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Home My WebLink About2025-12-02 Finance Committee Agenda PacketFINANCE COMMITTEE Regular Meeting Tuesday, December 02, 2025 Community Meeting Room & Hybrid 5:30 PM Finance Committee meetings will be held as “hybrid” meetings with the option to attend by teleconference/video conference or in person. Information on how the public may observe and participate in the meeting is located at the end of the agenda. The meeting will be broadcast on Cable TV Channel 26, live on YouTube https://www.youtube.com/c/cityofpaloalto, and streamed to Midpen Media Center https://midpenmedia.org. VIRTUAL PARTICIPATION CLICK HERE TO JOIN (https://cityofpaloalto.zoom.us/j/99227307235 ) Meeting ID: 992 2730 7235 Phone: 1(669)900-6833 PUBLIC COMMENTS General Public Comment for items not on the agenda will be accepted in person for up to three minutes or an amount of time determined by the Chair. General public comment will be heard for 30 minutes. Additional public comments, if any, will be heard at the end of the agenda. Public comments for agendized items will be accepted both in person and via Zoom for up to three minutes or an amount of time determined by the Chair. Requests to speak will be taken until 5 minutes after the staff’s presentation or as determined by the Chair. Written public comments can be submitted in advance to city.council@CityofPaloAlto.org and will be provided to the Council and available for inspection on the City’s website. Please clearly indicate which agenda item you are referencing in your subject line. PowerPoints, videos, or other media to be presented during public comment are accepted only by email to city.clerk@CityofPaloAlto.org at least 24 hours prior to the meeting. Once received, the Clerk will have them shared at public comment for the specified item. To uphold strong cybersecurity management practices, USB’s or other physical electronic storage devices are not accepted. Signs and symbolic materials less than 2 feet by 3 feet are permitted provided that: (1) sticks, posts, poles or similar/other types of handle objects are strictly prohibited; (2) the items do not create a facility, fire, or safety hazard; and (3) persons with such items remain seated when displaying them and must not raise the items above shoulder level, obstruct the view or passage of other attendees, or otherwise disturb the business of the meeting. 1 December 02, 2025 Materials submitted after distribution of the agenda packet are available for public inspection at www.paloalto.gov/agendas. CALL TO ORDER PUBLIC COMMENT Members of the public may speak in-person ONLY to any item NOT on the agenda. 1-3 minutes depending on number of speakers. Public Comment is limited to 30 minutes. Additional public comments, if any, will be heard at the end of the agenda. ACTION ITEMS 1.Discussion and Recommendation to the City Council to Accept the Macias Gini & O'Connell's Audit of the City of Palo Alto's Financial Statements as of June 30, 2025 2.FY2025 Annual Comprehensive Financial Report (ACFR) and the Year-End Budget Adjustments in Various Funds on the schedule 3.Review and Recommend the City Council Accept the FY 2027- 2036 Long Range Financial Forecast and FY 2027 Annual Budget Development Guidelines Late Packet Report 4.Accept the Fiscal Year 2026 First Quarter Financial Status Report Late Packet Report FUTURE MEETINGS AND AGENDAS Members of the public may not speak to the item(s) ADJOURNMENT 2 December 02, 2025 Materials submitted after distribution of the agenda packet are available for public inspection at www.paloalto.gov/agendas. PUBLIC COMMENT INSTRUCTIONS Members of the Public may provide public comments to teleconference meetings via email, teleconference, or by phone. 1.Written public comments may be submitted by email to city.council@cityofpaloalto.org. 2.For in person public comments please complete a speaker request card located on the table at the entrance to the Council Chambers and deliver it to the Clerk prior to discussion of the item. 3.Spoken public comments for agendized items using a computer or smart phone will be accepted through the teleconference meeting. To address the Council, click on the link below to access a Zoom-based meeting. Please read the following instructions carefully. ◦You may download the Zoom client or connect to the meeting in- browser. If using your browser, make sure you are using a current, up-to-date browser: Chrome 30 , Firefox 27 , Microsoft Edge 12 , Safari 7 . Certain functionality may be disabled in older browsers including Internet Explorer. Or download the Zoom application onto your smart phone from the Apple App Store or Google Play Store and enter in the Meeting ID below. ◦You may be asked to enter an email address and name. We request that you identify yourself by name as this will be visible online and will be used to notify you that it is your turn to speak. ◦When you wish to speak on an Agenda Item, click on “raise hand.” The Clerk will activate and unmute speakers in turn. Speakers will be notified shortly before they are called to speak. ◦When called, please limit your remarks to the time limit allotted. A timer will be shown on the computer to help keep track of your comments. 4.Spoken public comments for agendized items using a phone use the telephone number listed below. When you wish to speak on an agenda item hit *9 on your phone so we know that you wish to speak. You will be asked to provide your first and last name before addressing the Council. You will be advised how long you have to speak. When called please limit your remarks to the agenda item and time limit allotted. CLICK HERE TO JOIN Meeting ID: 992-2730-7235 Phone: 1-669-900-6833 Americans with Disability Act (ADA) It is the policy of the City of Palo Alto to offer its public programs, services and meetings in a manner that is readily accessible to all. Persons with disabilities who require materials in an appropriate alternative format or who require auxiliary aids to access City meetings, programs, or services may contact the City’s ADA Coordinator at (650) 329-2550 (voice) or by emailing ada@cityofpaloalto.org. Requests for assistance or accommodations must be submitted at least 24 hours in advance of the meeting, program, or service. 3 December 02, 2025 Materials submitted after distribution of the agenda packet are available for public inspection at www.paloalto.gov/agendas. California Government Code §84308, commonly referred to as the "Levine Act," prohibits an elected official of a local government agency from participating in a proceeding involving a license, permit, or other entitlement for use if the official received a campaign contribution exceeding $500 from a party or participant, including their agents, to the proceeding within the last 12 months. A “license, permit, or other entitlement for use” includes most land use and planning approvals and the approval of contracts that are not subject to lowest responsible bid procedures and have a value over $50,000. A “party” is a person who files an application for, or is the subject of, a proceeding involving a license, permit, or other entitlement for use. A “participant” is a person who actively supports or opposes a particular decision in a proceeding involving a license, permit, or other entitlement for use, and has a financial interest in the decision. The Levine Act incorporates the definition of “financial interest” in the Political Reform Act, which encompasses interests in business entities, real property, sources of income, sources of gifts, and personal finances that may be affected by the Council’s actions. If you qualify as a “party” or “participant” to a proceeding, and you have made a campaign contribution to a Council Member exceeding $500 made within the last 12 months, you must disclose the campaign contribution before making your comments. 4 December 02, 2025 Materials submitted after distribution of the agenda packet are available for public inspection at www.paloalto.gov/agendas. 8 5 0 7 Finance Committee Staff Report From: City Auditor Report Type: ACTION ITEMS Lead Department: City Auditor Meeting Date: December 2, 2025 Report #:2510-5389 TITLE Discussion and Recommendation to the City Council to Accept the Macias Gini & O'Connell's Audit of the City of Palo Alto's Financial Statements as of June 30, 2025. CEQA Status – Not a Project. RECOMMENDATION The City Auditor recommends that the Finance Committee review and forward to the City Council for acceptance of the City of Palo Alto's audited financial statement for the fiscal year ended June 30, 2025, and accompanying reports provided by Macias Gini & O'Connell LLP. EXECUTIVE SUMMARY The City Charter requires that the City Council, through the City Auditor, engage an independent public accounting firm to conduct the annual financial audit. The selected firm reports the results of the audit, in writing, to the City Council. Macias Gini & O’Connell LLP (MGO), a certified public accounting firm, conducted the City’s financial statement audits for the fiscal year ending June 30, 2025. The City Auditor is providing copies of the following financial statements and reports as prepared by MGO: Auditor's Report to the City Council (the "Management Letter") - Attachment A Cable TV Franchise, Independent Auditor's Report and Statements of Franchise Revenues & Expenses for the years ended December 31, 2024 and 2023 - Attachment B Palo Alto Public Improvement Corporation Annual Financial Report for the Year Ended June 30, 2025 - Attachment C Regional Water Quality Control Plant Independent Auditor's Report and Financial Statements for the Year Ended June 30, 2025 - Attachment D Item 1 Item 1 Staff Report Item 1: Staff Report Pg. 1 Packet Pg. 5 of 168 8 5 0 7 Independent Accountant's Report on Applying Agreed-Upon Procedures Related to the Article XIII-B Appropriations Limit for the Year Ended June 30, 2025 - Attachment E Pedestrian/Bicycle Facilities Grant Metropolitan Transportation Commission Transportation Development Act Funds, Article III, Independent Auditor's Reports, Financial Statements and Supplementary Information for the Year Ended June 30, 2025 - Attachment F The Annual Comprehensive Financial Report (ACFR) is presented as a separate item on this agenda and includes the Independent Auditor’s Reports on Financial Statements. MGO issued a clean opinion on each audit report and reported no findings within the Agreed- Upon Procedures report . Please note that the Federal Office of Management and Budget (Federal OMB) has not yet issued the Compliance Supplement required to complete the Single Audit. As a result, the following reports will be issued in 2026: Independent Auditor’s Report on Compliance for Each Major Federal Program; Report on Internal Control over Compliance; and Report on the Schedule of Federal Awards Required by Uniform Guidance, also known as, the Single Audit will be provided in 2026. Independent Auditor’s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements in Accordance with Government Auditing Standards The City Auditor would like to express appreciation to MGO and the Administrative Services Department staff for their hard work and cooperation during the audit. FISCAL/RESOURCE IMPACT There is no fiscal impact resulting from the attached audit reports. STAKEHOLDER ENGAGEMENT MGO conducted audits in coordination with the Administrative Services Department and the City Auditor. ENVIRONMENTAL REVIEW Council action on this item is not a project as defined by CEQA because the audit activities do not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment. CEQ Guidelines section 15378(b)(4). Item 1 Item 1 Staff Report Item 1: Staff Report Pg. 2 Packet Pg. 6 of 168 8 5 0 7 ATTACHMENTS APPROVED BY: Item 1 Item 1 Staff Report Item 1: Staff Report Pg. 3 Packet Pg. 7 of 168 CITY OF PALO ALTO, CALIFORNIA Report to the City Council For the Year Ended June 30, 2025 Item 1 Attachment A - Auditor's Report to the City Council Item 1: Staff Report Pg. 4 Packet Pg. 8 of 168 www.mgocpa.com Macias Gini & O’Connell LLP 2121 N. California Boulevard, Suite 750 Walnut Creek, CA 94596 October 31, 2025 Honorable Mayor and the Members of the City Council of the City of Palo Alto Palo Alto, California We are pleased to present this report related to our audit of the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of City of Palo Alto, California (City), as of and for the year ended June 30, 2025. This report summarizes certain matters required by professional standards to be communicated to you in your oversight responsibility for the City’s financial reporting process. In addition to the City’s basic financial statements, we audit and separately report on the following financial statements as of and for the year ended June 30, 2025. •City of Palo Alto Regional Water Quality Control Plant •Palo Alto Public Improvement Corporation •Cable TV Franchise Statements of Franchise Revenues and Expenditures •Pedestrian Bicycle Facilities Grant Transportation Development Act Funds, Article III This report is intended solely for the information and use of the City Council and the City’s management, and is not intended to be, and should not be, used by anyone other than these specified parties. It will be our pleasure to respond to any questions you have about this report. We appreciate the opportunity to continue to be of service to the City. Walnut Creek, California Item 1 Attachment A - Auditor's Report to the City Council Item 1: Staff Report Pg. 5 Packet Pg. 9 of 168 TABLE OF CONTENTS Required Communications 1 Exhibits Exhibit A—Recent Accounting Pronouncements 6 Item 1 Attachment A - Auditor's Report to the City Council Item 1: Staff Report Pg. 6 Packet Pg. 10 of 168 1 REQUIRED COMMUNICATIONS Auditing standards generally accepted in the United States of America (AU-C 260, The Auditor’s Communication With Those Charged With Governance) require the auditor to promote effective two-way communication between the auditor and those charged with governance. Consistent with this requirement, the following summarizes our responsibilities regarding the City’s financial statement audit as well as observations arising from our audit that are significant and relevant to your responsibility to oversee the financial and related compliance reporting process. Our Responsibilities With Regard to the Financial Statement Audit Our responsibilities under auditing standards generally accepted in the United States of America and Government Auditing Standards issued by the Comptroller General of the United States have been described to you in our arrangement letter dated April 15, 2025. Our audit of the City’s financial statements does not relieve management or those charged with governance of their responsibilities, which are also described in that letter. Overview of the Planned Scope and Timing of the Financial Statement Audit We have communicated to you the planned scope and timing of our audit in our arrangement letter dated April 15, 2025, regarding the planned scope and timing of our audit. Accounting Policies and Practices Preferability of Accounting Policies and Practices Under accounting principles generally accepted in the United States of America, in certain circumstances, management may select among alternative accounting practices. In our view, in such circumstances, management has selected the preferable accounting practice. Adoption of, or Change in, Accounting Policies Management has the ultimate responsibility for the appropriateness of the accounting policies used by the City. A summary of the significant accounting policies adopted by the City is included in Note 1 to the financial statements. As described in Note 1 to the financial statements, the City implemented the Governmental Accounting Standards Board (GASB) Statement No. 101, Compensated Absences, and GASB Statement No.102, Certain Risk Disclosures. The implementation of GASB Statement No. 101 resulted in the restatements of the beginning net position of the City’s governmental activities and the General Benefits Internal Services Funds of $9.5 million. Implementation of GASB Statement No. 102 did not have a significant impact on the City’s financial statements for the fiscal year ended June 30, 2025. Significant Accounting Policies We did not identify any significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus. Significant Unusual Transactions We did not identify any significant unusual transactions. Item 1 Attachment A - Auditor's Report to the City Council Item 1: Staff Report Pg. 7 Packet Pg. 11 of 168 2 Management’s Judgments and Accounting Estimates Accounting estimates are an integral part of the preparation of financial statements and are based upon management’s current judgment. The process used by management encompasses their knowledge and experience about past and current events, and certain assumptions about future events. You may wish to monitor throughout the year the process used to determine and record these accounting estimates. The following summarizes the significant accounting estimates reflected in the City’s financial statements. Significant Accounting Estimates Fair value of investments the price that would be received to sell an asset or paid to transfer a liability in The City’s inve hierarchy established by GASB Statement No. 72 and are valued using prices determined by the use of matrix pricing techniques maintained by the pricing vendors for these securities. The City’s investments in U.S. treasury notes are classified as level 1 and are valued based on quoted prices in an active market for identical assets. The City’s investments in the money market mutual funds, equity mutual funds, California Local Agency Investment Fund and California Asset Management Program are not subject to the fair value hierarchy. for losses on notes and loans receivable estimate regarding the likelihood of collectability based on loan provisions and collateral. estimates for capital assets, including depreciation methods and useful lives assigned to depreciable assets assets. The City uses the straight-line method for depreciation. liability closure costs of the Palo Alto landfill based on what it would cost to perform all currently mandated post-closure care. Actual post-closure care costs may be higher due to inflation variances, changes in technology, or changes in State or federal regulations. contributions, expenses, and other related balances actuarial methods and assumptions adopted by the City California Public Employees’ Retirement System’s independent actuaries. Item 1 Attachment A - Auditor's Report to the City Council Item 1: Staff Report Pg. 8 Packet Pg. 12 of 168 3 Significant Accounting Estimates Other postemployment benefits (OPEB) liabilities, contributions, expenses, and other related balances actuarial methods and assumptions adopted by the City City’s independent actuary. compensation and other claims and records an estimate of these losses based prepared based on the City’s prior claims history, which is used as a basis for loss experience may vary from these estimates. the calculation of lease liability, lease receivable, and SBITA liability and SBITA liability are based on the City’s estimated incremental borrowing rate using AAA General Obligations interest rates. compensated absences employees, factoring in usage pattern and termination payout. Audit Adjustments and Uncorrected Misstatements Professional standards require us to communicate to you all material, corrected misstatements that were brought to the attention of management as a result of our audit procedures. There were no corrected misstatements identified by us as a result of our audit procedures. Uncorrected misstatements or matters underlying these uncorrected misstatements could potentially cause future-period financial statements to be materially misstated, even if we have concluded that the uncorrected misstatements are immaterial to the financial statements under audit. We are not aware of any uncorrected misstatements other than misstatements that are clearly trivial. Observations About the Audit Process Disagreements With Management We encountered no disagreements with management over the application of significant accounting principles, the basis for management’s judgments on any significant matters, the scope of the audit or significant disclosures to be included in the financial statements. Consultations With Other Accountants We are not aware of any consultations management had with other accountants about accounting or auditing matters. Item 1 Attachment A - Auditor's Report to the City Council Item 1: Staff Report Pg. 9 Packet Pg. 13 of 168 4 Significant Issues Discussed With Management No significant issues arising from the audit were discussed or were the subject of correspondence with management. Significant Difficulties Encountered in Performing the Audit We did not encounter any significant difficulties in dealing with management during the audit. Difficult or Contentious Matters That Required Consultation We did not encounter any significant and difficult or contentious matters that required consultation outside the engagement team. Shared Responsibilities for Independence Independence is a joint responsibility and is managed most effectively when management, audit committees (or their equivalents), and audit firms work together in considering compliance with American Institute of Certified Public Accountants (AICPA) and Government Accountability Office (GAO) independence rules. For MGO to fulfill its professional responsibility to maintain and monitor independence, management, the Board of Commission, and MGO each play an important role. Our Responsibilities 1) AICPA and GAO rules require independence both of mind and in appearance when providing audit and other attestation services. MGO is to ensure that the AICPA and GAO’s General Requirements for performing non-attest services are adhered to and included in all letters of engagement. 2) Maintain a system of quality management over compliance with independence rules and firm policies. The City’s Responsibilities 1) Timely inform MGO, before the effective date of transactions or other business changes, of the following: a) New affiliates, directors, or officers. b) Changes in the organizational structure or the reporting entity impacting affiliates such as subsidiaries, partnerships, related entities, investments, joint ventures, component units, jointly governed organizations. 2) Provide necessary affiliate information such as new or updated structure charts, as well as financial information required to perform materiality calculations needed for making affiliate determinations. 3) Understand and conclude on the permissibility, prior to the Authority and its affiliates, officers, directors, or persons in a decision-making capacity, engaging in business relationships with MGO. 4) Not entering into arrangements of nonaudit services resulting in MGO being involved in making management decisions on behalf of the Authority. 5) Not entering into relationships resulting in close family members of MGO covered persons, temporarily or permanently acting as an officer, director, or person in an accounting, financial reporting or compliance oversight role at the City. Management Representations We have requested certain written representations from management, which are included in the management representation letter dated October 31, 2025. Item 1 Attachment A - Auditor's Report to the City Council Item 1: Staff Report Pg. 10 Packet Pg. 14 of 168 5 Other Information in the Annual Comprehensive Financial Report Our responsibility for other information included in the annual comprehensive financial report is to read the information and consider whether its content or the manner of its presentation is materially inconsistent with the basic financial information covered by our auditor’s report, whether it contains a material misstatement of fact or whether the other information is otherwise misleading. We read the City’s introductory and statistical sections. We did not identify material inconsistencies with the audited basic financial statements. Departure From the Auditor’s Standard Report Our auditor’s report includes an emphasis of matter paragraph describing the City’s adoption of the provisions of GASB Statement No. 101, Compensated Absences. Our opinions are not modified with respect to this matter. Internal Control and Compliance Matters We have separately communicated on internal control and compliance over financial reporting identified during our audit of the financial statements, as required by Government Auditing Standards. The financial and compliance audit of the City’s major federal awards in accordance with the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards at 2 CFR 200 (Uniform Guidance) is in process and will be issued no later than March 31, 2026. Item 1 Attachment A - Auditor's Report to the City Council Item 1: Staff Report Pg. 11 Packet Pg. 15 of 168 6 EXHIBIT A Recent Accounting Pronouncements Item 1 Attachment A - Auditor's Report to the City Council Item 1: Staff Report Pg. 12 Packet Pg. 16 of 168 7 RECENT ACCOUNTING PRONOUNCEMENTS The following accounting pronouncements have been issued as of October 31, 2025, but are not yet effective and may affect the future financial reporting by the Authority. Pronouncement Summary GASB Statement No. 103, Financial Reporting Model Improvements addresses certain application issues. Statement No. 103 are effective for the City’s financial statements for the year ending June 30, 2026. Disclosure of Certain Capital Assets The objective of this statement is to establish requirements for certain types of capital assets to be disclosed separately for purposes of note disclosures, and to establish requirements for capital assets held for sale and note disclosures for those capital assets. Statement No. 104 are effective for the City’s financial statements for the year ending June 30, 2026. Item 1 Attachment A - Auditor's Report to the City Council Item 1: Staff Report Pg. 13 Packet Pg. 17 of 168 CABLE TV FRANCHISE Independent Auditor’s Report and Statements of Franchise Revenues and Expenses For the Years Ended December 31, 2024 and 2023 Item 1 Attachment B - Cable TV Franchise Auditor's Report Item 1: Staff Report Pg. 14 Packet Pg. 18 of 168 CABLE TV FRANCHISE Independent Auditor’s Report and Statements of Franchise Revenues and Expenses For the Years Ended December 31, 2024 and 2023 Table of Contents Page Independent Auditor’s Report ................................................................................................................... 1 Financial Statements: Statements of Franchise Revenues and Expenses ................................................................................... 3 Notes to the Financial Statements ........................................................................................................... 4 Item 1 Attachment B - Cable TV Franchise Auditor's Report Item 1: Staff Report Pg. 15 Packet Pg. 19 of 168 www.mgocpa.com Macias Gini & O’Connell LLP 2121 N. California Boulevard, Suite 750 Walnut Creek, CA 94596 1 Independent Auditor’s Report Honorable Mayor and Members of the City Council of the City of Palo Alto Palo Alto, California Opinion We have audited the Statements of Franchise Revenues and Expenses (financial statements) of the Cable TV Franchise (Franchise) for the years ended December 31, 2024 and 2023, and the related notes to the financial statements, which collectively comprise the Franchise’s financial statements as listed in the table of contents. In our opinion, the accompanying financial statements referred to above present fairly, in all material respects, the revenues and expenses of the Franchise for the years ended December 31, 2024 and 2023, in accordance with the financial reporting provisions of the Amended and Restated Joint Exercise of Powers Agreement signed on June 9, 2009, between the City of Palo Alto, the City of East Palo Alto, the City of Menlo Park, the County of San Mateo, the County of Santa Clara, and the Town of Atherton, as described in Note 1 to the financial statements (Agreement). Basis for Opinion We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Franchise, and to meet our ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Emphasis of a Matter As discussed in Note 1 to the financial statements, the financial statements are prepared in accordance with the financial reporting provisions of the Agreement, which is a basis of accounting other than accounting principles generally accepted in the United States of America and are not intended to be a complete presentation of the Franchise’s financial position or results of operations. Our opinion is not modified with respect to this matter. Responsibilities of Management for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with the financial reporting provisions of the Agreement, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Item 1 Attachment B - Cable TV Franchise Auditor's Report Item 1: Staff Report Pg. 16 Packet Pg. 20 of 168 2 Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements. In performing an audit in accordance with GAAS, we: • Exercise professional judgment and maintain professional skepticism throughout the audit. •Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. •Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Franchise’s internal control. Accordingly, no such opinion is expressed. •Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit. Restriction on Use This report is intended solely for the information and use of the governing bodies and management of the City of Palo Alto, the City of East Palo Alto, the City of Menlo Park, the County of San Mateo, the County of Santa Clara, and the Town of Atherton, and is not intended to be and should not be used by anyone other than these specified parties. Walnut Creek, California October 31, 2025 Item 1 Attachment B - Cable TV Franchise Auditor's Report Item 1: Staff Report Pg. 17 Packet Pg. 21 of 168 2024 2023 Revenues: Franchise fees $ 1,312,571 $ 1,430,110 Expenses: Franchise administration 6,565 8,971 Consulting fees - - Total expenses 6,565 8,971 Net revenues $ 1,306,006 $ 1,421,139 Amount Percent Amount Percent Allocated Net Revenues: City of Palo Alto 616,815$ 47.2% 670,814$ 47.2% City of Menlo Park 348,517 26.7% 376,315 26.5% City of East Palo Alto 112,192 8.6% 133,381 9.3% Town of Atherton 128,393 9.8% 133,080 9.4% County of Santa Clara 74,455 5.7% 80,757 5.7% County of San Mateo 25,634 2.0% 26,792 1.9% Total allocated net revenues 1,306,006$ 100.0% 1,421,139$ 100.0% CABLE TV FRANCHISE Statements of Franchise Revenues and Expenses For the Years Ended December 31, 2024 and 2023 2024 2023 See accompanying notes to the financial statements. 3 Item 1 Attachment B - Cable TV Franchise Auditor's Report Item 1: Staff Report Pg. 18 Packet Pg. 22 of 168 CABLE TV FRANCHISE Notes to the Financial Statements For the Years Ended December 31, 2024 and 2023 4 NOTE 1 – JOINT OPERATING AGREEMENT AND BASIS OF ACCOUNTING In July 1983, a Joint Exercise of Powers Agreement was entered into by and between the Cities of Palo Alto, Menlo Park, East Palo Alto, the Counties of San Mateo and Santa Clara, and the Town of Atherton (Members) for the purpose of obtaining a state-of-the-art cable service for residents, businesses, and institutions, within each of their jurisdictions in the most efficient and economical manner possible. In October 1988, the Members entered into a Joint Operating Agreement in which the City of Palo Alto (City) was granted the power and the authority to administer and coordinate the activities of the franchise and exercise the rights and responsibilities of the City pursuant to the Franchise Agreement. The activities are administered by the City and are accounted for within the City’s Custodial Fund. The program is accounted for using the accrual basis of accounting. Under the accrual basis of accounting, revenues are recorded when earned and expenses are recognized when the liability is incurred. On August 9, 2000, the City, acting on behalf of the Members, signed a Franchise Agreement with TCI Cablevision of California, Inc., a wholly owned subsidiary of AT&T Broadband (AT&T), a third-party contractor, which was granted a non-exclusive franchise to construct, operate, maintain and repair a cable television system within the Members jurisdictions. In 2002, the Franchise Agreement was transferred from AT&T to Comcast Corporation (Comcast). TCI Cablevision of California, Inc. also signed an asset purchase agreement with Cable Communications Cooperative of Palo Alto, Inc. (CCCOPA), the former cable television system operator/owner, and acquired the system. On January 1, 2007, the Digital Infrastructure and Video Competition Act (DIVCA) went into effect. Under DIVCA, cable and video service franchises are now granted exclusively by the California Public Utilities Commission (Commission) rather than by local franchising entities. On March 30, 2007, the Commission granted AT&T a statewide franchise. Comcast was allowed to seek a State franchise after January 1, 2008, when another State franchise holder (in this case AT&T) entered the local market. On January 2, 2008, the Commission granted Comcast a State franchise. On June 9, 2009, the Members approved an Amended and Restated Joint Exercise of Powers Agreement, in substitution of the existing Joint Exercise of Powers Agreement and the Joint Operating Agreement, to reflect changes in the law due to DIVCA and to continue to allow the City to administer the cable and video franchise enforcement and monitoring process for State franchise holders. The accompanying financial statements are prepared in accordance with the financial reporting provisions of the Amended and Restated Joint Exercise of Powers Agreement between the Members, which is a basis of accounting other than accounting principles generally accepted in the United States of America, and are not intended to be a complete presentation of the Franchise’s financial position or results of operations. As compensation for services under the State franchise agreements, AT&T and Comcast pay annual franchise fees in an amount equal to 5% of annual gross revenues, considering a reasonable adjustment for bad debts. From these fees the City is first reimbursed for out-of-pocket franchise administration costs. The remaining fees are distributed to each Member according to the percentage of revenues derived from the residents and businesses in each of the entities compared to revenues in total. Item 1 Attachment B - Cable TV Franchise Auditor's Report Item 1: Staff Report Pg. 19 Packet Pg. 23 of 168 CABLE TV FRANCHISE Notes to the Financial Statements (Continued) For the Years Ended December 31, 2024 and 2023 5 NOTE 2 – PRIOR FRANCHISE SETTLEMENTS A prior Franchise Agreement with CCCOPA was set to expire on March 24, 2001. On June 21, 1999, the City hired a cable communications consultant and retained the services of a law firm to assist in the franchise renewal process. On July 31, 2000, CCCOPA reimbursed the City $185,000 toward the actual costs incurred as part of the franchise renewal efforts. On July 24, 2000, the City reached a settlement with CCCOPA in the amount of $220,000 to resolve outstanding claims resulting from CCCOPA’s alleged failure to fully perform under the prior Franchise Agreement. On November 22, 2004, the City reached a settlement agreement with Comcast regarding cable plant construction claims in the amount of $175,000. This money was to be used towards the institutional network connection costs. In 2006, the City conducted a franchise compliance audit performed by the City Auditor’s Office. A settlement was reached in the amount of $155,391. In addition, CCCOPA paid the City a $250,000 grant to acquire, install, and/or maintain equipment to be used in connection with an institutional network defined in the Franchise Agreement. In 2016, the City Auditor discovered that AT&T and Comcast did not consistently calculate the fees due in accordance with DIVCA and the municipal code of each of the cable joint powers members. As a result of the audit, the City received a settlement from AT&T in the amount of $75,647 in 2016. Additionally, the City received a settlement from Comcast in the amount of $25,000 in 2019. The settlements and grant have been deposited and are being held by the City and earning interest. The City has since spent a part of the balance on various projects including installing and maintaining the institutional network equipment. As of December 31, 2024 and 2023, the remaining balances on deposit with the City, including balances from other funding sources, were $1,950,238, and $1,685,064 respectively. These balances include interest receivable of $9,716 and $8,876 at December 31, 2024 and 2023, respectively. Item 1 Attachment B - Cable TV Franchise Auditor's Report Item 1: Staff Report Pg. 20 Packet Pg. 24 of 168 PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Annual Financial Report For the Year Ended June 30, 2025 Item 1 Attachment C - Public Improvement Corporation Annual Financial Report Item 1: Staff Report Pg. 21 Packet Pg. 25 of 168 PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Annual Financial Report For the Year Ended June 30, 2025 Table of Contents Page Independent Auditor’s Report ................................................................................................................... 1 Management’s Discussion and Analysis (Unaudited) .............................................................................. 3 Basic Financial Statements Government-wide Financial Statements: Statement of Net Position ................................................................................................................... 5 Statement of Activities ....................................................................................................................... 6 Debt Service Fund Financial Statements: Balance Sheet ..................................................................................................................................... 7 Statement of Revenues, Expenditures and Changes in Fund Balance ................................................ 8 Notes to the Basic Financial Statements .................................................................................................. 