HomeMy WebLinkAbout2021-12-07 Finance Committee Agenda Packet1
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FINANCE COMMITTEE
Tuesday, December 7, 2021
Special Meeting
Virtual Meeting
6:00 PM
AMENDED AGENDA
Amended agenda items will appear below in red
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CALL TO ORDER
ORAL COMMUNICATIONS
Members of the public may speak to any item NOT on the agenda.
ACTION ITEMS
1.Review and Recommend That Council Accept the FY 2023 - FY 2032
Long Range Financial Forecast (LRFF) and FY 2023 Budget
Development Guidelines
2.Discuss Updates and Recommend Further Refinement of Potential
Revenue Generating Local Ballot Measures (Late Packet Report)
3.First Quarter Financial Report FY 2022
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Finance Committee Special Meeting December 7, 2021
FUTURE MEETINGS AND AGENDAS
ADJOURNMENT
AMENDED AGENDA ITEMS
Items that have been added/modified from the original publication of the agenda are listed below. Any
corresponding materials are appended to the end of the initial packet. If full items have been added to the Agenda,
they will be denoted with a number staring with AA, meaning Amended Agenda item.
2. Discuss Updates and Recommend Further Refinement of Potential
Revenue Generating Local Ballot Measures (Late Packet Report)
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Finance Committee Special Meeting December 7, 2021
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City of Palo Alto (ID # 13502)
Finance Committee Staff Report
Meeting Date: 12/7/2021
City of Palo Alto Page 1
Title: Review and Recommend That Council Accept the FY 2023 - FY 2032
Long Range Financial Forecast (LRFF) and FY 2023 Budget Development
Guidelines
From: City Manager
Lead Department: Administrative Services
RECOMMENDATION
Staff recommends that the Finance Committee review and recommend that the City Council
accept the General Fund Long Range Financial Forecast (LRFF) for Fiscal Year 2023-2032 and the
FY 2023 annual Budget Development Guiding Principles (Attachment A) and direct staff to use
this forecast as the starting point for the initiation of the FY 2023 budget process.
EXECUTIVE SUMMARY
Historically, the City has presented a ten-year General Fund Long Range Financial Forecast
(LRFF) in December that marks the beginning of the annual budget process. This preliminary
forecast is based on the most current information available, actual revenues for FY 2021, and
expected results through FY 2022. General Fund expenditures are based on current City Council
approved service levels compared to projected revenues over the next year.
The Base Case Long Range General Fund forecast projects a surplus of $2.4 million in FY 2023,
followed by a $1.0 million gap in FY 2024, with small but increasing surpluses in FY 2025
through FY 2032. This forecast maintains current service levels approved in FY 2022 and should
be used for planning purposes to assist in gauging effects of major policy interventions against a
likely “status quo” version of the future. The level of uncertainty in this forecast is reduced from
where it was a year ago, but the City is first and foremost continuing to manage through the
unpredictable nature of the pandemic and impacts on the local economy.
In addition to the Base Case Forecast, staff modeled two alternate forecast scenarios that could
more closely align with the City’s service needs and financial outcome from the pandemic. The
two scenarios are A) an immediate Restoration of Service to Pre-COVID-19 Service Levels, and
B) a Competitive Market Compensation Adjustment. These scenarios are modeled separately
for purposes of this report, but impacts from both of these scenarios could happen during the
forecast period. Compared to the Base Case, both of these scenarios increase the General Fund
gap over the next ten years. In Scenario A, FY 2023 changes from a surplus to a gap of $11.0
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million, and revenues are not anticipated to be able to fund the annual expenditures until FY
2030. In Scenario B, the surplus in FY 2023 decreases to $0.9 million, the General Fund has a
larger gap in FY 2024 of $2.6 million, and the gap continues into FY 2025 ($1.0 million) before
returning to a surplus in FY 2026.
The difficult and significant actions that Council took to reduce services and balance the budget
during the pandemic were never meant to be permanent; however, restoration of impacted
services would require deliberate action. As mentioned in the preliminary FY 2022 Q1 financial
status report (CMR 13439), there are several issues across the City impacting the ability to
transition out of the pandemic including staff turnover, recruitment and retention, and supply
chain issues that could continue into FY 2023. Development of the FY 2023 budget and planning
for the subsequent years outlined in the forecast will need to be done strategically over the
next several months in order to balance the increased service level needs of the community
with the financial resources currently projected.
City staff will continue to review and refine these projections to establish the FY 2023 budget
and use this forecast to begin internal planning for budget balancing solutions. Based on this
forecast, it is anticipated that the prioritization of spending and consideration of measured
restoration of services are necessary to ensure continued financial stability. More detailed
guidelines or Budget Policies to inform the development of the FY 2023 budget are discussed at
the end of this document (Attachment A).
Looking forward, the City continues to face several pressures from the uncertain recovery from
the financial impacts of the COVID-19 pandemic, to funding and completing the 2014 Council
approved Infrastructure Plan projects, and the growing costs of pension benefits and labor
costs due to the current labor market and cost of living in the Bay Area. The continued policy
direction from the City Council regarding proactively addressing the pension obligations,
including the direction to assume a lower discount rate in calculating pension costs, is
contained in the forecast model. The City continues to face critical choices in order to balance
short term revenue projections based on the current economic situation and lingering impacts
of COVID-19, with future financial challenges including any unforeseen program needs, any
additional proactive funding contributions to pension liabilities, and evaluating service
restorations to pre-pandemic levels. The review of this forecast and the planning that follows
will be critical since the City is facing many requests and has identified several key programs
that the community would like to fund and complete.
Included in this report and subsequent documents are the following:
- Discussion of the current financial climate of the United States to the local economy of
the City of Palo Alto
- Current financial forecast including Revenue and Expense assumptions in FY 2023-2032
o Current financial status of the General Fund as of the FY 2022 Adopted Budget,
and a brief discussion of revised FY 2022 revenue estimates by category (a more
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detailed discussion is in the preliminary 1st Quarter Financial Status Report CMR
#13439)
- FY 2023 Budget Development Policies to inform the Budget process (Attachment A)
- Alternate scenarios to the base case forecast to demonstrate financial impacts to the
City from:
o Full restoration of services to pre-pandemic levels; reductions in FY 2021 and FY
2022 as a result of the COVID-19 Pandemic, and
o Modeled potential market-based compensation adjustments
BACKGROUND
Annually the Office of Management and Budget produces a ten-year General Fund Long Range
Financial Forecast (LRFF). The LRFF reflects staff’s best estimates on the projected revenues and
expenditures over the next ten years based on the information that is currently available. It is
important to note that the LRFF is a planning document and is separate and distinct from the
development of the City’s annual Operating and Capital Budgets. There are assumptions and
parameters modeled in the LRFF, but these assumptions are revised and refined as more
information becomes available through the budget development process.
The LRFF contains a comprehensive review of the costs to provide current City Council
approved service levels, including current contracts, updates to salaries and benefits based on
the current population of employees, and the current labor contracts in effect. Important to
note in this LRFF is the ongoing budget adjustments that were approved in the FY 2022
Adopted Budget and in the FY 2022 Q1 Preliminary Financial Status Report (CMR 13439). The
LRFF also reviews the status of the current economy and various economically sensitive
revenues such as Sales Tax, Documentary Transfer Tax, Property Tax, and Transient Occupancy
Tax to explain key trends in those areas. This Forecast allows staff and City Council to look at
both the short-term and long-term financial status of current service levels in the General Fund
to inform daily policy decisions and evaluate long-term goals and ongoing challenges.
Palo Alto serves a diverse community with a broad range of unique services that adds to the
significant complexity of managing a balanced budget and healthy financial outlook. The
demands and conflicts coupled with an economy that is recovering with some uncertainty after
the COVID-19 pandemic have heightened the intensity of the financial forecasting and budget
development processes. New analyses and data generation demands require deep-dives into
complex problem-solving within an engaged public process across a wide range of issues. These
forecast figures present staff with the challenge of prioritizing the growing needs of the City
with the fiscal sustainability of these needs.
The Economy
National, state, regional and local economic indicators are mixed, while the national economy
performance is strong it has cooled as summer ends. The local economy on the other hand had
strong performance in the second and third (calendar) quarters of 2021 with the expectation
this will continue into calendar year 2022 and beyond, albeit at a slower growth rate, as
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progress on vaccinations allow economic activity to resume and/or expand particularly in
previously shut-down sectors like restaurants, hotels, entertainment, and travel. Increased
spending of household pandemic-era savings due to pent-up demand for services created by
the pandemic restrictions could result in stronger economic growth as the pandemic
restrictions further wane. However, increased spending on services may slow spending on
durable goods which has increased and added to the strain to the supply chain. Business
investments continue to be robust, particularly in information processing equipment and
software. Overall housing construction remains strong, but it is expected to gradually decline
since building is outpacing population growth and demand. This is expected to a lesser degree
in high demand and densely populated areas like the San Francisco Bay Area. With the recent
passage of the bipartisan infrastructure bill in Congress, the concern about the impact of the
Federal stimulus packages ending, that contributed to the positive economic indicators over the
past year, has lessened though there remains uncertainty about the infrastructure spending
timing in the short-term.
As of the printing of this report, the rising vaccination rate, declining hospitalizations, and
slowing of the spread of the virus in California and particularly in the Bay Area bodes well for
Palo Alto’s economic recovery. On a national level, areas of the country that are slower to
address the pandemic might cause a slower national economic recovery in calendar year 2022.
Another impediment to growth, both nationally and locally, is the labor market contraction. The
pre-pandemic employment declined by about 10 million nationally, and businesses of all types
are impacted by labor shortages. Employment remains down by millions over the pre-pandemic
level even with the population growing over the past year. Some of this is explained by lack of
childcare preventing a parent from re-entering the labor force, health concern especially those
at higher risk and/or cannot be vaccinated due to a high risk of complications, and the long
known and expected baby boomers' retirement trend that the pandemic is thought to have
accelerated. This has created the conditions for companies to offer higher wages and/or
benefits to both skilled and lower-skilled workers to attract and retain them. However, issues
like the labor shortages, supply chain challenges, and rising gas and oil prices are stoking
inflationary pressures which could, if unchecked, dampen economic growth. The Federal Open
Market Committee (FOMC), whose actions during the pandemic kept the financial markets
liquid and operating, is carefully monitoring the economy and has already taken steps to
address the rising inflation, although the ability to keep this in an acceptable range is uncertain.
According to the US Bureau of Economic Analysis (BEA), the “advance” estimate of the U.S.
economy’s national gross domestic product (GDP) percentage change from the preceding
quarter grew in the second and third (calendar) quarters by 6.7 percent and 2 percent,
respectively. According to the BEA, “the increase in real GDP in the third quarter reflected
increases in private inventory investment, personal consumption expenditures (PCE), state and
local government spending, and nonresidential fixed investment that were partly offset by
decreases in residential fixed investment, federal government spending, and exports. Imports,
which are a subtraction in the calculation of GDP, increased (see below Table 1). The increase in
third quarter GDP performance reflected the continued economic impact of the COVID-19
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pandemic. A resurgence of COVID-19 cases resulted in new restrictions and delays in the
reopening of establishments in some parts of the country. Government assistance payments in
the form of forgivable loans to businesses, grants to state and local governments, and social
benefits to households all decreased. The national consumer price index (CPI), as of the third
calendar quarter has grown 5.3 percent and exceeds smaller increases in first and second
quarters of 1.9 percent and 4.8 percent. More households could see their finances as worse if
inflation erodes their nominal wage gains and shrinks their real purchasing power. The recent
inflation spike has driven pandemic pessimism, but it’s not clear if this will lead into reduced
retail spending. The following graphs depict the GDP and consumer price index (CPI) over the
past few years and CPI forecast in calendar year 2022.
Table 1: National Gross Domestic Product (GDP)
Table 2: National Consumer Price Index
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The nation’s unemployment rate fell to 5.1 percent in the third quarter, compared to a record
high of 13.1 percent at the height of the pandemic in the second (calendar) quarter of 2020. It
is expected, by the U.S. Bureau of Labor Statistics, that the unemployment rate will decline
below the pre-pandemic low of 3.5 percent. Per the State of California's Employment
Development Department, the state’s unemployment rate as of September 2021 is 6.4 percent
and the County of Santa Clara is 3.9 percent. Nationally, the improved unemployment rates are
driven by job gains in the leisure and hospitality; trade, transportation and utilities; professional
and business services; education and health services; manufacturing, and construction. As
shown in Table 2, these trends are expected to continue in calendar year 2022. Historically, the
Bay Area job growth has been led by the Peninsula for the past several years. The
unemployment rate for the San Francisco Peninsula improved to 4.7 percent in September
2021 compared to 9.0 percent in September 2020.
Table 3: U.S. Unemployment Rate
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DISCUSSION
Included in this section are the Base Case and revenue and expense assumptions. As with all
forecasts, there is uncertainty regarding the revenue and expenditure estimates contained in
this document. For example, General Fund revenues may exceed or fall below expectations
based on changes in economic or non-economic conditions. Various cost elements can also vary
from year to year. Adding to this complexity is the uncertain recovery from the financial
impacts of the COVID-19 pandemic. This forecast assumes a gradual improvement of economic
conditions and the continued easing of public health restrictions. In this forecast major tax
revenues continue to rebound from prior year levels, reserves for economically sensitive
revenues are phased out as modified or canceled programs return, and investments in Capital
projects are restored to pre-pandemic levels. It also recognizes legislative responses to the
pandemic that have boosted the City’s financial outlook in the near term, such as the
Coronavirus Aid, Relief, and Economic Securities Act (CARES Act), and American Rescue Plan Act
(ARPA). As one-time sources, these funds are eliminated in FY 2024.
Base Case
The following table displays the projected General Fund revenues and expenditures over ten
years and the cumulative net operating margin. The operating margin reflects the variance
between the projected General Fund revenues and expenditures for each year of the forecast
or the annual surplus or shortfall. The net operating margin is presented on a one-time basis, as
the annual surplus or shortfall for a given year, and on an incremental basis. The incremental
forecast assumes that each shortfall is addressed completely with ongoing solutions in the year
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it appears and that each surplus is completely expended with ongoing expenditures. Because it
is the City’s goal to remain in balance on an ongoing basis, the incremental figure is useful to
illustrate the additional surplus and/or shortfall attributed to a particular fiscal year. To the
extent that a shortfall is not resolved, or a surplus is not expended on an ongoing basis, it is
important to understand that the remaining budget gap or surplus will carry over to the
following year.
The current Base Case financial forecast projects a surplus of $2.4 million in FY 2023, followed
by a $1.0 million shortfall in FY 2024, with small but increasing surpluses in FY 2025 through FY
2032. As outlined above, if the City spends the projected FY 2023 surplus of $2.4 million on an
ongoing basis, the available projected gap for FY 2024 will be approximately $3.4 million. Based
on these assumptions, the cumulative net operating margin, or ongoing surplus, during the
forecast period is $34.3 million.
TABLE 4: FY 2023 – 2032 Long Range Financial Forecast (Base Case)
TABLE 5: FY 2023 – 2032 Long Range Financial Forecast Net Operating Margin (Base Case)
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Revenue Assumptions
On October 25, 2021, the City Council reviewed and discussed the preliminary Q1 FY 2022
financial status report (CMR 13439). This report provided a snapshot in time, with some
revenues projected to exceed the FY 2022 Adopted Budget estimates that reflected a slow to
moderate recovery pace as directed by the City Council (CMR 11954).
Tax revenues constitute nearly 60 percent of General Fund resources and the FY 2022 forecast
projects a 10.5 percent, or $11.6 million, increase over adopted levels that is driven by higher
than anticipated receipts in Sales Tax, Property Tax, and Transient Occupancy Tax (TOT)
categories. In FY 2023, the forecast projects a $9.1 million, or 7.5 percent, tax revenue increase
compared to the FY 2022 projected levels. The forecast assumes that major tax revenues
continue to rebound from prior-year levels; however, overall tax revenues in FY 2022 remain
below pre-pandemic levels by $12.3 million, or 9.1 percent, and are not expected to reach pre-
pandemic levels until FY 2024 in this LRFF.
The FY 2022 forecast for non-tax revenues projects a slight 0.2 percent, or $112,000 increase
over adopted levels. In FY 2023, the forecast projects a $3.6 million, or 5.0 percent, increase
compared to FY 2022 projected levels. This increase is primarily attributable to new fee-based
programs in the Fire Department and the restoration of several programs and services that
were modified due to public health orders, mainly in public safety and community services.
As part of the Federal stimulus support, the City is expected to receive $13.7 million in
American Rescue Plan Act (ARPA) funding that the Council, per the legislation, has designated
to address the immediate financial impacts resulting from the COVID-19 pandemic, specifically
the significant revenue loss. Budgetarily, and included in this forecast, is the assumed use of
$8.2 million (60 percent) appropriated in FY 2022 and $5.5 million (40 percent) appropriated in
FY 2023 to assist in smoothing the revenue loss as a result of the pandemic. As a one-time
funding source, ARPA funding is eliminated in FY 2024 and beyond which contributes to the
fluctuations in the surplus/operating gap in the first few years of the 10-year forecast. The
changes by revenue category, as well as the current expected FY 2022 status of many of the
revenue categories, are discussed in greater detail below.
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TABLE 6: General Fund Revenue Forecast
TABLE 7: General Fund Revenue Forecast Year to Year Percentage Change
Sales Tax
Sales tax receipts declined in FY 2020 and FY 2021 by 16.3 percent and 4.70 percent,
respectively. However, the FY 2021 fourth quarter cash receipts increased by 28.2 percent over
the prior year’s same quarter. The general retail, food products which includes restaurants, and
transportation which includes auto sales had significant increases. This economic trend also
occurred in municipalities in the San Francisco Bay Area and in California. These significant
upward trends were partially offset by business-to-business sales which has been declining.
Sales Tax is anticipated to generate $30.6 million in FY 2022, a $2.5 million or 8.7 percent
increase over the adopted level of $28.2 million, and $1.5 million or 5.2 percent over FY 2021
actuals of $29.1 million. In FY 2023, this revenue is anticipated to increase to $32.3 million, a
$1.7 million or 5.2 percent increase over FY 2022 projected levels. Revenue in this category is
experiencing growth; however, remains below pre-pandemic levels of $36.5 million in FY 2019.
TABLE 8: City of Palo Alto Sales Tax Revenues through FY 2032
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Property Tax
Property tax revenue is the General Fund’s largest revenue source and represents
approximately 25 percent of the total revenues. Historically, the 10-year compound annual
growth rate (CAGR) was 8.2 percent with a low of –1.1 percent in FY 2011 and a high of 11.5
percent in FY 2015. During economic downturns, impacts to property tax occur a year later. As
a result, the FY 2021 actual growth was 10.7 percent and FY 2022 is forecasted to be flat. In
addition, fiscal years 2018, 2019, 2020, and 2021 included receipts of $1.4 million, $2.7 million,
$3.9 million, and $5.5 million, respectively, for excess Educational Revenue Augmentation Fund
(ERAF) distributions from the County of Santa Clara. The FY 2022 forecast includes $4.5 million
for excess ERAF. ERAF is the fund used to collect and disburse property taxes that are shifted
to/from cities, the County, and special districts prior to their reallocation to K-14 school
agencies. When the state shifts more local property tax than required to support schools these
funds are returned and known as excess ERAF. As a result of the volatility of ERAF, it is not
considered a permanent local revenue source.
As discussed in the preliminary first quarter (Q1) FY 2022 financial status report (CMR 13439) ,
five counties including, Santa Clara County, and the State were in a dispute over the calculation
and disbursement of excess ERAF funds. The City had been reserving these funds, pending a
resolution of the dispute beginning in FY 2021 and through prior near-term forecasts. The
dispute between the counties and the State was settled in FY 2021 and, consistent with City
Council direction, these funds have been recognized in the Budget Stabilization Reserve (BSR)
and reallocated to the City’s reserve: Utilities Transfer Litigation (Equity Transfer). In FY 2022,
an additional $1.7 - $2.0 million above budgeted levels is anticipated as a result of the favorable
resolution.
