HomeMy WebLinkAbout2016-12-06 Finance Committee Summary Minutes
Special Meeting
Tuesday, December 6, 2016
Chairperson Filseth called the meeting to order at 6:07 P.M. in the Community Meeting Room, 250 Hamilton Avenue, Palo Alto, California.
Present: Filseth (Chair), Holman, Schmid, Wolbach arrived at 6:11 P.M.
Absent:
Oral Communications
Chair Filseth: First order is oral communications. Any member of the public may speak to any Item not on the Agenda. Is there any member of the public who would like to speak? With no
speakers from the public, let’s proceed to Action Items.
Action Items
1. Fiscal Year 2018 General Fund Financial Status and Budget Development Guidelines.
Chair Filseth: The first Item is Fiscal Year 2018 General Fund. Thanks folks.
James Keene, City Manager: We’ll catch you if you fall, but we know that won’t happen.
Kiely Nose, Budget Manager: Thank you Jim. Good evening Council Members. I’m Kiely, the Budget Director. So, before you guys tonight we have the Fiscal Year (FY) ’18 Budget development
status and development of guidelines. So, what Staff is recommending in this Item is that Finance Committee review and comment on the policies and strategies recommended by Staff to
the City Manager to guide the FY ’18 Budget process. We’ve brought this to you guys tonight, basically at the behest of the City Manager and from our FY ’17 Budget hearings back last
May with you guys. By City Charter the City Manager is charged with the responsibility of developing a recommended annual Budget and, of course, managing that through the year. This
Item is, obviously, basically due to the FY ’17 Budget process and this discussion is scheduled in keeping with our commitment to transparency and to continue to familiarize the Finance
Committee, Council and community with some of the challenges and decisions we are going to face as we go into this FY ’18 Budget process. I think we all saw that on the horizon as we
went through FY ’17. So, just a quick trip down memory lane, the last long-range financial forecast showed that over the very near term we were going to be breaking even basically, we
we’re on the cusp of small surpluses or small deficits. So, you know, we knew that we needed
to be prudent with our spending, but as we went into FY ‘17’s Budget we had a number of major adjustments that really changed that kind of landscape of our long-range
financial forecast. So, major changes, Project Safety Net was one, which is about a $2 million a year project. Obviously, we had all of our labor negotiations come through, so salaries
and benefits. We have on-going negotiations with Sanford University on our fire services contract. So this is just a smattering of the some of the major changes that we saw through the
FY ’17 process. So where are we now, which is probably where you guys would like to focus? Budget Staff has gone through and analyzed the normal variables. We have looked through all
of our tax revenue estimates. We have updated our salary and benefit projections. We have looked at our current compliment of employees and what their salaries are at, so we have updated
for turnover in the organization. We updated things like our retirement rates and whatnot. But what’s not included in these numbers, as we look at these $4-6 million gaps or deficits
in FY ’18 is any normal cost of business increases. So by that I mean general Cost of Living Adjustment (COLA) COLA’s that might be in contracts, general base increases the departments
might bring forward to just maintain current service levels because of inflation.
Chair Filseth: (Inaudible).
Ms. Nose: Correct. So, a good example that just came up, I think in Policy and Services, is HSRAP. This maintains HSRAP at the FY ’17 levels. So any increase is going to adjust these.
So what you guys are seeing is that in FY ’18 are one time, so in FY ’18 we are probably seeing a $4-6 million deficit and as the years go by, hopefully, things will clear up a little
bit, but ultimately there are a number of unknowns as we move through that forecast. So, I’m going to turn it over to Lalo and Joe, who are going to kind of just give a brief overview
of the economy and our major revenues. Whoever wants to go?
Lalo Perez, Chief Financial Officer: Ah, Joe.
Joe Saccio, Assistant Director of Administrative Services: Thank you. I’m Joe Saccio, Assistant Director of Administrative Services. You know, we really have good news to report on the
economy. We met with Steve Levy not long ago, Beacon Economics came out…
Mr. Keene: After the election.
Mr. Saccio: He wasn’t very depressed you know, and he did his presentation to us. So Beacon Economics today, both of them, both Steve and Beacon Economics are really impressed by the
job growth from year to year and they both believe that, you know, all the cylinders are firing well, and I think that is shown in how well the tax revenues are performing. Sales Tax,
Property Tax and Transient Occupancy Tax (TOT) are doing really well. The one area where we see just a tad of concern is in the documentary transfer tax. It’s a little bit below where
we were last year at this time. There are no major commercial transactions that will bump us up so far out of the $10 million level that we saw a couple of years ago. But there is still
a lot left in the year and we’re optimistic that it will come out at least equal to where it was last year. We have been, over the past years we have been not pushing the envelope on
revenues, but let’s just say we’ve been more assertive on the revenues. In the past we may have been somewhat conservative, but recognizing that there is a demand on resources, we feel
that we’ve gone fairly to the limit, you know, on what we expect. So again, we think that’s really good news, and we think it’s going to continue. Steve said that he thought it will
take 18 months for the current president, if he does any damage it might be in 18 months, but it’ll take 18 months, unless there is something like a trade war, for example. But he sees
it going forward for 18 and you do your, in the sort of economic newspapers and magazines that the economy should be doing well for at least a couple of more years. And that’s reflected
in the document that Kiely and her team put together. So, let’s see here, the growth rates that we’ve projected out for ’18 and then ’19 and ’20 are very similar to what we’ve seen in
the last ten years in the compound annual growth rates, so we haven’t exceeded those trends as the Finance Committee directed us to do about four years ago. We’ve been pretty consistent
with that. Surprisingly, one area we were surprised by, happy by, was the sales tax, that it’s doing fairly well, you know, the restaurant environment, auto sales have finally picked
up, restaurant environment. The only weak area is department store sales. So really, we can kind of go into some details, but overall there is this graph showing our revenues. Property
Taxes, we have been doing very well, and we’re consistent with the County and what the information is that they are providing to us in case you were worried about anything. The school
district’s forecast, we take out exemptions (inaudible) and so we’re very aware of what the exemptions are and ours are not nearly as significant as the school district’s. But you can
see a very good picture up there. TOT is doing really well. Occupancy rates are doing well and the regular rate per day is doing well, exceeding where we were last year through the first
four months of this year, so overall, really quite good news. I can go out on a high note.
Chair Filseth: You’re supposed to give us the bad news to report because you’re going…
Mr. Saccio: I know. Well, they’ll blame me in case things go south you know, so…
Lalo Perez, Chief Financial Officer: A couple other notes to add to Joe’s Report, last week I attended the League of California Finance Forum and we had Michael Coleman, who is very
involved in helping municipalities and watch the State and revenues and so on, talked about the sales tax impacts. As you may or may not know, there is a one-quarter cent reduction coming
effective ending at the end of this month, but even with that being taken into account, there is still a projection of one percent growth, so it’s good news that even…
Mr. Keene: That’s at the State level?
Mr. Perez: At the State level, even with the decrease of the one-quarter, there is still growth expected. He commended the governor for doing a very good job in being fiscally conservative
and increasing the reserves. The reserves are currently at $10 billion, so there were discussions about, well, if we were to see a recession and they were looking at some prior trends
and they estimated that a recession could impact, at the State level, at the $5 billion range, meaning there is still room within that $10 billion to absorb such a recession. Obviously
if it’s deeper, it’s a different discussion. The other point he made was that the debt ratio is now five percent of projected revenues, which is a great number for the State of California,
meaning that it’s paid down its obligations quite, faster than projected under the governor’s tenure. The reason I mention these things, is because in the past we have been concerned
about any takeaways. Well, there’s more protections. Even from an economic standpoint it seems like we’re better protected, that the State can fend off on its own a little bit better.
Then on top of that, the past calendar year ’17 starting in January of ’18, the State will be collecting a 15 percent excise tax on medical marijuana and so they project huge increases
in revenues as a result of those and that’s the base. Local agencies can decide on their own to add on top of that and they are even looking at whether a cultivation tax should be added,
so it sounds like it’s going to be an area that the State might have higher revenues as a result. Then at that same forum we had Peter Rupert, who is a professor of economics with UC
Santa Barbara, and he was looking at the economy himself and talking about the federal funds rate, and so that’s of interest to us because we have some significant debt program and as
you know, specifically the Public Safety Building. Last year at the same time, but before the rate increase was announced, we felt that it wasn’t necessary, but for political reasons
it was going to happen. He said, “well, I see another quarter happening this December.” He projects another 50 basis points in ’17, so a total of 0.75 cumulative is his projection on
that, so we’re obviously going to watch that very closely. It’s good on the investment side for our portfolio, but not so good on the debt issuance side.
Chair Filseth: (Inaudible, no mic).
Mr. Perez: It’s minimal to none.
Chair Filseth: (Inaudible, no mic).
Mr. Perez: Yeah, anything that we finance, our golf course, our Public Safety, anything in that nature, so you know, the good thing is that we are AAA rated and we tend to sell better
than what the market is offering, but nevertheless, we’re not going to be isolated from these increases. I think that’s all I wanted to report in terms of additional comments.
Ms. Nose: Thanks Lalo and Joe. So, moving on into our General Fund expenses, this is just a holistic view of kind of where your General Fund dollars go. These are in FY ’18 dollars.
So you can see that salaries and benefits continue to be 61 percent of your General Fund Budget. That’s consistent with what was in there for FY ’17, so we’re holding pretty steady as
we move forward. You can see our continued investment infrastructure with that 11 percent transfer. That’s that transfer to your General Infrastructure Fund. Overall these are those
figures we talked about that have been updated and annualized from what was adopted in FY ’17. All the one-time adjustments have been taken out. On the salary and benefits, it’s good
to note you guys have asked, historically how good are our forecasts and I’m actually happy to say, Paul’s not here tonight, but our salaries and benefits year over year are within one
percent of what we gave you guys in last year’s forecast. Not in terms of growth. Year over year, obviously, the growth is bigger, but in terms of what the FY ’18 salaries and benefits
are compared to what we reported to you guys in last year’s long-range financial forecast for FY ’18 salaries and benefits, we you know, within $1 million basically.
Chair Filseth: You said earlier, I want to make sure I understand this right, that if you look in the required contribution pay down of UAL for the Miscellaneous Plan of $15.7 million
here, that this number includes about half of that is what Lalo said. Is that right?
Ms. Nose: Correct. So it does include the General Fund’s component, share of that. So kind of getting into that, what are the major assumptions that are driving this? We’ve built it
on, we sync our positions with our actual employees, so whatever the actual salaries are of your current compliment of employees I think we did in October. We’ll to it again in January
just to keep the data as up-to-date as possible. We’ve updated all the pension information, so we have updated for the most recent CalPERS rate, so when you see these rates up here,
the 30 percent for miscellaneous and 49.7 percent for Safety, that’s a blended rate that takes that normal cost as well as that UAL required contribution and spreads it. So when you’re
looking at the salary and benefits, you are looking at that total, the total, I guess, package of pension costs. One thing to note on this is the City has taken great strides in our
recent labor negotiations and got agreement with a number of groups to have the employees share in the employer contributions. So these rates that you see up here are the gross rates.
So these are the rates that CalPERS gives us. In certain instances, actually I think beginning even now, some of them were upon ratification, employees are starting to pick up a component
of these contributions. I want to say over the course of the contracts some are picking up to three percent, so I think contracts that end in FY ’18, so Public Safety, for example, instead
of that 49 percent, three percent of that 49 the employees would be picking up.
Mr. Keene: I would like to just add to that though, it’s a really positive move, I mean, sort of breaking through that barrier on the employer side. That being said, let’s just take
Safety for example, over the term of a multi-year contract we’re going to pick up a three percent contribution from the employee to the employer share. Well, you look in one year you’ve
got a 4.3 percent increase in the Safety cost from last year to next year. So, you know, obviously, we need to be vigilant and concerned about the trajectory of this.
