HomeMy WebLinkAbout2018-09-04 Finance Committee Agenda PacketFinance Committee
1
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.
Tuesday, September 4, 2018
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 12 days 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/Community Meeting Room, and deliver it to the Clerk prior to discussion of the item. You are not
required to give your name on the speaker card in order to speak to the Committee, but it is very helpful. Public
comment may be addressed to the full Finance Committee via email at City.Council@cityofpaloalto.org.
Call to Order
Oral Communications
Members of the public may speak to any item NOT on the agenda.
Action Items
1. Adoption of Fiscal Year 2019 Investment Policy
2. Prioritization Criteria and Planning for Palo Alto's Natural Gas Utility's
Capital Improvement Plan
3. Review and Discussion of the Colleagues’ Memo From Council Members
DuBois, Filseth, Scharff, and Tanaka on Fiscal Transparency in Labor
Negotiations
Future Meetings and Agendas
Adjournment
AMERICANS WITH DISABILITY ACT (ADA)
Persons with disabilities who require auxiliary aids or services in using City facilities, services or programs or who
would like information on the City’s compliance with the Americans with Disabilities Act (ADA) of 1990, may contact (650) 329-2550 (Voice) 24 hours in advance.
2 September 4, 2018
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.
Finance Committee Items Tentatively Scheduled
Meeting
Date
Line
No.
Item Title Referral
Date
9/18/2018 1 CalPERs Reports & Pension Policies (Administrative Services Department)
2 $4 million GF Council Referral (Administrative Services Department)
10/2/2018 3 No agenda as of yet
10/16/201
8
4 No agenda as of yet
11/6/2018 5 Meeting Cancelled (November date to be determined)
11/20/201
8
6 Meeting Cancelled (November date to be determined)
12/4/2018 7 No agenda as of yet
Finance Committee Items to be Scheduled
Referral
Date
Line
No.
Item Title Status
8 HSRAP Allocation (CSD)
9 FY18 CAFR
10 FY2020 - FY2029 Long Range Financial Forecast (LRFF) (Administrative
Services Department)
11 Smartgrid Report (Utilities)
12 Reimbursement Resolution for Revenue Bonds for the Regional Water
Quality Control Plant (Public Works)
City of Palo Alto (ID # 9289)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 9/4/2018
City of Palo Alto Page 1
Summary Title: Investment Policy Update
Title: Adoption of Fiscal Year 2019 Investment Policy
From: City Manager
Lead Department: Administrative Services
Recommendation
Staff recommends that Finance Committee recommend that the City Council approve the City’s
Investment Policy (Policy) with the following changes:
1. Add language codifying the existing environmental, social and governance (ESG) practice
(Page 3 of Attachment A).
2. Increase the Negotiable Certificates of Deposit (NCD) not to exceed limit to 20 percent
from 10 percent of the par value of the portfolio (Page 7 of Attachment A) to allow for
greater investment with community banks and increase portfolio diversification.
3. Add “Supranational Organizations Securities” as authorized investments to increase
social investing with not to exceed 10 years of maturity, no more than 20 percent of the
par value of the portfolio, no more than 10 percent of par value with any one
institution, and with a minimum rating of double A, and limited to United States dollar
denominated senior debt obligations of International Bank for Reconstruction and
Development (IBRD), International Finance Corporation (IFC) and Inter-American
Development Bank (IADB). Update Appendix A and C to reflect the addition of
supranational organizations as authorized investments (Pages 7, 8, 14, 15, & 21 of
Attachment A).
4. Add Manager of Treasury, Debt & Investments and Senior Management Analyst as an
authorized investment personnel (Pages 8 & 9 of Attachment A) to align with job duties.
5. Increase the Manager of Treasury, Debt & Investments and Senior Management
Analyst’s authority to transfer funds from the City’s general (checking) account to an
authorized financial institution to $10 million per day from $8 million per day (Pages 8 &
9 of Attachment A) to better align with increased cash activities.
6. Remove the Tennessee Valley Authority (TVA) agency securities as an authorized
investment and keep their existing $9.4 million investments to maturity (Page 11 of
Attachment A) to reflect the transition out of fossil fuel-related investments.
7. Add under SCOPE section (Page 3 of Attachment A) that Public Agency Retirement
City of Palo Alto Page 2
Services (PARS) section 115 irrevocable trust investments are not covered by the
Investment Policy.
8. Add the rating service agency Fitch as an example of a nationally recognized rating
service; currently Moody’s and Standard and Poor’s are only mentioned (Pages 5 to 7 of
Attachment A).
Discussion
Historically, during the annual budget process, staff submits the Investment Policy (Policy) to
City Council for review and approval (Attachment A). This year the Policy is being brought to the
Finance Committee first. Also, it’s being submitted after the budget process due to scheduling
conflicts. For Fiscal Year (FY) 2019, staff is proposing to update the Policy to reflect the
following changes:
1. For decades, staff has informally used various environmental and social considerations
in investment decisions, for example, not investing in entities that directly manufacture
tobacco products, firearms, and those engaged in direct production or drilling of fossil
fuels. The recommendation is to codify this practice in the Policy. Investments in
Certificates of Deposit (CD) and Negotiable Certificates of Deposit (NCD) are exempt
from the ESG investing requirement.
2. The City has heavily invested in local or community banks through the purchase of
Negotiable Certificates of Deposit (NCD). The City’s portfolio has NCD from 210
separate banks totaling $50.3 million of which 136 separate banks totaling $32.6 million
or 65 percent of all NCD are in banks with ten or less branches. Of the latter, 77% or 105
separate banks NCD totaling $25 million are in local banks with five or less branches.
Each bank’s NCD are $250,000 or less so they are fully insured by the Federal Deposit
Insurance Corporation (FDIC) against principal loss.
Staff is recommending increasing the NCD Policy’s limit to 20 percent from the current
10 percent of the par value of the portfolio which would bring it in line with the
Certificate of Deposit’s (CD) 20 percent limit. This will allow further portfolio
diversification and investments in additional community banks. No additional risk will
be incurred in additional NCD purchases since future purchases will also be within the
FDIC limit.
3. To further enhance City’s social investing while not sacrificing safety, staff is
recommending adding highly rated “Supranational Organizations Securities” as
permitted investments. Supranational organizations refer to International Bank for
Reconstruction and Development (IBRD), International Finance Corporation (IFC), and
Inter-American Development Bank (IADB). These entities were established with the
purpose of ending poverty and raising the standard of living around the world through
sustainable economic growth.
City of Palo Alto Page 3
California Government Code (CGC 53601) defines allowable supranational securities as
United States dollar denominated senior unsecured unsubordinated obligations issued
or unconditionally guaranteed by IBRD, IFC, and IADB. Supranationals are well
capitalized and have strong credit support from member countries. CGC 53601 was
amended effective January 1, 2015 to allow local agencies to invest in the senior debt
obligations of these three supranationals.
Additional characteristics shared by the IBRD, IFC, and IADB include:
a) Headquartered in Washington, D.C. with the United States as the largest
shareholder of each organization (e.g. BRD: 17%, IFC: 22%, IADB: 30%).
b) All three supranational are rated triple A by S&P and Moody’s plus Fitch rates
IADB and IBRD triple A based on a solid financial structure, conservative financial
policies and consistent performance, as well as support and capital backing from
its shareholders or member countries.
c) Bullets securities comprise the majority of their outstanding debt.
d) The IBRD and IADB provide loans and guarantees exclusively to sovereigns and
government backed projects
e) The IFC supports the creation and growth of private companies through direct
lending and equity investment, attracting third party capital, and providing
advisory services.
The policy recommendation is to add IBRD, IFC and IADB securities as authorized
investments with the following criteria:
a) Securities will not exceed 10 years maturity.
b) No more than 20 percent of the par value of the portfolio.
c) No more than 10 percent of the par value with any one institution.
d) Securities eligible for investment shall have a minimum rating of AA or Aa2 from
a nationally recognized rating service (e.g. Moody’s, Fitch, and/or Standard &
Poor’s).
e) Limited to United States dollar denominated senior unsecured unsubordinated
obligations issued or unconditionally guaranteed by IBRD, IFC, and IADB.
California cities’ Investment Policy that allows supranational investments includes cities
of Sunnyvale, San Jose, Oakland, Fairfield, Riverside, San Diego, and City and County of
San Francisco.
4. A previously classified Senior Financial/Management Analyst (Analyst), as authorized by
the Assistant Director of Administrative Services (Assistant), enters into investments
within clearly specified parameters. In order to properly align the job classification with
the duties needed and performed within the Administrative Services Department, this
Analyst position was reclassified to Manager of Treasury, Debt, & Investments. The
recommendation is to update the Investment Policy to reflect this change. Also, to
provide greater flexibility to the Assistant in delegating this task and managing the work
City of Palo Alto Page 4
load, it’s recommended that the Senior Management Analyst be added. Again, to
properly align the job classification with the duties, Senior Financial Analysts were
previously reclassified to Senior Management Analysts.
5. The request to increase the Manager of Treasury, Debt & Investments (Manager) and
Senior Management Analyst’s (Analyst) authority to transfer funds is primarily a
consequence of higher payments to Northern California Power Agency (NCPA) and
counterparties for electric and gas commodities and the higher cash flow activity
between the City’s LAIF and its main checking account. LAIF (Local Agency Investment
Fund) is a State of California run investment pool where most of the City’s daily liquid
funds are deposited. Utility wire payments have increased from $92 million (annually) in
FY 2012 to over an expected $122 million (annually) in FY 2018, a 33 percent increase.
The current limit on the Manager and Analyst to transfer no more than a total amount
of $8 million a day from the City’s general (checking) account to an authorized financial
institution has proven inadequate. It’s recommended that this limit be raised to $10
million to reflect the growth in commodity payments and higher general checking
account cash activity. It should be noted that any transfer of funds to pay commodity
or other high value invoices is subject to approvals by the department head or his or her
designee requesting payment. In addition, wire transfers have strict controls in that
they require two ASD staff members to process, an Accounting or third ASD staff to post
to the City’s financial system, and are subject to annual audit by the City’s external
auditor. Cash flow between the City’s LAIF and general checking account is restricted to
these accounts so payments cannot be redirected to an alternate account.
6. In addition to the current and recommended investments that support sound
environmental, social and governance (ESG) investing, in this fiscal year, the City has
expanded into “green” municipal bond purchases. To date, $10.6 million in “green”
municipal revenue bonds have been purchased which financed photovoltaic energy
systems installations on municipal buildings, mass transportation (electrification)
project, and municipal utility wind turbine and solar projects. These investments have
been done under existing permitted investments so no Policy change is needed. Staff
expects to make additional such investments.
