Roughly two months ago, before the Palo Alto City Council's Feb. 10 vote to explore the outsourcing of the city's auditing operation to a consulting firm, council members met behind closed doors to consider another issue relating to the small office: a claim filed against the city by one of the office's three remaining employees.
Even though Mayor Adrian Fine announced "no reportable action" after the session, three days later, the city signed off on a settlement with Yuki Matsuura, a performance auditor who was part of a group of auditors who had complained about how they had been treated by their former boss and the city's last city auditor, Harriet Richardson.
As part of the settlement, the city paid Matsuura's attorneys $56,687, granted her 400 hours of vacation time and, reversing her demotion, restored her title to "senior performance auditor," according to the document, which was obtained by the Weekly.
In exchange, Matsuura agreed to withdraw a complaint she had filed against the city with the California Department of Industrial Relations, wherein she argued that Richardson had retaliated against her, according to the settlement.
The complaint was just the latest in a long series of squabbles that have roiled the Office of the City Auditor, which the voters created in 1983 as a way to provide oversight of City Hall. By the time Richardson left the city in February 2019, the dysfunction inside the office was an open secret at City Hall, with employees filing numerous whistleblower complaints against Richardson and council members complaining about the office's low productivity.
Richardson and Matsuura had been clashing over Matsuura's performance appraisals since at least 2014, a conflict that prompted Matsuura to file multiple grievances against her boss. At one point, Richardson demoted Matsuura from senior performance auditor to "performance auditor I." Matsuura responded by filing the retaliation complaint with the state.
Matsuura wasn't the only auditor who was clashing with her boss. Houman Boussina, another senior performance auditor, reportedly communicated to the council in 2015 his own concerns about Richardson's leadership. According to a letter Boussina's attorney sent to the council last month, these concerns pertained to Richardson's delays in reviewing and approving audit work and her alleged elimination of the office's risk-assessment process, which is used to prioritize certain audits over others. Richardson's actions, Boussina claimed, had created "risks to the reputation and credibility" of the office.
The accusation was just the latest example of the department's tense and toxic atmosphere, which was fueled by a staffing shortage, low morale, leadership vacuums and complaints from staff. Richardson attributed the tension with employees to disagreements about how the office should be managed. She said she only learned about the employees' concerns after they had filed complaints or submitted letters to the council, disparaging her work.
Another such letter was submitted in August 2018. That letter, which Boussina alluded to in his January 2020 letter, focused on Richardson's reported "pervasive misconduct and mismanagement" and alleged that her audit reports were "inaccurate and misleading." Richardson told the Weekly that she responded to the letter by providing evidence to the council indicating that the complaints were unsubstantiated.
One former employee, who asked not to be named because of the sensitive nature of personnel conflicts, said the atmosphere at the office was awkward and tense. A small group of employees could often be heard whispering about Richardson. Investigators hired by the city would come in to interview employees about the latest allegations. Ultimately, none were sustained, the employee said.
The council has steadfastly supported Richardson. In May 2018, citing low productivity at the office, the council's Finance Committee voted to eliminate five of the department's six positions, leaving only the city auditor. After criticism from the public, including from the city's former city auditor Sharon Erickson, the committee reversed course and agreed to keep the five positions.
Even so, by late 2018, Richardson was preparing for departure.
"It was a very unpleasant place to come to work," Richardson told the Weekly. "When people are filing complaints against you constantly, you just reach a point where you say 'enough is enough' and it's time to leave. That's why I decided to retire." (Richardson is now the inspector general of BART.)
Today, the office is down to three positions and has no leader. The last person to supervise it was Don Rhoads, a consultant whose contract expired last November. The National Citizens Survey, which the city auditor has released every year since 2006 and which the council has traditionally used as a basis for setting annual priorities, did not come out this year. And the office has produced only two audits in the current fiscal year, which began on July 1.
A person — or a firm?
When Richardson left, few could have predicted that the city would still be rudderless a year later. Fewer still could have envisioned the council's Feb. 10 action, which could wipe out nearly four decades of precedent.
Since the office came into being in 1983, there was always an understanding that the city auditor would be a City Hall employee, said Larry Klein, a former three-time mayor who served on the council in the early 1980s. At the time, Palo Alto had both a city manager, who ran the City Hall administration, and a controller, who handled the budget. As Klein recalls it, the two didn't always see eye-to-eye, and the council recognized that the budget process was a mess.
