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HomeMy WebLinkAbout2025-05-07 Finance Committee Summary MinutesFINANCE COMMITTEE SUMMARY MINUTES Page 1 of 48 Special Meeting May 7, 2025 The Finance Committee of the City of Palo Alto met on this date in the Community Meeting Room and by virtual teleconference at 9:00 AM. Present In-Person: Burt (Chair), Lythcott-Haims, Reckdahl Absent: None Public Comment 1) Steve L. opined that staff presented a cautious forecast but he wanted to see a plausible forecast that took into consideration it may take four or five years to recover job losses in the area, the risk to retail sales, 4 to 6 percent inflation, and mortgage rates at 7 or 8 percent. Steve L. thought the deficit could be higher, so he wanted to see the detail behind the ’26-’27 forecast but he could not easily find it. Steve L. believed the bond issue may be one of the big knobs. Agenda Items 1. Overview of the May 6, 2025 Finance Committee Special Meeting – Budget Hearing Lauren Lai, Chief Financial Officer and Administrative Services Department Director, addressed the Committee and provided an overview of today’s topics of discussion. Council Member Lythcott-Haims stated the Committee wanted to see the FTE historical positions filled and vacancies since the pandemic to determine whether unfilled staff positions were a source of savings. CFO Lai sought the Committee’s clarification. There was a 5 percent vacancy savings in the budget in addition to standing up recruitment review on a case-by-case basis. Council Member Burt clarified the Committee wanted to use the historic staffing levels to help inform a decision on staffing and if open positions should be closed, so it was a reexamination of the allocated staffing positions in the budget, which also raised the question of what portion of those would be assumed as vacancy levels for budgetary purposes. CFO Lai mentioned that HR will discuss the hiring review process in their segment. City Manager Ed Shikada remarked that the May 20 wrap-up will include a discussion on historical positions filled and vacancies but there may be opportunity to talk about it today. The departmental discussions could include the list of vacancies. CFO Lai wanted to hear from the SUMMARY MINUTES Page 2 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 Finance Committee how to approach the review of classifications or groups of positions that may be authorized but unfunded. City Manager Shikada noted that Attachment B from yesterday’s Supplemental Packet had the list of City vacancies. City Manager Shikada did not want the Committee to focus on the vacancies in isolation but a follow-up discussion was needed on what services would be impacted as a result of elimination of positions, which could be a summertime exercise for staff to come back to the Council in the fall. Council Member Burt commented that the Committee wanted to see historic staffing levels, authorized and filled positions, see what former City employee positions were outsourced historically, how many workers we have, what services we are attempting to provide and are those significantly different from the services we formerly provided. This information will inform how many people we need to employ. The assumed vacancy level in the budget is typically lower than the actual vacancy level. City Manager Shikada agreed a staffing evaluation needed to occur but it will not happen until summer and into the fall. City Manager Shikada thought the context of historical staffing levels and vacancies may be less valuable than evaluating the current circumstances. Positions have changed and so have workers’ expectations. For example, firefighters used to love overtime but now overtime is a concern. Five years ago, Our City at Work provided an overall evaluation of the services we provide and resources required at a program level, which may be due for an update as part of a summer exercise into the fall. Council Member Burt wanted to discuss staffing today and maybe in the follow-up budget Finance Committee meetings to allow the Committee an opportunity to give tentative feedback to help direct and inform the deeper analysis. The Council needed to reach a consensus on what request they would be asking about unfilled positions and the role of consultants. Staff told the Committee yesterday that there was additional scrutiny of consulting contracts and open positions but it was not anticipated to have a financial impact. Council Member Burt felt the Committee needed to understand at least at a high level what the impacts were of the ongoing measures, which would affect presumably whether we will have a surplus this fiscal year if expenses are reduced to some degree because of those actions and how it ties into our need to tap into the Uncertainty Reserve. As discussed yesterday, Council Member Burt wanted to know how to reduce using all the Uncertainty Reserve so we can retain some reserves in case things got worse or to partially meet the deficits projected in the following two years. Council Member Burt felt the Committee needed to make recommendations to the Council on what to do now as well as contingency planning for possible scenarios. Council Member Reckdahl agreed with Council Member Burt. Council Member Reckdahl expressed concern about using up the Uncertainty Reserve. The BSR is $3.8 million below its target and the Infrastructure Reserve was $1.4 million below its target. The assumed vacancy rate was 5 percent but in reality it was higher, so Council Member Reckdahl wanted to know what were the dollars associated with the vacancies. SUMMARY MINUTES Page 3 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 Council Member Lythcott-Haims thought it was helpful to have on a chart the $3.8 million for BSR and $1.4 million for the Infrastructure Reserve to try to recapture those dollars by potential cuts to CIP or other options. One item Council Member Burt wanted on the list to address was the impact of bond refinancing versus bonding additional CIP projects because it was a major knob that could be turned this month or in the coming months in scenario planning. City Manager Shikada suggested the topic of refinancing and new debt issuance could be addressed in the discussion on debt and borrowing opportunities. CFO Lai will ask the Assistant Director to contact our FA to see if refinancing our outstanding debt would result in enough savings in the current financing environment. The City had a policy on the net present value savings that needed to be achieved before refinancing. Discussion ensued on looking for one-time savings versus ongoing savings. City Manager Shikada pointed out that reductions in CIP will generate one-time savings. Council Member Burt wanted to talk about the targeted savings later this morning, and invited CFO Lai to proceed with her presentation. CFO Lai explained pension funding sources: 56 percent of a pension dollar comes from investment earnings, 11 percent from employee contributions, and 33 percent from employer contributions. The City has a pension trust. CalPERS assumed an investment rate of return (called a discount rate) of 6.8 percent. City policy has us investing at 5.8 percent. Employees contribute between 1 and 4 percent toward employee cost. The biggest lever relative to employer pension cost is the plans. The City has three plan levels, Tier 1 was the classic, Tier 2 was before PEPRA, and PEPRA is Tier 3. PEPRA is the least costly of the three tiers and is now mandated by law. In the prior year, 55 percent of the City’s workforce was on the PEPRA plan, now it is 60 percent, so trajectory of pension costs will change over time. Employer costs include the normal cost and Unfunded Accrued Liability (UAL). The focus is on paying down the UAL. The pension trust fund has $84.7 million. In the proposed budget, the City is funding $14.2 million in the pension plan. The General Fund $9 million is the prefunding trust portion. The proposed budget is in compliance with the policy. It was calculated that 5.3 percent would reach Council’s goal of a 90 percent funding level within 15 years. Should the Council want flexibility with the internal policy, it could be deliberated. It was Council Member Burt’s recollection that Section 115 was funded in FY17 or the following year and the 15-year goal was set, which was a valuable goal but not mandatory. Assistant City Manager Kiely Nose thought the policy was created over six years ago. The policy included an evaluation of the goals every four years, which has been done once before and will be reviewed again this year or next year. In the last review, the Council chose to continue with the goals as established. CFO Lai mentioned the policy review will occur this fall. CalPERS goes through the ALM process, which is when the CalPERS Board decides their investment strategy; following that, the City runs an actuarial update to see how it aligns with the objectives. SUMMARY MINUTES Page 4 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 Council Member Burt inquired if the 5.8 percent target meant the City was prefunding at 5.8 percent. CFO Lai explained the real investment return for the fiscal year versus CalPERS target and it is City policy to be more conservative at 5.3 percent. The implication of the 5.3 percent is our funding level, the spread between 5.3 percent and 6.8 percent to meet the objectives in Section 115. CFO Lai showed a chart of the Unfunded Accrued Liability (UAL) for the safety and non-safety categories of workforce. For Fiscal Year 2026 (FY26), the outstanding estimated liability is $574 million. The funding level per the actuarial report is about 64 percent blended. The Section 115 Trust has $85 million as of June 30, 2024. That added about a 5.3 percent funding contribution, therefore raising the funding status from 64 percent to 69.3 percent. Council Member Reckdahl asked if stock market returns drove the decrease in total UAL from $510 million in FY23 to $392 million in FY24. CFO Lai answered yes. Investment return drives almost 60 percent of pension costs, so the CalPERS investment strategy and actual return are very important. Swings in UAL tie directly to CalPERS actual returns but the City hedges against that with our policy. Council Member Burt noted those swings were big from year to year and pointed out it was trailing by two years, so he assumed the decreased return in FY24 actually occurred in FY22. CFO Lai stated that the City’s contribution to the pension was a tool for risk mitigation to hedge against some of the volatilities from CalPERS. Council Member Lythcott-Haims asked if there were forecasts out to 2030 or 2034. CFO Lai asked staff if the forecast was in last fall’s slide deck or in the budget book. CFO Lai said there were two actuarial reports. The actuarial report from CalPERS was less relevant because of the City’s prefunding. The more relevant actuarial report was done by the City every four years. Council Member Reckdahl asked if the City was contributing enough to the 115, including looking over a longer time span. CFO Lai answered yes. The budget included $14 million of contribution toward this. In FY22, the City contributed $29 million to the Section 115 Trust; in FY26, it is $85 million. Council Member Burt’s recollection was that Palo Alto was one of the first cities in the state to establish a supplemental fund but more have been doing so in recent years. Council Member Lythcott-Haims highly recommended watching former Mayor Eric Filseth’s tutorial on YouTube explaining the UAL, called Pension Finance Palo Alto, created in December of 2022, about 40 minutes long. Paul Harper, Budget Manager with the Office of Management and Budget, said the goal was to reach 90 percent funded by 2036, which the 5.3 percent discount rate versus CalPERS 6.8 percent discount rate was one of the big pieces to achieve that goal. CalPERS had a net loss of 6.1 percent in 2022 and 9.3 percent in 2024. When CalPERS does their ALM study later this year, CalPERS will decide if they want to continue using 6.8 percent as their target. Then, staff will come back to the Finance Committee and Council to decide if we want to continue at the 5.3 percent we hedge against CalPERS or update the discount rate. Staff planned to come back next year to make sure the policy was still in line with what we want to be funding. Council Member Burt noted CalPERS had been gradually reducing their rate of return. SUMMARY MINUTES Page 5 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 Council Member Reckdahl inquired if the Section 115 contribution or BSR contribution could be reduced to balance the budget, and what kind of return do we get on the BSR funds. CFO Lai replied there were higher investments in the 115 and it was more flexible than what was in the pooled cash. The monies in the BSR fund were more restricted to fixed income and LAIF whereas 115 was more of a 50/50 strategy of equity and debt. The 115 was a trust and cannot be removed except for limited purposes related to pension cost, current cost, and debt service liabilities. To address near-term challenges if the City was potentially facing an unusual stressed period, Council Member Burt wondered if we would choose to make any near-term adjustments to the long-term plan. CFO Lai spoke about the OPEB policy. There is an actuarial report on the City’s postemployment or retiree health. There is a prefunding policy for retiree benefits. A slide was shown of the 10- year projection of contributions and projected funding level. In 2025, the funding level was estimated at 54 percent. Continuing this contribution at the additional funding level will get to 84 percent by 2034, as was built into the proposed budget. The City is contributing $6.1 million in all funds related to this policy, of which the General Fund portion was $3.8 million. Council Member Reckdahl sought clarification if $14 million was put into the 115 in addition to $6 million for OPEB, and CFO Lai answered yes. CFO Lai stated it was the City’s policy to prefund at a higher level, which actuaries call an optional contribution. It will reach 90 percent in about 2035 or 2036, which was one of the core objectives of the policy. Council Member Burt queried if the City will halt contributions to the Section 115 once it reaches 90 percent or was the City obligated to maintain a 90 percent level. Budget Manager Harper’s recollection was the policy needed to determine that. When the 90 percent target is met around 2035, at that point Council will need to determine what to do with the money, hold it in the trust and/or give it to CalPERS. The contributions that the City puts into the trust and OPEB will reduce. The forecast ends at 2035, so Budget Manager Harper was not sure if the City will continue at the same rate beyond that timeframe. City Manager Shikada said it was a decision for the future Council as the policy is revisited periodically. CFO Lai pointed out the bar chart on the slide showing the UAL baseline and the green bar representing the City’s optional policy. Once it gets to 100 percent, the contributions continue but start to taper off. The actuarial report shows the City’s funding level with contributions tapering off to maintain the 100 percent level. Based on this projection, City contributions toward OPEB should end in 2044. Budget Manager Harper emphasized the 90 percent targeted number fluctuated yearly depending on the rate of return of the investments. CFO Lai provided reassurance that while CalPERS has swings in returns, they have a ramp up and a leveling of how they incorporate those investment returns year over year. Their governing policies allow for rate stabilization. This allowed the City to continue to manage the implications of CalPERS locally. Council Member Burt noted in yesterday’s presentation that the CalPERS contribution rate was projected to peak in the next few years and then was projected to decline, and presumably was incorporated into the long-term financial forecast. CFO Lai confirmed that it was incorporated. SUMMARY MINUTES Page 6 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 CFO Lai displayed the UUT FY25 projected versus FY26. The proposed budget showed -2 percent, which staff did not think was accurate. The FY25 projected $20.6 million for the combination of City utilities and telephone was based on 10 months of year-to-date actuals through April but estimating May and June revenues. The FY26 projected amount on the current slide was $21.4 million, so staff believed the midyear published number in the proposed budget publication of -2 percent was a clerical error. CFO Lai clarified that the error was in the midyear number for FY25 but the FY26 number in the proposed budget was a true-up of FY25. Council Member Burt asked for the average percent increase of utilities in the UUT. Assistant City Manager Nose reminded the Committee that the average bill impact for residential did not reflect the system revenue overall. The 5 percent year-over-year projected increase for City Utilities UUT revenue was in line with the three included utilities (electric, gas, and water). Water had about a 10 percent system increase whereas gas and electric were in the 5 percent range overall. Rates, supply costs, and consumption impact the overall system. Council Member Burt wondered how not filling budgeted positions would affect the FY26 budget because having a higher vacancy level than was projected would result in a greater carryover surplus at the end of the year. Discussion ensued on the desired amount of remaining Uncertainty Reserve. Council Member Reckdahl inquired what was the difference between what was budgeted and what would be spent on employees if current vacancies were not filled and there was no turnover. City Manager Shikada stated that question was impossible to answer because there is always turnover or attrition. Council Member Reckdahl suggested using half of the $12 million Uncertainty Reserve this year and half next