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City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: City Auditor
Meeting Date: June 8, 2026
Report #:2605-6353
TITLE
Accept the City of Palo Alto Utility Reserves Advisory Report and Public Safety Staffing and Overtime Audit as recommended by the Policy & Services Committee. CEQA Status: Not a Project.
RECOMMENDATION
The Policy & Services Committee (P&S) and the Office of the City Auditor recommend City Council accept the results of one advisory project and one audit:
1. City of Palo Alto Utility Reserves Advisory Project (Attachment A, P&S recommended accepting results on April 14, 2026), and
2. Public Safety Staffing and Overtime Audit (Attachment B, P&S recommended accepting results on May 12, 2026)
BACKGROUND
Baker Tilly Advisory, in its capacity serving as the Office of the City Auditor (OCA), performs a citywide risk assessment each year that evaluates a wide range of risk areas, including strategic, financial, operational, compliance, technological, and reputational risks. The purpose of these assessments is to identify and prioritize risks to develop each year’s annual audit plan.
During the FY2024 risk assessment, the OCA identified public safety (Police and Fire Departments) staffing and overtime as potential areas of risk and this audit topic was included in the FY2025 Annual Audit Plan approved by Council. OCA identified the City’s utility reserves as a potential area of risk during the FY2025 risk assessment and included this topic as an advisory project in the FY2026 Annual Audit Plan approved by Council.
In accordance with our agreement with the City, Baker Tilly Advisory is required to execute the Annual Audit Plan each year which consists of specific, approved task orders. Task Orders approved by the Council are executed by the P& S Committee Chair as the Project Manager for the Baker Tilly Contract as stipulated in the contract terms.
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ANALYSIS
City of Palo Alto Utility Reserves Advisory Project
P&S unanimously approved the results of the City of Palo Alto Utility Reserves Advisory Project on April 14, 2026. Discussion centered on developing a plan to steadily and sustainably increase reserves and management will be bringing a more comprehensive plan for addressing the findings in the fall of 2026 to the City’s Utility Advisory Commission and the Finance Committee.
The objective of the Utility Reserves Advisory Project was to assess and benchmark the City’s current utilities reserves and identify best practices related to reserve policies, structures, and levels.
The City’s utility reserve funds play a critical role in maintaining financial stability, supporting emergency response, and funding long-term capital needs. Our assessment noted that some reserve policies – particularly for the Wastewater Treatment, Refuse, and Stormwater utilities – are outdated and not fully aligned with more recently updated policies across other utilities. In addition, we noted that the current structure includes multiple reserve funds with varying guideline levels which can be administratively complex, requiring staff to track multiple reserve funds against minimum, target, and maximum levels. In a few cases, such as the Electric Special Projects Reserve, additional clarification on the purpose of the reserve could further improve understanding, consistency and minimize the potential for overlap.
The City remains in compliance with its bond covenants and maintains strong creditworthiness, but there are opportunities for reserve policies to more directly reference bond requirements and credit considerations to enhance alignment and transparency. Some existing bond-related reserve requirements are more complex than current market standards, though these are expected to phase out as outstanding bonds mature or are refinanced.
From an operational standpoint, many of the City’s practices align with industry standards, particularly regarding capital improvement (CIP) reserves. The report identifies opportunities to further strengthen consistency across utilities, including consideration of operating reserves where they are not currently in place and refinements to how capital reserve targets are defined. Compared to peer agencies, the City’s reserve policies are somewhat more detailed, while other communities often use more streamlined approaches with fewer reserve categories and simplified guidelines.
The report outlines several opportunities to update and refine reserve policies to improve clarity, consistency, and ease of administration. These include aligning older policies with current practices, clarifying the purpose of certain reserve funds, and refining guideline levels— particularly for rate stabilization and capital reserves. Overall, these enhancements are intended to support continued strong financial management while improving transparency and usability of the reserve framework.
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Please see Attachment A for a more detailed discussion of our observations and recommendations and management response.
Public Safety Staffing and Overtime Audit
P&S unanimously approved the results of the Public Safety Staffing and Overtime Audit on May 12, 2026. Discussion centered on the adequacy of budgeted staffing positions versus filled staffing positions. Both the Police and Fire Departments have significantly exceeded overtime budgets in recent year to maintain minimum staffing levels. Filling new fire fighter and sworn police officer positions requires months of training followed by a probationary period which can take up to 24 months.
The objective of the Public Safety Staffing and Overtime Audit was to determine if sworn personnel at the Palo Alto Police and Fire Departments are effectively and efficiently staffed including the use of overtime.
Findings for the Police Department noted that staffing levels may be insufficient to meet operational demands with the department relying heavily on overtime to maintain minimum staffing levels. The audit also noted that the department does not fully use workforce data to monitor staff sustainability and risk. Police academy success rates are not tracked and overtime is not considered when evaluating safety-related incidents. Finally, the audit identified inconsistent and manual tracking of overtime hours which could cause the department to make staffing decisions based on inaccurate data.
There was one primary finding for the Fire Department. While the City has added fire resources in recent years, overtime use remains a concern with most overtime use being used to meet minimum staffing requirements. The audit also found that while some key performance metrics are being met, staffing challenges may have impacted other response times and violation follow up. However, management implemented structural changes which reduced the amount of forced overtime with positive feedback from staff.
Key recommendations for both departments include strengthening workforce planning and hiring pipeline management to account for attrition and long training timelines, improving the monitoring of overtime and workforce sustainability, and improving budget transparency and operational efficiencies by better aligning budgets with historical trends and continuing process improvements.
FISCAL/RESOURCE IMPACT
The City Auditor’s Office is aware of ongoing budget constraints which may impact recommendation implementation and timelines.
CPAU Reserves Advisory Project: The timeline and resource needs for implementation of management’s action plan are identified by management within their attached response to the 9 9
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report (Attachment B). Implementation to change reserve levels would have rate impacts and staff recommend spending the coming year in advance of FY2028 rate setting to evaluate policy changes based on this research.
Public Safety Staffing and Overtime Audit: The timeline and resource needs for implementation of management’s corrective action plans are identified by management within the attached report.
STAKEHOLDER ENGAGEMENT
The OCA would like to thank the City of Palo Alto Utilities, Administrative Services, City Manager, Police and Fire Departments in conducting these audits and working to identify and implement corrective actions.
ENVIRONMENTAL REVIEW
Council action on this item is not a project as defined by CEQA because contracting for auditing services is an organizational or administrative activity that will not result in direct or indirect physical changes in the environment. CEQA Guidelines section 15378(b)(5).
ATTACHMENTS
Attachment A: City of Palo Alto Utilities Advisory Report Attachment B: Public Safety Staffing and Overtime Audit APPROVED BY:
Kate Murdock, City Auditor