Investment Guidelines in the City’s Investment Policy states, “This rule will not apply to new issues, which are purchased at
market no more than three (3) working days before pricing, as well as to LAIF, City of Palo Alto bonds, money market accounts and mutual
funds, all of which shall be evaluated separately.”
for job responsibilities is available to other ASD staff. The targeted
completion and transition of these duties is targeted for February 2024.
The analyst assigned to the Treasury Division has been tasked with creating
a desk manual for certain treasury tasks. While full completion of this
manual is not targeted for February 2024, it is continuously being worked on
as the analyst increases exposure and knowledge of treasury operations.
Finding 2:
Supporting
documents for
investment
activities
The Manager maintains the cash flow forecast and revenue projection
spreadsheets to monitor the City’s cash needs and make investment
decisions. According to the Manager, when the City needs to purchase or
sell securities, the Manager verbally communicates the City’s requirements
and needs to the brokers/dealers who are listed on the City’s List of
Authorized Brokers and Dealers (List) approved by the Assistant Director.
The City’s Investment Policy requires brokers and dealers to meet two
conditions before they can be added to the List. The Manager reviews the
information e-mailed by authorized brokers/dealers and decides a security to
purchase/sell. After a purchase/sale of a security, the Manager enters the
trade information in the investment management software and prepares a
Memorandum that will be approved by the Assistant Director and, if
necessary, the Director.
The OCA reviewed 58 out of 850 investment activities from July 1, 2020, to
March 26, 2023, and noted the following:
The printouts of the spreadsheets or the versions of the
spreadsheets that supported the Manager’s investment decisions for
the purchased investments (45 of 58 investment activities reviewed)
are not available as they were not included in the supporting
documents for the wire payments or in the Memorandums.
The General Investment Guidelines in the City’s Investment Policy
encourages the City to obtain three or more quotations on the
purchase or sale of comparable securities13 and take the higher yield
on purchase or higher price on sale whenever possible. However, no
multiple quotations were obtained for any of the 45 purchased
investments we reviewed. In the supporting documents for eight of
45 investment purchases we reviewed, a standard language “Not
required to obtain three or more quotations” was included. For the
remaining investment purchases we reviewed, a standard language,
“No comparable security offering maturing within 30 days of the one
purchased were available” was included. There were no other
documents such as evaluation of securities and the information
obtained from the authorized brokers and dealers to support the
unavailability of a comparable security.
The OCA verified that the brokers and dealers associated with the
selected investment activities were listed in the List of Authorized
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AUDIT RESULTS
Brokers and Dealers. During our audit period, there were two
changes to the List: The List dated 10/27/2020 had a new broker;
The List dated 11/16/2022 also had a new broker. Both changes
were approved by the Assistant Director. However, there were no
supporting documents showing that new brokers and dealers met the
City’s criteria. Additionally, the two requirements in the City’s
Investment Policy do not address Section 53601.5 of the California
Government Code regarding authorized brokers and dealers.
Furthermore, there was no documentation showing the broker’s
acknowledgement of the applicable California Government Code
sections and the City’s Investment Policy.
Adequate supporting documents for investment decisions and transactions
are important for transparency and accountability. The supporting
documents provide the necessary information to demonstrate the validity,
accuracy, and compliance to the approvers of the decisions and transactions
and the oversight functions such as auditors and an oversight committee.
Recommendation The City’s ASD should implement a procedure to assemble and maintain
adequate supporting documents such as the cash flow forecast and
evaluation of quotations for each investment decision and transaction to
enable the approvers to review and approve them prior to purchases/sales
and to allow the oversight functions to evaluate the validity, accuracy, and
compliance when needed.
The City should update the City’s Investment Policy to require the brokers
and dealers who wish to sell and buy securities to the City to provide
documentation showing their financial condition and relevant registration.
The City should also require them to certify in writing that they reviewed the
applicable California Government Code sections and the City’s Investment
Policy. An annual review should be also conducted to maintain the List of
Authorized Brokers and Dealers with the recent status.
Management
Response
Responsible Department(s): Administrative Services Department
Concurrence: Agree
Target Date: January and June 2024
Action Plan:
The City agrees that the evaluation of investment options that are available
at the time of purchase should be performed and documented before an
investment is purchased. Investment offerings are received by the Manager
via email and can be attached to investment paperwork as documentation.
