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HomeMy WebLinkAboutStaff Report 9846 City of Palo Alto (ID # 9846) Finance Committee Staff Report Report Type: Action Items Meeting Date: 12/4/2018 City of Palo Alto Page 1 Summary Title: Approval of FY 2018 Comprehensive Annual Financial Report (CAFR) & Budget Amendments Title: Discussion and Recommendation to Approve the FY 2018 Comprehensive Annual Financial Report (CAFR) and Approve Budget Amendments in Various Funds From: City Manager Lead Department: Administrative Services Recommended Motion Staff recommends that Council consider the following motion: Recommendation Staff recommends that the Finance Committee forward to the City Council for its approval: 1. Amendments to the Fiscal Year (FY) 2018 Budget Appropriation for various funds as identified in Attachment B - Exhibit 1 and various capital projects as identified in Attachment B - Exhibit 2; and 2. The City’s FY 2018 Comprehensive Annual Financial Report (CAFR) (Attachment C) Financial Highlights for FY 2018 The General Fund ended FY 2018 with a surplus of $11.5 million when compared to the assumptions used in the development of the FY 2019 Adopted Operating Budget. The surplus was largely a result of higher than estimated expense savings primarily in the Police Department, Development Services Department, and non-departmental activities such as contingent accounts. Revenue receipts beyond budgeted estimates in documentary transfer taxes ($2.3 million), Charges for services ($1.7 million), and Sales Taxes ($883,000) also contributed to the $11.5 million surplus. This surplus is recommended to be utilized for the following purposes: • use of reserve as approved by the City Council in the FY 2019 Adopted Budget ($206,000, net of the $4 million); • FY 2019 Budget Amendments approved by the City Council ($797,000); • Recommended reserve of revenues because of the fees received from Development City of Palo Alto Page 2 Services Fees and the Edgewood Plaza development ($4.0 million); and • Recommended appropriation of expenses for the settlement of fire services agreement ($5.5 million). After adjusting for amounts summarized above, the ending BSR balance of $42.3 million is 20.1 percent of FY 2019 General Fund budgeted expenditures and operating t ransfers ($3.3 million over the 18.5 percent target set by the City Council). Enterprise Funds, except for Electric, ended the year in surplus positions. The Airport and Wastewater Treatment Funds financial condition improved notably. The Airport Fund ended with a surplus of $10.1 million due to the increase in operating revenues and federal grant reimbursements for the Airport Capital Improvement Projects. The Wastewater Treatment Fund ended with a surplus of $4.8 million because of an increase in partner billing due to higher sewage treatment, operating and capital costs. Internal Service Funds ended the fiscal year with $49.3 million fund balance. All funds showed positive balances except the Printing and Mailing which reported a $0.4 million negative balance due to the pension liability per GASB 68 and OPEB liability per GASB 75. Background The City’s fiscal year ends on June 30, at which time its financial records are closed for the year and financial reports are prepared. The reports, along with the City’s financial data, are audited by Macias Gini & O’Connell LLP (MGO), Certified Public Accountants, a firm hired by the City Auditor. MGO issues an audit opinion on the financial position of the City’s activities and, together with the City’s financial statements and other information; this comprises the City’s Comprehensive Annual Financial Report (CAFR). The attachments to this Staff Report provide the necessary documents for closing the FY 201 8 Budget. In addition, they provide detailed information on the City’s financial activities for FY 2018 and highlight key fiscal issues affecting the City of Palo Alto. The Management’s Discussion and Analysis (MD&A) section of the CAFR (Attachment B of the CAFR) also provides a discussion and analysis of the City’s current fiscal health and includes financial statements and analysis that is compared to the prior year, along with capital asset and debt administration data. City of Palo Alto Page 3 Discussion Economic Environment: National, state, regional and local economic indicators point toward continuously improving economic growth. Economically sensitive revenue sources such as transient occupancy tax and documentary transfer tax remain strong, while sales tax revenue which had previously levelled off showed signs of growth in FY 2018. The robust local economy and job growth are also driving increases in other revenues, such as development fees and tax growth. While these results are welcome, continued rising benefit and other operating costs diminish this more positive outlook over the next ten or so years. As a service driven organization, salaries and benefits are a significant component of annual expenses outside of commodity purchases. The City continues to proactively take steps to mitigate increased costs by increasing employee contributions to the CalPERS retirement plan and capping the City’s share of healthcare premiums. Implementation of a second-tier retirement plan in 2011 and adoption of the state -mandated third tier pension benefit plan in 2013 also helps mitigate future pension cost increases. The City continues to balance the need to be a competitive employer of choice while implementing cost containment strategies. Through negotiations and employment agreements, employees pick up a portion of the employer share of pension contributions, an important cost containment strategy. Miscellaneous employees in the General Fund pick up 1.0 percent as of July 1, 2018 and Public Safety employees each picked up 3.0 percent during FY 2018. New contracts for these groups contemplate further cost containment measures such as increasing this share of cost sharing between the employer and employees. Despite these measures, pension and healthcare costs continue to dominate the conversation about long-term future costs. The most recent actuarial valuations show unfunded liabilities for pension and healthcare of $568 million. Council has approved funding a Section 115 Trust that is separate from CalPERS and acts as a mitigation reserve if the City were unable to meet its annual required contribution due to budget constraints each year. Through Fiscal Year 2018, total contributions of $7.6 million have been invested, $4.6 million from the General Fund. In 2014, Council approved a $125.8 million Council Infrastructure Plan (IP), which includes projects such as a new Public Safety Building, replacement of two Fire Stations, a Bike and Pedestrian plan, and two parking garages. The Plan continues to be updated for scope increases and cost escalations, resulting in an estimated gap in funding of $75 million. These projects will be funded partially by debt to be repaid with an increase in the transient occupancy tax (TOT) rate which went into effect in January 2015, TOT from newly opened hotels, and from other sources such as impact fees and Stanford University Medical Center development agreement monies. Staff and Council continue to work on strategies to close the remaining funding gap. Because of sound fiscal management and reserve policies, General Fund surpluses totaling $36.9 million were transferred to the Infrastructure Reserve over the past six years. No additional transfer of excess funds from the BSR are recommended at this time, however, should funds become available further contributions may be brought forward. City of Palo Alto Page 4 A detailed discussion of financial results for FY 2018 is included in the CAFR MD&A. In addition, staff will continue to discuss the financial outlook and potential strategies to employ during the FY 2020 budget development to address the management of resources. Results by Fund: General Fund Reserves At the end of the current fiscal year, fund balance of the General Fund was $68.3 million, an increase of $5.2 million from the prior year. The $68.3 million fund balance is comprised of several reserves: the Budget Stabilization Reserve (BSR), encumbrances and reappropriations, notes and loans, inventory, prepaid items, and other general government special purposes reserves. As described in the BSR reserve (city’s general reserve) policy approved by Council, the reserve is to remain between 15 and 20 percent of the General Fund operating budget, with a target goal of 18.5 percent. Any reserve balance in excess of 18.5 percent of expenditures and transfers may be transferred to the Infrastructure Reserve (IR) in the Capital Projects Fund at the discretion of the City Manager. The Fiscal Year 2019 Budget projected to have a $41.3 million Budget Stabilization Reserve Balance as of June 30, 2018, compared to the actual balance of $52.8 million (this is a component of the General Fund fund balance noted above). This is $11.5 million above estimates, however, of this $11.5 million, over 90 percent of it is already approved to be used or is recommended to be allocated (details are in the table below) leaving an excess of only $1.0 million from budgeted estimates. This is less than 0.5 percent of the annual expense budget. The chart below outlines the previously approved uses of this surplus, as well as recommended uses. Once all these adjustments are taken into consideration, the remaining BSR would be at $42.3 million; approximately 20.1 percent of the FY 2019 Adopted expenses of $210.7 million. This level is approximately $3.3 million above the target level of 18.5 percent. City of Palo Alto Page 5 Year-End Budget Stabilization Reserve (BSR) Summary (000’s) General Fund BSR Balance, June 30 2018 $52,826 Uses of the FY 2018 Surplus FY 2019 Approved Uses of BSR Balance FY 2019 City Manager Reports Budget Amendments - Approved (as of October 31, 2018) (797) Reserve: Edgewood Plaza development fees (701) FY 2019 Adopted Budget (excludes the Finance Committee $4 million referral) (206) Recommended Budget Amendments Reserve: Development Services Fees (3,300) Fire services settlement payment (Stanford) (5,500) Current Projected FY 2019 BSR Level (June 30, 2019) $42,322 As part of the FY 2019 Budget Adoption, a $4.0 million reduction in budgeted expenses was approved by the City Council as recommended by the Finance Committee. The specific impacts of the reduction are to be identified and articulated during the remainder of the 2018 calendar year to the Finance Committee, scheduled for discussion on November 28, 2018. At the time of the adoption of the budget, this reduction in expenses was accounted for in the BSR. Over the past six fiscal years, a total of $36.9 million in surplus funds have been transferred to the IR, as shown in the following table. Due to competing priorities, it is recommended that surplus BSR not be transferred to the IR and it is recomm ended that the BSR remain at levels similar to those approved in the FY 2019 Adopted Budget, or approximately 20 percent of the FY 2019 budgeted expenses. 2012 $ 7,600 2013 8,900 2014 4,000 2015 5,087 2016 7,000 2017 ___4,327 Total Transfers $36,914 City of Palo Alto Page 6 General Fund Revenues General Fund revenues for FY 2018 were $180.0 million, which is $15.6 million or 9.5 percent higher than the prior year. Year over year changes in each of the major tax revenue categories are summarized in the following table. Category FY 2018 FY 2017 % Change Increase (Decrease) Property tax $ 42,839 $ 39,381 8.8% Sales tax 31,091 29,923 3.9% Utility user tax 15,414 14,240 8.2% Transient occupancy tax 24,937 23,477 6.2% Documentary transfer tax 9,229 7,491 23.2% Property tax revenue increased due to higher assessed values because of continued robust commercial and residential real estate markets. Fiscal years 2018 and 2017 included unusual receipts of $1.4 million and $0.7 million, respectively, for excess Educational Revenue Augmentation Fund (ERAF) distributions from the County of Santa Clara. ERAF is the fund used to collect and disburse property taxes that are shifted to/from cities, the county, and special districts prior to their reallocation to K-14 school agencies. When the state shifts more local property tax than required to support schools these funds are returned and known as excess ERAF. Sales tax revenue has remained flat in recent years however, in FY 2018 a healthy growth of 3.9 percent was noted. This growth is primarily attributable to growth in electronic equipment, restaurants, furniture/appliance, and auto leases. There is continued erosion of brick and mortar receipts caused by steady growth in on-line retail sales. However, increased receipts from the county pool, which include a growing number of on-line retailers collecting sales and use tax, has been offsetting these losses. Utility user tax (UUT) revenue increased 1.2 million or 8.2 percent from the prior year. The increase is driven by an increase is driven equally by electric, gas, water, and the telephone user services. Transient occupancy tax (TOT) revenues were $1.5 million or 6.2 percent higher than the prior year. The average occupancy remained steady at 79.0 percent while room rate increased by 4.6 percent. There was a 2 percent rate increase from 12 percent to 14 percent that became effective January 1, 2015, and there were openings of several new hotels. The entire 14 percent TOT rate from new hotels, plus the 2 percent inc rease from existing hotels, has been allocated to the Infrastructure Plan pursuant to prior City Council direction. Following is a comparative breakdown of the allocation of transient occupancy tax receipts: City of Palo Alto Page 7 FY 2018 FY 2017 % Change Increase (Decrease) General Fund: $ 16,697 $ 15,734 3.6% Infrastructure Plan: New hotels – 12% 4,678 4,389 10.2% All hotels – 2% 3,562 3,354 4.9% Subtotal Infrastructure 8,240 7,743 7.9% Total TOT Receipts $ 24,937 $ 23,477 6.2% Documentary Transfer Tax (DTT) revenues increased $1.7 million, or 23.2 percent, from the prior year resulting from a strong real estate sales activity. Other revenue increases of $6.7 million from prior year levels are as follows: • Charges for Services and Permits and Licenses increased $4.7 million due primarily to the higher than anticipated receipts for Development Center activities as well as the re - opening of the Golf Course (spring 2018). • Actual investment earnings on the City’s portfolio increased by $240,000 or 18.0 percent, however, based on the Government Accounting Standard Board (GASB) rules, the net interest earnings reported in the financial statement is a loss of $0.8 million because of accounting for unrealized losses of $2.4 million on the City’s investments. Per GASB rules, public agencies are required to report the change in the valuation of City’s portfolio at June 30. Due to the rising interest rates, the portfolio’s fixed income securities have a “paper” loss as of June 30. As the City has a long-term policy of holding its investments until their maturity dates, there will likely be no actual losses incurred on these investments. Following is a chart which depicts the relative contribution of each tax category over the past seven years (2012 through 2018), as well as the current budgeted year (2019). City of Palo Alto Page 8 General Fund Tax Revenues Actual Fiscal Years 2012 – 2018 Budget Fiscal Year 2019 FY 2019 Budget FY 2018 Actual FY 2017 Actual FY 2016 Actual FY 2015 Actual FY 2014 Actual FY 2013 Actual FY 2012 Actual FY 2019 Budget FY 2018 Actual FY 2017 Actual FY 2016 Actual FY 2015 Actual FY 2014 Actual FY 2013 Actual FY 2012 Actual Property Tax 45,332 42,839 39,381 36,607 34,117 30,587 28,742 26,494 Sales Tax 31,246 31,091 29,923 30,018 29,675 29,424 25,606 22,132 Utility User Tax 16,092 15,414 14,240 12,469 10,861 11,008 10,861 10,834 Trans Occ Tax 25,049 24,937 23,477 22,366 16,699 12,255 10,794 9,664 Doc Transfer Tax 7,434 9,229 7,491 6,266 10,384 7,811 6,810 4,821 General Fund Expenditures General Fund expenditures for FY 2018, including encumbrances and reappropriations, totaled $184.9 million; an increase of 4.9 percent from the prior year. The Original Budget of $180.5 million was increased to the Final Adjusted Budget amount of $190.7 million, primarily due to the expenditure of prior year encumbered and reappropriated balances; increases for several departments throughout the year also occurred based on City Council direction per recommendations contained in City Manager Reports. Following is a chart which compares actual departmental costs, including encumbrances and reappropriations, over the past seven years and budgeted costs for FY 2019. City of Palo Alto Page 9 General Fund Departments Actual Expenditures Fiscal Years 2012– 2018 (including encumbrances) Budgeted Expenditures Fiscal Year 2019 ($ in thousands) 0 20 40 60 80 100 120 140 160 180 200 FY 2019 Budget FY 2018 Actual FY 2017 Actual FY 2016 Actual FY 2015 Actual FY 2014 Actual FY 2013 Actual FY 2012 Actual FY 2019 Budget FY 2018 Actual FY 2017 Actual FY 2016 Actual FY 2015 Actual FY 2014 Actual FY 2013 Actual FY 2012 Actual Public Safety 76,765 75,975 72,815 65,005 62,459 63,403 61,222 63,879 Community Services 30,096 28,395 26,573 25,262 23,902 23,402 22,279 21,399 Admin Depts 23,408 22,127 21,406 22,059 19,771 19,784 18,544 18,693 Public Works 19,004 18,908 17,475 15,084 14,210 14,138 13,987 13,789 Planning & Comm Env 11,009 10,446 10,732 10,912 9,026 14,637 13,112 11,186 Development Svcs 13,098 12,560 11,668 10,872 11,335 0 0 0 Library 9,900 9,357 9,266 8,217 8,144 8,072 7,555 7,714 Capital Projects Fund The Capital Projects Fund ended the year with a fund balance of $77.9 million, which are comprised of the following: Fund Balance Component Amount ($ in millions) Restricted for Library projects $ 638 Reserved for Roth Building rehabilitation 4,020 Reserved for TDR qualified expenditures 667 Reserved for Cubberley expenditures 4,991 Assigned for all other Capital projects 67,594 Total Capital Projects Fund Balance $ 77,910 City of Palo Alto Page 10 Restricted for Library projects of $0.6 million is the portion of fund balance dedicated to remaining Library expenditures which, if considered bondable expenses, will be paid for with cash from bond proceeds. Non-bondable expenditures such as salaries and benefits are funded from the Infrastructure Reserve, as established at the time of the bond issuance. Staff is reviewing the need for this reserve due to the completion of library projects and will make adjustments in the future as necessary. Assigned for all other Capital projects of $67.6 million represents the amount of unspent funds associated with Adopted Capital projects other than Library projects and other noted items. Outside funding sources such as grants, donations and future debt issues are not factored i nto this component of the fund balance until they are actually received. Enterprise Funds On June 30, 2018, the City’s Enterprise Funds reported a total net position of $688.1 million; a decrease of $11.2 million from the prior year. The change in net position for each of the Enterprise Funds is detailed in the following table. Enterprise Funds Change in Net Position for the Year Ended June 30 (in Millions) Increase/ Fund Name 2018 2017 (Decrease) Water 5.1$ 6.5$ (1.4)$ Electric (1.2)(1.2)(0.0) Fiber Optics 1.7 2.2 (0.5) Gas 1.5 2.4 (0.9) Wastewater Collection 1.0 1.5 (0.5) Wastewater Treatment 4.8 (0.1)4.9 Refuse 6.1 3.3 2.8 Storm Drainage 1.8 2.5 (0.7) Airport 10.1 2.4 7.7 Total Change in Net Position 30.9$ 19.5$ 11.4$ The total Change in Net Assets of $30.9 million is an increase of $11.4 million from the prior year, primarily due to improvements in Wastewater Treatment, Refuse, and Airport Funds. The Wastewater Treatment Fund experienced higher revenues because of higher partner billing due to higher sewage treatment operating and capital costs. The Refuse Fund reported a positive change from prior year based on the 5 percent rate increase in the current year. The Airport Fund reported a positive change because of higher program revenue and increase in federal grant reimbursements. City of Palo Alto Page 11 Effective July 1, 2015, following a Council approved resolution, Reserves Management Practices for the Electric, Gas, Wastewater Collection and Water Utilities were updated. Restructuring of the reserve balances was designed to increase transparency, to make contingency reserves easier to manage from year to year, and to eliminate reserves that are no longer necessary. Guidelines for managing the reserves are contained in the Reserves Management Practices, including actions to be taken when reserve balances are not within the guidelines. Enterprise Fund Rate Stabilization, Operations and other reserve balances are shown in detail in Note 10 of the CAFR. All Enterprise Funds maintained a positive unrestricted reserve balance as of June 30, 2018, except for Wastewater Treatment, which is in a deficit position of $15.0 million due to pension related items, and Airport Fund, which is in a deficit position of $3.3 million due to operating losses that are currently being funded by advances from the General Fund. Resource Impact Recommended actions in the report will align the FY 2018 appropriations with final financial activities. The approrpiation of funds in FY 2019 as recommended in the BSR table would be brought forward as part of the FY 2019 Mid -Year Budget Report. Environmental Review This is not a project for purposes of the California Environmental Quality Act. Attachments: • Attachment A: FY 2018 General Fund • Attachment B: Recommended FY 2018 Year End Budget Adjustments • Attachment C: City of Palo Alto FY 2018 - CAFR EXHIBIT 2 GENERAL FUND SUMMARY ($000s) FY 2018 FY 2018 FY 2018 FY 2018 FY 2018 FY 2018 FY 2018 Adopted Adjusted CAFR Basis Allocated Encum /Actual Actual to Budget Budget Rev/Exp Charges Reappropriation Rev/Exp Adj Budget Variance Revenues Sales Tax 31,458 30,208 31,091 n/a 31,091 883 Property Tax 41,927 42,327 42,839 n/a 42,839 512 Transient Occupancy Tax 25,143 24,398 24,937 n/a 24,937 539 Documentary Transfer Tax 6,930 6,930 9,229 n/a 9,229 2,299 Utility User Tax 13,867 15,367 15,414 n/a 15,414 47 Other Taxes, Fines and penalties 2,060 2,060 2,141 n/a 2,141 81 Charges for Services 26,902 25,125 26,824 n/a 26,824 1,699 Permits and Licenses 8,432 8,432 8,560 n/a 8,560 128 Investment Earnings 1,050 1,050 1,535 n/a 1,535 486 Rental Income 15,502 15,485 15,896 n/a 15,896 411 From Other Agencies 1,355 3,074 3,205 n/a 3,205 131 Charges to Other Funds 11,076 11,076 - 11,476 n/a 11,476 400 Other Revenues 502 824 776 - n/a 776 (48) Total Revenues 186,204 186,356 182,448 11,476 n/a 193,925 7,568 Add: Operating Transfers In 20,791 20,310 20,310 n/a 20,310 - Prior Year Encum / Reappropriation - 8,097 8,097 n/a 8,097 - Total Source of Funds 206,995 214,764 210,856 11,476 n/a 222,332 7,568 Expenditures 3,356 3,825 2,244 1,063 317 3,624 201 City Auditor 1,301 1,427 870 363 43 1,276 151 City Clerk 1,374 1,372 819 352 35 1,206 165 City Council 500 524 337 139 13 489 35 City Manager 3,681 4,227 2,509 1,205 317 4,031 195 Administrative Services 7,983 8,038 5,347 2,333 169 7,849 189 Community Services 27,560 28,756 27,122 56 1,217 28,395 362 Fire 31,774 34,077 33,522 183 347 34,052 25 Police 43,372 43,425 40,326 576 1,021 41,923 1,502 Human Resources 3,757 4,044 2,369 1,068 215 3,652 392 Library 9,447 9,767 9,120 237 9,357 410 Planning and Community Environment 8,452 10,708 8,312 66 2,068 10,446 262 Development Services 12,540 13,187 11,749 274 537 12,560 627 Public Works 17,005 19,071 14,569 3,798 541 18,908 163 Non-Departmental 2,510 2,218 667 745 1,412 807 Cubberley Lease 5,924 5,924 5,738 5,739 186 Total Expenditures 180,536 190,590 165,620 11,476 7,821 184,918 5,672 Add: Operating Trans Out 4,908 4,934 4,934 - 4,934 - Transfer to Infrastructure 24,981 24,801 24,801 - 24,801 - Total Use of Funds 210,425 220,325 195,355 11,476 7,821 214,653 5,672 Net Surplus/(Deficit)(3,430) (5,562) 15,501 0 7,821 7,679 13,240 CAFR Reconciliation:Unrealized gain/loss on investments (2,364) Changes in advances to other funds 200 Current year encumbrance / reappropriations 7,821 Prior Year encumbrances / reappropriations (8,097) CAFR Net Income 5,239 City Attorney 1 Department Adjustment Adjustment GENERAL FUND (102) Administrative Services Management Development & Training (reallocation to Non-Departmental) This action reallocates departmental management development savings to Non- Departmental to reappropriate funds for city-wide training needs in FY 2019. -$ (15,000)$ Administrative Services Departmental Expense Savings This action reallocates departmental vacancy savings within the General Fund in order to offset departments with higher than anticipated expenses in FY 2018. -$ (200,000)$ City Attorney's Office Management Development & Training (reallocation to Non-Departmental) This action reallocates departmental management development savings to Non- Departmental to reappropriate funds for city-wide training needs in FY 2019. -$ (10,000)$ City Attorney's Office Departmental Expense Savings This action reallocates departmental vacancy savings within the General Fund in order to offset departments with higher than anticipated expenses in FY 2018. -$ (200,000)$ City Clerk's Office Management Development & Training (reallocation to Non-Departmental) This action reallocates departmental management development savings to Non- Departmental to reappropriate funds for city-wide training needs in FY 2019. -$ (1,000)$ City Clerk's Office Departmental Expense Savings This action reallocates departmental vacancy savings within the General Fund in order to offset departments with higher than anticipated expenses in FY 2018. -$ (75,000)$ City Manager's Office Management Development & Training (reallocation to Non-Departmental) This action reallocates departmental management development savings to Non- Departmental to reappropriate funds for city-wide training needs in FY 2019. -$ (8,000)$ City Manager's Office Departmental Expense Savings This action reallocates departmental vacancy savings within the General Fund in order to offset departments with higher than anticipated expenses in FY 2018. -$ (100,000)$ Community Services Management Development & Training (reallocation to Non-Departmental) This action reallocates departmental management development savings to Non- Departmental to reappropriate funds for city-wide training needs in FY 2019. -$ (11,000)$ Community Services Departmental Expense Savings This action reallocates departmental vacancy savings within the General Fund in order to offset departments with higher than anticipated expenses in FY 2018. -$ (200,000)$ Development Services Management Development & Training (reallocation to Non-Departmental) This action reallocates departmental management development savings to Non- Departmental to reappropriate funds for city-wide training needs in FY 2019. -$ (7,000)$ Fire Salaries & Benefits This action reallocates funding as a result of higher than anticipated salary expenses in FY 2018. These higher anticipated expenditures are due to a number of variables including use of overtime as a result of significant vacancies throughout the year. This total adjustment includes strike team reimbursements received from the State in the amount of $489,062. -$ 1,450,000$ Human Management Development & Training (reallocation to Non-Departmental) Resources This action reallocates departmental management development savings to Non- Departmental to reappropriate funds for city-wide training needs in FY 2019. -$ (5,000)$ CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2018 BUDGET Revenues Expenses Attachment B Exhibit 1 1 Department Adjustment Adjustment GENERAL FUND (102) CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2018 BUDGET Revenues Expenses ATTACHMENT B, EXHIBIT 1 Library Management Development & Training (reallocation to Non-Departmental) This action reallocates departmental management development savings to Non- Departmental to reappropriate funds for city-wide training needs in FY 2019. -$ (4,000)$ Non- Departmental Management Development & Training (reallocation from various departments) This action reallocates departmental management savings to Non-Departmental to reappropriate funds for city-wide training needs in FY 2019. -$ 85,000$ Non- Departmental Transient Occupancy Tax/Transfer to Capital Improvement Fund This action increases the transfer to the Capital Improvement Fund as it relates to Transient Occupancy Tax (TOT) revenues earmarked for city-wide infrastructure improvements due to higher than anticipated TOT collections. 255,184$ 255,184$ Planning & Community Environment Management Development & Training (reallocation to Non-Departmental) This action reallocates departmental management development savings to Non- Departmental to reappropriate funds for city-wide training needs in FY 2019. -$ (3,000)$ Planning & Community Environment -$ 27,000$ Planning & Community Environment Transfer to Vehicle Maintenance Fund This action increases the transfer from the General Fund to the Vehicle Maintenance Fund for the purchase of a vehicle out of cycle. This expenditure i s offset by other non- salary savings within the Department. Departmental Expense Savings This action reallocates departmental vacancy savings and non-salary savings within the General Fund in order to offset departments with hi gher than anticipated expenses in FY 2018. -$ (227,000)$ Police Management Development & Training (reallocation to Non-Departmental) This action reallocates departmental management development savings to Non- Departmental to reappropriate funds for city-wide training needs in FY 2019. -$ (13,000)$ Police Departmental Expense Savings This action reallocates departmental vacancy savings within the General Fund in order to offset departments with higher than anticipated expenses in FY 2018. -$ (475,000)$ Public Works Management Development & Training (reallocation to Non-Departmental) This action reallocates departmental management development savings to Non- Departmental to reappropriate funds for city-wide training needs in FY 2019. -$ (8,000)$ GENERAL FUND (102) SUBTOTAL 255,184$ 255,184$ 2 Department Adjustment Adjustment CAPITAL IMPROVEMENT FUNDS GENERAL FUND CAPITAL IMPROVEMENT FUND (471) Capital Capital Improvement Project Adjustments This action reflects the combined impact from adjustments to projects as outlined in Attachment A, Exhibit 2. -$ 133,333$ Capital Transfer from General Fund This action increases the transfer from the General Fund related to TOT revenue Council earmarked to use for city-wide infrastructure improvements due to actual revenue collected being higher than budgeted in FY 2018. 255,184$ -$ Capital Transfer from Gas Tax Fund/ Street Maintenance (PE-86070) This action increases the transfer from the Gas Tax Fund. In October, 2017 the City Council approved a budget amendment in the Capital Fund to recognize and appropriate SB1 funding directly to the Capital Improvement Project PE-86070, Street Maintenance (CMR 8423). A technical correction is recommended to recognize the SB1 revenue estimate in the Gas Tax Fund. A corresponding transfer is recommended from the Gas Tax Fund to the Capital Fund to appropriate funding for this project. 402,500$ 17,124$ Capital Revenue from the State of California This action is a technical correction to decrease the SB1 funding that was originally recorded as Revenue from the State of California in the Capital Improvement Fund as part of CMR 8423. A separate action in this document recommends updating the SB1 funding to be recorded in the Gas Tax Fund, with a subsequent transfer to the Capital Improvement Fund to support the Street Maintenance Project (PE-86070). (385,376)$ -$ Fund Balance Adjustment to Fund Balance This action increases the fund balance to offset adjustments recommended in this report. -$ 104,727$ GENERAL FUND CAPITAL IMPROVEMENT FUND (471) SUBTOTAL 255,184$ 255,184$ CUBBERLEY PROPERTY INFRASTRUCTURE FUND (472) Capital Capital Improvement Project Adjustments This action reflects the combined impact from adjustments to projects as outlined in Attachment A, Exhibit 2. -$ 20,710$ Fund Balance Adjustment to Fund Balance This action decreases the fund balance to offset adjustments recommended in this report. -$ (20,710)$ CUBBERLEY PROPERTY INFRASTRUCTURE FUND (472) SUBTOTAL -$ -$ CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2018 BUDGET Revenues Expenses ATTACHMENT B, EXHIBIT 1 3 Department Adjustment Adjustment ENTERPRISE FUNDS GAS FUND (514 & 524) Capital Capital Improvement Project Adjustments This action reflects the combined impact from adjustments to projects as outlined in Attachment A, Exhibit 2. -$ 132,365$ Utilities Adjustment to Fund Balance This action decreases the fund balance to offset adjustments recommended in this report. -$ (132,365)$ GAS FUND (514 & 524) SUBTOTAL -$ -$ WASTEWATER COLLECTION FUND (527) Capital Capital Improvement Project Adjustments This action reflects the combined impact from adjustments to projects as outlined in Attachment A, Exhibit 2. -$ 64,713$ Fund Balance Adjustment to Fund Balance This action decreases the fund balance to offset adjustments recommended in this report. (64,713)$ WASTEWATER COLLECTION FUND (527) SUBTOTAL -$ -$ WATER FUND (522) Capital Capital Improvement Project Adjustments This action reflects the combined impact from adjustments to projects as outlined in Attachment A, Exhibit 2. -$ 284,240$ Fund Balance Adjustment to Fund Balance This action decreases the fund balance to offset adjustments recommended in this report. -$ (284,240)$ WATER FUND (522) SUBTOTAL -$ -$ CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2018 BUDGET Revenues Expenses ATTACHMENT B, EXHIBIT 1 -$ 4 Department Adjustment Adjustment INTERNAL SERVICE FUNDS PRINT AND MAILING FUND (683) Administrative Services Revenue This action increases the appropriation for revenue in the Print and Mailing Fund to align with year end revenues collected. 305,000$ -$ Administrative Services Non Salary Expense (Miscellaneous) This action increases the appropriation for non salary expenses in the Print and Mailing Fund to align with year end expenses. -$ 205,000$ Fund Balance Adjustment to Fund Balance This action increases the fund balance to offset adjustments recommended in this report. -$ 100,000$ PRINT AND MAILING FUND (683) SUBTOTAL 305,000$ 305,000$ INFORMATION TECHNOLOGY FUND (682) Capital Capital Improvement Project Adjustments This action reflects the combined impact from adjustments to projects as outlined in Attachment A, Exhibit 2. -$ 4,897$ Fund Balance Adjustment to Fund Balance This action decreases the fund balance to offset adjustments recommended in this report. -$ (4,897)$ INFORMATION TECHNOLOGY FUND (682) SUBTOTAL -$ -$ VEHICLE REPLACEMENT & MAINTENANCE FUND (681) General Fund Transfer from General Fund This action increases the transfer from the General Fund to the Vehicle Maintenance Fund for the purchase of a vehicle out of cycle. This expenditure is offset by other non-salary savings within the Department. 27,000$ -$ Fund Balance Adjustment to Fund Balance This action increases the fund balance to offset adjustments recommended in this report. -$ 27,000$ VEHICLE REPLACEMENT & MAINTENANCE FUND (681) SUBTOTAL 27,000$ 27,000$ CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2018 BUDGET Revenues Expenses ATTACHMENT B, EXHIBIT 1 5 Department Adjustment Adjustment SPECIAL REVENUE FUNDS PUBLIC ART FUND (207) Community Services Public Art Fee Revenue This action increases the estimate for Art Fees as result of higher than anticipated revenues in FY 2018. 90,000$ -$ Community Services Salaries & Benefits This action increases the salaries and benefits appropriation as result of slightly higher than anticipated expenses in FY 2018. These higher than anticipated expenditures are a result of a change in benefit election that occured during the year. -$ 2,600$ Fund Balance Adjustment to Fund Balance This action increases the fund balance to offset adjustments recommended in this report. -$ 87,400$ PUBLIC ART FUND (207) SUBTOTAL 90,000$ 90,000$ PUBLIC SERVICES DONATION FUND (191) Various Donations Revenue/Non-Salary Expenses This action increases the appropriation for expenses in the Public Services Donation Fund to align with FY 2018 year end expense and encumbered funds. Donations were for activities such as parks and open space activities, art center programs, and animal care services. A corresponding adjustment to revenue reflecting higher than budgeted donations is recommended to offset this increase. 77,000$ 47,000$ Fund Balance Adjustment to Fund Balance This action increases the fund balance to offset adjustments recommended in this report. -$ 30,000$ PUBLIC SERVICES DONATION FUND (191) SUBTOTAL 77,000$ 77,000$ GAS TAX FUND (231) Non- Departmental State of California Revenue: SB1 This action increases the revenue estimate for State of California SB1 allocations. In October, 2017 the City Council approved a budget amendment in the Capital Fund to recognize and appropriate SB1 funding directly to the Capital Improvement Project PE-86070, Street Maintenance (CMR 8423). A technical correction is recommended to recognize the SB1 revenue estimate in the Gas Tax Fund. A corresponding transfer is recommended from the Gas Tax Fund to the Capital Fund to appropriate funding for this project. 402,500$ -$ Non- Departmental Transfer to Capital Fund This action increases the transfer to the Capital Fund. In October, 2017 the City Council approved a budget amendment in the Capital Fund to recognize and appropriate SB1 funding directly to the Capital Improvement Project PE-86070, Street Maintenance (CMR 8423). A technical correction is recommended to recognize the SB1 revenue estimate in the Gas Tax Fund. A corresponding transfer is recommended from the Gas Tax Fund to the Capital Fund to appropriate funding for this project. -$ 402,500$ GAS TAX FUND (231) SUBTOTAL 402,500$ 402,500$ CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2018 BUDGET Revenues Expenses ATTACHMENT B, EXHIBIT 1 6 Department Adjustment Adjustment SPECIAL REVENUE FUNDS CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2018 BUDGET Revenues Expenses ATTACHMENT B, EXHIBIT 1 CALIFORNIA AVENUE PARKING PERMITS FUND (237) Planning & Community Environment Non Salary Expense (Contract Services) This action increases the contract services appropriation as result of higher than anticipated expenses in FY 2018 for the California Avenue parking study and the gathering of parking occupancy data. A corresponding decrease to expense appropriations elsewhere in the fund is recommended to offset this action. -$ 20,000$ Public Works Non Salary Expense (Contract Services) This action reallocates the appropriation for non-salary expenses within the fund to offset slightly higher than anticipated salary and benefits and as a technical adjustment to align budget levels with actual expenses in FY 2018. -$ (20,000)$ CALIFORNIA AVENUE PARKING PERMITS FUND (237) SUBTOTAL -$ -$ LAW ENFORCEMENT SERVICES FUND (248) Police State Revenue: Citizens Options for Public Safety (COPS)/Non Salary Expense $ 68,000 151,000 $ Fund Balance This action increases the appropriation for expenses in the Law Enforcement Services Fund to align with year end expense and encumbered funds. A corresponding adjustment to revenue is recommended for allocations received from the State during the period. The acceptance of the COPS CY 2018 annual expenditure plan was approved by the City Council in October, 2018 (CMR 9682). Adjustment to Fund Balance This action increases the fund balance to offset adjustments recommended in this report. -$ 83,000$ LAW ENFORCEMENT SERVICES FUND (248) SUBTOTAL $ 151,000 151,000 $ 7 Department Adjustment Adjustment DEBT SERVICE & AGENCY TRUST FUNDS CABLE - JPA FUND (779) Administrative Services Cable Franchise Fee Revenue/Inter-Agency Expense This action increases the cable franchise fee revenue collected by the City due to higher than anticipated fee collections in FY 2018. As the City manages this fund, a corresponding increase to inter-agency expenses is also recommended to align the revenue collected with the funding that was distributed to the other Cable Franchise JPA partners. 374,000$ 374,000$ CABLE - JPA FUND (779) SUBTOTAL 374,000$ 374,000$ EYERLY TRUST FUND (774) Administrative Services Investment Income/General Expense (Special Events) This action increases the interest income revenue collected in this fund to align the budget with the actual revenue collected. A corresponding increase to the appropriation for General Expenses within the fund is also recommended to align budget levels with actual expenditures in FY 2018. 3,000$ 3,000$ EYERLY TRUST FUND (774) SUBTOTAL 3,000$ 3,000$ 2002 DOWNTOWN PARKING IMPROVEMENT FUND (360) Administrative Services Bond Proceeds This action recognizes Certificates of Participation (COP) bond funding that was issued as part of the refinancing of debt for the 2002 Downtown parking garage improvements approved by the Council in CMR 9063 on April 16, 2018. 595,000$ -$ Administrative Services Debt Service Payment This action appropriates additional funding to repay the original debt service on the 2002 Downtown parking garage improvement bond in order to refinance the bond debt as approved by the Council in CMR 9063 on April, 16, 2018. -$ 833,000$ Fund Balance Adjustment to Fund Balance This action decreases the fund balance to offset adjustments recommended in this report. -$ (238,000)$ 2002 DOWNTOWN PARKING IMPROVEMENT FUND (360) SUBTOTAL 595,000$ 595,000$ CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2018 BUDGET Revenues Expenses ATTACHMENT B, EXHIBIT 1 8 Project Title Number Revenue Expense Comments Salaries and Benefits Capital Improvement Fund CIP Projects AS-10000 $ (1,913,242) Adjustment to allocate Salaries and Benefits across capital projects based on actual expenditures JMZ Renovation AC-86017 $ (255,757) Costs associated with this project was erroneously charged in a different project, Rinconada Park Improvements (PE-08001). A decrease in this project is offset by an increase in PE-08001. Open Space Trails and Amenities OS-00001 $ 64,702 Adjustment from Salaries and Benefits Capital Improvement Fund CIP Projects (AS-10000) to allocate Salaries and Benefits based on actual expenditures Rinconada Park Improvements PE-08001 $ 255,757 Adjustment to cover costs errorneously charged in this project instead of JMZ Renovation (AC-86017). Highway 101 Pedestrian/Bicycle Overcrossing PE-11011 $ 172,578 Adjustment from Salaries and Benefits Capital Improvement Fund CIP Projects (AS-10000) to allocate Salaries and Benefits based on actual expenditures Rinconada Park Master Plan & Design PE-12003 $ 7,739 Adjustment from Salaries and Benefits Capital Improvement Fund CIP Projects (AS-10000) to allocate Salaries and Benefits based on actual expenditures Parks Master Plan PE-13003 $ 28,501 Adjustment from Salaries and Benefits Capital Improvement Fund CIP Projects (AS-10000) to allocate Salaries and Benefits based on actual expenditures Bowden Park PE-13008 $ 406 Adjustment from Salaries and Benefits Capital Improvement Fund CIP Projects (AS-10000) to allocate Salaries and Benefits based on actual expenditures Bayland Interpretive Center PE-14018 $ 188,229 Adjustment from Salaries and Benefits Capital Improvement Fund CIP Projects (AS-10000) to allocate Salaries and Benefits based on actual expenditures New Public Safety Building PE-15001 $ 119,480 Adjustment from Salaries and Benefits Capital Improvement Fund CIP Projects (AS-10000) to allocate Salaries and Benefits based on actual expenditures Fire Station 3 Replacement PE-15003 $ 135,842 Adjustment from Salaries and Benefits Capital Improvement Fund CIP Projects (AS-10000) to allocate Salaries and Benefits based on actual expenditures New Downtown Parking Garage PE-15007 $ 470,200 Adjustment from Salaries and Benefits Capital Improvement Fund CIP Projects (AS-10000) to allocate Salaries and Benefits based on actual expenditures Michell Park Adobe Creek Bridge Replacement PE-17000 $ 25,847 Adjustment from Salaries and Benefits Capital Improvement Fund CIP Projects (AS-10000) to allocate Salaries and Benefits based on actual expenditures City Hall 3rd Floor Remodel PE-17002 $ 23,927 Adjustment from Salaries and Benefits Capital Improvement Fund CIP Projects (AS-10000) to allocate Salaries and Benefits based on actual expenditures ATTACHMENT B, EXHIBIT 2 CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2018 CAPITAL IMPROVEMENT PROGRAM CAPITAL IMPROVEMENT FUND 9 Project Title Number Revenue Expense Comments ATTACHMENT B, EXHIBIT 2 CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2018 CAPITAL IMPROVEMENT PROGRAM Boulware Park Improvements PE-17005 $ 31,633 Adjustment from Salaries and Benefits Capital Improvement Fund CIP Projects (AS-10000) to allocate Salaries and Benefits based on actual expenditures Baylands Flood Protection PE-17006 $ 133,333 Adjustment is necessary to fund additional costs associated with the Baylands Flood Protection study. CalTrain Corridor Video Monitoring System PE-18001 $ 25,026 Adjustment from Salaries and Benefits Capital Improvement Fund CIP Projects (AS-10000) to allocate Salaries and Benefits based on actual expenditures Emergency Facility Improvements PF-15005 $ 1,130 Adjustment from Salaries and Benefits Capital Improvement Fund CIP Projects (AS-10000) to allocate Salaries and Benefits based on actual expenditures Benches, Signage, Fencing, Walkways, Landscaping PG-06003 $ 14,592 Adjustment from Salaries and Benefits Capital Improvement Fund CIP Projects (AS-10000) to allocate Salaries and Benefits based on actual expenditures Park & Open Space Emergency Repairs PG-09002 $ 10,432 Adjustment from Salaries and Benefits Capital Improvement Fund CIP Projects (AS-10000) to allocate Salaries and Benefits based on actual expenditures Dog Park Installation and Renovation PG-18001 $ 42,261 Adjustment from Salaries and Benefits Capital Improvement Fund CIP Projects (AS-10000) to allocate Salaries and Benefits based on actual expenditures Downtown Parking Wayfinding PL-15004 $ 414 Adjustment from Salaries and Benefits Capital Improvement Fund CIP Projects (AS-10000) to allocate Salaries and Benefits based on actual expenditures Sidewalk Repairs PO-89003 $ 550,303 Adjustment from Salaries and Benefits Capital Improvement Fund CIP Projects (AS-10000) to allocate Salaries and Benefits based on actual expenditures Total $ - $ 133,333 Cubberley Repairs CB-17001 $ 20,710 Increase to project due to higher than anticipated expenditures. Total $ - $ 20,710 Gas Main Replacement - Project 22 GS-12001 $ 132,365 Increase to project due to higher than anticipated expenditures. Total $ - $ 132,365 Library Computer Systems TE-11001 $ 4,897 Increase to project due to higher than anticipated expenditures. Total $ - $ 4,897 Wastewater Collection System Rehabilitation/Augmentation Project 25 WC-14001 $ 64,713 Increase to project due to higher than anticipated expenditures. Total $ - $ 64,713 CUBBERLEY PROPERTY INFRASTRUCTURE FUND GAS FUND TECHNOLOGY FUND WASTEWATER COLLECTION FUND 10 Project Title Number Revenue Expense Comments ATTACHMENT B, EXHIBIT 2 CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2018 CAPITAL IMPROVEMENT PROGRAM Water Main Replacement Project - 26 WS-12001 $ 259,937 Increase to project due to higher than anticipated expenditures. Water System, Customer Connections WS-80013 $ 24,303 Increase to project due to higher than anticipated expenditures. Total $ - $ 284,240 $ - $ 640,258 TOTAL CIP ADJUSTMENTS WATER FUND 11 2017 - 2018 Comprehensive Annual Financial Report C ity of Palo Alto, California Fiscal Ye a r Ended: June 30, 2018 Attachment C Fiscal Year 2018 Comprehensive Annual Financial Report City of Palo Alto, CA Fiscal Year Ended June 30, 2018 City Council Liz Kniss, Mayor Eric Filseth, Vice Mayor Tom DuBois Adrian Fine Karen Holman Lydia Kou Gregory Scharff Greg Tanaka Cory Wolbach James Keene, City Manager Edward K. Shikada, Assistant City Manager/Utilities General Manager Kiely Nose, Interim Director of Administrative Services/Chief Financial Officer Rima Lobo, Finance Manager Prepared by: Administrative Services Department CITY OF PALO ALTO  For the Year Ended June 30, 2018  Table of Contents   Page  INTRODUCTORY SECTION:   Transmittal Letter .................................................................................................................................... i   City Officials ........................................................................................................................................... vii   Organizational Structure……………………………………………………………… … ................................................. viii   Administrative Services Organization .................................................................................................... ix   GFOA Certificate of Achievement for Excellence in Financial Reporting ............................................... x    FINANCIAL SECTION:    Independent Auditor’s Report .............................................................................................................. 1   Management’s Discussion and Analysis     (Required Supplementary Information – Unaudited) ...................................................................... 5    Basic Financial Statements   Government‐wide Financial Statements:    Statement of Net Position ....................................................................................................... 29    Statement of Activities ............................................................................................................ 31    Governmental Fund Financial Statements:    Balance Sheet .......................................................................................................................... 33  Reconciliation of the Balance Sheet of Governmental Funds to         the Statement of Net Position ‐ Governmental Activities ................................................. 34    Statement of Revenues, Expenditures and Changes in Fund Balances .................................. 35    Reconciliation of the Statement of Revenues, Expenditures and Changes    in Fund Balances of Governmental Funds to the Statement of Activities –           Governmental Activities ................................................................................................... 36    Statement of Revenues, Expenditures and Changes in Fund Balance –     Budget and Actual – General Fund ................................................................................... 37   Proprietary Fund Financial Statements:    Statement of Net Position ....................................................................................................... 38    Statement of Revenues, Expenses and Changes in Fund Net Position ................................... 40    Statement of Cash Flows ......................................................................................................... 42    Fiduciary Fund Financial Statement:    Statement of Assets and Liabilities ......................................................................................... 44    Index to the Notes to the Basic Financial Statements ................................................................. 45    Notes to the Basic Financial Statements ...................................................................................... 47    Required Supplementary Information:   Schedule of Changes in Net Pension Liability and related Ratios – Miscellaneous Plan ............. 109    Schedule of Pension Contributions – Miscellaneous Plan ........................................................... 110      CITY OF PALO ALTO  For the Year Ended June 30, 2018  Table of Contents (Continued)   Page  Required Supplementary Information:    Schedule of Changes in Net Pension Liability and Related Ratios – Safety Plan ......................... 111    Schedule of Pension Contributions – Safety Plan ........................................................................ 112    Schedule of Changes in Net OPEB Liability and Related Ratios ................................................... 113    Schedule of Employer OPEB Contributions ................................................................................. 114    Supplementary Information:    Non‐Major Governmental Funds:    Combining Balance Sheet ...................................................................................................... 115    Combining Statement of Revenues, Expenditures and     Changes in Fund Balances ............................................................................................... 117    Non‐Major Special Revenue Funds:    Combining Balance Sheet ...................................................................................................... 120    Combining Statement of Revenues, Expenditures and     Changes in Fund Balances ............................................................................................... 122    Combining Schedule of Revenues, Expenditures and     Changes in Fund Balances – Budget and Actual ............................................................. 124    Non‐Major Debt Service Funds:    Combining Balance Sheet ...................................................................................................... 130    Combining Statement of Revenues, Expenditures and     Changes in Fund Balances ............................................................................................... 131    Combining Schedule of Revenues, Expenditures and     Changes in Fund Balances – Budget and Actual ............................................................. 132    Non‐Major Permanent Fund:    Schedule of Revenues, Expenditures and     Changes in Fund Balance – Budget and Actual ............................................................... 134    Internal Service Funds:    Combining Statement of Fund Net Position .......................................................................... 136    Combining Statement of Revenues, Expenses and     Changes in Fund Net Position ......................................................................................... 137    Combining Statement of Cash Flows ..................................................................................... 138    Fiduciary Funds:    Statement of Changes in Assets and Liabilities – All Agency Funds ...................................... 140      CITY OF PALO ALTO  For the Year Ended June 30, 2018  Table of Contents (Continued)   Page  STATISTICAL SECTION:    Financial Trends:    Net Position by Component ......................................................................................................... 143    Changes in Net Position ............................................................................................................... 144    Fund Balances of Governmental Funds ....................................................................................... 146    Changes in Fund Balances of Governmental Funds ..................................................................... 148  Revenue Capacity:    Electric Operating Revenue by Source ......................................................................................... 149    Supplemental Disclosure for Water Utilities ............................................................................... 150    Supplemental Disclosure for Gas Utilities .................................................................................... 151    Assessed Value of Taxable Property ............................................................................................ 152    Property Tax Rates, All Overlapping Governments ..................................................................... 153    Property Tax Levies and Collections ............................................................................................ 154    Principal Property Taxpayers ....................................................................................................... 155    Assessed Valuation and Parcels by Land Use .............................................................................. 156    Per Parcel Assessed Valuation of Single Family Residential ........................................................ 157    Debt Capacity:    Ratio of Outstanding Debt by Type .............................................................................................. 158    Computation of Direct and Overlapping Debt ............................................................................. 159    Computation of Legal Bonded Debt Margin ................................................................................ 160    Revenue Bond Coverage .............................................................................................................. 161    Demographic and Economic Information:      Taxable Transactions by Type of Business ................................................................................... 162    Demographic and Economic Statistics ......................................................................................... 163    Principal Employers...................................................................................................................... 164    Operating Information:    Operating Indicators by Function/Program ................................................................................. 166    Capital Asset Statistics by Function/Program .............................................................................. 168    Full‐Time Equivalent City Government Employees by Function .................................................. 170  SINGLE AUDIT SECTION:    Index to the Single Audit Report .................................................................................................. 171  Independent Auditor’s Report on Internal Control Over Financial Reporting and           on Compliance and Other Matters Based on an Audit of Financial Statements            Performed in Accordance With Government Auditing Standards ........................................ 173    Independent Auditor’s Report on Compliance for Each Major Federal Program and                         Report on Internal Control Over Compliance Required by Uniform Guidance .................... 175   Schedule of Expenditures of Federal Awards .............................................................................. 177   Notes to the Schedule of Expenditures of Federal Awards ......................................................... 179    Schedule of Findings and Questioned Costs ................................................................................ 180    Schedule of Prior Years Findings and Questioned Costs ............................................................. 182 Introduction   ……….………………………………………………………………… City of Palo Alto   i   Transmittal Letter…………………………………………………...…  November 19, 2018  THE HONORABLE CITY COUNCIL  Palo Alto, California    Attention:  Finance Committee  COMPREHENSIVE ANNUAL FINANCIAL REPORT  YEAR ENDED JUNE 30, 2018      Members of the Council and Citizens of Palo Alto:    I am pleased to present the Comprehensive Annual Financial Report (CAFR) for the fiscal year ended  June 30, 2018 in accordance with Article III, Section 16 and Article IV, Section 13 of the City of Palo Alto  Charter.  The format and content of this CAFR complies with the principles and standards of accounting  and financial reporting adopted by the Governmental Accounting Standards Board (GASB), and  contains all information needed for readers to gain a reasonable understanding of City of Palo Alto  financial affairs.  Management takes sole responsibility for the completeness and reliability of the  information contained in this report, based upon a comprehensive framework of internal control that  it has established for this purpose.  The objective of internal controls is to provide reasonable, rather  than absolute, assurance that the financial statements are free of any material misstatements.    The City of Palo Alto’s financial statements have been audited by Macias Gini & O’Connell LLP, Certified  Public Accountants.   The goal of the audit is to obtain reasonable assurance that the financial  statements are free of material misstatements and are fairly presented in conformity with generally  accepted accounting principles (GAAP).  Macias Gini & O’Connell issued an unqualified opinion for the  fiscal year ended June 30, 2018.  Their report is presented as the first component of the financial  section of this report.    In addition, Macias Gini & O’Connell conducted the federally mandated “Single Audit” designed to  meet the special needs of federal grantor agencies.  The standards governing the Single Audit require  the independent auditor to report on the fair presentation of the financial statements, government’s  internal controls and compliance with legal requirements.  These reports are included in the Single  Audit section of the CAFR.     An overview of the City’s financial activities for the fiscal year is discussed in detail in the  Management’s Discussion and Analysis (MD&A) section of the CAFR. MD&A complements this  transmittal letter and should be read in conjunction with it.  City of Palo Alto Office of the City Manager    Introduction  ……….………………………………………………………………… ii    City of Palo Alto  CITY OF PALO ALTO PROFILE  Palo Alto was incorporated in 1894 and named after a majestic coastal redwood tree which lives along  the San Francisquito Creek where early Spanish explorers settled.  Located between the cities of San  Francisco and San Jose, Palo Alto is a largely built‐out community of approximately 67,000 residents.   Palo Alto delivers a full range of municipal services and public utilities under the Council‐Manager form  of government, and offers an outstanding quality of life for its residents.  It covers an area of twenty‐ six square miles, and has dedicated almost one‐half of the area to open spaces of parks and wildlife  preserves.  Public facilities include five libraries, four community centers, a cultural arts center, an  adult and children’s theater, a junior museum and zoo, and a golf course.  The City provides a diverse  array of services for seniors and youth, an extensive continuing education program, concerts, exhibits,  team sports and special events.   The independent Palo Alto Unified School District (PAUSD) has  achieved state and national recognition for the excellence of its programs.    City Council:   Council consists of nine members elected at‐large for four year staggered terms. At the  first meeting of each calendar year, Council elects a Mayor and Vice‐Mayor from its membership, with  the Mayor having the duty of presiding over Council meetings. Council is the appointing authority for  the positions of City Manager and three other officials, the City Attorney, City Clerk, and City Auditor,  all of whom report to Council.  Effective January 1, 2019, Council will be reduced from nine to seven  members.    Finance Committee and Policy and Services Committee:  While retaining the authority to approve all  actions, Council has established two subcommittees to consider and make recommendations on  matters relating to finance, budget, audits, capital planning and debt.  Each of the subcommittee is    comprised of four Council members.   Staff provides the subcommittees and Council with reports such  as the CAFR, quarterly budget‐versus‐actual results, and investment and performance measure  reports, all of which are utilized in their review of the City’s financial position.  FISCAL/ECONOMIC CONDITIONS AND OUTLOOK  Employment Trends:  The City of Palo Alto is located in the heart of Silicon Valley and is adjacent to  Stanford University, one of the premier institutions of higher education in the nation which has  produced much of the talent that founded many successful high‐tech companies in Palo Alto and  Silicon Valley.   With varied and relatively stable employers such as Stanford University, Stanford  Medical Center, Palo Alto Medical Foundation, Palo Alto Unified School District, Stanford Shopping  Center and businesses such as Hewlett‐Packard, VMware, Tesla, Palantir and Space Systems Loral, Palo  Alto has enjoyed diverse employment and revenue bases. The City’s unemployment rate ended the  year at 2.2 percent.  This compares to Santa Clara County’s unemployment rate of 2.7 percent. The  state’s unemployment rate was 4.5 percent.     