9 Item 1 Attachment C - Public Improvement Corporation Annual Financial Report Item 1: Staff Report Pg. 22 Packet Pg. 26 of 168 www.mgocpa.com Macias Gini & O’Connell LLP 2121 N. California Boulevard, Suite 750 Walnut Creek, CA 94596 1 Independent Auditor’s Report Board of Director of the Palo Alto Public Improvement Corporation The Honorable Mayor and Members of the City Council of the City of Palo Alto, California Opinions We have audited the financial statements of the governmental activities and the major fund of the Palo Alto Public Improvement Corporation (Corporation), a component unit of the City of Palo Alto, California (City), as of and for the year ended June 30, 2025, and the related notes to the financial statements, which collectively comprise the Corporation’s basic financial statements as listed in the table of contents. In our opinion, the accompanying financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities and the major fund of the Corporation as of June 30, 2025, and the respective changes in financial position thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Basis for Opinions We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Corporation and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Responsibilities of Management for the Financial Statements The Corporation’s management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Corporation’s ability to continue as a going concern for twelve months beyond the financial statement date, including any currently known information that may raise substantial doubt shortly thereafter. Item 1 Attachment C - Public Improvement Corporation Annual Financial Report Item 1: Staff Report Pg. 23 Packet Pg. 27 of 168 2 Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinions. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements. In performing an audit in accordance with GAAS, we: • exercise professional judgment and maintain professional skepticism throughout the audit. • identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. • obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control. Accordingly, no such opinion is expressed. • evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. • conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Corporation’s ability to continue as a going concern for a reasonable period of time. We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control–related matters that we identified during the audit. Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis be presented to supplement the basic financial statements. Such information is the responsibility of management and, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with GAAS, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Walnut Creek, California October 31, 2025 Item 1 Attachment C - Public Improvement Corporation Annual Financial Report Item 1: Staff Report Pg. 24 Packet Pg. 28 of 168 PAL ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Management’s Discussion & Analysis (Unaudited) For the Year Ended June 30, 2025 3 The Palo Alto Public Improvement Corporation (Corporation), a component unit of the City of Palo Alto (City), follows the provisions of Governmental Accounting Standards Board (GASB). The Corporation is controlled by the City and was organized to assist the City in financing public improvements. The Corporation issues debt and turns the proceeds of the debt over to the City under lease agreements that provide a revenue source for the repayment of this debt. The Corporation has three outstanding debts and has turned over the proceeds to the City, which pledged certain lease payments as collateral for this debt as discussed in Note 4 to the financial statements. FINANCIAL HIGHLIGHTS GASB requires the issuance of government-wide financial statements as well as fund financial statements. The government-wide financial statements report the balance of the Corporation’s long-term debt while the individual fund statements do not. In fiscal year 2018, the City issued 2018 Capital Improvement Project and Refinancing Certificates of Participation (2018 COPs) in the amount of $9.0 million to refinance the 2002B Downtown Parking Improvements Certificates of Participation remaining balance of $0.8 million, and also to fund the Palo Alto Municipal Golf Course renovations. In fiscal year 2019, the City issued the 2019 California Avenue Parking Garage tax exempt Series A and taxable Series B Certificates of Participation (2019A and 2019B COPs) in the amount of $26.8 million plus $4.9 million premium, and $10.6 million, respectively. The 2019A and 2019B COPs were issued to fund the construction of the new California Avenue parking garage. In fiscal year 2021, the City issued the 2021 Public Safety Building Certificates of Participation (2021 COPs) in the amount of $101.5 million plus $6.5 million premium. The 2021 COPs were issued to fund the construction of the new public safety building. As of June 30, 2025, the Corporation has the following outstanding debt: the 2018 COPs, 2019A and 2019B COPs, and 2021 COPs. At the government-wide level, the interest and fiscal agent charges were $4.3 million for fiscal year 2025, a decrease of $0.2 million from the prior year. The interest on leases from the City of Palo Alto was $4.3 million, a decrease of $0.2 million from the prior year. The decrease is mainly due to the decrease in outstanding debt from the prior year. The Corporation ended fiscal year 2025 with total assets of $148.8 million, a decrease of $3.6 million from the prior year. Total assets consisted of $0.1 million in cash and investments, $0.8 million of lease interest receivable from the City of Palo Alto, and $147.9 million of investment in leases to the City of Palo Alto. The total liabilities were $148.7 million, a decrease of $3.6 million from the prior year. The decrease of assets and liabilities resulted from scheduled principal and interest payments of the 2018 COPs, the 2019A and 2019B COPs, and the 2021 COPs. As of June 30, 2025, the Corporation reported a $0.1 million restricted net position. At the fund level, the Corporation’s revenues exceeded expenditures by $15.0 thousand. As of June 30, 2025, the Corporation had one fund, the Debt Service Fund, which reported a $0.1 million restricted fund balance. Item 1 Attachment C - Public Improvement Corporation Annual Financial Report Item 1: Staff Report Pg. 25 Packet Pg. 29 of 168 PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Management’s Discussion & Analysis (Unaudited) (Continued) For the Year Ended June 30, 2025 4 OVERVIEW OF THE CORPORATION’S BASIC FINANCIAL STATEMENTS The annual financial report is comprised of two parts: 1) Management’s discussion and analysis (this part), 2) The basic financial statements, which include the government-wide and the fund financial statements, along with the notes to these financial statements. The basic financial statements comprise the government-wide financial statements and the fund financial statements. These two sets of financial statements provide two different views of the Corporation’s financial activities and financial positions, both short-term and long-term. The government-wide financial statements provide a long-term view of the Corporation’s activities as a whole, and comprise the statement of net position and the statement of activities. The statement of net position provides information about the financial position of the Corporation as a whole, including all its long-term liabilities on the full accrual basis, similar to that used by corporations. The statement of activities provides information about all the Corporation’s revenues and expenses on the full accrual basis, with the emphasis on measuring net revenues or expenses of the Corporation’s program. The statement of activities explains in detail the change in net position for the year. The fund financial statements report the Corporation’s operations in more detail than the corporate-wide statements and focus primarily on the short-term activities of the debt service fund. Fund financial statements measure only current revenues and expenditures; current assets, liabilities and fund balances; and they exclude capital assets and long-term debt. Together, these statements along with the notes to the financial statements are called the basic financial statements. DEBT ADMINISTRATION The Corporation issues debt in the form of Certificates of Participation (COPs) to be repaid from future lease receipts from the City. Legally, these COP issues are the Corporation’s debt only; the City is liable only for the payment of the amounts set forth in the lease securing each debt issue. As of June 30, 2025, the Corporation has the following outstanding debt (excluding premium): 2018 COPs, 2019A and 2019B COPs, and 2021 COPs with outstanding principal balances of $7.8 million, $33.6 million and $97.1 million, respectively. ECONOMIC OUTLOOK AND MAJOR INITIATIVES The economy of the City and its major initiatives for the coming year are discussed in detail in the City’s Annual Comprehensive Financial Report. CONTACTING THE CORPORATION’S FINANCIAL MANAGEMENT These basic financial statements are intended to provide citizens, taxpayers, investors, and creditors with a general overview of the Corporation’s finances. Questions about these financial statements should be directed to the Finance Department of the City of Palo Alto, 250 Hamilton Avenue, Palo Alto, CA 94301. Item 1 Attachment C - Public Improvement Corporation Annual Financial Report Item 1: Staff Report Pg. 26 Packet Pg. 30 of 168 Assets Cash held for operations 112,885$ Cash and investments held by trustee 4,186 Lease interest receivable 775,266 Investment in leases to the City of Palo Alto 147,880,762 Total assets 148,773,099 Liabilities Interest payable 775,266 Long-term debt: Due in one year 3,743,253 Due in more than one year 144,137,509 Total liabilities 148,656,028 Net Position Restricted for debt service 117,071$ PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto) Statement of Net Position June 30, 2025 See accompanying notes to financial statements. 5 Item 1 Attachment C - Public Improvement Corporation Annual Financial Report Item 1: Staff Report Pg. 27 Packet Pg. 31 of 168 Expenses Interest and fiscal agent charges 4,295,076$ Program revenues Interest on leases from the City of Palo Alto 4,295,673 Net program revenues 597 General revenues Investment earnings 14,430 Change in net position 15,027 Net position, beginning of the year 102,044 Net position, end of the year 117,071$ PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto) Statement of Activities For the Year Ended June 30, 2025 See accompanying notes to financial statements. 6 Item 1 Attachment C - Public Improvement Corporation Annual Financial Report Item 1: Staff Report Pg. 28 Packet Pg. 32 of 168 Assets Cash held for operations 112,885$ Cash and investments held by trustee 4,186 Lease interest receivable 775,266 Investment in leases to City of Palo Alto 147,880,762 Total assets 148,773,099$ Deferred Inflows of Resources Unavailable lease receipts from the City of Palo Alto 148,656,028$ Fund balance Restricted for debt service 117,071 Total deferred inflows of resources and fund balance 148,773,099$ Reconciliation of fund balance to net position Fund balance restricted for debt service 117,071$ Long-term receivables are not available to pay for current period expenditures and are considered unavailable on the governmental fund balance sheet. 148,656,028 Some liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported in governmental funds. Interest payable (775,266) Long-term debt due within one year (3,743,253) Long-term debt due in more than one year (144,137,509) Net position of governmental activities 117,071$ PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto) Balance Sheet June 30, 2025 Debt Service Fund See accompanying notes to financial statements. 7 Item 1 Attachment C - Public Improvement Corporation Annual Financial Report Item 1: Staff Report Pg. 29 Packet Pg. 33 of 168 Revenues: Lease receipts from the City of Palo Alto: Principal 3,170,000$ Interest 4,729,196 Othe 597 Investments earnings 14,430 Total revenues 7,914,223 Expenditures: Debt service: Principal repayment 3,170,000 Interest and fiscal agent charges 4,729,196 Total expenditures 7,899,196 Net change in fund balance 15,027 Fund balance, beginning of the year 102,044 Fund balance, end of the year 117,071$ Reconciliation of net change in fund balance to change in net position Net change in fund balance - debt service fund 15,027$ Amounts reported for governmental activities in the statement of activities are different because: Repayment of bond principal is an expenditure in the governmental funds, but in the statement of net position the repayment reduces long-term liabilities. 3,170,000 Interest accrued on long-term debt and amortization of bond premium do not require the use of current financial resources and therefore are not reported as expenditures in governmental funds. Change in interest payable 25,867 Amortization of bond premium 408,253 Some amounts reported in the statement of revenues, expenditures and changes in fund balances reflect the timing of collection of assets which are not includable as revenues on the statement of activities. Lease receipt for bond principal repayment (3,170,000) Lease receipt for interest payment (25,867) Impact of bond premium amortization on lease receipt (408,253) Change in net position of governmental activities 15,027$ PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto) Statement of Revenues, Expenditures and Changes in Fund Balance For the Year Ended June 30, 2025 Debt Service Fund See accompanying notes to financial statements. 8 Item 1 Attachment C - Public Improvement Corporation Annual Financial Report Item 1: Staff Report Pg. 30 Packet Pg. 34 of 168 PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Notes to the Basic Financial Statements For the Year Ended June 30, 2025 9 NOTE 1 – DESCRIPTION OF REPORTING ENTITY The Palo Alto Public Improvement Corporation (the Corporation) was incorporated in September 1983 under the General Nonprofit Corporation Law of the State of California to acquire, construct and lease capital improvement projects. The Corporation is exempt from federal income taxes under Section 501(c)(4) of the Internal Revenue Code. The Corporation provides financing of public capital improvements for the City through the issuance of Certificates of Participation (COPs), a form of debt which allows investors to participate in a stream of future lease payments. Proceeds from the COPs are used to construct projects which are leased to the City for lease payments which are sufficient in timing and amount to meet the debt service requirements of the COPs. The Corporation is an integral part of the City of Palo Alto, California (City). It primarily services the City and its governing body is composed of the City Council. Therefore, the financial data of the Corporation has also been included as a blended component unit within the City’s annual comprehensive financial report for the year ended June 30, 2025. NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation Government-wide Statements: The statement of net position and the statement of activities include the financial activities of the Corporation. Eliminations have been made to minimize the double counting of internal activities. The statement of activities presents a comparison between direct expenses and program revenues for each function of the Corporation’s activities. Direct expenses are those that are specifically associated with a program or function and, therefore, are clearly identifiable to a particular function. Program revenues include (a) charges paid by the recipients of goods or services offered by the programs, and (b) grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Revenues that are not classified as program revenues, including investment earnings, are presented as general revenues. Fund Financial Statements: The fund financial statements provide information about the Corporation’s funds. The emphasis of fund financial statements is on major individual funds, of which the Corporation only reports one debt service fund. (b) Major Fund Major funds are defined as funds that have either assets, liabilities, revenues or expenditures equal to ten percent of their fund-type total and five percent of the grand total. The Corporation has one fund which is reported as a major governmental fund in the accompanying financial statements as follows: Debt Service Fund – This fund accounts for debt service payments on the Corporation’s long-term debt. Item 1 Attachment C - Public Improvement Corporation Annual Financial Report Item 1: Staff Report Pg. 31 Packet Pg. 35 of 168 PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2025 10 NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (Continued) (c) Basis of Accounting The government-wide financial statements are reported using the economic resources measurement focus and the full accrual basis of accounting. Revenues are recorded when earned ad expenses are recorded at the time liabilities are incurred, regardless of when the related cash flows take place. Governmental funds are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Under this method, revenues are recognized when measurable and available. The City considers revenues susceptible to accrual to be available if the revenues are collected within ninety days after year-end. Expenditures are recorded when the related fund liability is incurred, except for principal and interest on long-term debt, claims and judgments, and compensated absences, which are recognized as expenditures to the extent they have matured. (d) Investment in Leases Improvements financed by the Corporation are leased to the City for their entire estimated useful life and will become the City property at the conclusion of the lease on November 1, 2050. The Corporation therefore records the present value of the lease and considers the leased improvement to have been sold for this amount when leased. (e) Net Position The government-wide financial statements utilize a net position presentation. Net position is further categorized as net investment in capital assets, restricted and/or unrestricted. As of June 30, 2025, the entire net position was considered restricted. Restricted Net Position – This category presents external restrictions imposed by creditors, grantors, contributors or laws or regulations of other governments and restrictions imposed by law through constitutional provisions or enabling legislation. (f) Deferred Inflows of Resources A deferred inflow of resources is defined as an acquisition of net asset or fund balances applicable to a future reporting period and will not be recognized as an inflow of resources (revenue) until that time. On the governmental fund balance sheet, the lease receipts from the City corresponding to the debt are recorded as deferred inflows of resources since the balances are not current financial resources. (g) Fund Balances At June 30, 2025, the Corporation’s governmental fund’s fund balances include the following classification: Restricted Fund Balance – includes amounts that can be spent only for the specific purposes stipulated by external resource providers, constitutionally or through enabling legislation. Restrictions may effectively be changed or lifted only with the consent of resource providers. Item 1 Attachment C - Public Improvement Corporation Annual Financial Report Item 1: Staff Report Pg. 32 Packet Pg. 36 of 168 PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2025 11 NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (Continued) (h) Estimates The preparation of basic financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. NOTE 3 – CASH AND INVESTMENTS HELD BY TRUSTEE (a) Interest Rate Risk Interest rate risk is the risk that a change in market interest rates will adversely affect the fair value of an investment. Normally, the longer it takes an investment to reach maturity, the greater will be that investment’s sensitivity to changes in market rates. Information about the sensitivity of the fair values of the Corporation’s investments to market interest rate fluctuations is provided by the following table that shows the distribution of the Corporation’s investments by maturity: Investment Type Amount Maturity Date Money Market Mutual Fund 4,186$ 42 days (b) Credit Risk Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. As of June 30, 2025, the Corporation’s investments in money market mutual funds are rated AAAm by Standard & Poor’s. (c) Fair Value Hierarchy The City categorizes its fair value measurements within the fair value hierarchy established by generally accepted accounting principles. The hierarchy is based on the valuation inputs used to measure fair value of the assets. Level 1 inputs are quoted prices in an active market for identical assets; Level 2 inputs are significant other observable inputs; and Level 3 inputs are significant unobservable inputs. The Corporation’s investments in money market mutual funds are not subject to the fair value hierarchy. (d) Investment Policy The Corporation must maintain required amounts of cash and investments by trustee under the terms of certain debt issues. These funds are unexpended bond proceeds or are pledged as reserves to be used if the Corporation fails to meet its obligation under these debt issues. The California Government Code (Code) requires these funds to be invested in accordance with bond indentures or State statutes. All these funds have been invested as permitted under the Code and bond indentures, including the cash held for operations invested in the City’s investment pool. The City’s investment policy is described in detail in the City’s Annual Comprehensive Financial Report. Item 1 Attachment C - Public Improvement Corporation Annual Financial Report Item 1: Staff Report Pg. 33 Packet Pg. 37 of 168 PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2025 12 NOTE 3 – CASH AND INVESTMENTS HELD BY TRUSTEE (Continued) The table below identifies the investment types that are authorized by the City’s investment policy. The table also identifies certain provisions of the City’s Investment Policy that address interest rate risk, credit risk and concentration of credit risk. Maximum Maturity Minimum Credit Quality Maximum Percentage of Portfolio Maximum Investment in One Issuer U.S. Government Securities 10 years (*) N/A No Limit No Limit U.S. Government Agency Securities 10 years (*) N/A No Limit (A) No Limit Certificates of Deposit 10 years (*) N/A 20% 10% of the par value of portfolio Bankers Acceptances 180 days N/A 30% $5 million Commercial Paper 270 days A-1 15% $3 million (B) Local Agency Investment Fund N/A N/A No Limit $75 million per account Short-Term Repurchase Agreements 1 year N/A No Limit No Limit City of Palo Alto Bonds N/A N/A No Limit No Limit Money Market Deposit Accounts N/A N/A No Limit No Limit Mutual Funds N/A N/A 20% 10% Negotiable Certificates of Deposit 10 years (*) N/A 10% $5 million Medium-Term Corporate Notes 5 years AA 10% $5 million 10 years (*) AA/AA2 40% No Limit Supranational 5 years AA/AA2 20% 10% of the par value of ortfolio (A) (B) The lesser of $3 million or 10% of outstanding commercial paper of any one institution. (*) The maximum maturity is based on the Investment Policy that is approved by the City Council and is less restrictive than the California Governmental Code. Authorized Investment Type California State and Municipal and other 49 State Issued Bonds Callable and multi-step securities are limited to no more than 25% of the par value of the portfolio, provided that: 1) the potential call dates are known at the time of purchase, 2) the interest rates at which they "step- up" are known at the time of purchase, and 3) the entire face value of the security is redeemed at the call date. Item 1 Attachment C - Public Improvement Corporation Annual Financial Report Item 1: Staff Report Pg. 34 Packet Pg. 38 of 168 PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2025 13 NOTE 4 – LONG-TERM DEBT The Corporation’s long-term debt activities are presented below: Balance Balance Amount due July 1, 2024 Retirements June 30, 2025 in one year Certificates of Participation 2018 Capital Improvement Project 2.20-4.22%, due 11/1/2047 7,985,000$ 205,000$ 7,780,000$ 215,000$ 2019 California Ave. Parking Garage Series A & B 2.5%-5%, due 11/1/2048 34,365,000 720,000 33,645,000 760,000 2021 Public Safety Building 2%-5%, due 11/1/2050 99,370,000 2,245,000 97,125,000 2,360,000 Add: Unamortized Premium 9,739,015 408,253 9,330,762 408,253 Total 151,459,015$ 3,578,253$ 147,880,762$ 3,743,253$ On June 1, 2018, the City issued the 2018 Capital Improvement Project and Refinancing Certificates of Participation (2018 COPs) in the amount of $9.0 million to fully refinance the 2002B Downtown Parking Improvement Project Certificates of Participation and to fund the renovation of the Palo Alto Municipal Golf Course. Principal payments are due annually on November 1 and interest payments semi-annually at various rates on May 1 and November 1. The 2018 COPs are secured by lease revenues received by the Corporation from any City’s General Fund revenue source. On March 21, 2019, the City issued the 2019 California Avenue Parking Garage tax exempt Series A and taxable Series B Certificates of Participation (2019A and 2019B COPs) in the amount of $26.8 million plus $4.9 million premium, and $10.6 million, respectively, for the construction of the new California Avenue Parking Garage. Principal payments are due annually on November 1 and interest payments semi-annually at various rates on May 1 and November 1. The 2019A and 2019B COPs are secured by lease revenues received by the Corporation from any City’s General Fund revenue source. On March 24, 2021, the City issued the 2021 Public Safety Building Certificates of Participation (2021 COPs) in the amount of $101.5 million plus $6.5 million premium for the construction of the new public safety building. Principal payments are due annually on November 1 and interest payments semi-annually at various rates on May 1 and November 1. The 2021 COPs are secured by lease revenues received by the Corporation from any City’s General Fund revenue source. Item 1 Attachment C - Public Improvement Corporation Annual Financial Report Item 1: Staff Report Pg. 35 Packet Pg. 39 of 168 PALO ALTO PUBLIC IMPROVEMENT CORPORATION (A Component Unit of the City of Palo Alto, California) Notes to the Basic Financial Statements (Continued) For the Year Ended June 30, 2025 14 NOTE 4 – LONG-TERM DEBT (Continued) Future annual debt service on the outstanding debt is shown below: For the Year Ending June 30, Principal Interest Total 2026 3,335,000$ 4,569,844$ 7,904,844$ 2027 3,495,000 4,402,268 7,897,268 2028 3,675,000 4,226,076 7,901,076 2029 3,865,000 4,040,594 7,905,594 2030 4,050,000 3,845,456 7,895,456 2031-2035 23,090,000 16,373,857 39,463,857 2036-2040 27,300,000 12,124,665 39,424,665 2041-2045 31,570,000 7,796,552 39,366,552 2046-2050 33,215,000 2,745,366 35,960,366 2051 4,955,000 55,744 5,010,744 138,550,000$ 60,180,422$ 198,730,422$ Events of Default and Acceleration Clauses Generally, the Corporation is considered to be in default if the Corporation fails to pay the principal of and interest on the outstanding long-term debt when become due and payable. If an event of default has occurred and is continuing, the principal of the long-term debt, together with the accrued interest, may be declared due and payable immediately. Item 1 Attachment C - Public Improvement Corporation Annual Financial Report Item 1: Staff Report Pg. 36 Packet Pg. 40 of 168 CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Independent Auditor’s Report and Financial Statements For the Year Ended June 30, 2025 Item 1 Attachment D - Regional Water Quality Control Plant Auditor's Report Item 1: Staff Report Pg. 37 Packet Pg. 41 of 168 CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Independent Auditor’s Report and Financial Statements For the Year Ended June 30, 2025 Table of Contents Page Independent Auditor’s Report ................................................................................................................... 1 Financial Statements: Statement of Net Expenditures ............................................................................................................... 3 Statement of Quarterly Billings .............................................................................................................. 4 Notes to the Financial Statements ........................................................................................................... 5 Item 1 Attachment D - Regional Water Quality Control Plant Auditor's Report Item 1: Staff Report Pg. 38 Packet Pg. 42 of 168 www.mgocpa.com Macias Gini & O’Connell LLP 2121 N. California Boulevard, Suite 750 Walnut Creek, CA 94596 1 Independent Auditor’s Report The Honorable Mayor and Members of the City Council of the City of Palo Alto Palo Alto, California Opinion We have audited the Statements of Net Expenditures and Quarterly Billings (financial statements) of the City of Palo Alto Regional Water Quality Control Plant (Plant), an enterprise operation of the City of Palo Alto, California (City), for the year ended June 30, 2025, and the related notes to the financial statements, which collectively comprise the Plant’s financial statements as listed in the table of contents. In our opinion, the accompanying financial statements referred to above present fairly, in all material respects, the net expenditures and quarterly billings of the Plant for the year ended June 30, 2025, in accordance with the financial reporting provisions of the Basic Agreement between the City of Palo Alto, the City of Mountain View and the City of Los Altos for the Acquisition, Construction and Maintenance of a Joint Sewer System, dated October 10, 1968, as amended by addenda dated December 5, 1977, January 14, 1980, April 9, 1985, May 30, 1991, July 31, 1992, March 16, 1998, April 15, 2009, October 17, 2016, March 4, 2019, and May 17, 2021 (Basic Agreement), as described in Note 2 to the financial statements. Basis for Opinion We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the City and the Plant, and to meet our ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Emphasis of a Matter As discussed in Note 2 to the financial statements, the financial statements are prepared in accordance with the financial reporting provisions of the Basic Agreement, which is a basis of accounting other than accounting principles generally accepted in the United States of America and are not intended to be a complete presentation of the Plant’s financial position or results of operations. Our opinion is not modified with respect to this matter. Responsibilities of Management for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with the financial reporting provisions of the Basic Agreement, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Item 1 Attachment D - Regional Water Quality Control Plant Auditor's Report Item 1: Staff Report Pg. 39 Packet Pg. 43 of 168 2 Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements. In performing an audit in accordance with GAAS, we: • Exercise professional judgment and maintain professional skepticism throughout the audit. • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Plant’s internal control. Accordingly, no such opinion is expressed. • Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit. Restriction on Use This report is intended solely for the information and use of the governing bodies and management of the City of Palo Alto, the City of Mountain View, the City of Los Altos, the East Palo Alto Sanitary District, Stanford University, and the Town of Los Altos Hills, and is not intended to be and should not be used by anyone other than these specified parties. Walnut Creek, California October 31, 2025 Item 1 Attachment D - Regional Water Quality Control Plant Auditor's Report Item 1: Staff Report Pg. 40 Packet Pg. 44 of 168 CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Statement of Net Expenditures City of City of City of Total Mountain View Los Altos Palo Alto Direct Expenditures: Source control program 1,543,039$ 640,361$ 122,517$ 780,161$ Public outreach 86,759 36,005 6,889 43,865 Permitting and enforcement 1,471,574 599,550 33,605 838,419 Operations and maintenance 21,056,804 8,738,574 1,671,910 10,646,320 System improvement CIP (Note 3) 12,840,412 6,400,855 1,386,845 5,052,712 Total Direct Expenditures 36,998,588 16,415,345 3,221,766 17,361,477 Indirect Administrative Expenditures (Note 4): Source control program 1,045,788 434,002 83,036 528,750 Public outreach 16,915 7,020 1,343 8,552 Permitting and enforcement 286,470 116,714 6,542 163,214 Operations and maintenance 5,233,139 2,171,753 415,511 2,645,875 Total Indirect Administrative Expenditures 6,582,312 2,729,489 506,432 3,346,391 Debt Service Expenditures (Note 5): 2009 State Water Resource Loan 536,917 203,438 50,846 282,633 2017 State Water Resource Loan 1,090,813 413,309 103,300 574,204 Total Debt Service Expenditures 1,627,730 616,747 154,146 856,837 Total Expenditures 45,208,630 19,761,581 3,882,344 21,564,705 Deduct Joint Systems Revenues (Note 6) (549,650) (189,114) (123,729) (236,807) Net Expenditures 44,658,980$ 19,572,467$ 3,758,615$ 21,327,898$ For the Year Ended June 30, 2025 See accompanying notes to the financial statements. 3 Item 1 Attachment D - Regional Water Quality Control Plant Auditor's Report Item 1: Staff Report Pg. 41 Packet Pg. 45 of 168 CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Statement of Quarterly Billings City of City of Mountain View Los Altos Billings by Quarter, Beginning: July 1, 2024 4,500,909$ 1,093,042$ October 1, 2024 3,626,583 979,236 January 1, 2025 3,597,053 889,633 April 1, 2025 5,002,081 1,274,398 Total billings 16,726,626 4,236,309 Adjusted for: Impact of advance billings for Joint Intercepting Sewer Rehabilitation Project 861,309 206,714 Total net billings 17,587,935 4,443,023 Net expenditures 19,572,467 3,758,615 Excess (deficit) of total billings over (under) net expenditures (1,984,532)$ 684,408$ For the Year Ended June 30, 2025 See accompanying notes to the financial statements. 