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CONSENT CALENDAR
City of San Bernardino
Request for Council Action
Date: June 17, 2026
To: Honorable Mayor and City Council Members
From: Tarik Rahmani, Director of Finance
Department: Finance & Management Services
Subject: Approval of Amendment No. 2 to the Professional Services Agreement with Hinderliter, De Llamas & Associates for
Sales and Use Tax Audit and Recovery Services;
Authorization of Fiscal Year 2025/26 Budget Amendment;
and Related Fiscal Actions (All Wards)
Recommendation:
It is recommended that the Mayor and City Council of the City of San Bernardino, California:
1. Adopt Resolution No. 2026-079 approving Amendment No. 2 to the Professional Services Agreement (“PSA”) with Hinderliter, De Llamas & Associates (“HdL”) for sales and use tax audit and recovery services, clarifying the compensation structure to distinguish fixed base service fees subject to the not-to-exceed (“NTE”) limitation from contingency-based audit recovery fees and related budget amendments; and
2. Authorize the City Manager to execute Amendment No. 2 and any related documents necessary to effectuate its terms.
City Manager's Comments
The City Manager recommends approval of the contract. This will provide additional services for auditing and recovery services.
Executive Summary
Through their current agreement with the City, HdL provides two primary services: (1) economic and sales tax revenue analysis for a flat monthly base service fee of $850; and (2) sales tax auditing and recovery services, where HdL receives between 15%- 25% of any sales tax revenues that they were able to recover for the City that were previously “lost” due to reporting errors from businesses operating in the City.
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Amendment No. 2 clarifies that the total compensation amount of the agreement applies only to the fixed base service fees; the audit recovery fees that HdL is entitled to receive will continue to be calculated based on the percentage formulas already contained in Exhibit A of the original amendment. Previously, Amendment No. 1 inadvertently applied the agreement’s not-to-exceed amount of $275,500 to both services, which would have limited the amount of sales tax revenue that HdL would be able to recover for the City through their audit recovery services.
A budget amendment is also being requested due to the audit work carried out under this agreement identifying and correcting tax reporting errors that caused revenues owed to the City to be misallocated. As a direct result of HdL’s audit recovery services, the City received $2,661,843 in recovered tax revenues during FY 2025/26, of which HdL is entitled to $570,191.34 pursuant to the audit recovery fee provisions of the agreement. The associated audit recovery fees are a one-time expense funded entirely by the recovered revenues and support the correction in the City's ongoing tax revenue baseline. These corrected allocations represent ongoing, recurring revenue that has already been incorporated into the FY 2026/27 Proposed Budget. The program is self- funding, and its revenue benefit extends well beyond the audit period.
Background
The PSA executed April 7, 2021, established two categories of compensation. First, a fixed monthly base fee of $850 (invoiced quarterly and subject to annual consumer price index (“CPI”) adjustment) covering management reports, economic analysis, database maintenance, and ongoing consultation. Second, contingency-based audit recovery fees per Exhibit A: 15% of new Bradley-Burns sales and use tax revenues recovered, applied to retroactive fund transfers and the first eight consecutive reporting quarters following audit completion and CDTFA confirmation; and 25% of new Measure S transactions and use tax revenues recovered, applied to retroactive amounts only.
The higher Measure S rate reflects the greater complexity of transactions tax audits, which primarily involve non-payment requiring significant CDTFA coordination rather than correction of misallocations.
The PSA administratively treated the NTE as applying to fixed base services, while contingency-based recovery fees fluctuated based on actual audit recoveries. As audit recovery activity grew substantially, Amendment No. 1 increased the NTE to $275,500.
Amendment No. 1 was intended to increase the base service authorization; however, staff later determined the amendment unintentionally applied the not-to-exceed limitation to contingency-based recovery fees, but inadvertently subjected all compensation, including variable contingency fees, to that ceiling. Amendment No. 2 corrects that language without changing any fee rates, scope of services, or the PSA term.