Ms. Nose: Definitely. So, some other things to call out just so you guys are aware of. One-time adjustments in FY ’17 are some of the reserves that we established for one time, so in
FY ’17’s Adopted Budget we had established a Sustainability reserve for $250,000. We had established a $500,000 Transportation and Planning reserve. All of those were one-time reserves,
so in this forecast, in this $4-6 million deficit, none of those reserves are funded. So, if we wanted to reinstate those, again, that would be an additional cost to what you guys are
looking at. This has also been updated for other, you know, large known activities going on in the City. A great example is the golf course. So right now the golf course is scheduled
to reopen in the fall of 2017, so both the operating costs, so the revenues as well as the expenses associated with maintaining that, as well as the anticipated debt costs in the second
issuance, which we are anticipating will happen sometime this year, right Lalo?
Mr. Perez: This fiscal year.
Ms. Nose: Correct. So as always, this is the higher level look at all of the big, what we have referred to as known unknowns. So these are all the things that we know, the Council has
talked about or initiatives that we want to take on and that we’re in the process of doing, but we don’t quite know the time frame, we don’t know the amounts associated with them. So
kind of monetarily accounting for them in forecasts is very difficult and we haven’t in this. You know, big ones that are coming up are the Infrastructure Plan. Lalo had alluded to what
it would cost to build that Public Safety Building and the increase in our debt costs potentially. Our ongoing transportation issues and you know, the new sales tax measure that Santa
Clara County came on board will help with that, but it also spurs a number of probably, you know, regional transportation initiatives that we will probably have to help contribute to.
On the good side of things, there is some potential for tax increases. So if new hotels open, that will give us a boost in TOT. Sales tax, if say a car dealership opens, that could be
a boost in our sales tax revenues at a sizeable level. On the flip side, there is a ton of capital projects that we haven’t scheduled, so the junior museum zoo you guys just discussed,
we have phase one covered by the funds, but phase two is an unfunded capital project. Purchasing the Downtown Post Office, other things like future labor negotiations once these contracts
all come to term, and of course, a potential recession. Yes, we have a positive 18-month outlook from Steve, but we are in an unprecedented number of years of growth. You know, every
ten years we know approximately you should see or face a downturn, so we are a little bit due for that as a whole.
Mr. Keene: Before we, just can I, I just want to clarify mostly for maybe media and other folks, when we say tax increases here, we are really talking about the tax increases, increases
in our tax collection. This isn’t talking about an increase in the tax rate. Okay.
Ms. Nose: Correct. So before you guys we had articulated that the intent of this Item is for you guys to review and comment on the Budget strategies and policies, so in the actual CMR
there is a list of ten guidelines to help guide Jim in developing the FY ’18 Budget process. So instead of just restating those, we kind of wanted to give you guys an idea of the intent
of those and the goals of those guidelines. The goals are that we, you know, are prudent. We fulfill our financial, our current financial obligations, the Capital Improvement Plan. We
work to find new revenue sources, whether that be encouraging growth in new hotels or sales tax, or other venues. Also, looking at cost recovery areas, there are a number of areas where
we’ve chosen to either be below cost recovery levels or fully subsidized, so those are all areas that we should really look at and bring forward, so you guys are aware of the choices
you are making in terms of where you’re investing your funding. Other kind of key takeaways are, we want to minimize, obviously, impacts to the community, though do know that if there
are impacts to the community we will do outreach. Obviously, we are going to stand by and fulfill our labor negotiations and (Memorandum of Understanding) MOU’s, fully pay down our ARC,
that annual required contribution for our pension and retiree medical and really look to figure out best strategies and the most prudent way for us to start to address that unfunded
liability. So above and beyond our annual contribution, what can we be doing and what should we be doing to save, basically, or plan for the future in terms of the unfunded liability.
Mr. Keene: So if I can make a couple of general comments. Thanks so much for that. I would like, what Kiely was talking about, this list of the known unknowns. There’s actually three
sort of buckets of things we’re talking about tonight. One, there are the known knowns and the known knowns are part of what is driving the identified deficit or gap that we see of $4-6
million. The known unknowns that she talked about could either increase our deficit because of a greater cost than expected, or could reduce it because of, you know, even better revenue
performance, for example, than we have. Then, you know, the worst thing in one sense are the unknown unknowns. I mean
the things that aren’t even on this particular list. Again, some of those can be even as simple as, if there a potential recession, we assume it’s a typical recession and it’s a god-awful
recession for example. But I would say that, and our thinking I think is aligned with the kind of directives we have on in ongoing way from the Council and then even the Finance Committee’s
discussions last year when you sort of said, “okay, let’s go ahead and make some one-time adjustments for this year, knowing that we want to deal with systemic structural adjustments
for 2018.” Hopefully, we’re taking the same approach that the governor has over the past few years is that we’re not going to ignore the risks that are out there, and do our best to
try to mitigate future risks so that we don’t, you know, we’re not just okay for now and then things get worse. So even though we’re talking about pursuing a Budget that systemically
or structurally fixes the gap we have so we don’t have them in future years, we’re actually trying to also make payments, we were talking beforehand, towards future costs to keep those,
keep all of that blind sort of flatter for us. A couple of other things. The gap that we identified was $4-6 million is where we are right now in the General Fund for 2018. I would say
that I asked Lalo and his team to be a little more liberal in our revenue estimates than we have been in the past few years. What that means is, the other way is we have been pretty
conservative and so it has enabled us, both with maintaining expenditures to actually end recent years with some significant surpluses that we have then been able to put towards infrastructure
and that sort of thing. But going into a deficit situation where we’re going to have to be potentially cutting Budgets or reducing Budgets, we didn’t want to have some sort of dark matter
in the Budget, so to speak, that we use to sort of make a, let’s just say we cut a program that’s really important and then we find out we have a surplus at the end of the year and then
everyone says, why did you do that. So, I think we have done safe calculations, but we are being a little more aggressive say on the revenue side than we have in recent years. If we
didn’t do that we would be presenting a bigger Budget deficit, but our finance folks and I feel that we are being responsible and prudent there. And then lastly, I just want to restate
and then ready for whatever Lalo wants to say also, and then your comments. The main reason we’re doing this this year is the Committee again thought it was important to revisit early
in the, this is almost a prebudget situation, both to refamiliarize the Committee, even though we will have a different Finance Committee next year, and to sort of publicly get out there
that it’s clear, here’s the environment the City is in and what it is we need to do and where it is we need to go. So this is in many ways informational, wanting to get feedback from
the Council, but I would tell you that, and Kiely said, here are some of the guidelines that we’re thinking about using as we provide instruction to departments on the Budget. Those
things could change also. You know, we could suddenly say, that’s not going to be enough or we want to take a different approach. There are two other things just for the Committee’s
awareness. We have talked about, as we move through the rest of the year, trying to build a stronger fiscal impact section in the Staff Reports, so that some of the potential risks or
whatever, are more known, so that when you’re making decisions during the course of the year, you will have a little bit better sense of what the fiscal impact is. And then secondly,
and I think I might have mentioned this earlier once before too, as we told department directors this morning at the leadership team meeting, it’s that time of year where people need
to put in for Mid-year Budget adjustments and when Lalo made the announcement, he said be sure to identify and get in all your requests for Budget adjustments. We probably won’t approve
or recommend any of them, but we will want to get them anyway. What I will say is that we are, I’m telling departments that we need to be dealing with absolute mid-year essentials rather
than, this is another bite at the apple, because we want the choices that the City has to make all be, for the most part, be made when the Council, Finance and the Council work through
the FY ’18 Budget. I don’t want you to have approved the Mid-year Budget and again we get into some difficult choices and say, gosh, remember when we did those things in the mid-year,
why did we approve that. That has cut into our flexibility for the FY ’18 Budget, so that’s the thinking.
Mr. Perez: Taking you to Slide 11, there is nothing new or shocking that you haven’t seen in the past in our Budget Balancing Solutions that we’re going to pursue. It kind of ties into
all the comments that City Manager Keene has made, so it’s part of our typical… Maybe the one that’s a little bit different is the Fire Department, but that’s for obvious reasons there.
Let me give you a quick update on a couple of things. This came after the Report. Actually I was in Monterey where the League of California Finance Forum was and Kiely was typing away
at like 1 o’clock in the morning and I was like, okay, you’ve got to go. We’ll do this verbally. Literally during one of the sessions the lobbyist for the League interrupted the session
to say, “I just got a phone call from CalPERS Staff and they have breaking news where they’re, the board has decided as a result of survey results,” and I’ll read you the results of
the survey, “to hold a special meeting on December 20 to discuss the possibility of immediate reduction of 50 basis points, or half a percent,” so taking it from 7.5 to 7 percent on
the number without the administrative, if you recall that discussion from our last meeting.
Chair Filseth: (Inaudible, no mic).
Mr. Perez: Well, and in October, staff, CalPERS staff was saying everything we’re hearing, our numbers should be more in the four to six percent. So, you know, 7.5 is still probably
not sufficient based on what the experts are looking at. So what prompted the discussion was that there were over 600 respondents, including ourselves, either through the League, city
managers at the forum that CalPERS had, and the questions was, “Should we do something prior to February of 2018 in terms of the assumption of the rate of return”, and 82 percent said
yes. So I think the writing was on the wall for them. 73 of the cities are starting to prepare themselves for the change, us being one, we have had 10 percent of our General Fund contribution,
the 2.1 represents roughly 10 percent of our payment side, 11 percent are prefunding, so that’s, I would throw us in that bucket because we put that money aside. 70 percent of the respondents
were concerned about reducing the volatility and that’s the rate. The question was, “how many of you will have an extreme high impact as a result of this change?” Twenty-six percent
said so, 40 percent was high, so that’s you know, 66 percent on the high or extremely high impact. And that’s obviously been a very big concern for the board and that’s one of the reasons
why it has been a slow movement. And the one that was a little disturbing from a personal standpoint, 82 percent of the respondents said they wanted a phased-in approach, so that just
prolongs the pain a little, much longer in my opinion. So the options we have, there are to make our voices known at that meeting verbally or through correspondence. So that’s one thing
that’s up for discussion, whether you want to take a position as a Committee or maybe even as a Council. I suppose we could have this for Monday. In terms of the impacts, it’s not an
easy calculation. So one of the things that we talked about at the League was, well take your normal number and CalPERS and the Actuarial Reports, which you should have in your Packet
for Monday, December 12. We gave you the latest Actuarial Reports. They give you the impact on a one percent negative to the rate or one percent positive to the rate. And they said take
the normal rate number and look at that, so I did take a look at that, Kiely and I did, and for safety the normal rate change would be roughly about 3.5 so right now it’s at 49, so you
add 3.5 to that and it would be the normal rate impact by changing that 50 basis points. For the miscellaneous…
Council Member Schmid: Forty-nine percent of salary?
Mr. Perez: Correct.
Council Member Schmid: Would be moved up to 53?
Mr. Perez: Yes. And the miscellaneous would be about 2.2. Now again, these were just back-of-the-napkin numbers just on the normal cost. So it’s something we’re going to work on. One
option we have is not to wait for CalPERS, contact Mr. Bartel and work with him on calculating the number even better, I would hope. So it’s something we’re very mindful of, we’re watching,
we’re pursuing, and we’re keeping an eye on the process that’s going on with CalPERS. Going to the conclusions, you know, I think City Manager Keene covered the first slide very well.
Just to remind you, your Budget Stabilization Reserve is above the target level of 18.5, so there’s about $5.7 million in buffer. To the City Manager Keene’s comments that we were a
little more liberal with our revenue estimates, if for some reason we were to be off on something, this would be a bit of our buffer, assuming we don’t consume it for something else.
