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Tuesday, March 3, 2020
Regular Meeting
Community Meeting Room
7:00 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
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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. Review and Recommend to Council the Preliminary Operating Plan and
new Municipal Fees for the Junior Museum and Zoo
2. Preliminary Financial Forecasts and Proposed Rate Changes for
Electric, Gas, Water, and Wastewater Collection Utilities for Fiscal Year
2021
Future Meetings and Agendas
Adjournment
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City of Palo Alto (ID # 11093)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 3/3/2020
City of Palo Alto Page 1
Summary Title: FY 2021 Preliminary Operating Plan for JMZ
Title: Review and Recommend to Council the Preliminary Operating Plan and
New Municipal Fees for the Junior Museum and Zoo
From: City Manager
Lead Department: Community Services
RECOMMENDATION
Staff recommends that the Finance Committee review and recommend to City Council this
report’s proposed operating plan for the Junior Museum and Zoo, including the recommended
staffing complement and cost recovery levels.
EXECUTIVE SUMMARY
This memo outlines staff’s recommendations for an operating plan, including staffing
complement and cost recovery levels associated with the re-opening of the Junior Museum and
Zoo (JMZ). The JMZ will reopen in October 2020 as a larger facility with more animals and
exhibits, and as such fiscal year (FY) 2021 and future year budget adjustments are
recommended to accommodate the expanded facilities, animals, and public usage. Staff
recommends expanding personnel and some non-personnel budget items in order to ensure a
safe and enjoyable experience for users of the new facility. Staff also recommends introducing
new fees at the facility to offset increased costs. Details of this plan are described below. Any
necessary budgetary adjustments will be brought forward for Finance Committee review and
City Council approval in the appropriate budget cycle.
BACKGROUND
Founded in 1934, the Palo Alto Junior Museum & Zoo (JMZ) is dedicated to enriching the lives
of children, ages 0 to 11, through hands-on exploration of the world. Specifically, the mission is
to engage a child’s curiosity for science and nature. This mission is furthered through a variety
of exhibits, a diverse community of live animals, and educational programs for children, families
and schools.
The JMZ’s permanent location and facility was established in 1941, when the JMZ building was
built, and in 1969, when the zoo was added. About a decade ago, the Friends of the Junior
Museum and Zoo (Friends) launched the JMZ Initiative – a $25 million campaign to rebuild the
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outdated JMZ facility in recognition that the existing structures were not adequately sized nor
designed to 1) accommodate the JMZ’s vibrant exhibits, expanded educational programs,
current accessibility and seismic code requirements, and 2) to meet best-practices in modern
animal care and collection management.
By January 31, 2017, the Friends successfully met this campaign goal, thanks to a $15 million
matching grant from the Peery Family and $10 million in other private donations from local
donors. These donations have enabled the City and the Friends to build a new JMZ, which will
improve the visitor experience by combining experiential exhibits, with an expanded and
optimized space to make science programming scalable and able to meet the increased needs
of future generations. The JMZ has served families for more than eighty years and the new
facility will ensure the same exceptional quality of early science education for children for many
years to come.
The JMZ construction project began in the summer of 2018 and is expected to conclude in the
summer of 2020. Details of the rebuilding process can be found in Council Memo 8851 from
February 5, 2018 and Council Memo 9245 from May 29, 2018.
The JMZ will reopen in October 2020 as a state-of-the-art museum and zoo built with a focus on
inclusion, accessibility and the highest standards in animal care.
As leaders in early childhood education, the Junior Museum & Zoo engages infants, toddlers
and children through play to think critically and creatively. Research in this field points to the
following findings:
• Neuroscience confirms that play significantly effects the development of a young child’s
brain.
• Social science studies indicate that play helps a child build interpersonal and self-
regulation abilities.
• Futurists point to the global economy and the need for a workforce that can imagine,
innovate and empathize.
• Exhibits and programs provide children with tangible interactions that challenge them to
accomplish small and large feats.
The experience that guests will have in the zoo has been reimagined and rebuilt. The
experience is called Loose-in-the-Zoo because children will lead the experience and many of the
animals will be loose within the zoo (but under a protective net.) It is place where children will
lead their families to find animals where they would in nature; on a pond, in a log, in a tree
stump, underground, underwater, and in the trees. Animal care takers will introduce children
to animals in the Wildlife Circle, including the many birds that are loose in the zoo, such as
ibises, flamingos, spoonbills and many more.
In 2022, the JMZ will also open a permanent exhibit about the dinosaurs that lived in California.
It will include live cretaceous-era plants, turtles, geologic specimens, a fossil dig, and life-size
models of several types of dinosaurs from California.
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The new JMZ experience has been designed to accommodate people of all abilities. The
interactive science exhibits were developed by City exhibit staff who designed, prototyped, and
tested exhibits under the watchful eyes of an accessibility advisory committee made up of
people representing a variety of disabilities. This process helped find solutions to difficult
challenges and assured that every exhibit can be enjoyed by all. For example, in the zoo there
will be life-sized, detailed bronze sculptures representing the species of live animals on display,
so that everyone can use their sense of touch to learn more about their forms.
