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HomeMy WebLinkAbout2024-06-04 Finance Committee Agenda PacketFINANCE COMMITTEE Regular Meeting Tuesday, June 04, 2024 Community Meeting Room & Hybrid 5:30 PM Amended Agenda Amended agenda items appear below in RED Finance 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. Masks are strongly encouraged if attending in person. The m e e t i n g   w i l l   b e   b r o a d c a s t   o n   C a b l e   T V   C h a n n e l   2 6 ,   l i v e   o n YouTube https://www.youtube.com/c/cityofpaloalto,   a n d   s t r e a m e d   t o   M i d p e n   M e d i a Center https://midpenmedia.org. VIRTUAL PARTICIPATION CLICK HERE TO JOIN (https://cityofpaloalto.zoom.us/j/99227307235) Meeting ID: 992 2730 7235    Phone: 1(669)900‐6833 PUBLIC COMMENTS General Public Comment for items not on the agenda will be accepted in person for up to three minutes or an amount of time determined by the Chair. General public comment will be heard for 30 minutes. Additional public comments, if any, will be heard at the end of the agenda. Public comments for agendized items will be accepted both in person and via Zoom for up to three minutes or an amount of time determined by the Chair. Requests to speak will be taken until 5 minutes after the staff’s presentation or as determined by the Chair. Written public comments can be submitted in advance to city.council@CityofPaloAlto.org and will be provided to the Council and available for inspection on the City’s website. Please clearly indicate which agenda item you are referencing in your subject line. PowerPoints, videos, or other media to be presented during public comment are accepted only by email to city.clerk@CityofPaloAlto.org at least 24 hours prior to the meeting. Once received, the  Clerk will have them shared at public comment for the specified item. To uphold strong cybersecurity management practices, USB’s or other physical electronic storage devices are not accepted. Signs and symbolic materials less than 2 feet by 3 feet are permitted provided that: (1) sticks, posts, poles or similar/other type of handle objects are strictly prohibited; (2) the items do not create a facility, fire, or safety hazard; and (3) persons with such items remain seated when displaying them and must not raise the items above shoulder level, obstruct the view or passage of other attendees, or otherwise disturb the business of the meeting. CALL TO ORDER PUBLIC COMMENT  Members of the public may speak in­person ONLY to any item NOT on the agenda. 1­3 minutes depending on # of speakers. Public Comment is limited to 30 minutes. Additional public comments, if any, will be heard at the end of the agenda. ACTION ITEMS (ITEMS WILL BE HEARD OUT OF ORDER) 2.Accept June 30, 2023 Actuarial Valuation of Palo Alto's Retiree Healthcare and Other Post Employment Benefits and Recommend to the City Council to Approve Annual Actuarially Determined Contribution for Fiscal Year 2025 and 2026; CEQA Status – Not a Project 1.Recommend City Council Adopt a Resolution Amending the Gas Utility Long‐term Plan (GULP) Objectives, Strategies and Implementation Plan, Amending the Gas Utility Reserves Management Practices, and Amending Rate Schedules G‐1 (Residential Gas Service), G‐2 (Residential Master‐Metered and Commercial Gas Service), G‐3 (Large Commercial Gas Service), and G‐10 (Compressed Natural Gas Service); CEQA Status: Not a Project Under Public Resources Code 15378(b)(5) and Exempt Under Public Resources Code 15273(a) and Discussion of the Utilities Advisory Commission’s Proposed Alternatives. 3.Accept the Fiscal Year 2024 Third Quarter Financial Status Report 4.Continue Discussion on the Fiscal Year (FY) 2025 Budget Wrap‐Up and Recommended FY 2025 Budget including the FY 2025 Municipal Fee Schedule for City Council Adoption New Item Added FUTURE MEETINGS AND AGENDAS Members of the public may not speak to the item(s) ADJOURNMENT PUBLIC COMMENT INSTRUCTIONS Members of the Public may provide public comments to teleconference meetings via email, teleconference, or by phone. 1. Written public comments may be submitted by email to city.council@cityofpaloalto.org. 2. For in person public comments please complete a speaker request card located on the table at the entrance to the Council Chambers and deliver it to the Clerk prior to discussion of the item. 3. Spoken public comments for agendized items using a computer or smart phone will be accepted through the teleconference meeting. To address the Council, click on the link below to access a Zoom‐based meeting. Please read the following instructions carefully. You may download the Zoom client or connect to the meeting in‐ browser. If using your browser, make sure you are using a current, up‐to‐date browser: Chrome 30 , Firefox 27 , Microsoft Edge 12 , Safari 7 . Certain functionality may be disabled in older browsers including Internet Explorer. Or download the Zoom application onto your smart phone from the Apple App Store or Google Play Store and enter in the Meeting ID below. You may be asked to enter an email address and name. We request that you identify yourself by name as this will be visible online and will be used to notify you that it is your turn to speak. When you wish to speak on an Agenda Item, click on “raise hand.” The Clerk will activate and unmute speakers in turn. Speakers will be notified shortly before they are called to speak. When called, please limit your remarks to the time limit allotted. A timer will be shown on the computer to help keep track of your comments. 4. Spoken public comments for agendized items using a phone use the telephone number listed below. When you wish to speak on an agenda item hit *9 on your phone so we know that you wish to speak. You will be asked to provide your first and last name before addressing the Council. You will be advised how long you have to speak. When called please limit your remarks to the agenda item and time limit allotted. CLICK HERE TO JOIN    Meeting ID: 992‐2730‐7235   Phone: 1‐669‐900‐6833 Americans with Disability Act (ADA) It is the policy of the City of Palo Alto to offer its public programs, services and meetings in a manner that is readily accessible to all. Persons with disabilities who require materials in an appropriate alternative format or who require auxiliary aids to access City meetings, programs, or services may contact the City’s ADA Coordinator at (650) 329‐2550 (voice) or by emailing ada@cityofpaloalto.org. Requests for assistance or accommodations must be submitted at least 24 hours in advance of the meeting, program, or service.  1 Regular Meeting June 04, 2024 Materials related to an item on this agenda submitted to the Board after distribution of the agenda packet are available for public inspection at www.CityofPaloAlto.org.   FINANCE COMMITTEERegular MeetingTuesday, June 04, 2024Community Meeting Room & Hybrid5:30 PMAmended AgendaAmended agenda items appear below in REDFinance Committee meetings will be held as “hybrid” meetings with the option to attend byteleconference/video conference or in person. To maximize public safety while still maintainingtransparency and public access, members of the public can choose to participate from home orattend in person. Information on how the public may observe and participate in the meeting islocated at the end of the agenda. Masks are strongly encouraged if attending in person. Them e e t i n g   w i l l   b e   b r o a d c a s t   o n   C a b l e   T V   C h a n n e l   2 6 ,   l i v e   o nYouTube https://www.youtube.com/c/cityofpaloalto,   a n d   s t r e a m e d   t o   M i d p e n   M e d i aCenter https://midpenmedia.org.VIRTUAL PARTICIPATION CLICK HERE TO JOIN (https://cityofpaloalto.zoom.us/j/99227307235)Meeting ID: 992 2730 7235    Phone: 1(669)900‐6833PUBLIC COMMENTSGeneral Public Comment for items not on the agenda will be accepted in person for up to threeminutes or an amount of time determined by the Chair. General public comment will be heard for30 minutes. Additional public comments, if any, will be heard at the end of the agenda. Publiccomments for agendized items will be accepted both in person and via Zoom for up to threeminutes or an amount of time determined by the Chair. Requests to speak will be taken until 5minutes after the staff’s presentation or as determined by the Chair. Written public commentscan be submitted in advance to city.council@CityofPaloAlto.org and will be provided to theCouncil and available for inspection on the City’s website. Please clearly indicate which agendaitem you are referencing in your subject line.PowerPoints, videos, or other media to be presented during public comment are accepted onlyby email to city.clerk@CityofPaloAlto.org at least 24 hours prior to the meeting. Once received,the  Clerk will have them shared at public comment for the specified item. To uphold strongcybersecurity management practices, USB’s or other physical electronic storage devices are notaccepted. Signs and symbolic materials less than 2 feet by 3 feet are permitted provided that: (1) sticks, posts, poles or similar/other type of handle objects are strictly prohibited; (2) the items do not create a facility, fire, or safety hazard; and (3) persons with such items remain seated when displaying them and must not raise the items above shoulder level, obstruct the view or passage of other attendees, or otherwise disturb the business of the meeting. CALL TO ORDER PUBLIC COMMENT  Members of the public may speak in­person ONLY to any item NOT on the agenda. 1­3 minutes depending on # of speakers. Public Comment is limited to 30 minutes. Additional public comments, if any, will be heard at the end of the agenda. ACTION ITEMS (ITEMS WILL BE HEARD OUT OF ORDER) 2.Accept June 30, 2023 Actuarial Valuation of Palo Alto's Retiree Healthcare and Other Post Employment Benefits and Recommend to the City Council to Approve Annual Actuarially Determined Contribution for Fiscal Year 2025 and 2026; CEQA Status – Not a Project 1.Recommend City Council Adopt a Resolution Amending the Gas Utility Long‐term Plan (GULP) Objectives, Strategies and Implementation Plan, Amending the Gas Utility Reserves Management Practices, and Amending Rate Schedules G‐1 (Residential Gas Service), G‐2 (Residential Master‐Metered and Commercial Gas Service), G‐3 (Large Commercial Gas Service), and G‐10 (Compressed Natural Gas Service); CEQA Status: Not a Project Under Public Resources Code 15378(b)(5) and Exempt Under Public Resources Code 15273(a) and Discussion of the Utilities Advisory Commission’s Proposed Alternatives. 3.Accept the Fiscal Year 2024 Third Quarter Financial Status Report 4.Continue Discussion on the Fiscal Year (FY) 2025 Budget Wrap‐Up and Recommended FY 2025 Budget including the FY 2025 Municipal Fee Schedule for City Council Adoption New Item Added FUTURE MEETINGS AND AGENDAS Members of the public may not speak to the item(s) ADJOURNMENT PUBLIC COMMENT INSTRUCTIONS Members of the Public may provide public comments to teleconference meetings via email, teleconference, or by phone. 1. Written public comments may be submitted by email to city.council@cityofpaloalto.org. 2. For in person public comments please complete a speaker request card located on the table at the entrance to the Council Chambers and deliver it to the Clerk prior to discussion of the item. 3. Spoken public comments for agendized items using a computer or smart phone will be accepted through the teleconference meeting. To address the Council, click on the link below to access a Zoom‐based meeting. Please read the following instructions carefully. You may download the Zoom client or connect to the meeting in‐ browser. If using your browser, make sure you are using a current, up‐to‐date browser: Chrome 30 , Firefox 27 , Microsoft Edge 12 , Safari 7 . Certain functionality may be disabled in older browsers including Internet Explorer. Or download the Zoom application onto your smart phone from the Apple App Store or Google Play Store and enter in the Meeting ID below. You may be asked to enter an email address and name. We request that you identify yourself by name as this will be visible online and will be used to notify you that it is your turn to speak. When you wish to speak on an Agenda Item, click on “raise hand.” The Clerk will activate and unmute speakers in turn. Speakers will be notified shortly before they are called to speak. When called, please limit your remarks to the time limit allotted. A timer will be shown on the computer to help keep track of your comments. 4. Spoken public comments for agendized items using a phone use the telephone number listed below. When you wish to speak on an agenda item hit *9 on your phone so we know that you wish to speak. You will be asked to provide your first and last name before addressing the Council. You will be advised how long you have to speak. When called please limit your remarks to the agenda item and time limit allotted. CLICK HERE TO JOIN    Meeting ID: 992‐2730‐7235   Phone: 1‐669‐900‐6833 Americans with Disability Act (ADA) It is the policy of the City of Palo Alto to offer its public programs, services and meetings in a manner that is readily accessible to all. Persons with disabilities who require materials in an appropriate alternative format or who require auxiliary aids to access City meetings, programs, or services may contact the City’s ADA Coordinator at (650) 329‐2550 (voice) or by emailing ada@cityofpaloalto.org. Requests for assistance or accommodations must be submitted at least 24 hours in advance of the meeting, program, or service.  2 Regular Meeting June 04, 2024 Materials related to an item on this agenda submitted to the Board after distribution of the agenda packet are available for public inspection at www.CityofPaloAlto.org.   FINANCE COMMITTEERegular MeetingTuesday, June 04, 2024Community Meeting Room & Hybrid5:30 PMAmended AgendaAmended agenda items appear below in REDFinance Committee meetings will be held as “hybrid” meetings with the option to attend byteleconference/video conference or in person. To maximize public safety while still maintainingtransparency and public access, members of the public can choose to participate from home orattend in person. Information on how the public may observe and participate in the meeting islocated at the end of the agenda. Masks are strongly encouraged if attending in person. Them e e t i n g   w i l l   b e   b r o a d c a s t   o n   C a b l e   T V   C h a n n e l   2 6 ,   l i v e   o nYouTube https://www.youtube.com/c/cityofpaloalto,   a n d   s t r e a m e d   t o   M i d p e n   M e d i aCenter https://midpenmedia.org.VIRTUAL PARTICIPATION CLICK HERE TO JOIN (https://cityofpaloalto.zoom.us/j/99227307235)Meeting ID: 992 2730 7235    Phone: 1(669)900‐6833PUBLIC COMMENTSGeneral Public Comment for items not on the agenda will be accepted in person for up to threeminutes or an amount of time determined by the Chair. General public comment will be heard for30 minutes. Additional public comments, if any, will be heard at the end of the agenda. Publiccomments for agendized items will be accepted both in person and via Zoom for up to threeminutes or an amount of time determined by the Chair. Requests to speak will be taken until 5minutes after the staff’s presentation or as determined by the Chair. Written public commentscan be submitted in advance to city.council@CityofPaloAlto.org and will be provided to theCouncil and available for inspection on the City’s website. Please clearly indicate which agendaitem you are referencing in your subject line.PowerPoints, videos, or other media to be presented during public comment are accepted onlyby email to city.clerk@CityofPaloAlto.org at least 24 hours prior to the meeting. Once received,the  Clerk will have them shared at public comment for the specified item. To uphold strongcybersecurity management practices, USB’s or other physical electronic storage devices are notaccepted.Signs and symbolic materials less than 2 feet by 3 feet are permitted provided that: (1) sticks,posts, poles or similar/other type of handle objects are strictly prohibited; (2) the items do notcreate a facility, fire, or safety hazard; and (3) persons with such items remain seated whendisplaying them and must not raise the items above shoulder level, obstruct the view orpassage of other attendees, or otherwise disturb the business of the meeting.CALL TO ORDERPUBLIC COMMENT Members of the public may speak in­person ONLY to any item NOT on the agenda. 1­3 minutes depending on #of speakers. Public Comment is limited to 30 minutes. Additional public comments, if any, will be heard at the endof the agenda.ACTION ITEMS (ITEMS WILL BE HEARD OUT OF ORDER)2.Accept June 30, 2023 Actuarial Valuation of Palo Alto's Retiree Healthcare and OtherPost Employment Benefits and Recommend to the City Council to Approve AnnualActuarially Determined Contribution for Fiscal Year 2025 and 2026; CEQA Status – Not aProject1.Recommend City Council Adopt a Resolution Amending the Gas Utility Long‐term Plan(GULP) Objectives, Strategies and Implementation Plan, Amending the Gas UtilityReserves Management Practices, and Amending Rate Schedules G‐1 (Residential GasService), G‐2 (Residential Master‐Metered and Commercial Gas Service), G‐3 (LargeCommercial Gas Service), and G‐10 (Compressed Natural Gas Service); CEQA Status: Nota Project Under Public Resources Code 15378(b)(5) and Exempt Under Public ResourcesCode 15273(a) and Discussion of the Utilities Advisory Commission’s ProposedAlternatives.3.Accept the Fiscal Year 2024 Third Quarter Financial Status Report4.Continue Discussion on the Fiscal Year (FY) 2025 Budget Wrap‐Up and Recommended FY2025 Budget including the FY 2025 Municipal Fee Schedule for City Council AdoptionNew Item AddedFUTURE MEETINGS AND AGENDAS Members of the public may not speak to the item(s) ADJOURNMENT PUBLIC COMMENT INSTRUCTIONS Members of the Public may provide public comments to teleconference meetings via email, teleconference, or by phone. 1. Written public comments may be submitted by email to city.council@cityofpaloalto.org. 2. For in person public comments please complete a speaker request card located on the table at the entrance to the Council Chambers and deliver it to the Clerk prior to discussion of the item. 3. Spoken public comments for agendized items using a computer or smart phone will be accepted through the teleconference meeting. To address the Council, click on the link below to access a Zoom‐based meeting. Please read the following instructions carefully. You may download the Zoom client or connect to the meeting in‐ browser. If using your browser, make sure you are using a current, up‐to‐date browser: Chrome 30 , Firefox 27 , Microsoft Edge 12 , Safari 7 . Certain functionality may be disabled in older browsers including Internet Explorer. Or download the Zoom application onto your smart phone from the Apple App Store or Google Play Store and enter in the Meeting ID below. You may be asked to enter an email address and name. We request that you identify yourself by name as this will be visible online and will be used to notify you that it is your turn to speak. When you wish to speak on an Agenda Item, click on “raise hand.” The Clerk will activate and unmute speakers in turn. Speakers will be notified shortly before they are called to speak. When called, please limit your remarks to the time limit allotted. A timer will be shown on the computer to help keep track of your comments. 4. Spoken public comments for agendized items using a phone use the telephone number listed below. When you wish to speak on an agenda item hit *9 on your phone so we know that you wish to speak. You will be asked to provide your first and last name before addressing the Council. You will be advised how long you have to speak. When called please limit your remarks to the agenda item and time limit allotted. CLICK HERE TO JOIN    Meeting ID: 992‐2730‐7235   Phone: 1‐669‐900‐6833 Americans with Disability Act (ADA) It is the policy of the City of Palo Alto to offer its public programs, services and meetings in a manner that is readily accessible to all. Persons with disabilities who require materials in an appropriate alternative format or who require auxiliary aids to access City meetings, programs, or services may contact the City’s ADA Coordinator at (650) 329‐2550 (voice) or by emailing ada@cityofpaloalto.org. Requests for assistance or accommodations must be submitted at least 24 hours in advance of the meeting, program, or service.  3 Regular Meeting June 04, 2024 Materials related to an item on this agenda submitted to the Board after distribution of the agenda packet are available for public inspection at www.CityofPaloAlto.org.   