This could also be a temporary bridge if we were to bring you a reduction that you were not comfortable with, or the community refused or did not like something that we brought you,
that’s another way to handle it from our perspective. So I think you’ve seen examples over the years of how we have been looking at alternatives, and a lot of it is because of the growing
unfunded liability. Let me just give you a rough update on that number that you’ll see in the infrastructure, excuse me, in the CalPERS Actuarial Report, it roughly went up about $40-45
million. It’s now at $495 million combined pension and retired medical. This is through 06/30/2015. On the pension side, the City-wide total is $338 million, of which 47 percent is General
Fund, or $222 million. So it’s important to distinguish when we talk to you City-wide versus General Fund, so we try to be careful and distinguish that for you.
Chair Filseth: That’s still assuming 7.5 percent discount rate, right?
Mr. Perez: That is correct.
Chair Filseth: Let me ask this, sorry to interrupt here, so it looks to me from their sensitivity analysis if you drop one percent from 7.5 to 6.5, then basically the UAL goes up about
40 percent. Did I read that right?
Mr. Perez: You know, I didn’t get a chance to look at that number. I was focusing on the rate, but if you did that, it’s something we can double check.
Chair Filseth: Is it a good assumption that, let’s say for the sake of argument they were to change to 100 basis points, because that’s what happens to be in here, right, and the UAL
goes up 40 percent, is it a good assumption that our payment to pay down the UAL would track that, would also go up 40 percent?
Mr. Perez: No. Unfortunately, that goes back to my earlier comments, 82 percent of the respondents said we want it phased-in, so that would be my disappointment, that it would not match,
so you would go into a negative amortization, so you would just own more.
Mr. Keene: So, what is the phase-in period and then is the phased or not phased decision to be made, is that an all or none decision?
Mr. Perez: You know, the governor has been very hard, pressing very hard on the board to reduce the discount rate assumption and to do it all without phasing it in, but they have not,
he has not been successful in convincing the board to do that. It is up for discussion. I have not seen as of yet, there may be something out there, but I haven’t seen it, any proposals
as to what the phase-in would look like. The last phase-in remission they did was a five-year, you may recall. So it wouldn’t surprise me if they mimic that last one and come back with
another five-year approach. What I want to leave you with in terms of this, because there is a lot more discussion for us to have, is that we’re also looking at what alternatives we
have. Some of them are, if you will, refinancing the mortgage. In the Reports you will see that there’s what they call a refresh, a fresh start, and it gives you what the payment stream
would look like if we were to go to a 20-year amortization or a 15-year amortization, and those, what we want to do is give you a deep analysis of that, so we could explore options and
then within that there’s even more options. So I think there’s more to come and things for us to strategize on how we address this, because it’s definitely not in our numbers that we
have given you tonight, but it’s something that we’re well aware of that we need to start making some assumptions and with some professional help, because it’s such a key number. But
it is something that is going to impact all of us in the system and I think it needs to happen. I think we all on this side of the table agree on that, and so it’s something that we
will give you more information on that.
Chair Filseth: Let me ask one more question to make sure I understood what you’re saying, except maybe phrase it a little differently, which is, so we’re projecting a $4-6 million deficit
this year, right. We are not projecting a deficit of that magnitude the year after that or the year after that. On the other hand, in the out years there, we also have not factored in
things like inflation, right, and changes in our expenses. Because I think that vectors on how we think about the Budget Stabilization Reserve. If we said this is a one-time thing, you
know, we have two or three one-time expenses, the street lights or something like that, but it’s not going to happen again, then we might look at the BSR one way, because we said this
past year we don’t want to use the BSR until we see what the outlook is for… On the other hand, if we think it’s a structural kind of thing in which, you know I think of it as in the
long term how fast are our revenues growing versus how fast are our expenses growing, and once the relevant assessment for that you would factor in inflation, expansion of the unfunded
liability payments… For the unfunded liability, I mean, look the UAL went up $50 million this year. We spent $50 million more on humanity than we have in here, right, so if I spent $50
million on my VISA card but I don’t make a payment next year, it’s not like I don’t owe the $50 million. We’re going to have to pay for that at some point, so the question of what is
the structural outlook look like seems to me like really important, even as we think about how to use things like, make decisions like the BSR, but we haven’t done that yet, right?
Mr. Perez: Yeah, and I think that’s to the point of giving you the fresh start information, that it’s key because then you’ll be able to see, to your point of the credit card, if we
do it in a different manner, how much interest are we going to avoid and actually pay down and how fast, so I have done some preliminary review and I’m not doing this on my own. I’m
kind of taking the notes from fellow finance directors that are already further ahead of us in this field.
Chair Filseth: (Inaudible, no mic).
Mr. Perez: Well, you know, there is some really good work already out there, so we want to use that, not reinvent the wheel, then obviously check in with John Bartel to make sure we
are on the right track, and there could be some significant savings. But there’s tradeoffs in those decisions that we have to make, but I think the answer is, or where I feel better,
I should say, is that we don’t have to wait for CalPERS to do something. We can take action and not have to wait for the board to make those changes and we can choose to what level,
so that’s what makes me feel more comfortable. We will have these options, we will lay them out for you and we will be able to make informed decisions, but I think at the same time,
going back to City Manager Keene’s comments, we have to watch the whole finance bag and ensure we’re not growing other areas and that we’re focusing on where we want to put our dollars.
The last piece is the schedule of the calendar, which you are pretty well familiar with, since we just went through that exactly this year, but just to kind of put it up again and remind
you of what that is and with that we’re open for any other questions.
Mr. Keene: So the plan is to get to the Council, though, earlier than we have in recent years on the Mid-year Budget, right, so we’re not… We’ve been in like March or April on those
it seems so…
Ms. Nose: We have, and so in order to obtain that, though, that would mean that we most likely wouldn’t have Finance Committee see mid-year first, it would go straight to the full Council,
especially given January is typically that time where Council is reorganizing.
Council Member Wolbach: Thank you Staff for the presentation and Chair for some useful questions during the course of the conversation.
Council Member Schmid: Could I ask a process question before getting… What’s our response now? Is it questions and then comments or, what are we going to do.
Chair Filseth: That’s a good question. My inclination is why don’t we do questions and then comments together. We’re not being asked to do a Motion here, right? This is more like a study
session, right, so I think rigid adherence to Robert’s Rules, we might be a little flexible on, so I’d say, you know…
Mr. Keene: And, you know, I would say in the comments also, with all due respect for the Council Members who will be here next year in particular, if there is something in particular
that’s really on your mind that you would want us to be thinking about, I mean, it’s not in the form of a Motion, but it’s always helpful for us to know what the Council is thinking,
knowing that this is just a subset of the Council.
Council Member Holman: So does that mean you would like some kind of, not Motions, but maybe some straw polls or just some kind of supportive comments or something? Otherwise you’re
going to take away what individual Council members comments?
Mr. Keene: Yes, but I want to be clear, Kiely did a great job of leading off by just reminding us all that, actually I have an independent responsibility to propose a Budget to the Council,
and that, I mean this is with the utmost respect, but I’m under no obligation to take any direction from the Council in doing that part of the job. That being said (crosstalk) and you
all can completely amend it in Finance or whatever it is that you want to do. That being said, it is always helpful to know where people are seeing the emphasis is or issues or concerns
in the same way that it is important for you to hear from the public, what people think about even though you have to make your own independent decisions. You get bogged down in a lot
of issues, but clearly, to give you a perfect example, if somebody said, “I don’t really care that you make some hard choices and do some structural adjustments, I’m willing to do just
a bunch of one-time adjustments this year, and by the way, I think the majority of the Council is going to be there with me.” You wouldn’t say that, but that would be good to know. Things
like, I’m making it overly simple there, but…
Chair Filseth: Given sort of the unstructured nature of what we’re talking about here, I mean, other people can chime in, but I think we had a good meeting if you guys have the best
possible input you can get from us as you go off to do this.
Council Member Wolbach: Thanks for the clarification on the process. A couple of questions, in the City Manager’s Report, on Pages 9 and 10 where you actually list out your Budget Balancing
Strategy Guidelines in that table, it looks like there is a tell, correct me if I’m wrong, it looks like there is a real relationship between four and eight. I’m not sure if they’re
redundant or just kind of reinforcing each other. I’m talking about Exploring Alternative Services Delivery Models and Identifying City Policy Changes That Would Enable and Facilitate
Service Delivery Changes. I guess that’s more of a comment, unless Staff had anything to add to that besides the examples listed in number four. On Number 3 and Number 10, I was hoping
to get maybe a little bit more color. Maybe a couple of examples, if Staff has any in mind, even just hypotheticals, not necessarily ones you’re recommending, just so as we’re reading
this we can cut past the, in thinking about this or as the public is looking at this, that we can move past the abstract. We’re talking about number three, Business Process Redesign
and that that means or potentially could mean to Staff, and then Number 10, Resource Additions and what that would look like. Potentially again, hypothetically, how broad or how narrow,
those two phrases. So, Business Process Redesign and Resource Additions in Numbers 3 and 10 respectfully, any more clarification and then I might have some more comments after that we
well.
Mr. Perez: Sure, good points. We’ll look at that and clarify because there is some element of duplication in it, but we’ll distinguish them. Focusing on Number 3, it’s almost a necessary
change for us. One from a technology standpoint and second from a business best practices. We have had, over the years, either Council direction or audit findings and recommendations
that we institute it and we need to revisit some of those. Do they still make sense for us to do that? I’ll give you an example of one that Harriet was very open to discussing and adjusting
for us. A prior auditor recommended that we put a classification on the expenditures for whenever you use a contingency in a construction contract. So the classifications were, you know,
change in scope, engineering estimate was above/below. So you were classifying all these expenditures and every time you needed to make a move in the contract, you needed to pull out
the money and put it in these separate accounting buckets and it was creating all this work, and I would argue, so okay, the engineering estimate is off and it is economically driven,
not because the engineer is out of whack. Sometimes it just happens. What do I do with that information now that I have it, and I would argue with them and they wouldn’t give me a good
answer, so Harriet said, you mean you are capturing all this data and it’s not helping us. I said, “no, it’s not helping us negotiate anything”. So she agreed to remove that recommendation
and now the stream of our changes in our contracts are going faster. So that’s one example of one area there. A second example that we’re looking at is the automation, so in Procurement,
for example, we instituted a new system where you submit bids on line, so you don’t need to do it on paper. I can’t tell you how many protests we had because there were so many errors
just in mathematical or entry, because people would be sloppy on their entries and when you’re doing it electronically it’s cut down on that, so it cuts down on the administrative hearings
or protest hearings and then obviously for Staff and for the public, because now the information is there. We’re getting a lot more public records requests, now we can just go straight
to the data bank, pull it out and send it out to the requestors, and they know that we have more data so they’re asking us for some of that data. So those are some of the processes.
And I’m thinking of us in ASD because we’re the central service department, that we impact everybody. One of the things you recently did as a Council that we’re tracking and we’re going
to give you the results later on is that you allowed us to increase our competitive solicitation thresholds and we went from to $5,000 to $10,000, so it’s letting us be more efficient
and quicker to do things and it’s at a lower dollar volume where there’s less risk. So we’re looking at all those different processes where we can, instead of spending time in administration,
we can do it on the project or something else. Those are self benefits in ASD. I’m sure there’s more in other departments that we want to look at, you know, on-line parking permitting,
for example is another area.
Mr. Keene: So if I just might add to that, I don’t want to give a specific example, but just the mindset here, right. I mean there’s a tendency, particularly when you get into a budget-balancing
year where you’ve got to make cuts, that the focus is on just revenues and expenditures making those things balance, so people have to make cuts so they basically, it either results
in a decrease in productivity or decrease in services. So, this is a parallel thing saying, we want you to use the pressure of potentially having less funding to rethink what we do and
at least maintain the same productivity with less money, so how can we streamline things in order to do that. Or opportunistically, how can we use this as an argument to come to the
City Manager or to the Council and say, you know what, we do some things that are a nice to do thing, but if we cut those out we could shift that energy or that effort over to really
necessary things that are at risk in the Budget. And then lastly, I would say there is a dance that takes place in the Budget process, just like in everything else, and the truth is
we like to see folks being on the team and really trying to think how we do more with less and in some ways, by doing that it can have positive spill-over effects when we look at other
requests we make of folks. In other words, you know, to be honest with you, if somebody’s hiding the ball on you in a Budget, it actually doesn’t work. You’re more willing to cut the
heck out of their budget request than if they’re really trying to be creative. It is true.
