Palo Alto City Council
March 24, 2025

CITY OF PALO ALTO CONTRACT NO. C25187148

AGREEMENT FOR PROFESSIONAL SERVICES

BETWEEN THE CITY OF PALO ALTO AND INNOVATIVE CLAIMS SOLUTIONS This Agreement for Pr ofessional Services (this “Agreement”) is entered into as of the 2nd day of December, 2024 (the “Effective Date”), by and between the CITY OF PALO ALTO, a California chartered municipal corporation (“CITY”), and INNOVATIVE CLAIMS SOLUTIONS, a California corporation, located at 12677 Alcosta Blvd., Suite 335, San Ramon, CA 94583 (“ CONSULTANT” or “ICS”).

The following recitals are a substantive portion of this Agreement and are fully incorporated herein by this reference:

RECITALS
A. CITY intends to provide workers’ compensation support services (the “Project”) and desires to engage a consultant to administer the City's self -insured Workers’ Compensation Program in connection with the Project (the “Services”, as detailed more fully in Exhibit A).

B. CONSULTANT represent s that it, its employees and subconsultants, if any, possess the necessary professional expertise, qualifications, and capability, and all required licenses and/or certifications to provide the Services.

C. CITY, in reliance on these representations, desires to engage CONSULTANT to provide the Services as more fully described in Exhibit A, entitled “SCOPE OF SERVICES”.

NOW, THEREFORE, in consideration of the recitals, covenants, terms, and conditions, in this Agreement, the parties agree as follows:

SECTION 1. SCOPE OF SERVICES. CONSULTANT shall perform the Services described in Exhibit A in accordance with the terms and conditions contained in this Agreement. The performance of all Services shall be to the reasonable satisfaction of CITY.

SECTION 2. TERM.

The term of this Agreement shall be from the date of its full execution through November 30, 2025 with an option to renew up to 5 years, unless terminated earlier pursuant to Section 19 (Termination) of this Agreement.

SECTION 3. SCHEDULE OF PERFORMANCE. Time is of the essence in the performance of Services under this Agreement. CONSULTANT shall complete the Services within the term of this Agreement and in accordance with the schedule set forth in Exhibit B, entitled “SCHEDULE OF Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
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PERFORMANCE”. Any Services for which times for performance are not specified in this Agreement shall be commenced and completed by CONSULTANT in a reasonably prompt and timely manner based upon the circumstances and direction communi cated to the CONSULTANT.

CITY’s agreement to extend the term or the schedule for performance shall not preclude recovery of damages for delay if the extension is required due to the fault of CONSULTANT.

SECTION 4. NOT TO EXCEED COMPENSATION. The compensation to be paid to CONSULTANT for performance of the Services shall be based on the compensation structure detailed in Exhibit C, entitled “COMPENSATION,” including any reimbursable expenses specified therein, and the maximum total compensation shall no t exceed Seven Hundred Sixty Thousand, Eight Hundred Eighty-Six Dollars ($760,886). The hourly schedule of rates, if applicable, is set out in Exhibit C-1, entitled “SCHEDULE OF RATES.” Any work performed or expenses incurred for which payment would result in a total exceeding the maximum compensation set forth in this Section 4 shall be at no cost to the CITY.

SECTION 5. INVOICES. In order to request payment, CONSULTANT shall submit monthly invoices to the CITY describing the S ervices performed and the applicable charges (including , if applicable, an identification of personnel who performed the S ervices, hours worked, hourly rates, and reimbursable expenses), based upon Exhibit C or, as applicable, CONSULTANT’s schedule of rates set forth in Exhibit C-1. If applicable, the invoice shall also describe the percentage of completion of each task. The information in CONSULTANT’s invoices shall be subject to verification by CITY. CONSULTANT shall send all invoices to CITY’s Project Manager at the address specified in Section 13 (Project Management) below. CITY will generally process and pay invoices within thirty (30) days of receipt of an acceptable invoice.

SECTION 6. QUALIFICATIONS/STANDARD OF CARE. All Services shall be performed by CONSULTANT or under CONSULTANT’s supervision. CONSULTANT represents that it , its employees and subcontractors, if any, possess the professional and technical personnel necessary to perform the Services required by this Agreement and that the personnel have sufficient skill and experience to perform the Services assigned to them. CONSULTANT represents that it, its employees and subcontractors, if any, have and shall maintain during the term of this Agreement all licenses, permits, qualifications, insurance and approvals of whatever nature that are legally required to perform the Services. All Services to be furnished by CONSULTANT under this Agreement shall meet the professional standard and quality that prevail among professionals in the same discipline and of similar knowledge and skill engaged in related work throughout California under the same or similar circumstances.

SECTION 7. COMPLIANCE WITH LAWS. CONSULTANT shall keep itself informed of and in compliance with all federal, state and local laws, ordinances, regulations, and orders that may affect in any manner the Project or the performance of the Services or those engaged to perform Services under this Agreement , as amended from time to time . CONSULTANT shall p rocure all permits and licenses, pay all charges and fees, and give all notices required by law in the performance of the Services.

SECTION 8. ERRORS/OMISSIONS. CONSULTANT is solely responsible for costs, including, but not limited to, increases in the cost of Services , arising from or caused by CONSULTANT ’s errors and omissions, including, but not limited to, the costs of corrections such errors and omissions, Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
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any change or der markup costs, or costs arising from delay caused by the errors and omissions or unreasonable delay in correcting the errors and omissions.

SECTION 9. COST ESTIMATES. If this Agreement pertains to the design of a public works project, CONSULTANT shal l submit estimates of probable construction costs at each phase of design submittal. If the total estimated construction cost at any submittal exceeds the CITY’s stated construction budget by ten percent (10%) or more, CONSULTANT shall make recommendations to CITY for aligning the Project design with the budget, incorporate CITY approved recommendations, and revise the design to meet the Project budget, at no additional cost to CITY.

SECTION 10. INDEPENDENT CONTRACTOR. CONSULTANT acknowledges and agrees that CONSULTANT and any agent or employee of CONSULTANT will act as and shall be deemed at all times to be an independent contractor and shall be wholly responsible for the manner in which CONSULTANT performs the Services requested by CITY under this Agreement. CONSULTANT and any agent or employee of CONSULTANT will not have employee status with CITY , nor be entitled to participate in any plans, arrangements, or distributions by CITY pertaining to or in connection with any retirement, health or other benefits that CITY may offer its employees.

CONSULTANT will be responsible for all obligations and payments, whether imposed by federal, state or local law, including, but not limited to, FICA, income tax withholdings, workers’ compensation, unemployment compensation, insurance, and other similar responsibilities re lated to CONSULTANT’s performance of the S ervices, or any agent or employee of CONSULTANT providing same. Nothing in this Agreement shall be construed as creating an employment or agency relationship between CITY and CONSULTANT or any agent or employee of CONSULTANT. Any terms in this Agreement referring to direction from CITY shall be construed as providing for direction as to policy and the result of CONSULTANT ’s provision of the Services only, and not as to the means by which such a result is obtained.

SECTION 11. ASSIGNMENT . The parties agree that the expertise and experience of CONSULTANT are material considerations for this Agreement. CONSULTANT shall not assign or transfer any interest in this Agreement nor the performance of any of CONSULTANT’s obligations hereunder without the prior written approval of the C ity Manager. Any purported assignment made without the prior written approval of the C ity Manager will be void and without effect. Subject to the foregoing, t he covenants, terms, conditions and provisions of this Agreement will apply to, and will bind, the heirs, successors, executors, administrators and assignees of the parties.

SECTION 12. SUBCONTRACTING.

Option B: Subcontracts Authorized: Notwithstanding Section 11 (Assignment ) above, CITY agrees that subcontractors may be used to complete the Services. The subcontractors authorized by CITY to perform work on this Project are:

Diamond Bill Review, Arissa Cost Solutions, Alius Health , MIS, Inc., Klear.ai

CONSULTANT shall be responsible for directing the work of any subcontractors and for any compensation due to subcontractors . CITY assumes no responsibility whatsoever concerning compensation of subcontractors. CONSULTANT shall be fully responsible to CITY for all acts and Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
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omissions of subcontractors. CONSULTANT shall change or add subcontractors only with the prior written approval of the City Manager or designee.

SECTION 13. PROJECT MANAGEMENT . CONSULTANT will assign Dan Greco, [email protected] as the CONSULTANT’s Project Manager to have supervisory responsibility for the performance, progress, and execution of the Services and represent CONSULTANT during the day -to-day performance of the Services. If circumstances cause the substitution of the CONSULTANT’s Project Manager or any other of CONSULTANT’s key personnel for any reason, the appointment of a substitute Project Manager and the assignment of any key new or replacement personnel will be subject to the prior written approval of the CITY’s P roject Manager.

CONSULTANT, at CITY’s request, shall promptly remove CONSULTANT personnel who CITY finds do not perform the Services in an acceptable manner, are uncooperative, or present a threat to the adequate or timely completion of the Services or a threat to the safety of persons or property.

CITY’s Project Manager is Sandra Blanch, [email protected], Human Resources Department, 250 Hamilton Avenue , Palo Alto, CA , 94301, Telephone: (650) 329-2294. CITY’s Project Manager will be CONSULTANT’s point of contact with respect to performance, progress and execution of the Services. CITY may designate an alternate Project Manager from time to time.

SECTION 14. OWNERSHIP OF MATERIALS. All work product, including without limitation, all writings, drawings, studies, sketches, photographs, plans, reports, specifications, computations, models, recordings, data, documents, and other materials and copyright interests developed under this Agreement, in any form or media , shall be and remain the exclusive property of CITY without restriction or limitation upon their use. CONSULTANT agrees that all copyrights which arise from creation of the work product pursuant to this Agreement are vested in CITY, and CONSULTANT hereby waives and relinquishes all claims to copyright or other intellectual property rights in favor of CITY. Neither CONSULTANT nor its subcontractors, if any, shall make any of such work product available to any individual or organization without the prior written approval of the C ity Manager or designee. CONSULTANT makes no representation of the suitability of the work product for use in or application to circumstances not contemplated by the Scope of Services.

SECTION 15. AUDITS. CONSULTANT agrees to permit CITY and its authorized representatives to audit, at any reasonable time during the term of this Agreement and for four (4) years from the date of final payment , CONSULTANT’s records pertaining to matters covered by this Agreement , including without limitation records demonstrating compliance with the requirements of Section 10 (Independent Contractor). CONSULTANT further agrees to maintain and retain accurate books and records in accordance with generally accepted accounting principles for at least four (4) years after the expiration or earlier termination of this Agreement or the completion of any audit hereunder, whichever is later.

SECTION 16. INDEMNITY.

[Option B applies to any consultant who does not qualify as a design professional as defined in Civil Code Section 2782.8.] 16.1. To the fullest extent permitted by law, CONSULTANT shall indemnify, defend and hold harmless CITY, its Council members, officers, employees and agents (each an “Indemnified Party”) from and against any and all demands, claims, or liability of any Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
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nature, including death or injury to any person, property damage or any other loss, including all costs and expenses of whatever nature including attorney’ s fees, experts fees, court costs and disbursements (“Claims”) resulting from, arising out of or in any manner related to performance or nonperformance by CONSULTANT, its office rs, employees, agents or contractors under this Agreement, regardless of whether or not it is caused in part by an Indemnified Party.

16.2. Notwithstanding the above, nothing in this Section 16 shall be construed to require CONSULTANT to indemnify an Indemnified Party from a Claim arising from the active negligence or willful misconduct of an Indemnified Party that is not contributed to by any act of, or by any omission to perform a duty imposed by law or agreement by, CONSULTANT, its officers, employees, agents or contractors under this Agreement.

16.3. The acceptance of CONSULTANT’s S ervices and duties by CITY shall not operate as a waiver of the right of indemnification. The provisions of this Section 1 6 shall survive the expiration or early termination of this Agreement.

SECTION 17. WAIVERS. No waiver of a condition or nonperformance of an obligation under this Agreement is effective unless it is in writing in accordance with Section 29.4 of this Agreement.

No delay or failure to require performance of any provision of this Agreement shall constitute a waiver of that provision as to that or any other instance. Any waiver granted shall apply solely to the specific instance expressly stated. No single or partial exercise of any right or remedy will preclude any other or further exercise of any right or remedy.

SECTION 18. INSURANCE.

18.1. CONSULTANT, at its sole cost and expense, shall obtain and maintain, in full force and effect during the term of this Agreement, the insurance coverage described in Exhibit D, entitled “INSURANCE REQUIREMENTS”. CONSULTANT and its contractors, if any, shall obtain a policy endorsement naming CITY as an additional insured under any general liability or automobile policy or policies.

18.2. All insurance coverage required hereunder shall be provided through carriers with AM Best’s Key Rating Guide ratings of A-:VII or higher which are licensed or authorized to transact insurance business in the State of California. Any and all contractors of CONSULTANT retained to perform Services under this Agreement will obtain and maintain, in full force and effect during t he term of this Agreement, identical insurance coverage, naming CITY as an additional insured under such policies as required above.

18.3. Certificates evidencing such insurance shall be filed with CITY concurrently with the execution of this Agreement. The certificates will be subject to the approval of CITY’s Risk Manager and will contain an endorsement stating that the insurance is primary coverage and will not be canceled, or materially reduced in coverage or limits, by the insurer except after filing with the Purchasing Manager thirty (30) days’ prior written notice of the cancellation or modification. If the insurer cancels or modifies the insurance and provides less than thirty (30) days’ notice to CONSULTANT, CONSULTANT shall provide the Purchasing Manager written notice of the cancellation or modification within two (2) business days of the CONSULTANT’s receipt of such notice. CONSULTANT shall be responsible for ensuring that current certificates evidencing the Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
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insurance are provided to CITY’s Chi ef Procurement Officer during the entire term of this Agreement.

18.4. The procuring of such required policy or policies of insurance will not be construed to limit CONSULTANT’s liability hereunder nor to fulfill the indemnification provisions of this Agreement. Notwithstanding the policy or policies of insurance, CONSULTANT will be obligated for the full and total amount of any damage, injury, or loss caused by or directly arising as a result of the Services performed under this Agreement, including such damage, injury, or loss arising after the Agreement is terminated or the term has expired.

SECTION 19. TERMINATION OR SUSPENSION OF AGREEMENT OR SERVICES.

19.1. The City Manager may suspend the performance of the Services, in whole or in part, or terminate this Agreement, with or without cause, by giving ten (10) days prior written notice thereof to CONSULTANT. If CONSULTANT fails to perform any of its material obligations under this Agreement, in addition to all other remedies provided under this Agreement or at law, the City Manager may terminate this Agreement sooner upon written notice of termination. Upon receipt of any notice of suspension or termination, CONSULTANT will discontinue its performance of the Services on the effective date in the notice of suspension or termination.

19.2. In event of suspension or termination, CONSULTANT will deliver to the City Manager on or before the effective date in the notice of suspension or termination, any and all work product, as detailed in Section 14 (Ownership of Materials), whether or not completed, prepared by CONSULTANT or its contractors, if any, in the performance of this Agreement. Such work product is the property of CITY, as detailed in Section 14 (Ownership of Materials).

19.3. In event of suspension or termination, CONSULTANT will be paid for the Services rendered and work products delivered to CITY in accordance with the Scope of Services up to the effective date in the notice of suspension or termination; provided, however, if this Agreement is suspended or terminated on account of a default by CONSULTANT, CITY will be obligated to compensate CONSULTANT only for that portion of CONSULTANT’s Services provided in material conformity with this Agreement as such determination is made by the City Manager acting in the reasonable exercise of his/her discretion . The following Sections will survive any expiration or termination of this Agreement: 14, 15, 16, 17, 19.2, 19.3, 19.4, 20, 25, 27, 28, 29 and 30.

19.4. No payment, partial payment, acceptance, or partial acceptance by CITY will operate as a waiver on the part of CITY of any of its rights under this Agreement, unless made in accordance with Section 17 (Waivers).

SECTION 20. NOTICES.

All notices hereunder will be given in writing and mailed, postage prepaid, by certified mail, addressed as follows:

To CITY: Office of the City Clerk
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City of Palo Alto
Post Office Box 10250
Palo Alto, CA 94303

With a copy to the Purchasing Manager

To CONSULTANT: Attention of the P roject Manager at the address of CONSULTANT recited on the first page of this Agreement.

CONSULTANT shall provide written notice to CITY of any change of address.

SECTION 21. CONFLICT OF INTEREST.

21.1. In executing this Agreement, CONSULTANT covenants that it presently has no interest, and will not acquire any interest, direct or indirect, financial or otherwise, which would conflict in any manner or degree with the performance of the Services.

21.2. CONSULTANT further covenants that, in the performance of this Agreement, it will not employ subcontractors or other persons or parties having such an interest. CONSULTANT certifies that no person who has or will have any financial interest under this Agreement is an officer or employee of CITY; this provision will be interpreted in accordance with the applicable provisions of the Palo Alto Municipal Code and the Government Code of the State of California , as amended from time to time. CONSULTANT agrees to notify CITY if any conflict arises.

21.3. If the CONSULTANT meets the definition of a “Consultant” as defined by the Regulations of the Fair Political Practices Commission, CONSULTANT will file the appropriate financial disclosure documents required by the Palo Alto Municipal Code and the Political Reform Act of 1974, as amended from time to time.

SECTION 22. NONDISCRIMINATION; COMPLIANCE WITH ADA.

22.1. As set forth in Palo Alto Municipal Code Section 2.30.510, as amended from time to time, CONSULTANT certifies that in the performance of this Agreement, it shall not discriminate in the employment of any person due to that person’s race, skin color, gender, gender identity, age, religion, disability, national origin, ancestry, sexual orientation, pregnancy, genetic information or condition, housing status, marital status, familial status, weight or height of such person. CONSULTANT acknowledges that it has read and understands the provisions of Section

2.30.510 of the Palo Alto Municipal Code relating to Nondiscrimination Requirements and the penalties for violation thereof, and agrees to meet all requirements of Section 2.30.510 pertaining to nondiscrimination in employment.

22.2. CONSULTANT understands and agrees that pursuant to the Americans Disabilities Act (“ADA”), programs, services and other activities provided by a public entity to the public, whether directly or through a contractor or subcontractor, are required to be accessible to the disabled public. CONSULTANT will provide the Services specified in this Agreement in a manner that complies with the ADA and any other applicable federal, state and local disability rights laws and regulations , as amended from time to time . CONSULTANT will not discriminate against Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
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persons with disabilitie s in the provision of services, benefits or activities provided under this Agreement.

SECTION 23. ENVIRONMENTALLY PREFERRED PURCHASING AND ZERO WASTE REQUIREMENTS. CONSULTANT shall comply with the CITY’s Environmentally Preferred Purchasing policies which are available at CITY’s Purchasing Department, hereby incorporated by reference and as amended from time to time. CONSULTANT shall comply with waste reduction, reuse, recycling and disposal requirements of CITY’s Zero Waste P rogram. Zero Waste best practices include, first, minimizing and reducing waste; second, reusing waste; and, third, recycling or composting waste. In particular, C ONSULTANT shall comply with the following Z ero Waste requirements:
(a) All printed materials provided by CONSULTANT to CITY generated from a personal computer and printer including but not limited to, proposals, quotes, invoices, reports, and public education materials, shall be double -sided and printed on a minimum of 30% or greater post - consumer content paper, unless otherwise approved by CITY ’s Project Manager. Any submitted materials printed by a professional printing company shall be a minimum of 30% or greater post - consumer material and printed with vegetable-based inks. (b) Goods purchased by C ONSULTANT on behalf of CITY shall be purchased in accordance with CITY ’s Environmental Purchasing Policy including but not limited to Extended Producer Responsibility requirements for products and packaging. A copy of this policy is on file at the Purchasing Department’s office.
(c) Reusable/returnable pallets shall be taken back by CONSULTANT , at no additional cost to CITY, for reuse or recycling. CONSULTANT shall provide documentation from the facility accepting the pallets to verify that pallets are not being disposed.

SECTION 24. COMPLIANCE WITH PALO ALTO MINIMUM WAGE ORDINANCE .

CONSULTANT shall comply with all requirements of the Palo Alto Municipal Code Chapter 4.62 (Citywide Minimum Wage), as amended from time to time. In particular, for any employee otherwise entitled to the State minimum wage, who performs at least two (2) hours of work in a calendar week within the geographic boundaries of the City, CONSULTANT shall pay such employees no less than the minimum wage set forth in Palo Alto Municipal Code S ection 4.62.030 for each hour worked within the geographic boundaries of the City of Palo Alto. In addition, CONSULTANT shall post notices regarding the Palo Alto Minimum Wage Ordinance in accordance with Palo Alto Municipal Code Section 4.62.060.

SECTION 25. NON -APPROPRIATION. This Agreement is subject to the fiscal provisions of the Charter of the City of Palo Alto and the Palo Alto Municipal Code , as amended from time to time. This Agreement will terminate without any penalty (a) at the end of any fiscal year in the event that funds are not appropriated for the following fiscal year, or (b) at any time within a fiscal year in the event that funds are only appropriated for a portion of the fiscal year and funds for this Agreement are no longer available. This Section shall take precedence in the event of a conflict with any other covenant, term, condition, or provision of this Agreement.

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SECTION 26. PREVAILING WAGES AND DIR REGISTRATION FOR PUBLIC WORKS CONTRACTS.

26.1. This Project is not subject to prevailing wages and related requirements.

CONSULTANT is not required to pay prevailing wages and meet related requirements under the California Labor Code and California Code of Regulations in the performance and implementation of the Project if the contract:
(1) is not a public works contract;
(2) is for a public works construction project of $25,000 or less , per California Labor Code Sections 1782(d)(1), 1725.5(f) and 1773.3(j); or (3) is for a public works alteration, demolition, repair, or maintenance project of $15,000 or less, per California Labor Code Sections 1782(d)(1), 1725.5(f) and 1773.3(j).

SECTION 27. CLAIMS PROCEDURE FOR “9204 PUBLIC WORKS PROJECTS” . For purposes of this Section 27, a “9204 Public Works Project” means the erection, construction, alteration, repair, or improvement of any public structure, building, road, or other public improvement of any kind. ( Cal. Pub. Cont. Cod e § 9204.) Per California Public Contract Code Section 9204, for Public Works Projects, certain claims procedures shall apply, as set forth in Exhibit F, entitled “Claims for Public Contract Code Section 9204 Public Works Projects”.

This Project is not a 9204 Public Works Project.

SECTION 28. CONFIDENTIAL INFORMATION.

28.1. In the performance of this Agreement, CONSULTANT may have access to CITY’s Confidential Information (defined below). CONSULTANT will hold Confidential Information in strict confidence, not disclose it to any third party, and will use it only for the performance of its obligations to CITY under this Agreement and for no other purpose.

CONSULTANT will maintain reasonable and appropriate administrative, technical and physical safeguards to ensure the security, confidentiality and integrity of the Confidential Information.

Notwithstanding the foregoing, CONSULTANT may disclose Confidential Information to its employees, agents and subcontractors, if any, to the extent they have a need to know in order to perform CONSULTANT’s obligations to CITY under this Agreement and for no other purpose, provided that the CONSULTANT informs them of, and requires them to follow, the confidentiality and security obligations of this Agreement.

28.2. “Confidential Information” means all data, information (including without limitation “Personal Information” about a California resident as defined in Civil Code S ection 1798 et seq., as amended from time to time) and materials, in any form or media, tangible or intangible, provided or otherwise made available to CONSULTANT by CITY, directly or indirectly, pursuant to this Agreement. Confidential Information excludes information that CONSULTANT can show by appropriate documentation: (i) was publicly known at the time it was provided or has subsequently Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
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become publicly known other than by a breach of this Agreement; (ii) was rightfully in CONSULTANT’s possession free of any obligation of confidence prior to receipt of Confidential Information; (iii) is rightfully obtained by CONSULTANT from a third party without breach of any confidentiality obligation; (iv) is independently developed by employees of CONSULTANT without any use of or access to the Confidential Information; or (v) CONSULTANT has written consent to disclose signed by an authorized representative of CITY.

28.3. Notwithstanding the foregoing, CONSULTANT may disclose Confidential Information to the extent required by order of a court of competent jurisdiction or governmental body, provided that CONSULTANT will notify CITY in writing of such order immediately upon receipt and prior to any such disclosure (unless CONSULTANT is prohibited by law from doing so), to give CITY an opportunity to oppose or otherwise respond to such order.

28.4. CONSULTANT will notify City promptly upon learning of any breach in the security of its s ystems or unauthorized disclosure of, or access to, Confidential Information in its possession or control, and if such Confidential Information consists of Personal Information, CONSULTANT will provide information to CITY sufficient to meet the notice requirements of Civil Code Section 1798 et seq., as applicable, as amended from time to time.

28.5. Prior to or upon termination or expiration of this Agreement, CONSULTANT will honor any request from the CITY to return or securely destroy all copies of Confidential Information. All Confidential Information is and will remain the property of the CITY and nothing contained in this Agreement grants or confers any rights to such Confidential Information on CONSULTANT.

28.6. If selected in Section 30 (Exhibits), this Agreement is also subject to the terms and conditions of the Information Privacy Policy and Cybersecurity Terms and Conditions.

SECTION 29. MISCELLANEOUS PROVISIONS.

29.1. This Agreement will be governed by California law, without regard to its conflict of law provisions.

29.2. In the event that an action is brought, the parties agree that trial of such action will be vested exclusively in the state courts of California in the County of Santa Clara, State of California.

29.3. The prevailing party in any action brought to enforce the provisions of this Agreement may recover its reasonable costs and attorneys ’ fees expended in connection with that action. The prevailing party shall be entitled to recover an amount equal to the fair market value of legal services provided by attorneys employed by it as well as any attorneys’ fees paid to third parties.

29.4. This Agreement, including all exhibits, constitutes the entire and integrated agreement between the parties with respect to the subject matter of this Agreement, and supersedes all prior agreements, negotiations, representations, statements and undertakings , either oral or written. This Agreement may be amended only by a written instrument, which is signed by the Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
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authorized representatives of the parties and approved as required under Palo Alto Municipal Code, as amended from time to time.

29.5. If a court of competent jurisdiction finds or rules that any provision of this Agreement is void or unenforceable, the unaffected provisions of this Agreement will remain in full force and effect.

29.6. In the event of a conflict between the terms of this Agreement and the exhibits hereto (per Section 30) or CONSULTANT’s proposal (if any), the Agreement shall control. In the event of a conflict between the exhibits hereto and CONSULTANT’s proposal (if any), the exhibits shall control.

29.7. The provisions of all checked boxes in this Agreement shall apply to this Agreement; the provisions of any unchecked boxes shall not apply to this Agreement.

29.8. All section headings contained in this Agreement are for convenience and reference only and are not intended to define or limit the scope of any provision of this Agreement.

29.9. This Agreement may be signed in multiple counterparts, which, when executed by the authorized representatives of the parties, shall together constitute a single binding agreement.

SECTION 30. EXHIBITS . Each of t he following exhibits, if the check box for such exhibit is selected below, is hereby attached and incorporated into this Agreement by reference as though fully set forth herein:

EXHIBIT A: SCOPE OF SERVICES
EXHIBIT B: SCHEDULE OF PERFORMANCE
EXHIBIT C: COMPENSATION
EXHIBIT D: INSURANCE REQUIREMENTS
EXHIBIT G: INFORMATION PRIVACY POLICY
EXHIBIT H: CYBERSECURITY TERMS AND CONDITIONS

THIS AGREEMENT IS NOT COMPLETE UNLESS ALL SELECTED EXHIBITS ARE ATTACHED.

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CONTRACT No. C25187148 SIGNATURE PAGE

IN WITNESS WHEREOF, the parties hereto have by their duly authorized representatives executed this Agreement as of the date first above written.

CITY OF PALO ALTO

____________________________
City Manager

APPROVED AS TO FORM:

__________________________
City Attorney or designee

INNOVATIVE CLAIMS SOLUTIONS

Officer 1
By:

Name:

Title:

Officer 2
By:

Name:

Title:

Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 VP Client Services
Dan Greco
CEO
Jason Dawson
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EXHIBIT A

SCOPE OF SERVICES

CONSULTANT shall provide the Services detailed in this Exhibit A, entitled “SCOPE OF SERVICES”. Notwithstanding any provision herein to the contrary, CONSULTANT’s duties and services described in this Scope of Services shall not include preparing or assisting CITY with any portion of CITY’s preparation of a request for proposals, request for qualifications, or any other solicitation regarding a subsequent or additional contract with CITY. CITY shall at all times retain responsibility for public contracting, including with respect to any subsequent phase of this project.

CONSULTANT’s participation in the planning, discussions, or drawing of project plans or specifications shall be limited to conceptual, preliminary, or initial plans or specifications.

CONSULTANT shall cooperate with CITY to ensure that all bidders for a subsequent contract on any subsequent phase of this project have access to the same information, including all conceptual, preliminary, or initial plans or specifications prepared by CONSULTANT pursuant to this Scope of Services.

CONSULTANT (also referred to as ICS) will execute the following claim’s management program:

Caseloads
• CONSULTANT will assign one examiner to CITY’s indemnity claims, unless CITY has more than 150 open claims. CONSULTANT may assign those additional claims to another examiner.
• CITY may designate claim assignments alphabetically or by department, or by some other mutually agreed upon categorization.
• All medical only claims will be managed by a medical only examiner.

Communication

• CONSULTANT’s communications with an injured worker from CITY will begin when ICS is notified of a new lost time injury.
• CONSULTANT will initiate telephonic communication within 24-hours. CONSULTANT will obtain factual information and address any questions or concerns, explain compensation benefits and review the processes to come. • CONSULTANT’s claims examiner will contact the injured worker at least monthly while from work and periodically during the life of the claim especially prior to the issuance of any benefit letter.
• At CITY’s request, ICS conducts quarterly claim reviews, to review in detail jointly selected, key claims. CONSULTANT may designate claims examiners to attend these claim reviews.

Daily Communications

ICS will have continual interaction and communications with the CITY during normal Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
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day-to-day claims management. ICS policies require that all phone calls shall be returned within 1 day and all efforts to do so are clearly documented in the notes. A dditionally, all written inquiries are responded to within 5 days of receipt. The following is a brief list of selected, daily communications:
• Initial contact upon receipt of new lost time claims as part of our 24-hour strategy, i.e., contact with employer, employee and medical provider for early intervention and implementation/exploration of modified work possibilities. • Discussion of and strategic planning on all claims placed on delay status and . • on all claims recommended for denial.
• Written and verbal communications on all prospective settlements in accordance with the CITY’s requirements.
• Discussion of claims involving potential referral for outside investigation including sub- rosa investigations.
• Discussion of claims where proposed reserve increases exceeds pre-established thresholds.
• Communication at any other interval as required by the CITY .

New Claim Reporting

ICS offers the CITY several different ways to report new claims. ICS will accept new reports of claims by mail, fax, or e-mail ICS staff. In addition, ICS will provide two options to electronically transmit claims. First, using the ICS Web Site, the CITY can log in and input all relevant claims information on-line. ICS will download the information into its claim system for claim setup.

Second, the CITY can go directly into the ICS claim system through their dial-up connection and input the claim into the claim system.

ICS Management reviews all new claims to make sure the data is accurate and complete. ICS claim staff then reviews the claim data regularly to update fields with the most current information.

New Claim Setup

ICS will enter all new claims as pending claims in its claim management system upon receipt and immediately route them to the appropriate Unit Manager for urgent handling. Each unit manager reviews these new claims and documents initial recommendations for acceptance, denial or investigation as appropriate, and routes them to the appropriate examiner for immediate handling.

