HomeMy WebLinkAbout2026-04-14 Policy and Services Committee Agenda PacketPOLICY AND SERVICES COMMITTEE
Regular Meeting
Tuesday, April 14, 2026
Council Chambers & Hybrid
6:00 PM
Policy and Services 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/94618744621)
Meeting ID: 946 1874 4621 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@PaloAlto.gov 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. Multiple individuals who wish to speak on
the same item may designate a spokesperson. Spokespersons must be representing five or more
verified individuals who are present either in person or via zoom. Spokespeople will be allowed
up to 10 minutes, at the discretion of the presiding officer. Speaking time may be reduced if the
presiding officer reduces the speaking time for individual speakers.
PowerPoints, videos, or other media to be presented during public comment are accepted only
by email to city.clerk@paloalto.gov 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 April 14, 2026
Materials related to an item on this agenda submitted to the Board after distribution of the agenda packet are available for
public inspection at www.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.Update, Discussion, and Potential Feedback on Bill Positions Regarding State and Federal
Legislation, Executive Orders and Other Regulatory and Funding Activity. CEQA Status:
Not a Project.
2.Office of the City Auditor Presentation of the City of Palo Alto Utility Reserves Advisory
Report. CEQA Status: Not a Project.
3.Update on Citywide Development Impact Fee Nexus and Housing Feasibility Study. CEQA
Status: Exempt under CEQA Guidelines Section 15378. Late Packet Report Added
FUTURE MEETINGS AND AGENDAS
Members of the public may not speak to the item(s)
ADJOURNMENT
2 April 14, 2026
Materials related to an item on this agenda submitted to the Board after distribution of the agenda packet are available for
public inspection at www.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@PaloAlto.gov.
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: 946-1874-4621 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@PaloAlto.gov. Requests for assistance or
accommodations must be submitted at least 24 hours in advance of the meeting, program, or
service.
3 April 14, 2026
Materials related to an item on this agenda submitted to the Board after distribution of the agenda packet are available for
public inspection at www.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 April 14, 2026
Materials related to an item on this agenda submitted to the Board after distribution of the agenda packet are available for
public inspection at www.paloalto.gov/agendas.
Policy & Services Committee
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: City Manager
Meeting Date: April 14, 2026
Report #:2512-5784
TITLE
Update, Discussion, and Potential Feedback on Bill Positions Regarding State and Federal
Legislation, Executive Orders and Other Regulatory and Funding Activity. CEQA Status: Not a
Project.
RECOMMENDATION
Staff recommends that the Policy and Services Committee receive an update on the City’s
advocacy efforts, provide feedback on pending state and federal legislation, specifically AB 1821,
SB 1159, AB 1557, AB 2346, AB 2517, SB 1167, and SB 922.
BACKGROUND
As part of the City’s Federal and State legislative advocacy program, staff and Townsend Public
Affairs (TPA), the City’s legislative advocates, work to identify and analyze potentially impactful
legislation and communicate the City’s interests to legislators. The Policy and Services Committee
receives regular updates from Townsend Public Affairs (TPA), the City’s legislative advocates. This
item is an opportunity for the Committee to learn about prominent topics and proposed
legislation and provide feedback on legislative actions.
The City’s advocacy program is guided by the Advocacy Process Manual1 and a set of City Council-
approved Legislative Guidelines2. The guidelines provide direction to staff and Townsend Public
Affairs on issues important to the City Council and other emerging legislative issues. In
consultation with the Mayor and the Policy and Services Committee Chair, staff use the guidelines
to respond to legislative affairs throughout the year. The guidelines allow for flexible and prompt
responses to emerging issues in the fast-paced legislative environment without returning to the
1 Advocacy Process Manual: https://www.paloalto.gov/files/assets/public/v/2/intergovernmental-
affairs/advocacy-process-manual-2025.pdf
2 2026 Federal and State Legislative Guidelines: https://www.paloalto.gov/files/assets/public/v/2/city-
manager/legislation/2026-legislative-guidelines.pdf
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City Council each time an issue arises. Legislative items with formal City action are posted on the
Intergovernmental Affairs5 page.
ANALYSIS
Federal Items
Issue Summary City
Position
Status
5 Intergovernmental Affairs: https://www.paloalto.gov/Departments/City-Manager/City-Policy-
Initiatives/Intergovernmental-Affairs
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Grass Athletic Field Pilot Program
($2.2M), Cubberley Community Center
Acquisition ($2M)
appropriations
process
progresses.
State Items
The table below shows bills that the City has taken a position on and bills on which staff is
requesting Committee feedback. Upon receiving Committee input, staff will coordinate with
relevant City departments and Townsend on position letters. Attachment B includes all bills that
the City is monitoring through TPA.
Issue Summary City Position Status
AB 1708:
Homeless
Housing
Assistance and
Prevention
program
AB 1708 creates a new opportunity for
all cities to access the state’s flagship
homelessness grant program, the
Homeless Housing, Assistance, and
Prevention (HHAP) Grant program.
Support In committee:
hearing
postponed by
committee
SB 762:
Transactions and
Use Tax
SB 762 would authorize Palo Alto, among
other jurisdictions, to exceed the
statewide sales and use tax rate cap
subject to voter approval. If approved by
voters, the tax would help fund land
purchase and renovations at Cubberley
Community Center and general
government operations.
Support Passed Senate
Committees
and ordered to
the Assembly.
AB 2576:
Transit-oriented
development
AB 2567 would delay implementation of
all SB 79 operative dates by one year.
One piece of particular interest is
modifications for historic exemptions.
This bill would define “historic resource”
to mean a historic resource listed on a
local, state, or national historic register,
and would remove the limitation on the
exclusion of sites with a historic resource
to 10% of the eligible area of a transit-
oriented development zone.
Support letter
in progress le
Re-referred to
Committee on
Housing and
Community
Development
AB 1821:
California Public
Records Act:
fees and agency
response time
AB 1821 would require requesters
(except journalists and education or
noncommercial scientific institutions)
submitting a Public Records Act request
exceeding 2 hours of search time or
multiple requests totaling of 10 hours of
Pending
Committee
and staff
feedback.
Recommend
support.
Re-referred to
Committee on
Judiciary.
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search time per month to pay reasonable
fees to compensate for the
administrative time. It also changes the
required response time from 10 calendar
days to 10 business days.
SB 1159:
Artificial
Intelligence:
transparency
and governance
This bill excludes artificial intelligence
systems, autonomous agents, and bots
from the definition of those who may
engage with government agencies under
acts like the Brown Act, Political Reform
Act, and Public Records Act.
Pending
Committee
and staff
feedback.
Recommend
support.
Set for hearing
on April 6.
AB 1557:
Vehicles: electric
bicycles
This bill redefines the classification of
electric bicycles and prohibits
manufacturers and retailers from
labeling products that don’t meet the
new classifications as electric bikes and
imposes fines for violators.
Pending
Committee
and staff
feedback.
Recommend
support
Re-referred to
Committee on
Transportation.
AB 2346:
Vehicles: electric
bicycles and
speed limits
This bill requires electric bikes be
manufactured and sold with a
speedometer and lights, requires
retailers to provide disclosures at the
point of sale, and imposes fines for
violators.
Pending
Committee
and staff
feedback.
Recommend
support.
Re-referred to
Committee on
Transportation,
read second
time and
amended.
SB 1167:
Vehicles: electric
bicycles
This bill prohibits certain types of
vehicles, like motor-driven cycles and
mopeds, from being advertised and sold
as electric bikes It makes violation of this
provision a misleading a crime and would
impose a state-mandated local program.
Pending
Committee
and staff
feedback.
Recommend
support.
Re-referred to
Committee on
Transportation.
AB 2517: Fire
Safety: fire
hazard severity
zones
This bill would require the State Fire
Marshall to release preliminary maps of
fire hazard severity zones and provide a
public comment period and regional
public workshops.
Pending
Committee
and staff
feedback.
Recommend
support.
Referred to
Committees on
Natural
Resources and
Emergency
Management
Sb 922: Vehicles:
local agency
charges: use of
streets or
highways
This bill allows local agencies to recover
the cost of street maintenance and
repair associated with providing public
services.
Pending
Committee
and staff
feedback.
Ordered to
third reading.
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Regional Items
Issue Summary City Position Status
Connect
Bay Area
Transit
Initiative
This citizens’ initiative proposed for
the November 3, 2026 ballot would,
if approved by the voters, enact a
regional sales tax to fund public
transit.
Support Organizers are gathering
the required signatures
to qualify for the ballot
before the June 6, 2026
deadline.
FISCAL/RESOURCE IMPACT
There is no fiscal impact associated with this action. The City Council budgets annually for the
legislative advocacy services and these efforts are led by staff in the City Clerk’s Office in close
collaboration with the City Manager’s Office with stakeholder support across other City
departments on key issues.
STAKEHOLDER ENGAGEMENT
Staff from multiple departments are involved in the legislative process by helping to review the
impacts of bills and discussing grant opportunities linked to state and federal programs.
ENVIRONMENTAL REVIEW
The City’s legislative advocacy activities are not a project under section 15378(b)(5) of the
California Environmental Quality Act Guidelines (administrative activities that will not result in
direct or indirect physical changes in the environment).
ATTACHMENTS
Attachment A: TPA State and Federal Updates Memo
Attachment B: Palo Alto Priority Bill Matrix
APPROVED BY:
Ed Shikada, City Manager
Mahealani Ah Yun, City Clerk
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CALIFORNIA ADVOCACY • FEDERAL ADVOCACY • GRANT WRITING
Sacramento • Washington, D.C.
Northern California • Central California • Southern California
MEMORANDUM
To: Palo Alto Policy and Services Committee
CC: Ed Shikada, City Manager
Chantal Cotton Gaines, Deputy City Manager
Christine Prior, Assistant City Clerk
From: Townsend Public Affairs
Niccolo De Luca, Vice President
Carlin Shelby, Deputy Director
Joseph Melo, Federal Advocacy Manager
Date: March 30, 2026
Subject: State and Federal Legislative Updates
Townsend Public Affairs, Inc. (TPA) has prepared this report for the City of Palo Alto to provide a
summary of State, Federal, and funding efforts and highlight the current status of the legislative
process.
STATE LEGISLATIVE UPDATES
State Updates
The Legislature has entered a critical early phase of the 2026 legislative session, with policy
committees hearing a high volume of bills for the first time and beginning to shape which proposals
will advance. This stage is particularly important, as bills must successfully move through their
respective policy committees to remain viable. Measures with fiscal implications are required to
pass policy committees and advance to fiscal committees by April 24, while non-fiscal bills must
clear policy committees by May 1 to proceed to their respective house floors.
Across these hearings, several key policy themes are emerging that are likely to define the
direction of the session. These include efforts to strengthen e-bike safety through updated
definitions, equipment standards, and youth safety requirements; proposals addressing the role
of artificial intelligence in public meetings, including questions around what constitutes a “person”
for purposes of participation and compliance with open meeting laws; and legislation aimed at
addressing increasingly burdensome Public Records Act requests, particularly those that strain
local government resources.
In addition, the Legislature continues to prioritize housing market reforms focused on streamlining
development, clarifying state housing law, and expanding housing production in targeted areas.
Wildfire preparedness and prevention also remain a central focus, with proposals addressing
mitigation, resilience, and emergency response. Energy policy discussions are expanding to
include diversification of the State’s energy portfolio, including renewed consideration of nuclear
energy alongside other clean energy sources.
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A detailed summary of active legislation and recommended City positions across these issue
areas is provided in the attached bill matrix.
In parallel with policy committee activity, budget subcommittees in both houses continued
reviewing departmental proposals tied to the Governor’s budget and the Legislature’s priorities,
with discussions focused on program funding levels, effectiveness, and implementation
strategies. Informational and oversight hearings have also remained part of the broader legislative
workload, providing additional context on priority policy areas and emerging issues.
As of March 30, the Legislature has adjourned for its spring recess, temporarily pausing
committee and floor activity. Lawmakers are scheduled to reconvene on April 6, at which point
legislative activity is expected to accelerate quickly as key policy and fiscal deadlines approach.
State Budget Update
The California Department of Finance March 2026 Finance Bulletin reflects a modest but
meaningful improvement in the State’s fiscal outlook. Year-to-date General Fund revenues are
tracking approximately $7 billion (5.1%) above projections, with February receipts also exceeding
expectations. These gains are primarily driven by stronger-than-anticipated personal income and
corporate tax revenues, signaling continued resilience in California’s core revenue streams
despite broader economic moderation.
At the same time, underlying economic indicators present a mixed but stable picture. Growth is
slowing but remains positive, inflation continues to ease, and the labor market is showing slight
softening. Housing activity remains uneven across regions, reflecting ongoing affordability
challenges and higher interest rates. Collectively, these conditions suggest the State is navigating
a transition from a more volatile post-pandemic revenue environment toward a steadier, though
still uncertain, fiscal footing.
Looking ahead, the next key milestone in the budget process is the Governor’s May Revision,
which will incorporate updated revenue data and revised expenditure assumptions. This will set
the framework for final negotiations leading to the constitutionally required June budget adoption
deadline. Following adoption, the State will continue to refine policy and funding allocations
through budget trailer bills, which are expected to move throughout the summer months and into
August.
Importantly, this phase of the budget process often presents strategic opportunities for local
governments. As the Administration and Legislature reconcile priorities and allocate available
resources, there is typically an increased emphasis on identifying projects that can be deployed
quickly and deliver measurable outcomes. As such, jurisdictions should be prepared to advance
well-defined, implementation-ready proposals, as earmark-style funding opportunities and
targeted augmentations are most likely to emerge during the May Revision and subsequent trailer
bill negotiations.
SB 79 (Wiener, Statutes of 2025) Implementation and Cleanup Update
Senate Bill 79 (2025) represents one of the most significant recent changes to California housing
and land use law, establishing a statewide framework to promote transit-oriented housing
development. The law requires that qualifying housing projects located within proximity to major
transit stops be treated as an allowed use and establishes minimum standards for residential
density, building height, and floor area ratio. In effect, SB 79 preempts certain locally adopted
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zoning standards in transit-rich areas and creates state-defined development baselines intended
to increase housing production in transit-accessible, high-resource communities.
In Palo Alto, SB 79 applies to areas within approximately one-half mile of the University Avenue,
California Avenue, and San Antonio Caltrain stations, encompassing a substantial portion of the
City and extending well beyond the boundaries of existing planning efforts such as the Downtown
Housing Plan. The law introduces a new set of development standards that must be evaluated in
the context of existing land use patterns, parcel configurations, infrastructure capacity, and historic
resources.
Since the enactment of SB 79, the State has begun to address implementation questions through
a combination of targeted legislation and administrative guidance.
The primary legislative vehicle is AB 2576 (Harabedian), which proposes a series of technical
refinements to the SB 79 framework. The bill would delay key implementation timelines by one
year, providing jurisdictions with additional time to complete required analysis, adopt local
ordinances, or prepare alternative plans. It also clarifies the treatment of historic resources by
expanding definitions and removing constraints that currently limit the extent to which historic sites
may be excluded from development capacity calculations, and adjusts applicability thresholds to
better align with jurisdictional scale.
In parallel, SB 1361 (Durazo) introduces a narrower policy adjustment by creating an exemption
pathway for jurisdictions or agencies that have adopted policies to deliver at least 10,000 housing
units, with at least half designated as income-restricted, by 2032. While this provision is unlikely
to directly apply to Palo Alto, it reflects a broader legislative intent to introduce flexibility within the
SB 79 framework for jurisdictions advancing large-scale housing production.
Separately, the California Department of Housing and Community Development has now released
initial implementation guidance in the form of a March 20, 2026 advisory to Metropolitan Planning
Organizations. This guidance focuses on clarifying key statutory definitions that are central to SB
79 implementation, including what constitutes a transit-oriented development stop, how distances
are measured from “pedestrian access points,” and how transit service classifications such as
“high-frequency commuter rail” and qualifying bus service should be interpreted. The guidance is
intended to support consistent statewide mapping of transit-oriented development zones, which
will ultimately determine where SB 79 development standards apply. While this advisory does not
resolve all implementation questions, it represents an important first step in providing technical
clarity needed for local and regional implementation.
Earlier in the legislative session, there was an expectation that broader cleanup legislation would
be advanced through Senator Wiener’s SB 908 and SB 677, including provisions to clarify
statutory ambiguities and address implementation timelines. Those vehicles are no longer moving
forward as comprehensive fixes. Instead, the State appears to be narrowing its approach to a
smaller set of targeted legislative changes, supplemented by HCD-issued guidance to address
interpretive issues.
Taken together, this reflects a shift in strategy from more expansive statutory changes to a
combination of limited legislative refinements and administrative clarification. As of March 30,
2026, AB 2576 represents the primary legislative vehicle addressing SB 79 implementation,
supplemented by SB 1361 and the recently released HCD guidance. However, given the evolving
nature of the legislative process, additional changes or new proposals may still emerge as the
session progresses.
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For the City of Palo Alto, near-term implementation will be shaped by both the outcome of pending
legislation and ongoing state guidance, particularly as MPO-led mapping efforts advance.
FEDERAL UPDATES
Congressionally Directed Spending Submittals
Townsend Public Affairs worked closely with City of Palo Alto staff to develop and submit three
Community Project Funding (CPF) requests to Representative Sam Liccardo’s office as part of
the Fiscal Year 2027 appropriations process. The Congressman’s team is currently reviewing
submitted projects and is expected to begin identifying priority requests in the near term. This
marks the first step in the CPF process, after which selected projects will be advanced by the
Member to the relevant House Appropriations subcommittees for further consideration.
The City’s FY 2027 CPF requests include:
• The Track Watch Rail Safety Program, requesting $2,000,000, would fund a one-year
safety initiative placing trained monitors at Caltrain grade crossings throughout Palo Alto.
The program is designed to provide a visible presence, identify potential risks, and
coordinate with emergency responders, with the goal of reducing rail-related fatalities and
improving safety for residents, students, and commuters along the rail corridor.
• The Natural Grass Athletic Field Pilot Program, requesting $2,200,000, would support the
construction of a high-performance, sand-based natural grass athletic field. The project is
intended to improve durability, drainage, and playability under intensive use while allowing
the City to evaluate natural turf as a potentially more sustainable alternative to synthetic
fields.
• The Cubberley Community Center Acquisition project, requesting $2,000,000, would
support the acquisition of an additional seven acres at the Cubberley Community Center
campus. This effort would consolidate public ownership of the site and enable long-term
redevelopment, modernization of aging facilities, and expansion of arts, recreation,
education, and community programming at a major civic and cultural hub.
Townsend Public Affairs will continue to monitor developments, engage with Representative
Liccardo’s office, and provide updates as project prioritization decisions are made and
submissions advance to the committee stage.
Federal Policy Update – FCC Wireless Siting Rulemaking and Related Legislation
The Federal Communications Commission (FCC) is currently advancing a rulemaking titled “Build
America: Eliminating Barriers to Wireless Deployments” (WT Docket No. 25-276), which is
intended to evaluate and potentially revise federal standards governing wireless infrastructure
siting and deployment.