Mr. Perez: In terms of Number 10, what we’re thinking there is that if a department is going to come in and, given our deficit that we have, and demonstrate to us that something is necessary
and important, I want to challenge them to review their functions they have and look at something we may be doing that may not be as critical anymore in comparison to this new priority
and maybe have a reduction. And that’s why we talked about, you know, we want to minimize the impacts to the community, but we may find that something that was very popular 10 years
ago, when it was demanded is no longer that popular or it can be done in a different manner, and therefore, put something else of a higher priority in place. That’s kind of the thinking
on that.
Council Member Wolbach: Okay, because when I saw prioritize resource additions I was thinking things like what was alluded to earlier, like if a new hotel comes on line we get more TOT
or if there are new businesses that provide additional sales tax, etc. Was I wrong to think that is kind of part of what you were thinking?
Mr. Perez: We would do that, but that is not necessarily what we had in mind when we created number 10.
Council Member Wolbach: I’m glad I asked for a clarification. So to make sure I’m clear, part of what I heard as you were talking about number three was basically to avoid being pennywise
and pound foolish, right? We want to improve efficiency, but we don’t want to just hack things with a cleaver and then find out later that was an important process and ends up costing
us more later to fix what we cut carelessly, right?
Mr. Perez: Correct, and look for opportunities. I mean, I can tell you that we created a lot more space in ASD and Procurement, for example, because of this automation. That we do a
lot of things electronically now. If you were to visit them, you would be hard to find many file cabinets as a result. So there’s space savings, there’s savings in materials and papers
and materials being tracked and lost. DocuSign is another great example of technology that has made us a lot more efficient and effective. Things that used to take seven to 10 days on
a contract now can be done in one to three days, so it allows people to be more productive and it makes us have a better relationship with our community and our vendors.
Council Member Wolbach: Great. And I guess one comment is I think it is worth always keeping an open mind in looking for ways that we can monetize the resources we have now, right? If
we ever, like if we have any land that we’re not using, if we have office space we’re not using, can we lease it out, right? If we have a building or property that we’re not using very
efficiently, can we, we talked about, I’m just trying to encourage my colleagues and Staff to start thinking outside the box a little bit. You know we talk about wanting to make sure
there is space available for things like startups. Well, startups are happy to have short leases and will pay for any space they can find, and if we have any space that’s available,
you know, we can lease that to some startups, and in that way we’re not locked into a really long, several-year lease, but maybe we can collect a little bit of revenue in the meantime.
I just mention that as one example of trying to think outside the box as far as additional revenue streams.
Council Member Holman: So not wanting to violate the process here because the direction was to comment on the process, and…
Mr. Keene: You can comment on everything.
Council Member Holman: Good, because I have questions. You said you wanted to focus on questions first? Questions and comments both, okay. Some things that (crosstalk).
Mr. Keene: That’s one of the productivity improvements we’re going to have.
Council Member Holman: Okay, good. I was productive. I highlighted and I made my list. There were a few things I noticed. One was it talks about things that aren’t accounted for and
it mentioned some special projects. It mentions Cubberley, but it doesn’t mention Fry’s. That comes up a couple of times. I think Fry’s is really foremost on the community’s mind and
especially given when the lease agreement with Fry’s goes away, so I think it would be missing a large piece if we didn’t include Fry’s planning in this. Also, mentioned a few times
were TDR’s, I’m sorry, excuse me, were TDM’s and I don’t know what was meant by that. Was it really supposed to be TMA? TDM is mentioned, unless I totally misread it more than once,
I thought it was TDM a few times.
Ms. Nose: Transportation Demand Management?
Council Member Holman: Yeah, why are we spending money on TDM? Wasn’t it supposed to be TMA probably? It comes up a couple of times in here somewhere.
Council Member Wolbach: Do you mean internal, for the City’s own?
Council Member Holman: As one of the expenditures.
Mr. Keene: I think, not to get too cute about it, I mean I think we would always see TMA as a subset of TDM, obviously, that’s one approach. But we have to support a lot of initiatives
related to TDM, right? I mean, we’re going to be working with, on bike-share programs, things with the research park and who knows what other things we’ll do. I mean, in many ways lots
of alternative transportation issues we would do could also be part of TDM. It’s sort of a broad way of us looking at it.
Council Member Holman: Okay, so one place is on Packet Page 12, in the third bullet, third line, transportation initiatives are just the transportation demand management of TDM. So that’s
one place it comes up. Also, here it talks about capital projects not included in the adopted capital improvement program. I want to take a little bit of a look back.
Mr. Keene: Where are you? Oh, I see, on the same Page.
Council Member Holman: That’s on Packet Page 12, yeah, down, the sixth bullet. Included there somewhere are the junior museum, zoo and Roth Building. I would add in there, for purposes
of discussion, Avenidas. I can’t remember, so some of the funding we did through TDR’s and some we didn’t, and I don’t need to know exactly what we did in the blend, unless you know
offhand.
Mr. Perez: I do. You said no to TDR’s and…
Council Member Holman: For Avenidas.
Mr. Perez: For Avenidas. 2.5 from the Community Development Impact Fees and you gave us the homework to identify where the other 2.5 would come from, so that’s still a pending Item for
us. But as a footnote, there are sufficient funds in that same bucket for the other 2.5.
Council Member Holman: And if we wanted to use those for some other purpose, we could do some other kind of blending of TDR’s, especially if we looked to focus on housing and also we
could do that for the post office. I think the Roth Building was through TDR’s.
Mr. Perez: That is correct.
Council Member Holman: Yeah, so just, you know, thinking a little bit differently.
Mr. Perez: Yeah, so that’s the homework for us as we go through this process. Try to identify all the buckets that are out there for you to consider with, obviously, the General Fund
being the last bucket for us to work with.
Council Member Holman: Exactly. This has come up before and it hasn’t really been particularly pursued. Not that this is the best year to do it, but you have to start somewhere and some
time. We’ve talked before about sharing some costs with PAUSD, crossing guards and there are some other possibilities too and we’ve never really pursued that to any depth that I’m aware
of, so you know, we fund a lot of stuff that a lot of people think could be shared costs. So that’s something else I would hope would be on the…
Mr. Keene: I think that’s a good comment. That’s the kind of comment that’s very helpful to have. You know, it’s in the policy realm also. I would just point out we have pursued that
in the past. A number of years ago I proposed a number of funding transfers that just were, somehow just went right back to us, just ricocheted right back.
Mr. Perez: And, unfortunately, with the financial outlook, it just might happen again.
Council Member Holman: Like I said, this may not be the best time, but I do think we ought to start working towards that, you know. Whether it happens this year or not, I still think
we should be working towards that, and you can pick out the obvious ones where that would be applicable. Cost recovery, I’ve made this comment a couple of weeks ago, or three weeks ago
or whenever it was we were talking, we talked about cost recovery. That’s also one of the things mentioned in here. I think code enforcement is one place where we have a gaping hole,
where we don’t do cost recovery, we don’t charge penalties, we don’t charge for inspections. I mean, there is a huge gaping hole there, and most especially when it comes to repeat offenders.
We spend a lot of Staff time trying to get compliance, and then we get temporary compliance, then code enforcement is back out there again after citizen complaints and I do make note
of that because the public will also pick up on that. I was not sure what was meant by, if you wouldn’t mild clarifying, the Stanford fees, it said we weren’t getting as high a return,
not return but as high an income as we thought from the Stanford fees, and I wasn’t sure what quite that meant, if I can find that in my highlighting here.
Ms. Nose: If you can point us to a page, that would be helpful.
Council Member Holman: I will look for that.
Mr. Saccio: Is that in reference to the Stanford contract?
Council Member Holman: No. I didn’t read it as such. That’s the problem with highlighting too many things, right. The animal shelter is mentioned here, but I thought there was going
to be some savings by having an independent operator.
Mr. Perez: Well, it depends on how you look at it. If you look at it just from an operation, potentially; but we want to look at it from a whole picture. There is a request for capital
improvements and renovations at the very least, if the capital improvements, the major capital improvements not there, so I think we’re still in the process of working through those
details and so at this point I think it’s more of an unknown. There are general concepts we have been discussing, but, you know, unless I’m mistaken, I don’t think we’re quite there
to be able to really give you more information. I think we have it calendared in the early part of the year to come back with more.
Mr. Keene: We’ll know sort of what the known or unknown costs are on the animal services thing before we get into the FY ’18 Budget. We’re just identifying that we’re in the process
of exploring contract with Pets In Need and there are a lot of unknowns still there, that’s all.
Council Member Holman: So could the funds, or some of the funds from let’s just say Avenidas, if we raised some of those funds from TDR’s could we use some of the other bucket of money
for public/private partnership for the animal shelter?
Mr. Perez: Are you referring specifically to the impact fees I was talking about earlier?
Council Member Holman: Um-hmm.
Mr. Perez: We would have to look at it because it would have to fit the definition, the legal definition of it, so we would definitely explore that. So I would have to ask our Legal
Staff to help us define what community facility is, because I don’t know if it’s meant literally for like a community center or something beyond that. So I’m, right now I don’t know
that off the top of my head, so we would definitely explore those things.
Council Member Holman: And that would partly depend also on what some of the programming it’s planned for, the animal shelter?
Mr. Perez: I believe so but it’s a discussion we would need to have.
Council Member Holman: Understood. Thank you. New revenue, it’s nice to see that retail, except for department stores, is doing really well. The City Manager and I have had a couple
of conversations about an economic development manager, I think we called it one time, a creative director or slash creative director. You know, it is a staff position, but I think it
is something that we really need to focus on and how we can improve our retail mix, our service mix in the community, and really honestly I can’t recall ever having a, with all due respect
to a number of people, I can’t recall ever having a really strong person who was assertive and out there trying to attract people to the community to add to the good mix. And that’s,
again, with all due respect and some things I’m sure I’m not aware of, but I haven’t seen the kinds of results that I’ve seen in other communities, for whatever that’s worth. One thing
that also isn’t brought forth here is what the, and I think Cory alluded to this, is the lease rates, or I guess a different way you look at it, the lease rates the City is obligated
to, what that’s likely to do and how that might impact?
Mr. Perez: Just so I’m clear, the facilities that we’re leasing, the City?
Council Member Holman: Yes. Is that accounted for here in terms of, because those go up? I mean (crosstalk).
Mr. Perez: For the ones that we know, because the ones that we know we work with Amed and his staff because we have those leases and they are set. Some of them are based on Consumer
Price Index (CPI) inflation, so we take a guess at that and so we might have to refine that if we’re off on the assumptions. But, yes, most of them have some kind of trigger so we would
know that.
Council Member Holman: Okay, that’s helpful to know. And I think just one or two more things here. One is just a clarification, because in the Staff Report it talked about having a $2.1
million expense over what our Approved Budget was, that had come to us two or four weeks ago or so, but I thought it was 2.4?
Ms. Nose: Are you talking about the draws on the Budget Stabilization Reserve (BSR) thus far through the year, is that what you’re talking about?
Council Member Holman: Yeah.
Ms. Nose: Like Budget Amendments on any given Monday? Yes, it’s a moving target because every Monday it’s…
Council Member Holman: But this number was lower than what we have just seen more recently, so this was 2.1 and I think recently it was 2.4. But anyway, to just kind of… I really appreciate
what you said Jim, very much, about the Staff Reports and can I suggest that cumulative impact as a part of the Staff Reports would be really helpful. So I’ll just make this up, if there’s
a contract amendment for, you know, $1 million, to make that number up, it would be really helpful to know where that puts us in terms of an impact on Budget, Approved Budget, for instance.