In November 2021, the County of Santa Clara notified the cities that the California School
Boards Association and its Education Legal Alliance filed a lawsuit against the Controller of the
State of California arguing that the settlement reached with the counties is unlawful. The
County estimates that 20 percent of ERAF in FY 2022 is subject to this litigation. This forecast
assumes a slightly higher 25 percent or $1.5 million reserve for potential loss starting in FY 2022
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and beyond. It’s uncertain if a similar percentage is at risk for the prior two years; staff will
continue to monitor the status of this dispute and report on any significant developments.
Transfer of ownership has been a significant driver of past growth; however, that growth is
expected to moderate in FY 2022 due to the delayed impact of the (pandemic) recession. For
example, the median sales price of single family residential in the first quarter of FY 2022
declined by 2.6 percent.
TABLE 9: City of Palo Alto Property Tax Actuals and Forecast through FY 2032
Property Tax is anticipated to generate $56.5 million in FY 2022, a $5.2 million or 10.2 percent
increase over adopted levels of $51.2 million and remains consistent with FY 2021 actuals of
$56.6 million. In FY 2023, this revenue is anticipated to increase to $58.2 million, a $1.7 million
or 5.2 percent increase over FY 2022 projected levels.
Transient Occupancy Tax (TOT)
Revenue in this category is impacted by business and other leisure/non-leisure travel and has
experienced significant reductions in prior years due to public health orders, travel restrictions,
and diminishing business and personal travel plans resulting from the pandemic. As public
health conditions improve and travel resumes, revenue in this category is anticipated to recover
and possibly grow. This revenue remains low compared to pre-pandemic actuals of $25.7
million in FY 2019; however, strong growth was realized in the FY 2021 fourth and FY 2022 first
quarters. In FY 2022, receipts are expected to generate approximately $11.1 million (57 percent
below pre-pandemic levels) versus the FY 2021 actuals of $5.2 million (80 percent below pre-
pandemic levels); a 23 percent improvement. The opening of the two Marriott hotels in the
prior fiscal year and the re-opening of several hotels in the first quarter of FY 2022 are positive
developments that will also drive recovery for this tax revenue.
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Estimated TOT receipts of $11.1 million in FY 2022, would generate a $2.7 million or 32.1
percent increase over adopted levels of $8.4 million, and $4.9 million or 113.5 percent over FY
2021 actuals of $5.2 million. In FY 2023, this revenue is anticipated to increase to $16.9 million,
a $5.8 million or 52.3 percent increase over FY 2022 projected levels. Year-to-date, daily
average room rates increased by 37.7 percent from $120.76 per day to $166.24 per day while
occupancy rate increased by 40.4 percent from 43.2 percent to 60.6 percent.
TABLE 10: City of Palo Alto Transient Occupancy Tax Actuals and Forecast through FY 2032
Note: Jan. 2008, TOT Rate went from 10% to 12%
Jan. 2015, TOT Rate went from 12% to 14%
April 2019, TOT Rate went from 14% to 15.5%
Utility User’s Tax (UUT)
The UUT is levied on electric, gas, and water consumption, as well as on telephone usage.
Revenue in this category is impacted by consumption levels and has experienced reductions in
prior periods due to water reduction programs and reduced workforces and business closures
due to the pandemic. This revenue is showing early signs of recovery as public health orders
ease and workers return to the office. UUT is anticipated to generate $14.7 million in FY 2022, a
$0.3 million or 2.1 percent increase over adopted levels of $14.4 million, relatively constant
with FY 2021 levels. In FY 2023, this revenue is anticipated to increase to $14.9 million, a $0.2
million or 1.6 percent increase over FY 2022 projected levels.
TABLE 11: City of Palo Alto Utility Users Tax Actuals and Forecast through FY 2032
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Documentary Transfer Tax (DTT)
Revenue in this category is highly volatile and dependent on sales volume and the mix of
commercial and residential sales. In FY 2021, DTT experienced record receipts of $10.6 million.
This milestone was a result of six large commercial transactions and robust residential sales.
During economic downturns, some investors see it as an opportunity to expand their holdings.
Revenue from July through October in FY 2021 is running 4.4 percent above the same period in
FY 2020. DTT is anticipated to generate $8.1 million in FY 2022, a $1.0 million or 13.8 percent
increase over adopted levels of $7.1 million, and $2.5 million or 23.5 percent lower than FY
2021 actuals of $10.6 million. In FY 2023, this revenue is anticipated to decrease to $7.4 million,
a $0.7 million or 9.9 percent decrease over FY 2022 projected levels.
As in past years, this revenue source is challenging to forecast and can fluctuate month to
month depending on real estate transactions. The number of transactions through October
2021 (283) are running higher than those through October 2020 (229) with the total value of
these transactions increasing by 4.4 percent. However, though performance to date is higher
than the FY 2021 peak revenue receipts, the FY 2021 DDT receipts is not expected to be
repeated in FY 2022 since the major commercial sales receipts, which made up over half the
DDT receipts in FY 2021, came in the latter half of the last fiscal year. Though the Palo Alto
housing market remains strong, as discussed in the Property Taxes section, single family
residential median sales price in Palo Alto has slightly declined, which is an expected occurrence
as the recession will impact property sales activity in FY 2022.
TABLE 12: City of Palo Alto Documentary Transfer Tax Actuals and Forecast through FY 2032
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Rental Income
Rental Income of $14.5 million in FY 2022 primarily reflects rent paid to the General Fund from
the City’s Enterprise Funds and the Cubberley Community Center. There is a slight increase in
rental income 23of $1.0 million. The increase can be attributed to a review of the changes in
the California Consumer Price Index (CCPI) in the San Francisco Bay Area from the August-to-
August period, and it is expected that revenues will be reviewed and revised subsequent to this
forecast based on updated information, typically the December to December change in the
CCPI. This also assumes rentals of City space return to pre-pandemic levels in FY 2023. Impacts
from the pandemic, including reductions related to the rent forgiveness program (CMR 12234)
which provides up to three months of rent forgiveness for active non-profit tenants should be
resolved in FY 2022. As of November 1, 2021, the program has resulted in 12 tenant
applications for $255,000 of the $744,000 budgeted for rent relief. A further round of
applications will occur prior to the program’s sunset at the end of FY 2022. Additionally, staff
are working with several tenants to resolve issues of past due rent, and the City Attorney’s
Office has become involved in ongoing discussions. It is assumed this revenue source will
decrease during FY 2022 until past due rent issues are resolved.
The City is also considering using the former Los Altos Treatment Plant (LATP) site for Project
Homekey and a water purification site. Should this occur, the site would no longer be available
for rental as a laydown yard. Please see the General Expenses section of this report for
additional information regarding future plans for the former LATP site.
Charges for Services and Permits and Licenses
Revenues in the ‘Charges for Services’ and the ‘Permits and Licenses’ categories are anticipated
to be $28.4 million and $9.5 million, respectively, in Fiscal Year 2023. These amounts are
approximately $5.6 million higher than the FY 2022 amounts, mainly due to adjustments to
revenue from new Fire Department fees and adjustments to the Economically Sensitive
Department Revenue Reserve, discussed below.
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Revenues in these categories were impacted by changes in FY 2023, such as increases to reflect
a full year of operation for the Junior Museum and Zoo, which includes a ticketed entry fee and
membership program. These budget categories also include revenues associated with two fee-
based programs in the Fire Department: a first responder fee (assessed on commercial
insurance companies), to cover the cost for initial response for first due engine; and an
ambulance subscription fee, to secure co-pay free ambulance transport. These fees are still in
development and are currently scheduled for implementation by Spring or Summer of 2022.
Additionally, revenues in these categories were impacted by a phase-out of the Economically
Sensitive Department Revenue Reserve. This reserve was established to mitigate unexpected
losses from services impacted by the COVID-19 pandemic, such as the suspension of parking
enforcement, delays opening the Junior Museum and Zoo, and limited operations at
community centers, recreational facilities, and the Children's Theatre. In total, $5.0 million was
set aside for this purpose in the prior year. This forecast assumes gradual overall improvements
in the return of canceled or modified services by phasing out this reserve over three years,
appropriating $2.5 million in FY 2023, $1.25 million in FY 2024, and $0 in FY 2025 and beyond.
The revenue estimates in these categories are primarily driven by the cost of staff to provide
services to the community; therefore, revenues are impacted by the City’s personnel service
costs and modeled to increase by rates consistent with general salary and benefits and CPI
trends. One exception to this is for Development Services activities and related revenue.
Development Services fees are fully cost-recoverable and the department has been modeled as
cost-neutral in this forecast. Staff will analyze municipal fee revenue activity as part of the FY
2023 Budget development process and bring forward adjustments as appropriate.
Charges for Service - Stanford Fire and Dispatch Services
The City and Stanford have two separate agreements for the provision of fire response and
emergency dispatch services. The fire response services agreement became effective in July
2018 and outlines service level terms and a new cost allocation methodology as the baseline for
agreement costs. The term extends through June 2023, with renewals through 2028 unless
otherwise terminated. The agreement included a new staffing deployment model for
suppression and medical services, which was approved by the City Council in October 2017 and
deployed in January 2018. This forecast aligns with the new staffing model and, in accordance
with the agreement, adjustments to revenue from Stanford have been aligned with the year-
over-year changes to the operating expenses in the Fire Department for FY 2022. Similarly,
changes to the revenue received for dispatching services have been aligned with the FY 2022
adjustments to the operating expenses in the Technical Services Division of the Police
Department where the costs to provide these services are budgeted. Adjustments include
applicable costs for the Public Safety Communications Manager position approved as part of FY
2022 preliminary first quarter adjustments. For fire revenue, additional adjustments may be
applicable if a new labor agreement with IAFF is negotiated. Salary and benefits cost increases
are assumed using the CCPI in the San Francisco Bay Area from the August-to-August period of
3.7% for the base year and 2.5% for out years.
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Charges to Other Funds
The main source of revenues in this category is General Fund administrative cost allocation plan
charges to the Enterprise and Internal Service Funds. Internal support departments such as
Administrative Services, Human Resources, and Council Appointed Offices provide services to
Enterprise and Internal Service Funds. The costs for these services are recovered through the
administrative cost allocation plan charges. The FY 2023 estimate for Charges to Other Funds of
$13.0 million reflects a slight decrease of 8.45 percent from the FY 2022 Adopted amount of
$14.2 million; this is primarily attributed to fully adjusting the costs associated with the
allocated charges in the Internal Support Departments to the adjustments made as part of the
FY 2022 Budget as well as a technical adjustment to better align the cost plan methodology
with the system calculations.
Return on Investment
The return-on-investment category reflects the interest earnings on the City’s investment
portfolio. This category is a combination of past investments, new investments at current
market rates, and available investable cash which fluctuates seasonally and annually. Staff had
anticipated the decline in interest rates would occur sooner and at a faster rate than it has
occurred, so the City experienced a higher than anticipated return on investments in FY 2021.
In addition, prudent investments further resulted in higher investment yields and earnings.
The average portfolio rate of return for the first quarter of FY 2022 was 1.61 percent, and a 1.58
percent average yield as of the fourth quarter of FY 2021. The revised General Fund FY 2022
interest earning estimate of $0.95 million is $0.10 million higher than the Adopted Budget of
$0.85 million. In FY 2023, the forecast reflects a relatively level interest rate environment with
slight increases through the ten-year period.
TABLE 13: Palo Alto Historical Investment Portfolio Yield and Citywide Interest Earnings
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Operating Transfers-in
Operating Transfers-in materialize as expenses in other funds throughout the City and as a
revenue in the General Fund. This budget category includes repayment of a previous loan from
the General Fund to the Airport Fund, funding for police patrol in the downtown area, and the
equity transfer from the Electric and Gas funds. Overall, the Operating Transfers-in are
estimated to be $22.6 million, a $0.5 million decrease from the FY 2022 level of $23.1 million
due to the removal of a one-time transfer of funding for animal services in FY 2022.
In accordance with a methodology approved by the City Council in June 2009, the equity
transfer is calculated by applying a rate of return on the capital asset base of the Electric and
Gas funds. This rate of return is based on PG&E's rate of return on equity as approved by the
California Public Utilities Commission (CPUC). The transfer amount is calculated based on the
Utility Department’s projections from the Electric and Gas Five Year Financial Forecasts, as
approved by the City Council in spring 2021 (CMR 12240). For more detail on the ordinance
adopting the 2009 transfer methodology, see CMR 280:09, Budget Adoption Ordinance for
Fiscal Years 2009 and 2010; and CMR 260:09, Finance Committee Report explaining proposed
changes to equity transfer methodology.
This estimate also considers the trial court’s decision in Green v. City of Palo Alto (Santa Clara
Superior Court Case No. 16CV300760), a class action lawsuit which challenges the City’s gas and
electric rates under Proposition 26, one of many such cases following a 2015 decision involving
the City of Redding. In Green, the trial court judge found the City’s electric rates valid, but that
the City’s gas rates were taxes requiring voter approval under California’s Proposition 26,
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because they were set at a level sufficient to fund an annual transfer to the City’s general fund.
The results of this lawsuit will have important implications for Palo Alto, as well as for other
municipal utilities and cities in California. In September 2021, the Council therefore authorized
an appeal to seek guidance from the Court of Appeal on these novel legal questions. The City is
also exploring a ballot measure to seek voter approval or modification of the City’s general fund
transfer so City voters can have the final word on how they want to finance City services, and at
what level. Because the appeal is pending, the exact exposure to the City’s General Fund cannot
be estimated at this time. However, the City believes it is prudent to set aside funding to cover
the $12.6 million remedy related to gas rates that the Superior Court identified in Phase II, plus
interest, as well as the estimated future reduction in the gas equity transfer, should the current
Santa Clara County Superior Court decision be upheld. While the process for calculating the
equity transfer from the Electric and Gas Funds has not changed, the funding is now being held
in a Litigation Reserve. This action continues the City’s proactive actions to address known
liabilities with the best information available at the time and sets these funds aside pending
final resolution of this dispute.
Expense Assumptions
As part of developing the FY 2023-2032 Forecast expenditure budget, the General Fund
expense categories have been adjusted by removing FY 2022 Adopted Budget one-time
expenses and updating major cost elements such as salary and benefits costs. The table below
displays the expense forecast and when compared to the FY 2022 estimated expenditures,
growth of 9.9 percent is expected in FY 2023.
TABLE 14: General Fund Expense Forecast and Year to Year Percentage Change
Expenditures & Other Uses
Actual
2021
Adopted
2022
Projected
2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
CAGR 10
Years
CAGR 5
Years
Salary 67,284 69,304 66,304 72,531 74,791 76,699 78,718 80,554 82,274 83,986 85,698 87,411 89,125 2.5%1.1%
Benefits 58,509 62,245 63,745 66,247 68,738 71,045 71,867 72,088 73,581 74,650 76,004 77,392 76,430 2.1%0.8%
Subtotal: Salary & Benefits 125,793 131,549 130,049 138,778 143,529 147,744 150,584 152,641 155,855 158,636 161,701 164,803 165,554 2.3%1.0%
Contract Services 17,807 30,200 30,200 29,088 29,756 30,417 28,107 28,631 29,185 29,710 30,284 30,796 31,378 0.4%-0.2%
Supplies & Material 2,234 2,980 2,980 3,085 3,160 3,234 3,308 3,382 3,456 3,530 3,604 3,678 3,752 2.3%0.9%
General Expense 6,585 7,938 7,938 8,481 8,548 8,631 8,684 8,752 8,821 8,904 7,959 8,026 8,093 0.2%0.3%
Rents & Leases 1,709 1,298 1,298 1,332 1,367 1,404 1,442 1,481 1,522 1,563 1,605 1,649 1,693 2.7%1.1%
Facilities & Equipment 464 427 427 443 454 465 476 487 498 509 520 531 542 2.4%1.0%
Allocated Charges 17,423 20,117 20,117 22,445 23,105 23,729 24,275 24,818 25,417 26,040 26,630 27,250 27,780 3.3%1.0%
Total Non Sal/Ben Before Transfers 46,221 62,960 62,960 64,875 66,391 67,880 66,292 67,551 68,899 70,255 70,602 71,929 73,238 1.5%0.4%
Operating Transfers-Out 4,326 4,296 4,296 4,431 4,462 4,493 4,529 4,561 4,598 4,636 4,669 4,707 4,746 1.0%0.3%
Transfer to Infrastructure - Base 6,911 4,506 4,506 10,673 13,640 16,607 19,575 20,010 20,456 20,912 21,381 21,863 22,356 17.4%6.5%
Transfer to Infrastructure - TOT 2,383 5,899 5,657 9,238 12,719 14,966 15,456 15,927 16,536 17,222 18,061 18,969 19,961 13.0%5.6%
Total Use of Funds 185,634 209,210 207,468 227,995 240,741 251,691 256,437 260,691 266,344 271,661 276,414 282,271 285,855 3.2%1.3%
Expenditures & Other Uses
Actual
2021
Adopted
2022
Projected
2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Salary 3.0%-4.3%9.4%3.1%2.6%2.6%2.3%2.1%2.1%2.0%2.0%2.0%
Benefits 6.4%2.4%3.9%3.8%3.4%1.2%0.3%2.1%1.5%1.8%1.8%-1.2%
Subtotal: Salary & Benefits -0.2%-0.2%6.7%3.4%2.9%1.9%1.4%2.1%1.8%1.9%1.9%0.5%
Contract Services 69.6%0.0%-3.7%2.3%2.2%-7.6%1.9%1.9%1.8%1.9%1.7%1.9%
Supplies & Material 33.4%0.0%3.5%2.4%2.3%2.3%2.2%2.2%2.1%2.1%2.1%2.0%
General Expense 20.6%0.0%6.8%0.8%1.0%0.6%0.8%0.8%0.9%-10.6%0.8%0.8%
Rents & Leases -24.1%0.0%2.7%2.7%2.7%2.7%2.7%2.7%2.7%2.7%2.7%2.7%
Facilities & Equipment -8.0%0.0%3.7%2.5%2.4%2.4%2.3%2.3%2.2%2.2%2.1%2.1%
Allocated Charges 15.5%0.0%11.6%2.9%2.7%2.3%2.2%2.4%2.4%2.3%2.3%1.9%
Total Non Sal/Ben Before Transfers 3.1%3.1%3.0%2.3%2.2%-2.3%1.9%2.0%2.0%0.5%1.9%1.8%
Operating Transfers-Out -0.7%0.0%3.1%0.7%0.7%0.8%0.7%0.8%0.8%0.7%0.8%0.8%
Transfer to Infrastructure - Base -34.8%0.0%136.8%27.8%21.8%17.9%2.2%2.2%2.2%2.2%2.3%2.3%
Transfer to Infrastructure - TOT 147.6%-4.1%63.3%37.7%17.7%3.3%3.0%3.8%4.1%4.9%5.0%5.2%
Total Use of Funds 12.7%-0.8%9.9%5.6%4.5%1.9%1.7%2.2%2.0%1.7%2.1%1.3%
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FY 2022 Preliminary First Quarter Adjustments
On October 25, 2021 the City Council received preliminary information on the City’s financial
condition as of the first quarter (Q1) of FY 2022. That report indicated a gradual improvement
in the local economic outlook, similar to national trends. During that meeting, Council also
approved several budgetary and staffing adjustments to realign resources with priorities
identified by the City Council after the FY 2022 Adopted Budget (CMR 13439). Ongoing
adjustments from FY 2022 Q1 are part of this forecast, including the addition of economic
development coordination and management staffing (1.00 FTE Assistant to the City Manager)
housing support operations program staffing (1.00 FTE Assistant to the City Manager),
Development Center front desk staffing (1.00 FTE Administrative Associate III), and the
restoration of the Public Safety Communications Manager (1.00 FTE). The City Council also
expressed interest in staff bringing forward an additional action in FY 2022 to add a Code
Enforcement Officer (1.00 FTE, approximately $170,000 including staffing and vehicle costs) to
support enforcement of the ban on gas powered leaf blowers and address the backlog of code
enforcement requests. Various one-time adjustments were also approved, which are detailed in
CMR 13439. These one-time adjustments are contemplated in this forecast in that they impact
the FY 2023 estimated beginning balance of the Budget Stabilization Reserve (BSR).
