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Home My WebLink AboutStaff Report 13438 City of Palo Alto (ID # 13438) City Council Staff Report Meeting Date: 5/2/2022 Report Type: Action Items City of Palo Alto Page 1 Title: Adoption of a Resolution Authorizing the Issuance and Sale of One or More Series of General Obligation Refunding (Refinancing) Bonds (Election of 2008) in an Aggregate Principal Amount Not to Exceed $58 million, and Execution of a Paying Agency Agreement, and Certain Other Related Documents and Authorizing Official Actions Related Thereto From: City Manager Lead Department: Administrative Services Recommendation Staff recommends that the City Council approve a resolution (Attachment A): 1. Authorizing the refinancing of the outstanding Series 2010A and Series 2013A General Obligation (Library) Bonds through the issuance of tax-exempt and federally taxable General Obligation Bonds (Bonds) in the not to exceed amount of $58,000,000. 2. Approving the Paying Agency Agreement, Official Notice of Sale, Preliminary Official Statement, Irrevocable Refunding Instructions related to the Series 2010A Bonds, Escrow Deposit and Trust Agreement related to the Series 2013A Bonds Between City of Palo Alto and U.S. Bank Trust Company National Association; and authorize related documents and actions. Executive Summary The refinancing of the Series 2010A and Series 2013A General Obligation (GO) Bonds as Series 2022A tax-exempt and Series 2022B taxable GO bonds results in net present value (NPV) savings conservatively estimated at $5.5 million, equating to 10.1 percent of the refunded bonds’ principal amount. These bonds were issued based on the voter approved Measure N in November 2008. Proceeds from this financing were used for capital investments to the City’s library system at three locations. Annually, an assessment is levied on property owners via the property tax bill to service the annual debt associated with these investments. If this refinancing is approved, savings will be realized by property owners through lower annual assessments. City of Palo Alto Page 2 Background On November 4, 2008, City voters passed Measure N, which gave the City the authority to issue a maximum amount of $76 million of general obligation bonds (the “Bonds”) for capital improvements to the Mitchell Park, Downtown, and Rinconada (formerly Main) libraries and to the Mitchell Park community center. On May 10, 2010 (CMR: 242:10) and May 6, 2013 (CMR: 3753) Council authorized the issuance of two series of Bonds. The Series 2010A Bonds ($55.3 million) were issued on June 30, 2010 with a True Interest Cost (TIC) of 4.21 percent and the Series 2013A Bonds ($20.7 million) were issued on June 26, 2013 with a TIC of 3.85 percent. At the completion of the library and community center capital projects, $6.1 million in bond funds remained with $0.6 million being set aside to address the Mitchell Park Library roof and gutter repair. In June 2016 (CMR: 6993), the $6.1 million funds were used to defease/payoff some of the outstanding bonds early which resulted in net present value (interest) savings of $1.6 million. Debt service payments on these Bonds are paid through ad valorem taxes on all taxable land and improvements (both secured and unsecured assessment roll) within the City. Annually, staff seeks Council approval (via a resolution) which authorizes the placement of an ad valorem property tax levy. The most recent (for fiscal year 2022) tax levy rates were $0.00926 per $100 or $9.26 per $100,000 in AV for the secured tax roll; and $0.00956 per $100 or $9.56 per $100,000 in AV for the unsecured tax roll. In comparison, prior year’s secured and unsecured tax levy was $9.56 and $10.62 respectively, per $100,000 of AV. With the assessment for FY 2022, a house with an assessed value of $1.0 million, for example, would see an annual assessment of $92.60 on their property tax bill. In comparison, in FY 2021, a $1.0 million home had an assessment of $95.60. Discussion The principal (aka par) amount of outstanding General Obligation (GO) Bonds recommended to be refinanced totals $54.2 million (Series 2010A is $40.6 million and Series 2013A is $13.6 million). The City’s Financial Advisor, PFM Financial Advisors LLC (PFM), estimates that annual debt service costs will likely be reduced by $418,000 annually over the next eighteen plus years as a result of this refinancing. Since Palo Alto property owners are supporting the debt service payments through ad valorem taxes, this savings will be realized by property owners in the City through reduced property tax assessments. At this time, total cash savings are estimated at $7.5 million ($7.1 million is attributable to the Series 2010A Bonds and $0.4 million is attributable to the Series 2013A Bonds) and the net present value (NPV) savings are estimated at $5.5 million (attributable to the series 2010A), equating to 10.1 percent of the refunded bonds’ principal amount. The NPV savings of 10.1 percent exceeds the Debt Service Policy threshold which states NPV “savings of 2010A Bonds 2013A Bonds TOTAL Original Bonds Issuance $55.3M $20.7M $76.0M Outstanding Bonds $40.6M $13.6M $54.2M City of Palo Alto Page 3 at least 3 percent is a standard guideline for initiating a refunding”, therefore staff recommends moving forward at this time. The City expects the bond sale to occur on or around May 17, 2022. It is important to note that potential savings cited in this report are estimates and that final savings are dependent on prevailing interest rates and underwriter bids on the day of the bond sale. The tax reform bill passed by Congress and signed into law on December 22, 2017 prohibits the issuance of tax-exempt advance refunding bonds during the (ten-year) call protection period. The call protection period has passed on the Series 2010A Bonds, but it has not passed for the Series 2013A Bonds. As a result, staff is recommending that the Series 2010A bonds be refinanced with tax-exempt Series 2022A bonds and the Series 2013A bonds be refinanced with Series 2022B federally taxable bonds. Though the federally taxable refinancing of the Series 2013A Bonds generates significantly less cash savings than the larger tax-exempt refinancing of the Series 2010A Bonds, staff recommends that the City nevertheless refinance the Series 2013A Bonds because of the conservatively estimated cash savings. The City is seeking to have its current high rating (triple A) affirmed and if there’s aggressive bidding, it’s possible the actual underwriter’s bids could result in both positive cash and NPV savings. Undertaking the two refinancing at the same time offers economies of scale as the incremental cost of issuance is not significant for including the 2013A bonds in this refinancing. As a contingency, should the actual interest rates for the federally taxable refinancing bonds be at or higher than currently conservatively expected resulting in no NPV savings, staff will exercise its option to reject the bids for the refinancing of the Series 2013A Bonds and only proceed with the refinancing of the Series 2010A Bonds. Staff’s requesting authorization for the issuance and sale of one or more series of GO Bonds in an aggregate principal amount not to exceed $58 million; this flexibility will allow staff to adjust the structure of the bonds to maximize interest from potential underwriters with the goal of getting the lowest possible borrowing interest rate. Refinancing Administration The refinancing will include the City contributing the pending $2.7 million accrued debt service payment, which was scheduled for August 1, 2022. The funds for this payment were included in the fiscal year (FY) 2022 GO Bond property tax assessment levy. In addition, $0.35 million in savings from funds set aside to address the Mitchell Park Library roof and gutter repair will be applied toward this refinancing. Staff expects the debt issuance to be competitively solicited; the underwriter’s discount fee is estimated at $500,750, which equates to 1% of the estimated principal amount of the refinancing bonds. Other issuance costs of $223,880 are primarily made up of the financial advisor (PFM), bond counsel (Jones Hall), disclosure counsel (Quint & Thimmig, LLP), and the paying agency (U.S. Bank) (Attachment B). Precise costs for the underwriter will not be known until the day of sale. City of Palo Alto Page 4 The interest rates on the principal amounts of the Series 2022A (Tax-Exempt) and 2022B (Federally Taxable) bonds will be determined on the day of the sale and will reflect prevailing market conditions at that time. When the interest rates are established, annual debt service payments will be calculated and used to determine the FY 2023 property tax assessment. This is typically placed, annually, on the first meeting after the Council’s return from Summer Break in early August. As noted above in the background section, the current (FY 2022) levy for the GO Bonds is $9.26 per $100,000 in Assessed Value (AV) for the secured1 and utility tax roll and $9.56 per $100,000 in AV for the unsecured tax roll2. A June refinancing bond closing allows sufficient time to notify the County of the levy for next year based on the lower debt service requirement. Rating Agency Presentation To minimize interest expense and to promote the bond issuance staff will deliver a ratings presentation to Standard and Poor’s (S&P) on April 28, 2022. The City Manager and Administrative Services departments, as well as the City’s financial advisor and bond counsel, will participate in the presentation. Information on City demographics, property values, businesses, educational institutions, and financial condition will be provided to the rating agency. This information is factored into the rating agency’s credit rating, which investors use in determining whether or not to buy the City’s bonds. A higher credit rating results in lower interest costs and vice versa. The current underlying issuer credit rating for the City’s GO Bonds are triple A from Standard and Poor’s and Moody’s, the highest possible. Once S&P’s rating is received, staff will relay the results to Council and the public. Refinancing Mechanics Council approval is required to sell up to $58,000,000 in tax-exempt and federally taxable General Obligation (Refunding) Bonds through a competitive sale process targeted on or around May 17, 2022. The settlement or closing of the bond sale is expected to occur on or around June 16, 2022. The City’s Financial Advisor (PFM) will assist the City in receiving and evaluating bids from underwriters for the bonds and in selecting the optimal bid. Underwriters are investment-banking firms, and the underwriter selected will resell the bonds to investors, typically institutional investors like mutual funds and high net worth individuals. The underwriter with a bid resulting in the lowest TIC to the City will be selected on the bid day. The timeline for selling bonds is provided below assuming approval of this item. If not approved, timelines and financial projections would need to be revised and reconsidered. If approved, staff would issue a maximum amount of $58,000,000 in GO Bonds to refinance the tax-exempt Series 2010A and Series 2013A Bonds issued under the authority of voter approved 1 Secured property are Assessed Value (AV) on real property such as land and structures. 2 Unsecured are AV of personal property such as business equipment, boats, aircraft, and possessory interests. City of Palo Alto Page 5 Measure N. To issue Bonds, the Council will need to adopt the attached resolution (Attachment A) which: 1. Authorizes the issuance and sale of up to $58,000,000 in (principal) Bonds (“Series 2022A Tax-Exempt and 2022B Federally Taxable Bonds”). 2. Approves the required legal documents (Exhibits 1, through 5) which are discussed below. Approving the resolution would confer formal acceptance of the following documents: a. Paying Agency Agreement (Exhibit 1) This agreement outlines the responsibilities of the City and U.S. Bank in all financial transactions related to receipt of bond proceeds, disbursement of funds, payment of debt service, and payments to bond holders. This will be executed when the bond closing is done which is expected to occur on June 16, 2022. b. Official Notices of Sale (Exhibit 2a and 2b) Exhibit 2a describes the Series 2022A (Tax-Exempt) and Exhibit 2b for 2022B (Federally Taxable) Bonds to the investment community (potential bidders), for the purpose of seeking bids to be received via an electronic platform, on or around May 17, 2022. c. Preliminary Official Statement (POS) (Exhibit 3) The POS containing and discussing information about the City, its economic and property tax base, the Series 2022A (Tax-Exempt) and 2022B (Federally Taxable) Bonds, and other information material to the offering and sale of the Bonds, which will be approved by the Council in near “final” form (i.e., it is substantially complete, except for the interest rates and amount of final numbers which will result from the sale of the Series 2022A (Tax-Exempt) and 2022B (Federally Taxable) Bonds). The POS is the offering document for municipal securities. After the COPs have been sold to the underwriter, the City will prepare a final Official Statement, which should be identical to the POS except that it will include the final pricing information about the Bonds, including principal amount, interest rate, and prepayment terms. The distribution of the POS by the City is subject to federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require the POS to include all facts that would be material to an investor in the Bonds. Material information is information that there is a substantial likelihood would have actual significance in the deliberations of the reasonable investor when deciding whether to buy or sell the Bonds. If the Council concludes that the POS includes all facts that would be material to an investor in the Bonds, it must adopt a resolution that authorizes staff City of Palo Alto Page 6 to execute a certificate to the effect that the Preliminary Official Statement has been “deemed final.” The Securities and Exchange Commission (the “SEC”), the agency with regulatory authority over the City’s compliance with the federal securities laws, has issued guidance as to the duties of the Council with respect to its approval of the POS. In its “Report of Investigation in the Matter of County of Orange, California as it Relates to the Conduct of the Members of the Board of Supervisors” (Release No. 36761 / January 24, 1996) (the “Release”), the SEC stated that, if a member of the Council has knowledge of any facts or circumstances that an investor would want to know about prior to investing in the Bonds, whether relating to their repayment, tax-exempt status (if applicable), undisclosed conflicts of interest with interested parties, or otherwise, they should endeavor to discover whether such facts are adequately disclosed in the POS. In the Release, the SEC stated that the steps that a member of the Council could take include becoming familiar with the POS and questioning staff and consultants about the disclosure of such facts. Appendix F to the POS is the Continuing Disclosure Certificate, under which the City will agree to provide certain financial and operating data of the type included in the POS to owners of the Bonds on an annual basis, and information about certain enumerated events when they occur. This information is already being provided on the current GO Bonds so staff will continue doing this for the refinanced Bonds. d. Irrevocable Refunding Instructions Agreement (Exhibit 4) This document by the City of Palo Alto to U.S. Bank Trust Company National Association (aka Paying Agency) for the refunding of the Series 2010A Bonds. It directs the Paying Agency for (1) Establishment of Escrow Fund, (2) Deposit and Investment of Amounts in Escrow Fund, (3) Application of Amounts in Escrow Fund and related tasks. e. Escrow Deposit and Trust Agreement (Exhibit 5) This document between City of Palo Alto and U.S. Bank Trust Company National Association for the refunding of the Series 2013A Bonds which is an irrevocable escrow securing the payment and redemption of the refunded bonds. Timeline (2022) April 28, 2022 Standard and Poor’s (S&P) Rating Presentation May 5, 2022 Receive S&P’s Rating May 6, 2022 Post Preliminary Official Statement Week of May 9th Pre‐marketing Calls to Bidders May 17, 2022 Competitive Bond Sale Week of May 23rd Final Official Statement Printed and Posted June 16, 2022 Bond Sale Closing City of Palo Alto Page 7 Resource Impact Refinancing of the tax-exempt Series 2010A and 2013A General Obligation Bonds is estimated to reduce the city’ annual debt service payment by $418,000 annually over the next eighteen plus years. Bond Issuance expenses that include bond and disclosure counsel, financial advisor, rating agency fees, underwriter’s discount fee, etc. estimated at $724,630 (Cost of Issuance is $223,880 and Underwriter’s Discount Fee is $500,750) will be paid through the sale of bonds. Precise debt service payments will not be known until competitive bids are received from the underwriting firms. At this time, the current interest rate environment is favorable for issuing or refinancing debt. Policy Implications While there is no Council policy on the methods of refinancing debt, the traditional approach has been to sell bonds with competitive bids in the open bond market (Debt Policy, Section III, item C). Environmental Review The financing proposed for approval is not a project under the California Environmental Quality Act; therefore, an environmental review is not required. Attachments: • Attachment A: Resolution Authorizing the Issuance and Sale of One or More Series of General Obligation Refunding Bonds in Aggregate Principal Amount NTE $58,000,000 • Attachment B Bond Issuance Expense Estimates • Exhibit 1 Paying Agency Agreement • Exhibit 2a 2022A (Tax-Exempt) Official Notice of Sale • Exhibit 2b 2022B (Federally Taxable) Official Notice of Sale • Exhibit 3 Preliminary Official Statement • Exhibit 4 Irrevocable Refunding Instructions (2010A Bonds) • Exhibit 5 Escrow Deposit and Trust Agreement (2013A Bonds) Resolution No. _____ RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PALO ALTO AUTHORIZING THE ISSUANCE AND SALE OF ONE OR MORE SERIES OF GENERAL OBLIGATION REFUNDING BONDS (ELECTION OF 2008) IN AN AGGREGATE PRINCIPAL AMOUNT NOT TO EXCEED $58,000,000, AND AUTHORIZING ACTIONS RELATED THERETO R E C I T A L S A.The City of Palo Alto (the “City”) is empowered under Chapter 4(commencing with Section 43600) of Division 4 of Title 4 of the Government Code of the State of California to its issue general obligation bonds which are authorized by two- thirds of the electors voting on the proposition. B.More than two-thirds of the electors voting at a special municipal electionheld on November 4, 2008, voted for a proposition, designated Measure N, authorizing the issuance by the City of general obligation bonds in the aggregate principal amount of $76,000,000 for the purpose of financing the costs of constructing a new energy efficient, environmentally friendly Mitchell Park Library and Community Center, renovating and expanding the Main Library, and renovating the Downtown Library, including enhancements at all three facilities for seismic safety and disabled access, expanded space for library collections, meeting and study areas, and new air conditioning, ventilation and lighting systems. C.Pursuant to such authorization the City previously issued generalobligation bonds in two series: (a)$55,305,000 City of Palo Alto General Obligation Bonds, Electionof 2008, Series 2010A (the “2010 Bonds”) and (b) $30,695,000 City of Palo Alto General Obligation Bonds, Electionof 2008, Series 2013A (“the 2013 Bonds”; together with the 2010 Bonds, the “Prior Bonds”). D.The City Council has determined at this time to issue and sell one or more series of General Obligation Refunding Bonds (Election of 2008) in the aggregate principal amount of not to exceed $58,000,000 (the “Bonds”) for the purpose of refunding all of the outstanding Prior Bonds and thereby realizing financial savings to the property tax payers of the City. E.The 2010 Bonds are subject to redemption on any date on and afterAugust 1, 2020, without premium. F.As set forth in the 2013 Bonds and the Official Statement for the 2013Bonds, the 2013 Bonds maturing on and after August 1, 2024 are subject to optional redemption on August 1, 2023, without premium. G. In order to comply with federal tax law in effect as of the date hereof, theCity expects to issue one series of tax-exempt bonds (the “Tax-Exempt Bonds”) to Attachment A *NOT YET APPROVED* -2- refund the 2010 Bonds and one series of federally taxable bonds to refund the 2013 Bonds (the “Federally Taxable Bonds”). H. The City Council is authorized to provide for the issuance and sale of the Bonds under the provisions of Articles 9 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code, commencing with Section 53550 of said Code (the “Refunding Bond Law”). I. As required by Government Code Section 5852.1 enacted January 1, 2018 by Senate Bill 450, attached hereto as Appendix B is the information relating to the Bonds that has been obtained by the City Council and is hereby disclosed and made public. HJ On April 11, 2017, this City Council previously approved a Debt Policy which complies with Government Code Section 8855, and the delivery of the Bonds will be in compliance with said policy, or any non-compliance is hereby waived. NOW, THEREFORE, THE COUNCIL OF THE CITY OF PALO ALTO does resolve AS FOLLOWS: ARTICLE I DEFINITIONS; AUTHORITY SECTION 1.01. Definitions. The terms defined in this Section 1.01, as used and capitalized herein, shall, for all purposes of this Resolution, have the meanings given them below, unless the context clearly requires some other meaning. “Bond Counsel” means (a) Jones Hall, A Professional Law Corporation, and (b) any other attorney or firm of attorneys nationally recognized for expertise in rendering opinions as to the legality and tax exempt status of securities issued by public entities. “Bond Purchase Agreement” means the Bond Purchase Agreement for the Bonds, which is approved under Section 3.01(b). “Bond Sale Documentation” means (a) if the Bonds are sold by competitive bidding in accordance with Section 3.01(a), the Official Notice of Sale and the winning bid of the Original Purchaser, or (b) if the Bonds are sold by negotiation in accordance with Section 3.01(b), the Bond Purchase Agreement between the City and the Original Purchaser. “Bonds” means the City of Palo Alto General Obligation Refunding Bonds (Election of 2008) authorized to be issued in one or more series under this Resolution in the aggregate principal amount of not to exceed $58,000,000, including the Tax-Exempt Bonds and the Federally Taxable Bonds. “City” means the City of Palo Alto, a charter city and municipal corporation organized under the Constitution and laws of the State of California, and any successor thereto. *NOT YET APPROVED* -3- “City Representative” means the City Manager, the Assistant City Manager, the Director of Administrative Services or the Chief Financial Officer, or any other officer of the City authorized by resolution of the City Council of the City to act on behalf of the City with respect to this Resolution and the Bonds. “Closing Date” means the date upon which there is a physical delivery of the Bonds in exchange for the amount representing the purchase price of the Bonds by the Original Purchaser. “Costs of Issuance” means all items of expense directly or indirectly payable by or reimbursable to the City and related to the authorization, issuance, sale and delivery of the Bonds and the refunding of the Prior Bonds, including but not limited to the costs of preparation and reproduction of documents, printing expenses, filing and recording fees, initial fees and charges of the Paying Agent and its counsel, legal fees and charges, fees and disbursements of consultants and professionals, rating agency fees, fees and charges for preparation, execution and safekeeping of the Bonds and any other cost, charge or fee in connection with the original issuance of the Bonds and the refunding of the Prior Bonds. “County” means the County of Santa Clara, a political subdivision of the State of California, duly organized and existing under the Constitution and laws of the State of California. “Debt Service Fund” means the account established and held by the City under Section 4.02. “Depository” means (a) initially, DTC, and (b) any other Securities Depository acting as Depository under Section 2.09. “Depository System Participant” means any participant in the Depository’s book-entry system. “DTC” means The Depository Trust Company, New York, New York, and its successors and assigns. “Escrow Agreement (2013 Bonds)” means the Escrow Deposit and Trust Agreement (2013 Bonds), dated as of the Closing Date, by and between the City and the Prior Bonds Paying Agent, relating to the defeasance, payment and redemption of the outstanding 2013 Bonds. “Federal Securities” means United States Treasury notes, bonds, bills or certificates of indebtedness, or any other obligations the timely payment of which is directly or indirectly guaranteed by the faith and credit of the United States of America. “Federally Taxable Bonds” has the meaning given that term in the Recitals. “Interest Payment Date” means February 1, 2023, and the first day of each succeeding March and September. *NOT YET APPROVED* -4- “Irrevocable Refunding Instructions (2010 Bonds)” means the Irrevocable Refunding Instructions (2010 Bonds), dated as of the Closing Date, by and between the City and the Prior Bonds Paying Agent, relating to the defeasance, payment and redemption of the outstanding 2010 Bonds. “Official Notice of Sale” means the Official Notice of Sale for the Bonds, which is approved under Section 3.01(a). “Original Purchaser” means the original purchaser of the Bonds at the public or negotiated sale thereof. “Outstanding,” when used as of any particular time with reference to Bonds, means all Bonds except: (a) Bonds theretofore canceled by the Paying Agent or surrendered to the Paying Agent for cancellation; (b) Bonds paid or deemed to have been paid within the meaning of Section 9.02; and (c) Bonds in lieu of or in substitution for which other Bonds shall have been authorized, executed, issued and delivered by the City under this Resolution. “Owner”, whenever used herein with respect to a Bond, means the person in whose name the ownership of such Bond is registered on the Registration Books. “Paying Agent” means the Paying Agent appointed by the City and acting as paying agent, registrar and authenticating agent for the Bonds, its successors and assigns, and any other corporation or association which may at any time be substituted in its place, as provided in Section 6.01. “Principal Office” means the office or offices of the Paying Agent for the payment of the Bonds and the administration of its duties hereunder, as such office or offices shall be identified in a written notice filed with the City by the Paying Agent. “Prior Bonds Paying Agent” means U.S. Bank Trust Company National Association, in its capacity as successor paying agent for the Prior Bonds. “Prior Bonds” has the meaning given that term in the Recitals. “Record Date” means the 15th day of the month preceding an Interest Payment Date, whether or not such day is a business day. “Refunding Bond Law” means Articles 9 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the Government Code of the State of California, as amended from time to time. “Registration Books” means the records maintained by the Paying Agent for the registration of ownership and registration of transfer of the Bonds under Section 2.08. “Resolution” means this Resolution, as originally adopted by the City Council on May 2, 2022, and including all amendments hereto and supplements hereof which are duly adopted by the City Council from time to time in accordance herewith. *NOT YET APPROVED* -5- “Securities Depositories” means DTC; and, in accordance with then current guidelines of the Securities and Exchange Commission, such other securities depositories as the City may designate. “Supplemental Resolution” means any resolution supplemental to or amendatory of this Resolution, adopted by the City in accordance with Article VIII. “Tax Code” means the Internal Revenue Code of 1986 as in effect on the Closing Date or (except as otherwise referenced herein) as it may be amended to apply to obligations issued on the Closing Date, together with applicable proposed, temporary and final regulations promulgated, and applicable official public guidance published, under said Code. “Tax-Exempt Bonds” has the meaning given that term in the Recitals. “Written Request of the City” means an instrument in writing signed by a City Representative or by any other officer of the City duly authorized to act on behalf of the City under a written certificate of a City Representative. SECTION 1.02. Interpretation. (a) Unless the context otherwise indicates, words expressed in the singular shall include the plural and vice versa and the use of the neuter, masculine, or feminine gender is for convenience only and shall be deemed to include the neuter, masculine or feminine gender, as appropriate. (b) Headings of articles and sections herein and the table of contents hereof are solely for convenience of reference, do not constitute a part hereof and shall not affect the meaning, construction or effect hereof. (c) All references herein to “Articles,” “Sections” and other subdivisions are to the corresponding Articles, Sections or subdivisions of this Resolution; the words “herein,” “hereof,” “hereby,” “hereunder” and other words of similar import refer to this Resolution as a whole and not to any particular Article, Section or subdivision hereof. SECTION 1.03. Authority for this Resolution; Findings. This Resolution is entered into under the provisions of the Refunding Bond Law. It is hereby certified that all of the things, conditions and acts required to exist, to have happened or to have been performed precedent to and in the issuance of the Bonds do exist, have happened or have been performed in due and regular time and manner as required by the laws of the State of California, and that the amount of the Bonds, together with all other indebtedness of the City, does not exceed any limit prescribed by any laws of the State of California. This City Council hereby finds that the Recitals are true and correct, and ratifies the provisions of the 2013 Bonds and the 2013 Official Statement as to the fact that the 2013 Bonds maturing on and after August 1, 2024 are subject to redemption on August 1, 2023, having concluded that any contradictory provisions in the 2013 Paying Agent Agreement are in error. *NOT YET APPROVED* -6- ARTICLE II THE BONDS SECTION 2.01. Authorization. The City hereby determines that the prudent management of the fiscal affairs of the City requires that it issue refunding bonds to refund the Prior Bonds. One or more series of Bonds in the aggregate original principal amount of not to exceed $58,000,000 are hereby authorized by the City to be issued by the City under and subject to the terms of the Refunding Bond Law and this Resolution, for the purpose of providing funds to refund and defease the outstanding Prior Bonds and to pay the Costs of Issuance incurred in connection therewith. This Resolution constitutes a continuing agreement between the City and the Owners of all of the Bonds issued or to be issued hereunder and then Outstanding to secure the full and final payment of principal of and interest and premium, if any, on all Bonds which may be Outstanding hereunder, subject to the covenants, agreements, provisions and conditions herein contained. The Bonds are designated the “City of Palo Alto General Obligation Refunding Bonds (Election of 2008).” As provided in Section 53552 of the Refunding Bond Law, the Bonds shall not be issued unless the total net interest cost to maturity on the Bonds plus the principal amount of the Bonds is less than the total net interest cost to maturity on the Prior Bonds to be refunded plus the principal amount of the Prior Bonds to be refunded. Before issuing the Bonds, the City shall receive confirmation from the City’s municipal advisor that the requirements of Section 53552 of the Refunding Bond Law have been satisfied. SECTION 2.02. Terms of Bonds. (a) Principal Amount of Bonds. The Bonds are authorized to be issued in one or more series in the aggregate principal amount of not to exceed $58,000,000. (b) Form; Numbering. The Bonds will be issued in fully registered form, without coupons, in authorized denominations of $5,000 each or any integral multiple thereof. The Bonds will be lettered and numbered as the Paying Agent prescribes. (c) Date of Bonds. The Bonds will be dated as of the Closing Date. (d) CUSIP Identification Numbers. “CUSIP” identification numbers will be imprinted on the Bonds, but such numbers do not constitute a part of the contract evidenced by the Bonds and no error or omission with respect thereto will constitute cause for refusal of the Original Purchaser to accept delivery of and pay for the Bonds. In addition, failure on the part of the City to use such CUSIP numbers in any notice to Owners of the Bonds will not constitute an event of default or any violation of the City’s contract with such Owners and will not impair the effectiveness of any such notice. (e) Determination of Maturities and Interest Rates. The Bonds shall mature (or, alternatively, be subject to mandatory sinking fund redemption as hereinafter provided) on August 1 in each year in which principal on the Bonds is payable. The final schedule of Bond maturities shall be determined upon the sale of the Bonds as set forth in the Notice Inviting Bids. *NOT YET APPROVED* -7- Each Bond will bear interest at the respective rates to be determined upon the sale of the Bonds in accordance with Article III. Interest on the Bonds is payable from the Interest Payment Date next preceding the date of authentication thereof unless: • a Bond is authenticated as of an Interest Payment Date, in which event it will bear interest from such date, • a Bond is authenticated prior to an Interest Payment Date and after the close of business on the preceding Record Date, in which event it will bear interest from such Interest Payment Date, • a Bond is authenticated on or before the first Record Date, in which event it shall bear interest from the Closing Date, or • at the time of authentication of a Bond, interest is in default thereon, in which event it will bear interest from the Interest Payment Date to which interest has previously been paid or made available for payment thereon. (f) Manner of Payment. Interest on the Bonds (including the final interest payment upon maturity) is payable by check of the Paying Agent mailed to the Owner thereof at such Owner’s address as it appears on the Registration Books at the close of business on the preceding Record Date; except that at the written request of the Owner of at least $1,000,000 aggregate principal amount of the Bonds, which written request is on file with the Paying Agent as of any Record Date, interest on such Bonds shall be paid by wire transfer on the succeeding Interest Payment Date to an account in the United States of America as shall be specified in such written request. Principal of and premium (if any) on the Bonds is payable in lawful money of the United States of America upon presentation and surrender at the Principal Office of the Paying Agent. SECTION 2.03. Redemption. (a) Optional Redemption. The Bonds may be made subject to redemption prior to maturity, at the option of the City, in whole or in part among maturities on such basis as designated by the City and by lot within a maturity, from any available source of funds, on the dates and upon payment of a redemption price (equal to the principal amount of Bonds to be redeemed together with a redemption premium, if any), all as determined upon the sale of the Bonds and as set forth in the Notice Inviting Bids. (b) Mandatory Sinking Fund Redemption. If and to the extent specified in the bid of the Original Purchaser, any maturity of the Bonds will be designated as “Term Bonds” which are subject to mandatory sinking fund redemption on August 1 in each of the years and in the respective principal amounts set forth in such bid, at a redemption price equal to 100% of the principal amount of the Bonds to be redeemed, in each case without premium, together with interest accrued thereon to the redemption date. If some but not all of the Term Bonds have been redeemed under the preceding subsection (a) of this Section, the aggregate principal amount of Term Bonds to be redeemed in each year under this subsection (b) shall be reduced on a pro rata basis in integral multiples of $5,000, as designated in written notice filed by the City with the Paying Agent. *NOT YET APPROVED* -8- (c) Selection of Bonds for Redemption. Whenever less than all of the Outstanding Bonds of any one maturity are designated for redemption, the Paying Agent shall select the Outstanding Bonds of such maturity to be redeemed by lot in any manner deemed fair by the Paying Agent. For purposes of such selection, each Bond shall be deemed to consist of individual Bonds of $5,000 denominations which may be separately redeemed. (d) Redemption Procedure. The Paying Agent shall cause notice of any redemption to be mailed, first class mail, postage prepaid, at least 20 days but not more than 60 days prior to the date fixed for redemption, (i) to the Securities Depositories and the Municipal Securities Rulemaking Board’s EMMA website, and (ii) to the respective Owners of any Bonds designated for redemption, at their addresses appearing on the Registration Books. Such mailing shall not be a condition precedent to such redemption and failure to mail or to receive any such notice shall not affect the validity of the proceedings for the redemption of Bonds. Such notice shall state the redemption date and the redemption price and, if less than all of the then Outstanding Bonds are to be called for redemption, shall designate the serial numbers of the Bonds to be redeemed by giving the individual number of each Bond or by stating that all Bonds between two stated numbers, both inclusive, or by stating that all of the Bonds of one or more maturities have been called for redemption, and shall require that such Bonds be then surrendered at the Principal Office of the Paying Agent for redemption at the said redemption price, giving notice also that further interest on such Bonds will not accrue from and after the redemption date. The City is entitled to send a redemption notice that declares that the redemption is conditional upon the availability of moneys to accomplish the redemption, and the City may rescind any notice of optional redemption of the Bonds by written notice to the Paying Agent on or prior to the date fixed for redemption, and the Paying Agent shall mail notice of such rescission of redemption in the same manner as the original notice of redemption was sent under this section. Any notice of redemption shall be cancelled and annulled if for any reason funds will not be or are not available on the date fixed for redemption. The City and the Paying Agent shall have no liability to the Owners or any other party related to or arising from such rescission. Upon surrender of Bonds redeemed in part only, the City shall execute and the Paying Agent shall authenticate and deliver to the Owner, at the expense of the City, a new Bond or Bonds, of the same maturity, of authorized denominations in aggregate principal amount equal to the unredeemed portion of the Bond or Bonds. From and after the date fixed for redemption, if notice of such redemption has been duly given and funds available for the payment of the principal of and interest (and premium, if any) on the Bonds so called for redemption have been duly provided, such Bonds so called will cease to be entitled to any benefit under this Resolution other than the right to receive payment of the redemption price, and no interest will accrue thereon on or after the redemption date specified in such notice. The Paying Agent shall cancel all Bonds redeemed under this Section 2.03, and shall submit to the City a certificate of cancellation. SECTION 2.04. Form of Bonds. The form of the Bonds, including the form of the Paying Agent’s Certificate of Authentication and the form of Assignment to appear *NOT YET APPROVED* -9- thereon, with necessary or appropriate variations, omissions and insertions, as permitted or required by this Resolution, are set forth in Appendix A attached hereto. SECTION 2.05. Execution of Bonds. The Bonds shall be executed on behalf of the City by the facsimile signatures of its Mayor and City Clerk who are in office on the date of adoption of this Resolution or at any time thereafter, and the seal of the City shall be impressed, imprinted or reproduced by facsimile thereon. If any officer whose signature appears on any Bond ceases to be such officer before delivery of the Bonds to the Original Purchaser, such signature will nevertheless be as effective as if the officer had remained in office until the delivery of the Bonds to the Original Purchaser. Any Bond may be signed and attested on behalf of the City by such persons as at the actual date of the execution of such Bond are the proper officers of the City although at the nominal date of such Bond any such person does not serve as such officer of the City. Only those Bonds bearing a Certificate of Authentication in the form set forth in Appendix A attached hereto, executed and dated by the Paying Agent, will be valid or obligatory for any purpose or entitled to the benefits of this Resolution, and such Certificate of Authentication of the Paying Agent constitutes conclusive evidence that the Bonds so registered have been duly authenticated, registered and delivered hereunder and are entitled to the benefits of this Resolution. SECTION 2.06. Transfer of Bonds. Any Bond may, in accordance with its terms, be transferred, upon the Registration Books, by the person in whose name it is registered, in person or by his duly authorized attorney, upon surrender of such Bond for cancellation at the Principal Office at the Paying Agent, accompanied by delivery of a written instrument of transfer in a form approved by the Paying Agent, duly executed. The City may charge a reasonable sum for each new Bond issued upon any transfer. Whenever any Bond or Bonds is surrendered for transfer, the City shall execute and the Paying Agent shall authenticate and deliver a new Bond or Bonds, for like aggregate principal amount. SECTION 2.07. Exchange of Bonds. Bonds may be exchanged at the Principal Office of the Paying Agent for a like aggregate principal amount of Bonds of authorized denominations and of the same maturity. The City may charge a reasonable sum for each new Bond issued upon any exchange. SECTION 2.08. Registration Books. The Paying Agent shall keep or cause to be kept sufficient books for the registration and transfer of the Bonds, which shall at all times be open to inspection by the City upon reasonable notice; and, upon presentation for such purpose, the Paying Agent shall, under such reasonable regulations as it may prescribe, register or transfer or cause to be registered or transferred, on said books, Bonds as herein before provided. SECTION 2.09. Book-Entry System. Except as provided below, DTC will be the Owner of all of the Bonds, and the Bonds will be registered in the name of Cede & Co. as nominee for DTC. The Bonds shall be initially executed and delivered in the form of a single fully registered Bond for each maturity date of the Bonds in the full aggregate principal amount of the Bonds maturing on such date. The Paying Agent and the City may treat DTC (or its nominee) as the sole and exclusive owner of the Bonds registered in its name for all purposes of this Resolution, and neither the Paying Agent nor the City *NOT YET APPROVED* -10- shall be affected by any notice to the contrary. The Paying Agent and the City shall not have any responsibility or obligation to any Depository System Participant, any person claiming a beneficial ownership interest in the Bonds under or through DTC or a Depository System Participant, or any other person which is not shown on the register of the City as being an owner, with respect to the accuracy of any records maintained by DTC or any Depository System Participant or the payment by DTC or any Depository System Participant by DTC or any Depository System Participant of any amount in respect of the principal or interest with respect to the Bonds. The City shall cause to be paid all principal and interest with respect to the Bonds only to DTC, and all such payments shall be valid and effective to fully satisfy and discharge the City’s obligations with respect to the principal and interest with respect to the Bonds to the extent of the sum or sums so paid. Except under the conditions noted below, no person other than DTC shall receive a Bond. Upon delivery by DTC to the City of written notice to the effect that DTC has determined to substitute a new nominee in place of Cede & Co., the term “Cede & Co.” in this Resolution shall refer to such new nominee of DTC. If the City determines that it is in the best interest of the beneficial owners that they be able to obtain Bonds and delivers a written certificate to DTC and the City to that effect, DTC shall notify the Depository System Participants of the availability through DTC of Bonds. In such event, the City shall issue, transfer and exchange Bonds as requested by DTC and any other owners in appropriate amounts. DTC may determine to discontinue providing its services with respect to the Bonds at any time by giving notice to the City and discharging its responsibilities with respect thereto under applicable law. Under such circumstances (if there is no successor securities depository), the City shall be obligated to deliver Bonds as described in this Resolution. Whenever DTC requests the City to do so, the City will cooperate with DTC in taking appropriate action after reasonable notice to (a) make available one or more separate Bonds evidencing the Bonds to any Depository System Participant having Bonds credited to its DTC account or (b) arrange for another securities depository to maintain custody of certificates evidencing the Bonds. Notwithstanding any other provision of this Resolution to the contrary, so long as any Bond is registered in the name of Cede & Co., as nominee of DTC, all payments with respect to the principal and interest with respect to such Bond and all notices with respect to such Bond shall be made and given, respectively, to DTC as provided as in the representation letter delivered on the date of issuance of the Bonds. SECTION 2.10. Bonds Mutilated, Lost, Destroyed or Stolen. If any Bond becomes mutilated the City, at the expense of the Owner of said Bond, shall execute, and the Paying Agent shall thereupon authenticate and deliver, a new Bond of like maturity and principal amount in exchange and substitution for the Bond so mutilated, but only upon surrender to the Paying Agent of the Bond so mutilated. The Paying Agent shall cancel every mutilated Bond so surrendered to it. If any Bond is lost, destroyed or stolen, evidence of such loss, destruction or theft may be submitted to the City and, if such evidence is satisfactory to the City and the City receives satisfactory indemnity, the City, at the expense of the Owner, shall execute, and the Paying Agent shall thereupon authenticate and deliver, a new Bond of like maturity and principal amount in lieu of and in substitution for the Bond so lost, destroyed or stolen. The City may require payment of a sum not exceeding the actual cost of preparing each new Bond issued under this Section and of the expenses which may be *NOT YET APPROVED* -11- incurred by the City and the Paying Agent. Any Bond issued under the provisions of this Section 2.10 in lieu of any Bond alleged to be lost, destroyed or stolen will constitute an original additional contractual obligation of the City whether or not the Bond so alleged to be lost, destroyed or stolen is at any time enforceable by anyone, and such Bond will be equally and proportionately entitled to the benefits of this Resolution with all other Bonds issued under this Resolution. Notwithstanding any other provision of this Section 2.10, in lieu of delivering a new Bond for which principal has or is about to become due for a Bond which has been mutilated, lost, destroyed or stolen, the Paying Agent may make payment of such Bond in accordance with its terms. ARTICLE III SALE OF BONDS SECTION 3.01. Sale, Issuance and Delivery of Bonds. (a) Approval of Official Notice of Sale; Competitive Sale Procedures. The Bonds shall be offered for sale by competitive bid in accordance with the provisions of the Official Notice of Sale in substantially the form on file with the City Clerk together with such additions thereto and changes therein as may be approved by a City Representative. The City authorizes the Federally Taxable Bonds and the Tax-Exempt to be separately sold pursuant to separate Notices of Sale. City Council hereby authorizes and directs a City Representative to accept the best responsible bid for the Bonds, to be determined in accordance with the related Official Notice of Sale. A City Representative, on behalf of the City, may exercise his or her own discretion and judgment in awarding the sale of the Bonds, and may, in his or her discretion, reject any and all bids and waive any irregularity or informality in any bid. Sale of the Bonds shall be awarded, or all bids shall be rejected, not later than 24 hours after the expiration of the time prescribed for the receipt of proposals unless such time of award is waived by the successful bidder. The City Council hereby approves and authorizes the publication by Bond Counsel of one or more notices of the City’s intention to sell the Bonds, in form and substance acceptable to Bond Counsel, in accordance with applicable law. The municipal advisor to the City, PFM Financial Advisors LLC, is hereby authorized and directed by the City to cause to be furnished to prospective bidders a reasonable number of copies of such Official Notices of Sale and a reasonable number of copies of the preliminary Official Statement relating to the Bonds described in Section 3.02. (b) Negotiated Sale of Bonds. One or more series of the Bonds are authorized to be sold by negotiated sale if either (a) no bids are received when such Bonds are offered for public sale under Section 3.01(a), or (b) bids are received but such bids are not satisfactory as to price or responsibility of the bidders as determined by a City Representative, as a result of which all bids for such Bonds are rejected. In such event, such Bonds are authorized to be sold by negotiation with an underwriter or investment *NOT YET APPROVED* -12- bank which is designated by a City Representative upon consultation with the City’s municipal advisor. Such Bonds shall be sold to such underwriter or investment bank under the Bond Purchase Agreement in a form deemed advisable by a City Representative, whose execution shall be conclusive evidence of the City Council’s approval of such Bond Purchase Agreement. A City Representative is hereby authorized to accept a bid from such underwriter or investment bank to purchase such Bonds, and to execute the Bond Purchase Agreement on behalf of the City; provided that (i) the rate of interest on the Federally Taxable Bonds shall not exceed 4.00% and the underwriter’s discount on the Federally Taxable Bonds shall not exceed 2.00% of the principal amount of the Federally Taxable Bonds and (ii) the rate of interest on the Tax-Exempt Bonds shall not exceed 4.50% and the underwriter’s discount on the Tax-Exempt Bonds shall not exceed 2.00% of the principal amount of the Tax-Exempt Bonds. SECTION 3.02. Official Statement. The City Council hereby approves and deems nearly final, within the meaning of Rule 15c2-12 of the Securities Exchange Act of 1934, the preliminary Official Statement describing the Bonds in the form on file with the City Clerk. A City Representative is hereby authorized to execute an appropriate certificate stating the City Council’s determination that the preliminary Official Statement has been deemed nearly final within the meaning of such Rule. A City Representative is hereby authorized and directed to approve any changes in or additions to a final form of the Official Statement, and the execution thereof by a City Representative shall be conclusive evidence of approval of any such changes and additions. A City Representative shall execute the final Official Statement in the name and on behalf of the City. The City Council hereby authorizes the distribution of the final Official Statement by the Original Purchaser. SECTION 3.03. Application of Proceeds of Sale of Bonds. On the Closing Date, the Original Purchaser(s) shall pay the purchase price of the Bonds to U.S. Bank Trust Company National Association, in its capacity as escrow agent under the Escrow Agreement (2013 Bonds) and the Irrevocable Refunding Instructions and as custodian under the agreement approved pursuant to Section 3.05, to be applied as provided in Section 4.01. SECTION 3.04. Approval of Escrow Agreement and Irrevocable Refunding Instructions. The City Council hereby approves the Escrow Agreement (2013 Bonds) and the Irrevocable Refunding Instructions (2010 Bonds) in substantially the forms on file with the City Clerk, together with any changes therein or additions thereto deemed advisable by a City Representative, whose execution thereof shall be conclusive evidence of such approval. A City Representative is authorized and directed for and in the name and on behalf of the City to execute, and the City Clerk is hereby authorized and directed to attest, if applicable, the final form of the Escrow Agreement (2013 Bonds) and the Irrevocable Refunding Instructions (2010 Bonds). SECTION 3.05. Costs of Issuance Custodian Agreement. For the purpose of providing for the payment of Costs of Issuance, the City Council hereby authorizes a City Representative to enter into one or more Costs of Issuance Custodian Agreements with U.S. Bank Trust Company National Association in substantially the form on file with the City Clerk. As provided in said agreements, amounts provided for payment of the costs of issuing the Bonds shall be deposited thereunder and the payment of costs shall be requisitioned by a City Representative in accordance with said agreement. *NOT YET APPROVED* -13- SECTION 3.06. Engagement of Professional Services. In connection with the issuance of the Bonds, the City Council hereby appoints PFM Financial Advisors LLC to act as municipal advisor to the City, the firm of Jones Hall, A Professional Law Corporation, to act as bond counsel to the City, and the firm of Quint & Thimmig LLP, to act as disclosure counsel to the City. A City Representative is authorized and directed to execute an agreement with each of such firms, in the respective forms on file with the City Clerk. As provided in each such agreement, compensation payable to each firm is entirely contingent upon the successful issuance and sale of the Bonds. ARTICLE IV FUNDS AND ACCOUNTS SECTION 4.01. Use of Proceeds. Upon the payment by the Original Purchasers of the purchase price of the Bonds on the Closing Date, the proceeds thereof shall be applied as follows: Federally Taxable Bonds (a) there shall be transferred to the Prior Bonds Paying Agent the amount required to be held and administered in accordance with the Escrow Agreement (2013 Bonds) for the purpose of refunding and defeasing the 2013 Bonds, and (b) the remainder of such amounts shall be transferred to U.S. Bank Trust Company National Association, as custodian under the related agreement approved pursuant to Section 3.05, to be applied to the payment of Costs of Issuance, and Tax-Exempt Bonds (c) there shall be transferred to the Prior Bonds Paying Agent the amount required to be held and administered in accordance with the Irrevocable Refunding Instructions (2010 Bonds) for the purpose of refunding and defeasing the 2010 Bonds, and (d) the remainder of such amounts shall be transferred to U.S. Bank Trust Company National Association, as custodian under the related agreement approved pursuant to Section 3.05, to be applied to the payment of Costs of Issuance. SECTION 4.02. Debt Service Fund. The City Council hereby establishes a special fund to be held by the City separate and apart from all other funds of the City, to be known as the Debt Service Fund. All taxes levied by the County, as directed by the City herein, for the payment of the principal of and interest and premium (if any) on the Bonds in accordance with Section 5.03 shall be deposited in the Debt Service Fund by the City promptly upon the receipt thereof from the County. The Debt Service Fund is hereby pledged for the payment of the principal of and interest and premium (if any) on *NOT YET APPROVED* -14- the Bonds when and as the same become due. The City shall transfer amounts in the Debt Service Fund, to the extent necessary to pay the principal of and interest on the Bonds as the same become due and payable, to the Paying Agent as required to pay the principal of and interest and premium (if any) on the Bonds. In the event that the amounts in the Debt Service Fund are not sufficient to pay the principal of and interest on the Bonds as the same become due and payable, the Paying Agent shall apply such amounts in the Debt Service Fund to pay the principal of and interest on the Federally Taxable Bonds and the Tax-Exempt Bonds on a pro rata basis based on the amounts then due and payable. If, after payment in full of the Bonds, any amounts remain on deposit in the Debt Service Fund, the City shall transfer such amounts to its General Fund, to be applied solely in a manner which is consistent with the requirements of applicable state and federal tax law. SECTION 4.03. Investments. The City shall invest all moneys held in any of the funds or accounts established with it hereunder in accordance with the investment policies of the City, as such policies shall exist at the time of investment, and in accordance with Section 53601 of the California Government Code. All interest or gain derived from the investment of amounts in any of the funds or accounts established hereunder shall be deposited in the fund or account from which such investment was made, and shall be expended for the purposes thereof. The City covenants that all investments of amounts deposited in any fund or account created by or under this Resolution, or otherwise containing proceeds of the Bonds, shall be acquired and disposed of at the Fair Market Value thereof. For purposes of this Section 4.03, the term “Fair Market Value” means, with respect to any investment, the price at which a willing buyer would purchase such investment from a willing seller in a bona fide, arm’s length transaction (determined as of the date the contract to purchase or sell the investment becomes binding) if the investment is traded on an established securities market (within the meaning of Section 1273 of the Tax Code) and, otherwise, the term “Fair Market Value” means the acquisition price in a bona fide arm’s length transaction (as described above) if (i) the investment is a certificate of deposit that is acquired in accordance with applicable regulations under the Tax Code, (ii) the investment is an agreement with specifically negotiated withdrawal or reinvestment provisions and a specifically negotiated interest rate that is acquired in accordance with applicable regulations under the Tax Code, or (iii) the investment is a United States Treasury Security - State and Local Government Series that is acquired in accordance with applicable regulations of the United States Bureau of Public Debt. // // // // *NOT YET APPROVED* -15- ARTICLE V OTHER COVENANTS OF THE CITY; SECURITY FOR THE BONDS SECTION 5.01. Punctual Payment. The City shall punctually pay, or cause to be paid, the principal of and interest on the Bonds in strict conformity with the terms of the Bonds and of this Resolution, and shall faithfully observe and perform all of the conditions, covenants and requirements of this Resolution and of the Bonds. Nothing herein contained prevents the City from making advances of its own moneys howsoever derived to any of the uses or purposes permitted by law. SECTION 5.02. Extension of Time for Payment. In order to prevent any accumulation of claims for interest after maturity, the City will not, directly or indirectly, extend or consent to the extension of the time for the payment of any claim for interest on any of the Bonds and will not, directly or indirectly, approve any such arrangement by purchasing or funding said claims for interest or in any other manner. SECTION 5.03. Security for the Bonds. The Bonds are general obligations of the City and the City has the power, is obligated and hereby covenants to levy ad valorem taxes upon all property within the City subject to taxation by the City, without limitation of rate or amount, for the payment of the Bonds and the interest thereon, in accordance with Section 43632 of the Government Code of the State of California. Amounts in the General Fund of the City are not pledged to the payment of the Bonds. However, nothing herein limits the ability of the City to provide for payment of the principal of and interest and premium (if any) on the Bonds from any source of legally available funds of the City. Any amounts so advanced by the City from legally available funds may be reimbursed from ad valorem property taxes subsequently collected under this Section 5.03. SECTION 5.04. Books and Accounts; Financial Statement. The City will keep, or cause to be kept, proper books of record and accounts, separate from all other records and accounts of the City in which complete and correct entries are made of all transactions relating to the Bonds. Such books of record and accounts shall at all times during business hours be subject to the inspection of the Paying Agent and the Owners of not less than 10% in aggregate principal amount of the Bonds then Outstanding, or their representatives authorized in writing. SECTION 5.05. Protection of Security and Rights of Bond Owners. The City will preserve and protect the security of the Bonds and the rights of the Bond Owners, and will warrant and defend their rights against all claims and demands of all persons. From and after the sale and delivery of any of the Bonds by the City, the City may not contest the authorization, issuance, sale or repayment of the Bonds. SECTION 5.06. Tax Covenants Relating to the Tax-Exempt Bonds. The City shall take all actions necessary to assure the exclusion of interest on the Tax-Exempt Bonds from the gross income of the Owners of the Tax-Exempt Bonds to the same extent as such interest is permitted to be excluded from gross income under the Tax Code as in effect on the Closing Date. To that end, and without limiting the generality of the *NOT YET APPROVED* -16- foregoing covenant, the City hereby covenants with the Owners of the Tax-Exempt Bonds as follows: (a) Private Activity Bond Limitation. The proceeds of the Tax-Exempt Bonds may not be so used as to cause the Tax-Exempt Bonds to satisfy the private business tests of Section 141(b) of the Tax Code or the private loan financing test of Section 141(c) of the Tax Code. (b) Federal Guarantee Prohibition. The City may not take any action or permit or suffer any action to be taken if the result of the same would be to cause the Tax-Exempt Bonds to be “federally guaranteed” within the meaning of Section 149(b) of the Tax Code. (c) No Arbitrage. The City may not take, or permit or suffer to be taken by the Paying Agent or otherwise, any action with respect to the Tax-Exempt Bond proceeds which, if such action had been reasonably expected to have been taken, or had been deliberately and intentionally taken, on the Closing Date, would have caused the Tax-Exempt Bonds to be “arbitrage bonds” within the meaning of Section 148 of the Tax Code. (d) Rebate of Excess Investment Earnings. The City shall calculate or cause to be calculated all amounts of excess investment earnings with respect to the Tax-Exempt Bonds which are required to be rebated to the United States of America under Section 148(f) of the Tax Code, at the times and in the manner required under the Tax Code. The City shall pay or cause to be paid when due an amount equal to excess investment earnings to the United States of America in such amounts, at such times and in such manner as may be required under the Tax Code, such payments to be made from any source of legally available funds of the City. The City shall keep or cause to be kept, and retain or cause to be retained for a period of six years following the retirement of the Tax-Exempt Bonds, records of the determinations made under this subsection (d). (e) Maintenance of Tax-Exemption. The City shall take all actions necessary to assure the exclusion of interest on the Tax-Exempt Bonds from the gross income of the owners of the Tax-Exempt Bonds to the same extent as such interest is permitted to be excluded from gross income under the Tax Code as in effect on the date of issuance of the Tax-Exempt Bonds. (f) Record Retention. The City will retain its records of all accounting and monitoring it carries out with respect to the Tax-Exempt Bonds for at least 3 years after the Tax-Exempt Bonds mature or are redeemed (whichever is earlier); however, if the Tax-Exempt Bonds are redeemed and refunded, the City will retain its records of accounting and monitoring at least 3 years after the earlier of the maturity or redemption of the obligations that refunded the Tax-Exempt Bonds. *NOT YET APPROVED* -17- (g) Compliance with Tax Certificate. The City will comply with the provisions of the Certificate as to Arbitrage and the Certificate Regarding Use of Proceeds with respect to the Tax-Exempt Bonds. The covenants of this Section will survive payment in full or defeasance of the Tax-Exempt Bonds. SECTION 5.06. Tax Covenants Relating to the 2013 Bonds. The City shall take all actions necessary to assure the exclusion of interest on the 2013 Bonds from the gross income of the Owners of the 2013 Bonds until the redemption in full of the 2013 Bonds. Without limiting the generality of the foregoing, the City covenants and agrees as follows: (a) Private Activity Bond Limitation. The City will take all actions necessary to assure that the proceeds of the 2013 Bonds are not used as to cause the 2013 Bonds to satisfy the private business tests of Section 141(b) of the Tax Code or the private loan financing test of Section 141(c) of the Tax Code. (b) Federal Guarantee Prohibition. The City will not take any action or permit or suffer any action to be taken if the result of the same would be to cause the 2013 Bonds to be “federally guaranteed” within the meaning of Section 149(b) of the Tax Code. (c) No Arbitrage. The City will not take, or permit or suffer to be taken by the Paying Agent or otherwise, any action with respect to the 2013 Bond proceeds which, if such action had been reasonably expected to have been taken, or had been deliberately and intentionally taken, on the date of issuance of the 2013 Bonds, would have caused the 2013 Bonds to be “arbitrage bonds” within the meaning of Section 148 of the Tax Code. (d) Rebate Requirement. The City will take any and all actions necessary to assure compliance with section 148(f) of the Code, relating to the rebate of excess investment earnings, if any, to the federal government, to the extent that such section is applicable to the 2013 Bonds. (e) Record Retention. The City will retain its records of all accounting and monitoring it carries out with respect to the 2013 Bonds for at least 3 years after the 2013 are fully redeemed. (f) Unspent Proceeds. As of the date of this Resolution, the City is holding approximately $598,921 of 2013 Bond proceeds in the Project Fund established for the 2013 Bonds. The City has awarded and will execute prior to the Closing Date a contract for roof and gutter work at Mitchell Park Library with an expected completion date of October 1, 2022. A City Representative is hereby directed on the Closing Date to reserve $250,000 of the amounts in the Project Fund to pay for the costs of such project and to transfer any other amounts in the Project Fund to the Prior Bonds Paying Agent *NOT YET APPROVED* -18- for deposit in the Escrow Fund established under the Escrow Agreement (2013 Bonds). SECTION 5.08. Continuing Disclosure. The City hereby covenants and agrees that it will comply with and carry out all of the provisions of the Continuing Disclosure Certificate, which a City Representative is hereby authorized and directed to execute and deliver on the Closing Date. Notwithstanding any other provision of this Resolution, failure of the City to comply with the Continuing Disclosure Certificate will not be considered a default by the City hereunder or under the Bonds; however, any Participating Underwriter (as such term is defined in the Continuing Disclosure Certificate) or any holder or beneficial owner of the Bonds may, take such actions as may be necessary and appropriate to compel performance, including seeking mandate or specific performance by court order. SECTION 5.09. Further Assurances. The City will adopt, make, execute and deliver any and all such further resolutions, instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate the performance of this Resolution, and for the better assuring and confirming unto the Owners of the Bonds of the rights and benefits provided in this Resolution. ARTICLE VI THE PAYING AGENT SECTION 6.01. Appointment of Paying Agent. U.S. Bank Trust Company National Association is hereby appointed to act as Paying Agent for the Bonds. The Paying Agent undertakes to perform such duties, and only such duties, as are specifically set forth in this Resolution, and even during the continuance of an event of default with respect to the Bonds, no implied covenants or obligations shall be read into this Resolution against the Paying Agent. The Paying Agent shall signify its acceptance of the duties and obligations imposed upon it by this Resolution by executing and delivering to the City a certificate to that effect. The City may remove the Paying Agent initially appointed, and any successor thereto, and may appoint a successor or successors thereto, but any such successor shall be a bank or trust company doing business and having an office in the State of California, having a combined capital (exclusive of borrowed capital) and surplus of at least $50,000,000, and subject to supervision or examination by federal or state authority. If such bank or trust company publishes a report of condition at least annually, under law or under the requirements of any supervising or examining authority above referred to, then for the purposes of this Section 6.01 the combined capital and surplus of such bank or trust company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Paying Agent may at any time resign by giving written notice to the City and the Bond Owners of such resignation. Upon receiving notice of such resignation, the City shall promptly appoint a successor Paying Agent by an instrument in writing. Any resignation or removal of the Paying Agent and appointment of a successor Paying *NOT YET APPROVED* -19- Agent becomes effective upon acceptance of appointment by the successor Paying Agent. The City Council hereby approves an agreement with the Paying Agent in substantially the form on file with the City Clerk, together with any changes therein or additions thereto deemed advisable by a City Representative, whose execution thereof shall be conclusive evidence of such approval. A City Representative is authorized and directed for and in the name and on behalf of the City to execute, and the City Clerk is hereby authorized and directed to attest, if applicable, the final form of the agreement with the Paying Agent. SECTION 6.02. Paying Agent May Hold Bonds. The Paying Agent may become the Owner of any of the Bonds in its own or any other capacity with the same rights it would have if it were not Paying Agent. SECTION 6.03. Liability of Paying Agent. The recitals of facts, covenants and agreements herein and in the Bonds contained shall be taken as statements, covenants and agreements of the City, and the Paying Agent assumes no responsibility for the correctness of the same, nor makes any representations as to the validity or sufficiency of this Resolution or of the Bonds, nor shall incur any responsibility in respect thereof, other than as set forth in this Resolution. The Paying Agent is not liable in connection with the performance of its duties hereunder, except for its own negligence or willful default. In the absence of bad faith, the Paying Agent may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Paying Agent and conforming to the requirements of this Resolution. The Paying Agent has no liability for any error of judgment made in good faith by a responsible officer of its corporate trust department in the absence of the negligence of the Paying Agent. No provision of this Resolution requires the Paying Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it has reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. The Paying Agent may execute any of the powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Paying Agent is not responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. SECTION 6.04. Notice to Paying Agent. The Paying Agent may rely and shall be protected in acting or refraining from acting upon any notice, resolution, request, consent, order, certificate, report, warrant, bond or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or proper parties. The Paying Agent may consult with counsel, who may be of counsel to the City, with regard to legal questions, and the opinion of such counsel shall be full and complete *NOT YET APPROVED* -20- authorization and protection in respect of any action taken or suffered by it hereunder in good faith and in accordance therewith. Whenever in the administration of its duties under this Resolution the Paying Agent deems it necessary or desirable that a matter be proved or established prior to taking or suffering any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of bad faith on the part of the Paying Agent, be deemed to be conclusively proved and established by a certificate of the City, and such certificate will be full warrant to the Paying Agent for any action taken or suffered under the provisions of this Resolution upon the faith thereof, but in its discretion the Paying Agent may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as to it may seem reasonable. SECTION 6.05. Compensation; Indemnification. The City will pay to the Paying Agent from time to time reasonable compensation for all services rendered under this Resolution, and also all reasonable expenses, charges, counsel fees and other disbursements, including those of their attorneys, agents and employees, incurred in and about the performance of their powers and duties under this Resolution. The City further agrees to indemnify the Paying Agent against any liabilities which it may incur in the exercise and performance of its powers and duties hereunder which are not due to its negligence or bad faith. ARTICLE VII REMEDIES OF BOND OWNERS SECTION 7.01. Remedies of Bond Owners. Upon the happening and continuation of any default by the City hereunder or under the Bonds, any Bond Owner has the right, for the equal benefit and protection of all Bond Owners similarly situated: (a) by mandamus, suit, action or proceeding, to compel the City and its members, officers, agents or employees to perform each and every term, provision and covenant contained in this Resolution and in the Bonds, and to require the carrying out of any or all such covenants and agreements of the City and the fulfillment of all duties imposed upon it; (b) by suit, action or proceeding in equity, to enjoin any acts or things which are unlawful, or the violation of any of the Bond Owners’ rights; or (c) by suit, action or proceeding in any court of competent jurisdiction, to require the City and its members and employees to account as if it and they were the trustees of an express trust. SECTION 7.02. Remedies Not Exclusive. No remedy herein conferred upon the Owners of Bonds is exclusive of any other remedy. Each remedy is cumulative and shall be in addition to every other remedy given hereunder or thereafter conferred on the Bond Owners. *NOT YET APPROVED* -21- ARTICLE VIII AMENDMENT OF THIS RESOLUTION SECTION 8.01. Amendments Effective Without Consent of the Owners. For any one or more of the following purposes and at any time or from time to time, the City Council may by Supplemental Resolution amend this Resolution in whole or in part, without the consent of any of the Bond Owners: (a) to add to the covenants and agreements of the City in this Resolution, other covenants and agreements to be observed by the City which are not contrary to or inconsistent with this Resolution as theretofore in effect; (b) to confirm, as further assurance, any pledge under, and to subject to any lien or pledge created or to be created by, this Resolution, of any moneys, securities or funds, or to establish any additional funds or accounts to be held under this Resolution; (c) to cure any ambiguity, supply any omission, or cure or correct any defect or inconsistent provision in this Resolution, which in any event does not materially adversely affect the interests of the Bond Owners, in the opinion of Bond Counsel filed with the City; or (d) to make such additions, deletions or modifications as may be necessary to assure compliance with the applicable provisions of the Tax Code relating to the rebate of excess investment earnings to the United States or otherwise as may be necessary to assure that the interest on the Bonds remains excludable from gross income of the Owners thereof for federal income tax purposes, in the opinion of Bond Counsel filed with the City. SECTION 8.02. Amendments Effective With Consent to the Owners. Any modification or amendment of this Resolution and of the rights and obligations of the City and of the Owners of the Bonds, in any particular, may be made by a Supplemental Resolution, with the written consent of the Owners of a majority in aggregate principal amount of the Bonds Outstanding at the time such consent is given. Without the consent of the Owners of all affected Bonds, no such modification or amendment may (a) change the maturity of the principal of any Bonds or any interest payable thereon, (b) reduce the principal amount of the Bonds or the rate of interest thereon, (c) reduce the percentage of Bonds the consent of the Owners of which is required to effect any such modification or amendment, (d) change any of the provisions in Section 7.01 relating to a default by the City hereunder or under the Bonds, (e) reduce the amount of moneys pledged for the repayment of the Bonds. Without the consent of the Paying Agent, no such modification or amendment may change or modify any of the rights or obligations of the Paying Agent. *NOT YET APPROVED* -22- ARTICLE IX MISCELLANEOUS SECTION 9.01. Benefits of Resolution Limited to Parties. Nothing in this Resolution, expressed or implied, is intended to give to any person other than the City, the Paying Agent and the Owners of the Bonds, any right, remedy, claim under or by reason of this Resolution. Any covenants, stipulations, promises or agreements in this Resolution contained by and on behalf of the City shall be for the sole and exclusive benefit of the Owners of the Bonds. SECTION 9.02. Defeasance. (a) Discharge of Resolution. Bonds may be paid by the City, in whole or in part, in any of the following ways provided that the City also pays or causes to be paid any other sums payable hereunder by the City: (i) by paying or causing to be paid the principal of and interest on such Bonds, as and when the same become due and payable; (ii) by irrevocably depositing, in trust, at or before maturity, money or securities in the necessary amount to pay such Bonds as provided in Section 9.02(c); or (iii) by delivering such Bonds to the Paying Agent for cancellation by it. If the City pays all Outstanding Bonds and also pays or causes to be paid all other sums payable hereunder by the City, then and in that case, at the election of the City (evidenced by a certificate of a City Representative filed with the Paying Agent, signifying the intention of the City to discharge all such indebtedness and this Resolution), and notwithstanding that any Bonds have not been surrendered for payment, this Resolution, all taxes and other assets pledged under this Resolution and all covenants, agreements and other obligations of the City under this Resolution shall cease, terminate, become void and be completely discharged and satisfied, except only as provided in Section 9.02(b). In such event, upon request of the City, the Paying Agent shall cause an accounting for such period or periods as may be requested by the City to be prepared and filed with the City and shall execute and deliver to the City all such instruments as may be necessary to evidence such discharge and satisfaction, and the Paying Agent shall pay over, transfer, assign or deliver to the City all moneys or securities or other property held by it under this Resolution which are not required for the payment of Bonds not theretofore surrendered for such payment. (b) Discharge of Liability on Bonds. Upon the deposit, in trust, at or before maturity, of money or securities in the necessary amount to pay any Outstanding Bond Bonds as provided in Section 9.02(c), then all liability of the City in respect of such Bond will cease and be completely discharged, except only that thereafter the Owner thereof is entitled only to payment of the principal of and interest on such Bond by the City, and the City remains liable for such payment, but only out of such money or securities deposited with the Paying Agent as aforesaid for such payment, provided further, however, that the provisions of Section 9.02(d) apply in all events. *NOT YET APPROVED* -23- The City may at any time surrender to the Paying Agent for cancellation by it any Bonds previously issued and delivered, which the City acquires in any manner whatsoever, and such Bonds, upon such surrender and cancellation, will be deemed paid and retired. (c) Deposit of Money or Securities with Paying Agent. Whenever in this Resolution it is provided or permitted that there be deposited with or held in trust by the Paying Agent money or securities in the necessary amount to pay any Bonds, the money or securities so to be deposited or held may include money or securities held by the Paying Agent in the funds and accounts established under this Resolution and must be: (i) lawful money of the United States of America in an amount equal to the principal amount of such Bonds and all unpaid interest thereon to maturity; or (ii) Federal Securities the principal of and interest on which when due, in the opinion of a certified public accountant delivered to the City, will provide money sufficient to pay the principal of and all unpaid interest to maturity on the Bonds to be paid, as such principal and interest become due. (d) Payment of Bonds After Discharge of Resolution. Notwithstanding any provisions of this Resolution, any moneys held by the Paying Agent in trust for the payment of the principal of, or interest on, any Bonds and remaining unclaimed for two years after the principal of all of the Bonds has become due and payable, if such moneys were so held at such date, or two years after the date of deposit of such moneys if deposited after said date when all of the Bonds became due and payable, shall, upon request of the City, be repaid to the City free from the trusts created by this Resolution, and all liability of the Paying Agent with respect to such moneys shall thereupon cease. Before the repayment of such moneys to the City as aforesaid, the Paying Agent may (at the cost of the City) first mail to the Owners of all Bonds which have not been paid at the addresses shown on the Registration Books a notice in such form as may be deemed appropriate by the Paying Agent, with respect to the Bonds so payable and not presented and with respect to the provisions relating to the repayment to the City of the moneys held for the payment thereof. SECTION 9.03. Execution of Documents and Proof of Ownership by Bond Owners. Any request, declaration or other instrument which this Resolution may require or permit to be executed by Bond Owners may be in one or more instruments of similar tenor, and shall be executed by Bond Owners in person or by their attorneys appointed in writing. Except as otherwise herein expressly provided, the fact and date of the execution by any Bond Owner or his attorney of such request, declaration or other instrument, or of such writing appointing such attorney, may be proved by the certificate of any notary public or other officer authorized to take acknowledgments of deeds to be recorded in the state in which he purports to act, that the person signing such request, declaration or other instrument or writing acknowledged to him the execution thereof, or by an affidavit of a witness of such execution, duly sworn to before such notary public or other officer. *NOT YET APPROVED* -24- Except as otherwise herein expressly provided, the ownership of registered Bonds and the amount, maturity, number and date of holding the same are proved by the Registration Books. Any request, declaration or other instrument or writing of the Owner of any Bond binds all future Owners of such Bond in respect of anything done or suffered to be done by the City or the Paying Agent in good faith and in accordance therewith. SECTION 9.04. Waiver of Personal Liability. No City Council member, officer, agent or employee of the City has any individual or personal liability for the payment of the principal of or interest on the Bonds. Nothing herein contained relieves any City Council member, officer, agent or employee from the performance of any official duty provided by law. SECTION 9.05. Destruction of Canceled Bonds. Whenever in this Resolution provision is made for the surrender to the City of any Bonds which have been paid or canceled under the provisions of this Resolution, a certificate of destruction duly executed by the Paying Agent constitutes the equivalent of the surrender of such canceled Bonds and the City is entitled to rely upon any statement of fact contained in any certificate with respect to the destruction of any such Bonds therein referred to. SECTION 9.06. Partial Invalidity. If any section, paragraph, sentence, clause or phrase of this Resolution is for any reason held illegal or unenforceable, such holding will not affect the validity of the remaining portions of this Resolution. The City hereby declares that it would have adopted this Resolution and each and every other section, paragraph, sentence, clause or phrase hereof and authorized the issue of the Bonds pursuant hereto irrespective of the fact that any one or more sections, paragraphs, sentences, clauses, or phrases of this Resolution may be held illegal, invalid or unenforceable. SECTION 9.07. Execution of Documents. Each City Representative, and any and all other officers of the City, are each authorized and directed in the name and on behalf of the City to make any and all certificates, requisitions, agreements, notices, consents, warrants and other documents, which they or any of them might deem necessary or appropriate in order to consummate the lawful issuance, sale and delivery of the Bonds. Whenever in this Resolution any officer of the City is authorized to execute or countersign any document or take any action, such execution, countersigning or action may be taken on behalf of such officer by any person designated by such officer to act on his or her behalf in the case such officer shall be absent or unavailable. // // // // // *NOT YET APPROVED* -25- SECTION 9.08. Effective Date of Resolution. This Resolution becomes effective upon the date of its passage and adoption. INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: __________________________ ______________________________ City Clerk Mayor APPROVED AS TO FORM: APPROVED: __________________________ ______________________________ Chief Assistant City Attorney City Manager ______________________________ Director of Administrative Services I HEREBY CERTIFY that the foregoing resolution was duly and regularly passed and adopted by the City Council of the City of Palo Alto at a regular meeting thereof held on the 2nd day of May, 2022, and that the foregoing is a full, true and correct copy of said Resolution. City Clerk *NOT YET APPROVED* APPENDIX A FORM OF BOND REGISTERED BOND NO. ______ $____________ CITY OF PALO ALTO GENERAL OBLIGATION REFUNDING BONDS (ELECTION OF 2008), SERIES _____ INTEREST RATE: MATURITY DATE: DATED DATE: CUSIP ______% per annum August 1, ____ REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: The CITY OF PALO ALTO, a charter city and municipal corporation duly organized and existing under the Constitution and laws of the State of California (the “City”), for value received, hereby promises to pay to the Registered Owner named above, or registered assigns, the Principal Amount set forth above on the Maturity Date set forth above, together with interest thereon at the Interest Rate set forth above, calculated on a 30/360 day basis, until the Principal Amount hereof is paid or provided for, such interest to be paid on February 1 and August 1 of each year, commencing February 1, 2023 (the “Interest Payment Dates”). This Bond will bear interest from the Interest Payment Date next preceding the date of authentication hereof, unless (a) it is authenticated as of a business day following the 15th day of the month immediately preceding any Interest Payment Date and on or before such Interest Payment Date, in which event it shall bear interest from such Interest Payment Date, or (b) it is authenticated on or before January 15, 2023, in which event it shall bear interest from the Dated Date set forth above. Principal, interest and redemption premium (if any) are payable in lawful money of the United States of America to the person in whose name this Bond is registered (the “Registered Owner”) on the Bond registration books maintained by the Paying Agent, initially U.S. Bank Trust Company National Association, San Francisco, California. Principal hereof and any redemption premium hereon are payable upon presentation and surrender of this Bond at the principal corporate trust office of the Paying Agent. Interest hereon is payable by check mailed by the Paying Agent on each Interest Payment Date to the Registered Owner of this Bond by first-class mail at the address appearing on the Bond registration books at the close of business on the 15th day of the calendar month next preceding such Interest Payment Date (the “Record Date”); *NOT YET APPROVED* provided, however, that at the written request of the registered owner of Bonds in an aggregate principal amount of at least $1,000,000, which written request is on file with the Paying Agent prior to any Record Date, interest on such Bonds shall be paid on each succeeding Interest Payment Date by wire transfer in immediately available funds to such account of a financial institution within the United States of America as shall be specified in such written request. This Bond is one of a duly authorized issue of Bonds of the City designated as “City of Palo Alto 2022 General Obligation Refunding Bonds (Election of 2008), Series ______” (the “Bonds”), in an aggregate principal amount of $__________, all of like tenor and date (except for such variation, if any, as may be required to designate varying numbers, maturities, interest rates and other provisions) and all issued under the provisions of Articles 9 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the Government Code of the State of California (the “Bond Law”), and under a resolution adopted by the City Council of the City on May 9, 2022 (the “Resolution”) authorizing the issuance of the Bonds. Reference is hereby made to the Resolution (copies of which are on file at the office of the City Clerk) and the Bond Law for a description of the terms on which the Bonds are issued and the rights thereunder of the owners of the Bonds and the rights, duties and immunities of the Paying Agent and the rights and obligations of the City thereunder, to all of the provisions of which Resolution the Owner of this Bond, by acceptance hereof, assents and agrees. The Bonds have been issued by the City to refund and discharge outstanding general obligation bonds of the City, the issuance of which was authorized by a vote of more than two-thirds of the qualified voters of the City voting at a special municipal election held on November 4, 2008. The principal of and interest and redemption premium, if any, on this Bond do not constitute a debt of the County, the State of California, or any of its political subdivisions other than the City, or any of the officers, agents and employees thereof, and neither the County, the State of California, any of its political subdivisions other than the City, nor any of the officers, agents and employees thereof shall be liable hereon. In no event shall the principal of and interest and redemption premium, if any, on this Bond be payable out of any funds or properties of the City other than ad valorem taxes levied upon all taxable property in the City. The Bonds are issuable only as fully registered Bonds in the denominations of $5,000 or any integral multiple thereof. This Bond is exchangeable and transferable for Bonds of other authorized denominations at the principal corporate trust office of the Paying Agent, by the Registered Owner or by a person legally empowered to do so, upon presentation and surrender hereof to the Paying Agent, together with a request for exchange or an assignment signed by the Registered Owner or by a person legally empowered to do so, in a form satisfactory to the Paying Agent, all subject to the terms, limitations and conditions provided in the Bond Resolution. Any tax or governmental charges shall be paid by the transferor. The City and the Paying Agent may deem and treat the Registered Owner as the absolute owner of this Bond for the purpose of receiving payment of or on account of principal or interest and for all other purposes, and neither the City nor the Paying Agent shall be affected by any notice to the contrary. The Bonds maturing on or before August 1, 20__, are not subject to redemption prior to their respective stated maturities. The Bonds maturing on or after August 1, *NOT YET APPROVED* 20__, are subject to redemption prior to maturity as a whole, or in part among maturities on such basis as shall be designated by the City and by lot within a maturity, at the option of the City, from any available source of funds, on August 1, 20__, and on any Interest Payment Date thereafter, at a redemption price (expressed as a percentage of the principal amount of Bonds to be redeemed) as set forth in the following table, together with interest thereon to the date fixed for redemption. Redemption Dates Redemption Price [If applicable:] The Bonds maturing on August 1, 20__ (the “Term Bonds”) are also subject to mandatory sinking fund redemption on August 1 in the years, and in the amounts, as set forth in the following table, at a redemption price equal to 100% of the principal amount thereof to be redeemed (without premium), together with interest accrued thereon to the date fixed for redemption; provided, however, that if some but not all of the Term Bonds have been redeemed under the preceding paragraph, the aggregate principal amount of Term Bonds to be redeemed under this paragraph shall be reduced on a pro rata basis in integral multiples of $5,000, as shall be designated in written notice filed by the City with the Paying Agent. Sinking Fund Redemption Date (August 1) Principal Amount To Be Redeemed The Paying Agent shall give notice of the redemption of the Bonds at the expense of the City. Such notice shall specify: (a) that the Bonds or a designated portion thereof are to be redeemed, (b) the numbers and CUSIP numbers of the Bonds to be redeemed, (c) the date of notice and the date of redemption, (d) the place or places where the redemption will be made, and (e) descriptive information regarding the Bonds including the dated date, interest rate and stated maturity date. Such notice shall further state that on the specified date there shall become due and payable upon each Bond to be redeemed, the portion of the principal amount of such Bond to be redeemed, together with interest accrued to said date, the redemption premium, if any, and that from and after such date interest with respect thereto shall cease to accrue and be payable. Notice of any redemption of Bonds shall be mailed by first class mail, postage prepaid, at least 20 days but not more than 60 days prior to the date fixed for redemption, to the respective Owners of any Bonds designated for redemption, at their addresses appearing on the Bond registration books maintained by the Paying Agent; but such mailing shall not be a condition precedent to such redemption and failure to mail or to receive any such notice shall not affect the validity of the proceedings for the *NOT YET APPROVED* redemption of such Bonds or the cessation of accrual of interest thereon from and after the redemption date. The redemption notice may be conditional and may be rescinded in the circumstances set forth in the Resolution. Neither the City nor the Paying Agent will be required: (a) to issue or transfer any Bond during a period beginning with the opening of business on the 15th calendar day next preceding either any Interest Payment Date or any date of selection of any Bond to be redeemed and ending with the close of business on the Interest Payment Date or a day on which the applicable notice of redemption is given, or (b) to transfer any Bond which has been selected or called for redemption in whole or in part. Reference is made to the Bond Resolution for a more complete description of the provisions, among others, with respect to the nature and extent of the security for the Bonds, the rights, duties and obligations of the City, the Paying Agent and the Registered Owners, and the terms and conditions upon which the Bonds are issued and secured. The owner of this Bond assents, by acceptance hereof, to all of the provisions of the Bond Resolution. It is certified, recited and declared that all acts and conditions required by the Constitution and laws of the State of California to exist, to be performed or to have been met precedent to and in the issuing of the Bonds in order to make them legal, valid and binding general obligations of the City, have been performed and have been met in regular and due form as required by law; that payment in full for the Bonds has been received; that no statutory or constitutional limitation on indebtedness or taxation has been exceeded in issuing the Bonds; and that due provision has been made for levying and collecting ad valorem property taxes on all of the taxable property within the City in an amount sufficient to pay principal and interest when due, and for levying and collecting such taxes the full faith and credit of the City are hereby pledged. This Bond shall not be valid or obligatory for any purpose and shall not be entitled to any security or benefit under the Bond Resolution until the Certificate of Authentication below has been manually signed by the Paying Agent. Unless this Bond is presented by an authorized representative of The Depository Trust Company, a New York corporation (“DTC”), to the City or the Paying Agent for registration of transfer, exchange, or payment, and any Bond issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. *NOT YET APPROVED* IN WITNESS WHEREOF, the City of Palo Alto has caused this Bond to be executed by the facsimile signature of its Mayor and attested by the facsimile signature of its City Clerk, and has caused the seal of the City to be reproduced hereon, all as of the date stated above. CITY OF PALO ALTO By Mayor Attest: City Clerk *NOT YET APPROVED* CERTIFICATE OF AUTHENTICATION This Bond is one of the Bonds described in the Bond Resolution referred to herein. Date of Authentication: U.S. BANK TRUST COMPANY NATIONAL ASSOCIATION, as Paying Agent By Authorized Signatory FORM OF ASSIGNMENT For value received, the undersigned do(es) hereby sell, assign and transfer unto (Name, Address and Tax Identification or Social Security Number of Assignee) the within Bond and do(es) hereby irrevocably constitute and appoint ______________________ attorney, to transfer the same on the registration books of the Bond Registrar, with full power of substitution in the premises. Dated: ______________ Signature Guaranteed: Note: Signature(s) must be guaranteed by a an eligible guarantor institution. Note: The signature(s) on this Assignment must correspond with the name(s) as written on the face of the within Bond in every particular without alteration or enlargement or any change whatsoever. *NOT YET APPROVED* A-1 APPENDIX B REQUIRED DISCLOSURES PURSUANT TO GOVERNMENT CODE SECTION 5852.1* The following information consists of estimates that have been provided by the City’s municipal advisor which has been represented by such party to have been provided in good faith: Federally Taxable Bonds 1. Estimated True Interest Cost of the Federally Taxable Bonds: 3.82% 2. Estimated finance charge of the Federally Taxable Bonds, being the sum of all fees and charges paid to third parties, in the amount of approximately $189,286.24. Such amount consists of costs of issuing the Federally Taxable Bonds in the amount of approximately $60,301.43, together with estimated underwriter’s compensation in the amount of $128,984.81. 3. Estimated proceeds of the Federally Taxable Bonds expected to be received by the City for deposit pursuant to the Escrow Agreement (2013 Bonds), net of proceeds for Costs of Issuance in (2) above to paid, capitalized interest and reserves (if any) from the principal amount of the Federally Taxable Bonds: $13,485,713.76 4. Estimated Total Payment Amount for the Federally Taxable Bonds, being the sum of all debt service to be paid on the Federally Taxable Bonds to final maturity: $19,423,309.44. Tax-Exempt Bonds 1. Estimated True Interest Cost of the Tax-Exempt Bonds: 3.14% 2. Estimated finance charge of the Tax-Exempt Bonds, being the sum of all fees and charges paid to third parties, in the amount of approximately $535,343.37. Such amount consists of costs of issuing the Tax-Exempt Bonds in the amount of approximately $163,578.18, together with estimated underwriter’s compensation in the amount of $371,765.19. 