4 Item 1 Attachment D - Regional Water Quality Control Plant Auditor's Report Item 1: Staff Report Pg. 42 Packet Pg. 46 of 168 CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Notes to the Financial Statements For the Year Ended June 30, 2025 5 NOTE 1 – THE REPORTING ENTITY In 1968, the Cities of Mountain View and Los Altos retired their treatment plants and became partners with the City of Palo Alto (City) to construct a regional treatment plant. Construction started in 1970 and was completed in 1972 at a cost of $11 million. Since 1972, the Regional Water Quality Control Plant (the Plant) has been treating wastewater, which has significantly reduced the number of pollutants entering the San Francisco Bay. Initially, the Cities of Mountain View and Los Altos were the only partner agencies participating jointly in the cost of operating and maintaining the Plant. The City’s total usage of the treatment plant was not fully utilized and as a result, the City entered into separate subcontracts distributing some of its allocated use to other partner agencies. Currently, the City, the City of Los Altos, the City of Mountain View, and the subcontracting agencies: the East Palo Alto Sanitary District, Stanford University, and the Town of Los Altos Hills (Partner Agencies) share in the proportional operating and maintenance costs of the Plant. These partners regularly work with the City to foster positive relationship and ensure the Plant operates successfully. The Partner Agencies share the original costs of acquisition and construction of the Plant in the same proportions as the allocation of capacity rights to them. The City of Palo Alto (the City) is the owner and administrator of the Plant. The Cities of Mountain View and Los Altos are entitled to use a portion of the capacity of the Plant, as set forth in the Basic Agreement between the City of Palo Alto, the City of Mountain View and the City of Los Altos for the Acquisition, Construction and Maintenance of a Joint Sewer System dated October 10, 1968, as amended by addenda dated December 5, 1977, January 14, 1980, April 9, 1985, May 30, 1991, July 31, 1992, March 16, 1998, April 15, 2009, October 17, 2016, March 4, 2019, and May 17, 2021 (collectively, the “Basic Agreement”). The Basic Agreement will terminate on December 31, 2060, unless a written notice of withdrawal is tendered ten years preceding the date of withdrawal. On May 17, 2021, the Partner Agencies approved the construction of a new outfall and related improvements to existing discharge infrastructure and the rehabilitation of the primary sedimentation tanks including electrical upgrades. Each Partner Agency agreed to pay its share of the project costs, in proportion to the capacity it owns in the Joint Sewer System. The Partner Agencies also authorized the City to receive State Revolving Fund Loan from the State Water Resources Control Board (SWRCB) or pursue other project financing to fund the costs of the projects. In November 2022, the Partner Agencies approved the construction of secondary treatment upgrades (STU). The Partner Agencies also authorized the City to receive State Revolving Fund Loan from the SWRCB to fund the costs of the project. In December 2023, the Partner Agencies approved the construction of the joint intercepting sewer rehabilitation (Phase 1) project. Each Partner Agency agreed to pay fixed cost shares of the project costs. These large capital improvement programs are being implemented to replace aging infrastructure and upgrade treatment systems to comply with the new regulations. Item 1 Attachment D - Regional Water Quality Control Plant Auditor's Report Item 1: Staff Report Pg. 43 Packet Pg. 47 of 168 CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Notes to the Financial Statements For the Year Ended June 30, 2025 6 NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Plant is an enterprise that is operated by the City and its operations are accounted for as an enterprise fund in the City’s basic financial statements. The financial statements are prepared in accordance with the financial reporting provisions of the Basic Agreement, which is a basis of accounting other than accounting principles generally accepted in the United States of America. The accompanying financial statements are intended to present the Plant’s net expenditures and quarterly billings by the Plant to the Cities of Mountain View and Los Altos pursuant to the agreement of the Partner Agencies as described above and are not intended to be a complete presentation of the Plant’s financial position or results of operations. Additionally, the capital cost and the outstanding debt of the Plant are not presented in these statements but are presented in the basic financial statements of the City. Plant expenditures, joint system revenues, debt service and industrial waste compliance expenditures are shared by the Members based on agreed upon allocation percentages. The expenditures, including indirect administrative expenditures (see Note 4), are allocated to each of the Members based primarily on their respective percentages of the annual sewage flow and treatment needed for suspended solids, chemical oxygen demand and ammonia. Revenues from services, fines and penalties are allocated to each of the Members in the same proportions as those of expenditures. Debt service payments are allocated based on percentages established at the time of bond issuance. Industrial waste compliance (public outreach and permitting and enforcement) charges are allocated to Members primarily based upon the number of industries and efforts required to maintain compliance with sewage use ordinances and other regulations from Environmental Protection Agency. The percentages used for the year ended June 30, 2025 to allocate expenditures and revenues were as follows: City of City of City of Mountain View Los Altos Palo Alto Public outreach, source control program, operations and maintenance, system improvement 41.50% 7.94% 50.56% CIP and joint system revenues Joint intercepting sewer rehabilitation costs 62.50% 15.00% 22.50% Permitting and enforcement 40.74% 2.28% 56.98% Debt services expenditures: 2009 State Water Resources Loan 37.89% 9.47% 52.64% 2017 State Water Resources Loan 37.89% 9.47% 52.64% 2021 State Water Resources Loan 37.89% 9.47% 52.64% Item 1 Attachment D - Regional Water Quality Control Plant Auditor's Report Item 1: Staff Report Pg. 44 Packet Pg. 48 of 168 CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Notes to the Financial Statements For the Year Ended June 30, 2025 7 The City is allocated 50.56% of total usage of the treatment plant. The City does not fully utilize its percentage allocation. Therefore, the City has entered into separate contracts to allocate portions of its excess to other entities. Fiscal year 2025 allocations are as follows: East Palo Alto Sanitary District 5.78% Stanford University 6.75% Town of Los Altos Hills 2.02% Remaining City percentages 36.01% Total 50.56% The agreement the City has with the above entities has no effect on the partnership agreement between the Members. Billings are made in advance and are based on projects for the plant and estimated sewage flow. Excess (deficit) billings over (under) net expenditures are offset against the payments during the second quarter of the subsequent fiscal year. NOTE 3 – SYSTEM IMPROVEMENT CAPITAL IMPROVEMENTS PROGRAM (CIP) The basic agreement between the Members, dated October 10, 1968, provides that the administrator of the Plant is responsible for capital additions. These capital additions should be for the replacement of obsolete or worn-out units, or minor capital additions to improve the efficiency of the Plant’s operations. Per the addendum to the agreement dated March 16, 1998, the Members agreed that capital additions should not exceed $1.9 million in 1998-99 (base year). For future years, the base year amount will be adjusted annually based on increases to the Consumer Price Index-Urban Wage Earners and Clerical Workers for the San Francisco-Oakland-San Jose area. Unused authorized amount will be carried forward to future years. For fiscal year 2025, the adjusted pay-as-you-go capital additions (minor capital) authorized is $3,979,004. Actual minor capital additions amounted to $5,105,877 for fiscal year 2025. As of June 30, 2025, the commitments for minor capital additions, including unspent capital additions, is $20,141,947, of which encumbrances in the amount of $11,410,570 have been carried forward to fiscal year 2026. NOTE 4 – INDIRECT ADMINISTRATIVE EXPENDITURES Indirect expenditures include those costs allocated from the City’s General Fund administrative services, which supports all operating departments of the City. Other indirect expenses are administrative charges from the City’s Internal Services Funds. These allocations are applied on a uniform basis throughout the City. The allocations are applied in accordance with the subsequent letter of agreement dated April 9, 1985. Item 1 Attachment D - Regional Water Quality Control Plant Auditor's Report Item 1: Staff Report Pg. 45 Packet Pg. 49 of 168 CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Notes to the Financial Statements For the Year Ended June 30, 2025 8 NOTE 5 – DEBT SERVICE EXPENDITURES In October 2009, the City and the State Water Resources Control Board (SWRCB) executed an agreement for the 2009 State Water Resources Loan to finance the Ultraviolet Disinfection Project. As of June 30, 2011, the loan in the amount of $8.5 million was drawn down and became outstanding. Interest in the amount of $96,000 was accrued and added to the outstanding balance. Though the City is the recipient of the loan, the City’s agreement with the partner agencies obliges them to pay their proportionate share of the principal and interest of this loan. The City’s total share of the loan payment is 52.64%; however, 14.48% of this amount is recovered from the East Palo Alto Sanitary District, Stanford University, and the Town of Los Altos Hills. After these recoveries, the City’s share of the loan payment is 38.16% with the partner agencies paying 61.84%. In June 2017, the City and the SWRCB executed an agreement for a State Water Resources Loan for an award up to $30 million, payable over 30 years at 1.8% to finance the project replacing the sewage sludge “bio-solids” incinerators at the Plant. On September 13, 2017, the City and the SWRCB amended the original agreement of the 2017 SRF loan to lower the total amount to $29.7 million and the due date of the last debt service payment be May 31, 2049. Under the terms of the amended agreement, a portion of the loan amount, $4.0 million, is federally funded and the obligation balance was adjusted. The new facility will dewater the bio-solids and allow them to be loaded onto trucks and taken offsite for further treatment until further treatment units can be built onsite. The Plant provides treatment and disposal for wastewater for the City, City of Mountain View, City of Los Altos, Town of Los Altos Hills, East Palo Alto Sanitary District, and Stanford University. Though the City is the recipient of the loan, the City’s agreement with the partner agencies obliges them to pay their proportionate share of the principal and interest of this loan. The City’s total share of the loan payment is 52.64%; however, 14.48% of this amount is recovered from the East Palo Alto Sanitary District, Stanford University, and the Town of Los Altos Hills. After these recoveries, the City’s share of the loan payment is 38.16% with the partner agencies paying 61.84%. In July 2021, the SWRCB and the City executed a direct loan agreement for an award up to $17.5 million to finance the rehabilitation and upgrade of the Plant’s primary sedimentation tanks and ancillary systems. During the year ended June 30, 2023, the approved loan amount was increased to $19.4 million. Construction was completed in FY 2025, with a total loan of $16.7 million. The first annual installment is due July 31, 2025. Though Palo Alto is the recipient of the loan, the City’s agreement with the partner agencies obliges them to pay their proportionate share of the principal and interest of this loan. The City’s total share of the loan payment is 52.64%; however, 14.48% of this amount is recovered from the East Palo Alto Sanitary District, Stanford University, and the Town of Los Altos Hills. After these recoveries, the City’s share of the loan payment is 38.16% with the partner agencies paying 61.84%. In May 2022, the SWRCB and the City executed a direct loan agreement for an award up to $168.7 million to finance the Secondary Treatment Upgrades project to produce treated effluent with reduced total nitrogen content, increase treatment capacity, and rehabilitate aging infrastructure. In August 2024, the approved loan amount was increased to $192.8 million. Per the SWRCB agreement, the first debt service payment of this loan is estimated to be due on July 28, 2029. On June 30, 2025, the outstanding 2022 State water resources loan was $111.2 million. Item 1 Attachment D - Regional Water Quality Control Plant Auditor's Report Item 1: Staff Report Pg. 46 Packet Pg. 50 of 168 CITY OF PALO ALTO REGIONAL WATER QUALITY CONTROL PLANT Notes to the Financial Statements For the Year Ended June 30, 2025 9 NOTE 5 – DEBT SERVICE EXPENDITURES (Continued) The principal amount of the debt outstanding as of June 30, 2025, excluding the 2022 State Water Resources loans, are allocated as follows: 2009 2017 2021 State Water State Water State Water Resources Loan Resources Loan Resources Loan Total City of Palo Alto 1,164,185$ 8,062,068$ 6,362,035$ 9,226,253$ City of Mountain View 1,155,948 8,005,025 6,317,021 9,160,973 City of Los Altos 288,910 2,000,728 1,578,838 2,289,638 East Palo Alto Sanitary District 233,081 1,614,104 1,273,741 1,847,185 Stanford University 160,472 1,111,281 876,947 1,271,753 Town of Los Altos Hills 48,203 333,807 263,418 382,010 Total 3,050,799$ 21,127,013$ 16,672,000$ 24,177,812$ NOTE 6 – JOINT SYSTEM REVENUES The Plant’s joint system revenues for the year ended June 30, 2025 total $549,650 which consisted of the following: Septic hauling services 289,852$ Valley Water 236,301 Other miscellaneous revenues 2,078 Salt water marsh services 7,500 Others 13,919 549,650$ NOTE 7 – RELATED PARTY TRANSACTIONS During fiscal year 2025, the Plant paid the City a total of $7,617,536 for various internal services and cost allocations. These payments include $3,038,315 for utility costs, $235,196 for vehicle replacement charges, $1,750,728 for Cost Plan charges, $983,925 for liability insurance, $1,019,639 for information technology and desktop replacement services, and $589,733 for other related interfund transactions. All such expenses are included in the Statement of Net Expenditures. Item 1 Attachment D - Regional Water Quality Control Plant Auditor's Report Item 1: Staff Report Pg. 47 Packet Pg. 51 of 168 10 This page is left intentionally blank. Item 1 Attachment D - Regional Water Quality Control Plant Auditor's Report Item 1: Staff Report Pg. 48 Packet Pg. 52 of 168 CITY OF PALO ALTO, CALIFORNIA Independent Accountant’s Report on Applying Agreed–Upon Procedures Related to the Article XIII-B Appropriations Limit For the Year Ended June 30, 2025 Item 1 Attachment E - GANN Report Item 1: Staff Report Pg. 49 Packet Pg. 53 of 168 222ѵ("*+ѵ*(Macias Gini & O’Connell LLP 2121 N. California Boulevard, Suite 750 Walnut Creek, CA 94596 1 Independent Accountant’s Report on Applying Agreed-Upon Procedures Related to the Article XIII-B Appropriations Limit Honorable Mayor and the Members of the City Council, of City of Palo Alto, California We have performed the procedures enumerated below to the accompanying Appropriations Limit Worksheet of the City of Palo Alto, California (City) for the year ended June 30, 2025. The City’s management is responsible for the appropriations limit calculation for the year ended June 30, 2025. The City has agreed to and acknowledged that the procedures performed are appropriate to meet the intended purpose of assisting the City in evaluating the appropriations limit calculation in accordance with the requirements of Section 1.5 of Article XIIB of the California Constitution. The procedures are recommended by the California Committee on Municipal Accounting (as presented in the CCMA White Paper titled Agreed-upon Procedures Applied to the Appropriations Limit Prescribed by Article XIII-B of the California Constitution). This report may not be suitable for any other purpose. The procedures performed may not address all the items of interest to a user of this report and may not meet the needs of all users of this report and, as such, users are responsible for determining whether the procedures performed are appropriate for their purposes. The procedures and associated findings are as follows: 1. We obtained the completed worksheets setting forth the calculations necessary to establish the City’s appropriations limit and compared the limit and annual adjustment factors included in those worksheets to the limit and annual adjustment factors that were adopted by resolution of the City Council. We also compared the population and inflation options included in the aforementioned worksheets to those that were selected by a recorded vote of the City Council. Finding: No exceptions were noted as a result of our procedures. 2. For the accompanying Appropriations Limit Worksheet, we added the prior year appropriations limit to the total adjustments and compared the resulting amount to the current year appropriations limit. Finding: No exceptions were noted as a result of our procedures. The prior year appropriations limit was restated and readopted by the City Council on June 17, 2024. 3. We agreed the current year information presented in the accompanying Appropriations Limit Worksheet to the appropriate supporting worksheets described in No. 1 above. Finding: No exceptions were noted as a result of our procedures. Item 1 Attachment E - GANN Report Item 1: Staff Report Pg. 50 Packet Pg. 54 of 168 2 4. We agreed the prior year appropriations limit presented in the accompanying Appropriations Limit Worksheet to the prior year appropriations limit adopted by the City Council. Finding: No exceptions were noted as a result of our procedures. The prior year appropriations limit was restated and readopted by the City Council on June 17, 2024. We were engaged by the City to perform this agreed-upon procedures engagement and conducted our engagement in accordance with attestation standards established by the American Institute of Certified Public Accountants. We were not engaged to and did not conduct an examination or review, the objective of which would be the expression of an opinion or conclusion, respectively, on the appropriations limit calculation for the year ended June 30, 2025. Accordingly, we do not express such an opinion or conclusion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. No procedures have been performed with respect to the determination of the appropriations limit for the base year, as defined by Article XIII-B of the California Constitution. We are required to be independent of the City and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements related to our agreed-upon procedures engagement. This report is intended solely for the information and use of City Council and the City’s management, and is not intended to be and should not be used by anyone other than these specified parties. Walnut Creek, California October 31, 2025 Item 1 Attachment E - GANN Report Item 1: Staff Report Pg. 51 Packet Pg. 55 of 168 CITY OF PALO ALTO, CALIFORNIA Appropriations Limit Worksheet For the Year Ended June 30, 2025 3 2023-2024 appropriation limit, as restated and readopted 212,020,000$ Adjustment factors: Population (1)1.0002 Inflation (2)1.0362 Total adjustment factors (rounded) (3)1.0364 Total adjustments (rounded) 7,720,000 2024-2025 appropriation limit, as adopted 219,740,000$ (1) The population factor may be based on the change in population of 1) the City or 2) the County of Santa Clara, as provided by the State of California’s Department of Finance. The population factor adopted by the City for the current year appropriation limit represents the change in population of the County of Santa Clara. (2) The inflation factor may be based on 1) the change in per capita personal income for the State of California, as provided by the State of California’s Department of Finance; or 2) the change in the assessed valuation due to new non-residential construction within the City. The inflation factor adopted by the City for the current year appropriation limit represents the change in per capita personal income. (3) The total adjustment factor is calculated by multiplying the population factor by the inflation factor. Item 1 Attachment E - GANN Report Item 1: Staff Report Pg. 52 Packet Pg. 56 of 168 CITY OF PALO ALTO, CALIFORNIA Pedestrian/Bicycle Facilities Grant Metropolitan Transportation Commission Transportation Development Act Funds, Article III Independent Auditor’s Reports, Financial Statements and Supplementary Information For the Year Ended June 30, 2025 Item 1 Attachment F - Transportation Development Act Funds, Article III Item 1: Staff Report Pg. 53 Packet Pg. 57 of 168 CITY OF PALO ALTO, CALIFORNIA Pedestrian/Bicycle Facilities Grant Metropolitan Transportation Commission Transportation Development Act Funds, Article III For the Year Ended June 30, 2025 Table of Contents Page Independent Auditor’s Report ................................................................................................................... 1 Financial Statements Balance Sheet ................................................................................................................................... 3 Statement of Revenues, Expenditures, and Changes in Fund Balance ........................................... 4 Notes to the Financial Statements .................................................................................................... 5 Internal Control and Compliance Section Independent Auditor’s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards and the Transportation Development Act ............................................... 7 Item 1 Attachment F - Transportation Development Act Funds, Article III Item 1: Staff Report Pg. 54 Packet Pg. 58 of 168 www.mgocpa.com Macias Gini & O’Connell LLP 2121 N. California Boulevard, Suite 750 Walnut Creek, CA 94596 1 Independent Auditor’s Report Honorable Mayor and Members of the City Council City of Palo Alto, California Report on the Financial Statements Opinion We have audited the financial statements of the Pedestrian/Bicycle Facilities Grant (Grant) made to the City of Palo Alto, California (City), by the Metropolitan Transportation Commission, under the Transportation Development Act Funds, Article III, as of and for the year ended June 30, 2025, and the related notes to the financial statements, as listed in the table of contents. In our opinion, the accompanying financial statements referred to above present fairly, in all material respects, the financial position of the Grant as of June 30, 2025, and the changes in financial position for the year then ended in accordance with accounting principles generally accepted in the United States of America. Basis for Opinion We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS) and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States (Government Auditing Standards). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the City and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Emphasis of Matter As discussed in Note 2(a) to the financial statements, the financial statements present only the Grant and do not purport to, and do not, present fairly the financial position of the City as of June 30, 2025, and the changes in its financial position for the year then ended in accordance with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. Responsibilities of Management for the Financial Statements The City’s management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Item 1 Attachment F - Transportation Development Act Funds, Article III Item 1: Staff Report Pg. 55 Packet Pg. 59 of 168 2 Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS and Government Auditing Standards will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements. In performing an audit in accordance with GAAS and Government Auditing Standards, we  Exercise professional judgment and maintain professional skepticism throughout the audit.  Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the City’s internal control. Accordingly, no such opinion is expressed.  Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control–related matters that we identified during the audit. Other Reporting Required by Government Auditing Standards and the Transportation Development Act In accordance with Government Auditing Standards and the Transportation Development Act, we have also issued our report dated October 31, 2025, on our consideration of the City’s internal control over the Grant’s financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the City’s internal control over the Grant’s financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and the Transportation Development Act in considering the City’s internal control over the Grant’s financial reporting and compliance. Walnut Creek, California October 31, 2025 Item 1 Attachment F - Transportation Development Act Funds, Article III Item 1: Staff Report Pg. 56 Packet Pg. 60 of 168 CITY OF PALO ALTO, CALIFORNIA Pedestrian/Bicycle Facilities Grants Metropolitan Transportation Commission Transportation Development Act Funds, Article III Balance Sheet June 30, 2025 Assets -$ Liabilities and Fund Balance Liabilities -$ Fund balance - Total liabilities and fund balance -$ See accompanying notes to the financial statements. 3 Item 1 Attachment F - Transportation Development Act Funds, Article III Item 1: Staff Report Pg. 57 Packet Pg. 61 of 168 CITY OF PALO ALTO, CALIFORNIA Pedestrian/Bicycle Facilities Grants Metropolitan Transportation Commission Transportation Development Act Funds, Article III Statement of Revenues, Expenditures, and Changes in Fund Balance For the Year Ended June 30, 2025 Revenues TDA Article III Grant 71,837$ Expenditures Capital outlay 71,837 Change in fund balance - Fund balance - beginning of year - Fund balance - end of year -$ See accompanying notes to the financial statements. 4 Item 1 Attachment F - Transportation Development Act Funds, Article III Item 1: Staff Report Pg. 58 Packet Pg. 62 of 168 CITY OF PALO ALTO, CALIFORNIA Pedestrian/Bicycle Facilities Grant Metropolitan Transportation Commission Transportation Development Act Funds, Article III Notes to the Financial Statements For the Year Ended June 30, 2025 5 NOTE 1 – DESCRIPTION OF REPORTING ENTITY The accompanying financial statements are prepared from the accounts and financial transactions of the City of Palo Alto, California (City) for Pedestrian/Bicycle Facilities Grant (Grant) projects funded under the Transportation Development Act of 1971 (TDA) Article III of the State of California, which include the construction of pedestrian and bicycle paths. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation The Grant has been accounted for in the Capital Project Fund, which is a major governmental fund type and is included in the City’s basic financial statements. The Capital Project Fund accounts for resources used for acquisition and construction of capital facilities by the City, with the exception of those assets financed by proprietary funds. The financial statements present only the Grant and do not purport to, and do not, present fairly the financial position of the City as of June 30, 2025, and the changes in its financial position for the year then ended in accordance with accounting principles generally accepted in the United States of America. (b) Basis of Accounting The accompanying financial statements have been prepared on the modified accrual basis of accounting. Under the modified accrual basis of accounting, expenditures are recorded when the related governmental fund liabilities are incurred. Grant revenues, which are received as reimbursement for specific purposes or projects, are recognized when they become measurable and available. The City considers revenues susceptible to accrual to be available if the revenues are collected within ninety days after year-end, except for property taxes, which are available if collected within sixty days after year-end. (c) Fund Balance The City reports fund balance for governmental funds in specific classifications (nonspendable, restricted, committed, assigned and unassigned) based on the extent to which the City is bound to the constraints on the specific purposes for which funds can be spent. The Grant only receives restricted revenues. No fund balance was reported as of June 30, 2025. (d) Due to the City of Palo Alto Cash has been advanced to the Grant projects for expenditures paid by the City’s Capital Projects Fund for the benefit of the TDA Article III projects. The Grant projects are obligated to immediately repay these advances upon receipt of reimbursement from the Metropolitan Transportation Commission. No due to the City balance was reported as of June 30, 2025. Item 1 Attachment F - Transportation Development Act Funds, Article III Item 1: Staff Report Pg. 59 Packet Pg. 63 of 168 CITY OF PALO ALTO, CALIFORNIA Pedestrian/Bicycle Facilities Grant Metropolitan Transportation Commission Transportation Development Act Funds, Article III Notes to the Financial Statements For the Year Ended June 30, 2025 6 NOTE 3 – INTEREST EARNED ON ALLOCATED FUNDS The City incurred and paid expenditures prior to the receipt of the grant reimbursements and as a result, no interest was earned on Grant funds. NOTE 4 – PROJECTS The major projects funded in part by the Grant during the fiscal year ended June 30, 2025 were as follows: Expenditures incurred Expenditures incurred Allocation Allocation in previous for the year ended Project Title Number Amount fiscal years June 30, 2025 Bicycle and Pedestrian Transportation Project Update 24001113 250,720$ 92,583$ 71,837$ Item 1 Attachment F - Transportation Development Act Funds, Article III Item 1: Staff Report Pg. 60 Packet Pg. 64 of 168 www.mgocpa.com Macias Gini & O’Connell LLP 2121 N. California Boulevard, Suite 750 Walnut Creek, CA 94596 7 Independent Auditor’s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Governmental Auditing Standards and the Transportation Development Act Honorable Mayor and Members of the City Council City of Palo Alto, California We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States (Government Auditing Standards), the financial statements of the Pedestrian/Bicycle Facilities Grant (Grant) made to the City of Palo Alto, California (City), by the Metropolitan Transportation Commission, Transportation Development Act Funds, Article III, as of and for the year ended June 30, 2025, and the related notes to the financial statements, and have issued our report thereon dated October 31, 2025. Report on Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the City’s internal control over the Grant’s financial reporting (internal control) as a basis for designing audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City’s internal control. Accordingly, we do not express an opinion on the effectiveness of the City’s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses or significant deficiencies may exist that were not identified. Report on Compliance and Other Matters As part of obtaining reasonable assurance about whether the Grant’s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, including the applicable statutes, rules and regulations of the Transportation Development Act, including Section 6666 of Title 21, of the California Code of Regulations, and the allocation instructions and resolutions of the Metropolitan Transportation Commission, noncompliance with which could have a direct and material effect on the financial Item 1 Attachment F - Transportation Development Act Funds, Article III Item 1: Staff Report Pg. 61 Packet Pg. 65 of 168 8 statements. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards or the Transportation Development Act. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Walnut Creek, California October 31, 2025 Item 1 Attachment F - Transportation Development Act Funds, Article III Item 1: Staff Report Pg. 62 Packet Pg. 66 of 168 Finance Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: Administrative Services Meeting Date: December 2, 2025 Report #:2508-5036 TITLE FY2025 Annual Comprehensive Financial Report (ACFR) and the Year-End Budget Adjustments in Various Funds on the schedule RECOMMENDATION Staff recommends that the Finance Committee forward to the City Council for its acceptance: 1. The City’s Fiscal Year (FY) 2025 Annual Comprehensive Financial Report (ACFR)1. 2. Amendments to the FY 2025 Budget Appropriation for various funds as identified Attachment B. EXECUTIVE SUMMARY Audit Results and Overall Conclusion The City’s fiscal year ended on June 30, 2025. Financial statements were prepared and audited by Macias Gini & O’Connell LLP (MGO), Certified Public Accountants, under contract with the City Auditor. MGO issued an unmodified (clean) audit opinion on the City’s financial statements, confirming that they fairly present the City’s financial position and results of operations in accordance with generally accepted accounting principles. The Annual Comprehensive Financial Report (ACFR) includes the Independent Auditor’s Report on Internal Control and Compliance, prepared in accordance with Government Auditing Standards. The full ACFR is available on the City’s website1. The Single Audit is not included in the ACFR for FY 2025 and will be issued once the Federal Office of Management and Budget (OMB) releases the Compliance Supplement required to complete the audit. 1 ACFR FY2025; https://www.paloalto.gov/files/assets/public/v/1/administrative-services/financial- reporting/annual-comprehensive-financial-reports-acfr/current-2011-acfrs/city-of-palo-alto-acfr-fye-06.30.2025- final-secured.pdf Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 1 Packet Pg. 67 of 168 Attachment A provides a summary of General Fund revenues by source and expenditures by function. This is a comparison of budget versus budgetary actual results for FY 2025. Attachment B provides a summary of year-end technical actions reallocating and realigning the budget to appropriate funds for actual operating and capital expenditures and revenue collected and to adjust transfers between funds. Financial Highlights for FY 2025 Citywide Financial Position and Key Changes As of June 30, 2025, the City’s total net position was approximately $1.6 billion, an increase of $112.2 million (7.7%) over the prior fiscal year. This growth primarily reflects progress on major capital projects and increases in restricted funds and investment values. Notable projects include the Public Safety Building, Roth Building Rehabilitation, Fire Station No. 4 Replacement, Bouleware Park Improvements, and Electric Distribution System Upgrades. Citywide, 83% of net position represents investment in capital assets ($1.3 billion), 10% is restricted ($155.6 million), and 7% is unrestricted ($116.9 million). These results demonstrate continued infrastructure investment, prudent financial management, and improved long-term fiscal sustainability. (See Analysis – Government-wide Financial Statements for detailed discussion.) General Fund For FY 2025, the General Fund actual revenues (including reappropriations and adjustments to budgetary basis) of $ 261.3 million are within the adjusted budget of $261.3 million. The minimal variance reflects revenues that were generally in line with expectations. General Fund actual expenditures (including encumbrances and reappropriations) of $285.6 million are $9.1 million less than the adjusted budget of $294.7 million, with the primary budgetary savings comprised of salaries & benefits ($1.6 million), contract services ($4.4 million) and other/general expenses ($3.1 million) Including transfers in/out and prior year encumbrances and reappropriation, FY 2025 General Fund total sources was $324.4 million and total uses was $327.8 million. The revenue outcomes are primarily due to higher-than-expected property tax, which were partially offset by lower revenues from sales tax, utility users tax, business tax, other taxes and fines, and business tax. Expenditure savings were attributable across multiple departments. Refer to Attachment A for more detail. By policy, the City maintains a General Fund Budget Stabilization Reserve (BSR) balance of 15%- 20% of the annual operating expense, with a target level of 18.5%. The BSR ended FY 2025 at Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 2 Packet Pg. 68 of 168 $58.9 million, but after adjusting the BSR for FY 2026 additions approved by Council3, the net BSR balance is $58.8 million or $2.0 million above Council’s 18.5% BSR target level. The FY 2025 savings in salary & benefit, contracts services and other expenses contributed to this higher BSR. Staff recommend that the $2.0 million above the 18.5% BSR target level be kept in BSR for future budget balancing strategy and projected FY2027 budget shortfall and ensure the City maintains high quality service level. Consistent with current practice, any budget actions to allocate the BSR funds above the 18.5% target level will be included in the FY 2026 Mid-Year Review (February 2026). Other Funds: Enterprise and Internal Service Activities The City’s Enterprise Funds ended FY 2025 with a net position of $987.1 million, up $86.4 million (9.6%), largely due to continued investment in capital infrastructure and restoration of reserves. Internal Service Funds closed with $163.3 million in net position after a $9.5 million prior-period adjustment implementing GASB 101 (Compensated Absences). All internal service funds maintained positive balances except for the Printing & Mailing Fund, which showed a minor negative position ($0.03 million) due to non-cash GASB 68/75 pension and OPEB adjustments. Overall, FY 2025 results demonstrate stable financial performance and ongoing investment in essential capital and operational infrastructure. (See Analysis – Enterprise & Internal Service Funds for further detail.) BACKGROUND The City’s fiscal year ends on June 30, at which time its financial records are closed for the year and financial reports are prepared. The reports, along with the City’s financial data, are audited by Macias Gini & O’Connell LLP (MGO), Certified Public Accountants, a firm hired by the City Auditor. MGO issues an audit opinion on the financial position of the City’s activities, and together with the City’s financial statements and other information, comprises the City’s Annual Comprehensive Financial Report (ACFR). Attachment A provides detailed information of the General Fund revenue by category and expenditures by department. The Analysis section of this staff report includes the Results by Fund which discusses the position of fund balances, major revenue sources, and expense highlights. 3City Council Meeting June 16, 2025; Staff Report 2506-4822; https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=83489 Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 3 Packet Pg. 69 of 168 Attachment B outlines technical recommended amendments to the FY 2025 Budget. These recommended actions close the fiscal year by reallocating and realigning the budget to appropriate funds for actual operating and capital expenditures and revenue collected as well as adjust transfers between funds. The ACFR includes government-wide statements and fund level financial statements that provide a snapshot of fund balances and activity for the year. An overview of FY 2025 financial results, information on how to navigate the ACFR document, and highlights of key fiscal issues affecting the City can be found in the ACFR Management’s Discussion and Analysis (MD&A) section. This staff report summarizes analysis that can be found in the MD&A, which also includes an overview of the City’s current fiscal health, financial statements and analysis compared to the prior fiscal year, and capital asset and debt administration data. Throughout this report, pronouncements released by GASB are referred to by issuance number. A full list of pronouncements can be found GASB’s website5. The list below provides a summary of the GASB pronouncements referenced in this report: 5 GASB Pronouncements: https://www.gasb.org/standards-and-guidance Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 4 Packet Pg. 70 of 168 Table 1: Summary of GASB Pronouncements GASB 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools Requires governments to report investments at fair market value GASB 68, Accounting and Financial Reporting for Pensions Requires governments providing defined benefit pensions to recognize their long-term obligation for pension benefits as a liability GASB 75, Accounting and Financial Reporting for Postemployment Benefits Other than Pensions (OPEB) establishes accounting and financial reporting requirements for OPEB plans GASB 87, Leases Recognizes certain lease assets and liabilities that were previously categorized as inflows and outflows of resources GASB 96, Subscription-Based Information Technology Arrangements (SBITA) Recognizes SBITA subscription assets as an intangible asset, with a corresponding subscription liability GASB 101, Compensated Absences Updates the recognition and measurement guidance for compensated absences to better meet the information needs of financial statement users by updating the recognition and measurement guidance for compensated absences. GASB 102, Certain Risk Disclosures Provides information to users of government financial statements about risks that could impact a government's financial health. The statement aims to improve the consistency and transparency of how governments disclose information about risk financing and insurance-related transactions GASB 68 and 75 are similar in that both require that long-term liabilities for pension and OPEB benefits are recorded in the City’s financial statements. These long-term liabilities are being addressed through the proactive funding as outlined in the City’s Retiree Benefit Funding Policy7. ANALYSIS Financial Statement Presentation There are two methods of displaying the City’s financials in the ACFR: 1) Government Wide Statements and 2) Fund Financial Statements. The discussion below is organized by these two reporting standards. To assist in the terminology, a brief overview of these reporting standards outlined in Table 1; each of these displays of the City’s financial statements are governed by Generally Acceptable Accounting Principles (GAAP) as modified regularly by Governmental Accounting Standards Board (GASB). Neither of these views are the same as the City’s annual budget; however, Fund Financial Statements is most closely aligned. 