HomeMy WebLinkAbout2016-11-15 Finance Committee Summary Minutes (2)
Special Meeting
Tuesday, November 15, 2016
Chairperson Filseth called the meeting to order at 6:06 P.M. in the Community Meeting Room, 250 Hamilton Avenue, Palo Alto, California.
Present: Filseth (Chair), Holman, Schmid, Wolbach
Absent:
Oral Communications
None.
Action Items
1. Macias Gini & O'Connell's Audit of the City of Palo Alto's Financial Statements as of June 30, 2016, and Management Letter
Council Member Schmid: Oh sorry. It seems logical that we do Number 2 before Number 1. Number 1 asks us to approve the audit. The Audit refers to the Comprehensive Annual Financial Report
(CAFR). It would seem that if we have any questions about that, that we get them resolved before we approve the audit.
Chair Filseth: Sorry. Let me ask the City Auditor, the Audit is mostly about two or three very specific things, isn’t it?
Harriet Richardson, City Auditor: The Audit Reports are whether or not the financial statements are fairly reported in all material aspects, and then you have the financial statements
there, which MGO is here to discuss and we have Finance Staff here to answer questions where you can get into the details, and that’s really how we’ve done it in the past.
Council Member Schmid: If I could just make the point that in the audit letter it specifically refers under the aspects of accounting practices…
James Keene, City Manager: Do you have the page number for that?
Council Member Schmid: It’s on Packet Page 12 and 13. It refers to notes 11 and 12 in the CAFR Report. It seems to me those are issues we will be discussing and it would be good to hear
the audit input on that, since it describes in there how they have had interactions with the Staff about the preparation of those footnotes.
Chair Filseth: My inclination is that it would be preferable, since we have MGO here, to proceed with Item 1, but let me ask Staff for a comment on that one as well.
Lalo Perez, Chief Financial Officer: Lalo Perez, Chief Financial Officer. That’s how we’ve done it. There is also no reason, if the Committee wanted to hold off on the final vote of
the audit until you went through Item 2, that’s fine too. MGO has agreed to stay. They typically do for Item 2 as well, but it’s not an issue for us.
Chair Filseth: So you folks are planning on staying for Item 2?
James Keene, City Manager: Yeah, I was going to argue we stay the course until I heard this, because otherwise we would be paying them more money, but since they’re going to be here…
Chair Filseth: The only reason I can think of is if there is anybody, any speakers from the public that want to speak to Item 1 but don’t want to stay around for Item 2. But it’s only
Neilson. Why don’t we do that then. Why don’t we reorder and do Item Number 2 before Item Number 1? Is everybody okay with that?
Mr. Perez: You’re the lead on that but my suggestion would be that you might want to hear from the auditor to first hear what they have found, and then we can proceed to the Staff presentation
on 2. It kinds of goes in sequence, and then come back to that.
Chair Filseth: Are you okay with that?
James Keene, City Manager: Yeah.
Chair Filseth: Let’s do that then. Neilson, we beg your forbearance.
Neilson Buchanan: I’m sitting here remembering my professional career which involves some 21 audits of a public entity, so I’m very reminiscent of how much fun it is to put these things
to bed. I want to preface this by, I have absolutely no doubt that the audit’s in pristine condition, but I want to ask a question, and unfortunately, when you ask a question at a time
like this, people always kind of worry there is something untoward that I might be thinking about the audit, and I don’t. I want to ask a question purely for information point of view
and all I’ll be asking the Committee to do is to ask Staff to follow up on my puzzlement. My puzzlement has to do with the parking assessment district for the University Avenue. Over
the course of the last two to three years, working on permit parking, big questions have come up on the interface between the residential property parking and the commercial core. I
have done everything within my capabilities to try to understand how decisions are made, what decisions are made, how pricing is going to interface, so the only thing I would ask you
to ask the auditors in the prevue of their financial review, are the funds that flow from the participants in the Parking Assessment District that seem to come through the City, the
City takes off a small administrative fee and then it seems to go on to the bond holders. All I really would like to know and I would like the Council to know is that part of what the
auditors have reviewed in the tons of different accounts and cash flows. So that’s, hopefully I’m expressing it in a simple enough fashion. Now the reason I asked for that is in the
next 120 days or so the City Council is going to get a parking fee study coming through, and that’s going to trigger exactly how is all the pricing differentials and incentives for all
parking, including Caltrain and the neighborhoods, and the more we know about this question the better that discussion is going to be. So once again, I don’t mean to make any representation
that something is not right, but I do want to represent that it is really hard to figure out how the parking assessment district operates, who’s got authority to set fees, who owns title
of the garages. I have gone to every meeting possible asking those questions, and all I’ve gotten is conflicting information. Thank you.
Ms. Richardson: Good evening Mr. Chair and members of the Committee, Harriett Richardson, City Auditor. In accordance with the City Charter and the Palo Alto Muni Code requirements,
our office staff assists the City Auditor, coordinates the City’s Annual Financial Audit. Macias, Gini & O’Connell, also called MGO for short, conducted the audit for the sixth year.
We just recently renewed their contract, so they’re in the first year of a new contract period that we did through requests for proposal process. They are presenting nine reports tonight.
They issued an unmodified opinion for all of the City’s basic financial statements, which means that they concluded that the statements presented are presented fairly in all material
respects. So the auditors did not have any findings or recommendations this year and there were no outstanding recommendations from prior fiscal years. I would like to point out that
the audits that MGO conducts focus on financial reporting and whether there are any material misstatements, where the audits that my office conducts address operational risk, compliance
and strategic objectives that may or may not have financial impact; however, during the course of the audit we do meet with MGO and talk about the recently completed audits from my office
and audits that are in progress and other issues that we may be aware of that could potentially impact the City’s financial statements. I would like to thank David Bullick and Irene
Chan from MGO as well as Cindy Pon for coming here tonight in place of David, for their diligence and hard work in completing the audit. I would also like to thank Lalo Perez, David
Ramberg and Laura Kuryk and her staff in Administrative Services Department (ASD) for the assistance they provide to MGO to complete the audit on time, but more importantly, for the
work they do year-round to ensure that we receive an unmodified opinion on our financial statements as well as no audit findings. So now I will turn it over to Irene, right here. This
is Irene and this is Cindy, from MGO and they are here to present their results of the Report to you.
Irene Chan, Senior Manager, Macias Gini & O’Connell: Thank you Harriett. Good evening Council Members. Irene Chan, Senior Manager from MGO, the Engagements Manager as well. So thank
you for inviting us here to present to you the results of the audits. We’ll start off with the attachments in your meeting packets. You have actually six attachments there, first off
with the Report to the City Council. That is the required communication from us to the governing board. It summarizes the results of the audits and if there is any current year findings
that will be included in there too. I will go over in details a little bit after this. The second attachment is the original Water Quality Control Plan financial statements that discuss
the operating cost of the plans and how the costs are allocated among the members. The third attachment is the Public Improvement Cooperation. That’s related to your 2002 Certificate
of Participation that pays for the cap re-improvements for your downtown parking garages. Following that is the General Obligation (GO) Bonds for the library projects audits that you
(inaudible) and approved it in 2008 for the construction of the City’s libraries and the financial statements of the project activities funded by the bond proceeds. Again, the appropriation
limit that’s on the spending limit on the appropriation established at the beginning of the year and cable TV franchise, the audit of the franchise fee and also the distribution of the
net receipts to the members. On the second item, that includes just the CAFR. The CAFR itself, obviously it’s a City-wide financial statement that talks about the financial positions
of the City. During this year there isn’t too much of exciting activities going on, it’s rather quiet. There is a footnote that discusses some activities like paying off the partial
of the 2010 and 2013 GO Bonds that you guys approved last year as well. There is a footnote that discusses pension, postemployment benefits of the City’s employees. So like Harriett
mentioned, I am happy to say that based on our audit, the results we offer, we basically gave unmodified opinions. Everything is clean. There is no current year finding that results
from the audit. Out of the prior year finding has been corrected as of last year, so there isn’t anything reported as well. So with that said, I will go over details of the Report to
the City Council with you. If you go to the attachments, the required communication starting on page 1, and there are really two portions I would say. The first part of it talks about
the quality aspects of the financial statements. It talks about what the standard coming in this year as new standards, and also estimates to your financial statement what sensitive
information included on your CAFR. The second part talks about the results of the audit, any issue that we have encountered.
Mr. Perez: Sorry Irene. For the Finance Committee members it starts on Page 12. Thank you Irene.
Ms. Chan: Thanks Lalo. So this year there are four new General Accounting Standards Board (GASB) standards that became effective for the Fiscal Year 2016. There isn’t too big of impacts
to the financial statement. You see the GASB rates 72, 73, 76 and 79. After that is the list of sensitive estimates that is used on your financial statement. So those are estimates based
on management methodology to determine for the balances of the year. Very typical is the fair value of the City’s investments. GASB 72 this year adds some additional guidance on how
to measure these fair value and they added a new disclosure, basically shows additional information on how the fair value was measured. You can actually see that in the Footnote 3 in
the CAFR. Other estimates include the allowances of your receivables based on the collectability of the notes and loans outstanding, the useful life of certain fixed assets, and some
other estimates are based on the actuary studies. As Council Member Schmid talked about that there is a sensitive disclosure that is considered sensitive would be Note 11 for your pension
plan, 12 for your post-employment benefits to the employees and the community contingency Note 16. So that’s the first half of the required communication. The second half of that talks
about the issue that we have encountered with the management, such as if there are any difficulties or if there is any material misstatements based on the results and I am glad to say
there are no difficulties we encountered. We really appreciate the assistance from the management throughout the course of the audit. To me the audit is pretty efficient and went pretty
well. I would say that there is a pretty quiet year before the new GASB came up for the Other Post Employment Benefits (OPEB), which is coming up for the City’s Fiscal Year 2018. So
that concludes my presentations. I guess I will open up for questions if you guys have any.
Mr. Perez: Chair Filseth, before you proceed to questions, may I address the speakers commence, that way if the speaker decides he doesn’t want to wait, he has that option?
Chair Filseth: Yes.
Mr. Perez: Thank you for that. It is a very complex area and we have had the discussion multiple times including what some of the members of the Parking Committee, the University Avenue
that have come and spoken to you. So there are three parts, just to quickly remind you of them. There is the parking assessment, which is the assessment that issued the bonds to build
the garages. That is the money we collect from the partials and it goes directly to the bonds. That’s one of the easiest things that an auditor could review because it is segregated
funding, there are disclosure requirements and it’s pretty clean and said. The second one is Parking Permit Fund. Now that you have a lot of latitude, a lot of control. You as the Council
can set the fees based on recommendations that we give you. We have an increase of fees for the University Parking District, for example, in several years. You could set them at any
rate that you wanted to. You could use those funds for whatever you wanted to. We segregate them in a special fund and we call them out in our financials, in our budget, and therefore,
in our financials. It’s totally understood why it’s difficult to follow, but there seems to be confusion between the assessment and the permit fees. They are two distinctively different
pots of funds. Then the third one is the parking in-lieu, which again, that is limited to the use and it has been designated for the construction of garages in the downtown district
and you have somewhere in the $4 million balance for that. So I would be more than happy to sit down with Mr. Buchanan and get into some of the details or questions he has, and I am
sure that Harriett would be able to do the same on the audit side and go through those details, but I can understand the challenge to getting this all understood, because it is very
complex and three separate entities per se.
Chair Filseth: The third one is the parking in-lieu fees is for the construction of future garages, but doesn’t have anything to do with the existing garages, is that correct?
Mr. Perez: That is exactly correct, and that’s why it gets very confusing, because the term “assessment” seems to be used among all three of those pots of funds, and that’s when it becomes
very confusing, because if Staff’s here assessment, we automatically go to the bond issuance and the garages that were built, but then people are really talking about the permit fees
fund, which is a different entity. So right now the majority of the use of the funds for the parking fees are for operation and maintenance of the parking lots and garages, so that even
complicates it even more, because it’s the same garages that were built, but that’s not what’s paying for the garages to be built, it’s paying for the operation and maintenance and for
staffing to support the administration of the fees and managing the contracts and agreements for the operational maintenance.
Mr. Keene: So I think, as Lalo said, he’s more and the Staff is more than willing to dive deeper outside of this meeting. I would just say that I think one of the things that will get,
I don’t know if it will ever get completely clear, between what is what we’re doing appropriately according to accepted financial practices, and what is legal, versus what different
constituencies might think of as fair, because we certainly have some folks on the business community side of stuff who pound on us about how they see the connection on the permit fees
and on the Parking Assessment District and kind of get it all mangled up. They are making an argument about fairness, which is, you know, a perspective, and I just want to separate that
out from, so the kind of the CAFR kind of concerns that connect back to the parking assessment district component here.
Chair Filseth: Thank you very much for the explanation. Questions on the Audit Report? Council Member Schmid.
Council Member Schmid: I guess the key question is, who controls, who uses the parking that has been constructed. Now my understanding is back in, was it the 80’s or the 90’s, everyone
who participated in the parking assessment payments were given free parking for a number of square footage that was entered into the Assessment District, which created something like
9,000 you know, parking rights. Is that part of the issue here is we have created, through the Parking Assessment District, parking rights that do not necessarily have spaces?
Ms. Richardson: That question came up during the parking funds audit, so we looked at that and it didn’t actually give them rights to that many spaces. They paid into the fund for a
portion of the cost based on the percentage of spaces they had, but it didn’t actually give them rights to that many spaces, and I know that sometimes Staff Reports indicates that there’s
prepaid spaces for that many, and that Planning has looked at whether or not they should revisit the way they approach that, but it doesn’t actually give them rights to that many spaces.
If it did we would need to have several more garages to accommodate all those spaces.
Council Member Schmid: Yeah, I just note whenever there is a rebuilding, redevelopment in the downtown, they come and start by saying “we have guaranteed X number of spaces” and that’s
always been accepted.
Ms. Richardson: That’s been accepted and I know that Planning has been looking at that because that’s not really the intent, that they are guaranteed that many spaces.
Council Member Schmid: Okay, so you would be a good reference if that issue arises?
Ms. Richardson: It will probably come up again.
Council Member Schmid: Thank you.
Chair Filseth: Questions and comments, I think, from the Committee on the audit?