Outside the JMZ there will be several enhancements including a redesigned parking lot with
enhanced pathways for bicyclists and pedestrians, and improvements in the connecting spaces
around the Lucie Stern Community Center, the Lou Henry Hoover Girl Scout House, the JMZ and
Rinconada Park. There will be new picnic areas, a new playground, and new exhibits along the
promenade that connects Middlefield Road to Rinconada Park. Children can hop on boulders
through a bioswale, play alongside animal sculptures under a tree, or explore a 10-billionth
scale model of our solar system. The new facility will enhance the JMZ’s ability to deliver their
award-winning educational programs that deliver hands-on science lessons to more than
18,000 students in 60 schools including many Title 1 schools in East Palo Alto and Santa Clara
County.
DISCUSSION
As shown in the table below, the new JMZ facility will offer increased space for education,
interactive exhibits, play areas and enclosures. There will also be an increased number of
animals in the zoo and opportunities for visitors to interact with the animals. Because of these
increases, staff have developed operating model options designed to manage costs while
providing visitors with an exceptional, welcoming experience that meets the highest standards
in animal care. In order to reach these goals, staff recommends growing the JMZ’s headcount
and expenses in targeted program areas. The staff recommended option is presented below;
however, several options are included for consideration and discussion in the Analysis and
Alternatives section of this report. In every scenario, visitor safety and animal health and
welfare are prioritized. The JMZ will re-open as a larger facility which is a driving factor of the
recommendation to grow staff and expenses. The table below outlines the changes in square
footage and other aspects of the facility which contribute to this preferred recommendation.
Museum
(sq. ft.)
Zoo (sq.
ft.)
Education
space (sq.
ft.)
Exhibition
Area (sq.
ft.)
Number
of
interactive
exhibits
Number
of science
play areas
Number
of animal
enclosures
Old JMZ 9,000 10,000 3,300 2,500 40 7 35
New JMZ 15,150 18,518 4,690 6,713 78 13 60
Difference 6,150 8,518 1,390 4,213 38 6 25
As
Percent
68% 85% 42% 169% 95% 86% 71%
City of Palo Alto Page 4
Staff also recommend that the JMZ move to a fee-based ticketed gate when it reopens. This
recommendation is being made for several reasons, most notably to develop new funding
streams to support the increased expenses associated with a larger facility and increased
programming. Fee-based entry also provides an opportunity to smooth out visitation and
reduce surges in visitation with the possibility of timed-entry tickets or variable pricing. Staff is
still exploring whether these will be the right choice for the JMZ upon re-opening.
For decades, the JMZ has had a donation-based “pay-as-you-wish” policy for visiting the
museum. Staff recommends that the new JMZ require that visitors pay an admission fee (or
become a member) to enter the facility. This policy change will ensure that future generations
will inherit a strong and financially stable institution that is both a world-class museum and zoo
and a source of community pride.
City of Palo Alto Page 5
Staffing Recommendations
The JMZ’s current staffing structure is outlined in the table below:
Status Quo
Staffing
(Full-time
equivalent)
Animal Care
and
Experiences
Exhibitions
and Museum
Maintenance
Education
Programs
Guest
Services and
Experiences Management Total
Benefitted
Positions 1 1 4.60 1 1.15 8.75
Part-Time
Positions 1.07 1.38 4.26 0.48 0 7.19
Total 2.07 2.38 8.86 1.48 1.15 15.94
As described above, City staff have analyzed the current staffing model to determine what
changes may be needed in order to meet the goals of an exceptional visitor experience and
provide the highest standards in animal care. Staff identified several key areas to grow to
ensure these goals are met. The recommended staff additions are outlined in the table below:
Proposed
Additions
(Full-time
equivalent)
Animal Care
and
Experiences
Exhibitions
and Museum
Maintenance
Education
Programs
Guest
Services and
Experiences Management Total
Benefited
Positions 1 0 0 0 0 1
Part-Time
Positions 2.16 0.75 0 2.88 0 5.79
Total Additions 3.16 0.75 0 2.88 0 6.79
As the table shows, most of the staffing additions are recommended in the Animal Care and
Experiences and Guest Services and Experiences program areas. These staffing additions and
changes would add an additional, estimated expense of $470,000 annually. These additions will
provide several benefits:
● Ensure that visitor services staff are present at the entrance and available to roam the
facility to ensure safety and provide additional customer service support.
● Increase open hours by 5 percent. The JMZ is currently open 10am to 5pm Tuesday
through Saturday and 1 to 4pm Sundays. This model will grow open hours to 10am to
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5pm Tuesday through Sunday. Weekends are the most popular time to visit the facility
and community members have consistently requested additional weekend hours.
● Train zoo animals to be able to handle facilitated public encounters.
● Provide ‘floor programming’ of additional interactive science experiences to visitors
throughout the day.
● Meet best-in-class standards for animal care including close monitoring of diets for each
animal and daily monitoring of health and wellbeing for every animal. Meeting these
standards will allow the JMZ to develop a path towards Association of Zoos and
Aquariums (AZA) Accreditation.
Non-Personnel Budget Change Recommendations
Staff also recommend several non-personnel budget additions. These include increasing
funding for contract services, supplies and costs associated with museum affiliations and
memberships. Staff recommends increasing these operating expenses by an estimated total of
$370,000 in FY 2021. These expense increases will provide the following: sufficient funding for
marketing the new facility, overhead charges associated with an increased headcount,
additional funding for veterinary care and food for the increased number of animals at the zoo,
maintenance funding for the aquatic features, additional funding for exhibit maintenance,
museum association memberships and participation in conservation programs. The total
expense additions between personnel and non-personnel expenses that are recommended sum
to $840,000. The figures provided in this report are estimates and final figures will be refined
and brought forward for Finance Committee and City Council consideration through the FY
2021 budget process.
