HomeMy WebLinkAbout2022-11-29 Finance Committee Agenda Packet1
Materials related to an item on this agenda submitted to the Finance Committee after distribution of the agenda
packet are available for public inspection in the city’s website at www.cityofpaloalto.org
FINANCE COMMITTEE
Tuesday, November 29, 2022
Special Meeting
Community Meeting Room & Virtual
5:30 PM
Pursuant to AB 361 Palo Alto City Council and Committee meetings will be held as “hybrid”
meetings with the option to attend by teleconference/video conference or in person. To
maximize public safety while still maintaining transparency and public access, members of
the public can choose to participate from home or attend in person. Information on how the
public may observe and participate in the meeting is located at the end of the agenda.
HOW TO PARTICIPATE
VIRTUAL PARTICIPATION
CLICK HERE TO JOIN (https://cityofpaloalto.zoom.us/j/99227307235)
Meeting ID: 992 2730 7235 Phone:1(669)900-6833
The meeting will be broadcast on Cable TV Channel 26, live on YouTube at
https://www.youtube.com/c/cityofpaloalto, and s t r e a m e d t o Midpen Media
Center at https://midpenmedia.org.
PUBLIC COMMENTS
Public Comments will be accepted both in pers on and via Zoom meeting. All requests to
speak will be taken until 5 minutes after the staff’s presentation. Written public comments
can be submitted in advance to city.council@cityofpaloalto.org and will be provided to
the Committee and available for inspection on the City’s website. Please clearly
indicate which agenda item you are referencing in your email subject line.
CALL TO ORDER
ORAL COMMUNICATIONS
Members of the public may speak to any item NOT on the agenda.
ACTION ITEMS
1.Discussion and Recommendation to the City Council Accept the Macias
Gini & O’Connell’s (MGO) Audit of the City of Palo Alto’s Financial
Statements as of June 30, 2022
2.Approval of the FY 2022 Annual Comprehensive Financial Report
(ACFR) and Year-End Budget Amendments in Various Funds
Presentation
Presentation
2
Finance Committee Special Meeting November 29, 2022
3.Staff Recommends the Finance Committee Recommend the City
Council Adopt a Resolution Amending Electric Rate Schedule E-HRA
(Electric Hydro Rate Adjuster) Increasing the Current E-HRA Rate to
$0.050/kWh Effective January 1, 2023
4.Discussion and Update on Sanitary Sewer Main Replacement
Acceleration Alternatives
FUTURE MEETINGS AND AGENDAS
ADJOURNMENT
Presentation
Presentation
3
Finance Committee Special Meeting November 29, 2022
PUBLIC COMMENT INSTRUCTIONS
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AMERICANS WITH DISABILITY ACT (ADA)
Persons with disabilities who require auxiliary aids or services in using City facilities,
services or programs or who would like information on the City’s compliance with th e
Americans with Disabilities Act (ADA) of 1990, may contact (650) 329 -2550 (Voice) 48
hours or more in advance.
City of Palo Alto (ID # 14984)
Finance Committee Staff Report
Meeting Date: 11/29/2022 Report Type:
City of Palo Alto Page 1
Title: Discussion and Recommendation to the City Council Accept the Macias
Gini & O’Connell’s (MGO) Audit of the City of Palo Alto’s Financial Statements
as of June 30, 2022
From: City Manager
Lead Department: City Auditor
Recommendation
The City Auditor recommends that the Finance Committee review and forward to the
City Council for approval the City of Palo Alto’s audited financial statements for the fiscal
year ended June 30, 2022 and the accompanying reports provided by Macias Gini &
O’Connell LLP.
Discussion
The City Charter requires that the City Council, through the City Auditor, engage an
independent public accounting firm to conduct the annual financial audit. The selected
firm reports the results of the audit, in writing, to the City Council. Ma cias Gini &
O’Connell LLP, a certified public accounting firm, conducted the audits of the City’s
financial statements for the fiscal year ended June 30, 2022.
The City Auditor is providing copies of the following financial statements and reports as
prepared by MGO:
• Auditor’s Report to the City Council (the “Management Letter”) – Attachment A
• Cable TV Franchise, Independent Auditor’s Report and Statements of Franchise
Revenues and Expenses for the Years Ended December 31, 2021 and 2020 –
Attachment B
• Palo Alto Public Improvement Corporation Annual Financial Report for the Year
Ended June 30, 2022 – Attachment C
• Regional Water Quality Control Plant Independent Auditor’s Report and Financial
Statements for the Year Ended June 30, 2022 – Attachment D
• Independent Accountant’s Report on Applying Agreed-Upon Procedures Related
to the Article XIII-B Appropriations Limit for the Year Ended June 30, 2022 –
Attachment E
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City of Palo Alto Page 2
Note that the final audit report, the Single Audit, will be completed and presented at a
subsequent meeting.
The Annual Comprehensive Financial Report (ACFR), a separate item on this agenda,
includes the following Independent Auditor’s report:
• Independent Auditor’s Reports on the Financial Statements (pgs. 1-3)
Macias Gini & O’Connell LLP issued a clean opinion on each audit report and reported
no findings within the Agreed-Upon Procedures report.
The City Auditor would like to express appreciation to Macias Gini & O’Connell LLC
Administrative Services Department staff for their hard work and cooperation during the
audit.
Attachments:
• Schedule A - Auditor's Report to the City Council
• Schedule B - Cable TV Franchise Auditor's Report
• Schedule C - Public Improvement Corporation Annual Financial Report
• Schedule D - Regional Water Quality Control Plant Auditor's Report
• Schedule E - GANN Limit Agreed Upon Procedures Report
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Macias Gini & O’Connell LLP
2121 N. California Boulevard, Suite 750
Walnut Creek, CA 94596
Government Auditing Standards
deficiency in internal control
material weakness
Reasonably possible
Probable
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Accounting for Interest
Cost Incurred before the End of a Construction Period Omnibus 2020
Replacement of Interbank Offered Rates Certain Component Unit Criteria, and
Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation
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Plans – an Amendment of GASB Statements No. 14 and No. 84, and a Supersession of GASB Statement
No 32 Omnibus 2022
Fair value of investments
Estimated allowance for losses on notes and loans receivable
Depreciation estimates for capital assets, including depreciation methods and useful lives
assigned to depreciable assets
Landfill post-closure liability.
Net pension and Other Postemployment Benefits (OPEB) liabilities, contributions, expenses, and
other related balances.
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Claims loss reserve.
Discount rate used for the calculation of lease liability and lease receivable
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Required Supplementary Information
Supplementary Information and Other Sections
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Leases
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Macias Gini & O’Connell LLP
2121 N. California Boulevard, Suite 750
Walnut Creek, CA 94596
Opinion
Basis for Opinion
Emphasis of a Matter
Management’s Responsibilities for the Financial Statements
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Auditor’s Responsibilities for the Audit of the Financial Statements
Restriction on Use
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Macias Gini & O’Connell LLP
2121 N. California Boulevard, Suite 750
Walnut Creek, CA 94596
Opinions
Basis for Opinions
Responsibilities of Management for the Financial Statements
1.c
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Required Supplementary Information
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Basic Financial Statements - and Management’s Discussion and Analysis - for State and Local
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Debt Service Fund
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Walnut Creek, CA 94596
Opinion
Basis for Opinion
Emphasis of a Matter
Management’s Responsibilities for the Financial Statements
1.d
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Macias Gini & O’Connell LLP
2121 N. California Boulevard, Suite 750
Walnut Creek, CA 94596
Agreed-upon Procedures Applied to the Appropriations Limit Prescribed by Article XIII-B of
the California Constitution
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City of Palo Alto (ID # 14632)
Finance Committee Staff Report
Meeting Date: 11/29/2022 Report Type: Action Items
City of Palo Alto Page 1
Title: Approval of the FY 2022 Annual Comprehensive Financial Report (ACFR)
and Year-End Budget Amendments in Various Funds
From: City Manager
Lead Department: Administrative Services
RECOMMENDATION
Staff recommends that the Finance Committee forward to the City Council for its approval:
1. The City’s Fiscal Year (FY) 2022 Annual Comprehensive Financial Report (ACFR); and
2. Amend the FY 2022 Budget Appropriation Ordinance for various funds as identified in
the attached Recommended Amendments to the City Manager’s FY 2022 Budget
(Operating Budget: Attachment B – Exhibit 1; Capital Budget: Attachment B – Exhibit
2).
EXECUTIVE SUMMARY
The City’s fiscal year ended on June 30, 2022, financial records closed, and financial reports
summarizing the fiscal year were prepared. The reports, along with the City’s financial data,
were audited by Macias Gini & O’Connell LLP (MGO), Certified Public Accountants, a firm hired
by the City Auditor. MGO issued an unmodified (clean) audit opinion on the financial position of
the City’s activities and, together with the City’s financial statements and other information ,
comprises the City’s Annual Comprehensive Financial Report (ACFR). The full report can be
found in Attachment C.
In addition to the ACFR, this report includes recommended budget adjustment actions to close
the fiscal year. These technical actions reallocate and realign the budget to appropriate funds in
alignment with actual operating and capital expenditures and revenue collected as well as
adjust transfers between funds.
Financial Highlights for FY 2022
Government-wide
At the close of FY 2022, the City’s total Net Position is $1.27 billion, an increase of $40.6 million
or 3.2% over the prior fiscal year. The Statement of Net Position (p. 31 of the ACFR) repo rts
Governmental Activities Net Position (the City’s basic services which are generally funded by
taxes, and by specific program revenues such as fees and grants) at $474.1 million, a $51.0
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million increase from the prior year, and Business-Type Activities Net Position (the City’s
enterprise activities which are funded in whole or in part by fees charged to external parties) at
$796.8 million, a $10.4 million decrease. Various factors contributed to these changes, including
accounting adjustments required by the Governmental Accounting Standards Board (GASB).
General Fund
The General Fund ended with a net Budget Stabilization Reserve (BSR) surplus of $14.2 million,
compared to estimates used in the development of the FY 2023 Adopted Budget and the
Council’s target reserve level of 18.5% of budgeted expenses. Overall, a total $100.1 million
fund balance of both restricted and unrestricted balances is $24.4 million higher than the prior
year balance of $75.6 million. The BSR is $72.8 million, a $23.7 million or 48.3% increase from
FY 2021. This increase is driven by both higher than budgeted revenues and lower than
budgeted expenditures. Much of this variance was forecasted, discussed, and a core
component of the FY 2023 Adopted Budget and two-year budget balancing strategy to ensure
continued stability for the organization and community through uncertain times. Once the BSR
is adjusted for Council approved uses to balance the FY 2023 Adopted Budget 1 and other needs
through the first quarter of FY 2023, the City’s actual $59.8 million BSR balance is above the
Council’s 18.5% target ($45.6 million) for FY 2023 by $14.2 million.
Major tax revenues such as sales tax, property tax, transient occupancy tax, utility user tax, and
documentary transfer tax were higher than budgeted while expense savings were realized
across many of the departments (detailed in Attachment A). Although all the major taxes are
higher than the Adjusted Budget, the pandemic continues to impact the City’s revenue with
sales tax, transient occupancy tax, and utility user tax, remaining lower compared to pre -
pandemic revenues.
