After a dramatic rupture last year following the death of seven puppies, Palo Alto and the nonprofit group Pets In Need are working to mend their relationship and ink a new deal that would prolong their partnership beyond this year.

The Redwood City-based nonprofit has been providing animal services to Palo Alto since 2019, taking over an operation that had traditionally been conducted by city employees. As part of the agreement, the city had pledged to make various upgrades to the shelter at East Bayshore Road, including addition of dog kennels and improvements to the shelter's medical facility.

Things, however, turned sour late last year, when three Pets In Need employees were charged with animal cruelty after seven puppies died in August from what is believed to have been a heat stroke while being transported in a van that lacked air conditioning. With the investigation proceeding, the nonprofit's former Executive Director Al Mollica abruptly announced in November that Pets In Need will terminate its agreement at the end of 2022, citing the city's failure to meet its commitments to improving the shelter. Mollica resigned days later and was replaced on an interim basis by Valerie McCarthy, who had been serving on the nonprofit's board of directors.

Now, the two sides are looking at ways to reconcile their differences and move forward together. On Thursday afternoon, the city released a memo laying out some issues that the two sides have identified as needing resolution for their relationship to continue beyond its current expiration date of Nov. 15.

One issue that Pets In Need has identified is its interest in switching to a new software system at the animal shelter and asked for flexibility to do that.

It is also requesting that the city adjust the plan for dealing with feral cats. Currently, the agreement prohibits the shelter from releasing feral cats within Palo Alto and its two partner cities, Los Altos and Los Altos Hills. The new plan would allow the agency to catch, neuter and release feral cats, according to the memo.

The biggest wild card, however, remains shelter improvements, which are expected to cost between $3 million and $4 million. Pets In Need is hoping to demolish the existing kennel building, which the city had previously identified as substandard, and to construct a new building with 24 dog kennels, including four isolation kennels. It would also include an area for cats and small animals, according to the memo.

The city has already made some improvements to the animal shelter. In 2020, it funded improvements to the medical suite at the animal shelter and constructed a modular building that could be used as an office or classroom space. The two projects had cost close to $1.5 million, according to staff.

The city's agreement with Pets In Need commits a total of $3.4 million to the animal shelter for the requested improvements, well short of what would be required to build the new kennels. The new memo considers some options for narrowing the gap, including dipping into the city's existing infrastructure reserve and allocating from future hotel-tax revenues. The memo also considers a scenario in which the nonprofit would take on some of the costs of building the new kennels.

"If the agreement between the City and PIN continues, Staff anticipates working in partnership with PIN to determine the scope of the capital improvements and will explore a cost sharing method between the two parties to fund the project," the memo states.

Despite these outstanding issues, the memo suggests that Pets In Need is interested in remaining in Palo Alto. The nonprofit's board met on Wednesday and, according to the new memo, gave consent for staff "to engage in good faith negotiations with the City of Palo Alto for a new or amended agreement."