Pricing Recommendations
As described above, staff recommends updating the JMZ’s long standing policy of free
admission. While the pay-as-you-wish model has allowed the facility to be open and accessible
to everyone regardless of their ability to pay, staff recommends moving to a fee-based ticketed
entry. There are other tools available to allow access for community members for whom the
ticket fee will be a barrier, which are described in the next paragraph. Staff received pricing
strategy recommendations from the consulting firm Shultz and Williams. Based on that
guidance, staff recommend the following pricing model:
Daily Entrance Ticket $10 ($0 - 1 and younger)
Discounted Ticket Fee $0 - $2
Annual Family Membership - Resident $110
Annual Family Membership - Non-Resident* $145
Annual Family Plus Membership - Resident $185
Annual Family Plus Membership - Non-Resident* $245
* Non-Resident fees are set at approximately 30% above resident fee rates.
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Staff have also engaged a market research firm, Gardella and Associates, to further develop the
new JMZ marketing strategy. Any advice related to pricing will be included in CSD’s Finance
Committee budget presentations in May.
Daily entrance tickets and membership prices will become new municipal fees in FY 2021 and
will be adopted through the municipal fee development process. These prices will be finalized
pending recommendation from the Finance Committee and City Council and are anticipated to
range approximately 30% based on expense considerations of operating the facility and Finance
Committee and City Council recommendation on cost recovery.
Staff anticipate that most visitors will opt to purchase daily tickets for their visit, with
approximately 10% of visitors qualifying for discounted tickets. To ensure that the JMZ remains
accessible for as many families as possible, the JMZ plans to participate in several cooperative
initiatives that provide free or discounted entrance fees including the Blue Star Museums
Program and the Museums for All Program. Blue Star Museums is a collaboration among the
National Endowment for the Arts, Blue Star Families, the Department of Defense, and museums
across America. Each summer since 2010, Blue Star Museums have offered free admission to
the nation’s active-duty military personnel and their families, including National Guard and
Reserve. The Museums for All program is a cooperative initiative between the Association of
Children's Museums (ACM) and the Institute of Museum and Library Services (IMLS) to offer
free or reduced admission to individuals and families presenting a Supplemental Nutrition
Assistance Program (SNAP) Electronic Benefits Transfer (EBT) card.
Staff would also like to encourage Palo Alto residents to continue to view the JMZ as a
treasured community asset where they can easily drop-in to enjoy throughout the year and as
such, have built in discounted membership pricing for Palo Alto residents. There are two
membership options. The basic Family Membership provides access to two named adults plus
all children living at the same address. The Family Plus membership provides additional access
of a caregiver card plus the benefit of bringing two guests on every visit. Each level will include
several one-time guest passes for members to use and museum reciprocity to visit other
museums at a free or reduced rate through the Association of Children’s Museums reciprocity
program and the Association of Science and Technology Center’s passport program.
Staff do not propose different daily ticket prices for residents and non-residents. Requiring
visitors to show proof of residency at the ticket gate would diminish the customer experience
by having longer wait times to enter the JMZ and potentially turning guests away who do not
have proof of residency. The only resident rate that will be offered is through purchase of an
annual membership.
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Pricing Comparisons
The prices in the table above were set to be competitive with other nearby family science and
zoo-based attractions. Other local attractions have pricing models as follows:
Ticket
Membership
(Basic Family)
Children's Discovery Museum - San Jose $15 $175
Happy Hollow Park & Zoo - San Jose $14.25 $160
Curiodyssey - San Mateo $15.95 Adult / $12.95 Child $145
Children's Creativity Museum – San Francisco $15 $119
Children's Fairyland - Oakland $12 $119
As this chart makes clear, the JMZ’s proposed pricing model is slightly below the typical ticket
fee for other nearby attractions. Resident membership pricing is also slightly below other
nearby attractions and non-resident membership fees are set at approximately the median in
this group.
Staff have set fees to be priced slightly below other comparable attractions in consideration of
the adjustment that visitors to the old JMZ will need to make in moving from free to ticketed
entry.
Anticipated Visitation, Revenues Projection, Cost Recovery and Net Impact on the General Fund
Before the JMZ moved to its temporary location at Cubberley (during the construction period),
approximately 185,000 people visited the museum and zoo throughout the year. Museum
market consultants have advised that with robust marketing around the JMZ’s reopening, an
initial surge of visitation is likely, with expected current levels of attendance in the first year
despite a ticketed fee. Projecting revenue on ticket and membership sales without historical
data to rely on is challenging. The total number of visitors, total number of memberships, and
percentage of visitation by ticketed versus member visits are all hard to predict. Staff have
reviewed data from other local area attractions to develop realistic and conservative budget
expectations.
Most local area attractions see a ratio of approximately two-thirds of admission revenue from
ticket sales and one-third from memberships. Staff assumed a similar ratio for the JMZ.
Previous marketing strategists employed by the City have advised that 2,000 memberships is a
conservative estimate. If visitation reaches roughly 75% of previous attendance levels or
138,000 visitors annually, then these assumptions net the following estimated revenue and
expense outcomes for FY 2021.
