Palo Alto is preparing to tighten its policies around contracts with nonprofit groups after an audit found that the city's existing agreements suffer from a lack of clear expectations and insufficient monitoring.

The audit, which was performed earlier this year by the firm Baker Tilly, closely scrutinized 10 of the city's 46 agreements that had a contract amount of $10,000 or more in fiscal year 2021. These include Palo Alto's long-standing partnerships with organizations such as Alta Housing, the nonprofit developer that had administered the city's below-market-rate housing program since 1974, and MidPen Media Center, which provides public, educational and government access channels.

The audit found that the city has fallen short in monitoring whether some of its nonprofit partners are providing the expected service. Three of the 10 contracts that the firm had reviewed "did not include adequate information of performance and reporting expectation," Chiemi Perry, manager of public sector advisory at Baker Tilly, told the council's Policy and Services Committee at its June 14 discussion of the audit.

"Also, three of those 10 agreements had instances of noncompliance with the required reports in the agreements," Perry said.

One example that the audit cited was Pets In Need, the nonprofit that runs the city's animal shelter on East Bayshore Road. Its monthly reports did not include all the information that its agreement with the city had required, the audit found.

Project Safety Net, a nonprofit that is dedicated to fostering youth well-being, was more than two months late in submitting a required report for Dec. 31, 2021. Auditors were told that "less attention was paid to monitoring the compliance with the agreement due to limited staffing and a shift in priorities during the pandemic," the report states.

The auditors also could not find the monthly report for Ecology Action, which provides energy-efficiency services, because the project manager who was monitoring the contract retired last August and the documents could not be located, according to the report.

In some cases, the agreements fail to specify what type of information the partner agencies are required to provide. For example, the city's agreement with Alta Housing fails to define the reporting requirements that the nonprofit developer is expected to provide. Its contract with the Downtown Streets Team, meanwhile, requires the nonprofit to pick up litter but the nonprofit is not obligated to provide information pertaining to litter pickup, the audit states.

The city's relationship with its nonprofits has faced scrutiny over the past two years thanks to highly publicized scandals at Downtown Streets Team, where top administrators were accused of sexually harassing employees and fostering a drinking culture. The council had requested that the nonprofit provide an independent review of the harassment allegations as a condition of renewing the agreement. Though the Downtown Streets Team declined to provide the report, the council ultimately agreed to sign new agreements with the nonprofit after being assured that it had strengthened its governance measures.

More recently, city officials have been in dispute with Pets In Need, a nonprofit that took over the city's shelter operations in early 2019 and which has accused the city of failing to live up to its promises to upgrade the aged facility. The tension between Pets In Need escalated in the fall after seven puppies died in the nonprofit's custody while being transported from Central Valley last August, triggering an investigation of animal cruelty. The nonprofit in November gave the city a one-year notice of termination, though the two sides had since agreed to delay the severance by six months as they work on a new deal.

While the agreements mostly pertain to the duties that nonprofits are required to perform, in some cases they also outline the city's responsibilities. The audit cites the example of Pets In Need, which attributed its intention to cut ties with Palo Alto to "the failure of the City to meet the timelines for the construction and renovation projects specified in the Agreement."

The audit recommends that Palo Alto "ensure that the City's responsibilities to be included in the agreement are achievable before agreements are signed to avoid noncompliance with the agreements."

Kiely Nose, director of the Administrative Services Department, said the city's first step will be to "really beef up and revise our policies and procedure regarding the agreements in alignment with the recommendations contained in the audit." Both she and City Manager Ed Shikada largely agreed with the report's findings and committed to strengthening the city's policies on monitoring its agreements with nonprofits.

"This audit was really a good opportunity for us to look at where are the areas that we could perhaps do some beefing up in terms of maintaining a level of consistency in expectations while also taking a bit of a risk assessment framework perspective on where our attention should be paid," Shikada said.

Baker Tilly recommended that the city maintain a list of all nonprofit agreements and "periodically report to the City Council on performance of nonprofit organizations and any issues identified, resolved, and outstanding as appropriate," the audit states.

Without good governance, the audit states, "the City may not manage risks effectively to achieve the City's goals and serve the interest of its citizens."

The firm also recommends that the city track the performance of nonprofit organizations "to identify the risks associated with continuing the relationships (e.g. risk of not achieving the goals, reputation risk) and discontinuing the relationship (e.g. risk on not finding alternatives) and take appropriate actions to address the risks in a timely manner."

The audit recommends that all nonprofit agreements "consistently define the service level expectations, including the goals, performance measures, and reporting requirements that enable the City to monitor the performance of the nonprofit organizations and achievement of intended benefits."

"The higher the risk associated with an agreement, the more refined the performance and reporting expectations should be," the audit states. "The City should also ensure that appropriate City resources are assigned to high-risk agreements to manage such contracts and relationships adequately. Underperformance should be discussed with the organizations before it becomes an issue, and appropriate corrective actions should be taken to improve performance."

As the city moves toward strengthening its policies, Mayor Pat Burt said it's important for the city to strike a balance between ensuring compliance and allowing some of the smaller nonprofit partners to operate without stringent and burdensome reporting requirements.

"How do we assure that as we tighten our standards where appropriate, we don't really choke off the ability of some of these community partners to help our community in very cost-efficient and beneficial ways?" Burt asked.

Council member Alison Cormack also concurred with the report's findings and said it's important for the city to create a new framework for nonprofits to ensure that they are all treated in a similar fashion. At the same time, she acknowledged that the city will have to pay more attention to the risks associated with nonprofits that provide services pertaining to animal safety and children.

"There are some real obvious places where, regardless of the amount or the wonderfulness of the people providing these services, we're going to have to be more thoughtful," Cormack said.