Real Estate Market:  In its most recent annual report, the Santa Clara County Assessor’s Office noted  that Santa Clara County’s 2017/2018 assessment roll increased 7.4 percent, from $419 billion to $450  billion. The assessment roll growth was balanced throughout the County, with Santa Clara and  Mountain View once again led the highest growth.  Palo Alto’s assessment roll growth rate was 7.8  percent, compared to 8.6 percent in the prior report. Reassessment of changes in ownership,  significant new construction and the increase in the value of new business property were the primary  factors contributing to the robust growth. With its highly regarded school district, well‐educated and  high‐income population, cultural amenities, and the presence of Stanford University, the City’s real  estate activity continues to experience a pattern of high demand and short supply.  The result of this  continued pattern is reflected in the increase in FY 2018 property tax revenue.  Introduction   ……….………………………………………………………………… City of Palo Alto   iii   Local Trends:  National, state, regional and local economic indicators point toward continuously  improving economic growth.  Economically sensitive revenue sources such as transient occupancy tax  and documentary transfer tax remain strong, while sales tax revenue has levelled off.  The robust local  economy and job growth are also driving increases in other revenues, such as permit and license fees.    Looking forward, funding sources are sufficient to cover projected FY 2019 and FY 2020 expenses, as  written in the City’s Adopted Budget.  The Council adopted a General Fund budget with expenses of  $210.7 million for FY 2019 an increase of 0.1 percent from the prior year Adopted Budget.  This modest  increase is due primarily to a downward adjustment in expenses of $4.0 million as directed by the City  Council. Through strategic actions taken over the past few years, the City was able to deal with  increasing salary and benefit costs, increase its investments in infrastructure, and proactively  contribute to the City’s irrevocable Section 115 Pension Trust Fund, while balancing the General Fund  in FY 2019. Through the Budget Adoption process, the City Council directed staff to identify an  additional $4.0 million in savings, which is recognized as a contribution to the Budget Stabilization  Reserve in the FY 2019 Adopted Operating Budget. Staff anticipates returning to the City Council to  identify the $4.0 million in savings during FY 2019 and incorporating the policy direction from City  Council into the FY 2019 Operating Budget and into the development of the FY 2020 Operating Budget.    Pension and healthcare costs continue to dominate the conversation about long‐term future  costs.  The most recent actuarial valuations show unfunded liabilities for pension and healthcare  totaling $558 million.  The City has proactively taken steps over the past several years to mitigate  increased costs by increasing employee contributions to the CalPERS retirement plan and capping the  City’s share of healthcare premiums.  Implementation of a second tier retirement plan in 2011 and  adoption of the state‐mandated third tier pension benefit plan in 2013 also helps mitigate future  pension cost increases.  The most recent labor agreements with the Safety units increase the employee  pick‐up of the employer share over the term of the agreement. The current labor agreements with the  miscellaneous groups also include this cost‐sharing mechanism.  Further pension cost sharing with  employees could be necessary to fund future cost increases.  The City has established an irrevocable  Section 115 Pension Trust Fund that is separate from CalPERS and could act as a mitigation reserve if  the City were unable to meet its annual required contribution due to budget constraints in a given  year. As of the end of Fiscal Year 2018, the City has contributed $5.5 million to this trust, of which $3.4  million is from the General Fund. Additional contributions are included in the FY 2019 Adopted  Operating Budget to bring the total to $7.6 million across all funds, of which $4.6 million would be  from the General Fund.   As economic growth continues to flourish in this area of Silicon Valley, it also underscores the  challenges of increased traffic and congestion, affordable housing and demand for services.  These  issues were reflected in the setting of Council priorities for 2018:     Transportation   Housing   Budget and Finance (focus on funding our infrastructure  and pensions)   Grade Separation (choose preferred alternative by end of  year)  In keeping with these priorities, the City has begun to implement various strategies to address traffic  congestion in the City, including:  parking management (Residential Preferential Parking program,  parking technology enhancements, garage wayfinding signage), CalTrain Grade Separation,  transportation demand management (Transportation Management Association, enhanced shuttle     Introduction  ……….………………………………………………………………… iv    City of Palo Alto  services, CalTrain GoPass program for employees) and short and long‐term parking supply strategies  (valet parking, construction of new garages). Recent budgets reflect longer‐term goals of the City  Council and position the City to be able to address increases in pension costs and new labor agreement  negotiations, while highlighting the need to address the future year costs to complete the  Infrastructure Plan.    In FY 2014, the City Council approved a $125.8 million Infrastructure Plan (IP), which includes  projects such as a new Public Safety Building, replacement of two Fire Stations, a Bike and Pedestrian  plan and two parking garages. Through the development of the 2019‐2023 CIP, the IP was updated  for scope increases and cost escalations, resulting in a revised Infrastructure Plan of $249.9  million. These projects will be funded partially by debt to be repaid with an increase in the transient  occupancy tax (TOT) rate which went into effect in January 2015, TOT from newly opened hotels, and  from other sources such as impact fees and Stanford University Medical Center development  agreement monies totaling $186.7 million. Staff was tasked with closing this funding gap in the FY  2019 budget process, and this was done through project prioritization within the 2019‐2023 CIP and  additional revenue assumptions. The 2019‐2023 CIP assumes the opening of new Marriott hotels in  FY 2020. Based on this, an additional $3.6 million of annual TOT funding as well as one time COP  issuance of $35.2 million is estimated to cover the cost of the IP projects.     Rate increases will take effect in FY 2019 for electric, fiber optics, gas, storm drain, wastewater, and  water services. In general, the size and timing of rate adjustments take into account current and future  revenue requirements and reserve levels for needs such as increasing costs of commodity purchases,  capital construction costs, and contractually obligated increases to compensate for inflation, usually  based on the annual change to the Bay Area consumer price index (CPI).    Long Range Financial Forecast:  The City produces a 10 year General Fund Long Range Financial  Forecast (LRFF) annually.  This comprehensive report analyzes local, state, and federal economic  conditions, short and long‐term revenue and expense trends, and addresses challenges such as funding  long‐term pension and healthcare liabilities and infrastructure needs.  The forecast is designed to  highlight finance issues which the City can address proactively.  Moreover, it is a tool that allows  policymakers an opportunity to prioritize funding needs over time.  It sets the tone for the annual  budget process and is one of the many tools and reports that Council uses for financial planning.    The FY 2019 – FY 2028 LRFF was presented to the Finance Committee in December 2017 and to the  City Council in January 2018. The FY 2019 forecast anticipated a near‐term gap in the General Fund.  Staff identified and recommended a course of action that would structurally balance the General Fund  in FY 2019 and largely balance the General Fund on an ongoing basis. As discussed above, during the  adoption of the FY 2019 Operating Budget, the City Council directed that an additional $4.0 million be  reduced in the General Fund, which has been recognized in the Budget Stabilization Reserve (BSR) in  the FY 2019 Budget. By policy, the City maintains a General Fund BSR level of 15 to 20 percent of the  General Fund Operating Budget, with a target of 18.5 percent. As of June 30, 2018 the BSR balance is  $52.8 million. Staff will bring forward recommendations regarding the potential uses of the BSR as part  of the FY 2018 year‐end close process.  Both Moody’s and Standard and Poor’s (S&P) awarded their highest credit rating of Triple A to the  City’s general obligation debt.  This rating has been awarded to only a few cities in California.      SIGNIFICANT EVENTS AND ACCOMPLISHMENTS     Introduction   ……….………………………………………………………………… City of Palo Alto   v   The City of Palo Alto is a community dedicated to meeting the social, cultural,  recreational, educational, commercial and retail needs of its citizens and  businesses.   As such, open space, the environment, education, recreational  facilities, cultural events and safe streets and neighborhoods are important  aspects of the community. The City has been recognized for its accomplishments  with a wide variety of awards and recognitions over the past year.  Following is  a sampling:      Recipient of the Acterra Business Environmental Award and the Acterra Award for  Sustainability in recognition of the City’s overall approach, commitment and leadership in  sustainability.   Awarded Voice of the People Award for Excellence in the Natural Environment by the National  Research Center for being a top performing jurisdiction in the National Citizen Survey.   Santa Clara County presented Palo Alto with the Top Public Health Award for reducing second  hand smoke, the Safe Routes to School program and offering healthier choices in public  facilities like water bottle filling stations and healthy snacks.   The World Health Organization recognized Palo Alto as an Age‐Friendly City for involving older  adults in decision‐making, encouraging older adults to remain in the community and  promoting their autonomy.    Recipient of the Platinum Level Beacon Award – the highest level possible – for its effort and  leadership in addressing climate change.   Awarded gold level status as a Bicycle Friendly Community by the League of American Bicyclists  based on a strong commitment to bicycling evidenced by major streets with bike lanes, high  ratio of bike network mileage to road network mileage, and Bike to Work events;   Awarded Tree Line USA award by the National Arbor Day Foundation in recognition of the  Utilities exceeding the standard criteria for quality tree care, annual worker training, tree  planting and public education, a tree‐based energy conservation program, and an Arbor Day  celebration.    Awards:  During the past year, the City received an award for the prior fiscal year CAFR from the  Government Finance Officers Association (GFOA) for “excellence in financial reporting.”  The 2018  CAFR will be submitted to the GFOA award program to be considered for this distinguished financial  reporting award.   Acknowledgments:  This CAFR reflects the hard work, talent and commitment of the staff members of  the Administrative Services Department.  This document could not have been accomplished without  their efforts and each contributor deserves sincere appreciation.  Management wishes to acknowledge  the support of the entire accounting staff for their high level of professionalism and dedication.   Management would also like to express its appreciation to Macias Gini & O’Connell, the City’s  independent external auditors, who assisted and contributed to the preparation of this  Comprehensive Annual Financial Report.     Introduction  ……….………………………………………………………………… vi    City of Palo Alto  Special acknowledgment must be given to City Council and the Finance and Policy and Services  Committees for their dedication to directing the financial affairs of the City in a responsible,  professional and progressive manner.   Respectfully submitted,  KIELY NOSE, JAMES KEENE,  Interim Chief Financial Officer                                                                       City Manager  Introduction   ……….………………………………………………………………… City of Palo Alto   vii   City of Palo Alto City Officials ………………………….…………                                                                                Finance Committee  Gregory Scharff, Chair  Eric Filseth  Lydia Kou  Greg Tanaka Policy and Services Committee    Adrian Fine, Chair  Tom DuBois  Karen Holman  Cory Wolbach  Council‐Appointed Officers    City Manager  James Keene    City Attorney  Molly Stump    City Clerk  Beth Minor    City Auditor  Harriet Richardson  City Council    Liz Kniss, Mayor  Eric Filseth, Vice‐Mayor  Tom DuBois  Adrian Fine  Karen Holman  Lydia Kou  Gregory Scharff  Greg Tanaka  Cory Wolbach       Introduction  ……….………………………………………………………………… viii    City of Palo Alto  City Attorney  Molly Stump  City Manager  James Keene  City Auditor Harriet Richardson  City Clerk  Beth Minor  Assistant City Manager   Edward K. Shikada  City of Palo Alto Organization ……………………………………                                                                                      Palo Alto Residents City Council Community Services  Monique le Conge‐Ziesenhenne,  Interim Director  Administrative Services   Kiely Nose, Interim Chief Financial Officer  Fire  Eric Nickel, Chief  Human Resources   Rumi Portillo, Director  Police  Robert Jonsen, Chief Planning & Community Environment   Jonathan Lait, Interim Director  Utilities   Edward K. Shikada, General Manager  Public Works   Brad Eagleston, Interim Director  Library  Monique le Conge‐Ziesenhenne,  Director  Development Services   Michelle Flaherty, Interim Director  Chief Communications Officer  Claudia Keith  Office of Emergency Services  Kenneth Dueker, Director  Office of Sustainability Gil Friend, Chief Sustainability Officer  Information Technology   Jonathan Reichental,   Chief Information Officer  Introduction   ……….………………………………………………………………… City of Palo Alto   ix   Administrative Services Organization ……… Administrative Division Treasury Division  Accounting Division Budget Division  Purchasing Division Real Estate Division  Mission Statement    To provide proactive administrative and technical support to  City departments and decision makers, and to safeguard and  facilitate the optimal use of City resources.  Administrative Services Department     Introduction  ……….………………………………………………………………… x    City of Palo Alto  Government Finance Officers Association of the United States and Canada – Award …… www.mgocpa.com Macias Gini & O’Connell LLP 2121 N. California Boulevard, Suite 750 Walnut Creek, CA 94596 1 Independent Auditor’s Report Honorable Mayor and the Members of the City Council of City of Palo Alto, California Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Palo Alto, California (City), as of and for the year ended June 30, 2018, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements as listed in the table of contents. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. 2 Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City as of June 30, 2018, and the respective changes in financial position, and, where applicable, cash flows thereof and the respective budgetary comparison for the General Fund for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note 1(n) to the financial statements, effective as of July 1, 2017, the City adopted the provisions of Governmental Accounting Standards Board Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis, the schedules of changes in net pension liability and related ratios and the schedules of contributions, the schedule of changes in net OPEB liability and related ratios, the schedule of employer OPEB contributions, as listed in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City’s basic financial statements. The introductory section, combining and individual nonmajor fund financial statements and schedules, statistical section and the schedule of expenditures of federal awards, as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining and individual nonmajor fund financial statements and schedules and the schedule of expenditures of federal awards are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the combining and individual nonmajor fund financial statements and schedules and the schedule of expenditures of federal awards are fairly stated, in all material respects, in relation to the basic financial statements as a whole. 3 The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on them. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 19, 2018 on our consideration of the City’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is solely to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the City’s internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City’s internal control over financial reporting and compliance. Walnut Creek, California November 19, 2018 4 This page is left intentionally blank.                                       Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 5 Management’s Discussion and Analysis  Management’s Discussion and Analysis (MD&A) provides an overview of the City of Palo Alto’s financial  performance for the fiscal year ended June 30, 2018. To obtain a complete understanding of the City’s financial  condition, this document should be read in conjunction with the accompanying Transmittal Letter and Basic  Financial Statements.    Financial Highlights     The assets and deferred outflows of resources of the City of Palo Alto (City) exceeded its liabilities and  deferred inflows of resources at the close of Fiscal Year (FY) 2018 by $1.1 billion.  Of this amount,  $23.4 million represents unrestricted net position, which may be used to meet the government’s  ongoing obligations to citizens and creditors.    At the close of FY 2018, the City’s governmental funds reported combined fund balances of $251.2  million, an increase of $16.5 million from prior year.  Approximately 21.1 percent of this amount, or  $52.8 million, is unassigned fund balance and available for spending at the government’s discretion.   At the end of the current fiscal year, unrestricted fund balance (the total of the committed, assigned  and unassigned components of fund balance) for the General Fund was $60.3 million, or 0.31 percent  of total general fund expenditures, including transfers.   The City’s total outstanding long‐term debt increased $5.0 million during the current fiscal year. On  June 1, 2018 the city issued $9.0 million of Certificates of Participation (COPs) refinancing the 2002B  Downtown parking Improvement projects COPs and providing new funding to finance the costs of the  renovation of the Palo Alto Municipal Golf Course. The City received a loan of $7.5 million from the  State Water Resources Control Board (SWRCB) and was forgiven $4.0 million of a prior loan under the  terms of the contract with the SWRCB.   The City implemented GASB Statement No.75, Accounting and Reporting for Postemployment Benefits  Other than Pensions, effective July 1, 2017 and the balances were restated to reflect the impact. The  City’s  net  Other  Postemployment  Benefits  (OPEB)  liabilities  of $153.5  million  was  allocated  to  Governmental Activities ($109.4 million or 71.3   percent) and Business‐Type Activities ($44.1 million  or 28.7 percent) which reduced their unrestricted net positions by a like amount.  OVERVIEW OF THE COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR)  The CAFR is presented in six sections:     An introductory section that includes the Transmittal Letter and general information   Management’s Discussion and Analysis   The  Basic  Financial  Statements  that  include  the  Government‐wide  and  Fund  Financial  Statements, along with the Notes to these statements   Required and Other Supplemental Information   Statistical Information    Single Audit  Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 6 Basic Financial Statements  The  Basic  Financial  Statements  contain  the  Government‐wide  Financial  Statements,  the  Fund  Financial  Statements and the Notes to these financial statements.  This report also includes supplementary information  intended to furnish additional detail to support the Basic Financial Statements.    For certain entities and funds, the City acts solely as a depository agent. For example, the City has several  Assessment Districts for which it produces fiduciary statements detailing the cash balances and activities of  these districts. These entities are independent, and their balances are excluded from the City’s government‐ wide financial statements.   Government‐wide Financial Statements  The Government‐wide Financial Statements provide a longer‐term view of the City’s activities as a whole.   They include the Statement of Net Position and the Statement of Activities.      The Statement of Net Position includes the City’s capital assets and long‐term liabilities on a full accrual basis  of accounting similar to that used by private sector companies. Over time, increases or decreases in net  position  may  serve  as  a  useful  indicator  of  whether  the  financial  position  of  the  City  is  improving  or  deteriorating.      The Statement of Activities provides information about the City’s revenues and expenses on a full accrual  basis,  with  an  emphasis  on  measuring  net  revenues  or  expenses  for  each  of  the  City’s  programs.  The  Statement of Activities explains in detail the change in net position for the year.  All changes in net position  are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of  related cash flows.      The  amounts  in  the  Statement  of  Net  Position  and  the  Statement of  Activities  are  separated  into  Governmental and Business‐type Activities in order to provide a summary of each type of activity.     Governmental Activities ‐ All of the City’s basic services are considered to be governmental activities. Included  in basic services are the City Council, City Manager, City Attorney, City Clerk, City Auditor, Administrative  Services, Human Resources, Public Works, Planning and Community Environment, Development Services,  Public Safety, Community Services, and Library. These services are supported by general City revenues such  as taxes, and by specific program revenues such as fees and grants.     The City’s governmental activities also include the activities of the Palo Alto Public Improvement Corporation,  which is a separate legal entity financially accountable to the City.     Business‐type  Activities ‐  All  of  the  City’s  enterprise  activities  are  reported  as  business‐type  activities,  including Water, Electric, Fiber Optics, Gas, Wastewater Collection, Wastewater Treatment, Refuse, Storm  Drainage and Airport. Unlike governmental services, these services are intended to recover all or a significant  portion of their costs through user fees and charges, except for the Airport which is currently supported by a  long‐term advance from the General Fund, as discussed in Note 4.    The Government‐wide Financial Statements can be found on pages 29‐31 of this report.  Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 7 Fund Financial Statements  The Fund Financial Statements provide detailed information about each of the City’s most significant funds,  called  major  funds.  The  concept  of  major  funds,  and  the  determination  of  which  are  major  funds,  was  established by Governmental Accounting Standards Board (GASB) Statement No. 34 and replaced the concept  of combining like funds and presenting them in total. Therefore, each major fund is presented individually,  with all non‐major funds combined in a single column on each fund statement. Subordinate schedules display  these non‐major funds in more detail. Major funds present the major activities of the City for the year.  The  General Fund is always considered a major fund, but other funds may change from year to year as a result of  changes in the pattern of City activities.     The  Fund  Financial  Statements  display  the  City’s  operations  in more  detail  than  the  Government‐wide  Financial Statements. Their focus is primarily on the short‐term activities of the City’s General Fund and other  major funds.    Budget and actual financial comparison information is presented only for the General Fund. Fund Financial  Statements include Governmental, Proprietary, and Fiduciary Funds.    Governmental Funds  Governmental Fund Financial Statements are prepared on the modified accrual basis of accounting, which  means they measure only current financial resources and uses. Capital assets and other long‐lived assets,  along with long‐term liabilities, are presented only in the Government‐wide Financial Statements. In FY 2018,  the City had two major governmental funds, the General Fund and the Capital Projects Fund.  Data from the  other governmental funds are combined into a single aggregated presentation.  Individual fund data for each  of these non‐major governmental funds is provided in the Supplemental section of this report.     Because the focus of governmental funds is narrower than that of the Government‐wide Financial Statements,  it is useful to compare the information presented for governmental funds with similar information presented  for governmental activities in the Government‐wide Financial Statements.  By doing so, readers may better  understand the long‐term impact of the government’s near‐term financing decisions.  Both the Governmental  Fund Balance Sheet and the Governmental Fund Statement of Revenues, Expenditures and Changes in Fund  Balances provide a reconciliation to facilitate this comparison between governmental funds and governmental  activities.    The Governmental Fund Financial Statements can be found on pages 33‐37 of this report.    Proprietary Funds  Enterprise and Internal Service Fund Financial Statements are prepared on the full accrual basis of accounting,  similar  to  that  used  by  private  sector  companies.  These  statements  include  all  of  their  assets,  deferred  outflows and inflows of resources and liabilities, both current and long‐term.     Since the City’s Internal Service Funds provide goods and services exclusively to the City’s governmental and  business‐type activities, their activities are only reported in total at the fund level.  Internal Service Funds,  such as Technology and General Benefits, cannot be considered major funds because their revenues are  derived from other City funds. Revenues between funds are eliminated in the Government‐wide Financial  Statements, and any related profits or losses in Internal Service Funds are returned to the activities in which  they were created, along with any residual net assets of the Internal Service Funds.    The Proprietary Fund Financial Statements can be found on pages 38‐43 of this report.  Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 8 Fiduciary Funds  The City is the fiduciary agent for certain assessment districts such as the University Avenue Area Off‐Street  Parking Assessment District.  In this role, the City holds money collected from property owners and awaiting  transfer to the districts’ bond trustees. The City’s fiduciary activities are reported in the separate Statement  of Fiduciary Net Position and the supplemental Agency Funds Statement of Changes in Assets and Liabilities.  These activities are excluded from the City’s governmental‐wide financial statements because the City cannot  utilize these assets to finance its own operations.    The Fiduciary Fund Financial Statement can be found on page 44 of this report.  Notes to the Financial Statements  The Notes provide additional information that is necessary to acquire a full understanding of the data provided  in the Government‐wide and Fund Financial Statements.  The Notes to the financial statements can be found  on pages 47‐106 of this report.      Other Information  The Required Supplementary Information related to the City’s pension and OPEB plans is included after the  Notes  to  the  Financial  Statements  on  pages  107‐112.  The  combining  statements  referred  to  earlier  in  connection  with  non‐major  Governmental  Funds  and  Internal  Service  Funds,  are  presented  immediately  following the Required Supplementary Information.  Combining statements and individual fund statements  and schedules can be found on pages 113‐138 of this report.    Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 9 Financial Analysis of Government‐wide Financial Statements  This section focuses on the City’s net position and changes in net position of its governmental and business‐ type activities for the fiscal year ending June 30, 2018.  As noted earlier, the City’s total assets and deferred  outflows of resources exceeded total liabilities and deferred inflows of resources by $1.1 billion at the end of  the fiscal year, a change in net position of $111.1 million.   STATEMENT OF NET POSITION As of June 30, 2018 (in millions)   2018 2017 2018 2017 2018 2017 Cash and investments 286.9$    288.8$     241.8$     243.3$     528.7$         532.1$        Other assets 62.5 63.7 42.1 44.7 104.6           108.4          Capital assets 547.7 522.5 636.7 595.2 1,184.4 1,117.7   Total Assets 897.1       875.0       920.6       883.2       1,817.7        1,758.2       Unamortized loss from refunding ‐             ‐             0.2            0.3            0.2                0.3               Pension and OPEB related 78.8         52.8         28.9          19.2          107.7           72.0            Total Deferred Outflows of Resources 78.8         52.8         29.1          19.5          107.9           72.3            Net pension and OPEB liabilities 411.4       273.5       157.1       103.8       568.5           377.3          Long‐term debt 75.1 69.3 66.1 67.0 141.2 136.3 Other liabilities 54.5 51.8 36.0 30.9 90.5 82.7 Total Liabilities 541.0       394.6       259.2       201.7       800.2           596.3          Pension and OPEB related 7.4           5.8            2.4            1.7            9.8                7.5               Total Deferred Inflows of Resources 7.4           5.8            2.4            1.7            9.8                7.5                           Net Position             Net investment in capital assets 473.2 453.9 573.7 532.0 1,046.9 985.9 Restricted 41.2 36.1 4.0 4.1 45.2 40.2 Unrestricted (87.0) 37.3 110.4 163.2 23.4 200.5 Total Net Position 427.4$    527.3$     688.1$     699.3$     1,115.5$     1,226.6$    Governmental Activities Business‐type Activities Government‐wide Totals   The largest portion of the City’s net position (93.9 percent) is its net investment in capital assets such as land,  buildings, infrastructure and vehicles, less any related outstanding debt that was used to acquire those assets.   The City uses these capital assets to provide a variety of services to its citizens.  Accordingly, these assets are  not available for future spending.  Although the City’s investment in capital assets is reported net of related  debt, it should be noted that the resources used to repay this debt must be provided from other sources, since  the capital assets themselves cannot be used to liquidate these liabilities.  Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 10 The restricted portion of the City’s net position (4.0 percent) represents resources that are subject to external  restrictions on how they may be used.  The remaining balance of $23.4 million, representing 2.1 percent of  the City’s net position, is unrestricted and may be used to meet the government’s ongoing obligations to its  citizens and creditors.  The City implemented GASB 75 effective July 1, 2017. The beginning balance of FY 2017 net position was  restated to reflect the impact of the implementation.  The City’s net OPEB asset that was reported in previous  years, has been eliminated in accordance with the new OPEB standards.  Compliance with GASB 75 resulted  in reporting net OPEB liabilities on the Statement of Net Position for government‐wide and proprietary fund  financial statements, which reduces the unrestricted net position and, in some cases, creates a negative  unrestricted net position.  Deferred OPEB contributions are the total amount of FY2018 contributions. The contributions are deferred to  FY2019 because the measurement of the net OPEB liability balance is one year in arrears.  At June 30, 2018, the net OPEB liability represents the actuarially valued liability for OPEB benefits, less the  amount of resources accumulated in the OPEB trust, as of June 30, 2017.  The difference between expected  and actual earnings on investments is the portion of investment gains that is deferred.  The new accounting  standards require the differences between the projected and actual investment returns be amortized on a  straight‐line basis over five years.  At the end of the current fiscal year, the City is able to report positive unrestricted net positions for the  government as a whole. The unrestricted net position for governmental activities is negative due to the  implementation of GASB Statement No 75. The business‐type activities are positive except for two funds,  Wastewater treatment fund and Airport fund are negative mainly due to the pension and OPEB related  expenses.   Components of the $111.1 million decrease in total net position are discussed in the following sections for  governmental activities and business‐type activities.  Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 11 Governmental Activities – Net Position  The following analysis focuses on the net position and changes in net position of the City’s Governmental  Activities, presented in the Government‐wide Statement of Net Position and Statement of Activities.  Increase/   2018 2017 (Decrease) Cash and investments 286.9$     288.8$     (1.9)$        Other assets 62.5          63.7          (1.2)          Capital assets 547.7      522.5       25.2            Total Assets 897.1      875.0       22.1          Pension  and OPEB related 78.8          52.8          26.0          Total Deferred Outflows of Resources 78.8          52.8          26.0          Net pension and OPEB liabilities 411.4      273.5       137.9       Long‐term debt 75.1          69.3          5.8            Other liabilities 54.5          51.8          2.7            Total Liabilities 541.0      394.6       146.4       Pension and OPEB related 7.4            5.8            1.6            Total Deferred Inflows of Resources 7.4              5.8            1.6                     Net investment in capital assets 473.2      453.9       19.3          Restricted 41.2          36.1          5.1            Unrestricted (87.0)        37.3          (124.3)      Total Net Position 427.4$     527.3$     (99.9)$      GOVERNMENTAL ACTIVITIES Net Position at June 30 (in millions)   The City’s Governmental Activities total net position decreased $99.9 million to $427.4 million as of June 30,  2018. This decrease was a result of the following:   Capital assets net of depreciation increased $25.2 million due to major capital projects such as street  and sidewalk improvements throughout the City, Bicycle Boulevard project, Fire station #3 project,  Golf course reconfiguration, Baylands Athletic center project and Rinconada Park Improvements.   Pension and OPEB related deferred outflows increased $26 million due to the City implementing GASB  75, Accounting and Financial Reporting for Postemployment Benefits Other than Pension and for the  changes in assumptions for pension.   Net  pension  and  OPEB  liabilities  increased  $137.9  million  as  the  City  implemented  GASB  75,  Accounting and Financial Reporting for Postemployment Benefits Other than Pension and for the  changes in assumptions for pension.    Long‐term  debt  increased  $5.8  million  due  to  the  issuance  of  $9.0  million  in  Certificates  of  Participation (COPs) to finance the renovation of the Palo Alto Municipal Golf Course and to refinance  the 2002B Downtown Parking Improvement Project COPS. Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 12  Net investment in capital assets increased $19.3 million to $473.2 million due to the current year  capital additions noted above.  Restricted net position increased $5.1 million to $41.2 million due  primarily to the increased fund balance in the public benefit fund. Unrestricted net position decreased  $124.3 million from prior year. The unrestricted net position for governmental activities is negative  primarily due to the implementation of GASB Statement No 75. Governmental Activities – Revenues  The table below shows that Governmental Activities revenues totaled $211.3 million in FY 2018, an increase  of $30.1 million from prior year revenues of $181.2 million.   Increase/ Revenues by Source 2018 2017 (Decrease) Program Revenues: Charges for services 63.4$       57.3$       6.1$         Operating grants and contributions 14.1 2.0 12.1 Capital grants and contributions 1.5 1.9 (0.4) Total Program Revenues 79.0         61.2         17.8         General Revenues: Property tax 47.2 44.0 3.2 Sales tax 31.1 29.9 1.2 Utility user tax 15.4 14.2 1.2           Transient occupancy tax 24.9 23.4 1.5 Documentary transfer tax 9.2 7.5 1.7 Other tax 2.1 1.5 0.6 Investment earnings 0.4 (0.7) 1.1 Rents and miscellaneous 2.0 0.2 1.8 Total General Revenues 132.3 120.0 12.3 Total Revenues 211.3$    181.2$    30.1$       GOVERNMENTAL ACTIVITIES Revenues for the Year Ended June 30 (in millions)     Program Revenues such as charges for services, operating grants and contributions, and capital grants and  contributions are generated from or restricted to each activity.  Total Program Revenues increased $17.8  million from the prior year due to the following major factors:      $2.7 million increase in plan checking fee due to a decrease in deferred revenue.   $0.7 million increase in Golf Course related fees due to opening in May 2018.    Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 13 $1.1 million increase in permits and licenses. $11.7 million increase in receipts from Stanford Hospital and Clinics, Lucile Salter Packard Children’s hospital at Stanford and the Board of Trustees of the Leland Stanford Junior University (SUMC Parties) Development Agreement. General Revenues increased $12.3 million, or 10.3 percent, from the prior year primarily due to increased  General Fund Tax revenues.  Further analysis of general revenues can be found in the Financial Analysis of  Governmental Funds section of MD&A. Governmental Activities – Revenues by Source  The chart below presents revenues by source for Governmental Activities. General Revenues are composed  of taxes and other revenues not specifically generated by, or restricted to, individual activities. All tax revenues  and investment earnings are included in General Revenues.   Program Revenues 37% Property Tax 22% Sales Tax 15% Utility User Tax 7% Transient Occupancy Tax 12% Documentary Transfer Tax 4% Other 2% Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 14 Governmental Activities – Expenses  The table below presents a comparison of FY 2018 and FY 2017 expenses by function, along with interest and  other expenses.  Total Governmental Activities functional expense was $211.1 million in FY 2018, an increase  of $27.9 million.        Increase/ Activities 2018 2017 (Decrease) City Council 0.3$                0.3$                ‐$            City Manager 2.8 2.0 0.8 City Attorney 2.5 2.1 0.4 City Clerk 0.9 0.8 0.1 City Auditor 1.0 0.8 0.2 Administrative Services 13.9 11.9 2.0 Human Resources 2.7 2.3 0.4 Public Safety 83.9 73.3 10.6 Planning and Community Environment 11.4 10.9 0.5 Development Services 12.7 11.1 1.6 Public Works 30.3 25.5 4.8 Community Services 33.7 27.9 5.8 Library 12.2 11.4 0.8 Interest and Other Expense 2.8 2.9 (0.1) Total Functional Expense 211.1 183.2 27.9 Increase (Decrease) in Net Position    before Transfers 0.2 (2.0) 2.2 Transfers in 19.1 18.3 0.8 Change in Net Position 19.3 16.3 3.0 Net Position, Beginning  527.3              511.0              16.3 Restatement for implemation of GASB 75 (119.2)            ‐                     (119.2) Net Position, Ending 427.4$            527.3$           (99.9)$      GOVERNMENTAL ACTIVITIES Expenses and Change in Net Position for the Year Ended June 30 (in millions)          Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 15 In addition to the variances at the fund level which are explained in the Financial Analysis of Governmental  Funds section of the MD&A, year over year variances in Functional expenses at the government‐wide level  are due to the following:   Change in pension related adjustments for GASB 68 of $16.6 million;   Change in OPEB related adjustments for GASB 75 of ($3.6 million); and   Capital asset activities such as depreciation and asset retirements of ($22.1 million).    Governmental Activities – Functional Expenses  The functional expenses chart below includes only current year expenses. It does not include capital outlays,  as those are added to the City’s capital assets.  Functions which comprise 1 percent or less of total expenses  are combined into the All Other category in the chart below.  All Other includes City Council, City Manager,  City Attorney, City Clerk, City Auditor and Human Resources.    Administrative  Services 7% Public Works 14% Interest and Other 1% Planning and  Community  Environment 5% Development Services 6% Public Safety 40% Community Services 16% Library 6% All Other 5% Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 16 Business‐type Activities – Net Position  The following analysis focuses on the net position and changes in net position of the City’s Business‐type  Activities presented in the Government‐wide Statement of Net Position and Statement of Activities.    Increase/   2018 2017 (Decrease) Cash and investments 241.8$     243.3$     (1.5)$        Other assets 42.1 44.7 (2.6) Capital assets 636.7 595.2 41.5   Total Assets 920.6       883.2       37.4          Unamortized loss from refunding 0.2            0.3            (0.1)          Deferred pension contribution 28.9          19.2          9.7            Total Deferred Outflows of Resources 29.1          19.5          9.6            Net pension and OPEB liabilities 157.1 103.8 53.3 Long‐term debt 66.1 67.0 (0.9) Other liabilities 36.0 30.9 5.1 Total Liabilities 259.2       201.7       57.5          Difference between expected and actual earnings on investments 2.4            1.7            0.7            Total Deferred Outflows of Resources 2.4            1.7            0.7            Net Position       Net investment in capital assets 573.7 532.0 41.7 Restricted 4.0 4.1 (0.1) Unrestricted 110.4 163.2 (52.8) Total Net Position 688.1$     699.3$     (11.2)$      BUSINESS‐TYPE ACTIVITIES Net Position at June 30 (in millions)   The  City’s  Business‐type  Activities  total  net  position  decreased  $11.2  million  to  $688.1  million  as  of  June 30, 2018.     Capital assets increased $41.5 million to $636.7 million in FY 2018 primarily due to capital improvements in  the Wastewater Treatment, Electric, Water and Airport Funds. These capital improvements contributed to the  $41.7 million increase in net investment in capital assets to $573.7 million.   Unrestricted net position of $110.4 million, a decrease of $52.8 million from the prior year, represents assets  available to finance day‐to‐day operations and other expenditures approved by Council. This amount includes Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 17 rate stabilization reserves (RSR) of $48.1 million and operations reserves of $56.9 million, along with the  Electric special projects (Calaveras) reserve of $41.7 million, and the hydro stabilization reserve of $11.4  million.  The positive balances in these reserves are offset by the GASB 68 adjustment pension reserve of $91.9  million and GASB 75 OPEB reserve of $38.7 million.  Additional detail is included in Note 10.  Business‐type Activities – Revenues  The table below presents the revenues for each of the City’s Business‐type Activities or Enterprise Funds. The  City operates the Water, Electric, Fiber Optics, Gas, Wastewater Collection, Wastewater Treatment, Refuse,  Storm Drainage and Airport Funds.     BUSINESS‐TYPE ACTIVITIES Revenues for the Year Ended June 30 (in millions) Increase/ Revenues by Source 2018 2017 (Decrease) Program Revenues: Charges for services 330.2$           304.5$            25.7$                      Operating grants and contributions 0.5                   0.5                   ‐                          Capital grants and contributions 14.2 4.3 9.9 Total Program Revenues 344.9             309.3              35.6                        General Revenues: Investment earnings 0.6 (0.5) 1.1 Total General Revenues 0.6 (0.5) 1.1 Total Revenues 345.5$           308.8$            36.7$                            Business‐type Activities revenues totaled $345.5 million, an increase of $36.7 million from the prior year.   Program revenues increased $35.6 million year over year.  Charges for services increased $25.7 million from  the prior year due to the rate increase in the Electric Fund and the increased billing for capital and operating  costs in the Wastewater Treatment Fund.    Capital grants and contributions increased by $9.9 million from the prior year due to an increase in grant  revenues for the Airport Fund and $4.0 million in capital contributions for the Wastewater treatment fund  related to the forgiveness of a portion of the 2017 State Water Resources Loan. Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 18 Business‐type Activities – Expenses  The table below presents a comparison of the FY 2018 and FY 2017 expenses for the City’s Business‐type  Activities. Encumbrances and reappropriations are not included.  BUSINESS‐TYPE ACTIVITIES Expenses and Change in Net Position for the Year Ended June 30 (in millions) Increase/ Business‐type Activities 2018 2017 (Decrease) Water 40.8$       37.5$       3.3$          Electric 146.0 128.6 17.4 Fiber Optics 2.7 2.1 0.6 Gas 27.9 26.8 1.1 Wastewater Collection 16.8 16.4 0.4 Wastewater Treatment 27.5 23.5 4.0 Refuse 28.8 30.7 (1.9) Storm Drainage 5.1 4.1 1.0 Airport 1.7 1.3 0.4 Total Functional Expense 297.3 271.0 26.3 Increase in Net Position    before Transfers 48.2 37.8 10.4 Transfers out (19.1) (18.3) (0.8)       Change in Net Position 29.1 19.5 9.6 Net Position, Beginning 699.3       679.8       19.50       Reinstatement for implementationfor GASB 75 (40.3) ‐            (40.3) Net Position, Ending 688.1$     699.3$     (11.2)$        Business‐type Activities expenses increased $26.3 million for a total of $297.3 million. Year over year expenses  were significantly affected by the following events:   Water Fund expenses increased $3.3 million due to increased wholesale water rates to cover the cost  of upgrades and improvements to the water supply distribution system and an increase in salaries  and benefits.   Electric Fund expenses increased $17.4 million due to higher energy purchase costs offset by lower  surplus energy costs.   Wastewater Treatment Fund expenses increased $4.0 million due to higher sewage treatment costs,  higher operating costs and capital improvement costs for upgrades to the facilities plant. Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 19 FUND FINANCIAL STATEMENTS   Financial Analysis of Governmental Funds  As noted earlier, the City uses fund accounting to ensure and demonstrate compliance with finance‐related  legal requirements.    Governmental Funds  The focus of the City’s Governmental Funds is to provide information on near‐term inflows, outflows, and  balances of spendable resources.  Such information is useful in assessing the City’s financing requirements.  In  particular, the unassigned fund balance may serve as a useful measure of a government’s net resources  available for discretionary use as it represents the portion of fund balance not yet limited to use for a particular  purpose by either an external party, the City itself, or an entity that has been delegated authority by the City  Council to assign resources for use.    As of June 30, 2018, the City’s Governmental Funds reported combined fund balances of $251.2 million, an  increase of $16.5 million from the prior year.  Approximately 21.0 percent, or $52.8 million, constitutes  unassigned fund balance, which is available for spending at the government’s discretion and other purposes.   The remainder of the fund balance is either non‐spendable, restricted, committed, or assigned to indicate that  it is: 1) not in spendable form ($9.5 million); 2) restricted for particular purposes ($40.3 million); 3) committed  for particular purposes ($73.2 million); or 4) assigned for particular purposes ($75.4 million).    Governmental Fund revenues increased $29.9 million, or 16.5 percent, from the prior year to $211.3 million.   Revenues in the General Fund increased $15.7 million and Capital Projects Fund revenue decreased $0.2  million. Other Governmental Funds revenue increased $14.4 million due to increased plan checking fees, Golf  course related fees, permits and licenses and $11.7 million from Stanford University Medical Center (SUMC)  parties of the Development agreement.    Governmental Fund expenditures were $219.6 million, an increase of $3.6 million from the prior year. General  Fund expenditures increased $7.6 million, Capital Projects Fund expenditures increased by $1.3 million, and  Non‐major Fund expenditures increased by $4.7 million.  Details of significant changes are discussed in the  following sections.  General Fund   Balance Sheet  The General Fund is the primary operating fund of the City.  At the end of the current fiscal year, fund balance  of the General Fund was $68.3 million, compared to $63.1 million in the prior year.  The fund balance has  been classified as $8.0 million non‐spendable, $0.4 million committed, $7.1 million assigned and $52.8 million  unassigned.  The unassigned amount is designated by the Council for Budget Stabilization Reserve (BSR) and  other purposes.          Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 20 Statement of Revenues, Expenditures and Changes in Fund Balance  Revenues  The City’s General Fund revenues totaled $180 million in FY 2018. This represents an increase of $15.6 million,  or 9.5 percent, compared to the prior year.  The year over year change in significant revenue sources is noted  in the following table.            Property tax revenue increased by $3.4 million or 8.6 percent, due to increased property assessed value  growth. Sales tax receipts were $1.2 million higher compared to the prior fiscal year, and is driven by growth  of auto leasing and sales, drug stores, recreation products, furniture/appliance, office equipment, and health  services.      Utility user tax revenues were $1.2 million or 8.5 percent, higher compared to the prior year due to increased  utility rate. Transient occupancy tax (TOT) ended the year $1.4 million, or 6.0 percent, higher than prior year  due to higher room rates, newly opened hotels that performed better than expected, and revenue from short‐ term rentals.      Documentary transfer tax increased $1.7 million to $9.2 million or 22.7 percent, as real property turnover  continued to trend as in prior years.      Increase/ Revenues by Source 2018 2017 (Decrease) Property tax 42.8$              39.4$            3.4$          Sales tax 31.1 29.9 1.2 Utility user tax 15.4 14.2 1.2 Transient occupancy tax 24.9 23.5 1.4 Documentary transfer tax 9.2 7.5 1.7 Charges for services 26.8 22.3 4.5 Permits and licence 8.6 7.4 1.2 Rental income 15.9 15.7 0.2 All other 5.3 4.5 0.8 Total Revenues 180.0$           164.4$         15.6$       GENERAL FUND Revenues for the Year Ended June 30 (in millions) Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 21 All other revenue increased from prior year by $6.7 million primarily due to $2.7 million increase in plan check  fees, $0.7 million increase in golf course related fees and $1.1 million increase in permits and licenses.    Expenditures  General Fund expenditures totaled $165.6 million for FY 2018 compared to $158.0 in the prior year.  This  amount excludes encumbrances and reappropriations. The majority of increases were related to higher salary  and benefit costs with the implementation of new bargaining agreements. In addition, the benefit costs,  especially CalPERS retirement and retiree health costs, were substantially higher compared to the prior year.  The year over year change for major functions is noted in the following table.    Increase/ Expenditures by Function 2018 2017 (Decrease) Administrative Services 5.3$          5.0$          0.3$          Public Works 14.6 13.6 1.0            Planning and Community Environment 8.3 9.1 (0.8) Development Services 11.7 10.9 0.8 Police 40.3 39.6 0.7 Fire 33.5 31.4 2.1 Community Services 27.1 25.2 1.9 Library 9.1 9.0 0.1 Non‐Departmental 6.0 5.9 0.1 All other 9.6 8.3 1.3 Total Expenditures 165.5$     158.0$     7.5$          GENERAL FUND Expenditures for the Year Ended June 30 (in millions)     Public Works expenditures variance of $1.0 million was mainly due to increased janitorial services and salary  and benefit costs.     Fire department expenditures increased $2.1 million due to $1.5 million salary and overtime and $0.6 million  in other categories.    Community Services expenditures increased $1.9 million mainly due to golf course maintenance and salary  and benefit costs.    Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 22 Statement of Revenues, Expenditures and Changes in Fund Balance ‐ Budget and Actual    Original budget compared to final budget  Revenues were originally budgeted at $175.1 million and were revised downward by $0.2 million.  Revenue  categories that were adjusted are shown in the table below.    Adopted Final Increase/ Budgeted Revenues Budget Budget (Decrease) Property tax 41.9$          42.3$       0.4$          Sales tax 31.5 30.2 (1.3) Utility user tax 13.9 15.4 1.5 Transient occupancy tax 25.1 24.4 (0.7) Documentary transfer tax 6.9 6.9 ‐            All other 55.8 56.1 0.3 175.1 175.3 0.2 Charges to other funds 11.1 11.1 ‐              Prior year encumbrances and appropriations ‐                8.1 8.1 Total Budgeted Revenues 186.2$       194.5$     8.3$          GENERAL FUND Budgeted Revenues for the Year Ended June 30 (in millions)     In FY 2018, there were no major changes to the Adopted Budget general fund revenues. These were minor  changes in the taxes.   Actual revenues of $182.5 million were $7.2 million higher than final budgeted revenues of $175.3 million due  to the following:   $1.4 million higher than anticipated sales and property tax proceeds;   $2.3 million higher than expected documentary transfer tax;    $1.7 million higher than expected charges for services; and   All other revenue categories also reported favorable variances.     Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 23 Expenditures were originally budgeted at $180.5 million and were revised upward by $10.1 million, including  prior year encumbrances and reappropriations of $8.1 million, for a final budgeted amount of $190.6 million.    GENERAL FUND Budgeted Expenditures for the Year Ended June 30 (in millions) Adopted Final Increase/ Actuals, plus Budgeted Expenditures Budget Budget (Decrease) Encumbrances Community Services 27.6$          28.8$       1.2$          28.4$                  Fire 31.8   34.1 2.3 34.1 Police 43.4   43.4 0.0 41.9 Library 9.4   9.8 0.4 9.4 Planning and Community Environment 8.5 10.7 2.2 10.4 Public Works 17.0 19.1 2.1 18.9 Development Services 12.5 13.2 0.7 12.6 Non‐departmental 8.4 8.1            (0.3) 7.2 All other 21.9 23.5 1.6 22.1 Total Budgeted Expenditures 180.5$       190.7$     10.2$       185.0                  Less: Charges to Other Funds (11.5)                   Less: Encumbrances/reappropriations  (7.8) Net General Fund Expenditures 165.7$                    The  final  budgeted  expenditure  amount  of  $190.6  million  compares  to  the  actual  expenditures  plus  encumbrances/reappropriations  of  $184.9  million,  a  difference  of  $5.7  million,  of  which  $7.8  million  is  encumbrances and reappropriations carried forward to FY 2019.  The lower than budgeted expenditures were  primarily due to vacancy and benefits savings higher than expected.    Transfers out were originally budgeted at $29.8 million, with the final budget number at $29.7 million, a  decrease of $0.1 million.     Capital Projects Fund     Capital Projects Fund expenditures and other uses were $41.0 million in FY 2018 an increase of $1.3 million  from the prior year.    Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 24 Non‐major Funds  These funds are not presented separately in the Basic Financial Statements, but are individually presented as  Supplemental Information.  Financial Analysis of Enterprise Funds   At June 30, 2018, the City’s Enterprise Funds reported total net position of $688.1 million, a decrease of $11.2  million or 1.6 percent from the prior year, which includes the impact of the restatement from implementation  of GASB 75 of $40.3 million. The decrease was primarily from the Electric, Gas, Wastewater Collection and the  Wastewater Treatment Funds. Further analysis is noted in the following section. Unrestricted net position for  the Enterprise Funds totaled $109.4 million, a 31.7 percent decrease from FY 2017.  Of the $50.9 million  decrease, $40.3 million is a result of the adjustment for the GASB 75 OPEB liability.    Following is a table which compares the year over year change in net position for each of the Enterprise Funds.    ENTERPRISE FUNDS Change in Net Position for the Year Ended June 30 (in millions) Increase/ Fund Name 2018 2017 (Decrease) Water 5.1$            6.5$          (1.4)$        Electric (1.2) (1.2) ‐            Fiber Optics 1.7 2.2 (0.5) Gas 1.5 2.4 (0.9) Wastewater Collection 1.0 1.5 (0.5) Wastewater Treatment 4.8 (0.1) 4.9 Refuse 6.1 3.3 2.8 Storm Drainage 1.8 2.5 (0.7) Airport 10.1 2.4 7.7 Total Change in Net Position 30.9$          19.5$       11.4$         The most significant factors in the year over year change in net position for Enterprise Funds are as follows:   Wastewater  Treatment  increased  its  net  position  $4.9  million  as  a  result  of  increased  billing  to  partners and $4.0 million in federal grant revenues that represents forgiveness of a portion of the  State Water Resources Control Board loan amount. The principal was forgiven for $4.0 million for the  sewage “bio‐solids” incinerators project (2017 State Water Resources Loan).    Net position for Refuse increased $2.8 million. Revenues were higher due to a 5 percent rate increase  in the current year and decrease in operating expenses due to rent and green waste costs.    The net positon for Airport increased $7.7 million.  Revenues were higher resulting from a federal  grant reimbursement for $9.3 million for capital improvement projects.    Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 25 CAPITAL ASSETS  GASB 34 requires that the City record all its capital assets, including infrastructure and intangible assets.   Infrastructure includes roads, bridges, signals and similar assets used by the entire population.  The table  below shows capital assets and the amount of accumulated depreciation for these assets for Governmental  and Business‐type Activities.  Further detail can be found in Note 6 to the financial statements.    Increase/ 2018 2017 (Decrease) Governmental activites Capital Assets Land and improvements 78.5$                 78.5$         ‐                  Street trees 14.8                   14.9           (0.1)                 Construction in progress 69.3                   62.7           6.6                   Building and improvements 246.5                225.4         21.1                Intangible assets 3.8                      3.8              ‐                  Equipment 12.6                   11.9           0.7                   Roadway network 334.3                324.8         9.5                   Recreation and open space network 35.2                   35.2           ‐                  Less accumulated depreciation (269.0)               (253.3)       (15.7)               Internal Service funds ‐                  Construction in progress 1.9                      3.2              (1.3)                 Equipment 61.6                   56.9           4.7                   Less accumulated depreciation (41.7)                  (41.5)          (0.2)                 Total Governmental Activities 547.8                522.5         25.3                Business‐Type Activities Land 5.0                      5.0              ‐                  Construction in progress 153.4                110.3         43.1                Buildings and improvements 59.9                   56.9           3.0                   Capital Leases 0.5                      ‐             0.5                   Infrastructure 0.6                      0.6              ‐                  Transmission, distribution and treatment systems 779.3                765.8         13.5                Less accumulated depreciation (362.0)               (343.4)       (18.6)               Total Business‐type Activities 636.7$              595.2$       41.5$              CAPITAL ASSETS AT JUNE 30 (in millions)   Governmental Activities’ capital assets net of depreciation increased by $25.2 million from the prior year.  The  increase was primarily due to Golf Course improvements, city facilities improvements and street and sidewalk  improvements throughout the City.    Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 26 Council approved a $125.8 million Infrastructure Plan (IP) in June 2014, which includes projects such as a new  Public  Safety  Building,  replacement  of  two  Fire  Stations,  a  Bike  and  Pedestrian  plan,  and  two  parking  garages.  Through the developments of the 2019‐2023 Capital Improvement Projects, the IP was updated for  scope increases and cost escalations, resulting in a revised IP of $249.9 million. Funding for these projects will  come from a variety of sources, including TOT revenues, Stanford University Medical Center development  agreement, grant revenue, developer impact fees and the one time issuance of COPs.   Major Governmental Activities’ capital projects that are currently in progress, including the remaining capital  commitment of each, are as follows:  Fire Station 3 replacement  ‐ $5.6 million Charleston Arastradero Corridor  ‐ $10.2 million Bicycle Boulevards Implementation Project ‐ $9.3 million Business‐type Activities’ capital assets net of depreciation increased by $41.5 million over FY 2017.  The  increase is due primarily to Water, Electric, Wastewater Treatment, Storm Drainage and Airport infrastructure  improvements.  Major Business‐type Activities’ capital projects that are currently in progress, including the remaining capital  commitment of each, are as follows:  Water Main Replacement for Water fund ‐ $4.7 million Dewatering & Loadout Facility Project for Wastewater Treatment Fund ‐ $12.3 million Gas Main Replacement for Gas Fund ‐ $6.8 million The City depreciates its capital assets over their estimated useful lives, as required by GASB 34.  The purpose  of depreciation is to spread the cost of a capital asset over the years of its useful life so that an allocable  portion of the cost of the asset is borne by all users. Additional information on capital assets and depreciable  lives are in Note 6.  Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 27 DEBT ADMINISTRATION Each of the City’s debt issues is discussed in detail in Note 7 to the financial statements.    The City’s debt as  of June 30, 2018 is shown in the following table.  