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FY 2020 FY 2021
Revenue* $734,000 $1,920,000
Staffing Expense $1,854,000 $2,327,000
Non-personnel Expense $126,000 $498,000
Allocated Charges** $500,000 $900,000
Total Expense $2,479,000 $3,724,000
Net General Fund Impact $1,745,000 $1,807,000
*Revenues to the JMZ is generated from science-based classes and camps, birthdays and other facility rentals, field trips, and
school-based science programming.
** Allocated Charges include direct services such as electricity and refuse collection. They do not include General Fund Cost
Allocation Plan charges such as Human Resources or Administrative Services support, which are typically included in determining
cost recovery levels. These additional costs would add an estimated $500,000 in annual expenses. Allocated Charges are
generally budgeted at the department level, not by specific facilities. Therefore, the estimates included in this report are the
result of staff analysis of FTE and building square footage ratios managed by the Community Services Department. These
estimates will be refined in collaboration amongst internal stakeholders and brought forward as part of the annual budget
process.
The proposed plan results in an estimated increase of $62,000 in expenses to the General Fund
in FY 2021, however, if the JMZ attains annual visitation of around 140,000 visitors with 2,200
memberships in the first year, or ticket prices were raised further, this proposal may be able to
operate with no additional resources from the General Fund.
Historically, cost recovery for the JMZ has been between 25-30%, with revenue generated
through classes, camps, and facility rentals, and donations. The proposed ticket fee and
membership prices above would significantly increase revenue, with the potential to bring in
approximately $1,920,000 and raise the JMZ’s cost recovery to approximately 50% in FY21. This
would shift the JMZ’s cost recovery from the Low to the Medium Cost Recovery Level Group as
defined in the City of Palo Alto User Fee Cost Recovery Level Policy
(https://www.cityofpaloalto.org/civicax/filebank/documents/75393).
It is important to note that in FY 2021, the JMZ will need to ramp up staffing and expenses
during the summer to prepare for opening but the zoo will not open until October. This means
that the JMZ will be open 75% of the fiscal year and should therefore have visitation levels
around 138,750 in FY 2021 to meet previous visitation levels. Due to the training, operations,
and planning required to prepare for the opening, staffing levels and other expenses are not
recommended to be prorated.
In the next section, several alternative staffing complements are provided for the Finance
Committee’s consideration. In each alternative scenario, an estimated cost of staffing expenses
is provided. Non-personnel expenses and Allocated Charges remain constant through all
alternative scenarios.
Analysis and Alternatives
Staff evaluated several options for the JMZ reopening that are not recommended at this time,
though they are presented to clarify the options considered.
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Alternative #1 is most akin to a ‘status quo’ option. This option would not have an entrance fee
but still requires some additional staff and funding to ensure the safety and welfare of animals
and visitors because the facility is larger and will contain more animals. Alternative #1
increases full-time equivalent (FTE) staff at the JMZ by 4.94 to provide care for the increased
number of animals at the zoo and to provide additional guest services staff for safety in the
larger facility (1 benefited position, and 3.94 FTE unbenefited.) Overall, this option raises the
JMZ’s impact on the General Fund by approximately $1,100,000. The main benefit of this
option is that it continues to allow the JMZ to be free for all community members. The
drawbacks of this option are that it does not allow for additional staff to provide interactive
programming or increased open hours.
Two models that increased staffing beyond what is recommended at this time were also
evaluated. Alternative #2 increases staffing by 12.59 FTE from the current base staffing
(including 2.0 additional benefitted FTE.) This amount of additional staffing leads to an
expected $530,000 in increased impact to the General Fund in FY 2021. This option provides
additional staffing resources that would be used to provide extensive floor programming on
weekends and additional open hours. Staff anticipate that this option would be a good model
to consider in Year 2 or 3 of operation as it would also allow for sustainable growth in
programming as visitation grows and the zoo animals and landscaping mature to allow for
additional programs If the JMZ attains annual visitation above 190,000 and annual membership
of 3,500, this model could potentially require no additional resources from the General Fund.
Alternative #3 is what staff consider to be a ‘fully matured’ staffing projection for the facility if
visitation remains high and/or if the additional Phase 2 capital improvements that are
envisioned by the Friends of the JMZ are built. This model increases staffing by an additional
16.95 FTE from the current base staffing (including 3.0 additional benefitted FTE.) This amount
of additional staffing leads to an expected $830,000 in increased impact to the General Fund in
FY 2021. Only if the JMZ reached annual visitation levels of 220,000 and annual memberships
of over 4,400 would this require no additional resources from the General Fund. This
projection may be a good path to move towards if visitation is consistently high and the JMZ is
able to proceed with the Phase 2 butterfly enclosure. This staffing level allows for a large
amount of floor programming every day and a significant increase in open hours. As described
later in this report, staff are not currently recommending transitioning the JMZ to a
public/private partnership but will begin evaluating that path with the Friends of the JMZ within
the next 24 months.
Staff have developed several strategies to address the potential for large crowds at the
museum, which may occur, especially in the first weeks after reopening. JMZ has prior
experience with this issue, as in past years, many weekend days have drawn very large crowds.
When this occurs, staff will bring the floor programming outside to entertain visitors waiting in
front of the museum. Staff are very successful redirecting crowds into the park and adjacent
playground by bringing Sequoia, the JMZ’s bald eagle, and other critters out to entertain.
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With a ticketed entry system, staff can also create timed-entry tickets if crowds are consistently
high. This is not recommended on initial reopening because it creates additional complexity to
ticket purchases that may not be necessary. If staff see that the facility frequently experiences
crowding, it may be a good option to develop. With timed entry, customers would purchase
tickets for particular days and entry times rather than just a general admission ticket.
