City Council
Staff Report
From: City Manager
Report Type: STUDY SESSION
Lead Department: City Manager
Meeting Date: April 6, 2026
Report #:2603-6028
TITLE
Discussion of Nonprofit Partnership Workplan Phase I Purpose and Improvements for FY 2027.
CEQA Status – Not a project.
RECOMMENDATION
That the City Council discuss and provide feedback on the Nonprofit Partnership Workplan (NPW) Phase I purpose and improvements and, given the City’s FY 2027 projected $14.9 million deficit and planned General Fund reductions, and consider suspending the NPW Phase I pilot in FY 2027 (no FY 2027 solicitation) and return in FY 2028 with a refined approach.
EXECUTIVE SUMMARY
The Nonprofit Partnership Workplan (NPW) Phase I pilot, implemented in FY 2026, improved transparency in how nonprofit funding requests were evaluated during the City’s annual budget adoption process. A total of $506,646 was awarded to 17 nonprofit organizations, including four new partnerships serving the Palo Alto community.
Feedback from the City Council, the Policy & Services Committee, and nonprofit partners indicates that Phase I’s purpose and structure need refinement—particularly to reduce confusion about whether Phase I is a grant program versus a budget evaluation process, and to clarify its relationship to the Human Services Resource Allocation Process (HSRAP). The purpose of this study session is to review Phase I’s policy purpose, how it should align with existing funding mechanisms, and potential process improvements should the City choose to continue or redesign the approach.
Looking ahead to FY 2027, staff is currently developing budget recommendations that recognize the City faces significant fiscal constraints, including a projected budget deficit and a balancing strategy that reflect reduced General Fund resources. In this context, staff anticipates recommending no funding for NPW Phase I in the FY 2027 recommended budget. This suggests not inviting requests in FY 2027, with the intent to revisit the program in FY 2028 after incorporating City Council feedback and identifying a clear and sustainable approach to
discretionary funding. Should the City Council wish to proceed with the process for FY 2027, staff will continue work with the Policy & Services Committee to prioritize refining the program.
BACKGROUND
On December 15, 20251, the City Council approved continuing the Nonprofit Partnership Workplan Phase I funding process in the FY 2027 Budget Cycle and referred refinements of the process to the Policy & Services Committee with a return to Council in early 2026. The Phase I process is part of a broader effort to improve the City’s best practices for nonprofit partnerships and contract management, consistent with recommendations from the 2022 City Auditor’s report2. The pilot focused on improving how nonprofit funding requests that fall outside existing funding mechanisms are evaluated during the annual City budget process.
In debriefing the outcome of the NPW Phase I pilot, the 2025 Policy & Services Committee discussed possible refinements at its January 14, 2026 meeting3. The overall sentiment was that the process produced positive outcomes, funding 17 nonprofit organizations, four of which were new partnerships to provide services to the Palo Alto community. The pilot revealed structural and policy issues, which require refining. Staff presented a set of process improvements informed by stakeholder feedback for the Committee to consider. These included clarifying application eligibility requirements, establishing funding priorities, defining nonprofit service categories, enhancing application design and nonprofit engagement, and clarifying roles between the Finance Committee and the Policy and Services Committee.
The Committee suggested several administrative improvements but also expressed the need to clarify and refine Phase I’s policy purpose and define its relationship to the Human Services Resource Allocation Process (HSRAP). In discussing future direction, Committee members expressed differing perspectives on how Phase I could evolve in FY 2027. Views ranged from maintaining Phase I as a mechanism to address funding gaps within the nonprofit community, to repositioning it as a discretionary funding source focused on innovative or emerging initiatives, to redirecting resources to increase support for HSRAP.
This study session provides an opportunity for the Council to provide feedback on the purpose of the NPW Phase I process, its relationship to HSRAP, and proposed process improvements. 1 12/15/2025 City Council Meeting:
https://cityofpaloalto.primegov.com/meetings/ItemWithTemplateType?id=10222&meetingTemplateType=2&com piledMeetingDocumentId=18036
2 2022 City Auditor Report on Nonprofit Agreement Risk Management Review:
https://cityofpaloalto.primegov.com/Public/CompiledDocument?meetingTemplateId=9028&compileOutputType= 1 3 1/14/2026 Policy & Services Committee Meeting:
https://cityofpaloalto.primegov.com/meetings/ItemWithTemplateType?id=10664&meetingTemplateType=2&com piledMeetingDocumentId=18259
Concurrently, however, the likely limited funding availability in FY 2027 suggests that refining the program could be deferred.