Finance Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: Administrative Services Meeting Date: June 4, 2024 Report #:2402-2673 TITLE Accept June 30, 2023 Actuarial Valuation of Palo Alto's Retiree Healthcare and Other Post Employment Benefits and Recommend to the City Council to Approve Annual Actuarially Determined Contribution for Fiscal Year 2025 and 2026; CEQA Status – Not a Project RECOMMENDATION Staff recommends that the Finance Committee recommend the City Council: 1.Review and accept the June 30, 2023 actuarial valuation of Palo Alto's Retiree Healthcare Plan (Attachment B); and 2.Approve funding of the annual Actuarial Determined Contribution (ADC) for Fiscal Year 2025 and Fiscal Year 2026 using a two-year phase-in of the adjusted assumptions. EXECUTIVE SUMMARY In accordance with the Governmental Accounting Standards Board (GASB), the City Council is required to review and approve the actuarial valuation for retiree healthcare plan on a bi- annual basis for the upcoming two fiscal years and approve funding of the annual Actuarial Determined Contribution (ADC). This current study presents the fund's status as of June 30, 2023 and will be used to inform the FY 2025 and FY 2026 annual operating budgets. This report was finalized after the development of the FY 2025 Proposed Budget therefore, funding levels in the FY 2025 Proposed Budget reflect the out years of the prior completed study as of June 30, 20211. The City’s retiree medical trust is held by the California Employers Retirement Benefit Trust (CERBT) Fund that is managed by CalPERS. The City continues to select CERBT’s Strategy 1 asset allocation, currently projected at a 6.25% discount rate. With the adoption of the 1 Finance Committee, June 7, 2022, Agenda item #3, CMR ID 14112: https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=64042 Item 2 Item 2 Staff Report     Packet Pg. 4     Retiree Benefits Funding Policy2 the City Council directed staff to calculate additional discretionary payments ("prefunding") equivalent to a 5.75%discount rate and transmit amounts above payments at a 6.25% discount rate to the CERBT Fund. Through FY 2024, a total of $11.9 million in additional contributions are expected to be made to the CERBT due to this policy. The June 30, 2023, valuation includes several changes that have impacted the CERBT fund status, primarily due to healthcare and economic fluctuations resulting from the COVID-19 pandemic and continued proactive funding contributions: •Investment Returns: 2021-22 investment loss of -13.5%, compared to the 27.5% investment gains in 2020-21 (6.25% target); •Projected Payroll: Higher than projected salary growth; •Health Premiums: Higher than projected healthcare premiums; and •Pre-Funding Policy: Actuarially Determined Contribution “ADC” (full ADC payments and pre-funding) Compared to the favorable assumptions in the June 30, 2021 actuary study, these changes are advised to be taken in consideration of an uncertain environment. While the 2022-23 portfolio earnings yielded 6.4% and is within range of the 6.25% target, it is not known whether the recent change in healthcare premiums will be ongoing or an anomaly due to the significant governmental support of healthcare costs over the past two years. Because it is unknown whether these changes are the beginning of a trend, or merely a temporary anomaly, this report models short term significant rises in healthcare costs in alignment with inflation. The outyears of the June 30, 2021 valuation report were used to develop the OPEB assumptions in the FY 2025 Proposed Budget. Based on these assumptions and the attached actuary report, $5.2 million ($3.3 million General Fund) should be added to the FY 2025 Budget to maintain pre-funding levels in alignment with City Council policy. On May 21, the Finance Committee (“Committee”) recommended full funding of the ADC and a 2- year phase-in of prefunding levels in accordance with City Council policy as part of the FY 2025 Budget. This action reduces the funding need in FY 2025 to $2.6 million ($1.65 million General Fund). The below table provides a summary of the difference between the funding FY 2025 Proposed Budget in all funds between the June 30, 2021 and June 30, 2023 valuation reports. A more detailed discussion of these is included in this report. 2 City Council, February 6, 2023, Agenda Item #3, Staff Report# 2212-0513: https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=82218 Item 2 Item 2 Staff Report     Packet Pg. 5     Table 1: Funding for the FY 2025 OPEB Obligations* FY25 Proposed ADC (6/30/21 valuation) FY25 Adjusted ADC (6/30/23 valuation) $ Change Actuarially Determined Contribution •Proactive contribution at discount rate of 5.75% •15-year amortization period as of June 30, 2021 (13 years remaining) $16.8M $21.9M $5.1M *Approximately 65% of costs are allocated to the General Fund BACKGROUND The City of Palo Alto offers its employees and retirees a Retiree Healthcare benefit plan which is managed and administered by the California Public Employees' Retirement System (CalPERS), a State of California Retiree Healthcare Trust program. Bi-annually staff contracts with an actuary firm that provides an actuarial report detailing the latest status of the City of Palo Alto's Retiree Healthcare plans for employees and retirees. The actuarial report is used to calculate the annual ADC and pre-funding based on Council policy to the trust. In addition, updates on the rate of return, funding status, and changes to the trust based on various impacts are detailed in the report. Unlike the pension actuary reports, this actuary details impacts by Fund and Department, which inform the development of the annual budget. There are four groups of benefits within the CalPERS Retiree Healthcare benefit plans. Attachment A outlines the different benefits levels by Group. These benefit levels are negotiated and approved as part of the employee contracts. Employees and retirees have an open enrollment window in October each year in which they can make changes to their healthcare plans that take effect in January of the following year. CALPERS Projected Contribution Levels The actuary report has two components to the annual billing of the employer portion of retiree healthcare contributions that comprise the Actuarial Determined Contribution (ADC), (1) the Normal Cost (NC), and (2) the Unfunded Actuarial Accrued Liability (UAAL). •NC: This reflects a rate of contribution for the plan of retirement healthcare benefits provided to current employees based on the current set of assumptions. •Employer Amortization of UAAL: This is an annual payment calculated to pay down an agency's unfunded accrued liability. Assuming every assumption in the actuarial valuation was accurate, an organization would eliminate its unfunded pension liability if it made these payments annually for 30 years. The City Council approved a closed period to amortize the entire net pension liability over a specific timeframe, and 22 years (before the adoption of a Retiree Benefit Funding Policy Item 2 Item 2 Staff Report     Packet Pg. 6     remain as of June 30, 2021. The total liability will vary from one year to the next because of assumption changes and actuarial experience that is different from anticipated, such as actual investment returns that do not meet expectations. As established by the City Council, the City's CERBT Fund is invested in a Strategy 1 asset allocation at a 6.25% discount rate. With the adoption of the Retiree Benefits Funding Policy, directed staff to calculate additional discretionary payments ("prefunding") equivalent to a 5.75%discount rate and transmit amounts above payments at a 6.25% discount rate to the CERBT Fund. The City's CERBT Fund was established in May 2008 at a level of $33 million and it has grown to $173.0 million as of March 31, 2024. ANALYSIS Summary of Actuarial Report June 30, 2023 Staff contracted with Foster and Foster Actuary Consultants for this retiree healthcare actuarial report (Attachment B) to determine the City's retiree healthcare liability and the ADC for Fiscal Years 2025 and 2026. The actuarial analysis is based on current employees' accrued benefit, and retired employees as of June 30, 2023. This updated valuation includes several changes that have impacted the CERBT fund status, primarily due to healthcare and economic fluctuations resulting from the COVID-19 pandemic, inflation levels, and active employee salary growth. Most notably, investment returns for 2020-21 reached an unprecedented level of 27.5% for the period and then performance dropped to -13.5% for 2021-22. This volatile level of return had a significant impact on the overall status of the fund and is not expected to continue in future periods. Healthcare premiums are higher than anticipated due to significant current inflation levels and a return to pre-pandemic levels of utilization. Discount Rate Assumptions The City Council has taken steps to ensure long-term liability assumptions and costs for OPEB are being proactively addressed, including the adoption of a Retiree Benefit Funding Policy3 that invests at an estimated discount rate for OPEB of 6.25% and transmits additional contributions to prefund OPEB obligations at the equivalent of a 5.75% discount rate. Through FY 2024, a total of $11.9 million in additional contributions are expected. Discussed above, the ADC is impacted when actual experience differs from assumptions. One of the more significant impacts to ADC occurs when actual investment returns do not meet expectations. Chart 1 below presents historical returns since 2008-09. 3 City Council, February 6, 2023, Agenda Item #3: https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=82218 Item 2 Item 2 Staff Report     Packet Pg. 7     Chart 1: Historical Returns of the OPEB Trust (Market Value of Plan Assets (MVA) and Expected Return) Projected Unfunded Actuarial Accrued Liability This actuarial valuation includes the plan's "Funded Status." As of June 30, 2023, the CERBT Trust is funded at 56%, down 1,100 basis points from 67% in the June 30, 2021 actuarial valuation. As of June 30, 2023, the Unfunded Actuarial Accrued Liability (UAAL) was $120.5 million for all funds and $77.9 million for the General Fund. Beginning with the June 30, 2013 valuations, the City aligned its actuarial analysis to align with GASB's rules regarding the "implied subsidy". The calculation of implied subsidy requires an agency to recognize that it pays the same medical premiums for active employees as those that are retired. The implied subsidy identifies and accounts for the agency paying the same blended premium for both active employees and retirees, even though the medical cost for active employees is lower than retirees. Palo Alto had 902 active employees and 1,031 retirees as of June 30, 2023. The calculation increases the UAAL by $15.1 million or 18.9%; without the implied subsidy the UAAL for all funds would be at $76.8 million. Item 2 Item 2 Staff Report     Packet Pg. 8     Table 2: Unfunded Actuarial Accrued Liability (UAAL) June 30, 2021 June 30, 2023 Projected June 30, 2024 Citywide – UAAL $80,027 $120,511 $140,372 General Fund – UAAL $51,522 $77,914 $91,242 Citywide Funded Ratio 67%56%54% Citywide UAAL % Chg. from prior valuation 50.6%16.5% Sensitivity Analysis: Discount Rate and Amortization Period CalPERS recognizes the varying assumptions that may impact a plan's unfunded actuarial 3 As illustrated by tables four and five, these alternative assumptions cause significant impacts. For example, changing from a discount rate of 6.25% to 5.75% causes UAAL to increase by almost 15%. Table 3: Discount Rate Sensitivity 6.25% (Current CERBT Strategy) 5.75%5.25% Citywide – UAAL $120,511 $137,059 $155,266 General Fund – UAAL $77,914 $89,088 $100,923 Funded Ratio 56%53%50% Table 4: Amortization Sensitivity, 6.25% Discount Rate 20 Years (Current)18 Years Normal Cost $7,489 $7,489 UAAL Amortization*$8,933 $9,617 Total ACD $16,416 $17,105 ACD (% of payroll)12.8%13.4% *Includes administrative expenses Funding for the FY 2025 Including Actuarial Determined Contribution (ADC) This section outlines staff's recommended funding level for OPEB obligations beginning in FY 2025 for Finance Committee review and discussion. Staff recommend accepting the assumptions in this valuation report to inform the development of the FY 2025 and FY 2026 budgets, along with long range financial plans for the outyears. This is in alignment Item 2 Item 2 Staff Report     Packet Pg. 9     with the Retire Benefit Policy, including tenants such as continuing to use a reduced discount rate of 5.75% and an accelerated, closed amortization schedule of 15 years (as of the June 30, 2021 valuation). Staff recommends the Finance Committee continue with this funding approach that adjusts assumptions based on current data and the principles noted above. Included below is an optional two-year phase-in of the June 30, 2023 valuation results that the Finance Committee directed staff to consider, on May 21, 2024, in the development of the FY 2025 Budget for City Council adoption in June 2024. Staff have also outlined the actuarial "baseline" scenario for consideration that represents the minimal investment required but is incompliant with City policy. Funding levels may be adjusted annually based on City Council direction and policy adjustment, as long as the baseline ADC is met. Unlike the CalPERS pension plan, additional City contributions do not go into a separate Section Full ADC and Prefunding of FY 2025 OPEB Obligations Staff recommend adjusting funding from the typical baseline calculation to better align with City Council policy to continue to proactively fund long-term liabilities. Recommended revisions to baseline assumptions include: •Exclude proactive contributions at a lower discount rate towards the ADC: Consistent with the pension proactive funding, this would treat the proactive contributions assuming a lower discount rate of 5.75 as if in a separate "trust" or "saving account." ADC calculations will remain at consistent levels and these proactive contributions remain additive to baseline calculations of liability. •Continue to assume a shortened amortization period of 13 remaining years: This amortization period aligns OPEB with the City's Pension Policy goals to reach a 90% funded status over 15 years as of the June 30, 2021 valuation (by FY 2036). This results in an FY 2025 Adjusted ADC of $21.9 million citywide (approximately $13.9 million in the General Fund), a $5.1 million increase from the $16.8 million ADC from the June 30, 2021 valuation used to develop the FY 2025 Proposed Operating Budget. Finance Committee Recommendation: Two-Year Phase-In On May 21, 2024 the Finance Committee recommended a two-year phase-in of the financial impacts of the June 30, 2023 valuation. This recommendation mitigates the immediate impacts of this report’s expense escalation and supports financial flexibility for the provision of services citywide while continuing to proactively prefund long-term obligations in alignment with City Council policy. Item 2 Item 2 Staff Report     Packet Pg. 10     This results in an FY 2025 Adjusted ADC of $19.4 million citywide (approximately $12.2 million in the General Fund), Prior Valuation Additional Normal Cost Contributions In the prior valuation period the City Council approved factoring in funding for the addition of nearly 60 full-time staff since the June 30, 2021 valuation date. Based on the average salary reported in that valuation and the variable portion of ADC, or normal cost for current employees, the retiree healthcare cost of the additional staffing was approximately $400,000 citywide ($298,000 or 74% General Fund). This associated retiree health cost was included in the FY 2023 and FY 2024 Adopted budgets in alignment with the assumptions noted above. This funding was included to proactively address the expected deviation in actuarial assumptions though as noted, were insufficient to mitigate the full impact of the changes from the FY 2023 report. Staff recommends removing this additional retiree health cost as the position additions that prompted it are now included in the June 30, 2023 valuation. The $416,000 programmed in the FY 2025 Proposed Budget for additional normal cost contributions partially offset the cost increase from the new valuation to bring it down to $5.1 million for all funds. FISCAL/RESOURCE IMPACT The FY 2025 Proposed Budget includes an ADC of $16.9 million, an increase of $2.9 million from FY 2024 Adopted levels of $14.0 million. Funding of the full ADC and two-year prefunding phase in recommended by the Finance Committee on May 21, 2024 increases the ACD in FY 2025 to $19.4 million. This recommendation by the Finance Committee will be included as an amendment to the FY 2025 Proposed Budget for City Council consideration during the adoption of the budget on June 17, 2024. Staff will incorporate this direction on an ongoing basis beginning in FY 2026. STAKEHOLDER ENGAGEMENT The transmittal of the OPEB actuarial valuation as of June 30, 2023 begins conversations regarding the fiscal outlook for the City's OPEB liabilities and the appropriate contribution for the FY 2025 Actuarial Determined Contribution and prefunding levels. Initial public discussion was held with the Finance Committee on May 21, 2024, prior to City Council review and adoption of the FY 2025 Budget, scheduled for June 17, 2024. ENVIRONMENTAL REVIEW Item 2 Item 2 Staff Report     Packet Pg. 11     Committee action on this item is not a project as defined by CEQA because accepting and approving an annual actuarially determined contribution is a fiscal activity which does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment. CEQA Guidelines section 15378(b)(4). ATTACHMENTS APPROVED BY: Item 2 Item 2 Staff Report     Packet Pg. 12     Attachment A: 4 Benefit Groups in the CalPERS Retiree Healthcare benefit plans City of Palo Alto Retiree Healthcare Benefit Plans and Tiers nd nd nd (All active Group 3 IAFF & FCA (All active Group 3 POA & PMA elected into Group 4) Item 2 ​​Attachment A - 4 Benefit Groups in the CalPERS Retiree Healthcare Benefit Plans     Packet Pg. 13     CITY OF PALO ALTO RETIREE HEALTHCARE PLAN June 30, 2023 Actuarial Valuation Contributions for 2024/25 & 2025/26 Drew Ballard, FSA, EA, MAAA Cathy Wandro, ASA, MAAA Joseph Herm Foster & Foster, Inc. May 21, 2024 CONTENTS L:\PaloAltoCity\OPEB\2023_Val\Reports\F&F_PaloAltoCity_24-05-21_OPEB_6-30-23_Funding_Report.docx Topic Page Benefit Summary 1 Implied Subsidy 7 Participant Statistics 9 Actuarial Assumptions Highlights 15 Actuarial Methods 21 Assets 23 Results 25 Results – Details 39 Sensitivity Analysis 49 Comparison to Other Agencies 54 Actuarial Certification 57 Exhibits 58 Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 14     May 21, 2024 1 BENEFIT SUMMARY  Eligibility  Retire directly from the City under CalPERS (age 501 and 5 years of CalPERS service or disability)  Medical Provider  CalPERS health plans (PEMHCA)  CalPERS administrative fees paid by City  Retiree Medical Benefit for Current Retirees: Hired < 1/1/04 (1/1/05 SEIU, 1/1/06 PAPOA) & Did Not Elect into Group 4  GROUP 1 Retirees: Retired < 1/1/07 (3/1/09 for PAPOA) • Benefit = Full premium up to family coverage  GROUP 2 Retirees: Retired after GROUP 1 and before 5/1/11 (12/1/11 IAFF/FCA, 6/1/12 PMA, 4/1/15 POA) • Benefit = Same as above but premium limited to 2nd most expensive Basic (non-Medicare) medical plan in PEMHCA Region 1 (PERS Platinum in 2023 and 2024)  GROUP 3 Retirees: Retired after GROUP 2 • Benefit = same amount as active employees, which may change from time to time and in the future as bargaining agreements change (see next section for cap amounts) 1 Age 52 for Miscellaneous New Hires under PEPRA May 21, 2024 2 BENEFIT SUMMARY  Retiree Medical Benefit for Current Actives: Hired < 1/1/04 (1/1/05 SEIU, 1/1/06 PAPOA) & Did Not Elect into Group 4  GROUP 3 Future Retirees: Currently active and did not elect into Group 4 • No active Group 3 POA, PMA, IAFF or FCA • Only remaining Group 3 actives in MGMT, SEIU, UMPAPA (57 active members) • Benefit = up to full premium, but limited to flat dollar caps same as active contribution SEIU Mgmt/UMPAPA/ Other Groups 2023 2024 2023 & 2024 Single $ 906 $ 943 $ 871 2-Party 1,812 1,885 1,742 Family 2,350 2,444 2,260 Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 15     May 21, 2024 3 BENEFIT SUMMARY  Retiree Medical Benefit for those: Hired ≥ 1/1/04 (1/1/05 SEIU, 1/1/06 PAPOA) & Employees Hired Before These Dates Electing into Group 42  GROUP 4 Future Retirees: Government Code §22893 “Vesting Schedule” (based on all CalPERS Service)3: Years of Service % Years of Service % < 10 0% 13 65% 10 50% 14 70% 11 55% ↓ ↓ 12 60% > 20 100%  100% vesting for disability retirements  Vesting applies to 100/90 formula amounts, which are the maximum amounts payable by the City (retirees pay any difference between these amounts and actual premiums): 2023 2024 Single $ 883 $ 983 2-Party 1,699 1,890 Family 2,124 2,366  If have 20 years City service do not need to retire directly from City 2 All currently active POA/PMA, IAFF/FCA are Group 4. Some Mgmt/Conf and some SEIU remained in Group 3, and some elected into Group 4. 3 Minimum 5 years City Service. May 21, 2024 4 BENEFIT SUMMARY  Dental, Vision & Medicare Part B  None  Surviving Spouse Benefit  100% of retiree benefit continues to surviving spouse if retiree elects CalPERS pension survivor allowance  Waived Re- election  Waived retirees/beneficiaries may re-elect coverage at a future date  Summary of Changes Since the Prior Valuation  None Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 16     May 21, 2024 5 BENEFIT SUMMARY  Pay-As-You- Go ($000s) Fiscal Year Cash Implied Subsidy Total 2022/23 $ 11,269 $ 3,025 $ 14,294 2021/22 10,880 2,619 13,499 2020/21 10,631 2,346 12,977 2019/20 10,344 2,384 12,728 2018/19 9,960 2,197 12,157 2017/18 9,660 2,444 12,104 2016/17 9,713 2,203 11,916 2015/16 9,681 1,960 11,641 2014/15 8,995 1,916 10,911 2013/14 7,317 - 7,317 2012/13 8,766 - 8,766 2011/12 8,165 - 8,165 May 21, 2024 6 BENEFIT SUMMARY Monthly Benefit Cap Amounts 2023 2024 Group Single 2-Party Family Single 2-Party Family Group 14 $1,210.71 $2,421.42 $3,147.85 $1,339.70 $2,679.40 $3,483.22 Group 2 1,200.12 2,400.24 3,120.31 1,314.27 2,628.54 3,417.10 Group 3 SEIU 906.00 1,912.00 2,350.00 943.00 1,885.00 2,444.00 Group 3 Others5 871.00 1,742.00 2,260.00 871.00 1,742.00 2,260.00 Group 4 (100% vest) 883.00 1,699.00 2,124.00 983.00 1,890.00 2,366.00 % Decrease from Group 1 (assumes Group 1 is in most expensive plan) Group 2 1% 1% 1% 2% 2% 2% Group 3 SEIU 25% 25% 25% 30% 30% 30% Group 3 Others 28% 28% 28% 35% 35% 35% Group 4 27% 30% 33% 27% 29% 32% 4 No cap for Group 1. Amount shown is most expensive Non-Medicare Region 1 premium. 5 UMPAPA, Mgmt, IAFF, FCA, PMA, and PAPOA. Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 17     May 21, 2024 7 IMPLIED SUBSIDY  For PEMHCA, employer cost for allowing retirees to participate at active rates. • Kaiser 2024 Region 1 plan:  The City included the implied subsidy beginning with the June 30, 2013 valuation. 25 30 35 40 45 50 55 60 64 Premium 1,021 1,021 1,021 1,021 1,021 1,021 1,021 1,021 1,021 Male Cost by Age 371 412 487 579 696 866 1,094 1,376 1,636 Female Cost by Age 612 780 857 876 927 1,044 1,196 1,386 1,579 $- $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 $C o s t / P r e m i u m Age Kaiser 2024 -Single Coverage May 21, 2024 8 IMPLIED SUBSIDY This page intentionally blank Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 18     May 21, 2024 9 PARTICIPANT STATISTICS Participant Statistics 6 Excludes all waived retirees, regardless of age, except as noted. 7 Includes 68 waived retirees over 65. 8 Excludes all waived retirees over 65; includes 38 waived under 65 retirees. 