Additionally, the new recreation management software system that the Community Services
Department (CSD) has implemented, will allow customers to easily buy tickets from a staff
member, on their home computer, or even on their smartphones while walking into the
building. The ease of ticket sales and easy scanned entries will enable JMZ staff to process sales
quickly.
Finally, CSD and the Administrative Services Department staff have developed a proposal that
would provide optimal flexibility to JMZ staffing if visitation is much higher than anticipated in
FY 2021. This would be to approve, but not fund, the positions built into Alternative #2 above.
None of these positions would be filled unless visitation exceeds 17,000 visits per month in the
first 3 months of operation. This would be a visitation level 10% above what is expected. At
that visitation level, some of the positions in Alternative #2 would likely be necessary to ensure
safety and quality of service for the animals and visitors at the JMZ.
RESOURCE IMPACT
The resource impact of staff’s recommended operating proposal is outlined in the table below:
FY 2020 FY 2021
Revenue $734,000 $1,920,000
Staffing Expense $1,854,000 $2,327,000
Non-personnel Expense $126,000 $498,000
Allocated Charges $500,000 $900,000
Total Expense $2,479,000 $3,724,000
Net General Fund Impact $1,745,000 $1,807,000
This level of General Fund impact is based on visitation levels on pace with the JMZ before it
moved to Cubberley and would result in approximately 138,750 visits to the JMZ in FY 2021 and
2,000 annual memberships. All figures in this report are estimates and will be refined and
brought forward through the City’s standard budget process for FY 2021 and future budget
years as appropriate.
STAKEHOLDER ENGAGEMENT
City staff and the Friends of the JMZ have kept community members updated on the JMZ’s
construction process, temporary relocation, and reopening throughout the process. Updates
have come from both the City’s website and the Friends of the JMZ website as well as printed
brochures, flyers, and catalogs from the JMZ. One key component of the recommended
operating proposal is funding for marketing and outreach as the JMZ gets ready to reopen.
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Staff would like to begin a robust marketing plan in July to ensure that City residents, current
JMZ visitors, and neighboring communities are aware of the JMZ’s reopening.
Community Services Department staff have developed the proposed operating model in careful
coordination with other City departments including Human Resources and the Office of
Management and Budget.
JMZ staff have also conducted outreach to the public on the potential introduction of a
ticketing fee through on-site intercept surveys of visitors as well as key stakeholder interviews.
Reactions to the idea have been generally favorable. For instance, approximately 50% of
visitors responded “yes” to a survey asking whether they would be willing to pay a fee to access
the new facility. Stakeholder interviews conducted by market research firm Gardella and
Associates, found that key stakeholders were generally open to the idea of instituting a fee
although many expressed a wish that it “didn’t have to be that way.” Staff will continue to build
strong marketing and outreach throughout the spring and summer to build excitement and
momentum around the reopening with community members.
NEXT STEPS
The new facilities would not exist without the generous contributions of the Friends of the JMZ.
A decade ago, they saw an opportunity to rebuild the JMZ and worked to obtain the donations
necessary to enact this vision. At the time that fundraising began, the City and the Friends of
the JMZ began negotiating a potential change in operating structure for the JMZ that would
have transferred operations of the facility from the City to the Friends of the JMZ when the new
facility’s construction was complete. CMR 5170, was approved by City Council on October 10,
2014 to approve a Letter of Intent for Construction and Operation of the New Junior Museum
and Zoo Building by the Friends of the JMZ.
On October 19, 2015, Council approved a change in direction recommended by the Friends and
City staff to focus on the construction agreement to build the new JMZ, and to postpone
discussions regarding a possible transition of operations to the Friends to a later date after the
new facility is built and has been operated by the City for a period of time. The
recommendation can be found in CMR 6212.
City staff will present a new MOU with the Friends of the JMZ later this year, which will include
a framework for evaluating and negotiating the change in operations that was envisioned at the
start of this process as well as additional changes that will be necessary with the JMZ’s new
operating model.
POLICY IMPLICATIONS
The recommended operating model outlined in this report advance many important policy
objectives related to the City Comprehensive Plan Policy Goal C-1: Deliver community services
effectively and efficiently. These include:
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• Policy C-1.4 Promote City parks, open spaces, recreational facilities, libraries, classes and
cultural activities for community members recognizing that these facilities and
services build and strengthen community.
• Policy C-1.16 Provide arts, science and recreational activities that foster healthy
children, youth and teen development.
• Policy C-1.20 Leverage available funding to support the development of, and improved
access to, programs that address all types of developmental disabilities, including
physical, sensory, cognitive or social/emotional needs.
ENVIRONMENTAL REVIEW
The City Council adopted a resolution approving a mitigated negative declaration and
mitigation monitoring and reporting program in accordance with CEQA for the JMZ project on
December 4, 2017 (staff report, resolution and action minutes).
City of Palo Alto (ID # 11077)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 3/3/2020
City of Palo Alto Page 1
Council Priority: Fiscal Sustainability
Summary Title: FY 2021 Preliminary Rate Forecasts
Title: Preliminary Financial Forecasts and Proposed Rate Changes for Electric,
Gas, Water and Wastewater Collection Utilities for Fiscal Year 2021
From: City Manager
Lead Department: Utilities
Recommendation
This item is for discussion and no action is requested. Staff will use input from the Finance
Committee on its preliminary rate projections for the Electric, Gas, Water and Wastewater
Collection utilities to finalize its recommended FY 2021 Financial Plans and proposed rate
changes for each utility.
