HomeMy WebLinkAbout2015-08-18 Finance Committee Agenda Packet Finance Committee
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DURING NORMAL BUSINESS HOURS.
Tuesday, August 18, 2015
Special Meeting
Community Meeting Room
6:00 PM
Agenda posted according to PAMC Section 2.04.070. Supporting materials are available in
the Council Chambers on the Thursday preceding the meeting.
PUBLIC COMMENT Members of the public may speak to agendized items. If you wish to address the Committee on any issue that is on this agenda, please complete a speaker request card
located on the table at the entrance to the Council Chambers/Council Conference Room, and
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on the speaker card in order to speak to the Committee, but it is very helpful.
Call to Order
Oral Communications
Action Items
1. Utilities Advisory Commission Recommendation that the City Council Approve
Design Guidelines for the 2015 Electric Cost of Service Analysis
2. Third Quarter Fiscal Year 2015 Financial Report
3. Recommendation to Adopt City Debt Policy
Future Meetings and Agendas
Adjournment
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2 August 18, 2015
MATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE CITY COUNCIL AFTER
DISTRIBUTION OF THE AGENDA PACKET ARE AVAILABLE FOR PUBLIC INSPECTION IN THE CITY
CLERK’S OFFICE AT PALO ALTO CITY HALL, 250 HAMILTON AVE. DURING NORMAL BUSINESS HOURS.
Status of Items Requested by the Finance Committee
Referral
Date Item Title Status
2013 Police Services Utilization and Resources Study (PD) Pending
2014
Utilities Department Organizational Assessment
(ASD/UTL) Pending Return with an update on the status of organizational
assessment recommendations
2015
Review and Discussion of the Public Art Ordinance
(ASD)
Pending Discussion of Usage and Replacement of Pool
Vehicles (ASD)
Single Story Overlay Fee Waiver Policy and
Discussion (ASD)
2015 TBD
Strategies to Reduce the City's Long-term Pension
and Retiree Health Care Plans Unfunded Liabilities
(ASD)
Pending
Finance Committee Items Tentatively Scheduled
Meeting
Date Item Title
9/1/2015 Meeting Cancelled
9/15/2015 Meeting Cancelled
10/6/2015 Update to the Utilities Department Organization Assessment (Utilities)
GASB 68 (ASD)
11/17/2015 Close Budget and Approve CAFR for FY 2015
City of Palo Alto (ID # 5965)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 8/18/2015
City of Palo Alto Page 1
Summary Title: Design Guidelines for Electric COSA
Title: Utilities Advisory Commission Recommendation that the City Council
Approve Design Guidelines for the 2015 Electric Cost of Service Analysis
From: City Manager
Lead Department: Utilities
Recommendation
Staff and the Utilities Advisory Commission (UAC) recommend that the Finance Committee
recommend that Council approve the Design Guidelines for the 2015 Electric Cost of Service
Analysis (Attachment B).
Executive Summary
Electric rates were last adjusted when a 10% rate increase went into effect on July 1, 2009.
Staff intends to complete an electric cost of service analysis (COSA) in Fiscal Year (FY) 2016 in
advance of a rate adjustment that staff projects will be necessary on July 1, 2016. The primary
goal of the COSA will be to review the allocation of costs to customer classes and the electric
rate design to ensure customers are charged according to the cost to serve them. However, the
COSA will also include a review of the rate design issues created by increasing numbers of local
solar installations, higher electric vehicle penetration, and the potential for building
electrification. This report discusses the existing rate design, gives an overview of the issues to
be addressed in the COSA analysis, and sets forth short-term (Phase One) and long-term (Phase
Two) work plans for addressing various types of rate design issues. The attached guidelines are
only intended to address the Phase One work plan, which must be completed in time to
support the July 1, 2016 rate change. Staff will return for further discussion of the Phase Two
work plan and will recommend additional rate design guidelines at that time to guide Phase
Two rate design activities.
Background
Traditionally, utilities use a COSA to allocate costs among customer classes and to design rates.
COSAs gained a more important role for California publicly-owned utilities after the passage of
Proposition 26 (2010). Proposition 26 added provisions to the State Constitution essentially
defining every local government fee or charge as a tax, requiring voter approval, unless one of
seven exceptions applies. Municipal electric rates that do not exceed the reasonable costs to
City of Palo Alto Page 2
the local government of providing electric service are one exception from the constitutional
definition of a tax, and its voter approval requirements. Although Proposition 26 is not
retroactive, it will apply to the City’s electric rates once they are increased next via Council
adoption. The FY 2016 Electric Utility Financial Plan (Staff Report 5681) projected the need for a
6% rate increase on July 1, 2016.
The current rates, which were last changed on July 1, 2009, are based on a COSA performed in
2007. The fundamental structure of the City’s current rates has remained the same since the
early 1980s, though the commodity, distribution, and public benefits portions of the rates were
“unbundled,” or separated out, during California’s deregulation of the electric market in the
late 1990s. Like many utilities, Palo Alto had declining block rates (rates that decreased with
increasing consumption) for all customers until the late 1970s, at which point the City switched
to the current system. For residents, the current system includes inclining block rates (rates
that increase with consumption, more commonly called tiered rates), and for the more diverse
non-residential customer classes, flat seasonal rates with demand charges for larger customers.
As Palo Alto transitioned to its current rate design, fixed charges for both types of customers
were switched to minimum charges and eventually eliminated. The main driver for these
changes was to encourage conservation.
Discussion
The following sections provide a review of the current rate structure and a discussion of rate
design issues affecting the utility in the short term and in the long term. They also include a
work plan and a proposed set of rate design guidelines to guide the COSA.
Summary of Existing Rate Structure
Table 1, below, summarizes the number of customers on each electric rate schedule and the
percentage of the City’s sales volume they represent. Currently the electric rate for separately-
metered residential customers (Rate Schedule E-1) has three tiers, with rates that increase
when customer use exceeds roughly 300 kilowatt-hours (kWh) per month and again when the
customer exceeds roughly 600 kWh. Non-residential customers’ rates are flat (not tiered) and
are higher during the summer. Larger non-residential customers are billed based on their peak
demand (the highest fifteen minutes of consumption in the month, measured in kilowatts, or
kW) in addition to their monthly energy use. These demand charges are higher in the summer
than in the winter, just like the energy charges. None of the major rate schedules include fixed
or minimum charges.
City of Palo Alto Page 3
Table 1: Existing Electric Rate Schedules
Rate Applicability Description
Number of
customers(1)
Share of
sales(1)
E-1 Separately-metered residential
customers
Three tiered rate
No fixed or minimum charge
25,341 16%
E-2 Small non-residential
customers and master metered
multi-family customers
Flat energy charge that varies
seasonally
No fixed or minimum charge
3,073 7%
E-4 Demand-metered non-
residential customers, peak
demand <1000 kW
Flat energy and demand charges
that vary seasonally
No fixed or minimum charge
736 32%
E-7 Demand-metered non-
residential customers , peak
demand >1000 kW
Flat energy and demand charges
that vary seasonally
No fixed or minimum charge
66 42%
E-18 City-owned facilities Flat energy charge that varies
seasonally
No fixed or minimum charge
123 3%
(1) FY 2014
The City also has a number of optional, pilot, and special use rate schedules. Both the E-4 and
E-7 customer classes have optional time-of-use (TOU) rate schedules. There is a pilot residential
(E-1) TOU rate schedule as well, though it is limited to the small group of customers
participating in the pilot program. The E-14 rate establishes charges for street and highway
lighting, and the E-16 rate deals with unmetered electrical equipment such as billboards,
wireless antennas, and traffic cameras. There are also generation-related rates, such as the E-3
rate and E-NSE rate. The E-3 rate establishes wholesale energy purchase prices for certain types
of customer-owned generating facilities. The City designed this schedule to comply with the
Public Utility Regulatory Policies Act (PURPA). The E-NSE rate establishes the City’s purchase
price for surplus generation from customer-owned net-metered solar systems. Lastly, the
voluntary PaloAltoGreen rate is still available for certain commercial customers who want it for
sustainability reporting purposes.
Rate Design Issues, Short-Term and Long-Term
Staff has identified a variety of rate design issues to address in coming years. Some of the issues
are more relevant to the long-term operation of the utility (five to ten years from now), and
others are relevant to its operation over the next three to five years.
The short-term rate design issues include:
The need to update the City’s electric COSA. Since the current COSA was completed
over 8 years ago, an updated COSA is needed before implementing any changes to
existing rates.
Drought-related hydroelectric resource variability. This variability could potentially be
managed using a hydro rate adjustment mechanism.
Customer interest in electric water heating and space heating. The City’s Carbon
Neutral Portfolio has led some customers to consider electrifying the space and water
City of Palo Alto Page 4
heating systems in their homes, or replacing gas-using appliances with electric ones. The
electric rate structure has an impact on these decisions.
More electric vehicles and plug-in hybrids are on the market. Replacing gasoline or
diesel fueled vehicles with electric vehicles is another form of electrification and, again,
the electric rate structure can have an impact on these customer choices.
The City’s net energy metering (NEM) tariff for solar customers may reach capacity
within the next one to three years. The City should have new rules and rates ready for
customers who install solar systems after the NEM cap is reached, and should consider
the impact of existing and proposed rate designs on the economics of solar.
The long-term rate design issues include:
Advanced metering. This technology would enable wider applicability of TOU rate
structures and charges based on customer peak demand. The utility will need to
evaluate whether to apply these rate structures more widely.
Long-term potential for customer disconnection from the electric grid. As building
technology advances and energy storage and distributed generation technologies
become cheaper, it may become feasible for customers to disconnect from the
distribution system. The utility should begin considering how to monitor these trends
and how pricing strategies might need to be adapted.
Changing utility rate design. The largest utilities are considering a shift to residential
TOU rate or even real-time varying rates. They are also considering the rate design
issues raised by distributed solar, electric vehicles, building electrification, and other
developing technologies. The City attempts to maintain some consistency with the rate
designs in nearby communities, so the responses of larger utilities to these trends are
worth monitoring.
New carbon reduction targets. More vehicle and building electrification will be required
to achieve some of the targets being considered by the State and the City. This will have
cost and rate implications for the electric utility. The utility should begin evaluating
those long term impacts.
To address the issues listed above, staff is proposing a two phase work plan. Phase One involves
completing a COSA that addresses only the short-term rate design issues. Staff forecasts a need
to increase rates 6% on July 1, 2016 to preserve the financial position of the electric utility, so
that date will drive the work plan for Phase One. Longer-term rate design issues will be
addressed in Phase Two since these issues are not critical to address prior to July 1, 2016, but
preliminary analysis and some stakeholder discussions can begin in 2015 and 2016. Many of the
Phase Two projects do not have specific deadlines for completion because they are driven by
other planning efforts, such as the Sustainability and Climate Action Plan (S/CAP) and the City’s
advanced metering planning efforts. Table 2, below, shows the issues to be addressed in each
phase of the work plan. Note that the guidelines proposed for adoption only address the Phase
One work plan. Staff will return to the UAC and Council with additional guidelines for any Phase
Two rate design work.