Increase/   2018 2017 (Decrease) Governmental Activities General Long‐Term Obligations Certificates of Participation   2002B Downtown Parking Improvements ‐$            1.0$          (1.0)$        General Obligation Bonds         2010 45.8 47.0 (1.2) 2013A 16.3 16.7 (0.4) 2011 Lease Purchase Agreement 0.4 0.8 (0.4)   Add: unamortized premium 3.6 3.8 (0.2) 2018 Capital Improvement, COP 9.0 ‐            9.0 Total Governmental Activities 75.1$       69.3$       5.8$          Business‐type Activities Enterprise Long‐Term Obligations Utility Revenue Bonds          1995 Series A 1.3$          1.8$          (0.5)$          1999 Refunding 8.2 9.0 (0.8) 2009 Series A 27.7          28.7          (1.0) 2011 Refunding 10.2          11.3          (1.1) Add: unamortized premium 0.6            0.7            (0.1) Energy Tax Credit Bonds 2007 Series A 0.4            0.5            (0.1) Less: unamortized discount (0.1) (0.1) ‐            State Water Resources Loan 2007 5.0            5.4            (0.4) 2009 6.1            6.5            (0.4) 2017 6.7            3.2            3.5 Total Business‐type Activities 66.1$       67.0$       (0.9)$        LONG‐TERM DEBT AT JUNE 30 (in millions)   City‐wide long‐term debt increased a total of $4.8 million due to an issuance of COPs that refinanced existing  COPs and financed the Golf Course renovation and an addition to the 2017 State Water Resources Loan.  As  noted in the Statistical Section of the CAFR, the combined direct debt ratio to assessed valuation for the  General Fund is 0.21 percent compared to the allowable legal debt margin of 15 percent. Management’s Discussion and Analysis  ……….…………………………………………………………………… City of Palo Alto 28 SPECIAL ASSESSMENT DISTRICT DEBT  Special  assessment  districts  throughout  different  parts  of  the City  have  also  issued  debt  to  finance  infrastructure and facilities construction exclusively in their districts. As of June 30, 2018, the City had no  special assessment district debt with City commitment outstanding.    CONTACTING THE CITY’S FINANCIAL MANAGEMENT  The CAFR is intended to provide citizens, taxpayers, investors, and creditors with a general overview of the  City’s finances. Questions about this report should be directed to the Administrative Services Department, at  250 Hamilton Avenue, 4th Floor, Palo Alto, California. The Department can also be contacted by email at:  adminsvcs@cityofpaloalto.org.  This report and other financial reports can be viewed on the City of Palo Alto  website at: www.cityofpaloalto.org. On the home page, select Departments, select Administrative Services,  and select Financial Reporting. Within Financial Reporting, there are links to reports by title and reporting  date.   CITY OF PALO ALTO Statement of Net Position June 30, 2018 (Amounts in thousands) Governmental Business‐Type  Activities Activities Total ASSETS: Cash and investments available for operations (Note 3) 280,681$     237,800$      518,481$       Receivables, net: Accounts and intergovernmental 19,575         39,237          58,812            Interest receivable 1,872           1,373            3,245             Notes and loans receivable (Note 5) 34,295          ‐                 34,295            Internal balances (Note 4) 2,122           (2,122)            ‐                 Deposits 15                  ‐                 15                   Due from other government agencies ‐                3,300            3,300             Inventory of materials and supplies, prepaids and deposits 4,641           310                4,951             Restricted cash and investments with fiscal agents and trustees (Note 3) 6,185           4,014            10,199            Capital assets (Note 6): Nondepreciable 168,026       158,377        326,403         Depreciable, net of accumulated depreciation 379,715       478,337        858,052         Total assets 897,127       920,626        1,817,753      DEFERRED OUTFLOWS OF RESOURCES: Unamortized loss from refunding ‐                239                239                Pension related (Note 11): 63,621         22,698          86,319            OPEB related (Note 12): 15,210         6,139            21,349            Total deferred outflows of resources 78,831         29,076          107,907         LIABILITIES: Accounts payable and accruals 14,012         28,426          42,438            Accrued salaries and benefits 1,714           720                2,434             Unearned revenue 2,966            ‐                 2,966             Accrued compensated absences (Note 1): Due in one year 5,996            ‐                 5,996             Due in more than one year 6,062            ‐                 6,062             Claims payable (Note 14): Due in one year 5,835            ‐                 5,835             Due in more than one year 17,913          ‐                 17,913            Landfill post‐closure liability (Note 9): Due in more than one year ‐                6,825            6,825             Net pension liabilities (Note 11) 302,131       112,981        415,112         Net OPEB liabilities (Note 12) 109,377       44,132          153,509         Long‐term debt (Note 7): Due in one year 2,259           4,533            6,792             Due in more than one year 72,887         61,586          134,473         Total liabilities 541,152       259,203        800,355         DEFERRED INFLOWS OF RESOURCES: Pension related (Note 11): 5,644           1,644            7,288             OPEB related (Note 12): 1,792           724                2,516             Total deferred inflows of resources 7,436           2,368            9,804             NET POSITION (Note 10): Net Investment in capital assets 473,233       573,688        1,046,921      Restricted for: Transportation, infrastructure and other 36,108          ‐                 36,108            Debt service 3,571           4,014            7,585             Nonexpendable ‐ Eyerly Family 1,498            ‐                 1,498             Total restricted net position 41,177         4,014            45,191            Unrestricted (87,040)        110,429        23,389            Total net position $      427,370 $      688,131   $  1,115,501  See accompanying notes to the basic financial statements. 29 30  This page is left intentionally blank.    CITY OF PALO ALTO Statement of Activities For the Year Ended June 30, 2018 (Amounts in thousands) Net (Expense) Revenue and Program Revenues Changes in Net Position Operating Capital Charges for Grants and Grants and Governmental Business‐Type Functions/Programs Expenses Services Contributions Contributions Activities Activities Total Governmental Activities: City Council 345$               ‐$               ‐$               ‐$              (345)$              ‐$              (345)$             City Manager 2,757              ‐               59                 ‐               (2,698)            ‐                (2,698)           City Attorney 2,511              ‐                ‐                ‐               (2,511)            ‐                (2,511)           City Clerk 931                 ‐                ‐                ‐               (931)               ‐                (931)              City Auditor 994                 ‐                ‐                ‐               (994)               ‐                (994)              Administrative Services 13,949           6,536            ‐                ‐               (7,413)            ‐                (7,413)           Human Resources 2,674              ‐                ‐                ‐               (2,674)            ‐                (2,674)           Public Works 30,349           781               ‐               1,523           (28,045)        ‐                (28,045)        Planning and Community Environment 11,357           5,119           594               ‐               (5,644)            ‐                (5,644)           Development Services 12,664           16,000          ‐                ‐               3,336             ‐                3,336            Public Safety 83,923           13,507         1,656            ‐               (68,760)        ‐                (68,760)        Community Services 33,709           21,285         11,741         11                (672)               ‐                (672)              Library 12,208           145              4                    ‐               (12,059)        ‐                (12,059)        Interest on long‐term debt 2,761              ‐                ‐                ‐               (2,761)            ‐                (2,761)           Total Governmental Activities 211,132         63,373         14,054         1,534           (132,171)      ‐                (132,171)      Business‐Type Activities: Water 40,836           45,087         501              531               ‐                5,283             5,283            Electric 146,033         154,142        ‐                ‐                ‐                8,109             8,109            Fiber Optics 2,653             4,529            ‐                ‐                ‐                1,876             1,876            Gas 27,930           37,044          ‐                ‐                ‐                9,114             9,114            Wastewater Collection 16,801           17,990          ‐               329               ‐                1,518             1,518            Wastewater Treatment 27,518           27,382          ‐               4,000            ‐                3,864             3,864            Refuse 28,808           34,647          ‐                ‐                ‐                5,839             5,839            Storm Drainage 5,059             6,964            ‐                ‐                ‐                1,905             1,905            Airport 1,656             2,382            ‐               9,334            ‐                10,060           10,060          Total Business‐Type Activities 297,294         330,167       501              14,194          ‐                47,568           47,568          Total 508,426$      393,540$     14,555$        15,728$        (132,171)     47,568           (84,603)        General Revenues: Taxes: Property tax 47,170           ‐                47,170          Sales tax 31,091           ‐                31,091          Utility user tax 15,414           ‐                15,414          Transient occupancy tax 24,937           ‐                24,937          Documentary transfer tax 9,229             ‐                9,229            Other taxes 2,108             ‐                2,108            Investment earnings 420               596               1,016            Miscellaneous 1,973             ‐                1,973            Transfers (Note 4)19,077          (19,077)          ‐                Total general revenues and transfers         151,419 (18,481)         132,938        Change in net position 19,248          29,087           48,335          Net Position, beginning of year, as previously stated 527,289       699,294         1,226,583    Restatement for implementation of  GASB Statement No. 75 (119,167)     (40,250)         (159,417)      Net position, beginning of year, as restated 408,122       659,044         1,067,166    Net position, end of year 427,370$     688,131$      1,115,501$   See accompanying notes to the basic financial statements. 31 32  This page is left intentionally blank.    CITY OF PALO ALTO Governmental Funds Balance Sheet June 30, 2018 (Amounts in thousands) Capital Other Total General Projects Governmental Governmental Fund Fund Funds Funds ASSETS: Cash and investments available for operations (Note 3) 49,250$        82,525$        70,655$         202,430$       Receivables, net: Accounts and intergovernmental 18,881         242               399                 19,522          Interest receivable 950               27                 432                 1,409            Notes and loans receivable (Note 5) 479                  ‐                 33,816           34,295            Deposits 15                    ‐                  ‐                 15                    Advance to other fund (Note 4) 3,128              ‐                  ‐                 3,128              Inventory of materials and supplies 4,427            ‐                ‐                 4,427            Restricted cash and investments with fiscal agents (Note 3)‐               638                ‐                 638                Total assets 77,130$        83,432$        105,302$       265,864$       LIABILITIES AND FUND BALANCES: Liabilities: Accounts payable and accruals 4,293$          5,452$          358$              10,103$         Accrued salaries and benefits 1,525           70                 16                   1,611            Unearned revenue 2,966            ‐                ‐                 2,966            Interfund payables and advances ‐                ‐               13                   13                  Total liabilities 8,784           5,522           387                 14,693          Fund balances (Note 10): Nonspendable: Notes and loans receivable 479                ‐                ‐                 479                Deposits 15                  ‐                ‐                 15                  Inventories 4,427            ‐                ‐                 4,427            Advance to other fund 3,128            ‐                ‐                 3,128            Eyerly family ‐                ‐               1,498             1,498            Restricted for:  Transportation mitigation ‐                ‐               10,511           10,511          Federal revenue ‐                ‐               5,080             5,080            Street improvement  ‐                ‐               562                 562                Local law enforcement ‐                ‐               322                 322                Library bond project ‐               638                ‐                 638                Public benefit ‐                ‐               19,633           19,633          Debt service ‐                ‐               3,571             3,571            Committed for: Development Services 373                ‐                ‐                 373                Roth Building Rehabilitation ‐               4,020            ‐                 4,020            Cubberley Improvements ‐               4,991            ‐                 4,991            Developer impact fees ‐                ‐               13,764           13,764          Housing in‐lieu ‐                ‐               44,863           44,863          Special districts ‐                ‐               5,143             5,143            Assigned for: Capital projects ‐               68,261          ‐                 68,261          Other general government purposes 5,325            ‐                ‐                 5,325            Reappropriations 1,773            ‐                ‐                 1,773            Unassigned for: Budget Stabilization 52,826          ‐                ‐                 52,826          Downtown business  ‐                ‐               (32)                 (32)                Total fund balances 68,346         77,910         104,915         251,171        Total liabilities and fund balances 77,130$        83,432$        105,302$       265,864$       See accompanying notes to the basic financial statements. 33 CITY OF PALO ALTO Reconciliation of the Balance Sheet of Governmental Funds to  the Statement of Net Position ‐ Governmental Activities June 30, 2018 Total fund balances reported on the governmental funds balance sheet 251,171$       Amounts reported  for governmental activities in the statement of net position are different from those reported in the governmental funds balance sheet because of the following: Deferred outflows and inflows of resources in governmental activities are not  financial resources and, therefore, are not reported in the governmental funds. Deferred outflows of resources 78,831 Deferred inflows of resources (7,436)            Capital assets used in governmental activities are not current assets or financial  resources and therefore are not reported in the governmental funds (Note 6)547,741         Internal service funds are used by management to charge the costs of activities  such as insurance, equipment acquisition and maintenance, and certain  employee benefits to individual funds.  The assets and liabilities of the  internal service funds are therefore included in governmental activities in  the statement of net position (excludes capital assets, deferred outflows   of resources, deferred inflows of resources, net pension liabilities and net OPEB liabilities reported herein)44,922 Some liabilities, including bonds payable, are not due and payable in the  current period and therefore are not reported in the governmental funds: Interest payable (1,205)            Net pension liabilities (Note 11)(302,131)        Net OPEB liabilities (Note 12)(109,377)        Long‐term debt (Note 7)(75,146)           Net position of governmental activities 427,370$       (Amounts in thousands) See accompanying notes to the basic financial statements. 34 CITY OF PALO ALTO Governmental Funds Statement of Revenues, Expenditures and Changes in Fund Balances For the Year Ended June 30, 2018 (Amounts in thousands) Capital Other Total General Projects Governmental Governmental Fund Fund Funds Funds REVENUES: Property tax 42,839$         ‐$               4,331$           47,170$         Special assessments ‐                 ‐                72                   72                  Sales tax 31,091          ‐                 ‐                  31,091          Utility user tax 15,414          ‐                 ‐                  15,414          Transient occupancy tax 24,937          ‐                 ‐                  24,937          Documentary transfer tax 9,229             ‐                 ‐                  9,229             Other taxes and fines 2,141             ‐                2,116              4,257             Contributions ‐                 ‐                11,733           11,733          Charges for services 26,824          ‐                11                   26,835          Intergovernmental 3,205            1,595            592                 5,392             Permits and licenses 8,560             ‐                4,226              12,786          Investment earnings (828)              1,016            198                 386                Rental income 15,896          ‐                6                      15,902          Other revenue 776               131               5,160              6,067             Total revenues 180,084       2,742            28,445           211,271        EXPENDITURES: Current: City Council 337                ‐                 ‐                  337                City Manager 2,509             ‐                 ‐                  2,509             City Attorney 2,244             ‐                 ‐                  2,244             City Clerk 819                ‐                 ‐                  819                City Auditor 870                ‐                 ‐                  870                Administrative Services 5,347             ‐                226                 5,573             Human Resources 2,369             ‐                 ‐                  2,369             Public Works 14,569          ‐                857                 15,426          Planning and Community Environment 8,312             ‐                2,020              10,332          Development Services 11,749          ‐                 ‐                  11,749          Police 40,326          ‐                68                   40,394          Fire 33,522          ‐                 ‐                  33,522          Community Services 27,122          ‐                2,709              29,831          Library 9,120             ‐                 ‐                  9,120             Non‐Departmental 5,973             ‐                1,606              7,579             Capital outlay ‐                40,971          ‐                  40,971          Debt service: Principal 416                ‐                2,545              2,961             Interest and fiscal charges 16                  ‐                2,940              2,956             Total expenditures 165,620       40,971         12,971           219,562        EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES 14,464         (38,229)        15,474           (8,291)           OTHER FINANCING SOURCES (USES): Issuance of debt ‐                8,375            595                 8,970             Transfers in (Note 4) 20,310         35,844         728                 56,882          Transfers out (Note 4) (29,535)        (116)              (11,434)          (41,085)         Total other financing sources (uses) (9,225)          44,103         (10,111)          24,767          Change in fund balances 5,239            5,874            5,363              16,476          FUND BALANCES, BEGINNING OF YEAR 63,107         72,036         99,552           234,695        FUND BALANCES, END OF YEAR 68,346$        77,910$        104,915$       251,171$       See accompanying notes to the basic financial statements. 35 CITY OF PALO ALTO Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances  of Governmental Funds to the Statement of Activities ‐ Governmental Activities For the Year Ended June 30, 2018 Net change in fund balances ‐ total governmental funds 16,476$         Amounts reported for governmental activities in the statement of activities are different from those reported in the governmental funds because of the following: Governmental funds report capital outlays as expenditures. However, in the statement of activities, the costs of these assets are capitalized and allocated over their estimated useful lives and reported as depreciation expense.  Therefore, the activities associated with  capital assets are as follows: Capital outlay added back to fund balance for current year additions 41,586           Depreciation expense is deducted from fund balance (depreciation expense is net of  internal service fund depreciation of $3,074 (Note 6), which has already been allocated through the internal service fund activities below (15,814)          Disposal of capital assets (3,659)            Pension and OPEB contribution made subsequent to the measurement date is an  expenditure in the governmental funds, but reported as a deferred outflows of  resources in the government‐wide financial statements 37,915           Pension and OPEB expenses reported in the statement of activities do not require the  use of current financial resources and, therefore, are not reported as expenditures in  governmental funds (50,932)          Principal payments on long‐term liabilities are reported as expenditures in governmental funds when paid.  The governmental activities, however, report principal payments as  a reduction of long‐term debt on the statement of net position.  Interest accrued on  long‐term debt and amortization of premiums do not require the use of current financial  resources and therefore are not reported as expenditures in governmental funds.  Therefore,  the activities associated with long‐term debt are as follows: Principal paid during the year 2,961              Proceeds from debt issuance (8,970)            Change in interest payable 37                   Amortization of bond premium 158                 Internal service funds are used by management to charge the costs of activities, such  as insurance, equipment acquisition and maintenance, and employees benefits to  individual funds.  The portion of the net expense of these internal service  funds arising out of their transactions with governmental funds is reported with  governmental activities. (510)                Change in net position of governmental activities 19,248$         (Amounts in thousands) See accompanying notes to the basic financial statements. 36 Variance with Budgeted Amounts Final Budget Actual, Budgetary Positive Adopted Final Basis (Negative) 31,458$        30,208$        31,091$             883$              41,927         42,327         42,839              512                 25,143         24,398         24,937              539                 Documentary transfer tax 6,930           6,930           9,229                 2,299             13,867         15,367         15,414              47                   2,060           2,060           2,141                 81                   26,902         25,125         26,824              1,699             8,432           8,432           8,560                 128                 1,050           1,050           1,536                 486                 15,502         15,485         15,896              411                 1,355           3,074           3,205                 131                 501               824               776                    (48)                  175,127       175,280       182,448            7,168             11,076         11,076         11,476              400                 ‐                8,097           8,097                  ‐                  186,203       194,453       202,021            7,568             3,356           3,825           3,624                 201                 1,301           1,427           1,276                 151                 1,374           1,372           1,206                 166                 500               524               489                    35                   3,681           4,227           4,031                 196                 7,983           8,038           7,849                 189                 27,560         28,756         28,395              361                 Police 43,372         43,425         41,923              1,502             31,774         34,077         34,052              25                   3,714           4,044           3,652                 392                 9,447           9,767           9,357                 410                 8,452           10,708         10,446              262                 Development Services 12,540         13,187         12,560              627                 16,975         19,071         18,908              163                 8,437           8,142           7,149                 993                 180,466       190,590       184,917            5,673             5,737           3,863           17,104              13,241           20,791         20,310         20,310               ‐                  (29,888)        (29,735)        (29,735)              ‐                  (9,097)          (9,425)          (9,425)                ‐                  (3,360)$         (5,562)$         7,679                 13,241$         Unrealized gain/loss on investments (2,364)                Changes in advances to other funds 200                     Current year encumbrances and reappropriations 7,821                  Prior year encumbrances and reappropriations (8,097)                5,239                  63,107               68,346$              FUND BALANCE AT BEGINNING OF YEAR, GAAP BASIS FUND BALANCE AT END OF YEAR, GAAP BASIS EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES, BUDGETARY BASIS Adjustment to Budgetary Basis: CHANGE IN FUND BALANCE, GAAP BASIS Total other financing sources (uses) Human Resources Library Planning and Community Environment Total expenditures EXCESS OF REVENUES OVER EXPENDITURES OTHER FINANCING SOURCES (USES):  Transfers in Transfers out Public Works Non‐Departmental Fire Prior year encumbrances Total revenues EXPENDITURES: Current: City Attorney City Auditor City Clerk City Council City Manager Administrative Services Community Services Charges to other funds and departments Sales tax Property tax Transient occupancy tax Utility user tax Other taxes, fines and penalties Charges for services Permits and licenses Investment earnings Rental income From other agencies Other revenues REVENUES: CITY OF PALO ALTO General Fund Statement of Revenues, Expenditures and Changes in Fund Balance ‐ Budget and Actual For the Year Ended June 30, 2018 (Amounts in thousands) See accompanying notes to the basic financial statements. 37 Fiber Water Electric Optics Gas ASSETS: Current assets: Cash and investments available for operations (Note 3) 38,726$         90,470$         28,656$          28,705$          Accounts receivable, net of allowance of $608 5,715            18,727          1,094             2,476              Interest receivable 224               530               161                163                 Due from other government agencies ‐                      ‐                      ‐                       ‐                       Inventory of materials and supplies ‐                      ‐                      ‐                       ‐                       Restricted cash and investments with fiscal agents and trustees (Note 3) 3,219             ‐                      ‐                      795                 Total current assets 47,884          109,727        29,911           32,139            Noncurrent assets: Due from other government agencies ‐                      ‐                      ‐                       ‐                       Deposit ‐                     35                   ‐                       ‐                       Prepaid expense 92                   ‐                      ‐                       ‐                       Capital assets (Note 6): Nondepreciable 27,555          25,696          2,923             8,366              Depreciable, net 98,964          168,441        5,827             95,701            Total noncurrent assets 126,611        194,172        8,750             104,067           Total assets 174,495        303,899        38,661           136,206           DEFERRED OUTFLOWS OF RESOURCES: Unamortized loss from refunding 104                ‐                      ‐                      135                 Pension related 2,939              7,403              567                 3,153               OPEB related 690                 2,246               ‐                       988                  Total deferred outflows of resources 3,733            9,649            567                4,276              LIABILITIES: Current liabilities: Accounts payable and accruals 5,617            8,001            955                3,022              Accrued salaries and benefits 94                  241               18                   100                 Accrued compensated absences (Note 1)‐                      ‐                      ‐                       ‐                       Current portion of long term debt (Note 7) 1,636            100                ‐                      619                 Accrued claims payable (Note 14)‐                      ‐                      ‐                       ‐                       Total current liabilities 7,347            8,342            973                3,741              Noncurrent liabilities: Accrued compensated absences (Note 1)‐                      ‐                      ‐                       ‐                       Accrued claims payable (Note 14)‐                      ‐                      ‐                       ‐                       Advance from other fund (Note 4)‐                      ‐                      ‐                       ‐                       Landfill post‐closure liability (Note 9)‐                      ‐                      ‐                       ‐                       Net pension liabilities (Note 11) 15,180          36,384          2,381             16,202            Net OPEB liabilities (Note 12) 4,958            16,149           ‐                      7,107              Long term debt, net of  unamortized discounts/premiums (Note 7) 31,496          278                ‐                      5,370              Total noncurrent liabilities 51,634          52,811          2,381             28,679            Total liabilities 58,981          61,153          3,354             32,420            DEFERRED INFLOWS OF RESOURCES: Pension related 213               531               41                   228                 OPEB related 81                  265                ‐                      116                 Total deferred inflows of resources 294               796               41                   344                 NET POSITION (Note 10): Net Investment in capital assets 93,491          193,313        8,750             98,213            Restricted for debt service 3,219             ‐                      ‐                      795                 Unrestricted (deficit) 22,243          58,286          27,083           8,710              Total net position 118,953$      251,599$      35,833$          107,718$        Some amounts reported for Business‐type Activities in the statement of net position are different because certain Internal Service Fund net positions are included with Business‐type Activities Net position reported in Business‐type Activities Business‐Type Activities‐Enterprise Funds CITY OF PALO ALTO Proprietary Funds Statement of Net Position June 30, 2018 (Amounts in thousands) See accompanying notes to the basic financial statements. 38 Governmental Activities ‐ Wastewater Wastewater Storm Internal Service Collection Treatment Refuse Drainage Airport Totals Funds 8,419$            12,897$          23,703$         5,189$           1,035$           237,800$      78,251$           2,165              2,504              3,548             754               2,254            39,237          53  48 83 119                40 5 1,373            463                  ‐ 300                 ‐‐‐300               ‐  ‐ ‐ ‐‐‐‐214                  ‐ ‐ ‐‐‐4,014            5,547               10,632            15,784            27,370           5,983            3,294            282,724        84,528             ‐ 3,000               ‐‐‐3,000            ‐  ‐ ‐ ‐‐‐35 ‐  ‐ 183                 ‐‐‐275               ‐  33,240            26,773            1,952             18,435          13,437          158,377        1,873               54,538            28,717            3,359             22,179          611               478,337        19,905             87,778            58,673            5,311             40,614          14,048          640,024        21,778             98,410            74,457            32,681           46,597          17,342          922,748        106,306           ‐ ‐ ‐‐‐239               ‐  1,754              4,739              966                 872                 305                 22,698            3,795               378                 1,164              421                 184                 68 6,139              822                  2,132              5,903              1,387             1,056            373               29,076          4,617               572                 4,602              2,594             557               2,506            28,426          2,704               58 141                 30 27 11 720               103                  ‐ ‐ ‐‐‐‐5,996               94 1,399              ‐685               ‐4,533            ‐  ‐ ‐ ‐‐‐‐5,835               724                 6,142              2,624             1,269            2,517            33,679          14,638             ‐ ‐ ‐‐‐‐6,062               ‐ ‐ ‐‐‐‐17,913             ‐ ‐ ‐‐3,115            3,115            ‐  ‐ ‐ 6,825             ‐‐6,825            ‐  9,075              22,984            6,009             3,991            775               112,981        16,710             2,717              8,366              3,024             1,320            491               44,132          5,910               551                 19,838            ‐4,053            ‐61,586          ‐  12,343            51,188            15,858           9,364            4,381            228,639        46,595             13,067            57,330            18,482           10,633          6,898            262,318        61,233             128                 340                 70 70 23 1,644            286                  45 137                 50 22 8 724               97  173                 477                 120 92 31 2,368            383                  87,133            37,553            5,311             35,876          14,048          573,688        21,778             ‐ ‐ ‐‐‐4,014            ‐  169                 (15,000)           10,155           1,052            (3,262)           109,436        27,529             87,302$          22,553$          15,466$         36,928$         10,786$         687,138        49,307$           993                688,131$       Business‐Type Activities‐Enterprise Funds See accompanying notes to the basic financial statements. 39 Fiber Water Electric Optics Gas OPERATING REVENUES: Sales to:  Customers 40,661$         122,089$      3,380$            33,389$          City departments 2,735            4,264            874                 1,373             Surplus energy ‐                     11,792           ‐                        ‐                      Service connection charges and miscellaneous 852               1,766            101                 1,079             Charges for services ‐                      ‐                      ‐                        ‐                      Other 839               14,231          174                 1,203             Total operating revenues 45,087          154,142        4,529              37,044           OPERATING EXPENSES: Purchase of utilities: Retail purchase of utilities 21,958          83,910           ‐                       12,921           Surplus energy ‐                     10,749           ‐                        ‐                      Administrative and general 5,743            9,762            820                 4,767             Engineering (operating) 349               1,776             ‐                       345                Resource management and energy efficiency 911               5,941             ‐                       1,176             Operations and maintenance 5,626            11,384          1,453              4,561             Rent 1,776            5,285            75                    602                Depreciation and amortization 2,722            8,095            337                 3,152             Claims payments and changes in estimated self‐insurance liability ‐                      ‐                      ‐                        ‐                      Refund of charges for services ‐                      ‐                      ‐                        ‐                      Employment benefits ‐                      ‐                      ‐                        ‐                      Total operating expenses 39,085          136,902        2,685              27,524           Operating income (loss) 6,002            17,240          1,844              9,520             NONOPERATING REVENUES (EXPENSES): Investment earnings 122               310               40                    24                   Interest expense (1,703)           (8,787)            ‐                       (203)               Gain on disposal of capital assets ‐                      ‐                      ‐                        ‐                      Loss on disposal of capital assets (117)              (26)                 ‐                       (122)               Other nonoperating revenues 501                ‐                      ‐                        ‐                      Total nonoperating revenues (expenses)(1,197)           (8,503)           40                    (301)               Income (loss) before transfers and capital contributions 4,805            8,737            1,884              9,219             Capital contributions 531                ‐                      ‐                        ‐                      Transfers in (Note 4) 512               3,465             ‐                        ‐                      Transfers out (Note 4) (704)              (13,448)        (135)                (7,677)            Change in net position 5,144            (1,246)           1,749              1,542             NET POSITION (DEFICIT), BEGINNING OF YEAR AS PREVIOUSLY STATED 118,331        267,573        34,084            112,658         RESTATEMENT FOR IMPLEMENTATION OF GASB STATEMENT NO. 75 (4,522)           (14,728)         ‐                       (6,482)            NET POSITION (DEFICIT), BEGINNING OF YEAR, AS RESTATED 113,809        252,845        34,084            106,176         NET POSITION (DEFICIT), END OF YEAR 118,953$      251,599$      35,833$          107,718$       Some amounts reported for Business‐type Activities in the statement of activities are different because certain  Internal Service Fund activities are included with Business‐type Activities Change in net position reported in Business‐type Activities Business‐Type Activities‐Enterprise Funds CITY OF PALO ALTO Proprietary Funds Statement of Revenues, Expenses and Changes in Fund Net Position For the Year Ended June 30, 2018 (Amounts in thousands) See accompanying notes to the basic financial statements. 40 Governmental Activities‐ Wastewater Wastewater Storm Internal Service Collection Treatment Refuse Drainage Airport Totals Funds 17,324$          16,775$         30,402$          6,515$           1,760$           272,295$       ‐$                      95                    9,596              804                393                ‐                     20,134           ‐                        ‐                        ‐                        ‐                       ‐                      ‐                     11,792           ‐                        220                  ‐                        ‐                       ‐                      ‐                     4,018             ‐                        ‐                        ‐                        ‐                       ‐                      ‐                      ‐                      99,378              351                 1,011              3,441             56                  622               21,928          121                  17,990            27,382           34,647            6,964            2,382            330,167        99,499              9,559               ‐                       15,060             ‐                      ‐                     143,408         ‐                        ‐                        ‐                        ‐                       ‐                      ‐                     10,749           ‐                        1,933               ‐                       1,584             1,274            967               26,850          13,742              303                 2,374              320                198                ‐                     5,665             ‐                        ‐                        ‐                        ‐                      922                ‐                     8,950             ‐                        2,683              20,768           8,950             1,352            554               57,331          13,327              310                  ‐                       2,272             41                   ‐                     10,361           ‐                        2,049              2,882              109                763               21                  20,130          3,074                ‐                        ‐                        ‐                       ‐                      ‐                      ‐                      4,705                ‐                        ‐                        ‐                       ‐                      ‐                      ‐                      87                     ‐                        ‐                        ‐                       ‐                      ‐                      ‐                      70,547              16,837            26,024           28,295            4,550            1,542            283,444        105,482            1,153              1,358              6,352             2,414            840               46,723          (5,983)               18                    35                    15                   31                  1                    596                32                     (38)                  (423)                (156)               (298)              (64)                (11,672)         ‐                        ‐                        ‐                        ‐                       ‐                      ‐                      ‐                      218                  (12)                   ‐                        ‐                       ‐                      ‐                     (277)                ‐                        ‐                        ‐                        ‐                       ‐                      ‐                     501                42                     (32)                  (388)                (141)               (267)              (63)                (10,852)        292                  1,121              970                 6,211             2,147            777               35,871          (5,691)               329                 4,000               ‐                       ‐                     9,334            14,194           ‐                        ‐                        ‐                        ‐                       ‐                      ‐                     3,977            5,934                (442)                (210)                (62)                 (365)              (11)                (23,054)        (2,654)               1,008              4,760              6,149             1,782            10,100          30,988          (2,411)               88,772            25,423           12,075            36,350          1,134            76,528              (2,478)             (7,630)             (2,758)             (1,204)           (448)              (24,810)             86,294            17,793           9,317             35,146          686               51,718                                     87,302$          22,553$         15,466$          36,928$         10,786$         49,307$            (1,901)            29,087$          Business‐Type Activities‐Enterprise Funds See accompanying notes to the basic financial statements. 41 Fiber Water Electric Optics Gas Cash flows from operating activities: Cash received from customers 41,851$        135,515$      3,283$           34,363$          Cash refunds to customers ‐                 ‐                 ‐                  ‐                  Cash payments to suppliers for goods and services (29,786)        (119,238)      (997)              (17,863)           Cash payments to employees (5,197)          (8,471)          (663)              (4,237)             Internal activity‐ receipts (payments) from (to) other funds 2,735           4,264           874                1,373              Other receipts 839               14,231         174                1,203              Net cash provided by operating activities 10,442         26,301         2,671            14,839            Cash flows from noncapital financing activities: Receipt of loans from other funds ‐                 ‐                 ‐                  ‐                  Interest subsidy received from Build America Bonds 501                ‐                 ‐                  ‐                  Transfers in 512               3,465            ‐                  ‐                  Transfers out (704)             (13,448)        (135)              (7,677)             Net cash provided by (used in)  noncapital financing activities 309               (9,983)          (135)              (7,677)             Cash flows from capital and related financing activities: Acquisition and construction of capital assets (8,511)          (10,850)        (1,048)           (5,505)             Proceeds from sale of capital assets ‐                 ‐                 ‐                  ‐                  Capital grants and contributions 531                ‐                 ‐                  ‐                  Proceeds from debt issuance ‐                 ‐                 ‐                  ‐                  Principal paid on long‐term debt (1,573)          (100)              ‐                 (597)               Interest paid on long‐term debt (1,705)          (8,787)           ‐                 (203)               Net cash used in capital and related financing activities (11,258)        (19,737)        (1,048)           (6,305)             Cash flows from investing activities: Interest received 74                 236               2                    (14)                  Net cash provided by (used in) investing activities 74                 236               2                    (14)                  Net change in cash and cash equivalents (433)             (3,183)          1,490            843                 Cash and cash equivalents, beginning of year 42,378         93,653         27,166          28,657            Cash and cash equivalents, end of year $         41,945 $         90,470 $         28,656   $         29,500  Financial statement presentation: Cash and investments available for operations 38,726$        90,470$        28,656$         28,705$          Restricted cash and investments with fiscal agent 3,219            ‐                 ‐                 795                 Cash and cash equivalents, end of year 41,945$        90,470$        28,656$         29,500$          Reconciliation of operating income (loss) to  net cash provided by operating activities: Operating income (loss) 6,002$          17,240$        1,844$           9,520$            Adjustments to reconcile operating income (loss) to  net cash provided by operating activities: Depreciation and amortization 2,722           8,095           337                3,152              Other ‐                 ‐                 ‐                  ‐                  Change in assets and liabilities: Accounts receivable 338               (132)             (198)              (105)               Inventory of materials and supplies ‐                 ‐                 ‐                  ‐                  Deposit 8                   (20)                 ‐                  ‐                  Deferred outflow of resources ‐ pension plans (442)             (1,047)          (91)                 (477)               Deferred outflow of resources ‐ OPEB (214)             (696)              ‐                 (306)               Accounts payable and accruals 826               (173)             531                1,742              Accrued salaries and benefits 1                   (1)                  2                    5                     Accrued compensated absences ‐                 ‐                 ‐                  ‐                  Landfill closure and post‐closure care ‐                 ‐                 ‐                  ‐                  Accrued claims payable ‐                 ‐                 ‐                  ‐                  Net Pension liability 1,164           2,931           242                1,260              Net OPEB liability (40)                (129)              ‐                 (57)                  Deferred inflow of resources ‐ pension plans (4)                  (32)                4                    (11)                  Deferred inflow of resources ‐ OPEB 81                 265                ‐                 116                 Net cash provided by operating activities $         10,442 $         26,301 $           2,671   $         14,839  Business‐Type Activities‐Enterprise Funds CITY OF PALO ALTO Proprietary Funds Statement of Cash Flows For the Year Ended June 30, 2018 (Amounts in thousands) See accompanying notes to the basic financial statements. 42 Governmental Activities‐ Wastewater Wastewater Storm Internal Service Collection Treatment Refuse Drainage Airport Totals Funds 17,438$         19,716$         30,109$        6,508$          (283)$            288,500$      99,787$          ‐                   ‐                   ‐                  ‐                 ‐                 ‐                (10)                   (13,695)          (21,517)          (26,715)         (2,437)          1,633           (230,615)      (14,463)           (1,592)            (2)                    (1,483)           (1,080)          (886)             (23,611)        (79,574)           95                   9,596             804                393                ‐                20,134         (3,837)             351                 1,011             3,562            56                 622               22,049         42                    2,597             8,804             6,277            3,440           1,086           76,457         1,945              ‐                   ‐                   ‐                  ‐                200               200                ‐                   ‐                   ‐                   ‐                  ‐                 ‐                501                ‐                   ‐                   ‐                   ‐                  ‐                 ‐                3,977           5,934              (442)               (210)               (62)                 (365)             (11)                (23,054)        (2,654)             (442)               (210)               (62)                 (365)             189               (18,376)        3,280              (2,948)            (17,088)           ‐                 (5,610)          (10,370)        (61,930)        (6,275)             ‐                   ‐                   ‐                  ‐                 ‐                 ‐                248                  329                 4,300              ‐                  ‐                9,334           14,494          ‐                   ‐                  7,516              ‐                  ‐                 ‐                7,516            ‐                   (90)                  (5,358)             ‐                 (645)              ‐                (8,363)           ‐                   (38)                  (423)               (155)              (298)             (64)                (11,673)         ‐                   (2,747)            (11,053)          (155)              (6,553)          (1,100)          (59,956)        (6,027)             22                   24                   (29)                 36                 (1)                  350               (48)                   22                   24                   (29)                 36                 (1)                  350               (48)                   (570)               (2,435)            6,031            (3,442)          174               (1,525)          (850)                                8,989             15,332           17,672          8,631           861               243,339       84,648             $           8,419   $         12,897   $         23,703 $           5,189 $           1,035 $       241,814   $         83,798  8,419$           12,897$         23,703$        5,189$          1,035$          237,800$      78,251$          ‐                   ‐                   ‐                  ‐                 ‐                4,014           5,547              8,419$           12,897$         23,703$        5,189$          1,035$          241,814$      83,798$          1,153$           1,358$           6,352$          2,414$          840$              46,723$        (5,983)$           2,049             2,882             109                763               21                 20,130         3,074              ‐                   ‐                   ‐                  ‐                 ‐                 ‐                42                    (106)               2,941             (293)              (7)                  (2,043)          395               403                  ‐                   ‐                   ‐                  ‐                 ‐                 ‐                30                    ‐                  17                    ‐                  ‐                 ‐                5                    ‐                   (291)               (639)               (149)              (247)             (65)                (3,448)          (733)                (117)               (361)               (131)              (57)                (21)                (1,903)          (255)                (840)               697                 (113)              76                 2,187           4,933           1,687              5                     (2)                    (2)                   6                   (1)                  13                 14                    ‐                   ‐                   ‐                  ‐                 ‐                 ‐                580                  ‐                   ‐                  121                 ‐                 ‐                121                ‐                   ‐                   ‐                   ‐                  ‐                 ‐                 ‐                1,278              728                 1,843             367                466               154               9,155           1,709              (22)                  (67)                  (24)                 (11)                (4)                  (354)             (48)                   (7)                    (2)                    (10)                 15                 10                 (37)                50                    45                   137                 50                  22                 8                   724               97                     $           2,597   $           8,804   $           6,277 $           3,440 $           1,086 $         76,457   $           1,945  Business‐Type Activities‐Enterprise Funds See accompanying notes to the basic financial statements. 43 Agency Funds ASSETS: Cash and investments available for operations (Note 3) 2,522$           Restricted cash and investments with fiscal agents (Note 3) 2,594              Account receivable 532                 Interest receivable 14                   Total assets 5,662$           LIABILITIES: Due to bondholders 4,595$           Due to other governments 1,067              Total liabilities 5,662$           CITY OF PALO ALTO Statement of Assets and Liabilities June 30, 2018 (Amounts in thousands) Agency Funds See accompanying notes to the basic financial statements. 44 CITY OF PALO ALTO  Index to the Notes to the Basic Financial Statements   For the Year Ended June 30, 2018      45     Page    1. Summary of Significant Accounting Policies ........................................................................... 47  2. Budgets and Budgetary Accounting ........................................................................................ 56  3. Cash and Investments ............................................................................................................. 57  4. Interfund Transactions ............................................................................................................ 63  5. Notes and Loans Receivable .................................................................................................... 65  6. Capital Assets .......................................................................................................................... 70  7. General Long‐Term Obligations .............................................................................................. 77  8. Special Assessment Debt ......................................................................................................... 83  9. Landfill Post‐Closure Maintenance ......................................................................................... 84  10. Net Position and Fund Balances .............................................................................................. 84  11. Pension Plans ........................................................................................................................... 88  12. Other Post‐Employment Benefits (OPEB) ............................................................................... 95  13. Deferred Compensation Plan .................................................................................................. 99  14. Risk Management .................................................................................................................. 100  15. Joint Ventures ........................................................................................................................ 101  16. Commitments and Contingencies ......................................................................................... 104    Notes are essential to present fairly the information contained in the overview level of the basic financial  statements.  Narrative explanations are intended to communicate information that is not readily apparent  or cannot be included in the statements themselves, and to provide additional disclosures as required by  the Governmental Accounting Standards Board.       46    This page is left intentionally blank.    CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     47    NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES    The City of Palo Alto (the City) was incorporated in 1894 and operates as a charter city, having had its first  charter granted by the State of California in 1909.  The City operates under the Council‐Manager form of  government and provides the following services: public safety (police and fire), public works, electric, fiber  optics, water, gas, wastewater, storm drain, refuse, airport, golf course, planning and zoning, general  administration services, library, open space and science, recreational and human services.    (a) Reporting Entity    The City is governed by a nine‐member council, elected by City residents.  The City is legally  separate and fiscally independent, which means it can issue debt, set and modify budgets and  fees, and sue or be sued.  The accompanying basic financial statements present the financial  activities of the City, which is the primary government presented, along with the financial  activities of its component unit, which is an entity for which the City is financially accountable.   Although a separate legal entity, a blended component unit is, in substance, part of the City’s  operations and is reported as an integral part of the City’s financial statements.   The City’s  component unit described below is blended.    The Palo Alto Public Improvement Corporation (the Corporation) provides financing of public  capital improvements for the City through the issuance of Certificates of Participation (COPs), a  form of debt that allows investors to participate in a stream of future lease payments.  Proceeds  from the COPs are used to construct projects that are leased to the City.  The lease payments are  sufficient in timing and amount to meet the debt service requirements of the COPs.  The Board of  Directors of the Corporation is composed of the same members as the City Council. The  Corporation is controlled by the City, which performs all accounting and administrative functions  for the Corporation.  The financial activities of the Corporation are included in the Downtown  Parking Improvement Debt Service Fund.    Financial statements for the Corporation may be obtained from the City of Palo Alto,  Administrative Services Department, 4th Floor, 250 Hamilton Avenue, Palo Alto, CA  94301.    (b) Basis of Presentation     The City’s basic financial statements are prepared in conformity with accounting principles  generally accepted in the United States of America.  The Governmental Accounting Standards  Board (GASB) is the acknowledged standard setting body for establishing accounting and financial  reporting standards followed by governmental entities in the United States.            These standards require that the financial statements described below be presented:    Government‐wide Statements: The Statement of Net Position and the Statement of Activities  display information about the primary government and its component unit.  These statements  include the financial activities of the overall City government, except for fiduciary activities.   Eliminations have been made to minimize the double counting of internal activities.  However,  interfund goods and services transactions have not been eliminated in the consolidation process.   These statements distinguish between the governmental and business‐type activities of the City. CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     48    NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  (b) Basis of Presentation (Continued)  Governmental activities generally are financed through taxes, intergovernmental revenues, and  other non‐exchange transactions.  Business‐type activities are financed in whole or in part by fees  charged to external parties.  