Business Type Activities (Enterprise Funds & Internal Service Funds)
As of June 30, 2022, the City’s Enterprise Funds reported a total net position of $796.8 million, a
decrease of $10.4 million or 1.3% from the prior year. All funds showed positive balances: Net
Investment in Capital Assets ($670.8 million), Restricted for Debt Service ($3.3 million), and
Unrestricted ($122.7 million).
Internal Service Funds ended the fiscal year with $86.0 million net position balance. All funds
showed positive balances except the Printing and Mailing and Workers Compensation
Insurance Program Funds. The Printing and Mailing Fund reported a $0.2 million negative
balance due to the pension liability per GASB 68 and Other Post-Employment Benefits (OPEB)
liability per GASB 75. Workers Compensation Insurance Program Fund showed a $0.6 million
negative balance due to unrealized market losses on investments. Once adjusted for these
noncash transactions, both funds remain with a positive fund balance.
1 City Council June 30, 2022, Agenda Item #28; CMR #14352;
https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-council-
agendas-minutes/2022/20220620/20220620pccsm-amended-final-final.pdf#page=557
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BACKGROUND
The City’s fiscal year ends on June 30, at which time its financial records are closed for the year
and financial reports are prepared. The reports, along with the City’s financial data, are audited
by Macias Gini & O’Connell LLP (MGO), Certified Public Accountants, a firm hired by the City
Auditor. MGO issues an audit opinion on the financial position of the City’s activities and ,
together with the City’s financial statements and other information, comprises the City’s
Annual Comprehensive Financial Report (ACFR) that can be found in Attachment C.
Attachment B outlines technical recommended amendments to the FY 2022 Budget. These
recommended actions close the fiscal year by reallocating and realigning budget to appropriate
funds for actual operating and capital expenditures and revenue collected as well as adjust
transfers between funds. The General Fund Summary found in Attachment A, provides detailed
information of revenue and expenditures by department. The Discussion section of this staff
report includes Results by Fund which discusses position of fund balances, major revenue
sources, and expense highlights.
The ACFR includes government-wide statements and fund level financial statements that
provide a snapshot of fund balances and activity for the year. An overview of financial results,
information on how to navigate the ACFR document, and highlights of key fiscal issues affecting
the City can be found in the Management’s Discussion and Analysis (MD&A) section (ACFR p. 5).
The MD&A also provides a discussion and analysis of the City’s current fiscal health and
includes financial statements and analysis compared to the prior year, along with capital asset
and debt administration data.
Throughout this report, pronouncements released by GASB are referred to by issuance number.
For example, GASB Pronouncement No. 68 is referenced in this report as GASB 68. A full list of
pronouncements can be found on GASB’s website.
DISCUSSION & ANALYSIS
There are two methods of displaying the City’s financials that are included in the FY 2022 ACFR,
1) Government Wide Statements and 2) Fund Financial Statements. The discussion below is
organized by these two reporting standards and the results contained within. To assist in the
terminology below is a brief overview of these; each of these displays of the City’s financial
statements are governed by Generally Accepted Accounting Principles (GAAP) as modified
regularly by the Governmental Accounting Standards Board (GASB). Neither of these views are
the same as the City’s annual budget; however, Fund Financial Statements is most closely
aligned.
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Government Wide Financial Statements Fund Financial Statements
• Governmental Activities – City’s basic
services generally funded by taxes,
and/or by specific program revenues
such as fees and grants (full accrual) +
includes portion of internal service funds
• Business Type Activities – City’s
enterprise activities which are funded in
whole or in part by fees charged to
external parties (full accrual) + includes
portion of internal service funds
• Governmental Funds – similar to
“governmental activities” EXCEPT on a
modified accrual basis of accounting +
excludes internal service funds.
• Proprietary Funds – same as “business
type activities” EXCEPT includes internal
service funds. Includes what we refer to
as “enterprise funds” (full accrual)
Government-wide Statements
Statement of Net Position
The Statement of Net Position presents information of all the City’s assets plus deferred
outflows of resources, and liabilities plus deferred inflows of resources, with the reported net
position.
The City’s net position was $1.271 billion on June 30, 2022, compared to a balance of $1.230
billion on June 30, 2021. The total increase of $40.6 million, or 3.2%, consists of $51.0 million
from governmental activities partially offset by a decrease of $10.4 million from business -type
activities.
The largest portion of the City’s net position ($1.175 billion or 92.4%) is its net investment in
capital assets such as land, buildings, infrastructure, vehicles, and intangible assets – right to
use leased assets less any related outstanding debt that was used to acquire these assets. The
restricted portion of the City’s net position ($76.2 million or 6.0%) represents resources that are
subject to external restrictions on how they may be used. The remaining balance of $20.0
million, across all funds, representing 1.6% of the City’s net position, is unrestricted and may be
used to meet the City’s ongoing obligations to its citizens and creditors.
The unrestricted net position for the governmental activities portion is negative mainly due to
the recognition of the net pension liabilities required by GASB Statement No. 68 and net OPEB
liabilities required by GASB Statement No. 75. The $102.7 million deficits for governmental
activities include the $286.6 million impact of net pension liabilities and its related deferred
outflows of resources (GASB 68) and $78.3 million impact of net OPEB liabilities and its related
deferred outflows of resources and deferred inflows of resources (GASB 75). Excluding these
impacts, the Governmental Activities’ unrestricted net position is $262.2 million.
The net position of both governmental and business type activities reduced by $50.6 million
due to unrealized market losses on the City’s investment. Actual investment earnings on the
City’s portfolio are $9.0 million; however, the net interest earnings reported in the financial
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statement have a negative balance of $41.6 million due to accounting for unrealized losses on
the City’s investments. Per GASB 31, public agencies are required to report the change in the
valuation of City’s portfolio, and due to the rising interest rates, the portfolio’s fixed income
securities have a “paper” loss as of June 30. The City’s long-standing practice is to hold
investments to maturity and due to this practice, there will likely be no actual losses incurred
on these investments.
TABLE 1
STATEMENT OF NET POSITION
As of June 30, 2022
(in millions)
2022 2021 2022 2021 2022 2021
Cash and investments 400.7$ 443.4$ 241.3$ 285.6$ 642.0$ 729.0$
Other assets 82.4 76.6 50.7 47.7 133.1 124.3
Capital assets 674.2 602.0 735.2 693.2 1,409.4 1,295.2
Deferred outflows 59.2 60.8 24.7 21.1 83.9 81.9
Total assets and deferred outflows 1,216.5 1,182.8 1,051.9 1,047.6 2,268.4 2,230.4
Net pension and OPEB liabilities 316.5 438.2 109.5 159.7 426.0 597.9
Long-term debt 210.2 217.5 64.3 68.9 274.5 286.4
Other liabilities 102.9 87.6 33.1 23.8 136.0 111.4
Deferred inflows 112.8 16.3 48.2 6.4 161.0 22.7
Total Liabilities 742.4 759.6 255.1 258.8 997.5 1,018.4
Net Position
Net investment in capital assets 503.9 480.6 670.8 642.0 1,174.7 1,122.6
Restricted 72.9 80.3 3.3 3.4 76.2 83.7
Unrestricted (102.7)(137.7)122.7 161.8 20.0 24.1
Total Net Position 474.1$ 423.2$ 796.8$ 807.2$ 1,270.9$ 1,230.4$
Governmental Business-type Government-wide
Activities Activities Totals
Statement of Activities
The major sources of the City’s revenues are Program Revenues and General Revenues.
Program Revenues consist of charges for services (both governmental and business type
activities) as well as operating and capital grants and contributions. General Revenues include
property tax, sales tax, utility user tax, transient occupancy tax, documentary transfer tax, other
taxes and miscellaneous revenue.
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Revenues for the City in FY 2022 were $565.4 million, an increase of $11.7 million or 2.1%
above FY 2021, due to a $21.6 million increases in Governmental Activities partially offset by a
$9.9 million decrease from Business Activities. Governmental Activities increased $21.6 million
due to program and general revenues. The increases in program revenues are due to
resumption and increase of in-person classes, paramedic revenues, ARPA funding totaling $8.2
million, and $25.7 million donation from Friends of the Junior Museum & Zoo (JMZ). The
increases in general revenues are from major taxes partially offset by decreases in investment
earnings from the negative impact of fair market value adjustments. Business Activities revenue
decreased $9.9 million mainly due to decreases in Water Fund reven ues resulting from
conservation efforts in response to the drought. This was partially offset by an increase in Gas
Fund revenues driven by a 3% rate increase and portion of the commodity price increases is
passed through to customers. Another factor driving the decrease of the revenue is the
decrease of investment earnings resulting from negative fair market value adjustments.
Expenses for the City in FY 2022 were $524.8 million, a decrease of $24.1 million or 4.4% below
FY 2021, due to a $45.6 million decrease from Governmental Activities that is partially offset by
a $21.6 million increase from Business-type expenses.
The decrease in Governmental Activities expenses is mainly due to the decrease in pension and
OPEB related adjustments for GASB 68 and GASB 75, primarily due to higher actual than
expected interest earnings of City’s pension and OPEB plan.
Administrative Services expenses decreased $8.0 million, primarily due to the $12.6 million set
aside established in FY 2021 for Green v. City of Palo Alto. Additional expenses of $4.9 million
were set aside in 2022 to settle the case. The City has a total claim payable of $17.5 million for
the Green case on its governmental activities’ financial statements
Public Works expenses, which decreased $21.5 million mainly due to review and reclassification
of construction in progress balances and determined that certain expenses, specifically various
repairs and maintenance of streets, sidewalks, facilities, and parks, should not have been
capitalized per Generally Accepted Accounting Principles (GAAP). The expense to correct these
construction progress balances was recorded as part Public Works functional expenses in FY
2021. These actions are consistent with recent staff review, affirmed by an audit compl eted by
BakerTilly (the City Auditor), to more accurately account for capitalized assets.
The increase of Business Type Activities is driven by several cost categories and resulted in
higher costs compared to prior year, including energy purchase cost, op erations and
maintenance in Electric Fund, and commodity purchases in Gas Fund. These increases were
partially offset by the decrease in pension and OPEB related adjustments for GASB 68 and GASB
75, primarily due to higher actual than expected interest earnings of City’s pension and OPEB
plan.
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TABLE 2
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Capital Assets
The City’s capital assets for its governmental and business-type activities as of June 30, 2022
amounts to $1.409 billion (net of accumulated depreciation), which is a $98.9 million or 7.5%
increase over FY 2021. The increase was primarily due to various projects such as the
Charleston Arastradero Corridor, Public Safety Building, Highway 101 Bicycle and Pedestrian
Bridge, Water Main Replacement, Smart Grid Technology Installation, Electric System
Improvements, and Primary Sedimentation Tank Rehabilitation. In addition, due to the $29.2
renovated Junior Museum and Zoo (JMZ) of which $25.7 million was a donation from the
Friends of JMZ
City implemented GASB 87 – Leases which resulted in an increase of Intangible Asset – right to
use leased assets amounting to $9.1 million, net of amortization.