In addition to these actions, Council also approved the acceptance and appropriation of a
Staffing for Adequate Fire Emergency Response (SAFER) Grant to reimburse the City for an
additional 5.0 FTE Firefighter positions for three years (CMR 13643). These positions have been
assumed in this forecast along with the ongoing costs associated with the positions once the
grant funding ends in FY 2025.
Salary and Benefits
The table above depicts the estimated General Fund salaries and benefits costs. Consistent with
prior years, the FY 2023 salaries and benefits costs represent approximately 60 percent of the
General Fund budget expenditures.
Salary and Benefits are projected to increase $7.2 million or 5.2 percent from the prior year,
from $131.5 million to $138.8 million. Discussed in the following sections, this is primarily
attributable to increases in salaries ($3.2 million or 4.7 percent) and pension costs ($2.7 million
or 7.8 percent).
Salary
Consistent with the City’s salary budget methodology for recent budgets, positions are
budgeted at the actual rate of pay of employees including benefit selections as of Fall 2021.
Then, by position, salary costs are updated in accordance with applicable Memorandum of
Agreements (MOA’s) between the City and its labor groups and the Management and
Professional Personnel and Council Appointees Compensation Plan(s). It is important to note
that as of this forecast, all bargaining groups are at the end of their agreement terms. The
forecast assumes step increases for employees in applicable positions, including SEIU, IAFF, and
PAPOA, and merit increases for Management and Professional employees. A general wage
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adjustment of 2.0 percent is included for all employees and all years of the forecast since no
MOA’s are in effect. This is consistent with prior Council direction in previous long range
financial forecasts to use the 2.0 percent increase as a forecasting assumption, not as a
commitment to future negotiations.
Benefits
Pension: Pensions are budgeted based on CalPERS determined rates as of the June 30, 2020
valuation (CMR 13440) for the City’s Miscellaneous and Safety plans. CalPERS determines the
City’s total contributions for a given Fiscal Year as the sum of two factors: Normal Cost (NC) and
Unfunded Accrued Liability (UAL). Together the NC and the UAL expressed as a percentage of
payroll is the ‘blended rate’ and is used to represent total costs in the discussion below.
The Normal Cost (NC) is expressed as a percentage of payroll and is paid as part of the payroll
reporting process of active employees. Commonly referred to as the ‘pay-go’ cost, the NC is
variable and increases or decreases directly with the salary levels of the City. It represents the
necessary funding for the City to pay for employees presuming that CalPERS meets the current
set of assumptions.
In a year that CalPERS does not meet assumptions, due to plan changes, assumption changes,
method changes, or plan experience (including investment gains/losses), there is an increase or
decrease to the Unfunded Accrued Liability (UAL). Commonly referred to as the ‘catch-up’ cost,
the UAL is expressed as a dollar amount and is calculated over an amortized period with
defined annual payments, similar to a mortgage. The contributions for UAL are billed as a flat
dollar amount as opposed to a percentage of payroll due to potential funding issues that could
arise from a declining payroll or number of active members in the plan. However, CalPERS
provides an estimated percentage of payroll for UAL to allow a consistent comparison of total
costs.
In the miscellaneous plan, total costs are projected to increase from the current 41.8 percent in
FY 2022 to 42.9 percent in FY 2023. In the safety plan, total costs are projected to increase from
the current 69.6 percent in FY 2022 to 71.1 percent in FY 2023. These rates do not consider the
employee pick-up of the employer share; that pick-up materializes as savings in the City’s
pension costs. Consistent with applicable MOAs, the FY 2023 forecast presumes that the
miscellaneous plan will pick up 1 to 2 percent of the employer pension cost and that safety plan
members will pick up 3 to 4 percent.
TABLE 15: CalPERS’ Projected FY 2022-2032 Blended Retirement Rates
(percentage of payroll)
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
FY
20230
FY
2031
FY
2032
Miscellaneous 41.8 42.9 43.5 44.1 41.5 37.6 37.2 36.7 36.3 36.0 32.6
Safety 69.6 71.1 72.9 74.0 74.0 73.8 73.1 71.3 70.4 69.5 66.0
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The City has taken several proactive steps to address rising pension costs and long-term
liabilities, including cost-sharing in labor agreements, establishing an irrevocable Section 115
Pension Trust (“Pension Trust”), and adopting a Pension Funding Policy. In January 2017 the
City council authorized the establishment of a Pension Trust Fund with the Public Agency
Retirement Service (PARS) (CMR 7553). Contributions were initially made to the Pension Trust
on an ad-hoc basis, using one-time savings or excess revenues. In October 2018, the City
Council directed staff to include in budget assumptions the NC for pension benefits at an
equivalent of 6.2 percent discount rate and a transfer of the additional (“supplemental”)
funding beyond CalPERS actuarial determined contribution levels to the Pension Trust Fund
(CMR 9740). Additional one-time contributions continue to be made each year if excess
revenues or unspent savings are available, subject to City Council approval. This practice was
reinforced in the development of a Pension Funding Policy, adopted by the City Council in
November 2020 (CMR 11722). As part of policy goals, the City seeks to reach a 90 percent
funded status by FY 2036. This policy is subject to modification at City Council discretion and
requires that staff report the status of the funding goal every three years. Staff anticipates
returning in Fall 2022 with this analysis. In this forecast, an approximate $5.2 million ($3.1
million in the General Fund) in supplemental contributions is assumed in FY 2023, relatively
constant to prior year contribution levels. Through FY 2022, a total of $40.2 million in principal
contributions will have been made to the Pension Trust.
In the General Fund, it is anticipated the City will spend a total of $37.3 million on total pension
costs in FY 2023, including both CalPERS contributions and supplemental Pension Trust Fund
contributions. This is approximately $2.7 million higher than the prior year costs of $34.6
million, or a 7.8 percent increase. These expenses represent approximately 16 to 17 percent of
the General Fund’s total expenses.
Healthcare: Consistent with the most recent labor agreements between the City and its
bargaining units in the General Fund, the City’s contribution amounts towards medical costs for
employees are based on a flat rate contribution from the City, with the employee contributing
towards the remaining medical plan premium. Like salaries, healthcare costs are updated in
accordance with applicable Memorandum of Agreements (MOA) between the City and its labor
groups and the Management and Professional Personnel and Council Appointees
Compensation Plan(s).
Retiree Healthcare/Other Post-Employment Benefits (OPEB): Retiree Medical is based on the
most recent actuarial study prepared by Bartel Associates, which is completed every two years.
The most recent study was completed in May 2021 to inform the development of the FY 2023
and FY 2024 operating budgets. Consistent with City Council direction (CMR 11284), this
forecast continues the practice to budget the cost for retiree healthcare at a more conservative
6.25 percent discount rate and transmit the amount above the required payment as an
additional discretionary payment (“prefunding”) to the California Employers’ Retiree Benefit
Trust (CERBT) Fund. In FY 2022, this additional contribution is approximately $2.2 million ($1.4
million General Fund). The City continues to budget for the full payment of the Actuarial
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Determined Contribution (ADC) for retiree healthcare. CalPERS blends active employees with
pre-Medicare retirees and charges the same medical premium, even though younger
employees on average consume less healthcare. The higher premium to younger employees
thereby subsidizes older employees and retirees who, on average, have higher claims and
premiums. This implied subsidy effectively lowers the funding necessary to meet the ADC. The
FY 2023 Budget estimates $9.3 million for ADC, an approximate $500,000 or 5.7 percent
increase from FY 2022 levels of $8.8 million.
TABLE 16: Retiree Medical General Fund Contributions (Millions)
FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032
$9.3 $9.5 $9.8 $10.1 $10.1 $10.9 $11.2 $11.5 $11.9 $12.3
Workers’ Compensation: The budget appropriation for workers' compensation includes an
estimate for claims incurred and reserves for current filings at an 85 percent confidence level,
based on actuarial studies completed by Bickmore. In FY 2021, claims expenditures decreased
slightly by $340,000 or 5.3 percent from $6.4 million to $6.1 million from the prior year.
Actuarial estimates completed in August 2020 informed FY 2022 budget levels of $5.9 million
($3.9 million in the General Fund). More recent actuary estimates completed in August 2021
project higher than expected levels for FY 2022 at $6.3 million ($4.2 million in the General
Fund). Staff will continue to monitor expenditures in the fund and bring forward adjustments as
necessary. Estimates for FY 2023 are $6.6 million ($4.4 million in the General Fund),
representing a $0.8 million increase ($0.5 million in the General Fund) or 12.8 percent increase
over the Adopted FY 2022 Budget of $5.9 million ($3.9 million in the General Fund). Estimates
for workers' compensation increase in the forecast at rates consistent with general CPI
increases.
Contract Services
This forecast assumes contract services of $29.1 million in FY 2023, a 3.7 percent decrease from
the FY 2022 Adopted budget of $30.2 million. This decrease is driven primarily by the removal
of one-time costs adopted in FY 2022 including funding to address continued COVID-19
recovery efforts across the City. These decreases are partially offset by service contract
increases as well as a 3.7 percent CPI cost increase in FY 2023 based on a review of the changes
in the California Consumer Price Index (CCPI) in the San Francisco Bay Area from the August to
August period. It is expected that the estimated CPI increases will be substituted with further
department base budget requests as part of the FY 2023 budget process.
Contract Services - Committed Additions
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The Committed Additions included in this forecast account for anticipated operating and
maintenance (O&M) costs in the General Fund for capital projects anticipated to come online in
within the ten-year forecast period. A preliminary total estimate of $0.1 million for costs
associated with the Boulware Park Improvements (PE-17500) and Library Automated Materials
Handling (LB-21000) projects that are anticipated to come online in FY 2023. Additional cost
increases are included throughout the ten-year forecast, primarily due to estimated operating
impacts from the Public Safety Building (PE-15001), Fire Station 4 (PE-18004), Dog Park
Installations (PG-18001), and Park Restroom Installations (PG-19000).
TABLE 17: FY 2023 – FY 2032 Committed Additions (Millions)
FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032
$0.1 $0.5 $0.6 $0.6 $0.6 $0.7 $0.7 $0.7 $0.7 $0.8
Supplies and Materials
The FY 2022 Adopted Budget for the General Fund included $3.0 million for Supplies and
Materials, which is anticipated to increase slightly by a 3.7 percent CPI cost increase in FY 2023
to $3.1 million based on a review of the changes in the California Consumer Price Index (CCPI)
in the San Francisco Bay Area from the August to August period. It is expected that the
estimated CPI increases will be substituted with department base budget requests as part of
the FY 2023 budget process.
General Expense
This category includes costs for travel and meetings, telephone and non-city utilities,
contingency accounts, bank card service charges, and subsidies and grants provided through
the Human Services Resource Allocation Program (HSRAP). The FY 2022 Adopted Budget of $7.9
million is expected to increase to $8.5 million in FY 2023, primarily due to a $1.0 million
increase for Project Homekey (discussed further below) and a 3.7 percent CPI cost increase
based on a review of the changes in the California Consumer Price Index (CCPI) in the San
Francisco Bay Area from the August to August period. These increases are partially offset by a
$0.8 million decrease for the removal of the Budget Uncertainty Reserve in FY 2023. It is
expected that the estimated CPI increases will be substituted with department base budget
requests as part of the FY 2023budget process.
General Expense – Project Homekey: On September 27, 2021 the City Council directed staff to
apply for Project Homekey funding in conjunction with LifeMoves to build an emergency shelter
at the former Los Altos Treatment Plant (LATP) site (CMR 13595). This project will rapidly
deploy modular housing to provide interim housing opportunities for homeless individuals and
families in the City of Palo Alto. Project Homekey is a program, funded by the State of California
Department of Housing and Community Development, intended to provide grant funding and
facilitate a partnership with the State to quickly acquire, rehabilitate, or master lease a variety
of housing types. Once developed, these projects provide interim or permanent housing
options for persons experiencing homelessness and who are also at risk of health concerns. The
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site would be operated for at least fifteen years as interim housing per the program’s
durational requirement. This project would utilize a combination of funding sources including
the Project Homekey Program for capital expenses and donations, grant funds, and City support
for ongoing operations expenses. This LRFF includes the City’s committed investment of $7.0
million in operating expenses ($1.0 million annually starting in FY 2023 through FY 2029), with
actual timing of the funding still to be determined. Some operating funding support is expected
from Project Homekey as well as the County of Santa Clara. Any remaining gaps in funding will
need to be closed by fundraising, operating cost containment strategies, and/or grant funds.
General Expense - Cubberley Lease: In FY 2015, the City and Palo Alto Unified School District
(PAUSD) agreed to a five–year extension of the Cubberley lease from January 2015 to
December 2019. In October 2019, the City Council directed staff to negotiate with PAUSD to
extend the lease agreement an additional five years, through December 2024 (CMR 10730). A
new Cubberley lease was approved by the City Council in June 2020 (CMR 11460) for a smaller
portion of the Cubberley site with a correspondingly lower base rent payment(CMR 11386). As
part of the original lease agreement, the City Council approved creation of the Cubberley
Infrastructure Improvements Fund. The new lease continues the $1.9 million transfer to the
Cubberley Property Infrastructure Fund, which is classified as an Operating Transfer-Out and
discussed in further detail below. With the Cubberley Infrastructure funds set aside, the
monthly base rent for the Cubberley premises is $228,000 throughout the term or $2.7 million
annually. The monthly base rent may be reduced by $14,000 per month if the JMZ Building is
returned to PAUSD and $6,000 per month if the S Building is returned. The Community Services
Department is currently in negotiations with PAUSD to expand the Cubberley premises by
renting additional space from the M Building. Separately, the City leases extended child daycare
site from PAUSD on a two-year lease from July 2020 to June 2022. The combined monthly rent
for the child daycare sites amounts to $59,000 plus $4,000 for utilities ($756,000 annually for
rent and utilities).
Rents and Leases
The Rents and Leases expense category for FY 2023 is estimated to increase from the prior-year
level by approximately 3 percent based previously negotiated lease increases and remain at
$1.0 million. This category includes the lease agreement for Development Services staff at
locations outside City Hall (285 Hamilton and 526 Bryant) as well as lease with Stanford for El
Camino Park. A new lease agreement was executed in December 2020 for the Development
Services office location at 526 Bryant Street, limiting the space to the basement level (CMR
11426). In June 2021, the City entered into a seventh amendment for the Development Services
office lease at 285 Hamilton Avenue to extend the term from February 2022 to January 2025
(CMR 12334). As expenses for rent for Development Services are adjusted, a corresponding
revenue adjustment will be made to ensure Development Services maintains cost recovery
levels.
Facilities and Equipment
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The Facilities and Equipment expense category is expected to increase from the FY 2022
Adopted level of $427,000 to $443,000 by a 3.7 percent CPI cost increase in FY 2023 based on a
review of the changes in the California Consumer Price Index (CCPI) in the San Francisco Bay
Area from the August-to-August period. This budget category includes subscription payments
for equipment like public safety radios as well as other non-capital equipment.
Allocated Charges
Allocated Charges represent expense allocations by the City’s Enterprise and Internal Service
Funds for services and products they provide to General Fund departments. The FY 2022
Adopted Budget for the General Fund included $20.1 million for these expenses, including
utilities usage, general liability insurance, technology costs, vehicle equipment maintenance
and replacement costs and other charges. The FY 2023 allocated charges in the Forecast update
the revenues and expenses for these various allocations based on the information available at
the time of the Forecast development. FY 2023 is anticipated to experience an increase of 11.6
percent to a total of $22.4 million. This change is primarily due to a general CPI cost increase of
3.7 percent across most allocated charges; however, several of these charges have increased
more significantly due to anticipated cost increases for Liability Insurance and Technology
services. In addition, the two-year reduction of vehicle replacement charges approved by
Council as part of the FY 2021 Adopted Budget has been restored as of FY 2023, increasing that
charge by $1.4 million.
Operating Transfers Out
Operating Transfers Out include transfers from the General Fund to Debt Service Funds, the
Technology Fund, and various other funds but excludes transfers to the Capital Improvement
Fund, which are detailed in the following Transfer to Infrastructure section. The FY 2022
Adopted Budget included Operating Transfers Out of $4.3 million. In FY 2023, Operating
Transfers Out are anticipated to increase to $4.4 million as a result of standard annual cost
escalators of transfers between the General Fund and the Electric and Technology funds.
Transfer to Infrastructure
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During the development of the FY 2022 budget, uncertainties from COVID-19 were anticipated
to significantly decrease TOT revenues, which represents a significant portion of the General
Fund transfer to the Capital Improvement Fund. The anticipated impact was reflected in the FY
2022 Adopted General Fund transfer to the Capital Improvement Fund, which was $8.5 million
and comprised of a$2.6 million base transfer including interest earnings and $5.9 million from
TOT revenue generated through an additional voter-approved 3.5 percentage point TOT
increase. Incremental TOT increases from the voter-approved rate increase and new hotels are
dedicated to the Capital Improvement Fund to support the 2014 Council Infrastructure Plan,
consistent with City Council direction. As the local economy continues to recover from the
COVID-19 pandemic, this forecast estimates transfers from TOT revenues in FY 2023 are
currently projected to increase to $9.2 million and the base transfer to increase to $10.7 million
for a total $19.9 million transfer to the Capital Improvement Fund. This forecast continues the
goal established as part of the 2022-2026 CIP to restore the base portion of this transfer to pre-
pandemic levels by FY 2026. This budget category also includes the separate $1.9 million
transfer to the Cubberley Property Infrastructure Fund, described earlier in this document.
Budget Stabilization Reserve
The City's Budget Stabilization Reserve (BSR) serves as the primary General Fund reserve. By
policy, the BSR is maintained in the range of 15 to 20 percent of General Fund operating
expenditures, with a target of 18.5 percent. Any reduction to the reserve below 15 percent
requires City Council approval. At the discretion of the City Manager, any BSR balance above
18.5 percent may be transferred to the Infrastructure Reserve (IR), which was established to
provide funding for maintenance and rehabilitation of the City’s capital assets. The BSR is used
to fund unanticipated one-time costs as opposed to ongoing or recurring operating
expenditures. The City's intent is to fund ongoing programs and services with ongoing dollars.
Maintaining the BSR at 18.5 percent also provides flexibility for the City to deal with unforeseen
issues that may arise. Furthermore, establishing, and following, sound fiscal reserve policies has
been a strong factor in the City being rated AAA by rating agencies.
Based on information reported in the FY 2021 Annual Comprehensive Financial Report (ACFR)
CMR 13501, the City’s current BSR balance is $43.3 million, approximately $4.6 million above
the 18.5 percent target. In addition to the additional funding from FY 2021, this report
estimates that FY 2022 could end the year with a surplus of $10.7 million, based on the current
trends of a number of major tax revenue categories, compared to the FY 2022 Adopted Budget.
This one-time funding surplus compared to the FY 2022 budget has not been factored into the
2023-2032 LRFF assumptions. Use of this funding is discussed further in the Conclusion section
of this memorandum.
Assumptions NOT Included in Forecast
It should be noted that this forecast does not include several potential impacts to the FY 2023-
2032 LRFF that are outlined below. This is not intended to be a comprehensive list nor in any
priority order.
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Project Homekey: On September 27, 2021, the City Council directed staff to apply for Project
Homekey funding in conjunction with LifeMoves to build an emergency shelter at the former
Los Altos Treatment Plant (LATP) site (CMR 13595). This project will rapidly deploy modular
housing to provide interim housing opportunities for homeless individuals and families in the
City of Palo Alto. As discussed previously, this LRFF includes the City’s committed investment of
$7.0 million in operating expenses ($1.0 million annually starting in FY 2023 through FY 2029);
however, with the actual timing of the funding still to be determined, and commitments from
other local partners negotiated, City costs for this project could fluctuate up or down
throughout the ten year period.