A driver for the “green” bond purchase and the ESG Policy changes recommendation is
due to staff being responsive to community suggestions in this area. Included among the
suggestion is divesting the City’s $9.4 million par investment in Tennessee Valley
Authority (TVA) bonds. TVA is a U.S. federally owned corporation created by
congressional charter in 1933 to provide navigation, flood control, electricity
generation, fertilizer manufacturing, and economic development to a region of the
county that was greatly affected by the Great Depression. The concern cited as to why
the City should divest in TVA bonds is their use of fossil fuels; specifically for electricity
generation. In response, staff suspended further TVA bond purchase and is
recommending removing TVA as an authorized investment but has retained the existing
City of Palo Alto Page 5
$9.4 million investments. These investments consist of four TVA security bonds with
staggered maturities from February 2021 to November 2025. They are highly rated
(implied triple A and AA+) because they have the implied backing of the U.S.
government so are very safe investments. Since, due to a rising interest rate
environment, selling these securities prior to maturity would result in realizing over
$0.34 million in loss while holding them to maturity would not, staff is recommending,
consistent with the Policy’s “buy and hold philosophy”, holding them to their maturity
dates. Stopping new TVA bond purchase won’t materially impact the portfolio’s safety,
diversification, and/or yield since other highly rated securities like other U.S.
government agency, municipal, and/or supranational obligations can be purchased. The
latter is subject to the Finance Committee and City Council’s approval.
7. In May 2017, the City established the Public Agencies Post-Employment Benefits Trust
Administered by Public Agency Retirement Services (PARS) with an initial deposit of
$2.1 million followed by a $3.4 million deposit in May 2018. The Section 115 Trust
(Trust) will prefund pension costs and begin to address GASB 68 Net Pension Liabilities.
The Trust offers five portfolios that govern investment choices with each portfolio
having different risk profiles with different amounts invested in equities and other
instruments. As the amount of equities in the portfolio increases, volatility and risk
increases and vice versa. Staff recommended and Council approved a “Moderately
Conservative” portfolio which is the second most conservative portfolio among the five
offered. For clarity, staff recommends the Investment Policy state the Trust is not
covered by the Investment Policy since the Trust investment portfolio decision is made
separately.
8. To remove any ambiguity, recommending the rating service agency Fitch be added as an
example of a nationally recognized statistical rating organization (NRSRO). Fitch is one
of three NRSRO designated by the U.S. Securities and Exchange Commission.
Resource Impact
Except for the additional (existing) staff time to evaluate, purchase, and monitor securities that
support sound environmental, social and governance (ESG) investing, there is no budget impact
associated with this report.
Policy Implications
This recommendation contains a change to the City’s Investment Policy (Policy).
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: Proposed City of Palo Alto Investment Policy, Fiscal Year 2018-19
1
ATTACHMENT A
PROPOSED CITY OF PALO ALTO
Investment Policy
Fiscal Year 2018-19
With Changes
INTRODUCTION
The City of Palo Alto invests its pooled idle cash according to State of California law and the charter
of the City of Palo Alto. In particular, the City follows “The Prudent Investor Standard” cited in the
State Government Code (Section 53600.3). Under this standard, all governing bodies of local
agencies or persons authorized to make investment decisions on behalf of the City are trustees and
therefore fiduciaries subject to the prudent investor standard. When investing, reinvesting,
purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care,
skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to
the general economic conditions and the anticipated needs of the agency, that a prudent person
acting in a like capacity and familiarity with those matters would use in the conduct of funds of a
like character and with like aims, to safeguard the principal and maintain the liquidity needs of the
agency.
INVESTMENT PHILOSOPHY
The basic principles underlying Palo Alto's investment philosophy is to ensure the safety of public
funds; provide that sufficient money is always available to meet current expenditures; and achieve a
reasonable rate of return on its investments.
The City's preferred and chief practice is to buy securities and to hold them to their date of maturity
rather than to trade or sell securities prior to maturity. The City may, however, elect to sell a security
prior to its maturity should there be a significant financial need. If securities are purchased and held
to their maturity date, then any changes in the market value of those securities during their life will
have no effect on their principal value. Under a buy and hold philosophy, the City is able to protect
its invested principal. The economy, the money markets, and various financial institutions (such as
the Federal Reserve System) are monitored carefully to make prudent investments and to assess the
condition of the City’s portfolio.
INVESTMENT OBJECTIVES
Attachment A
2
The primary objectives, in priority order, of investment activities shall be safety, liquidity, and yield:
1.Safety: Safety of principal is the foremost objective of the investment program.
Investments shall be undertaken in a manner that seeks to ensure the preservation of
capital in the overall portfolio. The objective will be to mitigate credit risk and interest
rate risk.
a) Credit risk is the risk that an obligation will not be paid and a loss will result.
The City will seek to minimize this risk by:
x Limiting investment to the safest types of securities as listed in the
“Authorized Investment” section
x Diversifying its investments among the types of securities that are
authorized under this investment policy
b) Interest rate risk is the risk that changes in interest rates will adversely affect the
value of an investor’s portfolio. For example, an investor with large holdings in
long-term bonds has assumed significant interest rate risk because the value of
the bonds will fall if interest rates rise. The City can minimize this risk by:
x Buying and holding its securities until maturity
x Structuring the investment portfolio so that securities mature to meet cash
flow requirements
To further achieve the objective of safety, the amount that can be invested in all
investment categories, excluding obligations of the U.S. Government and its agencies, is
limited either as a percentage of the portfolio or by a specific dollar amount. These
limits are defined under the “Authorized Investments” section.
2.Liquidity: Liquidity is the second most important objective of the investment
program. The investment portfolio shall remain sufficiently liquid to meet all operating
requirements that may be reasonably anticipated. This is accomplished by maintaining
a portion of the portfolio in liquid money market mutual funds or local government
investment pools. In addition, the City will maintain one month’s cash needs in short
term investments and at least $50 million shall be maintained in securities maturing in
less than two years. Since all possible cash demands cannot be anticipated, however,
the portfolio will consist of securities with active secondary or resale markets should
the need to sell a security prior to maturity arises.
3.Yield: Yield on the City’s portfolio is last in priority among investment objectives.
The investment portfolio shall be designed to obtain a market rate of return that reflects
the authorized investments, risk constraints, and liquidity needs outlined in the City’s
investment policy. Compared to similar sized cities, the City of Palo Alto should be
able to take advantage of its relatively large reserve balances to achieve higher yields
through long-term investments. In addition, the City will strive to maintain the level of
investment of idle funds as close to 100 percent as possible.
3
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) RESPONSIBILITIES
In addition to and subordinate to the above investment objectives (e.g. Safety, Liquidity, &
Yield), the City has a desire to encourage investments that support sound environmental, social
and governance (ESG) investing. While the portfolio may not be classified as an ESG portfolio,
investments in entities that support community well-being through safe and environmentally
sound practices and fair labor practices and equality of rights regardless of sex, race, age,
disability, or sexual orientation is encouraged. Direct investments are discouraged in entities that
manufacture tobacco products, firearms, and engage in direct production or drilling of fossil
fuels.
This section applies to new investments only and does not require divestment of existing
investments. Investments in Certificates of Deposit (CDs) and Negotiable Certificates of Deposit
are exempt from the ESG investing requirement.
SCOPE
A. This investment policy shall apply to all financial assets of the City of Palo Alto as accounted
for in the Comprehensive Annual Financial Report (CAFR), including but not limited to the
following funds:
1. General Fund
2. Special Revenue Funds
3. Debt Service Funds
4. Capital Project Fund
5. Enterprise Funds
6. Internal Service Funds
7. Trust and Agency Funds
B. The policy does not cover funds held by the California Public Employees Retirement System
(CalPERS),or funds of the Deferred Compensation programs (e.g. ICMA, Hartford), and
Public Agency Retirement Services (PARS) section 115 irrevocable trust.
C. Investments of bond proceeds shall be governed by the provisions of the related bond
indentures.
GENERAL INVESTMENT GUIDELINES
1. The maximum stated final maturity of individual securities in the portfolio should be
ten years.
2. A maximum of 30 percent of the par value of the portfolio shall be invested in
securities with maturities beyond five years.
3. The City shall maintain a minimum of one month’s cash needs in short term
4
investments.
4. At least $50 million shall be maintained in securities maturing in less than 2 years.
5. Should the ratio of the market value of the portfolio to the book value of the portfolio
fall below 95 percent, the Administrative Services Department will report this fact to
the City Council within a reasonable time frame and evaluate whether there is any risk
of holding any of the securities to maturity.
6. Commitments to purchase securities newly introduced on the market shall be made no
more than three (3) working days before pricing.
7. Whenever possible, the City will obtain three or more quotations on the purchase or
sale of comparable securities and take the higher yield on purchase or higher price on
sale. This rule will not apply to new issues, which are purchased at market no more
than three (3) working days before pricing, as well as to LAIF, City of Palo Alto
bonds, money market accounts and mutual funds, all of which shall be evaluated
separately.
8. Where the Investment Policy specifies a percentage limitation for a particular category
of investment, that percentage is applicable only at the date of purchase. A later
increase or decrease in a percentage resulting from a change in the portfolio’s assets or
values shall not constitute a violation of that restriction. As soon as possible,
percentage limitations will be restored as investments mature in each category.
AUTHORIZED INVESTMENTS
The California Government Code (Sections 53600 et seq.) governs investment of City funds. The
following investments are authorized:
1.U.S. Government Securities (e.g. Treasury notes, bonds and bills) Securities that are
backed by the full faith and credit of the United States
a) There is no limit on purchase of these securities.
b) Securities will not exceed 10 years maturity.
c) All purchased securities must have an explicit or a de facto backing of
the full faith and credit of the U.S. Government.
2.U.S. Government Agency Securities – Obligations issued by the Federal Government
agencies (e.g. Federal National Mortgage Association).
a. There is no limit on purchase of these securities except for:
x Callable and Multi-step-up securities provided that:
5
- The potential call dates are known at the time of purchase
- The interest rates at which they “step-up” are known at the time
of purchase
- The entire face value of the security is redeemed at the call date
- No more than 25 percent of the par value of the portfolio
b. Securities will not exceed 10 years maturity.
3.California State, California Local Government Agencies, and other United States
State Bonds
a) Having at time of investment a minimum Double A (AA/Aa2) rating
as provided by a nationally recognized rating service (e.g. Moody’s,
Fitch, and/or Standard and Poor’s).
b) May not exceed 20 percent of the par value of the portfolio.
c) Investments include:
i) Registered state warrants or treasury notes or bonds of the State of
California and bonds, notes, warrants, or other evidences of
indebtedness of any local agency within California, including
bonds payable solely out of the revenues from a revenue producing
property owned, controlled, or operated by the state or local agency
or by a department, board, agency, or authority of the state or local
agency.
ii) Registered treasury notes or bond of any of the 49 United States in
addition to the State of California, including bonds payable solely
out of the revenues from a revenue-producing property owned,
controlled, or operated by a state or by a department, board, agency
or authority of any of the other 49 United States, in addition to the
State of California.