3. Estimated proceeds of the Tax-Exempt Bonds expected to be received by the City for deposit pursuant to the Irrevocable Refunding Instructions (2010 Bonds), net of proceeds for Costs of Issuance in (2) above to paid, capitalized interest and reserves (if any) from the principal amount of the Tax-Exempt Bonds: $38,879,289.28. *NOT YET APPROVED* A-2 4. Estimated Total Payment Amount for the Tax-Exempt Bonds, being the sum of all debt service to be paid on the Tax-Exempt Bonds to final maturity: $51,318,000 *All amounts and percentages are estimates, and are made in good faith by the City based on information available as of the date of adoption of this Resolution. Estimates include certain assumptions regarding tax-exempt interest rates available in the bond market at the time of pricing the Bonds. Attachment B Costs of Issuance (COI) Estimates: Bond Counsel (Jones Hall), includes expenses 66,500$ 29.7% Disclosure Counsel (Quint & Thimmig, LLP) 30,000 13.4% Financial Advisor (PFM Financial Advisors, LLC), includes expenses 63,000 28.1% Trustee (U.S. Bank) 10,000 4.5% Rating Agency (Standard & Poor's) 31,750 14.2% Verfification Agent (TBD) 1,750 0.8% Printer 1,000 0.4% Parity Bid Platform 1,000 0.4% Contingency 18,880 8.4% Total Cost of Issuance (COI) 223,880$ 100% Underwriter's Discount Fee 500,750 Total Bond Issuance Expense Estimates 724,630$ City of Palo Alto General Obligation (Refunding) Bonds Series 2022A (Tax-Exempt) and Series 2022B (Federally Taxable) Bonds Bond Issuance Expense Estimates PAYING AGENCY AGREEMENT This Paying Agency Agreement (the “Agreement”), entered into as of June __, 2022, by and between the City of Palo Alto (the “Issuer”) and U.S. Bank Trust Company National Association, a national banking association having a corporate trust office at San Francisco, California (the “Paying Agent”), WITNESSETH: WHEREAS, by the resolutions described in Exhibit A attached hereto (the “Authorization”), the Issuer authorized the issuance of its Bonds or Notes as described in Exhibit A attached hereto (the “Bonds” or “Notes”) and WHEREAS, said Authorization authorized the Issuer to enter into an agreement of appointment with a bond registrar/transfer agent and paying agent to service such Bonds or Notes. NOW, THEREFORE, the Issuer and the Paying Agent agree as follows: Section 1. Appointment and Acceptance. The Issuer hereby appoints U.S. Bank Trust Company National Association as bond registrar/transfer agent and paying agent for the Bonds or Notes, and the Paying Agent accepts such appointments, acknowledging the duties, obligations and responsibilities of the Paying Agent as set forth herein. Section 2. Documents to be Filed with the Paying Agent. The following documents shall be filed with the Paying Agent in connection with its appointment: (i)a copy of the Authorization. (ii) if not printed on the Bonds or Notes, an opinion of bond counsel stating that (a) the Bonds or Notes are valid and legally binding obligations of the Issuer, payable in accordance with their terms and (b) if applicable, the interest on such Bonds or Notes is not included in gross income for federal income tax purposes; (iii)a specimen certificate in the form approved by the Issuer; (iv) if the Bonds or Notes have been delivered prior to the Paying Agent’s appointment: (1)a list containing the name, address and taxpayer identification number of each holder of the Bonds or Notes as of the date of Paying Agent’s appointment, indicating the date of issuance, the authentication date, the certificate number and the denomination for each outstanding certificate, and (2)a list of stop transfer orders maintained by the Issuer (or its prior paying agents) against outstanding Bond or Note certificates giving details as to certificate numbers, denominations, names of registered owners and dates of stop transfer orders, and, if such certificates have been replaced, the numbers and denominations of the replacement certificates, dates of replacements and documents evidencing the indemnity accepted in connection with the issuance of the replacement certificates; and (v) such other instruments and certificates as the Paying Agent may reasonably request. Section 3. Registration, Authentication and Delivery of Initial Bonds or Notes. If the Bonds or Notes are to be newly issued, the Issuer will, or will cause its underwriter to: Exhibit 1 2 (i) deliver to Paying Agent, not later than five (5) business days prior to the required delivery date, written notice setting forth the maturity date, principal amount and interest rate borne by the Bonds or Notes; (ii) notify the Paying Agent in writing, not later than three (3) business days prior to the required delivery date, of the name(s) in which Bonds or Notes are to be registered, the mailing addresses of the respective registered holders and their respective taxpayer identification numbers, and the quantity, denominations, interest rates, maturity dates and CUSIP numbers of the certificates to be issued to each registered holder. The Paying Agent shall inscribe the Bonds or Notes as directed in Section 3(ii) above, authenticate the initial Bonds or Notes and deliver same in accordance with the written directions of the Issuer or its underwriter. If delivered before the Closing, such initial Bonds or Notes shall remain subject to the control of the Paying Agent, as agent for the Issuer, until released by the Paying Agent. Section 4. Transfer or Exchange of Certificates. The Paying Agent is authorized, empowered and directed to inscribe, to countersign or authenticate as registrar, and to record and deliver new certificates for Bonds or Notes of the Issuer pursuant to requests for transfer and cancellation of other certificates theretofore outstanding, or to replace lost, destroyed, stolen or mutilated certificates, as provided in Section 6 hereof. If the transfer and/or exchange of the Bond or Note certificate shall have been documented in the manner authorized or required by law, and if the rules, regulations, policies and procedures of the Issuer and of the Paying Agent, governing the transfer and registration of the Bonds or Notes shall have been met, then the Paying Agent shall cancel such certificate being transferred and/or exchanged and shall inscribe, authenticate, record and deliver a new certificate for the Bonds or Notes so transferred or exchanged. In the transfer of Bond or Note certificates, the Paying Agent may require a guarantee of signature by an eligible guarantor institution participating in a recognized signature guarantee program. The Paying Agent shall incur no liability for the refusal in good faith to make transfers which it, in its judgment, deems improper or unauthorized. The Paying Agent may, in effecting transfers, rely upon the Uniform Commercial Code of the State of California and/or the rules of the Stock Transfer Association, Inc. Prior to any transfer of the Bonds outside the book-entry system (including, but not limited to, the initial transfer outside the book-entry system) the transferor shall provide or cause to be provided to the Paying Agent all information necessary to allow the Paying Agent to comply with any applicable tax reporting obligations, including without limitation any cost basis reporting obligations under Internal Revenue Code Section 6045, as amended. The Paying Agent shall conclusively rely on the information provided to it and shall have no responsibility to verify or ensure the accuracy of such information. The Paying Agent acknowledges that the Issuer has no obligation to enforce any obligations imposed by this paragraph on the owners of the Bonds. Section 5. Bond or Note Certificates. The Issuer will furnish to the Paying Agent a sufficient supply of blank Bond or Note certificates and, from time to time, will replenish such supply upon request of the Paying Agent. Such blank Bond or Note certificates shall be signed by officers of the Issuer, authorized by the Issuer to sign Bond or Note certificates, and shall bear the seal of the Issuer or shall bear, to the extent permitted by law, the facsimile signature of each such officer and a facsimiles of the seal. If an officer of the Issuer, whose signature appears on any Bond or Note certificate, ceases to be an officer of the Issuer before delivery of said Bond or Note certificate, such signature nevertheless shall be valid and sufficient for all purposes, the same as if such officer of the Issuer had remained in office until such delivery and the Paying Agent may inscribe, authenticate, and deliver such certificate as being that of the Issuer whose signature properly shall have been inscribed on such Bond or Note certificate prior to its issuance. Section 6. Records of Certificates; Lost or Destroyed Certificates. The Paying Agent may open and keep such books and other records, including a bond register, as shall be required for, or 3 convenient in, the performance of its duties. If Bonds or Notes have been issued and delivered prior to the Paying Agent’s appointment, the Paying Agent may accept and adopt as a part of such records all lists of holders of records as may have been employed by any former bond registrar/transfer agent and paying agent for such Bonds or Notes if certified by such former bond registrar/transfer agent and paying agent. The Paying Agent shall use such list of holders of record of the Issuer’s Bond or Note certificates as sufficient basis for its records and verification of Bond or Note certificates therein described. Upon receiving written instructions from the Issuer and indemnity satisfactory to the Paying Agent and the Issuer, the Paying Agent may inscribe, authenticate and deliver, to the persons entitled thereto, new certificates in place of certificates represented to have been lost, stolen or destroyed and likewise may issue a new certificate in exchange for, and upon surrender of, an identifiable mutilated certificate. Section 7. Payments of Interest and Principal. The Paying Agent shall act as paying agent for the Bonds or Notes and in such capacity it shall: (i) with funds provided by Issuer, pay the interest upon the Bonds or Notes by mailing checks to the persons entitled to receive such interest, as determined by the registry of the Issuer maintained by the Paying Agent, provided that Issuer shall have deposited with the Paying Agent, on or before the day upon which interest checks are to be mailed, sufficient immediately available funds to cover payment of such interest; (ii) with funds provided by Issuer, pay the principal amount (including premium, if any) of the Bonds or Notes to the registered holders of such Bonds or Notes, upon the maturity date or earlier redemption date upon which the principal is to become payable and upon delivery to the Paying Agent of a Bond Note certificate with respect to which such principal payment shall have become payable, provided that the Issuer shall have deposited with the Paying Agent, on or before the payment date, sufficient immediately available funds to pay the aggregate principal amount (including premium, if any) due on all Bonds or Notes so payable; (iii) if a Bondholder or Noteholder shall report to the Paying Agent that any check so mailed for the payment of interest or principal has been lost and that the proceeds thereof, have not been received and if the check has not been paid then, upon provision of an indemnity satisfactory to the Paying Agent and the Issuer, stop payment upon such check, and issue and deliver to such Bondholder or Noteholder a new check for like amount; provided, however, that it may, at its discretion, defer the issuance of the new check for a reasonable period of time; (iv) record the fact of payment and cancel Bonds or Notes surrendered to it for payment, coincident with such payment being made to the person thereto entitled; and (v) have no liability for interest on, or investing, any funds received by it; any unclaimed funds remaining in the possession of the Paying Agent for payment of the Bonds or Notes will be escheated in accordance with applicable law and the Paying Agent’s policies and procedures. Section 8. Redemption Prior to Stated Maturity. If the Bonds or Notes are subject to redemption prior to their stated maturity date(s), the Paying Agent shall be governed by the redemption provisions set forth in the Authorization or as stated in the provisions as set forth on the bond/note form. The Paying Agent shall not be required to transfer any Bond or Note, or portion thereof, that has been called for redemption. Payment of the principal amount (including premium, if any) of any Bond or Note, or portion thereof, called for redemption shall be made by check payable to the registered owner, only upon presentation of the Bond or Note, at the designated corporate trust office of the Paying Agent on or after the redemption date. Where the entire principal amount of the Bond or Note has not been called for redemption, a new Bond or Note of the same series, maturity and interest rate in the amount of the unredeemed portion will be issued to the registered holder or its assignee. Whether or not promptly submitted for redemption, interest on any Bond or Note, or portion thereof, called for redemption shall 4 cease to accrue on and after the redemption date provided that sufficient moneys therefore are on deposit with the Paying Agent. Section 9. Compensation; Indemnification. The Issuer agrees to pay the Paying Agent fees as set forth in Exhibit B attached hereto and made a part hereof, and, if applicable, to reimburse Paying Agent for its out-of-pocket expenses (including without limitation attorneys; fees and expenses). The Issuer assumes full responsibility and, to the extent permitted by law, will indemnify the Paying Agent and its officers, directors, agents and employees and save it and them harmless from and against any and all actions or suits, whether groundless or otherwise, and from and against any and all losses, liabilities, costs and expenses (including attorneys’ fees and expenses) arising out of the agency relationship created by this Agreement, unless such losses, liabilities, costs and expenses shall have been finally adjudicated to have resulted from the willful misconduct or negligence of the Paying Agent, and such indemnification shall survive the Paying Agent’s resignation or removal for any reason, or the termination of this Agreement. Section 10. Instructions From the Issuer and Opinion From Counsel. At any time the Paying Agent may apply to any duly authorized representative of the Issuer for instructions, and shall have the right, but not the obligation, to consult with counsel of choice at the reasonable expense of the Issuer and shall not be liable for action taken or omitted to be taken either in accordance with such instruction or such advice of counsel, or in accordance with any opinion of counsel to the Issuer addressed to the Paying Agent. Section 11. Concerning the Paying Agent. The Paying Agent shall have only those duties as are specifically provided herein, which shall be deemed purely ministerial in nature, and shall have the right to perform any of its duties hereunder through agents, attorneys, custodians or nominees. The Paying Agent shall not be answerable for other than its negligence or willful misconduct. The Paying Agent shall have no responsibility for the form of inscription of ownership upon any Bond or Note certificate which has been made in accordance with directions of the Issuer, the Issuer’s underwriter, a broker or a holder of a Bond or Note. The Paying Agent shall be protected in acting upon any paper or document believed by it to be genuine and to have been signed by the proper person or persons and shall not be held to have notice of any change of authority of any person, until receipt of written notice thereof from the Issuer. The Paying Agent shall also be protected in recognizing Bond or Note certificates which it reasonably believes to bear the proper manual or facsimile signatures on behalf of the Issuer. The Paying Agent shall have the right, but not the obligation, to consult with counsel of choice and shall not be liable for action taken or omitted to be taken by Paying Agent either in accordance with the advice of such counsel or in accordance with any opinion of counsel to the Issuer addressed and delivered to the Paying Agent The Paying Agent shall not be under any obligation to prosecute any action or suit in respect of the agency relationship which, in its sole judgment, may involve it in expense or liability. In any action or suit the Issuer shall, as often as requested, reimburse the Paying Agent for any expense or liability growing out of such action or suit by or against the Paying Agent in its agency capacity; provided, however, that no such reimbursement shall be made for any expense or liability arising as a result of Paying Agent’s negligence or willful misconduct. No provision of this Agreement shall require the Paying Agent to risk or expend its own funds. The Paying Agent shall not be responsible or liable for any failure or delay in the performance of its obligation under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its reasonable control, including, without limitation, acts of God; earthquakes; fire; flood; wars; terrorism; military disturbances; sabotage; epidemic; riots; interruptions; loss or malfunctions of utilities, computer (hardware or software) or communications services; accidents; labor disputes; acts of civil or military authority or governmental action; it being understood that Paying Agent shall use commercially reasonable efforts which are consistent with accepted practices in the banking industry to resume performance as soon as reasonably practicable under the circumstances. Anything in this Agreement to the contrary notwithstanding, in no event shall the Paying Agent be liable for special, punitive, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if the Paying Agent has been advised of the likelihood of such loss or damage and regardless of the form of action. 5 The Paying Agent shall have the right to accept and act upon instructions, including funds transfer instructions (“Instructions”) given pursuant to this Agreement and delivered using Electronic Means (“Electronic Means” means mean the following communications methods: e-mail, facsimile transmission, secure electronic transmission containing applicable authorization codes, passwords and/or authentication keys issued by the Paying Agent, or another method or system specified by the Paying Agent as available for use in connection with its services hereunder); provided, however, that the Issuer shall provide to the Paying Agent an incumbency certificate listing officers with the authority to provide such Instructions (“Authorized Officers”) and containing specimen signatures of such Authorized Officers, which incumbency certificate shall be amended by the Issuer whenever a person is to be added or deleted from the listing. If the Issuer elects to give the Paying Agent Instructions using Electronic Means and the Paying Agent in its discretion elects to act upon such Instructions, the Paying Agent’s understanding of such Instructions shall be deemed controlling. The Issuer understands and agrees that the Paying Agent cannot determine the identity of the actual sender of such Instructions and that the Paying Agent shall conclusively presume that directions that purport to have been sent by an Authorized Officer listed on the incumbency certificate provided to the Paying Agent have been sent by such Authorized Officer. The Issuer shall be responsible for ensuring that only Authorized Officers transmit such Instructions to the Paying Agent and that the Issuer and all Authorized Officers are solely responsible to safeguard the use and confidentiality of applicable user and authorization codes, passwords and/or authentication keys upon receipt by the Issuer. The Paying Agent shall not be liable for any losses, costs or expenses arising directly or indirectly from the Paying Agent’s reliance upon and compliance with such Instructions notwithstanding such directions conflict or are inconsistent with a subsequent written instruction. The Issuer agrees: (i) to assume all risks arising out of the use of Electronic Means to submit Instructions to the Paying Agent, including without limitation the risk of the Paying Agent acting on unauthorized Instructions, and the risk of interception and misuse by third parties; (ii) that it is fully informed of the protections and risks associated with the various methods of transmitting Instructions to the Paying Agent and that there may be more secure methods of transmitting Instructions than the method(s) selected by the Issuer; (iii) that the security procedures (if any) to be followed in connection with its transmission of Instructions provide to it a commercially reasonable degree of protection in light of its particular needs and circumstances; and (iv) to notify the Paying Agent immediately upon learning of any compromise or unauthorized use of the security procedures. Any banking association or corporation into which the Paying Agent may be merged, converted or with which the Paying Agent may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Paying Agent shall be a party, or any banking association or corporation to which all or substantially all of the corporate trust business of the Paying Agent shall be transferred, shall succeed to all the Paying Agent's rights, obligations and immunities hereunder without the execution or filing of any paper or any further act on the part of the parties hereto, anything herein to the contrary notwithstanding. Section 12. Notices. Until changed by notice in writing, communications between the parties shall be delivered to: If to Issuer: City of Palo Alto 250 Hamilton Avenue Palo Alto, CA 94301 Attn: Adminstrative Services Director If to the Paying Agent: U.S. Bank Trust Company National Association 633 West 5th Street, 24th Floor Los Angeles, CA 90071 Attn: Corporate Trust Section 13. Destruction of Instruments, Records and Papers. The Paying Agent may retain in its files records, instruments, and papers maintained by it in relation to its agency as long as the Paying 6 Agent shall consider that such retention is necessary. The Paying Agent shall destroy or dispose of canceled Bonds or Notes in accordance with its customary procedures, unless contrary instructions are received from the Issuer. Section 14. Resignation or Removal of Paying Agent. Any time, other than on a day during the forty-five (45) day period preceding any payment date for Issuer’s Bonds or Notes, the Paying Agent may resign by giving at least forty-five (45) days’ prior written notice to Issuer; and the Paying Agent’s agency shall be terminated and its duties shall cease upon expiration of such forty-five (45) days or such lesser period of time as shall be mutually agreeable to Paying Agent and Issuer. At any time, following at least forty-five (45) days’ prior written notice (or such lesser period of time as shall be mutually agreeable to the Paying Agent and the Issuer) from the Issuer, the Paying Agent may be removed from its agency. Such removal shall become effective upon the expiration of the forty-five (45) day or agreed lesser time period, and upon payment to the Paying Agent of all amounts payable to it in connection with its agency. In such event, the Paying Agent shall deliver to the Issuer, or to the Issuer’s designated representative, all Bonds or Notes and cash belonging to the Issuer and, at the Issuer’s expense, shall furnish to the Issuer, or to the Issuer’s designated representative, reasonably detailed information regarding the status of the Issuer’s outstanding Bonds or Notes and copies of other pertinent records then in the Paying Agent’s possession, reasonably requested by the Issuer. Section 15. Effectiveness and Term. If the Bonds or Notes already are outstanding as of the date of the execution and delivery of this Agreement, this Agreement is effective as of the date hereof and shall continue until terminated as provided herein. If the Bonds or Notes are to be newly issued, then this Agreement shall become effective as of the date that the Bonds or Notes are delivered to the original purchaser(s) thereof, and shall continue until terminated. If said Bonds/Notes are not delivered to original purchaser(s), this Agreement shall be null, void and of no effect. This Agreement shall remain in effect and the agency established by the Agreement shall continue until (i) terminated by mutual agreement of Issuer and Paying Agent, (ii) the resignation or removal of Paying Agent pursuant to Section 14 hereof, or (iii) after all Bonds or Notes have been retired by payment or otherwise, or funds have been deposited for their retirement, and any remaining funds have either been returned to the Issuer or escheated in accordance with law. Section 16. Conflicts Between Documents. In the event of any conflict between any provision of this Agreement and the Authorization, the terms of the Authorization shall govern. Section 17. Jury Trial Waiver. Each party hereto hereby agrees not to elect a trial by jury of any issue triable of right by jury, and waives any right to trial by jury fully to the extent that any such right shall now or hereafter exist with regard to this Agreement, or any claim, counterclaim or other action arising in connection herewith. This waiver of right to trial by jury is given knowingly and voluntarily by each party, and is intended to encompass individually each instance and each issue as to which the right to a trial by jury would otherwise accrue. Section 18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 7 IN WITNESS WHEREOF, the parties hereto have caused these presents to be signed by their duly authorized officers as of the date first above written. CITY OF PALO ALTO By Name: Kiely Nose Title: Administrative Services Director U.S. BANK TRUST COMPANY NATIONAL ASSOCIATION By Name: Mary Wong Title: Vice President 8 EXHIBIT A DESCRIPTION OF BONDS OR NOTES Resolution Number Name of Bonds City of Palo Alto Refunding General Obligation Bonds (Election of 2008), Series 2022A (Tax- Exempt) City of Palo Alto Refunding General Obligation Bonds (Election of 2008), Series 2022B (Federally Taxable) 9 EXHIBIT B FEE SCHEDULE Registrar, Transfer Agent and Paying Agent For Fully Registered Bond / Note Issues OFFICIAL NOTICE OF SALE $_______________ CITY OF PALO ALTO (Santa Clara County, California) REFUNDING GENERAL OBLIGATION BONDS (ELECTION OF 2008), SERIES 2022A (TAX-EXEMPT) NOTICE IS HEREBY GIVEN by the City of Palo Alto (the “City”), that bids will be received by a representative of the City for the purchase of $________* principal amount of bonds of the City designated the “City of Palo Alto Refunding General Obligation Bonds (Election of 2008), Series 2022A (Tax-Exempt)” (the “Bonds”). Bids will be received in electronic form through BiDCOMPTM/Parity® (“Parity”) on: _____, 2022 starting at 8:30 a.m. and ending at 9:00 a.m. Pacific Time. The City reserves the right to postpone or change the time or sale date upon notice delivered via Bloomberg News Service or Thomson Municipal Market Monitor (http://www.tm3.com). The Bonds will be issued under the provisions of a resolution adopted by the City Council of the City on May 9, 2022 (the “Bond Resolution”), and under the laws of the State of California. The Bonds are more particularly described in the proposed form of the Bond Resolution on file with the City (which is incorporated herein by reference) and copies thereof will be furnished to the bidder upon request. The City is proposing to sell an additional series of bonds pursuant to a separate Notice of Sale at a different time, and those bonds will be designated the City of Palo Alto Refunding General Obligation Bonds (Election of 2008), Series 2022B (Federally Taxable). The sale of the Bonds pursuant to this Notice of Sale is completely unrelated to the sale of such other bonds. DESCRIPTION OF THE BONDS PURPOSE: The proceeds of the Bonds will be applied by the City for the purpose of refunding outstanding general obligation bonds of the City in order to realize debt service savings for the benefit of the taxpayers of the City. ISSUE; BOOK-ENTRY FORM: The Bonds will be issued in the aggregate principal amount of _______________* in the form of fully registered Bonds without coupons. The Bonds will be dated as of as of their original delivery, and will be issued in minimum denominations of $5,000. The Bonds will be issued in a book entry only system with no physical distribution of the Bonds made to the public. The Depository Trust Company, New York, New York (“DTC”), will act as depository for the Bonds which will be immobilized in its custody. The Bonds will be registered in  Preliminary, subject to change. Exhibit 2a the name of Cede & Co., as nominee for DTC, on behalf of the participants in the DTC system and the subsequent beneficial owners of the Bonds. MATURITIES: The Bonds will mature, or be subject to mandatory sinking fund redemption, on August 1 in each of the years, and in the amounts, as set forth in the following table. The final principal amount of the Bonds, and the final amount of each maturity of the Bonds, is subject to increase or reduction as described below under the heading “Adjustment of Principal Maturities”. Each bidder must specify in its bid whether, for any particular year, the Bonds will mature or, alternately, be subject to mandatory sinking fund redemption in such year. Maturity Date (August 1) Principal Amount Maturity Date (August 1) Principal Amount PAYMENT PROVISIONS: Interest on the Bonds will be payable on February 1, 2023, and on succeeding February 1 and August 1 (the “Interest Payment Dates”), to the registered owners by check or draft of The Bank of New York Mellon Trust Company, N.A., as paying agent (the “Paying Agent”) or, in the case of the owner of Bonds in an aggregate principal amount of at least $1,000,000, at the written request of such owner by wire transfer. Principal of and premium (if any) on any Bond will be paid upon presentation and surrender thereof at the office of the Paying Agent. Principal, interest and premium (if any) on the Bonds are payable in lawful money of the United States of America. OPTIONAL REDEMPTION: The Bonds maturing on or before August 1, _____, are not subject to redemption prior to their respective stated maturities. The Bonds maturing on or after August 1, _____, are subject to redemption prior to maturity, at the option of the City, in whole or in part among maturities on such basis as designated by the City and by lot within a maturity, from any available source of funds, on August 1, _____, and on any date thereafter, at a redemption price equal to 100% of the principal amount of Bonds to be redeemed together with accrued interest thereon to the date fixed for redemption, without premium. SINKING FUND REDEMPTION: Any bidder may, at its option, specify that one or more maturities of the Bonds will consist of term Bonds which are subject to mandatory sinking fund redemption in consecutive years immediately preceding the maturity thereof, as designated in the bid of such bidder. If the bid of the Purchaser (as defined below) specifies that any maturity of Bonds will be term Bonds, such term Bonds will be subject to mandatory sinking fund redemption on August 1 in each year so designated in the bid, in the respective amounts for such years as set forth above under the heading “MATURITIES”, at a redemption price equal to the principal amount thereof to be redeemed together with accrued interest to the redemption date, without premium. SECURITY: The Bonds are general obligations of the City, and the City will direct the appropriate officials of Santa Clara County to levy ad valorem taxes for the payment of the Bonds and the interest thereon without limitation as to rate or amount for the payment of the Bonds and the interest thereon. TAX-EXEMPT STATUS: In the opinion of Jones Hall, A Professional Law Corporation, bond counsel to the City (“Bond Counsel”), interest on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax. Bidders are referred to the Preliminary Official Statement for a description of the proposed opinion of Bond Counsel. In the further opinion of Bond Counsel, such interest is exempt from California personal income taxes. If prior to the delivery of the Bonds either (a) the interest on other obligations of the same type and character shall be declared to be taxable (either at the time of such declaration or at any future date) under any federal income tax laws, either by the terms of such laws or by ruling of a federal income tax authority or official which is followed by the Internal Revenue Service, or by decision of any federal court, or (b) any federal income tax law is adopted which will have a substantial adverse effect upon owners of the Bonds as such, the Purchaser may, at its option, prior to the tender of the Bonds, be relieved of its obligation under the contract to purchase the Bonds, and in such case the deposit accompanying its proposal will be returned. LEGAL OPINION: The legal opinion of Jones Hall, A Professional Law Corporation, San Francisco, California, approving the validity of the Bonds, will be furnished to the purchaser of the Bonds without cost. A copy of the legal opinion, certified by the official in whose office the original is filed, will be printed on each Bond at the expense of the City. FURTHER INFORMATION: A copy of the Preliminary Official Statement describing the Bonds, and any other information concerning the proposed financing, will be furnished upon request to the municipal advisor to the City as follows (“Municipal Advisor”): PFM Financial Advisors LLC, 44 Montgomery Street, 3rd Floor, San Francisco, CA 94104, telephone: (415) 393-7245 (Nick Jones) or JONESNI@pfm.com, website: www.pfm.com. The Official Notice of Sale and Preliminary Official Statement are available from the Municipal Advisor. TERMS OF SALE RIGHT TO CANCEL, POSTPONE OR RESCHEDULE SALE: The City reserves the right to cancel, postpone or reschedule the sale of the Bonds upon notice delivered via Bloomberg News Service or Thomson Municipal Market Monitor (www.tm3.com). If the sale is postponed, bids will be received at the above place at such date and hour as set forth in the notice. Failure of any bidder to receive such notice or any other form of notice of canceled, postponed or rescheduled sale will not affect the legality or validity of any sale. SUBMISSION OF BIDS: Bids will be received electronically as described below, provided that such electronic bid must be received no later than the date and time set for receipt of bids. All bidders, by submitting a bid, acknowledge that they have an established industry reputation for underwriting new issuances of municipal bonds. ELECTRONIC BIDS: Solely as an accommodation to bidders, the City will accept bids in electronic form solely from Ipreo, a KKR portfolio company, through its BiDCOMP Competitive Bid Calculation System and Parity Electronic Bid Submission System (“Ipreo”). For information about Ipreo, bidders may contact Ipreo at 395 Hudson Street, New York, New York 10014, telephone: (212) 849-5023. If any provision of this Notice of Sale conflicts with information provided by Ipreo, this Notice of Sale shall control. Each bidder submitting an electronic bid understands and agrees by doing so that it is solely responsible for all arrangements with Ipreo, that the City does not encourage the use of Ipreo, and that Ipreo is not acting as an agent of the City. Instructions for submitting electronic bids must be obtained from Ipreo, and the City does not assume any responsibility for ensuring or verifying bidder compliance with Ipreo procedures. Ipreo has advised the City that bidders must subscribe to Ipreo if such bidders intend to use Ipreo to submit bids. The City shall be entitled to assume that any bid received via Ipreo has been made by a duly authorized agent of the bidder. Neither the City, the Municipal Advisor nor Bond Counsel has any responsibility for proper functioning of the Ipreo system, for any error contained in any bid submitted electronically, or for failure of any bid to be transmitted, received or opened at the official time for receipt of bids. The official time for receipt of bids will be determined by the City at the place of bid opening, and the City will not be required to accept the time kept by Parity as the official time. The City assumes no responsibility for informing any bidder prior to the deadline for receiving bids that its bid is incomplete, or not received. FORM OF BID; PURCHASE PRICE: Each proposal must be for not less than all of the Bonds hereby offered for sale. The City will accept par, discount or premium bids for the Bonds. DESIGNATION OF INTEREST RATES: Each bidder must specify the rate or rates of interest which the Bonds will bear. The maximum rate bid on any Bonds may not exceed ______% per annum. A bidder will be permitted to bid different rates of interest for each maturity of Bonds, but:  each interest rate specified must be in a multiple of 1/20% or 1/8%;  no Bond may bear more than one rate of interest;  interest on each Bond will be computed from the date of original delivery to its stated maturity at the interest rate specified in the proposal, payable on the Interest Payment Dates as set forth above; and  all Bonds maturing at any one time will bear the same rate of interest. DETERMINATION OF BEST BID: The Bonds will be awarded to the responsible bidder whose bid produces the lowest true interest cost on the Bonds. The true interest cost specified in any bid will be that rate which, when used in computing the present worth of all payments of principal and interest to be paid on all Bonds from the date of original delivery (which is assumed to be _____, 2022) to their respective maturity dates or mandatory sinking fund redemption dates, produces an amount equal to the purchase price specified in such bid. For purposes of computing the true interest cost represented by any proposal, the purchase price specified in such proposal shall be equal to the par amount of the Bonds plus any premium specified in such proposal, and the true interest cost shall be calculated by the use of a semiannual interval of compounding interest based on the Interest Payment Dates for the Bonds. If two or more bids setting forth identical interest rates and premium, if any, are received, such officer may exercise discretion and judgment in making the award and may award the Bonds on a pro rata basis in such denominations as he or she determines. ADJUSTMENT OF PRINCIPAL MATURITIES: In order to achieve the financial goals of the City, the City may need to adjust the schedule of principal maturities for the Bonds based on the bids that are received. Therefore, the City reserves the right to increase or decrease the principal amount of any maturity of the Bonds (or, in the case of the term Bonds, the principal amount thereof which is subject to mandatory sinking fund redemption on August 1 in any year). The aggregate principal amount of the Bonds may be reduced as a result of such adjustment, in an amount not exceeding 10% of the amount of Bonds hereby offered for sale. Notice of such increase or decrease shall be given to the winning bidder as soon as practicable following the notification of award, as described below. The City will attempt to maintain total underwriter compensation when adjusting maturities. No such adjustment will have the effect of altering the basis upon which the best bid is determined. RIGHT OF REJECTION: The City reserves the right, in its discretion, to reject any and all bids and to the extent not prohibited by law to waive any irregularity or informality in any bid. PLACE OF DELIVERY; CANCELLATION FOR LATE DELIVERY: It is expected that the Bonds will be delivered to DTC for the account of the winning bidder on ______, 2022. The winning bidder has the right, at the winning bidder’s option, to cancel the contract of purchase if the Bonds are not tendered for delivery within 60 days from the date of the sale thereof, and in such event the winning bidder shall be entitled to the return of the deposit accompanying its bid. In such event, the successful bidder will be entitled to the return of the deposit accompanying the bid (see “- GOOD FAITH DEPOSIT”). PROCESS OF AWARD. The City will take final action awarding the Bonds or rejecting all bids not later than thirty (30) hours after the time for receipt of bids, unless such time period is extended by the City. The following steps constitute the City’s process for a final award of the Bonds: (1) The City’s municipal advisor, on behalf of the City, will give a verbal notice of award to the apparent winning bidder (the “Apparent Winning Bidder”) to be determined as described under “–DETERMINATION OF BEST BID” above. (2) The Apparent Winning Bidder shall provide within one hour of verbal notice the initial reoffering prices and confirm that it is prepared to execute the Issue Price Certificate described under “ESTABLISHMENT OF ISSUE PRICE” below. (3) The Apparent Winning Bidder shall provide the Good Faith Deposit by wire transfer, as described under “GOOD FAITH DEPOSIT.” (4) The City’s municipal advisor will fax or email to the Apparent Winning Bidder confirmation of the final principal amortization schedule and purchase price for the Bonds, after adjustments, if any, are made, as described under “ADJUSTMENT OF PRINCIPAL MATURITIES.” (5) The City will fax or email to the Apparent Winning Bidder written confirmation of the final award. Upon completion of all the steps described above, the Apparent Winning Bidder will be deemed the Purchaser of the Bonds (the “Purchaser”) and will be bound by the terms of the contract to purchase the Bonds, which contract shall consist of: (a) this Official Notice of Sale; (b) the information that is transmitted electronically by the bidder through Parity®; and (c) any adjustments to the final principal amortization schedule and purchase price made as described under “ADJUSTMENT OF PRINCIPAL MATURITIES.” GOOD FAITH DEPOSIT: A good faith deposit in the amount of $________ for the Bonds (the “Good Faith Deposit”) must be provided by the Apparent Winning Bidder. The Good Faith Deposit must be submitted by wire transfer (as described below). The Bonds will not be officially awarded to a bidder who has not submitted a Good Faith Deposit. Upon the determination by the City of the Apparent Winning Bidder (as described above under “PROCESS OF AWARD”), the City’s municipal advisor will request the Apparent Winning Bidder to (i) immediately wire the Good Faith Deposit to the Trustee, as described below, and (ii) provide, within ninety (90) minutes of such request, the Federal wire reference number of such Good Faith Deposit to the City’s municipal advisor by email (hollenbecks@pfm.com or Jonesni@pfm.com). The wire transfer is to be made to U.S. Bank Trust Company National Association, using the following wire instructions: Bank Name: U.S. Bank Trust Company National Association ABA No.: [_____] A/C No.: [_____] A/C Name: [_____] Attention: [_____] In the event that the Apparent Winning Bidder does not wire the Good Faith Deposit as required, or does not provide the Federal wire reference number confirming the wire-transfer of such deposit to the municipal advisor within the time specified above, the City may reject the bid of the Apparent Winning Bidder and may award the Bonds to a responsible bidder that submitted a conforming bid that represents the next lowest true interest cost to the City. No interest will be paid upon a Good Faith Deposit made by an Apparent Winning Bidder. Upon receipt of the Good Faith Deposit by the City, the Good Faith Deposit will immediately become the property of the City. The Good Faith Deposit will be held and invested for the exclusive benefit of the City. The Good Faith Deposit, without interest thereon, will be credited against the purchase price of the Bonds purchased by the Purchaser at the time of delivery thereof. If the purchase price is not paid in full upon tender of the Bonds, the City shall retain the Good Faith Deposit and the Purchaser will have no right in or to the Bonds or to the recovery of its Good Faith Deposit, or to any allowance or credit by reason of such deposit, except pursuant to a right of cancellation. See “PLACE OF DELIVERY; CANCELLATION FOR LATE DELIVERY.” In the event of nonpayment of the purchase price for the Bonds by the Purchaser, the City reserves any and all rights granted by law to recover the full purchase price of the Bonds and, in addition, any damages suffered by the City. PAYMENT OF PURCHASE PRICE: The Purchaser, will be required to pay the purchase price of the Bonds (less the amount of the Good Faith Deposit described above) in funds that are immediately available to the City. Such payment shall be made on the date of original delivery of the Bonds to DTC. STATEMENT OF TRUE INTEREST COST: Each bidder is requested, but not required, to state in its proposal the percentage true interest cost represented by its proposal, determined as described above, which will be considered as informative only and not binding on either the bidder or the City. ESTABLISHMENT OF ISSUE PRICE: (a) The Purchaser shall assist the City in establishing the issue price of the Bonds and shall execute and deliver to the City at closing an “issue price” or similar certificate setting forth the reasonably expected initial offering price to the public of the Bonds, together with the supporting pricing wires or equivalent communications, substantially in the form attached hereto as Exhibit 1, with such modifications as may be appropriate or necessary, in the reasonable judgment of the Purchaser, the City and Bond Counsel. All actions to be taken by the City under this Notice of Sale to establish the issue price of the Bonds may be taken on behalf of the City by the City’s municipal advisor identified herein and any notice or report to be provided to the City may be provided to the City’s municipal advisor. (b) The City intends that the provisions of Treasury Regulation Section 1.148-1(f)(3)(i) (defining “competitive sale” for purposes of establishing the issue price of the Bonds) will apply to the initial sale of the Bonds (the “competitive sale requirements”) because: (1) the City shall disseminate this Notice of Sale to potential underwriters in a manner that is reasonably designed to reach potential underwriters; (2) all bidders shall have an equal opportunity to bid; (3) the City may receive bids from at least three underwriters of municipal bonds who have established industry reputations for underwriting new issuances of municipal bonds; and (4) the City anticipates awarding the sale of the Bonds to the bidder who submits a firm offer to purchase the Bonds at the highest price (or lowest interest cost), as set forth in this Notice of Sale. Any bid submitted pursuant to this Notice of Sale shall be considered a firm offer for the purchase of the Bonds, as specified in the bid. By submitting a bid for the Bonds, each bidder certifies that it has an established industry reputation for underwriting new issuances of municipal bonds. The City will not accept bids from firms without an established industry reputation for underwriting new issuances of municipal bonds. (c) In the event the City receives less than three bids that conform to the parameters contained herein such that the competitive sale requirements are not satisfied, the City intends to treat the initial offering price of each maturity of the bonds set forth in the bid submitted by the winning bidder (the “initial offering price”) as the issue price of that maturity (the "hold-the-offering- price rule"). Consequently, each bidder should assume for purposes of making its bid that for each maturity of the Bonds, the City will treat the initial offering prices as of the date that the Bonds are awarded by the City to the successful bidder ("sale date") as the issue price of the Bonds. The City will advise the winning bidder within one hour of receipt of bids if the hold-the- offering-price rule will apply. In the event that the competitive sale requirements are not satisfied and issue price is established pursuant to the hold-the-offering-price rule, the issue price certificate shall be modified as necessary in the reasonable judgment of Bond Counsel and the City. (d) By submitting a bid, the Purchaser shall, on behalf of the underwriters participating in the purchase of the Bonds, (i) confirm that the underwriters have offered or will offer each maturity of the Bonds to the public on or before the sale date at the initial offering price set forth in the bid submitted by the winning bidder, and (ii) agree that the underwriters will neither offer nor sell any maturity of the Bonds to any person at a price that is higher than the initial offering price for such maturity during the period starting on the sale date and ending on the earlier of the following: (1) the close of the fifth business day after the sale date; or (2) the date on which the underwriters have sold at least 10% of that maturity of the Bonds to the public at a price that is no higher than the initial offering price for such maturity. The Purchaser shall promptly advise the City when the underwriters have sold 10% of that maturity of the Bonds to the public at a price that is no higher than the initial offering price if that occurs prior to the close of the fifth (5th) business day after the sale date. (e) The City acknowledges that, in making the representation set forth above, the Purchaser will rely on (i) the agreement of each underwriter to comply with the hold-the-offering- price rule, as set forth in an agreement among underwriters and the related pricing wires, (ii) in the event a selling group has been created in connection with the initial sale of the Bonds to the public, the agreement of each dealer who is a member of the selling group to comply with the hold-the-offering-price rule, as set forth in a selling group agreement and the related pricing wires, and (iii) in the event that an underwriter is a party to a retail distribution agreement that was employed in connection with the initial sale of the Bonds to the public, the agreement of each broker-dealer that is a party to such agreement to comply with the hold-the-offering-price rule, as set forth in the retail distribution agreement and the related pricing wires. The City further acknowledges that each underwriter shall be solely liable for its failure to comply with its agreement regarding the hold-the-offering-price rule and that no underwriter shall be liable for the failure of any other underwriter, or of any dealer who is a member of a selling group, or of any broker-dealer that is a party to a retail distribution agreement to comply with its corresponding agreement regarding the hold-the-offering-price rule as applicable to the Bonds. (f) By submitting a bid, each bidder confirms that: (1) any agreement among underwriters, any selling group agreement and each retail distribution agreement (to which the bidder is a party) relating to the sale of the Bonds to the public, together with the related pricing wires, contains or will contain language obligating each underwriter, each dealer who is a member of the selling group, and each broker-dealer that is a party to such retail distribution agreement, as applicable, to (A) report the prices at which it sells to the public the Bonds of each maturity allotted to it until it is notified by the successful bidder that either the 10% test has been satisfied as to the Bonds of that maturity or all Bonds of that maturity have been sold to the public and (B) comply with the hold-the-offering-price rule, if and for so long as directed by the successful bidder and in the related pricing wires, and (2) any agreement among underwriters relating to the sale of the Bonds to the public, together with the related pricing wires, contains or will contain language obligating each underwriter that is a party to a retail distribution agreement to be employed in connection with the initial sale of the Bonds to the public to require each broker-dealer that is a party to such retail distribution agreement to (A) report the prices at which it sells to the public the unsold Bonds of each maturity allotted to it until it is notified by the successful bidder or such underwriter that either the 10% test has been satisfied as to the Bonds of that maturity or all Bonds of that maturity have been sold to the public and (B) comply with the hold-the-offering-price rule, if and for so long as directed by the successful bidder or such underwriter and as set forth in the related pricing wires. Sales of any Bonds to any person that is a related party to an underwriter shall not constitute sales to the public for purposes of this Official Notice of Sale. (g) For purposes of this Official Notice of Sale: (1) "public" means any person (including an individual, trust, estate, partnership, association, company, or corporation) other than an underwriter or a related party, (2) "underwriter" means (A) any person that agrees pursuant to a written contract with the City (or with the lead underwriter to form an underwriting syndicate) to participate in the initial sale of the Bonds to the public and (B) any person that agrees pursuant to a written contract directly or indirectly with a person described in clause (A) to participate in the initial sale of the Bonds to the public (including a member of a selling group or a party to a retail distribution agreement participating in the initial sale of the Bonds to the public), (3) a purchaser of any of the Bonds is a "related party" to an underwriter if the underwriter and the purchaser are subject, directly or indirectly, to (A) at least 50% common ownership of the voting power or the total value of their stock, if both entities are corporations (including direct ownership by one corporation of another), (B) more than 50% common ownership of their capital interests or profits interests, if both entities are partnerships (including direct ownership by one partnership of another), or (C) more than 50% common ownership of the value of the outstanding stock of the corporation or the capital interests or profit interests of the partnership, as applicable, if one entity is a corporation and the other entity is a partnership (including direct ownership of the applicable stock or interests by one entity of the other), and In addition, the City reserves the right to cancel the public sale of the Bonds if the City receives fewer than three bids that conform to the parameters contained herein such that the competitive sale requirements are not satisfied. NO LITIGATION: There is no litigation pending concerning the validity of the Bonds, the corporate existence of the City or the entitlement of the officers thereof to their respective offices, and the purchaser will be furnished a no-litigation certificate certifying to the foregoing as of and at the delivery of the Bonds. CUSIP NUMBERS: It is anticipated that CUSIP numbers will be printed on the Bonds, but neither the failure to print such numbers on any Bonds nor any error with respect thereto will constitute cause for a failure or refusal by the purchaser to accept delivery of and pay for the Bonds in accordance with the terms hereof. All expenses in relation to the printing of CUSIP numbers on the Bonds will be paid for by the City, except that the CUSIP Service Bureau charge for the assignment of said numbers will be the responsibility of and shall be paid for by the purchaser. CALIFORNIA DEBT AND INVESTMENT ADVISORY COMMISSION FEES: All fees payable to the California Debt and Investment Advisory Commission in connection with the issuance of the Bonds are the sole responsibility of the purchaser of the Bonds. OFFICIAL STATEMENT: The City has approved a preliminary Official Statement relating to the Bonds. Copies of such preliminary Official Statement will be distributed to any bidder, upon request, prior to the sale in a form “deemed final” by the City for purposes of Rule 15c2-12 under the Securities Exchange Act of 1934 (the “Rule”). Within seven business days from the sale date, the City will deliver to the purchaser copies of the final Official Statement, executed by an authorized representative of the City and the City and dated the date of delivery thereof to the purchaser, in sufficient number to allow the purchaser to comply with paragraph (b)(4) of the Rule and to satisfy the Municipal Securities Rulemaking Board (the “MSRB”) Rule G-32 or any other rules adopted by the MSRB, which shall include information permitted to be omitted by paragraph (b)(1) of the Rule and such other amendments or supplements as are been approved by the City (the “Final Official Statement”). The purchaser agrees that it will not confirm the sale of any Bonds unless the confirmation of sale is accompanied or preceded by the delivery of a copy of the Final Official Statement. Upon request, the City will furnish to the winning bidder, at no charge, not in excess of 20 printed copies of the Official Statement for use in connection with any resale of the Bonds. CERTIFICATE REGARDING OFFICIAL STATEMENT: A responsible officer of the City will certify to the original purchaser of the Bonds, as a condition of closing, that based on such officer’s participation in the preparation of the Official Statement, nothing has come to his or her attention to lead him or her to believe that the Official Statement (except for certain financial statements, statistical data and other information) contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. CONTINUING DISCLOSURE. In order to assist bidders in complying with S.E.C. Rule 15c2- 12(b)(5), the City will execute and deliver a Continuing Disclosure Certificate, under which the City undertakes to provide certain annual financial information and notices of the occurrence of certain events, if material. A description of this undertaking is set forth in the preliminary Official Statement and will also be set forth in the final Official Statement. Such Continuing Disclosure Certificate will be a document required to be delivered at closing by the City, and the failure by the City to deliver such document in form and substance acceptable to Bond Counsel and the winning bidder will relieve the winning bidder of its obligation to purchase the Bonds. ACKNOWLEDGEMENT OF NO FIDUCIARY DUTY. The City acknowledges and agrees that (i) the purchase and sale of the Bonds is an arm’s-length commercial transaction between the City and the underwriter, (ii) in connection with such transaction, the underwriter is acting solely as a principal and not as an advisor, (including, without limitation, a Municipal Advisor (as such term is defined in Section 975(e) of the Dodd-Frank Wall Street Reform and Consumer Protection Act)), agent or a fiduciary of the City, (iii) the underwriter has not assumed (individually or collectively) a fiduciary responsibility in favor of the City with respect to the offering of the Bonds or the process leading thereto (whether or not the underwriter, or any affiliate of an underwriter, has advised or is currently advising the City on other matters) or any other obligation to the City except as described in this Notice of Sale, (iv) the underwriter has financial and other interests that differ from those of the City and (v) the City has consulted with its own legal and municipal advisors to the extent it deemed appropriate in connection with the offering of the Bonds. GIVEN by order of the City Council of the City of Palo Alto by a resolution adopted on May 9, 2022. EXHIBIT 1 Issue Price Certificate $__________________* CITY OF PALO ALTO REFUNDING GENERAL OBLIGATION BONDS (ELECTION OF 2008), SERIES 2022A (TAX-EXEMPT) The undersigned, on behalf of [NAME OF UNDERWRITER] (“Underwriter”), hereby certifies as set forth below with respect to the sale of the above-captioned obligations (the “Bonds”). 1. Reasonably Expected Initial Offering Price. (a) As of the Sale Date, the reasonably expected initial offering prices of the Bonds to the Public by Underwriter are the prices listed in Schedule A (the “Expected Offering Prices”). The Expected Offering Prices are the prices for the Maturities of the Bonds used by the Underwriter in formulating its bid to purchase the Bonds. Attached as Schedule B is a true and correct copy of the bid provided by Underwriter to purchase the Bonds. (b) Underwriter was not given the opportunity to review other bids prior to submitting its bid. (c) The bid submitted by Underwriter constituted a firm offer to purchase the Bonds. 2. Defined Terms. (a) Issuer means the City of Palo Alto. (a) Maturity means Bonds with the same credit and payment terms. Bonds with different maturity dates, or Bonds with the same maturity date but different stated interest rates, are treated as separate Maturities. (b) Public means any person (including an individual, trust, estate, partnership, association, company, or corporation) other than an Underwriter or a related party to an Underwriter. The term “related party” for purposes of this certificate generally means any two or more persons who have greater than 50 percent common ownership, directly or indirectly. (c) Sale Date means the first day on which there is a binding contract in writing for the sale of a Maturity of the Bonds. The Sale Date of the Bonds is ______, 2022. (d) Underwriter means (i) any person that agrees pursuant to a written contract with the Issuer (or with the lead underwriter to form an underwriting syndicate) to participate in the initial sale of the Bonds to the Public, and (ii) any person that agrees pursuant to a written contract directly or indirectly with a person described in clause (i) of this paragraph to participate in the initial sale of the Bonds to the Public (including a member of a selling group or a party to a retail distribution agreement participating in the initial sale of the Bonds to the Public). The representations set forth in this certificate are limited to factual matters only. Nothing in this certificate represents Underwriter’s interpretation of any laws, including specifically Sections 103 and 148 of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations thereunder. The undersigned understands that the foregoing information will be relied upon by the Issuer with respect to certain of the representations set forth in the Certificate of Arbitrage and with respect to compliance with the federal income tax rules affecting the Bonds, and by Jones Hall, A Professional Law Corporation in connection with rendering its opinion that the interest on the Bonds is excluded from gross income for federal income tax purposes, the preparation of the Internal Revenue Service Form 8038-G, and other federal income tax advice that it may give to the Issuer from time to time relating to the Bonds. [UNDERWRITER] By:____________________________________ Name:_________________________________ Dated: [ISSUE DATE] SCHEDULE A EXPECTED OFFERING PRICES Maturity Date Principal Interest Reoffering (August 1) Amount Rate Price * $ % % * Stated as a percentage of par. SCHEDULE B COPY OF UNDERWRITER’S BID (attached) 1 OFFICIAL NOTICE OF SALE $_______________ CITY OF PALO ALTO (Santa Clara County, California) REFUNDING GENERAL OBLIGATION BONDS (ELECTION OF 2008), SERIES 2022B (FEDERALLY TAXABLE) NOTICE IS HEREBY GIVEN by the City of Palo Alto (the “City”), that bids will be received by a representative of the City for the purchase of $____________* principal amount of bonds of the City designated the “City of Palo Alto Refunding General Obligation Bonds (Election of 2008), Series 2022B (Federally Taxable)” (the “Bonds”). Bids will be received in electronic form through BiDCOMPTM/Parity® (“Parity”) on: _____, 2022 starting at 9:30 a.m. and ending at 10:00 a.m. Pacific Time. The City reserves the right to postpone or change the time or sale date upon notice delivered via Bloomberg News Service or Thomson Municipal Market Monitor (http://www.tm3.com). The Bonds will be issued under the provisions of a resolution adopted by the City Council of the City on May 9, 2022 (the “Bond Resolution”), and under the laws of the State of California. The Bonds are more particularly described in the proposed form of the Bond Resolution on file with the City (which is incorporated herein by reference) and copies thereof will be furnished to the bidder upon request. The City is proposing to sell an additional series of bonds pursuant to a separate Notice of Sale at a different time, and those bonds will be designated the City of Palo Alto Refunding General Obligation Bonds (Election of 2008), Series 2022A (Tax-Exempt). The sale of the Bonds pursuant to this Notice of Sale is completely unrelated to the sale of such other bonds. DESCRIPTION OF THE BONDS PURPOSE: The proceeds of the Bonds will be applied by the City for the purpose of refunding outstanding general obligation bonds of the City in order to realize debt service savings for the benefit of the taxpayers of the City. ISSUE; BOOK-ENTRY FORM: The Bonds will be issued in the aggregate principal amount of _______________* in the form of fully registered Bonds without coupons. The Bonds will be dated as of as of their original delivery, and will be issued in minimum denominations of $5,000. The Bonds will be issued in a book entry only system with no physical distribution of the Bonds made to the public. The Depository Trust Company, New York, New York (“DTC”), will act as depository for the Bonds which will be immobilized in its custody. The Bonds will be registered in  Preliminary, subject to change. Exhibit 2b 2 the name of Cede & Co., as nominee for DTC, on behalf of the participants in the DTC system and the subsequent beneficial owners of the Bonds. MATURITIES: The Bonds will mature, or be subject to mandatory sinking fund redemption, on August 1 in each of the years, and in the amounts, as set forth in the following table. The final principal amount of the Bonds, and the final amount of each maturity of the Bonds, is subject to increase or reduction as described below under the heading “Adjustment of Principal Maturities”. Each bidder must specify in its bid whether, for any particular year, the Bonds will mature or, alternately, be subject to mandatory sinking fund redemption in such year. Maturity Date (August 1) Principal Amount Maturity Date (August 1) Principal Amount PAYMENT PROVISIONS: Interest on the Bonds will be payable on February 1, 2023, and on succeeding February 1 and August 1 (the “Interest Payment Dates”), to the registered owners by check or draft of The Bank of New York Mellon Trust Company, N.A., as paying agent (the “Paying Agent”) or, in the case of the owner of Bonds in an aggregate principal amount of at least $1,000,000, at the written request of such owner by wire transfer. Principal of and premium (if any) on any Bond will be paid upon presentation and surrender thereof at the office of the Paying Agent. Principal, interest and premium (if any) on the Bonds are payable in lawful money of the United States of America. OPTIONAL REDEMPTION: The Bonds maturing on or before August 1, _____, are not subject to redemption prior to their respective stated maturities. The Bonds maturing on or after August 1, _____, are subject to redemption prior to maturity, at the option of the City, in whole or in part among maturities on such basis as designated by the City and by lot within a maturity, from any available source of funds, on August 1, _____, and on any date thereafter, at a redemption price equal to 100% of the principal amount of Bonds to be redeemed together with accrued interest thereon to the date fixed for redemption, without premium. SINKING FUND REDEMPTION: Any bidder may, at its option, specify that one or more maturities of the Bonds will consist of term Bonds which are subject to mandatory sinking fund redemption in consecutive years immediately preceding the maturity thereof, as designated in the bid of such bidder. If the bid of the Purchaser (as defined below) specifies that any maturity of Bonds will be term Bonds, such term Bonds will be subject to mandatory sinking fund redemption on August 1 in each year so designated in the bid, in the respective amounts for such years as set forth above under the heading “MATURITIES”, at a redemption price equal to the principal amount thereof to be redeemed together with accrued interest to the redemption date, without premium. SECURITY: The Bonds are general obligations of the City, and the City will direct the appropriate officials of Santa Clara County to levy ad valorem taxes for the payment of the Bonds 3 and the interest thereon without limitation as to rate or amount for the payment of the Bonds and the interest thereon. FEDERALLY TAXABLE STATUS: In the opinion of Jones Hall, A Professional Law Corporation, bond counsel to the City (“Bond Counsel”), interest on the Bonds is not intended to be excluded from gross income for federal income tax purposes. In the further opinion of Bond Counsel, such interest is exempt from California personal income taxes. Bidders are referred to the Preliminary Official Statement for a description of the proposed opinion of Bond Counsel. LEGAL OPINION: The legal opinion of Jones Hall, A Professional Law Corporation, San Francisco, California, approving the validity of the Bonds, will be furnished to the purchaser of the Bonds without cost. A copy of the legal opinion, certified by the official in whose office the original is filed, will be printed on each Bond at the expense of the City. FURTHER INFORMATION: A copy of the Preliminary Official Statement describing the Bonds, and any other information concerning the proposed financing, will be furnished upon request to the municipal advisor to the City as follows (“Municipal Advisor”): PFM Financial Advisors LLC, 44 Montgomery Street, 3rd Floor, San Francisco, CA 94104, telephone: (415) 393-7245 (Nick Jones) or JONESNI@pfm.com, website: www.pfm.com. The Official Notice of Sale and Preliminary Official Statement are available from the Municipal Advisor. TERMS OF SALE RIGHT TO CANCEL, POSTPONE OR RESCHEDULE SALE: The City reserves the right to cancel, postpone or reschedule the sale of the Bonds upon notice delivered via Bloomberg News Service or Thomson Municipal Market Monitor (www.tm3.com). If the sale is postponed, bids will be received at the above place at such date and hour as set forth in the notice. Failure of any bidder to receive such notice or any other form of notice of canceled, postponed or rescheduled sale will not affect the legality or validity of any sale. SUBMISSION OF BIDS: Bids will be received electronically as described below, provided that such electronic bid must be received no later than the date and time set for receipt of bids. All bidders, by submitting a bid, acknowledge that they have an established industry reputation for underwriting new issuances of municipal bonds. ELECTRONIC BIDS: Solely as an accommodation to bidders, the City will accept bids in electronic form solely from Ipreo, a KKR portfolio company, through its BiDCOMP Competitive Bid Calculation System and Parity Electronic Bid Submission System (“Ipreo”). For information about Ipreo, bidders may contact Ipreo at 395 Hudson Street, New York, New York 10014, telephone: (212) 849-5023. If any provision of this Notice of Sale conflicts with information provided by Ipreo, this Notice of Sale shall control. Each bidder submitting an electronic bid understands and agrees by doing so that it is solely responsible for all arrangements with Ipreo, that the City does not encourage the use of Ipreo, and that Ipreo is not acting as an agent of the City. Instructions for submitting electronic bids must be obtained from Ipreo, and the City does not assume any responsibility for ensuring or verifying bidder compliance with Ipreo procedures. Ipreo has advised the City that bidders must subscribe to Ipreo if such bidders intend to use Ipreo to submit bids. The City shall be entitled to assume that any bid received via Ipreo has been made by a duly authorized agent of the bidder. 4 Neither the City, the Municipal Advisor nor Bond Counsel has any responsibility for proper functioning of the Ipreo system, for any error contained in any bid submitted electronically, or for failure of any bid to be transmitted, received or opened at the official time for receipt of bids. The official time for receipt of bids will be determined by the City at the place of bid opening, and the City will not be required to accept the time kept by Parity as the official time. The City assumes no responsibility for informing any bidder prior to the deadline for receiving bids that its bid is incomplete, or not received. FORM OF BID; PURCHASE PRICE: Each proposal must be for not less than all of the Bonds hereby offered for sale. The City will accept par, discount or premium bids for the Bonds. DESIGNATION OF INTEREST RATES: Each bidder must specify the rate or rates of interest which the Bonds will bear. The maximum rate bid on any Bonds may not exceed ______% per annum. A bidder will be permitted to bid different rates of interest for each maturity of Bonds, but:  each interest rate specified must be in a multiple of 1/20% or 1/8%;  no Bond may bear more than one rate of interest;  interest on each Bond will be computed from the date of original delivery to its stated maturity at the interest rate specified in the proposal, payable on the Interest Payment Dates as set forth above; and  all Bonds maturing at any one time will bear the same rate of interest. DETERMINATION OF BEST BID: The Bonds will be awarded to the responsible bidder whose bid produces the lowest true interest cost on the Bonds. The true interest cost specified in any bid will be that rate which, when used in computing the present worth of all payments of principal and interest to be paid on all Bonds from the date of original delivery (which is assumed to be _____, 2022) to their respective maturity dates or mandatory sinking fund redemption dates, produces an amount equal to the purchase price specified in such bid. For purposes of computing the true interest cost represented by any proposal, the purchase price specified in such proposal shall be equal to the par amount of the Bonds plus any premium specified in such proposal, and the true interest cost shall be calculated by the use of a semiannual interval of compounding interest based on the Interest Payment Dates for the Bonds. If two or more bids setting forth identical interest rates and premium, if any, are received, such officer may exercise discretion and judgment in making the award and may award the Bonds on a pro rata basis in such denominations as he or she determines. ADJUSTMENT OF PRINCIPAL MATURITIES: In order to achieve the financial goals of the City, the City may need to adjust the schedule of principal maturities for the Bonds based on the bids that are received. Therefore, the City reserves the right to increase or decrease the principal amount of any maturity of the Bonds (or, in the case of the term Bonds, the principal amount thereof which is subject to mandatory sinking fund redemption on August 1 in any year). The aggregate principal amount of the Bonds may be reduced as a result of such adjustment, in an amount not exceeding 10% of the amount of Bonds hereby offered for sale. Notice of such increase or decrease shall be given to the winning bidder as soon as practicable following the 5 notification of award, as described below. The City will attempt to maintain total underwriter compensation when adjusting maturities. No such adjustment will have the effect of altering the basis upon which the best bid is determined. RIGHT OF REJECTION: The City reserves the right, in its discretion, to reject any and all bids and to the extent not prohibited by law to waive any irregularity or informality in any bid. PLACE OF DELIVERY; CANCELLATION FOR LATE DELIVERY: It is expected that the Bonds will be delivered to DTC for the account of the winning bidder on ______, 2022. The winning bidder has the right, at the winning bidder’s option, to cancel the contract of purchase if the Bonds are not tendered for delivery within 60 days from the date of the sale thereof, and in such event the winning bidder shall be entitled to the return of the deposit accompanying its bid. In such event, the successful bidder will be entitled to the return of the deposit accompanying the bid (see “- GOOD FAITH DEPOSIT”). PROCESS OF AWARD. The City will take final action awarding the Bonds or rejecting all bids not later than thirty (30) hours after the time for receipt of bids, unless such time period is extended by the City. The following steps constitute the City’s process for a final award of the Bonds: (1) The City’s municipal advisor, on behalf of the City, will give a verbal notice of award to the apparent winning bidder (the “Apparent Winning Bidder”) to be determined as described under “–DETERMINATION OF BEST BID” above. (2) The Apparent Winning Bidder shall provide the Good Faith Deposit by wire transfer, as described under “GOOD FAITH DEPOSIT.” (3) The City’s municipal advisor will fax or email to the Apparent Winning Bidder confirmation of the final principal amortization schedule and purchase price for the Bonds, after adjustments, if any, are made, as described under “ADJUSTMENT OF PRINCIPAL MATURITIES.” (4) The City will fax or email to the Apparent Winning Bidder written confirmation of the final award. Upon completion of all the steps described above, the Apparent Winning Bidder will be deemed the Purchaser of the Bonds (the “Purchaser”) and will be bound by the terms of the contract to purchase the Bonds, which contract shall consist of: (a) this Official Notice of Sale; (b) the information that is transmitted electronically by the bidder through Parity®; and (c) any adjustments to the final principal amortization schedule and purchase price made as described under “ADJUSTMENT OF PRINCIPAL MATURITIES.” GOOD FAITH DEPOSIT: A good faith deposit in the amount of $________ for the Bonds (the “Good Faith Deposit”) must be provided by the Apparent Winning Bidder. The Good Faith Deposit must be submitted by wire transfer (as described below). The Bonds will not be officially awarded to a bidder who has not submitted a Good Faith Deposit. Upon the determination by the City of the Apparent Winning Bidder (as described above under “PROCESS OF AWARD”), the City’s municipal advisor will request the Apparent Winning Bidder to (i) immediately wire the Good Faith Deposit to the Trustee, as described below, and (ii) 6 provide, within ninety (90) minutes of such request, the Federal wire reference number of such Good Faith Deposit to the City’s municipal advisor by email (hollenbecks@pfm.com or Jonesni@pfm.com). The wire transfer is to be made to U.S. Bank Trust Company National Association, using the following wire instructions: Bank Name: U.S. Bank Trust Company National Association ABA No.: [_____] A/C No.: [_____] A/C Name: [_____] Attention: [_____] In the event that the Apparent Winning Bidder does not wire the Good Faith Deposit as required, or does not provide the Federal wire reference number confirming the wire-transfer of such deposit to the municipal advisor within the time specified above, the City may reject the bid of the Apparent Winning Bidder and may award the Bonds to a responsible bidder that submitted a conforming bid that represents the next lowest true interest cost to the City. No interest will be paid upon a Good Faith Deposit made by an Apparent Winning Bidder. Upon receipt of the Good Faith Deposit by the City, the Good Faith Deposit will immediately become the property of the City. The Good Faith Deposit will be held and invested for the exclusive benefit of the City. The Good Faith Deposit, without interest thereon, will be credited against the purchase price of the Bonds purchased by the Purchaser at the time of delivery thereof. If the purchase price is not paid in full upon tender of the Bonds, the City shall retain the Good Faith Deposit and the Purchaser will have no right in or to the Bonds or to the recovery of its Good Faith Deposit, or to any allowance or credit by reason of such deposit, except pursuant to a right of cancellation. See “PLACE OF DELIVERY; CANCELLATION FOR LATE DELIVERY.” In the event of nonpayment of the purchase price for the Bonds by the Purchaser, the City reserves any and all rights granted by law to recover the full purchase price of the Bonds and, in addition, any damages suffered by the City. PAYMENT OF PURCHASE PRICE: The Purchaser will be required to pay the purchase price of the Bonds (less the amount of the Good Faith Deposit described above) in funds that are immediately available to the City. Such payment shall be made on the date of original delivery of the Bonds to DTC. STATEMENT OF TRUE INTEREST COST: Each bidder is requested, but not required, to state in its proposal the percentage true interest cost represented by its proposal, determined as described above, which will be considered as informative only and not binding on either the bidder or the City. NO LITIGATION: There is no litigation pending concerning the validity of the Bonds, the corporate existence of the City or the entitlement of the officers thereof to their respective offices, and the purchaser will be furnished a no-litigation certificate certifying to the foregoing as of and at the delivery of the Bonds. CUSIP NUMBERS: It is anticipated that CUSIP numbers will be printed on the Bonds, but neither the failure to print such numbers on any Bonds nor any error with respect thereto will constitute cause for a failure or refusal by the purchaser to accept delivery of and pay for the Bonds in accordance with the terms hereof. All expenses in relation to the printing of CUSIP 7 numbers on the Bonds will be paid for by the City, except that the CUSIP Service Bureau charge for the assignment of said numbers will be the responsibility of and shall be paid for by the purchaser. CALIFORNIA DEBT AND INVESTMENT ADVISORY COMMISSION FEES: All fees payable to the California Debt and Investment Advisory Commission in connection with the issuance of the Bonds are the sole responsibility of the purchaser of the Bonds. OFFICIAL STATEMENT: The City has approved a preliminary Official Statement relating to the Bonds. Copies of such preliminary Official Statement will be distributed to any bidder, upon request, prior to the sale in a form “deemed final” by the City for purposes of Rule 15c2-12 under the Securities Exchange Act of 1934 (the “Rule”). Within seven business days from the sale date, the City will deliver to the purchaser copies of the final Official Statement, executed by an authorized representative of the City and the City and dated the date of delivery thereof to the purchaser, in sufficient number to allow the purchaser to comply with paragraph (b)(4) of the Rule and to satisfy the Municipal Securities Rulemaking Board (the “MSRB”) Rule G-32 or any other rules adopted by the MSRB, which shall include information permitted to be omitted by paragraph (b)(1) of the Rule and such other amendments or supplements as are been approved by the City (the “Final Official Statement”). The purchaser agrees that it will not confirm the sale of any Bonds unless the confirmation of sale is accompanied or preceded by the delivery of a copy of the Final Official Statement. Upon request, the City will furnish to the winning bidder, at no charge, not in excess of 20 printed copies of the Official Statement for use in connection with any resale of the Bonds. CERTIFICATE REGARDING OFFICIAL STATEMENT: A responsible officer of the City will certify to the original purchaser of the Bonds, as a condition of closing, that based on such officer’s participation in the preparation of the Official Statement, nothing has come to his or her attention to lead him or her to believe that the Official Statement (except for certain financial statements, statistical data and other information) contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. CONTINUING DISCLOSURE. In order to assist bidders in complying with S.E.C. Rule 15c2- 12(b)(5), the City will execute and deliver a Continuing Disclosure Certificate, under which the City undertakes to provide certain annual financial information and notices of the occurrence of certain events, if material. A description of this undertaking is set forth in the preliminary Official Statement and will also be set forth in the final Official Statement. Such Continuing Disclosure Certificate will be a document required to be delivered at closing by the City, and the failure by the City to deliver such document in form and substance acceptable to Bond Counsel and the winning bidder will relieve the winning bidder of its obligation to purchase the Bonds. ACKNOWLEDGEMENT OF NO FIDUCIARY DUTY. The City acknowledges and agrees that (i) the purchase and sale of the Bonds is an arm’s-length commercial transaction between the City and the underwriter, (ii) in connection with such transaction, the underwriter is acting solely as a principal and not as an advisor, (including, without limitation, a Municipal Advisor (as such term is defined in Section 975(e) of the Dodd-Frank Wall Street Reform and Consumer Protection Act)), agent or a fiduciary of the City, (iii) the underwriter has not assumed (individually or collectively) a fiduciary responsibility in favor of the City with respect to the offering of the Bonds or the process leading thereto (whether or not the underwriter, or any affiliate of an underwriter, has advised or is currently advising the City on other matters) or any other obligation to the City except as described in this Notice of Sale, (iv) the underwriter has financial and other interests 8 that differ from those of the City and (v) the City has consulted with its own legal and municipal advisors to the extent it deemed appropriate in connection with the offering of the Bonds. GIVEN by order of the City Council of the City of Palo Alto by a resolution adopted on May 9, 2022. Th i s P r e l i m i n a r y O f f i c i a l S t a t e m e n t a n d t h e i n f o r m a t i o n c o n t a i n e d h e r e i n a r e s u b j e c t t o c o m p l e t i o n o r a m e n d m e n t . T h e s e s e c u r i ti e s m a y n o t b e s o l d n o r m a y o f f e r s t o b u y b e a c c e p t e d p r i o r t o t h e t i m e t h e O f f i c i a l S t a t e m e n t i s de l i v e r e d i n f i n a l f o r m . U n d e r n o c i r c u m s t a n c e s s h a l l t h i s P r e l i m i n a r y O f f i c i a l S t a t e m e n t c o n s t i t u t e a n o f f e r t o s e l l o r a s o l i c i t a t i on o f a n o f f e r t o b u y n o r s h a l l t h e r e b e a n y s a l e o f t h e s e s e c u r i t i e s i n a n y j u r i s d i c t i o n i n w h i c h s u c h of f e r , s o l i c i t a t i o n o r s a l e wo u l d b e u n l a w f u l p r i o r t o r e g i s t r a t i o n o r q u a l i f i c a t i o n u n d e r t h e s e c u r i t i e s l a w s o f s u c h j u r i s d i c t i o n . PRELIMINARY OFFICIAL STATEMENT DATED MAY 5, 2022 TWO NEW ISSUES—FULL BOOK-ENTRY RATING: Standard & Poor’s: “___” See “RATING” herein. In the opinion of Jones Hall, A Professional Law Corporation, San Francisco, California, Bond Counsel, subject, however to certain qualifications described herein, under existing law, the interest on the 2022A Bonds is excluded from gross income for federal income tax purposes and such interest is not an item of tax preference for purposes of the federal alternative minimum tax. Interest on the 2022B Bonds is not excludable from gross income of the owners thereof for federal income tax purposes. In the further opinion of Bond Counsel, interest on the 2022 Bonds is exempt from California personal income taxes. See “TAX MATTERS.” $___________* CITY OF PALO ALTO (Santa Clara County, California) Refunding General Obligation Bonds (Election of 2008), Series 2022A (Tax-Exempt) $___________* CITY OF PALO ALTO (Santa Clara County, California) Refunding General Obligation Bonds (Election of 2008), Series 2022B (Federally Taxable) Dated: Date of Delivery Due: August 1, as shown on inside cover Authority for Issuance. The City of Palo Alto Refunding General Obligation Bonds (Election of 2008), Series 2022A (Tax-Exempt) (the “2022A Bonds”), and the City of Palo Alto Refunding General Obligation Refunding Bonds (Election of 2008), Series 2022B (Federally Taxable) (the “2022B Bonds” and, with the 2022A Bonds, the “2022 Bonds”) are being issued by the City of Palo Alto, California (the “City”) under provisions of the California Government Code and under a Resolution adopted by the City Council of the City (the “City Council”) on April 18, 2022 (the “Bond Resolution”). See “THE 2022 BONDS—Authority for Issuance” herein Purpose. The 2022A Bonds are being issued to refund, (a) on a current basis, the City’s outstanding City of Palo Alto General Obligation Bonds, Election of 2008, Series 2010A (the “2010 Bonds”), and (b) on an advance basis, the callable portion of the City’s outstanding City of Palo Alto General Obligation Bonds, Election of 2008, Series 2013A (the “2013 Bonds” and, with the 2010 Bonds, the “Prior Bonds”). The Prior Bonds were issued to finance projects approved by the voters of the City in 2008. See “REFUNDING PLAN” herein. Security. The 2022 Bonds are general obligations of the City, and the City Council of the City has the power to direct Santa Clara County (the “County”) to levy ad valorem taxes upon all property within the City subject to taxation without limitation of rate or amount, for the payment of the 2022 Bonds and the interest thereon. Under the Bond Resolution, the City directs the County to levy on all the taxable property in the City, in addition to all other taxes, a continuing direct and ad valorem tax annually during the period the 2022 Bonds are outstanding in an amount sufficient to pay the principal of and interest on the 2022 Bonds when due, without limitation of rate or amount (except certain personal property which is taxable at limited rates). See “SECURITY FOR THE 2022 BONDS” herein. Book-Entry Only. The 2022 Bonds will be issued in book-entry form only, and will be initially issued and registered in the name of Cede & Co. as nominee of The Depository Trust Company, New York, New York (“DTC”). The 2022 Bonds are issuable as fully registered securities in denominations of $5,000 or any integral multiple of $5,000. Purchasers of the 2022 Bonds (the “Beneficial Owners”) will not receive physical certificates representing their interest in the 2022 Bonds. See “THE 2022 BONDS” herein and APPENDIX F—DTC AND THE BOOK-ENTRY ONLY SYSTEM. Payments. Interest on the 2022 Bonds accrues from the date of delivery and is payable semiannually on February 1 and August 1 of each year, commencing August 1, 2022. Payments of principal and interest on the 2022 Bonds will be paid by The Bank of New York Mellon Trust Company, N.A., as paying agent, to DTC for subsequent disbursement to DTC Participants, which will remit such payments to the Beneficial Owners of the 2022 Bonds. See “THE 2022 BONDS—Description of the 2022 Bonds.” Redemption. The 2022 Bonds are subject to optional and sinking fund redemption prior to maturity. See “THE 2022 BONDS—Redemption” herein. Municipal Advisor. Public Financial Management, San Francisco, California, serving as municipal advisor to the City, has structured this issue. MATURITY SCHEDULE (See inside cover) Bids for the purchase of the 2022A Bonds will be received by the City on Tuesday, May 17, 2022, electronically only, through the I-Deal LLC BiDCOMP/PARITY® system, until 8:30 A.M., Pacific Daylight time. The 2022A Bonds will be sold pursuant to the terms of sale set forth in the Official Notice of Sale for the 2022A Bonds, dated May 10, 2022. Bids for the purchase of the 2022B Bonds will be received by the City on Tuesday, May 17, 2022, electronically only, through the I-Deal LLC BiDCOMP/PARITY® system, until 9:30 A.M., Pacific Daylight time. The 2022B Bonds will be sold pursuant to the terms of sale set forth in the Official Notice of Sale for the 2022B Bonds, dated May 10, 2022. Cover Page. This cover page contains certain information for general reference only. It is not a summary of all the provisions of the 2022 Bonds. Prospective investors must read the entire Official Statement to obtain information essential to making an informed investment decision. The 2022 Bonds are offered when, as and if issued and received by the purchasers thereof, and subject to the approval as to their legality by Jones Hall, A Professional Law Corporation, San Francisco, California, Bond Counsel. Certain legal matters will also be passed upon for the City by Quint & Thimmig LLP, Larkspur, California, as Disclosure Counsel. Certain legal matters will be passed upon for the City by the City Attorney. It is anticipated that the 2022 Bonds will be delivered in book-entry form through the facilities of DTC on or about June 16, 2022. The date of this Official Statement is __________, 2022. *Preliminary, subject to change. Exhibit 3 $___________* CITY OF PALO ALTO (Santa Clara County, California) Refunding General Obligation Bonds (Election of 2008), Series 2022A (Tax-Exempt) MATURITIES, PRINCIPAL AMOUNTS, INTEREST RATES, YIELDS AND PRICES CUSIP† Prefix ______ Maturity Principal Interest CUSIP† (August 1) Amount Rate Yield Price Suffix $___________* CITY OF PALO ALTO (Santa Clara County, California) Refunding General Obligation Bonds (Election of 2008), Series 2022B (Federally Taxable) MATURITIES, PRINCIPAL AMOUNTS, INTEREST RATES, YIELDS AND PRICES CUSIP† Prefix ______ Maturity Principal Interest CUSIP† (August 1) Amount Rate Yield Price Suffix *Preliminary, subject to change. †Copyright 2022, American Bankers Association. CUSIP® is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, operated by S&P Capital IQ. This data is not intended to create a database and does not serve in any way as a substitute for CUSIP Global Services. CUSIP numbers have been assigned by an independent company not affiliated with the District and are included solely for the convenience of the registered owners of the Bonds. Neither the District nor the Underwriter is responsible for the selection or uses of these CUSIP numbers and no representation is made as to their correctness on the Bonds or as included herein. The CUSIP number for a specific maturity is subject to being changed after the delivery of the Bonds as a result of various subsequent actions including, but not limited to, a refunding in whole or in part or as a result of the procurement of secondary market portfolio insurance or other similar enhancement by investors that is applicable to all or a portion of certain maturities of the Bonds. For purposes of compliance with Rule 15c2-12 of the United States Securities and Exchange Commission, as amended (“Rule 15c2-12”), this Preliminary Official Statement constitutes an “official statement” of the City with respect to the 2022 Bonds that has been deemed “final” by the City as of its date except for the omission of no more than the information permitted by Rule 15c2-12. Use of Official Statement. This Official Statement is submitted in connection with the sale of the 2022 Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. This Official Statement is not a contract between any bond owner and the City or the purchasers indicated in this Official Statement. This Official Statement should be considered in its entirety. Where statutes, ordinances, reports or other documents are referenced in this Official statement, reference should be made to those documents and those sources for complete information regarding the subject matter. No Offering Except by This Official Statement. No dealer, broker, salesperson or other person has been authorized by the City or the Purchasers to give any information or to make any representations other than those contained in this Official Statement and, if given or made, such other information or representation must not be relied upon as having been authorized by the City or the Purchasers. No Unlawful Offers or Solicitations. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor may there be any sale of the 2022 Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. Information in Official Statement. Certain of the information set forth in this Official Statement has been furnished by sources which are believed to be reliable, but it is not guaranteed as to accuracy or completeness. Document Summaries. All summaries of the documents referred to in this Official Statement are made subject to the provisions of such documents and qualified in their entirety to reference to such documents, and do not purport to be complete statements of any or all of such provisions. No Securities Laws Registration. The 2022 Bonds have not been registered under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, in reliance upon exceptions therein for the issuance and sale of municipal securities. The 2022 Bonds have not been registered or qualified under the securities laws of any state. Estimates and Projections. When used in this Official Statement and in any continuing disclosure by the City, in any press release and in any oral statement made with the approval of an authorized officer of the City, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “forecast,” “expect,” “intend” and similar expressions identify “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Any forecast is subject to such uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there are likely to be differences between forecasts and actual results, and those differences may be material. IN CONNECTION WITH THIS OFFERING, THE PURCHASERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE 2022 BONDS AT LEVELS ABOVE THOSE THAT MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE PURCHASERS MAY OFFER AND SELL THE 2022 BONDS TO CERTAIN SECURITIES DEALERS AND DEALER BANKS AND BANKS ACTING AS AGENT AND OTHERS AT PRICES LOWER THAN THE PUBLIC OFFERING PRICES STATED ON THE COVER PAGE HEREOF AND SAID PUBLIC OFFERING PRICES MAY BE CHANGED FROM TIME TO TIME BY THE PURCHASERS. Effective Date. This Official Statement speaks only as of its date, and the information and expressions of opinion contained in this Official Statement are subject to change without notice. Neither the delivery of this Official Statement nor any sale of the 2022 Bonds will, under any circumstances, give rise to any implication that there has been no change in the affairs of the City, the County, the other parties described in this Official Statement, or the condition of the property within the City since the date of this Official Statement. Website. The City maintains a website. Unless specifically indicated otherwise, the information presented on such website is not incorporated by reference as part of this Official Statement and should not be relied upon in making investment decisions with respect to the 2022 Bonds. CITY OF PALO ALTO LOCATION MAP TABLE OF CONTENTS INTRODUCTION .......................................................................... 1 The City ....................................................................................... 1 Purpose of the Issuance of the 2022 Bonds .................................. 2 Authority for Issuance .................................................................. 2 Security and Sources of Payment for the 2022 Bonds .................. 2 Description of the 2022 Bonds ..................................................... 2 Redemption .................................................................................. 3 Tax Matters .................................................................................. 3 Offering and Delivery ................................................................... 3 Continuing Disclosure .................................................................. 3 Professionals Involved in the Bond Offering ................................ 3 Other Information ........................................................................ 4 THE 2022 BONDS .......................................................................... 5 Authority for Issuance .................................................................. 5 Purposes of Issuance .................................................................... 5 Description of the 2022 Bonds ..................................................... 5 Payment ....................................................................................... 5 Redemption .................................................................................. 6 Registration, Transfer and Exchange of Bonds ............................ 7 Defeasance ................................................................................... 8 ESTIMATED SOURCES AND USES OF FUNDS ....................... 8 REFUNDING PLAN ....................................................................... 9 DEBT SERVICE SCHEDULES .................................................... 11 SECURITY FOR THE 2022 BONDS ........................................... 11 Ad Valorem Taxes ..................................................................... 11 Debt Service Fund ..................................................................... 12 Statutory Lien ............................................................................ 12 PAYING AGENT .......................................................................... 13 BOOK-ENTRY ONLY SYSTEM ................................................. 13 THE CITY ..................................................................................... 13 PROPERTY TAXATION ............................................................. 14 Property Taxation Generally ...................................................... 14 Property Tax Collection Procedures .......................................... 14 Taxation of State-Assessed Utility Property .............................. 15 Assessed Valuation ..................................................................... 15 Bonding Capacity ....................................................................... 24 CERTAIN RISK FACTORS ......................................................... 24 Risks to Assessed Values Generally ........................................... 24 Natural Calamities ..................................................................... 24 Risk of Changing Economic Conditions ..................................... 26 Public Health Emergencies ........................................................ 26 Bankruptcy Risks ........................................................................ 26 Cybersecurity Risks .................................................................... 27 Article XIIIA of the State Constitution ...................................... 27 Legislation Implementing Article XIIIA ..................................... 28 Article XIIIB of the State Constitution ...................................... 29 Articles XIIIC and XIIID of the State Constitution ................... 29 Proposition 62 ............................................................................ 30 Proposition 1A; Proposition 22 .................................................. 31 Proposition 19 ............................................................................ 31 Possible Future Initiatives .......................................................... 31 LEGAL MATTERS ....................................................................... 32 Possible Limitations on Remedies; Bankruptcy ......................... 32 Legal Opinions ........................................................................... 33 TAX MATTERS ........................................................................... 34 2022A Bonds .............................................................................. 34 2022B Bonds .............................................................................. 35 Other Tax Considerations .......................................................... 35 MUNICIPAL ADVISOR ............................................................... 36 CONTINUING DISCLOSURE .................................................... 36 LEGALITY FOR INVESTMENT IN CALIFORNIA .................. 36 ABSENCE OF MATERIAL LITIGATION .................................. 37 RATING ........................................................................................ 37 UNDERWRITING ........................................................................ 37 ADDITIONAL INFORMATION ................................................. 37 EXECUTION ................................................................................ 38 APPENDIX A: GENERAL, ECONOMIC AND DEMOGRAPHIC INFORMATION RELATING TO THE CITY AND THE COUNTY APPENDIX B: CITY FINANCIAL INFORMATION APPENDIX C: ANNUAL COMPREHENSIVE FINANCIAL REPORT OF THE CITY FOR THE YEAR ENDED JUNE 30, 2021 APPENDIX D: CITY INVESTMENT POLICY APPENDIX E: FORM OF OPINION OF BOND COUNSEL APPENDIX F: FORM OF CONTINUING DISCLOSURE CERTIFICATE APPENDIX G: BOOK-ENTRY SYSTEM CITY OF PALO ALTO 250 Hamilton Avenue Palo Alto, California 94301 http://www.cityofpaloalto.org CITY COUNCIL MEMBERS Patrick Burt, Mayor Lydia Kou, Vice Mayor Alison Cormack, Councilmember Tom DuBois, Councilmember Eric Filseth, Councilmember Greer Stone, Councilmember Greg Tanaka, Councilmember CITY OFFICIALS Edward K. Shikada, City Manager Kiely Nose, Acting Assistant City Manager/Chief Financial Officer/Administrative Services Director Meghan Horrigan-Taylor, Chief Communications Officer David Ramberg, Assistant Director of Administrative Services Brad Eggleston, Director of Public Works Tarun Narayan, Manager of Treasury, Debt & Investments Molly S. Stump, Esq., City Attorney Lesley Milton, City Clerk SPECIAL SERVICES Bond Counsel Jones Hall, A Professional Law Corporation San Francisco, California Disclosure Counsel Quint & Thimmig LLP Larkspur, California Financial Advisor PFM Financial Advisors LLC San Francisco, California Paying Agent and Escrow Bank U.S. Bank Trust, National Association San Francisco, California VERIFICATION AGENT __________ ________, _______ *Information therein is not incorporated by reference into this Official Statement. $___________* CITY OF PALO ALTO Refunding General Obligation Bonds (Election of 2008), Series 2022A (Tax-Exempt) $___________* CITY OF PALO ALTO Refunding General Obligation Bonds (Election of 2008), Series 2022B (Federally Taxable) INTRODUCTION This Official Statement, which includes the cover page and the appendices hereto, provides information in connection with the sale of the $_______* City of Palo Alto Refunding General Obligation Bonds (Election of 2008), Series 2022A (the “2022A Bonds”) and the $_________* City of Palo Alto Refunding General Obligation Refunding Bonds (Election of 2008), Series 2022B (Federally Taxable) (the “2022B Bonds” and, with the 2022A Bonds, the “2022 Bonds”). This Introduction is not a summary of this Official Statement. It is only a brief description of and guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement, including the cover page and the appendices hereto, and the documents summarized or described herein. A full review should be made of the entire Official Statement. The offering of the 2022 Bonds to potential investors is made only by means of the entire Official Statement. The City The City of Palo Alto (the “City”) is located in northern Santa Clara County (the “County”), approximately 35 miles south of the city of San Francisco. The City is part of the San Francisco Bay metropolitan area, and was incorporated in 1894. The City’s first Charter was granted by the State in 1909 and the City continues to operate as a charter city. Located between the cities of San Francisco and San Jose, the City is a largely built-out community. The City covers an area of twenty-six square miles and has dedicated almost one-half of the area to open spaces of parks and wildlife preserves. Public facilities include five libraries, four community centers, a cultural arts center, an adult and children’s theater, a junior museum and zoo, and a golf course. The City is located adjacent to Stanford University, one of the premier institutions of higher education in the nation. The City shares its borders with East Palo Alto, Mountain View, Los Altos, Los Altos Hills, Stanford, Portola Valley, and Menlo Park. The City’s current population is approximately 68,000. The City is a charter city and is governed by a city council of seven representatives (the “City Council”). City Council members are elected city-wide on an at-large basis for staggered four-year terms. At the first meeting of each calendar year, Council elects a Mayor and Vice-Mayor from its membership, with the Mayor having the duty of presiding over Council meetings. Council is the appointing authority for * Preliminary, subject to change. -2- the positions of City Manager and three other officials, the City Attorney, City Clerk, and City Auditor, all of whom report to Council. For more complete information concerning the City, including certain financial information, see “THE CITY,” APPENDIX A—GENERAL, ECONOMIC AND DEMOGRAPHIC INFORMATION RELATING TO THE CITY AND THE COUNTY and APPENDIX B—CITY FINANCIAL INFORMATION. The City’s audited financial statements for the fiscal year ended June 30, 2021, are included as APPENDIX C— ANNUAL COMPREHENSIVE FINANCIAL REPORT OF THE CITY FOR THE YEAR ENDED JUNE 30, 2021. Purpose of the Issuance of the 2022 Bonds The 2022A Bonds are being issued to refund, (a) on a current basis, the City’s outstanding City of Palo Alto General Obligation Bonds, Election of 2008, Series 2010A (the “2010 Bonds”), and (b) on an advance basis, the portion of the City’s outstanding City of Palo Alto General Obligation Bonds, Election of 2008, Series 2013A, maturing on and after August 1, 2024 (the “2013 Bonds” and, with the 2010 Bonds, the “Prior Bonds”). The Prior Bonds were issued to finance project approved by the voters of the City in 2008. See “THE 2022 BONDS” and “REFUNDING PLAN.” The Prior Bonds were authorized at an election of the registered voters of the City held on November 4, 2008, at which more than two-thirds of the persons voting on the measure voted to authorize the issuance and sale of not to exceed $76,000,000 principal amount of general obligation bonds. Authority for Issuance The 2022 Bonds are being issued under the provisions of Articles 9 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code (the “Bond Law”) and a resolution adopted by the City Council on May 2, 2022 (the “Bond Resolution”). Security and Sources of Payment for the 2022 Bonds The 2022 Bonds are general obligations of the City, and the City Council has the power to direct the County to levy ad valorem taxes upon all property within the City subject to taxation without limitation of rate or amount, for the payment of the 2022 Bonds and the interest thereon. Under the Bond Resolution, the City directs the County to levy on all the taxable property in the City, in addition to all other taxes, a continuing direct and ad valorem tax annually during the period the 2022 Bonds are Outstanding in an amount sufficient to pay the principal of and interest on the 2022 Bonds when due, without limitation of rate or amount (except certain personal property which is taxable at limited rates). See “SECURITY FOR THE 2022 BONDS.” Description of the 2022 Bonds The 2022 Bonds are being issued as current interest bonds. The 2022 Bonds will be dated as of their date of delivery, will be issued as fully registered bonds, without coupons, in the denominations of $5,000 principal amount or any integral multiple thereof. Interest on the 2022 Bonds accrues from their date of delivery and is payable semiannually on each February 1 and August 1 (each an “Interest Payment Date”), commencing August 1, 2022. -3- The 2022 Bonds will be issued in fully registered form only, registered in the name of Cede & Co. as nominee of The Depository Trust Company (“DTC”), and will be available to actual purchasers of the 2022 Bonds (the “Beneficial Owners”) in the denominations set forth on the cover page hereof, under the book-entry system maintained by DTC, only through brokers and dealers who are or act through DTC Participants as described herein. Beneficial Owners will not be entitled to receive physical delivery of the 2022 Bonds. See “BOOK-ENTRY ONLY SYSTEM” and APPENDIX G—BOOK-ENTRY SYSTEM. In event that the book-entry system described below is no longer used with respect to the 2022 Bonds, the 2022 Bonds will be registered in accordance with the Resolution as described herein. See “THE 2022 BONDS—Registration, Transfer and Exchange of Bonds.” Individual purchases of interests in the 2022 Bonds will be available to purchasers of the 2022 Bonds in the denominations of $5,000 principal amount or any integral multiple thereof. Redemption Certain of the 2022 Bonds are subject to optional and sinking fund redemption prior to maturity. See “THE 2022 BONDS—Redemption.” Tax Matters Assuming compliance with certain covenants and provisions of the Internal Revenue Code of 1986, in the opinion of Bond Counsel, interest on the 2022A Bonds will be excluded from gross income for federal income tax purposes and such interest is not an item of tax preference for purposes of the federal alternative minimum tax. Interest on the 2022B Bonds is not excludable from gross income of the owners thereof for federal income tax purposes. Also, in the opinion of Bond Counsel, interest on the 2022 Bonds will be exempt from State of California (the “State”) personal income taxes. See “LEGAL MATTERS—Tax Matters” Offering and Delivery The 2022 Bonds are offered when, as and if issued and received by the purchasers, subject to approval as to their legality by Bond Counsel. It is anticipated that the 2022 Bonds will be available for delivery through the facilities of DTC on or about June 16, 2022. Continuing Disclosure The City has covenanted for the benefit of the holders and Beneficial Owners of the 2022 Bonds to make available certain financial information and operating data relating to the City and to provide notices of the occurrence of certain enumerated events in compliance with S.E.C. Rule 15c2-12(b)(5) (the “Rule”). The specific nature of the information to be made available and of the notices of enumerated events is summarized below under the caption “CONTINUING DISCLOSURE.” Also, see APPENDIX F— FORM OF CONTINUING DISCLOSURE CERTIFICATE. Professionals Involved in the Bond Offering Several professional firms have provided services to the City with respect to the sale and delivery of the 2022 Bonds. Jones Hall, A Professional Law Corporation, San Francisco, California, Bond Counsel, will deliver its legal opinion in substantially the forms set forth in APPENDIX E—FORM OF OPINION OF BOND COUNSEL. Quint & Thimmig LLP, Larkspur, California, is serving as disclosure counsel to the City with respect to the 2022 Bonds (“Disclosure Counsel”). PFM Financial Advisors LLC, San Francisco, California, will act as municipal advisor to the City with respect to the 2022 Bonds. The payment -4- of fees and expenses of such firms with respect to the 2022 Bonds is contingent on the sale and delivery of the 2022 Bonds. The City’s financial statements for the fiscal year ended June 30, 2021, have been audited by CliftonLarsonAllen LLP, Glendora, California. See APPENDIX C— ANNUAL COMPREHENSIVE FINANCIAL REPORT OF THE CITY FOR THE YEAR ENDED JUNE 30, 2021. The purchasers of the 2022 Bonds are not obligated to undertake, and has not undertaken to make, an independent verification or to assume responsibility for the accuracy, completeness or fairness of the information in this Official Statement. Other Information This Official Statement speaks only as of its date, and the information contained herein is subject to change. Copies of documents referred to herein and information concerning the 2022 Bonds are available for inspection at the office of the City Clerk, City of Palo Alto, 250 Hamilton Avenue, Palo Alto, CA 94301, telephone (650) 329-2571. The City may impose a charge for copying, mailing and handling. This Official Statement is not to be construed as a contract with the purchasers of the 2022 Bonds. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of fact. The summaries and references to documents, statutes and constitutional provisions referred to herein do not purport to be comprehensive or definitive and are qualified in their entireties by reference to each of such documents, statutes and constitutional provisions. The information set forth herein has been obtained from official sources which are believed to be reliable, but it is not guaranteed as to accuracy or completeness and is not to be construed as a representation by the City. The information and expressions of opinions herein are subject to change without notice and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the City since the date hereof. This Official Statement is submitted in connection with the sale of the 2022 Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. Certain statements included or incorporated by reference in this Official Statement constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Exchange Act of 1933, as amended. Such statements are generally identifiable by the terminology used such as “plan,” “expect,” “estimate,” “project,” “budget,” or other similar words. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Any forecast is subject to such uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there are likely to be differences between forecasts and actual results, and those differences may be material. All terms used in this Official Statement and not otherwise defined shall have the meanings given such terms in the Resolution. -5- THE 2022 BONDS Authority for Issuance The 2022 Bonds are issued pursuant to the Bond Law and the Bond Resolution. Purposes of Issuance The 2022A Bonds are being issued to refund, (a) on a current basis, the 2010 Bonds, and (b) on an advance basis, the callable portion of the 2013 Bonds. The Prior Bonds were issued to finance project approved by the voters of the City in 2008. See “REFUNDING PLAN” and “ESTIMATED SOURCES AND USES OF FUNDS.” Description of the 2022 Bonds The 2022 Bonds will be issued in book-entry form only and will be initially issued and registered in the name of Cede & Co. as nominee for DTC. Beneficial Owners will not receive physical certificates representing their interests in the 2022 Bonds. See “BOOK-ENTRY ONLY SYSTEM” and APPENDIX G—BOOK-ENTRY SYSTEM. Interest on the 2022 Bonds accrues from their date of issuance and is payable semiannually on each Interest Payment Date. Interest on the 2022 Bonds accrues on the basis of a 360-day year comprised of twelve 30-day months. Each Bond will bear interest from the Interest Payment Date next preceding the date of authentication thereof unless it is authenticated as of a day during the period from the 16th day of the month next preceding any Interest Payment Date to that Interest Payment Date, inclusive, in which event it will bear interest from such Interest Payment Date, or unless it is authenticated on or before July 15, 2022, in which event it will bear interest from its date of delivery. The 2022 Bonds are issuable in denominations of $5,000 principal amount or any integral multiple thereof. The 2022 Bonds mature on the dates, in the years and amounts set forth on the inside cover page hereof. The principal of and interest on the 2022 Bonds (including the final interest payment upon maturity or earlier redemption) is payable by check or draft of the Paying Agent mailed by first-class mail to the Owner at the Owner’s address as it appears on the registration books maintained by the Paying Agent as of the close of business on the fifteenth day of the month next preceding such interest payment date (the “Record Date”), or at such other address as the Owner may have filed with the Paying Agent for that purpose; provided however, that payment of interest may be by wire transfer in immediately available funds to an account in the United States of America to any Owner of the 2022 Bonds in the aggregate principal amount of $1,000,000 or more who shall furnish written wire instructions to the Paying Agent at least five (5) days before the applicable Record Date. See also “Book Entry Only System” below. See the maturity schedule on the cover page hereof and “Debt Service Schedule.” Payment The redemption price, if any, on the 2022 Bonds will be payable upon maturity or redemption upon surrender of such Bonds at the principal office of the Paying Agent. The interest, principal and redemption price, if any, on the 2022 Bonds will be payable in lawful money of the United States of America. The Paying Agent is authorized to pay the 2022 Bonds when duly presented for payment at maturity, and to cancel all -6- Bonds upon payment thereof. The 2022 Bonds are general obligations of the City and do not constitute obligations of the County. No parts of any fund of the County are pledged or obligated to the payment of the 2022 Bonds. Redemption Optional Redemption. 2022A Bonds. The 2022A Bonds maturing on and prior to August 1, ____, are not callable for redemption prior to their stated maturity date. The 2022A Bonds maturing on and after August 1, ____, are callable for redemption prior to their stated maturity date at the option of the City, in whole or in part on any date on or after August 1, ____, from any source lawfully available therefor, at a redemption price equal to the principal amount of the 2022A Bonds called for redemption, together with accrued interest to the date fixed for redemption, without premium. 2022B Bonds. The 2022B Bonds maturing on and prior to August 1, ____, are not callable for redemption prior to their stated maturity date. The 2022B Bonds maturing on and after August 1, ____, are callable for redemption prior to their stated maturity date at the option of the City, in whole or in part on any date on or after August 1, ____, from any source lawfully available therefor, at a redemption price equal to the principal amount of the 2022B Bonds called for redemption, together with accrued interest to the date fixed for redemption, without premium. Sinking Fund Redemption. 2022A Bonds. The 2022A Bonds maturing on August 1, ____ (the “2022A Term Bonds”), are also subject to redemption prior to maturity from mandatory sinking fund payments in part by lot on August 1, ____, and on each August 1 thereafter, to and including August 1, ____, at a redemption price equal to the principal amount thereof, without premium, in the aggregate respective amounts and on the respective dates as set forth in the following table. Sinking Account Redemption Date Principal Amount (August 1) to be Redeemed †Maturity If any 2022A Term Bonds are redeemed pursuant to optional redemption, the total amount of all future sinking fund payments with respect to such 2022A Term Bonds shall be reduced by the aggregate principal amount of such 2022A Term Bonds so redeemed, to be allocated among such -7- payments on a pro rata basis in integral multiples of $5,000 principal amount (or on such other basis as the City may determine) as set forth in written notice given by the City to the Paying Agent. 2022A Bonds. The 2022A Bonds maturing on August 1, ____ (the “2022A Term Bonds”), are also subject to redemption prior to maturity from mandatory sinking fund payments in part by lot on August 1, ____, and on each August 1 thereafter, to and including August 1, ____, at a redemption price equal to the principal amount thereof, without premium, in the aggregate respective amounts and on the respective dates as set forth in the following table. Sinking Account Redemption Date Principal Amount (August 1) to be Redeemed †Maturity If any 2022B Term Bonds are redeemed pursuant to optional redemption, the total amount of all future sinking fund payments with respect to such 2022B Term Bonds shall be reduced by the aggregate principal amount of such 2022B Term Bonds so redeemed, to be allocated among such payments on a pro rata basis in integral multiples of $5,000 principal amount (or on such other basis as the City may determine) as set forth in written notice given by the City to the Paying Agent. Registration, Transfer and Exchange of Bonds If the book-entry system as described above and in APPENDIX G—BOOK-ENTRY SYSTEM is no longer used with respect to the 2022 Bonds, the following provisions will govern the registration, transfer, and exchange of the 2022 Bonds. The Paying Agent will keep or cause to be kept sufficient books for the ownership and registration of transfer of the 2022 Bonds (the “Registration Books”), which will at all times be open to inspection by the City upon reasonable notice; and, upon presentation for such purpose, the Paying Agent shall, under such reasonable regulations as it may prescribe, register or transfer or cause to be registered or transferred, on said books, the 2022 Bonds. Any Refunding Bond may, in accordance with its terms, be transferred, upon the Registration Books, by the person in whose name it is registered, in person or by his duly authorized attorney, upon surrender of such Refunding Bond for cancellation at the principal office of the Paying Agent, accompanied by delivery of a written instrument of transfer in a form approved by the Paying Agent, duly executed. The City may charge a reasonable sum for each new Refunding Bond issued upon any transfer. -8- Whenever any Bond or Bonds are surrendered for transfer, the City will execute and the Paying Agent will authenticate and deliver a new Refunding Bond or Refunding Bonds, for like aggregate principal amount. Refunding Bonds may be exchanged at the principal office of the Paying Agent for a like aggregate principal amount of Refunding Bonds of authorized denominations and of the same maturity. The City may charge a reasonable sum for each new Bond issued upon any exchange. Defeasance The City has the option to pay and discharge the entire indebtedness on all or any portion of the outstanding Refunding Bonds in any one or more of the following ways: (a) by paying or causing to be paid the principal of and interest on such Refunding Bonds, as and when the same become due and payable; (b) by irrevocably depositing, in trust, at or before maturity, (i) money in an amount equal to the principal amount of such Refunding Bonds and all unpaid interest thereon to maturity or (ii) Federal Securities, the principal of and interest on which when due, in the opinion of a certified public accountant delivered to the City, will provide money sufficient to pay the principal of and all unpaid interest to maturity on the 2022 Bonds to be paid, as such principal and interest become due; or (c) by delivery such Refunding Bonds to the Paying Agent for cancellation by it. “Federal Securities” means: (a) any direct general obligations of the United States of America (including obligations issued or held in book entry form on the books of the Department of the Treasury of the United States of America), for which the full faith and credit of the United States of America are pledged; (b) obligations of any agency, department or instrumentality of the United States of America, the timely payment of principal and interest on which are directly or indirectly secured or guaranteed by the full faith and credit of the United States of America. ESTIMATED SOURCES AND USES OF FUNDS The estimated sources and uses of funds in connection with the 2022 Bonds are as follows: Sources of Funds: 2022A Bonds 2022B Bonds Total Principal Amount of 2022 Bonds Total Sources of Funds Uses of Funds: Refunding of 2010 Bonds Refunding of 2013 Bonds Costs of Issuance (1) Total Uses of Funds (1) Includes the underwriters’ discounts, the fees of the municipal advisor, bond counsel, disclosure counsel, the rating agency -9- and other third-party providers. Any excess in the Costs of Issuance Fund will be transferred to the City’s Debt Service Fund. REFUNDING PLAN Refunding of the 2010 Bonds. A portion of the proceeds of the 2022A Bonds will be deposited into an escrow fund (the “2010 Escrow Fund”) created by U.S. Bank Trust Company, National Association, as escrow agent (the “Escrow Bank”), pursuant to Irrevocable Refunding Instructions given to the Escrow Bank by the City. Amounts deposited in the 2010 Escrow Fund will be held by the Escrow Bank in cash, uninvested. The cash in the 2010 Escrow Fund will be applied to redeem the 2010 Bonds on June 23, 2022, at a redemption price equal to 100% of the principal amount thereof, plus accrued interest to such date. ______________ (the “Verification Agent”), will verify that the cash in the 2010 Escrow Fund will be sufficient for the purposes described above. See “VERIFICATION OF MATHEMATICAL COMPUTATIONS.” The 2010 Bonds to be refunded are as follows: Issue Maturity Interest Redemption Principal Redemption CUSIP† Date Date Rate Date Amount Price Number 6/30/10 8/1/22 4.500% 6/16/22 $ 1,450,000 100.000 697362 TG6 6/30/10 8/1/23 4.500 6/16/22 1,515,000 100.000 697362 TH4 6/30/10 8/1/24 4.500 6/16/22 1,585,000 100.000 697362 TJ0 6/30/10 8/1/25 4.500 6/16/22 1,655,000 100.000 697362 TK7 6/30/10 8/1/26 5.000 6/16/22 1,730,000 100.000 697362 TL5 6/30/10 8/1/27 5.000 6/16/22 1,820,000 100.000 697362 TM3 6/30/10 8/1/28 5.000 6/16/22 1,910,000 100.000 697362 TN1 6/30/10 8/1/29 5.000 6/16/22 2,005,000 100.000 697362 TP6 6/30/10 8/1/32 4.375 6/16/22 6,595,000 100.000 697362 TQ4 6/30/10 8/1/34 4.375 6/16/22 4,890,000 100.000 697362 TR5 6/30/10 8/1/40 5.000 6/16/22 15,415,000 100.000 697362 TS0 A portion of the proceeds of the 2022A Bonds will be retained by the Paying Agent in a costs of issuance account (the “2022A Costs of Issuance Account”) and used to pay costs associated with the issuance of the 2022A Bonds. Any proceeds of sale of the 2022A Bonds not needed to redeem the 2010 Bonds or to pay costs of issuance of the 2022A Bonds will be held by the Paying Agent in the Debt Service Fund to be used only for payment of principal of and interest on the 2022A Bonds when due. Refunding of the 2013 Bonds. A portion of the proceeds of the 2022B Bonds will be deposited into an escrow fund (the “2013 Escrow Fund”) established under an escrow agreement (the “2013 Escrow Agreement”) by and between the City and the Escrow Bank. A portion of the amounts deposit in the 2013 Escrow Fund will be invested in direct obligations of the United States of America (the “Escrowed Securities”). The maturing Escrowed Securities, the investment earnings thereon and the cash in the 2013 Escrow Fund will be applied to (1) pay interest on the 2013 Bonds to and including August 1, 2023, and to redeem the 2013 Bonds maturing on and after August 1, 2024, on August 1, 2023, at a redemption price equal to 100% of the principal amount thereof. † Copyright 2021, American Bankers Association. CUSIP® is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, operated by Standard & Poor’s. This data is not intended to create a database and does not serve in any way as a substitute for CUSIP Global Services. -10- The Verification Agent will verify that the maturing Escrowed Securities, the investment earnings thereon and the cash in the Escrow Fund will be sufficient for the purposes described above. See “VERIFICATION OF MATHEMATICAL COMPUTATIONS.” The 2013 Bonds to be refunded are as follows: Issue Maturity Interest Redemption Principal Redemption CUSIP† Date Date Rate Date Amount Price Number 6/26/13 8/1/24 5.000% 8/1/23 $ 525,000 100.000 697362 UH2 6/26/13 8/1/25 5.000 8/1/23 555,000 100.000 697362 UJ8 6/26/13 8/1/26 5.000 8/1/23 585,000 100.000 697362 UK5 6/26/13 8/1/27 5.000 8/1/23 610,000 100.000 697362 UL3 6/26/13 8/1/28 5.000 8/1/23 645,000 100.000 697362 UM1 6/26/13 8/1/29 3.500 8/1/23 670,000 100.000 697362 UN9 6/26/13 8/1/30 4.000 8/1/23 695,000 100.000 697362 UP4 6/26/13 8/1/31 4.000 8/1/23 725,000 100.000 697362 UQ2 6/26/13 8/1/33 4.000 8/1/23 1,540,000 100.000 697362 UR0 6/26/13 8/1/35 4.000 8/1/23 1,670,000 100.000 697362 US8 6/26/13 8/1/38 4.000 8/1/23 2,765,000 100.000 697362 UT6 6/26/13 8/1/41 4.000 8/1/23 2,590,000 100.000 697362 UU3 A portion of the proceeds of the 2022B Bonds will be retained by the Paying Agent in a costs of issuance account (the “2022B Costs of Issuance Account”) and used to pay costs associated with the issuance of the 2022B Bonds. Any proceeds of sale of the 20022B Bonds not needed to redeem the 2013 Bonds or to pay costs of issuance of the 2022B Bonds will be held by the Paying Agent in the Debt Service Fund to be used only for payment of principal of and interest on the 2022B Bonds when due. † Copyright 2021, American Bankers Association. CUSIP® is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, operated by Standard & Poor’s. This data is not intended to create a database and does not serve in any way as a substitute for CUSIP Global Services. -11- DEBT SERVICE SCHEDULES The following table shows the debt service schedule with respect to the 2022 Bonds (assuming no optional redemptions). Bond Year Ending 2022A Bonds 2022B Bonds August 1 Principal* Interest(1) Total Principal* Interest(1) Total Total 2022 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 Total *Preliminary, subject to change. (1) Interest on the 2022 Bonds is payable semiannually on each February 1 and August 1, commencing August 1, 2022. SECURITY FOR THE 2022 BONDS Ad Valorem Taxes Bonds Payable from Ad Valorem Property Taxes. The 2022 Bonds are general obligations of the City, and the City Council has the power to direct the County to levy ad valorem taxes upon all property within the City subject to taxation without limitation of rate or amount, for the payment of the 2022 Bonds and the interest thereon. Under the Bond Resolution, the City directs the County to levy on all the taxable property in the City, in addition to all other taxes, a continuing direct and ad valorem tax annually during the period the 2022 Bonds are Outstanding in an amount sufficient to pay the principal of and interest on the 2022 Bonds when due, without limitation of rate or amount (except certain personal property which is taxable at limited rates). Levy and Collection. The City has covenanted to direct the County to levy such ad valorem taxes in such amounts and at such times as is necessary to ensure the timely payment of debt service. Such taxes, -12- when collected, will be deposited into a debt service fund for the 2022 Bonds, which is maintained by the City and which is irrevocably pledged for the payment of principal of and interest on the 2022 Bonds when due. See “–Debt Service Fund” below. Property taxes within the City are assessed and collected by the County in the same manner and at the same time, and in the same installments as other ad valorem taxes on real property, and will have the same priority, become delinquent at the same times and in the same proportionate amounts, and bear the same proportionate penalties and interest after delinquency, as do the other ad valorem taxes on real property. The City has elected not to participate in the County Teeter Plan. See “PROPERTY TAXATION – Tax Levies and Delinquencies.” Annual Tax Rates. The amount of the annual ad valorem tax levied by the County, as directed by the City, to repay the 2022 Bonds will be determined by the relationship between the assessed valuation of taxable property in the City and the amount of debt service due on the 2022 Bonds. Fluctuations in the annual debt service on the 2022 Bonds and the assessed value of taxable property in the City may cause the annual tax rate to fluctuate. Natural, economic and other factors both within and out of the City’s control, such as economic recession, deflation of land values, a relocation out of the City or financial difficulty or bankruptcy by one or more major property taxpayers, or the complete or partial destruction of taxable property caused by, among other eventualities, earthquake, flood or other natural disaster, could cause a reduction in the assessed value within the City and necessitate a corresponding increase in the annual tax rate. For additional discussion, see “CERTAIN RISK FACTORS” below. Debt Service Fund The City will establish the Debt Service Fund (the “Debt Service Fund”), which will be established as a separate fund to be maintained distinct from all other funds of the City. All taxes levied by the County, as directed by the City, pursuant to the Refunding Bond Resolution for the payment of the principal of and interest and premium (if any) on the 2022 Bonds will be deposited in the Debt Service Fund held by the City promptly upon the receipt by the City from the County. The Debt Service Fund is pledged for the payment of the principal of and interest and premium (if any) on the 2022 Bonds when and as the same become due. The City will transfer amounts in the Debt Service Fund, to the extent necessary to pay the principal of and interest on the 2022 Bonds as the same become due and payable, to the Paying Agent as required to pay the principal of and interest and premium (if any) on the 2022 Bonds. If, after payment in full of the 2022 Bonds, any amounts remain on deposit in the Debt Service Fund, the City shall transfer such amounts to its General Fund, to be applied solely in a manner which is consistent with the requirements of applicable state and federal tax law. Statutory Lien In accordance with Section 53515 of the California Government Code, the 2022 Bonds are secured by a statutory lien on all revenues received pursuant to the levy and collection of the ad valorem tax. This lien automatically arises without the need for any action or authorization by the City or the City Council, and shall be valid and binding from the time the 2022 Bonds are executed and delivered. The revenues received pursuant to the levy and collection of the ad valorem tax shall be immediately subject to the lien, and the lien shall immediately attach to the revenues and be effective, binding, and enforceable against the -13- City, its successors, transferees, and creditors, and all others asserting rights therein, irrespective of whether those parties have notice of the lien and without the need for any physical delivery, recordation, filing, or further act. PAYING AGENT U.S. Bank Trust Company, National Association will act as the transfer agent, bond registrar, authenticating agent and paying agent for the 2022 Bonds (the “Paying Agent”). As long as DTC is the registered owner of the 2022 Bonds and DTC’s book-entry method is used for the 2022 Bonds, the Paying Agent will send any notice of redemption or other notices to owners only to DTC. Any failure of DTC to advise any DTC Participant, or of any DTC Participant to notify any Beneficial Owner, of any such notice and its content or effect will not affect the validity or sufficiency of the proceedings relating to the redemption of the 2022 Bonds called for redemption or of any other action premised on such notice. The Paying Agent, the City, the County and the Underwriters (as hereinafter defined) have no responsibility or liability for any aspects of the records relating to or payments made on account of beneficial ownership, or for maintaining, supervising or reviewing any records relating to beneficial ownership, of interests for the 2022 Bonds. BOOK-ENTRY ONLY SYSTEM The Depository Trust Company, New York, New York, will act as securities depository for the 2022 Bonds. The 2022 Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. See APPENDIX G—BOOK-ENTRY SYSTEM. THE CITY The City is located approximately 35 miles south of the City of San Francisco. The City was incorporated in 1894. Its first Charter was granted by the State in 1909 and the City continues to operate as a charter city. Located between the cities of San Francisco and San Jose, the City is a largely built-out community. The City covers an area of twenty-six square miles and has dedicated almost one-half of the area to open spaces of parks and wildlife preserves. The City’s public facilities include five libraries, four community centers, a cultural arts center, an adult and children’s theater, a junior museum and zoo, and a golf course. The City shares its borders with East Palo Alto, Mountain View, Los Altos, Los Altos Hills, Stanford, Portola Valley, and Menlo Park. The City’s current population is approximately 68,000. Stanford University covers a 700-acre area in the City, and the City is home to high-tech leaders such as SAP America, Varian Medical Systems, VMware, Tibco Software, the Electric Power Research Institute, Communications and Power Industries and Skype. The City is also a major employment center, including U.S. Department of Veterans Affairs, Palo Alto Health Care System, Stanford Hospitals and Clinics, Lockheed Martin Missiles and Space, Palo Alto Medical Foundation, Stanford Shopping Center, the law offices of Wilson Sonsini Goodrich and Rosati, and the Xerox Palo Alto Research Center. The City is a charter city and is governed by a City Council of seven representatives. City Council members are elected city-wide on an at-large basis for staggered four-year terms. At the first meeting of each -14- calendar year, Council elects a Mayor and Vice-Mayor from its membership, with the Mayor having the duty of presiding over Council meetings. Council is the appointing authority for the positions of City Manager and three other officials, the City Attorney, City Clerk, and City Auditor, all of whom report to Council. Members of the Council and key administrative personnel of the City are listed at the front of this Official Statement. For more complete information concerning the City, including certain financial information, see APPENDIX A—GENERAL, ECONOMIC AND DEMOGRAPHIC INFORMATION RELATING TO THE CITY AND THE COUNTY and APPENDIX B—CITY FINANCIAL INFORMATION. The City’s audited financial statements for the fiscal year ended June 30, 2021, are included as APPENDIX C— ANNUAL COMPREHENSIVE FINANCIAL REPORT OF THE CITY FOR THE YEAR ENDED JUNE 30, 2021. PROPERTY TAXATION The information in this section describes ad valorem property taxation, assessed valuation, and other measures of the tax base of the City. The 2022 Bonds are payable solely from ad valorem taxes levied and collected by the County on taxable property in the City. The City’s General Fund is not a source for the repayment of the 2022 Bonds. Property Taxation Generally The City levies property taxes for general operating purposes as well as the payment of voter- approved general obligation bonds. Taxes levied to pay debt service for general obligation bonds may only be applied for that purpose. In general, if overall assessed values of taxable property in the City were to decline, then the City, in order to generate sufficient tax revenues to pay debt service on the 2022 Bonds ,would increase tax rates applicable to the 2022 Bonds. Property Tax Collection Procedures In California, property which is subject to ad valorem taxes is classified as “secured” or “unsecured.” The “secured roll” is that part of the assessment roll containing state assessed public utilities’ property and property, the taxes on which are a lien on real property sufficient, in the opinion of the county assessor, to secure payment of the taxes. A tax levied on unsecured property does not become a lien against such unsecured property, but may become a lien on certain other property owned by the taxpayer. Every tax which becomes a lien on secured property has priority over all other liens arising pursuant to State law on such secured property, regardless of the time of the creation of the other liens. Secured and unsecured property are entered separately on the assessment roll maintained by the county assessor. The method of collecting delinquent taxes is substantially different for the two classifications of property. Property taxes on the secured roll are due in two installments, on November 1 and August 1 of each fiscal year. If unpaid, such taxes become delinquent after December 10 and April 10, respectively, and a 10% penalty attaches to any delinquent payment. In addition, property on the secured roll with respect to which taxes are delinquent is declared tax defaulted on or about June 30 of the fiscal year. Such property may -15- thereafter be redeemed by payment of the delinquent taxes and a delinquency penalty, plus a redemption penalty of 1.5% per month to the time of redemption. If taxes are unpaid for a period of five years or more, the property is subject to sale by the County. Property taxes are levied for each fiscal year on taxable real and personal property situated in the taxing jurisdiction as of the preceding January 1. A bill enacted in 1983, SB813 (Statutes of 1983, Chapter 498), however, provided for the supplemental assessment and taxation of property as of the occurrence of a change of ownership or completion of new construction. Thus, this legislation eliminated delays in the realization of increased property taxes from new assessments. As amended, SB813 provided increased revenue to taxing jurisdictions to the extent that supplemental assessments of new construction or changes of ownership occur subsequent to the January 1 lien date and result in increased assessed value. Property taxes on the unsecured roll are due on the January 1 lien date and become delinquent, if unpaid on the following August 31. A 10% penalty is also attached to delinquent taxes in respect of property on the unsecured roll, and further, an additional penalty of 1.5% per month accrues with respect to such taxes beginning the first day of the third month following the delinquency date. The taxing authority has four ways of collecting unsecured personal property taxes: (1) a civil action against the taxpayer; (2) filing a certificate in the office of the county clerk specifying certain facts in order to obtain a judgment lien on certain property of the taxpayer; (3) filing a certificate of delinquency for record in the county recorder’s office, in order to obtain a lien on certain property of the taxpayer; and (4) seizure and sale of personal property, improvements or possessory interests belonging or assessed to the assessee. The exclusive means of enforcing the payment of delinquent taxes in respect of property on the secured roll is the sale of the property securing the taxes for the amount of taxes which are delinquent. Taxation of State-Assessed Utility Property The State Constitution provides that most classes of property owned or used by regulated utilities be assessed by the State Board of Equalization (“SBE”) and taxed locally. Property valued by the SBE as an operating unit in a primary function of the utility taxpayer is known as “unitary property,” a concept designed to permit assessment of the utility as a going concern rather than assessment of each individual element of real and personal property owned by the utility taxpayer. State-assessed unitary and “operating nonunitary” property (which excludes nonunitary property of regulated railways) is allocated to the counties based on the situs of the various components of the unitary property. Except for unitary property of regulated railways and certain other excepted property, all unitary and operating nonunitary property is taxed at special County-wide rates and tax proceeds are distributed to taxing jurisdictions according to statutory formulae generally based on the distribution of taxes in the prior year. Assessed Valuation Assessed Valuation. The assessed valuation of property in the City is established by the County Assessor, except for public utility property which is assessed by the SBE. Assessed valuations are reported at 100% of the “full value” of the property, as defined in Article XIIIA of the California Constitution. Certain classes of property, such as churches, colleges, not-for-profit hospitals and charitable institutions, are exempt from property taxation and do not appear on the tax rolls. No reimbursement is made by the State for such exemptions. Property taxes allocated to the City are collected by the County at the same time and on the same tax rolls as are county and special district taxes. The valuation of secured -16- property by the County Assessor is established as of January 1 and is subsequently equalized in September of each year. Future assessed valuation growth allowed under Article XIIIA of the State Constitution (new construction, certain changes of ownership, 2% inflation) will be allocated on the basis of “situs” among the jurisdictions that serve the tax rate area within which the growth occurs. Local agencies will share the growth of “base” revenues from the tax rate area. Each year’s growth allocation becomes part of each agency’s allocation in the following year. Assessed Valuation History. The table below shows the assessed valuation of taxable property in the City for the most recent fiscal years. TABLE 1 CITY OF PALO ALTO HISTORIC ASSESSED VALUATIONS Total Assessed % Fiscal Year Local Secured Utility Unsecured Valuation Change 2011-12 $20,967,297,668 $2,572,716 $1,516,837,280 $22,486,707,664 n/a 2012-13 22,334,464,145 2,572,716 1,355,969,707 23,693,006,568 5.36% 2013-14 24,039,563,713 2,572,716 1,493,921,967 25,536,058,396 7.78 2014-15 25,572,917,948 2,572,716 1,622,636,368 27,198,127,032 6.51 2015-16 27,618,260,149 2,572,716 1,794,920,762 29,415,753,627 8.15 2016-17 30,148,340,720 2,572,716 1,803,467,979 31,954,381,415 8.63 2017-18 32,509,995,986 2,572,716 1,922,170,300 34,434,739,002 7.76 2018-19 34,891,627,511 7,004,400 1,902,781,228 36,801,413,139 6.87 2019-20 37,331,775,663 7,004,400 1,946,679,944 39,285,460,007 6.75 2020-21 40,152,306,303 7,004,400 2,194,615,259 42,353,925,962 7.81 2021-22 41,743,865,568 7,004,400 2,232,482,077 43,983,352,045 3.85 Source: California Municipal Statistics, Inc. Assessments may be adjusted during the course of the year when real property changes ownership or new construction is completed. Assessments may also be appealed by taxpayers seeking a reduction as a result of economic and other factors beyond the City’s control, such as a general market decline in property values, reclassification of property to a class exempt from taxation, whether by ownership or use (such as exemptions for property owned by State and local agencies and property used for qualified educational, hospital, charitable or religious purposes), or the complete or partial destruction of taxable property caused by natural or manmade disaster, such as earthquake, flood, fire, toxic dumping, etc. When necessitated by changes in assessed value in the course of a year, taxes are pro-rated for each portion of the tax year. Appeals of Assessed Valuation; Blanket Reductions of Assessed Values. There are two basic types of property tax assessment appeals provided for under State law. The first type of appeal, commonly referred to as a base year assessment appeal, involves a dispute on the valuation assigned by the assessor immediately subsequent to an instance of a change in ownership or completion of new construction. If the base year value assigned by the assessor is reduced, the valuation of the property cannot increase in subsequent years more than 2% annually unless and until another change in ownership and/or additional new construction activity occurs. -17- The second type of appeal, commonly referred to as a Proposition 8 appeal (which Proposition 8 was approved by the voters in 1978), can result if factors occur causing a decline in the market value of the property to a level below the property’s then current taxable value (escalated base year value). Pursuant to State law, a property owner may apply for a Proposition 8 reduction of the property tax assessment for such owner’s property by filing a written application, in the form prescribed by the SBE, with the appropriate county board of equalization or assessment appeals board. A property owner desiring a Proposition 8 reduction of the assessed value of such owner’s property in any one year must apply to the county assessment appeals board (the “Appeals Board”). Following a review of the application by the county assessor’s office, the county assessor may offer to the property owner the opportunity to stipulate to a reduced assessment or may confirm the assessment. If no stipulation is agreed to, and the applicant elects to pursue the appeal, the matter is brought before the Appeals Board (or, in some cases, a hearing examiner) for a hearing and decision. The Appeals Board generally is required to determine the outcome of appeals within two years of each appeal’s filing date. Any reduction in the assessment ultimately granted applies only to the year for which application is made and during which the written application is filed. The assessed value increases to its pre-reduction level (escalated to the inflation rate of no more than 2%) following the year for which the reduction application is filed. However, the county assessor has the power to grant a reduction not only for the year for which application was originally made, but also for the then current year and any intervening years as well. In practice, such a reduced assessment may and often does remain in effect beyond the year in which it is granted. In addition to the above-described taxpayer appeals, county assessors may independently reduce assessed valuations based on changes in the market value of property, or for other factors such as the complete or partial destruction of taxable property caused by natural or man-made disasters such as earthquakes, floods, fire, drought or toxic contamination pursuant to relevant provisions of the State Constitution. In addition, Article XIIIA of the State Constitution provides that the full cash value base of real property used in determining taxable value may be adjusted from year to year to reflect the inflationary rate, not to exceed a 2% increase for any given year or may be reduced to reflect a reduction in the consumer price index or comparable local data. This measure is computed on a calendar year basis. The City typically experiences increases in assessment appeals activity during economic downturns and decreases in assessment appeals as the economy rebounds. Risk of Decline in Property Values; Fire; Earthquake Risk. Property values could be reduced by factors beyond the City’s control, including fire, earthquake and a depressed real estate market due to general economic conditions in the County, the region and the State. Other possible causes for a reduction in assessed values include the complete or partial destruction of taxable property caused by other natural or manmade disasters, such as flood, fire, drought, toxic dumping, acts of terrorism, etc., or reclassification of property to a class exempt from taxation, whether by ownership or use (such as exemptions for property owned by State and local agencies and property used for qualified educational, hospital, charitable or religious purposes). No assurance can be given that property tax appeals and/or blanket reductions of assessed property values will not significantly reduce the assessed valuation of property within the City in the future. For additional discussion, see “CERTAIN RISK FACTORS.” -18- Assessed Valuation by Land Use. The following table gives a distribution of taxable real property located in the City by principal purpose for which the land is used, and the assessed valuation and number of parcels for each use. TABLE 2 CITY OF PALO ALTO ASSESSED VALUATION AND PARCELS BY LAND USE FY2021-22 Assessed % of No. of % of Valuation (1) Total Parcels Total Non-Residential: Agricultural/Forest $ 38,144,744 0.09% 49 .23% Commercial 2,311,401,779 5.54 460 2.19 Professional/Office 6,546,290,199 15.68 562 2.68 Industrial/Research & Development 2,339,223,961 5.60 230 1.10 Recreational 68,559,232 0.16 14 .07 Government/Social/Institutional 40,361,772 0.10 119 .57 Miscellaneous 8,441,040 0.02 19 .09 Subtotal Non-Residential 11,352,422,727 27.20 1,453 6.93 Residential: Single Family Residence 24,897,037,849 59.64 15,188 72.40 Condominium/Townhouse 2,900,176,661 6.95 3,156 15.05 Mobile Home 120,444 0.00 8 .04 2-4 Residential Units 603,513,001 1.45 497 2.37 5+ Residential Units/Apartments 1,773,572,738 4.25 346 1.65 Subtotal Residential 30,174,420,693 72.28 19,195 91.50 Vacant Parcels 217,022,148 0.52 329 1.57 Total $41,743,865,568 100.00% 20,9727 100.00% Source: California Municipal Statistics, Inc. (1) Total secured assessed valuation, excluding tax-exempt property. -19- Assessed Valuation of Single-Family Homes. The following table focuses on single-family residential properties only, which comprise approximately 72.4% of the assessed value of taxable property in the City. TABLE 3 CITY OF PALO ALTO PER PARCEL - ASSESSED VALUATION OF SINGLE-FAMILY HOMES Average Median No. of FY2021-22 Assessed Assessed Parcels Assessed Valuation Valuation Valuation Single Family Residential 15,115 $ 24,897,037,849 $ 1,647,174 $ 1,166,660 FY2021-22 No. of % of Cumulative Total % of Cumulative Assessed Valuation Parcels(1) Total % of Total Valuation Total % of Total $0 - $199,999 2,271 15.025% 15.025% $ 276,277,479 1.110% 1.110% $200,000 - $399,999 1,336 8.839 23.864 394,435,821 1.584 2.694 $400,000 - $599,999 1,096 7.251 31.115 550,350,000 2.211 4.904 $600,000 - $799,999 1,102 7.291 38.406 767,133,798 3.081 7.986 $800,000 - $999,999 935 6.186 44.591 843,257,652 3.387 11.373 $1,000,000 - $1,199,999 981 6.490 51.082 1,075,650,158 4.320 15.693 $1,200,000 - $1,399,999 767 5.074 56.156 992,045,086 3.985 19.678 $1,400,000 - $1,599,999 752 4.975 61.131 1,124,935,157 4.518 24.196 $1,600,000 - $1,799,999 696 4.605 65.736 1,182,734,029 4.751 28.946 $1,800,000 - $1,999,999 574 3.798 69.534 1,090,034,969 4.378 33.325 $2,000,000 - $2,199,999 509 3.368 72.901 1,065,876,882 4.281 37.606 $2,200,000 - $2,399,999 459 3.037 75.938 1,054,350,224 4.235 41.841 $2,400,000 - $2,599,999 472 3.123 79.061 1,177,587,290 4.730 46.570 $2,600,000 - $2,799,999 476 3.149 82.210 1,284,583,642 5.160 51.730 $2,800,000 - $2,999,999 380 2.514 84.724 1,101,428,927 4.424 56.154 $3,000,000 - $3,199,999 341 2.256 86.980 1,054,947,701 4.237 60.391 $3,200,000 - $3,399,999 284 1.879 88.859 936,318,727 3.761 64.152 $3,400,000 - $3,599,999 211 1.396 90.255 737,732,583 2.963 67.115 $3,600,000 - $3,799,999 188 1.244 91.499 694,817,993 2.791 69.906 $3,800,000 - $3,999,999 168 1.111 92.610 654,847,649 2.630 72.536 $4,000,000 and greater 1,117 7.390 100.000 6,837,692,082 27.464 100.000 Total 15,115 100.000% $24,897,037,849 100.000% Source: California Municipal Statistics, Inc. (1) Improved single-family residential parcels. Excludes condominiums and parcels with multiple family units. Principal Taxpayers. In general, the more property (by assessed value) owned by any single assessee, the more exposure property tax collections have to weakness in that taxpayer’s financial situation and ability or that taxpayer’s willingness to pay property taxes. Based on Fiscal Year 2021-22 locally assessed taxable valuations, the top twenty taxable property owners in the City represent approximately 21.0% of the total Fiscal Year 2021-22 taxable value. -20- The following table shows the 20 largest owners of taxable property in the City as determined by secured assessed valuation in Fiscal Year 2021-22. TABLE 4 CITY OF PALO ALTO LARGEST LOCAL SECURED PROPERTY TAXPAYERS FY2021-22 Assessed % of Property Owner Primary Land Use Valuation Total(1) 1. Board of Trustees Leland Stanford Jr. University Various Land Uses $6,650,707,376(2) 15.93% 2. Google Inc. Industrial/Office 324,307,837 0.78 3. ARE-San Francisco 80 LLC Industrial 294,014,758 0.70 4. ARE-San Francisco 69 LLC Office Building 142,960,280 0.34 5. 395 Page Mill LLC Office Building 124,357,864 0.30 6. SVF Sherman Palo Alto Corporation Office Building 120,500,000 0.29 7. Hohbach Realty Co. LP Apartments 111,535,894 0.27 8. KRE El Camino Real Owner LLC Office Building 103,600,000 0.25 9. PA Hotel Holdings LLC Hotel 92,275,077 0.22 10. 530 Lytton Owner LLC Office Building 91,500,000 0.22 11. Palo Alto Tech Center LLC Office Building 86,018,514 0.21 12. Gwin Property Inc. Office Building 82,559,560 0.20 13. SI 45 LLC Office Building 80,735,316 0.19 14. BVK Hamilton Ave. LLC Office Building 76,934,719 0.18 15. M10 Dev LLC Hotel 70,455,423 0.17 16. Ronald & Ann Williams Shopping Center 69,600,610 0.17 17. GPCA Owner LLC Apartments 68,429,235 0.16 18. PPC Forest Towers LLC Apartments 62,839,402 0.15 19. 130 Lytton Owner LLC Office Building 60,022,946 0.14 20. 2747 Park PA LLC Office Building 57,675,001 0.14 Total Top 20 $8,771,029,812 21.01% Source: California Municipal Statistics, Inc. (1) FY2021-22 Local Secured Assessed Valuation: $41,743,865,568. (2) Net taxable value. Tax Levies and Delinquencies. Beginning in 1978-79, Article XIIIA and its implementing legislation shifted the function of property taxation primarily to the counties, except for levies to support prior-voted debt, and prescribed how levies on county-wide property values are to be shared with local taxing entities within each county. -21- The following table sets forth the secured tax charges and delinquencies for the most recent fiscal years. TABLE 5 CITY OF PALO ALTO SECURED TAX CHARGES AND DELINQUENCIES Fiscal Secured Amt. Del. % Del. Year Tax Charge (1) June 30 June 30 2010-11 $3,443,434.30 $29,254.95 0.85% 2011-12 3,208,610.90 21,029.74 0.66 2012-13 Not available 2013-14 4,304,606.92 33,648.91 0.78 2014-15 4,122,948.88 44,016.83 1.07 2015-16 4,112,476.21 67,220.43 1.63 2016-17 3,895,321.53 47,443.37 1.22 2017-18 3,806,759.16 11,434.14 0.30 2018-19 3,844,666.46 26,401.65 0.69 2019-20 3,972,942.77 15,960.60 0.40 2020-21 3,813,649.97 28,528.14 0.75 Source: California Municipal Statistics, Inc. (1) 1% General Fund apportionment Teeter Plan. The Board of Supervisors of the County has approved the implementation of the Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (the “Teeter Plan”), as provided for in section 4701 et seq. of the California Revenue and Taxation Code. The Teeter Plan guarantees distribution of 100% of the general taxes levied to the taxing entities within the County, with the County retaining all penalties and interest penalties affixed upon delinquent properties and redemptions of subsequent collections. Under the Teeter Plan, the County apportions secured property taxes on a cash basis to local political subdivisions, including the City, for which the County acts as the tax- levying or tax-collecting agency. At the conclusion of each fiscal year, the County distributes 100% of any taxes delinquent as of June 30th to the respective taxing entities. The County cash position is protected by a special fund, known as the “Tax Loss Reserve Fund,” which accumulates moneys from interest and penalty collections. In each fiscal year, the Tax Loss Reserve Fund is required to be funded to the amount of delinquent taxes plus one percent of that year’s tax levy. Amounts exceeding the amount required to be maintained in the tax loss reserve fund may be credited to the County’s general fund. Amounts required to be maintained in the tax loss reserve fund may be drawn on to the extent of the amount of uncollected taxes credited to each agency in advance of receipt. The Teeter Plan is to remain in effect unless the County Board orders its discontinuance or unless, prior to the commencement of any fiscal year of the County (which commences on July 1), the County Board receives a petition for its discontinuance joined in by resolutions adopted by at least two-thirds of the participating revenue districts in the County, in which event the County Board is to order discontinuance of the Teeter Plan effective at the commencement of the subsequent fiscal year. The County Board may also, after holding a public hearing on the matter, discontinue the Teeter Plan with respect to any tax levying agency or assessment levying agency in the County if the rate of secured tax delinquency in that agency in any year exceeds 3% of the total of all taxes and assessments levied on the secured roll in that agency. If the Teeter Plan is discontinued subsequent to its implementation, only those secured property taxes actually -22- collected would be allocated to political subdivisions (including the City) for which the County acts as the tax-levying or tax-collecting agency, but penalties and interest would be credited to the political subdivisions. The City is not aware of any petitions for the discontinuance of the Teeter Plan in the County. Direct and Overlapping Debt. Set forth below is a direct and overlapping debt report (the “Debt Report”) prepared by California Municipal Statistics, Inc. and effective March 1, 2022. The Debt Report is included for general information purposes only. The City has not reviewed the Debt Report for completeness or accuracy and makes no representation in connection therewith. The Debt Report generally includes long-term obligations sold in the public credit markets by public agencies whose boundaries overlap the boundaries of the City in whole or in part. Such long-term obligations generally are not payable from revenues of the City (except as indicated) nor are they necessarily obligations secured by land within the City. In many cases, long-term obligations issued by a public agency are payable only from the general fund or other revenues of such public agency. The contents of the Debt Report are as follows: (1) the first column indicates the public agencies which have outstanding debt as of the date of the Debt Report and whose territory overlaps the City; (2) the second column shows the percentage that the City’s assessed valuation represents of the total assessed valuation of each public agency identified in the first column; and (3) the third column is an apportionment of the dollar amount of each public agency’s outstanding debt to property in the City, as determined by multiplying the total outstanding debt of each agency by the percentage of the City’s assessed valuation represented in the second column. -23- TABLE 6 CITY OF PALO ALTO STATEMENT OF DIRECT AND OVERLAPPING BONDED DEBT (as of March 1, 2022) CITY OF PALO ALTO 2021-22 Assessed Valuation: $43,983,352,045 DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt 3/1/22 Santa Clara County 7.632% $ 87,497,827 Foothill-De Anza Community College District 21.622 142,246,451 Palo Alto Unified School District 90.013 188,315,935 Fremont Union High School District .009 52,449 Los Gatos-Saratoga Joint Union High School District .013 10,924 Mountain View-Los Altos Union High School District .827 1,579,629 Cupertino Union School District .016 43,483 Los Altos School District 1.114 1,623,711 Mountain View-Whisman School District .587 1,591,915 Saratoga Union School District .029 5,001 Whisman School District 1.478 86,245 City of Palo Alto 100.000 55,135,000 (1) El Camino Hospital District .070 77,868 Midepninsula Regional Open Space District 12.443 10,523,667 City of Palo Alto Special Assessment Bonds 100.000 16,315,000 Santa Clara Valley Water District Benefit Assessment District 7.632 3,674,808 TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT 508,779,913 DIRECT AND OVERLAPPING GENERAL FUND DEBT: Santa Clara County General Fund Obligations 7.632% 95,102,304 Santa Clara County Pension Obligation Bonds 7.632 25,615,928 Santa Clara County Board of Education Certificates of Participation 7.632 203,774 Foothill-DeAnza Community College District Certificates of Participation 21.622 4,775,219 Los Gatos-Saratoga Joint Union High School District Certificates of Participation .013 145 Mountain View-Los Altos Union High School District Certificates of Participation .827 17,818 Los Altos School District Certificates of Participation 1.114 19,702 Saratoga Union School District Certificates of Participation .029 677 City of Palo Alto General Fund Obligations 100.000 145,605,000 Santa Clara County Vector Control District Certificates of Participation 7.632 134,705 Midpeninsula Regional Open Space Park District General Fund Obligations 12.443 12,406,368 TOTAL GROSS DIRECT AND OVERLAPPING GENERAL FUND DEBT 283,881,640 Less: Santa Clara County supported obligations 1,379,771 TOTAL NET DIRECT AND OVERLAPPING GENERAL FUND DEBT 282,501,869 GROSS COMBINED TOTAL DEBT 792,661,553 (2) NET COMBINED TOTAL DEBT 791,281,782 Ratios to 2021-22 Assessed Valuation: Direct Debt ($55,135,000) ................................................... 0.13% Direct and Overlapping Tax and Assessment Debt .......................... 1.16% Total Direct Debt ($200,740,000) ......................................... 0.46% Gross Combined Total Debt ............................................................. 1.80% Net Combined Total Debt ................................................................ 1.80% Source: California Municipal Statistics, Inc. (1) Excludes issue to be sold. (2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and non-bonded capital lease obligations. -24- Bonding Capacity The City may issue bonds in an amount up to 2.50% of the assessed valuation of taxable property within its boundaries. Based on the fiscal year 2021-22 assessment roll, the City’s gross bonding capacity is approximately $109,958,380, and its net bonding capacity is $54,823,380 (taking into account current outstanding debt including the Prior Bonds). Refunding bonds may be issued without regard to this limitation; however, once issued, the outstanding principal of any refunding bonds is included when calculating the City’s bonding capacity. CERTAIN RISK FACTORS The following information should be considered by prospective investors in evaluating the 2022 Bonds. However, the following does not purport to be an exhaustive listing of risks and other considerations which may be relevant to investing in the 2022 Bonds. In addition, the order in which the following information is presented is not intended to reflect the relative importance of any such risks. The 2022 Bonds are payable from and secured by a voter-approved property tax levy on all taxable property within the City. The City is not obligated to pay the debt service on the 2022 Bonds from any other sources. This official statement, including Appendix B hereto, provides information on the City’s overall operations and financings with an emphasis on its General Fund and therefore includes information on revenues and funds that are not pledged to the 2022 Bonds and should not be considered available to pay debt service on the 2022 Bonds. Risks to Assessed Values Generally Natural and economic forces can affect the assessed value of taxable property in the City. The City is located in a seismically active region, and damage from an earthquake in or near the City could cause moderate to extensive or total damage to taxable property. Other natural or man-made disasters, such as flood and sea level rise, fire, the presence of hazardous materials, acts of terrorism or public health emergencies could also cause a reduction in the assessed value of taxable property within the City. Economic and market forces, such as a downturn in the local economy can also affect assessed values. For additional discussion, see “Natural Calamities,” “Limitations on Development,” and “Risk of Changing Economic Conditions” below. Natural Calamities General. From time to time, the City has been and could be subject to natural calamities, including, but not limited to, earthquake, flood or wildfire, that may adversely affect economic activity in the City, and which could have a negative impact on the City’s finances and on the taxable assessed values of property located within the City. Seismic. Like most regions in California, the City is located in an area of significant seismic activity. There are numerous earthquake faults near the City, including particularly the San Andreas and Hayward faults. The San Andreas fault runs along the Marin and Sonoma Coast through the Santa Cruz Mountains. The Hayward fault covers the hills on the east side of the San Francisco Bay and into San Pablo Bay, directly north and east of the City. Both can cause damaging earthquakes. Numerous other faults can produce damaging earthquakes similar in magnitude to the 1989 Loma Prieta earthquake. Soils in lowland areas away from major faults may also be unable to support buildings during major earthquakes. Landslides are likely -25- on hillsides during major earthquakes. Coastal areas are also at risk of tsunamis, generated from earthquakes on local faults or across the Pacific. If there were to be an occurrence of severe seismic activity in the City, the damage resulting from such an event could have a material adverse effect on the City’s financial condition and on the valuation of taxable property located within the City. Drought. The State is currently experiencing drought conditions. The Governor of the State has issued targeted emergency drought proclamations to nearly all counties across the State, including the County. The emergency drought proclamations allow for the set-aside of certain state regulatory requirements until the subsistence of drought conditions. The City and the County are presently experiencing drought conditions and are likely to continue to be effected by drought conditions in the future. Lasting drought conditions could have a material negative effect on the value of taxable property within the City. Wildfire. In recent years, wildfires have caused extensive damage to cities throughout the State. In some instances, entire neighborhoods have been destroyed. Areas effected by wildfires may be more prone to flooding and mudslides. In addition to the direct impact of wildfires on health and safety and property damage, the smoke from wildfires has negatively impacted the quality of life in the City and may have short- term and future impacts on residential and commercial activity in the City. Recent wildfires in the State have been driven in large measure by drought conditions and low humidity. Experts expect that California will continue to be subject to wildfire conditions as a result in changing weather patterns due to climate change. While the City is not in a wildfire severity zone and the City believes the possibility of wildfire damage to taxable property within the City is low, there can be no assurances that wildfires will not occur within the City or the region or that the City will not be negatively impacted by sustained smoky conditions caused by wildfires. Damage resulting from such an event could have a material adverse effect on the City’s financial condition and on the value of taxable property within the City. Climate Change/Sea Level Rise. Climate change caused by human activities may have adverse effects on the City and its finances. Climate change can also result in more variable weather patterns throughout the State, rising bay water levels, increased risk of flooding, changes in salinity and tidal patterns of San Francisco Bay, coastal erosion, drought, water restrictions and vegetation changes. Portions of the City are located adjacent to the San Francisco Bay and may be negatively impacted by these and other results of climate change. The City considers the potential effects of climate change in its planning. The State of California anticipates that relative sea level rise projections stemming from greenhouse gas emissions and related climate change pose significant economic, environmental and social risks to communities along the San Francisco Bay Shoreline, including the City. Research shows that these projections may worsen if greenhouse gas emission trajectories continue unabated. Greenhouse gases and thermal expansion are the primary cause of Antarctic and Greenland ice melt which in turn are the primary source of sea level rise globally and in San Francisco Bay. San Francisco Bay sea level rise projections range between 1-3’ in 2050, and 3.4’ to more than 10’ in 2100. To prepare for rising tides in the years ahead, the City Council of the City adopted a Sea Level Rise Adaptation Policy in March, 2019 which bridges the high-altitude general policy statements in various City -26- plans (such as the Comprehensive Plan and sea level rise components of the Sustainability and Climate Action Plan) to an eventual nuts-and-bolt Sea Level Rise Adaptation Plan and timeline which staff aims to complete in 2022. When complete, the City’s Sea Level Rise Vulnerability Assessment will be available on the City’s website at https://www.cityofpaloalto.org/Departments/Public-Works/Watershed- Protection/Sea-Level-Rise. Such website is not incorporated herein by this reference. Sustainability and Climate Action Plan. The City recognizes that the best way to avoid long-term impacts from the worst Sea Level Rise predictions and to minimize adaption response costs is to reduce greenhouse gas (“GHG”) contributions locally and to support regional, state and national initiatives that reduce GHGs. In early 2020, the City launched an update to the Sustainability and Climate Action Plan (“S/CAP”) to develop the strategies needed to meet its sustainability goals, including our goal of reducing GHG emissions 80 percent below 1990 levels by 2030 (the “80 x 30” goal). More generally, the City’s S/CAP aims to reduce the City and community’s greenhouse gas emissions to meet climate protection goals while considering the broader issues of sustainability, such as land use and natural resources. The City’s S/CAP can be found on the City’s website at https://www.cityofpaloalto.org/City- Hall/Sustainability/SCAP. Such website is not incorporated herein by this reference. Risk of Changing Economic Conditions While the City has historically enjoyed strong economic and financial performance, the City faces several long-term financial challenges including climate change and sea level rise, changes to the economy of the region and the nation, and the management of pension and post-employment retirement obligations. While the City has adopted measures and policies to better position its operating budgets for future risks and future economic downturns, such measures may not be sufficient. Property values could be reduced by factors beyond the City’s control, including a depressed real estate market due to general economic conditions in the County, the region, and the State. The general economy of the City is also subject to the types of risks generally associated with all urban real estate markets. Real estate prices may be adversely affected by changes in general economic conditions, fluctuations in the real estate market and interest rates, unexpected increases in home improvement costs and by other similar factors. In addition, if there is a significant decline in the general economy of the City, the owners of property within the City may be less able or less willing to make timely payments of property taxes or may petition for reduced assessed valuation causing a delay or interruption in the receipt of property tax revenues by the City. Public Health Emergencies The COVID-19 Pandemic is ongoing, and its duration and severity and economic effects are uncertain in many respects and difficult to forecast. The ultimate impacts of the COVID-19 Pandemic on the City’s operations and financings and on the local economy, real estate market and development within the City is not fully known, and it may be some time before the full adverse impact of the COVID-19 Pandemic is known. Further, there could be future outbreaks of other COVID-19 variants or other public health emergencies that could have material adverse effects on the City’s operations and finances. Bankruptcy Risks In bankruptcy, the voluntary application of pledged special revenues to indebtedness secured by such revenues is not subject to the automatic stay. A recent decision by the United States Court of Appeals -27- for the First Circuit in a case involving revenue bonds of the Puerto Rico Highways & Transportation Authority, however, concludes that an action by bondholders to compel the application of pledged special revenues is not exempt from the automatic stay. See “LEGAL MATTERS” below. Cybersecurity Risks The City and the County may each face various cyber security threats, including, but not limited to, hacking, viruses, malware, ransomware and other attacks on their computers and their networks. No assurance can be given that the City’s or County’s efforts to manage cyber threats and attacks will be successful in all cases, or that any such attack will not materially impact the operations or finances of the City or the County. The City owns and operates its own enterprise class data network serving the municipal city government and its operations. The City has retained information technology professionals to support, maintain and protect these operations locally in a purpose-built and physically secure environment. This network and its operations are governed by and in compliance with all applicable governmental regulations as well as the City’s own administrative regulations. Within the City’s operations and guidance is an active cyber-security program designed to protect from, and to quickly identify and mitigate, a multitude of complex security threats. While no network is completely immune from all possible compromise, the City exercises its due diligence in protecting the data it possesses and the systems it operates. To date, there have been no significant cyber-attacks on the City’s computers and technologies. The City is reliant on the County in connection with the administration of the 2022 Bonds, including without limitation the County’s tax collectors for the levy and collection of ad valorem taxes, and the Paying Agent. No assurance can be given that the City, the County, and these other entities will not be adversely affected by cyber threats and attacks in a manner that may affect owners of the 2022 Bonds. CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING CITY REVENUES AND APPROPRIATIONS Principal of and interest on the 2022 Bonds are payable from the proceeds of an ad valorem tax levied by the County, as directed by the City, for the payment thereof. See “THE REFUNDING BONDS” and “SECURITY FOR THE REFUNDING BONDS” above. Articles XIIIA, XIIIB, XIIIC and XIIID of the State Constitution, Propositions 62, 111, and 218 and 1A, and certain other provisions of law discussed below are included in this section to describe the potential effect of these Constitutional and statutory measures on the ability of the County to levy, and the City to spend, tax proceeds for operating and other purposes, and it should not be inferred from the inclusion of such materials that these laws impose any limitation on the ability of the County to levy taxes for payment of the 2022 Bonds. The tax levied by the County, as directed by the City, for payment of the 2022 Bonds was approved by the City’s voters in compliance with Article XIIIA and all applicable laws. Article XIIIA of the State Constitution On June 6, 1978, California voters approved Proposition 13, which added Article XIIIA to the State Constitution. Article XIIIA, as amended, limits the amount of any ad valorem tax on real property to one percent of the full cash value thereof, except that additional ad valorem taxes may be levied to pay -28- debt service (i) on indebtedness approved by the voters prior to July 1, 1978, (ii) on bonded indebtedness approved by a two-thirds vote on or after July 1, 1978, for the acquisition or improvement of real property or (iii) bonded indebtedness incurred by a school district, community college district or county office of education for the construction, reconstruction, rehabilitation or replacement of school facilities, including the furnishing and equipping of school facilities or the acquisition or lease of real property for school facilities, approved by 55 percent of the voters voting on the proposition. Article XIIIA defines full cash value to mean “the county assessor’s valuation of real property as shown on the 1975-76 tax bill under ‘full cash value,’ or thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment.” This full cash value may be increased at a rate not to exceed two percent per year to account for inflation. Article XIIIA has subsequently been amended to permit reduction of the “full cash value” base in the event of declining property values caused by damage, destruction or other factors, to provide that there would be no increase in the “full cash value” base in the event of reconstruction of property damaged or destroyed in a disaster, and in other minor or technical ways. Legislation Implementing Article XIIIA Legislation has been enacted and amended a number of times since 1978 to implement Article XIIIA. Under current law, local agencies are no longer permitted to levy directly any property tax (except to pay voter-approved indebtedness). The one percent property tax is automatically levied by the County and distributed according to a formula among taxing agencies. The formula apportions the tax roughly in proportion to the relative shares of taxes levied prior to 1989. Increases of assessed valuation resulting from reappraisals of property due to new construction, change in ownership or from the two percent annual adjustment are allocated among the various jurisdictions in the “taxing area” based upon their respective “situs.” Any such allocation made to a local agency continues as part of its allocation in future years. All taxable property is shown at full market value on the tax rolls. Consequently, the tax rate is expressed as $1 per $100 of taxable value. All taxable property value included in this Official Statement is shown at 100 percent of market value (unless noted differently) and all tax rates reflect the $1 per $100 of taxable value. -29- Article XIIIB of the State Constitution In addition to the limits Article XIIIA imposes on property taxes that may be collected by local governments, certain other revenues of the State and most local governments are subject to an annual “appropriations limit” imposed by Article XIIIB which effectively limits the amount of such revenues those entities are permitted to spend. Article XIIIB, approved by the voters in June 1979, was modified substantially by Proposition 111 in 1990. The appropriations limit of each government entity applies to “proceeds of taxes,” which consist of tax revenues, State subventions and certain other funds, including proceeds from regulatory licenses, user charges or other fees to the extent that such proceeds exceed “the cost reasonably borne by such entity in providing the regulation, product or service.” “Proceeds of taxes” excludes tax refunds and some benefit payments such as unemployment insurance. No limit is imposed on the appropriation of funds which are not “proceeds of taxes,” such as reasonable user charges or fees, and certain other non-tax funds. Article XIIIB also does not limit appropriation of local revenues to pay debt service on Bonds existing or authorized by January 1, 1979, or subsequently authorized by the voters, appropriations required to comply with mandates of courts or the federal government, appropriations for qualified capital outlay projects, and appropriation by the State of revenues derived from any increase in gasoline taxes and motor vehicle weight fees above January 1, 1990, levels. The appropriations limit may also be exceeded in case of emergency; however, the appropriations limit for the next three years following such emergency appropriation must be reduced to the extent by which it was exceeded, unless the emergency arises from civil disturbance or natural disaster declared by the Governor, and the expenditure is approved by two-thirds of the legislative body of the local government. The State and each local government entity has its own appropriations limit. Each year, the limit is adjusted to allow for changes, if any, in the cost of living, the population of the jurisdiction, and any transfer to or from another government entity of financial responsibility for providing services. Proposition 111 requires that each agency’s actual appropriations be tested against its limit every two years. If the aggregate “proceeds of taxes” for the preceding two-year period exceeds the aggregate limit, the excess must be returned to the agency’s taxpayers through tax rate or fee reductions over the following two years. The City has never exceeded its appropriations limit. Articles XIIIC and XIIID of the State Constitution General. On November 5, 1996, the voters of the State approved Proposition 218, known as the “Right to Vote on Taxes Act.” Proposition 218 adds Articles XIIIC and XIIID to the California Constitution and contains a number of interrelated provisions affecting the ability of the City to levy and collect both existing and future taxes, assessments, fees and charges. On November 2, 2010, California voters approved Proposition 26, entitled the “Supermajority Vote to Pass New Taxes and Fees Act.” Section 1 of Proposition 26 declares that Proposition 26 is intended to limit the ability of the State Legislature and local government to circumvent existing restrictions on increasing taxes by defining the new or expanded taxes as “fees.” Proposition 26 amended Articles XIIIA and XIIIC of the State Constitution. The amendments to Article XIIIA limit the ability of the State Legislature to impose higher taxes (as defined in Proposition 26) without a two-thirds vote of the Legislature. The amendments to Article XIIIC define “taxes” that are subject to voter approval as “any levy, charge, or exaction of any kind imposed by a local government,” with certain exceptions. -30- Taxes. Article XIIIC requires that all new local taxes be submitted to the electorate before they become effective. Taxes for general governmental purposes of the City (“general taxes”) require a majority vote; taxes for specific purposes (“special taxes”), even if deposited in the City’s General Fund, require a two-thirds vote. Property-Related Fees and Charges. Article XIIID also adds several provisions making it generally more difficult for local agencies to levy and maintain property-related fees, charges, and assessments for municipal services and programs. Reduction or Repeal of Taxes, Assessments, Fees and Charges. Article XIIIC also removes limitations on the initiative power in matters of reducing or repealing local taxes, assessments, fees or charges. No assurance can be given that the voters of the City will not, in the future, approve an initiative or initiatives which reduce or repeal local taxes, assessments, fees or charges currently comprising a substantial part of the City’s General Fund. If such repeal or reduction occurs, the City’s ability to pay debt service on the 2022 Bonds could be adversely affected. Burden of Proof. Article XIIIC provides that local government “bears the burden of proving by a preponderance of the evidence that a levy, charge, or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor’s burdens on, or benefits received from, the governmental activity.” Similarly, Article XIIID provides that in “any legal action contesting the validity of a fee or charge, the burden shall be on the agency to demonstrate compliance” with Article XIIID. Judicial Interpretation of Proposition 218. The interpretation and application of Articles XIIIC and XIIID will ultimately be determined by the courts, and it is not possible at this time to predict with certainty the outcome of such determination. Proposition 62 Proposition 62 was adopted by the voters at the November 4, 1986, general election and (a) requires that any new or higher taxes for general governmental purposes imposed by local governmental entities such as the City be approved by a two-thirds vote of the governmental entity’s legislative body and by a majority vote of the voters of the governmental entity voting in an election on the tax, (b) requires that any special tax (defined as taxes levied for other than general governmental purposes) imposed by a local governmental entity be approved by a two-thirds vote of the voters of the governmental entity voting in an election on the tax, (c) restricts the use of revenues from a special tax to the purposes or for the service for which the special tax was imposed, (d) prohibits the imposition of ad valorem taxes on real property by local governmental entities except as permitted by Article XIIIA, (e) prohibits the imposition of transaction taxes and sales taxes on the sale of real property by local governmental entities, and (f) requires that any tax imposed by a local governmental entity on or after August 1, 1985, be ratified by a majority vote of the voters voting in an election on the tax within two years of the adoption of the initiative or be terminated by November 15, 1988. California appellate court cases have overturned the provisions of Proposition 62 pertaining to the imposition of taxes for general government purposes. However, the California Supreme Court upheld Proposition 62 in its decision on August 28, 1995, in Fresno County Transportation Authority v. Guardino. This decision reaffirmed the constitutionality of Proposition 62. Certain matters regarding Proposition 62 -31- were not addressed in the Supreme Court’s decision, such as what remedies exist for taxpayers subject to a tax not in compliance with Proposition 62, and whether the decision applies to charter cities. The City has not experienced any substantive adverse financial impact as a result of the passage of this initiative. Proposition 1A; Proposition 22 Proposition 1A. Proposition 1A, proposed by the Legislature in connection with the State’s Fiscal Year 2004-05 Budget, approved by the voters in November 2004 and generally effective in Fiscal Year 2006- 07, provided that the State may not reduce any local sales tax rate, limit existing local government authority to levy a sales tax rate or change the allocation of local sales tax revenues, subject to certain exceptions. Proposition 1A generally prohibited the State from shifting to schools or community colleges any share of property tax revenues allocated to local governments for any Fiscal Year, as set forth under the laws in effect as of November 3, 2004. Any change in the allocation of property tax revenues among local governments within a county had to be approved by two-thirds of both houses of the Legislature. Proposition 22. Proposition 22, entitled “The Local Taxpayer, Public Safety and Transportation Protection Act,” was approved by the voters of the State in November 2010. Proposition 22 eliminates or reduces the State’s authority to (i) temporarily shift property taxes from cities, counties and special districts to schools, (ii) use vehicle license fee revenues to reimburse local governments for State-mandated costs (the State will have to use other revenues to reimburse local governments), (iii) redirect property tax increment from redevelopment agencies to any other local government, (iv) use State fuel tax revenues to pay debt service on State transportation bonds, or (v) borrow or change the distribution of State fuel tax revenues. Proposition 19 Proposition 19, entitled “Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment,” was approved by the voters of the State in November 2020. Proposition 19 amends Article XIIIA to: (i) expand special rules that give property tax savings to homeowners that are over the age of 55, severely disabled, or whose property has been impacted by wildfire or natural disaster, when they buy a different home; (ii) narrow existing special rules for inherited properties; and (iii) dedicate most of the potential new State revenue generated from Proposition 19 toward fire protection. The City cannot predict the impact that Proposition 19 might have on assessed values or property tax revenues in the City, or any other impacts on the local economy or the City’s financial condition. Possible Future Initiatives Articles XIIIA, XIIIB, XIIIC and XIIID and Propositions 62, 111, 218 and 1A were each adopted as measures that qualified for the ballot pursuant to the State’s initiative process. From time to time other initiative measures could be adopted, further affecting revenues of the City or the City’s ability to expend revenues. The nature and impact of these measures cannot be anticipated by the City. -32- LEGAL MATTERS Possible Limitations on Remedies; Bankruptcy General. Following is a discussion of certain considerations relating to potential bankruptcies of school districts in California. It is not an exhaustive discussion of the potential application of bankruptcy law to the City. State law contains a number of safeguards to protect the financial solvency of school districts. See “APPENDIX B—CITY FINANCIAL INFORMATION.” If the safeguards are not successful in preventing a school district from becoming insolvent, the State Superintendent of Public Instruction (the “State Superintendent”), operating through an administrator appointed by the State Superintendent, may be authorized under State law to file a petition under Chapter 9 of the United States Bankruptcy Code (the “Bankruptcy Code”) on behalf of a district for the adjustment of its debts, assuming that such district meets certain other requirements contained in the Bankruptcy Code necessary for filing such a petition. School districts under current State law are not themselves authorized to file a bankruptcy proceeding, and they are not subject to involuntary bankruptcy. Bankruptcy courts are courts of equity and as such have broad discretionary powers. If the City were to become the debtor in a proceeding under Chapter 9 of the Bankruptcy Code, the parties to the proceedings may be prohibited from taking any action to collect any amount from the City (including ad valorem tax revenues) or to enforce any obligation of the City, without the bankruptcy court’s permission. In such a proceeding, as part of its plan of adjustment in bankruptcy, the City may be able to alter the priority, interest rate, principal amount, payment terms, collateral, maturity dates, payment sources, covenants (including tax-related covenants), and other terms or provisions of the 2022 Bonds and other transaction documents related to the 2022 Bonds, if the bankruptcy court were to determine that the alterations were fair and equitable. In addition, in such a proceeding, as part of such a plan, the City may be able to eliminate the obligation of the County to raise taxes if necessary, to pay the 2022 Bonds. There also may be other possible effects of a bankruptcy of the City that could result in delays or reductions in payments on the 2022 Bonds. Moreover, regardless of any specific adverse determinations in any City bankruptcy proceeding, a City bankruptcy proceeding could have an adverse effect on the liquidity and market price of the 2022 Bonds. As stated above, if a school district were to go into bankruptcy, the bankruptcy petition would be filed under Chapter 9 of the Bankruptcy Code. Chapter 9 provides that it does not limit or impair the power of a state to control, by legislation or otherwise, a municipality of or in such state in the exercise of the political or governmental powers of such municipality, including expenditures for such exercise. For purposes of the language of Chapter 9, a school district is a municipality. State law provides that the ad valorem taxes levied to pay the principal and interest on the 2022 Bonds shall be used for the payment of principal and interest of the City’s general obligation bonds and for no other purpose. If this restriction on the expenditure of such ad valorem taxes is respected in a bankruptcy case, then the ad valorem tax revenue could not be used by the City for any purpose other than to make payments on the 2022 Bonds. It is possible, however, that a bankruptcy court could conclude that the restriction should not be respected. Statutory Lien. Pursuant to Senate Bill 222 (2015) (“SB 222”) that became effective on January 1, 2016, all general obligation bonds issued by local agencies in California, including the 2022 Bonds, will be secured by a statutory lien on all revenues received pursuant to the levy and collection of the tax. SB 222 provides that the lien will automatically arise, without the need for any action or authorization by the local agency or its governing board and will be valid and binding from the time the bonds are executed and delivered. Although a statutory lien would not be automatically terminated by the filing of a Chapter 9 -33- bankruptcy petition by the City, the automatic stay provisions of the Bankruptcy Code would apply and payments that become due and owing on the 2022 Bonds during the pendency of the Chapter 9 proceeding could be delayed unless the 2022 Bonds are determined to be secured by a pledge of “special revenues” within the meaning of the Bankruptcy Code and the pledged ad valorem taxes are applied to pay the 2022 Bonds in a manner consistent with the Bankruptcy Code. Special Revenues. If the ad valorem tax revenues that are pledged to the payment of the 2022 Bonds (see “THE 2022 BONDS – Security”) are determined to be “special revenues” within the meaning of the Bankruptcy Code, then the application in a manner consistent with the Bankruptcy Code of the pledged ad valorem revenues that are collected after the date of the bankruptcy filing should not be subject to the automatic stay. “Special revenues” are defined to include, among others, taxes specifically levied to finance one or more projects or systems of the debtor, but excluding receipts from general property, sales, or income taxes levied to finance the general purposes of the debtor. The City has specifically pledged the ad valorem taxes for payment of the 2022 Bonds. Additionally, the ad valorem taxes levied for payment of the 2022 Bonds are permitted under the State Constitution only where either (i) the applicable bond proposition is approved by 55% of the voters and such proposition contains a specific list of school facilities projects, or (ii) if the applicable bond proposition is approved by two-thirds of voters and such bonds must be issued for the acquisition or improvement of real property. Because State law prohibits the use of the tax proceeds for any purpose other than payment of the bonds and the bond proceeds can only be used to fund the acquisition or improvement of real property and other capital expenditures included in the proposition, such tax revenues appear to fit the definition of special revenues. However, there is no binding judicial precedent dealing with the treatment in bankruptcy proceedings of ad valorem tax revenues collected for the payments of bonds in California, so no assurance can be given that a bankruptcy court would not hold otherwise. In addition, even if the ad valorem tax revenues are determined to be “special revenues,” the Bankruptcy Code provides that special revenues can be applied to necessary operating expenses of the project or system, before they are applied to other obligations. This rule applies regardless of the provisions of the transaction documents. Thus, a bankruptcy court could determine that the City is entitled to use the ad valorem tax revenues to pay necessary operating expenses of the City and its schools, before the remaining revenues are paid to the owners of the 2022 Bonds. Possession of Tax Revenues; Remedies. If one or more of the County or the City go into bankruptcy and have possession of tax revenues (whether collected before or after commencement of the bankruptcy), and if the County or the City, as applicable, does not voluntarily pay such tax revenues to the owners of the 2022 Bonds, it is not clear what procedures the owners of the 2022 Bonds would take or how effective they would be in obtaining possession of such tax revenues. Opinion of Bond Counsel Qualified by Reference to Bankruptcy, Insolvency and Other Laws Relating to or Affecting Creditor’s Rights. The proposed form of opinion of Bond Counsel, attached hereto as Appendix E, is qualified by reference to bankruptcy, insolvency and other laws relating to or affecting creditor’s rights. Legal Opinions The proceedings in connection with the issuance of the 2022 Bonds are subject to the approval as to their legality of Jones Hall, A Professional Law Corporation, Bond Counsel for the City. Certain legal matters will also be passed upon for the City by Quint & Thimmig LLP, Larkspur, California, as Disclosure Counsel. The fees of Bond Counsel and Disclosure Counsel are contingent upon the issuance and delivery of the 2022 Bonds. -34- TAX MATTERS 2022A Bonds Federal Tax Status. In the opinion of Jones Hall, A Professional Law Corporation, San Francisco, California, Bond Counsel, subject, however to the qualifications set forth below, under existing law, the interest on the 2022A Bonds is excluded from gross income for federal income tax purposes and such interest is not an item of tax preference for purposes of the federal alternative minimum tax. The opinions set forth in the preceding paragraph are subject to the condition that the City comply with all requirements of the Internal Revenue Code of 1986, as amended (the “Tax Code”) that must be satisfied subsequent to the issuance of the 2022A Bonds in order that the interest thereon be, and continue to be, excludable from gross income for federal income tax purposes. The City has made certain representations and covenants in order to comply with each such requirement. Inaccuracy of those representations, or failure to comply with certain of those covenants, may cause the inclusion of such interest in gross income for federal income tax purposes, which may be retroactive to the date of issuance of the 2022A Bonds. Tax Treatment of Original Issue Discount and Premium. If the initial offering price to the public at which a Refunding Bond is sold is less than the amount payable at maturity thereof, then such difference constitutes “original issue discount” for purposes of federal income taxes and State of California personal income taxes. If the initial offering price to the public at which a Refunding Bond is sold is greater than the amount payable at maturity thereof, then such difference constitutes “bond premium” for purposes of federal income taxes and State of California personal income taxes. Under the Tax Code, original issue discount is treated as interest excluded from federal gross income and exempt from State of California personal income taxes to the extent properly allocable to each owner thereof subject to the limitations described in the first paragraph of this section. The original issue discount accrues over the term to maturity of the Refunding Bond on the basis of a constant interest rate compounded on each interest or principal payment date (with straight-line interpolations between compounding dates). The amount of original issue discount accruing during each period is added to the adjusted basis of such 2022A Bonds to determine taxable gain upon disposition (including sale, redemption, or payment on maturity) of such Refunding Bond. The Tax Code contains certain provisions relating to the accrual of original issue discount in the case of purchasers of the 2022A Bonds who purchase the 2022A Bonds after the initial offering of a substantial amount of such maturity. Owners of such 2022A Bonds should consult their own tax advisors with respect to the tax consequences of ownership of 2022A Bonds with original issue discount, including the treatment of purchasers who do not purchase in the original offering to the public at the first price at which a substantial amount of such 2022A Bonds is sold to the public. Under the Tax Code, bond premium is amortized on an annual basis over the term of the Refunding Bond (said term being the shorter of the Refunding Bond's maturity date or its call date). The amount of bond premium amortized each year reduces the adjusted basis of the owner of the Refunding Bond for purposes of determining taxable gain or loss upon disposition. The amount of bond premium on a Refunding Bond is amortized each year over the term to maturity of the Refunding Bond on the basis of a constant interest rate compounded on each interest or principal payment date (with straight-line interpolations -35- between compounding dates). Amortized bond premium is not deductible for federal income tax purposes. Owners of premium 2022A Bonds, including purchasers who do not purchase in the original offering, should consult their own tax advisors with respect to State of California personal income tax and federal income tax consequences of owning such 2022A Bonds. California Tax Status. In the further opinion of Bond Counsel, interest on the 2022A Bonds is exempt from California personal income taxes. The complete text of the final opinion that Bond Counsel expects to deliver upon the issuance of the 2022A Bonds is set forth in APPENDIX E—FORM OF OPINION OF BOND COUNSEL. 2022B Bonds Interest on the 2022B Bonds is not excludable from gross income of the owners thereof for federal income tax purposes. In the opinion of Bond Counsel, interest on the 2022B Bonds is exempt from California personal income taxes. The complete text of the final opinion that Bond Counsel expects to deliver upon the issuance of the 2022B Bonds is set forth in APPENDIX E—FORM OF OPINION OF BOND COUNSEL. Other Tax Considerations Current and future legislative proposals, if enacted into law, clarification of the Tax Code or court decisions may cause interest on the 2022A Bonds to be subject, directly or indirectly, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent beneficial owners from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such legislative proposals, clarification of the Tax Code or court decisions may also affect the market price for, or marketability of, the 2022A Bonds. It cannot be predicted whether or in what form any such proposal might be enacted or whether, if enacted, such legislation would apply to bonds issued prior to enactment. The opinions expressed by Bond Counsel are based upon existing legislation and regulations as interpreted by relevant judicial and regulatory authorities as of the date of such opinion, and Bond Counsel has expressed no opinion with respect to any proposed legislation or as to the tax treatment of interest on the 2022A Bonds, or as to the consequences of owning or receiving interest on the 2022A Bonds, as of any future date. Prospective purchasers of the 2022A Bonds should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel expresses no opinion. Owners of the 2022A Bonds should also be aware that the ownership or disposition of, or the accrual or receipt of interest on, the 2022A Bonds may have federal or state tax consequences other than as described above. Other than as expressly described above, Bond Counsel expresses no opinion regarding other federal or state tax consequences arising with respect to the 2022A Bonds, the ownership, sale or disposition of the 2022A Bonds, or the amount, accrual or receipt of interest on the 2022A Bonds. -36- MUNICIPAL ADVISOR PFM Financial Advisors LLC, San Francisco, California (“PFM”), is an independent financial advisory firm registered as a “Municipal Advisor” with the Securities Exchange Commission and Municipal Securities Rulemaking Board. PFM does not underwrite, trade or distribute municipal or other public securities. PFM has assisted the City in connection with the planning, structuring, sale and issuance of the 2022 Bonds. PFM is not obligated to undertake, and has not undertaken to make, an independent verification of or to assume responsibilities for the accuracy, completeness or fairness of the information contained in this Official Statement not provided by PFM. The fees of PFM in respect to the 2022 Bonds are contingent upon their sale and delivery. CONTINUING DISCLOSURE Pursuant to Rule 15c2-12 of the Securities and Exchange Commission (the “Rule”), the City has agreed, for the benefit of holders of the 2022 Bonds, to provide certain financial information and operating data relating to the City and the balances of funds relating to the 2022 Bonds, by not later than March 31 of each year commencing with the report for the 2021-22 fiscal year (the “Annual Information”), and to provide notices of the occurrence of certain enumerated events. The Annual Information and notices of enumerated events will be filed by the City with the Municipal Securities Rulemaking Board (the “MSRB”), via its Electronic Municipal Market Access (“EMMA”) system. The nature of the information to be provided in the Annual Information and the notices of material events is set forth in APPENDIX F— FORM OF CONTINUING DISCLOSURE CERTIFICATE. For fiscal year 2017-18 the City’s annual report was not properly associated on EMMA with all appropriate CUSIPs. Correcting EMMA filings have been made. Other than as noted, the City has made all required continuing disclosure filings required in the past five years. The City has established internal policies to ensure that all future required filings are made as required. Substantially all of the City’s required financial information and operating data is included in its Annual Comprehensive Financial Report (the “ACFR”) which is historically filed in advance of the required March 31 deadline. Any financial information and operating data not included in the Annual Comprehensive Financial Report is compiled by the City’s Treasury staff and its Assistant Administrative Services Director. The City has established a ticker system to provide staff with advance notice so that the reports are prepared in time to allow review and timely filing. LEGALITY FOR INVESTMENT IN CALIFORNIA Under provisions of the California Financial Code, the 2022 Bonds are legal investments for commercial banks in California to the extent that the 2022 Bonds, in the informed opinion of the bank, are prudent for the investment of funds of depositors, and under provisions of the California Government Code, are eligible for security for deposits of public moneys in California. -37- ABSENCE OF MATERIAL LITIGATION No litigation is pending or threatened concerning the validity of the 2022 Bonds, and a certificate to that effect will be furnished by the City to the purchasers at the time of the original delivery of the 2022 Bonds. The City is not aware of any litigation pending or threatened questioning the political existence of the City or contesting the County’s abilities to receive ad valorem taxes or contesting the City’s ability to issue and retire the 2022 Bonds. RATING S&P Global Ratings, a Standard & Poor’s Financial Services LLC business (“S&P”) has assigned the rating of “___” to the 2022 Bonds. Such rating reflects only the view of S&P and any desired explanation of the significance of such rating should be obtained from S&P. Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. There is no assurance such rating will continue for any given period or that such rating will not be revised downward or withdrawn entirely by S&P if, in the judgment of S&P, circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price for the 2022 Bonds. UNDERWRITING The 2022A Bonds were sold by competitive bidding on May 24, 2022, to ________ (the “2022A Underwriter”). The 2022A Underwriter has agreed to purchase the 2022A Bonds at a purchase price of $________ (being equal to the aggregate principal amount of the 2022A Bonds ($_______), less an underwriter’s discount of $______, plus a premium of $_______). The 2022A Underwriter will purchase all of the 2022A Bonds if any are purchased, the obligation to make such purchase being subject to the approval of certain legal matters by counsel and certain other conditions. The 2022A Underwriter may offer and sell 2022A Bonds to certain dealers and others at prices lower than the offering prices stated on the inside cover page hereof. The offering prices may be changed from time to time by the 2022A Underwriter. The 2022B Bonds were sold by competitive bidding on May 24, 2022, to ________ (the “2022B Underwriter” and, with the 2022A Underwriter, the “Underwriters”). The 2022B Underwriter has agreed to purchase the 2022B Bonds at a purchase price of $________ (being equal to the aggregate principal amount of the 2022B Bonds ($_______), less an underwriter’s discount of $______). The 2022B Underwriter will purchase all of the 2022B Bonds if any are purchased, the obligation to make such purchase being subject to the approval of certain legal matters by counsel and certain other conditions. The 2022B Underwriter may offer and sell 2022B Bonds to certain dealers and others at prices lower than the offering prices stated on the inside cover page hereof. The offering prices may be changed from time to time by the 2022B Underwriter. ADDITIONAL INFORMATION Quotations from and summaries and explanations of the 2022 Bonds, the Resolution, the Continuing Disclosure Certificate of the City and the constitutional provisions, statutes and other -38- documents referenced herein, do not purport to be complete, and reference is made to said documents, constitutional provisions and statutes for full and complete statements of their provisions. All data contained herein has been taken or constructed from City records. Appropriate City officials, acting in their official capacities, have reviewed this Official Statement and have determined that, as of the date hereof, the information contained herein is, to the best of their knowledge and belief, true and correct in all material respects and does not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made herein, in light of the circumstances under which they were made, not misleading. This Official Statement has been approved by the City Board. EXECUTION Execution and delivery of this Official Statement have been duly authorized by the City. CITY OF PALO ALTO By Ed Shikada, City Manager Appendix A Page 1 APPENDIX A GENERAL, ECONOMIC AND DEMOGRAPHIC INFORMATION RELATING TO THE CITY AND THE COUNTY The information in this Appendix A concerning the City of Palo Alto and Santa Clara County is included only for the purpose of supplying general information regarding the City and the County. The 2022 Bonds are secured solely by an ad valorem property tax levied by the County, on behalf of the City, in an amount sufficient to pay principal of and interest on the 2022 Bonds each year. The 2022 Bonds are not payable from any other funds or revenues. Although reasonable efforts have been made to include up-to-date information in this Appendix A, some of the information is not current due to delays in reporting of information by various sources. It should not be assumed that the trends indicated by the following data would continue beyond the specific periods reflected herein. Introduction City of Palo Alto. Palo Alto (the “City”) is located in northern Santa Clara County (the “County”), approximately 35 miles south of the City of San Francisco. It is part of the San Francisco Bay metropolitan area. The City is considered the birthplace of the high technology industry and a center of the Silicon Valley. Stanford University covers a 700-acre area in the City, and the City is home to high-tech leaders such as SAP America, Varian Medical Systems, VMware, Tibco Software, the Electric Power Research Institute, Communications and Power Industries and Skype. The City is also a major employment center, including U.S. Department of Veterans Affairs, Palo Alto Health Care System, Stanford Hospitals and Clinics, Lockheed Martin Missiles and Space, Palo Alto Medical Foundation, Stanford Shopping Center, the law offices of Wilson Sonsini Goodrich and Rosati, and the Xerox Palo Alto Research Center. Santa Clara County. Located at the southern end of the San Francisco Bay, the County is the most populous county in the San Francisco Bay Area region, and one of the most affluent counties in the United States. The County was one of the original counties of California, formed in 1850 at the time of statehood. The County seat is San Jose, the tenth-most populous city in the United States. According to the U.S. Census Bureau, the county has a total area of 1,304 square miles (3,380 km2), of which 1,290 square miles (3,300 km2) is land and 14 square miles (36 km2) (1.1%) is water. The highly urbanized Santa Clara Valley within the County is also known as Silicon Valley. The County is the headquarters for approximately 6500 high technology companies, including many of the largest tech companies in the world, among them hardware manufacturers AMD, Cisco Systems and Intel, computer and consumer electronics company Apple Inc. and internet companies eBay, Facebook, Google and Yahoo! Appendix A Page 2 Population The table below summarizes population of the City, the County, and the State of California for the last five years. TABLE A1 CITY OF PALO ALTO, SANTA CLARA COUNTY, and CALIFORNIA Population Year City of Palo Alto Santa Clara County State of California 2017 68,679 1,937,008 39,352,398 2018 68,482 1,943,579 39,519,535 2019 68,272 1,944,733 39,605,361 2020 68,145 1,945,166 39,648,938 2021 67,657 1,934,171 39,466,855 Source: California Department of Finance, E-4 Population Estimate for Cities, Counties, and the State, 2011-21, with 2010 Census Benchmark. Appendix A Page 3 Employment The following table summarizes historical employment and unemployment for the County, the State of California and the United States: TABLE A2 SANTA CLARA COUNTY, CALIFORNIA, and UNITED STATES Civilian Labor Force, Employment, and Unemployment (Annual Averages) Unemployment Year Area Labor Force Employment Unemployment Rate (1) 2016 Santa Clara County 1,026,500 987,900 38,600 3.8% California 19,102,700 18,065,000 1,037,700 5.4 United States 159,187,000 151,436,000 7,751,000 4.9 2017 Santa Clara County 1,042,000 1,008,600 33,400 3.2 California 19,312,000 18,393,100 918,900 4.8 United States 160,320,000 153,337,000 6,982,000 4.4 2018 Santa Clara County 1,048,800 1,021,500 27,300 2.6 California 19,398,200 18,582,800 815,400 4.2 United States 162,075,000 155,761,000 6,314,000 3.9 2019 Santa Clara County 1,053,700 1,027,500 26,200 2.5 California 19,411,600 18,627,400 784,200 4.0 United States 163,539,000 157,538,000 6,001,000 3.7 2020(2) Santa Clara County 1,020,700 949,400 71,300 7.0 California 18,821,200 16,913,100 1,908,100 10.1 United States 160,742,000 147,795,000 12,947,000 8.1 Source: California Employment Development Department, Monthly Labor Force Data for Counties, Annual Average 2010-20, and US Department of Labor. (1) The unemployment rate is computed from unrounded data; therefore, it may differ from rates computed from rounded figures available in this table. (2) Latest available full-year data. Appendix A Page 4 Major Industries in the City and the County The following tables list the ten largest employers in the City and in the County by employment in 2021. TABLE A3 CITY OF PALO ALTO Top 10 Employers as of June 30, 2021 Employer Employees % of Total City Employment Stanford Health Care 5,500 4.1% Hewlett-Packard Company 5,000 3.7 Stanford University 4,060 3.0 Veteran’s Affairs Palo Alto Health Care System 3,900 2.9 Stanford Children’s Health 3,500 2.6 VMware Inc. 3,500 2.6 SAP Labs Inc. 3,500 2.6 Varian Medical Systems 3,300 2.5 Tesla Inc. 2,650 2.0 Palo Alto Medical Foundation 2,200 1.6 Total Top 10 37,110 27.6 Source: City of Palo Alto FY2020-21 ACFR. TABLE A4 SANTA CLARA COUNTY Top 10 Employers as of June 30, 2021 Employer Employees % of Total County Employment Apple Inc. 25,000 2.60% Google LLC 25,000 2.60 Santa Clara County 20,638 2.15 Stanford University 15,314 1.59 Stanford Health Care 14,574 1.52 Tesla Motors Inc. 13,000 1.35 Cisco Systems Inc. 12,740 1.32 Kaiser Permanente 12,442 1.29 City of San Jose 7,641 .79 Intel Corporation 7,143 .74 Total Top 10 153,492 15.96 Source: Santa Clara County FY2020-21 ACFR. Appendix A Page 5 Construction Activity The following tables reflects the five-year history of building permit valuation for the City and the County: TABLE A5 CITY OF PALO ALTO Building Permits and Valuation (Dollars in Thousands) 2016 2017 2018 2019 2020(1) Permit Valuation: New Single-family $ 58,795 $ 76,244 $ 72,564 $ 76,229 $ 49,894 New Multi-family 5,764 9,262 - - 31,725 Res. Alterations/Additions 36,423 70,538 33,568 14,563 6,001 Total Residential 100,983 156,046 106,133 90,792 87,621 Total Nonresidential 298,797 357,789 342,597 110,092 30,278 Total All Building 399,780 513,835 448,731 200,884 117,900 New Dwelling Units: Single Family 96 119 110 105 68 Multiple Family 30 28 - - 8 Total 126 147 110 105 76 TABLE A6 SANTA CLARA COUNTY Building Permits and Valuation (Dollars in Thousands) 2016 2017 2018 2019 2020(1) Permit Valuation: New Single-family $ 660,301 $ 732,652 $ 728,590 $ 693,032 $ 465,531 New Multi-family 564,761 1,027,651 1,098,643 567,726 384,856 Res. Alterations/Additions 484,820 547,991 558,024 555,483 314,179 Total Residential 1,709,882 2,308,295 2,385,258 1,816,242 1,164,567 Total Nonresidential 4,698,158 3,359,316 4,132,146 5,447,642 2,816,509 Total All Building 6,408,041 5,667,612 6,517,404 7,263,884 3,981,077 New Dwelling Units: Single Family 1,608 2,022 2,011 1,814 1,329 Multiple Family 3,297 6,629 6,342 3,216 2,245 Total 4,905 8,631 8,353 5,030 3,574 Source: Construction Industry Research Board: “Building Permit Summary.” Note: Columns may not sum to totals due to independent rounding. (1) Latest available full year data. Household Effective Buying Income “Effective Buying Income” is defined as personal income less personal tax and nontax payments, a number often referred to as “disposable” or “after-tax” income. Personal income is the aggregate of Appendix A Page 6 wages and salaries, other labor-related income (such as employer contributions to private pension funds), proprietor’s income, rental income (which includes imputed rental income of owner-occupants of non-farm dwellings), dividends paid by corporations, interest income from all sources, and transfer payments (such as pensions and welfare assistance). Deducted from this total are personal taxes (federal, state and local), nontax payments (fines, fees, penalties, etc.) and personal contributions to social insurance. According to U.S. government definitions, the resultant figure is commonly known as “disposable personal income.” The following table summarizes the median household effective buying income for the City, the County, the State and the nation for the past five years. TABLE A7 CITY OF PALO ALTO, SANTA CLARA COUNTY, STATE OF CALIFORNIA AND UNITED STATES Median Household Effective Buying Income 2017 2018 2019 2020 2021 City of Palo Alto $121,376 $123,583 $133,985 $140,963 $152,326 Santa Clara County 88,243 92,773 98,882 103,458 118,652 California 59,646 62,637 65,870 67,956 77,058 United States 50,735 52,841 55,303 56,790 64,448 Source: Nielsen, Inc. Appendix B Page 1 APPENDIX B CITY FINANCIAL INFORMATION The information in this appendix concerning the operations of the City and the City’s finances is provided as supplementary information only, and it should not be inferred from the inclusion of this information in this Official Statement that the principal of and interest on the 2022 Bonds is payable from the general fund of the City or from State revenues. The 2022 Bonds are payable solely from the proceeds of an ad valorem tax approved by the voters of the City pursuant to all applicable laws and State Constitutional requirements and required to be levied by the County on property within the City in an amount sufficient for the timely payment of principal and interest on the 2022 Bonds. See “SECURITY FOR THE 2022 BONDS” in the Official Statement. Financial Statements and Budgetary Process The City’s accounting policies conform to generally accepted accounting principles. The audited financial statements also conform to the principles and standards for public financial reporting established by the Governmental Accounting Standards Board. Basis of Accounting and Financial Statement Presentation. The government-wide financial statements are reported using the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. Governmental fund financial statements are reported using the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures are recorded only when payment is due. Audited Financial Statements. The City retained Macias Gini & O’Connell LLP, Walnut Creek, California (the “City’s Auditor”), to examine the general purpose financial statements of the City as of and for the year ended June 30, 2021. The audited financial statements for fiscal year ended June 30, 2021, are included in APPENDIX B—ANNUAL COMPREHENSIVE FINANCIAL REPORT OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2021. The City has not requested, and the City’s Auditor has not provided, any review or update of such financial statements in connection with their inclusion in this Official Statement. Budget Process. The City Council is required to adopt a final budget by no later than the close of its fiscal year. The annual budget serves as the foundation for the City’s financial planning and control. Budget control is maintained at the fund and department level. The City Manager has the authority to approve appropriation transfers within the same department/fund. Transfers between funds/departments and amendments to the budget require City Council approval. A comprehensive mid-year budget review is done in February or March to update revenue and expenditure projections. In addition, the City Council receives quarterly budget updates. The City maintains budgetary controls to ensure compliance with legal provisions embodied in the appropriated Appendix B Page 2 budget approved by the City Council. The level of budgetary control (that is, the level at which expenditures cannot legally exceed the appropriated amount) for the City’s operating budget is at the fund/department level with departmental oversight of major expenditure categories as well as by program area within each fund. For the City’s capital improvement budget each individual capital improvement project with budget transfers between subprojects is subject to City Manager approval and budget transfers between projects are subject to City Council approval. Appropriation increases, decreases or transfers between funds require the approval of the City Council. All appropriations lapse at the end of the fiscal year unless specific carryovers are approved by the City Council. Certain of the City’s revenues are collected and dispersed by the State (such as sales tax and motor- vehicle license fees) or allocated in accordance with State law (most importantly, property taxes). Therefore, the State’s budget decisions can have an impact on City finances. Appendix B Page 3 General Fund Balance Sheet The following table shows the City’s audited General Fund balance sheet for the past five fiscal years. TABLE B1 CITY OF PALO ALTO GENERAL FUND BALANCE SHEET (Dollars in Thousands) Fiscal Year Ended June 30, 2017 2018 2019 2020 2021 Audited Audited Audited Audited Audited ASSETS Cash and Investments $47,779 $49,250 $55,139 $ 48,853 $ 67,397 Accounts and Intergovernmental Receivables 17,418 18,881 21,669 11,944 14,053 Interest Receivable 738 950 1,167 695 645 Notes and Loans Receivable 496 479 - 845 826 Prepaid Items - - - - 291 Deposits - 15 15 15 15 Due from other fund - - 843 1,895 943 Advance to Other Funds 2,915 3,128 3,115 3,233 3,036 Inventory of Materials and Supplies 4,298 4,427 4,517 4,874 5,208 Total Assets 73,644 77,130 86,465 70,354 92,414 LIABILITIES Accounts Payable and Accruals 4,984 4,293 6,501 3,581 5,115, Accrued Salaries and Benefits 1,466 1,525 1,562 2,046 2,254 Unearned Revenue 4,087 2,966 2,976 2,479 9,400 Total Liabilities 10,537 8,784 11,039 8,106 16,769 DEFERRED INFLOWS OF RESOURCES Unavailabe revenue - - 211 409 9 FUND BALANCES Nonspendable: Notes and Loans Receivable 496 479 - 845 826 Prepaid Items - - - - 291 Deposits - 15 15 15 15 Inventories 4,298 4,427 4,517 4,874 5,208 Advances to Other Funds 2,915 3,128 3,115 3,233 3,036 Committed for: Development Services - 373 4,399 3,804 3,950 Edgewood Plaza - - - - 701 Assigned for: Unrealized Gain on Investments - - 709 3,199 1,891 Other General Governmental Purposes 6,150 5,325 5,622 7,219 5,912 Electric charger - - 17 25 30 College Terrace finces - - 160 160 - Reappropriations 1,130 1,773 1,149 1,893 4,687 Unassigned for: Budget Stabilization 48,118 52,826 54,811 35,871 49,089 Total Fund Balances 63,107 68,346 75,215 61,839 75,636 Total Liabilities, Deferred Inflows of Resources and Fund Balances 73,644 77,130 86,465 70,354 92,414 Source: City of Palo Alto 2017-21 ACFRs. Appendix B Page 4 General Fund Revenues, Expenditures, and Changes in Fund Balances The following table shows the City’s audited results for General Fund revenues and expenditures for Fiscal Years 2017-18 through 2020-21 and budgeted projections for Fiscal Year 2021-22. TABLE B2 CITY OF PALO ALTO GENERAL FUND STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES (Dollars in Thousands) Fiscal Year Ending June 30, 2018 2019 2020 2021 2022 Audited Audited Audited Audited Budget REVENUES Property Tax $ 42,839 $ 47,327 $ 51,089 $ 56,572 $ 51,228 Sales Tax 31,091 36,508 30,563 29,127 28,184 Utility Users Tax 15,414 16,402 16,140 14,642 14,370 Transient Occupancy Tax 24,937 25,649 18,553 5,179 8,428 Documentary Transfer Tax 9,229 6,923 6,903 10,627 7,137 Other Taxes and Fines 2,141 1,888 1,172 683 1,434 Charges for Services 26,824 27,346 24,127 25,105 23,870 Intergovernmental 3,205 2,863 3,783 3,828 22,686 Permits and Licenses 8,560 8,410 7,467 7,261 8,406 Investment Earnings (828) 5,672 4,037 (161) 852 Rental Income 15,896 16,338 15,964 13,293 14,476 Other Revenue 776 1,753 587 632 2,260 Total Revenues 180,084 197,079 180,385 166,788 183,331 EXPENDITURES City Council 337 265 214 224 433 City Manager 2,509 2,883 3,273 2,304 3,319 City Attorney 2,244 2,649 2,509 2,149 3,945 City Clerk 819 805 815 748 1,327 City Auditor 870 865 680 645 972 Administrative Services 5,347 5,512 5,960 5,202 8,923 Human Relations 2,369 2,567 2,792 2,421 3,921 Public Works 14,569 13,757 13,577 13,265 18,785 Planning and Community Environment 8,312 8,132 19,269(1) 15,830(1) 17,673 Development Services 11,749 11,549 —(1) —(1) —(1) Office of Transportation — — 2,052 1,936 1,747 Police 40,326 42,854 45,679 41,328 43,115 Fire 33,522 33,489 36,440 34,918 36,914 Community Services 27,122 28,903 29,603 26,254 31,052 Library 9,120 9,288 9,988 8,528 8,903 Non-Departmental 5,973 11,769 9,255 4,599 13,478 Capital Outlay — — — — — Debt Service - Principal 416 426 — — — Debt Service – Interest 16 5 — — — Total Expenditures 165,620 175,718 182,106 160,351 194,507 EXCESS OF REVENUES OVER EXPENDITURES 14,464 21,361 (1,721) 6,437 (11,176) OTHER FINANCING SOURCES Proceeds from Sale of Capital Assets — 2,442 — 100 — Transfers In 20,310 20,154 20,568 20,880 23,121 Transfers Out (29,535) (37,088) (32,223) (13,620) (14,702) Total Other Financing Sources (9,225) (14,492) (11,655) 7,360 8,419 Change in Fund Balances 5,239 6,869 (13,376) 13,797 (2,757) FUND BALANCES, BEGINNING OF YEAR 63,107 68,346 75,215 61,839 75,636 FUND BALANCES, END OF YEAR 68,346 75,215 61,839 75,636 72,879 Source: City of Palo Alto 2018-21 ACFRs and City of Palo Alto Finance Department. (1) Planning and Community Environment and Development Services totals are combined in FY2019-20 and future years. Appendix B Page 5 Reductions in General Fund Revenues and Expenditures in FY2019-20 and FY2020-21 due to the COVID-19 Pandemic The City’s general fund revenues for sales taxes, utility users taxes, rental income and transient occupancy taxes in fiscal years 2019-20 and 2020-21 fell below historical expectations due to the unanticipated and severe disruptions caused by the COVID-19 Pandemic. The City’s fiscal year 2020-21 results reflect the one full year of the economic impacts of the COVID-19 Pandemic including the stark, immediate results stemming from shelter in place orders. The City’s expenditures for the 2019-20 and 2020-21 fiscal years reflect certain temporary and permanent reductions in expenses to offset the revenue losses, including staffing reductions, reductions in service/operating hours/programs at City owned facilities, and labor and bargaining unit concessions. All City General Fund department functional expenses decreased except for Public Works which increased due to various repairs and maintenance of capital assets such as streets, sidewalks, facilities, and parks all of which are non-capitalizable and Administrative Services mainly due to the expenses incurred for claims related to a class action lawsuit. For additional discussion, see “Principal Sources of General Fund Revenues,” “Sales and Use Taxes”, and “Transient Occupancy Taxes” herein. Appendix B Page 6 General Fund Budget to Actuals Comparison The following table shows the City’s General Fund adopted budget figures and a comparison of the final General Fund budgets versus audited actuals for Fiscal Year 2019-20 and Fiscal Year 2020-21. TABLE B3 CITY OF PALO ALTO GENERAL FUND BUDGET COMPARISON Fiscal Years 2019-20 and 2020-21 (Dollars in Thousands) Fiscal Year Ending June 30, 2020 Fiscal Year Ending June 30, 2021 Adopted Final Audited Adopted Final Audited Budget Budget Actuals Budget Budget Actuals REVENUES Sales Tax $ 34,346 $ 30,617 $ 30,563 20,500 25,030 29,127 Property Tax 48,634 50,853 51,089 52,000 53,173 56,572 Transient Occupancy Tax 29,309 19,425 18,553 14,900 5,123 5,179 Documentary Transfer Tax 8,369 6,676 6,903 4,700 6,875 10,627 Utility User Tax 17,581 16,133 16,140 15,100 14,080 14,642 Other Taxes and Fines 2,032 1,237 1,172 1,925 392 683 Charges for Services 30,127 25,196 24,127 25,984 24,414 25,105 Permits and Licenses 8,667 6,597 7,467 7,770 8,366 7,708 Investment Earnings 1,433 1,433 1,558 1,145 1,145 1,062 Rental Income 16,326 16,041 15,964 15,949 15,331 13,293 Intergovernmental 2,756 3,245 4,301 2,448 4,580 4,222 Other Revenue 587 619 587 674 666 732 Charges to other funds and departments 10,908 10,908 11,099 11,992 11,992 11,661 Prior year encumberances - 6,469 6,469 - 7,570 7,570 Total Revenues 211,075 195,449 195,992 175,087 178,737 188,183 EXPENDITURES City Attorney 3,387 3,896 3,789 3,485 3,744 3,589 City Auditor 1,235 1,157 981 828 981 962 City Clerk 1,346 1,402 1,186 1,245 1,293 1,147 City Council 498 542 414 419 509 366 City Manager 4,546 4,734 4,671 3,161 3,562 3,492 Administrative Services 8,519 8,770 8,515 8,362 8,338 7,897 Community Services 30,929 31,591 31,489 28,379 28,839 27,769 Police 46,369 46,845 46,844 41,733 42,441 42,441 Fire 34,889 36,773 36,772 33,607 35,354 35,354 Human Resources 3,902 4,107 3,994 3,554 3,622 3,545 Library 10,314 10,187 10,092 8,421 8,655 8,636 Planning and Community Enviornment 20,356 22,021 21,098 17,386 19,611 18,782 Public Works 19,142 19,341 18,932 18,397 19,089 18,553 Non-Departmental 9,028 12,312 10,156 8,237 9,332 9,259 Total Expenditures 196,772 206,411 201,293 179,118 187,509 183,802 EXCESS OF REVENUES OVER EXPENDITURES 14,303 (10,962) (5,301) (4,031) (8,772) 4,381 OTHER FINANCING SOURCES Transfers In 20,999 20,842 20,568 21,359 21,154 21,154 Transfers Out (33,985) (32,223) (32,223) (17,801) (13,620) (13,620) Total Other Financing Sources (12,986) (11,381) (11,655) 3,558 7,534 7,534 Change in Fund Balances, Budgetary Basis 1,317 (22,343) (16,956) (473) (1,238) 11,915 Change in Fund Balances, GAAP Basis (13,376)(1) 13,797(2) FUND BALANCES, BEGINNING OF YEAR, GAAP Basis 75,215 61,839 FUND BALANCES, END OF YEAR, GAAP Basis 61,839 75,636 Source: City of Palo Alto 2020-21 ACFRs. (1) Reflects adjustments for an unrealized gain of $2,479, current year encumbrances and reappropriations of $7,570 and prior year encumbrances and reappropriations of $(6,469). (2) Reflects adjustments for an unrealized loss of $(1,297), changes in interfund balances of $(197), current year encumbrances and reappropriations of $10,946 and prior year encumbrances and reappropriations of $(7,570). Appendix B Page 7 City Financial Management The City Council has adopted a comprehensive set of financial management policies to provide for: (i) establishing targeted general fund reserves; (ii) the prudent investment of City funds, and (iii) management of debt. The City’s practice is to incur debt only after deliberation over the effect of such debt on the City’s General Fund and other resources of the City, and in those circumstances where the use of debt would be appropriate to the scale and economic life of the asset being financed and the accumulation or availability of reserves to fund the capital requirement. General Fund Budget Stabilization Reserve Policy. The following table shows the City’s general fund Budget Stabilization Reserve Policy guidance, actual reserves for fiscal year 2020-21 and budgeted reserve for fiscal year 2021-22. CITY OF PALO ALTO GENERAL FUND BUDGET STABILIZATION RESERVE POLICY Policy Actual Budgeted Guidance FY 2020-21 FY 2021-22 % of Expenses 15% to 20%; target goal of 18.5% 23.5% 17.2% Source: City of Palo Alto Finance Department. During the 2019-20 fiscal year, the City drew $11.7 million from its Budget Stabilization Reserve (BSR) to mitigate service reductions as a result of revenue losses associated with the Covid-19 pandemic, bringing the remaining balance of the BSR to approximately $35.9 million as of June 30, 2020. During the 2020-21 fiscal year the City increased the BSR by $13.2 million through a combination of excess revenue above budgeted levels and expenditure savings, bringing the BSR balance to approximately $49.1 million as of June 30, 2021. The City’s adopted fiscal year 2021-22 budget relied on the use of $1.8 million from the BSR. The City’s fiscal year 2021-22 adopted budget reduced the BSR to $36.0 million or 17.2% of the adopted budget. This is within the targeted range of 15% to 20% but below the City Council goal of 18.5%. Since the budget adoption, the fiscal year 2021-22 BSR has been updated to reflect the final fiscal year 2020-21 BSR. The BSR is currently at $40.7 million or 19.4% of the adopted budget. As discussed in the fiscal year 2023-32 Long Range Financial Forecast, major general fund tax revenues are anticipated to be higher than budgeted levels in fiscal year 2021-22. Based on actual receipts for the first half of the fiscal year and projections for the remainder of the 2021-22 fiscal year, major tax revenues are anticipated to be $15 million over the adopted budget. Staff will return to the City Council as part of the fiscal year 2022-23 budget development process to discuss use of these funds. Investment Policy. The investment of funds of the City (except pension and retirement funds) is made in accordance with the City’s Investment Policy, most recently approved in June 2021 (the “Investment Policy”), and section 53601 et seq. of the California Government Code. The Investment Policy is subject to revision at any time and is reviewed at least annually to ensure compliance with the stated objectives of safety, liquidity, yield, and current laws and financial trends. All amounts held under the Resolution are invested at the direction of the City in Investment Securities, as defined in the Resolution, and are subject to certain limitations contained therein. See APPENDIX C—INVESTMENT POLICY OF THE CITY and APPENDIX E—SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS—TRUST AGREEMENT—Investments. Appendix B Page 8 Debt Management Policy. In accordance with section 8855(i) of the California Government Code the City adopted a debt management policy on April 11, 2017, to establish conditions for the use of debt; to ensure that debt capacity and affordability are adequately considered; to minimize the City’s interest and issuance costs; to maintain the highest possible credit rating; to provide complete financial disclosure and reporting; and to maintain financial flexibility for the City. Capital Improvement Project Practices. While the City does not have an adopted capital improvement project policy, it does have certain criteria that must be adhered to before commencing a capital improvement project including (a) that the project must have a minimum cost of $50,000 for each stand- alone unit or combined project, (b) that the project must have a useful life of at least five to seven years, and (c) that the project must extend the life of an existing asset or provide a new functional use for an existing asset for at least five years. Principal Sources of General Fund Revenues The City relies on several sources to balance its General Fund budget. The most important of these revenue sources (based on percentage of the total revenue budget) are taxes and fees including the following: property taxes, sales taxes, and transient occupancy taxes. The following table shows the City’s General Fund tax revenues by source for the four most recent fiscal years and budgeted projections for Fiscal Year 2021-22: TABLE B4 CITY OF PALO ALTO GENERAL FUND TAX REVENUES BY SOURCE (Dollars in Thousands) Fiscal Year Ending June 30, 2018 2019 2020 2021 2022 Audited Audited Audited Audited Budgeted Property Tax $ 42,839 $ 47,327 $ 51,089 $ 56,572 $ 51,228 Sales Tax 31,091 36,508 30,563 29,127 28,184 Transient Occupancy Tax 24,937 25,649 18,553 5,179 8,428 Utility User Tax 15,414 16,402 16,140 14,642 14,370 Documentary Transfer Tax 9,229 6,923 6,903 10,627 7,137 Other Taxes and Fines 2,141 1,888 1,172 683 1,434 Total Tax Revenues 125,651 134,697 124,420 116,830 $110,781 Source: City of Palo Alto 2028-21 ACFRs and City of Palo Alto Finance Department. In Fiscal Year 2019-20, the City’s General Fund tax revenues accounted for approximately $124.4 million or 69% of the City’s total General Fund revenues for Fiscal Year 2019-20. In Fiscal Year 2020-21, the City’s General Fund tax revenues accounted for approximately $116.8 million or 70% of the total General Fund revenue for Fiscal Year 2020-21. General Fund tax revenues are projected to account for approximately $110.8 million or 60.4% of the City’s total General Fund revenue budget for Fiscal Year 2021-22. Property Taxes. The County levies a tax of 1% on the assessed valuation of property within the County. The City receives approximately a 9.4% share of this 1% levy for property located within the City Appendix B Page 9 limits. In Fiscal Year 2019-20 property taxes generated approximately $51.1 million in General Fund revenues. In Fiscal Year 2020-21 property taxes generated approximately $56.5 million in General Fund revenues. Property tax revenues are budgeted to be $51.2 million, the adjusted budget is $53.2 million and projected to generate millions more in Fiscal Year 2021-22 in General Fund revenues. Property taxes are the General Fund’s largest revenue source. Property Tax revenues for Fiscal Year 2019-20 and 2020-21 have not been materially impacted by impacted by the COVID-19 Pandemic. Sales and Use Taxes. The City receives a 1% share of all taxable sales generated within its borders. In Fiscal Year 2019-20 sales and use taxes generated approximately $30.1 million in General Fund revenues. In Fiscal Year 2020-21 sales and use taxes generated approximately $29.1 million in General Fund revenues. Sales and use taxes are budgeted to be $28.2 million, however, due to better than expected economic recovery is projected to generate millions more in Fiscal Year 2021-22 in General Fund revenues. Sales and use taxes are the General Fund’s second largest revenue source. Sales and Use Tax revenues for Fiscal Years 2019-20 and 2020-21 were impacted by the COVID-19 Pandemic, primarily in lower revenues generated by high end in-person retail sales and by eating and drinking establishments. For additional discussion, see “Sales and Use Taxes.” Transient Occupancy Taxes. The City imposes a transient occupancy tax on all hotels in the City. The current rate is 15.5% of the rent charged. In Fiscal Year 2019-20 transient occupancy taxes generated approximately $18.5 million in General Fund revenues. In Fiscal Year 2020-21 transient occupancy taxes generated approximately $5.2 million in General Fund revenues. Transient occupancy taxes are budgeted at $8.4 million but based on receipts for the first half of the fiscal year is projected to generate millions more in Fiscal Year 2021-22 in General Fund revenues. Transient Occupancy Tax revenues for Fiscal Years 2019-20 and 2020-21 have been the City’s most impacted General Fund revenue source from the effects of the COVID-19 Pandemic and fall substantially below historical norms. Due to the lifting of public health restrictions and to improvements in public health including decreasing hospitalizations and mortality rate, the City expects Transient Occupancy Taxes for fiscal year 2021-22 and future years to revert to historical norms. For additional discussion, see “Transient Occupancy Tax.” Sales and Use Taxes A sales tax is imposed on the privilege of consuming personal property in the State. The State does not tax services. The tax rate is established by the State Legislature, and is presently 7.25%, statewide (of which 1% is paid to the City) (the “State Sales Tax”). In addition, many of the State’s cities, counties, districts and communities have special taxing jurisdiction to impose a transaction (sales) or use tax. These so-called district taxes increase the tax rate in a particular area by adding the local option tax to the statewide tax. While more than one district tax may be in effect for a particular location, counties, municipalities, and districts are allowed to increase the sales tax in specific jurisdictions up to a total of 10.25%. The State’s Department of Tax and Fee Administration actual administrative costs with respect to the portion of sales taxes allocable to the City are deducted before distribution and are determined on a quarterly basis. The following table shows a breakdown of the composition of the current sales and use tax rate applicable to transactions in the City: Appendix B Page 10 TABLE B5 CITY OF PALO ALTO CURRENT SALES AND USE TAX RATES Component Tax Rate State General Fund 5.75% State Local Public Safety Fund 0.50 City General Fund 1.00 County Transportation 1.88 Total 9.13% Source: City of Palo Alto The State’s Department of Tax and Fee Administration actual administrative costs with respect to the portion of sales taxes allocable to the City are deducted before distribution and are determined on a quarterly basis. Many categories of transactions are exempt for the State Sales Tax. The most important of these exemptions are the sales of food products for home consumption, prescription medicine, edible livestock and their feed, seed and fertilizer used in raising food for human consumption, and gas and electricity and water when delivered to consumers through mains, lines and pipes. In addition, occasional sales (i.e., sales of property not held or used by a seller in the course of activities for which he or she is required to hold a seller’s permit) are generally exempt from both the State Sales Tax; however, the occasional sales exemption does not apply to the sale of an entire business and other sales of machinery and equipment used in a business. Action by the State Legislature or by voter initiative could change the transactions and items upon which the State Sales Tax are imposed. Such changes or amendments could have either an adverse or beneficial effect on revenues produced by sales taxes. The City is not currently aware of any proposed legislative change that would have a material adverse effect on the State Sales Tax. Effects of COVID-19 Pandemic on Sales Tax Collections. The City’s sales tax receipts for Fiscal Years 2019-20 and 2020-21 have been impacted and may continue be impacted by the short and long-term effects of the COVID-19 Pandemic. During the COVID-19 Pandemic the City has experienced significant declines of in-person sales of high-end retail goods and declines in dining options at eating and drinking establishments, such as the stores and restaurants located at the Stanford Shopping Center. These declines have been partially offset by the strong performance in the business-to-business segment and in sales tax revenues from online sales. The City expects Sales and Use Tax Revenues to improve as the COVID-19 Pandemic wanes. Transient Occupancy Taxes The City levies a 15.5% tax on hotels and lodging establishments. The 15.5% transient occupancy tax level became effective on April 1, 2019 following the approval of an increase by 68% of the voters of the City voting in the November 6, 2018 election. Prior to April 1, 2019 the transient occupancy tax rate was 14% following an adjustment in 2014 when it was raised from 12%. The City’s transient occupancy tax is a general tax and can be used for any governmental purpose. Appendix B Page 11 The City’s historical transient occupancy tax revenue since fiscal year 2010-11 is shown in the following table. TABLE B6 CITY OF PALO ALTO HISTORICAL TRANSIENT OCCUPANCY TAX REVENUES (Dollars in Thousands) Fiscal Transient Occupancy Year Tax Revenues 2010-11 $ 8,082 2011-12 9,664 2012-13 10,794 2013-14 12,255 2014-15 16,699 2015-16 22,366 2016-17 23,477 2017-18 24,937 2018-19 25,649 2019-20 18,553 2020-21 5,179 2021-22(1) 8,484 Source: Palo Alto Finance Department (1) Budgeted Projection, for discussion, see Effects of COVID-19 Pandemic on Transient Occupancy Tax Revenues. Effects of COVID-19 Pandemic on Transient Occupancy Tax Revenues. Transient occupancy taxes are the City’s most impacted General Fund revenue source from the result of closures and reduced travel caused by the COVID-19 Pandemic. The City’s collections of transient occupancy tax revenues are down substantially in fiscal year 2019-20 and fiscal year 2020-21 as compared to historical levels. Six hotels within the City, representing approximately 16.3 percent of available rooms remained closed for the City’s entire 2020-21 fiscal year, while two other smaller hotels reopened partway though the City’s 2020-21 fiscal year. The hotels that remained open experienced significant declines in average daily room and occupancy rates in the first three quarters of fiscal year 2020-21 and partially recovered during the fourth quarter. During fiscal year 2020-21 the average occupancy rate in the City was 40.6 percent, a 33.4 percent decrease from fiscal year 2019-20 and the average room rate was $116.90, a 55.9 percent decrease from fiscal year 2019- 20. In response to the severe decrease in transient occupancy tax revenues, the City instituted a number of cuts to its General Fund expenditures in fiscal years 2019-20 and 2020-21. For additional discussion, see “Reductions in General Fund Revenues and Expenditures in FY2019-20 and FY2020-21 due to the COVID-19 Pandemic.” As the COVID-19 Pandemic wanes, the City expects revenues from transient occupancy taxes to revert towoards historical norms. Additionally, two new Marriott hotels (with a combined total of 293 rooms) have recently opened during 2021. For additional information about the status of the COVID-19 Pandemic and the state’s reopening process, see “RISK FACTORS—COVID-19 Pandemic.” Appendix B Page 12 Other Sources of General Fund Revenues In addition, the City receives the following General Fund revenues: Licenses and Permits. The City charges certain permits, licenses and fees for the cost recovery of providing current planning, building inspection, recreation and other municipal services. Charges for Services. The City charges various fees and charges for services provided, including development and inspection fees, paramedic fees, charges for public works, police, fire, library and parks and recreation services. By law, the City may not charge more than the cost of providing the service. Fines, Forfeitures and Penalties. These revenues include parking citations and other fines for municipal code violations. The following table illustrates other revenue sources for the four most recent fiscal years and the budgeted data for the current fiscal year: TABLE B7 CITY OF PALO ALTO OTHER REVENUE SOURCES Fiscal Year Ending June 30, 2018 2019 2020 2021 2022 Audited Audited Audited Audited Budgeted Charges for Services $ 26,824 $ 27,346 $ 24,127 $ 25,105 $23,870 Rental Income 15,896 16,338 15,964 13,293 14,476 From Other Agencies 3,205 2,863 3,783 3,828 8,521 Permits and Licenses 8,560 8,410 7,467 7,261 8,406 Investment Earnings(1) (828) 5,672 4,037 (161) 852 Other Income 776 1,753 587 632 2,260 Total Other Revenues 54,433 62,382 55,965 49,958 $58,385 Source: City of Palo Alto Finance Department. (1) Net of actual interest earnings and unrealized (paper) gain and loss. Impact of COVID-19 Pandemic on Other Revenue Sources. Fiscal Years 2019-20 and 2020-21 revenues from charges for services and rental income were reduced as compared to prior years. The City closed or reduced operations at many of its Park & Recreation and Library facilities and has cancelled some of its programs in fiscal years 2019-20 and 2020-21 and began re-instate these programs and classes as conditions related to the COVID-19 Pandemic improved. Charges for services revenues were also offset by increased revenues generated from the City’s golf course. Tenants not paying their monthly lease and rent payments because of COVID-19 Pandemic have negatively affected the City’s rental income revenues. The City expects these revenues sources to return to historical norms as the COVID-19 Pandemic improves. Reliance on State Budget The City does not rely on the State for a material amount of revenues. Continued economic uncertainty caused by the COVID-19 outbreak will significantly affect the State’s fiscal outlook, including lower capital gains-related tax revenue due to the volatility in the financial Appendix B Page 13 markets, the likelihood that a recession is forthcoming due to pullback in activity across wide swaths of the economy, and substantially increased expenditures related to fighting the COVID-19 Pandemic. The City cannot predict the short or long-term impacts that the COVID-19 Pandemic will have on global, State-wide and local economies, which may impact City operations and local property values. There can be no assurance that future State budget difficulties will not adversely affect the City’s revenues or its ability to pay debt service on the 2022 Bonds. Labor Relations Most full-time City employees are represented by two labor union associations, the principal one being the SEIU, which represents approximately 50% of all City employees. Approximately 80% of all permanent City employees are covered by negotiated agreements with management, confidential, and city attorney employees being unrepresented. The City has never had an employee work stoppage. Negotiated agreements have the following expiration dates: TABLE B8 CITY OF PALO ALTO NEGOTIATED EMPLOYEE AGREEMENTS Contract Number of Bargaining Unit Expiration Date Employees International Association of Firefighters (IAFF) June 30, 2022 88 Fire Chiefs’ Association (FCA) June 30, 2022 4 Palo Alto Peace Officers Association (PAPOA) June 30, 2022 83 Palo Alto Police Managers Association (PAPMA) June 30, 2022 7 Service Employees International Union (SEIU) December 31, 2021 573 Service Employees International Union Hourly Unit (SEIU-H) June 30, 2021 65 Utilities Management Professional Association of Palo Alto (UMPAPA) June 30, 2020 49 Management and Professional Personnel and Council Appointees Compensation Plan June 30, 2021 220 Limited Hourly Employees Compensation Plan June 30, 2021 40 Total 1,147 Source: City of Palo Alto Risk Management Coverage. The City provides dental coverage to employees through a City plan, which is administered by a third-party service agent. The City is self-insured for dental claims. The City has a workers’ compensation insurance policy with coverage up to the statutory limit set by the State. The City retains the risk for the first $750,000 in losses for each accident and employee under this policy. The City also has public employee dishonesty insurance with a $5,000 deductible and coverage up to $1.0 million per loss. The Director of Administrative Services and City Manager each have coverage up to $4.0 million per loss. The City’s property, boiler, and machinery insurance policy has various deductibles and coverage based on the type of property. Appendix B Page 14 The City is a member of the Authority for California Cities Excess Liability (“ACCEL”), which provides excess general liability insurance coverage, including auto liability, up to $200 million per occurrence. The City retains the risk for the first $1.0 million in losses for each occurrence under this policy. ACCEL was established for the purpose of creating a risk management pool for central California municipalities. ACCEL is governed by a Board of Directors consisting of representatives of its member cities. The board controls the operations of ACCEL, including selection of claims management, general administration and approval of the annual budget. The City’s deposits with ACCEL equal the ratio of the City’s payroll to the total payroll of all entities. Actual surpluses or losses are shared according to a formula developed from overall loss costs and spread to member entities on a percentage basis after a retrospective rating. During the year ended June 30, 2021, the City paid $2.1 million to ACCEL for current year coverage. Claims Liability. The City provides for the uninsured portion of claims and judgments in the General Liabilities insurance program funds. Claims and judgments, including a provision for claims incurred but not reported, and claim adjustment expenses are recorded when a loss is deemed probable of assertion and the amount of the loss is reasonably determinable. As discussed above, the City has coverage for such claims, but it has retained the risk for the deductible or uninsured portion of these claims. The City’s liability for uninsured claims is limited to dental, general liability, and workers’ compensation claims, as discussed above. Dental liability is based on a percentage of current year actual expense. During fiscal year 2020-21 the City recorded claims payable of $12.6 million on its governmental activities’ financial statements for a class action lawsuit filed against the City that challenged the City’s gas and electric rates. The City has not incurred a claim that has exceeded its insurance coverage limits in any of the last three years, however there has been a significant reduction in insurance coverage. California municipalities’ liability claim costs have significantly increased all cities’ costs, and have caused insurance underwriters to pull back from the California insurance market. California is faced with continuing negative claims trends driven by (1) dangerous condition claims involving significant medical damages, (2) changing laws involving sexual misconduct, and (3) costly law enforcement liability claims. Settlements and verdicts for these losses have rapidly inflated in cost resulting in the reduction of insurance for California public entities. For additional information about the City’s Risk Management, see APPENDIX B—ANNUAL COMPREHENSIVE FINANCIAL REPORT OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2021, Note 14. Joint Ventures The City participates in joint ventures through Joint Powers Authorities (“JPAs”) established under the Joint Exercise of Powers Act of the State of California. As separate legal entities, these JPAs exercise full powers and authorities within the scope of the related Joint Powers Agreement, including the preparation of annual budgets, accountability for all funds, the power to make and execute contracts and the Appendix B Page 15 right to sue and be sued. Obligations and liabilities of the JPAs, including the long-term debt in which the City participates in repayment, are not obligations and liabilities of the City, and are not reported on the City’s financial statements. Each JPA is governed by a board consisting of representatives from each member agency. Each board controls the operations of its respective JPA, including selection of management and approval of operating budgets, independent of any influence by member agencies beyond their representation on the Board. Northern California Power Agency. The City is a member of Northern California Power Agency (“NCPA”), a joint powers agency which operates under a joint powers agreement among fifteen public agencies. The purpose of NCPA is to use the combined strength of its members to purchase, generate, sell and interchange electric energy and capacity through the acquisition and use of electrical generation and transmission facilities. Each agency member has agreed to fund a pro rata share of certain assessments by NCPA and enter into take-or-pay power supply contracts with NCPA. While NCPA is governed by its members, none of its obligations are those of its members unless expressly assumed by them. During the year ended June 30, 2021, the City incurred expenses totaling $92.1 million for purchased power and assessments earned by NCPA. The City’s interest in NCPA projects and reserves, as computed by NCPA, was $8.1 million at June 30, 2021. This amount represents the City’s portion of funds, which resulted from the settlement with third parties of issues with financial consequences and reconciliations of several prior years’ budgets for programs. It is recognized that all the funds credited to the City are linked to the collection of revenue from the City’s ratepayers, or to the settlement of disputes relating to electric power supply and that the money was collected from the City’s ratepayers to pay power bills. Additionally, the NCPA Commission identified and approved the funding of specific reserves for working capital, accumulated employees’ post-retirement medical benefits, and billed property taxes for the geothermal project. The Commission also identified a number of contingent liabilities that may or may not be realized, the cost of which in most cases is difficult to estimate at this time. One such contingent liability is the steam field depletion, which will require funding to cover debt service and operational costs more than the expected value of the electric power. The General Operating Reserve is intended to minimize the number and amount of individual reserves needed for each project, protect NCPA’s financial condition and maintain its credit worthiness. There are no funds on deposit with NCPA as a reserve against these contingencies identified by NCPA. Members of NCPA may participate in an individual project of NCPA without obligation for any other project. Member assessments collected for one project may not be used to finance other projects of NCPA without the member’s permission. Calaveras Hydroelectric Project. In July 1981, NCPA agreed with Calaveras County Water District to purchase the output of the North Fork Stanislaus River Hydroelectric Development Project and to finance its construction. Debt service payments to NCPA began in February 1990 when the project was declared substantially complete and power was delivered to the participants. Under its power purchase agreement with NCPA, the City is obligated to pay 22.9 percent of this Project’s debt service and operating costs. At June 30, 2021, the book value of this Project’s plant, equipment and other assets was $303.8 million, while its long-term debt totaled $255.8 million and other liabilities totaled $44.5 million. The City’s share of the Project’s long-term debt amounted to $58.6 million at that date. Appendix B Page 16 Transmission Agency of Northern California (“TANC”). The City is a member of a joint powers agreement with 14 other entities in Transmission Agency of Northern California. TANC’s purpose is to provide electrical transmission or other facilities for the use of its members. While governed by its members, none of TANC’s obligations are those of its members unless expressly assumed by them. The City was obligated to pay 4 percent of TANC’s debt-service and operating costs. However, a Resolution was approved authorizing the execution of a Long-Term Layoff Agreement between the Cities of Palo Alto and Roseville. These two agencies desired to “layoff” their entitlement rights to the California-Oregon Transmission Project (and Roseville’s South of Tesla entitlement rights) for a period of 15 years to those acquiring members (Sacramento Municipal Utility District, Turlock Irrigation District, and Modesto Irrigation District). The effective date of this Agreement was February 1, 2009. As a result, the City is not obligated to pay TANC’s debt-service and operating costs starting February 1, 2009, for a period of fifteen years. Bay Area Water Supply and Conservation Agency (“BAWSCA”). The City is a member of a regional water district with 26 other entities, the Bay Area Water Supply and Conservation Agency. BAWSCA was created on May 27, 2003 to represent the interests of 24 cities and water districts and two private utilities in Alameda, Santa Clara and San Mateo counties that purchase water on a wholesale basis from the San Francisco regional water system. It has the power to issue debt and plan, finance, construct, and operate water supply, transmission, reclamation, and conservation projects on behalf of its members. In 2013 the City participated in a debt issuance by BAWSCA. The debt was issued to repay certain long- term costs associated with the San Francisco Public Utilities Commission water supply contract. During the 2020-21 fiscal year, the City paid its share of the annual debt service of $1.9 million, which will vary based on annual water purchases of the City compared to other BAWSCA agencies. Employee Retirement Plans The information set forth below regarding the California Public Employees’ Retirement System (“CalPERS”) program, other than the information provided by the City regarding its annual contributions thereto, has been obtained from publicly available sources which are believed to be reliable but are not guaranteed as to accuracy or completeness, and should not be construed as a representation by either the City or the Purchasers. Plan Description. Substantially all permanent employees are eligible to participate in the City’s Safety Plan (police and fire) and Miscellaneous Plan (all others), agent multiple employer defined benefit pension plans administered by the CalPERS, which acts as a common investment and administrative agent for its participating member employers. Benefit provisions under the Plans are established by State statute and City resolution. CalPERS issues publicly available reports that include a full description of the pension plans regarding benefit provisions, assumptions and membership information that can be found on the CalPERS website. Benefits Provided. CalPERS provides service retirement and disability benefits, annual cost of living adjustments and death benefits to plan members, who must be public employees and beneficiaries. Benefits are based on years of credited service, equal to one year of full-time employment. Members with five years of total service are eligible to retire at age 50 with statutorily reduced benefits. All members are eligible for non-duty disability benefits after 10 years of service. The death benefit is one of the following: the Basic Death Benefit, the 1959 Survivor Benefit, or the Optional Settlement 2W Death Benefit. The cost-of-living adjustments for each plan are applied as specified by the Public Employees’ Retirement Law. Appendix B Page 17 Employees Covered. At June 30, 2021, the following employees were covered by the benefit terms for each Plan. TABLE B9 CITY OF PALO ALTO COVERED EMPLOYEES Miscellaneous Safety Inactive employees or beneficiaries currently receiving benefits 1,223 435 Inactive employees entitled to but not yet receiving benefits 835 104 Active employees 777 174 Total 2,835 713 Source: City of Palo Alto 2020-21 ACFR. Contributions. Section 20814(c) of the California Public Employees’ Retirement Law requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and shall be effective on the July 1 following notice of a change in the rate. Funding contributions for both Plans are determined annually on an actuarial basis as of June 30 by CalPERS. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The City is required to contribute the difference between the actuarially determined rate and the contribution rate of employees. The City’s contributions to its Miscellaneous and Safety Plans for the past four years is summarized in the following table. TABLE B10 CITY OF PALO ALTO HISTORICAL PENSION CONTRIBUTIONS (Dollars in Thousands) Fiscal Year Ending June 30, Miscellaneous Plan Safety Plans Total Contributions 2017 $ 20,638 $ 10,220 $ 30,858 2018 23,342 11,030 34,372 2019 25,423 12,370 37,793 2020 28,889 14,297 43,186 2021 32,782 14,796 47,578 Source: City of Palo Alto 2017-21 ACFRs. Section 115 Trust. In April 2017, the City established a Section 115 irrevocable trust with the Public Agency Retirement Services (“PARS”). The City Council of the City approved an initial deposit of $2.1 million in General Fund proceeds into the General Fund subaccount of the City’s PARS Trust Account. The Trust Account allows more control and flexibility in investment allocations compared to City’s portfolio which is restricted by State regulations to fixed income instruments. The City proactively contributes to the Section 115 irrevocable trust amounts reflective of what retirement costs would be if the normal cost of contributions was budgeted at a 6.2% discount rate. The City contributed $5.0 million to the Appendix B Page 18 PARS Trust during the 2020-21 fiscal year. As of June 30, 2021, the City reported the account balance of $37.1 million as restricted investments in its General Benefits Internal Service Fund. Pension Expenses and Deferred Outflows/Inflows of Resources Related to Pensions. For the year ended June 30, 2021, the City recognized pension expense of $34.7 million for the Miscellaneous Plan and $25.7 million for the Safety Plans, respectively. At June 30, 2021, the City reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: TABLE B11 CITY OF PALO ALTO DEFERRED OUTFLOWS/INFLOWS OF RESOURCES FISCAL YEAR 2020-21 (Dollars in Thousands) Miscellaneous Safety Deferred Deferred Deferred Deferred Outflows Inflows Outflows Inflows of Resources of Resources of Resources of Resources Contributions after measurement date $ 32,782 $ - $ 14,796 $ - Diff. btw. actual and expected experience 5,051 - 5,157 - Changes in assumptions - - - - Diff. btw. projected and actual earnings on investment 3,887 - 1,977 - Total 41,720 - 21,930 - Source: City of Palo Alto 2020-21 ACFR. For information concerning the City’s pension obligations, including descriptions of the actuarial methods and assumptions, and an explanation of the discount rate used, please see APPENDIX B— ANNUAL COMPREHENSIVE FINANCIAL REPORT OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2021, Note 11. Funded Status. The following table sets forth a summary of the funding progress for the City’s Miscellaneous and Safety Plans for the four most recent actuarial valuation dates. Appendix B Page 19 TABLE B12 CITY OF PALO ALTO HISTORICAL PENSION FUNDING PROGRESS (Dollars in Thousands) Date June 30, Accrued Liability Market Value of Assets Unfunded Liability Funded Ratio Annual Covered Payroll Miscellaneous Plan 2017 $714,019 $469,782 $244,237 65.8% $73,722 2018 780,729 512,924 267,805 65.7% 77,606 2019 811,330 546,669 264,661 67.4% 80,634 2020 849,004 573,840 275,164 67.6% 82,573 2021 884,335 594,063 290,272 67.2% 81,017 Safety Plans 2017 $383,556 $250,474 $133,082 65.3% $21,822 2018 415,775 268,468 147,307 64.6% 21,906 2019 439,408 280,173 159,235 63.8% 24,131 2020 456,817 289,028 167,789 63.3% 24,263 2021 477,550 294,739 182,811 61.7% 26,189 Source: City of Palo Alto 2020-21 ACFR. CalPERS Amortization Period Reform. On February 13, 2018, the CalPERS Board voted to shorten the period over which actuarial gains and losses are amortized from 30 years to 20 years for new pension liabilities. The new 20-year amortization period begins with new gains or losses accrued starting with the June 30, 2019 actuarial valuations. The first payments on the new 20-year amortization schedule will take place in 2021. A shorter amortization period will increase annual Unfunded Accrued Liability (“UAL”) contributions for cities that participate in CalPERS so long as CalPERS remains underfunded. The shortened amortization period will also lead to reductions of periods of negative amortization of the UAL, interest cost savings, and faster recoveries of funded status after market downturns. Cities that participate in CalPERS will also see additional volatility in their future UAL contributions due to market performance as gains or losses will be amortized faster under the new amortization period. The City cannot currently estimate the impact the shorter amortization period will have on its required contributions for its Miscellaneous and Safety Plans. Other Post-Employments Benefits Plan Description. In addition to providing pension benefits, the City participates in the California Public Employees’ Medical and Health Care Act program to provide certain health care benefits for retired employees. The City’s Other Post-Employment Benefit plan is an agent multiple employer defined benefit plan. Employees who retire directly from the City are eligible for retiree health benefits if they retire on or after age 50 with 5 years of service and are receiving a monthly pension from CalPERS. Appendix B Page 20 In fiscal year 2007-08 the City elected to participate in an irrevocable trust to provide a funding mechanism for retiree health benefits. The trust, California Employers’ Retirees Benefit Trust (“CERBT”), is administrated by CalPERS and managed by a separately appointed board, which is not under control of the City Council. This Trust is not considered a component unit of the City. The City’s OPEB funding policy is to prefund these benefits by accumulating assets in the CERBT pursuant to City Council Resolution. For the year ended June 30, 2021, the City’s contributions totaled $14.6 million. Employees Covered. Membership of the plan consisted of 1,011 retirees and beneficiaries receiving benefits, 75 inactive members entitled to but not yet receiving benefits and 897 active plan members at June 30, 2020, the date of the latest actuarial valuation. Funding Policy. The contribution requirements for plan members and the City are established by an MOU as negotiated by each group or bargaining unit. The required contribution is based on projected pay- as-you-go financing requirements. Changes in Net OPEB Liability. The following table shows the changes in the City’s net OPEB obligation to the Plan: TABLE B13 CITY OF PALO ALTO CHANGE IN NET OPEB LIABILITY Fiscal Year 2020-21 (Dollars in Thousands) Service cost $ 6,366 Interest on OPEB liability 16,572 Employer contributions (16,475) Investment income (4,327) Changes in benefit terms - Changes in assumptions (4,426) Difference btw. actual and expected exp. - Administrative expenses 58 Net changes (2,323) Net OPEB obligation, beginning of the year 127,030 Net OPEB obligation, end of the year 124,798 Source: City of Palo Alto 2020-21 ACFR. Appendix B Page 21 The following table shows a three-year history of the City’s outstanding OPEB obligation and covered payroll. TABLE B14 CITY OF PALO ALTO HISTORIC OPEB LIABILITY AND COVERED PAYROLL (Dollars in Thousands) Fiscal Year Ending June 30, Total OPEB Obligation Plan Net Position Net OPEB Liability (UAAL) Covered Payroll Ratio of UAAL to Covered Payroll 2018 $ 244,759 $ 91,250 $ 153,509 $ 118,774 129.24% 2019 255,630 107,810 147,820 119,090 124.12 2020 245,509 118,479 127,030 118,014 107.64 2021 251,293 126,495 124,798 125,676 99.30 Source: City of Palo Alto 2020-21 ACFR. Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, investment returns, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the Plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. For information concerning the City’s OPEB obligations, including descriptions of the actuarial methods and assumptions, please see APPENDIX B—ANNUAL COMPREHENSIVE FINANCIAL REPORT OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2021, Note 12. Debt Obligations General Obligation Bonds. Other than the Prior Bonds, the City has no outstanding general obligation bonds. Short-Term General Fund-Secured Obligations. The City has no outstanding short-term obligations secured by its general fund. Long-Term General Fund-Secured Obligations. On June 5, 2018, the City caused the execution and delivery of its $8,970,000 City of Palo Alto 2018 Certificates of Participation (Capital Improvement Project; 2002B Refinancing) (Federally Taxable) (Green Bonds) (the “2018 Certificates”) to (a) finance the costs of the renovation of the Palo Alto Municipal Golf Course, and (b) prepay, on a current basis, the outstanding City of Palo Alto Certificates of Participation (Civic Center Refinancing and Downtown Parking Improvements Project), Series 2002B (Taxable). Principal payments are due annually on November 1 and interest payments are due semi-annually on May 1 and November 1 at an average rate of 4.10 percent. The City’s average annual payments with respect to the certificates is $530,000 and the certificates mature on November 1, 2047. On March 21, 2019, the City caused the execution and delivery of its $26,785,000 City of Palo Alto 2019 Certificates of Participation, Series A (California Avenue Parking Garage) (Tax-Exempt) (the “2019A Appendix B Page 22 Certificates”), and its $10,585,000 2019 Certificates of Participation, Series B (California Avenue Parking Garage) (Federally Taxable) (the “2019B Certificates”), to finance the costs of the construction of a 636 space parking garage. Principal payments are due annually on November 1 and interest payments are due semi-annually on May 1 and November 1 at an average rate of 4.76 percent. The City’s average annual payments with respect to the certificates is $2,384,515.88 and the certificates mature on November 1, 2048. On April 7, 2021, the City caused the execution and delivery of its $101,505,000 City of Palo Alto 2021 Certificates of Participation (Public Safety Building) (the “2021 Certificates”), to finance the costs of a public safety building. Principal payments are due annually on November 1 and interest payments are due semi-annually on May 1 and November 1 at an average rate of 2.47 percent. The City’s average annual payments with respect to the certificates is $4,948,912.05 and the certificates mature on November 1, 2050. Appendix B Page 23 The following tables shows the City’s total general fund-secured debt service obligations, including the 2018 Certificates, the 2019A Certificates, the 2019B Certificates and the 2021 Certificates. TABLE B15 CITY OF PALO ALTO DEBT SERVICE REQUIREMENTS ON GENERAL FUND-SECURED OBLIGATIONS Year Ending 2018 2019A 2019B 2021 November 1 Certificates Certificates Certificates Certificates Total 2022 $ 531,791.00 $ 1,649,250.00 $ 738,248.70 $ 2,926,712.50 $ 5,846,002.20 2023 530,707.00 2,013,750.00 373,315.80 5,061,712.50 7,979,485.30 2024 529,267.00 2,009,250.00 373,315.80 5,064,962.50 7,976,795.30 2025 532,317.50 2,013,250.00 373,315.80 5,067,712.50 7,986,595.80 2026 529,814.00 2,010,250.00 373,315.80 5,069,712.50 7,983,092.30 2027 531,916.00 2,010,500.00 373,315.80 5,075,712.50 7,991,444.30 2028 533,429.00 2,013,750.00 373,315.80 5,080,212.50 8,000,707.30 2029 529,453.00 2,009,750.00 373,315.80 5,082,962.50 7,995,481.30 2030 529,653.00 2,013,750.00 373,315.80 5,083,712.50 8,000,431.30 2031 529,453.00 2,010,250.00 373,315.80 5,072,212.50 7,985,231.30 2032 533,853.00 2,009,500.00 373,315.80 5,060,412.50 7,977,081.30 2033 532,653.00 2,011,250.00 373,315.80 5,061,862.50 7,979,081.30 2034 531,053.00 2,010,250.00 373,315.80 5,060,312.50 7,974,931.30 2035 529,053.00 2,011,500.00 373,315.80 5,065,762.50 7,979,631.30 2036 531,281.00 2,009,750.00 373,315.80 5,047,912.50 7,962,259.30 2037 532,891.00 2,010,000.00 373,315.80 5,049,212.50 7,965,419.30 2038 533,883.00 2,012,000.00 373,315.80 5,049,012.50 7,968,211.30 2039 529,257.00 2,010,500.00 373,315.80 5,047,312.50 7,960,385.30 2040 529,219.00 2,010,500.00 373,315.80 5,049,112.50 7,962,147.30 2041 533,563.00 2,011,750.00 373,315.80 5,049,312.50 7,967,941.30 2042 531,683.00 2,014,000.00 373,315.80 5,052,912.50 7,971,911.30 2043 529,170.00 2,012,000.00 373,315.80 5,054,812.50 7,969,298.30 2044 531,024.00 2,010,750.00 373,315.80 5,054,712.50 7,969,802.30 2045 532,034.00 — 2,383,315.80 5,057,700.00 7,973,049.80 2046 532,200.00 — 2,380,860.70 5,063,137.50 7,976,198.20 2047 531,522.00 — 2,384,707.26 5,061,212.50 7,977,441.76 2048 — — 2,384,420.36 5,062,037.50 7,446,457.86 2049 — — — 5,065,500.00 5,065,500.00 2050 — — — 5,066,487.50 5,066,487.50 Total $13,812,139.50 $45,897,500.00 $18,484,500.42 $144,664,362.50 $222,858,502.42 Other Obligations The City has certain other outstanding obligations including utility revenue bonds. See APPENDIX B—ANNUAL COMPREHENSIVE FINANCIAL REPORT OF THE CITY FOR THE YEAR ENDED JUNE 20, 202—Notes to Basic Financial Statements—NOTE 7. THIS PAGE INTENTIONALLY LEFT BLANK Appendix C APPENDIX C ANNUAL COMPREHENSIVE FINANCIAL REPORT OF THE CITY FOR THE YEAR ENDED JUNE 30, 2021 THIS PAGE INTENTIONALLY LEFT BLANK ANNUAL COMPREHENSIVE FINANCIAL REPORT CITY OF PALO ALTO CALIFORNIA FISCAL YEAR ENDED JUNE 30, 2021 CITY OF PALO ALTO Fiscal Year 2021 Annual Comprehensive Financial Report City of Palo Alto, CA Fiscal Year Ended June 30, 2021 City Council Tom DuBois, Mayor Patrick Burt, Vice Mayor Alison Cormack Eric Filseth Lydia Kou Greer Stone Greg Tanaka Ed Shikada, City Manager Kiely Nose, Director of Administrative Services/Chief Financial Officer Prepared by: Administrative Services Department CITY OF PALO ALTO For the Year Ended June 30, 2021 Table of Contents Page INTRODUCTORY SECTION: Transmittal Letter .................................................................................................................................... i City Officials ........................................................................................................................................... vii Organizational Structure ...................................................................................................................... viii Administrative Services Organization ....................................................................................................ix GFOA Certificate of Achievement for Excellence in Financial Reporting ............................................... x FINANCIAL SECTION: Independent Auditor’s Report .............................................................................................................. 1 Management’s Discussion and Analysis (Required Supplementary Information – Unaudited) ...................................................................... 5 Basic Financial Statements Government‐wide Financial Statements: Statement of Net Position ....................................................................................................... 31 Statement of Activities ............................................................................................................ 33 Governmental Fund Financial Statements: Balance Sheet .......................................................................................................................... 35 Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Position ‐ Governmental Activities ................................................. 36 Statement of Revenues, Expenditures and Changes in Fund Balances .................................. 37 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities – Governmental Activities ................................................................................................... 38 Statement of Revenues, Expenditures and Changes in Fund Balance – Budget and Actual – General Fund ................................................................................... 39 Proprietary Fund Financial Statements: Statement of Net Position ....................................................................................................... 40 Statement of Revenues, Expenses and Changes in Fund Net Position ................................... 42 Statement of Cash Flows ......................................................................................................... 44 Fiduciary Fund Financial Statement: Statement of Fiduciary Net Position ....................................................................................... 46 Statement of Changes in Fiduciary Net Position ..................................................................... 47 Index to the Notes to the Basic Financial Statements ................................................................. 49 Notes to the Basic Financial Statements ...................................................................................... 51 Required Supplementary Information: Schedule of Changes in Net Pension Liability and related Ratios – Miscellaneous Plan ............. 109 Schedule of Pension Contributions – Miscellaneous Plan ........................................................... 110 CITY OF PALO ALTO For the Year Ended June 30, 2021 Table of Contents (Continued) Page Required Supplementary Information: Schedule of Changes in Net Pension Liability and Related Ratios – Safety Plan ......................... 111 Schedule of Pension Contributions – Safety Plan ........................................................................ 112 Schedule of Changes in Net OPEB Liability and Related Ratios ................................................... 113 Schedule of Employer OPEB Contributions ................................................................................. 114 Supplementary Information: Non‐Major Governmental Funds: Combining Balance Sheet ...................................................................................................... 115 Combining Statement of Revenues, Expenditures and Changes in Fund Balances ............................................................................................... 116 Non‐Major Special Revenue Funds: Combining Balance Sheet ...................................................................................................... 118 Combining Statement of Revenues, Expenditures and Changes in Fund Balances ............................................................................................... 120 Combining Schedule of Revenues, Expenditures and Changes in Fund Balances – Budget and Actual ............................................................. 122 Non‐Major Debt Service Funds: Combining Balance Sheet ...................................................................................................... 128 Combining Statement of Revenues, Expenditures and Changes in Fund Balances ............................................................................................... 129 Combining Schedule of Revenues, Expenditures and Changes in Fund Balances – Budget and Actual ............................................................. 130 Non‐Major Permanent Fund: Schedule of Revenues, Expenditures and Changes in Fund Balance – Budget and Actual ............................................................... 132 Internal Service Funds: Combining Statement of Fund Net Position .......................................................................... 134 Combining Statement of Revenues, Expenses and Changes in Fund Net Position ......................................................................................... 135 Combining Statement of Cash Flows ..................................................................................... 136 Fiduciary Funds: Combining Statement of Fiduciary Net Position – Custodial Funds ...................................... 138 Combining Statement of Changes in Fiduciary Net Position – Custodial Funds ................... 139 CITY OF PALO ALTO For the Year Ended June 30, 2021 Table of Contents (Continued) Page STATISTICAL SECTION: Financial Trends: Net Position by Component ......................................................................................................... 143 Changes in Net Position ............................................................................................................... 144 Fund Balances of Governmental Funds ....................................................................................... 146 Changes in Fund Balances of Governmental Funds ..................................................................... 148 Revenue Capacity: Electric Operating Revenue by Source ......................................................................................... 149 Power Supply Resources .............................................................................................................. 150 Supplemental Disclosure for Water Utilities ............................................................................... 151 Supplemental Disclosure for Gas Utilities .................................................................................... 152 Assessed Value of Taxable Property ............................................................................................ 153 Property Tax Rates, All Overlapping Governments ..................................................................... 154 Property Tax Levies and Collections ............................................................................................ 155 Principal Property Taxpayers ....................................................................................................... 156 Assessed Valuation and Parcels by Land Use .............................................................................. 157 Per Parcel Assessed Valuation of Single Family Residential ........................................................ 158 Debt Capacity: Ratio of Outstanding Debt by Type .............................................................................................. 159 Computation of Direct and Overlapping Debt ............................................................................. 160 Computation of Legal Bonded Debt Margin ................................................................................ 161 Revenue Bond Coverage .............................................................................................................. 162 Demographic and Economic Information: Taxable Transactions by Type of Business ................................................................................... 163 Demographic and Economic Statistics ......................................................................................... 164 Principal Employers...................................................................................................................... 165 Operating Information: Operating Indicators by Function/Program ................................................................................. 166 Capital Asset Statistics by Function/Program .............................................................................. 168 Full‐Time Equivalent City Government Employees by Function .................................................. 170 Introduction  ……….……………………………………………………………………………………………. City of Palo Alto i Transmittal Letter…………………………………………………...… OFFICE OF THE CITY MANAGER 250 Hamilton Ave, 7th Floor Palo Alto, CA 94301 650.329.2692 November 15, 2021 THE HONORABLE CITY COUNCIL Palo Alto, California ANNUAL COMPREHENSIVE FINANCIAL REPORT YEAR ENDED JUNE 30, 2021 Members of the Council and Citizens of Palo Alto: I am pleased to present the Annual Comprehensive Financial Report (ACFR) for the fiscal year ended June 30, 2021 in accordance with Article III, Section 16 and Article IV, Section 13 of the City of Palo Alto Charter. The format and content of this ACFR complies with the principles and standards of accounting and financial reporting adopted by the Governmental Accounting Standards Board (GASB), and contains all information needed for readers to gain a reasonable understanding of City of Palo Alto (City) financial affairs. Management takes sole responsibility for the completeness and reliability of the information contained in this report, based upon a comprehensive framework of internal control that it has established for this purpose. The objective of internal controls is to provide reasonable, rather than absolute, assurance that the financial statements are free of any material misstatements. The City’s financial statements have been audited by Macias Gini & O’Connell LLP, Certified Public Accountants (MGO). The goal of the audit is to obtain reasonable assurance that the financial statements are free of material misstatements and are fairly presented in conformity with generally accepted accounting principles (GAAP). MGO issued an unmodified opinion for the fiscal year ended June 30, 2021. Their report is presented as the first component of the financial section of this report. While MGO has issued an unmodified opinion for this report, information and the contents of this report is the responsibility of the City. An overview of the City’s financial activities for the fiscal year is discussed in detail in the Management’s Discussion and Analysis (MD&A) section of the ACFR. MD&A complements this transmittal letter and should be read in conjunction with it. Introduction …….……………………………………………………………………………………………. ii City of Palo Alto CITY OF PALO ALTO PROFILE The City was incorporated in 1894 and named after a majestic coastal redwood tree which lives along the San Francisquito Creek where early Spanish explorers settled. Located between the cities of San Francisco and San Jose, the City is a largely built-out community of approximately 66,573 residents. The City delivers a full range of municipal services and public utilities under the Council-Manager form of government and offers an outstanding quality of life for its residents. It covers an area of twenty- six square miles and has dedicated almost one-half of the area to open spaces of parks and wildlife preserves. Public facilities include five libraries, four community centers, a cultural arts center, an adult and children’s theater, a junior museum and zoo, an airport, and a golf course. The City provides a diverse array of services for seniors and youth, an extensive continuing education program, concerts, exhibits, team sports and special events. The independent Palo Alto Unified School District (PAUSD) has achieved State and national recognition for the excellence of its programs. City Council: The seven members are elected at-large for four-year staggered terms. At the first meeting of each calendar year, Council elects a Mayor and Vice-Mayor from its membership, with the Mayor having the duty of presiding over Council meetings. Council is the appointing authority for the positions of City Manager and three other officials, the City Attorney, City Clerk, and City Auditor, all of whom report to Council. Finance Committee and Policy and Services Committee: While retaining the authority to approve all actions, Council has established two subcommittees, the Finance Committee and the Policy and Services Committee. The Finance Committee considers and makes recommendations on matters relating to finance, budget, financial audits, capital planning and debt. Each subcommittee is comprised of three Council members. Staff provides the subcommittees and Council with reports such as the ACFR, quarterly budget-versus-actual results, and various planning reports, all of which are utilized in their review of the City’s financial position. FISCAL/ECONOMIC CONDITIONS AND OUTLOOK The City declared a state of emergency in March 2020 and the world began to grapple with the impacts of the novel coronavirus (COVID-19), a global pandemic, and the ensuing public health emergency. While the Fiscal Year 2020 Adopted Budget saw the most significant immediate impacts as shelter in place orders were instituted in the County of Santa Clara and State of California, work on Economic Recovery began in Fall 2020, prior to the City Council setting this priority in January 2021. These financials reflect the one full year of the economic impacts of the pandemic – the stark, immediate results stemming from shelter in place orders through promising third calendar quarter results and widespread distribution of the COVID-19 vaccine. Throughout these times, several conversations with the City Council occurred in 2020 and 2021 that resulted in the Community and Economic Recovery workplan. This workplan includes several priority projects that connect the City Council’s Priorities and ensure organization support and capacity to further recovery efforts. Employment Trends: The City is located in the heart of Silicon Valley and is adjacent to Stanford University, one of the premier institutions of higher education in the nation which has produced much of the talent that founded many successful high-tech companies in Palo Alto and Silicon Valley. With varied historically and relatively stable employers such as Lucille Packard Children’s Hospital, Stanford Health Care, Stanford University, Veteran’s Affairs Palo Alto Healthcare System, Palo Alto Medical Foundation, Palo Alto Unified School District, Stanford Shopping Center and businesses such as Hewlett-Packard, VMware, Tesla, SAP labs Inc. and Space Systems Loral, Palo Alto has enjoyed diverse employment and revenue bases. As of June 2021, the City’s unemployment rate was 3.2 percent Introduction  ……….……………………………………………………………………………………………. City of Palo Alto iii compared to the prior year level of 5.7 percent. The County of Santa Clara’s unemployment rate was 5.2 percent compared to the prior year level of 10.7 percent. The State of California’s unemployment rate was 8.0 percent, compared to the prior year level of 14.9 percent. These levels are lower than FY 2020 but are still significantly higher than recent years as many businesses were forced to adjust their workforce and operations were severely restricted by the COVID-19 shelter in place orders. Real Estate Market: The 2020-2021 County of Santa Clara Assessor’s Annual Report noted that the County of Santa Clara’s annual assessment roll increased by $35.5 billion to $551.5 billion, a 6.87 percent increase over the prior year. Palo Alto’s assessment roll represents 7.69 percent of the County of Santa Clara’s assessment roll and grew 7.77 percent over the prior year to $42.4 billion. Per the Santa Clara County Association of Realtors, home prices in Palo Alto remain well above the County of Santa Clara’s average at $4.0 million as of second quarter 2021. According to Newmark, a company that tracks real estate trends throughout the county, the average asking rent in Palo Alto for commercial space during the second quarter of 2021 was $6.88 per square foot. Based on this report, leasing activities are rebounding, after a sluggish start in calendar year 2021. Despite continuing struggles between executives and employees as it relates to the push to return to offices, the continued focus on distribution of the vaccine, and increase confidence in the second half of calendar year 2021 will influence how quickly leasing activities will recover. Local Trends: Mixed economic opinions and indicators existed at the time the FY 2021 budget was developed. It is important to recall that the actions and leadership of the City Council quickly recognized and worked to address these impacts. On March 16, 2020, the State of California and the County of Santa Clara ordered Shelter in Place directives to slow the spread of COVID-19, which continued into FY 2021. Prior to COVID-19 and after, the Bay Area economy had sustained better performance than the state and the nation. Disruptions caused by COVID-19 are both widespread and significant to Palo Alto, the state and nation’s economic environment and community. The City’s unemployment has been elevated since the pandemic hit the region, however, the rate is significantly lower than national, State of California, and County of Santa Clara’s unemployment rates. Job growth is tepid. Economically sensitive revenue sources in FY 2020 and/or FY 2021, such as transient occupancy tax, sales and utility user’s taxes have significantly declined while documentary transfer and property taxes have been resilient with a healthy growth, however, future years will be monitored closely. General Fund Balancing and Results: The FY 2021 budget was developed as the world grappled with COVID-19, a global pandemic with unknown financial implications impacting regional, national and global economies in response to shelter in place orders and related social distancing restrictions. The City Council provided direction to build the FY 2021 budget assuming a loss of $39.0 million in General Fund tax revenues in FY 2021. Overall, the City’s General Fund was adopted to collect $196.4 million in revenues and $196.9 million in expenditure, a 15 percent reduction compared to the FY 2020 Adopted Operating Budget. In the General Fund, full-time staffing was reduced from 574.43 FTE to 509.91 FTE (a reduction of 64.52 FTE) and part-time staffing was reduced from 81.31 FTE to 55.61 FTE (a reduction of 25.70 FTE). Prioritizing essential services and reducing or eliminating discretionary services was reflected in this budget and achieved through compiling feedback throughout the May and June budget sessions with the City Council. Notwithstanding the service delivery reductions reflected in this budget, the budget balancing strategy ensured that the City continued to proactively pay for long term liabilities, maintained capital investments in its most critical infrastructure, provided resources for the City to successfully adapt from shelter in place to future service delivery models, and established funding to ensure those service delivery transitions. Introduction …….……………………………………………………………………………………………. iv City of Palo Alto Despite the financial constraints, the City maintained its commitment to addressing its long-term liabilities. Contributions towards the City’s long-term pension obligations and other post- employment obligations were maintained this fiscal year including payment to trust funds. These were made possible by cost containment strategies utilized across the organization over the past several years. In addition to the City’s past practice of planning for staffing costs contained in the agreed upon labor terms outlined in memorandums of agreement, CalPERS-determined retirement contribution levels, and a vacancy factor in the General Fund, proactive pension funding contributions to the City’s irrevocable Section 115 Pension Trust Fund were achieved in FY 2021. In the General Fund, this resulted in $3.0 million in additional contributions from various departments and reflects what retirement costs would be if the “normal cost” of contributions was budgeted at a 6.2 percent discount rate (CalPERS is currently at a 7.0 percent discount rate). As of June 30, 2021, the City’s irrevocable pension trust fund has a total of $32.3 million in Citywide contributions (excluding earnings from investments), of which $21.0 million is from the General Fund. As the community grappled with the various impacts of COVID-19, the City took a hard look at both the operating and capital budgets and prioritized essential services, pared back discretionary items, and continued to monitor impacts the global pandemic had on the City’s major revenue sources and economic sectors. In addition to these challenges, the City remained focused on maintaining high quality services with the resources available, while addressing issues facing the City as well as the state, and nation. These issues were reflected in the setting of Council priorities for 2021: • Economic Recovery • Housing for Social and Economic Balance • Social Justice • Climate Change - Protection and Adaptation Progress continues to be made on these priorities, which require long-term strategies. The FY 2021 budget established a number of COVID-19 related reserves to address needs of the City organization and the community during shelter in place, as well as planning for transition to the “new normal” after restrictions were lessened. In FY 2014, the City Council approved a $125.8 million Infrastructure Plan (IP), which included projects such as a new Public Safety Building, replacement of two Fire Stations, a Bike and Pedestrian plan, and two parking garages. As part of the development of the 2021-2025 Capital Improvement Plan (CIP), the IP projects were updated for scope increases and cost escalations, resulting in a revised Infrastructure Plan of $260.5 million. These projects will be funded partially by debt to be repaid with voter-approved increases of 3.5 percent in the transient occupancy tax (TOT) rate and from other sources such as impact fees and Stanford University Medical Center development agreement monies. The 2021-2025 CIP assumed the opening of new Marriott hotels in FY 2021; however, as a result of the public health emergency and its impact on revenues, the annual TOT funding is not estimated to cover the cost of the debt service related to the IP projects for several years. Staff is continually revising these figures and adjusting and planning for these impacts in order to maintain funding for the City’s most critical infrastructure improvements. Due to the COVID-19 pandemic, the City Council aimed to provide economic relief for residential and commercial customers by directing staff to maintain flat rates without compromising the safety and integrity of the utility systems. Rates increased in 2021 for gas, stormwater, and fiber services. In general, the size and timing of rate adjustments take into account current and future revenue requirements and reserve levels for needs such as increasing costs of commodity purchases, capital Introduction  ……….……………………………………………………………………………………………. City of Palo Alto v construction costs, and contractually obligated increases to compensate for inflation, usually based on the annual change to the Bay Area consumer price index (CPI). Long Range Financial Forecast: The City produces a 10-year General Fund Long Range Financial Forecast (LRFF) annually. This comprehensive report analyzes local, state, and federal economic conditions, short and long-term revenue and expense trends, and addresses challenges such as funding long-term pension and healthcare liabilities and infrastructure needs. The forecast is designed to highlight finance issues which the City can address proactively. Moreover, it is a tool that allows policymakers an opportunity to prioritize funding needs over time. It sets the tone for the annual budget process and is one of the many tools and reports that Council uses for financial planning. The LRFF was developed prior to the COVID-19 pandemic, at a time when national, state, and local economic indicators were mixed. Unemployment remained low, job growth slowed, and international trade had negative impacts on economic data. The FY 2021-2030 LRFF was presented to the Finance Committee in December 2019 and approved by the City Council in February 2020. The forecast anticipated a small surplus in FY 2021 followed by annual gaps in FY 2022 through 2025, before the revenues outpaced the expenses in FY 2026 and beyond. Staff identified and recommended a course of action that would structurally balance the General Fund in FY 2021 and largely balance the General Fund on an ongoing basis. The FY 2021 budget included a proactive pension funding contribution to the City’s irrevocable Section 115 Pension Trust Fund and reflected what retirement costs would be if the “normal cost” of contributions was budgeted at a 6.2 percent discount rate compared to the CalPERS estimated 7.0 percent discount rate. Subsequent to the development of the LRFF, revenue and expense numbers were revised based on estimated impacts from the pandemic to recalculate the budget and reflect changes in revenues and expenses to incorporate policy direction from City Council issued after the LRFF to prioritize essential services and pare back discretionary services as discussed in the General Fund Balancing and Results section above. Both Moody’s and Standard and Poor’s (S&P) awarded their highest credit rating of Triple A to the City’s general obligation bonds. This rating has been awarded to only a few cities in the State of California. SIGNIFICANT EVENTS AND ACCOMPLISHMENTS The City is a community dedicated to meeting the social, cultural, recreational, educational, commercial, and retail needs of its citizens and businesses. As such, open space, education, recreational facilities, cultural events and safe streets and neighborhoods are important aspects of the community and the City has been recognized for its accomplishments with a wide variety of awards and recognitions over the past year. Following is a sampling of those awards and accomplishments: • Applied for and awarded the Bike Friendly Communities Gold-level Status. • Received Santa Clara County Supervisor’s Medal for Outstanding Service for staff contributions and efforts in areas of auto theft and community service. • Received the Reliable Public Power Provider (RP3) award from American Public Power Association (APPA) for industry-recognized leading practices in reliability & safety. Introduction …….……………………………………………………………………………………………. vi City of Palo Alto •Received the Smart Energy Provider Award from American Public Power Association (APPA), which recognizes utilities for demonstrating commitment and accomplishment in smart energy program planning; energy efficiency and distributed energy resources; environmental and sustainability programs; and communication and customer experience. •Launched a robust Race & Equity framework and initiative and partnered with local community organizations and stakeholders. •Established the Uplift Local program to expand outdoor dining, retail, and more, generally supporting the business community and connecting the broader Palo Alto community together during challenging economic and public health emergencies. Continued to support key business districts such as Downtown Palo Alto, California Avenue, and the Stanford Shopping Center. •Responded to the COVID-19 pandemic by participating in the City's Emergency Operations Center and quickly developing policies and protocols to protect firefighters and patients by minimizing exposure. •Opened Foothills Nature Preserve to all visitors and partnered with the Environmental Volunteers and other volunteers to create a welcome video for the Preserve. •Awarded the construction contract for the Public Safety Building, a 2014 Infrastructure Plan Project, and associated debt financing. •Substantially completed the Junior Museum and Zoo rebuilding project after 10 years in the making, with all new exhibits designed by JMZ staff, a re-imagined zoo with new animals, and a focus on inclusion, accessibility, and the highest standards in animal care. It is expected to open in Fall 2021. •Completed construction of the new California Avenue Area Parking Garage project. Awards: During the past year, the City received an award for the prior fiscal year (2020) ACFR from the Government Finance Officers Association (GFOA) for “excellence in financial reporting.” The 2021 ACFR will be submitted to the GFOA award program to be considered for this distinguished financial reporting award. Acknowledgments: This ACFR reflects the hard work, talent and commitment of the staff members of the Administrative Services Department. This document could not have been accomplished without their efforts and each contributor deserves sincere appreciation. Management wishes to acknowledge the support of the entire accounting staff for their high level of professionalism and dedication. Management would also like to express its appreciation to MGO, the City’s independent external auditors, who assisted and contributed to the preparation of this Annual Comprehensive Financial Report. Special acknowledgment must be given to City Council and the Finance and Policy and Services Committees for their dedication to directing the financial affairs of the City in a responsible, professional and progressive manner. Respectfully submitted, KIELY NOSE ED SHIKADA Chief Financial Officer City Manager Introduction  ……….……………………………………………………………………………………………. City of Palo Alto vii City of Palo Alto City Officials ………………………….………… Council-Appointed Officers City Manager Ed Shikada City Attorney Molly Stump City Clerk Lesley Milton City Auditor Kyle O'Rourke City Council Tom DuBois, Mayor Patrick Burt, Vice-Mayor Alison Cormack Eric Filseth Lydia Kou Greer Stone Greg Tanaka Finance Committee Alison Cormack, Chair Patrick Burt Eric Filseth Policy and Services Committee Lydia Kou, Chair Greer Stone Greg Tanaka Introduction …….……………………………………………………………………………………………. viii City of Palo Alto City Attorney Molly Stump City Manager* Ed Shikada City Auditor Kyle O'Rourke City Clerk Lesley Milton City of Palo Alto Organization …………………………………… 1 * The Office of Transportation is situated in the City Manager’s Office. Community Services Kristen O’Kane, Director Administrative Services Kiely Nose, Director/Chief Financial Officer Fire Department Geoffrey Blackshire, Chief Human Resources Rumi Portillo, Director/Chief People Officer Police Department Robert Jonsen, Chief Planning & Development Services Jonathan Lait, Director Utilities Dean Batchelor, Director Public Works Brad Eggleston, Director Library Gayathri Kanth, Director Office of Emergency Services Kenneth Dueker, Director Information Technology Darren Numoto, Chief Information Officer Palo Alto Residents City Council Introduction  ……….……………………………………………………………………………………………. City of Palo Alto ix Administrative Services Organization ……… Administrative Services Department Administrative Division Treasury Division Accounting Division Office of Management & Budget Purchasing Division Real Estate Division Mission Statement To provide proactive administrative and technical support to City departments and decision makers, and to safeguard and facilitate the optimal use of City resources. Introduction …….……………………………………………………………………………………………. x City of Palo Alto Government Finance Officers Association of the United States and Canada – Award …… 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 the Members of the City Council of City of Palo Alto, California Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Palo Alto, California (City), as of and for the year ended June 30, 2021, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements as listed in the table of contents. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes 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. Auditor’s Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements 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 entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. 2 Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City as of June 30, 2021, and the respective changes in financial position, and, where applicable, cash flows thereof and the respective budgetary comparison for the General Fund for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note 1(n) to the financial statements, as of July 1, 2020, the City implemented Governmental Accounting Standards Board (GASB) Statement No. 84, Fiduciary Activities. Our opinions are not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis, the schedules of changes in net pension liability and related ratios, the schedules of pension contributions, the schedule of changes in net OPEB liability and related ratios, and the schedule of employer OPEB contributions, as listed in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the GASB 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 auditing standards generally accepted in the United States of America, 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. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City’s basic financial statements. The introductory section, combining and individual nonmajor fund financial statements and schedules, and statistical section, are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining and individual nonmajor fund financial statements are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the combining and individual nonmajor fund financial statements are fairly stated, in all material respects, in relation to the basic financial statements as a whole. The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on them. 3 Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 15, 2021 on our consideration of the City’s internal control over 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 financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City’s internal control over financial reporting and compliance. Walnut Creek, California November 15, 2021 4 This page is left intentionally blank. City of Palo Alto 5 Management’s Discussion and Analysis (Unaudited) Management’s Discussion and Analysis (MD&A) provides an overview of the City of Palo Alto’s financial performance for the fiscal year ended June 30, 2021. To obtain a complete understanding of the City’s financial condition, this document should be read in conjunction with the accompanying Transmittal Letter and Basic Financial Statements. Certain balances for prior year are reclassified to conform with current year presentation. FINANCIAL HIGHLIGHTS  The assets and deferred outflows of resources of the City of Palo Alto (City) exceeded its liabilities and deferred inflows of resources at the close of Fiscal Year (FY) 2021 by $1.2 billion. Of this amount, $24.1 million represents unrestricted net position, which may be used to meet the government’s ongoing obligations to citizens and creditors.  The City’s total net position is $1.2 billion, an increase of $4.8 million, or 0.4 percent over the prior fiscal year. Of this amount, $22.2 million was generated by business‐type activities and offset by a decrease of $17.4 million by governmental activities.  The City’s total outstanding long‐term debt increased by $99.4 million during the current fiscal year due to the issuance of Certificates of Participation (COPs) amounting to $101.5 million plus a $6.5 million premium to finance the construction of a public safety building, offset by the scheduled debt retirements.  At the close of FY 2021, the City’s governmental funds reported total fund balances of $365.6 million, an increase of $98.9 million from the prior year. Approximately 13.4 percent of this amount, or $49.1 million, is unassigned fund balance and available for spending at the City’s discretion.  At the end of the current fiscal year, unrestricted fund balance (the total of the committed, assigned and unassigned components of fund balance) for the General Fund was $66.3 million, or 38.1 percent of total General Fund expenditures, including transfers.  In May 2021, the City received the first half of its total $13.7 million American Rescue Plan Act of 2021 (ARPA) allocation. The first distribution of $6.9 million was recorded as unearned revenue at June 30, 2021 as the funds are not earned nor spent. The second distribution is expected in May 2022.  The City implemented the Governmental Accounting Standards Board (GASB) Statement No. 84, Fiduciary Activities, effective fiscal year ended June 30, 2021. The statement establishes criteria for identifying fiduciary activities of all state and local governments. The City evaluated all funds and activities in accordance with the statement and determined that the Cable Joint Powers Authority and the assessment district activities previously reported as agency funds should be reported as custodial funds. OVERVIEW OF THE ANNUAL COMPREHENSIVE FINANCIAL REPORT (ACFR) The ACFR is presented in five sections:  An introductory section that includes the Transmittal Letter and general information  Management’s Discussion and Analysis  The Basic Financial Statements that include the Government‐wide and Fund Financial Statements, along with the Notes to the Basic Financial Statements  Required and Other Supplemental Information  Statistical Information City of Palo Alto 6 Government‐wide Financial Statements The Government‐wide Financial Statements provide a longer‐term view of the City’s activities as a whole. They include the Statement of Net Position and the Statement of Activities. The Statement of Net Position includes the City’s capital assets and long‐term liabilities on a full accrual basis of accounting similar to that used by private sector companies. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the City is improving or deteriorating. The Statement of Activities provides information about the City’s revenues and expenses on a full accrual basis, with an emphasis on measuring net revenues or expenses for each of the City’s programs. The Statement of Activities explains in detail the change in net position for the year. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. The amounts in the Statement of Net Position and the Statement of Activities are separated into Governmental and Business‐type Activities in order to provide a summary of each type of activity. Governmental Activities All of the City’s basic services are considered to be governmental activities. Included in basic services are the City Council, City Manager, City Attorney, City Clerk, City Auditor, Administrative Services, Human Resources, Public Works, Planning and Development Services, Office of Transportation, Police, Fire, Community Services, and Library. These services are supported by City’s general revenues such as taxes, and by specific program revenues such as fees and grants. The City’s governmental activities also include the activities of the Palo Alto Public Improvement Corporation, which is a separate legal entity financially accountable to the City. Business‐type Activities All of the City’s enterprise activities are reported as business‐type activities, including Water, Electric, Fiber Optics, Gas, Wastewater Collection, Wastewater Treatment, Refuse, Storm Drainage, and Airport. Unlike governmental services, these services are intended to recover all or a significant portion of their costs through user fees and charges. The Government‐wide Financial Statements can be found on pages 31‐33 of this report. Fund Financial Statements The Fund Financial Statements provide detailed information about each of the City’s most significant funds, called major funds. The concept of major funds, and the determination of which funds are major funds, was established by GASB Statement No. 34. Each major fund is presented individually and all non‐major funds are combined in a single column on each fund statement. Supplemental schedules display these non‐major funds in more detail. The General Fund is always considered a major fund, but other funds may change from year to year as a result of changes in the pattern of City activities. The Fund Financial Statements display the City’s operations in more detail than the Government‐wide Financial Statements. Fund Financial Statements include Governmental, Proprietary, and Fiduciary Funds. City of Palo Alto 7 Governmental Funds Governmental Fund Financial Statements are prepared on the modified accrual basis of accounting, which means they measure only current financial resources and uses. Capital assets and other long‐term assets, along with long‐term liabilities, are presented only in the Government‐wide Financial Statements. In FY 2021, the City had two major governmental funds ‐ the General Fund and the Capital Projects Fund. Data from the other governmental funds are combined into a single column for presentation. Individual fund data for each of these non‐major governmental funds is provided in the Supplemental Information section of this report. Since the focus of governmental funds is narrower than that of the Government‐wide Financial Statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the Government‐wide Financial Statements. By doing so, readers may better understand the long‐term impact of the government’s near‐term financing decisions. Both the Governmental Fund Balance Sheet and the Governmental Fund Statement of Revenues, Expenditures and Changes in Fund Balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The Governmental Fund Financial Statements can be found on pages 35‐39 of this report. Proprietary Funds Enterprise and Internal Service Fund Financial Statements are prepared on the full accrual basis of accounting, similar to the basis of accounting that is used by private sector companies. These statements include all of the current and long‐term assets, deferred outflows of resources, current and long‐term liabilities, and deferred inflows of resources. The City’s Internal Service Funds provide goods and services exclusively to the City’s governmental and business‐type activities. Internal Service Funds cannot be considered major funds because their revenues are derived from other City funds. Revenues between funds are eliminated in the Government‐wide Financial Statements, and any related profits or losses in Internal Service Funds are returned to the activities in which they were created, along with any residual net position of the Internal Service Funds. The Proprietary Fund Financial Statements can be found on pages 40‐45 of this report. Fiduciary Funds Fiduciary funds are used to account for assets held by the City acting in a fiduciary capacity for other entities and individuals. Custodial Funds are fiduciary funds used to report fiduciary activities that are not required to be reported in pension (and other employee benefit) trust funds, investment trust funds, or private purpose trust funds. These include balances and activities of the Cable Joint Powers Authority and the assessment district. The financial activities of these funds are excluded from the government‐wide financial statements, but are presented in separate fiduciary fund financial statements. The Fiduciary Fund Financial Statement can be found on pages 46 and 47 of this report. Notes to the Basic Financial Statements The Notes to the Basic Financial Statements provide additional information that is necessary to acquire a full understanding of the data provided in the Government‐wide and Fund Financial Statements. The Notes to the financial statements can be found on pages 51‐108 of this report. City of Palo Alto 8 Required and Other Supplemental Information The Required Supplementary Information related to the City’s pension and Other Post‐Employment Benefits (OPEB) plans is included after the Notes to the Basic Financial Statements on pages 109‐114. The combining statements and individual fund statements and schedules referred to earlier in connection with non‐major Governmental Funds and Internal Service Funds are presented immediately following the Required Supplementary Information and can be found on pages 115‐139 of this report. FINANCIAL ANALYSIS OF GOVERNMENT‐WIDE FINANCIAL STATEMENTS This section focuses on the City’s net position and changes in net position of its governmental and business‐ type activities for the fiscal year ended June 30, 2021. As noted earlier, the City’s total assets and deferred outflows of resources exceeded total liabilities and deferred inflows of resources by $1.2 billion at the end of the fiscal year, an increase in net position of $4.8 million. CONDENSED STATEMENT OF NET POSITION As of June 30 (in millions) 2021 2020 2021 2020 2021 2020 Cash and investments 443.4$ 342.8$ 285.6$ 277.4$ 729.0$ 620.2$ Other assets 76.6 60.5 47.7 52.8 124.3 113.3 Capital assets 602.0 596.3 708.5 693.2 1,310.5 1,289.5 Total Assets 1,122.0 999.6 1,041.8 1,023.4 2,163.8 2,023.0 Unamortized loss from refunding ‐ 0.1 0.2 0.1 0.2 Pension and OPEB related 60.8 55.8 24.1 20.9 84.9 76.7 Total Deferred Outflows of Resources 60.8 55.8 24.2 21.1 85.0 76.9 Net pension and OPEB liabilities 438.2 416.3 159.7 153.7 597.9 570.0 Long‐term debt 217.5 112.5 68.9 74.5 286.4 187.0 Other liabilities 87.6 61.5 23.8 21.7 111.4 83.2 Total Liabilities 743.3 590.3 252.4 249.9 995.7 840.2 Pension and OPEB related 16.3 24.5 6.4 9.6 22.7 34.1 Total Deferred Inflows of Resources 16.3 24.5 6.4 9.6 22.7 34.1 Net Position Net investment in capital assets 480.6 497.4 642.0 621.3 1,122.6 1,118.7 Restricted 80.3 73.3 3.4 4.1 83.7 77.4 Unrestricted (137.7) (130.1) 161.8 159.6 24.1 29.5 Total Net Position 423.2$ 440.6$ 807.2$ 785.0$ 1,230.4$ 1,225.6$ Governmental Activities Business‐type Activities Government‐wide Totals The largest portion of the City’s net position (91.2 percent) is its net investment in capital assets such as land, buildings, infrastructure and vehicles, less any related outstanding debt that was used to acquire those assets. The City uses these capital assets to provide a variety of services to its citizens. Accordingly, these assets are not available for future spending. Although the City’s investment in capital assets is reported net of related debt, it should be noted that the resources used to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. City of Palo Alto 9 The restricted portion of the City’s net position (6.8 percent) represents resources that are subject to external restrictions on how they may be used. The remaining balance of $24.1 million, representing 2.0 percent of the City’s net position, is unrestricted and may be used to meet the City’s ongoing obligations to its citizens and creditors. Overall, the City has positive unrestricted net positions for the government on a combined basis, considering both governmental activities and business‐type activities. The unrestricted net position for governmental activities is negative due to recognition of the net pension liabilities, as required by GASB Statement No. 68, and net OPEB liabilities, as required by GASB Statement No. 75. The $137.7 million net deficit for governmental activities includes the $303.8 million net impact of net pension liabilities and its related deferred outflows of resources and $89.9 million net impact of net OPEB liabilities and its related deferred outflows of resources and deferred inflows of resources. Governmental activities’ unrestricted net position, excluding these impacts, is $256.0 million. Components of the $4.8 million increase in total net position are discussed in the following sections for governmental activities and business‐type activities. Governmental Activities – Net Position The following analysis focuses on the net position and changes in net position of the City’s Governmental Activities presented in the Government‐wide Statement of Net Position and Statement of Activities. Increase/ 2021 2020 (Decrease) Cash and investments 443.4$ 342.8$ 100.6$ Other assets 76.6 60.5 16.1 Capital assets 602.0 596.3 5.7 Total Assets 1,122.0 999.6 122.4 Pension and OPEB related 60.8 55.8 5.0 Total Deferred Outflows of Resources 60.8 55.8 5.0 Net pension and OPEB liabilities 438.2 416.3 21.9 Long‐term debt 217.5 112.5 105.0 Other liabilities 87.6 61.5 26.1 Total Liabilities 743.3 590.3 153.0 Pension and OPEB related 16.3 24.5 (8.2) Total Deferred Inflows of Resources 16.3 24.5 (8.2) Net investment in capital assets 480.6 497.4 (16.8) Restricted 80.3 73.3 7.0 Unrestricted (137.7) (130.1) (7.6) Total Net Position 423.2$ 440.6$ (17.4)$ CONDENSED STATEMENT OF NET POSITION As of June 30 (in millions) GOVERNMENTAL ACTIVITIES City of Palo Alto 10 The City’s Governmental Activities total net position decreased $17.4 million to $423.2 million as of June 30, 2021 due to the following:  Assets and Deferred Outflows of Resources  Cash and investments increased $100.6 million mainly due to the issuance of COPs amounting to $101.5 million plus $6.5 million premium to finance the construction of a public safety building and an increase in restricted cash and investments held in the Public Agency Retirement Services Section 115 irrevocable trust (Section 115 Pension Trust).  Other assets increased $16.1 million mainly due to an increase in notes receivable for the predevelopment and construction of multifamily rental housing reserved for occupancy by extremely low, very low and low‐income households.  Capital assets increased $5.7 million due to continued construction of the Highway 101 Pedestrian / Bicycle overpass, Public Safety Building, and California Avenue Parking Garage and offset by the retirements and depreciation.  Pension and OPEB related deferred outflows of resources increased $5.0 million due to increase of pension related deferred outflows of resources of $5.7 million offset by a decrease of OPEB related deferred outflows of resources of $0.7 million.  Liabilities and Deferred Inflows of Resources  Net pension and OPEB liabilities increased $21.9 million due to increase in net pension liabilities of $23.5 million offset by the decrease of net OPEB liabilities of $1.6 million.  Long‐term debt increased $105.0 million due to issuance of COPs amounting to $101.5 million plus $6.5 premium to finance the construction of a public safety building, offset by the scheduled debt retirements.  Other liabilities increased $26.1 million primarily due to $6.9 million receipt of City’s first of two distributions of the ARPA funding that was recorded as unearned revenue as the funds are not earned nor spent. Another factor driving the increase was the recording of a claim liability of $12.6 million for a class action lawsuit.  Pension and OPEB related deferred inflows of resources decreased $8.2 million due to decrease of $5.8 million pension related inflows of resources and decrease of OPEB related deferred inflows of resources of $2.4 million.  Net position  Net investment in capital assets decreased $16.8 million to $480.6 million mainly due to current year depreciation for capital assets. Restricted net position increased $7.0 million to $80.3 million primarily due to increases of restricted cash and investments held in the Section 115 Pension Trust and debt service. Unrestricted net position is negative primarily due to the recognition of the net pension and OPEB liabilities as required by GASB Statements Nos. 68 and 75. City of Palo Alto 11 Governmental Activities – Revenues The table below shows that Governmental Activities revenues totaled $198.1 million in FY 2021, a decrease of $15.2 million from prior year revenues of $213.3 million. Increase/ Revenues by Source 2021 2020 (Decrease) Program Revenues: Charges for services 55.5$ 57.1$ (1.6)$ Operating grants and contributions 3.0 2.6 0.4 Capital grants and contributions 11.3 9.0 2.3 Total Program Revenues 69.8 68.7 1.1 General Revenues: Property tax 60.9 55.6 5.3 Sales tax 29.1 30.6 (1.5) Utility user tax 14.6 16.1 (1.5) Transient occupancy tax 5.2 18.6 (13.4) Documentary transfer tax 10.6 6.9 3.7 Other tax 2.8 2.9 (0.1) Investment earnings 4.9 13.8 (8.9) Miscellaneous 0.2 0.1 0.1 Total General Revenues 128.3 144.6 (16.3) Total Revenues 198.1$ 213.3$ (15.2)$ GOVERNMENTAL ACTIVITIES Revenues for the Year Ended June 30 (in millions) Program Revenues such as charges for services, operating grants and contributions, and capital grants and contributions are generated from or restricted to each activity. Total Program Revenues increased $1.1 million, or 1.6 percent, from the prior year. City of Palo Alto 12 General Revenues decreased $16.3 million, or 11.3 percent, from the prior year mainly due to decreases in sales tax, utility user tax, transient occupancy tax revenues as a result of the economic impact of the COVID‐ 19 pandemic, and investment earnings due to impact of negative fair market value adjustments. Further analysis of program revenues and general revenues can be found in the Financial Analysis of Governmental Funds section of the MD&A. Governmental Activities – Revenues by Source The chart below presents revenues by source for Governmental Activities. General Revenues are composed of taxes and other revenues not specifically generated by, or restricted to, individual activities. All tax revenues and investment earnings are included in General Revenues. City of Palo Alto 13 Governmental Activities – Expenses The table below presents a comparison of FY 2021 and FY 2020 expenses by function, along with interest and other expenses and transfers. Total Governmental Activities functional expense was $234.6 million in FY 2021, a decrease of $8.3 million. Increase/ Activities 2021 2020 (Decrease) City Council 0.2$ 0.2$ ‐$ City Manager 2.5 3.6 (1.1) City Attorney 2.3 2.8 (0.5) City Clerk 0.7 0.8 (0.1) City Auditor 0.6 0.6 0.0 Administrative Services 23.0 15.9 7.1 Human Resources 2.5 3.0 (0.5) Public Works 52.7 45.6 7.1 Planning and Development Services 18.1 21.7 (3.6) Office of Transportation 3.6 4.7 (1.1) Police 43.6 50.9 (7.3) Fire 37.1 41.3 (4.2) Community Services 30.3 34.2 (3.9) Library 11.1 13.0 (1.9) Interest and Other Expense 6.3 4.6 1.7 Total Functional Expense 234.6 242.9 (8.3) Change in Net Position before Transfers (36.5) (29.6) (6.9) Transfers 19.1 20.2 (1.1) Change in Net Position (17.4) (9.4) (8.0) Net Position, Beginning 440.6 450.0 (9.4) Net Position, Ending 423.2$ 440.6$ (17.4)$ GOVERNMENTAL ACTIVITIES Expenses and Change in Net Position for the Year Ended June 30 (in millions) Functional expenses consisted of depreciation, uncapitalized operating expenses from capital project funds, internal service funds allocation, changes in pension and OPEB liabilities due to deferred contributions, and the amortization of pension and OPEB‐related outflows and inflows of resources. City of Palo Alto 14 Total functional expenses were $234.6 million in the current fiscal year, a decrease of $8.3 million from the prior year mainly due to decreases in salaries and benefits and contract services. All department functional expenses decreased except for a) Public Works which increased $7.1 million due to various repairs and maintenance of capital assets such as streets, sidewalks, facilities, and parks all of which are non‐capitalizable; and b) Administrative Services which increased $7.1 million mainly due to the expenses incurred for claims related to a class action lawsuit of $12.6 million. Further variance analysis of functional expenses can be found in the Financial Analysis of Governmental Funds section of the MD&A. Governmental Activities – Functional Expenses The functional expenses chart below includes only current year expenses. It does not include capital outlays, as those are added to the City’s capital assets. Functions which comprise less than 2 percent of total expenses are combined into the “All Other” category in the chart below. All Other includes City Council, City Manager, City Attorney, City Clerk, City Auditor, and Human Resources. Community Services 13% Library 5% All Other 4% Administrative Services 10% Public Works 22% Interest and Other Expense 3% Planning & Development Services 8% Office Of Transportation 1% Fire 16% Police 18% City of Palo Alto 15 Business‐Type Activities – Net Position The following analysis focuses on the net position and changes in net position of the City’s Business‐type Activities presented in the Government‐wide Statement of Net Position and Statement of Activities. Increase/ 2021 2020 (Decrease) Cash and investments 285.6$ 277.4$ 8.2$ Other assets 47.7 52.8 (5.1) Capital assets 708.5 693.2 15.3 Total Assets 1,041.8 1,023.4 18.4 Unamortized loss from refunding 0.1 0.2 (0.1) Pension and OPEB related 24.1 20.9 3.2 Total Deferred Outflows of Resources 24.2 21.1 3.1 Net pension and OPEB liabilities 159.7 153.7 6.0 Long‐term debt 68.9 74.5 (5.6) Other liabilities 23.8 21.7 2.1 Total Liabilities 252.4 249.9 2.5 Pension and OPEB related 6.4 9.6 (3.2) Total Deferred Inflows of Resources 6.4 9.6 (3.2) Net Position Net investment in capital assets 642.0 621.3 20.7 Restricted 3.4 4.1 (0.7) Unrestricted 161.8 159.6 2.2 Total Net Position 807.2$ 785.0$ 22.2$ BUSINESS‐TYPE ACTIVITIES As of June 30 (in millions) CONDENSED STATEMENT OF NET POSITION The City’s Business‐type Activities total net position increased $22.2 million to $807.2 million as of June 30, 2021 due to the following:  Assets and Deferred Outflows of Resources  Cash and investments increased $8.2 million mainly due to increases in net position for all enterprise funds except for the Electric Fund.  Other assets decreased $5.1 million mainly due to lower accounts receivable balance in the Electric Fund. City of Palo Alto 16  Capital assets increased $15.3 million to $708.5 million primarily due to capital assets addition in the Electric, Wastewater Collection, Wastewater Treatment, Storm Drainage and Airport Funds. These capital assets additions and reduction in related long term debt also contributed to the $20.7 million increase in net investment in capital assets to $642.0 million in FY 2021.  Liabilities and Deferred Inflows of Resources  Pension and OPEB related deferred outflows of resources increased $3.2 million due to increases of pension related deferred outflows of resources of $3.5 million offset by the decrease of OPEB related deferred outflows of resources of $0.3 million.  Net pension and OPEB liabilities increased $6.0 million due to a $6.6 million increase in net pension liabilities offset by a $0.6 million decrease in net OPEB liabilities.  Long term debt decreased $5.6 million due to scheduled debt retirements.  Other liabilities increased $2.1 million primarily due to higher year‐end accruals in the Electric and Airport Funds.  Pension and OPEB related deferred inflows of resources decreased $3.2 million due to a decrease of $2.3 million related pension inflows of resources and decrease of OPEB related deferred inflows of resources of $0.9 million.  Net Position  Unrestricted net position of $161.8 million, an increase of $2.2 million from the prior year, represents assets available to finance day‐to‐day operations and other expenses approved by the City Council. This amount includes rate stabilization reserves (RSR) of $51.3 million and operations reserves of $69.2 million, along with the electric special projects (Calaveras) reserve of $46.7 million, the hydro stabilization reserve of $15.4 million and the CIP reserve of $18.6 million. The positive balances in these reserves are offset by $105.7 million net impact of net pension liabilities and its related deferred outflows of resources and $36.3 million net impact of net OPEB liabilities and its related deferred outflows of resources and deferred inflows of resources. City of Palo Alto 17 Business‐Type Activities – Revenues The table below presents the revenues by source of the City’s Business‐type Activities. The City operates the Water, Electric, Fiber Optics, Gas, Wastewater Collection, Wastewater Treatment, Refuse, Storm Drainage, and Airport funds. BUSINESS‐TYPE ACTIVITIES Revenues for the Year Ended June 30 (in millions) Increase/ Revenues by Source 2021 2020 (Decrease) Program Revenues: Charges for services 346.5$ 353.0$ (6.5)$ Operating grants and contributions 0.5 0.5 ‐ Capital grants and contributions 6.4 6.4 ‐ Total Program Revenues 353.4 359.9 (6.5) General Revenues: Investment earnings 2.2 11.5 (9.3) Total General Revenues 2.2 11.5 (9.3) Total Revenues 355.6$ 371.4$ (15.8)$ Business‐type Activities revenues totaled $355.6 million, a decrease of $15.8 million from the prior year. Program revenues decreased $6.5 million year over year. Charges for services decreased $6.5 million from the prior year due to the following:  Electric fund revenue decreased due to lower demand in the commercial and industrial sectors as a result of continued limited businesses operations and closures.  Refuse fund revenue decreased due to a reduction of commercial and industrial services due to limited business operations and shelter in place restrictions.  The decreases mentioned above were partially offset by the increases in Gas Fund revenues due to a 2 percent rate increase and higher residential consumption and in Wastewater Treatment fund as a result of higher billing for capital costs. Storm Drainage and Fiber Optic rates also increased in FY 2021. Investment earnings decreased $9.3 million from the prior year mainly due to the impact of negative fair market value adjustments. City of Palo Alto 18 Business‐Type Activities – Expenses The table below presents a comparison of the FY 2021 and FY 2020 expenses for the City’s Business‐type Activities. BUSINESS‐TYPE ACTIVITIES Expenses and Change in Net Position for the Year Ended June 30 (in millions) Increase/ Business‐type Activities 2021 2020 (Decrease) Water 43.6$ 43.0$ 0.6$ Electric 156.1 142.4 13.7 Fiber Optics 2.5 2.8 (0.3) Gas 28.6 27.2 1.4 Wastewater Collection 19.6 18.9 0.7 Wastewater Treatment 28.4 28.8 (0.4) Refuse 29.1 36.9 (7.8) Storm Drainage 4.9 5.5 (0.6) Airport 1.5 2.1 (0.6) Total Functional Expense 314.3 307.6 6.7 Increase in Net Position before Transfers 41.3 63.7 (22.4) Transfers (19.1) (20.2) 1.1 Change in Net Position 22.2 43.5 (21.3) Net Position, Beginning 785.0 741.5 43.5 Net Position, Ending 807.2$ 785.0$ 22.2$ Business‐type Activities expenses increased $6.7 million for a total of $314.3 million mainly due to the following:  Electric Fund expenses increased $13.7 million due to higher energy purchase costs and increases in operations and maintenance. The availability of hydroelectric energy resources is lower than average and requires electricity purchases at market rates which were significantly higher during the spring of 2021.  Gas Fund expenses increased $1.4 million due to higher commodity purchases as a result of higher natural gas prices.  Refuse Fund expenses decreased $7.8 million due to lower payments to GreenWaste of Palo Alto for reimbursement of new waste collection vehicles, decreases in facility rent and a downward adjustment to landfill post closure maintenance as a result of a maintenance cost update that was approved in FY 2021. City of Palo Alto 19 FINANCIAL ANALYSIS OF GOVERNMENTAL FUNDS As noted earlier, the City uses fund accounting to ensure and demonstrate compliance with finance‐related legal requirements. The focus of the City’s Governmental Funds is to provide information on near‐term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the City’s financing requirements. In particular, the unassigned fund balance may serve as a useful measure of a government’s net resources available for discretionary use as it represents the portion of fund balance not yet limited to use for a particular purpose by either an external party, the City itself, or an entity that has been delegated authority by the City Council to assign resources for use. As of June 30, 2021, the City’s Governmental Funds reported combined fund balances of $365.6 million, an increase of $98.9 million from the prior year mainly due to issuance of COPs for the construction of a public safety building. Approximately 13.4 percent, or $49.1 million, constitutes unassigned fund balance, which is available for spending at the City’s discretion and other purposes. The remainder of the fund balance is either non‐spendable, restricted, committed, or assigned to indicate that it is: 1) not in spendable form ($11.9 million); 2) restricted for particular purposes ($136.8 million); 3) committed for particular purposes ($90.0 million); or 4) assigned for particular purposes ($77.9 million). Governmental Fund revenues decreased $13.8 million, or 6.6 percent, from the prior year to $194.9 million. General Fund revenues decreased $13.6 million and Capital Projects Fund revenue increased $1.8 million. Non‐major Governmental Funds revenue decreased $2.0 million primarily due to suspension of most parking enforcement which decreased the demand for parking permits. The violations were partially offset by an increase in housing in‐lieu fees and federal revenue. Governmental Fund expenditures were $222.1 million, a decrease of $38.7 million from the prior year. General Fund expenditures decreased $21.8 million, Capital Projects Fund expenditures decreased by $18.2 million, and Non‐major Governmental Funds expenditures increased by $1.3 million. Details of significant changes are discussed in the following sections. Governmental Fund other financing resources increased $112.3 million, from the prior year to $126.1 million mainly due to the issuance of COPs for the construction of a public safety building. General Fund Balance Sheet The General Fund is the primary operating fund of the City. At the end of the current fiscal year, the fund balance of the General Fund was $75.6 million, compared to $61.8 million in the prior year. The fund balance is classified as follows: $9.4 million non‐spendable, $4.6 million committed, $12.5 million assigned, and $49.1 million unassigned. The unassigned amount is designated by the City Council for Budget Stabilization Reserve. City of Palo Alto 20 Statement of Revenues, Expenditures and Changes in Fund Balance ‐ Revenues The City’s General Fund revenues totaled $166.8 million in FY 2021. This represents a decrease of $13.6 million, or 7.5 percent, compared to the prior year. The year over year change in significant revenue sources is noted in the following table. Increase/ Revenues by Source 2021 2020 (Decrease) Property tax 56.6$ 51.1$ 5.5$ Sales tax 29.1 30.6 (1.5) Utility user tax 14.6 16.1 (1.5) Transient occupancy tax 5.2 18.6 (13.4) Documentary transfer tax 10.6 6.9 3.7 Charges for services 25.1 24.1 1.0 Permits and license 7.3 7.5 (0.2) Rental income 13.3 16.0 (2.7) Other 5.0 9.5 (4.5) Total Revenues 166.8$ 180.4$ (13.6)$ GENERAL FUND Revenues for the Year Ended June 30 (in millions) Property tax revenue increased $5.5 million, or 10.8 percent due to pre‐pandemic assessed value growth and an increase of $1.7 million in the Excess Educational Revenue Augmentation Fund (ERAF) distribution. The FY 2021 secured and unsecured property tax assessed values growth rates are 7.6 percent and 12.7 percent, respectively, a weighted average of 7.8 percent. These higher assessed values reflect continued strength in commercial and residential real estate markets. Historically, during economic downturns such as a recession and/or a pandemic, impacts to property tax are delayed a year and then the growth rate typically plateaus. Over a seven‐year period, ERAF distribution has grown from $0.4 million in FY 2014 to $5.6 million in FY 2021. Excess 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. Due to the uncertainty of whether local agencies will continue to receive excess ERAF funds, it is not considered a permanent local revenue source. City of Palo Alto 21 Sales tax receipts were $1.5 million or 4.9 percent, lower than the prior year. The decrease is lower than expected even though there is a significant decline of high‐end goods and dining options at regional destinations, such as the Stanford Shopping Center, which was offset by the strong performance in the business to business segment and online sales. As the nation transitions from a shopping center country to online sales, a surge in online retail sales will partially displace tax revenue from traditional industry segments to state and county pools. Online sales data that cannot be tracked to a specific county jurisdiction are allocated to the Santa Clara County sales tax pool and then distributed to local jurisdictions based on local tax percentages. City’s average proportion of the county pool sales tax allocation is approximately 5.6 percent, a 1.5 percent decrease compared to the fourth calendar quarter of 2019 (pre‐pandemic). The sales tax growth in the second half of FY 2021 is due to high vaccination rates in the Bay Area resulting in increased employment and economic activity. Utility user tax (UUT) revenues are $1.5 million, or 9.3 percent, lower compared to prior year due to lower business consumption of electric and telephone services. The telephone UUT receipts declined by $1.2 million or 19.3 percent due to business closures and shelter in place restrictions which reduced the workforce present in the City. Transient occupancy tax (TOT) continues to be the revenue source most significantly impacted by the pandemic and fell to $5.2 million, a $13.4 million, or 72.0 percent decrease when compared to the prior year. Six hotels, representing 16.3 percent of available rooms remained closed while two other smaller hotels reopened during the fiscal year. However, two Marriott hotels (with around 293 rooms) are newly opened in the middle and end of the fiscal year. The opened hotels average daily room and occupancy rates significantly declined in the first three quarters and partially recovered in the fourth quarter. In FY 2021, the average occupancy rate was 40.6 percent, a 33.4 percent decrease and the average room rate was $116.90, a 55.9 percent decrease over the prior year. Documentary transfer tax increased $3.7 million, or 53.6 percent when compared to prior year due to six large commercial property transactions that occurred in FY2021. This revenue source is volatile since it is highly dependent on sales volume and the mix of commercial and residential sales. Charges for services increased $1.0 million, or 4.1 percent, when compared to prior year due to an increase of golf course revenues by $2.3 million which due to higher demand to play golf after re‐opening during the COVID‐19 pandemic. This increase is offset by reduced programs and classes and fewer reviews and inspections due to limited operations caused by COVID‐19 restrictions. Rental income decreased $2.7 million, or 16.9 percent, when compared to prior year due to lower facility rentals and number of tenants due to limited economic activities and some businesses closures. The City has continued to follow the Santa Clara County Moratorium Order to give protection for small businesses and approved a rent forgiveness program. Other revenues decreased $4.5 million, or 47.4 percent, when compared to prior year due to a decrease of investment earnings which resulted from negative fair market value adjustments City of Palo Alto 22 Statement of Revenues, Expenditures and Changes in Fund Balance ‐ Expenditures General Fund expenditures totaled $160.3 million for FY 2021 compared to $182.1 in the prior year. This amount excludes encumbrances and reappropriations. The year over year change for major functions is noted in the following table. Increase/ Expenditures by Function 2021 2020 (Decrease) Administrative Services 5.2$ 6.0$ (0.8)$ Public Works 13.3 13.6 (0.3) Planning and Development Services 15.8 19.3 (3.5) Police 41.3 45.7 (4.4) Fire 34.9 36.4 (1.5) Community Services 26.3 29.6 (3.3) Library 8.5 10.0 (1.5) Non‐Departmental 4.6 9.2 (4.6) All other 10.4 12.3 (1.9) Total Expenditures 160.3$ 182.1$ (21.8)$ GENERAL FUND Expenditures for the Year Ended June 30 (in millions) General Fund expenditures decreased by $21.8 million, or 12.0 percent compared to prior year primarily due to the decrease in salaries and benefits and reduced contract services. In response to financial uncertainties caused by the COVID‐19 pandemic, the City adopted various strategies to lower expenses such as implementing furloughs to the Management and Professional Group, leaving some vacant positions unfilled, eliminating a few positions, and deferring wage increases to most of the labor unions. The City also reduced service hours and various operating expenditures such as travel and training, program and project consultants, and other contractual services. Planning and Development expenses decreased $3.5 million primarily due to reduced contract services due to reorganized building inspection and plan review. Police expenses decreased $4.4 million mainly due to decreases in salaries and benefits, including overtime, as a result of eliminated positions including specialized police teams, detectives, dispatchers, records staff, animal control officers, parking enforcement officers and administration. City of Palo Alto 23 Fire expenses decreased $1.5 million mainly due to decreases in indirect charges such as vehicle replacement allocation and IT support. Community Services expenses decreased $3.3 million primarily due to decreases in salaries and benefits and contract services. In response to continued governmental restrictions, Community Services Facilities reduced operating hours in community centers, museums, theater and open space preserves. Special events, art exhibits and teen programs were also reduced or eliminated. Library expenses decreased $1.5 million which was attributed to a decrease in salaries and benefits and reduced contract services as a result of reduced library hours at all branches. Non‐Departmental expenditures decreased $4.6 million due to reduced lease payments for the Cubberley facility and a one‐time purchase of the current City Manager’s house in FY 2020. Statement of Revenues, Expenditures and Changes in Fund Balance‐Budget and Actual Revenues, excluding Charges to Other Funds, were originally budgeted at $163.1 million. Budget estimates were revised downward by $3.9 million. The revenue categories that were adjusted are shown in the table below. Adopted Final Increase/ Budgeted Revenues Budget Budget (Decrease) Property tax 52.0$ 53.2$ 1.2$ Sales tax 20.5 25.0 4.5 Utility user tax 15.1 14.1 (1.0) Transient occupany tax 14.9 5.1 (9.8) Documentary transfer tax 4.7 6.9 2.2 All other 55.9 54.9 (1.0) 163.1 159.2 (3.9) Charges to other funds 12.0 12.0 ‐ Prior year encumbrances and appropriations ‐ 7.6 7.6 Total Budgeted Revenues 175.1$ 178.8$ 3.7$ GENERAL FUND Budgeted Revenues for the Year Ended June 30 (in millions) City of Palo Alto 24 Adjustments to the original budget were based on the following:  Property tax was increased by $1.2 million due to property assessed value growth and change in ownership.  Sales tax was increased by $4.5 million due to the higher than expected receipts.  Utility user tax decreased by $1.0 million due to the lower consumption of both utility commodity and telephone.  Transient occupancy tax decreased by $9.8 million due to continued declines in hotel activities and rates.  Documentary transfer tax increased by $2.2 million based on year‐to‐date receipts tracking higher than anticipated. Expenditures, excluding Operating Transfers, were originally budgeted at $179.1 million and were revised upward by $8.4 million, for a final budgeted amount of $187.5 million. Adopted Final Increase/ Actuals, plus Budgeted Expenditures Budget Budget (Decrease) Encumbrances Community Services 28.4$ 28.8$ 0.4$ 27.8$ Fire 33.6 35.4 1.8 35.4 Police 41.7 42.4 0.7 42.4 Library 8.4 8.7 0.3 8.6 Planning and Development Services 17.4 19.6 2.2 18.8 Public Works 18.4 19.1 0.7 18.6 Non‐Departmental 8.2 9.3 1.1 9.3 All Other 23.0 24.2 1.2 22.9 Total Budgeted Expenditures 179.1$ 187.5$ 8.4$ 183.8 Less: Charges to Other Funds and Departments (11.7) Less: Encumbrances and Reappropriations (11.8) Net General Fund Expenditures 160.3$ GENERAL FUND Budgeted Expenditures for the Year Ended June 30 (in millions) Adjustments of $8.4 million to the original budget were primarily due to the $7.6 million carry‐forward of encumbrances from prior year and reappropriations. City of Palo Alto 25 Final actual expenditures totaled $183.8 million, $3.7 million lower than the final budget totaling $187.5 million. As mentioned previously, the Final budget includes encumbrances and reappropriations carried forward from prior year, totaling $7.6 million. In closing FY 2021, $11.8 million was encumbered and reappropriated in FY 2022. The actual expenditures were lower as compared with the budget primarily due to reduced contract services. Transfers out were originally budgeted at $17.8 million, with the final budget number at $13.6 million, a decrease of $4.2 million. The decrease was due to a reduction of the transfers to Capital Project Fund because of decreases in TOT revenues. Capital Projects Fund At the end of the current fiscal year, the fund balance of the Capital Project Fund was $165.7 million, compared to $83.6 million in the prior year. The fund balance is restricted for the Public Safety Building ($90.9 million) and library project ($0.6 million), committed for Roth building rehabilitation ($5.2 million) and Cubberley improvements ($4.7 million) and the remaining balance of $64.3 million is available for all other capital projects. Capital Projects Fund revenues were $11.4 million in FY 2021, an increase of $1.8 million from the prior year due to federal grant reimbursements while other financing sources were $118.8 million, an increase of $87.9 million mainly due to issuance of COPs amounting to $101.5 million plus $6.5 premium to finance the construction of a public safety building partially offset by the decrease of operating transfers in from General Fund due to significant decreases in revenues, including TOT. Capital Project Fund expenditures were $48.1 million in FY 2021, a decrease of $18.2 million. To manage resources with funding needs and balance for the City’s severe decrease in TOT revenues resulting from the pandemic, the most critical capital investments were prioritized and project budget for other projects were deferred into later years or beyond the five‐year capital plan. Non‐Major Governmental Funds These funds are not presented separately in the Basic Financial Statements but are individually presented in the Other Supplemental Information. City of Palo Alto 26 FINANCIAL ANALYSIS OF ENTERPRISE FUNDS At June 30, 2021, the City’s Enterprise Funds reported total net position of $807.2 million, an increase of $22.2 million or 2.8 percent from the prior year. All Enterprise funds contributed to this increase except Electric Fund. The changes in net position in the Enterprise Funds are summarized in the following table. ENTERPRISE FUNDS Change in Net Position for the Year Ended June 30 (in millions) Increase/ Fund Name 2021 2020 (Decrease) Water 6.6$ 8.0$ (1.4)$ Electric (4.8) 18.6 (23.4) Fiber Optics 1.5 2.9 (1.4) Gas 3.5 3.0 0.5 Wastewater Collection 0.7 2.1 (1.4) Wastewater Treatment 3.1 0.3 2.8 Refuse 1.9 (3.1) 5.0 Storm Drainage 3.0 2.2 0.8 Airport 6.7 5.6 1.1 Total Change in Net Position 22.2$ 39.6$ (17.4)$ The most significant factors in the change in net position between years for Enterprise Funds are as follows:  The Water and Fiber Optic Funds operating income has no significant change, however, the change in net position for both funds decreased $1.4 million from prior year due to decline in other revenues specifically interest earnings due to the impact of negative fair market value adjustments.  The change in net position for Electric Fund decreased $23.4 million from prior year due to decrease in commercial retail revenues as a result of lower consumption, a decrease in investment earnings due to the impact of negative fair market value adjustments, an increase in purchases of electricity due to low hydroelectric supply, and an increase in operations and maintenance expenses.  The change in net position for Wastewater Collection Fund decreased $1.4 million due to lower non‐ residential sewer charges, lower non‐operating revenue including interest earnings and an increase in operating expenses  The change in net position for Wastewater Treatment Fund increased $2.8 million due to higher billing to partners for capital costs and decreases in operations and maintenance expenses.  The change in net position of Refuse Fund increased $5.0 million due to a decrease in operating expenses as a result of lower payment to GreenWaste of Palo Alto for reimbursements of new waste collections and vehicles, a decrease in facility rent and downward adjustment to landfill post closure maintenance. The decrease of operating expenses was partially offset by lower revenues including investment earnings. City of Palo Alto 27 CAPITAL ASSETS GASB Statement No. 34 requires that the City record all its capital assets, including infrastructure and intangible assets. Infrastructure includes roads, bridges, signals and similar assets used by the entire population. The table below shows capital assets and the amount of accumulated depreciation for these assets for Governmental and Business‐type Activities. Further detail can be found in Note 6 to the financial statements. Increase/ 2021 2020 (Decrease) Governmental activites Capital Assets Land and improvements 82.1$ 82.2$ (0.1) Street trees 14.8 14.8 ‐ Construction in progress 137.8 139.4 (1.6) Building and improvements 272.1 251.1 21.0 Intangible assets 3.8 3.8 ‐ Equipment 17.2 15.7 1.5 Roadway network 335.3 335.2 0.1 Recreation and open space network 35.2 35.2 ‐ Less accumulated depreciation (319.3) (302.5) (16.8) Internal Service funds Construction in progress 5.6 2.7 2.9 Equipment 63.1 63.5 (0.4) Less accumulated depreciation (45.7) (44.8) (0.9) Total Governmental Activities 602.0$ 596.3$ 5.7$ Business‐Type Activities Land 5.0$ 5.0$ ‐$ Construction in progress 129.0 121.1 7.9 Buildings and improvements 74.5 74.5 ‐ Infrastructure 0.6 0.6 ‐ Transmission, distribution and treatment systems 914.8 884.8 30.0 Less accumulated depreciation (415.4) (392.8) (22.6) Total Business‐type Activities 708.5$ 693.2$ 15.3$ CAPITAL ASSETS AT JUNE 30 (in millions) City of Palo Alto 28 Governmental Activities’ capital assets net of depreciation increased by $5.7 million from the prior year. The increase was primarily due to activity in various projects such as the Highway 101 Pedestrian / Bicycle overpass, the Public Safety Building and California Avenue Parking Garage offset with retirements. The City Council approved a $125.8 million Infrastructure Plan (IP) in June 2014, which includes projects such as a new Public Safety Building, replacement of two Fire Stations, a Bike and Pedestrian plan and two parking garages. Through the development of the 2021‐2025 Capital Improvement Plan (CIP), the IP projects were updated resulting in a revised Infrastructure Plan of $260.5 million. These projects will be funded partially by debt to be repaid with voter‐approved increases of 3.5 percent in the TOT rate and from other sources such as impact fees and Stanford University Medical Center development agreement monies. Staff is continually assessing the COVID‐19 impact to maintain funding for these projects. Major Governmental Activities’ capital projects that are currently in progress, including the remaining capital commitment of each, are as follows:  Public Safety Building ‐ $97.1 million  Charleston Arastradero Corridor – $7.4 million  Municipal Service Center Improvements – $6.0 million  Churchill Ave/Alma – $4.2 million  Railroad Grade Separation – $4.0 million  Highway 101 Pedestrian/Bicycle Overpass – $3.7 million  Vehicle Replacements – $3.3 million Business‐type Activities’ capital assets net of depreciation increased by $15.3 million from the prior year. The increase is primarily due to, Electric, Wastewater Collection, Wastewater Treatment, Storm Drain and Airport Funds. Major Business‐type Activities’ capital projects that are currently in progress, including the remaining capital commitment of each, are as follows:  Seismic Water System Upgrade – $5.3 million  Gas Main Replacement Project 23 – $6.9 million  Primary Sedimentation Tank Rehabilitation – $11.8 million  Airport Apron Reconstruction Phase 1 – $23.3 million The City depreciates its capital assets over their estimated useful lives, as required by GASB Statement No. 34. The purpose of depreciation is to spread the cost of a capital asset over the years of its useful life so that an allocable portion of the cost of the asset is borne by all users. Additional information on capital assets and depreciable lives are in Note 6. City of Palo Alto 29 DEBT ADMINISTRATION Each of the City’s debt issues is discussed in detail in Note 7 to the financial statements. The City’s debt as of June 30, 2021 is shown in the following table. Increase/ 2021 2020 (Decrease) Governmental Activities General Long‐Term Obligations General Obligation Bonds 2010 42.0$ 43.3$ (1.3)$ Add: unamortized premium 2.3 2.5 (0.2) 2013A 15.0 15.5 (0.5) Add: unamortized premium 0.7 0.8 (0.1) Certificates of Participation 2018 Capital Improvement Projects 8.6 8.7 (0.1) 2019 California Ave Parking Garage Series A & B 36.4 37.0 (0.6) Add: unamortized premium 4.5 4.7 (0.2) 2021 Public Safety Building 101.5 ‐ 101.5 Add: unamortized premium 6.5 ‐ 6.5 Total Governmental Activities 217.5$ 112.5$ 105.0$ Business‐type Activities Enterprise Long‐Term Obligations Utility Revenue Bonds 1999 Refunding 5.1$ 6.7$ (1.6)$ 2009 Series A 24.3 25.5 (1.2) 2011 Refunding 6.7 7.9 (1.2) Add: unamortized premium 0.4 0.5 (0.1) Energy Tax Credit Bonds 2007 Series A 0.1 0.2 (0.1) Less: unamortized discount ‐ (0.1) 0.1 State Water Resources Loan 2007 3.6 4.0 (0.4) 2009 4.8 5.3 (0.5) 2017 23.9 24.5 (0.6) Total Business‐type Activities 68.9$ 74.5$ (5.6)$ LONG‐TERM DEBT AT JUNE 30 (in millions) City‐wide long‐term debt increased by a total of $99.4 million mainly due the issuance of COPs for the construction of the public safety building in the amount of $101.5 million plus $6.5 million premium which was offset by the scheduled debt retirement. City of Palo Alto 30 ECONOMIC OUTLOOK The COVID‐19 pandemic came with the strict orders for the safety of the public which resulted in a drastic drop in revenues. In FY2021, the City took swift, decisive, and difficult action to balance the budget by prioritizing essential services and reducing or eliminating discretionary services, while continue to address its long‐term liabilities such as pension and OPEB obligations. The fiscal challenges remain constant as the COVID‐19 pandemic continues. The City will maintain services at the same levels in previous year for the upcoming fiscal year, but these service levels are not sustainable for the fiscal health of the City in the long term. The FY 2022 adopted Operating and Capital reflects current fiscal reality, however, as hopeful signs for recovery continue, the City will respond quickly and adapt should more moderate growth occur than forecasted. More information about the economy of the City is discussed in the accompanying Transmittal Letter. CONTACTING THE CITY’S FINANCIAL MANAGEMENT The ACFR is intended to provide citizens, taxpayers, investors, and creditors with a general overview of the City’s finances. Questions about this report should be directed to the Administrative Services Department, located at 250 Hamilton Avenue, 4th Floor, Palo Alto, California. The Department can also be contacted by email at: adminsvcs@cityofpaloalto.org. This report and other financial reports can be viewed on the City of Palo Alto website at: www.cityofpaloalto.org. On the home page, select Departments, select Administrative Services, and select Financial Reporting https://www.cityofpaloalto.org/Departments/Administrative‐ Services/Financial‐Reporting. Within Financial Reporting, there are links to reports by title and reporting date. CITY OF PALO ALTO Statement of Net Position June 30, 2021 (Amounts in thousands) Governmental Business‐Type Activities Activities Total ASSETS: Cash and investments available for operations (Note 3) 310,091$ 282,271$ 592,362$ Receivables, net: Accounts and intergovernmental 16,099 43,321 59,420 Interest receivable 1,544 1,405 2,949 Notes and loans receivable (Note 5) 53,677 ‐ 53,677 Internal balances (Note 4) (298) 298 ‐ Deposits 15 ‐ 15 Due from other government agencies ‐ 2,400 2,400 Inventory of materials and supplies, prepaids and deposits 5,615 244 5,859 Restricted cash and investments with fiscal agents and trustees (Note 3) 133,264 3,340 136,604 Capital assets (Note 6): Nondepreciable 243,923 133,909 377,832 Depreciable, net of accumulated depreciation 358,056 574,600 932,656 Total assets 1,121,986 1,041,788 2,163,774 DEFERRED OUTFLOWS OF RESOURCES: Unamortized loss from refunding ‐ 149 149 Pension related (Note 11) 45,531 18,119 63,650 OPEB related (Note 12) 15,271 6,012 21,283 Total deferred outflows of resources 60,802 24,280 85,082 LIABILITIES: Accounts payable and accruals 14,812 16,432 31,244 Accrued salaries and benefits 2,679 1,224 3,903 Unearned revenue 9,400 ‐ 9,400 Accrued compensated absences (Note 1): Due in one year 6,327 ‐ 6,327 Due in more than one year 9,320 ‐ 9,320 Claims payable (Notes 14 and 16): Due in one year 6,811 ‐ 6,811 Due in more than one year 38,339 ‐ 38,339 Landfill post‐closure liability (Note 9): Due in more than one year ‐ 6,179 6,179 Net pension liabilities (Note 11): Due in more than one year 349,296 123,787 473,083 Net OPEB liabilities (Note 12): Due in more than one year 88,883 35,915 124,798 Long‐term debt (Note 7): Due in one year 3,264 5,757 9,021 Due in more than one year 214,270 63,153 277,423 Total liabilities 743,401 252,447 995,848 DEFERRED INFLOWS OF RESOURCES: OPEB related (Note 12) 16,250 6,402 22,652 NET POSITION (Note 10): Net Investment in capital assets 480,620 642,018 1,122,638 Restricted for: Transportation mitigation 12,512 ‐ 12,512 Public benefit 18,282 ‐ 18,282 Supplemental pension 37,089 ‐ 37,089 Others 6,077 ‐ 6,077 Debt service 3,749 3,340 7,089 Nonexpendable ‐ Eyerly Family 2,556 ‐ 2,556 Total restricted net position 80,265 3,340 83,605 Unrestricted (137,748) 161,861 24,113 Total net position $ 423,137 $ 807,219 $ 1,230,356 See accompanying notes to the basic financial statements. 31 32 This page is left intentionally blank. CITY OF PALO ALTO Statement of Activities For the Year Ended June 30, 2021 (Amounts in thousands) Net (Expense) Revenue and Program Revenues Changes in Net Position Operating Capital Charges for Grants and Grants and Governmental Business‐Type Functions/Programs Expenses Services Contributions Contributions Activities Activities Total Governmental Activities: City Council 178$ ‐$ ‐$ ‐$ (178)$ ‐$ (178)$ City Manager 2,466 ‐ ‐ ‐ (2,466) ‐ (2,466) City Attorney 2,292 ‐ ‐ ‐ (2,292) ‐ (2,292) City Clerk 702 ‐ ‐ ‐ (702) ‐ (702) City Auditor 641 ‐ ‐ ‐ (641) ‐ (641) Administrative Services 22,985 1,150 457 ‐ (21,378) ‐ (21,378) Human Resources 2,518 ‐ ‐ ‐ (2,518) ‐ (2,518) Public Works 52,727 937 ‐ 9,748 (42,042) ‐ (42,042) Planning and Development Services 18,141 21,228 1,191 ‐ 4,278 ‐ 4,278 Office of Transportation 3,636 80 ‐ 118 (3,438) ‐ (3,438) Police 43,627 2,008 414 ‐ (41,205) ‐ (41,205) Fire 37,131 9,127 888 51 (27,065) ‐ (27,065) Community Services 30,289 20,893 49 1,409 (7,938) ‐ (7,938) Library 11,145 47 34 ‐ (11,064) ‐ (11,064) Interest on long‐term debt 6,317 ‐ ‐ ‐ (6,317) ‐ (6,317) Total Governmental Activities 234,795 55,470 3,033 11,326 (164,966) ‐ (164,966) Business‐Type Activities: Water 43,556 48,812 462 533 ‐ 6,251 6,251 Electric 156,105 162,240 ‐ ‐ ‐ 6,135 6,135 Fiber Optics 2,529 3,936 ‐ ‐ ‐ 1,407 1,407 Gas 28,556 39,520 ‐ ‐ ‐ 10,964 10,964 Wastewater Collection 19,577 20,484 ‐ 239 ‐ 1,146 1,146 Wastewater Treatment 28,403 30,522 ‐ ‐ ‐ 2,119 2,119 Refuse 29,138 30,636 ‐ ‐ ‐ 1,498 1,498 Storm Drainage 4,897 7,785 ‐ ‐ ‐ 2,888 2,888 Airport 1,499 2,585 ‐ 5,619 ‐ 6,705 6,705 Total Business‐Type Activities 314,260 346,520 462 6,391 ‐ 39,113 39,113 Total 549,055$ 401,990$ 3,495$ 17,717$ (164,966) 39,113 (125,853) General Revenues: Taxes: Property tax 60,901 ‐ 60,901 Sales tax 29,127 ‐ 29,127 Utility user tax 14,642 ‐ 14,642 Transient occupancy tax 5,179 ‐ 5,179 Documentary transfer tax 10,627 ‐ 10,627 Other taxes 2,844 ‐ 2,844 Investment earnings 4,939 2,187 7,126 Miscellaneous 183 ‐ 183 Transfers (Note 4)19,087 (19,087) ‐ Total general revenues and transfers 147,529 (16,900) 130,629 Change in net position (17,437) 22,213 4,776 Net position, beginning of year 440,574 785,006 1,225,580 Net position, end of year 423,137$ 807,219$ 1,230,356$ See accompanying notes to the basic financial statements. 33 34 This page is left intentionally blank. CITY OF PALO ALTO Governmental Funds Balance Sheet June 30, 2021 (Amounts in thousands) Capital Other Total General Projects Governmental Governmental Fund Fund Funds Funds ASSETS: Cash and investments available for operations (Note 3) 67,397$ 79,130$ 66,758$ 213,285$ Receivables, net: Accounts and intergovernmental 14,053 1,429 519 16,001 Interest receivable 645 26 389 1,060 Notes and loans receivable (Note 5) 826 ‐ 52,851 53,677 Deposits 15 ‐ ‐ 15 Prepaid items 291 ‐ ‐ 291 Due from other fund (Note 4) 943 ‐ ‐ 943 Advances to other funds (Note 4) 3,036 ‐ ‐ 3,036 Inventory of materials and supplies 5,208 ‐ ‐ 5,208 Restricted cash and investments with fiscal agents (Note 3) ‐ 91,520 4,655 96,175 Total assets 92,414$ 172,105$ 125,172$ 389,691$ LIABILITIES, DEFERRED INFLOWS OF RESOURCES, AND FUND BALANCES: Liabilities: Accounts payable and accruals 5,115$ 5,350$ 495$ 10,960$ Accrued salaries and benefits 2,254 141 34 2,429 Unearned revenue 9,400 ‐ ‐ 9,400 Due to other funds (Note 4) ‐ ‐ 341 341 Total liabilities 16,769 5,491 870 23,130 Deferred inflows of resources Deferred inflows of resources ‐ Unavailable revenue 9 910 ‐ 919 16,778 6,401 870 24,049 Fund balances (Note 10): Nonspendable: Deposits 15 ‐ ‐ 15 Prepaid items 291 ‐ ‐ 291 Inventories 5,208 ‐ ‐ 5,208 Advances to other funds 3,036 ‐ ‐ 3,036 Notes and loans receivable 826 ‐ ‐ 826 Eyerly family ‐ ‐ 2,556 2,556 Restricted for: Transportation mitigation ‐ ‐ 12,512 12,512 Federal revenue ‐ ‐ 5,293 5,293 Street improvement ‐ ‐ 28 28 Local law enforcement ‐ ‐ 756 756 Public safety building ‐ 90,922 ‐ 90,922 Library bond project ‐ 598 ‐ 598 Public benefit ‐ ‐ 18,282 18,282 Debt service ‐ ‐ 8,404 8,404 Committed for: Development services 3,950 ‐ ‐ 3,950 Roth building rehabilitation ‐ 5,179 ‐ 5,179 Cubberley improvements ‐ 4,726 ‐ 4,726 Developer impact fees ‐ ‐ 13,300 13,300 Housing in‐lieu ‐ ‐ 58,883 58,883 Special districts ‐ ‐ 3,186 3,186 Edgewood Plaza 701 ‐ ‐ 701 Downtown business ‐ ‐ 50 50 Assigned for: Unrealized gains on investments 1,891 ‐ 1,052 2,943 Capital projects ‐ 64,279 ‐ 64,279 Other general government purposes 5,912 ‐ ‐ 5,912 Electric charger 30 ‐ ‐ 30 Reappropriations 4,687 ‐ ‐ 4,687 Unassigned for: Budget Stabilization 49,089 ‐ ‐ 49,089 Total fund balances 75,636 165,704 124,302 365,642 Total liabilities, deferred inflows of resources, and fund balances 92,414$ 172,105$ 125,172$ 389,691$ Total liabilities and deferred inflows of resources See accompanying notes to the basic financial statements. 35 CITY OF PALO ALTO Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Position ‐ Governmental Activities June 30, 2021 Total fund balances reported on the governmental funds balance sheet 365,642$ Amounts reported for governmental activities in the statement of net position are different from those reported in the governmental funds balance sheet because of the following: Deferred outflows and inflows of resources in governmental activities are not financial resources and, therefore, are not reported in the governmental funds. Deferred outflows of resources 60,802 Deferred inflows of resources (16,250) Certain receivables are not available to pay for current period expenditures and therefore are deferred in the governmental funds. 919 Capital assets used in governmental activities are not current assets or financial resources and therefore are not reported in the governmental funds. 601,979 Internal service funds are used by management to charge the costs of activities such as insurance, equipment acquisition and maintenance, and certain employee benefits to individual funds. The assets and liabilities of the internal service funds are therefore included in governmental activities in the statement of net position (excludes capital assets, deferred outflows of resources, deferred inflows of resources, net pension liabilities and net OPEB liabilities reported herein) 80,520 Some liabilities, including bonds payable and claims payable, are not due and payable in the current period and therefore are not reported in the governmental funds: Interest payable (2,143) Net pension liabilities (Note 11) (349,296) Net OPEB liabilities (Note 12) (88,883) Claims payable (Note 14 and 16) (12,619) Long‐term debt (Note 7) (217,534) Net position of governmental activities 423,137$ (Amounts in thousands) See accompanying notes to the basic financial statements. 36 CITY OF PALO ALTO Governmental Funds Statement of Revenues, Expenditures and Changes in Fund Balances For the Year Ended June 30, 2021 (Amounts in thousands) Capital Other Total General Projects Governmental Governmental Fund Fund Funds Funds REVENUES: Property tax 56,572$ ‐$ 4,329$ 60,901$ Special assessments ‐ ‐ 5 5 Sales tax 29,127 ‐ ‐ 29,127 Utility user tax 14,642 ‐ ‐ 14,642 Transient occupancy tax 5,179 ‐ ‐ 5,179 Documentary transfer tax 10,627 ‐ ‐ 10,627 Other taxes and fines 683 ‐ 2,816 3,499 Charges for services 25,105 1 ‐ 25,106 Intergovernmental 3,828 10,087 1,337 15,252 Licenses, permits and fees 7,261 ‐ 2,161 9,422 Investment earnings (161) 1,034 175 1,048 Rental income 13,293 ‐ ‐ 13,293 Housing In‐Lieu ‐ residential ‐ ‐ 5,804 5,804 Other revenue 632 247 154 1,033 Total revenues 166,788 11,369 16,781 194,938 EXPENDITURES: Current: City Council 224 ‐ ‐ 224 City Manager 2,304 ‐ ‐ 2,304 City Attorney 2,149 ‐ ‐ 2,149 City Clerk 748 ‐ ‐ 748 City Auditor 645 ‐ ‐ 645 Administrative Services 5,202 ‐ 261 5,463 Human Resources 2,421 ‐ ‐ 2,421 Public Works 13,265 ‐ 1,427 14,692 Planning and Development Services 15,830 ‐ 1,285 17,115 Office of Transportation 1,936 ‐ 1,437 3,373 Police 41,328 ‐ 36 41,364 Fire 34,918 ‐ ‐ 34,918 Community Services 26,254 ‐ 236 26,490 Library 8,528 ‐ ‐ 8,528 Non‐Departmental 4,599 ‐ 255 4,854 Capital outlay ‐ 48,114 ‐ 48,114 Debt service: Principal ‐ ‐ 2,595 2,595 Interest and fiscal charges ‐ ‐ 6,147 6,147 Total expenditures 160,351 48,114 13,679 222,144 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES 6,437 (36,745) 3,102 (27,206) OTHER FINANCING SOURCES (USES): Issuance of debt ‐ 95,476 6,029 101,505 Original debt premium ‐ 6,524 ‐ 6,524 Proceeds from sale of capital assets 100 ‐ ‐ 100 Transfers in (Note 4) 20,880 19,198 3,480 43,558 Transfers out (Note 4) (13,620) (2,380) (9,564) (25,564) Total other financing sources (uses) 7,360 118,818 (55) 126,123 Change in fund balances 13,797 82,073 3,047 98,917 FUND BALANCES, BEGINNING OF YEAR 61,839 83,631 121,255 266,725 FUND BALANCES, END OF YEAR 75,636$ 165,704$ 124,302$ 365,642$ See accompanying notes to the basic financial statements. 37 CITY OF PALO ALTO Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities ‐ Governmental Activities For the Year Ended June 30, 2021 Net change in fund balances ‐ total governmental funds 98,917$ Amounts reported for governmental activities in the statement of activities are different from those reported in the governmental funds because of the following: Governmental funds report capital outlays as expenditures. However, in the statement of activities, the costs of these assets are capitalized and allocated over their estimated useful lives and reported as depreciation expense. Therefore, the activities associated with capital assets are as follows: Capital outlay added back to fund balance for current year additions 33,525 Depreciation expense is deducted from fund balance (depreciation expense is net of internal service fund depreciation of $3,153) (Note 6), which has already been allocated through the internal service fund activities below (17,136) Disposal of capital assets (12,291) Pension and OPEB contribution made subsequent to the measurement date is an expenditure in the governmental funds, but reported as a deferred outflows of resources in the government‐wide financial statements 41,324 Pension and OPEB expenses reported in the statement of activities do not require the use of current financial resources and, therefore, are not reported as expenditures in governmental funds (50,170) Principal payments on long‐term liabilities are reported as expenditures in governmental funds when paid. The governmental activities, however, report principal payments as a reduction of long‐term debt on the statement of net position. Interest accrued on long‐term debt, amortization of premium, and changes in claims payable do not require the use of current financial resources and therefore are not reported as expenditures in governmental funds. Therefore, the activities associated with these balances are as follows: Principal paid during the year 2,595 Proceeds from debt issuance (101,505) Original debt premium (6,524) Change in interest payable (575) Amortization of bond premium 405 Change in claims payable (12,619) Revenues earned but not available are deferred in the governmental funds but are recognized in the government‐wide financial statements. Also, revenues recognized in the governmental funds during the current year that were earned and recognized in previous years in the government‐wide financial statements are reported as beginning net position in the statement of activities (563) Internal service funds are used by management to charge the costs of activities, such as insurance, equipment acquisition and maintenance, and employees benefits to individual funds. The portion of the net expense of these internal service funds arising out of their transactions with governmental funds is reported with governmental activities. 7,180 Change in net position of governmental activities (17,437)$ (Amounts in thousands) See accompanying notes to the basic financial statements. 38 Budgeted Amounts Actual, Budgetary Variance with Adopted Final Basis Final Budget 52,000$ 53,173$ 56,572$ 3,399$ 20,500 25,030 29,127 4,097 15,100 14,080 14,642 562 14,900 5,123 5,179 56 Documentary transfer tax 4,700 6,875 10,627 3,752 1,925 392 683 291 25,984 24,414 25,105 691 2,448 4,580 4,222 (358) 7,770 8,366 7,708 (658) 1,145 1,145 1,062 (83) 15,949 15,331 13,293 (2,038) 674 666 732 66 163,095 159,175 168,952 9,777 11,992 11,992 11,661 (331) ‐ 7,570 7,570 ‐ 175,087 178,737 188,183 9,446 419 509 366 143 3,161 3,562 3,492 70 3,485 3,744 3,589 155 1,245 1,293 1,147 146 828 981 962 19 8,362 8,338 7,897 441 3,554 3,622 3,545 77 18,397 19,089 18,553 536 17,386 19,611 18,782 829 Office of Transportation 1,904 2,139 2,010 129 Police 41,733 42,441 42,441 ‐ 33,607 35,354 35,354 ‐ 28,379 28,839 27,769 1,070 8,421 8,655 8,636 19 8,237 9,332 9,259 73 179,118 187,509 183,802 3,707 (4,031) (8,772) 4,381 13,153 21,359 21,154 21,154 ‐ (17,801) (13,620) (13,620) ‐ 3,558 7,534 7,534 ‐ (473)$ (1,238)$ 11,915 13,153$ Unrealized gain/loss on investments (1,297) Changes in interfund balances (197) Current year encumbrances and reappropriations 10,946 Prior year encumbrances and reappropriations (7,570) 13,797 61,839 75,636$ REVENUES: CITY OF PALO ALTO General Fund Statement of Revenues, Expenditures and Changes in Fund Balance ‐ Budget and Actual For the Year Ended June 30, 2021 (Amounts in thousands) Charges to other funds and departments Sales tax Property tax Transient occupancy tax Utility user tax Other taxes and fines Charges for services Licenses, permits and fees Investment earnings Rental income Intergovernmental Other revenues City Auditor City Clerk City Council City Manager Administrative Services Prior year encumbrances Total revenues EXPENDITURES: Current: City Attorney Community Services Total other financing sources (uses) Human Resources Library Planning and Development Services Total expenditures EXCESS OF REVENUES OVER EXPENDITURES OTHER FINANCING SOURCES (USES): Transfers in Transfers out Public Works Non‐Departmental Fire FUND BALANCE AT BEGINNING OF YEAR, GAAP BASIS FUND BALANCE AT END OF YEAR, GAAP BASIS EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES, BUDGETARY BASIS Adjustment to Budgetary Basis: CHANGE IN FUND BALANCE, GAAP BASIS See accompanying notes to the basic financial statements. 39 Fiber Water Electric Optics Gas ASSETS: Current assets: Cash and investments available for operations (Note 3) 46,602$ 107,044$ 35,983$ 30,484$ Accounts receivable, net of allowance of $1,551 6,636 19,244 864 2,996 Interest receivable 228 540 178 149 Due from other government agencies ‐ ‐ ‐ ‐ Inventory of materials and supplies ‐ ‐ ‐ ‐ Restricted cash and investments with fiscal agents and trustees (Note 3) 2,906 ‐ ‐ 434 Total current assets 56,372 126,828 37,025 34,063 Noncurrent assets: Due from other government agencies ‐ ‐ ‐ ‐ Deposits ‐ 44 ‐ ‐ Prepaid expense 67 ‐ ‐ ‐ Capital assets (Note 6): Nondepreciable 17,926 35,248 2,236 17,925 Depreciable, net 115,588 174,828 7,075 93,347 Total noncurrent assets 133,581 210,120 9,311 111,272 Total assets 189,953 336,948 46,336 145,335 DEFERRED OUTFLOWS OF RESOURCES: Unamortized loss from refunding 65 ‐ ‐ 84 Pension related (Note 11) 2,660 6,164 349 2,740 OPEB related (Note 12) 757 2,284 83 961 Total deferred outflows of resources 3,482 8,448 432 3,785 LIABILITIES: Current liabilities: Accounts payable and accruals 2,175 4,663 275 1,185 Accrued salaries and benefits 176 413 19 182 Due to other funds ‐ ‐ ‐ ‐ Accrued compensated absences (Note 1) ‐ ‐ ‐ ‐ Current portion of long term debt (Note 7) 1,852 100 ‐ 693 Accrued claims payable (Note 14) ‐ ‐ ‐ ‐ Total current liabilities 4,203 5,176 294 2,060 Noncurrent liabilities: Accrued compensated absences (Note 1) ‐ ‐ ‐ ‐ Accrued claims payable (Note 14) ‐ ‐ ‐ ‐ Advance from other fund (Note 4) ‐ ‐ ‐ ‐ Landfill post‐closure liability (Note 9) ‐ ‐ ‐ ‐ Net pension liabilities (Note 11) 16,803 40,376 2,587 17,532 Net OPEB liabilities (Note 12) 4,009 13,022 67 5,786 Long term debt, net of unamortized discounts/premiums (Note 7) 26,051 (5) ‐ 3,223 Total noncurrent liabilities 46,863 53,393 2,654 26,541 Total liabilities 51,066 58,569 2,948 28,601 DEFERRED INFLOWS OF RESOURCES: OPEB related (Note 12) 802 2,495 17 1,024 NET POSITION (Note 10): Net Investment in capital assets 105,676 209,851 9,311 107,440 Restricted for: Debt service 2,906 ‐ ‐ 434 Supplemental pension ‐ ‐ ‐ ‐ Unrestricted (deficit) 32,985 74,481 34,492 11,621 Total net position 141,567$ 284,332$ 43,803$ 119,495$ Some amounts reported for Business‐type Activities in the statement of net position are different because certain Internal Service Fund net positions are included with Business‐type Activities Net position reported in Business‐type Activities Business‐Type Activities‐Enterprise Funds CITY OF PALO ALTO Proprietary Funds Statement of Net Position June 30, 2021 (Amounts in thousands) See accompanying notes to the basic financial statements. 40 Governmental Non‐Major Activities ‐ Wastewater Wastewater Storm Internal Service Collection Treatment Refuse Drainage Airport Totals Funds 9,358$ 16,076$ 28,363$ 8,361$ ‐$ 282,271$ 96,806$ 2,709 2,601 3,297 890 4,084 43,321 98 46 83 139 42 ‐ 1,405 484 ‐ 300 ‐ ‐ ‐ 300 ‐ ‐ ‐ ‐ ‐ ‐ ‐ 116 ‐ ‐ ‐ ‐ ‐ 3,340 37,089 12,113 19,060 31,799 9,293 4,084 330,637 134,593 ‐ 2,100 ‐ ‐ ‐ 2,100 ‐ ‐ ‐ ‐ ‐ ‐ 44 ‐ ‐ 133 ‐ ‐ ‐ 200 ‐ 4,784 11,152 1,952 12,121 30,565 133,909 5,587 88,204 58,783 3,076 30,801 2,898 574,600 17,354 92,988 72,168 5,028 42,922 33,463 710,853 22,941 105,101 91,228 36,827 52,215 37,547 1,041,490 157,534 ‐ ‐ ‐ ‐ ‐ 149 ‐ 1,256 3,355 765 695 135 18,119 2,578 368 930 422 152 55 6,012 844 1,624 4,285 1,187 847 190 24,280 3,422 667 1,248 3,127 127 2,965 16,432 1,709 91 242 46 37 18 1,224 250 ‐ ‐ ‐ ‐ 602 602 ‐ ‐ ‐ ‐ ‐ ‐ ‐ 6,327 110 2,187 ‐ 815 ‐ 5,757 ‐ ‐ ‐ ‐ ‐ ‐ ‐ 6,811 868 3,677 3,173 979 3,585 24,015 15,097 ‐ ‐ ‐ ‐ ‐ ‐ 9,320 ‐ ‐ ‐ ‐ ‐ ‐ 25,720 ‐ ‐ ‐ ‐ 3,036 3,036 ‐ ‐ ‐ 6,179 ‐ ‐ 6,179 ‐ 9,624 24,633 6,661 4,682 889 123,787 17,548 2,212 6,874 2,458 1,083 404 35,915 4,800 238 31,896 ‐ 1,750 ‐ 63,153 ‐ 12,074 63,403 15,298 7,515 4,329 232,070 57,388 12,942 67,080 18,471 8,494 7,914 256,085 72,485 392 1,001 449 163 59 6,402 897 92,640 38,252 5,028 40,357 33,463 642,018 22,941 ‐ ‐ ‐ ‐ ‐ 3,340 ‐ ‐ ‐ ‐ ‐ ‐ ‐ 37,089 751 (10,820) 14,066 4,048 (3,699) 157,925 27,544 93,391$ 27,432$ 19,094$ 44,405$ 29,764$ 803,283 87,574$ 3,936 807,219$ Business‐Type Activities‐Enterprise Funds See accompanying notes to the basic financial statements. 41 Fiber Water Electric Optics Gas OPERATING REVENUES: Sales to: Customers 44,154$ 124,153$ 2,878$ 36,583$ City departments 2,532 4,167 1,045 542 Surplus energy ‐ 9,286 ‐ ‐ Service connection charges and miscellaneous 1,239 942 12 845 Charges for services ‐ ‐ ‐ ‐ Other 887 23,692 1 1,550 Total operating revenues 48,812 162,240 3,936 39,520 OPERATING EXPENSES: Purchase of utilities: Retail purchase of utilities 21,935 92,088 ‐ 12,750 Surplus energy ‐ 6,373 ‐ ‐ Administrative and general 5,771 9,605 873 4,285 Engineering (operating) 663 2,409 ‐ 571 Resource management and energy efficiency 1,216 6,597 ‐ 968 Operations and maintenance 7,401 17,191 1,249 6,225 Rent 2,225 5,950 52 471 Depreciation 3,127 8,637 420 3,409 Claims payments and changes in estimated self‐insurance liability ‐ ‐ ‐ ‐ Refund of charges for services ‐ ‐ ‐ ‐ Employment benefits ‐ ‐ ‐ ‐ Total operating expenses 42,338 148,850 2,594 28,679 Operating income 6,474 13,390 1,342 10,841 NONOPERATING REVENUES (EXPENSES): Investment earnings 366 941 268 205 Interest expense (1,476) (7,760) ‐ (104) Gain on disposal of capital assets ‐ ‐ ‐ ‐ Loss on disposal of capital assets (8) (70) ‐ (49) Other nonoperating revenues 462 ‐ ‐ ‐ Total nonoperating revenues (expenses) (656) (6,889) 268 52 Income before transfers and capital contributions 5,818 6,501 1,610 10,893 Capital contributions 533 ‐ ‐ ‐ Transfers in (Note 4) 557 2,582 ‐ ‐ Transfers out (Note 4) (268) (13,945) (118) (7,369) Change in net position 6,640 (4,862) 1,492 3,524 NET POSITION, BEGINNING OF YEAR 134,927 289,194 42,311 115,971 NET POSITION, END OF YEAR 141,567$ 284,332$ 43,803$ 119,495$ Some amounts reported for Business‐type Activities in the statement of activities are different because certain Internal Service Fund activities are included with Business‐type Activities Change in net position reported in Business‐type Activities Business‐Type Activities‐Enterprise Funds CITY OF PALO ALTO Proprietary Funds Statement of Revenues, Expenses and Changes in Fund Net Position For the Year Ended June 30, 2021 (Amounts in thousands) See accompanying notes to the basic financial statements. 42 Governmental Non‐Major Activities‐ Wastewater Wastewater Storm Internal Service Collection Treatment Refuse Drainage Airport Totals Funds 19,654$ 18,883$ 27,374$ 7,275$ 1,815$ 282,769$ ‐$ 162 10,587 860 434 ‐ 20,329 ‐ ‐ ‐ ‐ ‐ ‐ 9,286 ‐ 263 ‐ ‐ ‐ ‐ 3,301 ‐ ‐ ‐ ‐ ‐ ‐ ‐ 115,429 405 1,052 2,402 76 770 30,835 200 20,484 30,522 30,636 7,785 2,585 346,520 115,629 10,542 ‐ 17,474 ‐ ‐ 154,789 ‐ ‐ ‐ ‐ ‐ ‐ 6,373 ‐ 2,264 ‐ 1,342 1,135 698 25,973 13,212 351 2,359 260 253 ‐ 6,866 ‐ ‐ ‐ ‐ 1,127 ‐ 9,908 ‐ 3,413 20,387 8,529 1,168 632 66,195 12,765 252 ‐ 981 19 ‐ 9,950 ‐ 2,849 4,143 81 871 69 23,606 3,153 ‐ ‐ ‐ ‐ ‐ ‐ 8,745 ‐ ‐ ‐ ‐ ‐ ‐ 115 ‐ ‐ ‐ ‐ ‐ ‐ 75,775 19,671 26,889 28,667 4,573 1,399 303,660 113,765 813 3,633 1,969 3,212 1,186 42,860 1,864 42 159 148 77 (19) 2,187 3,891 (24) (721) (197) (174) (74) (10,530) ‐ ‐ ‐ ‐ ‐ ‐ ‐ 385 (1) ‐ ‐ ‐ ‐ (128) ‐ ‐ ‐ ‐ ‐ ‐ 462 5 17 (562) (49) (97) (93) (8,009) 4,281 830 3,071 1,920 3,115 1,093 34,851 6,145 239 ‐ ‐ ‐ 5,619 6,391 ‐ ‐ ‐ ‐ ‐ ‐ 3,139 3,797 (342) ‐ (30) (154) ‐ (22,226) (2,704) 727 3,071 1,890 2,961 6,712 22,155 7,238 92,664 24,361 17,204 41,444 23,052 80,336 93,391$ 27,432$ 19,094$ 44,405$ 29,764$ 87,574$ 58 22,213$ Business‐Type Activities‐Enterprise Funds See accompanying notes to the basic financial statements. 43 Fiber Water Electric Optics Gas Cash flows from operating activities: Cash received from customers 45,811$ 141,628$ 3,130$ 36,977$ Cash payments to suppliers for goods and services (30,814) (115,045) (992) (16,679) Cash payments to employees (10,576) (23,010) (1,246) (9,123) Internal activity‐ receipts (payments) from (to) other funds 2,532 4,167 1,045 542 Other receipts 887 23,692 1 1,550 Net cash provided by operating activities 7,840 31,432 1,938 13,267 Cash flows from noncapital financing activities: Repayment of loans from other funds ‐ ‐ ‐ ‐ Interest subsidy received from Build America Bonds 462 ‐ ‐ ‐ Transfers in 557 2,582 ‐ ‐ Transfers out (268) (13,945) (118) (7,369) Net cash provided by (used in) noncapital financing activities 751 (11,363) (118) (7,369) Cash flows from capital and related financing activities: Acquisition and construction of capital assets (3,549) (12,741) (398) (3,543) Proceeds from sale of capital assets ‐ ‐ ‐ ‐ Capital grants and contributions 533 ‐ ‐ ‐ Principal paid on long‐term debt (1,774) (99) ‐ (667) Interest paid on long‐term debt (1,501) (7,755) ‐ (134) Net cash used in capital and related financing activities (6,291) (20,595) (398) (4,344) Cash flows from investing activities: Investment interest received (expenses paid) 379 975 278 211 Net cash provided by investing activities 379 975 278 211 Net change in cash and cash equivalents 2,679 449 1,700 1,765 Cash and cash equivalents, beginning of year 46,829 106,595 34,283 29,153 Cash and cash equivalents, end of year $ 49,508 $ 107,044 $ 35,983 $ 30,918 Financial statement presentation: Cash and investments available for operations 46,602$ 107,044$ 35,983$ 30,484$ Restricted cash and investments with fiscal agents and trustees 2,906 ‐ ‐ 434 Cash and cash equivalents, end of year 49,508$ 107,044$ 35,983$ 30,918$ Reconciliation of operating income to net cash provided by (used in) operating activities: Operating income 6,474$ 13,390$ 1,342$ 10,841$ Adjustments to reconcile operating income (loss) to net cash provided by (used in) operating activities: Depreciation 3,127 8,637 420 3,409 Other ‐ ‐ ‐ ‐ Change in assets and liabilities: Accounts receivable 418 7,247 240 (451) Inventory of materials and supplies ‐ ‐ ‐ ‐ Deposit 8 ‐ ‐ ‐ Deferred outflow of resources ‐ pension plans (686) (1,389) 17 (679) Deferred outflow of resources ‐ OPEB 31 183 (83) 45 Accounts payable and accruals (2,070) 2,172 (144) (287) Accrued salaries and benefits 15 29 (5) 23 Accrued compensated absences ‐ ‐ ‐ ‐ Landfill closure and post‐closure care ‐ ‐ ‐ ‐ Accrued claims payable ‐ ‐ ‐ ‐ Net pension liability 980 2,579 129 894 Net OPEB liability (79) (314) 67 (101) Deferred inflow of resources ‐ pension plans (266) (725) (62) (274) Deferred inflow of resources ‐ OPEB (112) (377) 17 (153) Net cash provided by operating activities $ 7,840 $ 31,432 $ 1,938 $ 13,267 Business‐Type Activities‐Enterprise Funds CITY OF PALO ALTO Proprietary Funds Statement of Cash Flows For the Year Ended June 30, 2021 (Amounts in thousands) See accompanying notes to the basic financial statements. 44 Governmental Non‐Major Activities‐ Wastewater Wastewater Storm Internal Service Collection Treatment Refuse Drainage Airport Totals Funds 20,091$ 19,259$ 27,385$ 7,231$ (40)$ 301,472$ 115,400$ (11,507) (9,786) (24,905) (1,153) 2,120 (208,761) (14,110) (5,103) (13,195) (2,963) (2,422) (972) (68,610) (86,418) 162 10,587 860 434 ‐ 20,329 (5,765) 405 1,052 1,480 76 770 29,913 5 4,048 7,917 1,857 4,166 1,878 74,343 9,112 ‐ ‐ ‐ ‐ (1,354) (1,354) ‐ ‐ ‐ ‐ ‐ ‐ 462 ‐ ‐ ‐ ‐ ‐ ‐ 3,139 3,797 (342) ‐ (30) (154) ‐ (22,226) (2,704) (342) ‐ (30) (154) (1,354) (19,979) 1,093 (3,976) (5,682) ‐ (3,053) (6,050) (38,992) (4,828) ‐ ‐ ‐ ‐ ‐ ‐ 484 239 300 ‐ ‐ 5,619 6,691 ‐ (104) (2,131) ‐ (775) ‐ (5,550) ‐ (24) (719) (197) (172) (74) (10,576) ‐ (3,865) (8,232) (197) (4,000) (505) (48,427) (4,344) 49 158 168 77 (19) 2,276 3,914 49 158 168 77 (19) 2,276 3,914 (110) (157) 1,798 89 ‐ 8,213 9,775 9,468 16,233 26,565 8,272 ‐ 277,398 124,120 $ 9,358 $ 16,076 $ 28,363 $ 8,361 $ ‐ $ 285,611 $ 133,895 9,358$ 16,076$ 28,363$ 8,361$ ‐$ 282,271$ 96,806$ ‐ ‐ ‐ ‐ ‐ 3,340 37,089$ 9,358$ 16,076$ 28,363$ 8,361$ ‐$ 285,611$ 133,895$ 813$ 3,633$ 1,969$ 3,212$ 1,186$ 42,860$ 1,864$ 2,849 4,143 81 871 69 23,606 3,153 ‐ ‐ ‐ ‐ ‐ ‐ 5 174 376 11 (44) (1,855) 6,116 (67) ‐ ‐ ‐ ‐ ‐ ‐ (14) ‐ 17 ‐ ‐ ‐ 25 ‐ (145) (494) (150) (75) 77 (3,524) (275) 17 53 19 8 3 276 37 236 (226) 686 11 2,632 3,010 141 6 34 1 (7) (1) 95 47 ‐ ‐ ‐ ‐ ‐ ‐ 1,403 ‐ ‐ (922) ‐ ‐ (922) ‐ ‐ ‐ ‐ ‐ ‐ ‐ 2,818 373 1,098 375 370 (158) 6,640 681 (38) (99) (44) (16) (5) (629) (89) (179) (451) (104) (137) (60) (2,258) (462) (58) (167) (65) (27) (10) (952) (130) $ 4,048 $ 7,917 $ 1,857 $ 4,166 $ 1,878 $ 74,343 $ 9,112 Business‐Type Activities‐Enterprise Funds See accompanying notes to the basic financial statements. 45 Custodial Funds ASSETS: Cash and investments available for operations (Note 3) 3,276$ Accounts receivable 491 Interest receivable 16 Restricted cash and investments with fiscal agents (Note 3) 2,705 Total assets 6,488 LIABILITIES: Accounts payable and accruals 411 NET POSITION: Restricted for: Governmental entities 1,260 Bondholders of special assessment bonds 4,817 Total net position 6,077$ CITY OF PALO ALTO Statement of Fiduciary Net Position June 30, 2021 (Amounts in thousands) See accompanying notes to the basic financial statements. 46 Custodial Funds ADDITIONS: Franchise and other fees collected 1,821$ Special assessments collected 2,407 Investment earnings 9 Other 5 Total additions 4,242 DEDUCTIONS: Administrative and general 39 Distribution to governmental entities 1,538 Debt services payments 2,409 Total deductions 3,986 Changes in net position 256 NET POSITION, BEGINNING OF YEAR 5,821 NET POSITION, END OF YEAR 6,077$ CITY OF PALO ALTO Statement of Changes in Fiduciary Net Position For the Year Ended June 30, 2021 (Amounts in thousands) See accompanying notes to the basic financial statements. 47 48 This page is left intentionally blank. CITY OF PALO ALTO Index to the Notes to the Basic Financial Statements For the Year Ended June 30, 2021 49 Page 1. Summary of Significant Accounting Policies ........................................................................... 51 2. Budgets and Budgetary Accounting ........................................................................................ 60 3. Cash and Investments ............................................................................................................. 61 4. Interfund Transactions ............................................................................................................ 67 5. Notes and Loans Receivable .................................................................................................... 69 6. Capital Assets .......................................................................................................................... 74 7. Long‐Term Debt ....................................................................................................................... 80 8. Special Assessment Debt ......................................................................................................... 86 9. Landfill Post‐Closure Maintenance ......................................................................................... 86 10. Net Position and Fund Balances .............................................................................................. 87 11. Pension Plans ........................................................................................................................... 90 12. Other Post‐Employment Benefits (OPEB) ............................................................................... 97 13. Deferred Compensation Plan ................................................................................................ 101 14. Risk Management .................................................................................................................. 101 15. Joint Ventures ........................................................................................................................ 103 16. Commitments and Contingencies ......................................................................................... 105 17. Subsequent Event .................................................................................................................. 108 Notes are essential to present fairly the information contained in the overview level of the basic financial statements. Narrative explanations are intended to communicate information that is not readily apparent or cannot be included in the statements themselves, and to provide additional disclosures as required by the Governmental Accounting Standards Board. 50 This page is left intentionally blank. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 51 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The City of Palo Alto (the City) was incorporated in 1894 and operates as a charter city, having had its first charter granted by the State of California in 1909. The City operates under the Council‐Manager form of government and provides the following services: public safety (police and fire), public works, electric, fiber optics, water, gas, wastewater, storm drain, refuse, airport, golf course, planning and zoning, general administration services, library, open space and science, recreational and human services. (a) Reporting Entity The City is governed by a seven‐member council, elected by City residents. The City is legally separate and fiscally independent, which means it can issue debt, set and modify budgets and fees, and sue or be sued. The accompanying basic financial statements present the financial activities of the City, which is the primary government presented, along with the financial activities of its component unit, which is an entity for which the City is financially accountable. Although a separate legal entity, a blended component unit is, in substance, part of the City’s operations and is reported as an integral part of the City’s financial statements. The City’s component unit are described below. The Palo Alto Public Improvement Corporation (the Corporation) provides financing of public capital improvements for the City through the issuance of Certificates of Participation (COPs), a form of debt that allows investors to participate in a stream of future lease payments. Proceeds from the COPs are used to construct projects that are leased to the City. The lease payments are sufficient in timing and amount to meet the debt service requirements of the COPs. The Board of Directors of the Corporation is composed of the same members as the City Council. The Corporation is controlled by the City, which performs all accounting and administrative functions for the Corporation. The Corporation is a blended component unit of the City. The financial activities of the Corporation are included in the non‐major Debt Service Funds. The University Avenue Area Off‐Street Parking Assessment District (the District) provides financing for the construction of public vehicle off‐street parking improvements. The City is responsible for the governance of the District. The City can impose its will on the District but does not have a financial benefit or burden from the District. The assets associated with the District are for the benefit of the District and are not derived from the City’s provision of goods or services to the District. The District is a fiduciary component unit of the City. The financial activities of the District are included in the University Avenue Area Off‐Street Parking Assessment District Custodial Fund. Financial statements for the Corporation may be obtained from the City of Palo Alto, Administrative Services Department, 4th Floor, 250 Hamilton Avenue, Palo Alto, CA 94301. (b) Basis of Presentation The City’s basic financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The Governmental Accounting Standards Board (GASB) is the acknowledged standard setting body for establishing accounting and financial reporting standards followed by governmental entities in the United States. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 52 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) These standards require that the financial statements described below be presented: Government‐wide Statements: The Statement of Net Position and the Statement of Activities display information about the primary government and its component unit. These statements include the financial activities of the overall City government, except for fiduciary activities. Eliminations have been made to minimize the double counting of internal activities. However, interfund goods and services transactions have not been eliminated in the consolidation process. These statements distinguish between the governmental and business‐type activities of the City. (b) Basis of Presentation (Continued) Governmental activities generally are financed through taxes, intergovernmental revenues, and other non‐exchange transactions. Business‐type activities are financed in whole or in part by fees charged to external parties. The Statement of Activities presents a comparison between direct expenses and program revenues for each segment of the business‐type activities of the City and for each function of the City’s governmental 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 for goods and services offered by the programs, (b) grants and contributions that are restricted to meeting the operational needs of a particular program, and (c) fees, grants and contributions that are restricted to financing the acquisition or construction of capital assets. Revenues that are not classified as program revenues, including all taxes, are presented as general revenues. Fund Financial Statements: The fund financial statements provide information about the City’s funds, including fiduciary funds and its blended component unit. Separate statements for each fund category – governmental, proprietary and fiduciary – are presented. The emphasis of fund financial statements is on major individual governmental and enterprise funds, each of which is displayed in a separate column. All remaining governmental and internal service funds are aggregated and reported as non‐major funds. Proprietary fund operating revenues, such as utilities sales and charges for services, result from exchange transactions associated with the principal activity of the fund. Exchange transactions are those in which each party receives and gives up essentially equal values. Nonoperating revenues, such as subsidies and investment earnings, result from non‐exchange transactions or ancillary activities. Operating expenses for enterprise funds and internal service funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All expenses not meeting this definition are reported as nonoperating expenses. (c) Major Funds and Other Funds The City’s major governmental and enterprise funds need to be identified and presented separately in the fund financial statements. All other funds, called non‐major funds, are combined and reported in a single column, regardless of their fund type. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 53 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Major funds are defined as funds that have assets and deferred outflows of resources, liabilities and deferred inflows of resources, revenues or expenditures/expenses equal to at least 10 percent of their fund type total and at least 5 percent of the grand total. The General Fund is always a major fund. The City may also select other funds it believes should be presented as major funds on a qualitative basis. (c) Major Funds and Other Funds (Continued) The City reported the following major governmental funds in the accompanying financial statements: General Fund – This is the City’s primary operating fund. It accounts for all financial resources of the general government, except those required to be accounted for in another fund. Capital Projects Fund – This fund accounts for resources used for the acquisition and construction of capital facilities by the City, with the exception of those assets financed by proprietary funds. The City reported the following enterprise funds as major funds in the accompanying financial statements: Water Services Fund – This fund accounts for all financial transactions relating to the City’s water service. Services are on a user‐charge basis to residents and business owners located in the City. Electric Services Fund – This fund accounts for all financial transactions relating to the City’s electric service. Services are on a user‐charge basis to residents and business owners located in the City. Fiber Optics Fund – This fund accounts for all financial transactions relating to the City’s fiber optics service. Services are on a user‐charge basis to licensees located in the City. Gas Services Fund – This fund accounts for all financial transactions relating to the City’s gas service. Services are on a user‐charge basis to residents and business owners located in the City. Wastewater Collection Services Fund – This fund accounts for all financial transactions relating to the City’s wastewater collection service. Services are on a user‐charge basis to residents and business owners located in the City. Wastewater Treatment Services Fund – This fund accounts for all financial transactions relating to the City’s wastewater treatment. Services are on a user‐charge basis to residents and business owners located in the City. Refuse Services Fund – This fund accounts for all financial transactions relating to the City’s refuse service. Services are on a user‐charge basis to residents and business owners located in the City. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 54 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (c) Major Funds and Other Funds (Continued) Storm Drainage Services Fund – This fund accounts for all financial transactions relating to the City’s storm drainage service. Services are on a user‐charge basis to residents and business owners located in the City. The City also reports the following funds: Airport Fund – This non‐major enterprise fund accounts for all financial transactions relating to the Palo Alto Airport (PAO). The City assumed control over operation of PAO from the County of Santa Clara, effective August 11, 2014. Internal Service Funds – These funds account for fleet replacement and maintenance, technology, central duplicating, printing and mailing services, administration of compensated absences and health benefits, and the City’s self‐insured workers’ compensation and general liability programs, all of which are provided to other departments on a cost‐reimbursement basis. Also included is the Retiree Health Benefits Internal Service Fund, which accounts for benefits to retirees. Vehicle Replacement and Maintenance – This fund accounts for the maintenance and replacement of vehicles and equipment used by all City departments. The source of revenue is from reimbursement of fleet replacement and maintenance costs allocated to each department by usage of vehicle. Technology – This fund accounts for replacement and upgrade of technology, and covers four primary areas used by all City departments: desktop, infrastructure, applications, and technology research and development. The source of revenue is from reimbursement of costs for support provided to other departments. Printing and Mailing Services – This fund accounts for central duplicating, printing and mailing services provided to all City departments. The source of revenue for this fund is from reimbursement of costs for services and supplies purchased by other departments. General Benefits – This fund accounts for the administration of compensated absences and health benefits. Workers’ Compensation Insurance Program – This fund accounts for the administration of the City’s self‐insured workers’ compensation program. General Liability Insurance Program – This fund accounts for the administration of the City’s self‐ insured general liability program. Retiree Health Benefits – This fund accounts for retiree health benefits. Custodial Funds – These funds are fiduciary funds used to report fiduciary activities that are not required to be reported in pension (and other employee benefit) trust funds, investment trust funds, or private purpose trust funds. These include balances and activities of the Cable Joint CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 55 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (c) Major Funds and Other Funds (Continued) Powers Authority and the assessment district. The financial activities of these funds are excluded from the government‐wide financial statements, but are presented in separate fiduciary fund financial statements. Cable Joint Powers Authority – This fund accounts for the activities of the cable television system on behalf of the members. University Avenue Area Off‐Street Parking Assessment District – This fund accounts for the receipts and disbursements associated with the 2012 Limited Obligation Refunding Improvement Bonds. (d) Basis of Accounting The government‐wide, proprietary fund, and fiduciary fund financial statements are reported using the economic resources measurement focus and the full accrual basis of accounting. Revenues are recorded when earned and 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 reported in the governmental funds 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. Expenditures are recorded when the related fund liability is incurred, except for principal and interest on general long‐term debt, claims and judgments, and compensated absences, which are recognized as expenditures to the extent they have matured. General capital asset acquisitions are reported as expenditures in governmental funds. Proceeds from long‐term debt and acquisitions under capital leases are reported as other financing sources. Revenues susceptible to accrual include taxes, intergovernmental revenues, interest and charges for services. Grant revenues are recognized in the fiscal year in which all eligibility requirements are met. Under the terms of grant agreements, the City may fund certain programs with a combination of cost‐reimbursement grants, categorical block grants, and general revenues. Thus, both restricted and unrestricted net position may be available to finance program expenditures. The City’s policy is to first apply restricted grant resources to such programs, followed by general revenues if necessary. Certain indirect costs are included in program expenses reported for individual functions and activities. Transactions representing the exchange of interfund goods and services have also been included. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 56 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (e) Cash and Cash Equivalents Restricted and unrestricted pooled cash and investments held in the City Treasury, and other unrestricted investments invested by the City Treasurer, are considered cash equivalents for purposes of the statement of cash flows because the City’s cash management pool and funds invested by the City Treasurer possess the characteristics of demand deposit accounts. Other restricted and unrestricted investments with maturities of less than three months at the time of purchase are considered cash equivalents for purposes of the statement of cash flows. (f) Investments The City’s investments are carried at fair value, and its fair value measurements are categorized within the fair value hierarchy established by generally accepted accounting principles. Fair value 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. (g) Inventory of Materials and Supplies Materials and supplies are held for consumption and are valued at average cost. The consumption method is used to account for inventories. Under the consumption method, inventories are recorded as expenditures at the time inventory items are used, rather than purchased. (h) Prepaid items Prepaid items are recorded at cost. Using the consumption method, prepaid items are recorded as expenditures over the period that service is provided. (i) Compensated Absences The liability for compensated absences includes the vested portion of vacation, sick leave, and overtime compensation pay. The City’s liability for accrued compensated absences is recorded in the General Benefits Internal Service Fund. The fund is reimbursed through payroll charges to all other funds. Earned but unpaid vacation and overtime compensation pay are recognized as an expense or expenditure in the proprietary and governmental fund types when earned because the City has provided financial resources for the full amount through its budgetary process. Vested accumulated sick pay is paid in the event of termination due to disability and, under certain conditions, is specified in employment agreements. During the fiscal year ended June 30, 2021, changes to the compensated absences liabilities were as follows (in thousands): Beginning balance 14,244$ Additions 8,751 Payments (7,348) Ending balance 15,647$ Current portion 6,327$ CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 57 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (j) Property Tax Santa Clara County (the County) assesses properties and bills, collects, and distributes property taxes to the City. The County remits the entire amount levied and handles all delinquencies, retaining interest and penalties. The County assesses property values, levies bills and collects taxes as follows: Secured Unsecured Lien Dates January 1 January 1 Levy Dates October 1 July 1 Due Dates 50% on November 1 Upon receipt of billing 50% on February 1 Delinquent after December 10 (for November) August 31 April 10 (for February) The term “unsecured” refers to taxes on personal property other than real estate, land and buildings. These taxes are secured by liens on the property being taxed. Property tax revenues are recognized by the City in the fiscal year they are assessed, provided they become available as defined previously within sixty days after year‐end. (k) Deferred Outflows of Resources and Deferred Inflows of Resources A deferred outflow of resources is the consumption of net position that is applicable to a future reporting period. A deferred inflow of resources is defined as an acquisition of net position applicable to a future reporting period. (l) Pensions and OPEB For purposes of measuring the net pension liability and net OPEB liability, deferred outflows/inflows of resources related to pensions and OPEB, and pension and OPEB expense, information about the fiduciary net position of the City’s pension and OPEB plans and additions to/deductions from the plans’ fiduciary net positions have been determined on the same basis as they are reported by the California Public Employees’ Retirement System (CalPERS) and the California Employer’s Retiree Benefit Trust Fund Program (CERBT), respectively. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value. The governmental activities’ share of net pension liability and net OPEB liability are typically liquidated by the General Fund. (m) Rounding All amounts included in the basic financial statements and footnotes are presented to the nearest thousand. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 58 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (n) Effects of New Pronouncements As of July 1, 2020, the City implemented the following GASB Statement: In January 2017, the GASB issued Statement No. 84, Fiduciary Activities. The statement establishes criteria for identifying fiduciary activities of all state and local governments. The focus of the criteria generally is on (1) whether a government is controlling the assets of the fiduciary activity and (2) the beneficiaries with whom a fiduciary relationship exists. Separate criteria are included to identify fiduciary component units and postemployment benefit arrangements that are fiduciary activities. The statement provides recognition and measurement guidance for situations in which a government is a beneficiary of these agreements. The City evaluated all funds and activities in accordance with the statement and determine that the Cable Joint Powers Authority and the District’s activities previously reported as agency funds should be reported as custodial funds. In August 2018, the GASB issued Statement No. 90, Majority Equity Interests, an amendment of GASB Statements No. 14 and No. 61. The objectives of this statement are to improve the consistency and comparability of reporting a government’s majority equity interest in a legally separate organization and to improve the relevance of financial statement information for certain component units. Implementation of this statement did not have a significant impact on the City’s financial statements for the fiscal year ended June 30, 2021. In October 2021, the GASB issued Statement No. 98, The Annual Comprehensive Financial Report. This statement establishes the term annual comprehensive financial report and its acronym ACFR and eliminates the prior name and acronym in generally accepted accounting principles for state and local governments. No changes were made to the report’s structure or content. Implementation of this statement did not have a significant impact on the City’s financial statements for the fiscal year ended June 30, 2021. The City is currently analyzing its accounting practices to determine the potential impact on the financial statements for the following GASB Statements: In June 2017, the GASB issued Statement No. 87, Leases. The objective of this statement is to better meet the information needs of financial statement users by improving accounting and financial reporting for leases by governments. This statement increases the usefulness of governments’ financial statements by requiring recognition of certain lease assets and liabilities for leases that previously were classified as operating leases and recognized as inflows of resources or outflows of resources based on the payment provisions of the contract. It establishes a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset. Under this statement, a lessee is required to recognize a lease liability and an intangible right‐to‐use lease asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources, thereby enhancing the relevance and consistency of information about governments’ leasing activities. The requirements of this statement are effective for the City’s fiscal year ending June 30, 2022. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 59 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (n) Effects of New Pronouncements (Continued) In June 2018, the GASB issued Statement No. 89, Accounting for Interest Cost Incurred before the End of a Construction Period. The objectives of this statement are 1) to enhance the relevance and comparability of information about capital assets and the cost of borrowing for a reporting period, and 2) to simplify accounting for interest cost incurred before the end of a construction period. The requirements of this statement are effective for the City’s fiscal year ending June 30, 2022. In May 2019, the GASB issued Statement No. 91, Conduit Debt Obligations. The objectives of this statement are to provide a single method of reporting conduit debt obligations by issuers and eliminate diversity in practice associated with 1) commitments extended by issuers, 2) arrangements associated with conduit debt obligations, and 3) related note disclosure. The requirements of this statement are effective for the City’s fiscal year ending June 30, 2023. In January 2020, the GASB issued Statement No. 92, Omnibus 2020. The objectives of this statement are to enhance comparability in accounting and financial reporting and to improve the consistency of authoritative literature by addressing practice issues that have been identified during implementation and application of certain GASB statements. The requirements of this statement are effective for the City’s fiscal year ending June 30, 2022. In March 2020, the GASB issued Statement No. 93, Replacement of Interbank Offered Rates. The objective of this statement is to address those and other accounting and financial reporting implications that result from the replacement of an interbank offered rate. The requirements of this statement are effective for the City’s fiscal year ending June 30, 2022. In March 2020, the GASB issued Statement No. 94, Public‐Private and Public‐Public Partnerships and Availability Payment Arrangements. The objective of this Statement is to improve financial reporting by addressing issues related to public‐private and public‐public partnership arrangements (PPPs). This statement also provides guidance for accounting and financial reporting for availability payment arrangements (APAs). As defined in this statement, an APA is an arrangement in which a government compensates an operator for services that may include designing, constructing, financing, maintaining, or operating an underlying nonfinancial asset for a period of time in an exchange or exchange‐like transaction. The requirements of this statement are effective for the City’s fiscal year ending June 30, 2023. In May 2020, the GASB issued Statement No. 96, Subscription‐Based Information Technology Arrangements. This statement provides guidance on the accounting and financial reporting for subscription‐based information technology arrangements (SBITAs) for government end users (governments). This statement (1) defines a SBITA; (2) establishes that a SBITA results in a right‐ to‐use subscription asset—an intangible asset—and a corresponding subscription liability; (3) provides the capitalization criteria for outlays other than subscription payments, including implementation costs of a SBITA; and (4) requires note disclosures regarding a SBITA. The requirements of this statement are effective for the City’s fiscal year ending June 30, 2023. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 60 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (n) Effects of New Pronouncements (Continued) In June 2020, the GASB issued Statement No. 97, Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans – an Amendment of GASB Statements No. 14 and No. 84, and a Supersession of GASB Statement No. 32. The primary objectives of this statement are to (1) increase consistency and comparability related to the reporting of fiduciary component units in circumstances in which a potential component unit does not have a governing board and the primary government performs the duties that a governing board typically would perform; (2) mitigate costs associated with the reporting of certain defined contribution pension plans, defined contribution other postemployment benefit (OPEB) plans, and employee benefit plans other than pension plans or OPEB plans (other employee benefit plans) as fiduciary component units in fiduciary fund financial statements; and (3) enhance the relevance, consistency, and comparability of the accounting and financial reporting for Internal Revenue Code (IRC) Section 457 deferred compensation plans (Section 457 plans) that meet the definition of a pension plan and for benefits provided through those plans. The requirements of this statement are effective for the City’s fiscal year ending June 30, 2022. (o) Use of Estimates The accompanying basic financial statements have been prepared on the modified accrual and accrual basis of accounting in accordance with generally accepted accounting principles. This requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NOTE 2 – BUDGETS AND BUDGETARY ACCOUNTING 1. The City Manager submits proposed operating and capital budgets to the City Council for the fiscal year commencing the following July 1. The budget includes planned expenditures and the means of financing them. 2. Public hearings are conducted to obtain comments on the proposed budgets. 3. The budget is approved with the adoption of a budget ordinance for all funds except Custodial Funds. 4. Per the Palo Alto Municipal Code, only the City Manager is authorized to reallocate funds from contingency accounts maintained in the General Fund. Amendments to appropriations to departments in the General Fund, to total appropriations for all other budgeted funds, or to transfer of appropriations between funds, require approval by the City Council. Amendments to budgeted revenue and expenditures are added to or subtracted from the Adopted Budget and the resulting totals are reflected as Final Budget amounts. 5. As defined in the Palo Alto Municipal Code, expenditures may not exceed budgeted appropriations at the department level for the General Fund, and at the fund level for Enterprise, Internal Service, Special Revenue and Debt Service Funds. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 61 NOTE 2 – BUDGETS AND BUDGETARY ACCOUNTING (Continued) 6. Budgets for governmental funds are adopted on a basis consistent with generally accepted accounting principles (GAAP), except that unrealized gains or losses on investments, changes in advances to other funds and notes receivable are not recognized on a budgetary basis and encumbrances are treated as budgetary expenditures when incurred. 7. Expenditures for the Capital Projects Fund are budgeted and maintained at a project level for the life of the project. Budget to actual comparisons for these expenditures have been excluded from the accompanying financial statements. NOTE 3 – CASH AND INVESTMENTS The City pools cash from all sources and all funds, except restricted bond proceeds with fiscal agents and Public Agency Retirement Services, and invests its pooled idle cash according to State of California law and the City’s Investment Policy. The basic principles underlying the City’s investment philosophy are to ensure the safety of public funds, ensure that sufficient funds are available to meet current expenditures, and achieve a reasonable rate of return on investments. Policies The City invests in individual investments and in investment pools. Individual investments are evidenced by specific identifiable securities instruments, or by an electronic entry registering the owner in the records of the institution issuing the security, called the book entry system. In order to increase security, the City employs the trust department of a bank as the custodian of certain City managed investments. Classification Cash and investments are classified in the financial statements as shown below, based on whether or not their use is restricted under the terms of City debt instruments or agreements (in thousands): Governmental Business‐Type Fiduciary Activities Activities Funds Total Cash and investments: Available for operations 310,091$ 282,271$ 3,276$ 595,638$ With fiscal agents and trustees 133,264 3,340 2,705 139,309 Total cash and investments 443,355$ 285,611$ 5,981$ 734,947$ Investments Authorized by the City’s Investment Policy, Debt Agreements and Trust Agreements The table below summarizes the investment types that are authorized by the California Government Code (Code) and the City’s Investment Policy, and includes the interest rate risk, credit risk and concentration of credit risk as outlined in the Investment Policy. In addition, the table discloses investment of debt proceeds held by bond trustees. These investments are governed by the provisions of each debt agreement of the City, rather than the general provisions of the City’s Investment Policy. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 62 NOTE 3 – CASH AND INVESTMENTS (Continued) 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. Federal Agency Securities (C) 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 (D) N/A (D) 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 Mutual Funds N/A N/A (E) No Limit No Limit Mutual Funds (F) 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 30% No Limit 5 years AA/AA2 20% 10% of the par value of portfolio (A) (B) The lesser of $3 million or 10% of outstanding commercial paper of any one institution. Debt Agreements: (C) (D) (E) (F) (*)The maximum maturity is based on the Investment Policy that is approved by the City Council and is less restrictive than the California Government Code. Utility Revenue Bonds 2011 Refunding, General Obligation Bonds 2010 and 2013A, and University Avenue Parking Bond 2012 are allowed to invest in the California Asset Management Program. Authorized Investment Type Bonds of State of California Municipal Agencies & Other U.S. States 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 redeemable at the call date. Utility Revenue Bonds 2011 Refunding and 1999 Refunding allow general obligations of states with a minimum credit quality rating of A2/A by Moody's and Standard & Poor's. Utility Revenue Bonds 2011 Refunding and 1999 Refunding require a minimum credit quality rating of A‐1/P‐1 by Moody's and Standard & Poor's and maturing after no more than 360 days. Water Revenue Bonds 2009 Series A, Utility Revenue Bonds 2011 Refunding and 1999 Refunding require a minimum credit quality rating of AAAm or AAAm‐G by Standard & Poor's. Supranational The City must maintain required amounts of cash and investments with trustees under the terms of certain debt issues. These funds are unexpended bond proceeds or are pledged as reserves to be used if the City fails to meet its obligations under these debt issues. The Code requires these funds to be invested in accordance with City ordinance, bond indentures or state statute. All of these funds have been invested as permitted under the Code and the investment policy approved by the City Council. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 63 NOTE 3 – CASH AND INVESTMENTS (Continued) The City has implemented investment guidelines for its Public Agencies Retirement Services (PARS) Trust which authorizes the investments in U.S. Treasury securities, federal agencies and U.S. guaranteed obligations, corporate notes, certificates of deposit, bankers’ acceptances, equities investments, and mutual funds. Fair Value Measurements 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. All of the investments are measured using level 2 inputs, except for investments in money market mutual funds, California Asset Management Program and Local Agency Investment Fund, which are not subject to the fair value hierarchy. Investment securities classified in Level 2 of the fair value hierarchy are valued using prices determined by the use of matrix pricing techniques maintained by the pricing vendors for these securities. Matrix pricing is used to value securities based on the securities relationship to benchmark quoted prices. The following is a summary of the fair value measurements of the City as of June 30, 2021 (in thousands): Type of Investment June 30, 2021 Level 2 Investments by fair value hierarchy U.S. Federal Agency Securities 243,526$ 243,526$ U.S. Treasury Notes 13,680 13,680 Local Government Bonds 172,085 172,085 Negotiable Certificates of Deposit 36,271 36,271 Corporate Bonds 24,491 24,491 Supranational Bonds 31,792 31,792 Total investments by fair value hierarchy 521,845 521,845$ Investment not subject to fair value hierarchy Money Market Mutual Funds 103,428 Equity Mutual Funds (Irrevocable for Pension)37,089 California Asset Management Program 3,304 Local Agency Investment Fund 67,394 Total investments not subject to fair value hierarchy 211,215 Total investments measured at fair value 733,060$ Local Agency Investment Fund The City participates in the Local Agency Investment Fund (LAIF) which, under the oversight of the Treasury of the State of California, is regulated by California Government Code Section 16429. LAIF management calculates the fair value and cost of the entire LAIF pool. The City adjusts its cost basis invested in LAIF to fair value based on this ratio. The fair value of the City’s position in the pool is the same as the value of the pool share. The balance available for withdrawal on demand is based on CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 64 NOTE 3 – CASH AND INVESTMENTS (Continued) accounting records maintained by LAIF, which are recorded on an amortized cost basis. LAIF is part of the State’s Pooled Money Investment Account (PMIA). The total balance of the PMIA is approximately $193.3 billion as of June 30, 2021. Of that amount, 97.7 percent was invested in nonderivative financial products and 2.3 percent in structured notes and asset backed securities. At June 30, 2021, LAIF had a weighted average maturity of 291 days. Money Market Mutual Funds Money market mutual funds are available for withdrawal on demand and at June 30, 2021, had a weighted average maturity of approximately 1 month. California Asset Management Program The City is a voluntary participant in the California Asset Management Program (CAMP). CAMP is an investment pool offered by the California Asset Management Trust (the Trust). The Trust is a joint powers authority and public agency created by the Declaration of Trust and established under the provisions of the California Joint Exercise of Powers Act (California Government Code Sections 6500 et seq., or the “Act”) for the purpose of exercising the common power of its participants to invest certain proceeds of debt issues and surplus funds. The City’s investments are limited to investments permitted by subdivisions (a) to (n), inclusive, of Section 53601 of the California Government Code. The City reports its investments in CAMP at the fair value amounts provided by CAMP, which is the same as the value of the pool share. At June 30, 2021, the fair value approximated the City’s cost. CAMP had a weighted average maturity of 52 days at June 30, 2021. Interest Rate Risk Interest rate risk is the risk that changes in market interest rates may adversely affect the fair value of an investment. Normally, the longer the maturity of an investment, the greater the sensitivity its fair value is to changes in market interest rates. As of June 30, 2021, the City’s investments consisted of the following (in thousands): Type of Investment Less Than One Year One to Three Years Three to Five Years Over Five Years Total U.S. Federal Agency Securities 23,669$ 50,617$ 75,136$ 94,104$ 243,526$ U.S. Treasury Notes 1,517 9,215 2,948 ‐ 13,680 Local Government Bonds 24,545 27,492 47,841 72,207 172,085 Corporate Bonds 860 7,547 16,084 ‐ 24,491 Money Market Mutual Funds 103,428 ‐ ‐ ‐ 103,428 Equity Mutual Funds (Irrevocable for Pension)37,089 ‐ ‐ ‐ 37,089 Negotiable Certificates of Deposit 10,287 12,527 9,801 3,656 36,271 California Asset Management Program 3,304 ‐ ‐ ‐ 3,304 Supranational Bonds ‐ 4,257 27,535 ‐ 31,792 Local Agency Investment Fund 67,394 ‐ ‐ ‐ 67,394 Total Investments 272,093$ 111,655$ 179,345$ 169,967$ 733,060 Cash in bank and on hand 1,887 Total Cash and Investments 734,947$ Maturities CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 65 NOTE 3 – CASH AND INVESTMENTS (Continued) Investment with Fair Values Highly Sensitive to Interest Rate Fluctuations At June 30, 2021, the City’s investments (including investments held by bond trustees) include U.S. Federal Agency Callable Securities totaling $137.0 million. These investments are highly sensitive to interest rate fluctuations (to a greater degree than already indicated in the information provided above) and are subject to early redemption. Credit Risk Credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. Presented below is the actual rating as provided by Standard & Poor’s, Moody’s and/or Fitch’s investment rating system as of June 30, 2021, for each investment type (in thousands): Type of Investment Rating Total U.S. Federal Agency Securities AA+ 243,526$ Corporate Bonds AAA 19,076 AA+ 5,415 Total Corporate Bonds 24,491 Local Government Bonds AAA 52,338 AA+ 50,433 AA 41,241 N/A 28,073 Total Government Bonds 172,085 Supranational Bonds AAA 31,792 Money Market Mutual Funds AAA 103,428 Subtotal rated investments 575,322 Not Applicable: U.S. Treasury Notes 13,680 Not Rated: California Asset Management Program 3,304 Local Agency Investment Fund 67,394 Negotiable Certificates of Deposit 36,271 Equity Mutual Funds (Irrevocable for Pension) 37,089 Cash in bank and on hand 1,887 Total Cash and Investments 734,947$ CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 66 NOTE 3 – CASH AND INVESTMENTS (Continued) Concentration of Credit Risk Investments in any one issuer, other than U.S. Treasury securities, mutual funds, and external investment pools, that represent 5 percent or more of total City portfolio investments are as follows at June 30, 2021 (in thousands): Investments Reporting Type Fair Value at Year‐End Federal Agricultural Mortgage Corporation U.S. Federal Agency Securities 88,423$ Federal Home Loan Mortgage Corporation U.S. Federal Agency Securities 45,987 Federal Home Loan Bank U.S. Federal Agency Securities 43,991 Federal Farm Credit Bank U.S. Federal Agency Securities 39,439 Custodial Credit Risk California law requires banks and savings and loan institutions to pledge government securities with a market value of 110 percent of the City’s cash on deposit or first trust deed mortgage notes with a value of 150 percent of the deposit as collateral for these deposits. Under California Law, this collateral is considered held in the City’s name and places the City ahead of general creditors of the institution. The City has waived collateral requirements for the portion of deposits covered by federal deposit insurance. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty to a transaction, the City will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The City’s Investment Policy limits its exposure to custodial credit risk by requiring that all security transactions entered into by the City be conducted on a delivery‐versus‐ payment basis. Securities are to be held by a third‐party custodian. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 67 NOTE 4 – INTERFUND TRANSACTIONS Transfers Between Funds With Council approval, resources may be transferred from one City fund to another. The purpose of the majority of transfers is to subsidize a fund. Less often, a transfer may be made to open or close a fund. Transfers between City funds during fiscal year 2021 were as follows on the following page (in thousands): Fund Making Transfer Amount Transferred General Fund Nonmajor Governmental Funds 394$ A Electric Services Fund 13,639 B Gas Services Fund 6,847 B 20,880 Capital Projects Fund General Fund 9,294 C Nonmajor Governmental Funds 9,170 C Water Services Fund 84 C Electric Services Fund 165 C Fiber Optics Fund 10 C Gas Services Fund 69 C Wastewater Collection Fund 41 C Refuse Fund 10 C Storm Drainage Fund 150 C Internal Service Funds 205 C 19,198 Nonmajor Governmental Funds General Fund 1,019 A Capital Projects Fund 2,380 A Water Services Fund 13 A Electric Services Fund 24 A Fiber Optics Fund 1 A Gas Services Fund 10 A Wastewater Collection Fund 6 A Internal Service Funds 27 A 3,480 Water Services Fund Gas Services Fund 279 C Wastewater Collection Fund 278 C 557 Electric Services Fund General Fund 2,082 D Water Services Fund 137 C Gas Services Fund 136 C Fiber Optics Fund 102 C Internal Service Funds 125 C 2,582 Internal Service Funds General Fund 1,225 E Water Services Fund 34 E Electric Services Fund 117 E Fiber Optics Fund 5 E Gas Services Fund 28 E Wastewater Collection Fund 17 E Refuse Fund 20 E Storm Drainage Services Fund 4 E Internal Service Funds 2,347 F 3,797 Total 50,494$ Fund Receiving Transfer CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 68 NOTE 4 – INTERFUND TRANSACTIONS (Continued) The reasons for these transfers are set forth below: (A) Transfer to fund street maintenance activities, to pay debt service, fund City employee parking, and to return unspent project funds. (B) Transfer to fund the return of initial investment made by general fund when utility department was created. (C) Transfers of funds to construct, purchase or maintain capital assets. (D) Transfer to fund electricity costs associated with City streetlight and traffic signal costs. (E) Transfer to fund replacement and maintenance of critical desktop, software, infrastructure, vehicles and equipment. (F) Transfer to fund for retiree healthcare. Current Interfund Balances Current interfund balances arise in the normal course of business and are expected to be repaid shortly after the end of the fiscal year. At June 30, 2021, the non‐major Street Improvement Special Revenue Fund, the non‐major Federal Revenue Special Revenue Fund, and the non‐major Airport Enterprise Fund owed the General Fund $206,000, $135,000, and $602,000, respectively. Long‐Term Interfund Advance On December 6, 2010, the City Council accepted an Airport Business Plan of the Palo Alto Airport (PAO) and approved creation of the Airport Enterprise Fund to facilitate the transition of PAO control from the County of Santa Clara to the City. The City Council approved six separate general fund advances to the non‐major Airport Enterprise Fund. All advances bear interest equal to the average return yield on the City’s investment portfolio. The six separate advances and interest incurred have been consolidated and are scheduled to be repaid by June 2034. At June 30, 2021, the outstanding advances was $3.0 million. Internal Balances Internal balances represent the net interfund receivables and payables remaining after the elimination of all such balances within governmental and business‐type activities. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 69 NOTE 5 – NOTES AND LOANS RECEIVABLE At June 30, 2021, the City’s notes and loans receivable totaled (in thousands): Palo Alto Housing Corporation: Tree House Apartments 5,344$ Emerson Street Project 375 Alma Single Room Occupancy Development 2,222 Barker Hotel 2,111 Sheridan Apartments 2,222 Oak Court Apartments, L.P. 7,834 El Dorado Palace, LLC 150 Mid‐Peninsula Housing Coalition: Palo Alto Gardens Apartments 100 Community Working Group, Inc.1,280 Opportunity Center Associates, L.P.945 Home Rehabilitation Loans 46 Executive Relocation Assistance Loans 826 Below Market Rate Assessment Loans 53 Oak Manor Townhouse Water System 114 Lytton Gardens Assisted Living 101 Emergency Housing Consortium 75 Alma Gardens Apartments 1,150 2811‐2825 Alma Street Acquisition 1,890 Palo Alto Family Housing, 801 Alma Street 6,422 Palo Alto Senior Housing Project ‐ Stevenson House, LP 901 MP Palo Alto Garden, LLC 672 Colorado Park Housing Corporation 204 Buena Vista Mobile Home Park – Santa Clara County 14,500 Wilton Court Apartments 18,752 Total Notes and Loans Receivable 49,537 Less: Valuation Allowance (14,612) Total Notes and Loans Receivable, Net 53,677$ Housing Loans The City engages in programs designed to encourage construction or improvement in low‐to‐moderate income housing or other projects. Under these programs, grants or loans are provided under favorable terms to homeowners or developers who agree to spend these funds in accordance with the City’s terms. These loans have been offset by restricted or committed fund balances, as they are not expected to be repaid immediately. Some of these loans contain forgiveness clauses that provide for the amount loaned to be forgiven if the third party maintains compliance with the terms of the loan and associated regulatory agreements. Since some of these loans are secured by trust deeds that are subordinated to other debt on the associated projects or are only repayable from residual cash receipts on the projects, collectability of some of the outstanding balances may not be realized. As a result of the forgiveness clauses and nature of these housing projects and associated cash flows, a portion of the outstanding balances of the loans has been offset by a valuation allowance. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 70 NOTE 5 – NOTES AND LOANS RECEIVABLE (Continued) Tree House Apartments In March 2009, the City agreed to loan $2.8 million to Tree House Apartments, L.P. (THA) for the purchase of the real property located at 488 West Charleston Road. The loan accrues simple interest at the rate of 3 percent per annum. The loan was funded with $1.8 million of Community Development Block Grant (CDBG) funds and $1.0 million of residential housing funds. An additional development loan in the amount of $2.5 million was approved by the City on October 18, 2010. Principal and interest payments will be deferred, however if the borrower has earned extra income, and if it is acceptable to the other entities providing final permanent sources of funds, payment of interest and principal based on the City’s proportionate share of the project’s residual receipts from net operating income shall be made by the borrower. In no event shall full payment be made by the borrower later than concurrently with the expiration or earlier termination of the loan agreement, which is December 31, 2067. Emerson Street Project On November 8, 1994, the City loaned $375,000 to Palo Alto Housing Corporation (PAHC) for expenses necessary to acquire an apartment complex for the preservation of rental housing for low and very low‐ income households in the City. This loan is collateralized by a second deed of trust. The loan bears interest at 3 percent. Alma Single Room Occupancy Development On December 13, 1996, the City loaned $2.2 million to Alma Place Associates, L.P. for development of a 107‐unit single room occupancy development. This loan bears interest at 3 percent and is collateralized by a subordinated deed of trust. The principal balance is due in 2041. Barker Hotel On April 12, 1994, the City loaned a total of $2.1 million for the preservation, rehabilitation and expansion of a low‐income, single occupancy hotel. This loan was funded by three sources: $400,000 from the Housing In‐Lieu Fund, $1.0 million from HOME Investment Partnership Program Funds, and $670,000 from CDBG funds. All three notes bear no interest and are collateralized by a deed of trust, which is subordinated to private financing. Loan repayments are deferred until 2035. In July 2004, the City agreed to loan up to $41,000 to PAHC to rehabilitate the interior of the Barker Hotel. The loan was funded with CDBG funds and is collateralized by a deed of trust on the property. Annual loan payments are deferred until certain criteria defined in the loan agreement are reached. The loan will be forgiven if the borrower satisfactorily complies with all terms and conditions of the loan agreement. Sheridan Apartments On December 8, 1998, the City loaned $2.2 million to PAHC for the purchase and rehabilitation of a 57‐ unit apartment complex to be used for senior and low‐income housing (Sheridan Apartments). The loan was funded with $1.6 million in CDBG funds, and $825,000 of Housing In‐Lieu funds. The note is collateralized by a second deed of trust and an affordability reserve account held by PAHC. The loan was amended in June 2017. It will not accrue interest between May 1, 2017 and March 1, 2030. The loan will be forgiven on June 30, 2030 if PAHC uses the funds that would otherwise have been due to the City for another affordable housing project. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 71 NOTE 5 – NOTES AND LOANS RECEIVABLE (Continued) Oak Court Apartments, L.P. On August 18, 2003, the City loaned $5.9 million to PAHC for the purchase of land. The note bears interest of 5 percent and is secured by a deed of trust. Note payments are due annually after 55 years, or beginning in 2058, unless PAHC elects to extend the note until 2102, as defined in the regulatory agreement. The City also loaned $1.9 million to Oak Court Apartments, L.P. for the construction of a 53‐unit rental apartment complex for low and very low‐income households with children, which was completed in April 2005. The note bears no interest until certain criteria defined in the note are satisfied, at which time the note will bear an interest rate not to exceed 3 percent. The note is secured by a subordinate deed of trust. The principal balance is due in 2060. El Dorado Palace, LLC On June 22, 2015, the City approved a loan to PAHC in the amount of $375,000 to increase the supply of affordable low income housing in the City. The City loaned $52,000 and $13,000 in June 2017 and March 2018, respectively. In February 2019, the City loaned an additional $85,000. The loan bears three percent (3%) interest, however in the event of default will accrue at the lesser of 8% or the highest rate permitted by law. The term of the loan shall expire 55 years unless the City agree to extend an additional 44 years. As of June 30, 2021, the outstanding balance was $150,000. Palo Alto Gardens Apartments On April 22, 1999, the City loaned $1.0 million to Mid‐Peninsula Housing Coalition (the Coalition) for the purchase and rehabilitation of a 155‐unit complex for the continuation of low‐income housing. The loan was funded with $659,000 of CDBG funds and $341,000 of Housing In‐Lieu funds. The two notes bear interest at 3 percent and are secured by second deeds of trust and a City Affordability Reserve Account held by the Coalition. The remaining principal balance is due in 2039. As of June 30, 2021, the outstanding balance was $100,000. Community Working Group, Inc. On May 13, 2002, the City loaned $1.3 million to Community Working Group, Inc. for predevelopment, relocation and acquisition of land for development of an 89‐unit complex and homeless service center for very low income households. The loan was funded with $1.3 million of CDBG funds. The note bears no interest and is secured by a first deed of trust. No repayment is required as long as the borrower complies with all terms and conditions of the agreement. After 89 years of compliance with the regulatory agreement, the City’s loan would convert to a grant and its deed of trust would be re‐conveyed. Opportunity Center Associates, L.P. On July 19, 2004, the City loaned $750,000 for a 55‐year term to Opportunity Center Associates, L.P. for construction of 89 units of rental housing for extremely low‐income and very low‐income households. The loan was funded with $750,000 of residential housing funds. The note bears 3 percent interest and is secured by a deed of trust. The loan remains outstanding and becomes due at the end of the 55‐year term. During fiscal year 2019, the City received $25,000 in principal payments. On April 17, 2019, the City approved up to an additional $220,000 loan drawn from CDBG for the improvement of rental housing. In February 2019 and April 2019, the City loaned $191,000 and $29,000, respectively. The note bears 3 percent interest, and all payments of interest and principal shall be deferred until July 19, 2103. The loan balance owed as of June 30, 2021 was $945,000. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 72 NOTE 5 – NOTES AND LOANS RECEIVABLE (Continued) Home Rehabilitation Loans The City administers a closed housing rehabilitation loan program initially funded with CDBG funds. Under this program, individuals with incomes below a certain level are eligible to receive low interest loans for rehabilitation work on their homes. These loans are secured by deeds of trust, which may be subordinated to subsequent encumbrances upon said real property with the prior written consent of the City. The loan repayments may be amortized over the life of the loans, deferred, or a combination of both. Executive Relocation Assistance Loans The City Council may authorize a mortgage loan as part of a relocation assistance package to executive staff. The loans are secured by first deeds of trust, and interest is adjusted annually based on the rate of return of invested funds of the City for the year ended June 30 plus one‐quarter of a percent. Principal and interest payments are due monthly. Employees must pay any outstanding balance on their loans within a certain period after ending employment with the City. During the year ended June 30, 2020, the City entered into a 30‐year loan with the City Manager for $845,000. The purchase cost for the City Manager’s home was $3.4 million and the City holds 75 percent equity share. During the year ended June 30, 2021, the City Manager paid $21,000 for capital improvements and $100,000 to the City to exercise a one‐time option to purchase a portion of the City’s equity share which decreased to 71.43 percent. As of June 30, 2021, the outstanding balance was $826,000. Below Market Rate Assessment Loans In December 2002, the City loaned $53,000 to below market rate homeowners with low incomes and/or very limited assets for capital repairs, special assessments and improvements of their properties. The loans bear interest at 3 percent and are secured by a deed of trust on each property. Loan payments are deferred until 2032. Oak Manor Townhouse Water System On May 12, 2003, the City Council approved an allocation of $114,000 to Palo Alto Housing Corporation Apartments, Inc. (PAHCA) to replace the water pipes. Repayment of the loan will not be required unless the property is sold, the program is terminated or purpose of the program is changed without City’s approval prior to July 1, 2033. The loan for this project is subordinated to the existing City loan with PAHCA dated January 7, 1991 for the acquisition of the project site, which is discussed earlier in this section. Lytton Gardens Assisted Living In June 2005, the City loaned $101,000 to Community Housing, Inc. to upgrade and modernize the existing kitchens at the senior residential facility known as Lytton Gardens Assisted Living. The loan was funded with CDBG funds, and bears simple interest of 3 percent. Principal and interest payments are deferred until July 1, 2035, as long as the borrower continues to comply with all terms and conditions of the agreement. Emergency Housing Consortium In November 2005, the City agreed to loan up to $75,000 to Emergency Housing Consortium to cover architectural expenses that will be incurred in rehabilitating and expanding the property. The loan was funded with CDBG funds, and bears simple interest of 3 percent. Principal and interest payments are deferred until July 1, 2035, as long as the borrower continues to comply with all terms and conditions of the agreement. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 73 NOTE 5 – NOTES AND LOANS RECEIVABLE (Continued) Alma Garden Apartments In March 2006, the City agreed to loan up to $1.2 million to Community Working Group, Inc. to acquire a 10‐unit multi‐family housing complex known as Alma Garden Apartments. The loan was funded with CDBG funds. Principal and interest payments are deferred until July 1, 2061 as long as the borrower complies with all terms and conditions of the agreement. 2811‐2825 Alma Street Acquisition On October 9, 2011, the City agreed to loan $1.3 million to PAHC to acquire properties on Alma Street for the purpose of developing an affordable rental housing project. On June 29, 2015, the City loaned PAHC an additional $0.6 million, and entered into an Amended and Restated Acquisition and Development Agreement which combined the two loans for a total loan of $1.9 million. The loan term expires on December 8, 2066 with an option to extend the term for an additional 44 years. The loan bears simple interest of 3 percent, however in the event of default interest will accrue at the lesser of 8 percent or the highest rate permitted by law. Principal and interest payments are payable during the term of the agreement on a “residual receipt” basis as described in the agreement. All principal and interest is due in the event of an unauthorized transfer, a default or the expiration of the term. Palo Alto Family Housing, 801 Alma Street On February 14, 2011, the City agreed to loan Palo Alto Family, LP up to $9.3 million for the purposes of predevelopment expenses and acquiring certain real property for the Alma Street Affordable Multi‐Family Rental Housing Project. The loan bears simple interest of 3 percent. Principal and interest are due and payable during the term of the agreement on a “residual receipt” basis as described in the agreement. Except in the case of default, all remaining principal and interest shall be payable on the Restriction Termination Date as defined in the agreement. As of June 30, 2021, the outstanding amount is $6.4 million. Palo Alto Senior Housing Project – Stevenson House, LP On October 1, 2015, the City entered into an affordable housing fund loan agreement with PASHPI Stevenson House LP, a California limited partnership, in the principal amount of $1 million to assist in the rehabilitation of the Stevenson House. The loan bears simple interest of 3 percent. As of June 30, 2021, the loan outstanding balance is $901,000 and is due at the end of the 55‐year term. MP Palo Alto Garden, LLC The City loaned $619,000 and $53,000 in March 2017 and October 2017, respectively, in CDBG funds for the rehabilitation of the property. The note bears 3% simple interest and shall be deferred until April 24, 2054. If there are no Events of Default prior to the end of the terms, the unpaid principal and interest will be treated as a grant and no repayment will be due to the City. Colorado Park Housing Corporation On September 8, 2014, the City entered into an affordable housing fund loan agreement with Colorado Park Housing Corporation (CPHC), a California nonprofit public benefit corporation, in the principal amount of $204,000. The loan bears no interest except in the event of default. The principal and any accrued interest is due and payable on the earlier of (a) expiration of the term, or (b) a default by CPHC which has not been cured as provided for in the agreement. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 74 NOTE 5 – NOTES AND LOANS RECEIVABLE (Continued) Buena Vista Mobile Home Park – Santa Clara County In September 2017, the City entered into an agreement with the Santa Clara County Housing Authority (SCCHA) for the acquisition of Buena Vista Mobile Home Park. The City loaned SCCHA $14.5 million for the acquisition. The City is entitled to twenty six percent of all residual receipts. Interest for the promissory note is 3% simple interest. Principal and interest payments commenced on September 30, 2019 and the note and all interest is payable in full on September 29, 2092. Wilton Court Apartments In October 2020, the City entered into a predevelopment and construction loan agreement with Wilton ECR L.P. to construct approximately fifty‐nine (59) residential rental units on property located at 3703‐ 3709 El Camino Real with the City. Fifty‐eight (58) would be affordable to low, very low, and extremely low‐income households earning between thirty percent to sixty percent of area median income as determined by the United States Department of Housing and Urban Development, of which twenty‐one (21) of the units will be designated for persons with developmental disabilities. The City entered into a loan agreement with Wilton ECR L.P. in the amount of $18.8 million. The loan bear interest rate of 0% until the date of the permanent closing and 3% commencing the date of the permanent closing. The loan matures on December 31, 2077. During the year, $18.8 million was drawn. As of June 30, 2021, the outstanding balance was $18.8 million. NOTE 6 – CAPITAL ASSETS Valuation Capital assets are valued at historical cost if purchased or constructed. Donated capital assets, donated works of art and similar items, and capital assets received in a service concession arrangement are recorded at acquisition value at the time received. The City’s policy is to capitalize all assets when costs are equal to or exceed $5,000 and the useful life exceeds one year. Infrastructure assets are capitalized when costs are equal to or exceed $100,000. Proprietary fund capital assets are recorded at cost including significant interest costs incurred under restricted tax‐exempt borrowings, which finance the construction of capital assets. These interest costs, net of interest earned on investment of proceeds of such borrowings, are capitalized and added to the cost of capital assets during the construction period. Maintenance and repairs are expensed as incurred. The City has recorded all its public domain capital assets, consisting of roadway and recreation and open space, in its government‐wide financial statements. All capital assets with limited useful lives are depreciated over their estimated useful lives. The purpose of depreciation is to spread the cost of capital assets equitably among all users over the life of those assets. The amount charged to depreciation expense each year represents that year’s pro rata share of the cost of capital assets. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 75 NOTE 6 – CAPITAL ASSETS (Continued) Depreciation of capital assets is charged as an expense against operations each year and the total amount of depreciation taken over the years, called accumulated depreciation, is reported on the statement of net position as a reduction in the book value of capital assets. Depreciation is calculated using the straight‐line method, which means the cost of the asset is divided by its expected useful life in years, and the result is charged to expense each year until the asset is fully depreciated. The City has assigned the useful lives listed below to capital assets. Governmental Activities Years Buildings and structures 20 ‐ 30 Equipment: Computer equipment 3 ‐ 5 Office machinery and equipment 5 Machinery and equipment 5 ‐ 30 Intangible assets ‐ software 5‐20 Roadway network: 5 ‐ 40 Recreation and open space network: 25 ‐ 40 Business‐type Activities Buildings and structures 25 ‐ 60 Vehicles and heavy equipment 3 ‐ 10 Machinery and equipment 10 ‐ 50 Transmission, distribution and treatment systems 10 ‐ 100 Includes pavement, striping and legends, curbs, gutters and sidewalks, parking lots, traffic signage, and bridges Includes major park facilities, park trails, bike paths and medians CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 76 NOTE 6 – CAPITAL ASSETS (Continued) Governmental Activities Changes in the capital assets for governmental activities during the year ended June 30, 2021 were (in thousands): Balance Balance July 1, 2020 Additions Retirements Transfers June 30, 2021 Governmental activities Nondepreciable capital assets: Land and improvements 82,206$ ‐$ (75)$ ‐$ 82,131$ Street trees 14,787 165 (127) ‐ 14,825 Intangible assets ‐ Easement 3,567 ‐ ‐ ‐ 3,567 Construction in progress 139,365 33,143 (11,934) (22,761) 137,813 Total nondepreciable capital assets 239,925 33,308 (12,136) (22,761) 238,336 Depreciable capital assets: Buildings and structures 251,119 ‐ (25) 21,003 272,097 Intangible assets ‐ Software 279 ‐ ‐ ‐ 279 Equipment 15,737 217 (520) 1,758 17,192 Roadway network 335,202 ‐ ‐ ‐ 335,202 Recreation and open space network 35,186 ‐ ‐ ‐ 35,186 Total depreciable capital assets 637,523 217 (545) 22,761 659,956 Less accumulated depreciation: Buildings and structures (105,984) (7,728) 1 ‐ (113,711) Intangible assets ‐ Software (279) ‐ ‐ ‐ (279) Equipment (8,856) (460) 389 ‐ (8,927) Roadway network (171,522) (7,694) ‐ ‐ (179,216) Recreation and open space network (15,867) (1,254) ‐ ‐ (17,121) Total accumulated depreciation (302,508) (17,136) 390 ‐ (319,254) Depreciable capital assets, net 335,015 (16,919) (155) 22,761 340,702 Internal service fund capital assets Construction in progress 2,723 2,864 ‐ ‐ 5,587 Equipment 63,476 1,964 (2,415) ‐ 63,025 Less accumulated depreciation (44,834) (3,153) 2,316 ‐ (45,671) Net internal service fund capital assets 21,365 1,675 (99) ‐ 22,941 Governmental activities capital assets, net 596,305$ 18,064$ (12,390)$ ‐$ 601,979$ CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 77 NOTE 6 – CAPITAL ASSETS (Continued) Business‐Type Activities Capital Assets Changes in the capital assets for the business‐type activities during the year ended June 30, 2021 were (in thousands): Balance Balance July 1, 2020 Additions Retirements Transfers June 30, 2021 Business‐type activities Nondepreciable capital assets: Land and improvements 4,973$ ‐$ ‐$ ‐$ 4,973$ Construction in progress 121,096 38,420 ‐ (30,580) 128,936 Total nondepreciable capital assets 126,069 38,420 ‐ (30,580) 133,909 Depreciable capital assets: Buildings and structures 74,568 ‐ ‐ ‐ 74,568 Infrastructure 633 ‐ ‐ ‐ 633 Transmission, distribution and treatment systems 884,791 572 (1,154) 30,580 914,789 Total depreciable capital assets 959,992 572 (1,154) 30,580 989,990 Less accumulated depreciation: Buildings and structures (16,141) (1,393) ‐ ‐ (17,534) Infrastructure (65) (21) ‐ ‐ (86) Transmission, distribution and treatment systems (376,604) (22,192) 1,026 ‐ (397,770) Total accumulated depreciation (392,810) (23,606) 1,026 ‐ (415,390) Depreciable capital assets, net 567,182 (23,034) (128) 30,580 574,600 Business‐type activities capital assets, net 693,251$ 15,386$ (128)$ ‐$ 708,509$ Capital Asset Contributions Some capital assets may be acquired using federal and state grant funds, or they may be contributed by developers or other governments. Generally accepted accounting principles require that these contributions be accounted for as revenues at the time the capital assets are contributed. Depreciation Allocation Depreciation expense was charged to functions and programs based on their usage of the related assets. The amount allocated to each function or program is as follows (in thousands): Governmental Activities Business‐type Activities City Manager 22$ Water 3,127$ City Attorney 1 Electric 8,637 City Clerk 4 Fiber Optics 420 City Auditor 1 Gas 3,409 Administrative Services 4 Wastewater Collection 2,849 Public Works 10,530 Wastewater Treatment 4,143 Planning and Development Services 419 Refuse 81 Office of Transportation 9 Storm Drainage 871 Police 89 Airport 69 Fire 392 23,606$ Community Services 3,297 Library 2,368 Internal Service Funds 3,153 20,289$ CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 78 NOTE 6 – CAPITAL ASSETS (Continued) Construction In Progress Construction in progress as of June 30, 2021 is comprised of the following (in thousands): Governmental Activities Expended to June 30, 2021 California Avenue Parking Garage 48,522$ Highway 101 Pedestrian/Bicycle Overpass 19,617 New Public Safety Building 17,163 Charleston/Arastradero Corridor 13,136 Bicycle Boulevards Implementation Project 9,163 Traffic Signal Upgrades 4,875 Railroad Grade Separation 3,772 Technology Fund 3,748 JMZ Renovation 2,928 Animal Shelter Renovation 2,739 Rincondada Park Improvements 2,508 Vehicle Fund 1,839 Newell Road Bridge/SFC Bridge Replacement 1,829 Cubberley Track and Field Replacement 1,808 New Downtown Parking Garage 1,440 Quarry Road 1,282 Art in Public Places 1,027 Tennis & Basketball Court Resurfacing 908 Municipal Service Center Improvements 571 Emerg Vehicle Traffic Signal Preempt Sys 486 Park Wayfinding Design 475 Civic Center Electrical Upgrade 416 Other construction in progress 3,148 Total Governmental Activities 143,400$ Business‐type Activities Expended to June 30, 2021 Airport's Apron Reconstruction 30,464$ Electric distribution system improvements 22,752 Gas system extension replacements and improvements 17,800 Storm drainage structural and water quality improvements 11,779 Water quality control plant equipment replacement and lab facilities 7,528 Sewer system rehabilitation and extensions 4,241 Water system extension replacements and improvements 2,958 Other electrical improvements projects 2,148 Other construction in progress 29,266 Total Business‐type Activities 128,936$ CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 79 NOTE 6 – CAPITAL ASSETS (Continued) Construction In Progress Commitments Major governmental capital projects that are currently in progress, and the remaining capital commitment of each, are as follows:  New Public Safety Building ‐ $97.1 million  Charleston Arastradero Corridor – $7.4 million  Municipal Service Center Improvements ‐ $6.0 million  Churchill Ave/Alma ‐ $4.2 million  Railroad Grade Separation ‐ $4.0 million  Highway 101 Pedestrian/Bicycle Overpass ‐ $3.7 million  Vehicle Replacements ‐ $3.3 million Major business‐type capital projects that are currently in progress, and the remaining capital commitment of each, are as follows:  Seismic Water Systems Upgrades ‐ $5.3 million  Gas Main Replacement Project 23 ‐ $6.9 million  Primary Sedimentation Tank Rehabilitation ‐ $11.8 million  Airport Apron Reconstruction Phase 1 ‐ $23.3 million Vehicle Registration Fees (VRF) In fiscal year 2021, the City received VRF funds from the Santa Clara Valley Transportation Authority and expended the full amount on capital expenditures for the Overlay Resurfacing Project (PE‐86070) (in thousands): Starting VRF balance July 1, 2020 ‐$ VRF revenue 444 VRF interest earned 2 VRF expense (446) Ending VRF balance June 30, 2021 ‐$ CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 80 NOTE 7 – LONG‐TERM DEBT The City’s long‐term debt balances and activities, other than special assessment debt discussed in Note 8, are as follows (in thousands): Original Balance Balance Current Issue Amount July 1, 2020 Additions Retirements June 30, 2021 Portion Governmental Activities Debt: 2010 General Obligation Bonds, 3.25% ‐ 5%, due 08/01/2040 55,305$ 43,295$ ‐$ 1,330$ 41,965$ 1,395$ 2013A General Obligation Bonds, 2 ‐ 5%, due 08/01/2041 20,695 15,480 ‐ 450 15,030 465 2018 Captial Improvement Project and Refinancing Certficates of Participation, 2.2%‐ 4.22%, due 11/1/2047 8,970 8,755 ‐ 185 8,570 190 2019 California Ave Parking Garage Certficates of Participation, Series A & B 2.5%‐5%, due 11/1/2048 37,370 36,995 ‐ 630 36,365 645 2021 Public Safety Building Certficates of Participation, 2%‐5%, due 11/1/2050 101,505 ‐ 101,505 ‐ 101,505 ‐ Add: Unamortized Premium ‐ 7,980 6,524 405 14,099 569 Total Governmental Activities Debt 223,845$ 112,505$ 108,029$ 3,000$ 217,534$ 3,264$ Original Issue Amount Balance July 1, 2020 Additions Retirements Balance June 30, 2021 Current Portion Business‐type Activities Debt: Utility Revenue Bonds 1999 Refunding, 5.125‐5.25%, due 06/01/2024 17,735$ 6,660$ ‐$ 1,540$ 5,120$ 1,620$ 2009 Series A, 1.80‐5.95%, due 06/01/2035 35,015 25,510 ‐ 1,180 24,330 1,235 2011 Refunding, 3‐4%, due 06/01/2035 17,225 7,890 ‐ 1,210 6,680 1,260 Add: Unamortized Premium ‐ 479 ‐ 81 398 ‐ Energy Tax Credit Bonds 2007 Series A, 0%, Due 12/15/2021 1,500 200 ‐ 100 100 100 Less: Unamortized Discount ‐ (11) ‐ (5) (6) ‐ Total Bonds 71,475 40,728 ‐ 4,106 36,622 4,215 State Water Resources Loans Direct Borrowings: 2007, 1.02%, due 06/30/2029 9,000 4,050 ‐ 450 3,600 450 2009, 2.6%, due 11/30/2030 8,500 5,258 ‐ 419 4,839 430 2017, 1.8%, due 5/31/2049 29,684 24,500 ‐ 651 23,849 662 Total Direct Borrowings 47,184 33,808 ‐ 1,520 32,288 1,542 Total Business‐type Activities Debt 118,659$ 74,536$ ‐$ 5,626$ 68,910$ 5,757$ Bond premiums and discounts of long‐term debt issues are amortized over the life of the related debt. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 81 NOTE 7 – LONG‐TERM DEBT (Continued) Description of Long‐Term Debt Issues 2010 General Obligation Bonds (2010 GO Bonds) – On June 30, 2010, the City issued $55.3 million of 2010 GO Bonds to finance costs for constructing a new Mitchell Park Library and Community Center, and to fund substantial improvements to the Rinconada Library and the Downtown Library. Principal payments are due annually on August 1 and interest payments semi‐annually on February 1 and August 1 and are payable from property tax revenues. On June 28, 2016, the City defeased $2.3 million of 2010 GO Bonds using funds from bond premiums received at time of issue by depositing the amount in an irrevocable trust account. The trust account assets and the liability for the defeased bonds are not included in the City’s financial statements. The City defeased amount was paid off on August 1, 2020. 2013A General Obligation Bonds (2013A GO Bonds) – On June 30, 2013, the City issued $20.7 million of 2013A GO Bonds to finance costs for constructing a new Mitchell Park Library and Community Center, as well as making substantial improvements to the Rinconada Library and the Downtown Library. Principal payments are due annually on August 1 and interest payments semi‐annually on February 1 and August 1 from 2 percent to 5 percent, and are payable from property tax revenues. On June 28, 2016, the City defeased $2.8 million of 2013A GO Bonds using funds remaining at completion of the project by depositing the amount in an irrevocable trust account. The trust account assets and the liability for the defeased bonds are not included in the City’s financial statements. The City legally remains the primary obligor on the $2.8 million of defeased bonds until they are paid on August 1, 2023. The City’s 2010 and 2013A GO Bonds are general obligations of the City, secured and payable solely from ad valorem property taxes levied by the City and collected by the County of Santa Clara. The City is empowered and obligated to annually levy ad valorem taxes for the payment of the Bonds and the interest thereon upon all property within the City subject to taxation by the City, without limitation of rate or amount (except certain personal property which is taxable at limited rates) until the final maturity dates of the bonds on August 1, 2040 and August 1, 2041 respectively. For the fiscal year ended June 30, 2021, the City received $4.3 million in ad valorem property taxes for principal of $1.8 million and interest of $2.6 million for the 2010 and 2013A GO Bonds. 2018 Capital Improvement (“Golf Course”) Project and Refinancing Certificates of Participation (2018 COPs) – On June 1, 2018, the City issued taxable COPs of $9.0 million for the renovation of the Palo Alto Municipal Golf Course ($8.4 million) and to fully refinance the 2002B COPs ($0.6 million). There are two semi‐annual debt service payments, consisting of principal payments due annually on November 1 and interest payments due on May 1 and November 1, which are payable solely from and secured by the lease payments to be made by the City’s General Fund to the Public Improvement Corporation pursuant to the Lease Agreement. The leased property is the Palo Alto University Fire Station 1. The 2018 COPs has a final maturity date of November 1, 2047. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 82 NOTE 7 – LONG‐TERM DEBT (Continued) 2019 California Avenue Parking Garage Series A and B Certificates of Participation (2019A and 2009B COPs) – On March 21, 2019, the City issued tax exempt 2019A COPs of $26.8 million and taxable 2019B COPs of $10.6 million for the construction of the California Avenue Parking Garage. There are two semi‐ annual debt service payments, consisting of principal payments due annually on November 1 and interest payments due on May 1 and November 1. The debt service is payable solely from and secured by the lease payments to be made by the City’s General Fund to the Public Improvement Corporation pursuant to the Lease Agreement. The leased property is the Rinconada Library and after construction and the substantial readiness of the California Avenue Parking Garage project, the garage will become the leased property. The maturity dates for the 2019A COPs and 2019B COPs are November 1, 2044 and November 1, 2048, respectively. The reserve account requirement was waived due to the City being a highly rated bond issuer. 2021 Public Safety Building Certificates of Participation (2021 COPs) – On March 24, 2021, the City issued taxable COPs of $101.5 million for the construction of the City’s new public safety building. There are two semi‐annual debt service payments, consisting of principal payments due annually on November 1 and interest payments due on May 1 and November 1. The debt service is payable solely from and secured by the lease payments to be made by the City’s General Fund to the Public Improvement Corporation pursuant to the Lease Agreement. The leased property is the City’s Civic Center and after construction and the substantial readiness of the Public Safety Building project, the new public safety building will become the leased property. The maturity date for the 2021 COPs is November 1, 2050. The reserve account requirement was waived due to the City being a highly rated bond issuer. 1999 Utility Revenue and Refunding Bonds – The City issued $17.7 million of Utility Revenue Bonds on June 1, 1999, to refund the 1990 Utility Revenue Refunding Bonds, Series A and the 1992 Utility Revenue Bonds, Series A, and to finance rehabilitation of two Wastewater Treatment sludge incinerators. The 1990 Utility Revenue Refunding Bonds, Series A and the 1992 Utility Revenue Bonds, Series A, were subsequently retired. The 1999 Bonds are special obligations of the City payable solely from and secured by a pledge of and lien upon certain net revenues derived by the City’s sewer system and its storm and surface water system (the “Storm Drain System”). As of June 30, 2001, the 1999 Bonds had been allocated to and were repayable from net revenues of the following enterprise funds: Wastewater Collection (10.2 percent), Wastewater Treatment (64.6 percent) and Storm Drainage (25.2 percent). Principal payments are payable annually on June 1 and interest payments semi‐annually on June 1 and December 1. The bonds have a final maturity date of the June 1, 2024. As required by the Indenture, the City established a Reserve Account with a Reserve Requirement. At the time it issued the Bonds, the City satisfied the Reserve Requirement with a deposit into the Reserve Account of a surety bond issued by Ambac Indemnity Corporation (renamed to Ambac Assurance Corporation in 1997). CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 83 NOTE 7 – LONG‐TERM DEBT (Continued) The pledge of future Net Revenues for the above bonds ends upon repayment of the $5.1 million principal and $0.5 million interest as the remaining debt service on the bonds, which is scheduled to occur in fiscal year 2024. For fiscal year 2021, Net Revenues, including operating revenues and non‐operating interest earnings, amounted to $59.1 million; operating costs, including operating expenses but not interest, depreciation or amortization, amounted to $43.3 million. Net Revenues available for debt service amounted to $15.8 million, which represents coverage of 8.4 times over the $1.9 million in debt service. 2009 Water Revenue Bonds, Series A – On October 6, 2009, the City issued $35.0 million of Water Revenue Bonds to finance certain improvements to the City’s water utility system. Principal payments are due annually on June 1, and interest payments are due semi‐annually on June 1 and December 1 from 1.80 percent to 5.95 percent. The 2009 Revenue Bonds are secured by net revenues generated by the Water Services Fund. The 2009 Bonds were issued as bonds designated as “Direct Payment Build America Bonds” under the provisions of the American Recovery and Reinvestment Act of 2009 (“Build America Bonds”). The City expects to receive a cash subsidy payment from the United States Treasury equal to 35 percent of the interest payable on the 2009 Bonds. The lien of the 1995 Bonds on the Net Revenues is senior to the lien on Net Revenues securing the 2009 Bonds and the 2011 Bonds. The City received subsidy payments amounting to $462,000, which represents 30.8 percent of the interest payments due on December 1 and June 1. The pledge of future Net Revenues for the above bonds ends upon repayment of the $24.3 million principal and $11.6 million interest as the remaining debt service on the bonds, which is scheduled to occur in fiscal year 2035. For fiscal year 2021, Net Revenues, including operating revenues and non‐ operating interest earnings, amounted to $49.2 million; operating costs, including operating expenses but not interest, depreciation or amortization, amounted to $39.2 million. Net Revenues available for debt service amounted to $10.0 million, which represented coverage of 3.9 times over the $2.6 million in debt service. 2011 Utility Revenue Refunding Bonds – On September 8, 2011, the City issued $17.2 million in Lease Revenue Bonds (2011 Bonds) to refund the outstanding 2002 Series A Utility Revenue Bonds (2002 Bonds) on a current basis. The 2002 Bonds were issued to finance improvement to the City’s municipal water utility system and the natural gas utility system. Principal of the 2011 Bonds is payable annually on June 1, and interest on the 2011 Bonds is payable semi‐annually on June 1 and December 1. The 2011 Bonds are secured by net revenues generated by the Water Services and Gas Services Funds. The pledge of future Net Revenues of the above bonds ends upon repayment of the $6.7 million principal and $0.6 million interest as remaining debt service on the bonds, which is scheduled to occur in fiscal year 2026. For fiscal year 2021, Net Revenues, including operating revenues and non‐operating interest earnings, amounted to $88.9 million; operating costs, including operating expenses but not interest, depreciation or amortization, amounted to $64.5 million. Net Revenues available for debt service amounted to $24.4 million, which represented coverage of 16.7 times over the $1.5 million in debt service. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 84 NOTE 7 –LONG‐TERM DEBT (Continued) 2007 Electric System Clean Renewable Energy Tax Credit Bonds, Series A – In October 2007, the City issued $1.5 million of Electric Utility Clean Renewable Energy Tax Credit Bonds (CREBs), 2007 Series A, to finance the City’s photovoltaic solar panel project. The CREBs do not bear interest. In lieu of receiving periodic interest payments, bondholders are allowed annual federal income tax credits in an amount equal to a credit rate for such CREBs multiplied by the outstanding principal amount of the CREBs owned by the bondholders. The CREBs are payable solely from and secured solely by a pledge of the Net Revenues of the Electric system and the other funds pledged under the Indenture. The pledge of future Electric Fund Net Revenues ends upon repayment of the $0.1 million remaining debt service on the bonds, which is scheduled to occur in fiscal year 2022. For fiscal year 2021, Net Revenues, including operating revenues and non‐operating interest earnings, amounted to $163.2 million; operating costs, including operating expenses but not interest, depreciation or amortization, amounted to $140.2 million. Net Revenues available for debt service amounted to $23.0 million, which represented coverage of 229.7 times over the $0.1 million in debt service. Direct Borrowing ‐ 2007 State Water Resources Loan – In October 2007, the City approved a $9 million direct loan agreement with State Water Resources Control Board (SWRCB) to finance the City’s Mountain View/Moffett Area reclaimed water pipeline project. Under the terms of the contract, the City has agreed to repay $9 million to the State in exchange for receiving $7.5 million in proceeds to be used to fund the Project. The difference of $1.5 million between the repayment obligation and proceeds represents in‐ substance interest on the outstanding balance. Principal payments are payable annually on June 30. Concurrently with the loan, the City entered into various other agreements including a cost sharing arrangement with the City of Mountain View. Pursuant to that agreement, City of Mountain View agreed to finance a portion of the project with a $6.0 million loan repayable to the City. This loan has been recorded as “Due from other government agencies” in the accompanying financial statements. The balance due to the City at June 30, 2021 was $2.4 million. Direct Borrowing ‐ 2009 State Water Resources Loan – In October 2009, the City approved an $8.5 million direct loan agreement with SWRCB to finance the City’s Ultraviolet Disinfection project. Principal and interest payments are payable annually on November 30. The loan interest rate is 2.60 percent which represents a combination of loan service charge and interest. Direct Borrowing ‐ 2017 State Water Resources Loan ‐ In June 2017, the SWRCB and the City executed a direct loan agreement for an award up to $30 million, payable over 30 years to finance the replacement of sewage sludge “bio‐solids” incinerators at the City’s Regional Water Quality Control Plant (RWQCP). In September 2017, due to the projected lower project costs, the agreement was amended to a lower loan amount of $29.7 million. Under the terms of the agreement, a portion of the loan amount, $4.0 million, is federally funded and has been adjusted to reflect the correct long term obligation balance. The loan interest rate is 1.80 percent. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 85 NOTE 7 – LONG‐TERM DEBT (Continued) The new facility will dewater the bio‐solids and allow the material to be loaded onto trucks and taken to a separate facility for further treatment. The RWQCP provides treatment and disposal for wastewater for Palo Alto, Mountain View, Los Altos, Los Altos Hills, East Palo Alto Sanitary District, and Stanford University. Though Palo Alto is the recipient of the loan, the City’s agreement with the partner agencies oblige them to pay their proportionate share of the principal and interest of this loan. Palo Alto’s share of the loan payment is 38.2 percent with the partner agencies paying 61.8 percent. Debt Service Requirements (in thousands): Debt service requirements are shown below for all long‐term debt. For the Year Ending June 30 Principal Interest Total Principal Interest Total Principal Interest Total 2022 2,695$ 7,762$ 10,457$ 4,215$ 1,797$ 6,012$ 1,542$ 317$ 1,859$ 2023 2,795 7,462 10,257 4,300 1,616 5,916 1,566 300 1,866 2024 5,045 7,286 12,331 4,485 1,427 5,912 1,589 283 1,872 2025 5,280 7,062 12,342 2,790 1,229 4,019 1,613 266 1,879 2026 5,545 6,802 12,347 2,900 1,121 4,021 1,638 248 1,886 2027‐2031 32,115 29,450 61,565 8,645 4,178 12,823 7,679 962 8,641 2032‐2036 39,895 21,590 61,485 8,895 1,361 10,256 4,105 602 4,707 2037‐2041 45,720 13,356 59,076 ‐ ‐ ‐ 4,488 432 4,920 2042‐2046 33,080 6,842 39,922 ‐ ‐ ‐ 4,907 246 5,153 2047‐2051 31,265 1,836 33,101 ‐ ‐ ‐ 3,161 51 3,212 Total 203,435$ 109,448$ 312,883$ 36,230$ 12,729$ 48,959$ 32,288$ 3,707$ 35,995$ Governmental Activities Bonds Direct Borrowings Business‐Type Activities Debt Call Provisions Long‐term debt as of June 30, 2021 is callable on the following terms and conditions: Initial Call Date Governmental Activities Long‐Term Debt 2010 General Obligation Bonds $6.595 million due 08/01/2032 08/01/31 (2) $4.890 million due 08/01/2034 08/01/33 (2) $17.725 million due 08/01/2040 08/01/35 (2) Business‐Type Activities Long‐Term Debt Utility Revenue Bonds 1999 Refunding 06/01/09 (1) 2011 Refunding 06/01/21 (1) (1) Callable in inverse numerical order of maturity at par plus a premium of 2 percent beginning on the initial call date. The call price declines subsequent to the initial date. (2) Callable in any order specified by the City at par value plus any accrued interest beginning on the initial call date. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 86 NOTE 7 – LONG‐TERM DEBT (Continued) Leasing Arrangements COPs and Capital Leases are issued for the purpose of financing the construction or acquisition of projects defined in each leasing arrangement. Projects are leased to the City for lease payments which, together with unspent proceeds of the leasing arrangement, will be sufficient to meet the debt service obligations of the leasing arrangement. At the termination of the leasing arrangement, title to the project will pass to the City. Leasing arrangements are similar to debt in that they allow investors to participate in a share of guaranteed payments made by the City. Because they are similar to debt, the present value of the total payments to be made by the City is recorded as long‐term debt. The City’s leasing arrangements are included in long‐term obligations discussed above. Events of Default and Acceleration Clauses Generally, the City is considered to be in default if the City 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. NOTE 8 – SPECIAL ASSESSMENT DEBT Special Assessment Debt with no City Commitment On February 29, 2012, the District issued Limited Obligation Refunding Improvement Bonds (2012 Bonds), but the City has no legal or moral liability with respect to the payment of this debt, which is secured only by assessments on properties in this District. The City is in no way for the repayment of the Bonds, but is only acting as an agent for the property owners in collecting the assessments, forwarding the collections to bondholders, and initiating foreclosure proceedings, when appropriate. Therefore, this debt is not included in Governmental Activities long‐term debt of the City. At June 30, 2021, the District’s outstanding debt amounted to $17.9 million. The proceeds from the 2012 Bonds, combined with available Assessment Funds, were used to redeem the outstanding University Avenue Area Off‐Street Parking Assessment District Series 2001‐A and Series 2002‐A Bonds. On June 28, 2016, the District defeased $1.6 million of the 2012 Bonds using funds remaining from completion of the project. The defeased debt will be paid on September 2, 2022. Reserve and redemption funds held by the District are reported within the University Avenue Area Off‐Street Parking Assessment District Custodial Fund. NOTE 9 – LANDFILL POST‐CLOSURE MAINTENANCE The 126‐acre Palo Alto Refuse Disposal Site (Palo Alto Landfill) was filled to capacity and stopped accepting waste in July 2011. State and federal laws and regulations require the City to construct a final cover to cap the waste, and to perform certain post‐closure maintenance and monitoring activities at the site for a minimum of thirty years after closure. As of November 2015, the Palo Alto Landfill has been fully capped and subsequently converted to a pastoral park (Byxbee Park) that is open to the public. A final post‐ closure maintenance plan and cost estimate for the thirty‐year post‐closure maintenance related activities CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 87 NOTE 9 – LANDFILL POST‐CLOSURE MAINTENANCE (Continued) and corrective action costs was approved by State and local regulatory agencies in 2014. As required by the State, an updated five‐year post‐closure maintenance plan and cost estimate was submitted and approved in FY 2021. This cost estimate is adjusted annually for inflation at a percentage provided by the State. Landfill post‐closure liabilities as of June 30, 2021 are $6.2 million, a decrease of $0.9 million from the previous year. The City is required by State and federal laws and regulations to fund post‐closure maintenance activities by pledging future revenue received from Refuse customers through rate fees. NOTE 10 – NET POSITION AND FUND BALANCES Net Position Net Position is the excess of the City’s assets and deferred outflows of resources over its liabilities and deferred inflows of resources. Net position is divided into three categories that are described below: Net Investment in Capital Assets describes the portion of net position, which is represented by current net book value of the City’s capital assets, less the outstanding balance of any debt issued to finance these assets. Restricted describes the portion of net position that is reduced by liabilities related to restricted assets. Generally, a liability relates to restricted assets if the asset results from a resource flow that also results in the recognition of a liability or if the liability will be liquidated with the restricted assets reported. Unrestricted describes the portion of net position which is not restricted as to use. Fund Balances Governmental funds report fund balances in classifications based primarily on the extent to which the City is bound to honor constraints on the specific purposes for which amounts in the funds can be spent. Fund balances for governmental funds are made up of the following: Nonspendable – This category is comprised of amounts that are: (a) not in spendable form, or (b) legally or contractually required to be maintained intact. The “not in spendable form” criterion includes items that are not expected to be converted to cash, for example: prepaid items. The corpus of the permanent fund is contractually required to be maintained intact. Restricted – This category is comprised of 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. Committed – This category is comprised of amounts that can only be used for the specific purposes determined by the action that constitutes the most binding constraint (i.e. ordinance) of the City’s highest level of decision‐making authority, the City Council. Commitments may be changed or lifted only by the City taking the same formal action that imposed the constraint originally. Assigned – This category is comprised of amounts intended to be used by the City for specific purposes that are neither restricted nor committed. Intent is expressed by the City Council or the City Manager, to whom the City Council has delegated the authority to assign amounts to be used for specific purposes. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 88 NOTE 10 – NET POSITION AND FUND BALANCES (Continued) Unassigned –This category is the residual classification for the General Fund and includes all amounts not contained in the other classifications. Unassigned amounts are technically available for any purpose. Other governmental funds may report negative unassigned fund balance, which occurs when a fund has a residual deficit after allocation of fund balance to the nonspendable, restricted or committed categories. The fund balances of all governmental funds are presented by the above‐mentioned categories on the face of the financial statements. In circumstances when an expenditure is made for a purpose for which amounts are available in multiple fund balance categories, fund balance is depleted in the order of restricted, committed, assigned, and unassigned. The General Fund Budget Stabilization Reserve (BSR) is established by authority of the General Fund Reserve Policy, which is approved by the City Council and included in the City’s annual adopted budget. The BSR is maintained in the range of 15 to 20 percent of General Fund expenditures and operating transfers, with a target of 18.5 percent. Any reserve level below 15 percent requires City Council approval. At the discretion of the City Manager, a reserve balance above 18.5 percent may be transferred to the Infrastructure Reserve within the Capital Projects Fund. The purpose of the General Fund BSR is to fund unbudgeted, unanticipated one‐time costs. The BSR is not meant to fund ongoing, recurring General Fund expenditures. As of June 30, 2021, total outstanding encumbrances and reappropriations related to governmental funds were $10.9 million for the General Fund, $148.0 million for the Capital Projects Fund, and $3.2 million for the Special Revenue Funds. Enterprise Funds At June 30, 2021, enterprise funds’ unrestricted net position (in thousands) were as follows: Water Electric Fiber Optics Gas Wastewater Collection Wastewater Treatment Refuse Storm Drainage Airport Total Unrestricted Rate stabilization Supply ‐$ ‐$ ‐$ 2,766$ ‐$ ‐$ ‐$ ‐$ ‐$ 2,766$ Distribution 9,070 ‐ 33,343 ‐ 342 (4,988) 20,014 4,745 (14,006) 48,520 9,070 ‐ 33,343 2,766 342 (4,988) 20,014 4,745 (14,006) 51,286 Operations Supply ‐ 19,875 ‐ ‐ ‐ ‐ ‐ ‐ ‐ 19,875 Distribution 20,773 10,026 ‐ 11,982 6,578 ‐ ‐ ‐ ‐ 49,359 20,773 29,901 ‐ 11,982 6,578 ‐ ‐ ‐ ‐ 69,234 Emergency plant replacement ‐ ‐ 1,000 ‐ ‐ 1,980 ‐ ‐ ‐ 2,980 Electric special projects ‐ 46,665 ‐ ‐ ‐ ‐ ‐ ‐ ‐ 46,665 Reappropriations 4,451 10,050 202 443 716 ‐ ‐ 3,553 ‐ 19,415 Commitments 6,181 7,142 2,186 8,709 541 18,760 1,484 831 11,469 57,303 Underground loan ‐ 727 ‐ ‐ ‐ ‐ ‐ ‐ ‐ 727 Notes and loans ‐ ‐ ‐ ‐ ‐ 1,651 ‐ ‐ ‐ 1,651 Landfill corrective action ‐ ‐ ‐ ‐ ‐ ‐ 681 ‐ ‐ 681 Hydro stabilization reserve ‐ 15,400 ‐ ‐ ‐ ‐ ‐ ‐ ‐ 15,400 Public benefit program ‐ 3,028 ‐ ‐ ‐ ‐ ‐ ‐ ‐ 3,028 Reserve for LCFS ‐ 6,944 ‐ ‐ ‐ ‐ ‐ ‐ ‐ 6,944 CIP reserve 10,707 880 ‐ 3,820 3,178 ‐ ‐ ‐ ‐ 18,585 Geng Road reserve ‐ ‐ ‐ ‐ ‐ ‐ 268 ‐ ‐ 268 Cap & Trade ‐ 1,189 ‐ 4,542 ‐ ‐ ‐ ‐ ‐ 5,731 GASB 68 Pension (14,143) (34,212) (2,238) (14,792) (8,368) (21,278) (5,896) (3,987) (754) (105,668) GASB 75 OPEB (4,054) (13,233) (1) (5,849) (2,236) (6,945) (2,485) (1,094) (408) (36,305) Total 32,985$ 74,481$ 34,492$ 11,621$ 751$ (10,820)$ 14,066$ 4,048$ (3,699)$ 157,925$ CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 89 NOTE 10 – NET POSITION AND FUND BALANCES (Continued) The City Council has set aside unrestricted net position for general contingencies, and future capital and debt service expenditures including operating and capital contingencies for unusual or emergency expenditures. Internal Service Funds At June 30, 2021, Internal Service Funds unrestricted net position (in thousands) were as follows: Vehicle Replacement and Maintenance Technology Printing and Mailing Services General Benefits Workers' Compensation Insurance Program General Liabilities Insurance Program Retiree Health Benefits Total Unrestricted net position: Commitments 4,608$ 3,236$ 40$ 325$ 178$ 11$ ‐$ 8,398$ Future catastrophic losses ‐ ‐ ‐ ‐ ‐ 3,670 ‐ 3,670 Retiree health care ‐ ‐ ‐ ‐ ‐ ‐ 2,694 2,694 GASB 68 pension (3,235) (11,509) (263) ‐ 37 ‐ ‐ (14,970) GASB 75 OPEB (1,549) (3,162) (142) ‐ ‐ ‐ ‐ (4,853) Available 7,065 18,557 85 5,572 1,326 ‐ ‐ 32,605 Total 6,889$ 7,122$ (280)$ 5,897$ 1,541$ 3,681$ 2,694$ 27,544$  Commitments represent the portion of net position set aside for open purchase orders and reappropriations.  Future catastrophic losses represent the portion of net position to be used for unforeseen future losses.  Retiree health care represents the portion of net position set aside to defer future costs of retiree health care coverage.  GASB 68 pension represents the net impact of net pension liability and related deferred outflows/inflows of resources balances.  GASB 75 OPEB represents the net impact of net OPEB liability and related deferred outflows/inflows of resources balances. Deficit Fund Balance and Net Position: At June 30, 2021, the City’s Printing and Mailing Services internal service fund had a deficit net position of $254,000. The deficit is due to the impact of Pension and OPEB liabilities and related balances. The deficit is expected to be funded by future internal service charges to other City funds. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 90 NOTE 11 – PENSION PLANS (a) General Information about the Pension Plans Plan Descriptions ‐ Substantially all permanent City employees are eligible to participate in the City’s separate Safety (police and fire) and Miscellaneous (all other) Plans, agent multiple‐employer defined benefit pension plans administered by CalPERS, which acts as a common investment and administrative agent for its participating member employers. Benefits provisions under the Plans are established by State statute and City resolution. CalPERS issues publicly available reports that include a full description of the pension plans including benefits provisions, assumptions and membership information. The reports can be found on the CalPERS website at www.calpers.ca.gov. Benefits Provided ‐ CalPERS provides retirement and disability benefits, annual cost of living adjustments and death benefits to Plan members, who must be public employees and beneficiaries. Benefits are based on years of credited service (equal to one year of full‐time employment), age at retirement and final compensation. The death benefit is one of the following: the 1959 Survivor Benefit, or the pre‐retirement option 2W Death Benefit for local fire members only. The Plans’ provisions and benefits in effect at June 30, 2021, are summarized in the following table. Contribution rates are based on the Actuarial Valuation Report as of June 30, 2018. Fire Fighters, Fire Chief Association, Police Officers, Fire Fighters, Fire Chief Association Police Officers, Police Management Fire Fighters, Fire Chief Association, Police Officers, Hire Date Prior to June 8, 2012 On or after June 8, 2012 On or after Dec. 8, 2012 On or after Jan 1, 2013 Benefit formula1 3% at 55 3% at 55 3% at 50 2.7% at 57 Benefit vesting schedule 5 years service 5 years service 5 years service 5 years service Benefit payment monthly for life monthly for life monthly for life monthly for life Retirement age 50 55 1 551 571 Monthly benefit as % of eligible compensation 3% 3% 3% 2.7% Actuarially determined contribution rate ‐ EE 9% 9% 9% 11.25% Actuarially determined contribution rate ‐ ER 65.332% 65.332% 65.332% 65.332% Hire Date Prior to July 17, 2010 On or after July 17, 2010 On or after Jan 1, 2013 Benefit formula 2.7% at 55 2 2% at 602 2% at 623 Benefit vesting schedule 5 years service 5 years service 5 years service Benefit payments monthly for life monthly for life monthly for life Retirement age 55 2 602 623 Monthly benefit as % of eligible compensation2 2.70% 2.0% ‐ 2.418% 2% Actuarially determined contribution rate ‐ EE 8% 7% 6.25% Actuarially determined contribution rate ‐ ER 38.367% 38.367% 38.367% 1 Employees can retire at age 50 with reduced benefits of 2.4% ‐ 2.88% if hired before Jan 1, 2013, or 2.0% ‐ 2.6% if hired on or after Jan 1, 2013. 2 Employees can retire at age 50 with reduced benefits of 2.0% ‐ 2.56% if hired before July 17, 2010, or 1.092% ‐ 1.874% if hired on or after July 17, 2010. 3 Employees can retire at age 52 with reduced benefits of 1.0% ‐ 1.9% Miscellaneous Plan Safety Plan CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 91 NOTE 11 – PENSION PLANS (Continued) Employees Covered – Based on the Actuarial Valuation Report as of June 30, 2020, the most recent information available, the following employees were covered by the benefits terms for each Plan: Miscellaneous Plan Safety Plan Inactive employees or beneficiaries currently receiving benefits 1,223 435 Inactive employees entitled to but not yet receiving benefits 835 104 Active employees 777 174 Total 2,835 713 Contributions – Section 20814(c) of the California Public Employees’ Retirement Law requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and shall be effective on the July 1 following notice of a change in the rate. Funding contributions for the Plans are determined annually on an actuarial basis as of June 30 by CalPERS. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The City is required to contribute the difference between the actuarially determined rate and the contribution rate of employees. Further detail of contributions can be found in the Required Supplemental Information Schedules of Pension Contributions. In April 2017, the City established a Section 115 irrevocable trust with the Public Agency Retirement Services (PARS). The Council approved an initial deposit of $2.1 million in General Fund proceeds into the General Fund subaccount of the City’s PARS Trust Account. The Trust Account allows more control and flexibility in investment allocations compared to City’s portfolio which is restricted by State regulations to fixed income instruments. The City proactively contributes to the Section 115 irrevocable trust amounts reflective of what retirement costs would be if the normal cost of contributions was budgeted at a 6.2% discount rate. During the year, the City contributed $5.0 million to the PARS Trust. As of June 30, 2021, the City reported the account balance of $37.1 million as restricted investments in the General Benefits Internal Service Fund. (b) Net Pension Liability The City’s net pension liability for each plan is measured as the total pension liability, less each plan’s fiduciary net position. Net pension liability is measured as of June 30, 2020 (measurement date), using the Actuarial Valuation Report as of June 30, 2019 rolled forward to June 30, 2020 using standard update procedures. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 92 NOTE 11 – PENSION PLANS (Continued) Actuarial Assumptions ‐ The total pension liabilities were determined using the following actuarial assumptions: Valuation Date Measurement Date Actuarial Cost Method Actuarial Assumptions: Discount Rate Inflation Salary Increases Mortality1 Post Retirement Benefit Increase Derived using CalPERS membership data for all funds. The lessor of contract COLA or 2.50% until Purchasing Power Protection Allowance Floor on purchasing power applies, 2.50% thereafter. Varies by Entry Age and Service 1 The mortality table used was developed based on CalPERS' specific data. The probabilities of mortality are based on the 2017 CalPERS Experience Study for the period from 1997 to 2015. Pre‐retirement and post‐retirement mortality rates includes 15 years of projected mortality improvements using 90% of Scale MP‐2016 published by the Society of Actuaries. For more details on this table, please refer to the 2017 CalPERS Experience Study available on the CalPERS website. Miscellaneous and Safety Plans June 30, 2019 June 30, 2020 Entry Age Normal 7.15% 2.50% All other actuarial assumptions used in the June 30, 2019 actuarial valuation were based on the 2017 CalPERS Experience Study for the period from 1997 to 2015, including updates to salary increase, mortality and retirement rates. Further details of the 2017 CalPERS Experience Study can be found on the CalPERS website under Forms and Publications. Discount Rate – The discount rate used to measure the total pension liability was 7.15 percent for each Plan. The projection of cash flows used to determine the discount rate assumed that the contributions from employers will be made at current member contribution rates and that contributions from employers will be made at statutorily required rates, actuarially determined. Based on those assumptions, the Plan’s fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long‐term expected rate of return on plan investments was applied to all periods of projected benefit payments to determine the total pension liability. The long‐term expected rate of return on pension plan investments was determined using a building‐ block method in which expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 93 NOTE 11 – PENSION PLANS (Continued) In determining the long‐term expected rate of return, CalPERS took into account both short‐term and long‐term market return expectations as well as the expected pension fund cash flows. Using historical returns of all the funds’ asset classes, expected compound ( geometric) returns were calculated over the short‐term (first 10 years) and the long‐term (11+ years) using a building‐block approach. Using the expected nominal returns for both short‐term and long‐term, the present value of benefits was calculated for each fund. The expected rate of return was set by calculating the rounded single equivalent expected return that arrived at the same present value of benefits for cash flows as the one calculated using both short‐term and long‐term returns. The expected rate of return was then set equal to the single equivalent rate calculated and adjusted to account for assumed administrative expenses. The rate of return was calculated using the capital market assumptions applied to determine the discount rate and asset allocation. The long‐term expected real rate of return by asset class and the target allocation adopted by the CalPERS Board effective on July 1, 2019, are as follows: Asset Class Current Target Allocation Real Return Years 1 ‐ 10 1 Real Return Years 11+ 2 Global Equity 50.0% 4.80% 5.98% Global Fixed Income 28.0 1.00 2.62 Inflation Sensitive 0.0 0.77 1.81 Private Equity 8.0 6.30 7.23 Real Estate 13.0 3.75 4.93 Liquidity 1.0 0.00 (0.92) (1) An expected inflation rate of 2.00% is used for this period. (2) An expected inflation rate of 2.92% is used for this period. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 94 NOTE 11 – PENSION PLANS (Continued) (c) Changes in the Net Pension Liability The following table is based on the GASB 68 Accounting Valuation Report and shows the changes in the net pension liability for the Miscellaneous and Safety Plans (in thousands): Total Pension Liability Plan Net Position Net Pension Liability Miscellaenous Plan: Balances calculated at July 1, 2020 849,004$ 573,840$ 275,164$ Changes for the year: Service cost 14,267 ‐ 14,267 Interest on total pension liability 59,995 ‐ 59,995 Differences between expected and actual experiences 4,850 ‐ 4,850 Contributions from employer ‐ 28,889 (28,889) Contributions from employees ‐ 7,189 (7,189) Net investment income ‐ 28,735 (28,735) Benefit payments, including refunds of employee contributions (43,781) (43,781) ‐ Administrative expense ‐ (809) 809 Net changes 35,331 20,223 15,108 Balances reported at June 30, 2021 884,335 594,063 290,272 Safety Plan: Balances calculated at July 1, 2020 456,817$ 289,028$ 167,789$ Changes for the year: Service cost 7,898 ‐ 7,898 Interest on total pension liability 32,469 ‐ 32,469 Differences between expected and actual experiences 6,314 ‐ 6,314 Contributions from employer ‐ 14,297 (14,297) Contributions from employees ‐ 3,459 (3,459) Net investment income ‐ 14,310 (14,310) Benefit payments, including refunds of employee contributions (25,948) (25,948) ‐ Administrative expense ‐ (407) 407 Net changes 20,733 5,711 15,022 Balances reported at June 30, 2021 477,550 294,739 182,811 Total 1,361,885$ 888,802$ 473,083$ CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 95 NOTE 11 – PENSION PLANS (Continued) Sensitivity of the Net Pension Liability to Changes in the Discount Rate ‐ The following table presents the net pension liability of the Plans as of the measurement date, calculated using the discount rate of 7.15 percent, compared to a discount rate that is 1 percentage point lower (6.15 percent) or 1 percentage point higher (8.15 percent). Amounts shown below are in thousands: Discount Rate ‐ 1% (6.15%) Current Discount Rate (7.15%) Discount Rate + 1% (8.15%) Miscellaneous Plan: Plan's Net Pension Liability 401,532$ 290,272$ 197,747$ Safety Plan: Plan's Net Pension Liability 244,169$ 182,811$ 132,093$ Plan Fiduciary Net Position – Detailed information about the Plan’s fiduciary net position is available in the separately issued CalPERS financial report. (d) Pension Expenses and Deferred Outflows/Inflows of Resources Related to Pensions For the year ended June 30, 2021, the City recognized a pension expense of $34.7 million and $25.7 million for the Miscellaneous and Safety Plan, respectively, for a total of $60.4 million. At June 30, 2021, the City reported pension related deferred outflows of resources for the Miscellaneous and Safety Plans from the following sources (in thousands): Miscellaneous Plan: Deferred Outflows of Resources Pension contributions subsequent to measurement date 32,782$ Difference between expected and actual experience 5,051 Net difference between projected and actual earnings on plan investments 3,887 Balance reported at June 30, 2021 41,720 Safety Plan: Pension contributions subsequent to measurement date 14,796 Difference between expected and actual experience 5,157 Net difference between projected and actual earnings on plan investments 1,977 Balance reported at June 30, 2021 21,930 Total, Miscellaneous and Safety Plans 63,650$ CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 96 NOTE 11 – PENSION PLANS (Continued) The $47.6 million reported as deferred outflows of resources relates to contributions paid by the City from July 1, 2020 through June 30, 2021 which is subsequent to the City’s measurement date of June 30, 2020 for both the Miscellaneous and Safety Plans. This amount will be recognized as a reduction of the net pension liability in the year ended June 30, 2022. The net differences reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized in future pension expense as follows (in thousands): Year Ended June 30, Miscellaneous Plan Safety Plan Total 2022 975$ 1,931$ 2,906$ 2023 2,732 2,505 5,237 2024 2,849 1,494 4,343 2025 2,382 1,204 3,586 8,938$ 7,134$ 16,072$ CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 97 NOTE 12 – OTHER POST‐EMPLOYMENT BENEFITS (OPEB) (a) General Information about the OPEB Plan In addition to providing pension benefits, the City participates in the California Public Employees’ Medical and Health Care Act program to provide certain health care benefits for retired employees. The City’s Other Post‐Employment Benefit plan is an agent multiple‐employer defined benefit plan. Employees who retire directly from the City are eligible for retiree health benefits if they retire on or after age 50 with 5 years of service and are receiving a monthly pension from CalPERS. Details of benefits to retirees are noted in the following tables: Unit Hired Before Retiree Coverage1 Dependent Coverage Retired on or After Retiree Contribution Management & Professional2 1/1/2004 100% 100% 5/1/2011 Flat rate 4 Police Management2 1/1/2004 100% 100% 6/1/2012 Flat rate 4 Fire Fighters2 1/1/2004 100% 100% 12/1/2011 Flat rate 4 Fire Chiefs Association2 1/1/2004 100% 100% 1/1/2013 Flat rate 4 SEIU2 1/1/2005 100% 100% 5/1/2011 Flat rate4 Police Officers3 1/1/2006 100% 100% 4/1/2015 Flat rate 4 Utilities Managers & Professional2 1/1/2004 100% 100% 5/1/2011 10% 2 Effective 1/1/2007 plan capped at the second highest CalPERS Bay Area Basic plan premium. 3 Effective 7/1/2014 plan capped at the second highest CalPERS Bay Area Basic plan premium. 4 For the year ended June 20, 2021, City pays $840‐$871 for employee, $1,680‐1,742 for employee +1, and $2,180‐$2,260 for family. Unit Hired on or After Retiree Coverage1 Dependent Coverage2 Management & Professional 1/1/2004 50%‐100% Max. 90% Police Management 1/1/2004 50%‐100% Max. 90% Fire Fighters 1/1/2004 50%‐100% Max. 90% Fire Chiefs Association 1/1/2004 50%‐100% Max. 90% Utilities Managers & Professional 1/1/2004 50%‐100% Max. 90% SEIU 1/1/2005 50%‐100% Max. 90% Police Officers 1/1/2006 50%‐100% Max. 90% specified employer contribution, with the City portion increasing by 5% for each additional year of service credit. 2 The City will contribute an additional 90 percent of the weighted average of the additional premiums required for enrollment of those family members, during the benefit year to which the forumla is applied. 1 100% of benefits if the employee has five years CalPERS service credit and the employee retired from the City. 1 Employees with ten years of CalPERS service, at least five of which are at the City of Palo Alto, receive 50% of the Retiree contributions for units with the following hire dates are determined by Government Code Section 22893, 20 year graduated schedule: CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 98 NOTE 12 – OTHER POST‐EMPLOYMENT BENEFITS (OPEB) (Continued) In fiscal year 2008, the City elected to participate in an irrevocable trust to provide a funding mechanism for retiree health benefits. The Trust, California Employers’ Retirees Benefit Trust (CERBT), is administrated by CalPERS and managed by a separately appointed board, which is not under control of the City Council. This Trust is not considered a component unit of the City. Employees Covered – Employees covered by the benefit terms as of June 30, 2020, the most recent information available, are as follows: Inactive employees or beneficiaries currently receiving benefits 1,011 Inactive employees entitled to but not yet receiving benefits 75 Active employees 897 Total 1,983 Contributions – The City’s OPEB funding policy is to contribute 100 percent or more of the actuarially determined contribution each year pursuant to City Council Resolution. For the year ended June 30, 2021, the City’s contributions totaled $14.6 million. (b) Net OPEB Liability The City’s net OPEB liability is measured as the total OPEB liability, less the OPEB plan’s fiduciary net position. The net OPEB liability is measured as of June 30, 2020, using an annual actuarial valuation as of June 30, 2019 rolled forward to June 30, 2020 using standard update procedures. A summary of principal assumptions and methods used to determine the net OPEB liability is shown below. Valuation Date June 30, 2019 Measurement Date June 30, 2020 Actuarial Cost Method Entry‐Age, level percentage of payroll Actuarial Assumptions: Discount Rate 6.75% Inflation 2.75% Payroll Growth 3.00% Projected Salary Increase 2017 CalPERS Experience Study for the period from 1997 to 2015 Medical Trend Non‐Medicare ‐ 7.25% for 2021, decreasing to an ultimate rate of 4.0% in 2076 Medicare ‐ 6.3% for 2021, decreasing to an ultimate rate of 4.0% in 2076 Disability, Termination, Retirement CalPERS 1997‐2015 Experience Study Mortality 2017 CalPERS Experience Study for the period from 1997 to 2015 Mortality Improvement Post‐retirement mortality projected fully generational with Society of Actuaries Scale MP‐ 2019 Increase to Group 3 Flat Dollar Caps 1/2 of Medical Trend, not less than assumed inflation (2.75%) Healthcare Participation for Future Future retirees: 95‐98%, based on Plan experience ACA Excise Tax None CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 99 NOTE 12 – OTHER POST‐EMPLOYMENT BENEFITS (OPEB) (Continued) Change of Assumptions – During measurement period 2020, actuarial assumptions for ACA Exercise Tax was changed from 2% load on cash subsidy to none. Discount Rate – The discount rate used to measure the total OPEB liability was 6.75%. The projection of cash flows used to determine the discount rate assumed that the City’s contribution will be made equal to the actuarially determined contribution. Based on those assumptions, the OPEB plan’s fiduciary net position was projected to be available to make all projected OPEB payments for current active and inactive employees. Therefore, the long‐term expected rate of return on OPEB plan investments applied to all periods of projected benefit payments to determine the total OPEB liability. The long‐term expected rate of return for OPEB plan investments was 6.75%. The asset class target allocation and geometric real rates of return for each major asset class are summarized in the following table. Asset Class Current Target Allocation Expected Real Rate of Return Global Equity 59.0% 4.82% Fixed Income 25.0 1.47 TIPS 5.0 1.29 Commodities 3.0 0.84 REITS 8.0 3.76 Assumed long‐term rate of inflation of 2.75% (c) Changes in the Net OPEB Liability The following table shows the changes in the net OPEB liability (in thousands): Total OPEB Liability Plan Fiduciary Net Position Net OPEB Liability Balance at June 30, 2020 245,509$ 118,479$ 127,030$ Changes during the measurement period: Service cost 6,366 ‐ 6,366 Interest on the total OPEB liability 16,572 ‐ 16,572 Changes in assumptions (4,426) ‐ (4,426) Contributions ‐ employer ‐ 16,475 (16,475) Investment income ‐ 4,327 (4,327) Administrative expenses ‐ (58) 58 Benefit payments (12,728) (12,728) ‐ Net changes 5,784 8,016 (2,232) Balance at June 30, 2021 251,293$ 126,495$ 124,798$ Increase (Decrease) CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 100 NOTE 12 – OTHER POST‐EMPLOYMENT BENEFITS (OPEB) (Continued) Sensitivity of the Net OPEB Liability to Changes in the Discount Rate – The following presents the net OPEB liability of the City as of the measurement date, calculated using the discount rate of 6.75 percent, as well as what the City’s net OPEB liability would be if it were calculated using a discount rate that is 1 percentage‐point lower (5.75 percent) or 1 percentage‐point higher (7.75 percent) than the current discount rate: Discount Rate ‐1% (5.75%) Current Discount Rate (6.75%) Discount Rate +1% (7.75%) 157,131$ 124,798$ 98,126$ Sensitivity of the Net OPEB Liability to Changes in the Healthcare Cost Trend Rate – The following presents the net OPEB liability of the City, as well as what the City’s net OPEB liability would be if it were calculated using healthcare cost trends rates that are 1% lower or 1% higher than the current healthcare cost trend rates. Healthcare Trend Rate ‐ 1% Healthcare Trend Current Rate Healthcare Trend Rate + 1% 94,719$ 124,798$ 161,763$ OPEB Plan Fiduciary Net Position – Detailed information about the OPEB plan’s fiduciary net position is available in the separately issued CalPERS financial report. (d) OPEB Expenses and Deferred Outflows/Inflows of Resources Related to OPEB For the fiscal year ended June 30, 2021, the City recognized an OPEB expense of $10.0 million for the OPEB plan. At June 30, 2021, the City reported deferred outflows of resources and deferred inflows of resources related to OPEB from the following sources (in thousands): Deferred Outflows of Resources Deferred Inflows of Resources OPEB contributions subsequent to measurement date $ 14,592 $ ‐ Differences between expected and actual experience ‐ 19,031 Changes in assumptions 4,491 3,621 Net differences between projected and actual earnings on plan investments 2,200 ‐ Total $ 21,283 $ 22,652 CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 101 NOTE 12 – OTHER POST‐EMPLOYMENT BENEFITS (OPEB) (Continued) The $14.6 million reported as deferred outflows of resources relates to contributions made by the City from July 1, 2020 through June 30, 2021, which is subsequent to the City’s measurement date of June 30, 2020. This amount will be recognized as a reduction of the net OPEB liability in the fiscal year ended June 30, 2022. The net differences reported as deferred outflows of resources and deferred inflows of resources related to OPEB will be recognized in future OPEB expense as follows (in thousands): Fiscal Year Ending June 30, 2022 (4,964)$ 2023 (4,336) 2024 (4,125) 2025 (2,135) 2026 (401) Total (15,961)$ NOTE 13 – DEFERRED COMPENSATION PLAN City employees may defer a portion of their compensation under City sponsored Deferred Compensation Plans created in accordance with Internal Revenue Code Section 457. Under these Plans, participants are not taxed on the deferred portion of their compensation until distributed to them. Distributions may be made only at termination, retirement, death or in an emergency as defined by the Plans. The laws governing deferred compensation plan assets require plan assets to be held by a Trust for the exclusive benefit of plan participants and their beneficiaries. Since the assets held under these plans are not the City’s property and are not subject to City control, they have been excluded from these financial statements. NOTE 14 – RISK MANAGEMENT Coverage The City provides dental coverage to employees through a City plan, which is administered by a third party service agent. The City is self‐insured for dental claims. The City has a workers’ compensation insurance policy with coverage up to the statutory limit set by the State of California. The City retains the risk for the first $750,000 in losses for each accident and employee under this policy. The City also has public employee dishonesty insurance with a $5,000 deductible and coverage up to $1.0 million per loss. The Director of Administrative Services/CFO and City Manager each have coverage up to $4.0 million per loss. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 102 NOTE 14 – RISK MANAGEMENT (Continued) The City’s property, boiler, and machinery insurance policy has various deductibles and coverage based on the type of property. The City is a member of the Authority for California Cities Excess Liability (ACCEL), which provides excess general liability insurance coverage, including auto liability, up to $200 million per occurrence. The City retains the risk for the first $1.0 million in losses for each occurrence under this policy. ACCEL was established for the purpose of creating a risk management pool for central California municipalities. ACCEL is governed by a Board of Directors consisting of representatives of its member cities. The board controls the operations of ACCEL, including selection of claims management, general administration and approval of the annual budget. The City’s deposits with ACCEL equal the ratio of the City’s payroll to the total payroll of all entities. Actual surpluses or losses are shared according to a formula developed from overall loss costs and spread to member entities on a percentage basis after a retrospective rating. During the year ended June 30, 2021, the City paid $2.1 million to ACCEL for current year coverage. Audited financial statements are available from ACCEL at 100 Pine Street, 11th Floor, San Francisco, California 94111. Claims Liability The City provides for the uninsured portion of claims and judgments in the General Liabilities insurance program funds. Claims and judgments, including a provision for claims incurred but not reported, and claim adjustment expenses are recorded when a loss is deemed probable of assertion and the amount of the loss is reasonably determinable. As discussed above, the City has coverage for such claims, but it has retained the risk for the deductible or uninsured portion of these claims. The City’s liability for uninsured claims is limited to dental, general liability, and workers’ compensation claims, as discussed above. Dental liability is based on a percentage of current year actual expense. General and workers’ compensation liabilities are based on the results of actuarial studies, and include amounts for claims incurred but not reported as follows as of June 30 (in thousands): 2021 2020 Beginning balance 29,713$ 28,365$ Claims expense, including claims incurred but not reported (IBNR)11,197 6,914 Claims paid (8,379) (5,566) Ending balance 32,531$ 29,713$ Current portion 6,811$ 6,198$ Year Ended June 30 CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 103 NOTE 14 – RISK MANAGEMENT (Continued) The City also recorded claims payable of $12.6 million on its governmental activities’ financial statements for a class action lawsuit filed against the City that challenged the City’s gas and electric rates. See Note 16. The City has not incurred a claim that has exceeded its insurance coverage limits in any of the last three years, nor have there been any significant reductions in insurance coverage. NOTE 15 – JOINT VENTURES General The City participates in joint ventures through Joint Powers Authorities (JPAs) established under the Joint Exercise of Powers Act of the State of California. As separate legal entities, these JPAs exercise full powers and authorities within the scope of the related Joint Powers Agreement, including the preparation of annual budgets, accountability for all funds, the power to make and execute contracts and the right to sue and be sued. Obligations and liabilities of the JPAs, including the long‐term debt in which the City participates in repayment, are not obligations and liabilities of the City, and are not reported on the City’s financial statements. Each JPA is governed by a board consisting of representatives from each member agency. Each board controls the operations of its respective JPA, including selection of management and approval of operating budgets, independent of any influence by member agencies beyond their representation on the Board. Northern California Power Agency The City is a member of Northern California Power Agency (NCPA), a joint powers agency which operates under a joint powers agreement among fifteen public agencies. The purpose of NCPA is to use the combined strength of its members to purchase, generate, sell and interchange electric energy and capacity through the acquisition and use of electrical generation and transmission facilities. Each agency member has agreed to fund a pro rata share of certain assessments by NCPA and enter into take‐or‐pay power supply contracts with NCPA. While NCPA is governed by its members, none of its obligations are those of its members unless expressly assumed by them. During the year ended June 30, 2021, the City incurred expenses totaling $92.1 million for purchased power and assessments earned by NCPA. The City’s interest in NCPA projects and reserves, as computed by NCPA, was $8.1 million at June 30, 2021. This amount represents the City’s portion of funds, which resulted from the settlement with third parties of issues with financial consequences and reconciliations of several prior years’ budgets for programs. It is recognized that all the funds credited to the City are linked to the collection of revenue from the City’s ratepayers, or to the settlement of disputes relating to electric power supply and that the money was collected from the City’s ratepayers to pay power bills. Additionally, the NCPA Commission identified and approved the funding of specific reserves for working capital, accumulated employees’ post‐retirement CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 104 NOTE 15 – JOINT VENTURES (Continued) medical benefits, and billed property taxes for the geothermal project. The Commission also identified a number of contingent liabilities that may or may not be realized, the cost of which in most cases is difficult to estimate at this time. One such contingent liability is the steam field depletion, which will require funding to cover debt service and operational costs in excess of the expected value of the electric power. The General Operating Reserve (GOR) is intended to minimize the number and amount of individual reserves needed for each project, protect NCPA’s financial condition and maintain its credit worthiness. There are no funds on deposit with NCPA as a reserve against these contingencies identified by NCPA. Members of NCPA may participate in an individual project of NCPA without obligation for any other project. Member assessments collected for one project may not be used to finance other projects of NCPA without the member’s permission. NCPA’s financial statements can be obtained from NCPA, 651 Commerce Drive, Roseville, CA 95678. Calaveras Hydroelectric Project In July 1981, NCPA agreed with Calaveras County Water District to purchase the output of the North Fork Stanislaus River Hydroelectric Development Project and to finance its construction. Debt service payments to NCPA began in February 1990 when the project was declared substantially complete and power was delivered to the participants. Under its power purchase agreement with NCPA, the City is obligated to pay 22.9 percent of this Project’s debt service and operating costs. At June 30, 2021, the book value of this Project’s plant, equipment and other assets was $303.8 million, while its long‐term debt totaled $255.8 million and other liabilities totaled $44.5 million. The City’s share of the Project’s long‐term debt amounted to $58.6 million at that date. Transmission Agency of Northern California (TANC) The City is a member of a joint powers agreement with 14 other entities in Transmission Agency of Northern California (TANC). TANC’s purpose is to provide electrical transmission or other facilities for the use of its members. While governed by its members, none of TANC’s obligations are those of its members unless expressly assumed by them. The City was obligated to pay 4 percent of TANC’s debt‐service and operating costs. However, a Resolution was approved authorizing the execution of a Long‐Term Layoff Agreement (LTLA) between the Cities of Palo Alto and Roseville. These two agencies desired to “layoff” their entitlement rights to the California‐Oregon Transmission Project (COTP) (and Roseville’s South of Tesla entitlement rights) for a period of 15 years to those acquiring members (Sacramento Municipal Utility District, Turlock Irrigation District, and Modesto Irrigation District). The effective date of this Agreement was February 1, 2009. As a result, the City is not obligated to pay TANC’s debt‐service and operating costs starting February 1, 2009, for a period of fifteen years. TANC’s financial statements can be obtained from TANC, P.O. Box 15129, Sacramento, CA 95851. