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HomeMy WebLinkAbout2025-09-16 Finance Committee Summary MinutesFINANCE COMMITTEE SUMMARY MINUTES Page 1 of 10 Regular Meeting September 16, 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: Reckdahl, Lythcott-Haims, Burt (Chair) Present Remotely: None Absent: None Call to Order Chair Burt called the meeting to order. The clerk called the roll. Public Comment There were no requests to speak. Agenda Items 1. Accept California Public Employees’ Retirement System (CalPERS) Pension Annual Valuation Reports as of June 30, 2024. Budget Manager Paul Harper explained that 55 percent of the pension buck is collected from investment earnings, 34 percent is from CalPERS employers’ contributions, and 11 percent is from CalPERS members' contributions. CalPERS uses a 6.7 percent target for investment earnings. The most recent report shows 9.3 percent earnings compared to the target. The estimate for the period ending in June 2025 is 11.6 percent. The 20-year average is about 6.9 percent. The payment made by City to CalPERS includes 2 components: Normal Cost (NC) and the UAL (Unfunded Accrued Liability). Employees SUMMARY MINUTES Page 2 of 10 Finance Committee Meeting Summary Minutes: 09/16/25 pay a percentage of the paycheck based on which of the 3 pension plans they are in. As of September 2025, approximately 62 percent of the City’s employees are in PEPRA. The Pension Trust is the funding the City contributes when funding proactively at a lower contribution rate. The City assumes a 5.3 percent return versus the 6.8 percent CalPERS assumes. The difference between those is sent to the trust annually to refund pension costs. This is not contemplated in the reports CalPERS gives. The trust is currently at $109.9M, which would increase the funded status by 6.6 percent. Council Member Lythcott-Haims asked what the 5.3 percent investment return was on. Chief Financial Officer Lauren Lai said the investment return is on the City’s portfolio of assets being held at CalPERS. Budget Manager Harper explained making additional discretionary payments (ADPs) to the trust can increase the funded status. The retiree benefit policy outlines the use of funds and is projected to return to the Finance Committee in line with the ALM study CalPERS conducts every 4 years. The June 30, 2024, valuation report showed no significant changes from actuarial assumptions from last year. The ADC (Actuarial Determined Contribution) is about $71M, which is 3.8 percent higher than FY 2026 and includes $18.7M NC and $52.3M UAL. The total current UAL balance is $566.4M. A slide showed a table detailing the investment returns over the past 5 years and the City’s funded status. Returns are phased in over a 5-year period. A slide showed the UAL from 2023-2027. Another slide showed a graph of CalPERS employer contributions for NC and UAL compared to payroll, demonstrating the phase in of the large negative impact from 2022. Council Member Reckdahl asked why the impact was phased in. CalPERS Representative Matthew Biggart explained the investment return is the most volatile element of the valuation process and is phased in to avoid sudden impacts as a result of large negative or positive returns. Budget Manager Harper showed a slide comparing actuarial reports for annual changes for the NC, UAL, and total ADC for FY 2027 through FY 2031. The NC is increasing due to overall payroll increases and the UAL is increasing due to CalPERS’ practice to implement 5-year ramp up periods. Changes expected to impact future reporting include the CalPERS preliminary 11.6 percent investment return for the period ending June 30, 2025; the CalPERS ALM study is to be completed November 2025 to inform ongoing discount rate and other actuarial assumptions over the next 4 years; FY 2026 staffing changes; and new labor agreements with all bargaining groups that have been approved through June 2028. The FY 2027 to FY 2036 Long Range Financial Forecast (LRFF) will occur in December and January; proposed budget deliberations will occur in May; the FY 2027 budget will be adopted in June; and the retiree benefit policy will be reviewed in fall of 2026. The recommended action is to accept the reports and use them for the long range financial forecast and FY 2027 budget development. SUMMARY MINUTES Page 3 of 10 Finance Committee Meeting Summary Minutes: 09/16/25 Public Comment: None. Council Member Reckdahl asked if the expected inflation reduction from 2.5 percent to 2.3 percent, on packet page 7, occurred before inflation increased at the beginning of 2021 and if 2.5 percent was conservative enough. Council Member Reckdahl referenced packet page 51, which showed a summary of valuation data, specifically the members portion. Council Member Reckdahl questioned who took on the longevity risk, how separated members work, if CalPERS absorbs any risk, and what smaller cities do regarding the longevity risk. Council Member Reckdahl wondered why the City has 5 percent strategic financing when the short rates were high, citing packet page 25. Council Member Reckdahl asked if CalPERS calculates ELFA, what market performance they have, and if CalPERS achieves a positive ELFA. Council Member Reckdahl queried what the asset allocation for the City Pension Trust is and if it is passive. Council Member Reckdahl referenced Attachment C on packet page 156 and asked if those tables were for completeness only. CalPERS