The proceeding has generated significant national engagement, with more than 3,000 public
comments submitted during the formal comment period, which closed in mid-January 2026. A
substantial number of these filings were submitted by cities, counties, and local government
organizations, many of which raised concerns regarding potential federal preemption of local
zoning and land use authority. Key issues identified in these comments include proposed changes
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to shot clock timelines, expansion of “deemed granted” provisions, and limitations on local fees
and permitting conditions, all of which could affect how local governments review and approve
wireless infrastructure projects.
At the same time, industry stakeholders and wireless deployment advocates have expressed
support for the FCC’s effort, emphasizing the need for more consistent national standards to
facilitate network expansion, improve connectivity, and support economic competitiveness. The
FCC is currently reviewing comments, and additional clarity on the scope and timeline of potential
rule changes is expected in the coming months.
In parallel, there has been increased attention to federal legislation related to wireless and
broadband deployment, including H.R. 2289, the American Broadband Deployment Act of 2025.
The bill was approved by the House Energy and Commerce Committee in December 2025 and
would establish a comprehensive federal framework governing broadband and wireless
permitting across federal, state, and local levels.
As currently drafted, H.R. 2289 would make several structural changes to the permitting process
for telecommunications infrastructure. These include establishing federal timelines (“shot clocks”)
for application review, allowing certain projects to be deemed approved if jurisdictions do not act
within prescribed timeframes, and limiting the scope of environmental and historic preservation
review for certain wireless facility modifications. The bill also addresses local fee structures and
permitting requirements, with the stated objective of accelerating broadband deployment and
reducing regulatory barriers.
The legislation is part of a broader federal effort to streamline infrastructure deployment and is
aligned with ongoing FCC proceedings examining similar issues related to local permitting
processes and federal preemption. At this time, however, H.R. 2289 is not actively advancing
toward floor consideration, and no immediate action is expected.
Earlier communications circulating among local governments appear to have conflated the FCC
rulemaking with this legislation, contributing to some confusion regarding the status and potential
impacts of each. At present, the FCC proceeding represents the primary federal action underway,
while H.R. 2289 remains a separate legislative proposal that has not progressed further in
Congress.
Townsend Public Affairs has submitted comments into the FCC proceeding reflecting local
government perspectives and will continue to monitor both regulatory and legislative
developments, providing updates as additional information becomes available.
Federal Update – Department of Homeland Security Funding Status
Negotiations to resolve the partial funding lapse affecting agencies within the Department of
Homeland Security (DHS) remain ongoing, with limited progress following a period of heightened
legislative activity.
The current funding lapse began on February 14, 2026, following a breakdown in bipartisan
negotiations over immigration enforcement policy, particularly related to Immigration and Customs
Enforcement (ICE) operations. Since that time, DHS has been partially unfunded, while most
other federal agencies remain funded through the fiscal year.
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In recent days, the Senate advanced an amended version of H.R. 7147 that would provide full-
year funding through September 30, 2026, for non-immigration enforcement components of DHS,
including the Transportation Security Administration (TSA), Federal Emergency Management
Agency (FEMA), Cybersecurity and Infrastructure Security Agency (CISA), and certain Coast
Guard civilian personnel. The proposal excluded ICE, Customs and Border Protection (CBP), and
Border Patrol, which previously received supplemental funding and have continued operations
during the lapse.
Senate Republicans indicated a willingness to support this approach, with the expectation that
immigration enforcement funding would be addressed separately through a future reconciliation
package. However, the Senate-passed framework has not advanced in the House. On March 27,
House leadership declined to take up the Senate proposal and instead moved forward with a
short-term continuing resolution that would fund all DHS components, including immigration
enforcement.
This divergence between the House and Senate has reinforced the central issue driving the
impasse. Congressional negotiations remain focused on whether DHS funding should proceed
as a unified package that includes immigration enforcement activities, or as a partial measure that
excludes those components pending further policy agreement. The two chambers remain far
apart on this question, and recent discussions have not resulted in a compromise framework.
As of March 30, negotiations are effectively at a standstill. While there was notable legislative
activity last week, no agreement has been reached, and both chambers are now in recess.
Lawmakers are not expected to reconvene until mid-April, delaying further consideration of a
funding resolution.
Operational impacts continue across affected DHS agencies. The partial shutdown has resulted
in unpaid federal workers, including TSA personnel, and has contributed to service disruptions,
particularly at airports due to staffing shortages. In response, the Administration has taken interim
actions, including issuing an order directing continued pay for TSA officers, though broader
funding gaps remain in place for other DHS functions.
Recent reporting also indicates that negotiations between congressional leaders and the
Administration have occurred intermittently, but without a clear path forward. Discussions have
included both legislative and administrative approaches to maintaining operations while broader
policy disagreements persist.
The situation remains fluid, and additional developments are expected once Congress returns
from recess and negotiations resume.
Item 1
Attachment A - TPA State
and Federal Updates Memo
Item 1: Staff Report Pg. 11 Packet Pg. 15 of 84
MATRIX
To: Palo Alto Policy and Services Committee
From: Townsend Public Affairs
Date: March 30, 2026
Subject: City of Palo Alto Priority Bill Matrix
Energy, Utilities, and Communications
AB 2619 (Papan, D) Water resources: data centers.
Status: 03/09/2026 - Referred to Coms. on W., P., & W. and L. GOV.
Summary: Existing law authorizes the legislative body of an incorporated city and the county board of
supervisors to license businesses carried on within their respective jurisdictions and to set license fees,
as specified. This bill would require a person who owns or operates a data center, prior to applying to a
city or a county for an initial business license, equivalent instrument, or permit, to provide its water
supplier, under penalty of perjury, an estimate of the expected water use, the anticipated source of water,
and the data center’s projected water use volume for the maximum day, maximum month, and average
year. When applying to a city or county for an initial business license, the bill would require a person who
owns or operates a data center to report, under penalty of perjury, on the application, an estimate of the
expected water use, the anticipated source of water, and the data center’s projected water use volume for
the maximum day, maximum month, and average year. When applying to a city or county for a renewal of
a business license, equivalent instrument, or permit, the bill would require a person who owns or operates
a data center to report, under penalty of perjury, on the application, the data center’s annual water use for
the preceding calendar year, including total water use, direct water use, and indirect water use, as
prescribed. By expanding the crime of perjury, the bill would impose a state-mandated local program. The
bill would define terms for purposes of these provisions. This bill contains other related provisions and
other existing laws. (Based on 02/20/2026 text)
AB 2647 (Calderon, D) Energy: nuclear facilities: advanced nuclear reactors.
Status: 03/16/2026 - Referred to Coms. on NAT. RES. and U. & E.
Summary: Existing law prohibits the State Energy Resources Conservation and Development
Commission (Energy Commission) from certifying a nuclear fission thermal powerplant, except for
specified powerplants, and provides that a nuclear fission thermal powerplant, except those specified
powerplants, is not a permitted land use in California unless certain conditions are met regarding the
existence of technology for the construction and operation of nuclear fuel rod processing plants and of
demonstrated technology or means for the disposal of high-level nuclear waste, as specified. This bill
would exempt advanced nuclear reactors, as defined, from that prohibition. (Based on 02/20/2026 text)
Item 1
Attachment B - Palo Alto
Priority Bill Matrix
Item 1: Staff Report Pg. 12 Packet Pg. 16 of 84
SB 222 (Wiener, D) Residential heat pump systems: water heaters and HVAC: installations.
Status: 01/26/2026 - Read third time. Passed. (Ayes 29. Noes 8.) Ordered to the Assembly. In Assembly.
Read first time. Held at Desk.
Summary: Existing law establishes the State Energy Resources Conservation and Development
Commission and prescribes the authorities, duties, and responsibilities of the commission pertaining to
energy matters. Existing law requires the commission, on or before January 1, 2019, in consultation with
the Contractors State License Board, local building officials, and other stakeholders, to approve a plan
that promotes compliance with specified regulations relating to building energy efficiency standards in the
installation of central air-conditioning and heat pumps, as specified. Existing law authorizes the
commission to adopt regulations to increase compliance with permitting and inspection requirements for
central air-conditioning and heat pumps, and associated sales and installations, consistent with the
above-described plan. The bill would require a city, county, or city and county, beginning July 1, 2027, to
adopt and offer asynchronous inspections for installations of residential heat pump water heater or heat
pump HVAC systems, as defined, that do not require a licensed contractor and building inspector to be
simultaneously present during the inspection. The bill would authorize a building inspector to contact the
licensed contractor who performed the installation by telephone call or real-time video conferencing
during their inspection, and, if the building inspector determines during an asynchronous inspection that
there is an issue with an installation of the heat pump water heater or heat pump HVAC system and that
the licensed contractor who performed the installation must be present to perform tests or cure the
installation, to require the licensed contractor who performed the installation to schedule an additional
inspection in which the building inspector and the licensed contractor who performed the installation are
required to be simultaneously present during the additional inspection. The bill would specify that these
provisions do not require a local entity described above to discontinue offering inspections for the
installation of a residential heat pump water heater or heat pump HVAC system where in a building
inspector and licensed contractor who performed the installation are simultaneously present. This bill
contains other related provisions and other existing laws. (Based on 01/15/2026 text)
SB 1168 (McNerney, D) Data centers: natural gas and electricity: surcharges.
Status: 02/26/2026 - Referred to Coms. on E., U & C. and REV. & TAX.
Summary: Existing law vests the Public Utilities Commission (PUC) with regulatory authority over public
utilities, including gas corporations and electrical corporations, while local publicly owned electric utilities
are under the direction of their governing boards. Existing law establishes a surcharge on all natural gas
consumed in the state to fund certain low-income assistance programs, cost-effective energy efficiency
and conservation activities, and public interest research and development. Under existing law, the
surcharge is in addition to any other charges for natural gas sold or transported for consumption, as
defined, in this state. Existing law exempts from the surcharge gas customers within the service territories
of municipalities, districts, or public agencies that offer specified services or programs, as specified.
Under existing law, a violation of the Public Utilities Act, or any order, decision, rule, direction, demand, or
requirement of the PUC, is a crime. The Energy Resources Surcharge Law imposes a surcharge on
consumers for the consumption of electricity purchased from an electric utility, which includes an electrical
corporation and local publicly owned electric utility, at a rate annually fixed by the State Energy
Resources Conservation and Development Commission (Energy Commission), not to exceed a
surcharge rate cap of $0.0003 per kilowatthour. Existing law requires electric utilities to collect the
surcharge from consumers, and requires electric utilities, and any consumers who have not had the
surcharge collected by an electric utility, to file a return with specified information. Under existing law, a
violation of the Energy Resources Surcharge Law is a crime. This bill would impose surcharges, on and
after January 1, 2027, on natural gas consumed by a data center, as defined, or a person that consumes
natural gas to produce electricity primarily for a data center, at an unspecified rate, and on electricity
consumed by a data center that is purchased from an electric utility, which includes an electrical
corporation and local publicly owned electric utility, at an unspecified rate. The bill would specify that the
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Attachment B - Palo Alto
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Item 1: Staff Report Pg. 13 Packet Pg. 17 of 84
above-described surcharges apply to persons that meet specified criteria, including, among other things,
that during any single month beginning January 1, 2027, the person purchased natural gas from a gas
corporation, or electricity from an electric utility, that was wholly or partially consumed by a data center.
The bill would require a gas corporation and electric utility to collect the applicable surcharge from each
data center, except as provided. The bill would authorize a person to apply to a gas corporation or electric
utility, as applicable, for an exemption from a surcharge, as specified. (Based on 02/18/2026 text)
SB 1313 (McNerney, D) Public water systems: grants and loans: perfluoroalkyl and polyfluoroalkyl
substances.
Status: 03/16/2026 - Set for hearing April 22.
Summary: The California Safe Drinking Water Act provides for the operation of public water systems and
imposes on the State Water Resources Control Board various duties and responsibilities for the
regulation and control of drinking water in the state. This bill would authorize the state board to fund
projects, upon the appropriation of funds by the Legislature, through grants or loans to public water
systems to address perfluoroalkyl and polyfluoroalkyl substances in drinking water or source water. The
bill would prescribe sources from which those funds may originate and permissible activities for those
projects. The bill would authorize the state board to implement the bill through a policy handbook or
workplan exempt from the rulemaking provisions of the Administrative Procedure Act. This bill contains
other existing laws. (Based on 02/20/2026 text)
Governance and Transparency
AB 1821 (Pacheco, D) California Public Records Act: fees and agency response time.
Status: 03/17/2026 - Re-referred to Com. on JUD.
Summary: Existing law, the California Public Records Act, requires each state or local agency, upon a
request for a copy of records that reasonably describes an identifiable record or records, to make the
records promptly available to any person upon payment of fees covering direct costs of duplication, or a
statutory fee if applicable, except with respect to public records exempt from disclosure by express
provisions of law. This bill would require, if a single request exceeds 2 hours of search time, or if the total
requests by a requestor exceed 10 hours of search time in one month, the requestor to also submit to the
agency a payment of fees in an amount determined by the agency as reasonable to compensate the
agency for the administrative time of completing the requests. The bill would exempt from that
requirement a journalist, a newspaper, and an educational or noncommercial scientific institution, as
specified. The bill would define “search” for purposes of that requirement to mean to review, either
manually or by automated means, agency records for the purpose of locating those records that are
responsive to a request. (Based on 03/16/2026 text)
Position: Recommend Support
AB 2134 (Addis, D) City council members: absences without permission.
Status: 03/17/2026 - Re-referred to Com. on L. GOV.
Summary: Existing law provides that if a city council member is absent without permission from all
regular city council meetings for a specified number of days from the last regular meeting they attended,
their office becomes vacant and shall be filled as any other vacancy. This bill would prohibit a city from
refusing permission for a council member to take absences for parental leave and would exclude parental
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Item 1: Staff Report Pg. 14 Packet Pg. 18 of 84
leave from counting toward the number of allowed absences allotted to each council member. The bill
would prohibit a city from requiring a council member to request approval for their parental leave at a
public hearing. The bill would include findings that changes proposed by this bill address a matter of
statewide concern rather than a municipal affair and, therefore, apply to all cities, including charter cities.
This bill contains other related provisions and other existing laws. (Based on 03/16/2026 text)
SB 1159 (Cabaldon, D) Artificial intelligence: transparency and governance.
Status: 03/27/2026 - Set for hearing April 6.
Summary: The California Constitution provides that people have the right of access to information
concerning the conduct of the people’s business. Various provisions of existing law, including the
California Public Records Act, the Bagley-Keene Open Meeting Act, and the Ralph M. Brown Act,
provide, with some exceptions, for public access to government records and meetings of government
bodies. Among those acts, the California Public Records Act defines “person” to include any natural
person, corporation, partnership, limited liability company, firm, or association. Existing law, the Political
Reform Act of 1974, imposes various requirements and limitations with respect to the conduct of public
officials, campaign expenditures and disclosures, political advertisements, lobbying, the ballot pamphlet,
and other aspects of political reform. The act defines “person” to mean an individual, proprietorship, firm,
partnership, joint venture, syndicate, business trust, company, corporation, limited liability company,
association, committee, and any other organization or group of persons acting in concert. Existing law,
the Administrative Procedure Act, governs, among other things, the procedures for the adoption,
amendment, or repeal of regulations by state agencies and for the review of those regulatory actions by
the Office of Administrative Law. This bill would specify that, for purposes of the California Public Records
Act, the Bagley-Keene Open Meeting Act, the Ralph M. Brown Act, the Political Reform Act of 1974, the
Administrative Procedure Act, and CEQA, “person,” “interested person,” “participant,” “member of the
public,” as applicable, and any other similar terms under each act referring to those who may engage with
governmental agencies, do not include artificial intelligence, as defined, systems, autonomous agents,
robots, or other nonhuman entities, whether physical or digital. The bill would make findings and
declarations related to these provisions. This bill contains other related provisions and other existing
laws. (Based on 03/25/2026 text)
Position: Recommend Support
Homelessness
AB 1708 (Solache, D) Homeless Housing, Assistance, and Prevention program: round 7.
Status: 03/16/2026 - In committee: Hearing postponed by committee.
Summary: Existing law establishes the Homeless Housing, Assistance, and Prevention (HHAP) program
for the purpose of providing jurisdictions with grant funds to support regional coordination and expand or
develop local capacity to address their immediate homelessness challenges, as specified. Existing law
provides for the allocation of funding under the program among continuums of care, cities, counties, and
tribes in 6 rounds, with rounds 1 to 5, inclusive, administered by the Interagency Council on
Homelessness and round 6 administered by the Department of Housing and Community Development,
as provided. Existing law establishes round 7 of the program and states the intent of the Legislature to
enact future legislation that specifies the parameters, as specified. Existing law, effective July 1, 2026,
appropriates $500,000,000, as specified, provided that these funds be disbursed in accordance with
specified requirements, including that funds from this appropriation be disbursed to a city, county, tribe, or
continuum of care for round 7 of the program after a declaration by the director of the department, in
consultation with the Director of Finance, that the department has substantially completed its initial
disbursement of round 6 funds to the city, county, tribe, or continuum of care and that the city, county,
tribe, or continuum of care has obligated at least 50% of its total round 6 award. Existing law requires the
department, during the 2025–26 fiscal year, to prepare to administer round 7 of the program with the goal
that initial round 7 disbursements will be available to grantees meeting the statutory provisions for
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Item 1: Staff Report Pg. 15 Packet Pg. 19 of 84
disbursement beginning September 1, 2026, as specified. This bill would require a continuum of care
receiving funding pursuant to round 7, as described above, to allocate funds to a smaller jurisdiction,
defined as a city with a population under 300,000. The bill would require a smaller jurisdiction, in order to
be eligible for funding, to, among other things, adopt a resolution, as specified, have a compliant housing
element, and have adopted a local encampment policy, as described. The bill would require a continuum
of care to accept applications for funding in accordance with specified procedures. (Based on 02/04/2026
text)
Position: Support
Housing and Land Use
AB 1738 (Carrillo, D) State Housing Law: remote inspections.
Status: 03/26/2026 - Read second time and amended.
Summary: Existing law, the State Housing Law, establishes statewide construction and occupancy
standards for buildings used for human habitation. Existing law requires the building department of every
city or county to enforce the provisions of the State Housing Law, the State Building Standards Code, and
other specified rules and regulations promulgated pursuant to the State Housing Law pertaining to
standards for buildings used for human habitation. Existing law authorizes an officer, employee, or agent
of an enforcement agency to enter and inspect any building or premises whenever necessary to secure
compliance with, or prevent a violation of, any provision of the State Housing Law, the building standards
published in the State Building Standards Code, and other rules and regulations promulgated pursuant to
the provisions of the State Housing Law. Existing law provides certain immunities to a public entity or
employee immunity relative to an inspection or license, as provided. This bill would require a city,
including a charter city, county, or city and county to offer a homeowner or contractor the option of
requesting remote inspections for all or a subset of an inspection required by a building permit for
specified works in one- or 2-family dwelling units, by July 1, 2027, as provided. The bill would apply the
above-described immunities to remote inspections. The bill would authorize these local agencies, at their
discretion, to set up a process to perform onsite audits to confirm that a homeowner or contractor
accurately represented the work subject to the remote inspection and to temporarily ban the homeowner
or contractor from using the remote inspection if the homeowner is found to have willfully misrepresented
the work, as provided. By imposing new duties on local agencies, the bill would impose a state-mandated
local program. This bill contains other related provisions and other existing laws. (Based on 03/26/2026
text)
AB 1751 (Quirk-Silva, D) Missing Middle Townhome Ownership Act.