Executive Summary
At the meeting staff will provide a presentation describing staff’s preliminary rate projections
for the Electric, Gas, Water and Wastewater Collection utilities. A similar presentation was
provided to the Utilities Advisory Commission (UAC) at its December 4, 2019 meeting. The staff
presentation is available for review prior to the meeting at the following link:
Staff Presentation on Preliminary Rate Projections,
http://cityofpaloalto.org/civicax/filebank/blobdload.aspx?BlobID=75286
The preliminary retail rate forecast over the next five fiscal years is shown in the table below,
along with the overall impact to the median residential bill. The rate changes shown are
preliminary estimates. Actual rate changes will be based on updated financial data and the cost
of service methodologies and studies for each utility, and may differ by customer class and for
individual customers depending on consumption patterns. An updated cost of service study for
Wastewater Collection is underway and will be factored into staff proposals for FY 2021. Cost of
Service studies for Water and Gas were completed in 2019, and Electric was completed in 2016.
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Table 1: Projected Rate Increases
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Based on current data, reserve levels are projected to remain within guideline levels. Staff will
continue to monitor customer consumption patterns and refine operating and capital cost
projections over the coming months to determine whether any adjustment from this
preliminary forecast is needed. Staff seeks input from the Finance Committee prior to finalizing
the Utilities Financial Plans and developing recommendations for rate changes that would be
effective July 1, 2020. The proposed rate adjustment recommendations, along with each
utility’s Financial Plans, are currently scheduled to be presented to the Finance Committee in
April for the Water and Wastewater Collection Utilities. The Electric and Gas Utilities financial
plans and rates will be presented in May.
Background
Every year staff presents the UAC and Finance Committee with financial forecasts for the
Electric, Gas, Water, and Wastewater Collection utilities and recommends any rate adjustments
required to maintain their financial health. These forecasts are memorialized in Financial Plans
that comprehensively discuss the outlook for each utility. Before providing recommended
Financial Plans and rate changes, staff typically presents a preliminary forecast to get early
feedback.
Electric
Costs for electric supply purchases have been increasing, primarily as a result of increases in
statewide transmission costs. Recent hydro conditions have led to a short-term increase in
surplus energy revenues, but staff’s forecasts assume normal ongoing hydro conditions over
the long term. As of January 1, 2020, total precipitation is at 74% of average for this date.
These short-term revenue surpluses will be used to fund reserves, and, in the short term, they
will also help to lower needed rate increases.
Current capital spending and distribution system maintenance spending is currently lower than
budgeted, primarily because staffing shortages have prevented the electric utility from
performing the levels of capital improvement and distribution system work desired. Additional
crews are being contracted to perform these functions in upcoming years until full staffing can
be reached. As such, operational and capital costs are projected to increase substantially over
the forecast horizon if the utility can achieve its targeted staffing levels and capital and
maintenance spending levels.
There has been some decrease in the City’s electric load as well, which creates an upward
pressure on rates. Usage has decreased by about 2% each year over the last three years,
compared to an average annual decrease of about 0.3% in the prior decade. Most of the
decrease has been in the medium and small commercial customer groups (E4 and E2 rate
schedules).
Staff is projecting a preliminary rate increase of 2%, but will continue to monitor revenue and
cost projections. The current year (FY 2020) financial plan for the Electric utility (approved June
17, 2019) is available at:
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https://www.cityofpaloalto.org/civicax/filebank/blobdload.aspx?t=60223.49&BlobID=71361
Gas
Gas fund expenses are currently split at about 40% supply and 60% for distribution and capital.
Most of the supply costs are market driven and set to be pass-through charges on customers’
bills that change monthly according to market conditions. The long-term gas rate increases
shown in Table 1 will go towards funding the distribution and capital improvement costs of the
gas utility. As discussed in the prior year’s financial plan, the Utility recently resumed regular
scheduled main replacement. A large main replacement project is planned for every other year,
and the majority of any proposed rate increase would go towards capital improvements. Prior
to this, from FY 2018 to FY 2020, only one gas main replacement project was funded due to
staffing issues and competing priorities. Rates were held low during that time because capital
spending was low, but as staff resumes regular scheduled capital spending for the gas utility,
rates need to rise to fund that capital spending. In addition, construction costs have risen
significantly during that time.
Staff is projecting a preliminary rate increase of 5%, but will continue to monitor revenue and
cost projections. The current year (FY 2020) financial plan for the Gas utility (approved June 17,
2019) is available at:
https://www.cityofpaloalto.org/civicax/filebank/blobdload.aspx?t=60939.34&BlobID=71364
Water
In FY 2019, expenses were lower than forecasted due to delays in capital projects. The delayed
capital projects are expected to be completed in FY 2020 and FY 2021, and changes to budget
have resulted in a larger than expected ending reserve in FY 2019.
Staff is projecting that no rate increase is needed in FY 2021. This is because SFPUC’s latest
available estimate is that no increase is needed in wholesale water rates and because the water
utility’s reserves are sufficient to provide funding for some major one-time planned
infrastructure projects in the next two years.