Council Member Schmid: Well, let me (inaudible) certain financial statement disclosures are particularly sensitive because of their significance to financial statement users. The most
sensitive disclosure affecting the financial statements were the disclosures of the City’s pension plans in Note 11, the retiree health benefits in Note 12. Now you mentioned in your
letter that you had dialogs with the Staff about how they dealt with and treated certain of the information in there, and I notice in CAFR there are a couple of sections under Note 11
and 12 that have numbers. Now those numbers are sensitive and controversial. Can you tell us anything about, I guess your job was to make sure that things were done correctly and sensitively
to the data that was given. Can you tell us about your dialogs with the Staff on this?
Cynthia Pon, Partner, Macias Gini & O’Connell: In terms of sensitivity, what is meant by this is that the amounts and the disclosures related to the pension disclosure and the retiree
health disclosures, there are actual assumptions or other variables that if there are changes in any of those variables, the amounts in the financial statements and the disclosures will
change significantly. So for example, currently the pension discount rate is at 7.65 percent, so you know, if there is a change in California Public Employee Retirement System (CalPERS)
actuarial discount rate from 7.65 percent to 6.65 or 8.65, the amounts in the City’s financial statements will change accordingly as well. So that’s what is meant by, in terms of significance
is that these amounts and disclosures will fluctuate, depending on management’s estimates of these variables included imbedded in these assumptions.
Council Member Schmid: Now actually I thought that in our discussions and approval of the pension, we had accepted a rate of 7.5 as the discount rate. There is extensive argument about
whether that rate was too high and yet in your Report and the CAFR it says 7.65?
Ms. Pon: 7.65.
Council Member Schmid: Where did that come from?
Ms. Pon: The delta is that there is a discussion I believe on Page, I forgot what page of the Report.
Council Member Schmid: Page 87.
Ms. Pon: That there has been a change this year. In the past, it was 7.5, but it was net of the Administrative Fee of 0.15. What CalPERS did this last year was they updated the amounts
to comply with GASB Statement 67, 68, and included the Administrative Fee as part of the discount rate. So in the past it was net, now it’s gross.
Council Member Schmid: The last communication we got from CalPERS was that they were adding an addendum that they were going to lower the discount rate each time there was a performance
above it. That’s the only change that I think we were informed of. The fact that they have actually raised the rate during a time when their performance has been disastrous is quite
striking. There was no discussion of…
Ms. Pon: I think there is a difference between the funding requirements that CalPERS provided, study to the City every year saying “this is the funding requirement, this is the annual
required contribution” for various entities, participants of their plan versus the accounting requirements where they could throw in, say, well this is your net pension liability versus
your unfunded actuarial accrued liability. So there is a change in the way pension accounting is being reported with GASB 68 this last two years now versus in the past an organization
would show a liability if an organization did not pay the annual required contribution for that year. So in the past if you didn’t pay that mortgage you would have a liability. Now they
say, well every year they’re trying to measure what is the net pension liability for the year and this is what’s now being reported on the financial statements. As such we’ve been seeing
a lot of our clients with more volatility in their statement of net position or what used to be called the balance sheet. You know, there is more volatility now and as a result the expenses
are also more volatile in terms of the full accrual presentation. But there isn’t a change in the way an organization has been funding it, so when you look at the general fund, for example,
the required contribution year over year, the contribution amount generally has been increasing, but there isn’t that volatility that one now sees in the financial statements on an accrual
basis.
Council Member Schmid: What is the role of the external auditor going through the accounts in…
Ms. Pon: We review the results from the actuarial reports. We perform census testing on the data that is provided to the actuary to come up with the concluded amounts. We evaluate the
results as it relates to other comparable entities.
Council Member Schmid: But you do not evaluate the discount rate used?
Ms. Pon: We look to see if it is reasonable.
Council Member Schmid: The reason I raise this is they have had substantial internal discussions between their auditor and their own internal auditor has said it was time to change the
discount rate. So you do not look at the discussion that our pension auditor or CalPERS auditor had?
Ms. Pon: Well, you know, it some way, another member of our organization does do that, because we, for the 2016, 2015, over the last few years our firm is also the CalPERS financial
statement auditors, so we have looked at that, but it is a different office and a different team that’s been doing that, but we do look at that as part of the CalPERS audit. Now that’s
a different hat.
Mr. Keene: I do think it’s important to remember that there are some requirements in the financial reports and the disclosures that have to be followed that don’t always hit all of the
strategic policy or even longer term fiscal issues that we’re having in parallel to this. I mean not only during our budget discussions, but, you know, Lalo will be talking to you this
year about the fact that the current rate of return in CalPERS is significantly down and their schedule right now would call of them to not revisit resetting that figure until February
of 2018, so one of the more interesting things for us, both policy wise and maybe even politically in a sense, is what do we want to do as a City to advocate for a faster adjustment
downward on that investment return. I mean, that’s where the real differences are going to come for us and, of course, we’re just one city even in that regard. But, you know, I think
the auditors are bound to adhere to certain requirements, but even then I think the main point of this was to identify that this is variable potentially volatile and that these liabilities
could significantly change as we go forward. That’s what I see the note saying.
Ms. Pon: And in terms of funding policy, we have other clients that fund more than the annual required contribution, but they are a minority versus a majority, but we do have clients
that do fund more because they are looking down the horizon as well and saying, you know, when I have one time revenues it may be prudent for my city or my district to save that and
put it into that, so in the future my annual required contribution rate won’t be as high. So that’s a policy decision that other organizations have been grappling with.
Council Member Schmid: Yeah, I would just make the note that you mentioned that this is sensitive, it is extremely sensitive to the City because we are entering into contracts each year
that, for salary increases that have long-term pension and health care cost attached that have huge implications for our future, and that number which was in debate of a discount rate
is very important, and I guess I would think that an external auditor, as you say you have lots of clients who are making choices paying different rates would indicate that this number
is a number that should be looked at carefully.
Chair Filseth: I have a question or two on exactly this section as well, so I was going to say, is there anybody else who has questions on this specific topic? I want to make sure that,
I don’t know where the role of the auditor leaves off and the role of our Finance Department begins, and I don’t want to spend too much time talking about our Finance Department when
we have the auditor here, but I didn’t quite understand the discussion about…
Council Member Schmid: What page are you on?
Chair Filseth: I’m on Page 87 here. The discussion of discount rate, there is a discussion of, sorry. I don’t know what Packet Page.
Mr. Perez: Packet Page 200.
Chair Filseth: Packet Page 200, thank you. There is a discussion here of, should we use the municipal bond rate instead of the 7.65 percent discount rate, and I didn’t quite understand
that discussion.
Ms. Pon: Under the Accounting Standards 68, if the pension plan, when they project out their liabilities going forward and they deemed that they don’t have enough funds on hand, then
what will happen or what is required is that instead of using a long-term discount rate, they would need to blend it with a municipal bond rate, usually a lower rate, and they will be,
I guess not required, to use a lower discount rate, but since the CalPERS did a stress test on their current situation and deemed that using the long-term rate as the current situation
is appropriate.
Chair Filseth: Okay, I kind of guessed it was something like that. So the discount rate isn’t exactly the same as CalPERS’s expected return rate, right? The discount rate is what we
have to discount the future value of the unfunded liability at to figure out what it’s worth today, right? So why would we not use our cost of capital which I assume is the municipal
bond rate which is going to be 3 or 4 percent, right?
Ms. Pon: Because in terms of CalPERS portfolio, it’s more than just U.S. Government Municipal Bonds. They also have an extensive investment portfolio that’s…
Chair Filseth: But isn’t the critical number the City’s cost of financing, not CalPERS return rate?
Ms. Pon: No.
Mr. Perez: Yes, I guess, to interject a little bit, and that’s going to be on the accounting side. You’re still not dealing with the trust side, right, and I think that’s really where
you want to focus on, the trust, because that’s where you’re going to make the payment. So it’s important to know what it is on the accounting side for that number. If I may interrupt
here, I can probably give you a quick briefing. I think it’s appropriate. Every year CalPERS holds a forum and it was three weeks ago. I attended with a couple of members of my Staff
and Human Resources (HR) and it was quite a change in scenery, you’ll be happy to hear that Council Member Schmid. There was a very strong push by the agencies and by Staff of CalPERS
that the world was not going to be 7.5 and a deep acknowledgement with the Board all present for the most part, I kind of looked for that. There were presentations done where pension
trust experts were video clipped and shown to the audience by the Chief Investment Officer saying, look, everybody is talking about 4 to 6 percent returns. There’s no way we can hit
7.5. We’re admitting that to you right now.
Council Member Holman: That was pre-election.
Mr. Perez: Correct. Well you could argue that post-election the bond market is getting better, but we won’t go there. The message was clear that they recognized that it was not sustainable
and what was driving it down was the global markets, to your point, global equities, global bonds. They were doing well in their real estate, they were doing excellent in our U.S. equities
and they did a survey, so I’ll send you the results of the survey because it’s out now, I just didn’t happen to bring it with me. They were asking all of us through the league, though
that session and various other forums, if you believe that it is time to change the rate of return assumption, are you willing to take it all at once, or phase it in? The issue has been
that there’s been a lot of pressure and the Board’s reluctance to move on doing it all at once is because what happens is then agencies have to have a much bigger annual required contribution
to make that payment, an so they’re trying to get a gauge so they can present that information to the Board in terms of what should be done, because they acknowledge that we probably
can’t wait till February of 2018, and that was the message that we were saying as finance officers that were in there, because finance officers, HR staff, we’re all mixed in this room,
and us as finance officers are saying, why wait. We know you’re not going to make it. You know you’re not going to make it. Why postpone it? So that’s why they are doing the survey.
The Board is going to take this into discussions this week, they were presenting the results of the survey. So I think it’s going to be a mixed bag. The good thing is that we’re learning
more and more that there are various ways to go forward with this. That we’re not limited to what PERS parameters are set and so I think we’re getting better education, better educated
as I attend more of these sessions, as I spend more time with Mr. Bartel and I think we’re going to provide you options on how we do this. Basically what we’re doing is we going to a
negative amortization when we continue to have these returns that are less than 7.5, so now CalPERS has shown them in our reports and they show you what the different amortization, what
it does. So you have options on how you can prefund this because you can see that it makes sense. So our plan, not necessarily for tonight, is to bring you that information, bring you
those options, have that part of the education process for all of us so we can see what options we have. That we don’t necessarily have to wait for CalPERS to make a change on the rate.
If they do make a change, though, we have to be prepared because it will alter whatever plans we make, because it’s like refinancing your mortgage. You go from 30 to 15, but also then
your variable rate changes, a double whammy potentially, so we will have to be well prepared and informed.
Chair Filseth: If I can summarize here then, what we’re saying is that 7.65 percent, that number is already a little bit out of date, okay, and when you said this is a sensitive number,
you meant sensitive in the technical sense, right? Okay, but at 7.65 percent, you know, the City owes half a billion dollars it doesn’t have and if you change 7.65 percent to 5 percent,
how big is the number?
Ms. Pon: If you go to Page 90, there is a disclosure on the sensitivity chart, plus one and minus one percent from 7.65 percent.
Council Member Schmid: What page?
Ms. Pon: Um, Page 90.
Mr. Perez: Page 203 of your Packet, and it’s on the upper part of the page.
Chair Filseth: You are going from 6.5 to 5?
Ms. Pon: Yeah. But in terms of, because this is as of a measurement date of June 30, 2015, so that’s another element is terms of sensitivity, the data it takes, the time it takes to
arrive and compute these amounts, it takes some time, so this information is as of 2015, or ’14 rolling to ’15 and at that point in time with a 7.65 the City miscellaneous plan has a
net pension liability of $206 million, in the safety plan and $113 million, so if we have 1 percent lower, you’re adding about another $150 million plus or minus.
Chair Filseth: Okay so $50 million per percent. That’s just on pension not OPEB.
Ms. Pon: Not OPEB.
Council Member Schmid: Yeah, I would just add a comment. I looked at the first one of these reports when I arrived at the Council nine years ago and the unfunded liability has doubled
since that time, and that’s with “good returns” they were getting.
Chair Filseth: Well it was zero in 2001.
Ms. Pon: And it could have been negative in 2008, ’09, ‘10.
Council Member Schmid: So these problems compound themselves. Everyone admits the problem, but now there is a political problem with how to tell people, and I guess my base question
is, can the external auditor be a help to us in that situation, by identifying a potential problem?
Ms. Pon: I think presenting the information leaves for you to make the decisions and ask the questions.
Council Member Schmid: Okay, is this the right place to ask questions? What are we going to do?
Chair Filseth: Maybe in two weeks. I going to offer a suggestion in two weeks when we start talking about the 2018 Budget, or the 2017 Budget might be… We have the Auditor here.
Mr. Keene: I mean, with all due respect…
Chair Filseth: We’re going to need policy here.
Mr. Keene: Yeah, I mean I don’t think any external auditor wants to be put on the spot for making the policy recommendations and she has a responsibility to dispense the required responsibilities
within the practice, and GASB and all sorts of other reporting requirements to do that, and that’s what she has done here. I would imagine that there isn’t a problem at all though if
we’re sitting there and we’re having a policy discussion, let’s get real. Everything we’re going to do, I mean, we can point our fingers at CalPERS as much as we can. The real question
is, how much extra money do we want to be putting aside as a City? I mean, it doesn’t matter. Nobody is going to come to our rescue on the outside, and so that’s really a, that’s a priority
question, that’s a revenue and expenditure extreme question, but I’m sure if we called up our external auditor and said, if we were to start paying down our unfunded liability, would
you think that’s a problem, I’m sure they would say we think that would be a good thing. They’d be happy to do that for us.
Chair Filseth: Yeah, I think it is what it is and what we do is up to us. I mean, this process sort of helps us sort of scale where we are. Questions on other parts of the audit? Council
Member Wolbach? Council Member Holman.
Council Member Holman: This is a very simple one but I didn’t understand what it was about. So on the landfill closure liability, actual cost, post closure care costs may be higher due
to inflation variances, changes in technology. What do changes in technology have to do with the landfill closure costs? That’s on Packet Page 13.