Status: 02/23/2026 - Referred to Coms. on H. & C.D. and L. GOV.
Summary: Existing law, the Planning and Zoning Law, contains various provisions requiring a local
government that receives an application for certain types of qualified housing developments to review the
application under a streamlined, ministerial approval process depending on the type of housing
development, as specified. Existing law, the Subdivision Map Act, vests the authority to regulate and
control the design and improvement of subdivisions in the legislative body of a local agency and sets forth
procedures governing the local agency’s processing, approval, conditional approval or disapproval, and
filing of tentative, final, and parcel maps, and the modification thereof. The act generally requires a
subdivider to file a tentative map or vesting tentative map with the local agency, as specified, and the
local agency, in turn, to approve, conditionally approve, or disapprove the map within a specified time
period. Existing law, known as the Starter Home Revitalization Act of 2021, among other things, requires
a local agency to ministerially consider, without discretionary review or a hearing, a parcel map or a
tentative and final map for a housing development project that meets certain requirements, including that
the housing development project on the lot proposed to be subdivided will contain 10 or fewer residential
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units, except as provided. This bill, the Missing Middle Townhome Ownership Act, would authorize a
development proponent to submit an application for a townhome housing development project that is
subject to a prescribed ministerial approval process if the development complies with certain procedural
requirements and satisfies specified objective planning standards. The bill would also require a local
agency to ministerially consider, without discretionary review or a hearing, a parcel map or a tentative and
final map for a townhome development project that meets all of specified requirements, including that the
proposed subdivision will result in parcels and residential units that will meet prescribed densities and that
the newly created parcels are no smaller than 600 square feet. The act would define “townhome” for
these purposes to mean a single-family dwelling unit that is less than or equal to 3 stories of occupiable
square footage and shares a common wall, as specified, or is separated from one or more neighboring
units by an air gap, and would define “townhome development project” to mean a housing development
project consisting entirely of residential dwelling units that satisfy this definition of townhome. The bill
would authorize a local agency to disapprove a townhome housing development project, or deny the
issuance of a parcel map, a tentative map, or a final map for a townhome development project, allowed
under the bill’s provisions if it makes written findings based upon a preponderance of the evidence that
the proposed townhome housing development project would have a specific, adverse impact, as provided
in specified law, upon public health and safety and for which there is no feasible method to satisfactorily
mitigate or avoid the specific, adverse impact. The bill would authorize a local agency to adopt an
ordinance to implement its provisions and would provide that the adoption of such an ordinance is not a
project under CEQA. This bill contains other related provisions and other existing laws. (Based on
02/09/2026 text)
AB 1997 (Lee, D) Land use: housing development approvals: timelines and processes.
Status: 03/09/2026 - Referred to Coms. on L. GOV. and H. & C.D.
Summary: Existing law, the Planning and Zoning Law, requires a city or county to adopt a general plan
for land use development within its boundaries that includes, among other things, a housing element.
Existing law, the Housing Accountability Act (act), among other things, when a housing development
project, as defined, that complies with applicable, objective general plan, zoning, and subdivision
standards and criteria in effect at the time that the application was deemed complete, requires a local
agency that proposes to disapprove that development, or to impose a condition that the project be
developed at a lower density, to base its decision on written findings supported by a preponderance of the
evidence that specified conditions exist. That act, however, sets forth certain limitations with respect to its
requirements, including providing that the act does not prohibit a local agency from requiring the housing
development project to comply with objective, quantifiable, written development standards, conditions,
and policies appropriate to, and consistent with, meeting the jurisdiction’s share of the regional housing
need. The act provides for enforcement of its provisions by an enforcement action brought by the
applicant, a person who would be eligible to apply for residency in the housing development, or a housing
organization, as provided. This bill would, under the act, prohibit a plan, entitlement, or permit that has
been approved by a previous local utility or agency from being overturned or revised by a subsequent
utility or agency, unless the development proponent makes a material change to the project, as
described. This bill contains other related provisions and other existing laws. (Based on 02/17/2026 text)
AB 2139 (Garcia, D) Surplus lands: economic opportunities.
Status: 03/09/2026 - Referred to Com. on L. GOV.
Summary: Existing law prescribes requirements for the disposal of surplus land by a local agency,
including sending a written notice of the availability of the property before disposal of that property or
participating in negotiations to dispose of that property with a prospective transferee, as specified.
Existing law specifies that certain disposals of land are not subject to these provisions, including, disposal
of land by a city with a population exceeding 2,500,000 for certain purposes, as specified. Existing law
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authorizes a city, county, or city and county, with the approval of its legislative body by resolution after a
public hearing, to acquire, sell, or lease property in furtherance of the creation of an economic
opportunity, as defined. This bill would exempt from the requirements for the disposal of surplus property
the disposal of real property acquired by a local agency on or after, January 1, 2029, for the purpose of
creating an economic opportunity, when the local agency adopts a specified resolution that includes plans
for anticipated improvement and future use of the property and disposes of the property to a public or
private entity consistent with the planned used identified in the resolution. (Based on 02/18/2026 text)
AB 2576 (Harabedian, D) Transit-oriented development.
Status: 03/23/2026 - Re-referred to Com. on H. & C.D.
Summary: Existing law provides that a housing development project shall be an allowed use as a transit-
oriented housing development if specified conditions and requirements are met, including certain
requirements pertaining to cities with a population of at least 35,000. Existing law defines various terms
for these purposes. Existing law provides that these provisions do not apply to a local agency until
January 1, 2026, unless the local agency adopts an ordinance or local transit-oriented development
alternative plan, as defined, deemed compliant by the Department of Housing and Community
Development before July 1, 2027. Existing law specifies that, beginning on January 1, 2027, a local
government that denies a housing development project meeting the requirements referenced above that
is located in a high-resource area is presumed to be in violation of specified law and immediately liable for
specified penalties. This bill would delay each of those dates, and certain related dates, by one year. The
bill would also increase the population threshold for certain requirements to apply to cities, as described
above, from 35,000 to 40,000. (Based on 03/19/2026 text)
Position: Support
SB 417 (Cabaldon, D) The Affordable Housing Bond Act of 2026.
Status: 01/27/2026 - Read third time. Urgency clause adopted. Passed. (Ayes 30. Noes 9.) Ordered to
the Assembly. In Assembly. Read first time. Held at Desk.
Summary: Under existing law, there are programs providing assistance for, among other things,
emergency housing, multifamily housing, farmworker housing, home ownership for very low and low-
income households, and downpayment assistance for first-time home buyers. Existing law also
authorizes the issuance of bonds in specified amounts pursuant to the State General Obligation Bond
Law and requires that proceeds from the sale of these bonds be used to finance various existing housing
programs, capital outlay related to infill development, brownfield cleanup that promotes infill development,
and housing-related parks. This bill would enact the Affordable Housing Bond Act of 2026, which, if
adopted, would authorize the issuance of bonds in the amount of $10,000,000,000 pursuant to the State
General Obligation Bond Law. Proceeds from the sale of these bonds would be used to finance programs
to fund affordable rental housing and home ownership programs, including, among others, the Multifamily
Housing Program, the CalHome Program, and the Joe Serna, Jr. Farmworker Housing Grant Program.
This bill would provide for submission of the bond act to the voters at the November 3, 2026, statewide
general election, in accordance with specified law. This bill would declare that it is to take effect
immediately as an urgency statute. (Based on 01/22/2026 text)
Position: Support if Amended
Labor Relations
AB 1383 (McKinnor, D) Public employees’ retirement benefits: safety members.
Status: 01/29/2026 - Read third time. Passed. Ordered to the Senate. (Ayes 70. Noes 2.) In Senate.
Read first time. To Com. on RLS. for assignment.
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Summary: The Public Employees’ Retirement Law (PERL) establishes the Public Employees’ Retirement
System (PERS) to provide a defined benefit to members of the system based on final compensation,
credited service, and age at retirement, subject to certain variations. Existing law creates the Public
Employees’ Retirement Fund, which is continuously appropriated for purposes of PERS, including
depositing employer and employee contributions. Under the California Constitution, assets of a public
pension or retirement system are trust funds. The California Public Employees’ Pension Reform Act of
2013 (PEPRA) establishes a variety of requirements and restrictions on public employers offering defined
benefit pension plans. In this regard, PEPRA restricts the amount of compensation that may be applied
for purposes of calculating a defined pension benefit for a new member, as defined, by restricting it to
specified percentages of the contribution and benefit base under a specified federal law with respect to
old age, survivors, and disability insurance benefits. Existing law, the Teachers’ Retirement Law,
establishes the State Teachers’ Retirement System (STRS) and creates the Defined Benefit Program of
the State Teachers’ Retirement Plan, which provides a defined benefit to members of the program, based
on final compensation, creditable service, and age at retirement, subject to certain variations. This bill, on
and after January 1, 2027, would require a retirement system subject to PEPRA to adjust pensionable
compensation limits to be consistent with specified percentages of the contribution and benefit base
under the specified federal law with respect to old age, survivors, and disability insurance benefits. The
bill would require a new member of STRS to be subject to specified limits of the Teachers’ Retirement
Law. This bill contains other related provisions and other existing laws. (Based on 01/22/2026 text)
Public Safety
AB 1557 (Papan, D) Vehicles: electric bicycles.
Status: 03/17/2026 - Re-referred to Com. on TRANS.
Summary: Existing law defines an electric bicycle as a bicycle equipped with fully operable pedals and
an electric motor that does not exceed 750 watts of power. Existing law classifies electric bicycles into 3
classes with different restrictions. Existing law defines a “class 1 electric bicycle” as a bicycle equipped
with a motor that provides assistance only when the rider is pedaling, that is not capable of exclusively
propelling the bicycle, and that ceases to provide assistance when the bicycle reaches the speed of 20
miles per hour. Existing defines a “class 2 electric bicycle” as a bicycle equipped with a motor that may be
used exclusively to propel the bicycle and that is not capable of providing assistance when the bicycle
reaches the speed of 20 miles per hour. Existing law defines a “class 3 electric bicycle” as a bicycle
equipped with a speedometer and a motor that, in pertinent part, provides assistance only when the rider
is pedaling and that ceases to provide assistance when the bicycle reaches the speed of 28 miles per
hour. A violation of the Vehicle Code is a crime. This bill would instead define a class 1 electric bicycle as
a bicycle equipped with a motor that provides assistance only when the rider is pedaling, that is not
capable of exclusively propelling the bicycle, and that ceases to provide assistance when the bicycle
reaches the speed of 16 miles per hour. The bill would define a class 2 electric bicycle as a bicycle
equipped with a motor that may be used exclusively to propel the bicycle, and that is not capable of
providing assistance when the bicycle reaches the speed of 16 miles per hour. The bill would provide
that, notwithstanding these definitions, an electric bicycle manufactured prior to January 1, 2027, that was
equipped with a motor that is not capable of exceeding 750 watts of peak power and otherwise met the
legal requirements for the relevant class at the time of manufacture shall retain its classification. The bill
would prohibit a manufacturer from equipping, and a retailer from offering for sale or advertising, any
device labeled as an electric bicycle with a motor that is capable of exceeding 750 watts of peak power.
The bill would also prohibit a manufacturer from equipping, and a retailer from offering for sale or
advertising, any device labeled as a class 1 or class 2 electric bicycle with a motor that is capable of
exceeding 250 watts of continuous power or that is capable of providing assistance to reach speeds
greater than 16 miles per hour. The bill would make a violation of these provisions punishable by a civil
penalty not to exceed $15,000 for a first violation and not to exceed $50,000 for each subsequent
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violation, upon an action brought by the Attorney General, a city attorney, a county counsel, or a district
attorney. The bill would specify that a violation of this provision is not a criminal offense. (Based on
03/16/2026 text)
Position: Recommend Support
AB 1614 (Dixon, R) Vehicles: bicycles.
Status: 02/02/2026 - Referred to Com. on TRANS.
Summary: Existing law, the California Bicycle Transportation Act, establishes 4 classifications of
facilities, referred to as bikeways, that provide primarily for, and promote, bicycle travel. Existing law
requires a person operating a bicycle, which includes an electric bicycle, upon a highway to ride the
bicycle upon or astride a permanent and regular seat unless the bicycle was designed by the
manufacturer to be ridden without a seat. Existing law requires a person riding as a passenger on a
bicycle upon a highway to be upon or astride a seat attached to the bicycle, as specified. A violation of
these provisions in punishable as an infraction. This bill would make those provisions applicable to the
operation of a bicycle upon a Class I bikeway. By expanding an existing infraction, this bill would impose
a state-mandated local program. This bill contains other related provisions and other existing
laws. (Based on 01/21/2026 text)
AB 2284 (Dixon, R) Vehicles: electric bicycles.
Status: 03/17/2026 - Re-referred to Com. on TRANS.
Summary: Under existing law, the Department of the California Highway Patrol is responsible for
enforcement of all laws regulating the operation of vehicles and use of the highways, as specified.
Existing law requires the department to develop, on or before September 1, 2023, statewide safety and
training programs based on evidence-based practices for users of electric bicycles, as defined, including,
but not limited to, general electric bicycle riding safety, emergency maneuver skills, rules of the road, and
laws pertaining to electric bicycles. This bill would require, on or before June 1, 2027, the department, in
partnership with biking nonprofit groups, to compile a list of electric two-wheeled devices that do not
comply with the definition of any single class of electric bicycles and that are labeled, advertised, or
commonly perceived by riders or peace officers as electric bicycles or electric bicycle products. The bill
would require the department to make the list available on its internet website and to update the list and
internet website, when necessary. (Based on 03/16/2026 text)
AB 2346 (Wilson, D) Vehicles: electric bicycles and speed limits.
Status: 03/26/2026 - From committee chair, with author's amendments: Amend, and re-refer to Com. on
TRANS. Read second time and amended.
Summary: Existing law defines an electric bicycle as a bicycle equipped with fully operable pedals and
an electric motor of less than 750 watts, and classifies electric bicycles into 3 classes with different
restrictions for various purposes. This bill would require all class 1 and class 2 electric bicycles
manufactured, sold, or offered for sale on or after January 1, 2029, to be equipped with a speedometer.
The bill would also require all electric bicycles manufactured, sold, or offered for sale on or after January
1, 2029, to be equipped with an integrated front lamp and a rear lamp, as specified. The bill would also
require manufacturers and distributors of electric bicycles to include a written description of California’s
electric bicycle laws with the bicycle’s packaging to be provided to the consumer. The bill would also
require sellers and distributors of electric bicycles to provide specified disclosures at or before the point of
sale. The bill would make a violation of these provisions punishable by a civil penalty not to exceed
$15,000 for a first violation and not to exceed $50,000 for each subsequent violation, upon an action
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brought by the Attorney General, a city attorney, a county counsel, or a district attorney. The bill would
specify that a violation of these provisions is not a criminal offense. This bill contains other related
provisions and other existing laws. (Based on 03/26/2026 text)
Position: Recommend Support
AB 2517 (Calderon, D) Fire safety: fire hazard severity zones.
Status: 03/09/2026 - Referred to Coms. on NAT. RES. and E.M.
Summary: Existing law requires the State Fire Marshal to identify areas in the state that are not state
responsibility areas, commonly known as local responsibility areas, as moderate, high, and very high fire
hazard severity zones based on consistent statewide criteria and based on the severity of fire hazard that
is expected to prevail in those areas. Existing law requires the State Fire Marshal to periodically review
and make recommendations relative to very high fire hazard severity zones within local responsibility
areas. Under existing law, this review is required to coincide with review of state responsibility area lands
every 5 years and, when possible, fall within the timeframes for each county’s general plan update.
Existing law requires a local agency to designate, by ordinance, moderate, high, and very high fire hazard
severity zones in its jurisdiction within 120 days of receiving the recommendations from the State Fire
Marshal. Existing law authorizes a local agency to, at its discretion, include areas within its jurisdiction not
identified as very high fire hazard severity zones by the State Fire Marshal as very high fire hazard
severity zones and areas not identified as moderate and high fire hazard severity zones by the State Fire
Marshal as moderate and high fire hazard severity zones. Under existing law, a local agency is required
to transmit a copy of an adopted ordinance to the State Board of Forestry and Fire Protection within 30
days of adoption. Existing law provides that changes made by a local agency to the recommendations
made by the State Fire Marshal are final. This bill would require the State Fire Marshal to, no fewer than
180 days before finalizing the designation of local responsibility areas as moderate, high, and very high
fire hazard severity zones, post specified information on its public internet website, conduct regional
public workshops to receive oral public comments and consider those comments, host a 30-day public
comment period to receive written comments from interested stakeholders and respond to all written
comments by local agencies within 30 days of the end of the public comment period, and coordinate with
other state agencies to help educate the public during the public workshops, as specified. The bill would
also require, on or before January 1, 2030, and every 5 years thereafter, the State Fire Marshal to review
the local responsibility area lands designated as moderate, high, and very high fire hazard severity zones
and to recommend changes. The bill would no longer require this review to, when possible, fall within the
timeframes for each county’s general plan update. (Based on 02/20/2026 text)
Position: Recommend Support
SB 1167 (Blakespear, D) Vehicles: electric bicycles.
Status: 03/26/2026 - From committee with author's amendments. Read second time and amended. Re-
referred to Com. on TRANS.
Summary: Existing law defines an electric bicycle as a bicycle equipped with fully operable pedals and
an electric motor that does not exceed 750 watts of power. Existing law classifies electric bicycles into 3
classes with different restrictions for various purposes, and requires, among other things, a class 3
electric bicycle to be equipped with a speedometer. Existing law prohibits certain vehicles that do not
meet the definition of an electric bicycle from being advertised, sold, offered for sale, or labeled as an
electric bicycle, as specified. A violation of the Vehicle Code is a crime. This bill would amend the type of
vehicles that are prohibited from being advertised, sold, offered for sale, or labeled as electric bicycles,
including, among others, motor-driven cycles and mopeds. The bill would additionally make a violation of
this provision a misleading statement for purposes of unfair competition and false advertising provisions
of the Business and Professions Code. By creating new crimes related to the advertisement, sale, offer,
and labeling of electric bicycles, and by expanding the application of an existing crime, this bill would
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impose a state-mandated local program. This bill contains other related provisions and other existing
laws. (Based on 03/26/2026 text)
Position: Recommend Support
SB 1218 (Arreguín, D) Refusal of registration: illegal dumping violation penalties.
