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HomeMy WebLinkAbout2025-06-03 Finance Committee Summary MinutesFINANCE COMMITTEE SUMMARY MINUTES Page 1 of 15 Special Meeting June 3, 2025 The Finance Committee of the City of Palo Alto met on this date in the Community Meeting Room and by virtual teleconference at 5:30 P.M. Present In-Person: Burt (Chair), Lythcott-Haims, Reckdahl Absent: None Public Comment None Agenda Items 1. Finance Committee Discussion for Fire Chief Recruitment and Input of Candidate’s Key Characteristics Human Resources Director Sandra Blanch said the fire chief will retire at the end of this year. A recruitment plan was in place. A community engagement page was added to the City’s website at www.paloalto.gov/firechiefrecruitment. Executive Recruiter Teri Black explained the efforts to gather feedback and invited Committee input on desired qualities and characteristics in a perfect candidate. Referring to Item 1, Attachment A in the packet, Councilmember Lythcott-Haims noted the fire chief job description was dated July 2011 and wondered if it reflected the expected minimum qualifications and job duties when Chief Blackshire was hired. Councilmember Lythcott-Haims wondered why bicycle licensing was listed under the fire chief’s essential duties. Councilmember Lythcott-Haims thought the minimum qualifications in Bullet 2 were too low (5 years’ experience in a major fire service function, 2 of those years in a command role). Councilmember Lythcott-Haims asked how many years of prior experience did Chief Blackshire and former Chief Eric Nichols have. Director Blanch confirmed it was the current job description and it reflected the Fire Department Charter. The 2019 job posting was based on input received from stakeholders at the time. Executive Recruiter Black will create a job description relevant to the current projects and work in the department based on input received. Director Blanch did not believe bicycle licensing was a current Fire Department duty. Director Blanch stated the experience listed in ACTION MINUTES Page 2 of 15 Sp. Finance Committee Meeting Summary Minutes: 06/03/25 the minimum qualifications was the same as the prior posting; however, the best qualified candidates were being sought. Assistant City Manager Kiely Nose noted the last fire chief recruitment was done internally. Assistant City Manager Nose assured the Committee that the job posting was similar to the job description and offered to have staff provide the 2019 job posting to the Committee as information. Assistant City Manager Nose reminded the Committee they could articulate in their feedback that they would like the ideal candidate to have no less than X years of experience. Assistant City Manager Nose knew Chief Blackshire had about 20 years’ experience in the fire service when he was appointed as chief but she did not know how many of those years were in a command position, and she would need to research with staff what was former Chief Nichols’ experience. Executive Recruiter Black explained that one of the reasons for having the minimum qualifications was to cast a wide net and be inclusive but strong candidates typically had at least 10 to 15 years’ experience and a minimum of 5 years at a command level. With the retirement formula, a lot of public safety talent had been lost over the past 3 or 4 years. Councilmember Reckdahl asked if Cities typically hired internal or external, how does having fire and ambulance affect the selection of candidates, and if many other fire departments had ambulances. Councilmember Reckdahl expressed his concern that the minimum qualifications may attract too broad a pool, which created more work and may lead to inadvertently eliminating candidates without thorough review. Councilmember Reckdahl inquired if the possession of a valid California Class C driver’s license was a necessary requirement for this role. Executive Recruiter Black stated it was about a 50/50 or 60/40 split with slightly more external hires due to the lack of qualified internal candidates. Senior Recruiter Bill Weisgerber mentioned that fire chief candidates typically had 15 to 20 years’ experience in the fire service and at least 3 to 5 years in command. Senior Recruiter Weisgerber noted Palo Alto was one of the few in California that had Health and Safety Code Section 201 rights because Palo Alto had provided continuous paramedic transport since the 70s. Senior Recruiter Weisgerber knew a lot of agencies had engine-based paramedics, and he had seen agencies with a single-role paramedic service such as Sacramento and Huntington Beach as well as out-of-state EMS and paramedic programs with an ambulance transport component. Senior Recruiter Weisgerber said the apparatus engineer and operators needed a Class B license. Assistant City Manager Nose stated a California Class C driver’s license was required for the fire chief to drive a take-home City vehicle that was equipped for a certain level of response and had lights and sirens. Councilmember Lythcott-Haims clarified that Class C was a regular driver’s license. ACTION MINUTES Page 3 of 15 Sp. Finance Committee Meeting Summary Minutes: 06/03/25 Councilmember Burt pointed out that requiring a California driver’s license eliminated out-of- state candidates, so he suggested the requirement be to obtain a California Class C driver’s license by the time they start the job or another specified timeframe. In reply to Councilmember Burt questioning if a candidate would be hired with only 5 years of experience in fire and 2 years of leadership experience, Executive Recruiter Black answered it was highly unlikely. Therefore, Councilmember Burt suggested refining the minimum experience requirements in the job description to avoid misleading candidates into thinking they would be seriously considered. Councilmember Burt wanted staff to bring this item to the Committee with the 2019 job posting, staff recommendation for the minimum levels of experience, and no California driver’s license requirement. Councilmember Lythcott-Haims mentioned Chief Blackshire’s efforts