7 City Council, February 6, 2023: https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=82218 Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 5 Packet Pg. 71 of 168 Table 2: ACFR Financial Statement Presentation Government Wide Financial Statements: Fund Financial Statements Longer-term, holistic view of the City’s activities Governmental Activities – City’s basic services generally funded by taxes, and/or by specific program revenues such as fees and grants (full accrual) + includes portion of internal service funds. Business Type Activities – City’s enterprise activities which are funded in whole or in part by fees charged to external parties (full accrual) + includes portion of internal service funds Short-term, detailed view of individual funds. Governmental Funds – similar to “governmental activities” EXCEPT on a modified accrual basis of accounting + excludes internal service funds. Proprietary Funds – same as “business type activities” EXCEPT includes internal service funds. Includes what we refer to as “enterprise funds” (full accrual). Please note the balances reported are based on ACFR balances. Government-Wide Statements The Government-Wide Financial Statements include the Statement of Net Position and the Statement of Activities, presented using the full accrual basis of accounting, similar as the basis used by companies in the private sector. Statement of Net Position The Statement of Net Position presents information of all the City’s assets, plus deferred outflows of resources, and liabilities plus deferred inflows of resources. The City’s reported net position was $1.6 billion on June 30, 2025, compared to a balance of $1.5 billion on June 30, 2024. The total increase of $112.2 million, or 7.7%, consists of $25.8 million from governmental activities and $86.4 million from Business-Type activities. The net year-over-year $112.2 million Net Position increase includes a $9.5 million prior period adjustment recorded to implement GASB 101. This adjustment recognized the liability for compensated absences when earned. Details are presented in the ACFR’s Statement of Activities and the accompanying Notes to the Financial Statements. The largest portion of the City’s net position ($1.3 billion or 82.6%) is the City’s net investment in capital assets such as land, buildings, infrastructure, vehicles, and intangible assets less any related outstanding debt that was used to acquire these assets. Intangible assets include the right to use leased assets and subscription-based information technology arrangement (SBITA) assets. The restricted portion of the City’s net position ($155.6 million or 10.0%) represents resources that are subject to external restrictions on how they may be used. The remaining balance for the unrestricted portion of the City’s net position of $116.9 million, across all funds, represents 7.4% of the City’s net position. Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 6 Packet Pg. 72 of 168 Overall, the City’s Unrestricted Net Position is positive on a combined basis for Governmental Activities and Business-Type Activities. The Unrestricted Net Position for Governmental Activities is negative $70.8 million due to recognition of net pension liabilities and deferred pension outflows and inflows of resources (GASB 68), and net OPEB liabilities and deferred outflows and inflows of resources (GASB 75). Governmental Unrestricted Net Position includes the net impact of net pension and net OPEB liabilities and its related deferred outflows and inflows of resources, $314.8 and $59.4 million, respectively. Excluding these impacts, the Unrestricted Net Position for Governmental Activities is $303.3 million. Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 7 Packet Pg. 73 of 168 Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 8 Packet Pg. 74 of 168 Table 3 Statement of Activities Overall, total revenues increased $59.0 million, an 8.0% increase compared to FY 2024. Expenses increased to $35.4 million, or 5.6%. Condensed Statement of Activities As of June 30 (in millions) Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 9 Packet Pg. 75 of 168 Revenues The major sources of the City’s revenues are Program Revenues and General Revenues. Program Revenues consist of charges for services (both governmental and business type, i.e. enterprise, activities) as well as operating and capital grants and contributions. General Revenues include property tax, sales tax, utility user tax, transient occupancy tax, documentary transfer tax, business tax, other taxes, investment earnings and miscellaneous revenue. Government Wide revenues were $795.1 million, an increase of $59.0 million or 8.0% above FY 2024. Of this increase, $18.7 million from Governmental Activities and $40.3 million was from Business Activities. Across all funds, General Revenues increased by $17.9 million mainly due to an increase in the fair value of investments portfolio on June 30, 2025. Investment earnings increased by $12.2 million due to this fair market value adjustment of the City’s investment portfolio of which $9.4 million was from Governmental Activities and $2.8 million was from Business-Type Activities. Governmental Activities revenues totaled $298.7 million, an increase of $18.7 million or 6.7% from the prior fiscal year. Approximately half of this growth was due to higher investment earnings, while $7.5 million reflected increases in major tax revenues, primarily property tax, utility users tax, transient occupancy tax , documentary transfer tax, and business tax revenue. Business-Type Activities revenues before transfers were $496.4 million, up $40.3 million from FY 2024. The increase was driven by a $40.0 million rise in Charges for Services and a $0.1 million increase in Operating Grants and Contributions, partially offset by a $2.2 million decline in Capital Grants and Contributions. General Revenues also rose by $2.4 million, primarily reflecting the fair market value adjustment of the City’s investment portfolio. Expenses Government Wide expenses were $673.4 million, an increase of $35.4 million or 5.5% above 2024. $21.6 million of the increase was from Governmental Activities and $13.8 million was from Business-Type Activities. The increase in Governmental Activities expenses is mainly due to contract services and salaries and benefits increases, which were partially offset by a $5.8 million decrease in pension and OPEB expense adjustments (GASB Nos. 68 and 75). The increase in salaries and benefits reflects new positions in FY 2025, general merit and market salary rate adjustments, and higher pension and Pension Fund Trust contributions. Contract services increased across various departments, including Administrative Services for the HDL business tax services, comprehensive studies on the cost allocation plan and the municipal fee schedule; Public Works for janitorial service contracts; Community Services for landscape services; and Non-Departmental for legal services related to the Green vs. City of Palo Alto settlement. Public Works total expenses increased by $2.8 million, primarily due to higher salaries and benefits, including pension and OPEB Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 10 Packet Pg. 76 of 168 expenses, along with increased contract services costs, notably for janitorial services, which reflect scheduled annual rate increments and non-capitalizable project expenses related to City bridges assessment and repairs, Baylands Boardwalk piling repairs, Cubberley Center repairs, and street maintenance. Planning and Development Services total expenses decreased by $3.5 million, primarily due to the realignment of Fire Prevention-related expenses, including associated salaries and wages, from Development Services to Fire Services. Office of Transportation total expenses increased by $2.7 million, due to the increase in non- capitalizable project expenses related to improvements on Transportation and Parking, Bicycle & Pedestrian Transportation plan, the El Camino/Churchill enhanced bikeway, and the projects on Safe Routes to School and Paid Parking. Police and Fire total expenses increased by $6.6 million and $9.6 million, respectively, mainly due to increases in the salary and benefit cost category. These increases were driven by improved employment recruitment, contractually obligated wage adjustments, pension, and OPEB costs. Overtime also contributed to the overall increase, resulting from staff vacancy, temporary gaps caused by the training of new recruits, leave of absence coverage and mutual aid strike team deployments. Staff time for strike team deployments is fully reimbursable by California Governor’s Office of Emergency Services (CAL OES). Community Services total expenses increased by $1.0 million, mainly due to an increase in salaries and benefits, including pension and OPEB expenses. Office of Transportation total expenses increased by $2.7 million, due to the increase in non- capitalizable project expenses related to improvements on Transportation and Parking, Bicycle & Pedestrian Transportation plan, the El Camino/Churchill enhanced bikeway, and the projects on Safe Routes to School and Paid Parking. Library and All Other total expenses increased by $1.4 million and 1.6 million, respectively, primarily due to an increase in salaries and benefits, including pension and OPEB expenses. Water expenses increased by $1.5 million, or 3.0%, from the prior fiscal year due to higher commodity purchases caused by increased customer consumption and higher wholesale water rates. The San Francisco Public Utilities Commission (SFPUC) commodity rate increased from $5.21 to $6.67, an 8.8% increase. Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 11 Packet Pg. 77 of 168 Electric Fund expenses increased by $8.8 million, or 5.2%, from the prior fiscal year mainly due to a $16.2 million increase in commodity purchases primarily due to higher renewable energy purchases, increased operating and maintenance assessments from the Transmission Agency of Northern California (TANC) and Calaveras and higher Western power and Northern California Power Agency (NCPA) facility costs. These increases were partly offset by lower carbon-neutral purchases, reduced transmission charges, and lower NCPA pooling costs, as well as a $4.1 million decrease in joint agency service payments to the NCPA, related to reduced debt service costs related to the Calaveras hydroelectric project. Gas Fund expenses decreased by $1.5 million, or 3.5%, and are driven by lower commodity purchases due to the declines in market prices and reduced Renewable Energy Certificate (REC) purchases. Wastewater Collection expenses increased by $1.6 million, or 6.5%, due to the increase in the City’s share of operating costs and minor capital projects to maintain the Regional Water Quality Control Plant Wastewater Treatment expenses increased by $1.5 million, or 4.3%, due to higher contract services for sludge management and increased utility charges. Airport Fund expenses increased by $1.4 million or 48.3% primarily due to higher depreciation expense following the capitalization of $41.2 million Airport Apron Reconstruction project in September 2024. Government Wide Capital Assets Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 12 Packet Pg. 78 of 168 Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 13 Packet Pg. 79 of 168 Table 5 Government Wide Liabilities The City’s liabilities totaled $1.2 billion, a $18.7 million or 1.7% increase compared to prior year. This increase is driven by a $43.2 million increase in long term debt related to $53.5 million addition of State Water Resource loan, offset by scheduled debt retirements. In addition, the City’s Net Pension and OPEB liabilities decreased $24.6 million due to changes in balances in accordance with GASB Nos. 68 and 75. Additional information can be found in Notes 12 and 13 to the financial statements. Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 14 Packet Pg. 80 of 168 Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 15 Packet Pg. 81 of 168 Fund Financial Statements General Fund General Fund Reserves Reserve for Excess ERAF Reserve for Development Services Business Tax Reserve for Housing Affordability and Services for Unhoused, Transportation and Safe Train Crossings, and Public Safety. Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 16 Packet Pg. 82 of 168 The tax took effect in January 2023, and was phased in at 50% of the voter-approved rate or 3.75-cents per square foot per month. The full voter approved rate of 7.5-cents per square foot per month took effect starting in January 2025. The tax has an annual cap of $0.5 million per business and both the rate and the cap are increased by 2.5% annually beginning FY 2027. Tax filings are submitted on a quarterly basis. General Fund Budget Stabilization Reserve Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 17 Packet Pg. 83 of 168 the Council surplus allocation policy, but it honors the intention that funding be allocated to support financial needs before investing in reserves. This recommended allocation ensures adequate funding to address the projected FY 2027 budget shortfall and funding for capital cost uncertainties, ensuring the City maintains high quality service level. General Fund Revenues Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 18 Packet Pg. 84 of 168 Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 19 Packet Pg. 85 of 168 Table 8: General Fund Major Tax Revenues As of June 30 (in millions) Category FY 2025 FY 2024 % Change Increase/ (Decrease) Property tax $69.4 $66.3 4.6% Sales tax 35.2 37.5 (6.0%) Utility user tax 20.4 19 7.3% Transient occupancy tax 28.9 27.8 4.3% Documentary transfer tax 8.4 7.0 19.6% Business Tax 5.7 5.3 7.7% Property tax revenues were $69.4 and increased $3.1 million, or 4.6% over the prior fiscal year and the transfer of ownership has been a significant driver of growth and the excess ERAF which is set aside in a contingency reserve. Sales tax receipts were $35.2 and decreased by $2.3 million or 6.0% lower than the prior fiscal year, due to the decline of auto sales and leasing. Utility user tax revenues were $20.4 million and increased by $1.4 million, or 7.3%, over the prior fiscal year, due to greater utility consumption and rate increases, resulting in higher UUT revenue. Transient occupancy tax (TOT) revenues were $29.0 million and increased by $1.2 million, or 4.3% over the prior fiscal year. The increase was primarily due to higher average room rates, which increased 12.9% to $274, partially offset by a 7.0% decline in the average occupancy rate to 71.8%. The entire 15.5% TOT rate from new hotels, plus 3.5% from all other hotels, has been allocated to the Infrastructure Plan pursuant to City Council direction. This results in additional TOT for the Infrastructure plan of $1.2 million. These additional funds, coupled with the recommended excess BSR funds will assist in ensuring capital projects may continue as planned, adjusting for the rising costs due to the current inflationary economic conditions. Table 9 outlines a comparative breakdown of the transient occupancy tax allocation between the City’s General Fund and the Infrastructure Plan: Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 20 Packet Pg. 86 of 168 Documentary transfer tax revenues were $8.4 million and increased by $1.4 million, or 19.6%, due to higher total property sales activity. Despite this robust performance, documentary transfer tax remains a volatile revenue stream, sensitive to fluctuations in real estate market activity and the mix of residential versus commercial sales. Considering this volatility, staff closely monitors incoming receipts and adjust forecasts as needed. Business tax revenues were $5.7 million and increased by $0.4 million, or 7.5%, compared to the prior year. This increase was mainly attributable to the Business Tax rate ramping up to 7.5 cents per square foot in January 2025. The prior fiscal year’s revenue included six months of collections at the previous rate structure due to the timing of implementation, which partially offsets the FY 2025 year-over-year increase. Business Tax revenue is a new funding source for the City, with collections beginning in FY 2024. This revenue source is dedicated to transportation and safe train crossings, housing affordability and services for the unhoused, and public safety. Charges for services revenues were $39.2 million and increased by $2.5 million due to higher reimbursements for fire services and paramedic services, charges related to the City’s golf course, arts and science classes, plan check charges, Building Permits, Fire Permits, and miscellaneous health and safety-related licenses. Licenses, permits and fees revenues were $10.6 million and decreased by 0.20 million or 2.2% primarily due to the decrease in the construction permits. Rental Income revenues were $15.7 million and decreased by $0.50 or 3.1% million due to the decreases in facilities and property rentals. Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 21 Packet Pg. 87 of 168 Investment earnings revenues were $10.4 million and increased by $3.5 million or 51.7% due to an increase in fair value investments portfolio at June 30. Chart 1: General Fund Tax Revenues Actual Fiscal Years 2020 – 2025 Budget Fiscal Year 2026 ($ in millions) General Fund Expenditures Salaries and Benefits: The increase reflects new positions in FY 2025, general merit and market salary rate adjustments, and higher pension and Pension Fund Trust contributions. Contract services increased due to various audit and financial services such as the citywide risk assessment, execution of FY 2024/2025 audit plan, evaluation and benchmarking, purchasing card program, Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 22 Packet Pg. 88 of 168 Community Services department equipment & materials inventory; janitorial and landscape services, and the final disbursement of legal fees related to Green v. City of Palo Alto settlement (Santa Clara Superior Court, Case No. 1-16-CV-300760). These increases were partially offset by savings in facility and equipment repairs, and other miscellaneous contract services such as feasibility studies cost, and environmental assessments in compliance to California Environmental Quality Act (CEQA) and National Environmental Policy Act (NEPA), Palo Alto Link as transit services. The Direct charges increased due to higher gas, electric, refuse and wastewater costs, partly offset by lower sales and absence of City Hydro expenses. The increases reflect updated rates across utilities and services. Indirect charges increased due to higher General Fund cost plan allocations, rising liability insurance costs and increased IT and fleet maintenance costs. These increases reflect updated internal cost structures and continued support for core operational functions. The General Fund-Administrative expense category includes the Utility Transfer Litigation Reserve and the Budget Uncertainty Reserve. There was a one-time allocation of $9.4 million from the Utilities Transfer Litigation Reserve for the final refund payments to active class members and legal fees, for the Green v. City of Palo Alto (Santa Clara Superior Court, Case No. 1-16-CV-300760) settlement. As of the end of FY 2025, Utility Transfer Litigation Reserve has a zero balance and no remaining obligations. The Budget Uncertainty Reserve retains a balance of $12.0 million. This balance was reappropriated to FY 2026, with $6.0 million designated to support development of the FY 2026 budget. The remaining $6.0 million is available for future use and budget planning. The FY 2025 Adopted Budget for expenditures of $268,031 million was adjusted to $294,699 million, a $26.7 million increase. A majority of this increase reflects $17.4 million of encumbrance carryforwards and reappropriations from the prior fiscal year, $8.9 million allocation of BSR (at FY2025 Mid-Year $5.9 million to Uncertainty Reserve and $3.0 million to CIP), with the remainder being adjustments that were approved during FY 2025 by the City Council. The reappropriation includes Budget Uncertainty Reserve detailed in the preceding discussion of this report. Chart 2 compares actual departmental costs, including encumbrances and reappropriations, excluding Cubberley lease over the past six years and budgeted costs for FY 2026. Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 23 Packet Pg. 89 of 168 Chart 2: General Fund Departments -Admin departments expenditures were higher in fiscal years 2023 to 2025 due to Utility Transfer Litigation and Uncertainty Reserve. -This increase in Public Safety in FY 2026 is driven primarily by investment in additional resources in key areas of public safety; as discussed in the Transmittal Letter, the FY 2026 Budget focuses on continued investment in City services and resources that support City Council priorities and enhance organizational resilience, while balancing financial stability. Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 24 Packet Pg. 90 of 168 Capital Projects Fund The Capital Projects Fund ended the year with a fund balance of $100.3 million, comprised of the following: Table 10: Capital Projects Fund – Fund Balance Fund Balance Component Amount ($ in millions) Reserved for Cubberley expenditures 7.2 Restricted for Public Safety Building 5.2 Assigned for all other Capital projects 87.9 Total Capital Projects Fund Balance $100.3 Reserved for Cubberley Expenditures $7.2 million represents the amount of unspent funds in the Cubberley Property Infrastructure Fund to be used for capital improvement projects at the Cubberley Community Center. Restricted for Public Safety Building – This category includes all public safety buildings such as fire stations, police stations, emergency operations center. The $5.2 million represents the funding from the State of California restricted for the construction of Fire Station 4 Replacement (PE-18004). This project is currently under construction with estimated completion in Summer 2028. Assigned for all other Capital projects $87.9 million represents the amount of unspent funds associated with Adopted Capital projects and other noted items. Outside funding sources such as grants, donations and future debt issues are not factored into this component of the fund balance until they are received. The City’s Enterprise Funds reported a total Net Position of $965.1 million, a $82.6 million, or 9.4% increase from the prior fiscal year. The table below summarizes the overall change in Net Position for each Enterprise Fund. Compared to FY 2024, the Change in Net Position for Enterprise funds increased $82.6 driven primarily by the Electric, Gas and Wastewater Treatment Funds– details of these funds are summarized following this table. Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 25 Packet Pg. 91 of 168 Water Fund’s change in net position increased by $7.0 million, driven by operating revenues that outpaced the growth in expenses. Higher retail sales resulting from the FY 2025 rate increase and greater customer water consumption improved operating margins, even with the higher wholesale water rates charged by the San Francisco Public Utilities Commission (SFPUC). The increase was further supported by a $1.8 million decrease in transfers to other funds, which contributed to the overall improvement in net position. Electric Fund change in net position increased by $7.2 million, mainly due to an overall improvement in operating income and lower non-operating costs. Revenue growth from customer sales and renewable energy credit (REC) sales offset the impact of higher commodity purchases and lower resource adequacy sales. On the nonoperating side, joint agency service payments to the Northern California Power Agency (NCPA) were lower while interest income was higher, both of which strengthened the Fund’s net position compared to the prior year. Gas Fund change in net position increased $5.0 million due to higher operating income. Customer sales increased with the FY 2025 gas rate adjustment and commodity costs decreased due to market price declines, improving the Fund’s operating margin. Additionally, interest income also increased. These positive results are partially offset by higher equity transfers to the General Fund. Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 26 Packet Pg. 92 of 168 Wastewater Collection Fund change in net position increased $4.7 million mainly due to the revenue growth which outpaced the increase in expenses. The increase in revenue results from higher customer sales due to the FY 2025 rate increase and cost-share reimbursements from Valley Water under the Guiding Principle #5 (GP5) agreement. These increases are partially offset by higher operating costs related to the City’s share of the Regional Water Quality Control Plant operating costs and minor capital projects, along with lower transfers from other funds. Wastewater Treatment Fund change in net position increased $7.2 million due to higher billing to partners for operating and capital costs, as well as higher billing to Valley Water. The capital costs are capitalized as assets and depreciated over their useful lives; therefore, only the current year’s depreciation reduces the net position rather than the entire cost of the capital work. Airport Fund change in net position decreased $4.1 million primarily due to decrease in grants revenue from the Federal Aviation Administration and State of California for various airport projects and increase in depreciation expense. Unrestricted Net Position Table 11 below details the Change in Unrestricted Net Position in the Enterprise Funds. Enterprise Fund Rate Stabilization, Operations and other reserve balances are shown in detail in the ACFR (p. 90). Overall, except for the Wastewater Collection, Wastewater Treatment Fund and the Airport Fund, each Enterprise Funds maintained a positive unrestricted net position balance. Adjustments for the Pension Reserve (as required by GASB 68) and OPEB Reserve (as required by GASB 75) total $129.2 million and unrealized market losses on investments total $8.1 million (as required by GASB 31) for all Enterprise Funds and reduce each fund’s unrestricted net position. The Wastewater Collection Fund reflects a $6.1 million Unrestricted Reserve deficit mainly driven by $9.7 million in Pension and OPEB adjustments. The Wastewater Treatment Fund reflects a $29.2 million Unrestricted Reserve deficit driven by $26.0 million in Pension Reserves and OPEB Reserves adjustment and due to the delay of $17.4 million loan proceeds from State Water Resource Control Board for the Secondary Treatment Upgrade capital project. The Airport Fund reports a $2.4 million Unrestricted Reserve deficit due to $1.5 million Pension Reserve and OPEB Reserve adjustments, as well as ongoing investment in capital assets that support long-term airport facilities Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 27 Packet Pg. 93 of 168 FY 2025 Budget Appropriation for various funds To close the fiscal year, this report includes technical actions reallocating and realigning the budget to appropriate funds for actual operating and capital expenditures and revenue collected and to adjust transfer between funds, including adjustments to fund balance, is outlined in Attachment B. FISCAL/RESOURCE IMPACT Recommended actions in the report will align the FY 2025 appropriations with final financial activities as outlined in Attachment B. Overall, the City ended FY 2025 in a positive net position. STAKEHOLDER ENGAGEMENT The review and development of this report was coordinated among various divisions within the Administrative Services Department, along with Department staff who assisted with analysis. The actions recommended in this report were discussed and communicated to the impacted departments. Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 28 Packet Pg. 94 of 168 Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 29 Packet Pg. 95 of 168 ENVIRONMENTAL REVIEW ATTACHMENTS APPROVED BY: Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 30 Packet Pg. 96 of 168 GENERAL FUND SUMMARY ($000s) (a) (b)(a) vs (b) FY 2025 FY 2025 FY 2025 FY 2025 FY 2025 FY 2025 FY 2025 Adopted Adjusted Rev/Exp Allocated Encum /Actual Actual to Budget Budget Actuals Charges Reappropriation Rev/Exp Adj Budget Variance Revenues Sales Tax 39,577 35,588 35,219 35,219 (369) Property Tax 68,623 68,319 69,402 69,402 1,083 Transient Occupancy Tax 27,857 28,754 28,970 28,970 216 Documentary Transfer Tax 7,260 8,550 8,391 8,391 (159) Utility User Tax 19,943 21,489 20,394 20,394 (1,095) Business Tax 4,763 5,250 5,691 5,691 442 Other Taxes and Fines 1,757 1,757 802 802 (955) Charges for Services 38,507 39,112 39,180 39,180 68 Permits and Licenses 10,813 10,877 10,621 33 10,654 (223) Return on Investment 3,323 3,863 3,721 3,721 (142) Rental Income 16,367 16,367 15,750 15,750 (617) From Other Agencies 3,725 5,223 5,736 5,736 514 Charges to Other Funds 15,096 15,096 - 15,688 15,688 591 Other Revenues 780 1,010 1,705 1,705 695 Total Revenues 258,391 261,254 245,581 15,688 33 261,302 49 Add: Operating Transfers In 29,148 29,641 29,641 29,641 - Prior Year Encum / Reappropriation 16,093 33,469 33,469 33,469 - Total Source of Funds 303,632 324,364 308,691 15,688 33 324,412 49 Expenditures City Attorney 5,023 5,576 3,047 1,452 789 5,288 288 City Auditor 990 1,908 789 370 442 1,601 307 City Clerk 1,443 1,540 892 443 93 1,428 112 City Council 512 551 338 161 40 538 13 City Manager 5,592 5,858 3,683 1,814 160 5,657 201 Administrative Services 11,967 12,267 7,897 3,605 133 11,634 633 Community Services 41,159 42,846 40,021 278 1,498 41,797 1,048 Fire 55,008 56,530 54,500 194 221 54,915 1,615 Human Resources 5,509 5,997 3,666 1,782 165 5,614 383 Library 12,528 13,144 12,447 - 343 12,790 354 Office of Transportation 4,304 4,935 4,359 - 389 4,748 187 Planning and Development Services 24,327 29,336 22,463 107 4,928 27,499 1,838 Police 57,540 58,457 57,467 772 218 58,457 - Public Works 24,856 27,550 18,705 4,673 3,313 26,691 860 Non-Departmental 17,275 28,204 13,977 37 12,924 26,938 1,266 Total Expenditures 268,033 294,699 244,250 15,688 25,656 285,594 9,105 Add: Operating Trans Out 6,314 6,330 6,330 - 6,330 - Transfer to Infrastructure 32,526 35,900 35,900 - 35,900 - Total Use of Funds 306,873 336,929 286,480 15,688 25,656 327,824 9,105 Net Surplus/(Deficit)(3,241) (12,565) 22,211 - (25,623) (3,411) 9,154 Adjustments to GAAP Basis Unrealized gain/(loss) on investments 6,534 Changes in Advances to Other Funds 1,783 GASB 87 impact on net income 59 Current year encumbrance / reappropriations 25,623 Prior Year encumbrances / reappropriations (33,469) ACFR Net Income (Loss) - per GAAP (2,881) Attachment A Statement of Revenues, Expenditures and Change in Fund Balance - Budget and Actual Item 2 Attachment A - General Fund Statement of Revenues, Expenditures, and Change in Fund Balance - Budget versus Actual (Budgetary Statement) Item 2: Staff Report Pg. 31 Packet Pg. 97 of 168 Department Adjustment Adjustment GENERAL FUND (102) Non- Departmental Transient Occupancy Tax Revenue/Transfer to Capital Improvement Fund This action increases the transfer to the Capital Improvement Fund as it relates to Transient Occupancy Tax (TOT) revenues earmarked for city-wide infrastructure improvements due to higher than anticipated TOT collections in FY 2025. 409,000$ 409,000$ Non- Departmental Transfer to Capital Improvement Fund (PL-24000 and PL-24001) This action reduces the transfer of Business Tax funds to support capital projects PL-24000 and PL-24001, because work was not done on these projects in FY 2025. $270,702 of the funding will be reappropriated to FY 2026, and $973,506 will be returned to the Business Tax Reserve: Transportation in the General Fund to be used for future Transportation projects. -$ (1,244,208)$ Police Salaries and Benefits This action increases the allocation for Salaries and Benefits and Allocated Charges in the Police Department by $0.2 million, and includes $0.4 million to cover the reduction of funding for the PERT Program described below. A portion of the increased allocation is due to higher than anticipated fleet services charges which were impacted by the Department piloting an electric patrol vehicle. The remaining increase is due to the Department experiencing higher than anticipated salary and benefit expenses, specifically in overtime costs. This is primarily due to an above average amount of employee leave for illness and training and the need to maintain minimum staffing levels in dispatch and patrol operations which requires the use of overtime for backfill. -$ 212,000$ Police Transfer from Stanford University Medical Center (SUMC) Fund/Psychiatric Emergency Response Team (PERT) Program This action reduces the transfer of funds related to the Council-authorized contract with the Santa Clara County Behavioral Health (Staff Report 2305-1410) and recognized in the FY 2025 Adopted Budget for a mental health clinician to support the PERT Program. The funds were unspent due to the inability to source and supply a clinician, so the funds will be returned to the SUMC Fund and recommended to be used in the future to support the PERT Program when the County can provide a clinician. (366,000)$ (366,000)$ Public Works Departmental Expense Savings This action reallocates departmental savings within the General Fund in order to offset departments with higher than anticipated expenses in FY 2025. The Public Works Department realized a net savings, primarily in Salary and Benefits due to vacancies and in Contract Services due to delays in several contracts. Key vacancies include Manager of Maintenance Operations, Facilities Technician, Traffic Control Maintainer, and Cement Finisher. Contracts delays include the Security Guard contract for the MSC, airplane noise reduction, Foothills fire mitigation, fire alarm testing and maintenance, and S/CAP implementation. -$ (212,000)$ Fund Balance Adjustment to Business Tax Reserve: Transportation This action returns $973,506 of unused funding allocated to capital projects PL-24000 and PL- 240001 to the Business Tax Reserve: Transportation in the General Fund to be used for future Transportation projects. -$ 973,506$ GENERAL FUND (102) SUBTOTAL 43,000$ 43,000$ CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2025 BUDGET Revenues Expenses ATTACHMENT B, EXHIBIT 1 Item 2 Attachment B - Recommended FY25 Year- End Budget Adjustments Item 2: Staff Report Pg. 32 Packet Pg. 98 of 168 Department Adjustment Adjustment CAPITAL IMPROVEMENT FUNDS GENERAL FUND CAPITAL IMPROVEMENT FUND (471) Capital Capital Improvement Project Adjustments This action reflects the net zero budget impact from adjustments to projects as outlined in Attachment B, Exhibit 2. -$ 0$ Capital Transfer from California Avenue Parking Fund/California Avenue Parking District Parking Improvements Project (PF-25000) This action reduces the transfer of funds to support capital project PF-25000, because work was not done on this project in FY 2025. The transfer of funds for PF-25000 was reappropriated to FY 2026 in order to align funding with anticipated project expenses. (100,000)$ (100,000)$ Capital Transfer from Gas Tax Fund/Streets Maintenance (PE-86070) This action increases the transfer from the Gas Tax Fund as a result of SB1 Gas Tax revenue from the State of California that came in higher than budgeted levels. SB1 funding is designated for street improvment projects, so it will be added to the Streets Maintenance capital project (PE-86070). 139,226$ 139,226$ Capital Transfer from General Fund This action increases the transfer from the General Fund related to TOT revenue Council earmarked to use for city-wide infrastructure improvements due to actual revenue collected being higher than budgeted in FY 2025. 