November 2022 Ballot Initiatives: In 2019, the City Council approved the Fiscal Sustainability
Workplan (CMR 10267), which included the exploration of a revenue generating ballot
measure. Work on this initiative was suspended in March 2020 as part of the City’s pandemic
response. Resumption of this effort was outlined in the Community and Economic Recovery
Workplan and 2021 Council Priorities and on June 15, 2021, the Finance Committee (CMR
12299) recommended that the City Council approve the Ballot Measure Workplan. On August
16, 2021, the City Council (CMR 12381) approved the workplan for a revenue generating
November 2022 ballot measure that was recommended by the Finance Committee and staff.
The Ballot Measure Workplan contains three major components: analysis, polling, and
outreach. Full implementation of this workplan will require significant resources, including
internal staffing and consultant expertise as well as extensive stakeholder engagement.
Sustainability and Climate Action Plan (S/CAP): In early 2020, the City launched an update of the
Sustainability and Climate Action Plan (S/CAP) Framework to determine the goals and key
actions needed to meet its sustainability goals, including the goal of reducing green house gas
(GHG) emissions to 80 percent below 1990 levels by 2030 (the “80 x 30” goal). In April 2021
(CMR 12009), Council reviewed the S/CAP Update Report, provided feedback on policy tools,
directed the Mayor to form an S/CAP Ad Hoc Committee, directed staff to pursue near-term
actions in parallel to the S/CAP Update, and directed staff further develop various elements of
the S/CAP. The S/CAP Ad Hoc Committee launched in August 2021 and the City is currently in
the process of finalizing the proposed S/CAP Goals and Key Actions as well as the Three-Year
Work Plan, which was created at the direction of the April Council motion. The final S/CAP
Report and Three-Year Work Plan will be brought to Council for acceptance in Spring 2022 and
CEQA review will commence once the S/CAP Goals and Key Actions are finalized. As the S/CAP
Work Plan and final report are still in development, cost projections are not yet contemplated
in the forecast. Implementation is anticipated to require significant resources, including internal
staffing and consultant expertise as well as stakeholder engagement.
Service reductions not restored to pre-pandemic levels: The base case LRFF assumes that the
significant reductions taken in the FY 2021 and FY 2022 Adopted Budgets continue throughout
the forecast period, unless otherwise restored by subsequent City Council actions, including
those taken in FY 2022 Adopted and FY 2022 Q1. A summary of Q1 adjustments is included in
this report in the section entitled FY 2022 Preliminary First Quarter Adjustments. Full
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restoration of remaining reductions is modeled in Alternative Scenario A. The following is a
high-level summary of the reductions in FY 2021 in response to the initial economic impacts of
COVID-19, as originally stated in the FY 2022-2031 LRFF (CMR 11954). For a detailed listing of
adjustments, including FY 2021 and FY 2022 reductions and restorations and other FY 2022
actions, see relevant CMRs including the FY 2021 Budget Adoption (CMR 11330), FY 2022
Budget Adoption (CMR 12307), FY 2022 Q1 (CMR 13439), and listing of other budgetary
amendments.
Community & Library Services: FY 2021 reductions included $0.3 million in program
revenues and $4.9 million in expenses in the General Fund, including 16.1 full-time and
21.02 part-time staffing reductions (finalized in FY 2022). These actions reduced library
hours at all branches, keeping smaller libraries (Children’s, Downtown, and College
Terrace) open three days a week and full-service branches (Mitchell Park and
Rinconada) open six days per week. This includes greater cost-recovery through changes
in service delivery, charges for services, and/or limiting operating hours for facilities
such as the new Junior Museum and Zoo (JMZ), community centers, open space
preserves, the Children's Theatre, and the Art Center. These actions also reduced or
eliminated programming such as special events, art exhibits, human services activities,
and teen programs.
Planning, Transportation, and Infrastructure: FY 2021 reductions included $2.1 million in
program revenues and $6.1 million in expense in the General Fund, including 8.25 full-
time and 1.44 part-time staffing reductions (finalized in FY 2022). Included were actions
to reduce administration, code enforcement, front counter support, and inspection
services. Understanding that this could delay services to the development community,
the building inspection and plan review team was reorganized to minimize the impacts
to lead times for inspections, progress on the Energy Reach Code, and the ability to
meet next day inspections. The Crosstown and Embarcadero shuttle programs were
eliminated, and the delivery of this service redesigned to reduce costs. Additionally,
funding for tree trimming and vehicle replacement was reduced for one year and rate
changes in various utility enterprise funds were suspended.
Public Safety: FY 2021 adjustments included an increase of $1.55 million in program
revenues and a reduction of $7.3 million in expenses in the General Fund, including
33.27 full-time and 2.28 part-time staffing reductions (finalized in FY 2022). These
actions included suspensions of specialized police units such as the traffic enforcement
and investigation units to maintain minimal police patrol services and shift the priority
of police services to urgent calls, lowering capacity to respond to nonurgent calls.
Additional changes included limited officer training, promotional testing, uniform
purchases and eliminated or changed to full cost recovery non-essential programming
such as school resource officers. Curtailed dispatch, communication, and emergency
preparedness services, as well as emergency incident response and training and work to
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adopt fees to increase revenue for first responder and ambulance subscription were
also included in the actions.
Internal Services & Council Appointed Officers: FY 2021 reductions included $2.9 million
in operating expenses in the General Fund, including 5.9 full-time and 0.96 part time
staffing reductions (finalized in FY 2022). Internal Services departments include the
Information Technology, Human Resources, and Administrative Services Departments as
well as the Council and appointed officers (City Manager, City Attorney, City Auditor and
City Clerk). Reductions in these areas align with the changes in services, increasing
timeframes for assistance and review in areas such as recruitments, procurements,
performance reporting, and risk management. Technology solutions will be constrained
to only essential contracts and systems and support equipment needs as majority of our
workforce continues to work from home. The City Council, Innovation and Special
Events, and Human Recourses contingency accounts were eliminated in FY 2021 on a
one-time basis.
Significant code and ordinance updates: Updates to several significant programs, codes, and
ordinances such as the Seismic Inventory ordinance and program, Historic Building survey and
ordinance, and a zoning code update are expected to be necessary in the near future.
Depending on future Council direction and the results of program and survey updates,
implementation is anticipated to require significant resources, including internal staffing and
consultant expertise.
Labor negotiations: As of the timing of this report, there are no agreements in effect for FY
2023 and beyond. The City’s current agreements with safety units are set to expire on June 30,
2022. These safety units are the Palo Alto Peace Officers Association (PAPOA), the International
Association of Fire Fighters (IAFF), Fire Chiefs Association (FCA), and Palo Alto Police
Management Association (PAPMA). Additionally, the City's agreement with the Management
and Professional group is set to expire June 30, 2022. Agreements with the Service Employees
International Union (SEIU) extends through December 2021 and new labor agreements are
anticipated with the Utilities Management and Professional Association (UMPAPA) whose
contract expired June 30, 2020.
CalPERS Pension Updates: As of the timing of this report, the CalPERS board completed their
Asset Liability Management (ALM) process which reviews capital market assumptions and
strategic asset allocation and sets the discount rate for future periods. This comprehensive
review is completed every four years. Most significantly, this study resulted in actions that
reduce the discount rate from 7.0 to 6.8 percent, add 5 percent leverage to the asset allocation
mix, and increase the normal cost paid by Public Employee’s Pension Reform Act (PEPRA)
employees. Most PEPRA employees will see median increases ranging from 1.2% in
miscellaneous plans to 1.5% in safety plans in their total normal cost. These changes, as well as
preliminary 21.3 percent returns for the period ending June 30, 2021, will materialize in City
finances beginning in FY 2024. Overall, CalPERS expects that many plans will see required
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employer contributions that are comparable to or slightly lower than previously determined
contribution requirements. Additional information can be found in the CalPERS news release
issued on November 15, 2021: https://www.calpers.ca.gov/page/newsroom/calpers-news.
Capital Infrastructure Plan: As referenced earlier, the June 2014 Council approved
Infrastructure Plan of $125.8 million in projects was based on construction and design costs
with data from 2012. As construction costs have increased and the City is required to pay
prevailing wages, the Infrastructure Plan’s funding status has shifted. The FY 2022 Adopted
Capital Budget anticipated that these projects would cost $259.8 million. Staff is working to
maintain these projects within the current budget; however, project costs can fluctuate based
on market conditions at the time of construction award.
Grade Separation: The grade separation project consists of the four at-grade crossings along the
Caltrain corridor in the City of Palo Alto located at Palo Alto Avenue, Churchill Drive, Meadow
Avenue, and Charleston Road. The City is working on conceptual alternative plans for the
selection of the preferred alternative at Churchill Avenue, Meadow Drive, and Charleston
Avenue crossings. On April 26, 2021, the City Council eliminated two South Palo Alto Tunnel
Alternatives from consideration after receiving the final report and recommendations from the
Expanded Community Advisory Panel (XCAP) (CMR 12185). Staff is currently in process to
provide a detailed review of the alternatives in consideration and seeking Council direction for
additional studies to further narrow alternatives in consideration for selection of a preferred
alternative.
In FY 2022, staff plans to conduct additional studies as directed by the Council and work with
the Rail Committee for the selection of preferred alternative(s). Once preferred alternatives are
selected, the next phase will include preparing preliminary engineering and environmental
documents, which is anticipated in FY 2023 for the three crossings. The Valley Transportation
Authority (VTA) 2016 Measure B Caltrain Grade Separation funding will be available to the City
for funding the next phases of the project including preliminary engineering and environmental
review, right-of-way, design, and construction.
The 2016 Measure B program tax revenue amounts to a total of $700 million in 2017 dollars for
all at-grade crossings in Santa Clara County. The City anticipates allocation of 50% of said
funding. Grade Separation 2016 Measure B funding requires matching local funds as a result,
additional funding sources will need to be identified to perform this work in upcoming years (FY
2023 – FY 2032). The full funding needed to complete the grade crossings project is unknown at
this time. However, it is expected, that funding necessary to complete this work will exceed
funding currently identified for this project. Therefore, additional resources will need to be
explored to plan and fund these grade separations.
Parks Master Plan: The Parks Master Plan was finalized in 2017; however, when approved it
identified a need to develop a funding strategy and this is still in process. As such, this forecast
does not yet contemplate the necessary investments to fully execute this plan.
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Racial Equity Work: The Race & Equity Framework and action plan was approved in June 2020
(CMR 11441) and remaining funding of $0.5 million has been reappropriated to be available in
FY 2022. Staff is in the process of procuring consultants to assist with the City’s diversity, equity,
and inclusion efforts in engaging staff, the City Council, and Boards/Commissions After this
initial work, further recommendations are forthcoming and will likely require additional funding
either for more consultant assistance and or an ongoing in-house Equity Officer position (which
was discussed during the 2020 Ad Hoc Committee meetings). These recommendations are
anticipated to be brought forward as part of the FY 2023 or FY 2024 budget process.
Palo Alto Animal Shelter operations and rebuild
In early 2019, the City entered into a public private partnership with Pets In Need (PIN) to
support the operation of the City’s animal shelter. Part of PIN’s operating proposal included
robust fundraising to demolish the current shelter and build a state-of-the-art animal shelter
for the City. The City anticipated that the cost of the rebuilding would be shared between the
City and PIN; however, in November 2021 PIN announced a decision to end the operating
agreement with the City in FY 2022. Due to the recent nature of this decision, this forecast does
not contemplate alternative operating plans nor the necessary investments to execute the
rebuild.
City owned assets operated by non-profit organizations: This Forecast does not include any
additional capital or operating investments for the Avenidas Senior Center, the Ventura Child
Care Center, nor the Sea Scout Building. As costs around potential capital or operating
investments for these assets solidify, staff will return to City Council to address them as
appropriate. In FY 2022 the City Council directed a funding strategy for the Roth Building
Rehabilitation Project, which consisted of utilizing $4.0 million from a variety of funding sources
including the Stanford University Medical Center (SUMC) fund community and infrastructure
funds, parks impact fees, and community center impact fees (CMR 12307). This funding
strategy is included in the LRFF; however, if costs for rehabilitating the Roth building increase,
additional sources of funding would need to be identified.
Cubberley Community Center Concept Plan: The City and PAUSD completed a co-design process
for a Cubberley Community Center Concept Plan in 2019; however, costs to implement that
concept plan in excess of the dedicated Cubberley infrastructure funding included in the
existing agreement between the PAUSD and the City are not assumed in this Forecast. The
Concept Plan may require revision before implementation as operational changes have
occurred since its completion including execution of a new lease between the City and PAUSD
for the school district owned portion of Cubberley, which commenced on July 1, 2020, and
reduced the amount of building space leased to the City.
Loans for special projects: From time to time the City’s General Fund will assist other City
operations with modest cash flow loans to bridge fiscal years. For example, the City provided
over $3 million in loans to the Airport Fund as it works to secure significant grant funding from
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the Federal Aviation Administration (FAA) for capital improvement costs. As of FY 2020, the
Airport Fund began paying back the loan to the General Fund. Additions and other initiatives
funded in other funds may need financial support from the General Fund to ensure they are
fully implemented. Additional loans from the General Fund are not assumed in this forecast.
Legislative Updates: Various actions at the state and federal level that could impact the City of
Palo Alto have not been incorporated into this forecast due to the changing context and
uncertainty of the quantitative impacts of potential legislative changes. This includes the
Cadillac Healthcare Tax at the federal level, property tax changes at a state level, and state-level
efforts focused on the provision of affordable housing. As uncertainty regarding the potential
impact of various legislative initiatives is clarified, appropriate adjustments will be identified
and brought forward as part of future budget development cycles.
Tax revenue alignment with updated Comprehensive Plan: The 2030 Comprehensive Plan was
adopted in FY 2018, including the potential fiscal impact of various land use scenarios. The fiscal
impact of this plan and various land use scenarios are not factored into this forecast.
FY 2023 Budget Development Guidelines
As discussed earlier in this document, this preliminary forecast represents the initial steps of
the FY 2023 budget development process. In the FY 2019 – FY 2028 Long Range Financial
Forecast presented in December 2018, staff included budget development guidelines based on
the trends that were identified and the anticipated fiscal condition of the City. Due to the clear
overlap of projecting the City’s fiscal condition and the need to shape service level
expectations, staff recommends that the inclusion of Budget Development Guidelines be
incorporated into the discussions at the beginning of an annual budget process.
As the City and the County continue to move through recovery from COVID-19, the local
economy and major tax revenue categories are showing signs of rebounding. City operations,
which were adapted to best support and serve the community during County Public Health
Orders and State Public Health restrictions, are returning to in person delivery where possible.
However, as mentioned in the preliminary FY 2022 Q1 financial status report (CMR 13439),
there are several issues across the City impacting the ability to transition out of the pandemic
that could continue into FY 2023:
• Staff turnover across City departments is slowing the ability to restore programs and
services impacted by the pandemic, coupled with the addition of new projects and
priorities identified by the Council subsequent to the 2021 priority setting and FY 2022
Budget Adoption.
• Challenges with recruiting and hiring, due to the number of vacancies and the services
restored in the FY 2022 Budget, are also contributing to slower service restoration.
• Supply chain issues related to manufacturing and construction are impacting various
programs across the City, including replacement of City fleet vehicles, and acquiring
materials for construction projects.
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This year, the FY 2023 Budget Development Guidelines, which are detailed in Attachment A, are
meant to reflect the anticipated fiscal condition of the City and to provide high-level budgetary
direction to the organization. These guidelines will shape and inform the annual financial
planning and the allocation of resources across the organization, especially in the General Fund.
Further, strategic work is underway focused on a Community and Economic Recovery Strategy.
Key to the City Council’s and staff’s fiscal and recovery planning is the important work
underway to understand the fiscal implications of a revenue generating ballot measure for the
November 2022 election. This also includes the potential for City actions to affect economic
recovery and associated impacts on City revenues. This, in turn, affects the level and nature of
services the City can deliver to the community.
When the Fiscal Sustainability Workplan (CMR 10267) was approved by the City Council on April
22, 2019 drafting a budget development policy was listed as part of the “Newly proposed or
potential activities proposed to be completed”. The inclusion of Budget Development
Guidelines in with this forecast represents staff’s recommended method of addressing this
referral. Pairing Budget Development Guidelines with the forecast at the beginning of the
budget process links the anticipated fiscal condition of the organization with the necessary
context regarding service delivery prioritization and resource allocation that will be further
explored through the process. This also ensures that the City is able to proactively address
anticipated changes in its fiscal condition through the budget process.
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Conclusion
The financial impacts of the COVID-19 pandemic and health orders significantly restrained
consumer spending, resulting in a weakened job market, and uncertainty; however, positive
trends in major tax revenue categories that began in Q4 of FY 2021 and continue into Q1 of FY
2022 indicate that the economy is slowly recovering. This preliminary forecast provides context
to begin discussions on how to approach restoring services back to pre-pandemic levels while
keeping in mind the budget constraints still facing the City in the first couple years of the
forecast.
The forecast does not assume restoration of the service changes experienced in FY 2021 and FY
2022, and as seen in Alternative Scenario A below, incoming resources are not enough to
sustain full restorations in FY 2023 and beyond. Alternative Scenario B, examines a competitive
market adjustment for labor, and demonstrates that this adjustment would cause a longer gap
as compared to the base case forecast. As mentioned previously, there is one-time funding of
$4.6 million from savings in FY 2021 and there is an anticipated surplus of up to approximately
$10 million in FY 2022. This figure is above the preliminary estimate provided to the Council in
the Preliminary FY 2022 Q1 Financial Status report in October 2021 of additional revenues of $5
million - $6 million and is primarily driven by updated Sales Tax figures. When combined, these
one-time surplus funds from FY 2021 and projected in FY 2022 have not been factored into the
2023-2032 LRFF assumptions. The City Council provided staff direction as part of the
Preliminary FY 2022 Q1 Financial Status report to bring forward recommended allocation of
these surplus funds as part of the FY 2022 Mid-Year Budget Review, which staff anticipates
bringing for Council review in the first quarter of the new calendar year.
With regard to the $4.6 million, since it is savings from FY 2021 and above the 18.5 percent BSR
target, by City Council approved current policy, the funding would be allocated 50% to be
transferred to the Section 115 Pension Trust and 50% transferred to the Capital Improvement
Fund for infrastructure investment. Given the additional financial variables, additional options
for allocation may include: increase funding in the Utility Transfer Litigation Reserve,
restoration of services and/or investment in high priority projects, or left in the BSR to be
discussed as part of the FY 2023 budget. Final recommended actions will be brought forward as
part of the FY 2022 Mid-Year Budget Review as noted previously.
Alternative Scenarios for Consideration
Alternative Forecast Scenario A: Restoration of Service to Pre-COVID-19 Service Levels
As discussed in the Assumption NOT Included in Forecast section above, the base case forecast
does not include restoration of services that were impacted as a result of the COVID-19
pandemic, other than specific actions taken by Council in the preliminary FY 2022 Q1 financial
status report (CMR 13439). Those items have been outlined in the FY 2022 Preliminary First
Quarter Adjustments section of this memorandum. This alternative forecast models the impact
of restoring City Services to the pre-pandemic levels in FY 2023. The summary table for this
alternative forecast and the Net Operating Margin graph for this alternative forecast are below.
Additional discussion for this alternative follows these figures.
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TABLE 18: FY 2023 – FY 2032 Long Range Financial Forecast
Alternative Forecast A
TABLE 19: FY 2021 –2030 Long Range Financial Forecast Net Operating Margin
Alternative Forecast A
Compared to the Base Case, the General Fund would have a large gap of approximately $11.0
million in the first year of the forecast. This gap would shrink gradually until 2030, which would
be the first-year revenues would be at a level to support the expenses. Although an immediate
restoration of all services to pre-pandemic levels is not feasible as evidenced by this scenario, as
mentioned previously in this report, thoughtful and measured restoration of high priority
services that can be sustained by the recovering revenue will be brought forward for Council
consideration as part of the FY 2022 Mid-Year Review as well as the FY 2023 Budget process.
