Loading...
HomeMy WebLinkAboutStaff Report 2602-5986CITY OF PALO ALTO CITY COUNCIL Special Meeting Monday, May 18, 2026 Council Chambers & Hybrid 5:30 PM     Agenda Item     8.Adoption of a Resolution Authorizing the Borrowing of Funds on an Interim Basis for Improvements to the City's Regional Water Quality Control Plant and Authorizing the Execution and Delivery of a Revolving Credit Agreement and Related Note; CEQA Status - Not a Project Item Removed Off Agenda City Council Staff Report From: City Manager Report Type: CONSENT CALENDAR Lead Department: Administrative Services Meeting Date: May 18, 2026 Report #:2602-5986 TITLE Adoption of a Resolution Authorizing the Borrowing of Funds on an Interim Basis for Improvements to the City's Regional Water Quality Control Plant and Authorizing the Execution and Delivery of a Revolving Credit Agreement and Related Note; CEQA Status - Not a Project RECOMMENDATION Staff recommend that the City Council adopt the attached resolution (Attachment A) authorizing the borrowing of funds on an interim basis for improvements to the City's Regional Water Quality Control Plant and Authorize the Execution and Delivery of a Revolving Credit Agreement and Related Note for a total not to exceed $31 million for five years. EXECUTIVE SUMMARY The City of Palo Alto and its partner agencies are advancing more than $460 million in essential capital improvements at the Regional Water Quality Control Plant, and staff recommend approval of a $31 million Line of Credit (LOC) agreement with US Bank to ensure efficient project delivery and maintain flexible cash flow. Debt service obligations have been incorporated into the City’s financial forecast and upcoming utility rate planning, with all partner agencies—except the City of Mountain View, which will cash-fund its portion— participating in the LOC. The LOC is secured by net revenues of the City’s Wastewater Treatment Fund and the Wastewater Collection Fund. BACKGROUND The Regional Water Quality Control Plant (RWQCP), originally constructed in 1934 and substantially expanded in 1972 with funding from the Federal Clean Water Act, is an advanced tertiary treatment facility that provides wastewater treatment for Palo Alto, Mountain View, Los Altos, Los Altos Hills, East Palo Alto Sanitary District, and Stanford University. Palo Alto owns the RWQCP infrastructure and administers the Wastewater Treatment Fund on behalf of all the partner agencies under the Basic Agreement between the Cities of Palo Alto, Mountain View, and Los Altos executed in 1968 and subsequent agreements with the minor partner agencies (hereby collectively referred to as the “partner agreements”). The Wastewater Collection Fund is Palo Alto’s partner to the Wastewater Treatment Plan; the Wastewater Collection Fund develops the wastewater rate proposals based on Palo Alto’s share of the treatment plus the expenses that include operating and maintenance (O&M) and capital costs for the collection system. 1. The LRFP Update, currently underway, will reassess and reprioritize capital improvement needs over the next 50 years, incorporating consideration of updated regulatory requirements, emerging contaminants, and the current condition and performance of existing RWQCP infrastructure. The update will refine project scopes and cost estimates for remaining projects from the 2012 LRFP and identify additional capital improvements necessary to maintain reliable and compliant plant operations. The LRFP Update is expected to significantly increase RWQCP’s overall capital needs, highlighting the importance of flexible financing tools such as the proposed LOC. 2. Staff’s funding strategies include the following sources: State Revolving Fund (SRF) loans administered by the State Water Resources Control Board U.S. Environmental Protection Agency Water Infrastructure Finance and Innovation Act (WIFIA) loans Utility revenue bonds issued through capital markets Line of Credit (LOC) Capital budget for smaller or shorter-term projects. 1 City Council, June 10, 2024; Agenda Item #6; SR# 2405-2993, https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=82887&dbid=0&repo=PaloAlto 2 Finance Committee, November 4, 2025: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=83790&dbid=0&repo=PaloAlto summer/early fall. Palo Alto is responsible for 38.16% share of debt-financed costs. These obligations directly affect the City’s Wastewater Collection Fund and are the primary driver for projected rate adjustments. 