409,000$ -$ Capital Transfer from General Fund/Meadow Drive and Charleston Road (PL-24000) and Churchill Avenue (PL-24001) Rail Grade Separation and Safety Improvements This action reduces the transfer of Business Tax funds to support capital projects PL-24000 and PL-24001, because work was not done on these projects in FY 2025. $270,702 of the funding will be reappropriated to FY 2026 and $973,506 will returned to the Business Tax Reserve: Transportation in the General Fund to be used for future Transportation projects. (1,244,208)$ (1,244,208)$ Capital Transfer from Parkland Dedication Fund/Byxbee Park Completion Project (PG-18006) This action reduces the transfer of funds to support capital project PG-18006, because work was not done on this project in FY 2025. The transfer of funds for PG-86006 was reallocated to FY 2027 in order to align funding with anticipated project expenses. (450,000)$ (450,000)$ Capital Transfer from Utilities Administration Fund/Rinconada Pool Family Changing Room Project (PE-24004) This action reduces the transfer of funds to support capital project PE-24004, because work was not done on this project in FY 2025. The transfer of funds for PE-24004 was reappropriated to FY 2026 in order to align funding with anticipated project expenses. (371,165)$ (371,165)$ Capital Transfer from Parks Impact Fee Fund/Park Restroom Installation Project (PG-19000) This action reduces the transfer of funds to support capital project PG-19000, because work was not done on this project in FY 2025. The transfer of funds for PG-19000 was reappropriated to FY 2026 in order to align funding with anticipated project expenses. (353,770)$ (353,770)$ Capital Transfer from University Avenue Parking in Lieu Fee Fund/Downtown Parking Garage Project (PE-15007) This action reduces the transfer of funds to support capital project PE-15007, because work was not done on this project in FY 2025. The transfer of funds for PE-15007 was reappropriated to FY 2026 in order to align funding with anticipated project expenses. (13,106,958)$ (13,106,958)$ Fund Balance Adjustment to Fund Balance This action adjusts the fund balance to offset adjustments recommended in this report. -$ 346,932$ GENERAL FUND CAPITAL IMPROVEMENT FUND (471) SUBTOTAL (15,077,875)$ (15,077,875)$ CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2025 BUDGET Revenues Expenses ATTACHMENT B, EXHIBIT 1 Item 2 Attachment B - Recommended FY25 Year- End Budget Adjustments Item 2: Staff Report Pg. 33 Packet Pg. 99 of 168 Department Adjustment Adjustment CAPITAL IMPROVEMENT FUNDS CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2025 BUDGET Revenues Expenses ATTACHMENT B, EXHIBIT 1 CUBBERLEY PROPERTY INFRASTRUCTURE FUND (472) Capital Capital Improvement Project Adjustments This action reflects the combined impact from adjustments to projects as outlined in Attachment A, Exhibit 2. -$ 98,690$ Fund Balance Adjustment to Fund Balance This action adjusts the fund balance to offset adjustments recommended in this report. -$ (98,690)$ CUBBERLEY PROPERTY INFRASTRUCTURE FUND (472) SUBTOTAL -$ -$ Item 2 Attachment B - Recommended FY25 Year- End Budget Adjustments Item 2: Staff Report Pg. 34 Packet Pg. 100 of 168 Department Adjustment Adjustment ENTERPRISE FUNDS AIRPORT ENTERPRISE FUND (530) Capital Capital Improvement Project Adjustments This action reflects the combined impact from adjustments to projects as outlined in Attachment B, Exhibit 2. -$ 31,497$ Fund Balance Adjustment to Fund Balance This action adjusts the fund balance to offset adjustments recommended in this report. -$ (31,497)$ AIRPORT ENTERPRISE FUND (530) SUBTOTAL -$ -$ CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2025 BUDGET Revenues Expenses ATTACHMENT B, EXHIBIT 1 Item 2 Attachment B - Recommended FY25 Year- End Budget Adjustments Item 2: Staff Report Pg. 35 Packet Pg. 101 of 168 Department Adjustment Adjustment ENTERPRISE FUNDS CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2025 BUDGET Revenues Expenses ATTACHMENT B, EXHIBIT 1 REFUSE FUND (525) Capital Transfer to the Technology Fund for Utilities Customer Bill System Improvements (TE-10001) This action reduces the transfer of funds to support capital project TE-10001 because the project is closing. -$ (11,500)$ Fund Balance Adjustment to Fund Balance This action adjusts the fund balance to offset adjustments recommended in this report. -$ 11,500$ REFUSE FUND (525) SUBTOTAL -$ -$ STORMWATER MANGEMENT FUND (528) Capital Capital Improvement Project Adjustments This action reflects the combined impact from adjustments to projects as outlined in Attachment B, Exhibit 2. -$ 153,388$ Capital Transfer to the Technology Fund for Utilities Customer Bill System Improvements (TE-10001) This action reduces the transfer of funds to support capital project TE-10001 because the project is closing. -$ (2,600)$ Fund Balance Adjustment to Fund Balance This action adjusts the fund balance to offset adjustments recommended in this report. -$ (150,788)$ STORMWATER MANGEMENT FUND (528) SUBTOTAL -$ -$ UTILITIES ADMINISTRATION FUND (521) Capital Transfer to the Technology Fund for Utilities Customer Bill System Improvements (TE-10001) This action reduces the transfer of funds to support capital project TE-10001 because the project is closing. -$ (185,900)$ Fund Balance Adjustment to Fund Balance This action adjusts the fund balance to offset adjustments recommended in this report. -$ 185,900$ UTILITIES ADMINISTRATION FUND (521) SUBTOTAL -$ -$ WASTEWATER COLLECTION FUND (527) Capital Capital Improvement Project Adjustments This action reflects the combined impact from adjustments to projects as outlined in Attachment B, Exhibit 2. 40,361$ 40,361$ Utilities Customer Sales Revenue/Charges from Wastewater Treatment Fund This action reflects an increase in the cost of Treatment Fund charges allocated to the Wastewater Collection Fund in FY 2024. The variance is primarily attributable to expenditures associated with the Joint Intercepting Sewer project, increased minor capital activity, and operating budget components such as staffing, indirect charges, and electricity, which contributed to higher than anticipated year-end charges. 917,300$ 917,300$ Fund Balance Adjustment to Fund Balance This action adjusts the fund balance to offset adjustments recommended in this report. -$ -$ WASTEWATER COLLECTION FUND (527) SUBTOTAL 957,661$ 957,661$ Item 2 Attachment B - Recommended FY25 Year- End Budget Adjustments Item 2: Staff Report Pg. 36 Packet Pg. 102 of 168 Department Adjustment Adjustment ENTERPRISE FUNDS CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2025 BUDGET Revenues Expenses ATTACHMENT B, EXHIBIT 1 WASTEWATER TREATMENT FUND (526) Capital Capital Improvement Project Adjustments This action reflects the combined impact from adjustments to projects as outlined in Attachment B, Exhibit 2. -$ 2,099,618$ Public Works Charges to the Wastewater Collection Fund This action reflects an increase in the cost of Treatment Fund charges allocated to the Wastewater Collection Fund in FY 2024. The variance is primarily attributable to expenditures associated with the Joint Intercepting Sewer project, increased minor capital activity, and operating budget components such as staffing, indirect charges, and electricity, which contributed to higher than anticipated year-end charges. 917,300$ Fund Balance Adjustment to Fund Balance This action adjusts the fund balance to offset adjustments recommended in this report. -$ (1,182,318)$ WASTEWATER TREATMENT FUND (526) SUBTOTAL 917,300$ 917,300$ Item 2 Attachment B - Recommended FY25 Year- End Budget Adjustments Item 2: Staff Report Pg. 37 Packet Pg. 103 of 168 Department Adjustment Adjustment ENTERPRISE FUNDS CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2025 BUDGET Revenues Expenses ATTACHMENT B, EXHIBIT 1 WATER FUND (522) Capital Capital Improvement Project Adjustments This action reflects the combined impact from adjustments to projects as outlined in Attachment B, Exhibit 2. 450,004$ 450,004$ Fund Balance Adjustment to Fund Balance This action adjusts the fund balance to offset adjustments recommended in this report. -$ -$ WATER FUND (522) SUBTOTAL 450,004$ 450,004$ Item 2 Attachment B - Recommended FY25 Year- End Budget Adjustments Item 2: Staff Report Pg. 38 Packet Pg. 104 of 168 Department Adjustment Adjustment INTERNAL SERVICE FUNDS GENERAL BENEFITS FUND (687) Non- Departmental Adjust Transfer from General Benefits Fund to Retiree Healthcare Fund This technical action reduces the Implied Subsidy transfer to the Retiree Healthcare Fund to align with best Accounting practices. The funds will now reflect the full value of the Implied Subsidy from the June 30, 2023 Other Post Employment Benefits (OPEB) actuarial valuation. -$ (254,500)$ Non- Departmental Adjust Cost of Implied Subsidy This technical action reduces the Implied Subsidy expense within the General Benefits Fund to align with best Accounting practices. The fund will now reflect the full value of the Implied Subsidy from the June 30, 2023 Other Post Employment Benefits (OPEB) actuarial valuation. -$ 254,500$ Fund Balance Adjustment to Fund Balance This action increases/decreases the fund balance to offset adjustments recommended in this report. -$ -$ GENERAL BENEFITS FUND (687) SUBTOTAL -$ -$ RETIREE HEALTHCARE FUND (694) Non- Departmental Adjust Transfer from General Benefits Fund to Retiree Healthcare Fund This technical action reduces the Implied Subsidy transfer to the Retiree Healthcare Fund to align with best Accounting practices. The funds will now reflect the full value of the Implied Subsidy from the June 30, 2023 Other Post Employment Benefits (OPEB) actuarial valuation. (254,500)$ -$ Fund Balance Adjustment to Fund Balance This action increases/decreases the fund balance to offset adjustments recommended in this report. -$ (254,500)$ RETIREE HEALTHCARE FUND (694) SUBTOTAL (254,500)$ (254,500)$ GENERAL LIABILITIES INSURANCE FUND (689) Non- Departmental Charges to Other Funds/Liability Insurance and IBNR Adjustment This action recognizes expense impacts of FY 2025 increased incurred but not realized (IBNR) and FY 2026 liability insurance premiums and offsetting revenue from allocated charge adjustments to maintain General Liability Fund solvency. 539,900$ 539,900$ Fund Balance Adjustment to Fund Balance This action increases/decreases the fund balance to offset adjustments recommended in this report. -$ -$ GENERAL LIABILITIES INSURANCE FUND (689) SUBTOTAL 539,900$ 539,900$ INFORMATION TECHNOLOGY FUND (682) Capital Transfer from the Refuse Fund for Utilities Customer Bill System Improvements (TE-10001) This action reduces the transfer of funds to support capital project TE-10001 because the project is closing. (11,500)$ (11,500)$ Capital Transfer from the Stormwater Management Fund for Utilities Customer Bill System Improvements (TE-10001) This action reduces the transfer of funds to support capital project TE-10001 because the project is closing. (2,600)$ (2,600)$ CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2025 BUDGET Revenues Expenses ATTACHMENT B, EXHIBIT 1 Item 2 Attachment B - Recommended FY25 Year- End Budget Adjustments Item 2: Staff Report Pg. 39 Packet Pg. 105 of 168 Department Adjustment Adjustment INTERNAL SERVICE FUNDS CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2025 BUDGET Revenues Expenses ATTACHMENT B, EXHIBIT 1 Capital Transfer from the Utilities Administration Fund for Utilities Customer Bill System Improvements (TE-10001) This action reduces the transfer of funds to support capital project TE-10001 because the project is closing. (185,900)$ (185,900)$ Fund Balance Adjustment to Fund Balance This action increases/decreases the fund balance to offset adjustments recommended in this report. -$ -$ INFORMATION TECHNOLOGY FUND (682) SUBTOTAL (200,000)$ (200,000)$ VEHICLE REPLACEMENT & MAINTENANCE FUND (681) Capital Capital Improvement Project Adjustments This action reflects the combined impact from adjustments to projects as outlined in Attachment B, Exhibit 2. -$ 60,507$ Public Works Transfer from Supplemental Law Enforcement Services Fund/ Police Vehicle Purchase (VR- 25000) This action transfers funds from the SLES Fund to the Vehicle fund to record the purchase of a trailer in capital project VR-25000. The purchase was made in the SLES Fund but needs to be recorded in the Vehicle Fund in order to be recognized as an asset. 40,670$ 40,670$ Fund Balance Adjustment to Fund Balance This action adjusts the fund balance to offset adjustments recommended in this report. -$ (60,507)$ VEHICLE REPLACEMENT & MAINTENANCE FUND (681) SUBTOTAL 40,670$ 40,670$ Item 2 Attachment B - Recommended FY25 Year- End Budget Adjustments Item 2: Staff Report Pg. 40 Packet Pg. 106 of 168 Department Adjustment Adjustment SPECIAL REVENUE FUNDS ASSETS SEIZURE FUND (292) Police Supplies and Materials This action increases the allocation in the Assets Seizure Equity Fund due to the Department using the funds for training expenses. -$ 4,200$ Fund Balance Adjustment to Fund Balance This action adjusts the fund balance to offset adjustments recommended in this report. -$ (4,200)$ ASSETS SEIZURE FUND (292) SUBTOTAL -$ 4,200$ CALIFORNIA AVENUE PARKING FUND (237) Office of Transportation Transfer to the Capital Improvement Fund for California Avenue Parking District Parking Improvements Project (PF-25000) This action reduces the transfer of funds to support capital project PF-25000, because work was not done on this project in FY 2025. The transfer of funds for Pf-25000 was reappropriated to FY 2026 in order to align funding with anticipated project expenses. -$ (100,000)$ Fund Balance Adjustment to Fund Balance This action adjusts the fund balance to offset adjustments recommended in this report. -$ 100,000$ CALIFORNIA AVENUE PARKING FUND (237) SUBTOTAL -$ -$ GAS TAX FUND (231) Administrative Services Revenue from the State of California/Transfer to Capital Improvement Fund for Streets Repair Project (PE-86070) This action recognizes SB1 Gas Tax revenue from the State of California that came in higher than budgeted levels and appropriates funding to increase the transfer to the Capital Improvement Fund. SB1 funding is designated for street improvment projects, so it will be added to the Streets Maintenance capital project (PE-86070). This action also reduces HUTA Gas Tax revenue by $13,042 and Gas Tax interest income by $7,251 because those sources came in lower than budgeted. 118,933$ 139,226$ Fund Balance Adjustment to Fund Balance This action adjusts the fund balance to offset adjustments recommended in this report. -$ (20,293)$ GAS TAX FUND (231) SUBTOTAL 118,933$ 118,933$ HAMILTON AVENUE-PUBLIC BENFIT FUND (235) Planning and Development Services Investment Income/Grants & Subsidies This action recognizes higher unit resale revenue and increases the appropriation for Grants and Subsidies to Avenidas within the fund to align budget levels with actual expenditures in FY 2025. 34,300$ 34,300$ HAMILTON AVENUE-PUBLIC BENFIT FUND (235) SUBTOTAL 34,300$ 34,300$ PARKLAND DEDICATION FUND (209) CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2025 BUDGET Revenues Expenses ATTACHMENT B, EXHIBIT 1 Item 2 Attachment B - Recommended FY25 Year- End Budget Adjustments Item 2: Staff Report Pg. 41 Packet Pg. 107 of 168 Department Adjustment Adjustment SPECIAL REVENUE FUNDS CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2025 BUDGET Revenues Expenses ATTACHMENT B, EXHIBIT 1 Community Services Transfer to the Capital Improvement Fund for Byxbee Park Completion Project (PG-18006) This action reduces the transfer of funds to support capital project PG-18006, because work was not done on this project in FY 2025. The transfer of funds for PG-18006 was reappropriated to FY 2027 in order to align funding with anticipated project expenses. -$ (450,000)$ Community Services Transfer to the Capital Improvement Fund for Rinconada Pool Family Changing Room Project (PE-24004) This action reduces the transfer of funds to support capital project PE-24004, because work was not done on this project in FY 2025. The transfer of funds for PE-24004 was reappropriated to FY 2026 in order to align funding with anticipated project expenses. -$ (371,165)$ Fund Balance Adjustment to Fund Balance This action adjusts the fund balance to offset adjustments recommended in this report. -$ 821,165$ PARKLAND DEDICATION FUND (209) SUBTOTAL -$ -$ PARKS IMPACT FEE FUND (210) Community Services Transfer to the Capital Improvement Fund for Park Restroom Installation Project (PG-19000) This action reduces the transfer of funds to support capital project PG-19000, because work was not done on this project in FY 2025. The transfer of funds for PG-19000 was reappropriated to FY 2026 in order to align funding with anticipated project expenses. -$ (353,770)$ Fund Balance Adjustment to Fund Balance This action adjusts the fund balance to offset adjustments recommended in this report. -$ 353,770$ PARKS IMPACT FEE FUND (210) SUBTOTAL -$ -$ PUBLIC ART FUND (207) Community Services Salaries and Benefits This action increases appropriation for salaries and benefits to offset a minor overage. -$ 3,800$ Fund Balance Adjustment to Fund Balance This action adjusts the fund balance to offset adjustments recommended in this report. -$ (3,800)$ PUBLIC ART FUND (207) SUBTOTAL -$ -$ STANFORD UNIVERSITY MEDICAL CENTER FUND (260) Planning and Development Services Transfer from Stanford University Medical Center (SUMC) Fund/Psychiatric Emergency Response Team (PERT) Program This action reduces the transfer of funds related to the Council-authorized contract with the Santa Clara County Behavioral Health (Staff Report 2305-1410) and recognized in the FY 2025 Adopted Budget for a mental health clinician to support the PERT Program. The funds were unspent due to the inability to source and supply a clinician, so the funds will be returned to the SUMC Fund and recommended to be used in the future to support the PERT Program when the County can provide a clinician. -$ (366,000)$ Item 2 Attachment B - Recommended FY25 Year- End Budget Adjustments Item 2: Staff Report Pg. 42 Packet Pg. 108 of 168 Department Adjustment Adjustment SPECIAL REVENUE FUNDS CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2025 BUDGET Revenues Expenses ATTACHMENT B, EXHIBIT 1 Fund Balance Adjustment to Fund Balance This action adjusts the fund balance to offset adjustments recommended in this report. -$ 366,000$ STANFORD UNIVERSITY MEDICAL CENTER FUND (260) SUBTOTAL -$ -$ SUPPLEMENTAL LAW ENFORCEMENT SERVICES (SLES) FUND (248) Police Transfer to the Vehicle Replacement and Maintenance Fund for Vehicle Purchase (VR-25000) This action transfers funds from the SLES Fund to the Vehicle fund to record the purchase of a trailer in capital project VR-25000. The purchase was made in the SLES Fund but needs to be recorded in the Vehicle Fund in order to be recognized as an asset. The action nets to zero in the SLES Fund because it moves $40,670 from one expenditure account (allocated charges) to another expenditure account (transfers out). -$ -$ Fund Balance Adjustment to Fund Balance This action adjusts the fund balance to offset adjustments recommended in this report. -$ -$ SUPPLEMENTAL LAW ENFORCEMENT SERVICES (SLES) FUND (248) SUBTOTAL -$ -$ UNIVERSITY AVENUE IN-LIEU PARKING FUND (247) Planning and Development Services Transfer to the Capital Improvement Fund for Downtown Parking Garage Project (PE-15007) This action reduces the transfer of funds to support capital project PE-15007, because work was not done on this project in FY 2025. The transfer of funds for PE-15007 was reappropriated to FY 2065 in order to align funding with anticipated project expenses. -$ (13,106,958)$ Fund Balance Adjustment to Fund Balance This action adjusts the fund balance to offset adjustments recommended in this report. -$ 13,106,958$ UNIVERSITY AVENUE IN-LIEU PARKING FUND (247) SUBTOTAL -$ -$ Item 2 Attachment B - Recommended FY25 Year- End Budget Adjustments Item 2: Staff Report Pg. 43 Packet Pg. 109 of 168 Revenues Expenses Department Adjustment Adjustment DEBT SERVICE & AGENCY TRUST FUNDS EYERLY TRUST FUND (774) Administrative Services Investment Income/General Expenses This action recognizes higher investment returns and increases the appropriation for General Expenses within the fund for interest income distribution to designated recipients to align budget levels with actual expenditures in FY 2025. 2,700$ 8,700$ Fund Balance Adjustment to Fund Balance This action adjusts the fund balance to offset adjustments recommended in this report. -$ (6,000)$ EYERLY TRUST FUND (774) SUBTOTAL 2,700$ 2,700$ CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2025 BUDGET ATTACHMENT B, EXHIBIT 1 Item 2 Attachment B - Recommended FY25 Year- End Budget Adjustments Item 2: Staff Report Pg. 44 Packet Pg. 110 of 168 Project Number Title Revenue Expense Comments AS-10000 Capital Improvement Fund Administration $ (1,025,460) Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-12011 Newell Road/San Francisquito Creek Bridge Replacement $ (1,199,061) Adjustment to allocate Salaries and Benefits across capital projects based on actual PF-16006 Municipal Service Center Lighting, Mechanical, and Electrical Improvements $ (615,058) Adjustment to allocate Salaries and Benefits across capital projects based on actual expenditures. PL-24000 Meadow Drive and Charleston Road Rail Grade Separation and Safety Im rovements $ (470,595) Adjustment to allocate Salaries and Benefits across capital projects based on actual expenditures. PE-24005 Homekey Facilities $ (415,134) Adjustment to allocate Salaries and Benefits across capital projects based on actual PL-16000 Quarry Road Improvements and Transit Center Access $ (400,023) Adjustment to allocate Salaries and Benefits across capital projects based on actual PL-24001 Churchill Avenue Rail Grade Separation and Safety Improvements $ (279,869) Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-15007 New Downtown Parking Garage $ (258,974) Adjustment to allocate Salaries and Benefits across capital projects based on actual PG-26000 Stanford Palo Alto Community Playing Fields Turf Replacement $ (248,432) Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-19002 Animal Shelter Renovation $ (245,092) Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-24002 Lucie Stern Community Theater Mechanical Equipment Replacement $ (190,014) Adjustment to allocate Salaries and Benefits across capital projects based on actual PL-17001 Railroad Grade Separation and Safety Improvements $ (101,025) Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-24004 Rinconada Pool Family Changing Room $ (86,632) Adjustment to allocate Salaries and Benefits across capital projects based on actual PF-93009 Americans With Disabilities Act Compliance $ (80,820) Adjustment to allocate Salaries and Benefits across capital projects based on actual PG-18000 Golf Course Net and Artificial Turf Replacement $ (77,789) Adjustment to allocate Salaries and Benefits across capital projects based on actual PL-05030 Traffic Signal and Intelligent Transportation Systems $ (73,055) Adjustment to allocate Salaries and Benefits across capital projects based on actual PF-00006 Roofing Replacement $ (67,434) Adjustment to allocate Salaries and Benefits across capital projects based on actual AC-18001 JMZ Renovation $ (53,707) Adjustment to allocate Salaries and Benefits across capital projects based on actual PL-25001 Traffic Intersection Accessibility Improvement Project $ (50,513) Adjustment to allocate Salaries and Benefits across capital projects based on actual PL-25002 Charleston Road/Alma Street Railroad Crossing Safety Improvements $ (48,805) Adjustment to allocate Salaries and Benefits across capital projects based on actual ATTACHMENT B, EXHIBIT 2 CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2025 CAPITAL IMPROVEMENT PROGRAM CAPITAL IMPROVEMENT FUND Item 2 Attachment B - Recommended FY25 Year- End Budget Adjustments Item 2: Staff Report Pg. 45 Packet Pg. 111 of 168 Project Number Title Revenue Expense Comments ATTACHMENT B, EXHIBIT 2 CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2025 CAPITAL IMPROVEMENT PROGRAM PE-15020 Civic Center Waterproofing Study and Repairs $ (43,002) Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-17010 Civic Center Electrical Upgrade & EV Charger Installation $ (41,539) Adjustment to allocate Salaries and Benefits across capital projects based on actual PD-25000 City Radio Replacement Program $ (29,500) Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-19000 City Hall Space Planning $ (26,952) Adjustment to allocate Salaries and Benefits across capital projects based on actual OS-09001 Off-Road Pathway Resurfacing And Repair $ (24,724) Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-13014 Street Lights Condition Assessment $ (22,226) Adjustment to allocate Salaries and Benefits across capital projects based on actual PG-06001 Athletic Courts Resurfacing $ (20,472) Adjustment to allocate Salaries and Benefits across capital projects based on actual AC-24001 Lucie Stern Community Theatre Fire Curtain $ (20,205) Adjustment to allocate Salaries and Benefits across capital projects based on actual PD-20000 Police Video Recording Systems Replacement $ (18,672) Adjustment to allocate Salaries and Benefits across capital projects based on actual PO-05054 Street Lights Improvements $ (18,564) Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-21000 Foothills Nature Preserve Improvements $ (17,599) Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-22000 San Francisquito Creek Joint Powers Authority Ongoing Creek Projects $ (17,048) Adjustment to allocate Salaries and Benefits across capital projects based on actual PL-15003 Parking District Implementation $ (16,496) Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-09003 City Facility Parking Lot Maintenance $ (15,587) Adjustment to allocate Salaries and Benefits across capital projects based on actual OS-24001 Baylands Interpretive Signage Program $ (12,821) Adjustment to allocate Salaries and Benefits across capital projects based on actual PL-12000 Transportation and Parking Improvements $ (12,522) Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-17004 California Avenue District Gateway Signs $ (12,465) Adjustment to allocate Salaries and Benefits across capital projects based on actual OS-24000 Baylands Nature Preserve Entrance Gate $ (11,298) Adjustment to allocate Salaries and Benefits across capital projects based on actual PL-14000 Churchill Avenue Enhanced Bikeway $ (10,891) Adjustment to allocate Salaries and Benefits across capital projects based on actual FD-25000 Fire Equipment Replacement $ (10,406) Adjustment to allocate Salaries and Benefits across capital projects based on actual PL-00026 Safe Routes To School $ (10,103) Adjustment to allocate Salaries and Benefits across capital projects based on actual Item 2 Attachment B - Recommended FY25 Year- End Budget Adjustments Item 2: Staff Report Pg. 46 Packet Pg. 112 of 168 Project Number Title Revenue Expense Comments ATTACHMENT B, EXHIBIT 2 CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2025 CAPITAL IMPROVEMENT PROGRAM PF-25000 California Avenue Parking District Parking Improvements $ (10,103) Adjustment to allocate Salaries and Benefits across capital projects based on actual PF-23000 Electric Charger Infrastructure Installation $ (9,208) Adjustment to allocate Salaries and Benefits across capital projects based on actual AC-28002 Children's Theatre Facility Upgrade/Repair $ (8,754) Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-24003 Lucie Stern Community Theatre Theatrical and House Lighting System Replacement $ (8,116) Adjustment to allocate Salaries and Benefits across capital projects based on actual expenditures. AC-28003 Palo Alto Art Center Ceramics Equipment $ (7,880) Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-24006 Mitchell Park Library Repair $ (5,728) Adjustment to allocate Salaries and Benefits across capital projects based on actual PO-11000 Sign Reflectivity Upgrade $ (5,051) Adjustment to allocate Salaries and Benefits across capital projects based on actual OS-00002 Open Space Lakes And Pond Maintenance $ (4,668) Adjustment to allocate Salaries and Benefits across capital projects based on actual PG-17000 Baylands Comprehensive Conservation Plan $ (4,354) Adjustment to allocate Salaries and Benefits across capital projects based on actual OS-18000 Foothills Nature Preserve Boronda Lake Dock Replacement $ (4,243) Adjustment to allocate Salaries and Benefits across capital projects based on actual PG-25002 Eucalyptus Tree Removal $ (4,243) Adjustment to allocate Salaries and Benefits across capital projects based on actual PG-21000 Heritage Park Site Amenities Replacement $ (3,022) Adjustment to allocate Salaries and Benefits across capital projects based on actual FD-24000 Fire Training Facility Replacement $ 28 Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-19001 Water, Gas, Wastewater Office Remodel $ 43 Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-20002 City Facilities Assessment $ 56 Adjustment to allocate Salaries and Benefits across capital projects based on actual PL-16002 Parking Management and System Implementation $ 931 Adjustment to allocate Salaries and Benefits across capital projects based on actual PG-18001 Dog Park Installation and Renovation $ 2,605 Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-20001 City Bridge Improvements $ 5,160 Adjustment to allocate Salaries and Benefits across capital projects based on actual PG-14002 Cameron Park Improvements $ 5,637 Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-15003 Fire Station 3 Replacement $ 6,097 Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-24000 Baylands Boardwalk Piling Repair $ 6,466 Adjustment to allocate Salaries and Benefits across capital projects based on actual Item 2 Attachment B - Recommended FY25 Year- End Budget Adjustments Item 2: Staff Report Pg. 47 Packet Pg. 113 of 168 Project Number Title Revenue Expense Comments ATTACHMENT B, EXHIBIT 2 CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2025 CAPITAL IMPROVEMENT PROGRAM PF-14003 University Avenue Parking Improvements $ 12,000 Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-20000 Foothills Nature Preserve Dam Seepage Investigation and Repairs $ 12,798 Adjustment to allocate Salaries and Benefits across capital projects based on actual PL-04010 Bicycle and Pedestrian Transportation Plan Implementation $ 13,483 Adjustment to allocate Salaries and Benefits across capital projects based on actual PL-23000 California Avenue Streetscape Update $ 16,068 Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-18000 New California Avenue Area Parking Garage $ 17,417 Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-24001 Electrification of City Facilities $ 23,467 Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-18015 Robles Park Improvements $ 29,476 Adjustment to allocate Salaries and Benefits across capital projects based on actual OS-00001 Open Space Trails and Amenities $ 33,373 Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-21004 University Avenue Streetscape Update $ 43,417 Adjustment to allocate Salaries and Benefits across capital projects based on actual LB-21000 Library Automated Material Handling $ 45,779 Adjustment to allocate Salaries and Benefits across capital projects based on actual PG-14000 Ramos Park Improvements $ 53,792 Adjustment to allocate Salaries and Benefits across capital projects based on actual PF-01003 Building Systems Improvements $ 60,680 Adjustment to allocate Salaries and Benefits across capital projects based on actual PG-19000 Park Restroom Installation $ 63,094 Adjustment to allocate Salaries and Benefits across capital projects based on actual AC-18000 Performing Arts Venues Seat Replacement $ 74,393 Adjustment to allocate Salaries and Benefits across capital projects based on actual PF-02022 Facility Interior Finishes Replacement $ 77,844 Adjustment to allocate Salaries and Benefits across capital projects based on actual PO-12001 Curb and Gutter Repairs $ 85,656 Adjustment to allocate Salaries and Benefits across capital projects based on actual PF-23001 Roth Building Rehabilitation Phase 1 $ 93,724 Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-18016 Civic Center Fire Life Safety Upgrades $ 94,682 Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-08001 Rinconada Park Improvements $ 100,477 Adjustment to allocate Salaries and Benefits across capital projects based on actual PG-09002 Park and Open Space Emergency Repairs $ 116,262 Adjustment to allocate Salaries and Benefits across capital projects based on actual PG-06003 Benches, Signage, Walkways, Perimeter Landscaping, and Site Amenities $ 138,324 Adjustment to allocate Salaries and Benefits across capital projects based on actual expenditures. Item 2 Attachment B - Recommended FY25 Year- End Budget Adjustments Item 2: Staff Report Pg. 48 Packet Pg. 114 of 168 Project Number Title Revenue Expense Comments ATTACHMENT B, EXHIBIT 2 CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2025 CAPITAL IMPROVEMENT PROGRAM PE-18004 Fire Station 4 Replacement $ 237,741 Adjustment to allocate Salaries and Benefits across capital projects based on actual PL-20000 Churchill Avenue/Alma Street Railroad Crossing Safety Improvements $ 252,538 Adjustment to allocate Salaries and Benefits across capital projects based on actual PL-15002 Downtown Automated Parking Guidance Systems, Access Controls & Revenue Collection E ui . $ 310,764 Adjustment to allocate Salaries and Benefits across capital projects based on actual expenditures. PE-17005 Boulware Park Improvements $ 446,455 Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-13011 Charleston/Arastradero Corridor Project $ 490,964 Adjustment to allocate Salaries and Benefits across capital projects based on actual PO-89003 Sidewalk Repairs $ 985,206 Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-86070 Street Maintenance $ 1,259,252 Adjustment to allocate Salaries and Benefits across capital projects based on actual PE-15001 New Public Safety Building $ 1,259,805 Adjustment to allocate Salaries and Benefits across capital projects based on actual Total $ - $ 0 CB-17002 Cubberley Field Restroom $ 98,690 Increase to project due to higher than antici ated ex enditures. Total $ - $ 98,690 AP-21000 Airport Layout Plan $ 31,497 Increase to project due to higher than antici ated ex enditures. Total $ - $ 31,497 GS-80017 Gas System, Customer Connections $ 11,239 $ 11,239 Increase to project due to higher than antici ated ex enditures offset b revenue. Total $ 11,239 $ 11,239 SD-19000 Loma Verde Ave Trunkline Improvement $ 446 Increase to project due to higher than anticipated expenditures. SD-25000 Hamilton System Upgrades $ 152,942 Increase to project due to higher than antici ated ex enditures. Total $ - $ 153,388 GAS FUND STORMWATER MANAGEMENT FUND CUBBERLEY PROPERTY INFRASTRUCTURE FUND AIRPORT FUND Item 2 Attachment B - Recommended FY25 Year- End Budget Adjustments Item 2: Staff Report Pg. 49 Packet Pg. 115 of 168 Project Number Title Revenue Expense Comments ATTACHMENT B, EXHIBIT 2 CITY OF PALO ALTO RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2025 CAPITAL IMPROVEMENT PROGRAM VR-22000 Vehicle Replacement FY 2022 $ 60,507 Increase to project due to higher than antici ated ex enditures. Total $ - $ 60,507 WC-80020 Sewer System, Customer Connections $ 40,361 $ 40,361 Increase to project due to higher than antici ated ex enditures offset b revenue. Total $ 40,361 $ 40,361 WQ-22001 Horizontal Levee Pilot $ 67,441 Increase to project due to higher than antici ated ex enditures. WQ-19002 Plant Repair, Retrofit & Eqpt Replacement $ 2,032,177 Increase to project due to higher than anticipated expenditures. Total $ - $ 2,099,618 WS-80013 Water System, Customer Connections $ 450,004 $ 450,004 Increase to project due to higher than antici ated ex enditures offset b revenue. Total $ 450,004 $ 450,004 TOTAL CIP ADJUSTMENTS $ 501,604 $ 2,913,807 WASTEWATER TREATMENT FUND WATER FUND VEHICLE FUND WASTEWATER COLLECTION FUND Item 2 Attachment B - Recommended FY25 Year- End Budget Adjustments Item 2: Staff Report Pg. 50 Packet Pg. 116 of 168 Finance Committee Staff Report Report Type: ACTION ITEMS Lead Department: City Clerk Meeting Date: December 2, 2025 Report #:2511-5474 TITLE Review and Recommend the City Council Accept the FY 2027- 2036 Long Range Financial Forecast and FY 2027 Annual Budget Development Guidelines This will be a late packet report published on Wednesday, November 26, 2025. Item 3 Item 3 Staff Report Item 3: Staff Report Pg. 1 Packet Pg. 117 of 168 Finance Committee Staff Report Report Type: ACTION ITEMS Lead Department: City Clerk Meeting Date: December 2, 2025 Report #:2511-5475 TITLE Accept the Fiscal Year 2026 First Quarter Financial Status Report This will be a late packet report published on November 26, 2025. Item 4 Item 4 Staff Report Item 4: Staff Report Pg. 1 Packet Pg. 118 of 168 Finance Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: Administrative Services Meeting Date: December 2, 2025 Report #:2511-5473 TITLE Review and Recommend the City Council Accept the FY 2027- 2036 Long Range Financial Forecast and FY 2027 Annual Budget Development Guidelines. CEQA Status—Not a Project. RECOMMENDATION Staff recommends that the Finance Committee review and recommend that the City Council accept the General Fund Long Range Financial Forecast (LRFF) for Fiscal Years 2027-2036 and the FY 2027 annual Budget Development Guidelines (Attachment A) and direct staff to use this forecast as the starting point for the FY 2027 budget process. EXECUTIVE SUMMARY Annually in December, the City presents a ten-year General Fund Long Range Financial Forecast (LRFF) that marks the beginning of the budget process. This preliminary forecast is based on the most current information available, actual revenues and expenses for FY 2025, and projected results through FY 2026. General Fund expenditures are based on current City Council-approved service levels. The current outlook anticipates continued economic stagnation and challenges. The LRFF is a tool to model financial forecasting assuming resources and services are operating at the current authorized levels. City staff will continue to review and refine these projections to establish the FY 2027 budget. Individual fiscal years will vary from this forecast as changes in revenue estimates or operating transfers occur. The Base Case LRFF projects a deficit of $14.9 million in FY 2027, followed by deficits ranging from $15.1 million in FY 2029 down to $6.2 million in FY 2032. FY 2033 has a projected surplus of $1.0 million which continues to grow through FY 2036. These amounts represent a larger projected deficit than in prior projections. The projected $14.9 million deficit for FY 2027 is $6.8 million higher than the $8.1 million deficit forecasted for FY 2027 just seven months ago (May 2025) and $7.0 million higher than the $7.9 million projected in the December 2024 LRFF. This change is primarily driven by a combination of lower revenues (most notably Sales Tax) and to a lesser extent, higher-than-anticipated expenditure growth. This Item 3 Item 3 Late Packet Report Item 3: Staff Report Pg. 1 Packet Pg. 119 of 168 forecast (detailed in Attachments C and D) maintains current service levels approved in FY 2026 and should be used for planning purposes to assist in gauging the effects of major policy interventions. Instead of modeling alternative scenarios for this LRFF, staff has developed a "Budget Balancing Sandbox" for Committee and Council consideration. This "Sandbox" provides a menu of potential budget-balancing options, including revenue enhancements, expenditure reductions, and adjustments to pension and capital funding. This framework is designed to facilitate a strategic discussion on the trade-offs required to close the budget deficit in FY 2027 as well as the structural deficit in the out-years. The Finance Committee reviewed major tax revenues and the retiree benefit funding policy, specifically for the Section 115 pension trust on November 18, 20251. The Finance Committee supported the Section 115 pension recommendations, and the sandbox incorporates that among its options for budget balancing. Consistent with the projections in the FY 2026 Adopted Budget, this LRFF reflects deficits as revenues are outpaced by expenses. As part of the FY 2026 budget process, the projected deficit was addressed with budget reductions of $6 million (approximately 2%) and using one-time reserves. In developing the FY 2027 budget and planning for the subsequent years, staff will continue the strategy of balancing increasingly constrained projected financial resources and the community's desired service levels. Included in this report and subsequent attachments are the following: The Economy: discussion of the current financial climate (Attachment B) Summary Long Range Financial Forecast including Revenue and Expense assumptions in FY 2027-2036 (Attachments C and D) FY 2027 Budget Development Guidelines to inform the budget process (Attachment A) A summary of Assumptions Not Included in Forecast (Attachment E) BACKGROUND Annually, the Office of Management and Budget produces a ten-year General Fund Long Range Financial Forecast (LRFF). The LRFF reflects staff's best estimates on the projected revenues and expenditures over the next ten years based on the information that is currently available. It is important to note that the LRFF is a planning document and is separate and distinct from the development of the City's annual Operating and Capital Budgets. There are assumptions and parameters modeled in the LRFF, and these assumptions are revised and refined as more information becomes available through the budget development process. 