Alternative Forecast B: Compensation Change Model, Near-term Adjustments
Consistent with City Council direction and past practice, the Base Case assumes a two percent
general wage adjustment in the years beyond the terms of existing MOAs. This rate is used as a
forecasting assumption and not a commitment for future negotiations. As of the timing of this
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forecast, there are no MOAs in effect. Therefore, the entirety of the forecast assumes a 2.0
percent wage increase.
This alternative scenario models the impact of a one-time adjustment in FY 2023 to increase
compensation by an additional 2.0 percent above the two percent assumed in the Base Case to
better align the workforce to be competitive in the market (4.0 percent total). As with other
alternative models in the LRFF, this model is for forecasting purposes and is not a commitment
to future labor negotiations.
Similar to trends at the local and national level, the City is experiencing challenges in staffing a
high level of vacancies due to labor shortages and an uptick in resignations that are contributing
to a highly competitive labor market. As a service-driven organization, with approximately 60
percent of resources allocated to staff, the City is particularly vulnerable to the current
workforce challenges. In this competitive environment, employees have more choices, and
many are re-evaluating their career decisions with new perspectives. Recognition of the difficult
work and continued dedication is important, and City management is working on flexible work
arrangements (where feasible), advancing a positive work environment, and supporting other
programs that express appreciation and reinforce Palo Alto's reputation as an employer of
choice.
TABLE 20: FY 2023 – FY 2032 Long Range Financial Forecast
Alternative Forecast B
TABLE 21: FY 2023 – 2032 Long Range Financial Forecast Net Operating Margin
Alternative Forecast B
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In FY 2023, the one-time increase of two percent adds approximately $2.8 million citywide
($1.5 million in the General Fund). Minor increases for a general 2.0 percent adjustment are
forecasted in the out years. In this scenario, the initial surplus in FY 2023 is lessened compared
to the Base Case and wider gaps between revenues and expenses occur in the out years of the
forecast. The Base Case projected that by FY 2025, the City would begin to have a positive
surplus; this alternative forecast extends the operating gap to FY 2026.
STAKEHOLDER ENGAGEMENT
The preliminary forecast for FY 2023 represents the beginning of the fiscal year 2023 budget
development process. Information provided in this report will be discussed with the City
Council after Finance Committee and those conversations will provide direction to staff in the
budget development process. It is anticipated that conversations with City Council and the
community will occur through public budget hearings in Spring 2022, according to the standard
budget adoption process.
RESOURCE IMPACT
Financial implications from this report and input from the Finance Committee will be
considered in the City Manager’s development of the Fiscal Year 2023 budget.
ENVIRONMENTAL IMPACT
This report is not a project for the purposes of the California Environmental Quality Act.
Environmental review is not required.
Attachments:
• Attachment A - FY 2023 Budget Development Guidelines
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Attachment A – FY 2023 Budget Development Guidelines
1)Develop a structurally balanced budget that brings ongoing revenues and expenses into
alignment. Develop a plan for any structural imbalance to ensure that the City maintains
fiscal sustainability over the short, medium, and long-term.
2)Allocate one-time resources for one-time needs rather than committing one-time
resources to ongoing services. Examine appropriate uses of revenue surpluses that
exceed forecasted levels such as planning for recession needs, restoration needs, and
strategic investments.
3)Ensure appropriate resource allocation for City Council’s identified priorities.
4)Focus on business process redesign to enhance quality, flexibility, and cost-effectiveness of
service delivery (include examining opportunities to streamline, simplify, reorganize, and
reallocate resources to avoid duplication of effort).
5)Explore alternative service delivery models (such as partnerships with non-profits or
other public/private sector groups) to minimize overlap, maximize cost share, and
effectively use resources.
6)Continue to thoroughly analyze non-personnel/equipment/other costs, such as contract
services, for cost savings opportunities or realignment with current needs.
7)Explore the expansion of existing revenue sources or the addition of new revenue
sources, including the alignment of existing charges for services and the opportunity to
establish new fees, when appropriate.
8)Continue to analyze and prioritize resource augmentations, seeking to offset
augmentations with reductions elsewhere for net-zero impacts to the budget whenever
possible; however, ensuring when resource augmentations are added, it is in alignment
with one-time and ongoing forecasted sources.
9)Continue to prioritize proactively funding long term liabilities including but not limited to
debt obligations, pension obligations, and capital infrastructure in accordance with City
policies as approved by Council.
FY 2023 Budget Development Guidelines
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City of Palo Alto (ID # 13820)
Finance Committee Staff Report
Meeting Date: 12/7/2021
City of Palo Alto Page 1
Title: Late Packet: Discuss Updates and Recommend Further Refinement of
Potential Revenue Generating Local Ballot Measures
From: City Manager
This report will be a special late packet release on Thursday, December 2, 2021.
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City of Palo Alto (ID # 12394)
Finance Committee Staff Report
Meeting Date: 12/7/2021
City of Palo Alto Page 1
Title: First Quarter Financial Report FY 2022
From: City Manager
Lead Department: Administrative Services
Recommendation
This report is informational and does not require an action by the Finance Committee.
Background
The purpose of this report is to provide information on the financial condition of the City’s
General and Enterprise Funds as of the end of the 1st quarter, September 30,2021 of fiscal year
(FY) 2022. The figures presented here are unaudited.
On October 25, 2021, staff presented to Council preliminary FY 2022 Q1 financial status and
discussed the preliminary highlights of the unaudited balances of FY 2021 that ended on June
30, 2021 and a status update of the City services (CMR 13439). This staff report is a follow up
to the preliminary Q1 financial status that provides Q1 results and analysis.
Discussion
The FY 2022 1st quarter ended on September 30, 2021. This report summarizes the actual
financial activity of the General and Enterprise Funds for the three-month period and compares
those amounts to the same period of the prior year and to the FY 2022 Adjusted Budget. The
economic recovery from the COVID-19 pandemic downturn began in the prior quarter with
most impacted revenues showing solid upward trends.
Attachment A provides a breakdown of revenues by source and expenses by function, with
separate columns for Adopted Budget and Adjusted Budget. The Adjusted Budget column
includes prior year commitments that were carried forward into this fiscal year and
amendments to the FY 2022 Adopted Budget through September 30. Encumbrances and actual
expenses for the three-month period are also reported.
General Fund revenues (excluding operating transfers) for the 1st quarter of FY 2022 are $30.5
million and comprise 16.6 percent of the Adjusted Budget. In FY 2021 the City received $6.9
million from the American Rescue Program Act of 2021 (ARPA); however, this revenue was
recognized in FY 2022 because the funds were allocated to be spent as part of the FY 2022
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Adopted Operating Budget. Actual revenues for the first quarter, excluding ARPA funds, totaled
$23.6 million which is 16.8 percent higher than the same period of the prior year. Cash receipts
increased in all General Fund revenue categories compared to the FY 2021 1st quarter. This
indicates the economy is now showing signs of economic recovery and growth from the height
of COVID-19 pandemic, but it is not indicative of the annual expected receipts in FY 2022 due to
timing of major revenues received over the fiscal year.
General Fund expenses for the 1st quarter, excluding pre-encumbrance and encumbrance
amounts, are 0.2 percent lower than FY 2021 and are tracking at 20.8 percent of Adjusted
Budget
The following is a detailed discussion of the most significant revenue and expense items.
Revenue Highlights for 1st Quarter FY 2022
The following is a table which highlights the City’s major revenue sources for the 1st Quarter,
compared to 1st Quarter of the prior year. Each quarter’s revenue is expressed as a percentage
of the Adjusted Budget for each year.
Table 1
% change FY 2022 %FY 2021 %
Property Tax -61.3%$51,228 0.1%$52,000 0.3%
Sales Tax 16.5%28,184 7.0%20,500 8.3%
Charges for Services 38.8%24,515 21.7%25,984 14.8%
Transient Occupancy Tax 229.4%8,428 17.4%14,900 3.0%
Utility User Tax 4.5%14,370 24.2%15,100 22.0%
Permits and Licenses 20.0%7,761 24.1%7,770 20.1%
Documentary Transfer Tax 1.3%7,137 28.9%4,700 43.3%
All Other Revenue Sources 98.0%41,650 34.2%34,088 21.1%
Total Revenue 50.6%$183,273 16.6%$175,042 11.6%$30,495 $20,244
1,872 1,560
2,062 2,036
14,261 7,202
5,327 3,837
1,469 446
3,473 3,325
$55 $142
1,976 1,696
1st Quarter Actuals Adjusted Budget
FY 2022 FY 2021
General Fund Revenue
FY 2022 1st Quarter
(000's)
Property tax revenue in the 1st quarter of the fiscal year is only a nominal amount as property
tax receipts are paid by the County over three months beginning in the month of November
and then again beginning in March. Total property tax revenue for FY 2021 was $56.6 million,
$3.4 million or 6.4 percent higher than the FY 2021 adjusted budget. Robust property sales
during the year resulted in higher than anticipated assessed value growth and a favorable
settlement of dispute between the County of Santa Clara and the State for the calculation of
the excess Educational Revenue Augmentation Fund (ERAF) distributions contributed to these
increased receipts.
The FY 2022 budget amount is $51.2 million, 10.5 percent lower than the prior year’s actual
revenue. Since this budget was developed prior to the additional revenue receipts in FY 2021
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were known, the FY 2022 current budget doesn’t reflect this base increase. As a result, FY 2022
actuals are expected to be higher than the adjusted budget; however, since economic
downturns impact property taxes in the second year, the FY 2022 revised forecast is expected
to plateau or have a slight increase compared to the prior year’s actual receipts, as discussed in
the preliminary Q1 financial status update to the Council. Staff anticipates returning to Council
as part of the Mid-Year Budget Review with recommended adjustments to this revenue
category.
The excess ERAF distributions from the County of Santa Clara in fiscal years 2018, 2019, 2020,
and 2021 receipts are $1.4 million, $2.7 million, $3.9 million, and $5.6 million, respectively. In
FY2021, the dispute between the five counties including County of Santa Clara, and the State
for the calculation of the Excess ERAF1 resulted in a favorable settlement to the counties.
However, as of the development of this report, In November 2021, the County informed the
City that the California School Boards of Association and its Education Legal Alliance filed a
lawsuit against the Controller of the State of California arguing the settlement in favor of the
counties is unlawful. Staff is monitoring this and will report on significant developments.
Sales tax revenue cash receipts for the 1st quarter have increased by $280,000 or 16.5 percent,
from the same period of last year. This only represents one month’s sales tax activity due to
delay in sales tax collection by the State and remittance to the City. The FY 2021 actual sales
tax revenue was $29.1 million which is 3.1 percent higher than the $28.2 FY 2022 budget
amount. While the outlook of the local activity appears positive and sales tax continues to
perform well, the FY2022 estimate remains below pre-pandemic actuals of $36.5 million in FY
2019. As discussed in the preliminary Q1 financial status update to the Council, staff is
evaluating the City’s sales tax consultant’s expectations of receipts to exceed FY 2022 budgeted
levels by $2.5 million to $3.5 million. Staff anticipates returning to Council as part of the Mid-
Year Budget Review with recommended adjustments to this revenue category.
Charges for services revenue is down $1.8 million or 38.8 percent, compared to the same
quarter of last year is due to the following:
• Paramedic service fees increased by $341,000 over the same period of last year due to
an increased number of trips and higher average amount billed per trip.
• Golf course revenue increased by $246,000 due to higher demand. All facilities are
open, including the course, driving range, practice areas, and restaurant. The course is
staffed and maintained under a management contract.
• Program and classes increased by $660,000. Programs and classes that were not
offered due to pandemic restrictions were back and offered both in virtual and in-
person.
1 1 ERAF is the fund used to collect and disburse property taxes that are shifted to/from cities, the County, and
special districts prior to their reallocation to K-14 school agencies. When the state shifts more local property tax
than required to support schools these funds are returned and known as excess ERAF. In a claim by the State,
calculations for excess ERAF incorrectly shifted too much property tax from schools to local agencies. This has since
been resolved in the favor of the local agencies.
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• Plan check fees increased $145,000 due to more construction activities.
Transient occupancy tax (TOT) revenue of $1.5 million represents about one and half months
of collections which is an increase of $1.0 million or 229.4 percent, compared to the same
period in FY 2021. The increase is exceptionally high because this is compared to a time when a
shelter-in-place order was in effect, and there was a high level of restriction to travelers. When
compared to the pre-pandemic actuals of $3.2 million on the same period in FY 2020 revenues
remain $1.7 million or 53.1 percent below pre-pandemic levels. As discussed in the preliminary
Q1 financial status update to the Council, the July/August receipts may indicate a faster
recovery than expected. Staff expects revenues to exceed FY 2022 budget estimates by up to
$1.0 million and anticipates returning to Council as part of the Mid-Year Budget Review with
recommended adjustments to this revenue category.
During the first two months of the first quarter, the open hotels average daily room and
occupancy rates were $156.63 per day and 60.1 percent, respectively which is an increase of
34.8 percent and 26.5 percent over the same period of the prior year. For the open hotels, in
August 2021, the occupancy percentage of individual hotels ranges from 27.1 percent to over
89 percent.
Utility User Tax receipts total $3.5 million, or 24.2 percent of the FY 2022 budgeted amount.
This is $148,000, or 4.5 percent, higher than the prior year’s receipts due to telephone UUT.
This is in line with overall expectations assumed in the FY 2022 Adopted budget at this time.
Documentary transfer tax cash receipts for two and half months total $2.1 million, or 28.9
percent of the FY 2022 adjusted budget and are $26,000 or 1.3 percent higher than prior year
receipts for the same period with the number of transactions being 27.2 percent higher. This
revenue source is volatile since it is highly dependent on sales volume and the mix of
commercial and residential sales. The prior year had a record receipt due to six major
commercial sales which is not expected to be repeated in the current year. Staff will continue
to monitor these receipts closely because significant fluctuations can occur anytime depending
on the real estate sales activity.
Permits and licenses revenue is up by $312,000 or 20.0 percent, compared to the same quarter
of last year primarily due to an increase in building fees for commercial remodel and repairs.
All other revenue sources cash receipts for the 1st quarter has increased $7.1 million or 98.0
percent, from the same period of last year primarily due to the $6.9 million received by the City
from ARPA in previous year but recognized as revenue in FY 2022 because funds were allocated
to be spent/replace lost revenues as part of the FY 2022 Adopted Operating Budget. All other
revenue sources, excluding the $6.9 million, totaled $7.1 million which is almost equal to FY
2021.
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Expense Highlights for 1st Quarter FY 2022
The following is a table which highlights the City’s expenses by function for the 1st quarter,
compared to 1st quarter of the prior year. Each quarter’s expense is expressed as a percentage
of the Adjusted Budget for each year.
Table 2
Expenditures FY 2022 FY 2021 % change FY 2022 %FY 2021 %
Police 10,507$ 10,274$ 2.3%43,319$ 24.3%40,590$ 25.3%
Fire 9,137 8,608 6.1%35,951 25.4%33,917 25.4%
Community Services 6,816 6,583 3.5%32,098 21.2%30,090 21.9%
Public Works 3,935 4,014 -2.0%19,980 19.7%19,843 20.2%
Planning and Development Services 3,507 3,566 -1.7%19,855 17.7%18,719 19.1%
Library 2,055 2,198 -6.5%8,976 22.9%8,572 25.6%
Administrative Services 1,934 1,755 10.2%9,201 21.0%8,645 20.3%
All Other Departments 3,851 4,662 -17.4%31,359 12.3%25,555 18.2%
Total Expenses 41,742$ 41,660$ 0.20%200,739$ 20.8%185,931$ 22.4%
1st Quarter Actuals Adjusted Budget
FY 2022 1st Quarter
General Fund Expenses
(000's)
Total expenses for the 1st quarter of the fiscal year are up $82,000 or 0.2 percent from the same
quarter of last year and are right in line at 20.8 percent of full-year budgeted amount versus
22.4 percent of the full-year budgeted amount in FY 2021. The increase is mainly due to
increase in disability and workers compensation allocation charges, pension expenses,
overtime, and paid leave partially offset with the decrease in regular salaries due to significant
vacancies across departments.
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Attachment A shows that the total expenses, including encumbrances for the 1st quarter are 29
percent of the adjusted budget primarily due to the purchase orders for Community Services
and Planning and Development Services. The Community Services purchase requests / orders
are for golf course management, landscape maintenance, childcare subsidy, senior services,
consultant fees and others whereas Planning and Development orders are for grants and
subsidies, consultant fees and others. These purchase requests / orders cover the entire year.
From these encumbered funds, invoices are drawdown, or paid against them.
Police and Fire comprise 47.1 percent of the total General Fund expenditures for the 1st
quarter, which is 4.0 percent higher compared to the prior year. Following is a table which
highlights Police and Fire salaries and overtime for the 1st quarter.
Table 3
FY 2022 FY 2021 % change FY 2022 %FY 2021 %
Police - Salaries $4,241 4,468$ -5.1%$17,499 24.2%$17,321 25.8%
Police - Overtime 379 351 8.0%944 40.1%944 37.2%
Total Police 4,620 4,819 -4.1%18,443 25.1%18,265 26.4%
Fire - Salaries 3,219 3,513 -8.4%13,676 23.5%13,530 26.0%
Fire - Overtime 1,202 791 52.0%1,931 62.2%1,931 41.0%
Total Fire 4,421 4,304 2.7%15,607 28.3%15,461 27.8%
Total Public Safety
Salaries & Overtime $9,041 $9,123 -0.9%$34,050 26.6%$33,726 27.1%
1st Quarter YTD Actuals Adjusted Budget
Police and Fire
Salaries and Overtime Expense
FY 2022 1st Quarter YTD
(000's)
The Police and Fire salaries decreased due to staff vacancies which resulted to higher overtime
in the current fiscal year.
Police overtime is 8.0 percent higher than the prior year and 40.1 percent of adjusted budget
due to backfilling vacancies and adding staffing resources to the 24/7 center as an operational
necessity. As of this writing, the department has 11 vacancies: 9 police officers and 2
dispatchers and approximately 10 staff members on various categories of leave. On a combined
basis, salaries and overtime are at 25.1 percent of budget through the 1st quarter of the fiscal
year. The Department’s overtime analysis is included in Attachment B.
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The Fire overtime is 52.0 percent higher than the same period in prior year and 62.2 percent of
adjusted budget. Overtime is generated when there are firefighters on leave and the
department is required to backfill with overtime. The Department made deployment changes,
browning out Fire Station 2 in August of 2020, however, position reductions were completed
through attrition which took over six months. During that transition period in FY 2021 any
available backfill staffing was used to cover vacancies on shift and did not require overtime. In
this circumstance, overtime spending was unusually low. In FY 2022, the 8 positions have been
vacated and eliminated and overtime spending has returned to typical levels. In addition, the
Department entered into a tri-cities agreement to increase Fire Station 8 staffing during fire
season that has generated additional overtime compared to FY 2021. On a combined basis,
salaries and overtime are 26.6 percent of the budget through the 1st quarter of the fiscal year.
The Department’s overtime analysis is included in Attachment B.
General Fund Budget Stabilization Reserve (BSR) Balance
As reported to the Finance Committee on November 30, the General Fund ended FY 2021 with
a Budget Stabilization Reserve of $49.1 million which is $10.4 million above the Council’s 18.5
percent target of the FY 2022 Adopted expenses of $38.7 million. Use of these funds brings the
BSR to $43.3 million or $4.6 million above the 18.5% target.
Enterprise Funds
Following is a summary of changes in net position for each of the Enterprise Funds for the three
months ending September 30, 2021, including a comparison of results from the same period
last year.