6/30/15 6/30/17 6/30/19 6/30/21 6/30/23  Actives • Count 955 967 930 874 902 • Average Age 45.3 45.6 44.8 45.0 44.6 • Average City Service 10.8 10.9 10.8 11.2 10.4 • Average PERS Service 11.9 11.9 11.7 12.1 11.4 • Average Salary $91,714 $90,739 $110,969 $120,207 $134,338 • Total Salary (000’s) $87,586 $87,745 $103,201 $105,061 $121,173  Retirees: • Count6 1,0077 9598 974 1,009 1,031 • Average Age 68.9 68.9 70.0 70.9 71.5 • Average Retirement Age o Service 57.7 57.7 58.0 58.2 58.2 o Disability 45.6 45.9 46.1 46.3 45.8 May 21, 2024 10 PARTICIPANT STATISTICS Historical Active and Retiree Counts9 9 Retiree count is subscribers: retirees and surviving spouses 6/30/09 6/30/11 6/30/13 6/30/15 6/30/17 6/30/19 6/30/21 6/30/23 Active 955 923 948 955 967 930 874 902 Retired 710 860 968 1,007 959 974 1,009 1,031 43%48% 50% 51% 50%51%54%53% 57%52% 50% 49% 50%49%46%47% - 500 1,000 1,500 2,000 2,500 Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 19     May 21, 2024 11 PARTICIPANT STATISTICS Participant Statistics June 30, 2023 10 Based on June 30, 2023 PERSable pay rate. 11 Excludes retirees who have waived coverage, regardless of age. Group 1 Group 2 Group 3 Group 4 Total  Actives • Count n/a n/a 57 845 902 • Average Age n/a n/a 55.8 43.9 44.6 • Average Entry Age n/a n/a 31.5 34.4 34.2 • Average City Service n/a n/a 24.3 9.5 10.4 • Average PERS Service n/a n/a 24.4 10.5 11.4 • Average Salary n/a n/a $134,880 $134,302 $134,338 • Total Salary (000’s)10 n/a n/a 7,688 113,485 121,173  Benefitting Retirees11: • Count 396 280 165 190 1,031 • Average Age 79.3 70.7 65.7 61.5 71.5 • Avg Service Ret Age 57.3 57.8 59.1 59.0 58.2 • Avg Disability Ret Age 44.7 46.9 51.2 48.1 45.8 May 21, 2024 12 PARTICIPANT STATISTICS Participant Statistics June 30, 2021 12 Actual 2020/21 PERSable compensation. 13 Excludes retirees who have waived coverage, regardless of age. Group 1 Group 2 Group 3 Group 4 Total  Actives • Count n/a n/a 69 805 874 • Average Age n/a n/a 54.1 44.2 45.0 • Average Entry Age n/a n/a 31.5 34.0 33.8 • Average City Service n/a n/a 22.6 10.2 11.2 • Average PERS Service n/a n/a 22.8 11.2 12.1 • Average Salary n/a n/a $114,220 $120,720 $120,207 • Total Salary (000’s)12 n/a n/a 7,881 97,180 105,061  Benefitting Retirees13: • Count 429 290 152 138 1,009 • Average Age 77.8 68.8 64.0 61.4 70.9 • Avg Service Ret Age 57.5 57.9 59.1 59.4 58.2 • Avg Disability Ret Age 45.5 46.9 51.2 49.3 46.3 Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 20     May 21, 2024 13 PARTICIPANT STATISTICS Data Reconciliation14 6/30/2021 to 6/30/2023 Actives Retirees Disabled Benefic. Total  June 30, 2021 874 786 144 79 1,883 • New Hires/Rehires 199 - - - 199 • Disabled (8) - 8 - - • Terminated15 (100) - - - (100) • Died with Beneficiary16 - (8) (5) 13 - • Died, no Beneficiary - (25) (7) (10) (42) • Retired/covered (54) 54 - - - • Retired/waived (9) - - - (9) • Waived Retiree - (9) - (1) (10) • Adjustment/Other - 7 1 4 12  June 30, 2023 902 805 141 85 1,933 14 Excludes retirees who have waived coverage. 15 All actives in June 30, 2021 valuation and not in June 30, 2023 valuation assumed terminated. 16 Retirees in the June 30, 2021 valuation not in the June 30, 2023 valuation assumed deceased. May 21, 2024 14 PARTICIPANT STATISTICS This page intentionally blank Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 21     May 21, 2024 15 ACTUARIAL ASSUMPTIONS HIGHLIGHTS June 30, 2021 Valuation June 30, 2023 Valuation  Valuation Date  June 30, 2021  ADC for Fiscal Years 2022/23 & 2023/24 (end of year)  1 year lag  June 30, 2023  ADC for Fiscal Years 2024/25 & 2025/26 (end of year)  1 year lag  Funding Policy  Full Pre-funding through CalPERS trust (CERBT) Strategy #1  City may contribute additional amounts based on lower discount rate  Same  Discount Rate  6.25%, net of expenses based on CERBT Strategy #1  Same  General Inflation  2.50%  Same May 21, 2024 16 ACTUARIAL ASSUMPTIONS HIGHLIGHTS June 30, 2021 Valuation June 30, 2023 Valuation  Payroll Increases  Aggregate Increases: 2.75%  Merit Increases: CalPERS 2000- 2019 Experience Study  Same  Increase to Group 3 Flat Dollar Caps17  ½ of Medical Trend, not less than assumed inflation (2.50%)  Same  Medical Trend  Non-Medicare: 6.50% for 2023, decreasing to an ultimate rate of 3.75% in 2076  Medicare: 5.65% (non-Kaiser) and 4.60% (Kaiser) for 2023, decreasing to an ultimate rate of 3.75% in 2076  Non-Medicare: 8.50% for 2025, decreasing to an ultimate rate of 3.45% in 2076  Medicare: 7.50% (non-Kaiser) and 6.25% (Kaiser) for 2025, decreasing to an ultimate rate of 3.45% in 2076 17 Increase is for purposes of financial projection only and does not imply any obligation to increase the cap in the future. Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 22     May 21, 2024 17 ACTUARIAL ASSUMPTIONS HIGHLIGHTS June 30, 2021 Valuation June 30, 2023 Valuation  Participation at Retirement  Group 3: 98%  Group 4: if eligible for City contribution: 95%; if not: 0%  Based on Plan experience18  Same  Retirement, Mortality, Termination, Disability  CalPERS 2000-2019 Experience Study  Society of Actuaries mortality improvement scale MP-21  Same  Age-related Claims Costs for Medicare Advantage Plans  Included  Due to age-risk adjusted federal subsidies, no age-based claims costs were included for Medicare Advantage plans  Same 18 Actual participation percentage for Group 3 since 6/30/17 is 100% for Miscellaneous (there are no active Safety members in Group 3). Actual participation percentage for Group 4 since 6/30/17 who are eligible for a City contribution is 91%. Group 4 still has limited actual experience. We recommend continued monitoring for Group 4. May 21, 2024 18 ACTUARIAL ASSUMPTIONS HIGHLIGHTS June 30, 2021 Valuation June 30, 2023 Valuation  Basis for Assumptions (6/30/23 Valuation)  No experience study performed for this Plan  CalPERS experience study covering 2000 to 2019 experience was used  Mortality improvement is a Society of Actuaries table  Inflation based on our estimate for the Plan’s long time horizon  Capital market assumptions based on 2021 Foster & Foster stochastic analysis, taking into account capital market assumptions of investment advisory firms  Medical trends were based on expectations over the short term blended into long term medical trends developed using the Society of Actuaries Getzen Model of Long-Run Medical Cost Trends  Age-based claims costs are based on tables published by the Society of Actuaries and demographic data for the CalPERS health plans provided by CalPERS  Medical coverage and participation based in part on Plan experience Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 23     May 21, 2024 19 ACTUARIAL ASSUMPTIONS HIGHLIGHTS CERBT Investment Options  Asset Allocation Strategy 1 Strategy 2 Strategy 3 Global Equity 49% 34% 23% Long US Fixed Income 23% 41% 51% TIPS 5% 5% 9% Commodities 3% 3% 3% Global REITs 20% 17% 14% Total 100% 100% 100% CalPERS’ projected 20-year 6.0% 5.5% 5.0% 19 CalPERS assumes 2.25% price inflation. May 21, 2024 20 ACTUARIAL ASSUMPTIONS HIGHLIGHTS Discount Rate  Future expected returns  Stochastic simulations of geometric average returns over 20 years – 5,000 trials  2.50% inflation assumption  Projections based on 8 independent Investment Advisors 2021 10-year Capital Market Assumptions and where available, investment advisors long-term trends  Confidence levels: Strategy 1 Strategy 2 Strategy 3 50% Confidence Level 6.25% 5.75% 5.25% 55% Confidence Level 6.00% 5.50% 5.00% 60% Confidence Level 5.75% 5.25% 4.75%  Expected returns, 50th percentile: Strategy 1 Strategy 2 Strategy 3 Expected Real Rate of Return20 3.90% 3.39% 2.92% Inflation Assumption 2.50% 2.50% 2.50% Investment Expenses (0.05%) (0.05%) (0.05%) Nominal Rate of Return 6.35% 5.84% 5.37% Rounded to nearest 0.25% 6.25% 5.75% 5.25%  City currently in Strategy 1: Recommend 6.25% discount rate 20 Includes investment expenses Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 24     May 21, 2024 21 ACTUARIAL METHODS Method June 30, 2021 Valuation June 30, 2023 Valuation  Cost Method  Entry Age Normal Level % of Pay  Same  Unfunded Liability Amortization  22 years closed period  Level % of pay (2.75% annual escalation)  Sensitivity analysis: 20 & 18 years  20 years closed period  Level % of pay (2.75% annual escalation)  Sensitivity analysis: 18 years  Actuarial Asset Value  Market Value of Assets21  Same  Future New Entrants  Closed group – no new participants  Implied Subsidy  Implied subsidy valued  Plan Continuance  For purposes of financial projections, the plan and benefits are assumed to continue unchanged. The calculation of this obligation does not imply that there is any legal liability to provide or continue providing the benefits valued. 21 Using Market Value of Assets to determine the ADC will result in more volatile future ADCs than if a smoothed Market Value were used. For funding purposes, market value includes accrued contributions made for a previous fiscal year. May 21, 2024 22 ACTUARIAL METHODS This page intentionally blank Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 25     May 21, 2024 23 ASSETS Market Value of Plan Assets (MVA) Invested in CERBT Strategy 1 Fund (Amounts in 000’s) 2019/20 2020/21 2021/22 2022/23  MVA (Beg. of Year) $118,497 $126,520 $164,170 $144,745 • Contributions 3,747 2,94622 2,904 2,032 • Benefit Payments23 - - - - • Admin. Expenses (59) (71) (80) (72) • Investment Return24 4,335 34,776 (22,249) 9,356  MVA (End of Year) 126,520 164,170 144,745 156,061  Approx. Annual Return 3.6% 27.5% (13.5)% 6.4% 22 Includes $1,358 paid on 1/10/2022; MVA shown is not the same as market value for financial reporting purposes. 23 Benefit Payments made outside of trust by City in years other than 2018/19. Refer to Slide 5 for fiscal year amounts. 24 Net of investment expenses. May 21, 2024 24 ASSETS Historical Returns 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20 20/21 21/22 22/23 Market Value -22.5% 15.1% 24.4% 0.1% 11.2% 18.2% -0.2% 1.1% 10.4% 7.8% 6.3% 3.6% 27.5% -13.5% 6.4% Expected Return 7.75% 7.75% 7.75% 7.75% 7.75% 7.75% 7.61% 7.25% 7.25% 6.75% 6.75% 6.75% 6.75% 6.25% 6.25% (15%) (10%) (5%) 0% 5% 10% 15% 20% 25% 30% Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 26     May 21, 2024 25 RESULTS Actuarial Obligations (Amounts in 000’s)  Valuation Date 6/30/2021 6/30/2023  Discount Rate 6.25% 6.25%  Present Value of Benefits PVB • Actives future retirees $131 926 $154 864 • Retirees 169,243 192,253 • Total 301 169 347 117  Actuarial Accrued Liabilit AAL • Actives future retirees 74 954 84 319 • Retirees 169,243 192,253 • Total 244 197 276 572  Market Value of Assets (MVA) 164,170 156,061  Unfunded AAL UAAL 80 027 120 511  Funded Ratio 67% 56%  Normal Cost25 6 316 7 614  Pa -As-You-Go Cost Cash 11 190 12 827  Pa -As-You-Go Cost IS 3 025 2 745 25 Includes Administration fees. May 21, 2024 26 RESULTS Historical Funded Status (Amounts in 000’s) 24% 27% 29% 33% 37% 49% 67%56% $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 1/1/11 6/30/11 6/30/13 6/30/15 6/30/17 6/30/19 6/30/21 6/30/23 Retiree pay-go Retiree AAL less pay-go Active AAL AVA MVA X% FundedRatio Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 27     May 21, 2024 27 RESULTS Actuarial Gain/Loss (Amounts in $000’s) AAL Assets UAAL  Actual 6/30/21 $244,197 $164,170 $80,027  Expected 6/30/23 260,018 184,228 75,790  Ex erience (Gains)/Losses • Premiums/Caps different than expected 286 286 • Demographic & other (2,315) (2,315)  Assum tion Chan es increasin /(decreasin ) AAL • Medical Plan election percentages changed 1,269 1,269 • Updated medical trend 17,314 17,314  Contribution and Benefit Payment Gain 6,131 (6,131)  Investment Loss (34,297) 34,297  Total UAAL (Gain)/Loss 16,554 (28,167) 44,721  Actual 6/30/23 276,572 156,061 120,511 May 21, 2024 28 RESULTS Actuarially Determined Contribution (ADC) (Amounts in 000’s) 6/30/21 Valuation 6/30/23 Valuation 2022/23 2023/24 2024/25 2025/26  Discount Rate 6.25% 6.25%  ADC - $ • Normal Cost $ 6,196 $ 6,370 $ 7,489 $ 7,674 • Administrative Expenses26 120 126 125 133 • UAAL Amortization 5,112 5,253 8,802 9,044 • Total 11,428 11,749 16,416 16,851  Projected Payroll 110,919 113,969 127,929 131,447  ADC – Percent of Pay • Normal Cost 5.6% 5.6% 5.9% 5.8% • Administrative Expenses 0.1% 0.1% 0.1% 0.1% • UAAL Amortization 4.6% 4.6% 6.9% 6.9% • Total 10.3% 10.3% 12.8% 12.8% 26 Includes PEMHCA and CERBT administration fees. Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 28     May 21, 2024 29 RESULTS Actuarially Determined Contribution (ADC) Payment to Trust (Amounts in 000’s) 6/30/23 Valuation 2024/25 2025/26  Discount Rate 6.25%  ADC - $ • Normal cost $ 7,489 $ 7,674 • Administrative expenses27 125 133 • UAAL amortization 8,802 9,044 • Total 16,416 16,851 • Less: Implied subsidy benefit payments 2,745 2,871 • Remaining ADC 13,671 13,980 • Less: Estimated cash benefit payments 12,827 13,565 • Total Trust contribution (If negative, indicates a reimbursement for City out-of-pocket payments may be requested.) 844 415 27 Includes PEMHCA and CERBT administration fees. May 21, 2024 30 RESULTS Historical Recommended Funding Contributions (Amounts in 000’s) Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 29     May 21, 2024 31 RESULTS Amortization Bases & Payments (Amounts in 000’s) 6/30/21 Valuation 6/30/23 Valuation 6/30/22 6/30/23 6/30/24 6/30/25  Discount Rate 6.25% 6.25%  Payment Escalator 2.75% 2.75%  UAAL Balance $ 76,159 $ 75,807 $ 122,790 $ 121,662  Amortization Payment 5,112 5,253 8,802 9,044  Amortization Period (years) 22 21 20 19 May 21, 2024 32 RESULTS 10 Year Contribution Projection (Amounts in 000’s) FYE ADC28 Contribution Payroll ADC % of Pay Fund % Cash Benefit Payment Implied Subsidy BP Trust Pre- Funding Total UAAL Beg. Of FY 2025 $16,416 $12,827 $2,745 $844 $16,416 $127,929 12.8% $122,791 57% 2026 16,851 13,565 2,871 415 16,851 131,447 12.8% 121,662 59% 2027 17,318 14,286 3,017 15 17,318 135,062 12.8% 120,223 61% 2028 17,785 14,868 2,992 (75) 17,785 138,776 12.8% 118,444 62% 2029 18,276 15,590 3,089 (403) 18,276 142,593 12.8% 116,298 64% 2030 18,775 16,348 3,285 (858) 18,775 146,514 12.8% 113,755 66% 2031 19,271 16,933 3,312 (974) 19,271 150,543 12.8% 110,784 68% 2032 19,803 17,554 3,434 (1,185) 19,803 154,683 12.8% 107,350 69% 2033 20,347 18,086 3,516 (1,255) 20,347 158,937 12.8% 103,416 71% 2034 20,882 18,626 3,575 (1,319) 20,882 163,307 12.8% 98,944 73% 28 Actuarially Determined Contribution Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 30     May 21, 2024 33 RESULTS -$15 -$10 -$5 $0 $5 $10 $15 $20 $25 $30 $ M i l l i o n s Net Trust Payment/Reimbursement Benefit Payments Total ADC ADC, Benefitand Trust Payment/Reimbursement Projection (6.25% Discount Rate, 20 years level % of pay amortization) May 21, 2024 34 RESULTS 0% 20% 40% 60% 80% 100% 120% $0 $20 $40 $60 $80 $100 $120 $140 F u n d e d R a t i o UA A L ( $ M i l l i o n s ) UAAL Funded Ratio UAAL and Funded Ratio Projection (6.25% Discount Rate, 20 years amortization) Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 31     May 21, 2024 35 RESULTS % of Total Actuarial Accrued Liability for Actives and Retirees Miscellaneous 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 6/30/09 6/30/11 6/30/13 6/30/15 6/30/17 6/30/19 6/30/21 6/30/23 Actives Retirees May 21, 2024 36 RESULTS % of Total Actuarial Accrued Liability for Actives and Retirees Safety 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 6/30/09 6/30/11 6/30/13 6/30/15 6/30/17 6/30/19 6/30/21 6/30/23 Actives Retirees Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 32     May 21, 2024 37 RESULTS This chart excludes the Implied Subsidy and is provided for informational purposes only (Amounts in 000’s) Cash Benefit  Present Value of Benefits $ 294,841  Funded Status 6/30/23 • Actuarial Accrued Liability 232,822 • Actuarial Value of Assets29 156,061 • Unfunded AAL 76,761  Funded Ratio 67.0%  ADC 2024/25 • Normal Cost 6,570 • Administrative Expenses 125 • UAAL Amortization 5,590 • Total 12,285 • ADC % of Payroll 9.6% 29 All assets allocated to the cash benefit for illustrative purposes only. May 21, 2024 38 RESULTS This page intentionally blank Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 33     May 21, 2024 39 RESULTS - DETAILS Actuarial Obligations by Pre/Post 65 Benefits June 30, 2023 (Amounts in 000’s) Benefits Paid Before Age 65 Benefits Paid On or After Age 65 Total  Present Value of Benefits • Actives (future retirees) $78,087 $76,777 $154,864 • Retirees 48,369 143,884 192,253 • Total 126,456 220,661 347,117  Actuarial Accrued Liability • Actives (future retirees) 40,543 43,776 84,319 • Retirees 48,369 143,884 192,253 • Total 88,912 187,660 276,572  Normal Cost 2024/2530 3,872 3,741 7,614 30 Includes Administration fees. May 21, 2024 40 RESULTS - DETAILS Actuarial Obligations by Group June 30, 2023 (Amounts in 000’s) Group 1 Group 2 Group 3 Group 4 Total  Present Value of Benefits • Actives (future retirees) $ - $ - $12,507 $142,358 $154,864 • Retirees 47,911 53,548 36,227 54,567 192,253 • Total 47,911 53,548 48,734 196,925 347,117  Actuarial Accrued Liability • Actives (future retirees) - - 10,597 73,722 84,319 • Retirees 47,911 53,548 36,227 54,567 192,253 • Total 47,911 53,548 46,824 128,289 276,572  Normal Cost 2024/2531 n/a n/a 353 7,261 7,614  NC as % of Payroll n/a n/a 5.0% 6.0% 6.0%  Active Count n/a n/a 57 845 902  Projected Payroll n/a n/a 7,128 120,801 127,929 31 Includes Administration fees. Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 34     May 21, 2024 41 RESULTS - DETAILS Actuarial Obligations by Cash/Implied Subsidy June 30, 2023 (Amounts in 000’s) Cash Subsidy Implied Subsidy Total  Present Value of Benefits • Actives (future retirees) $134,797 $20,067 $154,864 • Retirees 160,044 32,209 192,253 • Total 294,841 52,276 347,117  Actuarial Accrued Liability • Actives (future retirees) 72,778 11,542 84,319 • Retirees 160,044 32,209 192,253 • Total 232,822 43,751 276,572  Market Value of Assets32 131,374 24,687 156,061  Unfunded AAL 101,448 19,064 120,511  Normal Cost 2024/2533 6,695 919 7,614  Pay-As-You-Go Cost 2024/25 12,827 2,745 15,572 32 Allocated in proportion to AAL for illustrative purposes. 33 Includes Administration fees. May 21, 2024 42 RESULTS - DETAILS Actuarially Determined Contribution by Cash/Implied Subsidy 2024/25 Fiscal Year (Amounts in 000’s) Cash Subsidy Implied Subsidy Total  ADC - $ • Normal Cost $ 6,570 $ 919 $ 7,489 • Administrative Expenses 125 - 125 • UAAL Amortization 7,424 1,378 8,802 • ADC 14,119 2,297 16,416  Projected Payroll 127,929 127,929 127,929  ADC - % of Payroll • Normal Cost 5.1% 0.7% 5.9% • Administrative Expenses 0.1% 0.0% 0.1% • UAAL Amortization 5.8% 1.1% 6.9% • ADC 11.0% 1.8% 12.8% Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 35     May 21, 2024 43 RESULTS - DETAILS Actuarial Obligations by Misc/Safety June 30, 2023 (Amounts in 000’s) Misc Safety Total  Present Value of Benefits • Actives (future retirees) $112,057 $42,807 $154,864 • Retirees 120,219 72,034 192,253 • Total 232,276 114,841 347,117  Actuarial Accrued Liability • Actives (future retirees) 63,059 21,260 84,319 • Retirees 120,219 72,034 192,253 • Total 183,278 93,294 276,572  Market Value of Assets34 103,418 52,643 156,061  Unfunded AAL 79,860 40,651 120,511  Normal Cost 2024/2535 5,495 2,118 7,614  Pay-As-You-Go Cost 2024/25 10,278 5,294 15,572 34 Allocated in proportion to the Actuarial Accrued Liability. 35 Includes Administration fees. May 21, 2024 44 RESULTS - DETAILS Actuarially Determined Contribution by Misc/Safety 2024/25 Fiscal Year (Amounts in 000’s) Misc Safety Total  ADC - $ • Normal Cost $ 5,412 $ 2,077 $ 7,489 • Administrative Expenses 83 42 125 • UAAL Amortization 5,848 2,954 8,802 • ADC 11,344 5,072 16,416  Projected Payroll 101,964 25,965 127,929  ADC - % of Payroll • Normal Cost 5.3% 8.0% 5.9% • Administrative Expenses 0.1% 0.2% 0.1% • UAAL Amortization 5.7% 11.4% 6.9% • ADC 11.1% 19.5% 12.8% Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 36     May 21, 2024 45 RESULTS - DETAILS Actuarial Obligations by Bargaining Unit June 30, 2023 (Amounts in 000’s) FCA IAFF M/C PAPOA PMA SEIU UMPAPA Total  PVB • Actives $1,362 $20,223 $32,491 $17,294 $2,521 $72,048 $8,927 $154,864 • Retirees 2,714 34,636 52,789 25,202 2,593 65,881 8,438 192,253 • Total 4,076 54,859 85,280 42,496 5,114 137,929 17,365 347,117  AAL • Actives 1,074 9,545 18,930 7,485 2,058 38,985 6,242 84,319 • Retirees 2,714 34,636 52,789 25,202 2,593 65,881 8,438 192,253 • Total 3,788 44,181 71,719 32,687 4,651 104,866 14,680 276,572  MVA36 2,137 24,930 40,469 18,444 2,624 59,173 8,283 156,061  UAAL 1,651 19,251 31,250 14,243 2,027 45,693 6,397 120,511  NC 24/2537 48 928 1,617 981 102 3,583 356 7,614  Pay-Go 205 2,624 4,315 1,771 174 5,749 734 15,572 36 Allocated in proportion to the Actuarial Accrued Liability. 