1 City Council, November 18, 2025; Agenda Item # 2: https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=83886 Item 3 Item 3 Late Packet Report Item 3: Staff Report Pg. 2 Packet Pg. 120 of 168 The LRFF contains a high-level comprehensive review of the costs to provide current City Council- approved service levels, including current contracts, updates to salaries and benefits based on the current employee population, and current labor contracts. This Forecast allows staff and the Finance Committee to look at both the short-term and long-term financial status of current service levels to inform policy decisions and evaluate long-term goals. The City Council last accepted the FY 2026-2035 Long Range Financial Forecast on January 13, 2025.3 The Economy At the national level, economic growth has shown significant strength through the third quarter of calendar year 2025, led by robust GDP (gross domestic product) growth. Consumer spending has remained resilient despite inflation rates that have ticked up from the prior year. As of September 2025, the Consumer Price Index (CPI), which measures changes in the prices paid by consumers for a basket of goods and services, was 3.0%. This is higher than the 2.6% CPI from a year ago. Assumptions in the LRFF report for general cost increases are using a CPI of 3% in FY 2026 and FY 2027 and 4% for FY 2028 and beyond. The national unemployment rate, as of August 2025, is 4.3%, a modest increase from 4.1% in October of the prior year, suggesting a labor market that is cooling but not contracting. This slowdown is consistent with the Federal Reserve's monetary policy intended to curb inflation without initiating a recession. Key factors to monitor include future Federal Reserve policy, ongoing geopolitical events, and the impact of tariffs on inflation. The local economy, in contrast, is projected to experience a more sluggish recovery. The latest Fall 2025 UCLA Anderson outlook states that while the U.S. economic recovery may begin in mid- 2026, "the California recovery will begin later, getting underway late next year and accelerating in 2027." The forecast notes that a rebound in the technology and aerospace sectors will be critical for this recovery, though this has yet to fully materialize. Locally, the unemployment rate for Santa Clara County was 4.7% in August 2025, tracking higher than the national average and indicating specific softness in the regional tech labor market. This in turn impacts local economic activity impacting major revenues, including property and sales taxes. The erosion of purchasing power from inflation remains a key watch item; however, consumer spending remains resilient. Personal consumption expenditures (PCE) are the primary measure of consumer spending. According to the U.S. Bureau of Economic Analysis (BEA), the headline PCE price index rose 2.7% year-over-year as of August 2025. A key component, the core PCE price index (which excludes food and energy), rose 2.9% year-over-year. This core measure is the Federal Reserve's preferred inflation gauge, and its persistence well above the 2% target adds leeway for the Federal Reserve to hold interest rates at a restrictive level. Also, the United States consumer confidence for November 2025 dropped to 51, hovering near one of the lowest levels in the poll’s history. This economic environment creates heightened complexity in financial forecasting. It is important to recognize that while the local economy within the City may exhibit 3 City Council, January 13, 2025; Agenda Item #12; https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=83197 Item 3 Item 3 Late Packet Report Item 3: Staff Report Pg. 3 Packet Pg. 121 of 168 trends similar to those at the state or national levels, its unique economic makeup will result in distinct variations. Staff is using the current available information to inform this forecast, which will change as new information becomes available and adjustments may be necessary to reflect evolving conditions. Additional details on economic statistics can be found in Attachment B. ANALYSIS As with all forecasts, there is uncertainty regarding the revenue and expenditure estimates. This report is a continuation of the financial review presented to the Finance Committee on November 18, 2025, and provides the full ten-year forecast based on the updated revenue figures discussed at that meeting5. As noted in the Executive Summary, the Base Case forecast projects a structural deficit from FY 2027 through FY 2032. This deficit is primarily driven by the revenue projections, particularly for sales tax, that were reviewed on November 18. This is combined with a 4.3% expenditure growth (approximately $13.1 million) from the FY 2026 Adopted Budget ($306.9 million), driven by contractual and inflationary increases in salaries, benefits, and services. Base Case Table 1 displays the projected General Fund revenues and expenditures over ten years and the cumulative net operating margin. The operating margin reflects the variance between the projected General Fund revenues and expenditures for each year of the forecast or the annual surplus or deficit. The net operating margin is presented on a one-time basis (the "Surplus/(Deficit)" line). An incremental forecast (not shown in the table) assumes that each deficit is addressed completely with ongoing solutions in the year it appears and that each surplus is completely expended with ongoing expenditures. It is the City's goal to remain in balance on an ongoing basis. To the extent a deficit is not resolved, or a surplus is not expended on an ongoing basis, the remaining budget deficit or surplus will be pushed to the following year. The Base Case financial forecast projects a deficit of $14.9 million in FY 2027, followed by deficits ranging from $6.2 million to $15.1 million through FY 2032. A surplus is not projected until FY 2033. 5 Finance Committee, November 18, 2025; Agenda Item #2; https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=83886 Item 3 Item 3 Late Packet Report Item 3: Staff Report Pg. 4 Packet Pg. 122 of 168 Table 1: FY 2027-2036 Long Range Financial Forecast (Base Case) (All figures in millions) FY 26 Adopted FY 26 Projected FY 27 FY 28 FY 29 FY 30 FY 31 FY 32 FY 33 FY 34 FY 35 FY 36 TOTAL REVENUE Revenues Uncert Reserve $307.2 $301.2 $5.8 $298.0 $292.2 $5.8 $305.1 $316.8 $327.2 $340.4 $352.9 $365.2 $378.4 $390.4 $404.4 $418.7 TOTAL EXPENDITURES $307.0 $307.0 $320.0 $329.7 $342.3 $354.6 $363.6 $371.4 $377.4 $385.9 $393.2 $405.5 SURPLUS/ (DEFICIT)$0 ($9.0)($14.9)($12.9)($15.1)($14.2)($10.7)($6.2)$4.5 $5.4 $11.2 $13.2 Staff has developed a comprehensive Budget Balancing Sandbox as a critical step to proactively address the projected structural deficit, offering a menu of financial strategies that close a gap of $14.9 million in FY 2027. These options illustrate the opportunities and trade-offs necessary to achieve immediate budget balance and systematically contribute to closing the structural deficit extending through FY 2032. The fundamental challenge remains in creating a responsible and strategic mix of one-time tools to fix the immediate FY 2027 problem and ongoing solutions required to address the structural imbalance over the next five years to achieve long-term fiscal stability. Table 2: FY 2027-2032 Balancing "Sandbox" Options (All figures in millions) FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 Revenues Explore new or updated fees and other revenues $0.8 $0.8 $0.8 $0.9 $0.9 $0.9 Budget Stabilization Reserve (BSR)$2.0 $-$-$-$-$- Budget Reductions FY 26 $6m through FY 30 $6.0 in base $6.0 in base $4.0 $4.0 $-$- Budget Reductions FY 27 $7m through FY 32 $7.0 $7.0 $7.0 $7.0 $7.0 $7.0 CIP Reductions Reduce Additional $1.0 $1.0 $-$-$-$- Pension Cost/Liability Reduce Additional Discretionary Payment (ADC)$3.6 $3.6 $3.6 $3.6 $3.6 $- Pension Cost/Liability Reduce Additional Discretionary Payment (ADP)$0.5 $0.5 $0.5 $0.5 $0.5 $- BALANCING STRATEGY TOTAL:$14.9*$12.9*$15.9 $16.0 $12.0 $7.9 Remaining Surplus/(Deficit)$0.0 $0.0 $0.8 $1.8 $1.3 $1.7 *Total of $14.9M and $12.9M excludes $6M already in FY27-FY28 Base Budget. Item 3 Item 3 Late Packet Report Item 3: Staff Report Pg. 5 Packet Pg. 123 of 168 Budget Balancing Sandbox for Consideration The Budget Balancing Sandbox outlines a multifaceted and multi-year budget balancing strategy, includes reductions on top of FY 2026 reductions of $6 million (or 2%), explores revenues, and service delivery efficiencies. It also charts a path forward for continued planning for reductions in pension liabilities, reinforcing the adopted Retiree Benefits Policy. Lastly, Staff strive to maintain the budget stabilization reserve at the 18.5% Council directed level. Together, these strategies will serve as a foundation for several Council actions coming to you soon including the Long-Range Financial Forecast, FY 2026 Mid-Year budget actions and the proposed FY 2027 budget. Achieving structural balance requires a combination of options. A key challenge is distinguishing between one-time tools (i.e. BSR) that tackle the immediate FY 2027 problem, and ongoing solutions (i.e. revenues, cost reductions, and pension option 1 “ADC”) that address the structural imbalance over the next five years. An approximate balance of one-time and ongoing strategies is essential. A brief summary of each option follows the table. Table 3: FY 2027 Budget Balancing "Sandbox" Options (All figures in millions. Projected FY 2027 Deficit: $14.9M) Option Category Item Strategy Potential FY 2027 Impact Revenue Enhancement (Ongoing) Additional Revenue Increase fees and/or other revenues $0.8 One-Time Funding BSR Contribution Utilize funds available above the 18.5% target $2.0 Ongoing Expenditure Reduction General Fund Reductions Target for permanent budget base reductions (ongoing)$7.0 Ongoing Expenditure Reduction Reduction in Capital Contribution Reduce General Fund Base Transfer to Capital Improvement Fund (CIF)$1.0 Long-term Cost & Liability Reductions Pension Option 1 - NC/UAL Reduce required payment to ADC level (for five years)$3.6 Long-Term Cost & Liability Reductions Pension Option 2 - ADP Reduce Additional Discretionary Payment (ADP) to Trust $0.5 Subtotal (Potential Solutions)$14.9 Remaining (Against $14.9M Deficit)$0 Revenue enhancement – ($800,000) – explore new or updated fees and other revenues. Ongoing expenditure reductions ($8.0 million) - further reduce the General Fund operating budget and capital investments for the next five years, while exploring service efficiencies and aiming to minimize service impact to the community. Long-term cost & liability reductions ($4.1 million) – continue to implement the Retiree Benefit Funding Policy and make transfers from Section 115 pension trust to CalPERS to reduce Item 3 Item 3 Late Packet Report Item 3: Staff Report Pg. 6 Packet Pg. 124 of 168 employer costs (ADC) and unfunded liability (ADP). Funding the ADC over the next 5 years and ADP on-going will reduce the budget operating and capital cuts necessary to balance the budget. As reviewed with the Committee on November 18, the Section 115 pension trust funding transfers scenarios were financially analyzed, consistent with the City policy and the projected outcomes would achieve the City policy key objectives. This balances the City’s financial position, policy objectives and desirable service level of the community. Table 4: Budget Stabilization Reserve (BSR) Summary (in millions) Budgeted FY 2025 Ending BSR $54.00 FY 2025 BSR Surplus Compared to Budget $4.9 Actual FY 2025 Ending BSR $58.9 Additional BSR (Included in FY 2026 Adopted Budget)$0.2 Use of BSR for FY 2026 Budget Amendments (BAOs)-$0.3 FY 2026 BSR Adjusted Balance $58.8 FY 2026 BSR 18.5% Target Level $56.8 Estimated Available BSR Above 18.5% Level $2.0 BSR Policy Analysis (PROJECTIONS): Item 3 Item 3 Late Packet Report Item 3: Staff Report Pg. 7 Packet Pg. 125 of 168 Table 4: Budget Stabilization Reserve (BSR) Summary (in millions) Recommend Roll Uncertainty Reserve/FY25 Surplus into BSR $6.0 BSR, FY 2026 Projected Ending Balance (before revenue decline)$64.8 Projected FY 2026 BSR Target Level 21.1% Projected BSR Above FY 2026 18.5% Target $8.0 Projected Use of BSR: FY 2026 projected revenue decline (partial offset with BSR, while contingency one-time redistribution of sales tax may be funded by other resources, including Section 115 trust)-$6.0 FY 2026 Projected BSR, ending (minus revenue declines)$58.8 FY 2027 Projected BSR, use -$2.0 FY 2027 Projected BSR, ending $56.8 BSR as % of projected FY 2027 expenditures 18.5% Revenue Assumptions The FY 2025 Annual Comprehensive Financial Report (ACFR), scheduled for review by the Finance Committee, will report General Fund revenues as compared to the prior year. Major tax revenues have shown mixed results through the first quarter of FY 2026, indicating current fiscal volatility. Total General Fund revenues are projected to be $305.1 million in FY 2027. As noted in the variance analysis provided to the Committee, this is approximately $5.8 million lower than the forecast presented during the FY 2026 budget process. This significant downward revision is the primary driver of the structural deficit, highlighting the immediate need for budget balancing strategies. The change is largely attributable to a $5.0 million reduction in the Sales Tax forecast, reflecting the steep decline in new auto sales and leasing sectors, with more detail in Attachment B. Property Tax was also revised down by $1.5 million, to reflect the 10-year compound annual growth rate (CAGR) is projected at approximately 4.5%, which is a moderation from historical trends. Staff will continue to monitor revenues and provide an update during the FY 2026 Mid- Year Budget Review. A summary of key revenue assumptions are below; extensive information regarding each revenue category can be found in Attachment C. Item 3 Item 3 Late Packet Report Item 3: Staff Report Pg. 8 Packet Pg. 126 of 168 Table 5: General Fund Revenue Forecast (Base Case) (All figures in millions) Revenue & Other Sources FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034 FY 2035 FY 2036 Sales Taxes $32.3 $33.3 $34.3 $35.3 $36.1 $37.0 $37.8 $38.5 $39.3 $40.1 Property Taxes $74.9 $78.1 $81.4 $84.9 $88.6 $92.5 $96.6 $100.9 $105.5 $110.3 Transient Occupancy Tax $31.0 $32.3 $33.8 $35.4 $37.1 $39.1 $41.1 $43.3 $45.5 $47.9 Documentary Transfer Tax $9.0 $9.3 $9.5 $9.8 $10.2 $10.5 $10.9 $11.3 $11.7 $12.1 Utility Users Tax $23.0 $24.5 $25.2 $27.5 $29.0 $30.6 $32.3 $34.1 $36.0 $38.0 Business Tax $6.7 $7.1 $7.3 $7.4 $7.6 $7.8 $8.0 $8.2 $8.4 $8.6 Other Taxes and Fines $0.8 $0.8 $0.8 $0.8 $0.8 $0.8 $0.8 $0.8 $0.8 $0.8 Subtotal: Taxes $178.0 $185.4 $192.3 $201.1 $209.5 $218.3 $227.5 $237.1 $247.2 $257.8 Charges for Services $45.1 $46.2 $46.9 $47.7 $48.3 $48.7 $49.0 $49.3 $49.6 $49.9 Permits and Licenses $11.8 $12.0 $12.1 $12.3 $12.5 $12.7 $12.7 $12.8 $13.0 $13.1 Return on Investments $3.7 $3.8 $3.9 $4.1 $4.2 $4.4 $4.6 $4.8 $5.0 $5.2 Rental Income $17.0 $17.5 $18.1 $18.8 $19.4 $20.1 $20.8 $21.5 $22.3 $23.1 From Other Agencies $1.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 Charges to Other Funds $15.8 $16.2 $16.7 $17.0 $17.4 $17.5 $17.8 $17.9 $18.0 $18.0 Other Revenue $2.5 $2.6 $2.6 $2.6 $2.6 $2.6 $2.7 $2.7 $2.7 $1.9 Subtotal: Non-Tax $97.0 $98.3 $100.5 $102.6 $104.5 $106.1 $107.7 $109.1 $110.6 $111.3 Operating Transfers-In $30.4 $33.2 $34.6 $36.7 $38.8 $41.2 $44.1 $45.7 $48.6 $51.4 TOTAL REVENUE $305.3 $316.9 $327.3 $340.3 $352.8 $365.6 $379.3 $391.9 $406.4 $420.5 Item 3 Item 3 Late Packet Report Item 3: Staff Report Pg. 9 Packet Pg. 127 of 168 Graph 1: Major General Fund Revenues ($ million) Sales Tax: The FY 2026 Adopted Budget for Sales Tax was $36.4 million. The new FY 2027 forecast is $32.3 million. This represents a $4.1 million (11.3%) decrease from the prior year's adopted budget and a significant $5.1 million downward revision from the FY 2027 forecast included in the FY 2026 Adopted Budget. This structural reduction is the single largest driver of the projected deficit, as was discussed with the Committee on November 18, 2025. Property Tax: Property tax revenue is the General Fund's largest revenue source, projected at $74.9 million for FY 2027. This is a modest 1.8% increase over the FY 2026 Adopted Budget of $73.6 million and a $1.5 million reduction from the forecast included in the FY 2026 Adopted Budget. This reduction reflects a cooling in the real estate market and lower-than-anticipated assessed valuation (AV) growth. The 10-year compound annual growth rate (CAGR) is projected at approximately 4.5%, which is a moderation from historical trends. Item 3 Item 3 Late Packet Report Item 3: Staff Report Pg. 10 Packet Pg. 128 of 168 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. Staff continues to monitor potential legislative and legal challenges to the ERAF calculation and reserves funding in accordance with County guidance. Utility Users Tax (UUT): The UUT is levied on electric, gas, and water consumption, as well as on telephone usage. Revenue in this category is projected at $23.0 million for FY 2027, a 7.5% increase over the FY 2026 Adopted Budget. This is based on updated financial plans from the Utilities department, reflecting anticipated consumption and approved rate adjustments. Revenue in this category is expected to show steady growth over the forecast period, aligned with the Utilities' long-range financial plans. Charges for Services and Permits and Licenses: Revenues in the Charges for Services and the Permits and Licenses categories are anticipated to be $45.1 million and $11.8 million, respectively, in FY 2027. Together, these amounts total $56.9 million. These revenue sources are primarily driven by the cost of staff to provide services to the community. To ensure alignment with target cost recovery levels, the City has engaged a consulting firm to assist with a comprehensive cost allocation plan and municipal fee study during FY 2026, with implementation anticipated in FY 2027. Staff will evaluate and bring forward recommendations to align fees with target cost recovery levels to cover general salary and benefits increases and CPI trends. One exception to this is Development Services activities and related revenue. Development Services fees are intended to be fully cost-recoverable, and the department has been modeled as cost-neutral in this forecast. To the extent Council wishes to provide subsidies to development service permit fees to encourage activities such as electrification to reach sustainability goals, these subsidies would add to the forecasted General Fund deficit unless an alternative funding source is identified. Expense Assumptions Attachment D. Item 3 Item 3 Late Packet Report Item 3: Staff Report Pg. 11 Packet Pg. 129 of 168 Table 6: General Fund Expense Forecast All figures in millions Expenditures & Other Uses FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034 FY 2035 FY 2036 Salary & Benefits $198.9 $203.6 $209.9 $216.2 $220.1 $223.7 $225.5 $228.7 $230.2 $232.3 Contract Services $32.1 $33.1 $35.2 $36.6 $38.0 $39.6 $41.1 $42.8 $44.5 $46.3 Supplies & Material $4.0 $4.1 $4.2 $4.3 $4.5 $4.7 $4.9 $5.1 $5.3 $5.5 General Expense $10.5 $10.8 $11.1 $11.5 $11.9 $12.3 $12.7 $13.1 $13.6 $14.6 Rents & Leases $1.5 $1.6 $1.7 $1.7 $1.8 $1.8 $1.8 $1.9 $1.9 $0.2 Facilities & Equipment $0.7 $0.7 $0.7 $0.7 $0.7 $0.7 $0.7 $0.7 $0.7 $0.7 Allocated Charges $32.4 $33.7 $35.2 $36.7 $38.2 $38.8 $38.9 $40.0 $41.4 $50.0 Subtotal: Non S&B $81.2 $84.0 $88.1 $91.5 $95.1 $97.9 $100.1 $103.6 $107.4 $117.3 Operating Transfers-Out $6.3 $6.3 $6.4 $6.4 $6.7 $6.6 $6.8 $7.0 $7.2 $5.6 Transfer to Infrastructure $33.6 $35.8 $38.1 $40.5 $41.8 $43.4 $45.0 $46.7 $48.5 $50.4 TOTAL EXPENDITURES $320.0 $329.7 $342.5 $354.6 $363.7 $371.6 $377.4 $386.0 $393.3 $405.6 Consistent with prior years, the FY 2027 salaries and benefits costs represent approximately 62% of the General Fund budget expenditures. Salary and Benefits are projected to increase $8.2 million or 4.3% from the prior year, from $190.7 million (FY 2026 Adopted) to $198.9 million (FY 2027 Forecast). Discussed in the following sections, this is primarily attributable to contractual increases in salaries, retiree healthcare costs, and pension costs. -Salary costs are updated in accordance with Memorandum of Agreements (MOA’s) between the City and its labor groups for contracts in effect. Then, a general wage adjustment of 2% is included for all employees starting in either January 2025 or July 2025 for all years of the forecast since no MOA’s would be in effect at that time. A staff vacancy assumption of 5% is assumed, which is an increase from 3% assumption most recently a few years ago, creating a tighter budget forecast as the City continues to improve its actual vacancy rate through successful recruitment and retention programs. -Pension are budgeted based on CalPERS determined rates as of the June 30, 2024, valuation for the City's miscellaneous and safety plans and additional contributions to Section 115 trust. In the General Fund, it is anticipated the City will spend a total of $62.5 million on total pension costs in FY 2027, which includes $53.7 million for the primary CalPERS contribution and $8.8 million in supplemental Pension Trust (PARS) contributions. This total is approximately $3.0 million higher than the prior year. These combined expenses represent approximately 19.5% of the General Fund's total expenses. This forecast does not reflect any strategies in the sandbox to transfer funds from Section 115 trust to CalPERS. Item 3 Item 3 Late Packet Report Item 3: Staff Report Pg. 12 Packet Pg. 130 of 168 -Retiree Healthcare/Other Post-Employment Benefits (OPEB) - Retiree Medical is based on the June 30, 2024, actuarial study, which is completed every two years to inform the development of the FY 2027 and FY 2028 operating budgets. Consistent with City Council direction and the Retiree Benefit Funding Policy, this forecast continues the practice to budget the full payment of the Actuarial Determined Contribution (ADC) for retiree healthcare and the City Retiree Benefits Funding Policy prefunding to California Employers’ Retiree Benefit Trust (CERBT) Fund. Inflationary assumption in this long range is generally 3% annual inflation, with limited exception during the ten-year forecast to estimate cost increases for non-salary services and equipment. Assumptions NOT Included in Forecast It should be noted that the Base Case LRFF does not include several potential future impacts to the FY 2027-2036 General Fund outlook that are outlined in Attachment E. These items represent known priority projects or areas of planned investment that have not yet been fully developed in terms of costs, definitive funding sources, or finalized timelines. This is not intended to be a comprehensive list nor is it in any priority order. FY 2027 Budget Development Guidelines As discussed earlier in this document, this preliminary forecast represents the initial steps of the FY 2027 budget development process. Due to the clear overlap of projecting the City's fiscal condition and the need to shape service level expectations, the FY 2027 Budget Development Guidelines are incorporated into this discussion (Attachment A). These guidelines provide high- level budgetary direction to the entire organization. Pairing the Budget Development Guidelines with the forecast at this time links the anticipated future fiscal condition of the organization with the necessary context regarding service delivery prioritization and resource allocation. This proactive linkage ensures that the City can address anticipated structural deficits, such as the $14.9 million gap in FY 2027, using a comprehensive framework. The guidelines provide the financial mandate necessary to vet proposals against the structurally imbalanced General Fund, requiring staff to design budget solutions that not only solve the immediate deficit but also contribute to long-term alignment. This ensures that resource allocation is strategic, disciplined, and focused on maintaining financial sustainability rather than simply relying on one-time measures. The policy demands staff explore alternative revenue streams, optimize expenditures, and ensure all augmentations contribute positively to the overall structural balance. Conclusion This forecast maintains current service levels approved in FY 2026 but projects a structural deficit from FY 2027 through FY 2032. The primary driver of this imbalance is the $14.9 million deficit in FY 2027, driven largely by downward revisions to Sales Tax projections. The Base Case assumes Item 3 Item 3 Late Packet Report Item 3: Staff Report Pg. 13 Packet Pg. 131 of 168 a sluggish economic recovery, leading to continued revenue stagnation that is unable to keep pace with growth in expenditures. The Budget Balancing Sandbox offers a framework for the Committee to recommend ongoing solutions, such as $8.0 million in structural General Fund reductions (operating and CIP) or adjustments to long-term liability payments, while leveraging one-time resources to bridge the immediate gap. Strategic planning and fiscal discipline are essential to maintain service levels and ensure long-term fiscal stability. FISCAL/RESOURCE IMPACT STAKEHOLDER ENGAGEMENT ENVIRONMENTAL REVIEW ATTACHMENTS APPROVED BY: Lauren Lai, Administrative Services Director Item 3 Item 3 Late Packet Report Item 3: Staff Report Pg. 14 Packet Pg. 132 of 168 Attachment A – FY 2026 Budget Development Guidelines FY 2027 Budget Development Guidelines Item 3 Attachment A - FY 2027 Budget Policy Guidelines Item 3: Staff Report Pg. 15 Packet Pg. 133 of 168 ATTACHMENT B The Economy At the national level, economic growth has shown significant strength through the third quarter of calendar year 2025, led by robust GDP (gross domestic product) growth. Consumer spending has remained resilient despite inflation rates that have ticked up from the prior year. As of September 2025, the consumer price index (CPI), which measures changes in the prices paid by consumers for a basket of goods and services, was 3.0%. This is higher than the 2.6% CPI from a year ago. Assumptions in the LRFF report for general cost increases are using a CPI of 3% in FY 2026 and FY 2027 and 4% for FY2028 and beyond. The national unemployment rate, as of August 2025, is 4.3%, a modest increase from 4.1% in October of the prior year, suggesting a labor market that is cooling but not contracting. This slowdown is consistent with the Federal Reserve's monetary policy intended to curb inflation without initiating a recession. Key factors to monitor include future Federal Reserve policy, ongoing geopolitical events, and the impact of tariffs on inflation. The local economy, in contrast, is projected to experience a more sluggish recovery. The latest Fall 2025 UCLA Anderson outlook states that while the U.S. economic recovery may begin in mid-2026, "the California recovery will begin later, getting underway late next year and accelerating in 2027." The forecast notes that a rebound in the technology and aerospace sectors will be necessary for California to resume its accustomed pace of growth. The risks to this forecast remain on the downside, tied to the performance of the tech sector, international trade, and the high cost of capital. Table 1: National Gross Domestic Product (GDP) According to the U.S. Bureau of Economic Analysis (BEA), the US economy is estimated to have expanded at an annualized 4.0% in the third (calendar) quarter of 2025 (latest estimate), a significant acceleration from the growth seen in 2024. This robust growth was supported by a significant increase in personal spending, which increased at its fastest pace since 2023, boosted by consumption of both goods and services. Consumers showed strong spending on services related to travel, entertainment, and healthcare. Government consumption also rose, Item 3 Attachment B - The Economy Item 3: Staff Report Pg. 16 Packet Pg. 134 of 168 led by defense and state and local infrastructure spending. Business investment in equipment and intellectual property showed strength, offsetting a continued slowdown in fixed residential investment, which has struggled under higher interest rates. The contribution from net trade was positive, as exports of capital goods increased while imports held steady. This strong performance at the national level provides a crucial buffer against regional weaknesses and suggests underlying momentum in the economy. The national inflation rate, as measured by the U.S. Bureau of Labor Statistics, rose to 3.0% (year-over-year) in September 2025, the highest rate since January 2025. This marks a continued upward trend from 2.9% in August. The increase was driven largely by a rise in energy prices, which rose 2.8% on the year, led by gasoline. Inflation for shelter, a major component of the index, also remained steady and elevated at 3.6%, continuing to pressure household budgets. On the other hand, a slowdown was seen in other areas, such as food (3.1%, down from 3.2% prior) and used cars and trucks (5.1%). On a monthly basis, the CPI increased 0.3%, which was below some market expectations. Core inflation (all items less food and energy), which is closely watched by the Federal Reserve, slowed slightly to 3.0% from 3.1% in the prior month, suggesting that underlying price pressures, while persistent, may be gradually easing. Table 2: National Inflation Rate (CPI) The nation's unemployment rate was 4.3% as of August 2025, with the number of unemployed persons at 7.4 million; these measures have changed little over the year. This rate, while low by historical standards, is slightly elevated from the beginning of the calendar year. Among those without employment, the number of long-term unemployed (those jobless for 27 weeks or more) was 1.9 million in August, accounting for 25.7% of all unemployed persons. In the meantime, the labor force participation rate held steady at 62.3%, which has declined by 0.4 percentage points over the year. Per the State of California's Employment Development Department (EDD), the state's unadjusted unemployment rate as of August 2025 is 5.8%, a notable increase from 5.3% in September of the prior year. The local region reflects this cooling trend. The unemployment rate for the San Jose-Sunnyvale-Santa Clara MSA was 4.7% in August 2025, with Santa Clara County at 4.6%. This is a measurable increase from the 4.1% county rate Item 3 Attachment B - The Economy Item 3: Staff Report Pg. 17 Packet Pg. 135 of 168 seen a year prior, reflecting the sluggishness in the technology sector referenced by the UCLA forecast. Table 3: U.S. Unemployment Rate The erosion of purchasing power from inflation remains a key watch item; however, consumer spending remains resilient. Personal consumption expenditures (PCE) are the primary measure of consumer spending on goods and services in the U.S. economy. It accounts for about two- thirds of domestic final spending, and thus it is one of the main factors that indicates future economic growth. Strength in PCE spending tends to prompt additional business spending. According to the U.S. Bureau of Economic Analysis (BEA), the headline PCE price index rose 2.7% year-over-year as of August 2025. A key component, the core PCE price index (which excludes food and energy), rose 2.9% year-over-year. This core measure is the Federal Reserve's preferred inflation gauge, and while it is an improvement from previous highs, its persistence well above the 2% target adds leeway for the Federal Reserve to hold interest rates at a restrictive level. This resilience in spending, particularly on services, continues to support economic growth but also poses a challenge to fully taming inflation. Table 4: Unemployment Rate Comparison (August 2025) Item 3 Attachment B - The Economy Item 3: Staff Report Pg. 18 Packet Pg. 136 of 168 ATTACHMENT C General Fund Bace Case Revenue Assumptions Chart 1: General Fund Major Tax Revenue Actuals and Forecast through FY 2036 Property Tax Property tax revenue is the General Fund’s largest revenue source and represents over 25% of the total General Fund revenues. Growth in this category has been steady over time, with the secured property tax 10-year compound annual growth rate (CAGR) ranging from a low of 5.8% in FY 2019 to a high of 7.25% in FY 2010, with the current 10-year CAGR of 6.9%. Although the City has realized a 10-year compound annual growth rate of 6.9% in property tax revenues, the FY 2027 forecast projects a moderated 1.8% growth rate , with revenues anticipated to increase from $73.6 million in FY 2026 (adopted) to $74.9 million in FY 2027 (projected). However, in FY 2026 it is likely that property taxes will be revised down to $72.3 million which aligns with the County Tax roll for FY 2026. We therefore estimated a 4.8% increase from this revised FY 2026 property tax to project FY 2027, by using the actual assessed valuation growth from 2025. Property tax performance typically lags economic conditions by about a year due to the assessment and collection timeline. This category also includes receipts for excess Educational Revenue Augmentation Fund (ERAF) distributions from the County of Santa Clara. ERAF is the fund used to collect and disburse property taxes that are shifted to/from cities, the County, and special districts prior to their reallocation to K-14 school agencies. When the state shifts more local property tax than required to support schools, these funds are returned and known as excess ERAF. As a result of the volatility of ERAF, it is not considered a permanent local revenue source even though it has performed strongly in the past decade. Item 3 Attachment C - General Fund Base Case Revenue Assumptions Item 3: Staff Report Pg. 19 Packet Pg. 137 of 168 ERAF Reserve: The City maintains an ERAF Reserve to address ongoing disputes related to the calculation of excess ERAF. Earlier challenges with the State and Santa Clara County, and with the State and California School Board Association, were resolved favorably, allowing the related reserves to be released. Currently, a State Controller’s Office audit finding against Marin County challenges the inclusion of former Redevelopment Agency funds in the excess ERAF calculation and remains under litigation. Approximately 18 -22% of excess ERAF is considered at risk under this finding. Separately, there have been statewide discussions about extending ERAF eligibility to charter schools. Although no changes have been adopted at this time, this could introduce additional risk in the future. To reflect this potential exposure, the City budgets excess ERAF on a net basis and reserves at - risk amounts when received. To date, a total of $7.1 million has been set aside for prior -year at- risk amounts, with an additional contribution planned for FY 2026 once final amounts are known. Chart 2: Property Tax Actuals and Forecast through FY 2036 Transfer of ownership is a significant driver of growth; however, that growth moderated in FY 2024 and is expected to continue in FY 2025 due to a higher interest rate environment and overall economic slowdown. Overall, median sales price of single family residential home increased 4.7%, where in the significantly low interest rate environment of 2021, the median price of a single family residential home increased by 18.26%. The FY 2026 Adopted Budget for Property Tax is $73.6 million, a $5.0 million or 7.3% increase over the FY 2025 adopted revenue of $68.6 million. In FY 2027, this revenue is anticipated to increase to $74.9 million, a $1.3 million or 1.8% increase over the FY 2026 Adopted Budget amount. The Base Case assumes approximately 2.0% to 4.5% growth over the length of the forecast. Sales Tax Sales Tax is the City’s second largest General Fund revenue source and represents approximately 13.5% of the total revenues. This revenue category continues to evolve based on Item 3 Attachment C - General Fund Base Case Revenue Assumptions Item 3: Staff Report Pg. 20 Packet Pg. 138 of 168 changes in consumer activity, including the growing influence of online purchasing and the modernization of retail operations. In the near term, these dynamics have been coupled with declines in the business-to-business (including car leases) and transportation sectors, consistent with trends in recent financial reporting and sales tax digests. These conditions, along with CDTFA adjustments and changes in the state’s allocation methodology, have resulted in lower receipts. As a result, FY 2026 revenue is expected to fall by up to $9.0 million below the adopted budget, decreasing from $36.4 million to a projected $27.3 million, due to a combination of potential one-time adjustments by the California Department of Tax and Fee Administration (CDTFA) and lower allocations to the City. The LRFF base case incorporates this lower starting point, with FY 2027 sales tax