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Table 4
City of Palo Alto
Enterprise Funds Change in Net Position
FY 2021 1st Quarter
1st Qtr 1st Qtr Increase
FY 2022 FY 2021 (Decrease)% Change
Water $5,321 $6,689 ($1,368)-20%
Electric 1,943 3,644 (1,701)-47%
Fiber Optic 170 356 (186)-52%
Gas (631)(530)(101)19%
Wastewater collection (32)222 (254)-114%
Wastewater treatment 660 1,316 (656)-50%
Refuse 3,316 2,539 777 31%
Storm Drainage 788 737 51 7%
Airport 120 57 63 111%
Total Change in Net Position $11,655 $15,030 ($3,375)-22%
Water Fund decreased $1.4 million from prior year due to decrease in operating revenues as
a result of the lower water consumption. In response to California’s drought, the Governor
requested water customers to reduce usage by 15 percent compared to 2020. Click here for
more information about Water Resources – City of Palo Alto.
Electric Fund decreased $1.7 million from prior year due to lower operating revenues as a
result of lower energy consumption and higher operating expenses.
Wastewater Collection Fund decreased $254,000 from prior year due to decrease in
commercial retail revenues despite of the 3 percent rate increase effective September 1,
2021, as well as decrease in capacity fees.
Wastewater Treatment Fund decreased $656,000 due to timing of billing to the partners.
Operating expenses are billed on a quarterly basis based on budget while true-up charges or
final billing is calculated based on actuals at year-end.
Refuse Fund increased $777,000 from prior year due to increase in operating revenues as a
result of higher commercial and industrial services and decrease in operating expenses such
as contract services and rent. This fund completed its final payment associated with the
landfill post-closure agreement, reducing the rent payment to General Fund.
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Stakeholder Engagement
This effort to manage and monitor the financial status of City funds continues to be a citywide
effort coordinated among all departments. Outside consultants for expertise on major revenues
categories including Sales Tax and Property Tax are consulted regularly to provide updates to
the forecasted revenue collections.
Resource Impact
At this time, this report does not recommend an action amending the City’s financials;
however, depending on trends and further input from Council, actions may be necessary later
in the year to better align revenues with expected collections. The City continues to monitor
activities closely. As discussed in the preliminary Q1 financial status update to the Council, staff
will return to Council as part of the Mid-Year Budget Review with FY 2022 Q2 financial status
information and recommended budget adjustments.
Environmental Review
The action recommended is not a project for the purposes of the California Environmental
Quality Act.
Attachments:
• Attachment A General Fund 1st Quarter Report FY2022
• Attachment B Public Safety Overtime Analysis Q1 2022
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CITY OF PALO ALTO
GENERAL FUND FIRST QUARTER FINANCIAL REPORT
FISCAL YEAR ENDING JUNE 30, 2022
(in thousands)
BUDGET ACTUALS (as of 9/30/2021)
Adopted Adjusted Pre % of Adj
Categories Budget Budget Encumbr Encumbr Actual Budget*
Revenues & Other Sources
Sales Tax 28,184 28,184 - - 1,976 7%
Property Tax 51,228 51,228 - - 55 0%
Transient Occupancy Tax 8,428 8,428 - - 1,469 17%
Documentary Transfer Tax 7,137 7,137 - - 2,062 29%
Utility Users Tax 14,370 14,370 - - 3,473 24%
Motor Vehicle Tax, Penalties & Fines 1,434 1,434 - - 72 5%
Charges for Services 24,515 24,515 - - 5,327 22%
Permits & Licenses 7,761 7,761 - - 1,872 24%
Return on Investment 852 852 - - 204 24%
Rental Income 14,403 14,403 - - 3,380 23%
From Other Agencies 10,277 10,291 - - 6,977 68%
Charges To Other Funds 14,165 14,165 - - 3,547 25%
Other Revenues 504 504 - - 80 16%
Total Revenues 183,259 183,273 - - 30,495 17%
Operating Transfers-In 23,121 23,151 - - 5,780 25%
Encumbrances and Reappropriation 150 6,410 - - - -
Contribution from Development Services Reserves 800 800 - - - -
Total Sources of Funds 207,329 213,633 - - 36,275 18%
Expenditures & Other Uses
City Attorney 3,945 4,311 - 520 857 32%
City Auditor 972 1,001 200 41 32 27%
City Clerk 1,327 1,382 55 61 229 25%
City Council 433 465 - 38 63 22%
City Manager 3,319 3,436 0 129 613 22%
Administrative Services 8,923 9,201 1 280 1,934 24%
Community Services 31,052 32,098 698 5,589 6,816 41%
Fire 35,677 35,951 111 698 9,137 28%
Human Resources 3,878 3,913 52 27 846 24%
Library 8,903 8,976 80 368 2,055 28%
Office of Emergency Services 1,237 1,408 - 357 252 43%
Office of Transporation 1,747 1,821 0 50 336 21%
Planning and Development Services 17,673 19,855 292 4,037 3,507 39%
Police 43,116 43,319 88 824 10,507 26%
Public Works 18,755 19,980 83 1,172 3,935 26%
Non-Departmental 13,478 13,623 85 153 622 6%
Total Expenditures 194,435 200,739 1,744 14,343 41,742 29%
Operating Transfers-Out 4,296 4,296 - - 1,075 25%
Transfer to Infrastructure 10,406 10,406 - - 2,601 25%
Total Use of Funds 209,137 215,441 1,744 14,343 45,418 29%
Net Change to BSR (1,808)(1,808)(9,143)
Excess of Actual BSR based on the ACFR vs Adopted BSR
FY2021 Year-End Estimate - 13,127 BSR Balance 35,962 47,281
BSR % of Adopted Total Use of Funds 17.2%22.6%
* Adopted BSR reflects FY 2021 Year-End Estimate at the time of the FY 2022 Budget Adoption. Adjusted BSR reflects FY 2021 Year-End Actuals based on the ACFR, net of FY2022 Approved Adjustments to BSR.
ATTACHMENT A
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Q1
2020 2021 2022
POLICE DEPARTMENTOvertime Expense
Adopted Budget (A)$1,842,231 $944,186 $944,186
Modified Budget 1,842,231 944,186 944,186
Net Overtime Cost - see below 441,197 366,045 56,757
Variance to Budget 1,401,034 578,141 887,429
Overtime Net Cost
Actual Expense $2,566,590 $1,431,959 $378,529
Less Reimbursements
California OES/FEMA (Strike Teams)- - -
Stanford Communications 110,177 64,906 20,957
Utilities Communications Reimbursement 54,086 33,191 10,125
Local Agencies (B)9,329 2,412 1,297
Police Service Fees 205,126 467,167 59,847
Total Reimbursements 378,717 567,676 92,226
Less Department Vacancies (A)1,746,677 498,238 229,547
Net Overtime Cost $441,197 $366,045 $56,757
Department Vacancies (number of days)6,192 1,494 621
Workers' Compensation Cases 30 18 1
Department Disabilities (number of days)700 1,324 115
FIRE DEPARTMENT
Overtime ExpenseAdopted Budget (C)$1,672,872 $1,931,121 $1,931,121
Modified Budget (D)2,086,872 2,971,460 1,931,121
Net Overtime Cost - see below 1,831,059 1,792,228 1,173,049
Variance to Budget 255,813 1,026,424 758,072
Overtime Net Cost
Actual Expense $2,018,548 $2,840,968 $1,202,158
Less Reimbursements
California OES/FEMA (Strike Teams) 114,000 887,531 -
Total Reimbursements 114,000 887,531 -
Less Department Vacancies (C)73,489 161,208 29,110
Net Overtime Cost $1,831,059 $1,792,228 $1,173,049
Department Vacancies (number of days)173 1,942 76
Workers' Compensation Cases 33 17 5
Department Disabilities (number of days)227 629 253
NOTES:
(A)The FY 2021/22 Police Department budget was reduced by 11.0 Police Officers and $900,000 in overtime.
(B)Includes Animal Control Services contract with Los Altos and Los Altos Hills.
(C)The FY 2021/22 Fire Department budget was reduced by the equivelant of 8.0 sworn positions. The overtime budget was
increased over the prior year by approximately $250,000 to extend the cross-staffing of Medic-61.
(D)The FY 2021 Modified Budget includes overtime adjustments recommended as part of the FY 2021 Mid-Year review for
Strike Team reimbursements ($1.0 million).
Public Safety Departments
Overtime Analysis for Fiscal Years 2020 through 2022
3.b
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City of Palo Alto (ID # 13728)
Finance Committee Staff Report
Meeting Date: 12/7/2021
City of Palo Alto Page 1
Title: Discuss Updates and Recommend Further Refinement of Potential
Revenue Generating Local Ballot Measures
From: City Manager
Lead Department: Administrative Services
RECOMMENDATION
Staff recommends that the Finance Committee recommend that Council direct staff to further
refine a proposal to replace the General Fund Equity Transfer (GFET) at risk in a legal challenge
considering the following options:
i. The form or forms of the proposal to poll on (percentage of gas utility gross
revenues embedded within gas rates, percentage of gas utility gross revenues
embedded within gas utility rates, or UUT modification to one or more utilities)
ii. Other provisions for the proposal, such as an escalation cap or provisions to
gradually shift collections from the gas utility to electric utility
EXECUTIVE SUMMARY
This report continues the Finance Committee’s discussion and work to explore the
development of a potential revenue generating local measure for the November 2022 ballot,
and seeks to refine components of a potential business license tax and weigh the tax structure
of a utility on-bill tax. Specifically, the Finance Committee should consider regarding the utility
on-bill tax, the City Council directed staff to model two methods to replace the gas GFET. This
report outlines the two potential tax methods and compares key attributes for the Finance
Committee’s consideration and review. Staff is diligently working on modeling the scenarios for
a potential business license tax and suggests reconvening early in calendar year 2022 to finalize
this review. Following direction from the Finance Committee, staff will return to the City
Council to deliberate on the first round of polling, initial review of modeling scenarios and the
plan for stakeholder outreach and engagement component of the ballot measure workplan.
This CMR includes attachments that contain detailed discussion of the following:
• Utility on-bill tax refined calculations and discussion of options (Attachment A)
• Summary of Prior Work on Potential Revenue Generating Ballot Measures (Attachment
B)
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BACKGROUND
The City’s efforts in advancing fiscal sustainability efforts have grown over the past decade. In
2019, several actions and plans were specifically outlined in the Fiscal Sustainability Workplan.
The goal of the workplan was to continue to make proactive progress towards fiscal
sustainability to maintain the quality of life that the City of Palo Alto supports through its
services. Elements of the workplan included proactive funding contributions for the City’s long-
term pension and other post-employment benefits (OPEB) and strategies to structurally balance
and contain cost in the City’s General Fund on an ongoing basis.
The economic impacts of the COVID-19 pandemic, and efforts to contain and mitigate the
spread of the virus resulted in a $40 million General Fund gap between revenues and expenses
in the FY 2021 Adopted Budget. This gap was balanced through significant service reductions
throughout the organization, concessions from the City’s labor groups, as well as substantive
reductions in the City’s capital investments, impacting catch-up and keep-up costs and funding
of new projects. Significant service reductions taken in FY 2021 persist this year due to both the
current impacts of Green v. City of Palo Alto, a class action lawsuit that challenges the City’s gas
and electric rates under Proposition 26, and the recovery period of the pandemic. In addition,
the City faces significant unmet needs in areas such as affordable housing and transportation,
including but not limited to a significant capital investment in the railroad Caltrain train/grade
crossings. This report represents the next step of discussions with the Finance Committee and
City Council regarding a potential revenue generating ballot measure(s) to balance the project
and services needs of the City with available resources.
In March 2020, the City Council, considering the uncertain economic impacts of the pandemic,
paused efforts that were underway at that time to explore a revenue generating ballot
measure. Resumption of this review was later outlined in the Community and Economic
Recovery Workplan and Council Priority in 2021. On June 15, 2021, the Finance Committee
reviewed the Workplan for the November 2022 Local Ballot Measure(s) and Affordable Housing
Funding Referral (CMR 12299), where the Finance Committee recommended that the City
Council:
• Approve the Ballot Measure Workplan, with a focus on development of a business tax
and a utility use-based tax,
• Refinement of estimates, evaluation of a stakeholder outreach plan and polling, and
• Additional information regarding affordable housing.
These Finance Committee recommendations were considered by the City Council in their
August 16, 2021 meeting (CMR 12381). Consistent with past practice, the City Council directed
the Finance Committee be the main deliberative body for the development of the potential
revenue generating ballot measure and, through an iterative process outlined in the Ballot
Measure Workplan, that updates will be taken to the City Council for review through June 2022.
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The Summary of Prior Work on Potential Revenue Generating Ballot Measures is included as
Attachment B.
On September 21, 2021 (CMR 13469) and October 19, 2021 (CMR 13648), the Finance
Committee directed staff to continue exploration of a business tax and utility tax by returning
to the Committee with refined modeling and additional information. The Finance Committee
was presented with refined modeling for the business tax and utility tax modeling and analysis,
along with additional research discussing the key differences between a parcel tax and business
license tax.
Following the two meetings with the Finance Committee, discussion on November 8, 2021 with
the City Council (CMR 13687) considered the Finance Committee’s recommendation to further
explore a business license tax and a utility tax. The Finance Committee serves as the public
body to review periodic progress reports and allow for structured public discussion for
feedback and recommendations of the potential revenue generating ballot measure. In
addition to direction regarding tax structure and modeling, the City Council also delegated the
review of polls to the Finance Committee, provided that the overall ballot measure workplan
stays on its timeline. The following is Council’s direction to staff and the Finance Committee on
November 8th:
A. Direct staff to model a business license tax at monthly rates of $0.05 to $0.20 per square
foot, with a preference for no sunset and an annual escalator, and with thresholds for
square footage size and possible exemptions for:
i. Small retail, measured by square footage;
ii. Grocery stores;
iii. No exemptions;
B. Direct staff to model two methods to replace the General Fund Equity Transfer (GFET) at
risk in the Green case:
iii. Seek voter approval in modifying the 2009 GFET formula to transfer a percentage
of gas utility gross revenues;
iv. Distribute the change across gas and electric as an increase in the percentage of
Utility Users Tax (UUT); and
C. Direct staff to execute initial round of polling (Attachment A), delegate review of the
polls to the Finance Committee, pending availability to stay on the workplan timeline,
and incorporate the Council’s feedback of the poll, including the modeling assumptions
identified in Parts A and Parts B of the motion; and
D. Remove the parcel tax as an option from the polling questions.
MOTION PASSED 6-1 (Tanaka no)
Staff has launched the initial round of polling and results will be made available to the City
Council estimated to be in January 2022. This staff report includes updated analysis and other
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information for a potential utility on-bill tax, refined for components as directed by the City
Council on November 8th.
DISCUSSION & ANALYSIS
Staff has provided additional analysis in response to the direction by Council at its November 8,
2021 meeting. Staff was asked to model specific scenarios for a business license tax and a
utility-related tax. This information is presented to inform Finance Committee
recommendations to Council regarding the form of the utility on-bill tax proposals. This item is
an incremental step in the process of reviewing fiscal sustainability measures through potential
local revenue ballot measure(s). Expected early in calendar year 2022 will be an additional item
reviewing more detailed scenario modeling for the potential business license tax based on
square footage as well as adding the expected initial round of polling results as well. Staff does
recommend, if agreeable to the Council, that if staff work is ready, a special Finance Committee
meeting with the current members convene in January 2022 for continuity of this next
incremental step as well as to ensure continued timely progress of this workplan.
Utility On-Bill Tax (Attachment A)
In the August 16, 2021 City Council meeting, the City Council directed staff to focus pursuit of a
utility use-based tax to replace revenues at risk due to the Green case and explore the option to
incorporate revenue to support the City’s climate adaptability initiative. Significant detail on the
options can be found in Attachment A. This attachment discusses two utility tax options,
modeled to replace the current gas GFET. Under these options, the current gas GFET would end
and potentially be replaced by:
1. Increasing or expanding the City’s UUT(s) codified in chapter 2.35 of the City’s municipal
code, which would continue to appear as a line item on utility bills, or
2. Modifying the 2009 GFET formula to transfer a percentage of gas utility gross revenues.
Under this option, the transfer would be embedded in utility rates.
On November 8, 2021, the City Council directed staff to perform further analysis of these two
methods, focusing on either a percentage of gas utility gross revenues or an adjustment to the
UUT for only the City’s electric and gas utilities. Staff analyzed the key features of the two
approaches to replace GFET revenue. Although both achieve the goal of recovering 100 percent
of the GFET revenue currently at risk in the Green case, differences in revenue volatility
(stability per the EASE Framework), distribution of tax between residential and non-residential
customers, and impacts on sustainability efforts are key differences between these two
approaches. Highlights of these key differences discussed in Attachment A are summarized
below:
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Method 1:
Increase Gas and Electric UUT
Method 2:
Percent of Gas Utility Revenue
Recovers GFET revenue
currently at risk
Both approaches recover 100% of GFET revenue currently at risk
Revenue growth
(Increase in annual
revenue from FY 2023 to FY
2025)
Increase from $7.34 million to
$8.76 million
Increase from $7.34 million to
$8.61 million
Note: due to expected utility cost and rate increases in FY 2023 to FY 2025, either
of these methods would increase the GFET significantly faster than the current
GFET methodology, which only is forecasted to increase from $7.34 million to
$7.9 million through FY 2025.
Revenue volatility1 +/- 4% to 6% variation in revenue
each year based on utility use
+/- 10% to 15% variation in
revenue each year based on utility
use
Distribution of tax
collection between
residents and business/
non-Residential
Increases share of tax collection on
business and non-residential
taxpayers (20% residential, 80%
business / non-residential)
No change from current GFET
collection (40% residential, 60%
business / non-residential)
Impact on sustainability
efforts
Decreases cost-effectiveness of
building and vehicle electrification
No impact to sustainability efforts
Impact of S/CAP goals on
revenues
Achieving building and vehicle
electrification goals outlined in
April 2021 S/CAP impact analysis
results in little change in revenue.
Achieving building and vehicle
electrification goals outlined in
April 2021 S/CAP impact analysis
results in $3.9 million (46%)
decrease in revenue.
Staff found a few notable differences between Method 1, modifying the UUT rate, and Method
2, assuming a percentage of gas utility revenues. Method 1 was less volatile, collected more tax
from businesses than Method 2, decreased the cost-effectiveness of building electrification,
and was significantly less affected by major shifts in electric and gas use associated with long-
term S/CAP goals.
Included in Attachment A is a potential proposal that could take advantage of some of the
features of both methods by adding a provision to Method 2 that the collection of GFET
revenue would shift from gas to electric over time as gas revenues decline below a certain
amount. If Method 2 were adopted with this provision in place, there would be no impact to
building and vehicle electrification cost-effectiveness until electrification was well underway.
This would impact gas revenues, but as that change occurred, the utility tax revenues would be
collected more and more from the electric utility rather than the gas utility, avoiding the
revenue decreases associated with achieving the Sustainability/Climate Action Plan (S/CAP)
goals.
1 Based on gas / electric sales revenue variations from projections over the last five years
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Both approaches increased the amount of revenue transferred to the General Fund at a faster
rate than the current GFET approach. The current GFET escalates at roughly 2.5% per year,
while utility rates are expected to increase at a higher rate in the next few years. If Council
wanted to limit the growth of either tax method to be more consistent with the rate of growth
of the current GFET methodology, some alternatives are discussed in Attachment A in the
section titled “Revenue Growth and Volatility of Various Utility Tax Methods vs. Current GFET.”
For additional details, please see Attachment A.
Staff is looking for some specific feedback from the Finance Committee:
• Should staff continue to consider increasing the UUT, or solely consider a percentage of
gas utility (or gas and electric utility) revenue?
• Should staff consider a measure to transfer revenue solely from the gas utility, or from
both the gas and electric utilities?
o If the latter, what percentage of revenues should staff collect from the gas
utility?
o If the former, should staff include a provision to gradually begin collecting
revenue from the electric utility if gas revenues begin to decline due to
electrification?
• Should staff consider a cap on total tax revenues collected or transferred?
Staff recognizes some of these questions will be further informed by the initial round of polling
and expects to provide opportunity for the Finance Committee recommendation to be revisited
in light of the initial polling results.