37 Includes Administration fees. May 21, 2024 46 RESULTS - DETAILS Actuarially Determined Contribution by Bargaining Unit 2024/25 Fiscal Year (Amounts in 000’s) FCA IAFF M/C PAPOA PMA SEIU UMPAPA Total  ADC - $ • Normal Cost $ 46 $ 908 $ 1,585 $ 966 $ 99 $ 3,536 $ 350 $ 7,489 • Admin. Expenses 2 20 32 15 2 48 7 125 • UAAL Amort 119 1,393 2,265 1,045 150 3,363 468 8,802 • ADC 166 2,321 3,881 2,026 252 6,947 824 16,416  Projected Payroll 803 10,826 34,117 11,174 1,880 59,705 9,424 127,929  ADC - % • Normal Cost 5.7% 8.4% 4.6% 8.6% 5.3% 5.9% 3.7% 5.9% • Admin. Expenses 0.2% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% • UAAL Amort 14.8% 12.9% 6.6% 9.3% 8.0% 5.6% 5.0% 6.9% • ADC 20.7% 21.4% 11.4% 18.1% 13.4% 11.6% 8.7% 12.8% Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 37     May 21, 2024 47 RESULTS - DETAILS Actuarially Determined Contribution by Bargaining Unit 2025/26 Fiscal Year (Amounts in 000’s) FCA IAFF M/C PAPOA PMA SEIU UMPAPA Total  ADC - $ • Normal Cost $ 47 $ 931 $ 1,624 $ 990 $ 102 $ 3,623 $ 358 $ 7,674 • Admin. Expenses 2 21 34 16 2 51 7 133 • UAAL Amort 122 1,431 2,327 1,073 154 3,456 481 9,044 • ADC 171 2,383 3,985 2,079 259 7,130 846 16,851  Projected Payroll 826 11,123 35,055 11,481 1,932 61,347 9,683 131,447  ADC - % • Normal Cost 5.7% 8.4% 4.6% 8.6% 5.3% 5.9% 3.7% 5.8% • Admin. Expenses 0.2% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% • UAAL Amort 14.8% 12.9% 6.6% 9.3% 8.0% 5.6% 5.0% 6.9% • ADC 20.7% 21.4% 11.4% 18.1% 13.4% 11.6% 8.7% 12.8% May 21, 2024 48 RESULTS - DETAILS This page intentionally blank Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 38     May 21, 2024 49 SENSITIVITY ANALYSIS Discount Rate Sensitivity (Amounts in 000’s) CERBT Strategy #1 (Current) #2 #3  Discount Rate 6.25% 5.75% 5.25%  Present Value of Benefits $347,117 $375,439 $407,741  Funded Status 6/30/23 • Actuarial Accrued Liability 276,572 293,120 311,327 • Assets 156,061 156,061 156,061 • Unfunded AAL 120,511 137,059 155,266  Funded Ratio 56.4% 53.2% 50.1%  ADC 2024/25 • Normal Cost 7,489 8,379 9,394 • Administrative Expenses 125 125 125 • UAAL Amortization38 8,802 9,582 10,377 • Total 16,416 18,085 19,896 • ADC % of Payroll 12.8% 14.1% 15.6% 38 UAAL amortized over 20 years for all scenarios. May 21, 2024 50 SENSITIVITY ANALYSIS Amortization Period Sensitivity Discount Rate – 6.25%, Level % of Pay with 2.75% Payment Escalation (Amounts in 000’s)  Amortization Period Current 20 Years 18 Years  Funded Status 6/30/23 • Actuarial Accrued Liability $276,572 $276,572 • Assets 156,061 156,061 • Unfunded AAL 120,511 120,511  Total Projected Payroll 2024/25 127,929 127,929  ADC 2024/25 • Normal Cost 7,489 7,489 • Administrative Expenses 125 125 • UAAL Amortization 8,802 9,492 • Total 16,416 17,105 • ADC % of Payroll 12.8% 13.4% Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 39     May 21, 2024 51 SENSITIVITY ANALYSIS Amortization Period Sensitivity Discount Rate – 5.75%, Level % of Pay with 2.75% Payment Escalation (Amounts in 000’s)  Amortization Period Current 20 Years 18 Years  Funded Status 6/30/23 • Actuarial Accrued Liability $293,120 $293,120 • Assets 156,061 156,061 • Unfunded AAL 137,059 137,059  Total Projected Payroll 2024/25 127,929 127,929  ADC 2024/25 • Normal Cost 8,379 8,379 • Administrative Expenses 125 125 • UAAL Amortization 9,582 10,371 • Total 18,085 18,875 • ADC % of Payroll 14.1% 14.8% May 21, 2024 52 SENSITIVITY ANALYSIS Actuarial Obligations by Bargaining Unit – 5.75% June 30, 2023 (Amounts in 000’s) FCA IAFF M/C PAPOA PMA SEIU UMPAPA Total  PVB • Actives $1,487 $22,844 $36,048 $19,489 $2,733 $80,761 $9,832 $173,194 • Retirees 2,865 36,463 55,395 26,661 2,773 69,183 8,905 202,245 • Total 4,352 59,307 91,443 46,150 5,506 149,944 18,737 375,439  AAL • Actives 1,153 10,284 20,354 8,089 2,200 42,076 6,719 90,875 • Retirees 2,865 36,463 55,395 26,661 2,773 69,183 8,905 202,245 • Total 4,018 46,747 75,749 34,750 4,973 111,259 15,624 293,120  MVA39 2,139 24,889 40,330 18,501 2,648 59,236 8,318 156,061  UAAL 1,879 21,858 35,419 16,249 2,325 52,023 7,306 137,059  NC 24/2540 54 1,039 1,797 1,091 115 4,007 399 8,504  Pay-Go 205 2,624 4,315 1,771 174 5,749 734 15,572 39 Allocated in proportion to the Actuarial Accrued Liability. 40 Includes Administration fees. Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 40     May 21, 2024 53 SENSITIVITY ANALYSIS 10 Year Contribution Projection – 5.75% 13 Year Amortization (Amounts in 000’s) FYE ADC41 Contribution Payroll ADC % of Pay Fund % Cash Benefit Payment Implied Subsidy BP Trust Pre- Funding Total UAAL Beg. Of FY 2025 $21,996 $12,827 $2,745 $6,424 $21,996 $127,929 17.2% $140,372 54% 2026 22,551 13,565 2,871 6,115 22,551 131,447 17.2% 134,951 57% 2027 23,180 14,286 3,017 5,877 23,180 135,062 17.2% 128,847 60% 2028 23,812 14,868 2,992 5,952 23,812 138,776 17.2% 122,011 63% 2029 24,474 15,590 3,089 5,795 24,474 142,593 17.2% 114,390 67% 2030 25,147 16,348 3,285 5,514 25,147 146,514 17.2% 105,928 70% 2031 25,821 16,933 3,312 5,576 25,821 150,543 17.2% 96,567 73% 2032 26,538 17,554 3,434 5,550 26,538 154,683 17.2% 86,242 77% 2033 27,272 18,086 3,516 5,670 27,272 158,937 17.2% 74,886 80% 2034 27,999 18,626 3,575 5,798 27,999 163,307 17.1% 62,429 84% 41 Actuarially Determined Contribution May 21, 2024 54 COMPARISON TO OTHER AGENCIES 50% of 90% of results results are are within within this this range range 5th Percentile 75th Percentile 50th Percentile 25th Percentile Foster & Foster California OPEB Database Sam le Percentile Gra h 95th Percentile 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% Pe r c e n t o f P a y Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 41     May 21, 2024 55 COMPARISON TO OTHER AGENCIES NC ADC NC ADC 95th Percentile 10.9% 24.2% 12.3% 35.5% 75th Percentile 5.4% 10.8% 5.0% 15.8% 50th Percentile 2.8% 5.4% 2.6% 6.2% 25th Percentile 1.5% 2.6% 1.5% 3.3% 5th Percentile 0.7% 0.7% 0.7% 0.9% ` Percent of Pay (♦) 5.3% 11.1% 8.0% 19.5% Percentile 74% 76% 88% 84% Miscellaneous Safety Discount Rate = 6.25%, Average Amortization Period = 20.0 Years 0% 5% 10% 15% 20% 25% 30% 35% 40% Pe r c e n t o f P a y Foster & Foster California OPEB Database Normal Cost & Actuarially Determined Contribution May 21, 2024 56 COMPARISON TO OTHER AGENCIES General Miscellaneous Safet 95th Percentile 317% 440% 75th Percentile 173% 202% 50th Percentile 87% 88% 25th Percentile 40% 48% 5th Percentile 14% 15% Percent of Pay (♦) 185% 369% Percentile 79% 91% Discount Rate = 6.25% 0% 50% 100% 150% 200% 250% 300% 350% 400% 450% 500% Pe r c e n t o f P a y Foster & Foster California OPEB Database Actuarial Accrued Liability Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 42     May 21, 2024 57 ACTUARIAL CERTIFICATION This report presents the City of Palo Alto Retiree Healthcare Plan (“Plan”) June 30, 2023 actuarial valuation. The purpose of this valuation is to:  Determine the June 30, 2023 Benefit Obligations,  Determine the Plan’s June 30, 2023 Funded Status, and  Calculate the 2024/25 and 2025/26 Actuarially Determined Contributions. The report provides information intended for funding the City’s Plan, but may not be appropriate for other purposes. Future actuarial measurements may differ significantly from the current measurements presented in this report due to such factors as: plan experience differing from that anticipated by the assumptions; changes in assumptions; changes expected as part of the natural progression of the plan; and changes in plan provisions or applicable law. Actuarial models necessarily rely on the use of estimates and are sensitive to changes. Small variations in estimates may lead to significant changes in actuarial measurements. Due to the limited scope of this assignment, we did not perform an analysis of the potential range of such measurements. The valuation is based on Plan provisions, participant data, and asset information provided by the City as summarized in this report, which we relied on and did not audit. We reviewed the participant data for reasonableness. To the best of our knowledge, this report is complete and accurate and has been conducted using generally accepted actuarial principles and practices. As members of the American Academy of Actuaries meeting the Academy Qualification Standards, we certify the actuarial results and opinions herein. Respectfully submitted, Drew Ballard, FSA, MAAA, EA Foster & Foster, Inc. Catherine A. Wandro, ASA, MAAA Foster & Foster, Inc. May 21, 2024 58 EXHIBITS Topic Page Premiums E- 1 Data Summary E- 5 Additional Actuarial Assumptions E-23 Results by Fund E-31 Results by GF Department E-33 Definitions E-35 Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 43     May 21, 2024 E-1 PREMIUMS 2023 PEMHCA Monthly Premiums Region 1 Non-Medicare Eligible Medicare Eligible Medical Plan Single 2-Party Family Single 2-Party Family Anthem Select $1,128.83 $2,257.66 $2,934.96 $413.59 $827.18 $1,240.77 Anthem Traditional 1,210.71 2,421.42 3,147.85 413.59 827.18 1,240.77 Blue Shield Access+ 1,035.21 2,070.42 2,691.55 361.90 723.80 1,085.70 Blue Shield Trio 888.94 1,777.88 2,311.24 361.90 723.80 1,085.70 Health Net SmartCare 1,174.50 2,349.00 3,053.70 n/a n/a n/a Kaiser 913.74 1,827.48 2,375.72 283.25 566.50 849.75 Kaiser Summit n/a n/a n/a 336.29 672.58 1,008.87 UnitedHealthcare Alliance 1,044.07 2,088.14 2,714.58 n/a n/a n/a UnitedHealthcare Group n/a n/a n/a 299.68 599.36 899.04 UnitedHealthcare Edge n/a n/a n/a 357.70 715.40 1,073.10 Western Health Advantage 760.17 1,520.34 1,976.44 331.11 662.22 993.33 PERS Platinum 1,200.12 2,400.24 3,120.31 420.02 840.04 1,260.06 PERS Gold 825.61 1,651.22 2,146.59 392.71 785.42 1,178.13 PORAC 825.00 1,875.00 2,300.00 465.00 1,030.00 1,395.00 May 21, 2024 E-2 PREMIUMS 2024 PEMHCA Monthly Premiums Region 1 Non-Medicare Eligible Medicare Eligible Medical Plan Single 2-Party Family Single 2-Party Family Anthem Select $1,138.86 $2,277.72 $2,961.04 $405.83 $811.66 $1,217.49 Anthem Traditional 1,339.70 2,679.40 3,483.22 405.83 811.66 1,217.49 Blue Shield Access+ 1,076.84 2,153.68 2,799.78 392.68 785.36 1,178.04 Blue Shield Trio 946.84 1,893.68 2,461.78 392.68 785.36 1,178.04 Kaiser 1,021.41 2,042.82 2,655.67 324.79 649.58 974.37 Kaiser Summit n/a n/a n/a 386.55 773.10 1,159.65 UnitedHealthcare Alliance 1,091.13 2,182.26 2,836.94 n/a n/a n/a UnitedHealthcare Harmony 937.39 1,874.78 2,437.21 n/a n/a n/a UnitedHealthcare Group n/a n/a n/a 341.72 683.44 1,025.16 UnitedHealthcare Edge n/a n/a n/a 366.01 732.02 1,098.03 Western Health Advantage 807.23 1,614.46 2,098.80 268.62 537.24 805.86 PERS Platinum 1,314.27 2,628.54 3,417.10 448.15 896.30 1,344.45 PERS Gold 914.82 1,829.64 2,378.53 406.60 813.20 1,219.80 PORAC 931.00 2,117.00 2,651.00 465.00 1,030.00 1,395.00 Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 44     May 21, 2024 E-3 PREMIUMS PEMHCA Monthly Premium Increases/(Decreases) Region 1 Non-Medicare Eligible Medicare Eligible Medical Plan 2023 2024 2023 2024 Anthem Select 11.1% 0.9% 14.8% (1.9%) Anthem Traditional (7.2%) 10.7% 14.8% (1.9%) Blue Shield Access+ (7.2%) 4.0% 2.5% 8.5% Blue Shield Trio (1.1%) 6.5% 2.5% 8.5% Health Net SmartCare 1.9% n/a n/a n/a Kaiser 6.6% 11.8% (6.4%) 14.7% Kaiser Summit n/a n/a n/a 14.9% UnitedHealthcare Alliance 2.3% 4.5% n/a n/a UnitedHealthcare Group n/a n/a 1.7% 14.0% UnitedHealthcare Edge n/a n/a 3.0% 2.3% Western Health Advantage 2.6% 6.2% 5.1% (18.9%) PERS Platinum 13.5% 9.5% 10.0% 6.7% PERS Gold 17.7% 10.8% 4.1% 3.5% PORAC 3.3% 12.8% 0.9% 0.0% May 21, 2024 E-4 PREMIUMS This page intentionally blank Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 45     May 21, 2024 E-5 DATA SUMMARY Participant Statistics by Bargaining Unit June 30, 2023 FCA IAFF M/C PAPOA PMA SEIU UMPAPA Total  Actives • Count 4 84 202 66 7 494 45 902 • Avg Age 48.0 39.1 46.9 38.9 48.9 44.8 50.5 44.6 • Avg City Svc 22.4 9.8 10.7 9.2 23.4 9.7 16.4 10.4 • Avg PERS Svc 22.4 10.3 12.4 10.2 24.2 10.4 17.6 11.4 • Avg Salary $190,356 $122,075 $159,976 $160,358 $254,449 $114,477 $198,351 $134,338 • Total Salary42 $761 $10,254 $32,315 $10,584 $1,781 $56,552 $8,926 $121,173  Retirees43: • Count 8 147 313 96 6 432 29 1,031 • Avg Age 64.3 71.4 73.0 66.4 53.2 72.6 62.9 71.5 • Avg Service Ret Age 55.8 54.7 58.1 52.5 50.4 59.7 58.2 58.2 • Avg Disab Ret Age 50.1 48.8 50.5 41.8 n/a 46.7 n/a 45.8 42 Amount in 000’s. Based on June 30, 2023 PERSable pay rate. 43 Excludes retirees who have waived coverage. May 21, 2024 E-6 DATA SUMMARY Participant Statistics by Bargaining Unit June 30, 2021 FCA IAFF M/C PAPOA PMA SEIU UMPAPA Total  Actives • Count 4 80 195 68 6 477 44 874 • Avg Age 42.6 42.5 47.3 39.8 46.9 44.8 49.1 45.0 • Avg City Svc 18.1 12.8 10.6 10.2 22.1 10.6 17.3 11.2 • Avg PERS Svc 18.1 13.3 12.2 11.2 23.1 11.2 18.1 12.1 • Avg Salary $209,498 $145,878 $134,380 $152,938 $228,619 $98,486 $172,711 $120,207 • Total Salary44 $838 $11,670 $26,204 $10,400 $1,372 $46,978 $7,599 $105,061  Retirees45: • Count 6 148 307 89 5 430 24 1,009 • Avg Age 64.7 71.0 72.0 66.9 57.5 71.6 62.2 70.9 • Avg Service Ret Age 56.7 54.6 58.3 52.3 50.4 59.6 58.8 58.2 • Avg Disab Ret Age 50.1 48.8 50.5 42.0 n/a 48.0 n/a 46.3 44 Amount in 000’s. Actual 2020/21 PERSable compensations. 45 Excludes retirees who have waived coverage. Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 46     May 21, 2024 E-7 DATA SUMMARY Participant Statistics by CalPERS Pension Category June 30, 2023 46 Based on June 30, 23 PERSable payrate. 47 Excludes retirees who have waived coverage. Miscellaneous Police Fire Total  Actives • Count 738 72 92 902 • Average Age 45.6 40.3 39.9 44.6 • Average City Service 10.3 10.8 10.8 10.4 • Average PERS Service 11.3 11.8 11.2 11.4 • Average Salary $130,866 $173,099 $131,856 $134,338 • Total Salary (000’s)46 $96,579 $12,463 $12,131 $121,173  Retirees47: • Count 751 113 167 1,031 • Average Age 72.4 65.9 71.2 71.5 • Avg Service Ret Age 59.2 52.2 54.7 58.2 • Avg Disability Ret Age 47.1 41.9 48.9 45.8 May 21, 2024 E-8 DATA SUMMARY Participant Statistics by CalPERS Pension Category June 30, 2021 48 Actual 2020/21 PERSable compensations. 49 Excludes retirees who have waived coverage. Miscellaneous Police Fire Total  Actives • Count 711 76 87 874 • Average Age 45.7 40.7 42.7 45.0 • Average City Service 11.0 11.0 13.2 11.2 • Average PERS Service 11.9 12.0 13.7 12.1 • Average Salary $112,031 $161,950 $150,562 $120,207 • Total Salary (000’s)48 $79,654 $12,308 $13,099 $105,061  Retirees49: • Count 739 105 165 1,009 • Average Age 71.6 66.3 70.7 70.9 • Avg Service Ret Age 59.2 52.0 54.5 58.2 • Avg Disability Ret Age 48.1 42.1 48.9 46.3 Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 47     May 21, 2024 E-9 DATA SUMMARY Medical Plan Participation – June 30, 2023 All Retirees Medical Plan Actives Under 65 65 or Older Total Miscellaneous/Sa et M S M S M S M S Anthem Select 2% 2% 3% - 1% - 1% - Anthem Traditional 3% 1% 5% 4% 6% 5% 6% 5% Blue Shield Access+ 10% 3% 7% 3% 1% 1% 3% 2% Blue Shiel Trio - - - 1% - - - - Health Net SmartCare - - 1% - - - - - Kaiser 68% 50% 43% 26% 29% 21% 32% 23% Kaiser Summit - - - - 2% - 2% - UnitedHealthcare - - 1% 1% 17% 10% 13% 7% UnitedHealthcare Ed e - - - - - - - - Western Health Advanta e - 1% - - - - - - PERS Gol 7% 4% 4% - 1% - 1% - PERS Platinum 10% 2% 35% 16% 42% 47% 41% 34% PORAC - 37% 1% 49% 1% 16% 1% 29% Total 100% 100% 100% 100% 100% 100% 100% 100% May 21, 2024 E-10 DATA SUMMARY Medical Plan Participation – June 30, 2021 All Retirees Medical Plan Actives Under 65 65 or Older Total Miscellaneous/Sa et M S M S M S M S Anthem Select 6% 3% 5% 1% - - 2% - Anthem Traditional 4% 1% 9% 8% 6% 5% 6% 6% Blue Shield Access+ - - 3% 7% - - 1% 3% Health Net SmartCare 1% 1% 1% 1% - - - - Kaiser 65% 51% 40% 36% 30% 23% 32% 29% UnitedHealthcare - - 1% 2% 18% 13% 14% 8% Western Health Advantage - - 1% - - - - - PERSCare - - 4% 9% 25% 37% 20% 25% PERS Choice 22% 3% 32% 3% 21% 15% 24% 10% PERS Select 1% 1% 3% - - - 1% - PORAC - 40% 1% 32% - 8% - 19% Total 100% 100% 100% 100% 100% 100% 100% 100% Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 48     May 21, 2024 E-11 DATA SUMMARY Active Medical Coverage – Miscellaneous Medical Plan Single 2-Party Family Waived Total Anthem Select 3 3 5 - 11 Anthem Traditional 9 3 5 - 17 Blue Shield Access+ 15 18 31 - 64 Blue Shield Trio - - 1 - 1 Health Net SmartCare - - 1 - 1 Kaiser 162 90 200 - 452 Western Health Advantage - - 1 - 1 PERS Gold 13 11 20 - 44 PERS Platinum 26 12 30 - 68 PORAC 1 - - - 1 Waived - - - 78 78 Total 229 137 294 78 738 % as of June 30, 2023 31% 18% 40% 11% 100% % as of June 30, 2021 30% 22% 40% 9% 100% May 21, 2024 E-12 DATA SUMMARY Active Medical Coverage – Safety Medical Plan Single 2-Party Family Waived Total Anthem Select 1 - 2 - 3 Anthem Traditional 1 - - - 1 Blue Shield Access+ 1 - 3 - 4 Blue Shield Trio - - - - - Health Net SmartCare - - - - - Kaiser 23 15 39 - 77 Western Health Advantage - - 1 - 1 PERS Gold 5 - 1 - 6 PERS Platinum 1 1 1 - 3 PORAC 7 7 43 - 57 Waived - - - 12 12 Total 39 23 90 12 164 % as of June 30, 2023 24% 14% 55% 7% 100% % as of June 30, 2021 20% 14% 63% 2% 100% Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 49     May 21, 2024 E-13 DATA SUMMARY Retiree Medical Coverage50 - Miscellaneous Medical Plan Single 2-Party Family Total <65 65+ <65 65+ <65 65+ Anthem Select 3 1 2 1 1 2 10 Anthem Traditional 7 11 2 21 - 2 43 Blue Shield Access+ 5 2 5 5 2 - 19 Health Net SmartCare 1 - - - - - 1 Kaiser 21 94 45 68 8 6 242 Kaiser Summit - 8 - 2 - 1 11 UnitedHealthcare - 64 1 32 - - 97 UnitedHealthcare Edge - 2 - 1 - - 3 Western Health Advantage - - - 1 - - 1 PERS Gold 1 1 2 2 4 - 10 PERS Platinum 19 129 32 111 10 7 308 PORAC - 3 1 1 - 1 6 Total 57 315 90 245 25 19 751 % as of June 30, 2023 8% 42% 12% 33% 3% 2% 100% % as of June 30, 2021 9% 41% 12% 32% 4% 2% 100% 50 Approximately 77% of retirees have coverage in a region 1 plan. The rest are in other state regions or out of state. May 21, 2024 E-14 DATA SUMMARY Retiree Medical Coverage51 - Safety Medical Plan Single 2-Party Family Total <65 65+ <65 65+ <65 65+ Anthem Select - - - - - - - Anthem Traditional 1 - 1 7 3 2 14 Blue Shield Access+ 1 - 2 - 1 1 5 Health Net SmartCare - - - - - - - Kaiser 7 12 11 21 12 1 64 Kaiser Summit - - - - - - 0 UnitedHealthcare - 11 - 6 1 - 18 UnitedHealthcare Edge - - - - - - 0 Western Health Advantage - - - - - - 0 PERS Gold - - - - - - 0 PERS Platinum 7 39 6 37 5 2 96 PORAC 12 4 15 19 29 3 82 Total 28 66 35 90 52 9 280 % as of June 30, 2023 10% 24% 13% 32% 19% 3% 100% % as of June 30, 2021 9% 25% 16% 29% 19% 2% 100% 51 Approximately 70% of retirees have coverage in a Region 1 plan. The rest are in other state regions or out of state. Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 50     May 21, 2024 E-15 DATA SUMMARY Retirees Medical Coverage by Age – Miscellaneous Age Single 2-Party Family Total Under 50 - 1 - 1 50-54 2 3 4 9 55-59 12 19 9 40 60-64 43 67 12 122 65-69 63 68 11 142 70-74 73 66 5 144 75-79 76 65 3 144 80-84 59 22 - 81 85 & Over 44 24 - 68 Total 372 335 44 751 Average Age 74.5 71.2 64.0 72.4 May 21, 2024 E-16 DATA SUMMARY Retirees Medical Coverage by Age – Police Age Single 2-Party Family Total Under 50 3 1 6 10 50-54 - 1 7 8 55-59 3 1 6 10 60-64 9 6 9 24 65-69 3 13 5 21 70-74 10 6 - 16 75-79 3 7 - 10 80-84 3 4 - 7 85 & Over 4 3 - 7 Total 38 42 33 113 Average Age 68.1 70.5 57.5 65.9 Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 51     May 21, 2024 E-17 DATA SUMMARY Retirees Medical Coverage by Age – Fire Age Single 2-Party Family Total Under 50 - - - - 50-54 - 1 7 8 55-59 6 10 11 27 60-64 7 15 6 28 65-69 3 14 4 21 70-74 5 11 - 16 75-79 7 12 - 19 80-84 17 9 - 26 85 & Over 11 11 - 22 Total 56 83 28 167 Average Age 76.7 71.7 59.0 71.2 May 21, 2024 E-18 DATA SUMMARY Retirees Medical Coverage by Age – Total Age Single 2-Party Family Total Under 50 3 2 6 11 50-54 2 5 18 25 55-59 21 30 26 7 7 60-64 59 88 27 174 65-69 69 95 20 184 70-74 88 83 5 176 75-79 86 84 3 173 80-84 79 35 - 114 85 & Over 59 38 - 97 Total 466 460 105 1,031 Average Age 74.3 71.2 60.6 71.5 Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 52     May 21, 2024 E-19 DATA SUMMARY Actives by Age and Service – Miscellaneous City Service Age < 1 1-4 5-9 10-14 15-19 20-24 ≥ 25 Total < 25 8 4 - - - - - 12 25-29 21 26 4 - - - - 51 30-34 18 49 37 1 - - - 105 35-39 15 21 30 16 3 - - 85 40-44 7 23 35 22 10 10 1 108 45-49 8 14 23 19 19 21 1 105 50-54 2 12 18 13 13 19 13 90 55-59 1 13 14 16 13 22 10 89 60-64 5 5 9 10 10 10 15 64 ≥ 65 2 2 4 3 8 6 4 29 Total 87 169 174 100 76 88 44 738 May 21, 2024 E-20 DATA SUMMARY Actives by Age and Service – Police City Service Age < 1 1-4 5-9 10-14 15-19 20-24 ≥ 25 Total < 25 - 1 - - - - - 1 25-29 1 8 1 - - - - 10 30-34 - 7 5 - - - - 12 35-39 1 1 6 2 2 - - 12 40-44 1 1 2 8 4 - - 16 45-49 - - 1 2 1 7 1 12 50-54 - - - 1 1 2 1 5 55-59 - - 1 - - - 1 2 60-64 - - 1 - - 1 - 2 ≥ 65 - - - - - - - - Total 3 18 17 13 8 10 3 72 Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 53     May 21, 2024 E-21 DATA SUMMARY Actives by Age and Service – Fire City Service Age < 1 1-4 5-9 10-14 15-19 20-24 ≥ 25 Total < 25 1 2 - - - - - 3 25-29 9 11 - - - - - 20 30-34 2 7 3 - - - - 12 35-39 2 1 4 5 1 - - 13 40-44 - - 1 4 6 1 - 12 45-49 - - 2 2 3 1 - 8 50-54 - - - 2 3 10 5 20 55-59 - - - - 1 1 1 3 60-64 - - - - - 1 - 1 ≥ 65 - - - - - - - - Total 14 21 10 13 14 14 6 92 May 21, 2024 E-22 DATA SUMMARY Actives by Age and Service – Total City Service Age < 1 1-4 5-9 10-14 15-19 20-24 ≥ 25 Total < 25 9 7 - - - - - 16 25-29 31 45 5 - - - - 81 30-34 20 63 45 1 - - - 129 35-39 18 23 40 23 6 - - 110 40-44 8 24 38 34 20 11 1 136 45-49 8 14 26 23 23 29 2 125 50-54 2 12 18 16 17 31 19 115 55-59 1 13 15 16 14 23 12 94 60-64 5 5 10 10 10 12 15 67 ≥ 65 2 2 4 3 8 6 4 29 Total 104 208 201 126 98 112 53 902 Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 54     May 21, 2024 E-23 ADDITIONAL ACTUARIAL ASSUMPTIONS June 30, 2021 Valuation June 30, 2023 Valuation  Retirement  CalPERS 2000-2019 Experience Study- Expected retirement age for each tier Misc Fire & Police Tier 1 2.7%@55 3%@50 Exp. RetAge 60.7 56.4 & 54.0 Tier 2 2%@60 3%@55 Exp. RetAge 63.0 57.7 & 56.4 PEPRA 2.5%@67 2.7%@57 Exp. RetAge 62.4 57.1 & 56.7  CalPERS 2000-2019 Experience Study - Expected retirement age for each tier Misc Fire & Police Tier 1 2.7%@55 3%@50 Exp. RetAge 61.2 56.1 & 53.9 Tier 2 2%@60 3%@55 Exp. RetAge 63.1 57.7 & 57.2 PEPRA 2.5%@67 2.7%@57 Exp. RetAge 62.5 57.2 & 56.5  Spousal Coverage at Retirement  70% of covered retirees are assumed to cover spouses  Based on Plan experience  Same  Waived Retiree Re-election  0%  Same May 21, 2024 E-24 ADDITIONAL ACTUARIAL ASSUMPTIONS June 30, 2021 Valuation June 30, 2023 Valuation  Medical Trend Increase from Prior Year Calendar Year Pre- Medicare Post- Medicare Other Post- Medicare Kaiser 2019-20 n/a 2021 Actual Premiums 2022 Actual Premiums 2023 6.50% 5.65% 4.60% 2024 6.25% 5.45% 4.45% 2025 6.00% 5.25% 4.60% 2026 5.75% 5.05% 4.45% 2027 5.55% 4.90% 4.35% 2028 5.35% 4.75% 4.25% 2029 5.15% 4.60% 4.20% 2030 4.95% 4.45% 4.05% 2031-35 4.80% 4.35% 4.00% 2036-45 4.65% 4.25% 3.95% 2046-55 4.50% 4.20% 3.90% 2056-65 4.35% 4.15% 3.85% 2066-75 4.05% 3.95% 3.80% 2076+ 3.75% 3.75% 3.75% Increase from Prior Year Pre- Medicare Post- Medicare Other Post- Medicare Year Kaiser 2021 n/a 2022 n/a 2023 Actual Premiums 2024 Actual Premiums 2025 8.50% 7.50% 6.25% 2026 7.90% 6.90% 5.65% 2027 7.35% 6.50% 5.45% 2028 6.75% 6.10% 5.25% 2029 6.20% 5.70% 5.05% 2030 5.60% 5.25% 4.85% 2031 5.05% 4.85% 4.65% 2032-38 4.45% 4.45% 4.45% 2039-40 4.35% 4.35% 4.35% 2041 4.30% 4.30% 4.30% ↓ ↓ ↓ ↓ 2076+ 3.45% 3.45% 3.45% Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 55     May 21, 2024 E-25 ADDITIONAL ACTUARIAL ASSUMPTIONS June 30, 2021 Valuation June 30, 2023 Valuation  Medical Plan at Retirement & Retirees Attaining age 65  Miscellaneous: <65 65+ Anthem Traditional 10% 5% Blue Shield Access+ 5% 0% Kaiser 50% 30% PERS Choice 30% 20% PERSCare 5% 25% UnitedHealthcare 0% 20%  Safety: <65 65+ Anthem Traditional 10% 5% Blue Shield Access+ 5% 0% Kaiser 40% 25% PERS Choice 0% 15% PERSCare 10% 35% PORAC 35% 10% UnitedHealthcare 0% 10%  Based on Plan experience  Miscellaneous: <65 65+ Anthem Traditional 10% 5% Blue Shield Access+ 5% 0% Kaiser 45% 30% PERS Gold 5% 0% PERS Platinum 35% 45% UnitedHealthcare 0% 20%  Safety: <65 65+ Anthem Traditional 5% 5% Blue Shield Access+ 5% 0% Kaiser 30% 25% PERS Gold 0% 0% PERS Platinum 15% 45% PORAC 45% 15% UnitedHealthcare 0% 10%  Based on Plan experience May 21, 2024 E-26 ADDITIONAL ACTUARIAL ASSUMPTIONS June 30, 2021 Valuation June 30, 2023 Valuation  Family Coverage at Retirement (for future retirees)  Misc: 15% until age 65 5% age 65-75  Safety: 50% until age 65 5% age 65-80  Based on Plan experience  Same  Spouse Age  Actives – Males 3 years older than females  Retirees – Males 3 years older than females if spouse birth date not available  Same  Surviving Spouse Participation  100%  Same Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 56     May 21, 2024 E-27 ADDITIONAL ACTUARIAL ASSUMPTIONS June 30, 2021 Valuation June 30, 2023 Valuation  Medicare Eligibility  Actives and retirees hired before 4/1/86: • Miscellaneous – 80% • Safety – 90%  Actives and retirees hired on or after 4/1/86: 100%  Retirees before 65 with unknown hire date: 90%  Everyone eligible for Medicare will elect Part B coverage  Same  Future New Participants  None – Closed Group  Same  Retirees Missing Fund  No retirees missing Fund information.  