The Statement of Activities presents a comparison between direct expenses and program  revenues for each segment of the business‐type activities of the City and for each function of the  City’s governmental activities.  Direct  expenses are those that are specifically associated with a  program or function and, therefore, are clearly identifiable to a particular function.  Program  revenues include: (a) charges paid by the recipients for goods and services offered by the  programs, (b) grants and contributions that are restricted to meeting the operational needs of a  particular program, and (c) fees, grants and contributions that are restricted to financing the  acquisition or construction of capital assets.   Revenues  that are not classified as program  revenues, including all taxes, are presented as general revenues.  Fund Financial Statements: The fund financial statements provide information about the City’s  funds, including fiduciary funds and its blended component unit.  Separate statements for each  fund category – governmental, proprietary and fiduciary – are presented.  The emphasis of fund  financial statements is on major individual governmental and enterprise funds, each of which is  displayed in a separate column.   All remaining governmental and internal service funds are  aggregated and reported as non‐major funds.  Proprietary fund operating revenues, such as utilities sales and charges for services, result from  exchange transactions associated with the principal activity of the fund.  Exchange transactions  are those in which each party receives and gives up essentially equal values.  Nonoperating   revenues, such as subsidies and investment earnings, result from non‐exchange transactions or  ancillary activities.  Operating expenses for enterprise funds and internal service funds include the cost of sales and  services, administrative expenses, and depreciation on capital assets.  All  expenses not meeting  this definition are reported as nonoperating expenses.  (c) Major Funds and Other Funds  The City’s major governmental and enterprise funds need to be identified and presented  separately in the fund financial statements.  All other funds, called non‐major funds, are combined  and reported in a single column, regardless of their fund type.  Major funds are defined as funds that have assets and deferred outflows of resources, liabilities  and deferred inflows of resources, revenues or expenditures/expenses equal to at least 10  percent of their fund type total and at least 5 percent of the grand total.  The General Fund is  always a major fund.  The City may also select other funds it believes should be presented as major  funds on a qualitative basis.  CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     49    NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)    (c) Major Funds and Other Funds (Continued)    The City reported the following major governmental funds in the accompanying financial  statements:    General Fund – This is the City’s primary operating fund.  It accounts for all financial resources of  the general government, except those required to be accounted for in another fund.    Capital Projects Fund – This fund accounts for resources used for the acquisition and construction  of capital facilities by the City, with the exception of those assets financed by proprietary funds.    The City reported the following enterprise funds as major funds in the accompanying financial  statements:    Water Services Fund – This fund accounts for all financial transactions relating to the City’s water  service.  Services are on a user‐charge basis to residents and business owners located in the City.    Electric Services Fund – This fund accounts for all financial transactions relating to the City’s  electric service.  Services are on a user‐charge basis to residents and business owners located in  the City.    Fiber Optics Fund – This fund accounts for all financial transactions relating to the City’s fiber  optics service.  Services are on a user‐charge basis to licensees located in the City.    Gas Services Fund – This fund accounts for all financial transactions relating to the City’s gas  service.  Services are on a user‐charge basis to residents and business owners located in the City.    Wastewater Collection Services Fund – This fund accounts for all financial transactions relating  to the City’s wastewater collection service.  Services are on a user‐charge basis to residents and  business owners located in the City.    Wastewater Treatment Services Fund – This fund accounts for all financial transactions relating  to the City’s wastewater treatment.  Services are on a user‐charge basis to residents and business  owners located in the City.    Refuse Services Fund – This fund accounts for all financial transactions relating to the City’s refuse  service.  Services are on a user‐charge basis to residents and business owners located in the City.    Storm Drainage Services Fund – This fund accounts for all financial transactions relating to the  City’s storm drainage service.  Services are on a user‐charge basis to residents and business  owners located in the City.      CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     50    NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)    (c) Major Funds and Other Funds (Continued)    The City also reports the following funds:    Airport Fund – This non‐major enterprise fund accounts for all financial transactions relating to  the Palo Alto Airport (PAO).  The City assumed control over operation of PAO from the County of  Santa Clara, effective August 11, 2014.    Internal Service Funds – These funds account for fleet replacement and maintenance, technology,  central duplicating, printing and mailing services, administration of compensated absences and  health benefits, and the City’s self‐insured workers’ compensation and general liability programs,  all of which are provided to other departments on a cost‐reimbursement basis.  Also included is  the Retiree Health Benefits Internal Service Fund, which accounts for benefits to retirees.    Vehicle Replacement and Maintenance – This fund accounts for the maintenance and  replacement of vehicles and equipment used by all City departments.  The source of revenue is  from reimbursement of fleet replacement and maintenance costs allocated to each department  by usage of vehicle.    Technology – This fund accounts for replacement and upgrade of technology, and covers four  primary areas used by all City departments: desktop, infrastructure, applications, and technology  research and development.  The source of revenue is from reimbursement of costs for support  provided to other departments.    Printing and Mailing Services – This fund accounts for central duplicating, printing and mailing  services provided to all City departments.   The source of revenue for this fund is from  reimbursement of costs for services and supplies purchased by other departments.    General Benefits – This fund accounts for the administration of compensated absences and health  benefits.    Workers’ Compensation Insurance Program – This fund accounts for the administration of the  City’s self‐insured workers’ compensation program.    General Liability Insurance Program – This fund accounts for the administration of the City’s self‐ insured general liability program.    Retiree Health Benefits – This fund accounts for retiree health benefits.    Fiduciary Funds – These funds account for assets held by the City, an agent for assessment  districts, and members of the Cable Joint Powers Authority.  These funds are custodial in nature  and do not involve measurement of results of operations.  The City maintains two agency funds.   The financial activities of these funds are excluded from the government‐wide financial  statements, but are presented in separate fiduciary fund financial statements.  Agency funds  apply the accrual basis of accounting but do not have a measurement focus.     CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     51    NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  (c) Major Funds and Other Funds (Continued)  Cable Joint Powers Authority – This fund accounts for the activities of the cable television system  on behalf of the members.  University Avenue Area Off‐Street Parking Assessment District – This fund accounts for the  receipts and disbursements associated with the 2012 Limited Obligation Refunding Improvement  Bonds.   (d) Basis of Accounting  The government‐wide and proprietary fund financial statements are reported using the economic  resources measurement focus and the full accrual basis of accounting.  Agency funds do not have  a measurement focus but are reported using the accrual basis of accounting.  Revenues are  recorded when earned and expenses are recorded at the time liabilities are incurred, regardless  of when the related cash flows take place.  Governmental funds are reported using the current financial resources measurement focus and  the modified accrual basis of accounting.  Under this method, revenues are recognized when  measurable and available.  The  City considers revenues susceptible to accrual reported in the  governmental funds to be available if the revenues are collected within ninety days after year‐ end, except for property taxes, which are available if collected within sixty days after year‐end.  Expenditures are recorded when the related fund liability is incurred, except for principal and  interest on general long‐term debt, claims and judgments, and compensated absences, which are  recognized as expenditures to the extent they have matured.  General  capital asset acquisitions  are reported as expenditures in governmental funds.  Proceeds  of general long‐term debt and  acquisitions under capital leases are reported as other financing sources.    Revenues susceptible to accrual include taxes, intergovernmental revenues, interest and charges  for services.  Grant revenues are recognized in the fiscal year in which all eligibility requirements are met.   Under the terms of grant agreements, the City may fund certain programs with a combination of  cost‐reimbursement grants, categorical block grants, and general revenues.  Thus, both restricted  and unrestricted net position may be available to finance program expenditures.  The City’s policy  is to first apply restricted grant resources to such programs, followed by general revenues if  necessary.  Certain indirect costs are included in program expenses reported for individual functions and  activities.  Transactions representing the exchange of interfund goods and services have also been  included.  CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     52    NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)    (e)  Cash and Cash Equivalents    Restricted and unrestricted pooled cash and investments held in the City Treasury, and other  unrestricted investments invested by the City Treasurer, are considered cash equivalents for  purposes of the statement of cash flows because the City’s cash management pool and funds  invested by the City Treasurer possess the characteristics of demand deposit accounts. Other  restricted and unrestricted investments with maturities of less than three months at the time of  purchase are considered cash equivalents for purposes of the statement of cash flows.    (f)  Investments    The City’s investments are carried at fair value, and its fair value measurements are categorized  within the fair value hierarchy established by generally accepted accounting principles. Fair value  is defined as the price that would be received to sell an asset or paid to transfer a liability in an  orderly transaction between market participants at the measurement date.     (g)  Inventory of Materials and Supplies    Materials and supplies are held for consumption and are valued at average cost.  The consumption  method is used to account for inventories.  Under the consumption method, inventories are  recorded as expenditures at the time inventory items are used, rather than purchased.      (h) Prepaid items      Prepaid items are recorded at cost.  Using the consumption method, prepaid items are recorded  as expenditures over the period that service is provided.    (i) Compensated Absences     The liability for compensated absences includes the vested portion of vacation, sick leave, and  overtime compensation pay.  The City’s liability for accrued compensated absences is recorded in  the General Benefits Internal Service Fund.  The fund is reimbursed through payroll charges to all  other funds.  Earned but unpaid vacation and overtime compensation pay are recognized as an  expense or expenditure in the proprietary and governmental fund types when earned because  the City has provided financial resources for the full amount through its budgetary process.   Vested accumulated sick pay is paid in the event of termination due to disability and, under certain  conditions, is specified in employment agreements.    During the fiscal year ended June 30, 2018, changes to the compensated absences liabilities were  as follows (in thousands):  Beginning balance 11,478$       Additions 7,374            Payments (6,794)          Ending balance 12,058$       Current portion 5,996$             CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     53    NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)   (j) Property Tax  Santa Clara County (the County) assesses properties and bills, collects, and distributes property  taxes to the City.  The  County remits the entire amount levied and handles all delinquencies,  retaining interest and penalties.  The County assesses property values, levies bills and collects taxes as follows:  Secured Unsecured Lien Dates January 01 January 01 Levy Dates October 01 July 01 Due Dates 50% on November 01 Upon receipt of billing 50% on February 01 Delinquent after December 10 (for November)August 31 April 10 (for February) The term “unsecured” refers to taxes on personal property other than real estate, land and  buildings.  These taxes are secured by liens on the property being taxed.  Property tax revenues  are recognized by the City in the fiscal year they are assessed, provided they become available as  defined previously within sixty days after year‐end.  (k) Deferred Outflows of Resources and Deferred Inflows of Resources  A deferred outflow of resources is the consumption of net position that is applicable to a future  reporting period. A deferred inflow of resources is defined as an acquisition of net position  applicable to a future reporting period.   (l) Pensions and OPEB  For purposes of measuring the net pension liability and net OPEB liability, deferred  outflows/inflows of resources related to pensions and OPEB, and pension and OPEB expense,  information about the fiduciary net position of the City’s pension and OPEB plans and additions  to/deductions from the plans’ fiduciary net positions have been determined on the same basis as  they are reported by the California Public Employees’ Retirement System (CalPERS) and the  California Employer’s Retiree Benefit Trust Fund Program (CERBT). For this purpose, benefit  payments (including refunds of employee contributions) are recognized when due and payable in  accordance with the benefit terms. Investments are reported at fair value.  (m) Rounding  All amounts included in the basic financial statements and footnotes are presented to the nearest  thousand.  CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     54    NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  (n) Effects of New Pronouncements      As of July 1, 2017, the City implemented the following GASB Statements:    In June 2015, GASB issued Statement No. 75, Accounting and Financial Reporting for  Postemployment Benefits Other Than Pensions. This statement addresses reporting by  governments that provide OPEB to their employees and for governments that finance OPEB for  employees of other governments.  As of July 1, 2017, the City recorded the beginning net OPEB  liability of $154.7 million, the beginning deferred outflows of resources of $14.7 million related to  OPEB contributions made after the beginning measurement date, the removal of the net OPEB  asset under the previous standards of $19.4 million, to arrive at the restatement of $159.4 million.   See Note 12 for detailed information about the impact of the implementation on the City’s  financial statements.    In March 2016, the GASB issued Statement No. 81, Irrevocable Split‐Interest Agreements. The  statement provides recognition and measurement guidance for situations in which a government  is a beneficiary of these agreements. Implementation of this statement did not have a significant  impact on the City’s financial statements for the fiscal year ended June 30, 2018.    In March 2017, the GASB issued Statement No. 85, Omnibus 2017. The objective of the statement  is to address practice issues that have been identified during implementation and application of  certain GASB Statements. The statement addresses a variety of topics including issues related to  blending component units, goodwill, fair value measurement and application, and  postemployment benefits (pensions and other postemployment benefits). Implementation of this  statement did not have a significant impact on the City’s financial statements for the fiscal year  ended June 30, 2018.    In May 2017, the GASB issued Statement No. 86, Certain Debt Extinguishment Issues. The primary  objective of the statement is to improve consistency in accounting and financial reporting for in‐ substance defeasance of debt by providing guidance for transactions in which cash and other  monetary assets acquired with only existing resources ‐ resources other than the proceeds of  refunding debt ‐ are placed in an irrevocable trust for the sole purpose of extinguishing debt.   Implementation of this statement did not have a significant impact on the City’s financial  statements for the fiscal year ended June 30, 2018.    The City is currently analyzing its accounting practices to determine the potential impact on the  financial statements for the following GASB Statements:    In November 2016, the GASB issued Statement No. 83, Certain Asset Retirement Obligations. The  statement addresses accounting and financial reporting for certain asset retirement obligations  (AROs). An ARO is a legally enforceable liability associated with the retirement of a tangible capital  asset. A government that has legal obligations to perform future asset retirement activities  related to its tangible capital assets should recognize a liability based on the guidance in this  statement. The requirements of this statement are effective for the City’s fiscal year ending  June 30, 2019.  CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     55    NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)   (n) Effects of New Pronouncements (Continued)  In January 2017, the GASB issued Statement No. 84, Fiduciary Activities. The statement establishes  criteria for identifying fiduciary activities of all state and local governments. The focus of the  criteria generally is on (1) whether a government is controlling the assets of the fiduciary activity  and (2) the beneficiaries with whom a fiduciary relationship exists. Separate criteria are included  to identify fiduciary component units and postemployment benefit arrangements that are  fiduciary activities. The statement also provides for recognition of a liability to the beneficiaries in  a fiduciary fund when an event has occurred that compels the government to disburse fiduciary  resources.  The requirements of this statement are effective for the City’s fiscal year ending  June 30, 2020.  In June 2017, the GASB issued Statement No. 87, Leases.  The objective of this statement is to  better meet the information needs of financial statement users by improving accounting and  financial reporting for leases by governments. This Statement increases the usefulness of  governments’ financial statements by requiring recognition of certain lease assets and liabilities  for leases that previously were classified as operating leases and recognized as inflows of  resources or outflows of resources based on the payment provisions of the contract. It establishes  a single model for lease accounting based on the foundational principle that leases are financings  of the right to use an underlying asset. Under this Statement, a lessee is required to recognize a  lease liability and an intangible right‐to‐use lease asset, and a lessor is required to recognize a  lease receivable and a deferred inflow of resources, thereby enhancing the relevance and  consistency of information about governments’ leasing activities.   The  requirements of this  statement are effective for the City’s fiscal year ending June 30, 2021.  In March 2018, the GASB issued Statement No. 88, Certain Disclosures Related to Debt, including  Direct Borrowings and Direct Placements.  The objective of this statement is to improve the  information that is disclosed in notes to government financial statements related to debt,  including direct borrowings and direct placements.  It also clarities which liabilities governments  should include when disclosing information related to debt.  The requirements of this statement  are effective for the City’s fiscal year ending June 30, 2019.  In June 2018, the GASB issued Statement No. 89, Accounting for Interest Cost Incurred before the  End of a Construction Period.  The  objectives of this statement are 1) to enhance the relevance  and comparability of information about capital assets and the cost of borrowing for a reporting  period, and 2) to simplify accounting for interest cost incurred before the end of a construction  period.   The requirements of this statement are effective for the City’s fiscal year ending  June 30, 2021.  CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     56    NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  (n) Effects of New Pronouncements (Continued)     In August 2018, the GASB issued Statement No. 90, Majority Equity Interests, an amendment of  GASB Statements No.14 and No.61.   The objectives of this statement are to improve the  consistency and comparability of reporting a government’s majority equity interest in a legally  separate organization and to improve the relevance of financial statement information for certain  component units.  The requirements of this statement are effective for the City’s fiscal year ending  June 30, 2020.   (o)   Use of Estimates    The accompanying basic financial statements have been prepared on the modified accrual and  accrual basis of accounting in accordance with generally accepted accounting principles.  This  requires management to make estimates and assumptions that affect the amounts reported in  the financial statements and accompanying notes. Actual results could differ from those  estimates.  NOTE 2 – BUDGETS AND BUDGETARY ACCOUNTING     1. The City Manager submits proposed operating and capital budgets to the City Council for the fiscal  year commencing the following July 1.  The operating budget includes proposed expenditures and the  means of financing them.  2. Public hearings are conducted to obtain comments on the proposed budgets.  3. The Budget is approved with the adoption of a budget ordinance for all funds except Agency Funds.  4. Per the Palo Alto Municipal Code, only the City Manager is authorized to reallocate funds from  contingency accounts maintained in the General Fund.  Additional appropriations to departments in  the General Fund, or to total appropriations for all other budgeted funds, or transfers of  appropriations between funds, require approval by the City Council.   Amendments to budgeted  revenue and expenditures are added to or subtracted from the Adopted Budget and the resulting  totals are reflected as Final Budget amounts.  5. As defined in the Palo Alto Municipal Code, expenditures may not exceed budgeted appropriations at  the department level for the General Fund, and at the fund level for Enterprise, Special Revenue and  Debt Service Funds.  6. Budgets for governmental funds are adopted on a basis consistent with generally accepted accounting  principles (GAAP), except that unrealized gains or losses on investments, changes in advances to other  funds and notes receivable are not recognized on a budgetary basis and encumbrances are treated as  budgetary expenditures when incurred.  7. Expenditures for the Capital Projects Fund are budgeted and maintained at a project level for the life  of the project.  Budget to actual comparisons for these expenditures have been excluded from the  accompanying financial statements.          CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018      57    NOTE 3 – CASH AND INVESTMENTS   The City pools cash from all sources and all funds, except restricted bond proceeds with fiscal agents and  Public Agency Retirement Services, and invests its pooled idle cash according to State of California law  and the City’s Investment Policy.  The basic principles underlying the City’s investment philosophy are to  ensure the safety of public funds, ensure that sufficient funds are available to meet current expenditures,  and achieve a reasonable rate of return on investments.  Policies  The City invests in individual investments and in investment pools.  Individual investments are evidenced  by specific identifiable securities instruments, or by an electronic entry registering the owner in the  records of the institution issuing the security, called the book entry system.  In order to increase security,  the City employs the trust department of a bank as the custodian of certain City managed investments.    Classification  Cash and investments are classified in the financial statements as shown below, based on whether or not  their use is restricted under the terms of City debt instruments or agreements (in thousands):   Governmental Business‐Type Fiduciary Activities Activities Funds Total Cash and investments: Available for operations 280,681$          237,800$          2,522$               521,003$          Held with fiscal agents and trustees 6,185                 4,014                 2,594                 12,793               Total cash and investments 286,866$          241,814$          5,116$               533,796$              Investments Authorized by the City’s Investment Policy, Debt Agreements and Trust Agreements  The table below summarizes the investment types that are authorized by the California Government Code  (Code) and the City’s Investment Policy, and includes the interest rate risk, credit risk and concentration  of credit risk as outlined in the Investment Policy.  In addition, the table discloses investment of debt  proceeds  held  by  bond  trustees.  These  investments  are  governed by  the  provisions  of  each  debt  agreement of the City, rather than the general provisions of the City’s Investment Policy.    The City must maintain required amounts of cash and investments with trustees under the terms of  certain debt issues.  These funds are unexpended bond proceeds or are pledged as reserves to be used if  the City fails to meet its obligations under these debt issues.  The Code requires these funds to be invested  in accordance with City ordinance, bond indentures or state statute.  All of these funds have been invested  as permitted under the Code and the investment policy approved by the City Council.    The City has implemented investment guidelines for its Public Agencies Retirement Services (PARS) Trust  which  authorizes  the  investments  in  U.S.  Treasury  securities,  federal  agencies  and  U.S.  guaranteed  obligations,  corporate notes, certificates of  deposit, bankers’ acceptances, equities investments, and  mutual funds.            CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018      58    NOTE 3 – CASH AND INVESTMENTS (Continued)    Maximum  Maturity  Minimum  Credit Quality  Maximum  Percentage  of Portfolio Maximum  Investment in  One Issuer U.S. Government Securities 10 years (*) N/A No Limit No Limit U.S. Federal Agency Securities (C)  10 years (*) N/A No Limit (A) No Limit Certificates of Deposit 10 years (*) N/A 20% 10% of the par  value of  portfolio Bankers Acceptances 180 days (D) N/A (D) 30% $5 million Commercial Paper 270 days A‐1 15% $3 million (B) Local Agency Investment Fund N/A N/A No Limit $50 million per  account Short‐Term Repurchase Agreements 1 year N/A No Limit No Limit City of Palo Alto Bonds N/A N/A No Limit No Limit Money Market Mutual Funds N/A N/A (E) No Limit No Limit Mutual Funds (F) N/A N/A 20% 10% Negotiable Certificates of Deposit 10 years (*) N/A 10% $5 million Medium‐Term Corporate Notes 5 years AA 10% $5 million 10 years (*) AA/AA2 20% No Limit (A) (B) The lesser of $3 million or 10% of outstanding commercial pa per of any one institution. Debt Agreements: (C)  (D) (E) (F) (*)The maximum maturity is based on the Investment Policy that is approved by the City Council and is less  restrictive than the California Government Code.  Utility Revenue Bonds 2011 Refunding, General Obligation Bonds 2010 and 2013A, and University Avenue Parking  Bond 2012 are allowed to invest in the California Asset Management Program. Authorized Investment Type Bonds of State of California  Municipal Agencies Callable and multi‐step securities are limited to no more than 25% of the par value of the portfolio, provided that:  1) the potential call dates are known at the time of purchase, 2) the interest rates at which they "step‐up" are  known at the time of purchase, 3) the entire face value of the security is redeemable at the call date. Utility Revenue Bonds 2011 Refunding and 1999 Refunding allow general obligations of states with a minimum  credit quality rating of A2/A by Moody's and Standard & Poor's. Utility Revenue Bonds 2011 Refunding and 1999 Refunding require a minimum credit quality rating of A‐1/P‐1 by  Moody's and Standard & Poor's and maturing after no more than 360 days.  Utility Revenue Bonds 1995 Series A  limit the maximum maturity to 365 days. Water Revenue Bonds 2009 Series A, Utility Revenue Bonds 2011 Refunding and 1 999 Refunding require a  minimum credit quality rating of AAAm or AAAm‐G by Standard & Poor's.       CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018      59    NOTE 3 – CASH AND INVESTMENTS (Continued)    Fair Value Measurements  The City categorizes its fair value measurements within the fair value hierarchy established by generally  accepted accounting principles.  The hierarchy is based on the valuation inputs used to measure fair value  of the assets.  Level 1 inputs are quoted prices in an active market for identical assets; Level 2 inputs are  significant other observable inputs; and Level 3 inputs are significant unobservable inputs.  All of the  investments are measured using level 2 inputs, except for investments in money market mutual funds,  California Asset Management Program and Local Agency Investment Fund, which are not subject to the  fair value hierarchy.     Investment securities classified in Level 2 of the fair value hierarchy are valued using prices determined  by the use of matrix pricing techniques maintained by the pricing vendors for these securities.  Matrix  pricing is used to value securities based on the securities relationship to benchmark quoted prices.    The following is a summary of the fair value measurements of the City as of June 30, 2018 (in thousands):    Type of Investment June 30, 2018 Level 2 Investments by fair value hierarchy U.S. Federal Agency Securities 316,594$       316,594$       U.S. Treasury Notes 19,470           19,470           Local Government Bonds 82,220           82,220           Negotiable Certificates of Deposit 48,556           48,556           Corporate Bonds 20,443           20,443           Total investments by fair value hierarchy 487,283         487,283$       Investment not subject to fair value hierarchy Bonds Fund: Money Market Mutual Funds 3,005              U.S Bank Trust Services 4,012              Equity Mutual Funds (Irrevocable for pension)5,548              California Asset Management Program 3,214              Local Agency Investment Fund 24,647           Total investments not subject to fair value hierarchy 40,426           Total investments measured at fair value 527,709$           Local Agency Investment Fund  The  City  participates  in  the  Local  Agency  Investment  Fund  (LAIF)  which,  under  the  oversight  of  the  Treasury of the State of California, is regulated by California Government Code Section 16429.  LAIF  management calculates the fair value and cost of the entire LAIF pool.  The City adjusts its cost basis  invested in LAIF to fair value based on this ratio.  The fair value of the City’s position in the pool is the  same  as  the  value  of  the  pool  share.  The  balance  available  for withdrawal  on  demand  is  based  on  accounting records maintained by LAIF, which are recorded on an amortized cost basis.  At June 30, 2018,  LAIF had a weighted average maturity of 193 days.        CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018      60    NOTE 3 – CASH AND INVESTMENTS (Continued)    Fidelity Institutional Asset Management  Money market mutual funds are available for withdrawal on demand and at June 30, 2018, had a weighted  average maturity of 29 days.    California Asset Management Program  The City is a voluntary participant in the California Asset Management Program (CAMP).  CAMP is an  investment pool offered by the California Asset Management Trust (the Trust).  The Trust is a joint powers  authority and public agency created by the Declaration of Trust and established under the provisions of  the California Joint Exercise of Powers Act (California Government Code Sections 6500 et seq., or the  “Act”) for the purpose of exercising the common power of its participants to invest certain proceeds of  debt  issues  and  surplus  funds.    The  City’s  investments  are  limited  to  investments  permitted  by  subdivisions (a) to (n), inclusive, of Section 53601 of the California Government Code.  The City reports its  investments in CAMP at the fair value amounts provided by CAMP, which is the same as the value of the  pool share.  At June 30, 2018, the fair value approximated the City’s cost. CAMP had a weighted average  maturity of 35 days at June 30, 2018.    Interest Rate Risk  Interest rate risk is the risk that changes in market interest rates may adversely affect the fair value of an  investment.  Normally, the longer the maturity of an investment, the greater the sensitivity its fair value  is  to  changes  in  market  interest  rates.  As  of  June 30, 2018,  the  City’s  investments  consisted  of  the  following (in thousands):    Type of Investment Less Than  One Year One to  Three Years  Three to  Five Years Over  Five Years Total U.S. Federal Agency Securities 43,867$        80,159$            81,637$         110,931$        316,594$        U.S. Treasury Notes 6,436             2,951                  10,083            ‐                        19,470             Local Government Bonds 251               14,468              34,032          33,469           82,220            Corporate Bonds 2,787           17,558              98                   ‐                       20,443            Bond Funds: Money Market Mutual Funds 3,005           ‐                         ‐                      ‐                       3,005               U.S Bank Trust Services 4,012           ‐                         ‐                      ‐                       4,012               Equity Mutual Funds (pension trust) 5,548           ‐                         ‐                      ‐                       5,548               Negotiable Certificates of Deposit 6,650           15,935              23,479          2,492              48,556            California Asset Management Program 3,214           ‐                         ‐                      ‐                       3,214               Local Agency Investment Fund 24,647         ‐                         ‐                      ‐                       24,647            Total Investments 100,417$      131,071$           149,329$        146,892$        527,709           Cash in bank and on hand 6,087                Total Cash and Investments 533,796$         Maturities   Investment with Fair Values Highly Sensitive to Interest Rate Fluctuations  At June 30, 2018, the City’s investments (including investments held by bond trustees) include U.S. Federal  Agency Callable Securities totaling $113 million.  These investments are highly sensitive to interest rate  fluctuations (to a greater degree than already indicated in the information provided above) and are  subject to early redemption.   CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018      61    NOTE 3 – CASH AND INVESTMENTS (Continued)    Credit Risk  Credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the  investment.  This is measured by the assignment of a rating by a nationally recognized statistical rating  organization.    Presented below is the actual rating as provided by Standard & Poor’s, Moody’s and/or Fitch’s investment  rating system as of June 30, 2018, for each investment type (in thousands):    Type of Investment Rating Total U.S. Federal Agency Securities AA+ 167,190$          N/A 149,404             Total U.S Federal Agency Securities 316,594             Corporate Bonds AAA 10,646               AA+ 8,831                 AA 966                     Total Corporate Bonds 20,443               Local Government Bonds AAA 39,659               AA+ 22,566               AA 19,995               Total Government Bonds 82,220               Money Market Mutual Funds AAAm 3,005                 Total Money Market Mutual Funds 3,005                 Total Investments 422,262             Not Applicable:  U.S. Treasury Notes 19,470               Not Rated: Bond Fund: U.S Bank Trust Services 4,012                 California Asset Management Program 3,214                 Local Agency Investment Fund 24,647               Negotiable Certificates of Deposit 48,556               Equity Mutual Funds 5,548                 Cash in bank and on hand 6,087                 Total Cash and Investments 533,796$             CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018      62    NOTE 3 – CASH AND INVESTMENTS (Continued)    Concentration of Credit Risk  Investments in any one issuer, other than U.S. Treasury securities, mutual funds, and external investment  pools, that represent 5 percent or more of total City portfolio investments are as follows at June 30, 2018  (in thousands):   Investments Reporting Type Fair Value at Year‐End  Federal Home Loan Bank U.S. Federal Agency Securities 99,848$                              Federal Agricultural Mortgage Corporation U.S. Federal Agency Securities 109,183                              Federal Farm Credit Bank U.S. Federal Agency Securities 52,623                                   Custodial Credit Risk  California law requires banks and savings and loan institutions to pledge government securities with a  market value of 110 percent of the City’s cash on deposit or first trust deed mortgage notes with a value  of 150 percent of the deposit as collateral for these deposits.  Under California Law, this collateral is  considered held in the City’s name and places the City ahead of general creditors of the institution.  The  City has waived collateral requirements for the portion of deposits covered by federal deposit insurance.    The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty to  a transaction, the City will not be able to recover the value of its investment or collateral securities that  are in the possession of another party.  The City’s Investment Policy limits its exposure to custodial credit  risk by requiring that all security transactions entered into by the City be conducted on a delivery‐versus‐ payment basis.  Securities are to be held by a third‐party custodian.  CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     63     NOTE 4 – INTERFUND TRANSACTIONS       Transfers Between Funds  With Council approval, resources may be transferred from one City fund to another.  The purpose of the  majority of transfers is to subsidize a fund.  Less often, a transfer may be made to open or close a fund.   Transfers between City funds during FY 2018 were as follows (in thousands):     Fund Making Transfer Amount  Transferred General Fund Nonmajor Governmental Funds 717$                   A Electric Services Fund 12,887              B Gas Services Fund 6,699                  B Capital Projects Fund 7                          A Capital  Projects Fund General  Fund 24,800               C Nonmajor Governmental Funds 10,696               C Water Services Fund 6                          C Fiber Optics Fund 6                          C Gas Services Fund 6                          C Storm Drainage 330                     C Nonmajor Governmental Funds General  Fund 659                     A Water Services Fund 10                        A Electric Services Fund 22                        A Fiber Optics Fund 2                          A Gas Services Fund 9                          A Wastewater Collection Fund 5                          A Internal Service Funds 21                        A  Water Services Fund Gas Services Fund 256                     C Wastewater Collection Fund 256                     C Electric Services Fund General  Fund 2,486                  D Water Services Fund 436                     C Gas Services Fund 436                     C Fiber Optics Fund 102                     C Internal Service Funds 5                          C Internal Service Funds General  Fund 1,590                  E/F Capital Projects Fund 108                     E/F Nonmajor Governmental Funds 22                        E/F Water Services Fund 252                     E/F Electric Services Fund 538                     E/F Fiber Optics Fund 25                        E/F Gas Services Fund 271                     E/F Wastewater Collection Fund 181                     E/F Wastewater Treatment Fund 210                     E/F Refuse Services Fund 62                        E/F Storm Drainage Services Fund 35                        E/F Airport 11                        E/F Internal Service Funds 2,629                  E/G Total 66,793$              Fund Receiving Transfer   CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     64    NOTE 4 – INTERFUND TRANSACTIONS (Continued)  The reasons for these transfers are set forth below:  (A) Transfer to fund street maintenance activities, to pay debt service, fund City employee parking,  and to return unspent project funds.  (B) Transfer to fund the return of initial investment made by general fund when utility department  was created.  (C) Allocation of funds to construct, purchase or maintain capital assets.  (D) Transfer to fund electricity costs associated with City streetlight and traffic signal costs.  (E) Transfer to fund supplemental pension trust fund.  (F) Transfer to fund replacement and maintenance of critical desktop, software, infrastructure,  vehicles and equipment.  (G) Transfer to fund an implied subsidy for retiree healthcare.  Long‐Term Interfund Advance  On December 6, 2010, the City Council accepted an Airport Business Plan of the Palo Alto Airport (PAO)  and approved creation of the Airport Enterprise Fund to facilitate the transition of PAO control from  County of Santa Clara to the City. Council approved the following General Fund advances to the Airport  Fund:  $ 610,000 Due June 2019  325,000 Due July 2023  760,000 Due July 2024  515,601 Due July 2025  704,150 Due July 2026  200,000 Due July 2027  All advances bear interest equal to the average return yield on the City’s investment portfolio.  As  of  June 30, 2018, the total outstanding principal amount is $3.1 million.   Internal Balances  Internal balances represent the net interfund receivables and payables remaining after the elimination of  all such balances within governmental and business‐type activities.  CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     65    NOTE 5 – NOTES AND LOANS RECEIVABLE     At June 30, 2018, the City’s notes and loans receivable totaled (in thousands):    Palo Alto Housing Corporation: Tree House Apartments 5,344$              Emerson Street Project 375                    Alma Single Room Occupancy Development 2,222                 Barker Hotel 2,111                 Sheridan Apartments 2,222                 Oak Court Apartments, L.P. 7,834                 El Dorado Palace LLC 65                      Mid‐Peninsula Housing Coalition: Palo Alto Gardens Apartments 100                    Community Working Group, Inc.1,280                 Opportunity Center Associates, L.P.750                    Home Rehabilitation Loans 46                      Executive Relocation Assistance Loans 479                    Below Market Rate Assessment Loans 53                      Oak Manor Townhouse Water System 114                    Lytton Gardens Assisted Living 101                    Emergency Housing Consortium 75                      Alma Gardens Apartments 1,150                 2811‐2825 Alma Street Acquisition 1,890                 Palo Alto Family Housing, 801 Alma Street 6,422                 Palo Alto Senior Housing Project ‐ Stevenson House, LLC 923                    MP Palo Alto Garden, LLC 672                    Colorado Park Housing Corporation 204                    Buena Vista ‐ County of Santa Clara 14,500              Total Notes and Loans 48,932              Less: Valuation Allowance (14,637)             Total Notes and Loans, Net 34,295$               Housing Loans  The City engages in programs designed to encourage construction or improvement in low‐to‐moderate  income housing or other projects.  Under these programs, grants or loans are provided under favorable  terms to homeowners or developers who agree to spend these funds in accordance with the City’s terms.   These loans have been offset by restricted or committed fund balances, as they are not expected to be  repaid immediately.    Some of these loans contain forgiveness clauses that provide for the amount loaned to be forgiven if the  third party maintains compliance with the terms of the loan and associated regulatory agreements.  Since  some of these loans are secured by trust deeds that are subordinated to other debt on the associated  projects or are only repayable from residual cash receipts on the projects, collectability of some of the  outstanding balances may not be realized.  As a result of the forgiveness clauses and nature of these  housing projects and associated cash flows, a portion of the outstanding balances of the loans has been  offset by a valuation allowance.  CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     66    NOTE 5 – NOTES AND LOANS RECEIVABLE (Continued)    Tree House Apartments  In March 2009, the City agreed to loan $2.8 million to Tree House Apartments, L.P. (THA) for the purchase  of the real property located at 488 West Charleston Road. The loan accrues simple interest at the rate of  3 percent per annum. The loan was funded with $1.8 million of Community Development Block Grant  (CDBG) funds and $1.0 million of residential housing funds. An additional development loan in the amount  of $2.5 million was approved by the City on October 18, 2010.  As of June 30, 2018, the outstanding  balance for THA in aggregate is $5.3 million. Principal and interest payments will be deferred, however if  the borrower has earned extra income, and if it is acceptable to the other entities providing final  permanent sources of funds, payment of interest and principal based on the City’s proportionate share of  the project’s residual receipts from net operating income shall be made by the borrower.  In no event  shall full payment be made by the borrower later than concurrently with the expiration or earlier  termination of the loan agreement, which is December 31, 2067.    Emerson Street Project  On November 8, 1994, the City loaned $375,000 to Palo Alto Housing Corporation (PAHC) for expenses  necessary to acquire an apartment complex for the preservation of rental housing for low and very low  income households in the City.  This loan is collateralized by a second deed of trust.  The loan bears interest  at 3 percent.    Alma Single Room Occupancy Development  On December 13, 1996, the City loaned $2.2 million to Alma Place Associates, L.P. for development of a  107‐unit single room occupancy development.  This loan bears interest at 3 percent and is collateralized  by a subordinated deed of trust.  The principal balance is due in 2041.    Barker Hotel  On April 12, 1994, the City loaned a total of $2.1 million for the preservation, rehabilitation and expansion  of a low‐income, single occupancy hotel.  This loan was funded by three sources: $400,000 from the  Housing In‐Lieu Fund, $1.0 million from HOME Investment Partnership Program Funds, and $670,000 from  CDBG funds.   All three notes bear no interest and are collateralized by a deed of trust, which is  subordinated to private financing.  Loan repayments are deferred until 2035.    In July 2004, the City agreed to loan up to $41,000 to PAHC to rehabilitate the interior of the Barker Hotel.   The loan was funded with CDBG funds and is collateralized by a deed of trust on the property.  Annual  loan payments are deferred until certain criteria defined in the loan agreement are reached.  The loan will  be forgiven if the borrower satisfactorily complies with all terms and conditions of the loan agreement.    Sheridan Apartments  On December 8, 1998, the City loaned $2.2 million to PAHC for the purchase and rehabilitation of a 57‐ unit apartment complex to be used for senior and low‐income housing.  The loan was funded with $1.6  million in CDBG funds, and $825,000 of Housing In‐Lieu funds.  The note is collateralized by a second deed  of trust and an affordability reserve account held by PAHC. The loan was amended in June 2017. It will not  accrue interest between May 1, 2017 and March 1, 2030. The loan will be forgiven on June 30, 2030 if  PAHC uses the funds that would otherwise have been due to the City for another affordable housing  project.      CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     67    NOTE 5 – NOTES AND LOANS RECEIVABLE (Continued)   Oak Court Apartments, L.P.  On August 18, 2003, the City loaned $5.9 million to PAHC for the purchase of land.  The note bears interest  of 5 percent and is secured by a deed of trust.  Note payments are due annually after 55 years, or beginning  in 2058, unless PAHC elects to extend the note until 2102, as defined in the regulatory agreement. The  City also loaned $1.9 million to Oak Court Apartments, L.P. for the construction of a 53‐unit rental  apartment complex for low and very low‐income households with children, which was completed in April  2005.  The note bears no interest until certain criteria defined in the note are satisfied, at which time the  note will bear an interest rate not to exceed 3 percent.  The note is secured by a subordinate deed of  trust.  The principal balance is due in 2060.    El Dorado Palace, LLC  On June 22, 2015, the City approved a loan to PAHC  Housing Corporation in the amount of $375,000 to  increase the supply of affordable low income housing in the City. The City loaned $52,000 and $13,000 in  June 2017 and March 2018, respectively.  The loan bears three percent (3%) interest, however in the event  of default will accrue at the lesser of 8% or the highest rate permitted by law.  The term of the loan shall  expire 55 years unless the City agree to extend an additional 44 years.    Palo Alto Gardens Apartments  On April 22, 1999, the City loaned $1.0 million to Mid‐Peninsula Housing Coalition (the Coalition) for the  purchase and rehabilitation of a 155‐unit complex for the continuation of low‐income housing.  The loan  was funded with $659,000 of CDBG funds and $341,000 of Housing In‐Lieu funds. The two notes bear  interest at 3 percent and are secured by second deeds of trust and a City Affordability Reserve Account  held by the Coalition. Principal and interest payments began in FY 2008.  The principal balance of $100,000  is due in 2039.    Community Working Group, Inc.  On May 13, 2002, the City loaned $1.3 million to Community Working Group, Inc. for predevelopment,  relocation and acquisition of land for development of an 89‐unit complex and homeless service center for  very low income households.  The loan was funded with $1.3 million of CDBG funds.  The note bears no  interest and is secured by a first deed of trust.  No repayment is required as long as the borrower complies  with all terms and conditions of the agreement. After 89 years of compliance with the regulatory  agreement, the City’s loan would convert to a grant and its deed of trust would be re‐conveyed.    Opportunity Center Associates, L.P.  On July 19, 2004, the City loaned $750,000 for a 55‐year term to Opportunity Center Associates, L.P. for  construction of 89 units of rental housing for extremely low‐income and very low‐income households.   The loan was funded with $750,000 of residential housing funds.  The note bears 3 percent interest and  is secured by a deed of trust. The loan remains outstanding and becomes due at the end of the 55‐year  term.     Home Rehabilitation Loans  The City administers a closed housing rehabilitation loan program initially funded with CDBG funds.  Under  this program, individuals with incomes below a certain level are eligible to receive low interest loans for  rehabilitation work on their homes.  These loans are secured by deeds of trust, which may be subordinated  to subsequent encumbrances upon said real property with the prior written consent of the City.  The loan  repayments may be amortized over the life of the loans, deferred, or a combination of both.  CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     68    NOTE 5 – NOTES AND LOANS RECEIVABLE (Continued)    Executive Relocation Assistance Loans  The City Council may authorize a mortgage loan as part of a relocation assistance package to executive  staff.  The loans are secured by first deeds of trust, and interest is adjusted annually based on the rate of  return of invested funds of the City for the year ended June 30 plus one‐quarter of 1 percent.  Principal  and interest payments are due bi‐weekly.  Employees must pay any outstanding balance on their loans  within a certain period after ending employment with the City.    As of June 30, 2018, the City had one outstanding home loan from the current City Manager.  The original  purchase cost for the current City Manager’s home was $1.9 million and the City holds a 75 percent equity  share.  The loan balance owed as of June 30, 2018 is $375,000.  During FY 2011, the Council authorized a  capital improvement loan of $125,000.  Loans for capital improvements are made on a dollar for dollar  matching basis, with an equal equity contribution made by the City Manager.  The loan balance owed as  of June 30, 2018 was $103,000.    Below Market Rate Assessment Loans  In December 2002, the City loaned $53,000 to below market rate homeowners with low incomes and/or  very limited assets for capital repairs, special assessments and improvements of their properties.  The  loans bear interest at 3 percent and are secured by a deed of trust on each property.  Loan payments are  deferred until 2032.  In 2018, the City did not receive interest payments.    Oak Manor Townhouse Water System  On May 12, 2003, the City Council approved an allocation of $114,000 to Palo Alto Housing Corporation  Apartments, Inc (PAHCA, Inc) to replace the water pipes. Repayment of the loan will not be required unless  the property is sold, the program is terminated or purpose of the program is changed without City’s  approval prior to July 1, 2033. The loan for this project is subordinated to the existing City loan with  PAHCA, Inc dated January 7, 1991 for the acquisition of the project site, which is discussed earlier in this  section.     Lytton Gardens Assisted Living  In June 2005, the City loaned $101,000 to Community Housing, Inc. to upgrade and modernize the existing  kitchens at the senior residential facility known as Lytton Gardens Assisted Living.  The loan was funded  with CDBG funds, and bears simple interest of 3 percent.  Principal and interest payments are deferred  until July 1, 2035, as long as the borrower continues to comply with all terms and conditions of the  agreement.    Emergency Housing Consortium  In November 2005, the City agreed to loan up to $75,000 to Emergency Housing Consortium to cover  architectural expenses that will be incurred in rehabilitating and expanding the property.  The loan was  funded with CDBG funds, and bears simple interest of 3 percent.  Principal and interest payments are  deferred until July 1, 2035, as long as the borrower continues to comply with all terms and conditions of  the agreement.      CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     69    NOTE 5 – NOTES AND LOANS RECEIVABLE (Continued)    Alma Garden Apartments  In March 2006, the City agreed to loan up to $1.2 million to Community Working Group, Inc. to acquire a  10‐unit multi‐family housing complex known as Alma Garden Apartments.  The loan was funded with  CDBG funds.  Principal and interest payments are deferred until July 1, 2061 as long as the borrower  complies with all terms and conditions of the agreement.    2811‐2825 Alma Street Acquisition  On October 9, 2011, the City agreed to loan $1.3 million to PAHC to acquire properties on Alma Street for  the purpose of developing an affordable rental housing project.  On June 29, 2015, the City loaned PAHC  an additional $0.6 million, and entered into an Amended and Restated Acquisition and Development  Agreement which combined the two loans for a total loan of $1.9 million. The loan term expires on  December 8, 2066 with an option to extend the term for an additional 44 years. The loan bears simple  interest of 3 percent, however in the event of default interest will accrue at the lesser of 8 percent or the  highest rate permitted by law. Principal and interest payments are payable during the term of the  agreement on a “residual receipt” basis as described in the agreement. All principal and interest is due in  the event of an unauthorized transfer, a default or the expiration of the term. As of June 30, 2018, the  outstanding balance was $1.9 million.    Palo Alto Family Housing, 801 Alma Street  On February 14, 2011, the City agreed to loan Palo Alto Family, LP up to $9.3 million for the purposes of  predevelopment expenses and acquiring certain real property for the Alma Street Affordable Multi‐Family  Rental Housing Project. The loan bears simple interest of 3 percent. Principal and interest are due and  payable during the term of the agreement on a “residual receipt” basis as described in the agreement.  Except in the case of default, all remaining principal and interest shall be payable on the Restriction  Termination Date as defined in the agreement. As of June 30, 2018, the outstanding amount is $6.4  million.    Palo Alto Senior Housing Project  On October 1, 2015, the City entered into an affordable housing fund loan agreement with PASHPI  Stevenson House LP, a California limited partnership, in the principal amount of $1 million to assist in the  rehabilitation of the Stevenson House. The loan bears simple interest of 3 percent. As of June 30, 2018,  the loan outstanding balance is $923,000 and is due at the end of the 55‐year term.    MP Palo Alto Garden, LLC  The City loaned $619,000 and $53,000 in March 2017 and October 2017, respectively, in CDBG funds for  the rehabilitation of the property. The note bears 3% simple interest and shall be deferred until April 24,  2054. If there are no Events of Default prior to the end of the terms, the unpaid principal and interest will  be treated as a grant and no repayment will be due to the City.    Colorado Park Housing Corporation  On September 8, 2014, the City entered into an affordable housing fund loan agreement with Colorado  Park Housing Corporation (CPHC), a California nonprofit public benefit corporation, in the principal  amount of $204,000. The loan bears no interest except in the event of default. The principal and any  accrued interest is due and payable on the earlier of (a) expiration of the term, or (b) a default by CPHC  which has not been cured as provided for in the agreement.    CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     70    NOTE 5 – NOTES AND LOANS RECEIVABLE (Continued)    Buena Vista Mobile Home Park – Santa Clara County  In September 2017, the City entered into an agreement with the Santa Clara County Housing Authority  (SCCHA) for the acquisition of Buena Vista Mobile Home Park.  The City loaned SCCHA $14.5 million for  the acquisition.   The City is entitled to twenty six percent of all residual receipts.   Interest for the  promissory note is 3% simple interest.  Principal and interest payments will commence on September 30,  2019 and the note and all interest is payable in full on September 29, 2019.  As of June 30, 2018, the loan  balance is $14.5 million.    NOTE 6 – CAPITAL ASSETS    Valuation  Capital assets are valued at historical cost or estimated historical cost if actual historical cost is not  available.  Contributed capital assets are recorded at acquisition value at the time received.  The City’s  policy is to capitalize all assets when costs are equal to or exceed $5,000 and the useful life exceeds one  year.  Infrastructure assets are capitalized when costs are equal to or exceed $100,000.    Proprietary fund capital assets are recorded at cost including significant interest costs incurred under  restricted tax‐exempt borrowings, which finance the construction of capital assets.  These interest costs,  net of interest earned on investment of proceeds of such borrowings, are capitalized and added to the  cost of capital assets during the construction period.  Maintenance and repairs are expensed as incurred.    The City has recorded all its public domain capital assets, consisting of roadway and recreation and open  space, in its government‐wide financial statements.  GASB Statement No. 34 requires that all capital assets  with limited useful lives be depreciated over their estimated useful lives.  Alternatively, the “modified  approach” may be used for certain capital assets.  Depreciation is not provided under this approach, but  all expenditures on these assets are expensed unless they are additions or improvements.  The City has  elected to use the depreciation method for its capital assets.  The purpose of depreciation is to spread the  cost of capital assets equitably among all users over the life of those assets.  The amount charged to  depreciation expense each year represents that year’s pro rata share of the cost of capital assets.    Depreciation of capital assets is charged as an expense against operations each year and the total amount  of depreciation taken over the years, called accumulated depreciation, is reported on the statement of  net position as a reduction in the book value of capital assets.    Depreciation is calculated using the straight line method, which means the cost of the asset is divided by  its expected useful life in years, and the result is charged to expense each year until the asset is fully  depreciated.  The City has assigned the useful lives listed below to capital assets.      CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     71    NOTE 6 – CAPITAL ASSETS (Continued)    Governmental Activities Years Buildings and structures 20 ‐ 30 Equipment: Computer equipment 3 ‐ 5 Office machinery and equipment 5 Machinery and equipment 5 ‐ 30 Intangible assets ‐ software 5‐20 Roadway network: 5 ‐ 40 Recreation and open space network: 25 ‐ 40 Business‐type Activities Buildings and structures 25 ‐ 60 Vehicles and heavy equipment 3 ‐ 10 Machinery and equipment 10 ‐ 50 Transmission, distribution and treatment systems 10 ‐ 100 Includes pavement, striping and legends, curbs, gutters and sidewalks, parking lots,  traffic signage, and bridges Includes major park facilities, park trails, bike paths and medians   CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     72    NOTE 6 – CAPITAL ASSETS (Continued)    General Capital Assets  Changes in the City’s general capital assets during the year ended June 30, 2018 were (in thousands):     Balance Balance July 1, 2017 Additions Retirements Transfers June 30, 2018 Governmental activities Nondepreciable capital assets: Land and improvements 78,481$            ‐$                        ‐$                       ‐$                      78,481$               Street trees 14,893             147                   (278)                  ‐                        14,762                  Intangible assets ‐ Easement 3,567                 ‐                          ‐                         ‐                        3,567                    Construction in progress 62,661             40,679              (3,334)              (30,663)           69,343                  Total nondepreciable capital assets 159,602           40,826              (3,612)              (30,663)           166,153               Depreciable capital assets: Buildings and structures 225,414           574                   (178)                 20,656             246,466               Intangible assets ‐ Software 279                    ‐                          ‐                         ‐                        279                       Equipment 11,891             186                    ‐                        494                  12,571                  Roadway network 324,817            ‐                          ‐                        9,513               334,330               Recreation and open space network 35,186              ‐                          ‐                         ‐                        35,186                  Total depreciable capital assets 597,587           760                   (178)                 30,663             628,832               Less accumulated depreciation: Buildings and structures (85,247)            (6,418)               131                   ‐                        (91,534)                Intangible assets ‐ Software (274)                  (5)                        ‐                         ‐                        (279)                      Equipment (7,353)              (507)                   ‐                         ‐                        (7,860)                   Roadway network (148,370)          (7,620)                ‐                         ‐                        (155,990)              Recreation and open space network (12,095)            (1,264)                ‐                         ‐                        (13,359)                Total accumulated depreciation (253,339)          (15,814)            131                   ‐                        (269,022)              Depreciable capital assets, net 344,248           (15,054)            (47)                   30,663             359,810               Internal service fund capital assets Construction in progress 3,182                6,198                 ‐                        (7,507)              1,873                    Equipment 56,939             77                      (2,954)              7,507               61,569                  Less accumulated depreciation (41,514)            (3,074)               2,924                ‐                        (41,664)                Net internal service fund capital assets 18,607             3,201                (30)                    ‐                        21,778                  Governmental activities capital assets, net 522,457$        28,973$          (3,689)$           ‐$                      547,741$                CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     73    NOTE 6 – CAPITAL ASSETS (Continued)    Business‐type Capital Assets  Changes in the City’s enterprise fund capital assets during the year ended June 30, 2018 were  (in thousands):    Balance Balance July 1, 2017 Additions Retirements Transfers June 30, 2018 Business‐type activities Nondepreciable capital assets: Land and improvements 4,973$              ‐$                       ‐$                              ‐$                       4,973$                    Construction in progress 110,287           61,118              ‐                               (18,001)             153,404                  Total nondepreciable capital assets 115,260           61,118              ‐                               (18,001)             158,377                  Depreciable capital assets: Buildings and structures 56,856              ‐                         ‐                               3,039                 59,895                    Capital Leases ‐                        531                   ‐                                ‐                          531                          Infrastructure 633                    ‐                         ‐                                ‐                          633                          Transmission, distribution and treatment systems 765,825           280                  (1,781)                     14,962               779,286                  Total depreciable capital assets 823,314           811                  (1,781)                     18,001               840,345                  Less accumulated depreciation: Buildings and structures (12,577)            (1,020)               ‐                                ‐                          (13,597)                   Infrastructure (2)                      (21)                    ‐                                ‐                          (23)                           Transmission, distribution and treatment systems (330,781)          (19,112)           1,505                       ‐                          (348,388)                 Total accumulated depreciation (343,360)          (20,153)           1,505                       ‐                          (362,008)                 Depreciable capital assets, net 479,954           (19,342)           (276)                        18,001               478,337                  Business‐type activities capital assets, net 595,214$        41,776$         (276)$                      ‐$                       636,714$                   Capital Asset Contributions  Some capital assets may be acquired using federal and state grant funds, or they may be contributed by  developers or other governments. Generally accepted accounting principles require that these  contributions be accounted for as revenues at the time the capital assets are contributed.        CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     74    NOTE 6 – CAPITAL ASSETS (Continued)    Depreciation Allocation  Depreciation expense was charged to functions and programs based on their usage of the related assets.   The amount allocated to each function or program is as follows (in thousands):      Governmental Activities Business‐type Activities City Manager 19$                  Water 2,747$              City Attorney 3                       Electric 8,089                City Clerk 4                       Fiber Optics 337                   City Auditor 1                       Gas 3,183                Administrative Services 4                       Wastewater Collection 2,049                Community Services 2,523               Wastewater Treatment 2,880                Public Safety 311                  Refuse 109                   Public Works 10,267           Storm Drainage 738                  Planning and Community Environment 333                  Airport 21                      Library 2,349               20,153$           Internal Service Funds 3,074                18,888$            CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     75    NOTE 6 – CAPITAL ASSETS (Continued)    Construction In Progress  Construction in progress as of June 30, 2018 is comprised of the following (in thousands):        Governmental Activities Expended to  June 30, 2018 Bicycle  Boulevards Implementation Project 7,917$                           Highway 101 Pedestrian/Bicycle  Overpass 4,406                             Fire  Station No. 3 Replacement Design 4,109                             Lucie  Stern Buildings Mech/Electrical Improvements 3,918                             Traffic Signal  Upgrades 3,593                             New Public Safety Building 3,101                             Charleston/Arastradero Corridor 2,770                             Transportation and Parking Improvements 2,383                             Rinconada Park Improvement 2,183                             Safe  Routes To School 1,647                             New California Ave  Area Parking Garage 1,634                             Park Trails 1,461                             CalTrain Corridor Video Management System Installation 1,417                             Curb & Gutter Repairs 1,268                             Telephone  Infrastructure and Network 1,251                             Parks Master Plan 1,250                             Newell  Road Bridge/SFC Bridge Replacement 1,114                             Cubberley Roof  Replacements 1,103                             Baylands Interpretive  Center Improvements 1,078                             City Facility Parking Lot Maintenance 1,067                             Railroad Grade  Separation 998                                 Benches/Signage/Fencing/Walkways 995                                 New Downtown Parking Garage 976                                 Baylands Interpretive  Center & Boardwalk Improvement 839                                 Interior Finishes Construction 826                                 Other Construction In Progress 17,912                           Total  Governmental  Activities Construction In Progress 71,216$                        Business‐type Activities Expended to  June 30, 2018 Water system extension replacements and improvements 16,900$                        Gas system extension replacements and improvements 7,101                             Sewer system rehabilitation and extensions 13,271                           Electric distribution system improvements 8,097                             Water quality control plant equipment replacement and lab facilities 4,063                             Storm drainage  structural  and water quality improvements 9,667                             Other electrical improvements projects 2,443                             Other construction in progress 91,862                           Total  Business‐type Activities Construction In Progress 153,404$                      CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     76    NOTE 6 – CAPITAL ASSETS (Continued)  Construction In Progress  Allocations of business‐type activity administration and general expenses of $12.2 million have been  capitalized and included in amounts expended to June 30, 2018.  Major governmental capital projects that are currently in progress, and the remaining capital commitment  of each, are as follows:  Fire Station Number 3 Replacement – $5.6 million Charleston Arastradero Corridor ‐ $10.2 million Bicycle Boulevards Implementation Project ‐ $9.3 million Major business‐type capital projects that are currently in progress, and the remaining capital commitment  of each, are as follows:  Water Main Replacement for Water fund ‐ $4.7 million Dewatering & Loadout Facility Project for Wastewater Treatment Fund ‐ $12.3 million Gas Main Replacement for Gas Fund ‐ $6.8 million Vehicle Registration Fees (VRF)  In FY 2018, the City received VRF funds from the Santa Clara Valley Transportation Authority and  expended the full amount on capital expenditures for the Overlay Resurfacing Project (PE‐86070):  Starting VRF balance July 1, 2017 ‐$       VRF revenue 421,874     VRF interest 2,999   VRF expense (424,873)    Ending VRF balance June 30, 2018 ‐$       CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     77    NOTE 7 – GENERAL LONG‐TERM OBLIGATIONS    Long‐Term Obligations  Bond premiums and discounts of long‐term debt issues are amortized over the life of the related debt.        The City’s long‐term debt issues and transactions, other than special assessment debt discussed in Note 8,  are as follows (in thousands):    Original Balance Balance Current Issue Amount July 1, 2017 Additions Retirements June 30, 2018 Portion Governmental Activities Debt: General Long‐Term Obligations:  2002B Downtown Parking Improvements, Certificates of Participation, 6.50%, due 03/01/2022 3,555$               975$                   ‐$                        975$                   ‐$                          ‐$                         2010 General Obligation Bonds, 3.25% ‐ 5%, due 08/01/2040 55,305               46,980                ‐                          1,170                 45,810                 1,225                  2011 Lease‐Purchase Agreement 3,222                 842                      ‐                          416                     426                      426                      2013A General Obligation Bonds, 2 ‐ 5%, due 08/01/2041 20,695               16,730                ‐                          400                     16,330                 415                      2018 Captial Improvement,   Certficates of Participation, 2.2%‐4.33%,  due 11/1/2047 8,970                  ‐                          8,970                  ‐                          8,970                   35                        Add: Unamortized Premium ‐                          3,768                  ‐                          158                     3,610                   158                      Total Governmental Activities Debt 91,747$             69,295$            8,970$              3,119$              75,146$              2,259$                  Original Issue  Amount  Balance  July 1, 2017 Additions Retirements Balance  June 30, 2018 Current Portion Business‐type Activities Debt: Enterprise Long‐Term Obligations: Utility Revenue Bonds 1995 Series A,  5.00‐6.25%, due 06/01/2020 8,640$               1,820$                ‐$                        570$                  1,250$               605$                   1999 Refunding,  5.125‐5.25%, due 06/01/2024 17,735               8,980                  ‐                          735                     8,245                 775                      2009 Series A,  1.80‐5.95%, due 06/01/2035 35,015               28,755                ‐                          1,035                 27,720               1,080                  2011 Refunding,  3‐4%, due 06/01/2035 17,225               11,270                ‐                          1,085                 10,185               1,125                  Add: Unamortized Premium ‐                          700                      ‐                          70                       630                      ‐                           Energy Tax Credit Bonds 2007 Series A, 0%, Due 12/15/2021 1,500                 500                      ‐                          100                     400                     100                      Less: Unamortized Discount ‐                          (27)                       ‐                          (5)                        (22)                       ‐                           State Water Resources Loans 2007, 1.02%, due 06/30/2029 9,000                 5,400                  ‐                          450                     4,950                 450                      2009, 2.6%, due 11/30/2030 8,500                 6,452                  ‐                          388                     6,064                 398                      2017, 1.8%, due 3/30/2049 29,684               3,181                 7,516                 4,000                 6,697                  ‐                           Total Business‐type Activities Debt 127,299$          67,031$            7,516$              8,428$              66,119$             4,533$                     CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     78    NOTE 7 – GENERAL LONG‐TERM OBLIGATIONS (Continued)    Description of Long‐Term Debt Issues    2002B Downtown Parking Improvements Project Certificates of Participation (COPs) – On  January 16, 2002, the City issued $3.6 million of COPs to finance the construction of certain improvements  to the non‐parking area contained in the City’s Bryant/Florence Garage complex.   Due to lower  construction costs, $0.9 million in par bonds were paid off early in January 2005.  Principal payments are  due annually on March 1 and interest payments semi‐annually on March 1 and September 1.  Debt service  payments are payable from lease revenues received by the Palo Alto Public Improvement Corporation.    As of June 30, 2018, these bonds were refinanced (extinguished) with the issuance of the AA+ rated 2018  (Golf Course Renovation) and refinancing COPs. The present value savings of $0.3 million included $0.2  million in reserve funds. The final payment on the defeased 2002B COPs will be in November 2022.    2010 General Obligation Bonds (GO Bonds) – On June 30, 2010, the City issued $55.3 million of GO Bonds  to finance costs for constructing a new Mitchell Park Library and Community Center, and to fund  substantial improvements to the Rinconada Library and the Downtown Library. Principal payments are  due annually on August 1 and interest payments semi‐annually on February 1 and August 1 and are  payable from property tax revenues.    On June 28, 2016, the City defeased $2.3 million of 2010 GO Bonds using funds from bond premiums  received at time of issue by depositing the amount in an irrevocable trust account.  The trust account  assets and the liability for the defeased bonds are not included in the City’s financial statements. The City  legally remains the primary obligor on the $2.3 million of defeased bonds until they are paid on August 1,  2020.      2013A General Obligation Bonds (GO Bonds) – On June 30, 2013, the City issued $20.7 million of GO  Bonds to finance costs for constructing a new Mitchell Park Library and Community Center, as well as  making substantial improvements to the Rinconada Library and the Downtown Library. Principal  payments are due annually on August 1 and interest payments semi‐annually on February 1 and August 1  from 2 percent to 5 percent, and are payable from property tax revenues.    On June 28, 2016, the City defeased $2.8 million of 2013A GO Bonds using funds remaining at completion  of the project by depositing the amount in an irrevocable trust account  The trust account assets and the  liability for the defeased bonds are not included in the City’s financial statements.  The City legally remains  the primary obligor on the $2.8 million of defeased bonds until they are paid on August 1, 2023.      The City’s 2010 and 2013A GO Bonds are payable from pledged ad valorem property taxes until the final  maturity dates of the bonds on August 1, 2040 and August 1, 2041 respectively. For the fiscal year ended  June 30, 2018, the City received $4.3 million in ad valorem property taxes for principal of $1.5 million and  interest of $2.8 million for both 2010 and 2013A GO Bonds.     CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     79    NOTE 7 – GENERAL LONG‐TERM OBLIGATIONS (Continued)    2011 Lease‐Purchase Agreement – On August 2, 2011, the City entered into a master lease‐purchase  agreement with JP Morgan Chase Bank, N.A. to finance redemption of the 1998 Golf Course COPs.  The  lease is secured by a first priority security interest in twenty‐one Fire Department emergency vehicles.   Lease proceeds were $3.2 million.  Principal payments are due annually on September 1 and interest  payments are due semi‐annually on September 1 and March 1 at a rate of 2.49 percent, payable from  General Fund revenues.    As of June 30, 2018, there will be $0.4 million in principal and $5,302 in interest as the remaining debt  service on the bonds with the final payment occurring in September 2018.   2018 Capital Improvement (“Golf Course”) Project and 2002B (“Civic Center Refinancing and Downtown  Parking Improvements Project”) Refinancing Certificates of Participation (COPs) – On June 1, 2018, the  City issued taxable (Green Bonds) COPs of $8.4 million for the renovation of the Palo Alto Municipal Golf  Course and  $0.6 million to refinance the 2002B COPs.  There are two semi‐annual debt service payments,  consisting of principal payments due annually on November 1 and interest payments due on May 1 and  November 1, which are payable solely from and secured by the lease payments to be made by the City’s  General Fund to the Public Improvement Corporation pursuant to the Lease Agreement. The leased  property is the Palo Alto University Fire Station 1. The 2018 Capital Improvement Project and 2002B  refinancing COPs maturity dates and true interest costs are November 2047 and 4.14 percent and  November 2022 and 3.11 percent, respectively. The refinancing of the 2002B COPs resulted in present  value savings of $283 thousand and net present savings of $46 thousand; the higher present value savings  was due to utilizing $0.2 million in the 2002B reserve account cash on hand to reduce the principal amount  that was needed to be refinanced. A reserve account is no longer required for a highly rated bond issuer  like the City of Palo Alto, so the entire 2018 COPs didn’t have a reserve account.    1995 Utility Revenue Bonds, Series A – The City issued $8.6 million of Utility Revenue Bonds on  February 1, 1995 to finance certain extensions and improvements to the City’s Storm Drainage and  Surface Water System.  The Bonds are special obligations of the City payable solely from and secured by  a pledge of and lien upon the revenues derived by the City from the funds, services and facilities of all  Enterprise Funds except the Refuse Services Fund, Fiber Optics Fund and Airport Fund. Principal payments  are payable annually on June 1 and interest payments semi‐annually on June 1 and December 1. A $2.9  million at 6.3 percent term bond is due June 1, 2020.    As required by the Indenture, the City established a debt service reserve fund for the Bonds (the “Reserve  Account”), with a minimum funding level requirement in the Reserve Account (the “Reserve  Requirement”).  At the time it issued the Bonds, the City satisfied the Reserve Requirement with a deposit  into the Reserve Account of a surety bond (the “Surety Bond”) in the amount of $685,340 issued by Ambac  Indemnity Corporation (renamed to Ambac Assurance Corporation in 1997).    The pledge of future Net Revenues for the above bonds ends upon repayment of the $1.3 million principal  and $0.1 million interest as the remaining debt service on the bonds, which is scheduled to occur in  FY 2020. For FY 2018, Net Revenues, including operating revenues and non‐operating interest earnings,  amounted to $289.1 million; operating costs, including operating expenses but not interest, depreciation  or amortization, amounted to $231.3 million. Net Revenues available for debt service amounted to $57.9  million, which represented coverage of 84.7 times over the $0.7 million in debt service.     CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     80    NOTE 7 – GENERAL LONG‐TERM OBLIGATIONS (Continued)  1999 Utility Revenue and Refunding Bonds – The City issued $17.7 million of Utility Revenue Bonds on  June 1, 1999, to refund the 1990 Utility Revenue Refunding Bonds, Series A and the 1992 Utility Revenue  Bonds, Series A, and to finance rehabilitation of two Wastewater Treatment sludge incinerators.  The 1990  Utility Revenue Refunding Bonds, Series A and the 1992 Utility Revenue Bonds, Series A, were  subsequently retired.  The 1999 Bonds are special obligations of the City payable solely from and secured by a pledge of and lien  upon certain net revenues derived by the City’s sewer system and its storm and surface water system (the   “Storm Drain System”). As of June 30, 2001, the 1999 Bonds had been allocated to and were repayable  from net revenues of the following enterprise funds: Wastewater Collection (10.2 percent), Wastewater  Treatment (64.6 percent) and Storm Drainage (25.2 percent). Principal payments are payable annually on  June 1 and interest payments semi‐annually on June 1 and December 1. A $3.1 million 5.3 percent term  bond and a $5.1 million 5.3 percent term bond are due June 1, 2021 and 2024, respectively.   As required by the Indenture, the City established a debt service reserve fund for the Bonds (the “Reserve  Account”), with a minimum funding level requirement in the Reserve Account (the “Reserve  Requirement”).  At the time it issued the Bonds, the City satisfied the Reserve Requirement with a deposit  into the Reserve Account of a surety bond (the “Surety Bond”) in the amount of $1,647,300 issued by  Ambac Indemnity Corporation (renamed to Ambac Assurance Corporation in 1997).  The pledge of future Net Revenues for the above bonds ends upon repayment of the $8.2 million principal  and $1.7 million interest as the remaining debt service on the bonds, which is scheduled to occur in  FY 2024. For FY 2018, Net Revenues, including operating revenues and non‐operating interest earnings,  amounted to $52.4 million; operating costs, including operating expenses but not interest, depreciation  or amortization, amounted to $41.7 million. Net Revenues available for debt service amounted to $10.7  million, which represents coverage of 8.88 times over the $1.2 million in debt service.  2007 Electric System Clean Renewable Energy Tax Credit Bonds, Series A – In October 2007, the City  issued $1.5 million of Electric Utility Clean Renewable Energy Tax Credit Bonds (CREBs), 2007 Series A, to  finance the City’s photovoltaic solar panel project. The CREBs do not bear interest. In lieu of receiving  periodic interest payments, bondholders are allowed annual federal income tax credits in an amount  equal to a credit rate for such CREBs multiplied by the outstanding principal amount of the CREBs owned  by the bondholders. The CREBs are payable solely from and secured solely by a pledge of the Net Revenues  of the Electric system and the other funds pledged under the Indenture.  The pledge of future Electric Fund Net Revenues ends upon repayment of the $0.4 million remaining debt  service on the bonds, which is scheduled to occur in FY 2022. For FY 2018, Net Revenues, including  operating revenues and non‐operating interest earnings, amounted to $154.5 million; operating costs,  including operating expenses but not interest, depreciation or amortization, amounted to $128.8 million.  Net Revenues available for debt service amounted to $25.7 million, which represented coverage of  256.4 times over the $0.1 million in debt service.  CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     81    NOTE 7 – GENERAL LONG‐TERM OBLIGATIONS (Continued)    2009 Water Revenue Bonds, Series A – On October 6, 2009, the City issued $35.0 million of Water  Revenue Bonds to finance certain improvements to the City’s water utility system. Principal payments are  due annually on June 1, and interest payments are due semi‐annually on June 1 and December 1 from  1.80 percent to 5.95 percent. The 2009 Revenue Bonds are secured by net revenues generated by the  Water Services Fund. The 2009 Bonds were issued as bonds designated as “Direct Payment Build America  Bonds” under the provisions of the American Recovery and Reinvestment Act of 2009 (“Build America  Bonds”). The City expects to receive a cash subsidy payment from the United States Treasury equal to 35  percent of the interest payable on the 2009 Bonds. The lien of the 1995 Bonds on the Net Revenues is  senior to the lien on Net Revenues securing the 2009 Bonds and the 2011 Bonds. The City received subsidy  payments amounting to $501 thousand, which represents 32.7 percent of the interest payments due on  December 1 and June 1.    The pledge of future Net Revenues for the above bonds ends upon repayment of the $27.7 million  principal and $15.9 million interest as the remaining debt service on the bonds, which is scheduled to  occur in FY 2035. For FY 2018, Net Revenues, including operating revenues and non‐operating interest  earnings, amounted to $45.2 million; operating costs, including operating expenses but not interest,  depreciation or amortization, amounted to $36.4 million. Net Revenues available for debt service  amounted to $8.8 million, which represented coverage of 3.45 times over the $2.6 million in debt service.    2011 Utility Revenue Refunding Bonds – On September 8, 2011, the City issued $17.2 million in Lease  Revenue Bonds (2011 Bonds) to refund the outstanding 2002 Series A Utility Revenue Bonds (2002 Bonds)  on a current basis. The 2002 Bonds were issued to finance improvement to the City’s municipal water  utility system and the natural gas utility system. Principal of the 2011 Bonds is payable annually on June  1, and interest on the 2011 Bonds is payable semi‐annually on June 1 and December 1. The 2011 Bonds  are secured by net revenues generated by the Water Services and Gas Services Funds.     The pledge of future Net Revenues of the above bonds ends upon repayment of the $10.2 million principal  and $1.6 million interest as remaining debt service on the bonds, which is scheduled to occur in FY 2035.  For FY 2018, Net Revenues, including operating revenues and non‐operating interest earnings, amounted  to $82.3 million; operating costs, including operating expenses but not interest, depreciation or  amortization, amounted to $60.7 million. Net Revenues available for debt service amounted to $21.5  million, which represented coverage of 14.78 times over the $1.5 million in debt service.    2007 State Water Resources Loan – In October 2007, the City approved a $9 million loan agreement with  State Water Resources Control Board (SWRCB) to finance the City’s Mountain View/Moffett Area  reclaimed water pipeline project. Under the terms of the contract, the City has agreed to repay $9 million  to the State in exchange for receiving $7.5 million in proceeds to be used to fund the Project. The  difference of $1.5 million between the repayment obligation and proceeds represents in‐substance  interest on the outstanding balance. Principal payments are payable annually on June 30.     Concurrently with the loan, the City entered into various other agreements including a cost sharing  arrangement with the City of Mountain View. Pursuant to that agreement, City of Mountain View agreed  to finance a portion of the project with a $6.0 million loan repayable to the City. This loan has been  recorded as “Due from other government agencies” in the accompanying financial statements.  The  balance due to the City at June 30, 2018 was $3.3 million.    CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     82    NOTE 7 – GENERAL LONG‐TERM OBLIGATIONS (Continued)    2009 State Water Resources Loan – In October 2009, the City approved an $8.5 million loan agreement  with SWRCB to finance the City’s Ultraviolet Disinfection project. Principal and interest payments are  payable annually on November 30.    2017 State Water Resources Loan ‐ In June 2017, the SWRCB and the City executed agreement for an  award up to $30 million, payable over 30 years to finance the replacement of sewage sludge “bio‐solids”  incinerators at the City’s Regional Water Quality Control Plant (RWQCP). In September 2017, due to the  projected lower project costs, the agreement was amended to a lower loan amount of $29.7 million.  Under the terms of the contract, a portion of the loan amount, $4.0 million, is federally funded and has  been adjusted to reflect the correct long term obligation balance.    The new facility will dewater the bio‐solids and allow the material to be loaded onto trucks and taken to  a separate facility for further treatment.  The RWQCP provides treatment and disposal for wastewater for  Palo Alto, Mountain View, Los Altos, Los Altos Hills, East Palo Alto Sanitary District, and Stanford  University. Though Palo Alto is the recipient of the loan, the City’s agreement with the partner agencies  oblige them to pay their proportionate share of the principal and interest of this loan. Palo Alto’s share of  the loan payment is 38.2 percent with the partner agencies paying 61.8 percent.   Debt Service Requirements (in thousands):  Debt service requirements are shown below for all long‐term debt.    For the Year Ending  June 30 Principal Interest Total Principal Interest Total 2019 2,101$             3,112$             5,213$             4,533$             2,484$                 7,017$              2020 1,905                3,068               4,973               5,291               2,651                   7,942                2021 1,965                2,991               4,956               5,562               2,523                   8,085                2022 2,050                2,909               4,959               5,778               2,359                   8,137                2023 2,130                2,826               4,956               5,882               2,158                   8,040                2024‐2028 12,155             12,624             24,779             21,641             8,063                   29,704              2029‐2033 15,285             9,405               24,690             12,120             4,861                   16,981              2034‐2038 18,930             5,677               24,607             4,705               424                      5,129                2039‐2043 12,665             1,403               14,068             ‐                    ‐                       ‐                         2044‐2048 2,350                256                  2,606                ‐                    ‐                        ‐                         2048‐2052 ‐                     ‐                   ‐                         ‐                    ‐                        ‐                         Total 71,536$           44,271$         115,807$       65,512$         25,523$             91,035$           Governmental Activities Business‐Type Activities       CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     83    NOTE 7 – GENERAL LONG‐TERM OBLIGATIONS (Continued)    Debt Call Provisions  Long‐term debt as of June 30, 2017 is callable on the following terms and conditions:    Initial Call Date Governmental Activities Long‐Term Debt 2010 General Obligation Bonds $6.595 million due 08/01/2032 08/01/31 (2) $4.890 million due 08/01/2034 08/01/33 (2) $17.725 million due 08/01/2040 08/01/35 (2) Business‐Type Activities Long‐Term Debt Utility Revenue Bonds 1999 Refunding 06/01/09 (1) 2011 Refunding 06/01/21 (1)   (1)  Callable in inverse numerical order of maturity at par plus a premium of 2 percent beginning on the  initial call date. The call price declines subsequent to the initial date.   (2)  Callable in any order specified by the City at par value plus any accrued interest beginning on the  initial call date.    Leasing Arrangements  COPs and Capital Leases are issued for the purpose of financing the construction or acquisition of projects  defined in each leasing arrangement. Projects are leased to the City for lease payments which, together  with unspent proceeds of the leasing arrangement, will be sufficient to meet the debt service obligations  of the leasing arrangement. At the termination of the leasing arrangement, title to the project will pass to  the City.    Leasing arrangements are similar to debt in that they allow investors to participate in a share of  guaranteed payments made by the City. Because they are similar to debt, the present value of the total  payments to be made by the City is recorded as long‐term debt. The City’s leasing arrangements are  included in long‐term obligations discussed above.      NOTE 8 – SPECIAL ASSESSMENT DEBT    Special Assessment Debt with no City Commitment  On February 29, 2012, the University Avenue Area Off‐Street Parking Assessment District issued Limited  Obligation Refunding Improvement Bonds (2012 Bonds), but the City has no legal or moral liability with  respect to the payment of this debt, which is secured only by assessments on properties in this District.  Therefore, this debt is not included in Governmental Activities long‐term debt of the City. At  June 30, 2018, the District’s outstanding debt amounted to $22.4 million. The proceeds from the 2012  Bonds, combined with available Assessment Funds, were used to redeem the outstanding University  Avenue Area Off‐Street Parking Assessment District Series 2001‐A and Series 2002‐A Bonds. On June 28,  2016, the District defeased $1.6 million of the 2012 Bonds using funds remaining from completion of the  project.  The defeased debt will be paid on September 2, 2022.   CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     84    NOTE 9 – LANDFILL POST‐CLOSURE MAINTENANCE    The 126 acre Palo Alto Refuse Disposal Site (Palo Alto Landfill) was filled to capacity and stopped accepting  waste in July 2011.  State and federal laws and regulations require the City to construct a final cover to  cap the waste, and to perform certain post‐closure maintenance and monitoring activities at the site for  a minimum of thirty years after closure. As of November 2015, the Palo Alto Landfill has been fully capped  and subsequently converted to a pastoral park (Byxbee Park) that is open to the public.  A final post‐ closure maintenance plan and cost estimate for the thirty year post‐closure related activities was  approved by state and local regulatory agencies in 2014. This cost estimate is adjusted annually for  inflation at a percentage provided by the State. Landfill post‐closure liabilities as of June 30, 2018 are  $6.8 million, an increase of $0.1 million from the previous year. The City is required by state and federal  laws and regulations to fund post‐closure maintenance activities by pledging future revenue received  from Refuse customers through rate fees.    NOTE 10 – NET POSITION AND FUND BALANCES    Net Position  Net Position is the excess of the City’s assets and deferred outflows of resources over its liabilities and  deferred inflows of resources. Net position is divided into three categories that are described below:    Net Investment in Capital Assets describes the portion of net position, which is represented by current net  book value of the City’s capital assets, less the outstanding balance of any debt issued to finance these  assets.    Restricted describes the portion of net position that is reduced by liabilities related to restricted assets.  Generally a liability relates to restricted assets if the asset results from a resource flow that also results in  the recognition of a liability or if the liability will be liquidated with the restricted assets reported.    Unrestricted describes the portion of net position which is not restricted as to use.    Fund Balances  As prescribed by GASB Statement No. 54, governmental funds report fund balances in classifications based  primarily on the extent to which the City is bound to honor constraints on the specific purposes for which  amounts in the funds can be spent. Fund balances for governmental funds are made up of the following:    Nonspendable – This category is comprised of amounts that are: (a) not in spendable form, or (b) legally  or contractually required to be maintained intact. The “not in spendable form” criterion includes items  that are not expected to be converted to cash, for example: prepaid items. The corpus of the permanent  fund is contractually required to be maintained intact.    Restricted – This category is comprised of amounts that can be spent only for the specific purposes  stipulated by external resource providers, constitutionally or through enabling legislation. Restrictions  may effectively be changed or lifted only with the consent of resource providers.    Committed – This category is comprised of amounts that can only be used for the specific purposes  determined by the action that constitutes the most binding constraint (i.e. ordinance) of the City’s highest  level of decision‐making authority, the City Council. Commitments may be changed or lifted only by the  City taking the same formal action that imposed the constraint originally.      CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     85    NOTE 10 – NET POSITION AND FUND BALANCES (Continued)  Assigned – This category is comprised of amounts intended to be used by the City for specific purposes  that are neither restricted nor committed. Intent is expressed by the City Council or the City Manager, to  whom the City Council has delegated the authority to assign amounts to be used for specific purposes.  Unassigned –This category is the residual classification for the General Fund and includes all amounts not  contained in the other classifications. Unassigned amounts are technically available for any purpose.  Other governmental funds may report negative unassigned fund balance, which occurs when a fund has  a residual deficit after allocation of fund balance to the nonspendable, restricted or committed categories.   The fund balances of all governmental funds are presented by the above mentioned categories on the  face of the financial statements.  In circumstances when an expenditure is made for a purpose for which  amounts are available in multiple fund balance categories, fund balance is depleted in the order of  restricted, committed, assigned, and unassigned.  The General Fund Budget Stabilization Reserve (BSR) is established by authority of the General Fund  Reserve Policy, which is approved by the City Council and included in the City’s annual adopted budget.  The BSR is maintained in the range of 15 to 20 percent of General Fund expenditures and operating  transfers, with a target of 18.5 percent.  Any reserve level below 15 percent requires City Council approval.   At the discretion of the City Manager, a reserve balance above 18.5 percent may be transferred to the  Infrastructure Reserve within the Capital Projects Fund.  The purpose of the General Fund BSR is to fund  unbudgeted, unanticipated one‐time costs.  The BSR is not meant to fund ongoing, recurring General Fund  expenditures.  As of June 30, 2018 total outstanding encumbrances and reappropriations related to governmental  activities were $7.8 million for the General Fund, $41.4 million for the Capital Projects Fund, and $1.0  million for the Special Revenue Funds.   General Fund encumbrances are reserved for the following  governmental activities:  Planning  & Community Environment $1.9 million, Development Services $0.5  million, Public Works $0.5 million, Community Services $0.8 million, Police $0.9 million, and the remaining  City departments $1.4 million.  CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     86    NOTE 10 – NET POSITION AND FUND BALANCES (Continued)    Enterprise Funds    At June 30, 2018, Enterprise Fund unrestricted net position (in thousands) were as follows:    Water Electric Fiber Optics Gas Wastewater  Collection Wastewater  Treatment Refuse Storm  Drainage Airport Total Unrestricted Rate stabilization Supply ‐$                       9,011$              ‐$                      727$             ‐$                      ‐$                    ‐$                 ‐$               ‐$              9,738$              Distribution 4,069                 ‐                        26,040             6,363           342                  (12,865)        14,748       2,560       (2,926)      38,331              4,069                9,011               26,040             7,090           342                  (12,865)        14,748       2,560       (2,926)      48,069              Operations Supply ‐                         9,537                ‐                         ‐                     ‐                        ‐                      ‐                   ‐                 ‐                9,537                Distribution 20,927              10,363              ‐                        8,638           7,414                ‐                      ‐                   ‐                 ‐                47,342              20,927              19,900              ‐                        8,638           7,414                ‐                      ‐                   ‐                 ‐                56,879              Emergency plant replacement ‐                          ‐                        1,000                ‐                     ‐                       1,980             ‐                   ‐                 ‐                2,980                Electric special projects ‐                         41,665              ‐                         ‐                     ‐                        ‐                      ‐                   ‐                 ‐                41,665              Reappropriations 3,614                9,063               1,194               600              506                  2,585             ‐                  1,063        ‐                18,625              Commitments 7,712                8,637               704                  8,074           762                  18,665          2,165         1,776       588           49,083              Underground loan ‐                         728                   ‐                         ‐                     ‐                        ‐                      ‐                   ‐                 ‐                728                   Notes and loans ‐                          ‐                         ‐                         ‐                     ‐                       559                ‐                   ‐                 ‐                559                   Landfill corrective action ‐                          ‐                         ‐                         ‐                     ‐                        ‐                     741              ‐                 ‐                741                   Hydro stabilization reserve ‐                         11,400              ‐                         ‐                     ‐                        ‐                      ‐                   ‐                 ‐                11,400              Public benefit program ‐                         681                   ‐                         ‐                     ‐                        ‐                      ‐                   ‐                 ‐                681                   CIP reserve 2,726                880                   ‐                        3,820           978                   ‐                      ‐                   ‐                 ‐                8,404                Geng Road reserve ‐                          ‐                         ‐                         ‐                     ‐                        ‐                     268              ‐                 ‐                268                   GASB 68 Pension reserve (12,455)            (29,511)           (1,855)              (13,277)       (7,449)             (18,584)        (5,114)        (3,189)      (493)         (91,927)            GASB 75 OPEB reserve (4,350)               (14,168)           (6,235)         (2,384)             (7,340)           (2,653)        (1,158)      (431)         (38,719)            Total 22,243$           58,286$          27,083$         8,710$        169$               (15,000)$     10,155$    1,052$     (3,262)$    109,436$              CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     87    NOTE 10 – NET POSITION AND FUND BALANCES (Continued)    The City Council has set aside unrestricted net position for general contingencies, and future capital and  debt service expenditures including operating and capital contingencies for unusual or emergency  expenditures.    Internal Service Funds  At June 30, 2018, Internal Service Funds unrestricted net position (in thousands) were as follows:    Vehicle  Replacement  and  Maintenance Technology Printing and  Mailing Services General  Benefits Workers'  Compensation  Insurance  Program General  Liabilities  Insurance  Program Retiree Health  Benefits Total Unrestricted net position: Commitments 1,998$               2,030$               61$                     302$                  40$                     19$                      ‐$                   4,450$                Future catastrophic losses ‐                       ‐                       ‐                       ‐                      1,595                 985                      ‐                      2,580                  Retiree health care ‐                       ‐                       ‐                       ‐                       ‐                       ‐                      999                     999                      Capital projects 1,973                 2,189                  ‐                       ‐                       ‐                       ‐                       ‐                      4,162                  GASB68 pension reserve (2,889)                (9,961)                (306)                    ‐                      (43)                       ‐                       ‐                      (13,199)               PARS supplemental pension reserve ‐                       ‐                       ‐                      5,483                  ‐                       ‐                       ‐                      5,483                  GASB75 OPEB reserve (1,657)                (3,380)                (148)                    ‐                       ‐                       ‐                       ‐                      (5,185)                 Available 5,505                 18,809               (69)                      3,994                  ‐                       ‐                       ‐                      28,239                Total 4,930$               9,687$              (462)$                9,779$              1,592$              1,004$               999$                  27,529$                Commitments represent the portion of net position set aside for open purchase orders.    Future catastrophic losses represent the portion of net position to be used for unforeseen future  losses.   Retiree health care represents the portion of net position set aside to defer future costs of retiree  health care coverage.    Capital projects represent the portion of net position set aside for adopted capital projects.   GASB68 pension reserve is the portion of net position required to be set aside to meet defined benefit  pension obligations.    PARS supplemental pension reserve represents Section 115 irrevocable trust with the PARS to prefund  pension obligations.   GASB75 OPEB reserve is the portion of net position required to be set aside to meet OPEB obligations.    Funds with deficits:    At June 30, 2018, the City’s Downtown Business Development District special revenue fund had a deficit  fund balance of $32,000.  The fund balance will be cured through collection of future special assessments.    At June 30, 2018, the City’s Printing and Mailing Services internal service revenue fund had a deficit net  position of $433,000.  The deficit is due to the impact from the recording of OPEB items.  The deficit is  expected to be funded by future internal service charges to other City funds.        CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     88     NOTE 11 – PENSION PLANS  (a)        General Information about the Pension Plans     Plan Descriptions ‐ Substantially all permanent City employees are eligible to participate in the City’s  separate Safety (police and fire) and Miscellaneous (all other) Plans, agent multiple‐employer defined  benefit pension plans  administered by California Public Employees’ Retirement System (CalPERS), which  acts as a common investment and administrative agent for its participating member employers. Benefits  provisions under the Plans are established by State statute and City resolution. CalPERS issues publicly  available reports that include a full description of the pension plans including benefits provisions,  assumptions and membership information. The reports can be found on the CalPERS website at:   <http://www.calpers.ca.gov/index.jsp?bc=/about/forms‐pubs/calpers‐reports/actuarial‐ reports/home.xml>    Benefits Provided ‐ CalPERS provides retirement and disability benefits, annual cost of living adjustments  and death benefits to Plan members, who must be public employees and beneficiaries. Benefits are based  on years of credited service (equal to one year of full‐time employment), age at retirement and final  compensation. The death benefit is one of the following: the 1959 Survivor Benefit, or the pre‐retirement  option 2W Death Benefit for local fire members only.     The Plans’ provisions and benefits in effect at June 30, 2018, are summarized in the following table.   Contribution rates are based on the Actuarial Valuation Report as of June 30, 2015.  Safety Plan Fire Fighters,  Fire Chief  Association,  Police Officers,  Fire Fighters,  Fire Chief Association Police  Officers, Police Management Fire Fighters,  Fire Chief  Association,  Police Officers,  Hire Date Prior to June 8, 2012 On or after June 8,  2012 On or after Dec. 8,  2012 On or after Jan 1,  2013 Benefit formula1 3% at 55 3% at 55 3% at 50 2.7% at 57 Benefit vesting schedule 5 years service 5 years service 5 years service 5 years service Benefit payment monthly for life monthly for life monthly for life monthly for life Retirement age 50 551 551 571 Monthly benefit as % of eligible compensatio 3% 3% 3% 2.7% Actuarially determined contribution rate ‐ EE 9% 9% 9% 11.25% Actuarially determined contribution rate ‐ ER 49.689% 49.689% 49.689% 49.689% Hire Date Prior to July 17, 2010 On or after July 17,  2010 On or after Jan 1,  2013 Benefit formula 2.7% at 552 2% at 602 2% at 623 Benefit vesting schedule 5 years service 5 years service 5 years service Benefit payments monthly for life monthly for life monthly for life Retirement age 552 602 623 Monthly benefit as % of eligible compensatio 2.70% 2.0% ‐ 2.418% 2% Actuarially determined contribution rate ‐ EE 8% 7% 6.25% Actuarially determined contribution rate ‐ ER 30.196% 30.196% 30.196% 1 Employees can retire at age 50 with reduced benefits of 2.4% ‐ 2.88% if hired before Jan 1, 2013, or 2.0% ‐ 2.6% if hired on or    after Jan 1, 2013. 2 Employees can retire at age 50 with reduced benefits of 2.0% ‐ 2.56% if hired before July 17, 2010, or 1.092% ‐ 1.874% if hired on or    after July 17, 2010. 3 Employees can retire at age 52 with reduced benefits of 1.0% ‐ 1.9% Miscellaneous Plan   CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     89    NOTE 11 – PENSION PLANS (Continued)  Employees Covered – Based on the Actuarial Valuation Report as of June 30, 2017, the following  employees were covered by the benefits terms for each Plan:   Miscellaneous  Plan Safety Plan Inactive employees or beneficiaries currently receiving benefits 1,098    427    Inactive employees entitled to but not yet receiving benefits 774   103    Active employees 818   172    Total 2,690    702    Contributions –Section 20814(c) of the California Public Employees’ Retirement Law requires that the  employer contribution rates for all public employers be determined on an annual basis by the actuary and  shall be effective on the July 1 following notice of a change in the rate.  Funding contributions for the Plans  are determined annually on an actuarial basis as of June 30 by CalPERS.  The actuarially determined rate  is the estimated amount necessary to finance the costs of benefits earned by employees during the year,  with an additional amount to finance any unfunded accrued liability.  The City is required to contribute  the difference between the actuarially determined rate and the contribution rate of employees.  Further detail can be found in the Required Supplemental Information Schedule of Contributions.  In April 2017, the City established a Section 115 irrevocable trust with the Public Agency Retirement  Services (PARS).  The Council approved an initial deposit of $2.1 million in General Fund proceeds into the  General Fund subaccount of the City’s PARS Trust Account.  The Trust Account allows more control and  flexibility in investment allocations compared to City’s portfolio which is restricted by State regulations to  fixed income instruments. As of June 30, 2018, the City reported the account balance of $5.5 million as  restricted cash in the General Benefits, an Internal Service Fund.    (b)       Net Pension Liability  The City’s net pension liability for both Plans is measured as the total pension liability, less the plan’s  fiduciary net position.  Net pension liability is measured as of June 30, 2017 (measurement date), using  the Actuarial Valuation Report as of June 30, 2016 rolled forward to June 30, 2017 using standard update  procedures. At June 30, 2018, the City reported a net pension liability of $415.1 million for both plans. A  summary of principal assumptions and methods used to determine the net pension liability is as follows:   CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     90    NOTE 11 – PENSION PLANS (Continued)    Actuarial Assumptions  ‐ The total pension liabilities were determined using the following actuarial  assumptions in the Accounting Valuation Report:    Miscellaneous  Plan Safety Plan Valuation Date June  30, 2016 June  30, 2016 Measurement Date June  30, 2017 June  30, 2017 Actuarial  Cost Method Entry Age  Normal Entry Age  Normal Actuarial  Assumptions: Discount Rate 7.15% 7.15% Inflation 2.75% 2.75% Salary Increases Mortality1 Retirement Age table  includes 20 years of mortality improvements using Society of  Actuaries Scale  VV.  For more  details on this table, please refer to the  2014 experience study report. Further details of  the  Experience  Study can be found on the CalPERS website. Derived using CalPERS membership data  Probabilities of retirement are  based on  the  2014 CalPERS Experience Study for the   period 1997 to 2011. Varies by Entry Age  and Service 1 Mortality table  used was developed based on CalPERS' specific data.  The     Change in Assumptions – The discount rate reduced from 7.65 percent to 7.15 percent for the June 30,  2017 actuarial valuation.    Discount Rate – The discount rate used to measure the total pension liability was 7.15 percent for each  Plan. To determine whether the municipal bond rate should be used in the calculation of a discount rate  for each Plan, CalPERS stress tested plans that would most likely result in a discount rate that would be  different from the actuarially assumed discount rate. Based on the testing, none of the tested plans ran  out of assets. Therefore, the current 7.15 percent discount rate is appropriate and the use of the  municipal bond rate calculation is not deemed  necessary. The long term expected discount rate of 7.15  percent is applied to all plans in the Public Employees Retirement Fund for the June 30, 2017  measurement date.  The stress test results are presented in a detailed report that can be obtained from  the CalPERS website under GASB Statement No. 68 section.      CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     91    NOTE 11 – PENSION PLANS (Continued)    The long‐term expected rate of return on pension plan investments was determined using a building‐ block method in which best estimate ranges of expected future real rates of return (expected returns, net  of pension plan investment expense and inflation) are developed for each major asset class.    In determining the long‐term expected rate of return, CalPERS took into account both short‐term  and long‐term market return expectations as well as the expected pension fund cash flows. Such cash  flows were developed assuming that both members and employers will make their required contributions  on time and as scheduled in all future years. Using historical returns of all the funds’ asset classes,  expected compound geometric returns were calculated over the short‐term (first ten years) and the  long‐term (11‐60 years) using a building‐block approach. Using the expected nominal returns for both  short‐term and long‐term, the present value of benefits was calculated for each fund. The expected rate  of return was set by calculating the single equivalent expected return that arrived at the same present  value of benefits for cash flows as the one calculated using both short‐term and long‐term returns.  The expected rate of return was then set equivalent to the single equivalent rate calculated above  and rounded down to the nearest one quarter of one percent.    The table below reflects the long‐term expected real rate of return by asset class for both Miscellaneous  and Safety Plans.  The rate of return was calculated using the capital market assumptions applied to  determine the discount rate and asset allocation.   These rates of return are net of administrative  expenses.     Asset Class Current  Target  Allocation Real  Return Years 1 ‐ 101 Real  Return Years 11+2 Global  Equity 47.0% 4.90% 5.38% Global  Fixed Income 19.0 0.8 2.27 Inflation Sensitive 6.0 0.6 1.39 Private  Equity 12.0 6.6 6.63 Real  Estate 11.0 2.80 5.21 Infrastructure  and Forestland 3.0 3.90 5.36 Liquidity 2.0 (0.4) (0.9) 1 An expected inflation of 2.5% used for this period. 2 An expected inflation of 3.0% used for this period.        CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     92    NOTE 11 – PENSION PLANS (Continued)   (c)  Changes in the Net Pension Liability  The following table is based on the GASB 68 Accounting Valuation Report and shows the changes in the  net pension liability for the Miscellaneous and Safety Plans (in thousands):  Total  Pension  Liability Plan Net  Position Net Pension  Liability Miscellaenous Plan: Balances calculated at July 1, 2017 714,019$        469,782$        244,237$      Changes for the year: Service  cost 14,423   ‐  14,423     Interest on total  pension liability 52,831   ‐  52,831     Changes in benefit terms ‐  ‐  ‐    Differences between expected and actual  experiences (6,378)  ‐ (6,378)    Changes in assumptions 42,239   ‐  42,239     Contributions from employer ‐  20,638   (20,638)   Contributions from employees ‐  6,314  (6,314)     Net investment income ‐  53,259   (53,259)   Benefit payments, including refunds of employee  contributions (36,405)  (36,405)  ‐   Administrative expense ‐ (694)  694   Other non‐investment expenses ‐ 30    (30)   Net changes 66,710   43,142   23,568     Balances reported at June  30, 2018  780,729   512,924    267,805  Safety Plan: Balances calculated at July 1, 2017 $383,556 $250,474 $133,082 Changes for the year: Service  cost 6,584  ‐   6,584    Interest on total  pension liability 28,272   ‐   28,272     Change  of  assumption 22,566   ‐   22,566     Differences between expected and actual  experiences (2,790)   ‐   (2,790)     Contributions from employer ‐    10,220   (10,220)   Contributions from employees ‐    2,475  (2,475)     Net investment income ‐    28,112   (28,112)   Benefit payments, including refunds of employee  contributions (22,413)   (22,413)  ‐    Administrative  expense ‐    (370)  370    Other non‐investment expenses ‐    (30)   30   Net changes 32,219   17,994   14,225     Balances reported at June 30, 2018 415,775  268,468  147,307    Total  for Miscellaneous & Safety Plans 1,196,504$    781,392$        415,112$      CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     93    NOTE 11 – PENSION PLANS (Continued)     Sensitivity of the Net Pension Liability to Changes in the Discount Rate ‐ The following table presents the  net pension liability of the Plans as of the measurement date, calculated using the discount rate of 7.15  percent, compared to a discount rate that is 1 percentage point lower (6.15 percent) or 1 percentage  point higher (8.15 percent). Amounts shown below are in thousands:       Discount Rate  ‐ 1% (6.15%) Current Discount Rate  (7.15%) Discount Rate + 1% (8.15%) Miscellaneous Plan: Plan's Net Pension Liability/(Asset) 369,257$                    267,805$                         183,661$                     Safety Plan: Plan's Net Pension Liability/(Asset) 201,189$                    147,307$                         102,861$                         Plan Fiduciary Net Position – Detailed information about the Plan’s fiduciary net position is available in  the separately issued CalPERS financial report: Schedule of Changes in Fiduciary Net Position by Rate Plan.     (d)       Pension Expenses and Deferred Outflows/Inflows of Resources Related to Pensions     For the year ended June 30, 2018, the City recognized a pension expense of $38.1 million and $19.5 million  for the Miscellaneous and Safety Plan respectively, for a total of $57.6 million.  