City of Palo Alto Page 5
Table 2: Electric Rate Design Work Plan
Phase One Work Plan (to be completed by July 1, 2016)
Before the spring 2016 financial forecasting and budget adoption process, develop an
electric COSA that addresses the rate design issues discussed in the Design Guidelines for
the 2015 Electric Utility COSA (Attachment B).
As part of the spring 2016 financial forecasting and budget adoption process, bring
completed COSA and new proposed rate schedules to the UAC and Council for review and
adoption.
Develop rules and rates governing solar customers once the NEM program reaches capacity.
Examine projected impacts of the current residential tiered rate design on customers with
electric heating and electric vehicles, and explore pilot programs, rebates, or other methods
for addressing those impacts, as needed.
Complete a connection fee study to evaluate existing fees and address rules related to
transformer upgrades.
Phase Two Work Plan (to begin in 2015, completion dates to be determined)
As the City establishes new sustainability goals as part of the S/CAP and continues to
analyze future trends in energy use, identify the impact of these on electric rate design and
the electric utility’s financial position and develop appropriate responses.
As the CustomerConnect advanced metering pilot program progresses, and as a long-term
plan is developed regarding advanced metering and other smart grid technologies, evaluate
TOU rate structures and other rate designs those technologies could enable.
Monitor electric rate trends at the State level and among other publicly owned utilities.
Consider the use of fixed charges to recover certain types of costs.
Begin assessing the impact of distributed generation, storage, grid-interactive appliances,
and electric vehicles on the distribution system and identify the rate designs that would
send appropriate and cost-based price signals to customers using these technologies.
Develop a framework for monitoring the utility’s cost recovery and competitiveness in light
of customer self-provision of power and disconnection from the electric grid.
Evaluate the long-term rate impact to the electric utility of new electric vehicle and building
electrification loads, as well as new highly efficient building code standards that are
currently in development.
Rate Design Guidelines
In the past, the UAC and Council have expressed concern about having limited ability to make
changes to proposed rate structures once a COSA is completed. Staff agrees, and has
committed to having policy discussions with the UAC and Council prior to embarking on a COSA.
Staff is proposing a set of rate design guidelines for Phase One (Attachment B) to guide its work
over the next year. Separate rate design guidelines will be developed for Phase Two. The
guidelines for the Phase One COSA are summarized below and discussed in more detail in
subsequent sections:
Guideline 1. Rates must be based on the cost of service.
City of Palo Alto Page 6
Guideline 2. Energy charges should be structured similarly to the way they are currently
structured, if feasible.
Guideline 3. All existing rates should be reviewed for inclusion in the COSA or for retirement.
Guideline 4. The COSA should consider the impact of rate designs on electric vehicle and
electric heating customers.
Guideline 5. The COSA should consider the need for a minimum charge.
Guideline 6. A hydroelectric rate adjustment mechanism should be evaluated.
Guideline 7. The effect of rate design on current and future solar customers should be
considered.
Guideline 8. A study of connection fees should be completed.
Guideline 9. The effect of proposed rate design changes on low income customers should be
considered.
Guideline 1: Rates to be based on the cost of service
The goal of a COSA is to identify the costs associated with serving each customer class and the
rates required to recover those costs. Historically, electric utilities have been able to make
some adjustments to COSA-recommended rates to achieve environmental or social objectives.
After Prop. 26, such rates cannot be structured solely to achieve policy objectives unless they
are also cost-based, absent voter approval. The COSA has become an important tool for
demonstrating that utility rates are based on the cost of service. As a result, this guideline must
be the overriding one for the COSA.
Guideline 2: Use existing rate design for energy charges
For Phase One, staff recommends against considering major modifications to the structure of
energy charges (such as shifting customers to flat rates, TOU rates, or real-time pricing) for this
COSA. The City has not installed the necessary metering technology to implement advanced
rate designs like TOU in the short term, and does not expect to do so for several years. The
installation of advanced metering may take place within the next several years, and that would
be the appropriate time to consider major changes to existing rate structures. This is
anticipated in Phase Two of the work plan. If feasible, the COSA should continue the current
structure for energy charges, including:
A tiered energy rate for residential customers
A uniform energy rate (possibly with seasonal variation) for non-residential customers
A demand and energy rate for large non-residential users, possibly with seasonal
variation
Although staff anticipates retaining the existing structure for energy charges, minor
adjustments, as discussed in subsequent guidelines, may be advisable (e.g. adding a minimum
charge).
City of Palo Alto Page 7
Guideline 3: Evaluation of all existing rate schedules for continuation, consolidation, or
retirement
Staff recommends evaluating all existing rate schedules to determine whether they should be
continued or retired. The main focus of this review will be the customer class definitions for
non-residential customers. Staff will ask a consultant to evaluate whether the boundaries
between small (E-2), medium (E-4), large (E-7), and City-owned (E-18) non-residential
customers should be redefined and whether some of the rate schedules should be
consolidated.
Guideline 4: Impact on electric vehicle and electric heating customers
Residential customers represent a fairly uniform customer class when compared to non-
residential customers. Electric vehicles are becoming more available, however, and some
customers are considering greater use of electricity in their homes by replacing natural gas
fueled water and space heaters with efficient heat pump water and space heaters. These
customers are likely to have significantly different load profiles from the average residential
customer. Staff recommends evaluating whether the cost to serve these customers differs from
other residential customers substantially. If so, adjusting the pricing structure applicable to
these customers may be appropriate.
Guideline 5: Minimum Charge
The electric utility incurs costs for billing, metering, and system maintenance for each customer
connected to its distribution system, regardless of whether that customer uses energy. Many
utilities use a fixed or minimum service charge to recover some or all of those costs. More
California utilities are adopting these charges in recent years because the rapidly decreasing
cost of rooftop solar and energy storage has enabled some customers to completely eliminate
their electric bills through the use of NEM. These customers still use the distribution system
when their solar system is not generating, and also incur costs for customer service, billing,
meter reading, and maintenance of meters and service drops. A fixed or minimum charge
recovers those costs.
Fixed and minimum charges can be designed to recover similar costs, but differ in the way they
operate:
A fixed service charge is applied each month in addition to the consumption charge.
Revenue generated from a fixed charge allows the consumption rate to be reduced.
Fixed charges are useful for reducing revenue variability for utilities with high load
variability due to weather or other factors.
A minimum charge applies only if a customer’s consumption charge falls below a
specified amount. For example, if the utility had a rate of $0.10/kWh, a customer using
30 kWh would pay $3 (30 kWh x $0.10/kWh) in the absence of a minimum charge. With
a $5 minimum charge, a customer using 30 kWh would pay $5. If the customer used 100
kWh, the customer’s bill would be $10 (100 kWh x $0.10/kWh), and the minimum
charge would not apply. A minimum charge generally does not generate as much
City of Palo Alto Page 8
revenue as a fixed charge, and may not generate much revenue at all unless there are
substantial numbers of customers with little or no energy consumption. However, it can
be useful for ensuring that very low users or solar customers contribute to the cost of
operating the utility.
For this COSA staff recommends considering a minimum charge as a way of ensuring that all
customer groups contribute their share of the utility’s operating costs. This is consistent with
the approach currently being implemented by PG&E and other investor-owned utilities, as well
as a number of publicly-owned utilities throughout California. Many of these utilities are
considering eventually implementing fixed charges rather than minimum charges. Staff
recommends considering a fixed charge in the Phase Two work plan, but only evaluating the
addition of a minimum charge in the Phase One COSA work.
Staff estimates that a minimum charge, if adopted, would be between $5 and $7 per month.
Staff estimates that such a charge would affect less than 1% of all non-solar customers. It would
affect slightly more customers on the rate assistance program, since these customers tend to
use less energy on average. Even so, it would still only affect 1% to 3% of these customers, and
they would still have lower bills than customers in the rest of the state.
As part of the COSA, staff will evaluate how this charge (and other aspects of the rate design)
would affect the economics of solar in Palo Alto.
Guideline 6: Hydroelectric rate adjustment mechanism
Hydroelectric resources make up roughly 50% of the City’s electric supply portfolio. The output
of these resources varies with annual rainfall, but their costs are largely fixed. When rain and
snow is plentiful and hydroelectric resources generate more than usual, the City does not need
to buy as much electricity in the markets (or can sell surplus electricity) and its costs decrease.
During a dry year the opposite happens. Costs increase because the City must buy more energy
in the markets to replace the hydroelectric generation. This variability can result in as much as
$11 million to $13 million in additional costs in a dry year or cost savings in a wet year. The City
maintains reserves to help manage these changes in cost in the short term, but the costs must
be passed through in the rates eventually. Some agencies use a rate adjustment mechanism to
make these rate impacts more transparent by passing on the costs and savings to customers as
they occur. These rate adjusters provide a temporary rebate in a wet year or impose a
temporary adder in a dry year. In addition to transparency, they have the added benefit of
reducing the reserves needed to manage cost variability. Staff recommends evaluating a
hydroelectric rate adjustment mechanism during development of the COSA. This would be
done in parallel with the Phase One COSA and would involve additional discussions with the
UAC and Council. If a hydro rate adjuster were recommended for adoption as part of this
process, it would then be incorporated into the COSA.
City of Palo Alto Page 9
Guideline 7: Rate design and solar customers
As a result of Senate Bill (SB) 1 (2006), investor-owned utilities and publicly-owned utilities like
the City were required to offer NEM to customers who installed solar systems. Under NEM,
solar customers who generate surplus energy in the summer receive a credit that can be used
to offset their bill in the winter. SB 1 required utilities to offer this program until installed solar
capacity reaches 5% of the utility’s peak load. The City, like many other utilities, will likely reach
that point within the next one to three years. Investor-owned utilities are currently working
with the California Public Utilities Commission (CPUC) to define rules for solar customers after
the NEM cap is reached. Staff is monitoring this effort and also working on its own analysis
specific to Palo Alto to develop a successor to the existing NEM rules.
For some customers, NEM can result in the elimination of the total electric bill on an annual
basis, or even a small net surplus. One criticism leveled at NEM is that it is unsustainable and
inequitable. Solar customers continue to use the distribution system during the night and
winter, but customers with large systems do not contribute to the upkeep of the system
because they pay no electric bill (or a very small bill). Solar advocates counter that existing rate
structures may not properly account for the value that solar systems provide to the distribution
system. Efforts are being made at the State level to balance these considerations in future rate
design, and staff will do the same in this COSA. Discussions about post-NEM rules for solar
customers will take place in parallel with the COSA and will involve additional discussions with
the UAC and Council. The COSA will also evaluate the impact of any recommended rate design
on the economics of solar systems.
Guideline 8: Connection fee study
The City currently charges customers a one-time fee to connect to the distribution system. The
City charges a flat fee for a 200 ampere capacity connection, but requires a customized
estimate for higher capacity connections. Fees for higher capacity connections can be
substantially more expensive, especially if the new connection triggers the need for a
residential transformer upgrade. These higher capacity connections, previously rare, are
becoming more common as electric vehicle penetration increases and some customers begin to
install electric space and water heaters. As part of the COSA, staff will re-evaluate its policies
and fees for new and upgraded customer connections.