within his department as well as within our state, nationally, and internationally to bring in more women and people of color into the profession. Councilmember Lythcott-Haims wanted to attract candidates who were aware the profession needed more diversity, not for the sake of DEI but to provide better service to the public by being a diverse force. Councilmember Lythcott-Haims spoke about public relations/communication issues related to the Fire Department and cited the recent fires in midtown as well as the Bill’s and Philz fires 2 years ago. The public perception was that the City was not doing enough because the burnt buildings had not been renovated or rehabilitated. Councilmember Lythcott-Haims stressed the need for clear, timely messaging from the fire chief to the constituents. Councilmember Lythcott-Haims wondered how often Chief Blackshire and his team were working with Meghan Horrigan-Taylor and her team or if the Fire Department had their own communications person. Councilmember Lythcott-Haims emphasized that the chief’s duties were to prevent, protect, and communicate. Councilmember Lythcott-Haims thought the fire chief should be the information resource for the public, other City Departments, the industry, and the media. The ability to communicate accurately, reassuringly, and timely were characteristics that Councilmember Lythcott-Haims valued. Councilmember Reckdahl noted a perfect candidate was unrealistic but the required characteristics were people skills, experience, effective delegator, good communicator, and a strategic thinker. Councilmember Reckdahl cited Darren Anderson as an example of how his experience as a ranger helped him in his Parks leadership role. Councilmember Burt agreed leadership skills and communication were important. Councilmember Burt suggested framing it as looking for an outstanding candidate instead of a perfect candidate. Councilmember Burt praised Chief Blackshire’s recruitment of qualified people from diverse backgrounds. Councilmember Burt felt it was an advantage to have staff from similar backgrounds as Palo Alto’s large immigrant population groups. Councilmember Burt noted half of Palo Alto’s geographic area was in highly dangerous wildlands. As a result, there was an increased focus on wildfire prevention and response. Advantageous technologies were important. Technology innovation was rapidly emerging, particularly on prevention and detection. Councilmember Burt felt it was valuable to have a candidate with that experience or who at a minimum understood the criticality and had the aptitude and orientation to embrace those needs aggressively. Interagency collaboration in prevention and training was a new and ACTION MINUTES Page 4 of 15 Sp. Finance Committee Meeting Summary Minutes: 06/03/25 important focus for the Fire Department. Councilmember Burt asked about the recruitment timeline and Chief Blackshire’s transition. Councilmember Burt noted it was not rare for an internal candidate to have the benefit of overlapping with the outgoing chief. If an external candidate was selected, Councilmember Burt suggested investing in an overlapping transition period, as he noted it had been valuable and appreciated in his experience of having run a company. Executive Recruiter Black said the recruitment will remain open for about a month, final interviews in summer, and the City Manager and Council will identify the top candidate by the first half of September. An external hire may start by October after the required background check and due diligence were completed whereas an internal hire would be a quicker transition. Candidate relocation could add 4 to 6 weeks. Executive Recruiter Black said it was rare to overlap the new hire and outgoing chief but it was a decision based on a discussion between the City Manager and the identified candidate on what they think they needed to be successful. Councilmember Lythcott-Haims questioned the accelerated timeline and asked if staff felt confident it was the right timeframe for external candidates. Executive Recruiter Black confirmed that 4 or 5 weeks of open recruitment could reach a very good, strong audience, with the help of technology and her recruitment experience. Executive Recruiter Black noted it was easier for external candidate to relocate in August or September before school starts or at the end of the year. Director Blanch said Chief Blackshire was in a command position for 9 years, promoted from a battalion chief to deputy chief. Councilmember Lythcott-Haims said that underscored the Committee’s concerns that the minimum qualifications were set too low. Executive Recruiter Black stated former Chief Nichols had 4 years’ experience as a battalion chief and over 5 years as a deputy chief before joining Palo Alto. NO ACTION 2. Recommendation to the City Council to Approve New FY 2026 Palo Alto Fiber Rates and Packages as Recommended by Utilities Advisory Commission Darren Numoto, Director of Information Technology/Chief Information Officer, shared his previous experience working for ISP providers, and explained his role in Palo Alto Fiber’s operations and partnership with the Utilities Department on the fiber infrastructure. Utilities Strategic Business Manager Dave Yuan said fiber was a Citywide project with help from Utilities, IT, ASD, HR, Public Works, Planning, and Legal. In December of 2022, the Council approved a fiber expansion plan utilizing $34M of fiber reserves that had accumulated from dark fiber licensing. The first Council-approved project was to rebuild the existing 30-year-old fiber backbone and create a second fiber backbone for the electric utility to provide additional capacity and security for future and current needs. The dark fiber business had gradually made a comeback since the pandemic, including a new connection in the foothills to provide reliable ACTION MINUTES Page 5 of 15 Sp. Finance Committee Meeting Summary Minutes: 06/03/25 internet service to about 20 customers in partnership with Adobe Creek Networks. The second Council-approved project was to spend up to $20M from the fiber