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HomeMy WebLinkAbout2024-12-03 Finance Committee Summary MinutesFINANCE COMMITTEE SUMMARY MINUTES Page 1 of 11 Special Meeting December 3, 2024 The Finance Committee of the City of Palo Alto met on this date in the Community Meeting Room and by virtual teleconference at 1:30 PM. Present In-Person: Burt (Chair), Lauing, Veenker Absent: None. Call to Order Chair Burt called the meeting to order. The clerk called the roll. Public Comment No public comment. Action Items 1A. Discussion and recommendation to the City Council to Accept the Macias Gini & O’Connell’s Audit of the City of Palo Alto’s Financial Statements as of June 30, 2024 1B. Approval of the FY2024 Annual Comprehensive Financial Report (ACFR), and Year-End Budget Adjustments in Various Funds Christine Paras, Assistant Director of Administrative Services, indicated that both Item 1A and 1B represented the fiscal and budgetary closeout of 2024. She acknowledged the hard work of the team. She explained they would be presenting a departure from City Council policy of allocating between BSR in excess of Council's target of 18.5 percent to the IR and the Pension Trust to rather the IR and General Fund Uncertainty Reserve. Kate Murdock, City Auditor, presented slides of an overview, purpose and results of the Financial Statement Audit. Benjamin Lau, Macias, Macias Gini & O’Connell, gave a slide presentation of the results of the 2024 audit including a scope of services, MGO Audits purpose and applicable framework, FY 2023-2024 audit results, basic financial statements, single audit reports, other reports and a summary of the report to the City Council. SUMMARY MINUTES Page 2 of 11 Sp. Finance Committee Meeting Summary Minutes: 11/19/2024 Rocelyn Fernando, Finance Manager, gave a slide presentation with information about the 2024 Annual Comprehensive Financial Report and some year-end budget adjustments including an overview, overview of financial statements, government-wide net position, government-wide statements of activities, fund financials – governmental funds, fund financials – general fund budget stabilization reserve, history of general fund revenues (budgetary), business tax, fund financials – general fund department expenditures, fund financials – enterprise funds net position, FY 2024 year-end budget adjustments (attachment B) and the recommended actions. Councilmember Veenker mentioned the general fund budget stabilization reserve slide showing 8.9 million above the 18.5 percent target level and the recommendation to allocate 3 million to the infrastructure reserve and 5.9 to the uncertainty reserve and wanted to hear thoughts on how that would dovetail with the projected FY 2026 shortfall. She was curious what the two major federal program grants mentioned in the single audit report were and how they were chosen. Lauren Lai, Chief Financial Officer, explained it dovetailed well with the long range financial forecast. She stated they would receive a projected forecast of FY25 having a 12 million dollar shortfall. They had 5.9 million from FY25’s adopted budget. Council adopted allocation into uncertainty reserve. The additional allocation would make the 12 million should the Finance Committee support it. That would put them in a good position for the forecasted shortfall seen in FY25. Mr. Lau replied that the summary of audit results specific to single audits would be found on page 183. The amount that had been received by the City for this year was $8.2 million and could be found on page 181. The individual federal grants received were and were the ALN Assistance and Congressional Directives and found on page 183. He described in detail how the programs were selected. Vice Chair Lauing queried how many more years they would be looking at the landfill liability post-closure. He was surprised claims loss preserve could be reliably predicted based on prior history. He wanted to know what the alternatives were for the 8.9 million mentioned on page 74. He asked for clarification on the expenses on the business tax. Director Paras commented there were unknowns, particularly with general liability and Worker’s Comps claims; however, they did an actuary report for both prior to a year in close and they were able to recommend confidence levels to which they would reserve. She commented on the business tax the revenue was allocated based on Council’s adopted spending resolution. Those expenses were actual that were spent in 2024 after 0.2 million of administrative expense was deducted from the total. The 1.9 went into reserves for future spending. Mr. Lau answered the dollar amount was $7.1 million on the landfill liability post-closure. He added when talking about historical information, IBNR (incurred but not reported) was the component that factored into the claims liability at year end. SUMMARY MINUTES Page 3 of 11 Sp. Finance Committee Meeting Summary Minutes: 11/19/2024 CFO Lai explained the proposal before them was to maintain the target of 18.5 percent and the 8.9 was above that. They recommended two categories which were 3 million into capital fund and in the uncertainty reserve to shore up FY26 anticipated shortfall. Alternative to that was to distribute more to capital and/or distribute to maintain more in BSR or putting more into retiree pension and setting that money aside. Those would all be policy discussions. The levers were current service level versus paying down liability keeping it in uncertainty reserve so they had more flexibility and be informed in the budget development. They may change the policy a little later. Chair Burt mentioned the period that went from a no revenue report to a half rate to the full rate and starting to expend those revenues on the slide with the business tax. He wanted to know how they separately accounted for that. He asked if there was an intention in FY26 to utilize some