Status: 03/26/2026 - Set for hearing April 14.
Summary: Existing law requires, except as specified, the Department of Motor Vehicles (DMV) to refuse
to renew the registration of a vehicle upon various grounds, including if the registered owner or lessee
has been mailed a notice of a delinquent parking violation relating to standing or parking, the processing
agency has filed or electronically transmitted to the department an itemization of unpaid parking penalties,
and the owner or lessee has not paid the parking penalties. Existing law makes it unlawful and punishable
as an infraction for a person to dump or caused to be dumped waste matter upon a public or private
highway or road, upon private property without the consent of the owner, or in or upon a public park or
other public property, as specified. Existing law also makes it unlawful and punishable as a misdemeanor
for a person to place, deposit, or dump, or cause to be placed, deposited, or dumped, waste matter in
commercial quantities, as specified. This bill would similarly require the DMV to refuse to renew the
registration of a vehicle if the registered owner or lessee has been mailed a notice of delinquent illegal
dumping violation. (Based on 02/19/2026 text)
SB 1292 (Richardson, D) Enhanced curb management system.
Status: 03/26/2026 - Set for hearing April 14.
Summary: Existing law authorizes, until January 1, 2030, a local agency, as defined, to install automated
forward facing parking control devices on city-owned or district-owned parking enforcement vehicles for
the purpose of taking photographs of parking violations occurring in bicycle lanes. Existing law requires a
designated employee of a city, county, city and county, or a contracted law enforcement agency for a
special transit district, who is qualified by the city and county or the district to issue parking citations, to
review photographs for the purpose of determining whether a parking violation occurred in a bicycle lane
and to issue a notice of violation to the registered owner of a vehicle within 15 calendar days, as
specified. Existing law requires these photographic records to be confidential and makes these records
available only to public agencies to enforce parking violations. Existing law requires any local agency that
implements this pilot program to report to specified committees of the Legislature on the system’s
effectiveness and impact on traffic outcomes, among other things, by December 31, 2028. This bill would
authorize a local agency, as defined, to establish an enhanced curb management system (system) that
records images of vehicles for the purpose of enforcing parking violations or automating parking
payments if certain requirements are met. The bill would require the governing body of the local agency to
adopt a public ordinance or resolution that would authorize the use of a system in specified locations,
including, among others, passenger loading zones and commercial loading zones. The bill would require
a local agency that automates parking payments by charging vehicles a fee for access to outline the fee,
and any adjusted rates, in an ordinance or resolution. This bill contains other related provisions and other
existing laws. (Based on 02/20/2026 text)
SB 1314 (Menjivar, D) Smoke shops: locations, hours of operation, and sale of nitrous oxide.
Status: 03/25/2026 - Set for hearing April 8.
Summary: The Stop Tobacco Access to Kids Enforcement (STAKE) Act requires the State Department
of Public Health to establish and develop a program to reduce the availability of tobacco products to
persons under 21 years of age through specified enforcement activities. In addition to the primary
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enforcement responsibility assumed by the department, existing law authorizes other state and local
governmental agencies to conduct inspections and assess penalties for violations of the act, as specified,
and encourages state and local enforcement agencies to share the results of inspections and coordinate
with the department when enforcing the act. In this regard, existing law authorizes an enforcing agency to
assess specified civil penalties against any person, firm, or corporation that sells, gives, or in any way
furnishes to another person who is under 21 years of age any tobacco, cigarettes, or cigarette papers.
Existing law, upon the assessment of a civil penalty for the 3rd, 4th, or 5th violation, requires the
department to notify the California Department of Tax and Fee Administration (CDTFA), and requires the
CDTFA to assess civil penalties and suspend or revoke a license issued under the Cigarette and
Tobacco Products Licensing Act of 2003. This bill, effective January 1, 2028, would prohibit the retail
location for a smoke shop, as defined, from being located within a 600-foot radius of a school or a day
care center in existence at the time the retail license is issued, unless the local jurisdiction specifies a
different radius. The bill would prohibit a smoke shop from engaging in the retail sale of tobacco products
directly to the public between the hours of 10:00 p.m. to 6:00 a.m. The bill would authorize the State
Department of Public Health or the CDTFA to establish regulations relating to the operation of smoke
shops, including the creation of a separate license category with administrative processes and separate
fee rates. The bill would also prohibit a smoke shop from possessing, storing, owning, or selling nitrous
oxide or paraphernalia relating to the consumption of nitrous oxide. The bill would authorize an
enforcement agency to assess civil penalties for a violation of those provisions. The bill would authorize
the CDTFA to then assess a civil penalty and suspend or revoke a license for a violation of those
provisions. The bill would define various terms relating to the bill’s provisions. This bill contains other
related provisions and other existing laws. (Based on 02/20/2026 text)
Revenue and Taxation
AB 2180 (Ward, D) Local government: Proposition 218 Omnibus Implementation Act: proportional cost of
service.
Status: 03/26/2026 - Read second time. Ordered to third reading.
Summary: The California Constitution specifies various requirements with respect to the levying of
assessments and property-related fees and charges by a local agency. As part of those requirements, the
California Constitution mandates that such fees or charges that are extended, imposed, or increased
satisfy certain requirements, including, but not limited to, that the amount of the fee or charge imposed
upon any parcel or person as an incident of property ownership not exceed the proportional cost of the
service attributable to the parcel. Existing law, known as the Proposition 218 Omnibus Implementation
Act (act), prescribes specific procedures and parameters for local jurisdictions to comply with these
requirements and, among other things, authorizes an agency providing water, wastewater, sewer, or
refuse collection services to adopt a schedule of fees or charges authorizing automatic adjustments that
pass through increases in wholesale charges for water, sewage treatment, or wastewater treatment or
adjustments for inflation under certain circumstances. This bill would authorize a local government to
demonstrate the proportional cost of the service attributable to the parcel by any method that reasonably
allocates the ascertainable cost of providing service to all parcels, if substantiated as provided. The bill
would, however, provide that for water or sewer service fee or charge impositions, a local government is
not required to provide an exact measure of the cost of the service at each parcel and may instead
impose uniform or tiered rates to parcel or customer classes that are defined based on common
characteristics indicative of likely water or sewer use. The bill would provide that the proportional cost of
service within each tier of water service may be substantiated by using any reasonable basis for
allocating costs attributed to the tier, as described, and would provide a local government discretion to
determine the costs allocated to each tier as long as the rate for each tier does not exceed the
proportional cost of service reasonably allocated to parcels subject to (Based on 03/11/2026 text)
SB 762 (Arreguín, D) Transactions and use tax: City of Hercules.
Status: 01/27/2026 - Read third time. Passed. (Ayes 29. Noes 10.) Ordered to the Assembly. In
Assembly. Read first time. Held at Desk.
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Summary: Existing law authorizes cities and counties, subject to certain limitations and approval
requirements, to levy a transactions and use tax for general or specific purposes in accordance with the
procedures and requirements set forth in the Transactions and Use Tax Law, including a requirement that
the combined rate of all taxes that may be imposed in accordance with that law in the jurisdiction not
exceed 2%. This bill would authorize the City of Hercules to impose a transactions and use tax for
general or specific purposes, at a rate of no more than 1%, that, in combination with other transactions
and use taxes, would exceed the above-described combined rate limit of 2%, if certain requirements are
met. The bill would provide that a transactions and use tax rate imposed pursuant to the bill will not be
considered for purposes of the combined rate limit described above. This bill would make legislative
findings and declarations as to the necessity of a special statute for the City of Hercules. (Based on
01/05/2026 text)
Position: Pending Support for City’s inclusion
SB 922 (Laird, D) Vehicles: local agency charges: use of streets or highways.
Status: 03/19/2026 - Read second time. Ordered to third reading.
Summary: Existing law prohibits a local agency from imposing a tax, permit fee, or other charge for the
privilege of using its streets or highways, other than a permit fee for an extralegal load unless the local
agency had imposed the fee prior to June 1, 1989. This bill would expressly limit this prohibition to
charges based on weight. The bill would also explicitly state that a fee, charge, or surcharge imposed by
or for a local agency to recover the cost of street maintenance and repair and other costs associated with
the use of its streets, roads, or highways to provide public services or public works is not a tax, permit fee,
or other charge that is prohibited by the provision above. The bill would provide that nothing in the Vehicle
Code prohibits a local agency from imposing or collecting this fee, charge, or surcharge. The bill would
delete obsolete references and make other technical changes. (Based on 03/11/2026 text)
Position: Recommend Support
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Policy & Services Committee
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: City Auditor
Meeting Date: April 14, 2026
Report #:2509-5177
TITLE
Office of the City Auditor Presentation of the City of Palo Alto Utility Reserves Advisory Report.
CEQA Status: Not a Project.
RECOMMENDATION
The Office of the City Auditor recommends the Policy & Services Committee accept the results
of the City of Palo Alto Utility Reserves Advisory Report.
BACKGROUND
Baker Tilly Advisory, in its capacity serving as the Office of the City Auditor (OCA), performed a
citywide risk assessment that evaluated a wide range of risk areas, including strategic, financial,
operational, compliance, technological, and reputational risks. The purpose of the assessment
was to identify and prioritize risks to develop the annual audit plan. The annual audit plan
includes both traditional audits and advisory projects to provide information for the City to
improve processes and outcomes.
During the FY 2025 risk assessment, the OCA identified Utility reserves as a potential area of
risk and was asked to include this as a non-audit advisory project in FY 2026 Audit Plan.
ANALYSIS
The objective of the Utility Reserves Advisory Project was to assess and benchmark the City’s
current utilities reserves and identify best practices related to reserve policies, structures, and
levels.
The City’s utility reserve funds play a critical role in maintaining financial stability, supporting
emergency response, and funding long-term capital needs. Our assessment noted that some
reserve policies – particularly for the Wastewater Treatment, Refuse, and Stormwater utilities –
are outdated and not fully aligned with more recently updated policies across other utilities. In
addition, we noted that the current structure includes multiple reserve funds with varying
guideline levels which can be administratively complex, requiring staff to track multiple reserve
funds against minimum, target, and maximum levels. In a few cases, such as the Electric Special
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Projects Reserve, additional clarification on the purpose of the reserve could further improve
understanding, consistency and minimize the potential for overlap.
FISCAL/RESOURCE IMPACT
STAKEHOLDER ENGAGEMENT
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ENVIRONMENTAL REVIEW
ATTACHMENTS
APPROVED BY:
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City of Palo Alto
Office of the City Auditor
City of Palo Alto Utility Reserves Advisory Report
March 27, 2026
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Contents
network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. Baker Tilly US, LLP is a licensed CPA firm that
provides assurance services to its clients. Baker Tilly Advisory Group, LP and its subsidiary entities provide tax and consulting services to their clients and are
not licensed CPA firms.
EXECUTIVE SUMMARY .................................................................................................. 1
PURPOSE OF THE ASSESSMENT ........................................................................................................ 1
REPORT HIGHLIGHTS ............................................................................................................................... 1
INTRODUCTION ............................................................................................................... 7
OBJECTIVE ................................................................................................................................................... 7
OVERVIEW .................................................................................................................................................... 7
SCOPE AND PROCEDURES ................................................................................................................... 7
DETAILED ANALYSIS ..................................................................................................... 8
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Executive Summary
Purpose of the Assessment
Baker Tilly Advisory Group, LP (Baker Tilly), in its capacity serving as the Office of the City Auditor
(OCA) for the City of Palo Alto (the City or Palo Alto), conducted a City of Palo Alto Utilities (CPAU)
Advisory Project based on approved Task Order 4.38 as part of the City’s Fiscal Year (FY) 2026 Audit
Plan. The purpose of this project was to assess CPAU's Reserve policies and benchmark them against
peer agencies.
Report Highlights
Overview of
Current
Reserves:
(Page 9)
Consistency
w/ Regulatory
Reserve
Margin
Requirements:
(Page 16)
Utility reserve funds provide a safety net for municipal utilities and can help
agencies stabilize rates, respond to emergencies and plan for capital
improvements, while ensuring the utility remains credit worthy and financially
healthy.
• Current reserve policies contain multiple prescribed transfer rules that
require the tracking of reserve funds to minimum, target, and maximum
levels resulting in significant administrative burden.
• Reserve funds and policies for the Wastewater Treatment Utility, Refuse
Utility, and Stormwater Utility date back to the early 1990s and are no
longer aligned with other utilities reserve policies which were updated in
June 16, 2025.
The Electric Special Projects Reserve appears to serve similar purposes
with the CIP Reserves. As such, additional clarity on the intended use of
these funds may be necessary.
Consistency with Regulatory Reserve Margin Requirements Policies
The City’s bond covenants contain specific reserve requirements for the
outstanding Water Revenue Bonds, 2009 Series A (2009 Bonds) and the
Utility Revenue Refunding Bonds, 2011 Series A (2011 Bonds)(collectively,
Utility Bonds). Relevant cash reserve credit rating targets from S&P and
Moody’s are also discussed in this section of the report.
• Both the Rate Covenant and Available Reserves Covenants are monitored
and tracked by the Administrative Services Department. Current utility
reserve policies do not specifically address the Rate Covenants or
Available Reserve Covenants made by the City in the official statements
and legal documents for the outstanding 2009 and 2011 bonds. According
to the latest Ratings Affirmation from S&P on the outstanding 2011 and
2009 bonds, Palo Alto is in compliance with the Rate and Available
Reserves Covenants. The City could consider referencing these
documents in its reserve policies.
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EXECUTIVE SUMMARY
Operational /
Industry Best
Practices:
(Page 20)
• When determining credit ratings, rating agencies ultimately rate a utility
based on a holistic financial profile. Rating agencies outline cash reserve
targets as a guideline and is one of the many differing levels of
creditworthiness. While the current reserve policies do not include cash
reserve targets that correspond to the amounts laid out in credit agency
rating guidelines, an important factor to consider is maintaining sufficient
cash reserves to maintain credit ratings for the City’s utilities.
• The outstanding 2009 and 2011 Bonds contain an overly burdensome
reserve requirement covenant that is not a market standard, particularly
for high-grade utility credits. The reserve requirement for the 2009 and
2011 Bonds require that the Electric Fund, the Gas Fund, and the Water
Fund be combined for an Available Reserves Test. With future issuances,
City Utilities can remove this Available Reserves Test form its covenants.
The 2011 Bonds mature in June 2026. Refunding the 2009 Bonds is being
evaluated by the City. Once both Utility Bonds are defeased, City Utilities
will no longer have to consider compliance to the Available Reserves Test
separate from its reserve policies.
Operational / Industry Best Practices
This section of the report includes information on common best practices for
operational reserves and capital improvement reserves from the Government
Finance Officers Association (GFOA) and best practices that Baker Tilly
employs when working with Utility clients.
• Current operations reserve fund policies are in alignment with the GFOA’s
recommendations for operating reserves, however, the Wastewater
Treatment Utility, Refuse Utility and Stormwater Utility do not currently
have operations reserve funds. Wastewater Treatment Utility is currently
working with a consultant to review their reserves.
• Current reserve policies for the City’s CIP reserve funds specify a
maximum reserve guideline level that is equivalent to one-year of average
capital improvements. In Baker Tilly’s experience, one-year of average
capital improvements is the amount most frequently used as a target level
of reserves in a CIP reserve fund. We consider this a best practice as
setting aside one-year worth of capital improvement expenditures allows
for the ongoing replacement of necessary infrastructure. It should be
noted that when determining the one-year average capital improvement
amount, Baker Tilly recommends that reappropriations and commitments
(and the funds set aside for them) should not be considered.
• While Baker Tilly considers one-year of average capital improvements a
best practice CIP reserve level, GFOA recommends that capital reserve
level development should be designed to best serve the particular needs
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EXECUTIVE SUMMARY
Benchmarked
Comparables:
(Page 22)
recommendation could be considered. Alternatively, another approach to
determining a CIP reserve fund guideline level could be to maintain one-
year or a percentage of one-year of depreciation expense in reserve
balances.
• The current CIP reserve fund policy does not make a distinction between
budgeted CIP expenses to be funded by cash or CIP expenses to be
funded by Bonds or other funding sources. The best practice for this
reserve policy would be to separate those two types of CIP expenses, and
craft reserve guideline levels based on CIP expenses to be funded by
cash. This ensures that reserve fund amounts in a given year are not
artificially inflated due to large projects that will be funded through other
funding sources.
Local Economy Specific Reserves Through Benchmarking Comparables
This assessment benchmarked reserve policies from the Roseville, Santa
Clara, Healdsburg and Pasadena cities, as well as, San Jose Energy CCA
(collectively, the “benchmarked communities”) and compares their policies to
CPAU’s reserve policies.
• Rate stabilization reserve funds for the City’s Electric, Water, and
Wastewater Collection Utilities do not contain formally established
guideline reserve levels while most benchmarked communities specify
varying target levels.
• Operation and maintenance reserve funds for the City’s Electric, Water,
and Wastewater Collection Utilities have more prescriptive guidelines
reserve levels through the establishment of minimum, target, and
maximum guideline levels compared to the benchmarked communities.
The benchmark communities, with just one exception used only minimum
guideline levels for the operation and maintenance reserve funds. The
minimum guideline levels were most typically based on a specified amount
of days operating expenses.
• Note that when analyzing operating reserves vs. rate stabilization
reserves, Baker Tilly specifically compared Palo Alto’s rate stabilization
reserve fund policies to only rate stabilization reserve fund policies for the
Benchmark Communities, and Palo Alto’s operation reserve fund policies
to operation reserve fund policies for the Benchmark Communities.
• The Benchmark Communities typically have some or all of the three
commonly established reserve funds that Palo Alto Utilities with updated
reserve policies have, which are the rate stabilization reserve, the
operations and maintenance reserve, and the CIP reserve.
• The City’s Electric, Water, and Wastewater Collection Utilities have set
minimum and maximum guideline levels for the capital replacement and
improvement reserve funds, while all other benchmark communities with
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EXECUTIVE SUMMARY
Reserve
Tracking:
(Page 35)
capital replacement and improvement reserve funds only had target
guideline levels.
• In general, the reserve policies for CPAU are more detailed and
cumbersome than the policies of the benchmarked communities. CPAU
has more funds established to hold cash reserves and its policies are
more detailed in terms of guideline levels and sources and uses of those
reserve funds when compared to others.
Reserve Tracking – Key Observations
This section of the report examines the current requirements and processes
for tracking reserves.
• Utility Management tracks reserves on an annual basis in conjunction with
the development of each individual Utility’s Financial Plan. A reserve
tracking policy with guidance included to report instances when reserve
fund balances do not meet guideline levels to Council may provide more
assurance that reserve targets are being met throughout the year and
equip the Council with better information to make financial decisions than
the current reporting process.