Same May 21, 2024 E-28 ADDITIONAL ACTUARIAL ASSUMPTIONS June 30, 2021 Valuation June 30, 2023 Valuation  Retirees Missing Department  Assumed to have the same department as the prior valuation  Liability for retirees assumed to be 75% GF allocated proportionately across all Departments  Same  Actuarial Models  Our valuation was performed using and relying on ProVal, an actuarial model leased from Wintech. Our use of ProVal is consistent with its intended purpose. We have reviewed and understand ProVal and its operation, sensitivities and dependencies.  Data Quality  Our valuation used census data provided by the City and CalPERS OPEB data extract. We reviewed the data for reasonableness and resolved any questions with the City. We believe the resulting data can be relied on for all purposes of this valuation without limitation. Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 57     May 21, 2024 E-29 ADDITIONAL ACTUARIAL ASSUMPTIONS June 30, 2021 Valuation June 30, 2023 Valuation  Sample Medical Claims Costs 2024  Sample estimated monthly claims costs: Region 1 – Non-Medicare Eligible Kaiser PERS Platinum PORAC Age M F M F M F 55 $1,094 $1,196 $1,197 $1,307 $1,083 $1,184 60 1,376 1,386 1,503 1,513 1,364 1,373 65 1,704 1,633 1,858 1,780 1,691 1,619 70 1,917 1,829 2,058 1,964 1,952 1,861 75 2,158 2,053 2,292 2,181 2,235 2,125 80 2,487 2,347 2,640 2,492 2,578 2,432 85 2,790 2,634 2,959 2,795 2,893 2,731 Region 1 – Medicare Eligible Kaiser PERS Platinum PORAC Age M F M F M F 65 n/a n/a $447 $428 $408 $391 70 n/a n/a 484 463 442 423 75 n/a n/a 516 495 471 452 80 n/a n/a 532 514 486 469 85 n/a n/a 526 512 480 468 May 21, 2024 E-30 ADDITIONAL ACTUARIAL ASSUMPTIONS This page intentionally blank Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 58     May 21, 2024 E-31 RESULTS BY FUND Actuarial Obligations – June 30, 2023 – 6.25% Discount Rate (Amounts in 000’s) FUND AAL Assets52 UAAL  Airport $ 443 $ 250 $ 193  CIP 4,957 2,797 2,160  Elec53 31,933 18,019 13,914  Gas5353 12,636 7,130 5,506  GF 178,807 100,893 77,914  ISF – Technology 6,254 3,529 2,725  ISF – Vehicle 2,214 1,249 965  ISF – Printing & Mailing 125 70 55  ISF – Workers Comp 115 65 50  PARKING 656 371 285  Refuse 5,246 2,960 2,286  Storm Drain 2,344 1,324 1,020  Water5353 10,435 5,890 4,545  WWC53 3,028 1,708 1,320  WWT 17,379 9,806 7,573  Total 276,572 156,061 120,511 52 Assets allocated in proportion to AAL. 53 AAL for UTL employees allocated to Elec, Gas, Water, and WWC in proportion to each Fund’s AAL May 21, 2024 E-32 RESULTS BY FUND Actuarially Determined Contribution (ADC) – 6.25% Discount Rate (Amounts in 000’s) FUND 2024/25 2025/26  Airport $ 61 $ 63  CIP 440 452  Elec53 1,764 1,811  Gas53 781 802  GF 10,325 10,600  ISF – Technology 442 453  ISF – Vehicle 148 152  ISF – Printing & Mailing 11 11  ISF – Workers Comp 16 17  PARKING 76 77  Refuse 242 248  Storm Drain 172 177  Water53 616 631  WWC53 100 103  WWT 1,222 1,254  Total 16,416 16,851 Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 59     May 21, 2024 E-33 RESULTS BY GF DEPARTMENT Actuarial Obligations – June 30, 2023 – 6.25% Discount Rate (Amounts in 000’s) GF Department AAL Assets54 UAAL  ASD $ 9,447 $ 5,331 $ 4,116  ATT 2,674 1,509 1,166  AUD 141 79 61  CLK 713 402 311  COU 1,257 709 548  CSD 16,738 9,445 7,293  DSD 5,734 3,236 2,498  FIR 50,675 28,590 22,083  HRD 2,727 1,539 1,188  LIB 6,637 3,746 2,892  MGR 2,772 1,564 1,208  PLA 6,764 3,817 2,947  POL 55,075 31,078 23,998  PWD 17,453 9,848 7,605  Total 178,807 100,893 77,914 54 Assets allocated in proportion to AAL. May 21, 2024 E-34 RESULTS BY GF DEPARTMENT Actuarially Determined Contribution (ADC) – 6.25% Discount Rate (Amounts in 000’s) GF Department 2024/25 2025/26  ASD $ 584 $ 599  ATT 157 162  AUD 4 4  CLK 36 37  COU 69 71  CSD 1,059 1,086  DSD 478 491  FIR 2,588 2,657  HRD 157 161  LIB 492 505  MGR 186 191  PLA 420 431  POL 3,175 3,260  PWD 920 945  Total 10,325 10,600 Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 60     May 21, 2024 E-35 DEFINITIONS Present Value of Benefits May 21, 2024 E-36 DEFINITIONS  Actuarially Determined Contribution (ADC)  Contribution for the current period including: • Normal Cost • Administrative expenses • Amortization of:  Initial Unfunded AAL  AAL for plan, assumption, and method changes  Experience gains/losses (difference between expected and actual)  Contribution gains/losses (difference between ADC and actual) Item 2 ​Attachment B - City of Palo Alto Retiree Healthcare Plan June 30, 2023 Actuarial Valuation Contributions for FY 2025 and FY 2026​     Packet Pg. 61     Finance Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: Utilities Meeting Date: June 4, 2024 Staff Report:2401-2506 TITLE Recommend City Council Adopt a Resolution Amending the Gas Utility Long-term Plan (GULP) Objectives, Strategies and Implementation Plan, Amending the Gas Utility Reserves Management Practices, and Amending Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master- Metered and Commercial Gas Service), G-3 (Large Commercial Gas Service), and G-10 (Compressed Natural Gas Service); CEQA Status: Not a Project Under Public Resources Code 15378(b)(5) and Exempt Under Public Resources Code 15273(a) and Discussion of the Utilities Advisory Commission’s Proposed Alternatives. RECOMMENDATION Staff recommends that the Finance Committee recommend the City Council adopt a resolution (Attachment A): (1) Amending the Gas Utility Long-term Plan (GULP) Objectives, Strategies and Implementation Plan which includes collecting funds via a gas price mitigation adder (Adder) to manage potential future short-term natural gas price spikes; (2) Amending the Gas Utility Reserves Management Practices; and (3) Amending Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master-Metered and Commercial Gas Service), G-3 (Large Commercial Gas Service), and G-10 (Compressed Natural Gas Service). EXECUTIVE SUMMARY If Staff’s recommendation on the gas hedging program were to be approved it would take effect November 1, 2024. At the time of the development of this report and the Utilities Advisory Commission (UAC) discussion, the Finance Committee and City Council were reviewing Gas utility Item 1 Item 1 Staff Report     Packet Pg. 62     rates as part of the FY 2025 Proposed Budget process in parallel. The Finance Committee and City Council have reviewed the current FY 2025 budget discussion and is recommending an increase of approximately 3.5% for a total estimated increase of 12.5% for FY 2025 in gas utility rates. The actions outlined in this report would further increase that estimated rate change. Raise the maximum Gas Commodity Charge to $5 per therm with no Adder. •An Adder of 10.3 cents per therm (estimated 5.2% increase on an annual bill) is recommended for a four-year period to the Gas Commodity Charge, generating $11.3 million in customer revenues to be reserved for future price spikes. •Gradually reduce the maximum Gas Commodity Charge from the current $4 per therm back to the historically typical level of $2 per therm, estimated to be done during FY 2029. Item 1 Item 1 Staff Report     Packet Pg. 63     BACKGROUND The Shift to Market Price-Based Commodity Charges 1 changed the gas purchasing strategy from one in which gas commodity rates2 changed about once per year to one in which a monthly market price-based charge was passed through to customers. In the 10 years prior to that change, the majority of Palo Alto’s natural gas needs were met through fixed-price gas purchases. This strategy succeeded in achieving relatively stable gas supply costs, and hence, relatively stable commodity rates. In times of declining market prices, however, Palo Alto’s costs and resulting commodity rates were higher than the market and higher than Pacific Gas & Electric’s (PG&E) rates which change on a monthly basis and generally mirror the market. Council’s approval of monthly market price-based commodity rates reduced the need for financial reserves and reduced the need for staff resources to manage the gas portfolio. Gas Commodity Price spike of Winter 2022-2023 1 Resolution 9244 https://www.cityofpaloalto.org/files/assets/public/v/1/city-clerk/resolutions/reso-9244.pdf 2 Gas Commodity Rates https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes- reports/reports/city-manager-reports-cmrs/year-archive/2011/id-2106-110111.pdf Item 1 Item 1 Staff Report     Packet Pg. 64     Figure 1 – Gas Market Prices When staff began to see signs of higher gas prices in late November and early December 2022, customers were informed through utility bill messaging, website notices, social media, email newsletters, and other community forums. Customers were encouraged to save energy to dampen the impact of rising prices on their utility bills. On December 19, 20223, Council adopted Resolution 100904 which increased the maximum allowed Gas Commodity Charge from $2 per therm to $4 per therm. Because the January 2023 gas market monthly index of nearly $5 per therm exceeded the higher maximum Council- approved Gas Commodity Charge, the full cost of January gas was not recovered through rates; instead, about $1.84 million was withdrawn from the Gas Operations Reserve to cover the shortfall. Recognizing the significant impact on customer bills, the City offered resources to customers including access to free home efficiency assessments and utility bill payment arrangements. In April 2023 Council approved gas and electric (Staff Report 2303-1209)5 rebates of $2.4 million, funded by the City’s General Fund, to compensate residential customers for the high energy bills they experienced. Capped-Price Winter Natural Gas Purchasing Strategy through October 2024 3 December 19, 2022 https://www.cityofpaloalto.org/Departments/City-Clerk/Citys-Meeting-Agendas/Meeting- Agendas-and-Minutes 4 Resolution 10090 https://www.cityofpaloalto.org/files/assets/public/v/1/city-clerk/resolutions/resolutions- 1909-to-present/2022/reso-10090.pdf 5 Staff Report 2303-1209 https://cityofpaloalto.primegov.com/Portal/viewer?id=1954&type=0 Item 1 Item 1 Staff Report     Packet Pg. 65     In response to the dramatic and unprecedented price spike, Council approved a capped-price winter natural gas purchasing strategy in September 20236 for the gas year November 2023- October 2024 by adopting Resolution 101267. The Gas Commodity Charge continues to be based on a monthly market index price. The capped-price winter natural gas purchasing strategy involved purchasing price caps on the City’s cost of gas for December-February, limiting the price the City paid for gas to $2 per therm for a portion of City’s anticipated gas needs. The impact on customers of what is, in essence, an insurance policy to mitigate the potential for a repeat of high winter gas prices, was limited to a maximum 15 cents per therm (estimated 7.6% increase to annual bill) applied for 12 months to customer usage through the Gas Commodity Charge. Within the cost constraints approved by Council, staff was able to purchase $2 per therm price caps for about half of Palo Alto’s expected load for the months of December 2023, January 2024 and February 2024. The total cost of the price caps, or insurance, was $1.5 million. Spread out over the entire year, an adder of 5.5 cents per therm is currently applied to the Gas Commodity Charge through October 2024. This represents approximately $1.81 per month on a typical residential customer’s bill or an approximate 2.8% increase, not taking into account changes in the underlying commodity price which is still based on a market index. The monthly market index price remained under $2 per therm for the December 2023, January 2024, and February 2024 months, so the City did not make use of the contracted price caps it had purchased. In addition to approving the capped-price winter natural gas purchasing strategy, Council directed staff to explore other alternatives for managing potential commodity price spikes in the future. ANALYSIS The report below was presented to the UAC on May 1, 2024 for review and consideration. This was transmitted in the context of the initial 9% recommended gas rate change for FY 2025, discussed by the Finance Committee in April 2024. Subsequent to these conversations, the Finance Committee and City Council have discussed the FY 2025 Budget and currently have recommended an approximately 12.5% gas utility rate change for FY 2025. The actions recommended in this report should be considered in the context of this revised status. As such, three scenarios are before the Finance Committee consideration and staff is seeking a recommendation from the Committee to the City Council for adoption: •Initial Staff Recommendation: An Adder of 10.3 cents per therm (estimated 5.2% increase on an annual bill) is recommended for a four-year period to the Gas Commodity Charge, generating $11.3 million in customer revenues to be reserved for future price spikes. Gradually reduce the maximum Gas Commodity Charge from the current $4 per therm back to the historically typical level of $2 per therm, estimated to be done during FY 2029. 6 September 2023 https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=13026 7 Resolution 10126 https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=61970 Item 1 Item 1 Staff Report     Packet Pg. 66     •UAC Alternative Scenario A: Maintain the maximum Gas Commodity Charge of $4 per therm with a $0.06 per therm Adder for three years, and for Staff to return to the UAC for review in two years. •UAC Alternative Scenario B: Raise the maximum Gas Commodity Charge to $5 per therm with no Adder. Recognizing the inherent tension among these variables, including but not limited to price stabilization, reserve stabilization, market price competitiveness, and maintaining the current practice of purchasing based on a monthly market index price, staff will be ready to discuss variations of the options described above at the Committee meeting. UAC Review Staff presented this proposal to the UAC on May 1, 2024, seeking the UAC‘s recommendation to the City Council. The UAC unanimously approved a motion outlining their two preferred alternatives above with Commissioner Segal absent. The Commissioners expressed a preference for the 2nd alternative (higher maximum Gas Commodity Charge and no short-term price spike mitigation). The Commissioners also recommended the City Council advise Staff to investigate options to protect low-income customers and expand price spike informational campaigns. The Commissioners discussed options for protecting low-income customers from gas price spikes by utilizing General Fund resources. Establishing a New Strategy for Mitigating Short-term Gas Price Spikes Beginning November 2024 A gas price mitigation adder (Adder) is recommended be included in the Gas Commodity Charge, maintaining the practice of purchasing gas based on a monthly market index price. The funds will accrue in the Gas Rate Stabilization Reserve and would be intended to be used to offset potential future short-term price spike impacts. Staff presented to the UAC a recommended Adder of 10.3 cents per therm (estimated 5.2% increase on an annual bill). An estimated $2.8 million per year will accumulate each year with a total estimated balance of $11.3 million after 4 years if no funds are withdrawn to mitigate short- term market price spikes in the interim. This is in line with the maximum adder approved by Council for the current winter capped price strategy. Historically, PG&E’s gas commodity rates have been about 6% higher than Palo Alto’s Gas Commodity Charge. As the funds accumulate in the Gas Rate Stabilization Reserve, staff expects to recommend reducing the customer maximum Gas Commodity Charge, lowering the price spike risk to the customer. At this time, the retail maximum rate is modeled to be reduced from the current $4 per therm, to $3.50 per therm during FY 2027, to $2.75 per therm during FY 2028, and to $2 per therm during FY 2029. Actual recommendations for each year will be made as part of the budget process annually. Staff anticipates that as of November 2028, the rate mitigation adder will have raised $11.3 million. This would be enough to maintain the Gas Commodity Charge at $2 per therm for a single Item 1 Item 1 Staff Report     Packet Pg. 67     month even if market index prices increased to $5 per therm for that month. The highest price during the 2022-23 winter price spike was nearly $5 per therm. Table 1 – Gas Commodity Charges and Market Price Protection ($ per therm) 8, which are listed in the City’s gas rate schedules and shown by month. If approved by Council, the strategy will be implemented effective November 1, 2024. Changes to the rate schedules are shown in Attachment A and include the changes proposed in the FY 2025 Financial Plans which will be considered by Council in June 2024. Note, these schedules do not reflect the current proposed rate as recommended by the Finance Committee on May 21, 2024. GULP Revisions 9 GULP update modified the purchasing strategy to include the capped- price winter natural gas purchases. The new strategy, if adopted, requires changes to GULP as shown in Table 1 below. While some other items also need updates, staff is not proposing changes other than those associated with the gas purchasing strategy at this time for the sake of simplicity. Administrative updates will be brought to Council for consideration in a separate staff report. 8 Monthly gas volumetric and service charges https://www.cityofpaloalto.org/files/assets/public/utilities/rates- schedules-for-utilities/residential-utility-rates/monthly-gas-volumetric-and-service-charges-residential.pdf 9 September 2023 https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=13026 M M M M A $$$$ A $$$$ A $$$$ A $$$$ A $$$$ A $$$$ A $$$$ A $$$$ Item 1 Item 1 Staff Report     Packet Pg. 68     Table 2 – Gas Utility Long-term Plan Revisions GULP Current Proposed Objective 1 Pass a market supply cost signal through to customers with measures to protect against price spikes applied during winter months. Pass a market supply cost signal through to customers with measures to mitigate the impact of short-term natural gas market price spikes. Strategy 1 a. Purchasing natural gas at monthly and daily market index prices; b. Changing gas supply rates monthly to reflect market prices; and c. Purchasing physical capped-price gas for some or all forecasted natural gas volumes for December through February, provided that the cost of the price caps results in no more than a 15 cents per therm impact on retail commodity gas rates a. Purchasing natural gas at monthly and daily market index prices; b. Changing gas supply rates monthly to reflect market prices; c. Collecting funds in the Gas Rate Stabilization Reserve to manage potential short-term price spikes; and d. Utilizing those funds if a short-term natural gas market price spike occurs Implementation Plan Item 1 Implement market-based supply purchases and commodity rates with measures to protect against price spikes applied during winter months by: a. Developing a new purchasing plan to be approved by the Director of Utilities; and b. Conducting customer communication and outreach. Implement market-based supply purchases and commodity rates with measures to protect against price spikes by: a. Adding 10.3 cents per therm to the Gas Commodity Charge from November 2024 through October 2028; and b. Conducting customer communication and outreach. Revisions to the Gas Utility Reserves Management Practices Staff recommends modifying Section 7 in the Gas Utility Reserves Management Practices, which are the guidelines followed in the Utility’s financial planning process, to reflect the new reserve and strategy: Section 7. Rate Stabilization Reserve Funds may be added to the Rate Stabilization Reserve by action of the City Council and held to manage the trajectory of future year rate increases and to mitigate the impact of short-term gas market price spikes. Withdrawal of funds from the Rate Stabilization Reserve requires Council action. If there are funds in the Rate Stabilization Reserve at the end of any fiscal year, any subsequent Gas Utility Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the Financial Planning Period, except gas price mitigation revenues that may be held in the Rate Stabilization Reserve until needed. The Gas Utility Reserves Management Practices, including the changes proposed to that document in the FY 2025 Financial Plan are included in Attachment A. Item 1 Item 1 Staff Report     Packet Pg. 69     Fixed Price Purchases Alternative An alternative to staff’s proposal is to purchase some portion of winter gas needs (winter is the most likely time period when a market price spike could occur) at fixed prices. The downside of this strategy is that the City’s cost of gas could deviate significantly from the market price, either higher or lower. This alternative would require structural changes in the way the Gas Commodity Charge is established for the months during which fixed-price purchases