of those dollars for the RV dwelling site. He asked if the funding for Palo Alto Link was being envisioned under the transportation category. He wanted to know if there was an anticipated timeframe for the court ruling regarding the property tax. CFO Lai explained that through advisory and resolution, Council had the business tax into three categories after the administrative cost. The administrative cost is taken off the top and then divided into three categories, affordable housing, transportation and staffing enhancements. The residual was reserved in the general fund in an unassigned category. The 1.9 was segregated above BSR and uncertainty reserve. She commented that the funding for Palo Alto Link was not being contemplated in the transportation category at this time. They would be levers to be used in looking at the portfolio of services and funding they have available. Assistant City Manager Kiely Nose expected that the use of the 1.1 million in reserve as well as the forecast for FY26 receipts would be a budget discussion the Committee would be expected to have as they plan for FY26. Director Paras replied there would be clarity about the court ruling regarding property tax in February. MOTION: Councilmember Veenker moved to recommend to Council to accept the audit of the City’s financial statements as of June 30, 2024 and approve the ACFR, seconded by Vice Chair Lauing. MOTION PASSED: 3-0 2. Review and Forward Fiscal year 2026-2035 Long Range Financial Forecast (LRFF) to City Council CFO Lai provided a detailed description of the Long Range Financial Forecast. She stated it would be similar to the prior year in that the outlook of the economy remained stagnant coupled with some potential volatility especially over the next four years. The anticipated FY26 SUMMARY MINUTES Page 4 of 11 Sp. Finance Committee Meeting Summary Minutes: 11/19/2024 shortfall was about $12 million. She noted their service level in the past three years had changed quite a bit. Coming out of the pandemic, they promptly restored services coupled with investing in some key new priority areas. The FY24 results had a narrow margin of 1.5 percent budget variance. Areas of vacancies were 2 million. They were being more successful with recruitment and retention. The long-range financial forecast incorporated the FY24 results so that information was leveraged including what was known about FY25. It was based on current service level and not more. That was a part of the proposal and budget development in the spring and presented a multi-year strategy looking at shoring up short-term shortfalls and maintaining a very high quality service level in an environment of financial stability. Kitty Dandan, Budget Manager, gave a slide presentation about the FY26-35 long range financial forecast (LRFF) including an overview, fiscal year 2026-2035 base case forecast, major tax revenue projections and BSR and recommended FY24 surplus allocation. Paul Harper, Budget Manager, resumed the presentation covering the first alternative scenario to the base case modeling a 1 percent decrease in economically sensitive revenue sources in 2026 and how that impact would flow through the 10-year forecast period, the second alternative scenario: compensation adjustment in FY26, FY 2026 budget development guidelines (attachment A), assumptions not included in forecast (attachment E), conclusion, next steps and recommended action. PUBLIC COMMENT Stephen Levy, economist, cautioned that the world would probably change dramatically by the time a budget was reached due to uncertainties about whether tariffs, deportation and massive tax cuts would happen. He suggested going back to the 2007-2010 recession to see what the hit on current revenues were. He opined good national and state economic forecast should be available by April. He advised following the massive appeals on commercial property. Vice Chair Lauing questioned if the City Council’s existing priorities referenced on Item 3 was the big top 4 or the 72 the city manager has to execute on. He thought they would need to get a view of the 72 and not the 4 when doing budget. He suggested outsourcing maintenance on four, five and six. He liked the addition of finding new revenue sources on number seven. He suggested if they came up with a new program they thought was vital and would cost a million dollars, they should look at the bottom priorities and see if there was a million dollars that could be saved somewhere. He asked for clarification on number nine. Assistant City Manager Nose replied the 74 were nestled underneath the 4 priorities so it was comprehensive. She expected this year as they moved through the FY26 budget at the Council retreat in January they would continue to look at funding allocations and bring that forward in order to identify for the Council areas that need additional investment to accomplish that priority. CFO Lai explained they were undertaking the fee study to analyze their cost of service and would be bringing it to the Committee in the spring as a full review of the master fee schedule. SUMMARY MINUTES Page 5 of 11 Sp. Finance Committee Meeting Summary Minutes: 11/19/2024 She stated while they were focused on service level, number nine brought attention to long- term planning related to liability management to reduce the cost to the taxpayer. In terms of long-term planning, they talk about capital infrastructure planning and how to maintain, repair and improve the infrastructure and be proactive with costs. Vice Chair Lauing did not think much would be gained by looking at a 1 percent shortfall. He thought a 5 percent reduction scenario should be looked at. He thought the 5 percent vacancy was not right and they should go with 6 or 7. He thought as they go through the process, they would have to make the policy decisions and decide if they want a $12 million deficit or if they should not do that in