ANALYSIS
The FY 2026 the NPW Phase I pilot enhanced transparency in the funding process and resulted in the award of $506,646 to 17 new and existing partners delivering community programs. As the Council considers whether to continue Phase I in FY 2027, it is important to do so within the context of the City’s broader financial outlook, as discussed on January 20, 2026,7 as well as consideration of recent urgent funding needs such as Oversized Vehicles parking regulation, railroad crossing monitoring, and funding allcove youth mental health services.
The FY 2027 forecast reflects a projected $14.9 million deficit, driven largely by declining sales tax revenues. In response, the Council approved a balancing strategy that includes developing a budget with approximately $7 million in General Fund reductions, along with adjustments to the Capital Improvement Program, pension cost contributions, use of stabilization reserves, and exploration of new revenue sources. Funding the Phase I process would widen the deficit by any amount allocated to it.
Given these fiscal constraints, staff recommends that the Council consider suspending the Phase I pilot in FY 2027, with the intent to revisit the program in FY 2028 incorporating Council feedback on the refinements outlined below.
NPW Phase I Purpose
The Phase I process is designed to provide the City Council with a fair and equitable way to evaluate nonprofit funding requests during the Budget Adoption process; notable it was not intended to represent a new grant program. This distinction was a source of confusion among the nonprofit applicants, especially those with multi-year or ongoing service agreements with the City. In the past, the City Council approved funding requests from nonprofits with no notifications or criteria for selection.
A key challenge was the high number of applications submitted by existing grant recipients.
While they were not discouraged from applying, their participation limited opportunities for nonprofits without established funding from the City. This dynamic was compounded by the difficulty of clearly communicating the new process. The broad and flexible parameters made it challenging to provide straightforward guidance, resulting in confusion among nonprofit partners, particularly existing recipients, about whether the process applied to them and how it differed from a traditional grant program or multi-year service contracts. As a result, some 7 1/20/2026 City Council Meeting:
https://cityofpaloalto.primegov.com/meetings/ItemWithTemplateType?id=10251&meetingTemplateType=2&com piledMeetingDocumentId=18295
partners defaulted to applying out of uncertainty, contributing to the disproportionate number of applications from organizations already receiving City funding.
On January 14, 2026, the 2025 Policy & Services Committee discussed this dynamic and the challenge of creating a clear path forward. Committee members expressed differing perspectives on how Phase I could evolve in FY 2027. Views ranged from maintaining Phase I as a mechanism to address funding gaps within the nonprofit community, to repositioning it as a discretionary funding source focused on innovative or emerging initiatives, to redirecting resources to increase support for HSRAP. Given the wide range of perspectives on the future of the NPW Phase I process, the Policy & Services Committee agreed that the policy purpose must be clarified before procedural adjustments. City Council feedback is needed to clarify its purpose and intent for FY 2027.
Possible improvements could include all or a combination of the following:
Exclude nonprofits that receive funding through existing grant programs or have a multi- year service agreement from the Phase I funding application process. Expand and broaden the scope of the existing Emerging Needs Fund process to support larger funding requests and funding categories for unanticipated nonprofit needs throughout the year.
Consider expanding HSRAP (or rebranding as Community Need Grants) to include funding gaps such as arts, culture, workforce development, and environmental stewardship. Ensure adequate funding is allocated to accommodate increase in scope.
Staff has compiled a table with all nonprofit grants and service agreements above $10,000 to provide a “big picture” overview of nonprofit funding beyond Phase I grants alone (Attachment A). A summary of funding by source:
FY HSRAP CDBG Phase I
Grants
Operating
Services
Total
FY 2026 $911,431 154,812 $506,646* $5,163,723 $6,736,612 Anticipated
FY 2027
Amounts
$942,971 $152,000 TBD $5,476,223 $6,571,194
*Includes two $5,000 grants not listed in Attachment A
Overall, a key concern expressed by nonprofit public comments as well as the Policy & Services Committee was to avoid undermining Palo Alto’s collaborative nonprofit ecosystem and avoid a situation where nonprofits feel pitted against one another.
