HomeMy WebLinkAboutStaff Report 2605-6353CITY OF PALO ALTO
CITY COUNCIL
Special Meeting
Monday, June 08, 2026
Council Chambers & Hybrid
5:30 PM
Agenda Item
5.Accept the City of Palo Alto Utility Reserves Advisory Report and Public Safety Staffing
and Overtime Audit as recommended by the Policy & Services Committee. CEQA Status:
Not a Project. At-Places Supplemental Report added, Public Comment
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City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: City Auditor
Meeting Date: June 8, 2026
Report #:2605-6353
TITLE
Accept the City of Palo Alto Utility Reserves Advisory Report and Public Safety Staffing and
Overtime Audit as recommended by the Policy & Services Committee. CEQA Status: Not a
Project.
RECOMMENDATION
The Policy & Services Committee (P&S) and the Office of the City Auditor recommend City
Council accept the results of one advisory project and one audit:
1. City of Palo Alto Utility Reserves Advisory Project (Attachment A, P&S recommended
accepting results on April 14, 2026), and
2. Public Safety Staffing and Overtime Audit (Attachment B, P&S recommended accepting
results on May 12, 2026)
BACKGROUND
Baker Tilly Advisory, in its capacity serving as the Office of the City Auditor (OCA), performs a
citywide risk assessment each year that evaluates a wide range of risk areas, including strategic,
financial, operational, compliance, technological, and reputational risks. The purpose of these
assessments is to identify and prioritize risks to develop each year’s annual audit plan.
During the FY2024 risk assessment, the OCA identified public safety (Police and Fire
Departments) staffing and overtime as potential areas of risk and this audit topic was included
in the FY2025 Annual Audit Plan approved by Council. OCA identified the City’s utility reserves
as a potential area of risk during the FY2025 risk assessment and included this topic as an
advisory project in the FY2026 Annual Audit Plan approved by Council.
In accordance with our agreement with the City, Baker Tilly Advisory is required to execute the
Annual Audit Plan each year which consists of specific, approved task orders. Task Orders
approved by the Council are executed by the P& S Committee Chair as the Project Manager for
the Baker Tilly Contract as stipulated in the contract terms.
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ANALYSIS
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Please see Attachment A for a more detailed discussion of our observations and
recommendations and management response.
Public Safety Staffing and Overtime Audit
FISCAL/RESOURCE IMPACT
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report (Attachment B). Implementation to change reserve levels would have rate impacts and
staff recommend spending the coming year in advance of FY2028 rate setting to evaluate policy
changes based on this research.
Public Safety Staffing and Overtime Audit: The timeline and resource needs for implementation
of management’s corrective action plans are identified by management within the attached
report.
STAKEHOLDER ENGAGEMENT
ENVIRONMENTAL REVIEW
ATTACHMENTS
APPROVED BY:
City of Palo Alto
Office of the City Auditor
City of Palo Alto Utility Reserves Advisory Report
March 27, 2026
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
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.
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
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
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
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
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
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!
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)
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.
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
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
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
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.
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.
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
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
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.
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.
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
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
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.
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
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
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.
A
April 30, 2026
City of Palo Alto
Office of the City Auditor
Public Safety Staffing and Overtime
Audit
Contents
Baker Tilly Advisory Group, LP and Baker Tilly US, LLP, trading as Baker Tilly, operate under an alternative practice structure and are members of the global
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
Introduction ........................................................................................................................................ 7
Best Practices Overview ................................................................................................................... 11
Audit Results ..................................................................................................................................... 14
Palo Alto Police Department ............................................................................................................ 14
Palo Alto Fire Department ................................................................................................................ 30
Executive Summary
Purpose of the Audit
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), conducted a Public Safety Staffing and Overtime (OT) Audit
based on approved Task Order 4.33 as part of the City’s FY25 Audit Plan. The objective of this audit
was to:
• Determine if sworn personnel at the Palo Alto Police Department (Police) and Palo Alto Fire
Department (Fire) are effectively and efficiently staffed including use of OT. Please note that OT
used by public safety dispatchers was assessed separately in 2025 and their use of OT was not
considered as part of this audit.