Key Recommendations
1. Update Dated Policies - the Wastewater Treatment, Refuse, and Stormwater
Utilities’ operations, rate stabilization, and CIP reserve funds policies should
be updated to align with similar reserve policy guidelines in other CPAU
utilities. When updating, management should consider the need for the
existing reserve funds in these Utilities that are not common across other
CPAU utilities, including the Emergency Plant Replacement Reserve Fund,
the Notes and Loans Reserve Fund for the Wastewater Treatment Utility, and
the Landfill Corrective Action and Geng Road Reserve funds for the Refuse
Utility. If no longer necessary, these funds should be closed out and the
money transferred to other funds in place.
2. Do not eliminate any of the current reserve funds in place – With the
exception of the utilities with dated policies mentioned above, all City Utilities
have in common three reserve funds: operations, rate stabilization, and CIP
reserve funds. Baker Tilly views maintaining each of these reserve funds as a
best practice. Additionally, as shown in the Benchmarking Comparables
section of the report, many of the Benchmark Communities share these same
common reserve funds in their utilities. Specifically, the City of Roseville Water
and wastewater utilities, the City of Santa Clara electric utility, and the San
Jose clean energy electric utility all have both rate stabilization and operation
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EXECUTIVE SUMMARY
wastewater utilities have operation and maintenance, rate stabilization, and
capital improvement reserve funds. What’s more, all Benchmark communities
utilities that were reviewed had at least one of the three of these reserve
funds.
Palo Alto Utilities reserve funds separate from the three commonly shared
reserve funds are in place for specifically defined and valid purposes and
should remain in place until those purposes are accomplished or are no longer
applicable.
3. Clarify CIP Reserve Fund Language – the Electric Special Project Reserve
within the Electric Utility is distinct from the CIP Reserve Fund. While both of
these funds are purposed for capital projects clarity on intended use of funds
is recommended.
4. Consider adjustment to CIP Reserve Fund Guideline Levels – Consider
adjustment to CIP Reserve guideline levels to align with Baker Tilly’s
recommendation to maintain in the CIP reserve fund 20% of 60 months of
budgeted CIP expenses or alternatively, one-year of depreciation expense in
the CIP reserve fund. CIP expenses should only include those intended to be
funded by Utility cash and not those projects intended to be funded by bonds
or other outside sources of funding.
5. Adjust Rate Stabilization Reserve Policy to align with Bond Covenants
and Benchmark Communities – Consider establishing:
• Minimum guideline levels in the Rate Stabilization Reserve Funds for the
Electric, Gas, and Water Utilities to ensure reserve balances meet or
exceed the current Available Reserves Bond Covenants. Note: Staff is
evaluating refunding of the 2009 Bonds and a normal payoff of the 2011
Bonds in June 2026, which would eliminate the need to make a change to
these minimum guideline levels due to this Bond Covenant.
• Target guideline levels for these funds for the Electric, Gas and Water
Utilities should be at the higher of the minimum guideline level required by
the Available Reserve Bond Covenants or a specified percentage of the
total operating revenues or operating expenses in the current fiscal year so
that the Rate Stabilization Reserve could hold funds in excess of the
amount dictated by bond covenants to be used for its defined purposes.
• The rate stabilization fund for Utilities without the Available Reserve Bond
Covenants in place (Wastewater Collection, Wastewater Treatment,
Refuse, and Stormwater) should have a target guideline level based on a
specified percentage of total operating revenues or operating expenses in
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EXECUTIVE SUMMARY
•
varied between 10 to 65% of either revenues or expenses. The larger the
percentage selected, the more reserve funds would be available to
stabilize future rate increases. The percentage of operating revenues or
expenses to be used as a target guideline level should be determined by
Utility Management based on the amount desired to be held in the fund to
help stabilize future rate increases.
• Revising wording in the policy from “If there are funds in the Rate
Stabilization Reserve at the end of any fiscal year, any subsequent Utility
Financial Plan must result in withdrawal of all funds from this Reserve by
the end of the Financial Planning Period.” to “If a Utility Financial Plan
proposes a rate increase, the funds in the Rate Stabilization Reserve
Fund in excess of the target amounts must be drawn down to offset the
proposed rate increase.”
6. Formalize Reserve Tracking – Develop a reserve tracking policy with
reporting requirements to City Council on a regular basis. The policy could
include a schedule prepared for each Utility showing the current reserve fund
balances compared to the amount that should be held in those funds based
on established guideline levels, as well as an explanation of how those
guideline levels are calculated and the reserve funds are used based on the
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Introduction
The purpose of this assessment was to assess and benchmark the City’s current
Utilities Reserves Policies.
Overview
and Reserve Policies, Compliance with Regulatory Reserve Margin
Requirements, Operational/Industry Best Practices, Local Economy Specific
Reserves Through Benchmarking Comparables, and Reserve Tracking. These
sections include the information obtained through our research and outline our
thought process in developing the proposed recommendations for adjustments to
the City's current Utility Reserve Policies.
Scope and
Procedures
The OCA performed the following procedures:
• Gathered all relevant information on the Utility Reserve Policies currently in place;
• Interviewed Utility personnel to gain a comprehensive understanding of these
policies;
• Researched applicable information on Utility reserve policies, operational &
industry best practices;
• Researched reserve policies for comparable communities to provide benchmarking
information regarding the reserve funds;
• Analyzed and outlined observations regarding the current Utility Reserve Policies
against best practices, and
• Developed recommendations for decision makers to consider for updating the
current Utility Reserve Policies.
The OCA greatly appreciates the support of the CPAU and Administrative Services Department
in conducting this assessment.
Thank you!
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Alto Utilities Reserves
Advisory Report
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DETAILED ANALYSIS
Detailed Analysis
Overview of Current Reserve Funds and Reserve Policies
Utility reserve funds provide a safety net for municipal utilities and can help an agency stabilize
rates, respond to emergencies and plan for capital improvements, while ensuring the utility remains
credit worthy and financially healthy. This section of the report to provides a detailed overview of the
current reserve funds and reserve policies for each of the City’s Utilities. Below is a chart that
provides a listing of all the reserve funds in place and whether those reserve funds are in place in
the individual utility listed at the top of each column. Utilities not listed in this chart were not analyzed
as a part of this engagement. The remainder of this section provides the details of these reserve
funds and their associated policies categorized by the reserve funds that are common across all
utilities and the reserve funds that are unique to specific utilities.
Current Reserve Funds in Place for the Utility?
Electric Gas Water Stormwater
Operations No No No
Rate Stabilization
CIP Reserves No No No
Electric Special Projects No No No No No No
Underground Loan No No No No No No
Hydroelectric Stabilization No No No No No No
Electrification Reserve No No No No No No
Public Benefits No No No No No No
Low Carbon Fuel Standard No No No No No No
Cap and Trade Program No No No No No
Emergency Plant Replacement No No No No No No
Landfill Corrective Action Reserve No No No No No No
Geng Road Reserve No No No No No No
Notes and Loans No No No No No No
Reserve Funds included in all Utilities
Unless otherwise noted, guideline levels for reserve funds are based on the reserves
management practices document for each utility.
Rate Stabilization
The purpose of the Rate Stabilization Reserve Fund is to manage the trajectory of
future year rate increases. Withdrawal of funds from Rate Stabilization Reserves
requires action by the City Council. If there are funds at the end of any fiscal year,
any subsequent Financial Plan must result in the withdrawal of all funds from the
Reserves by the end of the Financial Planning Period. The Council may approve
exceptions to this requirement, when proposed by staff to provide greater rate
stabilization to customers.
City of Palo Alto ACFR FYE June 30, 2025 (Page 112)
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DETAILED ANALYSIS
Rate Stabilization Reserves for Wastewater Treatment and Refuse have set Minimum,
Target, and Maximum Levels, which are defined as a % of sales revenue. There is only a
Target Level for Stormwater.
Guideline Levels
Wastewater
Treatment (1) Refuse (1) Stormwater (2)
Rate Stabilization Reserves for Electric, Gas, Wastewater Collection and Water
do not have set Minimum, Target and Maximum Levels.
Reserve Funds unique to specific utilities
Operations
The purpose of the Operations Reserve Fund is to manage normal variations in
costs and as a reserve for contingencies. The Operations Reserve Fund is found
within the Electric Utility, Gas Utility, Wastewater Collection Utility, and Water Utility.
The Minimum, Target, and Maximum level of reserves for the Electric, Gas, Wastewater
Collection, and Water Utilities are defined by the number of days of expenses that
should be covered. Based on the current reserve policies, these guideline levels are as
follows:
Guideline Levels
Electric
Supply (1)
Electric
Distribution (2) Gas (3)
Wastewater
Collection (4) Water (5)
Electric Utility Reserves Management Practices, Gas Utility Reserves Management Practices,
Wastewater Collection Utility Reserves Management Practices, Water Utility Reserves
Management Practices, City Council CMR:320:0, City Council CMR:263:3
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Advisory Report
Item 2: Staff Report Pg. 14 Packet Pg. 42 of 84
DETAILED ANALYSIS
Based upon policy, it should be noted that if, at the end of any fiscal year, the funds
remaining in the Operations Reserves are lower than the minimum level set forth
above, staff shall present a plan to the City Council to replenish the reserve. The
plan shall be delivered within six months of the end of the fiscal year, and shall, at a
minimum, result in the reserve reaching its minimum level by the end of the
following fiscal year. In addition, staff may present an alternative plan that takes
longer than one year to replenish the reserve.
The policy also states that if, at the end of any fiscal year, either Operations Reserve
is higher or lower than the target level, any Financial Plan for a Utility shall be
designed to return Operations Reserves to their target levels by the end of the
forecast period considered in the Financial Plan.
Also, based upon policy, if at any time the Operations Reserve reaches its
maximum level, no funds may be added to this Reserve. Any further increase in
that fund's Fund Balance shall be automatically included in the Unassigned
Reserves.
CIP Reserves
The purpose of the CIP Reserve Fund is to manage cash flow for capital projects
and to act as a reserve for capital contingencies such as overage amounts for a
project. The CIP Reserve Fund is found within the Electric Utility, Gas Utility,
Wastewater Collection Utility, and Water Utility.
The Minimum and Maximum Level guidelines are the same for Electric, Gas,
Wastewater Collection, and Water for the CIP Reserves Fund.
Guideline Levels
These guideline levels are calculated for each fiscal year of the Financial Planning
Period and approved by Council resolution.
Based upon policy, it should be noted that if, at the end of any fiscal year, the
minimum guideline is not met, staff shall present a plan to the City Council to
replenish the reserve. The plan shall be delivered by the end of the following
fiscal year, and shall, at a minimum result in the reserve reaching its minimum
level by the end of the next fiscal year.
Electric Utility Reserves Management Practices, Gas Utility Reserves Management Practices,
Wastewater Collection Utility Reserves Management Practices, Water Utility Reserves
Management Practices, City Council CMR:320:0, City Council CMR:263:3
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Item 2: Staff Report Pg. 15 Packet Pg. 43 of 84
DETAILED ANALYSIS
Also, based upon policy, it should be noted that if, at any time, the CIP Reserve
reaches its maximum level, no funds may be added to this reserve. If there are
funds in this reserve in excess of the maximum level staff must propose to transfer
these funds to another reserve or return them to ratepayers in the next Financial
Plan. Staff may also seek Council approval to hold funds in this reserve in excess
of the maximum level, if they are held for a specific future purpose related to the
CIP.
Electric Special Projects
The purpose of the Electric Special Projects (ESP) Reserve Fund is to fund
projects that benefit electric rate payers. The Electric Special Projects Reserve
Fund is found within the Electric Utility.
The Electric Special Projects Reserve Fund will be managed in accordance with the
policies set forth in Resolution 9206 (Resolution of the Council of the City of Palo
Alto Approving Renaming the Calaveras Reserve to the Electric Special Project
Reserve and Adoption of Electric Special Project Reserve Guidelines) which was
passed in 2011.
Below are the Electric Special Projects (ESP) Reserve Fund guidelines set forth in
Resolution 9206:
• The purpose of the ESP Reserve is to fund projects that benefit electric
ratepayers.
• The ESP Reserve Funds must be used for projects of significant impact.
• Projects proposed for funding must demonstrate a need and value to electric
ratepayers. The projects must have verifiable value and must not be
speculative, or high-risk in nature.
• Projects proposed for funding must be substantial in size, requiring funding of
at least $1 million.
• Set a goal to commit funds by the end of FY 2025.
• Any uncommitted funds remaining at the end of FY 2030 will be transferred to
the Electric Supply Operations Reserve and the ESP Reserve will be closed.
Underground Loan
The purpose of the Underground Loan Reserve Fund is to fund a reserve for
principal payments of outstanding Underground Loan(s). The Underground Loan
Reserve Fund is found within the Electric Utility.
Based upon policy, it should be noted that, at the end of each fiscal year, the
Underground Loan Reserve will be adjusted by the principal payments made
against outstanding underground loans. There are no set Minimum, Target and
Maximum Levels.
Electric Utility Reserves Management Practices
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Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 16 Packet Pg. 44 of 84
DETAILED ANALYSIS
Hydroelectric Stabilization Reserve
The purpose of the Hydroelectric Stabilization Reserve Fund is to manage the
supply cost impacts with variations in generation from hydroelectric resources. The
Hydroelectric Stabilization Reserve Fund is found within the Electric Utility.
Based upon policy, it should be noted that, near the end of each fiscal year, staff
will determine the actual and expected hydro output for that fiscal year, compare
that to the long-term average annual output level, and multiply the difference by the
average of the monthly round-the-clock forward market prices for each month of
the current fiscal year for the projected hydro output.
Staff is authorized to transfer the amount calculated for the projected hydro output
(described above) from the Operations Reserve to the Hydroelectric Stabilization
Reserve for hydro output deviations above long-term average levels, or transfer this
amount from the Hydroelectric Stabilization Reserve to the Operations Reserve for
hydro output deviations below long-term average levels.
The level of the Hydroelectric Stabilization Reserve after the transfers described
above shall be the basis for staff's determination, with Council approval, of whether
to implement the Hydro Rate Adjuster (Electric Rate E-HRA) for the following fiscal
year.
For the Hydroelectric Stabilization Reserve Fund there are set Minimum, Target
and Maximum Levels.
Guideline Levels
Electrification Reserve
The purpose of the Electrification Reserve Fund is to track funding of City
buildings, appliance and vehicle electrification projects and programs, including
development and implementation costs and associated financial incentives, loans
and rebates for participating customers. The Electrification Reserve Fund is found
within the Electric Utility.
Electric Utility Reserves Management Practices
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Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 17 Packet Pg. 45 of 84
DETAILED ANALYSIS
Based upon policy, the Electrification Reserve may be funded by any lawful source
of funds available for such programs, including new or ongoing utility revenues
derived from customer participation. The Electrification Reserve balance shall be
annually adjusted based on the net of revenues and expenses associated with the
City's building appliance and vehicle electrification projects and programs using this
reserve.
Public Benefits
The purpose of the Public Benefits Reserve Fund is to track unspent Public
Benefits Revenues. The Public Benefits Reserve Fund is found within the Electric
Utility.
Based upon policy, the Public Benefits Reserve Fund will be increased by the
amount of unspent Public Benefits Revenues remaining at the end of each fiscal
year. Expenditure of these funds requires actions by the City Council.
Low Carbon Fuel Standard
The purpose of the Low Carbon Fuel Standard (LCFS) Reserve Fund is to track the
revenues earned via the sale of Low Carbon Fuel Credits allocated by the
California Air Resources Board to the City, as well as expenses incurred, in
accordance with California's Low Carbon Fuel Standard Program. The Low Carbon
Fuel Standard Reserve Fund is found within the Electric Utility.
Based upon policy, at the end of each fiscal year, the Low Carbon Fuel Standard
Reserve will be adjusted by the net of revenues and expenses associated with
California's Low Carbon Fuel Standard program
Cap and Trade Program
The purpose of the Cap-and-Trade Program Reserve Fund is to track unspent or
unallocated revenues from the sale of carbon allowances freely allocated by the
California Air Resources Board to the Electric Utility and Gas Utility, under the
State's Cap and Trade Program. The Cap-and-Trade Program Reserve Fund is
found within the Electric Utility and Gas Utility.
Based upon policy, funds in this reserve are managed in accordance with the City's
Policy on the Use of Freely Allocated Allowances under the State's Cap and Trade
Program, adopted by Council Resolution 9487 in January 2015. At the end of each
fiscal year, the Cap-and-Trade Program Reserve will be adjusted by the net of
revenues and expenses associated with the Cap-and-Trade program.
Electric Utility Reserves Management Practices, Gas Utility Reserves Management Practices
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Attachment A - City of Palo
Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 18 Packet Pg. 46 of 84
DETAILED ANALYSIS
Emergency Plant Replacement
The purpose of the Emergency Plant Replacement Reserve Fund is to manage
cash flow for replacement or emergency repairs of damaged equipment. Reserves
in this fund are to be used on the most expensive pieces of equipment which, if lost,
would interrupt Wastewater Treatment activity. The Emergency Plant Replacement
Reserve Fund is found within the Wastewater Treatment Utility.
Based upon policy, uses of funds in this reserve require special appropriation by the Council.
For the Emergency Plant Replacement Reserve Fund there are set Minimum and Maximum
Levels.
Guideline Levels (1)
Notes and Loans
The purpose of the Notes and Loans Reserve Fund is to manage cash flow reserves
for any outstanding Notes and Loans. The Notes and Loans Reserve Fund is found
within the Wastewater Treatment Utility. There are no set Minimum, Target, and
Maximum Levels explicitly stated in the policies as required amounts are established
in the respective loan agreements.
Landfill Corrective Action Reserve
The purpose of the Landfill Corrective Action Reserve Fund is to manage cash flow
reserves for any costs of closure/post closure maintenance and corrective action
for the respective facilities to protect the environment. The Landfill Corrective
Action Reserve is found within the Refuse Utility. There are no set Minimum,
Target, and Maximum Levels.
Geng Road Reserve
The purpose of the Geng Road Reserve is to manage cash flow reserves for any
costs associated with Geng Road. The Geng Road Reserve is found within the
Refuse Utility. There are no set Minimum, Target, and Maximum Levels.
City Council CMR:320:0, City Council CMR:263:3
Item 2
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Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 19 Packet Pg. 47 of 84
DETAILED ANALYSIS
Overview of Current Reserve Funds and Reserve Policies Observations
Observation #1
Based on the information discussed within the Reserve Funds included in all Utilities
category, and the Reserve Funds that are unique to specific Utilities category,
current reserve policies result in significant administrative burden through multiple
prescribed transfer rules and the necessary tracking of reserve funds to minimum,
target, and maximum levels. The policies for many reserve funds dictate that reserve
funds money must be transferred into the fund if below the minimum level or out of
the fund if above the maximum level. For example, this is a requirement for the
Operations and Maintenance Reserve, CIP Reserve, and Hydroelectric Stabilization
Reserve for the Electric Utility. This requirement necessitates tracking reserve funds
to the specific minimum and maximum amounts and transferring funds accordingly.