TABLE 3
Capital Assets
2022 2021 (Decrease)
Governmental activites
Land and improvements 82.1$ 82.1$ -$
Street trees 15.0 14.8 0.2
Construction in progress 121.9 143.4 (21.5)
Building and improvements 350.6 272.1 78.5
Intangible assets 3.8 3.8 -
Equipment 82.9 80.3 2.6
Roadway network 359.1 335.3 23.8
Recreation and open space network 37.0 35.2 1.8
Less accumulated depreciation (385.2) (365.0) (20.2)
Intangible assets-right to use leased assets 9.8 - 9.8
Less accumulated amortization (2.8) - (2.8)
Total Governmental Activities 674.2 602.0 72.2$
Business-Type Activities
Land 5.0$ 5$ -$
Construction in progress 136.9 129.0 7.9
Buildings and improvements 80.5 74.5 6.0
Infrastructure 0.6 0.6 -
Transmission, distribution and treatment systems 948.9 914.8 34.1
Less accumulated depreciation (438.8) (415.4) (23.4)
Intangible assets-right to use leased assets 2.9 - 2.9
Less accumulated amortization (0.8) - (0.8)
Total Business-Type Activities 735.2$ 708.5$ 26.7$
Total Capital Assets 1,409.4$ 1,310.5$ 98.9$
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Liabilities
As of June 30, 2022, the City’s liabilities totaled $831.6 million, which is a $164.1 million or
16.5% decrease below FY 2021. The decrease was due City’s Net Pension Liabilities and Net
Other Post-Employment Benefit (OPEB) Liabilities decreasing by $171.9 million, driven primarily
due to investment earnings that increased the OPEB Plan’s Net Position, scheduled debt service
payments, and refinancing activities. The decrease was partially offset by an increase of lease
liabilities amounting to $10.0 million due to GASB 87 – Leases implementation.
Fund Financial Statements
General Fund
General Fund Reserves
The General Fund ended with a net Budget Stabilization Reserve (BSR) surplus of $14.2 million,
when compared to estimates used in the development of the FY 2023 Adopted Budget and the
Councils target reserve level of 18.5% of budgeted expenses. Overall, at the end of the current
fiscal year, the General Fund’s fund balance was $100.1 million of both restricted and
unrestricted balances. This fund balance is comprised of several reserves: the Budget
Stabilization Reserve (BSR or City’s general reserve), reappropriations, notes and loans,
inventory, prepaid items, and other general government special purpose reserves (this includes
reserves for encumbrances and donations). In FY 2022, $1.7 million was set aside for the
Reserve for Excess Educational Revenue Augmentation Fund (ERAF) for the at-risk amount
related to the lawsuit filed in November 2021 by the California School Boards of Association
and its Education Legal Alliance against the Controller of the State of California for over the
calculation methodology of the Excess ERAF.
As described in the BSR reserve policy approved by the Council, the reserve is to remain 15 -20%
of the General Fund operating budget, with a target goal of 18.5%. Any reserve balance in
excess of the 18.5% target may be transferred to the Infrastructure Reserve (IR) in the Capital
Improvement Fund, and/or the City's Section 115 Pension Trust, as outlined in the Pension
Funding Policy at the discretion of the City Manager.
The FY 2023 Adopted Operating Budget projected a $54.7 million BSR balance as of June 30,
2022, compared to the actual balance of $72.8 million (this is a component of the General
Fund, fund balance noted above). The BSR is above projected levels due to higher major taxes
and program revenues, and lower expenses due to higher vacancy savings and lower expenses
across departments for internal costs to run the City such as utilities, printing and mailing, and
vehicle maintenance.
Much of this variance was forecasted, discussed, and a core component of the FY 2023 Adopted
Budget and two-year budget balancing strategy. The Council recognized these higher than
budgeted estimate and used these funds to bridge the transition as the City and community
emerged from the pandemic while ensuring stability for the organization. The chart below
outlines the already approved uses of the BSR in FY 2023. These adjustments, totaling $13.0
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million, results in a BSR balance of $59.8 million; approximately 24.2% of the FY 2022 Adopted
expenses of $247.4 million. This level is approximately $14.2 million above the target level of
18.5% ($45.6 million). Micro and macro-economic conditions are adjusting daily, with rising
inflation, changes in jobs, and recessionary trends creating significant uncertainty. As the St ate
of California Legislative Analyst Office (LAO) wrote in their annual Fiscal Outlooks for California
“Economic Conditions Weigh on Revenues, [the] booming economy has led to high
inflation…efforts to tame inflation are slowing the economy…inflation pres sures remain, raising
risk of recession…fiscal outlooks revenues balance competing risks.2” Therefore, below are
recommended adjustments in line with the City Manager’s authority for transfer of excess BSR,
adjusted for a recommendation to reserve funds to safeguard the stability the City has strived
to achieve in the recent year by re-establishing an economic uncertainty reserve. Staff
anticipates returning to Council in February 2023 with the FY 2023 Mid -Year Review and
recommendations in alignment with the allocation below for the appropriation of BSR funds
above the 18.5% level. Staff do recommend a transfer to the Infrastructure Reserve as
inflationary costs are impacting capital project needs including anticipated significant price
increases in the Automated Parking Guidance Project, as well as a need to provide safety
improvements to critical assets such as the artificial turf playing fields.
2 The 2023-24 Budget California’s Fiscal Outlook, California Legislative Analyst’s Office (LAO), November 16, 2022,
https://lao.ca.gov/Publications/Report/4646
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TABLE 4
Year-End Budget Stabilization Reserve (BSR) Summary
(in millions)
General Fund BSR Balance, June 30, 2022 $72,835
Uses of the FY 2022 Surplus
FY 2023 Approved Adjustments to the BSR Balance
FY 2023 Adopted Budget ($9,072)
FY 2023 Services Reinvestment ($3,700)
Downtown Streets Team (CMR 14526) ($167)
Reappropriations (CMR 14728) ($100)
Subtotal: Approved Adjustments to the BSR Balance ($13,039)
Subtotal: BSR Balance, After Approved Adjustments $59,796
FY 2023 RECOMMENDED Adjustments to the BSR Balance
(to be considered in FY 2023 Mid-Year Budget)
Reserve for Economic Uncertainty ($5,000)
Transfer to Section 115 Pension Trust Fund ($5,000)
Transfer to Infrastructure Reserve (IR) in the Capital Improvement Fund ($4,000)
Subtotal: RECOMMENDED Adjustments to the BSR Balance ($14,000)
Current Projected FY 2022 BSR Level, (June 30, 2023) $45,796
General Fund Revenues
General Fund revenues for FY 2022 were $190.4 million, which is $23.6 million or 14.1% higher
than the prior year. Year-over-year changes in each of the major tax revenue categories are
summarized in the following table. The majority of these higher than budgeted revenues were
forecasted and discussed as part of the FY 2023 Adopted Budget, in May 2022, staff and the
Finance Committee discussed use of a projected $14 million excess revenues to develop a two-
year budget strategy and begin reinvestments.
TABLE 5
General Fund Major Tax Revenues
(in millions)
Category FY 2022 FY 2021
% Change
Increase (Decrease)
Property tax $ 59,353 $ 56,572 4.9%
Sales tax 32,705 29,127 12.3%
Utility user tax 15,599 14,642 6.5%
Transient occupancy tax 16,946 5,179 227.2%
Documentary transfer tax 11,990 10,627 12.8%
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Property tax revenue increased $2.8 million or 4.9% due to property assessed value growth
that was driven by the change of ownership, and an increase of $1.1 million in the Excess
Educational Revenue Augmentation Fund (ERAF) distribution.
Sales tax receipts were $3.6 million or 12.3% higher than the prior year. The increase is due to
the strong performance of apparel and department stores, furniture/appl iance, and food
products categories which include restaurants, and transportation such as new auto sales. The
City’s revenue base also benefits from many high-end goods and dining options at regional
destinations, such as Stanford Shopping Center.
Utility user tax revenues are $1.0 million or 6.5%, higher compared to prior year. The economic
recovery resulted in increased business activity and workers returning to the office/business
site resulting an increased use of services subject to UUT.
Transient occupancy tax (TOT) ended the year $11.8 million or 227% higher than prior year.
The increase is exceptionally high because this is compared to a time when there was a high -
level of health, safety and travel restrictions however remains lower than the pr e-pandemic
levels. In FY 2022, the average occupancy rate was 63.5%, a 57.4% increase and the average
room rate was $194.89, a 68.6% increase over the prior year. The entire 15.5% TOT rate from
new hotels, plus 3.5% from all other hotels, has been allocated to the Infrastructure Plan
pursuant to City Council direction. This results in additional TOT for the Infrastructure plan of
$2.2 million. These additional funds, coupled with the recommended excess BSR funds will
assist in ensuring capital projects may continue as planned, adjusting for the rising costs due to
the current inflationary economic conditions. The following is a comparative breakdown of the
allocation of transient occupancy tax receipts:
TABLE 6
Allocation of Transient Occupancy Tax
FY 2022 FY 2021
% Change
Increase (Decrease)
General Fund $ 8,828 $ 2,796 215.7 %
Infrastructure Plan
New hotels – 12% 4,292 1,214 253.5 %
All hotels – 3.5% 3,826 1,169 227.3 %
Subtotal Infrastructure 8,118 2,383 240.7 %
Total TOT Receipts $ 16,946 $ 5,179 227.2 %
Documentary transfer tax increased $1.4 million or 12.8% compared to prior year due to nine
large commercial property transactions that occurred in FY2022. The number of transactions
was comparable to the prior year This revenue source is volatile since it is highly dependent on
sales volume and property values and the mix of commercial and residential sales.
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Charges for services increased $4.2 million or 16.7% compared to prior year mainly due to
resumption of program and classes and offered both virtually and in-person with the lifting of
many State and County Public Health restrictions.
Other revenues decreased $2.8 million or 56.0% compared to prior year, due to decrease of
investment earnings, mainly from unrealized market losses on investments, partially offset by
the American Rescue Plan Act distribution of $8.2 million recognized as revenue in FY 2022.
The following is a chart which depicts the relative contribution of each tax category over the
past seven years (2016 through 2022), as well as the current budgeted year (2022).
CHART 1
General Fund Tax Revenues
Actual Fiscal Years 2016 – 2022
Budget Fiscal Year 2022
($ in thousands)
General Fund Expenditures
General Fund expenditures for FY 2022, including encumbrances and reappropriations, totaled
$209.5; an increase of 14.0% from the prior year, primarily due to the increase in salary and
benefit costs, and indirect charges. The increase in salaries and benefits are due to overtime,
specifically police and fire, paid leave, and pension. The indirect charges were higher in the
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current year primarily due to liability insurance charges, vehicle equipment maintenance
service and information technology (IT) support. The increase in liability insurance charges is
based on actuarial analysis of the City’s liabilities costs over the past few years and provides an
85 percent confidence level. Another factor driving the increase was due to reappropriations of
$12.4 million claims for a class action lawsuit.