At June 30, 2018, the City  reported pension related deferred outflows of resources and deferred inflows of resources for the  Miscellaneous and Safety Plans from the following sources (in thousands):  Miscellaneous Plan: Outflows of  Resources Inflows of  Resources Pension contributions subsequent to     measurement date 23,225$                     ‐$                             Change  of  assumptions 27,674                     ‐                              Difference  between expected and actual  experience 235                            4,178                      Net difference between projected and actual  earnings    on plan investments 5,949                         ‐                               Balance  reported at June  30, 2018 57,083                      4,178                      Safety Plan: Pension contributions subsequent to     measurement date 11,030                       ‐                               Change  of  assumptions 14,785                      744                          Difference  between expected and actual  experience 9                                 2,366                      Net difference between projected and actual  earnings    on plan investments 3,412                         ‐                               Balance  reported at June  30, 2018 29,236                      3,110$                    Total, Miscellaneous & Safety Plans 86,319$                    7,288$                       CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     94    NOTE 11 – PENSION PLANS (Continued)     The $34.2 million reported as deferred outflows of resources relates to contributions paid by the City from  July 1, 2017 through June 30, 2018 which is subsequent to the City’s measurement date of June 30, 2017  for both the Miscellaneous and Safety Plans.  This amount will be recognized as a reduction of the net  pension liability in the year ended June 30, 2019.     The net differences reported as deferred outflows of resources and deferred inflows of resources related  to pensions will be recognized in future pension expense as follows (in thousands):       Year Ended June 30,  Miscellaneous  Plan Safety Plan Total 2019 12,212$              5,318$                17,530$                2020 18,844 10,392 29,236 2021 2,661 1,507 4,168 2022 (4,037) (2,121) (6,158) 29,680$               15,096$               44,776$                           CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     95     NOTE 12 – OTHER POST‐EMPLOYMENT BENEFITS (OPEB)    (a) General Information about the OPEB Plan    In addition to providing pension benefits, the City participates in the California Public Employees’ Medical  and Health Care Act program to provide certain health care benefits for retired employees.  Employees  who retire directly from the City are eligible for retiree health benefits if they retire on or after age 50  with 5 years of service and are receiving a monthly pension from CalPERS.  Details of benefits to retirees  are noted in the following tables:      Unit Hired  Before Retiree  Coverage1 Dependent  Coverage Retired on  or After Retiree   Contribution Management & Professional 2 1/1/2004 100% 100% 5/1/2011 Flat rate 4 Police  Management2 1/1/2004 100% 100% 6/1/2012 Flat rate 4 Fire  Fighters2 1/1/2004 100% 100% 12/1/2011 Flat rate 4 Fire  Chiefs Association2 1/1/2004 100% 100% 1/1/2013 Flat rate 4 SEIU 1/1/2005 100% 100% 5/1/2011 Flat rate 4 Police  Officers3 1/1/2006 100% 100% 4/1/2015 Flat rate 4 Utilities Managers & Professional 2 1/1/2004 100% 100% 5/1/2011 10% 2 Effective  1/1/2007 plan  capped  at the  second  highest CalPERS  Bay Area  Basic plan  premium. 3 Effective  7/1/2014 plan  capped  at the  second  highest CalPERS  Bay Area  Basic plan  premium. 4 Effective  1/1/2017 City pays  $773 for employee, $1,544 for employee  +1, $2,008 for family.  Effective  1/1/2018 City pays      $804 for employee, $1,606 for employee  +1, $2,088 for family. Unit Hired on or  After Retiree  Coverage1 Dependent  Coverage2 Management & Professional 1/1/2004 50%‐100% Max. 90% Police Management 1/1/2004 50%‐100% Max. 90% Fire  Fighters 1/1/2004 50%‐100% Max. 90% Fire  Chiefs Association 1/1/2004 50%‐100% Max. 90% Utilities Managers & Professional 1/1/2004 50%‐100% Max. 90% SEIU 1/1/2005 50%‐100% Max. 90% Police Officers 1/1/2006 50%‐100% Max. 90%    specified  employer contribution, with  the  City portion  increasing by 5% for each  additional  year of service  credit.  2 The  City will  contribute  an  additional  90 percent of the  weighted  average  of the  additional  premiums  required  for  enrollment of those  family members, during the  benefit year to  which  the  forumla  is  applied. 1 100% of benefits  if the  employee  has  five  years  CalPERS service  credit and  the  employee  retired  from the  City. 1 Employees  with  ten  years  of CalPERS  service, at least five  of which  are  at the  City of Palo  Alto, receive  50% of the Retiree contributions for units with the following hire dates are determined by Government Code   Section 22893, 20 year graduated schedule: CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     96    NOTE 12 – OTHER POST‐EMPLOYMENT BENEFITS (OPEB) (Continued)    In FY 2008, the City elected to participate in an irrevocable trust to provide a funding mechanism for  retiree health benefits. The Trust, California Employers’ Retirees Benefit Trust (CERBT), is administrated  by CalPERS and managed by a separately appointed board, which is not under control of the City Council.  This Trust is not considered a component unit of the City.    Employees Covered – Employees covered by the benefit terms as of June 30, 2017 are as follows:    Inactive employees or beneficiaries currently     receiving benefits 921 Inactive employees entitled to but not yet     receiving benefits 113 Active  employees 967            Total 2,001   Contributions – The City’s OPEB funding policy is to prefund these benefits by accumulating assets in the  Trust Fund discussed above pursuant to City Council Resolution.  For the year ended June 30, 2018, the  City’s contributions totaled $21.3 million.     (b) Net OPEB Liability    The City’s net OPEB liability is measured as the total OPEB liability, less the OPEB plan’s fiduciary net  position.  The net OPEB liability is measured as of June 30, 2017, using an annual actuarial valuation as of  June 30, 2017.  A summary of principal assumptions and methods used to determine the net OPEB liability  is shown below.    Valuation Date June  30, 2017 Measurement Date June  30, 2017 Actuarial  Cost Method Entry‐Age, level  percentage of payroll Actuarial  Assumptions:      Discount Rate 6.75%      Inflation 2.75%      Payroll  Growth 3.00%      Projected Salary Increase CalPERS 1997‐2015 Experience Study      Investment Rate  of  Return 6.75% Net of OPEB Plan Investment Expenses,  includes Inflation.      Post Retirement Benefit Increase For medical  plan premiums:  6.50% for 2019,  decreasing to 4.00% for 2076 and later; For pre‐ Medicare  premiums: 7.50% for 2019, decreasing to  4.00% for 2076 and later      Disability, Termination, Retirement CalPERS 1997‐2015 Experience  Study      Mortality CalPERS 1997‐2011 Experience Study, and Society  of Actuaries mortality improvement scale  MP‐17      Increase to Group 3 Flat Dollar Caps 1/2 of  Medical  Trend, not less than assumed  inflation (2.75%)      Healthcare  Participation for Future  Future  retirees: 90%, Based on Plan experience      ACA Excise  Tax Estimate  by 2% load on cash subsidy   CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     97    NOTE 12 – OTHER POST‐EMPLOYMENT BENEFITS (OPEB) (Continued)    Discount Rate – The discount rate used to measure the total OPEB liability was 6.75%.  The projection of  cash flows used to determine the discount rate assumed that the City’s contribution will be made equal  to the actuarially determined contribution.  Based on those assumptions, the OPEB plan’s fiduciary net  position was projected to be available to make all projected OPEB payments for current active and inactive  employees.  Therefore, the long‐term expected rate of return on OPEB plan investments applied to all  periods of projected benefit payments to determine the total OPEB liability.    The long‐term expected rate of return for OPEB plan investments was 6.75%.  The asset class target  allocation and geometric real rates of return for each major asset class are summarized in the following  table.    Asset Class Current  Target  Allocation Expected Real   Rate of Return Global  Equity 57.0% 4.82% Fixed Income 27.0 1.47 TIPS 5.0 1.29 Commodities  3.0 0.84 REITS 8.0 3.76 (a) An expected inflation of 2.50% used for  this  period (b) An expected inflation of 3.00% used for  this  period     (c) Changes in the Net OPEB Liability    The following table shows the changes in the net OPEB liability for the fiscal year ended June 30, 2018.    Total OPEB Liability Plan Fiduciary Net Position Net OPEB Liability Balance at June 30, 2016 234,580$        79,843$          154,737$         Changes during the measurement period:      Service cost 6,242               ‐                      6,242                    Interest on the total OPEB liability 15,853             ‐                      15,853                  Contributions  ‐ employer ‐                      14,739            (14,739)                 Investment income ‐                      8,628              (8,628)                   Administrative expenses ‐                      (44)                  44                         Benefit payments (11,916)         (11,916)          ‐                             Net changes 10,179            11,407            (1,228)                  Balance at June 30, 2017 244,759$        91,250$          153,509$         Increase (Decrease)         CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     98    NOTE 12 – OTHER POST‐EMPLOYMENT BENEFITS (OPEB) (Continued)    Sensitivity of the Net OPEB Liability to Changes in the Discount Rate – The following presents the net  OPEB liability of the City as of the measurement date, calculated using the discount rate of 6.75 percent,  as well as what the City’s net OPEB liability would be if it were calculated using a discount rate that is 1  percentage‐point lower (5.75 percent) or 1 percentage‐point higher (7.75 percent) than the current  discount rate:    Discount Rate  ‐1% (5.75%) Current  Discount Rate  (6.75%) Discount Rate  +1% (7.75%) 186,295$               153,509$               126,553$                  Sensitivity of the Net OPEB Liability to Changes in the Healthcare Cost Trend Rate – The following  presents the net OPEB liability of the City, as well as what the City’s net OPEB liability would be if it were  calculated using healthcare cost trends rates that are 1% lower or 1% higher than the current healthcare  cost trend rates.    Healthcare Trend  Rate ‐ 1% Healthcare Trend  Current Rate Healthcare Trend  Rate + 1% 124,392$               153,509$                 189,207$                  OPEB Plan Fiduciary Net Position – Detailed information about the OPEB plan’s fiduciary net position is  available in the separately issued CalPERS financial report.    (d) OPEB Expenses and Deferred Outflows/Inflows of Resources Related to OPEB    For the fiscal year ended June 30, 2018, the City recognized an OPEB expense of $16.0 million for the OPEB  plan.  At June 30, 2018, the City reported deferred outflows of resources and deferred inflows of resources  related to OPEB from the following sources (dollars in thousands):    Deferred  Outflows of Resources Deferred  Inflows of Resources OPEB contributions  subsequent to     measurement date $         21,349   $                 ‐    Net differences  between projected and actual     earnings  on plan investments ‐                                  (2,516)           Total  $         21,349   $         (2,516)      CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     99    NOTE 12 – OTHER POST‐EMPLOYMENT BENEFITS (OPEB) (Continued)    The $21.3 million reported as deferred outflows of resources relates to contributions made by the City  from July 1, 2017 through June 30, 2018, which is subsequent to the City’s measurement date of June 30,  2017.  This amount will be recognized as a reduction of the net OPEB liability in the fiscal year ended June  30, 2019.   The net difference between projected and actual earnings on plan investments will be  recognized in future OPEB expense as follows (dollars in thousands):    Fiscal  Year  Ending June 30, 2019 (629)$                 2020 (629)                   2021 (629)                   2022 (629)                             Total (2,516)$                NOTE 13 – DEFERRED COMPENSATION PLAN    City employees may defer a portion of their compensation under City sponsored Deferred Compensation  Plans created in accordance with Internal Revenue Code Section 457. Under these Plans, participants are  not taxed on the deferred portion of their compensation until distributed to them. Distributions may be  made only at termination, retirement, death or in an emergency as defined by the Plans.    The laws governing deferred compensation plan assets require plan assets to be held by a Trust for the  exclusive benefit of plan participants and their beneficiaries. Since the assets held under these plans are  not the City’s property and are not subject to City control, they have been excluded from these financial  statements.    CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     100    NOTE 14 – RISK MANAGEMENT    Coverage  The City provides dental coverage to employees through a City plan, which is administered by a third party  service agent. The City is self‐insured for dental claims.    The City has a workers’ compensation insurance policy with coverage up to the statutory limit set by the  State of California. The City retains the risk for the first $750,000 in losses for each accident and employee  under this policy.    The City also has public employee dishonesty insurance with a $5,000 deductible and coverage up to  $1.0 million per loss.  The Interim Director of Administrative Services/CFO and City Manager each have  coverage up to $4.0 million per loss.     The City’s property, boiler, and machinery insurance policy has various deductibles and coverage based  on the type of property.    The City is a member of the Authority for California Cities Excess Liability (ACCEL), which provides excess  general liability insurance coverage, including auto liability, up to $100 million per occurrence. The City  retains the risk for the first $1.0 million in losses for each occurrence under this policy.    ACCEL was established for the purpose of creating a risk management pool for central California  municipalities. ACCEL is governed by a Board of Directors consisting of representatives of its member  cities. The board controls the operations of ACCEL, including selection of claims management, general  administration and approval of the annual budget.    The City’s deposits with ACCEL equal the ratio of the City’s payroll to the total payroll of all entities. Actual  surpluses or losses are shared according to a formula developed from overall loss costs and spread to  member entities on a percentage basis after a retrospective rating.    During the year ended June 30, 2018, the City paid $0.9 million to ACCEL for current year coverage.    Audited financial statements are available from ACCEL at 100 Pine Street, 11th Floor, San Francisco,  California 94110.    Claims Liability  The City provides for the uninsured portion of claims and judgments in the General Liabilities insurance  program funds. Claims and judgments, including a provision for claims incurred but not reported, and  claim adjustment expenses are recorded when a loss is deemed probable of assertion and the amount of  the loss is reasonably determinable. As discussed above, the City has coverage for such claims, but it has  retained the risk for the deductible or uninsured portion of these claims.    CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     101    NOTE 14 – RISK MANAGEMENT (Continued)    The City’s liability for uninsured claims is limited to dental, general liability, and workers’ compensation  claims, as discussed above. Dental liability is based on a percentage of current year actual expense.   General and workers’ compensation liabilities are based on the results of actuarial studies, and include  amounts for claims incurred but not reported as follows as of June 30 (in thousands):    2018 2017 Beginning balance 22,470$           23,379$            Claims expense, including claims incurred but not  reported (IBNR)4,705                3,078                 Claims paid (3,427)              (3,987)               Ending balance 23,748$           22,470$            Current portion 5,835$             5,286$              Year Ended June 30     The City has not incurred a claim that has exceeded its insurance coverage limits in any of the last three  years, nor have there been any significant reductions in insurance coverage.    NOTE 15 – JOINT VENTURES  General  The City participates in joint ventures through Joint Powers Authorities (JPAs) established under the Joint  Exercise of Powers Act of the State of California. As separate legal entities, these JPAs exercise full powers  and authorities within the scope of the related Joint Powers Agreement, including the preparation of  annual budgets, accountability for all funds, the power to make and execute contracts and the right to  sue and be sued. Obligations and liabilities of the JPAs, including the long‐term debt in which the City  participates in repayment, are not obligations and liabilities of the City, and are not reported on the City’s  financial statements.    Each JPA is governed by a board consisting of representatives from each member agency. Each board  controls the operations of its respective JPA, including selection of management and approval of operating  budgets, independent of any influence by member agencies beyond their representation on the Board.    Northern California Power Agency  The City is a member of Northern California Power Agency (NCPA), a joint powers agency which operates  under a joint powers agreement among fifteen public agencies. The purpose of NCPA is to use the  combined strength of its members to purchase, generate, sell and interchange electric energy and  capacity through the acquisition and use of electrical generation and transmission facilities. Each agency  member has agreed to fund a pro rata share of certain assessments by NCPA and enter into take‐or‐pay  power supply contracts with NCPA. While NCPA is governed by its members, none of its obligations are  those of its members unless expressly assumed by them.      CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     102    NOTE 15 – JOINT VENTURES (Continued)  During the year ended June 30, 2018, the City incurred expenses totaling $83.9 million for purchased  power and assessments earned by NCPA.  The City’s interest in NCPA projects and reserves, as computed by NCPA, was $7.7 million at June 30, 2018.  This amount represents the City’s portion of funds, which resulted from the settlement with third parties  of issues with financial consequences and reconciliations of several prior years’ budgets for programs. It  is recognized that all the funds credited to the City are linked to the collection of revenue from the City’s  ratepayers, or to the settlement of disputes relating to electric power supply and that the money was  collected from the City’s ratepayers to pay power bills. Additionally, the NCPA Commission identified and  approved the funding of specific reserves for working capital, accumulated employees’ post‐retirement  medical benefits, and billed property taxes for the geothermal project. The Commission also identified a  number of contingent liabilities that may or may not be realized, the cost of which in most cases is difficult  to estimate at this time. One such contingent liability is the steam field depletion, which will require  funding to cover debt service and operational costs in excess of the expected value of the electric power.  The General Operating Reserve (GOR) is intended to minimize the number and amount of individual  reserves needed for each project, protect NCPA’s financial condition and maintain its credit worthiness.  There are no funds on deposit with NCPA as a reserve against these contingencies identified by NCPA.  Members of NCPA may participate in an individual project of NCPA without obligation for any other  project. Member assessments collected for one project may not be used to finance other projects of NCPA  without the member’s permission.  Geothermal Projects  A purchased power agreement with NCPA obligated the City for 6.2 percent and 6.2 percent, respectively,  of the operating costs and debt service of the two NCPA 110‐megawatt geothermal steam‐powered  generating plants, Project Number 2 and Project Number 3.  The City’s participation in the Geothermal Project was sold to Turlock Irrigation District in October 1984.  Accordingly, the City is liable for payment of outstanding geothermal related debt only in the event that  Turlock fails to make specified payments. Total outstanding debt of the NCPA Geothermal Project at  June 30, 2018 is $74.8 million. The City’s participation in this project was 6.2 percent, or $4.6 million.  Calaveras Hydroelectric Project  In July 1981, NCPA agreed with Calaveras County Water District to purchase the output of the North Fork  Stanislaus River Hydroelectric Development Project and to finance its construction. Debt service payments  to NCPA began in February 1990 when the project was declared substantially complete and power was  delivered to the participants. Under its power purchase agreement with NCPA, the City is obligated to pay  22.9 percent of this Project’s debt service and operating costs. At June 30, 2018, the book value of this  Project’s plant, equipment and other assets was $378 million, while its long‐term debt totaled  $309 million and other liabilities totaled $62.3 million. The City’s share of the Project’s long‐term debt  amounted to $75.9 million at that date.  CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     103    NOTE 15 – JOINT VENTURES (Continued)    Geothermal Public Power Line  In 1983, NCPA, the Sacramento Municipal Utility District, the City of Santa Clara and the Modesto Irrigation  District (Joint Owners) initiated studies for a Geothermal Public Power Line (GPPL), which would carry  power generated at several existing and planned geothermal plants in The Geysers area to a location  where the Joint Owners could receive it for transmission to their load centers. NCPA has an 18.5 percent  share of this Project and the City has an 11.1 percent participation in NCPA’s share. In 1989, the  development of the proposed Geothermal Public Power Line was discontinued because NCPA was able to  contract for sufficient transmission capacity to meet its needs in The Geysers.    However, because the project financing provided funding for an ownership interest in a Pacific Gas &  Electric (PG&E) transmission line, a central dispatch facility and a performance bond pursuant to the  Interconnection Agreement with PG&E, as well as an ownership interest in the proposed GPPL, NCPA  issued $16 million in long‐term, fixed‐rate revenue bonds in November 1989 to defease the remaining  variable rate refunding bonds used to refinance this project. The City is obligated to pay its 11.1 percent  share of the related debt service, but debt service costs are covered through NCPA billing mechanisms  that allocate the costs to members based on use of the facilities and services.    At June 30, 2018, the book value of this Project’s plant, equipment and other assets was zero, and its long‐ term debt totaled zero.     NCPA’s financial statements can be obtained from NCPA, 180 Cirby Way, Roseville, CA 95678.    Transmission Agency of Northern California (TANC)  The City is a member of a joint powers agreement with 14 other entities in Transmission Agency of  Northern California (TANC). TANC’s purpose is to provide electrical transmission or other facilities for the  use of its members. While governed by its members, none of TANC’s obligations are those of its members  unless expressly assumed by them. The City was obligated to pay 4 percent of TANC’s debt‐service and  operating costs. However, a Resolution was approved authorizing the execution of a Long‐Term Layoff  Agreement (LTLA) between the Cities of Palo Alto and Roseville. These two agencies desired to “layoff”  their entitlement rights to the California‐Oregon Transmission Project (COTP) (and Roseville’s South of  Tesla entitlement rights) for a period of 15 years to those acquiring members (Sacramento Municipal  Utility District, Turlock Irrigation District, and Modesto Irrigation District). The effective date of this  Agreement was February 1, 2009. As a result, the City is not obligated to pay TANC’s debt‐service and  operating costs starting February 1, 2009, for a period of fifteen years.     TANC’s financial statements can be obtained from TANC, P.O. Box 15129, Sacramento, CA 95851.        CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     104    NOTE 15 – JOINT VENTURES (Continued)  Bay Area Water Supply and Conservation Agency (BAWSCA)   The City is a member of a regional water district with 26 other entities, the Bay Area Water Supply and  Conservation Agency (BAWSCA).  BAWSCA was created on May 27, 2003 to represent the interests of 24  cities and water districts and two private utilities in Alameda, Santa Clara and San Mateo counties that  purchase water on a wholesale basis from the San Francisco regional water system.  It has the power to  issue debt and plan, finance, construct, and operate water supply, transmission, reclamation, and  conservation projects on behalf of its members.    In 2013 the City participated in a debt issuance by BAWSCA.  The debt was issued to repay certain long‐ term costs associated with the San Francisco Public Utilities Commission (SFPUC) water supply contract.   During the fiscal year, the City paid its share of the annual debt service of $1.9 million, which will vary  based on annual water purchases of the City compared to other BAWSCA agencies.   BAWSCA’s financial statements can be obtained from BAWSCA, 155 Bovet Road, Suite 650, San Mateo,  California 94402.  NOTE 16 – COMMITMENTS AND CONTINGENCIES  Palo Alto Unified School District – The City leases 27 acres of the former Cubberley School site and twelve  extended day care sites from Palo Alto Unified School District (PAUSD). The lease includes a mechanism  for a joint planning process between the City and PAUSD to develop a long‐term master plan for the  Cubberley site.  The City will pay $1.86 million annually into a separate fund to be used for repairing,  renovating and/or improving the infrastructure at the Cubberley site. The previous lease term expired on  December 31, 2014, and the City and PAUSD reached an agreement to extend the lease agreement for an  additional five (5) years, with a new expiration date of 12/31/2019. The City and PAUSD also agreed to  distribute gains or losses of revenue that resulted from the Foothill College departure from Cubberley.  The City’s rent and infrastructure payment for the facilities is $7.3 million per year plus insurance, repairs  and maintenance.  Lease expenditures for the year ended June 30, 2018 amounted to $7.6 million. Future  minimum annual lease and infrastructure payments are as follows (in thousands):  Year Ending June 30 Payment 2019 7,653$       2020 3,922      11,575$         CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     105    NOTE 16 – COMMITMENTS AND CONTINGENCIES (Continued)    GreenWaste of Palo Alto – GreenWaste of Palo Alto is the City’s contractor for waste collection,  transportation, and processing services. The agreement expires June 30, 2021. The base compensation  for GreenWaste is adjusted annually based on CPI indicators stipulated in the contract. In FY 2018  payments to GreenWaste were $9.3 million.    City of Palo Alto Regional Water Quality Control Plant – The cities of Palo Alto, Mountain View and Los  Altos (the Partners) participate jointly in the cost of maintaining and operating the City of Palo Alto  Regional Water Quality Control Plant and related system (the Plant). The City is the owner and  administrator of the Plant, which provides the transmission, treatment and disposal of sewage for the  Partners. The cities of Mountain View and Los Altos are entitled to use a portion of the capacity of the  Plant for a specified period of time. Each partner has the right to rent unused capacity from/to the other  partners. The expenses of operations and maintenance are paid quarterly by each partner based on its  pro rata share of treatment costs. Additionally, joint system revenues are shared by the partners in the  same ratio as expenses are paid. The amended agreement has a term of fifty years beginning from the  original signing in October 1968, but may be terminated by any partner upon ten years’ notice to the other  partners. All sewage treatment property, plant and equipment are included in the Wastewater Treatment  Enterprise Fund’s capital assets balance. If the City initiates the termination of the contracts, it is required  to pay the other partners their unamortized contribution towards the capital assets.    Solid Waste Materials Recovery and Transfer Station (SMaRT Station) – On June 9, 1992, the City, along  with the City of Mountain View, signed a Memorandum of Understanding (MOU) with the City of  Sunnyvale (Sunnyvale) to participate in the construction and operation of the SMaRT Station, which  recovers recyclable materials from the municipal solid waste delivered from participating cities. Per the  MOU, the City has a capacity share of 21.3 percent of this facility and reimburses its proportionate capacity  share of design, construction and operation costs to Sunnyvale.    In FY 2008, the members agreed to finance an Equipment Replacement Project from existing reserves and  proceeds from the Solid Waste Revenue Bond, Series 2007. The City has committed to repay 27.8 percent  of the remaining debt service on the Bonds. The City’s portion of the Bonds amounts to $0.6 million as of  June 30, 2018. During the year ended June 30, 2018, the City paid $0.2 million as its portion of current  debt service.      CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     106    NOTE 16 – COMMITMENTS AND CONTINGENCIES (Continued)  UTILITIES ENERGY RESOURCE MANAGEMENT  Electric Power Supply Purchase Agreements – The City has numerous power purchase agreements with  power producers to purchase capacity and energy to supply a portion of its load requirements. As of  June 30, 2018, the approximate minimum obligations for the contracts, assuming the energy is delivered  over the next five years, are as follows:  Fiscal Year Projected Obligation  2019 $65.6 million  2020 $63.0 million  2021 $62.6 million  2022 $65.2 million  2023 $63.9 million  Contractual Commitments beyond 2022 (Electricity) – Several of the City’s purchase power and  transmission contracts extend beyond the five‐year summary presented above. These contracts expire  between 2026 and 2051 and provide for power under various terms and conditions.  The City estimates  that its annual minimum commitments under the contracts, assuming the energy is delivered, ranges  between $67.1 million in 2023 and $51.7 million in 2034.  The City’s largest single purchase power source  is the Western Base Resource contract, whereby the City receives 12.31 percent of the amount of energy  made available by Western, after meeting Central Valley Project use requirements, in any given year at a  12.31 percent share of their revenue requirement.  The Western contract expires on December 31, 2024.   The City expects to have the option to extend the Western contract for an additional 30‐year period  beyond 2024, although likely at a slightly lower share of the total energy output and revenue requirement.  Gas Accord V – The City is a party to the Gas Accord V, a natural gas transportation contract between  Pacific Gas and Electric Company (PG&E) and its gas transportation customers.  New rates are determined  through a proceeding at the California Public Utilities Commission.  A final CPUC decision on Pacific Gas  and Electric Company’s (PG&E) Gas Transmission and Storage Case was issued June 2016.  Although  several appeals are underway, Palo Alto’s gas transmission rates increased by 230% and Palo Alto’s local  transmission rates increased by $2 million on August 1, 2016.  A processing is underway at the California  Public Utilities Commission which will determine new PG&E gas transportation rates to be implemented  in 2019.  San Francisco Public Utilities Commission – The City purchases water to deliver to the customers of its  water utility from the San Francisco Public Utilities Commission (SFPUC) under a contract terminating in  2034.  Th e City’s wholesale water rate under this contract is determined by a ratemaking process under  the authority of the SFPUC, with contractual limitations on the types of costs that may be allocated to  wholesale water purchasers like the City.   The City is prohibited from purchasing from other water  suppliers under this contract, though it is not prohibited from using ground water.  The City’s cost of water  under this contract is projected to increase by 10% by 2021 as the SFPUC has nearly completed an upgrade  to its regional water system facilities under its Water System Improvement Program (WSIP).     CITY OF PALO ALTO  Notes to the Basic Financial Statements  For the Year Ended June 30, 2018     107    NOTE 16 – COMMITMENTS AND CONTINGENCIES (Continued)  Litigation   The City is subject to litigation arising in the normal course of business. In the opinion of the City Attorney,  there is no pending litigation, claims or assessments that are likely to have a materially adverse effect on  the City’s financial condition.  A class action lawsuit for refund of telephone users tax was filed against the City in August 2015.  At this  time, the City Attorney is of the opinion that a potential loss is neither probable nor can it be reasonably  estimated.   A class action lawsuit for refund of allegedly illegal charges to gas and electrical customers was filed  against the City in October 2016.  At this time, the City Attorney is of the opinion that a potential loss is  neither probable nor can it be reasonably estimated.  Grant Programs  The City participates in Federal and State grant programs. These programs have been audited by the City’s  independent auditors in accordance with the provisions of the Federal Single Audit Act amendments of  1996 and applicable State requirements. No costs were questioned as a result of these audits; however,  these programs are still subject to further examination by the grantors and the amount, if any, of  expenditures which may be disallowed by the granting agencies cannot be determined at this time. The  City expects such amounts, if any, to be immaterial.  108  This page is left intentionally blank.  CITY OF PALO ALTO  Required Supplementary Information (Unaudited)  Last 4 Fiscal Years*  I. SCHEDULE OF CHANGES IN NET PENSION LIABILITY AND RELATED RATIOS – MISCELLANEOUS PLAN  (In thousands)  Fiscal year 2017‐18 2016‐17 2015‐16 2014‐15 Measurement Period 2016‐17 2015‐16 2014‐15 2013‐14 Total pension liability Service cost 14,423$     12,582$         12,183$      12,442$       Interest 52,831  51,531  49,345    46,963    Changes of assumptions 42,239  ‐    (11,552)   ‐    Difference between expected and actual  experience (6,378)   757   3,507    ‐    Benefit payments, including refunds of employee contributions (36,405)    (34,825)   (32,980)   (31,781)      Net change in total pension liability 66,710  30,045  20,503    27,624    Total pension liability ‐ beginning 714,019   683,974  663,471  635,847     Total pension liability ‐ ending (a)780,729$        714,019$         683,974$       663,471$       Plan fiduciary net position Contributions ‐ employer 20,638$     18,840$         18,610$      17,400$       Contributions ‐ employee 6,314   5,812     5,730    6,345     Net investment income 53,259  2,464     10,597    70,989    Benefit payments, including refunds of employee contributions (36,405)    (34,825)   (32,980)   (31,781)      Administrative  expense (694)     (291)    (538)    ‐    Other non‐investment expenses 30    ‐    ‐   ‐    Net change in fiduciary net position 43,142  (8,000)   1,419    62,953    Plan fiduciary net position ‐ beginning 469,782   477,782  476,363  413,410     Plan fiduciary net position ‐ ending (b)512,924$        469,782$         477,782$       476,363$       Plan net pension liability/(asset) ‐ Ending (a) ‐ (b)267,805$        244,237$         206,192$       187,108$       Plan fiduciary net position as a percentage of total pension liability 65.70% 65.79% 69.85% 71.80% Covered payroll 77,606$     73,722$         69,837$      66,373$       Plan net pension liability/(asset) as a percentage of covered employee pay 345.08% 331.29% 295.25% 281.90% Notes to Schedule: Benefit changes ‐ The figures above do not include any liability that may have resulted from plan changes  which occurred after the June 30, 2015 valuation date. This applies for voluntary benefit changes as well as any offers of two years additional  service credit (Golden Handshake). Changes in assumptions ‐ The  di scount rate  was changed from 7.5 percent (net of administrative expense) in 2015  to 7.65 percent in 2016.  In  2017, the accounting discount rate reduced from 7.65% to 7.15% * Fiscal year ended June 30, 2015 was the first year of implementation of GASB Statement No. 68, therefore only four years of information is shown. 109 CITY OF PALO ALTO  Required Supplementary Information (Unaudited)  Last 5 Fiscal Years*  II.SCHEDULE OF PENSION CONTRIBUTIONS– MISCELLANEOUS PLAN (In thousands) Fiscal Year 2017‐18 2016‐17 2015‐16 2014‐15 2013‐14 Contractually required contribution (actuarially determined) 23,225$         20,638$          18,840$          18,610$          17,400$                Actual contribution (23,225)    (20,638)   (18,840)       (18,611)     (17,400)    Contribution deficiency/(excess)‐$        ‐$         ‐$         (1)$             ‐$                Covered payroll 82,228$              77,606$          73,722$          69,837$          66,373$                Contributions as percentage of covered‐employee payroll 28.24% 26.59% 25.56% 26.65% 26.22% Notes to Schedule: The  actuarial methods and assumptions used to set the actuarially determined contributions for fiscal  year 2018 contribution rates are as follows:  ADC for fiscal year June 30, 2018 Actuarial valuation date June 30, 2015 Actuarial cost method Entry‐Age Normal  Cost Method Asset valuation method Actuarial value  of  assets Inflation 2.75% Salary increases Varies by entry age and services Payroll  growth 3.00% Investment rate of return Retirement age Mortality 7.50%, net of pension plan investment and administrative expenses,  includes inflation. The probabilities of retirement are  based on the  2014 CalPERS  Experience Study for the period 1997 to 2011. The probabilities of mortality are based on the 2014 CalPERS Experience  Study for the period from 1997 to 2011. Pre‐retirement and Post‐ retirement mortality rates include 20 years of  projected mortality  improvement using Scale  BB published by the Society of Actuaries. * Fiscal  year ended June  30, 2015 was the first year of implementation of GASB Statement No. 68, therefore only five years of information is shown. 110 CITY OF PALO ALTO  Required Supplementary Information (Unaudited)  Last 4 Fiscal Years*  III.SCHEDULE OF CHANGES IN NET PENSION LIABILITY AND RELATED RATIOS – SAFETY PLAN (In thousands) Fiscal year 2017‐18 2016‐17 2015‐16 2014‐15 Measurement Period 2016‐17 2015‐16 2014‐15 2013‐14 Total pension liability Service cost 6,584$        5,916$        5,959$            6,221$             Interest 28,272    27,816    27,047     26,113      Changes of assumptions 22,566    ‐   (6,327)     ‐     Difference between expected and actual experience (2,790)    (1,516)    75     ‐     Benefit payments, including refunds of employee contributions (22,413)  (21,669)  (21,148)   (19,985)    Net change in total pension liability 32,219    10,547    5,606   12,349      Total pension liability ‐ beginning 383,556     373,009     367,403  355,054   Total pension liability ‐ ending (a)415,775$       383,556$       373,009$          367,403$           Plan fiduciary net position Contributions ‐ employer 10,220$     9,403$        8,617$            7,616$             Contributions ‐ employee 2,475  2,059  2,047   2,762    Net investment income 28,112    1,259  5,774   40,033      Benefit payments, including refunds of employee contributions (22,413)  (21,669)  (21,148)   (19,985)    Administrative  expense (370)    (157)    (290)     ‐     Other non‐investment expenses (30)  ‐   ‐    ‐     Net change  in fiduciary net position 17,994    (9,105)    (5,000)     30,426      Plan fiduciary net position ‐ beginning 250,474     259,579     264,579  234,153   Plan fiduciary net position ‐ ending (b)268,468$       250,474$       259,579$          264,579$           Plan net pension liability/(asset) ‐ Ending (a) ‐ (b)147,307$       133,082$       113,430$          102,824$           Plan fiduciary net position as a percentage of total pension liability 64.57% 65.30% 69.59% 72.01% Covered payroll 21,906$     21,822$     21,912$         21,896$          Plan net pension liability/(asset) as a percentage of covered employee 672.45% 609.85% 517.66% 469.60% Notes to Schedule: Benefit changes ‐ The figures above do not include any liability that may have  resulted from plan changes  which occurred after the June 30, 2015 valuation date. This applies for voluntary benefit changes as well  as any offers of two years additional  service credit (Golden Handshake). Changes in assumptions ‐ The discount rate was changed from 7.5 percent (net of administrative expense) in 2015  to 7.65 percent in  2016.  In 2017, the  accounting discount rate reduced from 7.65% to 7.15%. * Fiscal  year ended June 30, 2015 was the first year of implementation of GASB Statement No. 68, therefore only four years of information is shown. 111 CITY OF PALO ALTO  Required Supplementary Information (Unaudited)  Last 5 Fiscal Years*  IV.SCHEDULE OF PENSION CONTRIBUTIONS – SAFETY PLAN (In thousands) Fiscal Year 2017‐18 2016‐17 2015‐16 2014‐15 2013‐14 Contractually required contribution (actuarially determined) 11,030$     10,220$      9,403$      8,617$       7,616$        Actual contribution (11,030)   (10,220)   (9,403)    (8,617)    (7,616)     Contribution deficiency/(excess)‐$      ‐$      ‐$      ‐$       ‐$        Covered payroll 24,477$     21,906$      21,822$      21,912$       21,896$        Contributions as percentage of covered‐employee payroll 45.06% 46.65% 43.09% 39.33% 34.78% Notes to Schedule: The actuarial  methods and assumptions used to set the  actuarially determined contributions for fiscal  year 2018 contribution rates are  as follows:  ADC for fiscal year June 30, 2018 Actuarial  valuation date June 30, 2015 Actuarial  cost method Entry‐Age Normal Cost Method Asset valuation method Actuarial value of assets Inflation 2.75% Salary increases Varies by entry age and services Payroll growth 3.00% Investment rate of return Retirement age Mortality 7.50%, net of pension plan investment and administrative  expenses,  includes inflation. The probabilities of  retirement are based on the  2014 CalPERS  Experience Study for the period 1997 to 2011. The probabilities of mortality are based on the  2014 CalPERS Experience  Study for the period from 1997 to 2011. Pre ‐retirement and Post‐ retirement mortality rates include  20 years of projected mortality  improvement using Scale  BB published by the  Society of Actuaries. * Fiscal  year ended June  30, 2015 was the  first year of implementation of GASB Statement No. 68, therefore only five years of information is shown. 112 CITY OF PALO ALTO  Required Supplementary Information (Unaudited)  Last 5 Fiscal Years*  V. SCHEDULE OF CHANGES IN NET OPEB LIABILITY AND RELATED RATIOS   (In thousands)  Fiscal year 2017‐18 Measurement Period 2016‐17 Total OPEB liability Service  cost 6,242$         Interest 15,853      Benefit payments, including refunds of employee contributions (11,916)    Net change in total OPEB liability 10,179      Total OPEB liability ‐ beginning 234,580   Total OPEB liability ‐ ending (a)244,759$         Plan fiduciary net position Contributions ‐ employer 14,739$        Net investment income 8,628     Benefit payments, including refunds of employee contributions (11,916)    Administrative expense (44)    Net change in fiduciary net position 11,407      Plan fiduciary net position ‐ beginning 79,843      Plan fiduciary net position ‐ ending (b)91,250$        Plan net OPEB liability/(asset) ‐ Ending (a) ‐ (b)153,509$         Plan fiduciary net position as a percentage of total OPEB liability 37.28% Covered payroll 118,774$         Plan net OPEB liability/(asset) as a percentage of covered employee payroll 129.24% Notes to Schedule: Benefit changes ‐ The figures above  do not include  any liability that may have  resulted  which occurred after the measurement dates. Changes in assumptions ‐ There were  no changes in assumptions * Fiscal year ended June 30, 2018 was the first year of implementation of GASB Statement  No. 75, therefore only one year of information is shown.  The measurement date  for GASB  Statement No. 75 purposes is June 30, 2017. 113 CITY OF PALO ALTO  Required Supplementary Information (Unaudited)  Last 5 Fiscal Years*  VI.SCHEDULE OF EMPLOYER OPEB CONTRIBUTIONS (In thousands) Fiscal Year 2017‐18 2016‐17 Contractually required contribution (actuarially determined) 16,938$          16,365$           Actual contribution (21,349)           (14,739)            Contribution deficiency/(excess)(4,411)$           1,626$             Covered payroll 119,090$        118,774$         Contributions as percentage of covered‐employee payroll 17.93% 12.41% Notes to Schedule: The actuarial  methods and assumptions used to set the  actuarially determined contributions for fiscal  year 2018 contribution rates are  as follows:  ADC for fiscal  year June 30, 2018 Actuarial valuation date June 30, 2015 Actuarial cost method Entry‐Age, level  percentage of payroll Amortization method Level percent of payroll over closed 27 year period. Asset valuation method Market value, no smoothing Inflation 3.00% Payroll growth 3.25% Investment rate  of return Other Assumptions 7.25%, net of pension plan investment and administrative expenses,  includes inflation. Same as for determining total  OPEB liability, except for rates of  retirement/mortality/termination, medical  trend, medical plan at  retirement, waived retiree  re ‐election, and assumed spouse coverage  percent. 114 Total Special Debt Other Revenue Service Permanent Governmental Funds Funds Fund Funds ASSETS: Cash and investments: Available for operations 65,621$        3,545$          1,489$           70,655$         Receivables, net: Accounts 394               5 ‐ 399                Interest 402               21 9 432                Notes 33,816         ‐‐ 33,816          Total assets 100,233$      3,571$          1,498$           105,302$       Liabilities: Accounts payable and accruals 358$              ‐$‐$ 358$               Accrued salaries and benefits 16 ‐‐ 16 Interfund payables and advances 13 ‐‐ 13 Total liabilities 387               ‐‐ 387                Fund balances: Nonspendable Eyerly family ‐‐1,498             1,498             Restricted Transportation mitigation 10,511 ‐‐ 10,511 Federal revenue 5,080            ‐‐ 5,080             Street improvement 562               ‐‐ 562                Local law enforcement 322               ‐‐ 322                Debt service ‐3,571            ‐ 3,571             Public benefit 19,633 ‐‐ 19,633 Committed Developer impact fee 13,764 ‐‐ 13,764 Housing In‐Lieu 44,863 ‐‐ 44,863 Special districts 5,143            ‐‐ 5,143             Unassigned Downtown business (32)‐‐ (32) Total fund balances 99,846 3,571            1,498             104,915        Total liabilities and fund balances 100,233$      3,571$          1,498$           105,302$       LIABILITIES AND FUND BALANCES: CITY OF PALO ALTO Non‐major Governmental Funds Combining Balance Sheet June 30, 2018 (Amounts in thousands) 115 This page is intentionally left blank.  116 Total Special Debt Other Revenue Service Permanent Governmental Funds Funds Fund Funds REVENUES: Property tax ‐$4,331$           ‐$ 4,331$            Special assessments 72 ‐‐ 72 Other taxes and fines 2,116            ‐‐ 2,116              Contributions 11,733          ‐‐ 11,733            Charges for services 11 ‐‐ 11 Intergovernmental: Community Development Block Grants 363               ‐‐ 363                 State of California 229               ‐‐ 229                 Permits and licenses University Avenue Parking 3,088            ‐‐ 3,088              California Avenue Parking 556               ‐‐ 556                 Other permits and licenses 582               ‐‐ 582                 Investment earnings 224               (28)                2 198                 Rental income 6 ‐‐ 6 Other: Housing In‐Lieu ‐ residential 1,145            ‐‐ 1,145              Other fees 4,015            ‐‐ 4,015              Total revenues 24,140          4,303            2 28,445            EXPENDITURES: Current: Administrative Services 226               ‐‐ 226                 Public Works 857               ‐‐ 857                 Planning and Community Environment 2,020            ‐‐ 2,020              Police 68 ‐‐ 68 Community Services 2,709            ‐‐ 2,709              Non‐Departmental 1,589            14 3 1,606              Debt service: Principal retirement ‐2,545            ‐ 2,545              Interest and fiscal charges ‐2,940            ‐ 2,940              Total expenditures 7,469            5,499            3 12,971            EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES 16,671          (1,196)           (1) 15,474            OTHER FINANCING SOURCES (USES): Issuance of debt ‐595               ‐ 595                 Transfers in 495               233               ‐ 728                 Transfers out (11,434)        ‐‐ (11,434)          Total other financing sources (uses)(10,939)        828               ‐ (10,111)          Change in fund balances 5,732            (368)              (1) 5,363              FUND BALANCES, BEGINNING OF YEAR 94,114          3,939            1,499             99,552            FUND BALANCES, END OF YEAR 99,846$        3,571$           1,498$            104,915$       CITY OF PALO ALTO Non‐major Governmental Funds Combining Statement of Revenues, Expenditures and Changes in Fund Balances For the Year Ended June 30, 2018 (Amounts in thousands) 117 This page is intentionally left blank.  118 NON‐MAJOR GOVERNMENTAL FUNDS  SPECIAL REVENUE FUNDS   Street Improvement   This fund accounts for revenues received from state gas tax. Allocations must be spent on the construction  and maintenance of the road network system of the City.  Federal Revenue  This fund accounts for grant funds received under the Community Development Act of 1974 and HOME  Investment Grant Programs, for activities approved and subject to federal regulations.  Housing In‐Lieu  This fund accounts for revenues from commercial and residential developers to provide housing under  the City’s Below Market Rate program.  Special Districts  This fund accounts for revenues from parking permits and for maintenance of various parking lots within  the City’s parking districts.  Transportation Mitigation  This fund accounts for revenues from fees or contributions required for transportation mitigation issues  encountered as a result of City development.  Local Law Enforcement  This fund accounts for revenues received in support of City’s law enforcement program.  Asset Seizure  This fund accounts for seized property and funds associated with drug trafficking. Under California  Assembly Bill No. 4162, the monies are released to the City for specific expenditures related to law  enforcement activities.  Developer Impact Fee  This fund accounts for fees imposed on new developments to be used for parks, community centers and  libraries.  Downtown Business Development District  The Downtown Business Development District Fund was established to account for the activities of the  Palo Alto Downtown Business Development District, which was established to enhance the viability of the  downtown business district.  Public Benefit  This fund accounts for the activities of the Stanford University Medical Center (SUMC) Development  Agreement (DA) whereby SUMC will enhance and expand their facilities and the City will grant SUMC the  right to develop the facilities in accordance with the DA.  119 Street Federal Housing Special Improvement Revenue In‐Lieu Districts ASSETS: Cash and investments: Available for operations 412$             219$             15,809$         5,292$           Receivables: Accounts 146              137              ‐ 9 Interest 4 ‐ 129               28 Notes ‐ 4,831           28,985          ‐ Total assets 562$             5,187$          44,923$         5,329$           Liabilities: Accounts payable and accruals ‐$106$             60$                173$              Accrued salaries and benefits ‐1 ‐ 13 Interfund payables and advances ‐‐‐ ‐ Total liabilities ‐ 107 60 186 Fund balances: Restricted Transportation mitigation ‐‐‐ ‐ Federal revenue ‐ 5,080           ‐ ‐ Street improvement 562 ‐‐ ‐ Local law enforcement ‐‐‐ ‐ Public benefit ‐‐‐ ‐ Committed Developer impact fee ‐‐‐ ‐ Housing In‐Lieu ‐‐ 44,863          ‐ Special districts ‐‐‐  5,143             Unassigned Downtown business ‐‐‐ ‐ Total fund balances 562 5,080           44,863          5,143             Total liabilities and fund balances 562$             5,187$          44,923$         5,329$           LIABILITIES AND FUND BALANCES: CITY OF PALO ALTO Non‐major Special Revenue Funds Combining Balance Sheet June 30, 2018 (Amounts in thousands) 120 Downtown Total Business Special  Transportation Local Law Asset Developer Development Public  Revenue Mitigation Enforcement Seizure Impact Fee District Benefit Funds 10,450$         317$              3$13,581$        ‐$19,538$         65,621$         ‐ ‐ ‐ 102              ‐‐ 394                61 2 ‐83 ‐95 402                ‐ ‐ ‐‐‐‐  33,816           10,511$         319$              3$13,766$        ‐$19,633$         100,233$       ‐$  ‐$  ‐$‐$19$               ‐$  358$              ‐ ‐ ‐2 ‐‐ 16 ‐ ‐ ‐‐13 ‐ 13 ‐ ‐ ‐2 32 ‐ 387 10,511           ‐ ‐‐‐‐  10,511           ‐ ‐ ‐‐‐‐  5,080             ‐ ‐ ‐‐‐‐ 562                ‐ 319 3 ‐‐‐ 322                ‐ ‐ ‐‐‐ 19,633          19,633           ‐ ‐ ‐13,764         ‐‐  13,764           ‐ ‐ ‐‐‐‐  44,863           ‐ ‐ ‐‐‐‐  5,143             ‐ ‐ ‐‐(32)‐ (32)                 10,511           319 3 13,764         (32) 19,633          99,846           10,511$         319$              3$13,766$        ‐$19,633$         100,233$       121 Street Federal Housing Special Improvement Revenue In‐Lieu Districts REVENUES: Special assessments ‐$‐$‐$  ‐$ Other taxes and fines 1,781            ‐‐ 335                 Contributions ‐‐‐ ‐ Charges for services ‐‐‐ ‐ Intergovernmental: Community Development Block Grants ‐363               ‐ ‐ State of California 78                 ‐‐ ‐ Permits and licenses University Avenue Parking ‐‐‐  3,088              California Avenue Parking ‐‐‐ 556                 Other permits and licenses ‐‐‐ 582                 Investment earnings 3 ‐70                  3 Rental income ‐‐6 ‐ Other: Housing In‐Lieu ‐‐ 1,145             ‐ Other fees ‐217               106                27                   Total revenues 1,862            580               1,327             4,591              EXPENDITURES: Current: Administrative Services ‐‐‐ 226                 Public Works ‐‐‐ 857                 Planning and Community Environment ‐528               87 1,405              Police ‐‐‐ ‐ Community Services ‐‐‐ 24 Non‐Departmental ‐‐157                303                 Total expenditures ‐528               244                2,815              EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES 1,862            52                 1,083             1,776              OTHER FINANCING SOURCES (USES): Transfers in ‐‐‐ 340                 Transfers out (2,166)          ‐(1)                    (1,237)            Total other financing sources (uses)(2,166)          ‐(1)                   (897)                Change in fund balances (304)              52                 1,082             879                 FUND BALANCES, BEGINNING OF YEAR 866               5,028            43,781          4,264              FUND BALANCES, END OF YEAR 562$              5,080$          44,863$         5,143$           CITY OF PALO ALTO Non‐major Special Revenue Funds Combining Statement of Revenues, Expenditures and Changes in Fund Balances For the Year Ended June 30, 2018 (Amounts in thousands) 122 Downtown Total Business Special  Transportation Local Law Asset Developer Development Public Revenue Mitigation Enforcement Seizure Impact Fee District Benefit Funds ‐$  ‐$  ‐$‐$72$                ‐$  72$                 ‐ ‐ ‐‐‐‐  2,116               ‐ ‐ ‐‐‐ 11,733         11,733            ‐ ‐ ‐‐‐11                  11                   ‐ ‐ ‐‐‐‐ 363                 ‐ 151                 ‐‐‐‐ 229                 ‐ ‐ ‐‐‐‐  3,088               ‐ ‐ ‐‐‐‐ 556                 ‐ ‐ ‐‐‐‐ 582                 39                   ‐ ‐39                 ‐70                  224                 ‐ ‐ ‐‐‐‐ 6 ‐ ‐ ‐‐‐‐  1,145               2,158              ‐ ‐ 1,507            ‐‐  4,015               2,197              151                 ‐1,546            72                  11,814         24,140            ‐ ‐ ‐‐‐‐ 226                 ‐ ‐ ‐‐‐‐ 857                 ‐ ‐ ‐‐‐‐  2,020               ‐ 68 ‐‐‐‐ 68                   ‐ ‐ ‐ 2,685            ‐‐  2,709               1,000              ‐ ‐‐129               ‐  1,589               1,000              68                   ‐ 2,685            129               ‐  7,469               1,197              83                   ‐ (1,139)          (57)                11,814         16,671            ‐ ‐ ‐155               ‐‐ 495                 (1,627)            ‐ ‐ (653)              ‐ (5,750)          (11,434)           (1,627)            ‐ ‐ (498)              ‐ (5,750)          (10,939)           (430)                83                   ‐ (1,637)          (57)                6,064             5,732               10,941           236                 3 15,401         25                  13,569         94,114            10,511$         319$               3$                   13,764$        (32)$               19,633$        99,846$          123 Street Improvement Federal Revenue Variance Variance Actual, Positive Actual, Positive Budget Budgetary Basis (Negative) Budget Budgetary Basis (Negative) REVENUES: Special assessments ‐$            ‐$‐$              ‐$            ‐$‐$               Other taxes and fines 1,416     1,781              365          ‐             ‐‐                 Contributions ‐              ‐‐                 ‐             ‐‐                 Charges for services ‐              ‐‐                 ‐             ‐‐                 Intergovernmental: Community Development Block Grants ‐              ‐‐                 436      363 (73)            State of California ‐              78 78             ‐             ‐‐                 Permits and licenses University Avenue Parking ‐              ‐‐                 ‐             ‐‐                 California Avenue Parking ‐              ‐‐                 ‐             ‐‐                 Other permits and licenses ‐              ‐‐                 ‐             ‐‐                 Investment earnings 13          13 ‐                 ‐             ‐‐                 Rental income ‐              ‐‐                 ‐             ‐‐                 Other: Housing In‐Lieu ‐ residential ‐              ‐‐                 ‐             ‐‐                 Loan payoffs ‐              ‐‐                 ‐             ‐‐                 Other fees ‐              ‐‐                136      217 81              Total revenues 1,429     1,872              443           572      580 8                EXPENDITURES: Current: Administrative Services ‐              ‐‐                 ‐             ‐‐                 Public Works ‐              ‐‐                 ‐             ‐‐                 Planning and Community Environment ‐              ‐‐                 977      959 18              Police ‐              ‐‐                 ‐             ‐‐                 Community Services ‐              ‐‐                 ‐             ‐‐                 Non‐Departmental ‐              ‐‐                 ‐             ‐‐                 Total expenditures ‐              ‐‐                 977      959 18              Excess (deficiency) of revenues  over (under) expenditures 1,429     1,872              443           (405)     (379)                  26              OTHER FINANCING SOURCES (USES): Transfers in ‐              ‐‐                 ‐             ‐‐                 Transfers out (1,764)   (2,166)             (402)         ‐             ‐‐                 Total other financing sources (uses)(1,764)   (2,166)             (402)         ‐             ‐‐                 Change in fund balances, budgetary basis (335)$     (294)                41$            (405)$    (379)                  26$            Adjustment to Budgetary Basis: Unrealized gain/loss on investments (10)‐ Changes in notes receivable ‐52 Current year encumbrances/reappropriations ‐379 (304)                52 FUND BALANCES, BEGINNING OF YEAR, GAAP BASIS 866                  5,028                 FUND BALANCES, END OF YEAR, GAAP BASIS 562$                5,080$               CHANGE IN FUND BALANCE, GAAP BASIS (Amounts in thousands) CITY OF PALO ALTO Non‐major Special Revenue Funds Combining Schedule of Revenues, Expenditures and Changes in Fund Balances ‐  Budget and Actual For the Year Ended June 30, 2018 124 Housing In‐Lieu Special Districts Transportation Mitigation Variance Variance Variance Actual, Positive Actual, Positive Actual, Positive Budget Budgetary Basis (Negative) Budget Budgetary Basis (Negative) Budget Budgetary Basis (Negative) ‐$                ‐$  ‐$               ‐$             ‐$‐$              ‐$              ‐$‐$               ‐                  ‐ ‐                  180          335                  155          ‐               ‐‐                 ‐                  ‐ ‐                 ‐               ‐‐                ‐               ‐‐                 ‐                  ‐ ‐                 ‐               ‐‐                ‐               ‐‐                 ‐                  ‐ ‐                 ‐               ‐‐                ‐               ‐‐                 ‐                  ‐ ‐                 ‐               ‐‐                ‐               ‐‐                 ‐                  ‐ ‐                  2,717      3,088              371          ‐               ‐‐                 ‐                  ‐ ‐                  441          556                  115          ‐               ‐‐                 ‐                  ‐ ‐                  1,069      582                  (487)         ‐               ‐‐                 427             478 51              27            100                  73              204        240 36              9                 6 (3)              ‐               ‐‐                ‐               ‐‐                 2,150         1,145                 (1,005)      ‐               ‐‐                ‐               ‐‐                 25               77 52              ‐               ‐‐                ‐               ‐‐                 170             106 (64)            ‐               27 27              467        2,158                1,691        2,781         1,812                (969)           4,434      4,688              254          671        2,398                1,727        ‐                  ‐ ‐                  231          226                  5               ‐               ‐‐                 ‐                  ‐ ‐                  1,224      857                  367          ‐               ‐‐                 573             440 133            2,021      2,176              (155)         ‐               ‐‐                 ‐                  ‐ ‐                 ‐               ‐‐                ‐               ‐‐                 ‐                  ‐ ‐                  26            24 2               ‐               ‐‐                 14,765       14,670              95               683          303                  380           1,000     1,000                ‐                 15,338       15,110              228            4,185      3,586              599           1,000     1,000                ‐                 (12,557)      (13,298)             (741)          249          1,102              853          (329)       1,398                1,727        ‐                  ‐ ‐                  340          340                  ‐                ‐               ‐‐                 ‐                  (1) (1)               (1,237)     (1,237)             ‐                 (1,627)    (1,627)               ‐                 ‐                  (1) (1)               (897)         (897)                ‐                 (1,627)    (1,627)               ‐                 (12,557)$   (13,299)             (742)$         (648)$      205                  853$          (1,956)$  (229)                   1,727$       (408)                  (97)(201)                   14,436              ‐‐ 353 771                  ‐ 1,082                879                  (430)                   43,781              4,264              10,941               44,863$            5,143$             10,511$             125 Local Law Enforcement Asset Seizure Variance Variance Actual, Positive Actual, Positive Budget Budgetary Basis (Negative) Budget Budgetary Basis (Negative) REVENUES: Special assessments ‐$             ‐$‐$              ‐$             ‐$‐$               Other taxes and fines ‐               ‐‐                ‐               ‐‐                 Contributions ‐               ‐‐                ‐               ‐‐                 Charges for services ‐               ‐‐                ‐               ‐‐                 Intergovernmental: Community Development Block Grants ‐               ‐‐                ‐               ‐‐                 State of California ‐               151                  151          ‐               ‐‐                 Permits and licenses University Avenue Parking ‐               ‐‐                ‐               ‐‐                 California Avenue Parking ‐               ‐‐                ‐               ‐‐                 Other permits and licenses ‐               ‐‐                ‐               ‐‐                 Investment earnings 2              6 4               ‐               ‐‐                 Rental income ‐               ‐‐                ‐               ‐‐                 Other: Housing In‐Lieu ‐ residential ‐               ‐‐                ‐               ‐‐                 Loan payoffs ‐               ‐‐                ‐               ‐‐                 Other fees ‐               ‐‐                ‐               ‐‐                 Total revenues 2              157                  155          ‐               ‐‐                 EXPENDITURES: Current: Administrative Services ‐               ‐‐                ‐               ‐‐                 Public Works ‐               ‐‐                ‐               ‐‐                 Planning and Community Environment ‐               ‐‐                ‐               ‐‐                 Police 1              68 (67)           ‐               ‐‐                 Community Services ‐               ‐‐                ‐               ‐‐                 Non‐Departmental ‐               ‐‐                ‐               ‐‐                 Total expenditures 1              68 (67)           ‐               ‐‐                 Excess (deficiency) of revenues  over (under) expenditures 1              89 88             ‐               ‐‐                 OTHER FINANCING SOURCES (USES): Transfers in ‐               ‐‐                ‐               ‐‐                 Transfers out ‐               ‐‐                ‐               ‐‐                 Total other financing sources (uses)‐               ‐‐                ‐               ‐‐                 Change in fund balances, Budgetary basis 1$            89 88$           ‐$             ‐‐$               Adjustment to Budgetary Basis: Unrealized gain/loss on investments (6)‐ Changes in notes receivable ‐‐ Current year encumbrances/reappropriations ‐‐ 83 ‐ FUND BALANCES, BEGINNING OF YEAR, GAAP BASIS 236                  3 FUND BALANCES, END OF YEAR, GAAP BASIS 319$                3$ CHANGE IN FUND BALANCE, GAAP BASIS (Amounts in Thousands) CITY OF PALO ALTO Non‐major Special Revenue Funds Combining Schedule of Revenues, Expenditures and Changes in Fund Balances ‐  Budget and Actual For the Year Ended June 30, 2018 126 Developer Impact Fee Downtown Business Improvement District Public Benefit Variance Variance Variance Actual, Positive Actual, Positive Actual, Positive Budget Budgetary Basis (Negative) Budget Budgetary Basis (Negative) Budget Budgetary Basis (Negative) ‐$              ‐$  ‐$                140$       72$(68)$          ‐$            ‐$‐$               ‐                ‐ ‐                  ‐               ‐‐                ‐             ‐‐                 ‐                ‐ ‐                  ‐               ‐‐                 11,734  11,733              (1)              ‐                ‐ ‐                  ‐               ‐‐                 11          11 ‐                 ‐                ‐ ‐                  ‐               ‐‐                ‐             ‐‐                 ‐                ‐ ‐                  ‐               ‐‐                ‐             ‐‐                 ‐                ‐ ‐                  ‐               ‐‐                ‐             ‐‐                 ‐                ‐ ‐                  ‐               ‐‐                ‐             ‐‐                 ‐                ‐ ‐                  ‐               ‐‐                ‐             ‐‐                 215           314 99              2              1 (1)              211        374 163           ‐                ‐ ‐                  ‐               ‐‐                ‐             ‐‐                 ‐                ‐ ‐                  ‐               ‐‐                ‐             ‐‐                 ‐                ‐ ‐                  ‐               ‐‐                ‐             ‐‐                 1,599       1,507                (92)            ‐               ‐‐                ‐             ‐‐                 1,814       1,821                7                 142         73 (69)            11,956  12,118              162           ‐                ‐ ‐                  ‐               ‐‐                ‐             ‐‐                 ‐                ‐ ‐                  ‐               ‐‐                ‐             ‐‐                 ‐                ‐ ‐                  ‐               ‐‐                ‐             ‐‐                 ‐                ‐ ‐                  ‐               ‐‐                ‐             ‐‐                 2,682       2,685                (3)              ‐               ‐‐                 35          45  (10)            ‐                ‐ ‐                  152         150                  2               ‐             ‐‐                                 2,682       2,685                (3)               152         150                  2                35          45 (10)            (868)          (864)                  4                 (10)          (77)(67)            11,921  12,073              152           155           155 ‐                  ‐               ‐‐                ‐             ‐‐                 (653)          (653)                  ‐                  ‐               ‐‐                 (5,750)   (5,750)               ‐                 (498)          (498)                  ‐                  ‐               ‐‐                 (5,750)   (5,750)               ‐                 (1,366)$    (1,362)               4$                (10)$        (77)(67)$           6,171$   6,323                152$          (275)                  (1)(304)                   ‐ ‐‐ ‐ 21 45  (1,637)               (57)6,064                 15,401              25 13,569               13,764$            (32)$                 19,633$             127 This page is left intentionally blank.  