Report Highlights
Palo Alto Police Department
(Page 12) operational demands.
Although the Police Department generally maintains minimum patrol staffing levels,
overall staffing has not returned to pre-pandemic levels and, at times, a portion of the
sworn workforce is unavailable for deployment due to injury leave or training
assignments. As a result, the number of officers available for field operations may be
lower than authorized staffing levels, placing additional strain on operations and
limiting resources available for functions such as investigations. OCA also found that
Police’s minimum staffing standards have not been formally reassessed in more than
two decades, despite changes in service demand and crime trends. While PAPD has
generally maintained stable response times, the absence of a recent staffing analysis
makes it difficult to determine whether current staffing levels and deployment
strategies remain appropriate.
Key Observations:
1. The Police Department has not returned to pre-pandemic staffing levels.
Average actual staffing declined by approximately 10 staff from FY2015–
FY2019 to 139 FTEs in FY2024.
2. During FY25 and the beginning of FY26 approximately 20 employees
were not deployable. During FY2025 and early FY2026, approximately 20
employees were unavailable for field deployment due to injury leave or
training assignments.
3. Investigations have gone without resolution due to staffing constraints.
Staffing constraints have resulted in personnel being reassigned from
investigations to patrol, leaving some cases uninvestigated.
4. Minimum staffing standards have not been evaluated in over two
decades. While Police generally meets minimum staffing levels, the
EXECUTIVE SUMMARY
5. Police has not met response time goals but response times have
slightly improved despite being understaffed. While Police has not met
the performance measure of answering 90% of emergency calls within 6
minutes and 90% of urgent calls within 10 minutes, response times have
been trending positively since FY2021.
Key Recommendations:
• Consider over-hiring for positions affected by long-term leave to
maintain adequate deployable staffing levels and leverage normal attrition for
balancing staffing levels if needed.
• Expand recruitment and retention efforts to address ongoing staffing
shortages and strengthen the hiring pipeline.
• Conduct a comprehensive staffing analysis using data on workload, calls
for service, response times, crime trends, and deployable personnel.
• Reassess minimum patrol staffing standards to ensure they reflect current
service demands and operational needs.
Finding 2:
(Page 17) Police relies heavily on OT to maintain minimum staffing levels.
Police sustained OT usage has largely been driven by staffing shortages and high
vacancy levels. OT expenditures have consistently exceeded the City’s budget since
2015 and in recent years have been more than double the budgeted amount.
Analysis indicates a strong correlation between increased vacancy days and higher
OT expenditures, demonstrating that OT is primarily being used to maintain minimum
staffing levels rather than address temporary operational needs. While this approach
enables the department to maintain service levels in the short term, heavy reliance
on OT may create long-term operational and workforce risks, including employee
fatigue, reduced morale, and potential impacts on safety and performance. A more
strategic approach to budgeting, staffing, and workload distribution may help the City
better manage OT and support sustainable police operations.
Key Observations:
• Vacancies are a primary driver of OT usage. Analysis of FY2015–FY2024
data shows a clear relationship between vacancy days and OT expenditures;
as vacancies increase, OT usage rises to compensate for staffing gaps.
• Overtime use in CY2024 was largely driven by meeting minimum staffing
levels. In 2024, approximately 81% of patrol OT was attributed to minimum
staffing needs such as backfilling vacancies, early call-ins, and hold-over
shifts.
• OT concentration suggests potential workload imbalances and burnout.
While 82% of employees recorded OT hours, the top 10 employees
accounted for more than 25% of total OT, suggesting potential workload
imbalances. Survey results show public safety employees report lower morale
EXECUTIVE SUMMARY
rate morale as good or excellent), and staff indicated that OT levels are often
higher than desired.