The Adopted Budget of $194.4 million was increased to the Final Adjusted Budget amount of
$215.1 million, primarily due to increased funding from prior year encumbered and
reappropriated balances and increases for several departments throughout the year also
occurred based on City Council direction per recommendations contained in City Manager
Reports. The following is a chart which compares actual departmental costs, including
encumbrances and reappropriations, excluding Cubberley lease over the past seven years and
budgeted costs for FY 2023.
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CHART 2
General Fund Departments
Actual Expenditures Fiscal Years 2016– 2022 (including reappropriations and encumbrances)
Budgeted Expenditures Fiscal Year 2023
($ in thousands)
0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 220,000
FY 2023 Budget
FY 2022 Actual
FY 2021 Actual
FY 2020 Actual
FY 2019 Actual
FY 2018 Actual
FY 2017 Actual
FY 2016 Actual
FY 2023
Budget
FY 2022
Actual
FY 2021
Actual
FY 2020
Actual
FY 2019
Actual
FY 2018
Actual
FY 2017
Actual
FY 2016
Actual
Public Safety 89,724 83,339 77,795 83,616 77,592 75,975 72,815 65,005
Community Services 32,866 31,712 27,769 31,489 30,201 28,395 26,573 25,262
Admin Depts 41,302 39,762 26,165 28,169 29,304 23,538 22,157 22,059
Public Works 20,134 19,448 18,553 18,932 17,928 18,908 17,475 15,084
Planning and Development Services 22,615 21,231 18,782 21,098 22,606 23,006 22,400 21,784
Office Of Transportation 1,718 1,648 2,010 2,360
Library 10,211 8,904 8,636 10,092 9,491 9,357 9,266 8,217
The Development Services Department was combined with the Planning and Community Environment in FY 2020 and renamed
to the Planning and Development Services Department.
The Office of Transportation Department, which previously was a division of the Plannin g and Community Environment
Department was established in FY 2020.
Capital Projects Fund
The Capital Projects Fund ended the year with a fund balance of $117.9 million, comprised of
the following:
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TABLE 7
Capital Projects Fund – Fund Balance
Fund Balance Component
Amount
($ in millions)
Restricted for Library projects $ 251
Reserved for Roth Building rehabilitation 5,184
Reserved for Cubberley expenditures 5,720
Restricted for Public Safety Building 48,216
Assigned for all other Capital projects 58,567
Total Capital Projects Fund Balance $ 117,938
Restricted for Library projects $0.3 million is the portion of fund balance dedicated to the
remaining Mitchell Park Library expenditures which, if considered bond expenses will be paid
for with cash from bond proceeds. Non-bondable expenditures such as salaries and benefits are
funded from the Infrastructure Reserve (ending fund balance in the Capital Projects Fund), as
established at the time of the bond issuance. The Mitchell Park Library project is already
completed but the roof defects need to be fixed using this reserve.
Restricted for Public Safety Building $48.2 million represents the remaining bond funding
dedicated to the construction of the public safety building. This project is currently under
construction with estimated completion in Fall 2023.
Assigned for all other Capital projects $58.6 million represents the amount of unspent funds
associated with Adopted Capital projects and other noted items. Outside funding sources such
as grants, donations and future debt issues are not factored into this component of the fund
balance until they are received.
Enterprise Funds
The City’s Enterprise Funds reported a total Net Position of $790.7 million, a $12.6 million, or
1.6% decrease from the prior year. The table below summarizes the overall change in Net
Position for each Enterprise Fund. Compared to FY 2021, the Change in Net Position for
Enterprise funds decreased $34.8 million driven primarily by the Electric Fund, Wate r, Fiber
Optics and Gas Funds – details of these funds are summarized following this table.
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TABLE 8
ENTERPRISE FUNDS
Change in Net Position for the Year Ended June 30
(in millions)
Increase/
Fund Name 2022 2021 (Decrease)
Water 0.7$ 6.6$ (5.9)$
Electric (24.2)(4.8)(19.4)
Fiber Optics (1.2)1.5 (2.7)
Gas (0.6)3.5 (4.1)
Wastewater Collection 1.2 0.7 0.5
Wastewater Treatment 1.4 3.1 (1.7)
Refuse (0.2)1.9 (2.1)
Storm Drainage 2.6 3.0 (0.4)
Airport 7.7 6.7 1.0
Total Change in Net Position (12.6)$ 22.2$ (34.8)$
Overall, Changes in Net Position decreased $34.8 million for Enterprise Funds, mainly due to
accounting adjustments that resulted in over $21.5 million net unrealized market loss. In
addition, the Water Fund experienced lower revenue due to residential conservation efforts.
The Electric Fund also reported negative net change from the prior year due to increases in
purchases of electricity which were primarily driven by higher than historical forward energy
prices (future delivery), increased resource adequacy costs (capacity supply and demand), and
lower hydroelectric supply. The Gas Fund showed a $4.1 million negative change due t o higher
commodity prices partially offset by a 3% rate increase and increased revenue from a portion of
the commodity price increases being passed directly to customers. The Airport Fund reported a
$1.0 million positive net change due to federal grants received for the Apron Reconstruction
project.
The table below details the Change in Unrestricted Net Position in the Enterprise Funds.
Enterprise Fund Rate Stabilization, Operations and other reserve balances are shown in detail in
the ACFR (p. 96). Overall, except for the Wastewater Treatment Fund and the Airport Fund,
each Enterprise Funds maintained a positive unrestricted net position balance as of June 30,
2022. Adjustments for the Pension Reserve (as required by GASB 68) and OPEB Reserve (as
required by GASB 75) total $130.2 million and unrealized market losses on investments total
$21.5 million (as required by GASB 31) for all Enterprise Funds and reduce each fund’s
unrestricted net position.
The Wastewater Treatment Fund reflects a $14.8 million Un restricted Reserve deficit and is
mainly driven by $ $26.1 million in Pension Reserves and OPEB Reserves adjustments.
The Airport Fund reports a $3.0 million Unrestricted Reserve deficit which is attributed to the
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$1.1 million Pension Reserve and OPEB Reserve adjustments. Second, the fund deficit in the
Airport Fund is also a result of cumulative fund deficits over the life of the fund as fiscal
operations at the airport stabilize and capital projects near completion. The $7.7 million change
in net position of Airport Fund in current year is $0.6 million from operations and $7.1 million
grants received in current year.
TABLE 8
Increase/
Fund Name 2022 2021 (Decrease)
Water 27.8$ 33.0$ (5.2)$
Electic 46.5 74.5 (28.0)
Fiber Optics 32.1 34.5 (2.4)
Gas 6.4 11.6 (5.2)
Wastewater Collection 2.1 0.7 1.4
Wastewater Treatment (14.8) (10.8) (4.0)
Refuse 13.9 14.1 (0.2)
Storm Drainage 5.5 4.0 1.5
Aiport (3.0) (3.7) 0.7
Total Changes in Reserves (Unrestricted)116.5$ 157.9$ (41.4)$
Enterprise Funds
Changes in Unrestricted (Deficit) Net Position
(In Million)
RESOURCE IMPACT
Recommended actions in the report will align the FY 2022 appropriations with final fin ancial
activities as outlined in Attachment B. Overall, the City ended the FY 2022 in a positive net
position.
STAKEHOLDER ENGAGEMENT
The review and writing of this report was coordinated among various divisions within the
Administrative Services Department, along with Departments who assisted in staff’s analysis.
The actions recommended in this report were discussed and communicated to the impacted
departments.
ENVIRONEMENTAL REVIEW
This is not a project for purposes of the California Environmental Quality Act.
.
Attachments:
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• Attachment A: General Fund Summary (Budget and Actuals)
• Attachment B: Recommended FY 2022 Year-End Budget Actions
• Attachment C: FY2022 Annual Comprehensive Financial Report
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Department Adjustment Adjustment
GENERAL FUND (102)
City Attorney's
Office
Contract Services
This action reallocates funding as a result of higher than anticipated contract services expenses in FY 2022.
These higher expenditures are primarily due to special projects including the Roth Building rehabilitation,
wireless ordinance update, employee investigations, and capital project construction contract claims.
‐$ 103,000$
City Auditor's
Office
Salaries & Benefits and Contract Services
This action reallocates funding as a result of salary and benefit expenses in FY 2022 that were unbudgeted as
well as higher than anticipated contract services expenses related to FY 2021 audits that were paid during FY
2022.
‐$ 25,000$
Community
Services
Departmental Expense Savings
This action reallocates departmental cost savings within the General Fund in order to offset departments with
higher than anticipated expenses in FY 2022. The Community Services Department realized a net savings,
primarily in salaries and benefits, as a result of a large number of vacancies as well as savings from lower than
anticipated utility charges.
‐$ (253,000)$
Fire Charges for Services and Revenue from Other Agencies/Salaries & Benefits
This action reallocates funding as a result of higher than anticipated salary and benefit expenses and recognizes
and appropriates higher than anticipated paramedic services revenue and revenue from the State of California.
The higher expenditures, specifically in overtime costs, are primarily due to an above average amounts of
vacancies, employee leave, and employee turnover (voluntary and retirement) as maintaining minimum
staffing levels requires the use of overtime for backfill. The higher expenditures are partially offset by increased
paramedic transport services revenue as well as additional revenue from the State of California as
reimbursements for participating in Strike Teams and other statewide fire services.
600,000$ 725,000$
Non‐
Departmental
Transient Occupancy Tax Revenue/Transfer to Capital Improvement Fund
This action increases the transfer to the Capital Improvement Fund as it relates to Transient Occupancy Tax
(TOT) revenues earmarked for city‐wide infrastructure improvements due to higher than anticipated TOT
collections in FY 2022.
2,219,000$ 2,219,000$
GENERAL FUND (102) SUBTOTAL 2,819,000$ 2,819,000$
CITY OF PALO ALTO
RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2022 BUDGET
Revenues Expenses
ATTACHMENT B, EXHIBIT 1
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Department Adjustment Adjustment
CAPITAL IMPROVEMENT FUNDS
GENERAL FUND CAPITAL IMPROVEMENT FUND (471)
Capital Capital Improvement Project Adjustments
This action reflects the combined impact from adjustments to projects as outlined in
Attachment B, Exhibit 2.
‐$ 419,000$
Capital Transfer from General Fund
This action increases the transfer from the General Fund related to TOT revenue Council
earmarked to use for city‐wide infrastructure improvements due to actual revenue collected
being higher than budgeted in FY 2022.
2,219,000$ ‐$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
‐$ 1,800,000$
GENERAL FUND CAPITAL IMPROVEMENT FUND (471) SUBTOTAL 2,219,000$ 2,219,000$
CUBBERLEY PROPERTY INFRASTRUCTURE FUND (472)
Public Works Revenue from Other Agencies/Salaries and Benefits
This action appropriates funding for increased costs related to facilities maintenance work at
the Cubberley Property and recognizes and appropriates increased revenue from the Palo Alto
United School District (PAUSD) to reimburse the City for their share of the costs as outlined in
the Cubberley lease agreement between the City and PAUSD.