Ms. Pon: Because right now in terms of the landfill post closure estimate, this is also an estimate in terms of what the liability is. It’s not something that you already have a bill
and you know how much you are going to be paying, so that this, if there are changes in regulation or changes in technology that could improve the, or change the estimating technique,
then the liability could be lower or it could be higher.
Council Member Holman: But I still don’t understand what changes in technology have to do with that. Regulations I understand, inflation variances I understand. Changes in technology
I do not understand.
Ms. Pon: Improved monitoring.
Mr. Keene: Yeah, well, I don’t know. Is this saying this is one directional, this issue? I would think it could go both ways.
Council Member Holman: I still don’t understand why that’s a fluctuating, why that’s an effect. What changes in technology would be an effect or could have an effect?
Mr. Keene: Well, I could certainly see if we had some improved capping, more efficient venting, you know, how we would vent methane gases and, or whatever, or that certainly could have
a positive effect. I’m not exactly sure on the technology side why we would have a negative effect that would generate increased costs. I could see on the regulatory side. We’re not
connecting on this?
Council Member Holman: I guess what I’m thinking of in changes in technology are not necessarily environmental technology. Is that what’s intended here, environmental technology?
Mr. Keene: Mm-Hmm.
Council Member Holman: Okay, that helps.
Chair Filseth: So I actually didn’t have anything else. It looks good. Thank you. So let’s see, so what we said was we would proceed to the next item before we come back and make motions?
Council Member Schmid: I think we had the discussion that I wanted to make, so I would be happy to move ahead with the vote.
Chair Filseth: In that case do you want to move to accept Staff recommendation (inaudible). Do we want to move, do we have a Motion here? I’ll move it then. Recommend the Staff recommendation
without having further comments or discussion. All in favor. Motion passes unanimously. Thank you very much.
MOTION: Chair Filseth moved, seconded by Council Member Schmid to recommend the City Council approve the City of Palo Alto’s audited financial statements for the Fiscal Year ended June
30, 2016, and the accompanying reports provided by Macias Gini & O’Connell LP.
MOTION PASSED: 4-0
James Keene, City Manager: Okay, if I could just make a statement, I think tonight is actually the first night you will notice we don’t actually have the rigged-up kind of camera system,
so we’re now interconnected back into the command center back there, but I do think it makes it even more critical that we are actually being sure that we’ve got the mikes themselves
here turned on, since everything is 30 feet away from us.
2. Recommendation to Approve the FY 2016 Comprehensive Annual Financial Report (CAFR) and Approve Budget Amendments in Various Funds
Chair Filseth: Okay, in that case we will proceed to Item 2, which is the CAFR. Are there any members of the public who wish to speak to this item? With no public comments, let’s proceed.
Welcome.
David Ramberg, Assistant Director of Administrative Services Department: Good evening Chair and members of the Finance Committee. My name is David Ramberg. I’m the Assistant Director
of the Administrative Services Department. Myself and Laura are going to run through slides on the Fiscal Year 2016 year-End Financial Report. I’m going cover a couple of overview points
and then we’re going to get into the details. On the overview, the Fiscal Year 2016 continued where sort of 2015 left off. We had some increasing positive indicators in some of our major
revenue sources, so that’s a good news story for 2016 which we’re closing out, and you’re going to see some of those numbers in detail in a moment. We do have some additional positive
expense controls reflected as well, where we’re keeping expenses within budget and coming in under budget in some cases; however, there still are the large unfunded liabilities that
are out there, which we’ve already touched upon a little bit tonight in addition to the additional liability of infrastructure funding. As also has been mentioned tonight, the City received
a clean audit and we’re very happy for that and we’re also happy for the Government Finance Officers’ Association (GFOA) award, the Government Finance Officer’s Aware of Excellence for
our Comprehensive Annual Financial Report for Fiscal Year 2015. A little bit of foreshadowing here, coming up on December 6 the Finance Committee will start having a very preliminary
look at the upcoming Fiscal Year 2018 budget, which will be informed in large part by the numbers you’re seeing coming out of 2016 tonight. So just sort of keep that in mind as you look
ahead to that Finance Committee meeting. So with those opening remarks, I’d like to turn it over to Laura Kuryk, our Accounting Manager.
Laura Kuryk, Accounting Manager: Good afternoon Finance Committee members. I’m Laura Kuryk, the Accounting Manager. So I would like to go into a little more detail on the financial numbers.
I would like to refer you to Packet Page 82. This is the revenue and expense summary that I think you’re probably most familiar with looking at. So referring to this summary, we can
see that revenues exceeded our final budget by $6.4 million for the year and that’s primarily due to higher revenue for UUT and sales tax, as well as the proceeds we received from the
sale of the former City Manager house. On the expense side, we ended up with expenses $7.8 million lower than final budget. These were savings due to vacancies and also benefits savings
higher than expected. You can see we are carrying forward $6.2 million of encumbrances to Fiscal Year 2017. At the end of the year, on a budgetary basis, we have a surplus of $2.5 million
after expending $10.6 million from our Fiscal Year 2015 surplus funds and these amounts were approved in CMR 6251, when we closed out the Fiscal Year ’15 year end. Next slide gives you
a picture of our past three years of revenue from tax sources compared to how we’re looking for the ’17 budget, so you can see that sales tax is remaining fairly flat, property tax is
ascending, transient occupancy tax is higher starting in ’15 because of the tax rate increase from 12 to 14 percent, documentary transfer tax has leveled off and Utility User’s Tax (UUT)
as well is consistent year over year.
Council Member Holman: Do you want questions during or at the end?
James Keene, City Manager: … more relevant.
Council Member Holman: So if I could please then, the Document Transfer Tax, given that Property Tax has gone up so significantly, why has the Document Transfer Tax, why did it take
a pretty steep dive in ’16?
Lalo Perez, Chief Financial Officer: So what happened was in Fiscal Year ’15 we had several large properties on the commercial side change hands. There was a 50-year lease on the El
Camino, Page Mill corner property, I can’t think of the name of it, El Camino Square, and they had five properties in that transaction including that one, and there were a couple of
others, the hotel down the street, the hotel, Epiphany, yeah, and so what happens is that we will have one-time transactions, so we track them. It’s difficult to predict when they are
going to come through. We think those are really exceptions, but I think we discussed here maybe in the year you were mayor, because I think that’s when we had gone through it that it
does have a residual in a positive way on the property tax itself because it gets reset to the market value. But those were the drivers and what we’ re seeing now in property transactions
is a slowdown. On the residential side we’re seeing properties stay longer for sale, less transactions, so it’s an area where we’re a bit cautious and a bit concerned as rates are moving
up as well, as you have been hearing. Rates are now in the 4 percent level for 30 years, which they have been below 4 for quite some time. It’s something that will be interesting to
see how it influences the potential on the fence buyers.
Council Member Holman: Thank you for that and also what about ’14? So I understand the spike in ’15, but what about ’14, because we’re still quite a bit below ’14 as well.
Mr. Perez: Yeah, I think we were coming out of the wait and see and people starting putting their houses on the market after the downturn and so we saw that trend. So it was quite a
flurry of activity for Palo Alto, and then including too the commercial side. I think what we’re seeing is a slowdown and we’re trying to stay in communication with real estate agents
and brokers that can help us, give us a gauge on what they’re seeing and what’s coming.
Mr. Keene: Yeah, we just recall that, I mean obviously we were in the recession years, or post-recession years, but at that point in time we were running 3, 4, at best $5 million a year,
so even these almost $7 million numbers are still, I mean, anywhere from 25 to 50 percent more than we had in some other years.
Ms. Kuryk: Next slide. Oh sorry.
Council Member Schmid: The Transient Occupancy Tax (TOT) is just given as a tax, but we have identified a portion if that which is to be used for infrastructure. Can you give me an idea
of how much is targeted funds rather than available funds?
Mr. Perez: That’s a good question and we are earmarking all of those funds to assure you we’re not using them for anything else and then this current Fiscal Year we’re projecting $8
million from the combination of the increase of the rate from 12 to 14 percent and three new hotels.
Council Member Schmid: Yeah, I think it’s important when we look at salary and benefits that we make sure that we are identifying funds that are available to spend on salary and benefits.
Ms. Kuryk: If you look at Packet Page 76, at the bottom of the page you’ll see how we have broken out where the TOT goes, how it’s split between the general fund and the infrastructure
plan.
Council Member Schmid: Can you tell me the page.
Ms. Kuryk: Packet Page 76.
Council Member Schmid: I don’t have that Packet Page here.
Mr. Perez: Page 6 of the Report, Report 7383.
Council Member Schmid: Page 6?
Mr. Perez: Page 6, yeah. So it shows you, so I gave you the 2017 number so what Laura has pointed out for the 2016 number is $7.2 million in actuals.
Ms. Kuryk: It’s in the CMR, not the CAFR, it’s in the CMR Page 6.
Council Member Schmid: Yeah, I don’t have my Packet Page on there.
Mr. Perez: Do you have the 7383?
Council Member Schmid: Yeah.
Ms. Kuryk: There it is.
Mr. Perez: It should be…
Chair Filseth: Page 6.
Council Member Schmid: Got it, okay. Good, thank you very much.
Mr. Keene: While we’re on that figure though, could I make another statement? We rarely are pleased at all with growth in our town of late, and I would just say that if we did not have
the new hotels, if we did not have the increase in the rate and if we did not have a lot of economic activity and actually high room rental rates, we’d be in real trouble right now.
I mean, it was not long ago we were collecting about $6 or $7 million a year here, and we’re now collecting $23 or $24 million. You could just imagine, take the earmark out, I’m glad
we’re not balancing the FY’18 budget without TOT being in the mix.
Mr. Perez: Let me give you a couple of other points of reference, just so you understand the vibrancy of the TOT. When we compare Fiscal Year ’17 to Fiscal Year ’16, the month of September,
I’ll just pick that one, the average room rate in ’16 was $257, the average room rate now was $267. The average occupancy the year before was 77.7 percent, 83.3 percent. This is just
telling you there is still a lot of activity. We believe it’s because we’re a destination point, Stanford and the business community and, obviously, residents that have relatives that
stay. And this includes Airbnb and I think we mentioned to you in our prior report, now we’re getting the on-line outlets contributing to the TOT as well.
Council Member Holman: Is there any way to know, two things, did you say the room rate went down in 2017?
Mr. Perez: No, it went up from comparison last year in September it went up roughly $9.
Council Member Holman: Okay, I was hearing it the other way around. Okay. And is there any way to know what the Airbnb for instance, impact has on hotel occupancy? Do you have any kind
of…?
Mr. Perez: Well, since it’s a mix, you know, we would have to pull it out. The problem is that we, it’s in the numbers on the average room rate, but it’s not on the occupancy percentage
because we don’t have any data from them. We do not receive anything. My gut would be that at this point there is not a negative impact from what I can tell and looking at these numbers,
but I don’t have sufficient data to firmly state that.
Council Member Holman: Is that sort of based on like what you see neighboring cities, what their occupancy rates are, is that one criteria you use.
Mr. Perez: Well, it’s something that I would need to, we haven’t had a chance to meet with our neighboring cities. We meet every other month, and there has been some transition so we
haven’t met. I’ll have to explore that, but it’s definitely one of the key areas of indicators that we looked at. The trend has been that we’ve all been building more hotels, the demand
is high, the area here has been a leading area for the state in terms of demand and build and just reading, there are still more hotels coming on line because the demand is there.
Mr. Keene: Yeah, if you look at that chart on Page 7 of the Report, I mean it’s $6.8 million we collected in Transient Occupancy Tax in 2010 and now we’re catching up with, I mean, we’
re getting in the sales tax revenue collection levels.
Ms. Kuryk: Okay, moving on to the next slide, the expense side of the equation. Fiscal Year 2016 expenses ended $7.8 million lower than the final budget. We had funds remaining in the
non-departmental salary reserve as well as higher than expected expense saving. A couple of highlights, Community Services $1.3 million under, Police Department $1.1 million under, and
Development Services $1.4 million under. And again, this is detailed in your Attachment A. Next slide, looking at the Budget Stabilization Reserve (BSR), we started Fiscal Year ’16 with
a balance of $48,198 million. The addition for the year net of revenues, expenses and our previously committed monies from the Fiscal Year ’15 surplus means that we can add $3.3 million
to the BSR, so our ending balance as of 06/30/2016 is going to be $51.582 million. Of that $51.582 million we’ve made certain commitments already, as to what we’re going to spend that
on. So we have a reserve set aside for pension trust fund of $2,055 million. 2017 budget amendments that have already been approved $2,611 million and then recommended uses for Capital
Improvement Program (CIP) projects, real estate sale proceeds and fines from Edgewood Plaza, we’ve set aside $5.3 million. That will leave us with a BSR level of $41.673 million, and
that represent 21.4 percent of our 2017 adopted budget expenditures. Next Slide, Enterprise Funds. All of the enterprise funds were in a surplus position for Fiscal Year 2016 except
for electric and again, electric is in a deficit position for the year due to repercussions of the drought conditions. The rate stabilization balances for all of the Enterprise Funds
is in a positive position at the year end, except for wastewater treatment and airport. If we go to the next Slide, you’ll see that wastewater treatment has a negative Rate Stabilization
Reserve (RSR) balance of $2.3 million because we had to increase the reappropriations due to plant upgrades. This negative RSR will be restored as we recover those replacement costs
from the partners. The airport continues in a negative position. They are continuing operating losses which are funded by the general fund and on a cumulative basis their loss position
is $2.4 million. Any questions?
Council Member Wolbach: Yeah, just maybe a quick reminder. I’m just not recollecting if we talked about it earlier and I apologize for that. Do we have an anticipation that over the
next few years that the airport losses will be mitigated or reversed?
Mr. Perez: That’s the plan. I call it a plan. It’s a good question, because it’s something important that's coming up. You may recall the City entered into a 50-year agreement with the
County. The County came back a few years ago and said we don’t want it, back to you. That 50-year agreement is ending I want to say April of 2017, so we get an opportunity to enter into
current market leases versus some leases that were really not favorable to the County whatsoever. One of the reasons why they wanted to get out. So we believe that if we go into these
market rate leases, that it will generate a positive revenue. It will go from tens of thousands to a million plus potentially, based on what we’re looking at in terms of the revenue,
so that’s a big swing. But there’s a lot of work that needs to be done to the airport, the facilities themselves. The prior real property manager told me in tongue-in-cheek that the
reason the buildings are still up is because the termites are hold hands. So, you know, we definitely need some infrastructure. We have some infrastructure needs that we need to address.