• OT is not assessed as part of reviewing Workers’ Compensation cases,
vehicle crashes or use-of-force incidents. Although a direct causal
relationship cannot be confirmed, increased OT and staff absences may contribute to
a cycle where remaining employees work additional OT to maintain staffing levels.
The department and Independent Police Auditor review use-of-force incidents but do
not assess whether officers involved were working OT, limiting opportunities to
identify potential risk factors. Studies from oversight bodies in other cities indicate
extended OT can increase the likelihood of complaints, workplace injuries, and use-
of-force incidents.
Key Recommendations:
• Align OT budgets with operational needs. The City should reassess the
PAPD’s OT budget to better reflect actual operational demands and historical
spending trends, improving transparency and financial planning.
• Evaluate the balance between staffing levels and OT use. PAPD, in
coordination with the City’s budget and human resources offices, should
periodically analyze vacancy rates, workload demands, and service
expectations to determine whether adjustments to staffing levels or OT
practices are needed.
• Explore opportunities for civilianization. The department should evaluate
whether certain administrative, technical, or support functions currently
performed by sworn officers could be reassigned to civilian staff to reduce
workload pressures and limit reliance on OT.
Finding 3:
(Page 23)
The Police Department does not consistently collect or analyze key workforce data
that could help evaluate recruitment effectiveness, staffing sustainability, and
potential operational risks associated with OT. In particular, the department does not
formally track police academy success rates or probationary outcomes, limiting its
ability to assess recruitment and training effectiveness or accurately forecast staffing
needs. Additionally, OT hours are not currently considered when reviewing safety-
related incidents such as workers’ compensation claims, police vehicle crashes, or
use-of-force events. Strengthening workforce data collection and incorporating OT
analysis into operational reviews would support more data-driven decision-making
and help the department better manage staffing, performance, and officer well-being.
Key Observations:
• Police academy success rates are not currently tracked. PAPD does not
maintain comprehensive data needed to evaluate recruitment outcomes,
training success rates, or long-term staffing sustainability.
• Effects of OT are not considered in safety related incidents. The
EXECUTIVE SUMMARY
workers’ compensation claims, employee injuries, mental health concerns,
vehicle crashes, or use-of-force incidents.
Key Recommendations:
• Formally track police academy outcomes. PAPD should establish a
process to monitor recruitment levels, academy completion rates,
probationary success rates, and reasons for separation to better evaluate
recruitment and training effectiveness and improve workforce planning.
• Analyze OT in safety incident reviews. PAPD should include OT hours as a
factor when reviewing workers’ compensation claims, vehicle crashes, and
use-of-force incidents to identify potential fatigue-related risks.
(Page 32) decisions based on inaccurate data.
The City’s internal processes for tracking, analyzing, and reporting OT within the
Police department relies heavily on manual data entry and fragmented systems,
which increases the risk of data inaccuracies and limits the City’s ability to effectively
monitor OT usage. Inconsistent reporting methods, lack of automation, and
discrepancies between internal reports reduce confidence in the data used to inform
staffing and budgetary decisions. Additionally, limitations within the City’s
timekeeping system and the absence of standardized OT categorization hinder the
City’s ability to analyze the root causes of OT. Strengthening automation, improving
data integration, and enhancing reporting practices would improve transparency,
support better workforce planning, and help the City more effectively manage OT
costs.
Key Observations:
• Timekeeping Systems Are Incompatible. Police’s scheduling systems
cannot interface directly with the City's central timekeeping system. Data
exports from departmental scheduling platforms do not share common
identifiers or structures with City timecard records, making cross-system
indexing unreliable and labor-intensive.
• Departmental Data Access Is Insufficient for Effective Overtime
Management. Police receives limited payroll data from the City's central
payroll function which is not easily reconciled against departmental overtime
tracking efforts. The structural gap between what departments can see and
what central systems produce limits the reliability and comparability of
internal management reporting.