I’m just going to put a little plug in here. It’s not necessarily pertinent to this, but I’m just going to put a little plug in here. I know the Policy and Services Committee had a conversation,
the Council hasn’t yet, but I’m really hoping to see the $200,000 allocated in the Budget for HSRAP increase, to bring us up to some kind of decent, you know, level compared to where
we were 13 years ago. I think that is it, and I’ll try to find the Stanford reference that I highlighted earlier and come back with that. Thank you.
Mr. Saccio: Can I ask one clarifying question? Excuse me. When you were talking about Fry’s, perhaps Lalo knows, but are you referring to the loss of revenue from Fry’s versus costs
associated…
Council Member Holman: No, the costs associated with doing a plan for the Fry’s site.
Mr. Saccio: The plan, right. Okay. Thank you.
Council Member Holman: Akin to what’s in here referenced, what’s referenced in here to doing a plan for Cubberley.
Mr. Saccio: Okay.
Council Member Schmid: I guess I’m the only member who, this is the last Finance Committee after nine years, so I get to say what I want. (Crosstalk). First I want to say that I have
always admired the budget process. It’s really an ideal model for the rest of the City. You start by looking in the fall, looking back at the previous year to the Comprehensive Annual
Financial Report. Then you have the long-term financial outlook of where we’re going with the context for moving forward. Then you get into the details of a grand look at the budget,
the details. Then, finally a budget vote. And it works very well over a nine-month period. I think this is a great idea, a great addition. To start upfront with what are the strategic
goals. You know, let’s talk about our strategies of approaching this. So it’s hard to argue with the ones you have here, like number one and two, let’s do a good Budget, balance the
budget. But I have come up with a list of seven items I would put on my strategy list. First, I guess, be aware of the wake-up calls. In recent months we have had the animal services
turned down by our partners and left alone to deal with that service. We had the Stanford Fire Service, both in the foothills and now the Hanover station saying, do we really want to
work with you guys anymore. There was an Item the other night on the budget, (inaudible) brought up the point, gee, the Council voted transportation traffic officers, but they’re not
there because money has to be spent elsewhere. So, we are in a situation where our costs are losing contact with our neighbors, with the private sector and we need to be aware that providing
government services is expensive and hard. Leads to point number two, the pension issue. Lalo, I am glad that you brought up the numbers. My original notion was to ask maybe we should
talk to our Legal Department on if there is something we could do to go directly to CalPERS and say, look if you guys don’t give us an accurate number on the liabilities we are facing
in the future, maybe we could get a group of cities to go and say, you are not doing your job. But I think it is essential that we confront in every one of our Budgets the real cost
of pensions, this year and in the future, the obligations we’re taking on. So it’s important to do that on a large scale, but even on a detailed scale. One of our solutions this year
was to say, oh, we’ll get the workers to pay more of their pensions. We’ll give them a higher salary, but they will put that money into the pensions. But, of course, we’re creating 30
years of pension payments with liabilities that aren’t being covered by those payments. So we’re compounding our difficulties. So we have to address that pension issue right up front.
I think Eric has made that point a number of times, and that’s something that just has to be done if we want a clear Budget. I think it’s important to separate the infrastructure from
our salary and benefits. When we do a Budget, we look at the TOT and say, oh great, our tax revenues are going up, but part of that of obligated, a good portion of that is obligated
to our infrastructure which pays for virtually no salaries. So we’ve got to have a Budget that clearly states that we have dedicated funds to infrastructure. I think that’s a real beneficial
thing that’s come up in the last couple of years. But to recognize that in our Budget and say, okay, it provides $10 million through the TOT. We have an obligation to provide maybe another
$10 from our Budget, so that’s $20 million set aside that cannot be used to calculate salaries and benefits. So I think that distinction is important moving ahead. My point number four
is the money-making opportunities. Council Member Wolbach has made that point already. I think as we talk about properties, we have to think, is there revenue generation possibilities.
Not just displacing people from other leases, but how can we use those properties in a beneficial way. You know, I think it’s a shame to be talking about the post office building without
talking about getting the public in there in some way, café, restaurant, bar, some way of getting people to utilize this wonderful space and generate a little revenue. Again, help support
uses on the rest of the property. Startups, we can use some of those jail cells in the old Police building to get them started, locked in there. (Crosstalk). Point number five. I think
one of the real disturbing issues for me is we have a 3:1 ratio of jobs to employed residents. We are one of the big commute centers in the country. There is no other city that is really
above us. Washington D.C. and Manhattan County are the only two that come close to us. No one in California is close. So, and that ratio over the last 15 years has, you know, of new
developments has been 3:1, and what benefit do we get out of that? Property taxes over that period of the last, what, eight, nine years, property tax paid by business has gone from 33
percent of our property tax to 25, and yet we’re grappling now on a weekly basis with our Budgets on growth and planning, RPP’s, new signals, TDM’s, parking, Police and Fire, which are
intensely used in the Downtown areas, and yet they’re paying a smaller and smaller share of the costs. We need to grapple with that issue of how can business participate in at least
covering the cost of the mitigations, parking, traffic congestion and so on, that they cause. It’s crazy that they are not participating actively in a funding way. Staffing, I guess
the pension issue is a big one. Everyone we hire we’re taking on not just the obligation of the salaries, which are growing modestly with our revenue, but pensions which are growing
at twice the cost to us of salaries, and yet not fully covered. So we’re pushing that down the road and ten years from now Council Members and Staff are going to be scratching their
heads, how can we deal with this. I think it means that we have to look very carefully at what does our staff look like down the road, five or ten years, and say, what’s an appropriate
staff to be dealing with the City, although you mentioned some technologies that allow you to do things more effectively. What kind of impact can we anticipate over the next five years
that those technologies can be used and how can we rethink a little bit how we use those people? Back to the wake-up call, how do we use people differently? You know, Stanford is asking
this question on the Fire Department. Can we work out a solution to them which is more cost effective? And finally, last point, I think use the Council better. I think this is a good
example of how to use the Council. Upfront ask for strategic guidance and perceptions so that when you get down to the details, it’s not, “oh, go gather some more details,” but rather
it’s a statement to the Council, “here is how we have interpreted your strategic guidance”. I think you would find it leads to a lot less Staff running off to do studies on A, B, C,
D, if you can upfront say, here are the strategic issues that are important to us”. So, with that, good luck. I’ll miss seeing your Budget when it comes.
Chair Filseth: First of all, I really like this very terse and direct and interesting read. (Crosstalk). What do I do first here? At what point do we start getting money from Measure
B? Right? Does that impact any of this, because we supposed to… I mean, the grade separation is one thing, but we’re supposed to get a whole bunch of money, or a certain amount of money
nominally for potholes, except our potholes are in pretty good shape, so we can use it for other things. So do we… What’s the outlook on that?
Mr. Keene: I think we should add that to the known unknowns list, really. (Crosstalk).
Chair Filseth: I mean, I’m sure there’s a constrained range of things it can be used for but…
Mr. Perez: Yeah. And you know, just to point out and I think we covered it in the Report, that we did not include things that are in the pipeline, such as potential hotel additions or
auto dealership expansion and all of those, would be to your point of strategic decision and policy direction on those.
Chair Filseth: Yeah, there’s going to be plenty of room for judgement, management judgement in this kind of stuff.
Ms. Nose: Really quickly, to answer your question on Measure B, from a very technical standpoint, the money is not actually going to start flowing to the County until this spring, so
the rate will go in effect, I think it’s maybe like a three-month or four-month lag in terms of limitation timeframe, so the County won’t even see the money until then. Then after that
there’s a number of programs and basically groupings of projects that the measure kind of talked about, so things from BART, County expressways, highway interchanges, Caltrain grade
separation, so they have allocated $700 million to these things. But in terms of the specifics, you know, so what exactly will Palo Alto see, we’ll work with Josh directly on part of
our CIP this year, on any urgent projects, but I think there is definitely a role out period.
Chair Filseth: I think we’re looking at sort of long… I mean, my mentality is sort of long-term here, you know, ten year’s timeframe kind of stuff. I mean, a one-year problem we can
fix with a BSR surplus, okay. But what are we looking at for the next ten, fifteen, what are we doing structurally? That Measure B is not structural, but it’s kind of a long-term thing,
right?
Mr. Keene: I would say Measure B, I mean, if we’re talking about the County, by this spring, we wouldn’t really be making any FY ’18 Budget decisions based upon, I think, any revenue
flow from Measure B for FY ’18. And then secondly, beyond that, most of the funding that will come to us will be, that matters most to us, would be ultimately on some really big capital
projects. The one that is probably most fungible for us that I think could have an impact on the Budget, though, is the amount of money that we would get for roadway improvements, because
of the fact that we will be above the 85 PCI index, which will basically allow us to reallocate those funds towards almost whatever we want, and…
Chair Filseth: That’s the one I was thinking of first, yeah.
Ms. Nose: We’re going to get $38 million.
Chair Filseth: Well, it’s a million a year. I think somebody mentioned a general preference for full cost recovery, which I think we’re already doing, right? That’s, we sort of adopted
that already as a general strategy, that makes sense?
Mr. Perez: We have a ‘moving towards’ policy in some areas. (Crosstalk).
Mr. Keene: We have pushed for faster than we have been able to get.
Chair Filseth: I will remind you of that in our next Item tonight. Okay, and then, so my summary on this was, again, from a structural perspective, overall, in general revenues, General
Fund revenues, anyway, increasing five percent a year in general, maybe 4.5, five, you know. Property Tax has gone up a little bit faster, documentary transfer tax still a little bit
slower, but that’s sort of… How fast are construction costs increasing?
Mr. Perez: They’re scary. I’m only aware of a couple of projects. I can’t really speak, you know, Brad or Mike would probably be better suited to speak, but some of the costs are just
alarming. What we’re hearing is that there is intense competition because a lot of the major contractors are already very busy with major projects with, obviously, big, known companies
in the area with these huge projects. So there’s less people available and they are increasing their costs because of the demands. So it’s not just costs, it’s opportunity, so…
Mr. Keene: So where you’re going is, just to make it terse and direct, I mean, time is money and so fast decision making and execution on our capital projects, I think, is really in
our best interests, because those costs are going up faster than our revenue stream by, I’m sure it actually makes our near-term pension problem look more manageable near term. So while
the economy is doing well, that’s when we need to be getting these projects done as fast as we possibly can, because we get the revenues on the one hand, on the other hand costs are
going to go up. I mean, we can’t sit, lay around waiting for a big recession and the price of steel and everything to drop through the roof. You know, that’s a problem. So it really
means…
Chair Filseth: It will happen at some point.
Mr. Keene: So it really means being decisive on the Public Safety Building, for example, it would be really key for us to, you know, not, I mean accelerate the Palo Alto process on some
of these capital projects, I think will be important.
Chair Filseth: Well, you watch, I mean, it’s not just us. You look at the JMZ for example. You know, they are sort of, plans have changed over time and so forth.
Council Member Holman: Can I have a follow up to that?
Chair Filseth: Yeah.
Council Member Holman: So, you the economy is not this strong pretty much any place as it is here, so do we ever look at importing contracting firms?
Mr. Keene: I don’t know where you want to import them from, but we did import Flintco.
Council Member Holman: I know where you’re going, but one bad apple doesn’t necessarily lead to… I mean, it’s not an untried and successful pursuit sometimes. I mean, I’ve done it myself,
to hire somebody from another state to come in and do, I’d just say, I‘ve had somebody from another state come and do my roofs a couple of years ago and it saved me a whole lot of money.
Mr. Perez: Yeah, and I think with technology and the ability to expand where we post our requests for proposals (inaudible) for bid, we can definitely explore those. I happen to commute
near a hotel that I think is reasonable and it’s remarkable to look at the parking lot, that it’s a lot of vehicles with equipment. So the workers, it’s telling me the workers are staying
in a hotel and they’re working on a project. So I think it’s going to happen. It just depends on what we’re looking for. But we will definitely look at our ability to post our requests
for proposals in a wider distribution.