Nevertheless, we believe that with the current tie-downs available for us and the opportunity to enter into these new agreements we can go into a positive cash flow. So the question
will be, what are going to be the needs for the operations of the airport, what are going to be the capital needs. Currently you have to make a deal with the Federal Aviation Administration
(FAA). They are more than willing, if there is funding available, to provide you with 90 percent of the capital funding for a specific need, so I’ll give you an example. Earlier this
year you approved, I believe in the summertime, around August, an expenditure for the fencing to be replaced because the FAA wanted new fencing. So they gave us 90 percent, we had to
put up the other 10 percent. So there is an amount of money you have to put in, then once you do that and accept that 90 percent then you’re in bed with them for another 20 years. It
just keeps triggering that, right. So what we have to look at is what kind of business plan we can formulate from this this, determine the cash flows, determine at what point we can
stop lending them money from the general fund and where is the payback of the loans for the general fund. So that’s in the works, but I think we are seeing a window of a better future
post April of 2017.
Council Member Wolbach: I appreciate that, sorry for the diversion.
Chair Filseth: None of that is contingent on us increasing the number or length of runways, right?
Mr. Perez: My understanding is that we’re limited and that’s primarily driven by that levy, so that’s the end of the road, so we are limited to the type of jet planes that can land to
a small type of plane.
Council Member Holman: My primary question also had to do with the airport. So this is for good reason a sensitive topic in the community, so runway length is one thing, but I am also
understanding that there are new craft capabilities that can use larger planes landing on shorter runways. So when you’re talking about extrapolating costs out in the future and new
leases, that was the terminology used, new leases as opposed to renewed leases, is that anticipation being with new users at higher rates that might create other impacts to the community?
Are you talking about existing users or, what’s our latitude so we don’t end up with maybe a positive cash flow, but a negative community quality?
Mr. Perez: Yeah, all of that has to be put forward and then need discussion and plans so there would be discussions with the stakeholders and input, but you know, I’m kind of out of
my league. I haven’t earned my wings yet on that, but in meetings that I have attended and things that we’re going to brief the City Manager on for getting ready to formulate a plan,
all of that is being put into play because it’s important we understand that is sensitive in the community.
Council Member Holman: Then also you were saying, you know, about the fencing you said, “and then you’re in bed with the FAA for 20 years”, so how do you mean that? So let’s just say
if there’s a building that’s needs to be restored or replaced, how does that impact the future? So if they pay 90 percent of the cost, what’s that mean for the next 20 years?
Mr. Perez: That means that you must operate the airport for 20 more years from the date you took that grant funding. It just resets every time you accept funds, so every year that there
is funding available. So…
Mr. Keene: We’re not adding a new 20-year period on top of the 20-year period, we’re just extending. It’s 2016 and then we have 20 years and so we’re 2036, and then if we take another
grant in 2018, it’s another 20 years, so it’s 2038.
Council Member Holman: So is it possible and maybe this is not an appropriate question for here, just it is a matter of concern for the community, so is it possible to have fewer leases
at a higher rate. I mean, has there been any extrapolation of possibilities there?
Mr. Perez: So what we did is we hired an expert to help us assess what we could potentially charge because we’re not privy to the existing leases, because they are privately held, so
part of the homework, if you will, that we tasked the consultant to do is to compare to other airports. So one of the things that we have to be sensitive about is that if we push too
hard, we may push somebody out of Palo Alto and into a neighboring airport. Now, there’s a certain demand to be in Palo Alto and we understand that, but trying to figure out where that
is, since we have just taken over, it’s a fine line for us to look at, but we’re definitely looking at all the alternatives, all the possible ways we could do this, and keeping in mind
the stakeholders, because the aviators also and the schools and all that also don’t want to have huge disruptions or challenges. It’s a heavy task for the Palo Alto Staff that is managing
this project.
Council Member Holman: It’s also a push/pull because even if we had fewer operators at our airport, at least going out of our airport, we have some control over paths, some control.
Mr. Perez: That’s out of my league, I’m sorry.
Council Member Holman: We don’t need to go there. So on the Slide 6, it doesn’t read right to me, so help me understand this one. Slide 6, the next to last row there, “recommended uses”,
now these are expenditures so CIP projects, of course, those are expenditures. I don’t understand City Manager real estate sale and Edgewood Plaza fines. Why those are expenses.
Mr. Perez: It’s funny, the City Manager asked me the same question, why are you confusing me.
Mr. Perez: So now we have two.
Council Member Holman: Two smart people, you understand. And I take it the City Manager real estate sale is the Bennett’s house?
Mr. Perez: Yes.
Council Member Holman: Well, why is it an expense?
Mr. Keene: I think it’s, as I understand it, it’s not, so I think the hard part is the term “recommended uses”. We have some pools of revenues and those are the three things that are
being identified, and then the use is actually in one sense, the use is unspoken. It has to go towards carrying forward and balancing things.
Kiely Nose, Budget Manager: So if you guys look on CMR, Page 5, what we are seeing on the slide is we are trying to abbreviate it to fit on the slide.
Mr. Keene: City Manager’s Report (CMR) Page 5
Ms. Nose: Packet Page 75, thank you. You actually see a breakout of what those three items are and so the reason why we say uses because from a very technical budgetary term and we should
probably get out of that, we’re transferring these funds to the Capital Improvement Fund is the recommendation.
Mr. Keene: That’s what I was saying.
Ms. Nose: Yeah, exactly. So from a General Fund standpoint, it’s a use in terms of it’s a transfer, so we can refine the language.
Council Member Holman: So it’s money that’s come in, but it’s being recommended to be put out as a transfer to CIP funds?
Ms. Nose: Correct.
Council Member Holman: So we didn’t have a conversation, I don’t remember us having a conversation about where we wanted the, either the Edgewood Plaza development fees or the... About
where we wanted them to go.
Mr. Keene: So let me jump in. So there are two things. This is both a report on things that have happened and actually recommendations for action for you to recommend to the Council,
so that’s one thing we will be doing without saying how we would like to…
Council Member Holman: Tonight?
Mr. Keene: Yes. And the Edgewood Plaza development fees, in my sense here, right, is this just says it is set up as a reserve. So it’s really not saying, what it’s really saying is we’re
not spending this money. We’re going to set it up as a reserve, so it’s available for some future designated use as opposed to just treating it as a part of the revenue flow into the
General Fund in some way that could be then spent.
Council Member Holman: Okay, then one other question, if it’s okay, one other question is we had a little bit of conversation about the Los Altos Treatment Plant (LATP) site and charging
rent on the users of that land and some of that coming into the General Fund. Has that been looked at at all?
Mr. Perez: We have, we have actually been doing that and we have been splitting the rent, because as you may recall it is 50/50 ownership between the Refuse Fund and the General Fund.
We had been using it for staging, so some of our own contractors, but mainly from utilities have been in need for a staging area, so that’s been one use. The second use had been for
the shuttles that go around the City with the happy faces. They had been parking there. Recently Public Works Staff has asked us to do a switch and waste management is moving out of
the Geng Roads area because we need the site for the Fire Station 3, so we’re moving waste management into the 50 percent site of the LATP and that’s taken the majority of that, so the
shuttles are moving to the remaining part of Geng Road, so we’re renting that smaller space at Geng Road because it wouldn’t make sense to charge rent to waste management because all
it would do is turn around with the inflator on top of that and charge us right back, so there’s no rent charged there.
Mr. Keene: If I can sort of put into perspective what we’re trying to do here today, because we are in a few weeks, we will start larger discussions about the City’s budget situation
and the implications for the next Fiscal Year. I mean for the most part what we’re doing is we’ve got the CAFR Report on our performance in 2016 and in a sense we’ve closed the books
on 2016, so this is really primarily addressing for the most part what recommendations do we have with the outcomes of the performance of our budgets and our financial statements in
2016, and what should we do with those funds. There’s a whole host of other items and issues like we were just starting to talk about that will be more prospective about what we do.
So I think it would be, actually I think it’s, given the nature of this Report, it would be appropriate to try to stay in the track of the CAFR and budget amendments recommendations
as the Staff’s putting forward.
Council Member Holman: Thank you for that and I just, sometimes it gets a little bit like, because there are fine lines you don’t want to miss an opportunity, it’s like, oh, we’ve already
talked about that, so fine lines sometimes, so thanks.
Council Member Schmid: Keeping in line with the historical perspective, the CAFR is the only place that has these numbers, and that’s on Page 150, no 149, it’s the…
Mr. Perez: Packet Page 262.
Council Member Schmid: As we saw in the slides, the property tax is by far our most valuable tax and forecasted to continue. What this sheet says is that the nonresidential side is paying
25 percent of that tax and if you compare it to the 2010 Report, it used to be 31, so each year it’s going down by about one percentage point. This is during a secure period where office
growth has been three times the size of employed residents in town, so it’s a very, very striking number that office space is going up, but their payment of local taxes is going down.
So who pays all those property taxes? If you look at the Page 150, it gives the notion there of tax changes by property value and if you again compare it to 2010, it’s very clear that
there are about 300 homes turning over each year that account for the bulk of the increase in property tax payments. That is, we are getting our local funding from 300 new residents
who are paying escalating rates, and…
Chair Filseth: (inaudible)
Council Member Schmid: Yeah, the increase above the base 1 or 2 percent is taking place among the 300 who are moving up, the property’s moving up. And they are all residences, virtually
all the increase comes from residents, so as we look at our future budgets, it’s important to keep in mind who it is that we’re drawing on general funds, who it is who is paying. The
CAFR provides a very valuable insight for us.
Mr. Keene: Well and I would, I don’t know what data we have. I would imagine that the majority of those 300 would tend to be new residents of town, rather than somebody maybe moving
up, but I could be mistaken. I know from my own neighbors, when they have sold their houses, well this is great, I’ve made a lot of money off of it, but I can’t afford to buy a new house
in Palo Alto, you know. It is interesting to see this, because I remember what the numbers were back in 2009 and ’10. We still have 27 percent though of our housing stock valued at $300,000
or less. That’s a, as I look at that, is that correct? Cumulative percentage total of parcels, 26.74 percent at $299,000? Here, 26 percent of our parcels are under $300,000 assessed
valuation.
Council Member Schmid: Maybe Lalo can help with this. The ones that don’t turn over, even though the residents might change are if you have a trust family, family trust or something.
Any ideas how many properties in Palo Alto are under a family trust?
Mr. Perez: We don’t have that data. The discussions we’ve been having is how many homes have now, you know, so the… We’re trying to search how we can get information. We’re even talking
to companies that do data mining for short-term rentals and trying to figure out from there which ones are being residents moving out and converted to short-term rentals, because the
return on that is much better than the stock market and the bond market, so what it does is it fixes the asset at the low assessed valuation, as Jim’s talking about those percentages.
Our concern is that then that doesn’t flip, it stays there and it’s not really adding to the tax base of the impacts of these short-term rentals that are occurring, so we’re trying to
find out ways, how do we do that because what we were using is that to Jim’s point, somebody passes, the property is too expensive for one of the heirs to take over so it’s sold and
distributed, the proceeds are distributed. Now there’s an opportunity to consider it as maybe an income property, not just for short-term rentals, but just in general rentals, because
Palo Alto is in such high demand. So we’re trying to find ways to data mine that type of information, and it’s not easy.
Council Member Schmid: Yeah, it’s extremely important though that you are looking at that because that could really affect in the long run what we get from our property taxes.
Mr. Keene: On other interesting thing, I just, I mean it’s an indication of some of the drivers, I guess, some of our local conversations, if the median house price, the single-family
house price here now is $2.4 million or something, just under 15 percent of our parcels are valued at $2 million or greater.
Council Member Schmid: Have been sold at that rate, yeah.
Mr. Keene: No this isn’t just sold, this is what I see as the…
Council Member Schmid: But they only get revalued when they are sold.
Mr. Keene: Right, that’s what I mean. I mean there’s only 15 percent of the people who are paying taxes on a $2 million or more property, and yet anybody who wanted to go out and buy
an average typical place is going to be in that mix.
Chair Filseth: A lot more that 15 percent.
Mr. Keene: Yeah, so you can kind of really understand why Palo Alto is out of reach for Palo Alto, let alone the rest of the world.
Chair Filseth: Well, you have to consider too, I mean this is a mix of single family homes and multi units are on a dramatically different scale (inaudible)
Mr. Keene: One other thing, just for the public who may not be as attuned to this, your comments on the commercial side, so we have two factors here. One, right, typically the commercial
properties do not change ownership at the same frequency, especially in our town it seems. And the other thing is, we don’t have any discretion, these are all set by the State or by
the voters, what the rates are and what the laws are. If we were in another state, Council could have the ability to readjust the commercial real estate property values to address these
things, but it’s out of the Council’s purview to be able to make those remedies.
Council Member Schmid: Yeah, you pointed out with the documentary transfer taxes, there was a gigantic sale, but it was the sale only of the lease. The property itself didn’t get revalued.
Chair Filseth: On the single family home thing again, I think again, I think the scale, the irony is you’ve got some of these you know, $299,000 properties that are probably single family
homes that haven’t been sold since the 60’s or something like that, right, and yet if you look at the City, I mean, we’ve got 17,000 single family homes here, and that number hasn’t
changed in decades, right, materially. All the interesting action, activity is going on in multi units, right, which is where the rest of this stuff is.
Council Member Holman: No other questions. Are you looking for a Motion and would the Motion include…?
Chair Filseth: I think so. What kind of Motion are you looking for here?
Mr. Perez: We’re looking for you to, let me make sure I’m looking at the right report, sorry.
Mr. Keene: We want you to approve the CAFR.
Mr. Perez: Right.
Chair Filseth: That’s Number 2 here, right?
Council Member Holman: Mm-hmm.