are included in the portfolio, as well as a significant amount of staff resources to implement. A second alternative is to continue the strategy of purchasing insurance against high market prices. The cost of that insurance varies, and the product is not commonly traded and is expected to be costly. Like familiar types of insurance, premiums are not refunded if the insurance is not used. The cost would occur every year and may or may not provide value to Palo Alto’s rate payers. Another alternative is to return to the pre-2023 strategy. Customers will not be protected from short-term natural gas market price spikes. Council may consider a higher maximum Gas Commodity Charge to protect the Gas Utility from costs greater than what may be recovered through rates. Variations of Staff’s Initial Recommendation There are three variables embedded in staff’s recommendation which, if changed, yield different results. A higher Adder would result in more than the estimated $11.3 million collected over 4 years and vice versa. A longer period over which the Adder is applied results in more funds collected. A slower or more modest decrease in the maximum Gas Commodity Charge would provide less protection for the rate payers but more protection for the Gas Utility Operations Reserve. A combination of changes to the three variables offers an array of alternatives. The table below summarizes the considerations for staff’s recommendation and the alternatives. Table 3 – Summary of Staff Recommendation and Alternatives Alternative Description Consideration Staff Recommendation (self-insured) 10.3 cents per therm Adder; four years; decrease max Commodity Charge to $2 per therm; Estimated $11.3 million reserve balance Variation Higher/lower Adder Larger/smaller reserve balance = more or less price protection Variation Longer/Shorter collection period Larger/smaller reserve balance = more or less price protection Variation Leave max Commodity Charge high/reduce max Commodity Charge faster More price protection for the Gas Utility/more price protection for the customer Item 1 Item 1 Staff Report     Packet Pg. 70     Fixed-Price Purchases Purchase some fixed-price gas for the winter months Commodity Charges will be higher or lower than the market price and PG&E’s rates Capped Price Winter Purchases (Insurance from the market) Replicate the winter 2023-2024 strategy Cost and availability of insurance is uncertain; cost is sunk whether insurance is needed or not Return to previous strategy Pass through market price with no price mitigation Customers pay market price in all scenarios, may consider higher maximum Commodity Charge FISCAL/RESOURCE IMPACT Staff recommends Council approval of a gas price mitigation adder of 10.3 cents per therm to be applied the Gas Commodity Charge for four years which is estimated to result in the collection of $11.3 million. The Adder equates to an estimated increase of 5.2% on the median monthly residential customer bill; the estimated increase will be 5.6% for the winter bill months (November-March) and 4.6% for the summer bill months (April-October). This is lower than the maximum Gas Commodity Charge impact of 15 cents per therm (estimated 7.6% on an annual bill) approved by Council for the capped-price winter natural gas purchasing strategy through October 2024. If approved by Council, an appropriation amendment to the FY 2025 budget will be required to reflect an expected additional $2.2 million in revenue. Table 3 shows the median monthly residential customer bill and the projected impact based on the 10.3 cents per therm Adder. Table 3 STAKEHOLDER ENGAGEMENT Staff plans to seek approval of staff’s original proposal from the Finance Committee in June 2024 and Council in August 2024, and to implement the Council-approved strategy beginning November 2024. If adopted by Council, the City website will be updated to reflect the change in the Commodity Charge calculation in the Monthly Gas Volumetric and Service Charges10 document. In addition, customers will be notified via utility outbound communications and marketing updates. 10 Monthly Gas Volumetric and Service Charges https://www.cityofpaloalto.org/files/assets/public/utilities/rates- schedules-for-utilities/residential-utility-rates/monthly-gas-volumetric-and-service-charges-residential.pdf M S T B B B W 5 9$5$5 S 1 4$1$4 A 3 6$3$5 Item 1 Item 1 Staff Report     Packet Pg. 71     ENVIRONMENTAL REVIEW ATTACHMENTS APPROVED BY: Item 1 Item 1 Staff Report     Packet Pg. 72     6056828 1 Resolution No. Resolution of the Council of the City of Palo Alto Amending the Gas Utility Long-term Plan Objectives, Strategies, and Implementation Plan, Amending the Gas Utility Reserves Management Practices, Amending the FY 2025 Gas Fund Budget, and Amending Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master- Metered and Commercial Gas Service), G-3 (Large Commercial Gas Service), and G-10 (Compressed Natural Gas Service) R E C I T A L S A. On March 7, 2011, the Council adopted Resolution No. 9151, approving the Gas Utility Long-term Plan Objectives, Strategies and Implementation Plan (the "Plan"), amended on April 23, 2012 via Resolution No. 9244 and on September 18, 2023 via Resolution No. 10126. B. On May 1, 2024 staff presented the Utilities Advisory Commission and the Council information proposing a third amendment to Resolution No. 10126, to further amend the Plan to include a gas price mitigation strategy, which will collect funds to mitigate the impact of short-term gas price spikes on customer rates. C. 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. D. On June _, 2024, the Council adopted Resolution ____, approving the Fiscal year 2025 Gas Utility Financial Plan including the Gas Utility Reserves Management Practices. E. Implementing the gas price mitigation strategy requires amending the FY 2025 Gas Fund Budget revenue by $2,200,000. F. Implementing the gas price mitigation strategy requires amending the Commodity Charge cost component of Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master-Metered and Commercial Gas Service), G-3 (Large Commercial Gas Service),and G- 10 (Compressed Natural Gas Service); attached and incorporated as Exhibits C through F to this Resolution. The Council of the City of Palo Alto does hereby RESOLVE as follows: SECTION 1. The Council hereby approves the amendments to the Gas Utility Long-term Plan Objectives, Strategies and Implementation Plan (GULP), attached to this Resolution as Exhibit A. SECTION 2. The Council hereby approves the amendments to the Gas Utility Reserve Practices, attached to this Resolution as Exhibit B. Item 1 Attachment A - Resolution Amending Gas Utility Long-Term Plan and Rates     Packet Pg. 73     6056828 2 SECTION 3. Resolution No. 10126 is hereby amended in so far as the Plan, as amended, is hereby approved. SECTION 4. The Council hereby approves increasing the FY 2025 gas operating revenues by $2,200,000. SECTION 5. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule G-1 (Residential Gas Service) is hereby amended to read as attached and incorporated to this Resolution as Exhibit C. Utility Rate Schedule G-1, as amended, shall become effective November 1, 2024. SECTION 6. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule G-2 (Residential Master-Metered and Commercial Gas Service) is hereby amended to read as attached and incorporated to this Resolution as Exhibit D. Utility Rate Schedule G-2, as amended, shall become effective November 1, 2024. SECTION 7. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule G-3 (Large Commercial Gas Service) is hereby amended to read as attached and incorporated to this Resolution as Exhibit E. Utility Rate Schedule G-3, as amended, shall become effective November 1, 2024. SECTION 8. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule G-10 (Compressed Natural Gas Service Service) is hereby amended to read as attached and incorporated to this Resolution as Exhibit F. Utility Rate Schedule G-10, as amended, shall become effective November 1, 2024. SECTION 9. The City Council finds as follows: a.Revenues derived from the gas rates approved by this resolution do not exceed the funds required to provide gas service. b.Revenues derived from the gas rates approved by this resolution shall not be used for any purpose other than providing gas service, and the purposes set forth in Article VII, Section 2, of the Charter of the City of Palo Alto. B. SECTION 10. 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. // // // Item 1 Attachment A - Resolution Amending Gas Utility Long-Term Plan and Rates     Packet Pg. 74     6056828 3 SECTION 11. The Council finds that approving the changes to the FY 2024 Gas Fund budget appropriation and Plan does not meet the California Environmental Quality Act’s (CEQA)definition of a project under Public Resources Code Section 21065 and CEQA Guidelines Section 15378(b)(5), because these actions are administrative governmental activities which will not cause a direct or indirect physical change in the environment. The Council finds that changing the Commodity Charge cost component of gas rates to meet operating expenses and financial reserve needs necessary to maintain service 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 Item 1 Attachment A - Resolution Amending Gas Utility Long-Term Plan and Rates     Packet Pg. 75     Adopted April 23, 2012 via Resolution 9244 4 0 4 5 Proposed Gas Utility Long-term Plan (GULP) Objectives, Strategies and Implementation Plan GULP Objectives: 1.Market price transparency – Pass a market supply cost signal through to customers with measures to mitigate the impact of short-term gas market price spikes.protect against price spikes applied during winter months. 2. Supply Cost Management – Lower delivered gas cost over the long term. 3. Energy Efficiency – Ensure the deployment of all feasible, reliable, cost-effective energy efficiency measures. 4. Climate Protection – Reduce the carbon intensity of the gas portfolio in accordance with the Sustainability and Climate Protection Plan. 5. Parity with PG&E – At a reasonable cost, protect the City’s interests and maintain access to transportation on par with PG&E’s core customers. GULP Strategies: 1. Pass a market supply cost signal through to customers with measures to mitigate the impact of short-term gas market price spikes by: protect against price spikes applied during winter months by: a. Purchasing natural gas at monthly and daily market index prices; b. Changing gas supply rates monthly to reflect market prices; and c. Collecting funds in the Gas Rate Stabilization Reserve to manage potential short-term price spikes; and d. Utilizing those funds if a short-term gas market price spike occurs. Purchasing physical capped-price gas for some or all forecasted natural gas volumes for December through February, provided that the cost of the price caps results in no more than a 15 cents per therm impact on retail commodity gas rates. 2. Lower delivered gas cost over the long term by: a. Acquiring pipeline assets that yield supply costs below market and meet operational needs; b. Taking advantage of the City’s low cost of capital to acquire gas supply and assets; and c. Optimizing existing assets. 3. Ensure the deployment of all feasible, reliable, cost-effective energy efficiency measures by: a. Developing a ten-year gas efficiency plan every four years maintaining consistency with the electric energy efficiency goals update schedule; and b. Considering the impacts of electrification on gas demand. 4. Reduce the carbon intensity of the gas portfolio in accordance with the Climate Protection Plan by: a. Terminating the PaloAltoGreen Gas program established by Resolution 9405; and b. Designing and implementing the Carbon Neutral Gas Plan to achieve carbon reduction with no more than a 10 cent per therm rate impact. 5. At a reasonable cost, protect the City’s interests and maintain access to transportation on par with PG&E’s core customers by: a. Participating in the regulatory and legislative arenas when the potential impact on Item 1 Attachment A - Resolution Amending Gas Utility Long-Term Plan and Rates     Packet Pg. 76     Adopted April 23, 2012 via Resolution 9244 4 0 4 5 the City is aligned with the cost to intervene and the probability of success; a. Negotiating with PG&E for fair access to transportation and storage; and b. Exploring potential joint action with other public agencies. Item 1 Attachment A - Resolution Amending Gas Utility Long-Term Plan and Rates     Packet Pg. 77     GULP Implementation Plan: 1. Implement market-based supply purchases and commodity rates with measures to mitigate the impact of short-term gas market price spikes by:protect against price spikes applied during winter months by: a.Adding 10.3 cents per therm to the Gas Commodity Charge from November 2024 through October 2028Developing a new purchasing plan to be approved by the Director of Utilities; and b. Conducting customer communication and outreach. 2. Pursue below-market assets available through the Gas Transportation and Storage Settlement by: a. Evaluating the pipeline capacity reservation options available; and b. Contracting with PG&E for any pipeline capacity with an estimated cost below the forecasted market value. 3. Monitor the prepay market and prepare for implementation in preparation for a future MuniGas transaction. 4. Implement gas efficiency programs to meet the gas efficiency goals. 5. Track and report on gas efficiency by: a. Providing quarterly updates to the UAC about the gas efficiency programs; and b. Providing annual updates to Council on gas efficiency achievements compared to the goals and overall cost effectiveness. 6. Continue evaluating new gas efficiency technologies and undertake pilot studies where appropriate. 7. Pursue potential modifications to the Carbon Neutral Gas Plan by: a. Determining an acceptable premium, if any, to be paid for a local offset project if and when a certified project is identified; and b. Investigating alternatives to offsets, including methods involving voter approval. Item 1 Attachment A - Resolution Amending Gas Utility Long-Term Plan and Rates     Packet Pg. 78     Attachment A: Exhibit 2 4 0 4 6 APPENDIX C: GAS UTILITY RESERVES MANAGEMENT PRACTICES The following reserves management practices shall be used when developing the Gas Utility Financial Plan: Section 1. Definitions a) “Financial Planning Period” – The Financial Planning Period is the range of future fiscal years covered by the Financial Plan. For example, if the Financial Plan delivered in conjunction with the FY 2015 budget includes projections for FY 2015 to FY 2019, FY 2015 to FY 2019 would be the Financial Planning Period. b) “Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers to the Utility’s Unrestricted Net Assets. c) “Net Assets” - The Government Accounting Standards Board defines a Utility’s Net Assets as the difference between its assets and liabilities. d) “Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital assets (net of related debt) or restricted for debt service or other restricted purposes. Section 2. Supply Fund Reserves The Gas Utility’s Supply Fund Balance is reserved for the following purposes: a) For existing contracts, as described in Section 4 (Reserve for Commitments) b)For operating and capital budgets re-appropriated from previous years, as described in Section 5 (Reserve for Re-appropriations) Section 3. Distribution Fund Reserves a) For existing contracts, as described in Section 4 (Reserve for Commitments) b) For operating and capital budgets re-appropriated from previous years, as described in Section 5 (Reserve for Re-appropriations) c) For cash flow management and contingencies related to the Gas Utility’s Capital Improvement Program (CIP), as described in Section 6 (CIP Reserve) d) For rate stabilization, as described in Section 7 (Rate Stabilization Reserve) e) For operating contingencies, as described in Section 8 (Operations Reserve) f)For tracking unspent or unallocated revenues from the sale of carbon allowances freely allocated by the California Air Resources Board to the gas utility under the State’s Cap and Trade Program, as described in Section 11 (Cap and Trade Program Reserve) g) Any funds not included in the other reserves will be considered Unassigned Reserves and shall be returned to ratepayers or assigned a specific purpose as described in Section 9 (Unassigned Reserves) Item 1 Attachment A - Resolution Amending Gas Utility Long-Term Plan and Rates     Packet Pg. 79     Attachment A: Exhibit 2 4 0 4 6 Section 4. Reserve for Commitments Item 1 Attachment A - Resolution Amending Gas Utility Long-Term Plan and Rates     Packet Pg. 80     Attachment A: Exhibit 2 4 0 4 6 Section 7. Rate Stabilization Reserve Item 1 Attachment A - Resolution Amending Gas Utility Long-Term Plan and Rates     Packet Pg. 81     Attachment A: Exhibit 2 4 0 4 6 If the Operations Reserve reaches its maximum level, any further additions to the Gas Utility’s Fund Balance will be held in the Unassigned Reserve. If there are any funds in the Unassigned Reserve at the end of any fiscal year, the next Financial Plan presented to the City Council must include a plan to assign them to a specific purpose or return them to the Gas Utility ratepayers by the end of the first fiscal year of the next Financial Planning Period. For example, if there were funds in the Unassigned Reserves at the end of FY 2015, and the next Financial Planning Period is FY 2016 through FY 2020, the Financial Plan shall include a plan to return or assign any funds in the Unassigned Reserve by the end of FY 2016. Staff may present an alternative plan that retains these funds or returns them over a longer period of time. Section 10. Intra-Utility Transfers Between Supply and Distribution Funds The Gas Utility records costs in two separate funds: the Gas Supply Fund and the Gas Distribution Fund. At the end of each fiscal year staff is authorized to transfer funds between the Gas Supply Fund and Gas Distribution Fund if consistent with the purposes of the two reserves involved in the transfer and an amount in order to balance gas utility reserves to avoid negative balances. For example, Gas Distribution revenues are needed to pay for certain supply-related costs such as administration of the Gas Supply Fund. equal to the difference between Gas Supply Fund costs and Gas Supply Fund Revenues, from the Gas Distribution Fund Operations Reserve to the Gas Supply Fund, or vice versa. Such transfers shall be included in the ordinance closing the budget for the fiscal year. Section 11. Cap and Trade Program Reserve This reserve tracks holds revenues from the sale of carbon allowances freely allocated by the California Air Resources Board to the gas utility, under the State’s Cap and Trade Program. Funds in this Reserve are managed in accordance with the City’s Policy on the Use of Freely Allocated Allowances under the State’s Cap and Trade Program (the Policy), adopted by Council Resolution 9487 in January 2015. At the end of each fiscal year, the Cap and Trade Program Reserve will be adjusted by the net of revenues and expenses associated with the Cap and Trade program.At the end of each fiscal year staff is authorized to transfer all revenues from the sale of allocated carbon allowances to this reserve. Item 1 Attachment A - Resolution Amending Gas Utility Long-Term Plan and Rates     Packet Pg. 82     RESIDENTIAL MASTER-METERED AND COMMERCIAL GAS SERVICE UTILITY RATE SCHEDULE G-2 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No G-2-1 Effective 11711-1-20243 dated 11-1-20237-1-2024 Sheet No G-2-1 4 0 4 8 A. APPLICABILITY: This schedule applies to the following Customers receiving Gas Service from the City of Palo Alto Utilities: 1. Commercial Customers who use less than 250,000 therms per year at one site; 2. Master-metered residential Customers in multi-family residential facilities. This schedule applies anywhere the City of Palo Alto provides Gas Service. Per Service Monthly Service Charge:.............................................................................................$149.2429.78 Per Therm Supply Charges: 1. Commodity (Monthly Market Based) ......................................... $0.10-$4.00 2. Cap and Trade Compliance Charges ........................................... $0.00-$0.25 3. Transportation Charge................................................................. $0.00-$0.25 4. Carbon Offset Charge.................................................................. $0.00-$0.10 Distribution Charge: ..................................................................................................$1.02820.8941 The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or Taxes. On a Customer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. The Commodity Charge is based on the monthly natural gas Bidweek Price Index for delivery at PG&E Citygate, adjusted to account for delivery losses to the Customer’s Meter. The Commodity Charge also includes adjustments to account for Council- approved programs implemented to reduce the cost of Ggas, including a municipal purchase discount1, and $0.103 per therm to mitigate the impact of short-term market 1 Adopted via Resolution 9451, on September 15, 2014. Item 1 Attachment A - Resolution Amending Gas Utility Long-Term Plan and Rates     Packet Pg. 83     RESIDENTIAL MASTER-METERED AND COMMERCIAL GAS SERVICE UTILITY RATE SCHEDULE G-2 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No G-2-2 Effective 11711-1-20243 dated 11-1-20237-1-2024 Sheet No G-2-2 4 0 4 8 price spikes2.and a maximum $0.15/per therm cost for capped price winter natural gas purchases3. The Cap and Trade Compliance Charge reflects the City’s cost of regulatory compliance with the state’s Cap and Trade Program, including the cost of acquiring compliance instruments sufficient to cover the City’s Gas Utility’s compliance obligations. The Cap and Trade Compliance Charge will change in response to changing market conditions, retail sales volumes and the quantity of allowances required. The Carbon Offset Charge reflects the City’s cost to purchase offsets for greenhouse gases produced when Gas is burnedin the burning of natural gas. The Carbon Offset Charge will change in response to changing market conditions, changing sales volumes and the quantity of offsets purchased within the Council-approved per therm cap. The Transportation Charge is based on the current PG&E G-WSL rate for Palo Alto, accounting for delivery losses to the Customer’s Meter. The Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges will fall within the minimum/maximum ranges set forth in Section C. Current and historic per therm rates for the Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges are posted on the City Utilities website.4 {End} 2 Adopted via Resolution XXXX on _____, 2024 3 Adopted via Resolution 10126, on September 18, 2023. 