Guideline 9: Impact on low income customers
Changes in rate design can have different impacts on customers who use different amounts of
electricity. Low-income customers have lower electricity usage than other customers, on
average. Staff intends to evaluate the impact of any recommended rate design changes on low-
income consumers and may recommend mitigation of those impacts if necessary.
Commission Review
The UAC reviewed the staff recommendation at its June 3, 2015 meeting. Commissioners were
largely supportive of the staff proposal after asking a variety of clarifying questions. There was
some discussion of whether it was possible, even in light of Prop. 26, to establish incentive rates
City of Palo Alto Page 10
that incorporated the value of the environmental and societal benefits associated with
switching transportation and heating uses away from fossil fuels. One suggestion was to place
the incentive rates on the ballot, and a question was asked whether there was a simple way to
incorporate these incentive rates into the Phase One work plan. Staff recommended deferring
this analysis to Phase Two of the work plan due to the short time line associated with the Phase
One work plan.
Ultimately, the UAC voted to recommend that Council approve the proposed Design Guidelines
for Phase One of the Electric COSA and to recommend that staff consider rate designs that
reduce the global climate footprint in Phase Two by a vote of 3-1-1 (Commissioners Cook,
Danaher, and Schwartz voting yes, Chair Foster abstaining, Commissioner Hall opposed, and
Commissioners Eglash and Van Dusen absent). Commissioner Hall was opposed to the motion
since he wanted the analysis to be conducted in Phase One instead of Phase Two. Final
excerpted notes from the UAC’s June 3, 2015 meeting are provided as Attachment B.
Timeline
After receiving the Finance Committee’s recommendation, Council will consider approval of the
Phase One Electric COSA design guidelines. The COSA is expected to be completed by the spring
of 2016 so that updated rates can be adopted as part of the FY 2017 budget process to be
effective on July 1, 2016.
Resource Impact
The work associated with this project will be absorbed using existing staff and contract budgets.
The new rates adopted as a result will be designed to generate adequate sales revenue to fund
the electric utility’s operations in FY 2017. For FY 2017, the utility is projected to need roughly
6% more sales revenue ($8.8 million) than is generated by current rates, mainly due to
increased costs associated with renewable projects. In addition, if the drought continues
through FY 2017, additional revenue (as much as $10 million to $15 million) may be needed to
fund higher market purchase costs resulting from low output of hydroelectric resources. As part
of the COSA, staff will evaluate a hydroelectric rate adjustment mechanism that could add a
temporary charge to customer bills to generate additional revenue under a drought scenario.
For more detail on these projections see the proposed FY 2016 Electric Utility Financial Plan
(Staff Report 5681).
Policy Implications
The process of adopting these design guidelines provides the UAC and Council an opportunity
to provide policy guidance to staff before work begins on the COSA. Once a COSA is complete, it
can be difficult to modify the resulting rate design without reviewing and possibly amending
the analysis.
The analysis performed as part of this COSA will support other policy initiatives, including the
Local Solar Plan (Staff Report 4608) and the S/CAP. Both the Phase One and Phase Two work
plans involve analysis of the impacts of rate design on electrification, and are therefore part of
City of Palo Alto Page 11
staff’s response to the December 15, 2014 Council Colleagues Memo on Climate Action Plan
Implementation Strategies to Reduce Use of Natural Gas and Gasoline through Fuel Switching
to Carbon Free Electricity. The analysis of the hydroelectric rate adjustment mechanism is part
of the Long-term Electric Acquisition Plan (LEAP) Implementation Plan (Staff Report 1317).
Environmental Review
Adoption of the Design Guidelines for the 2015 Electric Cost of Service Analysis does not meet
the definition of a project, pursuant to Section 21065 of the California Environmental Quality
Act, thus no environmental review is required.
Attachments:
Attachment A: Design Guidelines for the 2015 Electric Cost of Service Analysis - Phase
One (PDF)
Attachment B: Excerpted Draft UAC Minutes of June 3, 2015 meeting (PDF)
Attachment A
Design Guidelines for the 2015 (Phase One) Electric Utility Cost of Service Analysis
1. Rates must be based on the cost to serve customers. This is the overriding principle for the
cost of service analysis (COSA); all other rate design considerations are subsidiary to this
basic premise.
2. For this cost of service study, and to the extent feasible, energy charges should be based on
existing rate structures. This includes:
a. A tiered rate design structure for residents
b. A flat general service rate for small non-residential users
c. A flat demand and energy rate for large non-residential users
3. The COSA should involve a review of all existing rate schedules for inclusion in the COSA or
retirement.
4. The COSA should take into account the impact of rate designs on electric vehicles and
electric heating customers, and should investigate:
a. the extent to which these customers have different load profiles from other
residential customers; and
b. the extent to which existing rate designs should be adjusted for these differing load
profiles
5. The COSA should evaluate the need for a minimum charge.
6. A hydroelectric rate adjustment mechanism should be evaluated.
7. The COSA should evaluate the impact of rate designs on the economics of local solar for
current and future customers and should be coordinated with an analysis of long-term solar
policies to be put into effect after the existing net energy metering tariff reaches capacity.
8. A connection fee study should be performed and policies regarding residential transformer
upgrades should be reviewed, either as part of the COSA or as part of a parallel analysis. The
COSA methodology should be coordinated with any potential connection fee changes or
policy changes.
9. The impact of any proposed changes on low income customers should be evaluated
EXCERPTED DRAFT MINUTES OF THE JUNE 3, 2015
UTILITIES ADVISORY COMMISSION MEETING
ITEM 4: ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend
that the City Council Adopt a Resolution Approving Design Guidelines for the 2015 Electric Cost
of Service Analysis
Chair Foster explained to the newer commissioners that the past practice was when utility rates
were proposed to the UAC or Council, there was little discretion once the cost of service model
was developed, since the rates were based on the results of the cost of service analysis (COSA).
But, staff now holds a policy discussion with the UAC and Council prior to conducting a COSA so
that there can be input to the policies used to develop the rates.
Senior Resource Planner Jon Abendschein thanked Chair Foster for the explanation of why staff
is bringing forward this item. He noted that the last Electric COSA was completed in 2007 and
that the last Electric rate change was effective July 2009. He explained that the Electric COSA
will be done in two phases to deal with the short- and long-term issues. Abendschein said that
the short-term issues will be dealt with in Phase One of the COSA, which needs to be completed
in time to get new rates in place by July 2016. The Phase Two work will take longer to complete
and deal with longer-term issues such as those that can only be implemented with a new billing
system or advanced meters. For Phase One, no large departures from existing rate structures
are contemplated. The COSA was an important way of demonstrating that the City’s rates
reflected the cost to serve customers, which was necessary to avoid having them be considered
a tax under sections of the California Constitution added by Proposition 26 (2010). The goal was
to complete the COSA by the end of the year so the rates would be ready for adoption with the
FY 2017 budget in the spring. He discussed the design guidelines.
Cook asked how often a COSA should be completed. Abendschein said that they should be
redone every 3 to 5 years.
Commissioner Schwartz asked if efficiencies could be achieved with the use of technology, such
as helping customers understand when they were approaching a higher usage tier.
Abendschein said that there was a smart meter pilot program underway experimenting with
these types of approaches, and that the longer-term impacts and implications of technology
and innovation will be addressed in Phase Two.
ATTACHMENT B
Commissioner Hall asked if a hydro adjuster mechanism would allow rates to be adjusted on a
monthly or quarterly basis without returning to Council.
Abendschein said that it could be done that way, or the rates could be changed annually. The
goal would be to keep the adjuster simple and base it on a clear formula.
Commissioner Danaher said that he supported the proposed guidelines, including the minimum
charge. He said he was interested in looking at other rate designs that might not be in line with
a cost of service study but that could go to the voters for approval. He thought this might not
be appropriate for Phase One, but could be looked at later.
Vice Chair Cook agreed that the rate design could be approved by voters, for example in the
case where restrictions based on Constitution might lead to flat rates, but the community could
decide that conservation efforts would be much improved with tiered rates.
Commissioner Hall stated that Phase Two would take several years, and some parts should be
worked on earlier. It was important to begin realizing carbon benefits from electrification
sooner than later. Staff should look at ways of including environmental benefits in rate design
and use that to provide subsidies in rates for greenhouse gas reducing activities, such as EV
charging. He was in favor of changing the design guidelines to ask staff to consider climate
benefits in the rates and structuring rates to provide incentives for activities that benefit the
climate.
Abendschein asked that if the UAC considered such an amendment, that it only direct staff to
evaluate the use of externalities rather than direct staff to use externalities. Rates are typically
based on direct costs to serve customers, and it could be a challenge to include externalities.
Commissioner Hall said he thought staff could evaluate whether a policy framework adopted by
the Council might enable the use of externalities, and that if it did not, that the question could
be put to the voters.
Senior Assistant City Attorney Grant Kolling agreed that the question can go to the voters for
decision.
Director Fong noted that there was a constrained timeline and that it was important to
complete a COSA.
Commissioner Hall said that he was only suggesting a guideline that stated that staff would
evaluate the approach, not directing staff to use such an approach.
Commissioner Schwartz said that the true cost imposed by customers with solar systems and
electric vehicles (EVs) did need to be dealt with. She asked if the value of solar via net metering
will be determined as part of this study.
Abendschein responded that the City will be reaching its cap for net energy metering in the
next several years so that the City needs to be prepared for solar after NEM cap reached. He
said that this is part of the Phase One work plan.
Commissioner Schwartz asked who advocates for ratepayers, especially low income customers.
Director Fong stated that the Council performs the function of advocating for the ratepayers.
She noted that the City's utility is not for profit, unlike the investor-owned utilities that are
regulated by the California Public Utilities Commission.
Vice Chair Cook noted that the UAC can perform the role of ratepayer advocate as well.
Council Member Scharff said that the City needed to think about energy efficiency versus
conservation. The three-tiered rate structure may not achieve the goals of the Council
regarding electrification. If using electricity efficiently, people should be able to use more
without being penalized. Since the electric supplies were carbon neutral, Council was moving
toward encouraging electrification. He noted that the three-tiered rate structure does not
encourage fuel switching. The UAC should consider that in their policy discussions.
Commissioner Danaher said that the rate structures should be driven by a low carbon policy.
This might ultimately require voter approval.
Commissioner Schwartz said that the issue is more complex. Electricity Palo Altans consumed at
night did not come from the City’s solar energy projects. The electricity Palo Alto uses costs
different amounts depending on the time of day. Achieving cost of service was not as simple as
changing from tiered rates to flat rates.
Council Member Scharff said that he agreed with the need for time of use rates, but not tiered
rates. He said energy efficiency was what was important, not conservation.
Chair Foster asked if the Council has adopted a policy on electrification.
Director Fong stated that the Council had considered electrification, but had not yet taken a
policy position on the issue.
Council Member Scharff agreed, but noted that there was broad support on the Council to
support electrification, even if the details of the policy had not been worked out yet.