Observation #2
The current reserve funds and policies for the Wastewater Treatment Utility,
Refuse Utility, and Stormwater Utility are from May 24, 1990 and May 6, 1993 and
are not up to date compared to the other Utilities. Reserve policies for the other
utilities were updated June 16, 2025.
Observation #3
The purpose of the Electric Special Projects Reserve appears to be similar to the CIP
Reserves, and the combination of the two reserves into just one, could assist in
relieving the administrative burden of having two reserve funds within the Electric
Utility that are for similar purposes.
Consistency With Regulatory Reserve Margin Requirements
Outstanding Bond Requirements
There are two series of publicly-sold utility bonds outstanding:
• $35,015,000 City of Palo Alto Water Revenue Bonds, 2009 Series A (Taxable Direct Payment
Build America Bonds), which mature on June 1, 2035
• $17,225,000 City of Palo Alto Utility Revenue Refunding Bonds 2011 Series A, which mature
on June 1, 2026
The 2009 Bonds are payable only from Net Revenues of the Water System. Proceeds of the 2009
Bonds funded a debt service reserve fund for the 2009 Bonds in the amount of $2,567,280. The City
is required to maintain the debt service reserve fund while the 2009 Bonds remain outstanding.
Water Revenue Bonds, 2009 Series A, OS, Utility Revenue Refunding Bonds, 2011 Series A, OS
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Advisory Report
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DETAILED ANALYSIS
The 2011 Bonds were separated into sub-series, with 45% ($7,751,250) allocated to the Water
System and 55% ($9,473,750) allocated to the Gas System. The Water System’s 2011 sub-series is
payable only from Net Revenues of the Water System on a parity basis with the 2009 Bonds. The Gas
System 2011 sub-series is payable only from Net Revenues of the Gas System. Proceeds of the
2011 Bonds funded a debt service reserve fund for the 2009 Bonds in the amount of $1,462,600. The
City is required to maintain the debt service reserve fund the 2011 Bonds remain outstanding.
Rate Covenant
2009 Bonds. In the Indenture for the 2009 Bonds, the City covenanted to fix,
prescribe, revise and collect Charges for the Water System during each Fiscal Year
which (together with other funds transferred from stabilization reserve funds for the
Water System, and which are lawfully available to the City for payment of any of the
following amounts during such Fiscal Year) are at least sufficient, after making
allowances for contingencies and error in the estimates, to pay the following
amounts in the following order:
• All Maintenance and Operation Costs of the Water System estimated by the
City to become due and payable in such Fiscal Year;
• the Debt Service;
• All other payments required for compliance with the Indenture and the
instruments pursuant to which any Parity Bonds relating to the Water System
shall have been issued; and
• All payments required to meet any other obligations of the City which are
charges, liens, encumbrances upon or payable from the Gross Revenues of
the Water System or the Net Revenues of the Water System.
In addition, the City covenanted to fix, prescribe, revise and collect Charges for the Water System
during each Fiscal Year which, when added to the balance then on hand in Available Reserves
for the Water System, are sufficient to yield Net Revenues of the Water System at least equal to
one hundred twenty-five percent (125%) of the amounts payable under the preceding clause (a)(2)
in such Fiscal Year for Bonds which have a lien on such Net Revenues.
2011 Bonds. In the Indenture for the 2011 Bonds, the City covenanted, separately
for each of the Water System and the Gas System, to fix, prescribe, revise, and
collect Charges for each System during each Fiscal Year which (together
with other funds transferred from stabilization reserve funds for such System, and
which are lawfully available to the City for payment of any of the following amounts
during such Fiscal Year) are at least sufficient, after making allowances for
contingencies and error in the estimates, to pay the following amounts in the
following order:
• All Maintenance and Operation Costs of Such System estimated by the City
to become due and payable in such Fiscal Year;
• The Debt Service on the Sub-Series of the 2011 Bonds issued for such
System;
Water Revenue Bonds, 2009 Series A, OS, Utility Revenue Refunding Bonds, 2011 Series A, OS
Item 2
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Advisory Report
Item 2: Staff Report Pg. 21 Packet Pg. 49 of 84
DETAILED ANALYSIS
• All other payments required for compliance with this Indenture and the
instruments pursuant to which any Parity Bonds relating to such System shall
have been issued; and
• All payments required to meet any other obligations of the City which are
charges, liens, encumbrances upon or payable from the Gross Revenues of
such System or the Net Revenues of such System.
In addition, the City covenanted for each of the Water System and the Gas System to
fix, prescribe, revise, and collect Charges for such System during each Fiscal Year
which, when added to the balance then on hand in Available Reserves for such System,
are sufficient to yield Net Revenues of such System at least equal to one hundred twenty-five
percent (125%) of Debt Service that is payable from Net Revenues of the such System.
Available Reserves
2009 Bonds. In the Indenture for the 2009 Bonds, the City covenanted to maintain
the funds on hand in Available Reserves in an aggregate amount at least equal to
five (5.0) times maximum annual debt service on all outstanding bonded
indebtedness secured by Net Revenues of the Water, Gas or Electric Systems.
In addition, the City covenanted to transfer from Available Reserves, to the Water
Revenue Fund, as needed, amounts sufficient to enable the City to pay all
maintenance and operation costs of the Water System, and all debt service on the
Bonds, when and as the same become due and payable.
The 2009 Indenture defines “Available Reserves” to mean funds held in the City’s:
(i) Rate Stabilization Reserve for the Water System,
(ii) Distribution Rate Stabilization Reserve for the Electric System,
(iii) Distribution Rate Stabilization Reserve for the Gas System,
(iv) Supply Rate Stabilization Reserve for the Electric System,
(v) Supply Rate Stabilization Reserve for the Gas System, and
(vi) the Electric System’s Calaveras-Stranded Costs Reserve.
2011 Bonds. In the Indenture for the 2011 Bonds, the City covenanted to maintain
the funds on hand in Available Reserves (as defined above) in an aggregate amount
at least equal to five (5.0) times maximum annual debt service on all outstanding
bonded indebtedness secured by Net Revenues of the Water System and the Gas
System.
Water Revenue Bonds, 2009 Series A, OS, Utility Revenue Refunding Bonds, 2011 Series A, OS
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DETAILED ANALYSIS
In addition, the City covenanted to transfer from Available Reserves, to the Revenue
Fund, as needed, amounts sufficient to enable the City to pay all Maintenance and
Operation Costs of the applicable Water System or Gas System, and all Debt
Service, when and as the same become due and payable.
The City covenanted in the 2011 Indenture that any depletion of the Available
Reserves which causes the balance therein to fall below the required level shall be
restored from Net Revenues of the System which caused such depletion to take
place.
Application of the Available Reserves Requirement
As described above, the City covenanted in the Indentures for the 2009 Bonds and
the 2011 Bonds to maintain in the Available Reserves an aggregate amount at least
equal to five (5.0) times maximum annual debt service on all outstanding bonded
indebtedness secured by Net Revenues of the Water, Gas or Electric Systems.
The Maximum Annual Debt Service on the 2009 and 2011 Bonds is $4,025,221.26.
There is no outstanding bonded indebtedness payable from the Electric System.
Five times the Maximum Annual Debt Service is $20,126,106.30. Consequently, the
City is obligated to maintain $20,126,106.30 in the Available Reserves as long as
the 2009 Bonds and the 2011 Bonds are outstanding.
The 2011 Bonds mature in 2026. The City intends to refinance the 2009 Bonds, if
market conditions permit.
Water Revenue Bonds, 2009 Series A, OS, Utility Revenue Refunding Bonds, 2011 Series A, OS
Item 2
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Advisory Report
Item 2: Staff Report Pg. 23 Packet Pg. 51 of 84
DETAILED ANALYSIS
Credit Rating Reserve Targets
Standard & Poor's
Standard & Poor’s (S&P) has a methodology known as “S&P Criteria for U.S.
Municipal Water Sewer, and Solid Waste Utilities” that S&P applies for rating
any water, sewer or solid waste utility nationally. S&P also has a methodology
known as “S&P Criteria for U.S. Municipal Retail Electric and Gas Utilities” that
S&P applies for rating any electric or gas utility nationally. More information
about the S&P methodologies are provided below.
Standard & Poor's (S&P) issued a Global Ratings Affirmation for the outstanding Utility Revenue
Refunding Bonds, 2011 Series A and Water Revenue Bonds, 2009 Series A, and affirmed its
'AAA' rating on the outstanding bonds and determined that the outlook is stable.
The outstanding bonds fall under the S&P Criteria for U.S. Municipal Water,
Sewer, and Solid Waste Utilities, since they are backed by multiple Utility
revenues.
For the S&P Criteria for U.S. Municipal Water, Sewer, and Solid Waste Utilities,
Liquidity and Reserves have a 40% weighting when it comes to a rating.
Due to the significant weight of liquidity and the reserves on the overall rating
criteria, An important factor in maintaining the City’s 'AAA' Rating is ensuring that
their Water, Sewer, and Solid Waste Liquidity and Reserves meet the reserve
balance category of Extremely Strong. Below is a table that lists the Liquidity and
Reserves S&P criteria for U.S. Municipal Water, Sewer, and Solid Waste Utilities.
Days' Cash Available Reserves
Water Revenue Bonds, 2009 Series A, OS, Utility Revenue Refunding Bonds, 2011 Series A, OS, S&P Ratings
Report from April 7, 2025, S&P Criteria | Governments | U.S. Public Finance: U.S. Municipal Water, Sewer, And
Solid Waste Utilities: Methodology And Assumptions
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Advisory Report
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DETAILED ANALYSIS
For the S&P Criteria for U.S. Municipal Retail Electric and Gas Utilities, Liquidity
and Reserves have a 25% weighting when it comes to a rating. The City does not
currently have outstanding debt that is rated using this criteria. Below is a table
that lists the Liquidity and Reserves S&P Criteria for U.S. Municipal Retail Electric
and Gas Utilities. The following table measures liquidity through a Days' Liquidity
metric, which measures how many days the Utility can continue to operate and
pay for its expenses using only its currently available cash on hand. If the City
intends to issue rated electric or gas utility debt in the future, the available
reserves for those utilities would be considered against the amounts listed in the
table below to help determine the liquidity and reserves scoring component for a
bond rating.
Total Days'
Extremely Strong =>270 =>$250
Very Strong 150-270 $100-$250
Strong 90-150 $50-$100
Adequate 45-90 $10-$50
Vulnerable 15-45 $2-$10
Highly Vulnerable <=15 <=$2
Moody's
Moody's issued a credit opinion on December 16, 2024 for the City of Palo Alto,
the water system, and water and gas as a combined utility. The City's rating of
'Aaa' was determined to be stable, the water system's rating of 'Aa1' was
determined to be stable, and the water and gas combined utility's rating of 'Aa2'
was determined to stable.
The criteria Moody's utilizes for their ratings from the credit opinion is their rating
methodology over US Municipal Utility Revenue Debt.
For Moody's US Municipal Utility Revenue Debt, Financial Strength has a 40%
weighting when it comes to a rating. Of the 40% weighting, Annual Debt Service
Coverage is 15%, Days Cash on Hand is 15%, and Debt to Operating Revenues is
10%. Below is a table that lists the Financial Strengths Moody's criteria for US
Municipal Utility Revenue Debt.
S&P Criteria | Governments | U.S. Public Finance: U.S. Municipal Retail Electric And Gas Utilities:
Methodology And Assumptions, Moody's Rating Methodology: US Municipal Utility Revenue Debt
Item 2
Attachment A - City of Palo
Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 25 Packet Pg. 53 of 84
DETAILED ANALYSIS
Annual Debt
Service
Coverage
Days Cash
on Hand
Debt to Operating
Revenues
Aaa >2.00x >250 days <2.00x
Aa
A
Baa 35 > n > 15 7.00x < n < 8.00x
Ba 15 > n > 7 8.00x < n < 9.00x
B and
Below <0.70x <7 days >9.00x
Compliance With Regulatory Reserve Margin Requirements Observations
Observation #1
Current reserve policies do not specifically address the Rate Covenants or Available
Reserve Covenants listed above as Outstanding Bond Requirements. These covenants
were made by the City in the official statements and legal documents for the outstanding
2009 and 2011 bonds. The City could consider referencing these documents in its
reserve policies.
• It is important to note that aaccording to the latest Ratings Affirmation from
S&P on the outstanding 2011 and 2009 bonds, Palo Alto is in compliance
with the Rate and Available Reserves Covenants
Observation #2
Current reserve policies do not specifically address relevant credit rating reserve
targets. By formulating reserve policies that specify guideline levels for reserve funds
with these credit rating reserve targets in mind, the City can better position itself to
maintain its strong bond ratings.
Moody's Rating Methodology: US Municipal Utility Revenue Debt
Item 2
Attachment A - City of Palo
Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 26 Packet Pg. 54 of 84
DETAILED ANALYSIS
Operational/Industry Best Practices
Government Finance Officers Association (GFOA)
Operating Reserves
GFOA recommends, at a minimum, regardless of a governments size, to maintain
operating reserves at no less than two months of regular operating revenues or
regular operating expenditures. The choice of revenues or expenditures as a basis
of comparison may be dictated by what is more predictable for the government's
particular circumstances. GFOA also states that a government's particular situation
often may require a level of operating reserves to be significantly in excess of the
recommended minimum level of no less than two months of regular operating
revenues or regular operating expenditures. An example of a particular situation
could be a government that knows it is exposed to certain economical or climate
risks with complex potential effects of them in the future.
GFOA also recommends that if the reserve balance falls below the government's
policy level, there should be a solid plan to replenish it, and governments should
seek to replenish the reserve balance within one to three years.
Capital Improvement Program Reserves
GFOA states that Capital Improvement Program Reserves may be used to
proactively manage capital assets, for instance by annually setting aside 20% of a
five-year asset's replacement costs so that funding is available when replacement is
necessary.
Furthermore, the GFOA provides two examples of annual funding allocations/levels
for a Capital Improvement Program Reserves, which are listed below.
• Maintain an ending balance equal to a dollar amount or a percentage of the
five-year average of the entity's annual capital budget. (The actual dollar
amount or percentage should be set based on the particular entity's capital
needs and financial capabilities.)
• Baker Tilly considers maintaining 20%, which is the equivalent of one-
year of average capital improvements, of the total capital anticipated
to be funded with cash on hand in the five-year capital budget in CIP
reserves as a best practice.
GFOA Fund Balance Guidelines for the General Fund, GFOA Strategies for Establishing Capital Asset Renewal
and Replacement Reserve Policies
Item 2
Attachment A - City of Palo
Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 27 Packet Pg. 55 of 84
DETAILED ANALYSIS
• Annually contribute an amount based on a percentage of the annual
depreciation of the entity's assets. Funding sources will vary and may includes
transfers from the Operations Fund or one-time revenues. An entity may wish
to consider initial funding levels for the first one to five years with a plan for
increasing funding thereafter until the target funding level is achieved. In
addition, organizations should consider the pros and cons of the level of
reliance on one-time versus recurring revenues based upon the financial
conditions of the jurisdiction and the goals of the reserve.
Additional Industry Best Practices
Capital Improvement Program Reserves
An additional best practice for the Capital Improvement Program Reserves it to
have at least one year worth of depreciation expense in a fund for capital
improvements. Note that a reserve target for a CIP fund would typically be based
on either a percentage of average annual capital spending based on a CIP plan or
based on depreciation expense amounts.
Operational/Industry Best Practices Observations
Observation #1
The City of Palo Alto's current reserve policies for its operations reserve funds are in
alignment with the GFOA's recommendations for operating reserves. However, the
Wastewater Treatment Utility, Refuse Utility, and Stormwater Utility do not currently
have operations reserve funds.
Observation #2
The City of Palo Alto's current reserve policy for its CIP reserve funds outlines a maximum
reserve guideline level that aligns with Baker Tilly’s recommendation for a target ending
balance for a CIP reserve fund (approximately one-year of average capital improvement
spending held in reserve). Current reserve policy outlines a minimum reserve guideline level
that is 20% of this amount.
While Baker Tilly considers one-year of average capital improvements a best practice CIP
reserve level, GFOA recommends that capital reserve level development should be designed to
best serve the particular needs of a given organization. As such, an amount less than our
recommendation could be considered. Alternatively, another approach to determining a CIP
reserve fund guideline level could be to maintain one-year or a percentage of one-year of
depreciation expense in reserve balances.
Item 2
Attachment A - City of Palo
Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 28 Packet Pg. 56 of 84
DETAILED ANALYSIS
Local Economy Specific Reserves Through Benchmarking Comparables
The purpose of this section is to provide an overview of the local economy specific reserves
by benchmarking the reserve funds and reserve policies of communities comparable to the
City of Palo Alto ("benchmark communities"). The benchmark communities that we
researched are City of Roseville, City of Santa Clara, City of Healdsburg, City of Pasadena,
and San Jose Clean Energy. Within this section, we list the reserve funds and the guideline
cash reserve levels for the reserve funds from the benchmark communities and compare
them to the City of Palo Alto's Utility reserve funds and reserve policies guidelines. This
information is broken down into two sections; Reserve Funds Palo Alto Utilities Have and
Reserve Funds Palo Alto Utilities Do Not Have. The chart below indicates for each
comparable community what reserve funds they have (indicated by “Yes”) and do not have
(indicated by “No”) for each of their utilities.
Benchmarking Comparables
City of Roseville City of Santa
Clara City of Healdsburg City of
Pasadena
Jose
Clean
Electric Water Electric Water Electric Water Electric Electric
Rate
Stabilization Yes Yes Yes No Yes No No Yes Yes No Yes
Operations No Yes Yes Yes Yes No Yes Yes Yes Yes Yes
Capital
Replacement &
Improvement
No No No No No Yes Yes Yes Yes Yes No
No Yes Yes No No No No No No No No
Yes No No No No No No No No Yes No
Reserve Funds Palo Alto Utilities Do Not Have:
Debt Service Yes No No No No No No No No No No
Yes No No No No No No No No No No
Fixed Cost
Coverage Yes No No No No No No No No No No
No No No No No No No No No Yes No
No No No No No No No No No Yes No
No No No No No No No No No Yes No
Contingency
Reserve No No No No No No No No No Yes No
Item 2
Attachment A - City of Palo
Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 29 Packet Pg. 57 of 84
DETAILED ANALYSIS
Reserve Funds Palo Alto Utilities Have
Rate Stabilization
As noted in the overview of current reserve funds and reserve policies section, the City of Palo
Alto has a rate stabilization reserve fund for each of its utilities. The current City reserve policies
outline the guideline levels for rate stabilization reserves as follows:
Table 1 - Palo Alto Rate Stabilization Fund
Minimum 15% 10% N/A
Target 22.5% 15% $500,000
Maximum 30% 20% N/A
(1) % of sales revenue. Levels found in City Council CMR:263:3 from May 6, 1993 (2) Target Level found in City Council CMR:320:0 from May 24, 1990
Rate Stabilization Reserves for Electric, Gas, Wastewater Collection and Water do not have set
Minimum, Target and Maximum Levels.