reserves for a phased buildout of fiber to the premises (FTTP). The pilot is a subset of Phase 1. About 1000 customers will be in the pilot and the goal was about 7000 customers in Phase 1. After the pilot, staff will return to the UAC and Council with data points, financials, and metrics of success to determine the financial sustainability of the fiber business. FTTP construction was being aligned with grid modernization to increase efficiency, reduce construction costs, and minimize disruption in neighborhoods. There had been minimal complaints from customers in the pilot area. Utilities Strategic Business Manager Yuan presented an Xfinity and AT&T coverage/pricing map for the FTTP pilot area. The red dots represented where Xfinity offered 2 Gbps services, which was about 50 percent of the pilot area. The blue balloons were where AT&T offered fiber service, which was 98 percent of the pilot area. The map depicted the blue under the red. Xfinity offered nonsymmetrical speed, meaning the upload and download speeds varied. For example, Xfinity may offer 2 Gbps of download speed but their upload speed was probably 300 Mbps. Fiber was symmetrical speed, so upload and download had the same amount of speed. The red boxes on the map depicted the City’s 2 offerings for the pilot, 1 Gbps and 5 Gbps, to keep it simple and make it easier for staff to learn from. The yellow boxes on the map showed where more than 1 Gbps of service was offered. Xfinity offered 1 Gbps and 2 Gbps. AT&T offered 1 Gbps, 2 Gbps, and 5 Gbps. Councilmember Burt asked for an explanation of Xfinity’s two $80 offerings, 1.2 Gbps and 2 Gbps. Utilities Strategic Business Manager Yuan explained only certain areas had Xfinity 2 Gbps available, and he did not think Xfinity was planning on upgrading the 1.2 Gbps areas. Councilmember Lythcott-Haims wondered why the pilot was chosen to be in an area where there was high-speed internet offered by 1 or 2 competitors instead of in an area where people do not have great internet speeds and are waiting for better technology. Utilities Strategic Business Manager Yuan thought AT&T was in 75 percent of the city but probably not in the underground areas. The pilot area location was coordinated with the 4 kV to 12 kV conversion for grid modernization. The cost to build in the underground area was almost 10x the expense than the overheard area. Councilmember Burt recalled another reason for the location of this pilot was to understand the uptake and pricing, so it needed to be in an area where there was competition. Utilities Strategic Business Manager Yuan presented a slide on Xfinity and AT&T promotional rates and/or gift cards offered in the pilot area. The promotional rate for 1 Gbps was $55/month for 1 or 2 years and then increased to $95 or $114. Palo Alto Fiber will have one rate with no hidden fees or ballooning rates. The City did not have deep pockets to underprice competitors and offer gift cards, so the plan was to differentiate ourselves through our service, quality and speed of the product, responsiveness, and customers’ trust in the City based on their experience with City utilities and other City services. ACTION MINUTES Page 6 of 15 Sp. Finance Committee Meeting Summary Minutes: 06/03/25 Councilmember Burt wanted to start with trying 2 models in the pilot area to see which worked best and have the ability to adapt, and he asked if that was a consideration. Utilities Strategic Business Manager Yuan confirmed that staff considered trying 2 models in the pilot area. The up-to rates in the proposal provided flexibility to offer promotional rates, although not lower than competitors. Director Numoto stated the message that had to be emphasized was that we are here in the community, we will be there to respond if you have a problem, and our local presence allows us to get people quickly to a customer’s home if they are having trouble. We will not compete on technology or price. The primary goal was to invest in the community and offer reliable, affordable internet for the entire community. Utilities Strategic Business Manager Yuan showed a slide of the estimated $4.5M capital expenses for the pilot’s 1000 customers, about half of those costs were one-time costs and the other half was ongoing. Strand/messenger installation and construction will probably begin in July. Staff was trying to get the hut permit approved in order to begin work on the padmount and paving. Councilmember Burt asked why there was a permitting hold and wondered why the permitting was not done earlier. Councilmember Burt advised staff to do things in parallel rather than in sequence. Utilities Strategic Business Manager Yuan explained that FEMA requirements were 12 feet because it was near the floodplain. The engineers had built it at 10 or 11 feet, so they had to go back and add the necessary height to get the permit approved. Utilities Strategic Business Manager Yuan did not have the final engineering design until the hut was fully built out and all the weight structures were calculated. Utilities Strategic Business Manager Yuan highlighted the difference in overhead and underground construction costs with ~37,000 feet of overhead construction costing $584,080 versus ~2400 feet of underground construction costing $383,859. The cost per passing including one-time costs was $5500, excluding one-time costs was about $2200. The goal was to decrease the cost per passing to around $1500 in Phase 1 since there will be more volume to bid out. Councilmember Burt recalled underground utilities were more expensive to upgrade for grid modernization, so he wanted to make sure the community and the Council understood the increased costs when having discussions on undergrounding. Utilities Strategic Business Manager Yuan stated that undergrounding made it harder to troubleshoot outages because you cannot visually inspect, so it was a manual process of going from box to box to find the outage location; however, having more technology with AMI and distributed energy has made it possible to detect outages faster. ACTION MINUTES Page 7 of 15 Sp. Finance