Additionally, the unit manager is assigned a diary on all new claims to track for completion of timely set up. The examiner evaluates each new claim and begins execution of ICS’ procedures for handling of new claims. ICS will clearly document all communication, and ICS will complete new claims creations within 72 hours of ICS knowledge.

Initial Contact

ICS will contact all injured employees who are losing time from work within 24 hours of ICS' knowledge of the claims.

Additionally, ICS will obtain factual information surrounding an incident, i.e., witnesses, past medical history, etc. ICS will also obtain information regarding the quality of medical care from the Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
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employee’s perspective. ICS will send each injured worker an Injury Questionnaire that asks questions regarding past injuries and treatment .

ICS requires all examiners to maintain unsolicited communication with each injured worker until they return to work. These calls take place monthly, at least. ICS will contact all injured workers prior to issuing any mandatory benefit notices for the duration of the claim.

ICS will also maintain contact with the employer to obtain information regarding the specifics of the incident, witnesses and any other pertinent information the employer may have to contribute.

ICS will encourage the individual departments to participate in the workers’ compensation process, extending their control whenever possible. ICS will assure modified work alternatives have been explored.

ICS will contact the medical provider within 24 hours of ICS’ knowledge, to obtain information regarding the nature and extent of injuries, prognosis, and estimations on length of disability, etc.

ICS will continually explore with the treating physicians the possibility of releasing the injured employee to modified work as soon as possible.

When appropriate, ICS claims examiners will maintain close ongoing communications with injured employees, medical providers as well as individual departments on lost time claims. All communication will be clearly documented in the computer system, which is accessible to the Unit Manager as well as the designated CITY contacts.

Compensability Determination

An ICS Unit Manager will initially review all claims and will give instruction on any claims that appear to be questionable based solely on the information contained in the initial report.

All decisions to delay claims must be approved by a Unit Manager, and all decisions to accept compensability once a claim has been placed on delay, or to deny claims, must also be approved by a Unit Manager. Discussion and decisions on delaying or denying benefits will also be discussed with the City.

On all claims that will be delayed, ICS will issue a delay notice within 14 days from the employer’s date of knowledge, or 14 days from the return of the DWC-1 claim form.

Investigations

ICS investigates all lost-time claims. The initial investigation is completed by the Unit Manager who is responsible for reviewing all new claims each day outlining any AOE/COE issues to be explored when completing initial calls. When deemed necessary by the Unit Manager, ICS will obtain recorded statements from injured workers or witnesses, and ICS may refer to an outside investigative firm with CITY’s advance approval.

ICS’ initial investigation includes discussions with immediate supervisors or managers of the allegedly injured employee and possible discussion with co-workers. ICS will obtain copies of personnel files and assess the need for scheduling of medical evaluations.

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On questionable indemnity claims, ICS will make investigative assignments to outside vendor within 5 days of ICS notice of claim to obtain statements from witnesses and the injured employee, subject to CITY’s written approval as described in Section 12 (Subcontracting).

ICS will contact the injured employee via telephone within 24 hours of notice of injury on all cases to verify injury, prior related medical history, and accident information and to explain benefits. ICS will document the results of this contact and all contact attempts in the claim file. ICS will maintain subsequent regular contact with disabled employees.

ICS will obtain medical verification of causation and disability prior to each payment of disability benefits. ICS will obtain an estimate as to length of disability and extent of disability.

ICS will make all referrals to investigators specific in nature, outlining time frames for completion.

ICS may retain outside investigative services will be retained on an as-needed basis with concurrence from the CITY, as described in Section 12 (Subcontracting). The need for outside services will be clearly documented in the file.

Diary

ICS will maintain all unresolved indemnity claim files on an examiner 30-day diary and manager 90-day diary for Plan of Action management. Additionally, ICS will maintain all unresolved claims on diary for reserve reviews every 90 days, while resolved claims are reviewed for reserves every 180 days. ICS will maintain Future Medical claims on an examiner 90-day diary and manager 180- day diary. ICS will clearly label each Plan of Action and Reserve entry as such. Reserve entries are a combined Reserve and Plan of Action review. The following is a brief list of items that ICS will review at each diary:
• Reserves
• Plan of Action
• Coding
• Subrogation Status
• Excess Reporting
• Treatment Status
• Disability Status
• Closure Posture
• Plan for resolution
Litigation status

Claim Supervision

ICS has developed a claim review frequency to afford optimal quality control including scheduled mandatory reviews, or audits, of all claims. ICS Unit Managers are responsible for conducting these reviews and ICS has customized audit checklist that is followed in association with each review.

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High Visibility Claims
ICS recognizes that each client may have unique circumstances that generate claims that may involve sensitive or high-profile issues. In such circumstances or as CITY may direct, ICS will suppress injured worker names in reports and limit viewing of those designated claims through on- line access. At CITY’s request, the Unit Manager or Vice President of Operations will handle sensitive cases.

Benefits Delivery

Initial and subsequent indemnity payment and DWC notices will be processed in full compliance with the Labor Code. ICS will tailor a payment-tracking system to meet the CITY’s needs for any potential salary continuation program. ICS’s system will encompass voucher posting, unless .

Disability Payment Options

ICS will develop Temporary Disability, Salary Continuation and LC 4850 payment procedures that coincide with payroll periods or other directives from the CITY. Based on CITY’s request, ICS will pay LC 4850 as full salary or break-out the TD portion and the non-TD portion as separate payments. ICS will make payments as checks or vouchers posting, or any combination of the two, as directed by CITY.

Reserve Accuracy

ICS will reserve all claims based on their ultimate probable cost. We understand the importance of establishing accurate reserves as early in the life of a claim as possible. Reserving files accurately requires a combination of experience, skill, judgement and astute analysis of all available data.

ICS will schedule all open unresolved indemnity claims for reserve review and potential adjustment at 30 days from date of creation and every 90 days thereafter until a claim either settled or closed.

ICS will also adjust reserves when developments are revealed that will likely affect the ultimate cost of a given claim to preclude any reserve "stair stepping”. Once claims are settled, ICS will move them to a diary review for reserves every 180 days.

ICS will ensure all reserve changes beyond the first 30 days will be reviewed and approved by a supervisor and documented in our computer system. ICS will create and retain a reserve analysis worksheet in the claims management system. CITY can review this information on-line, as well.

When reserving for future medical files, ICS examiners will review all medical payments made in the last three years. ICS will delete non-recurring medical expenses will be deleted from the analysis. ICS will evaluate the remaining amount and then multiply by the injured worker’s life expectancy. ICS may adjust the reserve based on medical opinion relating to life expectancy as well. All future medical reserves are then reviewed by the ICS Unit Manager.

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Medical Control

ICS oversees a medical management program that encompasses Bill Review, Utilization Review, Preferred Provider Organization access, and other Medical Management services.

Actual bill review for reduction to fee schedule and appropriateness of charges is completed by the outside bill review company. However, ICS examiners are responsible for reviewing and approving each bill for payment ensuring all prescriptions, or treatment provided, adheres to what has been authorized. All treatment requests are responded to timely and documented in the claim management system by ICS.

ICS will make referrals to the selected utilization review company for concurrent reviews when treatment appears to be excessive, or at time of treatment requests if they meet the referral trigger criteria.

Additionally, ICS examiners are responsible for reviewing all medical reports and documenting a brief recap of all reports in the claim management system.

Medical verification of disability will be obtained by ICS in a timely manner and maintained in ICS’s claim file to document the need for continuing indemnity benefits. Medical treatment provided will be reviewed by ICS for necessity, reasonableness, and relationship to the industrial injury.

Catastrophic injury claims and extensive lost-time claims will be reviewed by ICS by a qualified medical management provider. ICS will ensure claims referred for outside medical management services will reflect the intent and scope of services requested. ICS will obtain CITY approval prior to a referral to any nurse case manager.

Pre-existing medical conditions and medical records will be explored/obtained by ICS on all lost- time claims.

ICS will manage pharmacy benefits as follows. ICS has partnered with a Pharmacy Benefit Program, (PBM), provider that provides a pharmacy card to the injured worker. The pharmacy will use the card to confirm authorization for the meds, give the meds to the injured worker and submit their billing to the PBM provider. Medications will be billed at the Official Medical Fee Schedule (OMFS) with the exception of a $20 discount per prescription filled through mail order. The PBM will monitor for duplicate therapy, early refill, and control access to medications strictly for the industrial injury.

Medical bills submitted without a supporting medical report shall not be paid until a medical report is obtained. ICS will ensure all bills will be adjusted according to the fee schedule and paid or objected to according to the law.

Medical-legal costs will be reviewed by ICS for appropriateness and necessity. Bills which do not qualify as valid medical-legal expense will be objected to by ICS on a timely basis.

Catastrophic Injury Claims Handling

The following details the step-by-step process ICS has in place and puts in play following a serious, or potential catastrophic, injury or circumstance:

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• ICS will provide access to after hours or emergency contact telephone numbers allowing them access to the appropriate Unit Manager, Vice President of Operations or co- Presidents of ICS.
• Upon notice, from any source, of a catastrophic situation, the Unit Manager, Vice President of Operations and client should be notified immediately. • Depending on the severity of injuries that have occurred, a n ICS medical case manager should immediately be assigned to the case. In serious injury cases ICS frequently deals with medical practitioners not familiar with the reporting and communication responsibilities associated with treatment of work-related injuries. An ICS medical case manager will assist in ensuring we are provided timely and frequent information regarding the status of the injured workers’ medical condition.
• In most circumstances, an ICS investigator should be immediately dispatched to the site of the incident to screen and identify witness, ascertain the potential of subrogation opportunities, evaluate exposure for Serious and Willful Misconduct, obtain or determine if police reports will be available and ascertain information required to determine compensability. • ICS will immediately notify the appropriate CITY personnel , and they likely will be dispatched for purposes of a site visit, especially in circumstances where OSHA has been contacted.
• In circumstances where injured workers are hospitalized for longer than overnight for purposes other than observation, an ICS representative should meet with the injured worker or their family members, whenever possible. The purpose of the visit would be to personally explain benefits due, explain the processes to come, notify who will be the daily contact person available to them and answer any other questions they may have. • When feasible, ICS’s medical case manager assigned should jointly meet the injured worker or family members with the ICS representative.
• Depending on the C lient’s excess coverage and policy, the excess carrier should immediately be notified.
• In circumstances involving multiple injured workers, all files should be coded by ICS to reflect they are part of a catastrophic incident to ensure appropriate excess reporting and tracking capabilities are in place.
• In cases of serious injury, ICS should provide updates to the Unit Manager, Vice President of Operations and the Client no less frequently than monthly for a period of time to be determined, depending on the seriousness of each incident.

Claim Settlements

It is ICS’ responsibility to identify as early as possible the potential for permanent disability. If none is anticipated or documented, claim closure is pursued rapidly by ICS. If permanent residuals are anticipated, a plan for claim resolution is placed in motion by ICS.

ICS will seek from CITY settlement authority that will allow ICS to resolve cases of nominal value in a time- and cost-effective manner. Regardless of the settlement authority value, all settlements will be discussed and approved by the Unit Manager, and basis for recommendations will be clearly documented by ICS in the claims management system.

Medicare Reporting
Per CMS guidelines, ICS will submit a Query file of all claims from 2010 to CMS quarterly. CMS Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
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will process and return that file identifying Medicare Recipients to ICS. That information is uploaded to Renaissance by ICS. ICS will also keep a log each time of all of the claims that have been reported and those that are Medicare Recipients.

ICS then goes to each newly identified Medicare Recipient in klear.ai and input the necessary data to complete the Claim report to CMS. ICSalso reviews other claims to determine if an update or change needs to be reported such as a TPOC (?) or legal representation. ICS transmits the new and updated Claim files to CMS quarterly with all of the new claim information.

Medicare Recipient claims are flagged in klear.ai so the examiners will make sure their settlements incorporate the protection of Medicare’s interests.

Subrogation

ICS aggressively pursues subrogation on behalf of the Client. Clear policies and procedures are in place at ICS to assure that any case offering subrogation potential is thoroughly and expeditiously pursued. ICS identifies all opportunities for subrogation although action is not taken unless the CITY has specifically authorized such action.

ICS will identify subrogation opportunities immediately upon receipt of a claim and put in motion a plan to obtain information regarding the responsible party. As soon as a responsible third party is identified, notice of intent to pursue recovery will be issued by ICS, and regular contact will be maintained by ICS until a recovery is made.

ICS will notify the client as soon as it is felt a complaint in Civil court may be needed to protect the statute of limitations so appropriate legal referrals can be made. ICS will ensure credits are asserted against an injured workers’ net recovery for future benefits whenever possible.

In addition, ICS’ claims supervisor maintains a separate diary of all claims on which ICS is pursuing subrogation recoveries to ensure all statutes are protected.

Excess Claims

ICS will provide the initial report, follow-up reports and settlement requests to the Client Excess Insurance Carrier when necessary. ICS maintains a listing of all reporting requirements as well as the Self-Insured Retention level for each policy period. ICS will also prepare and send requests for reimbursement on claims that have payments exceeding the SIR. ICS examiners and managers have diaries set to ensure timelines are met for reporting claims and requesting reimbursements.

Fraud Claims Management

ICS has an in-house fraud investigations unit that consists of both Presidents, VP of Operations and all Unit Managers; however, we do not have in-house investigators. The actual investigative assignment would be referred to an outside vendor.

All ICS examiners are trained as to the “red flags” indicative of potential fraud cases. Additionally, ICS will incorporate fraud awareness training into the training program for all CITY supervisors and managers.

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Sub-rosa Investigation

While a sub-rosa investigation can be a useful tool, ICS’ referrals of this nature must be justified due to the high cost and the relative low ratio of success. All sub-rosa investigations must have both ICS supervisory and CITY approvals.

Sub-rosa Guidelines

• Examiner will specify number of hours authorized.
• Investigator will stop, or request authority to continue, if no activity in four continuous hour period.
• No use of second vehicle or investigator without prior approval of ICS examiner. • All videotapes will be sent with the report and are the property of CITY . • Examiner must approve all records checks prior to conducting them. • All expenses are to be itemized, including office expenses, and must show date of activity. • Reports should be received by ICS within 10 working days of completion of assignment.

The purpose of the ICS litigation management program is to reduce the client’s overall cost of risk, taking into consideration both loss and cost factors in litigated claims.

ICS accomplishes this by taking a proactive approach to litigation, Encouraging and fostering early resolution, ICS closely monitors the activities of defense counsel and hearing representatives to assure early disposition. Claims examiners will continue to actively manage all such litigated claims.

The mere fact that a claim goes into litigation is insufficient cause to trigger an outside referral.

ICS’ preference in many cases is that the claims examiners continue with the day-to-day handling of the claim. The second choice is referral to a qualified defense attorney with the client’s concurrence.

When a defense attorney is optioned, ICS holds defense counsel to strict standards of reporting frequency, report content, cost containment, billing protocol and overall handling. Attorneys will not be authorized to perform or be reimbursed for tasks that are the responsibility of ICS.

The ICS Claims Examiner is responsible for the following:

• Refer file to specific attorney
• Direct and approve plan of action
• Subpoena medical records
• Serve original medical reports on all parties prior to DOR • Set defense med evaluation and send mileage and TTD
• Obtain settlement authority
• Review file with attorney prior to conference or trial • Respond to attorney phone call within one working day Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
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The Defense Attorney is responsible for the following, which ICS will monitor to ensure all responsibilities are fulfilled:

• Assign file to specific attorney requested
• Consult with and follow direction of examiner
• Unless otherwise directed, complete an initial file review within 15 days of receipt of file • Serve medical reports on WCAB when necessary
• Not refer to another attorney for deposition or appearance without prior examiner approval • Prepare purpose letter for medical evaluation
• Evaluate and request settlement authority from examiner • Respond to examiner phone calls within one working day • Meet with examiner and/or employer at request
• Within 5 days of receipt of DOR provide written analysis of case strategy and settlement authority requested
• Fax notice of hearing/conference/trial to examiner within one day of receipt • Initiate call to examiner to discuss strategy at least two weeks prior to hearing/conference/trial including proposed witnesses and settlement recommendations

• Report by fax, email or phone call to examiner within one working day, results of conference, hearing or trial
• Fax award notice to examiner within one day of receipt • Use ICS directed copy service
• Manage overall cost of litigation

By mutual consent the defense attorney may subpoena medical records and set evaluations with Unit Manager approval.

Closing Ratios

Closing ratios are directly related to examiner competence, staffing levels, and indemnity caseloads. ICS standards require a minimum-closing ratio of 100% in the first six months after transfer of the program. After the transition period, we will be substantially more familiar with employee demographics and the program’s operating environment to establish appropriate on- going closing ratio goals above 100% and develop appropriate performance benchmarks.

ICS employs a continuous improvement philosophy. Therefore, merely attaining the initial closing- ratio goal is viewed as a temporary accomplishment. Once ICS has assimilated to the Client’s program, ICS will then strive toward higher closing ratios and enhanced performance benchmarks.

Medical Only Claims Management

ICS will use its workflow that addresses claims management criteria similar to the standards required for management of lost time claims. ICS has created a Medical Only Examiner position that handles a blend of medical only and future medical claims and requires mandatory supervisor review of all open medical only claims every 90 days in addition to other review triggers. The medical only examiner is required to review all open claims every 30 days.

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File Documentation and Structure

Although the computer system offers many capabilities, hard copy files are still maintained by ICS.

ICS maintains hard copies of all benefit notices issued and all other correspondence in each claim file, although those documents can also be viewed on-line in the claim management system. ICS also documents all file balancing. Claims that have been closed for six months or more are stored by ICS off- site in a secure sub-contracted data storage facility.

Records, Files and Transcripts

ICS requires all examiners maintain a uniform segregation of information in our claim files. All bills and EOB’s are maintained by ICS in one section while medical reports are contained in another. All remaining communication is maintained by ICS in chronologic order, including hard copies of all completed reserve worksheets, benefit notices and any other written communication.

All claim activity is documented and maintained by ICS in the notepad area of our claims management system. Every phone call, every email, etc., are all clearly documented. ICS requires all examiners enter all mail received in the notepad area as well and our expectations are that this is done on a daily basis. ICS requires a Plan of Action entry on all unresolved claims every 30 days and a more extensive Plan of Action entry and Reserve recap every 90 days on unresolved claims.

For resolved claims these detailed reviews are conducted by ICS every 90 days. Evidence of file balancing is also reflected by ICS in the notes.

Certain critical information is scanned by ICS into the claims management system including Applications for Adjudication, Settlement documents and key AME or QME medical reports.

Index System

ICS subscribes and electronically files reports to the Index Systems; a clearinghouse that receives and facilitates the sharing of reported claims information among some 3000 organizations nationwide. ICS files its Index reports electronically.

ICS proposes that all indemnity claims, as well as, medical only claims with extensive treatment issues be indexed. The initial report should be made immediately upon receipt of sufficient information, then on an as needed basis thereafter. ICS will promptly file inquiries on any matches that the system finds.

Trust Fund

Trust Fund or Zero Balance accounts will be maintained by ICS for CITY. ICS ensures check production is password- protected, and signature requirements are client-specific. ICS will work with CITY on specific funding and banking procedures including frequency of reimbursement, bank reconciliation and signature authority. ICS will customize a reporting mechanism of checks issued to meet the Client’s need.

ICS ensures that safeguards are in place for the check printing process so that individuals entering checks and vendors into the system cannot also be the ones to sign and release the checks.

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ICS does not have “check stock” but instead each account has the Magnetic Ink Character Recognition (MICR) coding embedded by the printer and check software. Only certain individuals are able to access the check printing system as it is password and rights protected.

ICS will ensure all checks over a client’s designated threshold amount will be reviewed by a manager prior to signatures or mailing.

Closed File Storage

ICS uses the services of a professional file storage company for off-site storage of older closed claims. All closed claims are inventoried prior to transfer to the storage company. Closed claims are easily obtained from the off-site company if needed. ICS will maintain closed claims at the cost for five years from closing date.

Claim Roundtables

ICS will conduct random file audits to ensure compliance to all ICS and Client performance requirements. ICS will ensure all teams are up to date on procedure and case law and collaborate on challenging claims. ICS senior management has bi-monthly meetings with all Unit Managers where a number of topics are discussed, including roundtable discussions on claims.

The ICS Claim Examiner may initiate a roundtable discussion with senior management staff, defense counsel, the client and others on an as needed basis to discuss issues and resolution of individual claims.

Cost Containment Services

ICS will continue to partner with one of many managed care full service medical cost containment organizations specializing in workers' compensation. Services include managed care, medical, hospital, and pharmacy PPO access, and bill review.

Products and Services

All programs are offered as unbundled services:

• Medical Bill Review
• Utilization Review management
• Medical Case Management

ICS will always ensure that the managed care companies partnering with the Client and ICS remain uniquely qualified to provide the best medical managed care programs that promote quality medical care with the greatest cost savings, early return to work, and/or a permanent and stationary status of the injured worker.

• Early intervention, coordinating services and education of the injured claimant • Ongoing monitoring of treatment which helps to correct or prevent medical complication or secondary injury
• Savings of claims dollars through continued monitoring and selective placement of Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
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claimants at the appropriate level of care
• Reduction of relapses, needless hospital stays, and unnecessary emergency visits to the hospital
• Ongoing communication and team management which help to generate movement from one level of care to the next with as little confusion and disruption as possible for the claimant
• Generation of database for claims analysis
• Providing accountability for and tracking of medical services required

Bill Review Provider

The first step in creating an effective cost containment program begins with bill review. It is our belief that reviewing all medical bills creates a safety net against duplicitous and other erroneous billing.

Unless otherwise directed, ICS will continue to utilize Diamond Bill Review (DBR) to provide all bill review functions. ICS utilizes DBR for their knowledge and expertise of not only reviewing medical bills, but also providing the support and communication necessary to provide the quickest, most accurate turn-around for bill payments. DBR’s bill review software and services are the hallmark of their company culture. They prove it every day with an investment in experienced personnel and advanced technology.

The staff includes:
o Coding and Analyst Experts
o Dedicated Account and Production Managers
o Fee Schedule and Research Technicians
o Surgical Evaluation Specialists

DBR’s flexible bill review program allows changes to be made by ICS quickly if requested.

Diamond Bill Review takes care of any correspondence with providers concerning allowance disputes over bills reviewed for their offices. ICS will ensure ICS claims adjusters are always kept updated with any billing questions and DBR helps find immediate solutions.

Diamond Bill Review incorporates a system of checks and balances that refer to state-mandated allowances. From time to time a provider will have an extraordinary circumstance that goes beyond the “usual” level of care covered by a fee schedule item. When this occurs, the provider is asked to submit a report citing specific reasons for an additional allowance of those items in question.

If, upon re-review, an additional payment to the provider is recommended, a letter is sent to the claims adjuster with appropriate recommendations contained therein.

DBR practices a series of processes for Quality Assurance that allows for capturing duplicate bills, overpayments, and billing errors. Duplicate billing is captured by comparing bills that are received against bills that are already in the ICS system. The bill intake process involves the billing technology catching most duplicate bills when they are uploaded into the system. The data verification coordinators verify that each bill is an original, and if there is duplicate billing, ICS will Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
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ensure that the provider is sent an EOR with the check number or request for information contained on it. Quality Assurance is maintained through Communication, Management and Training. ICS will manage continual contact with DBR’s staff.

ICS will manage contract with DBR, intending to deliver services to CITY based on DBR’s performance standards, listed below:

1. Turn-Around time from bill being received into software, through payment file processing:
a. Maximum of 3 days

2. Review-Only Turn-Around Time:
a. Same day

3. Complex Bill Review Turn-Around Time:
a.1 Day from time received

4. Reconsideration Request:
a. 1 Day from time received

5. Paper Bill Scans:
a. Same day of being received

6. Bill Review Processing Quantity per Day/Employee:
a. 300 Minimum (Bill is scanned and uploaded into software)

7. Data Verification Processing Quantity per Day/Employee:
a. 400 Minimum (Bill is scanned and uploaded into software)

8. Provider Request (EOR, Payment Question, Bill Process, Etc.):
a. Same day of being received

Diamond Bill Review’s charges are as follows and are paid off the claim files:

Medical bills $3.00 Header per bill, $1.00 per line
Inpatient Bills 20% of savings
Outpatient Bills 16% of savings

PPO Network 20% of savings
Fees for Review Only bills and liens $100.00 flat rate

Hospital Bill Review
With the implementation of the hospital inpatient fee schedule, hospital bills that do not fall into a PPO network will be reduced to the fee schedule.

DBR’s highly trained bill review staff will ensure that a bill's DRG code matches the services the provider is billing for and will screen for length of stay and trauma situations before applying the rates.

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When a facility bill falls outside of the fee schedule, DBR will establish a U&C baseline for the treatment. They will use the 85th percentile U&C application and consult the medical treatment “Blue Book” for pricing recommendations. After establishing a starting rate for negotiation, they will contact ICS to receive authorization for the recommended amount. DBR’s communication throughout the negotiation process keeps our examiners updated as to each step in the negotiation process.

All DBR staff members have been trained on the calculations and regulations of the fee schedule in each state, for determining the rates of reimbursement, with key staff members attending state fee schedule programs pertaining to accurate calculations of Hospital bills. All bills that go through the office are subject to a two-check system to ensure accuracy.

Utilization Review

Unless otherwise directed, ICS will continue to utilize Arissa Cost Solutions to manage all Utilization and Physician/Peer Review services provided to CITY . All Utilization Review ( UR) requests are reviewed by physicians. Arissa’s charges remain as follows:

Level 1 (Nurse) UR Services:
• 1-3 Treatment Requests: $156
• 4-6 Treatment Requests: $156
• 7-9 Treatment Requests: $156
• 10+ Treatment Requests: $156

Level 2 (Peer) UR Services:
• 1-3 Treatment Requests: $215
• 4-6 Treatment Requests: $430
• 7-9 Treatment Requests: $645
• 10+ Treatment Requests: $860
• Escalated Requests: $50
• Withdrawal: $50

ICS will follow its UR referral guidelines , described below, that allow the claims examiners to authorize most treatment requests that are in line with each type of injury. ICS will utilize its list of triggers to reduce unnecessary delays, and questions only those treatment requests that appear to be outside of the ACOEM guidelines.

ICS’s UR Referral Guidelines:
• All requests for spinal surgery that are not being authorized outright. If there is any question regarding authorization, a referral must be made to UR immediately. If UR denies the surgery, we must formally object and request a 2
nd opinion. All of this must take place within
10 days of receipt of the request for surgery. Likewise, if UR recommends the surgery, it must be authorized immediately – there is no option for a 2nd opinion. This applies only to claims with dates of injury prior to 1/1/13 – and only until 6/30/13. Thereafter, only submit Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
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requests for spinal surgery to UR if the request meets another referral trigge r detailed below.
• Physical Therapy/Occupational Therapy, Chiropractic or Acupuncture treatment requests when the number of recommended visits has reached or exceeded 18, not including post - operative treatment.
• Post-Operative Physical/Occupational Therapy or Chiropractic treatment requests when the number of recommended post-operative visits has reached or exceeded 18. • All authorization requests for experimental, new, or not commonly performed surgical or other procedures.
• All requests for authorization of Durable Medical Equipment, expected to be used for more than 60 days, or suggested for a purchase price in excess of $500. • All authorization requests for inpatient surgery

• All authorization requests for referrals to nursing, convalescent or residential homes or for home health care services not related to post-surgical care. • All home health care service requests for a period beyond 2 weeks post-surgery, or 2 weeks post release from hospital.
• All cases where psychiatric or psychological therapy extends beyond two weeks. • All cases where the doctor specialty does not match diagnosis, i.e., chiropractic care for the diagnosis of a fracture, etc.
• All authorization requests for repeat diagnostic testing (CT/myelogram, discogram, diagnostic injections, angiogram, MRI, and EMG's) unless required due to the poor quality of prior studies, or when requested by a QME/AME, or when original studies are more than 12 months old.
• All authorization requests for referrals to Functional Restoration Programs and/or FRP evaluations.
• All authorization requests for Inpatient or Outpatient chemical dependency or weight loss programs.
• All cases where there is a need to obtain a second opinion on long -term need/use of prescriptions.
• All authorization requests for therapeutic injections (i.e. ESI, steroid injections, PRP injections, viscosupplementation, etc.).
• All prescription requests for unlisted, or non-exempt drugs per the MTUS guidelines. • Requests for treatment not recognized within LC 4600, such as massage therapy, gym memberships, etc.

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• Any other additional criteria requested by CITY.

When ICS determines a referral to Utilization is inappropriate, ICS will seek the opinion of a physician regarding past or future treatment recommendations. Those occasions require referral for a Peer or Physician Review. ICS will manage internal review prior to referral.

ICS will perform a non-utilization review, a product entitled, “Administrative Denials,” as defined by CCR9792.9.1(h) for those requests which have been previously submitted and partially certified or denied within the past 365 days by the same reviewer for the same service.

PPO Network

ICS will include the number of members in the PPO to be used and the number of specialties represented. In addition, ICS will provide the PPO member’s contract provision language which specifies the percentage below the California Official Medical Fee Schedule to which the PPO member has agreed.

Through the ICS affiliation with Diamond Bill Review ICS is able to offer access to 9 PPO networks:

• CorCare:
• Average of 9% discount off of CA state fee schedule.
• 2200 members with 146,000 trea tment locations in CA. • Multiplan
• Three Rivers Provider Network
• Triton Networks
• HealthSmart
• IHP
• Optum
• Novanet
• CareIQ – Physical Therapy and DME Specialties

Medical Case Management

ICS will perform the role of the Medical Case Manager, to coordinate, facilitate and orchestrate the management of the case under the review of the best-qualified physicians. ICS will ensure an appropriate treatment plan is established that delineates specific goals and outcome objectives.

ICS’s roles and responsibilities include the following:

• Involvement with the selection of quality medical providers

• Assuring all treatments are medically justified
• Tracking information and data on the injured workers
• Working with the medical treatment team to develop a plan of care with specific goals and objectives
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• Monitoring the utilization of services
• Evaluating the treatment plan as injured worker makes progress. • Educating the injured worker on rehabilitation or the treatment program and outcome • Encouraging active compliance with medically necessary treatment • Working to eliminate duplication of medical care or treatment • Active communication with the claim adjuster on management of the case • Working with the injured worker to develop trust and credibility in the treatment team and employer with return to work as soon as medically possible • Communication with the injured worker weekly to prevent regression, undue stress and feelings of abandonment which workers often experience, and which lead them to initiate litigation
• Working with all parties concerned to ensure timeliness of payments of disability, medical services and any out-of-pocket expenses
• Provide an "active" therapeutic environment for the injured worker

ICS’s Medical Case Manager works with the claimant's physician and health care providers to appropriately coordinate services and monitor the various treatment programs.

Pharmacy Benefit Management

ICS will manage its partnership with Alius Health to deliver pharmacy benefit management services to CITY as described below.

Alius Health provides a pharmacy lookup tool for convenience and boasts a network of over 74,000 pharmacies nationwide, over 6,000 of which are in the state of California. Their First Fill Program is completely customizable and can be delivered over text, digital or paper format. The card can be used at no risk to the CITY.

Should a medication fall outside the California formulary, a prior authorization notification is sent in real time to one of the ICS claims professionals. Alius Health can SMART route the prior authorizations to adjusters, utilization review or nurse case managers. The determination can be made in real time through Alius Health’s interactive email delivery system or through the client web portal.

The client web portal gives claims professional additional tools to help manage the pharmacy benefits, including but not limited to:
• Manage Prior Authorizations
• Alerts/Risk Scoring
• Medication History
• Claims documents and notes
• Reporting
• Distribution of pharmacy cards

Alius Health offers a wide variety of clinical tools to ensure that the injured workers receive the most cost-effective treatment while safeguarding that the care received is within the guidelines of Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
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the state of California’s workers’ compensation system. Formularies are thoroughly reviewed monthly and updated as frequently as daily when applicable.