• The OMB Quarterly Public Safety OT Analysis Is Not Actionable at the
Department Level. The Quarterly Public Safety OT Analysis produced by
OMB presents overtime data in aggregated form and is effective at reporting
broadly to the public but lacks the employee-level detail departments need to
identify patterns, investigate anomalies, or intervene in overtime spending.
EXECUTIVE SUMMARY
• Previous audit findings remain unaddressed. Issues identified in the 2017
Continuous Monitoring Audit of OT 1—including limited SAP data capture,
non-standardized timecard notes, and inconsistent departmental tracking—
continue to affect OT monitoring.
Key Recommendations:
• Revisit and assess prior audit recommendations from the 2017 OT audit,
including developing a continuous monitoring system to analyze service
demand, absences, vacancies, and policy requirements, have not been fully
implemented to support management of OT costs.
• Improve OT data collection, system integration, and reporting, as well as
exploring extending use of Telestaff, the OT tracking and monitoring system
in use by the Fire department, to Police.
Finding 5:
(Page 25) concern.
While Fire has recently increased deployed resources and restored some services
across fire stations, challenges remain due to lengthy hiring and training timelines,
vacancy-driven OT, and the need to ensure staffing and deployment align with
increases in service demand. Continued workforce planning and improved monitoring
of OT will be important to support sustainable operations and maintain service levels.
Key Observations:
• In recent years, the City has added Fire resources. In FY2025, 3.0 FTE
were added to restore Fire Engine 62 from a two-person squad. In FY2026,
3.0 FTE Fire Captains were added to cross-staff Medic 64 with Fire Engine
64. In FY2026, 7.0 FTE were added to create a new Single Role Ambulance
response division, by adding a 12-HR Peak Ambulance to the deployed
resources.
• While Fire was meeting some KPIs, staffing challenges may have
impacted other response times and violation follow-up. Fire has not
consistently achieved its eight-minute fire response target. Staffing constraints
may have affected timely follow-up on fire code violations.
• Most OT is used to meet minimum staffing requirements. Most OT is
used to backfill vacancies, leave, and training absences. In addition, actual
OT expenditures frequently exceed budgeted amounts suggesting OT has
been used to compensate for staffing vacancies rather than as intended to
manage schedules when firefighters are out for various types of leave.
• Fire implemented structural changes to reduce forced mandatory OT
Adjustments to OT scheduling
1 https://www.paloalto.gov/files/assets/public/v/1/city-auditor/z-old-reports/continuous-monitoring-audit-overtime.pdf
EXECUTIVE SUMMARY
implemented in FY2023 have improved fairness and reduced forced OT
hours.
Key Recommendations:
• Strengthen workforce planning and hiring pipeline management to
account for attrition and long training timelines.
• Periodically evaluate staffing levels and deployment against service
demand to ensure resources align with service demand.
• Improve OT monitoring and workforce sustainability to better manage
fatigue and staffing risks.
• Improve budget transparency and operational efficiency by aligning
budgets with historical trends and continuing process improvements.
Introduction
2 https://pmc.ncbi.nlm.nih.gov/articles/PMC6617405/
Safety Departments (Fire and Police) are effectively and efficiently staffed
including use of OT.
Alto Police Department (Police) and Palo Alto Fire Department (Fire) are
managing staffing and OT in an efficient, effective, and sustainable manner. The
audit includes examining: the adequacy of current staffing levels relative to
service demands; scheduling practices and how workloads are distributed; the
policies and controls in place for authorizing and monitoring OT; and the impacts
of OT on budget, employee well-being, and service delivery.
OT expenditures in Palo Alto have regularly exceeded budgeted amounts. By
analyzing OT drivers in Police and Fire, the City can find ways to control
personnel costs. Additionally, ensuring proper staffing has safety implications:
excessive OT can lead to fatigued first responders, which may affect their safety
and performance on the job 2. To assess OT management, the audit also
evaluated the systems and processes used by Police and Fire to record,
approve, and report staff time and OT. Fire utilizes a program called Telestaff to
manage scheduling and time reporting, while Police records staff time and
overtime through the City’s Systems, Application, and Data (SAP) enterprise
software and another scheduling system called PlanIt.