Following the well-established Palo Alto process, the council created a citizens' committee to look into the issue. In May 1983, the committee issued a series of recommendations, including the delegation of the budget function to the city manager and the creation of a city auditor to ensure public funds are wisely spent. The city auditor effectively replaced the city controller and maintained the latter's independence from the city manager.
In November of that year, voters approved an amendment to the City Charter to establish the city auditor position. The charter states that the council shall "appoint the city manager, clerk, attorney and auditor, who shall serve at its pleasure."
Klein, who returned to the council in 2005 to serve an additional two terms, said it has always been assumed that the city auditor would be a person, not an outside firm. No one has ever proposed outsourcing the function, he said, and the auditor was always hired through the city's recruiting process.
Klein said the office serves a critical function: ensuring that public funds are spent properly.
"The independent auditor's very existence is a disincentive for people to act improperly," Klein said. "It's not just a question of how many audits you do."
But on Feb. 10, the council focused its discussion primarily on the number and quality of audits that the office has been producing. Numerous council members cited recent findings by Kevin W. Harper CPA and Associates, a consultant whom the city commissioned last year to survey cities throughout the region and issue recommendations pertaining to auditing services. Harper — who also had been hired by the city in 2016 to investigate allegations against Richardson by her employees — found that Palo Alto spends more per audit and releases fewer audits than other cities.
The average audit in Palo Alto is costing the city $417,000, the Harper report states, while costs elsewhere ranged from $78,000 in Fresno to $354,000 in Santa Clara. The report also noted that Palo Alto produces 0.7 audits per full-time-equivalent position, tied with Oakland for lowest productivity among the surveyed cities.
After citing the Harper study and the frequent turnover in the city auditor's office, Councilman Eric Filseth said he found the status quo "underwhelming."
"We have done some good work, but it's at a high cost, the focus isn't quite right (and) large numbers of implementation recommendations don't get adopted. And I worry that if we just do the same thing we've done before, two years from now we'll be in the same spot, which is looking for someone else," Filseth said on Feb. 10.
Councilwoman Liz Kniss, a former Santa Clara County supervisor, also supported adopting the consultant model — an approach used by the county, which has hired the San Francisco-based firm Harvey M. Rose Associates. She called the switch a "major decision" but suggested that it could make the office more effective.
"I remain concerned, especially looking at the data that came to us tonight, that we're running an expensive operation, and I don't think we are presently getting a sufficient outcome for that," Kniss said.
Not everyone was thrilled about outsourcing the function. Fine noted that while it may be cheaper and faster to have an outside contractor, it would also come with "stark" consequences, including greater personnel turnover among consultants, less accessibility to the public and a steeper learning curve.
"I think having a staff member here at City Hall ... brings us a little closer to our citizens, which is an important auditing function," Fine said.
In addition, an in-house auditor may be more familiar with the city's operations and personnel. Consultants can take a long time to get up to speed, Fine said.
Filseth and Fine also observed that recent audits (of the city's aged animal shelter, glitchy business license tax and occasionally inaccurate water meters) haven't really pertained to "significant risks" and potential liabilities that the city may be facing. The city doesn't need a $417,000 audit to tell you that the city's code-enforcement operation is short staffed, Filseth said, referring to an 2019 review of code enforcement, which was prompted by a growing number of residents' complaints about zoning violations.
While Fine, Councilwoman Alison Cormack and Vice Mayor Tom DuBois all initially said they prefer having an employee, rather than an outside consultant, in charge of auditing, they ultimately joined their colleagues in a unanimous vote that favored outside firms over an in-house expert. The vote authorized the mayor to appoint an ad hoc committee to craft a request for proposals that would follow the Santa Clara County model of having an outside consultant provide auditing services. The council also directed that the work be completed within 90 days.
"We have a responsibility to the community to consider some alternative approaches," Filseth said. "Because I think there's a good chance we can do better."
The council hasn't yet determined whether the entire operation, or just the person in charge of the office, will be outsourced. DuBois told the Weekly that he can envision a model in which the city has internal staff performing certain consulting tasks and managing projects, such as the National Citizen Survey, while a consultant handles the bulk of performance audits.
DuBois noted that outsourcing the auditing function will have some pros and cons. An internal auditor, he said, may have a better familiarity with what's going on at City Hall. An external auditor, however, could bring more independence to the work, as well as a perspective that comes with performing work in other cities and being better acquainted with best practices.
"It could be potentially more independent," DuBois said.