Through Surescripts, Alius Health connects with over 85% of the prescriber’s electronic medical records (EMR) platforms. The Alius Health technology allows to upload formulary information and medication history into the prescriber’s EMR. Through Alius Health proprietary algorithms, prescribers can be notified if a medication is going to require prior authorization and presents a medication option within the California formulary. Benefits of this technology are endless but some of the highlights include:
• Increased patient safety
• Over a 30% reduction in spend
• Up to a 40% reduction in prior authorization requests • Less wait time at the pharmacy
• Greater medication adherence

At the point of sale, the formularies provide utilization review edits to help to protect against unrelated prescriptions as well as redundant therapy, early refills, unapproved prescribers, excessive morphine equivalent dosages, and cost thresholds. As ide from the constant real -time monitoring of medication regimens, they also offer quarterly reports that are risk based in an attempt to highlight claims that may be headed in the wrong direction.

Diagnostic Services

ICS has elected MIS, Inc., as their diagnostic services network provider. ICS staff is equipped with a toll- free number when diagnostics are requested, and all referrals are directed to schedule services through MIS who provides quality services at a competitive rate. CITY may elect another service provider in this area.

Return to Work

ICS will ensure all employees who are off work, or working modified duty, be evaluated by their treating physician at least every two weeks so that updated work restrictions can be obtained. This also assists the examiner in evaluating evidence of improvement, as work restrictions should decline throughout the process of recovery. For individuals who have undergone surgery, depending on the severity of that surgery, ICS will encourage re-evaluations no less frequently than monthly.

During ICS’ claims examiner’s initial and ongoing communication with injured workers, ICS will ensure workers are aware of the CITY’s program as well, and if they have been released to modified duty, instruct them to report for work. ICS will make sure they understand that returning for modified duty is not an option, and that they may not qualify for benefits if the Client is able to offer them work within their restrictions.

Transition Plan
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Accordingly, ICS will deploy sufficient senior staff to ensure a smooth, closely coordinated transition, avoiding a disruption of benefits to injured employees. ICS will facilitate this process to achieve a successful first contract year.

In addition to the above transition processes, ICS creates a document entitled “Client Profile” to confirm all client specific operational procedures and requirements. ICS integrates this document integrated into the CITY’s claims administrative standards and into ICS’s policy and procedures.

This document is maintained by the ICS Unit Manager, updated regularly, and provided to each ICS team member assigned to the CITY’s program.

Database Management

ICS utilizes klear.ai which is Internet and Windows based. ICS will complete data conversions for any other claims management software systems when necessary. ICS has a complete IMS department that oversees all hardware and software support for client and internal use.

Our current configuration allows clients to access their claims data, free of charge, through use of our claims management system. ICS, through a subcontractor, will providethe ability to see all active information and manage a CITY diary . CITY can enter notes and update body part and classification coding (?) as well. ICS will allow CITY to be users of the system and give CITY the capability to view all data that ICS maintains.

Security is a primary concern in today's corporate world, especially when dealing with personal information. Consequently, klear.ai allows the system administrator to assign permissions by user or by group access, all the way from network rights to database rights, down to individual screen and field access. ICS adheres to the IT Standards as adopted by CAJPA in their Accreditation Standards.

ICS will customize the software for CITY as needed. The ICS IMS Department will provide Help Desk support and custom programming.

Claim Reports

ICS will provide each client with a customized set of claim reports based on the CITY’s need.

These reports can be done daily, weekly, monthly, quarterly or upon CITY request. As requested, ICS will download and email the reports in Word, Excel, Adobe or other formats. Reports will be delivered to the CITY within 5 working days of the end of each month.

ICS will provide the following reports based on CITY’s needs:

Claim Activity Report
Report produces a detailed listing of claims, the associated financial activity, and indicates if each claim has one (or more) of nine categories of claim activity.

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Claim Summary by Year Report
Report produces a listing of claim counts and totals, grouped by annual periods and broken into report categories (loss type/LOB categories).

Claim Cost Detail Report
Report produces a detailed listing of claims and their associated financial activity broken down by reserve category.

Claims Cost Summary Report
Report produces a single-line, detailed listing of claims and their associated financial activity.

Claim Log
Report produces a listing of claims dated within a user-specified date-range, sorted by either claimant name or claim number.

Examiner Activity Report
Report produces a listing of claims, which 1) have been Opened, Closed, or Reopened during the activity period, or 2) are dated within the activity period.

Management Summary Report

Report produces a listing of claim counts and totals, grouped by user-specified location levels.

Examiner Case Log

Report produces one of three listings of claims, sorted by examiner: 1) Claims with activity in period; 2) Claims dated within the period; or 3) Claims, which are open at the end of the period. If "claims with activity within the period" is chosen, a summary section showing New, Closed, or Reopen counts is also produced.

Frequency Analysis Reports

Nine reports, each of which produces a different listing showing the frequency of claim incidences.

All reports have the same parameters, and most display information in the same way. Each report is ordered by the total number of claims for the type, highest count to lowest. The following nine types of frequency analysis are available:

• Body Part - claim counts by body part code.

• Line of Business - claim counts by line of business code. • Loss Age - claim counts by claimant age on the loss date (whole years only) • Loss Agency - claim counts by loss agency code.
• Loss Cause - claim counts by loss cause code.
• Loss Nature - claim counts by loss nature code.
• Loss Time - claim counts by loss time hour
• Loss Type - claim counts by loss type code.

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• Loss Day of Week - claim counts by loss day of week.
• Class Code – claim counts by class code.
• Length of Service – claim counts by number of years’ claimant has been employed. • Claim Location (Org Tree) – claim counts by location in your organization tree. • Loss Location – claim counts by loss location (using the loss location field).

Financial Reconciliation Ledger

Report produces a listing of financial transactions within a user-entered effective date range and/or a user-entered check number range.

Financial Location Summary by Year

Report produces a listing of claim counts and totals, grouped by Annual Periods (claim years).

Payment Type Totals Report

Report produces either a summary or detail report, showing totals by payment types. The summary report shows totals for each pay type grouped by reserve summary type. The detail report shows totals for each pay type grouped by individual claims.

Loss Triangle Report

Eight reports, each of which produces a trend analysis for specific claim activity for annual reporting periods, with aging based on the claim year, or based on claim life, i.e. the actual claim date chosen according to the parameter choice entered. All reports have the same parameters, and display information in the same way.

• Case Reserves - Net open reserves of all claims as of each period. • Claims Entered - Displays the number of claims entered for each period based on claim entry date.
• Claims with Incurred - Claims which have an incurred amount. Note: a reduction in the claim count within a development period represents the zeroing out of reserves. • Closed Claims - Number of claims closed as of each development period. • Closed with Paid - Numbe r of closed claims which have payments as of each development period.
• Incurred Loss - Total incurred loss of all claims as of each period. • Open Claims - Number of claims open as of each development period. • Paid Loss - Total paid loss of all claims a s of each period.

Vendor Payments by Claim Report

Report produces a listing of payment counts and totals to selected vendors, summarized for each claim and grouped by vendor.

Vendor Payments Summary Report
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Report produces either a single-line summary of payment totals for each vendor, or a listing of totals grouped by payment type within vendor. Reported information is for payments within the extract Activity Period.

Multiple Claims Report

Report produces a list showing multiple instances of a common tax ID number on different claims.

A user- specified number of instances controls how many times claims must be found in order to be reported.

Occurrence Cost Detail Report

Report produces a detailed listing of occurrences and their associated financial activity broken down by reserve category.

Occurrence Cost Summary Report

Report produces a single-line, detailed listing of occurrences and their associated financial activity.

SIP Annual Report

Report produces a completed Consolidated Liabilities report and Open Claim Log as required by SIP.

OSHA 300 Report
Report produces OSHA 300 log for calendar year and can be broken out by department.

ICS will prepare IRS Form 1099’s and all other State mandated reports. ICS will download data to Excel, Word, Adobe and to most other software programs as requested.

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EXHIBIT B

SCHEDULE OF PERFORMANCE

CONSULTANT shall perform the Services so as to complete each milestone within the number of days/weeks specified below. The time to complete each milestone may be increased or decreased by mutual written agreement of the Project Managers for CONSULTANT and CITY so long as all work is completed within the term of the Agreement. CONSULTANT shall provide a detailed schedule of work consistent with the schedule below within 2 weeks of receipt of the notice to proceed (“NTP”) from the CITY.

Duties assigned as needed.

Year 1 $239,060.00
Year 2 $248,504.00
Year 3 $258,322.00
Conversion Fee $15,000.00
Total Years 1-3 Not to Exceed Compensation $760,866.00

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EXHIBIT C

COMPENSATION

CITY agrees to compensate CONSULTANT for the Services performed in accordance with the terms and conditions of this Agreement, including Services, any specified reimbursable expenses, and Additional Services (if any, per Section 4 of the Agreement ), based on the hourly rate schedule attached as Exhibit C-1.

The compensation to be paid to CONSULTANT under this Agreement for all Services, any specified reimbursable expenses , and Additional Services (if any, per Section 4) , shall not exceed the amount(s) stated in Section 4 of this Agreement . CONSULTANT agrees to complete all Services , any specified reimbursable expenses, and Additional Services (if any, per Section 4) , within this/these amount(s). Any work performed or expenses incurred for which payment would result in a total exceeding the maximum amount of compensation set forth in this Agreement shall be at no cost to the CITY.

Should termination occur prior to the end of this agreement, the CITY agrees to pay a fee of $8,000 for the data transfer to a new entity.

REIMBURSABLE EXPENSES

CONSULTANT’S ordinary business expenses, such as administrative, overhead, administrative support time /overtime, information systems, software and hardware, photocopying, telecommunications (telephone, internet) , in-house printing, insurance and other ordinary business expenses , are included within the scope of payment for S ervices and are not reimbursable expenses hereunder.

Reimbursable expenses, if any are specified as reimburs able under this section, will be reimbursed at actual cost. The expenses (by type, e.g. travel) for which CONSULTANT will be reimbursed are: NONE up to the not-to-exceed amount of: $0.00.

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EXHIBIT D

INSURANCE REQUIREMENTS

CONSULTANTS TO THE CITY OF PALO ALTO (CITY), AT THEIR SOLE EXPENSE, SHALL FOR THE TERM OF THE

CONTRACT OBTAIN AND MAINTAIN INSURANCE IN THE AMOUNTS FOR THE COVERAGE SPECIFIED BELOW, AFFORDED BY COMPANIES WITH AM BEST’S KEY RATING OF A-:VII, OR HIGHER, LICENSED OR AUTHORIZED TO TRANSACT INSURANCE BUSINESS IN THE STATE OF CALIFORNIA.

AWARD IS CONTINGENT ON COMPLIANCE WITH CITY’S INSURANCE REQUIREMENTS AS SPECIFIED HEREIN.

REQUIRED TYPE OF COVERAGE REQUIREMENT

MINIMUM LIMITS
EACH

OCCURRENCE AGGREGATE
YES
YES
WORKER’S COMPENSATION
EMPLOYER’S LIABILITY

STATUTORY

STATUTORY STATUTORY STATUTORY
YES

GENERAL LIABILITY, INCLUDING

PERSONAL INJURY, BROAD FORM

PROPERTY DAMAGE BLANKET

CONTRACTUAL, AND FIRE LEGAL

LIABILITY

BODILY INJURY

PROPERTY DAMAGE

BODILY INJURY & PROPERTY
DAMAGE COMBINED.
$2,000,000

$2,000,000

$2,000,000

$4,000,000

$4,000,000

$4,000,000

YES

AUTOMOBILE LIABILITY,

INCLUDING ALL OWNED, HIRED,

NON-OWNED

BODILY INJURY
- EACH PERSON
- EACH OCCURRENCE

PROPERTY DAMAGE

BODILY INJURY AND PROPERTY

DAMAGE, COMBINED
$1,000,000
$1,000,000
$1,000,000

$1,000,000

$1,000,000

$1,000,000
$1,000,000
$1,000,000

$1,000,000

$1,000,000

YES

PROFESSIONAL LIABILITY,

INCLUDING, ERRORS AND

OMISSIONS, MALPRACTICE (WHEN

APPLICABLE), AND NEGLIGENT

PERFORMANCE
ALL DAMAGES $2,000,000
YES

THE CITY OF PALO ALTO IS TO BE NAMED AS AN ADDITIONAL INSURED: CONSULTANT, AT ITS SOLE COST

AND EXPENSE, SHALL OBTAIN AND MAINTAIN, IN FULL FORCE AND EFFECT THROUGHOUT THE ENTIRE TERM

OF ANY RESULTANT AGREEMENT, THE INSURANCE COVERAGE HEREIN DESCRIBED, INSURING NOT ONLY

CONSULTANT AND ITS SUBCONSULTANTS, IF ANY, BUT ALSO, WITH THE EXCEPTION OF WORKERS’
COMPENSATION, EMPLOYER’S LIABILITY AND PROFESSIONAL INSURANCE, NAMING AS ADDITIONAL INSUREDS CITY, ITS COUNCIL MEMBERS, OFFICERS, AGENTS, AND EMPLOYEES.

I. INSURANCE COVERAGE MUST INCLUDE:

A. A CONTRACTUAL LIABILITY ENDORSEMENT PROVIDING INSURANCE COVERAGE FOR CONSULTANT’S AGREEMENT TO INDEMNIFY CITY.

II. THE CONSULTANT MUST SUBMIT CERTIFICATES(S) OF INSURANCE EVIDENCING REQUIRED COVERAGE AT THE FOLLOWING EMAIL: [email protected]

III. ENDORSEMENT PROVISIONS WITH RESPECT TO THE INSURANCE AFFORDED TO ADDITIONAL INSUREDS:

A. PRIMARY COVERAGE
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WITH RESPECT TO CLAIMS ARISING OUT OF THE OPERATIONS OF THE NAMED INSURED,

INSURANCE AS AFFORDED BY THIS POLICY IS PRIMARY AND IS NOT ADDITIONAL TO OR

CONTRIBUTING WITH ANY OTHER INSURANCE CARRIED BY OR FOR THE BENEFIT OF THE ADDITIONAL INSUREDS.

B. CROSS LIABILITY

THE NAMING OF MORE THAN ONE PERSON, FIRM, OR CORPORATION AS INSUREDS UNDER THE

POLICY SHALL NOT, FOR THAT REASON ALONE, EXTINGUISH ANY RIGHTS OF THE INSURED

AGAINST ANOTHER, BUT THIS ENDORSEMENT, AND THE NAMING OF MULTIPLE INSUREDS, SHALL NOT INCREASE THE TOTAL LIABILITY OF THE COMPANY UNDER THIS POLICY.

C. NOTICE OF CANCELLATION

1. IF THE POLICY IS CANCELED BEFORE ITS EXPIRATION DATE FOR ANY REASON OTHER

THAN THE NON-PAYMENT OF PREMIUM, THE CONSULTANT SHALL PROVIDE CITY AT LEAST A THIRTY (30) DAY WRITTEN NOTICE BEFORE THE EFFECTIVE DATE OF CANCELLATION.

2. IF THE POLICY IS CANCELED BEFORE ITS EXPIRATION DATE FOR THE NON-PAYMENT OF PREMIUM, THE CONSULTANT SHALL PROVIDE CITY AT LEAST A TEN (10) DAY WRITTEN NOTICE BEFORE THE EFFECTIVE DATE OF CANCELLATION.

EVIDENCE OF INSURANCE AND OTHER RELATED NOTICES ARE REQUIRED TO BE FILED WITH THE CITY OF PALO ALTO SENT TO THE FOLLOWING EMAIL:

[email protected]

Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
Attachment A -
Professional Services
Contract #C25187148
with Innovative Claims
Solutions

Item 7: Staff Report
Pg.
43 Packet Pg. 200 of 309

POLICY S
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DocuSign Envelope ID: 87E1232D-F46E-405A-95CD-91CC38106A93 Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
Attachment A -
Professional Services
Contract #C25187148
with Innovative Claims
Solutions

Item 7: Staff Report
Pg.
44 Packet Pg. 201 of 309

POLICY AND PROCEDURES 1‐64/IT
Revised: December 2017

The  goals  and  objectives  of  the  Policy  are:  (a)  a  safe,  productive,  and  inoffensive  work environment  for  all  users  having  access  to  the  City’s  applications  and  databases;  (b)  the appropriate maintenance and security of database information assets owned by, or entrusted to, the City; (c) the controlled access and security of the Information provided to the City’s staff and third party contractors; and (d) faithful compliance with legal and regulatory requirements.

SCOPE
The  Policy  will  guide  the  City’s  staff  and,  indirectly,  third  party  contractors,  which  are  by contract required to protect the confidentiality and privacy of the Information of the persons whose  personal  information  data  are  intended  to  be  covered  by  the Policy  and which  will  be advised by City staff to conform their performances to the Policy should they enjoy conditional access to that information.

CONSEQUENCES
The City’s employees shall comply with the Policy in the execution of their official duties to the extent  their  work  implicates  access  to  the  Information  referred  to  in  this  Policy.   A  failure  to comply may result in employment and/or legal consequences.

EXCEPTIONS
In the event that a City employee cannot fully comply with one or more element(s) described in this Policy, the employee may request an exception by submitting Security Exception Request.

The  exception  request  will  be  reviewed  and  administered  by  the  City’s  Information  Security Manager  (the  “ISM”).   The  employee,  with  the  approval  of  his  or  her  supervisor,  will  provide any  additional  information  as  may  be  requested  by  the  ISM.  The  ISM  will  conduct  a  risk assessment  of  the  requested  exception  in  accordance  with  guidelines  approved  by  the  City’s Chief  Information  Officer  (“CIO”)  and  approved  as  to  form  by  the  City  Attorney.  The  Policy’s guidelines  will  include  at  a  minimum:  purpose,  source,  collection,  storage,  access,  retention, usage, and protection of the Information identified in the request. The ISM will consult with the CIO to approve or deny the exception request.  After due consideration is given to the request, the exception request disposition will be communicated, in writing, to the City employee and his  or  her  supervisor.  The  approval  of  any  request  may  be  subject  to  countermeasures established by the CIO, acting by the ISM.

MUNICIPAL ORDINANCE
This Policy will supersede any City policy, rule, regulation or procedure regarding information privacy.

RESPONSIBILITIES OF CITY STAFF
DocuSign Envelope ID: 87E1232D-F46E-405A-95CD-91CC38106A93 Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
Attachment A -
Professional Services
Contract #C25187148
with Innovative Claims
Solutions

Item 7: Staff Report
Pg.
45 Packet Pg. 202 of 309

POLICY AND PROCEDURES 1‐64/IT
Revised: December 2017

A. RESPONSIBILITY OF CIO AND ISM
The CIO, acting by the ISM, will establish an information security management framework to  initiate  and  coordinate  the  implementation  of  information  security  measures  by  the City’s government.

The  City’s  employees,  in  particular,  software  application  users  and  database  users,  and, indirectly,  third  party  contractors  under  contract  to  the  City  to  provide  services,  shall  by guided by this Policy in the performance of their job responsibilities.

The  ISM  will  be  responsible  for:  (a)  developing  and  updating  the  Policy,  (b)  enforcing compliance  with  and  the  effectiveness  of  the  Policy;  (c)  the  development  of  privacy standards that will manifest the Policy in detailed, auditable technical requirements, which will be designed and maintained by the persons responsible for the City’s IT environments; (d) assisting the City’s staff in evaluating security and privacy incidents that arise in regard to  potential  violations  of  the  Policy;  (e)  reviewing  and  approving  department‐specific policies and procedures which fall under the purview of this Policy; and (f) reviewing Non‐ Disclosure Agreements (NDAs) signed by third party contractors, which will provide services, including, without limitation, local or ‘cloud‐based’ software services to the City.

B. RESPONSIBILITY OF INFORMATION SECURITY STEERING COMMITTEE The Information Security Steering Committee (the “ISSC”), which is comprised of the City’s employees,  drawn  from  the  various  City  departments,  will  provide  the  primary  direction, prioritization  and  approval  for  all  information  security  efforts,  including  key  information security and privacy risks, programs, initiatives and activities. The ISSC will provide input to the information security and privacy strategic planning processes to ensure that information security  risks  are  adequately  considered,  assessed  and  addressed  at  the  appropriate  City department level.

C. RESPONSIBILITY OF USERS
All authorized users of the Information will be responsible for complying with information privacy processes and technologies within the scope of responsibility of each user.

D. RESPONSIBILITY OF INFORMATION TECHNOLOGY (IT) MANAGERS The  City’s  IT  Managers,  who  are  responsible  for  internal,  external,  direct  and  indirect connections  to  the  City’s  networks,  will  be  responsible  for  configuring,  maintaining  and securing  the  City’s  IT  networks  in  compliance  with  the  City’s  information  security  and privacy policies. They are also responsible for timely internal reporting of events that may have compromised network, system or data security.

DocuSign Envelope ID: 87E1232D-F46E-405A-95CD-91CC38106A93 Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
Attachment A -
Professional Services
Contract #C25187148
with Innovative Claims
Solutions

Item 7: Staff Report
Pg.
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POLICY AND PROCEDURES 1‐64/IT
Revised: December 2017

E. RESPONSIBILITY OF AUTHORIZATION COORDINATION
The  ISM  will  ensure  that  the  City’s  employees  secure  the  execution  of  Non‐Disclosure Agreements  (NDA),  whenever  access  to  the  Information  will  be  granted  to  third  party contractors, in conjunction with the Software as a Service (SaaS) Security and Privacy Terms and  Conditions.   An  NDA  must  be  executed  prior  to  the  sharing  of  the  Information  of persons covered by this Policy with third party contractors. The City’s approach to managing information  security  and  its  implementation  (i.e.  objectives,  policies,  processes,  and procedures for information security) will be reviewed independently by the ISM at planned intervals, or whenever significant changes to security implementation have occurred.

The CIO, acting by the ISM, will review and recommend changes to the Policy annually, or as appropriate, commencing from the date of its adoption.

GENERAL PROCEDURE FOR INFORMATION PRIVACY
A. OVERVIEW
The Policy applies to activities that involve the use of the City’s information assets, namely, the Information of persons doing business with the City or receiving services from the City, which  are  owned  by,  or  entrusted  to,  the  City  and  will  be  made  available  to  the  City’s employees and third party contractors under contract to the City to provide Software as a Service  consulting  services.  These  activities  include,  without  limitation,  accessing  the Internet, using e‐mail, accessing the City’s intranet or other networks, systems, or devices.

The  term  “information  assets”  also  includes  the  personal  information  of  the  City’s employees  and  any  other  related  organizations  while  those  assets  are  under  the  City’s control.  Security measures will be designed, implemented, and maintained to ensure that only authorized persons will enjoy access to the information assets. The City’s staff will act to protect its information assets from theft, damage, loss, compromise, and inappropriate disclosure  or  alteration.  The  City  will  plan,  design,  implement  and  maintain  information management  systems,  networks  and  processes  in  order  to  assure  the  appropriate confidentiality,  integrity,  and  availability  of  its  information  assets  to  the  City’s  employees and authorized third parties.

B. PERSONAL INFORMATION AND CHOICE
Except as permitted or provided by applicable laws, the City will not share the Information of any person doing business with the City, or receiving services from the City, in violation of this  Policy,  unless  that  person  has  consented  to  the  City’s  sharing  of  such  information during  the  conduct  of  the  City’s  business  as  a  local  government  agency  with  third  parties under contract to the City to provide services.

DocuSign Envelope ID: 87E1232D-F46E-405A-95CD-91CC38106A93 Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
Attachment A -
Professional Services
Contract #C25187148
with Innovative Claims
Solutions

Item 7: Staff Report
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POLICY AND PROCEDURES 1‐64/IT
Revised: December 2017

C. METHODS OF COLLECTION OF PERSONAL INFORMATION
The City may gather the Information from a variety of sources and resources, provided that the collection of such information is both necessary and appropriate in order for the City to conduct  business  as  a  local  government  agency  in  its  governmental  and  proprietary capacities.   That  information  may  be  gathered  at  service  windows  and  contact  centers  as well as at web sites, by mobile applications, and with other technologies, wherever the City may interact with persons who need to share such formation in order to secure the City’s services.

The  City’s  staff  will  inform  the  persons  whose  Information  are  covered  by  this  Policy  that the City’s web site may use “cookies” to customize the browsing experience with the City of Palo Alto web site.  The City will note that a cookie contains unique information that a web site can use to track, among others, the Internet Protocol address of the computer used to access  the  City’s  web  sites,  the  identification  of  the  browser  software  and  operating systems used, the date and time a user accessed the site, and the Internet address of the website  from  which  the  user  linked  to  the  City’s  web  sites.  Cookies  created  on  the  user’s computer  by  using  the  City’s  web  site  do  not  contain  the  Information,  and  thus  do  not compromise the user’s privacy or security. Users can refuse the cookies or delete the cookie files from their computers by using any of the widely available methods. If the user chooses not to accept a cookie on his or her computer, it will not prevent or prohibit the user from gaining access to or using the City’s sites.

D. UTILITIES SERVICE
In the provision of utility services to persons located within Palo Alto, the City of Palo Alto Utilities Department (“CPAU”) will collect the Information in order to initiate and manage utility  services  to  customers.   To  the  extent  the  management  of  that  information  is  not specifically  addressed  in  the  Utilities  Rules  and  Regulations  or  other  ordinances,  rules, regulations  or  procedures,  this  Policy  will  apply;  provided,  however,  any  such  Rules  and Regulations  must  conform  to  this  Policy,  unless  otherwise  directed  or  approved  by  the Council.  This  includes  the  sharing  of  CPAU‐collected  Information  with  other  City departments except as may be required by law.

Businesses and residents with standard utility meters and/or having non‐metered monthly services  will  have  secure  access  through  a  CPAU  website  to  their  Information,  including, without limitation, their monthly utility usage and billing data. In addition to their regular monthly  utilities  billing,  businesses  and  residents  with  non‐standard  or  experimental electric, water or natural gas meters may have their usage and/or billing data provided to them  through  non‐City  electronic  portals  at  different  intervals  than  with  the  standard monthly billing.

DocuSign Envelope ID: 87E1232D-F46E-405A-95CD-91CC38106A93 Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
Attachment A -
Professional Services
Contract #C25187148
with Innovative Claims
Solutions

Item 7: Staff Report
Pg.
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POLICY AND PROCEDURES 1‐64/IT
Revised: December 2017

Businesses and residents with such non‐standard or experimental metering will have their Information  covered  by  the  same  privacy  protections  and  personal  information  exchange rules applicable to Information under applicable federal and California laws.

E. PUBLIC DISCLOSURE
The Information that is collected by the City in the ordinary course and scope of conducting its business could be incorporated in a public record that may be subject to inspection and copying  by the  public, unless  such  information  is  exempt  from  disclosure  to  the  public  by California law.

F. ACCESS TO PERSONAL INFORMATION
The  City  will  take  reasonable  steps  to  verify  a  person’s  identity  before  the  City  will  grant anyone  online  access  to  that  person’s  Information.  Each  City  department  that  collects Information  will  afford  access  to  affected  persons  who  can  review  and  update  that information at reasonable times.

G. SECURITY, CONFIDENTIALITY AND NON‐DISCLOSURE
Except  as  otherwise  provided  by  applicable  law  or  this  Policy,  the  City  will  treat  the Information  of  persons  covered  by  this  Policy  as  confidential  and  will  not  disclose  it,  or permit it to be disclosed, to third parties without the express written consent of the person affected.  The  City  will  develop  and  maintain  reasonable  controls  that  are  designed  to protect the confidentiality and security of the Information of persons covered by this Policy.

The City may authorize the City’s employee and or third party contractors to access and/or use the Information of persons who do business with the City or receive services from the City.  In  those  instances,  the  City  will  require  the  City’s  employee  and/or  the  third  party contractors  to  agree  to  use  such  Information  only  in  furtherance  of  City‐related  business and in accordance with the Policy.

If the City becomes aware of a breach, or has reasonable grounds to believe that a security breach  has  occurred,  with  respect  to  the  Information  of  a  person,  the  City  will  notify  the affected person of such breach in accordance with applicable laws. The notice of breach will include  the  date(s)  or  estimated  date(s)  of  the  known  or  suspected  breach,  the  nature  of the Information that is the subject of the breach, and the proposed action to be taken or the responsive action taken by the City.

H. DATA RETENTION / INFORMATION RETENTION
DocuSign Envelope ID: 87E1232D-F46E-405A-95CD-91CC38106A93 Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
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Professional Services
Contract #C25187148
with Innovative Claims
Solutions

Item 7: Staff Report
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POLICY AND PROCEDURES 1‐64/IT
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The City will store and secure all Information for a period of time as may be required by law, or  if  no  period  is  established  by  law,  for  seven  (7)  years,  and  thereafter  such  information will be scheduled for destruction.

I. SOFTWARE AS A SERVICE (SAAS) OVERSIGHT
The  City  may  engage  third  party  contractors  and  vendors  to  provide  software  application and database services, commonly known as Software‐as‐a‐Service (SaaS).

In order to assure the privacy and security of the Information of those who do business with the  City  and  those  who  received  services  from  the  City,  as  a  condition  of  selling  goods and/or  services  to  the  City,  the  SaaS  services  provider  and  its  subcontractors,  if  any, including any IT infrastructure services provider, shall design, install, provide, and maintain a secure IT environment, while it performs such services and/or furnishes goods to the City, to the extent any scope of work or services implicates the confidentiality and privacy of the Information.

These  requirements  include  information  security  directives  pertaining  to:  (a)  the  IT infrastructure, by which the services are provided to the City, including connection to the City's  IT  systems;  (b)  the  SaaS  services  provider’s  operations  and  maintenance  processes needed to support the IT environment, including disaster recovery and business continuity planning; and (c) the IT infrastructure performance monitoring services to ensure a secure and  reliable  environment  and  service  availability  to  the  City.  The  term  “IT  infrastructure” refers to the integrated framework, including, without limitation, data centers, computers, and database management devices, upon which digital networks operate.

Prior  to  entering  into  an  agreement  to  provide  services  to  the  City,  the  City’s  staff  will require  the  SaaS  services  provider  to  complete  and  submit  an  Information  Security  and Privacy Questionnaire. In the event that the SaaS services provider reasonably determines that  it  cannot  fulfill  the  information  security  requirements  during  the  course  of  providing services, the City will require the SaaS services provider to promptly inform the ISM.

J. FAIR AND ACCURATE CREDIT TRANSACTION ACT OF 2003
CPAU  will  require  utility  customers  to  provide  their  Information  in  order  for  the  City  to initiate and manage utility services to them.

Federal  regulations,  implementing  the  Fair  and  Accurate  Credit  Transactions  Act  of  2003 (Public  Law  108‐159),  including  the  Red  Flag  Rules,  require  that  CPAU,  as  a  “covered financial institution or creditor” which provides services in advance of payment and which can  affect  consumer  credit,  develop  and  implement  procedures  for  an  identity  theft program for new and existing accounts to detect, prevent, respond and mitigate potential identity theft of its customers’ Information.

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POLICY AND PROCEDURES 1‐64/IT
Revised: December 2017

CPAU  procedures  for  potential  identity  theft  will  be  reviewed  independently  by  the  ISM annually  or  whenever  significant  changes  to  security  implementation  have  occurred.  The ISM will recommend changes to CPAU identity theft procedures, or as appropriate, so as to conform to this Policy.

There  are  California  laws  which  are  applicable  to  identity  theft;  they  are  set  forth  in California Civil Code § 1798.92.

NOTE:  Questions  regarding  this  policy  should  be  referred  to  the  Information  Technology Department, as appropriate.

