HomeMy WebLinkAbout2024-12-03 Finance Committee Agenda PacketFINANCE COMMITTEE
Special Meeting
Tuesday, December 03, 2024
Community Meeting Room & Hybrid
1:30 PM
Finance Committee meetings will be held as “hybrid” meetings with the option to attend by
teleconference/video conference or in person. Information on how the public may observe and
participate in the meeting is located at the end of the agenda. The meeting will be broadcast on
Cable TV Channel 26, live on YouTube https://www.youtube.com/c/cityofpaloalto, and streamed
to Midpen Media 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
1. A.Discussion and Recommendation to the City Council to Accept the Macias Gini &
O’Connell’s Audit of the City of Palo Alto’s Financial Statements as of June 30, 2024
1. B.Approval of the FY2024 Annual Comprehensive Financial Report (ACFR), and Year‐End
Budget Adjustments in Various Funds.
2.Review and Forward Fiscal Year 2026‐2035 Long Range Financial Forecast (LRFF) to City
Council Late Packet Report
3.Review and Discuss Preliminary Fiscal Year 2026 Utilities Financial Forecast and Rate
Projections Late Packet Report
4.Informational Item: First Quarter Fiscal Year 2025 Financial Status Report
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 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.
California Government Code §84308, commonly referred to as the "Levine Act," prohibits an
elected official of a local government agency from participating in a proceeding involving a
license, permit, or other entitlement for use if the official received a campaign contribution
exceeding $250 from a party or participant, including their agents, to the proceeding within the
last 12 months. A “license, permit, or other entitlement for use” includes most land use and
planning approvals and the approval of contracts that are not subject to lowest responsible bid
procedures. A “party” is a person who files an application for, or is the subject of, a proceeding
involving a license, permit, or other entitlement for use. A “participant” is a person who actively
supports or opposes a particular decision in a proceeding involving a license, permit, or other
entitlement for use, and has a financial interest in the decision. The Levine Act incorporates the
definition of “financial interest” in the Political Reform Act, which encompasses interests in
business entities, real property, sources of income, sources of gifts, and personal finances that
may be affected by the Council’s actions. If you qualify as a “party” or “participant” to a
proceeding, and you have made a campaign contribution to a Council Member exceeding $250
made within the last 12 months, you must disclose the campaign contribution before making
your comments.
1 December 03, 2024
FINANCE COMMITTEESpecial MeetingTuesday, December 03, 2024Community Meeting Room & Hybrid1:30 PMFinance Committee meetings will be held as “hybrid” meetings with the option to attend byteleconference/video conference or in person. Information on how the public may observe andparticipate in the meeting is located at the end of the agenda. The meeting will be broadcast onCable TV Channel 26, live on YouTube https://www.youtube.com/c/cityofpaloalto, and streamedto Midpen Media Center https://midpenmedia.org.VIRTUAL PARTICIPATION CLICK HERE TO JOIN (https://cityofpaloalto.zoom.us/j/99227307235)Meeting ID: 992 2730 7235 Phone: 1(669)900‐6833PUBLIC 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 heardfor 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 tothree minutes or an amount of time determined by the Chair. Requests to speak will be takenuntil 5 minutes after the staff’s presentation or as determined by the Chair. Written publiccomments can be submitted in advance to city.council@CityofPaloAlto.org and will be providedto the Council and available for inspection on the City’s website. Please clearly indicate whichagenda item 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
1. A.Discussion and Recommendation to the City Council to Accept the Macias Gini &
O’Connell’s Audit of the City of Palo Alto’s Financial Statements as of June 30, 2024
1. B.Approval of the FY2024 Annual Comprehensive Financial Report (ACFR), and Year‐End
Budget Adjustments in Various Funds.
2.Review and Forward Fiscal Year 2026‐2035 Long Range Financial Forecast (LRFF) to City
Council Late Packet Report
3.Review and Discuss Preliminary Fiscal Year 2026 Utilities Financial Forecast and Rate
Projections Late Packet Report
4.Informational Item: First Quarter Fiscal Year 2025 Financial Status Report
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 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.
California Government Code §84308, commonly referred to as the "Levine Act," prohibits an
elected official of a local government agency from participating in a proceeding involving a
license, permit, or other entitlement for use if the official received a campaign contribution
exceeding $250 from a party or participant, including their agents, to the proceeding within the
last 12 months. A “license, permit, or other entitlement for use” includes most land use and
planning approvals and the approval of contracts that are not subject to lowest responsible bid
procedures. A “party” is a person who files an application for, or is the subject of, a proceeding
involving a license, permit, or other entitlement for use. A “participant” is a person who actively
supports or opposes a particular decision in a proceeding involving a license, permit, or other
entitlement for use, and has a financial interest in the decision. The Levine Act incorporates the
definition of “financial interest” in the Political Reform Act, which encompasses interests in
business entities, real property, sources of income, sources of gifts, and personal finances that
may be affected by the Council’s actions. If you qualify as a “party” or “participant” to a
proceeding, and you have made a campaign contribution to a Council Member exceeding $250
made within the last 12 months, you must disclose the campaign contribution before making
your comments.
2 December 03, 2024
FINANCE COMMITTEESpecial MeetingTuesday, December 03, 2024Community Meeting Room & Hybrid1:30 PMFinance Committee meetings will be held as “hybrid” meetings with the option to attend byteleconference/video conference or in person. Information on how the public may observe andparticipate in the meeting is located at the end of the agenda. The meeting will be broadcast onCable TV Channel 26, live on YouTube https://www.youtube.com/c/cityofpaloalto, and streamedto Midpen Media Center https://midpenmedia.org.VIRTUAL PARTICIPATION CLICK HERE TO JOIN (https://cityofpaloalto.zoom.us/j/99227307235)Meeting ID: 992 2730 7235 Phone: 1(669)900‐6833PUBLIC 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 heardfor 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 tothree minutes or an amount of time determined by the Chair. Requests to speak will be takenuntil 5 minutes after the staff’s presentation or as determined by the Chair. Written publiccomments can be submitted in advance to city.council@CityofPaloAlto.org and will be providedto the Council and available for inspection on the City’s website. Please clearly indicate whichagenda item 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 # ofspeakers. Public Comment is limited to 30 minutes. Additional public comments, if any, will be heard at the end ofthe agenda.ACTION ITEMS1. A.Discussion and Recommendation to the City Council to Accept the Macias Gini &O’Connell’s Audit of the City of Palo Alto’s Financial Statements as of June 30, 20241. B.Approval of the FY2024 Annual Comprehensive Financial Report (ACFR), and Year‐EndBudget Adjustments in Various Funds.2.Review and Forward Fiscal Year 2026‐2035 Long Range Financial Forecast (LRFF) to CityCouncil Late Packet Report3.Review and Discuss Preliminary Fiscal Year 2026 Utilities Financial Forecast and RateProjections Late Packet Report4.Informational Item: First Quarter Fiscal Year 2025 Financial Status Report2.Review and Forward Fiscal Year 2026‐2035 Long Range Financial Forecast to City Council3.Discuss the Fiscal Year 2026 Preliminary Utilities Financial Forecast and Rate ProjectionsFUTURE 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 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.
California Government Code §84308, commonly referred to as the "Levine Act," prohibits an
elected official of a local government agency from participating in a proceeding involving a
license, permit, or other entitlement for use if the official received a campaign contribution
exceeding $250 from a party or participant, including their agents, to the proceeding within the
last 12 months. A “license, permit, or other entitlement for use” includes most land use and
planning approvals and the approval of contracts that are not subject to lowest responsible bid
procedures. A “party” is a person who files an application for, or is the subject of, a proceeding
involving a license, permit, or other entitlement for use. A “participant” is a person who actively
supports or opposes a particular decision in a proceeding involving a license, permit, or other
entitlement for use, and has a financial interest in the decision. The Levine Act incorporates the
definition of “financial interest” in the Political Reform Act, which encompasses interests in
business entities, real property, sources of income, sources of gifts, and personal finances that
may be affected by the Council’s actions. If you qualify as a “party” or “participant” to a
proceeding, and you have made a campaign contribution to a Council Member exceeding $250
made within the last 12 months, you must disclose the campaign contribution before making
your comments.
3 December 03, 2024
Materials submitted after distribution of the agenda packet are available for public inspection
at www.CityofPaloAlto.org/agendas.
FINANCE COMMITTEESpecial MeetingTuesday, December 03, 2024Community Meeting Room & Hybrid1:30 PMFinance Committee meetings will be held as “hybrid” meetings with the option to attend byteleconference/video conference or in person. Information on how the public may observe andparticipate in the meeting is located at the end of the agenda. The meeting will be broadcast onCable TV Channel 26, live on YouTube https://www.youtube.com/c/cityofpaloalto, and streamedto Midpen Media Center https://midpenmedia.org.VIRTUAL PARTICIPATION CLICK HERE TO JOIN (https://cityofpaloalto.zoom.us/j/99227307235)Meeting ID: 992 2730 7235 Phone: 1(669)900‐6833PUBLIC 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 heardfor 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 tothree minutes or an amount of time determined by the Chair. Requests to speak will be takenuntil 5 minutes after the staff’s presentation or as determined by the Chair. Written publiccomments can be submitted in advance to city.council@CityofPaloAlto.org and will be providedto the Council and available for inspection on the City’s website. Please clearly indicate whichagenda item 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 # ofspeakers. Public Comment is limited to 30 minutes. Additional public comments, if any, will be heard at the end ofthe agenda.ACTION ITEMS1. A.Discussion and Recommendation to the City Council to Accept the Macias Gini &O’Connell’s Audit of the City of Palo Alto’s Financial Statements as of June 30, 20241. B.Approval of the FY2024 Annual Comprehensive Financial Report (ACFR), and Year‐EndBudget Adjustments in Various Funds.2.Review and Forward Fiscal Year 2026‐2035 Long Range Financial Forecast (LRFF) to CityCouncil Late Packet Report3.Review and Discuss Preliminary Fiscal Year 2026 Utilities Financial Forecast and RateProjections Late Packet Report4.Informational Item: First Quarter Fiscal Year 2025 Financial Status Report2.Review and Forward Fiscal Year 2026‐2035 Long Range Financial Forecast to City Council3.Discuss the Fiscal Year 2026 Preliminary Utilities Financial Forecast and Rate ProjectionsFUTURE MEETINGS AND AGENDASMembers of the public may not speak to the item(s)ADJOURNMENTPUBLIC COMMENT INSTRUCTIONSMembers 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 thetable at the entrance to the Council Chambers and deliver it to the Clerk prior todiscussion of the item.3. Spoken public comments for agendized items using a computer or smart phone willbe accepted through the teleconference meeting. To address the Council, click on the linkbelow 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 usingyour 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 inolder browsers including Internet Explorer. Or download the Zoom application ontoyour smart phone from the Apple App Store or Google Play Store and enter in theMeeting ID below.You may be asked to enter an email address and name. We request that youidentify yourself by name as this will be visible online and will be used to notify youthat it is your turn to speak.When you wish to speak on an Agenda Item, click on “raise hand.” The Clerk willactivate and unmute speakers in turn. Speakers will be notified shortly before theyare called to speak.When called, please limit your remarks to the time limit allotted. A timer will beshown on the computer to help keep track of your comments.4. Spoken public comments using a phone use the telephone number listed below. Whenyou wish to speak on an agenda item hit *9 on your phone so we know that you wish tospeak. You will be asked to provide your first and last name before addressing theCouncil. You will be advised how long you have to speak. When called please limit yourremarks to the agenda item and time limit allotted.CLICK HERE TO JOIN Meeting ID: 992‐2730‐7235 Phone: 1‐669‐900‐6833Americans with Disability Act (ADA) It is the policy of the City of Palo Alto to offer its publicprograms, services and meetings in a manner that is readily accessible to all. Persons withdisabilities 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.
California Government Code §84308, commonly referred to as the "Levine Act," prohibits an
elected official of a local government agency from participating in a proceeding involving a
license, permit, or other entitlement for use if the official received a campaign contribution
exceeding $250 from a party or participant, including their agents, to the proceeding within the
last 12 months. A “license, permit, or other entitlement for use” includes most land use and
planning approvals and the approval of contracts that are not subject to lowest responsible bid
procedures. A “party” is a person who files an application for, or is the subject of, a proceeding
involving a license, permit, or other entitlement for use. A “participant” is a person who actively
supports or opposes a particular decision in a proceeding involving a license, permit, or other
entitlement for use, and has a financial interest in the decision. The Levine Act incorporates the
definition of “financial interest” in the Political Reform Act, which encompasses interests in
business entities, real property, sources of income, sources of gifts, and personal finances that
may be affected by the Council’s actions. If you qualify as a “party” or “participant” to a
proceeding, and you have made a campaign contribution to a Council Member exceeding $250
made within the last 12 months, you must disclose the campaign contribution before making
your comments.
4 December 03, 2024
Materials submitted after distribution of the agenda packet are available for public inspection
at www.CityofPaloAlto.org/agendas.
4
8
2
7
Finance Committee
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: City Auditor
Meeting Date: December 3, 2024
Report #:2405-3095
TITLE
Discussion and Recommendation to the City Council to Accept the Macias Gini & O’Connell’s
Audit of the City of Palo Alto’s Financial Statements as of June 30, 2024
RECOMMENDATION
The City Auditor recommends that the Finance Committee review and forward to the City
Council for approval the City of Palo Alto’s audited financial statement for the fiscal year ended
June 30, 2024, and accompanying reports provided by Macias Gini & O’Connell LLP.
EXECUTIVE SUMMARY
The City Charter requires that the City Council, through the City Auditor, engage an
independent public accounting firm to conduct the annual financial audit. The selected firm
reports the results of the audit, in writing, to the City Council. Macias Gini & O’Connell LLP
(MGO), a certified public accounting firm, conducted the City’s financial statement audits for
the fiscal year ending June 30, 2024.
The City Auditor is providing copies of the following financial statements and reports as
prepared by MGO:
•Auditor’s Report to the City Council (the “Management Letter”) – Attachment A
•Cable TV Franchise, Independent Auditor’s Report and Statements of Francise Revenues
and Expenses for the years ended December 31, 2023 and 2022 – Attachment B
•Palo Alto Public Improvement Corporation Annual Financial Report for the Year Ended
June 30, 2024 – Attachment C
•Regional Water Quality Control Plant Independent Auditor’s Report and Financial
Statements for the Year Ended June 30, 2024 – Attachment D
•Independent Accountant’s Report on Applying Agreed-Upon Procedures Related to the
Article XIII-B Appropriations Limit (GANN Limit) for the Year Ended June 30, 2024 –
Attachment E
Item 1. A
Item 1A Staff Report
Item 1. A: Staff Report Pg. 1 Packet Pg. 5 of 178
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8
2
7
•Pedestrian/Bicycle Facilities Grant Metropolitan Transportation Commission
Transportation Development Act Funds, Article III, Independent Auditor’s Reports,
Financial Statements and Supplementary Information for the Year Ended June 30, 2024
– Attachment F
Note that the Annual Comprehensive Financial Report (ACFR) and the reports collectively
known as the Single Audit, are presented as a separate item on this agenda and include the
following Independent Auditor’s reports:
•Independent Auditor’s Reports on Financial Statements (ACFR)
•Independent Auditor’s Report on Internal Control Over Financial Reporting and on
Compliance and Other Matters Based on an Audit of Financial Statements in Accordance
with Government Auditing Standards (Single Audit)
•Independent Auditor’s Report on Compliance for Each Major Federal Program; Report
on Internal Control over Compliance; and Report on the Schedule of Federal Awards
Required by Uniform Guidance (Single Audit)
The MGO issued a clean opinion on each audit report and reported no findings within the
Agreed-Upon Procedures report.
The City Auditor would like to express appreciation to MGO and the Administrative Services
Department staff for their hard work and cooperation during the audit.
FISCAL/RESOURCE IMPACT
There is not fiscal impact resulting from the attached audit reports.
STAKEHOLDER ENGAGEMENT
MGO conducted audits in coordination with the Administrative Services Department and the
City Auditor.
ENVIRONMENTAL REVIEW
Council action on this item is not a project as defined by CEQA because the audit activities do
not involve any commitment to any specific project which may result in a potentially significant
physical impact on the environment. CEQ Guidelines section 15378(b)(4).
ATTACHMENTS
Attachment A: Auditor’s Report to the City Council
Attachment B: Cable TV Franchise Auditor’s Report
Attachment C: Public Improvement Corporation Annual Financial Report
Attachment D: Regional Water Quality Control Plant Auditor’s Report
Attachment E: GANN Report
Item 1. A
Item 1A Staff Report
Item 1. A: Staff Report Pg. 2 Packet Pg. 6 of 178
4
8
2
7
Attachment F: Transportation Development Act Funds, Article III, Auditor’s Report
APPROVED BY:
Item 1. A
Item 1A Staff Report
Item 1. A: Staff Report Pg. 3 Packet Pg. 7 of 178
CITY OF PALO ALTO, CALIFORNIA
Report to the City Council
For the Year Ended June 30, 2024
Item 1. A
Attachment A - Auditor's
Report to the City Council
Item 1. A: Staff Report Pg. 4 Packet Pg. 8 of 178
www.mgocpa.com Macias Gini & O’Connell LLP
2121 N. California Boulevard, Suite 750
Walnut Creek, CA 94596
November 8, 2024
Honorable Mayor and the Members of
the City Council of the City of Palo Alto
Palo Alto, California
We are pleased to present this report related to our audit of the financial statements of the governmental
activities, the business-type activities, each major fund, and the aggregate remaining fund information of
City of Palo Alto, California (City), as of and for the year ended June 30, 2024. This report summarizes
certain matters required by professional standards to be communicated to you in your oversight
responsibility for the City’s financial reporting process.
In addition to the City’s basic financial statements, we audit and separately report on the following financial
statements as of and for the year ended June 30, 2024.
• City of Palo Alto Regional Water Quality Control Plant
• Palo Alto Public Improvement Corporation
• Cable TV Franchise Statements of Franchise Revenues and Expenditures
• Pedestrian Bicycle Facilities Grant Transportation Development Act Funds, Article III
This report is intended solely for the information and use of the City Council and the City’s management,
and is not intended to be, and should not be, used by anyone other than these specified parties. It will be
our pleasure to respond to any questions you have about this report. We appreciate the opportunity to
continue to be of service to the City.
Walnut Creek, California
Item 1. A
Attachment A - Auditor's
Report to the City Council
Item 1. A: Staff Report Pg. 5 Packet Pg. 9 of 178
TABLE OF CONTENTS
Required Communications 1
Exhibits
Exhibit A—Recent Accounting Pronouncements 6
Item 1. A
Attachment A - Auditor's
Report to the City Council
Item 1. A: Staff Report Pg. 6 Packet Pg. 10 of 178
1
REQUIRED COMMUNICATIONS
Auditing standards generally accepted in the United States of America (AU-C 260, The Auditor’s
Communication With Those Charged With Governance) require the auditor to promote effective two-way
communication between the auditor and those charged with governance. Consistent with this requirement,
the following summarizes our responsibilities regarding the City’s financial statement audit as well as
observations arising from our audit that are significant and relevant to your responsibility to oversee the
financial and related compliance reporting process.
Our Responsibilities With Regard to the Financial Statement Audit
Our responsibilities under auditing standards generally accepted in the United States of America and
Government Auditing Standards issued by the Comptroller General of the United States have been
described to you in our arrangement letter dated June 14, 2024. Our audit of the City’s financial statements
does not relieve management or those charged with governance of their responsibilities, which are also
described in that letter.
Overview of the Planned Scope and Timing of the Financial Statement Audit
We have communicated to you the planned scope and timing of our audit in our arrangrment letter dated
June 14, 2024 regarding the planned scope and timing of our audit.
Accounting Policies and Practices
Preferability of Accounting Policies and Practices
Under accounting principles generally accepted in the United States of America, in certain circumstances,
management may select among alternative accounting practices. In our view, in such circumstances,
management has selected the preferable accounting practice.
Adoption of, or Change in, Accounting Policies
Management has the ultimate responsibility for the appropriateness of the accounting policies used by the
City. A summary of the significant accounting policies adopted by the City is included in Note 1 to the
financial statements. As described in Note 1 to the financial statements. The City implemented the
Governmental Accounting Standards Board (GASB) Statement No. 100, Accounting Changes and Error
Corrections—an amendment of GASB Statement No. 62, and requirements of GASB Statement No. 99,
Omnibus 2022 related to financial guarantees and the classification and reporting of derivative instruments
within the scope of GASB Statement No. 53. The implementation of these statements did not have a
significant impact on the City’s financial statements for the year ended June 30, 2024.
Significant Accounting Policies
We did not identify any significant accounting policies in controversial or emerging areas for which there
is a lack of authoritative guidance or consensus.
Significant Unusual Transactions
We did not identify any significant unusual transactions.
Item 1. A
Attachment A - Auditor's
Report to the City Council
Item 1. A: Staff Report Pg. 7 Packet Pg. 11 of 178
2
Management’s Judgments and Accounting Estimates
Accounting estimates are an integral part of the preparation of financial statements and are based upon
management’s current judgment. The process used by management encompasses their knowledge and
experience about past and current events, and certain assumptions about future events. You may wish to
monitor throughout the year the process used to determine and record these accounting estimates.
The following summarizes the significant accounting estimates reflected in the City’s financial statements.
Significant Accounting Estimates
Fair value of
investments
The City’s investments are generally carried at fair value, which is defined as
the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date.
The City’s investments are primarily classified as level 2 of the fair value
hierarchy established by GASB Statement No. 72 and are valued using prices
determined by the use of matrix pricing techniques maintained by the pricing
vendors for these securities. The City’s investments in U.S. treasury notes are
classified as level 1 and are valued based on quoted prices in an active market
for identical assets. The City’s investments in the money market mutual funds,
California Local Agency Investment Fund and California Asset Management
Program are not subject to the fair value hierarchy.
Estimated allowance
for losses on notes and
loans receivable
The allowance for losses on notes and loans receivable is based on the types of
loans (e.g., forgivable, deferred, grant, or amortizing) and management’s
estimate regarding the likelihood of collectability based on loan provisions and
collateral.
Depreciation
estimates for capital
assets, including
depreciation methods
and useful lives
assigned to
depreciable assets
The estimated useful lives of capital assets were determined based on the nature
of the capital assets and management’s estimate of the economic life of the
assets. The City uses the straight-line method for depreciation.
Landfill post-closure
liability
The City has estimated, based on a study conducted by consultants, the post-
closure costs of the Palo Alto landfill based on what it would cost to perform
all currently mandated post-closure care. Actual post-closure care costs may be
higher due to inflation variances, changes in technology, or changes in State or
federal regulations.
Net pension liabilities,
contributions,
expenses, and other
related balances
The balances were estimated based on actuarial valuations, which incorporate
actuarial methods and assumptions adopted by the City, performed by the
California Public Employees’ Retirement System’s independent actuaries.
Item 1. A
Attachment A - Auditor's
Report to the City Council
Item 1. A: Staff Report Pg. 8 Packet Pg. 12 of 178
3
Significant Accounting Estimates
Other
postemployment
benefits (OPEB)
liabilities,
contributions,
expenses, and other
related balances
The balances were estimated based on actuarial valuations, which incorporate
actuarial methods and assumptions adopted by the City, performed by the
City’s independent actuary.
Claims loss reserve The City is exposed to a variety of risks of loss due to general liability, workers’
compensation and other claims and records an estimate of these losses based
on actuarial studies performed by third party actuaries. These studies are
prepared based on the City’s prior claims history, which is used as a basis for
extrapolating losses for known and incurred but not reported claims. Actual
loss experience may vary from these estimates.
Discount rate used for
the calculation of
lease liability, lease
receivable, and
SBITA liability
The discount rate used for the calculation of the lease liability, lease receivable,
and SBITA liability are based on the City’s estimated incremental borrowing
rate using AAA General Obligations interest rates.
Audit Adjustments and Uncorrected Misstatements
In the course of the audits, there were no misstatements identified through the course of audit procedures
and corrected by management that were material to the City’s financial statements. There were no
uncorrected misstatements. Uncorrected misstatements or matters underlying these uncorrected
misstatements could potentially cause future-period financial statements to be materially misstated, even if
we have concluded that the uncorrected misstatements are immaterial to the financial statements under
audit.
Observations About the Audit Process
Disagreements With Management
We encountered no disagreements with management over the application of significant accounting
principles, the basis for management’s judgments on any significant matters, the scope of the audit or
significant disclosures to be included in the financial statements.
Consultations With Other Accountants
We are not aware of any consultations management had with other accountants about accounting or auditing
matters.
Significant Issues Discussed With Management
No significant issues arising from the audit were discussed or were the subject of correspondence with
management.
Significant Difficulties Encountered in Performing the Audit
We did not encounter any significant difficulties in dealing with management during the audit.
Difficult or Contentious Matters That Required Consultation
We did not encounter any significant and difficult or contentious matters that required consultation outside
the engagement team.
Item 1. A
Attachment A - Auditor's
Report to the City Council
Item 1. A: Staff Report Pg. 9 Packet Pg. 13 of 178
4
Shared Responsibilities for Independence
Independence is a joint responsibility and is managed most effectively when management, audit committees
(or their equivalents), and audit firms work together in considering compliance with American Institute of
Certified Public Accountants (AICPA) and Government Accountability Office (GAO) independence rules.
For MGO to fulfill its professional responsibility to maintain and monitor independence, management, the
Board of Commission, and MGO each play an important role.
Our Responsibilities
1) AICPA and GAO rules require independence both of mind and in appearance when providing audit
and other attestation services. MGO is to ensure that the AICPA and GAO’s General Requirements
for performing non-attest services are adhered to and included in all letters of engagement.
2) Maintain a system of quality management over compliance with independence rules and firm
policies.
The Authority’s Responsibilities
1) Timely inform MGO, before the effective date of transactions or other business changes, of the
following:
a) New affiliates, directors, or officers.
b) Changes in the organizational structure or the reporting entity impacting affiliates such as
subsidiaries, partnerships, related entities, investments, joint ventures, component units, jointly
governed organizations.
2) Provide necessary affiliate information such as new or updated structure charts, as well as financial
information required to perform materiality calculations needed for making affiliate
determinations.
3) Understand and conclude on the permissibility, prior to the Authority and its affiliates, officers,
directors, or persons in a decision-making capacity, engaging in business relationships with MGO.
4) Not entering into arrangements of nonaudit services resulting in MGO being involved in making
management decisions on behalf of the Authority.
5) Not entering into relationships resulting in close family members of MGO covered persons,
temporarily or permanently acting as an officer, director, or person in an accounting, financial
reporting or compliance oversight role at the City.
Management Representations
We have requested certain written representations from management, which are included in the
management representation letter dated November 8, 2024.
Other Information in Documents Containing Audited Financial Statements
Pursuant to professional standards, our responsibility as auditors for other information in documents
containing the City’s audited financial statements does not extend beyond the financial information
identified in the audit report, and we are not required to perform any procedures to corroborate such other
information. However, in accordance with such standards:
Required Supplementary Information
We applied certain limited procedures to the management’s discussion and analysis and the pension and
other postemployment benefits related schedules, which is required supplementary information (RSI) that
supplements the financial statements. Our procedures consisted of inquiries of management regarding the
methods of preparing the information and comparing the information for consistency with management’s
Item 1. A
Attachment A - Auditor's
Report to the City Council
Item 1. A: Staff Report Pg. 10 Packet Pg. 14 of 178
5
responses to our inquiries, the financial statements, and other knowledge we obtained during our audit of
the financial statements. We did not audit the RSI and do not express an opinion or provide any assurance
on the RSI.
Supplementary Information
We were engaged to report on the following supplementary information, which accompany the financial
statements but are not RSI:
Combining Statements of nonmajor funds
Schedule of Expenditures of Federal Awards (included in the Single Audit Section)
Other Information
The other information in the Annual Comprehensive Financial Report (ACFR) comprises the introductory
and statistical sections. Our opinions on the basic financial statements do not cover the other information,
and we do not express an opinion or any form of assurance thereon.
Our responsibility for other information included in the ACFR is to read the information and consider
whether its content or the manner of its presentation is materially inconsistent with the financial information
covered by our auditor’s report, whether it contains a material misstatement of fact or whether the other
information is otherwise misleading. We read the City’s introductory and statistical sections, and did not
identify material inconsistencies with the audited basic financial statements.
Internal Control and Compliance Matters
We have separately communicated on internal control and compliance over financial reporting identified
during our audit of the financial statements and major awards, as required by Government Auditing
Standards and when applicable, Uniform Administrative Requirements, Cost Principles, and Audit
Requirements for Federal Awards at 2 CFR 200 (Uniform Guidance). This communication is included with
the Single Audit Section of the ACFR.
Item 1. A
Attachment A - Auditor's
Report to the City Council
Item 1. A: Staff Report Pg. 11 Packet Pg. 15 of 178
6
EXHIBIT A
Recent Accounting Pronouncements
Item 1. A
Attachment A - Auditor's
Report to the City Council
Item 1. A: Staff Report Pg. 12 Packet Pg. 16 of 178
7
RECENT ACCOUNTING PRONOUNCEMENTS
The following accounting pronouncements have been issued as of November 8, 2024, but are not yet
effective and may affect the future financial reporting by the Authority.
Pronouncement Summary
GASB Statement No. 101,
Compensated Absences
The objective of this Statement is to better meet the information
needs of financial statement users by updating the recognition and
measurement guidance for compensated absences. That objective
is achieved by aligning the recognition and measurement
guidance under a unified model and by amending certain
previously required disclosures.
Statement No. 101 is effective for the City’s financial statements
for the year ending June 30, 2025.
GASB Statement No. 102,
Certain Risk Disclosures
The objective of this Statement is to provide users of government
financial statements with essential information about risks related
to a government’s vulnerabilities due to certain concentrations or
constraints.
Statement No. 102 is effective for the City’s financial statements
for the year ending June 30, 2025.
GASB Statement No. 103,
Financial Reporting Model
Improvements
The objective of this Statement is to improve key components of
the financial reporting model to enhance its effectiveness in
providing information that is essential for decision making and
assessing a government’s accountability. This Statement also
addresses certain application issues.
Statement No. 103 are effective for the City’s financial statements
for the year ending June 30, 2026.
GASB Statement No. 104,
Disclosure of Certain Capital Assets
The objective of this statement is to establish requirements for
certain types of capital assets to be disclosed separately for
purposes of note disclosures, and to establish requirements for
capital assets held for sale and note disclosures for those capital
assets.
Statement No. 104 are effective for the City’s financial statements
for the year ending June 30, 2026.
Item 1. A
Attachment A - Auditor's
Report to the City Council
Item 1. A: Staff Report Pg. 13 Packet Pg. 17 of 178
CABLE TV FRANCHISE
Independent Auditor’s Report and
Statements of Franchise Revenues and Expenses
For the Years Ended December 31, 2023 and 2022
Item 1. A
Attachment B - Cable TV
Franchise Auditor's
Report
Item 1. A: Staff Report Pg. 14 Packet Pg. 18 of 178
CABLE TV FRANCHISE
Independent Auditor’s Report and Statements of Franchise Revenues and Expenses
For the Years Ended December 31, 2023 and 2022
Table of Contents
Page
Independent Auditor’s Report ....................................................................................................................... 1
Financial Statements:
Statements of Franchise Revenues and Expenses ................................................................................... 3
Notes to the Financial Statements ........................................................................................................... 4
Item 1. A
Attachment B - Cable TV
Franchise Auditor's
Report
Item 1. A: Staff Report Pg. 15 Packet Pg. 19 of 178
www.mgocpa.com Macias Gini & O’Connell LLP
2121 N. California Boulevard, Suite 750
Walnut Creek, CA 94596
1
Independent Auditor’s Report
Honorable Mayor and Members
of the City Council of the City of Palo Alto
Palo Alto, California
Opinion
We have audited the Statements of Franchise Revenues and Expenses (financial statements) of the Cable
TV Franchise (Franchise) for the years ended December 31, 2023 and 2022, and the related notes to the
financial statements, which collectively comprise the Franchise’s financial statements as listed in the table
of contents.
In our opinion, the accompanying financial statements referred to above present fairly, in all material
respects, the revenues and expenses of the Franchise for the years ended December 31, 2023 and 2022, in
accordance with the financial reporting provisions of the Amended and Restated Joint Exercise of Powers
Agreement signed on June 9, 2009, between the City of Palo Alto, the City of East Palo Alto, the City of
Menlo Park, the County of San Mateo, the County of Santa Clara, and the Town of Atherton, as described
in Note 1 to the financial statements (Agreement).
Basis for Opinion
We conducted our audit in accordance with auditing standards generally accepted in the United States of
America (GAAS). Our responsibilities under those standards are further described in the Auditor’s
Responsibilities for the Audit of the Financial Statements section of our report. We are required to be
independent of the Franchise, and to meet our ethical responsibilities, in accordance with the relevant
ethical requirements relating to our audit. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit opinion.
Emphasis of a Matter
As discussed in Note 1 to the financial statements, the financial statements are prepared in accordance
with the financial reporting provisions of the Agreement, which is a basis of accounting other than
accounting principles generally accepted in the United States of America and are not intended to be a
complete presentation of the Franchise’s financial position or results of operations. Our opinion is not
modified with respect to this matter.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in
accordance with the financial reporting provisions of the Agreement, and for the design, implementation,
and maintenance of internal control relevant to the preparation and fair presentation of financial
statements that are free from material misstatement, whether due to fraud or error.
Item 1. A
Attachment B - Cable TV
Franchise Auditor's
Report
Item 1. A: Staff Report Pg. 16 Packet Pg. 20 of 178
2
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our
opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not
a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement
when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one
resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or
the override of internal control. Misstatements are considered material if there is a substantial likelihood
that, individually or in the aggregate, they would influence the judgment made by a reasonable user based
on the financial statements.
In performing an audit in accordance with GAAS, we:
• Exercise professional judgment and maintain professional skepticism throughout the audit.
• Identify and assess the risks of material misstatement of the financial statements, whether due to
fraud or error, and design and perform audit procedures responsive to those risks. Such procedures
include examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Franchise’s internal control. Accordingly, no such opinion is expressed.
• Evaluate the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluate the overall presentation of the
financial statements.
We are required to communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit, significant audit findings, and certain internal control-related matters
that we identified during the audit.
Restriction on Use
This report is intended solely for the information and use of the governing bodies and management of the
City of Palo Alto, the City of East Palo Alto, the City of Menlo Park, the County of San Mateo, the
County of Santa Clara, and the Town of Atherton, and is not intended to be and should not be used by
anyone other than these specified parties.
Walnut Creek, California
November 8, 2024
Item 1. A
Attachment B - Cable TV
Franchise Auditor's
Report
Item 1. A: Staff Report Pg. 17 Packet Pg. 21 of 178
2023 2022
Revenues:
Franchise fees $ 1,430,110 $ 1,548,870
Expenses:
Franchise administration 8,971 6,728
Consulting fees - -
Total expenses 8,971 6,728
Net revenues $ 1,421,139 $ 1,542,142
Amount Percent Amount Percent
Allocated Net Revenues:
City of Palo Alto $ 670,814 47.2% $ 732,658 47.5%
City of Menlo Park 376,315 26.5% 410,245 26.6%
City of East Palo Alto 133,381 9.3% 150,310 9.8%
Town of Atherton 133,080 9.4% 135,934 8.8%
County of Santa Clara 80,757 5.7% 85,519 5.5%
County of San Mateo 26,792 1.9% 27,476 1.8%
Total allocated net revenues $ 1,421,139 100.0% $ 1,542,142 100.0%
CABLE TV FRANCHISE
Statements of Franchise Revenues and Expenses
For the Years Ended December 31, 2023 and 2022
2023 2022
See accompanying notes to the financial statements.
3
Item 1. A
Attachment B - Cable TV
Franchise Auditor's
Report
Item 1. A: Staff Report Pg. 18 Packet Pg. 22 of 178
CABLE TV FRANCHISE
Notes to the Financial Statements
For the Years Ended December 31, 2023 and 2022
4
NOTE 1 – JOINT OPERATING AGREEMENT AND BASIS OF ACCOUNTING
In July 1983, a Joint Exercise of Powers Agreement was entered into by and between the Cities of Palo
Alto, Menlo Park, East Palo Alto, the Counties of San Mateo and Santa Clara, and the Town of Atherton
(Members) for the purpose of obtaining a state-of-the-art cable service for residents, businesses, and
institutions, within each of their jurisdictions in the most efficient and economical manner possible.