The intent of the law
Not everyone feels this change will improve City Hall operations. Klein believes the council would be making a mistake in moving away from an in-house city auditor to a consulting firm. Having a city auditor at City Hall allows employees of the office to have more informal interactions with their colleagues, he said, whether by the water fountains or in the coffee room. An external firm, by contrast, would not become a part of the organization to the same extent.
Basing the decision to outsource on a simple calculation — cost per audit — misses the larger point that an audit can deter improper actions just by being there. The benefit could disappear if the city strays from the existing model, Klein said. Having an auditor is as close as the city can get to giving citizens a guarantee that public funds would not be misspent, he said.
Erickson, who served as Palo Alto's city auditor between 2001 and 2008 before becoming the city auditor in San Jose, also told the Weekly she was disappointed in the council's February action. An outside consultant, she said, simply won't give the city the kind of institutional knowledge and accountability that an in-house auditor would provide.
"People rarely supervise consultants appropriately. It's really hard to do that," said Erickson, who retired last year.
Even when the council proposed cutting and outsourcing positions in the auditor's office two years ago, council members agreed that they need to retain the actual city auditor position, Erickson said. In her view, by straying from that position, the current council is creating a system in which there won't be the proper oversight necessary for auditing work.
"It's not the City Council's job to oversee the performance-audit work on a day-to-day basis. So, who's going to do that? I'm convinced there's no way you can hire consultants to provide the value that internal staff build up over time," Erickson said.
The decision also is facing pushback from the auditors themselves, who are considering litigation to challenge the move. City Attorney Molly Stump told the council on Feb. 10 that the City Charter has a "functional requirement" for a city auditor. So while the city has to provide for the auditing function, it could do so through the type of process that the council is considering — namely, an outside firm (by that logic, the council can also outsource the city attorney, the city clerk and the city manager functions, though no one has yet proposed doing so).
Karl Olson, an attorney representing Boussina, Matsuura and former auditor Lisa Wehara, told the Weekly that he respectfully disagrees with Stump's contention that the city auditor's job can be performed by an outside consultant. He also said he and his clients believe that "it would be inconsistent with the City Charter (and unwise and expensive) to outsource the City Auditor's Office."
"We believe it would be a radical change to shift the City Auditor's job from an in-house position to one handled by a consultant. And, in our view, such a change could only be seen as retaliation for well-founded concerns which my clients have raised," wrote Olson, an attorney with the firm Cannata, O'Toole, Fickes & Olson.
Leaving aside the question of legality, it's clear that the idea of having an outside firm serve as the city auditor was not the intent of those who created the position. The official argument in the 1983 ballot to amend the Charter stated that the auditor "would be appointed by the council, as is the current controller." And the impartial analysis from then-City Attorney Diane Lee noted that the Charter amendment would create "a new city officer," language that to an average voter connotes a human being at City Hall rather than an outside consultant.
For the council, the change in the city auditor model comes in the same year that council members are preparing to ask residents to pass a business tax to pay for transportation projects. In January, the council decided that the tax should be a "general tax," which requires a simple majority to pass and gives council members great discretion in how the money is spent (a special tax, which requires a two-thirds majority of votes, dedicates funding to specific projects).
This "trust us" approach may be a tougher sell for council members once they outsource the one City Hall position whose mission, according to the Municipal Code, is to promote "honest, efficient, effective, economical, and fully accountable and transparent city government." It also doesn't help that the numbers in the city's last National Citizens Survey, which Richardson presented to the council on Feb. 2, 2019, in her final official duty, showed that public trust in government has already slipped. According to the survey, the percentage of people who reported that the city is "generally acting in the best interests of the community" went from 51% in 2017 to 45% in 2018.
At the same time, because code also empowers the city auditor to have "unrestricted access to all sources of information, property and personnel" relating to council-approved audits and identification of "potential risks," the council will have to increasingly trust outside firms with profit motives to handle the city's sensitive information with due discretion.
Erickson and Klein have both told the Weekly that they believe the council should follow past practice and recruit a city auditor. Existing employees seem to agree. Olson's letter on behalf of Boussina urges the city to hire a new city auditor who can "restore leadership and supervision and work with the City Council to restore operations at the office."
Hiring a city auditor, Erickson said, should be "the council's responsibility," notwithstanding concerns about personnel issues inside the office.
She recalled when she was hired in San Jose, just after her predecessor was fired: "It was a very contentious environment. It was very difficult. But that's why the City Council hires someone new — it's to go in and, if there are issues, to take care of those. And if there are questions about what's being audited — the City Council should be handling that."