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 105 NOTE 15 – JOINT VENTURES (Continued) Bay Area Water Supply and Conservation Agency (BAWSCA) The City is a member of a regional water district with 26 other entities, the Bay Area Water Supply and Conservation Agency (BAWSCA). BAWSCA was created on May 27, 2003 to represent the interests of 24 cities and water districts and two private utilities in Alameda, Santa Clara and San Mateo counties that purchase water on a wholesale basis from the San Francisco regional water system. It has the power to issue debt and plan, finance, construct, and operate water supply, transmission, reclamation, and conservation projects on behalf of its members. In 2013 the City participated in a debt issuance by BAWSCA. The debt was issued to repay certain long‐ term costs associated with the San Francisco Public Utilities Commission (SFPUC) water supply contract. During the fiscal year, the City paid its share of the annual debt service of $1.9 million, which will vary based on annual water purchases of the City compared to other BAWSCA agencies. BAWSCA’s financial statements can be obtained from BAWSCA, 155 Bovet Road, Suite 650, San Mateo, California 94402. NOTE 16 – COMMITMENTS AND CONTINGENCIES Palo Alto Unified School District – The City leased 27 acres of the former Cubberley School site and twelve extended day care sites from Palo Alto Unified School District (PAUSD) through December 31, 2019. The City and the PAUSD reached new agreements for the Cubberley School site through December 31, 2024, and the twelve extended day care sites through June 30, 2022. Under the new Cubberley lease, the City leases approximately 65,046 rentable square feet of building area and 15.94 acres of outdoor recreational area. The City has the right to reduce the leased premises by surrendering the Junior Museum and Zoo (JMZ) Building and/or the Building S. The City intends to surrender the JMZ Building after the completion of the new museum building that is not located on the property. The total lease expenditures for the year ended June 30, 2021 amounted to $4.1 million. Future minimum annual lease payments are as follows (in thousands): Year Ending June 30 Payment 2022 3,406$ 2023 2,568 2024 2,568 2025 1,284 9,826$ CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 106 NOTE 16 – COMMITMENTS AND CONTINGENCIES (Continued) GreenWaste of Palo Alto – GreenWaste of Palo Alto is the City’s contractor for waste collection, transportation, and processing services. The agreement expires June 30, 2026. The base compensation for GreenWaste is adjusted annually based on CPI indicators stipulated in the contract. In fiscal year 2021 payments to GreenWaste were $11.0 million. City of Palo Alto Regional Water Quality Control Plant – The cities of Palo Alto, Mountain View and Los Altos (the Partners) participate jointly in the cost of maintaining and operating the City of Palo Alto Regional Water Quality Control Plant and related system (the Plant). The City is the owner and administrator of the Plant, which provides the transmission, treatment and disposal of sewage for the Partners. The cities of Mountain View and Los Altos are entitled to use a portion of the capacity of the Plant for a specified period of time. Each partner has the right to rent unused capacity from/to the other partners. The expenses of operations and maintenance are paid quarterly by each partner based on its pro rata share of treatment costs. Additionally, joint system revenues are shared by the partners in the same ratio as expenses are paid. The amended agreement will terminate on December 31, 2060, but may be terminated by any partner upon ten years’ written notice to the other partners. All sewage treatment property, plant and equipment are included in the Wastewater Treatment Enterprise Fund’s capital assets balance. If the City initiates the termination of the contracts, it is required to pay the other partners their unamortized contribution towards the capital assets. Sunnyvale Materials Recovery and Transfer Station (SMaRT Station) – On September 30, 1991, as amended on June 9, 1992, the City, the City of Sunnyvale, and the City of Mountain View, entered into a Memorandum of Understanding (MOU) to participate in the construction and operation of the SMaRT Station, which recovers recyclable materials from the municipal solid waste delivered from participating cities. Per the MOU, the City has a capital share of 21.3 percent of this facility and reimburses its proportionate capital share of design, construction and operation costs to Sunnyvale. In fiscal year 2008, the members agreed to finance an Equipment Replacement Project from existing reserves and proceeds from the Solid Waste Revenue Bond, Series 2007. The City has committed to repay 27.8 percent of the remaining debt service on the Bonds. During the year ended June 30, 2021, the City made the last debt service payment of $0.2 million and the City’s obligation to pay related debt service payments is completed. The MOU is expiring on December 31, 2021. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 107 NOTE 16 – COMMITMENTS AND CONTINGENCIES (Continued) UTILITIES ENERGY RESOURCE MANAGEMENT Electric Power Supply Purchase Agreements – The City has numerous power purchase agreements with power producers to purchase capacity and energy to supply a portion of its load requirements. As of June 30, 2021, the approximate minimum obligations for the contracts, assuming the energy is delivered over the next four years, are as follows: Fiscal Year Projected Obligation 2022 $63.66 million 2023 $57.61 million 2024 $55.60 million 2025 $52.02 million 2026 $52.63 million Contractual Commitments beyond 2022 (Electricity) – Several of the City’s purchase power and transmission contracts extend beyond the five‐year summary presented above. These contracts expire between 2026 and 2051 and provide for power under various terms and conditions. The City also has a new solar power purchase agreement that is schedule to start in January 2023. The City estimates that its annual minimum commitments under all of its contracts, assuming the energy is delivered, ranges between $62.06 million in 2025 and $67.13 million in 2034. The City’s largest single purchase power source is the Western Base Resource contract, whereby the City receives 12.31 percent of the amount of energy made available by Western, after meeting Central Valley Project use requirements, in any given year at a 12.31 percent share of their revenue requirement. The Western contract expires on December 31, 2024. The City has the option to extend the Western contract for an additional 30‐year period beyond 2024, although at a slightly lower share of the total energy output and revenue requirement (12.06 percent instead of 12.31 percent). Gas Transmission and Local Transportation Rates – The City relies on Pacific Gas and Electric Company’s (PG&E) natural gas pipeline infrastructure, including both high‐pressured transmission and medium‐ pressure local transportation, to move gas from the California border to the City’s distribution system. Rates are determined through proceedings at the California Public Utilities Commission. The gas transmission and local transportation rates increased by 26% and 8%, respectively, from fiscal year 2020 to fiscal year 2021. The gas transmission and local transportation rates are expected to increase by 4% and 3%, respectively, in fiscal year 2022. San Francisco Public Utilities Commission – The City purchases water from the San Francisco Public Utilities Commission (SFPUC) under a Water Supply Agreement (WSA) terminating in 2034. The City’s wholesale water rate under this contract is determined by a ratemaking process under the authority of the SFPUC, with contractual limitations on the types of costs that may be allocated to wholesale water purchasers like the City. The WSA contains certain restrictions regarding water purchases from other water suppliers, though those restrictions do not apply to recycled water or emergency water supplies. The City’s cost of water under this contract is projected to remain flat through 2022. CITY OF PALO ALTO Notes to the Basic Financial Statements For the Year Ended June 30, 2021 108 NOTE 16 – COMMITMENTS AND CONTINGENCIES (Continued) Litigation The City is subject to litigation arising in the normal course of business. In the opinion of the City Attorney, there is no pending litigation, claims or assessments that are likely to have a materially adverse effect on the City’s financial condition. A class action lawsuit was filed against the City in October 2016 that challenged the City’s gas and electric rates under Proposition 26. On June 24, 2021, a trial court entered judgment partially against the City and ordered the City to pay $12.6 million to a common fund to refund gas rate payers and for payment of incurred litigation costs. The City and the plaintiffs have appealed the trial court’s judgment. Payment of refunds due to gas rate payers under the trial court judgment are stayed pending a decision by the Court of appeal (expected in late 2022/early 2023) on the parties’ respective appeals. While the ultimate outcome of the claim is uncertain, the City has recorded a claims payable equal to the trial court judgment. This liability is not due and payable at June 30, 2021 and the City recorded a non‐current claims payable of $12.6 million on its governmental activities’ financial statements for this lawsuit. In 2022, the City has set aside funding in the General Fund for the potential financial impacts. A personal injury lawsuit was filed against the City in August 2018. Plaintiff, a bicyclist, alleges that the City created a dangerous condition of public property that caused him to suffer catastrophic injuries. The City Attorney is of the opinion that a loss is reasonably possible but cannot be reasonably estimated at this time. Grant Programs The City participates in Federal and State grant programs. These programs have been audited by the City’s independent auditors in accordance with the provisions of the Federal Single Audit Act amendments of 1996 and applicable State requirements. No costs were questioned as a result of these audits; however, these programs are still subject to further examination by the grantors and the amount, if any, of expenditures which may be disallowed by the granting agencies cannot be determined at this time. The City expects such amounts, if any, to be immaterial. Uncertainties In March 2020, the World Health Organization declared coronavirus COVID‐19 a global pandemic. This contagious disease outbreak and any related adverse public health developments have adversely affected workforces, customers, economies, and financial markets globally. It has also disrupted the normal operations of many governments, including the City. The City expects this outbreak to impact the City’s operations for future reporting periods. It is not possible for the City to predict the duration or magnitude of the adverse results of the outbreak and its effects on the City’s operations. Note 17 – SUBSEQUENT EVENT On July 12, 2021, the SWRCB and the City executed a direct loan agreement for an award up to $17.5 million to finance the rehabilitate and upgrade the RWQCP primary sedimentation tanks and ancillary systems. The loan interest rate is 0.9% and has a final maturity on February 15, 2053. CITY OF PALO ALTO Required Supplementary Information (Unaudited) Last 7 Fiscal Years* 109 I. SCHEDULE OF CHANGES IN NET PENSION LIABILITY AND RELATED RATIOS – MISCELLANEOUS PLAN (In thousands) Fiscal year 2020‐21 2019‐20 2018‐19 2017‐18 2016‐17 2015‐16 2014‐15 Measurement Period 2019‐20 2018‐19 2017‐18 2016‐17 2015‐16 2014‐15 2013‐14 Total pension liability Service cost 14,267$ 15,045$ 14,724$ 14,423$ 12,582$ 12,183$ 12,442$ Interest 59,995 57,523 54,903 52,831 51,531 49,345 46,963 Changes of assumptions ‐ ‐ (5,673) 42,239 ‐ (11,552) ‐ Difference between expected and actual experience 4,850 6,230 4,271 (6,378) 757 3,507 ‐ Benefit payments, including refunds of employee contributions (43,781) (41,124) (37,624) (36,405) (34,825) (32,980) (31,781) Net change in total pension liability 35,331 37,674 30,601 66,710 30,045 20,503 27,624 Total pension liability ‐ beginning 849,004 811,330 780,729 714,019 683,974 663,471 635,847 Total pension liability ‐ ending (a) 884,335$ 849,004$ 811,330$ 780,729$ 714,019$ 683,974$ 663,471$ Plan fiduciary net position Contributions ‐ employer 28,889$ 25,423$ 23,342$ 20,638$ 18,840$ 18,610$ 17,400$ Contributions ‐ employee 7,189 6,939 6,654 6,314 5,812 5,730 6,345 Net investment income 28,735 36,322 43,690 53,259 2,464 10,597 70,989 Benefit payments, including refunds of employee contributions (43,781) (41,124) (37,624) (36,405) (34,825) (32,980) (31,781) Administrative expense (809) (390) (799) (694) (291) (538) ‐ Other non‐investment income (expenses) ‐ 1 (1,518) 30 ‐ ‐ ‐ Net change in fiduciary net position 20,223 27,171 33,745 43,142 (8,000) 1,419 62,953 Plan fiduciary net position ‐ beginning 573,840 546,669 512,924 469,782 477,782 476,363 413,410 Plan fiduciary net position ‐ ending (b) 594,063$ 573,840$ 546,669$ 512,924$ 469,782$ 477,782$ 476,363$ Plan net pension liability/(asset) ‐ Ending (a) ‐ (b) 290,272$ 275,164$ 264,661$ 267,805$ 244,237$ 206,192$ 187,108$ Plan fiduciary net position as a percentage of total pension liability 67.18% 67.59% 67.38% 65.70% 65.79% 69.85% 71.80% Covered payroll 81,017$ 82,573$ 80,634$ 77,606$ 73,722$ 69,837$ 66,373$ Plan net pension liability/(asset) as a percentage of covered payroll 358.29% 333.24% 328.23% 345.08% 331.29% 295.25% 281.90% Notes to Schedule: Change in assumptions ‐ During measurement period 2014, the discount rate was 7.50%. During measurement period 2015, the discount rate was increased from 7.50 percent to 7.65 percent. There is no change in discount rate during measurement period 2016. During measurement period 2017, the discount rate was reduced from 7.65 percent to 7.15 percent. During measurement period 2018, demographic assumptions and inflation rate were changed in accordance to the CalPERS Experience Study and Review of Actuarial Assumptions December 2017. There are no change in assumptions during measurement periods 2019 and 2020. * Fiscal year ended June 30, 2015 was the first year of implementation of GASB Statement No. 68, therefore only seven years of information is shown. Benefit changes ‐ The figures above do not include any liability that may have resulted from plan changes which occurred after the June 30, 2019 valuation date. This applies for voluntary benefit changes as well as any offers of two years additional service credit (a.k.a. Golden Handshake). CITY OF PALO ALTO Required Supplementary Information (Unaudited) Last 8 Fiscal Years* 110 II. SCHEDULE OF PENSION CONTRIBUTIONS– MISCELLANEOUS PLAN (In thousands) Fiscal Year 2020‐21 2019‐20 2018‐19 2017‐18 2016‐17 2015‐16 2014‐15 2013‐14 Contractually required contribution (actuarially determined) 32,782$ 28,889$ 25,423$ 23,342$ 20,638$ 18,840$ 18,610$ 17,400$ Actual contribution (32,782) (28,889) (25,423) (23,342) (20,638) (18,840) (18,610) (17,400) Contribution deficiency/(excess) ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ Covered payroll 87,177$ 81,017$ 82,573$ 80,634$ 77,606$ 73,722$ 69,837$ 66,373$ Contributions as percentage of covered payroll 37.60% 35.66% 30.79% 28.95% 26.59% 25.56% 26.65% 26.22% Notes to Schedule: The actuarial methods and assumptions used to set the actuarially determined contributions for fiscal year 2021 contribution rates are as follows: ADC for fiscal year June 30, 2021 Actuarial valuation date June 30, 2018 Actuarial cost method Entry‐Age Normal Cost Method Asset valuation method Actuarial value of assets Inflation 2.50% Salary increases Varies by entry age and services Payroll growth 2.75% Investment rate of return Retirement age Mortality 7.00%, net of pension plan investment and administrative expenses, includes inflation. The probabilities of retirement are based on the 2017 CalPERS Experience Study for the period 1997 to 2015. The probabilities of mortality are based on the 2017 CalPERS Experience Study for the period from 1997 to 2015. Pre‐retirement and post‐ retirement mortality rates includes 15 years of projected mortality improvements using 90% of Scale MP‐2016 published by the Society of Actuaries. * Fiscal year ended June 30, 2015 was the first year of implementation of GASB Statement No. 68, therefore only eight years of information is shown. CITY OF PALO ALTO Required Supplementary Information (Unaudited) Last 7 Fiscal Years* 111 III. SCHEDULE OF CHANGES IN NET PENSION LIABILITY AND RELATED RATIOS – SAFETY PLAN (In thousands) Fiscal year 2020‐21 2019‐20 2018‐19 2017‐18 2016‐17 2015‐16 2014‐15 Measurement Period 2019‐20 2018‐19 2017‐18 2016‐17 2015‐16 2014‐15 2013‐14 Total pension liability Service cost 7,898$ 7,259$ 7,168$ 6,584$ 5,916$ 5,959$ 6,221$ Interest 32,469 31,066 29,871 28,272 27,816 27,047 26,113 Changes of assumptions ‐ ‐ (1,374) 22,566 ‐ (6,327) ‐ Difference between expected and actual experience 6,314 3,841 11,604 (2,790) (1,516) 75 ‐ Benefit payments, including refunds of employee contributions (25,948) (24,757) (23,636) (22,413) (21,669) (21,148) (19,985) Net change in total pension liability 20,733 17,409 23,633 32,219 10,547 5,606 12,349 Total pension liability ‐ beginning 456,817 439,408 415,775 383,556 373,009 367,403 355,054 Total pension liability ‐ ending (a) 477,550$ 456,817$ 439,408$ 415,775$ 383,556$ 373,009$ 367,403$ Plan fiduciary net position Contributions ‐ employer 14,297$ 12,370$ 11,030$ 10,220$ 9,403$ 8,617$ 7,616$ Contributions ‐ employee 3,459 3,225 2,799 2,475 2,059 2,047 2,762 Net investment income 14,310 18,217 22,724 28,112 1,259 5,774 40,033 Benefit payments, including refunds of employee contributions (25,948) (24,757) (23,636) (22,413) (21,669) (21,148) (19,985) Administrative expense (407) (201) (418) (370) (157) (290) ‐ Other non‐investment income (expenses) ‐ 1 (794) (30) ‐ ‐ ‐ Net change in fiduciary net position 5,711 8,855 11,705 17,994 (9,105) (5,000) 30,426 Plan fiduciary net position ‐ beginning 289,028 280,173 268,468 250,474 259,579 264,579 234,153 Plan fiduciary net position ‐ ending (b) 294,739$ 289,028$ 280,173$ 268,468$ 250,474$ 259,579$ 264,579$ Plan net pension liability/(asset) ‐ Ending (a) ‐ (b) 182,811$ 167,789$ 159,235$ 147,307$ 133,082$ 113,430$ 102,824$ Plan fiduciary net position as a percentage of total pension liability 61.72% 63.27% 63.76% 64.57% 65.30% 69.59% 72.01% Covered payroll 26,189$ 24,263$ 24,131$ 21,906$ 21,822$ 21,912$ 21,896$ Plan net pension liability/(asset) as a percentage of covered payroll 698.04% 691.54% 659.88% 672.45% 609.85% 517.66% 469.60% Notes to Schedule: Benefit changes ‐ The figures above do not include any liability that may have resulted from plan changes which occurred after the June 30, 2019 valuation date. This applies for voluntary benefit changes as well as any offers of two years additional service credit (a.k.a. Golden Handshake). * Fiscal year ended June 30, 2015 was the first year of implementation of GASB Statement No. 68, therefore only seven years of information is shown. Change in assumptions ‐ During measurement period 2014, the discount rate was 7.50%. During measurement period 2015, the discount rate was increased from 7.50 percent to 7.65 percent. There is no change in discount rate during measurement period 2016. During measurement period 2017, the discount rate was reduced from 7.65 percent to 7.15 percent. During measurement period 2018, demographic assumptions and inflation rate were changed in accordance to the CalPERS Experience Study and Review of Actuarial Assumptions December 2017. There are no change in assumptions during measurement periods 2019 and 2020. CITY OF PALO ALTO Required Supplementary Information (Unaudited) Last 8 Fiscal Years* 112 IV. SCHEDULE OF PENSION CONTRIBUTIONS – SAFETY PLAN (In thousands) Fiscal Year 2020‐21 2019‐20 2018‐19 2017‐18 2016‐17 2015‐16 2014‐15 2013‐14 Contractually required contribution (actuarially determined) 14,796$ 14,297$ 12,370$ 11,030$ 10,220$ 9,403$ 8,617$ 7,616$ Actual contribution (14,796) (14,297) (12,370) (11,030) (10,220) (9,403) (8,617) (7,616) Contribution deficiency/(excess) ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ Covered payroll 25,615$ 26,189$ 24,263$ 24,131$ 21,906$ 21,822$ # 21,912$ 21,896$ Contributions as percentage of covered payroll 57.76% 54.59% 50.98% 45.71% 46.65% 43.09% 39.33% 34.78% Notes to Schedule: The actuarial methods and assumptions used to set the actuarially determined contributions for fiscal year 2021 contribution rates are as follows: ADC for fiscal year June 30, 2021 Actuarial valuation date June 30, 2018 Actuarial cost method Entry‐Age Normal Cost Method Asset valuation method Actuarial value of assets Inflation 2.50% Salary increases Varies by entry age and services Payroll growth 2.75% Investment rate of return Retirement age Mortality 7.00%, net of pension plan investment and administrative expenses, includes inflation. The probabilities of retirement are based on the 2017 CalPERS Experience Study for the period 1997 to 2015. The probabilities of mortality are based on the 2017 CalPERS Experience Study for the period from 1997 to 2015. Pre‐retirement and post‐ retirement mortality rates includes 15 years of projected mortality improvements using 90% of Scale MP‐2016 published by the Society of Actuaries. * Fiscal year ended June 30, 2015 was the first year of implementation of GASB Statement No. 68, therefore only eight years of information is shown. CITY OF PALO ALTO Required Supplementary Information (Unaudited) Last 4 Fiscal Years* 113 V. SCHEDULE OF CHANGES IN NET OPEB LIABILITY AND RELATED RATIOS (In thousands) Fiscal year 2020‐21 2019‐20 2018‐19 2017‐18 Measurement Period 2019‐20 2018‐19 2017‐18 2016‐17 Total OPEB liability Service cost 6,366$ 6,622$ 6,429$ 6,242$ Interest 16,572 17,292 16,546 15,853 Changes in benefit terms ‐ 972 ‐ ‐ Changes of assumptions (4,426) 7,057 ‐ ‐ Difference between expected and actual experience ‐ (29,907) ‐ ‐ Benefit payments, including refunds of employee contributions (12,728) (12,157) (12,104) (11,916) Net change in total OPEB liability 5,784 (10,121) 10,871 10,179 Total OPEB liability ‐ beginning 245,509 255,630 244,759 234,580 Total OPEB liability ‐ ending (a) 251,293$ 245,509$ 255,630$ 244,759$ Plan fiduciary net position Contributions ‐ employer 16,475$ 15,997$ 21,349$ 14,739$ Net investment income 4,327 6,852 7,519 8,628 Benefit payments, including refunds of employee contributions (12,728) (12,157) (12,104) (11,916) Administrative expense (58) (23) (204) (44) Net change in fiduciary net position 8,016 10,669 16,560 11,407 Plan fiduciary net position ‐ beginning 118,479 107,810 91,250 79,843 Plan fiduciary net position ‐ ending (b) 126,495$ 118,479$ 107,810$ 91,250$ Plan net OPEB liability/(asset) ‐ Ending (a) ‐ (b) 124,798$ 127,030$ 147,820$ 153,509$ Plan fiduciary net position as a percentage of total OPEB liability 50.34% 48.26% 42.17% 37.28% Covered employee payroll 125,676$ 118,014$ 119,090$ 118,774$ Plan net OPEB liability/(asset) as a percentage of covered employee payroll 99.30% 107.64% 124.12% 129.24% Notes to Schedule: Benefit changes ‐ The figures above do not include any liability that may have resulted from plan changes which occurred after the measurement dates. Changes in assumptions ‐ During measurement period 2020, demographic assumptions were change in accordance to the 2017 CalPERS Experience Study while mortality improvement scale was updated to Scale MP‐2019. * Fiscal year ended June 30, 2018 was the first year of implementation of GASB Statement No. 75, therefore only four years of information is shown. CITY OF PALO ALTO Required Supplementary Information (Unaudited) Last 5 Fiscal Years* 114 VI. SCHEDULE OF EMPLOYER OPEB CONTRIBUTIONS (In thousands) Fiscal Year 2020‐21 2019‐20 2018‐19 2017‐18 2016‐17 Contractually required contribution (actuarially determined) 14,566$ 16,482$ 15,997$ 16,938$ 16,365$ Actual contribution (14,592) (16,475) (15,997) (21,349) (14,739) Contribution deficiency/(excess) (26)$ 7$ ‐$ (4,411)$ 1,626$ Covered employee payroll 120,869$ 125,676$ 118,014$ 119,090$ 118,774$ Contributions as percentage of covered employee payroll 12.07% 13.11% 13.56% 17.93% 12.41% Notes to Schedule: The actuarial methods and assumptions used to set the actuarially determined contributions for fiscal year 2021 contribution rates are as follows: ADC for fiscal year June 30, 2021 Actuarial valuation date June 30, 2019 Actuarial cost method Entry‐Age, level percentage of payroll Amortization method Level percent of pay Amortization period 24‐year fixed period for 2020/21 Asset valuation method Market value, no smoothing Inflation 2.75% Payroll growth 3.00% Investment rate of return Medical trend Mortality Mortality Improvement 6.75% * Fiscal year ended June 30, 2018 was the first year of implementation of GASB Statement No. 75, therefore only five years of information is shown. Non‐Medicare ‐ 7.25% for 2021, decreasing to an ultimate rate of 4.0% in 2076 Medicare ‐ 6.3% for 2021, decreasing to an ultimate rate of 4.0% in 2076 CalPERS 1997‐2015 Experience Study Post‐retirement mortality projected fully generational with Society of Actuaries Scale MP‐2019 Total Special Debt Other Revenue Service Permanent Governmental Funds Funds Fund Funds ASSETS: Cash and investments available for operations 60,487$ 3,728$ 2,543$ 66,758$ Receivables, net: Accounts and intergovernmental 517 2 ‐ 519 Interest 357 19 13 389 Notes and loan receivable 52,851 ‐ ‐ 52,851 Restricted cash and investments with fiscal agents ‐ 4,655 ‐ 4,655 Total assets 114,212$ 8,404$ 2,556$ 125,172$ Liabilities: Accounts payable and accruals 495$ ‐$ ‐$ 495$ Accrued salaries and benefits 34 ‐ ‐ 34 Due to other funds 341 ‐ ‐ 341 Total liabilities 870 ‐ ‐ 870 Fund balances: Nonspendable Eyerly family ‐ ‐ 2,556 2,556 Restricted for: Transportation mitigation 12,512 ‐ ‐ 12,512 Federal revenue 5,293 ‐ ‐ 5,293 Street improvement 28 ‐ ‐ 28 Local law enforcement 756 ‐ ‐ 756 Public benefit 18,282 ‐ ‐ 18,282 Debt service ‐ 8,404 ‐ 8,404 Committed for: Developer impact fee 13,300 ‐ ‐ 13,300 Housing In‐Lieu 58,883 ‐ ‐ 58,883 Special districts 3,186 ‐ ‐ 3,186 Downtown business 50 ‐ ‐ 50 Assigned for: Unrealized gain on investment 1,052 ‐ ‐ 1,052 Total fund balances 113,342 8,404 2,556 124,302 Total liabilities and fund balances 114,212$ 8,404$ 2,556$ 125,172$ LIABILITIES AND FUND BALANCES: CITY OF PALO ALTO Non‐major Governmental Funds Combining Balance Sheet June 30, 2021 (Amounts in thousands) 115 Total Special Debt Other Revenue Service Permanent Governmental Funds Funds Fund Funds REVENUES: Property tax ‐$ 4,329$ ‐$ 4,329$ Special assessments 5 ‐ ‐ 5 Other taxes and fines 2,816 ‐ ‐ 2,816 Intergovernmental 1,337 ‐ ‐ 1,337 Licenses, permits and fees: University Avenue Parking 83 ‐ ‐ 83 California Avenue Parking 22 ‐ ‐ 22 Other licenses, permits and fees 2,056 ‐ ‐ 2,056 Investment earnings 169 (10) 16 175 Housing In‐Lieu ‐ residential 5,804 ‐ ‐ 5,804 Other revenue 154 ‐ ‐ 154 Total revenues 12,446 4,319 16 16,781 EXPENDITURES: Current: Administrative Services 261 ‐ ‐ 261 Public Works 1,427 ‐ ‐ 1,427 Planning and Development Services 1,285 ‐ ‐ 1,285 Office of Transportation 1,437 ‐ ‐ 1,437 Police 36 ‐ ‐ 36 Community Services 236 ‐ ‐ 236 Non‐Departmental 255 ‐ ‐ 255 Debt service: Principal retirement ‐ 2,595 ‐ 2,595 Interest and fiscal charges ‐ 6,147 ‐ 6,147 Total expenditures 4,937 8,742 ‐ 13,679 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES 7,509 (4,423) 16 3,102 OTHER FINANCING SOURCES (USES): Transfers in 570 2,910 ‐ 3,480 Transfers out (9,564) ‐ ‐ (9,564) Total other financing sources (uses) (8,994) 8,939 ‐ (55) Change in fund balances (1,485) 4,516 16 3,047 FUND BALANCES, BEGINNING OF YEAR 114,827 3,888 2,540 121,255 FUND BALANCES, END OF YEAR 113,342$ 8,404$ 2,556$ 124,302$ CITY OF PALO ALTO Non‐major Governmental Funds Combining Statement of Revenues, Expenditures and Changes in Fund Balances For the Year Ended June 30, 2021 (Amounts in thousands) 116 117 NON‐MAJOR GOVERNMENTAL FUNDS SPECIAL REVENUE FUNDS Street Improvement This fund accounts for revenues received from state gas tax. Allocations must be spent on the construction and maintenance of the road network system of the City. Federal Revenue This fund accounts for grant funds received under the Community Development Act of 1974 and HOME Investment Grant Programs, for activities approved and subject to federal regulations. Housing In‐Lieu This fund accounts for revenues from commercial and residential developers to provide housing under the City’s Below Market Rate program. Special Districts This fund accounts for revenues from parking permits and for maintenance of various parking lots within the City’s parking districts. Transportation Mitigation This fund accounts for revenues from fees or contributions required for transportation mitigation issues encountered as a result of City development. Local Law Enforcement This fund accounts for revenues received in support of City’s law enforcement program. Asset Seizure This fund accounts for seized property and funds associated with drug trafficking. Under California Assembly Bill No. 4162, the monies are released to the City for specific expenditures related to law enforcement activities. Developer Impact Fee This fund accounts for fees imposed on new developments to be used for parks, community centers and libraries. Downtown Business Development District The Downtown Business Development District Fund was established to account for the activities of the Palo Alto Downtown Business Development District, which was established to enhance the viability of the downtown business district. Public Benefit This fund accounts for the activities of the Stanford University Medical Center (SUMC) Development Agreement (DA) whereby SUMC will enhance and expand their facilities and the City will grant SUMC the right to develop the facilities in accordance with the DA. Street Federal Housing Special Improvement Revenue In‐Lieu Districts ASSETS: Cash and investments available for operations ‐$ ‐$ 11,573$ 3,546$ Receivables, net: Accounts and intergovernmental 234 283 ‐ ‐ Interest ‐ ‐ 92 27 Notes and loan receivable ‐ 5,351 47,500 ‐ Total assets 234$ 5,634$ 59,165$ 3,573$ Liabilities: Accounts payable and accruals ‐$ 203$ 10$ 282$ Accrued salaries and benefits ‐ 3 1 26 Due to other funds 206 135 ‐ ‐ Total liabilities 206 341 11 308 Fund balances: Restricted Transportation mitigation ‐ ‐ ‐ ‐ Federal revenue ‐ 5,293 ‐ ‐ Street improvement 28 ‐ ‐ ‐ Local law enforcement ‐ ‐ ‐ ‐ Public benefit ‐ ‐ ‐ ‐ Committed Developer impact fee ‐ ‐ ‐ ‐ Housing In‐Lieu ‐ ‐ 58,883 ‐ Special districts ‐ ‐ ‐ 3,186 Downtown business ‐ ‐ ‐ ‐ Assigned Unrealized gains on investments ‐ ‐ 271 79 Total fund balances 28 5,293 59,154 3,265 Total liabilities and fund balances 234$ 5,634$ 59,165$ 3,573$ LIABILITIES AND FUND BALANCES: CITY OF PALO ALTO Non‐major Special Revenue Funds Combining Balance Sheet June 30, 2021 (Amounts in thousands) 118 Downtown Total Business Special Transportation Local Law Asset Developer Development Public Revenue Mitigation Enforcement Seizure Impact Fee District Benefit Funds 12,635$ 760$ 3$ 13,446$ 51$ 18,473$ 60,487$ ‐ ‐ ‐ ‐ ‐ ‐ 517 64 3 ‐ 73 ‐ 98 357 ‐ ‐ ‐ ‐ ‐ ‐ 52,851 12,699$ 763$ 3$ 13,519$ 51$ 18,571$ 114,212$ ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ 495$ ‐ ‐ ‐ 4 ‐ ‐ 34 ‐ ‐ ‐ ‐ ‐ ‐ 341 ‐ ‐ ‐ 4 ‐ ‐ 870 12,512 ‐ ‐ ‐ ‐ ‐ 12,512 ‐ ‐ ‐ ‐ ‐ ‐ 5,293 ‐ ‐ ‐ ‐ ‐ ‐ 28 ‐ 753 3 ‐ ‐ ‐ 756 ‐ ‐ ‐ ‐ ‐ 18,282 18,282 ‐ ‐ ‐ 13,300 ‐ ‐ 13,300 ‐ ‐ ‐ ‐ ‐ ‐ 58,883 ‐ ‐ ‐ ‐ ‐ ‐ 3,186 ‐ ‐ ‐ ‐ 50 ‐ 50 187 10 ‐ 215 1 289 1,052 12,699 763 3 13,515 51 18,571 113,342 12,699$ 763$ 3$ 13,519$ 51$ 18,571$ 114,212$ 119 Street Federal Housing Special Improvement Revenue In‐Lieu Districts REVENUES: Special assessments ‐$ ‐$ ‐$ ‐$ Other taxes and fines 2,793 ‐ ‐ 23 Intergovernmental ‐ 1,172 ‐ ‐ Licenses, permits and fees: University Avenue Parking ‐ ‐ ‐ 83 California Avenue Parking ‐ ‐ ‐ 22 Other licenses, permits and fees ‐ ‐ ‐ 49 Investment earnings (3) ‐ 9 1 Housing In‐Lieu ‐ residential ‐ ‐ 5,804 ‐ Other revenue ‐ ‐ 85 29 Total revenues 2,790 1,172 5,898 207 EXPENDITURES: Current: Administrative Services ‐ ‐ ‐ 261 Public Works ‐ ‐ ‐ 1,427 Planning and Development Services ‐ 1,100 179 6 Office of Transportation ‐ ‐ ‐ 1,437 Police ‐ ‐ ‐ ‐ Community Services ‐ ‐ ‐ 32 Non‐Departmental ‐ ‐ 75 160 Total expenditures ‐ 1,100 254 3,323 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES 2,790 72 5,644 (3,116) OTHER FINANCING SOURCES (USES): Transfers in ‐ ‐ ‐ 400 Transfers out (2,837) ‐ ‐ (838) Total other financing sources (uses) (2,837) ‐ ‐ (438) Change in fund balances (47) 72 5,644 (3,554) FUND BALANCES, BEGINNING OF YEAR 75 5,221 53,510 6,819 FUND BALANCES, END OF YEAR 28$ 5,293$ 59,154$ 3,265$ CITY OF PALO ALTO Non‐major Special Revenue Funds Combining Statement of Revenues, Expenditures and Changes in Fund Balances For the Year Ended June 30, 2021 (Amounts in thousands) 120 Downtown Total Business Special Transportation Local Law Asset Developer Development Public Revenue Mitigation Enforcement Seizure Impact Fee District Benefit Funds ‐$ ‐$ ‐$ ‐$ 5$ ‐$ 5$ ‐ ‐ ‐ ‐ ‐ ‐ 2,816 ‐ 165 ‐ ‐ ‐ ‐ 1,337 ‐ ‐ ‐ ‐ ‐ ‐ 83 ‐ ‐ ‐ ‐ ‐ ‐ 22 429 ‐ ‐ 1,578 ‐ ‐ 2,056 66 7 ‐ 14 ‐ 75 169 ‐ ‐ ‐ ‐ ‐ ‐ 5,804 ‐ ‐ ‐ 40 ‐ ‐ 154 495 172 ‐ 1,632 5 75 12,446 ‐ ‐ ‐ ‐ ‐ ‐ 261 ‐ ‐ ‐ ‐ ‐ ‐ 1,427 ‐ ‐ ‐ ‐ ‐ ‐ 1,285 ‐ ‐ ‐ ‐ ‐ ‐ 1,437 ‐ 36 ‐ ‐ ‐ ‐ 36 ‐ ‐ ‐ 204 ‐ ‐ 236 ‐ ‐ ‐ ‐ 20 ‐ 255 ‐ 36 ‐ 204 20 ‐ 4,937 495 136 ‐ 1,428 (15) 75 7,509 ‐ ‐ ‐ 170 ‐ ‐ 570 (400) ‐ ‐ (3,539) ‐ (1,950) (9,564) (400) ‐ ‐ (3,369) ‐ (1,950) (8,994) 95 136 ‐ (1,941) (15) (1,875) (1,485) 12,604 627 3 15,456 66 20,446 114,827 12,699$ 763$ 3$ 13,515$ 51$ 18,571$ 113,342 121 Street Improvement Federal Revenue Actual, Actual, Budget Budgetary Basis Variance Budget Budgetary Basis Variance REVENUES: Special assessments ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ Other taxes and fines 2,793 2,793 ‐ ‐ ‐ ‐ Intergovernmental ‐ ‐ ‐ 1,384 1,172 (212) Licenses, permits and fees University Avenue Parking ‐ ‐ ‐ ‐ ‐ ‐ California Avenue Parking ‐ ‐ ‐ ‐ ‐ ‐ Other licenses, permits and fees ‐ ‐ ‐ ‐ ‐ ‐ Investment earnings 9 (1) (10) ‐ ‐ ‐ Rental income ‐ ‐ ‐ ‐ ‐ ‐ Housing In‐Lieu ‐ residential ‐ ‐ ‐ ‐ ‐ ‐ Other: Loan payoffs ‐ ‐ ‐ ‐ ‐ ‐ Other revenue ‐ ‐ ‐ ‐ ‐ ‐ Total revenues 2,802 2,792 (10) 1,384 1,172 (212) EXPENDITURES: Current: Administrative Services ‐ ‐ ‐ ‐ ‐ ‐ Public Works ‐ ‐ ‐ ‐ ‐ ‐ Planning and Development Services ‐ ‐ ‐ 1,886 1,462 424 Office of Transportation ‐ ‐ ‐ ‐ ‐ ‐ Police ‐ ‐ ‐ ‐ ‐ ‐ Community Services ‐ ‐ ‐ ‐ ‐ ‐ Non‐Departmental ‐ ‐ ‐ ‐ ‐ ‐ Total expenditures ‐ ‐ ‐ 1,886 1,462 424 Excess (deficiency) of revenues over (under) expenditures 2,802 2,792 (10) (502) (290) 212 OTHER FINANCING SOURCES (USES): Transfers in ‐ ‐ ‐ ‐ ‐ ‐ Transfers out (2,837) (2,837) ‐ ‐ ‐ ‐ Total other financing sources (uses) (2,837) (2,837) ‐ ‐ ‐ ‐ Change in fund balances, budgetary basis (35)$ (45) (10)$ (502)$ (290) 212$ Adjustment to Budgetary Basis: Unrealized gain (loss) on investments (2) ‐ Changes in notes receivable ‐ ‐ Current year encumbrances/reappropriations ‐ 362 (47) 72 FUND BALANCES, BEGINNING OF YEAR, GAAP BASIS 75 5,221 FUND BALANCES, END OF YEAR, GAAP BASIS 28$ 5,293$ CHANGE IN FUND BALANCE, GAAP BASIS (Amounts in thousands) CITY OF PALO ALTO Non‐major Special Revenue Funds Combining Schedule of Revenues, Expenditures and Changes in Fund Balances ‐ Budget and Actual For the Year Ended June 30, 2020 122 Housing In‐Lieu Special Districts Transportation Mitigation Actual, Actual, Actual, Budget Budgetary Basis Variance Budget Budgetary Basis Variance Budget Budgetary Basis Variance ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ ‐ ‐ ‐ 52 23 (29) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 2,464 83 (2,381) ‐ ‐ ‐ ‐ ‐ ‐ 880 22 (858) ‐ ‐ ‐ ‐ ‐ ‐ 1,198 49 (1,149) 276 429 153 463 366 (97) 109 92 (17) 260 217 (43) 9 ‐ (9) ‐ ‐ ‐ ‐ ‐ ‐ 2,150 5,804 3,654 ‐ ‐ ‐ ‐ ‐ ‐ 25 ‐ (25) ‐ ‐ ‐ ‐ ‐ ‐ 170 85 (85) ‐ 29 29 ‐ ‐ ‐ 2,817 6,255 3,438 4,703 298 (4,405) 536 646 110 ‐ ‐ ‐ 330 261 69 ‐ ‐ ‐ ‐ ‐ ‐ 1,697 1,634 63 ‐ ‐ ‐ 20,462 20,720 (258) 1 7 (6) ‐ ‐ ‐ ‐ ‐ ‐ 3,539 2,005 1,534 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 43 42 1 ‐ ‐ ‐ 695 75 620 206 410 (204) ‐ ‐ ‐ 21,157 20,795 362 5,816 4,359 1,457 ‐ ‐ ‐ (18,340) (14,540) 3,800 (1,113) (4,061) (2,948) 536 646 110 ‐ ‐ ‐ 400 400 ‐ ‐ ‐ ‐ ‐ ‐ ‐ (838) (838) ‐ (400) (400) ‐ ‐ ‐ ‐ (438) (438) ‐ (400) (400) ‐ (18,340)$ (14,540) 3,800$ (1,551)$ (4,499) (2,948)$ 136$ 246 110$ (357) (91) (151) 18,752 ‐ ‐ 1,789 1,036 ‐ 5,644 (3,554) 95 53,510 6,819 12,604 59,154$ 3,265$ 12,699$ 123 Local Law Enforcement Asset Seizure Actual, Actual, Budget Budgetary Basis Variance Budget Budgetary Basis Variance REVENUES: Special assessments ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ Other taxes and fines ‐ ‐ ‐ ‐ ‐ ‐ Intergovernmental 105 165 60 ‐ ‐ ‐ Licenses, permits and fees University Avenue Parking ‐ ‐ ‐ ‐ ‐ ‐ California Avenue Parking ‐ ‐ ‐ ‐ ‐ ‐ Other licenses, permits and fees ‐ ‐ ‐ ‐ ‐ ‐ Investment earnings 7 11 4 ‐ ‐ ‐ Rental income ‐ ‐ ‐ ‐ ‐ ‐ Housing In‐Lieu ‐ residential ‐ ‐ ‐ ‐ ‐ ‐ Other: Loan payoffs ‐ ‐ ‐ ‐ ‐ ‐ Other revenue ‐ ‐ ‐ ‐ ‐ ‐ Total revenues 112 176 64 ‐ ‐ ‐ EXPENDITURES: Current: Administrative Services ‐ ‐ ‐ ‐ ‐ ‐ Public Works ‐ ‐ ‐ ‐ ‐ ‐ Planning and Development Services ‐ ‐ ‐ ‐ ‐ ‐ Office of Transportation ‐ ‐ ‐ ‐ ‐ ‐ Police 105 36 69 ‐ ‐ ‐ Community Services ‐ ‐ ‐ ‐ ‐ ‐ Non‐Departmental ‐ ‐ ‐ ‐ ‐ ‐ Total expenditures 105 36 69 ‐ ‐ ‐ Excess (deficiency) of revenues over (under) expenditures 7 140 133 ‐ ‐ ‐ OTHER FINANCING SOURCES (USES): Transfers in ‐ ‐ ‐ ‐ ‐ ‐ Transfers out ‐ ‐ ‐ ‐ ‐ ‐ Total other financing sources (uses) ‐ ‐ ‐ ‐ ‐ ‐ Change in fund balances, budgetary basis 7$ 140 133$ ‐$ ‐ ‐$ Adjustment to Budgetary Basis: Unrealized gain (loss) on investments (4) ‐ Changes in notes receivable ‐ ‐ Current year encumbrances/reappropriations ‐ ‐ 136 ‐ FUND BALANCES, BEGINNING OF YEAR, GAAP BASIS 627 3 FUND BALANCES, END OF YEAR, GAAP BASIS 763$ 3$ CHANGE IN FUND BALANCE, GAAP BASIS (Amounts in Thousands) CITY OF PALO ALTO Non‐major Special Revenue Funds Combining Schedule of Revenues, Expenditures and Changes in Fund Balances ‐ Budget and Actual For the Year Ended June 30, 2021 124 Developer Impact Fee Downtown Business Improvement District Actual, Actual, Actual, Budget Budgetary Basis Variance Budget Budgetary Basis Variance Budget Budgetary Basis Variance ‐$ ‐$ ‐$ 140$ 5$ (135)$ ‐$ ‐$ ‐$ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 875 1,578 703 ‐ ‐ ‐ ‐ ‐ ‐ 352 227 (125) ‐ ‐ ‐ 370 324 (46) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 40 40 ‐ ‐ ‐ ‐ ‐ ‐ 1,227 1,845 618 140 5 (135) 370 324 (46) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 203 204 (1) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 203 20 183 ‐ ‐ ‐ 203 204 (1) 203 20 183 ‐ ‐ ‐ 1,024 1,641 617 (63) (15) 48 370 324 (46) 170 170 ‐ ‐ ‐ ‐ ‐ ‐ ‐ (3,539) (3,539) ‐ ‐ ‐ ‐ (1,950) (1,950) ‐ (3,369) (3,369) ‐ ‐ ‐ ‐ (1,950) (1,950) ‐ (2,345)$ (1,728) 617$ (63)$ (15) 48$ (1,580)$ (1,626) (46)$ (213) ‐ (249) ‐ ‐ ‐ ‐ ‐ ‐ (1,941) (15) (1,875) 15,456 66 20,446 13,515$ 51$ 18,571$ Public Benefit 125 126 This page is left intentionally blank. 127 NON‐MAJOR GOVERNMENTAL FUNDS DEBT SERVICE FUNDS 2018 Golf Course Capital Improvement This fund accounts for revenues received from the General Fund to provide payment of principal and interest associated with the 2018 Golf Course Capital Improvement Certificates of Participation as they become due. 2019 California Avenue Parking Garage COPs This fund accounts for revenues received from the General Fund to provide payment of principal and interest associated with the 2019 California Avenue Parking Garage Certificates of Participation as they become due. Library Projects This fund accounts for revenues received from property taxes to provide payment of principal and interest associated with the 2010 and 2013A General Obligation Bonds as they become due. Public Safety Building This fund accounts for revenues received from the General Fund to provide payment of principal and interest associated with the 2021 Public Safety Building Certificates of Participation as they become due. CITY OF PALO ALTO Non‐major Debt Service Funds Combining Balance Sheet June 30, 2021 (Amounts in thousands) 2018 Golf Course 2019 California Total Capital Avenue Parking Library Public Safety Debt Service Improvement Garage COPs Projects Building Funds ASSETS: Cash and investments available for operations 1$ 5$ 3,722$ ‐$ 3,728$ Receivables: Accounts and intergovernmental ‐ ‐ 2 ‐ 2 Interest ‐ ‐ 19 ‐ 19 Restricted cash and investments with fiscal agents 18 16 ‐ 4,621 4,655 Total assets 19$ 21$ 3,743$ 4,621$ 8,404$ FUND BALANCES: Restricted: Debt service 19$ 21$ 3,743$ 4,621$ 8,404$ 128 CITY OF PALO ALTO Non‐major Debt Service Funds Combining Statement of Revenues, Expenditures and Changes in Fund Balances For the Year Ended June 30, 2021 (Amounts in thousands) 2018 Golf Course 2019 California Total Capital Avenue Parking Library Public Safety Debt Service Improvement Garage COPs Projects Building Funds REVENUES: Property tax ‐$ ‐$ 4,329$ ‐$ 4,329$ Investment earnings ‐ ‐ (10) ‐ (10) Total revenues ‐ ‐ 4,319 ‐ 4,319 EXPENDITURES: Debt service: Principal retirement 185 630 1,780 ‐ 2,595 Interest and fiscal charges 345 1,748 2,646 1,408 6,147 Total expenditures 530 2,378 4,426 1,408 8,742 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES (530) (2,378) (107) (1,408) (4,423) OTHER FINANCING SOURCES (USES): Issuance of debt ‐ ‐ ‐ 6,029 6,029 Transfers in 530 2,380 ‐ ‐ 2,910 Total other financing sources (uses) 530 2,380 ‐ 6,029 8,939 Change in fund balances ‐ 2 (107) 4,621 4,516 FUND BALANCES, BEGINNING OF YEAR 19 19 3,850 ‐ 3,888 FUND BALANCES, END OF YEAR 19$ 21$ 3,743$ 4,621$ 8,404$ 129 Actual, Actual, Actual, Actual, Budgetary Budgetary Budgetary Budgetary Budget Basis Variance Budget Basis Variance Budget Basis Variance Budget Basis Variance REVENUES: Property tax ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ 4,559$ 4,329$ (230)$ ‐$ ‐$ ‐$ Investment earnings ‐ ‐ ‐ ‐ ‐ ‐ 29 32 3 ‐ ‐ ‐ Total revenues ‐ ‐ ‐ ‐ ‐ ‐ 4,588 4,361 (227) ‐ ‐ ‐ EXPENDITURES: Debt service: Principal retirement 185 185 ‐ 630 630 ‐ 1,780 1,780 ‐ ‐ ‐ ‐ Interest and fiscal charges 345 345 ‐ 1,750 1,748 2 2,646 2,646 ‐ 1,408 1,408 ‐ Total expenditures 530 530 ‐ 2,380 2,378 2 4,426 4,426 ‐ 1,408 1,408 ‐ Excess (deficiency) of revenues over (under) expenditures (530) (530) ‐ (2,380) (2,378) 2 162 (65) (227) (1,408) (1,408) ‐ OTHER FINANCING SOURCES (USES): Issuance of debt ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 6,029 6,029 ‐ Transfers in 530 530 ‐ 2,380 2,380 ‐ ‐ ‐ ‐ ‐ ‐ ‐ Total other financing sources (uses) 530 530 ‐ 2,380 2,380 ‐ ‐ ‐ ‐ 6,029 6,029 ‐ Change in fund balances, budgetary bas ‐$ ‐ ‐$ ‐$ 2 2$ 162$ (65) (227)$ 4,621$ 4,621 ‐$ Adjustment to Budgetary Basis: Unrealized gain (loss) on investments ‐ ‐ (42) ‐ ‐ 2 (107) 4,621 FUND BALANCES, BEGINNING OF YEAR 19 19 3,850 ‐ FUND BALANCES, END OF YEAR 19$ 21$ 3,743$ 4,621$ CHANGE IN FUND BALANCE, GAAP BASIS (Amounts in thousands) CITY OF PALO ALTO Non‐major Debt Service Funds Combining Schedule of Revenues, Expenditures and Changes in Fund Balances ‐ Budget and Actual For the Year Ended June 30, 2021 2018 Golf Course Capital Improvement 2019 California Avenue Parking Garage COPs Library Projects Public Safety Building 130 131 NON‐MAJOR GOVERNMENTAL FUNDS PERMANENT FUND Eyerly Family This fund accounts for the revenues received from assets donated by Mr. and Mrs. Fred Eyerly for the City and or its citizenry. Eyerly Family Permanent Fund Variance Actual, Positive Budget Budgetary Basis (Negative) REVENUES: Investment earnings 42$ 44$ 2$ Change in fund balance 42$ 44 2$ Adjustment to Budgetary Basis: Unrealized gain (loss) on investments (28) 16 FUND BALANCE, BEGINNING OF YEAR 2,540 FUND BALANCE, END OF YEAR 2,556$ CHANGE IN FUND BALANCE, GAAP BASIS (Amounts in thousands) CITY OF PALO ALTO Non‐major Permanent Fund Schedule of Revenues, Expenditures and Changes in Fund Balance ‐ Budget and Actual For the Year Ended June 30, 2021 132 133 INTERNAL SERVICE FUNDS INTRODUCTION Internal Service Funds are used to finance and account for special activities and services performed by a designated department for other departments in the City on a cost reimbursement basis. Vehicle Replacement and Maintenance This fund accounts for the maintenance and replacement of vehicles and equipment used by all City departments. The source of revenue is from reimbursement of fleet replacement and maintenance costs allocated to each department by usage of vehicle. Technology This fund accounts for replacement and upgrade of technology, and covers four primary areas used by all City departments: desktop, infrastructure, applications, and technology research and development. The source of revenue is from reimbursement of costs for support provided to other departments. Printing and Mailing Services This fund accounts for central duplicating, printing and mailing services provided to all City departments. Source of revenue for this fund is from reimbursement of costs for services and supplies purchased by other departments. General Benefits This fund accounts for the administration of compensated absences and health benefits. Workers’ Compensation Insurance Program This fund accounts for the administration of the City’s self‐insured workers’ compensation programs. General Liabilities Insurance Program This fund accounts for the administration of the City’s self‐insured general liability programs. Retiree Health Benefits This fund accounts for the retiree health benefits contributions. Vehicle Printing Workers' General Total Replacement and Compensation Liabilities Retiree Internal and Mailing General Insurance Insurance Health Services Maintenance Technology Services Benefits Program Program Benefits Funds ASSETS: Current Assets: Cash and investments available for operations 11,524$ 22,009$ 231$ 22,833$ 27,555$ 9,970$ 2,684$ 96,806$ Accounts receivable, net 70 ‐ ‐ 16 12 ‐ ‐ 98 Interest receivable 62 119 1 108 134 50 10 484 Inventory of materials and supplies 116 ‐ ‐ ‐ ‐ ‐ ‐ 116 Restricted cash and investments with fiscal agents and trustees ‐ ‐ ‐ 37,089 ‐ ‐ ‐ 37,089 Total current assets 11,772 22,128 232 60,046 27,701 10,020 2,694 134,593 Noncurrent Assets: Capital assets: Nondepreciable 1,839 3,748 ‐ ‐ ‐ ‐ ‐ 5,587 Depreciable, net 15,419 1,909 26 ‐ ‐ ‐ ‐ 17,354 Total noncurrent assets 17,258 5,657 26 ‐ ‐ ‐ ‐ 22,941 Total assets 29,030 27,785 258 60,046 27,701 10,020 2,694 157,534 DEFERRED OUTFLOWS OF RESOURCES: Pension related 469 2,058 10 ‐ 41 ‐ ‐ 2,578 OPEB related 271 552 10 ‐ 11 ‐ ‐ 844 Total deferred outflows of resources 740 2,610 20 ‐ 52 ‐ ‐ 3,422 LIABILITIES: Current Liabilities: Accounts payable and accruals 62 195 105 1,253 94 ‐ ‐ 1,709 Accrued salaries and benefits 37 140 2 ‐ 71 ‐ ‐ 250 Accrued compensated absences ‐ ‐ ‐ 6,327 ‐ ‐ ‐ 6,327 Accrued claims payable ‐ current ‐ ‐ ‐ 160 4,240 2,411 ‐ 6,811 Total current liabilities 99 335 107 7,740 4,405 2,411 ‐ 15,097 Noncurrent liabilities: Accrued compensated absences ‐ ‐ ‐ 9,320 ‐ ‐ ‐ 9,320 Accrued claims payable ‐ ‐ ‐ ‐ 21,792 3,928 ‐ 25,720 Net pension liabilities 3,704 13,567 273 ‐ 4 ‐ ‐ 17,548 Net OPEB liabilities 1,532 3,127 141 ‐ ‐ ‐ ‐ 4,800 Total noncurrent liabilities 5,236 16,694 414 9,320 21,796 3,928 ‐ 57,388 Total liabilities 5,335 17,029 521 17,060 26,201 6,339 ‐ 72,485 DEFERRED INFLOWS OF RESOURCES: OPEB related 288 587 11 ‐ 11 ‐ ‐ 897 NET POSITION: Net Investment in capital assets 17,258 5,657 26 ‐ ‐ ‐ ‐ 22,941 Restricted for supplemental pension ‐ ‐ ‐ 37,089 ‐ ‐ ‐ 37,089 Unrestricted 6,889 7,122 (280) 5,897 1,541 3,681 2,694 27,544 Total net position 24,147$ 12,779$ (254)$ 42,986$ 1,541$ 3,681$ 2,694$ 87,574$ CITY OF PALO ALTO Internal Service Funds Combining Statement of Fund Net Position June 30, 2021 (Amounts in thousands) 134 Vehicle Printing Workers' General Total Replacement and Compensation Liabilities Retiree Internal and Mailing General Insurance Insurance Health Services Maintenance Technology Services Benefits Program Program Benefits Funds OPERATING REVENUES: Charges for services 6,522$ 12,322$ 1,314$ 72,224$ 6,578$ 2,892$ 13,577$ 115,429$ Other ‐ 27 ‐ ‐ 162 11 ‐ 200 Total operating revenues 6,522 12,349 1,314 72,224 6,740 2,903 13,577 115,629 OPERATING EXPENSES: Administrative and general 1,478 7,801 948 137 613 2,208 27 13,212 Operations and maintenance 3,269 7,463 253 1,577 203 ‐ ‐ 12,765 Depreciation 2,751 395 7 ‐ ‐ ‐ ‐ 3,153 Claim payments and change in estimated self‐insured liability ‐ ‐ ‐ 1,524 6,075 1,146 ‐ 8,745 Refund of charges for services 105 10 ‐ ‐ ‐ ‐ ‐ 115 Employment benefits ‐ ‐ ‐ 61,205 ‐ ‐ 14,570 75,775 Total operating expenses 7,603 15,669 1,208 64,443 6,891 3,354 14,597 113,765 Operating income (loss) (1,081) (3,320) 106 7,781 (151) (451) (1,020) 1,864 NONOPERATING REVENUES (EXPENSES): Investment earnings 83 83 (1) 3,380 224 65 57 3,891 Gain on disposal of capital assets 385 ‐ ‐ ‐ ‐ ‐ ‐ 385 Other nonoperating revenues 5 ‐ ‐ ‐ ‐ ‐ ‐ 5 Total nonoperating revenues (expenses) 473 83 (1) 3,380 224 65 57 4,281 Income (loss) before transfers (608) (3,237) 105 11,161 73 (386) (963) 6,145 Transfers in 105 1,340 ‐ ‐ ‐ 5 2,347 3,797 Transfers out (326) (31) ‐ (2,347) ‐ ‐ ‐ (2,704) Change in net position (829) (1,928) 105 8,814 73 (381) 1,384 7,238 NET POSITION, BEGINNING OF YEAR 24,976 14,707 (359) 34,172 1,468 4,062 1,310 80,336 NET POSITION, END OF YEAR 24,147$ 12,779$ (254)$ 42,986$ 1,541$ 3,681$ 2,694$ 87,574$ CITY OF PALO ALTO Internal Service Funds Combining Statement of Revenues, Expenses and Changes in Fund Net Position For the Year Ended June 30, 2021 (Amounts in thousands) 135 Vehicle Printing Workers' General Total Replacement and Compensation Liabilities Retiree Internal and Mailing General Insurance Insurance Health Services Maintenance Technology Services Benefits Program Program Benefits Funds Cash flows from operating activities: Cash received from customers 6,455$ 12,354$ 1,314$ 72,225$ 6,572$ 2,903$ 13,577$ 115,400$ Cash payments to suppliers for goods and services (2,895) (7,615) (1,011) 59 (430) (2,218) ‐ (14,110) Cash payments to employees (2,191) (7,694) (146) (61,422) (368) ‐ (14,597) (86,418) Cash payments for judgments and claims ‐ ‐ ‐ (1,524) (3,814) (427) ‐ (5,765) Other cash receipts 5 ‐ ‐ ‐ ‐ ‐ ‐ 5 Net cash flows provided by (used in) operating activities 1,374 (2,955) 157 9,338 1,960 258 (1,020) 9,112 Cash flows from noncapital financing activities: Transfers in 105 1,340 ‐ ‐ ‐ 5 2,347 3,797 Transfers out (326) (31) ‐ (2,347) ‐ ‐ ‐ (2,704) Net cash flows provided by (used in) noncapital financing activities (221) 1,309 ‐ (2,347) ‐ 5 2,347 1,093 Cash flows from capital and related financing activities: Acquisition of capital assets (3,317) (1,511) ‐ ‐ ‐ ‐ ‐ (4,828) Proceeds from sale of capital assets 484 ‐ ‐ ‐ ‐ ‐ ‐ 484 Net cash flows (used in) capital and related financing activities (2,833) (1,511) ‐ ‐ ‐ ‐ ‐ (4,344) Cash flows from investing activities: Investment interest received (expenses paid) 88 110 (1) 3,377 223 66 51 3,914 Net change in cash and cash equivalents (1,592) (3,047) 156 10,368 2,183 329 1,378 9,775 Cash and cash equivalents, beginning of year 13,116 25,056 75 49,554 25,372 9,641 1,306 124,120 Cash and cash equivalents, end of year $ 11,524 $ 22,009 $ 231 $ 59,922 $ 27,555 $ 9,970 $ 2,684 $ 133,895 Financial statement presentation: Cash and investments available for operations 11,524$ 22,009$ 231$ 22,833$ 27,555$ 9,970$ 2,684$ 96,806$ Restricted cash and investments with fiscal agents and trustees ‐ ‐ ‐ 37,089 ‐ ‐ ‐ 37,089 Cash and cash equivalents, end of year 11,524$ 22,009$ 231$ 59,922$ 27,555$ 9,970$ 2,684$ $ 133,895 Reconciliation of operating income (loss) to net cash flows provided by (used in) operating activities: Operating income (loss) (1,081)$ (3,320)$ 106$ 7,781$ (151)$ (451)$ (1,020)$ 1,864$ Adjustments to reconcile operating income (loss) to net cash provided by (used in) operating activities: Depreciation 2,751 395 7 ‐ ‐ ‐ ‐ 3,153 Other 5 ‐ ‐ ‐ ‐ ‐ ‐ 5 Change in assets and liabilities: Accounts receivable (67) 5 ‐ 1 (6) ‐ ‐ (67) Inventory of materials and supplies (14) ‐ ‐ ‐ ‐ ‐ ‐ (14) Deferred outflows of resources ‐ pension plans 32 (330) 23 ‐ ‐ ‐ ‐ (275) Deferred outflows of resources ‐ OPEB 12 24 1 ‐ ‐ ‐ ‐ 37 Accounts payable and accruals (74) (16) 63 153 25 (10) ‐ 141 Accrued salaries and benefits 3 9 (2) ‐ 37 ‐ ‐ 47 Accrued compensated absences ‐ ‐ ‐ 1,403 ‐ ‐ ‐ 1,403 Accrued claims payable ‐ ‐ ‐ ‐ 2,099 719 ‐ 2,818 Net pension liability 8 747 (33) ‐ (41) ‐ ‐ 681 Net OPEB liability (29) (58) (2) ‐ ‐ ‐ ‐ (89) Deferred inflows of resources ‐ pension plans (131) (326) (3) ‐ (2) ‐ ‐ (462) Deferred inflows of resouces ‐ OPEB (41) (85) (3) ‐ (1) ‐ ‐ (130) Net cash flows provided by (used in) operating activities 1,374$ (2,955)$ 157$ 9,338$ 1,960$ 258$ (1,020)$ 9,112$ CITY OF PALO ALTO Internal Service Funds Combining Statement of Cash Flows For the Year Ended June 30, 2021 (Amounts in thousands) 136 137 FIDUCIARY FUNDS INTRODUCTION Fiduciary Funds are used to account for assets held by the City acting in a fiduciary capacity for other entities and individuals. The funds are operated to carry out the specific actions required by the trust agreements, ordinances and other governing regulations. Fiduciary Funds are presented separately from the Citywide and Fund financial statements. Custodial Funds are fiduciary funds used to report fiduciary activities that are not required to be reported in pension (and other employee benefit) trust funds, investment trust funds, or private purpose trust funds. The City maintains two agency custodial funds as follows: Cable Joint Powers Authority The fund was established to account for the activities of the cable television system on behalf of the members. University Avenue Area Off‐Street Parking Assessment District The fund accounts for the receipts and disbursements associated with the Series 2012 Limited Obligation Refunding Improvement Bonds. University Avenue Cable Area Off‐Street Joint Powers Parking Assessment Authority District Total ASSETS: Cash and investments available for operations (Note 3) 1,207$ 2,069$ 3,276$ Accounts receivable 459 32 491 Interest receivable 5 11 16 Restricted cash and investments with fiscal agents (Note 3) ‐ 2,705 2,705 Total assets 1,671 4,817 6,488 LIABILITIES: Accounts payable and accruals 411 ‐ 411 NET POSITION: Restricted for: Governmental entities 1,260 ‐ 1,260 Bondholders of special assessment bonds ‐ 4,817 4,817 Total net position 1,260$ 4,817$ 6,077$ CITY OF PALO ALTO Custodial Funds Combining Statement of Fiduciary Net Position June 30, 2021 (Amounts in thousands) 138 University Avenue Cable Area Off‐Street Joint Powers Parking Assessment Authority District Total ADDITIONS: Franchise and other fees collected 1,821$ ‐$ 1,821$ Special assessments collected ‐ 2,407 2,407 Investment earnings 14 (5) 9 Other ‐ 5 5 Total additions 1,835 2,407 4,242 DEDUCTIONS: Administrative and general 34 5 39 Distribution to governmental entities 1,538 ‐ 1,538 Debt services payments ‐ 2,409 2,409 Total deductions 1,572 2,414 3,986 Changes in net position 263 (7) 256 NET POSITION, BEGINNING OF YEAR 997 4,824 5,821 NET POSITION, END OF YEAR 1,260$ 4,817$ 6,077$ CITY OF PALO ALTO Custodial Funds Combining Statement of Changes in Fiduciary Net Position For the Year Ended June 30, 2021 (Amounts in thousands) 139 140 This page is intentionally left blank. 141 STATISTICAL SECTION The statistical section contains comprehensive statistical data, which relates to physical, economic, social and political characteristics of the City. It is intended to provide users with a broader and more complete understanding of the City and its financial affairs than is possible from the financial statements and supporting schedules included in the financial section. In this section, readers will find comparative information related to the City’s revenue sources, expenditures, property tax valuations, levies and collections, general obligation bonded debt, utility revenue debt service, and demographics. Where available, the comparative information is presented for the last ten fiscal years. In addition, this section presents information related to the City’s legal debt margin computation, principal taxpayers, notary and security bond coverages, and other miscellaneous statistics pertaining to services provided by the City. In contrast to the financial section, the statistical section information is not usually subject to independent audit. Financial Trends These schedules contain trend information to help the reader understand how the City’s financial performance and well‐being have changed over time:  Net Position by Component  Changes in Net Position  Fund Balances of Governmental Funds  Changes in Fund Balances of Governmental Funds Revenue Capacity These schedules contain information to help the reader assess the City’s most significant local revenue sources, property tax and electric charges:  Electric Operating Revenue by Source  Power Supply Resources  Supplemental Disclosure for Water Utilities  Supplemental Disclosure for Gas Utilities  Assessed Value of Taxable Property  Property Tax Rates, All Overlapping Governments  Property Tax Levies and Collections  Principal Property Taxpayers  Assessed Valuation and Parcels by Land Use  Per Parcel Assessed Valuation of Single Family Residential Debt Capacity These schedules present information to help the reader assess the affordability of the City’s current levels of outstanding debt and the City’s ability to issue additional debt in the future:  Ratio of Outstanding Debt by Type  Computation of Direct and Overlapping Debt  Computation of Legal Bonded Debt Margin  Revenue Bond Coverage 142 STATISTICAL SECTION Demographic and Economic Information These schedules offer demographic and economic indicators to help the reader understand the environment within which the City’s financial activities take place:  Taxable Transactions by Type of Business  Demographic and Economic Statistics  Principal Employers Operating Information These schedules contain service and infrastructure data to help the reader understand how the information in the City’s financial report relates to the services the City provides and the activities it performs:  Operating Indicators by Function/Program  Capital Asset Statistics by Function/Program  Full‐Time Equivalent City Government Employees by Function Sources Unless otherwise noted, the information in these schedules is derived from the Annual Comprehensive Financial Reports for the relevant year. 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Governmental Activities Investment in capital assets 370,111$ 378,047$ 386,696$ 405,921$ 425,179$ 453,878$ 473,233$ 493,706$ 497,378$ 480,620$ Restricted 52,934 71,717 68,331 55,963 47,907 38,138 46,724 59,669 73,274 80,265 Unrestricted 142,102 165,810 187,386 1,972 37,905 35,273 (92,587) (103,392) (130,078) (137,748) Total Governmental Activities Net Position 565,147$ 615,574$ 642,413$ 463,856$ 510,991$ 527,289$ 427,370$ 449,983$ 440,574$ 423,137$ Business‐type Activities Investment in capital assets 437,151$ 446,597$ 473,795$ 490,874$ 512,918$ 532,063$ 573,688$ 602,136$ 621,354$ 642,018$ Restricted ‐ 4,060 4,166 4,142 4,115 4,073 4,014 4,016 4,060 3,340 Unrestricted 262,602 269,926 266,794 172,802 162,806 163,158 110,429 135,391 159,592 161,861 Total Business‐type Activities Net Position 699,753$ 720,583$ 744,755$ 667,818$ 679,839$ 699,294$ 688,131$ 741,543$ 785,006$ 807,219$ Primary Government Investment in capital assets 807,262$ 824,644$ 860,491$ 896,795$ 938,097$ 985,941$ 1,046,921$ 1,095,842$ 1,118,732$ 1,122,638$ Restricted 52,934 75,777 72,497 60,105 52,022 42,211 50,738 63,685 77,334 83,605 Unrestricted 404,704 435,736 454,180 174,774 200,711 198,431 17,842 31,999 29,514 24,113 Total Primary Government Net Position 1,264,900$ 1,336,157$ 1,387,168$ 1,131,674$ 1,190,830$ 1,226,583$ 1,115,501$ 1,191,526$ 1,225,580$ 1,230,356$ Notes: Source: Annual Financial Statements, Statement of Net Position The City implemented GASB Statement No. 68, Accounting and Financial Reporting for Pensions, effective July 1, 2014, and GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pension, effective July 1, 2017. The City's unrestricted net position decreased in FY 2015 and again in FY 2018 as a result. Fiscal Year Ended June 30 CITY OF PALO ALTO Net Position by Component Last Ten Fiscal Years (Amounts in thousands) (Accrual basis of accounting) $0 $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 $ T h o u s a n d s Primary Government Investment in capital assets Restricted Unrestricted 143 PROGRAM REVENUES 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Governmental Activities Charges for services Administrative Services 1,647$ 15,629$ 4,055$ 5,460$ 9,444$ 5,242$ 6,536$ 6,413$ 5,758$ 1,150$ Public Works 1,008 1,314 1,093 1,209 599 878 781 1,478 990 937 Planning & Community Environment 31,491 28,768 12,896 8,090 9,071 6,067 5,119 11,997 ‐ ‐ Development Services1&2 ‐ ‐ ‐ 12,019 12,570 11,768 16,000 13,904 ‐ ‐ Planning & Development Services2 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 16,173 21,228 Office of Transportation3 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 1,161 80 Public Safety 15,658 16,139 14,902 15,726 13,945 12,670 13,507 14,179 12,101 11,135 Community Services 11,365 13,808 20,882 20,912 21,551 20,472 21,285 22,805 20,808 20,893 Library 1,600 187 166 137 198 139 145 134 94 47 Operating grants and contributions 3,441 5,038 5,360 5,300 2,164 1,990 14,054 2,100 2,619 3,033 Capital grants and contributions 1,064 515 917 619 344 1,929 1,534 8,247 9,021 11,326 Total Governmental Activities Program Revenues 67,274 81,398 60,271 69,472 69,886 61,155 78,961 81,257 68,725 69,829 Business‐type Activities Charges for services Water 31,467 37,746 40,291 35,847 37,588 42,678 45,087 45,571 48,740 48,812 Electric 118,886 121,805 121,916 120,842 120,743 137,543 154,142 163,514 169,389 162,240 Fiber Optics 3,662 4,382 4,485 4,627 4,505 4,553 4,529 4,657 4,576 3,936 Gas 41,774 34,633 35,737 30,751 30,212 36,431 37,044 42,113 37,402 39,520 Wastewater Collection 14,942 16,077 15,599 16,182 16,496 17,748 17,990 20,219 20,933 20,484 Wastewater Treatment 22,200 21,528 18,460 24,120 23,825 23,649 27,382 27,573 29,310 30,522 Refuse 30,645 30,583 30,297 31,576 32,169 33,918 34,647 33,996 32,695 30,636 Storm Drainage 5,892 6,053 6,183 6,281 6,520 6,693 6,964 7,249 7,543 7,785 Airport ‐ ‐ ‐ 683 826 1,286 2,382 2,483 2,362 2,585 Operating grants and contributions 605 572 549 534 744 512 501 488 473 462 Capital grants and contributions 1,526 2,224 2,005 2,080 1,061 4,265 14,194 6,677 6,449 6,391 Total Business‐type Activities Program Revenues 271,599 275,603 275,522 273,523 274,689 309,276 344,862 354,540 359,872 353,373 Total Primary Government Program Revenues 338,873$ 357,001$ 335,793$ 342,995$ 344,575$ 370,431$ 423,823$ 435,797$ 428,597$ 423,202$ EXPENSES Governmental Activities City Council 345$ 94$ 387$ 271$ 352$ 329$ 345$ 270$ 172$ 178$ City Manager 1,960 1,237 2,180 2,155 2,662 1,975 2,757 3,336 3,616 2,466 City Attorney 1,656 1,642 1,797 1,759 2,472 2,140 2,511 3,086 2,845 2,292 City Clerk 908 330 641 680 582 762 931 822 748 702 City Auditor 235 464 489 362 414 847 994 1,081 645 641 Administrative Services 10,100 7,614 11,388 9,980 10,637 11,887 13,949 19,169 15,919 22,985 Human Resources 1,071 1,420 1,346 1,464 2,224 2,272 2,674 3,021 3,060 2,518 Public Works 14,568 20,816 24,577 21,075 24,613 25,539 30,349 36,617 45,609 52,727 Planning & Community Environment2 12,074 13,549 14,926 8,423 10,208 10,918 11,357 12,169 ‐ ‐ Development Services1&2 ‐ ‐ ‐ 10,449 11,158 11,102 12,664 12,622 ‐ ‐ Planning & Development Services2 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 21,725 18,141 Office of Transportation3 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 4,693 3,636 Public Safety (Police and Fire) 62,817 59,452 62,883 58,660 56,653 73,320 83,923 89,189 92,187 80,758 Community Services 21,915 22,705 23,822 24,688 28,547 27,866 33,709 36,815 34,147 30,289 Library 7,323 7,319 7,758 7,721 10,825 11,437 12,208 12,557 12,971 11,145 Interest on long term debt 2,575 2,562 3,367 3,658 3,552 2,846 2,761 3,653 4,576 6,317 Total Governmental Activities Expenses 137,547 139,204 155,561 151,345 164,899 183,240 211,132 234,407 242,913 234,795 Business‐type Activities Water 29,093 30,707 31,593 33,205 35,120 37,535 40,836 40,606 43,034 43,556 Electric 102,030 106,438 113,004 122,499 120,319 128,603 146,033 139,605 142,426 156,105 Fiber Optics 1,489 1,437 1,661 1,891 2,107 2,159 2,653 2,476 2,761 2,529 Gas 28,878 26,749 26,869 23,525 20,879 26,783 27,930 30,915 27,212 28,556 Wastewater Collection 14,825 14,313 13,235 14,595 15,199 16,405 16,801 17,324 18,877 19,577 Wastewater Treatment 20,712 20,635 21,018 21,553 22,546 23,498 27,518 27,070 28,755 28,403 Refuse 31,900 28,542 28,413 27,974 30,370 30,665 28,808 30,391 36,947 29,138 Storm Drainage 3,103 3,703 3,644 3,721 3,735 4,106 5,059 4,951 5,514 4,897 Airport 153 246 466 1,004 970 1,274 1,656 1,790 2,131 1,499 Total Business‐type Activities Expenses 232,183 232,770 239,903 249,967 251,245 271,028 297,294 295,128 307,657 314,260 Total Primary Government Expenses 369,730$ 371,974$ 395,464$ 401,312$ 416,144$ 454,268$ 508,426$ 529,535$ 550,570$ 549,055$ CITY OF PALO ALTO Changes in Net Position Last Ten Fiscal Years (Accrual basis of accounting) (Amounts in thousands) Fiscal Year Ended June 30 144 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 NET (EXPENSE)/REVENUE Governmental Activities (70,273)$ (57,806)$ (95,290)$ (81,873)$ (95,013)$ (122,085)$ (132,171)$ (153,150)$ (174,188)$ (164,966)$ Business‐type Activities 39,416 42,833 35,619 23,556 23,444 38,248 47,568 59,412 52,215 39,113 Total Primary Government Net (Expense)/Revenue (30,857)$ (14,973)$ (59,671)$ (58,317)$ (71,569)$ (83,837)$ (84,603)$ (93,738)$ (121,973)$ (125,853)$ GENERAL REVENUES AND OTHER CHANGES IN NET POSITION Governmental Activities Taxes Property tax 30,104$ 31,929$ 35,299$ 38,750$ 41,189$ 43,953$ 47,170$ 51,718$ 55,604$ 60,901$ Sales tax 22,132 25,606 29,424 29,675 30,018 29,923 31,091 36,508 30,563 29,127 Utility user tax 10,834 10,861 11,008 10,861 12,469 14,240 15,414 16,402 16,140 14,642 Transient occupancy tax 9,664 10,794 12,255 16,699 22,366 23,477 24,937 25,649 18,553 5,179 Other taxes 8,173 10,504 9,660 11,867 7,868 8,989 11,337 9,525 9,775 13,471 Investment earnings 6,238 (1,228) 5,859 5,010 8,639 (711) 420 15,375 13,850 4,939 Miscellaneous 14,943 518 2,575 3,428 894 168 1,973 1,906 60 183 Transfers 17,426 19,249 17,103 16,405 18,705 18,344 19,077 18,680 20,234 19,087 Total Governmental Activities 119,514 108,233 123,183 132,695 142,148 138,383 151,419 175,763 164,779 147,529 Business‐type Activities Investment earnings 7,605 (2,754) 6,379 4,857 7,282 (449) 596 12,680 11,482 2,187 Transfers (17,426) (19,249) (17,103) (16,405) (18,705) (18,344) (19,077) (18,680) (20,234) (19,087) Total Business‐type Activities (9,821) (22,003) (10,724) (11,548) (11,423) (18,793) (18,481) (6,000) (8,752) (16,900) Total Primary Government 109,693$ 86,230$ 112,459$ 121,147$ 130,725$ 119,590$ 132,938$ 169,763$ 156,027$ 130,629$ CHANGE IN NET POSITION Governmental Activities 49,241$ 50,427$ 27,893$ 50,822$ 47,135$ 16,298$ 19,248$ 22,613$ (9,409)$ (17,437)$ Business‐type Activities 29,595 20,830 24,895 12,008 12,021 19,455 29,087 53,412 43,463 22,213 Total Primary Government Change in Net Position 78,836$ 71,257$ 52,788$ 62,830$ 59,156$ 35,753$ 48,335$ 76,025$ 34,054$ 4,776$ Notes:1The Development Services Department was formed in FY15. Source: Annual Financial Statements, Statement of Activities 2In FY20, the Development Services Department was combined with the Planning and Community Environment Department to form the Planning and Development Services Department. 3In FY20, the City established the Office of Transportation. Fiscal Year Ended June 30 145 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 General Fund Nonspendable 6,007$ 5,749$ 6,188$ 6,296$ 7,088$ 7,709$ 8,049$ 7,647$ 8,967$ 9,376$ Committed ‐ ‐ ‐ ‐ ‐ ‐ 373 5,100 4,505 4,651 Assigned 6,400 5,415 5,432 7,976 8,261 7,280 7,098 7,657 12,496 12,520 Unassigned 29,616 30,913 36,690 48,198 51,582 48,118 52,826 54,811 35,871 49,089 Total General Fund 42,023$ 42,077$ 48,310$ 62,470$ 66,931$ 63,107$ 68,346$ 75,215$ 61,839$ 75,636$ Source: Annual Financial Statements, Balance Sheet Fiscal Year Ended June 30 CITY OF PALO ALTO Fund Balances of Governmental Funds (General Fund) Last Ten Fiscal Years (Modified accrual basis of accounting) (Amounts in thousands) $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 $ T h o u s a n d s Nonspendable Committed Assigned Unassigned 146 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 All Other Governmental Funds Nonspendable 11,112$ 18,189$ 14,869$ 1,468$ 1,505$ 1,499$ 1,498$ 2,438$ 2,540$ 2,556$ Restricted 61,324 84,688 68,468 59,650 47,113 35,298 40,317 85,940 55,548 136,795 Committed 14,284 20,400 27,145 48,434 65,745 71,566 72,781 84,616 83,973 85,324 Assigned 33,264 45,514 55,211 52,627 64,411 63,225 68,261 56,842 62,825 65,331 Unassigned ‐ ‐ ‐ ‐ ‐ ‐ (32) (32) ‐ ‐ Total All Other Governmental Funds 119,984$ 168,791$ 165,693$ 162,179$ 178,774$ 171,588$ 182,825$ 229,804$ 204,886$ 290,006$ Source: Annual Financial Statements, Balance Sheet Fiscal Year Ended June 30 CITY OF PALO ALTO Fund Balances of Governmental Funds (All Other Governmental Funds) Last Ten Fiscal Years (Modified accrual basis of accounting) (Amounts in thousands) $0 $50,000 $100,000 $150,000 $200,000 $250,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 $ T h o u s a n d s Nonspendable Restricted Committed Unassigned ($50,000) $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 $ T h o u s a n d s Nonspendable Restricted Committed Assigned Unassigned 147 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Revenues Property tax 30,216$ 32,040$ 35,393$ 38,836$ 41,289$ 44,050$ 47,242$ 51,776$ 55,628$ 60,906$ Sales tax 22,132 25,606 29,424 29,675 30,018 29,923 31,091 36,508 30,563 29,127 Other taxes and fines 29,231 32,141 35,305 41,576 44,909 48,875 53,837 53,525 45,729 33,947 Contributions5 ‐ ‐ ‐ ‐ ‐ ‐ 11,733 ‐ ‐ ‐ Charges for services 46,273 38,976 23,962 25,973 23,910 22,267 26,835 27,346 24,127 25,106 From other agencies 1,116 4,109 5,700 7,727 4,417 5,443 5,392 4,689 12,315 15,252 Permits and licenses 7,136 8,218 8,990 9,179 11,228 10,523 12,786 17,759 13,144 9,422 Interest and rentals 18,583 12,136 18,445 18,658 22,269 15,348 16,288 32,905 26,123 20,145 Other revenue 12,739 17,570 7,471 12,837 13,827 4,985 6,067 7,955 1,091 1,033 Total Revenues 167,426 170,796 164,690 184,461 191,867 181,414 211,271 232,463 208,720 194,938 Expenditures Administration1 9,412 8,291 9,961 10,806 11,501 13,192 14,721 15,799 16,527 13,954 Public Works 11,304 11,489 12,439 12,276 13,112 14,485 15,426 14,764 14,793 14,692 Planning and Community Environment3 11,966 13,474 14,761 8,628 9,722 10,568 10,332 10,911 ‐ ‐ Development Services2, 3 ‐ ‐ ‐ 11,152 10,643 10,908 11,749 11,549 ‐ ‐ Planning and Development Services2 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 20,170 17,115 Office of Transportation4 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 4,175 3,373 Public Safety (Police and Fire) 62,418 59,537 62,028 61,447 63,784 71,164 73,916 76,344 82,173 76,282 Community Services 20,860 21,661 22,644 23,553 25,511 25,408 29,831 31,619 29,868 26,490 Library 7,072 6,902 7,340 7,980 7,960 8,953 9,120 9,288 9,988 8,528 Non‐departmental 6,819 4,567 8,135 6,180 8,068 6,566 7,579 12,231 9,498 4,854 Capital Outlay 29,154 29,542 37,035 41,754 24,457 39,643 40,971 46,914 66,362 48,114 Debt service ‐ principal payments 1,743 1,489 1,524 1,948 7,130 2,066 2,961 2,101 2,280 2,595 Debt service ‐ interest and fiscal fees 2,757 2,659 3,196 3,404 4,266 3,032 2,956 3,398 5,025 6,147 Payment to bond refunding escrow 586 540 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Total Expenditures 164,091 160,151 179,063 189,128 186,154 205,985 219,562 234,918 260,859 222,144 Excess (Deficiency) of Revenues Over (Under) Expenditures 3,335 10,645 (14,373) (4,667) 5,713 (24,571) (8,291) (2,455) (52,139) (27,206) Other Financing Sources (Uses) Issuance of Debt ‐ ‐ ‐ ‐ ‐ ‐ 8,970 42,297 ‐ 101,505 Original debt premium ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 6,524 Proceeds from sale of capital assets ‐ ‐ ‐ ‐ ‐ ‐ ‐ 2,442 ‐ 100 Transfers in 47,200 50,343 41,683 45,137 61,835 58,331 56,882 54,711 58,397 43,558 Transfers out (29,782) (33,833) (24,175) (29,824) (46,492) (44,770) (41,085) (43,147) (44,552) (25,564) Proceeds from long term debt 3,222 21,706 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Payments to refund bond escrow (3,104) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Total Other Financing Sources (Uses)17,536 38,216 17,508 15,313 15,343 13,561 24,767 56,303 13,845 126,123 Net Change in Fund Balances 20,871$ 48,861$ 3,135$ 10,646$ 21,056$ (11,010)$ 16,476$ 53,848$ (38,294)$ 98,917$ Debt Service as a Percentage of Non‐Capital Expenditures 3.3% 2.6% 2.6% 2.8% 6.1% 2.5% 2.7% 2.3% 2.8% 4.6% Notes: Source: Annual Financial Statements, Governmental Funds, Statement of Revenues, Expenditures and Changes in Fund Balances 4In FY20, the City established the Office of Transportation. 5Represents contributions from the Stanford University Medical Center in FY18. 2The Development Services Department was formed in FY15. Fiscal Year Ended June 30 CITY OF PALO ALTO Changes in Fund Balances of Governmental Funds Last Ten Fiscal Years (Modified accrual basis of accounting) (Amounts in thousands) 1Comprised of the following departments: City Council, City Manager, City Attorney, City Clerk, City Auditor, Administrative Services, and Human Resources. 3In FY20, the Development Services Department was combined with the Planning and Community Environment Department to form the Planning and Development Services Department. 148 Fiscal Commercial & City of Year Residential Industrial Palo Alto Total 2012 20,328 85,895 3,352 109,575 2013 19,951 86,998 3,265 110,214 2014 18,744 88,419 3,225 110,388 2015 17,404 88,257 3,234 108,895 2016 18,191 86,715 3,127 108,033 2017 20,269 90,635 3,780 114,684 2018 22,764 100,200 4,264 127,228 2019 23,613 103,509 4,404 131,526 2020 25,466 107,335 4,286 137,087 2021 26,719 98,582 4,167 129,468 * The electric operating revenues include sales to customers and City departments, and excludes the sale of surplus energy, utility billing discounts, and bad debt expense. City of Palo Alto Municipal Communications & Power Industries (CPI) Research Lucille Packard Children's Hospital Hospital Space Systems/Loral, LLC Satellite & Satellite Systems Stanford Health Care Hospital/Health Care Stanford Hospital & Clinics Hospital Tesla, Inc. Manufacturing Varian Medical Systems, Inc. Manufacturing Veterans Administration Hospital Hospital VMware, Inc. Computer Average Kilowatt‐hour Installations Billed1 Sales (kWh)Revenue Residential 25,074 165,102,659 26,719$ Commercial 3,599 501,635,237 81,235 Industrial 62 122,154,960 17,347 City of Palo Alto 143 24,991,825 4,167 Total 28,878 813,884,681 129,468$ Source: City of Palo Alto, Utilities and Accounting Departments 1Values provided are in terms of average number of meters (installations) billed per month. Individual customers may utilize multiple meters or facilities within Palo Alto which encompass one or more designations (commercial, industrial and/or residential), thus aggregation on the basis of ‘number of customers’ does not hold for this type of breakdown. The number of active meters in any given month may vary due to patterns of move in, move outs, as well as meter reading cycles. 1The top ten customers accounted for approximately 38.1% of total kWh consumption (309,840,850 kWh) and 33.9% of revenue ($45,815,976). The largest top ten customer accounted for 9.4% of total kWh consumption and 8.1% of revenue. The smallest top ten customer accounted for 2% of total kWh consumption and 1.9% of revenue. Revenue used to determine top ten electric customers includes metered and non‐metered charges, adjustments, surcharges and discounts. Revenue does not include Utility Users Tax (UUT) and deposits. Customer (alphabetical order)Type of Business CITY OF PALO ALTO Electric Operating Revenue by Source * Last Ten Fiscal Years (Amounts in thousands) Top Ten Electric Customers by Revenue1 149 Source Capacity Available (MW) Actual Energy (GWh) Percent of Total Energy Purchased Power: Solar 130 311 38% Wind 21 120 15% Landfill Gas 14 104 13% Hydro (NCPA) 58 49 6% Hydro (Western) 182 246 30% Net Forward Market Sales/Purchases 60 (30) ‐4% Net Spot Market Sales/Purchases ‐ 27 3% Total N/A 1 827 100% Notes: Source: City of Palo Alto, Utilities Department In the fiscal year ended June 30, 2021, Palo Alto's average cost of power delivered to the Palo Alto electric system was approximately $0.10 per kWh. CITY OF PALO ALTO For the Fiscal Year Ended June 30, 2021 1Capacity availability varies by season and is not necessarily additive at any given time. Department of Utilities Power Supply Resources 150 Top Ten Largest Water Utility Customers (alphabetical order) City of Palo Alto Palo Alto Hills Golf & Country Club Lucille Packard Children's Hospital Palo Alto Unified School District Simon Property Group Stanford Hospital & Clinics Stanford West Management Veterans Administration Hospital Vi at Palo Alto VMware, Inc. The top ten customers total consumption is 866,031 CCF with revenue of $8,293,613. This amount accounts for approximately 18.2% of total consumption and 16.6% of total revenue. The largest top ten customer (other than the City of Palo Alto) accounted for 2.1% of consumption and 2.1% of revenue. The smallest top ten customer accounted for 0.7% of consumption and 0.6% of revenue. Revenue used to determine top ten water utility customers includes metered and non‐metered charges, adjustments, surcharges and discounts. Revenue does not include Utility Users Tax (UUT) and deposits. Note: Source: City of Palo Alto, Utilities Department This schedule is provided as required by the Continuing Disclosure Agreement for the City's Utility Revenue Bond and is not required by Governmental Accounting Standards Board (GASB). CITY OF PALO ALTO Supplemental Disclosure for Water Utilities For the Fiscal Year Ended June 30, 2021 151 Top Ten Largest Gas Utility Customers (alphabetical order) City of Palo Alto Genencor International Lucille Packard Children's Hospital Palo Alto Unified School District Space Systems/Loral, LLC Stanford Health Care Stanford Hospital & Clinics Stanford University Veterans Administration Hospital VMWare, Inc. The top ten customers total consumption is 5,993,550 THM with revenue of $7,292,737. This amount accounts for approximately 23.4% of total consumption and 18.9% of total revenue. The largest top ten customer (other than the City of Palo Alto) accounted for 8.1% of consumption and 6.3% of revenue. The smallest top ten customer accounted for 0.9% of consumption and 0.8% of revenue. Note: Source: City of Palo Alto, Utilities Department This schedule is provided as required by the Continuing Disclosure Agreement for the City's Utility Revenue Bond and is not required by Governmental Accounting Standards Board (GASB). CITY OF PALO ALTO Supplemental Disclosure for Gas Utilities For the Fiscal Year Ended June 30, 2021 152 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Net Local Secured Roll Land 11,352,993$ 12,255,515$ 13,357,851$ 14,409,837$ 15,718,665$ 17,333,969$ 18,770,642$ 20,386,904$ 22,186,582$ 24,028,178$ Improvements 11,703,597 12,381,306 12,984,735 13,633,986 14,998,502 16,752,295 18,642,970 19,845,666 21,183,768 22,706,856 Personal property 257,436 287,296 307,499 290,590 310,929 306,576 300,352 181,381 194,646 198,396 23,314,026 24,924,117 26,650,085 28,334,413 31,028,096 34,392,840 37,713,964 40,413,951 43,564,996 46,933,430 Less: Exemptions net of state aid (2,346,728) (2,589,653) (2,610,521) (2,761,495) (3,409,836) (4,244,500) (5,203,968) (5,522,323) (6,233,220) (6,781,123) Total Net Local Secured Roll 20,967,298 22,334,464 24,039,564 25,572,918 27,618,260 30,148,340 32,509,996 34,891,628 37,331,776 40,152,307 Public utilities 2,573 2,573 2,573 2,573 2,573 2,573 2,573 7,004 7,004 7,004 Unsecured property 1,516,837 1,355,970 1,493,922 1,622,636 1,794,921 1,803,468 1,922,170 1,902,781 1,946,680 2,194,615 Total Assessed Value 22,486,708$ 23,693,007$ 25,536,059$ 27,198,127$ 29,415,754$ 31,954,381$ 34,434,739$ 36,801,413$ 39,285,460$ 42,353,926$ Total Direct Tax Rate 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% Note: The State Constitution requires property to be assessed at 100% of the most recent purchase price, plus an increment of no more than 2% annually, plus any local over‐rides. These values are considered to be full market values. Source: County of Santa Clara Assessor's Office CITY OF PALO ALTO Assessed Value of Taxable Property Last Ten Fiscal Years (Amounts in thousands) Fiscal Year Ended June 30 $20,000,000 $22,000,000 $24,000,000 $26,000,000 $28,000,000 $30,000,000 $32,000,000 $34,000,000 $36,000,000 $38,000,000 $40,000,000 $42,000,000 $44,000,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 $ T h o u s a n d s Total Assessed Value 153 Basic County County Total County County Hospital City Library Santa Clara Affordable Direct and Fiscal Wide Retirement G.O. Bond G.O. Bond Valley Water School Community Midpeninsula Housing Bond Overlapping Year Levy Levy (Measure A)(Measure N)District District College Open Space1 (Measure A)2 Rates 2012 1.00 0.0388 0.0047 0.0155 0.0064 0.0742 0.0297 ‐ ‐ 1.17 2013 1.00 0.0388 0.0051 0.0129 0.0069 0.0718 0.0287 ‐ ‐ 1.16 2014 1.00 0.0388 0.0035 0.0177 0.0070 0.0655 0.0290 ‐ ‐ 1.16 2015 1.00 0.0388 0.0091 0.0159 0.0065 0.0657 0.0276 ‐ ‐ 1.16 2016 1.00 0.0388 0.0088 0.0148 0.0057 0.0604 0.0240 0.0008 ‐ 1.15 2017 1.00 0.0388 0.0086 0.0129 0.0086 0.0591 0.0234 0.0006 ‐ 1.15 2018 1.00 0.0388 0.0082 0.0118 0.0062 0.0570 0.0220 0.0009 0.0127 1.16 2019 1.00 0.0388 0.0072 0.0111 0.0042 0.0858 0.0217 0.0018 0.0105 1.18 2020 1.00 0.0388 0.0069 0.0106 0.0041 0.0783 0.0208 0.0016 0.0100 1.17 2021 1.00 0.0388 0.0069 0.0096 0.0037 0.1113 0.0364 0.0015 ‐ 1.21 Notes:1The Midpeninsula Regional Open Space District Bond Issue and Property Tax, Measure AA, passed in 2014. Rates were first levied for the 2015‐16 fiscal year. 2The Santa Clara County Affordable Housing Bond ‐ Measure A 2016 passed on November 8, 2016. Rates were first levied for the 2017‐18 fiscal year. Source: County of Santa Clara, Tax Rates and Information CITY OF PALO ALTO Property Tax Rates All Overlapping Governments Last Ten Fiscal Years $1.14 $1.15 $1.16 $1.17 $1.18 $1.19 $1.20 $1.21 $1.22 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Rate per $100 of Assessed Value 154 Fiscal Year Total Tax Percentage Collections in Percentage of Ended June 30 Levy for FY1 Amount of Levy Subsequent Years2 Amount Levy 2012 26,494$ 26,494$ 100% ‐ 26,494$ 100% 2013 28,742 28,742 100% ‐ 28,742 100% 2014 30,587 30,587 100% ‐ 30,587 100% 2015 34,117 34,117 100% ‐ 34,117 100% 2016 36,607 36,607 100% ‐ 36,607 100% 2017 39,381 39,381 100% ‐ 39,381 100% 2018 42,839 42,839 100% ‐ 42,839 100% 2019 47,327 47,327 100% ‐ 47,327 100% 2020 51,089 51,089 100% ‐ 51,089 100% 2021 56,572 56,572 100% ‐ 56,572 100% Notes: Source:Annual Financial Statements, Government Funds, Statement of Revenues, Expenditures and Changes in Fund Balances. 1During fiscal year 1995, the County of Santa Clara began providing the City 100% of its tax levy under an agreement which allows the County to keep all interest and delinquency charges collected. 2Effective fiscal year 1994, the City is on the Teeter Plan, under which the County of Santa Clara pays the full tax levy due. CITY OF PALO ALTO Property Tax Levies and Collections Last Ten Fiscal Years (Amounts in thousands) Collected within the Fiscal Year of the Levy Total Collections to Date 155 Taxable Assessed Value Rank Percentage of Total Taxable Assessed Value Taxable Assessed Value Rank Percentage of Total Taxable Assessed Value Leland Stanford Jr. University 6,529,897$ 1 15.4% 3,035,075$ 1 13.5% Google Inc. 303,697 2 0.7% ARE‐San Francisco 80 LLC 291,000 3 0.7% SVF Sherman Palo Alto Corporation 143,575 4 0.3% ARE‐San Francisco 69 LLC 141,494 5 0.3% 395 Page Mill LLC 123,083 6 0.3% 530 Lytton Owner LLC 119,850 7 0.3% Hohbach Realty Co. LP 110,392 8 0.3% SI 45 LLC 84,423 9 0.2% PA Hotel Holdings LLC 82,600 10 0.2% Space Systems/Loral, Inc. 226,246 2 1.0% Arden Realty Limited Partnership 112,472 3 0.5% Whisman Ventures, LLC 105,066 4 0.5% ECI 2 Bayshore LLC/ECI Hamilton LLC 73,901 5 0.3% Ronald & Ann Williams Charitable Foundation 58,804 6 0.3% Blackhawk Parent LLC 50,196 7 0.2% 300 / 400 Hamilton Associates 41,433 8 0.2% Thoit Bros., Inc.31,740 9 0.1% 529 Bryant St.31,737 10 0.1% Total 7,930,011$ 18.7% 3,766,670$ 16.7% Total City Taxable Assessed Value: FY 2021 42,353,926$ FY 2012 22,486,708$ Source: California Municipal Statistics, Inc. Fiscal Year 2021 Fiscal Year 2012 Taxpayer CITY OF PALO ALTO Principal Property Taxpayers Current Year and Nine Years Ago (Amounts in thousands) 156 2020‐2021 No. of Assessed % of No. of % of Taxable % of Valuation1 Total Parcels Total Parcels Total Non‐Residential: Agricultural/forest 37,697,860$ 0.09 % 49 0.23 % 31 0.15 % Commercial 2,192,486,496 5.46 459 2.20 457 2.23 Professional/office 6,506,771,625 16.21 560 2.68 540 2.64 Industrial/research & development 2,295,767,267 5.72 230 1.10 229 1.12 Recreational 77,145,645 0.19 16 0.08 14 0.07 Government/social/institutional 44,228,709 0.11 115 0.55 50 0.24 Miscellaneous 11,435,206 0.03 18 0.09 17 0.08 Subtotal Non‐Residential 11,165,532,808 27.81 1,447 6.92 1,338 6.53 Residential: Single family residence 23,266,022,527 57.94 15,096 72.20 15,024 73.31 Condominium/townhouse 2,863,724,800 7.13 3,151 15.07 3,146 15.35 Mobile Home 114,938 0.00 8 0.04 8 0.04 2‐4 Residential units 534,551,067 1.33 497 2.38 497 2.43 5+ Residential units 1,944,144,849 4.84 345 1.65 329 1.61 Subtotal Residential 28,608,558,181 71.25 19,097 91.33 19,004 92.73 Vacant Parcels 378,215,314 0.94 365 1.75 151 0.74 Total 40,152,306,303$ 100 % 20,909 100 % 20,493 100 % Notes: This schedule is provided as required by the Continuing Disclosure Agreement for the City's 2010 and 2013A General Obligation Bonds and is not required by Governmental Accounting Standards Board (GASB). Therefore, ten years of comparison data is not presented. 1Local secured assessed valuation, excluding tax‐exempt property. Source: California Municipal Statistics, Inc. CITY OF PALO ALTO Assessed Valuation and Parcels by Land Use As of June 30, 2021 157 No. of Taxable Average Parcels1 Assessed Valuation Single Family Residential 15,024 $1,548,590 No. of % of Cumulative % of Cumulative Taxable Total % of Total Total Total % of Total Parcels1 Parcels Parcels Valuation Valuation Valuation 774 5.15 % 5.15 % 62,751,790$ 0.27 % 0.27 % 1,627 10.83 15.98 226,741,966 0.97 1.24 736 4.90 20.88 181,708,519 0.78 2.03 636 4.23 25.11 221,115,384 0.95 2.98 552 3.67 28.79 248,397,391 1.07 4.04 565 3.76 32.55 311,648,230 1.34 5.38 604 4.02 36.57 392,667,685 1.69 7.07 534 3.55 40.12 401,042,038 1.72 8.79 445 2.96 43.08 377,885,136 1.62 10.42 517 3.44 46.53 492,018,891 2.11 12.53 517 3.44 49.97 542,105,280 2.33 14.86 484 3.22 53.19 557,127,718 2.39 17.26 432 2.88 56.06 539,458,161 2.32 19.58 361 2.40 58.47 487,217,064 2.09 21.67 392 2.61 61.08 566,176,362 2.43 24.10 369 2.46 63.53 571,850,964 2.46 26.56 353 2.35 65.88 582,441,439 2.50 29.07 325 2.16 68.04 567,977,334 2.44 31.51 297 1.98 70.02 548,853,685 2.36 33.87 283 1.88 71.90 551,751,152 2.37 36.24 4,221 28.10 100.00 14,835,086,338 63.76 100.00 15,024 100.00 % 23,266,022,527$ 100.00 % Notes: Source: California Municipal Statistics, Inc. This schedule is provided as required by the Continuing Disclosure Agreement for the City's 2010 and 2013A General Obligation Bonds and is not required by Governmental Accounting Standards Board (GASB). Therefore, ten years of comparison data is not presented. 1Improved single family residential parcels. Excludes condominiums and parcels with multiple family units. $1,900,000‐1,999,999 $2,000,000 and greater Total $1,800,000‐1,899,999 $700,000‐799,999 $800,000‐899,999 $900,000‐999,999 $1,000,000‐1,099,999 $1,100,000‐1,199,999 $1,200,000‐1,299,999 $1,300,000‐1,399,999 $1,400,000‐1,499,999 $1,500,000‐1,599,999 $1,600,000‐1,699,999 $1,700,000‐1,799,999 $600,000‐699,999 $23,266,022,527 $1,096,758 2020‐2021 Assessed Valuation $0‐99,999 $100,000‐199,999 $200,000‐299,999 $300,000‐399,999 $400,000‐499,999 $500,000‐599,999 Assessed Valuation Assessed Valuation 2020‐2021 Median CITY OF PALO ALTO Per Parcel Assessed Valuation of Single Family Residential As of June 30, 2021 158 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 1,685$ 1,560$ 1,430$ 1,285$ 1,135$ 975$ 8,970$ 46,305$ 45,750$ 146,440$ 54,540 74,235 73,215 71,795 65,210 63,710 62,140 60,500 58,775 56,995 2011 Lease‐Purchase Agreement 2,764 2,400 2,026 1,643 1,248 842 426 ‐ ‐ ‐ Add: unamortized premium 3,514 4,400 4,242 4,084 3,926 3,768 3,610 8,331 7,980 14,099 62,503 82,595 80,913 78,807 71,519 69,295 75,146 115,136 112,505 217,534 65,879 63,104 60,224 57,224 54,095 50,825 47,400 43,815 40,060 36,130 Energy Tax Credits 1,000 900 800 700 600 500 400 300 200 100 State Water Resources Loan 15,900 15,109 14,309 13,500 12,681 15,034 17,711 29,589 33,808 32,288 580 543 867 803 737 673 608 544 468 392 83,359 79,656 76,200 72,227 68,113 67,032 66,119 74,248 74,536 68,910 Outstanding Debt 145,862$ 162,251$ 157,113$ 151,034$ 139,632$ 136,327$ 141,265$ 189,384$ 187,041$ 286,444$ 3.36% 3.36% 3.24% 2.94% 2.42% 2.22% 2.13% 2.64% 2.48% 3.81% Population 65,544 66,368 66,861 66,029 66,968 66,478 66,649 67,082 67,019 66,573 2.23$ 2.44$ 2.35$ 2.29$ 2.09$ 2.05$ 2.12$ 2.82$ 2.79$ 4.30$ Notes: Sources: 2020 Official City Data Set (population) California Department of Transportation Long‐Term Socio‐Economic Forecasts (personal income) Annual Financial Statements and Note 7 Long‐Term Debt Debt Per Capita 1See the schedule of Demographic and Economic Statistics for personal income data. Per capita personal income is only available for Santa Clara County, therefore personal income is the product of the countywide per capita amount and the City's population. County of Santa Clara (assessed valuation) Percentage of Personal Income1 Certificates of Participation General Obligation Bonds Total Governmental Activities Business‐type Activities Utility Revenue Bonds Add: unamortized premium (discount), net Total Business‐type Activities Total Primary Government Governmental Activities CITY OF PALO ALTO Ratio of Outstanding Debt by Type Last Ten Fiscal Years (Amounts in thousands) Fiscal Year Ended June 30 $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 $ T h o u s a n d s Total Governmental Activities Total Business‐type Activities 159 2020‐2021 Assessed Value 42,353,925,962$ Percentage Amount Applicable Applicable Total Debt to City of to City of Outstanding Palo Alto1 Palo Alto Santa Clara County 812,685,000$ 7.69% 62,471,096$ Foothill‐DeAnza Community College District 707,932,142 21.92% 155,214,122 Palo Alto Unified School District 241,738,172 90.39% 218,499,882 Fremont Union High School District 617,160,088 0.01% 55,544 Los Gatos‐Saratoga Joint Union High School District 86,585,000 0.01% 11,256 Mountain View‐Los Altos Union High School District 207,011,101 0.85% 1,755,454 Cupertino Union School District 284,223,303 0.02% 48,318 Los Altos School District 164,070,000 1.13% 1,860,554 Mountain View‐Whisman School District 279,115,000 0.61% 1,691,437 Saratoga Union School District 19,249,458 0.03% 5,775 Whisman School District 8,380,054 1.62% 135,505 City of Palo Alto 56,995,000 100% 56,995,000 El Camino Hospital District 116,290,000 0.07% 82,566 Midpeninsula Regional Open Space District 86,400,000 12.58% 10,872,576 City of Palo Alto Special Assessment Bonds 17,915,000 100% 17,915,000 Santa Clara Valley Water District Benefit Assessment District 57,010,000 7.69% 4,382,359 Total Direct and Overlapping Tax and Assessment Debt 531,996,444 914,957,860 7.69% 70,332,811 341,399,194 7.69% 26,243,356 2,670,000 7.69% 205,243 22,085,000 21.92% 4,842,136 1,709,000 0.01% 222 2,489,970 0.85% 21,115 2,750,000 0.03% 825 Los Altos School District Certificates of Participation 1,954,070 1.13% 22,159 City of Palo Alto General Fund Obligations 146,440,000 100% 146,440,000 1,765,000 7.69% 135,676 Midpeninsula Regional Open Space Park District General Fund Obligations 106,000,600 12.58% 13,339,116 $ 261,582,659 1,943,066 $ 259,639,593 $ 791,636,037 Ratio to Assessed Value Total Direct Debt 0.51% 217,534,000$ 3 Total Overlapping Debt 1.39% 588,201,037 Total Direct and Overlapping Debt 1.90% 805,735,037$ 2 Notes: 2Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and non‐bonded capital lease obligations Source: California Municipal Statistics, Inc. 3Includes unamortized premium of $14,099,000. Santa Clara County Pension Obligations Santa Clara County Board of Education Certificates of Participation Foothill‐DeAnza Community College District Certificates of Participation Los Gatos‐Saratoga Joint Union High School District Certificates of Participation Mountain View‐Los Altos Union High School District Certificates of Participation Saratoga Union High School District Certificates of Participation Less: Santa Clara County supported obligations Total Net Direct and Overlapping General Fund Debt Santa Clara County Vector Control District Certificates of Participation Total Gross Direct and Overlapping General Fund Debt Total Combined Debt 1The percentage of overlapping debt applicable to the City is estimated using taxable assessed property value. Applicable percentages were estimated by determining the portion of the overlapping district's assessed value that is within the boundaries of the City divided by the district's total taxable assessed value. Santa Clara County General Fund Obligations CITY OF PALO ALTO Computation of Direct and Overlapping Debt As of June 30, 2021 Direct and Overlapping Tax and Assessment Debt Direct and Overlapping General Fund Debt 160 Assessed Valuation: Secured property assessed value, net of exempt real property 42,353,926$ Bonded Debt Limit (3.75% of Assessed Value) 1 1,588,272 Direct Debt: Certificates of Participation 146,440 General Obligation bonds 56,995 Total Direct Debt3 203,435 Less: Amount of Debt Not Subject to Limit 2 146,440 Total Net Debt Applicable to Limit 56,995 Legal Bonded Debt Margin 1,531,277$ Total Bonded Total Net Debt Legal Total Net Debt Ratio of Net General Fiscal Assessed Debt Limit Applicable to Bonded Debt Applicable as % of Debt to Bonded Debt Year Value (AV)(3.75% of AV)Limit Margin Population Bonded Debt Limit Assessed Value Per Capita 2012 22,486,708 843,252 54,540 788,712 65,544 6.47% 0.0024 0.83 2013 23,693,007 888,488 74,235 814,253 66,368 8.36% 0.0031 1.12 2014 25,536,058 957,602 73,215 884,387 66,861 7.65% 0.0029 1.10 2015 27,198,127 1,019,930 71,795 948,135 66,029 7.04% 0.0026 1.09 2016 29,415,754 1,103,091 65,210 1,037,881 66,968 5.91% 0.0022 0.97 2017 31,954,381 1,198,289 63,710 1,134,579 66,478 5.32% 0.0020 0.96 2018 34,434,739 1,291,303 62,140 1,229,163 66,649 4.81% 0.0018 0.93 2019 36,801,413 1,380,053 60,500 1,319,553 67,082 4.38% 0.0016 0.90 2020 39,285,460 1,473,205 58,775 1,414,430 67,019 3.99% 0.0015 0.88 2021 42,353,926 1,588,272 56,995 1,531,277 66,573 3.59% 0.0013 0.86 Notes: Source: Annual Financial Statements, Assessed Value of Taxable Property and Note 7 Long‐Term Debt 2In accordance with California Government Code Section 43605, only the City's General Obligation bonds are subject to the legal debt limit of 15%. Enterprise Fund debt is not subject to legal debt margin. CITY OF PALO ALTO Computation of Legal Bonded Debt Margin As of June 30, 2021 (Amounts in thousands) 1California Government Code, Section 43605 sets the debt limit at 15% of the assessed value of all real and personal property of the City. Because this Code section was enacted when assessed value was 25% of market value, the limit is calculated at one‐fourth, or 3.75%. This legal debt margin applies to General Obligation debt. Prior year limits have been adjusted to conform to the current year methodology. 3Total direct debt excludes any premiums, discounts or other amortization amounts. 161 Less: Net Revenue Fiscal Gross Direct Operating Available for Year Revenue Expenses2 Debt Service Principal Interest3 Total Coverage Ratio 2012 235,160 169,777 65,383 2,945 2,959 5,904 11.07 2013 237,842 173,510 64,332 2,875 3,167 6,042 10.65 2014 239,948 176,718 63,230 2,980 3,073 6,053 10.45 2015 234,025 188,276 45,749 3,100 2,954 6,054 7.56 2016 235,386 186,793 48,593 3,230 2,823 6,053 8.03 2017 264,734 205,102 59,632 3,370 2,678 6,048 9.86 2018 288,610 231,255 57,355 3,525 2,524 6,049 9.48 2019 306,237 227,824 78,413 3,685 2,359 6,044 12.97 2020 313,317 237,223 76,094 3,855 2,419 6,274 12.13 2021 309,363 247,962 61,401 4,030 2,008 6,038 10.17 Notes:1Airport, Refuse and Fiber Optics funds have no debt and are therefore excluded from this schedule. 2Excludes depreciation and amortization expense. 3Excludes joint venture debt service and federal interest subsidy. Source: City of Palo Alto, Accounting Department Debt Service CITY OF PALO ALTO Revenue Bond Coverage Business‐type Activities1 Last Ten Fiscal Years (Amounts in thousands) $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 $ T h o u s a n d s Net Revenue Available for Debt Service Total Debt Service 162 Fiscal Year 2012 2,445 2,937 1,590 1,492 387 722 257 5,049 7,034 21,913 2013 2,478 3,160 1,465 1,656 424 765 259 4,056 13,729 27,992 2014 2,097 3,541 1,555 2,041 392 772 444 4,845 9,890 25,577 2015 2,398 3,894 1,672 1,708 435 699 265 3,674 11,253 25,998 2016 2,250 4,134 1,410 1,694 448 582 257 4,949 12,423 28,147 2017 2,036 4,079 1,513 1,794 542 502 259 3,810 14,325 28,860 2018 2,001 4,224 1,716 1,647 428 614 243 3,184 15,663 29,720 2019 1,934 4,299 1,795 1,994 409 706 810 2,245 22,254 36,446 2020 1 1,260 3,488 1,421 1,391 417 572 1,413 1,597 18,313 29,872 2021 1 1,125 2,410 980 1,283 332 489 700 2,062 18,744 28,125 Source: California State Board of Equalization, compiled by MuniServices LLC Sales Tax Rates for the Fiscal Year Ended June 30, 2021 State Rate:7.25% Special District Tax Rates: Santa Clara County Transit District (SCCT) 0.50% Santa Clara County Valley Transportation Authority (SCVT) 0.50% Santa Clara VTA BART Operating and Maintenance Transactions and Use Tax (SVTB) 0.125% Santa Clara Retail Transactions and Use Tax (SCCR) 0.125% Silicon Valley Transportation Solutions Tax (SVTS) 0.50% Total Sales and Use Tax Rate:9.000% Notes:1Decrease due to the adverse impact of coronavirus COVID‐19 since March 2020. Source: California State Board of Equalization CITY OF PALO ALTO Taxable Transactions by Type of Business Last Ten Fiscal Years (Amounts in thousands) Total ECONOMIC SEGMENT Department Stores Restaurants Furniture/ Appliance Food Markets Service Stations Drug Stores Other Retail All Other Apparel Stores Department Stores 4% Restaurants 9%Furniture/ Appliance 3% Apparel Stores 5%Food Markets 1% Service Stations 2% Drugs Stores 2% Other Retail 7% All Other 67% Fiscal Year 2019 Department Stores 0 5%Restaurants 0 12% Furniture/ Appliance 0 5% Apparel Stores 0 6% Food Markets 0 1% Service Stations 0 2% Drugs Stores 2% Other Retail 0 6% All Other 0 61% Fiscal Year 2019 Department Stores 4% Restaurants 9% Furniture/ Appliance 3% Apparel Stores 5% Food Markets 1% Service Stations 2% Drugs Stores 2% Other Retail 7%All Other 67% Fiscal Year 2021 163 Santa Clara City of Palo Alto City of Palo Alto Santa Clara City Population County Total Santa Clara Fiscal City of Palo Alto Unemployment School County as a Percentage of Personal Income County Per Capita Year Population Rate Enrollment Population County Population (in thousands)Personal Income 2012 65,544 4.7% 12,286 1,813,860 3.61% 120,100,000 66,212 2013 66,368 3.6% 12,396 1,840,218 3.61% 134,000,000 72,817 2014 66,861 2.8% 12,483 1,866,208 3.58% 135,200,000 72,446 2015 66,029 2.7% 12,532 1,890,929 3.49% 147,300,000 77,898 2016 66,968 2.9% 12,488 1,919,736 3.49% 165,300,000 * 86,106 * 2017 66,478 2.4% 12,261 1,933,839 3.44% 178,500,000 * 92,303 * 2018 66,649 2.5% 12,230 1,945,829 3.43% 193,700,000 * 99,546 * 2019 67,082 2.1% 11,938 1,955,946 3.43% 209,000,000 * 106,854 * 2020 67,019 5.7% 11,683 1,961,117 3.42% 220,400,000 * 112,385 * 2021 66,573 3.2% 10,801 1,967,525 3.38% 222,200,000 112,934 Note: Data on personal income and per capita personal income is only available for Santa Clara County. Source: State of California Employment Development Office (unemployment rate) Palo Alto Unified School District (school enrollment) * California Department of Transportation Long‐Term Socio‐Economic Forecasts (personal income). Forecasts from prior years are updated. CITY OF PALO ALTO Demographic and Economic Statistics Last Ten Fiscal Years Beginning in 2015 City population is sourced from the US Census Bureau American Community Survey (via the City of Palo Alto's Official City Data Set). 63,000 64,000 65,000 66,000 67,000 68,000 City Population 10,000 10,500 11,000 11,500 12,000 12,500 13,000 School Enrollment 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%City Unemployment Rate 164 Number of Employees Rank Percentage of Total City Employment Number of Employees Rank Percentage of Total City Employment Stanford Health Care2 5,500 1 4.1% 5,059 2 4.6% Hewlett‐Packard Company2 5,000 2 3.7% 2,201 5 2.0% Stanford University2 4,060 3 3.0% 10,680 1 9.7% Veteran's Affairs Palo Alto Health Care System 3,900 4 2.9% 3,500 4 3.2% Stanford Children's Health/Lucile Packard Children's H 3,500 5 2.6% 4,750 3 4.3% VMware Inc. 3,500 6 2.6% SAP Labs Inc. 3,500 7 2.6% Varian Medical Systems 3,300 8 2.5% Tesla Inc. 2,650 9 2.0% Palo Alto Medical Foundation2 2,200 10 1.6% 2,200 6 2.0% Space Systems/Loral 1,870 7 1.7% Wilson Sonsini Goodrich & Rosati 1,650 8 1.5% Palo Alto Unified School District 1,362 9 1.2% City of Palo Alto 1,017 10 0.9% Total 37,110 27.6% 34,289 31.2% Estimated Total City Day Population: FY 2021 134,582 FY 2012 110,000 Notes: Source: Employer 1Available data sources are limited and may be unreliable. The City does not affirm the validity of this data. 2021 numbers are rounded. Figures may include employees not located within City limits. 2FY21 data was not available. Prior years data was used. 2020 Official City Data Set (total City day population); AtoZ databases; Stanford Comprehensive Plan Economic Impact Report, Stanford University Land Use Planning, "Stanford Facts 2021." CITY OF PALO ALTO Principal Employers Current Year and Nine Years Ago FY 20211 FY 2012 165 2011 2012 2013 2014 Governmental activities Community Services Number of theater performances 175 175 184 108 Total hours of athletic field usage2 42,687 44,226 ‐ ‐ Number of rounds of golf 67,381 65,653 60,153 46,527 Enrollment in recreation classes (includes summer camps) 12,310 11,703 11,598 11,997 Planning and Community Environment Planning applications completed 238 204 307 310 Building permits issued 3,559 3,320 3,682 3,624 Caltrain average weekday boarding3 4,923 5,730 6,763 7,564 Police Calls for service 52,159 51,086 54,628 58,559 Total arrests 2,288 2,212 2,274 2,589 Parking citations issued 40,426 41,875 43,877 36,551 Animal Services Number of service calls 2,804 3,051 2,909 2,398 Number of animals handled 3,323 3,379 2,675 2,480 Fire Calls for service 7,555 7,796 7,904 7,829 Number of fire incidents 165 186 150 150 Number of fire inspections4 1,807 1,654 2,069 1,741 Library Total number of cardholders 53,246 60,283 51,007 46,950 Total number of items in collection 314,101 306,160 277,749 361,103 Total checkouts 1,476,648 1,559,932 1,512,975 1,364,872 Public Works Street resurfacing (lane miles) 29 40 36 36 Number of potholes repaired 2,986 3,047 2,726 3,418 Sq. ft. of sidewalk replaced or permanently repaired 71,174 72,787 82,118 74,051 Number of trees planted 150 143 245 148 Tons of materials recycled or composted 56,586 51,725 47,941 49,594 Business‐type activities Electric Number of customer accounts 29,708 29,545 29,299 29,338 Residential MWH consumed 160,318 160,604 156,411 153,190 Gas Number of customer accounts 23,816 23,915 23,659 23,592 Residential therms consumed 11,476,609 11,522,999 10,834,793 10,253,776 Water Number of customer accounts 20,248 20,317 20,043 20,037 Residential water consumption (CCF) 2,442,415 2,513,595 2,521,930 2,496,549 Wastewater collection Number of customer accounts 22,320 22,421 22,152 22,105 Millions of gallons processed 8,652 8,130 7,546 7,186 Notes: 2According to the department, this measure was not accurately tracked during FY13, FY14 and FY20 and thus are not presented. 