projected at $32.3 million, roughly 11% below prior expectations due to an ongoing annual reduction of about $5.1 million. In the out -years, sales tax is assumed to stabilize at this reduced level, with modest growth beginning in FY 2028 and returning to current budget levels by FY 2032. Chart 3: Sales Tax Actuals and Forecast through FY 2036 Utility User’s Tax (UUT) The UUT is levied on electric, gas, and water consumption, as well as on telephone usage. Revenue in this category is impacted by consumption levels and has experienced reductions in prior periods due to water conservation programs and reduced workforces and business closures during the pandemic. This revenue has recovered as the local economy recovered and workers returned to the office in FY 2023. In addition, higher utility commodity costs and capital costs resulted in sizable utility rate increases and higher UUT revenues. The FY 2026 Adopted Budget for UUT is $21.4 million, $1.0 million or 5.1% higher than the FY 2025 actuals of $20.4 million. In FY 2027, this revenue is anticipated to increase to $23.0 million, a $1.6 million or 7.5% increase over the FY 2026 budgeted amount. Revenue in this category is expected to grow between 3% to 10% over the length of the forecast, or a 10 -year CAGR of 5.0%. Item 3 Attachment C - General Fund Base Case Revenue Assumptions Item 3: Staff Report Pg. 21 Packet Pg. 139 of 168 Chart 4: Utility Users Tax Actuals and Forecast through FY 2036 Transient Occupancy Tax (TOT) The City’s TOT is applied at a rate of 15.5% on hotel and other short -term lodging stays and is impacted by business and other leisure travel activity. Consistent with policy, a portion of TOT receipts from new hotel developments is allocated to support infrastructure needs. In recent years, this has resulted in an overall distribution that is roughly split between the General Fund and Capital Improvement Fund. TOT revenues were significantly affected in FY 2020 and FY 2021 during the pandemic and have since stabilized as hotel activity recovered and new hotels added capacity. The FY 2026 Adopted Budget for TOT revenue is $29.1 million, a $0.2 million or 0.6% increase over FY 2025 actuals of $28.9 million. In FY 2027, this revenue is anticipated to increase to $31.0 million. Of this amount, approximately $16.7 million is allocated for general fund purposes and $14.3 million is used to support capital infrastructure projects. This aligns with Council policy to direct a portion of TOT toward infrastructure investments. During the first two months of the fiscal year, hotels reported an average daily room rate of $225.86 and an occupancy rate of 82.3%, compared to $238.76 and 70.2% in the same period in the prior fiscal year. TOT receipts have grown at a CAGR of 9.3% over the past five years and 5.7% over the past ten years, reflecting a rebound from pandemic lows and overall sustained recovery in the local hotel market. This LRFF assumes growth rates ranging from 1.3% to 5.3% over the forecast period. Item 3 Attachment C - General Fund Base Case Revenue Assumptions Item 3: Staff Report Pg. 22 Packet Pg. 140 of 168 Chart 4: Transient Occupancy Tax Actuals and Forecast through FY 2036 Note: January 2015, TOT Rate went from 12% to 14% April 2019, TOT Rate went from 14% to 15.5% Documentary Transfer Tax (DTT) Revenue in this category is highly volatile and depends on sales volume and the mix of commercial and residential sales. Activity can vary significantly year to year, making this a challenging category to forecast. Over the past 10 years, DTT receipts have averaged approximately $8.0 million annually, with occasional spikes driven by large commercial transactions. FY 2021 and FY 2022 generated a record revenue of $10.6 million and $12.0 million due to several high-value commercial transactions, while lower activity contributed to a decline in receipts in FY 2023. The FY 2026 Adopted Budget for DTT is $8.5 million, a $1.2 million or 16.4% increase from the FY 2025 adopted revenue of $7.3 million. FY 2027 is forecast at $9.0 million, with growth ranging from approximately 2.0% to 3.5% over the period. The number of transactions through October 2025 (75) is 18.0% higher than the same period in the prior year, with the total revenue from these transactions increasing by 22.6%. Data from the first six months of the calendar year indicates that single family residential homes are selling for 1.5% less than in the previous calendar year, with number of sales being relatively flat. The median price for single family properties is $3.3 million. Item 3 Attachment C - General Fund Base Case Revenue Assumptions Item 3: Staff Report Pg. 23 Packet Pg. 141 of 168 Chart 6: Documentary Transfer Tax Actuals and Forecast through FY 2036 Business Tax (BT) In November 2022, voters approved Measure K (Business Tax) to provide additional funding for critical public safety needs, transportation safety improvements and grade separations, and affordable housing and unhoused services. The tax applies to non-exempt businesses above 10,000 square feet with an annual single business cap of $500,000. The initial collection was based on a BT rate of 3.75 cents per square foot which increased to 7.5 per square foot starting on January 1, 2025. FY 2026 is the first fiscal year in which the full rate will be assessed. Both the rate and the cap will be increased annually by 2.5% beginning in FY 2027. The FY 2026 Adopted Budget for BT is $6.5 million, a $1.0 million or 18.4% increase over the FY 2025 actuals of $5.7 million. This increase reflects the first full fiscal year at the fully phased -in rate and continued registration activity from non-exempt businesses. In FY 2027, this revenue is projected to increase to $6.7 million, supported by steady participation and the scheduled annual rate increase. The BT program is still in its early stages and will continue to evolve as participation stabilizes and year-over-year data becomes more consistent. Staff will continue to monitor performance and will provide updated analysis and recommendations in future financial updates as more data becomes available. Return on Investment Investment income reflects interest earned on the City’s investment portfolio and liquid balances. In FY 2026, the City transitioned from managing its investment portfolio in -house to partnering with Chandler Asset Management for professional investment management services. The City’s current earnings reflect a combination of legacy holdings and new investments purchased under the revised portfolio strategy. As of the first quarter of FY 2026, the portfolio’s market yield was 4.01%. Investment income is projected to generate approximately $3.6 million in FY 2026 and increase Item 3 Attachment C - General Fund Base Case Revenue Assumptions Item 3: Staff Report Pg. 24 Packet Pg. 142 of 168 gradually to about $5.2 million by FY 2036. The forecast assumes annual growth of roughly 2.0% to 4.0% over the forecast period, reflecting expected reinvestment of maturing securities and current market conditions. Staff continues to work with Chandler on developing forecasts that reflect the new strategy and expects to incorporate more refined projections in future financial updates. Rental Income Rental Income of $16.4 million in FY 2026 primarily reflects rent paid to the General Fund from the City’s Enterprise Funds and tenants at the Cubberley Community Center. Rental income is projected to remain flat compared to the FY 2025 Adopted Budget. This revenue category will be further reviewed and revised subsequent to this forecast, typically based on the December - to-December California Consumer Price Index (CCPI) in the San Francisco Bay Area. Charges for Services and Permits and Licenses Revenues in the Charges for Services and the Permits and Licenses categories are anticipated to be $43.6 million and $11.4 million, respectively, in FY 2026. Together, these amounts total $55.0 million and are approximately $5.7 million higher than the FY 2025 Adopted Budget of $49.3 million. Increases in these categories are primarily due to revenue adjustments for the agreement with Stanford to provide Fire and Dispatch services, and higher forecasts for permit and plan review services processed through the Development Center. The revenue estimates in these categories are based on current activity levels, and these revenue sources are primarily driven by the cost of staff to provide services to the community. To ensure alignment with target cost recovery levels, the City has engaged a consulting firm to assist with comprehensive cost allocation plan and municipal fee study during FY 2025, with implementation anticipated in FY 2026. Staff will evaluate and bring forward recommendations to align fees with target cost recovery levels to cover general salary and benefits increases and CPI trends. These efforts aim to improve fee transparency and ensure equitable cost distribution across City services. One exception to this is Development Services activities and related revenue. Development Services fees are fully cost-recoverable, and the department has been modeled as cost-neutral in this forecast. Charges for Service – Stanford Fire and Dispatch Services The City and Stanford have two separate agreements for the provision of fire response and emergency dispatch services. The fire response services agreement became effective in July 2018 and outlines service level terms and a new cost allocation methodology as the baseline for agreement costs. The term extended through June 2023, with annual renewals in effect through June 2028 unless otherwise terminated. The agreement includes a staffing deployment model for suppression and medical services, which was approved by The City Council in October 2017 and deployed in January 2018. This forecast aligns with the new staffing model; and, in accordance with the agreement, adjustments to revenue from Stanford have been aligned with the year-over-year changes to the operating expenses in the Fire Department over the forecast period. Similarly, changes to the revenue received for dispatching services have been aligned with the operating expenses in the Technical Services Division of the Police Department where the costs to provide these services are budgeted. The agreements for both fire and dispatch Item 3 Attachment C - General Fund Base Case Revenue Assumptions Item 3: Staff Report Pg. 25 Packet Pg. 143 of 168 services have termination dates that fall within the forecast period, and while the revenue forecast assumes continuation of the current agreement terms, new contracts will need to be executed. For fire and police revenue, additional adjustments may be applicable if new labor agreements are negotiated for the forecast period. Revenues for these services are based on current anticipated changes in salary and benefits costs within the Fire Department and Police Department Dispatch Unit. Charges to Other Funds The FY 2026 estimate for Charges to Other Funds of $15.5 million remains flat compared to the FY 2025 budgeted amount. To ensure alignment with target cost recovery levels, the City has engaged a consulting firm to assist with a comprehensive cost allocation plan and municipal fee study in FY 2025, with targeted implementation in FY 2026. Staff will evaluate and bring forward cost allocation recommendations. Operating Transfers-In Overall, the Operating Transfers-in are estimated to be $31.5 million for FY 2026. While this matches the total for FY 2025, the prior year included a one-time $2.0 million transfer from the General Benefits Fund. This transfer was a refund of allocated charges paid by General Fund departments into the General Benefits Fund in prior years, which had accumulated in fund balance. Additionally, the Electric Fund equity transfer increased from $15.1 million to $18.3 million, while the Gas Fund equity transfer decreased from $10.9 million to $9.7 million, reflecting updated revenue forecasts for each fund. In accordance with the methodology approved by the City Council in June 2009, the Electric Fund’s equity transfer to the General Fund equity transfer has been calculated by applying a rate of return on the capital asset base of the Electric Fund. This rate of return is based on PG&E’s rate of return on equity as approved by the California Public Utilities Commission (CPUC). The Gas Fund’s equity transfer calculation was updated based on the passage of Measure L on the November 2022 ballot. As outlined in the ballot measure language, the Gas Fund equity transfer can be up to 18% of annual gross gas retail revenue. This LRFF increases the transfer to 18% in FY 2026, where it is projected to remain through 2036. Other Revenue and Revenue from Other Agencies Revenues in these two categories is projected at $3.6 million in FY 2027, $0.9 million lower than the FY 2025 adopted budget of $4.5 million. These two revenue categories mainly account for grants or reimbursements from the federal and state governments or other local jurisdictions. Other Revenue decreased slightly by $0.2 million in FY 2026 as a result of limited time funding in FY 2025 from LifeMoves, for reimbursement related to the Homekey Facility. Revenue from Other Agencies decreases by $0.7 million in FY 2026, because FY 2025 is the last year of the Staffing for Adequate Fire and Emergency Response (SAFER) grant funding awarded to the City in FY 2022. Item 3 Attachment C - General Fund Base Case Revenue Assumptions Item 3: Staff Report Pg. 26 Packet Pg. 144 of 168 Table 1: General Fund Revenue Forecast (Year-to-Year Percentage Change) Revenue & Other Sources FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034 FY 2035 FY 2036 Sales Taxes -11.3% 3.1% 3.0% 2.9% 2.3% 2.5% 2.2% 1.9% 2.1% 2.0% Property Taxes 1.8% 4.3% 4.2% 4.3% 4.4% 4.4% 4.4% 4.5% 4.6% 4.5% Transient Occupancy Tax 6.5% 4.2% 4.6% 4.7% 4.8% 5.4% 5.1% 5.4% 5.1% 5.3% Documentary Transfer Tax 7.5% 7.4% 2.8% 9.8% 5.7% 3.4% 3.9% 3.8% 4.6% 4.1% Utility Users Tax 5.9% 3.3% 2.2% 3.2% 4.1% 2.9% 3.8% 3.7% 3.5% 3.4% Business Tax 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other Taxes and Fines 3.1% 1.5% 2.9% 2.9% 2.8% 2.7% 2.6% 2.6% 2.5% 2.4% Subtotal: Taxes 0.2% 4.3% 3.7% 4.7% 4.2% 4.0% 4.0% 4.0% 4.1% 4.1% Charges for Services 3.4% 2.7% 1.3% 1.7% 1.3% 0.8% 0.6% 0.6% 0.6% 0.6% Permits and Licenses 3.5% 1.7% 0.8% 1.7% 1.6% 1.6% 0.0% 0.8% 1.6% 0.8% Return on Investments 0.0% 2.7% 2.6% 2.6% 5.0% 4.8% 4.5% 4.3% 4.2% 4.0% Rental Income 3.0% 2.9% 3.4% 3.9% 3.2% 3.6% 3.5% 3.4% 3.7% 3.6% From Other Agencies* 1000% -90.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Charges to Other Funds 1.9% 2.5% 3.1% 1.8% 2.4% 0.6% 1.7% 0.6% 0.6% 0.0% Other Revenue 0.0% 0.0% 4.0% -3.8% 4.0% -3.8% 4.0% -3.8% 4.0% 0.0% Subtotal: Non-Tax 4.0% 1.4% 2.0% 2.0% 2.1% 1.4% 1.5% 1.2% 1.6% 1.3% Operating Transfers-In -3.5% 9.2% 4.2% 6.1% 5.7% 6.2% 7.0% 3.6% 6.3% 5.8% TOTAL REVENUE 1.3% 3.9% 3.3% 4.0% 3.7% 3.5% 3.6% 3.1% 3.7% 3.5% Item 3 Attachment C - General Fund Base Case Revenue Assumptions Item 3: Staff Report Pg. 27 Packet Pg. 145 of 168 ATTACHMENT D General Fund Base Case Expense Assumptions Salary and Benefits Consistent with prior years, the FY 2027 salaries and benefits costs represent approximately 62% of the General Fund budget expenditures. Salary and Benefits are projected to increase $8.3 million or 4.4% from the prior year. Discussed in the following sections, this is primarily attributable to increases in salaries ($4.9 million), retiree healthcare costs ($12.7 million total cost), and pension costs ($45.1 million total cost). Salary - Consistent with the City's salary budget methodology for recent budgets, positions are budgeted at the actual rate of pay of employees including benefit selections as of Fall 2025. Then, by position, salary costs are updated in accordance with applicable Memorandum of Agreements (MOA's) between the City and its labor groups and the Management and Professional Personnel and Council Appointees Compensation Plan(s). In FY 2025, the City Council engaged with labor groups to negotiate new agreements for wages, benefits, and other terms and conditions of employment. These agreements extend through December 2027 (SEIU) and June 2028 (all other labor groups) for full-time staffing and include target market adjustments to align salaries with benchmark studies, Cost of Living Adjustments (COLAs), and other benefits such as a flexible compensation benefit. The forecast assumes step increases for employees in applicable positions, including Service Employees International Union (SEIU), International Association of Fire Fighters (IAFF), and Palo Alto Peace Officers' Association (PAPOA), and merit increases for Management and Professional employees including Utilities Management & Professional Association of Palo Alto (UMPAPA). A general wage adjustment of 2% is included for all employees in the forecast when there is no MOA in effect. This is consistent with prior Council direction in previous LRFF reporting to use the 2% increase as a forecasting assumption, not as a commitment to future negotiations. A reserve is included for potential changes to future labor costs including, changes in vacancy rates, labor and benefit rate variability, and inflation assumptions. Offering competitive compensation plans aligns with industry standards for attracting and retaining a skilled and motivated workforce and better positions the City of Palo Alto as an employer of choice. This level of funding is intended to offset potential future costs and may differ from actual outcomes. Negotiations for new labor agreements are anticipated to occur in FY 2028 for new terms beginning in FY 2028 and FY 2029. Additionally, the budget includes vacancy savings that are expected to materialize as positions are vacated and new employees are hired through the normal course of business. As of the timing of this LRFF, the vacancy rate is approximately 11.6% (as of October 2025). Vacancy savings from public safety positions are typically exhausted by uses such as backfill, hire ahead programs, and overtime. Consistent with changes in the previous LRFF, this forecast assumes a General Fund vacancy rate of 5% in all years. This results in savings of approximately $$5.5 million in FY 2027 and increases annually over the forecast period in alignment with forecasted salary trends. Consistent with past practice, the vacancy assumption is lower than the actual vacancy rate to allow departmental Item 3 Attachment D - General Fund Base Case Expense Assumptions Item 3: Staff Report Pg. 28 Packet Pg. 146 of 168 use of those savings for other staffing strategies, such as filling staffing gaps by contracting for professional services, hiring ahead to allow overlap and smooth transitions, piloting new technologies to increase efficiency in the absence of staff, and supporting a summer internship program. Benefits - Pension: Pensions are budgeted based on CalPERS determined rates as of the June 30, 2024 valuation for the City's miscellaneous and safety plans. CalPERS determines the City's total contributions for a given Fiscal Year as the sum of two factors: Normal Cost (NC) and Unfunded Accrued Liability (UAL). Together the NC and the UAL expressed as a percentage of payroll is the 'blended rate' and is used to represent total costs in the discussion below. The Normal Cost (NC) is expressed as a percentage of payroll and is paid as part of the payroll reporting process of active employees. Commonly referred to as the 'pay-go' cost, the NC is variable and increases or decreases directly with the salary levels of the City. It represents the necessary funding for the City to pay for employees presuming that CalPERS meets the current set of assumptions. In a year that CalPERS does not meet assumptions, due to plan changes, assumption changes, method changes, or plan experience (including investment gains/losses), there is an increase or decrease to the Unfunded Accrued Liability (UAL). Commonly referred to as the 'catch-up' cost, the UAL is expressed as a dollar amount and is calculated over an amortized period with defined annual payments, similar to a mortgage. The contributions for UAL are billed as a flat dollar amount as opposed to a percentage of payroll due to potential funding issues that could arise from a declining payroll or number of active members in the plan. However, CalPERS provides an estimated percentage of payroll for UAL to allow a consistent comparison of total costs. In the General Fund, it is anticipated the City will spend a total of $45.1 million on total pension costs in FY 2027, including both CalPERS contributions and supplemental Pension Trust Fund contributions. This projection reflects the economic and demographic assumptions used in the annual CalPERS Valuation reports, including but not limited to investment returns. The CalPERS projected FY27-36 blended retirement rates are as of the June 30, 2024 valuation for plans and do not reflect any impacts of pension trust to CalPERS for additional discretionary payments (ADP). Should Council authorize, such impacts will be incorporated into the budget development. Table 1: CalPERS’ Projected FY 2027-2036 Blended Retirement Rates (percentage of payroll) FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034 FY 2035 FY 2036* Miscellaneous 40.6% 41.0% 43.1% 42.7% 42.2% 38.7% 37.2% 34.5% 32.7% 31.5% Safety 82.8% 83.3% 86.3% 85.4% 84.4% 80.2% 77.6% 72.3% 69.7% 67.5% *FY 2036 projected based on amortization trends. Retiree Healthcare/Other Post-Employment Benefits (OPEB): Retiree Medical is based on the June 30, 2023 actuarial study prepared by Foster & Foster (previously Bartel Associates), which is completed every two years. The most recent study was completed in June 2024 (CMR 2406-31401) to inform the development of the FY 2025 and FY 2026 operating budgets. This biannual actuarial study is anticipated to be updated in Spring 2026 and will be incorporated into FY 2027 budget development. 1 City Council, June 17, 2024; Agenda Item #28; CMR# 2406-3140; https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=82926 -c044073c40cb Item 3 Attachment D - General Fund Base Case Expense Assumptions Item 3: Staff Report Pg. 29 Packet Pg. 147 of 168 Consistent with City Council direction and the Retiree Benefit Funding Policy, this forecast continues the practice to budget the full payment of the Actuarial Determined Contribution (ADC) for retiree healthcare and uses alternative assumptions, such as a more conservative 5.75% discount rate (6.25% assumption), to transmit amounts above the recommended payment as an additional discretionary payment ("prefunding") to the California Employers' Retiree Benefit Trust (CERBT) Fund. CalPERS blends active employees with pre-Medicare retirees and charges the same medical premium, even though younger employees on average consume less healthcare. The higher premium to younger employees thereby subsidizes older employees and retirees who, on average, have higher claims and premiums. The LRFF estimates $12.7 million in the General Fund in FY 2027 for ADC. The implied subsidy effectively lowers the funding necessary to meet the ADC. Table 2: Retiree Medical General Fund Contributions (in millions) FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034 FY 2035 FY 2036 $10.5 $12.4 $12.7 $13.1 $13.5 $13.8 $14.2 $14.6 $15.0 $15.4 $16.0 $16.7 Retiree Benefit Funding Policy (formerly “Pension Funding Policy”): The City has taken several proactive steps to address rising pension costs and long-term liabilities, including cost-sharing in labor agreements, establishing an irrevocable Section 115 Pension Trust (“Pension Trust”) and California Employers’ Retiree Benefit Trust (CERBT) Fund, and adopting a policy that guides financial planning of these benefits (CMR 11722 as modified by 2212-05132). The City initially contributed to the Pension Trust in FY 2017 on an ad-hoc basis, using one-time savings or excess revenues. Beginning in FY 2019, the City Council directed staff to use a more conservative discount rate as compared to CalPERS for the Normal Cost (NC) portion of the payment and transferring the supplemental funding beyond CalPERS required employer contributions to the Pension Trust. This practice was reinforced with Council approval of the Retiree Benefit Funding Policy, and as of FY 2024 the City’s NC discount rate is 5.3% as compared to CalPERS 6.8%. Additionally, one-time contributions continue to be made each year if excess revenues or unspent savings are available, subject to City Council approval. As part of policy goals, the City seeks to reach a 90% funded status by FY 2036. Every four years, the City’s Retiree Benefit Funding Policy requires that staff consult with an actuary to inform the City Council of progress the City has made towards achieving a 90% funded status goal and assess and respond to changes impacting the City’s retiree benefit plans. This comprehensive review was most recently completed in FY 2023 and resulted in several policy revisions, most notably reducing the discount rate used to calculate supplemental contributions to the Pension Trust from 6.2% to 5.3% and extending actuary reporting from 3 to 4 years to align with the CalPERS ALM Study. Additionally, the title of the policy was revised from the Pension Policy to the Retiree Benefit Policy to recognize actions approved by the City Council to proactively plan for retiree healthcare plans in a similar manner 2 City Council, November 30, 2020; Agenda Item #7; CMR 11722; https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=80990 City Council, February 6, 2023; Agenda Item #3; CMR 2212-0513; https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=82218 Item 3 Attachment D - General Fund Base Case Expense Assumptions Item 3: Staff Report Pg. 30 Packet Pg. 148 of 168 to pensions, including the use of a lower 5.75% discount rate (CMR 2212-0513 3). The most recent actuary analysis projects that the City will meet a 90% funded goal for pension plans by FY 2034 (miscellaneous plan) and FY 2036-37 (safety plan); the City’s practice of transmitting excess one-time savings will help reach these goals sooner. In this forecast, approximately $8.8 million in the General Fund in supplemental contributions to the City’s Pension Trust is assumed in FY 2027. Through FY 2026, a total of $101.8 million ($65.5 million in the General Fund) in principal contributions are expected to be made to the Pension Trust for pension benefits. Through FY 2026, it is expected that $17.5 million in principal contributions will be made to the CERBT Fund for retiree healthcare benefits. Healthcare: Consistent with the most recent labor agreements between the City and its bargaining units, the City’s contribution amounts towards medical costs for employees are based on a flat rate contribution from the City, with the employee contributing towards the remaining medical plan premium. Like salaries, healthcare costs are updated in accordance with applicable Memorandum of Agreements (MOA) between the City and its labor groups and the Management and Professional Personnel and Council Appointees Compensation Plan(s). For FY 2027, Healthcare costs are projected at $15.4 million. Workers’ Compensation: The budget appropriation for workers’ compensation includes an estimate for claims incurred and reserves for current filings at an 85% confidence level, based on actuarial studies completed by Bickmore. Actuarial estimates completed in August 2024 informed FY 2027 budget levels. More recent actuary estimates completed in August 2025 project expense levels to increase, but the allocation between the General Fund and other funds to remain consistent. Staff will continue to monitor expenditures in the fund and bring forward adjustments as necessary. Estimates for workers’ compensation increase in the forecast at rates consistent with general CPI increases. Contract Services This forecast assumes contract services of $35.7 million in FY 2027, a 3.1% increase from the FY 2026 Adopted budget of $34.6 million. This increase for FY 2027 is driven primarily by known contractual increases and a general 3% CPI cost increase on contracts that do not have defined annual increases, based on a review of the changes in the California Consumer Price Index (CCPI) in the San Francisco Bay Area from the August-to-August period. It is expected that the estimated CPI increases will be substituted with department base budget requests to adjust contract funding needs as part of the FY 2027 budget process. Contract Services - Committed Additions The Committed Additions included in this forecast account for anticipated operating and maintenance (O&M) costs in the General Fund for capital projects anticipated to come online within the ten-year forecast period. Costs for projects that came online in FY 2026 have been annualized into the ongoing General Fund operating budget as part of the LRFF. The preliminary total estimate is $52,300 for costs associated with the following projects anticipated to come online in FY 2027: Dog Park Installation (PG- 18001), Fire Station 4 (PE-18004), Library Automated Materials Handling (LB-21000), and Park Restroom Installation (PG-19000). Additional cost increases of 3.0% annually are included throughout 3 City Council, February 6, 2023; Agenda Item #3; CMR 2212-0513; https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=82218 Item 3 Attachment D - General Fund Base Case Expense Assumptions Item 3: Staff Report Pg. 31 Packet Pg. 149 of 168 the ten-year forecast based on a review of the changes in the California Consumer Price Index (CCPI) in the San Francisco Bay Area from the August-to-August period. Timing and analysis of the funding needs for these projects will be evaluated as part of the FY 2027 Budget process and development of the 2027-2031 Capital Improvement Plan (CIP). TABLE 3: FY 2027 – FY 2036 Committed Additions (Millions) FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034 FY 2035 FY 2036 $0.05 $0.05 $0.07 $0.11 $0.12 $0.12 $0.14 $0.14 $0.16 $0.17 Supplies and Materials The FY 2026 Adopted Budget for the General Fund included $3.6 million for Supplies and Materials, which is anticipated to increase by a 3.0% CPI cost increase in FY 2027 to $3.7 million based on a review of the changes in the California Consumer Price Index (CCPI) in the San Francisco Bay Area from the August-to-August period. This annual increase is adjusted to 4% starting FY 2029 through the ten- year forecast period. It is expected that the estimated CPI increases will be substituted with department base budget requests to adjust funding for supplies and materials as part of the FY 2027 budget process. General Expense This category includes costs for travel and meetings, telephone and non-city utilities, contingency accounts and reserves, bank card service charges, and subsidies and grants provided through the Human Services Resource Allocation Program (HSRAP). The FY 2026 Adopted Budget of $18.4 million is expected to decrease to $15.5 million in FY 2027, primarily reflecting a planned year over year reduction in appropriations for settlement payouts and the anticipated use of the Budget Uncertainty Reserve to balance the FY 2027 budget. This reserve was partially used to balance the FY 2026 Adopted Budget ($5.9 million), leaving funding to partially fund the anticipated gap in FY 2027 ($14.9 million). The reduction is partially offset by a 3.0% annual CPI cost increase on smaller items that do not have a set annual budget, based on a review of the changes in the California Consumer Price Index (CCPI) in the San Francisco Bay Area from the August-to-August period. It is expected that the estimated CPI increases will be substituted with department base budget requests to adjust funding for general expense items as part of the FY 2027 budget process. General Expense – Project Homekey On September 27, 2021 the City Council directed staff to apply for Project Homekey funding in conjunction with LifeMoves to build an emergency shelter at the former Los Altos Treatment Plant (LATP) site (CMR 13595 4). This project will deploy modular housing to provide interim housing opportunities for homeless individuals and families in the City of Palo Alto. Project Homekey is a program, funded by the State of California Department of Housing and Community Development, intended to provide grant funding and facilitate a partnership with the State to quickly acquire, rehabilitate, or master lease a variety of housing types. Once developed, these projects provide interim or permanent housing options for persons experiencing homelessness. The site will be operated for at 4 City Council, September 27, 2021; Agenda Item #10, Page 268; CMR 13595; https://www.cityofpaloalto.org/files/assets/public/v/6/agendas-minutes-reports/agendas-minutes/city-council-agendas- minutes/2021/09-september/20210927/210927accsm-amended-final.pdf#page=268 Item 3 Attachment D - General Fund Base Case Expense Assumptions Item 3: Staff Report Pg. 32 Packet Pg. 150 of 168 least fifteen years as interim housing per the program’s durational requirement. This project will utilize a combination of funding sources including the Project Homekey Program for capital expenses and donations, grant funds, and City support for ongoing operations expenses. This LRFF includes the City’s committed investment of $7.0 million in operating expenses ($1.0 million annually FY 2025 through FY 2031). Some operating funding support is expected from Project Homekey as well as the County of Santa Clara. Any remaining gaps in funding will need to be closed by fundraising, operating cost containment strategies, and/or grant funds. General Expense - Cubberley Lease The City and PAUSD adopted a tentative agreement between the City and PAUSD for land acquisition and amends the City’s leased portion of the Cubberley site. Although this agreement still needs to be approved by the City Council, this report assumes a lease costs for Cubberley of $2.5 million, the current lease of $2.0 million increases to $2.5 million if PAUSD vacates its leases. Future lease costs and terms beyond current agreement are subject to renegotiation between the City and PAUSD. Rents and Leases The Rents and Leases expense category for FY 2027 is estimated to increase from the FY 2026 Adopted Budget level by approximately 2.7% to $1.5 million. This is based on current lease terms that include previously negotiated lease increases. This category includes the lease agreement for Development Services staff at locations outside City Hall (285 Hamilton and 526 Bryant) as well as the lease with Stanford for El Camino Park. A new lease agreement was executed in December 2020 for the Development Services office location at 526 Bryant Street, limiting the space to the basement level (CMR 11426 5). The lease was amended in September 2022 to extend the term initially for 12 months with the right to automatically extend for four successive 12-month periods, potentially through January 31, 2028 (CMR 14713 6). In June 2021, the City entered into a seventh amendment for the Development Services office lease at 285 Hamilton Avenue to extend the term through January 2026 (CMR 12334 7). As expenses for rent for Development Services are adjusted, a corresponding revenue adjustment will be made to ensure Development Services maintains cost recovery levels. Facilities and Equipment Along with funding for various equipment needs across departments, this budget category includes subscription payments for equipment like public safety radios. The Facilities and Equipment expense category is expected to increase from the FY 2026 Adopted level of $536,000 to $552,000 due to standard inflationary adjustments. It is expected that the estimated CPI increases will be substituted with department base budget requests to adjust funding for equipment needs as part of the FY 2027 budget process. Allocated Charges Allocated Charges represent expense allocations by the City’s Enterprise and Internal Service Funds for 5 City Council, December 14, 2020; Agenda Item #5; CMR 11426; https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes-reports/reports/city-manager-reports-cmrs/year- archive/2020-2/id-11426.pdf?t=59979.32 6 City Council, September 27, 2022; Agenda Item #7; CMR 14713; https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=82035 7 City Council, June 21, 2021; Agenda Item #15; CMR 12334; https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes-reports/reports/city-manager-reports-cmrs/year- archive/2021/id-12334.pdf Item 3 Attachment D - General Fund Base Case Expense Assumptions Item 3: Staff Report Pg. 33 Packet Pg. 151 of 168 services and products they provide to other departments. The FY 2026 Adopted Budget for the General Fund included $30.7 million for these expenses, including utilities usage, general liability insurance, technology costs, vehicle equipment maintenance and replacement costs, and other charges for services provided by other City departments and funds. The FY 2027 allocated charges in the LRFF update the revenues and expenses for these various allocations based on the information available at the time of the LRFF development. FY 2027 is anticipated to experience an increase of 3.8% to a total of $32.4 million. This increase is primarily due to anticipated higher costs associated with technology services and utilities for City facilities such as water, electricity, and gas. Operating Transfers Out Operating Transfers Out include transfers from the General Fund to Debt Service Funds, the Technology Fund, and various other funds but excludes transfers to the Capital Improvement Fund, which are detailed in the following Transfer to Infrastructure section. The FY 2026 Adopted Budget included Operating Transfers Out of $6.4 million. In FY 2027, Operating Transfers Out are anticipated to remain relatively flat of $6.3 million to maintain the same service levels. Consistent with the FY 2026 Adopted Budget, a total of $2.0 million across the University Avenue, California Avenue, and Residential Permit Parking Funds is factored into this LRFF. Transfer to Infrastructure The total General Fund transfer to the Capital Improvement Fund budgeted in FY 2026 is $32.3 million compared to the $30.2 million transferred in FY 2025. This is comprised of a $14.0 million base transfer, interest earnings of $1.1 million, $14.3 million from TOT revenue generated through voter- approved rate increases and new hotels that is dedicated to the Capital