Furthermore, a workplan to formalize review and oversight of investment
activities has been developed outlining expectations for routine reviews of
cash flow and investment status. Expected implementation of this workplan
is targeted for January 2024.
The City agrees that the Investment Policy should be updated to include the
requirements that brokers and dealers who wish to buy or sell securities with
the City must provide documentation of their financial condition and relevant
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AUDIT RESULTS
registration. ASD staff will consider these updates in the next Investment
Policy review by the City Council in June 2024.
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Appendix A: Resumes
Appendices
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Appendix A: City of Palo Alto Investment Portfolio
The following information on the City’s investment portfolio was reported in the Investment Activity Report for the
Second Quarter, Fiscal Year 2023.
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Appendix B: Palo Alto Investment Management Processes and Controls
City of Palo Alto ASD Investment Function
Ad
m
i
n
i
s
t
r
a
t
i
v
e
Se
r
v
i
c
e
s
D
e
p
t
.
Ac
c
o
u
n
t
i
n
g
D
i
v
i
s
i
o
n
M
a
n
a
g
e
r
o
f
T
r
e
a
s
u
r
y
D
i
v
i
s
i
o
n
A
s
s
i
s
t
a
n
t
D
i
r
e
c
t
o
r
o
f
A
S
D
SAP FI
Recording of
Investment
Transactions
Start
(during budget process)
Monitor the City’s
cash flow
Invest? YesNo
Annually, prepare a
Proposed Statement
of Investment Policy
Obtain an
approval by the
Council
Approved
Investment Policy
Authorize Treasury
Manager to enter into
investments within
parameters specified
by the Policy
Maintain Cash
flow and daily
investment
spreadsheets
Account for
investments in
financial statements
(ACFR)
Independent auditor
provides reasonable
assurance about the
financial statements
Report to
Council
Quarterly, prepare a
report on investment
activity, portfolio’s
performance, etc.
Approve updates to
the list of acceptable
dealers
Verbally
communicate to
the dealers the
City’s
requirements and
needs
Daily, review the
options received
from brokers via
email
SymPro
Enter the
trade
information
Place the
information on
the investment in
a temporary
shared folder
Respond to an
email on an
exception basis
Email paperwork
with coversheet
to custodian and
Assistant Director
Prepare wire
paperwork
Review and approve a
quarterly report in the
One Meeting system
Upload and
submit a quarterly
report in the One
Meeting system
US Bank Portal
Initiate a wire
transaction
Send the wire
paperwork via
Docusign to the
approver of the
transaction
Check the
reasonableness of
investment activities
using cash flow
spreadsheet
Memo for trade
tickets to
formalize
paperwork
Approve a memo
via Docusign
Suggest dealers to
be added to/
removed from the
approved list
Investment
over 5 years?
Director of ASD
Approve a memo
via Docusign
Yes
Save the
approved memo
and supporting
documents in the
shared drive
No
Monthly
reconciliation
against SymPro
Approve wire
paperwork via
Docusign
Daily reconciliation
against a daily bank
statement, cash flow
spreadsheet, and SymPro
US Bank Portal
Approve a wire
transaction
Wire payment
Receive an
automatic e-mail
notification
Review by
Director, City
Manager, and
City Attorney
Journal Entries
Prepared
monthly and annually
Sell before
maturity?No
Propose
investment to be
sold before
maturity
Yes
Approve sales of
investments
before maturity
Approve sales of
investments
before maturity
Contact a Broker
to buy/sell the
investment
No Investment
action needed.
Monthly
Review performance
against the
Investment Policy
Is Incoming $ larger
than purchase $ on
the settlement day?
No
Yes
Supporting documents (cash flow
projection and evaluation of
quotations):
• are not assembled
• are not submitted for approval
• No supporting documents for qualifications
• No broker’s acknowledgement of the applicable
California Government Code sections and the City’s
Investment Policy
This is not a control as the
evidence of review and
approval is not maintained
Receive the
netted
amount
There is no
approval of the
transaction
• This report is not prepared and
reviewed as required by the policy
• Advisory or oversight committee does
not exist
Formulas are used to meet
various requirements listed
in the Investment Policy.