Mr. Perez: And then to amend the Fiscal Year 2016 Budget Appropriation Ordinance for the various funds as identified in Exhibit B, excuse me, Attachment B, Exhibit 1 and various capital
projects identified in Attachment B, Exhibit 2. Yes, and then in addition, we have at your places a memo tonight where we want to make a correction and that’s the memo dated today, labeled
Number 2, which is “increase of funding for the Quarry Road Improvement Project Transit Center by $40,000” as a result of an encumbrance that was incorrectly booked. So that, along with
the other recommendations I just stated. What I can also tell you is, let me try to see if I can put it in perspective that you can grasp at a high level and it will help you as we discuss
later in December, future budgets. So the bottom line is you end up with a budget, I’m looking at Slide 6 by the way of the presentation, you end up with a Budget Stabilization Reserve
of $41.5 million, or 21.4 percent. That’s with the assumption that you agree with us to send that money to the CIP for the couple of projects we put off, right. So then that still gives
you, if you look back at your policy that you approved, you have the 18.5 target, that leaves you about a $5.7 million discretionary use of the funds as of the end of ’16. So what we’re
recommending to you is that you let that go for now, until you look at your ’18 numbers that we give you, and any other needs that you may have already in the unfunded category, and
you have a plethora of projects that you are interested in, either acquiring or getting to, and so for that reason we are not making a recommendation for you to do anything else with
those funds. To let it stay in the budget, still it’s in reserve, as you have more information and you make an informed decision. So what we’re saying basically is, let’s take care of
these projects you said you wanted, you said we can’t get to them, now we think we can get to.
Chair Filseth: Don’t rush out and spend the 3.5 percent.
Mr. Perez: Yeah, let’s leave that money there because you have more information, more data sets to come and decisions to be made in the future.
Chair Filseth: Okay, were you going to make a Motion?
Council Member Holman: Let me understand one other thing here too. So it happens to be on Slide 6 of the presentation, so the third from the bottom row there, “2017 earmarked use of
Budget Stabilization Reserve (BSR) via budget amendments”. So it’s one of the things I’ve mentioned a few times, and it’s one of the things that’s like puzzling and a little troubling
to me. It’s like we adopt a budget before the end of June. It’s only November and yet we’re $2.6 million… I find that really frustrating. That’s a lot of money and I don’t know how we
can avoid that to that degree. I mean, that’s a lot of money and it’s troubling and disturbing and frustrating and I could go on.
Mr. Perez: Well I think you won’t get an argument from the City Manager and myself. I think it’s going to be an important discussion on the 6th on how we go forward, because that is
the challenge that if we do one offs throughout the year, it doesn’t leave you a lot of room for the strategic part, and if we have limited resources but a big list of needs, it makes
it more challenging. Some of these are directs responses to Council directives, I would say predominantly the majority of them. We could probably go through them really quick to give
you a flavor of what they are, but that’s the nature of how we operated here since I’ve been here. It’s not just this Council, you know, but it’s something that I think it should be
part of our thinking of how we want to go forward, because with the challenges that we have ahead and we talked about pension and we’re going to have a lot more discussions about that
and the unfunded liability. We didn’t even discuss our unfunded retire medical liability, but you mention the combined number of $500 million.
Mr. Keene: $800 million if you extrapolate.
Mr. Perez: I don’t want to go there yet. But you know, I think it’s an excellent point and it’s something that we need to team up with Staff and Council and with the community, because
we need to reset our expectations to what we can really afford, because in some census you know, in looking at some of the potential data, excuse me, land acquisitions it will be great,
but then it may restrict us from doing other projects or developing projects that are already on hand, land is on hand, so it’s something where we need to bring you that data, and that’s
why I was cautious tonight and say, hey, let’s not make any decisions on these reserves, because we need to give you more information so you can have this data set and then make those
informed decisions. We wholeheartedly agree with you that we need to work together on having a plan, and hopefully we can start next month.
Council Member Holman: One of the things I would find helpful and which I also mentioned before, is when we get a Budget Amendment Ordinance (BAO) that comes before us, I don’t often
notice in there, it’s like, here’s what happens in the big picture. It seems to be kind of like, here’s a BAO for, I’ll just make up a number, for $320,000, but it doesn’t have a section
in the Staff Report that also includes, here’s what the cumulative impact is if we do three BAO’s, what the cumulative impact is to, you know, our budget, because there is a cumulative
impact and that’s what we here in the 2.6.
Mr. Perez: I think we can definitely work on reporting format, because if that’s what’s going to help us get…
Mr. Keene: If that’s going to help you guys from spending money, I’m happy to do it.
Council Member Holman: Well, it may not keep us from spending money, but it’s going to help us see how much is left in the checkbook before we spend it.
Mr. Keene: I think we do put stuff in, but I think you’re point is, I mean, it’s much more like if funding is available in the reserve or whatever, and you know, we’re still guided by
some policies. In other words, if we’re going to drop to levels below any established policies, then we wouldn’t say that funding is available. But I think to go back to what Lalo says,
is to, and your points, okay, yes, but as we inch along over the year that accumulates, and then even more so given the fact that we have these other competitors out there, say for Fiscal
Year ’18 that the Council could say, gosh, if I had known that we couldn’t do this other thing next year because we’re spending money right now, I would have maybe thought about the
decision differently.
Council Member Holman: And I look at this and it’s like we’re five-twelves of the way through this year. I mean it’s scary as the dickens.
Mr. Keene: Well, we’re going to try to do our best to see about how we put the kybosh on the midyear budget process. Actually, we’ll be back in two weeks.
Council Member Holman: Will Alec Baldwin be playing what character at that meeting?
Chair Filseth: Okay
Council Member Holman: Well, I’ll move the Staff recommendation, but I also want to know, is this the time though when we, given what I just said, I do want to set aside the City Manager
real estate sale funding, the income from that, and the Edgewood Plaza project fines, use to be determined.
Mr. Keene: So this recommendation does set the Edgewood Plaza fines, and of course the estimate we have right here is just on the old yield.
Council Member Holman: On what page was that. I lost the page that was on the breakdown.
Mr. Perez: Page 5 of the Report or Page 75 of your Packet.
Mr. Keene: And what we would be doing, of course is taking the Finance Committee recommendation to the Council, so it will be on the Council’s Report and just so that we’re clear I would
think we should change this reserve recommendation not tied just to the 365 but for the future revenue stream that we continue to collect. Would that be your thinking? Do you know what
I mean, as we’re increasing this thing five-fold or whatever?
Council Member Holman: Yeah, so if we can set that aside and let the use of that or the purpose of that TBD and the investment return for the former City Manager real estate sale, we’re
not selling your house out from under you Jim, set that aside. I don’t know how specific you want to be, but my preference, and I know one non-Finance Committee member at least, would
like to set that money aside for future real estate transactions or purchase.
Mr. Keene: So that one’s a little bit different on the Staff recommendation. Maybe the Staff can speak to how you positioned it.
Council Member Holman: In other words, we don’t want to be selling land and then not getting land back.
Mr. Perez: Right, it would be different than our recommendation, but we don’t have, that’s your policy decision. What I’m hearing you say is, set it aside for potential land acquisition.
Do not use it for CIP projects?
Council Member Holman: Absolutely.
Mr. Perez: If that’s the direction you give us, that’s what we’ll do.
Mr. Keene: So what’s the impact on CIP projects?
Mr. Perez: It gives you that much less for your projects, you know, and it’s a transaction, you know, that eventually we would come back to you at mid-year with this actual transaction
and say this is the direction you gave us. Right now we’re looking at March for mid-year? Sorry, January or February for that. So you would make a decision before you would have the
proposed budget in front of you. So, you know, at this point it would just give us $650,000 less for the CIP projects.
Council Member Holman: So I would argue that it might, it would, not might, it would give use $650,000 less for CIP projects, but it will give us $650,000 more latitude in what we might
do in the future having do to with some other project or purchase, if that money was earmarked. So that would be my argument and my Motion.
Mr. Keene: Can I complicate things here Lalo. So I’m having trouble with the math. The proceeds were $1.7 million, but we’re only allocating in our recommendation $651,000 of it?
Mr. Perez: Right. The majority of the funding came from the general fund operating budget to initiate the transaction, so basically we’re reimbursing the majority of the funds to the
general fund operating and the majority of the net proceeds we were sending to the capital.
Mr. Keene: Just so we’re clear, Council Member Holman’s recommendation would say, the entire $1.7 million would be set aside for land acquisition, future land acquisition, so it wouldn’t
be just the $651,000 is what I’m hearing.
Council Member Holman: I’m sorry, I usually do that. Because originally the General Fund purchased the property, so it was a reimbursement of the original purchase, and that’s why it’s
reduced down to $651,000. Do I get that right?
Mr. Perez: Right. We’re basically saying the majority of the return on investment we’re sending to the capital and giving the General Fund back its money.
Chair Filseth: $1.1 million from the General Fund, sold the property for $1.7, we made $600,000. That’s the $600,000 and hereafter put the 1.1 back into the General Fund. That’s what
you’re saying right?
Mr. Perez: The concern we would have if you were to pull the 1.1, now you don’t 5.7, you have 4.6 in the budget stabilization reserve, so it takes it away from the budget stabilization
reserve if we were to do the whole 1.7.
Council Member Holman: I could live with the ROI being set aside, but I don’t know what my colleagues think.
Mr. Keene: And I want to be clear what Staff is saying though, which is they are more saying, we can do this and we’re just sort of staying alive, because what it is going to say is
that ultimately the Council is going to be revisiting some of these choices when you look at the FY’18 budget, not just in two weeks, but as you adopt the budget. And you could end up
changing your mind and you know, in other words you could end up saying, we really needed that $650,000 for this capital project and I know we recommended saving it for future land acquisitions,
but we want you to use it. I just want to say just be clear that’s part of the reason that the Staff is saying it’s fungible, because we’re really not spending any of this money and
allocating it at this point.
Council Member Holman: I do understand that, but if we don’t set it aside and earmark it, it tends to get fungible and almost absorbed. It’s harder to track, so…
Mr. Keene: And I think, may I?
Council Member Holman: Sure.
Mr. Keene: May I just say I think that’s fine, but I’m kind of going back to your comment about when we have these Staff Reports and we’re not really be clear about the cumulative impact
on the cost. This is sort of a one-off sort of recommendation, and I just think it’s okay, except for the fact that the whole Council may need to feel that they can clearly freely revisit,
this isn’t a sacred earmark, you know what I mean. Because otherwise it maybe is a larger policy discussion we should have, what it should be going for.
Council Member Holman: And what I want to have is the policy discussion, because if we just pass this the way it is and say, okay, fine, it’s just going to get, you know, lumped in here.
So the policy discussion is what I want to have, and I think it’s an important policy discussion and so that’s why I appreciate the comments, but I would still maintain that the $650…
Mr. Keene: Maybe a better way to handle that, I’m not saying I want to be overly linear about it, one way to handle it would be say, you don’t want this allocated at all right now, the
$651,000. Just leave it in the budget stabilization reserve rather than recommending it be allocated to CIP, because for example, when we get to the budget you would like to be able
to talk about using that to set it aside for…
Council Member Holman: Yes, I would, yes that is the place I assumed it would be is in the BSR but also called out as a line item.
Mr. Perez: Just so we don’t confuse you, what Jim said is correct, but the books are done, right, so I can’t call out in the books that are done. That’s why we are saying we would come
back with the subsequent action. So the $651, assuming that the Committee approves this, the $651 is in the BSR and it would stay there is what I’m hearing, and as you move forward,
to repeat what Jim said, just because it is important, if you change your mind, you would have the ability to use it. It’s not going to be designated for anything else.
Council Member Holman: Yes, but I just want to make sure though, so I need to be redundant here, yes it would be in the BSR, but would the budget stabilization reserve come to us as,
you know, a big number like this and the $651 not be called out so, you know, the source.
Mr. Perez: So let me go through the steps to assure you. So let’s say you get that Motion and it’s approved. It goes to Council for approval and consent. When we come back with the mid-year,
we will come back and earmark that $651 as you directed and the Council approved within the BSR.
Council Member Holman: Okay, I appreciate that. And a policy comment just quickly, and then I will hush on this, but the policy, I mean there’s nothing that has greater value in this
town than land, and so if we let the 651 just go to, you know, building toilets in parks, just to make up something silly here, you know, it’s not the same value, it’s not the same return,
it’s not the same asset building from my perspective, and so that’s why I’m really committed to wanting to have the policy discussion about this at the larger level as well as this level.
Chair Filseth: Can I try the neg case on that? I mean, if I understand what we’re saying is you’re saying you would really like to have a discussion about land acquisition in general,
okay. And then in this case we’re talking about $650,000, which from a land acquisition perspective is not very much, so then the question is, you know, the added complexity of earmarking
this little piece for this as opposed to the discussion we’re going to start having in a couple of weeks, which is going to be much more sweeping, right. I mean, does it really add anything
to sort of add that level of sort of complication, although it’s not very much. Okay, that’s the negative and the aff case is going to be, well, is doing this going to que up the discussion
that you want, which is, you know, how much land should the City be buying, whether it’s post office land or parcels for parks or whatever, right. And then the question is, is that $650,000
really going to que up that discussion. And that seems to me like the two sides.
Council Member Holman: So what this partly stems from is this particular and specific matter. I’m sorry we’re spending so much time on this, but I think it is a really important one.
Is we have also in the past, to my great frustration, although not in the last probably couple of years, we have sold off, we have identified and declared some land to be surplus, but
we haven’t taken those funds from those sales of surplus lands and put them into any kind of reserve for land acquisition, and so I think it is a policy discussion we need to have, and
determine whether or decide whether it’s a…
Mr. Keene: Can I interject though. I don’t know what land we declared surplus and sold. We identified the potential to do that, but we haven’t done that. The Council has raised, like
you and other Council members…
Council Member Holman: Two parcels on Almon near Churchill, just a few years ago, for instance.
Mr. Keene: We sold them?
Council Member Holman: Yup.