4.Certificates of Deposit (CD) - A debt instrument issued by a bank for a specified
period of time at a specified rate of interest.
a) May not exceed 20 percent of the par value of the portfolio.
b) No more than 10 percent of the par value of the portfolio in
collateralized CDs in any institution.
c) Purchase collateralized deposits only from federally insured large banks
that are rated by a nationally recognized rating service (e.g. Moody’s,
Fitch, and/or Standard and Poor’s).
6
d) For non-rated banks, deposit should be limited to amounts federally
insured (FDIC). – See Appendix C
e) Rollovers are not permitted without specific instruction from authorized
City staff.
5.Banker's Acceptance Notes (BA) – Bills of exchange or time drafts drawn on and
accepted by commercial banks. Purchase of banker’s acceptances are limited to:
a) No more than 30 percent of the par value of the portfolio.
b) Not to exceed 180 days maturity.
c) No more than $5 million with any one institution.
6.Commercial Paper - Short-term unsecured obligations issued by banks, corporations,
and other borrowers. Purchases of commercial paper are limited to:
a) Having highest letter or numerical rating as provided for by a nationally
recognized rating service (e.g. Moody’s, Fitch, and/or Standard and
Poor’s).
b) No more than 15 percent of the par value of the portfolio.
c) Not to exceed 270 days maturity.
d) No more than $3 million or 10 percent of the outstanding commercial
paper of any one institution, whichever is lesser.
7.Local Agency Investment Fund (LAIF) – A State of California managed investment
pool may be used up to the maximum permitted by California State Law.
8.Short-Term Repurchase Agreements (REPO) – A contractual agreement between a
seller and a buyer, usually of U.S. government securities, whereby the seller agrees to
repurchase the securities at an agreed upon price and, usually, at a stated time.
a) Not to exceed 1 year.
b) Market value of securities that underlay a repurchase agreement shall be
valued at 102 percent or greater of the funds borrowed against those
securities.
c) A Master Repurchase agreement must be signed with the bank or dealer.
9.Money Market Deposit Accounts – Liquid bank accounts which seek to maintain a
net asset value of $1.00.
7
10.Mutual Funds which seek to maintain a net asset value of $1.00 and which are limited
essentially to the above investments and further defined in note 9 of Appendix A
a) No more than 20 percent of the par value of the portfolio.
b) No more than 10 percent of the par value with any one institution.
11.Negotiable Certificates of Deposit (NCD) issued by nationally or state chartered
banks and state or federal savings institutions and further defined in note 11 of
Appendix A. Purchases of negotiable certificates of deposit:
a) May not exceed 1020 percent of the par value of the portfolio.
b) No more than $5 million in any one institution.
12.Medium-Term Corporate Notes – Issued by corporation organized and operating
within the United States or by depository institutions licensed by the United States or
any state and operating with the United States.
a) Not to exceed 5 years maturity.
b) Securities eligible for investment shall have a minimum rating of AA or
Aa2 from a nationally recognized rating service (e.g. Moody’s, Fitch,
and/or Standard & Poor’s).
c) No more than 10 percent of the par value of the portfolio.
d) No more than $5 millionof the par value may be invested in securities of
any single issuer, other than the U.S. Government, its agencies and
instrumentality.
e) If securities owned by the City are downgraded by either Moody’s, Fitch,
or Standard & Poors to a level below AA or Aa2, it shall be the City’s
policy to review the credit situation and make a determination as to
whether to sell or retain such securities in the portfolio.
13.Supranational Organizations Securities – Supranational organizations refer to
International Bank for Reconstruction and Development (IBRD), International
Finance Corporation (IFC) and Inter-American Development Bank (IADB).
a. Securities will not exceed 10 years maturity.
b. No more than 20 percent of the par value of the portfolio.
c. No more than 10 percent of the par value with any one institution.
d. Securities eligible for investment shall have a minimum rating of AA or
Aa2 from a nationally recognized rating service (e.g. Moody’s, Fitch,
8
and/or Standard & Poor’s).
e. Limited to United States dollar denominated senior unsecured
unsubordinated obligations issued or unconditionally guaranteed by
IBRD, IFC, and IADB.
Appendix A provides a more detailed description of each investment vehicle and its security and
liquidity features. Most of the City's short-term investments will be in securities which pay principal
upon maturity, while long-term investments may be in securities that periodically repay principal, as
well as interest. Most of the City's investments will be at a fixed rate. However, some of the
investments may be at a variable rate, so long as that rate changes on specified dates in pre-
determined increments.
PROHIBITED INVESTMENTS:
Includes all investments not specified above, and in particular:
1. Reverse repurchase agreements
2. Derivatives, as defined in Appendix B
Appendix B provides a more detailed description of each investment, which is prohibited, for City
investment.
AUTHORIZED INVESTMENT PERSONNEL
Idle cash management and investment transactions are the responsibility of the Administrative
Services Department. The Administrative Services Department is under the control of the Director
of Administrative Services (Director), as treasurer, who is subject to the direction and supervision of
the City Manager.
The Assistant Directors of Administrative Services, who reports to the Director, are authorized to
make all investment transactions allowed by the Statement of Investment Policy. He or she may
authorize the Manager of Treasury, Debt & Investments and/or Senior FinancialManagement
Analyst/Investments (Manager and/or Analyst) to enter into investments within clearly specified
parameters.
The Investment function is under the supervision of the Assistant Director of Administrative
Services (Assistant). The Assistant is charged with the responsibility to manage the investment
program (portfolio), which includes developing and monitoring the City's cash flow model and
developing long-term revenue and financing strategies and forecasts.
The Manager and/or Analyst areis subject to the direction and supervision of the Assistant. The
Manager and/or Analyst assist the Assistant, in the purchase and sale of securities. The Manager
and/or Analyst also prepare the quarterly report, and record daily all investment transactions as to
the type of investment, amount, yield, and maturity. Cash flow projections are prepared as needed.
In all circumstances, approval from the Director of Administrative Services is required before selling
9
securities from the City's portfolio. The Manager and/or Analyst may also transfer no more than a
total of $108 million a day from the City's general account to any one financial institution, without
the prior approval of the Assistant Director of Administrative Services.
No other person has authority to make investment transactions without the written authority of the
Director or Assistant Director of Administrative Services.
USE OF BROKERS AND DEALERS
The Administrative Services Department maintains a list of acceptable dealers. A dealer acts as a
principal in security transactions, selling securities from and buying securities for their own position.
A dealer must have
a) At least three years experience operating with California municipalities;
b) Maintain an inventory of trading securities of at least $10 million; and
c) Be approved by the Assistant Administrative Services Director before being
added to the City's list of approved dealers. In addition, individual traders or
agents representing a dealer:
A dealer will be removed from the list should there develop a history of problems to include: failure
to deliver securities as promised, failure to honor transactions as quoted, or failure to provide
accurate information.
SAFEKEEPING AND CUSTODY
All securities shall be delivered to the City's safekeeping custodian and held in the name of the City
of Palo Alto, with the exception of the following investments:
a) Certificates of deposit, which may be held by the City itself.
b) City shares in pooled investment funds, under contract.
c) Mutual funds
d) Local Agency Investment Fund (LAIF)
POLICY REVIEW AND REPORTING ON INVESTMENTS
Monthly, the Administrative Services Department will review performance in relation to Council-
adopted Policy. Quarterly, the Department will report to Council on: its performance in comparison
to policy, explain any variances from policy, provide any recommendations for policy changes, and
discuss overall compliance with the City’s Investment Policy. In addition, the Department will
provide Council with:
10
a) A detailed list of all securities, investments and monies held by the City, and
b) Report on the City’s ability to meet expenditure requirements over the next six
months.
Annually, the Administrative Services Department will present a Proposed Statement of Investment
Policy, to include the delegation of investment authority, to the City Council for review during the
annual budget process. All proposed changes in policy must be approved by the Council prior to
implementation.
Adopted by City Council October 22, 1984 Amended by City Council June 19, 2000
Monthly reporting effective January 1985 Amended by City Council June 11, 2001
Amended and Adopted by City Council June 24, 1985 Amended by City Council June 17, 2002
Amended by City Council December 2, 1985 Amended by City Council June 17, 2003
Amended by City Council June 23, 1986 Amended by City Council June 28, 2004
Amended by City Council June 22, 1987 Amended by City Council June 20, 2005
Amended by City Council August 8, 1988 Amended by City Council June 12, 2006
Amended by City Council November 28, 1988 Amended by City Council June 11, 2007
Amended by City Council June 26, 1989 Amended by City Council June 09, 2008
Amended by City Council May 14, 1990 Amended by City Council June 15, 2009
Amended by City Council June 24, 1991 Amended by City Council June 28, 2010
Amended by City Council June 22, 1992 Amended by City Council June 20, 2011
Amended by City Council June 23, 1993 Amended by City Council June 18, 2012
Amended by City Council June 20, 1994 Amended by City Council June 03, 2013
Amended by City Council June 19, 1995 Amended by City Council June 16, 2014
Amended by City Council June 24, 1996 Amended by City Council June 15, 2015
Amended by City Council June 23, 1997 Amended by City Council June 13, 2016
Amended by City Council January 26, 1998 Amended by City Council June 27, 2017
Amended by City Council June 22, 1998
Amended by City Council June 28, 1999
11
APPENDIX A
EXPLANATION OF PERMITTED INVESTMENTS
1.U.S. Government Securities – United States Treasury notes, bonds, bills, or certificates of
indebtedness or those for which the faith and credit of the United States are pledged for the
payment of principal and interest.
2.U.S. Government Agency Securities - U.S. Government Agency Obligations include the
securities of the Federal National Mortgage Association (FNMA), Federal Land Banks (FLB),
Federal Intermediate Credit Banks (FICB), banks for cooperatives, Federal Home Loan Banks
(FHLB), Government National Mortgage Association (GNMA), Federal Home Loan Mortgage
Corporation (FHLMC), Student Loan Marketing Association (SLMA), Small Business
Administration (SBA), Federal Farm Credit (FFC), and Federal Agricultural Mortgage
Corporation (FAMC or FMAC)., and Tennessee Valley Authority (TVA). Federal Agency
securities are debt obligations that essentially result from lending programs of the Government.
Federal agency securities differ from other types of securities, as well as among themselves.
Their characteristics depend on the issuing agency. It is possible to distinguish three types of
issues: (A) participation certificates (pooled securities), (B) Certificates of interest (pooled
loans), (C) notes, bonds, and debentures. The securities of a few agencies are explicitly
backed by the full faith and credit of the U.S. Government. All other issues purchased by the
City have the de facto backing from the federal government, and it is highly unlikely that the
government would let any agency default on its obligations.