In October 1988, the Members entered into a Joint Operating Agreement in which the City of Palo Alto
(City) was granted the power and the authority to administer and coordinate the activities of the franchise
and exercise the rights and responsibilities of the City pursuant to the Franchise Agreement. The activities
are administered by the City and are accounted for within the City’s Custodial Fund. The program is
accounted for using the accrual basis of accounting. Under the accrual basis of accounting, revenues are
recorded when earned and expenses are recognized when the liability is incurred.
On August 9, 2000, the City, acting on behalf of the Members, signed a Franchise Agreement with TCI
Cablevision of California, Inc., a wholly owned subsidiary of AT&T Broadband (AT&T), a third-party
contractor, which was granted a non-exclusive franchise to construct, operate, maintain and repair a cable
television system within the Members jurisdictions. In 2002, the Franchise Agreement was transferred
from AT&T to Comcast Corporation (Comcast).
TCI Cablevision of California, Inc. also signed an asset purchase agreement with Cable Communications
Cooperative of Palo Alto, Inc. (CCCOPA), the former cable television system operator/owner, and
acquired the system.
On January 1, 2007, the Digital Infrastructure and Video Competition Act (DIVCA) went into effect.
Under DIVCA, cable and video service franchises are now granted exclusively by the California Public
Utilities Commission (Commission) rather than by local franchising entities. On March 30, 2007, the
Commission granted AT&T a statewide franchise. Comcast was allowed to seek a State franchise after
January 1, 2008, when another State franchise holder (in this case AT&T) entered the local market. On
January 2, 2008, the Commission granted Comcast a State franchise.
On June 9, 2009, the Members approved an Amended and Restated Joint Exercise of Powers Agreement,
in substitution of the existing Joint Exercise of Powers Agreement and the Joint Operating Agreement, to
reflect changes in the law due to DIVCA and to continue to allow the City to administer the cable and
video franchise enforcement and monitoring process for State franchise holders.
The accompanying financial statements are prepared in accordance with the financial reporting provisions
of the Amended and Restated Joint Exercise of Powers Agreement between the Members, which is a
basis of accounting other than accounting principles generally accepted in the United States of America,
and are not intended to be a complete presentation of the Franchise’s financial position or results of
operations.
As compensation for services under the State franchise agreements, AT&T and Comcast pay annual
franchise fees in an amount equal to 5% of annual gross revenues, considering a reasonable adjustment
for bad debts. From these fees the City is first reimbursed for out-of-pocket franchise administration
costs. The remaining fees are distributed to each Member according to the percentage of revenues derived
from the residents and businesses in each of the entities compared to revenues in total.
Item 1. A
Attachment B - Cable TV
Franchise Auditor's
Report
Item 1. A: Staff Report Pg. 19 Packet Pg. 23 of 178
CABLE TV FRANCHISE
Notes to the Financial Statements (Continued)
For the Years Ended December 31, 2023 and 2022
5
NOTE 2 – PRIOR FRANCHISE SETTLEMENTS
A prior Franchise Agreement with CCCOPA was set to expire on March 24, 2001. On June 21, 1999, the
City hired a cable communications consultant and retained the services of a law firm to assist in the
franchise renewal process. On July 31, 2000, CCCOPA reimbursed the City $185,000 toward the actual
costs incurred as part of the franchise renewal efforts.
On July 24, 2000, the City reached a settlement with CCCOPA in the amount of $220,000 to resolve
outstanding claims resulting from CCCOPA’s alleged failure to fully perform under the prior Franchise
Agreement.
On November 22, 2004, the City reached a settlement agreement with Comcast regarding cable plant
construction claims in the amount of $175,000. This money was to be used towards the institutional
network connection costs.
In 2006, the City conducted a franchise compliance audit performed by the City Auditor’s Office. A
settlement was reached in the amount of $155,391. In addition, CCCOPA paid the City a $250,000 grant
to acquire, install, and/or maintain equipment to be used in connection with an institutional network
defined in the Franchise Agreement.
In 2016, the City Auditor discovered that AT&T and Comcast did not consistently calculate the fees due
in accordance with DIVCA and the municipal code of each of the cable joint powers members. As a result
of the audit, the City received a settlement from AT&T in the amount of $75,647 in 2016. Additionally,
the City received a settlement from Comcast in the amount of $25,000 in 2019.
The settlements and grant have been deposited and are being held by the City and earning interest. The
City has since spent a part of the balance on various projects including installing and maintaining the
institutional network equipment.
As of December 31, 2023 and 2022, the remaining balances on deposit with the City, including balances
from other funding sources, were $1,685,064, and $1,485,453 respectively. These balances include
interest receivable of $8,876 and $6,965 at December 31, 2023 and 2022, respectively.
Item 1. A
Attachment B - Cable TV
Franchise Auditor's
Report
Item 1. A: Staff Report Pg. 20 Packet Pg. 24 of 178
PALO ALTO
PUBLIC IMPROVEMENT CORPORATION
(A Component Unit of the City of Palo Alto, California)
Annual Financial Report
For the Year Ended June 30, 2024
Item 1. A
Attachment C - Public
Improvement
Corporation Annual
Financial Report
Item 1. A: Staff Report Pg. 21 Packet Pg. 25 of 178
Item 1. A
Attachment C - Public
Improvement
Corporation Annual
Financial Report
Item 1. A: Staff Report Pg. 22 Packet Pg. 26 of 178
PALO ALTO PUBLIC IMPROVEMENT CORPORATION
(A Component Unit of the City of Palo Alto, California)
Annual Financial Report
For the Year Ended June 30, 2024
Table of Contents
Page
Independent Auditor’s Report ................................................................................................................... 1
Management’s Discussion and Analysis (Unaudited) .............................................................................. 3
Basic Financial Statements
Government-wide Financial Statements:
Statement of Net Position ................................................................................................................... 5
Statement of Activities ....................................................................................................................... 6
Debt Service Fund Financial Statements:
Balance Sheet ..................................................................................................................................... 7
Statement of Revenues, Expenditures and Changes in Fund Balance ................................................ 8
Notes to the Basic Financial Statements .................................................................................................. 9
Item 1. A
Attachment C - Public
Improvement
Corporation Annual
Financial Report
Item 1. A: Staff Report Pg. 23 Packet Pg. 27 of 178
This Page Intentionally Left Blank
Item 1. A
Attachment C - Public
Improvement
Corporation Annual
Financial Report
Item 1. A: Staff Report Pg. 24 Packet Pg. 28 of 178
www.mgocpa.com Macias Gini & O’Connell LLP
2121 N. California Boulevard, Suite 750
Walnut Creek, CA 94596
1
Independent Auditor’s Report
Board of Director of the
Palo Alto Public Improvement Corporation
The Honorable Mayor and
Members of the City Council of the
City of Palo Alto, California
Opinions
We have audited the financial statements of the governmental activities and the major fund of the Palo
Alto Public Improvement Corporation (Corporation), a component unit of the City of Palo Alto,
California (City), as of and for the year ended June 30, 2024, and the related notes to the financial
statements, which collectively comprise the Corporation’s basic financial statements as listed in the table
of contents.
In our opinion, the accompanying financial statements referred to above present fairly, in all material
respects, the respective financial position of the governmental activities and the major fund of the
Corporation as of June 30, 2024, and the respective changes in financial position thereof for the year then
ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinions
We conducted our audit in accordance with auditing standards generally accepted in the United States of
America (GAAS). Our responsibilities under those standards are further described in the Auditor’s
Responsibilities for the Audit of the Financial Statements section of our report. We are required to be
independent of the Corporation and to meet our other ethical responsibilities, in accordance with the
relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit opinions.
Responsibilities of Management for the Financial Statements
The Corporation’s management is responsible for the preparation and fair presentation of the financial
statements in accordance with accounting principles generally accepted in the United States of America,
and for the design, implementation, and maintenance of internal control relevant to the preparation and
fair presentation of financial statements that are free from material misstatement, whether due to fraud or
error.
In preparing the financial statements, management is required to evaluate whether there are conditions or
events, considered in the aggregate, that raise substantial doubt about the Corporation’s ability to continue
as a going concern for twelve months beyond the financial statement date, including any currently known
information that may raise substantial doubt shortly thereafter.
Item 1. A
Attachment C - Public
Improvement
Corporation Annual
Financial Report
Item 1. A: Staff Report Pg. 25 Packet Pg. 29 of 178
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Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that
includes our opinions. Reasonable assurance is a high level of assurance but is not absolute assurance and
therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a
material misstatement when it exists. The risk of not detecting a material misstatement resulting from
fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control. Misstatements are considered material
if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment
made by a reasonable user based on the financial statements.
In performing an audit in accordance with GAAS, we:
• exercise professional judgment and maintain professional skepticism throughout the audit.
• identify and assess the risks of material misstatement of the financial statements, whether due to
fraud or error, and design and perform audit procedures responsive to those risks. Such
procedures include examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements.
• obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Corporation’s internal control. Accordingly, no such opinion
is expressed.
• evaluate the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluate the overall presentation of the
financial statements.
• conclude whether, in our judgment, there are conditions or events, considered in the aggregate,
that raise substantial doubt about the Corporation’s ability to continue as a going concern for a
reasonable period of time.
We are required to communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit, significant audit findings, and certain internal control–related
matters that we identified during the audit.
Required Supplementary Information
Accounting principles generally accepted in the United States of America require that the management’s
discussion and analysis be presented to supplement the basic financial statements. Such information is the
responsibility of management and, although not a part of the basic financial statements, is required by the
Governmental Accounting Standards Board who considers it to be an essential part of financial reporting
for placing the basic financial statements in an appropriate operational, economic, or historical context.
We have applied certain limited procedures to the required supplementary information in accordance with
GAAS, which consisted of inquiries of management about the methods of preparing the information and
comparing the information for consistency with management’s responses to our inquiries, the basic
financial statements, and other knowledge we obtained during our audit of the basic financial statements.
We do not express an opinion or provide any assurance on the information because the limited procedures
do not provide us with sufficient evidence to express an opinion or provide any assurance.
Walnut Creek, California
November 8, 2024
Item 1. A
Attachment C - Public
Improvement
Corporation Annual
Financial Report
Item 1. A: Staff Report Pg. 26 Packet Pg. 30 of 178
PALO ALTO PUBLIC IMPROVEMENT CORPORATION
(A Component Unit of the City of Palo Alto, California)
Management’s Discussion & Analysis (Unaudited)
For the Year Ended June 30, 2024
3
The Palo Alto Public Improvement Corporation (Corporation), a component unit of the City of Palo Alto
(City), follows the provisions of Governmental Accounting Standards Board (GASB). The Corporation is
controlled by the City and was organized to assist the City in financing public improvements. The
Corporation issues debt and turns the proceeds of the debt over to the City under lease agreements that
provide a revenue source for the repayment of this debt. The Corporation has three outstanding debts and
has turned over the proceeds to the City, which pledged certain lease payments as collateral for this debt
as discussed in Note 4 to the financial statements.
FINANCIAL HIGHLIGHTS
GASB requires the issuance of government-wide financial statements as well as fund financial statements.
The government-wide financial statements report the balance of the Corporation’s long-term debt while
the individual fund statements do not.
In fiscal year 2018, the City issued 2018 Capital Improvement Project and Refinancing Certificates of
Participation (2018 COPs) in the amount of $9.0 million to refinance the 2002B Downtown Parking
Improvements Certificates of Participation remaining balance of $0.8 million, and also to fund the Palo
Alto Municipal Golf Course renovations.
In fiscal year 2019, the City issued the 2019 California Avenue Parking Garage tax exempt Series A and
taxable Series B Certificates of Participation (2019A and 2019B COPs) in the amount of $26.8 million
plus $4.9 million premium, and $10.6 million, respectively. The 2019A and 2019B COPs were issued to
fund the construction of the new California Avenue parking garage.
In fiscal year 2021, the City issued the 2021 Public Safety Building Certificates of Participation (2021
COPs) in the amount of $101.5 million plus $6.5 million premium. The 2021 COPs were issued to fund
the construction of the new public safety building.
As of June 30, 2024, the Corporation has the following outstanding debt: the 2018 COPs, 2019A and
2019B COPs, and 2021 COPs.
At the government-wide level, the interest and fiscal agent charges were $4.5 million for fiscal year 2024,
an increase of $0.2 million from the prior year. The interest on leases from the City of Palo Alto was $4.5
million, an increase of $1.6 million from the prior year. The increase is mainly due to the one-time usage
of cash and investments held by the Corporation for interest payments in prior year.
The Corporation ended fiscal year 2024 with total assets of $152.4 million, a decrease of $3.4 million
from the prior year. Total assets consisted of $0.1 million in cash and investments, $0.8 million of lease
interest receivable from the City of Palo Alto, and $151.5 million of investment in leases to the City of
Palo Alto. The total liabilities were $152.3 million, a decrease of $3.4 million from the prior year. The
decrease of assets and liabilities resulted from scheduled principal and interest payments of the 2018
COPs, the 2019A and 2019B COPs, and the 2021 COPs. As of June 30, 2024, the Corporation reported a
$0.1 million restricted net position.
At the fund level, the Corporation’s revenues exceeded expenditures by $17,000. As of June 30, 2024, the
Corporation had one fund, the Debt Service Fund, which reported a $0.1 million restricted fund balance.
Item 1. A
Attachment C - Public
Improvement
Corporation Annual
Financial Report
Item 1. A: Staff Report Pg. 27 Packet Pg. 31 of 178
PALO ALTO PUBLIC IMPROVEMENT CORPORATION
(A Component Unit of the City of Palo Alto, California)
Management’s Discussion & Analysis (Unaudited) (Continued)
For the Year Ended June 30, 2024
4
OVERVIEW OF THE CORPORATION’S BASIC FINANCIAL STATEMENTS
The annual financial report is comprised of two parts:
1) Management’s discussion and analysis (this part),
2) The basic financial statements, which include the government-wide and the fund financial statements,
along with the notes to these financial statements.
The basic financial statements comprise the government-wide financial statements and the fund financial
statements. These two sets of financial statements provide two different views of the Corporation’s
financial activities and financial positions, both short-term and long-term.
The government-wide financial statements provide a long-term view of the Corporation’s activities as a
whole, and comprise the statement of net position and the statement of activities. The statement of net
position provides information about the financial position of the Corporation as a whole, including all its
long-term liabilities on the full accrual basis, similar to that used by corporations. The statement of
activities provides information about all the Corporation’s revenues and expenses on the full accrual
basis, with the emphasis on measuring net revenues or expenses of the Corporation’s program. The
statement of activities explains in detail the change in net position for the year.
The fund financial statements report the Corporation’s operations in more detail than the corporate-wide
statements and focus primarily on the short-term activities of the debt service fund. Fund financial
statements measure only current revenues and expenditures; current assets, liabilities and fund balances;
and they exclude capital assets and long-term debt.
Together, these statements along with the notes to the financial statements are called the basic financial
statements.
DEBT ADMINISTRATION
The Corporation issues debt in the form of Certificates of Participation (COPs) to be repaid from future
lease receipts from the City. Legally, these COP issues are the Corporation’s debt only; the City is liable
only for the payment of the amounts set forth in the lease securing each debt issue.
As of June 30, 2024, the Corporation has the following outstanding debt (excluding premium): 2018
COPs, 2019A and 2019B COPs, and 2021 COPs with outstanding principal balances of $8.0 million,
$34.4 million and $99.4 million, respectively.
ECONOMIC OUTLOOK AND MAJOR INITIATIVES
The economy of the City and its major initiatives for the coming year are discussed in detail in the City’s
Annual Comprehensive Financial Report.
CONTACTING THE CORPORATION’S FINANCIAL MANAGEMENT
These basic financial statements are intended to provide citizens, taxpayers, investors, and creditors with
a general overview of the Corporation’s finances. Questions about these financial statements should be
directed to the Finance Department of the City of Palo Alto, 250 Hamilton Avenue, Palo Alto, CA 94301.
Item 1. A
Attachment C - Public
Improvement
Corporation Annual
Financial Report
Item 1. A: Staff Report Pg. 28 Packet Pg. 32 of 178
Assets
Cash held for operations 97,168$
Cash and investments held by trustee 4,876
Lease interest receivable 801,133
Investment in leases to the City of Palo Alto 151,459,015
Total assets 152,362,192
Liabilities
Interest payable 801,133
Long-term debt:
Due in one year 3,578,253
Due in more than one year 147,880,762
Total liabilities 152,260,148
Net Position
Restricted for debt service 102,044$
PALO ALTO PUBLIC IMPROVEMENT CORPORATION
(A Component Unit of the City of Palo Alto)
Statement of Net Position
June 30, 2024
See accompanying notes to financial statements.
5
Item 1. A
Attachment C - Public
Improvement
Corporation Annual
Financial Report
Item 1. A: Staff Report Pg. 29 Packet Pg. 33 of 178
Expenses
Interest and fiscal agent charges 4,447,773$
Program revenues
Interest on leases from the City of Palo Alto 4,448,620
Net program revenues 847
General revenues
Investment earnings 15,846
Change in net position 16,693
Net position, beginning of the year 85,351
Net position, end of the year 102,044$
PALO ALTO PUBLIC IMPROVEMENT CORPORATION
(A Component Unit of the City of Palo Alto)
Statement of Activities
For the Year Ended June 30, 2024
See accompanying notes to financial statements.
6
Item 1. A
Attachment C - Public
Improvement
Corporation Annual
Financial Report
Item 1. A: Staff Report Pg. 30 Packet Pg. 34 of 178
Assets
Cash held for operations 97,168$
Cash and investments held by trustee 4,876
Lease interest receivable 801,133
Investment in leases to City of Palo Alto 151,459,015
Total assets 152,362,192$
Deferred Inflows of Resources
Unavailable lease receipts from the City of Palo Alto 152,260,148$
Fund balance
Restricted for debt service 102,044
Total deferred inflows of resources and fund balance 152,362,192$
Reconciliation of fund balance to net position
Fund balance restricted for debt service 102,044$
Long-term receivables are not available to pay for current period expenditures
and are considered unavailable on the governmental fund balance sheet. 152,260,148
Some liabilities, including bonds payable, are not due and payable in
the current period and therefore are not reported in governmental funds.
Interest payable (801,133)
Long-term debt due within one year (3,578,253)
Long-term debt due in more than one year (147,880,762)
Net position of governmental activities 102,044$
PALO ALTO PUBLIC IMPROVEMENT CORPORATION
(A Component Unit of the City of Palo Alto)
Balance Sheet
June 30, 2024
Debt Service Fund
See accompanying notes to financial statements.
7
Item 1. A
Attachment C - Public
Improvement
Corporation Annual
Financial Report
Item 1. A: Staff Report Pg. 31 Packet Pg. 35 of 178
Revenues:
Lease receipts from the City of Palo Alto:
Principal 3,025,000$
Interest 4,880,640
Othe 847
Investments earnings 15,846
Total revenues 7,922,333
Expenditures:
Debt service:
Principal repayment 3,025,000
Interest and fiscal agent charges 4,880,640
Total expenditures 7,905,640
Net change in fund balance 16,693
Fund balance, beginning of the year 85,351
Fund balance, end of the year 102,044$
Reconciliation of net change in fund balance to change in net position
Net change in fund balance - debt service fund 16,693$
Amounts reported for governmental activities in the statement of activities are
different because:
Repayment of bond principal is an expenditure in the governmental funds,
but in the statement of net position the repayment reduces long-term liabilities. 3,025,000
Interest accrued on long-term debt and amortization of bond premium do not
require the use of current financial resources and therefore are not reported
as expenditures in governmental funds.
Change in interest payable 24,614
Amortization of bond premium 408,253
Some amounts reported in the statement of revenues, expenditures and changes
in fund balances reflect the timing of collection of assets which are
not includable as revenues on the statement of activities.
Lease receipt for bond principal repayment (3,025,000)
Lease receipt for interest payment (24,614)
Impact of bond premium amortization on lease receipt (408,253)
Change in net position of governmental activities 16,693$
PALO ALTO PUBLIC IMPROVEMENT CORPORATION
(A Component Unit of the City of Palo Alto)
Statement of Revenues, Expenditures and Changes in Fund Balance
For the Year Ended June 30, 2024
Debt Service Fund
See accompanying notes to financial statements.
8
Item 1. A
Attachment C - Public
Improvement
Corporation Annual
Financial Report
Item 1. A: Staff Report Pg. 32 Packet Pg. 36 of 178
PALO ALTO PUBLIC IMPROVEMENT CORPORATION
(A Component Unit of the City of Palo Alto, California)
Notes to the Basic Financial Statements
For the Year Ended June 30, 2024
9
NOTE 1 – DESCRIPTION OF REPORTING ENTITY
The Palo Alto Public Improvement Corporation (the Corporation) was incorporated in September 1983
under the General Nonprofit Corporation Law of the State of California to acquire, construct and lease
capital improvement projects. The Corporation is exempt from federal income taxes under
Section 501(c)(4) of the Internal Revenue Code. The Corporation provides financing of public capital
improvements for the City through the issuance of Certificates of Participation (COPs), a form of debt
which allows investors to participate in a stream of future lease payments. Proceeds from the COPs are
used to construct projects which are leased to the City for lease payments which are sufficient in timing
and amount to meet the debt service requirements of the COPs.
The Corporation is an integral part of the City of Palo Alto, California (City). It primarily services the
City and its governing body is composed of the City Council. Therefore, the financial data of the
Corporation has also been included as a blended component unit within the City’s annual comprehensive
financial report for the year ended June 30, 2024.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
Government-wide Statements: The statement of net position and the statement of activities include the
financial activities of the Corporation. Eliminations have been made to minimize the double counting of
internal activities.
The statement of activities presents a comparison between direct expenses and program revenues for each
function of the Corporation’s activities. Direct expenses are those that are specifically associated with a
program or function and, therefore, are clearly identifiable to a particular function. Program revenues
include (a) charges paid by the recipients of goods or services offered by the programs, and (b) grants and
contributions that are restricted to meeting the operational or capital requirements of a particular program.
Revenues that are not classified as program revenues, including investment earnings, are presented as
general revenues.
Fund Financial Statements: The fund financial statements provide information about the Corporation’s
funds. The emphasis of fund financial statements is on major individual funds, of which the Corporation
only reports one debt service fund.
(b) Major Fund
Major funds are defined as funds that have either assets, liabilities, revenues or expenditures equal to ten
percent of their fund-type total and five percent of the grand total. The Corporation has one fund which is
reported as a major governmental fund in the accompanying financial statements as follows:
Debt Service Fund – This fund accounts for debt service payments on the Corporation’s long-term debt.
Item 1. A
Attachment C - Public
Improvement
Corporation Annual
Financial Report
Item 1. A: Staff Report Pg. 33 Packet Pg. 37 of 178
PALO ALTO PUBLIC IMPROVEMENT CORPORATION
(A Component Unit of the City of Palo Alto, California)
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2024
10
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (Continued)
(c) Basis of Accounting
The government-wide financial statements are reported using the economic resources measurement focus
and the full accrual basis of accounting. Revenues are recorded when earned ad expenses are recorded at
the time liabilities are incurred, regardless of when the related cash flows take place.
Governmental funds are reported using the current financial resources measurement focus and the
modified accrual basis of accounting. Under this method, revenues are recognized when measurable and
available. The City considers revenues susceptible to accrual to be available if the revenues are collected
within ninety days after year-end. Expenditures are recorded when the related fund liability is incurred,
except for principal and interest on long-term debt, claims and judgments, and compensated absences,
which are recognized as expenditures to the extent they have matured.
(d) Investment in Leases
Improvements financed by the Corporation are leased to the City for their entire estimated useful life and
will become the City property at the conclusion of the lease on November 1, 2050. The Corporation
therefore records the present value of the lease and considers the leased improvement to have been sold
for this amount when leased.
(e) Net Position
The government-wide financial statements utilize a net position presentation. Net position is further
categorized as net investment in capital assets, restricted and/or unrestricted. As of June 30, 2024, the
entire net position was considered restricted.
Restricted Net Position – This category presents external restrictions imposed by creditors, grantors,
contributors or laws or regulations of other governments and restrictions imposed by law through
constitutional provisions or enabling legislation.
(f) Deferred Inflows of Resources
A deferred inflow of resources is defined as an acquisition of net asset or fund balances applicable to a
future reporting period and will not be recognized as an inflow of resources (revenue) until that time. On
the governmental fund balance sheet, the lease receipts from the City corresponding to the debt are
recorded as deferred inflows of resources since the balances are not current financial resources.
(g) Fund Balances
At June 30, 2024, the Corporation’s governmental fund’s fund balances include the following
classification:
Restricted Fund Balance – includes amounts that can be spent only for the specific purposes stipulated by
external resource providers, constitutionally or through enabling legislation. Restrictions may effectively
be changed or lifted only with the consent of resource providers.
Item 1. A
Attachment C - Public
Improvement
Corporation Annual
Financial Report
Item 1. A: Staff Report Pg. 34 Packet Pg. 38 of 178
PALO ALTO PUBLIC IMPROVEMENT CORPORATION
(A Component Unit of the City of Palo Alto, California)
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2024
11
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (Continued)
(h) Estimates
The preparation of basic financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
NOTE 3 – CASH AND INVESTMENTS HELD BY TRUSTEE
(a) Interest Rate Risk
Interest rate risk is the risk that a change in market interest rates will adversely affect the fair value of an
investment. Normally, the longer it takes an investment to reach maturity, the greater will be that
investment’s sensitivity to changes in market rates. Information about the sensitivity of the fair values of
the Corporation’s investments to market interest rate fluctuations is provided by the following table that
shows the distribution of the Corporation’s investments by maturity:
Investment Type Amount Maturity Date
Money Market Mutual Fund 4,876$ 31 days
(b) Credit Risk
Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder
of the investment. This is measured by the assignment of a rating by a nationally recognized statistical
rating organization. As of June 30, 2024, the Corporation’s investments in money market mutual funds
are rated AAAm by Standard & Poor’s.
(c) Fair Value Hierarchy
The City categorizes its fair value measurements within the fair value hierarchy established by generally
accepted accounting principles. The hierarchy is based on the valuation inputs used to measure fair value
of the assets. Level 1 inputs are quoted prices in an active market for identical assets; Level 2 inputs are
significant other observable inputs; and Level 3 inputs are significant unobservable inputs. The
Corporation’s investments in money market mutual funds are not subject to the fair value hierarchy.
(d) Investment Policy
The Corporation must maintain required amounts of cash and investments by trustee under the terms of
certain debt issues. These funds are unexpended bond proceeds or are pledged as reserves to be used if the
Corporation fails to meet its obligation under these debt issues. The California Government Code (Code)
requires these funds to be invested in accordance with bond indentures or State statutes. All these funds
have been invested as permitted under the Code and bond indentures, including the cash held for
operations invested in the City’s investment pool. The City’s investment policy is described in detail in
the City’s Annual Comprehensive Financial Report.
Item 1. A
Attachment C - Public
Improvement
Corporation Annual
Financial Report
Item 1. A: Staff Report Pg. 35 Packet Pg. 39 of 178
PALO ALTO PUBLIC IMPROVEMENT CORPORATION
(A Component Unit of the City of Palo Alto, California)
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2024
12
NOTE 3 – CASH AND INVESTMENTS HELD BY TRUSTEE (Continued)
The table below identifies the investment types that are authorized by the City’s investment policy. The
table also identifies certain provisions of the City’s Investment Policy that address interest rate risk, credit
risk and concentration of credit risk.
Maximum
Maturity
Minimum
Credit Quality
Maximum
Percentage
of Portfolio
Maximum
Investment in
One Issuer
U.S. Government Securities 10 years (*) N/A No Limit No Limit
U.S. Government Agency Securities 10 years (*) N/A No Limit (A) No Limit
Certificates of Deposit 10 years (*) N/A 20% 10% of the par
value of
portfolio
Bankers Acceptances 180 days N/A 30% $5 million
Commercial Paper 270 days A-1 15% $3 million (B)
Local Agency Investment Fund N/A N/A No Limit $75 million per
account
Short-Term Repurchase Agreements 1 year N/A No Limit No Limit
City of Palo Alto Bonds N/A N/A No Limit No Limit
Money Market Deposit Accounts N/A N/A No Limit No Limit
Mutual Funds N/A N/A 20% 10%
Negotiable Certificates of Deposit 10 years (*) N/A 10% $5 million
Medium-Term Corporate Notes 5 years AA 10% $5 million
10 years (*) AA/AA2 40% No Limit
Supranational 5 years AA/AA2 20% 10% of the par
value of
ortfolio
(A)
(B) The lesser of $3 million or 10% of outstanding commercial paper of any one institution.
(*) The maximum maturity is based on the Investment Policy that is approved by the City Council
and is less restrictive than the California Governmental Code.
Authorized Investment Type
California State and Municipal and other
49 State Issued Bonds
Callable and multi-step securities are limited to no more than 25% of the par value of the portfolio, provided
that: 1) the potential call dates are known at the time of purchase, 2) the interest rates at which they "step-
up" are known at the time of purchase, and 3) the entire face value of the security is redeemed at the call
date.
Item 1. A
Attachment C - Public
Improvement
Corporation Annual
Financial Report
Item 1. A: Staff Report Pg. 36 Packet Pg. 40 of 178
PALO ALTO PUBLIC IMPROVEMENT CORPORATION
(A Component Unit of the City of Palo Alto, California)
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2024
13
NOTE 4 – LONG-TERM DEBT
The Corporation’s long-term debt activities are presented below:
Balance Balance Amount due
July 1, 2023 Retirements June 30, 2024 in one year
Certificates of Participation
2018 Capital Improvement Project
2.20-4.22%, due 11/1/2047 8,185,000$ 200,000$ 7,985,000$ 205,000$
2019 California Ave. Parking Garage
Series A & B
2.5%-5%, due 11/1/2048 35,055,000 690,000 34,365,000 720,000
2021 Public Safety Building
2%-5%, due 11/1/2050 101,505,000 2,135,000 99,370,000 2,245,000
Add: Unamortized Premium 10,147,268 408,253 9,739,015 408,253
Total 154,892,268$ 3,433,253$ 151,459,015$ 3,578,253$
On June 1, 2018, the City issued the 2018 Capital Improvement Project and Refinancing Certificates of
Participation (2018 COPs) in the amount of $9.0 million to fully refinance the 2002B Downtown Parking
Improvement Project Certificates of Participation and to fund the renovation of the Palo Alto Municipal
Golf Course. Principal payments are due annually on November 1 and interest payments semi-annually at
various rates on May 1 and November 1. The 2018 COPs are secured by lease revenues received by the
Corporation from any City’s General Fund revenue source.
On March 21, 2019, the City issued the 2019 California Avenue Parking Garage tax exempt Series A and
taxable Series B Certificates of Participation (2019A and 2019B COPs) in the amount of $26.8 million
plus $4.9 million premium, and $10.6 million, respectively, for the construction of the new California
Avenue Parking Garage. Principal payments are due annually on November 1 and interest payments
semi-annually at various rates on May 1 and November 1. The 2019A and 2019B COPs are secured by
lease revenues received by the Corporation from any City’s General Fund revenue source.
On March 24, 2021, the City issued the 2021 Public Safety Building Certificates of Participation (2021
COPs) in the amount of $101.5 million plus $6.5 million premium for the construction of the new public
safety building. Principal payments are due annually on November 1 and interest payments semi-annually
at various rates on May 1 and November 1. The 2021 COPs are secured by lease revenues received by the
Corporation from any City’s General Fund revenue source.
Item 1. A
Attachment C - Public
Improvement
Corporation Annual
Financial Report
Item 1. A: Staff Report Pg. 37 Packet Pg. 41 of 178
PALO ALTO PUBLIC IMPROVEMENT CORPORATION
(A Component Unit of the City of Palo Alto, California)
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2024
14
NOTE 4 – LONG-TERM DEBT (Continued)
Future annual debt service on the outstanding debt is shown below:
For the Year
Ending June 30, Principal Interest Total
2025 3,170,000 4,729,196 7,899,196$
2026 3,335,000 4,569,844 7,904,844
2027 3,495,000 4,402,268 7,897,268
2028 3,675,000 4,226,076 7,901,076
2029 3,865,000 4,040,594 7,905,594
2030-2034 22,180,000 17,292,031 39,472,031
2035-2039 26,485,000 12,950,680 39,435,680
2040-2044 30,650,000 8,726,392 39,376,392
2045-2049 35,065,000 3,750,799 38,815,799
2050-2051 9,800,000 221,738 10,021,738
141,720,000$ 64,909,618$ 206,629,618$
Events of Default and Acceleration Clauses
Generally, the Corporation is considered to be in default if the Corporation fails to pay the principal of
and interest on the outstanding long-term debt when become due and payable. If an event of default has
occurred and is continuing, the principal of the long-term debt, together with the accrued interest, may be
declared due and payable immediately.
Item 1. A
Attachment C - Public
Improvement
Corporation Annual
Financial Report
Item 1. A: Staff Report Pg. 38 Packet Pg. 42 of 178
CITY OF PALO ALTO
REGIONAL WATER QUALITY
CONTROL PLANT
Independent Auditor’s Report
and Financial Statements
For the Year Ended June 30, 2024
Item 1. A
Attachment D - Regional
Water Quality Control
Plant Auditor's Report
Item 1. A: Staff Report Pg. 39 Packet Pg. 43 of 178
Item 1. A
Attachment D - Regional
Water Quality Control
Plant Auditor's Report
Item 1. A: Staff Report Pg. 40 Packet Pg. 44 of 178
CITY OF PALO ALTO
REGIONAL WATER QUALITY CONTROL PLANT
Independent Auditor’s Report and Financial Statements
For the Year Ended June 30, 2024
Table of Contents
Page
Independent Auditor’s Report ................................................................................................................... 1
Financial Statements:
Statement of Net Expenditures ............................................................................................................... 3
Statement of Quarterly Billings .............................................................................................................. 4
Notes to the Financial Statements ........................................................................................................... 5
Item 1. A
Attachment D - Regional
Water Quality Control
Plant Auditor's Report
Item 1. A: Staff Report Pg. 41 Packet Pg. 45 of 178
Item 1. A
Attachment D - Regional
Water Quality Control
Plant Auditor's Report
Item 1. A: Staff Report Pg. 42 Packet Pg. 46 of 178
www.mgocpa.com Macias Gini & O’Connell LLP
2121 N. California Boulevard, Suite 750
Walnut Creek, CA 94596
1
Independent Auditor’s Report
The Honorable Mayor and Members
of the City Council of the City of Palo Alto
Palo Alto, California
Opinion
We have audited the Statements of Net Expenditures and Quarterly Billings (financial statements) of the
City of Palo Alto Regional Water Quality Control Plant (Plant), an enterprise operation of the City of
Palo Alto, California (City), for the year ended June 30, 2024, and the related notes to the financial
statements, which collectively comprise the Plant’s financial statements as listed in the table of contents.
In our opinion, the accompanying financial statements referred to above present fairly, in all material
respects, the net expenditures and quarterly billings of the Plant for the year ended June 30, 2024, in
accordance with the financial reporting provisions of the Basic Agreement between the City of Palo Alto,
the City of Mountain View and the City of Los Altos for the Acquisition, Construction and Maintenance
of a Joint Sewer System, dated October 10, 1968, as amended by addenda dated December 5, 1977,
January 14, 1980, April 9, 1985, May 30, 1991, July 31, 1992, March 16, 1998, April 15, 2009, October
17, 2016, March 4, 2019, and May 17, 2021 (Basic Agreement), as described in Note 2 to the financial
statements.
Basis for Opinion
We conducted our audit in accordance with auditing standards generally accepted in the United States of
America (GAAS). Our responsibilities under those standards are further described in the Auditor’s
Responsibilities for the Audit of the Financial Statements section of our report. We are required to be
independent of the City and the Plant, and to meet our ethical responsibilities, in accordance with the
relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit opinion.