22,000$ 22,000$
CUBBERLEY PROPERTY INFRASTRUCTURE FUND (472) SUBTOTAL 22,000$ 22,000$
CITY OF PALO ALTO
RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2022 BUDGET
Revenues Expenses
ATTACHMENT B, EXHIBIT 1
2.b
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Department Adjustment Adjustment
ENTERPRISE FUNDS
ELECTRIC FUND (513 & 523)
Capital Capital Improvement Project Adjustments
This action reflects the combined impact from adjustments to projects as outlined in
Attachment B, Exhibit 2.
‐$ 145,000$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
‐$ (145,000)$
ELECTRIC FUND (513 & 523) SUBTOTAL ‐$ ‐$
FIBER OPTICS FUND (533)
Capital Capital Improvement Project Adjustments
This action reflects the combined impact from adjustments to projects as outlined in
Attachment B, Exhibit 2.
‐$ 18,000$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
‐$ (18,000)$
FIBER OPTICS FUND (533) SUBTOTAL ‐$ ‐$
GAS FUND (514 & 524)
Capital Capital Improvement Project Adjustments
This action reflects the combined impact from adjustments to projects as outlined in
Attachment B, Exhibit 2.
‐$ 4,000$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
‐$ (4,000)$
GAS FUND (514 & 524) SUBTOTAL ‐$ ‐$
REFUSE FUND (525)
Public Works Refuse Collection, Hauling, and Disposal
As described in CMR 14275, at the end of each fiscal year staff estimates the expenses needed
for the next contract year for GreenWaste of Palo Alto (GWPA) and conducts a technical clean‐
up of expenses to ensure that any excess carryforward amount from the contract
encumbrance is returned to the fund balance. An error occurred in FY 2021 and too much was
returned to the fund balance, leaving insufficient funds for the contract in FY 2022. CMR
14275 approved a $0.9 million budget adjustment but this $1.4 million technical correction
augments the adjustment made in CMR 14275 to fully align the budget with the total
expenses for services provided by GWPA in FY 2022.
‐$ 1,443,000$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
‐$ (1,443,000)$
REFUSE FUND (525) SUBTOTAL ‐$ ‐$
CITY OF PALO ALTO
RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2022 BUDGET
Revenues Expenses
ATTACHMENT B, EXHIBIT 1
2.b
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Department Adjustment Adjustment
ENTERPRISE FUNDS
CITY OF PALO ALTO
RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2022 BUDGET
Revenues Expenses
ATTACHMENT B, EXHIBIT 1
STORMWATER MANGEMENT FUND (528)
Capital Capital Improvement Project Adjustments
This action reflects the combined impact from adjustments to projects as outlined in
Attachment B, Exhibit 2.
‐$ 5,000$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
‐$ (5,000)$
STORMWATER MANGEMENT FUND (528) SUBTOTAL ‐$ ‐$
WASTEWATER COLLECTION FUND (527)
Capital Capital Improvement Project Adjustments
This action reflects the combined impact from adjustments to projects as outlined in
Attachment B, Exhibit 2.
‐$ 90,000$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
‐$ (90,000)$
WASTEWATER COLLECTION FUND (527) SUBTOTAL ‐$ ‐$
WATER FUND (522)
Capital Capital Improvement Project Adjustments
This action reflects the combined impact from adjustments to projects as outlined in
Attachment B, Exhibit 2.
‐$ 145,000$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
‐$ (145,000)$
WATER FUND (522) SUBTOTAL ‐$ ‐$
2.b
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Department Adjustment Adjustment
INTERNAL SERVICE FUNDS
VEHICLE REPLACEMENT & MAINTENANCE FUND (681)
Capital Capital Improvement Project Adjustments
This action reflects the combined impact from adjustments to projects as outlined in
Attachment B, Exhibit 2.
140,000$ 140,000$
VEHICLE REPLACEMENT & MAINTENANCE FUND (681) SUBTOTAL 140,000$ 140,000$
WORKERS' COMPENSATION FUND (688)
Human
Resources
Claims Costs/Reimbursements
This net‐neutral action increases the estimate for workers' compensation claims by $115,000,
from $5.9 million to $6.0 million, due to higher than anticipated claims costs in FY 2022. This
amount is fully offset by additional revenue for excess insurance reimbursements received
during the period.
115,000$ 115,000$
WORKERS' COMPENSATION FUND (688) SUBTOTAL 115,000$ 115,000$
CITY OF PALO ALTO
RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2022 BUDGET
Revenues Expenses
ATTACHMENT B, EXHIBIT 1
2.b
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Department Adjustment Adjustment
SPECIAL REVENUE FUNDS
PUBLIC ART FUND (207)
Community
Services
Contract Services
This action increases the appropriation for contract services in the Public Art Fund to align with the
costs associated with the City's CodeArt Festival.
‐$ 48,000$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
‐$ (48,000)$
PUBLIC ART FUND (207) SUBTOTAL ‐$ ‐$
CITY OF PALO ALTO
RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2022 BUDGET
Revenues Expenses
ATTACHMENT B, EXHIBIT 1
2.b
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Department Adjustment Adjustment
DEBT SERVICE & AGENCY TRUST FUNDS
2021 PUBLIC SAFETY BUILDING COP FUND (363)
Administrative
Services
Debt Service Payment
This action appropriates funding to cover the capitalized interest payment for the Certificates of
Participation to fund the New Public Safety Building capital project (PE‐15001). These funds
were set aside as part of bond sale in this Fund in order to make this payment; however, they
were not appropriated as part of the FY 2022 Budget.
‐$ 3,133,000$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
‐$ (3,133,000)$
2021 PUBLIC SAFETY BUILDING COP FUND (363) SUBTOTAL ‐$ ‐$
LIBRARY PROJECTS FUND (370)
Administrative
Services
Bond Proceeds/Debt Service Payment
This action recognizes and appropriates bond proceed revenue from refinancing of Library
General Obligation (GO) Bonds (CMR 13438). This action also appropriates funding to pay off
the previous GO Bond amount. The refinancing occurred in June 2022, so this action is needed
to true up the budget with the actual amounts for the bond sales.
41,197,000$ 44,071,000$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
‐$ (2,874,000)$
LIBRARY PROJECTS FUND (370) SUBTOTAL 41,197,000$ 44,071,000$
UNIVERSITY AVENUE PARKING ASSESSMENT AGENCY FUND (775)
Administrative
Services
Contract Services
This action increases the appropriation for Contract Services within the fund to align budget
levels with actual expenditures in FY 2022.
‐$ 2,000$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
‐$ (2,000)$
UNIVERSITY AVENUE PARKING ASSESSMENT AGENCY FUND (775) SUBTOTAL ‐$ ‐$
CITY OF PALO ALTO
RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2022 BUDGET
Revenues Expenses
ATTACHMENT B, EXHIBIT 1
2.b
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Project
Number Title Revenue Expense Comments
PE‐19002 Animal Shelter Renovation $ 74,000 Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
FD‐21000 Automated External Defibrillators $ (50,000) Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
PE‐18006 Byxbee Park Completion $ (500,000) Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
PF‐14004 Cal Avenue Parking District Parking
Improvements
$ 1,000 Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
PG‐14002 Cameron Park Improvements $ 16,000 Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
AS‐10000 Capital Improvement Fund Administration $ (1,040,000) Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
PE‐13011 Charleston/Arastradero Corridor Project $ 205,000 Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
PE‐20001 City Bridge Improvements $ (19,000) Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
PE‐09003 City Facility Parking Lot Maintenance $ (61,000) Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
PE‐17010 Civic Center Electrical Upgrade & EV
Charger Installation
$ 6,000 Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
PE‐18016 Civic Center Fire Life Safety Upgrades $ 34,000 Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
PE‐15020 Civic Center Waterproofing and Repairs $ 114,000 Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
PG‐18001 Dog Park Installation $ 36,000 Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
PL‐14000 El Camino/Churchill Enhanced Bikeway $ (518,000) Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
FD‐14002 Fire Ringdown System Replacement $ 14,000 Increase to project due to higher than
anticipated contract service expenditures to
close out the project.
PE‐15003 Fire Station No. 3 Replacement $ 87,000 Increase to project due to higher than
anticipated contract service expenditures to
close out the project.
PE‐18002 High and Bryant Street Garages
Waterproofing and Repairs
$ 6,000 Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
PE‐11011 Highway 101 Pedestrian/Bicycle Overpass
Project
$ 524,000 Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures ($315k). Increase to project due to
higher than anticipated contract service
expenditures to close out the project ($209k)
CAPITAL IMPROVEMENT FUND
ATTACHMENT B, EXHIBIT 2
CITY OF PALO ALTO
RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2022 CAPITAL IMPROVEMENT PROGRAM
2.b
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Number Title Revenue Expense Comments
ATTACHMENT B, EXHIBIT 2
CITY OF PALO ALTO
RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2022 CAPITAL IMPROVEMENT PROGRAM
LB‐21000 Library Automated Materials Handling $ (50,000) Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
PF‐17000 Municipal Service Center A, B, & C Roof
Replacement
$ 80,000 Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
PE‐18000 New California Avenue Area Parking
Garage
$ 34,000 Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
OS‐00001 Open Space Trails & Amenities $ 135,000 Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
OS‐09001 Off‐Road Pathway Resurfacing and Repair $ (16,000) Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
PG‐09002 Park and Open Space Emergency Repairs $ 37,000 Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
PG‐19000 Park Restroom Installation $ (71,000) Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
PG‐14000 Ramos Park Improvements $ 29,000 Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
PE‐08001 Rinconada Park Improvements $ 236,000 Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures ($127k). Increase to project with
corresponding reduction in FY23 due to project
expenses for construction oversight
anticipated in FY23 being completed in FY22
($109k). FY23 reduction action approved by
Council on 10/24/22 in CMR 14728.
PO‐89003 Sidewalk Repairs $ 533,000 Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
PE‐86070 Street Maintenance $ 518,000 Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
PE‐21004 University Avenue Streetscape Update $ 25,000 Adjustment to allocate Salaries and Benefits
across capital projects based on actual
expenditures.
Total $ ‐ $ 419,000
EL‐06001 115 kV Electric Intertie $ 28,000 Increase to project due to higher than
anticipated expenditures.
EL‐19001 Colorado Power Station $ (730,000) Decrease to project due to lower than
anticipated expenditures to offset overspent
projects.
EL‐89028 Electric Customer Connections $ 1,100,000 Increase to project due to higher than
anticipated expenditures, with a $650k
reduction in EL‐17007, and a $450k reduction in
EL‐17002, both of which had some project
savings.
EL‐17007 Facility Relocation for Caltrain $ (650,000) Decrease to project due to lower than
anticipated expenditures to offset overspent
projects.
EL‐11014 Smart Grid Technology Installation $ 18,000 Increase to project due to higher than
anticipated expenditures.
ELECTRIC FUND
2.b
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Number Title Revenue Expense Comments
ATTACHMENT B, EXHIBIT 2
CITY OF PALO ALTO
RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2022 CAPITAL IMPROVEMENT PROGRAM
EL‐17002 Substation Breakers $ (450,000) Decrease to project due to lower than
anticipated expenditures to offset overspent
projects.