Improvement Fund to support the 2014 Council Infrastructure Plan, and $2.9 million of Utility User Tax (UUT) and Measure K Business Tax transferred directly into specific capital projects, consistent with City Council direction. Looking ahead, estimated transfers from TOT revenues in FY 2027 are projected to increase to $14.9 million and the base transfer to increase to $16.1 million, along with estimated interest earnings of $1.1 million, and $2.5 million of UUT and Measure K Business Tax transferred directly into specific capital projects, for a total $34.7 million transfer to the Capital Improvement Fund. This forecast continues the goal established as part of the 2022-2026 Capital Improvement Plan (CIP) to restore the base portion of this transfer to pre-pandemic levels. This budget category also includes the separate $1.9 million transfer to the Cubberley Property Infrastructure Fund. This transfer to the Cubberley Property Infrastructure Fund supports facility systems maintenance needs at the Cubberley Community Center facility as well as capital improvement projects to maintain and upkeep the facility. Item 3 Attachment D - General Fund Base Case Expense Assumptions Item 3: Staff Report Pg. 34 Packet Pg. 152 of 168 ATTACHMENT E Assumptions Not Included in Forecast It should be noted that this forecast does not include several potential impacts to the FY 2027- 2036 LRFF that are outlined below. These items are known projects or areas of investment that are priorities but have not been fully developed in terms of costs and timelines. This is not intended to be a comprehensive list nor in any priority order. Project Homekey: Homekey Palo Alto, a modular interim housing shelter for unhoused individuals and families codeveloped by the City of Palo Alto and LifeMoves, continues to operate at the former Los Altos Treatment Plant (LATP) site. This LRFF incorporates the City’s ongoing committed investment of $7.0 million in operating expenses ($1.0 million annually for seven years). While the City's direct costs for this project are currently programmed, future fluctuations could occur over the ten-year period. Potential offsets may be available through business tax revenue specifically designated for affordable housing and homeless services that has not yet been fully allocated. Upon the completion of the initial 7-year term, the source and structure of ongoing funding remain to be determined and will be evaluated in future forecast cycles. Housing Growth Impacts: The City’s certified FY 2023-31 Housing Element 1 outlines the condition of the City’s current housing and future needs of its residents through citywide housing goals, objectives, and policies. The City is required to ensure adequate planning for its “fair share” of affordable and market rate housing, defined by its RHNA allocation of an additional 6,086 total units. The financial implications of this housing growth continue to evolve, increasing potential costs for land acquisition, planning and design, and construction, with potential offsets from new revenues such as sales tax and other economic benefits derived from more affordable housing. While significant planning has occurred, the full financial impacts, especially to the General Fund over the long term, have yet to be fully determined and incorporated into the LRFF. Geng Road Safe Parking Program: The Geng Road program, launched in early 2021 in partnership with Santa Clara County, offers recreational vehicle (RV) dwellers a safe place to park, case management, and assistance with finding permanent homes. Following the City Council's approval to expand the site at 2000 Geng Road, the program’s capacity has increased (CMR 2407-3274 2). Staff continues to work on securing funding for operations through the California Department of Housing and Community Development’s (HCD) Permanent Local Housing Allocation Program (PLHA). Even with grant funding, PLHA is not expected to fully fund the ongoing operations, and any balance of the costs may be funded by business tax revenue for affordable housing and homeless services that has not yet been fully allocated, or other sources as may be identified during the budget process. Sustainability and Climate Action Plan (S/CAP): The City continues to implement its Sustainability and Climate Action Plan (S/CAP) to meet the goal of reducing greenhouse gas (GHG) emissions to 80 percent below 1990 levels by 2030 (the “80x30” goal). Investments Item 3 Attachment E - Assumptions Not Included in Forecast 1 City of Palo Alto FY 2023-31 Housing Element, https://paloaltohousingelement.com/wp-content/uploads/2024/08/Palo-Alto-Housing-Element.pdf 2 City Council, August 19, 2024; Agenda Item #10; Staff Report #2407-3274, https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=82980&dbid=0&repo=PaloAlto Item 3: Staff Report Pg. 35 Packet Pg. 153 of 168 continue across various City funds related to S/CAP, including grid modernization, infrastructure improvements, and electrification incentives. The S/CAP Work Plan provides a roadmap for these efforts, and the City has accounted for known capital projects and programmatic needs in its forecasts. However, uncertainties related to external factors, technological advancements, and the pace of adoption could impact the scope and scale of work needed to achieve the City’s long-term sustainability goals. These unknowns are not fully reflected in this forecast. Significant Code and Ordinance Updates: Updates to several significant programs, codes, and ordinances continue to be necessary. Key initiatives include Seismic Inventory Ordinance and Program Development, Historic Building Survey and Ordinance Development, Zoning Code Updates, and the implementation of the 2040 Comprehensive Plan. While some costs associated with these updates were included in the forecast, additional resources may be required depending on future Council direction and the extent and pace of implementation efforts. Fee and Organizational Studies: The City regularly conducts comprehensive cost allocation plans and municipal fee studies to ensure fees align with cost recovery policies. Following the implementation of recommendations from the FY 2025 study, staff continues to evaluate and bring forward adjustments to align fees with target cost recovery levels to cover general salary and benefits increases and CPI trends. These efforts aim to improve fee transparency and ensure equitable cost distribution across City services. Future adjustments based on subsequent studies are not fully factored into the outer years of this forecast. Labor Negotiations: In FY 2025, the City successfully negotiated new labor agreements with most bargaining units, extending terms through December 2027 (SEIU) and June 2028 (IAFF, UMPAPA). Consistent with Council direction in previous LRFFs, a general 2% assumption is included for all employees in the years following the expiration of these agreements for forecasting purposes; this is not a commitment to future negotiations. Additionally, this forecast includes a level of reserve for potential changes in employee compensation in future agreements for competitive wages and other terms of employment. Actual funding needs may differ, depending on outcomes of future labor negotiations. Grade Separation: The grade separation project consists of at-grade crossings along the Caltrain corridor in the City of Palo Alto. The City continues to advance the project through the Preliminary Engineering and Environmental Documentation (PE&ED) Phase (CMR 2404-2861 3). Currently, staff is working with the Valley Transportation Authority (VTA) and Caltrain to allocate Measure B funding. As Grade Separation funding requires matching local funds, additional funding sources will need to be identified to perform this work in upcoming years. Additional resources will need to be explored to plan and fund these grade separations, including City staff pursuing additional funding through grant opportunities and other financing mechanisms. Parks Master Plan: The Parks, Trails, Natural Open Space and Recreation Master Plan 4 presents a long-term vision for the system. While potential funding mechanisms have been identified for several high-priority projects and programs, a strategy to fund implementation of the entire 3 City Council, June 17, 2024; Staff Report #2404-2861, https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=82900 4 The Parks, Trails, Natural Open Space and Recreation Master Plan, 2017; https://www.cityofpaloalto.org/files/assets/public/public-works/palo-alto-parks-master-plan.pdf Item 3 Attachment E - Assumptions Not Included in Forecast Item 3: Staff Report Pg. 36 Packet Pg. 154 of 168 plan has not been completed. As such, this forecast does not yet contemplate the necessary investments to fully execute this plan. City-owned Assets Operated by Non-profit Organizations: This Forecast does not include any additional capital or operating investments for the Avenidas Senior Center, the Ventura Childcare Center, nor the Sea Scout Building. As costs around potential capital or operating investments for these assets solidify, staff will return to City Council to address them as appropriate. The Roth Building Rehabilitation continues to proceed under its funding strategy; however, if costs for rehabilitating the facility further increase, additional sources of funding would need to be identified. Cubberley Community Center Redevelopment: Following the City Council's approval (CMR 2409- 3500 5) of the MOU with PAUSD for the Cubberley Site purchase and lease, the LRFF includes the revised lease financial terms and maintains the Real Estate Investment Reserve. This reserve funds critical professional service contracts (i.e., master plan, community outreach) and serves as a placeholder for future real estate investment appropriations. However, the LRFF does not reflect any potential General Obligation bond cashflow or future operating costs and repairs for a redeveloped site, as these fiscal impacts will be informed by the ongoing development of operational and financial models. Loans for Special Projects: From time to time the City’s General Fund will assist other City operations with modest cash flow loans to bridge fiscal years. As parking continues to be impacted by long-term shifts in demand, additional support or loans from the General Fund to the parking funds may be required. This LRFF assumes repayment revenue to the General Fund from previous parking loans in the outer years of the forecast. Staff will continue to review costs in the parking funds and revise funding needs and evaluate support as a loan or subsidy from the General Fund as part of the annual budget process. Legislative Updates: Various actions at the state and federal level that could impact the City of Palo Alto have not been incorporated into this forecast due to the changing context and uncertainty of the quantitative impacts of potential legislative changes. As the potential impacts of various legislative initiatives are clarified, appropriate adjustments will be identified and brought forward as part of future budget development cycles. Aging or Noncompliant Infrastructure: The City maintains indoor and outdoor facilities, many of which have been identified in the City’s ADA transition plan and by the Infrastructure Blue Ribbon Commission as requiring capital project work to bring them up to full ADA compliance and/or sufficient conditions. Staff continues the program work needed in this area as part of the Americans with Disabilities Act Compliance capital project; however, the entire scope of work needed in this area exceeds current resources. General Liability Umbrella Excess Premiums: The City’s General Liability Program provides funding to cover various insurance policies for City-owned equipment and machinery. General Liability Umbrella Excess Premiums are anticipated to increase in future years due to significant national events and natural disasters. Staff will bring forward adjustments for these costs as part of future budget cycles as they become available. Fire and Ambulance Service Expansion: Staff continues to analyze options for fire and Item 3 Attachment E - Assumptions Not Included in Forecast 5 City Council, October 7, 2024; Agenda Item #AA1; Staff Report #2409-3500, https://recordsportal.paloalto.gov/Weblink/DocView.aspx?id=83032&dbid=0&repo=PaloAlto Item 3: Staff Report Pg. 37 Packet Pg. 155 of 168 ambulance service expansion. Any funding, appropriation, and labor negotiation related to such expansion will be guided by future City Council direction, and as such is not incorporated into the LRFF at this time. Fire Training Center: The City continues to evaluate options for the Fire Training Facility Replacement capital project, including identifying an appropriate site or partnering with other local jurisdictions. Funding for construction has not been fully appropriated, and additional resources will need to be identified in future budget cycles based on the results of ongoing studies and consultant engagements. Limited Term Programs: There are several programs currently in progress that are funded on a limited term basis per Council approval. If these programs are recommended to continue through the ten-year forecast period, additional resources would be needed. These include the Psychiatric Emergency Response Team (PERT) program and the Palo Alto Link on-demand transit service, which rely on a mix of City funding, grants, and partner contributions that may require renewal or backfill in future years. Vehicle Fleet Electrification: Currently the City’s policy is to consider electric vehicles and then other alternative fuel vehicles when replacing existing vehicles. Transitioning the vehicle fleet to full Electric Vehicles (EVs) is part of the City’s sustainability goals. It has been estimated that significant additional funding across all funds will be needed annually in order to replace all City vehicles with EVs. Green Storm Infrastructure (GSI) Maintenance: The City is subject to the requirements of the Municipal Regional Stormwater National Pollutant Discharge Elimination System Permit. The City expects to have significantly more Green Stormwater Infrastructure (GSI) and associated maintenance in the coming years to comply with permit provisions. The long-term cost of this maintenance is still being quantified and is not fully reflected in this forecast. Item 3 Attachment E - Assumptions Not Included in Forecast Item 3: Staff Report Pg. 38 Packet Pg. 156 of 168 Finance Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: Administrative Services Meeting Date: December 2, 2025 Report #:2412-3921 TITLE Accept the Fiscal Year 2026 First Quarter Financial Status Report RECOMMENDATION Staff recommend the Committee review and accept the Fiscal Year 2026 First Quarter Financial Status Report. EXECUTIVE SUMMARY The purpose of this report is to provide the City Council with information on the financial status of the City’s General Fund and Enterprise Funds as of the end of the first quarter of Fiscal Year (FY) 2026 (July 1, 2025, through September 30, 2025). The figures presented in this report are unaudited. For the first quarter, General Fund revenues totaled $33.5 million, or 7.9% higher than the same period of the prior fiscal year. First quarter General Fund receipts are not indicative of the annual expected receipts in FY 2026 due to the timing of major revenues received over the fiscal year. Expenditures totaled $65.3 million, 1.5% higher than the prior year and tracks 22.7% of the Adjusted Budget. All Enterprise Funds, except Airport Fund, resulted in a positive change in net position. The total change in position increased by $0.7 million, or 2.0%, higher than the same period of the prior fiscal year. BACKGROUND This report summarizes the financial information of the General and Enterprise Funds for the first quarter ending September 30, 2025, of FY 2026 and compares those amounts to the same period of the prior fiscal year and to the FY 2026 Adjusted Budget. Attachment A provides a breakdown of revenues by source and expenses by function, with separate columns for Adopted Budget and Adjusted Budget. The Adjusted Budget column includes prior year commitments that were carried forward into this fiscal year and Item 4 Item 4 Late Packet Report Item 4: Staff Report Pg. 1 Packet Pg. 157 of 168 amendments to the FY 2026 Adopted Budget through September 30, if any. Encumbrances and actual expenditure for the three months are also reported. ANALYSIS GENERAL FUND th. Although sales tax increased by close to 9% in the first quarter compared to the same period in prior year, the City has experienced an overall sales tax decline over the past twelve months. In the quarter ending June 30, 2025, leasing, which represents 12.7% of the City’s total sales tax, decreased by 41.6%. As discussed with the Finance Committee on November 18, 20251 and in the FY 2027 to 2036 Long Range Financial Forecast, sales tax is projected to decline by approximately $8 million to $9 million in FY 2026. Revenue Highlights for First Quarter FY 2026 2. 1 Finance Committee, November 18, 2025, Item #2: https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=16320 2 November 18, 2025 Finance Committee Action Minutes Item 4 Item 4 Late Packet Report Item 4: Staff Report Pg. 2 Packet Pg. 158 of 168 Table 1 Sales Tax cash receipts totaled $2.8 million for the first quarter. This represents one month’s sales tax activity due to the two-month delay between sales tax collection by the State and remittance to the City. The FY 2026 Sales Tax performance is expected to decline and fall below budgeted levels. The FY 2025 actual sales tax revenue was $35.2 million, $2.3 million or 6.5% higher than FY 2024. The FY 2026 budget amount is $36.4 million, 3.4% higher than the prior year’s actual revenue. Sales tax performance is expected to decrease in the current year with several key sectors showing year-over-year declines. The business-to-business and transportation sectors are the primary drivers of this downturn, reflecting changes in local activity and broader shifts in the State’s allocation methodology. These conditions indicate that FY 2026 revenues will fall below the adopted budget, with an estimated one-time reduction of $8.0 to $9.0 million, followed by an approximate ongoing $5.0 million decrease in the underlying base. Property Tax in the first quarter of the fiscal year is the typical nominal amount, as property tax receipts are mostly paid by the County over three months beginning in the month of November and then again beginning in March. FY2025 actuals are $3 million or 4.6% over the prior fiscal year, primarily driven by a change in assessed values due to ownership change in FY 2025, plus the expected 2% Proposition 13 overall annual increase in FY 2026. The FY 2026 Adopted Budget is $73.6 million, $4.2 million higher than the prior year’s actual revenue and $5 million higher than the FY 2025 adjusted budget. The FY 2026 updated forecast anticipates a $1.3 million or 1.7% decrease and reflects the County’s most recent estimates. Receipts for November will be reviewed; staff will recommend adjustments to this revenue, if needed, during year Mid-Year Budget Review. Item 4 Item 4 Late Packet Report Item 4: Staff Report Pg. 3 Packet Pg. 159 of 168 Educational Revenue Augmentation Fund (ERAF) distributions from the County of Santa Clara were $5.6 million, $6.6 million, $6.4 million, $7 million, and $7.1 million in fiscal years 2021 through 2025, respectively. In November 2021, Santa Clara County informed cities that the California School Boards Association had sued the State Controller over the distribution of ERAF funds. The case was resolved favorably; however, two new risks have emerged. The first stems from the State Controller’s audit on Marin County’s ERAF methodology, which also applies to Santa Clara County, and asserts that former Redevelopment Agency funds, now part of regular property taxes, should be excluded from the excess ERAF calculation. Both Marin and Santa Clara counties have filed lawsuits challenging this finding. If upheld, an estimated 18% to 22% of excess ERAF from FY 2021 through FY 2025, and potentially future years, may be at risk. To mitigate this risk, the City established a reserve for potential ERAF losses, with a balance of $7.1 million as of June 30, 2025. The City continues to monitor these developments and will update financial assumptions as new information becomes available. Transient Occupancy Tax (TOT) cash receipts for about one and a half months totaled $3.2 million, or 10.9% of the FY 2026 Adopted Budget, and are $0.8 million, or 19.9%, decrease from prior fiscal year receipts for the same period. This decrease is primarily due to the timing of hotel remittances rather than underlying economic changes. During the first two months of the fiscal year, hotels reported an average daily room rate of $225.86 and an occupancy rate of 82.3%, compared to $238.76 and 70.2% in the prior fiscal year. TOT receipts have grown at a compound annual growth rate (CAGR) of 9.3% over the past five years and 5.7% over the past ten years, reflecting a rebound from pandemic lows and overall sustained recovery in the local hotel market. Documentary Transfer Tax cash receipts for two-and-a-half months total $2.1 million, or 25.1% of the FY 2026 Adjusted Budget, and are $0.6 million, or 43.3%, increase over prior year receipts for the same period due to the higher total property sales value. The number of transactions is 2.0% higher compared to the prior fiscal year's first quarter. This revenue source is volatile; it is highly dependent on sales volume and the mix of commercial and residential sales. Staff continue to monitor these receipts closely due to significant fluctuations that can occur anytime, depending on the real estate sales activity. The budgeted amount of $8.5 million, which is 1.8% higher than the actual receipts of the prior year, is still expected to be realized. Utility User Tax (UUT) revenue totals $4.5 million, or 21.3% of the FY 2026 adjusted budget and is $1 million, or 5.1% than the prior year’s actuals. This is $0.1 million, or 1.8%, consistent with the prior fiscal year’s receipts. Business Tax revenue in the first quarter of the fiscal year is a nominal amount as businesses are required to file business tax quarterly, but it is due on the first day of the following at the end of each quarter. For example, the quarterly tax for the July-September period is due October 1st and is delinquent 30 days later. The FY 2026 Adjusted Budget includes $6.7 million for business tax revenue. The tax became effective in January 2023 at half of the full rate, or Item 4 Item 4 Late Packet Report Item 4: Staff Report Pg. 4 Packet Pg. 160 of 168 3.75 cents per square foot per month. The full rate of 7.5 cents per square foot per month became effective in January 2025, making FY 2026 the first fiscal year reflecting the full rate. The tax has an annual cap of $0.5 million per business, and both the rate and the cap are increased by 2.5% annually beginning FY 2027. Charges for Services increased by $2.1 million, or 34.2% compared to the same period of the prior fiscal year. The growth was primarily driven by a timing difference in the recognition of Golf Course revenue in the prior year, the introduction of the new First Responder Fee in FY 2026, higher Paramedic fee rates and transport volumes, and greater demand for zoning plan check services related to new construction projects across the City- including the multifamily apartment development at 3150 El Camino Real, as well as the higher community program drop-in admission. All Other Revenue Sources increased primarily due to timing differences, including the earlier receipt of the Motor Vehicle In-Lieu Tax, which in FY 2025 was received in December 2024, the Stanford billing for Silicon Valley Regional interoperable communications for public safety, and the higher rental income resulting from annual rate adjustments Expenditure Highlights for First Quarter FY 2026 Table 2 Expenditures FY 2026 FY 2025 Inc/(Dec) % change FY 2026 % FY 2025 % Police 15,108$ 15,500$ (392)$ -2.5% 57,713$ 26.2% 56,365$ 27.5% Fire 14,867 14,550 317 2.2% 59,504 25.0% 55,441 26.2% Community Services 10,086 10,136 (50) -0.5% 44,786 22.5% 42,300 24.0% Public Works 6,596 5,977 619 10.4% 28,753 22.9% 27,190 22.0% Planning and Development Services 5,686 5,425 261 4.8% 29,336 19.4% 29,009 18.7% Library 3,370 3,230 140 4.3% 13,085 25.8% 12,840 25.2% Administrative Services 2,716 2,843 (127) -4.5% 12,039 22.6% 12,154 23.4% All Other Departments 6,838 6,649 189 2.8% 42,176 16.2% 45,417 14.6% Total Expenditures 65,267$ 64,310$ 957$ 1.5% 287,392$ 22.7% 280,716$ 22.9% General Fund Expenditures FY 2026 1st Quarter YTD (000's) 1st Quarter Actuals Adjusted Budget Item 4 Item 4 Late Packet Report Item 4: Staff Report Pg. 5 Packet Pg. 161 of 168 For the first quarter, total expenses increased modestly by $0.9 million, or 1.5%, compared to the same quarter in the prior year, consistent with the adjusted budget at 22.7%. This increase primarily reflects higher salary and benefit costs, including the 2.5-3.0% cost-of-living adjustment for all labor groups effective July 1, 2025; flexible compensation options; rising health premium costs; and the filling of previously vacant positions. These increases were partially offset by lower employer pension and medical costs resulting from actuarial adjustments in the June 30, 2023, CalPERS valuation, which reduced the City’s required FY 2026 contributions. Lower pension costs reflect the shift to expensing only Normal Costs to departments and allocating flat-dollar Unfunded Actuarial Liability (UAL) on a quarterly, actuals basis rather than in a single adjustment at year-end. Also, the lower medical cost reflects the FY 2025 year-end reclassification of the employee portion ($1 million) back to the departments. Public Works expenditures increased $0.6 million, or 10.4%, primarily due to higher contract services costs. The increase in contract services is attributable to the expanded tree maintenance work and the interim security services at the Municipal Service Center (MSC). Police and Fire accounted for 45.9% of total General Fund expenditure in the first quarter, consistent with the prior year. Item 4 Item 4 Late Packet Report Item 4: Staff Report Pg. 6 Packet Pg. 162 of 168 Table 3 Police overtime remains consistent with the prior year and accounts for 23.7% of the adjusted budget due to improved recruitment efforts. As of the end of the first quarter of FY 2026, the Department had 13 vacancies, representing 9% of its 139 authorized FTEs- 11 police officer positions and 2 dispatchers. The Police Department utilizes overtime to cover staffing gaps resulting from vacancies, training, leaves of absence, and to meet infrequent increases in demand, such as major incidents or accidents. Most overtime is attributed to staffing police officer positions. Currently, 60 non-management police officers are available for duty, representing 71% of the authorized 84 positions. In addition to the vacancies noted above, 9 officers are unavailable due to long-term injuries or approved leaves, and 4 are attending the police academy or field training. An analysis is included in Attachment B. Fire overtime results from filling shift vacancies. The department requires 25 daily positions to keep fire engines and ambulances fully staffed. Any vacancy due to open positions, injury leave, training, or other absences must be covered to maintain operations. In the first quarter of FY 2026, there were 10 vacant positions and 7 employees on injury leave, like FY 2025 first quarter. Overtime costs were lower mainly because there were fewer State Strike Team deployments, compared to the 8 incidents in FY 2025 first quarter that incurred overtime pay. An analysis is included in Attachment B. Expenditures FY 2026 FY 2025 % change FY 2025 % Inc (Dec) Police - Salaries $5,568 $5,477 1.7% $24,338 23,793 23.0% Police - Overtime 1,085 1,057 2.6% 4,574 5,868 18.0% Total Police 6,653 6,534 1.8% 28,912 29,661 22.0% Fire - Salaries 5,351 4,840 10.6% 22,924 21,628 22.4% Fire - Overtime 1,373 1,716 -20.0% 3,080 2,721 63.1% Total Fire 6,724 6,556 2.6% 26,004 24,349 26.9% Total Public Safety Salaries & Overtime 13,377$ 13,090$ 2.2% 54,916$ 54,010$ 24.2%24.4% 23.3% 44.6% 25.9% 22.9% 23.7% 23.0% 1st Quarter Actuals Adjusted Budget FY 2026 % Police and Fire Salaries and Overtime Expense FY 2026 1st Quarter YTD (000's) Item 4 Item 4 Late Packet Report Item 4: Staff Report Pg. 7 Packet Pg. 163 of 168 The BSR ended FY 2025 at $58.9 million, but after adjusting the BSR for FY 2026 additions approved by Council, the net BSR balance is $58.8 million or $2.0 million above Council’s 18.5% BSR target level. The FY 2025 savings in salary & benefit, contracts services and other expenses contributed to this higher BSR. Staff recommend that the $2.0 million above the 18.5% BSR target level be kept in BSR for future budget balancing strategy and projected FY 2027 budget shortfall and ensure the City maintains high quality service level. Consistent with current practice, any budget actions to allocate the BSR funds above the 18.5% target level will be included in the FY 2026 Mid-Year Review (February 2026). Enterprise Funds Table 4 Water Fund increased $1.9 million, or 38.3%, compared to the prior fiscal year. This change was primarily due to a $1.7 million increase in operating revenues, mainly from customer sales, and a $0.2 million decrease in operating expenses. The increase in customer sales resulted from 10.0% overall rate increase for residential and commercial customers, effective July 1, 2025. Operating expenses decrease primarily due to lower salaries and benefits and contract services. Increase Funds FY 2026 FY 2025 (Decrease)% Change Water 6,802$ 4,918$ 1,884$ 38.3% Electric 12,437 18,077 (5,640)-31.2% Fiber Optic 58 316 (258)-81.6% Gas 731 (776)1,507 194.2% Wastewater Collection 1,951 998 953 95.5% Wastewater Treatment 8,664 6,779 1,885 27.8% Refuse 3,265 2,926 339 11.6% Storm Drainage 523 429 94 21.9% Airport (280)(183)(97)-53.0% Total Change in Net Position 34,151$ 33,484$ 667$ 2.0% Enterprise Funds Change in Net Position FY 2026 1st Quarter YTD 1st Quarter Actuals (000's) Item 4 Item 4 Late Packet Report Item 4: Staff Report Pg. 8 Packet Pg. 164 of 168 Electric Fund decreased by $5.6 million, or 31.2%, compared to the same period in prior fiscal year. In FY 2025, operating expenses increased by $13.4 million compared to prior year, which was offset by a $7.5 million increase in operating revenues. The increase in operating revenues was due to a 6.0% electric rate adjustment effective July 1, 2025 and higher commercial usage. The operating expenses increase was due to higher commodity costs, as Resource Adequacy (RA) purchase prices were significantly higher than in the prior year. Western Power purchase costs also increased as the contract transitioned into a high-cost year within its multi-year power revenue requirement cycle. In addition, Central Valley Project Improvement Act (CVPIA) Restoration Fund charges increased from $1.7 million in FY 2025 to $3.3 million in FY 2026 under the updated contract. Gas Fund increased by $1.5 million or 194.2%, compared to the same period in the prior fiscal year. Operating revenues increased, driven primarily by higher customer sales. This reflects the 5.0% gas rate adjustment effective July 1, 2025, coupled with increased consumption. In addition, the rate of return payment to the General Fund decreased by $0.3 million, which further contributed to the net increase in the fund balance for the period. Operating expenses increased by $0.3 million, reflecting higher contract services and commodity purchases associated with the rise in commercial usage. Wastewater Collection Fund increased by $1.0 million or 95.5%, compared to the same period in the prior fiscal year. Operating revenues increased by $1.4 million, driven primarily by higher customer sales resulting from the 20.0% rate adjustment for residential and commercial customers effective July 1, 2025. Operating expenses increased by $0.3 million, reflecting the fund’s higher allocated share of wastewater treatment costs paid to the Regional Water Quality Control Plant (RWQCP). These costs include RWQCP’s operating requirements, debt service obligations, capital improvement project funding, and depreciation. Wastewater Treatment Fund increased by $1.9 million or 27.8%, compared to the same period in the prior fiscal year. Operating revenues increased by $2.5 million, driven primarily by the recovery of rising operating and maintenance costs from partner agencies and the timing of billings. This includes a $7.1 million advance billing to the City of Mountain View for the Advanced Water Purification Project and a $1.1 million billing to Valley Water for first-quarter expenses. The increase in revenues also reflects standard cost-recovery allocations across the six partner agencies, with Mountain View representing the largest share. Operating revenues were impacted in this period relative to FY 2025 due to timing differences related to the Joint Intercepting Rehabilitation Project advance billing and accelerated second-quarter billings that were recognized in the prior fiscal year. Operating expenses increased by $0.7 million, reflecting higher contract services, increased supplies and materials, and higher indirect charges. Item 4 Item 4 Late Packet Report Item 4: Staff Report Pg. 9 Packet Pg. 165 of 168 FISCAL/RESOURCE IMPACT STAKEHOLDER ENGAGEMENT ENVIRONMENTAL REVIEW ATTACHMENTS APPROVED BY: Item 4 Item 4 Late Packet Report Item 4: Staff Report Pg. 10 Packet Pg. 166 of 168 CITY OF PALO ALTO GENERAL FUND FIRST QUARTER FINANCIAL REPORT FISCAL YEAR ENDING JUNE 30, 2026 (in thousands) BUDGET ACTUALS (as of 9/30/2025) Adopted Adjusted Pre % of Adj Categories Budget Budget Encumbr Encumbr Actual Budget* Revenues & Other Sources Sales Tax 36,377 36,377 - - 2,809 7.7% Property Tax 73,627 73,627 - - 87 0.1% Transient Occupancy Tax 29,139 29,139 - - 3,162 10.9% Documentary Transfer Tax 8,542 8,542 - - 2,148 25.2% Utility Users Tax 21,437 21,437 - - 4,565 21.3% Business Tax 6,488 6,738 - - 138 2.1% Other Taxes and Fines 780 780 - - 275 35.3% Charges for Services 44,293 44,209 - - 8,277 18.7% Permits & Licenses 10,671 10,705 - - 2,557 23.9% Return on Investment 3,742 3,742 - - 857 22.9% Rental Income 16,448 16,448 - - 3,789 23.0% From Other Agencies 1,830 1,921 - - 756 39.4% Charges To Other Funds 15,547 15,547 - - 3,919 25.2% Other Revenues 785 785 - - 131 16.7% Total Revenues 269,706 269,997 - - 33,473 12.4% Operating Transfers-In 31,459 31,459 - - 7,865 25.0% Encumbrances and Reappropriation 12,203 25,934 - - - 0.0% Total Sources of Funds 313,369 327,390 - - 41,338 13.7% Expenditures & Other Uses City Attorney 5,094 5,855 15 1,081 1,288 40.7% City Auditor 995 1,412 2 283 38 22.9% City Clerk 1,542 1,609 18 240 373 39.2% City Council 550 589 0 80 126 35.0% City Manager 5,356 5,514 25 148 1,472 29.8% Administrative Services 11,831 12,039 23 281 2,716 25.1% Community Services 43,495 44,786 3,328 4,542 10,086 40.1% Fire 59,966 59,504 46 693 14,867 26.2% Human Resources 5,655 5,318 27 85 1,402 28.5% Library 12,925 13,085 120 784 3,370 32.7% Office of Emergency Services 1,728 2,091 - 325 403 34.8% Office of Transporation 3,464 3,850 0 338 666 26.1% Planning and Development Services 24,768 29,336 38 4,305 5,686 34.2% Police 58,243 57,713 10 914 15,108 27.8% Public Works 25,662 28,753 73 7,468 6,596 49.2% Non-Departmental 12,173 15,678 100 413 1,068 10.1% Total Expenditures 273,449 287,134 3,824 21,980 65,267 31.7% Operating Transfers-Out 6,383 6,383 - - 1,596 25.0% Transfer to Infrastructure 33,057 33,328 - - 8,264 24.8% Total Use of Funds 312,889 326,845 3,824 21,980 75,127 30.9% Net Change to BSR 479 545 (33,789) BSR Balance, FY 2025 58,865 58,865 Less: Reserve for BT Transport & Housing (258) (258) FY2026 Amendments 66 BSR Balance, FY 2026 59,086 59,152 BSR % of Adopted Total Use of Funds 19.3% 19.3% ATTACHMENT A Item 4 Attachment A - FY 2026 First Quarter Financial Report Item 4: Staff Report Pg. 11 Packet Pg. 167 of 168 Attachment C 2024 2025 2026 Q1 POLICE DEPARTMEN Overtime Expens Adopted Budget (A)$1,028,988 $1,098,939 $1,173,110 Modified Budget (B)1,028,988 1,098,939 1,173,110 Net Overtime Cost - see below 1,160,290 1,868,684 250,569 Variance to Budget (131,303) (769,745) 922,541 Overtime Net Cos Actual Expense $3,467,691 $3,181,061 $1,084,887 Less Reimbursements Other Program Reimbursements 259,747 - 310,499 California OES/FEMA (Strike Teams) - - - Stanford Communications 99,161 109,651 23,952 Utilities Communications Reimbursement 56,429 67,170 13,801 Local Agencies (C)6,574 6,813 2,685 Police Service Fees 117,433 138,141 23,738 Total Reimbursements 539,345 321,775 374,674 Less Department Vacancies (A)1,768,057 990,602 459,644 Net Overtime Cost $1,160,290 $1,868,684 $250,569 Department Vacancies (number of days)5,419 2,733 1,101 Workers' Compensation Cases 21 13 2 Department Disabilities (number of days)381 664 265 FIRE DEPARTMEN Overtime Expens Adopted Budget (D)$2,146,234 $2,721,066 $3,079,691 Modified Budget (E)2,146,234 5,216,682 3,079,691 Net Overtime Cost - see below 1,734,841 3,474,470 1,166,191 Variance to Budget 411,393 1,742,212 1,913,499 Overtime Net Cos Actual Expense $4,099,233 $5,288,738 $1,373,447 Less Reimbursements California OES/FEMA (Strike Teams) - 957,482 107,417 Fire Station 8 Fire Services 272,267 57,315 Total Reimbursements - 1,229,749 164,732 Less Department Vacancies (D)2,364,392 584,519 42,524 Net Overtime Cost $1,734,841 $3,474,470 $1,166,191 Department Vacancies (number of days)5,297 3,401 361 Workers' Compensation Cases 8 16 6 Department Disabilities (number of days)274 395 137 NOTES: (A)The FY 2026 Police Department budget did not include any new positions. (B)Police Department adopted budget has not been adjusted in FY 2026. (C)Includes Animal Control Services contract with Los Altos and Los Altos Hills. (D)The FY 2026 Fire Department budget was increased by 3.0 Fire Captains and 7.0 Single Role EMS Division positions. (E)Fire Department adopted budget has not been adjusted in FY 2026. Public Safety Departments Overtime Analysis for Fiscal Years 2024 through 2026 Item 4 Attachment B - Public Safety Overtime Analysis Q1 2026 Item 4: Staff Report Pg. 12 Packet Pg. 168 of 168