Council Member Holman: Just a quick follow up to that. So you know, relationships, because city managers is a network and finance directors is a network, it’s like, surely some of those
relationships might be able to, not to steal from another community, but you know, maybe there are other communities aren’t quite as, that word, vibrant as this. Okay.
Chair Filseth: So then, as I look at this, I think this chart, so if revenues are growing five percent, I mean, one of the things we’ve been fortunate is the last few years, I mean,
some of this is in here too, which is, we’ve had a couple of years of sort of one-time windfalls, right. You know, the one DTT year, the one sales tax year, so that’s sort of been felicitous,
but you can’t count on it right. Or maybe you can, but… So if our overall is five percent, the if expenses are growing at roughly the same rate, then we’re going to be sort of behind
the eight Ball on some of these other kinds of things going up, construction expenses and so forth. You know, Lalo and I talked about this prior to the meeting, but one of the things
that really struck me looking at this and the CalPERS Report, was that I assume if the salary and benefits part increases faster than the revenue rate, then basically what it takes up
from is the transfer to capital, the Capital Improvement Fund? I mean, is that…
Ms. Nose: That’s a policy call, I think, at that point.
Chair Filseth: But it’s got to go somewhere right?
Mr. Perez: Yeah, and Kiely you may need you to help me make sure we’re looking at the chart in the same way, because, back to Council Member Schmid’s recommendations or points, we did
segregate the revenues from the hotels in relationship to the Infrastructure Plan. So if you start showing those expenses then we kind of need to (crosstalk). Right, to look at the net
impact. I guess, net growth, without some of these transfers that distort it a little bit. But it’s a significant number. It’s $8 million that we’re setting aside and reserving. But,
yeah, those are the kinds of things that I think we will need to dissect a little bit for us so when we do make these comparisons, what we’ll look at and with a little bit more of a
net number.
Chair Filseth: Because the observation that sort of struck me as I was looking at this was, you know, if this number right now is about, in the General Fund, is $115 million or something
like that, and growing at about four percent a year or something like that, which is good because it’s not quite as fast as revenues are growing, right? But you can almost look at it
as two components, right, because the paydown of the UAL is part of that number too, so the paydown of the UAL, which is in here, which is about 20 total or something like that, and
then if you count OPEB on top of that it’s 30, but then only half of it is in the General Fund, so it’s 15 or something like that, that’s growing like 15 percent a year, so as long as
that number is really small compared to sort of the regular wage and benefit number, then it’s going to grow, the aggregate is going to grow four percent a year or something like that.
But as the UAL increases and it becomes a more, as the UAL payment increases, as the UAL increases the UAL payment is going to increase, right, it becomes a more significant part of
this, so the growth rate of that over time is going to increase. So it’s going to go from, even if wage growth continues on its sort of regular trajectory, the growth rate of this number
is going to go from four to 4.5 to five, 5.5, six percent. You know, you sort of have one number up here and a much smaller but growing faster than that, so as we think in the long term,
we have to worry that we’re building in a… I mean, it’s going to be $3 million bigger every year, right?
Mr. Perez: I think that’s why it’s important for us to come back with these scenarios about changing the fresh start that I’m talking about, because there are ways for us to potentially
mitigate this, and we control it without having to wait for PERS, for CalPERS board to do it. So, for example, you’re not going to tell a city in southern California that I’m tracking
them on this, in changing their amortization schedule and their numbers are much different than us. They are smaller, but still in a significant magnitude. They project to save $22 million
over the change to go from 30 year to a 20 year. So those are the kinds of things we want to look at because if you can avoid this growth because of the negative amortization, then maybe
it’s worth to make that investment upfront.
Chair Filseth: Yeah, that makes a lot of sense. I mean, the PERS, I know this isn’t the way that John Bartel looks at it, but it seems to me that the PERS thing, there’s two numbers.
One is what they’re going to do. What their investment return is really going to be. And the other is what they report, okay. And what they report is subject to all kinds of variables,
but our liability depends really on what they are going to do, right, not what they report in the long run. I mean, what they report changes, and what they ask us to contribute changes
sort of the timeframe. We pay it off or not if it’s negative amortization, but really what we’re going to own depends on the real number, so it seems like… I guess I’m saying yes, I
agree. That’s the right thing. Focus on that number and, you know, whether PERS stages it in or does it as a cliff or something like that, it doesn’t change the amount of money we’re
going to owe, and that seems like annoyance to me. I’m sure it’s more complicated than that.
Mr. Perez: Yeah, there’s one component that, it’s in our favor that we started several years ago that’s positive in consequences, which is the second tier that we put in. So I was looking
at the numbers and we’re, one-third of our current workforce is on the second and third tier in the miscellaneous and about 18 percent in Safety. So it’s growing. It’s not, it’s obviously
a number that still needs to keep swinging, but it’s having the newer employees pay a higher contribution and it’s a lesser benefit, having people stay longer. So it’s going to have
some benefits down the line as well.
Council Member Holman: I had asked the question earlier about Stanford, and the reference was on Packet Page 4. At the bottom it says, it’s talking about sales tax, it’s that category.
And it says, “Status incorporated lower Stanford hospital construction use taxes and its tax estimates.” I wasn’t quite clear what construction use taxes are. What this referenced.
Mr. Saccio: So in a development agreement, and Stanford has been conscientious about that, of collecting what’s known as use tax on the construction that they’re doing there, and this
question came up, I think it was from Council Member Schmid, are we keeping track of those revenues. They will decline over time as a consequence of the construction being completed,
so we have, we are gradually tapering those off in the next three years, as they begin to do all the major work on the construction.
Council Member Holman: But this says it’s lower than was estimated. Is there a reason for that?
Mr. Saccio: Lower than estimated, let me see the language that was used there. (Crosstalk). What we’re saying is that we have…
Council Member Holman: Lower than previous years.
Mr. Saccio: Yes, exactly.
Council Member Holman: Now it makes sense.
Mr. Saccio: Exactly.
Council Member Holman: Now it makes sense.
Chair Filseth: Let me comment once more, since you jogged my mind on this. One of the things that occurred to me as I look up, and I think you guys have done the same analysis, but I
think back on the UAL, it’s somewhere between $500 million and maybe significantly north of there, depending on what the number really is, right? Irrespective of what they project, right?
The really shocking thing, I mean, this is only 15 years old. I mean, 15 years ago it was zero, so we ran up this entire bill, I mean the whole State has run up this entire bill in 15
years. So let’s say it’s $500 million, so then on average that’s $30, $40 million a year. I mean, basically our expenses, our personnel expenses are $30, $40 million a year higher than
we thought, which is, I don’t know, 30 percent or something like that on average. As we assess contract services and stuff like that, I hope we can figure out how that 30 percent is
picked up by the customer as opposed to us as we negotiate some of these contracts for services.
Mr. Keene: Yeah, well, you know, you go ahead and double a pension, I mean, add a 50 percent retroactive pension benefit increase across the board statewide for Public Safety and almost
30 percent for everybody else, it’s not surprising that zero went to where it went.
Council Member Schmid: Just a note, I mean the rules of the game were decided in the 1990’s. We were coming out of a 30-year period where US GDP was growing at three to 3.5 percent.
Since 2000 we have been growing at two percent and that seems to be our natural growth rate, yet all the pension assumptions are based on the original three percent.
Mr. Keene: That’s true. I would just say, having been in the Bay Area when that was happening, many of us were arguing very strongly against believing that that kind of risk was real.
Mr. Perez: I wanted to acknowledge a thank you to Kiely for leading this effort and Joe and (inaudible) with helping with the revenues and I wanted to acknowledge this is Joe’s last
official meeting. Even though he had a celebration last night, I wanted to thank him for all his years of service and all the nights here at Finance with you.
Chair Filseth: Thank you Joe. Happy Holidays and best wishes. And Jane as well,
Mr. Keene: Mr. Chair, I’m going to skip out on the next Item, so if you would just indulge me, Chair, I just wanted to pay my, give my thanks to Council Member Schmid. This is his last
Finance Committee meeting and since I’ll be leaving and I just would say, you know, on behalf of all the Staff, but you know, Greg has been a strategic macroeconomic hound dog on the
Staff, steward on behalf of the City. No, really, we have tremendous respect for the thought process that you brought and the diligence you have inspired in us and you are increasingly
being proven right. I was going to say jokingly that was the Schmid Amendment that CalPERS made, but it was only 50 basis points and I knew you’d be upset. But really, it seems like
you have been on Finance for many, many of the years that you were on Council, and it really has been a delight. Thanks.
Council Member Schmid: I won’t be able to spend my weekends reading budget books anymore.
Mr. Keene: We’ll still send you them, if you like.
Mr. Perez: I forgot to thank the rest of the OMB team as well.
NO ACTION TAKEN
2. Recommendation to the Finance Committee to Recommend That the City Council Adopt a Resolution to Continue the Palo Alto Clean Local Energy Accessible Now (CLEAN) Program, Including:
(1) for Local Non-Solar Resources, Utilities Advisory Commission (UAC) and Staff Supported Updates to a Price of 8.4 ¢/kWh to 8.5 ¢/kWh With no Capacity Limit; and (2) for Local Solar
Resources, Either a 16.5 ¢/kWh Price That Drops to Avoided Cost at 3 MW Recommended by the UAC, or a Tiered Pricing Structure That Declines From 16.5c/kWh to Avoided Cost Over 6 MW Recommended
by Staff; and Approval of Associated Program Rules and Agreements.
Chair Filseth: Okay, with that, after only two hours, we move on to the Palo Alto Clean Local Energy Accessible Now (CLEAN) Program. This will be quick. (Crosstalk). I’d rather keep
going.
Ed Shikada, Assistant City Manager: Okay, very good. Thank you. So, yes, it may feel like your regular update on the Palo Alto CLEAN Program. As it happens, we have a specific issue
we’re bringing forward, which is, what happens when we reach our programmatic cap of three MW, and since we have the potential for applications that would hit that cap, what’s going
on? (Crosstalk). Other duties as required, trying to figure out how to make it work. (Crosstalk).
Chair Filseth: On this issue by the way, is there a speaker from the public?
Ed Shikada: We were expecting one, but it looks like he didn’t make it. (Crosstalk). Okay, so next step, but perhaps it gives us an opportunity to speak to the specifics that we know
of the pending perspective application. (Crosstalk). With that, I’m going to hand it off to Jim Stack.