year. Council Member Reckdahl asked if it was feasible to cut $6 million without affecting services, and how much implied margin we had, taking into account a higher vacancy rate than was budgeted. City Manager Shikada noted it was challenging to connect the vacancy figure to the service impact because vacancies were random and not intentional. City Manager Shikada addressed Council Member Burt’s earlier question; the expected impact of higher scrutiny on new hires would give the Council some flexibility in getting through this budget process by reducing the amount of cutting needed, if that is what was ultimately decided but it was a stopgap measure, not a strategic action. City Manager Shikada acknowledged there was some level of service impact by whatever target is established but staff will go through the effort of identifying how to make those savings. Council Member Reckdahl noted that the City gets even in in 2030 per the long-term plan but the question was how to transition between now and then. Council Member Reckdahl asked if staff envisioned achieving a sustainable expenditure level to get through the transition period by cutting positions or postponing capital projects. City Manager Shikada replied it was a policy question. An ongoing expenditure was considered as lasting more than three years; therefore, if ongoing cuts were made, it needed to be sustained for three years and could potentially be SUMMARY MINUTES Page 7 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 cut permanently or be revisited along the way. Typically, it would not include stopping ongoing maintenance for three years because that would have irreversible impacts. Council Member Burt posed the following for staff to consider to reach a hypothetical target of $6 million or more and maybe a contingency plan if things got worse: Staffing reductions from the proposed number of budgeted authorized positions and the assumed vacancy ratio, savings from reducing the CIP transfer as a result of bonding Station No. 4, reduction of $1 million or $2 million in consultant expenses, use $1 million of VTA Measure B funds instead of Measure K for grade separation, reduce the City’s Section 115 contribution by $1 million or $2 million this year, and potential savings from refinancing bonds. Reducing the number of authorized positions decreases the budgeting level versus not filling authorized positions results in a surplus at the end of the year. Sandra Blanch, Human Resources Department Director, stated that they have been looking weekly at vacancies and not authorizing recruitments for the time being in preparation for contingency planning. The General Fund has 55 authorized positions, meaning a savings of 2 percent above the 5 percent vacancy rate. Looking at five classifications in the SEIU group, it achieves $1 million in savings. Council Member Lythcott-Haims noted that 55 represented slightly less than 10 percent of the overall 607 FTEs under the General Fund. Director Blanch said that 55 calculated to about 9 percent. CFO Lai mentioned the 5 percent vacancy savings in the budget was $5.1 million, so approximately 1 percent of vacancy savings equated to about $1 million. At the end of FY24, the General Fund had $2 million of savings attributable to the staffing and benefit category. FY24 closed with savings from revenue projections coming in slightly higher, contracts, and miscellaneous costs. The vacancy level was running slightly above 5 percent, which CFO Lai hoped some of that margin will create a FY25 surplus to help offset FY26 and FY27. Council Member Reckdahl questioned if the vacancies included Public Safety because not filling those had minimal return because of overtime. Director Blanch answered yes; the 55 vacancies included fire and police, and a 2 percent cushion is used to pay for backfilling absences. In the past, the policy was to divide surpluses between additional funding to CIP and Section 115, so Council Member Burt posed a policy question of what would be done with the prospective FY25 surplus and if it could be used to diminish what is put in the Uncertainty Reserve. Council Member Burt was interested in comparing how many employees the City had now and how many positions were authorized versus pre-COVID in 2019 when there was a 12 percent vacancy rate. In 2019, Palo Alto had roughly the same number of residents but fewer City workers. Council Member Reckdahl wondered if there had been scope creep in City services. Council Member Reckdahl asked if any BSR transfers were done this year because he recalled CFO Lai came to Council a couple months ago and said that sales tax was decreasing in the current fiscal year and revenue targets were not being met but it was rectified by pulling some SUMMARY MINUTES Page 8 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 money out of BSR. CFO Lai explained that at midyear Council was shown the reduction in sales tax but it was offset by increases in other tax categories, so the revenue was recalibrated amongst all other major line items. BSR was not used to fill the gap. The FY24 actuals ended with a fund balance; at midyear, the Council legislatively appropriates the prior year carryforward balance into different buckets. FY25 will hopefully have some expenditure savings because of the controls in place around staffing and recruitment, which will enable an FY25 carryforward going into FY26. CFO Lai confirmed Council Member Lythcott-Haims’s understanding that the carryforward was not included in calculating the projected deficits for FY26, FY27, and FY28. In reply to Council Member Burt asking when the carryforward amount will be known, City Manager Shikada answered next fiscal year. CFO Lai stated the vacancy level was higher than the budget assumption of 5 percent, so it was hoped that there will be savings in the staffing category, especially in non-safety departments. Council Member Lythcott-Haims noted there was a 9.3 percent overall vacancy in the General Fund, excluding public safety it was 7 percent. Council Member Reckdahl saw a table on Slide 18 in yesterday’s presentation showing $57 million in BSR at the end of FY24 but we will have $54 million at the end of 2025. Budget Manager Harper explained that a couple hundred thousand was used throughout 2025 to pay for various items. Approximately $2.6 million was used to balance the budget in 2025. Budget Manager Harper could take a more detailed look at the BSR if the Committee so chooses. CFO Lai recalled at one point the BSR level was above the 18.5 percent margin, so they considered moving funds from the BSR to the Uncertainty Reserve but it did not directly go toward the FY25 budget. Council Member Burt asked what the average turnover was each year. Director Blanch replied the turnover rate was roughly 9 percent. Council Member Burt recalled the City dealing with a very severe budget impact during the Great Recession and when the Council asked the City Manager to make adjustments in the staffing level and expenses, the City Manager said he needed a two-year period to reduce staff in a thoughtful way without layoffs. Therefore, Council Member Burt wanted staff to act now to allow a longer runway to manage changes. The 9 percent turnover created opportunities to right-size the staffing level by making hiring decisions of which of those positions were essential. Council Member Reckdahl inquired if the 9 percent turnover rate was uniform almost every year or if there were large swings in the turnover percentage. Director Blanch referred to the chart included in the Supplemental Memo. It was 8.2 percent last year and 11 percent in 2023. Council Member Reckdahl was worried that the City’s turnover may decrease because there may be a lot of public workers looking for jobs if they are laid off by the federal government, and nobody will leave their job because of increased competition for open positions. Council Member Burt pointed out that measures taken subsequent to 2023 may have resulted in the current lower turnover. The City’s wage competitiveness as a result of moving toward the 75th percentile was one of the key factors in reducing turnover. Director Blanch stated that planned retirements also created opportunities to evaluate staffing. SUMMARY MINUTES Page 9 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 City Manager Shikada commented that this discussion will have an impact on employees’ interest in joining the organization, as well as moving from a period of active recruiting to slower recruiting or potentially a hiring freeze or layoffs. City Manager Shikada asked for the staff to be given an opportunity to come forward with recommendations on how to reach a targeted amount, taking into consideration the impact on services. The budget proposed 17.3 percent for the BSR, which was within the range of 15 to 20 percent but below the 18.5 percent target. Council Member Lythcott-Haims asked staff to tell the Committee why they felt confident that 17.3 percent was a reasonable risk to undertake in FY26. CFO Lai replied that the policy speaks to a range between 15 to 20 percent. The $54 million shown on the slide reflected a percentage of the operating budget. As the operating budget goes up because of increases in cost of living for the workforce and contracts, the denominator grew and therefore the percentage declined. CFO Lai asked the Committee to provide a monetary target for General Fund expenditure reduction so staff can look within their programs and come back with proposals. Council Member Reckdahl was concerned that a $9.6 million deficit was projected in FY27, so he wanted an ongoing target to significantly reduce that deficit. One-time cuts made this year will not address the ongoing problem in FY27. Council Member Burt suggested a combination of one-time and ongoing cuts. City Manager Shikada said it was a policy decision on where to focus and how to set the balance. Council Member Reckdahl noted a hiring freeze was not a good way of reducing headcount because it is arbitrary where those positions end up, so he thought the better option was to give staff more runway to reduce headcount in a thoughtful way. Council Member Burt pointed out that if use of the Uncertainty Reserve was reduced by $6 million for this fiscal year through a variety of one-time and ongoing means and applying $6 million from the Uncertainty Reserve to FY27 did not solve FY28 or FY29, or was the goal to have a balanced budget in FY27 on income and expenses. Council Member Reckdahl stated it will take time to reduce ongoing expenditures in a thoughtful manner. Council Member Reckdahl suggested using $6 million from the Uncertainty Reserve for FY26, $4 million in FY27, and $2 million in FY28, and match ongoing expenditures so the budget is balanced going forward. Council Member Lythcott-Haims commented that when looking at the CIP 5, 10, and 15 percent one-time expenditure cuts next year, there needed to be a projection of the impact of deferring CIP to FY27 and FY28 because it could significantly increase the deficits in those years. Council Member Burt stated that staff needed to look at CIP for FY27, FY28, and FY29 to determine if those projects needed to occur in those fiscal years or if a percentage from each year could be moved out a year. As an example, Council Member Reckdahl said staff had to plan the park renovations, so there was a limit on how many can be accomplished in one year, which meant probably all park renovations could slide down. SUMMARY MINUTES Page 10 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 The proposed budget included $12 million use of the Uncertainty Reserve. CFO Lai acknowledged the Committee’s request was to cut use of the Uncertainty Reserve in half in order to retain $6 million for future years. Staff was tasked with coming back with plans for cutting $6 million from the FY26 proposed budget, which could include the 5, 10, and 15 percent reductions in CIP. Council Member Burt wanted to see alternatives if staff found more than a $6 million reduction for the FY26 budget. If staff can reduce CIP by 15 percent, use $1 million of Measure B dollars, transfer less to CIP because we bonded, and projected less consultant expenses, it would add to more than $6 million. Council would be very interested in further reducing the projected deficits in FY27, FY28, and FY29. City Manager Shikada acknowledged Council Member Burt’s request but thought it will be difficult for staff to get to $6 million. Council Member Reckdahl feared things could be worse 12 months from now. City Manager Shikada understood that staff needed to take immediate action as well as contingency planning. CFO Lai noted that if the desire of this Committee was to hold back $6 million of the Uncertainty Reserve to contribute toward FY27 and FY28, then savings at the $2 million threshold needed to be multiyear. The Committee reached a consensus that out of the $6 million, approximately $2 million will be ongoing and $4 million in one-time cuts. CFO Lai acknowledged it was the wish of the Committee for staff to come back with a contingency plan with a target of $6 million, $4 million of which is one-time, $2 million of which is ongoing. Staff will discuss later today whether they can bring something meaningful during this budget development process or later because of the implications. Public Comment: None. The Finance Committee took a break. NO ACTION TAKEN 2. Infrastructure and Environment: a) Utilities: Operating 1) Electric Fund (O: 429-444) 2) Fiber Optics Fund (O: 445-452) 3) Gas Fund (O: 453-466) a) Gas Fund SUMMARY MINUTES Page 11 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 b) Recommendation to the City Council to Adopt a Resolution Approving the FY 2026 Gas Utility Financial Forecast and Reserve Transfers, the Natural Gas Cost of Service and Rate Study, and General Fund Transfer; and Amending Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master-Metered and Commercial Gas Service), G-3 (Large Commercial Gas Service), and G-10 (Compressed Natural Gas Service) and Implement a Climate Credit in FY 2026 4) Wastewater Collection Fund (O: 467-478) 5) Water Fund (O: 479-492) b) Public Works: Operating 1) General Fund (O: 345-362) 2) Airport Fund (O: 363-372) 3) Refuse Fund (O: 373-384) 4) Stormwater Management Fund (O: 385-398) 5) Vehicle Replacement and Maintenance Fund (O: 399-408) c) Wastewater Treatment Fund (O: 409-420) Naomi Hsu, Senior Management Analyst with the Office of Management and Budget, addressed the Committee. In the FY26 Proposed Budget Summary, the General Fund only pertained to Public Works because Utilities did not have anything in the General Fund. For Public Works, the main driver of the 3.2 percent budget increase between FY25 and FY26 were proposed adjustments to the base budget. Other Funds included all nine of the City’s Enterprise Funds and the Vehicle Internal Service Fund, which had a proposed total budget decrease of 9.6 percent between FY25 and FY26. The biggest driver of change in Other Funds was the Capital Improvement Program, as can be seen in the Funds’ reconciliation tables in the Operating Book. The Refuse Fund did not have any capital projects, so the primary change was the annual increase to the Green Waste contract. Alan Kurotori, Utilities Chief Operating Officer, delivered a presentation on the Utilities Department’s Electric, Fiber, Gas, Wastewater Collection, and Water Funds. Staff will come back to the Committee with some proposals on the gas charges. The FY26 budget for Utilities was largely status quo, with a continued focus on upgrades for grid modernization, fiber to the premise (FTTP), and rate stabilization. The major proposed changes in the Utilities Department included grid modernization, natural gas transition strategy, Palo Alto FTTP, and replacement of SUMMARY MINUTES Page 12 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 gas, sewer, and water mains to enhance safety and reliability. Staff will come back to the UAC, Finance Committee, and full Council to discuss the long-term viability of the fiber program. COO Kurotori said the Utilities Department was not requesting any additional FTE positions. Utilities had a 14 percent vacancy rate, about 38 people. One high-priority project is undergrounding lines for wildfire mitigation. Some projects were shifted to consolidate into larger projects, and Utilities was coordinating with Public Works on the timing of projects in a neighborhood. The Utilities Department has seen the impact of inflation and supply chain issues, and the tariff discussion has come up. Multiple Tier 1 vendors for overhead transformers were under contract. About 1000 transformers were purchased at $4.5 million to buy in bulk and staff was looking at purchasing more before January 2025 while the supplier was holding those rates. To extend the life of assets and determine how to best invest, CCTV will be used for sewer mains to assess the condition of underground facilities and define if spot repairs are needed versus full replacement. The electric utility has renewable portfolio standard requirements that are increasing over time, therefore new supply contracts need to be evaluated and negotiated to meet those objectives and meet the S/CAP goals to green the City’s electric supply. A couple of very attractive contracts will be brought to full Council later this summer as a result of staff working in partnership with NCPA (a consortium of 16 utilities) to get the best value. Council Member Reckdahl asked if there was available cash flow to buy ahead of time and in bulk. COO Kurotori replied there were reserves set up to do so. Staff will do bonding for grid modernization with the first tranche of about $80 million probably coming later this year. The total cost for grid modernization is around $300 million, which so far had been done using reserves to pay-as-you-go. It was a very good hydro year, so that cash on hand was being utilized. For grid modernization, Council Member Reckdahl