Commissioner Schwartz said that there could be value in the efficient use of natural gas.
Director Fong said that the UAC would discuss this issue at its next meeting.
ACTION:
Commissioner Hall made a motion to adopt the proposed guidelines with the addition of a new
guideline to the Phase One COSA as follows: The COSA should evaluate the opportunities for
rate designs that reduce the global climate footprint and those that increase all-fuel energy
efficiency.
Commissioner Danaher asked Commissioner Hall to clarify whether the evaluation should take
place within the COSA framework or outside the COSA framework.
Commissioner Hall said it should take place within the COSA framework. Phase One was the
right time to do this evaluation rather than waiting until Phase Two.
Abendschein said this would be a difficult goal to achieve within the timeline for Phase One.
Director Fong stated that the proposed guideline was very broad. It would be difficult for staff
to know whether proposed rates met the guideline.
Commissioner Hall said that the consultant could do an evaluation of what was necessary for
such a rate to be adopted. He believed a Council policy could be sufficient to allow these types
of rate designs. If legal analysis revealed this was not the case, the rate design could be put to
the voters.
Director Fong discussed the feed-in tariff, which had been a specific example of a time that the
Council had put some value on externalities. There had been specific direction for a specific
purpose. The proposed guideline was too broad to implement.
Abendschein said that this issue could be dealt with early in Phase Two rather than Phase One.
Not everything in Phase Two had to be evaluated at the same time.
Commissioner Hall said the “all-fuel” section of the guideline might be difficult, but the “global
footprint” section could be handled in Phase One. Two elements of the evaluation could be
incentives for electric vehicles and increased pricing for solar energy. If the only thing
preventing these rate structures was a Council policy, one could be adopted quickly.
Abendschein said that the risk of including this in Phase One was that there would not be
enough time to do a thorough evaluation of the legal approach, and staff would simply return
saying it was not possible.
Commissioner Hall said that was fine, and the analysis could then continue in Phase Two.
The motion died for the lack of a second.
ACTION:
Commissioner Hall moved, seconded by Chair Foster, to approve the Staff recommendation
with the addition of a new guideline to the Phase One COSA as follows: The COSA should
evaluate the opportunities for rate designs that reduce the global climate footprint.
ACTION
Commissioner Schwartz made a substitute motion, seconded by Commissioner Cook, to
approve the Staff recommendation and to recommend that Staff consider rate designs that
reduce the global climate footprint in Phase Two.
Commissioner Hall said he would vote against the motion, but he agreed with the overall
approach. He only thought that it should be evaluated in Phase One.
Commissioner Danaher asked Staff whether this approach would be unduly burdensome.
Director Fong said Staff had considered including this in Phase Two, and that it could be
considered early in Phase Two.
The motion carried (3-1-1 with Commissioners Cook, Danaher, and Schwartz voting yes, Chair
Foster abstaining, Commissioner Hall opposed, and Commissioners Eglash and Van Dusen
absent).
City of Palo Alto (ID # 5946)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 8/18/2015
City of Palo Alto Page 1
Summary Title: 3rd Quarter FY 2015 Financial Report
Title: Third Quarter Fiscal Year 2015 Financial Report
From: City Manager
Lead Department: Administrative Services
Motion
Staff recommends that Finance Committee review and approve the Third (3rd) Quarter financial
report.
Background
The purpose of this report is to provide the Finance Committee with information on the
financial status of the City’s General Fund and Enterprise Funds as of the end of the 3rd Quarter
of fiscal year (FY) 2015.
As reported in the FY 2016-2025 General Fund Long Range Financial Forecast and the FY 2016
Operating Budget, the City’s major tax revenue streams continue to exceed expectations. As a
result, the mid-year budget changes for FY 2015 included a $4.8 million upward adjustment in
revenues, a 3.2 percent increase over the FY 2015 Adopted Budget. Expenses were also
adjusted and, after subtracting Budget Amendments authorized by Council, the net projected
surplus for FY 2015 was estimated at $4.3 million. Attachment A contains a line by line report of
major revenues and expenditures, as well as a comparison to the FY 2015 Adopted Budget and
Adjusted Budget as of March 31, 2015. The net projected surplus for FY 2015 was increased to
$8.0 million in June 2015 as part of the presentation of the FY 2016 Operating Budget to City
Council.
Revenue activity subsequent to the mid-year budget changes in March indicates it is now likely
that FY 2015 will end with a surplus in excess of $8 million due to items such as an
extraordinarily large $3.3 million documentary transfer tax receipt, and one-time receipts for
excess Educational Revenue Augmentation Funds (ERAF) and reimbursement of state unfunded
mandates. As approved in the FY 2016 Operating Budget, $2.1 million of the FY 2015 surplus
will be used to fund one-time expenditures in FY 2016.
City of Palo Alto Page 2
Discussion
GENERAL FUND
Revenue Highlights for FY 2015 3rd Quarter Year to Date (YTD)
Following is a table which highlights the City’s major revenue sources for the 3rd Quarter YTD,
compared to the same period of the prior year. Revenue for each period is expressed as a
percentage of Adjusted/Final Budget.
In total, revenue is up $5.6 million, or 5 percent, from prior year as of the end of the 3rd Quarter
YTD. After factoring out a FY 2014 anomaly in the Charges for Services line ($2.0 million
explained later), the “normalized” increase in revenue for the nine month period is $3.6 million,
or 3.5 percent, driven primarily by property tax and transient occupancy tax increases. In total,
receipts are at 69 percent of Adjusted Budget, which is typical for the end of the 3rd Quarter
due to property tax receipts which spike in the last quarter of the fiscal year. It is important to
note that the FY 2015 Adjusted Budget includes the voter approved Transient Occupancy Tax
increase from 12% to 14% effective January 1, 2015 and the voter approved Telephone Utility
Tax decrease from 5% to 4.75% effective April 1, 2015.
Following is a chart which demonstrates the three year trend for major sources of General Fund
tax revenue, and compares FY 2013 and FY 2014 actuals with FY 2015 Adjusted Budget. As
detailed in the City’s most recent Long Range Financial Forecast, all major tax revenue streams
are expected to continue a positive trajectory. Property tax and transient occupancy tax are
expected to continue strong growth trends, while sales tax and documentary transfer tax will
City of Palo Alto Page 3
advance at a slower rate. The chart is followed by a more detailed discussion of each major
revenue category.
Property tax revenue at the close of 3rd Quarter YTD was $20.7 million, an increase of 9
percent over the same period prior year. Property tax is received from the County of Santa
Clara during the 2nd, 3rd and 4th quarters of the year, and receipts at 64 percent of full-year
budget is typical for this line item through March 31. The FY 2015 Adjusted Budget is $32.6
million, 6.4 percent higher than the prior year’s actual revenue of $30.6 million. Staff expects
property tax revenue will exceed FY 2015 Adjusted Budget by $1.4 million, primarily due to a
one-time receipt of $0.9 million for an excess ERAF distribution 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.
Property tax increases are driven by high demand in the residential sector and robust activity in
the commercial property market. Palo Alto’s single family home median sale price has doubled
since 2008 and currently stands at $2.5 million. The current trend in real estate activity is
expected to continue into FY 2016, as evidenced by continued growth in assessed values
resulting from robust sales such as seven large commercial sales in May, 2015, which alone are
expected to increase FY 2016 property tax revenue by $0.5 million.
City of Palo Alto Page 4
Sales tax revenue for 3rd quarter YTD has decreased $2.7 million, or 13 percent, from the same
period last year for a total of $17.7 million in receipts YTD. FY 2014 revenue through 3rd
Quarter included a large one-time receipt from a single vendor. After adjusting for this
anomaly, sales tax revenue declined $1.1 million from prior year, a decrease of 6 percent.
Through the first three quarters of the fiscal year, receipts are at 61 percent of Adjusted
Budget. The FY 2015 Adjusted Budget includes a one-time positive adjustment of $1.7 million
to align the accrual period with the fiscal year. In prior years sales tax was accrued through the
period ended May 15. Effective for FY 2015 sales tax will be accrued through June 30, which
creates a one-time revenue addition of $1.7 million for the period May 16 through June 30.
This is a one-time accounting adjustment which will be made in the 4th Quarter.
Sales tax revenue continues to show positive growth and has fully recovered from the depths of
FY 2010. Staff expects that full-year revenue will be very close to the Adjusted Budget amount
of $29.2 million.
Transient occupancy tax (TOT) revenue reached $9.4 million through the end of the 3rd
Quarter, an increase of $1.8 million from prior year. Average daily room rates increased 14
percent from prior year - $202 per day to $230 per day - while average occupancy rates
remained flat at 77 percent. The Epiphany Hotel has been open for a full year, and two new
Hilton hotels opened in March, 2015. The Clement Hotel is expected to open at the end of this
calendar year.
Effective January 1, 2015, the TOT rate increased from 12 percent to 14 percent. In the first
three months, the 2 percent increase generated $0.6 million in revenue. As part of closing the
FY 2015 Budget, staff will bring forward a recommendation to allocate the receipts from both
the 2 percent rate increase and the newly opened hotels to the Infrastructure Reserve.
Documentary transfer tax revenue for the nine months ended March 31 totals $4.7 million,
down $0.9 million or 15 percent from the prior year. An unusually large sale of commercial
properties by Hudson Pacific resulted in a $3.3 million receipt in the 4th Quarter. Staff expects
full year revenue will be in excess of $9.8 million, the highest year on record and 32.5 percent
higher than last year.
Charges for services revenue through the first three quarters of FY 2015 is up $2.7 million from
the same period last year, primarily due to a $2.0 million timing difference in the billings to
Stanford University for fire and emergency services. After adjusting for this anomaly, this
revenue category is up $0.7 million from prior year, primarily driven by an increase in the
annual charge to Stanford for fire services.
Permits and licenses revenue for 3rd Quarter YTD is up $1.3 million from the same period prior
year due to a 3rd Quarter surge in new construction permits. This revenue category will be
adjusted at year-end to defer a portion of revenue to FY 2016 for those permits that are in
progress at June 30.
City of Palo Alto Page 5
Expense Highlights for FY 2015 3rd Quarter YTD
Following is a table which highlights the City’s expenses by function for the 3rd Quarter YTD,
and compares expenses to the same period prior year. In addition, the expense for the period
is expressed as a percentage of budget for each of the years.
Actual expenses through the first three quarters of the fiscal year total $109.6 million, a 4
percent increase over prior year. The expenses are right in line with the Adjusted Budget at 67
percent of full-year budgeted amounts.
Effective July 2, 2014, as approved in the FY 2015 Adopted Budget, Development Services was
separated from Planning and Community Environment so that development partners could
work together more comprehensively and provide a higher quality of service. Salary and non-
salary expenses were identified and transferred out of the Planning, Fire, Information
Technology, and Public Works departments. The largest expense transfer was from the
Planning Department.
Library expenses are up over prior year due to increased staffing costs as a result of the Mitchell
Park and Rinconada Libraries both re-opening in FY 2015.