Conclusion & Next Steps
Further narrowing the focus of the potential revenue generating ballot measure is critical so
that staff can continue advancing the Ballot Measure Workplan that was approved by Council in
August. This staff report outlines refined analysis for the potential utility on-bill tax. As initial
polling is completed and information provided to the City Council estimated in January 2022,
additional exemptions and/or threshold considerations can be further refined as the ballot
measure workplan proceeds and be tested through the second round of opinion research and
outreach and engagement efforts.
With regards to the potential utility on-bill tax, consideration of differences between key
features of each method, whether a modification to the electric and gas UUT or a percentage of
gas utility revenue, should be considered, specifically in the areas of revenue stability/volatility,
the distribution of tax collection between residential and non-residential customers, and
impacts on S/CAP goals.
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TIMELINE
The below table recaps the Ballot Measure Workplan, as approved by the City Council in
August, with minor adjustments, based on the process and discussion thus far.
Ballot Measure Workplan Timeline
November 2021
COMPLETED
Council:
- Confirm potential revenue-generating proposals, including refined
modeling and analysis
- Direction to complete initial polling and initial stakeholder outreach
December 2021
Finance Committee:
- Consideration of additional refinements and updates for potential
revenue generating tax measure(s)
January 2022 Recommended Special Finance Committee:
- Consideration of additional refinements and updates for potential
revenue generating tax measure(s), business license tax
City Council:
Review the results of the first round of polling and the Finance
Committee’s recommendation from third round of staff analysis and seek
direction to proceed with stakeholder outreach.
January to
April 2022
Finance and Council:
- Provide iterative policy decisions and direction based on staff work
related to stakeholder outreach, polling, and draft legal documents
- Second refined round of polling to be reviewed by Finance and Council
decision on revenue-generating ballot measure(s) to pursue
June 2022
Council:
- Final Approval of November 2022 Ballot Measures, including ballot
measure language
August 2022
Language submitted to Santa Clara County Registrar of Voters
November 2022
Election
FISCAL/RESOURCE IMPACT
Implementation of this workplan to develop a revenue generating local ballot measure will
require significant resources that include internal staff, consultant expertise, as well as
stakeholder engagement. Resource needs will scale proportionately based on the ballot
measure option and the complexity of the measure that the Finance Committee and City
Council direct staff to pursue. It is important that the scope of the potential ballot measure(s)
be clearly defined and effectively narrowed for staff to successfully progress through the
workplan.
It is expected that this initiative will require an equivalent of approximately two full time
dedicated staff positions and will have an impact on other projects. In addition, support is
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required from outside consultants and engagement with internal stakeholders in key
departments. The City Council appropriated funding for this activity as part of the FY 2022
Preliminary 1st Quarter. Additional contracts and/or proposed budget amendments will be
brought forward for approval as appropriate.
STAKEHOLDER ENGAGEMENT
The Ballot Measure Workplan integrates stakeholder engagement through constituent polling
and stakeholder outreach. Staff, throughout the process and from previous conversations, has
solicited input and feedback with the Finance Committee, the City Council, residents, and the
business community. Staff received direction to proceed with initial polling at the November 8,
2021 Council meeting and plans to make available to the Finance Committee for review as soon
as results are available. Based on the Ballot Measure Workplan, staff plans to seek the City
Council’s direction regarding initial stakeholder outreach. The City has engaged with Fairbank,
Maslin, Maullin, Metz & Associates (FM3) perform polling, Lew Edwards for stakeholder
engagement planning, and the Public Dialogue Consortium (PDC) for stakeholder engagement.
The stakeholder outreach strategy has yet to be finalized and staff expects to return to Council
with a strategy in January 2022.
ENVIRONMENTAL REVIEW
This activity is not a project under California Environmental Quality Act (CEQA) as defined in
CEQA Guidelines, section 15378, because it has no potential for resulting in either a direct or
reasonably foreseeable indirect physical change in the environment.
.
Attachments:
• Attachment A: Preliminary Utility Ballot Measure Options
• Attachment B: Summary of Prior Work on Potential Revenue Generating Ballot
Measures
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ATTACHMENT A
Attachment A - 1
Preliminary Utility Ballot Measure Options
The City Council has directed staff, through the City of Palo Alto’s conversations exploring a
potential business tax, to pursue a utility users tax (UUT) and to explore the option to generate
revenue to support the City’s climate adaptability goals. This attachment transmits analysis
related to a potential ballot measure to further the Finance Committee and City Council’s
conversations on this issue. In addition to potentially increasing the City’s utility users tax,
currently set at 5 percent, there are a variety of alternatives that the Finance Committee and City
Council can consider in structuring such a tax, each of which relate to the broader question of
whether and how to modify or replace the Council-adopted General Fund Equity Transfer (GFET)
methodology.
At the September 21, 2021 Finance Committee meeting, the Committee directed staff to model
a UUT increase applied to retail gas service charges to restore the amount at risk in the Green v
City of Palo Alto, a class action lawsuit which challenged the City’s gas and electric rates under
Proposition 26. In Green, the trial court judge found that the City’s electric rates are valid, but
the City’s gas rates include an element of tax requiring voter approval under California’s
Proposition 26 because they are set at a level sufficient to fund an annual transfer of
approximately $7.7 million to the City’s General Fund. Last month, City Council authorized an
appeal to seek guidance from the Court of Appeal on a variety of legal questions that will impact
Palo Alto and, potentially, municipal utilities across California.
The GFET is included in the City’s utility rate model as an expense. With respect to electricity, the
utility generates sufficient revenue from sources other than rate payers to pay for the GFET.
Therefore, the electric GFET does not impact rates. With respect to gas, the GFET impacts the
utility rate. The Green litigation has shifted the City’s FY 2022 financial balancing strategy and
has potentially significant, long-term budgetary impacts to the City’s General Fund. If the gas
GFET is excluded from Palo Alto’s utility rate model, based on the FY 2022 Adopted Budget,
approximately $7.4 million would no longer be transferred to the General Fund and would remain
with the City’s gas enterprise, reducing gas rates. Finance Committee and City Council direction
is needed on whether to seek to recover for the General Fund an equivalent amount, or some
portion of the total, via a modified voter-approved GFET, an increase or expansion of the
current 5 percent UUT, or some combination of both.
This attachment discusses two utility tax options, modeled to replace the current gas GFET. Under
either option, the current gas GFET would end and potentially be replaced by:
1) Increasing or expanding the City’s electric and gas UUT(s) codified in chapter 2.35 of the
City’s municipal code, which would continue to appear as a line item on utility bills, and
2) Modifying the 2009 GFET formula to transfer a percentage of gas utility gross revenues.
Under this option, the transfer would be embedded in utility rates.
This attachment also includes discussion of the following topics that were included in CMR 13514,
Attachment B. Staff has included once again for ease of reference:
a
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ATTACHMENT A
Attachment A - 2
• Climate adaptability options that include impact on current rates and estimated
generated revenue to support this initiative;
• General Fund Equity Transfer Methodology;
• Review of EASE framework as it pertains to utility users tax; and
• Utility user tax rates for cities in Santa Clara County and San Mateo County.
Method 1: Potential Modifications to the City’s Gas Utility Users Tax, Chapter 2.35 of the
Municipal Code
UUTs are very common across California, with the vast majority structured to create general fund
revenue with majority voter approval. Roughly half of California residents and businesses pay a
UUT. Enacted in 1987, the City’s UUTs are applied to electricity, water and gas usage as well as
telephone service. The tax rate applied to utilities is five (5) percent.
The first method of replacing the amount of the gas GFET, projected to be $7.5 million in FY 2023,
would involve increasing the gas and electric UUT rates, which would result in a 10 percent gas
and electric UUT rate, made up of a 5 percent tax on gas and electric to replace the gas GFET plus
the current 5 percent rate.
Staff estimates that for every 1 percent increase to the gas and electric UUT rate, an additional
$1,502,000 in UUT revenue would be generated. This calculation is based on estimated sales
activity and utility rates in the FY 2022 Adopted Budget.
Table A1: Modification to City’s Utility Users Taxes (Based on FY 2022 Budget and Rates)
Estimated gas and electric UUT to replace GFET revenue 10%
Additional Revenue Generated by each additional 1% UUT change $1,502,000
Under this approach, the amount of gas GFET currently collected via the City’s gas utility rates
would end, resulting in a lower average gas bill. Table A2 outlines the decrease for residential
and commercial gas customers, based on rates that are effective December 2020. The average
monthly gas residential bill would decrease from $45 to $37, which is 30 percent lower than
PG&E’s rates.
Table A2: Gas Residential and Commercial Monthly Bill Comparisons
Type Usage level
(therms) Palo Alto PG&E $
Difference
%
Difference
Palo Alto
Excluding
Gas GFET
$
Difference
%
Difference
Residential Median** $45 $53 ($8) -14% $37 ($16) -30%
Commercial 500 $685 $718 ($33) -5% $562 ($156) -22%
Commercial 5000 $5,986 $6,831 ($845) -12% $4,909 ($1,922) -28%
Commercial 10000 $11,875 $12,045 ($170) -1% $9,738 ($2,308) -19%
Commercial 50000 $59,005 $51,419 $7,586 15% $48,384 ($3,035) -6%
a
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ATTACHMENT A
Attachment A - 3
Table A2A calculates the average monthly bill for the Palo Alto and PG&E as detailed in Table A2,
and layers on the current 5 percent UUT and exclusion of the gas GFET, as well as the 10 percent
UUT.
Table A2A: Gas Residential and Commercial Monthly Bill Comparisons (with UUT)
Type Usage level
(therms)
Palo Alto
(w 5% UUT)
PG&E
(w 5% UUT)
$
Difference
%
Difference
Palo Alto
Excluding
Gas GFET w
10% UUT
$
Difference
%
Difference
Residential Median** $47 $56 ($8) -18% $41 ($15) -37%
Commercial 500 $719 $754 ($35) -5% $618 ($136) -22%
Commercial 5000 $6,285 $7,173 ($887) -14% $5,400 ($1,773) -33%
Commercial 10000 $12,469 $12,647 ($179) -1% $10,712 ($1,935) -18%
Commercial 50000 $61,955 $53,990 $7,965 13% $53,222 ($768) -1%
Method 2: Potential Voter Approval of Transfer of a Percentage of Gross Utility Revenues
Another option is to leave the current UUT intact and seek voter approval to simplify the 2009
GFET methodology to impose a flat tax on gross utility revenues. The flat tax would be embedded
in rates which mirrors the current practice as seen by customers. Collecting the projected annual
$7.5 million gas transfer via this method would keep gas utility rates the same (in other words,
they would not be reduced as shown in Table A2); because an amount equivalent to 18% of the
gas utility’s prior year’s gross gas sales revenues would be embedded in customer rates, and then
transferred to the General Fund. This would not require a change in utility rates and is consistent
with how the GFET is collected now.
Several other cities with municipal utilities, including Burbank, Colton, Long Beach, Pasadena and
Sacramento, structure their annual utility transfers as a percentage of gross revenues, which is
then covered by utility revenues as a cost of providing service. Cities have been challenged over
this practice, and this area of the law remains in flux.1 However, California’s Court of Appeal
recently upheld Sacramento and Pasadena’s voter-approved general fund transfer taxes, which
were structured as an 11 percent and 12 percent tax, respectively, on the gross revenues of
Sacramento’s and Pasadena’s city-operated utility enterprises.2 Each of these taxes are
embedded in the cost of providing utility services, and are not identified as a separate line item
on the customer’s utility bills.
1 On December 1, 2020, the City of Long Beach lost its appeal to a challenge to its voter-approved 12 percent tax
on its water and wastewater utilities, based on the theory that UUTs on services other than electric and gas are
either invalid, or require 2/3 voter approval, as special taxes based on an incident of property ownership (here, on
utility services). Fees for gas and electric service, however, are exempt from the California constitution’s definition
of property-related fee, and Long Beach’s gas UUT was not part of this challenge.
2 Wyatt v. City of Sacramento, (2021) 60 Cal.App.5th 373 (upholding 11% tax on gross revenues of city’s water,
sewer, storm drain and solid waste services); Komesar v. City of Pasadena (2021, Case No. B314666) (upholding
12% tax on gross revenues of city’s electric utility). Long Beach’s loss on appeal has produced a split of authority at
the appellate level as to the legitimacy of all non-electric and gas UUTs statewide, which will require Supreme
Court review to resolve.
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ATTACHMENT A
Attachment A - 4
Revenue Growth and Volatility of Various Utility Tax Methods vs. Current GFET
The current GFET methodology adopted in 20093 was based on the current depreciated value of
the City’s capital investments. It grew gradually based on utility investment, and growth was
offset by depreciation. Because the two methods proposed for replacing the GFET are based on
a percentage of revenues rather than utility investment they can grow more rapidly depending
on the revenue increases adopted for utility rates.
Chart A1 below show the projected growth rate for GFET for FY 2023 to FY 2025. This is compared
to the projected growth in revenue for the two GFET methods modeled. These growth
projections are based on the FY 2022 Gas Financial Plan projections and FY 2022 Electric Financial
Plan projections for the gas and electric utilities adopted in June of 2021.4 As shown in the chart,
transfers to the General Fund increase over the projection period relative to the current GFET
methodology under both Method 1 (Increase to Gas and Electric UUT) and Method 2 (% of Gas
Utility Revenue).
If there is interest in controlling the rate of escalation, there may be some possible approaches.
A cap could be designated for the tax to be collected and escalated at an inflationary index. If
Council adopted an increase to gas and electric UUTs, these rates could be designated as
maximum rates, with rates to be set each year with the intent of collecting not more than the
capped amount. If Council adopted a transfer of a percentage of gas utility revenues, the cap
would be directly applied to the transfer itself (e.g. the City would transfer 18% of gas utility
revenues per year, not to exceed an amount equal to the cap for that year). Included in the Chart
A1 below is a series indicating how a cap set at the FY 2022 GFET amount escalated at inflation
for the San Francisco Bay Area would compare to projected GFET growth under the current
methodology and under Methods 1 and 2. The cap is set using the preliminary inflation
assumptions embedded in the City’s financial forecasts, assumed to be 3.7% for FY 2023 and 2.5%
for FY 2024 and FY 2025.
3 For more detail on the ordinance adopting the 2009 transfer methodology, see CMR 280:09, Budget Adoption
Ordinance for Fiscal Years 2009 and 2010; and CMR 260:09, Finance Committee Report explaining proposed
changes to equity transfer methodology.
4 Council Staff Report #12240, June 21, 2021, https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-
reports/reports/city-manager-reports-cmrs/2021/id-12240.pdf
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ATTACHMENT A
Attachment A - 5
Chart A1: Growth in General Fund Revenues For Utility Tax Methods
In addition, revenues from either methodology would be more volatile than the current GFET
methodology due to both changes in gas market prices and changes in gas sales year to year due
to variations in winter temperatures. From FY 2015 through FY 2020 gas sales varied from 4%
above to 5% below the average for that period. Market prices varied even more significantly,
contributing to gas utility revenue changes varying from 11% above to 8% below the average for
the period. It would not be unreasonable to assume a potential 10% to 15% potential annual
swing in utility tax revenues due to the combined effects of these two factors. A major change to
gas economics or problems with the regional gas transmission system can cause even greater
shifts in market prices, and therefore revenues.
The revenues from both methods vary more significantly than the current GFET methodology
and would require more active management by the City’s Finance Department. But because the
electric utility’s sales revenues are more stable from year to year, the UUT method (Method 1) is
less volatile than the percentage of gas utility sales (Method 2). Swings in electric sales revenue
from FY 2015 through FY 2020 range from 6% below to 4% above the average for that period.
Because the electric utility’s taxable revenue is roughly four times as large as the gas utility’s,
replacing the gas utility GFET with an increase to the gas and electric UUT (Method 1) results in
about 80% of the resulting revenue being based on less volatile electric utility revenue. This could
significantly reduce the variability of this revenue source. However, setting a cap, as described
above, would also limit the volatility of the percentage of gas utility sales methodology (Method
2). In addition, revenue volatility could be managed by the City’s Administrative Services
Department, which already manages revenue volatility created by the City’s existing UUT. Table
A3 below summarizes the volatility of the various methods and potential mitigation measures.
The last method of managing volatility could be to transfer a specific amount from the gas utility
each year (e.g. $7.5 million) that escalates at Bay Area inflation or some other index rather than
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ATTACHMENT A
Attachment A - 6
transferring a percentage of gas utility revenues. Staff knows of only one other agency that has
taken this approach, the City of Alameda, which approved an annual transfer of $3.7 million,
adjusted for inflation, from its electric utility in November 2016. The measure included a utility
user’s tax modernization and passed 73% to 27%.
Table A3. Estimated Revenue Volatility from Various Utility Tax Methodologies
Method 1:
Utility Users
Tax on Gas and
Electric Use
Method 2:
Transfer of %
of Utility Gross
Revenues
Method 2 with
Inflationary Cap on
General Fund
Transfer
Transfer of a
Specific
Amount from
Gas Utility
Estimated
volatility
+/- 4% to 6% +/- 10% to 15% Projected to be +0% to
-4% by FY 2025, likely
improving in later
years.
None
Business / Non-Residential and Resident Impact of Utility Tax Alternatives
The City’s electric utility and gas utility rely on residential and business / non-residential revenues
in very different ways. Approximately 75% of electricity revenues come from business and non-
residential customers, while about 50% of gas revenues come from business and non-residential
customers. This means that Method 1, which involves replacing the GFET revenue with an
increase to UUT for both electric and gas customers, could change the share of tax revenue
collected from business / non-residential customers. Method 2, which continues the existing
transfer, would not.
Impacts to Cost-Effectiveness of Building and Vehicle Electrification
The City has been updating its sustainability goals via the 2021 Sustainability and Climate Action
Plan (S/CAP) update process, and decisions about utility taxes can have some effect on achieving
these goals. A gas and electric UUT (Method 1) or a percentage of gross gas utility revenues
(Method 2) will each affect the cost-effectiveness of building and vehicle electrification
differently. A percentage of gross gas utility revenues methodology will not change the current
cost-effectiveness of building and vehicle electrification. As shown above in Table A2A, the UUT
methodology will lower gas bills. It would also increase electric bills 5%. The combination of these
two changes would make building electrification less cost effective.
The change would only slightly lower the cost-effectiveness of EVs, since the increase in electric
bills does not substantially offset the significant cost advantages of EVs in lower maintenance and
fuel bills. But by significantly lowering gas bills, Method 1, the UUT, does make building
electrification less cost effective. Staff was unable to do a comprehensive analysis of all building
electrification measures, but Table A4, below, shows one example. The table shows the cost
effectiveness of a heat pump water heater under both Method 1 and Method 2. While a heat
pump water heater costs more to install, it is highly efficient, and due to Palo Alto’s low electric
rates relative to its gas rates, can save money on operation. Gas rates are expected to rise more
rapidly than electric rates in the next ten years, giving the heat pump water heater an operational
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ATTACHMENT A
Attachment A - 7
cost advantage over a gas water heater that partially offsets the higher up-front cost compared
to a gas water heater. Method 1, by lowering the cost of gas and increasing the cost of electricity,
would significantly decrease that cost advantage. In the example in Table A4, below, the cost of
a gas water heater goes from being 87% of an electric heat pump water heater under Method 2
to 71% of an electric heat pump water heater under Method 1, increasing the cost barrier to
electrification and the cost of incentives needed to help people electrify.
Note that these long-term forecasts of electric and gas rates are very uncertain and these are
very rough estimates. The costs for gas water heaters and heat pump water heaters vary widely,
and customer usage patterns vary. This example is intended to give some sense of how these two
methods might perform under one set of assumptions, but individual project outcomes will vary
widely.