Committee Meeting Summary Minutes: 06/03/25 Utilities Strategic Business Manager Yuan displayed a slide on the operating expense assumptions built into the model. The annual working capital was about $1.6M, including a team of 2 FTEs. Council authorized 4 FTEs for the FTTP deployment. In addition to current staff, 1 FTE was hired to work on the pilot, which staff believed was sufficient to do the pilot successfully. As Palo Alto Fiber gets more subscribers, variable costs will increase for help desk support, installation, sales and marketing, and routers. Utilities Strategic Business Manager Yuan displayed a slide of the proposed rates and product offerings. For 500 Mbps, the proposed rate was up to $75 (up to $30 on the rate assistance program). The proposed rates for the pilot were 1 Gb up to $95 and 5 Gb up to $265, which were competitive with incumbents and allowed flexibility to offer promotional rates while not disclosing to the incumbents how much we were charging. Councilmember Reckdahl noted the 2 Gbps and 5 Gbps plans did not include a router. Utilities Strategic Business Manager Yuan thought the consultant recommended passing the router cost to the customers because the higher-speed routers cost more. Director Numoto said staff was investigating the opportunity to add a fixed wireless offering, which will help reduce the cost of deployment but the speeds were less than fiber. Our fiber provider offered ancillary services such as Protect IQ for security and Experience IQ for managing home Wi-Fi access and usage (parental controls). Utilities Strategic Business Manager Yuan mentioned that staff will consider bundling ancillary services as part of a promotion, depending on the level of interest. Councilmember Burt asked staff to explain how fixed wireless would integrate with the fiber program, if fixed wireless was dependent on a node, and if it was moderately or significantly less costly. Councilmember Burt knew Tarana released a couple of generations of products since the last demo and he wondered what speed they currently offered. Councilmember Burt thought fixed wireless was probably similar to Xfinity’s offerings. Director Numoto stated that staff was investigating technology to offer fixed wireless service in areas where it was expensive to add fiber, to provide an intermediate option for higher speed or more reliable internet, as well as potentially for businesses as a backup or ancillary service. Fixed wireless needed nodes to offer higher speeds and more reliable service, depending on the canopy coverage, distance, and interference. It was estimated that 4 nodes might be needed to cover the entire city. Fixed wireless could achieve up to 700 Mbps download and maybe half of that upload. Director Numoto said the initial build was substantially cheaper for fixed wireless because it does not require building fiber to the premise or building the backhaul to serve it, and the equipment was not as expensive. Utilities Strategic Business Manager Yuan displayed a slide on the operational financial scenarios for various take rates. The take rate was a key metric to determine if the business will be financially sustainable. Based on modeling, about 27 to 30 percent minimum take rate was needed to break even on operational costs after the fourth year. Magellan’s 2022 survey projected a take rate of 35 to 40 percent. A take rate below 25 percent would probably need ACTION MINUTES Page 8 of 15 Sp. Finance Committee Meeting Summary Minutes: 06/03/25 funding from the dark fiber fund or elsewhere to keep the fiber business going. Speed to market was essential. A minimum of about 2200 customers was needed to start breaking even. The take rate modeling was for Phase 1 (up to 7500 passings). The pilot is in FY26. Phase 1 will start being built up in the beginning of 2027 and will be fully built out in 2029. Utilities Strategic Business Manager Yuan provided the following responses to Councilmember Reckdahl’s questions. The numbers in the 2029 column were operating expenses. The Operating Expense Assumptions slide was displayed, and it was pointed out that the expenses that said “Sub” were variable costs based on the number of subscribers with the remainder (about 85 percent) being fixed costs. In the first year, we are losing $1.7M for operational costs because a lot of the fixed costs were for staff, standing up the data center, and equipment. The pilot phase is about 1000 passings with another 6500 passings in Phase 1 for a total of 7500 passings. Depending on the take rate, the passings can be slowed down or sped up and our strategic partners can scale up as needed. Installers and staff will be hired as we get more subscribers. The chart showed a small increase in the number of subscribers but a lot more revenue from FY 2027 to FY 2028, which Utilities Strategic Business Manager Yuan thought could reflect the timing of subscribers added at the end or beginning of a year. Utilities Strategic Business Manager Yuan showed a slide on operational financial scenarios for different price levels. It will take longer to break even with rates at the lower end but you break even sooner as prices increase; however, the scenarios did not include price elasticity. Take rate and number of subscribers were constant for each scenario. All 3 rate scenarios break even for net operating costs by the fourth year whereas Magellan’s model was closer to 10 years. To keep it lean, a lot of expenses were scaled back and we did not hire the number of FTEs that Magellan suggested. Utilities Strategic Business Manager Yuan displayed the Fiber Fund Cash Flow Projection, which was a conservative model assuming low-level pricing. The fiber fund had $34M, about $3M was spent on construction, so there was about $31M remaining. Dark fiber revenue has not increased as fast as before. Councilmember Burt asked what the dark fiber income was for the last 3 years. Utilities Strategic Business Manager Yuan thought last year’s dark fiber revenue was $1.5M with this year projected to be about the same. Last year, about $700,000 of the revenue was from