Recommended:     __________________________________  ________________ Director Information Technology/CIO   Date

Approved:         ___________________________________  _________________ City Manager        Date

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Information Security
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ATTACHMENT H

CYBERSECURITY TERMS AND CONDITIONS
In order to assure the privacy and security of the personal information of the City 's customers and people who do business with the City, including, without limitation, vendors, utility customers, library patrons, and other individuals and companies, who are required to share such information with the City, as a condition of receiving services from the City or selling goods and services to the City, including, without limitation, the Software as a Service services provider (the "Consultant") and its subcontractors, if any, including, without limitation, any Information Technology ("IT") infrastructure services provider, shall design, install, provide, and maintain a secure IT environment, described below, while it renders and performs the Services and furnishes goods, if any, described in the Statement of Work, Exhibit B, to the extent any scope of work implicates the confidentiality and privacy of the personal information of the City's customers. The Consultant shall fulfill the data and information security requirements (the "Requirements") set forth in Part A below.

A "secure IT environment" includes (a) the IT infrastructure, by which the Services are provided to the City, including connection to the City's IT systems; (b) the Consultant 's operations and maintenance processes needed to support the environment, including disaster recovery and business continuity planning; and (c) the IT infrastructure performance monitoring services to ensure a secure and reliable environment and service availability to the City . "IT infrastructure" refers to the integrated framework, including, without limitation, data centers, computers, and database management devices, upon which digital networks operate.

In the event that, after the Effective Date, the Consultant reasonably determines that it cannot fulfill the Requirements, the Consultant shall promptly inform the City of its determination and submit, in writing, one or more alternate countermeasure options to the Requirements (the "Alternate Requirements" as set forth in Part B), which may be accepted or rejected in the reasonable satisfaction of the Information Security Manager (the "ISM").

Part A. Requirements:

The C
onsultant shall at all times during the term of any contract between the City and the Consultant:
(
a) Appoint or designate an employee, preferably an executive officer, as the security liaison to the City with respect to the Services to be performed under this Agreement. (b) Comply with the City's Information Privacy Policy:
(c) H ave adopted and implemented information security and privacy policies that are documented, are accessible to the City , and conform to ISO 27001/2 – Information Security Management Systems (ISMS) Standards. See the following:
http://www.iso.org/iso/home/store/catalogue_tc/catalogue_detail.htm?csnumber=42103 http://www.iso.org/iso/iso_catalogue/catalogue_tc/catalogue_detail.htm?csnumber=50297 (d) Conduct routine data and information security compliance training of its personnel that is appropriate to their role.
(e) Develop and maintain detailed documentation of the IT infrastructure, including softwar e v
ersions and patch levels.
(f) Develop an independently verifiable process, consistent with industry standards, for performing professional and criminal background checks of its employees that (1) would permit verification of employees' personal identity and employment status, and (2) would enable the immediate denial of access to the City's confidential data and information by any of its employees who no Docusign Envelope ID: 540DFEFB-C8BA-4F56-A850-F1BE0BE67C90 Item 7
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Information Security
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longer would require access to that information or who are terminated. (g) Provide a list of IT infrastructure components in order to verify whether the Consultant has met or has failed to meet any objective terms and conditions. (h) Implement access accountability (identification and authentication) architecture and support role-based access control ( "RBAC") and segregation of d uties ( "SoD") mechanisms for all personnel, systems, and Software used to provide the Services. "RBAC" refers to a computer systems security approach to restricting access only to authorized users. "SoD" is an approach that would require more than one individual to complete a security task in order to promote the detection and prevention of fraud and errors.
(i) Assist the City in undertaking annually an assessment to assure that: (1) all elements of the Services' environment design and deployment are known to the City, and (2) it has implemented measures in accordance with industry best practices applicable to secure coding and secure IT architecture.
(j) Provide and maintain secure intersystem communication paths that would ensure the confidentiality, integrity, and availability of the City's information. (k) Deploy and maintain IT system upgrades, patches and configurations conforming to current patch and/or release levels by not later than one (1) week after its date of release. Emergency security patches must be installed within 24 hours after its date of release. (l) Provide for the timely detection of, response to, and the reporting of security incidents, including on-going incident monitoring with logging.
(m) Notify the City within one (1) hour of detecting a security incident that results in the unauthorized access to or the misuse of the City's confidential data and information. (n) Inform the City that any third party service provider(s) meet(s) all of the Requirements. (o) Perform security self-audits on a regular basis and not less frequently than on a quarterly basis, and provide the required summary reports of those self -audits to the ISM on the annual anniversary date or any other date agreed to by the Parties. (p) Accommodate, as practicable, and upon reasonable prior notice by the City, the City 's performance of random site security audits at the Consultant's site(s), including the site(s) of a third-party service provider(s), as applicable. The scope of these audits will extend to the Consultant's and its third-party service provider(s)' awareness of security policies and practices, systems configurations, access authentication and authorization, and incident detection and response.
(q) Cooperate with the City to ensure that to the extent r equired by applicable laws, rules and regulations, and the Confidential Information will be accessible only by the Consultant and any authorized third-party service provider's personnel.
(r) Perform regular, reliable secured backups of all data needed to maximize the availability of the Services. Adequately encrypt the City of Palo Alto's data, during the operational process, hosted at rest, and the backup stage at the Vendors' environment (including Vendor's contracting organization's environment).
(s) Maintain records relating to the Services for a period of three (3) years after the expiration or earlier termination of this Agreement and in a mutually agreeable storage medium. Within thirty (30) days after the effective date of expiration or earlier termination of this Agreement, all of those records relating to the performance of the Services shall be provided to the ISM. (t) Maintain the Confidential Information in accordance with applicable federal, state, and local data and information privacy laws, rules, and regulations.
(u) Encrypt the Confidential Information before delivering the same by electronic mail to the City and or any authorized recipient.
(v) Provide Network Layer IP filtering services to allow access only from the City of Palo Alto's IP address to the Vendor environment (primarily hosted for the City of Palo Alto). (w) Offer a robust disaster recovery and business continuity (DR-BCP) solutions to the City for the systems and services the Vendor provides to the City.

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(x) Provide and support Single Sign- on (SSO) and Multifactor Authentication (MFA) solutions for authentication and authorization services from the "City's environment to the Vendor's environment," and Vendor's environment to the Vendor's cloud services/hosted environment ." The Vendor shall allow two employees of the City to have superuser and super -admin access to the Vendor's IT environment, and a cloud-hosted IT environment belongs to the City. (y) Unless otherwise addressed in the Agreement, shall not hold the City liable for any direct, indirect or punitive damages whatsoever including, without limitation, damages for loss of use, data or profits, arising out of or in any way connected with the City's IT environment, including, without limitation, IT infrastructure communications.
(z) The Vendor must provide evidence of valid cyber liability insurance policy per the City’s
EXHIBIT “D” INSURANCE REQUIREMENTS.

Part B. Alternate Requirements:

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City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: City Auditor
Meeting Date: March 24, 2025
Report #:2502-4132
TITLE
Approval of Contract Amendment Number 2 to Contract Number C22183462 with Macias Gini & O'Connell LLP (MGO) to Add $415,071 and Extend the Term for Two Years for External Financial Audit Services; CEQA Status -- Not a Project.

RECOMMENDATION
The Office of the City Auditor recommends that City Council approve and authorize the City Manager or their designee to execute Amendment Number 2 to Contract C22183462 with Macias Gini & O'Connell LLP (MGO) for external financial audit services, to add $415,071 and extend the term for two years. This amendment results in a revised total contract not to exceed amount of $1,014,390, for five years of services, from 2022 through March 31, 2027.

BACKGROUND
The City Charter requires the City Council, through the City Auditor, to engage an independent certified public accounting firm to conduct the annual external financial audit, and report the results of the audit, in writing, to the City Council. MGO has provided the city with external financial audit services since 2017. In October 2021, the City initiated a formal Request for Proposal (RFP) process that encouraged competition from all qualified firms, including MGO, and selected MGO’s proposal for continued services through March 31, 2025. The City Council approved the agreement with MGO on May 2, 20221.

Due to the recent appointment of the current City Auditor, and to ensure the City is not in the position of potentially replacing both the City Auditor and External Financial Auditor in the same year, the Office of the City Auditor proposes extending the contract with MGO through fiscal years 2025 and 2026, and conducting another formal Request for Proposal (RFP) process in 2026 for external financial auditing services to commence in FY2027. 1 City Council, May 2, 2022: https://portal.laserfiche.com/Portal/DocView.aspx?id=59469&repo=r- 704298fc&searchid=c93bca32-12fd-4626-8c17-0020136890ba
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ANALYSIS
This recommendation does not present any changes to existing City policies and aligns with the City’s Charter requirements.

FISCAL/RESOURCE IMPACT
The total five-year cost not to exceed $1,019,556 is funded in the City Auditor’s Office operating budget beginning in Fiscal Year 2023 through March 31, 2027, subject to Council appropriation of funds for future fiscal year budgets. Funding for this agreement is included in the FY 2025 Adopted Budget. The payment per year for professional services and reimbursable expenses shall not exceed:
2022 – 2023 $176,270
2023 – 2024 $181,560
2024 – 2025 $187,005
2025 – 2026 $204,452
2026 – 2027 $210,619
Additional Services $54,484

STAKEHOLDER ENGAGEMENT
The Office of the City Auditor worked primarily with the Administrative Services Department in assessing contract amendment terms. The Office of the City Attorney assisted in review of the contract amendment.

ENVIRONMENTAL REVIEW
Council action on this item is not a project as defined by CEQA because the financial audit activities are an administrative activity that will not result in direct or indirect physical changes in the environment. CEQA Guidelines section 15378(b)(5).

ATTACHMENTS
Attachment A: Amendment No. 2 to Contract No. C22183462 with Macias Gini & O’Connell LLP APPROVED BY:

Kate Murdock, City Auditor
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AMENDMENT NO. 2 TO CONTRACT NO. C22183462

BETWEEN THE CITY OF PALO ALTO AND
MACIAS GINI & O’CONNELL LLP

This Amendment No. 2 (this “Amendment”) to Contract No. C22183462 (the “Contract” as defined below) is entered into as of March 17, 2025 by and between the CITY OF PALO ALTO, a California chartered municipal corporation (“CITY”), and MACIAS GINI & O’CONNELL LLP , a Limited Liability Partnership, located at 500 Capitol Mall, Suite 2200 Sacramento, CA 95 814 (“CONSULTANT”). CITY and CONSULTANT are referred to collectively as the “Parties” in this Amendment.

R E C I T A L S

A. T he Contract (as defined below) was entered into by and between the Parties hereto for the provision of providing External Audit Services, as detailed therein.

B. The Parties now wish to amend the Contract in order to (1) extend the contract term (2) increase N ot to Exceed Compensation (3) revise Exhibit C Compensation, and (4) revise Exhibit C-1 Schedule of Rates, as detailed herein.

NOW, THEREFORE, in consideration of the covenants, terms, conditions, and provisions of this Amendment, the Parties agree:

SECTION 1. Definitions. The following definitions shall apply to this Amendment:

a. Contract. The term “Contract” shall mean C ontract No. C22183462 between CONSULTANT and CITY, dated April 13, 2022 as amended by Amendment No. 1 dated January 22, 2024 and Amendment No. 2 dated March 17, 2025.

b. Other Terms. Capitalized terms used and not defined in this Amendment shall have the meanings assigned to such terms in the Contract.

SECTION 2. Section 2 “TERM” of the Contract is hereby amended to read as follows:

“The term of this Agreement shall be from the date of its full execution through March 31, 2027 unless terminated earlier pursuant to Section 19 (Termination) of this Agreement.”

SECTION 3 . Section 4_”NOT TO EXCEED COMPENSATION ” of the Contract is hereby amended to read as follows:

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Amendment No. 2 to
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“The compensation to be paid to CONSULTANT for performance of the Services shall be based on the compensation structure detailed in Exhibit C, entitled “COMPENSATION,” including any reimbursable expenses specified therein, and the maximum total compensation shall not exceed Nine Hundred Fifty-Nine Thousand Nine Hundred Six Dollars ($959,906.00). The hourly schedule of rates, if applicable, is set out in Exhibit C-1, entitled “SCHEDULE OF RATES.” Any work performed or expenses incurred for which payment would result in a total exceeding the maximum compensation set forth in this Section 4 shall be at no cost to the CITY.

Optional Additional Services Provision (This provision applies only if checked and a not-to- exceed compensation amount for Additional Services is allocated below under this Section 4.) In addition to the not-to-exceed compensation specified above, CITY has set aside the not-to- exceed compensation amount of Fifty-Four Thousand Four Hundred Eighty-Four Dollars ($54,484.00) for the performance of Additional Services (as defined below). The total compensation for performance of the Services, Additional Services and any reimbursable expenses specified in Exhibit C, shall not exceed One Million Fourteen Thousand Three Hundred and Ninety Dollars ($1,014,390), as detailed in Exhibit C.

“Additional Services” means any work that is determined by CITY to be necessary for the proper completion of the Project, but which is not included within the Scope of Services described at Exhibit A. CITY may elect to, but is not required to, authorize Additional Services up to the maximum amount of compensation set forth for Additional Services in this Section 4.

CONSULTANT shall provide Additional Services only by advanced, written authorization from CITY as detailed in this Section. Additional Services, if any, shall be authorized by CITY with a Task Order assigned and authorized by CITY’s Project Manager, as identified in Section 13 (Project Management). Each Task Order shall be in substantially the same form as Exhibit A-1, entitled “PROFESSIONAL SERVICES TASK ORDER”. Each Task Order shall contain a specific scope of services, schedule of performance and maximum compensation amount, in accordance with the provisions of this Agreement. Compensation for Additional Services shall be specified by CITY in the Task Order, based on whichever is lowest: the compensation structure set forth in Exhibit C, the hourly rates set forth in Exhibit C-1, or a negotiated lump sum.

To accept a Task Order, CONSULTANT shall sign the Task Order and return it to CITY’s Project Manager within the time specified by the Project Manager, and upon authorization by CITY (defined as counter-signature by the CITY Project Manager), the fully executed Task Order shall become part of this Agreement. The cumulative total compensation to CONSULTANT for all Task Orders authorized under this Agreement shall not exceed the amount of compensation set forth for Additional Services in this Section 4. CONSULTANT shall only be compensated for Additional Services performed under an authorized Task Order and only up to the maximum amount of compensation set forth for Additional Services in this Section 4. Performance of and payment for any Additional Services are subject to all requirements and restrictions in this Agreement.”

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Amendment No. 2 to
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SECTION 4. The following exhibit(s) to the Contract is/are hereby amended or added, as indicated below, to read as set forth in the attachment(s) to this Amendment, which is/ are hereby incorporated in full into this Amendment and into the Contract by this reference:

a. Exhibit “ C” entitled “Compensation , Amendment No. 2”, AMENDED, REPLACES PREVIOUS, to provide the not to exceed compensation for Basic Audit Services for FY 2025 and FY 2026.

b. Exhibit “C-1” entitled “Schedule of Rates, Amendment No. 2”, AMENDED, REPLACES PREVIOUS , to provide the applicable hourly rates for services performed during FY 2025 and FY 2026.

SECTION 5. Legal Effect. Except as modified by this Amendment, all other provisions of the Contract, including any exhibits thereto, shall remain in full force and effect.

SECTION 6. Incorporation of Recitals . The recitals set forth above are terms of this Amendment and are fully incorporated herein by this reference.

(SIGNATURE BLOCK FOLLOWS ON THE NEXT PAGE.)

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SIGNATURES OF THE PARTIES

IN WITNESS WHEREOF, the P arties have by their duly authorized representatives executed this Amendment effective as of the date first above written.

CITY OF PALO ALTO

City Manager

APPROVED AS TO FORM:

City Attorney or designee

MACIAS GINI & O’CONNELL LLP

Officer 1

By:

Name:

Title:

Attachments:

EXHIBIT C: “COMPENSATION, AMENDMENT NO. 2” (AMENDED, REPLACES PREVIOUS) EXHIBIT C-1: “SCHEDULE OF RATES, AMENDMENT NO. 2” (AMENDED, REPLACES PREVIOUS)

Docusign Envelope ID: C33C9314-809E-4BB0-A68A-611BC4AE55DE David Bullock
Partner
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Amendment No. 2 to
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EXHIBIT C
COMPENSATION, AMENDMENT NO. 2
(AMENDED, REPLACES PREVIOUS)

CITY agrees to compensate CONSULTANT for Services performed in accordance with the terms and conditions of this Agreement, and as set forth in the budget schedule below. Compensation shall be calculated based on the rate schedule attached as Exhibit C -1 up to the not to exceed budget amount for each task set forth below.

CITY’s Project Manager may approve in writing the transfer of budget amounts between any of the tasks or categories listed below, provided that the total compensation for the Services, including any specified reimbursable expenses, and the total compensation for Additional Services (if any, per Section 4 of the Agreement) do not exceed the amounts set forth in Section 4 of this Agreement.

CONSULTANT agrees to complete all Services, any specified reimbursable expenses, and Additional Services (if any, per Section 4), within this/these amount(s). Any work performed or expenses incurred for which payment would result in a total exceeding the maximum amount of compensation set forth in this Agreement shall be at no cost to the CITY.

BUDGET SCHEDULE

FISCAL YEAR NOT TO EXCEED AMOUNT

Basic Audit Services for FY 2022, Single Audit includes one major program
$176,270.00
Basic Audit Services for FY 2023, Single Audit includes one major program
$181,560.00
Basic Audit Services for FY 2024, Single Audit includes one major program
$187,005.00
Basic Audit Services for FY 2025, Single Audit includes two major programs
$204,452.00
Basic Audit Services for FY 2026, Single Audit includes two major programs
$210,619.00
Sub-total for Services $959,906.00
Reimbursable Expenses (if any) $0.00
Total for Services and Reimbursable Expenses $959,906.00 Additional Services (if any, per Section 4) $54,484.00 Maximum Total Compensation $1,014,390.00

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with Macias Gini &
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REIMBURSABLE EXPENSES
CONSULTANT’S ordinary business expenses, such as administrative, overhead, administrative support time/overtime, information systems, software and hardware, photocopying, telecommunications (telephone, internet), in-house printing, insurance and other ordinary business expenses, are included within the s cope of payment for Services and are not reimbursable expenses hereunder.

Reimbursable expenses, if any are specified as reimbursable under this section, will be reimbursed at actual cost. The expenses (by type, e.g. travel) for which CONSULTANT will be reimbursed are: NONE up to the not-to-exceed amount of: $0.00.

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Amendment No. 2 to
Contract No. C22183462
with Macias Gini &
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EXHIBIT C-1
SCHEDULE OF RATES, AMENDMENT NO. 2
(AMENDED, REPLACES PREVIOUS)

Position FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
Partner/Director $ 350 $ 361 $ 371 $382 $393
Manager $ 240 $ 247 $ 255 $263 $271
IT Consultant $ 245 $ 252 $ 260 $268 $276
Auditor In Charge $ 175 $ 180 $ 186 $191 $197
Staff Auditor $ 135 $ 139 $ 143 $147 $151
Support Staff $ 90 $ 93 $ 95 $98 $101

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Amendment No. 2 to
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with Macias Gini &
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City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: City Auditor
Meeting Date: March 24, 2025
Report #:2503-4318
TITLE
Approval of Audit Reports for Grant Management And Utility Billing as Reviewed by Policy and Services Committee; CEQA: Not A Project

RECOMMENDATION
The Policy & Services Committee and Office of the City Auditor recommend City Council approve the results of two audit reports:

1. Grant Management Audit (Attachment A, P&S Committee recommended approval on February 11, 2025), and

2. Utility Billing Audit (Attachment B, P&S Committee recommended approval on February 11, 2025).

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 FY 2023 risk assessment, the OCA identified grant management processes and utility billing as potential areas of risk and included these audits in their FY 2024 Audit Plan. These audits were presented to, and approved by, the Policy and Services Committee on February 11, 2025 and are here transmitted to City Council for approval.

ANALYSIS
Grant Management Audit
The objective of this audit was to determine whether the City has adequate internal controls to manage the grant lifecycle efficiently and effectively.

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The City receives incoming grant funding from various sources to support its services, including federal, state, and local grants. Most of the City’s grant funding comes from federal agencies.

Audit findings and recommendations focused on three areas of improvement:
1) better coordinating oversight of grant management across departments; 2) improving recordkeeping and internal reporting of active grants in order to better monitor grant activities and increase visibility of grant performance; and 3) more consistently assess and track efforts in pursuit and management of grant opportunities to measure its return on investment.

OCA’s Grant Management Audit report, included as Attachment A, summarizes the analysis, audit findings, and recommendations. The Policy and Services Committee unanimously recommended City Council approval of this audit report on February 11, 2025.

Utility Billing Audit
The objectives of the Utility Billing Audit were to:
1) 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 policies and regulations, and
2) determine whether billing adjustments are properly supported and approved.

The CPAU Department provides the City of Palo Alto with five municipal utility services:
electricity, natural gas, water, wastewater, and fiber optics. The City’s Public Works Department also provides refuse collection and processing for recycling, compost and garbage, wastewater treatment, and stormwater management services.

Palo Alto is the only city in California that owns and operates a full suite of municipal utility services, including electric, fiber optics, natural gas, water and wastewater.

The OCA found utility bills and adjustments are accurately calculated in compliance with City policies and regulations. Audit findings and recommendations focus on two areas of improvement:
1) improving documentation and approval for some billing processes; and 2) closing some internal controls gaps to improve overall process performance.

OCA’s Utility Billing Audit report, included as Attachment B, summarizes the analysis, audit findings, and recommendations. The Policy and Services Committee unanimously recommended City Council approval of this audit report on February 11, 2025.

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6 7
1 5

FISCAL/RESOURCE IMPACT
The timeline for implementation of corrective action plans and the necessary resources are identified within the attached reports.

STAKEHOLDER ENGAGEMENT
The Office of the City Auditor worked with and would like to thank several departments for their assistance in conducting the Grant Management d Utility Billing Audits including:

Administrative Services, City of Palo Alto Utilities, City Manager’s Office, Public Works, Planning & Development Services, Office of Transportation, Community Services, City of Palo Alto Utilities, Library, Police and Office of Emergency Services.

ENVIRONMENTAL REVIEW
Council action on this item is not a project as defined by CEQA because the audit activities do not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment. CEQA Guidelines section 15378(b)(4).

ATTACHMENTS
Attachment A: Grant Management Audit, January 29, 2025
Attachment B: Utility Billing Audit, January 30, 2025
APPROVED BY:

Kate Murdock, City Auditor
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1 January 29, 2025
City of Palo Alto
Office of the City Auditor
Grant Management Audit
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Contents
Baker Tilly Advisory Group, LP and Baker Tilly US, LLP, trading as Baker Tilly, operate under an alternative practice structure and are members of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. Baker Tilly US, LLP is a licensed CPA firm that provides assurance services to its clients. Baker Tilly Advisory Group, LP and its subsidiary entities provide tax and consulting services to their clients and are not licensed CPA firms.

EXECUTIVE SUMMARY...................................................................................................1 INTRODUCTION ...............................................................................................................4 DETAILED ANALYSIS .....................................................................................................7 AUDIT RESULTS............................................................................................................10 APPENDICES .................................................................................................................18 Item 9
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1 Executive Summary
Purpose of the Audit
Baker Tilly Advisory Group, LP (Baker Tilly), in its capacity serving as the Office of the City Auditor (OCA) for the City of Palo Alto (the City), conducted a Grant Management Audit based on approved Task Order 4.24 as part of the City’s FY24 Audit Plan. The objective of this audit was to:

Determine whether the City has adequate internal controls to manage the grant lifecycle efficiently and effectively.

Report Highlights
Finding 1:
(Page 10)
There is a lack of coordinated oversight of the City’s grant management efforts, resulting in inconsistent management across departments and the potential for non-compliance with grant requirements While the City has a grant policy, it is not consistently implemented and enforced by departments applying for grants.

The OCA noted the following observations regarding grant management practices:
•For 11 out of 15 grants tested, the Grant Application Authorization Checklist was not completed by the project manager prior to grant application as required by the policy. This checklist ensures that management has reviewed the appropriateness of the grant, as well as the financial obligations pertaining to the City upon grant award. Four of the 11 grants did not have a checklist as the City did not have to go through an application process for these awarded grants.
•For all samples tested, copies of acceptance and/or cooperative agreements were not provided to all the relevant sponsoring departments listed in the policy.

Additionally, the grant policy in place was last revised in 2004 and appears to be insufficient to govern the complete grant management process and ensure a consistent process across departments. The City’s policy only addresses grant and funding request applications, leaving a gap in policies and procedures for managing activities throughout the grant lifecycle, including tracking, monitoring, and closing activities. A more comprehensive grant policy to govern the complete grant management process will help ensure a consistent process across departments.

To promote the coordinated oversight of grant management activities, the City recently hired a Grant Analyst position. This position will help improve the grant administration process by implementing a standardized tracking and monitoring system. Additionally, the Grant Analyst can help develop more diverse grants and find new opportunities.

Key Recommendations
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2 EXECUTIVE SUMMARY
The City should perform regular reviews and updates of all city policies. We recommend that the City update the grant policy to document how departments should manage activities throughout the grant lifecycle, including tracking, monitoring, and closing activities.

Additionally, the City should ensure that all departments receive the appropriate training and awareness of the updated policy. It should be determined if the policy should be enforced for all grants received or only grants actively applied for by the City1.

Lastly, we recommend that the City utilize the Grant Analyst position to provide centralized oversight of grant administration and management from the application phase to the closing of the grant.

Finding 2:
(Page 12)
While the City is actively pursuing grant opportunities, there is insufficient recordkeeping and internal reporting of active grants, resulting in limited monitoring and visibility of grant performance The OCA noted the following observations:
•There is not a complete, central repository of all active City grants. While the Administrative Services Department (ASD) compiles an annual listing of grants, only Federal grants are validated for completeness and accuracy for the Single Audit, an annual audit designed to meet the requirements of federal grantor agencies.
•Grants do not have formalized internal tracking and reporting, such as project plans and timelines in place. The OCA noted the following observations pertaining to grant tracking and monitoring of grant requirements:
- For 8 out of 15 samples tested, there did not appear to be any formalized internal tracking and reporting, such as project plans and timelines in place.
- For 4 out of 15 samples tested, progress and/or performance reports were not provided within the required timeframe stated in the Grant Agreement.

There were no penalties or consequences for reports submitted after the deadline for these grants.
•Grant milestones are not formally and consistently communicated internally by departments, such as when a grant is awarded or closed out. •There is a lack of reporting and visibility of the pursuit of grants as the City has not formally tracked which grants have been applied for versus awarded.

Key Recommendations
We recommend that the City consider establishing a complete, central repository of all City grants including such information as how many active grants there are, if they are federal or local, and dollar amount. Additionally, the City should consider whether they can set up a separate account, cost center, or chart string for each grant within the 1 The City receives some grants that do not require the City to formally apply for them.

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3 EXECUTIVE SUMMARY
financial system (SAP). This will allow the City to easily pull a complete listing of grants.

For appropriate grants, those that are not awarded by the State on a recurring basis, milestones should be tracked, monitored and noticed to the appropriate departments, such as when a grant has been successfully awarded and/or closed out to enhance recordkeeping of active grants. Lastly, the City should consider utilizing the Grant Analyst position to enhance tracking and reporting of active grants. Formalized tracking will help the City gauge trends and review who is pursuing grants and what was applied for vs. rewarded.

Finding 3:
(Page 14)
The City does not consistently assess and track efforts in pursuit and management of grant opportunities to measure its return on investment The OCA noted the following observations:
•The City does not assess whether or not to pursue potential grant opportunities based on the effort, time and complexity that may be required in the application and administration of the grant.
•While Townsend Public Affairs, Inc., an external consultant providing grant pursuit and management activities for the City, appears to have provided some valuable services to the City, they have not provided some of the deliverables specified in the contract. This may make it difficult for the City to assess their performance.
•The City’s recently hired Grant Analyst indicated they will be working with Townsend to clarify deliverables and incorporate a strategic funding plan and a grant dashboard to improve reporting and tracking of grants.

Key Recommendations
We recommend that the City consider the merits of establishing a system for assessing grant pursuit, application, and administration efforts and determining when to pursue or abandon such opportunities. The City should determine if tracking staff time spent pursuing and managing grants would be beneficial. Establishing a process for assessing efforts would aid in the overall evaluation of grant program performance and its return on investment. In addition, we recommend that the City continue to explore and implement strategies to make the most effective use and reporting of the external contract for grant application, tracking and monitoring services.

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4 Introduction
2 https://www.cityofpaloalto.org/files/assets/public/v/1/administrative-services/financial-reporting/annual-comprehensive-financial-reports- acfr/current-2011-cafrs/city-of-palo-alto-acfr-single-audit-fy2024-final-unsercured.pdf 3 56% of federal award expenditures were granted by the U.S. Department of Transportation, which included the following program(s):

Airport Improvement Program, Highway Planning and Construction, and Safe Streets and Roads for All. 20% of federal award expenditures were granted by the U.S. Department of Homeland Security, which included the following program(s):

Staffing for Adequate Fire and Emergency Response (SAFER) and Disaster Grants – Public Assistance (Presidentially Declared Disasters) 15% of federal award expenditures were granted by the U.S. Department of Health and Human Services, which included the following program(s): Congressional Directives
Objective The objective of this audit was to determine whether the City has adequate internal controls to manage the grant lifecycle efficiently and effectively.

Background The City receives incoming grant funding from various sources to support its services, including federal, state, and local grants. Most of the City’s grant funding comes from federal agencies.

Macias Gini & O’Connell LLP, Certified Public Accounts (MGO) conducts a “Single Audit” designed to meet the requirements of federal grantor agencies.

The standards governing the Single Audit require the independent auditor to report the fair presentation of the financial statements, government internal controls and compliance with legal requirements.

The City’s expenditures of federal grants totaled $8.2 million in FY 20242. The Federal Grantor Agencies included the U.S. Department of Housing and Urban Development, U.S. Department of the Interior, U.S. Department of Justice, U.S.

Department of Transportation, U.S. Department of Treasury, National Endowment for the Humanities, U.S. Department for Health and Human Services, and U.S. Department of Homeland Security.

Table 1: Percentage of FY 2024 Federal Award Expenditures by Federal Grantor Agency3
Table 2: Expenditures of Federal Grants FY 2022 - 2024
Transportation
56%
Homeland Security
20%
Health and Human
Services
15%
Housing and Urban
Development
5%
Treasury
3%
Humanities, Justice, Interior, &
Environmental Protection
1%
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5 INTRODUCTION
*Analysis conducted by OCA in November 2024
The City has decreased Federal grant expenditures since FY 2022 due to lower expenditures of COVID 19 grants, such as the COVID-19 Coronavirus Relief Fund which decreased approximately $8M from 2022 to 2024.

According to the Schedule of Expenditures of Federal Awards (SEFA) listings prepared by the City for the Single Audit, the City had a portfolio of 21 Federal grants, including 5 Federal grants with no expenses incurred/activities, and 8 State and Local Grants in FY 2022; 24 Federal grants, including 2 Federal grants with no expenses incurred/activities, and 11 State Local, or Private grants in FY 2023; and 20 Federal grants and 20 State, Local, or Private grants in FY 2024.

The OCA determined that the City had an approximate population of 82 incoming grant awards from FY 2022 – FY 2024 based on the Schedule of Expenditures of Federal Awards (SEFA) listings and surveying 3 City departments with the highest number of grants.

Scope The OCA obtained grant records from FY 2022 to FY 2024 and assessed grant management activities and internal controls to manage the grant lifecycle across all applicable departments.