End
Start
Reporting
Monthly Report of
Investment
Transactions
This report is
included in the
Quarterly Report
Needs
ImprovementKey Control
Untimely
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Appendix C: Management Response
Findings and Recommendation Responsible
Department(s)
Agree, Partially Agree, or Do Not Agree and Target Date and Corrective Action
Plan
Fining 1: Segregation of duties and oversight of investment activities
The City should implement a formal process for a review and
approval of investment activities by the Assistant Director and, if
required, the Director prior to placing an order to buy or sell
securities. Approvals should be documented.
Additionally, the City should reassess the City’s Investment Policy to
ensure that the City will:
Comply with the requirement to perform a monthly
performance review described in the City’s Investment Policy.
The City can take this opportunity to assess the suitability of
an investment advisory committee to execute a monthly
performance review to ensure appropriate investment
decisions are made in compliance with the laws, regulations,
and the City’s Investment Policy.
Address the Section 53607 of the California Government
Code that requires submission of a monthly report of
investment transactions to the City Council.
Administrative
Services Concurrence: Agree
Target Date: February 2024
Action Plan:
The City agrees that a formal process for review and approval of
investment activities by the Assistant Director will provide oversight of
investment activities and transactions. A workplan has been
developed for the team and will be amended to include clear approval
processes for the purchase or sale of securities in advance of the
transaction, however, staff does anticipate some authority to continue
to be granted for real time transactions within approved guidelines
and limits. Expected implementation of this is targeted to be
completed in January 2024.
The City concurs with the City Auditor’s recommendation that a
monthly informational report of investment transactions be made
available to the City Council, as required by California Government
Code section 53607.
The City should continue the efforts to adjust the staffing of the
investment function to assign responsibilities to ensure adequate
internal controls are in place for prevention of the loss of public
funds arising from errors, imprudent actions, and fraud. The new
staff members should receive adequate training and a procedure
manual to perform their job responsibilities, and succession planning
should be reviewed and updated for the key positions.
Administrative
Services Concurrence: Agree
Target Date: February 2024
Action Plan:
The City agrees with segregation of duties in this function will provide
adequate internal controls, additional oversight, and back fill for these
activities when the key staff is on leave. A workplan for this was
provided in early 2023 and under the guidance of an Assistant
Director, has continuously worked on transitioning certain duties to
ASD’s analytical staff and administrative support staff. The workplan
will be reviewed and amended to ensure documented adequate
training and a procedure manual for job responsibilities is available to
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Findings and Recommendation Responsible
Department(s)
Agree, Partially Agree, or Do Not Agree and Target Date and Corrective Action
Plan
other ASD staff. The targeted completion and transition of these
duties is targeted for February 2024.
The analyst assigned to the Treasury Division has been tasked with
creating a desk manual for certain treasury tasks. While full
completion of this manual is not targeted for February 2024, it is
continuously being worked on as the analyst increases exposure and
knowledge of treasury operations.
Finding 2: Supporting documents for investment activities
The City’s ASD should implement a procedure to assemble and
maintain adequate supporting documents such as the cash flow
forecast and evaluation of quotations for each investment decision
and transaction to enable the approvers to review and approve them
prior to purchases/sales and to allow the oversight functions to
evaluate the validity, accuracy, and compliance when needed
Administrative
Services Concurrence: Agree
Target Date: January 2024
Action Plan:
The City agrees that the evaluation of investment options that are
available at the time of purchase should be performed and
documented before an investment is purchased. Investment offerings
are received by the Manager via email and can be attached to
investment paperwork as documentation. Furthermore, a workplan to
formalize review and oversight of investment activities has been
developed outlining expectations for routine reviews of cash flow and
investment status. Expected implementation of this workplan is
targeted for January 2024.
The City should update the City’s Investment Policy to require the
brokers and dealers who wish to sell and buy securities to the City to
provide documentation showing their financial condition and relevant
registration. The City should also require them to certify in writing
that they reviewed the applicable California Government Code
sections and the City’s Investment Policy. An annual review should
be also conducted to maintain the List of Authorized Brokers and
Dealers with the recent status.
Administrative
Services Concurrence: Agree
Target Date: June 2024
Action Plan:
The City agrees that the Investment Policy should be updated to
include the requirements that brokers and dealers who wish to buy or
sell securities with the City must provide documentation of their
financial condition and relevant registration. ASD staff will consider
these updates in the next Investment Policy review by the City
Council in June 2024.
Item 5
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Investment Management
Packet Pg. 103