Emphasis of a Matter
As discussed in Note 2 to the financial statements, the financial statements are prepared in accordance
with the financial reporting provisions of the Basic Agreement, which is a basis of accounting other than
accounting principles generally accepted in the United States of America and are not intended to be a
complete presentation of the Plant’s financial position or results of operations. Our opinion is not
modified with respect to this matter.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in
accordance with the financial reporting provisions of the Basic Agreement, and for the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation of
financial statements that are free from material misstatement, whether due to fraud or error.
Item 1. A
Attachment D - Regional
Water Quality Control
Plant Auditor's Report
Item 1. A: Staff Report Pg. 43 Packet Pg. 47 of 178
2
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that
includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and
therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a
material misstatement when it exists. The risk of not detecting a material misstatement resulting from
fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control. Misstatements are considered material
if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment
made by a reasonable user based on the financial statements.
In performing an audit in accordance with GAAS, we:
• Exercise professional judgment and maintain professional skepticism throughout the audit.
• Identify and assess the risks of material misstatement of the financial statements, whether due to
fraud or error, and design and perform audit procedures responsive to those risks. Such
procedures include examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements.
• Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Plant’s internal control. Accordingly, no such opinion is
expressed.
• Evaluate the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluate the overall presentation of the
financial statements.
We are required to communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit, significant audit findings, and certain internal control-related
matters that we identified during the audit.
Restriction on Use
This report is intended solely for the information and use of the governing bodies and management of the
City of Palo Alto, the City of Mountain View, the City of Los Altos, the East Palo Alto Sanitary District,
Stanford University, and the Town of Los Altos Hills, and is not intended to be and should not be used by
anyone other than these specified parties.
Walnut Creek, California
November 8, 2024
Item 1. A
Attachment D - Regional
Water Quality Control
Plant Auditor's Report
Item 1. A: Staff Report Pg. 44 Packet Pg. 48 of 178
CITY OF PALO ALTO
REGIONAL WATER QUALITY CONTROL PLANT
Statement of Net Expenditures
City of City of City of
Total Mountain View Los Altos Palo Alto
Direct Expenditures:
Source control program 1,312,595$ 515,981$ 133,097$ 663,517$
Public outreach 114,429 44,982 11,603 57,844
Permitting and enforcement 1,398,273 400,154 22,124 975,995
Operations and maintenance 19,246,690 7,565,875 1,951,615 9,729,200
System improvement CIP (Note 3) 7,156,302 2,941,799 752,612 3,461,891
Total Direct Expenditures 29,228,289 11,468,791 2,871,051 14,888,447
Indirect Administrative Expenditures (Note 4):
Source control program 1,133,728 445,668 114,960 573,100
Public outreach 2,024 796 205 1,023
Permitting and enforcement 412,782 369,373 20,422 22,987
Operations and maintenance 4,837,366 1,901,568 490,509 2,445,289
Total Indirect Administrative Expenditures 6,385,900 2,717,405 626,096 3,042,399
Debt Service Expenditures (Note 5):
Refunding 1990 Series A Bonds 284,111 144,896 22,161 117,054
1999 Wastewater Treatment New Project 541,530 205,186 51,283 285,061
2009 State Water Resource Loan 560,629 212,422 53,092 295,115
2017 State Water Resource Loan 1,090,832 413,316 103,302 574,214
Total Debt Service Expenditures 2,477,102 975,820 229,838 1,271,444
Operational Transfer
Operational transfer to Technology Fund 16,400 6,447 1,663 8,290
Total Expenditures 38,107,691 15,168,463 3,728,648 19,210,580
Deduct Joint Systems Revenues (Note 6) (813,615) (286,939) (174,125) (352,551)
Net Expenditures 37,294,076$ 14,881,524$ 3,554,523$ 18,858,029$
For the Year Ended June 30, 2024
See accompanying notes to the financial statements.
3
Item 1. A
Attachment D - Regional
Water Quality Control
Plant Auditor's Report
Item 1. A: Staff Report Pg. 45 Packet Pg. 49 of 178
CITY OF PALO ALTO
REGIONAL WATER QUALITY CONTROL PLANT
Statement of Quarterly Billings
City of City of
Mountain View Los Altos
Billings by Quarter, Beginning:
July 1, 2023 3,189,611$ 672,526$
October 1, 2024 3,515,586 952,111
January 1, 2024 3,296,421 897,681
April 1, 2024 6,395,998 1,635,328
Total billings 16,397,616 4,157,646
Less: Advance billings (1,844,658) (439,966)
Total net billings 14,552,958 3,717,680
Net expenditures 14,881,524 3,554,523
Excess (deficit) of total billings over (under) net expenditures (328,566)$ 163,157$
For the Year Ended June 30, 2024
See accompanying notes to the financial statements.
4
Item 1. A
Attachment D - Regional
Water Quality Control
Plant Auditor's Report
Item 1. A: Staff Report Pg. 46 Packet Pg. 50 of 178
CITY OF PALO ALTO
REGIONAL WATER QUALITY CONTROL PLANT
Notes to the Financial Statements
For the Year Ended June 30, 2024
5
NOTE 1 – THE REPORTING ENTITY
In 1968, the Cities of Mountain View and Los Altos retired their treatment plants and became partners
with the City of Palo Alto (City) to construct a regional treatment plant. Construction started in 1970 and
was completed in 1972 at a cost of $11 million. Since 1972, the Regional Water Quality Control Plant
(the Plant) has been treating wastewater, which has significantly reduced the number of pollutants
entering the San Francisco Bay.
Initially, the Cities of Mountain View and Los Altos were the only partner agencies participating jointly
in the cost of operating and maintaining the Plant. The City’s total usage of the treatment plant was not
fully utilized and as a result, the City entered into separate subcontracts distributing some of its allocated
use to other partner agencies. Currently, the City, the City of Los Altos, the City of Mountain View, and
the subcontracting agencies: the East Palo Alto Sanitary District, Stanford University, and the Town of
Los Altos Hills (Partner Agencies) share in the proportional operating and maintenance costs of the Plant.
These partners regularly work with the City to foster positive relationship and ensure the Plant operates
successfully.
The Partner Agencies share the original costs of acquisition and construction of the Plant in the same
proportions as the allocation of capacity rights to them. The City of Palo Alto (the City) is the owner and
administrator of the Plant. The Cities of Mountain View and Los Altos are entitled to use a portion of the
capacity of the Plant, as set forth in the Basic Agreement between the City of Palo Alto, the City of
Mountain View and the City of Los Altos for the Acquisition, Construction and Maintenance of a Joint
Sewer System dated October 10, 1968, as amended by addenda dated December 5, 1977, January 14,
1980, April 9, 1985, May 30, 1991, July 31, 1992, March 16, 1998, April 15, 2009, October 17, 2016,
March 4, 2019, and May 17, 2021 (collectively, the “Basic Agreement”). The Basic Agreement will
terminate on December 31, 2060, unless a written notice of withdrawal is tendered ten years preceding the
date of withdrawal.
On May 17, 2021, the Partner Agencies approved the construction of a new outfall and related
improvements to existing discharge infrastructure and the rehabilitation of the primary sedimentation
tanks including electrical upgrades. Each Partner Agency agreed to pay its share of the project costs, in
proportion to the capacity it owns in the Joint Sewer System. The Partner Agencies also authorized the
City to receive State Revolving Fund Loan from the State Water Resources Control Board (SWRCB) or
pursue other project financing to fund the costs of the projects.
In November 2022, the Partner Agencies approved the construction of secondary treatment upgrades
(STU). The Partner Agencies also authorized the City to receive State Revolving Fund Loan from the
SWRCB to fund the costs of the project. In December 2023, the Partner Agencies approved the
construction of the joint intercepting sewer rehabilitation (Phase 1) project. Each Partner Agency agreed
to pay fixed cost shares of the project costs. These large capital improvement programs are being
implemented to replace aging infrastructure and upgrade treatment systems to comply with the new
regulations.
Item 1. A
Attachment D - Regional
Water Quality Control
Plant Auditor's Report
Item 1. A: Staff Report Pg. 47 Packet Pg. 51 of 178
CITY OF PALO ALTO
REGIONAL WATER QUALITY CONTROL PLANT
Notes to the Financial Statements
For the Year Ended June 30, 2024
6
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Plant is an enterprise that is operated by the City and its operations are accounted for as an enterprise
fund in the City’s basic financial statements. The financial statements are prepared in accordance with the
financial reporting provisions of the Basic Agreement, which is a basis of accounting other than
accounting principles generally accepted in the United States of America. The accompanying financial
statements are intended to present the Plant’s net expenditures and quarterly billings by the Plant to the
Cities of Mountain View and Los Altos pursuant to the agreement of the Partner Agencies as described
above and are not intended to be a complete presentation of the Plant’s financial position or results of
operations. Additionally, the capital cost and the outstanding debt of the Plant are not presented in these
statements but are presented in the basic financial statements of the City.
Plant expenditures, joint system revenues, debt service and industrial waste compliance expenditures are
shared by the Members based on agreed upon allocation percentages. The expenditures, including indirect
administrative expenditures (see Note 4), are allocated to each of the Members based primarily on their
respective percentages of the annual sewage flow and treatment needed for suspended solids, chemical
oxygen demand and ammonia. Revenues from services, fines and penalties are allocated to each of the
Members in the same proportions as those of expenditures. Debt service payments are allocated based on
percentages established at the time of bond issuance. Industrial waste compliance (public outreach and
permitting and enforcement) charges are allocated to Members primarily based on upon the number of
industries and efforts required to maintain compliance with sewage use ordinances and other regulations
from Environmental Protection Agency.
The percentages used for the year ended June 30, 2024 to allocate expenditures and revenues were as
follows:
City of City of City of
Mountain View Los Altos Palo Alto
Public outreach, source control program,
operations and maintenance, system improvement 39.31% 10.14% 50.55%
CIP and joint system revenues
Joint intercepting sewer rehabilitation costs 62.50% 15.00% 22.50%
Permitting and enforcement 42.49% 2.35% 55.16%
Debt services expenditures:
Refunding 1990 Series A Bonds 51.00% 7.80% 41.20%
1999 Wastewater Treatment New Project 37.89% 9.47% 52.64%
2009 State Water Resources Loan 37.89% 9.47% 52.64%
2017 State Water Resources Loan 37.89% 9.47% 52.64%
Item 1. A
Attachment D - Regional
Water Quality Control
Plant Auditor's Report
Item 1. A: Staff Report Pg. 48 Packet Pg. 52 of 178
CITY OF PALO ALTO
REGIONAL WATER QUALITY CONTROL PLANT
Notes to the Financial Statements
For the Year Ended June 30, 2024
7
The City is allocated 50.55% of total usage of the treatment plant. The City does not fully utilize its
percentage allocation. Therefore, the City has entered into separate contracts to allocate portions of its
excess to other entities. Fiscal year 2024 allocations are as follows:
East Palo Alto Sanitary District 5.56%
Stanford University 6.35%
Town of Los Altos Hills 1.98%
Remaining City percentages 36.66%
Total 50.55%
The agreement the City has with the above entities has no effect on the partnership agreement between
the Members.
Billings are made in advance and are based on projects for the plant and estimated sewage flow. Excess
(deficit) billings over (under) net expenditures are offset against the payments during the second quarter
of the subsequent fiscal year.
NOTE 3 – SYSTEM IMPROVEMENT CAPITAL IMPROVEMENTS PROGRAM (CIP)
The basic agreement between the Members, dated October 10, 1968, provides that the administrator of the
Plant is responsible for capital additions. These capital additions should be for the replacement of obsolete
or worn-out units, or minor capital additions to improve the efficiency of the Plant’s operations. Per the
addendum to the agreement dated March 16, 1998, the Members agreed that capital additions should not
exceed $1.9 million in 1998-99 (base year). For future years, the base year amount will be adjusted
annually based on increases to the Consumer Price Index-Urban Wage Earners and Clerical Workers for
the San Francisco-Oakland-San Jose area. Unused authorized amount will be carried forward to future
years. For fiscal year 2024, the adjusted pay-as-you-go capital additions (minor capital) authorized is
$3,903,738. Actual minor capital additions amounted to $6,129,596 for fiscal year 2024. As of June
30, 2024, the commitments for minor capital additions, including unspent capital additions, is
$15,935,953, of which encumbrances in the amount of $6,077,703 have been carried forward to fiscal
year 2025.
NOTE 4 – INDIRECT ADMINISTRATIVE EXPENDITURES
Indirect expenditures include those costs allocated from the City’s General Fund administrative services,
which supports all operating departments of the City. Other indirect expenses are administrative charges
from the City’s Internal Services Funds. These allocations are applied on a uniform basis throughout the
City. The allocations are applied in accordance with the subsequent letter of agreement dated
April 9, 1985.
Item 1. A
Attachment D - Regional
Water Quality Control
Plant Auditor's Report
Item 1. A: Staff Report Pg. 49 Packet Pg. 53 of 178
CITY OF PALO ALTO
REGIONAL WATER QUALITY CONTROL PLANT
Notes to the Financial Statements
For the Year Ended June 30, 2024
8
NOTE 5 – DEBT SERVICE EXPENDITURES
Debt service expenditures include principal repayments, interest expense and amortization of bond
discount reduced by any interest income earned from investments with the fiscal agent, related to the
1999 Series A Bonds (split for the portions used for the “New Project” and refunding of the 1990 Series
A Bonds) and the 2009 and 2017 State Water Resources loans.
In June 1999, the City, City of Mountain View, City of Los Altos, Town of Los Altos Hills, East Palo
Alto Sanitary District, and Stanford University agreed to issue bonds (1999 Series A Bonds) to finance
the rehabilitation of the Wastewater Treatment System’s two sludge incinerators and to refund the 1990
Series A Bonds. The 1999 Series A Bonds matured on June 1, 2024.
In October 2009, the City and the SWRCB executed an agreement for the 2009 State Water Resources
Loan to finance the Ultraviolet Disinfection Project.
In June 2017, the City and the SWRCB executed an agreement for a State Water Resources Loan for an
award up to $30 million, 30 years at 1.8% to finance the project replacing the sewage sludge “bio-solids”
incinerators at the Plant. On September 13, 2017, the City and the SWRCB amended the original
agreement of the 2017 SRF loan to lower the total amount to $29.7 million and the due date of the last
debt service payment be May 31, 2049. Under the terms of the amended agreement, a portion of the loan
amount, $4.0 million, is federally funded and the obligation balance was adjusted.
The new facility will dewater the bio-solids and allow it to be loaded onto trucks and taken offsite for
further treatment until further treatment units can be built onsite. The Plant provides treatment and
disposal for wastewater for the City, City of Mountain View, City of Los Altos, Town of Los Altos Hills,
East Palo Alto Sanitary District, and Stanford University. Though the City is the recipient of the loan, the
City’s agreement with the partner agencies oblige them to pay their proportionate share of the principal
and interest of this loan. The City’s share of the loan payment is 38.2% with the partner agencies paying
61.8%.
In July 2021, the SWRCB and the City executed a direct loan agreement for an award up to $17.5 million
to finance the rehabilitate and upgrade the Plant’s primary sedimentation tanks and ancillary systems.
During the year ended June 30, 2023, the approved loan amount was increased to $19.4 million. Per the
SWRCB agreement, the first debt service payment of this loan is estimated to be due on July 31, 2025.
At June 30, 2024, the outstanding 2021 State water resources loan was $14.0 million.
In May 2022, the SWRCB and the City executed a direct loan agreement for an award up to $168.7
million to finance the Secondary Treatment Upgrades project to produce treated effluent with reduced
total nitrogen content, increase treatment capacity, and rehabilitate aging infrastructure. In August 2024,
the approved loan amount was increased to $192.8 million. Per the SWRCB agreement, the first debt
service payment of this loan is estimated to be due on July 28, 2029. At June 30, 2024, the outstanding
2022 State water resources loan was $60.4 million.
Item 1. A
Attachment D - Regional
Water Quality Control
Plant Auditor's Report
Item 1. A: Staff Report Pg. 50 Packet Pg. 54 of 178
CITY OF PALO ALTO
REGIONAL WATER QUALITY CONTROL PLANT
Notes to the Financial Statements
For the Year Ended June 30, 2024
9
NOTE 5 – DEBT SERVICE EXPENDITURES (Continued)
The principal amount of the debt outstanding as of June 30, 2024, excluding 2021 and 2022 State water
resources loans, are allocated as follows:
2009 2017
State Water State Water
Resources Loan Resources Loan Total
City of Palo Alto 1,341,375$ 8,328,804$ 9,670,179$
City of Mountain View 1,331,883 8,269,874 9,601,757
City of Los Altos 332,883 2,066,923 2,399,806
East Palo Alto Sanitary District 268,556 1,667,507 1,936,063
Stanford University 184,896 1,148,048 1,332,944
Town of Los Altos Hills 55,539 344,851 400,390
Total 3,515,132$ 21,826,007$ 25,341,139$
NOTE 6 – JOINT SYSTEM REVENUES
The Plant’s joint system revenues for the year ended June 30, 2024 total $813,615 which consisted of the
following:
Septic hauling services 307,020$
Valley Water 229,865
Other miscellaneous revenues 182,506
Salt water marsh services 7,500
Utility service to other utility funds 83,983
Others 2,741
813,615$
NOTE 7 – RELATED PARTY TRANSACTIONS
During fiscal year 2024, the Plant paid the City $2,785,779 for utility costs. Such costs are included in the
Statement of Net Expenditures as source control program, permitting and enforcement, and operations
and maintenance expenditures. Vehicle replacement charges of $306,112 were paid to the City’s Vehicle
Replacement and Maintenance Internal Services Fund, which is included in the Statement of Net
Expenditures as operations and maintenance expenditures.
Item 1. A
Attachment D - Regional
Water Quality Control
Plant Auditor's Report
Item 1. A: Staff Report Pg. 51 Packet Pg. 55 of 178
10
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Item 1. A
Attachment D - Regional
Water Quality Control
Plant Auditor's Report
Item 1. A: Staff Report Pg. 52 Packet Pg. 56 of 178
CITY OF PALO ALTO, CALIFORNIA
Independent Accountant’s Report on
Applying Agreed–Upon Procedures Related to
the Article XIII-B Appropriations Limit
For the Year Ended June 30, 2024
Item 1. A
Attachment E - GANN
Limit Agreed Upon
Procedures Report
Item 1. A: Staff Report Pg. 53 Packet Pg. 57 of 178
Item 1. A
Attachment E - GANN
Limit Agreed Upon
Procedures Report
Item 1. A: Staff Report Pg. 54 Packet Pg. 58 of 178
www.mgocpa.com Macias Gini & O’Connell LLP
2121 N. California Boulevard, Suite 750
Walnut Creek, CA 94596
1
Independent Accountant’s Report on
Applying Agreed-Upon Procedures Related to
the Article XIII-B Appropriations Limit
Honorable Mayor and the Members
of the City Council, of
City of Palo Alto, California
We have performed the procedures enumerated below to the accompanying Appropriations Limit
Worksheet of the City of Palo Alto, California (City) for the year ended June 30, 2024. The City’s
management is responsible for the appropriations limit calculation for the year ended June 30, 2024.
The City has agreed to and acknowledged that the procedures performed are appropriate to meet the
intended purpose of assisting the City in evaluating the appropriations limit calculation in accordance with
the requirements of Section 1.5 of Article XIIB of the California Constitution. The procedures are
recommended by the California Committee on Municipal Accounting (as presented in the CCMA White
Paper titled Agreed-upon Procedures Applied to the Appropriations Limit Prescribed by Article XIII-B of
the California Constitution). This report may not be suitable for any other purpose. The procedures
performed may not address all the items of interest to a user of this report and may not meet the needs of
all users of this report and, as such, users are responsible for determining whether the procedures performed
are appropriate for their purposes.
The procedures and associated findings are as follows:
1. We obtained the completed worksheets setting forth the calculations necessary to establish the
City’s appropriations limit and compared the limit and annual adjustment factors included in those
worksheets to the limit and annual adjustment factors that were adopted by resolution of the City
Council. We also compared the population and inflation options included in the aforementioned
worksheets to those that were selected by a recorded vote of the City Council.
Finding: No exceptions were noted as a result of our procedures. The City applied an incorrect
population adjustment factor for the calculation of the prior year appropriations limit. If the City
applied the correct population adjustment factor, the prior year appropriations limit should be
$203,450,000, which is $150,000 higher than the prior year adopted appropriations limit. If the
City applied the correct prior year appropriation limit for the calculation of the current year
appropriation limit, the total adjustment amount would remain $8,500,000, which is the amount
used for the calculation of the current year adopted appropriation limit.
2. For the accompanying Appropriations Limit Worksheet, we added the prior year appropriations
limit to the total adjustments and compared the resulting amount to the current year appropriations
limit.
Finding: No exceptions were noted as a result of our procedures. The City applied an incorrect
population adjustment factor for the calculation of the prior year appropriations limit. If the City
applied the correct prior year appropriations limit of $203,450,000, the current year appropriation
limit should be $211,950,000.
Item 1. A
Attachment E - GANN
Limit Agreed Upon
Procedures Report
Item 1. A: Staff Report Pg. 55 Packet Pg. 59 of 178
2
3. We agreed the current year information presented in the accompanying Appropriations Limit
Worksheet to the appropriate supporting worksheets described in No. 1 above.
Finding: No exceptions were noted as a result of our procedures. See findings of procedures 1 and
2 above.
4. We agreed the prior year appropriations limit presented in the accompanying Appropriations Limit
Worksheet to the prior year appropriations limit adopted by the City Council.
Finding: No exceptions were noted as a result of our procedures. See finding of procedures 1.
We were engaged by the City to perform this agreed-upon procedures engagement and conducted our
engagement in accordance with attestation standards established by the American Institute of Certified
Public Accountants. We were not engaged to and did not conduct an examination or review, the objective
of which would be the expression of an opinion or conclusion, respectively, on the appropriations limit
calculation for the year ended June 30, 2024. Accordingly, we do not express such an opinion or conclusion.
Had we performed additional procedures, other matters might have come to our attention that would have
been reported to you. No procedures have been performed with respect to the determination of the
appropriations limit for the base year, as defined by Article XIII-B of the California Constitution.
We are required to be independent of the City and to meet our other ethical responsibilities, in accordance
with the relevant ethical requirements related to our agreed-upon procedures engagement.
This report is intended solely for the information and use of City Council and the City’s management, and
is not intended to be and should not be used by anyone other than these specified parties.
Walnut Creek, California
November 8, 2024
Item 1. A
Attachment E - GANN
Limit Agreed Upon
Procedures Report
Item 1. A: Staff Report Pg. 56 Packet Pg. 60 of 178
CITY OF PALO ALTO, CALIFORNIA
Appropriations Limit Worksheet
For the Year Ended June 30, 2024
3
2022-2023 appropriation limit, as adopted 203,300,000$
Adjustment factors:
Population (1)0.997500
Inflation (2)1.0444
Total adjustment factors (rounded) (3)1.0418
Total adjustments (rounded) 8,500,000
2023-2024 appropriation limit, as adopted 211,800,000$
(1) The population factor may be based on the change in population of 1) the City or 2) the County of Santa
Clara, as provided by the State of California’s Department of Finance. The population factor adopted
by the City for the current year appropriation limit represents the change in population of the County
of Santa Clara.
(2) The inflation factor may be based on 1) the change in per capita personal income for the State of
California, as provided by the State of California’s Department of Finance; or 2) the change in the
assessed valuation due to new non-residential construction within the City. The inflation factor adopted
by the City for the current year appropriation limit represents the change in per capita personal income.
(3) The total adjustment factor is calculated by multiplying the population factor by the inflation factor.
Item 1. A
Attachment E - GANN
Limit Agreed Upon
Procedures Report
Item 1. A: Staff Report Pg. 57 Packet Pg. 61 of 178
CITY OF PALO ALTO, CALIFORNIA
Pedestrian/Bicycle Facilities Grant
Metropolitan Transportation Commission
Transportation Development Act Funds, Article III
Independent Auditor’s Reports,
Financial Statements and
Supplementary Information
For the Year Ended June 30, 2024
Item 1. A
Attachment F -
Transportation
Development Act
Auditor's Report
Item 1. A: Staff Report Pg. 58 Packet Pg. 62 of 178
CITY OF PALO ALTO, CALIFORNIA
Pedestrian/Bicycle Facilities Grant
Metropolitan Transportation Commission
Transportation Development Act Funds, Article III
For the Year Ended June 30, 2024
Table of Contents
Page
Independent Auditor’s Report ................................................................................................................... 1
Financial Statements
Balance Sheet ................................................................................................................................... 3
Statement of Revenues, Expenditures, and Changes in Fund Balance ........................................... 4
Notes to the Financial Statements .................................................................................................... 5
Internal Control and Compliance Section
Independent Auditor’s Report on Internal Control over Financial
Reporting and on Compliance and Other Matters Based on an
Audit of Financial Statements Performed in Accordance with
Government Auditing Standards and the Transportation Development Act ............................................... 7
Item 1. A
Attachment F -
Transportation
Development Act
Auditor's Report
Item 1. A: Staff Report Pg. 59 Packet Pg. 63 of 178
www.mgocpa.com Macias Gini & O’Connell LLP 2121 N California Blvd. Suite 750Walnut Creek, CA 94596
1
Independent Auditor’s Report
Honorable Mayor and Members
of the City Council
City of Palo Alto, California Report on the Financial Statements
Opinion
We have audited the financial statements of the Pedestrian/Bicycle Facilities Grant (Grant) made to the
City of Palo Alto, California (City), by the Metropolitan Transportation Commission, under the
Transportation Development Act Funds, Article III, as of and for the year ended June 30, 2024, and the
related notes to the financial statements, as listed in the table of contents.
In our opinion, the accompanying financial statements referred to above present fairly, in all material
respects, the financial position of the Grant as of June 30, 2024, and the changes in financial position for
the year then ended in accordance with accounting principles generally accepted in the United States of
America.
Basis for Opinion
We conducted our audit in accordance with auditing standards generally accepted in the United States of
America (GAAS) and the standards applicable to financial audits contained in Government Auditing
Standards issued by the Comptroller General of the United States (Government Auditing Standards). Our
responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit
of the Financial Statements section of our report. We are required to be independent of the City and to
meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our
audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our audit opinion.
Emphasis of Matter
As discussed in Note 2(a) to the financial statements, the financial statements present only the Grant and
do not purport to, and do not, present fairly the financial position of the City as of June 30, 2024, and the
changes in its financial position for the year then ended in accordance with accounting principles
generally accepted in the United States of America. Our opinion is not modified with respect to this
matter.
Responsibilities of Management for the Financial Statements
The City’s management is responsible for the preparation and fair presentation of the financial statements
in accordance with accounting principles generally accepted in the United States of America, and for the
design, implementation, and maintenance of internal control relevant to the preparation and fair
presentation of financial statements that are free from material misstatement, whether due to fraud or
error.
Item 1. A
Attachment F -
Transportation
Development Act
Auditor's Report
Item 1. A: Staff Report Pg. 60 Packet Pg. 64 of 178
2
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that
includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and
therefore is not a guarantee that an audit conducted in accordance with GAAS and Government Auditing
Standards will always detect a material misstatement when it exists. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
Misstatements are considered material if there is a substantial likelihood that, individually or in the
aggregate, they would influence the judgment made by a reasonable user based on the financial
statements.
In performing an audit in accordance with GAAS and Government Auditing Standards, we
• Exercise professional judgment and maintain professional skepticism throughout the audit.
• Identify and assess the risks of material misstatement of the financial statements, whether due to
fraud or error, and design and perform audit procedures responsive to those risks. Such
procedures include examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements.
• Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the City’s internal control. Accordingly, no such opinion is
expressed.
• Evaluate the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluate the overall presentation of the
financial statements.
We are required to communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit, significant audit findings, and certain internal control–related
matters that we identified during the audit.
Other Reporting Required by Government Auditing Standards
and the Transportation Development Act
In accordance with Government Auditing Standards and the Transportation Development Act, we have
also issued our report dated November 8, 2024, on our consideration of the City’s internal control over
the Grant’s financial reporting and on our tests of its compliance with certain provisions of laws,
regulations, contracts, and grant agreements and other matters. The purpose of that report is solely to
describe the scope of our testing of internal control over financial reporting and compliance and the
results of that testing, and not to provide an opinion on the effectiveness of the City’s internal control over
the Grant’s financial reporting or on compliance. That report is an integral part of an audit performed in
accordance with Government Auditing Standards and the Transportation Development Act in considering
the City’s internal control over the Grant’s financial reporting and compliance.
Walnut Creek, California
November 8, 2024
Item 1. A
Attachment F -
Transportation
Development Act
Auditor's Report
Item 1. A: Staff Report Pg. 61 Packet Pg. 65 of 178
CITY OF PALO ALTO, CALIFORNIA
Pedestrian/Bicycle Facilities Grants
Metropolitan Transportation Commission
Transportation Development Act Funds, Article III
Balance Sheet
June 30, 2024
Assets
Due from the Metropolitan Transportation Commission 92,583$
Liabilities and Fund Balance
Liabilities
Due to the City of Palo Alto 92,583$
Fund balance
Restricted -
Total liabilities and fund balance 92,583$
See accompanying notes to the financial statements.
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Item 1. A
Attachment F -
Transportation
Development Act
Auditor's Report
Item 1. A: Staff Report Pg. 62 Packet Pg. 66 of 178
CITY OF PALO ALTO, CALIFORNIA
Pedestrian/Bicycle Facilities Grants
Metropolitan Transportation Commission
Transportation Development Act Funds, Article III
Statement of Revenues, Expenditures, and Changes in Fund Balance
For the Year Ended June 30, 2024
Revenues
TDA Article III Grant 176,715$
Expenditures
Capital outlay 176,715
Change in fund balance -
Fund balance - beginning of year -
Fund balance - end of year -$
See accompanying notes to the financial statements.
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Item 1. A
Attachment F -
Transportation
Development Act
Auditor's Report
Item 1. A: Staff Report Pg. 63 Packet Pg. 67 of 178
CITY OF PALO ALTO, CALIFORNIA
Pedestrian/Bicycle Facilities Grant
Metropolitan Transportation Commission
Transportation Development Act Funds, Article III
Notes to the Financial Statements
For the Year Ended June 30, 2024
5
NOTE 1 – DESCRIPTION OF REPORTING ENTITY
The accompanying financial statements are prepared from the accounts and financial transactions
of the City of Palo Alto, California (City) for Pedestrian/Bicycle Facilities Grant (Grant) projects
funded under the Transportation Development Act of 1971 (TDA) Article III of the State of
California, which include the construction of pedestrian and bicycle paths.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The Grant has been accounted for in the Capital Project Fund, which is a major
governmental fund type and is included in the City’s basic financial statements. The
Capital Project Fund accounts for resources used for acquisition and construction of
capital facilities by the City, with the exception of those assets financed by proprietary
funds.
The financial statements present only the Grant and do not purport to, and do not, present
fairly the financial position of the City as of June 30, 2024, and the changes in its
financial position for the year then ended in accordance with accounting principles
generally accepted in the United States of America.
(b) Basis of Accounting
The accompanying financial statements have been prepared on the modified accrual basis
of accounting. Under the modified accrual basis of accounting, expenditures are recorded
when the related governmental fund liabilities are incurred. Grant revenues, which are
received as reimbursement for specific purposes or projects, are recognized when they
become measurable and available. The City considers revenues susceptible to accrual to
be available if the revenues are collected within ninety days after year-end, except for
property taxes, which are available if collected within sixty days after year-end.
(c) Fund Balance
The City reports fund balance for governmental funds in specific classifications
(nonspendable, restricted, committed, assigned and unassigned) based on the extent to
which the City is bound to the constraints on the specific purposes for which funds can be
spent. The Grant only receives restricted revenues. No fund balance was reported as of
June 30, 2024.
(d) Due to the City of Palo Alto
Cash has been advanced to the Grant projects for expenditures paid by the City’s Capital
Projects Fund for the benefit of the TDA Article III projects. The Grant projects are
obligated to immediately repay these advances upon receipt of reimbursement from the
Metropolitan Transportation Commission.
Item 1. A
Attachment F -
Transportation
Development Act
Auditor's Report
Item 1. A: Staff Report Pg. 64 Packet Pg. 68 of 178
CITY OF PALO ALTO, CALIFORNIA
Pedestrian/Bicycle Facilities Grant
Metropolitan Transportation Commission
Transportation Development Act Funds, Article III
Notes to the Financial Statements
For the Year Ended June 30, 2024
6
NOTE 3 – INTEREST EARNED ON ALLOCATED FUNDS
The City incurred and paid expenditures prior to the receipt of the grant reimbursements and as a
result, no interest was earned on Grant funds.
NOTE 4 – PROJECTS
The major projects funded in part by the Grant during the fiscal year ended June 30, 2024 were as
follows:
* During the year ended June 30, 2024, the remaining allocation amount of $250,720 was rescinded.
Item 1. A
Attachment F -
Transportation
Development Act
Auditor's Report
Item 1. A: Staff Report Pg. 65 Packet Pg. 69 of 178
www.mgocpa.com Macias Gini & O’Connell LLP 2121 N California Blvd. Suite 750Walnut Creek, CA 94596
7
Independent Auditor’s Report on Internal Control Over
Financial Reporting and on Compliance and Other Matters
Based on an Audit of Financial Statements Performed in Accordance with
Governmental Auditing Standards and the Transportation Development Act
Honorable Mayor and Members
of the City Council
City of Palo Alto, California
We have audited, in accordance with the auditing standards generally accepted in the United States of
America and the standards applicable to financial audits contained in Government Auditing Standards,
issued by the Comptroller General of the United States (Government Auditing Standards), the financial
statements of the Pedestrian/Bicycle Facilities Grant (Grant) made to the City of Palo Alto, California
(City), by the Metropolitan Transportation Commission, Transportation Development Act Funds, Article
III, as of and for the year ended June 30, 2024, and the related notes to the financial statements, and have
issued our report thereon dated November 8, 2024.
Report on Internal Control Over Financial Reporting
In planning and performing our audit of the financial statements, we considered the City’s internal control
over the Grant’s financial reporting (internal control) as a basis for designing audit procedures that are
appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but
not for the purpose of expressing an opinion on the effectiveness of the City’s internal control.
Accordingly, we do not express an opinion on the effectiveness of the City’s internal control.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to prevent, or
detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination
of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement
of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. A
significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less
severe than a material weakness, yet important enough to merit attention by those charged with
governance.
Our consideration of internal control was for the limited purpose described in the first paragraph of this
section and was not designed to identify all deficiencies in internal control that might be material
weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any
deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses
or significant deficiencies may exist that were not identified.
Report on Compliance and Other Matters
As part of obtaining reasonable assurance about whether the Grant’s financial statements are free from
material misstatement, we performed tests of its compliance with certain provisions of laws, regulations,
contracts, and grant agreements, including the applicable statutes, rules and regulations of the
Transportation Development Act, including Section 6666 of Title 21, of the California Code of
Regulations, and the allocation instructions and resolutions of the Metropolitan Transportation
Commission, noncompliance with which could have a direct and material effect on the financial
Item 1. A
Attachment F -
Transportation
Development Act
Auditor's Report
Item 1. A: Staff Report Pg. 66 Packet Pg. 70 of 178
8
statements. However, providing an opinion on compliance with those provisions was not an objective of
our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no
instances of noncompliance or other matters that are required to be reported under Government Auditing
Standards or the Transportation Development Act.
Purpose of this Report
The purpose of this report is solely to describe the scope of our testing of internal control and compliance
and the results of that testing, and not to provide an opinion on the effectiveness of the entity’s internal
control or on compliance. This report is an integral part of an audit performed in accordance with
Government Auditing Standards in considering the entity’s internal control and compliance. Accordingly,
this communication is not suitable for any other purpose.
Walnut Creek, California
November 8, 2024
Item 1. A
Attachment F -
Transportation
Development Act
Auditor's Report
Item 1. A: Staff Report Pg. 67 Packet Pg. 71 of 178
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Finance Committee
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Administrative Services
Meeting Date: December 3, 2024
Report #:2404-2912
TITLE
Approval of the FY2024 Annual Comprehensive Financial Report (ACFR), and Year-End Budget
Adjustments in Various Funds.
