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HomeMy WebLinkAboutStaff Report 2504-4485CITY OF PALO ALTO Finance Committee Regular Meeting Tuesday, April 29, 2025   Agenda Item     1.Recommend to the City Council Subsidy Options for Select Development Services Fees Related to Gas and Electric Appliances Staff Presentation Finance Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: Planning and Development Services Meeting Date: April 29, 2025 Report #:2504-4485 TITLE Recommend to the City Council Subsidy Options for Select Development Services Fees Related to Gas and Electric Appliances RECOMMENDATION Staff recommends that the Finance Committee recommend City Council direct staff to implement: 1) targeted subsidies for building permit fees related to gas and electric appliances delivered through electrification programs, with subsidy amounts and funding sources to be established on a program-by-program basis; 2) a subsidy for stand-alone gas appliances to reduce fees to the level of instant permit costs, to reduce permit avoidance. EXECUTIVE SUMMARY Staff recommends that the Finance Committee support targeted subsidies for building permit fees related to electrification, with funding and amounts determined through existing or future rebate programs. This approach supports Council objectives to promote sustainability, encourage compliance, and reduce permit avoidance. Based on the implementation options evaluated, staff recommends a flat rebate administered by Utilities staff as the most cost-effective and administratively efficient approach. Relying on existing program infrastructure avoids duplicative processes and supports program scalability. In addition, staff recommends that permit fees for gas appliances, specifically HVAC systems, be subsidized using General Fund resources, at an estimated cost of $50,000 annually. This is intended to encourage contractors and homeowners to obtain permits and inspections, thereby improving building safety and community resilience. BACKGROUND On March 4, 20251, the Finance Committee reviewed the Planning and Development Services (PDS) Cost of Services Study and proposed municipal fee adjustments. During the meeting, the Committee discussed the City’s historical approach to cost recovery and acknowledged new policy considerations regarding building permit fees for appliance replacements—particularly those tied to electrification and sustainability goals. Staff presented a supplemental report outlining potential cost recovery options (Low, Medium, High) for a variety of permit types related to electric vehicle charging, photovoltaic systems, HVAC units, and other electrification efforts. Finance Committee members expressed interest in aligning fees with public policy objectives, particularly by encouraging compliance and reducing permit avoidance for high-benefit projects like electric heat pump installations. ANALYSIS Based on prior Finance Committee feedback, staff began to explore options and strategies for implementing targeted electrification subsidies. It identified the following key considerations: •The types of equipment to be subsidized •How projects with this type of equipment are identified •The funding source for subsidies •Whether the subsidy is delivered at the time of project adoption or as a rebate •If using a funding source other than the General Fund, how that funding source is transferred to the General Fund It turns out that several of the factors above will affect the cost of administering a subsidy program. For example, providing a subsidy for a standalone water heater electrification project may be simple, but when that project is part of a larger remodel, determining which part of the remodel permit fee is related to the heat pump water heater can demand staff time. HVAC projects are even more complicated and have a wide range of permit fees. Determining which aspects of the project were related to replacing the furnace as opposed to replacing ductwork, also requires staff time. And if the subsidy is funded by a non-General-Fund funding source but the subsidy is provided at the time the fees are paid, a periodic accounting reconciliation process needs to be established to reimburse the General Fund for these subsidies. In considering these factors staff identified four potential approaches: 1.Provide a flat rebate, processed by Utilities staff (recommended): This is the simplest alternative through the Sustainability and Climate Action Plan. It does not require time to determine a project by project subsidy, and aligns with existing Utilities processes for delivering rebates. 1 Finance Committee, March 4, 2025; Agenda Item #2, SR#2501-4019, https://cityofpaloalto.primegov.com/Portal/viewer?id=0&type=7&uid=e5da7df0-ff49-4bd3-a088-35f82503bce2 2. Provide a flat rebate for specific types of projects at the time permit fees are issued: This alternative eliminates the staff time needed to determine a unique permit fee subsidy for each application. An accounting reconciliation process to transfer funds to the General Fund would also be required if the subsidy came from non-General Fund sources. 3. Subsidize the portion of any permit fee that involves electrification at the time permit fees are issued: Development Center staff would review each permit involving an electrification measure to determine which parts of the fee to subsidize. At current permit levels this additional task is expected to slow down permit response time during peak periods. As the number of electrification projects increases, this will consume more staff resources. An accounting process would still be required if funded by a non-General Fund source. 4. Provide a Utilities rebate equal to the portion of any permit fee involving electrification: As in alternative 3, this alternative requires Development Center staff time to determine which parts of the fee to subsidize and Utilities staff time to review the rebate application, but does not require an accounting process to transfer funds. Another consideration is whether this fee subsidy should apply to new construction and other major projects where electric readiness is required and electrification is economic for project applicants even without incentives. For these projects incentives are not needed and reduce available funding to drive other retrofits; therefore, a subsidy is not recommended for new construction and other major projects. The recommended path of a rebate program allows for staff to administer the program with this restriction. Currently there are electrification rebate and technical assistance programs serving the following project types: •Single-family residential retrofits (not new construction or substantial remodels) •Non-residential packaged HVAC replacements •Multi-family shared