Mr. Keene: Okay, so the other question I want to make…, I’m sort of splitting hairs here but this is a housekeeping action that we’re taking here today. We’re closing the books. We’re
identifying some surplus funds. For the most part we’re saying, when you balanced the budget last year we kind of pulled back on some capital projects. You’ve already sort of given us
policy direction, and we’re now saying we would rededicate that funding to policy directions you’ve already made. This is a new policy direction, this idea of, let’s start earmarking
some money for future acquisition. Everything else we’re doing here is responding to already other directions that the Council made, whether it was clear or not. You know, we’re not
interjecting new things really, and I just wonder if this is, when we’re doing this on an annual basis, this cleanup, whether you want to put in, well I’d like to establish a new practice
for how we allocate our funding. Should we really be doing that as part of this process versus separately. And I know it sounds very hair splitting, but if all of a sudden everybody
started saying, yeah, well I’d like to put another thing here and there, we would definitely say this is not the time to do it. You know, this could easily just say, nope, we’re not
going to put that in the CIP, it’s going to stay in the BSR, and then we have this other discussion about what’s the best use. Because I guarantee you, I know it sounds good right now,
but that allocation could be in conflict with something else that you want to do, and shouldn’t you have that at the point in time you have the conflict, rather than, I mean, it just
seems like it’s going counter to what you had just asked us to do about being more specific about the financial impacts, every time we make a decision.
Chair Filseth: You’re proposing, basically you’re proposing a new policy that we don’t sell land and put the money in the general fund.
Council Member Holman: Well, and I did understand earlier in this conversation that, yes, that is something we would bring up tonight, so I was following on that track. And the other
thing is, if we wait and have the conversation later, then, well the $651 is already committed, so…
Mr. Keene: What we are definitely saying is you could take this recommendation out about the transfer to the capital fund, and just leave it in the BSR. You could do that.
Chair Filseth: She wants a policy that says…
Council Member Holman: No, I want to recommend a policy for the Council to discuss, so…
Mr. Keene: So I’m just saying my sense is this kind of doesn’t fit in with what we’re trying, what we’re generally trying to do here. You should have that discussion and we leave the
funds completely fungible by not transferring it to the infrastructure. We’re recommending leaving it in the BSR, and you can do that in the future.
Chair Filseth: So I think I’m going to side with the City Manager on this, but you’re free to make a Motion.
Council Member Holman: Oh, you didn’t have your mike on.
Chair Filseth: Sorry, so I think I lean towards the City Manager’s interpretation. So we should make a Motion either with or without that thing.
Council Member Holman: So the Motion would be to approve, or to amend the Fiscal 2016 Budget Appropriation Ordinance for various funds identified in Attachment B, Exhibit 1 and various
capital projects identified in Attachment B, Exhibit 2 with corrections provided at places which I’ve lost track of, with corrections provided in an at places memo, and approve the City’s
2016 Comprehensive Annual Financial Report or CAFR Attachment C with the two amendments. One would be to, I guess it’s one amendment really, to keep the investment return from former
City Manager real estate sale and Edgewood Plaza development fees in the BSR.
Council Member Holman: Okay, and Lalo will help us track those funds. Okay, that’s agreeable.
Mr. Keene: And I promise you when we are discussing the budget, if you somehow forgot this, we will bring up the fact that that 651 had been identified as the possible use towards seed
funding towards I promise you we won’t forget it. We’re just going to have ten other things you’re going to have to balance against it.
Council Member Holman: Well you have a long arm. So I’m looking for a second on that.
Council Member Schmid: Yeah, clarification. Number 1 says that we are approving the funds in Attachment B, Exhibit 1 and Exhibit 2. There’s a lot of funds in there. Have each of these
been approved by Council before, or brought to Council before, or is this all new.
Ms. Nose: Thank you Council Member Schmid. So what’s in Attachment B is actually cleanup of FY’16, so this is based on, and this is to my understanding something that we have historically
done. This is based on actual activity. Some of the budgets weren’t adjusted correctly and so once accounting closed the books, once we went through all the audits, went through everything.
All the i’s were dotted, t’s were crossed, these were areas where we were out of balance between the actuals and what the budget appropriations were.
Council Member Schmid: I thought we did that a month ago and closed…
Ms. Nose: That was the reappropriations, so what that did was actually looked at these ending numbers and said, okay, out of those numbers, here are the gaps. We didn’t spend say $100,000
and I want to move that from ’16 to ’17.
Council Member Schmid: And what are these?
Ms. Nose: This is actually just cleaning up that FY’16 alone. So this is actually going the other direction sometimes, where maybe we misbudgeted between categories or departments or
transfers, and we actually overspent what the budget authority was, so now we’re bringing up to what the actuals were. A really good example of one of the really big dollar values is
we actually went through and defeased the bonds for a lot of those CIP projects, so we had earmarked those funds in a reserve, but we weren’t sure when we would actually make the financial
transaction, so this is adjusting the budget to clean up that financial transaction. You guys have already given us authority to clean up those and to defease the bonds, but we just
weren’t sure on the timing. The timing happened to work out, and so we are just retroactively adjusting the budget accordingly. So it’s truly technical.
Council Member Schmid: Let me just ask another one, to make sure I understand. On Page 10, Stanford Medical Center, operating transfer in (inaudible) yes, it’s B1, $1.7 million transfer
to housing in-lieu commercial fund?
Ms. Nose: So I know a little bit about this one, but not we’re on Attachment B, Page 8 of Attachment B.
Council Member Schmid: Packet Page?
Ms. Nose: Oh, I don’t know the Packet Page. Hold on one second.
Council Member Schmid: Yeah, I’m on Page 10 of Attachment B.
Mr. Perez: Packet Page 92.
Mr. Keene: So it says Attachment B10.
Ms. Nose: Yeah. So what this is, this is just an alignment with the Stanford Development Agreement that we were supposed to move these funds from the Stanford Medical Fund, or Development
Fund to the residential in-lieu fund.
Council Member Schmid: And why don’t we want to do it?
Ms. Nose: I’m sorry? We are doing it. So we did the financial transaction. We’re just catching the budget up to the finances.
Mr. Perez: Maybe I can help you. This is to, technically we can’t move the funds ourselves as Staff, but you’ve give us direction or we have a general understanding to do it, so this
is the technical authority to go ahead and finalize that move of all these transactions. A lot of those are that, and as Kiley said, you know if there is say a department was short and
because it’s within the general fund and we can make it balance within all of the departments, then we move money around and then we, that’s what we call clean up and we come to you
and we close that out. So the bottom line is that the general fund came in as an excess. We have savings and expenditures. We’re just doing movements from one bucket to the other and
technically we can’t do them because the charter or the Muni Code says that the City Manager only has ability to move within the departments. So if we move within other departments,
then we have to ask you for authority.
Council Member Schmid: Yeah, I guess I just want to make sure there’s no big surprises in the newspaper tomorrow, look and say, oh, they just transferred $700,000 to you know, X, Y or
Z.
Mr. Keene: Right. We’re just moving stuff from one fund to another fund.
Mr. Perez: And in some instances we have that from one fund to another.
Mr. Keene: It’s what I see, we’re moving from (inaudible) to the specific housing in lieu fund. The City Attorney says the interpretation is that that’s a requirement of the Stanford
Agreement that we have.
Council Member Schmid: But we weren’t in compliance for the last 18 months if we have to do it all of a sudden. Do my colleagues see any number that jumps out at them?
Chair Filseth: All the stuff looks to me like housekeeping stuff. It doesn’t escalate the level of …
Council Member Schmid: Okay, I guess the biggest one was that $1 million one. There is a $1.2 salary and benefit reserve, Fire Department.
Ms. Nose: I’m sorry, what Page is that?
Council Member Schmid: B2, last one on the bottom, $1.2 million. Anything special on that?
Ms. Nose: It’s also housecleaning. So what happened is by the end of the year the Fire Department overtime expenses were higher than we had budgeted. There are a number of factors associated
with that. One of them is we had budgeted all of the potential labor negotiation increases in that salary reserve, and because all the negotiations didn’t happen until, frankly we were
way down staffed in the middle of budget season, we never distributed the reserve to cover the additional costs, so it’s one of the, a big driver, and so we’re just cleaning that up,
moving it.
Council Member Schmid: That we have heard. On B9 there is a $6 million general expenses?
Mr. Perez: The bonds defeasance.
Ms. Nose: Correct, that’s us defeasing the bonds.
Mr. Perez: So you gave us the authority earlier.
Council Member Schmid: Right.
Mr. Perez: We’re just formalizing the transaction.
Council Member Schmid: Okay, thank you. So I will second the Motion.
Council Member Holman: Thank you.
MOTION: Council Member Holman moved, seconded by Council Member Schmid to recommend the City Council:
Amend the Fiscal Year 2016 Budget Appropriation Ordinance for various funds as identified in Attachment B – Exhibit 1 and various capital projects as identified in Attachment B – Exhibit
2 of the Staff Report; and
Approve the City’s FY 2016 Comprehensive Annual Financial Report (CAFR) (Attachment C of Staff Report)
Increase funding for the Quarry Road Improvements and Transit Center Access Project (PL-16000) by $40,000 as a result of an encumbrance that was incorrectly booked to another project.
Remove the recommended transfer to the Capital Improvement Fund of the Investment Return from the former City Manager Real Estate Sale so that those funds remain in the Budget Stabilization
Reserve.
Chair Filseth: Do you care to speak to your Motion?
Council Member Holman: I think I’ve spoken plenty.
Chair Filseth: Care to speak to your second?
Council Member Schmid: No.
MOTION PASSED: 4-0
3. Development Services Cost of Services Study Including Fiscal Year 2017 Fee Proposals
Chair Filseth: With that we move to Item 3, Development Services Cost of Study. I don’t see anybody from the public in here, so I assume there are no public speakers to this topic. If
there are any please speak up. Okay, thank you very much. Welcome Development Services, Peter.
Peter Pirnejad, Development Services Director: We need a microphone. Well, hello. It used to be so informal, now it’s so formal. Well, okay, let me start from the top. Peter Pirnejad,
Development Services Department Director. It’s a pleasure to be here. We’re going to be going over our proposed fee changes to nonvaluation based fees. It’s going to be a two-part process.
This is the first part before you and I was just about to say that we’re going to share the mike with Office of Management and Budget and our key consultant that did the actual Fee Study.
So basically Development Services is a matrix department. We have bits and pieces of many different departments and divisions within those departments and the trick is to try to figure
out how to coordinate all of their efforts to make sure that we have a predictable, transparent and efficient process that meets all the codes of state, regional, local as well as adopt
local amendments to meet the needs of the community and the Council. So tonight we’re talking about our fee structure because we have been directed to be cost recoverable, and that’s
the direction we have been actively moving towards. We have been pretty successful at it over the last few years, since we’ve actually formed the department. Now we’re trying to refine
that edge a bit more and be cost recoverable in each of those various divisions and departments. So Development Services, as you know, is a very tight sliver of activity and I put up
this slide to sort of emphasize that we are talking about activity that’s within private property and post entitlement, so we’re not talking about work that’s happening in the public
right of way, we’re not talking about work that’s happening in the planning circles as it relates to the California Environmental Quality Act (CEQA), land use, development agreements,
zone changes, general plan amendments. We’re really talking about, nondiscretionary items, ministerial items that are coming before us to do reviews of their building permit activity.
So to that extent, we’re an enforcement agency. We’re trying to make sure that departments or applicants comply with code standards and understanding that those code standards come from
a variety of different perspectives, Public Works, Planning, Fire, Utilities, etc. So when we did our cost of services study we were talking about making sure that we are fully cost
recoverable, ensuring that the applicant pays their entire share of what it would take to recover the entire cost, fully loaded, fully burdened, the cost of providing that service to
them. It is broken up into two parts. The first part is the plan check fee, which covers all the plan checking, all the different departments, which is normally, the majority of which
is a valuation-based process. Then the second is a permit-based fee, which covers all the inspection activity after the permit is issued. So with that I will pass it on to Jessie, but
I’ll make sure to jump in if there’s any questions or I need to fill in any blanks.
Jessie Deschamps, Senior Management Analyst: Thanks. Jessie Deschamps, Senior Management Analyst with the Office of Management and Budget, previously the Senior Management Analyst at
Development Services. I’m part of the team that worked on this project. So just to give kind of a high-level overview, the objective of this is to calculate the total cost of fee-generating
services, and with that said, to analyze these fees consistent with the City adopted cost recovery policy, which established a high, medium and low recovery range. Since participants
receive most or all of the benefit from the services provided, this falls within the high category, so the fees in front of you are set at 100 percent recovery. Just to highly summarize
the methodology, this is activity-based costing method as completed by our consultant, who is here tonight. It’s to identify staff positions, productive hours and direct and indirect
activities and costs and to calculate a fully burdened hourly rate, upon which indirect and direct cost layers are added on top to come up with a total fee. So in terms of next steps,
should Finance Committee recommend that we go forward, the Staff would provide notice of a public hearing to which Council must adopt the municipal fees by Ordinance. Upon adoption,
the effective date would come 60 days following the adoption. So with that said, we have Staff here, we have our consultant here to answer any questions.
Chair Filseth: Super, thanks very much. Questions? Council Member Schmid.
Council Member Schmid: I think Council has probably given clear direction. The cost recovery is our goal, our target. I like the study. I think it was very helpful, very detailed to
look at each specific thing. One big issue that the City is concerned about is affordability of housing. We are basically pricing out 90 percent of the population from living here or
staying here. So I look at some of the numbers that result from this study and, you know, it’s surprising and shocking. If you look at, I’ll just take for example, green building. Packet
Page 298. Currently residents are paying $677 for new construction and you want to double that. Residential renovation currently $56 per review, going up to $1,000 per review. Just examples
like that. So what can you give me in general? I guess you have these broken out into all kinds of pieces and parts, can you give me an idea on the residential side of one, new resident
being built, or two, renovation. I guess if you look at the age of our housing stock, virtually everywhere in town we’re reaching the age of needing to renovate, so what are the costs
currently and under the proposals for those two categories, new housing and renovation of existing housing?
Mr. Pirnejad: So I can explain the methodology that we used.
Council Member Schmid: The methodology is clear. I’m concerned about the outcome.
Mr. Pirnejad: Right, so the outcome in the Fee Study isn’t broken up by the type of construction. It’s broken up into the amount of work, the number of hours it would actually take to
do the work. So when we charge a fee, it would depend on what they were proposing and that proposal would determine the fee. So it’s, we don’t have scenarios built that would address
a typical new construction versus a typical remodel. There’s lots of different scenarios that would require different sets of fees be assessed to those different scenarios. We could
talk about like specific fees.
Council Member Schmid: Okay, under green buildings, it says alterations and additions for single family homes less than 1,000 square feet. Currently $56, new proposed fee $1,097. Now
that is 20 times as high. What’s taking place?