Methodology To achieve the audit objectives, the OCA performed the following procedures:
• Interviewed the appropriate individuals to gain an understanding of the organizational structure, processes, and controls related to grant management.
• Analyzed policies and procedures as well as the legislative and regulatory requirements to identify the criteria to be used for evaluation of control design and effectiveness.
• Selected a sample of grants during the audit period, FY 2022 to FY 2024, to assess whether grant performance standards, procurement, and reporting complied with grant requirements, city policies, and best practices. The OCA stratified the population into smaller groupings by $17,754,575
$9,731,531
$8,214,153
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
2022 2023 2024
Total Federal Financial Awards
Expeditures
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6 INTRODUCTION
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 with Baker Tilly U.S, LLP for internal audit services for October 2020 through June 2022 with an extension through June 2025. City Council appointed Kate Murdock, Audit Manager in Baker Tilly’s Risk Advisory practice, as City Auditor in May 2024. As a result of transitions in the Audit Office and peer review delays due to the COVID pandemic, an external peer review is targeted for 2025. It should be noted that Baker Tilly’s most recent firmwide peer review was completed in November 2024 with a rating of “Pass”. The scope of that peer review includes projects completed under government auditing standards. A report on the next firmwide peer review should be available later in 2024. department. The OCA selected at least one grant from each department.

If multiple grants were sampled for a department, at least one federal and one state or local grant was selected. The OCA tested a sample of 15 grants across departments. Please see a listing of grant selections in Appendix A.
• Completed audit report of findings, conclusions, and recommendations based on the supporting evidence gathered.

Compliance
Statement
This audit activity was conducted from June 2024 to December 2024 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, observations, and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings, observations, and conclusions based on our audit objectives.

Organizational
Strengths
During this audit activity, we noted the professionalism and responsiveness of the following departments: Administrative Services, City Manager’s Office, Public Works, Planning & Development Services, Office of Transportation, Community Services, City of Palo Alto Utilities, Library, Police and Office of Emergency Services. We appreciated the participation of departments in interviews, providing grant documentation for selected samples, and responding to follow-up requests.

The Office of the City Auditor greatly appreciates the support of the departments involved in conducting this audit activity.

Thank you!
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7 Detailed Analysis
5 https://www.theiia.org/
6 https://grants.gov/learn-grants/grants-101/
Best Practices:

Grant
Management
Criteria
The Institute of Internal Auditors (IIA) 5 Supplemental Guidance Practice Guide for Auditing Grants in the Public Sector, released in April 2018, provides supplemental guidance for auditing grants in the public sector. This practical guide provides detailed, step-by-step approaches, featuring processes, procedures, tools, and programs, as well as examples of deliverables. Key public sector grant management insights are highlighted here:
“Examples of Grant Usage in the Public Sector
•Address specific policy goals.
•Stimulate an industry or the economy.
•Support activities including research and capital projects. •Deliver public services, such as health care and education. •Produce goods, such as medicines; intellectual property, such as patents; and infrastructure, such as highways, schools, homes, and hospitals.” “A grant program follows a linear life cycle that includes creating the funding opportunity, applying, making award decisions, and successfully implementing the award. The specific actions along the life cycle are grouped into three phases6:
•Pre-award phase.
•Award phase.
•Post-award phase.

The above infographic was obtained from pg. 6 of IIA Supplemental Guidance Practice Guide for Auditing Grants in the Public Sector.
“Grant administration is a broader concept that involves all administrative, financial, and operational activities required to implement, execute, and monitor a grants program (from phase one to phase three).”
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8 DETAILED ANALYSIS
Grants management has a very specific starting point, and the scope is limited to activities in phases two and three. The management process starts when the grantee signs an agreement with the grantor and aid in the form of funds are disbursed or resources transferred.”
Grant Administration and Management Controls
The Practice Guide provides a Risk and Control Matrix for Grants Administration and Management for a grantee. See full Risk & Control Matrix visual in Appendix B. Control examples for each phase of the grant life cycle include the following:

Phase: Program Objective/Purpose
•Implement policies and procedures for application development. •Identify eligibility limitations.
•Understand the community needs and how they can be addressed. •Establish a process to research potential grantors to better understand their selection process.

Phase: Identifying Sources of Grants
•Dedicate resources to research potential sources of grants. •Implement controls that ensure potential grants match the organization’s objectives.

Phase: Applying for Grants
•Implement a robust grant application process.
•Implement a continuous improvement process to ensure the application process meets new regulations or operating procedures.
•Implement controls that ensure completeness/accuracy/validity of information submitted.
•Secure regulatory approval, or at a minimum, determine if it can be obtained if needed.

Phase: Managing Grant Resources
•Adequate/effective internal controls over expenditures. •Implement audit trail of resources.
•Adequate segregation of duties or dual controls for approval. •Periodic account reconciliation.
•Monitoring progress of substantive work during the life of the grant.

Phase: Accountability Reporting
•Adequate/effective internal controls to account for use of resources in accordance with terms and conditions.
•Complete/accurate/valid/timely reporting.

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Phase: Program Evaluation and Closing
•Completeness and accuracy of accountability reports.
•Ensuring project managers have measures in place to demonstrate that objectives and/or performance standards were met.
•Include steps to evaluate if the program was effective in the program closing process.

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10 AUDIT RESULTS
Audit Results
Finding 1:

There is a lack of
coordinated
oversight of the
City’s grant
management
efforts, resulting
in inconsistent
management
across
departments and
the potential for
non-compliance
with grant
requirements
Grant management activities are dispersed among several departments that use grant funding for City projects and programs. These include Administrative Services, the City Manager's Office, Public Works, Office of Transportation, Planning & Development Services, Community Services, Utilities, Library, Police, and Emergency Services.

Individual departments are responsible for submitting the grant application, preparing a council resolution if required, complying with applicable grant laws and regulations, establishing and maintaining effective internal controls for compliance with grant requirements, and tracking grant expenses and revenues.

While the City has a grant policy, it is not consistently followed by departments applying for grants.

The City has a Grant and Funding Request Applications Policy that establishes uniform procedures for grant applications and other funding requests. This policy requires:
•Completion of a Grant Application and Authorization Checklist prior to applying for grant funds.
•Department Head review of the Grant Application Authorization Checklist at the time a grant funding application is made. •When grants are funded, the sponsoring department must notify and provide copies of the acceptance or cooperative agreement to:
a. The City Manager
b. The Director of Administrative Services
c. The City Auditor
d. The City Attorney
The OCA tested a sample of 15 grants across 10 departments. The OCA selected at least one grant from each department to see how grant management is approached across the City. If multiple grants were sampled for a department, the auditor selected at least one federal and one state or local grant.

The grant application and acceptance process does not appear to be consistently followed in accordance with the policy adopted by the City.

Per the policy, it is essential that grants be reviewed carefully for impact on the City's resources and consistency with City policy and procedures.

Additionally, there appears to be a lack of regular training and awareness of the grant application and acceptance process. When inquiring with staff, some staff were unaware of the policy itself or unaware of the necessary requirements to adhere to the policy.

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The OCA noted the following observations pertaining to the Grant and Funding Request Applications Policy:
•For 11 out of 15 grants tested, the Grant Application Authorization Checklist was not completed by the project manager prior to grant application as required by the policy. This checklist ensures that management has reviewed the appropriateness of the grant, as well as the financial obligations pertaining to the City upon grant award. Four of the 11 grants did not have a checklist as the City did not have to go through an application process for these awarded grants.
•For all samples tested, copies of acceptance and/or cooperative agreements were not provided to all the relevant sponsoring departments listed in the policy.

A more comprehensive grant policy to govern the complete grant management process will help ensure a consistent process across departments.

The City lacks policies and/or procedures to govern activities performed during the duration of the grant lifecycle. The City’s policy, last revised in 2004, only addresses grant and funding request applications, leaving a gap in policies and procedures for managing activities throughout the grant lifecycle, including tracking, monitoring, and closing activities.

Although grant requirements vary based on the grant agreement, there should be a standardized policy establishing grant internal controls during the grant lifecycle. The City should perform a regular review of the policy to ensure it is still applicable and appropriate in coordinating grant applications across departments.

The City is hiring a Grant Analyst position to provide coordinated oversight of grant management activities.

The City recently hired a Grant Analyst. This position can help improve the grant administration process by implementing a standardized tracking and monitoring system. Additionally, staff stated that the Grant Analyst can help develop more diverse grants, find new opportunities, and will be working on compliance and training issues with departments.

Recommendation We recommend that the City update the grant policy to document how departments should manage activities throughout the grant lifecycle, including tracking, monitoring, and closing activities.

Additionally, the City should ensure that all departments receive training on the updated policy and grant management procedures. It should be determined if the policy should be enforced for all grants received or only grants actively applied for by the City.

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Lastly, we recommend that the City utilize the Grant Analyst position to provide coordinated oversight of grant administration and management from the application phase to the closing of the grant.

Management
Response
Responsible Department(s): ASD
Concurrence: Agree
Target Date: August 30, 2025
Action Plan:

Department staff have been able to manage and monitor their grant activities, however with increased volume and complexity staff recognizes that the grant policy should be updated with a more comprehensive view of the grant lifecycle. Prior to FY 2017, complex grants awarded to the City consisted of recurring Housing and Urban Development and Department of Transportation grants. Staff has begun the update of the City’s grant policy and procedures, using best practices Government Finance Officers Association and agencies with similar grant portfolios.

The revised grant policy will include guidelines for managing activities throughout the grant lifecycle, from pre-award to post-award and is expected to be complete spring/summer 2025.

Staff concurs that a training plan should be developed for all departments on the updated procedures and continual training be a focus. Staff is targeting the first round of training to be done in spring/summer 2025 to coincide with the release of the updated Grants Policy. Additional training modules will be developed and conducted on an ongoing and as needed basis. Staff expects to release a comprehensive training calendar in late summer 2025.

The Grant Analyst position to oversee this coordination, utilizing the City’s grant consultant as a resource, in addition to overall grant administration and management. The Grant Analyst was hired in November 2024.

Finding 2:

While the City is
actively pursuing
grant opportunities,
there is insufficient
recordkeeping and
internal reporting of
active grants,
resulting in limited
monitoring and
visibility of grant
performance
The City completes an annual Schedule of Expenditures of Federal Awards (SEFA) as required by the Single Audit, which is required for non-Federal entities that expend $750,000 or more of Federal awards during the fiscal year. ASD prepares the SEFA using data reported by departments in the Single Audit questionnaire. Departments provide information about State, Local, and Private grants in the Single Audit questionnaire.

There is not a complete, central repository of all active City grants.

While ASD compiles an annual listing of grants, only Federal grants are validated for completeness and accuracy for the Single Audit.

The OCA was unable to obtain a complete population of grants for our testing. Upon surveying 3 City departments, the OCA identified some State and Local grants that were not included in the City's single audit listing. The City uses the annual Single Audit process as an opportunity Item 9
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13 AUDIT RESULTS
to ask departments about all grant funding received. However, it appears that this process does not ensure a complete list of all Federal, State, and Local grants.

Although the SEFA listing appeared to include a complete inventory of all Federal grants, it did not have complete information such as a unique identifier or grant number for each grant.

Due to incomplete recordkeeping, it was difficult for the OCA to obtain a complete inventory of how many Federal, State, and Local grants have been received by the City. As a result, the City does not have visibility into the population of all grants.

Staff stated that it is difficult to obtain federal grant identification numbers, but they are still able to track these grants within the ERP system.

Additionally, it was noted that recently the Federal Government changed their numbering system from the name Catalogue of Federal Domestic Assistance to Assistance Listing Number in June 2023. Staff stated that they will explore assigning grants an internal tracking number that will better enable annual and multi-year grant reconciliation.

Grants do not have formalized internal tracking and reporting, such as project plans and timelines in place.

According to the IIA Supplemental Guidance Practice Guide for Auditing Grants in the Public Sector, internal controls should be implemented to effectively monitor substantive progress during the life of the grant. In addition, effective internal controls should be in place around accountability reporting to account for use of resources in accordance with terms and conditions of the grant agreement and complete, accurate, and timely reporting.

The OCA tested a sample of 15 grants to see if internal tracking and reporting was in place and if progress and/or performance reports were submitted timely and accurately within the deadline outlined in the grant agreement.

The OCA noted the following observations pertaining to grant tracking and monitoring of grant requirements:
•For 8 out of 15 samples tested, there did not appear to be any formalized internal tracking and reporting, such as project plans and timelines in place.
•For 4 out of 15 samples tested, progress and/or performance reports were not provided within the required timeframe stated in the Grant Agreement. There were no penalties or consequences for reports submitted after the deadline for these grants.

Not all departments have adopted an internal tracking and reporting process, resulting in limited visibility in the progress of meeting project goals and timelines. Since program managers track grants differently and projects/programs are monitored individually, there is no consistent, formal tracking system in place.

Additionally, many City grants require the submission of financial and/or performance reporting within a required deadline. The OCA noted that Item 9
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some of the required reports were not submitted within the required deadline, however, there were no penalties or consequences for reports submitted after the deadline.

The OCA also validated that for all completed grants tested, the grant funds were fully expended timely as all grant funds were received.

Grant milestones are not formally and consistently communicated by departments.

Departments do not formally and consistently communicate with ASD when grant milestones are completed such as when a grant is awarded or closed out. There are no formal close-out procedures performed to internally notify the City that a grant is officially closed out or to evaluate its effectiveness during the closing process.

There is a lack of reporting and visibility of the pursuit of grants as the City has not formally tracked which grants have been applied for vs. awarded.

There is not a formal, complete list of grants applied for vs. awarded. The OCA obtained a Grant Tracker document from ASD which included an informal list of grants, awarded amount, and the award status, however, it was indicated that this was not a precise or formal list. Staff noted that the primary purpose of the list is to provide information to the external auditors for the purposes of the Single Audit and is not the full list of all grants, regardless of granting agency.

The City reports expenditure data in the annual SEFA (see Table 2- Expenditures of Federal Grants FY 2022 - 2024 located in the Background section of the report). However, they do not appear to track or report the annual grant funding awarded to the City.

As a result, the City does not have visibility of its performance of pursuing and winning grants. This leads to difficulty in reporting and monitoring how the City is performing.

Recommendation We recommend that the City consider establishing a complete, central repository of all City grants including such information as how many active grants there are, if they are federal or local, and dollar amount.

Additionally, the City should consider whether they can set up a separate account, cost center, or chart string for each grant within the financial system (SAP). This will allow the City to easily pull a complete listing of grants.

For appropriate grants, milestones should be tracked, monitored and noticed to the appropriate departments, such as when a grant has been successfully awarded and/or closed out to enhance recordkeeping of active grants.

Lastly, the City should consider utilizing the Grant Analyst position to enhance tracking and reporting of active grants. Formalized tracking will help the City gauge trends and review who is pursuing grants and what was applied for versus rewarded.

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15 AUDIT RESULTS
Management
Response
Responsible Department(s): ASD
Concurrence: Agree
Target Date: March 31, 2025
Action Plan:

Staff has completed a comprehensive list and repository of all City grants that will formalize grant tracking and be used by ASD and the grant consultant to track and report out on grants throughout the grant life cycle.

The City’s SEFA listing is a complete list of grants that were communicated to ASD or of grants that received revenue during the reporting period. The SEFA list contains known information; unique identifiers are not assigned to all grants by the granting agency.

Staff will assess whether changes to SAP accounts, cost centers, and/or chart strings for each grant or a grant module/software need to be made to more effectively support grant management and tracking.

Finding 3:

The City does not
consistently assess
and track efforts in
pursuit and
management of grant
opportunities to
measure its return on
investment
Currently, the City does not assess whether or not to pursue potential grant opportunities based on the effort, time and complexity that may be required in the application and administration of the grant.. In addition to internal grant pursuit efforts, the City has a contract with an external consultant, Townsend Public Affairs, Inc. (Townsend) to provide grant pursuit and management activities but does not appear to receive all the tracking and monitoring deliverables noted in the contract that would help the City to assess the value obtained from these services.

The City does not assess efforts expended in the pursuit, application for, and administration of potential grant opportunities.

Currently, the City does not have a process for assessing the time and effort a grant opportunity may require and criteria for determining when to pursue vs. abandon opportunities due to lack of return on investment.

Also, the City does not appear to capture data related to these activities.

Tracking such information could help the City to determine when it is worthwhile to pursue a grant opportunity versus when the effort and investment may not be justified.

While Townsend appears to have provided some valuable services to the City, they have not provided some of the deliverables specified in the contract. This may make it difficult for the City to assess their performance.

Townsend supports the City in identifying grant funding opportunities, completing applications, and communicating with funding agencies.

Although Townsend holds a monthly meeting to report progress to the City and provides a monthly memo detailing current and upcoming Item 9
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opportunities, some deliverables have not been provided that would aid the City in monitoring grants and the contractor’s performance.

According to the Townsend contract with the City, there are several grant application, management and tracking deliverables they are required to provide to the City. These deliverables include a:
•Strategic Funding Plan
•Grant Matrix of Funding Programs
•Overview of application requirement for grants with project background and details
•Monthly status reports of grants in progress, submitted and awarded
•Monthly report detailing compliance activities and current and upcoming state and/or federal legislative advocacy work/support.

It does not appear that these documents are currently being provided.

The City’s recently hired Grant Analyst communicated that the City will be working with Townsend to clarify deliverables, how tasks are being accomplished and what may need to be done moving forward. In addition, the City's new Grant Analyst said they will be working with Townsend on a strategic funding plan, a grant calendar and eventually a grant writing manual and working to develop a grant dashboard to show the status of grants in Monday.com, an online project management and reporting system.

As of the date of this report, Townsend reports helping the City pursue a total of approximately $14 million in grant opportunities with one grant awarded in the amount of $5,176,812 and approximately $8 million in grant opportunities still pending a funding decision.

Recommendation We recommend that the City consider the merits of establishing a system for assessing grant pursuit, application, and administration efforts and determining when to pursue or abandon such opportunities. The City should determine if tracking staff time spent pursuing and managing grants would be beneficial. Establishing a process for assessing efforts would aid in the overall evaluation of grant program performance and its return on investment.

In addition, we recommend that City continue to explore and implement strategies to make the most effective use and reporting of the external contract for grant application, tracking and monitoring services.

Management
Response
Responsible Department(s): ASD
Concurrence: Agree
Target Date: June 30, 2025
Action Plan:

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Staff agrees that a formal system to assess grant pursuit, application, and administration efforts to determine when to pursue or abandon grant opportunities would be beneficial to support grant strategic planning.

These conversations are currently informal and while the discussion between the grant consultant and City staff is sufficient to guide decision making of whether to pursue a grant. City staff and the grant consultant meet monthly to assess whether available grant opportunities are worth pursuing, from a priority aspect and staff time spent to manage the grant.

A more formal workplan with the grant consultant is under development that includes the deliverables listed in the contract, included in these findings.

Staff will assess whether establishing a system to track staff time for grant management activities, including pursuing or abandoning opportunities, is a value adding activity and will engage with its grant consultant to strategically focus time spent. In 2024, five grants were awarded, totaling $44.5 million.

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18 Appendices
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19 Appendix A: Grant Testing Selections
The OCA determined that there was a population of 82 grants from FY 2022 – FY 2024 based on the SEFA listings and surveying 3 City departments with the highest number of grants. A sample of 15 grants was selected for testing. The population was stratified based on City department. The auditor selected a sample of grants from the following 10 departments: Administrative Services (ASD), the City Manager's Office (CMO), Public Works (PWD), Office of Transportation (OOT), Planning & Development Services (PDS), Community Services (CSD), Utilities (UTL), Library (LIB), Police (PD), and Emergency Services (OES).

Sample
# Year Grant Type Total Grant
Amount ($)
Program/Project
Name:

Name of
Grantor
Name of
Pass-
through
Entity, if
any
Auditor
determined
Department
1 FY
2023 Federal
$135,185.01
Severe Winter
Storms, Flooding,
Landslides, and
Mudslides
FEMA-4683-DR-
CA
U.S.

Department
of Homeland
Security’s
Federal
Emergency
Managemen
t Agency
California
Governor's
Office of
Emergency
Services
CalOES
ASD
2 FY
2022 Federal
$150,194.00
Institute of
Museum &
Library
Serv/Museums
for
America/museum
s Empowered-
Working
Together
IMLS
Palo Alto
Art Center
Foundation
CSD
3 FY
2024
State/Local/
Private $182,448.00
Historical
Heritage Grant
Program
(windows)
County of
Santa Clara ASD
4 FY
2023 Federal $6,000.00
California State
Library - Library
Services &
Technology Act
(LSTA)
Inspiration Grant
National
Endowment
for the
Humanities
(NEH)
California
State
Library
LIB
5 FY
2022 Federal
$3,657,685.00
Staffing for
Adequate Fire
and Emergency
Response
(SAFER)
Department
of Homeland
Security
FEMA
OES
6 FY
2022 Federal
$3,863,677.27
Section 130
Grade Crossing
Improvement
Program
Caltrans OOT
7 FY
2023 State
$92,640.00
Transportation
Development Act
Metropolitan
Transportati
on
Commission
(MTC)
OOT
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20 8 FY
2024
State/Local/
Private

$5,176,812.00
BSCC Organized
Retail Theft
(ORT) Grant
Board of
State and
Community
Corrections
- California
PD
9 FY
2023 Federal
$800,000.00
PDA Planning
and Technical
Assistance Grant
U.S
Department
of Housing
and Urban
Developmen
t
MTC
(Metropolit
an
Transportat
ion
Commissio
n)
PDS
10 FY
2023 State
$310,000.00
SB2 (Housing
Element)
California
Department
of Housing
and
Community
Developmen
t
PDS
11 FY
2022 Federal
$237,396.18 CWWAPP ARPA
State
Water
Resource
Control
Board
UTL
12 FY
2023 Federal
$1,216,351.00
US EPA SF Bay
Area Water
Quality
Improvement
Fund
U.S.

Environment
al Protection
Agency
PWD
13 FY
2024 Federal
$156,841.00
Airport
Improvement
Program
U.S
Department
of
Transportati
on
PWD
14 FY
2024
State/Local/
Private

$175,000.00 EV Charges
Bay Area Air
Quality
Managemen
t District
PWD
15 FY
2023 Federal
$2,000,000.00
Consolidated
Appropriation
Act, 2022
US
Department
of Health
and Human
Services/Su
bstance
Abuse and
Mental
Health
Services
(SAMHSA)
CMO
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21 Appendix B: Risk and Control Matrix for Grants Administration and Management – Grantee7
7 https://www.theiia.org/
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1 January 30, 2025
City of Palo Alto
Office of the City Auditor
Utility Billing Audit
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Contents
Baker Tilly Advisory Group, LP and Baker Tilly US, LLP, trading as Baker Tilly, operate under an alternative practice structure and are members of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. Baker Tilly US, LLP is a licensed CPA firm that provides assurance services to its clients. Baker Tilly Advisory Group, LP and its subsidiary entities provide tax and consulting services to their clients and are not licensed CPA firms.

EXECUTIVE SUMMARY .................................................................................................. 1 INTRODUCTION ............................................................................................................... 5 DETAILED ANALYSIS ..................................................................................................... 9 AUDIT RESULTS............................................................................................................ 12 APPENDICES ................................................................................................................. 21

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1 Executive Summary
Purpose of the Audit
Baker Tilly Advisory Group, LP (Baker Tilly), in its capacity serving as the Office of the City Auditor (OCA) for the City of Palo Alto (the City), conducted a Utility Billing Audit based on approved Task Order 4.26 as part of the City’s FY24 Audit Plan. The objectives of this audit were to:

1. 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 policies and procedures.

2. Determine whether billing adjustments are properly supported and approved.

Report Highlights
Finding 1:
(Page 12)
The OCA found utility bills and adjustments are accurately calculated in compliance with City policies; however, certain billing adjustments and account write-offs were not properly documented or approved per City policy.

Overall, the OCA concluded that there is a robust utility billing process in place and found that utility bills are accurate and in agreement with rates annually established by the City.

The OCA noted the following positive observations:

• For all utility billing invoices tested, the OCA concluded that billing was accurate and in compliance with City policies as we found no test exceptions.

• Utility billing is appropriately reviewed for exceptions.

• The implementation of AMI meters will provide an opportunity to reduce both the frequency and magnitude of adjustments as it will enable the City of Palo Alto Utilities (CPAU) Department to have more timely access to usage data.

While billing adjustments are properly billed, the OCA identified some instances in which utility billing adjustments were not properly documented or approved during the period tested.

The OCA selected a sample of adjustments from FY 2023 – FY 2024 for testing. The OCA tested all categories of adjustments, which include consumption, miscellaneous debit/credit, water leak, and GreenWaste adjustments.

Out of 60 adjustments tested, there were 10 exceptions noted. These exceptions were primarily due to documentation and approval errors.

The OCA observed the following:

• For 6 adjustments tested, there was no IC WEB (Interaction Center Webclient) interaction record as the processor did not note the adjustment in SAP per the Processing Adjustments procedural document.

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2 EXECUTIVE SUMMARY
• For 1 miscellaneous adjustment tested, a Customer Service Specialist (CSS) approved transactions above their authority level.

• For 1 miscellaneous adjustment tested, there was no Adjustment Form submitted to verify proper approval.
• For 1 miscellaneous adjustment tested, the Invoice Cancellation Form was incorrectly filled out by the CSS to include the incorrect invoice document number.
• For 1 consumption adjustment tested, an adjustment was incorrectly entered in the Adjustment Log due to a typographical error; however, the correct amount was entered into SAP. Therefore, this did not result in a billing error to the customer.

When proper approvals for adjustments are not obtained and documented, there is potential for inappropriate adjustments, financial losses, or fraud. As approval is currently obtained via DocuSign or manually entered in the Adjustment Log, there is an increased possibility for improper approval due to human error.

Additionally, the OCA identified some instances when account write-offs of stale-dated checks were not properly approved during the period tested.

The OCA selected a sample of 25 account write-offs of uncollectable utility accounts during FY 2023 – FY 2024 for testing. During the period tested, collections were put on hold from March 4th, 2020 – October 2023 due to COVID-19. Therefore, the OCA did not test the collections process.

Out of 25 account write-offs tested, there were 4 exceptions noted.

The OCA observed that for all 4 stale-dated check write-offs sampled, the support was not attached to the Quarterly Utilities Invoice Cancellation Memorandum and Form (Quarterly Memo) for proper approval per the City Write-off Policy for Utilities Bad Debt. By omitting support for review and approval, this could lead to inaccurate financial reporting as not all write-offs are properly reviewed.

Key Recommendations
We recommend that the City review the adjustments process to determine if there are ways to automate approvals in the billing system rather than relying on manual processes which can increase the possibility for human error. Otherwise, the City should review the current Processing Adjustments procedural document to ensure it is comprehensive and includes all necessary steps for accurately recording and reviewing adjustments. The City should determine if an IC WEB interaction record should be submitted for all miscellaneous adjustments and ensure this process is implemented by the CPAU Department.

Additionally, if automation is not possible, the City could consider enhancing the procedural document by incorporating a checklist for both the processor and the approver of the adjustment. The approver checklist should include steps to reconcile adjustments entered in SAP with supporting documentation. By defining these steps in a checklist, the reviewer is more likely to identify any data entry errors before approving an adjustment. The CPAU Department should provide regular training Item 9
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3 EXECUTIVE SUMMARY
sessions for staff on any updated procedures and the importance of accurate data entry and review.

Lastly, we recommend that the City maintain the practice of incorporating stale-dated check support in the Quarterly Memo and integrate this procedure into training materials or official policies. This will help ensure employees consistently follow this important step and prevent any potential oversights.

Finding 2:
(Page 16)
Two internal control gaps in the utility billing process should be addressed to prevent potential errors and inefficiencies.

The OCA identified some internal control gaps in the utility billing process, specifically related to segregation of duties and timely resolution of billing adjustments.

• First, the utility billing process does not currently instruct staff on the proper segregation of duties to ensure that the same person processing a consumption adjustment is not the same person approving the adjustment. We noted that for 3 consumption adjustments tested, the same individual processed and approved the adjustments on the Adjustment Log. Segregating duties helps an organization reduce the risk of errors and fraud by distributing responsibilities and accountability among multiple people and/or departments. • Second, outstanding investigations are not regularly reviewed to ensure prompt resolution of billing adjustments. Despite the CSS’s responsibility to follow up on outstanding Service Notifications (SNs), there is no regular, formal review process for these outstanding investigations. While such instances appear to be rare, we noted an example where this lack of a structured review led to a prolonged open investigation for more than 2 months (77 days) after the initial customer complaint and unresolved customer bill, causing delays in resolution. Delays in resolving billing issues can lead to inaccurate financial records and operational inefficiencies as well as customer frustration and dissatisfaction.

Key Recommendations
We recommend that the CPAU update the utility billing process to include a control to ensure proper segregation of duties between processing and approving adjustments.

Without proper segregation of duties, there is a risk of potential error or fraud, as an individual can self-authorize an adjustment without adequate review.

Additionally, we recommend that the City consider implementing a regular, periodic review process for outstanding billing adjustments to prevent prolonged unresolved billing issues. The City should establish specific timeframes for reviewing outstanding adjustments and maintain thorough documentation of these reviews. This approach will enable the CPAU Department to better monitor the timeliness and effectiveness of resolving investigations and billing adjustments.

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4 EXECUTIVE SUMMARY
The City should provide ongoing training and support for CSSs and Field Service Technicians to ensure they are equipped to handle billing adjustments efficiently and effectively.

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5 Introduction

1 utilities-at-a-glance-fy-2023_final.pdf
Objective The objectives of this audit were to:

1. 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 policies and procedures.

2. Determine whether billing adjustments are properly supported and approved.

Background The CPAU Department provides the City with five municipal utility services:
electricity, natural gas, water, wastewater, and fiber optics. The City’s Public Works Department also provides refuse collection and processing for recycling, compost and garbage, wastewater treatment, and stormwater management services. Palo Alto is the only city in California that owns and operates a full suite of municipal utility services, including electric, fiber optics, natural gas, water and wastewater.

These services benefit thousands of customers, including residential, commercial, and City facilities. In FY 2023, there were 30,002 electric; 20,533 water; and 23,837 natural gas customer accounts, the majority of which were residential households1. See table below for breakout by customer type (residential, commercial, or City).

Electric Water Natural Gas
City 142 345 36
Commercial 3,640 3,572 2,202
Residential 26,220 16,616 21,599
26,220
16,616
21,599
3,640
3,572
2,202
142
345
36 0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Number of Customer of Accounts in FY 2023 By Utility &
Customer Type
Residential Commercial City
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6 INTRODUCTION

2 https://www.cityofpaloalto.org/Departments/Utilities/Customer-Service/Utilities-at-a-Glance 3 https://www.cityofpaloalto.org/files/assets/public/v/1/administrative-services/financial-reporting/annual-comprehensive-financial-reports- acfr/current-2011-cafrs/city-of-palo-alto-acfr-single-audit-fy2024-final-unsercured.pdf See below FY 2023 financial highlights (in thousands) per utility2:

Electricity led with the highest sales revenue of $171,605 (in thousands) in FY 2023. Per the FY 2024 Annual Comprehensive Financial Report, electric operating revenue totaled $131,273, $164,556, and 178,549 in FY 2022, 2023, and 2024 (amounts in thousands).