asked how much of the hardware had been purchased and how much still needed to be purchased. COO Kurotori explained that grid modernization was being done in stages. One issue was where to store the transformers, so staff was considering storage facilities. The City has leased property in the past, so staff was looking at getting a property within Palo Alto for storage of materials. One reason for not pre- purchasing too much was warranty issues. Staff was having discussions with other NCPA members on their procurement so Palo Alto can get the best value. Council Member Reckdahl asked if suppliers could provide storage. COO Kurotori answered yes, at a cost. Another consideration is the uncertainty of how long it takes to get transformers and breakers, so projects are de-risked by pre-purchasing materials to have them available for the contractor. Staff uses a spreadsheet to determine the schedule of when products are needed, the costs associated with the multiple vendors, and delivery timelines. Utilities staff works with ASD to stage purchases. Council Member Burt emphasized that about 40 percent of the $300 million cost for grid modernization had to be done anyway; it was not all attributable to electrification. Grid modernization will also improve reliability and resiliency. SUMMARY MINUTES Page 13 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 Council Member Burt asked what percentage of transformers was sourced domestically versus imports and from what countries, and the risk of availability and prospective cost when relying on imported transformers. COO Kurotori replied they were seeing good pricing and a reduction of time lag from order to delivery of distribution transformers and pad-mounted transformers, which meant the market was stabilizing. Larger transformers for substations came from the international market with European manufacturers, South Korea, Hitachi in Japan, and domestic suppliers, so those lead times were typically three years out. To de-risk projects, materials with long lead times need to be ordered early, about two to three years for breakers and transformers. Council Member Burt pointed out that ordering early does not necessarily avoid a tariff impact when they arrive, so he thought contingency planning needed to project the cost and availability. COO Kurotori explained that as they procure transformers they will look at the language addressing potential tariffs in the purchase agreements, increases in materials, the certainty of when transformers can be supplied, and the timing. As projects are pushed into future years, staff has seen a spike in inflationary costs and increasing construction costs in California. Council Member Burt understood FTTP was supposed to align with grid modernization but fiber was further behind and wondered if it was due to waiting for the hut for the Colorado Station. COO Kurotori said the fiber hut had been delivered to the Colorado Substation but he did not have the precise information. Dave Yuan, Utilities Strategic Business Manager, clarified that the hut was built but was being held for delivery because of the permitting process for the pad to get the hut installed at the Colorado Power Station. Hopefully the permit will be issued by the end of the month. Council Member Burt was aware the initial proposed Palo Alto Fiber rates were above some of the telecom rates. Mr. Yuan, Utilities Strategic Business Manager, replied that the rates will be presented to the UAC tonight. The City cannot compete with the incumbents on their promotional rates but Palo Alto’s price will be competitive with the incumbents’ usual rates. Council Member Burt wondered whether the City should offer promotional rates. Council Member Burt recalled an analysis was performed years ago about the pricing structure of telecoms when they do not have competition versus one competitor or two competitors. The analysis demonstrated that rates decreased significantly when there are two competitors. One of the significant benefits of providing fiber as a municipal service was our ratepayers save as a result of the telecoms dropping their prices because there are two competitors. Therefore, Council Member Burt wanted to make sure that staff will track the incumbents’ pricing structure as a result of competition. Mr. Yuan, Utilities Strategic Business Manager, will bring that data back after Palo Alto Fiber is launched. Staff received a lot of feedback from the community regarding the gas cost of service study (COSA), and COO Kurotori understood the Committee wanted some options. Lisa Bilir, Senior Resources Planner with Utilities, presented the Supplemental Memo issued last night on the SUMMARY MINUTES Page 14 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 FY26 Gas Rate Proposal. Today, staff will answer the Committee’s questions that arose during the discussion on April 15, 2025. Ms. Bilir, Senior Resources Planner, presented an alternative recommendation for the Committee’s consideration: Keep the current rate structure, increase rates across the board to recover the revenue requirement in FY26, and provide a one-time climate credit in FY26 to G-2 customers because they will receive the benefit of lowered meter service charges recommended in the most recent COSA. Approximately $1.1 million of Cap-and-Trade auction revenues was required to fund the climate credit. Staff will bring this back to the UAC to have a more detailed and public discussion about the policy guidelines and COSA recommendations, meaning the COSA rates will be implemented in FY27. Some of the major changes that occurred in the COSA were the following: A change to the classification factor for average and excess (demand and energy) to recognize that part of the system was built for providing service to the peakiness of the usage and part of the system was built to provide average usage. The General Fund transfer was changed to reflect a Measure L calculation update based upon a percentage of the gross sales revenue from two years prior. The General Fund transfer and reserve replenishment were reallocated to recover costs from each customer based on their therm usage. A slide was shown of system cost allocations. The 2020 COSA system cost allocation was 39 percent G-1 residential and 46 percent G-2 small commercial. In 2025 COSA, the system cost allocation was 44 percent G-1 residential and 41 percent G-2 small commercial. Assistant City Manager Kiely Nose explained the costs to providing gas service, the cost to have a gas hookup and provide service as well as consumption and the peakiness of consumption. The COSA looked at our system characteristics at a more granular level to determine how to appropriately proportion costs to the customer classes in alignment with the law. The difference between the 2020 COSA and 2025 COSA was a refinement between the G-1 residential and G-2 small commercial customer base because one has higher demand but one has more connections, both of which drive costs. G-1 residents are 91 percent of service connections and 38 percent of therms annual usage. G-2 small commercial is 9 percent of service connections and 45 percent of therms annual usage. The meter size of the smallest G-2 customers is similar to the meter size of G-1 residential customers. Likewise, bigger G-2 customers have a similar meter size to G-3 large commercial. The 2025 COSA divided the G-2 customer class in a more granular way. Ms. Bilir, Senior Resource Planner, addressed the Committee’s April question of why the G-1 Residential Tier 1 distribution rate went up 49 percent. The residential customer class has a seasonal tiered rate structure (Tier 1 and 2). The rate in Tier 1 and Tier 2 is the same throughout the year but there is a different baseline level in the summer and winter. The Tier 1 rate proposed in the COSA for FY26 will increase by 49 percent or $0.40/therm (from $0.82/therm to $1.22/therm). The primary driver for the rate increase is the increase in distribution energy (the amount of cost attributable to providing average levels of gas usage), reserve SUMMARY MINUTES Page 15 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 replenishment, and recovering the General Fund transfer. Distribution demand increased as a result of the average and excess calculation update. The combination of the change in usage since 2020, a change in the summer baseline, and a 4 percent reduction in overall residential demand caused the increase in rates because there is less volume to spread a larger amount of costs. In response to the Committee’s question in April of why the G-2 monthly service charge was changing so much for lower-capacity meters, Ms. Bilir, Senior Resource Planner, stated the proposed monthly service charges for FY26 was $29.06 for the smallest G-2 customers (1134 customers) and $417.62 for the largest G-2 customers (116 customers). In FY25, all G-2 customers paid the same rate of $156.90. As a result of this COSA, the consultant split G-2 into three groups based upon meter size and taking into consideration the billing complexity. If the Committee were to adopt the FY25 COSA, the UAC recommended a $1.6 million climate credit to residential customers to maintain a 9 percent overall increase in the Utility bill. To maintain a 9 percent increase in the gas bill for the median residential customer would require an estimated $2.4 million of climate credit funds from Cap-and-Trade auction revenues. Climate credits can be applied either monthly or annually. Staff presented the following alternatives for Committee consideration: Provide a climate credit from the Cap-and-Trade fund. At the end of 2024, the Gas Cap-and-Trade fund had an available balance of $13.6 million, which was prioritized for electrification and other related measures in accordance with the Council’s priorities. A $1.1 million climate credit for G-2 small and medium customers was estimated to compensate those customers if the 2025 COSA is not adopted. The UAC recommended use of $1.6 million for G-1 residential customers with the adoption of the 2025 COSA. Refer the 2025 COSA to the UAC with direction to revisit the guiding principles desired in the rate design. Discuss or direct further analysis on an alternative rate design for G-1 residential tiered rates (uniform rate or declining tiers). Direction to use the FY25 rate schedule with rate increases to achieve full revenue recovery in FY26. Staff recommended the Finance Committee: a) Revise the proposed FY26 rates to retain the current FY25 rate structure with rate increases to meet the revenue requirement for FY26 in the gas utility; b) In FY26 only, apply a climate credit to G-2 customers (small and medium meter capacities) in the amount of $1.1 million in total; and c) Refer staff to return to the UAC to further review the 2025 COSA assumptions and principles. Council Member Lythcott-Haims noted this increase represented a catchup in gas rates from FY21 and FY22 when rates were not increased; therefore, our revenues did not keep up with expenses and necessitated a drawdown of reserves. SUMMARY MINUTES Page 16 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 Council Member Reckdahl was not comfortable with using Cap-and-Trade money to subsidize gas and inquired if there were any other non-rate funds that could be used. Ms. Bilir, Senior Resource Planner, replied there were very limited non-rate funds in the gas utility. Interest income earned from reserves was for other purposes; Ms. Bilir will look up the amount but it was maybe $800,000 per year. Council Member Burt invited public comment and noted the Committee received written correspondence as well. Item 2 Public Comment: 1) Hamilton H. stated Palo Alto Neighborhoods opposed the proposed 34 percent average gas rate increase on residents despite an overall average gas bill rising only 5 percent. Tier 2 heavy gas users get a 10 percent rate cut, undermining climate goals. The proposal was to spend $1.6 million of funds on a one-time $73 climate credit instead of lasting electrification programs for homes and small businesses. Hamilton H. opined the COSA was flawed in shifting costs unfairly by improperly using PG&E as a benchmark. PG&E charges small businesses about 40 percent less per therm than residential customers. Citing seasonal variability, the current consultant adopted a new methodology that moved infrastructure cost from small businesses onto households, referred to as average and excess. Service fees for small businesses and master-meter landlords decreased from $150 to $29 while residents face a 34 percent increase. This reduces any incentive for small businesses and master-meter landlords to electrify as well as raises the residential share of the General Fund transfer. There is a precedent for reconsideration. Davis overturned a COSA-based water rate plan and later adopted a structure that better aligned with community goals. Hamilton H. recommended remanding the current study and rate design to the UAC for an equitable and climate- aligned FY27 revision, hold the FY26 increase to a uniform Proposition 26 compliant 5 percent while commissioning a new COSA, and preserve the $1.6 million in Cap-and- Trade funds for permanent emission-reduction projects. 2) Utsav Gupta is a UAC commissioner but was speaking on his own behalf. Mr. Gupta strongly recommended remanding the gas COSA back to the UAC for review, and do not use Cap-and-Trade funds to subsidize gas. During their recent UAC meeting, many commissioners operated under a misunderstanding that they had to accept the consultant’s findings. Other Cities such as Davis, Glendale, and Oxnard have revisited and revised their COSAs after public scrutiny. As a former litigator, Mr. Gupta believed there were greater legal and ballot initiative risks from adopting the drastic changes in the COSA prematurely rather than pausing for further analysis and community input. Cities that have moved ahead quickly have faced litigation, ballot measures, and had to pay attorneys’ fees for citizens’ groups. Proposition 26 does not require a specific methodology. The previous COSA is compliant with Proposition 26. The current COSA’s increase to residents was more driven by the consultant’s accounting changes. Remanding the gas COSA to the UAC will allow a thorough review, reduce potential SUMMARY MINUTES Page 17 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 risks, and enhance community trust. Mr. Gupta believed the proposed use of Cap-and- Trade reserves to subsidize gas directly violated Palo Alto’s Resolution 9487 adopted unanimously in 2015, which explicitly prioritizes using those funds for greenhouse gas reduction projects. In 2022, the City’s unanimous adoption of Resolution 10077 reinforced this intent, specifying those funds should support electrification initiatives that reduced emissions. The UAC did not have the City’s Resolutions on hand before deciding to recommend a transfer from Cap and Trade. Council Member Reckdahl did not think the new COSA had been vetted properly nor was it understood what the assumptions were in the COSA. Council Member Reckdahl was in support of sending the COSA back to the UAC. Council Member Reckdahl is an engineer and engineers worry about unintended consequences. The German word verschlimmbesserung translated to trying to make something better but actually making it worse, which was Council Member Reckdahl’s concern this COSA might be. Council Member Reckdahl wondered if the peaky charge was appropriate or if the COSA was overstating the penalty for peakiness. Council Member Lythcott-Haims agreed to have the UAC take a closer look at the COSA. Council Member Lythcott-Haims thought of herself as a humanist, and she felt a deep unfairness in the way this COSA allocated the burden of using gas. Council Member Lythcott-Haims expressed her concern about the use of Cap-and-Trade for anything related to gas. Council Member Lythcott-Haims wondered whether the upper end of G-2 ought to be lumped in with G-3. Assistant City Manager Nose stated the 2025 COSA was trying to more closely align large G-2 customers with G-3, and small G-2 with G-1 because of similar-sized meters. Staff researched the eligible uses and restrictions of Cap-and-Trade funds and the policy that Council adopted for the use of those funds. In next week’s staff report, there is a study session on this topic with the full Council. Council has a policy that states there is a preference for using gas Cap-and- Trade funds for electrification or moving toward the City’s sustainability goals but it also states that a climate credit is a valid use. COO Kurotori explained that gas Cap-and-Trade funds are regulated by CARB, who creates an annual report of the potential uses by investor-owned and public-owned utilities. The primary use of Cap-and-Trade funds by investor-owned utilities is a climate credit to a series of customers. Cap and Trade is used for decarbonization fuel switching and other programs that benefit gas customers; none of these programs are impacted by the potential use of these funds for a climate credit. Council Member Reckdahl pointed out that home electrification will be very expensive and it uses the same Cap-and-Trade funds. Assistant City Manager Nose agreed the City can incentivize customers financially but it was also about how quickly they can stand up those programs and what the adoption rates are within those programs, which has been factored into the assumed spending for the S/CAP programs and goals. SUMMARY MINUTES Page 18 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 Council Member Reckdahl asked if there was a legal obligation to spend the Cap-and-Trade funds anytime soon. Assistant City Manager Nose replied the funds need to be spent within 10 years of receiving them, as well as needing to demonstrate annually that the funds are used in appropriate ways. In the CARB report, COO Kurotori saw some revenues were nearing the 10- year timeline. Karla Dailey, Assistant Director of Utilities and