The Police Department’s stated mission is to “proudly serve and protect the
public with respect and integrity”. The department is a full-service law
enforcement agency with approximately 87sworn officers (78 who are members
of Palo Alto Police Officer Association [PAPOA]) serving a resident population
around 67,000 (not counting a large daytime workforce and visitors) as reported
in the FY2026 adopted budget. The department provides 24/7 emergency
response, criminal investigations, traffic safety, and community policing services.
The Fire Department operates 6 fire stations serving Palo Alto and Stanford
University, staffed by 89 firefighters and paramedics in FY2026 who handle fire
suppression, rescue, and emergency medical services. Dedicated to
“safeguarding and enriching the lives of anyone, anytime, anywhere with
compassion and pride”, the department also serves communities beyond Palo
Alto through mutual aid agreements and when called upon by the State or
Federal government for such services as combating large wildfires or providing
medical response in emergencies.
Both departments have high operational demands and at times rely on OT to
meet staffing requirements and ensure public safety coverage. This round-the-
clock staffing requirement, combined with challenges in keeping up with
turnover, recruiting and retaining public safety personnel, has led to significant
INTRODUCTION
3 https://www.paloalto.gov/files/assets/public/v/1/administrative-services/city-budgets/fy-2026-city-
budget/proposed/fy-2026-proposed-operating-budget.pdf
4 https://www.paloalto.gov/Departments/Fire/Frequently-Asked-Questions
have grown further. In FY2024, the City paid $7.5 million in OT to Police and Fire
employees 3.
While OT is an expected tool to meet staffing needs for emergencies or special
events, such figures may suggest that OT is being used to backfill routine
staffing shortages.
According to management, minimum staffing backfill challenges underlie much of
this OT. Police has struggled with vacant FTEs and long-term benefited leave
such as sick leave, retirement, and workers’ compensation. For instance, in 2018
it had a 17% vacancy rate (14 of 83 sworn positions unfilled) despite offering pay
raises and hiring bonuses to attract officers. Competition from neighboring
jurisdictions and a difficult recruiting climate have made it hard to reach full
staffing, forcing remaining officers to work extra shifts. As of March 2026,
PAPD’s authorized sworn staffing levels remain below pre-pandemic levels.
Fire has experienced chronic challenges with minimum staffing backfill. The
deployed resources require a continuous schedule of employees on Fire
Department units. When the department holds vacant FTEs, overtime is the only
mechanism available to provide coverage for these positions. According to
management, Police and Firefighters have some of the longest hiring-to-full-
productivity timelines in the public sector. For example, it can be 10-12 months
from a firefighter application posting to the day a new recruit is able to work on a
unit. That entire time, current employees are providing coverage for that spot on
a unit to maintain the deployed resources.
Fire deployment resource levels were impacted by the pandemic. In FY2021,
budget cuts led the City Council to temporarily reduce fire staffing and
temporarily close fire station 2 on nights and weekends 4. Although those cuts
were partially reversed in FY2022 with funding to staff all six stations again, Fire
reported using OT to fill gaps from vacancies, sick leave, and training absences
in order to keep all engine and ambulance companies in service. Within the last
two years, Fire has restored some deployed resources and is similar to pre-
pandemic levels.
Finally, OCA noted from the City of Palo Alto’s 2024 Community Survey that
81% of respondents rated the quality of Police Services positively. Fire Services
received 92% positive ratings for emergency response services and 80%
positive ratings for prevention and education services. In response to the
question, "As a resident of Palo Alto, what one change could the City make that
would make you happier?" many residents expressed a desire for better funding
and staffing of the fire and police departments. Specific concerns included the
lack of fire trucks and staff at Mitchell Park, the need for more police services to
enhance safety, and increased policing in neighborhoods.