128 NON‐MAJOR GOVERNMENTAL FUNDS  DEBT SERVICE FUNDS   Downtown Parking Improvement  This fund accounts for revenues received from the General Fund to provide payment of principal and  interest associated with the 2002B Downtown Parking Improvement Certificates of Participation as they  become due.  Library Projects  This fund accounts for revenues received from property taxes to provide payment of principal and interest  associated with the 2010 and 2013A General Obligation Bonds as they become due.  129 CITY OF PALO ALTO Non‐major Debt Service Funds Combining Balance Sheet June 30, 2018 (Amounts in thousands) Downtown Total Parking Library Debt Service Improvement Projects  Funds ASSETS: Cash and investments: Available for operations 15$                3,530$           3,545$           Receivables: Accounts ‐5 5 Interest ‐21                  21 Total assets 15$                3,556$          3,571$           FUND BALANCES: Debt service 15$                3,556$          3,571$           130 CITY OF PALO ALTO Non‐major Debt Service Funds Combining Statement of Revenues, Expenditures and Changes in Fund Balances For the Year Ended June 30, 2018 (Amounts in thousands) Downtown Total Parking Library Debt Service Improvement Projects  Funds REVENUES: Property tax ‐$4,331$           4,331$           Investment earnings 2 (30)                 (28)                  Total revenues 2 4,301             4,303              EXPENDITURES: Current: Non‐Departmental 14 ‐ 14 Debt service: Principal retirement 975               1,570             2,545              Interest and fiscal charges 77 2,863             2,940              Total expenditures 1,066            4,433             5,499              EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES (1,064)          (132)               (1,196)            OTHER FINANCING SOURCES (USES): Issuance of debt 595               ‐ 595                 Transfers in 233               ‐ 233                 Total other financing sources (uses)828               ‐ 828                 Change in fund balances (236)              (132)               (368)                FUND BALANCES, BEGINNING OF YEAR 251               3,688             3,939              FUND BALANCES, END OF YEAR 15$                3,556$           3,571$           131 Downtown Parking Improvement Library Projects Variance Variance Actual, plus Positive Actual, plus Positive Budget Encumbrances (Negative) Budget Encumbrances (Negative) REVENUES: Special assessments ‐$‐$‐$4,433$           4,331$          (102)$             Investment earnings ‐2 2 ‐ 38 38                  Total revenues ‐2 2 4,433            4,369            (64)                EXPENDITURES: Current: Debt service: Principal retirement 170               975               (805)             1,570            1,570            ‐ Interest and fiscal charges 63                 77                 (14)               2,863            2,863            ‐ Total expenditures 233               1,052           (819)             4,433            4,433            ‐ Excess (deficiency) of revenues  over (under) expenditures (233)             (1,050)          (817)             ‐ (64)(64)                OTHER FINANCING SOURCES (USES): Issuance of debt ‐595               595               ‐ ‐‐ Payment to bond refunding escrow ‐(14)               (14)               ‐ ‐‐ Transfers in 233               233               ‐‐ ‐‐ Total other financing sources (uses)233               814               581               ‐ ‐‐ Change in fund balances, Budgetary basis ‐$(236)             (236)$            ‐$  (64) (64)$               Adjustment to Budgetary Basis: Unrealized gain/loss on investments (68) (236)             (132)               FUND BALANCES, BEGINNING OF YEAR 251               3,688             FUND BALANCES, END OF YEAR 15$                3,556$           CHANGE IN FUND BALANCE, GAAP BASIS (Amounts in thousands) CITY OF PALO ALTO Non‐major Debt Service Funds Combining Schedule of Revenues, Expenditures and Changes in Fund Balances ‐  Budget and Actual For the Year Ended June 30, 2018 132 NON‐MAJOR GOVERNMENTAL FUNDS  PERMANENT FUND  Eyerly Family  This fund accounts for the revenues received from assets donated by Mr. and Mrs. Fred Eyerly for the City  and or its citizenry.  133 Eyerly Family Permanent Fund Variance Actual, plus Positive Budget Encumbrances (Negative) REVENUES: Investment earnings 27$              31$               4$                  Total revenues 27                31                 4 EXPENDITURES: Current: Non‐Departmental ‐3 (3) Total expenditures ‐3 (3) Excess (deficiency) of revenues  over (under) expenditures 27                28                 1 Change in fund balance 27$              28                 1$                  Adjustment to Budgetary Basis: Unrealized gain/loss on investments (29)                (1)                  FUND BALANCE, BEGINNING OF YEAR 1,499            FUND BALANCE, END OF YEAR 1,498$           CHANGE IN FUND BALANCE, GAAP BASIS (Amounts in thousands) CITY OF PALO ALTO Non‐major Permanent Fund Schedule of Revenues, Expenditures and Changes in Fund Balance ‐  Budget and Actual For the Year Ended June 30, 2018 134 INTERNAL SERVICE FUNDS  INTRODUCTION  Internal Service Funds are used to finance and account for special activities and services performed by a  designated department for other departments in the City on a cost reimbursement basis.  Vehicle Replacement and Maintenance  This fund accounts for the maintenance and replacement of vehicles and equipment used by all City  departments. The source of revenue is from reimbursement of fleet replacement and maintenance costs  allocated to each department by usage of vehicle.  Technology  This fund accounts for replacement and upgrade of technology, and covers four primary areas used by all  City departments: desktop, infrastructure, applications, and technology research and development. The  source of revenue is from reimbursement of costs for support provided to other departments.  Printing and Mailing Services  This fund accounts for central duplicating, printing and mailing services provided to all City departments.  Source of revenue for this fund is from reimbursement of costs for services and supplies purchased by  other departments.  General Benefits  This fund accounts for the administration of compensated absences and health benefits.  Workers’ Compensation Insurance Program  This fund accounts for the administration of the City’s self‐insured workers’ compensation programs.  General Liabilities Insurance Program  This fund accounts for the administration of the City’s self‐insured general liability programs.  Retiree Health Benefits  This fund accounts for the retiree health benefits contributions.  135 Vehicle Printing Workers' General Total Replacement and Compensation Liabilities Retiree Internal  and Mailing General Insurance Insurance Health Services Maintenance Technology Services Benefits Program Program Benefits Funds ASSETS: Current Assets: Cash and investments: Available for operations 9,614$           23,419$        188$              17,304$        19,805$        6,289$           1,632$           78,251$         Restricted investments with trustees ‐  ‐ ‐  5,547            ‐ ‐  ‐  5,547             Accounts receivable, net 4 ‐ ‐ 32                  17                  ‐  ‐ 53                   Interest receivable 57  136               1 96                  116               37                   20 463                Inventory of materials and supplies 214                 ‐ ‐ ‐ ‐ ‐  ‐ 214                Total current assets 9,889              23,555         189               22,979         19,938         6,326             1,652              84,528          Noncurrent Assets: Capital assets: Nondepreciable 622                 1,251            ‐ ‐ ‐ ‐  ‐  1,873             Depreciable, net 17,720           2,156            29                  ‐ ‐ ‐  ‐  19,905          Total noncurrent assets 18,342           3,407            29                  ‐ ‐ ‐  ‐  21,778          Total assets 28,231           26,962         218               22,979         19,938         6,326             1,652              106,306        DEFERRED OUTFLOWS OF RESOURCES: Pension related 878                 2,776            64                  ‐ 77                  ‐  ‐  3,795             OPEB related 263                 536               23                  ‐ ‐ ‐  ‐ 822                Total deferred outflows of resources 1,141               3,312            87                  ‐ 77                  ‐  ‐  4,617             LIABILITIES: Current Liabilities: Accounts payable and accruals 386                  435               193               1,002            35                  ‐  653                 2,704             Accrued salaries and benefits 23  76                  2 ‐ 2 ‐  ‐ 103                Accrued compensated absences 4 16                  ‐  5,976            ‐ ‐  ‐  5,996             Accrued claims payable ‐ current ‐  ‐ ‐ 160               3,231            2,444             ‐  5,835             Total current liabilities 413                 527                 195                 7,138              3,268              2,444              653                 14,638            Noncurrent liabilities: Accrued compensated absences ‐  ‐ ‐  6,062            ‐ ‐  ‐  6,062             Accrued claims payable ‐  ‐ ‐ ‐  15,035         2,878             ‐  17,913          Net pension liabilities 3,704              12,526         366               ‐ 114               ‐  ‐  16,710          Net OPEB liabilities 1,888              3,853            169               ‐ ‐ ‐  ‐  5,910             Total noncurrent liabilities 5,592              16,379         535               6,062            15,149         2,878             ‐  46,595          Total liabilities 6,005              16,906         730               13,200         18,417         5,322             653                 61,233          DEFERRED INFLOWS OF RESOURCES: Pension related 64  211               5 ‐ 6 ‐  ‐ 286                OPEB related 31  63                  3 ‐ ‐ ‐  ‐ 97                   Total deferred inflows of resources 95  274               8 ‐ 6 ‐  ‐ 383                NET POSITION: Net Investment in capital assets 18,342            3,407            29                  ‐ ‐ ‐  ‐  21,778          Unrestricted 4,930              9,687            (462)              9,779            1,592            1,004             999                 27,529          Total net position 23,272$         13,094$        (433)$             9,779$          1,592$          1,004$           999$               49,307$         CITY OF PALO ALTO Internal Service Funds Combining Statement of Fund Net Position June 30, 2018 (Amounts in thousands) 136 Vehicle Printing Workers' General Total Replacement and Compensation Liabilities Retiree Internal  and Mailing General Insurance Insurance Health Services Maintenance Technology Services Benefits Program Program Benefits Funds OPERATING REVENUES: Charges for services 9,361$           13,775$        1,646$          56,429$        1,827$          1,813$           14,527$         99,378$         Other ‐  ‐                     ‐ 1 114               6 ‐ 121                Total operating revenues 9,361              13,775         1,646            56,430         1,941            1,819             14,527           99,499          OPERATING EXPENSES: Administrative and general 1,420              7,994            1,218            177               740               2,150             43  13,742          Operations and maintenance 3,994               7,770            432               926               205               ‐  ‐  13,327          Depreciation and amortization 2,601              469               4 ‐ ‐ ‐  ‐  3,074             Claim payments and change in estimated self‐insured liability ‐  ‐ ‐  1,613            2,594            498                ‐  4,705             Refund of charges for services 77  10                  ‐ ‐ ‐ ‐  ‐ 87                   Employment benefits ‐  ‐ ‐ 49,231         ‐ ‐   21,316           70,547          Total operating expenses 8,092              16,243         1,654            51,947         3,539            2,648             21,359           105,482        Operating income (loss)1,269              (2,468)          (8)  4,483            (1,598)          (829)               (6,832)            (5,983)           NONOPERATING REVENUES (EXPENSES): Investment earnings 17  37                  (5) (64)                34                  5 8 32                   Gain on disposal of capital assets 218                 ‐ ‐ ‐ ‐ ‐  ‐ 218                Other nonoperating revenues 42  ‐ ‐ ‐ ‐ ‐  ‐ 42                   Total nonoperating revenues (expenses)277                 37                  (5) (64)                34                  5 8 292                Income (loss) before transfers 1,546              (2,431)          (13)                4,419            (1,564)          (824)               (6,824)            (5,691)           Transfers in 26   2,032            ‐  1,427            ‐ 5  2,444              5,934             Transfers out (42)                  (162)              (3)  (2,444)          (3) ‐  ‐  (2,654)           Change in net position 1,530              (561)              (16)                3,402            (1,567)          (819)               (4,380)            (2,411)           NET POSITION (DEFICIT), BEGINNING OF YEAR AS PREVIOUSLY STATED 23,464           17,170         (263)              6,377            3,159            1,823             24,798           76,528          RESTATEMENT FOR IMPLEMENTATION OF  GASB STATEMENT NO. 75 (1,722)            (3,515)          (154)              ‐ ‐ ‐   (19,419)          (24,810)         NET POSITION, BEGINNING OF YEAR, AS RESTATED 21,742           13,655         (417)              6,377            3,159            1,823             5,379              51,718          NET POSITION, END OF YEAR 23,272$         13,094$        (433)$             9,779$          1,592$          1,004$           999$               49,307$         CITY OF PALO ALTO Internal Service Funds Combining Statement of Revenues, Expenses and Changes in Fund Net Position For the Year Ended June 30, 2018 (Amounts in thousands) 137 Vehicle Printing Workers' General Total Replacement and Compensation Liabilities Retiree Internal  and Mailing General Insurance Insurance Health Services Maintenance Technology Services Benefits Program Program Benefits Funds Cash flows from operating activities: Cash received from customers 9,369$            13,775$         1,646$           56,410$         2,241$           1,819$            14,527$          99,787$         Cash refunds to customers ‐  (10)                ‐ ‐ ‐ ‐  ‐ (10)                 Cash payments to suppliers for goods and services (2,782)            (7,964)          (1,227)          (1,255)          (211)              (1,677)           653                  (14,463)         Cash payments to employees (2,211)            (7,069)          (257)              (47,967)        (711)              ‐   (21,359)          (79,574)         Cash payments for judgments and claims ‐  ‐ ‐  (1,598)          (1,714)          (525)               ‐  (3,837)           Other cash receipts 42  ‐ ‐ ‐ ‐ ‐  ‐ 42                   Net cash flows provided by (used in)  operating activities 4,418              (1,268)          162               5,590            (395)              (383)               (6,179)            1,945             Cash flows from noncapital financing activities: Transfers in 26   2,032            ‐  1,427            ‐ 5  2,444              5,934             Transfers out (42)                  (162)              (3)  (2,444)          (3) ‐  ‐  (2,654)           Net cash flows provided by (used in) noncapital financing activities (16)                  1,870            (3)  (1,017)          (3) 5  2,444              3,280             Cash flows from capital and related financing activities: Acquisition of capital assets (5,359)            (916)              ‐ ‐ ‐ ‐  ‐  (6,275)           Proceeds from sale of capital assets 248                  ‐ ‐ ‐ ‐ ‐  ‐ 248                Net cash flows (used in)  capital and related financing activities (5,111)            (916)              ‐ ‐ ‐ ‐  ‐  (6,027)           Cash flows from investing activities: Interest received (charged)10  9 (6) (90)                16                  3 10 (48)                 Net change in cash and cash equivalents (699)                (305)              153               4,483            (382)              (375)               (3,725)            (850)               Cash and cash equivalents, beginning of year 10,313            23,724         35                   18,368         20,187         6,664             5,357              84,648          Cash and cash equivalents, end of year  $           9,614  $         23,419  $               188  $         22,851  $         19,805  $           6,289   $           1,632  $         83,798  Reconciliation of operating income (loss) to net cash flows provided by (used in) operating activities: Operating income (loss)1,269$           (2,468)$         (8)$                 4,483$          (1,598)$         (829)$              (6,832)$          (5,983)$          Adjustments to reconcile operating income (loss)  to net cash provided by (used in) operating activities: Depreciation 2,601              469               4 ‐ ‐ ‐  ‐ 3,074             Other 42  ‐ ‐ ‐ ‐ ‐  ‐ 42                   Change in assets and liabilities: Accounts receivable 8 ‐ ‐ (19)                414               ‐  ‐ 403                Inventory of materials and supplies 30  ‐ ‐ ‐ ‐ ‐  ‐ 30                   Net OPEB asset ‐  ‐ ‐ ‐ ‐ ‐  ‐ ‐  Deferred outflows of resources ‐ pension plan (126)                (580)              (16)                ‐ (11)                ‐  ‐  (733)               Deferred outflows of resources ‐ OPEB (82)                   (166)               (7) ‐ ‐ ‐  ‐  (255)               Accounts payable and accruals 292                  112               155               533               (6) (52)                 653                 1,687             Accrued salaries and benefits 2 12                  ‐ ‐ ‐ ‐  ‐ 14                   Accrued compensated absences ‐  1 ‐ 579               ‐ ‐  ‐ 580                Accrued claims payable ‐  ‐ ‐ 14                  766               498                ‐  1,278             Net pension liability 360                 1,283            32                  ‐ 34                  ‐  ‐  1,709             Net OPEB liability (15)                  (32)                (1) ‐ ‐ ‐  ‐ (48)                 Deferred inflows of resources ‐ pension plans 6 38                  ‐ ‐ 6 ‐  ‐ 50                   Deferred inflows of resouces ‐ OPEB 31  63                  3 ‐ ‐ ‐  ‐ 97                   Net cash flows provided by (used in)  operating activities 4,418$           (1,268)$         162$              5,590$          (395)$             (383)$              (6,179)$          1,945$           CITY OF PALO ALTO Internal Service Funds Combining Statement of Cash Flows For the Year Ended June 30, 2018 (Amounts in thousands) 138 FIDUCIARY FUNDS  INTRODUCTION  Fiduciary Funds are used to account for assets held by the City acting in a fiduciary capacity for other  entities and individuals. The funds are operated to carry out the specific actions required by the trust  agreements, ordinances and other governing regulations.  Fiduciary Funds are presented separately from the Citywide and Fund financial statements.  Agency Funds are custodial in nature and do not involve measurement of results of operations. The City  maintains three agency funds, as follows:  Cable Joint Powers Authority  The fund was established to account for the activities of the cable television system on behalf of the  members.  University Avenue Area Off‐Street Parking Assessment District  The fund accounts for the receipts and disbursements associated with the Series 2012 Limited Obligation  Refunding Improvement Bonds.  139 CITY OF PALO ALTO All Agency Funds Statement of Changes in Assets and Liabilities For the Year Ended June 30, 2018 Balance Balance June 30, 2017 Additions Deletions June 30, 2018 Cable Joint Powers Authority ASSETS: Cash and investments available for operations 473$               76$                ‐$  549$               Accounts receivable 515               ‐‐ 515                Interest receivable 3 ‐‐ 3 Total assets 991$              76$                ‐$  1,067$            LIABILITIES: Due to other governments 991$              76$                ‐$  1,067$            ASSETS: Cash and investments available for operations 1,935$            38$                ‐$   1,973$            Cash and investments with fiscal agents 2,556            38                  ‐  2,594             Accounts receivable 64                  ‐47                   17                   Interest receivable 9 2 ‐ 11                   Total assets 4,564$           78$                47$                 4,595$            LIABILITIES: Due to bondholders 4,564$           31$                ‐$  4,595$            Total Agency Funds ASSETS: Cash and investments available for operations 2,408$            114$              ‐$   2,522$            Cash and investments with fiscal agents 2,556            38                  ‐  2,594             Accounts receivable 579               ‐47                   532                Interest receivable 12                  2 ‐ 14                   Total assets 5,555$           154$              47$                 5,662$            LIABILITIES: Due to bondholders 4,564$           31$                ‐$   4,595$            Due to other governments 991               76                  ‐  1,067             Total liabilities 5,555$           107$              ‐$   5,662$            (Amounts in thousands) University Avenue Area  Off‐Street Parking Assessment District 140 STATISTICAL SECTION  The statistical section contains comprehensive statistical data, which relates to physical, economic, social  and political characteristics of the City. It is intended to provide users with a broader and more complete  understanding of the City and its financial affairs than is possible from the financial statements and  supporting schedules included in the financial section.  In this section, readers will find comparative information related to the City’s revenue sources,  expenditures, property tax valuations, levies and collections, general obligation bonded debt, utility  revenue debt service, and demographics. Where available, the comparative information is presented for  the last ten fiscal years.  In addition, this section presents information related to the City’s legal debt margin computation, principal  taxpayers, notary and security bond coverages, and other miscellaneous statistics pertaining to services  provided by the City.  In contrast to the financial section, the statistical section information is not usually subject to independent  audit.  Financial Trends  These schedules contain trend information to help the reader understand how the City’s financial  performance and well‐being have changed over time:  Net Position by Component Changes in Net Position Fund Balances of Governmental Funds Changes in Fund Balances of Governmental Funds Revenue Capacity  These schedules contain information to help the reader assess the City’s most significant local revenue  sources, property tax and electric charges:  Electric Operating Revenue by Source Supplemental Disclosure for Water Utilities Supplemental Disclosure for Gas Utilities Assessed Value of Taxable Property Property Tax Rates, All Overlapping Governments Property Tax Levies and Collections Principal Property Taxpayers Assessed Valuation and Parcels by Land Use Per Parcel Assessed Valuation of Single Family Residential Debt Capacity  These schedules present information to help the reader assess the affordability of the City’s current levels  of outstanding debt and the City’s ability to issue additional debt in the future:  Ratio of Outstanding Debt by Type Computation of Direct and Overlapping Debt Computation of Legal Bonded Debt Margin Revenue Bond Coverage 141 STATISTICAL SECTION  Demographic and Economic Information  These schedules offer demographic and economic indicators to help the reader understand the  environment within which the City’s financial activities take place:  Taxable Transactions by Type of Business Demographic and Economic Statistics Principal Employers Operating Information  These schedules contain service and infrastructure data to help the reader understand how the  information in the City’s financial report relates to the services the City provides and the activities it  performs:  Operating Indicators by Function/Program Capital Asset Statistics by Function/Program Full‐Time Equivalent City Government Employees by Function Sources  Unless otherwise noted, the information in these schedules is derived from the Comprehensive Annual  Financial Reports for the relevant year.  142 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Governmental Activities Investment in capital assets 356,657$        369,499$         364,747$        370,111$        378,047$        386,696$         405,921$        425,179$        453,878$        473,233$         Restricted 36,632             34,323             16,437             52,934             71,717             68,331             55,963             47,907             36,081            41,177              Unrestricted 118,133          102,199           134,722          142,102          165,810          187,386           1,972               37,905             37,330            (87,040)            Total Governmental Activities Net Position 511,422$        506,021$         515,906$        565,147$        615,574$        642,413$         463,856$        510,991$        527,289$        427,370$         Business‐type Activities Investment in capital assets 384,313$        399,317$         416,418$        437,151$        446,597$        473,795$         490,874$        512,918$        532,063$        573,688$         Restricted 1,732               4,300                ‐ ‐  4,060               4,166                4,142               4,115               4,073              4,014                Unrestricted 208,025          232,420           253,740          262,602          269,926          266,794           172,802          162,806          163,158          110,429           Total Business‐type Activities Net Position 594,070$        636,037$         670,158$        699,753$        720,583$        744,755$         667,818$        679,839$        699,294$        688,131$         Primary Government Investment in capital assets 740,970$        768,816$         781,165$        807,262$        824,644$        860,491$         896,795$        938,097$        985,941$        1,046,921$      Restricted 38,364             38,623             16,437             52,934             75,777             72,497             60,105             52,022             40,154            45,191              Unrestricted 326,158          334,619           388,462          404,704          435,736          454,180           174,774          200,711          200,488          23,389              Total Primary Government Net Position 1,105,492$     1,142,058$     1,186,064$     1,264,900$     1,336,157$     1,387,168$     1,131,674$     1,190,830$     1,226,583$    1,115,501$      Notes: Source:  Annual Financial Statements, Statement of Net Position The City implemented GASB Statement No. 68, Accounting and Financial Reporting for Pensions, effective July 1, 2014, and GASB Statement No. 75,  Accounting and Financial Reporting for Postemployment Benefits Other Than Pension , effective July 1, 2017. The City's unrestricted net position decreased in FY  2015 and again in FY 2018 as a result. Fiscal Year Ended June 30 CITY OF PALO ALTO Net Position by Component Last Ten Fiscal Years (Amounts in thousands) (Accrual basis of accounting) $0 $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ T h o u s a n d s Primary Government Investment in capital assets Restricted Unrestricted 143 PROGRAM REVENUES 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Governmental Activities Charges for services City Council ‐$  ‐$                  ‐$                  ‐$                  ‐$                  ‐$                  ‐$  ‐$  ‐$  ‐$                   City Manager ‐ ‐                ‐                ‐                ‐                ‐                ‐                  ‐                  ‐                  ‐                 City Attorney 12.00               53.00            ‐                ‐                ‐                ‐                ‐                  ‐                  ‐                  ‐                 City Clerk ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐  City Auditor ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐  Administrative Services 726 984                2,889            1,647            15,629          4,055            5,460              9,444              5,242              6,536             Human Resources ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐  Public Works 1,169               1,258            2,419            1,008            1,314            1,093            1,209              599                 878                 781                Planning & Community Environment 4,704               4,813            7,237            31,491          28,768          12,896          8,090              9,071              6,067              5,119             Development Services1 ‐ ‐ ‐ ‐ ‐ ‐  12,019            12,570            11,768            16,000           Public Safety 14,670             14,337          15,274          15,658          16,139          14,902          15,726            13,945            12,670            13,507           Community Services 8,522               8,729            7,724            11,365          13,808          20,882          20,912            21,551            20,472            21,285           Library 177 199               480                1,600            187               166               137                 198                 139                 145                Operating grants and contributions 3,599               4,829            2,884            3,441            5,038            5,360            5,300              2,164              1,990              14,054           Capital grants and contributions 3,810               1,280            1,903            1,064            515               917               619                 344                 1,929              1,534             Total Governmental Activities Program Revenues 37,389             36,482          40,810          67,274          81,398          60,271          69,472            69,886            61,155            78,961           Business‐type Activities Charges for services Water 27,120              26,259          26,624          31,467          37,746          40,291          35,847            37,588            42,678            45,087           Electric 119,320           121,900       122,109       118,886       121,805       121,916       120,842          120,743          137,543          154,142        Fiber Optics 3,336               3,105            3,322            3,662            4,382            4,485            4,627              4,505              4,553              4,529             Gas 47,838             44,450          43,584          41,774          34,633          35,737          30,751            30,212            36,431            37,044           Wastewater Collection 14,486             15,136          15,094          14,942          16,077          15,599          16,182            16,496            17,748            17,990           Wastewater Treatment 28,425             16,915          18,830          22,200          21,528          18,460          24,120            23,825            23,649            27,382           Refuse 29,101             28,568          30,469          30,645          30,583          30,297          31,576            32,169            33,918            34,647           Storm Drainage 5,505               5,647            5,796            5,892            6,053            6,183            6,281              6,520              6,693              6,964             Airport ‐ ‐ ‐ ‐ ‐ ‐  683                 826                 1,286              2,382             External Services ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐  Operating grants and contributions ‐  361               610               605               572               549               534                 744                 512                 501                Capital grants and contributions 639 475                3,004            1,526            2,224            2,005            2,080              1,061              4,265              14,194           Total Business‐type Activities  Program Revenues 275,770           262,816       269,442       271,599       275,603       275,522       273,523          274,689          309,276          344,862        Total Primary Government  Program Revenues 313,159$         299,298$     310,252$     338,873$     357,001$     335,793$     342,995$       344,575$       370,431$       423,823$      EXPENSES Governmental Activities City Council 394$                455$             15$               345$             94$               387$             271$               352$               329$               345$              City Manager 2,085               2,399            1,842            1,960            1,237            2,180            2,155              2,662              1,975              2,757             City Attorney 2,575               2,621            953                1,656            1,642            1,797            1,759              2,472              2,140              2,511             City Clerk 1,098               1,369            803               908               330               641               680                 582                 762                 931                City Auditor 2,053               2,601            138               235               464               489               362                 414                 847                 994                Administrative Services 17,784             17,893          9,888            10,100          7,614            11,388          9,980              10,637            11,887            13,949           Human Resources 3,448               3,707            1,346            1,071            1,420            1,346            1,464              2,224              2,272              2,674             Public Works 21,270             18,658          19,357          14,568          20,816          24,577          21,075            24,613            25,539            30,349           Planning & Community Environment 12,940             12,114          15,031          12,074          13,549          14,926          8,423              10,208            10,918            11,357           Development Services1 ‐ ‐ ‐ ‐ ‐ ‐  10,449            11,158            11,102            12,664           Public Safety 52,487             55,799          58,996          62,817          59,452          62,883          58,660            56,653            73,320            83,923           Community Services 19,862             17,171          22,845          21,915          22,705          23,822          24,688            28,547            27,866            33,709           Library 6,244               6,143            6,920            7,323            7,319            7,758            7,721              10,825            11,437            12,208           Interest on long term debt 404 370                2,742            2,575            2,562            3,367            3,658              3,552              2,846              2,761             Total Governmental Activities Expenses 142,644           141,300       140,876       137,547       139,204       155,561       151,345          164,899          183,240          211,132        Business‐type Activities Water 20,271             21,037          24,268          29,093          30,707          31,593          33,205            35,120            37,535            40,836           Electric 122,268           107,910       100,130       102,030       106,438       113,004       122,499          120,319          128,603          146,033        Fiber Optics 1,284               1,407            1,561            1,489            1,437            1,661            1,891              2,107              2,159              2,653             Gas 34,603             32,498          32,051          28,878          26,749          26,869          23,525            20,879            26,783            27,930           Wastewater Collection 14,875             10,696          12,275          14,825          14,313          13,235          14,595            15,199            16,405            16,801           Wastewater Treatment 36,896             13,466          19,731          20,712          20,635          21,018          21,553            22,546            23,498            27,518           Refuse 37,217             28,119          30,684          31,900          28,542          28,413          27,974            30,370            30,665            28,808           Storm Drainage 2,943               2,491            3,229            3,103            3,703            3,644            3,721              3,735              4,106              5,059             Airport ‐  ‐  31                 153               246               466               1,004              970                 1,274              1,656             Total Business‐type Activities Expenses 270,357           217,624       223,960       232,183       232,770       239,903       249,967          251,245          271,028          297,294        Total Primary Government Expenses 413,001$         358,924$     364,836$     369,730$     371,974$     395,464$     401,312$       416,144$       454,268$       508,426$      CITY OF PALO ALTO Changes in Net Position Last Ten Fiscal Years (Accrual basis of accounting) (Amounts in thousands) Fiscal Year Ended June 30 144 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 NET (EXPENSE)/REVENUE Governmental Activities (105,255)$       (104,818)$    (100,066)$    (70,273)$      (57,806)$      (95,290)$      (81,873)$        (95,013)$        (122,085)$      (132,171)$     Business‐type Activities 5,413               45,192          45,482          39,416          42,833          35,619          23,556            23,444            38,248            47,568           Total Primary Government Net (Expense)/Revenue (99,842)$         (59,626)$      (54,584)$      (30,857)$      (14,973)$      (59,671)$      (58,317)$        (71,569)$        (83,837)$        (84,603)$       GENERAL REVENUES AND OTHER CHANGES IN NET POSITION Governmental Activities Taxes Property tax 25,432$            25,981$       29,156$       30,104$       31,929$       35,299$       38,750$          41,189$          43,953$          47,170$        Sales tax 20,089             17,991          20,746          22,132          25,606          29,424          29,675            30,018            29,923            31,091           Utility user tax 11,030             11,295          10,851          10,834          10,861          11,008          10,861            12,469            14,240            15,414           Transient occupancy tax 7,111               6,858            8,082            9,664            10,794          12,255          16,699            22,366            23,477            24,937           Other taxes 3,364               4,055            8,156            8,173            10,504          9,660            11,867            7,868              8,989              11,337           Investment earnings 8,525               6,514            3,500            6,238            (1,228)          5,859            5,010              8,639              (711)                420                Miscellaneous 15,682             12,729          12,377          14,943          518                2,575            3,428              894                 168                  1,973             Transfers 24,020             13,994          17,083          17,426          19,249          17,103          16,405            18,705            18,344            19,077           Total Governmental Activities 115,253           99,417          109,951       119,514       108,233       123,183       132,695          142,148          138,383          151,419        Business‐type Activities Investment earnings 14,103             10,769          5,722            7,605            (2,754)          6,379            4,857              7,282              (449)                596                Transfers (24,020)            (13,994)        (17,083)        (17,426)        (19,249)        (17,103)        (16,405)          (18,705)          (18,344)          (19,077)         Total Business‐type Activities (9,917)              (3,225)          (11,361)        (9,821)          (22,003)        (10,724)        (11,548)          (11,423)          (18,793)          (18,481)         Total Primary Government 105,336$         96,192$       98,590$       109,693$     86,230$       112,459$     121,147$       130,725$       119,590$       132,938$      CHANGE IN NET POSITION Governmental Activities 9,998$             (5,401)$        9,885$          49,241$       50,427$       27,893$       50,822$          47,135$          16,298$          19,248$        Business‐type Activities (4,504)              41,967          34,121          29,595          20,830          24,895          12,008            12,021            19,455            29,087           Total Primary Government Change in Net Position 5,494$             36,566$       44,006$       78,836$       71,257$       52,788$       62,830$          59,156$          35,753$          48,335$        Notes:1The Development Services Department was formed in FY15. Source:  Annual Financial Statements, Statement of Activities Fiscal Year Ended June 30 145 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 General Fund Nonspendable 6,476$        6,581$        6,085$        6,007$        5,749$        6,188$        6,296$        7,088$        7,709$        8,049$        Committed ‐             ‐             ‐             ‐             ‐             ‐             ‐             ‐             ‐              373$           Assigned 6,100          7,295          6,235          6,400          5,415          5,432          7,976          8,261          7,280          7,098          Unassigned 30,648        27,581        31,859        29,616        30,913        36,690        48,198        51,582        48,118        52,826        Total General Fund 43,224$      41,457$      44,179$      42,023$      42,077$      48,310$      62,470$      66,931$      63,107$      68,346$      Source: Annual Financial Statements, Balance Sheet Fiscal Year Ended June 30 CITY OF PALO ALTO Fund Balances of Governmental Funds (General Fund) Last Ten Fiscal Years (Modified accrual basis of accounting) (Amounts in thousands) $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ T h o u s a n d s Nonspendable Committed Assigned Unassigned 146 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 All Other Governmental Funds Nonspendable 1,308$       1,402$        1,422$         11,112$     18,189$     14,869$     1,468$        1,505$        1,499$        1,498$         Restricted 1,412          55,400        50,646        61,324        84,688        68,468        59,650        47,113        35,298        40,317         Committed 22,043       16,962        24,775        14,284        20,400        27,145        48,434        65,745        71,566        72,781         Assigned 36,629       38,538        20,114        33,264        45,514        55,211        52,627        64,411        63,225        68,261         Unassigned ‐                   ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  (32)               Total All Other Governmental Funds 61,392$     112,302$   96,957$      119,984$   168,791$   165,693$   162,179$   178,774$   171,588$   182,825$    Source: Annual Financial Statements, Balance Sheet Fiscal Year Ended June 30 CITY OF PALO ALTO Fund Balances of Governmental Funds (All Other Governmental Funds) Last Ten Fiscal Years (Modified accrual basis of accounting) (Amounts in thousands) $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ T h o u s a n d s Nonspendable Restricted Committed Unassigned ($20,000) $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 $180,000 $200,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ T h o u s a n d s Nonspendable Restricted Committed Assigned Unassigned 147 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Revenues Property tax 25,432$      25,981$      29,248$      30,216$      32,040$      35,393$      38,836$      41,289$      44,050$      47,242$       Sales tax 20,089        17,991        20,746        22,132        25,606        29,424        29,675        30,018        29,923        31,091         Other taxes and fines 24,843        25,063        27,890        29,231        32,141        35,305        41,576        44,909        48,875        53,837         Contributions3 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐  11,733         Charges for services 19,837        19,775        22,311        46,273        38,976        23,962        25,973        23,910        22,267        26,835         From other agencies 5,984          3,035          1,614          1,116          4,109          5,700          7,727          4,417          5,443          5,392           Permits and licenses 4,033          4,408          5,433          7,136          8,218          8,990          9,179           11,228        10,523        12,786         Interest and rentals 19,183        19,045        16,553        18,583        12,136        18,445        18,658        22,269        15,348        16,288         Other revenue 6,223          4,724          8,624           12,739        17,570        7,471           12,837        13,827        4,985          6,067           Total Revenues 125,624      120,022      132,419      167,426      170,796      164,690      184,461      191,867      181,414      211,271       Expenditures Administration1 16,002         17,353        8,351          9,412          8,291          9,961           10,806        11,501        13,192        14,721         Public Works 10,064        9,787           11,317        11,304        11,489        12,439        12,276        13,112        14,485        15,426         Planning and Community Environment 10,462        9,480           10,309        11,966        13,474        14,761        8,628          9,722           10,568        10,332         Development Services2 ‐ ‐ ‐ ‐ ‐ ‐  11,152        10,643        10,908        11,749         Public Safety 48,957        51,022        58,874        62,418        59,537        62,028        61,447        63,784        71,164        73,916         Community Services 17,451        16,451        20,029        20,860        21,661        22,644        23,553        25,511        25,408        29,831         Library 5,985          5,900          6,509          7,072          6,902          7,340          7,980          7,960          8,953          9,120           Non‐departmental 10,765        10,149        7,352          6,819          4,567          8,135          6,180          8,068          6,566          7,579           Special revenue and capital projects 21,485        22,006        35,486        29,154        29,542        37,035        41,754        24,457        39,643        40,971         Debt service ‐ principal payments 800              840              870               1,743          1,489          1,524          1,948          7,130          2,066          2,961           Debt service ‐interest and fiscal fees 416              382               1,815          2,757          2,659          3,196          3,404          4,266          3,032          2,956           Payment to bond refunding escrow ‐  ‐  ‐  586              540               ‐  ‐  ‐  ‐  ‐  Total Expenditures 142,387      143,370      160,912      164,091      160,151      179,063      189,128      186,154      205,985      219,562       Excess (Deficiency) of Revenues Over (Under) Expenditures (16,763)       (23,348)       (28,493)       3,335           10,645         (14,373)       (4,667)         5,713           (24,571)       (8,291)          Other Financing Sources (Uses) Issuance of Debt ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐  8,970           Transfers in 39,903        34,835        30,323        47,200        50,343        41,683        45,137        61,835        58,331        56,882         Transfers out (22,399)       (21,415)       (14,352)       (29,782)       (33,833)       (24,175)       (29,824)       (46,492)       (44,770)       (41,085)        Other ‐ ‐  (101)            ‐ ‐ ‐ ‐ ‐ ‐ ‐  Proceeds from long term debt ‐  59,071        ‐  3,222           21,706        ‐ ‐ ‐ ‐ ‐  Payments to refund bond escrow ‐  ‐  ‐  (3,104)          ‐  ‐  ‐  ‐  ‐  ‐  Total Other Financing Sources (Uses)17,504        72,491        15,870        17,536        38,216        17,508        15,313        15,343        13,561        24,767         Net Change in Fund Balances 741$            49,143$       (12,623)$    20,871$      48,861$      3,135$         10,646$      21,056$       (11,010)$    16,476$       Debt Service as a Percentage of Non‐Capital Expenditures 1.0% 1.0% 2.2% 3.5% 3.2% 3.3% 3.7% 7.1% 3.1% 3.3% Notes: 2The Development Services Department was formed in FY15. 3Contributions from the Stanford University Medical Center. Source: Annual Financial Statements, Governmental Funds, Statement of Revenues, Expenditures and Changes in Fund Balances 1Comprised of the following departments: City Council, City Manager, City Attorney, City Clerk, City Auditor, Administrative Services and Human Resources. Fiscal Year Ended June 30 CITY OF PALO ALTO Changes in Fund Balances of Governmental Funds Last Ten Fiscal Years (Modified accrual basis of accounting) (Amounts in thousands) 148 Fiscal Commercial & City of Year Residential Industrial Palo Alto Total 2009 17,939 83,710 2,823    104,472                  2010 19,898 89,315 2,890    112,103                  2011 19,848 88,076 2,991    110,915                  2012 20,328 85,895 3,352       109,575                  2013 19,951 86,998 3,265       110,214                  2014 18,744 88,419 3,225       110,388                  2015 17,404 88,257 3,234       108,895                  2016 18,191 86,715 3,127       108,033                  2017 20,269 90,635 3,780       114,684                  2018 22,764 100,200                   4,264       127,228                  * The electric operating revenues include sales to customers and city departments, and excludes the sale of surplus energy, utility billing discounts, and bad debt expense. 529 Bryant Street LLC Technology City of Palo Alto Municipal Communications & Power Industries (CPI)Research Hewlett‐Packard Company Computer Hewlett‐Packard Enterprise Computer Space Systems/Loral, LLC Satellite & Satellite Systems Stanford Hospital & Clinics Hospital Varian Medical Systems, Inc.Manufacturing Veterans Administration Hospital Hospital VMware, Inc.Computer Number Kilowatt‐hour of Customers Sales (kWh)Revenue2 Residential 25,502 150,064,098           22,764$             Commercial 3,788 588,217,628           82,299               Industrial 79      141,387,345           17,901               CPA 144 29,780,348             4,264                  Total 29,513 909,449,419           127,228$           City of Palo Alto Power Purchase  Western Area Power Administration Hydroelectric 39.3% Forward Market Purchases ‐9.4% Wind Energy 9.6% Landfill Gas Energy 11.4% Solar Energy 36.3% Northern California Power Agency Hydroelectric 12.4% Short‐Term Market 0.4% Source: City of Palo Alto, Utilities and Accounting Departments Customer (alphabetical order)Type of Business 1The top ten customers accounted for approximately 35.2% of total kWh consumption (317,136,608 kWh)  and 31.0% of revenue ($40,521,589). The largest customer accounted for 8.1% of total kWh consumption  and 6.9% of revenue. The smallest customer accounted for 1.9% of total kWh consumption and 1.6% of  revenue. Revenue used to determine top ten electric customers includes metered and non‐metered  charges, adjustments, surcharges and discounts. Revenue does not include Utility Users Tax (UUT) and  deposits. 2Revenue includes metered and non‐metered charges and revenue adjustments. Revenue does not  include California Energy Commission (CEC) surcharges, Utility Users Tax (UUT), Primary Voltage and Rate  Assistance (RAP) discounts and deposits. Parts of this schedule are provided as required by the Continuing  Disclosure Agreement for the City's Utility Revenue Bond and are not required by Governmental  Accounting Standards Board (GASB).  CITY OF PALO ALTO Electric Operating Revenue by Source * Last Ten Fiscal Years (Amounts in thousands) Top Ten Electric Customers by Revenue1 149 Top Ten Largest Water Utility Customers (alphabetical order) City of Palo Alto Oak Creek Apartments Palo Alto Hills Golf & Country Club Palo Alto Unified School District Simon Property Group Stanford Hospital & Clinics Stanford West Management Veterans Administration Hospital Vi at Palo Alto VMware Inc. The top ten customers total consumption is 867,488 CCF with revenue of $8,116,799. This amount accounts for approximately 19% of total consumption and 17.6% of total revenue. The largest customer (other than the City of Palo Alto) accounted for 2.4% of  consumption and 2.1% of revenue. The smallest customer accounted for 0.8% of consumption and 0.7% of revenue. Revenue used to determine top ten water utility  customers includes metered and non‐metered charges, adjustments, surcharges  and discounts. Revenue does not include Utility Users Tax (UUT) and deposits. Note: Source: City of Palo Alto, Utilities Department CITY OF PALO ALTO Supplemental Disclosure for Water Utilities Fiscal Year 2018 This schedule is provided as required by the Continuing Disclosure Agreement for the City's Utility Revenue  Bond and is not required by Governmental Accounting Standards Board (GASB).  150 Top Ten Largest Gas Utility Customers (alphabetical order) City of Palo Alto Communications & Power Industries (CPI) Hewlett Packard Palo Alto Unified School District Space Systems/Loral, LLC Stanford Hospital & Clinics Stanford School of Medicine Stanford University Veterans Administration Hospital VMware Inc. The top ten customers total consumption is 6,972,852 THM with revenue of $7,608,768. This amount accounts for approximately 24.5% of total consumption and 21% of total revenue. The largest customer (other than the City of Palo Alto) accounted for 6.2% of  consumption and 5.2% of revenue. The smallest customer accounted for 1.1% of consumption and 1% of revenue.  Note: Source: City of Palo Alto, Utilities Department CITY OF PALO ALTO Supplemental Disclosure for Gas Utilities Fiscal Year 2018 This schedule is provided as required by the Continuing Disclosure Agreement for the City's Utility Revenue  Bond and is not required by Governmental Accounting Standards Board (GASB).  