City of Palo Alto Page 6
Public Safety comprises the largest portion of General Fund expenditures – 42 percent of
actuals as of March 31. Following is the detail for Public Safety overtime expenses through the
3rd Quarter of the current fiscal year:
Police overtime has increased $0.1 million, or 10 percent, over the same period last year. On a
combined basis, salaries and overtime are at 75 percent of budget through the first nine
months of the fiscal year. Overtime cost is primarily due to vacancies, which increased from 8
positions to 11 positions. The Department’s overtime analysis is included in Attachment B.
Fire overtime has decreased slightly from the same period last year. On a combined basis,
salaries and overtime are at 73 percent of budget through the first nine months of the fiscal
year. Overtime cost is driven by vacancies. Vacancies increased from 4 to 9, all of which are
being held open pending the outcome of negotiations on the Stanford fire services contract.
The Department’s overtime analysis is included in Attachment B.
General Fund Budget Stabilization Reserve (BSR) Balance
The General Fund BSR balance as of July 1, 2014 was $35.1 million. Staff anticipates the City
could end the year with an $8 million surplus due to continued upward revenue trends through
the 4th Quarter, and items such as one-time receipts for excess ERAF ($0.9 million) and
reimbursement of state unfunded mandates ($1.0 million). As part of closing the FY 2015
Budget, staff will bring forward recommendations to allocate budget surplus funds, including a
transfer to the Infrastructure Reserve.
City of Palo Alto Page 7
ENTERPRISE FUNDS
Following is a summary of change in net position for each of the Enterprise Funds for the nine
months ended March 31, 2015, including a comparison of results from the same period last
year.
Water Fund 3rd Quarter YTD revenue has decreased $3.6 million, or 12 percent, from same
period prior year due to reduced water usage by retail and wholesale customers, as requested
by the San Francisco Public Utilities Commission in response to California’s fourth year of
drought.
Gas Fund 3rd Quarter YTD revenue declined $3.8 million, or 14 percent, from same period prior
year due to markedly reduced consumption over the course of the winter months November
through February.
Airport Fund 3rd Quarter YTD revenue is $0.4 million. City of Palo Alto took over operation of
the Airport from County of Santa Clara during the 1st Quarter of FY 2015. Revenue sources
include tie-down fees and rental revenue.
City of Palo Alto Page 8
Electric Fund operating expenses through the 3rd Quarter total $78.6 million, or 13 percent
higher than the same period last year due to increased spot market purchases as a result of less
hydroelectric power.
Gas Fund expenses have declined $1.0 million, or 6 percent, from prior year due to lower
commodity prices.
Wastewater Treatment Fund expenses have increased 5 percent over the same period last year
due to increased salaries and benefit expense as a result of filling vacancies, and higher
allocated charges.
Storm Drainage Fund expenses have increased $0.3 million, or 18 percent, over the same
period last year, primarily due to an increase in allocated charges.
Fiber Optics Fund expenses are 7 percent higher than the same period last year due to
increased salaries and allocated administrative expenses.
Airport Fund expenses have increased due to assumption of active operations from County of
Santa Clara in the 1st Quarter. Airport expenses are being partially funded by a loan from the
General Fund.
City of Palo Alto Page 9
Pension and Retiree Medical Liabilities
Long-term unfunded liabilities for pension and retiree medical continue to be the dominant
issue in discussion of the City’s long-range financial planning. At the direction of City Council,
Staff will bring forward a report in September 2015 which identifies potential strategies to
address these unfunded liabilities.
In order to slow the growth of pension costs over the long term, the City implemented a second
tier pension formula in 2011 (2% @ 60) and the California Public Employees’ Pension Reform
Act of 2013 (PEPRA) mandated a third tier pension formula of 2% @ 62 effective January 1,
2013. Following is a table which shows the employee count in each of the Miscellaneous and
Safety plans as of June 1, 2015. As of that date, 28 percent of the City’s full-time employees
were enrolled in Tier 2 and Tier 3 plans.
City of Palo Alto Page 10
As of June 30, 2014 the City’s unfunded pension and retiree medical liabilities totaled $439
million. The Governmental Accounting Standards Board (GASB) passed new accounting
standards for the presentation of pension liability which will be effective for FY 2015. The
primary changes relate to amortization periods and disclosure, and the impact of these changes
will be included in Staff’s September 2015 presentation on strategies for funding of long-term
liabilities. In addition, new accounting standards for presentation of the retiree medical liability
were enacted and will be effective for FY 2018.
Attachments:
Attachment A: General Fund Third Quarter Financial Report (XLSX)
Attachment B: Public Safety Overtime Analysis (XLSX)
ATTACHMENT ACITY OF PALO ALTO
GENERAL FUND THIRD QUARTER FINANCIAL REPORT
FISCAL YEAR ENDING JUNE 30, 2015
(in thousands)
BUDGET ACTUALS (as of 03/31/2015)
Adopted Adjusted Pre % of Adj
Categories Budget Budget Encumbr Encumbr Actual Budget*
Revenues & Other Sources
Sales Tax 25,957 29,238 - - 17,703 61%
Property Tax 31,927 32,556 - - 20,715 64%
Transient Occupancy Tax 14,156 15,901 - - 9,400 59%
Documentary Transfer Tax 7,514 6,500 - - 4,744 73%
Utility Users Tax 11,285 10,895 - - 8,070 74%
Motor Vehicle Tax, Penalties & Fines 2,164 2,168 - - 1,340 62%
Charges for Services 23,013 24,863 - - 18,052 73%
Permits & Licenses 7,804 7,738 - - 6,288 81%
Return on Investment 685 685 - - 796 116%
Rental Income 14,254 14,206 - - 11,110 78%
From Other Agencies 453 453 - - 603 133%
Charges To Other Funds 10,647 10,647 - - 8,006 75%
Other Revenues 1,060 1,493 - - 1,375 92%
Total Revenues 150,919 157,343 - - 108,202 69%
Operating Transfers-In 18,433 18,620 - - 13,639 73%
Encumbrances and Reappropriation 6,386 - - - 0%
Contribution from Budget Stabilization Reserve
As Assumed in the Adopted Budget 1,732 1,732 - - - 0%
Total Sources of Funds 171,084 184,081 - - 121,841 69%
Expenditures & Other Uses
City Attorney 2,578 2,924 10 455 1,930 82%
City Auditor 1,065 1,075 26 808 78%
City Clerk 1,276 1,286 73 832 70%
City Council 432 517 53 265 62%
City Manager 2,728 2,485 235 1,613 74%
Administrative Services 7,175 7,417 23 160 5,341 74%
Community Services 22,764 24,339 40 1,835 16,688 76%
Development Services 10,535 10,900 208 6,852 65%
Library 7,521 8,301 355 5,802 74%
Office of Sustainability 272 575 121 343 81%
People Strategy and Operations 3,264 3,757 181 222 2,337 73%
Planning and Community Environment 7,015 9,018 75 1,488 5,297 76%
Public Safety 62,054 63,460 285 714 45,775 74%
Public Works 13,397 14,475 38 1,194 9,777 76%
Non-Departmental 13,272 11,890 5,914 50%
Total Expenditures 155,348 162,419 652 7,139 109,574 72%
Operating Transfers-Out 2,077 2,320 - - 1,708 74%
Transfer to Infrastructure 13,659 14,591 - - 10,244 70%
Total Use of Funds 171,084 179,330 652 7,139 121,526 72%
Net Change to BSR - 4,751
Budget Amendments Authorized by Council thru 9/30/14:* Including reappropriations and prior yearShuttle Contract, EPA Contribution (6/23/14)- encumbrances.
Golf Course Operating Budget (6/23/14)-
Transportation Management Authority (8/4/14)(30) Sustainability and Climate Action Plan (8/18/14)(137)
Increase Airport Fund loan for legal counsel (9/22/14)(200) Golf Course Operating Loss Reserve (9/22/14)-
Golf Restaurant Lease Revenue (10/6/14)(23)
Business Registry (11/3/14)- Comprehensive Plan Fiscal Analysis (3/2/15)(158)
Tree Pruning Contract (3/9/15)(160) Residential Preferential Parking Program (3/9/15)(119)
Midyear Budget (4/20/15)(4,330)
Total Augmentations Authorized by Council - (5,157)
Net Surplus/(Deficit) Excluding BAOs - (406)
BSR Balance
BSR % of Total Use of Funds, excluding
Prior year reappropriations & encumbrances
Earmarked Reserves, 9/30/15:
-
- -
7/30/2015
Attachment B
Overtime Analysis for Fiscal Years 2013 through 2015
thru 03/31/15
2013 2014 2015
POLICE DEPARTMENT
Overtime Expense
Adopted Budget $967,900 $1,500,000 $1,500,000
Modified Budget 970,382 1,500,000 1,500,000
Net Overtime Cost - see below (82,849) 593,565 757,380
Variance to Budget $1,053,231 $906,435 $742,620
Overtime Net Cost
Actual Expense $1,542,754 $1,711,764 $1,497,045
Less Reimbursements
Stanford Communications 51,299 54,552 51,031
Utilities Communications Reimbursement 28,247 29,845 29,949
Local Agencies (A)16,255 8,905 7,448
Police Service Fees 83,785 73,934 56,352
Total Reimbursements 179,586 167,236 144,780
Less Department Vacancies 1,446,017 950,963 594,884
Net Overtime Cost ($82,849)$593,565 $757,380
Department Vacancies (number of days)5,543 4,251 2,506
Workers' Compensation Cases 10 14 11
Department Disabilities (number of days)641 776 468
FIRE DEPARTMENT
Overtime Expense
Original Budget $1,624,415 $1,424,414 $1,424,414
Modified Budget (B)1,624,415 1,750,956 1,608,710
Net Overtime Cost - see below 628,711 1,012,521 95,089
Variance to Budget $995,704 $738,435 $1,513,621
Overtime Net Cost
Actual Expense $1,812,170 $2,562,549 $1,707,952
Less Reimbursements
Stanford Fire Services (C)549,088 776,452 517,509
Cal-Fire/FEMA (Strike Teams)- 50,542 184,269
Total Reimbursements 549,088 826,994 701,778
Less Department Vacancies 634,371 723,034 911,085
Net Overtime Cost $628,711 $1,012,521 $95,089
Department Vacancies (number of days)2,340 2,618 2,709
Workers' Compensation Cases 9 18 12
Department Disabilities (number of days)216 489 175
NOTES:
(A)Includes Animal Services contract with Los Altos and Los Altos Hills.
(B)Includes Strike Team Reimbursement of $184,296 approved by Council in the FY 2015 Midyear Report on 4/20/15.
(C )Stanford reimburses 30.3% of Fire Service expenditures.
Public Safety Departments
7/30/2015
City of Palo Alto (ID # 5860)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 8/18/2015
City of Palo Alto Page 1
Summary Title: City Debt Policy
Title: Recommendation to Adopt City Debt Policy
From: City Manager
Lead Department: Administrative Services
Recommendation
Staff recommends that the Finance Committee recommend the Council approve the attached
Proposed Debt Policy.