RECOMMENDATION
Staff recommends that the Finance Committee forward to the City Council for its approval:
1. The City’s Fiscal Year (FY) 2024 Annual Comprehensive Financial Report (ACFR) and
reports collectively referred to as the Single Audit1; and
2. Amend the FY 2024 Budget Appropriation for various funds as identified in the attached
Recommended Amendments to the City Manager’s FY 2024 Budget (Operating Budget:
Attachment B – Exhibit 1; Capital Budget: Attachment B – Exhibit 2).
EXECUTIVE SUMMARY
The City’s fiscal year ended on June 30, 2024, financial records closed, and financial reports
summarizing the fiscal year were prepared. The reports, along with the City’s financial data,
were audited by Macias Gini & O’Connell LLP (MGO), Certified Public Accountants, a firm hired
by the City Auditor. MGO issued an unmodified (clean) audit opinion on the financial position of
the City’s activities and, together with the City’s financial statements and other information,
comprises the City’s Annual Comprehensive Financial Report (ACFR). The ACFR also includes
reports collectively referred to as the Single Audit, which is mandatory for Federal grant
awards. These reports include the:
1. Independent Auditor’s Report on Internal Control Over Financial Reporting and on
Compliance and Other Matters Based on an Audit of Financial Statements in Accordance
with Government Auditing Standards
1 https://www.cityofpaloalto.org/files/assets/public/v/1/administrative-services/financial-reporting/annual-
comprehensive-financial-reports-acfr/current-2011-cafrs/city-of-palo-alto-acfr-single-audit-fy2024-final-
unsercured.pdf
Item 1. B
Item 1B Staff Report
Item 1. B: Staff Report Pg. 1 Packet Pg. 72 of 178
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2. Independent Auditor’s Report on Compliance for Each Major Federal Program; Report
on Internal Control over Compliance; and Report on the Schedule of Federal Awards
Required by Uniform Guidance.
MGO reports the following within the Single Audit Report:
Unmodified opinions (clean) as it pertains to both the Financial Statements and to the
Federal Awards
No material weaknesses or significant deficiencies in internal controls over financial
reporting or over major programs
No fundings or questioned costs
The full ACFR report can be found at the City’s website1.
Attachment A provides a summary of General Fund revenues by source and expenditures by
function. This is a comparison of budget versus budgetary actual results for FY 2024.
Attachment B provides a summary of year-end technical actions reallocating and realigning the
budget to appropriate funds for actual operating and capital expenditures and revenue
collected and to adjust transfers between funds.
Financial Highlights for FY 2024
Government-wide
The Statement of Net Position and the Statement of Activities display information about the
primary government and its component unit. These statements have a long-term and wholistic
view of the financial activities of overall City government (i.e. all funds), except fiduciary
activities, and is based upon full-accrual basis of accounting, which includes long-term assets
and liability (i.e. net pension and OPEB liabilities and deferred inflows) and is different than the
annual budgetary basis. As of June 30, 2024, the citywide total net position is $1.5 billion, an
increase of $98.1 million or 7.2% over the prior fiscal year. 75% of this increase is attributable to
net investment in capital assets (i.e. Public Safety Building, Secondary Treatment Upgrades,
Wastewater Collection Rehabilitation and Augmentation projects, and Smart Grid Technology
installation are the primary drivers) and restricted funds (i.e. grants, impact fees, pension trust
fund) primarily due to additional pension trust contributions and increase of its fair market
value. Recoveries in fair market value of investment portfolio primarily accounts for the
remaining growth in unrestricted net position. 95% of citywide net position is comprised of net
investment in capital assets of $1.2 billion (86%) and restricted net position of $104 million
(9%), leaving unrestricted net position of $48.9 million or 5%.
Item 1. B
Item 1B Staff Report
Item 1. B: Staff Report Pg. 2 Packet Pg. 73 of 178
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General Fund
For FY 2024, the General Fund actual revenues (including reappropriations and adjustments to
budgetary basis) of $ 255.5 million are $6.0 million higher than the adjusted budget of $249.5
million, noting only approximately $2.0 million of the higher revenues is unrestricted. General
Fund actual expenditures (including encumbrances and reappropriations) of $276.6 million are
$5.7 million less than the adjusted budget of $282.2 million, with the primary budgetary savings
comprised of vacancy savings ($2.0 million), contract services ($2.4 million) and other expenses
($1.3 million). Including transfers in/out and prior year encumbrances and reappropriation, FY
2024 General Fund total sources was $322.8 million and total uses was $315.6 million. The
revenue outcomes are primarily due to higher-than-expected property tax, documentary
transfer, business tax, investment earnings, and charges for services, noting that a large portion
of this gain is set aside for contingency of excess ERAF property tax and the Council designated
uses for business tax. Expenditure savings were attributable across multiple departments.
Refer to Attachment A for more detail.
By policy, the City maintains a General Fund Budget Stabilization Reserve (BSR) balance of 15%-
20% of the annual operating expense, with a target level of 18.5%. The BSR ended FY 2024 at
$65.9 million, but after adjusting the BSR for FY 2025 uses approved by Council2, the net BSR
balance is $63.3 million or $8.9 million above Council’s 18.5% BSR target level. The $8.9 million
is comprised of $7.9 million or 1.5% budget variance in comparison to total FY 2024 actual
General Fund revenues and expenditures, which is well within acceptable standard deviation
given the complexity, size and fluctuation of the General Fund budget, and an additional $1
million due to an isolated misclassification of prior year reappropriation, which staff discovered
in the year-end close reconciliation. The FY 2024 budget surplus of $7.9 million or 1.5%
variance is comprised of vacancy savings of $2 million, contract services of $2.4 million, other
expenses of $1.3 million and various revenues of $2 million. Staff recommends that the $8.9
million above the 18.5% BSR target level be allocated between the Capital Fund Infrastructure
Reserve (IR) ($3.0 million) and Budget Uncertainty Reserve ($5.9 million). While it is a
departure from the Council surplus allocation policy, this allocation provides adequate funding
to address the projected FY 2026 budget shortfall and flexibility to fund capital cost
uncertainties, ensuring the City maintains high quality service level. Consistent with current
practice, the budget actions to allocate the BSR funds above the 18.5% target level will be
included in the FY 2025 Mid-Year Review (February 2025).
Business Type Activities (Enterprise Funds & Internal Service Funds)
As of June 30, 2024, the City’s Enterprise Funds reported a total net position of $900.7 million,
an increase of $63.0 million or 7.5% from the prior year, primarily due to investments in capital
2 City Council Meeting, June 17 2024, Staff Report 2406-3140: https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=82926
Item 1. B
Item 1B Staff Report
Item 1. B: Staff Report Pg. 3 Packet Pg. 74 of 178
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assets. Business Type Activity funds showed positive balances: Net Investment in Capital
Assets ($755.5 million), Restricted for Debt Service ($3.0 million), and Unrestricted ($142.2
million). This increase was anticipated as 76% of it pertains to investment in capital assets while
the remainder relates to restoring depleted reserves and improvements in fair market value of
saving investments.
BACKGROUND
Attachment A provides detailed information of the General Fund revenue by category and
expenditures by department. The Analysis section of this staff report includes Results by Fund
which discusses the position of fund balances, major revenue sources, and expense highlights.
Attachment B outlines technical recommended amendments to the FY 2024 Budget. These
recommended actions close the fiscal year by reallocating and realigning the budget to
appropriate funds for actual operating and capital expenditures and revenue collected as well
as adjust transfers between funds.
Item 1. B
Item 1B Staff Report
Item 1. B: Staff Report Pg. 4 Packet Pg. 75 of 178
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pronouncements can be found GASB’s website3. The list below provides a summary of the GASB
pronouncements referenced in this report:
GASB 31, Accounting and Financial Reporting for Certain Investments and for External
Investment Pools: requires governments to report investments at fair market value.
GASB 68, Accounting and Financial Reporting for Pensions: requires governments
providing defined benefit pensions to recognize their long-term obligation for pension
benefits as a liability.
GASB 75, Accounting and Financial Reporting for Postemployment Benefits Other than
Pensions (OPEB): establishes accounting and financial reporting requirements for OPEB
plans.
GASB 87, Leases: recognizes certain lease assets and liabilities that were previously
categorized as inflows and outflows of resources.
GASB 96, Subscription-Based Information Technology Arrangements (SBITA): recognizes
SBITA subscription assets as an intangible asset, with a corresponding subscription
liability.
GASB 68 and 75 are similar in that both require that long-term liabilities for pension and OPEB
benefits are recorded in the City’s financial statements. These long-term liabilities are being
addressed through the proactive funding as outlined in the City’s Retiree Benefit Funding
Policy4.
ANALYSIS
Financial Statement Presentation
There are two methods of displaying the City’s financials in the ACFR: 1) Government Wide
Statements and 2) Fund Financial Statements. The discussion below is organized by these two
reporting standards and the results contained within. To assist in the terminology, a brief
overview of these reporting standards outlined in Table 1; each of these displays of the City’s
financial statements are governed by Generally Acceptable Accounting Principles (GAAP) as
modified regularly by Governmental Accounting Standards Board (GASB). Neither of these
views are the same as the City’s annual budget; however, Fund Financial Statements is most
closely aligned.
Table 1: ACFR Financial Statement Presentation
Government Wide Financial Statements Fund Financial Statements
Governmental Activities – City’s basic
services generally funded by taxes,
and/or by specific program revenues
Governmental Funds – similar to
“governmental activities” EXCEPT on a
3 GASB Pronouncements: https://www.gasb.org/standards-and-guidance
4 City Council, February 6, 2023: https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=82218
Item 1. B
Item 1B Staff Report
Item 1. B: Staff Report Pg. 5 Packet Pg. 76 of 178
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Table 1: ACFR Financial Statement Presentation
Government Wide Financial Statements Fund Financial Statements
such as fees and grants (full accrual) +
includes portion of internal service funds.
Business Type Activities – City’s
enterprise activities which are funded in
whole or in part by fees charged to
external parties (full accrual) + includes
portion of internal service funds
modified accrual basis of accounting +
excludes internal service funds.
Proprietary Funds – same as “business
type activities” EXCEPT includes internal
service funds. Includes what we refer to
as “enterprise funds” (full accrual).
Please note the balances reported are based on ACFR balances.
Government-Wide Statements
The Government-Wide Financial Statements provide a longer-term, wholistic view of the City’s
activities. The Government-Wide Financial Statements include the Statement of Net Position
and the Statement of Activities, which are both presented using the full accrual basis of
accounting, similar as the basis used by companies in the private sector.
Statement of Net Position
The Statement of Net Position presents information of all the City’s assets, plus deferred
outflows of resources, and liabilities plus deferred inflows of resources, with the reported net
position.
The City’s net position was $1.452 billion on June 30, 2024, compared to a balance of $1.354
billion on June 30, 2023. The total increase of $98.1 million, or 7.2 %, consists of $35.1 million
from governmental activities and $63.0 million from business-type activities.
The largest portion of the City’s net position ($1.245 billion or 85.7%) is the City’s net
investment in capital assets such as land, buildings, infrastructure, vehicles, and intangible
assets (right to use leased and SBITA assets), less any related outstanding debt that was used to
acquire these assets. The restricted portion of the City’s net position ($133.8 million or 9.2%)
represents resources that are subject to external restrictions on how they may be used. The
remaining balance for the unrestricted portion of the City’s net position of $73.3 million, across
all funds, represents 5.1% of the City’s net position.
Overall, the City’s Unrestricted Net Position is positive on a combined basis for Governmental
Activities and Business-Type Activities. The Unrestricted Net Position for Governmental
Activities is negative $68.9 million due to recognition of net pension liabilities and deferred
pension outflows and inflows of resources (as required by GASB 68), and net OPEB liabilities
and deferred outflows and inflows of resources (as required by GASB 75). Governmental
Item 1. B
Item 1B Staff Report
Item 1. B: Staff Report Pg. 6 Packet Pg. 77 of 178
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Unrestricted Net Position includes the net impact of net pension and net OPEB liabilities and its
related deferred outflows and inflows of resources, $305.9 and $64.6 million, respectively.
Excluding these impacts, the Unrestricted Net Position for Governmental Activities is $301.6
million.
Table 2:
I
2 2 2 2 2 2 (
C $$$$$$$
O 8 8 8 7 1 1 1
C 7 7 8 7 1 1 1
T 1 1 1 1 2 2 1
U 0 0 0 0 0 0 0
P 1 1 4 4 1 1 2
T 1 1 4 4 1 1 2
O 9 9 4 3 1 1 9
N 4 4 1 1 6 6 2
L 8 1 6 5 1 1 (
L 2 2 1 7 3 2 4
T 7 7 3 2 1 1 8
P 1 2 4 8 1 3 (
L 3 3 4 9 7 1 (
U 2 2 0 2 2 (
T 1 2 8 1 2 4 (
N
N 4 4 7 7 1 1 4
R 1 1 3 3 1 1 2
U ((1 1 7 4 2
T $$$$$$$
A
B
A
G
T
C
A
(
G
Item 1. B
Item 1B Staff Report
Item 1. B: Staff Report Pg. 7 Packet Pg. 78 of 178
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Statement of Activities
Overall, total revenues increased $41.4 million, a 6.0% increase compared to FY 2023. Expenses
increased $26.6 million, or 4.3%.
Table 3:
C
(
G B
A A T I
2 2 2 2 2 2 (
R
C $$$$$$$
O 7 8 0 2 7 3 (
C 6 7 3 2 9 9 (
-
P 7 6 --7 6 3
S 3 3 --3 3 0
U 1 1 --1 1 0
T 2 2 --2 2 2
D 7 5 --7 5 1
B 5 -5 -5
I 2 2 1 1 3 3 3
O 4 3 0 -4 3 0
G -------
M -------
T 2 2 4 4 7 6 4
E
0 0 0 0 0
3 2 3 2 0
2 2 2 2 0
0 0 0 0 -
0 0 0 0 0
1 9 1 9 3
3 2 3 2 0
4 3 4 3 1
2 2 2 2 2
6 6 6 6 (
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Revenues
The major sources of the City’s revenues are Program Revenues and General Revenues.
Program Revenues consist of charges for services (both governmental and business type
activities) as well as operating and capital grants and contributions. General Revenues include
property tax, sales tax, utility user tax, transient occupancy tax, documentary transfer tax,
business tax, other taxes, investment earnings and miscellaneous revenue.
FY 2024 Government Wide revenues were $736.1 million, an increase of $41.4 million or 6.0%
above FY 2023, due to a $31.8 million increase from Governmental Activities and $9.6 million
from Business Activities. Across all funds, General Revenues increased by $30.5 million due to
the investment unrealized loss adjustment as required by GASB 31. The prior fiscal year
financials recorded an unrealized investment loss of $8.7 million citywide that was offset with
unrealized gain of $19.0 million in FY 2024, resulting in increased investment earnings in FY
2024 from an accounting basis perspective.
Governmental Activities revenues increased a $31.8 million, or 12.8% compared to the prior
fiscal year. Almost two-third of this increase, $20.4 million, is driven by investment earnings due
to an increase in fair value of investments portfolio at June 30. Major tax revenues increased
by $7.6 million, primarily property tax, transient occupancy tax, documentary transfer tax, and
new business tax revenue.
Business Activities revenue increased $9.6 million due to the $10.5 increase in general revenues
mostly from investment earnings as a result of an increase in fair value of investments portfolio
at June 30, offset by $0.9 million decrease in program revenue. The decrease in program revenue
is due to decrease in Gas Fund offset by the increase in Water Fund and Wastewater Treatment
Funds. Gas program revenue decreased by $21.2 million or 28.2%, due to lowered commodity
prices which are pass-through in nature compared to unprecedented spike in natural gas market
in prior fiscal year wintertime (November 2022 to January 2023). Water program revenue
increased by $6.5 million or 14.7% from the prior fiscal year due to 5% rate increase effective July
1, 2023, higher consumption and increase in service connection fees due to higher volume of
connections. Wastewater Treatment program revenue increased by $7.1 million, or 22.7% from
prior fiscal due to higher billing to partners that is driven by increased operating and minor capital
costs that were not funded by State Water Resource loan and Valley Water.
Expenses
Government Wide expenses for the City in FY 2024 were $638.0 million, an increase of $26.6
million or 4.3% above 2023, due to a $40.4 million increase from Governmental Activities and
$13.8 million decrease from Business-type expenses.
The increase in Governmental Activities expenses is mainly due to the increases in salaries and
benefits and includes pension (GASB 68) and OPEB (GASB 75) related to adjustments and
contract services and is highlighted in discussion below. In addition to the impact of GASB 68
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and GASB 75, salaries and benefits are higher in FY 2024 due to the City’s progress in workforce
recruitment in the past year and Council approved general and market salary rate adjustments
and merit and step increases for employees.
Administrative Services (includes Non-Departmental) expenses increased by $3.5 million, or
36.8%, mainly due to the City paid refund of impact fees (from restricted Parking In-Lieu funds)
of $1.1 million related to Hamilton and High. LLC v. City of Palo Alto, salaries and benefits,
contract services, and rent expenses.
Public Works expenses increased by $11.7 million, or 31.3%, primarily due to salaries and
benefits, contract services and non-capitalizable related project expenses of Homekey facilities,
Roth building rehabilitation and street maintenance expenses. The increase in salaries and
benefits is mainly due to required pension and OPEB expense adjustments for GASB Statements
Nos. 68 and 75. Contract services is due to higher janitorial service contract costs that were driven
by new wage and benefits standards and additional City facilities and service frequency of some
facilities.
Planning and Development Services expenses increased by $2.1 million, or 8.6%, primarily due to
increase in salaries and benefits, including GASB 68 and 75 adjustments for pension and OPEB.
Police and Fire expenses, which comprise over one-third of total Governmental Activities
expense, increased by $6.5 million and $5.6 million, or 14.2% for both by the same percentage,
mainly due to salaries and benefits cost increases that include GASB 68 and 75 required
adjustments for pension and OPEB expenses, respectively. The Police overtime expenses are
higher primarily due to backfilling vacancies and benefited leave benefits of absences as well as
additional shifts for the recently awarded grant for increased retail theft prevention activities.
Community Services expenses increased by $7.1 million or 19.2%, mainly due to salaries and
benefits, including, GASB 68 and 75 pension and OPEB expenses adjustments and increases in
contract services such as landscape maintenance, animal service provider cost and golf course
fee contract services.
Library expenses increased by $2.2 million, or 19.8%, primarily due to increase in salaries and
benefits, primarily due to expanded library hours and services, and GASB 68 and 75
adjustments for pension and OPEB expenses, respectively.
Electric Fund expenses decreased by $11.4 million, or 6.3%, from the prior fiscal year mainly
due decrease in commodity purchases that were driven by improved hydroelectric generation
resulting from rainy winter 2022/2023. The supply costs reductions were partially offset by
higher costs in resource managements with more vacancies filled and higher operations and
maintenance costs.
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Gas Fund expenses decreased by $20.5 million, or 32.3%, mostly due to lowered commodity
prices in FY 2024 compared to unprecedented spike in natural gas prices in prior fiscal year
wintertime, November 2022 to January 2023.
Government Wide Capital Assets
Table 4:
Government Wide Liabilities
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million due to a $61.2 million addition of State Water Resource loan, offset by scheduled debt
retirements. In addition, the City’s Net Pension Liabilities and Net Other Post-Employment
Benefit (OPEB) Liabilities increased by $29.1 million due to adjustments for required
Government Accounting Standards Board (GASB) Statement No. 68 and 75.
Fund Financial Statements
General Fund
General Fund Reserves
Reserve for Excess ERAF
Reserve for Development Services
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Business Tax Reserve for Housing Affordability and Services for Unhoused, Transportation and
Safe Train Crossings, and Public Safety.
The City’s Business Tax (Measure K) was passed by voters in November 2022. The City Council
adopted advisory spending guidelines for the proceeds of the City’s business tax. These
guidelines require that the City report receipts from business tax and that year’s spending from
business tax proceeds for housing affordability and services for unhoused, transportation and
safe train crossings, and public safety.
The tax was effective in January 2023, with the rate through January 2025 being 50% of the
voter-approved rate or 3.75-cents per square foot per month. The full rate will 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.
Included in the committed portion of the General Fund fund balance are the reserves for
Housing Affordability and Services for the Unhoused and Transportation ($1.1 million) and Safe
Train Crossings ($0.8 million). These reserves represent unspent Business Tax proceeds.
Assessment of the tax began January 2023, and the first annual payment was due January 2024.
Table 5 includes details for business tax revenues, expenses, and remaining balances as of June
30, 2024, which have been respectively placed in reserves.
Table 5:
As described in the BSR reserve policy approved by the Council, the reserve is to remain 15%-
20% of the General Fund operating budget, with a target level of 18.5%. After adjusting for FY
2024 year-end actuals and Council approved uses of the BSR in FY 2025 ($2.6 million, outlined
in Table 6), the adjusted BSR balance is $63.3 million, or 21.5% of the FY 2025 Adopted
expenses ($294.0 million). This level is $8.9 million above the 18.5% target level of $54.4
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million. The $8.9 million is comprised of $7.9 million or 1.5% budget variance in comparison to
total FY 2024 actual General Fund revenues and expenditures, which is well within acceptable
standard deviation given the complexity, size, and fluctuation of the General Fund budget, and
an additional $1 million due to an isolated misclassification of prior year reappropriation, which
staff discovered in the year-end close reconciliation.
Table 6: Year-End Budget Stabilization Reserve (BSR) Summary (in millions)
General Fund BSR Balance, June 30, 2024 $65.9
Uses of the FY 2025 BSR Balance Above Target
FY 2025 Approved Adjustments to balance FY 2025
Subtotal: BSR Balance, After Approved Adjustments $63.3
FY 2025 RECOMMENDED Adjustments to the BSR Balance
(to be considered in FY 2025 Mid-Year Budget Review)
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Transfer to Budget Uncertainty Reserve (Fully fund FY 2026 forecasted
deficit)
($5.9)
Subtotal: Recommended Adjustments to the BSR Balance ($8.9)
Projected FY 2025 BSR Level, (June 30, 2025)$54.4
The General Fund unassigned fund balance is $53.7 million (ACFR, p.33.). Staff has reconciled
the accounting basis of this presentation (where non-cash activity is recorded) against
budgetary activity. The main difference between the BSR balance ($65.9 million) and
unassigned fund balance ($53.7 million) is the investment unrealized loss adjustment, as
required by GASB 31 and discussed previously in this report.
General Fund Revenues
General Fund revenues for FY 2024 were $242.1 million, which is $27.6 million or 12.9% higher
than the prior fiscal year. The increase is mainly due to increases in major taxes, new business
tax, property tax, charges for services, license, permits and fees, rental income, and investment
earnings. Year-over-year changes in each of the major tax revenue categories are summarized
in Table 7. Sales tax and TOT revenues were significantly affected by the pandemic; while these
two major tax revenues have reached pre-pandemic levels due to the improved local economy,
higher price trends also attributed to this trend.
Table 7: General Fund Major Tax Revenues (in millions)
Category FY 2024 FY 2023
% Change
Increase/
(Decrease)
Property tax $66.3 $63.1 5.1%
Sales tax 37.5 36.9 1.6%
Utility user tax 19.0 18.8 1.1%
Transient occupancy tax 27.8 25.5 9.0%
Documentary transfer tax 7.0 5.8 20.7%
Property tax revenue increased $3.2 million, or 5.1% over the prior fiscal year due to higher
assessed values changes in ownership and excess ERAF which is set aside in a contingency
reserve.
Sales tax receipts were $0.6 million or 1.6% higher than the prior fiscal year, due to higher
prices of goods and stronger consumer spending.
Utility user tax revenues were $0.2 million or 1.1% higher compared to the prior year due to
higher telephone UUT, which was partially offset by decline in utility UUT.
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Transient occupancy tax (TOT) revenues were $2.3 million or 9.0% higher than prior year due
growth in travel and tourism, partially offset by lower room rates. In FY 2024, the average
occupancy rate was 77.16%, a 14.6% increase and the average room rate was $242, a 5.5%
decrease over the prior year. The entire 15.5% TOT rate from new hotels, plus 3.5% from all
other hotels, has been allocated to the Infrastructure Plan pursuant to City Council direction.
This results in additional TOT for the Infrastructure plan of $1.6 million. These additional funds,
coupled with the recommended excess BSR funds will assist in ensuring capital projects may
continue as planned, adjusting for the rising costs due to the current inflationary economic
conditions. Table 8 outlines a comparative breakdown of the transient occupancy tax allocation
between the City’s General Fund and the Infrastructure Plan:
Table 8: Allocation of Transient Occupancy Tax (in millions)
FY 2024 FY 2023
% Change
Increase
(Decrease)
General Fund
Infrastructure Plan
Subtotal Infrastructure 13.7 12.1
Total TOT Receipts $27.8 $25.5 9.0%
Documentary transfer tax increased $1.2 million, or 20.7%, over the prior fiscal year. due to the
10.1% increase in the number of transactions compared to the prior fiscal year. The average
median home price per Zillow, increased from $3.0 million in June 2023 to $3.3 million in June
2024, an increase of 10.0%. This revenue source is considered volatile since it is highly dependent
on sales volume and the mix of commercial and residential sales.
Business tax receipts were $5.3 million, a new revenue source in FY 2024, represents six
quarters of collection in FY 2024 (includes the last two quarters of FY 2023). This City’s new
funding source is allocated between three critical service areas: transportation and safe train
crossings, housing affordability and services for the unhoused, and public safety.
Charges for services increased by $1.6 million due to increases in reimbursements for fire
services ($1.1 million) and paramedic service fees ($0.7 million).
Licenses, permits and fees increased by $3.4 million primarily due to the surge in the
construction permits and adjustments in Developer Services building permits and other fees
that have been increased in current fiscal year.
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Rental Income increased by $2.0 million due to increases in facilities rent paid by Enterprise
Funds and the annual CPI of 4.9% increase Cubberly Community Center tenants. Revenue for
customer facilities rent also increased.
Investment earnings increased by $9.4 million primarily due to an $8.3 million increase in fair
value investments portfolio at June 30 and $1.1 million as a result of higher yield of investments
and cash balance
Chart 1: General Fund Tax Revenues
Actual Fiscal Years 2018 – 2024
Budget Fiscal Year 2025
($ in thousands)
The City’s Business Tax (Measure K) was passed by voters in November 2022 and was effective
in January 2023. The first due date was January 2024 for the calendar year of 2023.
General Fund Expenditures
FY 2025
Budget
FY 2024
Actual
FY 2023
Actual
FY 2022
Actual
FY 2021
Actual
FY 2020
Actual
FY 2019
Actual
FY 2018
Actual
Business Tax 4,763 5,286 ------
Doc Transfer Tax 7,260 7,016 5,751 11,990 10,627 6,903 6,923 9,229
Trans Occ Tax 27,857 27,781 25,485 16,946 5,179 18,553 25,649 24,937
Utility User Tax 19,943 19,013 18,763 15,599 14,642 16,140 16,402 15,414
Sales Tax 39,577 37,482 36,926 32,705 29,127 30,563 36,508 31,091
Property Tax 68,623 66,344 63,129 59,353 56,572 51,089 47,327 42,839
FY 2025 Budget
FY 2024 Actual
FY 2023 Actual
FY 2022 Actual
FY 2021 Actual
FY 2020 Actual
FY 2019 Actual
FY 2018 Actual
-25,000 50,000 75,000 100,000 125,000 150,000 175,000
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and benefits, contract services and general expenses. The increase in salaries and benefits is
due to positions added in FY 2024, general merit and market salary rate adjustments, pension
contributions and Pension Fund Trust contributions. The increase in Pension Trust Fund
contribution is due to approval of reduced discount rate from 6.2% to 5.3% in FY 2023 to
calculate pension fund trust contributions. FY 2023 is a transitional year equivalent to a rate of
approximately 5.8% contributions. The increase in contract services is driven by increases in
janitorial services, landscape maintenance, animal service provider cost, golf course fee
contract services, and outside services (Trusted Response Support Team and Demand Shuttle
Program – Palo Alto Link).
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Chart 2: General Fund Departments
The Development Services Department was combined with Planning and Community
Environment in FY 2020 and renamed to the Planning and Development Services Department.
The Office of Transportation, which previously was a division of Planning and Community
Environment, was established in FY 2020.
Admin departments expenditures were higher in fiscal years 2023 to 202 due to Utility Transfer
Litigation and Uncertainty Reserve.
Capital Projects Fund
The Capital Projects Fund ended the year with a fund balance of $107.3 million, comprised of
the following:
FY 2025
Budget
FY 2024
Actual
FY 2023
Actual
FY 2022
Actual
FY 2021
Actual
FY 2020
Actual
FY 2019
Actual
FY 2018
Actual
Library 12,528 11,556 9,688 8,904 8,636 10,092 9,491 9,357
Office Of Transportation 4,304 4,773 4,884 1,648 2,010 2,360
Planning and Development Services 24,327 29,955 24,863 21,231 18,782 21,098 22,606 23,006
Public Works 24,886 24,594 21,901 19,448 18,553 18,932 17,928 18,908
Admin Depts 46,706 60,338 62,226 39,762 26,165 28,169 29,304 23,538
Community Services 41,159 40,521 34,330 31,712 27,769 31,489 30,201 28,395
Public Safety 110,820 101,250 92,969 83,339 77,795 83,616 77,592 75,975
FY 2025 Budget
FY 2024 Actual
FY 2023 Actual
FY 2022 Actual
FY 2021 Actual
FY 2020 Actual
FY 2019 Actual
FY 2018 Actual
-40,000 80,000 120,000 160,000 200,000 240,000 280,000
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Table 9: Capital Projects Fund – Fund Balance
Fund Balance Component
Amount
($ in millions)
Non-spendable Deposits $2.0
Reserved for Cubberley expenditures 6.3
Restricted for Public Safety Building 5.2
Assigned for all other Capital projects 85.7
Total Capital Projects Fund Balance $99.2
Non-spendable Deposits $2.0 million represents the initial deposit into the Project Account for
the Roth Building construction project per Section 4.2.B of April 20, 2023, Tenant Work Letter5.
Reserved for Cubberley Expenditures $6.3 million represents the amount of unspent funds in
the Cubberley Property Infrastructure Fund to be used for capital improvement projects at the
Cubberley Community Center.
Restricted for Public Safety Building – This category includes all public safety buildings such as
fire stations, police stations, emergency operations center. The $5.2 million represents the
funding from the State of California restricted for the construction of Fire Station 4
Replacement (PE-18004). This project is currently under construction with estimated
completion in Summer 2028.
Assigned for all other Capital projects $85.7 million represents the amount of unspent funds
associated with Adopted Capital projects and other noted items. Outside funding sources such
as grants, donations and future debt issues are not factored into this component of the fund
balance until they are received.
Enterprise Funds
The City’s Enterprise Funds reported a total Net Position of $882.5million, a $55.3 million, or
6.7% increase from the prior fiscal year. The table below summarizes the overall change in Net
Position for each Enterprise Fund. Compared to FY 2023, the Change in Net Position for
Enterprise funds increased $55.3 million driven primarily by the Electric Fund, and Wastewater
Treatment Funds, partially offset by the decrease in Gas Fund – details of these funds are
summarized following this table.
5 City Council, April 17, 2023: https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=82328
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Table 10:
Electric Fund change in net position increased $14.4 million, or 51.5%, is mainly due to $35.3
million increase in operating income offset by $20.6 decrease in non-operating revenue. The
increase in operating income is due to higher customer and resource adequacy capacity sales
and decrease in commodity purchases. The increase in customer sales revenue is due to
increased consumption and the net impact of base rate increase effective July 1, 2023 and
deactivation of the Electric Hydro Adjusted (E-HRA). The decrease in nonoperating income
(expenses) is due to receipt of $23.9 million refund in FY 2023 from the Bureau of Reclamation
for an overcharge associated with the Central Valley Project, where the City gets most of its
hydroelectric power. The refund is as a result of successful litigation the City participated in
against the Bureau of Reclamation
Wastewater Treatment Fund change in net position increased $3.5 million due to higher billing
to partners for capital costs that were not funded by State Water Resource loan and Valley
Water. The capital costs are recorded as assets which depreciates over the years of its useful
life. The depreciation for the year decreased the net position and not the entire capital costs.
Gas Fund change in net position decreased $2.1 million mainly due to $1.5 increase in equity
transfer to the General Fund and retirements of gas meters due to incompatibility of smart
meter endpoints. The operating revenue decrease of $21.2 million was offset by a decrease of
operating expenses, $20.4 million. Operating revenue and expenses decreases are related to
the lowered commodity prices which are pass-through in nature.
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Unrestricted Net Position
Table 11 below details the Change in Unrestricted Net Position in the Enterprise Funds.
Enterprise Fund Rate Stabilization, Operations and other reserve balances are shown in detail in
the ACFR (p. 90). Overall, except for the Wastewater Collection, Wastewater Treatment Fund
and the Airport Fund, each Enterprise Funds maintained a positive unrestricted net position
balance as of June 30, 2024. Adjustments for the Pension Reserve (as required by GASB 68) and
OPEB Reserve (as required by GASB 75) total $130.2 million and unrealized market losses on
investments total $15.3 million (as required by GASB 31) for all Enterprise Funds and reduce
each fund’s unrestricted net position.
The Wastewater Collection Fund reflects a $10.2 million Unrestricted Reserve deficit mainly
driven by $9.7 million in Pension and OPEB adjustments.
The Wastewater Treatment Fund reflects a $36.6 million Unrestricted Reserve deficit driven by
$26.2 million in Pension Reserves and OPEB Reserves adjustment and due to the delay of $ 30.6
million loan proceeds from State Water Resource Control Board for the Primary Sedimentation
Tank Rehabilitation and Secondary Treatment Upgrade capital projects.
The Airport Fund reports a $2.5 million Unrestricted Reserve deficit due to advances from
General Fund and $1.4 million Pension Reserve and OPEB Reserve adjustments.
Table 11:
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FY 2024 Budget Appropriation for various funds
To close the fiscal year, this report includes technical actions reallocating and realigning the
budget to appropriate funds for actual operating and capital expenditures and revenue
collected and to adjust transfer between funds, including adjustments to fund balance, is
outlined in Attachment B.
Recommended actions in the report will align the FY 2024 appropriations with final financial
activities as outlined in Attachment B. Overall, the City ended the FY 2024 in a positive net
position.
The review and development of this report was coordinated among various divisions within the
Administrative Services Department, along with Department staff who assisted with analysis.
The actions recommended in this report were discussed and communicated to the impacted
departments.
This activity is not a project under California Environmental Quality Act (CEQA) as defined in
CEQA Guidelines, section 15378, because it has no potential for resulting in either a direct or
reasonably foreseeable indirect physical change in the environment.