Resource Management, thought the City had a couple more years to spend the first tranche but she did not have the dollar amount. Council Member Burt is on the S/CAP Committee and was aware of plenty of needs that the funds could be spent on. Council Member Reckdahl noticed projects for replacement of EV chargers in the CIP yesterday were very expensive and wondered if Cap-and-Trade funds could be used. Brad Eggleston, Public Works Department Director, stated the expenses for the project mentioned yesterday were balanced with revenues from LCFS and are generated by the City’s network of chargers. Council Member Burt asked if the $800,000 in interest income was a potential source to mitigate rate increases. Ms. Bilir, Senior Resource Planner, noted the amount had varied in the last several years between $400,000 and $700,000 but a portion of it was used to fund low income rate assistance and other programs. Assistant City Manager Nose mentioned that staff made sure the use of Cap-and-Trade funds was in alignment with the requirements, which one requirement was that the funds cannot be distributed on a volumetric basis. Council Member Burt asked for the Committee’s consensus on referring the COSA back to the UAC for further review of the assumptions and principles, and to make recommendations. Council Member Reckdahl wanted the UAC to study the COSA, use the current COSA for this year and increase rates by 5 percent, and questioned if the Committee wanted to suggest a rebate or reduction for the small G-2. Assistant City Manager Nose pointed out that rates needed to increase in the range of 9 percent across the entire gas system. Council Member Lythcott-Haims was in favor of the three items in staff’s alternative recommendation package. Assistant City Manager Nose explained that staff’s recommendation provided time for staff and the UAC to move through a more public process of reviewing the 2025 COSA, which will affect the FY27 rates. Rate setting is a highly litigious environment, so the Committee had been counseled on options from that perspective. Council Member Reckdahl was not in favor of using Cap-and-Trade funds but maybe $300,000 or $400,000 of the interest money could be used to offset a $300/year subsidy for small G-2. Assistant City Manager Nose stated staff brought forward what they thought was the best proposal but ultimately it was a policy call. Council Member Burt inquired if a lesser subsidy could be accomplished with interest funds rather than Cap and Trade. Assistant City Manager Nose explained that staff calculated the climate credit based on the tradeoff costs between the 2025 COSA and the current rates, so any reduction to the climate credit would adjust the City’s risk exposure. Staff can look for any available interest income. Assistant City Manager Nose suggested one option the Committee could take is to recommend applying a climate credit at this value using as much interest income as available and then filling the rest with Cap-and- SUMMARY MINUTES Page 19 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 Trade money. Council Member Reckdahl pointed out the 2020 COSA was updated in 2022, so it is not that old, and customers would have been charged the same amounts if the 2025 COSA study had not been performed. Council Member Burt asked to what extent were the recommendations of the 2025 COSA versus the 2020 that was updated in 2022 based upon actual changes in circumstances versus two different consultants who had different notions of what was an appropriate model. Assistant Director Dailey said the 2020 COSA was not updated in 2022. A slide was demonstrated that listed some of the differences and drivers, part of it is cost and part is the rate design that subdivided the G-2 customers into three categories. Not accepting the 2025 COSA resulted in a $1.1 million impact on small and medium G-2 customers. Council Member Reckdahl had not seen vetting of the new COSA; therefore, it was unknown whether the new COSA was correct, so he thought it was questionable to base any numbers on the 2025 COSA because it could have incorrect assumptions. Assistant City Manager Nose said if the 2025 COSA was adopted, the majority of the G-2 customer class would have seen a rate decrease. If the Committee chose to have staff further refine the 2025 COSA and instead move forward with the current rate structure, rates for G-2 customers will increase by about 9 percent. The 2020 COSA and 2025 COSA were both valid. Council Member Burt recommended that the Committee request staff to look at a combination of interest funds, Cap-and-Trade dollars, or other alternative funds to achieve $1.1 million. Council Member Lythcott-Haims was fine with Council Member Burt’s recommendation. Council Member Reckdahl pointed out that the two COSAs had vastly different rates and a third study could propose a third set of rates, so he did not think the climate credit needed to specifically be $1.1 million because it was based on one particular analysis that was not vetted. City Manager Shikada stated the COSA had been vetted by staff and through the UAC, had been brought to Council, and is a public document that has been shared widely; therefore, it represented a benchmark for which to compare any action the City takes. Council Member Reckdahl thought the UAC got the packet shortly before their meeting and did not deeply evaluate the methodology. City Manager Shikada stated staff agreed the COSA should be revisited but the rationale behind the $1.1 million was a way to acknowledge the work that has been done while the revisit occurs. Chief Assistant City Attorney Caio Arellano mentioned that the City Attorney’s Office provided confidential legal advice to the Finance Committee and the Council before the April 15 meeting and again last night, and he referred the Committee to those memos. The legal landscape around rates and local government revenues had evolved to make it difficult for agencies to go through the ratemaking process while making it easier for folks who are not happy with those rates to challenge them. Costs increase over time and, as a result, agencies perform COSAs more frequently to justify rate increases to meet revenue requirements. Utility staff identified a non-rate revenue source that allowed the Utility to raise rates in a way that meets the revenue SUMMARY MINUTES Page 20 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 requirements of the gas utility but also provides rate relief in the form of a $1.1 million climate credit to the folks who are the biggest losers in that rate increase. The regulations around Cap- and-Trade funds do allow this use. Council Member Reckdahl asked how the climate credit amount would be divided between the small and medium G-2 customers. Ms. Bilir, Senior Resource Planner, replied the proposal was for a one-time flat credit in the same amount to each small and medium meter customer. It had not been analyzed in great detail, so staff will provide the specific amount later. Assistant Director Dailey said staff recommended this credit occur in December/January when gas use is high and customers see their highest gas bills of the year. One of the important tenets of using gas Cap-and-Trade money for a climate credit is it has to be distributed on a non-volumetric basis, so customers will receive the same amount of credit. Council Member Reckdahl expressed his concern about spending money this year and perhaps again 12 months from now for a different class of customers impacted by a new COSA. Council Member Lythcott-Haims hoped the analytical work is completed well before the budget is in front of this Committee again. City Manager Shikada said the work plan would presumably include analytical work and planning for transition. MOTION: Councilmember Lythcott-Haims moved, seconded by Councilmember Burt, to recommend the City Council: 1) Revise the proposed FY 2026 rates to retain the current FY 2025 rate structure, with rate increases to meet the revenue requirement for FY 2026 in the gas utility; 2) In FY 2026 only, apply a combination of climate credit and interest income to G2 customers (small and medium meter capacities) in the amount of $1.1 million in total; and 3) Refer staff to return to the UAC to further review the 2025 COSA assumptions and principles. MOTION PASSED: 3-0 Lunch Break The Finance Committee unanimously agreed to tentatively recommend that the City Council approve Agenda Item #2. 3) Infrastructure and Environment: Capital Improvement Program (continued), Enterprise Fund Projects & Internal Service Fund Projects a) Information Technology (C: 651-676) SUMMARY MINUTES Page 21 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 1) Technology Fund b) Public Works 1) Airport Fund [Public Works] (C: 373-396) 2) Stormwater Management Fund [Public Works] (C: 513-538) 3) Wastewater Treatment Fund [Public Works] (C: 573-608) 4) Vehicle Replacement and Maintenance Fund (C: 677-714) c) Utilities 1) Electric Fund (C: 397-456) 2) Fiber Optics Fund (C: 457-478) 3) Gas Fund (C: 479-512) 4) Wastewater Collection Fund (C: 539-572) 5) Water Fund (C: 609-648) Brad Eggleston, Public Works Department Director, stated the FY26 General Fund budget for Public Works was largely a status quo budget while adding capacity to support traffic control needs. The only significant General Fund budget proposal was to add a 1.0 FTE Traffic Control Maintainer II position, which was a position that was eliminated during the pandemic and the work group has had three employees since then but the workload has increased. That group handles illegal dumping, homeless encampment issues, painting curbs, bike/pedestrian striping, sign fabrication, among other items dealing with roads and traffic safety. Also proposed was the elimination of positions for a 1.0 FTE Coordinator Public Works Projects and a 0.48 FTE Hourly Staff Specialist. Eliminating those two positions and adding one position resulted in an overall modest increase in General Fund expenses while expanding traffic control maintenance citywide. Director Eggleston provided the following FY26 Public Works Department Outlook: Continue implementation of the S/CAP three-year work plan and develop a plan for 2026-2027. Continue enhanced downtown cleanliness and medium-term improvement efforts, including addressing news racks and projects to improve the Caltrain-to-University pedestrian tunnels. Begin construction on the Newell Road Bridge Replacement project. Continue delivery of 2014 Council Infrastructure Plan capital projects, which included completing design of the new downtown parking structure project and starting construction on Fire Station No. 4. Examples of Public Works’ consultant contracts: Urban Planning Partners helped in developing the ongoing parklet standards that are being implemented downtown and are currently SUMMARY MINUTES Page 22 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 working on the design for the car-free Ramona Street. E3 is working on the S/CAP funding study and some other related studies. The majority of contracts are associated with CIP projects, architects for design and other types of design professionals, and construction management professionals for the downtown garage and Fire Station No. 4. Other Funds includes the Vehicle Replacement and Maintenance Fund, Airport Fund, Refuse Fund, Stormwater Management Fund, and Wastewater Treatment Fund. This year, there are budget proposals for the Airport Fund and Wastewater Treatment Fund. To phase out leaded fuel at the airport, funding was proposed for ongoing atmospheric lead monitoring services and noise monitoring software at the airport. Funding was proposed for an assessment of the organizational structure and current staffing at the Regional Water Quality Control Plant to ensure efficient operations and make recommendations for approval. An additional 3.0 FTE positions were proposed within the Wastewater Treatment Fund for an Instrumentation Electrician, Senior Operator WQC, and an Environmental Specialist. The Instrumentation Electrician and Senior Operator WQC are needed to maintain new instruments that are being added as part of the secondary treatment upgrade project. The Operator will enhance shift coverage, which will improve training capacity and the ability to perform preventive maintenance work at the plant. A lot of new requirements are coming along with the advanced water purification system, so the Environmental Specialist will work on the Title 22 recycled water permit and regulatory reports for other permits, budget development, and contract management for that workgroup. These positions will be partially offset by eliminating three vacant hourly positions. Director Eggleston provided the following FY26 Department Outlook for the Enterprise: Continue to promote the sales of unleaded fuels and implement the unleaded fuel transition plan at the airport. Continue implementing the 13 high-priority stormwater management projects outlined in the Stormwater Management Fee ballot measure. The Hamilton Avenue system upgrades project is important because it will help protect against flooding damage that can occur during a creek overflow; the project is planned to go out to bid in June with a contract award after the Council break and is targeted to complete next year in the fall. Continue implementation of City fleet electrification through vehicle replacements and charger infrastructure deployment. Continue update of the 2012 RWQCP Long-Range Facilities Plan for the next 50 years, with a focus on updating the Biosolids Facility Plan in FY26. Examples of consultant contracts include Carollo Engineers working on the updates of the Long-Range Facilities Plan and Biosolids Facility Plan. Schaaf & Wheeler is performing storm drain modeling and previously helped develop the master plan for storm drain improvements. The budget request for funding S/CAP programs in FY26 is $3.6 million. The six electrification programs from the S/CAP three-year work plan are the advanced commercial rooftop HVAC pilot program, multifamily EV charger program, advanced whole-home electrification program Phase 2, major facility emissions reduction grants, central space and water heating pilot program, and gas decommissioning/block-scale electrification pilots. The total S/CAP electrification program cost is $8.4 million ($3.6 million proposed in addition to $4.8 million SUMMARY MINUTES Page 23 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 from the existing budget) with funding sources of $4.1 million from Gas Cap and Trade, $3.1 million from Low Carbon Fuel Standard (LCFS), and $1.3 million from Electric Public Benefits. Council Member Lythcott-Haims wondered why Wastewater Collection had significantly more revenue than expenses. Director Eggleston replied the Wastewater Treatment Fund generated revenues from Palo Alto and five other partners to operate the wastewater treatment plant. City Manager Ed Shikada stated the rates reflected a combination of collection and treatment. Director Eggleston explained there was a high expense for the treatment plant because it is for six partners but about 37 percent is allocated as an expense to the Wastewater Collection Fund. The Wastewater Collection Fund sets wastewater rates to collect revenue to pay for Palo Alto’s share of the collection system and treatment plant. Council Member Burt thought the Collection Fund could be retitled to better describe what Director Eggleston articulated. Council Member Reckdahl referred to Slide 9 and asked what other types of planning is done in- house versus consultants. Director Eggleston responded that consultants are not hired to help with routine work such as street resurfacing and sidewalk replacement but CIP projects that involve designing a new building required a lot of expertise and being up-to-date on codes that we do not have in-house, so consultants are hired to do that kind of work and to assist staff in running the construction of large projects. In looking across the Public Work Department, City Manager Shikada could not recall any plan or study that was done completely in-house. The wastewater treatment plant, airport, facilities, and buildings all involved consultants from initial planning through architecture, engineering, and often construction management. Council Member Reckdahl asked if it was because of skills we do not have or is it a surge support issue. City Manager Shikada answered both. For the downtown parking structure, Director Eggleston said an architect was hired to do the design and hire subcontractors for civil design, MEP (mechanical, electrical, plumbing), landscape architecture, geotechnical, and low voltage. Sometimes a consultant assists with the CEQA environmental review. Staff manages the work of these consultants, takes projects through design review and through the sequence of City Boards and Commissions, plan check, through Development Services, write staff reports, interact with Council, work with the Purchasing Department in ASD on bids, and is involved in the day-to-day construction with assistance from other construction management professionals. Council Member Burt asked if staff was looking strategically at the coming years to determine whether internal capacity versus external was more cost effective. Director Eggleston replied they are often thinking about that. For example, the wastewater treatment plant had two engineering staff; when major CIP started ramping up, consultants were brought on for program management but eventually three engineering staff was added. City Manager Shikada noted the same considerations exist within the Utilities Department being heavily dependent on consultants for project design but having in-house capabilities to do some of the design, project management, and construction inspection. Council Member Burt felt that the community underappreciated the flood protection benefits provided by the storm drain initiative. The downstream projects at San Francisquito Creek