Similar to Palo Alto, many of the benchmark communities researched had rate stabilization
reserve funds for their utilities. The guideline levels of reserves outlined in the benchmark
communities reserve policies for the rate stabilization reserve funds were as follows:
City of Roseville Electric
Table 2 - Roseville Electric Rate Stabilization Fund
Minimum 40% of operating expenses
Target 65% of operating expenses
Maximum 90% of operating expenses
City of Roseville Water and Wastewater
Table 3 - Roseville Water and Wastewater Rate Stabilization Fund
City of Roseville Financial Policies (Pages 106-108 and 118-120)
50% of operating expenses or roughly 180 Days' Cash Target
Item 2
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Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 30 Packet Pg. 58 of 84
DETAILED ANALYSIS
City of Santa Clara Electric
Based upon research, it is determined that the City of Santa Clara Electric Utility has an
Electric Rate Stabilization Reserve Fund with a balance as of May 31, 2025 of $70,000,000;
however, we were unable to track down guideline levels for their Electric Rate Stabilization
Reserve Fund. When calculating $70,000,000 divided by the City of Santa Clara's Electric
Utility Fiscal Year 2024-2025 adopted budget for Electric Utility Operating Expenses of
$649,513,582, the reserve balance comes out to approximately 10.78% of budgeted Electric
Utility Operating Expenses.
City of Healdsburg Water and Wastewater
Table 4 - Healdsburg Water and Wastewater Rate Stabilization Fund
San Jose Clean Energy
Table 5 - San Jose Clean Energy Rate Stabilization Fund
Comparison to City of Palo Alto Electric
Table 6 - Electric Rate Stabilization Fund Guideline Reserve Levels Comparison
Palo Alto City of Electric Santa San Jose Clean Energy
Minimum N/A N/A N/A
Target N/A 65% of
expenses operating non-operating revenues
Maximum N/A N/A N/A
There are no set Minimum, Target and Maximum Levels for City of Palo Alto Electric.
City of Santa Clara Financial Status Report as of May 31, 2025 (Pages 23-24), City of Healdsburg Ordinance
No. 1240, San Jose Clean Energy Financial Reserves Policy
Guideline Level
Guideline Level
Item 2
Attachment A - City of Palo
Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 31 Packet Pg. 59 of 84
DETAILED ANALYSIS
Comparison to City of Palo Alto Water
Table 7 - Water Rate Stabilization Fund Guideline Reserve Levels Comparison
Guideline Levels
City of Palo Alto Water City of Roseville Water
Minimum N/A N/A N/A
Target N/A 50% of operating expenses or
roughly 180 Days' Cash $1,000,000
There are no set Minimum, Target and Maximum Levels for City of Palo Alto Water.
Comparison to City of Palo Alto Wastewater
Table 8 - Wastewater Rate Stabilization Fund Guideline Reserve Levels Comparison
Palo Alto
Wastewater Collection
Palo Alto
Wastewater Treatment (1)
City of
Roseville
Wastewater
City of
Healdsburg
Wastewater
Minimum N/A 15% N/A N/A
Target N/A 22.5% 50% of operating
expenses or roughly
180 Days' Cash
There are no set Minimum, Target and Maximum Levels for City of Palo Alto Wastewater
Collection.
Also, it should be noted that the Gas, Refuse and Stormwater Systems for the City of Palo Alto
all had rate stabilization reserve funds as well, but as none of the benchmark communities had
rate stabilization reserve funds for these utilities, no charts are shown for them.
Rate Stabilization Observations
Observation #1
The City of Palo Alto Electric Utility does not have a set minimum, target, or maximum
guideline level. For the benchmark communities, the City of Roseville Electric has a
minimum, target, or maximum guideline level found in Table 2, our calculation for City of
Santa Clara Electric of 10.78% of operating expenses is assumed to be the target guideline
level, and San Jose Clean Energy only has a target guideline level found in Table 5. Table
6 shows these benchmark communities reserve guideline levels compared to the City of
Palo Alto's Electric Utility.
Item 2
Attachment A - City of Palo
Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 32 Packet Pg. 60 of 84
DETAILED ANALYSIS
Observation #2
The City of Palo Alto Water Utility does not have a set minimum, target, or maximum
guideline level, while the City of Roseville Water and City of Healdsburg Water both have
target guideline levels found in Table 3 and Table 4. Table 7 shows these benchmark
communities reserve guideline levels compared to the City of Palo Alto's Water Utility.
Observation #3
The City of Palo Alto Wastewater Collection Utility does not have a set minimum, target, or
maximum guideline level, while the City of Palo Alto Wastewater Treatment Utility does as
shown in Table 1. The City of Roseville Wastewater and City of Healdsburg Wastewater both
have target guideline levels found in Table 3 and Table 4. Table 8 shows these benchmark
communities reserve guideline levels compared to the City of Palo Alto's Wastewater
Collection Utility.
Operations and Maintenance
As noted in the overview of current reserve funds and reserve policies section, the City of Palo
Alto has an operations reserve fund for its Electric Utility, Gas Utility, Wastewater Collection
Utility, and Water Utility. The current City reserve policies outline the guideline levels for
operations reserves are found in the below table.
Table 9 - Palo Alto Operations and Maintenance Fund
Supply (1) Distribution (2) Gas (3) Collection (4) Water
Minimum 60 60 60 60 60
Target 90 90 90 105 90
Maximum 120 120 120 150 120
(1) Days of Electric Supply Fund O&M and Commodity Expense
(2) Days of Electric Distribution Fund O&M Expense
(3) Days of Gas O&M and Commodity Expense
(4) Days of Wastewater Collection O&M and Commodity Expense
(5) Days of Water O&M and Commodity Expense
City of Roseville Water
Table 10 - Roseville Water Operations and Maintenance Fund
City of Roseville Financial Policies (Pages 118-120)
Minimum 90 days' cash worth of operating expenses.
Item 2
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Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 33 Packet Pg. 61 of 84
DETAILED ANALYSIS
City of Roseville Wastewater
Table 11 - Roseville Wastewater Operations and Maintenance Fund
City of Roseville Solid Waste
Table12 - Roseville Solid Waste Operations and Maintenance Fund
City of Santa Clara Electric
Based upon research, it is determined that the City of Santa Clara Electric Utility has an
Operations and Maintenance Reserve Fund with a balance as of May 31, 2025 of
$257,000,000; however, we were unable to track down guideline levels for their Electric
Operations and Maintenance Reserve Fund. When calculating $257,000,000 divided by the
City of Santa Clara's Electric Utility Fiscal Year 2024-2025 adopted budget for Electric Utility
Operating Expenses of $649,513,582, the reserve balance comes out to approximately 39.57%
of budgeted Electric Utility Operating Expenses, or 145 days of operating expenses.
City of Healdsburg Electric
Table 13 - Healdsburg Electric Operations and Maintenance Fund
City of Healdsburg Water
Table 14 - Healdsburg Water Operations and Maintenance Fund
City of Healdsburg Wastewater
Table 15 - Healdsburg Wastewater Operations and Maintenance Fund
City of Roseville Financial Policies (Pages 118-120), City of Santa Clara Financial Status Report as of May 31,
2025 (Pages 23-24), City of Healdsburg Ordinance No. 1240, City of Healdsburg Biennial Budget (Page 70)
Minimum 90 days' cash worth of operating expenses.
Minimum 90 days' cash worth of operating expenses.
183 days of operating expenses Minimum
92 days of operating expenses Minimu
92 days of operating expenses Minimum
Item 2
Attachment A - City of Palo
Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 34 Packet Pg. 62 of 84
DETAILED ANALYSIS
City of Pasadena Electric
Table 16 - Pasadena Electric Operations and Maintenance Fund
Minimum 60 days of operating expenses
Target 90 days of operating expenses
San Jose Clean Energy
Table 17 - San Jose Clean Energy Operations and Maintenance Fund
Comparison to City of Palo Alto Water
Table 18 - Water Operations and Maintenance Fund Guideline Reserve Levels
Comparison
Minimum 60 days of operating
expenses. of operating expenses.
City of Pasadena Code of Ordinances 13.04.175, San Jose Clean Energy Financial Reserves Policy
180 days liquidity on hand Minimum
Item 2
Attachment A - City of Palo
Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 35 Packet Pg. 63 of 84
DETAILED ANALYSIS
Comparison to City of Palo Alto Wastewater Collection
Table 19 - Wastewater Operations and Maintenance Fund Guideline Reserve
Levels Comparison
Wastewater Collection Wastewater Wastewater
Minimum 60 days of operating
expenses. of operating expenses.
Comparison to City of Palo Alto Electric Table 20 - Electric Operations and Maintenance Fund Guideline Reserve Levels Comparison
Guideline Levels
City of Palo
Alto Electric
Supply (1)
City of Palo
Alto
Electric
Distribution (2)
City of Santa
Clara
Electric
City of
Healdsburg
Electric
City of
Pasadena
Electric
San
Jose
Clean
Energy
Minimum
60 days of
operating
expenses
60 days of
operating
expenses.
N/A
183 days of
operating
expenses
60 days of
operating
expenses
days
liquidity
on
Target operating operating operating N/A operating N/A
Maximum
120 days of
operating
expenses
120 days of
operating
expenses
N/A N/A N/A N/A
(1) Defined in the reserve policy as Electric Supply Fund O&M and Commodity Expense
(2) Defined in the reserve policy as Electric Distribution Fund O&M Expense
Also, it should be noted that the Gas System for the City of Palo Alto had
operations and maintenance reserve fund as well, but as none of the
benchmark communities had operations and maintenance reserve funds for
Gas, no charts are shown for it.
Item 2
Attachment A - City of Palo
Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 36 Packet Pg. 64 of 84
DETAILED ANALYSIS
Operations and Maintenance Observations
Observation #1
As shown in Tables 18 and 19, the City of Palo Alto Water Utility and Wastewater
Collection Utility both have a set minimum, target, and maximum guideline levels, while
the City of Roseville and City of Healdsburg Water and Wastewater Utilities only have
minimum guideline levels. While the City of Palo Alto's minimum guideline levels for both
utilities are lower than the City of Roseville or the City of Healdsburg Water and
Wastewater Utilities, Palo Alto's maximum guideline levels are higher than the minimum
guideline levels for the City of Roseville and City of Healdsburg Water and Wastewater
Utilities.
Observation #2
As shown in Table 20, the City of Palo Alto Electric Utility has set minimum, target, and
maximum guideline levels for Electric Supply and Electric Distribution, while City of
Healdsburg Electric and San Jose Clean Energy only have a minimum guideline level,
City of Pasadena Electric has both a minimum and target guideline levels, and while the
City of Santa Clara Electric does not have specified guideline levels, we have listed their
current balance expressed as days operating expenses as their target guideline level.
Based on these guideline levels of reserves, the City of Palo Alto Electric Utility minimum
and target guideline levels are the same as the City of Pasadena Electric, but the
minimum and target guideline levels are lower than any minimum or target guideline
levels for City of Santa Clara Electric, City of Healdsburg Electric, and San Jose Clean
Energy. The City of Palo Alto Electric Utility maximum guideline level is lower than City of
Healdsburg Electric and San Jose Clean Energy minimum guideline levels, and the Santa
Clara Electric target guideline level. See Table 20.
Capital Replacement & Improvement
As noted in the overview of current reserve funds and reserve policies section, the City of
Palo Alto has a CIP reserve fund for its Electric Utility, Gas Utility, Wastewater Collection
Utility, and Water Utility. The current City reserve policies outline the guideline levels for
CIP reserves as follows:
Table 21 - Palo Alto Capital Replacement & Improvement Fund
Minimum 20% of the maximum CIP Reserve guideline level
Maximum Average annual (12 month) CIP budget, for 48 months of budgeted CIP expenses
City of Santa Clara Water
Based upon research, it is determined that the City of Santa Clara Water has a Capital
Replacement & Improvement Reserve Fund with a balance as of May 31, 2025 of
$303,090; however, we were unable to track down guideline levels for their Water Capital
Replacement & Improvement Reserve Fund.
Item 2
Attachment A - City of Palo
Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 37 Packet Pg. 65 of 84
DETAILED ANALYSIS
City of Healdsburg Electric
Table 22 - Healdsburg Electric Capital Replacement & Improvement Fund
City of Healdsburg Water
Table 23 - Healdsburg Water Capital Replacement & Improvement Fund
City of Healdsburg Wastewater
Table 24 - Healdsburg Wastewater Capital Replacement & Improvement Fund
City of Pasadena Electric
Table 25 - Pasadena Electric Capital Replacement & Improvement Fund
Comparison to City of Palo Alto Electric
Table 26 - Electric Capital Replacement & Improvement Fund Guideline Reserve Levels
Comparison
Palo Alto Healdsburg Pasadena
Minimum 20% of the maximum CIP
Reserve guideline level
N/A N/A
Target N/A $4,000,000 capital expenditures
budget, for 48 months of
City of Santa Clara Financial Status Report as of May 31, 2025 (Pages 23-24), City of Healdsburg Ordinance
No. 1240, City of Healdsburg Biennial Budget (Pages 66 and 69-70)
One year of budgeted capital expenditures Target
$1,000,000 Target
$1,000,000 Target
$4,000,000 Target
Item 2
Attachment A - City of Palo
Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 38 Packet Pg. 66 of 84
DETAILED ANALYSIS
Comparison to City of Palo Alto Water
Table 27 - Water Capital Replacement & Improvement Fund Guideline Reserve Levels
Comparison
Palo Alto Healdsburg
Minimum 20% of the maximum CIP Reserve guideline level N/A
Target N/A $1,000,000
Maximum Average annual (12 month) CIP budget, for 48
months of budgeted CIP expenses
N/A
Table 28 - Wastewater Capital Replacement & Improvement Fund Guideline
Reserve Levels Comparison
Palo Alto Healdsburg
Minimum 20% of the maximum CIP Reserve guideline level N/A
Target N/A $1,000,000
Maximum Average annual (12 month) CIP budget, for 48
months of budgeted CIP expenses
N/A
Also, it should be noted that the Gas System for the City of Palo Alto had capital replacement &
improvement reserve fund as well, but as none of the benchmark communities had capital
replacement & improvement reserve funds for Gas, no charts are shown for it.
Capital Replacement & Improvement Observations
Observation #1
The City of Palo Alto Electric, Water, and Wastewater Collection Utilities have set minimum and
maximum guideline levels for the capital replacement & improvement reserve funds, while all other
benchmark communities that had utilities with capital replacement & improvement reserve funds
only had target guideline levels. See Tables 26 - 28 for the comparisons between Palo Alto and the
benchmark communities for each of these Utilities.
System Critical Failure
As noted in the overview of current reserve funds and reserve policies section, the City of Palo Alto
has an Emergency Plant Replacement reserve fund for its Wastewater Treatment Utility. The
current City reserve policies outline the guideline levels for Emergency Plant Replacement
reserves as follows:
Table 29 - Palo Alto Wastewater Treatment System Critical Failure Fund
Minimum 5% of annual increase in the net book value of fixed assets
Maximum 5% of total net book value of fixed assets
(1) Levels are found in City Council CMR:320:0
Item 2
Attachment A - City of Palo
Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 39 Packet Pg. 67 of 84
DETAILED ANALYSIS
City of Roseville Water
Table 30 - Roseville Water System Critical Failure Fund
City of Roseville Wastewater
Table 31 - Roseville Wastewater System Critical Failure Fund
System Critical Failure Observations
Observation #1
The City of Palo Alto Wastewater Treatment Utility has set minimum and maximum guideline levels
for the emergency plant replacement reserve, while the City of Roseville Water and Wastewater
Utilities only had minimum guideline levels. See Table 29, Table 30, Table 31.
Debt Service Reserve
City of Roseville Electric
Table 35 - Roseville Electric Debt Service Reserve Fund
City of Pasadena Electric
Table 36 - Pasadena Electric Debt Service Reserve Fund
Reserve Funds Palo Alto Utilities Do Not Have
Debt Service Coverage
City of Roseville Electric
Table 32 - Roseville Electric Debt Service Coverage Ratio
City of Roseville Financial Policies (Page 118-120), City of Pasadena Code of Ordinances 13.04.175
Minimum 1% - 2% of the Capital Assets belonging to the Water Utility
Minimum 1% - 2% of the Capital Assets belonging to the Wastewater Utility
Minimum 2.0x annual debt service payments
Minimum Maintain a fully funded debt service reserve as required by
bond covenants.
Minimum Maintain a reserve equivalent to one year of debt service
payments for outstanding bond or credit obligations.
Item 2
Attachment A - City of Palo
Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 40 Packet Pg. 68 of 84
DETAILED ANALYSIS
Days Cash on Hand
City of Roseville Electric
Table 33 - Roseville Electric Days Cash on Hand Fund
City of Roseville Electric
Table 34 - Roseville Electric Fixed Cost Coverage
General Fund Transfer
City of Pasadena Electric
Table 37 - Pasadena Electric General Fund Transfer
Energy Services Charge
City of Pasadena Electric
Table 38 - Pasadena Electric Energy Services Charge
Minimum 60 days of projected power supply costs
Target 90 days of projected power supply costs
Transmission Services Charge
City of Pasadena Electric
Table 39 - Pasadena Electric Transmission Services Charge
Minimum 60 days of transmission services cost
Target 90 days of transmission services cost
City of Roseville Financial Policies (Page 106-108), City of Pasadena Code of Ordinances 13.04.175
Minimum 1.5x of annual fixed costs
Guideline Level
One year of the budgeted General Fund Transfer Target
Guideline Level
Minimum >250 days
Guideline Level
Item 2
Attachment A - City of Palo
Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 41 Packet Pg. 69 of 84
DETAILED ANALYSIS
Contingency Reserve
City of Pasadena Electric
Table 40 - Pasadena Electric Contingency Reserve Fund
Minimum Sum of 60 days of operating expenses and 60 days of capital
expenditures
Target Sum of 90 days of operating expenses and 90 days of capital
expenditures
Local Economy Specific Reserves Through Benchmarking Comparables
Observations
Observation #1
The Benchmark Communities typically have some or all of the three commonly established reserve
funds that Palo Alto Utilities with updated reserve policies have, which are the rate stabilization reserve,
the operations and maintenance reserve, and the CIP reserve.
Observation #2
Based upon the research of the City of Roseville, City of Santa Clara, City of Healdsburg, City of
Pasadena, and San Jose Clean Energy Reserve Policies, it is determined that the City of Palo Alto's
Reserve Policies are more cumbersome than the comparables identified. The City of Palo Alto Utilities
Operations and Maintenance Reserve Funds include a minimum, target and maximum guideline level
while the other benchmark communities only include a minimum and/or a target. The City of Palo Alto
Utilities Capital Replacement and Improvement Reserve Funds also include a minimum, target, and
maximum, while the other benchmark communities only include a target. Overall, the City of Palo Alto
Utilities have not only more funds established to hold cash reserves, but their policies are more detailed
in terms of guideline levels and sources and uses of those reserve funds compared to the other
benchmark communities reserve policies.