4 Monthly gas and commodity and volumetric rates are available herehere, or by visiting https://www.cityofpaloalto.org/files/assets/public/utilities/business/business-rates/monthly-gas-volumetric-and-service- charges-commercial.pdf Item 1 Attachment A - Resolution Amending Gas Utility Long-Term Plan and Rates     Packet Pg. 84     LARGE COMMERCIAL GAS SERVICE UTILITY RATE SCHEDULE G-3 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No G-3-1 Effective 11711-1-20243 dated 117-1-20237-1-2024 Sheet No G-3-1 A. APPLICABILITY: This schedule applies to the following Customers receiving Gas Service from the City of Palo Alto Utilities: 1. Commercial Customers who use at least 250,000 therms per year at one site; 2. Customers at City-owned generation facilities. This schedule applies anywhere the City of Palo Alto provides Gas Service. Per Service Monthly Service Charge: $682.85593.79 Per Therm Supply Charges: 1. Commodity (Monthly Market Based)....................................................$0.10-$4.00 2. Cap and Trade Compliance Charges ....................................................$0.00-$0.25 3. Transportation Charge.......................................................................... $0.00-$0.25 4. Carbon Offset Charge........................................................................... $0.00-$0.10 Distribution Charge: ..................................................................................................$1.01790.8852 The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or Taxes. On a Customer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. The Commodity Charge is based on the monthly natural gas Bidweek Price Index for delivery at PG&E Citygate, adjusted to account for delivery losses to the Customer’s Meter. The Commodity Charge also includes adjustments to account for Council- approved programs implemented to reduce the cost of gas, including a municipal Item 1 Attachment A - Resolution Amending Gas Utility Long-Term Plan and Rates     Packet Pg. 85     LARGE COMMERCIAL GAS SERVICE UTILITY RATE SCHEDULE G-3 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No G-3-2 Effective 11711-1-20243 dated 117-1-20237-1-2024 Sheet No G-3-2 purchase discount1, and $0.103 per therm for mitigating the impact of short-term natural gas market price spikes2and a maximum $0.15/per therm cost for capped price winter natural gas purchases3. The Cap and Trade Compliance Charge reflects the City’s cost of regulatory compliance with the state’s Cap and Trade Program, including the cost of acquiring compliance instruments sufficient to cover the City’s Gas Utility’s compliance obligations. The Cap and Trade Compliance Charge will change in response to changing market conditions, retail sales volumes and the quantity of allowances required. The Carbon Offset Charge reflects the City’s cost to purchase offsets for greenhouse gases produced in the burning of natural gas. The Carbon Offset Charge will change in response to changing market conditions, changing sales volumes and the quantity of offsets purchased within the Council-approved per therm cap. The Transportation Charge is based on the current PG&E G-WSL rate for Palo Alto, accounting for delivery losses to the Customer’s Meter. The Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges will fall within the minimum/maximum ranges set forth in Section C. Current and historic per therm rates for the Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges are posted on the City Utilities website.4 2. Request for Service A qualifying Customer may request service under this schedule for more than one account or meter if the accounts are located on one site. A site consists of one or more contiguous parcels of land with no intervening public right-of- ways (e.g. streets). 3. Changing Rate Schedules Customers may request a rate schedule change at any time to any applicable City of Palo Alto full-service rate schedule. 1 Adopted via Resolution 9451, on September 15, 2014. 2 Adopted via Resolution XXXX on _____, 2024 3 Adopted via Resolution 10126, on September 18, 2023. 4 Monthly gas and commodity and volumetric rates are available here, or by visiting https://www.cityofpaloalto.org/files/assets/public/utilities/business/business-rates/monthly-gas-volumetric-and-service- charges-commercial.pdf Item 1 Attachment A - Resolution Amending Gas Utility Long-Term Plan and Rates     Packet Pg. 86     LARGE COMMERCIAL GAS SERVICE UTILITY RATE SCHEDULE G-3 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No G-3-3 Effective 11711-1-20243 dated 117-1-20237-1-2024 Sheet No G-3-3 {End} Item 1 Attachment A - Resolution Amending Gas Utility Long-Term Plan and Rates     Packet Pg. 87     COMPRESSED NATURAL GAS SERVICE UTILITY RATE SCHEDULE G-10 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No G-10-1 Effective 11711-1-20243 dated 7-1-2024 Sheet No. G-10-1 4 0 4 9 A. APPLICABILITY: This schedule applies to the sale of natural gasGas to the City-owned compressed natural gas (CNG) fueling station at the Municipal Service Center in Palo Alto. Applies to the City’s CNG fueling station located at the Municipal Service Center in City of Palo Alto. Per Service Monthly Service Charge:.............................................................................................$100.9387.77 Per Therm Supply Charges: Commodity (Monthly Market Based)................................................................$0.10-$4.00 Cap and Trade Compliance Charges..................................................................$0.00-$0.25 Transportation Charge........................................................................................$0.00-$0.25 Carbon Offset Charge.........................................................................................$0.00-$0.10 Distribution Charge...........................................................................................................$0.016645 The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or Taxes. On a Customer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. The Commodity Charge is based on the monthly natural gas Bidweek Price Index for delivery at PG&E Citygate, adjusted to account for delivery losses to the Customer’s Meter. The Commodity Charge also includes adjustments to account for Council-approved programs implemented to reduce the cost of gas, including a municipal purchase discount1, and $0.103 per therm for mitigating the impact of short-term natural gas market price spikes2.and a maximum 1 Adopted via Resolution 9451, on September 15, 2014. 2 Adopted via Resolution XXXX on _____, 2024 Item 1 Attachment A - Resolution Amending Gas Utility Long-Term Plan and Rates     Packet Pg. 88     COMPRESSED NATURAL GAS SERVICE UTILITY RATE SCHEDULE G-10 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No G-10-2 Effective 11711-1-20243 dated 7-1-2024 Sheet No. G-10-2 4 0 4 9 $0.15/per therm cost for capped price winter natural gas purchases3. The Cap and Trade Compliance Charge reflects the City’s cost of regulatory compliance with the state’s Cap and Trade Program, including the cost of acquiring compliance instruments sufficient to cover the City’s Gas Utility’s compliance obligations. The Cap and Trade Compliance Charge will change in response to changing market conditions, retail sales volumes and the quantity of allowances required. The Carbon Offset Charge reflects the City’s cost to purchase offsets for greenhouse gases produced when Gas is burnedin the burning of natural gas. The Carbon Offset Charge will change in response to changing market conditions, changing sales volumes and the quantity of offsets purchased within the Council-approved per therm cap. The Transportation Charge is based on the current PG&E G-WSL rate for Palo Alto, accounting for delivery losses to the Customer’s Meter. The Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges will fall within the minimum/maximum range set forth in Section C. Current and historic per therm rates for the Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges are posted on the City Utilities website.4 {End} 3 Adopted via Resolution 10126, on September 18, 2023. 4 Monthly gas and commodity and volumetric rates are available here, or by visiting https://www.cityofpaloalto.org/files/assets/public/utilities/business/business-rates/monthly-gas-volumetric-and-service- charges-commercial.pdf Item 1 Attachment A - Resolution Amending Gas Utility Long-Term Plan and Rates     Packet Pg. 89     RESIDENTIAL GAS SERVICE UTILITY RATE SCHEDULE G-1 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No G-1-1 Sheet No G-1-1 dated 117-1-20237-1-2024 Effective 11711-1-20243 A. APPLICABILITY: This schedule applies to the following Customers receiving Gas Service from City of Palo Alto Utilities: 1. Separately-metered single-family residential Customers; 2. Separately-metered multi-family residential Customers in multi-family residential facilities. This schedule applies anywhere the City of Palo Alto provides Gas Service. Per Service Monthly Service Charge:.................................................................................................$16.114.01 Tier 1 Rates: Per Therm Supply Charges: 1. Commodity (Monthly Market Based).......................................... $0.10-$4.00 2. Cap and Trade Compliance Charge ............................................ $0.00-$0.25 3. Transportation Charge................................................................. $0.00-$0.25 4. Carbon Offset Charge.................................................................. $0.00-$0.10 Distribution Charge:....................................................................................... $0.78286807 Tier 2 Rates: (All usage over 100% of Tier 1) Supply Charges: 1. Commodity (Monthly Market Based).......................................... $0.10-$4.00 2. Cap and Trade Compliance Charge............................................. $0.00-$0.25 3. Transportation Charge................................................................. $0.00-$0.25 4. Carbon Offset Charge.................................................................. $0.00-$0.10 Distribution Charge:............................................................................................. ............................................................................................................$2.00161.7 406 Item 1 Attachment A - Resolution Amending Gas Utility Long-Term Plan and Rates     Packet Pg. 90     RESIDENTIAL GAS SERVICE UTILITY RATE SCHEDULE G-1 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No G-1-2 Sheet No G-1-2 dated 117-1-20237-1-2024 Effective 11711-1-20243 D. SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or Taxes. On a Customer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. The Commodity Charge is based on the monthly natural gas Bidweek Price Index for delivery at PG&E Citygate, adjusted to account for delivery losses to the Customer’s Meter. The Commodity Charge also includes adjustments to account for Council- approved programs implemented to reduce the cost of gas, including a municipal purchase discount1,and $0.103 per therm for mitigating the impact of short-term natural gas market price spikes2 and a maximum $0.15/per therm cost for capped price winter natural gas purchases3. The Cap and Trade Compliance Charge reflects the City’s cost of regulatory compliance with the state’s Cap and Trade Program, including the cost of acquiring compliance instruments sufficient to cover the City’s Gas Utility’s compliance obligations. The Cap and Trade Compliance Charge will change in response to changing market conditions, retail sales volumes and the quantity of allowances required. The Carbon Offset Charge reflects the City’s cost to purchase offsets for greenhouse gases produced in the burning of natural gas. The Carbon Offset Charge will change in response to changing market conditions, changing sales volumes and the quantity of offsets purchased within the Council-approved per therm cap. The Transportation Charge is based on the current PG&E G-WSL rate for Palo Alto, accounting for delivery losses to the Customer’s Meter. The Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges will fall within the minimum/maximum ranges set forth in Section C. Current and historic 1 Adopted via Resolution 9451, on September 15, 2014. 2 Adopted via Resolution XXXX on _____, 2024 3 Adopted via Resolution 10126, on September 18, 2023. Item 1 Attachment A - Resolution Amending Gas Utility Long-Term Plan and Rates     Packet Pg. 91     RESIDENTIAL GAS SERVICE UTILITY RATE SCHEDULE G-1 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No G-1-3 Sheet No G-1-3 dated 117-1-20237-1-2024 Effective 11711-1-20243 per therm rates for the Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges are posted on the City Utilities website.4 2. Seasonal Rate Changes: The Summer period is effective April 1 to October 31 and the Winter period is effective from November 1 to March 31. When the billing period includes use in both the Summer and the Winter periods, the usage will be prorated based on the number of days in each seasonal period, and the charges based on the applicable rates for each period. For further discussion of bill calculation and proration, refer to Rule and Regulation 11. 3. Calculation of Usage Tiers Tier 1 natural gas usage shall be calculated and billed based upon a level of 0.667 therms per day during the Summer period and 2.0 therms per day during the Winter period, rounded to the nearest whole therm, based on meter reading days of service. As an example, for a 30 day bill, the Tier 1 level would be 20 therms during the Summer period and 60 therms during the Winter period months. For further discussion of bill calculation and proration, refer to Rule and Regulation 11. {End} 4 Monthly gas and commodity and volumetric rates are available here, or by visiting https://www.cityofpaloalto.org/files/assets/public/utilities/rates-schedules-for-utilities/residential-utility-rates/monthly-gas- volumetric-and-service-charges-residential.pdf Item 1 Attachment A - Resolution Amending Gas Utility Long-Term Plan and Rates     Packet Pg. 92     Finance Committee Staff Report From: City Manager Report Type: Action Item Lead Department: Administrative Services Meeting Date: June 4, 2024 Report #:2403-2792 TITLE Accept the Fiscal Year 2024 Third Quarter Financial Status Report RECOMMENDATION This report transmits information regarding the City of Palo Alto’s Fiscal Year 2024 Third Quarter Financial Status Report. No action other than acceptance by the Finance Committee is recommended. EXECUTIVE SUMMARY The purpose of this report, provided quarterly, is to provide the City Council with information on the financial status of the City’s General Fund and Enterprise Funds. This report is as of the end of the Third (3rd) Quarter of Fiscal Year (FY) 2024 (July 1, 2023 through March 31, 2024). The actuals are preliminary or unaudited balances. The General Fund FY 2024 Adjusted Operating budget is $247.5 million estimate for revenue sources (excluding Operating Transfers-in). Of this amount, $164.0 million has been collected through the end of the 3rd quarter, which is 66.2% of the adjusted budget (compared to FY 2023, revenues were 66.9% of the adjusted budget) and 9.2 % higher than the same quarter in prior fiscal year and inline with expected levels estimated in the FY 2024 Adopted Budget. The FY 2024 Adjusted Budget reflects a 10.4% increase in estimated revenues from the prior year. Actual major tax revenues are $97.5 million, which is 63.5%, from the $153.5 million adjusted budget. The General Fund FY 2024 Adjusted Operating expenditures budget is $285.3 million (excluding Operating Transfers-out). Of this amount, $180.0 million has been spent to date, which is 63.1% of the Adjusted Budget and most notably, the spend is 23.4% higher than the same quarter in prior year. The General Fund 3rd Quarter Financial Report (Attachment A) contains a summary of major General Fund revenues by source and expenditures by department and the comparison between the FY 2024 Adopted Budget and Adjusted Budget. The Adjusted Budget column includes prior year commitments that were carried forward into FY 2024 and the City Council approved Item 3 Item 3 Staff Report     Packet Pg. 93     amendments to the FY 2024 Adopted Budget Year-to-Date (YTD). The Adjusted Budget - Revenue and Sources (excluding Operating Transfers-in) includes a $10.4 million increase, a 4.4% increase over the FY 2024 Adopted Budget. Expenses (excluding Operating Transfers-out) were also adjusted from $245.9 million to $285.3 million, a 16.0% increase over the FY 2024 Adopted Budget. This increase includes reappropriations, encumbrances, and budget amendments. These changes can be viewed on City’s website1. Actual revenues and expenditures (including encumbrances) are tracking at 66.2% and 69.7%, respectively, with the adjusted budget. As a result of budget amendment actions taken in FY 2024, the Budget Stabilization Reserve (BSR) is $57.0 million at the end of Q3. It is anticipated that at end of FY2024, BSR will stay at the same Q3 level of $57.0 million. The FY 2025 Proposed Budget continues the two-year budget balancing strategy from FY 2024. FY 2025 reflects cautious optimism as inflation and other economic, global, and labor market factors impact both the pace of revenue and expense growth. The FY 2025 Proposed Budget is projected to have a $55.0 million BSR balance at year end, but this estimate has been reduced tentatively to $54.0 million based on Finance Committee proceedings on May 21, 2024 at the time this report was produced. All Enterprise Funds ended the 3rd quarter with positive change in net position, totaling a $30.5 million increase, or 149.0%, higher than the same period of the prior fiscal year. The increase is primarily from Electric and Wastewater Treatment Funds. BACKGROUND Staff provides quarterly financial reports to ensure visibility of the City’s financial status. Staff provided the Mid-Year Budget Review2 to report the financial status of major funds and the Capital Improvement Program as of the second quarter (Q2) of the current fiscal year and recommended adjustments to the Adopted Budget in February 2024. This 3rd Quarter Financial Report covers financial activity from July 1, 2023 to March 31, 2024 and compares those amounts to the same period of the prior fiscal year and to the FY 2024 Adjusted Budget. This report serves as a financial status and does not include budgetary adjustments; budgetary transactions necessary to align FY 2024 activities with the FY 2025 balancing strategy will be brought forward during year-end close. 