and SUMMARY MINUTES Page 24 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 those that deal with the 101 and East and West Bayshore have had a major impact on the reduction in flood risk. The general perception was that nothing had been done for the middle reach. Council Member Burt encouraged communicating these efforts for the public to realize the benefits they have already derived in addition to what still has to be done. The Creek’s JPA had not analyzed it or communicated it well enough. Director Eggleston agreed that the benefit was huge and 2022 would have been dramatically worse, which staff has tried to communicate in blogs and at Town Hall meetings. The modeling of Hamilton will help tell the story of the improvement we have already seen and, if this were to happen again, how much more water we are able to channel directly to the pump station with this improvement. Council Member Burt had heard from the press and community members the misconception that Palo Alto had a $1 billion budget. The Water Quality Control Plant serves six agencies including ourselves but the cost is rolled into the Palo Alto budget, and Palo Alto has its own utilities. Council Member Burt believed the budget needed to be framed in a way that includes what we do in Public Works and Utilities but makes sure everybody understands that the General Fund is a third of the total budget, not $1 billion. Council Member Lythcott-Haims asked if Public Works had staff to tell their own narrative in a proactive way or if they relied on Meghan Horrigan-Taylor to take their message forward. Director Eggleston answered they work very closely with Meghan and her team on a lot of these communication efforts. With the new State daylighting law prohibiting parking 15 or 20 feet from an intersection, Council Member Burt asked if there was a plan to identify and prioritize curb painting for the highest-risk intersections particularly for bikes and pedestrians. Director Eggleston replied they were working on that plan now and have been in discussions with the Office of Transportation, Meghan’s team, and the Police Department. PABAC has had some of these discussions and has started to identify some of the highest-risk intersections. City Manager Shikada noted this was a primary focus of the Safe Streets for All Action Plan. Public Comments: None. Naomi Hsu, Senior Management Analyst from the Office of Management and Budget, presented a slide on capital projects in the Enterprise and Internal Service Funds. Large capital projects include grid modernization in the Electric Fund and the headworks facility replacement project in the Wastewater Treatment Fund. Darren Numoto, Chief Information Officer/Information Technology Department Director, provided the FY26 proposed budget summary for the Technology Fund. Major technology projects in progress include the Enterprise Resource Planning (ERP) Phase 2 updates, the Computer-Aided Dispatch (CAD) Center replacement for Public Safety, continued customization of the City’s Computerized Maintenance and Management System (CMMS) to serve as a capital tracking and capital planning solution, and datacenter upgrades to reclaim space for IT staff. The incremental upgrades for Council Chambers such as new microphones are being done with internal resources and an existing consultant to help support the current A/V system. Staff evaluates what work they can do internally, including doing research on the types of products SUMMARY MINUTES Page 25 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 that will best fit our environment. Staff can forego moving forward on video concepts if the Council and Committee feel that our current technologies fit the need. Director Eggleston said the five-year CIP expenses for the Vehicle Replacement Fund was $30 million, of which $11.9 million was proposed for FY26 because it included reappropriated funding of $7.6 million from previous years for vehicles that have not been purchased yet. Vehicle replacement has been challenging in the past few years because of supply chain issues, availability of vehicles, and to some extent our S/CAP fleet electrification goals where funding was set aside for electric vehicles but they are not yet available. Proposed in FY26 is the addition of 12 new vehicles, four of those being electric. The intention has been to purchase electric hybrid fire engines in FY25 and FY26; however, when placing the FY25 order, it was several hundred thousand dollars higher than the pricing from a couple years ago. Fire engine replacements were planned in FY25, FY26, FY27, FY28, and FY30. Previously, there was about a $700,000 cost differential between the diesel and the electric hybrid. Staff will get pricing soon on the diesel versions, so at this point it was unknown what the increased pricing may be. The lead time on hybrids is 12-18 months whereas on diesel it is 54 months. Staff will consider the cost, how we can afford it, as well as the mileage and age of the existing fleet. Council Member Burt requested further explanation as to why $11.9 million was proposed for FY26 versus $4 million in the subsequent years. Director Eggleston replied that FY26 included reappropriations. For example, the FY25 project was about $4.3 million but not many of those vehicles have been purchased yet, so those were reappropriated to FY26. Council Member Burt asked if staff anticipated making $11.9 million of purchases in FY26. Director Eggleston acknowledged they will not make all of the purchases. In the capital budget, each year is its own standalone capital project. The FY23 project still has some funding in it for one or two vehicles they are trying to procure. In FY24, there are a few more they are working on. It takes several years to finish everything in that year’s project and then close the project out. Council Member Lythcott-Haims thought this chart could be a key factor in decreasing this year’s expenses by pushing more vehicle replacement forward unless vehicles are at the end of their life, acknowledging costs go up when you wait a couple years. Director Eggleston stated the reappropriations were to replace vehicles that were prioritized years ago and budgeted but for whatever reason they have not been able to procure them yet. Council Member Burt asked what have been the consequences of not procuring those vehicles, and if staff compared what was anticipated versus what has come about as a result of delays in replacing those vehicles. Director Eggleston replied that individual modeling is not done for those vehicles. Many times when decisions are made to recommend a vehicle replacement, it is because of seeing increased maintenance and downtime but he did not have metrics. Council Member Burt requested staff to go back and see if good assumptions were made and if there had been significant consequences, not a quantitative study but just a reflection. Council Member Reckdahl inquired if there was a market for used firetrucks and if that was a consideration. Director Eggleston answered yes. The City sells firetrucks at auction. Director SUMMARY MINUTES Page 26 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 Eggleston said they were looking at options because usually they have two reserve engines but with an engine at Fire Station No. 4 starting this week they were down to one reserve engine. Staff has been in discussions with neighboring agencies that have acquired new equipment and have a vehicle they might otherwise send to auction, and there is also the potential of acquiring something at auction. Director Eggleston has heard that our apparatus are some of the best maintained compared to other fire departments, and the fire staff are very happy with the performance and in-service percent of time even when equipment gets to higher mileage. Director Eggleston said the plan is to purchase five over the next years, so they need a strategy for the first couple purchases. Council Member Burt asked if there was any difference in the reliability of hybrid versus diesel. Fleet Manager Danitra Bahlman replied a hybrid unit with a small diesel engine is very new technology, so the reliability cannot be said for sure yet but the small diesel engine could be used as a backup if they experienced any issues with the new battery technology. It was Director Eggleston’s understanding that there was not enough history with hybrids to determine their reliability. Fleet Manager Bahlman agreed; she thought there were some LA County agencies that have purchased hybrids but it was too soon to tell because not many agencies have purchased hybrid engines. Council Member Reckdahl questioned if IT costs were increasing or decreasing, and what was the overall budget compared to five years ago. Director Numoto replied that costs have increased slightly over the years with new technologies. Overall operating costs have increased as software companies have moved more toward a SaaS model versus a purchase and maintenance model. We are in uncertain times with the potential of tariffs impacting hardware costs for laptops, networking equipment, etc. There is the potential of having to forego some replacement cycles because of cost but staff will adjust as they see the markets adjust. Sherri Wong, Senior Management Analyst with the IT Department, stated the budget is roughly about $6 million to $7 million higher than five years ago when it was around $12 to $13 million. Council Member Reckdahl asked if software was licensed per user or a license server. Director Numoto said it depended on the type of software and the vendor, some applications require a license server, others are per user, and others are an enterprise site license; however, staff considers upgrading a per user license to an enterprise license when it makes sense. Council Member Reckdahl inquired if cloud computing or automation software can help with productivity, or if there were other things that will be incorporated to reduce cost. Director Numoto replied that an analysis was performed of on-premises versus moving things into the cloud. In Director Numoto’s experience, cloud cost can get out of control if not managed properly. One challenge with cloud cost is paying for it month over month, year over year. When you purchase and operate something on your own, the only ongoing cost is maintenance and the infrastructure to support it. You can upgrade potentially every seven years instead of five years or do a break/fix. Director Numoto said they always look at ways to optimize cost and automate processes to help reduce the time for staff to perform certain tasks. SUMMARY MINUTES Page 27 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 Council Member Reckdahl wanted to know if AI and ChatGPT will be encouraged, how it will be introduced, and who was pushing for it. Director Numoto stated they are working on the AI policy and other tools for staff to use. One challenge for the City and other agencies is how to roll out AI responsibly and in a secure manner. A governance process is in place to ensure staff is using approved technologies. City Manager Shikada said he was pushing for it with the support of Director Numoto. A Citywide team is working on rollout of various tools and providing guidance for how to use it responsibly. Director Numoto mentioned that companies are using AI as a marketing tool, so it was about understanding how to use it, how they are using the data, and whether they are feeding the data into larger language learning models. Council Member Burt inquired when and how will staff begin to estimate AI’s organizational impact, if AI will result in the same number of people being able to do more and/or fewer people doing the same. City Manager Shikada answered no; expectations have not been set for efficiency generated other than specific applications. The City is rolling out a chatbot to our website named Citybot to assist with search, enabling the public and staff to make better use of the resources that are already a part of the City’s information base. AI had not been analyzed at a broader strategic level. Council Member Burt thought it was important for staff to attempt to estimate AI’s organizational impact. City Manager Shikada said he and Director Numoto can look at models to do prospective forecasting. In the near term, the training will result in a resource requirement as opposed to an immediate efficiency but City Manager Shikada felt it was a worthwhile investment. Director Eggleston presented the Public Works Enterprise Fund Capital Projects budget, which included projects in the Airport Fund, Stormwater Fund, and Wastewater Treatment Fund. Regarding Director Eggleston’s earlier statement about consultants, staff reminded him that staff designs the storm drain improvement projects and the Hamilton Avenue project; they are not designed by a consultant. The Airport Fund CIP will address noise and leaded fuel issues, continue the long-range planning process, and has a project for an automated weather observation station in FY26. The airport access road reconstruction will occur later in the five-year plan. The airport microgrid evaluation study is being conducted this year in partnership with the Utilities Department as part of the Reliability and Resiliency Strategic Plan. Council Member Burt asked if the City was anticipated to own the microgrid or contract it out. Director Eggleston answered it is still under consideration. A consultant, Burns-McDonnell, is doing a study to evaluate the potential sizing and models of ownership. Council Member Burt noted the feed-in tariff program has a little remainder, which was the program used to solarize City garages. It may not be the right approach for the airport but Council Member Burt wanted to make sure that Utility policy discussion was taking place concurrently with this effort. Director Eggleston thought it was mentioned at last week’s Climate Action Committee meeting that the UAC will be hearing updates on the Reliability and Resiliency Strategic Plan. The feed- in-tariff program and net metering programs are pieces of that and so is the microgrid. SUMMARY MINUTES Page 28 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 Director Eggleston said the Stormwater Management Fund had 13 high-priority projects funded by a ballot measure that voters approved, three of which have been completed, three are underway, and three others are in the proposed five-year CIP. The Hamilton Avenue project is slated to start this year. The Center Drive project will also add capacity in that area; construction will begin as soon as Hamilton is finished. Nothing this year’s CIP was much bigger than the next four years, Council Member Lythcott- Haims inquired if the $7 million for Hamilton Avenue was all being deployed this year or if there would be an unused portion that could be delayed to next fiscal year. Director Eggleston answered most of it will be spent in 2026 but the full amount is encumbered with the contract and then spent over the term of the contract. It is dedicated funding via a ballot measure for this purpose. Director Eggleston said the Wastewater Treatment Fund had three projects underway, including a very large secondary treatment upgrade project, a 12 kV electrical upgrade project, and Council will see a staff report soon on the joint intercepting sewer rehabilitation project. On May 19, a construction contract for the advanced water purification system will be brought to Council for approval. The horizontal levee pilot project is expected to start construction soon and be completed in early 2026. The outfall line construction and headworks facility replacement are in design. Alan Kurotori, Utilities Chief Operating Officer, presented the FY25 proposed budged summary for Utilities. Grid modernization includes replacing infrastructure earlier but with higher- standard poles and more robust systems that have higher reliability. Staff will track outage lengths before and after the pilot. Staff is working in conjunction with S/CAP, Public Works, and Sustainability on the integration of Distributed Energy Resources with vehicle to grid, standalone storage, and rooftop solar. Our system needs to be upgraded to enable those technologies. COO Kurotori presented the following Utilities FY26-FY30 Capital Improvement Strategy: Optimize debt financing for grid modernization to minimize debt service costs and rate changes. The first tranche of $80 million in debt service will be going out. Administrative errors were found in some of the budget submittals, so COO Kurotori will point those out during his presentation but a budget update will come to the Council in June. Staff is reaching out to contractors early in a hope to attract more bidders and increase competition, which is a tactic used by some large utilities in Southern California. Council Member Reckdahl queried if there was an obligation to accept the lowest bid. COO Kurotori replied it was a public bid process and the winner is the apparent low bidder. COO Kurotori addressed the FY26 Utilities Electric Fund. Expenses include the costs associated with grid modernization. Revenues are developer contributions or bond financing but the full amount was not entered into the budget because of a data entry error, so the $63 million should have been $80 million. The error does not affect rates because the models used for rate SUMMARY MINUTES Page 29 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 evaluations had the correct amount. The electric fund reflected $194.8 million for grid modernization between 2026 and 2030. The Colorado Substation will have staged upgrades because it is nearing end of life. A lot of the distribution work will be done first. The Colorado Receiving Station will be updated to accommodate the new transmission line coming in from the CAISO, add capacity, and replace transformers that are at the end of their life. The substation physical security project is in response to the physical attack at the Metcalf Substation in South San