The Palo Alto City Council's Finance Committee moved Wednesday to reverse a recommendation it issued last week that would have dramatically downsized the Office of the City Auditor.
As part of its vote to recommend adoption of the fiscal year 2019 budget, the committee agreed to rescind its May 15 decision to eliminate five out of six positions in the Office of the City Auditor, leaving City Auditor Harriet Richardson as the office's sole employee. The committee had also recommended using 80 percent of the savings from the position cuts to contract with outside firms for performance audits.
On Wednesday, the committee revisited its earlier recommendation after City Manager James Keene recommended taking more time to consider the staff cuts and after Richardson expressed major reservations about the quality of work produced by outside firms.
In Stockton, for example, city officials had eliminated their audit function several years ago and switched to a consultant to serve as their internal auditor. The city is now spending about $450,000 annually and is not getting real performance audits, Richardson said. Instead, the auditor mostly deals with "internal control reviews" and helps departments develop policies and procedures. Modesto had also outsourced its audit function, Richardson said, but there is no indication on the city's website whether the contractors are actually doing any work.
Richardson also cited Valley Metro, a transit agency in Arizona that recently hired a consultant for the auditing function. Richardson said that after discussing the auditing function with someone she knows at the agency, she learned that the contractor's work does not meet the government standards for auditing and that its reports often have to be rewritten.
She also discussed her experience in the Washington State Auditor's Office, her former place of employment. The state brought her in to "transition out of contracting because the cost was so high for contracting," Richardson said.
"They were spending an average of about $1 million for contracts and getting very voluminous reports," Richardson said. "I do recall those reports weren't well received by the agencies."
Though Richardson did not object to the Finance Committee's original May 15 recommendation, this week she advocated for a more cautious approach. She noted that her staff is working on City Hall's pending switch to a new Enterprise Resource Planning system, a complex project that involves many city departments.
"I think it's important for you to think about whether this is the right time to think about contracting out and what you will get for your money," Richardson said.
The committee also heard from several public speakers, at least two of whom had been employed in the Office of the City Auditor. Former City Auditor Sharon Erickson, who vehemently criticized the committee's May 15 recommendation, appealed to the committee Wednesday to reconsider it.
In-house auditors, she said, are there to "follow up on recommendations and make sure the residents of Palo Alto actually see the benefits of service improvements and cost savings."
"The proposal to outsource all audit work to consultants ignores the value of in-house auditors who provide continuing oversight," said Erickson, a Palo Alto resident who now serves as city auditor in San Jose.
Though the committee agreed at the May 15 discussion to outsource auditing work, one committee member had second thoughts even before hearing from Richardson. Councilwoman Lydia Kou said at the beginning of the Wednesday meeting that after giving this matter more thought and hearing from the community, she'd like to rescind her vote to eliminate the positions.
The office, she noted, was created in 1983 by a vote of the people.
"To eliminate it and to cut it out without any discussions with the auditor herself -- that was not wise at all," Kou said.
The committee's Wednesday vote restores all five performance-auditor positions in the 2019 budget. The office's long-term future, however, remains hazy. At the end of its meeting, the committee voted 3-1, with Kou dissenting, to revisit the topic after its summer break and consider other staffing models.
Committee Chair Greg Scharff, who made the initial proposal to eliminate the five positions, said Wednesday that the goal was to boost the office's productivity. Richardson had told him that she believes the office should be able to produce about 10 audits per year; their current goal is six audits.
Scharff said he has no problem "taking a step back," but did not back away from his earlier position that the office isn't as productive as it should be.
"I view it as very unfortunate that audits are taking longer than they should and that we're having productivity issues in the auditor's office," Scharff said.
The committee's recommendation means that the City Council will now be confronted with what City Manager James Keene described as a "status quo" budget. The biggest change will take place in the Fire Department, which will see 11 positions eliminated. The staffing change has already been implemented, however, and the budget will reflect – rather than shape -- the new reality in the department, which is now relying more on cross-staffing.
Another change will be in the Office of Sustainability, which will no longer be a separate entity. The position of Chief Sustainability Officer Gil Friend will be eliminated and the office's function will be subsumed within the work of Keene's office and the various department work plans.
The status quo is not, however, expected to last for too long. As part of its recommendation, the Finance Committee agreed that at least $4 million needs to be trimmed from the $214 million general fund in the coming year. As such, they adopted a $210 million budget, with the $4 million in cuts to be identified over a series of meetings that the committee plans to hold after the council's July break.
Following last week's direction from the committee, Keene brought forward a list of ideas that the city can explore to reduce costs and address its ballooning pension liabilities. These include regionalizing police dispatch, "civilianizing" the medical-response positions in the Fire Department that are currently occupied by firefighters and creating new cost-sharing arrangements with the Palo Alto Unified School District for Project Safety Net and the Cubberley Community Center.
Rather than make the cuts as part of the budget process, Keene suggested revisiting the various proposals after the summer break.
"I don't think we ought to have ad hoc decisions," Keene said. "I think we want to be able to endorse the most cost-effective ones and the ones that provide the most value to the community."
The Finance Committee agreed, with Councilman Eric Filseth calling the proposal "pragmatic and sensible." But Filseth also underscored the need to make the budget cuts in the coming months and noted that every delay will only add to the budget pains down the road.
"The reality is that this year, we are on line to spend $8 million more on pensions than we have. … And we don't have the money to pay for it," Filseth said. "The way we fund it, is we write an IOU that our children will have to pay for.
"By the time we have to pay it back, it won't be $8 million. It will be $30 million or $40 million by the time our children will have to pay it back. They will pay in the future for the services we are consuming now."
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