151 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Net Local Secured Roll Land 10,420,139$       11,007,650$       11,011,160$       11,352,993$       12,255,515$       13,357,851$       14,409,837$       15,718,665$       17,333,969$       18,770,642$        Improvements 10,527,617         10,752,671         10,962,928         11,703,597         12,381,306         12,984,735         13,633,986         14,998,502         16,752,295         18,642,970          Personal property 303,688              288,148              241,280              257,436              287,296              307,499              290,590              310,929              306,576              300,352               21,251,444         22,048,469         22,215,368         23,314,026         24,924,117         26,650,085         28,334,413         31,028,096         34,392,840         37,713,964          Less: Exemptions net of state aid (1,871,292)          (1,809,119)          (1,757,241)          (2,346,728)          (2,589,653)          (2,610,521)          (2,761,495)          (3,409,836)          (4,244,500)          (5,203,968)           Total Net Local Secured Roll 19,380,152         20,239,350         20,458,127         20,967,298         22,334,464         24,039,564         25,572,918         27,618,260         30,148,340         32,509,996          Public utilities 2,573                    2,573                    2,573                    2,573                    2,573                    2,573                    2,573                    2,573                    2,573                    2,573                    Unsecured property 1,702,884           1,638,436           1,495,574           1,516,837           1,355,970           1,493,922           1,622,636           1,794,921           1,803,468           1,922,170            Total Assessed Value 21,085,609$       21,880,359$       21,956,274$       22,486,708$       23,693,007$       25,536,059$       27,198,127$       29,415,754$       31,954,381$       34,434,739$        Total Direct Tax Rate 1%1%1%1%1%1%1%1%1%1% Note: The State Constitution requires property to be assessed at 100% of the most recent purchase price, plus an increment of no more than 2% annually,  plus any local over‐rides. These values are considered to be full market values. Source:  County of Santa Clara Assessor's Office CITY OF PALO ALTO Assessed Value of Taxable Property Last Ten Fiscal Years (Amounts in thousands) Fiscal Year Ended June 30 $13,000,000 $15,000,000 $17,000,000 $19,000,000 $21,000,000 $23,000,000 $25,000,000 $27,000,000 $29,000,000 $31,000,000 $33,000,000 $35,000,000 $37,000,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ T h o u s a n d s Total Assessed Value 152 Basic County County Total County County Hospital City Library Santa Clara Affordable  Direct and Fiscal Wide Retirement G.O. Bond G.O. Bond Valley Water School Community Midpeninsula Housing Bond Overlapping Year Levy Levy (Measure A)1 (Measure N)2 District District College Open Space3 (Measure A)4 Rates 2009 1.00        0.0388           ‐‐  0.0061             0.0674        0.0123            1.12              2010 1.00        0.0388          0.0122             ‐  0.0074             0.0686        0.0322            1.16              2011 1.00        0.0388          0.0095             0.0171             0.0072             0.0751        0.0326            1.18              2012 1.00        0.0388          0.0047             0.0155             0.0064             0.0742        0.0297            1.17              2013 1.00        0.0388          0.0051             0.0129             0.0069             0.0718        0.0287            1.16              2014 1.00        0.0388          0.0035             0.0177             0.0070             0.0655        0.0290            1.16              2015 1.00        0.0388          0.0091             0.0159             0.0065             0.0657        0.0276            1.16              2016 1.00        0.0388          0.0088             0.0148             0.0057             0.0604        0.0240            0.0008            1.15              2017 1.00        0.0388          0.0086             0.0129             0.0086             0.0591        0.0234            0.0006            1.15              2018 1.00        0.0388          0.0082             0.0118             0.0062             0.0570        0.0220            0.0009            0.0127             1.16              Notes:1The County General Obligation Bond (Measure A) was passed in 2008 to fund the seismic upgrade of the Santa Clara Valley Medical Center. Rates were first levied for the 2009‐10 fiscal year. 2The City of Palo Alto General Obligation Bond (Measure N) was passed in 2008 to fund the construction and  renovation of three of the City's libraries. Rates were first levied for the 2010‐11 fiscal year. 3The Midpeninsula Regional Open Space District Bond Issue and Property Tax, Measure AA, passed in 2014. 4The Santa Clara County Affordable Housing Bond ‐ Measure A 2016 passed on November 8, 2016. Source: County of Santa Clara, Tax Rates and Information CITY OF PALO ALTO Property Tax Rates All Overlapping Governments Last Ten Fiscal Years  $1.10  $1.12  $1.14  $1.16  $1.18  $1.20 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Rate per $100 of Assessed Value 153 Fiscal Year Total Tax Percentage  Collections in Percentage of Ended June 30 Levy1 for FY Amount of Levy Subsequent Years 2 Amount Levy 2009 25,432            25,432          100%‐  25,432       100% 2010 25,981            25,981          100%‐  25,981       100% 2011 25,688            25,688          100%‐  25,688       100% 2012 26,494            26,494          100%‐  26,494       100% 2013 28,742            28,742          100%‐  28,742       100% 2014 30,587            30,587          100%‐  30,587       100% 2015 34,117            34,117          100%‐  34,117       100% 2016 36,607            36,607          100%‐  36,607       100% 2017 39,381            39,381          100%‐  39,381       100% 2018 42,839            42,839          100%‐  42,839       100% Notes: Source:Annual Financial Statements, Government Funds, Statement of Revenues, Expenditures and  Changes in Fund Balances. 1During fiscal year 1995, the County of Santa Clara began providing the City 100% of its tax levy  under an agreement which allows the county to keep all interest and delinquency charges  collected. 2Effective fiscal year 1994, the City is on the Teeter Plan, under which the County of Santa Clara  pays the full tax levy due. All prior delinquent taxes were also received in that fiscal year. CITY OF PALO ALTO Property Tax Levies and Collections Last Ten Fiscal Years (Amounts in thousands) Collected within the  Fiscal Year of the Levy Total Collections to Date 154 Taxable Assessed  Value Rank Percentage of  Total Taxable  Assessed Value Taxable  Assessed  Value Rank Percentage of  Total Taxable  Assessed Value Leland Stanford Jr. University 5,119,879$            1 14.9%3,288,925$   1 15.6% Loral Space & Communications 235,175 2 0.7%182,172         2 0.9% Google Inc.209,211 3 0.6% EOSII Palo Alto Technology Center LLC 126,019 4 0.4% 395 Page Mill LLC 115,984 5 0.3% Hudson Embarcadero Place LLC 112,328 6 0.3% Hohbach Realty Co. LP 92,081  7 0.3% SI 45 LLC 79,554  8 0.2% BVK Hamilton Ave LLC 71,754  9 0.2% LVBL Ventures LLC 69,744  10 0.2% Arden Realty Limited Partnership 109,703         3 0.5% Whisman Ventures, LLC 102,479         4 0.5% ECI 2 Bayshore LLC/ECI Hamilton LLC 66,421            5 0.3% Blackhawk Parent LLC 48,960            6 0.2% Pacific Hotel Dev Venture LP 42,829            7 0.2% 300 / 400 Hamilton Associates 40,413            8 0.2% 505 Hamilton Avenue Partners LLC 39,355            9 0.2% Ronald & Ann Williams Charitable Foundation 39,189            10 0.2% Total 6,231,729$            18.1%3,960,446$   18.8% Total City Taxable Assessed Value: FY 2018 34,434,739$           FY 2009 21,085,609$           Source: California Municipal Statistics, Inc. Fiscal Year 2018 Fiscal Year 2009 Taxpayer CITY OF PALO ALTO Principal Property Taxpayers Current Year and Nine Years Ago (Amounts in thousands) 155 2017‐2018 No. of Assessed % of No. of % of Taxable % of Valuation1 Total Parcels Total Parcels Total Non‐Residential: Agricultural/forest 32,699,093$            0.10 % 49            0.24 % 31            0.15 % Commercial 1,919,466,847         5.90 458          2.21 455          2.23 Professional/office 4,829,648,560         14.86 550          2.65 530          2.60 Industrial/research & development 2,014,536,745         6.20 232          1.12 231          1.13 Recreational 45,199,508              0.14 14            0.07 12            0.06 Government/social/institutional 81,684,346              0.25 111          0.53 46            0.23 Miscellaneous 7,539,575 0.02 18            0.09 17            0.08 Subtotal Non‐Residential 8,930,774,674$      27.47 % 1,432       6.90 % 1,322       6.48 % Residential: Single family residence 19,059,115,051$    58.63 % 15,066   72.54 % 15,019   73.66 % Condominium/townhouse 2,429,099,115         7.47 3,033       14.60 3,029       14.86 Mobile Home 72,701 0.00 7              0.03 7              0.03 2‐4 Residential units 486,523,359            1.50 502          2.42 502          2.46 5+ Residential units 1,426,234,104         4.39 341         1.64 326         1.60 Subtotal Residential 23,401,044,330$    71.98 % 18,949   91.24 % 18,883   92.61 % Vacant Parcels 178,176,982$          0.55 % 387          1.86 % 184          0.90 % Total 32,509,995,986$    100         % 20,768   100          % 20,389   100 % Notes: This schedule is provided as required by the Continuing Disclosure Agreement for the City's General Obligation 2010 and 2013A Bonds and is not required by Governmental Accounting Standards Board (GASB). Therefore, ten years of comparison data is not presented. 1Local secured assessed valuation, excluding tax‐exempt property. Source: California Municipal Statistics, Inc. CITY OF PALO ALTO Assessed Valuation and Parcels by Land Use As of June 30, 2018 156 No. of Taxable Average Parcels1 Assessed Valuation Single Family Residential 15,019 $1,269,000 No. of % of Cumulative % of  Cumulative Taxable Total % of Total Total Total % of Total Parcels1 Parcels Parcels Valuation Valuation Valuation 1,104        7.35       7.35             88,330,950$ 0.46         0.46              1,724        11.48    18.83           239,011,366 1.25         1.72              788  5.25        24.08           194,789,586 1.02         2.74              700  4.66        28.74           242,034,889 1.27         4.01              628  4.18        32.92           282,502,458 1.48         5.49              678  4.51        37.43           373,803,650 1.96         7.45              638  4.25        41.68           413,101,443 2.17         9.62              581  3.87        45.55           434,768,134 2.28          11.90            529  3.52        49.07           451,055,602 2.37          14.27            615  4.09        53.17           584,609,797 3.07          17.34            557  3.71        56.87           585,596,977 3.07          20.41            528  3.52        60.39           606,426,223 3.18          23.59            414  2.76        63.15           517,138,530 2.71          26.30            440  2.93        66.08           592,647,993 3.11          29.41            419  2.79        68.87           607,508,258 3.19          32.60            376  2.50        71.37           582,467,595 3.06          35.66            390  2.60        73.97           643,233,203 3.37          39.03            318  2.12        76.08           556,202,247 2.92          41.95            315  2.10        78.18           582,513,341 3.06          45.01            264  1.76        79.94           513,482,644 2.69          47.70            3,013        20.06    100.00 9,967,890,165 52.30        100.00  15,019      100.00  19,059,115,051$                  100.00      Notes: Source: California Municipal Statistics, Inc. Assessed Valuation Assessed Valuation CITY OF PALO ALTO Per Parcel Assessed Valuation of Single Family Residential As of June 30, 2018 2017‐2018 Median $600,000‐699,999 $19,059,115,051 $923,460 2017‐2018 Assessed Valuation $0‐99,999 $100,000‐199,999 $200,000‐299,999 $300,000‐399,999 $400,000‐499,999 $500,000‐599,999 $1,800,000‐1,899,999 $700,000‐799,999 $800,000‐899,999 $900,000‐999,999 $1,000,000‐1,099,999 $1,100,000‐1,199,999 $1,200,000‐1,299,999 $1,300,000‐1,399,999 $1,400,000‐1,499,999 $1,500,000‐1,599,999 $1,600,000‐1,699,999 $1,700,000‐1,799,999 This schedule is provided as required by the Continuing Disclosure Agreement for the City's General  Obligation 2010 and 2013A Bonds and is not required by Governmental Accounting Standards Board (GASB).  Therefore, ten years of comparison data is not presented. 1Improved single family residential parcels. Excludes condominiums and parcels with multiple family units. $1,900,000‐1,999,999 $2,000,000 and greater Total 157 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 7,605$       6,765$       5,895$       1,685$       1,560$       1,430$       1,285$       1,135$       975$          8,970$       ‐                 55,305       55,305       54,540       74,235       73,215       71,795       65,210       63,710       62,140       2011 Lease‐Purchase Agreement ‐                 ‐                 ‐                 2,764         2,400         2,026         1,643         1,248         842            426            Add: unamortized premium ‐                 3,766         3,640         3,514         4,400         4,242         4,084         3,926         3,768         3,610         ‐                 (571)           ‐               ‐               ‐               ‐               ‐               ‐               ‐                   7,605         65,265       64,840       62,503       82,595       80,913       78,807       71,519       69,295       75,146       38,744       72,104       69,551       65,879       63,104       60,224       57,224       54,095       50,825       47,400       Energy Tax Credits 1,300         1,200         1,100         1,000         900            800            700            600            500            400            State Water Resources Loan 9,000         13,080       16,696       15,900       15,109       14,309       13,500       12,681       15,034       17,711       (2,479)        (2,737)       (229)          580            543            867            803            737            673            608            46,565       83,647       87,118       83,359       79,656       76,200       72,227       68,113       67,032       66,119       Outstanding Debt 54,170$     148,912$  151,958$  145,862$  162,251$  157,113$  151,034$  139,632$  136,327$  141,265$  1.53% 4.51% 3.86% 3.36% 3.36% 3.24% 2.94% 2.52% 2.38% 2.33% Population 64,484       65,408       64,417       65,544       66,368       66,861       66,029       66,968       66,478       66,649       0.84$         2.28$         2.36$         2.23$         2.44$         2.35$         2.29$         2.09$         2.05$         2.12$         Notes: Sources: 2018 Official City Data Set (population) California Department of Transportation Long‐Term Socio‐Economic Forecasts (personal income) Annual Financial Statements and Note 7 General Long‐Term Obligations Governmental Activities CITY OF PALO ALTO Ratio of Outstanding Debt by Type Last Ten Fiscal Years (Amounts in thousands) Fiscal Year Ended June 30 Percentage of Personal Income1 Certificates of Participation General Obligation Bonds Less: unamortized discount/     issuance costs Total Governmental Activities Business‐type Activities Utility Revenue Bonds Less: unamortized discount/     issuance costs Total Business‐type Activities Total Primary Government Debt Per Capita 1See the schedule of Demographic and Economic Statistics for personal income data. Per capita personal income is only available for Santa Clara  County, therefore personal income is the product of the countywide per capita amount and the City's population. County of Santa Clara (assessed valuation) $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 $180,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ T h o u s a n d s Total Governmental Activities Total Business‐type Activities 158 2017‐2018 Assessed Valuation 34,434,739,002$      Percentage Amount Applicable Applicable Total Debt to City of to City of Outstanding Palo Alto1 Palo Alto Santa Clara County 1,012,400,000$        7.66%77,509,344$               Foothill‐DeAnza Community College District 633,997,978             22.10% 140,145,253               Palo Alto Unified School District 298,433,689             90.08% 268,841,004               Fremont Union High School District 433,280,088             0.01%43,328  Los Gatos‐Saratoga Joint Union High School District 105,845,000             0.01%12,701  Mountain View‐Los Altos Union High School District 52,243,375                0.96%502,059  Cupertino Union School District 270,528,688             0.02%45,990  Los Altos School District 57,145,000                1.21%692,026  Mountain View‐Whisman School District 185,455,000             0.75%1,381,640                    Saratoga Union School District 25,833,901                0.03%6,717  Whisman School District 15,293,173                1.96%299,593  City of Palo Alto 62,140,000                100%62,140,000                 El Camino Hospital District 127,800,000              0.08% 102,240  Midpeninsula Regional Open Space District 93,350,000                 12.97% 12,107,495                 City of Palo Alto Special Assessment Bonds 22,370,000                 100% 22,370,000                 Santa Clara Valley Water District Benefit Assessment District 82,285,000                 7.66% 6,299,740                    Total Direct and Overlapping Tax and Assessment Debt 592,499,130               590,242,965              7.66% 45,189,001                               357,547,175  7.66%                  27,373,812  4,985,000 7.66%381,652                  28,803,859 22.10%6,367,093  4,424,000 0.01%  531  1,845,000 0.96%17,730  Mountain View‐Whisman School District Certificates of Participation                 32,850,000 0.75%244,733  3,905,000 0.03%1,015  Los Altos School District Certificates of Participation            2,616,389 1.21%31,684  City of Palo Alto General Fund Obligations 9,395,852 100%9,395,852  2,470,000 7.66%189,103  Midpeninsula Regional Open Space Park District General Fund Obligations 123,040,600              12.97%                 15,958,366   $            105,150,572                   31,151,167   $              73,999,405   $            666,498,535   Ratio to  Assessed Valuation Total Direct Debt 0.21%71,535,852$              3 Total Overlapping Debt 1.73%594,962,683               Total Direct and Overlapping Debt 1.94%666,498,535$            2 Notes: 1Percentage of overlapping agency's assessed valuation located within boundaries of the city. 2Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non‐bonded capital lease obligations. Source:  California Municipal Statistics, Inc. Santa Clara County General Fund Obligations CITY OF PALO ALTO Computation of Direct and Overlapping Debt As of June 30, 2018 Direct and Overlapping Tax and Assessment Debt Direct and Overlapping General Fund Debt 3Total direct debt excludes any premiums, discounts or other amortization amounts. Santa Clara County Pension Obligations Santa Clara County Board of Education Certificates of Participation Foothill‐DeAnza Community College District Certificates of Participation Los Gatos‐Saratoga Joint Union High School District Certificates of Participation Mountain View‐Los Altos Union High School District Certificates of Participation Saratoga Union High School District Certificates of Participation Less: Santa Clara County supported obligations Total Net Direct and Overlapping General Fund Debt Overlapping debt is the financial obligations of one political jurisdiction that also falls partly on a nearby jurisdiction. The amount of debt of each  unit applicable to the reporting unit is arrived at by 1) determining what percentage of the total assessed value of the overlapping jurisdiction  lies within the limits of the reporting unit, and 2) applying this percentage to the total debt of the overlapping jurisdiction.   Santa Clara County Vector Control District Certificates of Participation Total Gross Direct and Overlapping General Fund Debt Total Combined Debt 159 Assessed  Valuation: Secured property assessed value, net of exempt real property 34,434,739$         Bonded Debt Limit (3.75% of Assessed Value) 1 1,291,303  Direct Debt: Certificates of Participation 8,970  Lease Purchase Agreement 426  General Obligation bonds 62,140                  Total Direct Debt3 71,536                  Less: Amount of Debt Not Subject to Limit 2 9,396  Total Net Debt Applicable to Limit 62,140  Legal Bonded Debt Margin 1,229,163$                 Total Bonded Total Net Debt Legal Total Net Debt Ratio of Net General Fiscal Assessed Debt Limit Applicable to Bonded Debt Applicable to the Debt to Bonded Debt Year Value (AV)(3.75% of AV)Limit Margin Population Debt as a %Assessed Value Per Capita 2009 21,085,609          790,710               ‐  790,710               64,484 0.00%‐ 0.00 2010 21,880,359          820,513               55,305                 765,208               65,408 6.74%0.0025                  0.85 2011 21,956,274          823,360               55,305                 768,055               64,417 6.72%0.0025                  0.86 2012 22,486,708          843,252               54,540                 788,712               65,544 6.47%0.0024                  0.83 2013 23,693,007          888,488               74,235                 814,253               66,368 8.36%0.0031                  1.12 2014 25,536,058          957,602               73,215                 884,387               66,861 7.65%0.0029                  1.10 2015 27,198,127          1,019,930            71,795                 948,135               66,029 7.04%0.0026                  1.09 2016 29,415,754          1,103,091            65,210                 1,037,881            66,968 5.91%0.0022                  0.97 2017 31,954,381          1,198,289            63,710                 1,134,579            66,478 5.32%0.0020                  0.96 2018 34,434,739          1,291,303            62,140                 1,229,163            66,649 4.81%0.0018                  0.93 Notes: Source: Annual Financial Statements, Assessed Value of Taxable Property and Note 7 General Long‐Term Obligations 2In accordance with California Government Code Section 43605, only the City's General Obligation bonds are subject to the legal debt limit of 15%.  Enterprise Fund debt is not subject to legal debt margin. CITY OF PALO ALTO Computation of Legal Bonded Debt Margin As of June 30, 2018 (Amounts in thousands) 1California Government Code, Section 43605 sets the debt limit at 15% of the assessed value of all real and personal property of the City. Because this  Code section was enacted when assessed value was 25% of market value, the limit is calculated at one‐fourth, or 3.75%. This legal debt margin applies  to General Obligation debt. Prior year limits have been adjusted to conform to the current year methodology. 3Total direct debt excludes any premiums, discounts or other amortization amounts. 160 Less: Net Revenue Fiscal Gross Direct Operating Available for Year Revenue Expenses2 Debt Service Principal Interest3 Total Coverage Ratio 2009 242,693            180,880                 61,813 1,590            2,024            3,614            17.10                   2010 230,308            171,320                58,988 1,755            1,954            3,709            15.90                   2011 234,278            151,641                82,637 2,655            3,261            5,916            13.97                   2012 235,160            169,777                65,383 2,945            2,959            5,904            11.07                   2013 237,842            173,510                64,332 2,875            3,167            6,042            10.65                   2014 239,948            176,718                63,230 2,980            3,073            6,053            10.45                   2015 234,025            188,276                45,749 3,100            2,954            6,054            7.56  2016 235,386            186,793                48,593 3,230            2,823            6,053            8.03  2017 264,734            205,102                59,632 3,370            2,678            6,048            9.86  2018 288,610            231,255                57,355 3,525            2,524            6,049            9.48  Notes:1Airport, Refuse and Fiber Optics funds have no debt and are therefore excluded from this schedule. 2Excludes depreciation and amortization expense. 3Excludes joint venture debt service and federal interest subsidy. Source: City of Palo Alto, Accounting Department Debt Service CITY OF PALO ALTO Revenue Bond Coverage Business‐type Activities1 Last Ten Fiscal Years (Amounts in thousands) $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ T h o u s a n d s Net Revenue Available for Debt Service Total Debt Service 161 Fiscal Year 2009 2,251             2,443                  1,431           1,258          315              493             214            4,284                6,635             19,324                 2010 2,215             2,418                  1,402           1,254          343              549             219            4,458                5,556             18,414                 2011 2,374             2,621                  1,564           1,292          381              630             242            4,873                6,322             20,299                 2012 2,445             2,937                  1,590           1,492          387              722             257            5,049                7,034             21,913                 2013 2,478             3,160                  1,465           1,656          424              765             259            4,056                13,729          27,992                 2014 2,097             3,541                  1,555           2,041          392              772             444            4,845                9,890             25,577                 2015 2,398             3,894                  1,672           1,708          435              699             265            3,674                11,253          25,998                 2016 2,250             4,134                  1,410           1,694          448              582             257            4,949                12,423          28,147                 2017 2,036             4,079                  1,513           1,794          542              502             259            3,810                14,325          28,860                 2018 2,001             4,224                  1,716           1,647          428              614             243            3,184                15,663          29,720                 Source: California State Board of Equalization, compiled by MuniServices LLC Sales Tax Rates for the Fiscal Year ended June 30, 2018 State Rate:7.25% Special District Tax Rates: Santa Clara County Transit District (SCCT) 0.50% Santa Clara County Valley Transportation Authority (SCVT) 0.50% Santa Clara VTA BART Operating and Maintenance Transactions and Use Tax (SVTB) 0.125% Santa Clara Retail Transactions and Use Tax (SCCR) 0.125% Santa Clara County Valley Transportation Authority (SCVT)  0.50% Total Sales and Use Tax Rate:9.000% Source: California State Board of Equalization CITY OF PALO ALTO Taxable Transactions by Type of Business Last Ten Fiscal Years (Amounts in thousands) Total ECONOMIC SEGMENT Department  Stores Restaurants Furniture/  Appliance Food  Markets Service  Stations Drug  Stores Other Retail All Other Apparel  Stores Department Stores 7%Restaurants 14% Furniture/ Appliance 6% Apparel Stores 5% Food Markets 1% Service Stations 2% Drug Stores 1% Other Retail 11% All Other 53% Fiscal Year 2018 162 Santa Clara Santa Clara City of Palo Alto City of Palo Alto Santa Clara City Population  County Total  County Per Capita Fiscal City of Palo Alto Unemployment School County as a Percentage of Personal Income Personal Income Year Population Rate Enrollment Population County Population (in thousands)(in thousands) 2009 64,484 6.5%11,329 1,857,621                  3.47% 101,800,000          54,801 2010 65,408 6.2%11,565 1,880,876                  3.48% 95,000,000            50,508 2011 64,417 5.3%12,024 1,786,443                  3.61% 109,300,000          *61,183 * 2012 65,544 4.7%12,286 1,813,860                  3.61% 120,100,000          *66,212 * 2013 66,368 3.6%12,396 1,840,218                  3.61% 134,000,000          *72,817 * 2014 66,861 2.8%12,483 1,866,208                  3.58% 135,200,000          *72,446 * 2015 66,029 2.7%12,532 1,890,929                  3.49% 147,300,000          *77,898 * 2016 66,968 2.9%12,488 1,915,102                  3.50% 158,700,000          *82,868 * 2017 66,478 2.4%12,261 1,930,215                  3.44% 166,600,000          86,312 2018 66,649 2.5%12,230 1,948,176                  3.42% 177,600,000          91,162 Note: Data on personal income and per capita personal income is only available for Santa Clara County. Source: Beginning in 2015 population is sourced from the US Census Bureau Community Survey (via the City of Palo Alto's Official City Data Set). State of California Employment Development Office (unemployment rate) Palo Alto Unified School District (school enrollment) * California Department of Transportation Long‐Term Socio‐Economic Forecasts (personal income). Forecasts from prior years are updated annually. CITY OF PALO ALTO Demographic and Economic Statistics Last Ten Fiscal Years  60,000  61,000  62,000  63,000  64,000  65,000  66,000  67,000  68,000 City Population  10,000  10,500  11,000  11,500  12,000  12,500  13,000 School Enrollment 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%City Unemployment Rate 163 Number of  Employees Rank Percentage of Total  City Employment Number of  Employees Rank Percentage of Total  City Employment Stanford Health Care 5,500           1 4.2%5,025           2 7.8% Lucile Packard Children's Hospital 5,400           2 4.1%3,326           4 5.2% Stanford University2 4,300           3 3.3%9,821           1 15.2% Veteran's Affairs Palo Alto Health Care System 3,900           4 3.0%3,500           3 5.4% VMware Inc.3,500           5 2.7% SAP Labs Inc.3,500           6 2.7% Space Systems/Loral 2,800           7 2.1%1,700           7 2.6% Hewlett‐Packard Company 2,500           8 1.9%2,001           5 3.1% Palo Alto Medical Foundation 2,200           9 1.7%2,000           6 3.1% Varian Medical Systems 1,400           10 1.1% Wilson Sonsini Goodrich & Rosati 1,500           8 2.3% Palo Alto Unified School District 1,304           9 2.0% City of Palo Alto 1,100           10 1.7% Total 35,000        26.8%31,277        48.5% Estimated Total City Day Population: FY 2018 130,443       FY 2008 64,484         Notes: Source:   2018 Official City Data Set (total City day population); AtoZ databases; Stanford website, Stanford Planning Office. CITY OF PALO ALTO Principal Employers Current Year and Nine Years Ago FY 20181 FY 2009 Employer 1Available data sources are limited and may be unreliable. The City does not affirm the validity of this data. 2018 numbers are  rounded. Figures may include employees not located within City limits. 2Stanford University number of employees was provided by the Stanford Office of Planning in FY17 and includes only employees  located in Palo Alto. 164 This page is left intentionally blank.  165 2008 2009 2010 2011 Governmental activities Community Services Number of theater performances 166  159  174  175   Total hours of athletic field usage 2 63,212  45,762  41,705  42,687   Number of rounds of golf 74,630  72,170  69,791  67,381   Enrollment in recreation classes (includes summer camps)13,851  13,091  12,880  12,310   Planning and Community Environment Planning applications completed 257  273  226  238   Building permits issued 3,046 2,543 2,847 3,559  Caltrain average weekday boarding 3 4,589 4,407 4,359 4,923  Police Calls for service 58,742  53,275  55,860  52,159   Total arrests 3,253 2,612 2,451 2,288  Parking citations issued 50,706  49,996  42,591  40,426   Animal Services Number of service calls 3,059 2,873 2,692 2,804  Number of animals handled 3,532 3,422 3,147 3,323  Fire Calls for service 7,723 7,549 7,468 7,555  Number of fire incidents 192  239  182  165   Number of fire inspections 4 1,277 1,028 1,526 1,807  Library  Total number of cardholders 53,740  54,878  51,969  53,246   Total number of items in collection 279,403                  293,735                  298,667                  314,101                   Total checkouts 1,542,116              1,633,955              1,624,785              1,476,648               Public Works Street resurfacing (lane miles)27  23  32  29   Number of potholes repaired 1,977 3,727 3,149 2,986  Sq. ft. of sidewalk replaced or permanently repaired 83,827  56,909  54,602  71,174   Number of trees planted 188  250  201  150   Tons of materials recycled or composted 52,196  49,911  48,811  56,586   Business‐type activities Electric Number of customer accounts 29,024  28,527  29,430  29,708   Residential MWH consumed 162,680                  159,899                  163,098                  160,318                   Gas Number of customer accounts 23,502  23,090  23,724  23,816   Residential therms consumed 11,969,151            11,003,088            11,394,712            11,476,609             Water Number of customer accounts 19,942  19,422  20,134  20,248   Residential water consumption (CCF)2,746,980              2,566,962              2,415,467              2,442,415               Wastewater collection Number of customer accounts 21,970  22,210  22,231  22,320   Millions of gallons processed 8,510 7,958 8,184 8,652  Notes: 2According to the department, this measure was not accurately tracked during FY13 or FY14. Source: CITY OF PALO ALTO Operating Indicators by Function/Program Last Ten Fiscal Years1 City of Palo Alto Performance Report (formerly the Service Efforts and Accomplishments Report); 2017 Official City Data Set  (Caltrain) 3Prior‐year data has been updated based on annual counts revised by Caltrain. Beginning 2015, data source is Official City Data  Set. 1Ten most recent years available. Fiscal Year Ended June 30 FUNCTIONS/PROGRAMS 4The method for calculating the number of fire inspections changed in FY17. The department now uses a more detailed feature  which categorizes inspections by type and location. 166 2012 2013 2014 2015 2016 2017 175  184  108  172  161  171   44,226  ‐‐47,504 65,723 82,526  65,653  60,153  46,527  42,048  42,573  ‐   11,703  11,598  11,997  12,586  12,974  11,649   204  307  310  335  383  365   3,320 3,682 3,624 3,844 3,492 2,970  5,730 6,763 7,564 8,294 9,622 9,994  51,086  54,628  58,559  59,795  53,870  53,901   2,212 2,274 2,589 3,273 2,988 2,745  41,875  43,877  36,551  41,412  37,624  33,661   3,051 2,909 2,398 2,013 2,421 2,399  3,379 2,675 2,480 2,143 2,184 2,211  7,796 7,904 7,829 8,548 8,882 9,056  186  150  150  135  150  155   1,654 2,069 1,741 1,964 2,806 5,476  60,283  51,007  46,950  51,792  57,307  54,676   306,160                  277,749                  361,103                  429,460                  461,292                  427,548                   1,559,932              1,512,975              1,364,872              1,499,406              1,400,926              1,524,614               40  36  36  31  39  39   3,047 2,726 3,418 2,487 3,435 3,449  72,787  82,118  74,051  120,776                  115,293                  17,275   143  245  148  305  387  319   51,725  47,941  49,594  50,546  56,438  60,582   29,545  29,299  29,338  29,065  29,304  29,616   160,604                  156,411                  153,190                  145,284                  150,112                  148,986                   23,915  23,659  23,592  23,461  23,467  23,637   11,522,999            10,834,793            10,253,776            8,537,754              9,535,377              10,233,669             20,317  20,043  20,037  20,061  19,994  20,213   2,513,595              2,521,930              2,496,549              2,052,176              1,696,383              1,856,879               22,421  22,152  22,105  21,990  22,016  22,216   8,130 7,546 7,186 6,512 6,387 7,176  Fiscal Year Ended June 30 167 2009 2010 2011 2012 2013 FUNCTION/PROGRAM Public Safety Fire: Fire Stations Operated 8                8                8                7                7                 Police: Police Stations 1                1                1                1                1                 Police Patrol Vehicles 30              30              30              30              30               Community Services Acres ‐ Downtown/Urban Parks2 157            157            157            157            157             Acres ‐ Open Space2 3,744         3,744         3,744         3,744         3,744          Acres ‐ Parks and Preserves2 ‐                 ‐                 ‐                 ‐                 ‐                  Acres ‐ Open Space2 ‐                 ‐                 ‐                 ‐                 ‐                  Acres ‐ Municipal Golf Course2 ‐                 ‐                 ‐                 ‐                 ‐                  Parks and Preserves 36              36              36              36              36               Golf Course (see above for acreage)1                1                1                1                1                 Tennis Courts 51              51              51              51              51               Athletic Center 4                4                4                4                4                 Community Centers 4                4                4                4                4                 Theaters 3                3                3                3                3                 Cultural Center/Art Center 1                1                1                1                1                 Junior Museum and Zoo 1                1                1                1                1                 Swimming Pools 1                1                1                1                1                 Nature Center 3                3                3                3                3                 Libraries Libraries 5                5                5                5                5                 Public Works: Number of Trees Maintained3 32,007       32,007      31,993      31,890      31,923       Electric Utility1 Miles of Overhead Lines 193            193            193            223            222             Miles of Underground Lines 253            253            253            245            246             Water Utility Miles of Water Mains 214            214            214            234            233             Gas Utility Miles of Gas Mains 207            205            205            210            210             Waste Water Miles of Sanitary Sewer Lines 207            207            207            217            217             Note: Source: City of Palo Alto 3Due to an error in the beginning balance, the number of trees maintained was adjusted for all prior years in FY18.  1The City of Palo Alto Utilities Department recently completed the conversion of its electric system maps to a GIS  mapping system database. Therefore, the distances reported for FY 11/12 and forward are more accurate than the  distances reported in previous years. 2Beginning in 2016 park acreage is sourced from the Official City Data Set.  The discrepancy between FY16 and FY17  is because FY16 numbers were derived off GIS parcels identified as parks or zoned in the Open Space Zoning District.  For FY17, Council approved Parks Master Plan numbers were used. CITY OF PALO ALTO Capital Asset Statistics by Function/Program Last Ten Fiscal Years  Fiscal Year Ended June 30 168 2014 2015 2016 2017 2018 7                7                7                7                7                 1                1                1                1                1                 30              30              30              30              30               157            157            ‐                 ‐                 ‐                  3,744         3,752         ‐                 ‐                 ‐                  ‐                 ‐                  3,921         174            174             ‐                 ‐                  4,489         4,030         4,030          ‐                 ‐                 ‐                 181            181             36              36              36              36              36               1                1                1                1                1                 51              51              51              51              51               4                4                4                4                4                 4                4                4                4                4                 3                3                3                3                3                 1                1                1                1                1                 1                1                1                1                1                 1                1                1                1                1                 3                3                3                3                3                 5                5                5                5                5                 31,757      31,652      31,699      31,712      31,849       223            223            222            223            222             249            262            268            264            272             236            236            235            236            236             214            211            209            210            210             217            217            216            216            216             Fiscal Year Ended June 30 169 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Governmental Funds General Fund: Administrative 98        89        83         83        85         83         84         86         87         89         Community Services 97        94        74         74        74         74         76         77         78         79         Development Services6 ‐           ‐           ‐            ‐           ‐            ‐            38         38         36         36         Fire 127      123      121       122      119       116       107       107       109       109       Library 44        42        41         41        41         42         44         48         48         48         Office of Emergency Services5 ‐           ‐           ‐            ‐           ‐            3           3           3           3           3           Planning and Community Environment6 53        49        44         43        48         49         28         31         32         30         Police 164      161      157       157      154       155       155       155       155       155       Public Works1 69        64        59         56        57         56         53         54         56         55         Subtotal General Fund 652      622      579       576      578       578       588       599       604       604       All Other Funds: Capital Projects Fund 21        24        24         24        26         27         27         28         31         34         Special Revenue Fund 1           1           2           2           2           9           10         9           10         9           Total Governmental Funds 674      647      605       602      606       614       625       636       645       647       Enterprise Funds Public Works2 113      115      115       115      104       99         100       95         99         101       Utilities3 238      242      251       251      254       255       258       256       255       257       External Services4 ‐           ‐           ‐            ‐           ‐            ‐            ‐            ‐            ‐       ‐       Total Enterprise Funds 351      357      366       366      358       354       358       351       354       358       Internal Service Funds Printing and Mailing 4           4           2           2           2           2           2           2           2           2           Technology 31        31        30         30        31         32         32         34         35         36         Vehicle Replacement 16        16        16         16        17         17         17         17         16         16         Total Internal Service Funds 51        51        48         48        50         51         51         53         53         54         Total 1,076  1,055  1,019   1,016  1,014   1,019   1,034   1,040   1,052   1,059   Notes: 1Fleet and Facilities Management 2Refuse, Storm Drainage, Wastewater Treatment Numbers adjusted for rounding purposes. Source:   City of Palo Alto ‐ Fiscal Year 2017 Adopted Operating Budget 6ln FY15, staff was moved from Planning and Community Environment (PC&E), Public Works and Fire to create  Development Services. 5In 2014, emergency services and disaster preparation activities have been removed from the Fire Department and are now  shown in newly created Office of Emergency Services. 4In 2009, External Services was dissolved. 5 FTEs were eliminated and 1 FTE was transferred to the Technology Fund. CITY OF PALO ALTO Full‐Time Equivalent City Government Employees by Function Last Ten Fiscal Years Full Time Equivalent Employees as of June 30 3Electric, Gas, Wastewater Collection, Water 0 200 400 600 800 1,000 1,200 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Fu l l   T i m e   E q u i v a l e n t s Governmental Funds Enterprise Funds Internal Service Funds 170 CITY OF PALO ALTO  Index to the Single Audit Report  For the Year Ended June 30, 2018  171   Page  Independent Auditor’s Report on Internal Control Over Financial Reporting     and on Compliance and Other Matters Based on an Audit of Financial     Statements Performed in Accordance With Government Auditing Standards ..................................... 173    Independent Auditor’s Report on Compliance for Each Major Federal Program and    on Internal Control Over Compliance Required by the Uniform Guidance ........................................... 175    Schedule of Expenditures of Federal Awards ........................................................................................... 177    Notes to the Schedule of Expenditures of Federal Awards ...................................................................... 179    Schedule of Findings and Questioned Costs ............................................................................................. 180    Schedule of Prior Year Findings and Questioned Costs ............................................................................ 182        This page is intentionally left blank.  172 www.mgocpa.com Macias Gini & O’Connell LLP 2121 N. California Boulevard, Suite 750 Walnut Creek, CA 94596 Independent Auditor’s Report on Internal Control Over Financial Reporting  and on Compliance and Other Matters Based on an Audit of Financial  Statements Performed in Accordance With Government Auditing Standards  Honorable Mayor and the Members     of the City Council of the City of Palo Alto  Palo Alto, California  We have audited, in accordance with the auditing standards generally accepted in the United States of  America and the standards applicable to financial audits contained in Government Auditing Standards,  issued by the Comptroller General of the United States, the financial statements of the governmental  activities, the business‐type activities, each major fund, and the aggregate remaining fund information of  the City of Palo Alto, California (City), as of and for the year ended June 30, 2018, and the related notes  to the financial statements, which collectively comprise the City’s basic financial statements and have  issued our report thereon dated November 15, 2018.   Internal Control Over Financial Reporting  In planning and performing our audit of the financial statements, we considered the City’s internal  control over financial reporting (internal control) to determine the audit procedures that are appropriate  in the circumstances for the purpose of expressing our opinions on the financial statements, but not for  the purpose of expressing an opinion on the effectiveness of the City’s internal control. Accordingly, we  do not express an opinion on the effectiveness of the City’s internal control.  A deficiency in internal control exists when the design or operation of a control does not allow  management or employees, in the normal course of performing their assigned functions, to prevent, or  detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a  combination of deficiencies, in internal control such that there is a reasonable possibility that a material  misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a  timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control  that is less severe than a material weakness, yet important enough to merit attention by those charged  with governance.  Our consideration of internal control was for the limited purpose described in the first paragraph of this  section and was not designed to identify all deficiencies in internal control that might be material  weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may  exist that have not been identified. Given these limitations, during our audit we did not identify any  deficiencies in internal control that we consider to be material weaknesses. We did identify a certain  deficiency in internal control, described in the accompanying schedule of findings and questioned costs  as item 2018‐001 that we consider to be a significant deficiency.   173 Compliance and Other Matters  As part of obtaining reasonable assurance about whether the City’s financial statements are free from  material misstatement, we performed tests of its compliance with certain provisions of laws,  regulations, contracts, and grant agreements, noncompliance with which could have a direct and  material effect on the determination of financial statement amounts. However, providing an opinion on  compliance with those provisions was not an objective of our audit, and accordingly, we do not express  such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that  are required to be reported under Government Auditing Standards.  City’s Response to Finding  The City’s response to the finding identified in our audit is described in the accompanying schedule of  findings and questioned costs. The City’s response was not subjected to the auditing procedures applied  in the audit of the financial statements and, accordingly, we express no opinion on it.  Purpose of this Report  The purpose of this report is solely to describe the scope of our testing of internal control and  compliance and the results of that testing, and not to provide an opinion on the effectiveness of the  entity’s internal control or on compliance. This report is an integral part of an audit performed in  accordance with Government Auditing Standards in considering the entity’s internal control and  compliance. Accordingly, this communication is not suitable for any other purpose.  Walnut Creek, California  November 19, 2018  174 www.mgocpa.com Macias Gini & O’Connell LLP 2121 N. California Boulevard, Suite 750 Walnut Creek, CA 94596 Independent Auditor’s Report on Compliance for Each Major Federal Program and on Internal Control  Over Compliance Required by the Uniform Guidance  Honorable Mayor and the Members     of the City Council of the City of Palo Alto  Palo Alto, California  Report on Compliance for Each Major Federal Program  We have audited the City of Palo Alto’s, California (City) compliance with the types of compliance  requirements described in the OMB Compliance Supplement that could have a direct and material effect  on the City’s major federal program for the year ended June 30, 2018. The City’s major federal program  is identified in the summary of auditor’s results section of the accompanying schedule of findings and  questioned costs.   Management’s Responsibility  Management is responsible for compliance with federal statutes, regulations, and the terms and  conditions of its federal awards applicable to its federal programs.  Auditor’s Responsibility  Our responsibility is to express an opinion on compliance for the City’s major federal program based on  our audit of the types of compliance requirements referred to above. We conducted our audit of  compliance in accordance with auditing standards generally accepted in the United States of America;  the standards applicable to financial audits contained in Government Auditing Standards, issued by the  Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal  Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for  Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan  and perform the audit to obtain reasonable assurance about whether noncompliance with the types of  compliance requirements referred to above that could have a direct and material effect on a major  federal program occurred. An audit includes examining, on a test basis, evidence about the City’s  compliance with those requirements and performing such other procedures as we considered necessary  in the circumstances.   We believe that our audit provides a reasonable basis for our opinion on compliance for the major  federal program. However, our audit does not provide a legal determination of the City’s compliance.   Opinion on Each Major Federal Program  In our opinion, the City of Palo Alto, complied, in all material respects, with the types of compliance  requirements referred to above that could have a direct and material effect on its major federal program  for the year ended June 30, 2018.  175 Report on Internal Control Over Compliance  Management of the City is responsible for establishing and maintaining effective internal control over  compliance with the types of compliance requirements referred to above. In planning and performing  our audit of compliance, we considered the City’s internal control over compliance with the types of  requirements that could have a direct and material effect on each major federal program to determine  the auditing procedures that are appropriate in the circumstances for the purpose of expressing an  opinion on compliance for each major federal program and to test and report on internal control over  compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion  on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on  the effectiveness of the City’s internal control over compliance.  A deficiency in internal control over compliance exists when the design or operation of a control over  compliance does not allow management or employees, in the normal course of performing their  assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance  requirement of a federal program on a timely basis. A material weakness in internal control over  compliance is a deficiency, or a combination of deficiencies, in internal control over compliance, such  that there is a reasonable possibility that material noncompliance with a type of compliance  requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A  significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies,  in internal control over compliance with a type of compliance requirement of a federal program that is  less severe than a material weakness in internal control over compliance, yet important enough to merit  attention by those charged with governance.  Our consideration of internal control over compliance was for the limited purpose described in the first  paragraph of this section and was not designed to identify all deficiencies in internal control over  compliance that might be material weaknesses or significant deficiencies. We did not identify any  deficiencies in internal control over compliance that we consider to be material weaknesses. However,  material weaknesses may exist that have not been identified.  The purpose of this report on internal control over compliance is solely to describe the scope of our  testing of internal control over compliance and the results of that testing based on the requirements of  the Uniform Guidance. Accordingly, this report is not suitable for any other purpose.   Walnut Creek, California  November 19, 2018  176 Grantor Federal Identifying CFDA Subrecipients Grantor/Pass‐Through Grantor/Program Title Number Number  Expenditures Expenditures  U.S Department of Housing and Urban Development Direct B‐14‐MC‐06‐0020 CDBG ‐ Entitlement Grants Cluster B‐15‐MC‐06‐0020 Community Development Block Grants/Entitlement Grants B‐16‐MC‐06‐0020 14.218 579,856$               497,396$               U.S. Department of Justice Direct Bulletproof Vest Partnership n/a 16.607 12,391 ‐ U.S. Department of Transportation Direct Public Transportation Research, Technical Assistance  and Training CA‐2017‐020‐00 20.514 42,374 ‐ Airport Improvement Program 3‐06‐0182‐010‐2015 3‐06‐0182‐011‐2016, 3‐06‐0182‐012‐2016, 3‐06‐0182‐013‐2017 20.106 9,340,267 ‐  Subtotal ‐ Direct Awards 9,382,641 ‐ Pass‐through from State of California Department of Transportation Highway Planning and Construction BRLS‐5100(017) 20.205 132,623 ‐ Total U.S. Department of Transportation 9,515,264 ‐ National Endowment for the Humanities Pass‐through from California State Library  Museums for America MA‐10‐17‐0327‐17 45.301 10,937  MA‐11‐15‐0104‐15 45.301 8,324 ‐ Total National Endownment for the Humanities 19,261 ‐ U.S. Department of Homeland Security Pass‐through from State of California Department of Transportation Emergency Management Performance Grants 085‐00000‐2017‐0007 97.042 2,600 ‐ TOTAL FEDERAL FINANCIAL AWARDS 10,129,372$         497,396$               CITY OF PALO ALTO Schedule of Expenditures of Federal Awards For the Year Ended June 30, 2018 See accompanying notes to the Schedule of Expenditures of Federal Awards177 This page is intentionally left blank.  178 CITY OF PALO ALTO  Notes to the Schedule of Expenditures of Federal Awards  For the Year Ended June 30, 2018  NOTE 1 – REPORTING ENTITY  The schedule of expenditures of federal awards (the Schedule) includes expenditures of federal awards  for the City of Palo Alto, California (City), and its component unit as disclosed in the notes to the basic  financial statements.  NOTE 2 – BASIS OF ACCOUNTING  Basis of accounting refers to when revenues and expenditures or expenses are recognized in the  accounts and reported in the financial statements, regardless of measurement focus applied. All  governmental funds are accounted for using the modified accrual basis of accounting. All proprietary  funds are accounted for using the accrual basis of accounting. Expenditures of federal awards reported  in the Schedule are recognized when incurred and all eligibility requirements have been met. Such  expenditures are recognized following the cost principles contained in 2 CFR 200, Subpart E (Cost  Principles), wherein certain types of expenditures are not allowable or are limited as to reimbursement.  The City did not elect to use the 10% de minimis cost rate as covered in 2 CFR 200.414(F&A) costs.   NOTE 3 – DIRECT AND INDIRECT (PASS‐THROUGH) FEDERAL AWARDS  Federal awards may be granted directly to the City by a federal granting agency or may be granted to  other government agencies which pass‐through federal awards to the City. The Schedule includes both  of these types of federal award programs when they occur.  NOTE 4 – RELATIONSHIP TO FEDERAL FINANCIAL REPORTS  Amounts reported in the Schedule agree to or can be reconciled with the amounts reported in the  related federal financial reports.  NOTE 5 – RELATIONSHIP TO BASIC FINANCIAL STATEMENTS  Federal awards and expenditures agree to or can be reconciled with the amounts reported in the City’s  basic financial statements.   179 CITY OF PALO ALTO  Schedule of Findings and Questioned Costs  For the Year Ended June 30, 2018  Section I ‐ Summary of Auditor’s Results  Financial Statements  Type of auditor’s report issued on the   basic financial statements of the City: Unmodified  Internal control over financial reporting:  Material weakness(es) identified? No   Significant deficiency(ies) identified? Yes  Noncompliance material to the financial statements  noted? No  Federal Awards  Internal control over major programs:  Material weakness(es) identified? No   Significant deficiency(ies) identified? None reported  Type of auditor’s report issued on compliance for  major programs: Unmodified  Any audit findings disclosed that are required to be  reported in accordance with Uniform Guidance? No  Identification of Major Programs: CFDA No. 20.106  ‐ Airport Improvement  Program  Dollar threshold used to distinguish between type A  and type B programs: $750,000  Auditee qualified as a low‐risk auditee? No  180 CITY OF PALO ALTO  Schedule of Findings and Questioned Costs  For the Year Ended June 30, 2018  Section II – Financial Statements Findings  Item 2018‐001  Significant Deficiency   Internal Controls over Financial Reporting  Effective March 20, 2017, the City and the State Water Resources Control Board (SWRCB) entered into an  agreement to award the City up to $30 million from its Clean Water State Revolving Fund for the Sludge  Dewatering and Loadout Facility project.  The SWRCB loan is to be repaid over 30 years at a rate of 1.8%,  with the first annual installment due on May 31, 2020.  In September 2017, due to the projected lower  project costs, the agreement was amended to reduce the SWRCB loan amount to $29.7 million.  Under the  terms  of  the  agreement,  $4  million  of  the  SWRCB  loan  is  a  federal  pass  through  grant  from  the  U.S.  Environmental  Protection  Agency  under  its  Capitalization  Grants  for  Clean  Water  Tate  Revolving  Funds  program.    On August 4, 2018, the City received a letter from the SWRCB explaining the status of the SWRCB loan and  the federal pass through grant.  The letter clarified the funding sources and summarized the project draws  through the date of the letter.  Based on the information provided in the SWRCB letter, we observed the  following two issues:  1.The SWRCB letter on August 4, 2018 clarified that the project costs included in the first two draws submitted to SWRCB were applied to the federal awards first, before applying them to State funding sources.  Therefore, an adjustment of $4,000,000 was necessary to reduce the SWRCB loan balance and recognize grant revenue for the year ended June 30, 2018. 2.The City incurred eligible project costs of $4,964,775 during the year ended June 30, 2018 and submitted the loan draws subsequent to year end.  Accordingly, the City accrued draws made in July and August as a receivable from the SWRCB and as an obligation for SWRCB loan payable. The draws for the $4,964,775 were not made by June 30, 2018, therefore City does not owe that amount to SWRCB as of year‐end and overstated its obligation for the SWRCB loan. An audit adjustment of $4,964,775 was necessary to reduce the SWRCB loan balance at June 30, 2018 and reduce receivables from the SWRCB to properly account for the loan. We recommend the City document the important terms and conditions of the SWRCB loan, to ensure  proper internal controls over the financial reporting and compliance.  The City’s Finance department  should  also  collaborate  with  other  departments  that  have  material  or  complex  transactions  to  strengthen internal controls over financial reporting and compliance.   Management Response  The  City  concurs  with the  finding  and  recommendation.  City  Staff  will  update  the  year‐end  closing  processes and procedures to ensure that all material transactions and balances are properly reflected in  the financial statements in conformance with Generally Accepted Accounting Principles (GAAP) and the  terms and conditions of the loan.  Section III ‐ Federal Award Findings and Questioned Costs  No current year findings are reported.  181 182 183 184 This page is intentionally left blank.  185 Americans with Disabilities Act Statement IN COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT (ADA) OF 1990, THIS DOCUMENT MAY BE PROVIDED IN OTHER ACCESSIBLE FORMATS. For information contact: ADA Coordinator City of Palo Alto 250 Hamilton Ave (650) 329-2550 ADA@cityofpaloalto.org City of Palo Alto 250 Hamilton Avenue, Palo Alto, CA 94301 P 650.329.2100 W cityofpaloalto.org Spanish explorers named the area for the tall, twin-trunked redwood tree they camped beneath in 1769. Palo Alto incorporated in 1894 and the State of California granted its first charter in 1909. The City has long been known for its innovative people and its exploration of ideas that have changed the world. In Palo Alto, our history has always been about the future.