Attachment A: General Fund Statement of Revenues, Expenditures, and Change in Fund
Balance – Budget versus Actual (Budgetary Statement)
Attachment B: Recommended FY 2024 Year-End Budget Amendments
APPROVED BY:
Lauren Lai, Administrative Services Director
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GENERAL FUND SUMMARY ($000s)
(a)(b)(a) vs (b)
FY 2024 FY 2024 FY 2024 FY 2024 FY 2024 FY 2024 FY 2024
Adopted Adjusted Actuals, Rev/Exp Allocated Encum /Actuals, Rev/Exp Actual to
Budget Budget
Alloc Charges & Encum/Reapp Alloc Charges & Encum/Reapp Variance
Sales Tax 36,272 37,887 37,482 37,482 (405)
Property Tax 63,785 64,578 66,344 66,344 1,766
Transient Occupancy Tax 26,834 27,117 27,781 27,781 664
Documentary Transfer Tax 5,920 5,808 7,016 7,016 1,209
Utility Users Tax 18,457 19,674 19,013 19,013 (661)
Business Tax 1,660 2,451 5,286 5,286 2,835
Other Taxes and Fines 1,757 1,757 827 827 (930)
Charges for Services 35,131 35,181 36,606 - 36,606 1,425
Permits and Licenses 10,151 10,702 10,860 64 10,924 222
Return on Investment 1,892 2,955 3,718 3,718 763
Rental Income 15,858 15,858 16,256 16,256 397
From Other Agencies 3,333 8,231 6,369 997 7,366 (865)
Charges to Other Funds 15,496 15,550 - 15,409 15,409 (141)
Other Revenues 636 1,713 1,425 - 1,425 (288)
Add: Operating Transfers In 23,927 23,854 23,854 23,854 -
Prior Year Encum / Reappropriation 15,000 43,471 43,471 43,471
306,308 15,409 1,061 322,778 5,992
Expenditures
City Attorney 4,668 5,287 2,874 1,518 553 4,944 342
City Auditor 986 1,692 446 232 919 1,597 95
City Clerk 1,491 1,641 759 376 98 1,232 408
City Council 439 553 328 172 39 539 14
City Manager 4,715 5,365 3,334 1,816 215 5,365 0
Administrative Services 11,099 11,298 6,950 3,668 187 10,805 493
Community Services 38,224 40,711 39,005 233 1,283 40,521 190
Fire 46,761 47,529 45,981 163 432 46,576 954
Human Resources 4,747 5,305 3,031 1,640 443 5,115 191
Library 12,138 12,599 11,243 - 313 11,556 1,042
Office of Transportation 2,704 5,466 4,267 - 506 4,773 693
Planning and Development Services 26,055 31,000 24,567 379 5,009 29,955 1,045
Police 53,340 54,674 52,994 763 916 54,674 0
Public Works 23,668 24,608 17,345 4,450 2,799 24,594 14
Non-Departmental 14,894 34,530 13,561 - 20,778 34,339 192
Total Expenditures 245,928 282,257 226,685 15,409 34,490 276,584 5,673
Add: Operating Trans Out 5,042 6,743 6,743 - 6,743 -
Transfer to Infrastructure 28,538 32,257 32,257 - 32,257 -
Total Use of Funds 279,508 321,258 265,685 15,409 34,490 315,584 5,673
Net Surplus/(Deficit)(3,400) (4,472) 40,623 - 33,429 7,194 11,665
GL 38220/38500/38225 (3,400) Adjustments to GAAP Basis
Unrealized gain/(loss) on investments 2,978
Changes in Advances to Other Funds 687
GASB 87 impact on net income 87
Current year encumbrance / reappropriations 33,429
Prior Year encumbrances / reappropriations (43,471)
Change in Fund Balance, GAAP Basis 904
Attachment A
Statement of Revenues, Expenditures and Change in Fund Balance - Budget and Actual (Budgetary Basis)
Item 1. B
Attachment A - General
Fund Statement of
Revenues, Expenditures,
and Change in Fund
Balance - Budget versus
Actual (Budgetary Basis)
Item 1. B: Staff Report Pg. 24 Packet Pg. 95 of 178
Department Adjustment Adjustment
GENERAL FUND (102)
City Manager's
Office
Salaries and Benefits
This action aligns budget levels with actual expenditures. First, to increase the Salaries and
Benefits allocation due to unbudgeted hourly positions that are specifically focused on
economic development initiatives on California Ave. and University Avenue and sustainability
and climate action communications. Second, to align budget with costs reflected in CMR that
are shared with another department, causing vacancy savings in other departments (i.e.
Administrative Services) that offset these additional costs.
-$ 337,000$
Non-
Departmental
Transient Occupancy Tax Revenue/Transfer to Capital Improvement Fund
This action increases the transfer to the Capital Improvement Fund as it relates to Transient
Occupancy Tax (TOT) revenues earmarked for city-wide infrastructure improvements due to
higher than anticipated TOT collections in FY 2024.
1,570,000$ 1,570,000$
Planning &
Development
Services
Transfer from Housing Funds/525 East Charleston Road/Mitchell Park Place
This action reverses a previously approved transfer outlined in Staff Report #2310-2167 from
the Housing In-Lieu/Residential Fund ($1.5M) and the Local Housing Trust Fund Grant Fund
($1.5M) to the General Fund. Undoing this transfer will redirect the distribution of $3.0M for
the Eden Housing 525 E. Charleston Rd. project through the Housing In-Lieu/Residential Fund
and the Local Housing Trust Fund Grant Fund instead of the General Fund to align with best
practices for disbursing state housing grant funds.
(3,000,000)$ (3,000,000)$
Police Salaries and Benefits
This action increases the allocation for Salaries and Benefits in the Police Department by $0.8
million, and includes $0.4 million to cover the reduction of funding for the PERT Program
described below. A portion of the increased allocation ($0.3 million) is due to reimbursable
grant-related overtime that was actualized in the General Fund and not charged to the
Supplemental Law Enforcement Services Fund. The remaining $0.1 million is due to the
Department experiencing higher than anticipated salary and benefit expenses, specifically in
overtime costs. This is primarily due to an above average amount of employee leave for illness
and training and the need to maintain minimum staffing levels in dispatch and patrol
operations which requires the use of overtime for backfill.
-$ 805,000$
Police Transfer from Stanford University Medical Center (SUMC) Fund/Psychiatric Emergency
Response Team (PERT) Program
This action reduces the transfer of funds related to the Council-authorized contract with the
Santa Clara County Behavioral Health (Staff Report 2305-1410) and recognized in the FY 2024
Adopted Budget for a mental health clinician to support the PERT Program. The funds were
unspent due to the inability to source and supply a clinician, so the funds will be returned to
the SUMC Fund and recommended to be used in the future to support the PERT Program when
the County can provide a clinician.
(366,000)$ (366,000)$
Public Works Departmental Expense Savings
This action reallocates departmental savings of $1.1 million within the General Fund in order to
offset departments with higher than anticipated expenses in FY 2024. The Public Works
Department realized a net savings, primarily in Salary and Benefits due to vacancies and in
Contract Services due to delays in several contracts. Key vacancies include a Project Manager, a
Manager of Maintenance Operations, an Electrician, and several tree maintenance positions.
Contracts delays include the Security Guard contract for the MSC, S/CAP consultant services;
fire alarm, sprinkler, and extinguisher contracts; and several Urban Forestry contracts.
-$ (1,142,000)$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
-$ -$
GENERAL FUND (102) SUBTOTAL (1,796,000)$ (1,796,000)$
CITY OF PALO ALTO
Item 1. B
Attachment B-
Recommended FY24 Year-
end Budget Amendments
Item 1. B: Staff Report Pg. 25 Packet Pg. 96 of 178
Department Adjustment Adjustment
CAPITAL IMPROVEMENT FUNDS
GENERAL FUND CAPITAL IMPROVEMENT FUND (471)
Capital Capital Improvement Project Adjustments
This action reflects the combined impact from adjustments to projects as outlined in
Attachment B, Exhibit 2.
344,793$ 344,793$
Capital Transfer from Community Development Block Grant Fund/Sidewalk Repairs (PO-89003)
This action reduces the transfer of funds to support capital project PO-89003, because work
was not done on this project in FY 2024. The transfer of funds for PO-89003 was
reappropriated to FY 2025 in order to align funding with anticipated project expenses.
(511,673)$ -$
Capital Transfer from Gas Tax Fund/Streets Maintenance (PE-86070)
This action increases the transfer from the Gas Tax Fund as a result of SB1 Gas Tax revenue
from the State of California that came in higher than budgeted levels. SB1 funding is
designated for street improvement projects, so it will be added to the Streets Maintenance
capital project (PE-86070).
128,000$ -$
Capital Transfer from General Fund
This action increases the transfer from the General Fund related to TOT revenue Council
earmarked to use for city-wide infrastructure improvements due to actual revenue collected
being higher than budgeted in FY 2024.
1,570,000$ -$
Capital Transfer from Library Impact Fee Fund/Library Project (LB-21000)
This action reduces the transfer of funds to support capital project LB-21000, because work
was not done on this project in FY 2024. The transfer of funds for LB-21000 was
reappropriated to FY 2025 in order to align funding with anticipated project expenses.
(382,983)$ -$
Capital Transfer from Parks Impact Fee Fund/Park Restroom Installation Project (PG-19000)
This action reduces the transfer of funds to support capital project PG-19000, because work
was not done on this project in FY 2024. The transfer of funds for PG-19000 was
reappropriated to FY 2025 in order to align funding with anticipated project expenses.
(629,570)$ -$
Capital Transfer from Refuse Fund/MSC Lighting Project (PF-16006)
This action reduces the transfer of funds to support capital project PF-16006, because work
was not done on this project in FY 2024. The transfer of funds for PF-16006 was
reappropriated to FY 2025 in order to align funding with anticipated project expenses.
(10,000)$ -$
Capital Transfer from University Avenue Parking in Lieu Fee Fund/Downtown Parking Garage
Project (PE-15007)
This action reduces the transfer of funds to support capital project PE-15007, because work
was not done on this project in FY 2024. The transfer of funds for PE-15007 was
reappropriated to FY 2025 in order to align funding with anticipated project expenses.
(5,398,600)$ -$
Capital Transfer from Utilities Administration Fund/MSC Lighting Project (PF-16006)
This action reduces the transfer of funds to support capital project PF-16006, because work
was not done on this project in FY 2024. The transfer of funds for PF-16006 was
reappropriated to FY 2025 in order to align funding with anticipated project expenses.
(315,000)$ -$
Capital Transfer from Vehicle Replacement and Maintenance Fund/MSC Lighting Project (PF-16006)
This action reduces the transfer of funds to support capital project PF-16006, because work
was not done on this project in FY 2024. The transfer of funds for PF-16006 was
reappropriated to FY 2025 in order to align funding with anticipated project expenses.
(175,000)$ -$
CITY OF PALO ALTO
Item 1. B
Attachment B-
Recommended FY24 Year-
end Budget Amendments
Item 1. B: Staff Report Pg. 26 Packet Pg. 97 of 178
Department Adjustment Adjustment
CAPITAL IMPROVEMENT FUNDS
CITY OF PALO ALTO
Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
GENERAL FUND CAPITAL IMPROVEMENT FUND (471) SUBTOTAL (5,380,033)$ (5,380,033)$
Item 1. B
Attachment B-
Recommended FY24 Year-
end Budget Amendments
Item 1. B: Staff Report Pg. 27 Packet Pg. 98 of 178
Department Adjustment Adjustment
ENTERPRISE FUNDS
AIRPORT ENTERPRISE FUND (530)
Capital Capital Improvement Project Adjustments
This action reflects the combined impact from adjustments to projects as outlined in
-$ 59,429$
AIRPORT ENTERPRISE FUND (530) SUBTOTAL -$ 59,429$
ELECTRIC FUND (513 & 523)
Capital Capital Improvement Project Adjustments
This action reflects the combined impact from adjustments to projects as outlined in
Attachment B, Exhibit 2.
-$ 2,507,491$
ELECTRIC FUND (513 & 523) SUBTOTAL -$ 2,507,491$
REFUSE FUND (525)
Public Works Transfer to the Capital Improvement Fund for MSC Lighting Project (PF-16006)
This action reduces the transfer of funds to support capital project PF-16006, because work
was not done on this project in FY 2024. The transfer of funds for PF-16006 was
-$ (10,000)$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
-$ 10,000$
REFUSE FUND (525) SUBTOTAL -$ -$
STORMWATER MANGEMENT FUND (528)
Capital Capital Improvement Project Adjustments
This action reflects the combined impact from adjustments to projects as outlined in
Attachment B, Exhibit 2.
-$ 88,014$
STORMWATER MANGEMENT FUND (528) SUBTOTAL -$ 88,014$
UTILITIES ADMINISTRATION FUND (521)
Utilities Transfer to the Capital Improvement Fund for MSC Lighting Project (PF-16006)
This action reduces the transfer of funds to support capital project PF-16006, because work
was not done on this project in FY 2024. The transfer of funds for PF-16006 was
reappropriated to FY 2025 in order to align funding with anticipated project expenses.
-$ (315,000)$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
-$ 315,000$
UTILITIES ADMINISTRATION FUND (521) SUBTOTAL -$ -$
WASTEWATER COLLECTION FUND (527)
Capital Capital Improvement Project Adjustments
This action reflects the combined impact from adjustments to projects as outlined in
Attachment B, Exhibit 2.
-$ 285$
WASTEWATER COLLECTION FUND (527) SUBTOTAL -$ 285$
WASTEWATER TREATMENT FUND (526)
Capital Capital Improvement Project Adjustments
This action reflects the combined impact from adjustments to projects as outlined in
-$ 569,941$
CITY OF PALO ALTO
Item 1. B
Attachment B-
Recommended FY24 Year-
end Budget Amendments
Item 1. B: Staff Report Pg. 28 Packet Pg. 99 of 178
Department Adjustment Adjustment
ENTERPRISE FUNDS
CITY OF PALO ALTO
WATER FUND (522)
Capital Capital Improvement Project Adjustments
This action reflects the combined impact from adjustments to projects as outlined in
Attachment B, Exhibit 2.
-$ 888,267$
WATER FUND (522) SUBTOTAL -$ 888,267$
Item 1. B
Attachment B-
Recommended FY24 Year-
end Budget Amendments
Item 1. B: Staff Report Pg. 29 Packet Pg. 100 of 178
Department Adjustment Adjustment
INTERNAL SERVICE FUNDS
GENERAL LIABILITIES INSURANCE FUND (689)
Non-
Departmental
Excess Insurance Reimbursement/Liability Claims
This action recognizes revenue and expense related to a settlement of $12.0 million that was
resolved in FY 2024. The City is self-insured up to $1.0 million and received the remaining
11,000,000$ 11,000,000$
GENERAL LIABILITIES INSURANCE FUND (689) SUBTOTAL 11,000,000$ 11,000,000$
VEHICLE REPLACEMENT & MAINTENANCE FUND (681)
Capital Capital Improvement Project Adjustments
This action reflects the combined impact from adjustments to projects as outlined in -$ 72,773$
Public Works Transfer to the Capital Improvement Fund for MSC Lighting Project (PF-16006)
This action reduces the transfer of funds to support capital project PF-16006, because work
was not done on this project in FY 2024. The transfer of funds for PF-16006 was
reappropriated to FY 2025 in order to align funding with anticipated project expenses.
-$ (175,000)$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
-$ 102,227$
VEHICLE REPLACEMENT & MAINTENANCE FUND (681) SUBTOTAL -$ -$
CITY OF PALO ALTO
Item 1. B
Attachment B-
Recommended FY24 Year-
end Budget Amendments
Item 1. B: Staff Report Pg. 30 Packet Pg. 101 of 178
Department Adjustment Adjustment
SPECIAL REVENUE FUNDS
COMMUNITY DEVELOPMENT BLOCK GRANT FUND (232)
Planning &
Development
Services
Transfer to the Capital Improvement Fund for Sidewalk Repair Project (PO-89003)
This action reduces the transfer of funds to support capital project PO-89003, because work
was not done on this project in FY 2024. The transfer of funds for PO-89003 was
-$ (511,673)$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
-$ 511,673$
COMMUNITY DEVELOPMENT BLOCK GRANT FUND (232) SUBTOTAL -$ -$
GAS TAX FUND (231)
Administrative
Services
Revenue from the State of California/Transfer to Capital Improvement Fund for Streets
Repair Project (PE-86070)
This action recognizes SB1 Gas Tax revenue from the State of California that came in higher
than budgeted levels and appropriates funding to increase the transfer to the Capital
Improvement Fund. SB1 funding is designated for street improvement projects, so it will be
128,000$ 128,000$
GAS TAX FUND (231) SUBTOTAL 128,000$ 128,000$
HAMILTON AVENUE-PUBLIC BENFIT FUND (235)
Planning and
Development
Services
Investment Income/Grants & Subsidies
This action recognizes higher unit resale revenue and increases the appropriation for Grants
2024.
27,200$ 27,200$
HAMILTON AVENUE-PUBLIC BENFIT FUND (235) SUBTOTAL 27,200$ 27,200$
HOUSING IN-LIEU/RESIDENTIAL FUND (233)
Planning and
Development
Services
Transfer to the General Fund
This action reverses the previously approved transfer outlined in Staff Report #2310-2167,
from the Housing In-Lieu/Residential Fund to the General Fund. Undoing this transfer will
redirect the distribution of $1.5M for the Eden Housing 525 E. Charleston Rd. project through
the Housing In-Lieu/Residential Fund instead of the General Fund to align with best practices
for disbursing state housing grant funds.
-$ (1,500,000)$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
-$ 1,500,000$
HOUSING IN-LIEU/RESIDENTIAL FUND (233) SUBTOTAL -$ -$
LIBRARY IMPACT FEE FUND (212)
Library Transfer to the Capital Improvement Fund for Library Project (LB-21000)
This action reduces the transfer of funds to support capital project LB-21000, because work
was not done on this project in FY 2024. The transfer of funds for LB-21000 was
reappropriated to FY 2025 in order to align funding with anticipated project expenses.
-$ (382,983)$
CITY OF PALO ALTO
Item 1. B
Attachment B-
Recommended FY24 Year-
end Budget Amendments
Item 1. B: Staff Report Pg. 31 Packet Pg. 102 of 178
Department Adjustment Adjustment
SPECIAL REVENUE FUNDS
CITY OF PALO ALTO
Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
LIBRARY IMPACT FEE FUND (212) SUBTOTAL -$ (382,983)$
LOCAL HOUSING TRUST FUND GRANT FUND (252)
Planning and
Development
Services
Transfer to the General Fund
This action reverses the previously approved transfer outlined in Staff Report #2310-2167,
from the Local Housing Trust Fund Grant Fund to the General Fund. Undoing this transfer will
redirect the distribution of $1.5M for the Eden Housing 525 E. Charleston Rd. project through
the Local Housing Trust Fund Grant Fund instead of the General Fund to align with best
practices for disbursing state housing grant funds.
-$ (1,500,000)$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
-$ 1,500,000$
LOCAL HOUSING TRUST FUND GRANT FUND (252) SUBTOTAL -$ -$
PARKS IMPACT FEE FUND (210)
Community
Services
Transfer to the Capital Improvement Fund for Park Restroom Installation Project (PG-19000)
This action reduces the transfer of funds to support capital project PG-19000, because work
was not done on this project in FY 2024. The transfer of funds for PG-19000 was
reappropriated to FY 2025 in order to align funding with anticipated project expenses.
-$ (692,570)$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
-$ 692,570$
PARKS IMPACT FEE FUND (210) SUBTOTAL -$ -$
RESIDENTIAL PARKING PERMIT PROGRAMS FUND (239)
Office of
Transportation
Residential Parking Permit Revenue/Contract Services
This action increases parking permit revenue to recognize additional permits sold above the
budgeted estimate to partially offset increased contract services expenses. This action also
increases the appropriation for parking enforcement contract services
90,600$ 128,300$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
-$ (37,700)$
RESIDENTIAL PARKING PERMIT PROGRAMS FUND (239) SUBTOTAL 90,600$ 90,600$
STANFORD UNIVERSITY MEDICAL CENTER FUND (260)
Planning and
Development
Services
Transfer from Stanford University Medical Center (SUMC) Fund/Psychiatric Emergency
Response Team (PERT) Program
This action reduces the transfer of funds related to the Council-authorized contract with the
Santa Clara County Behavioral Health (Staff Report 2305-1410) and recognized in the FY 2024
Adopted Budget for a mental health clinician to support the PERT Program. The funds were
unspent due to the inability to source and supply a clinician, so the funds will be returned to
the SUMC Fund and recommended to be used in the future to support the PERT Program
-$ (366,000)$
Item 1. B
Attachment B-
Recommended FY24 Year-
end Budget Amendments
Item 1. B: Staff Report Pg. 32 Packet Pg. 103 of 178
Department Adjustment Adjustment
SPECIAL REVENUE FUNDS
CITY OF PALO ALTO
Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
STANFORD UNIVERSITY MEDICAL CENTER FUND (260) SUBTOTAL -$ -$
UNIVERSITY AVENUE IN-LIEU PARKING FUND (247)
Planning and
Development
Services
Transfer to the Capital Improvement Fund for Downtown Parking Garage Project (PE-15007)
This action reduces the transfer of funds to support capital project PE-15007, because work
was not done on this project in FY 2024. The transfer of funds for PE-15007 was
reappropriated to FY 2025 in order to align funding with anticipated project expenses.
-$ (5,398,600)$
Administrative
Services
Fee Refund for Hamilton and High LLC v City of Palo Alto
This action increases funding for General Expenses ($669,300) and Interest Expenses ($58,000)
to refund impact fees collected by the City and interest earned on those fees as a result of a
legal decision in the case of Hamilton and High LLC v. City of Palo Alto.
-$ 727,300$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
-$ 4,671,300$
UNIVERSITY AVENUE IN-LIEU PARKING FUND (247) SUBTOTAL -$ -$
Item 1. B
Attachment B-
Recommended FY24 Year-
end Budget Amendments
Item 1. B: Staff Report Pg. 33 Packet Pg. 104 of 178
Revenues Expenses
Department Adjustment Adjustment
DEBT SERVICE & AGENCY TRUST FUNDS
EYERLY TRUST FUND (774)
Administrative
Services
Investment Income/General Expenses
This action recognizes higher investment returns and increases the appropriation for General
Expenses within the fund for interest income distribution to designated recipients to align
budget levels with actual expenditures in FY 2024.
$9,500 $9,500
EYERLY TRUST FUND (774) SUBTOTAL 9,500$ 9,500$
UNIVERSITY AVENUE PARKING ASSESSMENT AGENCY FUND (775)
Administrative
Services
Contract Services
This action increases the appropriation for Contract Services within the fund to align budget
levels with actual expenditures in FY 2024.
-$ 12,600$
Fund Balance Adjustment to Fund Balance
This action adjusts the fund balance to offset adjustments recommended in this report.
-$ (12,600)$
UNIVERSITY AVENUE PARKING ASSESSMENT AGENCY FUND (775) SUBTOTAL -$ -$
CITY OF PALO ALTO
Item 1. B
Attachment B-
Recommended FY24 Year-
end Budget Amendments
Item 1. B: Staff Report Pg. 34 Packet Pg. 105 of 178
Project
Number
AC-18001
across capital projects based on actual
AC-24001
Curtain across capital projects based on actual
OS-09001
across capital projects based on actual
OS-18000
Dock Replacement across capital projects based on actual
PD-20000
Replacement across capital projects based on actual
PE-09003
across capital projects based on actual
PE-13014
across capital projects based on actual
PE-17010
Charger Installation across capital projects based on actual
PE-19000
across capital projects based on actual
PE-20002
across capital projects based on actual
PE-22000
Authority Ongoing Creek Projects across capital projects based on actual
PE-24003
and House Lighting System Replacement across capital projects based on actual
expenditures.
PF-00006
across capital projects based on actual
PF-16006
Mechanical, and Electrical Improvements across capital projects based on actual
expenditures.
PF-93009
Compliance across capital projects based on actual
PG-14001
across capital projects based on actual
PG-14002
across capital projects based on actual
PG-17000
Plan across capital projects based on actual
PG-18000
Replacement across capital projects based on actual
ATTACHMENT B, EXHIBIT 2
CITY OF PALO ALTO
RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2024 CAPITAL IMPROVEMENT PROGRAM
CAPITAL IMPROVEMENT FUND
Item 1. B
Attachment B-
Recommended FY24 Year-
end Budget Amendments
Item 1. B: Staff Report Pg. 35 Packet Pg. 106 of 178
Project
PO-11001 Thermoplastic Lane Marking and Striping $ (7,938) Adjustment to allocate Salaries and Benefits
across capital projects based on actual
AS-10000
across capital projects based on actual
FD-24000
across capital projects based on actual
LB-21000
across capital projects based on actual
OS-00002
across capital projects based on actual
PE-12011
Bridge Replacement across capital projects based on actual
PE-15007
across capital projects based on actual
PE-15020
Repairs across capital projects based on actual
PE-19002
across capital projects based on actual
PF-01003
across capital projects based on actual
PF-02022
across capital projects based on actual
PF-23000
across capital projects based on actual
PG-06001
across capital projects based on actual
PG-14000
across capital projects based on actual
PG-24000
across capital projects based on actual
PL-00026
across capital projects based on actual
PL-04010
Plan Implementation across capital projects based on actual
PL-05030
Transportation Systems across capital projects based on actual
PL-12000
across capital projects based on actual
PL-14000
across capital projects based on actual
Item 1. B
Attachment B-
Recommended FY24 Year-
end Budget Amendments
Item 1. B: Staff Report Pg. 36 Packet Pg. 107 of 178
Project
PL-17001 Railroad Grade Separation and Safety
Improvements across capital projects based on actual
PL-20000
Crossing Safety Improvements across capital projects based on actual
PL-23000
across capital projects based on actual
PL-24000
Grade Separation and Safety across capital projects based on actual
expenditures.
PL-24001
and Safety Improvements across capital projects based on actual
PO-11000
across capital projects based on actual
PO-12001
across capital projects based on actual
PE-18000
Garage across capital projects based on actual
PE-19001
across capital projects based on actual
PE-24004
across capital projects based on actual
PE-24006
across capital projects based on actual
PG-09002
across capital projects based on actual
AC-18000
across capital projects based on actual
OS-24000
across capital projects based on actual
PE-18004
across capital projects based on actual
PE-24002
Mechanical Equipment Replacement across capital projects based on actual
PE-24005
Benefits across capital projects based on actual
expenditures; $52,078 of additional
PG-06003
Landscaping, and Site Amenities across capital projects based on actual
PO-05054
across capital projects based on actual
Item 1. B
Attachment B-
Recommended FY24 Year-
end Budget Amendments
Item 1. B: Staff Report Pg. 37 Packet Pg. 108 of 178
Project
OS-00001 Open Space Trails and Amenities $ 197,346 Adjustment to allocate Salaries and Benefits
across capital projects based on actual
PE-08001
across capital projects based on actual
PE-15003
across capital projects based on actual
PE-17005
across capital projects based on actual
PE-18015
across capital projects based on actual
PE-18016
across capital projects based on actual
PE-20000
Investigation and Repairs across capital projects based on actual
PE-20001
across capital projects based on actual
PE-21000
across capital projects based on actual
PE-24001
across capital projects based on actual
PE-86070
across capital projects based on actual
expenditures, partially offset by additional
PF-23001
across capital projects based on actual
PG-19000
across capital projects based on actual
PL-15002
Systems, Access Controls & Revenue across capital projects based on actual
expenditures.
PO-89003
across capital projects based on actual
PG-18001
PL-16002
funds which will be liquidated in FY 2025.
PE-13011
across capital projects based on actual
PE-21004
across capital projects based on actual
PE-24000
across capital projects based on actual
Item 1. B
Attachment B-
Recommended FY24 Year-
end Budget Amendments
Item 1. B: Staff Report Pg. 38 Packet Pg. 109 of 178
Project
PE-15001 New Public Safety Building $ 1,646,643 Adjustment to allocate Salaries and Benefits
across capital projects based on actual
Total $ 344,793 $ 344,793
AP-21000
Total $ - $ 59,429
EL-89028
encumbrance which carried forward to FY 2025.
Error corrected in FY 2025 (Report # 2405-3061).
EL-17007
anticipated expenditures.
EL-21001
Total $ - $ 2,507,491
SD-22002
Total $ - $ 88,014
VR-22000
Total $ - $ 72,773
anticipated expenditures.
Total $ - $ 285
future years of a multi-year contract.
Total $ - $ 569,941
Total $ - $ 888,267
TOTAL CIP ADJUSTMENTS $ 344,793 $ 4,471,564
WATER FUND
WASTEWATER COLLECTION FUND
VEHICLE FUND
ELECTRIC FUND
STORMWATER MANAGEMENT FUND
WASTEWATER TREATMENT FUND
AIRPORT FUND
Item 1. B
Attachment B-
Recommended FY24 Year-
end Budget Amendments
Item 1. B: Staff Report Pg. 39 Packet Pg. 110 of 178
Finance Committee
Staff Report
Report Type: ACTION ITEMS
Lead Department: Administrative Services
Meeting Date: December 3, 2024
Report #:2411-3823
TITLE
Review and Forward Fiscal Year 2026-2035 Long Range Financial Forecast (LRFF) to City Council
This report will be a late packet report published on November 27, 2024.
.
Item 2
Item 2 Staff Report
Item 2: Staff Report Pg. 1 Packet Pg. 111 of 178
Finance Committee
Staff Report
Report Type: ACTION ITEMS
Lead Department: Utilities
Meeting Date: December 3, 2024
Report #:2411-3822
TITLE
Review and Discuss Preliminary Fiscal Year 2026 Utilities Financial Forecast and Rate Projections
This report will be a late packet report published on November 27, 2024.
.
Item 3
Item 3 Staff Report
Item 3: Staff Report Pg. 1 Packet Pg. 112 of 178
4
8
2
9
Finance Committee
Staff Report
From: City Manager
Report Type: INFORMATION REPORT
Lead Department: Administrative Services
Meeting Date: December 3, 2024
Report #:2405-3096
TITLE
Informational Item: First Quarter Fiscal Year 2025 Financial Status Report
RECOMMENDATION
This report transmits the City of Palo Alto’s Fiscal Year 2025 First Quarter Financial Status
Report. Staff recommends the Committee review and accept this report.
EXECUTIVE SUMMARY
The purpose of this report is to provide the City Council with information on the financial status
of the City’s General Fund and Enterprise Funds as of the end of the First (1st) Quarter of Fiscal
Year (FY) 2025 (July 1, 2024 through September 30, 2024). The figures presented in this report
are unaudited.
For the 1st quarter, General Fund revenues totaled $31.0 million, or 9.2% higher than the same
period of the prior fiscal year. Expenditures totaled $64.3 million, 17.9% higher than prior year
and are tracking at 22.9% of Adjusted Budget.
All Enterprise Funds, except Gas and Airport Funds, resulted in a positive change in net position.
The total change in position increased by $11.3 million, or 51.0%, higher than the same period
of the prior year.
BACKGROUND
This report summarizes the financial information of the General and Enterprise Funds for First
(1st) quarter ending September 30, 2024 of Fiscal Year (FY) 2025 and compares those amounts
to the same period of the prior year and to the FY 2024 Adjusted Budget.
Attachment A provides a breakdown of revenues by source and expenses by function, with
separate columns for Adopted Budget and Adjusted Budget. The Adjusted Budget column
includes prior year commitments that were carried forward into this fiscal year and
amendments to the FY 2025 Adopted Budget through September 30, if any. Encumbrances and
actual expenditures for the three-month period are also reported.
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ANALYSIS
As of September 30, 2024, General Fund expenditures ($64.3 million) exceeds the revenue
receipts ($31.0 million). First quarter General Fund receipts are not indicative of the annual
expected receipts in FY 2025 due to timing of major revenues received over the fiscal year.
Revenues and expenditures are tracking within the FY2025 adjusted budget, comparable to
prior fiscal year trend.
General Fund revenues (excluding operating transfers) for the 1st quarter are $31.0 million, or
12.0%, of the current year Adjusted Budget. Actual revenues totaled $31.0 million, 9.2% or $2.6
million higher than the same period of the prior fiscal year. Major taxes increased by $1.9 million
compared to the same period of prior fiscal year driven primarily by Transient Occupancy Tax
(TOT) and Utility Users Tax revenue. Sales and documentary transfer taxes are nearly identical to
the same period in prior fiscal year. This reflects ongoing economic conditions and reinforces the
forecast of a gradual return to moderate growth beginning in 2026.
For the 1st quarter, General Fund expenditures totaled $64.3 million, $9.8 million or 17.9% higher
than the prior fiscal year and tracking at 22.9% of adjusted budget, slightly higher compared to
prior budget versus actual at 19.4%. The City is making significant efforts to fill vacant positions
while this budget to actual variance also reflects the change in budget assumptions between FY
2024 and FY 2025 which reflected a 2% increase for a total presumed vacancy factor of 5% instead
of 3% in assumed vacancies.
The following is a detailed discussion of the most significant revenue and expense items.
st Quarter FY 2025
The following highlights the City’s major revenue sources for the 1st Quarter, compared to 1st
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.
As of September 30, 2024, General Fund expenditures ($64.3 million) exceeds the revenue
receipts ($31.0 million). First quarter General Fund receipts are not indicative of the annual
expected receipts in FY 2025 due to timing of major revenues received over the fiscal year.
Revenues and expenditures are tracking within the FY2025 adjusted budget, comparable to
prior fiscal year trend.
General Fund revenues (excluding operating transfers) for the 1st quarter are $31.0 million, or
12.0%, of the current year Adjusted Budget. Actual revenues totaled $31.0 million, 9.2% or $2.6
million higher than the same period of the prior fiscal year. Major taxes increased by $1.9 million
compared to the same period of prior fiscal year driven primarily by Transient Occupancy Tax
(TOT) and Utility Users Tax revenue. Sales and documentary transfer taxes are nearly identical to
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the same period in prior fiscal year. This reflects ongoing economic resilience despite elevated
inflationary pressures, consistent with a forecasted modestly weak economy in FY 2025 and a
gradual return to moderate growth starting in 2026.
st quarter, General Fund expenditures totaled $64.3 million, $9.8 million or 17.9%
higher than the prior fiscal year and tracking at 22.9% of Adjusted Budget, slightly higher
compared to prior budget versus actual at 19.4%.
Revenue Highlights for 1st Quarter FY 2025
st Quarter, compared to 1st
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
Property tax revenue in the 1st quarter of the fiscal year is the typical nominal amount as
property tax receipts are mostly paid by the County over three months beginning in the month
of November and then again beginning in March. FY2024 actuals are $3.2 million or 5.1% over
the prior fiscal year primarily driven by change in assessed values due to ownership change in
FY 2024 plus the expected 2% Proposition 13 overall annual increase in FY 2025
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ERAF distributions from the County of Santa Clara in fiscal years 2021, 2022, 2023, and 2024
receipts were $5.6 million, $6.6 million, $6.4 million, and $7.0 million respectively. In FY 2024,
the reserve for Excess ERAF, representing the at-risk amount related to the State Controller’s
Office auditing finding on Marin County, totaled $5.6 million. The state’s assertion is former
Redevelopment Agency funds which are now part of the regular property taxes should be
excluded from the excess ERAF calculation. Marin County is challenging this finding and the
County of Santa Clara has filed a lawsuit. The estimate is, if this audit finding is sustained, 20%
to 22% of excess ERAF is at risk for fiscal years 2021 to 2025. If the finding holds, the County of
Santa Clara, as well as other Excess ERAF counties, may be negatively impacted for future fiscal
years as well. This reserve, as of FY 2024, is consistent with prior year methodology of
assumptions for this challenge. Also, consistent with prior year, the FY 2025 budget has been
reduced by this at-risk amount.
Sales tax revenue cash receipts totaled $2.6 million for the 1st quarter. This represents one
month’s sales tax activity due to the two-month delay between sales tax collection by the State
and remittance to the City. The FY 2024 actual sales tax revenue was $37.5 million, $0.6 million
or 1.5% higher than FY 2023.
Transient occupancy tax (TOT) cash receipts for about one and half months totaled $3.9
million, or 14.2% of the FY 2025 adjusted budget and is $1.2 million, or 45.1%, increase than
prior fiscal year receipts for the same period. The 45.1% increase is due to timing of individual
hotel receipts and does not reflect the true economic performance. This revenue is at an
economic crossroad. In July and September, there were growth of 8.6% and 5.3%, respectively,
but in August, receipts declined by 2.5%: over the prior fiscal year’s actual receipts. As of
writing of this report, 1st quarter revenue is $7.1 million, an increase of $0.3 million, or 3.8%,
higher the prior fiscal year. Without considering inflation, the FY 2025 adopted budget of $27.9
million is higher than the FY 2019 pre-pandemic actuals of $25.6 million by $2.2 million or 8.6%.
The FY 2024 had similar level or $2.3 million or 9% growth over the prior years. The revised
forecast is expecting a flattening of this revenue.
st quarter of FY 2025, hotels average daily room and occupancy rates are $238.76
per day and 70.2%, respectively, a 2.5% increase in average daily room and 10.8% decrease in
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occupancy rates over the same period of the prior fiscal year. In comparison, the five- and ten-
year annual compound annual growth rate on actual receipts was 1.6% and 8.5%, respectively.
Documentary transfer tax cash receipts for two and half month total $1.5 million, or 20.6% of
the FY 2025 adjusted budget and is $0.1 million, or 9.6%, increase than prior year receipts for
the same period due to the higher total property sales value. The number of transactions is
2.0% higher compared to prior fiscal year first quarter. This revenue source is volatile, it is
highly dependent on sales volume and the mix of commercial and residential sales. Staff
continues to monitor these receipts closely due to significant fluctuations that can occur
anytime depending on the real estate sales activity. The budgeted amount of $7.3 million,
which is 3.5% higher than the actual receipts of the prior year, is still expected to be realized.