3.Certificates of Deposit - A certificate of deposit (CDs) is a receipt for funds deposited in a
bank, savings bank, or savings and loan association for a specified period of time at a specified
rate of interest. Denominations are $250,000 and up. The first $250,000 of a certificate of
deposit is guaranteed by the Federal Deposit Insurance Corporation (FDIC), if the deposit is
with a bank or savings bank, or the Savings Association Insurance Fund (SAIF), if the deposit
is with a savings and loan. CDs with a face value in excess of $250,000 can be collateralized
by U.S. Government Agency and Treasury Department securities or first mortgage loans.
Government securities must be at least 110 percent of the face value of the CD collateralized
in excess of the first $250,000. The value of first mortgages must be at least 150 percent of the
face value of the CD balance insured in excess of the first $250,000. Generally, CDs are issued
for more than 30 days and the maturity can be selected by the purchaser.
4.Bankers' Acceptance - A Banker's acceptance (BA) is a negotiable time draft or bill of
exchange drawn on and accepted by a commercial bank. Acceptance of the draft irrevocably
obligates the bank to pay the bearer the face amount of the draft at maturity. BAs are usually
created to finance the import and export of goods, the shipment of goods within the United
States and storage of readily marketable staple commodities. In over 70 years of usage in the
United States, there has been no known instance of principal loss to any investor in BAs. In
addition to the guarantee by the accepting bank, the transaction is identified with a specific
commodity. Warehouse receipts verify that the pledged commodities exist, and, by definition,
these commodities are readily marketable. The sale of the underlying goods generates the
12
necessary funds to liquidate the indebtedness.
BAs enjoy marketability since the Federal Reserve Bank is authorized to buy and sell prime
BAs with maturities of up to nine months. The Federal Reserve Bank enters into repurchase
agreements in the normal course of open market operations with BA dealers.
As are sold at a discount from par. An acceptance is tied to a specific loan transaction;
therefore, the amount and maturity of the acceptance is fixed.
5.Commercial Paper - Commercial paper notes are unsecured promissory notes of industrial
corporations, utilities, and bank holding companies. Interest is discounted from par and
calculated using actual number of days on a 360-day year. The notes are in bearer form, with
maturities up to 270 days selected by the purchaser, and denominations generally start at
$100,000. There is a small secondary market for commercial paper notes and an investor may
sell a note prior to maturity.
Commercial paper notes are backed by unused lines of credit from major banks. Some issuer's
notes are insured, while some are backed by irrevocable letters of credit from major banks.
State law limits a City to investments in United States corporations having assets in excess of
five hundred million dollars with an "A" or higher rating by a nationally recognized rating
service for the issuer's debentures. Cities may not invest more than 25 percent of idle cash in
commercial paper.
6.Local Agency Investment Fund Demand Deposit - The Local Agency Investment Fund
LAIF) was established by the State to enable treasurers to place funds in a pool for
investments. The City is limited to an investment of the amount allowed by LAIF (currently
$40 million). LAIF has been particularly beneficial to those jurisdictions with small
portfolios. Palo Alto uses this fund for short-term investment, liquidity, and yield.
7.Repurchase Agreements - A Repurchase Agreement (REPOS) is not a security, but a
contractual arrangement between a financial institution or dealer and an investor. The
agreement normally can run for one or more days. The investor puts up funds for a certain
number of days at a stated yield. In return, the investor takes title to a given block of securities
as collateral. At maturity, the securities are repurchased and the funds repaid, plus interest.
Usually, amounts are $500,000 or more, but some REPOS can be smaller.
8.Money Market Deposit Accounts - Money Market Deposit Accounts are market-sensitive
bank accounts, which are available to depositors at any time, without penalty. The interest rate
is generally comparable to rates on money market mutual funds, though any individual bank's
rate may be higher or lower. These accounts are insured by the Federal Deposit Insurance
Corporation or the Savings Association Insurance Fund.
13
9.Mutual Funds - Mutual funds are shares of beneficial interest issued by diversified
management companies, as defined by section 23701 M of the Revenue and Taxation Code.
To be eligible for investment, these funds must:
a) Attain the highest ranking in the highest letter and numerical rating provided by
not less than two of the three largest nationally recognized rating services; or
b) Have an investment advisor registered with the Securities and Exchange
Commission with not less than five years’ experience investing in the securities
and obligations, as authorized by subdivisions (a) to (n), inclusive, of Section
53601 of the California Government Code, and with assets under management in
excess of five hundred million dollars; and
c) Invest solely in those securities and obligations authorized by Sections 53601
and 53635 of the California Government Code. Where the Investment Policy of
the City of Palo Alto may be more restrictive than the State Code, the Policy
authorizes investments in mutual funds that shall have minimal investment in
securities otherwise restricted by the City's Policy. Minimal investment is
defined as less than 5 percent of the mutual fund portfolio; and
d) The purchase price of shares of beneficial interest purchased shall not include
any commission that these companies may charge.
e) Have a net asset value of $1.00.
10.Callable Securities and Multi-Step-ups: Callable securities are defined as fixed interest rate
government agency securities that give the issuing agency the option of returning the invested
funds at a specific point in time to the purchaser. Multi-step-ups are government agency
securities in which the interest rate increases ("steps-up") at preset intervals, and which also
have a callable option that allows the issuing agency to return the invested funds at a preset
interval. Callable and multi-step-ups are permitted, provided that:
x the potential call dates are known at the time of purchase;
x the interest rates at which they “step-up” are known at the time of purchase; and
x the entire face value of the security is redeemed at the call date.
14
11.Negotiable Certificates of Deposit (NCD). NCDs are large-dollar-amount, short-term
certificate of deposit. Such certificates are issued by large banks and bought mainly by
corporations and institutional investors. They are payable either to the bearer or to the order of
the depositor, and, being negotiable, they enjoy an active secondary market, where they trade
in round lots of $5 million. Although they can be issued in any denomination from $100,000
up, the typical amount is $1 million. Also called a Jumbo Certificate of Deposit.
State law prohibits the investment of local agency funds in negotiable certificates of deposit
issued by a state or federal credit union if a member of the legislative body of the local
agency, or any person with investment decision making authority in the administrative,
manager’s, budget, auditor-controller’s, or treasurer’s offices of the local agency also serves
on the board of directors, other credit committee or the supervisory committee of the state or
federal credit union issuing the negotiable certificate of deposit.
12.Medium-Term Corporate Notes: Notes of a maximum of five years maturity issued by
corporations organized and operating with the United States or by depository institutions
licensed by the United States or any state and operating with the United States. According to
California Code Section 53601, “Notes eligible for investment under this subdivision shall be
rated in the rating category of “Double A” or its equivalent or better by a nationally recognized
rating service. Purchase of medium-term notes may not exceed 30 percent of the agency’s
surplus money which may be invested pursuant to this section.”
13.Supranational Securities: California Government Code (CGC 53601) defines allowable
supranational securities as United States dollar denominated senior unsecured unsubordinated
obligations issued or unconditionally guaranteed by the International Bank for Reconstruction
and Development, the International Finance Corporation, and Inter-American Development
Bank. Supranationals are well capitalized and in most cases have strong credit support from
contingent capital calls from their member countries. CGC 53601 was amended effective
January 1, 2015 to allow local agencies to invest in the senior debt obligations of these three
supranational issuers which are eligible for purchase and resale within the United States. These
entities were established with the purpose of ending poverty and raising the standard of living
around the world through sustainable economic growth.
a) The supranationals are international organization owned by member countries.
Again, these are:
x International Bank for Reconstruction and Development (IBRD or
World Bank), a member of the World Bank Group, provides direct loans and
guarantees to sovereigns and governmentǦbacked projects
x International Finance Corporation (IFC), a member of the World Bank
Group, supports the creation and growth of private companies through direct
lending and equity investment, attracting third party capital, and providing
advisory services
x InterǦAmerican Development Bank (IADB), a member of the
InterǦAmerican Development Bank Group, provides loans, grants, and
guarantees to sovereigns in Latin America and the Caribbean
15
b) Additional characteristics shared by the IBRD, IFC, and IADB include:
x Headquartered in Washington, D.C. with the United States as the largest
shareholder of each organization
x Rated AAA/Aaa by S&P and Moody’s
16
APPENDIX B
EXPLANATION OF PROHIBITED INVESTMENTS
1.Reverse Repurchase Agreements: A Reverse Repurchase Agreement (Reverse REPO) is a
contractual agreement by the investor (e.g. local agency) to post a security it owns as
collateral, and a bank or dealer temporarily exchanges cash for this collateral, for a specific
period of time, at an agreed-upon interest rate. During the period of the agreement, the local
agency may use this cash for any purpose. At maturity, the securities are repurchased from the
bank or dealer, plus interest.
California law contains a number of restrictions on the use of Reverse REPOS by local
agencies.
2.Derivatives: A derivative is a financial instrument created from, or whose value depends on
(is derived from), the value of one or more underlying assets or indices. The term "derivative"
refers to instruments or features, such as collateralized mortgage obligations, forwards, futures,
currency and interest rate swaps, options, caps and floors. Except for those callable and multi-
step-up securities as described under Permitted Investments, derivatives are prohibited.
Certain derivative products have characteristics which could include high price volatility,
liquid markets, products that are not market-tested, products that are highly leveraged,
products requiring a high degree of sophistication to manage, and products that are difficult to
value.
According to California law, a local agency shall not invest any funds in inverse floaters, range
notes, or interest-only strips that are derived from a pool of mortgages.
17
APPENDIX C
GLOSSARY OF INVESTMENT TERMS
AGENCIES: Federal agency and instrumentality securities.
ASKED: The price at which securities are offered.
BID:The price offered by a buyer of securities (when one sells securities, one asks for a bid).
See “Offer”.
BROKER:A broker brings buyers and sellers together so that he can earn a commission.
COLLATERAL: Securities, evidence of deposit, or other property, which a borrower pledges
to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of
public monies.
COMPREHENSIVE ANNUAL FINANCIAL REPORT (“CAFR”): The official annual
report for the City of Palo Alto. It includes combined financial statements for each individual
fund and account group prepared in conformity with GAAP. It also includes supporting
schedules that are necessary to demonstrate compliance with finance-related legal and
contractual provisions, extensive introductory material, and a detailed statistical section.
COUPON: (a) The annual rate of interest that a bond’s issuer promises to pay the bondholder
on the bond’s face value. (b) A certificate attached to a bond evidencing interest due on a
payment date.
DEALER:A dealer, as opposed to a broker, acts as a principal in all transactions, buying and
selling for his own account.
DEBENTURE: A bond secured only by the general credit of the issuer.
DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities: (1)
delivery versus payment (DVP); and (2) delivery versus receipt (DVR). DVP is delivery of
securities with an exchange of money for the securities. DVR is delivery of securities with an
exchange of a signed receipt for the securities.
DISCOUNT: The difference between the acquisition cost of a security and its value at maturity
when quoted at lower than face value. A security that sells below original offering price shortly
after sale, is also is considered to be at a discount.
DISCOUNT SECURITIES: Non-interest bearing money market instruments that are issued a
discount and that are redeemed at maturity for full face value (e.g., U.S. Treasury Bills).