Representative Biggart said the inflation adjustment was part of the experience study completed in advance of the inflation increase in 2021. The initial proposal for the experience study in September has the inflation rate going back to 2.5 percent, assuming the current high inflation will be short lived. CalPERS Representative Biggart confirmed the City only pays the cost of service associated with a member’s service with the City’s agency, that all the risk is on City’s own assets, and that the City takes on the longevity risk. The general conclusion of the current experience study is to not recommend significant changes to the demographic assumptions. There are non-pool plans and pool plans for agencies that are smaller in size that share the demographic risk. CalPERS Representative Biggart will get more information regarding leveraging and market performance and did not know if CalPERS achieved positive ELFA. The tables in attachment C were for completeness. Assistant City Manager Kiely Nose reminded that CalPERS takes a long-term view. Assistant City Manager Nose said all the appendices were the assumptions the actuaries used to create the report. Chief Financial Officer Lai said there is a demographic analysis done every couple years in addition to the ALM which helps the Board and actuaries update assumptions to make sure it is trending consistently with the best understanding over a 20- or 30-year horizon. The asset allocation for the City Pension Trust is 60/40. The trust is in PARS, which is being managed as a collective pool portfolio for all participants with 5 different investment strategies. Council Member Lythcott-Haims recommended a video tutorial put together by former mayor Eric Filseth, completed in December 2022, for those who want to better understand the unfunded pension liability. Council Member Lythcott-Haims asked how the more conservative discount rate of 5.3 percent versus CalPERS’ 6.8 percent was established and how often that is revisited. Council Member Lythcott-Haims wondered if CalPERS was not being conservative enough and not facilitating filling up the unfunded pension liability hole. Council Member Lythcott-Haims asked if they were on target to be 90 percent funded by 2036 and why 90 SUMMARY MINUTES Page 4 of 10 Finance Committee Meeting Summary Minutes: 09/16/25 percent was the goal. Council Member Lythcott-Haims had notes from the budget process which said the City was adding 12.25 FTE and asked what happened to give the additional FTEs. Chair Burt asked what year the 5.3 percent was established. Chair Burt wanted to note they are doing better than projected. Chair Burt said if the population increases, then the pool of active employees will continue to grow and asked if that was a factor in considering what the target was. Chair Burt wanted to know how the projections provided compared to previous projections. Chair Burt asked why there was not a revision downward in payments as a result of the returns being above projections. Chair Burt asked if the City is projecting an increase in staff. Budget Manager Harper explained the discount rate is revisited as part of the retiree benefit policy, which is scheduled to be revisited when the ALM study comes out. The policy was approved by Council in February of 2023. Budget Manager Harper said the Miscellaneous Plan would get to 90 percent around 2034 and the Safety Plan would get there around 2036. Slide 8 was brought up, which showed the comparison of actuarial reports from the June 30, 2023, valuation versus the June 30, 2024, valuation. Budget Manager Harper confirmed the increase in staff to 18 FTE was the authorized staffing level as per the FY 2026 adopted budget. The 12.25 FTE was the number from the proposed budget, the 18.25 FTE is with those 6 positions added in the fire department between the proposed and adopted budgets. Assistant City Manager Nose said the 5.3 percent was informed by CalPERS independent analysis and established 4 years ago. Assistant City Manager Nose stated the former Council landed at the 90 percent goal because no assumptions will be perfect and fluctuations can happen. The former Council presumed the CalPERS assumptions were not conservative enough for what the organization wanted to do financially, so balanced that with how expensive it would be to get there. CalPERS Representative Biggart said the current proposal as a result of the ALM study is that 6.8 percent is a reasonable long-term investment assumption but acknowledged a significant amount of uncertainty. CalPERS Representative Biggart did not interpret the number of active employees as being related to the funded ratio target but it does have the impact of reducing the UAL contributions as a percentage of payroll. CalPERS Representative Biggart explained the payroll growth was driving the NC in comparison to projections. There was a non-investment loss related to higher-than-expected salary increases which is not phased in, therefore the investment returns did not produce a reduction in the UAL contribution. Chief Financial Officer Lai clarified slide 8 was comparing the difference between the valuation report being submitted this evening and last year’s valuation report. Council Member Reckdahl brought up packet page 44, which showed that inflation reduces real return, and asked if the study looked at the change in expenses due to inflation. CalPERS Representative Biggart confirmed the study looked at both. SUMMARY