The audit recovery services performed under this PSA identified tax revenues owed to the City that were not being properly reported or allocated. When the consultant identifies and corrects a misallocation, the City begins receiving those revenues both retroactively for prior periods and prospectively for subsequent quarters. The
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contingency fees are the consultant's earned compensation for producing that result: a fixed percentage of revenues the City actually receives. The City received $2,661,843 in recovered tax revenues in FY 2025/26 as a direct result of this program.
The audit recovery fees of $570,191.34 authorized by this action are funded entirely by those recovered revenues. Once CDTFA processes the corrections, the revenues flow to the City automatically each quarter as part of the normal tax distribution cycle, no further audit effort is required for corrected taxpayers. These audit corrections establish an ongoing recurring revenue benefit, allowing corrected allocations to continue through the City’s normal sales tax distribution cycle. . That recurring revenue stream has been incorporated into the FY 2026/27 Proposed Budget, and City Council (“Council”) action with this amendment establishes the compensation framework that allows this program to continue generating value for the City going forward.
Discussion
Key Changes in Agreement Amendments
Amendment No. 2 does not change the Exhibit A fee rates, scope of services, or agreement term. In addition, Amendment No. 2 does not split the PSA into separate contracts. The City will continue administering the PSA as a single contract while separately tracking base service fees and audit recovery fees for accounting and budget purposes. The table below summarizes the substantive differences between Amendment No. 1 and Amendment No. 2.
Provision Amendment No. 1 Amendment No. 2
NTE Amount $275,500 - applied to all compensation
including contingency fees
$275,500 - applied to base service fees
only
Audit Recovery Fees Explicitly included within and subject to the NTE
Explicitly carved out from the NTE; paid
separately based on verified recovered
revenues per Exhibit A
Fee Rates (Exhibit A) 15% Bradley-Burns / 25% Measure S - both subject to NTE
Unchanged rates; both outside NTE. 15%
applies to retroactive amounts + 8
prospective quarters. 25% applies to
retroactive only
Work Authorization Not addressed
Quarterly Work Authorizations required;
City must review and approve before
consultant invoices for any recovery
services
Budget Appropriation Subject to annual appropriation; no mechanism for recovery fee variability
Acknowledges recovery fees may exceed
budgeted amounts; authorizes staff to
bring budget amendments forward as
needed; City retains discretion to defer
payment until appropriations are in place
Measure S Compliance General reference to Measure S
Expenditure Policy
Detailed provisions ensuring recovered
Measure S revenues are tracked,
budgeted, and audited consistent with the
Measure S Expenditure Policy and
Chapter 3.56 SBMC
CDTFA Access Relied on Resolution 2021-76
Supported by new consolidated CDTFA
access resolution superseding all prior
resolutions; positions authorized by current
title
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Budget Amendment for FY 2025/26
The FY 2025/26 Operating Budget did not originally include appropriations for audit recovery revenues or associated fees at this scale, as the magnitude of recovery activity was not known at the time of budget adoption. The proposed budget amendment formally recognizes the recovered revenues and appropriates the associated contractual contingency-based audit recovery fees. Because the recovery fees are directly tied to revenues actually received by the City, the program remains self-funding. The following budget amendment is required to formally recognize the recovered revenues received and authorize payment of the associated contingency fees:
The General Fund realizes a net benefit of $2,091,651.66, the difference between the revenues recovered and the fees owed. The expenditure appropriation of $570,191.34 authorizes payment of audit recovery fees associated with revenues recovered during FY 2025/26., Any uninvoiced balance remaining at fiscal year-end will be carried over into the FY 2026/27 budget, which has been structured to continue covering audit recovery fees as they are invoiced throughout the year.