interest return from reserves. The Council authorized spending up to $20M from the fiber reserve, so when subtracting CapEx for the pilot and Phase 1 as well as FTTP negative net income in Years 1, 2, and 3, there will be $339,000 remaining. Additional fiber fund sources include $13M set aside for the new fiber backbone and a conservative estimate of $300,000 to $500,000 in annual dark fiber net income (depending on interest return). Councilmember Burt wanted to know the best estimate of projected income from the existing dark fiber, and Utilities Strategic Business Manager Yuan acknowledged the request. The measures of success for the pilot were reliability, speed, network uptime, demonstration of operational success, positive net promoter score/customer feedback, and take rate greater than 20 percent. Utilities Strategic Business Manager Yuan opined the most effective marketing campaign for Phase 1 would be door to door, and some pricing was obtained for that. Measures ACTION MINUTES Page 9 of 15 Sp. Finance Committee Meeting Summary Minutes: 06/03/25 of success for Phase 1 were to reduce construction cost to $1500 per passing, find strategic partnerships for installations and customer service, financial sustainability, and a take rate greater than 33 percent. Councilmember Burt asked staff to elaborate on strategic partnerships and who do those vendors work for now. Utilities Strategic Business Manager Yuan noted the original models projected hiring up to 22 FTEs but some of the work will be outsourced in the beginning instead of adding more FTEs. RFPs were being issued now, with the intention of getting more than 1 vendor for each service to have a backup ready. The contract terms will specify if it is based on the number of subscribers instead of fixed costs. Staff will make sure the partnership has the ability to scale up. The potential vendors probably work now for AT&T and Xfinity. Materials will be ordered in June. The fiber hut was built but the permitting was delayed. The marketing strategy was starting to develop and will be publicized as the timing gets closer. Compliance and regulatory items including agreements and polices were being created to ensure disclosures were available to customers when they sign up. Utilities Strategic Business Manager Yuan stated the UAC approved the flexible rate structure. The UAC asked staff to come back with metrics and data points from the pilot before starting Phase 1 construction, which staff can do if it is part of the Council’s request. Public Comment: Utsav Gupta, Utilities Advisory Commissioner, expressed his personal comments. Utsav Gupta was in support of the proposed fiber rates. Palo Alto has lagged in providing modern internet service. This proposed fiber project strategically aligned with grid modernization and addressed the need to invest in crucial fiber backbone upgrades. The fiber backbone had reached capacity and composed a large amount of the cost. Residential fiber was projected to save our community $15M in internet spending over 10 years, with all fees staying local. The fiber plant lifespan was 40 years. FCC data estimated that at most 45 percent of Palo Alto residents had access to fiber, so Utsav Gupta was not sure where the previously cited 75 percent figure came from. This project was financially sustainable. A take rate of 37 to 42 percent was expected, well above the 30 percent needed for the network to recover its costs. Expanding Palo Alto’s fiber services to homes was a smart, legally sound way to invest existing surplus fiber funds back into our residents and businesses, saving them millions of dollars in service costs while providing superior, modern internet. Councilmember Reckdahl asked what the demand was for symmetric speeds, if people were willing to pay a premium for symmetric speeds, and was it gamers or what kind of user needed a faster upload. Councilmember Reckdahl recalled previous discussion about having a third- party partner as a one-stop shop for cable TV and internet and thought that could help get a good take rate. Councilmember Reckdahl advised staff to note during the pilot if people were not signing up for fiber because they wanted to keep their cable TV. Councilmember Reckdahl inquired how staff figured out the costs mentioned in the staff report. Councilmember Reckdahl said pricing was critical to success, so if most of the costs were system-wide as opposed to per customer, he suggested cutting rates in half and doubling the number of subscribers, resulting in roughly the same feasibility. Councilmember Reckdahl knew UAC ACTION MINUTES Page 10 of 15 Sp. Finance Committee Meeting Summary Minutes: 06/03/25 Commissioner Robert Phillips was an expert on pricing and wondered if he had made any suggestions on the pricing strategy. Councilmember Reckdahl wondered if Magellan’s predictions about system profitability were credible and recommended checking if Magellan’s predictions for other cities came true. If Magellan had a bad track record, then we would have to see if we were making the right assumptions, if the Cities that worked with Magellan had the right pricing model or what they did wrong so we do not go on the same path. Utilities Strategic Business Manager Yuan stated symmetric speed was a big differentiator with fiber. Xfinity used a much inferior product than fiber. There was more demand for a faster upload speed for streaming and other internet activities. Another advantage was that Palo Alto Fiber’s latency will be much slower than AT&T or Xfinity because PAIX or Equinix (our data center) was next to us, so we do not have to transfer our data to another state or county. Utilities Strategic Business Manager Yuan had seen some cable TV and internet models but had not explored it; however, it was a potential and staff would look into it if there was enough interest. The costs in the staff report used Magellan’s revenue stream model and the table of expenses to build out the assumptions. Utilities Strategic Business Manager Yuan had not researched Magellan’s predictions for other cities and offered to get back