MINUTES Page 5 of 10 Finance Committee Meeting Summary Minutes: 09/16/25 MOTION: Council Member Lythcott-Haims moved, seconded by Council Member Reckdahl to recommend to that the City Council accept the California Public Employees’ Retirement System (CalPERS) Pension Annual Valuation Reports as of June 30, 2024, for the Miscellaneous and Safety Plans. MOTION PASSED: 3-0 2. Recommendation to the City Council to Adopt a Resolution Amending Utilities Connection Fees and Service Charges in Utilities Rate Schedules E-15 (Electric Service Connection Charges), W-5 (Water Service Connection Charges), G-5 (Gas Service Connection Charges), S-5 (Wastewater Service Connection Charges) and C-1 (Utility Miscellaneous Charges), and to Approve Corresponding Budget Appropriation Revisions for FY 2026. CEQA status: Not a Project. Senior Business Analyst Anna Vuong explained that staff updates the rate schedules every 3-5 years, with the last update being in 2019. The rise in rates were due to updated labor hours and activities and rising material costs and disposal expenses. The new cost recovery charges added to the C-1 rate schedule are for equipment fees and cross connection fees. The fees would be effective January 1, 2026. Service connection fees and charges are the cost recovery for work performed by the City for customer connections and are applicable to new construction and remodels. A table showed the 5 rate schedules, number of fees charged, expected annual cost recovery associated with fee increases, and the percentage increase for standard connection fees. A slide showed a table of the electric rate schedule, E-15, with the current and proposed fees. A new standard fee for both underground and overhead 400 amps, single-phase, is due to an increase in applications in order to provide staffing efficiency. The overhead and underground temporary power in 200 amps or less fee decreased due to new time estimates. A slide showed a table of some of the WGW rate schedules with the current and proposed fees. The new gas demolition fee is not for electrification. Utilities Director Alan Kurotori clarified there is a cost associated with demolishing and eliminating the gas service but there are other funds available to cover that, whereas a customer would bear the cost to relocate and reinstall the gas service. Senior Business Analyst Vuong explained that cross connection is a backflow device that prevents contamination into the potable water system. This is an existing program mandated by the State Water Resource Control Board. It safeguards community trust by eliminating contamination of the City’s drinking water and aligns with industry standard. There are 4,754 devices in the system, 402 of which are noncompliant. The proposed changes are a delinquency processing fee of $57; a fee for testing and certifying domestic assemblies of $310; and a fee for testing and certifying fire service assemblies of $517.50. Council Member Reckdahl asked what counts as a noncompliant device and what the ramifications are if one is broken. SUMMARY MINUTES Page 6 of 10 Finance Committee Meeting Summary Minutes: 09/16/25 Utility Project Coordinator Denise Rodriguez explained that the devices were tested in a laboratory and determined to only function properly for 12 months at a time, though they usually function longer. New regulations were passed with more stringent requirements to review commercial and residential properties, including annual testing. Potential ramifications of a noncompliant device are the potential for contamination of City potable water. Utility Project Coordinator Rodriguez explained that is not a health hazard, but the water would be polluted. Senior Business Analyst Vuong proposed using the California Construction Cost Index for the annual percentage increase in order to recover costs in a timely manner but not give customers sticker shock. The fees and charges are proposed to be moved to the Municipal Fee Schedule in FY 2027. The staff recommendation is the Finance Committee recommend to Council to approve updating the standard service connection rate schedules for E-15, G-5, W-5, S-5, and C- 1 effective January 1, 2026. Utilities Director Kurotori emphasized staff does not take cost increases lightly but wanted to ensure cost recovery. Rates were kept flat during COVID. Off hauling materials was more expensive than what was in the model originally. Chair Burt confirmed the Construction Cost Index increase since the last update started in 2020 and did not include 2019. Chair Burt said the compounded increase was more than 40 percent. On the electric rate schedule, the two existing categories on permanent power increased 278 percent and 180 percent. Chair Burt asked how that increase was justifiable based on the 50- plus percent increase on the CCI and how they got to those numbers. Chair Burt questioned how there is only an 8 percent increase over 5 years out of all of E-15 when there are small decreases in temporary power but massive increases on permanent power. Chair Burt asked if the increase was primarily due to a large number of hours not being included. Utilities Director Kurotori confirmed the 2020-2025 Construction Cost Index was the history to look at and did not include 2019. Strategic Business Manager Dave Yuan explained the previously underestimated number of hours only factored in design and construction and did not include permitting or inspection. The percentage of