EL‐89044 Substation Facility Improvements $ 99,000 Increase to project due to higher than
anticipated expenditures.
EL‐16003 Substation Security $ 1,100,000 Increase to project due to higher than
anticipated expenditures with a $730k
reduction in EL‐19001, and a $370k reduction in
EL‐19004, both of which had some project
savings.
EL‐19004 Wood Pole $ (370,000) Decrease to project due to lower than
anticipated expenditures to offset overspent
projects.
Total $ ‐ $ 145,000
FO‐16000 Fiber Optics Network ‐ System Rebuild $ 18,000 Increase to project due to higher than
anticipated expenditures.
Total $ ‐ $ 18,000
GS‐11002 Gas System Improvements $ 4,000 Increase to project due to higher than
anticipated expenditures.
Total $ ‐ $ 4,000
SD‐22000 East Bayshore Road & East Meadow Drive
Storm Drain System Upgrade
$ 5,000 Increase to project due to higher than
anticipated expenditures.
Total $ ‐ $ 5,000
VR‐22000 Scheduled Vehicle and Equipment
Replacement ‐ Fiscal Year 2022
$ 140,000 $ 140,000 Adjustment to align project budget with mid‐
year amendments to the operating budget for
the purchase of a tractor ($100K) and a code
enforcement vehicle ($40K).
Total $ 140,000 $ 140,000
WC‐99013 Sewer Manhole Rehab/Replacement $ 85,000 Increase to project due to higher than
anticipated expenditures.
WC‐80020 Sewer System, Customer Connections $ 5,000 Increase to project due to higher than
anticipated expenditures.
Total $ ‐ $ 90,000
WS‐80013 Water System Customer Connections $ 145,000 Increase to project due to higher than
anticipated expenditures.
Total $ ‐ $ 145,000
TOTAL CIP ADJUSTMENTS $ ‐ $ 718,000
GAS FUND
STORMWATER MANAGEMENT FUND
WATER FUND
WASTEWATER COLLECTION FUND
FIBER FUND
VEHICLE FUND
2.b
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Fiscal Year 2022 Annual Comprehensive Financial Report
This document may be viewed at the City’s website:
Financial Reporting – City of Palo Alto, CA
https://www.cityofpaloalto.org/files/assets/public/administrative-services/financial-
reporting/comprehensive-annual-financial-reports-cafr/current-2011-cafrs/2022-acfr-final/
city-of-palo-alto-acfr-fy2022-final.pdf
ATTACHMENT C
2.c
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City of Palo Alto (ID # 14975)
Finance Committee Staff Report
Meeting Date: 11/29/2022 Report Type: Action Items
City of Palo Alto Page 1
Title: Staff Recommends the Finance Committee Recommend the City Council
Adopt a Resolution Amending Electric Rate Schedule E -HRA (Electric Hydro
Rate Adjuster) Increasing the Current E -HRA Rate to $0.050/kWh Effective
January 1, 2023
From: City Manager
Lead Department: Utilities
Recommended Motion
Staff recommends that the Finance Committee recommend the City Council adopt a Resolution
of the Council of the City of Palo Alto Amending the Electric Hydro Rate Adjuster rate schedule
(E-HRA), Increasing the Current E-HRA Rate to $0.050/kWh Effective January 1, 2023, to reflect
current hydrological conditions and market purchase costs. This would replace the existing E-
HRA surcharges and discounts across all levels, and increase the current E -HRA rate from
$0.013/kWh to $0.050/kWh .
Executive Summary
Power available to the City of Palo Alto (City or Palo Alto) from hydroelectric resources is
reduced due to the ongoing drought. Reduced hydro output has resulted in increased demand
for market power resources which is largely comprised of gas-fired generation. The increase in
demand combined with high fossil fuel prices caused by unstable socio-political conditions has
resulted in power prices that are greater than the values used to calculate the existing E-HRA
surcharge. Hydro Stabilization Reserves (HSR) have been exhausted and Operations Reserves
are being negatively impacted by higher ongoing costs.
On November 2, 2022, staff recommended, and the Utilities Advisory Commission approved,
increasing the E-HRA from $0.013/kWh to $0.026/kWh (ID# 14837). However, further increases
to electric purchase cost from September projections are prompting staff to revise their
recommendation.
Staff has provided two E-HRA alternatives for Finance Committee consideration. Both
alternatives aim to keep the Electric Supply Operations Reserve (E-SOR) above minimum
guideline levels at the end of FY 2023. Alternative #1 results in a projected E-SOR slightly higher
than the minimum guideline, while Alternative #2 adds additional supporting funds to the E-
SOR.
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Staff recommends Alternative #2 to the Finance Committee, increasing the current $0.013/kwh
surcharge to $0.05/kwh forecasted to end June 30, 2023. This change will preserve reserve
levels above the minimum guidelines if market prices remain in the forecasted range during the
fiscal year. Activation of the E-HRA surcharge creates a temporary rate increase. When
triggered, the proposed E-HRA increase is approximately a 21% or $18.13 monthly increase for
a median electric residential customer, which remains 38% below a comparable PG&E
customer.
Staff expects that the E-HRA will have to be modified again in July. If market costs continue to
be high, staff will likely increase base electric rates to reflect the new commodity cost
environment, and the E-HRA would be reduced. As part of the FY 2023 rate setting the Utilities
department will evaluate and recalibrate electric rates and adapt to the changing market.
Background
The City has access to a large amount of relatively low-cost, carbon free hydroelectric
generation to meet its electric supply needs. Whereas hydroelectric generation supplies about
10% of the overall electric supply for California, the City meets about 50% of its electric supply
needs with hydro generation in an average year.
The drawback to maintaining such a heavy reliance on hydroelectric generation is that the
output of these resources is highly sensitive to weather conditions. Although the City receives
about 50% of its electric supplies from its hydroelectric resources in a “normal” weather year,
that amount can fall to as low as 20% in extremely dry years. And unlike many of the City’s
supply contracts, where the cost of the resource is proportional to the amount of generation
delivered, the City essentially pays a fixed amount every year for the output of its two
hydroelectric resources (Western Base Resource and the Calaveras project) regardless of the
amount of electricity they produce.
The City purchases additional supply resources (generic market power and, to comp ly with the
Carbon Neutral Plan, renewable energy certificates, or RECs) to make up for the reduced
hydroelectric output during dry years. Compounding the problem, market power prices are
often higher in dry years when the City must purchase more because t he entire state is
experiencing reduced hydro supply conditions. Market prices are influenced by inflation,
weather, alternative fuel costs, and global supply and demand.
Figure 1 below illustrates this relationship between the City’s annual market purcha se costs and
the amount of hydroelectric generation it receives.
Figure 1: Annual Hydro Generation vs. Market Purchase Costs (2012-2022)
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In 2005, when a new “Contract for Electric Service - Base Resource” with the Western Area
Power Administration (Wester or WAPA) increased the City’s exposure to hydro variability,
Council adopted a policy of maintaining reserves, combined with “laddered” market purchases,
to manage this variability1.
In 2018, Council adopted the E-HRA mechanism (ID 8962) to manage the financial impacts of
the annual variability in production of the City’s hydroelectric resource. The E-HRA and the HS
Reserve are used to stabilize electric rates when hydrological conditions are either poor, as is
currently the case, or exceptionally good. Activation of the E-HRA is based on staff’s evaluation
of hydro generation availability and the HS Reserve level. When the HS Reserve falls below 25%
of its maximum ($11 million) and hydro generation is projected to be below normal through the
end of the current fiscal year, the E-HRA surcharge is applied. The resulting revenues are used
to fund the additional short-term costs of providing electric service. When drought conditions
subside and/or HS Reserves are within guideline ranges, the surcharge can be de-activated and
standard rates can resume.
In 2018, staff developed the E-HRA mechanism utilizing a 20-year simulation model, estimating
reserve needs under periods of both above average hydro generation as well as periods of
extended drought. The model estimated high market prices during periods of drought using
generation prices that were high at the time, about $47/MWh. As market costs have increased
1 As described in Palo Alto’s current Long-term Electric Acquisition Plan (LEAP) Objectives and Strategies:
https://www.cityofpaloalto.org/files/assets/public/environment-in-palo-alto/energy-compost-facility-
consideration/leap-objectives-and-strategies-april-2012.pdf
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above this level, staff recommends amending the E-HRA structure to update energy prices to
reflect current conditions. The model’s generation levels remain valid.
The E-HRA rate structure in effect now can result in either a 4% rate increase (at the
$0.0065/kWh level) or an 8% increase (at the $0.013/kWh level)2. The proposed E-HRA increase
of $0.037/kWh (from $0.013 to $0.050) is approximately a 21% or $18.13/month increase for a
median electric residential customer and 38% below a comparable PG&E customer.
In March 2022, in response to rapidly worsening drought conditions in California, Council
adopted changes to the E-HRA surcharge (ID 13905), broadening the conditions under which
the rate could be utilized and activating the rate effective April 1, 2022. This was done to help
lower longer-term average rates, as well as help maintain general reserve health.
Discussion
The City receives power from two hydroelectric projects, the Calavera s project and the Western
Base Resource contract for Federal hydropower from the Central Valley Project.3 The
watershed for Western hydropower is primarily in the northern end of California, while the
watershed for the Calaveras project is in the Central S ierras.
Power from these sources is reduced under continued drought conditions. For water year 2020 -
2021 (October 2020 to September 2021), total precipitation was just below 50% of average in
both watersheds. For water year 2021-2022, total precipitation was below 80% of average in
Northern California and about 63% of average in the Central Sierras. As shown in Table 1, total
actual hydropower for FY 2021 was 295 GWh, which is 183 GWh (38%) below the long-term
average, and total actual hydropower for FY 2022 was 230 GWh, which is 250 GWh (52%) below
the long-term average.4
Table 1: Hydro Generation FY 2021-22 Actuals (GWh)
Hydro Generation FY 2021 FY 2022
Calaveras Actuals 49 61
Western Actuals 246 169
Total Hydro Generation 295 230
Long-term Average Total (%) 61% 48%
2 For the median Palo Alto household, which consumes approximately 490 kWh/month, rate adjustments of 0.65
¢/kWh, 1.3 ¢/kWh, and 1.8 ¢/kWh equate to monthly bill impacts of $3.19, $6.37, and $8.82, respectively.
3 The Calaveras project is a hydropower project located in Calaveras County that is maintained and operated by the
Northern California Power Agency on behalf of the City and other project participants. The City is also one of
several public entities with contracts with the Western Area Power Administration for “Base Resource” el ectricity,
which is the hydroelectric power available from the Federal Government’s Central Valley Project (operated by the
Bureau of Reclamation) after accounting for power used for Central Valley Project operations and power delivered
to certain “preference” customers.
4The long-term average forecast levels for both Western and Calaveras have been revised downward (about 10%
each) in recent years to reflect the impact of climate change. These values may need to be revisited again in the
coming years.