2 includes and LOC cost analysis. In June 2024, Council authorized staff to obtain a $31 million Line of Credit for the Wastewater Treatment Fund5; this authority allows the City Manager to negotiate and execute the LOC however per Palo Alto Municipal Code (PAMC) section 12.28, the LOCs must be approved by Council via resolution (Attachment A). ANALYSIS Table 1: Pricing and Fee Comparison BMO US Bank (Recommended) Pricing Tax-Exempt Rate: 82% 1M SOFR + 1.45% Taxable Rate: 1M SOFR + 1.20% Undrawn Fee: 0.30% of unutilized amount 5 Year Tax-Exempt Rate: 80% 1M SOFR + 1.19% Taxable Rate: 1M SOFR + 1.19% Undrawn Fee: 0.25% of unutilized amount Terms & Conditions Rate Covenant - 125% of Debt Service Additional Bonds Test - 125% of Debt Service Rate Covenant - 125% of Maximum Annual Debt Service* Additional Bonds Test - 125% of Debt Service Minimum Ratings of A3/A- for City's GO Debt Bank Ratings Long-Term (S/M/F): A+/A1/AA- Short-Term (S/M/F): A-1/P-1/F1+ Outlook (S/M/F): Stable/Stable/Stable Long-Term (S/M/F): A+/A2/A+ Short-Term (S/M/F): A-1/P-1/F1 Term Out Provisions Base Rate + 2.00% fixed for 3 years Base Rate + 3.00% fixed for 3 years 5 City Council, June 17, 2024: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=82897&dbid=0&repo=PaloAlto&searchid=a71833e6 -80d5-4688-8ab4-cd9a7edc4503 and Supplemental Memo: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=82929&dbid=0&repo=PaloAlto&searchid=a71833e6 -80d5-4688-8ab4-cd9a7edc4503 Table 1: Pricing and Fee Comparison BMO US Bank (Recommended) Relevant Experience Los Angeles County Metropolitan Transportation Authority, City of Pasadena, City of Modesto, Chicago Housing Authority, and Citizens Energy Group Santa Clara Valley Water District, SFPUC - Water Enterprise, SFPUC Wastewater Enterprise, Gainesville Regional Utilities, CO, Lower Colorado River Authority Fees Legal Expenses Capped at $35,000 Estimated at $45,000; Capped at $50,000 Upfront Fee $0 $0 Termination Fee $0 One-year make whole termination provision *The Wastewater Treatment Fund compiles with the 125% of Maximum Annual Debt Service. Under both proposals, security for the LOC is net revenues of the RWQCP system, on parity with the existing State Revolving Fund (SRF) install sale agreements. Regarding the City’s Debt Policy7, the Enterprise Funds have a debt service limit of 15% of operating expense. The estimated debt service limit for FY 2026 is 7.6%. Conservatively assuming a fixed $21 million drawn amount, with $10 million unutilized, issuance of a $31 million LOC would increase the fund’s debt service limit by approximately 2.2 to 2.6 percentage points between FY 2027 and FY 2028. The City Council approved an exception to the debt limit on December 5, 2022 upon approving the budget amendment to fund the Secondary Treatment Upgrade (STU) project using the 2022 SRF loan. Based on the estimated interest and cost forecast budget, the WWT Fund is estimated to exceed the 15% debt limit due in FY 2028 due to repayment of the 2022 SRF loan. FISCAL/RESOURCE IMPACT Amendments to the agreements with partner agencies are scheduled for City Council consideration in August 2026. Palo Alto, Los Altos, East Palo Alto Sanitary District, Standford, and Los Altos Hills will participate in the LOC; City of Mountain View has elected to contribute cash for its share of project costs and not participate in the LOC. Table 2 estimated annual parter cost, which is lower than the approximately $1.3 to $1.5 million range communicated to the City Council and partners fall 2025. Table 2: Estimated Annual Parter Cost (in thousands) Partner Tax-Exempt Taxable Palo Alto $516 $602 Mt. View n/a n/a Los Altos $128 $149 EPUSD $103 $121 Stanford $72 $83 L.A. Hills $21 $25 TOTAL $840 $980 7 City Debt Policy, Adopted by City Council on April 11, 2017: https://www.paloalto.gov/files/assets/public/v/1/administrative-services/adopted-debt-policy-2017-04-11.pdf The City of Palo Alto, as a parter to the RWQCP, has assumed the impact of the LOC in its Financial Forecast and utility rates for FY 2027, as presented to the Finance Committee on March 17, 20269. STAKEHOLDER ENGAGEMENT The Administrative Services Department (ASD) and Public Works Department (PWD) work in close collaboration on the RWQCP capital improvement plan and its financing strategy. Staff in the ASD and PWD have also been meeting regularly with partner agencies to review financing needs, explain the structure of the LOC, and discuss repayment obligations. ENVIRONMENTAL REVIEW This item is not a project as defined by the California Environmental Quality Act (CEQA) because approval of a LOC is a government funding mechanisms or fiscal activity which does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment. CEQA Guidelines section 15378(b)(4). The Individual capital improvement projects described in this report are exempt from CEQA review under section 15301 of the CEQA Guidelines because they involve the operation, repair, maintenance, permitting, or minor alteration to an existing facility with negligible or no expansion in use. ATTACHMENTS Attachment A: Resolution Authorizing the Borrowing of Funds on an Interim Basis for the RWQCP APPROVED BY: Lauren Lai, Administrative Services Director 9 Finance Committee, March 17, 2026: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=86854&dbid=0&repo=PaloAlto&searchid=da736b0 9-2d2f-4bc1-ac2c-38a18f34577e ATTACHMENT A Resolution No. __ Resolution of the Council of the City of Palo Alto Authorizing the Borrowing of Funds Pursuant to Chapter 12.28 of the Palo Alto Municipal Code to Finance on an Interim Basis Improvements to the City’s Regional Water Quality Control Plant, Authorizing the Execution and Delivery of a Revolving Credit Agreement, a Fee Letter and Related Notes, Authorizing and Ratifying Execution and Delivery of Related Documents, and Authorizing Related Actions RECITALS A. The City of Palo Alto (the "City"), acting under and pursuant to the powers reserved to the City under Sections 3, 5 and 7 of Article XI of the Constitution of the State of California and Article II of the Charter of the City, operates and maintains facilities for the collection, pumping, transport, treatment, storage and disposal of wastewater (the "Wastewater System") B. The City is empowered pursuant to Chapter 12.28 of the Palo Alto Municipal Code to issue bonds, notes and other obligations, to provide funds for the acquisition, construction, improvement or financing of the Wastewater System. C. Chapter 12.28 authorizes the City Council to exercise all of the powers set forth in the Revenue Bond Law of 1941, being Chapter 6, commencing with Section 54300, of Part 1 of Division 2 of Title 5 of the California Government Code, subject to the restrictions set forth therein, except as provided in Chapter 12.28. D. The City previously issued or incurred the following outstanding obligations for the purpose of financing and refinancing, as applicable, certain improvements to the Wastewater System (the “Outstanding Obligations”): (i) a Project Finance Agreement No. 07-814-550-0 between the City and the California State Water Resources Control Board (“State Water Board”), as amended, (ii) a Project Finance Agreement No. 09-814-550 between the City and the State Water Board, as amended, (iii) an Installment Sale Agreement No. D16-01034, dated as of March 20, 2017 by and between the City and the State Water Board, as amended, (iv) an Installment Sale Agreement No. SWRCB0000000000D2001009, executed as of July 12, 2021 by and between the City and the State Water Board, as amended, (v) an Installment Sale Agreement No. D2101050, executed as of May 9, 2022 by and between the City and the State Water Board, as amended, and (vi) an Installment Sale Agreement No. D2401001, executed as of March 27, 2025 by and between the City and the State Water Board. E. The Outstanding Obligations are secured by a first priority pledge of and payable from net revenues of the City’s Wastewater Treatment enterprise and its Wastewater Collection enterprise. -2- F. The City has determined that it is a necessary and proper municipal affair to finance on an interim basis certain additions, betterments, extensions and improvements to the City’s Regional Water Quality Control Plant. G. The City wishes to secure such financing by a first priority pledge of net revenues of the City’s Wastewater Treatment enterprise and its Wastewater Collection enterprise. H. Pursuant to Government Code Section 5852.1, certain