The current year (FY 2020) financial plan for the Water utility (approved June 17, 2019) is
available at:
https://www.cityofpaloalto.org/civicax/filebank/blobdload.aspx?t=61704.19&BlobID=71368
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Wastewater Collection
Costs are projected to rise over the next several years due primarily to increasing treatment
costs related to capital improvements costs and attendant debt service at the Regional Water
Quality Control Plant (RWQCP). Collection system CIP work is also increasing, but at a lower
rate. Operations and maintenance costs for both Treatment and Collections are expected to
increase with inflation. Current projected rate increases are slightly lower but generally similar
to last year’s projections.
Staff is working on a cost of service study for the Wastewater Collection utility. Factoring in the
results from the study may change rate impacts to individual customer groups in the FY 2021
proposal.
The current year (FY 2020) financial plan for the Wastewater Collection utility (approved June
17, 2019) is available at:
https://www.cityofpaloalto.org/civicax/filebank/blobdload.aspx?t=61290.09&BlobID=71366
Commission Review
The UAC reviewed the preliminary financial forecasts at its December 4, 2019 meeting. No
recommendation was requested at that meeting, but staff sought input from Commissioners
regarding the preliminary rate adjustment recommendations. Commissioners asked questions,
but did not request staff re-examine any of the rate changes listed in Table 1. An excerpt of the
draft minutes from the UAC’s December 4, 2019 meeting is located (here).
Next Steps
The UAC is scheduled to review the long-term Financial Plans and proposed rate adjustments
for the Water and Wastewater Collection utilities in March and the Electric and Gas utilities in
April.
The Finance Committee is tentatively scheduled to review the long-term Financial Plans and
proposed rate adjustments in April (for the Water and Wastewater Collection utilities) and in
May (for the Electric and Gas utilities). Once the Finance Committee has provided its
recommendation, notification of any recommended Water and/or Wastewater Collection rate
adjustments will be sent to customers, giving them the opportunity to protest the proposed
changes as required by Article XIIID of the State Constitution (added by Proposition 218). The
Financial Plans and proposed new rate schedules will be considered by the City Council with the
FY 2021 budget, at which time the public hearing required by Article XIIID of the State
Constitution will be held.
Environmental Review
The Finance Committee’s review of the preliminary financial projections does not meet the
definition of a project, pursuant to Section 21065 of the California Environmental Quality Act,
thus no environmental review is required.
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Stakeholder Engagement
Staff met with the Utilties Advisory Commission on December 4, 2019. Notices of proposed rate
changes will be distributed throughout the city as recommendations are finalized.
Resource Impact
The FY 2021 Budget is being developed concurrent with these rates. Depending on final rates,
adjustments may be necessary in the FY 2021 Budget at a later time. Based on the preliminary
rate increases as shown, the estimated revenue impacts would be an increase of $1.2 million in
wastewater collection and $318,000 in gas. Due to projected load losses in Electric, the forecast
rate increase would be relatively revenue neutral for the fund.
Attachments:
•Attachment A: 12-04-2019 UAC Excerpt Minutes Item 3
Utilities Advisory Commission Minutes Approved on: February 5, 2020 Page 1 of 3
UTILITIES ADVISORY COMMISSION MEETING
MINUTES OF DECEMBER 4, 2019 REGULAR MEETING
CALL TO ORDER
Chair Danaher called the meeting of the Utilities Advisory Commission (UAC) to order at 7:00 p.m.
Present: Chair Danaher, Vice Chair Forssell, Commissioners Jackson, Johnston, Segal, and Smith
Absent: Commissioner Scharff
ITEM 3: DISCUSSION: Discussion of Preliminary Rate Change Projections for the Electric, Gas, Water and
Wastewater Collection Utilities for Fiscal Year 2021.
Eric Keniston, Senior Resource Planner, reported a wastewater cost of service study is underway and should
be complete in time for staff to utilize it in calculating new wastewater rates to meet the expected July 1st
date for new rates. Fiscal Year (FY) 2021 preliminary rate projections are a 3% increase for the Electric Utility,
a 5% increase for the Gas Utility, a 6% increase for the Wastewater Utility, a 0% increase for the Water Utility,
and a 0% increase for Refuse. In water, gas, and wastewater collection, staff is planning to stagger main
replacement projects but to allocate funds periodically to the CIP Reserve so that the CIP Reserve reflects
project expenditures and fluctuations caused by main replacement projects occurring every other year.
Beginning this year in the Water Fund, there will be a level amount of funding going to the CIP Reserve to
begin establishing this process.
In response to Commissioner Smith's request for cost containment measures provided in the agreement with
Valley Water, Jonathan Abendschein, Assistant Director of Resource Management, explained that Valley
Water's $16 million payment will fund construction of the reverse osmosis facility. If there was no $16 million
payment, sewer and water ratepayers would have to fund the construction. The cost containment measure
is ratepayers not having to fund construction of the plant. In reply to Commissioner Smith's question of
whether the listed cost containment measures apply to the rate projections, Abendschein indicated most of
them do. Almost any of the cost containment measures directly reduce the cost associated with the individual
utility.
Keniston continued the presentation, stating Electric Utility Operations Reserves are projected to fall within
the guideline ranges. FY 2019 was a good year for hydroelectric power, and CPAU was able to sell its surplus
energy, which reduced purchase costs.
In answer to Commissioner Johnston's inquiry about disposition of surplus funds, Keniston advised that
initially surplus funds are deposited into the Operations Reserve and then transferred to the other Reserve
Funds. Staff proposes to repay the $10 million loan from the Special Projects Reserve and increase the
Hydroelectric Stabilization Reserve Fund to the target level.
