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DISCUSSION REGARDING POTENTIAL CHANGES TO CHAPTER 5.10 OF THE COUNCIL POLICY MANUAL
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RECOMMENDATION
This discussion relates to potential changes to Chapter 5.10 of the Council Policy Manual, Mayor and Council Discretionary Funding.
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Summary
At the May 12, 2025, Audit Committee meeting the Audit Committee received the final report from Moss Adams regarding its review of the Council discretionary funds (Attachment A). The report made findings and recommendations for potential policy changes to Council Policy Manual Chapter 5.10, Mayor and Council Discretionary Funding (Attachment B). At the June 16, 2025, Legislation and Environmental Committee meeting, the Chair requested that a discussion of discretionary fund policy be brought to the Committee’s August meeting to address potential changes to clarify the parameters and procedures for the expenditures of the Council discretionary funds.
Accordingly, this discussion has been agendized before the Legislation and Environmental Committee to allow the Committee to discuss and direct staff regarding desired changes, if any, to Chapter 5.10 of the Council Policy Manual.
DISCUSSION
Background
Council Policy Manual Chapter 5.10 provides the expenditure guidelines for the discretionary funds allocated by the Mayor and Council to be expended by the Mayor and Council in fiscal years when discretionary funding is explicitly adopted in the annual operating budget.
In December 2023, the Legislation and Environmental Committee began its review of the full Council Policy Manual. On August 28, 2024, the Committee requested the review of the Council discretionary fund policy be expedited. However, on September 9, 2024, by Motion 2024-09-09-0303 the Council Audit Committee added the review of the Council discretionary funds procedures into the Auditor’s Fiscal Year 24-25 Internal Audit Program. Therefore, the review and potential update to the discretionary fund policy requested by the Legislation and Environmental Committee was deferred pending the outcome of Auditor’s best practice review. The Moss Adams final report was provided to the Council Audit Committee on May 12, 2025.
The Moss Adams report made two findings and recommendations and identified process improvement opportunities. The report’s first finding was as follows:
“Finding: Six out of 42 expenditures tested appeared to be for a travel-related personal benefit, which did not comply with the City’s Council Policy Manual, Chapter 5.10 Mayor and Council Discretionary Funding and Chapter 2.04 City Council Travel and Expenses.
Recommendation: Implement a centralized pre-approval process for travel expenditures and mandatory training sessions for the Mayor, Council Members, and relevant staff to ensure adherence to the applicable policies. Violations should result in immediate corrective actions, including reimbursement.”
The second finding was as follows:
“Finding: Ten out of 42 expenditures appeared to show use of discretionary funds that provided benefits for select groups of people in return for the donations made, without documentation of rationale for the funding decision. Examples include multiple golf events that allowed for four to eight select people to participate and gain access to prizes, meals, and raffles, as well as events where donations were rewarded with table seats for one to 16 individuals with drinks and meals included.
Recommendation: The City should provide regular training to the Mayor, Council Members, and all relevant personnel on the policy requirements and ethical considerations for the use of public funds. The City should also strengthen the approval process and conduct periodic internal audits to ensure compliance.”
In addition, Moss Adams identified the following three process improvement opportunities that did not rise to the level of a finding: (1) institution of a formal application process; (2) clarification of the review structure; and (3) implementation of a Council stipend for administrative costs.
Present Situation
Below is a breakdown of potential options to address the findings and recommendations made in the Moss Adams report.
Travel Related Approvals
The City Council receives a separate budget, outside of the discretionary funds, to cover travel expenses, such as the registration for, the travel to, and the hotel stay for the League of California Cities Conference. These travel expenditures fall under Council Policy Manual Chapter 2.04, City Council Travel and Expenses (Attachment C).
In addition, Council Policy Manual section 5.10.010(2)(C) allows for the reimbursement of mileage with discretionary funds. This section provides that the authorized and reimbursable expenses must meet the following conditions:
“i) Communication or meeting with constituents.
ii) Attend local events that have a community benefit
iii) Attend City-sponsored events.
iv) Events and meetings shall not be political or religious in nature.”
The Moss Adams report identified “two instances of first-class seat upgrades and four instances of hotel costs outside internal City policies, with nightly rates ranging from $349 to $679.” Accordingly, Moss Adams recommended that the City “Streamline the approval process to ensure all travel-related expenses are reviewed centrally for compliance before the trip occurs.”
Because travel expenses are covered under a separate budget item and there is a specific travel policy, to address this audit report finding, the Committee could consider recommending the removal of travel reimbursement from the discretionary fund policy. Alternatively, if the use of discretionary funds is still desired for travel reimbursement, the Committee could consider recommending that the policy reference and incorporate the Chapter 2.04 requirements. Therefore, the same review and approval process would be utilized for all travel reimbursements.
Clarify Funding Criteria
The Moss Adams report further recommended that the City “[d]efine and communicate specific criteria for what constitutes an appropriate use of discretionary funds, ensuring that all expenditures align with policy requirements.”
Currently, Chapter 5.10 provides the following categories for authorized and reimbursable expenses:
“i) Has a community benefit.
ii) Cannot be religious or political in nature.
iii) Cannot be a personal benefit.
These terms are currently undefined in the policy. These broad and undefined terms can cause confusion, especially when determining what constitutes a “community benefit.”
Staff reviewed several sample city policies including City of Carmel-by-the-Sea (Attachment D), City of Palmdale (Attachment E), and the City of Cudahy (Attachment F). Each of these policies, included a statement regarding the general definition of “public purpose” or “public benefit” like the following:
“In general, a public benefit is defined as an activity or service that is open and accessible to all public members regardless of race, gender, sexual orientation, religious affiliation, etc., without restriction.” (See Attachment F).