Jim Stack, Senior Resources Planner: Thank you very much. Good evening Council Members. So as General Manager Ed Shikada mentioned, this is part of our annual review process for this
program and just as a quick recap, this is our feed-in tariff program wherein rate payers, whether they are residential or commercial, can build and own a renewable energy facility on
their own property and sell the energy to us, or they can lease their rooftop or parking lot space to a third party who would own the system and sell all the energy to us. Either way,
we are buying all the power that the facilities produce. That is separate from the net metering program where they use a good portion of the energy on site and sell us the excess. We
get all the energy out of these systems. So, this is the annual update where we review what has happened in the past year in terms of participation and where to go looking forward. A
quick history of the program, we adopted it in 2012. It initially was only open to solar projects in the first year and had a rate of 14 ¢/kWh and a four MW cap. We expected a good amount
of participation right away, but the year ended and we had no applications, so Council at the end of the year decided to extend the program indefinitely and raised the price we would
offer to 16.5 ¢ but lower the cap to two MW. A few more years went by and each year the Council reaffirmed the price. In the past couple of years there has been a fairly lively discussion
of Council about what to do with the price and what price to offer to the customers, but each year the 16.5¢ price has been reaffirmed. In 2015 the program was expanded to include non-solar
renewable resources like wind or biomass. There’s not a whole lot of potential in the City for such resources and the rates that we were offering those resources currently are pretty
low, so they’re probably not enough to incentivize participation in that category, but the program does exist for them. Earlier this year we finally got our first applications to the
program. We received five applications, all from the same developer. Four of those projects are going to be on the top of City-owned parking garages here in the Downtown and on Cambridge
Avenue areas. The fifth one is at the Unitarian Universalist Church at East Meadow. Altogether, those projects amount to about 1.5 MW, so that’s about half of the total three MW capacity
that’s currently been approved for solar projects at the 16.5¢ rate. Then, lastly I wanted to add that recently, toward the end of the year we have received word from a large customer
in the City that they are planning to do a large project and submit it into this program. They are still kind of working through the planning stages, but the project could be as large
as four MW all by itself, so it will easily kick us well beyond the current three MW program cap, and they are essentially waiting for the Council to decide what to do with the capacity
that extends beyond the three MW limit that we have in place right now, before they determine how large of a project they will actually build. So this conversation is fairly timely for
them. Next slide is another way of looking at the history of the program. Just kind of stepping through the years. The value or the avoided cost of local solar generation in the City
for a 20-year term and comparing it to the price where we have agreed to offer, and then the difference between the value of the energy and the price that we’re willing to pay for it
yields the annual excess cost of the program. So the first year the price of the program was just barely above the avoided of cost, so there was a pretty minimal excess cost in place,
but over the past few years, the cost of solar has declined dramatically, as I’m sure you’ve heard, so we’re now down to an avoided cost of only 8.9¢ for 20 years and with a 16.5¢ contract
in place, that yields an excess cost of $380,000 a year for the three MW that have been currently authorized. So that’s a number to keep in mind going forward. The next slide shows a
breakdown of how we arrived at that 8.9¢ level. You may have seen this before. It shows the various components that make up the avoided cost of the energy. The biggest one, of course,
is just the electrons that are produced that are used to supply our need. Another component is the renewable energy certificate or renewable energy credit, the REC, and that represents
the fact that we can use this energy to satisfy our own State renewable energy requirements. Then when the energy is generated, it also allows us to avoid some of our capacity charges
that we have to pay to buy capacity from other resources. Then the top three categories, when energy is generated here in town it allows us to avoid paying transmission charges to get
the energy from remote facilities to the City. It also allows us to avoid having to pay for those transmission and distribution system losses that we incur getting the energy to us and
the congestion costs associated with that transmission too. So that makes up the total price. Then on the next slide there is the non-solar renewable energy component of the program.
I mentioned earlier, there is not a whole lot of potential for this type of generation in the City, and at rates of 8 or 9¢ it’s very unlikely we will get any participation from these
programs, but nevertheless, the program is open to them. The price that we’re currently estimating, or the value of this energy that we’re currently estimating is about the same as last
year. It’s now up to 8.4¢ which we’re proposing the price be set at equal to the avoided costs so there is zero excess costs associated with this portion of the program. So that brings
us to the Staff recommendation. We are recommending that the Council continue the program for the three MW that have currently been authorized at the same 16.5¢ price that was approved
earlier this year. And then once three MW is reached, we’re recommending sort of a tiered step-down approach to the price where from three MW until six MW, the price gradually decreases,
and then for any capacity above six MW, we’re recommending that generation receive the avoided cost, or the value of that energy. We also recommend continuing the program for non-solar
resources and continuing to pay those resources at their avoided cost level. Then we finally recommend removing the cap of three MW that would apply to each of these types of resources,
because once we are paying them the avoided cost, there’s no excess cost to the rate payers. There’s not very much cost associated to administering the program at that level. The next
slide shows a little more detail on the tiered step-down price schedule that I mentioned on the previous slide.
Chair Filseth: (Inaudible, no mic).
Mr. Stack: I think I changed the order on this since I, I moved that to after the Staff recommendation. Sorry about that. So for the price schedule that Staff is proposing, again, the
first three MW would receive a price of 16.5 ¢/kWh and that’s the same as Council approved earlier this year. For the next megawatt, up to four MW we proposed that megawatt receive a
price of 14¢. The next megawatt would receive a price of 12¢, and the 6th MW would receive a price of 10¢. Then for everything above 10¢ we would propose they would receive the avoided
cost. You can see that under this proposal the annual excess cost associated with the whole program would rise from $380,000 per year to $530,000 per year.
Council Member Holman: And this is not in any kind of time-limited component. It’s just when you reach the four and when you reach five? So, no time-limited aspect to it?
Mr. Stack: That’s correct. That’s what we’re proposing. So we brought this recommendation to the UAC last month, and they had a slightly different recommendation. The UAC voted four
to one to recommend that the Council continue the program for three MW at the 16.5¢ rate, as is currently authorized, but then the UAC recommended that once the three MW level was reached,
that the price immediately drop to the avoided cost level. They were concerned with the size of the excess cost and the marginal excess cost associated with the tiered step-down approach
that Staff recommended. The UAC also voted unanimously to support the Staff recommendation for the non-solar component as well as to remove the three MW caps associated with both pieces,
the non-solar and the solar portions of the program. Finally, we did evaluate a few other alternatives for consideration. The first one would be to continue to program to three MW, then
immediately just cut it off and not allow any participation beyond that.
Chair Filseth: (Inaudible, no mic).
Mr. Stack: Yeah, so not offering any compensation for above three MW. Another option would be to pay the final project that gets into the program that kind of kicks us over the three
MW cap, to pay that whole project, the 16.5¢ rate, so regardless of whether that final project takes us to 3.1 MW or six MW, regardless of the size, the whole project would receive the
16.5¢ rate. This table shows that if the project was three MW, which is what we were told it might be initially, that would take the excess cost up to $560,000. We heard recently it
might be as large as four MW, and that would mean the excess cost would go up to $685,000 under that scenario. The final option would be to just remove the participation cap altogether
and offer the 16.5¢ rate to all projects that would like to participate, and of course the excess cost with that would be unlimited. So that’s all I have.
Chair Filseth: Questions and comments? Greg. Cory.
Council Member Wolbach: Nope.
Council Member Schmid: There is a non-solar in here, but I’d like… I understand there are no non-solar projects.
Mr. Stack: That’s right.
Council Member Schmid: Why are we doing this? I mean, could we be surprised three years from now if someone comes up with some crazy idea and gets 16¢ for something that…
Mr. Stack: I think the reason the program was expanded is primarily because the anaerobic digester project was considering or wanting to be considered as a possibility for this program.
They were hoping to receive a higher rate than the 8 or 9¢ that we ended up…
Council Member Schmid: So it’s a remainder from the past. It’s not an expectation of… I’m worried that someone in their backyard is going to start some (crosstalk) yeah, and start drawing
down funds. (Crosstalk).
Jane Ratchye, Assistant Director of Utilities: It’s not 16.5¢.
Mr. Stack: Well, for the non-solar portion there wouldn’t be any excess cost to rate payers, because we would be paying them essentially what we value the energy that we would be buying
from them, so there’s no subsidy.
Council Member Schmid: Okay. We had a discussion last night about Prop 26 and the CLEAN natural gas world that we’re looking at, and I know we had a discussion here a while ago about
the legal ramifications of whether it’s possible to give benefits to one or a few people, where everybody pays for it. So the question is, are we entangled in those issues here, or if
not, why not? Isn’t it the same as...?
Ms. Ratchye: My understanding is this is a resource that we’re buying for the entire portfolio for the benefit of everyone in Palo Alto. Remember, we get all the output from the project
and we use it for helping to meet our renewable portfolio standards, so it’s part of our total portfolio. None of the energy at the site is used by the host.
Council Member Schmid: Although they do use energy?
Ms. Ratchye: They do and they pay for it all according to their normal retail rates.
Council Member Schmid: At the cheaper price. We’re paying them…
Mr. Shikada: We pay more for the energy supply than we do to provide the energy to the customer. I think one other perhaps element that we really haven’t played up is the recognition
of the project sponsor’s commitment to the system, to the utility in this case. The fact that the only projects that have come through to this point are City-owned property effectively,
as well as, in the cast of the Unitarian Universalist Christian Church, I think they have really looked at this as a community good, and have advanced the project that way. So I think
as we go forward, it is our understanding based upon the company that has suggested the potential to sponsor projects, they’re also looking it as a corporate social responsibility, a
program or initiative, because, as you might imagine, it is a difficult decision for a private property owner to choose to lock up their property effectively for 20 to 25 years. So that’s
the other element, I think, that really hasn’t been front and center part of our discussion, but based upon the nature of the proposals that we have seen, I think is reflected in ultimately
the cost that it takes to pay in order for these projects to come forward.
Ms. Ratchye: I just wanted to add one thing. The price we pay, the 16.5¢ is fixed for 25 or 20 years, depending on what they choose, probably 25, but our rates, as you know, generally
go up and probably will be higher in 25 years than they are today, I’m just saying.
Council Member Schmid: Well, I’m thinking that if you wanted efficient solar energy, you would go out in the desert where land is cheap and sun shines year-round at high temperatures,
so I would be surprised if (inaudible) doesn’t come back and say, hey, I’ve got a deal for you at 4¢ and we’ll say I’m sorry, but we’re spending all our money on these, subsidizing the
16¢ thing.
Ms. Ratchye: This is our annual conversation. It has been decided again and again that it’s worth 16.5 (crosstalk)…
Council Member Schmid: I’m trying to think of a parallel and what I finally came up with is, gee, suppose there weren’t enough gas stations in Palo Alto, we wanted a new gas station.
So we offered someone a guarantee for the next 20 years, 25 years that they would get $4 per gallon and it would be paid for by a tax on those who are buying gasoline at $2.50 a gallon,
and then we’re saying, oh, we don’t want to just do it for one, anyone else who comes along can get the same deal. You know, I’m trying to see where the benefit is for the community
where we can produce this cheaper elsewhere more effectively.
Mr. Shikada: Again, perhaps to Jane’s point, at the risk of repeating prior conversations, it really is a question of the value, and ultimately the quantified value of the local solar
and potential resilience benefit that is presumed as a part of that.
Council Member Schmid: Yeah, I would just bottom line say we’re paying $7.6 million for 0.5 percent of our City’s energy, giving up our future resources for a small piece.
Council Member Wolbach: So a couple of questions. I just want to make sure I’m very clear about a couple of things. So if we were to move forward with the Staff recommendation, that
would cost $10.7 million, correct? Did I read that correctly?
Mr. Stack: That’s correct, yes, although over 20 years and the currently authorized program would cost $7.6 million, so it’s a marginal $3.1 million.
Council Member Wolbach: Okay, so it would be $3.1 over what we’re currently spending right? Thanks for the reminder. And, yeah, that context is important. And remind me why only large
projects are part of this. Not say an individual homeowner who has an extremely efficient home and throws some solar panels on their roof? Why is this only larger, or I should say moderate
scale projects, right? It’s not just a rooftop, but maybe covering a whole parking structure.
Mr. Stack: Well it’s not limited to those sized projects. It’s open to any size project. So a residential homeowner could choose to participate in the program. Currently none have. I
believe it is partly due to the fact that they have net metering available to them, and that’s probably a better deal for most people. There are also just kind of the process costs associated
with being in this program. I mean, having to sign a power purchase agreement with the City and go through the interconnection process and have a separate meter installed. There are
some kind of start-up costs there that make a small profit not terribly viable.
Council Member Wolbach: So this is, that metering, it’s available right now to property owners?
Mr. Shikada: Yes.
Council Member Wolbach: Remind me the benefits of participating in this versus the benefits of participating in that metering. Is it, let me frame that by asking, is it because here
you can do it when you don’t own the property, whereas with net metering you do it with your own property? Right, like the people building, those proposing solar panels for the UUT parking
lot or for City parking structures, they don’t own the property there, but they are proposing introducing solar panels there. Whereas with net metering it’s the property owner that does
it with their own site or the lessee perhaps.