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Long-term Average Total Hydro 481 481
Reservoir levels remain very low across Northern and Central California. Most reservoirs are 30
to 50% below their average levels for this time of year. As a result, Palo Alto’s hydroelectric
projections are approximately 275 GWh for this fiscal year, which is about 57% of the long -term
average level of hydro output, and 377 GWh for FY 2024, which is 78% of the long -term average
level.
When Council activated the E-HRA at the $0.013/kwh level effective April 1, 2022, projected
hydro output was about 310 GWh/year and HSR funds were projected to be drawn below $11
million5 by the end of FY 2022. Market prices are now more than double the price used to
estimate the existing E-HRA rate. Actual power supply costs for FY 2022 were about $16 million
more than adopted budget levels, and FY 2023 costs are projected to be similarly high. As a
result, staff requested a transfer of all $15 million of HSR funds to the Operations Reserve to
offset costs in FY 2022. Council’s activation of the E-HRA rate offset $1.5 million of higher costs
that remained after the $15 million HS Reserve transfer. $400,000 remains in the Hydro
Stabilization Reserves.
While the FY 2022 Annual Comprehensive Financial Report is still being reviewed , the
unaudited ending balance for the Supply Operations Reserve is approximately $22.2 million.
This is about $3.3 million above the Council-adopted minimum guideline levels for FY 20236.
Updated November estimates for FY 2023 electric purchase costs are now $16.1 million more
than budget, compared to the $9 million previously estimated and cited in the November 2 UAC
staff report (which was based on September data). The proposal provided to the UAC was to
increase the E-HRA to $0.026/kwh, resulting in about $5 million in additional revenue (over the
last 6 months of FY 2023). Based upon updated purchase cost estimates, this would still leave
the Supply Operations Reserve roughly $6.8 million below minimum guideline levels at the end
of FY 2023, as shown in Table 2 below:
Table 2: Projected FY 2023 Supply Operations Reserve Balances (Million $’s)
($’s in millions) FY 2023
Financial Plan
(Adptd Budget)
UAC
Projections
(Nov 2022)
Updated
Projections
($0.026/kwh surcharge)
Beginning Supply Operations Reserve
Balance $33,046 $22,197 $22,197
Net Fund Revenues/(Expenses) 927 927 927
Revenue: Proposed Additional E-HRA N/A 5,000 5,000
5 When the HS Reserve level falls below 25% of its maximum, or $11 million, the E-HRA can be activated if
projected hydro generation is also below 480 GWh/yr.
6 FY 2023 Electric Financial Plan, adopted June 13, 2022, Staff Report ID# 13661:
https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-
councilagendas-minutes/2022/20220613/20220613pccsm-final-amended-linked.pdf
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Expense: Additional Purchase Cost N/A (9,000) (16,100)
Ending Supply Operations Reserve Balance $34,973 $19,124 $12,024
Supply Operations Reserve Minimum
Guideline $18,843
Based on the current sales trends for FY 2023, staff estimates the existing $0.013/kwh adjuster
will generate $10.25 million in the Electric Fund over all of FY 2023, as projected in the FY 2023
Financial Plan.
In November 2022, staff proposed the UAC recommend doubling of the E-HRA rate, as shown in
Table 6, which is projected to bring the Electric Fund appr oximately $5 million in additional
revenues in FY 2023 assuming an effective date of January 1, 2023.
Staff has determined that meeting the revised supply cost increases and keeping reserves at or
above minimum guideline levels, would require increasing the E-HRA surcharge to at least
$0.044/kwh. However, even this would result in an ending Supply Operations Reserve lower
than the original UAC proposal.
To keep the Supply Operations Reserve from eroding further, staff has provided two
alternatives in Table 3 below: Alternative #1 which provides for $1.6 million above minimum
guideline levels by the end of FY 2023, and Alternative #2, which provides for $2.4 million above
minimum levels by the end of FY 2023.
Table 3: Projected FY 2023 Supply Operations Reserve Balances (Million $’s)
FY 2023
Financial
Plan
UAC Proposal
($0.026/kwh
surcharge)
Alternative #1
($0.048/kwh
surcharge)
Alternative #2
($0.050/kwh
surcharge)
Beginning Supply Operations
Reserve Balance $33,046 $22,197 $22,197 $22,197
Net Fund Revenue (Expense) 927 927 927 927
Revenue: New E-HRA Revenue N/A 5,000 13,462 14,231
Expense: Additional Purchase Cost N/A (9,000) (16,100) (16,100)
Ending Supply Operations Reserve
Balance $34,973 $19,124 $20,486 $21,255
Supply Operations Reserve
Minimum Guideline $18,843
For reference, each additional $0.001/kwh would add about $380,000 to FY 2023 revenues,
based on current sales estimates.
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Table 4 shows the relative bill impacts of these proposals on a median electric customer , as well
as how far below comparable PG&E bills the new rates would be:
Table 4: Bill Impacts
Current
($0.013/kwh
surcharge)
UAC Proposal
($0.026/kwh
surcharge)
Alternative #1
($0.048/kwh
surcharge)
Alternative #2
($0.050/kwh
surcharge)
Monthly bill $86.57 $92.94 $103.72 $104.70
Bill Impact ($) - 6.37 17.15 18.13
Bill Impact (%) - 7% 20% 21%
% Below PG&E 49% 45% 39% 35%
The current E-HRA levels are shown in Table 5:
Table 5: Current Hydro Rate Adjustments ($/kWh)
Hydro Stabilization
Reserve Level
Projected Hydro Generation vs. Average Hydro Generation
(GWh/year)
Less than 319 319 to 480 480 to 642 Over 642
Above Maximum
(>$35 million)
$- $(0.0065) $(0.0065) $(0.018)
75% to 100%
($27 to $35 million)
$- $- $(0.0065) $(0.013)
25% to 75%
($11 to $27 million)
$- $- $- $-
25% and below
(<$11 million)
$0.013 $0.0065 $- $-
The proposed E-HRA as presented to the UAC on November 2, 2022 is shown in Table 6:
Table 6: Proposed Hydro Rate Adjustments at November 2022 UAC meeting ($/kWh)
Hydro Stabilization
Reserve Level
Projected Hydro Generation vs. Average Hydro Generation
(GWh/year)
Less than 319 319 to 480 480 to 642 Over 642
Above Maximum
(>$35 million)
$- $(0.013) $(0.013) $(0.036)
75% to 100%
($27 to $35 million)
$- $- $(0.013) $(0.026)
25% to 75% $- $- $- $-
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($11 to $27 million)
25% and below
(<$11 million)
$0.026 $0.013 $- $-
Table 7 shows the overall revised rates under Alternative #1:
Table 7: Proposed Hydro Rate Adjustments ($/kWh) – Alternative #1
Hydro Stabilization
Reserve Level
Projected Hydro Generation vs. Average Hydro Generation
(GWh/year)
Less than 319 319 to 480 480 to 642 Over 642
Above Maximum
(>$35 million)
$- $(0.024) $(0.024) $(0.066)
75% to 100%
($27 to $35 million)
$- $- $(0.024) $(0.048)
25% to 75%
($11 to $27 million)
$- $- $- $-
25% and below
(<$11 million)
$0.048 $0.024 $- $-
Table 8 shows the overall revised rates under Alternative #2:
Table 8: Proposed Hydro Rate Adjustments ($/kWh) -Alternative #2
Hydro Stabilization
Reserve Level
Projected Hydro Generation vs. Average Hydro Generation
(GWh/year)
Less than 319 319 to 480 480 to 642 Over 642
Above Maximum
(>$35 million)
$- $(0.029) $(0.029) $(0.069)
75% to 100%
($27 to $35 million)
$- $- $(0.029) $(0.050)
25% to 75%
($11 to $27 million)
$- $- $- $-
25% and below
(<$11 million)
$0.050 $0.029 $- $-
While either of the alternative increases shown would keep the Supply Operations Reserve
above minimum if all other revenue and expense conditions hold, it is still possible that external
factors (higher/lower market prices, reduced/increased sales, etc.) could positively or
negatively impact the Operations Reserve by fiscal year end.
E-HRA going forward
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Staff expects that the E-HRA will have to be modified again in July. If market costs continue to
be high, staff will likely increase base electric rates to reflect the new commodity cost
environment, and the E-HRA would be reduced. Staff is also investigating an alterna tive
mechanism for passing through cost variations from budget, to be provided and reviewed
during the upcoming FY 2024 budget cycle.
Staff Proposed Alternative
Staff recommends that the Finance Committee recommend that City Council adopt the rates
shown in Table 8 (Alternative #2).
While this proposal is different from what the Utilities Advisory Commission reviewed in
November, staff feels that the projected continued increases to electricity costs from what was
seen back in September warrant the change. Further, given the burgeoning electricity costs and
the relatively low level of current Operations Reserves, staff believes the higher Alternative #2
rate would place the Electric Utility in a better financial position for FY 2023 and beyond.
The alternative to increasing the E-HRA surcharge is implementing a general rate increase.
Utilizing the E-HRA is a targeted way to mitigate the impacts of hydro generation and supply
cost fluctuations. If higher market prices persist or appear to be a ‘new normal,’ or larger long-
term reserves are needed, general rates can be increased at the next fiscal year and the E -HRA
brought to zero as additional revenue recovery is not needed.
Resource Impact
Based on the current sales trends for FY 2023, the estimated re venue impacts for the existing
$0.013/kwh adjuster is an increase of $10.25 million in the Electric Fund in FY 2023, which has
already been included in the adopted budget.
If, in December 2022, Council additionally adopts:
• UAC proposal ($0.026/kWh), FY 2023 revenues would increase by $5 million;
• Alternative #1 ($0.048/kWh), FY 2023 revenues would increase by $13.5 million; and
• Alternative #2 ($0.050/kWh), FY 2023 revenues would increase by $14.2 million.
Staff’s recommendation is Alternative #2. The City is a utility customer so rate increases will
also result in City expense increases. Resource impacts to City departments and funds of the
recommended rate adjustments will be reflected in the mid-year budget process.
Policy Implications
The proposed Electric Hydro Rate Adjuster (E-HRA) rate amendment is consistent with Council-
adopted Reserve Management Practices that are part of the adopted 2023 Electric Financial
Plans.
Stakeholder Engagement
The UAC considered staff’s request (Table 6) at its November 2, 2022 meeting. At that meeting,
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the UAC agreed that, given the escalating costs of purchasing electricity, that the rate increase
was prudent. The UAC approved Staff’s motion unanimously.
Staff will provide a subsequent memo the UAC informing of them of staff’s modified
recommendation, as well as the Finance Committee’s actions on that recommendation.
Environmental Review
The Finance Committee’s recommendation that Council amend the E-HRA rate does not meet
the California Environmental Quality Act’s definition of a project, pursuant to Public Resources
Code 21065 and CEQA Guidelines Section 15378(b)(4) and (5), because it is a governmental
fiscal and administrative activity which will not cause a direct or indirect physical change in the
environment.