the coming year because of the uncertainties. For the current recommendation to Council, he thought their recommendations were okay and they should look at shoring that up before getting to the final signoff on the budget. He thought a range on what the potential salary impacts could be as well as the timing should be included. Assistant City Manager Nose answered any time they were in active negotiations, there was a timing issue with the assumptions in financial planning both recognizing the need for the negotiations to play out but also for the organization to plan accordingly. In this setting, she thought it best to describe it as the long-range financial forecast currently assumed the negotiating authority that the Council empowered the labor negotiations team with to date. To the extent the contract fell within current authorized negotiating levels, there would not be a change to the long-range financial forecast. To the extent that the contract required additional authority or fell below the current authority, those would be the times an impact would be seen to the financial forecast. They would talk about that in subsequent closed sessions and any impacts. Councilmember Veenker asked for more information about infrastructure versus the pension trust or some other paying down of those kinds of obligations and explicate what infrastructure means and why. She wanted to hear thoughts on doing additional alternative scenarios. She queried if there was anything else they should be doing to prepare for unforeseen eventualities. CFO Lai replied the proposal would include $3 million toward infrastructure for anticipated cost increase on existing projects. This was something they felt they should fund and plan toward in the short term. She thought pension and retiree liability were still important policies and priorities. They continued to institute and monitor policies to accelerate the discount rate and prefund. Funding and paying down those liabilities continued to be a priority. She thought they indexed it as 1 percent to give a sense of what that represents. If they forecast 3 percent, then alternative B is multiplied by 3. It gives the impact of the magnitude and the tools they would have to respond. She remarked creating flexibility as noted by the economist, continuing to monitor the situation, going into FY26 budget development with a keen awareness of the volatility and looking globally across the City at what projects and services they have that rely on external resources and continuing to monitor what is at risk were ways to prepare. SUMMARY MINUTES Page 6 of 11 Sp. Finance Committee Meeting Summary Minutes: 11/19/2024 Chair Burt asked for a review of the constraints on outsourcing opportunities. He observed if they further reduced their vacancy level, they would be adding staffing they had not had in years. That begged the question of what would happen when those actual members of workforce were added. He thought they needed to have a discussion and analysis of the impact of capacity of bringing the vacancy level down below 10 percent and that should tie in with some of the scenario planning. He talked about having surpluses in FY22-23 due to the effects from COVID and then adjustments made. In the scenario planning, he wanted to make sure if they had a challenge getting from FY27 through FY29, they did certificates of participation bonds on major capital projects. He thought it would be helpful to look at the revenue increase and the number of rooms that increased from the baseline period on the transient occupancy tax so they did not misconstrue the impact of occupancy rates and average daily rates because they were looking at the total revenue from TOT. Assistant City Manager Nose commented the outsourcing everyone was talking about was something that both California regulations as well as CalPERS had restrictions on what they could and could not do. They had to be careful doing things like splitting work. They could look at hiring an entire service to perform a service not done by City staff but there were labor negotiations that would need to be moved through. Vice Chair Lauing added they would have to address the increased service level desired by the community with the financial resources currently projected. Councilmember Veenker was concerned if there would be any ripple effect they should be aware of on general lending practices to municipalities or other economic things from other cities that were not in good shape. CFO Lai thought continuing to garner public support and confidence in their governance and fiscal stewardship was important. These policy discussions were to set the table for how they looked at going into the next budget cycle. They were hearing that the long-range financial forecast was okay to accept as it is but going into budget development, they would need to exercise more caution and think about more contingency plans and the different tools they have. She added they continue to foster the trust and transparency with their constituents and stay engaged and demonstrate how they were being stewards of those dollars and continuing to move forward looking at all the different options and they would continue to discuss in the next six months. Assistant City Manager Nose talked about how the markets and interest rates would be an impact. They have trust accounts they could use to help phase in things. To the extent the state sees significant financial challenges they will oftentimes look to local agencies. That was another area they would look at in terms of how the state balances their budget and how that would impact local jurisdictions. SUMMARY MINUTES Page 7 of 11 Sp. Finance Committee Meeting Summary Minutes: 11/19/2024 Chair Burt stated regional state and federal grants were dependent on the availability of those. The state could see a ripple impact from federal impacts that that cause