1 Budget Adjustments and Monitoring https://www.cityofpaloalto.org/Departments/Administrative-Services/Budget-Adjustments-and-Monitoring 2 City Council Special Meeting, February 12, 2024, Agenda Item 11, Staff Report# 2311-2233 https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=82690 Item 3 Item 3 Staff Report     Packet Pg. 94     In the discussion of the various major tax revenue categories below, staff indicates generally how each category is trending compared to the adjusted budget from the FY 2024 Mid-Year Review. ANALYSIS General Fund Revenue Highlights for FY 2024 3rd Quarter YTD rd Quarter YTD, compared to the same period of the prior fiscal year. Revenue for each period is expressed as a percentage of the Adjusted Budget Table 1: General Fund Revenue R F I %F %F % P $$1 $6 $6 C 2 7 2 3 7 3 8 S 2 3 1 3 5 3 6 T 1 1 1 2 6 2 6 U 1 (-1 6 1 8 P 7 2 4 1 6 9 4 D 4 1 3 5 7 7 4 B 2 -2 -2 1 -0 A 3 2 0 4 6 4 6 T $1 9 $6 $6 3 A F F ( 2 1 1 $ 2 $ 4 3 2 Item 3 Item 3 Staff Report     Packet Pg. 95     Property Tax At the close of the 3rd quarter, property tax revenue receipts were $42.1 million, 65.3% of the adjusted budget, and an increase of 13.5% over the same period in the prior fiscal year. Higher assessed values driven by change in ownership was the primary reason for the increase. Property tax is received from the County of Santa Clara during second, third, and fourth quarters of the calendar year. The compound annual growth rate (CAGR) over the 10 years has been approximately 8.2%. The FY 2024 secured property tax assessed value growth rate and unsecured property tax assessed values (AV) growth rates are 5.98 % and 11.64 %, respectively, with a combined rate of 6.23%. At FY 2024 mid-year, the property tax budget was revised upward by $0.8 million to $64.6 million. The County of Santa Clara’s Finance Agency and Office of the Assessor, the entities responsible for managing the property tax billing, collection, and processing changes (e.g., sales, assessment appeal, etc.) forecasts indicate the upward revised FY 2024 forecast of $64.6 million will be met or exceeded. However, the Governor’s FY 2025 State budget proposal has the potential to retroactively (in FY 2024) result in $0.6 loss in Excess ERAF that is not reflected in the above forecast due to uncertainty of this actually materializing and if it impacts past fiscal year(s). Excess Educational Revenue Augmentation Fund (ERAF) distributions from the County of Santa Clara in fiscal years 2021, 2022, and 2023 receipts are $5.6 million, $6.6 million, and $6.4 million, respectively. Approximately 22% of Excess ERAF is at-risk from fiscal years 2021 to 2024 and 20% in FY 2025 due to the State Controller’s Office audit finding on Marin County Excess ERAF calculation methodology that is applicable to the County of Santa Clara. The County of Santa Clara has filed a lawsuit against the State Controller’s Office on this matter. As of June 30, 2023, the total excess ERAF reserve balance totaled $4.1 million for the at-risk amounts for fiscal years 2021 to 2023. The updated FY 2024 forecast assumes $1.5 million for additional reserve for Excess ERAF for a potential loss from the State audit as recommended by the County. In addition, another 8% of Excess ERAF is also at risk in FY 2024 due to the Governor’s FY 2025 budget proposed legislation allocating ERAF to charter schools, potentially reversing the recent appellate decision the County and State Controller’s Office obtained holding the charter school do not get Excess ERAF. The at-risk amount increases to 9% in FY 2025. As of the third quarter, sales tax revenue is $21.7 million, 57.2% of the adjusted budget, and a $0.4 million increase, or 1.8%, from the same period last fiscal year. Inflation is still elevated during this quarter but declining, while consumer spending is experiencing a slowdown but remains strong. Due to the timing of the California Department Tax and Fee Administration (CDTFA) sales tax collection and distribution, third quarter sales tax represents seven months of sales tax activity and does not represent sales tax activity for the full three quarters of the fiscal year. However, as of writing of this report, the eight month’s sales tax receipt results in an increase of $0.6 million or 2.6% over the prior year for the same period. Actual performance for this fiscal year will not be known until August/September. Item 3 Item 3 Staff Report     Packet Pg. 96     At FY 2024 mid-year, this revenue was revised upward by $1.6 million to $37.9 million or 4.5% based on conservative estimate, and the projected outlook by City’s sale’s tax consultant. Staff expect that the actuals for the year will at or slightly higher than the $37.9 million adjusted budget. Transient Occupancy Tax (TOT) rd quarter results represent 7.5 months of TOT receipts due to up to 2.5- month timing delay in receipts. At FY 2024 mid-year, the budget was revised downward by $1.3 million to $25.5 million, a 4.8% decrease, based on the performance of the first quarter of the current fiscal year. Of this amount, $13.4 million is anticipated to fund General Fund Expenses, while $12.1 million will be transferred to the Capital Improvement Fund to fund 2014 Council Infrastructure Plan capital projects and associated debt service costs. Staff continues to monitor trends and, at the time of the forecast, conservatively estimate TOT levels based on recent trends and the economic outlook. As of the writing of this report, receipts as of the third quarter or March 2024 are 7.3% higher, average occupancy is 78.8%, an increase of 9.7%, and average daily room rate is $251, a decrease of 7.7%, all from the same period last year. If the current trend continues, receipts are likely to exceed the adjusted budget. However, on a monthly basis this revenue source has been volatile so the degree of actuals being over adjusted budget remains uncertain. Permits, Licenses and Other Fees rd quarter total $7.2 million, 68.9% of the adjusted budget, an increase of $2.4 million or 49.2% compared to the prior year fiscal year. The increase is primarily due to the surge in new construction permits and street cut fees. The new construction permit revenues will be adjusted at year-end to defer a potion to FY 2025 for permits that are in progress by June 30, 2024. Documentary Transfer Tax Business Tax rd quarter, while revenue collected totals $2.6 million. The tax is effective in January 2023, with the rate through January 2025 being 50% or 3.75-cents per square foot per month. The full rate will Item 3 Item 3 Staff Report     Packet Pg. 97     be assessed starting January 2025 at 7.5-cents per square foot per month. The tax has an annual cap of $0.5 million per business and both the rate and the cap are increased by 2.5% annually beginning FY 2027. While tax began January 1, 2023, the first due date is January 2024 for the calendar year of 2023. After the initial first payment, filings shall be submitted on a quarterly basis. Expense Highlights for FY 2024 3rd Quarter YTD Table 2: General Fund Expenditures $4.6 million in regular salaries because of positions added and hired in FY 2024 and general, merit and market adjustments. $4.7 million in City’s pension contribution. $0.7 million in medical, dental and vision expenses E F F I %F %F % P 4$3$3$1 5$7 4$7 F 3 3 4 1 4 7 4 7 C 2 2 7 3 4 6 3 5 P 1 1 1 9 2 6 2 6 P 1 1 3 2 3 5 2 5 L 8 6 1 2 1 6 1 6 A 7 7 5 7 1 6 9 7 A 2 1 1 7 6 4 6 2 T 1$1$3$2 2$6 2$5 F ( 3 A Item 3 Item 3 Staff Report     Packet Pg. 98     $2.5 million pension contribution to Section 115 irrevocable Pension Trust which is based on approximate lower discount rate of 5.3%. Temporary salaries, overtime, and workers compensation are also trending higher due to increase in salary rates and vacancies across departments. In addition to salaries and benefits, the following department experienced material variances. Community Services expenditures increased by $7.4 million compared to the same period in prior year mainly due to salaries and benefits ($2.6 million increase) and contract services ($3.9 million increase). Most contract services increases are as follows. Landscape maintenance due to additional sites and services on weekends, increase in required minimum staffing level and higher material, and labor cost; Animal service provider cost; and Golf course fee contract services are higher by $2.2 million because in prior fiscal year July 2022 to March 2023 invoices were delayed until the 4th quarter. The variance of $2.2 million will be neutralized at year-end. Public Works expenditures increased by $1.3 million, due to $0.7 million and $0.6 million increase of salaries and benefits and contract services, respectively. The increase of contract services is mainly due to higher janitorial service contact. This is caused by new wage and benefits standards, and additional City facilities and service frequency at some facilities. All Other Departments expenditures increased $11.9 million, or 77.9% compared to the same quarter in the prior fiscal year. Majority of the increase is from Non-Departmental and Office of Transportation, expending $11.5 million and $3.4 million, respectively. Non-Departmental expenses increased by $8.4 million, or 273.9% compared from prior fiscal year and is driven by the following: Contract Services-legal fees increased by $1.4 million for settlement of Green v. City of Palo Alto (Santa Clara Court Case No. 1-16-CV-300760)3. This is the first payment of total legal fees of $4.3 million to be paid over 3 years. Contract Services-outside services increased $0.7 million primarily due the Trusted Response Urgent Support Team (Trust) Call Center Team Services program, launched in April 2023. General Expenses – payment of first set of refunds issued to active class members and a lumpsum refund to inactive class members totaling $6.3 million resulting from the 3 Green v City of Palo is a class action lawsuit filed against the City in October 2016 that challenged the City’s gas and electric rates under Proposition 26. The trial court rejected plaintiff’s challenges to the City electric rates but found that gas rates constituted unapproved taxes in violation of article XIII C of the California Constitutions. In December 2023, the court issued a final order approving the $17.3 million settlement which consists of a $12.9 million refund to class members, a $7,500 service award for the class representative, and $4.3 million in attorney’s fees for plaintiff’s counsel. Item 3 Item 3 Staff Report     Packet Pg. 99     Green v. City of Palo Alto (Santa Clara Superior Court, Case No. 1-16-CV-300760) settlement3. Total customer refunds are $12.9 million to be paid over three years. Office of Transportation increased by $1.5 million, or 118.8% from the same quarter in the prior fiscal year primarily due the contract for Palo Alto Link, the City’s new on demand shuttle program. Program started spring of FY 2023. Police and Fire The total actual expenses for the Police and Fire Departments comprised approximately 42.0% of total General Fund expenditures for the 3rd quarter. The following table highlights Police and Fire salaries and overtime for the third quarter. Net overtime cost analysis for the Police and Fire Departments can be found in Attachment B. Table 3: Police and Fire Salaries and Overtime Expenditures Police overtime is 19.6% higher than FY 2023 and represents 250.7% of the adjusted budget due to backfilling vacancies and benefited leave of absences. The Police Department uses overtime to fill staffing gaps due to vacancies, trainings, leave of absences, and provide resources to infrequent increased demand such as major incidents. As of 3rd quarter of FY 2024, the Department has a total of 12 vacancies, or 12% of 139 FTE: six police officer positions, three dispatchers, two records staff, one community service officer. Another 6 FTE are unavailable to work due to long-term injury and 8 FTE of filled positions are attending the police academy or field training to become solo police officers. Most overtime is attributed to staffing police officer positions. Although overtime is tracking higher and exceeded adjusted budget, overall, the Department is trending within the budget for total salary and benefits and anticipates doing so F ( S F F %F %F % P 1$1$1 2$6 1$6 P 2 2 1 1 2 1 2 T 1 1 1 2 7 2 7 F 1 1 1 1 6 1 7 F 2 2 5 2 1 3 7 T 1 1 1 2 7 1 7 T S 3$2$1 4$7 3$7 3 A Item 3 Item 3 Staff Report     Packet Pg. 100     through the remainder of FY 2024. The Department’s net overtime cost is $1.6 million after deducting the reimbursements and salary savings due to vacancies. Analysis is included in Attachment B. Fire overtime is 5.0% higher than the same quarter in FY 2023 and represents 139.4% of the adjusted budget. Overtime is generated from backfill for vacancies on shift. There are 23 positions required each day for fire engines and ambulances to be fully operational according to the current deployment model. If there is a vacancy, the position must be backfilled for the Engine or Ambulance to be operational. This vacancy can be due to unfilled positions (15 FTE as of 3rd quarter), employee on injury, new hires who are in training and have not completed probation, and on vacation or sick leave. Overtime will continue to be high as these vacancies must be filled each day with overtime to maintain operation. Although overtime is tracking higher and exceeded the adjusted budget, overall, the Department is trending within the budget for total salary and benefits and anticipates doing so through the remainder of FY 2024. The Department’s net overtime cost is $2.0 million after deducting the reimbursements and salary savings due to vacancies. Analysis is included in Attachment B. General Fund Budget Stabilization Reserve (BSR) Balance As a result of budget amendment actions taken in FY 2024, including the FY 2024 Midyear Budget Report4 the Budget Stabilization Reserve (BSR) was $57.0 million at the end of Q3, which is above the City Council recommended 20% level of $53.9 million by $3.1 million. By policy, the City maintains a BSR balance of 15-20% of the annual operating expense, with a target level of 18.5%. However, in development of the FY 2024 budget, the Council adopted the BSR at the 20% level to mitigate risk due to economic uncertainty. The FY 2025 Proposed Budget is projected to have a $55.0 million BSR balance at year end, which is 18.8% of expenses and higher than the City Council’s recommended target level of 18.5% by $1.0 million. The BSR level of $55.0 million includes a recommendation to use $2.0 million from the BSR to increase the Uncertainty Reserve to $4.7 million in FY 2025 to prepare for a forecasted shortfall of $9.7 million in FY 2026. FY 2025 and future fiscal year BSR balances are estimates and subject to revision based on Finance Committee proceedings under way at the time this report was written. 4 City Council Special Meeting, February 12, 2024, Agenda Item 11, Staff Report# 2311-2233 https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=82690 Item 3 Item 3 Staff Report     Packet Pg. 101     Table 4: Enterprise Funds Change in Net Position Water Fund increased $0.8 million, or 37.1%, from the prior fiscal year due to overall increase in revenues partially offset by an increase in operating costs. Water revenues are higher for nine months ended March 31 due to 5% rate increase effective July 1, 2023, and higher consumption. Service connection fees are also higher during this fiscal year mainly due to two major customers. The increase in operating costs is primarily from commodity purchases and salaries and benefits. San Francisco Public Utilities Commission (SFPUC) commodity rate increased from $4.75 to $5.21 per cubic feet, a 9.7% increase. Electric Fund increased $23.8 million, or 3,513.0% from prior fiscal year due to overall increase in operating revenue and decrease in operating costs. The $20.1 million increase in operating revenue is mainly driven by $11.2 million and $4.8 million increases from customer and resource adequacy capacity sales, respectively. The $11.2 million increase in customer sales is due to the net impact of 21% increase in base rate effective July 1, 2023, and deactivation of the Electric Hydro Adjuster (E-HRA). There is also an increase in consumption in the current fiscal year. The $2.7 million decrease in operating costs is due to $11.4 million decrease in commodity purchases due to improved hydroelectric generation resulting from rainy winter of 2022/2023. However, the decrease in purchase of utilities was offset mainly by increases in salaries and benefits and contract services. Based on the current financials, this fund may end in a positive change in net position which portion of this will replenish the nearly depleted hydroelectric stabilization reserves, reducing the chance that City would need to activate the E-HRA in the next few years, even if there is less snow and rain. I F F F (% W 3$2$8$3 E 2 6 2 3 F 1 1 (- G 4 5 (- W 7 7 (- W 1 4 5 1 R 3 3 (- S 1 1 (- A 2 5 1 3 T 5$2 3 1 F 3 ( Item 3 Item 3 Staff Report     Packet Pg. 102     Gas Fund decreased by $1.2 million, or 21.6%, from the same period prior fiscal year mainly due to $0.9 million increase in equity transfer to the General Fund, and $0.4 million retirements of gas meters due to incompatibility with the new advanced metering infrastructure or smart meter endpoints. Overall, the operating revenue decrease of $20.1 million, was offset by a decrease in operating expenses, $20.2 million. Revenue and operating expense decreases are related to the lowered commodity prices compared to unprecedented spike in natural gas market price in prior fiscal year wintertime, November 2022 to January 2023. The gas distribution rate increased 8% effective July 1, 2023, but the system average rate decreased by 31.3% due to decrease in natural gas market prices which are pass-through in nature. Wastewater Treatment Fund increased $5.7 million, or 129.4%, from prior fiscal year mainly due to a revenue increase from partners that is driven by increased capital activity for Joint Intercepting Sewer Project and credits applied to partners in FY2023. Partner revenues are determined by estimated cost of maintaining and operating the Regional Water Control Plant and related system (Plant). Per addendum 12 of the Basic Agreement between the City of Palo Alto, City of Mountain View, and City of Los Altos for the Acquisition, Construction and Maintenance of a Joint Sewer System5 (Joint Intercepting Sewer Project), Mountain View and Los Altos begun paying additional $2.3 million and $0.6 million, respectively for the Joint Intercepting Sewer Project in 4th quarter, which was billed and sent to Partners in the 3rd quarter. Also, $2.7 million in credits were identified and applied to partners in FY2023, which lowered Q3 revenue of FY2023. These credits are due to the amount billed to partners in FY2018-2022 for Secondary Upgrade Upgrades (WQ-19001), and Primary Sedimentation Tank Rehabilitation (WQ-14002 before the California State Water Resource Control Board reimbursed the City in FY2023. Airport Fund increased by $1.9 million, or 353%, primarily due to $1.6 million increase in grants received from Federal Aviation Administration and State of California for various airport projects. FISCAL/RESOURCE IMPACT There are no financial impacts recommended in this report. Staff will return to Council as part of the review of the FY 2024 Annual Comprehensive Financial Report with year-end budget adjustments to recommend any adjustments needed to align budgets with actuals. 5 City Council, December 11, 2023, Agenda Item 2, Staff Report # 2308-1879 https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=82522 Item 3 Item 3 Staff Report     Packet Pg. 103     STAKEHOLDER ENGAGEMENT ENVIRONMENTAL REVIEW ATTACHMENTS APPROVED BY: Item 3 Item 3 Staff Report     Packet Pg. 104     5/22/20244:53 PM CITY OF PALO ALTO GENERAL FUND FIRST QUARTER FINANCIAL REPORT FISCAL YEAR ENDING JUNE 30, 2024 (in thousands) BUDGET ACTUALS (as of 03/31/2024) Adopted Adjusted Pre % of Adj Categories Budget Budget Encumbr Encumbr Actual Budget* Revenues & Other Sources Sales Tax 36,272$ 37,887$ -$ -$ 21,669$ 57.2% Property Tax 63,785 64,578 - - 42,149 65.3% Transient Occupancy Tax 26,834 25,547 - - 16,443 64.4% Documentary Transfer Tax 5,920 5,808 - - 4,228 72.8% Utility Users Tax 18,457 19,674 - - 13,041 66.3% Business Tax 1,660 2,451 2,620 106.9% Other Taxes and Fines 1,757 1,757 - - 641 36.5% Charges for Services 35,131 35,181 - - 26,423 75.1% Permits & Licenses 10,151 10,402 - - 7,168 68.9% Return on Investment 1,846 2,909 - - 1,861 64.0% Rental Income 15,858 15,858 - - 12,181 76.8% From Other Agencies 3,333 8,231 - - 2,961 36.0% Charges To Other Funds 15,496 15,550 - - 11,796 75.9% Other Revenues 636 1,713 - - 785 45.8% Total Revenues 237,136 247,545 - - 163,967 66.2% Operating Transfers-In 23,932 27,225 - - 20,419 75.0% Encumbrances and Reappropriation 15,000 43,471 - - - 0.0% Contribution from Development Services Reserves 1,084 1,084 - - - 0.0% Total Sources of Funds 277,152$ 319,325$ -$ -$ 184,386$ 67.1% Expenditures & Other Uses City Attorney 4,668 5,287 15 758 3,274 76.6% City Auditor 986 1,692 0 659 221 52.0% City Clerk 1,491 1,641 50 150 802 61.1% City Council 439 541 3 53 323 70.1% City Manager 4,715 4,968 126 126 3,776 81.1% Administrative Services 11,099 11,298 52 368 7,775 72.5% Community Services 38,224 40,701 152 3,486 28,054 77.9% Fire 46,761 47,529 84 576 35,545 76.2% Human Resources 4,747 5,280 32 219 3,396 69.1% Library 12,138 12,599 15 515 8,293 70.0% Office of Emergency Services 1,576 1,981 82 213 944 62.5% Office of Transporation 2,704 5,466 140 1,156 2,917 77.1% Planning and Development Services 26,055 33,700 1,681 2,972 17,744 66.5% Police 51,764 52,241 441 337 40,022 78.1% Total Expenditures 245,928 285,323 3,032 15,818 180,043 69.7% Total Use of Funds 279,508$ 322,753$ 3,032$ 15,818$ 208,116$ 70.3% Net Change to BSR (2,356)$ (3,428)$ (23,730)$ ATTACHMENT A Item 3 Attachment A - FY2024 Third Quarter Financial Report     Packet Pg. 105     Attachment D 2022 2023 2024 Q3 POLICE DEPARTMENT Overtime Expense Adopted Budget (A)$944,186 $972,512 $1,028,988 Modified Budget (B)1,244,186 972,512 1,028,988 Net Overtime Cost - see below 781,344 1,107,518 1,575,247 Variance to Budget 462,842 (135,006) (546,260) Overtime Net Cost Actual Expense $2,319,043 $2,940,019 $2,576,927 Less Reimbursements Other Program Reimbursements - 878 259,747 California OES/FEMA (Strike Teams) - - - Stanford Communications 107,684 124,868 76,900 Utilities Communications Reimbursement 56,004 64,599 43,794 Local Agencies (C)5,456 4,949 4,891 Police Service Fees 120,411 100,413 103,071 Total Reimbursements 289,556 295,707 488,403 Less Department Vacancies (A)1,248,143 1,536,794 513,277 Net Overtime Cost $781,344 $1,107,518 $1,575,247 Department Vacancies (number of days)3,903 4,876 1,577 Workers' Compensation Cases 11 23 21 Department Disabilities (number of days)1,221 739 381 FIRE DEPARTMENT Overtime Expense Adopted Budget (D)$1,931,121 $2,124,054 $2,146,234 Modified Budget (E)2,703,621 3,801,054 2,146,234 Net Overtime Cost - see below 4,073,011 1,740,750 1,961,648 Variance to Budget (1,369,390) 2,060,304 184,586 Overtime Net Cost Actual Expense $4,684,796 $3,589,198 $2,990,514 Less Reimbursements California OES/FEMA (Strike Teams) - 341,629 - Total Reimbursements - 341,629 - Less Department Vacancies (D)611,784 1,506,819 1,028,865 Net Overtime Cost $4,073,011 $1,740,750 $1,961,648 Department Vacancies (number of days)1,717 4,105 1,752 Workers' Compensation Cases 35 32 8 Department Disabilities (number of days)947 484 274 NOTES: (A)The FY 2024 Police Department budget was increased by 1.0 Court Liaison Officer, 1.0 Administrative Associate, 2.0 Public Safety Dispatchers, and 2.0 Police Officers. (B)Police Department adopted budget has not been adjusted in FY 2024. (C)Includes Animal Control Services contract with Los Altos and Los Altos Hills. (D)The FY 2024 Fire Department budget was increased by 2.0 Fire Inspectors. (E)The Fire Department adopted budget has not been adjusted in FY 2024. Public Safety Departments Overtime Analysis for Fiscal Years 2022 through 2024 Item 3 Attachment B - FY2024 Q3 Public Safety Overtime Analysis     Packet Pg. 106     Finance Committee Staff Report Report Type: ACTION ITEMS Lead Department: Administrative Services Meeting Date: June 4, 2024 Report #:2405-3104 TITLE Continue Discussion on the Fiscal Year (FY) 2025 Budget Wrap-Up and Recommended FY 2025 Budget including the FY 2025 Municipal Fee Schedule for City Council Adoption RECOMMENDATION This item allows for the Finance Committee to continue its discussion from their May 21, 2024 “Discussion on the Fiscal Year (FY) 2025 Budget Wrap-Up and Recommended FY 2025 Budget including the FY 2025 Municipal Fee Schedule for City Council Adoption” and any further recommended revisions to the FY 2025 Proposed Budget for City Council Adoption scheduled June 17, 2024. The May 21, 2024 Finance Committee Agenda and materials can be found here: https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=14280 ENVIRONMENTAL REVIEW This is not a project under Section 21065 for purposes of the California Environmental Quality Act (CEQA). APPROVED BY: Lauren Lai Item 4 Item 4 Staff Report     Packet Pg. 107