The average monthly residential bill totaled $451.84 in FY 2023. See chart below for a breakout by utility:

Per the FY 2024 Annual Comprehensive Financial Report3, due to the COVID-19 pandemic, the City Council aimed to provide economic relief for residential and commercial utility customers by directing staff to maintain lower rate increases over several years without compromising the safety and integrity of the utility systems. As the City and the economy continues to transition into a steadier $171,605
$72,474
$41,802
$20,694
$2,629
$29,542
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
$180,000
$200,000
Electric Natural Gas Water WastewaterFiber Optics Refuse FY 2023 Financial Highlights (in thousands)
Sales Revenue Interest, Fees & Other Revenue
Commodity Purchase Costs Operating Costs
$103.23
$125.15 $107.99
$48.64
$50.07
$16.76
FY 2023 Average Monthly Residential Bill by Utility
Electric Gas Water Sewer Refuse Stormwater
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7 INTRODUCTION

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 with Baker Tilly U.S, LLP for internal audit services for October 2020 through June 2022 with an extension through June 2025. City Council appointed Kate Murdock, Audit Manager in Baker Tilly’s Risk Advisory practice, as City Auditor in May 2024. As a result of transitions in the Audit Office and peer review delays due to the COVID pandemic, an external peer review is targeted for 2025. It should be noted that Baker Tilly’s most recent firmwide peer review was completed in October 2021 with a rating of “Pass”. The scope of that peer review includes projects completed under government auditing standards. A report on the next firmwide peer review should be available in 2025. state, rates were approved to increase in FY 2024 for all utility services except electric, which decreased, and refuse, which remained flat, resulting in a $11.11, or 3.01%, increase for the average residential bill.

As of the writing of this report, CPAU management staff reported the City has installed approximately 80% of advanced or smart electric, gas, and water meters as part of the Advanced Metering Infrastructure (AMI) project. Staff reported that AMI implementation will likely be completed by Spring 2025. The AMI meters will empower customers to utilize energy and water more efficiently, better enable customer adoption of distributed energy resources (DER) such as solar photovoltaics, energy storage, and electric vehicles, and enable the timely detection of water leaks. AMI will also enable Utilities to optimize operations and improve reliability by reducing restoration time for outages.

Scope The OCA obtained utility billing records from FY 2023 to FY 2024 and assessed whether internal controls over the utility billing process and billing adjustments are working effectively and in compliance with the City's policies.

Methodology To achieve the audit objectives, the OCA performed the following procedures:
• Interviewed the appropriate individuals to gain an understanding of the organizational structure, processes, and controls related to utility billing. • Analyzed City policies and procedures to identify the criteria to be used for evaluation of control design and effectiveness.
• Selected a sample of utility billing invoices, utility billing adjustments, billing and usage exceptions, and write-offs of uncollectable accounts for testing to compare the process and controls against City policies. • Developed Meter Reading and Utility Billing Adjustments process maps, identifying internal controls and control gaps.
• Completed audit report of findings, conclusions, and recommendations based on the supporting evidence gathered.

Compliance
Statement
This audit activity was conducted from June 2024 to December 2024 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, observations, and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings, observations, and conclusions based on our audit objectives.

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8 INTRODUCTION

Organizational
Strengths
During this audit activity, we noted the expertise and responsiveness demonstrated by the CPAU Department, notably the Director of Customer Service, Credit & Collections Manager, and the Customer Service Manager. We greatly appreciate staff participating in interviews and providing a substantial amount of documentation for testing.

The OCA greatly appreciates the support of the departments involved in conducting this audit activity.

Thank you!
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9 Detailed Analysis

Utility Billing
Process and
Controls
The utility billing function must accurately measure a customer’s usage and bill customers for their electricity, water, and gas usage based on current utility rates.

The Utility Billing Memo provides a summary of the utility billing process in the City of Palo Alto. It outlines the procedures performed for meter reading, billing and invoicing, and processing adjustments.

Meter Reading
Meter readings for natural gas, electric, and water consumption are required within a 27 to 33-day period. The SAP CCS system, a customer information system, generates a daily meter read route file, which is given to 7 to 9 Meter-Readers.

They visit customer addresses to record readings using handheld or drive-by devices. These readings are batch uploaded to the CCS system nightly.

For residents with Advanced Metering Infrastructure (AMI) meters, data is transmitted via radio signals to pole-mounted antennas and substations, then stored in the Head End System (HES). The data is verified, stored in the Meter Data Management System (MDMS), and uploaded to the billing system for processing.

If meter readings fall outside pre-programmed tolerance bands, the system generates an exception report. CSSs perform an “Implausibles” review of these exceptions using account history to determine if the readings are reasonable. If accuracy is in question, a “check-read” is requested. Once validated or corrected, the account proceeds to the next billing step. If exceptions remain, the account cannot proceed to invoicing.

The City also accepts monthly self-readings from customers, which are subjected to the same tests as those by Meter Readers.

Billing and Invoicing
Invoices are pre-numbered and created in the CCS system, which Customer Service and Credit Collections use to track the outstanding balance owed by customers, usage statistics, past due amounts, etc.

Billing charges that appear out-of-range must pass a “Billing Outsorts” review to ensure they are reasonable. If charges fail standard financial controls, an exception report is generated for further review by Customer Service staff. Accounts failing validation are held from invoice processing until manually released.

Monthly customer invoices are created in the CCS system and update the Accounts Receivable (A/R) account balance in the SAP FI-CA system nightly. This system tracks customer payments, late fees, and account adjustments.

Adjustments
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10 DETAILED ANALYSIS

Adjustments are initiated from various sources, including customer disputes or exceptions flagged during the “Implausibles” or “Billing Outsorts” reviews.

Account adjustments and credits are prepared by Utilities Customer Service staff.

Before processing, these are reviewed and approved by varying levels of Utilities management based on organizational level and financial limits. If the adjustments exceed internal signing authority limits, additional reviews and approvals from external departments are required.

Financial Authorization Levels and Signing Authority:

• Customer Service Specialist – Authorized to approve billing adjustments up to $500 per transaction per account.

• Customer Service Specialist Lead – Authorized to approve billing adjustments of up to $2000 per transaction per account.

• Manager, Utilities Credit and Collection - Authorized to approve billing and financial transactions up to $19,999 per transaction.

• Manager, Utilities Customer Service - Authorized to approve billing and financial transactions up to $19,999 per transaction.

• Assistant Director, Utilities Customer Support Services Division- Authorized to approve billing and financial transactions up to $65,000 per transaction.

• General Manager, Utilities Department –Authorized to approve billing and financial transactions greater than $65,000.

Twice per month the SAP ZCAR002 report of adjustments/credits is generated by the billing system. Utilities Credit and Collections staff review the report to make sure that the scheduled transactions and adjustments have been processed correctly in the billing system.

See Appendices for flowcharts showing the abbreviated current processes and controls in place.

Write-off Policy for Utilities Bad Debt

A quarterly memorandum requesting approval for “Utility Invoice Cancellation” is submitted by the Utilities Credit Collection Specialist, reviewed by the Utilities Back Office, and approved by the Manager of Utilities Customer Service and the Utilities Assistant Director of Customer Support Service.

Utilities Debt Collection Guidelines.

Accounts are defined by their aging as follows:

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• 1 to 30 days Current – No action
• 31 to 90 days Past Due – Automated system letter generation • 91 to 180 days Delinquent – Internal Collections while customer account is in an Active Status
• 181 days to 3 years Collection Agency - External Collections while customer account is in an Inactive Status and Accounting calculates Allowance for Doubtful Customers and Bad Debt
• 4+ years and beyond Write-off - Cancellation of Uncollectible Utilities Accounts Receivable and Write-off

The exceptions below are all considered automatic cancellation of uncollectible utilities accounts receivable and write-off:

• Amounts <$25 and 91+ days
• Discharged/Uncollectible Bankruptcies and 1+ days
• Verified deceased and 1+ days
• Deemed as uncollectible by external collection agency

The thresholds below require signatures of approval before write-off occurs:

• $.01 or more Signed by Assistant Director of Customer Support Services • $10,000 or more Signed by Director of Utilities Department and Director of Administrative Services Department
• $25,000 or more Signed by City Manager or Assistant City Manager

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12 AUDIT RESULTS

Audit Results
Finding 1:

The OCA found
utility bills and
adjustments are
accurately
calculated in
compliance with
City policies;
however, certain
billing adjustments
and account write-
offs were not
properly
documented or
approved per City
policy.

Overall, the OCA concluded that there is a robust utility billing process in place and found that, based on our testing, utility bills are accurately calculated. During our assessment of the City’s policies and procedures as well as testing of internal controls over the utility billing process, the OCA concluded that the process is working as intended.

Specifically, the OCA performed testing over utility billing invoices, utility billing adjustments, billing and usage exceptions, and write-offs of uncollectable accounts to compare the process and controls against City policies.

For all utility billing invoices tested, the OCA concluded that billing was accurate and in compliance with City policies as we found no test exceptions.

On a monthly basis, utility billing invoices are generated from SAP based on monthly usage and the City Council approved rates. These are then billed to customers.

To test the completeness and accuracy of utility billing invoices, the OCA selected an invoice from each account class (Residential Single Family, Residential Multi Family, Commercial, Industrial, Public Facilities Non-City, City, and Residential Multi Family Master Meter) during FY 2023 – FY 2024.

This resulted in a sample size of 7 invoices. In our testing of utility billing invoices, we found no exceptions.

For all invoices tested, the utility rates billed on the customer invoice aligned with City Council approved rates and the invoice amount and usage was accurately reflected in the system-generated reports from SAP.

Utility billing is appropriately reviewed for exceptions.

Prior to customer billing of invoices, CPAU generates a daily exception report and reviews it for implausible and billing outsorts exceptions. The exception reports flag when meter readings or billing charges fall outside pre-programmed tolerance bands and need to be reviewed to ensure they are reasonable. If exceptions are deemed reasonable during a daily review, they are released for billing. However, if the accuracy of an exception is in question, it is investigated further and may result in an adjustment.

The OCA tested a sample of implausibles and billing outsorts exceptions from randomly selected dates during FY 2023 – FY 2024. The OCA randomly selected 4 dates from each year that fell between FY 2023 - FY 2024. The OCA tested 1 implausible and 1 billing outsort for each date,

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13 AUDIT RESULTS

5 https://www.cityofpaloalto.org/files/assets/public/v/1/administrative-services/financial-reporting/annual-comprehensive-financial-reports- acfr/current-2011-cafrs/city-of-palo-alto-acfr-single-audit-fy2024-final-unsercured.pdf Exception Report. This resulted in testing 22 samples. In our testing of implausibles and billing outsorts exceptions, we found no exceptions.

For all implausibles and billing outsorts exceptions tested, the exception reports included appropriate amounts based on established parameters and were properly reviewed by the CSS to evaluate whether the readings are determined to be reasonable before released for billing or resulting in an adjustment.

With the implementation of AMI Meters, the City is confident that there will be a reduction in the number and magnitude of adjustments.

With the implementation of Advanced Metering Infrastructure (AMI) Meters in FY 2024, the CPAU Department will be able to flag high usage of meters on a daily rather than monthly basis. This will enable more timely detection of possible water leaks or meter read errors. Additionally, customers will be able to track their own meter usage as the AMI system can share usage information with customers.

According to the FY 2024 Annual Comprehensive Financial Report5, the City has installed approximately 38,000 or 40% electric, gas, and water AMI meters. As of the writing of this report, staff reported that CPAU has installed approximately 80% of water meters. Additionally, CPAU staff indicated that AMI implementation will likely be completed by Spring 2025.

The OCA identified some instances in which utility billing adjustments were not properly documented, supported, or approved during the period tested.

Utility billing adjustments are initiated from a few different sources: 1) Customer calls to question or dispute billings; 2) Incorrect read identified while processing “Implausible” exceptions; 3) Miscellaneous billing adjustments submitted to CSS for addition to the account, 4) Incorrect billing charges are identified while processing “Billing Outsorts” exceptions, and 5) annual reconciliation of the refuse service data.

Any of the above actions may result in a consumption or miscellaneous adjustment. Consumption adjustments primarily result from incorrect reads identified while processing implausibles exceptions. Miscellaneous adjustments result from credit/debiting a customer account for billing discrepancies, a water leak credit, or from periodic emails received from GreenWaste, a waste collection service provider for the City of Palo Alto, to process refuse adjustments. See table below:

Adjustment Type Table
Adjustment
Type Adjustment Cause
Consumption Implausibles Exceptions
Miscellaneous
Billing Discrepancies /
Billing Outsorts Exceptions
Water Leak Credit
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GreenWaste Adjustment

The City has a Processing Adjustments procedural document in place which describes the steps taken to process adjustments. See Appendix B: Utility Billing Adjustment Process Map for the abbreviated current processes and controls in place for processing adjustments.

The OCA requested a population of adjustments from FY 2023 – FY 2024 to select a sample for testing. The OCA sampled all categories of adjustments and determined that the following sample sizes were appropriate using AICPA sample size guidance: 25 consumption adjustments and 35 miscellaneous adjustments (13 miscellaneous debit/credit adjustments, 12 water leak adjustments, and 10 GreenWaste adjustments). This totaled a sample size of 60 adjustments tested for FY 2023 – FY 2024.

Out of 60 adjustments tested, there were 10 exceptions noted. These exceptions were primarily due to documentation and approval errors. The OCA observed the following:
• For 6 adjustments tested, there was no IC WEB interaction record.

The Processing Adjustments procedural document states that the CSS goes to IC WEB to note the account for Miscellaneous Adjustments. Failure to note the adjustment in IC WEB results in gaps in documentation used internally by the CPAU Department. • For 1 miscellaneous adjustment tested, a CSS approved transactions above their authority level. When the CSS entered signatures in DocuSign, they accidentally placed the signature and date block in the wrong place on the Miscellaneous Adjustment Form. The absence of proper approval from the appropriate authorization level and signing authority can result in inaccurate or unauthorized adjustments.
• For 1 miscellaneous adjustment tested, there was no Miscellaneous Adjustment or Invoice Cancellation Form submitted. The Processing Adjustments procedural document states that the CSR (Utilities Customer Service Center Representative) will fill out an Invoice Cancellation Form if the entire invoice needs to be cancelled. Failing to submit the Invoice Cancellation Form results in gaps in documentation and does not allow verification of proper review and approval of the invoice cancellation.
• For 1 miscellaneous adjustment tested, the Invoice Cancellation Form was incorrectly filled out by the CSS to include the incorrect Invoice Document Number. This resulted in a data entry error on the Invoice Cancellation Form.
• For 1 consumption adjustment tested, an adjustment was incorrectly entered in the Adjustment Log, due to a typographical error, however, the correct amount was updated in SAP. Therefore, this did not result in a billing error to the customer.

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When proper approvals for adjustments are not obtained and documented, there is potential for inappropriate adjustments, financial losses, or fraud. As approval is currently obtained via DocuSign or manually entered in the Adjustment Log, there is an increased possibility for improper approval due to human error.

Some account write-offs of stale-dated checks were not properly approved during the period tested.

The City collects customer payments and adjusts A/R for cash received.

Accounts that are aged past 30 days are considered “past due” and may be escalated to internal collections, an external collections agency, and eventually written off, as demonstrated in the table below:

Customer Account Aging Table
Aging Period Categorization Action Taken
1 to 30 days Current No action
31 to 90 days Past Due Automated system letter generation 91 to 180 days Delinquent Internal Collections
181 days to 3 years Collection Agency External Collections 4+ years Write-off Cancellation of A/R and Write-off

Cancellation of uncollectable utilities A/R and write-off occurs during the following exceptions:
• Aged 4+ years
• Amounts <$25 and 91+ days
• Discharged/Uncollectible Bankruptcies and 1+ days
• Verified deceased and 1+ days
• Deemed as uncollectible by external collection agency

For invoice cancellation and write-off of customer accounts, a Quarterly Utilities Invoice Cancellation Memorandum and Form (Quarterly Memo) is submitted for review and approval of cancellation of uncollectible utilities accounts receivable and write-off.

The OCA selected a sample of 25 account write-offs of uncollectable utility accounts during FY 2023 – FY 2024 for testing. During the period tested, collections were put on hold on March 4th, 2020 – October 2023 due to COVID-19. Therefore, the OCA did not test the collections process.

Out of 25 account write-offs tested, there were 4 exceptions noted.

The OCA observed that for all 4 stale-dated check write-offs sampled, the support, showing proper approval for the write-off, was not attached to the Quarterly Memo per the City Write-off Policy for Utilities Bad Debt. By omitting support for review and approval, this could lead to inaccurate financial reporting if all write-offs are not properly reviewed.

Per discussion with the CPAU Department, these were unintentionally omitted from the reports by an employee in training. The amounts of each stale-dated check did not exceed $25. Per review of the FY 24-25 1st Item 9
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16 AUDIT RESULTS
Quarter Memo, the OCA observed that stale-dated check write-offs were properly included in the attached support.

Recommendation We recommend that the City review the adjustments process to determine if there are ways to automate approvals in SAP rather than relying on manual processes which can increase the possibility for human error. Otherwise, the City should review the current Processing Adjustments procedural document to ensure it is comprehensive and includes all necessary steps for accurately recording and reviewing adjustments. The City should determine if an IC WEB interaction record should be submitted for all miscellaneous adjustments and ensure this process is implemented by the CPAU Department.

Additionally, if automation is not possible, the City could consider enhancing the procedural document by incorporating a checklist for both the processor and the approver of the adjustment. The approver checklist should include steps to reconcile adjustments entered in SAP with supporting documentation. By defining these steps in a checklist, the reviewer is more likely to identify any data entry errors before approving an adjustment. The CPAU Department should provide regular training sessions for staff on any updated procedures and the importance of accurate data entry and review.

Lastly, we recommend that the City maintain the practice of incorporating stale-dated check support in the Quarterly Memo and integrate this procedure into training materials or official policies. This will help ensure employees consistently follow this important step and prevent any potential oversights.

Management
Response

Responsible Department(s): CPAU
Concurrence: Agree
Target Date: Q4 CY 2025
Action Plan: Staff concur with the audit finding regarding the benefits of automation in mitigating human error. As the Office of the City Auditor (OCA) acknowledges, automation is not always feasible or readily attainable.

Currently, staff adhere to the established standard operating procedures outlined in the Processing Adjustments procedural document to ensure accurate processing.

To further address the finding, we will undertake the following actions:
• Automation Assessment: Staff will assess the effort and costs associated with automating the adjustment process within the current SAP environment. These specifications will be considered during the development of the next system upgrade.
• Procedural Enhancement: Staff will revise the Processing Adjustments procedural document to incorporate a reference to an adjustment checklist. This will enhance clarity and ensure all necessary steps are followed.

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Furthermore, to ensure comprehensive clarity and consistency across all related processes, the following areas within the procedural document will be reviewed and updated as needed: inclusion of the ICWEB interaction record with each adjustment; clarification of training requirements and documentation expectations at each staff/approval level; all processes, including the quarterly write-off process, reflect appropriate backup and review procedure expectations in the checklist.

Targeted changes include:
• Adjustments (Misc. Adjustments, Invoice Cancellations, Green Waste Adjustments, Water Leak Credits) are to be submitted in DocuSign for approval process, according to the Authority Level.
• Adding that an IC WEB interaction record is required for adjustments. (Misc. Adjustments, Invoice Cancellations, Green Waste Adjustments, Water Leak Credits)
• Review and update the Miscellaneous Adjustment and Invoice Cancellation forms including process for checking data in the form prior to approving and processing. Process to include steps to verify information in SAP.
• Review and update Adjustment Log. Include steps to verify information in SAP before providing approval. Clarifying approval process, to include screenshots of the steps.
• The City’s Quarterly Write off training instructions will add the process to include the stale dated checks on the Quarterly Write-Off Memo

Finding 2:

Two internal
control gaps in the
utility billing
process should be
addressed to
prevent potential
errors and
inefficiencies.

Through our testing and analysis of the process map, the OCA identified some internal control gaps in the billing process, specifically related to segregation of duties and timely resolution of billing adjustments.

The CPAU Department does not enforce proper segregation of duties between processing and approving consumption adjustments.

The utility billing process does not currently instruct staff on the proper segregation of duties to ensure that the same person processing a consumption adjustment is not the same person approving the adjustment. In the current utility billing process, the same individual can both record and self- approve adjustments.

For 3 consumption adjustments tested, the same individual processed and approved the adjustments on the Adjustment Log.

The absence of segregation of duties between processing and approving consumption adjustments can result in inadequate review and increased risk for potential errors or fraud. The City can minimize these risks by utilizing more than one person to complete they types of tasks. Segregating duties helps an organization reduce the risk of errors and fraud by distributing responsibilities and accountability among multiple people and/or departments.

Outstanding investigations are not regularly reviewed to ensure prompt resolution of billing adjustments.

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Adjustments can originate from various sources, such as customer billing disputes or when atypical billing and/or consumption amounts are during review via exception reports. If the accuracy of a customer bill is in question, the CSS opens a Service Notification (SN) in SAP to investigate the potential issue. After the SN is created, a Field Service Technician conducts a further review of the meter. The CSS is responsible for monitoring the status of any outstanding SNs.

Despite the CSS’s responsibility to follow up on outstanding SNs, there is no regular, formal review process for these outstanding investigations. This lack of a structured review can lead to prolonged open investigations and unresolved customer bills, causing delays in resolution. We noted an example where this lack of a structured review led to a prolonged open investigation for more than 2 months (77 days) after the initial customer complaint and unresolved customer bill, causing delays in resolution. Delays in resolving billing issues can lead to inaccurate financial records and operational inefficiencies as well as customer frustration and dissatisfaction.

Recommendation We recommend that the City consider implementing a control to ensure proper segregation of duties between processing and approving adjustments.

Without proper segregation of duties, there is a risk of potential error or fraud, as an individual can self-authorize an adjustment without adequate review.

Additionally, we recommend that the City consider implementing a regular, periodic review process for outstanding billing adjustments to prevent prolonged unresolved billing issues. The City should establish specific timeframes for reviewing outstanding adjustments and maintain thorough documentation of these reviews. This approach will enable the CPAU Department to better monitor the timeliness and effectiveness of resolving investigations and billing adjustments.

The City should provide ongoing training and support for CSSs and Field Service Technicians to ensure they are equipped to handle billing adjustments efficiently and effectively.

Management
Response
Responsible Department(s): CPAU
Concurrence: Agree
Target Date: Q4 CY 2025
Action Plan: Staff concur that standardized processes and robust internal controls are essential for mitigating the risks of errors and fraud. As noted in the prior response, staff are revising the Processing Adjustments procedural document to include a reference to a comprehensive adjustment checklist, ensuring all required steps are clearly delineated and consistently followed.

The Processing Adjustments procedural document and the new checklist will incorporate the following enhancements:
• Clear Approval Authorities: A review and update of approval authorities will be conducted, specifying both dollar thresholds and appropriate signing authority.

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• Implausibles Documentation: The Implausibles documentation will be revised to include a documented process for managing outstanding investigations.
• Training Expectations: Consistent with the above, training expectations related to the revised procedures and controls will be clearly outlined within the documentation.

To further strengthen oversight and segregation of duties, staff will facilitate coordination between the Utilities Department and the Administrative Services Department providing an independent review of these procedure revisions to ensure their effectiveness and alignment with the City’s internal control practices.

Review and update Implausibles documentation to include a process for these outstanding investigations, which includes checkpoints for follow up. • Review DocuSign documentation to include expectations for review steps and timely approvals deadlines.
• Coordinate training with CSR, CSS for follow up procedures for Service Notifications investigations.
• Project coordinator currently working on checklist and updated policies and procedures for follow up on billing investigations. • Completion target is resolutions within two billing cycles. • Communicate with Meter Shops on timely resolution of field issues.

Additional
Observations:

1. Formalizing
and more
consistently
documenting
adjustments may
improve
efficiency

The CSR/CSS manually inputs adjustments into the Adjustment Log, an excel sheet kept by the CPAU Department. When entering an adjustment in the log, the CSR/CSS notes the reasoning for the adjustment in the “Adjustment Reason” and/or “Notes” column of the log.

Per the OCA’s observation of the adjustment documentation in the adjustment logs, we noted that there were blank rows, and a variety of adjustment reasons and notes entered in the Adjustment Log. The adjustment notations did not follow a consistent naming convention or provide a clear and detailed reasoning for the adjustment.

The CPAU Department could enhance the adjustment documentation process by creating a bank of approved adjustment reasons (reason codes) and notes to ensure consistency throughout the process. Additionally, by formalizing notations of adjustments and the reasoning, the reviewer could better understand the adjustment justification and ensure that it was appropriate.

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6 7 KPIS and Metrics That Your Utility Needs to Know - Silver Blaze Solutions 7 7 KPIs to Streamline Utility Billing

2. Formally
tracking key
Utility Billing
indicators could
aid CPAU in
monitoring
performance over
time
CPAU management said they do not formally track utility billing Key Performance Indicators (KPIs) but do monitor some indicators periodically.

There are several utility billing KPIs that could help the utility track its billing function performance over time and improve its effectiveness and efficiency.

Based on our analysis of a few industry publications, use of such indicators can help management make more informed decisions, improve operations and increase customer satisfaction

67. Some of these indicators include:
• Billing Error Rate – percentage of total bills that have errors • Customer Satisfaction Score – a direct measure of satisfaction with services provided
• Collection Rate – percentage of billed amount received within a specific time frame
• Percentage of On-Time Payments – percentage of payments that were paid timely
• First Contact Resolution Rate – percentage of customer inquiries or issues resolved during the first interaction

Tracking KPIs over time can help an organization see trends, note when performance either improves or worsens, and determine what areas may need assessment.

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21 Appendices

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22 Appendix A: Meter Reading Process Map

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23 Appendix B: Utility Billing Adjustment Process Map

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City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: Transportation
Meeting Date: March 24, 2025
Report #:2411-3835
TITLE
Approval of an Amended Funding Agreement with the Santa Clara Valley Transportation Authority (VTA) for 2016 Measure B Bicycle and Pedestrian Education and Encouragement Program Funding; CEQA status – not a project.

RECOMMENDATION
Staff recommends that Council authorize the City Manager to execute an amended and restated funding agreement with VTA for the 2016 Measure B Bicycle and Pedestrian Education and Encouragement Program through March 2047 (the life of Measure B).

BACKGROUND
On November 8, 2016, Santa Clara County voters passed 2016 Measure B1 (“Measure B”), a 30- year, half-cent sales tax measure funding transportation projects. Collection of the tax revenue began on April 1, 2017. The measure funds projects in nine program areas. The Bicycle and Pedestrian Program2 is allocated 3.97% of tax revenue to eliminate gaps in active transportation networks and to make walking and bicycling safer and more convenient. The program has three sub-categories: Planning Studies, Capital Projects, and E&E.

The current agreement with VTA for the Bicycle and Pedestrian Program E&E Category funds was signed by the City Manager on October 29, 2019 and signed by VTA on November 13, 2019.

This agreement expires on June 30, 2025. The amended and restated funding agreement (Attachment A) for 2016 Measure B Bicycle & Pedestrian E&E Program Category funds will go through the life of the measure until March 31, 2047 – reducing need and effort to renew and extend the current funding agreements every two years. This new agreement also includes new 1 VTA 2016 Measure B, https://2016measureb.vta.org/
2 VTA 2016 Measure B, Bicycle and Pedestrian Program,
https://2016measureb.vta.org/?transactionType=award&grantee=&project=&category=Bicycle%20%26%20Pedest rian
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2016 Measure B standard language. Approval and execution of the funding agreement with VTA is required for the City to access any of the Bicycle & Pedestrian funds.

ANALYSIS
E&E funds can be used, with VTA’s approval, for activities such as: organization and implementation of Safe Routes to Schools programs and activities, education of walking and bicycling skills to adults and children, and purchase and distribution of bicycle helmets, lights, reflective vests, or other bicycle/pedestrian safety equipment to be used in education/encouragement activities. Funds are only available for activities or projects for individuals who live, work, or attend school in Palo Alto. Funds may be used for direct costs or staff time costs. Funds may not be used for capital improvements. The City has previously utilized this funding for reimbursement of staff time and is currently using funding for K-5 bicycle and pedestrian safety educational programming.

The City’s maximum funding allocation for each fiscal year (July 1st through June 30th of the following calendar year) is based upon an annual population-based distribution formula (Attachment A, Section II, Paragraph 5). The County of Santa Clara has a separate agreement for these funds that also address the sharing of countywide funds/activities with VTA. The City must submit a work program and annual progress report3 as part of the funding agreement.

Upon execution of the funding agreement, the City will continue to receive annual allocations from Measure B.

FISCAL/RESOURCE IMPACT

The City receives approximately $50,000 annually in E&E funds, and the VTA releases its annual funding allocations in two-year cycles. FY 2024 and 2025’s allocation has been budgeted to help fund K-5 bicycle and pedestrian safety educational programming as previously mentioned, and future funding is also earmarked for this purpose.4 The VTA has yet to announce its allocations for FY 2026 and FY 2027. Depending on the timing of the announcement, staff will request to appropriate the additional funding through the FY 2026 budget process or the FY 2026 mid-year budget review. No additional budgetary action is required at this time.

ENVIRONMENTAL REVIEW
Approval and execution of the funding agreement are actions that do not meet the definition of a project for the purposes of CEQA, under Public Resources Code Section 21065 and CEQA 3 Palo Alto Bike/Pedestrian Education & Encouragement Program, VTA, https://2016measureb.vta.org/projects/palo-alto-bike-pedestrian-education-encouragement-program 4 City Council, February 24, 2025; Agenda Item #9; SR #2412-3864, https://cityofpaloalto.primegov.com/Portal/viewer?id=0&type=7&uid=141736ca-9e37-4a2f-a38c-aeba5c8e1048 Item 10
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Guidelines Section 15378(b)(5), because they are administrative governmental activities which will not cause a direct or indirect physical change in the environment. Each project funded via Measure B Bicycle and Pedestrian E&E funds will be reviewed for compliance under CEQA.

ATTACHMENTS
Attachment A: 2016 Measure B Bicycle & Pedestrian Education and Encouragement Program Funding Agreement
APPROVED BY:

Lily Lim-Tsao, Interim Chief Transportation Official
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Rev 2.4.25 Page 1 of 19

AMENDED AND RESTATED FUNDING AGREEMENT

BETWEEN

CITY OF PALO ALTO
AND

SANTA CLARA VALLEY TRANSPORTATION AUTHORITY
FOR
2016 MEASURE B BICYCLE & PEDESTRIAN EDUCATION AND ENCOURAGEMENT PROGRAM

THIS AMENDED AND RESTATED FUNDING AGREEMENT (“AGREEMENT”) is entered into as of July 1st, 2025 (“EFFECTIVE DATE”) and is by and between the CITY OF PALO ALTO (“ RECIPIENT”) and SANTA CLARA VALLEY TRANSPORTATION AUTHORITY (“VTA”). RECIPIENT and VTA may be individually referred to as “PARTY” or collectively referred to as “PARTIES.”

I. RECITALS

1. Whereas, on June 24, 2016, the VTA Board of Directors (“VTA BOARD”) adopted a resolution to place a ballot measure before the voters of Santa Clara County (“SCC”) in November 2016 to authorize a one-half of one percent retail transaction and use tax (“2016 MEASURE B ”) for 30 years for nine transportation-related program categories;

2. Whereas, on November 8, 2016, the voters of Santa Clara County enacted 2016 MEASURE B for 30 years to pay for the nine transportation-related program categories;

3. Whereas, on October 5, 2017, the VTA BOARD established the 2016 Measure B Program (“PROGRAM”) and adopted the 2016 Measure B Program Category Guidelines (“GUIDELINES”). In addition, VTA established a program manual (“PROGRAM MANUAL”) . Both the GUIDELINES and the PROGRAM MANUAL are incorporated into this Agreement by this reference and available at www.vta.org or upon request to VTA;

4. Whereas, the PROGRAM includes a Bicycle & Pedestrian program category (“BIKE/PED CATEGORY”) to fund bicycle and pedestrian projects and educational programs;

5. Whereas, the BIKE/PED CATEGORY consists of three sub -categories, including the education & encouragement program (“BIKE/PED E&E PROGRAM”);

6. Whereas, the duration of 2016 MEASURE B will be 30 years from the initial year of collection, beginning April 1, 2017, and continuing through March 31, 2047;

7. Whereas, the PARTIES executed a funding agreement for the BIKE/PED E&E PROGRAM funds on November 13, 2019 which expires on June 30, 2025 (“PRIOR AGREEMENT”); and

8. Whereas, the PARTIES desire to amend and restate the PRIOR AGREEMENT to, among other things, specify the terms and conditions under which VTA will administer BIKE/PED E&E PROGRAM funds allocated to VTA and RECIPIENT through the life of the PROGRAM.