EV charging There are programs in development for additional project types: •Affordable housing electrification •Multi-family individual unit EV charging •Additional types of non-residential equipment These existing programs and programs in development provide rebates to cover permit fees. Most electrification in Palo Alto currently comes through these programs and staff is working on program designs with financial structure that can scale community-wide. Staff recommends subsidizing permit fees via these programs rather than creating a separate set of administrative processes. Lastly, when evaluating options to maintain or encourage permit compliance for gas appliances, there are two potential approaches: 1.Incentivizing voluntary compliance through an upfront fee subsidy (recommended): This approach reduces fees to encourage permitting compliance. Staff recommends providing a subsidy for stand-alone gas appliance installations or replacements to mitigate potential life safety concerns and improve community safety and recommends lowering the permit fees in this category to $298 - the cost of an instant permit. Since stand alone gas furnaces, boilers, and water heaters already meet this rate, the subsidy would only be applied to stand alone HVAC systems. 2.Deterring non-compliance through enhanced enforcement: This approach involves increasing inspections and potentially implementing fines to ensure that buildings are safe and compliant with applicable laws. However, this option cannot be supported based on current staffing levels and workload in the code enforcement program. FISCAL/RESOURCE IMPACT Current levels of subsidy for electrification projects are funded by the General Fund, resulting in the permit fees listed in the current FY 2025 Municipal Fee Schedule. This subsidy amounts to approximately $300k per year based on preliminary estimates. The City then provides additional rebates to cover the remaining cost as part of its electrification programs. The funding source and amount of these rebates are determined on a program-by-program basis, often using funding sources such as Electric and Gas Cap and Trade, Low Carbon Fuel Standard, and Public Benefits funds. If these General Fund fee subsidies are eliminated, additional funding from these or other sources would be needed if Council wanted to maintain current levels of fee subsidy. Council will be discussing the use of these revenue sources, which are limited, at a study session on May 5, 2025. It is worth noting that as project activity increases due to greater electrification adoption and the activation of regional mandates, the amount needed for subsidies could increase substantially, perhaps as much 300% to 400%. This would lead to a need for additional funding for subsidies that would need to be considered in the context of broader financial planning taking place in 2025 related to transitioning to an electrified community. Additionally, reducing fees for stand-alone gas HVAC systems is estimated to cost the General Fund approximately $50K annually based on current permitting levels. No alternative funding is available, as the subsidy does not align with electrification objectives. Should the Committee recommend this subsidy, the financial impacts will need to be included in the upcoming FY 2026 budget deliberations as an additional financial need from the General Fund. STAKEHOLDER ENGAGEMENT Finance Committee feedback from March 4, 2025, directly informed this report. Staff also consulted with Matrix Consulting Group, the City Manager’s Office, and the Utilities Department to develop options consistent with operational feasibility and policy objectives. ENVIRONMENTAL REVIEW Council action on this item is not a project as defined by CEQA because a cost of services study update is a government funding mechanism or fiscal activity which does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment. CEQA Guidelines section 15378(b)(4). APPROVED BY: Jonathan Lait, Planning and Development Services Director PDS Cost of Services Study: Subsidy Options for Gas and Electric Appliances Presenters: Jonathan Lait, DirectorGeorge Hoyt, Chief Building Official Jonathan Abendschein, Asst. DirectorSarah McRee, Senior Operations Manager Tuesday, April 29, 2025 www.paloalto.gov 1 PURPOSE •Follow-up to the March 4th discussion on PDS Cost of Service Study •Provide high-level recommendations for building permit fee subsidies •Solicit Finance Committee feedback on implementation approach and highlight funding needs for potential electrification subsidies 2 POLICY CONTEXT •Fee Policy: Cost of service is baseline per City policy •Policy Discretion: Council can subsidize fees to support community objectives •Focus Areas: Electrification and Community Safety (gas appliances) 3 STAFF RECOMMENDATION •Electrification Permits: Implement targeted subsidies through the electrification program (see next slide) •Gas Appliance Permits: Subsidize stand-alone gas HVAC permits to instant permit cost ($298) using General Fund support 4 ELECTRIFICATION SUBSIDY OPTIONS •Option 1 – Flat rebate administered by Utilities staff (simple, leverages existing infrastructure) - Recommended •Option 2 – Flat rebate issued at time of permit issuance (requires accounting reconciliation) •Option 3 – Subsidize electrification-related portion of each permit at time of issuance (requires staff review per project) •Option 4 – Utilities rebate tied to electrification-related portion of fees (requires staff review + rebate admin) Note: All options are for FY 2026 only. Funding for FY 2027 and beyond is not yet identified. Costs expected to rise significantly due to regional electrification mandates starting in 2027. 5 IMPLEMENTATION CONSIDERATIONS •Funding Sources: General Fund, Cap & Trade, LCFS, Public Benefits funds (program-based) •Scalability and Simplicity: Flat rebates are easiest to manage •Future Fiscal Impact: Substantial growth in costs projected (300–400%) •FY 2027 + Funding Gap: Air District mandates will drive higher demand. Future subsidy needs are not currently budgeted. 6 STANDALONE GAS HVAC SUBSIDY •Policy Goal: Improve permit compliance and safety •Approach: Reduce stand-alone gas HVAC fees to $298 •Cost Estimate: ~$50K/year from General Fund •Alternative: Enforcement-based compliance (resource intensive) 7 REQUESTED FINANCE COMMITTEE ACTION •Consider and provide feedback on electrification permit fee subsidy options and their implications for implementation and funding •Recommend subsidy for stand-alone HVAC gas appliances •Provide guidance on FY 2026 budget considerations for General Fund support 8 NEXT STEPS •April 29: Finance Committee Feedback •May 5: Council Study Session – Funding Sources •June: Budget Adoption •August: Implementation (60-day notice period ends)