The revenue corrections achieved through this audit program are consistent. The City's corrected tax revenue allocation will continue to flow through CDTFA's normal quarterly distribution cycle without further audit intervention for corrected taxpayers. This recurring revenue has been incorporated into the FY 2026/27 Proposed Budget. The Provision Amendment No. 1 Amendment No. 2
NTE Amount $275,500 - applied to all compensation
including contingency fees
$275,500 - applied to base service fees
only
Audit Recovery Fees Explicitly included within and subject to the NTE
Explicitly carved out from the NTE; paid
separately based on verified recovered
revenues per Exhibit A
Fee Rates (Exhibit A) 15% Bradley-Burns / 25% Measure S - both subject to NTE
Unchanged rates; both outside NTE. 15%
applies to retroactive amounts + 8
prospective quarters. 25% applies to
retroactive only
Work Authorization Not addressed
Quarterly Work Authorizations required;
City must review and approve before
consultant invoices for any recovery
services
Budget Appropriation Subject to annual appropriation; no mechanism for recovery fee variability
Acknowledges recovery fees may exceed
budgeted amounts; authorizes staff to
bring budget amendments forward as
needed; City retains discretion to defer
payment until appropriations are in place
Measure S Compliance General reference to Measure S
Expenditure Policy
Detailed provisions ensuring recovered
Measure S revenues are tracked,
budgeted, and audited consistent with the
Measure S Expenditure Policy and
Chapter 3.56 SBMC
CDTFA Access Relied on Resolution 2021-76
Supported by new consolidated CDTFA
access resolution superseding all prior
resolutions; positions authorized by current
title
Action Amount
Increase General Fund revenue appropriation -
recovered tax revenues received in FY 2025/26 2,661,843.00 $ Increase General Fund expenditure
appropriation - contingency-based audit
recovery fees, FY 2025/26
(570,191.34) $
Net General Fund Benefit 2,091,651.66 $
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Council's approval of Amendment No. 2 and the associated budget amendment ensures continuity of the program's fiscal framework into the next fiscal year and beyond.
2021-2025 Strategic Targets and Goals
The contract amendments and resolutions align with Key Target No. 1: Improved Operational & Financial Capacity. The audit recovery program has produced an improvement in the City's tax revenue baseline by correcting reporting errors that were causing revenues owed to the City to be misallocated. The fees authorized by this action are entirely self-funded by the revenues recovered, and the ongoing revenue benefit flows to the General Fund each quarter going forward.
Fiscal Impact
The FY 2025/26 General Fund impact is a net of $2,091,651.66. The audit recovery fee component is fully offset by recovered revenues generated through the program.
A budget amendment is needed to increase revenue appropriations by $2,661,843 and expenditure appropriations by $570,191.34, for a net General Fund benefit of $2,091,651.66. The remaining expenditure budget will be carried over into FY 2026/27 to allow future quarterly invoices to have sufficient appropriation for payment within the Finance and Management Services department. The recurring revenue resulting from audit corrections has been incorporated into the FY 2026/27 Proposed Budget.
Conclusion
It is recommended that the Mayor and City Council of the City of San Bernardino, California:
1. Adopt Resolution No. 2026-079 approving Amendment No. 2 to the Professional Services Agreement (“PSA”) with Hinderliter, De Llamas & Associates (“HdL”) for sales and use tax audit and recovery services, clarifying the compensation structure to distinguish fixed base service fees subject to the not-to-exceed (“NTE”) limitation from contingency-based audit recovery fees and related budget amendments; and
2. Authorize the City Manager to execute Amendment No. 2 and any related documents necessary to effectuate its terms.
Attachments
Attachment 1 - Resolution No. 2026-079 – Approving Amendment No. 2 to the PSA with Hinderliter De Llamas & Associates and Budget Amendment Attachment 2 - Amendment No. 1 to PSA with HdL
Attachment 3 - Amendment No. 2 to PSA with HdL
Ward:
All Wards
Synopsis of Previous Council Actions:
March 4, 2026 The Mayor and City Council Approved Amendment No. 1 to
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the Professional Services Agreement with Hinderliter, De Llamas & Associates for Sales and Use Transaction Tax
Auditing Services, Including Measure S District Tax.
April 7, 2021 The Mayor and City Council adopted Resolution No. 2021-75 authorizing the execution of a Professional Services
Agreement with Hinderliter, De Llamas & Associates for sales and use tax auditing and analysis services.
April 7, 2021 The Mayor and City Council adopted Resolution No. 2021-76 authorizing examination of transactions and use tax records from the California Department of Tax and Fee Administration.
CC
Eric Levitt, City Manager