INTRODUCTION
5 Government auditing standards require an external peer review at least once every three (3) years. The last peer review of the Palo Alto
Office of the City Auditor was conducted in 2017. The Palo Alto City Council approved a contract with Baker Tilly U.S, LLP for internal audit
services for October 2020 through June 2022 with an extension through June 2025. City Council appointed Kate Murdock, Audit Manager in
Baker Tilly’s Risk Advisory practice, as City Auditor in May 2024. As a result of transitions in the Audit Office and peer review delays due to
the COVID pandemic, an external peer review is targeted for 2026. It should be noted that Baker Tilly’s most recent firmwide peer review
was completed in November 2024 with a rating of “Pass”. The scope of that peer review includes projects completed under government
auditing standards. A report on the next firmwide peer review should be available later in 2024.
police and fire services but also underscore a desire for increased funding,
staffing, and resources to further improve public safety and community
design and implementation of time-tracking and OT reporting processes,
including the internal controls in place to ensure accuracy, authorization, and
• Interviewed the appropriate individuals to gain an understanding of the
organizational structure, processes, and controls related to staffing and
OT.
• Analyzed policies and procedures as well as regulatory requirements to
identify the criteria to be used for evaluation of control design and
effectiveness.
• Analyzed the complete list of Police and Fire employees and pay periods
with higher OT utilization to assess the processes for time tracking,
overtime recording, and supervisory review and approval.
• OCA sampled employee time records from each department and the
three highest-overtime months in 2024 and two highest-OT months in
2025. OCA conducted detailed testing for the selected employees and
periods to assess compliance with applicable OT policies, labor
agreements, and regulatory requirements.
• Completed audit report of findings, conclusions, and recommendations
based on the supporting evidence gathered.
Statement
This audit activity was conducted from January 2025 to March 2026 in
accordance with generally accepted government auditing standards, except for
the requirement of an external peer review 5. Those standards require that we
plan and perform the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings, observations, and conclusions based on our
audit objectives. We believe that the evidence obtained provides a reasonable
basis for our findings, observations, and conclusions based on our audit
objectives.
INTRODUCTION
Organizational
Strengths
During this audit activity, we noted the professionalism and responsiveness of
the PAPD and PAFD. We appreciated the participation of both departments in
interviews, providing documentation for selected samples, and responding to
follow-up requests.
The OCA appreciates the support of the departments involved in conducting this audit activity.
Thank you!
Best Practices Overview
6 305747_Analysis of Police Department Staffing _ McCabe.pdf
7 NFPA 1710 Summary
8 GFOA_Rethinking-Police-Budgeting_7.14.25.pdf
9 Home | The Institute of Internal Auditors | The IIA
Public Safety
Staffing and OT
Criteria
Addressing staffing and OT challenges in public safety requires a clear understanding
of what effective management looks like in practice. The following best practice
principles draw from leading industry standards and professional organizations and
reflect widely accepted approaches to managing police and fire department staffing in
a manner that controls OT costs while sustaining effective public safety service
delivery. Professional organizations researched include the Institute of Internal
Auditors (IIA), Government Finance Officers Association (GFOA), International
City/County Management Association (ICMA), International Association of Chiefs of
Police (IACP), U.S. Department of Justice (DOJ), and National Fire Protection
Association (NFPA)
Data-Driven Staffing and Workforce Planning
Best practice indicates that staffing levels should be aligned with actual workload,
service demand, and performance objectives. The ICMA Center for Public Safety
Management recommends workload-based staffing models that evaluate calls for
service, officer availability, and discretionary time rather than relying solely on
historical minimum staffing levels6.
For fire services, NFPA 1710 (Standard for the Organization and Deployment of Fire
Suppression Operations, Emergency Medical Operations, and Special Operations to
the Public by Career Fire Departments) provides nationally recognized benchmarks for
crew size and response times 7. However Palo Alto Fire follows California
Occupational Safety and Health Administration (CalOSHA), Title 8 standards requiring
staffing be sufficient to perform fire response safely as well as a written procedure to
implement firefighter safety.