Utility User Tax (UUT) revenue total $4.5 million, or 22.5% of the FY 2025 adjusted budget and
is $0.9 million, or 4.9% than the prior year’s actuals. This is $0.6 million, or 15.7%, higher than
the prior fiscal year’s receipts due to rate increases and strong telephone UUT. This trend has
led to revising the budgeted forecast to $20.6 million, $0.7 million or 3.5% higher than the current
budget. The revised forecast is 8.4% higher than the prior year’s actual receipts.
Business Tax revenue in the 1st quarter of the fiscal year is a nominal amount as business are
required to file business tax quarterly but it is due the first day of the following quarter
(October 1st) and is delinquent 30 days later. FY 2025 Adjusted Budget includes $4.8 million for
business tax revenue. The tax became effective in January 2023, with the rate through January
2025 being half of the full rate, or 3.75 cents per square foot per month. The full rate will 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.
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Expenditure Highlights for 1st Quarter FY 2025
The following highlights the City’s expenditures by function for the 1st quarter, excluding
encumbrances, compared to the same quarter in prior year. Each quarter’s expense is
expressed as a percentage of the Adjusted Budget for each year.
For the 1st quarter of the fiscal year, total expenses increased by $9.8 million, or 17.9%, compared
to the same quarter prior fiscal year, aligning with total budget at 22.9%. This increase is primarily
due to higher salaries and benefits costs, including pension and medical expenses; a 4.0% cost of
living adjustment for all labor groups (effective July 1, 2024), flexible compensation options; rising
health costs; and the addition of new positions.
Attachment A shows total expenses, including encumbrances for the 1st quarter are 33.4% of the
adjusted budget. Most departments exceed 25% due to purchase orders that cover the entire
year (i.e., landscape maintenance, contract services, consultant fees and others). It is the City’s
practice to encumber budget funds for the fiscal year, allowing invoices to be drawn down, or
paid against these encumbrances.
Community Services expenditures increased $2.0 million, or 24.4%, due mainly due to salaries
and benefits ($0.8 million increase) and contract services ($1.1 million increase). Most of the
contract services increases are as follows:
•Golf course fee contract services are higher by $0.8 million due to the timing of invoice
payments for the golf course management; prior fiscal year was delayed until the 2nd
quarter.
•Landscape maintenance due to additional sites and services on weekends, increase in
required minimum staffing level and higher material, and labor cost.
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•Animal service provider cost.
Public Works expenditures increased $1.1 million, or 23.6%, primarily due to salaries and
benefits ($0.4 million increase) and contract services ($0.6 million). The increases of contract
services are due to higher janitorial service contact and consultant fees. The increase in
janitorial service contract, effective December 2023, was due to new higher wage and benefits
standards, and additional City facilities and service frequency at some facilities. Consultant fees
increase is due to the Sustainability Climate Action Plan (S/CAP) Funding Study.
Police and Fire accounted for 46.7% of total General Fund expenditures in the 1st quarter,
consistent with the prior year.
The following highlights Police and Fire salaries and overtime for the 1st quarter.
Table 3
Police overtime is 40.2% higher than the prior fiscal year and 96.2% of adjusted budget. In the
first quarter of FY 2025, the Department had 7 vacancies out of 142 full-time positions: one
Lieutenant, three Dispatchers, one Records staff, and two Police Officers. Of the 76 filled
PAPOA positions, 10 (13%) were in training, 10 (13%) were on long-term leave and 56 (74%)
were available for duty.
Currently, eight officers focus to investigations, three to traffic enforcement, two to personnel
and training, two to special problems and one on Psychiatric Emergency Response Team,
leaving 40 police officers available for patrol. These officers respond to approximately 110 calls
daily, conduct enforcement stops and participate in community outreach. The Department
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operates five patrol teams, each with four to five members. Most overtime is attributed to
filling police positions to address staffing gaps from vacancies or absences and to respond to
sporadic increases in demand such as major accidents. The Department will continue to
monitor overtime and any impact on budget appropriation including additional overtime
incurred in alignment with the recent retail theft grant activities. An analysis is included in
Attachment B.
Fire overtime is 60.4% higher than the same period in prior year and 63.1% of the adjusted
budget. Department overtime were incurred due to backfilling vacancies on shift. The
department current deployment model requires 24 positions daily for Fire Engines and
Ambulances to operate fully. Any vacancy must be backfilled to maintain operational readiness.
Vacancies can arise from several factors, including unfilled positions, employees on injury leave,
new hires still in training and not yet off probation, or those on vacation or other leaves of
absence. In FY 2025 Q1, with 10 vacant positions and three employees on injury leave, overtime
levels remained high as we needed to fill these positions daily. An analysis is included in
Attachment B.
General Fund Budget Stabilization Reserve (BSR) Balance
Based on information reported in the FY 2024 Annual Comprehensive Financial Report (ACFR),
the City’s current General Fund Budget BSR ended FY 2024 at $65.9 million; after adjusting the
BSR for FY 2025 uses approved by Council1 in the amount of $2.6 million, the net BSR balance
was $63.3 million, or $8.9 million above Council’s 18.5% BSR target level. By policy, the City
maintains a BSR balance of 15-20% of the annual operating expense, with a target level of
18.5%. The $8.9 million is comprised of $7.9 million or 1.5% budget variance in comparison to
total FY 2024 actual General Fund revenues and expenditures, which is well within acceptable
standard deviation given the complexity, size and fluctuation of the General Fund, and an
additional $1 million due to an isolated misclassification of prior reappropriation, which staff
discovered in the year-end close reconciliation. Staff recommends that the $8.9 million above
the 18.5% BSR target level be allocated between the Capital Fund Infrastructure Reserve (IR)
($3.0 million) and Budget Uncertainty Reserve ($5.9 million). The budget actions to allocate the
BSR funds above the 18.5% target level will be included in the FY 2025 Mid-Year Review
(February 2025).
1 City Council Meeting, June 17 2024, Staff Report 2406-3140: https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=82926
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Enterprise Funds
The following is a summary of changes in net position for each of the Enterprise Funds for the
three months ending September 30, 2024, along with a comparison to the same period last
fiscal year.
Table 4
increased $1.3 million, or 37.7%, from prior year fiscal year, due to an increase in
operating revenues primarily from customer sales, which was partially offset by an increase in
operating expenses. The increase in customer sales resulted from 9.5% overall rate increase for
residential and commercial customers, effective July 1, 2024, and higher consumption. Operating
expenses have increased, driven by higher commodity costs. The wholesale commodity rate
from San Francisco Public Utilities Commission (SFPUC) increased from $5.21 to $5.67 per CCF,
reflecting a 9.0% increase.
increased by $10.0 million, or 123.0%, from prior fiscal year, due to increase in
operating revenues, from a new data center, customer sales and resource adequacy sales, and
decrease in operating. The expense decrease is driven by lower joint agency service payment to
Northern California Power Agency (NCPA) due to lower debt service costs of the Calaveras
hydroelectric project, and lower transmission costs and commodity expense due to higher-than-
expected hydro generation. The increase in customer sales revenue is due to rate increases
effective July 1, 2024, and higher commercial usage. The rate changes were based on the electric
cost of service study including higher demand rates due to rising local capacity costs. While the
increase in resource adequacy capacity sales is due to favorable market conditions.
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Wastewater Collection Fund increased by $0.9 million, or 1714.5% from prior year due to an
increase in operating revenue primarily from customer sales and from connection fees. The
increase in customer sales resulted primarily from 15.0% overall rate increase for residential
and commercial customers, effective July 1, 2024. The rate increase allows the highest priority
sewer mains to be replaced while allowing the reserves to gradually replenish before the next
major project.
Wastewater Treatment Fund increased $1.3 million, or 24.2%, from the prior fiscal year
primarily due to revenue increase from the partner agencies. The revenue increases can be
attributed to various factors, including higher operating and maintenance expenses, increased
salary and benefit costs, elevated permitting fees, and rising contract costs. This fund recovers
its increased expenses from partner agencies including the Wastewater Collection Fund. The
partner agencies cover these expenses either quarterly or annually, depending on the specific
agency per the agreement terms. The billing is based on the FY2025 adopted budget, the
previous year's sewage flow, and the existing partner debt service. Any excess or underbilling
(adopted budget vs. actual expenses) is calculated at the end of the fiscal year, and then an
additional cost or credit is provided based on the results of this calculation.
Airport Fund decreased $0.9 million, or 123.9%, mainly due to decrease in federal grants.
Federal grants from the Federal Aviation Administration for the Apron Reconstruction (AP-
16000) have been fully utilized in FY 2024 and for the Airport Layout Plan (AP-21000) is nearing
to its end, remaining 20% of the grant is to be received in current fiscal year.
FISCAL/RESOURCE IMPACT
STAKEHOLDER ENGAGEMENT
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ENVIRONMENTAL REVIEW
ATTACHMENTS
APPROVED BY:
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11/14/20248:15 AM
CITY OF PALO ALTO
GENERAL FUND FIRST QUARTER FINANCIAL REPORT
FISCAL YEAR ENDING JUNE 30, 2025
(in thousands)
BUDGET ACTUALS (as of 9/30/2024)
Adopted Adjusted Pre % of Adj
Revenues & Other Sources
Sales Tax 39,577 39,577 - - 2,585 6.5%
Property Tax 68,623 68,623 - - 94 0.1%
Transient Occupancy Tax 27,857 27,857 - - 3,950 14.2%
Documentary Transfer Tax 7,260 7,260 - - 1,499 20.7%
Utility Users Tax 19,943 19,943 - - 4,486 22.5%
Other Taxes and Fines 1,757 1,757 - - 173 9.9%
Charges for Services 38,507 38,637 - - 6,169 16.0%
Permits & Licenses 10,813 10,813 - - 2,803 25.9%
Return on Investment 3,264 3,264 - - 905 27.7%
Rental Income 16,367 16,367 - - 3,687 22.5%
From Other Agencies 3,725 3,725 - - 749 20.1%
Charges To Other Funds 15,096 15,096 - - 3,811 25.2%
Other Revenues 781 930 - - 78 8.4%
Total Revenues 258,333 258,612 - - 31,009 12.0%
Operating Transfers-In 29,148 29,148 - - 7,287 25.0%
Encumbrances and Reappropriation 16,093 28,510 - - - 0.0%
Contribution from Development Services Reserves 682 682 - - - 0.0%
Total Sources of Funds 304,256 316,952 - - 38,296 13.3%
Expenditures & Other Uses
City Attorney 5,023 5,576 - 775 834 28.9%
City Auditor 990 1,908 0 1,635 0 85.7%
City Clerk 1,443 1,540 15 199 339 35.8%
City Council 512 551 0 115 95 38.1%
City Manager 5,592 5,807 30 194 1,506 29.8%
Administrative Services 11,967 12,154 13 499 2,843 27.6%
Community Services 41,159 42,300 248 8,773 10,136 45.3%
Fire 55,008 55,441 55 625 14,550 27.5%
Human Resources 5,509 5,660 47 133 1,365 27.3%
Library 12,528 12,840 218 688 3,230 32.2%
Office of Emergency Services 1,728 2,091 - 325 403 34.8%
Office of Transporation 4,304 4,810 1,200 338 801 48.6%
Planning and Development Services 24,327 29,009 0 4,416 5,425 33.9%
Police 55,812 56,365 75 1,317 15,500 30.0%
Public Works 24,856 27,190 5,286 1,764 5,977 47.9%
Non-Departmental 17,265 17,475 110 449 1,306 10.7%
Total Expenditures 268,021 280,716 7,298 22,245 64,310 33.4%
Operating Transfers-Out 6,314 6,314 - - 1,578 25.0%
Transfer to Infrastructure 32,526 32,526 - - 8,131 25.0%
Total Use of Funds 306,861 319,556 7,298 22,245 74,019 32.4%
Net Change to BSR (2,605)(2,604)(35,723)
BSR Balance, FY 2024 65,936 65,936 559 diff
breakdown
BSR Balance, FY2025 63,331 63,332
BSR % of Adopted Total Use of Funds 21.5%21.5%
ATTACHMENT A
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Attachment A - FY2025
First Quarter Financial
Report
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Attachment D
2023 2024 2025 Q1
POLICE DEPARTMENT
Overtime Expense
Adopted Budget (A)$972,512 $1,028,988 $1,098,939
Modified Budget (B)972,512 1,028,988 1,098,939
Net Overtime Cost - see below 1,107,518 1,160,290 487,967
Variance to Budget (135,006) (131,303) 610,972
Overtime Net Cost
Actual Expense $2,940,019 $3,467,691 $1,057,188
Less Reimbursements
Other Program Reimbursements 878 259,747 228,000
California OES/FEMA (Strike Teams) - - -
Stanford Communications 124,868 99,161 24,373
Utilities Communications Reimbursement 64,599 56,429 14,844
Local Agencies (C)4,949 6,574 1,776
Police Service Fees 100,413 117,433 30,462
Total Reimbursements 295,707 539,345 299,455
Less Department Vacancies (A)1,536,794 1,768,057 269,766
Net Overtime Cost $1,107,518 $1,160,290 $487,967
Department Vacancies (number of days)4,876 5,419 838
Workers' Compensation Cases 23 24 4
Department Disabilities (number of days)739 625 220
FIRE DEPARTMENT
Overtime Expense
Adopted Budget (D)$2,124,054 $2,146,234 $2,721,066
Modified Budget (E)3,801,054 2,146,234 2,721,066
Net Overtime Cost - see below 1,740,750 1,734,841 1,252,437
Variance to Budget 2,060,304 411,393 1,468,629
Overtime Net Cost
Actual Expense $3,589,198 $4,099,233 $1,716,248
Less Reimbursements
California OES/FEMA (Strike Teams) 341,629 - -
Total Reimbursements 341,629 - -
Less Department Vacancies (D)1,506,819 2,364,392 463,810
Net Overtime Cost $1,740,750 $1,734,841 $1,252,437
Department Vacancies (number of days)4,105 5,297 1,062
Workers' Compensation Cases 32 9 6
Department Disabilities (number of days)484 389 85
NOTES:
(A)The FY 2025 Police Department budget was increased by 1.0 Police Lieutenant.
(B)Police Department adopted budget has not been adjusted in FY 2025.
(C)Includes Animal Control Services contract with Los Altos and Los Altos Hills.
(D)The FY 2025 Fire Department budget was increased by 3.0 Fire Fighters.
(E)The Fire Department adopted budget has not been adjusted in FY 2025.
Public Safety Departments
Overtime Analysis for Fiscal Years 2023 through 2025
Item 4
Attachment B - Public
Safety Overtime Analysis
Q1 2025 - Final
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Finance Committee
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Administrative Services
Meeting Date: December 3, 2024
Report #:2405-3068
TITLE
Review and Forward Fiscal Year 2026-2035 Long Range Financial Forecast to City Council
RECOMMENDATION
Staff recommends that the Finance Committee review and recommend that the City Council
accept the General Fund Long Range Financial Forecast (LRFF) for Fiscal Year 2026-2035 and the
FY 2026 annual Budget Development Guidelines (Attachment A) and direct staff to use this
forecast as the starting point for the initiation of the FY 2026 budget process.
EXECUTIVE SUMMARY
Annually, the City presents a ten-year General Fund Long Range Financial Forecast (LRFF) in
December that marks the beginning of the annual budget process. This preliminary forecast is
based on the most current information available, actual revenues and expenses for FY 2024, and
projected results through FY 2025 at the point in time of release. General Fund expenditures are
based on current City Council approved service levels compared to projected revenues over the
next year. The City service levels have increased during the 3-year period between FY 2024 to FY
2026, as the City continues to maintain a multi-year budget strategy, deliver excellent service
level while supporting Council priority objectives and maintaining fiscal stability with anticipated
upcoming volatility. The current outlook anticipates a modestly weak economy in 2025, followed
by a gradual return to trend growth rates starting in 2026, assuming inflation continues to
moderate, and consumer demand remains stable.
The Base Case Long Range General Fund forecast projects a $12.0 million shortfall in FY
2026, followed by shortfalls ranging from $7.9 million in FY 2027 to $5.6 million in FY
2029. FY 2030 has a projected surplus of $2.0 million which continues to grow through FY
2035. This forecast maintains current service levels approved in FY 2025 and should be
used for planning purposes to assist in gauging effects of major policy interventions
against a likely “status quo” version of the future. These amounts are fairly consistent
with previous projections used as part of the two-year budget balancing strategy when
adopting the FY 2025 Budget, however, the FY 2026 shortfall increased by $1 million due
to the various factors discussed in detail below. The proposed multi-year financial
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strategy addresses the FY 2026 shortfall of $12 million with uncertainty reserves of $6.1
million from FY 2023 Mid-Year review and $5.9 million from FY 2024 Year-end review.
Staff modeled an alternate forecast scenario that reflects a 1% loss in economically
sensitive revenue and the impact on the General Fund over the forecast period.
Compared to the Base Case, this scenario increases the General Fund shortfall over the
next ten years. FY 2026 changes from a shortfall of $12.0 million to $14.3 million, and
revenues are not anticipated to be able to fund the annual expenditures until FY 2031.
Staff modeled an alternate forecast that reflects a one-time compensation adjustment
(1%) in FY 2026 and the impacts on the General Fund over the next ten years. Compared
to the Base Case, this scenario increases expenses by $1.1 million in FY 2026 and increases
projected shortfalls in the forecast, ranging from $13.1 million in FY 2026 to $6.8 million
in FY 2029. FY 2030 has a projected surplus of $0.7 million which continues to grow
through FY 2035.
These alternate forecasts were done separately to show the impacts of each scenario in
isolation; however, aspects of both alternate forecasts may occur in conjunction in the
future.
Consistent with the projections in the FY 2025 Adopted Budget, this LRFF reflects deficits in the
near term with revenues falling below expenses. As previously recommended, the shortfall in FY
2025 will be addressed by the Uncertainty Reserve, that was proactively set aside during the prior
year for this purpose. Development of the FY 2026 budget and planning for the subsequent years
outlined in the forecast will need to be done strategically over the next several months to balance
the increased service level desired by the community with the financial resources currently
projected. With these variables, ongoing revenues are unable to keep pace with expenses over
the next several years.
The LRFF is a tool to model financial forecasting assuming resources and services are operating
at the current authorized levels. City staff will continue to review and refine these projections to
establish the FY 2026 budget and use this forecast to begin internal planning for budget balancing
solutions. Individual fiscal years will vary from this forecast such as changes in revenue estimates
or operating transfers. These circumstances, specific to a given year, typically represent one-time
resources that are factored into the annual budget planning process. More detailed guidelines
or Budget Policies to inform the development of the FY 2026 budget are discussed at the end of
this document (Attachment A).
Included in this report and subsequent documents are the following:
•The Economy: discussion of the current financial climate of the United States to the local
economy of the City of Palo Alto (details can be found in Attachment B)
•Summary Long Range Financial Forecast including Revenue and Expense assumptions in
FY 2026-2035 (details can be found in Attachments C and D)
▪Financial status of the General Fund as of the FY 2025 Adopted Budget
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▪Brief discussion of FY 2024 surplus funding
▪Updated revenue assumptions based on current projections
•FY 2026 Budget Development Guidelines to inform the Budget process (Attachment A)
•Summary of Assumptions Not Included in Forecast (Attachment E)
•Alternate scenarios to the base case forecast to demonstrate financial impacts to the City
from:
▪Impacts from a moderate recession
▪Impacts from a citywide 1% increase of salaries and benefits
BACKGROUND
Annually the Office of Management and Budget produces a ten-year General Fund Long Range
Financial Forecast (LRFF). The LRFF reflects staff’s best estimates on the projected revenues and
expenditures over the next ten years based on the information that is currently available. It is
important to note that the LRFF is a planning document and is separate and distinct from the
development of the City’s annual Operating and Capital Budgets. There are assumptions and
parameters modeled in the LRFF, and these assumptions are revised and refined as more
information becomes available through the budget development process.
The LRFF contains a high-level comprehensive review of the costs to provide current City Council
approved service levels, including current contracts, updates to salaries and benefits based on
the current population of employees, and the current labor contracts in effect. The LRFF also
reviews the status of the current economy and various economically sensitive revenues such as
Sales Tax, Documentary Transfer Tax, Property Tax, and Transient Occupancy Tax to explain key
trends in those areas. This Forecast allows staff and City Council to look at both the short-term
and long-term financial status of current service levels in the General Fund to inform daily policy
decisions and evaluate long-term goals and ongoing challenges.
The Economy
The economy continues to demonstrate resiliency to a formal recession and this forecast reflects
a continued level of stagnation offset by inflation. Risks remain due to world conflicts and
potential local economy impacts. At the national level, economic growth through the third
quarter of calendar year 2024 has been driven by resilient consumer spending, although
inflationary pressures remain elevated and borrowing costs continue to weigh on economic
activity. The Federal Reserve’s monetary policy actions have kept interest rates at historically
high levels, with the federal funds rate holding near its highest levels in over two decades. The
Fed is maintaining its tight stance in an effort to achieve a “soft landing”, aiming for a slowdown
in economic growth that avoids recession while containing inflation. Despite these efforts,
inflation remains sticky, particularly in sections such as housing and services, leading to ongoing
economic uncertainty. The current outlook anticipates a modestly weak economy in 2025,
followed by a gradual return to trend growth rates starting in 2026, assuming inflation continues
to moderate and consumer demand remains stable. Risks that will continue to be monitored
include escalating political tensions, and political landscape shaped by the recent presidential
election, all of which could lead to shifts in national economic policies in 2025 and beyond. These
factors are creating heightened complexity in financial forecasting and budget development. The
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City must navigate the challenge of addressing growing fiscal needs while ensuring long-term
fiscal sustainability.
Attachment B in greater length.
ANALYSIS
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completing the Council approved 2014 Infrastructure Plan projects as well as maintaining and
upkeeping the City’s current facilities and infrastructure. The Uncertainty Reserve that was
established as part of the FY 2023 Mid-Year Review was used to balance the FY 2025 Adopted
Budget, but as planned and approved by Council, still has funding available to solve the
projected shortfall in FY 2026. Strategic planning and fiscal discipline will be needed to solve the
estimated shortfalls in the subsequent years of the forecast.
operating margin reflects the variance between the
projected General Fund revenues and expenditures for each year of the forecast or the annual
surplus or shortfall. The net operating margin is presented on a one-time basis, as the annual
surplus or shortfall for a given year, and on an incremental basis. The incremental forecast
assumes that each shortfall is addressed completely with ongoing solutions in the year it
appears and that each surplus is completely expended with ongoing expenditures. It is the
City’s goal to remain in balance on an ongoing basis, so the incremental figure is useful to
illustrate the additional surplus and/or shortfall attributed to a particular fiscal year. To the
extent a shortfall is not resolved, or a surplus is not expended on an ongoing basis, it is
important to understand that the remaining budget shortfall or surplus will remain and be
pushed to the following year. The Base Case financial forecast projects a shortfall of $12.0
million in FY 2026, followed by shortfalls ranging from $7.9 million in FY 2027 down to $5.6
million in FY 2029. FY 2030 has a projected surplus of $2.0 million which continues to grow
through FY 2035. Based on these assumptions, the cumulative net operating margin, or
ongoing surplus, during the forecast period is a surplus of $25.4 million.
TABLE 1: FY 2026 – 2035 Long Range Financial Forecast (Base Case)
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TABLE 2: FY 2026 – 2035 Long Range Financial Forecast Net Operating Margin (Base Case)
Revenue Assumptions
The FY 2024 Annual Comprehensive Financial Report (ACFR), scheduled for review by the
Finance Committee on December 3, 2024, reported General Fund revenues as compared to the
prior year; most major tax revenues experienced growth back to pre-pandemic levels due to
the improved local economy, high price trends, and inflation (CMR 2404-29121). Major tax
revenues have continued to grow moderately through the first quarter (Q1) of FY 2024 and is
projected to come in at the FY 2025 Adopted Budget level totaling 287.6 million. Further
discussion of changes to specific categories can be found in Attachment C. Overall, revenues are
projected to increase by $11.0 million in FY 2026, mainly in Property Tax, Transient Occupancy
Tax, and Utility Users Tax. As part of the FY 2025 Mid-Year Budget Review, staff will be
returning to Council to recommend using the FY 2024 budget saving to increase the budget
uncertainty reserve to help mitigate impacts from a potential recession, as well as smooth the
near-term shortfalls seen in this LRFF. A summary of revenue assumptions is discussed here,
extensive information regarding each revenue category can be found in Attachment C.
Tax revenues constitute approximately 60% of General Fund resources. In FY 2026, the forecast
projects a $7.6 million or 4.5% increase from FY 2025 projected levels ($169.8 million to
$177.4million). This increase is primarily attributed to higher anticipated receipts across all
categories, with Property Tax, Transient Occupancy Tax (TOT), and Utility Users Tax (UUT)
accounting for the largest increases.
•Property Taxes makes up the largest source of General Fund’s revenue, approximately
25%. In FY 2026, this revenue is anticipated to increase $3.1 million or 4.5% from FY
2025 ($68.6 million to $71.7 million). Steady residential property sales resulting in
higher property tax assessed valuation is projected to continue to grow this source
annually.
1Finance Committee, December 3, 2024; Agenda Item #2; Staff Report #2404-2912,
https://cityofpaloalto.primegov.com/portal/viewer?id=9637&type=3
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•Transient Occupancy Taxes are impacted by business and other leisure/non-leisure
travel and experienced significant reductions in the past few years due to a number of
factors resulting from the pandemic. However, this revenue was able to return to pre-
pandemic levels in FY 2023. In FY 2026, this revenue is anticipated to increase $1.3
million or 4.6% from FY 2025 ($27.9 million to $29.1 million).
•Utility Users Tax (UUT) is levied on electric, gas, and water consumption, as well as
telephone usage. Revenue in this category is impacted by consumption levels and has
continued to recover as the local economy recovered and workers returned to the office
starting in FY 2023. In FY 2026, UUT revenue is anticipated to increase by $1.6 million or
7.9% from FY 2025 ($19.9 million to $21.5 million).
The forecast for non-tax revenues projects a $3.5 million or 3.9% increase in FY 2026 from FY
2025 adopted levels. This increase is primarily attributable to charges for services and
investment income. These increases are partially offset by decreases in limited term revenue
from other agencies such as the Staffing for Adequate Fire and Emergency Response (SAFER)
Grant Program and decreased reimbursement revenue from other funds for centralized and
administrative services.
The changes by revenue category can be seen in Tables 3 and 4 below. Major tax revenue
trends are shown in Table 5 and discussed in greater detail in Attachment C.
TABLE 3: General Fund Revenue Forecast
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TABLE 4: General Fund Revenue Forecast Year to Year Percentage Change
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Expense Assumptions
As part of developing the FY 2026-2035 Forecast expenditure budget, the General Fund expense
categories have been adjusted by removing FY 2025 Adopted Budget one-time expenses and
updating major cost elements such as salary and benefits costs. Table 6 below displays the
expense forecast and when compared to the FY 2025 Adopted Budget, growth of 4.2% is
expected in FY 2026. The overall annual growth is due mainly to increases in expense categories
such as Salary and Benefits, Contractual Services, and Transfers to Other Funds.
A summary of expense assumptions is discussed here, extensive information regarding each
expense category can be found in Attachment D.
•Salary and Benefits are projected to increase $8.4 million or 4.7% from the FY 2025
($179.9 million to $188.3 million). This is primarily attributable to increases salaries ($4.5
million), retiree healthcare costs ($1.9 million) and pension costs ($1.4 million).
▪A general wage adjustment of 2% is included for all employees starting in either
January 2025 or July 2025 for all years of the forecast since no MOA’s would be in
effect at that time.
▪A reserve is included for potential changes to future labor costs including, changes
in vacancy rates, labor and benefit rate variability, and inflation assumptions.
▪A staff vacancy assumption of 5% is assumed, which is an increase from 3%
assumption most recently a few years ago, creating a tighter budget forecast as
the City continues to improve its actual vacancy rate through successful
recruitment and retention programs.
•Long Term contributions to pension and other post-employment benefits reflect
increases over the prior year and capital investments are being phased through the first
three to five years of the forecast:
▪Pension 115 Trust contributions are calculated using a lower 5.3% discount rate
for normal cost as compared to CalPERS 6.8%. Through FY 2025, it is expected that
$87.4 million ($56.4 million in the General Fund) in supplemental principal
contributions will be made to the Pension Trust. The FY 2026 budget estimates
$14.1 million ($8.5 million in the General Fund) in supplemental contributions, a
$0.2 million or 1.0% decrease from FY 2025 Adopted levels of $14.2 million. This
slight reduction is the result of the economic and demographic assumptions used
in the annual CalPERS Valuation reports, including but not limited to investment
returns.
▪California Employers’ Retiree Benefit Trust (CERBT) Fund contributions for Retiree
medical costs are calculated using a lower 5.75% discount rate as compared to a
6.25% assumption. Through FY 2025, it is expected that $14.7 million in
supplemental principal contributions will be made to the CERBT Trust. The FY 2025
Budget estimates $12.4 million in the General Fund for ADC, an approximate $1.9
million or 18.4% increase from FY 2025 levels of $10.5 million.
▪Capital Infrastructure transfers reflect the goal established as part of the 2022-
2026 Capital Improvement Plan (CIP) to restore the base portion of this transfer
to pre-pandemic levels by FY 2026. The local economy has recovered from the
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COVID-19 pandemic, and estimated transfers from TOT revenues in FY 2026 are
currently projected to increase to $14.2 million and the base transfer to increase
to $17.2 million, along with estimated interest earnings of $2.0 million, for a total
$33.4 million transfer to the Capital Improvement Fund.
•Inflationary assumptions in this long range reflect lower inflation being seen at present.
A 3% annual inflation is assumed in FY 2026 and FY 2027 and increases to 4% in FY 2028
through the end of the ten-year forecast to estimate cost increases for non-salary services
and equipment.
•Some limited term programs are not extended through the entire ten-year forecast, but
discussed later in this report to indicate that continuing the programs would require
additional resources. This LRFF also includes the City’s committed investment of $7.0
million in operating expenses for the partnership with LifeMoves and Project Homekey
site services ($1.0 million annually from FY 2025 through FY 2031). The timing of the
funding was shifted as a result of $2.0 million from FY 2023 and FY 2024 being approved
by the Council to be used to fund expenses related to the Homekey Facilities capital
project (PE-24005). Staff will monitor operating funding needs in FY 2025 to align
allocations based on the timing of the completion of PE-24005.
TABLE 6: General Fund Expense Forecast and Year to Year Percentage Change
Budget Stabilization Reserve
The City's Budget Stabilization Reserve (BSR) serves as the primary General Fund reserve. By
policy, the BSR is maintained in the range of 15 to 20% of General Fund operating expenditures,
with a target of 18.5%. As part of the FY 2025 Adopted Budget, the Council approved a targeted
BSR of 18.5% or $54.4 million as part of the budget balancing strategy. Any reduction to the
reserve below 15% requires City Council approval. At the discretion of the City Manager, any BSR
balance above 18.5% may be transferred to the Infrastructure Reserve (IR) in the Capital
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Improvement Fund and the City's Section 115 Pension Trust Fund, as outlined in the Retiree
Benefit Policy. The BSR is used to fund unanticipated one-time costs as opposed to ongoing or
recurring operating expenditures; ongoing revenue or expense trends are updated as part of the
annual budget process to adjust ongoing needs. The City's intent is to fund ongoing programs
and services with ongoing dollars. Maintaining the BSR at 18.5% or higher provides flexibility for
the City to deal with unforeseen issues that may arise. Furthermore, establishing, and following,
sound fiscal reserve policies has been a strong factor in the City being rated AAA by rating
agencies.
2, the City’s current BSR balance is $65.9 million, approximately $8.9 million
above the 18.5% target of $54.4 million for FY 2025. The proposed allocations are for the Capital
Fund Infrastructure Reserve (IR) of $3.0 million and Budget Uncertainty Reserve of $5.9
million. While it is a departure from the current policy, this allocation provides flexibility to fund
capital cost uncertainties and adequate funding to address the projected FY 2026 budget
shortfall, ensuring the City maintains high quality service level. Staff anticipates returning to
Council in February 2025 with the FY 2025 Mid-Year Review and recommendations in alignment
with the allocation below for the appropriation of BSR funds above the 18.5% level. These actions
will leave the BSR at $54.4 million per the 18.5% Council recommended level.
2Finance Committee, December 3, 2024; Agenda Item #2; Staff Report #2404-2912,
https://cityofpaloalto.primegov.com/portal/viewer?id=9637&type=3
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TABLE 7: Budget Stabilization Reserve (BSR) Summary (in millions)
General Fund BSR Balance, June 30, 2024 $65.9
FY 2025 Approved Adjustments to the BSR Balance
FY 2025 Adopted Budget ($2.6)
Subtotal: Approved Adjustments to the BSR Balance ($2.6)
Subtotal: BSR Balance, After Approved Adjustments $63.3
FY 2025 RECOMMENDED Adjustments to the BSR Balance
(to be appropriated in FY 2025 Mid-Year Budget Review)
Transfer to Infrastructure Reserve (IR) in the Capital Improvement Fund ($3.0)
Increase Uncertainty Reserve ($5.9)
Subtotal: RECOMMENDED Adjustments to the BSR Balance ($8.9)
Current Projected FY 2025 BSR Level, (June 30, 2025)$54.4
As mentioned previously, major tax revenues have continued to grow moderately through the
first quarter (Q1) of FY 2025 in alignment with projections and are expected to come in at the FY
2025 Adopted Budget levels. In FY 2025, staff estimates total revenues to be consistent with the
Adopted Budget of $287.6 million. Further discussion of changes to specific categories for FY
2026 can be found in Attachment C. Staff will continue to monitor revenues especially amongst
significant sources with anticipated increases and decreases and provide another update in FY
2025 mid-year budget update (February 2025).
In addition to the BSR, funding of approximately $6.1 million remains in an Uncertainty Reserve
that was established as part of the FY 2023 Mid-Year Review to fund the two-year budget strategy
for FY 2024 and FY 2025. These funds are one-time in nature so once they are spent, they are
not available for ongoing needs.
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Assumptions NOT Included in Forecast
It should be noted that this forecast does not include several potential impacts to the FY 2026-
2035 LRFF that are outlined in Attachment E. These items are known projects or areas of
investment that are priorities but have not been fully developed in terms of costs and timelines.
This is not intended to be a comprehensive list nor in any priority order.
FY 2026 Budget Development Guidelines
As discussed earlier in this document, this preliminary forecast represents the initial steps of the
FY 2026 budget development process. Due to the clear overlap of projecting the City’s fiscal
condition and the need to shape service level expectations, staff recommends that the inclusion
of Budget Development Guidelines be incorporated into the discussions at the beginning of an
annual budget process. The FY 2026 Budget Development Guidelines, which are detailed in
Attachment A, are meant to reflect the anticipated fiscal condition of the City and to provide
high-level budgetary direction to the organization. These guidelines will shape and inform the
annual financial planning and the allocation of resources across the organization, especially in
the General Fund.
Pairing Budget Development Guidelines with the forecast at the beginning of the budget process
links the anticipated fiscal condition of the organization with the necessary context regarding
service delivery prioritization and resource allocation that will be further explored through the
process. This also ensures that the City is able to proactively address anticipated changes in its
fiscal condition through the budget process.
Conclusion
This forecast maintains current service levels approved in FY 2025 and should be used for
planning purposes to assist in gauging effects of major policy interventions against a likely “status
quo” version of the future. The level of uncertainty in this forecast is similar to where it was a
year ago in terms of impacts from economic and geo-political uncertainty and evaluating
potential impacts on the local economy. Expense savings and uptick in several revenue categories
that occurred in FY 2024 caused a one-time surplus of $8.9 million. These revenue trends
continue in the forecast, although increases in the near term may be flattened due to economic
stagnation. Staff will return to Council in February 2025 with the FY 2025 Mid-Year Review,
recommending that the $8.9 million surplus be allocated to the Infrastructure Reserve d ($3.0
million) and Budget Uncertainty Reserve ($5.9 million) to help bridge the FY 2026 budget gap, in
accordance with Council policy allowing the City Manager to direct amounts exceeding the BSR
target.