NOW, THEREFORE, in consideration of the mutual promises contained in this AGREEMENT , the PARTIES agree as follows:

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Measure B Bicycle &
Pedestrian Education and
Encouragement Program
Funding Agreement

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Rev 2.4.25 Page 2 of 19

II. AGREEMENT

1. BIKE/PED E&E PROGRAM DEFINITION

The BIKE/PED E&E PROGRAM covers activities and the development and distribution of materials that are designed and intended to satisfy the following goals within RECIPIENT ’s jurisdiction: (i) promote, educate, and/or encourage safe walking or bicycling for residents or visitors of every age and ability; (ii) communicate to residents and visitors the benefits of walking and bicycling; and (iii) communicate to school children, residents, and visitors the rights and responsibilities of pedestrians, bicyclists, and motorists.

2. TERM OF AGREEMENT

The term of this AGREEMENT will commence on the EFFECTIVE DATE and continue through March 31, 2047, or until BIKE/PED E&E PROGRAM CATEGORY funds allocated to RECIPIENT have been expended entirely, whichever occurs later.

Notwithstanding the foregoing, the PARTIES may terminate this A GREEMENT pursuant to Section II, Paragraph 13.

3. ELIGIBLE USE OF FUNDS

A. RECIPIENT may use RECIPIENT’s allocated BIKE/PED E&E PROGRAM funds only for activities/projects that (i) are offered/available to individuals who live , work, or attend school in RECIPIENT’S boundaries or school districts, and (ii) VTA has pre-approved in writing (each, an “E&E PROJECT”). Only VTA’s AUTHORIZED REPRESENTATIVE (defined in Section II, Paragraph 15 below), or designee, has authority to approve an E&E PROJECT.

B. VTA will consider for approval the following types of activities / projects:

i. Organization and implementation of K-12 Safe Routes to Schools programs and activities. ii. Organization and implementation of Vision Zero programs. “Vision Zero” is defined by the Vision Zero Network campaign as the “Strategy to eliminate all traffic fatalities and severe injuries while increasing safe, healthy, equitable mobility for all,” which definition is adopted for purposes of this AGREEMENT.
iii. Organization and implementation of open streets events. “Open streets events” are defined by the Open Streets Project (an advocacy project and collaboration between 8 80 Cities and Street Plans) as “Programs that temporarily open streets to people by closing them to cars,” which definition is adopted for purposes of this AGREEMENT. iv. Creation and implementation of marketing to encourage mode shift towards active transportation.
v. Development and distribution of maps that promote places to walk or bike. vi. Education of walking and bicycling skills to adults and children. vii. Working with law enforcement officials to ensure common understanding and consistent application among law enforcement officials of traffic laws related to biking and walking. viii. Organization and implementation of broad or targeted safety campaigns to promote safe driving, walking, and bicycling behavior.*
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ix. Creation and distribution of marketing materials to encourage safe walking, biking, and driving.*
x. Purchase and distribution of bicycle helmets, lights, reflective vests, or other bicycle/pedestrian safety equipment to be used in education/encouragement activities. xi. Purchase and distribution of incentives for education/encouragement activities. xii. Organization and implementation of crosswalk stings or other activities that educate roadway users on traffic laws. Crosswalk stings are activities conducted by law enforcement to educate the public about crosswalk right of way laws that may or may not inc lude citations.
xiii. Organization and implementation of special community events focused on achieving the BIKE/PED E&E PROGRAM goals described in Section II, Paragraph 1, such as community rides or walks.
xiv. Energizer stations and other Bike to Wherever Day activities. xv. Implementation of valet bicycle parking.
xvi. Community-based bicycle/pedestrian surveys of facilities and surrounding areas to learn, observe, and identify bicycle and pedestrian hot spots. xvii. Any other program or activity VTA pre-approves in writing.

*Any safety campaign or public service announcement targeted to motorists must focus on safe, responsible, and respectful motorist interactions with pedestrians and bicyclists.

C. RECIPIENT is permitted to use BIKE/PED E&E PROGRAM funds allocated f or (i) direct costs and staff time costs incurred by RECIPIENT to support E&E PROJECTS , and (ii) costs incurred for evaluation of the E&E PROJECTS (as required under Section II, Paragraph 4).

D. Notwithstanding any other provision of this AGREEMENT , RECIPIENT is not permitted to use BIKE/PED E&E PROGRAM funds for capital improvements.

E. E&E PROJECTS may be targeted and limited to specific demographics including, but not limited to, school children, seniors, or people with disabilities to the extent not prohibited by applicable law.

F. Only BIKE/PED E&E PROGRAM costs incurred by RECIPIENT on or after July 1, 2017, will be eligible for reimbursement.

4. EVALUATION REQUIREMENTS

A. RECIPIENT must identify (i) the project reach and scale of each E&E PROJECT and (ii) one or more metric(s) that will be used to evaluate whether the goal was achieved. Examples of acceptable metrics are set forth in Attachment A, attached hereto and incorporated herein.

B. RECIPIENT must identify and obtain VTA’s prior written approval of the frequency and schedule of each E&E PROJECT evaluation.

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5. MAXIUMUM FUNDING ALLOCATIONS

A. RECIPIENT’S maximum funding allocation for each fiscal year (July 1 st through June 30 th of the following calendar year) will be based upon the VTA BOARD’s Adopted Biennial Budget for the BIKE/PED E&E PROGRAM and the annual fund distribution formula described below.

B. Annual Fund Distribution Formula. The BIKE/PED E&E PROGRAM annual fund distribution formula is calculated every two fiscal years (in line with VTA’s budget cycle) and is based on the following:

i. First, at the same time that VTA plans and finalizes its budget for the two upcoming fiscal years, the VTA BOARD determines the allocation of 2016 MEASURE B funds for the two upcoming fiscal years.

ii. Second, the VTA BOARD determines the amount of 2016 MEASURE B funds to be allocated amongst the PROGRAM categories and subcategories , including the BIKE/PED E&E PROGRAM CATEGORY.

iii. Third, an allocation is made to VTA and the County of Santa Clara for countywide (with respect to Santa Clara County) BIKE/PED E&E PROGRAM activities (“COUNTYWIDE ACTIVITIES”). Per the GUIDELINES, COUNTYWIDE ACTIVITIES will receive 25% of available BIKE/PED E&E POGRAM funds.

iv. Fourth, the 2016 Measure B funds remaining for the BIKE/PED E&E PROGRAM category allocation are calculated by deducting the amount allocated for COUNTYWIDE ACTIVITIES in subparagraph (iii), immediately above, from the total BIKE/PED E&E PROGRAM category allocation (“REMAINING FUNDS”).

v. Fifth, VTA determines the percentage of the total population of SCC (“TOTAL SCC POP”) of each city (“CITY POP”) and of the unincorporated areas of SCC (“SCC UNINCORP POP”) to determine allocations to each city. For purposes of these calculations, the TOTAL SCC POP includes unincorporated areas and is based on the then most current California Department of Finance’s more current annual population estimates at the time of allocation determination, i.e., Report E -1, or any successor report . Each CITY POP is divided by the TOTAL SCC POP, and then the result is multiplied by 100. The result for each city is the “CITY PERCENTAGE SHARE” (for SCC, the ”SCC PERCENTAGE SHARE”).

vi. SIXTH, each CITY PERCENTAGE SHARE (including the SCC PERCENTAGE SHARE) is multiplied by the REMAINING FUNDS to determine the dollar amount that would be allocated to each city based on their CITY PERCENTAGE SHARE; however, no allocation is yet made at this step. Cities that would receive less than $10,000 as a result of the calculation described in Subsection (v) will be identified as low population cities (“LOW POP CITIES”).

vii. Seventh, each city is allocated $10,000 (“10K ALLOCATIONS”). LOW POP CITIES will not be allocated any additional funds beyond the 10K ALLOCATIONS made to each city as described in this Sub section (vii). The minimum 10k ALLOCATIONS will continue through fiscal year 2025. Following fiscal year 2025, the minimum allocated to LOW POP CITIES will increase by Item 10
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$2,000 every five years. See the “LOW POP CITES ALLOCATION SCHEDULE” included in this AGREEMENT as Attachment B, attached hereto and incorporated herein.

viii. Eighth, the modified REMAINING FUNDS are calculated by subtracting the cumulative total of allocations made to LOW POP CITIES from the REMAINING FUNDS (“MOD REMA INING FUNDS”).

ix. Ninth, a modified Santa Clara County population is calculated by deducting the SCC UNINCORP POP and all LOW POP CITIES from the TOTAL SCC POP (“MODIF IED POPULATION”).

x. Tenth, a modified population percentage share (“MOD CITY PERCENTAGE SHARE”) is calculated for all cities that are not LOW POP CITIES (“NON -LOW POP CITIES”) by dividing the NON-LOW POP CITY’S total population by the MODIFIED POPULATION and multiplying the result by 100.

xi. Eleventh, each NON-LOW POP CITY’S MOD CITY PERCENTAGE SHARE is multiplied by the MOD REMAINING FUNDS to calculate each NON-LOW POP CITY’s additional allocation of 2016 Measure B funds for the BIKE/PED E&E PROGRAM category. This allocation will be made in addition to the 10K ALLOCATION described above.

C. RECIPIENT’s allocations are subject to change based on allocations made by the VTA BOARD pursuant to the PROGRAM.

D. BIKE/PED E&E PROGRAM allocations may be banked and remain unspent for a maximum of three fiscal years, provided that (i) RECIPIENT provides VTA with a satisfactory explanation for why the allocation is not being spent and (ii) VTA provides RECIPIENT with written approval for such explanation. In this instance, RECIPIENT must begin drawing funds during the fourth fiscal year.

Following the third fiscal year of banked allocations and within the fourth fiscal year, RECIPIENT must provide to VTA the required documentation as described in Section II, Paragraph 7. In this fourth fiscal year, RECIPIENT must submit , at minimum, one invoice for funds towards an E&E PROJECT.

If RECIPIENT fails to do the above by the end of the fourth fiscal year and no funds have been spent in the past four consecutive fiscal years, then allocations will be returned by VTA to the pool of 2016 MEASURE B funds allocated to the BIKE/PED E&E PROGRAM category for redistribution in the next allocation cycle pursuant to the formula above.

E. All funds will be available to RECIPIENT on a reimbursement basis only.

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6. VTA’s OBLIGATIONS

VTA will:

A. Annually report to the public the amount of BIKE/PED E&E PROGRAM revenues allocated and distributed to RECIPIENT.

B. Annually report to the public a summary of E&E PROJECT evaluation metrics submitted by RECIPIENT, as required in Section II, Paragraph 4.

C. Conduct an assessment regarding the effectiveness of the BIKE/PED E&E PROGRAM using approved metrics and data provided by RECIPIENT (pursuant to Section II, Paragraph 4) related to RECIPIENT’s E&E PROJECT(s).

D. Biennially, or however frequently as VTA determines is appropriate based upon the number of ongoing E&E PROJECTs, report to the public the effectiveness of the BIKE/PED E&E PROGRAM based on the assessment described immediately above in Section II, Paragraph 6(C).

E. Remit the amount due to the RECIPIENT under an invoice within thirty (30) calendar days of receipt of a complete and proper, fully documented invoice complying with the requirements set forth herein.

7. RECIPIENT’s OBLIGATIONS

RECIPIENT must:

A. Comply with 2016 Measure B reporting requirements.

B. Ensure that all 2016 MEASURE B funds are expended on allowable BIKE/PED E&E PROGRAM expenditures as described above in Section II, Paragraph 3, ELIGIBLE USE OF FUNDS.

C. Annually complete and submit to VTA, by October 1st of each year, RECIPIENT’s proposed work program for the BIKE/PED E&E PROGRAM, in which RECIPIENT must set forth proposed E&E PROJECTS and develop all such E&E PROJECTS that are approved by VTA as eligible. RECIPIENT ’s proposed metrics and frequency of E&E PROJECT evaluation must be included with the proposed work program (see Section II, Paragraph 4); VTA must provide approval of the proposed metrics and frequency of evaluation.

D. Annually submit to VTA, by October 1st of each year, a summary of the prior fiscal year’s completed E&E PROJECTS.

E. Submit to VTA, on a frequency as approved by VTA, the evaluation of the completed E&E PROJECTS pursuant to Section II, Paragraph 4.

F. If applicable, annually submit to VTA, by October 1st of each year, an explanation of why no BIKE/PED E&E PROGRAM funds are planned for expenditure during the upcoming fiscal year.

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G. Annually complete and submit to VTA, by October 1st of each year, any accompanying reporting requirements for the BIKE/PED E&E PROGRAM.

H. Submit to VTA all records including contractors’ invoices, miscellaneous invoices, and force account charges as substantiation for invoices submitted to VTA for reimbursement hereunder.

I. Maintain financial records, books, documents, papers, accounting records, and other evidence pertaining to costs related to this AGREEMENT for five (5) years. RECIPIENT shall make such records available to VTA upon VTA’s written request for review and audit purposes. Financial audits will be performed at VTA’s sole discretion.

J. Submit invoices to VTA, no more frequently than monthly, for reimbursement of eligible E&E PROJECT costs (see Section II, Paragraph 3 ) RECIPIENT must submit invoices within one year of the date RECIPIENT incurs the cost submitted on the invoice for reimbursement (unless otherwise approved by VTA in writing).

K. At all times during this AGREEMENT, RECIPIENT must comply with the insurance requirements and specifications of the attached Attachment C, Insurance Requirements. RECIPIENT may, in its discretion, elect to self-insure, but any such self-insurance must meet the requirements and specifications in Attachment C.

8. INDEMNIFICATION
Neither VTA nor any officer or employee thereof will be responsible for any damage or liability arising out of or relating to RECIPEINT’s negligent acts or omissions, recklessness, or willful misconduct under or in connection with any work, authority, or jurisdiction associated with this AGREEMENT. Pursuant to California Government Code §895.4, RECIPIENT must fully defend, indemnify, and hold harmless VTA from all suits or actions of every name, kind, and description arising from an injury (as defined by California Government Code §810.8) arising out of or relating to RECIPEINT’s negligent acts or omissions, recklessness, or willful misconduct under or in connection with any work, authority, or jurisdiction delegated to RECIPIENT under this AGREEMENT. This provision will survive the termination or expiration of this AGREEMENT.

9. INSURANCE
At all times during this Agreement, RECIPIENT must comply with the insurance requirements and specifications of Attachment C, Insurance Requirements, attached hereto and incorporated herein .

RECIPIENT may, in its discretion, elect to self- insure, but any such self -insurance must meet the requirements and specifications in Attachment C.

10. ADDITIONAL INSURED AND INDEMNITY PROVISION
In any agreement executed between the RECIPIENT and a third party for purposes related in any way to the subject matter of this Agreement (“Third Party Contract”), RECIPIENT must require that VTA be named as (i) an additional insured on a primary and non-contributory basis with separation of insureds and waiver of subrogation on all policies of insurance, except when not applicable and (ii) an indemnified party in any indemnity provision contained in the Third Party Contract. Third Party Contracts must contain insurance requirements with coverages at least as broad as, and limits at least as great as, the requirements of Attachment C.

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11. COMPLIANCE WITH APPLICABLE LAW
In execution of any E&E PROJECT and performance of its responsibilities set forth herein, RECIPIENT must comply with all applicable requirements of local, state, and federal law.

12. COMPLIANCE WITH 2016 MEASURE B REQUIREMENTS
A. In its performance under this AGREEMENT, RECIPIENT must comply, and must ensure E&E PROJECT compliance, with all PROGRAM requirements including, but not limited to, the GUIDELINES and PROGRAM MANUAL.

B. VTA may, in its sole discretion, make changes to the GUIDELINES and/or the PROGRAM MANUAL at any time. If VTA makes such changes, VTA will notify RECIPIENT within a reasonable time of such changes.

13. TERMINATION
A. Either PARTY may at any time terminate this Agreement by giving ten (10) business days written notice of such termination to the other P ARTY. Notice must identify the effective date of such cancellation and must be provided in accordance with the terms and conditions of this AGREEMENT.

B. In the event of termination under this section, City must submit its final invoice to VTA within thirty (30) calendar days of the effective date of termination, and such invoice will be solely for ELIGIBLE COSTS RECIPIENT incurred prior to termination.

14. AUDITS AND RECORDS

A. RECIPIENT must maintain, and must require their contractors to maintain, in accordance with generally accepted accounting principles and practices, complete books, accounts, records, and data pertaining to services performed under this AGREEMENT, including the costs of contract administration. Such documentation must be supported by properly executed payrolls, invoices, contracts, and vouchers evidencing in detail the nature and propriety of any charges and must be sufficient to allow a proper audit of services. All checks, payrolls, invoices, contracts, and other accounting documents pertaining in whole or in part to the services must be clearly identified and readily accessible.

B. For the duration of the AGREEMENT, and for a period of five years after final payment, each PARTY and its representatives must have access during normal business hours to any books, accounts, records, data, and other relevant documents (“RECORDS”) of the other PARTY that are pertinent to this AGREEMENT for audits, examinations, excerpts, and transactions. The other PARTY must furnish copies of the RECORDS upon request.

15. NOTICES / AUTHORIZED REPRESENTATIVES
A. Notices. Any notice which may be required under this AGREEMENT (i) must be in writing, (ii) will be effective one (1) business day after personal service or delivery by certified mail, and (iii) must be given by personal service or certified mail the other PARTY’S AUTHORIZED REPRESENTATIVE at the addresses set forth below, or to such other address that may be specified in writing by a PARTY.

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B. Authorized Representatives.

VTA:

Marcella Rensi
Deputy Director, Programming and Grants
Santa Clara Valley Transportation Authority
3331 N First Street
San Jose, CA 95134
Email: [email protected]

RECIPIENT:

Lily Lim-Tsao
Interim Chief Transportation Official
Palo Alto
250 Hamilton Ave
Palo Alto, CA, 94301
[email protected]

Written notification to the other PARTY must be provided, in advance, for changes in the name or address of the individuals identified above.

The individual identified above for RECIPIENT is RECIPIENT’s BIKE/PED E&E PROGRAM Liaison (“LIAISON”). The LIAISON shall be (i) the liaison to VTA pertaining to implementation of this AGREEMENT and (ii) the contact for information about the BIKE/PED E&E PROGRAM and E&E PROJECTS.

16. GENERAL TERMS AND CONDITIONS

A. Headings. The subject headings of the articles and paragraphs in this A GREEMENT are included for convenience only and will not affect the construction or interpretation of any of its provisions.

B. Incorporation of Exhibits and Attachments. All exhibits and attachments referenced in this AGREEMENT are incorporated into it by this reference.

C. Construction and Interpretation of Agreement. This AGREEMENT, and each of its provisions, terms, and conditions, has been reached as a result of negotiations between the PARTIES .

Accordingly, each PARTY expressly acknowledges and agrees that (i) this AGREEMENT will not be deemed to have been authored, prepared, or drafted by any particular PARTY and (ii) the rule of construction to the effect that ambiguities are to be resolved against the drafting party will not be employed in the interpretation of this AGREEMENT or in the resolution of disputes.

D. Amendment. No alteration or variation of the terms of this AGREEMENT will be valid unless made in writing and signed by both of the PARTIES hereto, and no oral understanding or AGREEMENT not incorporated herein will be binding on any of the PARTIES hereto.

E. Entire Agreement. This A GREEMENT constitutes the entire agreement between the PARTIES relating to the subject matter and supersedes all prior negotiations, contracts, agreements, or understandings, whether oral or written, of the PARTIES regarding the subject matter.

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F. Representation of Authority. Each PARTY to this AGREEMENT represents and warrants that each person whose signature appears hereon has been duly authorized and has the full authority to execute this AGREEMENT on behalf of the entity that is a PARTY to this AGREEMENT.

G. No Waiver. The failure of either PARTY to insist upon the strict performance of any of the terms, covenant, and conditions of this AGREEMENT will not be deemed a waiver of any right or remedy that either PARTY may have, and will not be deemed a waiver of either PAR TY’s right to require strict performance of all of the terms, covenants, and conditions hereunder.

H. Dispute Resolution.
a. If a question or allegation arises regarding (i) interpretation of this AGREEMENT or its performance, or (ii) the alleged failure of a PARTY to perform, the PARTY raising the question or making the allegation must give written notice thereof to the other P ARTY. The PARTIES must promptly meet in an effort to resolve the issues raised. If the PARTIES fail to resolve the issues raised, alternative forms of dispute resolution, including mediation, may be pursued by mutual agreement. It is the intent of the PARTIES to avoid litigation as a method of dispute resolution to the greatest extent possible.

b. Notwithstanding the foregoing, nothing in this Paragraph 16 will be deemed to prevent a PARTY from filing suit or an administrative action to preserve its right to assert a claim within any applicable statute of limitations. To the extent practicable, the PARTIES will negotiate in good faith to create a tolling agreement to toll such statute(s) of limitations to allow for the PARTIES to engage in dispute resolution provisions of this AGREEMENT prior to filing of such actions.

I. Severability. If any term, covenant, condition or provision of this AGREEMENT, or the application thereof to any person or circumstance, shall to any extent be held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, co venants, conditions and provisions of this AGREEMENT, or the application thereof to any person or circumstance, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby.

J. Governing Law. The laws of the State of California will govern this AGREEMENT , as well as any claim that might arise between RECIPIENT and VTA, without regard to conflict of law provisions.

K. Venue. Any lawsuit or legal action arising from this AGREEMENT must be commenced and prosecuted in the courts of Santa Clara County, California. RECIPIENT agrees to submit to the personal jurisdiction of the courts located in Santa Clara County, California for the purpose of litigating all such claims.

L. Use of Work. All PARTIES may retain a copy of all material produced under this AGREEMENT for use in their general activities.

M. Attribution to VTA. RECIPIENT must include attribution to VTA that indicates part of the work was funded by PROGRAM Funds. This provision applies to any project or publication that was funded in part or in whole by PROGRAM Funds. Acceptable forms of attribution include 2016 MEASURE B’s branding on E&E PROJECT-related documents, public information materials, and any other applicable documents. VTA will provide Program branding to RECIPIENT.

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N. Non-discrimination. The PARTIES and any contractors performing services on behalf of the PARTIES (“CONTRACTORS”) will not unlawfully discriminate or permit discrimination, harass, or allow harassment against any person or group of persons because of race, color, religious creed, national origin, ancestry, age (over 40), sex, gender, gender identity, gender expression, sexual orientation, marital status, pregnancy or childbirth (including related conditions), medical condition (including cancer), mental disability, physical disability (including HIV and AIDS), genetic information, or military and veteran’s status, or in any manner prohibited by federal, state, or local laws. In addition, the PARTIES and CONTRACTORS must not unlawfully deny any of their employees family care leave to which they are entitled or discriminate against such employees on the basis of having to use family care leave. The PARTIES and CONTRACTORS must ensure that the evaluation and treatment of their employees and applicants for employm ent is free of such discrimination and harassment.

O. Relationship of the P arties. It is understood that this is an AGREEMENT by and between independent parties and does not create the relationship of agent, servant, employee, partnership, joint venture or association, or any other relationship other than that of independent contractor.

P. Execution in Counterparts / Electronic Signature. This AGREEMENT may be executed in one or more counterparts, each of which will be deemed an original but all of which will constitute one and the same instrument. An electronic copy of a signed contract, or an electronically signed contract, has the same force and legal effect as a contract executed with an original ink signature.

The term “electronic copy of a signed contract” refers to a copy of an original signed contract that meets the admissibility standards of a writing described in Evidence Code §1550. The term “electronically signed contract” means a contract that is executed by applying an electronic signature using technology approved by each of the Parties.

Q. Authority to Execute Agreement. Each PARTY to this AGREEMENT represents and warrants that each person whose signature appears hereon has been duly authorized and has the full authority to execute this AGREEMENT on behalf of the entity that is a PARTY to this AGREEMENT.

R. Third Party Beneficiaries. This AGREEMENT does not, and is not intended to, confer any rights or remedies upon any person or entity other than the PARTIES.

S. Survival. All representations, warranties, and covenants contained in this AGREEMENT, or in any instrument, certificate, exhibit, or other writing intended by the PARTIES to survive this AGREEMENT, shall survive the termination or expiration of this AGREEMENT, including but not limited to all terms (1) providing for indemnification; (2) relating to the California Public Records Act; (3) relating to maintenance of data; and (4) relating to PARTIES’ obligations upon and following termination or expiration of this AGREEMENT.

Signatures of PARTIES on following page.

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IN
WITNESS WHEREOF, VTA and RECIPIENT have caused their undersigned, duly authorized signatories to execute this AMENDED AND RESTATED FUNDING AGREEMENT as of the EFFECTIVE DATE.

SANTA CLARA VALLEY CITY OF PALO ALTO

TRANSPORTATION AUTHORITY
Carolyn M. Gonot Ed Shikada
General Manager/CEO City Manager
Date Date
Approved as to Form Approve as to Form
Evelynn Tran
General Counsel
Tim Shimizu
Assistant City Attorney
Date Date
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ATTACHMENT A

Example Evaluation Requirement Metrics
Evaluation metrics include, but are not limited to, the ones used below.

• Project reach - A metric measuring the total number of people or entities that participated in the activity or received a physical item provided by the program. o Hypothetical Example: Online media safety campaign had 10,000 unique views, resulting in 2,000 people taking the “I will drive, walk, and bike safely and responsibly” pledge.

• Mode shift - A metric measuring the change in the number or percentage of people who replaced another mode of transportation with walking or biking. o Hypothetical Example: At the end of the school year, 200 bicycles were counted in the bike cage, an increase of 20% over the number of bicycles counted at the beginning of the year.

• Behavior change - A metric measuring the change in the number or percentage of people who changed their travel habits, including but not limited to frequency of walking or biking. o Hypothetical Example: Individualized marketing packets were provided to 1,200 households. 200 households requested additional information. Before and after surveys showed that 5% of households that requested additional information switched to biking, walking, or taking transit more.

• Safety improvements – A metric measuring the change in risky/safe behavior or the change in crashes.
o Hypothetical Example: After the crosswalk sting, motorists were observed yielding to pedestrians 8 out of 10 times, an increase of 10% over the yielding rate before the crosswalk sting. However, these rates decreased over time, suggesting that continued events or infrastructure changes are needed to permanently improve driver behavior.

• Community Engagement – A metric measuring the number or percentage of people who become involved in a program on an ongoing basis.
o Hypothetical Example: At the end of five Train the Trainer events, of the 25 trainees, ten agree to lead Safe Routes to School activities at their schools.

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ATTATCHMENT B

LOW POP CITES ALLOCATION SCHEDULE
Cities that would receive less than $10,000 as a result of the allocation calculations are instead allocated $10,000 minimum per fiscal year. The minimum $10,000 allocation will continue through fiscal year 2028. Following fiscal year 2028, the minimum allocated to LOW POP CITIES will increase every biennial budget cycle.

The allocation schedule starting fiscal year 2028 is as follows:

Fiscal Year (FY) Allocation Amount to LOW POP CITIES
FY 2028 $12,000
FY 2029 $12,000
FY 2030 $12,000
FY 2031 $12,000
FY 2032 $12,000
FY 2033 $12,000
FY 2034 $14,000
FY 2035 $14,000
FY 2036 $14,000
FY 2037 $14,000
FY 2038 $14,000
FY 2039 $14,000
FY 2040 $16,000
FY 2041 $16,000
FY 2042 $16,000
FY 2043 $16,000
FY 2044 $16,000
FY 2045 $16,000
FY 2046 $18,000
FY 2047 $18,000

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ATTACHMENT C

INSURANCE REQUIREMENTS

RECIPIENT’S ATTENTION IS DIRECTED TO THE INSURANCE REQUIREMENTS BELOW. IT IS HIGHLY

RECOMMENDED THAT RECIPIENT CONFER WITH THEIR INSURANCE CARRIERS OR BROKERS IN

ADVANCE OF PROPOSAL SUBMISSION TO DETERMINE THE AVAILABILITY OF INSURANCE CERTIFICATES AND ENDORSEMENTS REQUIRED BY THIS AGREEMENT.

INSURANCE

Without limiting RECIPIENT’s obligation to indemnify and hold harmless VTA, RECIPIENT must procure and maintain for the duration of the AGREEMENT insurance against claims for injuries to persons or damages to property which may arise from or in connection with the performance of the Work hereunder by RECIPIENT , its agents, representatives, or employees, or subcontractors. The cost of such insurance must be included in AGREEMENT price. In the event of any material change in the AGREEMENT Scope of Services, VTA reserves the right to change the insurance requirements set forth herein. RECIPIENT must furnish complete copies of all insurance policies, within three (3) business days of any request for such by VTA.

A. Liability and Workers’ Compensation Insurance

1. Minimum Scope of Coverage

Coverage must be at least as broad as:

a. Insurance Services Office General Liability coverage (“occurrence” form CG 0001). General Liability insurance written on a “claims made” basis is not acceptable.

b. Insurance Services Office Business Auto Coverage, Insurance Services Office form number CA 0001, covering Automobile Liability, code 1 “any auto.” Auto Liability written on a “claims - made” basis is not acceptable.

c. Workers’ Compensation insurance as required by the Labor Code of the State of California, and Employer’s Liability insurance.

d. Professional Liability, including limited contractual liability coverage, covering liability arising out of any negligent act, error, mistake or omission in the performance of RECIPIENT’s services under this AGREEMENT. This coverage must be continuously maintained for a minimum of two (2) years following completion of this AGREEMENT. This coverage may be written on a “claims made” basis, if so, please see special provisions in Section B.

2. Minimum Limits of Insurance

RECIPIENT must maintain limits no less than:

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Attachment A - 2016
Measure B Bicycle &
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Funding Agreement

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a. General Liability (including Umbrella/Excess insurance): $2,000,000 limit per occurrence for bodily injury, personal injury, and property damage. If a General Liability or other form with a general aggregate limit is used, either the general aggregate limit must apply separately to this project/location or the general aggregate limit must be twice the required occurrence limit. This requirement may be satisfied by a combination of General Liability insurance with Excess or Umbrella policies, but in no ev ent may the General Liability primary policy limit per occurrence be less than $2,000,000, unless Umbrella/Excess policies feature inception and expiration dates concurrent with the underlying policy, “Follow Form” coverage, and a “Drop Down”.

b. Automobile Liability $1,000,000 limit per accident for bodily injury and property damage.

c. Workers’ Compensation and Employer’s Liability: Statutory Workers’ Compensation limits and Employer’s Liability limits of $1,000,000 per accident.

d. Professional Liability: $2,000,000 each occurrence/aggregate minimum limit per claim.

This requirement may be satisfied by a combination of Professional Liability insurance with Excess or Umbrella policies, but in no event may the Professional Liability primary policy limit per occurrence be less than $2,000,000, unless Umbrella/Excess policies feature inception and expiration dates concurrent with the underlying policy, “Follow Form” coverage, and a “Drop Down” provision.