to Councilmember Reckdahl. Regarding the target audience, Director Numoto noted a lot of people had transitioned to streaming, especially kids were streaming on multiple devices or gaming, so there was a need for bandwidth. Gaming and uploading a lot of videos required higher upload speeds. Fiber provided a more consistent, reliable experience versus cable, which was a shared medium and caused people to experience slower speeds when they come home after work. The copper infrastructure in our environment was aging. Technology was advancing at enormous speed, so offering fiber would set us up for future needs. Assistant City Manager Kiely Nose mentioned that the UAC debated the intention and goals of the pilot. The UAC did not reach a full consensus but the majority wanted to see how many customers we could get and acknowledged there may be operating losses as a result of the lower revenue estimates. The UAC did not want to go too far in investment without proof of concept that this pilot could feasibly turn into a sustained citywide operation. Assistant City Manager Nose thought state regulations had an impact on the success of fiber programs, so she advised noting whether a fiber program was in or out of California when looking at Magellan and other agencies’ track records. Councilmember Reckdahl suggested peer-to-peer marketing, putting an “I have Palo Alto Fiber” lawn sign on the front yard, and using the City’s social media to post “Sign up for fiber.” Councilmember Reckdahl wondered what the purpose was of running dark fiber through Foothills Park and if the foothills dark fiber ISP would eventually be part of this fiber trial or would remain separate forever. Utilities Strategic Business Manager Yuan said the dark fiber ISP will remain separate for now. It will take a lot more money to build up to the foothills to offer Palo Alto ISP service. The City’s ACTION MINUTES Page 11 of 15 Sp. Finance Committee Meeting Summary Minutes: 06/03/25 dark fiber was principally for electrical poles and City facilities in the foothills but was not meant to serve customers. Adobe Creek Network took the dark fiber backbone and invested to build it out to serve customers in the foothills. The City’s water reservoirs and fire station in Foothills Park used dark fiber for communication. For scenario predictions, construction costs, uptake, and pricing, Councilmember Burt encouraged reading the book How Big Things Get Done written by a global expert on transportation megaprojects and project economics. The book explained why 98 percent of projects were over budget, behind schedule, and did not have the uptake projected, as was seen with the BART extension to Silicon Valley and the Caltrain extension. Looking at comparisons, planning, building rapidly, and having the right team were among the guiding principles to anticipate and mitigate risks more effectively. Councilmember Burt asked if staff had a sense of what portion of folks wanted to keep cable TV, because we may not be able to get them as subscribers until we have an internet offering with cable TV. Councilmember Burt encouraged staff to work in parallel and move more aggressively on a third-party cable partnership as opposed to waiting. Utilities Strategic Business Manager Yuan thought Magellan’s survey in 2022 revealed 50 percent had cut the cord and an additional 25 percent said they were willing to cut the cord, which correlated with what was heard in the industry due to cable TV costs. Utilities Strategic Business Manager Yuan said there will be a survey of customers in the pilot area to identify the reasons they did not subscribe to fiber. Director Numoto recalled Magellan conducted a citywide survey, so staff will have to look if the survey targeted the pilot area and what were the response rates. The percentages of people who have cut the cord or willing to cut the cord were higher than Director Numoto expected and was becoming more apparent because of Xfinity’s higher cost and programming. Cutting the cord provided flexibility because most programming was through streaming services. Staff had discussed internally about being careful as a City to give a referral to different companies. Strategic partnership evaluation will potentially be key. The City can point customers in the direction of research and options but for the City to recommend becomes a challenge. Councilmember Burt wondered if Mr. Gupta’s public comment making reference to a $15M savings to the community was referring to a previous contractor in 2016 who noted nationally an increased savings when you have 3 providers versus a modest decrease in pricing with 2 providers. Councilmember Burt’s recollection was that the 2022 model showed the value of a third provider but it was not as great as the 2016 value. Councilmember Burt encouraged staff to explain to residents that the City entering the market would result in residents saving money. Utilities Strategic Business Manager Yuan confirmed that staff could track that information during the pilot. Councilmember Burt asked how old was the current fiber backbone, what was its lifespan expectancy, and when did it need to be replaced. Utilities Strategic Business Manager Yuan ACTION MINUTES Page 12 of 15 Sp. Finance Committee Meeting Summary Minutes: 06/03/25 thought the fiber backbone was built in 1998 or sometime in the late 90s. Utilities Strategic Business Manager Yuan said most of the fiber backbone was okay but the parts that had congestion because of demand were being patched or fixed. The desire was to eventually build 1 or 2 new backbones. With grid modernization and the FTTP project, staff did not have the resources to perform a third large project. To benefit the community at a fairly low cost, Councilmember Burt inquired if staff wanted to consider a fixed wireless pilot in one of the underground areas where there was not good internet coverage. Councilmember Burt was interested in the role of fixed wireless for expanding the City’s public Wi-Fi offered in public spaces. Councilmember Burt recalled the Wi- Fi node pilot done 2 or 3 years ago