Additionally, these cities set restrictions on what organizations may receive the discretionary funds. These have been broken down in the following chart:
In addition to the above, the City of Carmel-by-the-Sea also includes a chart to help explain how to demonstrate a public benefit, which has been included below:
Additionally, the Moss Adams report suggests expenditures on sponsorships and other ticketed events, such as exclusive golf events which call for donations in exchange for event tickets, appear to benefit only select individuals rather than the broader community. Such events are currently authorized as they are viewed as indirect charitable donations. To ensure clarity, staff recommends that Committee address whether it would like to allow or prohibit these ticketed events and, if allowed, set parameters on what purchases are allowed.
Maintain Detailed Records
The Moss Adams report also recommended that the City “[e]nsure that all funding requests and approvals are documented thoroughly, including the rationale for each decision and how it aligns with the policy.” The City’s current “Request for Expenditure” form for the use of discretionary funds is included as Attachment G to this report. The form can be updated to reflect any updated funding criteria or other policy changes.
Training
The report further recommends that the City provide training for the Mayor, Council Members, and relevant staff on both Council Policy Manual Chapter 2.04, City Council Travel and Expenses, and Chapter 5.10 of the Council Policy Manual, Mayor and Council Discretionary Funding.
For some City administrative policies, like the City’s E-Mail Access and Acceptable Use policy, employees are required to sign an acknowledgement form (Attachment H). Such a form could be incorporated into one or both policies and a review and signature of the Mayor and Councilmembers could be required on a set basis.
If additional or alternative training or if training for staff is desired, staff seeks direction regarding what the Committee would like to be incorporated into the policy.
Regular Audits and Public Reporting
Additionally, the report recommends that the City “[i]mplement regular audits of travel expenses to monitor adherence to the policy, with findings to be reported publicly to enhance transparency” and “[r]egularly audit and report on the use of discretionary funds, including the outcomes of funded activities, to the public to enhance transparency and accountability in fund management.”
Under Chapter 5.10, the policy is enforced by the City Council. Therefore, like the Commission attendance reports submitted under Council Policy 3.03.010(3), the policy could incorporate a set review schedule for the City Council to receive a report of expenditures during a regularly scheduled Council Meeting, such as an annual review before budget season. This way the City Council could take any appropriate enforcement action needed and assess the allocation of the discretionary funds in light of past expenditures.
Enforcement
The Moss Adams report recommends that “[f]or any violations detected, such as inappropriate expenditures, [the City] enforce immediate corrective actions including reimbursement of disallowed expenses” (emphasis added).
As addressed above, the discretionary fund policy is enforced by the City Council consistent with section 5.10.010(4). The policy does not call for a specific timeframe for violations to be addressed. The Committee could consider the incorporation of an enforcement timeframe to address this recommendation.
Formal Application Process
The report concluded that “[b]est practices for managing Council discretionary funds include implementing a formal application process for entities seeking funding.” Outside of its report, Moss Adams provided the City Manager’s Office with the City of Carmel-by-the-Sea policy as an example of these best practices.
In addition to the City of Carmel-by-the-Sea policy, the other staff reviewed cities (City of Palmdale and City of Cudahy) also had an application process. Such a process shifts the burden onto the applicant to justify the public benefit and mitigates the risks of (or appearance of) inconsistent funding decisions and favoritism.
If the Committee recommends the implementation of a formal application process, the policy will be restructured and an application form drafted for the Committee’s consideration.
Review Structure
Currently, under section 5.10.030, both the City Attorney's Office and the City Manager's Office responsibilities include “[r]eview requests for compliance with City policies and processes.”
Moss Adams concluded: “The City should establish a clear hierarchy for reviewing discretionary fund expenditure requests to ensure the expenses are appropriate and compliant with the policy. The City Attorney’s Office should focus on ensuring legal compliance for expenditure requests, while the City Manager’s Office should evaluate alignment with the City’s strategic priorities and budget.” The report further suggests, “[i]mplementing a sequential review process, where the City Attorney’s Office reviews requests first and the City Manager’s Office gives final approval. . .”
As a practical matter, the City Attorney’s Office does focus its review on ensuring legal compliance for expenditure requests. Additionally, the City Attorney’s Office review is first and the City Manager’s Office has final approval. However, the policy can be clarified to better reflect the review responsibilities and sequential review.
Council Stipend for Administrative Costs
Because discretionary funds could be “potentially misused for administrative costs, including cell phone bills, personal car, internet access fees, professional development and membership dues,” the Moss Adams report recommended establishing “stipend system.” This would include establishing procedures for the issuance of a fixed monthly stipend with reporting requirements for usage.
First, membership dues are currently covered under section 5.10.010(2)(D). If the Committee would like to exclude these dues, the policy can be revised to reflect this. Similarly, the definition of “a personal benefit” could be clarified to exclude these administrative costs.
Second, because changes to introduce a stipend exceed the scope of Council Policy Manual Chapter 5.10, they have not been addressed in this report. If the Committee has interest in establishing a separate policy for the issuance of stipends, staff can return with additional information as requested.
Conclusion
Staff seeks direction regarding desired changes, if any, to Chapter 5.10 of the Council Policy Manual.
FINANCIAL SUMMARY
Providing direction and clarification on referrals to the Civil Grand Jury or the District Attorney’s Office will not impact the City’s General or Special Funds in any way.
Attachment A - Moss Adams Report
Attachment B - Council Policy Manual Chapter 5.10
Attachment C - Council Policy Manual Chapter 2.04
Attachment D - City of Carmel Discretionary Funds Policy
Attachment E - City of Palmdale Discretionary Funds Program
Attachment F - City of Cudahy Discretionary Funds Policy
Attachment G - 2025-2026 Discretionary funds Form
Attachment H - Page 10 of IT04