Background
An outstanding request by the City’s Finance Committee was to draft a comprehensive citywide
debt policy. Debt guidelines were adopted by Council in a report (CMR 210:97) that addressed
infrastructure needs. Although staff has been following these guidelines, which are provided in
the City’s Annual Budget document (e.g., page 95 of the FY 2015 Adopted Budget
http://www.cityofpaloalto.org/civicax/filebank/documents/43341), a more comprehensive and
detailed document that is similar to the City’s Investment Policy will be more beneficial for the
City in the years ahead. The new policy follows best practices by utilizing a template from the
Government Finance Officers Association (GFOA). Staff consulted other jurisdiction debt
policies as well in the effort to update previous guidelines and practices.
Discussion
The attached policy discusses several important areas that are not addressed in current
guidelines. These include, for example: expanding the current policy to all City Funds;
providing guidelines for refinancing existing debt; detailing the responsibilities of City staff
engaged in issuing debt; delineating the debt instruments or vehicles (e.g. General Obligation
Bonds or Certificates of Participation) the City can utilize; and describing situations in which tax-
exempt and taxable debt can be used. The depth and breadth of the policy will serve to guide
future staff.
Historically, the City has been conservative in issuing debt, both in quantity and type.
Whenever possible, a pay-as-you-go approach has been applied to capital projects. For capital
intensive projects requiring financing, the City traditionally used fixed rate debt. This has
provided certainty as to annual obligations and smooth debt levels over time. It is important to
City of Palo Alto Page 2
note that the attached policy predominantly reflects these practices. Staff has not included in
the policy more complex debt instruments that include “synthetic debt” whereby variable for
fixed or fixed for variable interest rate swaps/exchanges are incorporated. Because of their
complexity, a general policy approach is not recommended in this instance, as such instruments
should be thoroughly reviewed, explained, vetted, and approved by the Council on a case by
case basis.
As with all guidelines and policies, exceptions will arise in the future. For example, even though
the guideline for enterprise/utility funds specifies that annual debt service cannot exceed 15
percent of the operating budget for the individual fund (10 percent for the General Fund), it will
be inevitable that given the scale of the future replacement and renovation of the Water
Quality Control Plant that annual debt service will exceed the 15 percent threshold. In this
case, the purpose of the threshold is not to forestall a necessary project, but to ensure public
review and staff explanation for the reasons for a departure from policy, and how rates will be
adjusted to meet annual debt service.
In conclusion, staff recommends that the Finance Committee approve the attached Debt Policy.
Resource Impact
There is no budget impact associated with this report.
Policy Implications
This recommendation is in line with debt guidelines outlined in the Annual General Fund
Operating Budget and comports with the more detailed policy document or best practices
provided by the Government Finance Officers Association.
Environmental Review
The actions requested in this report do not constitute a project for the purposes of the
California Environmental Quality Act (CEQA).
Attachments:
Attachment A: Draft Debt Policy (DOCX)
Attachment A
1
CITY OF PALO ALTO DEBT POLICY
DRAFT 4
5/14/15
I. Background/General Statement
One of the keys to sound financial management is the development of a debt policy. Development of a
debt policy is a recommended practice by the Government Finance Officers Association. Bond rating
agencies recognize the importance of debt guidelines as a sign of prudent financial management. A
debt policy establishes the parameters for issuing debt and managing the debt portfolio. It provides
guidance from the Council to City staff regarding purposes for which debt may be issued, types and
amounts of permissible debt, and the method of sale that may be used.
The City of Palo Alto (City) maintains conservative financial policies to assure strong financial health both
in the short- and long-term. The City is an infrequent issuer of debt with debt primarily used as a tool to
finance large capital investments such as property acquisitions, new building construction, and
rehabilitating or replacing major assets. Maintaining the City’s strong bond rating is an important
objective of the City’s financial policies. To this end, the City is constantly working to improve its
financial policies, budgets, forecasts, and financial health.
II. Scope of Policy
This policy sets forth the criteria for the City’s issuance, repayment, and management of debt. The
primary objective of the debt policy is to establish criteria that will protect the City’s financial integrity
while providing a funding mechanism to meet the City’s capital needs. The underlying approach of the
City is to borrow only for capital improvements that cannot be funded on a pay-as-you-go basis. The City
will not rely on any form of debt to finance current operations unless there is a cash flow shortage
requiring short-term instruments such as Tax and Revenue Anticipation Notes (TRANS). All debt issued
will be in compliance with this policy along with all other City, State, and Federal laws, rules, and
regulations.
This debt policy shall apply to all City of Palo Alto funds although exceptions may be requested from
Council in the future.
III. Purpose of Debt Financing
The City borrows money primarily to fund long-term capital improvement projects and to refinance
existing debt. Another potential use is for financing the purchase of major and multiple pieces of
equipment.
With the exception of potential use of short-term TRANS, debt issued to fund operating deficits is not
permitted. TRANS are used to address short-term cash flow issues and are intended to be repaid within
the fiscal year of issuance. Debt will be used to finance eligible projects only if it is the most cost-
effective and practical means available to the City. In addition, consideration on using debt will be
analyzed when interest rates are low. While the “pay-as-you-go” method of using current revenues to
pay for capital projects is often considered the preferred means of financing (to avoid interest and
issuance costs), it may not be entirely practical or equitable.
The “pay-as-you-go” funding option requires revenues to accumulate to pay for capital projects. The City
would be able to undertake capital projects under this method only if sufficient cash accumulates.
Attachment A
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Prudent use of debt financing rather than “pay-as-you-go” funding of capital projects can facilitate:
better allocation of resources over time, increased financial flexibility, and payment equity across
generations for the use of long-term assets. The three primary borrowing purposes are summarized
below:
A. Long-Term Capital Improvements
The City maintains a 5-year Capital Improvement Plan (CIP) and an annual CIP Budget for consideration
and adoption by the City Council as part of the City’s budget process. The Administrative Services
Department’s Treasury Division is responsible for coordinating and analyzing potential debt financing for
CIP projects. Factors included in the analysis are: amount and type of debt, duration of bonds, interest
rates, annual debt service cost, current outstanding debt levels, debt limitation calculations and
compliance, impact on future debt burdens, credit requirements, and existing or needed revenue
sources to meet annual debt service obligations. Prior to issuance of debt, the City will prepare revenue
projections, such as the biennial budget or financial forecasts (e.g. financial plans for utilities or the
General Fund Long Range Financial Forecast) to ensure that there is adequate capacity to make principal
and interest payments. A new or enhanced revenue source may need consideration and approval to
support additional debt levels.
Since the aggregate cost of desired capital projects generally exceeds available funds, the capital
planning process prioritizes projects and identifies the funding needs. The City will initially rely on
internally-generated funds and/or grants and contributions from other governmental agencies to
finance its capital needs. Debt will be issued for a capital project only when the magnitude of costs
justifies a debt financing; the project meets a critical need; if a secure revenue source is identified to
repay the debt; and when it is an appropriate means to achieve a fair allocation of costs between
current and future beneficiaries. All debt issuances must be approved by the City Council.
The Treasury Division of the Administrative Services Department, working with the Office of
Management and Budget, City departments, and within the context of the Capital Improvement Plan
and the City’s financial forecasts, oversees and coordinates the analysis, timing, processing, and
marketing of the City’s bonds. Close coordination of capital and debt planning among appropriate
departments will ensure that the maximum benefit from existing funding is achieved. Debt financing
will be considered after a debt capacity or affordability analysis is conducted.
B. Essential Vehicle and Equipment Needs
In addition to capital projects, the City can finance essential equipment and vehicles. These assets range
from public safety vehicles to utility equipment. The underlying asset must have a minimum useful life
of three years. Short-term financings, including loans and capital lease purchase agreements, are
executed to meet such needs. It has been the City’s practice to fund these purchases with existing
resources; however, debt financing flexibility for future needs remains an option.
C. Re-financings/Refunding of Existing Debt
The Chief Financial Officer or Director of Administrative Services, supported by Treasury Division, will
periodically evaluate its existing debt and execute re-financings when economically beneficial. A
refinancing may include the issuance of bonds to refund existing bonds or the issuance of bonds in order
to refund other obligations. A net present value analysis, both in dollar and percentage terms, will be
conducted to determine whether a re-financing is optimal. As a “rule of thumb,” a minimum 3 percent
net present value savings will be used as a basis to begin re-financing efforts. As with new debt, all re-
financings must be approved by Council.
Attachment A
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IV. Responsibilities of City Personnel
Authority to issue and manage debt is derived from Palo Alto Municipal Code 2.08.150, section 13.
This section gives the Director of Administrative Services (Chief Financial Officer or CFO) authority to
perform the duties of debt management. This section also authorizes the CFO to appoint a subordinate
employee from the Department to assist in the performance of the duties of City Treasurer. The CFO has
appointed an Assistant Director and a Senior Management Analyst to oversee debt issuance and
subsequent responsibilities such as: making interest and principal payments via a Trustee; managing
debt service reserves and project funds; and following bond indenture requirements and all other
Federal and State regulations. The CFO is responsible for assuring that the activities related to the
issuance and payment of bonds or other obligations do not materially impact the City’s bond rating
which currently stands at a Triple A level (the highest possible rating).
V. Guidelines for Use of Debt and Other Financing
A. Debt may be judiciously used when some or all of the following conditions exist:
1. Estimated future revenue is sufficient to ensure the payment of annual debt service
2. Other financing options have been explored and are not viable for the timely or economic
acquisition or completion of a capital project
3. A capital project is mandated by federal or state authorities with no other viable funding option
available
4. The capital project or asset lends itself to debt financing rather than pay-as-you-go funding
based on the expected useful life of the project
5. Debt will not be used to fund ongoing operating expenses of the City except for situations in
which cash flow problems arise and the City may need to issue short-term Tax or Revenue
Anticipation Notes.
6. Annual debt service shall not exceed 10 percent of annual operating expenses for the General
Fund unless an exception is approved by Council. For all other City funds annual debt service
shall not exceed 15 percent of annual operating expenses unless an exception is approved by
Council.
B. Minimize borrowing costs by:
1. Maximizing the use of existing resources for capital projects and equipment needs.
2. Issuing tax-exempt debt except in instances where IRS regulations require taxable bonds.
3. Striving to obtain the highest credit ratings possible.
4. Maintaining a competitive bid process on bond sales except for situations in which negotiated or
private placement sales meet City objectives. In negotiated or private placement sales, City staff
will work with its Financial Advisor to review proposed interest rates and proposed fees.
5. Ensuring that the type of debt and debt structure developed ensure advantageous marketing of
each issue.
C. Linking debt to appropriate revenue sources and project users:
1. When possible, tie project financing directly to users of a specific facility or use. Examples
include renovation of the Golf Course where user fees can offset debt service or replacing gas
mains where gas rates can be increased to cover debt expense.
2. Using debt in the Enterprise Funds so as to avoid significant spikes in user rates by smoothing
out costs over time.
Attachment A
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VI. Types of Financing Instruments
As outlined by the California Debt and Investment Advisory Commission (CDIAC), there are numerous
options or debt instruments to fund projects. These range from General Obligation Bonds to Mello-Roos
Districts, to State Revolving Funds to Certificates of Participation. The list below represents the most
typically used debt vehicles and the general guidelines for their use.
