City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: Human Resources
Meeting Date: June 2, 2025
Report #: 2503-4422
TITLE
Approval of Contract Amendment No. 2 to Contract Number C21179340 with Baker Tilly US, LLP in the Amount of $2,126,250 and to Extend Term to June 30, 2026, with Option to Extend for Two Years, for Internal Auditing Services; Revised Total Not to Exceed is $5,552,500, CEQA Status – Not a Project.
RECOMMENDATION
Staff recommends that the City Council approve and authorize the Mayor or designee to execute Amendment No. 2 to Contract C21179340 with Baker Tilly US (Attachment A) to extend term to June 30, 2026, with option to extend for two years, in an amount not to exceed $2,126,250 for internal auditing services. This amendment results in a revised total contract not-to-exceed amount of $5,552,500.
BACKGROUND
The City Auditor is a City Council appointed position. The City Charter defines the City Auditor’s role and furthers the City Council’s commitment to internal auditing, transparency, and accountability in government.
Per City Council direction on February 10, 2020 to consider outsourcing the City Auditor function, the Council Appointed Officers (CAO) Committee completed a request for proposals (RFP) process for outsourced internal auditing services. The CAO led the procurement process, aligned with Council direction, and engaged in a transparent review of scope of work services, RFP evaluation, and a public interview process as part of the overall effort. Through the procurement process, the Council selected Baker Tilly to lead the City’s internal audit services.
On September 28, 20201, the Council approved a contract with Baker Tilly US, LLP for internal audit services in an amount not to exceed $1.3 million for a term beginning October 1, 2020 1 Council Appointed Officers Committee, September 28, 2020:
https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes-reports/reports/city-manager-reports- cmrs/year-archive/2020-2/id-11624.pdf?t=64761.15
through June 30, 2022. The contract provided the option to extend the term for a period or periods up to three additional years, through June 30, 2025, by mutual agreement with compensation to be determined in such years by terms outlined in the contract. Council as extended the contract through approval of two amendments with the current term ending June 30, 2025.
On May 9, 20222, the Council approved the first contract amendment to provide audit services for fiscal years 2023, 2024, and 2025.
Baker Tilly US, LLC provides auditing services for the City and the City’s contract with Baker Tilly specifies the designation of a City Auditor. On May 6, 2024, the Council formally appointed Kate Murdock as City Auditor.
The CAO Committee met on November 13, 20243 to review and discuss the options availability for the internal audit services contract and make recommendations to Council on next steps for future direction of these services. The Committee recommended to the Council that the CAO Committee Chair refine terms of a contract renewal with Baker Tilly through June 30, 2026 plus negotiate terms for an option to renew for two years, and to align the review of the City Auditor performance with other CAO review (passed 3-0).
The City Council then met on December 16, 20244 to review and approve the CAO Committee’s recommendation and directed the CAO Committee Chair, Mayor Ed Lauing, with technical support from the Human Resources Department and appropriate staff to renew and refine the terms of a contract amendment with Baker Tilly though June 30, 2026, plus negotiate terms for an option to renew for two years, and to align the review of the City Auditor performance with other CAO reviews (passed 7-0).
ANALYSIS
The below summarizes the terms, compensation, and scope amendments of the second amendment (attached):
Table 1: Baker Tilly US, LLP Amendment No. 2 Summary
Term This amendment will extend the contract through June 30, 2026, with an option to extend through June 30, 2027, and a second option to extend through June 30, 2028 2 City Council, May 9, 2022: https://portal.laserfiche.com/Portal/DocView.aspx?id=59458&repo=r- 704298fc&searchid=32d4e2bb-6430-45f5-9850-f69a8ddb1e1c
3 Council Appointed Officer Committee, November 13, 2024, Item #1:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=16375 4 City Council, December 16, 2024, Item #27:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=14537 Table 1: Baker Tilly US, LLP Amendment No. 2 Summary
Compensation Target value of compensation during this extension is $2,126,250. Annual compensation of the contract was held flat compared to costs in second amendment:
•Year 6 (FY 2026): $708,750
•Year 7 (FY 2027, optional): $708,750
•Year 8 (FY 2028, optional): $708,750
The NTE of the overall contract over the full contract term of eight years is $5,552,500.
Scope
Amendment
Task 3. Selection of External Financial Auditor and Annual Audit Coordination •City anticipates conducting a Request for Proposals in FY 2027.
Task 6. Evaluation and Benchmarking
•Peer evaluation every three years (from every two years), following guidelines of the Association of Local Government Auditors
•Cost per audit analysis submitted every other year (from every year), following the first completed fiscal year, throughout the contract term.
If Council approves this amendment, audit services will continue through June 30, 2026 with an option to extend through June 30, 2028. The City Auditor is scheduled to go through the annual CAO evaluation process with the Council Appointed Officers Committee in calendar year 2025, prior to authorization of further extension beyond June 2026.
FISCAL/RESOURCE IMPACT
As noted above, the annual cost for audit services will be $708,750, unchanged from the prior amendment, for a new total not-to-exceed of $5,552,500 over the eight-year term of the contract. Funding for this contract in FY 2026 is included in the Proposed Budget and future year contract cost is subject to the annual appropriation of funds.
STAKEHOLDER ENGAGEMENT
Selection of the City Auditor was done via the City’s competitive solicitation process and was discussed in public CAO Committee meetings in 2020. The City Council discussed the contract extension in a public meeting on December 16, 2024.
ENVIRONMENTAL REVIEW
This activity is not a project under the California Environmental Quality Act (CEQA) as defined in CEQA Guidelines, section 15378.
ATTACHMENTS
Attachment A: Contract C21179340 Amendment No. 2 with Baker Tilly US, LLP APPROVED BY:
Sandra Blanch, Human Resources Director