information relating to the revenue bonds is set forth in Appendix A attached to this Resolution, and such information is hereby disclosed and made public. NOW, THEREFORE, the Council of the City of Palo Alto RESOLVES, as follows: SECTION 1. Findings and Determinations. The City Council hereby finds, determines and declares that the Recitals are true and correct. SECTION 2. Approval of Credit Agreement, Fee Letter and Notes; Terms of the Credit Agreement, Fee Letter and Notes; Security. The Council is adopting this resolution under the powers reserved to the City under Sections 3, 5 and 7 of Article XI of the Constitution and Article II of the Charter. Pursuant to Chapter 12.28, and for the purpose of financing on an interim basis certain additions, betterments, extensions and improvements to the City’s Regional Water Quality Control Plant, the City Council hereby approves the borrowing of funds by the City in the form of a revolving credit agreement (the “Credit Agreement”), a letter confirming certain terms related to the calculation of the interest rate payable by the City under the Credit Agreement and related fees (the “Fee Letter”) and one or more notes to evidence the City’s obligations under the Credit Agreement (the “Notes”). The maximum principal amount outstanding under each of the Credit Agreement and the Notes at any time shall not exceed $31,000,000. The interest rate under the Credit Agreement, the Fee Letter and the Notes shall not exceed the maximum rate of interest authorized by law. The interest rate under the Credit Agreement, the Fee Letter and the Notes may be fixed, variable, exempt from federal income taxation or subject to federal income taxation, in each case, as determined by the City Manager, Administrative Services Director or a designee appointed in writing by any such officer (each, an “Authorized Officer”) in consultation with Jones Hall LLP, the City’s bond counsel, and PFM Financial Advisors LLC, the City’s municipal advisor. The initial term of the Credit Agreement and the Notes shall not exceed five years, but the Credit Agreement and the Notes may have a succeeding term that shall not exceed three years. The City’s payment obligation under the Credit Agreement, the Fee Letter and the Notes shall be secured by a first priority pledge of and payable solely from the net revenues of the City’s Wastewater Treatment enterprise and its Wastewater Collection enterprise. The pledge shall be on a parity basis with the pledge securing the Outstanding Obligations, as determined by an Authorized Officer. The general fund of the City is not liable for the payment of the City’s obligations under the Credit Agreement, the Fee Letter or the Notes. The credit or taxing power of the City is not pledged for the payment of the City’s obligations under the Credit Agreement, the Fee Letter or the Notes. The Lenders (as defined in the Credit Agreement) may not compel the exercise of the taxing power of the City or the forfeiture of its property. -3- The City Council hereby determines that the Credit Agreement, the Fee Letter and the Notes are conclusively deemed valid and executed, delivered and issued, as applicable, in conformity with Chapter 12.28. SECTION 3. Selection of U.S. Bank. The City Council hereby approves U.S. Bank National Association as Agent (as defined in the Credit Agreement) and the initial sole Lender, which staff has recommended following a competitive selection process. SECTION 4. Approval of Credit Agreement, Fee Letter and Notes. The City Council hereby approves the Credit Agreement, the Fee Letter and the Notes in substantially the forms on file with the City Clerk, with such changes approved by an Authorized Officer, acting alone, after consultation with City staff, bond counsel and the municipal advisor. An Authorized Officer, acting alone, is authorized and directed for and in the name and on behalf of the City to execute and the City Clerk is hereby authorized and directed to attest the final form of the Credit Agreement, the Fee Letter and the Notes, and the execution of the Credit Agreement, the Fee Letter and the Notes by an Authorized Officer shall be conclusive evidence of their approval by this City Council. SECTION 5. Authorization and Ratification of Amendments to the Outstanding Obligations. The City Council hereby