A. General Obligation Bonds (G.O.)
G.O. bonds provide investors with the most secure credit and the City with the lowest cost of funds.
Through a super majority vote, residents agree to place a lien/tax on all properties to pay annual debt
service. A lien on property, especially with land values in the City of Palo Alto, along with a City pledge to
use its unlimited authority to levy property taxes for debt service provides significant assurance to
investors and bondholders. Proceeds from G.O. bonds are strictly limited for acquisition of land, capital
projects and the purchase of fixed equipment. These bonds cannot be used for operating expenses or
moveable equipment. The sum of all G.O. debt outstanding is governed by a statutory legal debt limit
that is disclosed in the City’s annual Comprehensive Annual Financial Report and the City’s budget
documents.
B. Certificates of Participation (COPs)
COPs are a form of lease obligation in which the City enters into an agreement to pay a fixed amount
annually to a third party, usually a private leasing company or trust structure. These leases are issued
for land acquisition and capital improvements. In addition, the purchase of moveable equipment is
permitted. It is typical for the asset being acquired or improved to act as the credit for the financing, but
the City’s General Fund is ultimately liable for all annual debt service limits. COPs can be tied, for
example, to revenue streams such as Golf Course fees or rents from a newly constructed facility. The
City has established a leasing structure with the Public Improvement Corporation (PIC) that allows the
issuance of COPS
C. Revenue Bonds
Revenue bonds may be issued to fund capital improvements related to enterprise functions (e.g. water,
sewer, electric) or for special projects supported by discrete revenue sources. They are designed to be
self-supporting through user fees or other special earmarked receipts or taxes and do not rely on the
general taxing powers of the City. Principal and interest is paid from net the revenues of enterprise
operations. Unlike General Obligation bonds, revenue bonds are not subject to the City’s statutory debt
limitation. Electric and gas bonds, for example, do not require voter approval while other enterprise
funds such as the Storm Drain Fund may be subject to Proposition 218 requirements in raising revenue
levels sufficient to pay debt. Net revenues generated by the applicable Enterprise Funds must be
sufficient to maintain required debt service coverage levels specified in bond indentures.
D. Special District Bonds.
These bonds are typically used for a specific purpose such as garage construction, landscape and lighting
improvements, or utility work. They are subject to voter or property owner approval where special
taxes or assessments are levied on properties to pay debt service for constructed facilities or services.
With the passage of Proposition 218 by voters, specific steps and requirements must be followed to
implement such districts. The City’s downtown parking assessment district is one such example.
Attachment A
5
E. State Revolving Fund (SRF) and Federal Loans
The SRF provides a low interest loan program for construction of water and wastewater infrastructure
projects. The City’s Regional Water Quality Control Plant, for example, has an outstanding SRF loan.
Both the State and rating agencies require the City to disclose all incurred debt as they determine
whether the City is able to meet required debt service coverage ratios (the basic concept of coverage is
that after covering all operating expenses, the fund issuing debt has sufficient revenue (at a specified
level) to cover annual debt service.
In addition to the SRF, the City may participate in advantageous Federal loans as they become available.
For example, the City has issued Clean Renewable Energy Bonds for a photovoltaic project and Build
America Bonds to construct water system improvements. Such bonds typically offer incentives for
investors and a low cost of funds for the City.
VII. Debt Limits
A standard guideline, and one that has been inserted annually in the City’s General Fund budget
document, is that debt service payments should not exceed 10 percent of the annual expenditure
budget. Moreover, California 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 now at one‐fourth of that amount or
3.75 percent. For details on current General Fund debt service levels as a percent of budget and for
where the City stands on the State’s legal debt margin, see the Comprehensive Annual Financial Report’s
(CAFR) Statistical section for the Computation of Legal Bonded Debt Margin calculation. Similar, but
abbreviated information also is provided in the Operating Budget’s Debt Service Funds Overview
section.
Enterprise or other fund debt is not subject to legal debt margin described above. For Enterprise and all
other funds, debt service payments should not exceed 15 percent of the annual expenditure budget.
Any exceptions to the above guidelines will be presented to Council for approval.
VIII. Term and Structure of Debt
A. The duration of a debt issue is typically tied to the economic or useful life of an asset. This
is consistent with standard practice and further serves the concept of allocating debt service costs to
current and future beneficiaries of the asset. It is possible, though uncommon, for the term of debt to
exceed 30 years duration. For long-term assets such as a building or a parking garage, the City has
issued 30 year bonds. Wherever possible and to save on interest costs, the City should consider shorter-
term borrowings where appropriate. Additional factors to include in the analysis of the term of debt
are: current market conditions, institutional interest, and the durability and consistency of revenue
sources covering debt service payments.
Structure
A. Fixed and Variable Rate Debt.
The City’s practice has been to issue fixed rate debt. Such debt provides absolute certainty, at the time
of a bond sale, as to the level of principal and interest owed annually. Moreover, it allows the City to
have even debt service payments over time. This conservative practice has served the City well over the
past decades.
Attachment A
6
Specific conditions may arise where the City would consider the use of variable interest rate bonds.
Variable bonds have interest rates that reset on a periodic basis (e.g. daily, weekly, monthly).
Conditions which would cause consideration of variable rate debt are:
1. An adverse fixed-rate municipal market
2. Uncertainty over the level of annual revenues to cover debt service
3. The potential for rapid repayment of debt
4. The need or desire to optimize the City’s asset/liability balance
Variable interest rate debt, however, exposes the City to interest rate risk over the term of the
financing. While credit rating agencies are supportive of variable rate debt, the magnitude of any
unhedged variable rate debt could raise concerns. Rating agencies suggest the aggregate amount of
such debt be capped at a level not exceeding 20-25 percent of debt outstanding.
It is possible to issue a combination of both fixed and variable rate debt. The City could use this tool, as
well as others, such as front or back ending debt to manage its debt portfolio. These structures should
be used in a manner which best supports the City’s long-term financial condition. There are other types
of debt that are a variation of fixed and variable debt. These can involve swaps of fixed for variable debt
(or vice versa) depending on the interest rate environment and the City’s general financial position.
These instruments can become most complex and sensitive to shifts in the interest rate and economic
environment. They require careful analysis and monitoring.
B. Tax-exempt versus Taxable Debt
The City’s primary mode is to issue tax-exempt debt. This debt reduces the City’s interest
expense and provides considerable savings over time. There are, however, instances in which
the City may want or need to issue taxable debt. For example, if the City builds a garage and
plans retail space within it, it may, depending on square footage used, have to issue both
exempt and taxable debt. The Internal Revenue Service (IRS) has specific guidelines on public
and private usage of facilities and when taxable debt must be issued. Working with the City’s
Bond Counsel to understand and comply with IRS regulations is essential.
C. Prepayment Provisions
Redemption provisions and call features shall be evaluated in the context of each bond sale to:
enhance marketability of the bonds; ensure flexibility related to potential early redemption; and
to foster future refunding transactions. The potential for additional costs such as a call premium
and potentially higher interest rates will be evaluated in the decision to redeem bonds. The
following are different redemption provisions to be evaluated:
1. Optional redemption allows the City the ability to redeem bonds early.
2. Mandatory redemption includes provisions for redeeming bonds under specific and
pre-determined conditions.
3. Extraordinary redemption provides ability to redeem bonds given fortuitous events.
IX. Attention to Credit-Worthiness
A. Credit Ratings
The City seeks to maintain the highest possible credit rating on debt that can be achieved
without compromising its policy objectives or transparency. Achieving the highest possible
credit rating translates into lower interest cost and annual debt service. At a high level, rating
Attachment A
7
agencies will look for the ability to repay debt, prudent financial management, systematic
capital planning, interdepartmental cooperation and coordination, long-term labor agreements,
and long-term financial planning. More specifically, agencies such as Standard and Poor’s focus
on:
Fiscal soundness of the General and Enterprise Funds
Community demographics such as education and income levels
Property values and business concentration
Management capability
State and Federal regulations
The credits, revenue sources, and coverage ratios pledged to repay debt
Fund reserve levels and policies
City’s debt history and current debt structure
The capital improvement project being funded
Covenants and conditions in the governing legal documents
Cost adjustments to balance budgets during an economic downturn
The City recognizes that external legislative, economic, natural, or other events may, from time to time,
affect the creditworthiness of its debt. Such events could lead to a downgrade or upgrade to City
ratings. Naturally, when new debt is proposed, rating agencies will evaluate its potential impact upon
the City’s outstanding debt rating. The major source of risk rating agencies consider is the stability and
reliability of revenue sources to service the debt. Projects with volatile or risky debt repayment revenue
will receive a lower rating and that could potentially impact the ratings on other City debt.
B. Rating Agency Relationships
The Chief Financial Officer (CFO) is responsible for maintaining relationships with the rating
agencies (e.g. Standard and Poor’s and Moody’s) that assign ratings to debt issuances. The CFO
performs this function in conjunction with the Assistant Director, Senior Financial Analyst, and
outside consultants such as the City’s Financial Advisor and Bond Counsel. This effort shall
include providing periodic updates on a Fund’s financial conditions when requested and
providing documents such as the Comprehensive Annual Financial Report and Adopted Budget.
Rating agencies may require payments from the City to update their bond ratings.
C. Bond Ratings
The CFO and his staff are responsible for providing factual, well-organized, and germane
presentations to the agencies rating proposed bonds. These presentations will involve
coordination among the City Manager’s and City Attorney’s Offices, Administrative Services, and
the department responsible for the debt issuance such as the Public Works, Utilities or
Community Services departments. In addition, the City’s Financial Advisor and Bond Counsel
will attend these presentations.
D. Credit Enhancement
Credit enhancement may be used to establish or improve a credit rating on a City debt
obligation. Types of credit enhancement include bond insurance, surety policies, or a Letter of
Credit. The CFO and staff will consider the use of credit enhancement if it reduces the overall
cost of the proposed financing, or if in the opinion of the CFO, the use of such credit
enhancement furthers the City’s overall financial objectives.
Attachment A
8
Bond insurance is an unconditional pledge by an insurance company to make principal and interest
payments on the City’s debt in the event insufficient funds are available to meet a debt service
obligation. Bond insurance, when available, may be purchased from an insurance company and is a
potential means of enhancing the debt’s rating. The cost of the insurance is to be weighed against the
potential interest costs savings generated by the assurance. A Letter of Credit may be obtained from a
major bank, for a fee, to enhance the credit rating. This letter is an unconditional pledge of the bank’s
credit to make principal and interest payments on the City’s debt in the event insufficient funds are
available to meet a debt service obligation. Again, the cost of the credit Letter is to be weighed against
savings from the Letter.
E. Debt Service Reserve Fund
With the exception of G.O. bond indebtedness, the City may size the debt issuance such that a debt
service reserve fund is established at the time of issuance. The debt service reserve funds will be held by
and are available to the Trustee to make principal and interest payments to bondholders in the event
that pledged revenues are insufficient to do so. The maximum size of the reserve fund is generally
governed by tax law, which permits the lesser of: 1) 10 percent of par; 2) 125 percent of average annual
debt service; and 3) 100 percent of maximum annual debt service. Debt reserve funds for the City are
typically equal to one year’s maximum debt service. On a case-by-case basis and assuming there is no
economic or credit disadvantage, the City may issue bonds with a debt service reserve fund that is sized
at a lower level.