3Beginning 2015, data source is Official City Data Set. In FY20 the count was not provided due to COVID‐19. Source: FUNCTIONS/PROGRAMS 4The method for calculating the number of fire inspections changed in FY17. The department uses a more detailed feature which categorizes inspections by type and location. CITY OF PALO ALTO Operating Indicators by Function/Program Last Ten Fiscal Years1 City of Palo Alto Performance Report (formerly the Service Efforts and Accomplishments Report); Official City Data Set (Caltrain); 2019 and 2020 data supplied by City of Palo Alto Departments. 1Ten most recent years available. Fiscal Year Ended June 30 166 2015 2016 2017 2018 2019 2020 172 161 171 160 175 191 47,504 65,723 71,431 65,443 67,608 ‐ 42,048 42,573 ‐ 6,790 54,619 42,429 12,586 12,974 11,649 10,652 13,553 12,997 335 383 365 376 327 262 3,844 3,492 2,970 3,105 2,918 2,476 8,294 9,622 9,994 9,977 10,400 ‐ 59,795 53,870 53,901 55,480 54,479 48,394 3,273 2,988 2,745 2,678 2,388 1,568 41,412 37,624 33,661 37,441 33,496 20,261 2,013 2,421 1,674 1,737 2,550 3,081 2,143 2,184 2,211 2,077 2,125 2,361 8,548 8,882 9,153 8,981 8,843 8,102 135 150 155 189 133 140 1,964 2,806 5,476 9,581 10,984 9,602 51,792 57,307 54,676 56,159 68,034 66,530 429,460 461,292 427,548 472,895 485,157 515,032 1,499,406 1,400,926 1,524,614 1,538,118 1,467,038 1,048,676 31 39 39 31 10 7 2,487 3,435 3,449 2,835 2,929 1,761 120,776 115,293 17,275 38,557 66,662 48,847 305 387 319 411 403 346 50,546 56,438 60,582 57,744 55,900 51,852 29,065 29,304 29,616 29,475 29,616 29,849 145,284 150,112 148,986 149,526 146,036 153,976 23,461 23,467 23,637 23,395 23,664 23,770 8,537,754 9,535,377 10,233,669 10,261,276 9,794,177 10,382,762 20,061 19,994 20,213 20,000 20,012 20,608 2,052,176 1,696,383 1,856,879 2,120,588 2,058,663 2,241,461 21,990 22,016 22,216 21,979 22,216 22,410 6,512 6,387 7,176 6,464 6,958 6,294 Fiscal Year Ended June 30 167 2012 2013 2014 2015 2016 FUNCTION/PROGRAM Public Safety Fire: Fire Stations Operated 7 7 7 7 7 Police: Police Stations 1 1 1 1 1 Police Patrol Vehicles 30 30 30 30 30 Community Services Acres ‐ Downtown/Urban Parks2 157 157 157 157 ‐ Acres ‐ Open Space2 3,744 3,744 3,744 3,752 ‐ Acres ‐ Parks and Preserves2 ‐ ‐ ‐ ‐ 3,921 Acres ‐ Open Space2 ‐ ‐ ‐ ‐ 4,489 Acres ‐ Municipal Golf Course2 ‐ ‐ ‐ ‐ ‐ Parks and Preserves3 36 36 36 36 36 Golf Course (see above for acreage) 1 1 1 1 1 Tennis Courts 51 51 51 51 51 Athletic Center 4 4 4 4 4 Community Centers 4 4 4 4 4 Theaters 3 3 3 3 3 Cultural Center/Art Center 1 1 1 1 1 Junior Museum and Zoo 1 1 1 1 1 Swimming Pools 1 1 1 1 1 Nature Center 3 3 3 3 3 Libraries Libraries 5 5 5 5 5 Public Works: Number of Trees Maintained 31,890 31,923 31,757 31,652 31,699 Electric Utility1 Miles of Overhead Lines 223 222 223 223 222 Miles of Underground Lines 245 246 249 262 268 Water Utility Miles of Water Mains 234 233 236 236 235 Gas Utility Miles of Gas Mains 210 210 214 211 209 Waste Water Miles of Sanitary Sewer Lines 217 217 217 217 216 Note: Source: City of Palo Alto 1The City of Palo Alto Utilities Department completed the conversion of its electric system maps to a GIS mapping system database. Therefore, the distances reported for FY 11/12 and forward are more accurate than the distances reported in previous years. 3Williams Park is excluded from the list as the City does not operate it as a park. Located near downtown and across from Heritage Park, the land is leased to a non‐profit that operates it as the Museum of American Heritage. CITY OF PALO ALTO Capital Asset Statistics by Function/Program Last Ten Fiscal Years Fiscal Year Ended June 30 2Beginning in 2016 park acreage is sourced from the Official City Data Set. The discrepancy between FY16 and FY17 is because FY16 numbers were derived off GIS parcels identified as parks or zoned in the Open Space Zoning District. For FY17, Council approved Parks Master Plan numbers were used. 168 2017 2018 2019 2020 2021 7 7 7 7 7 1 1 1 1 1 30 30 30 29 29 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 174 174 174 174 174 4,030 4,030 4,030 4,018 4,018 181 181 181 181 181 36 36 36 36 36 1 1 1 1 1 51 51 51 50 50 4 4 4 4 4 4 4 4 4 4 3 3 3 3 3 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 3 3 3 3 3 5 5 5 5 5 31,712 31,849 31,815 31,819 31,716 223 222 220 220 221 264 272 274 279 287 236 236 236 236 236 210 210 210 210 211 216 216 216 216 216 Fiscal Year Ended June 30 169 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Governmental Funds General Fund: Administration 83 85 83 84 86 87 89 87 86 85 Community Services 74 74 74 76 77 78 79 78 76 75 Development Services5 ‐ ‐ ‐ 38 38 36 36 36 ‐ ‐ Fire 122 119 116 107 107 109 109 98 98 98 Library 41 41 42 44 48 48 48 48 47 47 Office of Emergency Services4 ‐ ‐ 3 3 3 3 3 3 3 3 Planning and Community Environment5 43 48 49 28 31 32 30 30 ‐ ‐ Planning and Development Services5 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 62 62 Office of Transportation6 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 6 6 Police 157 154 155 155 155 155 155 155 149 149 Public Works1 56 57 56 53 54 56 55 51 49 51 Subtotal General Fund 576 578 578 588 599 604 604 586 576 576 All Other Funds: Capital Projects Fund 24 26 27 27 28 31 34 33 36 36 Special Revenue Fund 2 2 9 10 9 10 9 10 11 11 Total Governmental Funds 602 606 614 625 636 645 647 629 623 623 Enterprise Funds Public Works2 115 104 99 100 95 99 101 101 101 101 Utilities3 251 254 255 258 256 255 257 257 257 257 Total Enterprise Funds 366 358 354 358 351 354 358 358 358 358 Internal Service Funds Printing and Mailing 2 2 2 2 2 2 2 2 2 2 Technology 30 31 32 32 34 35 36 36 36 36 Vehicle Replacement 16 17 17 17 17 16 16 16 16 16 Total Internal Service Funds 48 50 51 51 53 53 54 54 54 54 Total 1,016 1,014 1,019 1,034 1,040 1,052 1,059 1,041 1,035 1,035 Notes: 1Fleet and Facilities Management 2Refuse, Storm Drainage, Wastewater Treatment Numbers adjusted for rounding purposes. Source: City of Palo Alto ‐ Fiscal Year 2021 Adopted Operating Budget 5ln FY15, staff was moved from Planning and Community Environment (PC&E), Public Works and Fire to create Development Services; In FY20, the Development Services Department was combined with the Planning and Community Environment Department to form the Planning and Development Services Department. 6ln FY20, the City established the Office of Transportation. Staffing in prior years was included in the Development Services Department and Planning and Community Environment Department. 4In FY14, emergency services and disaster preparation activities were transferred from the Fire Department and are shown in newly created Office of Emergency Services. 3Electric, Fiber Optics, Gas, Wastewater Collection, Water Fund CITY OF PALO ALTO Full‐Time Equivalent City Government Employees by Function Last Ten Fiscal Years Full Time Equivalent Employees as of June 30 0 5 10 15 20 25 30 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Fu l l T i m e E q u i v a l e n t s Governmental Funds Internal Service Funds 0 200 400 600 800 1,000 1,200 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Fu l l T i m e E q u i v a l e n t s Governmental Funds Enterprise Funds Internal Service Funds 0 200 400 600 800 1,000 1,200 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Fu l l T i m e E q u i v a l e n t s Governmental Funds Enterprise Funds Internal Service Funds 170 Americans with Disabilities Act Statement IN COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT (ADA) OF 1990, THIS DOCUMENT MAY BE PROVIDED IN OTHER ACCESSIBLE FORMATS. For information contact: ADA Coordinator City of Palo Alto 250 Hamilton Ave (650) 329-2550 ADA@cityofpaloalto.org CITY OF PALO ALTO 250 HAMILTON AVENUE, PALO ALTO, CA 94301 P 650.329.2100 W CITYOFPALOALTO.ORG Spanish explorers named the area for the tall, twin-trunked redwood tree they camped beneath in 1769. Palo Alto incorporated in 1894 and the State of California granted its first charter in 1909. The City has long been known for its innovative people and its exploration of ideas that have changed the world. In Palo Alto, our history has always been about the future. PALO ALTO Appendix D APPENDIX D CITY INVESTMENT POLICY THIS PAGE INTENTIONALLY LEFT BLANK 1 CITY OF PALO ALTO Investment Policy Fiscal Year 2021-22 (Adopted June 21, 2021) INTRODUCTION The City of Palo Alto invests its pooled idle cash according to State of California law and the charter of the City of Palo Alto. In particular, the City follows “The Prudent Investor Standard” cited in the State Government Code (Section 53600.3). Under this standard, all governing bodies of local agencies or persons authorized to make investment decisions on behalf of the City are trustees and therefore fiduciaries subject to the prudent investor standard. When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency. INVESTMENT PHILOSOPHY The basic principles underlying Palo Alto's investment philosophy is to ensure the safety of public funds, provide that sufficient money is always available to meet current expenditures, and achieve a reasonable rate of return on its investments. The City's preferred and chief practice is to buy securities and to hold them to their date of maturity rather than to trade or sell securities prior to maturity. The City may, however, elect to sell a security prior to its maturity should there be a significant financial need. If securities are purchased and held to their maturity date, then any changes in the market value of those securities during their life will have no effect on their principal value. Under a buy and hold philosophy, the City is able to protect its invested principal. The economy, the money markets, and various financial institutions (such as the Federal Reserve System) are monitored carefully to make prudent investments and to assess the condition of the City’s portfolio. INVESTMENT OBJECTIVES The primary objectives, in priority order, of investment activities shall be safety, liquidity, and yield: 1. Safety: Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective will be to mitigate credit risk and interest 2 rate risk. a) Credit risk is the risk that an obligation will not be paid and a loss will result. The City will seek to minimize this risk by:  Limiting investment to the safest types of securities or minimum credit quality rating as listed in the “Authorized Investment” section  Diversifying its investments among the types of securities that are authorized under this investment policy b) Interest rate risk is the risk that changes in interest rates will adversely affect the value of an investor’s portfolio. For example, an investor with large holdings in long-term bonds has assumed significant interest rate risk because the value of the bonds will fall if interest rates rise. The City can minimize this risk by:  Buying and holding its securities until maturity  Structuring the investment portfolio so that securities mature to meet cash flow requirements To further achieve the objective of safety, the amount that can be invested in all investment categories, excluding obligations of the U.S. Government and its agencies, is limited either as a percentage of the portfolio or by a specific dollar amount. These limits are defined under the “Authorized Investments” section. 2. Liquidity: Liquidity is the second most important objective of the investment program. The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This is accomplished by maintaining a portion of the portfolio in liquid money market mutual funds or local government investment pools. In addition, the City will maintain one month’s net cash needs in short term and/or liquid investments and at least $50 million shall be maintained in securities maturing in less than two years. Although the City’s practice is to buy and hold securities to maturity, since all possible cash demands cannot be anticipated, the portfolio will consist of securities with active secondary or resale markets should the need to sell a security prior to maturity arises. 3. Yield: Yield on the City’s portfolio is last in priority among investment objectives. The investment portfolio shall be designed to obtain a market rate of return that reflects the authorized investments, risk constraints, and liquidity needs outlined in the City’s investment policy. Compared to similar sized cities, the City of Palo Alto should be able to take advantage of its relatively large reserve balances to achieve higher yields through long-term investments. In addition, the City will strive to maintain the level of investment of idle funds as close to 100 percent as possible. ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) RESPONSIBILITIES In addition to and subordinate to the Safety, Liquidity, and Yield investment objectives, 3 investments that support sound environmental, social and governance (ESG) objectives are also considered. While the City’s portfolio is not classified as an ESG portfolio, investments in entities that support community well-being through practices that emphasize safe and environmentally sound objectives; fair labor practices; and equality of rights regardless of sex, race, age, disability, or sexual orientation, is encouraged. Direct investments in entities that manufacture tobacco products, firearms, and engage in direct production or drilling of fossil fuels is discouraged. This section applies to new investments (after November 5, 2018) only and does not require divestment of existing investments. Investments in Certificates of Deposit (CDs) and Negotiable Certificates of Deposit are exempt from the ESG investing objective. SCOPE A. This investment policy shall apply to all financial assets of the City of Palo Alto as accounted for in the Annual Comprehensive Financial Report (ACFR), including but not limited to the following funds: 1. General Fund 2. Special Revenue Funds 3. Debt Service Funds 4. Capital Project Fund 5. Enterprise Funds 6. Internal Service Funds 7. Trust and Agency Funds B. The policy does not cover funds held by the California Public Employees Retirement System (CalPERS), the California Employers’ Retiree Benefit Trust (CERBT), Deferred Compensation programs (e.g. ICMA, Hartford), the Authority for California Cities Excess Liability (ACCEL), and the Public Agency Retirement Services (PARS) Section 115 Irrevocable Trust. C. Investments of bond proceeds shall be governed by the provisions of the related bond indentures. GENERAL INVESTMENT GUIDELINES 1. The maximum stated final maturity of individual securities in the portfolio should be ten years. 2. A maximum of 30 percent of the par value of the portfolio shall be invested in securities with maturities beyond five years. 3. The City shall maintain a minimum of one month’s net cash needs in short term and/or liquid investments. 4. At least $50 million shall be maintained in securities maturing in less than two (2) 4 years. 5. Should the ratio of the market value of the portfolio to the book value of the portfolio fall below 95 percent, the Administrative Services Department will report this fact to the City Council within a reasonable time frame and evaluate whether there is any risk of holding any of the securities to maturity. 6. Commitments to purchase securities newly introduced on the market shall be made no more than three (3) working days before pricing. 7. Whenever possible, the City will obtain three or more quotations on the purchase or sale of comparable securities and take the higher yield on purchase or higher price on sale. This rule will not apply to new issues, which are purchased at market no more than three (3) working days before pricing, as well as to LAIF, City of Palo Alto bonds, money market accounts and mutual funds, all of which shall be evaluated separately. 8. Where the Investment Policy specifies a percentage limitation for a particular category of investment, that percentage is applicable only at the date of purchase. A later increase or decrease in a percentage resulting from a change in the portfolio’s assets or values shall not constitute a violation of that restriction. As soon as possible, percentage limitations will be restored as investments mature in each category. AUTHORIZED INVESTMENTS The California Government Code (Sections 53600 et seq.) governs investment of City funds. The following investments are authorized: 1. U.S. Government Securities (e.g. Treasury notes, bonds and bills) Securities that are backed by the full faith and credit of the United States a) There is no limit on purchase of these securities. b) Securities will not exceed 10 years maturity. c) All purchased securities must have an explicit or a de facto backing of the full faith and credit of the U.S. Government. 2. U.S. Government Agency Securities – Obligations issued by the Federal Government agencies (e.g. Federal National Mortgage Association, etc.). a. There is no limit on purchase of these securities except for:  Callable and Multi-step-up securities provided that: - The potential call dates are known at the time of purchase - The interest rates at which they “step-up” are known at the time 5 of purchase - The entire face value of the security is redeemed at the call date - No more than 25 percent of the par value of the portfolio b. Securities will not exceed 10 years maturity. 3. California State, California Local Government Agencies, and other United States State Bonds a) Having at time of investment a minimum Double A (AA/Aa2) rating as provided by a nationally recognized rating service (e.g. Moody’s, Fitch, and/or Standard and Poor’s). b) May not exceed 40 percent of the par value of the portfolio. c) Investments include: i) Registered state warrants or treasury notes or bonds of the State of California and bonds, notes, warrants, or other evidences of indebtedness of any local agency within California, including bonds payable solely out of the revenues from a revenue producing property owned, controlled, or operated by the state or local agency or by a department, board, agency, or authority of the state or local agency. ii) Registered treasury notes or bond of any of the 49 United States in addition to the State of California, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by a state or by a department, board, agency or authority of any of the other 49 United States, in addition to the State of California. 4. Certificates of Deposit (CD) - A debt instrument issued by a bank for a specified period of time at a specified rate of interest. Purchase of CD’s are limited to: a) May not exceed 20 percent of the par value of the portfolio. b) No more than 10 percent of the par value of the portfolio in collateralized CDs in any institution. c) Purchase collateralized deposits only from federally insured large banks that are rated by a nationally recognized rating service (e.g. Moody’s, Fitch, and/or Standard and Poor’s). d) For non-rated banks, deposit should be limited to amounts federally insured (FDIC). – See Appendix C 6 e) Rollovers are not permitted without specific instruction from authorized City staff. 5. Banker's Acceptance Notes (BA) – Bills of exchange or time drafts drawn on and accepted by commercial banks. Purchase of banker’s acceptances are limited to: a) No more than 30 percent of the par value of the portfolio. b) Not to exceed 180 days maturity. c) No more than $5 million with any one institution. 6. Commercial Paper - Short-term unsecured obligations issued by banks, corporations, and other borrowers. Purchases of commercial paper are limited to: a) Having highest letter or numerical rating as provided for by a nationally recognized rating service (e.g. Moody’s, Fitch, and/or Standard and Poor’s). b) No more than 15 percent of the par value of the portfolio. c) Not to exceed 270 days maturity. d) No more than $3 million or 10 percent of the outstanding commercial paper of any one institution, whichever is lesser. 7. Local Agency Investment Fund (LAIF) – A State of California managed investment pool may be used up to the maximum permitted by California State Law. 8. Short-Term Repurchase Agreements (REPO) – A contractual agreement between a seller and a buyer, usually of U.S. government securities, whereby the seller agrees to repurchase the securities at an agreed upon price and, usually, at a stated time. Purchases of REPO’s must: a) Not to exceed 1 year. b) Market value of securities that underlay a repurchase agreement shall be valued at 102 percent or greater of the funds borrowed against those securities. c) A Master Repurchase agreement must be signed with the bank or dealer. 9. Money Market Deposit Accounts – Liquid bank accounts which seek to maintain a net asset value of $1.00. 7 10. Mutual Funds which seek to maintain a net asset value of $1.00 and which are limited essentially to the above investments and further defined in note 9 of Appendix A a) No more than 20 percent of the par value of the portfolio. b) No more than 10 percent of the par value with any one institution. 11. Negotiable Certificates of Deposit (NCD) issued by nationally or state-chartered banks and state or federal savings institutions and further defined in note 11 of Appendix A. Purchases of negotiable certificates of deposit: a) May not exceed 20 percent of the par value of the portfolio. b) No more than $5 million in any one institution. 12. Medium-Term Corporate Notes – Issued by corporation organized and operating within the United States or by depository institutions licensed by the United States or any state and operating with the United States. a) Not to exceed 5 years maturity. b) Securities eligible for investment shall have a minimum rating of AA or Aa2 from a nationally recognized rating service (e.g. Moody’s, Fitch, and/or Standard & Poor’s). c) No more than 10 percent of the par value of the portfolio. d) No more than $5 million of the par value may be invested in securities of any single issuer, other than the U.S. Government, its agencies and instrumentality. e) If securities owned by the City are downgraded by Moody’s, Fitch, or Standard & Poors to a level below AA or Aa2, it shall be the City’s policy to review the credit situation and make a determination as to whether to sell or retain such securities in the portfolio. 13. Supranational Organizations Securities – Supranational organizations refer to International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC) and Inter-American Development Bank (IADB). a. Securities will not exceed 5 years maturity. b. No more than 20 percent of the par value of the portfolio. c. No more than 10 percent of the par value with any one institution. d. Securities eligible for investment shall have a minimum rating of AA or Aa2 from a nationally recognized rating service (e.g. Moody’s, Fitch, and/or Standard & Poor’s). 8 e. Limited to United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by IBRD, IFC, and IADB. Appendix A provides a more detailed description of each investment vehicle and its security and liquidity features. Most of the City's short-term investments will be in securities which pay principal upon maturity, while long-term investments may be in securities that periodically repay principal, as well as interest. Most of the City's investments will be at a fixed rate. However, some of the investments may be at a variable rate, so long as that rate changes on specified dates in pre- determined increments. PROHIBITED INVESTMENTS: Includes all investments not specified above, and in particular: 1. Reverse repurchase agreements 2. Derivatives, as defined in Appendix B Appendix B provides a more detailed description of each investment, which is prohibited, for City investment. AUTHORIZED INVESTMENT PERSONNEL Idle cash management and investment transactions are the responsibility of the Administrative Services Department. The Administrative Services Department is under the control of the Director of Administrative Services (Director), as treasurer, who is subject to the direction and supervision of the City Manager. The Assistant Directors of Administrative Services (Assistant Director), who reports to the Director, are authorized to make all investment transactions allowed by the Statement of Investment Policy. The Assistant Director may authorize the Manager of Treasury, Debt & Investments and/or Senior Management Analyst (Manager and/or Analyst) to enter into investments within clearly specified parameters. The Investment function is under the supervision of the Assistant Director. The Assistant Director is charged with the responsibility to manage the investment program (portfolio), which includes developing and monitoring the City's cash flow model and developing long-term revenue and financing strategies and forecasts. The Manager and/or Analyst are subject to the direction and supervision of the Assistant Director. The Manager and/or Analyst assist the Assistant Director, in the purchase and sale of securities. The Manager and/or Analyst also prepare the quarterly report, and record daily all investment transactions as to the type of investment, amount, yield, and maturity. Cash flow projections are prepared as needed. In all circumstances, approval from the Director of Administrative Services is required before selling 9 securities from the City's portfolio. The Manager and/or Analyst may also transfer no more than a total of $10 million a day from the City's general account to any one financial institution, without the prior approval of the Assistant Director. No other person has authority to make investment transactions without the written authority of the Director or Assistant Director of Administrative Services. USE OF BROKERS AND DEALERS The Administrative Services Department maintains a list of acceptable dealers. A dealer acts as a principal in security transactions, selling securities from and buying securities for their own position. A dealer must have: a) At least three years experience operating with California municipalities; b) Maintain an inventory of trading securities of at least $10 million; and c) Be approved by the Assistant Director before being added to the City's list of approved dealers; including individual traders or agents representing a dealer: A dealer will be removed from the list should there develop a history of problems to include: failure to deliver securities as promised, failure to honor transactions as quoted, or failure to provide accurate information. SAFEKEEPING AND CUSTODY All securities shall be delivered to the City's safekeeping custodian and held in the name of the City of Palo Alto, with the exception of the following investments: a) Certificates of deposit, which may be held by the City itself. b) City shares in pooled investment funds, under contract. c) Mutual funds d) Local Agency Investment Fund (LAIF) 10 POLICY REVIEW AND REPORTING ON INVESTMENTS Monthly, the Administrative Services Department will review performance in relation to Council adopted Policy. Quarterly, the Department will report to Council investment activity, including: the portfolio’s performance in comparison to policy, explain any variances from policy, provide any recommendations for policy changes, and discuss overall compliance with the City’s Investment Policy. In addition, the Department will provide Council with: a) A detailed list of all securities, investments and monies held by the City, and b) Report on the City’s ability to meet expenditure requirements over the next six months. Annually, the Administrative Services Department will present a Proposed Statement of Investment Policy, to include the delegation of investment authority, to the City Council for review during the annual budget process. All proposed changes in policy must be approved by the Council prior to implementation. Adopted by City Council October 22, 1984 Amended by City Council June 11, 2001 Monthly reporting effective January 1985 Amended by City Council June 17, 2002 Amended and Adopted by City Council June 24, 1985 Amended by City Council June 17, 2003 Amended by City Council December 2, 1985 Amended by City Council June 28, 2004 Amended by City Council June 23, 1986 Amended by City Council June 20, 2005 Amended by City Council June 22, 1987 Amended by City Council June 12, 2006 Amended by City Council August 8, 1988 Amended by City Council June 11, 2007 Amended by City Council November 28, 1988 Amended by City Council June 09, 2008 Amended by City Council June 26, 1989 Amended by City Council June 15, 2009 Amended by City Council May 14, 1990 Amended by City Council June 28, 2010 Amended by City Council June 24, 1991 Amended by City Council June 20, 2011 Amended by City Council June 22, 1992 Amended by City Council June 18, 2012 Amended by City Council June 23, 1993 Amended by City Council June 03, 2013 Amended by City Council June 20, 1994 Amended by City Council June 16, 2014 Amended by City Council June 19, 1995 Amended by City Council June 15, 2015 Amended by City Council June 24, 1996 Amended by City Council June 13, 2016 Amended by City Council June 23, 1997 Amended by City Council June 27, 2017 Amended by City Council January 26, 1998 Amended by City Council November 5, 2018 Amended by City Council June 22, 1998 Amended by City Council June 24, 2019 Amended by City Council June 28, 1999 Adopted by City Council June 22, 2020 Amended by City Council June 19, 2000 Amended by City Council June 21, 2021 11 APPENDIX A EXPLANATION OF PERMITTED INVESTMENTS 1. U.S. Government Securities: United States Treasury notes, bonds, bills, or certificates of indebtedness or those for which the faith and credit of the United States are pledged for the payment of principal and interest. 2. U.S. Government Agency Securities: U.S. Government Agency Obligations include the securities of the Federal National Mortgage Association (FNMA), Federal Land Banks (FLB), Federal Intermediate Credit Banks (FICB), banks for cooperatives, Federal Home Loan Banks (FHLB), Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Student Loan Marketing Association (SLMA), Small Business Administration (SBA), Federal Farm Credit (FFC), and Federal Agricultural Mortgage Corporation (FAMC or FMAC). Federal Agency securities are debt obligations that essentially result from lending programs of the Government. Federal agency securities differ from other types of securities, as well as among themselves. Their characteristics depend on the issuing agency. It is possible to distinguish three types of issues: (A) participation certificates (pooled securities), (B) Certificates of interest (pooled loans), (C) notes, bonds, and debentures. The securities of a few agencies are explicitly backed by the full faith and credit of the U.S. Government. All other issues purchased by the City have the de facto backing from the federal government, and it is highly unlikely that the government would let any agency default on its obligations. 3. Certificates of Deposit: A certificate of deposit (CDs) is a receipt for funds deposited in a bank, savings bank, or savings and loan association for a specified period of time at a specified rate of interest. Denominations are $250,000 and up. The first $250,000 of a certificate of deposit is guaranteed by the Federal Deposit Insurance Corporation (FDIC), if the deposit is with a bank or savings bank, or the Savings Association Insurance Fund (SAIF), if the deposit is with a savings and loan. CDs with a face value in excess of $250,000 can be collateralized by U.S. Government Agency and Treasury Department securities or first mortgage loans. Government securities must be at least 110 percent of the face value of the CD collateralized in excess of the first $250,000. The value of first mortgages must be at least 150 percent of the face value of the CD balance insured in excess of the first $250,000. Generally, CDs are issued for more than 30 days and the maturity can be selected by the purchaser. 4. Bankers' Acceptance: A Banker's Acceptance (BA) is a negotiable time draft or bill of exchange drawn on and accepted by a commercial bank. Acceptance of the draft irrevocably obligates the bank to pay the bearer the face amount of the draft at maturity. BAs are usually created to finance the import and export of goods, the shipment of goods within the United States and storage of readily marketable staple commodities. In over 70 years of usage in the United States, there has been no known instance of principal loss to any investor in BAs. In addition to the guarantee by the accepting bank, the transaction is identified with a specific commodity. Warehouse receipts verify that the pledged commodities exist, and, by definition, these commodities are readily marketable. The sale of the underlying goods generates the necessary funds to liquidate the indebtedness. 12 BAs enjoy marketability since the Federal Reserve Bank is authorized to buy and sell prime BAs with maturities of up to nine months. The Federal Reserve Bank enters into repurchase agreements in the normal course of open market operations with BA dealers. As are sold at a discount from par. An acceptance is tied to a specific loan transaction; therefore, the amount and maturity of the acceptance is fixed. 5. Commercial Paper: Commercial paper notes are unsecured promissory notes of industrial corporations, utilities, and bank holding companies. Interest is discounted from par and calculated using actual number of days on a 360-day year. The notes are in bearer form, with maturities up to 270 days selected by the purchaser, and denominations generally start at $100,000. There is a small secondary market for commercial paper notes and an investor may sell a note prior to maturity. Commercial paper notes are backed by unused lines of credit from major banks. Some issuer's notes are insured, while some are backed by irrevocable letters of credit from major banks. State law limits a City to investments in United States corporations having assets in excess of five hundred million dollars with an "A" or higher rating by a nationally recognized rating service for the issuer's debentures. Cities may not invest more than 25 percent of idle cash in commercial paper. 6. Local Agency Investment Fund Demand Deposit: The Local Agency Investment Fund LAIF) was established by the State to enable treasurers to place funds in a pool for investments. The City is limited to an investment of the amount allowed by LAIF (currently $75 million). LAIF has been particularly beneficial to those jurisdictions with small portfolios. Palo Alto uses this fund for short-term investment, liquidity, and yield. 7. Repurchase Agreements: A Repurchase Agreement (REPOS) is not a security, but a contractual arrangement between a financial institution or dealer and an investor. The agreement normally can run for one or more days. The investor puts up funds for a certain number of days at a stated yield. In return, the investor takes title to a given block of securities as collateral. At maturity, the securities are repurchased and the funds repaid, plus interest. Usually, amounts are $500,000 or more, but some REPOS can be smaller. 8. Money Market Deposit Accounts: Money Market Deposit Accounts are market-sensitive bank accounts, which are available to depositors at any time, without penalty. The interest rate is generally comparable to rates on money market mutual funds, though any individual bank's rate may be higher or lower. These accounts are insured by the Federal Deposit Insurance Corporation or the Savings Association Insurance Fund. 13 9. Mutual Funds: Mutual funds are shares of beneficial interest issued by diversified management companies, as defined by Section 23701 M of the Revenue and Taxation Code. To be eligible for investment, these funds must: a) Attain the highest ranking in the highest letter and numerical rating provided by not less than two of the three largest nationally recognized rating services; or b) Have an investment advisor registered with the Securities and Exchange Commission with not less than five years’ experience investing in the securities and obligations, as authorized by subdivisions (a) to (n), inclusive, of Section 53601 of the California Government Code, and with assets under management in excess of five hundred million dollars; and c) Invest solely in those securities and obligations authorized by Sections 53601 and 53635 of the California Government Code. Where the Investment Policy of the City of Palo Alto may be more restrictive than the State Code, the Policy authorizes investments in mutual funds that shall have minimal investment in securities otherwise restricted by the City's Policy. Minimal investment is defined as less than 5 percent of the mutual fund portfolio; and d) The purchase price of shares of beneficial interest purchased shall not include any commission that these companies may charge. e) Have a net asset value of $1.00. 10. Callable Securities and Multi-Step-ups: Callable securities are defined as fixed interest rate government agency securities that give the issuing agency the option of returning the invested funds at a specific point in time to the purchaser. Multi-step-ups are government agency securities in which the interest rate increases ("steps-up") at preset intervals, and which also have a callable option that allows the issuing agency to return the invested funds at a preset interval. Callable and multi-step-ups are permitted, provided that:  the potential call dates are known at the time of purchase;  the interest rates at which they “step-up” are known at the time of purchase; and  the entire face value of the security is redeemed at the call date. 14 11. Negotiable Certificates of Deposit (NCD): NCDs are large-dollar-amount, short-term certificate of deposit. Such certificates are issued by large banks and bought mainly by corporations and institutional investors. They are payable either to the bearer or to the order of the depositor, and, being negotiable, they enjoy an active secondary market, where they trade in round lots of $5 million. Although they can be issued in any denomination from $100,000 up, the typical amount is $1 million also called a Jumbo Certificate of Deposit. State law prohibits the investment of local agency funds in negotiable certificates of deposit issued by a state or federal credit union if a member of the legislative body of the local agency, or any person with investment decision making authority in the administrative, manager’s, budget, auditor-controller’s, or treasurer’s offices of the local agency also serves on the board of directors, other credit committee or the supervisory committee of the state or federal credit union issuing the negotiable certificate of deposit. 12. Medium-Term Corporate Notes: All corporate and depository institution debt securities with a maximum remaining maturity of five years or less, issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. According to California Government Code Section 53601, “Notes eligible for investment under this subdivision shall be rated in a rating category of “A” or its equivalent or better by a nationally recognized rating service. Purchase of medium-term notes shall include other instruments authorized by this section and shall not exceed 30 percent of the agency’s moneys that may be invested pursuant to this section.” 13. Supranational Securities: California Government Code Section53601 defines allowable supranational securities as United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development, the International Finance Corporation, and Inter-American Development Bank. Supranationals are well capitalized and in most cases have strong credit support from contingent capital calls from their member countries. Section 53601 was amended effective January 1, 2015 to allow local agencies to invest in the senior debt obligations of these three supranational issuers which are eligible for purchase and resale within the United States. These entities were established with the purpose of ending poverty and raising the standard of living around the world through sustainable economic growth. a) The supranationals are international organization owned by member countries. These are:  International Bank for Reconstruction and Development (IBRD or World Bank), a member of the World Bank Group, provides direct loans and guarantees to sovereigns and government-backed projects  International Finance Corporation (IFC), a member of the World Bank Group, supports the creation and growth of private companies through direct lending and equity investment, attracting third party capital, and providing advisory services  Inter-American Development Bank (IADB), a member of the 15 Inter-American Development Bank Group, provides loans, grants, and guarantees to sovereigns in Latin America and the Caribbean b) Additional characteristics shared by the IBRD, IFC, and IADB include:  Headquartered in Washington, D.C. with the United States as the largest shareholder of each organization  Rated AAA/Aaa by S&P and Moody’s 16 APPENDIX B EXPLANATION OF PROHIBITED INVESTMENTS 1. Reverse Repurchase Agreements: A Reverse Repurchase Agreement (Reverse REPO) is a contractual agreement by the investor (e.g. local agency) to post a security it owns as collateral, and a bank or dealer temporarily exchanges cash for this collateral, for a specific period of time, at an agreed-upon interest rate. During the period of the agreement, the local agency may use this cash for any purpose. At maturity, the securities are repurchased from the bank or dealer, plus interest. California law contains a number of restrictions on the use of Reverse REPOS by local agencies. 2. Derivatives: A derivative is a financial instrument created from, or whose value depends on (is derived from), the value of one or more underlying assets or indices. The term "derivative" refers to instruments or features, such as collateralized mortgage obligations, forwards, futures, currency and interest rate swaps, options, caps and floors. Except for those callable and multi- step-up securities as described under Permitted Investments, derivatives are prohibited. Certain derivative products have characteristics which could include high price volatility, liquid markets, products that are not market-tested, products that are highly leveraged, products requiring a high degree of sophistication to manage, and products that are difficult to value. According to California law, a local agency shall not invest any funds in inverse floaters, range notes, or interest-only strips that are derived from a pool of mortgages. 17 APPENDIX C GLOSSARY OF INVESTMENT TERMS AGENCIES: Federal agency and instrumentality securities. ASKED: The price at which securities are offered. BID: The price offered by a buyer of securities (when one sells securities, one asks for a bid). See “Offer”. BROKER: A person or institution that conducts investment transactions on behalf of the buyer and seller of the investment and earns a commission on the transaction. COLLATERAL: Securities, evidence of deposit, or other property, which a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public monies. ANNUAL COMPREHENSIVE FINANCIAL REPORT (ACFR): The official annual report for the City of Palo Alto. It includes combined financial statements for each individual fund and account group prepared in conformity with Generally Accepted Accounting Principles and pronouncements set forth by the Governmental Accounting Standards Board (GASB). The ACFR also includes supporting schedules that are necessary to demonstrate compliance with finance-related legal and contractual provisions, extensive introductory material, and a detailed statistical section. COUPON: The annual rate of interest that a bond’s issuer promises to pay the bondholder on the bond’s face value or the certificate attached to a bond evidencing interest due on a payment date. DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account. DEBENTURE: A bond secured only by the general credit of the issuer. DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities: (1) delivery versus payment (DVP); and (2) delivery versus receipt (DVR). DVP is delivery of securities with an exchange of money for the securities. DVR is delivery of securities with an exchange of a signed receipt for the securities. DISCOUNT: The difference between the acquisition cost of a security and its value at maturity when quoted at lower than face value. A security that sells below original offering price shortly after sale, is also is considered to be at a discount. DISCOUNT SECURITIES: Non-interest-bearing money market instruments that are issued a discount and that are redeemed at maturity for full face value (e.g., U.S. Treasury Bills). 18 DIVERSIFICATION: Dividing investment funds among a variety of securities that offer independent returns. FEDERAL AGRICULTURAL MORTGAGE CORPORATION (“FAMC” or “FMAC”): A federal agency established in 1988 to provide a secondary market for farm mortgage loans. Informally called Farmer Mac. FEDERAL CREDIT AGENCIES: Agencies of the Federal Government that were established to supply credit to various classes of institutions and individuals (e.g., S&Ls, small business firms, students, farmers, farm cooperatives, and exporters). FEDERAL DEPOSIT INSURANCE CORPORATION (“FDIC”): A federal agency that insures all types of deposits received at an insured bank, including deposits in a checking account, negotiable order of withdrawal (NOW) account, savings account, money market deposit account (MMDA) or time deposit such as a certificate of deposit (CD). FDIC insurance covers depositors' accounts at each insured bank, dollar-for-dollar, including principal and any accrued interest through the date of the insured bank's closing, up to the insurance limit. The FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities or municipal securities, even if these investments are purchased at an insured bank. The FDIC does not insure U.S. Treasury bills, bonds or notes, but these investments are backed by the full faith and credit of the United States government. The standard maximum deposit insurance amount is described as the “SMDIA” in FDIC regulations. The SMDIA is $250,000 per depositor, per insured bank. FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open-market operations. FEDERAL HOME LOAN BANKS (“FHLB”): Government-sponsored wholesale banks (currently 12 regional banks) which lend funds and provide correspondent banking services to member commercial banks, thrift institutions, credit unions, and insurance companies. The mission of the FHLBs is to liquefy the housing-related assets of its members, who must purchase stock in their District Bank. FEDERAL NATIONAL MORTGAGE ASSOCIATION (“FNMA”): FNMA, like GNMA, was chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal corporation working under the auspices of the Department of Housing and Urban Development (HUD). It is the largest single provider of residential mortgage funds in the United States. Fannie Mae, as the corporation is called, is a private stockholder-owned corporation. The corporation’s purchases include a variety of adjustable mortgages and second loans, in addition to fixed-rate mortgages. FNMA’s securities are also highly liquid and are widely accepted. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest. FEDERAL OPEN MARKET COMMITTEE (“FOMC”): The FOMC consists of seven 19 members of the Federal Reserve Board and five of the 12 Federal Reserve Bank Presidents. The President of the New York Federal Reserve Bank is a permanent member, while the other Presidents serve on a rotating basis. The Committee periodically meets to set Federal Reserve guidelines regarding purchases and sales of government securities in the open market, as a means of influencing the volume of bank credit and money. FEDERAL RESERVE SYSTEM: The central bank of the United States created by Congress and consisting of a seven-member Board of Governors in Washington, D.C., 12 regional banks, and about 5,700 commercial banks that are members of the system. GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (“GNMA” or “Ginnie Mae”): Securities that influence the volume of bank credit that is guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan associations, and other institutions. A security holder is protected by the full faith and credit of the U.S. Government. Ginnie Mae securities are backed by the FHA, VA, or FMHM mortgages. The term “pass-throughs” is often used to describe Ginnie Maes. LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value. In the money market, a security is said to be liquid if the spread between bid and asked prices is narrow, and reasonable amount can be done at those quotes. LOCAL GOVERNMENT AGENCY: A local government agency is any city, county, city and county, district, or other local governmental body or corporation, including the California State Universities (CSU) and University of California (UC) systems, K-12 schools and community colleges empowered to expend public funds. LOCAL GOVERNMENT INVESTMENT FUND (“LAIF”): Monies from local governmental units may be remitted to the California State Treasurer for deposit in this special fund for the purpose of investment. MARKET VALUE: The price at which a security is trading and could presumably be purchased or sold. MASTER REPURCHASE AGREEMENT: A written contract covering all future transactions between the parties to repurchase-reverse repurchase agreements that establish each party’s rights in the transactions. A master agreement will often specify, among other things, the right of the buyer (lender) to liquidate the underlying securities in the event of default by the seller (borrower). MATURITY: The date upon which the principal or stated value of an investment becomes due and payable. MONEY MARKET: The market in which short-term debt instruments (e.g., bills, commercial paper, and bankers’ acceptances) are issued and traded. OFFER: The price asked by a seller of securities (when one buys securities, one asks for an offer). See “Asked” and “Bid”. 20 OPEN MARKET OPERATIONS: Purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank, as directed by the FOMC in order to influence the volume of money and credit in the economy. Purchases inject reserves into the bank system and stimulate growth of money and credit; sales have the opposite effect. Open market operations are the Federal Reserve’s most important and most flexible monetary policy tool. PORTFOLIO: A collection of securities that an investor holds. PRIMARY DEALER: A group of government securities dealers that submit daily reports of market activity and positions, and monthly financial statements to the Federal Reserve Bank of New York, and are subject to its informal oversight. Primary dealers include Securities and Exchange Commission (SEC) -- registered securities broker-dealers, banks, and a few unregulated firms. PRUDENT INVESTOR RULE: An investment standard cited in the California Government Code Section 53600 et seq. Under this standard, all governing bodies of local agencies or persons authorized to make investment decisions on behalf of the City are trustees and therefore fiduciaries subject to the prudent investor standard. When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency. QUALIFIED PUBLIC DEPOSITORIES: A financial institution that: (1) does not claim exemption from the payment of any sales, compensating use, or ad valorem taxes under the laws of this state; (2) has segregated for the benefit of the commission eligible collateral having a value of not less than its maximum liability; and (3) has been approved by the Public Deposit Protection Commission to hold public deposits. RATE OF RETURN: The yield obtainable on a security based on its purchase price or its current market price. SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities and valuables of all types and descriptions are held in the bank’s vaults for protection. SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution. SECURITIES AND EXCHANGE COMMISSION: An agency created by Congress to administer securities legislation for the purpose of protecting investors in securities transactions. STRUCTURED NOTES: Notes issued by instrumentalities (e.g., FHLB, FNMA, SLMA) and by corporations, that have imbedded options (e.g., call features, step-up coupons, floating rate coupons, derivative-based returns) in their debt structure. The market performance of structured notes is affected by fluctuating interest rates; the volatility of imbedded options; and shifts in the yield curve. 21 SUPRANATIONALS: International institutions that provide development financing, advisory services and/or financial services to their member countries to achieve the overall goal of improving living standards through sustainable economic growth. The California Government Code Section 53601 allows local agencies to purchase the United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC), or Inter- American Development Bank (IADB). TIME CERTIFICATE OF DEPOSIT: A non-negotiable certificate of deposit, which cannot be sold prior to maturity. TREASURY BILLS: A non-interest-bearing discount security that is issued by the U.S. Treasury to finance the national debt. Most T-bills are issued to mature in three months, six months, or one year. TREASURY BONDS: Long-term, coupon-bearing U.S. Treasury securities that are issued as direct obligations of the U.S. Government, and having initial maturities of more than 10 years. TREASURY NOTES: Medium-term, coupon-bearing U.S. Treasury securities that are issued as direct obligations of the U.S. Government, and having initial maturities of two to 10 years. YIELD: The rate of annual income return on an investment, expressed as a percentage. YIELD-TO-CALL (YTC): The rate of return an investor earns from a bond assuming the bond is redeemed (called) prior to its nominal maturity date. YIELD-TO-MATURITY: The current income yield minus any premium above par or plus any discount from par in purchase price, with the adjustment spread over the period from the date of purchase to the date of maturity. ZERO-COUPON SECURITIES: Security that is issued at a discount and makes no periodic interest payments. The rate of return consists of a gradual accretion of the principal of the security and is payable at par upon maturity. THIS PAGE INTENTIONALLY LEFT BLANK Appendix E Page 1 APPENDIX E FORM OF OPINION OF BOND COUNSEL [Letterhead of Jones Hall, A Professional Law Corporation] [Closing Date] City Council City of Palo Alto 250 Hamilton Avenue Palo Alto, CA 94301 OPINION: $_____ City of Palo Alto Refunding General Obligation Bonds (Election of 2008), Series 2022A (Tax-Exempt) $_____ City of Palo Alto Refunding General Obligation Bonds (Election of 2008), Series 2022B (Federally Taxable) Members of the City Council: We have acted as bond counsel to the City of Palo Alto (the “City”) in connection with the issuance by the City of the general obligation bonds captioned above, dated the date hereof (the “Bonds”). In such capacity, we have examined such law and such certified proceedings, certifications, opinions and other documents as we deem necessary to render this opinion. The Bond are issued pursuant to a resolution (the “Resolution”) of the City Council of the City adopted on April 18, 2022. Regarding questions of fact material to our opinion, we have relied on representations of City contained in the Resolution, and on the certified proceedings and other certifications of public officials and others furnished to us, without undertaking to verify the same by independent investigation. Regarding certain questions of law material to our opinion, we have assumed the correctness of certain legal conclusions contained in the written opinions of the City Attorney, and others, without undertaking to verify the same by independent investigation. Based on the foregoing, we are of the opinion that, under existing law: 1. The City is a duly created and validly existing municipal corporation and charter city with the power to adopt the Resolution, perform the agreements on its part contained therein, and issue the Bonds. 2. The Resolution constitutes a valid and binding obligation City, enforceable against the City. 3. The Bonds have been duly authorized and executed by City, and are valid and binding general obligations of the City. 4. The City is obligated and authorized under the laws of the State of California to levy ad valorem taxes, without limit as to rate or amount (except with respect to certain personal property which is taxable at limited rates), upon the taxable property in the City for the payment when due of the principal of and interest on the Bonds. Appendix E Page 2 5. The interest on the Refunding General Obligation Bonds (Election of 2008), Series 2022A (Tax- Exempt) (“Tax-Exempt Bonds”) is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax. The opinions set forth in the preceding sentence are subject to the condition that the City comply with all requirements of the Internal Revenue Code of 1986, as amended, that must be satisfied subsequent to the issuance of the Tax-Exempt Bonds in order that the interest thereon be, and continue to be, excludable from gross income for federal income tax purposes. The City has made certain representations and covenants in order to comply with each such requirement. Inaccuracy of those representations, or failure to comply with certain of those covenants, may cause the inclusion of such interest in gross income for federal income tax purposes, which may be retroactive to the date of issuance of the Tax-Exempt Bonds. 6. The City does not intend for the interest on the Refunding General Obligation Bonds (Election of 2008), Series 2022B (Federally Taxable) to be excluded from gross income for federal income tax purposes. 7. The interest on the Bonds is exempt from personal income taxation imposed by the State of California. We express no opinion regarding any other tax consequences arising with respect to the ownership, sale or disposition of, or the amount, accrual or receipt of interest on, the Bonds. The rights of the owners of the Bonds and the enforceability of the Bonds are limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights generally, and by equitable principles, whether considered at law or in equity. This opinion is given as of the date hereof, and we assume no obligation to revise or supplement this opinion to reflect any facts or circumstances that may hereafter come to our attention, or any changes in law that may hereafter occur. Moreover, our opinions are not a guarantee of a particular result, and are not binding on the Internal Revenue Service or any court; rather, our opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations, opinions, and covenants referenced above. Our engagement with respect to this matter has terminated as of the date hereof. Respectfully submitted, A Professional Law Corporation Appendix F Page 1 APPENDIX F FORM OF CONTINUING DISCLOSURE CERTIFICATE This CONTINUING DISCLOSURE CERTIFICATE (the “Disclosure Certificate”) is executed and delivered by the CITY OF PALO ALTO (the “City”) in connection with the issuance of $_______* City of Palo Alto Refunding General Obligation Bonds (Election of 2008), Series 2022A (the “2022A Bonds”) and the $_________* City of Palo Alto Refunding General Obligation Refunding Bonds, Series 2022B (Federally Taxable) (the “2022B Bonds” and, with the 2022A Bonds, the “2022 Bonds”). The 2022 Bonds are being issued pursuant to a resolution adopted by the City Council of the City on May 2, 2022 (the “Resolution”). Pursuant to Section 10.11 of the Resolution, the City covenants and agree as follows: Section 1. Definitions. In addition to the definitions set forth above and in the Resolution, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section 1, the following capitalized terms shall have the following meanings: “Annual Report” means any Annual Report provided by the City pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate. “Annual Report Date” means the March 31 after the end of the City’s Fiscal Year. “Dissemination Agent” shall mean, initially, the City, or any successor Dissemination Agent designed in writing by the City and which has been filed with the then current Dissemination Agent a written acceptance of such designation. “Fiscal Year” means any twelve–month period beginning on July 1 in any year and extending to the next succeeding June 30, both dates inclusive, or any other twelve–month period selected and designated by the City as its official fiscal year period under a Certificate of the City filed with the Trustee. “MSRB” means the Municipal Securities Rulemaking Board, which has been designated by the Securities and Exchange Commission as the sole repository of disclosure information for purposes of the Rule, or any other repository of disclosure information that may be designated by the Securities and Exchange Commission as such for purposes of the Rule in the future. “Official Statement” means the final official statement executed by the City in connection with the issuance of the 2022 Bonds. “Participating Underwriter” means the original underwriters of the 2022 Bonds. “Rule” means Rule 15c2–12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as it may be amended from time to time. “Significant Events” means any of the events listed in Section 5(a) of this Disclosure Certificate. Section 2. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the City for the benefit of the holders and beneficial owners of the 2022 Bonds and in order to assist the Participating Underwriter in complying with S.E.C. Rule 15c2– 12(b)(5). * Preliminary, subject to change. Appendix F Page 2 Section 3. Provision of Annual Reports. (a) The City shall, or shall cause the Dissemination Agent to, not later than the Annual Report Date, commencing March 31, 2022, with the report for fiscal year 2020-21 provide to the MSRB, in an electronic format as prescribed by the MSRB, an Annual Report that is consistent with the requirements of Section 4 of this Disclosure Certificate; provided, however, that the first Annual Report shall consist solely of the Official Statement. Not later than 15 Business Days prior to the Annual Report Date, the City shall provide the Annual Report to the Dissemination Agent (if other than the City). If by 15 Business Days prior to the Annual Report Date the Dissemination Agent (if other than the City) has not received a copy of the Annual Report, the Dissemination Agent shall contact the City to determine if the City is in compliance with the previous sentence. The Annual Report may be submitted as a single document or as separate documents comprising a package and may include by reference other information as provided in Section 4 of this Disclosure Certificate; provided that the audited financial statements of the City may be submitted separately from the balance of the Annual Report, and later than the Annual Report Date, if not available by that date. If the City’s fiscal year changes, it shall give notice of such change in the same manner as for a Significant Event under Section 5(c). The City shall provide a written certification with each Annual Report furnished to the Dissemination Agent to the effect that such Annual Report constitutes the Annual Report required to be furnished by the City hereunder. (b) If the City does not provide (or cause the Dissemination Agent to provide) an Annual Report by the Annual Report Date, the City in a timely manner shall provide (or cause the Dissemination Agent to provide) to the MSRB, in an electronic format as prescribed by the MSRB, a notice in substantially the form attached as Exhibit A. (c) With respect to each Annual Report, the Dissemination Agent shall: (i) determine each year prior to the Annual Report Date the then–applicable rules and electronic format prescribed by the MSRB for the filing of annual continuing disclosure reports; and (ii) if the Dissemination Agent is other than the City, file a report with the City certifying that the Annual Report has been provided pursuant to this Disclosure Certificate, and stating the date it was provided. Section 4. Content of Annual Reports. The City’s Annual Report shall contain or incorporate by reference the following: (a) The City’s audited financial statements prepared in accordance with generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board. If the City’s audited financial statements are not available by the Annual Report Date, the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the final Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. (b) Unless otherwise provided in the audited financial statements filed on or prior to the annual filing deadline for Annual Reports provided for in Section 3 above, financial information and operating data with respect to the City for preceding fiscal year, substantially similar to that provided in the following tables in the Official Statement: (i) Assessed Valuations of Taxable Property; (ii) Assessed Valuation and Parcels by Land Use; (iii) Per Parcel Assessed valuation of Single Family Homes; (iv) Summary of Ad Valorem Tax Rates; (v) Tax Levies and Collections; and (vi) Largest Local Secured Taxpayers. Appendix F Page 3 (c) In addition to any of the information expressly required to be provided under this Disclosure Certificate, the City shall provide such further material information, if any, as may be necessary to make the specifically required statements, in the light of the circumstances under which they are made, not misleading. (d) Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the City or related public entities, which are available to the public on the MSRB’s Internet web site or filed with the Securities and Exchange Commission. The City shall clearly identify each such other document so included by reference. Section 5. Reporting of Significant Events. (a) The City shall give, or cause to be given, notice of the occurrence of any of the following Significant Events with respect to the 2022 Bonds: (i) Principal and interest payment delinquencies; (ii) Non–payment related defaults, if material; (iii) Unscheduled draws on debt service reserves reflecting financial difficulties; (iv) Unscheduled draws on credit enhancements reflecting financial difficulties; (v) Substitution of credit or liquidity providers, or their failure to perform; (vi) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701–TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax status of the security; (vii) Modifications to rights of security holders, if material; (viii) Bond calls, if material, and tender offers; (ix) Defeasances; (x) Release, substitution, or sale of property securing repayment of the securities, if material; (xi) Rating changes; (xii) Bankruptcy, insolvency, receivership or similar event of the City or other obligated person; (xiii) The consummation of a merger, consolidation, or acquisition involving the City or an obligated person, or the sale of all or substantially all of the assets of the City or an obligated person (other than in the ordinary course of business), the entry into a definitive agreement to undertake such an action, or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; (xiv) Appointment of a successor or additional trustee or the change of name of a trustee, if material; (xv) The incurrence of a financial obligation of the City or other obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the City or other obligated person, any of which affect security holders, if material; or Appendix F Page 4 (xvi) A default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation of the City or other obligated person, any of which reflect financial difficulties. (b) Whenever the City obtains knowledge of the occurrence of a Significant Event, the City shall, or shall cause the Dissemination Agent (if not the City) to, file a notice of such occurrence with the MSRB, in an electronic format as prescribed by the MSRB, in a timely manner not in excess of 10 business days after the occurrence of the Significant Event. Notwithstanding the foregoing, notice of Significant Events described in subsection (a)(viii) above need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to holders of affected 2022 Bonds under the Resolution. (c) The City acknowledges that the events described in subparagraphs (a)(ii), (a)(vii), (a)(viii) (if the event is a bond call), (a)(x), (a)(xiii), (a)(xiv) and (a)(xv) of this Section 5 contain the qualifier “if material.” The City shall cause a notice to be filed as set forth in paragraph (b) above with respect to any such event only to the extent that the City determines the event’s occurrence is material for purposes of U.S. federal securities law. The City intends that the words used in paragraphs (xv) and (xvi) and the definition of “financial obligation” to have the meanings ascribed thereto in SEC Release No. 34-83885 (August 20, 2018). (d) For purposes of this Disclosure Certificate, any event described in paragraph (a)(xii) above is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent, or similar officer for the City in a proceeding under the United States Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the City, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement, or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the City. Section 6. Identifying Information for Filings with the MSRB. All documents provided to the MSRB under this Disclosure Certificate shall be accompanied by identifying information as prescribed by the MSRB. Section 7. Termination of Reporting Obligation. The City’s obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of all of the 2022 Bonds. If such termination occurs prior to the final maturity of the 2022 Bonds, the City shall give notice of such termination in the same manner as for a Significant Event under Section 5(b). Section 8. Dissemination Agent. The City may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and may discharge any Dissemination Agent, with or without appointing a successor Dissemination Agent. Any Dissemination Agent may resign by providing 30 days’ written notice to the City. Section 9. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the City may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied: (a) if the amendment or waiver relates to the provisions of Sections 3(a), 4 or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of an obligated person with respect to the 2022 Bonds, or type of business conducted; (b) the undertakings herein, as proposed to be amended or waived, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the primary offering of the 2022 Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and Appendix F Page 5 (c) the proposed amendment or waiver either (i) is approved by holders of the 2022 Bonds in the manner provided in the Resolution for amendments to the Resolution with the consent of holders, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the holders or beneficial owners of the 2022 Bonds. If the annual financial information or operating data to be provided in the Annual Report is amended pursuant to the provisions hereof, the first annual financial information filed pursuant hereto containing the amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided. If an amendment is made to the undertaking specifying the accounting principles to be followed in preparing financial statements, the annual financial information for the year in which the change is made shall present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. The comparison shall include a qualitative discussion of the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial information, in order to provide information to investors to enable them to evaluate the ability of the City to meet its obligations. To the extent reasonably feasible, the comparison shall be quantitative. The Dissemination Agent shall not be obligated to enter into any amendment increasing or affecting its duties or obligations hereunder. A notice of any amendment made pursuant to this Section 9 shall be filed in the same manner as for a Significant Event under Section 5(b). Section 10. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the City from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Significant Event, in addition to that which is required by this Disclosure Certificate. If the City chooses to include any information in any Annual Report or notice of occurrence of a Significant Event in addition to that which is specifically required by this Disclosure Certificate, the City shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Significant Event. Section 11. Default. If the City fails to comply with any provision of this Disclosure Certificate, the Participating Underwriter or any holder or beneficial owner of the 2022 Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be deemed an Event of Default under the Resolution, and the sole remedy under this Disclosure Certificate in the event of any failure of the City to comply with this Disclosure Certificate shall be an action to compel performance. Section 12. Duties, Immunities and Liabilities of Dissemination Agent. (a) Article VIII of the Resolution is hereby made applicable to this Disclosure Certificate as if this Disclosure Certificate were (solely for this purpose) contained in the Resolution. The Dissemination Agent shall be entitled to the protections and limitations from liability afforded to the Paying Agent thereunder. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate, and the City agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which they may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys’ fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent’s negligence or willful misconduct. The Dissemination Agent shall have no duty or obligation to review any information provided to it by the City hereunder and shall not be deemed to be acting in any fiduciary capacity for the City, the Certificate holders or any other party. The obligations of the City under this Section shall survive resignation or removal of the Dissemination Agent and payment of the 2022 Bonds. Appendix F Page 6 (b) The Dissemination Agent shall be paid compensation by the City for its services provided hereunder in accordance with its schedule of fees as amended from time to time, and shall be reimbursed for all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder. Section 13. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the City, the Dissemination Agent, the Participating Underwriter and the holders and beneficial owners from time to time of the 2022 Bonds and shall create no rights in any other person or entity. Section 14. Counterparts. This Disclosure Certificate may be executed in several counterparts, each of which shall be regarded as an original, and all of which shall constitute one and the same instrument. Date: [Closing Date] CITY OF PALO ALTO By Authorized Officer Appendix F Page 7 EXHIBIT A NOTICE TO MSRB OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: City of Palo Alto, California Name of Issues: $______ City of Palo Alto Refunding General Obligation Bonds (Election of 2008), Series 2022A, and $_________ City of Palo Alto Refunding General Obligation Refunding Bonds, Series 2022B (Federally Taxable) Date of Issuance: [Closing Date] NOTICE IS HEREBY GIVEN that the City has not provided an Annual Report with respect to the above-named Issues as required by the Continuing Disclosure Certificate, dated [Closing Date], furnished by the City in connection with the Issue. The City anticipates that the Annual Report will be filed by _________________. Date: ________________ CITY OF PALO ALTO, as Dissemination Agent By Authorized Officer THIS PAGE INTENTIONALLY LEFT BLANK Appendix G APPENDIX G BOOK-ENTRY SYSTEM The following description of the procedures and record keeping with respect to beneficial ownership interests in the 2022 Bonds, payment of principal of and interest on the 2022 Bonds to Direct Participants, Indirect Participants or Beneficial Owners (as such terms are defined below) of the 2022 Bonds, confirmation and transfer of beneficial ownership interests in the 2022 Bonds and other Bond related transactions by and between DTC, Direct Participants, Indirect Participants and Beneficial Owners of the 2022 Bonds is based solely on information furnished by DTC to the City which the City believes to be reliable, but the City and the Underwriter do not and cannot make any independent representations concerning these matters and do not take responsibility for the accuracy or completeness thereof. Neither the DTC, Direct Participants, Indirect Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters but should instead confirm the same with DTC or the DTC Participants, as the case may be. The Depository Trust Company (“DTC”), New York, New York, will act as securities depository for the 2022 Bonds. The 2022 Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully- registered Bond will be issued for each maturity of the 2022 Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC. DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org. Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the 2022 Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the 2022 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the 2022 Bonds, except in the event that use of the book-entry system for the 2022 Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede &Co. or such other name as requested by an authorized representative of DTC. The deposit of the 2022 Bonds with DTC and their registration in the name of Cede & Co. or such other DTC Appendix G nominee do not affect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the 2022 Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct or Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the 2022 Bonds, such as tenders, defaults, and proposed amendments to the 2022 Bonds documents. For example, Beneficial Owners of the 2022 Bonds may wish to ascertain that the nominee holding the 2022 Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Paying Agent and request that copies of notices be provided directly to them. Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the 2022 Bonds unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the 2022 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Payments of principal of and interest on the 2022 Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the City or the Paying Agent, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, the Paying Agent or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Paying Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its service as depository with respect to the 2022 Bonds at any time by giving reasonable notice to the City or the Paying Agent. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered. The City may decide to discontinue use of the system of book-Entry Only transfers through DTC (or a successor securities depository). In that event, the Bond certificates will be printed and delivered to DTC. The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the City believes to be reliable, but the City takes no responsibility for the accuracy thereof. In the event that (a) DTC determines not to continue to act as securities depository for the 2022 Bonds, or (b) the City determines that DTC shall no longer act and delivers a written certificate to the Paying Agent to that effect, then the City will discontinue the Book-Entry System with DTC for the 2022 Bonds. If the City determines to replace DTC with another qualified securities depository, the City will prepare or direct the preparation of a new single separate, fully registered Bond for each maturity of the 2022 Bonds registered in the name of such successor or substitute securities depository as are not inconsistent with the terms of the Resolution. If the City fails to identify another qualified securities depository to replace the incumbent securities depository for the 2022 Bonds, then the 2022 Bonds shall no longer be restricted to being registered in the Bond registration books in the name of the incumbent securities depository or its nominee but shall be registered in whatever name or names the incumbent securities depository or its nominee transferring or exchanging the 2022 Bonds shall designate. Appendix G In the event that the Book-Entry System is discontinued, the following provisions would also apply: (i) the 2022 Bonds will be made available in physical form, (ii) payment of principal of and interest on the 2022 Bonds will be payable upon surrender thereof at the trust office of the Paying Agent identified in the Resolution, and (iii) the 2022 Bonds will be transferable and exchangeable as provided in the Resolution. The City and the Paying Agent do not have any responsibility or obligation to DTC Participants, to the persons for whom they act as nominees, to Beneficial Owners, or to any other person who is not shown on the registration books as being an owner of the 2022 Bonds, with respect to (i) the accuracy of any records maintained by DTC or any DTC Participants; (ii) the payment by DTC or any DTC Participant of any amount in respect of the principal of and interest on the 2022 Bonds; (iii) the delivery of any notice which is permitted or required to be given to registered owners under the Resolution; (iv) any consent given or other action taken by DTC as registered owner; or (v) any other matter arising with respect to the 2022 Bonds or the Resolution. The City and the Paying Agent cannot and do not give any assurances that DTC, DTC Participants or others will distribute payments of principal of and interest on the 2022 Bonds paid to DTC or its nominee, as the registered owner, or any notices to the Beneficial Owners or that they will do so on a timely basis or will serve and act in a manner described in this Official Statement. The City and the Paying Agent are not responsible or liable for the failure of DTC or any DTC Participant to make any payment or give any notice to a Beneficial Owner in respect to the 2022 Bonds or any error or delay relating thereto. THIS PAGE INTENTIONALLY LEFT BLANK 1 IRREVOCABLE REFUNDING INSTRUCTIONS (2010 Bonds) $55,305,000 City of Palo Alto General Obligation Bonds Election of 2008, Series 2010A These IRREVOCABLE REFUNDING INSTRUCTIONS (2010 BONDS) (these “Instructions”), are dated ____, 2022, and are given by the CITY OF PALO ALTO, a charter city and municipal corporation organized and existing under the Constitution and laws of the State of California (the “City”), to U.S. BANK TRUST NATIONAL ASSOCIATION, a national banking association organized and existing under the laws of the United States of America, acting as paying agent for the 2010 Bonds described below (the “2010 Paying Agent”). BACKGROUND: 1.More than two-thirds of the electors voting at a special municipal election held on November 4, 2008, voted for a proposition, designated Measure N, authorizing the issuance by the City of general obligation bonds in the aggregate principal amount of $76,000,000 for the purpose of financing the costs of constructing a new energy efficient, environmentally friendly Mitchell Park Library and Community Center, renovating and expanding the Main Library, and renovating the Downtown Library, including enhancements at all three facilities for seismic safety and disabled access, expanded space for library collections, meeting and study areas, and new air conditioning, ventilation and lighting systems. 2.The City issued the captioned bonds (the “2010 Bonds”) pursuant to such authorization, Resolution No. 9057 adopted by the City Council on May 10, 2010 (the “2010 Bond Resolution”) and that certain Paying Agent Agreement, dated as of June 1, 2010 (the “2010 Paying Agent Agreement”), by and between the City and the 2010 Paying Agent. 3.Under the 2010 Paying Agent Agreement, the City is authorized to redeem the 2010 Bonds, in whole or in part on any date on or after August 1, 2020, at a redemption price equal the outstanding principal amount of the 2010 Bonds to be redeemed, plus interest accrued to the redemption date, without premium. 4.In order to realize debt service savings for the benefit of the taxpayers of the City, the City Council has authorized the issuance and sale of its “City of Palo Alto Refunding General Obligation Bonds (Election of 2008), Series 2022A (Tax-Exempt)” (the “2022 Bonds”) for the purpose of refinancing the 2010 Bonds pursuant to a resolution adopted on May 9, 2022 (the “2022 Resolution”). 5.The City wishes to give these Instructions to the 2010 Paying Agent for the purpose of establishing an irrevocable escrow fund to be funded, invested, held and Exhibit 4 2 administered for the purpose of providing for the payment and redemption of the 2010 Bonds on _____, 2022. 6. As a result of the deposit and investment of funds in accordance with these Instructions, the 2010 Bonds shall be discharged and defeased in accordance with the provisions of Section 9.03 of the 2010 Paying Agent Agreement. INSTRUCTIONS: In order to provide for the payment and redemption of the 2010 Bonds in accordance with the 2010 Paying Agent Agreement, the City hereby irrevocably directs the 2010 Paying Agent as follows: SECTION 1. Establishment of Escrow Fund. The 2010 Paying Agent is directed to establish an escrow fund (the “Escrow Fund”) to be held by the 2010 Paying Agent in trust as an irrevocable escrow securing the payment of the 2010 Bonds as hereinafter set forth. All cash and securities in the Escrow Fund are hereby irrevocably pledged as a special fund for the payment of the principal of and interest on the 2010 Bonds in accordance with the 2010 Paying Agent Agreement. If at any time the 2010 Paying Agent receives actual knowledge that the cash and securities in the Escrow Fund will not be sufficient to make any payment required by Section 4 in respect of the 2010 Bonds, the 2010 Paying Agent shall notify the City of such fact and the City shall immediately cure such deficiency from any source of legally available funds. The 2010 Paying Agent has no liability for any such insufficiency. SECTION 2. Deposit and Investment of Amounts in Escrow Fund. On ______, 2022 (the “Closing Date”), the City shall cause to be transferred to the 2010 Paying Agent for deposit into the Escrow Fund the amount of $_______ in immediately available funds, to be derived from the proceeds of the Refunding Bonds received by the 2010 Paying Agent on the Closing Date. Also on the date hereof, the 2010 Paying Agent shall transfer the following amounts from the funds and accounts established and held by the 2010 Paying Agent under the 2010 Paying Agent Agreement for deposit in the Escrow Fund: [identify other sources of funds] The 2010 Paying Agent shall hold all amounts in the Escrow Fund uninvested. SECTION 3. Application of Amounts in Escrow Fund. Amounts held by the 2010 Paying Agent in the Escrow Fund shall be withdrawn to pay the redemption price of the 2010 Bonds on _____, 2022 (the “Redemption Date”). Following payment and redemption in full of all of the 2010 Bonds on the Redemption Date, the 2010 Paying Agent shall withdraw any amounts remaining on deposit in the Escrow Fund and transfer such amounts to the City, to be deposited in the Debt Service Fund established for the Refunding Bonds and applied to pay debt service coming due on the Refunding Bonds. SECTION 4. Irrevocable Election to Redeem 2010 Bonds; Redemption Notice. The City hereby irrevocably elects to redeem all of the outstanding 2010 Bonds on the 3 Redemption Date, in accordance with the provisions of Section 2.03(a) of the 2010 Paying Agent Agreement. The City previously directed the 2010 Paying Agent to give notice of the redemption of the 2012 Bonds in accordance with Section 2.03(c) of the 2010 Paying Agent Agreement in substantially the form of Exhibit A. The City hereby directs the 2010 Paying Agent to file a notice of defeasance of the 2010 Bonds in substantially the form of Exhibit B on the Electronic Municipal Market Access system (“EMMA”) on the date hereof. The sole remedy for failure to post such notice on EMMA shall be an action by the holders of the 2010 Bonds in mandamus for specific performance or similar remedy to compel performance. SECTION 5. Application of Certain Terms of 2010 Paying Agent Agreement. All of the terms of the 2010 Paying Agent Agreement relating to the payment and redemption of the 2010 Bonds, and the protections, immunities and limitations from liability afforded the 2010 Paying Agent as paying agent for the 2010 Bonds, are incorporated in these Instructions as if set forth in full herein. SECTION 6. Compensation to Paying Agent. The City shall pay the 2010 Paying Agent full compensation for its services under these Instructions, including out-of-pocket costs such as publication costs, redemption expenses, legal fees and other costs and expenses relating hereto and, in addition, all fees, costs and expenses relating to the purchase, substitution or withdrawal of any securities after the date hereof. Under no circumstances shall amounts deposited in or credited to the Escrow Fund be deemed to be available for said purposes. The 2010 Paying Agent has no lien upon or right of set off against the cash and securities at any time on deposit in the Escrow Fund. CITY OF PALO ALTO By: City Manager ACCEPTED: U.S. BANK TRUST NATIONAL ASSOCIATION, as Paying Agent By Authorized Officer A-1 EXHIBIT A FORM OF CONDITIONAL NOTICE OF REDEMPTION $55,305,000 City of Palo Alto General Obligation Bonds Election of 2008, Series 2010A NOTICE IS HEREBY GIVEN, by the City of Palo Alto (the “City”) that the captioned bonds (the “2010 Bonds”) have been called for redemption on ______, 2022 (the “Redemption Date”) at a redemption price equal to the par amount thereof together with accrued interest thereon to the redemption date, without premium (the “Redemption Price”). Interest on the 2010 Bonds will not accrue after the redemption date. The 2010 Bonds consist of the following: Maturity Date (August 1) Principal Amount Interest Rate CUSIP (Base 697362) 2022 $1,450,000 4.500 TG6 2023 1,515,000 4.500 TH4 2024 1,585,000 4.500 TJ0 2025 1,655,000 4.500 TK7 2026 1,730,000 5.000 TL5 2027 1,820,000 5.000 TM3 2028 1,910,000 5.000 TN1 2029 2,005,000 5.000 TP6 2032 (T) 6,595,000 4.375 TQ4 2034 (T) 4,890,000 4.375 TR2 2040 (T) 17,725,000 5.000 TS0 (T) Term Bond Redemption of the 2010 Bonds as described in this notice shall be conditioned upon the receipt by the 2010 Paying Agent from the City of the funds necessary for the proposed redemption on or before the Redemption Date. Payment of the Redemption Price of the 2010 Bonds will become due and payable on the Redemption Date upon presentation and surrender thereof in the following manner: [to come from US Bank] IMPORTANT NOTICE Under the Tax Cuts and Jobs Act of 2017 (the “Act”), 24% will be withheld if tax identification number is not properly certified. The City and the Paying Agent shall not be responsible for the selection or use of the CUSIP numbers listed above, nor is any representation made as to the accuracy of the CUSIP numbers listed above or as printed on any 2010 Bond; the CUSIP numbers are included solely for the convenience of the owners of the 2010 Bonds. A-2 Dated: ____________, 2022 U.S. BANK TRUST COMPANY NATIONAL ASSOCIATION, as Paying Agent B-1 EXHIBIT B FORM OF NOTICE OF DEFEASANCE $55,305,000 City of Palo Alto General Obligation Bonds Election of 2008, Series 2010A NOTICE IS HEREBY GIVEN, by the City of Palo Alto (the “City”) that the captioned bonds (the “2010 Bonds”) has been defeased and discharged under and within the meaning of the Paying Agent Agreement, dated as of June 1, 2010 (“Paying Agent Agreement”), by and between the City and U.S. Bank Trust Company National Association, as paying agent (“Paying Agent”), related to the 2010 Bonds. Funds for the payment of the 2010 Bonds have been deposited with the Paying Agent, and the sufficiency of the funds and investments for the purpose of paying the principal of and interest on the 2010 Bonds has been verified by____________, certified public accountants. As a consequence of the foregoing actions and in accordance with the Paying Agent Agreement, the 2010 Bonds are no longer secured by a pledge of revenues under the Paying Agent Agreement, and the 2010 Bonds are now payable solely from the moneys set aside in escrow as described above and, if necessary, from other legally available funds of the City. The City has irrevocably elected to redeem all of the outstanding 2010 Bonds on _____, 2022, at a redemption price equal to the par amount thereof together with accrued interest thereon to the redemption date, without premium. The 2010 Bonds that have been defeased and discharged consist of the following: Maturity Date (August 1) Principal Amount Interest Rate CUSIP (Base 697362) 2022 $1,450,000 4.500 TG6 2023 1,515,000 4.500 TH4 2024 1,585,000 4.500 TJ0 2025 1,655,000 4.500 TK7 2026 1,730,000 5.000 TL5 2027 1,820,000 5.000 TM3 2028 1,910,000 5.000 TN1 2029 2,005,000 5.000 TP6 2032 (T) 6,595,000 4.375 TQ4 2034 (T) 4,890,000 4.375 TR2 2040 (T) 17,725,000 5.000 TS0 (T) Term Bond The City and the Paying Agent shall not be responsible for the selection or use of the CUSIP numbers listed above, nor is any representation made as to the accuracy of the CUSIP numbers listed above or as printed on any 2010 Bond; the CUSIP numbers are included solely for the convenience of the owners of the 2010 Bonds. B-2 Dated: _____, 2022 U.S. BANK TRUST COMPANY NATIONAL ASSOCIATION, as 2010 Paying Agent ESCROW DEPOSIT AND TRUST AGREEMENT (2013 Bonds) Relating to $20,695,000 City of Palo Alto General Obligation Bonds Election of 2008, Series 2013A This ESCROW DEPOSIT AND TRUST AGREEMENT (2013 BONDS) (this “Agreement”), dated ______, 2022, is between the CITY OF PALO ALTO, a charter city and municipal corporation organized and existing under the Constitution of the State of California (the “City”), and U.S. BANK TRUST COMPANY NATIONAL ASSOCIATION, a national banking association organized and existing under the laws of the United States of America, in its capacity as paying agent (the “2013 Paying Agent”) under that certain Paying Agent Agreement, dated as of June 1, 2013 (the “2013 Paying Agent Agreement”), by and between the City and the 2013 Paying Agent. BACKGROUND: 1.More than two-thirds of the electors voting at a special municipal election held on November 4, 2008, voted for a proposition, designated Measure N, authorizing the issuance by the City of general obligation bonds in the aggregate principal amount of $76,000,000 for the purpose of financing the costs of constructing a new energy efficient, environmentally friendly Mitchell Park Library and Community Center, renovating and expanding the Main Library, and renovating the Downtown Library, including enhancements at all three facilities for seismic safety and disabled access, expanded space for library collections, meeting and study areas, and new air conditioning, ventilation and lighting systems. 2.Pursuant to such authorization, Resolution No. 9334, adopted by the City Council on May 6, 2013 (the “2013 Bond Resolution”), and the 2013 Paying Agent Agreement, the City previously issued the captioned bonds (the “2013 Bonds”). 3.Under the 2013 Paying Agent Agreement, the City is authorized to redeem the 2013 Bonds maturing on or after August 1, 2024, in whole or in part on any date on or after August 1, 2023, at a redemption price equal the outstanding principal amount of the 2013 Bonds to be redeemed, plus interest accrued to the redemption date, without premium. 4.In order to realize debt service savings for the benefit of the taxpayers of the City, the City Council has authorized the issuance and sale of its “City of Palo Alto Refunding General Obligation Bonds (Election of 2008), Series 2022B (Federally Taxable)” (the “2022 Bonds”) for the purpose of refinancing the 2013 Bonds pursuant to a resolution adopted on May 9, 2022 (the “2022 Resolution”). Exhibit 5 2 5. The City Council is authorized to provide for the issuance and sale of the 2022 Bonds under the provisions of Articles 9 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code, commencing with Section 53550 of said Code (the “Bond Law”). 6. The City wishes to establish an irrevocable escrow fund to be funded, invested, held and administered for the purpose of providing for the payment in full of the principal, interest and redemption premium on the outstanding 2013 Bonds. 7. As a result of the deposit and investment of funds in accordance with this Agreement, the 2013 Bonds will be discharged and defeased in accordance with the provisions of Section 9.03 of the 2013 Paying Agent Agreement. AGREEMENT: In consideration of the premises and the material covenants contained herein, the City and the 2013 Paying Agent hereby agree as follows: SECTION 1. Establishment of Escrow Fund. The 2013 Paying Agent is hereby directed to establish an escrow fund (the “Escrow Fund”) to be held by the 2013 Paying Agent in trust as an irrevocable escrow securing the payment of the 2013 Bonds as hereinafter set forth. All cash and securities in the Escrow Fund are hereby irrevocably pledged as a special fund for the payment of the principal of and interest and premium on the 2013 Bonds in accordance with the 2013 Paying Agent Agreement. If at any time the 2013 Paying Agent receives actual knowledge that the cash and securities in the Escrow Fund will not be sufficient to make any payment required by Section 4 in respect of the 2013 Bonds, the 2013 Paying Agent shall notify the City of such fact and the City shall immediately cure such deficiency from any source of legally available funds. The 2013 Paying Agent has no liability for any such insufficiency. SECTION 2. Deposit and Investment of Amounts in Escrow Fund. On the date hereof (the “Closing Date”), the City shall cause to be transferred to the 2013 Paying Agent for deposit into the Escrow Fund the amount of $________ in immediately available funds, to be derived from the proceeds of the 2022 Bonds. Also on the date hereof, the 2013 Paying Agent shall transfer the following amounts from the funds and accounts established and held by the 2013 Paying Agent under the 2013 Paying Agent Agreement for deposit in the Escrow Fund: [identify other sources of funds] On the Closing Date, the 2013 Paying Agent shall invest $______ of the amounts deposited in the Escrow Fund in the federal securities listed on Exhibit A. The 2013 Paying Agent shall hold the remaining $_____ in cash, uninvested. If the 2013 Paying Agent learns that the Department of the Treasury or the Bureau of Public Debt will not, for any reason, accept a subscription of state and local government series securities (“SLGS”) that is to be submitted pursuant to this Agreement, the 2013 Paying Agent shall promptly request alternative written investment instructions from the City with respect to funds which were to be invested in SLGS. The 2013 Paying Agent 3 shall follow such instructions and, upon the maturity of any such alternative investment, the 2013 Paying Agent shall hold such funds uninvested and without liability for interest until receipt of further written instructions from the City. In the absence of investment instructions from the City, the 2013 Paying Agent shall hold such funds uninvested. The 2013 Paying Agent may conclusively rely upon the City’s selection of an alternative investment as a determination of the alternative investment’s legality and suitability and shall not be liable for any losses related to the alternative investments or for compliance with any yield restriction applicable thereto. SECTION 3. Application of Amounts in Escrow Fund. The 2013 Paying Agent is hereby instructed to withdraw from the Escrow Fund the amounts required to pay the principal of and interest and redemption premium on the 2013 Bonds, in accordance with the schedule attached as Exhibit B hereto. Following the payment and redemption of the 2013 Bonds in full, the 2013 Paying Agent shall transfer any amounts remaining on deposit in the Escrow Fund to U.S. Bank Trust Company National Association, in its capacity as paying agent for the 2022 Bonds, for deposit into the Debt Service Fund established under the 2022 Resolution, to be applied to pay interest next coming due and payable on the 2022 Bonds. SECTION 4. Irrevocable Election to Redeem 2013 Bonds; Defeasance Notice; Redemption Notice. The City has irrevocably elected to pay and redeem all of the outstanding 2013 Bonds on the dates set forth in Exhibit B, in accordance with the provisions of the 2013 Bond Resolution. The 2013 Paying Agent is hereby directed to provide notice of redemption in the form attached as Exhibit C to the owners of the 2013 Bonds, in accordance with 2013 Paying Agent Agreement, not less than 30 or more than 60 days prior to the redemption date. The City further hereby directs the 2013 Paying Agent to file on the Closing Date the notice attached as Exhibit D on the Municipal Securities Rulemaking Board’s EMMA system. SECTION 5. Compensation to 2013 Paying Agent. The City shall pay the 2013 Paying Agent full compensation for its services under this Agreement, including out-of- pocket costs such as publication costs, redemption expenses, legal fees and other costs and expenses relating hereto and, in addition, all fees, costs and expenses relating to the purchase, substitution or withdrawal of any securities after the date hereof. Under no circumstances shall amounts deposited in or credited to the Escrow Fund be deemed to be available for said purposes. The 2013 Paying Agent has no lien upon or right of set off against the cash and securities at any time on deposit in the Escrow Fund. SECTION 6. Immunities and Liability of 2013 Paying Agent. All of the terms of the 2013 Paying Agent Agreement relating to the payment and redemption of the 2013 Bonds, and the protections, immunities and limitations from liability afforded the 2013 Paying Agent as paying agent for the 2013 Bonds, are incorporated herein as if set forth in full herein. SECTION 7. Termination of Agreement. Upon payment in full of the principal of and interest and redemption premium on the 2013 Bonds and all fees, expense and 4 charges of the 2013 Paying Agent as described above, this Agreement shall terminate and the 2013 Paying Agent shall be discharged from any further obligation or responsibility hereunder. SECTION 8. Execution in Counterparts. This Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. 5 SECTION 9. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. CITY OF PALO ALTO By: City Manager U.S. BANK TRUST COMPANY NATIONAL ASSOCIATION, as 2013 Paying Agent By: Authorized Officer A-1 EXHIBIT A ESCROW SECURITIES Type of Security CUSIP Purchase Date Maturity Date Par Amount Rate Price Interest Class B-1 EXHIBIT B ESCROW REQUIREMENTS Payment Date Interest Payment Maturing Principal Redeemed Principal Redemption Premium Total Payment 8/1/22 2/1/23 8/1/23 $0.00 D-1 EXHIBIT C FORM OF NOTICE OF REDEMPTION $20,695,000 City of Palo Alto General Obligation Bonds Election of 2008, Series 2013A NOTICE IS HEREBY GIVEN, by the City of Palo Alto (the “City”) that the captioned bonds (the “2013 Bonds”) have been called for redemption on August 1, 2023 (the “Redemption Date”) at a redemption price equal to the par amount thereof together with accrued interest thereon to the redemption date, without premium (the “Redemption Price”). Interest on the 2013 Bonds will not accrue after the redemption date. The 2013 Bonds consist of the following: Maturity Date (August 1) Principal Amount Interest Rate CUSIP (Base 697362) 2022 $485,000 4.0% UF6 2023 505,000 4.0 UG4 2024 525,000 5.0 UH2 2025 555,000 5.0 UJ8 2026 585,000 5.0 UK5 2027 610,000 5.0 UL3 2028 645,000 5.0 UM1 2029 670,000 3.5 UN9 2030 695,000 4.0 UP4 2031 725,000 4.0 UQ2 2033 (T) 1,540,000 4.0 UR0 2035 (T) 1,670,000 4.0 US8 2038 (T) 2,765,000 4.0 UT6 2043 (T) 5,415,000 4.0 UU3 (T) Term Bond Funds for the payment of the 2013 Bonds have been deposited with U.S. Bank Trust Company National Association, as paying agent, and the sufficiency of the funds and investments for the purpose of paying the principal of and interest on the 2013 Bonds has been verified by ________, certified public accountants. Payment of the Redemption Price of the 2013 Bonds will become due and payable on the Redemption Date upon presentation and surrender thereof in the following manner: [to come from US Bank] IMPORTANT NOTICE Under the Tax Cuts and Jobs Act of 2017 (the “Act”), 24% will be withheld if tax identification number is not properly certified. D-2 The City and the Paying Agent shall not be responsible for the selection or use of the CUSIP numbers listed above, nor is any representation made as to the accuracy of the CUSIP numbers listed above or as printed on any 2013 Bond; the CUSIP numbers are included solely for the convenience of the owners of the 2013 Bonds. Dated: ____________, 2023 U.S. BANK TRUST COMPANY NATIONAL ASSOCIATION, as Paying Agent D-1 EXHIBIT D FORM OF NOTICE OF DEFEASANCE $20,695,000 City of Palo Alto General Obligation Bonds Election of 2008, Series 2013A NOTICE IS HEREBY GIVEN, by the City of Palo Alto (the “City”) that the captioned bonds (the “2013 Bonds”) has been defeased and discharged under and within the meaning of the Paying Agent Agreement, dated as of June 1, 2013 (“Paying Agent Agreement”), by and between the City and U.S. Bank Trust Company National Association, as paying agent (“Paying Agent”), related to the 2013 Bonds. Funds for the payment of the 2013 Bonds have been deposited with the Paying Agent, and the sufficiency of the funds and investments for the purpose of paying the principal of and interest on the 2013 Bonds has been verified by____________, certified public accountants. As a consequence of the foregoing actions and in accordance with the Paying Agent Agreement, the 2013 Bonds are no longer secured by a pledge of revenues under the Paying Agent Agreement, and the 2013 Bonds are now payable solely from the moneys set aside in escrow as described above and, if necessary, from other legally available funds of the City. The City has irrevocably elected to redeem all of the outstanding 2013 Bonds maturing on or after August 1, 2024, on August 1, 2023, at a redemption price equal to the par amount thereof together with accrued interest thereon to the redemption date, without premium. The 2013 Bonds that have been defeased and discharged consist of the following: Maturity Date (August 1) Principal Amount Interest Rate CUSIP (Base 697362) 2022 $485,000 4.0% UF6 2023 505,000 4.0 UG4 2024 525,000 5.0 UH2 2025 555,000 5.0 UJ8 2026 585,000 5.0 UK5 2027 610,000 5.0 UL3 2028 645,000 5.0 UM1 2029 670,000 3.5 UN9 2030 695,000 4.0 UP4 2031 725,000 4.0 UQ2 2033 (T) 1,540,000 4.0 UR0 2035 (T) 1,670,000 4.0 US8 2038 (T) 2,765,000 4.0 UT6 2043 (T) 5,415,000 4.0 UU3 (T) Term Bond The City and the Paying Agent shall not be responsible for the selection or use of the CUSIP numbers listed above, nor is any representation made as to the accuracy of D-2 the CUSIP numbers listed above or as printed on any 2013 Bond; the CUSIP numbers are included solely for the convenience of the owners of the 2013 Bonds. Dated: _____, 2022 U.S. BANK TRUST COMPANY NATIONAL ASSOCIATION, as 2013 Paying Agent