Attachment A
Utilities Advisory Commission Minutes Approved on: February 5, 2020 Page 2 of 3
Keniston further reported 40% of electric costs are related to distribution and 60% to supply. Transmission
costs continue to grow rapidly because of the cost to expand the statewide system. Generation costs should
remain stable.
In reply to Vice Chair Forssell's inquiry regarding increased costs from renewable projects coming online,
Abendschein indicated newer contracts for renewable projects are generating some savings. Between 2009
and 2015, many renewable projects were not online, and CPAU benefited from low gas prices. As CPAU
increased its renewable contracts, it was no longer exposed to low gas prices, which raised the cost of the
electric supply.
In response to Commissioner Johnston's noted between FY 2021 and 2022 revenues decrease even though
rates increase. Keniston stated revenue includes hydroelectric revenues, Renewable Energy Certificate (REC)
sales, and other projected revenues. Staff anticipates REC sales will decrease in FY 2022 and less hydroelectric
revenue; revenue will be more normalized by FY 2022. Abendschein clarified that FY 2019 and FY 2020
revenues exceed costs because of the sale of surplus hydroelectric. Staff has questions about the FY 2021
forecast from the Western Area Power Administration. Chair Danaher added that CPAU will not have surplus
hydroelectric power to sell, which will decrease revenue.
Keniston continued the presentation by listing the distribution cost drivers of medical and retirement
benefits, capital investment, and underground construction. Staff projects a 3% rate increase in FY 2021 and
4-5% rate increase thereafter. The main drivers of the rate increase are increased supply costs, increased
operations costs, increased CIP expenses, increased non-retail revenues, and decreased sales. Also, without
the additional hydroelectric revenues a larger rate increase would have been needed. The Electric Supply
Operations and Distribution Operations Reserves are above target levels and projected to remain above
target levels.
In response to Commissioner Segal's query about the rationale for a rate increase if reserve funds are healthy
and revenues exceed costs, Keniston explained that without a rate increase, the balances will begin to fall
below the minimum reserve level. Abendschein added that a one-time surplus can be used to defer rate
increases for a year or two, but a rate increase will be needed eventually. By deferring rate increases, the
reserves decrease such that few funds are available for adverse situations, and greater rate increases are
needed.
Keniston further reported staff projects a 5% rate increase for the Gas Utility in FY 2021 due to decreases in
distribution and increases in CIP cost projections.
In answer to Vice Chair Forssell's inquiry about the impact of reach codes on gas sales, Abendschein indicated
all-electric construction would affect 100-150 projects.
Keniston continued his presentation, advising that 50% of overall gas costs are related to distribution.
Abendschein clarified that the main driver for rate increases over the next five years is investment in the gas
distribution system. Of the 5% rate increase, 3.7% is related to CIP expenses and 1.3% is related to operations
and maintenance (O&M) expenses. Staff has transferred funds from the Rate Stabilization Reserve Fund to
the Gas Operations Reserve Fund. Projected rate increases will slowly increase the Reserve Fund to the target
level.
Lisa Bilir, Acting Senior Resource Planner, reported staff projects a 6% rate increase in FY 2021 for the
Wastewater Collection Utility because of increases in treatment and collection costs. The largest expense
increase is CIP projects. Wastewater costs are divided 50% for treatment and 50% for collection. 2.4% of the
6% rate increase is related to treatment expenses, 1.2% to O&M expenses, and 2.4% to an existing revenue
shortfall. The Wastewater Operations Reserve is projected to remain within target levels.
Utilities Advisory Commission Minutes Approved on: February 5, 2020 Page 3 of 3
In reply to Commissioner Johnston's question about partner agencies utilizing Palo Alto pipelines for
wastewater, Keniston indicated Los Altos Hills utilizes Palo Alto's collection system starting in the foothills,
and Stanford University enters the collection system along Embarcadero Road.
Bilir further reported staff's projection for a 0% rate increase for the Water Utility. The Operations Reserve
Fund is currently above the maximum guideline but should fall to the target level by the end of FY 2021.
In answer to Vice Chair Forssell's query regarding the cause of the reserve being above target level, Bilir
explained that the chart shows the Operations Reserve but does not show the balances of all the reserves.
When the Operations Reserve reaches the maximum guideline level, the additional funds above that level
are reflected in the unassigned reserve, which can be seen in the stacked bar chart.
Chair Danaher remarked that CPAU cannot change gas commodity prices or PG&E's transmission costs. The
only thing CPAU can do is defer or accelerate construction projects or manipulate reserve fund balances to
fall within target levels.
In response to Commissioner Segal's inquiry about gas billing and cost fluctuations, Keniston advised that the
policy is to reflect the bid week price plus any expected loss or shrink. Reserve funds should absorb the extra
cost. Collecting the extra cost the following month would not be appropriate.
In reply to Vice Chair Forssell's question of customer backlash in response to the gas bill increases, Catherine
Elvert, Communications Manager, did not recall any customer comment.
Commissioner Johnston remarked that explaining the rate increases in light of projected revenues exceeding
projected costs could be a challenge. Abendschein indicated the challenge would be explaining wastewater
and gas rate increases because of the plan to alternate years of CIP projects.
Chair Danaher commended staff for maintaining fund balances within target levels and averaging rate
increases over time.
In answer to Vice Chair Forssell's question about the cost of service study, Bilir reported a consultant is
conducting the study.
ACTION: None