Jose, which prompted Utilities nationwide to look at hardening their facilities. In response to Council Member Reckdahl asking if substation security was our cost or if there were grants, COO Kurotori answered it was our cost. COO Kurotori said the FY26 Utilities Fiber Fund budget showed some funding from Utilities to put in new fiber backbone. The dark fiber was created from Utilities. The FY26-FY30 Fiber Fund CIP Outlook included $10.9 million for fiber-to-the-premises (FTTP). Council Member Burt asked about the profits from commercial fiber, if it was still in the range of a couple million dollars per year. Assistant City Manager Kiely Nose replied the commercial dark fiber program was running at a positive in terms of revenues versus expenses, it ebbs and flows but was staying within that range, not including capital infrastructure because the FTTP versus dark fiber maintenance costs had not been calculated. COO Kurotori addressed the FY26 Utilities Gas Fund. A $16.5 million DOT grant was received from the federal government for replacement projects for the gas distribution system. The grant requires the City to expend the monies first and 50 percent of those associated costs will be reimbursed. The first $8.5 million was included in the budget but FY27 and FY28 needed to be adjusted to reflect reimbursement of the remainder of the grant, which was an administrative error. COO Kurotori said that mechanisms are being created internally to catch administrative errors earlier. COO Kurotori spoke about the FY26 Utilities Wastewater Collection Fund. A lot of collection projects have been pushed out. Rate management will smooth rates over time. FY30 will have $27 million of expenses but the expense amount will be lower because Replacement Project 34 will be pushed to 2031 to balance investments and avoid large spikes in capital expenditures. The CCTV program will inform which projects need to move forward. Utilities and Public Works staff noted some pay-as-you-go costs associated with the treatment plant capital costs were double counted, so the next report will recognize the duplication and there will be a 1 percent reduction in the next two fiscal years. Although this will have a positive impact on rates, the rates are still high at 15, 16, and 17 percent due to the investment in the treatment plant and infrastructure. Of note, the rest of the Bay Area was also making major reinvestments to their treatment plants. COO Kurotori addressed the FY26 Utilities Water Collection Fund. Seismic upgrades will be performed at the City’s reservoir sites. Staff was looking at wildfire mitigation for the pump station sites and tank sites, including consideration of noncombustible materials, removing brush and flammable materials, SCADA automation, and the ability to remotely control our SUMMARY MINUTES Page 30 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 pumps and generators. A tabletop exercise will be done this summer to work through some of these issues with the Office of Emergency Services (OES). In response to Council Member Reckdahl asking if those sites had fiber, COO Kurotori answered yes. As part of the Foothills project, fiber was incorporated in the undergrounding, there are conduits going to these sites, so communication will be more robust and secure. Staff was engaging with the Fire Department and OES about the consideration to add more cameras out there. Public Comment: None. Council Member Lythcott-Haims suggested considering the deferral of at least a few vehicle replacement purchases to put less of a burden on FY26 to aggregate a few million in cuts to protect this year’s budget. City Manager Shikada pointed out that the Vehicle Fund is separate from the General Fund. Council Member Reckdahl wondered if staff had the ability to buy a used firetruck if one was found or if it required Council approval. Director Eggleston thought staff had the budget authority, and it was within the City’s Manager’s authority to make a purchase under $250,000. The Finance Committee unanimously agreed to tentatively recommend that the City Council approve Agenda Item #3. 4. FY 2026 Proposed Municipal Fees & Charges Rene Escobar-Mena, Senior Analyst with the Office of Management and Budget, presented the annual update to the City’s Municipal Fee Schedule with proposed changes to over 350 fees across various departments. Most of the City’s fees were reviewed and revised earlier this year through the Planning and Development Cost of Services Study and the Citywide Cost of Services Study; however, this report included fees that were not addressed through those two studies. Exception reporting was used to highlight fees that are new, deleted, or changed by something other than the 6.8 percent general rate increase (GRI). Where applicable, the Cost Recovery Level policy established in 2019 continues serving as a guide for departments when updating their fees, depending on the balance of the public and private benefit. Six new fees in the Community Services Department are related to new or soon to be available rental spaces at the Roth and Bryant Street facilities. The Office of Transportation deleted two fees for fares, following Council action to adopt a standardized fare structure for all Palo Alto Link user types. The 304 fees that changed by factors other than GRI are listed in Attachment A. Justifications include but are not limited to: Fees set by an outside agency or by a vendor such as our partner agency Pets In Need, fees where the department recommended holding them flat, and SUMMARY MINUTES Page 31 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 adjustments based on program priorities or Council direction such as golf fee discounts for East Palo Alto residents. Staff Recommendation: Finance Committee review amendments to the Municipal Fee Schedule for FY26 and make recommendations to Council for incorporation into the FY26 budget. Council Member Burt mentioned the City had rights to lease a space above the Grocery Outlet at Alma Plaza that was envisioned as community meeting room space but he had never heard of anybody using it, so we are not getting any revenue from it. City Manager Ed Shikada said he had discussed with the Planning Director about looking at the terms of the PC but this can be discussed later when the Planning Director arrives. Council Member Burt thought the space may be a candidate for a long-term nonprofit lease. Council Member Lythcott-Haims recalled the Finance Committee previously discussed that a dog can escape 8, 9, and 10 times but the owner is charged the same amount. Council Member Lythcott-Haims wondered if we can incentivize better behavior on the part of dog owners if not the dogs themselves by increasing those fees beyond the fifth or eighth infraction. Senior Analyst Escobar-Mena said that could be explored but he believed it was under the purview of the Chief of Police. Lauren Lai, Chief Financial Officer and Administrative Services Department Director, stated that staff will bring back various fees on May 20 related to the Citywide fee update. Council Member Reckdahl inquired if Palo Alto Link was sustainable. CFO Lai replied that item will come up in the Planning and Transportation segment. Public Comment: None. The Finance Committee unanimously agreed to tentatively recommend that the City Council approve Agenda Item #4. 5. Planning and Transportation a) Planning and Development Services (O: 315-330) b) Office of Transportation (O: 303-314) 1) Parking Special Revenue Funds Paul Harper, Budget Manager with the Office of Management and Budget, addressed the Committee. The Planning & Development Department and Transportation Department are mostly funded by the General Fund. The $10 million reduction from FY25 to FY26 in Other Funds is mainly for transfers for a couple capital projects that happened from the in-lieu SUMMARY MINUTES Page 32 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 parking fund and the SUMC Fund for the downtown parking garage and Fire Station No. 4 in 2025. Jonathan Lait, Planning and Development Services Department Director, stated the FY26 Planning and Development budget proposal had one request for a FTE Principal Planner for Development Center operations to help with permitting and coordination between City departments. There was a one-time $150,000 funding request for a consultant (reduced from $300,000). As noted in the Budget Book, the Planning and Development Department had approximately $3.3 million of consultant funding, of which 50 percent is offset by revenue generated by plan review consultant services and inspection services. About 25 percent of consultant spending is related to the San Antonio Area Plan ($700,000) and the Downtown Area Plan ($150,000). About $400,000 of consultant services is used to augment current Planning staff for the Individual Review program. For Development Services, a contract with ID360 of about $190,000 is to support green building and energy Reach code implementation, to make sure local and state initiatives are implemented as well as provide a service to our customers who have questions about compliance with those programs. Planning and Development Services key initiatives for FY26 are to focus on the Housing Element implementation, work on the triannual building code update, and continued review of our processes and engagement with our customers through our permit operations and application processing to look for opportunities to make refinements and improvements. Council Member Reckdahl asked if staff envisioned consultant use will be decreasing or holding steady. Director Lait replied that consultants for Development Services are used as a function of application-generated need and demand. Planning uses consultants for the following: To support staff with the planning application process when the volume exceeds staff’s capacity, the Individual Review program requires localized architectural expertise, and to help with implementation of individual new single family home development. A steady flow of consultant work has consistently been used for the long-range planning program, depending on the City Council’s priority objectives for any given year and the Council’s expectations in the Department’s work plan. Housing Element implementation is prioritized because the City is mandated by the State to meet certain deadlines. Planning could scale back some of the consultant work but it will take longer to process applications. Council Member Reckdahl inquired if consultants were mostly used for special expertise or surge support. Director Lait answered surge support was about 50 percent for current planning and 50 percent for technical support. For the long-range planning program, there is a component of staff augmentation where a particular consultant has been helpful and is part of the on-call consultant list. Technical expertise for environmental review, historic resources, and economic feasibility studies is not readily available by in-house staff, so consultants are used. Council Member Reckdahl asked if there were any tasks where a full-time employee can be hired instead of using consultants. Director Lait did not advocate for additional staff resources; SUMMARY MINUTES Page 33 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 he wanted to moderate the work plan to accommodate what can be accomplished with the existing resources. Council Member Lythcott-Haims wondered if the new area plans will be more efficient versus the Coordinated Area Plan approach. Director Lait thought a number of things did not go right with NVCAP. Staff was trying to be more nimble and get the Downtown and San Antonio Area Plan projects done more quickly. The most significant change was the formation of a City Council-appointed Coordinated Area Plan Committee which, as a Brown-Acted Committee, created a process that extended the length. Staff wanted to achieve the same value of that component but thought it could be done in a more efficient way. Council Member Burt wondered how to appraise the use of consultant services and if it was possible to change the nomenclature to differentiate contract services from consulting for special project management or expertise. City Manager Ed Shikada said staff will look at how to refine their language on this. City Manager Shikada asked Director Lait if he had any insight on whether the Alma Plaza space could be a rented. Director Lait replied there is a space of about 1300 square feet on the second floor that is available for the community as part of the public benefits for the project approval. Director Lait did not have details about how it can get leased or when it is available but there was probably information available in the file. Council Member Burt thought the space had been largely unutilized for a decade or more and he wondered whether the City could lease it to a nonprofit on an ongoing basis. Ripon Bhatia, Senior Engineer with the Office of Transportation, addressed the Committee. The Office of Transportation supports various functions including transportation planning for mobility, Safe Routes to School, parking, transit, traffic engineering, tending to concerns from residents, traffic calming, reviewing traffic control plans and private projects, Utility project reviews for traffic control and encroachment permits, capital improvement projects, Bike and Pedestrian Transportation Plan implementation, modifications and upgrades of traffic signals, and the rail grade separation project. Staff manages most of the projects but depends upon consultants for professional services to support the execution of larger projects such as the grade separation project. Quiet Zone might use consultant or professional services. For FY26, the addition of one Project Engineer position was proposed to support the City’s rail grade separation CIP, funded from VTA Measure B and FRA grants. Future state and federal funding is anticipated for the grade separation project. The Department has ongoing loans to the City’s Parking Fund of about $1.8 million. Some of the major Office of Transportation initiatives include the grade separation project and looking at interim measures for Quiet Zones at the Churchill, Meadow, and Charleston crossings. Bike/pedestrian connectivity is being evaluated in Palo Alto and across the Caltrain corridor. Construction is in progress of the Churchill Avenue enhanced bikeway project between Alma and El Camino Real, as well as safety improvement projects at the intersections SUMMARY MINUTES Page 34 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 of Alma/Churchill and Charleston/Alma. Updates to the Bicycle and Pedestrian Transportation Plan and Safe Streets for All are in progress. Council Member Reckdahl asked how much Palo Alto Link is costing the City. Joseph Shin, Senior Analyst for the Office of Transportation, answered the FY25 budget had $500,000 in General Funds for Palo Alto Link services and the same amount was budgeted for FY26. The City contributes $500,000 of the total $1.1 million projected cost of Palo Alto Link for next year. Council Member Reckdahl did not think Palo Alto Link was an efficient way of providing transportation and inquired if there had been consideration to trim it. City Manager Shikada said the plan was to continue the service but he did not know if it could be a long-term alternative. City Manager Shikada asked staff what the City had previously spent on the fixed- route shuttle and what were the ridership figures for comparison. Nathan Baird, Transportation Planning Manager for the Office of Transportation, replied the City previously spent around $500,000/year on three shuttle services for a significantly smaller service area. Palo Alto Link services most of the City except for the Baylands and foothills, and provides door-to-door service for vulnerable users. In the last two years, the City and Stanford Research Park have each been paying about one-third of the cost. The plan for next fiscal year is to have the same $500,000 budget amount from the City. It is not yet known if VTA will provide funding for next year, so staff is looking to reduce service. In the beginning, spending was about $120,000/month; now it is around $85,000/month while still getting about the same ridership but wait times have increased. When Link first began, wait times were around 13 to 15 minutes but currently are 20 minutes. VTA has let us know that next year’s fiscal availability will not be solidified until July or August. Should additional VTA funding be confirmed, the service quality will increase for next fiscal year while continuing to pursue additional long-term funding streams. Sylvia Star-Lack, Transportation Planning Manager with the Office of Transportation, stated the $500,000 previously spent for fixed-route transit was not enough to support the Embarcadero Shuttle and Crosstown Shuttle, so they were subsidized by SamTrans and possibly TSA funds. Council Member Burt asked what the revenue was for Palo Alto Link with the increased pricing structure compared to the previous year. City Manager Shikada said the rate increased from $3 to $4.50. Mr. Shin, Senior Analyst, would have to verify the revenue amounts but he believed revenues were close to what was budgeted although revenues have fallen a little short as ridership has decreased. Link previously had discounted fares but now all ridership is charged a $4 flat fare. Any rides to and from the Stanford Research Park do not pay a ride fee; Stanford directly pays the City a percentage based on the total monthly cost and percentage of rides to and from the Stanford Research Park on a prorated basis. Council Member Burt inquired if the compensation from Stanford fully covered the cost of the rides to Stanford Research Park. Mr. Shin, Senior Analyst, answered yes; the City bills Stanford monthly based on the total cost of service for the month and the percentage of rides, so Stanford is paying their fair calculated share. There are currently no grant