Faced with a stinging audit from the Santa Clara County Grand Jury, Palo Alto officials this week acknowledged that they followed a "flawed" process when they privately negotiated with billionaire John Arrillaga in 2012 over a parcel of public parkland while at the same time considering his ambitious and ill-fated plan to build four office towers and a theater downtown.

However, staff took some issue with the Grand Jury's criticism of the way the city responds to public records requests, even while noting that the process can use some improvements.

The city's explanations came as part of staff's response to a June audit from the Grand Jury, which concluded that the city had "failed to meet expectations of transparency" in discussing the sale of a 7.7-acre property to Arrillaga and in failing to engage the public in its initial discussions of 27 University Ave., a proposed "arts and innovation district" near the downtown Caltrain station. The panel also criticized the city for failing to "consistently respond to requests for public records in a timely manner" and for having "operational deficiencies" in how it tracks public record requests.

Entitled "The City of Palo Alto's Actions Reduced Transparency and Inhibited Public Input and Scrutiny on Important Land Issues," the Grand Jury report also found that the city disregarded its own policies by considering the sale of what's known as the "Lee Gift Deed property" -- a parcel of parkland near Foothills Park -- without first publicly declaring it a "surplus property" and soliciting community feedback. Furthermore, it found that the city's talks with Arrillaga about 27 University Ave. were "done in a manner that was permissible but undertaken in a way to avoid public scrutiny unlike other similar large-scale projects."

In the response that was released Wednesday, city officials acknowledged early missteps in the process for 27 University Ave., a proposal that included four office towers, a new performing-arts theater and various road improvements around the transit center. Officials had briefly considered bringing this concept to a public vote but the council scrapped that plan on Dec. 3, 2012 after intense community opposition and widespread criticism about the city's lack of transparency. Sheri Furman, chair of Palo Alto Neighborhoods, was one of many to argue at that meeting that "what we gain is not worth the price." Former Mayor Dena Mossar said the public deserved to have more information about the project.

"It is wrong to continue private negotiations with a developer who has never submitted a project application," Mossar told the council. "You are spending the public's money as if you are the developer."

In a report to the City Council this week, City Manager James Keene characterized the project as one that "got off to a bad start, and certainly off on the wrong foot." Despite its proposed size and density, the Arrillaga proposal was introduced abruptly in March 2012 and designs quickly evolved with little opportunity for the public to comment. The fact that council members received private briefings from Arrillaga only made people more cynical about the process. Given the "dramatic change the concept presented for the area, it is natural that many folks would take the concept as a surprise and for many, out of character with the city," Keene wrote.

"More importantly, the scale of the potential project, particularly building heights, far overshadowed potential public benefits related to a new regional theater, significant parking, and improvements to the intermodal transit center and surrounding road network," Keene wrote.

Accepting the Grand Jury's conclusion, Keene concluded in his report that "there was a lack of clarity of objective and transparency at the start of the consideration of 27 University."

"Council changed that mid-course but much damage had been done to the project's possibilities and to confidence in the process," Keene wrote.

Staff largely concurred with the Grand Jury's recommendation that the city should "obtain early input from its constituency about significant development proposals before allocating City funds to the proposals," a reference to the city's $250,000 allocation for design work on the Arrillaga concept.

"Early input from constituents is critically important," the city's response states. "City staff is placing an increased emphasis on early and effective public engagement in planning efforts."

At the same time, the city's response maintains that it is "sometimes true that complex concepts require preparation in order for the public to have significant substantive material to react to and provide input on."

Officials were less accepting of the Grand Jury's findings that the city "does not consistently respond to requests for public records in a timely manner." This determination was based on the Grand Jury's review of the city's log of public records requests, which in some cases omitted entries or did not include a response date. The panel also submitted two public records requests of its own. In one case, it received a request within the statutory 10-day limit. Another request, made by email, received a response from the city 19 days later.

Palo Alto officials acknowledged in their response Wednesday that when it comes to public-records requests, the city's practices "are not perfect in every case and could be improved." They also agreed that the city's tracking system "does not capture all requests and responses and could be improved." But they disagreed with the notion that these practices "fall outside reasonable customary and even best practices in the area."

"The City receives many requests for routine information eery single day and does a good job of responding promptly to the public," the response states.

The response noted that the city has recently made some improvements to the process, including a FAQ section on the city's website and an online form that people can fill out. Officials are also "exploring additional software solutions to automate tracking and responses to Public Records Requests" and planning more training for city staff.

Much of the Grand Jury report focused on the city's process for negotiating with Arrillaga on the 7.7-acre parcel of undeveloped land next to Foothills Park, a parcel that the council last month officially dedicated as "parkland." The land was donated to the city by the family of Russell Lee in 1981, with a stipulation that the "property shall be used for conservation, including park and recreation purposes." It is located next to Arrillaga's property and the developer at one point leased it from the city to store construction materials while making renovations on his own property.

The Grand Jury report criticizes the city for not following its own policies in discussing the land sale. The policies require the city to notify appropriate departments and other public agencies about the availability of "potential surplus city property," prepare a report for the City Council and then obtain an independent appraisal and go through a formal bid process. When the council negotiated privately with Arrillaga, it did not follow these policies, the Grand Jury found. The property was never declared "surplus" and public agencies were not notified about its availability.

Palo Alto officials wrote in the response that the city has "implemented procedures to ensure public debate about disposition of real property well before transactions are finalized, and also understands that greater attention must be paid to open public process early and in any potential transaction." At the same time, the response noted, "a recommendation to always seek public input before meeting lawfully in private to discuss a parcel of City-owned real property exceeds the requirements of local and state law and should not be implemented in a manner that may injure the public interest."

The city also disagreed that the deed restrictions requiring the property to be used for parks precludes the city from selling the land.

"A private party, non-profit entity or other governmental entity could comply with this deed restriction," the city's response states. "There are many such parcels of land throughout the Bay Area and the state. Thus the deed restriction did not prevent the City from selling the property. The new owner would have been obligated to meet the deed restriction."

Related content:

• Editorial: A half-hearted mea culpa