standard fees for electric is smaller than other WGW, so the standard fees only make up 8 percent of the total connection charges. For the other utilities, which have 40 different fees, there are more options and is why they are a bigger percentage of the total revenue increase. The new rates were comparable to those in Santa Clara. Senior Business Analyst Vuong noted that, for the 200 amp overhead services, the template had 8 hours of work but the new analysis moved it to 13 or 14 hours. Council Member Reckdahl referenced table E-15 and asked if the 400 amps is a new service or was part of another category before. SUMMARY MINUTES Page 7 of 10 Finance Committee Meeting Summary Minutes: 09/16/25 Chair Burt asked how many of the 400 amp applications were for new homes that are electrifying versus people converting from gas to electric. Chair Burt opined that electrification does not necessitate an increase in service. Chair Burt wondered if there were tools to educate homeowners and contractors on smarter ways to approach electrification. Senior Business Analyst Vuong explained there had been an increase for 400 amp services, having received about 90 applications for underground services from 2020-2024. Senior Business Analyst Vuong mentioned staff did not have the data on who was applying for the 400 amp services but that data point will start to be collected. Strategic Business Manager Yuan said previously the 400 amp service was an engineer estimate, so each one had to be estimated individually. The new standard fee will streamline the permitting process for the customer and save engineer time. Council Member Reckdahl queried if there was a standard way for doing multi-family residences. Council Member Reckdahl referenced packet page 191 and asked what the difference between the “2-inch copper water service” and “install 2-inch water service connection” was and why copper was cheaper. Council Member Reckdahl questioned if sewer laterals were on private or public property and under what circumstances a private person would have to pay for rehabilitation on the public right-of-way. Council Member Reckdahl asked what core drill and manhole connections were and if it was legal to connect to the manhole. Acting Chief Operating Officer Terry Crowley said the intent with multifamily developments was to have multiple meters and constituted an engineered estimate, which ends up being lower than charging all the individual fees. Senior Business Analyst Vuong said the 2” water service connection is the plastic HDPE pipes and the copper is used for areas with contaminated soil where plastic will not work. Principal Engineer John Nguy explained that 90-plus percent of all water services are PE. Copper is cheaper because the PE requires drilling which, when labor and equipment are factored in, costs more. Principal Engineer Nguy said the sewer lateral is in the public right-of-way and in the past, customers were charged to do rehabilitation on the existing sewer lateral but with the new standard, the customer does not pay for it. Some new developments require the sewer lateral to connect into the manhole and the fee is given to ensure the City drills the hole. Connections into the manhole are only permitted when there is no other option. Utilities Director Kurotori added that the fee for drilling and connecting to a manhole is a protective measure to ensure it is being drilled out to cause less damage. Public Comment: None. MOTION: Councilmember Reckdahl moved, seconded by Councilmember Lythcott-Haims requests that the Finance Committee recommend that the City Council adopt a resolution SUMMARY MINUTES Page 8 of 10 Finance Committee Meeting Summary Minutes: 09/16/25 (Attachment A) amending five Utilities rate schedules which set forth charges for utility connection charges and service call fees, effective January 1, 2026, and including an annual increase based on the California Construction Cost Index (CCCI) in fiscal years when a cost of service study is not performed: a. E-15 (Electric Service Connection Charges), b. W-5 (Water Service Connection Charges), c. G-5 (Gas Service Connection Charges), d. S-5 (Wastewater Service Connection Charges), and a. C-1 (Utility Miscellaneous Charges). MOTION PASSED: 3-0 3. Recommendation to City Council to Approve Purchase Order C26195416 with Carahsoft, Utilizing a General Services Administration Blanket Purchase Agreement, to Procure SAP S/4 HANA Suite of Products and Corresponding Software and Hosting Services for a 5- Year Term for a Not-To-Exceed Amount of $6,640,429; and Approve a Budget Amendment in the Technology Fund; CEQA Status - Not a Project Information Technology Director Darren Numoto explained that SAP is used for the City’s Enterprise Resource Planning (ERP) system. The current version has been deemed end-of-life as of December 2027, therefore an upgrade to the latest version, S/4 Hana, is required. SAP is used by Finance, Human Resources, and Utilities for things such as accounting, accounts payable, payroll benefits, utility billing, etc. Staff also uses it daily for time cards, purchase orders, etc. SAP was first installed at the City in 2002. The benefits of migrating to S/4 Hana include support, compliance, security, new innovations, and less risks. A slide showed the overall 5-year cost breakdown. The focus is on licensing but will move forward with implementation services if this gets approved. Another slide showed the projected cost