was hooked up in a short period of time and was not very cumbersome. Councilmember Burt encouraged staff to consider offering a promotional rate for a subset of the pilot area to perform a side-by-side comparison with the part of the pilot area without the promotional rate to identify what does and does not work instead of doing things in sequence. Director Numoto said the pilot phase will determine whether the City can offer internet services and operate it successfully, then adding on other services could be considered. Director Numoto stated that the data center we were building was the core infrastructure needed to offer services. Currently, the City was leveraging its IT infrastructure to provide that service as a beta but the goal was to get the data center operational for the ISP portion of the business. Councilmember Reckdahl pointed out ISPs used promotional rates to get customers because they know people do not like to switch. Director Numoto remarked that staff wanted a range in pricing to allow flexibility to change rates. Councilmember Reckdahl reiterated the recommendation for staff to study what other Cities have done to learn from their failures and successes. MOTION: Council Member Lythcott-Haims moved to recommend that the City Council approve the FY 2026 Palo Alto Fiber rates and packages as recommended by the Utilities Advisory Commission. Council Member Reckdahl seconded the motion. MOTION PASSED: 3-0 3. Recommend the City Council Adopt the Fiscal Year 2026 Investment Policy Christine Paras, Assistant Director of Administrative Services, addressed the Committee. State law required Council to review and approve the City’s investment policy annually. Staff further researched industry standards and proposed changes related to the Broker/Dealer Review section of the policy to include review of the FINRA BrokerCheck report and net capital requirements to gauge the solvency of the brokerage firm. The City’s policy was more restrictive than the California Government Code, so staff proposed adding language in the policy that says whichever requirement was more restrictive will take precedence. Investments held at the time the policy was adopted that do not meet new policy guidelines can be held to ACTION MINUTES Page 13 of 15 Sp. Finance Committee Meeting Summary Minutes: 06/03/25 maturity and be exempt from current policy. Staff will report to Council within 45 days after end of quarter. Staff wanted to update the Authorizing Vestment Personnel section on Page 9 of the policy (Packet Page 36) to allow the use of a blended approach for management of City’s investments that leveraged a specialized firm and internal staff. Assistant Director Paras explained that a blended approach aligned with the best practice of updating City policy and practices, aligned with what staff found in their research of what other Cities and outside firms used, and would result in anticipated higher investment earnings. The budget included bringing on a specialized firm for investment management. Proposed language: The Assistant Director may authorize the Treasury Debt & Investments Manager, Senior Management Analyst, and/or designated investment firm (Firm) to enter into investments within clearly specified parameters. Councilmember Lythcott-Haims assumed there was a sound reason for the City not having an outside firm to date and was curious as to what triggered the decision to bring on a third party. Lauren Lai, Director of Administrative Services/CFO, explained it was best practice to evaluate and update City policies and procedures, so staff surveyed other Cities within the County and discovered two-thirds of those Cities had a blended approach where they leveraged City staff with a specialized firm focused on investment and asset portfolio management. Staff looked at 3 agencies and found their yields were higher even after expenses, with returns from 3.3 to 4.2 percent compared to Palo Alto’s 2.6 percent yield in the most recent report. Councilmember Reckdahl pointed out the possibility that those agencies took on more risk. Director Lai said these contracts had 4 to 6 basis points, which was fairly low. Staff wanted to align this document in the policy to stay current around investments and allow for a blended approach. The 2023 audit revealed gaps relative to the risk of redundancy, continuity of service, and compliance with state law on reporting. The reporting compliance was cured. Staff hoped this blended approach will mitigate those risks in addition to providing a higher return. Of note, Section 115 funds were managed by a specialized firm. Director Lai proposed having the investment firm come twice to this Committee (subject to Council approving the contract). As an introduction to the Finance Committee, the investment firm will talk about their background and hear the Committee’s feedback. The investment firm will come back within 3 months or so to provide some initial observations and suggestions. Assistant City Manager Kiely Nose mentioned that staff planned to bring forward a contract to Council on consent on June 16 to support the hybrid model. Director Lai stated the contract would entail helping staff with investment decisions based on current and forecasted economic conditions, reporting, looking at cash flow, and strategically determining the most optimal blend of our portfolio within the parameters and limits contained in the City’s policy. Staff can leverage the investment firm’s more contemporary and modern technology to bring a more robust report to the Finance Committee. Staff will explore the frequency of the investment firm’s conversations with the Finance Committee. Now, the quarterly report was done on a more casual basis. The first 12 months may look formative and thereafter it could be determined what the Finance Committee’s support would look like and the opportunities that staff wanted to explore in this blended approach. ACTION MINUTES Page 14 of 15 Sp. Finance Committee Meeting Summary Minutes: 06/03/25 Councilmember Lythcott-Haims expressed her concern with this material change on how