Attachments:
• Attachment A: Resolution
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Attachment A
6056681F 1
Reference Document: Utility Rate Schedule E-HRA
Resolution No.___
Resolution of the Council of the City of Palo Alto Amending Electric
Rate Schedule E-HRA (Electric Hydro Rate Adjuster), Increasing the
Current E-HRA Rate to $0.050/kWh Effective January 1, 2023
R E C I T A L S
A. Hydroelectric Rate Adjustment mechanisms are designed to modify customer
rates, either up or down, such that overall sales revenue is aligned with supply costs for the
electric utility.
B. Hydroelectric Rate Adjustment mechanisms are intended to enable the electric
utility to maintain a reasonably stable level of financial reserves, and maintain base electric
rates at lower levels over the long term.
C. In 2018, staff developed the E-HRA rate mechanism utilizing a 20-year
simulation model, estimating reserve needs under periods of both above average hydro
generation as well as periods of extended drought. The original model inputs have changed
since then, with multi-year drought conditions, rising inflation, increased market costs for
alternative fuels, and uncertainty in natural gas markets greatly increasing the market costs for
electricity. The existing E-HRA rate is no longer collecting enough revenue to adequately offset
required market purchases.
D. Section D(2)(a) of the Council-adopted E-HRA Rate Schedule directs staff to
calculate the Hydro Rate Adjustment annually in May. E-HRA activation may also occur at other
times throughout the year, such as when hydrologic conditions are poor and Hydroelectric
Stabilization Reserve levels are projected to fall below the 25% level within the current fiscal
year.
E. Therefore, staff recommends the Council modify the E-HRA rate schedule to
reflect updated market supply costs and hydrologic conditions, and mitigate Operations
Reserve impacts.
F. Pursuant to Chapter 12.20.010 of the Palo Alto Municipal Code, the Council of
the City of Palo Alto may by resolution adopt rules and regulations governing utility services,
fees and charges.
The Council of the City of Palo Alto hereby RESOLVES as follows:
SECTION 1. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule E-HRA (Electric Hydro Rate Adjuster) is added as attached and incorporated.
Utility Rate Schedule E-HRA, as amended, shall become effective January 1, 2023.
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Attachment A
6056681F 2
Reference Document: Utility Rate Schedule E-HRA
SECTION 2. As a result, on January 1, 2023 the $0.013/kWh E-HRA rate activated by
Council on March 14, 2022, and effective April 1, 2022, will increase to $0.050/kWh.
SECTION 3. The Council finds that the revenue derived from the adoption of this
resolution shall be used only for the purpose set forth in Article VII, Section 2, of the Charter of
the City of Palo Alto.
SECTION 4. The Council finds that the fees and charges adopted by this resolution are
charges imposed for a specific government service or product provided directly to the payor
that are not provided to those not charged, and do not exceed the reasonable costs to the City
of providing the service or product.
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Attachment A
6056681F 3
Reference Document: Utility Rate Schedule E-HRA
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SECTION 5. The Council finds that the adoption of this resolution changing electric
rates to meet operating expenses and meet financial reserve needs is not subject to the
California Environmental Quality Act (CEQA), pursuant to California Public Resources Code Sec.
21080(b)(8) and Title 14 of the California Code of Regulations Sec. 15273(a). After reviewing
the staff report and all attachments presented to Council, the Council incorporates these
documents herein and finds that sufficient evidence has been presented setting forth with
specificity the basis for this claim of CEQA exemption.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
___________________________ ___________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
___________________________ ___________________________
Assistant City Attorney City Manager
___________________________
Director of Utilities
___________________________
Director of Administrative Services
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City of Palo Alto (ID # 14611)
Finance Committee Staff Report
Meeting Date: 11/29/2022 Report Type: Action Items
City of Palo Alto Page 1
Title: Discussion and Update on Sanitary Sewer Main Replacement
Acceleration Alternatives
From: City Manager
Lead Department: Utilities
Recommendation
This item is for the Finance Committee’s discussion and feedback; no action is requested.
Discussion
There are 138 miles of remaining clay sanitary sewer mains that need to be replaced before
they exceed their approximately 100-year life expectancy, which would require an annual
replacement of around 2.5 miles per year. Current wastewater rates support an annual rate of
replacement of around 1 mile per year. Staff seeks input from the Finance Committee on how
quickly to move to a 2.5 mile per year rate of sanitary sewer main replacement given the
associated increase of customer wastewater collection rates necessary to fund the
improvements.
The brief summary below describes three alternative approaches to accelerate the sanitary
sewer main replacement and illustrate the preliminary rate increase projections needed to
achieve the proposed 2.5 mile per year main replacement for each alternative based on a pay-
go financial model and a debt financing model. Staff will continue to update and refine these
estimates based on changing economic conditions and the availability of updated financial
information from the Fiscal Year 2022 Year-End process.
• Alternative #1: immediately move to 2.5 miles per year of sanitary sewer main
replacement starting in FY 2024
• Alternative #2: transition to 2.5 miles per year of sanitary sewer main replacement over
four years and begin the program in FY 2026
• Alternative #3: transition to 2.5 miles per year of sanitary sewer main replacement to
keep rate increases below 5%; program estimated to start in FY 2034
Once equipment reaches the approximate 100-year life expectancy, the risks or maintenance
the City may experience include:
• Increased maintenance to clear blockages and perform spot repairs
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• Increased frequency of sanitary sewer overflows
• Increased volume of sewage discharged per sanitary sewer overflow event
• Increased cost to replace failed infrastructure
• Increased potential for sinkholes at locations of failed infrastructure
• Potential additional liability associated with sanitary sewer overflows
While reviewing and receive feedback on this important maintenance schedule, the City’s
Regional Water Quality Control Plant is going through significant capital investment in parallel
that will also impact rates during this same period. A key project to upgrade the secondary
stage of the wastewater treatment system for the City’s Regional Water Quality Control Plant of
which the City is responsible for 38.16% of the capital investment ($169 million, financing at
$193 million). The Secondary Treatment Upgrades (STU) project will be financed by the state
low-interest SRF loan program and be repaid by Palo Alto and its five partner agencies. The
project was identified in the 2012 Long Range Facilities Plan (LRFP). Construction is expected to
start in early 2023 and the improvement is expected to be completed around November 2027.
Loan payments on the debt service will begin in 2028. This timing is important for the
discussion on impact to the rates. Further details on rates follows the alternative approaches
to accelerate the sanitary sewer main replacement
Three alternative approaches to accelerate the sanitary sewer main replacement
Alternative 1
The first alternative is to immediately move to 2.5 miles per year of sanitary sewer main
replacement starting in FY 2024. Subsequent projects will replace 5 miles of sewer mains every
two years. At this replacement rate, the last clay sewer mains would be replaced when they
are 107 years old. This alternative could be financed either using pay-as-you-go financing with
funds collected from rates (Alternative 1a), or using a utility revenue bond of an estimated
$12.6 million to fund the sewer main replacement work planned for FY 2024 and FY 2025
(Alternative 1b).
Under Alternative 1a, staff estimates rate increases of 15% and 12% in FY 2024 and FY 2025
would be needed followed by 3% to 4% annual rate increases throughout the forecast period.
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Figure 1: Alternative 1a – Immediate Move to 2.5 miles/year Pay-Go Finance 5-mile Project in
FY 2024
Under Alternative 1b, staff estimates rate increases of 7% annually over the next seven years
followed by 3% annual rate increases throughout the forecast period.
Figure 2: Alternative 1b – Immediate Move to 2.5 Miles/Year, Debt Finance 5-mile Project in
FY 2024
However, when compared to the other alternatives, Alternative 1b is expected to cost the City
approximately $11,000,000 extra for bond financing and $3,400,000 for loan financing from the
California State Revolving Loan (SRF) Fund over the duration of the financing period. Given the
competitive nature of SRF loans, there is no guarantee the City’s SRF application would be
funded.
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Alternative 2
The second alternative is to transition to 2.5 miles per year of sanitary sewer main replacement
over four years and begin the program in FY 2026. Subsequent projects will replace 5 miles of
sewer mains every two years. At this replacement rate, the last clay sewer mains would be
replaced when they are 109 years old. Under Alternative 2, staff estimates rate increases of 9%
annually for the next three years (FY 2024 through FY 2026), and 8% in FY 2027, followed by
annual 3% rate increases throughout the forecast period.
Figure 3: Alternative 2 – Transition to 2.5 Miles/Year Over Four Years, 5-Mile Project in FY 2026
Alternative 3
The third alternative is to transition to 2.5 miles per year of san itary sewer main replacement
slowly to keep rate increases below 5%. Staff anticipates that the 2.5 miles per year
replacement program would start in FY 2034. Subsequent projects will replace 5 miles of sewer
mains every two years. At this replacement rate, the last clay sewer mains would be replaced
when they are 113 years old. Under Alternative 3, rate increases are limited to 5% annually.
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Figure 4: Alternative 3 – Transition to 2.5 Miles/Year Slowly To Keep Rate Increases Low, 5-Mile
Project in FY 2034
Waste Water Collection Rates
Staff plans to return to the Finance
Committee with Preliminary
Financial Forecasts in February 2023
and with proposed Financial Plans
and rates in April 2023. However,
for context to assist the committee
in the review of these alternatives,
below is a graph from Silicon Valley
Clean Water’s Proposed 2021-22
Operating Budget representing the City’s current residential rate of $ 44.62 compared of
neighboring agencies. The City has historically enjoyed low residential wastewater rates
compared to neighboring agencies. Rate increases are expected to support inflation, the
cashflow needs of the capital investments being made at the RWQCP, and the debt payment for
the significant capital investments, along with the alternative scenarios for discussion above.
The scenarios above do have some modeling for the RWQCP capital needs in the “Treatment
Capital & Debt” section of the alternative forecasts above, though cost of these capital
improvements continue to exceed engineer estimates in this environment.
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Stakeholder Engagement
At the Utilities Advisory Commission (UAC) April 2022 meeting, staff presented the need to
increase the rate of sewer main replacement from 1 mile per year to 2.5 miles per year in order
to replace the remaining 138 miles of sewer mains scheduled for replacement before they
exceed their expected life. UAC Commissioners expressed support for increasing the rate of
sewer main replacement to 2.5 miles per year. At the UAC’s October 12, 2022 meeting, staff
presented the same attached three alternative approaches to accelerate the sanitary sewer
main replacement (Staff Report #14610). UAC Commissioners asked questions about the causes
of sanitary sewer overflows, and asked whether pipes are prioritized based upon condition.
Staff responded that sanitary sewer overflows can be caused by leaks or blockages and that
pipes are targeted for cleaning and prioritized for replacement. A UAC Commissioner asked a
question about climate change and sea level rise impacts on the sewer mains. Staff responded
that as part of the upcoming sewer master plan study, staff will work with the consultant on
examining these impacts. One Commissioner stated that Alternative 1a or 1b (only with SRF
loan) is reasonable while two Commissioners opposed Alternative 1a and 1b. Three
Commissioners supported Alternative 2 while one Commissioner questioned whether
Alternative 3 may also be acceptable. Staff responded that Alternative 3 would not allow the
City to manage sewer infrastructure on a life-cycle basis.
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