Proposed Process Improvements
While the 2025 Policy & Services Committee did not make formal recommendations at its January 14, 2026 meeting, there was general consensus on various administrative areas of improvement. Below is a list of discussion points:
Improve coordination between Finance and Policy & Services Committee. The Finance Committee should set the Phase I budget for the fiscal year and the Policy & Services Committee should make award recommendations to the City Council based on the established budget.
Add a partial funding disclosure question to the application to help evaluate award recommendations.
Consider routing applications through the Human Resources Commission for review and recommendation to the Policy & Services Committee.
Replace alignment with Council Priorities in the Phase I application with other priority or community needs criteria.
Frame future Phase I process funding as discretionary and non-guaranteed. Include funding categories in the application for applicants to self-select (special needs, youth services, arts & culture, climate action & natural resources, services for the unhoused, senior services, workforce development, Other) Revise the application (as proposed in Attachment B) to remove redundant or low-value questions identified during the evaluation process.
Improve nonprofit outreach and guidance on Phase I process, including posting a template service agreement on the City’s website to increase transparency on contractual expectations.
Timeframe Considerations
Although staff suggests not soliciting proposals for FY 2027, should the City Council wish to continue the NPW Phase I process in FY 2027, two timelines are outlined for consideration.
Option 1 ensures that awards to specific nonprofits are approved by the City Council during the Budget Adoption Process, however, is an aggressive and compressed timeframe. In this scenario, nonprofits will have only two weeks to apply. Option 2 would focus on setting the Phase I budget during the FY 2027 Budget Adoption process and allow for a longer application period with grants awarded in the new fiscal year after budget adoption.
OPTION 1.
Date Activity Hearing Body
April 6 Council feedback on Phase I purpose and
improvements
City Council
April Phase I website updated: application timeline
and requirements posted
April 17 Nonprofit information session on FY27 Phase I
updates and requirements
April 20- May 1 Application period open (2 weeks)
April 21 Nonprofit workshop on application goals and
budget
May 4-8 Application intake
May 5-6 FY27 Phase I target budget set Finance Committee May 14 Application review and recommendations to
P&S
HRC
May Special Meeting Applicant interviews Policy & Services Committee
June 9 FY27 Phase I award recommendations Policy & Services Committee
June 15 FY27 Phase I awards approved City Council
OPTION 2.
Date Activity Hearing Body
April 6 Council feedback on Phase I purpose and
improvements
City Council
April Phase I website updated: application timeline
and requirements posted
May 5-6 FY27 Phase I target budget recommendation Finance Committee May Nonprofit information session on FY27 Phase I
updates and requirements
May Nonprofit workshop on application goals and
budget
June 1-29 Application period open (4 weeks)
June 15 FY27 Phase I budget approved City Council
July Summer Break
August 13 Application review and recommendations to
P&S
HRC
August Special
Meeting
Applicant interviews Policy & Services
Committee
September 8 FY27 Phase I award recommendations Policy & Services Committee
September 28 FY27 Phase I awards approved City Council
Option 2 offers nonprofits more time for engagement and communication on the Phase I process changes as well as four weeks for the application period.
Staff requests the City Council’s feedback on suspension of the NPW Phase I process in FY 2027, clarity of purpose and improvements of the process for future consideration. Staff would return to Council on consent agenda to reflect consensus heard during the Study Session.
FISCAL/RESOURCE IMPACT
No resource impact is expected at this time. The FY 2027 target budget for Phase I process will be addressed during the budget review process in May.
STAKEHOLDER ENGAGEMENT
Throughout the development and implementation of the FY 2026 Nonprofit Partnership Workplan Phase I process development, staff collected feedback through an extensive engagement process from key stakeholders such as nonprofits, Policy & Services Committee, Finance Committee and Council. Additionally, nonprofits were invited to send additional feedback prior to the January 14, 2026 Policy & Services meeting and invited to attend.
ENVIRONMENTAL REVIEW
Committee action on this item is not a project as defined by the California Environmental Quality Act (CEQA) because making improvements to the Nonprofit Partnership Workplan Phase I funding process is a continuing administrative or maintenance activity. CEQA Guidelines section 15378(b)(2).
ATTACHMENTS
Attachment A: FY 2026 Nonprofit Service Agreements
Attachment B: Proposed Phase I Application Edits
APPROVED BY:
Ed Shikada, City Manager