The LRFF Base Case assumes a weak economy in 2025, followed by a return to trend growth rates
starting in 2026 and through the remaining ten-year forecast period. Revenue growth is
anticipated to stagnate through the end of FY 2025, and potentially into FY 2026, as inflationary
pressures remain elevated and borrowing costs continue to weigh on economic activity. As a
result, the LRFF projects a shortfall of $12.0 million in FY 2026, followed by shortfalls ranging from
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$7.9 million in FY 2027 to $5.6 million in FY 2029. FY 2030 has a projected surplus of $2.0 million
which continues to grow through FY 2035. These amounts are fairly consistent with previous
projections used as part of the two-year budget balancing strategy when adopting the FY 2025
Budget. Additionally, this LRFF projects $287.6 million in total revenues in FY 2025, consistent
with the adopted budget.
Alternative Scenarios for Consideration
Alternative Forecast Scenario A: Economically Sensitive Revenue Loss
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TABLE 8: FY 2026 – FY 2035 Long Range Financial Forecast
Alternative Forecast B: One-time Compensation Adjustment, Additional 1%
Consistent with City Council direction and past practice, the Base Case assumes a 2% general
wage adjustment in the years beyond the terms of existing Memorandum of Agreements
(MOAs). As of the timing of this forecast, MOAs are in effect through January 2025 (Service
Employees International Union) (SEIU) and June 2025 (all other full-time labor groups). To
support ongoing efforts for competitive wages and other terms of employment, the Base Case
forecast includes a reserve for potential changes in new labor agreements, pension, or other
benefits. Offering competitive compensation plans aligns with industry standards for attracting
and retaining a skilled and motivated workforce and better positions the City of Palo Alto as an
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employer of choice. This level of funding is intended to offset potential future costs and may
differ from actual outcomes. Negotiations for new labor agreements are anticipated to occur in
FY 2025 for new terms beginning in FY 2025 and FY 2026.
TABLE 10: FY 2026 – FY 2035 Long Range Financial Forecast
Alternative Forecast B
TABLE 11: FY 2026 – 2035 Long Range Financial Forecast Net Operating Margin
Alternative Forecast B
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FISCAL/RESOURCE IMPACT
Financial implications from this report and input from the Finance Committee and City Council
will be considered in the City Manager’s development of the Fiscal Year 2026 budget.
STAKEHOLDER ENGAGEMENT
The preliminary forecast for 2026-2035 represents the beginning of the fiscal year 2026 budget
development process. Information provided in this report will be discussed with the City Council
after the Finance Committee reviews and provides recommendations. Those conversations will
provide direction to staff in the budget development process. It is anticipated that conversations
with City Council and the community will occur through public budget hearings in Spring 2025,
according to the standard budget adoption process.
The community can track previous and upcoming FY 2026 budget discussions and information at
www.cityofpaloalto.org/budget
ENVIRONMENTAL REVIEW
This report is not a project for the purposes of the California Environmental Quality Act.
Environmental review is not required.
ATTACHMENTS
Attachment A: FY 2026 Budget Policy Guidelines
Attachment B: The Economy
Attachment C: General Fund Base Case Revenue Assumptions
Attachment D: General Fund Base Case Expense Assumptions
Attachment E: Assumptions Not Included in Forecast
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APPROVED BY:
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Attachment A – FY 2026 Budget Development Guidelines
1) Develop a structurally balanced budget that brings ongoing revenues and expenses into
alignment. Develop a plan for any structural imbalance to ensure that the City maintains
fiscal sustainability over the short, medium, and long-term.
2) Allocate one-time resources for one-time needs rather than committing one-time
resources to ongoing services. Examine appropriate uses of revenue surpluses that
exceed forecasted levels such as planning for recession needs, restoration needs, and
strategic investments.
3) Review resource allocation for the City Council’s existing priorities and identify priority
funding needs.
4) Focus on business process redesign to enhance quality, flexibility, and cost-effectiveness
of service delivery (include examining opportunities to streamline, simplify, reorganize,
and reallocate resources to avoid duplication of effort).
5) Explore alternative service delivery models (such as partnerships with non-profits or
other public/private sector groups) to minimize overlap, maximize cost share, and
effectively use resources.
6) Continue to thoroughly analyze non-personnel/equipment/other costs, such as contract
services, for cost savings opportunities or realignment with current needs.
7) Explore the expansion of existing revenue sources or the addition of new revenue
sources, including the alignment of existing charges for services and the opportunity to
establish new fees, when appropriate.
8) Continue to analyze and prioritize resource augmentations, seeking to offset
augmentations with reductions elsewhere for net-zero impacts to the budget whenever
possible; however, ensuring when resource augmentations are added, it is in alignment
with one-time and ongoing forecasted sources.
9) Continue to prioritize proactively funding long term liabilities including but not limited
to debt obligations, pension obligations, and capital infrastructure in accordance with
City policies as approved by the City Council.
FY 2026 Budget Development Guidelines
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ATTACHMENT B
The Economy
At the national level, economic growth through the third quarter of calendar year 2024, was led
by GDP (gross domestic product) growth and strong consumer (retail) spending despite lower yet
still higher than preferred inflation rates and borrowing costs with interest rates. The gross
domestic product (GDP), a measure of all goods and services produced in the economy, increased
at an annualized rate of 2.8% in the third quarter of 2024, in between the first quarter of 1.6%
and second quarter of 3.0% growth. As of October 2024, the consumer price index (CPI), which
measures changes in the prices paid by consumers for a basket of goods and services, was 2.6%.
This is lower than the 3.2% CPI from a year ago. Assumptions in the LRFF report for general cost
increases are using a CPI of 3% in FY 2026 and FY 2027 and 4% for FY2028 and beyond. The
unemployment rate, as of October 2024, is 4.1% which is up from 3.7% at the beginning of the
2024 calendar year and is consistent with a “soft-landing” economic slowdown. The
unemployment rate in the past six months has been in the low 4% range as a result of the
economy slowing down. As expected, the slowdown in economic growth intends to avoid
recession for the purpose of stopping the economy from overheating and continuing to
experience higher inflation. There are factors to monitor that could change the expected
economic growth pattern such as the election results and changing national economic policies
and geopolitical events.
The local economy continues to show sluggish performance in the calendar year 2024 with higher
than U.S. growth expected in 2025 and 2026 led by technology and aerospace; however, recent
election results has added additional market uncertainty to this outcome. The UCLA Anderson
outlook states, “The California economy is expected to grow faster than the national economy in
2025 and 2026, but not by much. The risks to the forecast are political and geopolitical, and on
the downside, the interest rates could potentially still disrupt the current expansion and, on the
upside, international immigration and accelerated onshoring of technical manufacturing could
increase growth.”
According to the U.S. Bureau of Economic Analysis (BEA), the US economy expanded an
annualized 2.8% in the third (calendar) quarter of 2024, below 3% in the second quarter. Personal
spending increased at the fastest pace since the first quarter of 2023 (2.8%), boosted by a 6.0%
surge in consumption of goods and a robust spending on services, mostly prescription drugs,
motor vehicles and parts, outpatient services and food services and accommodations.
Government consumption also rose more, led by defense spending, and investment in
equipment increased. In addition, the contribution from net trade was less negative, with
increases in both exports and imports, led by capital goods, excluding autos. On the other hand,
private inventories dragged from the growth, and fixed investment slowed, led by a decline in
structures and residential investment.
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Table 1: National Gross Domestic Product (GDP)
Real GDP: Percent Change from Preceding Quarter
U.S. Bureau of Labor Statistic
The national inflation rate remained steady but still slightly high compared to the 2% rate targeted by
the federal reserve at 2.6% in October 2024, up from September (2.4%) which was the lowest rate since
May 2020 (0.1%). It marks the first increase in inflation in seven months, as energy costs declined less,
mainly due to gasoline and fuel oil while natural gas prices rose, the same as in September. Also, inflation
for shelter steadied at 4.9%. On the other hand, inflation slowed for food and transportation and prices
continued to fall for new vehicles and used cars and trucks. On a monthly basis, CPI rose by 0.2%,
consistent with the previous three months. The index for shelter rose 0.4%, accounting for over half of
the monthly increase. Meanwhile, core inflation remained steady at 3.3% as expected.
Table 2: National Inflation Rate (aka Consumer Price Index (CPI))
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The nation’s unemployment rate is 4.1% as of October 2024, compared to a record high of 14.7%
at the height of the pandemic in April 2020. The number of unemployed individuals was broadly
unchanged at 7 million. Among those without employment, permanent unemployment rose
slightly to 1.8 million, while temporary layoffs were little changed at 846,000. In turn, long-term
unemployment was little changed from the previous month at 1.6 million. In the meantime, the
labor force participation rate eased by 0.1 percentage points to 62.6%. Per the State of
California's Employment Development Department, the state’s unemployment rate as of
September 2024 is 5.3% with the prior year being 5% and the County of Santa Clara is 4.1%.
Historically, the Bay Area job growth has been led by the Peninsula for the past several years. The
unemployment rate for the San Francisco Peninsula and Palo Alto is 4.2% and 3.5% respectively
as of September 2024; last year it was 4% and 3.3%, respectively.
Table 3: U.S. Unemployment Rate
U.S. Bureau of Labor Statistic
The elevated inflation rate has resulted in the continued erosion of purchasing power; however, there is
still growth in U.S. consumer spending. Personal consumption expenditures (PCE) are the primary measure
of consumer spending on goods and services in the U.S. economy. It accounts for about two-thirds of
domestic final spending, and thus it is one of the main factors that indicates future economic growth.
Strength in PCE spending tends to prompt additional business spending. Personal spending in the United
States rose by 0.5% from the previous month to an annualized rate of $20.024 trillion in September 2024,
accelerating from the 0.3% increase in the previous month, and ahead of market expectations of a 0.4%
increase. The result extended the period of resilience of the US consumer to higher interest rates, adding
leeway for the Federal Reserve to hold rates at a restrictive level to combat inflation. The rise was owed
to higher spending in goods, amid increases for durable goods and non-durable goods, consistent with the
jump in spending for services.
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Table 4: Personal Consumption Spending Growth
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ATTACHMENT C
Table 1: General Fund Base Case Revenue Assumptions
Sales Tax
Compared to FY 2019 pre-pandemic actuals of $36.5 million, sales tax revenue declined by $7.4
million, or 20.2%, during the pandemic in FY 2021. The recovery, which began in the last quarter
of FY 2021, resulted in the FY 2022 and FY 2023 receipts increasing by $3.6 million or 12.3% and
$4.2 million or 12.9%, respectively. The FY 2024 receipts increased by $0.6 million or 1.5%. With
the economic “soft-landing”, the FY 2025 receipts is expected to be relatively flat; however, with
the expected opening of a new car dealership at the end of this calendar year, a modest increase
may develop compared to FY 2024. The general retail, food products (includes restaurants),
transportation, and business to business (includes car leasing) categories experienced increases.
This economic trend was mixed in the San Francisco Bay Area and in California. A few
municipalities had single digit increases in FY 2024 while most had single or double digit
decreases.
The FY 2025 Adopted Budget for Sales Tax is $39.6 million, a $2.1 million or 5.6% increase from
FY 2024 actuals of $37.5 million. Staff continues to monitor the FY 2025 sales tax trends. Revenue
for FY 2026 is projected at $39.8 million, a slight $0.2 million or 0.6% increase over the FY 2025
Adopted Budget due to many uncertainties surrounding the economy. The Base Case assumes
2.3% to 4% growth over the length of the forecast with a 10-year compound annual growth rate
(CAGR) of 3.4%.
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TABLE 2: City of Palo Alto Sales Tax Revenues through FY 2035
Property Tax
Property tax revenue is the General Fund’s largest revenue source and represents approximately
25% of the total revenues. Historically, the 10-year compound annual growth rate (CAGR) was
8.1%, with a low of 4.9% in FY 2022 and a high of 11.5% in FY 2015. During economic downturns,
impacts to property tax occur a year later, as a result, the $2.8 million or 4.9% growth in FY 2022
was the lowest in the past decade. This category also includes receipts for excess Educational
Revenue Augmentation Fund (ERAF) distributions from the County of Santa Clara. ERAF is the
fund used to collect and disburse property taxes that are shifted to/from cities, the County, and
special districts prior to their reallocation to K-14 school agencies. When the state shifts more
local property tax than required to support schools, these funds are returned and known as
excess ERAF. As a result of the volatility of ERAF, it is not considered a permanent local revenue
source even though it has performed strongly in the past decade.
ERAF Reserve: Since FY 2021, the City has engaged in several disputes over the calculation and
disbursement of excess ERAF Funds. In response, the City established reserves for potential
estimated losses at 25% of total Excess ERAF receipts. There were favorable resolutions with the
State and Santa Clara County, followed by the State and California School Board Association, for
two prior disputes. The associated reserves have been released to the Budget Stabilization
Reserve (BSR) or consolidated for potential future at-risk amounts.
A few years ago,, the State Controller’s Office issued a negative audit finding against Marin
County. The state asserts that former Redevelopment Agency funds, which are now part of the
regular property taxes, should be excluded from the excess ERAF calculation. Marin County is
challenging this finding and the County of Santa Clara has filed a lawsuit. The estimate is, if this
audit finding is sustained, 22% of excess ERAF is at risk for fiscal years 2021, 2022, 2023, and
2024. If the finding holds, the County of Santa Clara, as well as other Excess ERAF counties, would
be negatively impacted in FY 2025 and beyond. In FY 2024, $5.6 million was set aside for the
Reserve of excess ERAF for the at-risk amount. In addition, 22% or $1.5 million in FY 2025 budget
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has been reduced by this amount. Staff will continue to monitor the status of this audit finding
and report on any significant developments.
TABLE 3: City of Palo Alto Property Tax Actuals and Forecast through FY 2035
Transfer of ownership has been a significant driver of past growth; however, that growth did
moderate in FY 2024 which is expected to continue in FY 2025 due to the economic slowdown. For
example, the median sales price of single family residential in the first (fiscal year) quarter of FY 2025
increased by 4% over the prior year.
The FY 2025 Adopted Budget for Property Tax is $68.6 million, a $2.3 million or 3.5% increase over
the FY 2024 actuals of $66.3 million. In FY 2026, this revenue is anticipated to increase to $71.7
million, a $3.1 million or 4.5% increase over the FY 2025 Adopted Budget amount. The Base Case
assumes 5.2% to 6.4% growth over the length of the forecast with a 10-year CAGR of 5.9%.
Transient Occupancy Tax (TOT)
Revenue in this category is impacted by business and other leisure/non-leisure travel and
experienced significant reductions in FY 2020 and FY 2021 due to public health orders, travel
restrictions, and diminishing business and personal travel plans resulting from the pandemic. TOT
revenue declined by $20.5 million or 79.8% in FY 2021, when comparing the FY 2019 pre-
pandemic actuals of $25.6 million. As public health conditions improved and travel resumed, this
revenue began to recover, significantly grew in FY 2022, and in FY 2023, currently, this revenue
has recovered to pre-pandemic levels. The opening of the two Marriott hotels in mid and late FY
2021 and the re-opening of multiple hotels in FY 2021 and FY 2022 were positive developments
that helped drive recovery for this tax revenue.
The FY 2025 Adopted Budget for TOT revenue is $27.9 million, a $0.1 million or 0.4% increase
over FY 2024 actuals of $27.8 million. In FY 2026, this revenue is anticipated to increase to $29.1
million. Year-to-date (as of August 2024), daily average room rates increased by 0.5% from $220
per day to $221 per day while occupancy rate decreased by 9.9% from 76.6% to 69.0%. Revenue
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in this category is experiencing a near term stagnation; however, it’s anticipated to grow in FY
2026 and beyond at a projected rate of 1.3% to 5.3% over the length of the forecast, or a 4.9%
10-year CAGR.
TABLE 4: City of Palo Alto Transient Occupancy Tax Actuals and Forecast through FY 2035
Note: January 2015, TOT Rate went from 12% to 14%
April 2019, TOT Rate went from 14% to 15.5%
Utility User’s Tax (UUT)
The UUT is levied on electric, gas, and water consumption, as well as on telephone usage.
Revenue in this category is impacted by consumption levels and has experienced reductions in
prior periods due to water conservation programs and reduced workforces and business closures
during the pandemic. This revenue has recovered as the local economy recovered and workers
returned to the office in FY 2023. In addition, higher utility commodity costs resulted in sizable
utility rate increases and higher UUT revenues. The FY 2025 Adopted Budget for UUT is $19.9
million, $0.9 million or 4.7% higher than the FY 2024 actuals of $19.0 million. In FY 2026, this
revenue is anticipated to increase to $21.5 million, a $1.6 million or 7.9% increase over the FY
2025 budgeted amount. Revenue in this category is expected togrow at 2.5% to 9.8% over the
length of the forecast, or a 10-year CAGR of 4.0%.
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TABLE 5: City of Palo Alto Utility Users Tax Actuals and Forecast through FY 2035
Documentary Transfer Tax (DTT)
Revenue in this category is highly volatile and dependent on sales volume and the mix of
commercial and residential sales. DTT experienced record receipts in FY 2021 and FY 2022 at
$10.6 million and $12.0 million, respectively,which was followed by a sharp decline in FY 2023 at
$5.8 million. In both record years, the primary drivers werelarge commercial transactions, six in
FY 2021 and nine in FY 2022, and robust residential sales. In FY 2023, sales activities normalized,
dropping revenue to $5.8 million, but the FY 2024 receipts were $7 million, a 10.1% increase in
transactions. The FY 2025 Adopted Budget for DTT is $7.3 million, $0.3 million or 3.5% higher
than FY 2024 actuals. In FY 2026, this revenue is projected to increase to $7.9 million, a $0.6
million or 9.4% increase, from the FY 2025 budgeted amount of $7.3 million.
As in past years, this revenue source is challenging to forecast and can fluctuate month to month
depending on real estate transactions. The number of transactions through October 2024 (217)
is 14.2% higher than October 2023, with the total revenue from these transactions increasing by
14.2%. The Palo Alto housing market remains strong, as discussed in the Property Taxes section,
single family residential median sales price in Palo Alto has increased, which is an expected
occurrence as the predicated economic soft landing and lower mortgage rate will impact
property sales activity in FY 2025.
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TABLE 6: City of Palo Alto Documentary Transfer Tax Actuals and Forecast through FY 2035
Business Tax (BT)
In November 2022, voters approved Measure K (Business Tax) to provide additional funding for
critical public safety needs, transportation safety improvements and grade separations, and
affordable housing and unhoused services. The first BT payment was due on January 1, 2024, for
calendar year 2023. As a result, the FY 2024 receipt of $5.3 million represents a year and half of
collection. However, the initial collection was based on a BT rate of 3.75 cents per square foot
which will increase to 7.5 per square foot starting on January 1, 2025. The tax applies to non-
exempt businesses above 10,000 square feet with an annual single business cap of $500,000.
Both the rate and the cap will be increased annually by 2.5% beginning in FY 2027. A limited
number of businesses have the option to offset this tax by their sales/use tax collection. After
the initial first payment, filings will be submitted on a quarterly basis.
The FY 2025 Adopted Budget for BT is $4.8 million, a $0.5 million or 9.9% lower than the FY 2024
actuals of $5.3 million. In FY 2026, this revenue is anticipated to increase to $6.5 million. Revenue
in this category, after an initial double-digit growth due to the rate increase, is expected to
experience growth at 3% to 3.8% over the length of the forecast, with a 10-year CAGR of 5.6%.
Since this is a relatively new revenue source, staff continues to monitor collections and will make
revisions if needed as part of FY 2026 budget process.
Return on Investment
The return-on-investment category reflects the interest earnings on the City’s investment
portfolio. This category is a combination of past investments, new investments at current market
rates, and available investable cash which fluctuates seasonally and annually. As of the timing of
this LRFF, the Federal Open Market Committee (FOMC) has cut the federal funds rate twice
totaling 0.75% to 4.75% (75 basis points). It is expected that further interest rates cuts will occur.
The actual FY 2024 interest earning was $3.7 million, higher than expected due an increasing
interest rate environment. The average portfolio rate of return for the first quarter of FY 2025
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was 2.46%, and a 2.59% average yield as of the fourth quarter of FY 2024. The adopted General
Fund FY 2025 budget for interest earning is $3.3 million, and is projected at $3.8 million for FY
2026, with a 4.2% CAGR over the ten-year period.
TABLE 7: Palo Alto Historical Investment Portfolio Yields and Citywide Interest Earnings
Rental Income
Rental Income of $16.4 million in FY 2026 primarily reflects rent paid to the General Fund from
the City’s Enterprise Funds and tenants at the Cubberley Community Center. Rental income is
projected to remain flat compared to the FY 2025 Adopted Budget. This revenue category will
be further reviewed and revised subsequent to this forecast, typically based on the December-
to-December California Consumer Price Index (CCPI) in the San Francisco Bay Area.
Charges for Services and Permits and Licenses
Revenues in the Charges for Services and the Permits and Licenses categories are anticipated to
be $41.3 million and $11.6 million, respectively, in FY 2026. Together, these amounts total $52.9
million and are approximately $3.6 million higher than the FY 2025 Adopted Budget of $49.3
million. Increases in these categories are primarily due to revenue adjustments for the agreement
with Stanford to provide Fire and Dispatch services, and higher forecasts for permit and plan
review services processed through the Development Center.
The revenue estimates in these categories are based on current activity levels, and these revenue
sources are primarily driven by the cost of staff to provide services to the community. To ensure
alignment with target cost recovery levels, the City has engaged a consulting firm to assist with a
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comprehensive cost allocation plan and municipal fee study during FY 2025, with implementation
anticipated in FY 2026. Staff will evaluate and bring forward recommendations to align fees with
target cost recovery levels to cover general salary and benefits increases and CPI trends. These
efforts aim to improve fee transparency and ensure equitable cost distribution across City
services. One exception to this is Development Services activities and related revenue.
Development Services fees are fully cost-recoverable, and the department has been modeled as
cost-neutral in this forecast.
Charges for Service - Stanford Fire and Dispatch Services: The City and Stanford have two separate
agreements for the provision of fire response and emergency dispatch services. The fire response
services agreement became effective in July 2018 and outlines service level terms and a new cost
allocation methodology as the baseline for agreement costs. The term extended through June
2023, with annual renewals in effect through June 2028 unless otherwise terminated. The
agreement includes a staffing deployment model for suppression and medical services, which
was approved by the City Council in October 2017 and deployed in January 2018. This forecast
aligns with the new staffing model; and, in accordance with the agreement, adjustments to
revenue from Stanford have been aligned with the year-over-year changes to the operating
expenses in the Fire Department over the forecast period. Similarly, changes to the revenue
received for dispatching services have been aligned with the operating expenses in the Technical
Services Division of the Police Department where the costs to provide these services are
budgeted. For fire and police revenue, additional adjustments may be applicable if new labor
agreements are negotiated for the forecast period. Revenues for these services are based on
current anticipated changes in salary and benefits costs within the Fire Department and Police
Department Dispatch Unit.
Charges to Other Funds
The main source of revenues in this category is General Fund administrative cost allocation plan
charges to the Enterprise and Internal Service Funds. Internal support departments such as
Administrative Services, Human Resources, and Council Appointed Offices provide services to
Enterprise and Internal Service Funds. The costs for these services are recovered through the
administrative cost allocation plan charges. The FY 2026 estimate for Charges to Other Funds of
$15.1 million remains flat compared to the FY 2025 budgeted amount. To ensure alignment with
target cost recovery levels, the City has engaged a consulting firm to assist with a comprehensive
cost allocation plan and municipal fee study in FY 2025, with targeted implementation in FY 2026.
Staff will evaluate and bring forward cost allocation recommendations.
Operating Transfers-in
Operating Transfers-in materialize as expenses in other funds throughout the City and as a
revenue in the General Fund. This budget category includes repayment of a previous loan from
the General Fund to the Airport Fund, funding for police patrol in the downtown area, and the
equity transfer from the Electric and Gas funds. Overall, the Operating Transfers-in are estimated
to be $29.1 million for FY 2026. While this matches the total for FY 2025, the prior year included
a one-time $2.0 million transfer from the General Benefits Fund. This transfer was a refund of
allocated charges paid by General Fund departments into the General Benefits Fund in prior
years, which had accumulated in fund balance. Additionally, the Electric Fund equity transfer
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increased from $15.1 million to $18.3 million, while the Gas Fund equity transfer decreased from
$10.9 million to $9.7 million, reflecting updated revenue forecasts for each fund.
In accordance with the methodology approved by the City Council in June 2009, the Electric
Fund’s equity transfer to the General Fund equity transfer has been calculated by applying a rate
of return on the capital asset base of the Electric Fund. This rate of return is based on PG&E’s
rate of return on equity as approved by the California Public Utilities Commission (CPUC). The
Gas Fund’s equity transfer calculation was updated based on the passage of Measure L on the
November 2022 ballot. As outlined in the ballot measure language, the Gas Fund equity transfer
can be up to 18% of annual gross gas retail revenue. This LRFF increases the transfer to 18% in FY
2026, where it is projected to remain through 2035.
Other Revenue and Revenue from Other Agencies
Revenues in these two categories is projected at $3.6 million in FY 2026, $0.9 million lower than
the FY 2025 adopted budget of $4.5 million. These two revenue categories mainly account for
grants or reimbursements from the federal and state governments or other local jurisdictions.
Other Revenue decreased slightly by $0.2 million in FY 2026 as a result of limited time funding in
FY 2025 from LifeMoves, ,for reimbursement related to the Homekey Facility. Revenue from
Other Agencies decreases by $0.7 million in FY 2026, because FY 2025 is the last year of the
Staffing for Adequate Fire and Emergency Response (SAFER) grant funding awarded to the City
in FY 2022.
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ATTACHMENT D
General Fund Base Case Expense Assumptions
Salary and Benefits
Consistent with prior years, the FY 2026 salaries and benefits costs represent approximately 60%
of the General Fund budget expenditures. Sa lary and Benefits are projected to increase $8.4
million or 4.7% from the prior year, from $179 .9 million to $188 .3 million. Discussed in
the following sections, this is primarily attributable to increases in salaries ($4.5 million),
retiree healthcare costs ($1.9 million) and pension costs ($1.4 million).
Salary
Consistent with the City’s salary budget methodology for recent budgets, positions are budgeted
at the actual rate of pay of employees including benefit selections as of Fall 2024. Then, by
position, salary costs are updated in accordance with applicable Memorandum of Agreements
(MOA’s) between the City and its labor groups and the Management and Professional Personnel
and Council Appointees Compensation Plan(s).
In FY 2023, the City Council engaged with labor groups to negotiate new agreements for wages,
benefits, and other terms and conditions of employment. These agreements extend through
January 2025 (SEIU) and June 2025 (all other labor groups) for full-time staffing and include target
market adjustments to align salaries with benchmark studies, Cost of Living Adjustments (COLAs),
and other benefits such as a flexible compensation benefit.
The forecast assumes step increases for employees in applicable positions, including Service
Employees International Union (SEIU), International Association of Fire Fighters (IAFF), and Palo
Alto Peace Officers’ Association (PAPOA), and merit increases for Management and Professional
employees including Utilities Management & Professional Association of Palo Alto (UMPAPA). A
general wage adjustment of 2% is included for all employees starting in either January 2025 or
July 2025 for all years of the forecast since no MOA’s would be in effect at that time. This is
consistent with prior Council direction in previous LRFF reporting to us e the 2% increase as a
forecasting assumption, not as a commitment to future negotiations. The FY 2025 Budget
includes MOA terms for a 4% COLA adjustment (all labor groups), 2% market alignment (Safety
only), and increase in flexible compensation payment from $100 to $200 per month (all labor
groups except SEIU).
A reserve is included for potential changes to future labor costs including changes in vacancy
rates, labor and benefit rate variability, and inflation assumptions. Offering c ompetitive
compensation plans aligns with industry standards for attracting and retaining a skilled and
motivated workforce and better positions the City of Palo Alto as an employer of choice. This
level of funding does not reflect a commitment to future negotiations and may differ from actual
outcomes. Negotiations for new labor agreements are anticipated to occur in the next year for
new terms beginning in FY 2025-26. An alternative scenario is included in this report for increases
beyond the assumptions described above.
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Additionally, the budget includes vacancy savings that are expected to materialize as positions
are vacated and new employees are hired through the normal course of business. As of the
timing of this LRFF, the vacancy rate is approximately 10%. Vacancy savings from public safety
positions are typically exhausted by uses such as backfill, hire ahead programs, and overtime.
Consistent with changes in the previous LRFF, this forecast assumes a vacancy rate of 5% in
all years. This results in additional savings of approximately $5.1 million in FY 2026 and increases
to $6.5 million annually over the forecast period. Consistent with past practice, the vacancy
assumption is lower than the actual vacancy rate to allow departmental use of those
savings for other staffing strategies, such as filling staffing gaps by contracting for
professional services, hiring ahead to allow overlap and smooth transitions, piloting new
technologies to increase efficiency in the absence of staff, and supporting a summer internship
program.
Benefits
Pension: Pensions are budgeted based on CalPERS determined rates as of the June 30, 2023
valuation for the City’s miscellaneous and safety plans (CMR 2405-3062 1). CalPERS determines
the City’s total contributions for a given Fiscal Year as the sum of two factors: Normal Cost (NC)
and Unfunded Accrued Liability (UAL). Together the NC and the UAL expressed as a percentage
of payroll is the ‘blended rate’ and is used to represent total costs in the discussion below.
The Normal Cost (NC) is expressed as a percentage of payroll and is paid as part of the payroll
reporting process of active employees. Commonly referred to as the ‘pay-go’ cost, the NC is
variable and increases or decreases directly with the salary levels of the City. It represents the
necessary funding for the City to pay for employees presuming that CalPERS meets the current
set of assumptions.
In a year that CalPERS does not meet assumptions, due to plan changes, assumption changes,
method changes, or plan experience (including investment gains/losses), there is an increase or
decrease to the Unfunded Accrued Liability (UAL). Commonly referred to as the ‘catch-up’ cost,
the UAL is expressed as a dollar amount and is calculated over an amortized period with defined
annual payments, similar to a mortgage. The contributions for UAL are billed as a flat dollar
amount as opposed to a percentage of payroll due to potential funding issues that could arise
from a declining payroll or number of active members in the plan. However, CalPERS provides an
estimated percentage of payroll for UAL to allow a consistent comparison of total costs.
The miscellaneous plan total costs are projected to decrease from the current 47.4% in FY 2025
to 43.7% in FY 2026. In the safety plan, total costs are projected to decrease from the current
83.1% in FY 2025 to 81.7% in FY 2026. These rates do not consider the employee pick-up of the
1 Finance Committee, September 17, 2024; Agenda Item #1; CMR 2405-3062,
https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=64617
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employer share; that pick-up materializes as savings in the City’s pension costs. Consistent with
applicable MOAs, the LRFF presumes that the miscellaneous plan will pick up 1 to 2% of the
employer pension cost and that safety plan members will pick up 3 to 4%.
The FY 2024 and FY 2025 budgets were impacted by significant swings in investment gains and
losses earned by CalPERS in the periods ending June 30, 2021 and 2022. The FY 2024 budget
reflected significant investment returns of +21.3% (+6.8% target) and changes to economic and
demographic assumptions resulting from the CalPERS Asset Liability Management (ALM) process
and Experience Study completed in November 2021. As part of the ALM, the CalPERS board
approved a reduction to the discount rate (from 7.0 to 6.8%), revised actuarial assumptions (price
inflation from 2.5 to 2.3%), and a new asset allocation targeting 1/3 investment in private assets,
5% leverage, and reduced public equity exposure. FY 2025 on the other hand reflected an
investment loss of -6.1% (+6.8% target), nearly offsetting the positive impacts experienced in the
prior year’s investment gains.
The current LRFF uses an investment return of 5.8% as indicated in the June, 30, 2023 valuation
report. Since the issuance of the current valuation, CalPERS announced a preliminary investment
return of +9.3% (+6.8% target) for the period ending June 30, 2024 2 which has been recently
revised to 9.5%. These results will be included in the CalPERS valuation report issued in Fall 2025
to inform the development of the 2027-2036 LRFF and FY 2027 budget. The resulting liability
from investment returns that did not meet target levels will be amortized over 20 years with a 5-
year ramp-up period. To inform this LRFF, staff used the CalPERS Pension Outlook Tool to
calculate the estimated impacts, resulting in additional costs of $0.2 million ($0.1 million in the
General Fund) in FY 2026, and increasing to $1.2 million ($0.5 million in the General Fund) at the
peak of the 5-year ramp in FY 2030.
In the General Fund, it is anticipated the City will spend a total of $51.1 million on total pension
costs in FY 2026, including both CalPERS contributions and supplemental Pension Trust Fund
contributions. This is approximately $1.4 million higher than the prior year costs of $49.7 million,
or a 2.9% increase. These expenses represent approximately 16% of the General Fund’s total
expenses.
TABLE 1: CalPERS’ Projected FY 2025-2035 Blended Retirement Rates
FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
FY
2030
FY
2031
FY
2032
FY
2033
FY
2034
FY
2035
Miscellaneous
Safety
2 CalPERS Reports Preliminary 9.3% Investment Return for 2023-24 Fiscal Year:
https://news.calpers.ca.gov/calpers-reports-preliminary-9-3-investment-return-for-2023-24-fiscal-
year/#:~:text=CalPERS%20today%20reported%20a%20preliminary,were%20valued%20at%20%24502.9%20billion.
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Retiree Healthcare/Other Post-Employment Benefits (OPEB): Retiree Medical is based on the June
30, 2023 actuarial study prepared by Foster & Foster (previously Bartel Associates), which is
completed every two years. The most recent study was completed in June 2024 to inform the
development of the FY 2026 and FY 2027 operating budgets (CMR 2406-3140 3). Consistent with
City Council direction and the Retiree Benefit Funding Policy, this forecast continues the practice
to budget the full payment of the Actuarial Determined Contribution (ADC) for retiree healthcare
and uses alternative assumptions, such as a more conservative 5.75% discount rate (6.25%
assumption), to transmit amounts above the recommended payment as an additional
discretionary payment (“prefunding”) to the California Employers’ Retiree Benefit Trust (CERBT)
Fund.
CalPERS blends active employees with pre-Medicare retirees and charges the same medical
premium, even though younger employees on average consume less healthcare. The higher
premium to younger employees thereby subsidizes older employees and retirees who, on
average, have higher claims and premiums. The LRFF estimates $12.4 million in the General Fund
in FY 2026 for ADC, an approximate $1.9 million or 18.4% increase from FY 2025 levels of $10.5
million in the General Fund. The implied subsidy is $2.9 million in FY 2026 and effectively lowers
the funding necessary to meet the ADC.
TABLE 2: Retiree Medical General Fund Contributions
FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
FY
2030
FY
2031
FY
2032
FY
2033
FY
2034
FY
2035
$10.5 $12.4 $12.8 $13.2 $13.6 $14.0 $14.5 $14.9 $15.4 $15.8 $16.3
Retiree Benefit Funding Policy (formerly “Pension Funding Policy”): The City has taken several
proactive steps to address rising pension costs and long-term liabilities, including cost-sharing in
labor agreements, establishing an irrevocable Section 115 Pension Trust (“Pension Trust”) and
California Employers’ Retiree Benefit Trust (CERBT) Fund, and adopting a policy that guides
financial planning of these benefits (CMR 11722 as modified by 2212-0513 4).
The City initially contributed to the Pension Trust in FY 2017 on an ad-hoc basis, using one-time
savings or excess revenues. Beginning in FY 2019, the City Council directed staff to use a more
conservative discount rate as compared to CalPERS for the Normal Cost (NC) portion of the
payment and transferring the supplemental funding beyond CalPERS required employer
contributions to the Pension Trust. This practice was reinforced with Council approval of the
Retiree Benefit Funding Policy, and as of FY 2024 the City’s NC discount rate is 5.3% as compared
to CalPERS 6.8%. Additionally, one-time contributions continue to be made each year if excess
3 City Council, June 17, 2024; Agenda Item #28; CMR 2406-3140 (Attachment D),
https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=82926
4 City Council, November 30, 2020; Agenda Item #7; CMR 11722,
https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=80990
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revenues or unspent savings are available, subject to City Council approval. As part of policy goals,
the City seeks to reach a 90% funded status by FY 2036.