Table A4. Estimated Impact of S/CAP Goals on Heat Pump Water Heater Cost-Effectiveness
Method 1: Utility Users Tax on
Gas and Electric Use
Method 2: Transfer of % of
Utility Gross Revenues
Gas water
heater
Heat pump
water heater
Gas water
heater
Heat pump
water heater
Replacement cost $1600 $4040 $1600 $4040
Cost of operation5 $2890 $2280 $3830 $2180
Total lifecycle cost $4490 $6320 $5430 $6220
Gas vs heat pump
water heater cost
Gas water heater cost is 71% of
heat pump water heater
Gas water heater cost is 87% of
heat pump water heater
Impacts of S/CAP Goals to Utility Tax Revenue
Implementation of the City’s S/CAP goals would also greatly change the composition of the City’s
energy use. A gas and electric UUT or a percentage of gross gas utility revenues would be affected
differently. Table A5 below assumes 2030 projections of energy use with and without a significant
fraction of gas uses transformed to electric uses due to S/CAP goals. It compares the utility tax
revenues from both methodologies under the non-electrified and electrified scenarios. An
increase to the gas and electric UUT (Method 1) preserves utility tax revenue significantly better
than the percentage of gross gas utility revenues methodology (Method 2). Note that forecasts
about the S/CAP and forecasts out to 2030 are very uncertain and these are very rough estimates.
They are intended to give some sense of how these two methods might perform under one
scenario, but should not be used for planning purposes.
Table A5. Estimated Impact of S/CAP Goals on Utility Tax Methods
Method 1: Utility Users Tax on
Gas and Electric Use
Method 2: Transfer of % of
Utility Gross Revenues
5 Net present value of gas bills or electric bills over 13 years, the life of the water heater.
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ATTACHMENT A
Attachment A - 8
Table A5. Estimated Impact of S/CAP Goals on Utility Tax Methods
Projected 2030
Revenues without
S/CAP Goals
$9.9 million $8.4 million
Projected 2030
Revenues with
S/CAP Goals
$10.1 million $4.5 million
Net Gain / (Loss)
Due to S/CAP
$0.2 million ($3.9 million)
Alternative to Method 1: % of Gas and Electric Utility Revenues
The Finance Committee and Council also discussed using the % of revenue methodology but
spreading it across the gas and electric utilities instead of just the gas utility. This is similar to
Method 1 (increasing the gas and electric UUT) in that it spreads the revenue across two utilities
but differs in that the % of revenue methodology does not include any exemptions, unlike the
UUT. This slightly changes the calculations. The table below shows what percentage of revenues
would need to be collected from the gas and electric utilities to generate $7.5M in revenues to
replace the GFET. Two columns are highlighted. The first, in which 25% of the revenue is collected
from the gas utility, is roughly equivalent to raising the UUT by 5% (with small differences due to
the lack of exemptions). The second, in which 100% of the revenue is collected from the gas
utility, is equivalent to Method 2.
Table A6. % of Gas and Electric Utility Revenues, Alternative to Method 1 (UUT)
% of Revenue Collected from Gas Utility:
0% 25%1 50% 75% 100%2
% of Gas
Revenues
- 5% 10% 14% 18%
% of Electric
Revenues
5% 4% 3% 1% 0%
1. Roughly equivalent to Method 1, but collected via a % of utility revenue methodology
instead of increasing the UUT
2. Equivalent to Method 2, % of gas utility revenues
One way to capture the benefits of Method 1 could be to implement Method 2 but add a
provision that if gas utility revenues decline, the City may begin to collect revenue from the
electric utility. This provision might be written as follows, for example:
In the event a decline in gas utility revenues results in the transferred amount falling below
$7.5 million in FY 2023 (adjusted annually for inflation) the shortfall may be collected from
the electric utility in the following year and in subsequent years by transferring a percentage
of electric utility revenues, up to a maximum of 5%.
Such a provision would prevent a decrease in utility tax revenues from this measure if gas usage
decreases significantly due to climate action goals. However, in early years, unlike Method 1, it
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ATTACHMENT A
Attachment A - 9
would not have any impact on building or vehicle electrification cost-effectiveness, nor would it
change the percentage of revenue collected from homes versus businesses and non-residential
uses.
Climate Adaptability Funding Options
In the August 16, 2021 City Council meeting, the City Council directed staff to focus pursuit of a
utility use-based tax and explore the option to incorporate revenue to support the City’s climate
adaptability initiative. The City’s FY 2022 Adopted Budget includes $9.7 million for UUTs assessed
on utility usage for electric, gas, and water; the City’s current UUT rate is 5 percent. Staff
estimates that a 1 percent increase to the UUT rate, for both gas and electric, is estimated to
yield an additional $2 million in UUT revenue in the General Fund, while a 1 percent increase in
the gas utility only is estimated to yield $284,000. These calculations are based on sales activity
and utility rates in the FY 2022 Adopted Budget. To illustrate, if the desired total UUT revenue is
$30 million, a $20 million increase above the FY 2022 Adopted Budget, then the UUT rate, if
applied to gas, electric, and water, would be approximately 15 percent, an additional 10 percent
on top of the current 5 percent rate.
Furthermore, based on the City’s Sustainability and Climate Action Plan (S/CAP) and the plan’s
goal to reduce natural gas usage, in applying the EASE Framework, the long-term stability of this
revenue source decreases over time. Staff has included Chart A1, Forecast Gas Consumption, that
was included in the Gas Utility Financial Plan (CMR 12240). This chart is a baseline forecast used
for utility rate modeling and does not include reductions resulting from S/CAP key actions (i.e.
approximately a 7 percent decrease from 2020 to 2030), which would further reduce revenue
generated from a potential ballot measure. Further analysis by staff would have to be done to
calculate the potential estimated impacts of the City’s S/CAP goals in reducing use of natural gas
and the impacts to potential utility tax to recover the amount of the gas GFET.
Review of the Equity, Administrability, Stability, and Economic Benefits (EASE) framework for
a Utility Based Tax
The City Council and Finance Committee have used the EASE framework as the main means of
evaluating potential tax ballot measures. A review of the EASE frameworks for both the UUT and
tax on utility gross revenues is presented in Table A7 below.
Table A7. EASE Framework for Utility Users Tax
Method 1: Utility Users Tax
Method 2: Tax on Utility Gross
Revenues
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ATTACHMENT A
Attachment A - 10
Table A7. EASE Framework for Utility Users Tax
Equity Utility Users Tax is a flat rate tax
imposed on the charges made for
metered utility and charges for
service (includes customer charges,
service charges, standby charges,
charges for temporary services,
demand charges, and annual and
monthly charges.
This tax is considered a proportional
tax, a tax that takes the same
percentage from all groups, since the
flat tax rate is assessed based on the
customer bill, the amount of tax paid
by a customer directly correlates to
the amount of utility commodity that
is used.
Because of different patterns of
electric and gas consumption for
different segments of the
community, Method 1 and Method 2
can differ in the amount of tax
collected from the business vs.
residential sectors.
This tax can be a flat rate assessed
on gross utility revenues (includes
customer charges, service charges,
standby charges, charges for
temporary services, demand
charges, and annual and monthly
charges.
Similar to the UUT, this tax is
considered a proportional tax, a tax
that takes the same percentage
from all groups, since the flat tax
rate is assessed based on the
customer bill, the amount of tax
paid by a customer directly
correlates to the amount of utility
commodity that is used.
Because of different patterns of
electric and gas consumption for
different segments of the
community, Method 1 and Method
2 can differ in the amount of tax
collected from the business vs.
residential sectors.
Administrability This tax is administrated through the City’s Utility Billing system and appears
monthly on customer bills. The cost for administrating this tax is assumed
in the City’s Utility Department budget and is supported internally by City
staff.
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ATTACHMENT A
Attachment A - 11
Table A7. EASE Framework for Utility Users Tax
Stability The City’s Sustainability and Climate Action Plan outlines a variety of work
plan items that makes progress towards reducing the City’s carbon impacts,
greenhouse gas emissions, and resource consumption. Changes in resource
consumption, particularly for gas will have a direct impact on the amount
of UUT revenue collected by the City in the long term. As describe earlier in
this attachment, these impacts can vary significantly between Method 1
and Method 2. The City’s Sustainability and Climate Action Plan (S/CAP)
update project includes a draft Three-Year Workplan that focuses on
reducing use of natural gas that will impact the ability to generate revenues
to restore the amount at risk from the Green litigation.
In addition to the long-term reduction of gas use, month to month gas
commodity costs and usage vary and although the market price of gas has
dropped over the past decade, these variables may have a long-term
stability of this tax revenue source if applied to gas utility usage. See below
charts, excerpted from the Gas Utility Plan that was presented to the City
Council in April 2021 (CMR 12240, Gas Utility Financial Plan)
Economic
Benefits
This tax may deter certain business industries that have heavy resource
consumption (i.e. industrial, manufacturing). Weighing this impact against
the overall lower utility rates, specifically if utility rates are adjusted
downward for the General Fund Equity Transfer, will offset this impact.
Payment of the tax for customers is incorporated into the customer’s
monthly bill; the seamless administration of this tax minimizes disruption
for the taxpayer.
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ATTACHMENT A
Attachment A - 12
Chart A2: Forecast Gas Consumption
Chart A3: Gas Commodity Rates from July 2012 through January 2021
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ATTACHMENT A
Attachment A - 13
Utility User Tax Rates for Cities in Santa Clara County and San Mateo County
The Utility User Tax rates for cities in San Mateo County and Santa Clara County are listed in Table
A8, A comparison of Local Utility User Tax Rates obtained from the California State Controller.
Average UUT rates in the region fall between 2 percent (City of Sunnyvale) and 6.5 percent (City
of Pacifica). The City’s 5 percent rate falls within the overall average of the region.
Table A8. Comparison of Local Utility User Tax Rates
Electric Gas
Residential Commercial Residential Commercial
San Mateo County
Daly City 5.0% 5.0% 5.0% 5.0%
East Palo Alto 5.0% 5.0% 5.0% 5.0%
Menlo Park 3.5% 3.5% 3.5% 3.5%
Pacifica 6.5% 6.5% 6.5% 6.5%
Portola Valley 4.5% 4.5% 4.5% 4.5%
Redwood City 5.0% 5.0% 5.0% 5.0%
Electric Gas
Residential Commercial Residential Commercial
Santa Clara County
Cupertino 2.4% 2.4% 2.4% 2.4%
Gilroy 5.0% 5.0% 5.0% 5.0%
Los Altos 3.5% 3.5% 3.5% 3.5%
Mountain View 3.0% 3.0% 3.0% 3.0%
Palo Alto 5.0% 5.0% 5.0% 5.0%
San Jose 5.0% 5.0% 5.0% 5.0%
Sunnyvale 2.0% 2.0% 2.0% 2.0%
Source: California State Controller, Cities Annual Reports
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ATTACHMENT A
Attachment A - 14
In addition to the information discussed earlier in this staff report, below is staff’s research of several pertinent utility tax measures in
California, including the ballot questions, rate, and passage rates.
City Ballot Question Ballot
Measure Rate Date Approved?
City of Alameda To maintain funding for essential services, such as
police, fire, parks and libraries, without raising tax
rates or electric charges, shall the City of Alameda
amend its Charter to reaffirm the continuous annual
transfer of approximately $3.7 million from Alameda
Municipal Power to the City, adjust future transfer
amounts for inflation, and modernize the existing
Utility Users Tax ordinance to reflect new and
evolving technologies so that all taxpayers are
treated equally regardless of technology?
Measure K This measure does not change the
7.5% tax rate.
This measure would modernize the
City’s utility laws in two significant
ways. First, it would amend the City
Charter to reaffirm the annual
transfer of approximately
$3,700,000 (cash and services) from
Alameda Municipal Power (AMP) to
the City. Second, it would update
the City’s Utility Users Tax (“UUT”)
ordinance.
Nov. 2018 Approved.
Yes: 72.92%
No: 27.08%
City of Anaheim Shall Section 1221 of the Anaheim City Charter
regarding water and electric rates be amended to:
update language regarding financial reserves,
reaffirm and authorize the transfer of money to the
City's general fund to support general City services,
remove unnecessary language that duplicates a
requirement of the California Constitution, and
authorize programs to assist non-residential and
residential customers?
Measure N Rates shall be sufficient to pay basic
expenses, as well as (Sec 1221(e)):
4% of operating revenue earned by
water and electric utilities during
prior fiscal year.
Sec 1221 also put ratepayer
discounts and customer assistance
programs in the Charter, to be paid
from rates.
Nov. 2014 Defeated.
No: 50.1%
Yes: 49.9%
City of Banning To allow approximately $2,325,000 annually for
unrestricted general revenue purposes such as
police, fire, paramedics, parks, and senior services
while stabilizing electric utility rates, shall an
ordinance be adopted authorizing a transfer not to
exceed 7.5% of annual electric utility gross revenues
to the City's General Fund until December 1, 2021
and 5.5% thereafter, for unlimited duration, and
establishing a rate freeze for 3 years, except as
needed for financial emergency or bond covenants?
Measure P Transfer 7.5% of annual electric
utility gross revenues to General
fund until Dec. 1, 2021, and 5.5%
thereafter, and setting a rate freeze
for 3 years, except for emergencies.
Nov. 2018 Defeated.
No: 51.29%
Yes: 48.71%
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ATTACHMENT A
Attachment A - 15
City Ballot Question Ballot
Measure Rate Date Approved?
City of Burbank To maintain essential City services/infrastructure like
police, fire, parks, libraries, streets and street
lighting, shall the measure be adopted amending the
City of Burbank Charter to continue the past practice
of transferring not more than 7% of Burbank Water
and Power’s gross annual sales of electricity, paid by
retail electric rate payers, providing approximately
$12.5 million annually to the City’s General Fund
until ended by voters, with all money spent to
benefit Burbank residents?
Measure T 7% of gross annual electricity sales
paid by retail rate payers, as a
separate line item on the bill or
embedded within rates and applied
retroactively to 2016/17 fiscal year.
June 5, 2018. Approved.
Yes: 81.1%
No: 18.9%
City of Colton To add approximately $4,800,000 in funding annually
for general city services such as police, fire,
paramedics, parks, libraries and senior services while
stabilizing electric utility rates; shall an ordinance be
adopted authorizing a transfer not to exceed 20% of
annual electric utility gross revenues to the City’s
General Fund reverting back to a 12.39% maximum
on June 30, 2021, and establishing a freeze on
electric utility rates for 5 years, except in cases of
financial emergency?
Measure D 20% of Electric Utility’s prior year
gross revenues for 5 years.
June 2016 Approved.
Yes: 76.2%
No: 23.8%
City of Long Beach To maintain general City services like 9-1-1
emergency response, police/fire protection,
street/pothole repairs, senior services, parks and
libraries, shall the City of Long Beach amend its
Charter to authorize annual fund transfers from the
City’s water, sewer and gas utilities to the General
Fund not to exceed 12% of utility gross revenues,
generating approximately $25,500,000 annually for
unrestricted general revenue purposes, requiring
annual independent audits, until ended by voters?
Measure
M
Up to 12% of gross revenues from
water, sewer and gas utilities.
June 2018 Approved.
Yes: 53.76%
No: 46.24%
Water and sewer charges
challenged in Lejins v. City of Long
Beach; appellate court held on
Dec. 1, 2021 that both charges and
transfers were unconstitutional
violations of Prop. 218.
City of Pasadena Shall the measure maintaining 911 response, fire,
paramedic, public health, senior and homeless
services, street repairs, and other services by
amending the City Charter to continue collecting in
electric rates and maintain the longstanding transfer,
limited to 12% gross revenue, providing $18,000,000
annually to Pasadena's General Fund that does not
increase taxes or utility rates until ended by voters,
requiring financial audits with all funds locally
Measure P
12% of gross revenue of electric
utility.
Nov. 3 2020 Approved:
Yes: 83.57%
Challenged in Komesar v. City of
Pasadena, upheld.
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ATTACHMENT A
Attachment A - 16
City Ballot Question Ballot
Measure Rate Date Approved?
controlled benefitting Pasadena residents, be
adopted?
City of Sacramento In order to comply with Prop 218 . .. shall the City of
Sacramento replace its current in-lieu franchise and
property tax fees on water, sewer, drainage and
garbage with a general tax which will not result in any
changes to existing city utility rates??
Measure I Tax of 11 percent on gross revenues
from user fees & charges imposed by
city enterprises providing water,
sewer, storm drainage, & solid waste
services
June 1998 Approved:
Yes: 54.4%
Challenged in Wyatt v. City of
Sacramento, upheld.
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ATTACHMENT B
Attachment B - 1
Summary of Prior Work on
Potential Revenue Generating Ballot Measures
The City of Palo Alto has been discussing its options for potential revenue-generating ballot
measures through 2019 and 2020. This work was suspended at City Council direction in March
2020 in order to marshal available resources to manage through the COVID-19 pandemic. A
brief timeline of the CMRs and discussions with the Finance Committee and the City Council
since April of 2019, when staff was formally directed to begin working on this project by the
City Council, is included below for additional context. The date, the forum of the meeting
(Finance Committee or City Council), the summary title, and the CMR number are included for
ease of reference.
Timeline
4/22/2019 City Council, “2019 Fiscal Sustainability Workplan”, CMR 10267
4/22/2019 City Council, “Approve Workplan for a Potential Revenue Generated Ballot
Measure”, CMR 10261
6/18/2019 Finance Committee, “Review, Comment, and Accept Preliminary Revenue Estimates
for Consideration of a Ballot Measure”, CMR 10392
8/20/2019 Finance Committee, “Evaluation and Discussion of Potential Revenue Generating
Ballot Measures”, CMR 10445
9/16/2019 City Council, “Evaluation and Discussion of Potential Revenue Generating Ballot
Measures and Budget Amendment”, CMR 10615
10/1/2019 Finance Committee, “Revised Workplan for Consideration of a Ballot Measure”, CMR
10712
10/15/2019 Finance Committee, “Stakeholder Outreach, Initial Polling, and Discussion of a
Potential Ballot Measure”, CMR 10743
11/4/2019 City Council, “Potential Ballot Measure Polling/Outreach, Contract, Solicitation
Exemption and Budget Amendment”, CMR 10792
12/2/2019 City Council, “Structure and Scenarios of Initial Round of Polling for a Potential Local
Tax Measure”, CMR 10891
12/17/2019 Finance Committee, “Consideration, Evaluation, and Discussion of a Revenue
Generating Local Tax Ballot Measure, Review of Refined Modeling, Analysis, Tax Structure and
Recommendation to the City Council”, CMR 10655
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ATTACHMENT B
Attachment B - 2
1/27/2020 City Council, “Update, Consideration, and Potential Direction on Possible Local Tax
Measure for 2020 Election”, CMR 11019
3/23/20 City Council, “Consideration of Analysis, Public Outreach, and Refined Polling and
Further Direction on a Potential Local Business Tax Ballot Measure for 2020 Election”, CMR
11161
3/23/20 City Council, “Consideration of Analysis, Public Outreach, and Refined Polling and
Further Direction on a Potential Local Business Tax Ballot Measure for 2020 Election”, At-Places
Memorandum
6/15/2021, Finance Committee Staff Report, “Recommend the City Council Approve the
Workplan for Pursuit of a Revenue-Generating Local Ballot Measure for the November 2022
General Election; Review and Potential Guidance to Staff on Affordable Housing Funding as
Referred by the Council”, CMR 12299
8/16/2021 City Council, “Approve the Workplan for Development of a Revenue-Generating
Local Ballot Measure for the November 2022 General Election; Review and Potential Guidance
to Staff on Affordable Housing Funds as Referred by the City Council”, CMR 12381
9/21/2021 Finance Committee, “Discuss Updates and a Recommended Further Refinement of
Potential Revenue Generating Local Ballot Measures,” CMR 13514
10/19/2021 Finance Committee, “Discuss Updates and Recommend Further Refinement of
Potential Revenue Generating Local Ballot Measures, and Review Draft Initial Polling Outline”,
CMR 13648
11/8/2021 City Council, “Discuss Updates and Recommend Further Refinement of Potential
Revenue Generating Local Ballot Measures, and Review Draft Initial Polling Outline”, CMR
13687
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