Observation #3
While there are reserve funds that benchmark communities have in place that Palo Alto Utilities does
not have in place, none of these reserve funds are vital or in line with industry best practices. In many
cases, these reserve funds serve the same or a similar purpose as other reserve funds the benchmark
communities and Palo Alto Utilities have in place. For example, the City of Roseville Electric days
cash on hand reserve and fixed cost coverage reserve, and the City of Pasadena electric energy
services charge and transmission services charge reserve funds serve a similar purpose to the
operation and maintenance fund reserve for these Utilities. The City of Pasadena Contingency Reserve
serves the same purpose as both the operation and maintenance reserve fund and the capital
replacement and improvement reserve fund.
City of Pasadena Code of Ordinances 13.04.175
Item 2
Attachment A - City of Palo
Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 42 Packet Pg. 70 of 84
DETAILED ANALYSIS
Reserve Tracking
Reserve Tracking Requirements and Processes
Current Requirements for Tracking Palo Alto's Reserves
The Reserve Management Practices (policies) all state that they should be used when developing
each individual Utility's Financial Plan.
Guideline levels included in the reserve policies that are not a fixed dollar amount are calculated for
each fiscal year of the financial planning period for each individual Utility's Financial Plan.
Current Processes Being Performed for Tracking Palo Alto's Reserves
Reserve targets are recalibrated annually to calculate the dollar amount planned to be held in
reserve. The dollar amount for each reserve target calculated annually does not always represent
the target outlined in the policy statement when the policy statement guideline levels are not fixed (for
example, a guideline level based on number of days may not have a reserve target in a Financial
Plan that matches this metric).
During the update of a Utility's Financial Plan, reserve policies are reviewed to determine if they
need to be updated.
Reserve Tracking Observations
Observation #1
Reserve tracking appears to be done on an annual basis in conjunction with the development of each
individual Utility's Financial Plan for Palo Alto. A reserve tracking policy with guidance included to
report instances when reserve fund balances do not meet guideline levels to Council would
provide more assurance that reserve targets are being met throughout the year and equip the Council
with better information to make financial decisions than the current process being performed for
reserve tracking.
Item 2
Attachment A - City of Palo
Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 43 Packet Pg. 71 of 84
Item 2
Attachment A - City of Palo
Alto Utilities Reserves
Advisory Report
Item 2: Staff Report Pg. 44 Packet Pg. 72 of 84
ATTACHMENT B
TO: Baker Tilly
FROM: City of Palo Alto (Office of the City Manager, Administrative Services, Utilities & Public Works
Departments)
DATE: April 2, 2026
SUBJECT: Utilities Reserve Advisory Report
UTILITIES RESERVE ADVISORY REPORT
Management Response
Staff is appreciative of the work Baker Tilly has done to provide the City of Palo Alto Utility Reserves
Advisory Report (Reserves Advisory Report) that reviews the reserve policies and peer agency
benchmarks in the various enterprise funds in the Utilities and Public Works Departments. The City
Council directed staff to do a review of reserve policies as part of the FY 2026 Budget Adoption. This
advisory report provides impartial analysis of best practices and recommendations based on Baker Tilly
analysis and research.
While the City supports the intent to improve utility reserve levels, streamline reserve management and
improve reserve reporting to the City Council, City staff recommends exploring approaches that align
with existing structures and resources and that can be implemented with gradual impacts to utility rates
that are paid for by residents and businesses in Palo Alto. Any financial decision must be right sized for
the risk profile, impact to customers, and regulatory requirements. After a general review of the
recommendations to assess order of magnitude of financial impacts, staff estimate individual utility rate
increases could range from increases of approximately 2% to 8% at the low range and between 20 – 26%
at the high range of the recommendations (this assumes implementation over a five‐year period). These
increases would be significantly impactful to Palo Alto’s residents and businesses. The primary drivers of
these increases would be to achieve the reserve levels of peers described in the Reserves Advisory
Report as 10‐65% of Operating Revenue in the Rate Stabilization Reserves and 20% of 60 months of
budgeted CIP.
As such, following the Policy and Services Committee review of this Reserves Advisory Report on April
14, 2026 and City Council review to follow, staff recommend a workplan over the coming year to review
and revise reserve policies for City Council consideration with the assistance of the Utility Advisory
Commission and the Finance Committee that balance need to be attractive to private markets with
having rates that are affordable to residents and competitive for businesses while remaining within the
range of recommendations from Baker Tilly in terms of industry standards and peer comparisons.
Staff expect in advance of the FY 2028 rate setting, to prepare discussion and ultimately
recommendations on policy‐related issues including setting the target levels for utility reserves. Staff will
strive for a coordinated approach across Electric, Gas, Water, Wastewater Collection, Wastewater
Treatment, Refuse, and Stormwater Utilities. Staff review will inform the strategic direction and timing
of any changes.
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Management Response
Utilities Reserve Advisory
Report
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ATTACHMENT B
Staff have provided more detailed responses to the specific recommendations below as well as a
summary comparison table of existing reserve policies and recommendations from Baker Tilly in Table 1.
Baker Tilly Recommendations and Responses from City Staff
1. Update Dated Policies ‐ Target Date: CY 2026 for Wastewater Treatment, CY Q2 2027 for Refuse
and Stormwater Management
City staff agrees and plans to align reserve policies across Utilities and Public Works enterprise funds as
appropriate. Public Works is currently working with an outside consultant to update the Wastewater
Treatment Fund’s reserves policy. As part of this effort, the consultant will review Baker Tilly’s
recommendations from the Reserves Advisory Report and incorporate them, as appropriate, into the
overall comprehensive approach. The Wastewater Treatment Fund is an example of a more specific
business operation as it is reflective of a regional operation with other local government partner
agencies that are all contributors and members of the services and funds.
2. Do not eliminate any of the current reserve funds in place
City staff agrees that having operations, rate stabilization and CIP Reserve funds in place makes sense
and that each of the other Utilities reserve funds are in place for specifically defined and valid purposes.
3. Clarify CIP Reserve Fund Language ‐ Target Date: CY Q2 2027
Council renamed the Calaveras Reserve to the Electric Special Projects (ESP) Reserve in 2011 (Resolution
9206) to fund projects that benefit electric ratepayers. In 2015 (Resolution 9510), Council established
guidelines for managing the ESP Reserve and those guidelines were revised by Council in 2022
(Resolution 10076) . City staff agrees an update of the council‐adopted policy on the use of ESP Reserve
funds is appropriate. Previously, the ESP reserve has been used to fund Electric’s share of the Advanced
Metering Infrastructure (~$10M) and provide seed funding to the Electrification Reserve (~$4.5M).
Future uses of the funds as well as the sunset date and full review of ESP Reserve guidelines should be
considered by Council. The City’s reserve management policies cover how the CIP Reserve is used.
4. Consider adjustment to CIP Reserve Fund Guideline Levels – Target Date: CY Q2 2027
City staff acknowledge the CIP Reserve guideline recommendations made by Baker Tilly to maintain the
CIP Reserve fund at 20% of 60 months of budgeted CIP expenses or alternatively, one‐year of
depreciation expense in the CIP reserve fund and the research used to identify like agencies and best
practices. As noted previously, staff has preliminarily evaluated the rate implications of this
recommendation for the Electric, Gas, Water and Wastewater Funds – assuming the funds are
recovered over five years, a 0% to 4% rate increase specific to each fund is estimated to be needed to
bring reserves to this level. Public Works will consider this recommendation as it brings forward the
comprehensive reserve policy recommendations for Wastewater Treatment, Refuse, and Storm Water
Funds.
As part of City staff’s recommendations that it will bring forward, the rate and bill impacts across each
utility need to be considered to find alignment with Baker Tilly’s recommendation while considering
customer affordability. This approach aligns with the GFOA recommendation mentioned by Baker Tilly
that recommends capital reserve level development should be designed to best serve the particular
needs of a given organization. In evaluating appropriate rate stabilization reserve levels, staff plans to
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Management Response
Utilities Reserve Advisory
Report
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ATTACHMENT B
assess each utility holistically, taking into account the full suite of available reserves and overall financial
position and compliance with bond covenants, preservation of credit ratings, and affordability.
5. Adjust Rate Stabilization Reserve Policy to align with Bond Covenants –Target Date: CY Q2 2027
– CY Q2 2028
As noted in the Reserves Advisory Report, staff plans to refund the 2009 Bonds later in 2026 and a
normal payoff of the 2011 Bonds is expected in June 2026 which would eliminate the need to make a
change to these minimum guideline levels due to this Bond Covenant as reserve policies will align with
bond or loan covenants as applicable. According to the latest Ratings Affirmation from S&P on the
outstanding 2009 and 2011 bonds, Palo Alto is in compliance with the Rate and Available Reserves
Covenants.
City staff agrees with the recommendation to weigh the need for additional Rate Stabilization Reserve
fund levels, comparability to peer agencies, and the impacts to customer rates among other
considerations in order to determine an appropriate level of funding for each reserve fund. Staff will
work through these considerations depending on the individual circumstances for each reserve, staff will
consider the options available in the context of the totality of reserves for each fund.
6. Formalize Reserve Tracking – Target Date: CY Q4 2026
City Staff agrees transparency of reserve fund balances, reserve policies and guideline levels, and use of
reserves is important. Staff already provide this information about the reserve balances in the annual
budget, Annual Comprehensive Financial Report, and utility financial plans each year. Staff plans to
continue its current practices of providing this information to the City Council. Staff recommends
exception‐based reporting added to the existing quarterly financial report to Council to supplement
current transparency reporting.
The Reserves Advisory Report mentions the following observations regarding further specificity of the
flow of funds and reserve targets in the reserve policies and credit rating reserve targets. While staff
agree specificity is helpful, policies are intended to be evergreen so staff will review and include this
feedback in the recommended policy updates as appropriate. Staff agree that exploring the use of a
target or guideline levels could reduce administrative burden.
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Management Response
Utilities Reserve Advisory
Report
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ATTACHMENT B
Table 1: Palo Alto Current and Baker Tilly Proposed Reserve Targets and Guidelines for the
Operations, CIP, and Rate Stabilization Reserves
OPERATIONS RESERVE CIP RESERVE RATE STABILIZATION RESERVE
Current
Palo Alto
Target
Proposed Baker
Tilly Target
Current Palo Alto
Guidelines
Proposed Baker
Tilly Guidelines
Current Palo Alto
Guidelines Proposed Baker Tilly Guidelines
Electric
U lity
90 days of
O&M and
Commodity
Expense
No Change Minimum: 5% of 48
months of budgeted CIP
Maximum: 25% of 48
months (12 months) of
budgeted CIP
20% of 60
months (12
months) of
budgeted CIP
Each year, the
Financial forecast must
plan for the
withdrawal of all Rate
Stabiliza on Reserve
funds within 5 years.
10 to 65% of either revenues or
expenses
Gas U lity 90 days of
O&M and
Commodity
Expense
No Change Minimum: 5% of 48
months of budgeted CIP
Maximum: 25% of 48
months of budgeted CIP
20% of 60
months of
budgeted CIP
Each year, the
Financial forecast must
plan for the
withdrawal of all Rate
Stabiliza on Reserve
funds within 5 years.
10 to 65% of either revenues or
expenses
Water U lity 90 days of
O&M and
Commodity
Expense
No Change Minimum: 5% of 48
months of budgeted CIP
Maximum: 25% of 48
months of budgeted CIP
20% of 60
months of
budgeted CIP
Each year, the
Financial forecast must
plan for the
withdrawal of all Rate
Stabiliza on Reserve
funds within 5 years.
10 to 65% of either revenues or
expenses
Wastewater
U lity
105 days of
O&M and
Commodity
Expense
No Change Minimum: 5% of 48
months of budgeted CIP
Maximum: 25% of 48
months of budgeted CIP
20% of 60
months of
budgeted CIP
Each year, the
Financial forecast must
plan for the
withdrawal of all Rate
Stabiliza on Reserve
funds within 5 years.
10 to 65% of either revenues or
expenses
Wastewater
Treatment
No
Opera ons
Reserve
Baker Tilly
views
maintaining
Opera ons
Reserve as a
best prac ce.
No CIP Reserve Baker Tilly views
maintaining CIP
Reserve as a best
prac ce.
Minimum: 15%, Target
22.5%, Maximum 30%
% of sales revenue
Baker Tilly proposes management
should consider the need for the
exis ng reserve funds. If no longer
necessary, these funds should be
closed out and the money
transferred to other funds in place.
Refuse No
Opera ons
Reserve
Baker Tilly
views
maintaining
Opera ons
Reserve as a
best prac ce.
No CIP Reserve Baker Tilly views
maintaining CIP
Reserve as a best
prac ce.
Minimum: 10%, Target
15%, Maximum 20%
% of sales revenue
Baker Tilly proposes management
should consider the need for the
exis ng reserve funds. If no longer
necessary, these funds should be
closed out and the money
transferred to other funds in place.
Stormwater No
Opera ons
Reserve
Baker Tilly
views
maintaining
Opera ons
Reserve as a
best prac ce.
No CIP Reserve Baker Tilly views
maintaining CIP
Reserve as a best
prac ce.
Target: $500,000 Baker Tilly proposes management
should consider the need for the
exis ng reserve funds. If no longer
necessary, these funds should be
closed out and the money
transferred to other funds in place.
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Attachment B -
Management Response
Utilities Reserve Advisory
Report
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Policy & Services Committee
Staff Report
Report Type: ACTION ITEMS
Lead Department: Planning and Development Services
Meeting Date: April 14, 2026
Report #:2604-6208
TITLE
Update on Citywide Development Impact Fee Nexus and Housing Feasibility Study. CEQA
Status: Exempt under CEQA Guidelines Section 15378.
This report will be a late packet report published on March 9, 2026.
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Policy & Services Committee
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Planning and Development Services
Meeting Date: April 14, 2026
Report #: 2603-6061
TITLE
Update on Citywide Development Impact Fee Nexus and Housing Feasibility Study. CEQA
Status: Exempt under CEQA Guidelines Section 15378.
RECOMMENDATION
Staff recommend the Committee receive an update on the subject effort and provide feedback
on potential 2050 residential and non-residential growth projections.
EXECUTIVE SUMMARY
Staff are conducting a comprehensive update of Palo Alto's development impact fees and
related in-lieu fees. In December 2025, City Council approved a professional services contract
with Keyser Marston Associates (KMA), with NBS Government Finance Group (NBS) as a
subconsultant, to prepare an AB 602-compliant nexus study and financial feasibility analysis.
This report provides a preliminary analysis of 2050 growth projections, which will serve as an
input for certain fee calculations related to transportation and fire safety, and provide a basis
for projecting fee revenues over time.
BACKGROUND
Development impact fees help ensure new development pays its fair share of the public
facilities needed to serve growth. Under California's Mitigation Fee Act (AB 1600), jurisdictions
may charge these fees when there is a reasonable relationship, or nexus, between the fee and
the type of development.
Assembly Bill 602, effective January 1, 2022, added requirements to adopt and update certain
impact fees at least every eight years. Palo Alto's Housing Element also requires timely updates
to certain housing-related fees and feasibility analyses.
To meet these state law and Housing Element requirements, and to create a consistent
citywide fee framework, the City Council approved a professional services contract in December
2025 to comprehensively update multiple impact and in-lieu fees. The work includes
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development forecasting, facility needs analysis, fee and revenue analysis, financial feasibility
testing, and implementation recommendations for administration, accounting, and reporting.
ANALYSIS
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number of existing residential units is based on the January 1, 2025 DOF report, increased by
0.3 percent to account for 2025 growth. The estimate of existing jobs in the City was based on
data from the 2022 Economic Census, adjusted to 2026. Non-residential development amounts
were estimated from the jobs data using employment density factors, with no assumed growth
in non-residential categories from 2022 to 2026 except in the office category, where 0.1
percent annual growth was applied.
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the likelihood that buildout will approach Plan Bay Area 2050's projections within the study
horizon.
Table 1: City of Palo Alto Residential Growth Projections Through 2050
Approximate Existing
Conditions (January 2026)
Low
Range
Plan Bay
Area 2050
Staff
Recommended
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planning horizon; 2,700 units associated with SB 79 development potential around existing
transit stations; and 2,400 units from the San Antonio Road corridor. This estimate is
considered conservative, reflecting real market constraints including elevated construction
costs, labor costs, and tight lending conditions that continue to compress development margins
and make it difficult for many builders to achieve the returns necessary to move projects
forward. That said, several factors could drive higher production over the horizon.
Development may occur outside of transit stations or housing focus areas; lower borrowing
costs or higher rents may stimulate greater activity; and local or state housing policies may
serve as additional catalysts. Conversely, if fewer units are produced, the city would collect less
fee revenue, while greater production would generate more revenue, though that revenue
would also correspond to increased demand for city services. Total development impact fee
revenue is demand-driven and fluctuates accordingly. Fees are required to be updated every
eight years, ensuring they remain calibrated to anticipated development levels and the
infrastructure planning needed to accommodate that growth.
Hotel/motel: the initially projected decline was revised upward because it was skewed
by a small number of recent projects that replaced hotels with housing; the revised
estimate reflects pipeline projects and development trends from 2018 to 2024.
Commercial: although some commercial space is being converted to residential use, the
initial projected decline was removed to reflect City efforts to strengthen retail along El
Camino Real and encourage ground-floor retail; commercial space is therefore projected
to remain at approximately 6.5 million square feet through 2050.
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Industrial: the initial estimate was reduced by 5 percent to reflect expected residential
development along San Antonio Road and Fabian Way, where some existing industrial
uses may transition.
Public facilities: the initial growth rate is retained to account for likely new public
facilities associated with the Cubberley Community Center project.
Job growth was then estimated using NBS employment density assumptions applied to the
projected increase in non-residential square footage by 2050.
Table 2: City of Palo Alto Existing Non-Residential Conditions and 2050 Growth Projections
Existing Conditions (estimated as
of January 2026)
Staff
Recommendation
Total Jobs 125,000 130,000
Total Hotel/Motel Rooms 2,500 2,750
Total Non-Residential Development 53,100,000 53,700,000
Total Square Feet of Commercial
Development 6,500,000 6,500,000
Total Square Feet of Office
Development 27,500,000 28,500,000
Total Square Feet of Medical
Development 8,000,000 8,000,000
Total Square Feet of Industrial
Development 10,500,000 10,000,000
Total Square Feet of Public Facilities
Development 600,000 700,000
Overall, the non-residential forecast reflects a relatively stable development picture, with net
growth of approximately 600,000 square feet and 5,000 jobs citywide by 2050. The modest
scale of this projection is intentional: it reflects the continued constraints on large-scale office
and commercial development in a largely built-out city, tempered by the policy adjustments
described above. Staff is comfortable that this estimate provides a reasonable basis for fee
calculations and revenue projections, and it will be revisited as part of the required eight-year
update cycle.
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Next Steps and Anticipated Schedule
FISCAL/RESOURCE IMPACT
STAKEHOLDER ENGAGEMENT
ENVIRONMENTAL REVIEW
ATTACHMENTS
APPROVED BY:
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