Every four years, the City’s Retiree Benefit Funding Policy requires that staff consult with an
actuary to inform the City Council of progress the City has made towards achieving a 90% funded
status goal and assess and respond to changes impacting the City’s retiree benefit plans. This
comprehensive review was most recently completed in FY 2023 and resulted in several policy
revisions, most notably reducing the discount rate used to calculate supplemental contributions
to the Pension Trust from 6.2% to 5.3% and extending actuary reporting from 3 to 4 years to align
with the CalPERS ALM Study. Additionally, the title of the policy was revised from the Pension
Policy to the Retiree Benefit Policy to recognize actions approved by the City Council to
proactively plan for retiree healthcare plans in a similar manner to pensions, including the use of
a lower 5.75% discount rate (CMR 2212-0513 5). The most recent actuary analysis projects that
the City will meet a 90% funded goal for pension plans by FY 2034 (miscellaneous plan) and FY
2036-37 (safety plan); the City’s practice of transmitting excess one-time savings will help reach
these goals sooner.
In this forecast, approximately $8.5 million in the General Fund in supplemental contributions to
the City’s Pension Trust is assumed in FY 2026. Through FY 2025, a total of $87.4 million ($56.4
million in the General Fund) in principal contributions are expected to be made to the Pension
Trust for pension benefits. Through FY 2025, it is expected that $14.7 million in principal
contributions will be made to the CERBT Fund for retiree healthcare benefits.
Healthcare: Consistent with the most recent labor agreements between the City and its
bargaining units, the City’s contribution amounts towards medical costs for employees are based
on a flat rate contribution from the City, with the employee contributing towards the remaining
medical plan premium. Like salaries, healthcare costs are updated in accordance with applicable
Memorandum of Agreements (MOA) between the City and its labor groups and the Management
and Professional Personnel and Council Appointees Compensation Plan(s).
Workers’ Compensation: The budget appropriation for workers' compensation includes an
estimate for claims incurred and reserves for current filings at an 85% confidence level, based on
actuarial studies completed by Bickmore. Actuarial estimates completed in August 2023
informed FY 2025 budget levels of $7.6 million (approximately 72% in the General Fund). More
recent actuary estimates completed in August 2024 project expense levels to increase, but the
allocation between the General Fund and other funds to remain consistent. Staff will continue to
monitor expenditures in the fund and bring forward adjustments as necessary. Claim estimates
and reserves for FY 2026 are $9.0 million, representing a $1.4 million or 18.4% increase from the
FY 2025 Adopted Budget. Estimates for workers' compensation increase in the forecast at rates
consistent with general CPI increases.
5 City Council, February 6,2023; Agenda Item #3; CMR 2212-0513,
https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=82218
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Contract Services
This forecast assumes contract services of $34.6 million in FY 2026, a 3.1% increase from the FY
2025 Adopted budget of $33.5 million. This increase for FY 2026 is driven primarily by known
contractual increases and a general 3% CPI cost increase on contracts that do not have defined
annual increases, based on a review of the changes in the California Consumer Price Index (CCPI)
in the San Francisco Bay Area from the August-to-August period. It is expected that the estimated
CPI increases will be substituted with department base budget requests to adjust contract
funding needs as part of the FY 2026 budget process.
Contract Services - Committed Additions
The Committed Additions included in this forecast account for anticipated operating and
maintenance (O&M) costs in the General Fund for capital projects anticipated to come online
within the ten-year forecast period. Costs for projects that came online in FY 2025 have been
annualized into the ongoing General Fund operating budget as part of the LRFF. The preliminary
total estimate is $50,800 for costs associated with the following projects anticipated to come
online in FY 2026: Dog Park Installation (PG-18001), Fire Station 4 (PE-18004), Library Automated
Materials Handling (LB-21000), and Park Restroom Installation (PG-19000). Additional cost
increases of 3.0% annually are included throughout the ten-year forecast based on a review of
the changes in the California Consumer Price Index (CCPI) in the San Francisco Bay Area from the
August-to-August period. Timing and analysis of the funding needs for these projects will be
evaluated as part of the FY 2026 Budget process and development of the 2026-2030 Capital
Improvement Plan (CIP).
TABLE 3: FY 2026 – FY 2035 Committed Additions (Millions)
FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034 FY 2035
$0.05 $0.05 $0.07 $0.11 $0.12 $0.12 $0.14 $0.14 $0.16 $0.16
Supplies and Materials
The FY 2025 Adopted Budget for the General Fund included $3.5 million for Supplies and
Materials, which is anticipated to increase by a 3.0% CPI cost increase in FY 2026 to $3.6 million
based on a review of the changes in the California Consumer Price Index (CCPI) in the San
Francisco Bay Area from the August-to-August period. This annual increase is adjusted to 4%
starting FY 2028 through the ten-year forecast period. It is expected that the estimated CPI
increases will be substituted with department base budget requests to adjust funding for supplies
and materials as part of the FY 2026 budget process.
General Expense
This category includes costs for travel and meetings, telephone and non-city utilities, contingency
accounts and reserves, bank card service charges, and subsidies and grants provided through the
Human Services Resource Allocation Program (HSRAP). The FY 2025 Adopted Budget of $22.1
million is expected to decrease to $18.2 million in FY 2026, primarily reflecting a planned year
over year reduction in appropriations for Green Case settlement payouts and the anticipated use
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of the Budget Uncertainty Reserve to balance the FY 2026 budget. This reserve was partially used
to balance the FY 2025 Adopted Budget ($6.1 million), leaving approximately $6.1 million to
partially fund the anticipated gap in FY 2026 ($12.0 million). The reduction is partially offset by a
3.0% annual CPI cost increase on smaller items that do not have a set annual budget, based on a
review of the changes in the California Consumer Price Index (CCPI) in the San Francisco Bay Area
from the August-to-August period. It is expected that the estimated CPI increases will be
substituted with department base budget requests to adjust funding for general expense items
as part of the FY 2026 budget process.
General Expense – Project Homekey: On September 27, 2021 the City Council directed staff to
apply for Project Homekey funding in conjunction with LifeMoves to build an emergency shelter
at the former Los Altos Treatment Plant (LATP) site (CMR 13595 6). This project will deploy
modular housing to provide interim housing opportunities for homeless individuals and families
in the City of Palo Alto. Project Homekey is a program, funded by the State of California
Department of Housing and Community Development, intended to provide grant funding and
facilitate a partnership with the State to quickly acquire, rehabilitate, or master lease a variety of
housing types. Once developed, these projects provide interim or permanent housing options for
persons experiencing homelessness. The site will be operated for at least fifteen years as interim
housing per the program’s durational requirement. This project will utilize a combination of
funding sources including the Project Homekey Program for capital expenses and donations,
grant funds, and City support for ongoing operations expenses. This LRFF includes the City’s
committed investment of $7.0 million in operating expenses ($1.0 million annually FY 2025
through FY 2031). Some operating funding support is expected from Project Homekey as well as
the County of Santa Clara. Any remaining gaps in funding will need to be closed by fundraising,
operating cost containment strategies, and/or grant funds.
General Expense - Cubberley Lease: Recently, a tentative agreement between the City and PAUSD
has been developed that will amend the City’s leased portion of the Cubberley site. Although this
agreement still needs to be approved by the City Council, this report assumes a reduction to the
annual lease costs for Cubberley to $2.0 million plus the ongoing $0.8 million for child daycare
sites and utilities. As part of the original lease agreement, the City Council approved creation of
the Cubberley Infrastructure Improvements Fund supported by an annual $1.9 million transfer
from the General Fund, which is classified as an Operating Transfer-Out and discussed in further
detail in that section of this report below.
Rents and Leases
The Rents and Leases expense category for FY 2026 is estimated to increase from the FY 2025
Adopted Budget level by approximately 2.7% to $1.45 million. This is based on current lease
terms that include previously negotiated lease increases This category includes the lease
agreement for Development Services staff at locations outside City Hall (285 Hamilton and 526
6 City Council, September 27,2021; Agenda Item #10; CMR 13595:
https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-council-
agendas-minutes/2021/09-september/20210927/210927accsm-amended-final.pdf
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Bryant) as well as lease with Stanford for El Camino Park. A new lease agreement was executed
in December 2020 for the Development Services office location at 526 Bryant Street, limiting the
space to the basement level (CMR 11426 7). The lease was amended in September 2022 to extend
the term initially for 12 months with the right to automatically extend for four successive 12-
month periods, potentially through January 31, 2028 (CMR 14713). In June 2021, the City entered
into a seventh amendment for the Development Services office lease at 285 Hamilton Avenue to
extend the term from February 2022 to January 2025 (CMR 12334 8). As expenses for rent for
Development Services are adjusted, a corresponding revenue adjustment will be made to ensure
Development Services maintains cost recovery levels.
Facilities and Equipment
Along with funding for various equipment needs across departments, this budget category
includes subscription payments for equipment like public safety radios. The Facilities and
Equipment expense category is expected to decrease from the FY 2025 Adopted level of $656,000
to $536,000 due to the elimination of one-time funding to replace fire equipment budgeted in FY
2025. It is expected that the estimated CPI increases will be substituted with department base
budget requests to adjust funding for equipment needs as part of the FY 2026 budget process.
Allocated Charges
Allocated Charges represent expense allocations by the City’s Enterprise and Internal Service
Funds for services and products they provide to other departments. The FY 2025 Adopted Budget
for the General Fund included $26.9 million for these expenses, including utilities usage, general
liability insurance, technology costs, vehicle equipment maintenance and replacement costs, and
other charges for services provided by other City departments and funds. The FY 2026 allocated
charges in the LRFF update the revenues and expenses for these various allocations based on the
information available at the time of the LRFF development. FY 2025 is anticipated to experience
an increase of 14.0% to a total of $30.7 million. This increase is primarily due to anticipated higher
costs associated with technology services and utilities for City facilities such as water, electricity,
and gas.
Operating Transfers Out
Operating Transfers Out include transfers from the General Fund to Debt Service Funds, the
Technology Fund, and various other funds but excludes transfers to the Capital Improvement
Fund, which are detailed in the following Transfer to Infrastructure section. The FY 2025 Adopted
Budget included Operating Transfers Out of $6.3 million. In FY 2026, Operating Transfers Out are
anticipated to increase to $6.4 million due to increases in the technology surcharge transferred
to the Technology Fund to cover the General Fund’s portion of new technology costs. Consistent
with the FY 2025 Adopted Budget, a total of $2.0 million across the University Avenue, California
7 City Council, December 14, 2020; Agenda Item #5; CMR 11426,
https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city-manager-reports-
cmrs/year-archive/2020-2/id-11426.pdf?t=59979.32
8 City Council, June 21, 2021; Agenda Item #15; CMR 12334,
https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city-manager-reports-
cmrs/2021/id-12334.pdf
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Avenue, and Residential Permit Parking Funds is factored into this LRFF. Staff will continue
evaluating these funds as part of the FY 2026 budget development and will bring forward
recommendations as needed to keep the parking permit funds solvent.
Transfer to Infrastructure
Recovery from the COVID-19 pandemic is reflected in improved revenue levels in the FY 2025
budget compared to the FY 2024 budget. The total General Fund transfer to the Capital
Improvement Fund budgeted in FY 2025 is $30.2 million compared to the $24.7 million
transferred in FY 2024. This is comprised of a $14.5 million base transfer, interest earnings of $2.0
million, and $13.7 million from TOT revenue generated through voter-approved rate increases
and new hotels that is dedicated to the Capital Improvement Fund to support the 2014 Council
Infrastructure Plan, consistent with City Council direction. Estimated transfers from TOT revenues
in FY 2026 are currently projected to increase to $14.2 million and the base transfer to increase
to $17.2 million, along with estimated interest earnings of $2.0 million, for a total $33.4 million
transfer to the Capital Improvement Fund. This forecast continues the goal established as part of
the 2022-2026 Capital Improvement Plan (CIP) to restore the base portion of this transfer to pre-
pandemic levels by FY 2026. This budget category also includes the separate $1.9 million transfer
to the Cubberley Property Infrastructure Fund. This transfer to the Cubberley Property
Infrastructure Fund supports facility systems maintenance needs at the Cubberley Community
Center facility as well as capital improvement projects to maintain and upkeep the facility.
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ATTACHMENT E
Assumptions Not Included in Forecast
It should be noted that this forecast does not include several potential impacts to the FY 2026-
2035 LRFF that are outlined below. These items are known projects or areas of investment that
are priorities but have not been fully developed in terms of costs and timelines. This is not
intended to be a comprehensive list nor in any priority order.
Project Homekey: Homekey Palo Alto is a modular interim housing shelter for unhoused
individuals and families codeveloped by the City of Palo Alto and LifeMoves. This LRFF includes
the City’s committed investment of $7.0 million in operating expenses ($1.0 million annually for
seven years) to fund Homekey Palo Alto. The City’s costs for this project could fluctuate
throughout the ten-year period, but some of those costs could be funded by business tax revenue
for affordable housing and homeless services that has not been fully allocated. Upon the
completion of the 7 years, ongoing funding remains to be determined.
Housing Growth Impacts: On August 20, 2024, the City’s FY 2023-31 Housing Element1 was
certified, outlining the condition of the City’s current housing and future needs of its residents
through citywide housing goals, objectives, and policies. The City is required to ensure adequate
planning for its “fair share” of affordable and market rate housing, and must demonstrate a
strategy for removing barriers to increase housing production and counter well-documented
housing shortage. The City’s housing target for the eight-year planning period (January 31, 2023
to January 31, 2031) is defined by its RHNA allocation which assigns an additional 6,086 total
units into four income categories. The financial implications of this housing growth would
increase costs for land acquisition, planning and design, and construction, with offset by new
revenues such as sales tax and other economic benefits derived from more affordable housing.
The Housing Element2 and the associated Environmental Impact Report (EIR)3 provide more
detail; however, such financial impacts, especially to the General Fund, have yet to be
determined and incorporated into the LRFF.
Geng Road Safe Parking Program: The Geng Road program began in early 2021 as a place for
households dwelling in their vehicles to park their vehicles in a designated off-street parking lot.
The City launched the program in partnership with Santa Clara County to offer recreational
vehicle (RV) dwellers a safe place to park, case management, and assistance with finding
permanent homes. On August 19, 2024, City Council approved the site expansion at 2000 Geng
1 City of Palo Alto FY 2023-31 Housing Element, https://paloaltohousingelement.com/wp-
content/uploads/2024/08/Palo-Alto-Housing-Element.pdf
2 City of Palo Alto FY 2023-31 Housing Element, https://paloaltohousingelement.com/wp-
content/uploads/2024/08/Palo-Alto-Housing-Element.pdf
3 Addendum to the 2030 Comprehensive Plan Environmental Impact Report,
https://files.ceqanet.opr.ca.gov/80033-5/attachment/XqcKmj04NCYoJsEb-
_sTj8ondOwUj0KbDwiMk56gQ1DCexjgecgNZzQ5LYmJyKBi2EBHmZ65ks5lb4s00
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Assumptions Not
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Road to increase the number of safe parking spaces by 10 (CMR 2407-3274 4). Staff is working to
secure funding for this expansion through the California Department of Housing and Community
Development’s (HCD) Permanent Local Housing Allocation Program (PLHA). Even if granted, PLHA
funding is not expected to fully fund the expansion, and any balance of the costs may be funded
by business tax revenue for affordable housing and homeless services that has not yet been fully
allocated, or other sources as may be identified during the budget process.
Sustainability and Climate Action Plan (S/CAP): In early 2020, the City launched an update of the
Sustainability and Climate Action Plan (S/CAP) Framework to determine the goals and key actions
needed to meet its sustainability goals, including the goal of reducing greenhouse gas (GHG)
emissions to 80 percent below 1990 levels by 2030 (the “80x30” goal). Investments have been
made across various City funds related to S/CAP including: a new Grid Modernization for
Electrification capital project (EL-24000), realignment of staff to manage infrastructure
improvement projects; scaling existing successful energy efficiency programs; performing and
analyzing research in alternative energy sources, sustainable water supplies, carbon
sequestration options; and increasing incentives for voluntary electrification programs. The
S/CAP Three-Year Work Plan for 2023–2025, approved by Council in Spring 2023, provided a
roadmap for these efforts, and the City has accounted for known capital projects and
programmatic needs in its forecasts. However, there are uncertainties related to external factors
that could impact the scope and scale of work needed to achieve the City’s long-term
sustainability goals. These unknowns are not fully reflected in this forecast.
Significant Code and Ordinance Updates: Updates to several significant programs, codes and
ordinances are expected to be necessary in the near future. Some of these updates include:
Seismic Inventory Ordinance and Program Development, Historic Building Survey and Ordinance
Development, Zoning Code Updates, and the development of the 2040 Comprehensive Plan, the
successor plan to the 2030 Comprehensive Plan. While some costs associated with zoning code
updates and the preparation of the 2040 Comprehensive Plan were included in the forecast,
additional resources may be required depending on future Council direction and the extent and
pace of implementation efforts.
Fee and Organizational Studies: The Planning and Development Services (PDS) Department is in
the process of finalizing a fee study which is tentatively scheduled for Finance Committee in
February 2025. At the same time, the City is conducting a Citywide Municipal Fee Study and Cost
Allocation Plan, with plans to implement its recommendations in FY 2026. Periodically completing
fee studies with an outside consultant is a best practice to ensure the City’s fees align with its
cost recovery policies. Recently the Park, Community Center, and Library Development Impact
Fees for residential development were converted from a per dwelling unit basis to a per square
foot basis, aligning with AB 602 requirements for a more equitable distribution of fees based on
4 City Council, August 19, 2024; Agenda Item #10; Staff Report #2407-3274,
https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=82980
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development size. Additional impact fee modifications are anticipated, with a staff report
providing further details expected in Spring.
Labor Negotiations: As of the timing of this report, all labor agreements for full-time employees
are scheduled to expire by June 2025 except for the Service Employees International Union (SEIU)
agreement, which expires January 2025. Consistent with Council direction in previous LRFF’s, a
general 2% assumption is included for all employees starting in either January or July 2025 for all
years of the forecast since no MOA’s would be in effect at that time; this is not as a commitment
to future negotiations and is for forecasting purposes. Additionally, this forecast includes a level
of reserve for potential changes in employee compensation in future agreements for competitive
wages and other terms of employment. Actual funding needs may differ, depending on outcomes
of future labor negotiations. Additional information on salary and benefit assumptions and
reserves for future agreements is included in Attachment D.
Grade Separation: The grade separation project consists of four at-grade crossings along the
Caltrain corridor in the City of Palo Alto located at Palo Alto Avenue, Churchill Avenue, Meadow
Drive, and Charleston Road. As part of the FY 2024 Capital budget, the Council approved two
capital projects to separate them, specifying the funding sources and costs associated with
Churchill Avenue (PL-24001) and Meadow Drive and Charleston Road (PL-24000) which are being
designed together. The Palo Alto Avenue project is currently on hold. In June 2024, City Council
authorized staff to advance the project into Preliminary Engineering and Environmental
Documentation (PE&ED) Phase (CMR 2404-2861 5) for the three crossings at Churchill Avenue
Meadow drive, and Charleston Road. The phase will lead to the development of 35% plans,
renderings, and cost estimates as well as completion of CEQA and NEPA documentation to obtain
necessary environmental clearances.
Currently, staff is working on developing a three-party cooperative agreement between the City,
Valley Transportation Authority (VTA) and the Peninsula Corridor Joints Power Board (PCJPB) or
also known as Caltrain to allocate $14.0 million from Santa Clara County 2016 Measure B Caltrain
Grade Separation funding toward PE&ED phase. The 2016 Measure B program tax revenue
amounts to a total of $700 million in 2017 dollars for all at-grade crossings in Santa Clara County,
and the City anticipates an allocation of 50% of this funding. The VTA is currently programming
these funds in two-year increments. As Grade Separation 2016 Measure B funding requires
matching local funds as a result, additional funding sources will need to be identified to perform
this work in upcoming years (FY 2025-FY 2033). Additional resources will need to be explored to
plan and fund these grade separations, including City staff pursuing additional funding through
grant opportunities as they become available and other financing mechanisms.
5 City Council, June 17, 2024; Staff Report #2404-2861,
https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=82900
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Parks Master Plan: The Parks, Trails, Natural Open Space and Recreation Master Plan 6 was
adopted in 2017; and presents a long-term vision for the system. Potential funding mechanisms
have been identified for several high-priority projects and programs, however, a strategy to fund
implementation of the entire plan has not been completed. As such, this forecast does not yet
contemplate the necessary investments to fully execute this plan.
City-owned Assets Operated by Non-profit Organizations: This Forecast does not include any
additional capital or operating investments for the Avenidas Senior Center, the Ventura Childcare
Center, nor the Sea Scout Building. As costs around potential capital or operating investments for
these assets solidify, staff will return to City Council to address them as appropriate. The Roth
Building Rehabilitation Phase 1 capital project (PF-23001) is proceeding under a funding strategy
outlined in the Tenant Work Letter and included in the LRFF; however, if costs for rehabilitating
the facility further increase, additional sources of funding would need to be identified.
Additionally, the City’s newly approved community center at 445 Bryant Street will operate with
part-time use by La Comida for a senior nutrition program, alongside potential programming and
shared uses coordinated by the Community Services Department. While La Comida’s rental terms
are being defined, future revenue opportunities from shared programming or facility rentals
remain uncertain.
Cubberley Community Center Redevelopment: On October 7, 2024, the City Council (CMR 2409-
3500 7) approved the MOU with PAUSD for Cubberley Site purchase and lease. The LRFF includes
the revised lease financial terms and maintains the Real Estate Investment Reserve of $1 million
annually which will fund the critical professional service contracts (i.e. master plan, community
outreach, polling, etc.) in the next 24 months, and also serve as a placeholder for future real
estate investment appropriations. However, the LRFF does not reflect any General Obligation
bond cashflow as that is yet to be determined and hopefully will have an insignificant net impact
on the General Fund. The LRFF does not factor in other costs such as future Cubberley operating
costs and/or repairs, as these fiscal impacts will be informed in the upcoming 24 months with the
development of the proposed operational and financial models.
Loans for Special Projects: From time to time the City’s General Fund will assist other City
operations with modest cash flow loans to bridge fiscal years. For example, the City provided
over $3 million in loans to the Airport Fund as it worked to secure significant grant funding from
the Federal Aviation Administration (FAA) for capital improvement costs. As of FY 2020, the
Airport Fund began paying back the loan to the General Fund. Additions and other initiatives
funded in other funds may need financial support from the General Fund to ensure they are fully
implemented. In FY 2023 the Residential Preferential Parking (RPP) Fund received a $0.4 million
General Fund loan to remain solvent while continuing operations, given the sustained drop in
parking demand during the pandemic. A similar loan for $50,000 to the Residential Preferential
6The Parks, Trails, Natural Open Space and Recreation Master Plan, 2017;
https://www.cityofpaloalto.org/files/assets/public/public-works/palo-alto-parks-master-plan.pdf
7 City Council, October 7, 2024; Agenda Item #AA1; Staff Report #2409-3500,
https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=83032
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Parking (RPP) Fund and $450,000 to the California Avenue Parking Fund were approved as part
of the FY 2024 budget. As parking continues to be impacted by effects from the Covid-19
pandemic and remote/hybrid work, additional loans from the General Fund of $2.0 million
annually to the parking funds are assumed in this forecast. This LRFF also assumes repayment
revenue to the General Fund from previous parking loans including $0.4 million (RPP) in FY 2033,
$500,000 (RPP and California Avenue Parking Fund) in FY 2034, and $2.0 million (RPP, California
Avenue Parking Fund, and University Avenue Parking Fund) in FY 2035. Staff will continue to
review costs in the parking funds and revise funding needs and evaluate support as a loan or
subsidy from the General Fund as part of the development of the FY 2026 budget.
Legislative Updates: Various actions at the state and federal level that could impact the City of
Palo Alto have not been incorporated into this forecast due to the changing context and
uncertainty of the quantitative impacts of potential legislative changes. As the potential impacts
of various legislative initiatives are clarified, appropriate adjustments will be identified and
brought forward as part of future budget development cycles.
Aging or Noncompliant Infrastructure: The City maintains indoor and outdoor facilities, many of
which have been identified in the City’s ADA transition plan and by the Infrastructure Blue Ribbon
Commission as requiring capital project work to bring them up to full ADA compliance and/or
sufficient conditions. Facilities of concern include Cubberley Community Center, Foothills Park
Restrooms, and Lucie Stern Community Theatre restrooms. Staff continues the program work
needed in this area as part of the Americans with Disabilities Act Compliance capital project (PF-
93009); however, the entire scope of work needed in this area exceeds current resources.
General Liability Umbrella Excess Premiums: The City’s General Liability Program provides funding
to cover various insurance policies for City-owned equipment and machinery. The City is self-
insured for the first $1.0 million in losses per occurrence and participates in a Joint Powers
Authority for coverage up to $55 million per occurrence. These expenses are allocated to citywide
departments. General Liability Umbrella Excess Premiums are anticipated to increase in future
years due to significant national events and natural disasters such as claim costs for Hurricane
Ian. Staff will bring forward adjustments for these costs as part of future budget cycles as they
become available.
Fire and Ambulance Service Expansion: On November 19, 2024, the Finance Committee reviewed
and discussed fire and ambulance service expansion options (CMR 2406-3310). Staff continues
to analyze these services, and any funding, appropriation and labor negotiation will be guided by
future City Council direction, and as such not incorporated into the LRFF at this time.
Fire Training Center: As part of the FY 2023 Adopted Capital Budget the City Council approved
the Fire Training Facility Replacement capital project (FD-24000) to identify an appropriate site
and construct a new fire training facility in Palo Alto. Funding was only appropriated for the
feasibility study portion of the project in FY 2024, and additional resources will need to be
appropriated in future budget cycles based on the results of the study. In addition, the Fire
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Department is also evaluating opportunities to partner with other local jurisdictions for training
needs, instead of building a permanent facility in Palo Alto. Staff from Public Works and Fire
Departments are working on a scope of work to study the facility needs and potential locations
for the center and plan on engaging a consultant in early 2025.
Limited Term Programs: There are several programs currently in progress that are funded on a
limited term basis per Council approval. If these programs are recommended to continue through
the ten-year forecast period additional resources would be needed.
• The Psychiatric Emergency Response Team (PERT) program in the Police Department pairs
a police officer in plain clothes and a mental health clinician to respond to calls for mental
health emergencies. In FY 2024, PERT funds were unspent due to the inability to source
and supply a clinician. The funds were returned to the Stanford University Medical Center
(SUMC) Fund and recommended to be used in the future to support the PERT program
when the County can provide a clinician. The PERT program is recommended to be
supported with SUMC funding through FY 2028.
• PA Link, the on-demand transit service, is continuing its pilot program with grant funding
from the Transportation Fund for Clean Air (TFCA) and contributions from the Stanford
Research Project (SRP) in conjunction with CIty funding in FY 2025. Staff is looking for new
funding sources including grant funding and potential strategic partnerships with
companies. With the continuation of the SRP cost sharing agreement and current fare
structure in FY 2026, it is estimated that an additional $0.4 million in funding is required
to fully fund the program in FY 2026.
Vehicle Fleet Electrification: Currently the City’s policy is to consider electric vehicles and then other
alternative fuel vehicles when replacing existing vehicles. Transitioning the vehicle fleet to full Electric
Vehicles (EVs) is part of the City’s sustainability goals. It has been estimated that at least $6.0 million
across all funds will be needed annually ($2.4 million above the FY 2025 budget) in order to replace all
City vehicles with EVs.
Green Storm Infrastructure (GSI) Maintenance: The City is subject to the requirements of the
Municipal Regional Stormwater National Pollutant Discharge Elimination System Permit in the San
Francisco Bay Area (Order R2-2015-0049,) also known as the Municipal Regional Permit (MRP). The MRP
applies to 79 municipalities and flood control agencies that discharge stormwater into the San Francisco
Bay. MRP Provision C.3 requires “Regulated Projects,” defined as new development and redevelopment
projects that exceed certain impervious surface size thresholds, to mitigate stormwater quality impacts
by incorporating site design, pollution control measures, and stormwater treatment measures--typically
known as green stormwater infrastructure (GSI). Section C.3.j.ii.(2) also requires that the City, by June 30,
2027, construct GSI that treats 3.92 acres of impervious surface (based on a required ratio of 3
acres/50,000 residents). Moreover, the City is required to integrate GSI into Capital Improvement Program
projects when possible. Consequently, the City expects to have significantly more GSI and associated
maintenance in the coming years, the cost of which is still being quantified.
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Finance Committee
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Utilities
Meeting Date: December 3, 2024
Staff Report: 2410-3669
TITLE
Discuss the Fiscal Year 2026 Preliminary Utilities Financial Forecast and Rate Projections
RECOMMENDATION
This item is for discussion, and no action is requested. These preliminary calculations reflect an initial
estimate for review and feedback by the Finance Committee and Utilities Advisory Commission (UAC) on
key assumptions for the Electric, Gas, Water and Wastewater Collection Utilities to inform
recommended FY 2026 financial forecasts and proposed rate changes for each utility.
EXECUTIVE SUMMARY
The City of Palo Alto Utilities provides electricity, water, wastewater, natural gas, and fiber optics. The
City’s Public Works Department also provides refuse collection and processing for recycling, compost
and garbage, wastewater treatment and stormwater management services. Customers benefit from the
continued safe, reliable, environmentally sustainable, and cost-effective operations of each of these
utilities. FY 2026 preliminary calculations model necessary rate increases to support upkeep,
infrastructure replacements, and replenishment of reserves to allow the City to continue to provide high
quality utility services to the community.
Preliminary forecasts reflect a need for an overall 9% or $36.40 monthly rate increase in FY 2026 for the
median residential utility bill, encompassing six services (electric, gas, refuse, sewer, stormwater, water).
Table 1 shows the preliminary five-year rate projections necessary to restore reserves to within
guideline ranges within the five-year planning period, maintain operations given inflationary cost
increases, and enable ongoing capital work necessary to provide safe, reliable, and environmentally
sustainable utilities while balancing affordability. The City of Palo Alto Utilities is engaged in some
infrastructure projects including modernizing the electric grid, improving resiliency, replacing water
mains and reservoirs to continue to provide pristine drinking water to residents and businesses and pay
toward the rebuild of the wastewater treatment plant that provides a critical service to the community
24 hours a day, 365 days per year.
BACKGROUND
Annually, the Utilities Department prepares recommended rates forecasts and financial plans for the
Finance Committee review and ultimately City Council adoption in June. Rate adjustments are
recommended to maintain each utility’s financial health. Recognizing staffing transitions, initial
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estimates, and feedback from the rate review process, staff has prepared a preliminary forecast for
review and early feedback to better inform the official recommended forecasts expected in Spring 2025
for implementation in July 2025. The rate changes shown in this report are preliminary estimates; actual
rate changes will be based on updated financial data and the cost-of-service methodologies and studies
for each utility, and may differ by customer class and for individual customers depending on consumption
patterns. A cost-of-service study for the Gas Utility is expected to be completed in early 2025 and will be
factored into proposals for FY 2026. Cost of service studies for the Electric, Wastewater and Water Utilities
were completed in 2024, 2021 and 2019 respectively.
ANALYSIS
1. FY 2025 incorporates results of cost-of-service analysis
2. Gas rate in FY 2026 based on General Fund transfer of 18% of gross revenues in FY 2024; changes shown with
commodity rates held constant; actual gas commodity rates vary monthly
3. Stormwater fees increase by CPI index annually per approved 2017 ballot measure (2.6% in FY 2025)
4.Based on projected FY 2025 monthly residential bill of $402
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Electric
The preliminary electric forecast maintains the same annual 5% rate increase presented in last year’s FY
2025 financial plan. Net electric supply purchase costs are anticipated to be in line with the FY 2025
Financial Plan; revenues from surplus system Resource Adequacy and Renewable Energy Certificates
further reduce supply costs. On the expense side, transmission costs continue to rise, and capital
spending and distribution system maintenance spending is rising due to grid modernization, fiber-
related investments and an upgrade to the Hanover Substation which will benefit all electric rate payers.
Staff expects some of these costs to be offset with debt service through a bond issuance in FY 2026.
On balance, the net effect of these various one-time costs and revenues is expected to be positive,
enabling the utility to refill reserves to target levels; the Hydroelectric Rate Stabilization Reserve was
repaid in FY 2024 and had a balance of $17.4 million at the end of FY 2024. Replenishing this reserve
reduces the risk that, in the event of a significant degradation in hydro conditions, the City will need to
use the Hydro Rate Adjuster to recover higher supply costs. In FY 2025, the forecasts anticipate the
Electric Special Projects Reserve will also be repaid $7.5 million, bringing the balance from $22.6 million
to $30.1 million. This will fully repay the monies borrowed for the supply fund to cover higher costs
during the pandemic, the drought, and high winter energy prices during 2022-2023.
In the longer term (FY 2027 through FY 2030), projected increases in electric costs related to stricter
resource adequacy requirements, increasing transmission costs, and capital investment and operational
cost increases are expected to result in system average rate increases of 5% per year. Due to the
positive net ending position in FY 2024 and CIP reappropriation, the electric utility is able to defer debt
financing for grid modernization until FY 2026 and use existing balances for pay-go costs until financing
is needed.
The current year (FY 2025) financial plan for the Electric Utility (approved June 17, 2024) is available at:
https://www.cityofpaloalto.org/files/assets/public/v/2/agendas-minutes-reports/reports/city-manager-
reports-cmrs/attachments/2024-rates/electric-utility-financial-plan-fy25.pdf
Gas fund expenses are typically one-third supply-related and two-thirds distribution system-related.
Supply costs are market driven, change monthly according to market conditions, and are passed through
to customers. Distribution costs include distribution operations and maintenance, capital investment,
and the general fund transfer.
During the pandemic, the City kept overall gas utility rate increases at 2% to 3% annually and utilized
reserve funding to cover costs. In the winter of 2022-23, surging gas prices depleted the gas utility
reserves, which covered the gap between actual gas costs and the Council-approved maximum gas
commodity charge. Reserves need to be replenished over time to ensure funds are available for safety
and reliability needs, while managing ongoing cost inflation. In the FY 2025 financial plan, a gas rate
increase of 5% was forecasted for FY 2026. However, due to FY 2024 year-end financials which resulted
in lower sales revenues and higher operations and overhead costs, staff preliminary forecasts a 6%
overall rate increase for the Gas Utility effective July 1, 2025.
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On May 9, 2024, the Gas Utility received a recommendation letter from the U.S. Department of
Transportation Pipeline and Hazardous Materials Safety Administration (PHMSA) for the FY 2023 Natural
Gas Distribution Infrastructure Safety and Modernization (NGDISM) Grant. Staff expects this grant to
provide approximately $16.5 million for capital-related work that is additional to the utility’s already-
planned capital work over the next five-year period. The Gas Utility's transfer to the City’s General Fund
is a component of the City’s gas rates. This transfer was first authorized by voters in 1950 and reaffirmed
in November 2022 with the passage of Measure L which authorizes a transfer amount up to 18% of the
gross revenues of the gas utility. The preliminary forecast assumes a transfer based on 18% of estimated
gross revenues from FY 2024, to be $9.735 million in FY 2026. This transfer of 18% is in alignment with
the assumptions in the FY 2025 Adopted Budget process.
Water
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the utility will need to continue to pay them annually. The rate stabilization reserve at the end of FY
2024 has $4 million remaining and the financial forecast plans to use all of that remaining funding to
cover costs in FY 2025 and 2026.
Wastewater Collection
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Section 115 Pension Trust expenses inadvertently excluded from the RWQCP’s forecast. To address
these challenges, the Wastewater Collection Utility preliminary forecast assumes deferral of the next
sewer main replacement budget to FY 2028 and reflects investments in minimally necessary projects to
allow the Wastewater Collection fund to recover and mitigate an even higher rate increase. This
assumption would defer the more aggressive replacement cycle adopted in the FY 2024 financial plan to
increase replacement from 1 miles to 2.5 miles of pipe annually starting in FY 2026.
FISCAL/RESOURCE IMPACT
STAKEHOLDER ENGAGEMENT
ENVIRONMENTAL REVIEW
APPROVED BY:
Dean Batchelor, Director of Utilities
Staff: Lisa Bilir, Senior Resource Planner
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