DIVERSIFICATION: Dividing investment funds among a variety of securities that offer
18
independent returns.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION (“FAMC” or “FMAC”): A
federal agency established in 1988 to provide a secondary market for farm mortgage loans.
Informally called Farmer Mac.
FEDERAL CREDIT AGENCIES: Agencies of the Federal Government that were established to
supply credit to various classes of institutions and individuals (e.g., S&Ls, small business firms,
students, farmers, farm cooperatives, and exporters).
FEDERAL DEPOSIT INSURANCE CORPORATION (“FDIC”): A federal agency that insures
all types of deposits received at an insured bank, including deposits in a checking account,
negotiable order of withdrawal (NOW) account, savings account, money market deposit account
(MMDA) or time deposit such as a certificate of deposit (CD). FDIC insurance covers depositors'
accounts at each insured bank, dollar-for-dollar, including principal and any accrued interest through
the date of the insured bank's closing, up to the insurance limit.
The FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies,
annuities or municipal securities, even if these investments are purchased at an insured bank. The
FDIC does not insure U.S. Treasury bills, bonds or notes, but these investments are backed by the
full faith and credit of the United States government.
The standard maximum deposit insurance amount is described as the “SMDIA” in FDIC regulations.
The SMDIA is $250,000 per depositor, per insured bank.
FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate is
currently pegged by the Federal Reserve through open-market operations.
FEDERAL HOME LOAN BANKS (“FHLB”): Government-sponsored wholesale banks
(currently 12 regional banks) which lend funds and provide correspondent banking services to
member commercial banks, thrift institutions, credit unions, and insurance companies. The mission
of the FHLBs is to liquefy the housing-related assets of its members, who must purchase stock in
their District Bank.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (“FNMA”): FNMA, like GNMA, was
chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal
corporation working under the auspices of the Department of Housing and Urban Development
(HUD). It is the largest single provider of residential mortgage funds in the United States. Fannie
Mae, as the corporation is called, is a private stockholder-owned corporation. The corporation’s
purchases include a variety of adjustable mortgages and second loans, in addition to fixed-rate
mortgages. FNMA’s securities are also highly liquid and are widely accepted. FNMA assumes and
guarantees that all security holders will receive timely payment of principal and interest.
FEDERAL OPEN MARKET COMMITTEE (“FOMC”): The FOMC consists of seven
members of the Federal Reserve Board and five of the 12 Federal Reserve Bank Presidents. The
19
President of the New York Federal Reserve Bank is a permanent member, while the other Presidents
serve on a rotating basis. The Committee periodically meets to set Federal Reserve guidelines
regarding purchases and sales of government securities in the open market, as a means of
influencing the volume of bank credit and money.
FEDERAL RESERVE SYSTEM: The central bank of the United States created by Congress and
consisting of a seven-member Board of Governors in Washington, D.C., 12 regional banks, and
about 5,700 commercial banks that are members of the system.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (“GNMA” or “Ginnie Mae”):
Securities that influence the volume of bank credit that is guaranteed by GNMA and issued by
mortgage bankers, commercial banks, savings and loan associations, and other institutions. A
security holder is protected by the full faith and credit of the U.S. Government. Ginnie Mae
securities are backed by the FHA, VA, or FMHM mortgages. The term “pass-throughs” is often
used to describe Ginnie Maes.
LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash without a
substantial loss of value. In the money market, a security is said to be liquid if the spread between
bid and asked prices is narrow, and reasonable amount can be done at those quotes.
LOCAL GOVERNMENT AGENCY: A local government agency is any city, county, city and
county, district, or other local governmental body or corporation, including the California State
Universities (CSU) and University of California (UC) systems, K-12 schools and community
colleges empowered to expend public funds.
LOCAL GOVERNMENT INVESTMENT FUND (“LAIF”): Monies from local governmental
units may be remitted to the California State Treasurer for deposit in this special fund for the
purpose of investment.
MARKET VALUE:The price at which a security is trading and could presumably be purchased or
sold.
MASTER REPURCHASE AGREEMENT: A written contract covering all future transactions
between the parties to repurchase-reverse repurchase agreements that establish each party’s rights in
the transactions. A master agreement will often specify, among other things, the right of the buyer
(lender) to liquidate the underlying securities in the event of default by the seller (borrower).
MATURITY: The date upon which the principal or stated value of an investment becomes due and
payable.
MONEY MARKET: The market in which short-term debt instruments (e.g., bills, commercial
paper, and bankers’ acceptances) are issued and traded.
OFFER: The price asked by a seller of securities (when one buys securities, one asks for an offer).
See “Asked” and “Bid”.
20
OPEN MARKET OPERATIONS: Purchases and sales of government and certain other securities
in the open market by the New York Federal Reserve Bank, as directed by the FOMC in order to
influence the volume of money and credit in the economy. Purchases inject reserves into the bank
system and stimulate growth of money and credit; sales have the opposite effect. Open market
operations are the Federal Reserve’s most important and most flexible monetary policy tool.
PORTFOLIO:A collection of securities that an investor holds.
PRIMARY DEALER:A group of government securities dealers that submit daily reports of
market activity and positions, and monthly financial statements to the Federal Reserve Bank of New
York, and are subject to its informal oversight. Primary dealers include Securities and Exchange
Commission (SEC) -- registered securities broker-dealers, banks, and a few unregulated firms.
PRUDENT INVESTOR RULE: An investment standard cited in the California Government Code
(CGC) Section 53600 et seq. Under this standard, all governing bodies of local agencies or persons
authorized to make investment decisions on behalf of the City are trustees and therefore fiduciaries
subject to the prudent investor standard. When investing, reinvesting, purchasing, acquiring,
exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and
diligence under the circumstances then prevailing, including, but not limited to the general economic
conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity
and familiarity with those matters would use in the conduct of funds of a like character and with like
aims, to safeguard the principal and maintain the liquidity needs of the agency.
QUALIFIED PUBLIC DEPOSITORIES: A financial institution that: (1) does not claim
exemption from the payment of any sales, compensating use, or ad valorem taxes under the laws of
this state; (2) has segregated for the benefit of the commission eligible collateral having a value of
not less than its maximum liability; and (3) has been approved by the Public Deposit Protection
Commission to hold public deposits.
RATE OF RETURN: The yield obtainable on a security based on its purchase price or its current
market price.
SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities and
valuables of all types and descriptions are held in the bank‘s vaults for protection.
SECONDARY MARKET: A market made for the purchase and sale of outstanding issues
following the initial distribution.
SECURITIES AND EXCHANGE COMMISSION: An agency created by Congress to administer
securities legislation for the purpose of protecting investors in securities transactions.
STRUCTURED NOTES: Notes issued by instrumentalities (e.g., FHLB, FNMA, SLMA) and by
corporations, that have imbedded options (e.g., call features, step-up coupons, floating rate coupons,
derivative-based returns) in their debt structure. The market performance of structured notes is
affected by fluctuating interest rates; the volatility of imbedded options; and shifts in the yield curve.
21
SUPRANATIONALS: International institutions that provide development financing, advisory
services and/or financial services to their member countries to achieve the overall goal of improving
living standards through sustainable economic growth. The California Government Code (CGC
53601) allows local agencies to purchase the United States dollar denominated senior unsecured
unsubordinated obligations issued or unconditionally guaranteed by the International Bank for
Reconstruction and Development (IBRD), International Finance Corporation (IFC), or Inter-
American Development Bank (IADB).
TIME CERTIFICATE OF DEPOSIT: A non-negotiable certificate of deposit, which cannot be
sold prior to maturity.
TREASURY BILLS:A non-interest bearing discount security that is issued by the U.S. Treasury
to finance the national debt. Most T-bills are issued to mature in three months, six months, or one
year.
TREASURY BONDS:Long-term, coupon-bearing U.S. Treasury securities that are issued as
direct obligations of the U.S. Government, and having initial maturities of more than 10 years.
TREASURY NOTES: Medium-term, coupon-bearing U.S. Treasury securities that are issued as
direct obligations of the U.S. Government, and having initial maturities of two to 10 years.
YIELD: The rate of annual income return on an investment, expressed as a percentage.
YIELD-TO-CALL (YTC): The rate of return an investor earns from a bond assuming the bond is
redeemed (called) prior to its nominal maturity date.
YIELD-TO-MATURITY: The current income yield minus any premium above par or plus any
discount from par in purchase price, with the adjustment spread over the period from the date of
purchase to the date of maturity.
ZERO-COUPON SECURITIES: Security that is issued at a discount and makes no periodic
interest payments. The rate of return consists of a gradual accretion of the principal of the security
and is payable at par upon maturity.
City of Palo Alto (ID # 9480)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 9/4/2018
City of Palo Alto Page 1
Summary Title: Natural Gas Capital Improvement Plan
Title: Prioritization Criteria and Planning for Palo Alto's Natural Gas Utility's
Capital Improvement Plan
From: City Manager
Lead Department: Utilities
Executive Summary
In the May 15, 2018 budget hearing meeting, the Finance Committee requested staff to return
to the Finance Committee in Fiscal Year 2019 to discuss Capital Improvement Plan (CIP)
prioritization criteria for the Gas Utility. The purpose is to provide information on the City of
Palo Alto Utilities’ (CPAU) natural gas five-year Capital Improvement Program (CIP), specifically
prioritization and planning for the gas main replacement program, and to solicit feedback from
the Finance Committee regarding future planning for the five-year gas CIPs.
Discussion
The Gas Utility’s five-year CIP program consists of the following:
The Gas Main Replacement Program - which covers the Gas Utility replacement of
aging gas mains ranked to have the highest threat scores within the system.
Customer Connections - which covers the cost when the Gas Utility installs new
services or upgrades existing services at a customer’s request in response to
development or redevelopment. The Gas Utility charges a fee to these customers to
cover the cost of these projects.
Ongoing Projects - which covers the cost of routine meter, regulator, and service
replacement; minor projects to improve reliability or increase capacity; and other
general improvements.
Tools and Equipment - which covers the cost of capitalized equipment, such as
directional boring, tapping and stopping equipment, and emergency equipment.
This equipment is required to safely interrupt the flow of gas without performing a
large scale shutdown of service to customers.
One-time Projects -, which covers occasional large projects that do not fall into any
other categories, (i.e. Gas ABS/Tenite Replacement Project (GS-18000).)