3. Self-Insured Retention

The certificate of insurance must disclose the actual amount of any deductible or self-insured retention, or lack thereof, for all coverages required herein. Any self -insured retention or deductible in excess of $50,000 ($100,000 if RECIPIENT is a publicly-traded company) must be declared to and approved by VTA. If RECIPIENT is a governmental authority such as a state, municipality or special district, self-insurance is permitted. To apply for approval for a level of retention or deductible in excess of $50,000, RECIPIENT must provide a current financial report including balance sheets and income statements for the past three years, so that VTA can assess RECIPIENT’s ability to pay claims falling within the self-insured retention or deductible.

Upon review of the financial report, if deemed necessary by VTA in its sole discretion, VTA may elect one of the following options: to accept the existing self -insured retention or deductible; require the insurer to reduce or eliminate the self -insured retention or deductible as respects VTA, its directors, officers, officials, employees and volunteers; or to require RECIPIENT to procure a bond guaranteeing payment of losses and related investigations, claim administration and defense expenses. Applicable costs resulting therefrom will be borne solely by RECIPIENT. RECIPIENT may request execution of a nondisclosure agreement prior to submission of financial reports.

B. Claims Made Provisions (not applicable to General Liability or Automobile Liability)

Claims-made coverage is never acceptable for General Liability or Auto Liability. Claims-made may be considered for Professional, Environmental/Pollution, or Cyber Liability. If coverage is written on a claims -made basis, the Certificate of Insurance must clearly state so. In addition to all other coverage requirements, such policy must provide that:

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1. The policy must be in effect as of the date of this AGREEMENT and the retroactive date must be no later than the date of this AGREEMENT.

2. If any policy is not renewed or the retroactive date of such policy is to be changed, RECIPIENT must obtain or cause to be obtained the broadest extended reporting period coverage available in the commercial insurance market. This extended reporting provision must cover at least two (2) years.

3. No prior acts exclusion may be added to the policy during the contract period.

4. The policy allows for reporting of circumstances or incidents that might give rise to future claims.

C. Other Provisions

The policies must contain, or be endorsed to contain, the following provisions:

1. General Liability and Automobile Liability

a. VTA, its directors, officers, officials, employees and volunteers are to be named as additional insureds as respects: liability arising out of activities performed by or on behalf of RECIPIENT, including VTA’s general supervision of RECIPIENT; products and completed operations of RECIPIENT and its subcontractors; premises owned, occupied or used by RECIPIENT; or automobiles owned, leased, hired or borrowed by RECIPIENT. The coverage must contain no special limitations on the scope of protection afforded to VTA, its directors, officers, officials, employees, or volunteers. Additional Insured endorsements must provide coverage at least as broad as afforded by the combination of ISO CG 20 10 10 01 and CG 20 37 10 01.

b. Any failure to comply with reporting provisions of the policies may not affect coverage provided to VTA, its directors, officers, officials, employees, or volunteers.

c. RECIPIENT’s insurance must apply separately to each insured against whom claim is made or suit is brought, except with respect to the limits of the insurer’s liability.

d. The General Liability General Aggregate limit must apply per project, not per policy.

e. The General Liability policy must be endorsed to remove the exclusion for railroad liabilities, with coverage at least as broad as afforded by ISO CG 24 17.

2. All Coverages

a. The insurer must agree to waive all rights of subrogation against VTA, its directors, officers, officials, employees, and volunteers for losses arising from work performed by RECIPIENT and its subcontractors for VTA.

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b. RECIPIENT’s insurance coverage must be primary insurance as respects VTA, its directors, officers, officials, employees, and volunteers. Self -insurance or insurance that may be maintained by VTA, its directors, officers, officials, employees, or volunteers may appl y only as excess to RECIPIENT’s insurance. RECIPIENT ’s insurance must not seek contribution from VTA’s insurance program.

3. Other Insurance Provisions
a. The Certificate must disclose the actual amount of the Deductible or Self -Insured Retention

b. If any coverage forms or endorsements required by this AGREEMENT are updated by their publishers, whether they be the insurance carrier(s), the Insurance Services office, or the American Association of Insurance Services, during the duration of this AGREEMENT, VTA reserves the rights to require RECIPIENT to procure said coverage forms or endorsements using the updated versions upon the next renewal cycle.

D. Acceptability of Insurers

Insurance and bonds must be placed with insurers with an A.M. Best’s rating of no less than A VII (financial strength rating of no less than A and financial size category of no less than VII), unless specific prior written approval has been granted by VTA.

E. Certificates of Insurance

RECIPIENT must furnish VTA with a Certificate of Insurance. The certificates for each insurance policy are to be signed by an authorized representative of that insurer. The certificates must be issued on a standard ACORD Form. The RECIPIENT must instruct their insurance broker/agent to submit all insurance certificates and required notices electronically in PDF format to [email protected]. All endorsements must be attached to the ACORD certificate in a single PDF document.

The certificates must (1) identify the insurers, the types of insurance, the insurance limits, the SIRs/deductibles or lack thereof and the policy term, (2) include copies of all the actual policy endorsements required herewith, and (3) in the “Certificate Holder” box include:

Santa Clara Valley Transportation Authority (“VTA”)
3331 North First Street
San Jose, CA 95134-1906

In the Description of Operations/Locations/Vehicles/Special Items Box, the VTA Contract number must appear, the list of policies scheduled as underlying on the Umbrella/Excess policy must be listed, Certificate Holder must be named as additional insured, and Waiver of Subrogation must be indicated as endorsed to all policies as stated in the Contract Documents.

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It is a condition precedent to award of this AGREEMENT that all insurance certificates and endorsements be received and approved by VTA before AGREEMENT execution. No work may be performed until insurance is in full compliance. VTA reserves the rights to require complete, certified copies of all required insurance policies, at any time.

If RECIPIENT receives notice that any of the insurance policies required by this Exhibit may be cancelled or coverage reduced for any reason whatsoever, RECIPIENT must immediately provide written notice to VTA that such insurance policy required by this Exhibit is canceled or coverage is reduced.

F. Maintenance of Insurance

If RECIPIENT fails to maintain insurance as required herein, VTA, at its option, may suspend payment for work performed and/or may order RECIPIENT to suspend work at RECIPIENT’s expense until a new policy of insurance is in effect.

Ed. Rev. 10-1-19

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Pedestrian Education and
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Funding Agreement

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City Council
Staff Report
Report Type: CONSENT CALENDAR
Lead Department: City Clerk
Meeting Date: March 24, 2025
Report #:2503-4346
TITLE
SECOND READING: Ordinance of the Council of the City of Palo Alto Creating New Chapter

10.66 (Pedestrian Only Streets and Community Streets) in Title 10 (Vehicles and Traffic) (FIRST READING: March 10, 2025 PASSED 7-0)

BACKGROUND
The City Council heard this item on March 10, 2025 for a first reading and approved it as amended on a 7-0 vote. The ordinance has been updated to reflect the City Council’s action, and it is now before the City Council for a second reading.

ATTACHMENTS
Attachment A: Ordinance of the Council of the City of Palo Alto Creating New Chapter 10.66 (Pedestrian Only Streets and Community Streets) in Title 10 (Vehicles and Traffic) APPROVED BY:

Mahealani Ah Yun, City Clerk
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Ordinance No. _____
Ordinance of the Council of the City of Palo Alto Creating New Chapter 10.66 (Pedestrian Only Streets and Community Streets) in Title 10 (Vehicles and Traffic)

The Council of the City of Palo Alto ORDAINS as follows:

SECTION 1. Findings and Declarations. The City Council finds and declares as follows:

A. In conjunction with this ordinance, the City is amending its Comprehensive Plan to create two new street types called “Pedestrian Only Streets” and “Community Streets. ” A portion of Ramona Street will be a Pedestrian Only Street, and a portion of California Avenue will be a Community Street.

B. The City Council desires to delegate the regulation of such streets to the City Manager. In addition, the Ci ty Council desires to regulate the speed of bicycles and similar vehicles under existing PAMC section 10.64.220 (Speed limits on shared- use paths) and prohibit bicycles and similar vehicles on Pedestrian Only Streets.

SECTION 2. New Chapter 10.66 (Pedestrian Only Streets and Community Streets) is hereby added to Title 10 (Vehicles and Traffic) to read as follows:

Chapter 10.66 Pedestrian Only Streets and Community Streets

10.66.010 Definitions
For the purpose of this Chapter, “Pedestrian Only Streets” and “Community Streets” shall have the same meaning as found in the City’s Comprehensive Plan, as may be amended.

10.66.020 City Manager Authority to Create and Enforce Regulations The City Manager or designee may promulgate regulations to control vehicle access and usage of any street designated as a Pedestrian Only Street and Community Street . Such regulations shall be consistent with applicable laws and the allowable uses of these streets as defined in the Comprehensive Plan. Regulations shall be publicly available by posting them on the City’s website. Any person who violates such regulations shall be liable for a violation of this Section.

10.66.030 Speed limits on Community Streets
(a) No person shall ride or operate any bicycle, skateboard, or any other transportation vehicle or device in excess of eight miles per hour upon on any designated path for such vehicles on a Community Street when pedestrians are present.
(b) No person shall operate any bicycle, skateboard, or any other transportation vehicle or device at a speed greater than is reasonable for safe operation, nor in any manner which may endanger the safety of others.

Item 11
Attachment A - Ordinance
of the Council of the City
of Palo Alto Creating New
Chapter 10.66 (Pedestrian
Only Streets and
Community Streets) in
Title 10 (Vehicles and
Traffic)

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10.66.040 No Bicycles or Skateboards on Pedestrian Only Streets No person shall ride or operate any bicycle, skateboard, or any other transportation vehicle or device on any street designated as a Pedestrian Only Street.

SECTION 3. Severability.

If any section, subsection, sentence, clause, or phrase of this Ordinance is for any reason held to be invalid or unconstitutional by a decision of any court of competent jurisdiction, such decision shall not affect the validity of the remaining portions of this Ordinance. The City Council hereby declares that it would have passed this Ordinance and each and every section, subsection, sentence, clause, or phrase not declared invalid or unconstitutional without regard to whether any portion of the Ordinance would be subsequently declared invalid or unconstitutional.

SECTION 4. Environmental Review
In conformance with the California Environmental Quality Act (CEQA), the environmental impacts of this project were evaluated in an Environmental Impact Report Addendum entitled “City of Palo Alto Car Free Ramona Street and California Avenue Addendum to the Comprehensive Plan EIR” dated February 2025. This addendum supplements the analysis in the Environmental Impact Report (EIR) for the 2030 Comprehensive Plan (SCH #2014052101), which the Council considered and adopted, together with the related Mitigation Monitoring and Reporting Plan (MMRP) on November 13, 2017. In accordance with City Council Resolution 9721 an d 9722. The addendum did not disclose any new significant impacts that were not previous evaluated and mitigated in the Comp plan EIR, for which a statement of overriding considerations was previously adopted.

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Item 11
Attachment A - Ordinance
of the Council of the City
of Palo Alto Creating New
Chapter 10.66 (Pedestrian
Only Streets and
Community Streets) in
Title 10 (Vehicles and
Traffic)

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SECTION 5. Effective Date

This Ordinance shall be effective 31 days after adoption.

INTRODUCED:

PASSED:

AYES:

NOES:

ABSENT:

ABSTENTIONS:

NOT PARTICIPATING:

ATTEST:

____________________________ ____________________________ City Clerk Mayor

APPROVED AS TO FORM: APPROVED:

____________________________ ____________________________ Assistant City Attorney City Manager

____________________________
Director of Transportation

____________________________
Director of Planning & Development
Services
Item 11
Attachment A - Ordinance
of the Council of the City
of Palo Alto Creating New
Chapter 10.66 (Pedestrian
Only Streets and
Community Streets) in
Title 10 (Vehicles and
Traffic)

Item 11: Staff Report
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City Council
Staff Report
From: City Manager
Report Type: INFORMATION REPORTS
Lead Department: Administrative Services
Meeting Date: March 24, 2025
Report #:2411-3789
TITLE
City of Palo Alto's Energy Risk Management Report for the second half of Fiscal Year 2024 (January 1, 2024 - June 30, 2024) CEQA Status – Not a Project.

RECOMMENDATION
This is an informational report and no City Council action is required.

EXECUTIVE SUMMARY
Staff continues to purchase electricity and gas in compliance with the City’s Energy Risk Management Policies, Guidelines, and Procedures. This report is based on market prices and load and supply data as of June 30, 2024, the second half of Fiscal Year (FY) 2024.

The projected cost of the City’s fixed-price electricity purchases is $0.55 million lower than the market value of that electricity as of June 30, 2024 for the 12-month period beginning July 1, 2024. During the second half of FY 2024 (January 1, 2024 through June 30, 2024) the City’s credit exposure to fixed price contracts is minimal. The projected Electric Supply Operations Reserve is above the FY 2024 minimum guideline reserve level and the projected gas reserve is below the FY 2024 guideline reserve level range.

The low gas operations reserve level at the end of FY 2024 is because of the gas price spike of FY 2023. Although gas prices stabilized in FY 2024, there were several reasons the reserve was more impacted in FY 2024 than in FY 2023. Specifically, carbon offset purchases from FY 2023 were made in FY 2024, and the transfer of prior years’ Cap-and-Trade auction sales revenue from the Operations Reserve to the Cap-and-Trade reserve, which was a cost item, also occurred in FY 2024. Additionally, FY 2024 costs reflect the Council’s adopted revised natural gas purchasing strategy for the FY 2024 winter months to include insurance against very high prices. The plan is to bring this reserve within the reserve guidelines in FY 2025.

With the exception of the Gas reserve being below the minimum reserve guideline, there were no exceptions to the Energy Risk Management Policies, Guidelines, or Procedures during this reporting period.

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BACKGROUND
The purpose of this report is to inform the Council about the status of the City’s energy portfolio and transactions executed with energy suppliers for the second half of FY 2024. The City’s Energy Risk Management Policy requires that staff report on a semi-annual basis on: 1) the City’s energy portfolio; 2) the City’s credit and market risk profile; 3) portfolio performance; and 4) other key market and risk information.

The City’s Energy Risk Management Policy describes the management organization, authority, and processes to monitor, measure, and control market risks. “Market risks” include price and counterparty credit risk. These are risks that the City is exposed to on a regular basis in procuring electric supplies, and to a lesser extent for gas supplies which are purchased at market rates via a monthly index price. The City’s Energy Risk Management function, whose role is to monitor and mitigate the energy market risks, is a part of the Treasury Division of the Administrative Services Department. This semi-annual of FY 2024 Energy Risk Management report contains information on the following:
•Electric Supplies
•Hydroelectricity
•Fixed-Price Forward Electricity Purchases
•Gas Supplies
•Credit Risk
•Electric Forward Mark-to-Market Values
•Electric and Gas Supply Operations Reserves Adequacy
•Exceptions to Energy Risk Management Policies, Guidelines, or Procedures

ANALYSIS
Electric Supplies
In order to serve the City’s electric supply demands, the City obtains electricity from:
hydroelectric resources (from Western and Calaveras Hydroelectric Projects); long-term renewable energy contracts (from landfill gas converted to electricity, wind, and solar projects); wholesale purchases which are carried out via fixed-priced forward market purchase contracts; and the electric spot market.

Figure 1 below illustrates the projected sources and expected purchases of electricity supplies by month for the 36 months from July 1, 2024 to July 1, 2027, in megawatt-hours (MWh). The negative bars represent sales of excess power on the wholesale market.

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Hydroelectricity
The cost of hydroelectricity received from Western over the 12-month period ending June 30, 2024 is lower than the market value of electricity by $2.8 million. Hydroelectric power from Calaveras was expected to cost $8.3 million (as of June 30, 2024) more than the market value of electricity. Note that Calaveras provides benefits not reflected in the mark-to-market (MTM, defined in the following section) calculation, including, for example, ancillary services (e.g., the ability to regulate energy output when the electric grid needs change), and that much of the above-market costs are related to debt service on the cost of constructing the dam. This debt is due to be retired in 2032, and retirement will substantially improve the value of the project relative to the market price of electricity.

Fixed-Price Forward Electricity Purchases
The City, as of June 30, 2024, has purchased and sold fixed-priced supplies of electricity for the next 12 months totaling 62,657 MWh with an average price of $83.58 per MWh and totaling 36,960 with an average price of $41.29, respectively. The City contracted for these purchases with one of its approved counterparties: NextEra Energy Resources. The 12-month MTM value of the City’s forward transactions for wholesale power was $0.55 million for fiscal year 2024. A positive MTM means that the sales price for these transactions was lower than the market value as of June 30, 2024. The City tracks the mark to market value of its forward contracts to measure the value that would be lost due to a counterparty failing to deliver on its contractual commitments, forcing the City to purchase replacement electricity in the market. The exposure listed above is well within risk management guidelines and presents little risk to the City’s financial outlook.
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Jul-25
Sep-25
Nov-25
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Mar-26
May-26
Jul-26
Sep-26
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Jan-27
Mar-27
May-27
M e g a w a t t H o u r s
F i g u r e 1 - E l e c t r i c B a l a n c e G e o t h e r m a l & W h o l e s a l e
W i n d
W e s t e r n
S o l a r
L a n d f i l l
C a l a v e r a s
T o t a l L o a d
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The figures below represent the electric forward volumes (Figure 2) and MTM positions (Figure 3) for each electric supplier by month of delivery for all forward fixed-price electricity contracts over the 12-month period ending July 1, 2025.

Gas Supplies
In order to serve the City’s natural gas needs, the City purchases gas on the monthly and daily spot markets. The City purchases all of its forecasted gas needs for the month ahead at a price based on the published monthly spot market index price for that month. Within the month, the Item 12
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City’s gas operator buys and sells gas to match the City’s daily needs if the actual daily usage is different from the forecasted daily usage. Those daily transactions are made at an average price based on the published daily spot market index. These costs are passed through directly to customers using a monthly rate adjustment mechanism, leaving the City with little or no price risk or counterparty risk exposure for the gas utility.

Credit Risk
Staff monitors and reports on counterparty credit risk based on the major credit rating agencies (S&P and Moody’s) scores, Ameresco has an 8.53 percent Expected Default Frequency (EDF) which is much higher than the recommended EDF level of 0.08%. Staff is continuing to monitor Ameresco’s EDF and will continue to report to City Council in this semi-annual report. Table 1 below shows the EDF values for the City’s renewable energy counterparties. Table 2 below shows the EDF values and credit exposure for the City’s electric suppliers. There is virtually no credit exposure to the City’s gas suppliers since the supplies are purchased on a short-term basis.

Table 1 - Renewable Counterparties Credit Ratings and EDFs as of 06/30/24 Table 2 - Credit Exposure and Expected Default Frequency of Electric Suppliers as of 06/30/24 Electric Forward Mark-to-Market Values
It is important to note that, for contracts with renewable energy companies, Council waived the investment grade credit rating requirement of Section 2.30.340(d) of the Palo Alto Municipal Code, which applies to energy companies that do business with the City. In addition, the City does not pay for renewable energy until it is received, thereby reducing risk.

An EDF of 0.08% or below indicate supplier’s current expected default frequency falls within the investment grade range. An EDF above 0.08% indicates the supplier may have financial issues that require monitoring.

Current Expected Default Frequency
Moody's (EDF) Implied Rating
Ameresco 8.53% Ca

0.10% Baa3
Source: Moody's EDF-X (formerly CreditEdge) website
Avangrid (fomerly Iberdrola)
Renewable Counterparty
Electric Counterparty Costof Transaction Market Value of Transaction Current Expected Default Frequency
Moody's (EDF) Implied Rating
NextEra 4,129,195$ 3,578,925$ 0.038% A3
Totals 4,129,195$ 3,578,925$
A-
(550,270)$ (207)$
Cost vs. Market (MTM) Value
S&P Cr
Expected Loss (MTM x Expected Default Frequency)
(207)$ (550,270)$
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Electric and Gas Supply Operations Reserves Adequacy
As shown in Table 3 below, the Electric Supply Operations reserve’s audited balance as of June 30, 2024 is $32.2 million, which is within the reserve guideline with $12.3 million above the minimum reserve guideline level. Contributing to this higher reserve are related to a favorable past litigation settlement of the Central Valley Project Improvement Act (CVPIA) operated by the U.S. Bureau of Reclamation and anticipates and increase in wholesale revenues. The plan is to transfer the excess reserves to other reserves (e.g., Special Projects, CIP, etc.). The audited Gas Operations reserve balance is $4.3 million, which is ($5.5) million below the minimum reserve guideline level.

Table 3 - Electric Supply Operations and Gas Operations Reserve Levels for FY 2024 Exceptions to Energy Risk Management Policies, Guidelines, or Procedures Except for the Gas reserve being below the minimum reserve guideline, there were no exceptions to the Energy Risk Management Policies, Guidelines, or Procedures to report during the semi-annual of FY 2024.

FISCAL/RESOURCE IMPACT
This is an information report.

STAKEHOLDER ENGAGEMENT
ASD staff works internally with the Utilities Department and Moody’s website to prepare this report.

ENVIRONMENTAL REVIEW
This item is not a project under California Environmental Quality Act (CEQA) as defined in CEQA Guidelines, section 15378, because the report is for informational purposes only with no action required by the Council.

APPROVED BY:

Lauren Lai, Administrative Services Director
Fund
Audited Reserve for Operations Balance as of 06/30/2023 ($ Millions) Changes to the Reserves for Operations ($ Millions)
Unaudited Reserve for Operations Balance as of 06/30/24($ Millions) Minimum Guideline Reserve Level ($ Millions)
Maximum Guideline Reserve Level ($ Millions)
Electric $38.88 ($6.66) $32.22 $19.90 $39.80
Gas $14.44 ($10.18) $4.26 $9.76 $19.52
FY 2024
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City Council
Staff Report
Report Type: ACTION ITEMS
Lead Department: City Manager
Meeting Date: March 24, 2025
Report #:2503-4404
TITLE
Potential Support or Sponsorship of a Senate Bill 457 (Becker) Regarding Housing Accountability Act Reforms

RECOMMENDATION
Staff recommends the City Council discuss and provide direction to:

A. Approve a Support or Sponsorship position on SB 457; and B. Designate a City Council representative to provide testimony in support of the Bill or authorize the City Manager or their designee to serve this role.

ANALYSIS
Background and analysis on the proposed legislation are provided on the attached memorandum (Attachment A) from the City’s legislative advocate, Townsand Public Affairs.

FISCAL/RESOURCE IMPACT
The recommended action has no direct fiscal impact.

STAKEHOLDER ENGAGEMENT
Staff has consulted with State Senator Becker’s office on this matter.

ENVIRONMENTAL REVIEW
Not a project.

ATTACHMENTS
Attachment A: Memo from Townsend Public Affairs Regarding SB 457 APPROVED BY:

Ed Shikada, City Manager
Item AA1
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M E M O R A N D U M

To: City of Palo Alto
Honorable Mayor Lauing, Vice Mayor Veenker, Members of the City Council Ed Shikada, City Manager
Molly Stump, City Attorney

From: Townsend Public Affairs
Niccolo De Luca, Vice President
` Carlin Shelby, Senior Associate

Date: March 19, 2025

Subject: SB 457 (Becker) – Housing Accountability Act Reforms

The purpose of this memo is to provide an overview of recent changes to state law governing the timing, approval, and processing of ‘Builder’s Remedy” applications provided within the Housing Accountability Act (HAA), and a legislative proposal from Senator Becker designed to close certain loopholes.

BACKGROUND
During the 2024 Legislative Session, the Legislature passed several bills modifying the Housing Accountability Act (HAA), particularly regarding the Builder’s Remedy provision. The HAA, first enacted in 1982, aims to prevent local jurisdictions from arbitrarily denying or unduly rest ricting housing development projects that contribute to meeting their housing needs. The law limits a city's ability to disapprove or reduce density in residential projects while still allowing the enforcement of objective standards and developer fees.

A key focus of recent legislative reforms has been the Builder’s Remedy, which prohibits local governments from denying housing developments that include at least 20% lower -income housing, even if they do not conform to local zoning—provided the jurisdiction lacks a compliant Housing Element. Recent legal interpretations and implementation have highlighted loopholes and inconsistencies, prompting legislative action.

Key Legislative Action in 2024:
• AB 1886 (Alvarez, 2024) clarified that a Housing Element is only compliant after both:

1. The local jurisdiction adopts it; and

2. The California Department of Housing and Community Development (HCD) certifies it as compliant.
• This measure was intended to address “self-certification,” preventing cities from arguing that a Housing Element could be compliant without first receiving HCD approval. • However, this change could create discrepancies among cities based on the timeline for HCD review. It also extended the window for Builder’s Remedy applications to be Item AA1
Attachment A - Memo
from Townsend Public
Affairs Regarding SB 457

Item AA1: Staff Report
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submitted until HCD review was complete, even if a Housing Element was substantively unchanged from the date of agency adoption.

In Palo Alto, the City Council adopted its revised Housing Element on April 15, 2024 and the final staff changes to the Housing Element were submitted to HCD on July 26, 2024. HCD completed its review and certified the Housing Element on August 20, 2024. In the time between Council adoption and HCD certification, the City received two SB -330 Preliminary Applications for Builder’s Remedy projects (680 University Avenue and 2300 Geng Road). In addition, the City received a number of formal applications for Builder’s Remedy projects (762 San Antonio Road, 3606 El Camino Real, 3781 El Camino Real, 3400 El Camino Real) and deemed two formal applications complete (762 San Antonio Road and 156 California Avenue).

As these projects exceed the density of development anticipated in the City’s Comprehensive Plan, some projects may not be adequately served by critical infrastructure such as the water utility supply needed for firefighting as well as domestic needs, sewer capacity to prevent backups or the necessity of major upgrades to mainline and treatment capacity, and storm drain capacity.

Financing these infrastructure improvements can be particularly complex when existing systems are already strained, as not all costs can be attributed t o a single developer. Local jurisdictions rely on long-term capital improvement plans and bond measures to fund upgrades in a strategic and fiscally responsible manner. However, Builder’s Remedy projects, which exceed growth projections, can necessitate immediate and costly infrastructure investments, disrupting this careful planning. Assigning a fair share cost to developers is challenging when upgrades – such as increased water supply, sewer capacity, or storm drainage – require large-scale improvements ahead of schedule.

In Palo Alto, several Builder’s Remedy projects will require both on-site and off-site improvements to increase fire flow capacity. One project alone demands a 3,000-gallon-per-minute increase, far exceeding current fire flow capacity. These unexpected infrastructure demands – whether for water supply, fire safety, sewer, or stormwater management – undermine well-planned municipal land use and financing strategies, placing an undue burden on local governments and taxpayers.

BILL PROPOSAL
In discussions with the office of Senator Becker, the City has worked to craft bill language to refine the Builder’s Remedy framework and restore a more balanced approach that aligns compliance timelines with the procedural realities of local government adoption and state certification.

SB 457 (Becker) proposes that a jurisdiction’s Housing Element be considered compliant upon local adoption, provided that HCD ultimately certifies the adopted element as compliant. By making this distinction, SB 457 aims to eliminate the current window of uncertainty wherein developers can exploit the delay between adoption and HCD approval by submitting applications under the Builder’s Remedy provision.

The bill further clarifies that Builder’s Remedy protections apply only to projects with a completed formal application submitted before the jurisdiction adopts a Housing Element that is later deemed compliant by HCD or a court. This measure seeks to prevent instances where developers file preliminary applications with minimal substantive detail solely to establish eligibility for the Builder’s Remedy, even after the jurisdiction has completed the necessary analyses, policies, and programs required by state law. By ensuring that Builder’s Remedy protections are only available Item AA1
Attachment A - Memo
from Townsend Public
Affairs Regarding SB 457

Item AA1: Staff Report
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when a jurisdiction is genuinely out of compliance, the legislation reinforces the original intent of the remedy while preventing misuse that circumvents legitimate land use planning processes.

The measure also ensures equitable treatment of local agencies by preventing jurisdictions from being subject to Builder’s Remedy protections due to delays in HCD’s administrative review process. Under current law, jurisdictions remain exposed to Builder’s Remedy applications even after adopting a Housing Element that is later deemed compliant, simply because HCD has not yet completed its review. This bill eliminates this potential for inequity by recognizing a jurisdiction’s good-faith adoption of a Housing Element as the operative date for compliance, contingent upon subsequent HCD approval.

Additionally, SB 457 proposes to limit the extraordinary benefits of the Builder’s Remedy to developers who hav e demonstrated a serious intent to construct much- needed housing.

Currently, a developer may establish eligibility for the Builder’s Remedy simply filing a preliminary application with minimal detail. A preliminary application secures development rights even if the project changes, so long as density or floor area do not change by more than 20%. While this flexibility is not normally problematic, in combination with the Builder’s Remedy, which allows a developer to bypass all zoning and general plan regulations, it means the project described in a preliminary application has very little meaning. . The bill instead requires that a developer must submit a complete formal application to utilize the Builder’s Remedy. This ensures that only serious developers with real housing plans can proceed with a project that disregards local policies. It also means that other developers will be required to comply with local policies and programs that are ultimately found to satisfy the state’s high standards for promoting both fair housing and housing production goals.

The proposed legislation will significantly improve clarity on the applicability of the Builder’s Remedy in future RHNA cycles. The applicability of its provisions to applications already filed with the City of Palo Alto and other local jurisdictions will need to be reviewed on a case-by-case basis, including any phase-in provisions provided through the legislation.

LOOKING FORWARD
SB 457 will be amended to reflect the updated language during the week of March 24 and is scheduled for its first policy hearing in the Senate Housing Committee on April 1, 2025, at 3:00 PM. The measure has been double- referred and will also be considered by the Senate Local Government Committee. Stakeholder engagement efforts are ongoing, with continued discussions involving local jurisdictions, housing advocates, and the development community to refine the bill’s provisions and ensure clarity in its implementation.

The City of Palo Alto and its advocates remain engaged in monitoring the legislative process and advocating for refinements that ensure a fair and balanced application of the Builder’s Remedy.

The intent of this measure is not to weaken existing housing laws but to provide a rational and predictable framework that aligns compliance determinations with actual adoption dates, thus eliminating opportunities for speculative development while maintaining strong incentives for timely Housing Element adoption.

Item AA1
Attachment A - Memo
from Townsend Public
Affairs Regarding SB 457

Item AA1: Staff Report
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4 Packet Pg. 308 of 309

As the bill progresses through the legislative process, Townsend Public Affairs will continue to provide updates on any amendments and strategic opportunities for the City to participate in shaping the final language of SB 457.

ACTION
Given the City’s active engagement with Senator Becker’s office in developing the legislative language for SB 457, it is recommended that the City take a formal and sponsorship position (which, in turn, indicates a “support” position). By doing so, the City would serve as the lead stakeholder in advancing the measure and advocating for its passage. If the City Council agrees to this course of action, the City will co- champion the bill alongside Senator Becker. This effort would necessitate a representative from the City providing testimony on the technical merits of the legislation, as well as its potential impacts on local land use planning and housing policy.

Given that this proposal originated from the City, it is common practice that Palo Alto serve as the bill “sponsor” which indicates to other members and stakeholders who the primary driver(s) of the measure are. Should the city only elect to “support” the bill, the measure would lack a sponsor, which would run contrary to the origination of the measure, which, in this case, is not a member sponsored bill.

The requested City Council actions therefore include:

A. Approve a Sponsorship position on SB 457; and

B. Designate a City Council representative to provide testimony in support of the Bill or authorize the City Manager or their designee to serve this role.

Item AA1
Attachment A - Memo
from Townsend Public
Affairs Regarding SB 457

Item AA1: Staff Report
Pg.
5 Packet Pg. 309 of 309