X. Method of Sale
The CFO/Director of Administrative Services will select the method of sale that best fits the type of
bonds being sold, the prevailing market conditions, and the desire to structure bond maturities to
enhance the overall performance of the entire debt portfolio. Three general methods exist for the sale
of municipal bonds:
A. Competitive Sale
Bonds are marketed to a wide audience of investment banking (underwriting) firms. Their bids
are submitted at a specified time (generally the day of the bond sale). The underwriter then is
selected based on the best bid (lowest interest rate) for the securities. Pursuant to this policy
and within the parameters approved by the City Council, the CFO or his/her designee (Assistant
Directors of ASD) is hereby authorized to sign the bid form on behalf of the City fixing the
interest rates on bonds sold on a competitive basis
B. Negotiated Sale
The City selects the underwriter or group of underwriters of its securities in advance of the bond
sale. This method of sale is warranted for complex or unique bonds that require education and
marketing in the investment community. Underwriters will perform this service on the City’s
behalf given ties to large institutional investors and large brokerage houses. Moreover, it is only
through competitive sales that City staff can arrange the sale of its bonds to residents. When
feasible and effective, staff will give local residents and investors domiciled in the City first
priority to purchase bonds.
The City’s financing team (ASD staff and the Financial Advisor) works with a selected
underwriter to bring a bond issue to market. In advance of the sale, the City will determine a
selected underwriter’s compensation, their liability, and the designation rules and priority of
Attachment A
9
orders under which the sale will be conducted. The Financial Advisor is responsible for advising
staff on whether the fees and interest rates terms offered by the underwriter are consistent
with prevailing market conditions. The City adheres to a strict policy of separating its Financial
Advisor function from the underwriter function. Pursuant to this policy and conditions
described herein, the City Council authorizes the CFO or his/her designee (Assistant Directors of
ASD) to negotiate the terms of sale and to sign bond purchase agreements (that fix interest
rates on bonds sold) in a negotiated sale.
C. Private placement
This method involves the City selling its bonds to a bank or limited number of sophisticated
investors. Bonds are not sold to the general, investor community. City staff will perform due
diligence in comparing interest costs and fees in a private placement to those using a
competitive or negotiated sale. There are potential benefits in securing a private placement
such as:
a. lower fees or costs compared to selling bonds on the open market e.g. no fees for a
Disclosure Counsel or rating agencies.
b. the time frame for selling City is shorter and subject to less uncertainty in the event
market rates move upward and against the City by the time a competitive bid
process is held.
c. the lack of a reserve requirement through a private placement could reduce the
amount of principal outstanding and lead to lower annual debt service costs.
XI. Initial Disclosure Requirements
The Administrative Services Department, together with the City Attorney’s Office and an outside
Disclosure Counsel, shall coordinate all the necessary documents for disclosing the City’s financial
condition. The City’s practice is to use separate law firms for the Disclosure and Bond Counsel functions.
Each publicly offered debt issuance will meet the disclosure requirements of the Securities and
Exchange Commission (SEC) and other government agencies before and after the bond sale takes place.
The disclosure documents, specifically the Preliminary and Final Official Statements, will provide the
potential investor with full and accurate information necessary to make prudent investment decisions.
Information for City backed transactions generally includes: a City government description; a
description or scope of project being financed; annual financial data and statements; disclosure of
liabilities; the tax or rate base; current debt burden; the history of tax collections and bond repayments;
future borrowing plans; the source of funds for the proposed debt repayments; and specific bond data
and bond holder risk factors.
XII. Post Issuance Administration
A. Investment of Bond Proceeds
The proceeds of the bond sales will be invested until used for the intended project in order to maximize
utilization of the public funds. The investments will be made to obtain the highest level of safety and will
be guided by the City’s Investment Policy and bond indenture guidelines. City staff will provide
investment guidance to a Trustee or management firm holding bond proceeds whether for project or
debt service reserve funds.
B. Arbitrage Compliance
Attachment A
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ASD shall establish and maintain a system of record keeping and reporting to meet the arbitrage rebate
compliance requirements as required by the Federal tax code. This effort shall include tracking
investment earnings on bond proceeds, calculating rebate payments in compliance with tax law, and
remitting any rebate earnings to the federal government in a timely manner. These activities preserve
the tax-exempt status of the City’s outstanding debt issuances. Additionally, financial reporting and
other tax certification requirements embodied in bond covenants shall be monitored to ensure the City
is in compliance with its bond covenants.
C. Ongoing Disclosure
ASD shall be responsible for providing annual disclosure information to established national information
repositories and for maintaining compliance with disclosure requirements by state and national
regulatory bodies. Securities and Exchange Commission (SEC) disclosure, stipulated by the SEC Rule
15c2-12, shall occur by the date designated in the bond ordinance. Disclosures shall include the
Comprehensive Annual Financial Report (CAFR) at a minimum and any other information required by the
bond indenture or regulatory body.
The Chief Financial Officer (CFO) shall be responsible for providing ongoing disclosure information to the
Municipal Securities Rulemaking Board’s (MSRB’s) Electronic Municipal Market Access (EMMA) system.
This is the central depository designated by the SEC for ongoing disclosures by municipal issuers. The
CFO is responsible for maintaining compliance with disclosure standards promulgated by state and
national regulatory bodies, including the Government Accounting Standards Board (GASB), the National
Federation of Municipal Analysts, the Securities and Exchange Commission (SEC), and Generally
Accepted Accounting Principles (GAAP). The City may also employ the services of firms that improve the
availability of or supplement the City’s EMMA filings. [These updates reflect recent changes by the SEC
to Rule 15c2-12, effective July 1, 2009.] The City will provide full and complete financial disclosure to
rating agencies, institutional and individual investors, other levels of government, and the general public
to share clear, comprehensible, and accurate financial information using the appropriate
channels/policies/procedures.
In order to facilitate the City’s receipt of financing proposals associated with existing or contemplated
debt, the City will have in place as Independent Registered Municipal Advisor (IRMA). The IRMA will
provide advice to the City on proposals from broker-dealers or banks and will be required to be
registered as a Municipal Advisor with the SEC and the MSRB. To attract financing proposals and
assuage underwriter concerns about federal requirements, the City has posted on its website that an
IRMA is under contract with the City.
D. Compliance with Other Bond Covenants
In addition to financial disclosure and arbitrage compliance, once bonds are issued, the City is
responsible for verifying compliance with all activities, agreements, and requirements outlined in the
bond documents on an ongoing basis. This typically includes: ensuring an annual appropriation to meet
debt service payments; that relevant taxes, rates, and fees are levied and collected at a level sufficient
to meet indenture requirements and debt service payments; the timely payment of debt service to a
trustee or paying agent is completed; and compliance with insurance and other requirements.
XIII. Professional Services
The Administrative Services Department shall be responsible for the solicitation and selection of
financial professional services that are necessary to issue and manage debt.
Attachment A
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A. Financial Advisor
A Financial Advisor(s) will be used to assist in the issuance of the City’s debt. The Financial Advisor, or
IRMA, will provide the City with objective advice and analysis on debt issuance. This includes, but is not
limited to, monitoring market opportunities, structuring and pricing debt, and advising on official
statements of disclosure.
B. Underwriters
An Underwriter(s) will be used for all debt issued in a negotiated sale. The Underwriter is responsible for
purchasing negotiated debt and reselling it to investors.
C. Fiscal Agent
A Fiscal Agent or Trustee will be used to provide accurate and timely securities processing and timely
payment to bondholders.
The City Attorney’s Office shall be responsible for the appointment of Bond and Disclosure Counsels
D. Bond Counsel
All debt issued by the City will include a written opinion by Bond Counsel affirming that the City is
authorized to issue the proposed debt. The opinion shall include confirmation that the City has met all
City and State constitutional and statutory requirements necessary for issuance; a determination of the
proposed debt’s federal income tax status; and any other components necessary for the proposed debt.
Bond Counsel shall provide a comprehensive and complete document of resolutions, indentures,
disclosure statements and all related bond documents in binder and in electronic form.
E. Disclosure Counsel
This Counsel is responsible for drafting Preliminary and final Official Disclosure statements. While City
staff provides Counsel with information required for these statements, it is Counsel’s responsibility to
know all regulatory and legal requirements necessary for full disclosure to investors.
XIV. Refunding Debt
Refunding of debt may be undertaken to:
Take advantage of lower interest rates and achieve debt service cost savings.
Restructure debt to either shorten or lengthen its duration or eliminate a debt service reserve.
Refund outstanding indebtedness when existing bond covenants or other financial structures
impinge on prudent and sound financial management or are too complex.
Generally, the City will consider a refunding only when there is a net economic benefit. This is when
there is an aggregate net present value savings expressed as a percentage and dollar value of the par
amount of the refunded bonds. A net present value savings of at least 3 percent is a standard guideline
for initiating a refunding; however, a higher savings level may be considered. A net present value
savings of 4 percent is a reasonable guideline for an advance refunding. The savings guideline for an
advanced refunding may be waived by the Chief Financial Officer upon determining that such a
restructuring is in the City’s overall best financial interest. Exceptions shall be made only upon the
approval of the Chief Financial Officer.
Attachment A
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Types of Refunding include:
A. Current Refunding
A current refunding is one in which the refunding bonds are issued less than 90 days before the date
upon which the refunded bonds will be redeemed.
B. Advance Refunding
An advance refunding is one in which the refunding bonds are issued more than 90 days prior to the
date upon which the refunded bonds will be redeemed. An advance refunding is used to refinance
outstanding debt before the date the outstanding debt becomes due or callable. Proceeds of the
advance refunding bonds are placed into an escrow account with a fiduciary and used to pay interest
and principal on the refunded bonds and then used to redeem the refunded bonds at their maturity or
call date. Internal Revenue Code §149(d)(3) provides that governmental bonds issued after 1985 may
only be advanced refunded once over the life of a bond issuance.
XV. Arbitrage Rebate Monitoring and Reporting
The City will, unless otherwise justified, use bond proceeds within the established time frame pursuant
to the bond ordinance, contract or other documents to avoid arbitrage. The general rule is that the City
must spend all bond proceeds for a project within three (3) years of project initiation. Arbitrage is the
interest earned on the investment of the bond proceeds above the interest paid on the debt. If arbitrage
occurs, the City will pay the amount of the arbitrage to the Federal Government as required by Internal
Revenue Service Regulation 1.148-11. The City will maintain a system of recordkeeping and reporting to
meet the arbitrage rebate compliance requirement of the IRS regulation. For each bond issue not used
within the established time frame, the recordkeeping shall include tracking investment earnings on bond
proceeds, calculating rebate payments, and remitting any rebate earnings to the federal government in
a timely manner in order to preserve the tax-exempt status of the outstanding debt.