Mr. Pirnejad: So with our green building program, we’ve done many things to address the community needs, the Council’s direction to create a more robust green building program. That
program includes things such as low-flow fixtures, landscaping review, additional Title 20, energy compliance and all of these things have required that we revisit our process and ensure
that we’re able to provide the necessary level of review to meet all of those code requirements. Those fees haven’t been updated well before I have been here. I haven’t even heard of
the last time we’ve updated fees. Back when that green building fee was first assessed my assumption is that our process was much more simple than it is today. So maybe Dan can speak
to the process that we went through to actually collect that fee. It was based on time.
Council Member Schmid: Okay, let me add one point to my question. I was just looking at the permit, but if you add landscaping, you said landscaping used to be zero and now it’s $894.
So you’re going from $56 to $1,900.
Mr. Pirnejad: Yeah, the landscaping fee, it’s an interesting story. It started with the Governor Executive Order to require that we provide additional review for all landscaping. So
it was something that wasn’t even something that we would review through a permitting process. People would just landscape their yards. Over the last 3-6 years, we’ve seen a lot of new
regulations, partly because of the drought, that has mandated us to do an exceptionally higher level of review, forcing us to create processes and systems and add contractors to do those
reviews that previous years we didn’t have to do.
Council Member Schmid: Yeah, I guess I’m just concerned, trying to get a picture in my mind of taking an old, say an Eichler that’s 65 years old and saying, oh, I need to look at the
water system, look at the backyard, look at the walls, and what’s, not the cost of the contracting, what is the City going to charge me.
Mr. Pirnejad: Right. We’re seeing on average, we were just looking at that. The average, on average the fees are somewhere between doubling and tripling, because again, we haven’t looked
at these fees probably as far back as six or seven years or more. This is, I think the second or third attempt we’ve had at a Fee Study, and we finally feel like we’ve brought before
you a Fee Study that really is able to capture all the costs, the indirect costs, as well as the, you know, the fully burdened rate.
Council Member Schmid: I guess the danger is that someone would say, oh, I’m just going to avoid that. Either I won’t refurbish my home which needs it, or I’ll not report it, which neither
one we want to encourage.
Mr. Pirnejad: Well, based on experience, I haven’t seen people not pull permits. The number of Code Enforcement violations that we get for people working without permits is very low
compared to other cities, so that’s not a concern.
Council Member Schmid: Yeah, okay.
Mr. Pirnejad: The concern that people aren’t renovating their homes doesn’t seem to, I don’t see that the values, the property values of these homes have quadrupled over the last five
years, so there is definitely value in the home to be able to refinance or pull a second or whatever it is that they’re doing, or if they, or if it switches hands, there’s plenty of
money to be spent on these projects. And again, the permit fees are a fraction of the cost of the renovations.
Council Member Schmid: Can you give me an idea of that fraction? Is it a standard 5 percent or 10 percent?
Mr. Pirnejad: Not for these fees. These are nonvaluation-based fees. When we come back with valuation-based fees, those are a percentage.
Council Member Schmid: No, I mean can you give me an idea of what percentage your new fees would be of a renovation.
Mr. Pirnejad: It would depend on the renovation.
James Keene, City Manager: Are we taking up valuation-based fees tonight?
Mr. Pirnejad: No, nonvaluation-based fees.
Council Member Schmid: No, I’m just trying to get an idea of…
Mr. Pirnejad: Oh, geeze, not in Palo Alto.
Mr. Keene: Well, I mean you guys deal with this all the time. Just like identify a project that could be roughly relevant and say that it’s $2,000 worth of permit fees for the green
build, I mean, well what is it?
Chair Filseth: To give an example, a $100,000 valuation on Page 298.
Mr. Pirnejad: So, again, since we’re not looking at valuation-based fees, but…
Mr. Keene: He’s not saying you calculated based on valuation, but if you could give somebody the bill, they could calculate the ratio of the permit. That’s what he’s asking for, an example.
Mr. Pirnejad: A kitchen remodel, for example, would be in Palo Alto $60,000. I didn’t want to like scare anybody, but yeah.
Council Member Schmid: So if you’re dealing with the gas line and electricity, what kind of permit fees are there?
Mr. Pirnejad: Well, there’s building permit fees and then there’s things like utility hookup fees and meter fees and the installation of those meters, which … so we’re not updating utility
fees.
Mr. Keene: Just the fees we’re updating, tell him how much it is.
Mr. Pirnejad: A few thousand dollars, roughly speaking. I mean, you’re talking about fixtures, you talking about lighting, you’re talking about maybe some minor…
Council Member Schmid: Would the Fire Department come in?
Mr. Pirnejad: Yes sir.
Council Member Schmid: Okay. Let’s see, one other question. You say you’ve looked carefully at your cost and you’re using hours of work at 1,600, what happens to the other hours of work?
Who pays?
Mr. Pirnejad: We’ll get Dan to answer.
Dan Edds, Capital Accounting Partners: So your question revolves around the calculation of productive hours. Excuse me, doing that we would start out with a standard 2,080 hours and
then we’re subtracting out vacation time. We actually do that on an individual basis. Subtracting out paid holiday time, sick leave. We do actually use the full allowable amount for
sick leave. We assume that’s essentially a budget expense to the City. Then we’re also subtracting out meeting time, time for training, building inspectors as well as plan reviewers
all have standard training that they have to maintain for their certifications, so we’re subtracting that time out, as well as the standard staff meeting every Monday morning at 10:00
A.M.. So when we do all those calculations invariably it comes down to 1,600 hours, depending upon the seniority of the staff. I’ve had cities that were around 1,400, but you know, people
have been there for 30 years. I think around 1,600 hours is very, very standard.
Council Member Schmid: Yeah, I guess that’s what, 12 weeks of time, and you would think in the focused department that a lot of that nonworking time is actually looking at records, talking
to others about what should be done, new learning. It’s not down time. A lot of it is actually extremely valuable time, sharing notions and ideas, but this doesn’t get reimbursed.
Mr. Edds: Well, we build it into the productive hourly rate, so as the number of productive hours comes down, that rate goes up. So, you know…
Council Member Schmid: So you’re productive rate would pay for those hours.
Mr. Edds: Yeah, that’s the only way we come to full cost recovery.
Council Member Schmid: Okay.
Chair Filseth: You load it as overhead on the productive hours.
Mr. Edds: Yes.
Council Member Schmid: One question, on Page 315, there’s a discussion there of reserves. You recommend getting reserves. I don’t understand why an operating department would need a
reserve. What are you reserving for? If you’re a policeman or a fireman or utility, you have to deal with emergencies and you need a fund to get assets there in a crisis. But here you’re
just responding to clients. If a problem comes up you don’t have clients, you don’t respond. So what’s the reserve for?
Mr. Pirnejad: So as we slowly creep towards a full enterprise fund or maybe a partition general fund, we want to make sure we have all the revenues to operate outside the general fund
from fee revenue. What we’re seeing is that the market is very cyclical. It’s very dynamic. It’s hard to predict the ebbs and flows. We can predict the general trends, but it’s harder
to predict, you know, complete bottoming, so in those cases where we have a bottoming, we can’t cycle staff out that quickly so we need a reserve in order to absorb that cushion so we’re
not having to bleed between funds, one fund paying for a second fund. Fire Department paying for you know, Public Works fees and Building Department paying for Planning fees.
Council Member Schmid: I thought there was a number of consultants or people that you would draw in as activity increases.
Mr. Pirnejad: Yeah, but even those we can draw, but we can’t draw them that fast, where we would immediately, you know, let go five consultants if we saw a slight blip, because that
blip could be just you know, a slight correction, and then we might see activity come back. Bringing those contractors back on isn’t as simple as flipping a switch, so the reserve would
allow to absorb those tiny fluctuations if you will, and respond to major corrections.
Council Member Schmid: So the full time staff would be increasing, is that your implication of building reserves?
Mr. Pirnejad: The full time staff would be increasing?
Council Member Schmid: The number of full time staff would increase, which would create a need for reserves?
Mr. Pirnejad: No, the reserve would be created to absorb any fluctuations in the market that we would respond to say a decrease in permit activity by assessing whether it’s a minor correction
or a trend. If it’s a trend, then the first thing that would happen is we downsize our contract staff, depending on where the activity is slowing. If it’s in the plan check, then we
would downsize the plan check staff. If it’s in inspections, the inspection staff. Fulltime staff would be the last, because that’s where our core institutional knowledge lies and all
the fees that we need to transfer over to the new contractors as we bring them on board. So that’s, but the argument is, having done this before with Dan, that cushion is to absorb.
Mr. Keene: Thank you. So first, obviously, this whole move has been to not subsidize from the public good, private benefits. To get those aligned really closely and have the full cost,
but we do have these ups and downs cyclical. I don’t see where, we’re identifying this is a need. Do we have a specific recommendation tonight as to what we want to do, and then secondly,
I would be curious, I’m trying to understand how we would actually build the reserve, because…
Council Member Schmid: General Fund?
Mr. Keene: Well, I mean, how do we build the reserve, because on the one hand we really can’t overcharge somebody for, I mean, we’re charging them 100 percent of our cost to do something.
It seems problematic to me to start charging people some carrying costs for the fund as a whole, as some hedge for the future. You know, it kind of runs against the whole idea of the
cost.
Mr. Pirnejad: I’ll let Dan address. I mean, it’s a two-part answer.
Mr. Keene: Because I don’t like the general fund answer, by the way.
Chair Filseth: Can I ask a clarifying question before you answer? You know, hearing you describe it, it kind of sounds like a receivables issue. I mean, is it the case that somebody
goes and does the work, right, and then you have to pay them, and then you have to collect the fee from the customer like a month later or two months. Is that the issue?
Mr. Pirnejad: That’s a great analogy of how the plan check and inspection works. We collect a plan check fee and it might take us six months or a year to do that plan check. Then we
collect a Permit Fee and it might take 18 months to continue to monitor that construction through inspections.
Chair Filseth: Okay, but you collect the fee from the homeowner upfront. So you don’t need to finance it, so this isn’t a finance thing.
Lalo Perez, Chief Financial Officer: And keep in mind, you’re paying the Staff, whether it’s contract or permanent, every month.
Chair Filseth: Sure, but if I understand what Peter said, I mean, you know you sort of have fluctuations. The baseline is covered with the permanent staff and above the baseline is covered
with contractors, right. So presumably there’s not that issue with the permanent staff, if I understand what you said.
Mr. Pirnejad: Right, so…
Chair Filseth: I was wondering if there is a receivable issue on the contract, but it doesn’t sound like it. The homeowner pays upfront.
Mr. Pirnejad: Right and just to be clear that we’re not recommending a reserve in this nonvaluation-based fee. It’s something that we need to come back and visit, but I’ll let Dan.
Mr. Edds: The issue of reserves, there’s a couple of things going on, actually you’ve touched on both of them. One is as you just said, is a large project comes in on June 30 and you
collect a fee. It may take 6, 8, 10, 12, 24 months to complete that. So a reserve helps buffer that issue where you collected a fee, but then the actual service has to be provided over
the next several months, if not years. The other issue is just to maintain your staffing, and as Peter said, the institutional skill sets of your core staff, so you don’t want to lose
that institutional knowledge of the regulations that’s required to build in the City of Palo Alto. With regards to looking or factoring in reserves as a cost, generally the way I do
this, or the way I recommend is if you need an extra, you know, two percent, just layer that on top of the actual fee. When I presented that to any number of California building official
representatives, I have yet to have one say, no you can’t do that. Everybody says, has told me we want the City to maintain the skill sets that they need so we can have a high quality
of service over a long period of time, and not have these fluctuations where one month they are totally strapped and it takes a day or two to get an inspection made and then the next
month after that then everybody is fine. The reserves really are designed to provide a high level of service that is stable over time, and my experience is that, especially since we
have been coming out of the recession, is that many of my clients, virtually all of my clients are scrambling to catch up. I have had them where the general finance has actually made
loans to the building function, the Building Department, to the Development Services Department, and now those are having to be paid back. If those reserves were adequate, that would
have a lesser impact. The other thing about reserves that I like to point out is they are not necessarily fund balances. Then the two are very different. But the point of a reserve is
really to fund staffing model through various fluctuations of building activity, what most of us would do in our business anyway, have reserves set aside. Mr. Pirnejad: That’s correct.
We are going to come back when we do our valuation-based fees, to address the reserve policy.
Mr. Perez: We would have guidance, specific guidance and specific target areas. It could be technology, replacement of systems, conversion from paper to electronics, online enhancement
beyond what the shop currently has, so we will have very specific targets.
Council Member Holman: Just, so my understanding that’s not the recommendation now, but also how do we end up in the, I’ll call it a deficit or staff deficit, because it might be somebody
draws a permit on let’s say January 1, but you don’t actually collect the other inspections for some time, but you have other work that’s already back before that, so isn’t there a constant,
I don’t know how to say this right, but isn’t there a constant flow of work coming through those, so that you don’t really have a deficit? Because it’s not like you’re starting with
zero every time.
Mr. Pirnejad: Correct. So there are encumbrances that carry forward, but as we talked about, the fee comes in, it’s paying for work going forward. What we tend to see is that the work
that’s coming in the door is hard to predict. So we look at planning trends, we look at building trends, Consumer Price Index (CPI), other indicators, to get a sense if the economy is
slowing or not, because unlike other industries, in the building trades, it’s a very quick change. So you might see some drastic movement because if there was something that happened
with the price of steel or, you know, if there was uncertainty in the market because of the political environment, all of a sudden projects stop. Commercial projects might stop, but
residential projects might continue to go forward. So we’re developing those models, developing dashboards to be more predictable in terms of how we watch these trend lines. There is
a continuous flow of revenues, but it’s not always enough to keep the existing staffing levels, so the hope is that the money we receive for a building permit would sustain all the activity
necessary to provide that level of service that they paid for with that permit, but if revenues stop, then we need to be able to downsize quickly to respond to that slowing of the economy
behind that permit that paid its fair share.
Council Member Holman: So this is also an argument for why these fees should potentially be adjusted every year, because as we have staff cost increases annually, so these should really
be adjusted every year.
Mr. Pirnejad: I’m sure Dan would love that.
Council Member Holman: And well, our City budget would too.