City of Palo Alto Page 2
The Gas Main Replacement (GMR) Program is in the final stages of completing a major
milestone with the replacement of gas mains made from Acrylonitrile-Butadiene-Styrene (ABS)
plastic. The program to replace ABS and other low-performing materials within the gas system
started in the 1990s. With the replacement of all ABS mains with Polyethylene (PE) plastic near
completion, the material most at risk for failure is the remaining Polyvinyl chloride (PVC) plastic
and steel (wrapped, with cathodic protection). The next focus of the GMR program will be the
replacement of all PVC mains with PE mains. CPAU installed PVC pipes from the early 1970s to
mid-1980s. Some of the City’s PVC pipe is approaching 50 years of service, and according to
industry data, PVC pipes have a much higher leakage rate than PE mains after 20 years of
service due to potential disbondment of fittings and joints. Since FY 2014, the total annual
number of gas leaks have declined significantly, between 50% - 70%, from approximately 150
leaks to 70 leaks. This is due to the City’s gas ABS replacement program. Continuing the
natural gas PVC pipeline replacement program significantly reduces the probability of failure
and risks associated with the natural gas pipeline. Without this program, staff expects the
number of annual leaks would likely increase, since 17% of the existing gas mains are PVC.
The FY2019 - FY2023 CIP budget for the gas main replacement program takes into account the
recent rise in construction costs. The GMR program represents approximately 75% of the total
natural gas five-year CIP budget. Several factors are contributing to the increase in
construction costs, and include economic recovery in the Bay Area, a greater focus on
infrastructure improvement by many municipal agencies, and the higher demand for utility
contractors within these fields. CPAU has seen the replacement cost per linear foot increase by
50% to 100% over the last couple of years. The Gas Utility posted the most recent project for
competitive bid (the Upgrade Downtown Project) which resulted in very few contractor bids
and an eventual contract price that was much higher than estimated. Council approved an
additional $6.7 million in FY 2018 related to the natural gas capital portion of this project (CMR
8517). Staff has begun to include the higher construction cost in future projects in order to
provide more accurate cost estimate, rate projections, as well as ensure the overall integrity of
the gas system. Currently, CPAU plans to replace as many aging mains as possible within its
approved budget. However, if this trend of higher construction cost continues, the Gas Utility
will consider reducing the main replacement rate or requesting for larger CIP budgets and as a
result, increasing rates.
It should be noted that staff recently discovered that the Fiscal Year 2019 Adopted Capital
Budget inadvertently double-counted the Gas Fund budget for GS-03009 (Systems Extensions -
Unreimbursed). Staff will recommend correcting this error as part of the FY 2019 Mid-Year
Review by reducing the FY 2019 budget for GS-03009 in the amount of $210,590 and return the
funds to reserves.
Commission Review
The Utilities Advisory Commission reviewed the presentation in their meeting packet at the
August 1, 2018 meeting. However, there was no formal discussion or Q&A due to meeting time
constraint.
City of Palo Alto Page 3
Attachments:
Attachment A: Natural Gas CIP_Presentation
1
NATURAL GAS CIP
PLANNING
August 1, 2018
Attachment A
2
CPAU NATURAL GAS SYSTEM
•Four PG&E/City of Palo Alto (CPAU)
city gate stations
•3 distribute gas to the City at a
delivery pressure of 25
•1 dedicated to VA Hospital at a
delivery pressure of 40
•386 miles of natural gas pipeline
•210 miles of distribution main
•176 miles of service pipe
•17,500 natural gas service pipelines
•24,000 natural gas meters
MATERIAL
MILES OF
MAINS IN
SYSTEM
NUMBER OF
SERVICES IN
SYSTEM
MILES OF SERVICES
IN SYSTEM
(AVG 53'/SERVICE)
STEEL 63.231 1820 18.269
COPPER 0 1 0.010
PLASTIC PVC 36.110 716 7.187
PLASTIC PE 110.380 13988 140.410
PLASTIC ABS 0.380 102 1.024
PLASTIC
OTHER 0.017 65 0.652
OTHER 0 851 8.542
TOTAL 210.118 17,543 176.095
3
•Federal Department of Transportation
•PHMSA –Pipeline and Hazardous Materials Safety Administration
•Five regions that cover the United States: Western, Central, Eastern,
Southern and Southwest
•Responsible for regulating and ensuring the safe and secure movement
of hazardous materials
•Establish national policy, set and enforce standards, educate and
conduct research to prevent incidents
•151 inspection and enforcement employees; 90 of which are pipeline
inspectors
REGULATORY OVERSIGHT
4
PIPELINE INTEGRITY PLAN
•In August 2011 distribution operators were required to develop and
implement a Gas Distribution Integrity Management Plan (DIMP)
•Distribution Integrity Management Plan elements:
•Knowledge of the system
•Identifying threats of the system
•Evaluate and rank risks
•Implement measures to reduce risks
•Measure performance
•CPAU uses American Public Gas Association’s tool, “SHRIMP”,to create
the City’s custom DIMP plan
•SHRIMP: Simple, Handy, Risk-Based, Integrity Management Plan
5
CPAU INTEGRITY MANAGEMENT PLAN
SHRIMP
Gas Leak Data
-Yearly leak data
-Historical leak data
System Knowledge
-30+yrs of individual
operations staff
-City engineering staff
DIMP Plan
Gas System Configuration
-System material
-System pipe diameter
-System components
6
•DIMP –Distribution Integrity Management Plan risk assessment
•#1 –Material, Weld or Joint Failure; PVC
•#2 –Excavation Damage; by Third Party
•#3 –Excavation Damage; by Crew or Contractors
•#4 –Material, Weld or Joint Failure; Acrylonitrile Butadiene
Styrene (ABS)/Te nite
•#5 –Corrosion, External Corrosion
•#6 –Other Threats, Legacy Crossbores
•#7 –Natural Forces
CPAU INTEGRITY MANAGEMENT PLAN
7
NATIONWIDE PVC FAILURES SINCE 1970
•Plastic Pipe Database
Committee, with 119 operators
•PVC failure/leaks increase after
20+ years of service life
•CPAU has prioritized the
replacement of PVC pipes in its
system based on this industry
data and experience
Report: April 27, 2017
8
CPAU REPORTED LEAKS
Total Reported Leaks by Category (6 year)
2012 2013 2014 2015 2016 2017
Corrosion 11 11 14 6 12 5
Natural Force 3 5 1 1 5 3
Excavation 47 54 52 42 35 19
Other Outside Force 0 2 0 2 2 2
Pipe, Weld, Joint 16 47 34 19 9 9
Equipment 8 3 7 1 5 5
Incorrect Operation 0 0 0 0 0 0
Other Cause 10 32 39 12 8 1
0
10
20
30
40
50
60
2012 2013 2014 2015 2016 2017
Corrosion
Natural Force
Excavation
Other Outside Force
Pipe, Weld, Joint
Equipment
Incorrect Operation
Other Cause
9
CPAU PVC RISK ASSESSMENT
•In 2015 CPAU commissioned a PVC and PE gas piping study.
•Assessed risk of vintage PVC, vintage PE and modern PE by analyzing
extracted segments of pipe from the system.
•Concluded PVC material presented a greater risk to the system than
PE material.
•Compared to PE pipe, PVC has a 4 times greater risk of failure when
used on distribution mains and a 3 times greater risk of failure on
services.
•Three scenarios: 5-, 10-, and 15-year replacement programs,
indicating a small benefit to accelerating from the 15-year program.
10
GAS CIP BUDGETING
•Natural gas CIP master plan
FY2019-FY2023
•Average about 18,000 linear feet
of main replacement per year
•Locate replacement economically
•Replacement includes distribution
main and services
•Estimating a total of $6.5M in
pipeline main and service
replacement per year
11
GAS CIP BUDGETING
•Estimated $325 per linear
foot in FY20
•Annual labor and material
cost increase of 3%
•Replacement cost varies due
to replacement size and
project site conditions.
•13 year replacement strategy
for PVC main
Total PVC Footage
Remaining
MainReplacement
Footage
$/ft of Replacement +
3%Annual Increase Total-13 years
190,872 18,250 325.00$ 5,931,250.00$
172,622 17,703 334.75$ 5,925,911.88$
154,920 17,171 344.79$ 5,920,578.55$
137,748 16,656 355.14$ 5,915,250.03$
121,092 16,157 365.79$ 5,909,926.31$
104,935 15,672 376.76$ 5,904,607.37$
89,263 15,202 388.07$ 5,899,293.23$
74,062 14,746 399.71$ 5,893,983.86$
59,316 14,303 411.70$ 5,888,679.28$
45,013 13,874 424.05$ 5,883,379.47$
31,138 13,458 436.77$ 5,878,084.43$
17,680 13,054 449.88$ 5,872,794.15$
4,626 12,663 463.37$ 5,867,508.64$
12
ABS/TENITE REPLACEMENT PROJECT
•Replace 160 ABS/Te nite natural gas services
•ABS/Te nite pipe form rapid crack
propagation
•Remove the remaining known ABS/Te nite
service pipe from the natural gas system
•Construction replacement cost average at
$5,000 per new natural gas service.