Mr. Shikada: Actually in both scenarios in all likelihood, well it really is the property owner, the applicant we received in the projects we have are the developer on behalf of the
property owner. They are under contract with the property owner.
Council Member Wolbach: And the property owner is the City?
Mr. Shikada: Yes, in the case of the parking structures and the church in the case of that.
Council Member Wolbach: Okay.
Ms. Ratchye: Also, in the place like the parking garages, there is not very much load there and so they are going to produce a lot more energy than they use at that facility. It’s not
an office building that has a lot of energy use, so this would be a more appropriate program for them to pursue.
Council Member Wolbach: Just because it pays better or?
Ms. Ratchye: Well, because if you sized a system just to meet the load of the parking garage, it would be quite a small system, but they can fill as much as they can of the roof space
and produce a whole lot more energy.
Council Member Wolbach: Well, remind me with that metering program…
Ms. Ratchye: You’re not supposed to oversize a net metered system.
Council Member Wolbach: Okay, so there’s a limit to how much…
Ms. Ratchye: Right.
Council Member Wolbach: You can pump back into the system beyond what you use yourself?
Ms. Ratchye: Yeah, you’re supposed to make your house efficient first and then size a limited system to meet your annual load.
Council Member Wolbach: Are people able to past their own… Right now with our net metering if someone had an extremely efficient home and bundled up and never turn on the heat in the
wintertime, and you know, have lots of daylight over their roof and put in really good solar panels and they were able to provide more (crosstalk).
Ms. Ratchye: There are some systems that do net generate over a 12-month period, but there aren’t that many and it’s not that much, and maybe they reduce their load from the time they
installed their system, where they got more efficient after they installed their system. You’re not supposed to oversize those.
Council Member Wolbach: Well, I guess my question is, when you say you’re not supposed to, what are our limitations on that end? I’m sorry, my questions are, I’m just trying to understand
the value of this versus that other system, and particularly thinking about what’s available for Palo Alto residents and property owners.
Ms. Ratchye: Jim, do you know a better answer on exactly how we restrict it. It’s part of the law.
Mr. Stack: Yeah, I don’t know how we actually keep track of that, but also we do, when customers generate more than they use, so when we buy back their surplus on net metering, we pay
a very low rate for that energy. It’s only like around 8¢ I think right now. So there’s not a whole lot of financial incentive for them to try to oversize their system by a lot.
Council Member Wolbach: I guess one of the questions that’s on my mind is whether we would want to invest more in that and less in this, or invest equally in that as in this. I don’t
know if Staff or my colleagues have any thoughts about that.
Ms. Ratchye: Well you kind of settled that issue. You have a cap for the net metering program. There is sort of an extra cost. (Crosstalk) But you’ve now set the new cap.
Mr. Shikada: I think we were referring to the net metering program. In this case, the feed-in tariff program, we are speaking to increasing that a bit more. There is actually an infrastructure
issue that ultimately ties back to the financial feasibility of the projects, and I’m not sure this is the reason we limit residential net metering projects, but the potential energy
generated by multiple individual homes could put a reverse strain on the electrical system, and in this case, and in fact what we found with the, one of the project applicants maybe
more than one of the projects under the feed-in tariff, is that there’s upgrades necessary on the utility side of the meter in order to accommodate the amount of load, the amount of
energy that is being generated on the property. So that affects the ultimate cost effectiveness of the projects themselves and needs to be factored into the performance. So that factor,
you know, if we were to say as a program, we really wanted to have residents maximize the size of their solar systems on their homes, that that could have implications on the system
that would drive additional costs that are unanticipated.
Council Member Wolbach: Right and I’m not ready to propose a Motion yet, but I guess one thing for us to consider when we do come to a Motion is, in the past this Committee’s work has
been overturned when it has gone to Council, and it doesn’t mean we don’t make a recommendation based on our best judgement, but we might want to anticipate what our colleagues’ thinking
will be, if, for no other reason, but to at least preempt arguments if we expect there to be disagreement.
Chair Filseth: Well, as you point out, we’re back here again this year, and I think the good news from all this is that once again it shows that solar is here to stay. I mean, even despite
the newly elected administration, solar shows resilience, so that’s good. Real briefly, you know 16¢ versus 8.5 or something like that, earlier this week we had a discussion about natural
gas and we said the focus is on GHG reduction, right. Utility grade solar we can buy twice as much renewable energy or almost twice as much renewable energy for the same amount of money.
And as far as the resiliency issue goes, I’ve always struggled with that one a little bit because it only works in the daytime, so if you really wanted resiliency, then you would be
looking at storage or something like that or, God help us, (inaudible) plants, but something that would work 24 hours as opposed to just in the daytime. So, recognizing that we may well
have two different Motions here, which is fine, it’s hard for me to see why, a lot of justification for expanding the program beyond that three MW that we all agreed we are going to
do. I’m tempted to observe and I will observe, but except I’m not observing it at the same time, that the $3.6 million or $200,000 a year, I mean, my colleague here asked for $200,000
for HSRAP, recognizing that it’s not fungible because this one goes to rate payers and that’s the General Fund and they don’t transfer and so for, then again, on the one hand we just
had a discussion about structural shortfalls and $4-6 million deficit next year potentially. On the other hand, the General Fund, this is rate payers and they are not the same. So with
that, and recognizing and encouraging actually substitute Motions, I’ll move the UAC recommendation.
Committee Member Holman: I’ll second.
Committee Member Schmid: What are you recommending?
Chair Filseth: The UAC recommendation, yeah, right. If somebody wants to make a substitute Motion, we welcome that too.
MOTION: Chair Filseth moved, seconded by Council Member Holman to recommend the City Council adopt a Resolution to:
1. Continue the Palo Alto CLEAN program price for local solar energy resources at the current price of 16.5 cents per kilowatt-hour (¢/kWh) for a 20-year or 25-year contract term up
to the current 3 MW program capacity limit, and for any capacity over 3 MW, reduce the price to the avoided cost of such energy (currently 8.9 ¢/kWh for a 20-year contract term, or 9.1
¢/kWh for a 25-year contract term), and remove the program limit of 3 MW for local solar resources; and
2. Raise the Palo Alto CLEAN program price for local non-solar eligible renewable energy resources to the updated avoided cost of such energy (8.4 ¢/kWh for a 20-year contract term,
or 8.5 ¢/kWh for a 25-year contract term), from the prior price (8.1 ¢/kWh for a 20-year contract term, or 8.2 ¢/kWh for a 25-year contract term), and to remove the program limit of
3 MW for local non-solar eligible renewable resources
Chair Filseth: I’ll speak to my Motion. I think I concur with UAC on this and I think I’ve already spoken to it.
Council Member Holman: Just briefly, I agree with that and while they are different sources, I think it still is an exercise in prudence, so that’s why I seconded it.
Chair Filseth: If I may speak, I think our focus ought to be greenhouse gas reduction. Council Member Wolbach.
Council Member Wolbach: I’ll be supporting the Motion. I think there are clearly strong arguments on both sides. My expectation is that Council will want to weigh in, I suggest Staff
consider just agendizing it as an Action Item because if we don’t agendize as an Action Item there’s a good chance it will get pulled and I’ll leave that to Staff’s judgement.
Council Member Holman: (Inaudible, no mic).
Council Member Wolbach: Yes, assuming it’s unanimous. I will say, just to a point that was raised earlier, I do see it as a little bit different than the gas station analogy, because
I do see a greater benefit to local solar than the gas stations, but gas stations are useful as well and you can make an argument that they are of equal utility to the residents and
visitors to the City, but I think at this point we are abiding by either the recommendation of our Staff, or Utilities Advisory Commission, and again a strong argument for either, so
I’ll support the Motion.
Chair Filseth: Do we have to decide here whether it gets agendized or (inaudible, no mic).
Council Member Holman: Well, if Greg… We do decide here whether it goes to a recommendation, at least whether it stays on consent, which would be the typical process, or it goes as an
Action Item. I would actually suggest this goes on consent. This has been hashed so many times and we have a very strong UAC recommendation as well. I would suggest it goes, which would
be our typical process, it would go on consent.
Chair Filseth: I actually concur with that. I think certainly it may well get pulled off, which is fine. If we put it on the Agenda, we’re going to go through all this stuff again. We’re
going to see all the same good friends and colleagues we see here except for Jane. I’m going to bring a full-sized cutout of Jane. We’re going to see all our good friends again. We’re
going to talk about all the same stuff again, which is fine, but I think we should let the Council decide whether they want to do that and the way we do that is pull it off consent.
And what we should do is we should alert the Mayor that it is going to go on consent so nobody’s surprised. And this is different from last time too, because the three MW remains intact
here.
Mr. Shikada: This could be interesting. It is actually my understanding, based on prior reiteration of this specific Item, that either the City Manager or the Mayor could choose to put
it on Action, and so if that recollection is correct, it might be an interesting exercise, given that by the time this gets to Council, there will be both a new Council as well as probably
a new Mayor, just recalling the time frame. (Crosstalk).
Council Member Holman: Unless you’re planning on putting this on next week’s agenda.
Mr. Shikada: I don’t think that would be appropriate. I think that would be out of order for us to push.
Council Member Holman: So you’re not arguing against putting this on consent?
Mr. Shikada: I’m not. (Crosstalk).
Council Member Wolbach: Chair Filseth, if I might just look back, since I was the one who raised the question of where it should go, I guess that’s fine because as the City Manager and
Mr. Shikada pointed out, either the City Manager or the Mayor will have the prerogative to, or three Council members will have the prerogative to remove it from consent to make it an
Action Item.
Chair Filseth: So then the Motion on the floor is the UAC recommendation and that if it passes unanimously it will follow standard procedure in going to consent? All in favor?
MOTION PASSED: 4-0
Chair Filseth: Motion passes unanimously. Thank you, folks, for your diligence on this thing for many years.
Council Member Holman: And Jane for 31 or 32 years, which was it?
Chair Filseth: Is this your last City meeting tonight?
Ms. Ratchye: Yes.
Council Member Holman: Thank you so very much for all the many years of service.
Council Member Wolbach: Thank you.
Mr. Perez: Thank you for spending all those nights with us.
Council Member Holman: And watch for that cardboard cutout. We’re going to hold you to that Eric. I don’t think I’ve ever heard applause at a Finance Committee meeting before tonight.
Council Member Wolbach: I was just going to point out that it is interesting that two of the Staff members who are retiring this week are both here tonight and we appreciate the work
you’ve done for the City for so long. Thank you.
Future Meetings and Agendas
Chair Filseth: And with that we move to Future Meetings and Agendas.
Lalo Perez, Chief Financial Officer: Well, I’m sorry to say there are no more. I want to thank you Chair Filseth and the rest of you Finance Committee members. We had a challenging year,
specifically on my side with staffing and I appreciate your accommodating us and giving us your guidance and support throughout the year. I think we positioned the City in a good place
and continue to be aware and alert and we appreciate all the good feedback tonight as we go forward in setting up our Budget. Thank you for all those years of your guidance as well Council
Member Schmid.
Chair Filseth: Thank you. I think you guys rocked and rolled this year. I think you overcame the loss of Walter, which was a significant loss, but Kiely stepped up and I think good stuff.
Council Member Holman: Walter, who had the nerve to show up at the City’s Association meeting.
Council Member Wolbach: Chair, if I might make a comment before we adjourn. I want to say thank you to the Staff, including Terrence and Ed Shikada and Jessica for helping keep us on
track and helping us work through some very difficult issues. This is my first year on the Finance Committee. I think I’m the only one of the Committee for whom that was true and I want
to thank my colleagues and especially the Chair. You run a fine meeting and thank you for guiding us through tricky issues over the course of this year. It’s been a pleasure.
Chair Filseth: Thank you.
Adjournment: The meeting was adjourned at 8:35 P.M.
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Finance Committee Action Minutes
December 6, 2016
FINANCE COMMITTEE
TRANSCRIPT
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Finance Committee Transcript
December 6, 2016