Mr. Keene: So if I may say two things. One is I do think the two examples that were given about the sort of the fiscal years and the cash flow, the revenue flow, then when the work is
done, it strikes me that most of that can be handled by clearly setting up a special revenue fund or an enterprise fund or whatever, so we don’t get into this issue of it just flowing
back into the general fund. So that will take care of that and I have been an advocate of that for years, from the get go and have used that approach before. But, again, this other idea
of trying to keep the kind of stable, steady state which does require some buffering funding through reserves, I was being a little facetious about where it’s going to come from, but
the need to have it is important, and I think this is a useful analogy, sort of like your investment portfolio, right, which is most people would generally recommend is be careful about
jumping in and out of the market, because the ability to, you might be able to say, well, I’m going to sell now because things are really going bad, but more often than not, to be able
to be there on the upswing is when people really get burned. They suddenly, if they’re not in the market, and all of a sudden things really go back up and they don’t get in in time,
because it happens fast. And this is a little bit what happens more in the building area is we have some buffer by having a contract employee. It makes it easier to bring and pull, I
mean push and pull, but they’re a portion of what we have, so we can use that as an almost, I want to say Federal Reserve or monetary policy stuff to kind of keep things health or whatever.
But at some point, if we really go in and we have to lay off or you know, cut back on existing staff, we could have big then upswing, and then getting new people here and on board when
our customers want them, you know, is really an issue. So in some sense you would way we want to be able to carry people a little more. We’re not going to completely feast or famine,
so we’re ready when somebody comes in because we will have all kinds of issues when suddenly say, gosh, you not only do you not have the people, they don’t have enough experience here,
they don’t understand the processes, they don’t know the context, all of those things. So just something to think about when we talk about it later.
Council Member Holman: There are different ways to right size.
Council Member Wolbach: So also I’m a bit concerned about something that Council Member Schmid mentioned earlier and it’s just the question of what it means for somebody who owns a home
and is remodeling or is doing minor or substantial work on their home, or also for people who are trying to do the one kind of development where we have a growing reconditioning of the
community that we need, which is residential development. I am particularly concerned about say people who are house rich, but don’t have a lot of income. They have had their house for
a couple of decades, don’t have a lot of money coming in and might be on a fixed income, and I am looking at some of these fees and I am a little bit concerned. You know, I’m actually
not, I don’t know if I would say that the $56 fee for renovation became $1,000. I’m not sure exactly how to read this because the definitions look like they were changed. This is on
Packet Page 298 under green building. It looks like you’re deleting a couple, adding a couple. I’m not sure if they translate exactly. There is a note about valuation. It’s kind of hard
to read, the print is small, but it looks like there is a note about valuation for the old ones that are getting deleted and no note about valuation in the new ones. It looks like under
1,000 square feet is not much cheaper than over 1,000 square feet. Then on landscaping, those are pretty hefty fees for landscape reviews, almost $900 just for a single-family home.
I did hear the reasoning. Then on the following page, on Packet Page 299 under plumbing permits, we’re looking at a lot of fees that are going up to $100, $200 from say $5 or $28 a piece.
I am wondering for all of these, do we have any kind of low to moderate income discounts or, I mean, again my concern is policy implications of not the person who just bought, you know,
a $2.5 million piece of property that has a home on it and they want to remodel it. I’m thinking of people who were here, Palo Alto residents who are here now. We were talking earlier
about how a lot of homes in Palo Alto, you know, if you sold them would be worth $2.5 million, but a quarter of them are currently valued at $300,000. So anything you can do to alleviate
my concerns here. I’m not precise in my request or my recommendation, just wondering if there is anything, you know. I’m concerned looking at these numbers, what it means for a lot of
Palo Alto residents and I’m wondering if I’m missing something.
Mr. Pirnejad: Well I would just draw a little bit of realization to the, like replacement fees, water heater replacement, roof replacement, those fees are not out of line with what other
cities typically would charge. So we haven’t priced the routine maintenance type fees, say house rich, income poor residents struggling to make their utility payment for example, would
still be able to re-roof their house. The cost of the permit wouldn’t be more than the cost of the roofing, wouldn’t be a deterrent. Where the pricing of the permit starts to escalate
quickly is when you’re doing major work, when you’re doing major remodeling, major retrofitting, which requires construction, demolition, debris monitoring, requires green building compliance,
that’s the type of work where you’re really doing some major retrofits and major renovations. And again, the fees are set at minimum cost recovery, so absolute net zero cost recovery,
so we’re not generating a profit. We’re not putting money into any kind of reserve yet.
Council Member Wolbach: I guess what I’m getting at is, this is the policy question for us to consider, are there times when we actually do want to subsidize, you know, a resident and
provide it as a service to them, get his costs defrayed rather than doing full cost recovery.
Mr. Pirnejad: I think for affordable housing projects, there’s other types of tax incentives, rebates, subsidies, grants that are available to subsidize say affordable housing. And again,
the cost of that construction would make the permit fee pale in comparison. The only way to subsidize the actual permit fee would be through a general fund subsidy, because we couldn’t
use somebody else’s building permit revenue to offset the cost of somebody else’s building permit revenue or fees. That’s the concern.
Council Member Wolbach: So as that relates to this, does that mean we are legally unable to reduce any of these fees and if we did want to subsidize it, we would have to find it somewhere
else and then move it back into this.
Mr. Pirnejad: We would have to bring it from the general fund.
Council Member Wolbach: Okay. And help me understand, and I should remember, please remind me, when these landscape plan reviews would be needed for a single-family residence. So I see
landscape plan reviews, single family residential, $894. Who would that apply to? Just if you totally tore down your house, scrapped everything, did it from scratch?
Mr. Pirnejad: Essentially, so if you remember almost a year ago, I came to the Council with the Proposal that says, if you do anything to your landscape we would want a permit. We pulled
back from that and we just stuck to the state minimum, which is 1,000 square feet. So you would have to do again a major renovation to your home that’s impacting the landscaping that
would kick in the landscaping review fee.
Council Member Wolbach: But if somebody just wanted to redo their landscaping, just wanted to redo their garden, tear out a lawn and put in drought resistance stuff, no permit?
Mr. Pirnejad: They would not need a permit.
Council Member Wolbach: Okay, that does help alleviate a lot of my concern on that. I’m not going to speak to that. And, okay, this is a bit cut off, at least in our printed version
in what I’m looking at here, on the following page, Page 299, of these fees that go from, this is under plumbing permits, all of these fees that go from say $5 up to $81, $97 from $5
or $28 up to $195, there is something about it being a flat fee per permit. Is it that those tend to get grouped together when somebody remodels their kitchen? I can’t actually read
what it’s supposed to say there.
Mr. Pirnejad: Well, maybe I can ask Dan to provide more clarity, but what we did is some of the fees went up, some of them went down, because we took a look at how we were collecting
the fee, and then tried to assess it to a fully burdened rate that took into account how much time it took to do each of those activities. So if you look at a fixture, the per fixture
account may have gone up in terms of the permit fee, only because we really took a hard look at how long does it take to do all the activities necessary to enforce code compliance with
that specific fixture. And again, we haven’t looked at those fees in close to a decade, so it’s much more exact than it used to be and the methodology is much more of a science than
it was before. I’ll let Dan add any flavor to that.
Mr. Edds: Sure, thank you. A couple of things. Number One, specifically with the plumbing fees as well as electrical, mechanical, there is also an admin base fee, which is actually going
to go down, and the other thing is in developing these, the cost for these services, we actually looked at how are the inspections made. So that your example, Councilman, what used to
be a $5 fee, we actually looked at how that specific service is processed in terms of the inspection and administrative piece. I don’t know how the $5 was calculated but I can say how
we calculated this one and it’s based on the inspection time to get out there and actually do the inspection.
Council Member Wolbach: Okay, and again, going back to the question of discounts or subsidies or things like that, I’m again thinking about lower to middle income residents, do you happen
to know if we do provide any discounts or subsidies to some of these low or moderate income and retrofitting or the work that they’re doing is something they need to do in order to maintain
the health and safety of the building? Let’s say maybe you’re a retiree, you’ve been in your house a long time, your house is falling apart and really needs some work just to keep it
habitable. Do you know if we do provide in the City organization, discounts or subsidies of any kind for at least the fee aspect of that.
Mr. Pirnejad: In Development Services we don’t have any kind of incentive, but utilities has certain incentive programs to, say, switch over to an all-electric water heater or other
types of programs that are incentive based. We, all of our fees are fee-based. We don’t have any incentives or any way to provide that discount, again, unless there was some outside
agency or general fund contribution.
Council Member Wolbach: Okay, so it sounds like tonight’s not the time to push for that, but I guess maybe we can bookmark that for a future discussion, because it’s something like what
you’re describing with utilities, might be appropriate to consider, but again, unless the Chair thinks I’m wrong, it sounds like, and from what I’m hearing from Staff, it sounds like
that’s a future discussion beyond the purview of this.
Council Member Holman: Yeah, just a point on it, so going along with two comments that have been made previously, I mean I can see how some of the fees would be disincentives to get
a permit. Now if you look at a plumbing fixture, if you add $97 to, excuse me, it would be $81 to replacing a toilet, I mean what’s the cost of a toilet? You’re adding significantly,
so I can see how people wouldn’t get permits. And this came up in a little different way about mechanical equipment being in setbacks, and people needing to move them, you know, to make
them compliant but we didn’t want the compliance to keep them from coming in to get a permit to do it right, so I mean, we can’t argue both ways. I mean reality exists in both occasions.
You can’t argue in just one way.
Mr. Pirnejad: Well, just drawing from personal experience in other jurisdictions, Palo Alto is kind of an exception to the rule. By and large, we don’t have an issue of people not pulling
permits for work. The people that wouldn’t pull a permit for a toilet wouldn’t pull that permit if that fee was $10 or if it was $100, they just wouldn’t pull a permit. But again, those
circumstances, based on my assessment is few and far between. The fee is really a function of how long does it actually take an inspector to schedule the inspection, drive out to the
site, take a look at the toilet, make sure it is Code compliant, installed, doesn’t contaminate the water supply and is installed properly. It is one visit, but again, we’re talking
about a fully burdened rate, so.
Council Member Holman: I understand that. To go to Cory’s point earlier though, I don’t, and respectfully seriously, I don’t know how anybody could know who would or wouldn’t pull a
permit depending on the permit cost. How would anybody know?
Mr. Pirnejad: Your assessment?
Council Member Wolbach: Actually, just a couple of real quick questions. So, if you have a toilet or a sink or showerhead in your place. You go to Home Depot, pick up a new one, put
it in, that requires one of these $81, $97 fees?
Mr. Pirnejad: That’s correct.
Council Member Wolbach: Again, to this point, I respectfully just disagree that I think anecdotally I think there is a lot of work that is done in Palo Alto which is not permitted.
Mr. Pirnejad: I have a lot of faith in our residents.
Council Member Wolbach: I have, that’s a commentary statement.
Council Member Holman: And we just add $81 to it.
Council Member Wolbach: And how much is a showerhead or a new sink or a faucet?
Mr. Pirnejad: All I can say is the cost of the permit is strictly a function of how long does it take to issue the permit, support that issuance of the permit, pay for the inspector
to go out there, come back, the fully burdened rate yada, yada.
Council Member Holman: So I’m going to make a little bit of an argument here for, it’s off topic, acknowledging that, that the goal of code enforcement is to get compliance, but we’re
subsidizing code enforcement tremendously by not charging penalties and fees, you know, at a much earlier time, rather than waiting for multiple offences before ever charging anything.
So we’re subsidizing code enforcement but we’re perhaps creating burdens by doing what’s the responsible thing to do here in terms of fees, so it’s just a comment.
Council Member Schmid: I’ll move the Staff recommendation.
Chair Filseth: Second.
MOTION: Council Member Schmid moved, seconded by Chair Filseth to recommend the City Council adopt an Ordinance amending the Development Services Municipal Fees as described in Attachment
A of the Staff Report, based on the completion of a Cost of Services Study (Attachment B) and adjusted by the annual inflator applied to Municipal Fees from Fiscal Year 2016 to Fiscal
Year 2017.
Chair Filseth: Do you care to speak to your Motion?
Council Member Schmid: Yeah, I think the goal of the Council always has been to cover your costs. I think that you’ve got good evidence for what you presented to us. I think the sense
of the Council is to be sensitive about homes, but with that I think we should move ahead. Thank you.
Chair Filseth: It looks very thorough. Thank you very much. Do you have a comment? All in favor? Motion passes unanimously. Thank you very much.
MOTION PASSED: 4-0
Future Meetings and Agendas
Lalo Perez, Chief Financial Officer: Mr. Chair, if I may, one last meeting for this Finance Committee, and that is Tuesday, December 6, and we’re down to two items. It’s probably better
because we’ll need the time for the Fiscal Year ’18 General Fund Budget preliminary budget balancing outline that we will prepare for you. The second item that we will have is the Palo
Alto clean up date. Public Works has asked for additional time, they need more time on this item. It’s a little more complex than it appears. So we’ll prepare a packet for you and have
that general discussion and we will include information on, while we did not give you a full long-range financial forecast, we will give you information that we’ve updated on our revenues
and expenses. In addition, we have a session with Stephen Levy tomorrow, so we’re interested in hearing his take on the California economy, especially given the changes. So we will provide
you some feedback on that as well.
James Keene, City Manager: Can we put the CLEAN item first. I’m in Sacramento that morning on the 6th, so I just want to be sure I bet back in time for the budget discussion.
Mr. Perez: Yeah, that shouldn’t be a problem. And one of the challenges we have is trying to get you the latest information, so we’re going to try to make our packet, but if not, it
might be a little bit late, but we want to make sure we get you as much information as possible for the important item.
Council Member Schmid: Lalo, did I hear you correctly, with the 2018 you’ll have some brief long-range financial forecast?
Mr. Perez: Exactly, that level, yes. And that’s all I have. Thank you.
Mr. Keene: And that’s Council Member Schmid’s last Finance Committee.
Council Member Holman: We’ll have peanut butter sandwiches for celebration.
Adjournment: The meeting was adjourned at 9:11 P.M.
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Finance Committee Transcript
November 15, 2016
FINANCE COMMITTEE
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Finance Committee Transcript
November 15, 2016