funds as those have been expended. SUMMARY MINUTES Page 35 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 Council Member Burt expressed his apprehension with Palo Alto Link being a highly subsidized public Uber program, and wondered if we were trying to serve everyone in the community including those who choose to use this highly subsidized system instead of Uber, a VTA bus, or riding a bike. Council Member Burt asked staff to consider if there was a way to target this service toward vulnerable communities. Council Member Burt inquired if Palo Alto Link was sustainable. VTA’s budget is not sustainable and is facing a big deficit for the coming years, it is not yet known which programs will get reduced funding and grants, so Council Member Burt was concerned that VTA will eliminate some of the least cost-effective programs. Mr. Baird, Transportation Planning Manager, shared ridership statistics. In FY20, Crosstown had 4000-6000 riders/month and Embarcadero had 2500-35000 riders/month. Palo Alto Link’s highest ridership was 10,000 trips, lowest was 5500 trips. There has been a drop in ridership this calendar year probably as a result of the wait time increase. About 40 percent of Link’s ridership is the vulnerable population category, seniors and disabled. Mr. Baird has been in contact with people in the vulnerable category who rely on this service. Stanford Research Park’s participation helps in extending this service to those who most need it. Mr. Baird felt as if Palo Alto Link was in a pilot phase in determining how to right-size or utilize the service. Mr. Baird proposed continuing Palo Alto Link another year with the reductions put in place, which will give staff more time to consider further options. Council Member Lythcott-Haims asked if the Crosstown and Embarcadero Shuttles had served the Research Park, and asked staff to net out the Research Park rides from the Link users for a more equivalent comparison to the Embarcadero and Crosstown Shuttles. Mr. Baird, Transportation Planning Manager, replied that Stanford Research Park riders have been about 35 to upper 40 percent of ridership. City Manager Shikada recognized an evaluation of the alternatives was needed but staff needed to first have a discussion with the new Chief Transportation Official. Council Member Burt advised staff he did not want to wait for a year. Council Member Burt mentioned that yesterday a question arose on grade separation funding using Measure K dollars and whether Measure B could be used. Senior Engineer Bhatia replied that staff checked and found that regulations do not allow the use of Measure B LSR funds to support Measure B Grade Separation for the local match funds. The language in the Measure B Grade Separation regulations state that the 10 percent local match shall be used by non-VTA funding. Council Member Burt asked if it had to be ongoing non-VTA funding for the local match or if what we had already spent can count. Senior Engineer Bhatia explained that 10 percent local match and General Fund was used for the additional studies for the grade separation project because Measure K was not available. In 2022 or 2023, the Rail Committee said not to use Measure B LSR funds, so the switch was made to Measure B Grade Separation Funds which require local match. Council Member Burt asked a question that had been put forward by Channing House on whether there was surplus capacity for employees to purchase long-term parking permits in Webster/Cowper Garage. Mr. Baird, Transportation Planning Manager, replied each of the garages have rules about who can purchase into them; however, lots are more available. In SUMMARY MINUTES Page 36 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 recent years, we have reduced the amount of on-street employee permits available in the downtown employee districts. There is capacity at the Webster/Cowper garage and lots but it is a legal question to pursue related to bonding on whether we could open up the employee- permit-only spaces. Daily permits are widely and publicly available, so Channing House could purchase a daily permit at Cowper/Webster. Quarterly and annual employee-permit-only require you to be within a particular address range or other eligibility rule. Mr. Baird did not know the Cowper/Webster radius. City Manager Shikada said staff will evaluate this further. Because of the bike lane on El Camino, Council Member Lythcott-Haims learned from her dentist’s office that there are no permits available in Area A, so the dentist was paying the parking tickets for his employees. Council Member Lythcott-Haims has reached out to PATMA on this issue. Council Member Lythcott-Haims wanted to know what the City could do. Mr. Baird, Transportation Planning Manager, stated Zone A sold out quickly but B, C, and D have availability. Staff will monitor the impact of the El Camino Real project on those neighborhoods. Parking was previously removed from A, B, C, and D, so they do not want to reintroduce employees without good data about the impact of putting them back in. With the no-parking signs going in this week, there will be a better sense of the impact of visitors and employees who park in the neighborhoods. Zones A, B, C, and D might need to be redrawn to better serve the new arrangement. Council Member Burt asked if folks are told there is capacity in adjacent zones when they are seeking Zone A. Mr. Baird, Transportation Planning Manager, explained that once you have submitted and it says it is not available, you can go back in and request an adjacent zone but our service provider can follow up with folks about availability. When staff receives requests, they can walk people through where the availability is. City Manager Shikada told Council Member Lythcott-Haims that the business or the employees need to contact the City’s Transportation staff. Council Member Burt suggested getting a better understanding of the problem by the number of parking tickets in those neighborhoods. City Manager Shikada advised Mr. Baird, Transportation Planning Manager, to be sure the communication lines were open to allow staff to respond as quickly as needed. Council Member Burt wondered if we needed to do another blast to everybody about the change in the next week. City Manager Shikada acknowledged the Committee’s comments. Item 5 Public Comment: 1) Neilson B. expressed his interest in wildfire prevention and wildfire management. Neilson B. heard that $51/year for a resident’s permit was not enough to recover the cost of the RPP but due to staff turnover and loss of their office director, he has been unable to have a dialogue with the Office of Transportation about who will pay the balance. The stakeholders committee that created the RPP asked the City to consider cost recovery and how much the residents who live in the neighborhood should pay for a permit versus the folks creating commercial parking demand in the neighborhoods. Secondly, Neilson B. wondered how well the Office of Transportation’s operating budget was. SUMMARY MINUTES Page 37 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 2) Justine B., Executive Director of Palo Alto Transportation Management Association (PATMA), stated they offer free train and bus passes to workers in Palo Alto making less than $100,000 (80 percent of area median income in Santa Clara County), $5/day of Bike Love rewards up to $600/year for biking to work, and $10 Lyft credits after the busses stop running. If you do not have a bike, PATMA hooks up people with Bike Exchange for a refurbished bike. PATMA promotes Palo Alto Link and VTA’s Guaranteed Ride Home program. As a result of PATMA’s work, as of last week there were 289 train and bus passes out for Caltrain, VTA, SamTrans, and Dumbarton Express; and 14 people used Bike Love $5/day three times or more per week. In the last two years, PATMA purchased 12 refurbished bikes for people and there are five requests in the pipeline. Because of PATMA’s outreach efforts, 315 parking spaces are not needed. Justine B. reached out to and will follow up with the dentist’s office manager where 11 employees are currently parking because the office is near the Cal Ave Caltrain. Justine B. thanked the Committee for their support of PATMA’s work. 3) Cedric D. is a member of the Bicycle Advisory Committee and a member of the PATMA Board but he was speaking on his own behalf. Cedric D. pointed out that having transportation projects in the Bicycle and Pedestrian Plan is a prerequisite for several sources of grant funding, so spending money to update the plan and complete it is well worth the cost. Cedric D. hoped the City will keep supporting PATMA because it is a great resource for the City and local businesses in reducing traffic and parking demand and increasing active and public transportation. Every dollar spent in a locally owned business tends to recycle at least seven times through the community, so it is essential to keep local businesses operating. PATMA is part of the solution in helping with employee retention. Public transportation service has been drastically cut and for the most part was aimed toward bringing commuters in but there is no good transit option for individuals going point to point. Cedric D. used Palo Alto Link once and opined it is a great service and served as a lifeline for those who need it. Cedric D.‘s dad is a senior and currently cannot drive, so he uses the Link service a lot. Cedric D. suggested charging people like himself a medium rate for Link that was in between Uber and subsidized transit. 4) Lara A. is a parent volunteer with Safe Routes to School. Lara A. thanked Council for last month’s unanimous support of the updated Safe Routes to School consensus statement. Lara A. appreciated that funding for Safe Routes to School is maintained in the Office of Transportation’s proposed operating budget. Lara A. felt it is critically important for children and families in our community that Safe Routes to School continue to be fully funded throughout the full budget process. Council Member Burt wanted to leverage PATMA’s resources as much as possible because it encourages people to take transit, decreasing cars on the road and freeing up parking spaces, reduces air pollution and greenhouse gas, and it has resulted in businesses seeing a discernible improvement in their ability to retain employees. Council Member Burt stated the City had 500 VTA passes primarily related to bike lanes on El Camino but we are not utilizing that many SUMMARY MINUTES Page 38 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 passes. Council Member Burt heard that PATMA is not allowed to provide their services where there is a private TMA such at Town & Country and Palo Alto Commons. Ms. Star-Lack, Transportation Planning Manager, answered yes; TMA services were structured for small businesses or restaurants that were too small to require a TDM plan. TMA services are almost entirely subsidized by the City. Businesses that required a TDM plan could not use TMA services because then a developer is having their TDM plan funded by the City. Council Member Burt asked if that was a Transportation Department decision or a higher-level policy. We want to get people off the road but some TDM programs do not have the same capability as PATMA, so Council Member Burt was interested in understanding whether there was a legal constraint on the City’s ability to provide TMA services to those who have mandated TDM programs. Ms. Star-Lack, Transportation Planning Manager, has been in conversations with the City Attorney’s Office about this over the years. If large businesses have been required to do a TDM but are not and the City does not have the capacity to know that and enforce it, Council Member Lythcott-Haims wondered if those businesses could pay the City for using PATMA resources, so businesses either have the obligation to do it themselves or pay the City to follow through. The City has excess capacity and great passes going unused. Council Member Burt asked to have this scheduled as a future topic. Senior Engineer Bhatia confirmed staff will do that. Council Member Lythcott-Haims heard at Monday night’s Council meeting that Palo Alto Commons has had a TDM for decades that has not been enforced. The Finance Committee unanimously agreed to tentatively recommend that the City Council approve Agenda Item #5. 6) Citywide Internal Support and Administration (continued) a) Information Technology (O: 267-280) b) Administrative Services (including Printing & Mailing Fund) (O: 185-204) 1) Debt Service Funds (O: 123-126; C: 54-60) c) Human Resources 1) General Fund (O: 241-254) 2) General Liabilities Insurance Program (O: 255-260) 3) Workers Compensation Fund (O: 261-266) SUMMARY MINUTES Page 39 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 4) General Benefits Fund (O: 501-510) 5) Retiree Health Benefit Fund (O: 511-514) d) Non-Departmental (O: 493-500) Darren Numoto, Information Technology Department Director, requested a reclassification of 1.00 Senior Technologist to an IT Manager for a GIS Division Manager. Director Numoto requested a transfer of $2 million from the Technology Fund Reserves to support FY26 City initiatives. The Technology Fund is used to upgrade major technologies Citywide such as networking, wireless supports, connectivity in facilities, and ERP systems. Director Numoto provided the following FY26 IT Department outlook: Strengthen the City’s cybersecurity, continue supporting the technology efforts for the new Public Safety Building, improve operational efficiencies and citizen engagement using innovative technologies such as AI, and continue partnering with the Utilities Department on the Fiber-to-the-Premises initiative. Instead of hiring contractors for design configuration and ongoing support, IT staff has been involved in designing, installing, and configuring the networking infrastructure to support the new Public Safety Building, including the required infrastructure such as servers. Chief Financial Officer Lauren Lai presented the FY26 budget summary for Administrative Services. The requests in the proposed budget within the General Fund were for two part-time Administrative Specialist positions for Customer Service staffing at City Hall, reclassification of one analyst to align with the duties and division structure (cost is net neutral because it is offset with reductions in contract cost), and to transition our investment management to a specialized firm (cost is net neutral). The City has $600 million in investments that we manage. Two-thirds of the cities in Santa Clara County have their investments managed professionally by specialized firms. Staff felt that using a specialized firm will be an enhancement of the services, is consistent with how we manage our Section 115 Trust for pension and retiree benefits, and will be cost neutral because it was anticipated that the specialized firm will gain additional margin to offset their cost. CFO Lai displayed the FY26 Department Outlook for ASD. The Department was pleased with their grant activity in helping to support the grant pipeline and compliance. Last year, ASD took on the Risk Management function (previously was HR). Another important role of ASD is in supporting departments with complex financing. CFO Lai showed a slide on ASD Debt Service, which was compliant with the City’s debt policy. No new General Fund debt is assumed. Governmental debt service is about $11.9 million in FY26. Enterprise Funds Debt Service was $10.6 million across all Enterprise funds. Two debts are anticipated for FY26: Council approved a line of credit for the Wastewater Utility of $31 million (have not drawn money yet but it is available), and at least the first of three tranches of debt financing for grid modernization. SUMMARY MINUTES Page 40 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 Sandra Blanch, Human Resources Department Director, said in the coming year the recruitment focus will be primarily for Enterprise positions where there are several vacancies, and focus on the cultivation of the talent pipeline with local universities and colleges. One proposal request for the General Fund is $24,000 for the employee survey vendor contract. The second annual employee survey was recently completed and was a good tool to gain helpful information from City employees for employee retention and to drive strategies to support the City’s work environment. Director Blanch presented the following HR Department outlook: Finalize the recruitment strategic plan initiative, formalize workforce career advancement and continuity planning program (succession planning), and continue the expansion of employee benefits self-service enrollment portal and wellness programming to help automate the enrollments of employees to free up time from the Benefits team to enable staff to focus on new hires. The long-term disability program was enhanced. The new pilot BayPass program was recently launched and 50 percent of eligible employees have registered. Great employee feedback has been heard about the benefit of the BayPass program and cost savings, so this supports employee retention. A new workers compensation administrator will be effective July 1. CFO Lai presented the FY26 Non-Departmental budget. Some of the major proposed changes in the General Fund relate to various reserve transfers, the contribution to the Parking Fund, and the continuation of the childcare pilot program. The Non-Department outlook for FY26 is to manage the reserves, invest in initiatives such as Cubberley, and manage and support investments throughout the City. Most of the tax revenues come through Non-Department, so City staff within ASD manages and monitors those major revenues. Council Member Burt asked if changing the workers compensation administrator will have a big impact on the City’s workers compensation expenses and the administration of it, what is the intention of that transition, if there were any expectations on what the outcomes would be, and were there any KPIs that would allow us to judge the administrator’s performance. Director Blanch replied there was an expectation of improved customer service and communication from the administrator with injured workers, which was a problem area with the current administrator. The new administrator is focused on California’s laws and benefits, which was lacking with the prior national administrator. The KPI in the budget document is related to the dollar amount of claims but is not specific to the administrator. Director Blanch said our insurance organization performs an audit of the administrator and outlines their performance, so staff could share the metrics that the auditor uses in their review. Public Comment: None. The Finance Committee unanimously agreed to tentatively recommend that the City Council approve Agenda Item #6. The Finance Committee took a break. 