them to reduce their grant making. Assistant City Manager Nose commented that pre-pandemic citywide they were at about a 12 percent vacancy. They would look into that in more detail as they go back to full Council in January on some of the scenario planning. MOTION: Councilmember Veenker moved to recommend to Council acceptance of the long- range financial forecast, seconded by Vice Chair Lauing. MOTION PASSED: 3-0 3. Review and Discuss Preliminary Fiscal Year 2026 Utilities Financial Forecast and Rate Projections Dean Batchelor, Director of Utilities, indicated Utilities would present some preliminary numbers on their rate changes moving forward into 2026 and provided an overview of the presentation. Lisa Bilir, Senior Resource Planner, and Mike Babbitt, Senior Resource Planner, gave a slide presentation about the preliminary FY 2026 rate changes including preliminary residential system average rate projections and ongoing cost containment examples and efforts for all utilities. Mike Babbitt, Senior Resource Planner, discussed slides covering preliminary electric rate projection, preliminary electric cost and revenue projections, preliminary electric supply operating reserve projections, preliminary electric distribution operating reserve projections and electric bill comparisons. Assistant City Manager Nose added they would draw down reserves but once they did issue the debt that would replenish the reserves. That would be enabled by a resolution that would be on the consent calendar for reimbursement of expenses. They would be able to reimburse themselves with bond proceeds once they went forward with that issuance. Councilmember Veenker wanted to know why they were able to hold off on the bond financing for a year. She asked if there was anything they had learned fiscally that would adjust their thoughts and anticipation about the financial side of the grid modernization. Mr. Babbitt explained when they got deeper into conversations with the engineering team on what they were going to be spending this year they realized that those numbers would be lower. It would take time to have design ready plans to work through all the procurement SUMMARY MINUTES Page 8 of 11 Sp. Finance Committee Meeting Summary Minutes: 11/19/2024 items. A number of the items they would be purchasing were long lead items that would take a couple years to have delivered and the full amount would not be due. Vice Chair Lauing wondering if they should be breaking the bill out as a separate item on the utility bill so they see the grid mod cost of the electricity. He wanted explanation on why it would still cost $5 million in debt service even though they were postponing it. He wanted to know how good the market intelligence was on getting the competitors’ information on percentages of increases. Director Batchelor explained they were just replacing poles. A lot of the work they were planning on doing up front was going to look at the substation work where folks would not be able to see too much work being done. Seeing the lead times and materials and the substations did not need to be upgraded as fast at the grid mod is moving forward so they decided to slow the substation work down. They would start upgrading the substation portion in the later years. He did not think they learned anything from the pilot standpoint. He thought the community would appreciate knowing they were looking at end of life equipment at that period of time. It was a $300 million project and $150 million was already work that would have had to be done in the next 10 years. He explained that they looked at the rate information sent out by PG&E. Mr. Babbitt thought they would still probably debt finance the same sum of money. Instead of starting to incur that cost in FY25, it would start in FY26 and go a year later. Alan Kurotori added they should be comparing and showing the value of Palo Alto to the surrounding agencies. They were putting together an option of showing where the bill goes and what that investment looks like so the public and customers understand where their money goes and what value it brings. Doing this investment in the infrastructure now increases reliability. Chair Burt talked about the competitive rates and thought they should be promoting them. He asked if it was a pilot or a first production phase. He thought they should break down the portion of the cost that was going to have to be done anyway because of equipment end of life in the presentation clearly. He asked if co-locating some storage at some of the substation sites was now part of the plan and to what degree would that address the reliability and resiliency need. He asked how much of the projected increase was attributable to the grid mod. He asked how much the wildfires were hitting them when the transmission cost increases. Director Batchelor replied the pilot portion was around the fiber and electric phase one was going to be coming out in the same neighborhoods. They were then going to build out as Council gave direction spending the money in the reserves then stop and do an evaluation and see how the take rate was going to be. He explained that as they built the overhead section, the fiber was being made ready. He indicated the co-locating part was toward the end of the rebuilding of the substations. They had the capacity where they could look at ways of bringing in some extra reliability. SUMMARY MINUTES Page 9 of 11 Sp. Finance Committee Meeting Summary Minutes: 11/19/2024 Mr. Babbitt answered 60 percent of the increase was attributable to the grid mod. They had also been generating a substantial amount of revenue from the wholesale electric portfolio, renewable energy credits and resource adequacy. They were forecasting that those revenues would start to fall off so they were having to raise rates to make up for that lost revenue. He said in FY24 they spent about $30 million on transmission