savings breakdown. The benefits of moving forward with incentives are the City will be provided price protection for 5 years, the business transformation incentive, and the City will no longer be paying for support of the current system. That equates to a $3,430,976 savings over the course of 5 years if the contract is signed by the end of September 2025. The alternative is to stay on existing platform, which has the advantage of avoiding a $660,000 increase. Chair Burt asked if the $660,000 above the current annual hosting cost of $934,000 was a net increase and if it was in the budget. Chair Burt queried if the amount budgeted was for the price with incentives. Chair Burt confirmed the City will be saving versus what was budgeted for SUMMARY MINUTES Page 9 of 10 Finance Committee Meeting Summary Minutes: 09/16/25 if the contract is signed by the end of September 2025. Chair Burt wondered how staff felt about being locked into SAP and if the new version is easier to modify. Chair Burt asked if the efficiencies apply to the City, not just the provider having lower costs, and how AI will be empowering those efficiencies. Chair Burt wanted to actualize productivity gains in terms of cost savings. Chair Burt wanted to understand how to be, as a result of these technologies, a more productive organization that does not have to add labor as it grows in population, etc. Chair Burt questioned if SAP was doing projections of how the new upgrade should benefit customers, particularly in government. Information Technology Director Numoto clarified the slide showed the savings if the City signed by the end of September versus not. The $660,000 is a net increase over the current cost structure which was planned and will be funded through the tech fund. The budget was for the upgrade and was a range of overall cost. The incentives came from negotiating with SAP. The budget was geared toward the cost without incentives. A lot of ERP companies were not able to provide all the services like SAP was. Information Technology Director Numoto confirmed there will be an increase in efficiencies and opportunities for reporting and interacting with the system using AI. AI benefits will include lower costs and faster changes but will mostly improve efficiency in how internal staff interacts with the system. The general goal of moving to new system is to allow staff to decrease the amount of repetitive work to focus on higher-value work. SAP has provided some city references that have migrated already. Chief Financial Officer Lauren Lai added that year 1 and 2 are in alignment with the budget and long-range plan but years 3, 4, and 5, will need to incorporate the $660,000 across all funds. Chief Financial Officer Lai opined there are struggles in the current version to making some necessary updates and was looking forward to being on an updated platform. Chief Financial Officer Lai felt there was opportunity to have better integration with other systems. Chief People Officer Sandra Blanch said that the last upgrade has sped up processing for new hire entries and work has been done to enable employees to enter benefit changes for life events. Assistant City Manager Kiely Nose said some things that have alleviated day-to-day paperwork have been replaced, for example, with vacancy statistics that staff has historically not been able to provide the Committee. Council Member Reckdahl asked if other systems are from a third party and if there will be compatibility issues when switching to S/4 Hana. Council Member Reckdahl wondered if the 2018 decision was because SAP was the best provider or because of big switching costs. Council Member Reckdahl queried why go with Carahsoft instead of directly with SAP. Information Technology Director Numoto said platforms interface with SAP and third-party systems pull data from or push data into SAP. Information Technology Director Numoto did not foresee compatibility issues. The 2018 decision was because SAP was one of the only providers SUMMARY MINUTES Page 10 of 10 Finance Committee Meeting Summary Minutes: 09/16/25 that could service all 3 business units fully. SAP does not sell directly to customers. Carahsoft is a purchasing vehicle that all agencies use to procure services. Public Comment: None. MOTION: Council Member Reckdahl moved, seconded by Council Member Lythcott-Haims to recommend to the City Council: a. Approve and authorize the City Manager or their designee to execute PO C26195416 with Carahsoft, utilizing a General Services Agreement (GSA) Blanket Purchase Agreement Contract Number 47QSWA18D008F, to procure SAP S/4HANA suite of products and corresponding software and hosting services for a 5-year term (December 31, 2025 to December 31, 2030), with a total not-to-exceed amount of $6,640,429 (Attachment A). b. Amend the Fiscal Year 2026 Budget Appropriation for the Technology Fund by [requires a two-thirds approval by the Council]: a. Increasing the expenditure appropriation for the Enterprise Resource Planning Upgrade 2026 Project (TE-19000) in the Information Technology Department by $1,660,000 b. Decreasing the Technology Reserve by $1,660,000 MOTION PASSED: 3-0 Future Meetings and Agendas Chief Financial Officer Lauren Lai said the October 7 meeting is canceled. The October 21 meeting will look at reviewing the City’s insurance and risk management program and investment advisory services and programs. Adjournment: The meeting was adjourned at 7:37 P.M.