7) Closing Summary SUMMARY MINUTES Page 41 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 CFO Lauren Lai provided a wrap-up of today’s meeting. The parking lot for further deliberation with financial implications heard by the Committee thus far are restoring the Uncertainty Reserve by $6 million of which at least $2 million should be ongoing, and potentially reducing our transfer to CIP by 5, 10, or 15 percent. The reduction of CIP could be within the $6 million of restored Uncertainty Reserve. The areas that staff wanted to clarify today if possible: Whether we would augment Fire and Ambulance and the financial implications, what are the Finance Committee’s thoughts around nonprofit funding, and the triaging of how to approach defunding projects in the proposed budget to accomplish CIP reductions of 5, 10, and 15 percent. CFO Lai was not sure if staff was ready today to address the debt ratio and borrowing opportunities. Brad Eggleston, Public Works Department Director, addressed the CIP reduction request of 5, 10, and 15 percent. Given the projected fund balances in the later years of the five-year plan, Director Eggleston thought there should be some flexibility to rearrange timing of projects and potentially reallocation of funding sources without eliminating projects. Director Eggleston was not proposing this but as a hypothetical example, the Foothills Nature Preserve restrooms project is scheduled in FY27 and FY28 but is not a critical need; the impact of delay is cost escalation and adding to staff’s backlog of work. Staff will reassess previous policy decisions. One policy decision that staff discussed was the move of Cubberley maintenance funding into the General Fund out of the Cubberley Infrastructure Fund in FY24 and whether there were any projects that could be possible to fund through dedicated funding sources rather than the General Fund. Staff will look at the possibility of swapping Measure K funding with Measure B funding. Staff proposed the following criteria for identifying projects that might be deferred: Is it primarily aesthetic as opposed to functional enhancements? The deferral of a project should not lead to significant deterioration or cause other damage that increases the initial cost. Deferral of projects or portions of projects should not cause significant rework or disruption of dependencies. For example, delaying a project could mean that new codes are in place, necessitating expensive redesign work and cost escalation. Disrupting dependencies means one project needs to be happen to allow other projects to proceed. For example, the Newell Road Bridge project needs to be completed to allow other flood control projects to proceed. Certain projects experience cost escalation more than others. Costs for routine projects such as street resurfacing and sidewalk replacements tend to escalate over time at steady rates and generally have a lot of competition for bids. More complex standalone projects might have less competition. Council Member Burt was disinclined on switching back to routine custodial Cubberley maintenance in part because the purpose of that fund was clear when the Council took that action. There may be an adjustment if we are anticipating a bond measure for Cubberley. CFO Lai asked for guidance on how to frame to Council the reduced use of the Uncertainty Reserve by $6 million, the impact on the General Fund, and service impacts. CFO Lai said that SUMMARY MINUTES Page 42 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 usually when staff comes back to Council, the Committee Chair would speak to some of the referrals in the parking lots. CFO Lai would like to have more prioritization of deferred, suspended, or eliminated services and programs. Council Member Burt mentioned that normally the Council will hear the staff presentation and then perhaps the Chair would complement those discussions. Council Member Burt did not know whether to categorize consulting contracts as ongoing or one-time, certain contracts are one-time but the pattern will potentially be continuing. In regard to staffing, Council Member Burt commented that staff might remove unfilled lower-priority positions from the org chart. Council Member Reckdahl asked if staff was looking to the Committee for guidance on what types of positions to eliminate or vice versa. City Manager Ed Shikada said the discussion was focusing on how the Committee’s work over the last two days will be communicated to the Council on Monday. Council Member Burt commented that borrowing additional debt for a capital program such as Fire Station No. 4 indirectly affects how much we need to transfer to the Capital Improvement Plan. Council Member Burt asked if additional revenue was part of the $6 million and part of the ongoing reductions. CFO Lai stated the goal was to retain $6 million of Uncertainty Reserve, however staff gets to that number in the General Fund, which could include enhancing revenues through fee updates, reallocation of source of funding that gives financial relief to the General Fund and/or other cost savings in the area of budget appropriation, and the 5, 10, and 15 percent reduction of the General Fund base transfer to CIP. Council Member Burt wanted to reframe the goal as $6 million minimum. City Manager Shikada stated the Committee received a supplemental memo with a new alternative recommendation. Fire Chief Geo Blackshire invited the Committee to ask questions. City Manager Shikada confirmed Council Member Reckdahl’s understanding that the FY26 budget does not include any phase-in of the single-role division, which pushes it to 2027. Fire Chief Blackshire said in the proposed budget is the addition of three FTEs to eliminate the current overtime to cross-staff the engine and ambulance. Council Member Reckdahl noted single-role costs $900,000 but having an extra ambulance will provide a couple hundred thousand of service fees. Fire Chief Blackshire explained the increase in transport fees will increase revenue by $700,000 in the next fiscal year, even if nothing else changed. Council Member Reckdahl asked if we would get some revenue by adding a fourth 12-hour ambulance. Fire Chief Blackshire answered yes, an additional estimated $70,000, and it would decrease the reliability on County Ambulance by two-thirds based on last year’s data, but it would cost $900,000 in FY26. Deputy Fire Chief Kevin McNally said the option is presented to get the 12- hour ambulance in play but it is done with the single-role to get a lower cost than a firefighter who would normally be staffing it. Council Member Reckdahl found it compelling to get the single-role capability into the City. City Manager Shikada pointed out that the $700,000 increase in transport fees is not part of the currently proposed budget, so that additional revenue is not yet counted and it helps balance SUMMARY MINUTES Page 43 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 the books. Council Member Burt noted it would offset $700,000 of the $900,000 this year and $700,000 of the $1.2 million ongoing annual costs. Alternatively, Council Member Reckdahl stated if we did not do single role we would have an extra $700,000 for other things. Fire Chief Blackshire said the Committee could approve the overtime positions for the firefighter to staff the 12-hour vehicle after Fire Station No. 8 closes or decide to defer it and instead start the 12- hour ambulance when the single-role program is ready, which reduces the cost. Council Member Burt asked what the timing was for starting the single role for 12 hours. Fire Chief Blackshire answered April 2026 is in the proposed timeline in the packet but the target is before Fire Station No. 8 opens next year. Council Member Reckdahl asked how much of the $900,000 cost in FY26 would decrease by eliminating overtime, and if overtime was attractive to firefighters. Fire Chief Blackshire replied the cost would decrease by $300,000 by eliminating a 12-hour peak ambulance on firefighter overtime from October to March. A 12-hour overtime shift is challenging on the firefighter’s schedule. Palo Alto firefighters are staffing Fire Station No. 8 with three 12-hour assignments while it is open during the day. The 12-hour ambulance is a response to the service need during the peak day hours. Council Member Reckdahl asked for consensus on starting up the single-role division but not having overtime for the 12-hour ambulance. Council Member Burt thought it made good sense, and he recalling hearing from the Fire Union that they are not enthusiastic about 12-hour overtime shifts. CFO Lai said that staff will bring the recommended Transport Fee to the Council on June 16, which was very important because we are relying on that new revenue. Lupita Alamos, Assistant to the City Manager, presented the Nonprofit Partnership Work Plan Phase II Scope. The audit pointed out many inconsistencies in our contracting and how we initiated the partnership. Staff recommended policy adjustments, new processes and procedures to reflect audit recommendations, and the guiding principles on how we enter into and manage nonprofit relationships. Staff recommendation: Finance Committee recommends that: • Council, within the Nonprofit Work Plan Phase I, allocate an additional $100,000; • Any decisions regarding additional nonprofit allocations be reserved until after the May 9 nonprofit application deadline per the Nonprofit Partnership Work Plan Phase I process; and • Council add an additional $50,000 ongoing funding for community events in the Community Services Department operating budget. Council Member Burt noted that nonprofits such as DreamCatchers that received funds under HSRAP have applied to seek funds from the additional $100,000, which reduces the funding for SUMMARY MINUTES Page 44 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 nonprofits that Council had intended to continue to fund. Another issue was YCI is potentially part of the additional $100,000. City Manager Shikada said the purpose of the $100,000 was to address yesterday’s discussion and realization that in addition to the organizations that received funding last year, we expect some additional organizations to put in this cycle. This will provide some capacity to evaluate them as a complete category rather than any individual expectation. Staff understood that the previous funding was for three years that ended in FY25 and staff communicated to YCS that they should put in here in order to receive additional funding through the City’s budget. Council Member Burt’s inclination was that we should delineate Project Safety Net funding and at a future time make a decision on how to fund it. Similarly, YCI should be in this contract. City Manager Shikada clarified the $50,000 for community events was separate from the proposed Nonprofit Work Plan. Council Member Burt thought the Nonprofit Work Plan was for entities that do not fall under HSRAP but are ongoing, such as 3rdThursday and UNAFF. Neighbors Abroad comes out of the City Manager’s budget but is not a delineated budget item. City Manager Shikada said that after staff gets through the immediate not-ongoing agreements, seeing if we need to rationalize the existing agreements will be Phase II. Council Member Burt did not want to treat Neighbors Abroad as if it was an annual discretionary decision but it is not in a line item. Regarding the question of whether HSRAP recipients could apply here, City Manager Shikada said it was a point of discussion at P&S and Council. Phase I was explicitly nonexclusive. Receiving HSRAP was not a disqualifier from being able to put in here. Phase I was a reaction to last year’s budget when we had a sizeable request from AbilityPath and the Council did not have a way to address it, which led to the recommendation and the process we have now to create a timeframe and method through which that request could be received and decided on. It had been said that Project Safety Net was being allocated but Council Member Burt noted it is not listed here. Council Member Burt wondered if we wanted to designate certain community partner nonprofits as part of the expanded list of General Human Service contracts or some other way but not have them compete for this $100,000 Nonprofit Work Plan. Council Member Reckdahl agreed with having established partners in a separate bucket. Council Member Lythcott-Haims agreed, although there will be some disagreement on who the established partners are. Somebody who has been getting HSRAP funding for many years may see themselves as an established partner and whether we do or not is the pertinent question. Project Safety Net, Avenidas, and YCI would expect they are a City partner. Council Member Burt wondered if the Nonprofit Work Plan should be open for everybody to apply or for those who do not fit under HSRAP, which he leaned toward the latter; you apply for one or the other but not one and then the other. Ms. Alamos, Assistant to the City Manager, pointed out that would be going against the direction or the recommendation that staff received from Policy and Services as they wanted to make the Nonprofit Work Plan accessible to everybody. City Manager Shikada noted it was previous Council action to approve making SUMMARY MINUTES Page 45 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 the Nonprofit Work Plan nonexclusive at least for this cycle. Council Member Burt felt it had not been thought through well enough until now. Council Member Lythcott-Haims was not clear on the HSRAP limitations and qualifications, so she did not have a sense of how many nonprofits fall outside the scope of eligibility for HSRAP. Council Member Reckdahl wanted a way to have the ongoing partners of the City separate from everybody else. Council Member Reckdahl thought it made more sense to have one application process. Council Member Burt asked the Committee’s thoughts about making a recommendation to Council for their consideration of an alternative approach. Council Member Lythcott-Haims wondered if P&S would feel that their jurisdiction is being encroached upon by Finance. Council Member Burt noted the funding side was the Finance Committee’s jurisdiction. Council Member Lythcott-Haims was more comfortable with the Finance Committee articulating its financial concerns. Council Member Lythcott-Haims underscored that YCI through YCS was supposed to be in there but was not. Council Member Burt thought this should have gone to Finance rather than P&S. Council Member Reckdahl proposed making a suggestion of an alternative and ask them what they think instead of making a recommendation. Ms. Alamos, Assistant to the City Manager, questioned if the Committee was suggesting this apply to the FY26 process. Ms. Alamos’s concern was that staff had been communicating to our nonprofit partners, collaborating with them, and answering their questions that yes, if you are a HSRAP recipient you may also apply, and it felt disingenuous to change it at the last minute. City Manager Shikada pointed out that proposals are expected this Friday and many of them have either already filed or are in the process of filing. Looking at the HSRAP list for overlap, City Manager Shikada noted YCS receives HSRAP as well as direct funding from the Council. Council Member Burt said it was not Council’s intention to make YCI, Magical Bridge, 3rdThursday, and UNAFF compete with more folks for a diminished funding service but that is what was set up, we have set up some expectations that are problematic, and YCI was left off from ongoing funding by mistake. Because of the overlap between P&S and Finance, Council Member Reckdahl thought maybe it is better to go straight to the full Council. Council Member Reckdahl asked if it had to be agendized for Council on Monday. City Manager Shikada answered it will be part of Monday’s Study Session on the budget. Public Comments: None. MOTION: Councilmember Burt moved, seconded by Councilmember Reckdahl, to recommend the City Council: SUMMARY MINUTES Page 46 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 • Include funding for Project Safety Net, Youth Connectedness Initiative, Magical Bridge, 3rdThursday, United Nations Association Film Festival, and Environmental Volunteers in General Human Service contracts; • Allocate an additional $111,000 toward the Nonprofit Work Plan Phase I; and • Add an additional $50,000 ongoing funding for community events in the Community Services Department Operating Budget. MOTION PASSED: 3-0 MOTION: Councilmember Burt moved, seconded by Councilmember Lythcott-Haims, to recommend that the City Council approve the proposed adjustments to the Fiscal Year 2026 Proposed Operating and Capital Budgets and Municipal Fee Schedule in alignment with the work completed by the Finance Committee on May 6, 2025 and May 7, 2025, and refer the following parking lot items to City Council for consideration: SUMMARY MINUTES Page 47 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 SUMMARY MINUTES Page 48 of 48 (Sp.) Finance Committee Meeting Summary Minutes: 05/07/25 MOTION PASSED: 3-0 Adjournment: The meeting was adjourned at 5:45 PM.