to get power to Palo Alto. That was expected to be $40 million by the end of this period. The total supply and distribution revenue requirement in FY25 was $164 million. They also had non-rate revenues that get them above that. Ms. Bilir resumed the slide presentation with the preliminary gas rate projections, preliminary gas cost and revenue projections, preliminary gas operations reserve projections, preliminary gas CIP reserve projections, gas bill comparisons, preliminary water rate projections, preliminary water cost and revenue projections, preliminary water operations reserve projections, preliminary water CIP reserve projections, water bill comparisons, preliminary wastewater rate projections, preliminary wastewater cost and revenue projections, preliminary wastewater operations reserve projections, preliminary wastewater CIP reserve projections and wastewater bill comparisons. Vice Chair Lauing questioned if the reserves were correct and if there were any they should look at evaluating what the right reserve was which would mean they could lower the rates. He wanted to know what they had in terms of forecast for population growth going toward 2030. Ms. Bilir thought looking at the reserve policies and whether they had the right guideline ranges was good feedback. In terms of gas and water forecasts, she did not think they were using a specific number of population. In the gas utility, they had a regression. They had a consultant do a regression and look at various factors. She was not sure if they used population or a different measure of growth. Water was based on their best guess of normal year of water use. Chair Burt added since new construction would be all electric, there would not be an increase in gas. There would be an increase in electric but not so much so on water because it is multifamily which is far lower water use without the landscaping. He was interested in whether they were or not projecting those demographic changes because they were anticipated to be significant but not across the board. Mr. Babbitt indicated in FY24, they overestimated what the gas sales would be. They got more conservative on this year’s financial plan on the gas load forecast. They projected they would lose services over the five-year period as part of electrification so they developed a base forecast they would have used historically and they also developed an electrification scenario where more and more customers were disconnecting. They were looking at population and economic trends when developing a base linear regression forecast. Councilmember Veenker asked about smoothing out the higher rates on the water. SUMMARY MINUTES Page 10 of 11 Sp. Finance Committee Meeting Summary Minutes: 11/19/2024 Ms. Bilir stated in order to do that they would need to look at reducing their costs. The only area they could reduce cost in would be CIP. One of the main projects in CIP was a water main replacement. Mr. Kurotori added they were taking a look at the storage reservoirs in terms of the seismic retrofit, the age of pipelines and materials when they were installed and wanted to keep high reliability for the water system. He thought they should tell the story better in terms of the justification and how the projects were prioritized. There were systems that were at the end of their useful life and needed to be replaced. Chair Burt asked if water supply on slide 20 included the investments SFPUC had put in through their capital program and now baked into the supply number. He wanted to understand more about what drove the significant operational cost increases. He thought it would be valuable to have references of utility comparisons of both standard set of cities and a comparison to SFPUC customers. He thought they should make sure the ratepayers understand that SFPUC has the best supply reliability in the state. On the wastewater, he was surprised that the massive investment was not the big driver on the cost increases and at the difference in residential rates between Los Altos and Redwood City. He thought it was important to share with folks the information on the rate increases on other public-owned treatment plants that were going through rebuilds and the story of why. Ms. Bilir replied that was the rate they paid per unit to pay for their revenue requirement including capital and operating cost. She noted the CIP budget moves around from year to year but compared to last year it was similar. They had seen increases on the operating side that they were continuing to investigate to fully understand them comprehensively and develop forecast recommendations fully. She indicated they were continuing to look into the operational cost increases and would come back with a full answer. She thought the main drivers were some administrative cost, salaries and benefits and specific costs that came in higher than expected. 4. Informational Item: First Quarter Fiscal Year 2025 Financial Status Report CFO Lai indicated this was just an informational report and no presentation had been prepared. Future Meetings and Agendas Assistant City Manager Nose announced this would be the final meeting for the calendar year. There were no Committee meetings scheduled in January as Council would move through their reorganization in the beginning of January. Typically, the Committee would resume meetings in February with the first meeting being scheduled February 4. In terms of the workplan for the Committee, there were standing agenda items like bringing forward the additional refined rate SUMMARY MINUTES Page 11 of 11 Sp. Finance Committee Meeting Summary Minutes: 11/19/2024 forecasts as well as moving through the budget process. There would also be some fee studies that were expected to come. They would review the workplan in greater detail for committees as part of the Council retreat on January 25. Adjournment: The meeting was adjourned at 4:43 PM.