authorizes and ratifies the execution and delivery of amendments to the Outstanding Obligations as may be required to facilitate the proposed interim financing. The execution of such amendments by an Authorized Officer shall be conclusive evidence of such approval and ratification. SECTION 6. Official Actions. Each Authorized Officer, the City Attorney, the City Clerk and all other officers of the City are each authorized and directed in the name and on behalf of the City to make any and all assignments, certificates, requisitions, agreements, notices, consents, instruments of conveyance, warrants, promissory notes and other documents, which they or any of them might deem necessary or appropriate in order to consummate any of the transactions contemplated by the agreements and documents approved under this Resolution. Whenever in this Resolution any officer of the City is authorized to execute or countersign any document or take any action, such execution, countersigning or action may be taken on behalf of such officer by any person designated by such officer to act on his or her behalf in the case such officer is absent or unavailable. Any and all acts of each Authorized Officer, the City Attorney, the City Clerk and all other officers of the City in furtherance of the transactions contemplated by the foregoing resolutions that were taken prior to the adoption of these resolutions, are hereby ratified, confirmed, approved, and adopted. SECTION 7. California Environmental Quality Act. The foregoing resolutions and the execution and delivery of the Credit Agreement, the Fee Letter and the Notes are not a project for purposes of the California Environmental Quality Act because the additions, betterments, extensions and improvements to the City’s Regional Water Quality Control Plant to be financed as described herein are categorically exempt under CEQA Guidelines Section 15301. SECTION 8. Effective Date. This Resolution shall take effect immediately upon its adoption. -4- * * * * * * INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST: APPROVED: City Clerk Mayor APPROVED AS TO FORM: APPROVED Jones Hall LLP By: Christopher K. Lynch, City Manager Jones Hall LLP Bond Counsel Director of Administrative Services City Attorney -4- ATTACHMENT A APPENDIX A The following information consists of estimates that have been provided by the City’s municipal advisor which has been represented by such party to have been provided in good faith. The information assumes that the City will borrow funds in the form of a revolving line of credit in the principal amount not to exceed $31,000,000 at any time with a five-year maturity date. (A) True Interest Cost of the Financing: 3.416% (B) Finance Charge of the Financing (Sum of all fees/charges paid to third parties): $127,000 (C) Net Proceeds to be Received (net of finance charges, reserves and capitalized interest, if any): $30,873,000 (D) Total Payment Amount Through Maturity: $33,943,027 The foregoing estimates constitute good faith estimates only. The principal amount, the true interest cost, the finance charges thereof, the amount of proceeds received therefrom and total payment amount with respect thereto may differ from such good faith estimates due to (a) the actual date of the financing being different than the date assumed for purposes of such estimates, (b) the actual principal amount being different from the estimated amount used for purposes of such estimates, (c) the actual amortization of the principal being different than the amortization assumed for purposes of such estimates, (d) the actual interest rate being different than those estimated for purposes of such estimates, (e) other market conditions, or (f) alterations in the City’s financing plan (including the mix of tax-exempt and taxable obligations), or a combination of such factors. The actual timing of the financing and the actual principal amount of the financing will be determined by the City based on the timing of the need for proceeds and other factors. The actual interest rates paid by the City will depend on market interest rates and the terms of the financing. The actual amortization of the principal will also depend, in part, on market interest rates. Market interest rates are affected by economic and other factors beyond the control of the City.