we operate as a City, moving from managing our own investments to bringing in a third party, and it spoke to the capacity of City staff and where there were gaps and tradeoffs. Councilmember Lythcott-Haims asked how much money staff thought the City will yield from making this change. Councilmember Lythcott-Haims did not recall a discussion about this during budget talks. Councilmember Lythcott-Haims felt uninformed and surprised. Councilmember Lythcott- Haims wished the Finance Committee had the opportunity to hear staff present on why this might be a good idea and get the Committee’s feedback and concerns so the Committee could have confidence in supporting the contract when it comes before Council on consent in 2 weeks. Councilmember Lythcott-Haims noted staff did not tell the Finance Committee anything substantive on what it was going to yield or why we were doing it. Councilmember Lythcott- Haims felt that staff skipped the step of making the case that this should happen and instead provided a redline document alluding to it happening. Director Lai explained that Day 2 of the budget was compressed for the internal service departments, so staff went through this topic but did not elaborate. Director Lai shared that she had previously been through a conversion from in-house to third-party management. The firm that staff was moving forward with had numerous local California agency experience. Should Council approve the contract, staff will bring the investment firm to the Finance Committee in August for an initial conversation before onboarding to set expectations, and then in 3 to 4 months with observations and the work plan to ensure that the Committee and Council addressed any concerns. Public Comment: None. Councilmember Reckdahl appreciated a conservative approach. Councilmember Reckdahl wanted to know how the current portfolio was spread among treasuries and money markets. Councilmember Reckdahl was surprised to see maturity mentioned a lot when he thought it should talk about duration, so he wondered if there was a reason for calling it maturity. Duration did not have a one-to-one correlation to maturity because it depended whether it was callable, below par, or above par. Duration was the proper word when talking about interest rate sensitivity. Packet Page 34 talked about the repo market but the counterparty risk was not called out. Councilmember Reckdahl recalled the repo market had problems with people walking away from the repurchase during the Great Recession. Councilmember Reckdahl noted the credit rating of the bond issuer was addressed but there was no mention of the credit worthiness of the person doing the repurchase. Councilmember Reckdahl wondered if we wanted repos on our list. Commercial paper was unsecured, so Councilmember Reckdahl inquired if we wanted to have unsecured credit and if the City had any corporate paper or corporate bonds. On Packet Page 35, Councilmember Reckdahl wanted to review the policy of corporate being no more than 5 percent of any single issuer because having 1 percent of your money in a single corporate seemed concentrated. The agency portion limited the amount of callable, so Councilmember Reckdahl questioned why corporate did not have any limits on callable. ACTION MINUTES Page 15 of 15 Sp. Finance Committee Meeting Summary Minutes: 06/03/25 Assistant Director Paras stated the total portfolio was $656M as of the end of the third quarter of the fiscal year, about 37 percent was with U.S. municipal state debt instruments, 30 percent with agency, and the third biggest category was liquid assets accounts (LAIF and a money market account). Assistant Director Paras noted the Code referred to the duration of the investment; however, the specific duration was not required to be called out but rather the maturity of the investment. Director Lai will take back the terminology question on the use of duration versus maturity because she was unsure of the answer. Repos were allowed under the California Code although the City had not actively invested in repos since Assistant Director Paras has been with this organization but staff could review it. Assistant Director Paras said that staff can look at recommendations with the investment management firm. Assistant Director Paras mentioned corporate was currently about 5.5 percent of the City’s portfolio. Councilmember Reckdahl thought that bonds issued in foreign currency should be on the list of prohibited investments. For example, Apple had EU bonds, which qualified as a potential investment when looking at corporate but carried an unwanted currency risk. Assistant Director Paras explained that bonds issued in foreign currency were not explicitly prohibited in the policy but the City did not carry any because it was not allowed per the Government Code. MOTION: Councilmember Lythcott-Haims moved, seconded by Councilmember Reckdahl, to recommend that the City Council adopt the Fiscal Year 2026 City Investment Policy with the amendment to Attachment A as presented by Assistant Director Paras. MOTION PASSED: 3-0 Future Meetings and Agendas Director of Administrative Services/CFO Lauren Lai stated the next Finance Committee meeting after the July recess will be held on August 5 and will include a discussion with the investment firm as well as several Utilities-related items. Councilmember Lythcott-Haims suggested having the Finance Committee start later or the Cubberley Ad Hoc Committee start earlier on August 5 due to all 3 members serving on both committees. Therefore, staff and committee members needed a break between meetings. Assistant City Manager Kiely Nose acknowledged Councilmember Lythcott-Haims’ comment. Assistant City Manager Nose said the August 5 tentative agenda included potentially bringing back the investment firm as well as 2 or 3 Utilities items potentially coming from the UAC’s June meeting. Christine Paras, Assistant Director of Administrative Services, offered to confirm the investment management firm’s availability for August 5, pending Council approval. Adjournment: The meeting was adjourned at 8:11 P.M.