13
ADOPTED GAS CIP FY 2019 -2023
CIP Project Title FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
GS-12001 -Gas Main Replacement -Project 22 $ 800,000 $ -$ -$ -$ -
GS-13001 -Gas Main Replacement -Project 23 $ 550,000 $ 6,500,000 $ -$ -$ -
GS-14003 -Gas Main Replacement -Project 24 $ -$ 804,525 $ 6,500,000 $ -$ -
GS-15000 -Gas Main Replacement -Project 25 $ -$ -$ 650,000 $ 6,500,000 $ -
GS-16000 -Gas Main Replacement -Project 26 $ -$ -$ -$ 650,000 $ 6,500,000
GS-20000 -Gas Main Replacement -Project 27 $ -$ -$ -$ -$ 856,180
GS-03009 -System Extensions -Unreimbursed *$ 421,180 $ 433,816 $ 446,830 $ 460,234 $ 474,042
GS-18000 -Gas ABS/Tenite Replacement Project $ 1,500,000 $ -$ -$ -$ -
GS-14004 -Gas Distribution System Model $ 20,000 $ 20,000 $ 20,000 $ -$ -
GS-11002 -Gas Distribution System Improvements $ 246,036 $ 253,417 $ 261,020 $ 268,851 $ 276,916
GS-13002 -Gas Equipment and Tools $ 350,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000
GS-80019 -Gas Meters and Regulators $ 376,652 $ 387,952 $ 399,591 $ 411,579 $ 423,926
GS-80017 -Gas System, Customer Connections $ 1,303,315 $ 1,342,415 $ 1,382,688 $ 1,424,169 $ 1,466,894
Total Expenses $ 5,567,183 $ 9,842,125 $ 9,760,129 $ 9,814,833 $ 10,097,958
GS-80017 -Gas System, Customer Connections $ (1,078,935)$ (1,111,303)$ (1,144,642)$ (1,178,981)$ (1,200,000)
Total Revenues $ (1,078,935)$ (1,111,303)$ (1,144,642)$ (1,178,981)$ (1,200,000)
Grand Total $ 4,488,248 $ 8,730,822 $ 8,615,487 $ 8,635,852 $ 8,897,958
Note: * GS-03009 (System Extensions -Unreimbursed) -FY2019 mid-year adjustment to reduce budget in half due to double-counting
14
GAS CIP BUDGETING
Committee/Public Discussion and
Feedback to Staff
15
GAS CIP BUDGETING
Backup Slides
16
HISTORICAL GAS CIP FY 2012 -2018
Project Description FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
Gas Main Replacements 3,155,239 3,389,034 7,955,055 6,019,882 1,119,184 425,932 1,100,737
Gas System Improvements 951,749 622,258 265,169 421,614 323,205 257,476 179,167
Gas Meters, Equipment and
Tools 391,924 49,707 322,171 60,750 91,276 -127,968
Gas Customer Connections 605,635 932,035 904,684 1,005,525 1,252,556 1,155,768 936,441
Revenue -Customer
Connections (612,121)(731,191)(643,754)(747,954)(964,858)(955,081)(1,102,979)
Grand Total 4,492,426 4,261,843 8,803,325 6,759,817 1,821,363 884,095 1,241,334
17
Increasing Construction Costs –Labor & Materials
Year Project Feet Contract $/LFT
P/P %
Increase
% Increase as of
2010/11/12
2011 GMR 18/19A 38,563 4,042,637$ 105$
2012 GMR 19/20/21 68,811 12,110,846$176$ 68%
2018 GMR 22 14,272 5,127,395$ 359$ 104%243%
2012 WMR 23 /24 19,463 4,220,699$ 217$
2015 WMR 25 11,872 4,008,210$ 338$ 56%
2017 WMR 26 12,626 4,987,424$ 395$ 17%82%
2012 SSR 22/23 33,497 3,987,034$ 119$
2015 SSR 24/25/26 42,398 6,732,482$ 159$ 33%
2016 SSR 27 15,752 3,078,198$ 195$ 23%64%
2010 O/H to U/G Conversion 45 10,662 2,280,000$ 214$
2015 O/H to U/G Conversion 47 5,625 1,940,000$ 345$ 61%
2018 O/H to U/G Conversion 46 2,800 1,475,000$ 527$ 53%146%
City of Palo Alto (ID # 9549)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 9/4/2018
City of Palo Alto Page 1
Summary Title: Colleague's Memo on Fiscal Transparency in Labor
Negotiations
Title: Review and Discussion of the Colleagues’ Memo From Council
Members DuBois, Filseth, Scharff, and Tanaka on Fiscal Transparency in Labor
Negotiations
From: City Manager
Lead Department: City Manager
Recommendation
Staff recommends the Finance Committee review and discuss next steps in regards to the
Colleagues’ memo from Councilmembers DuBois, Filseth, Scharff, and Tanaka on Fiscal
Transparency in Labor Negotiations.
Discussion
At the February 26, 2018 City Council meeting, four Councilmembers brought forward a
colleagues’ memo in regards to transparency during the labor negotiation process. The
following motion was unanimously approved by the City Council.
MOTION: Vice Mayor Filseth moved, seconded by Council Member Wolbach to:
A. Refer the proposal regarding Fiscal Transparency in Labor Negotiations to the Finance
Committee for refinement and to develop the fiscal and actuarial analysis template;
B. Direct Staff to, at the appropriate time, initiate Meet and Confer discussions with the
City’s bargaining groups regarding this proposed Policy; and
C. Return the final proposal to Council.
In accordance with the first step in this action, the attached memo is presented to the Finance
Committee for review. Staff has also attached the transcribed minutes for this item during the
February 26, 2018 City Council meeting for ease of reference as well.
Resource Impact
No implications on resources are anticipated as a result of this item; however, once a final
proposal is determined, significant staff and potentially consultant resources may be necessary
to both discuss this proposed policy and meet the requirements of a final policy.
City of Palo Alto Page 2
Attachments:
• Attachment A: Colleagues' Memo on Fiscal Transparency in Labor Negotiations from
February 26, 2018
• Attachment B: Excerpt Minutes From 02-26-2018 Special City Council Meeting
City of Palo Alto
COLLEAGUES MEMO
February 26, 2018 Page 1 of 7
(ID # 8963)
DATE: February 26, 2018
TO: City Council Members
FROM: Council Member Filseth, Councilman Tanaka, Mayor Scharff, Council
Member DuBois
SUBJECT: COLLEAGUES' MEMO FROM COUNCIL MEMBERS DUBOIS, FILSETH,
SCHARFF, AND TANAKA ON FISCAL TRANSPARENCY IN LABOR NEGOTIATIONS
Goals:
Decisions on Staff wages, benefits, and future pension and retiree-medical obligations have
significance both to the community’s fiscal circumstances and to its ability to recruit and retain
highly qualified employees. Yet these wage, benefit and pension decisions are currently
reached though essentially private negotiations, without meaningful opportunity for public
examination. The goal of this Council Policy is appropriate transparency: to provide timely and
meaningful fiscal and actuarial information about labor negotiations to the public, while
protecting the fairness and integrity of the bargaining process.
Background and Discussion:
In general in Palo Alto, as in the majority of California cities, unless otherwise agreed to by the
City and the bargaining unit, collective bargaining negotiation sessions under state law -- the
Meyers-Milias-Brown Act (MMBA) -- are confidential. While Council is briefed and gives
direction in closed sessions, virtually no information becomes available to the public until a
tentative Memorandum of Agreement (MOA) has been negotiated between the City and the
bargaining unit and is presented to the Council for final approval, by which time public review
and comment are essentially irrelevant to the outcome of the process.
These outcomes, such as those affecting the City’s unfunded liabilities (pension and retiree
medical), are public concerns which will be borne by the community for decades, and merit
meaningful public review.
A handful of California cities have adopted practices providing for greater fiscal and actuarial
transparency during the bargaining period, without fundamentally transforming the negotiation
process. This Council Policy proposal borrows relevant elements from the City of San Jose’s
existing Council Policy 0-39 (2008)1, along with one or two ideas from the City of Fullerton’s
Council Resolution 2016-41 (2016)2.
February 26, 2018 Page 2 of 7
(ID # 8963)
Proposal:
1. This Policy is meant to apply to contract negotiations between the City and a Bargaining
Unit during the time from the first negotiating session to approval of an MOA. It is not
intended to cover a range of other circumstances such as administrative or judicial
dispute resolution processes. [San Jose Policy]
2. The City shall prepare a baseline fiscal summary of the costs and liabilities associated
with the bargaining unit; this summary will be posted on the City’s website for public
review together with the agenda for the first Council closed session with the City’s labor
negotiators. The fiscal data should normally be collated from other existing city
documents. [Public Information]
3. Formal written proposals made or received by City negotiators shall be posted for public
review on the City’s website within two days after transmittal to the other party’s
designated negotiators. [San Jose Policy]
4. Public posting of written proposals made by the City shall be accompanied by a fiscal
analysis, including impact on the unfunded actuarial liability (UAL) for pension and
“other post-employment benefits” (OPEB) associated with the bargaining unit.
[Fullerton Policy]
5. The City shall also post on the City’s website a fiscal analysis of any MOA proposed for
adoption by Council; and in the event of an impasse, of both parties’ last best and final
offers.
6. Council may authorize and direct City negotiators in open or closed session. If done in
closed session, the closed session discussions themselves are to remain confidential.
[San Jose Policy]
Recommendations:
1. The City Council should refer this proposal to the Finance Committee for refinement
and to develop the fiscal and actuarial analysis template; and,
2. At the appropriate time, Staff should initiate Meet and Confer discussions with the
City’s bargaining groups regarding this proposed Policy.
Resource Impact:
The primary impact will be on staff time, especially during the development of the proposal, its
vetting, discussions with labor representatives, and committee and Council sessions to discuss
and approve. Subject to specific requirements for fiscal analyses, the ongoing operational
February 26, 2018 Page 3 of 7
(ID # 8963)
impacts should be small, as these analyses are already standard factors in negotiation strategies
and bargaining itself.
Appendices:
A. Comparison of Other Cities’ Procedures
B. Example Web Site and Public Written-Proposal Posting (City of Fullerton)
References:
1. City of San Jose Council Policy 0-39
https://www.sanjoseca.gov/DocumentCenter/View/3834
2. City of Fullerton Council Resolution 2016-41
https://www.cityoffullerton.com/gov/opengov/labor_negotiations/default.aspprivate
February 26, 2018 Page 4 of 7
(ID # 8963)
Appendix A: Comparison of Other Cities’ Procedures
February 26, 2018 Page 5 of 7
(ID # 8963)
Additional Comments on Other-Cities Procedures Not Included in the Proposal
Other cities’ policies included a variety of other elements; these were deemed of lower relevance to
Palo Alto and left out of this proposal, but could be discussed.
1. Negotiation Agents. Both the San Jose and Fullerton policies contain provisions discouraging side
discussions between Council members and the bargaining unit. This has not recently been a
concern in Palo Alto, so these provisions were left out of the Proposal.
a. San Jose Policy: Unless requested by the City Manager, members of the City Council or
other Council appointees should not discuss with any bargaining unit representative any
matter that is a subject of negotiations during the bargaining process.
b. Fullerton Policy: City Council members will report any ex parte communications, with any
and all employee association representatives regarding subject matter of a pending meet
and confer process.
2. Open-Session Review. San Jose’s policy includes an additional provision for regular open-session
reviews of offers during the bargaining period. Potential concerns would be (1) a potentially large
numbers of such open sessions, given the number of bargaining units in Palo Alto; and (2) potential
to distract focus onto direct lobbying of Council and public, and away from core negotiation process
a. San Jose Policy: The City Manager will provide periodic updates on labor negotiations to the
Council in open session. These updates shall include a summary of proposals exchanged
since the last update. Bargaining unit representatives may comment on the City Manager’s
open session update; the City Council may listen but not respond.
3. Independent Financial Auditors required. No strong evidence this is needed in Palo Alto at this
time.
a. Costa Mesa Policy: The city shall have prepared on its behalf, by an independent auditor in
co-operation with the Finance Director, a study and supplemental data upon which the
study is based, determining the fiscal impacts attributed to each term and condition made
available to the members of all recognized employee organizations.
4. Fully-Open Bargaining Sessions. One model used in some districts in the United States, notably
school boards, is a requirement that all bargaining sessions be open to the public and noticed.
Supporters note full transparency aspect; some critics charge that it distorts the bargaining process
towards public lobbying vs actual negotiation.
a. Colorado State Proposition 104 (passed Nov-2014): No adoption of any proposed policy,
position, resolution, rule, regulation, or formal action … shall occur at any executive session
February 26, 2018 Page 6 of 7
(ID # 8963)
that is not open to the public … any meeting of a Board of Education at which a collective
bargaining agreement is discussed shall be open to the Public, and any notice required by
Section 24-6-403(2)(C), C.R.S., shall be given prior to the meeting.
(Applies to all Colorado public school districts)
February 26, 2018 Page 7 of 7
(ID # 8963)
FINAL TRANSCRIPT MINUTES
Page 66 of 71
Special City Council Meeting
Final Transcript Minutes: 2/26/18
C. Direct Staff to return to Council with a proposal for parking quality
standards with parameters that can be adjusted based on
neighborhood characteristics; and
D. Direct Staff to factor in the Business Registry.
Mayor Kniss: We're ready at this point to vote on the main Motion. I am
still uncomfortable with it. I am going to vote no, but I would anticipate it
would pass. That passes on a 7-1 vote with the Mayor dissenting.
MOTION AS AMENDED PASSED:7-1 Kniss no, Scharff absent
12. Approval of the City of Palo Alto Utilities 2018 Strategic Plan.
THIS ITEM CONTINUED TO A DATE UNCERTAIN.
13. Colleagues' Memo From Council Members DuBois, Filseth, Scharff, and
Tanaka on Fiscal Transparency in Labor Negotiations.
Council Member Scharff returned to the meeting at 10:33 P.M.
Mayor Kniss: Let's move forward with one last item we're taking up tonight.
This is a Colleagues' Memo from Council Members DuBois, Filseth, Scharff
and Tanaka on fiscal transparency in labor negotiations. Whomever is going
to introduce this.
Vice Mayor Filseth: This is about fiscal transparency. It's a proposed policy
modeled after an existing San Jose Council policy, which says that during the
bargaining process formal offers and counteroffers should be posted to the
City's website along with a fiscal analysis including any impact on long-term
liabilities. It's not intended to change the bargaining process itself. It
introduces public visibility at key checkpoints during the process. The
current practice is there is no public information at all during the bargaining
process until a tentative Memorandum of Understanding (MOU) is reached
and presented to Council for an up or down vote. By that time, it's
essentially too late for public review and comment to have any bearing on
the outcome of the process. City finances and pension liabilities in particular
are a major public concern. With decisions affecting pensions, we're talking
about hundreds of millions of dollars in public debt that will take the
community many decades to pay off. Currently, those decisions are very
opaque. The City is a public agency. This is a major public concern that
merits public review and input and transparency. Matters of serious public
concern done entirely in Closed Session are what we have today. There's no
compelling reason that so much of it needs to be done out of sight. Again,
this is not intended to change the bargaining process itself. It introduces
Excerpt Minutes from the
Special City Council Meeting
on February 26, 2018
Special Meeting
February 26, 2018
The City Council of the City of Palo Alto met on this date in the Council Chambers
at 5:10 P.M.
Present: DuBois, Filseth, Fine, Holman, Kniss, Kou, Scharff, Tanaka,
Wolbach
Absent:
FINAL TRANSCRIPT MINUTES
Page 67 of 71
Special City Council Meeting
Final Transcript Minutes: 2/26/18
public visibility at key checkpoints during the process. What's proposed here
is a Council policy, not an actual ordinance, with discussions from legal.
Because it's not proposed as a formal Ordinance, Council would still be
allowed to make exceptions if it deemed fit. Finally, this is about good
governance. Beyond that, eventually cities all over the State of California
are going to be asking the public to make a real sacrifice over these
outstanding liabilities. Government and labor are going to have to work
together to bring everybody along with this. I believe that California
residents are not going to be happy as the full import of this comes home.
If we're going to bring everybody along with this, then all of the State
agencies are going to need to be very transparent and inclusive with the
public about this top to bottom. This a tide that is coming in. Let me make
a Motion as well.
Mayor Kniss: Wait a second, a public speaker. Thank you, Vice Mayor.
Lynn Krug. Welcome.
Lynn Krug: Good evening, however late in the evening. It's Lynn Krug. I
am the former Chapter Chair of Service Employees International Union
(SEIU). I'm here on behalf of SEIU members this evening to take notes. I'd
like to say that many of us are listening from home tonight, all those people
that commute an hour or 2 hours each way to work. We want to have a
respectful conversation with you in the future. Those responses will be
forthcoming. I'd like to see that we maintain a relationship—this is from me
personally—that is welcoming to future employees. As Jim Keene mentioned
earlier, staffing issues are real. Maintaining an environment for future
employees and existing employees that is welcoming, that shows respect,
and honors the need for having a high level of skill for many jobs here in the
City is very important given the economic and housing issues we now face.
Our hiring problems are real. It makes it even difficult for existing
employees to be able to work if they cannot work for Staff that have the
skills that are needed for those jobs. I highly encourage you in the face of
your Colleagues' Memo to also consider how you can make things more
copacetic, how the City can run better for the citizens itself, and they get
their money's worth for those employees that are hired. They need to be
employees who are well skilled and serve the City well. I hope it goes well.
In the future, SEIU will come back with a response. Thanks.
Mayor Kniss: Thank you for coming at this late hour. Back to you, Vice
Mayor Filseth, for a Motion.
Vice Mayor Filseth: I'd like to make a three-part Motion. This is on Page
169 of the Staff Report. One, the City Council should refer this proposal to
the Finance Committee for refinement and to develop the fiscal and actuarial
FINAL TRANSCRIPT MINUTES
Page 68 of 71
Special City Council Meeting
Final Transcript Minutes: 2/26/18
analysis and reporting template. Two, at the appropriate time, the City
Manager should initiate meet and confer discussions with the City's
bargaining groups regarding this proposed policy. Three, the final proposal
should return to Council for full discussion and approval.
Council Member Scharff: Second.
Council Member Wolbach: Second.
Council Member Fine: Don't steal someone else's memo.
Council Member Wolbach: I'll defer to former Mayor Scharff.
MOTION:Vice Mayor Filseth moved, seconded by Council Member Wolbach
to:
A. Refer the proposal regarding Fiscal Transparency in Labor Negotiations
to the Finance Committee for refinement and to develop the fiscal and
actuarial analysis template;
B. Direct Staff to, at the appropriate time, initiate Meet and Confer
discussions with the City’s bargaining groups regarding this proposed
Policy; and
C. Return the final proposal to Council.
Mayor Kniss: Are you speaking to your Motion now that you have a second?
Vice Mayor Filseth: I believe I've already spoken to it.
Mayor Kniss: Would the seconder like to speak?
Council Member Wolbach: Part C is the Amendment I was going to offer.
You beat me to it. I like the Motion. Transparency is helpful. Being
thoughtful as a community, as a Council about some of the big fiscal
decisions we face is important. When this goes to Finance, there will be
some good discussions. I look forward to seeing how it looks when it comes
back to Council. I appreciate SEIU sending somebody here tonight.
Mayor Kniss: Council Member Fine and then Council Member DuBois.
Council Member Fine: Two quick comments. One, thank you, gentlemen,
for bringing this forward. This is well thought out and balanced. In my
limited experience in labor negotiations, I really do have some hope that this
can help us going forward and also help our bargaining units as well. Two
quick comments. One, thank you for including the City of Fullerton's labor
FINAL TRANSCRIPT MINUTES
Page 69 of 71
Special City Council Meeting
Final Transcript Minutes: 2/26/18
negotiations profile. This is really informative. It's super basic. If we can
attain something like this, we will have made progress. The second thing is
just a broad comment. In some ways Letter B is the most important. I was
researching this, it came to my attention that we would only be able to move
forward with this through a meet and confer process. I would put forth that
Letter B may be the most important movement here. Otherwise, I'm happy
to support this. Thank you all for bringing it forward.
Mayor Kniss: Council Member DuBois.
Council Member DuBois: This was a carefully considered memo. We really
tried to model it on existing policies in other cities. We looked at many
cities, but San Jose and Fullerton in particular. It's good for the public. It's
good for the City. I actually think this is really good for our employees. It
helps the public understand what's needed to support the level of services
owe have in our City, what's needed to attract and retain employees, and
what the cost of those employees are in the Bay Area. Having some
transparency on this process will help bring the public along so that
everyone will understand why labor agreements are made the way they are.
Mayor Kniss: Council Member Holman and then Scharff.
Council Member Holman: I also want to thank the Colleagues who brought
this forward. I look forward to it creating a more collaborative environment.
Getting some sunshine on this process is helpful and healthy for Council
Members, Staff, and bargaining units. I appreciate you all bringing it
forward. Thank you.
Mayor Kniss: Council Member Scharff.
Council Member Scharff: I figured I had to speak since I came back for this.
I'm looking forward to the meet and confer process. I hope our friends in
labor feel that this is a positive step. Transparency is good for everyone.
It's good for the residents. They have a sense of what's going on. They see
the progress and the initiation, and they're not surprised when they see an
MOU finally on the calendar. There are updates. The community gets
brought along in the process. It forces people to start at more reasonable
positions. Who knows where people start because it's all Closed Session.
You can see people giving thoughtful offers that they would put in the public
eye. Hopefully all of that makes the whole process work better. We are
starting labor negotiations right around now. I would say to our friends in
labor that how long the meet and confer process takes is up to both parties
on this. We could do this quickly and see how it goes and see if it's a real
positive in the steps. I'm hoping it will be. I'm hoping we all come together
on this and work together on it.
FINAL TRANSCRIPT MINUTES
Page 70 of 71
Special City Council Meeting
Final Transcript Minutes: 2/26/18
Mayor Kniss: Thanks in particular to Vice Mayor Filseth because I know he
drove this from behind even if he wouldn't take credit for it. The rest of you
have agreed; I know you have. This is a very creative proposal. It's going
to take some time, some energy. You've worked closely with City Council on
this. I'm delighted you brought it forward. I think we're ready to vote.
Actually we might go home. That passes unanimously. Thanks to the four
of you who brought that forward.
MOTION PASSED:9-0
Inter-Governmental Legislative Affairs
None.
Council Member Questions, Comments and Announcements
Mayor Kniss: We have gotten to the point where you all can say something
about what you've been doing lately or intend to do in the future or
whatever. Any comments at all? Karen and then Lydia.
Council Member Holman: Just one brief one. Council Member Kou and I
attended a really interesting and informative retail meeting on Wednesday of
last week. We'll be reporting on that next week.
Mayor Kniss: If there's nothing else—Lydia. Sorry.
Council Member Kou: As the liaison to the Palo Alto Youth Council,
yesterday they had a meet and greet with Council Members. Council
Member Tanaka and I attended. The teens asked some really great
questions. They really wanted to know what Council does, how we got on.
One of the questions that really struck me was about the Parkland High
School shooting. They seemed pretty inquisitive about that. I would be nice
if we can maybe ask the Chief to have a session with them just to give them
information. Just an idea.
Mayor Kniss: Thank you for going to that. I had read about it and wasn't
able to go. Greg, you've thought of something?
Council Member Scharff: I did think of something. I remembered on Friday
I went to the Parks and Rec Retreat, which was really informative. I've got
to say the Parks and Rec Committee showed us all of their accomplishments
for the past year. It was quite amazing. They're doing a fantastic job. We
talked a lot about what we should include in a tax measure to fund the Parks
Master Plan and other park improvements for this year.
Mayor Kniss: I see no other lights. I know it's early, but we are adjourned.