In addition, workforce planning literature from GFOA emphasizes incorporating long-
term leave, retirement projections, and attrition rates into staffing forecasts to avoid
structural reliance on OT. Persistent OT used to meet routine minimum coverage is
widely recognized as an indicator that staffing models should be reassessed 8.
OT Monitoring and Internal Controls
The IIA identifies payroll and OT as high-risk expenditure areas requiring strong
internal controls, routine monitoring, and data validation. The IIA’s Global Internal Audit
Standards 9 emphasize continuous monitoring and use of analytics to identify
anomalies and control weaknesses.
The DOJ found that police OT can be effectively controlled through strong
management practices, including systematic recordkeeping, analysis of OT trends,
and supervisory oversight. The report emphasizes that while some OT is unavoidable
BEST PRACTICES OVERVIEW
10 https://www.ojp.gov/pdffiles/167572.pdf
11 Officer Safety and Wellness
12 21OIGNYPD.OT.Rpt.Release.05.03.2023.pdf
13 kcao-overtime-2017.ashx
staffing and policy decisions 10.
Best practice includes automated data capture, reconciliation across systems,
supervisory approval thresholds, and analysis of OT drivers (e.g., minimum staffing,
vacancy backfill, special events).
Fatigue Management and Risk Mitigation
Public safety research indicates that excessive OT can impair performance and
increase safety risks. The IACP advise departments to establish reasonable limits on
consecutive hours worked, enforce rest periods, and monitor cumulative OT 11.
Oversight bodies such as the New York City Police Department Office of Inspector
General 12 and the King County Auditor’s Office 13 have found statistically significant
relationships between extended OT and increased complaints, use-of-force incidents,
and workers’ compensation claims.
The International Association of Fire Chiefs (IAFC), published The Effect of Sleep
Deprivation on Fire Fighters and EMS Responders. The report identifies sleep
disruption and fatigue as inherent risks in fire and EMS operations, documenting that
insufficient or interrupted sleep impairs alertness, decision-making, reaction time, and
overall responder performance. Critically, the IAFC notes that these impairments are
not limited to extended wakefulness, even moderate disruption of nighttime sleep,
such as that caused by repeated emergency calls between 10pm and 6am, can
produce measurable cognitive degradation by the end of a shift. The IAFC additionally
highlights that firefighters are at elevated risk for chronic, undiagnosed sleep disorders
that further erode their capacity to perform safely under operational demands. The
National Fire Protection Association (NFPA 1710) further establishes that safe and
effective emergency response depends on maintaining adequate staffing and
deployment levels rather than relying on extended work hours. Together, these
authorities indicate that sustained reliance on overtime as a primary staffing
mechanism can contribute to fatigue-related performance degradation, increased
safety risk, and diminished workforce health, ultimately undermining the consistency
and safety of emergency service delivery.
Best practices therefore include enforcing daily and weekly hour limits, monitoring
individual cumulative OT, and integrating OT data into early intervention systems.
Fair and Transparent OT Distribution
Public safety agencies should track OT usage at the individual employee level and
periodically review workload distribution to ensure OT assignments are equitable.
Monitoring OT allocation can help identify situations where a small number of
employees are consistently working a disproportionate share of OT hours, which may
increase fatigue risks and indicate underlying staffing or scheduling inefficiencies.
BEST PRACTICES OVERVIEW
14 WorkforceCrisis.pdf
15 A Performance-Based Approach to Police Staffing and Allocation
16 NFPA Standard 1710
17 305747_Analysis of Police Department Staffing _ McCabe.pdf
18 Workforce Planning and Development | icma.org
agencies should analyze workload and staffing distribution data to ensure resources
are deployed effectively and personnel demands are balanced across staff.
Transparent and consistent OT assignment procedures can help improve morale,
reduce perceptions of favoritism, and distribute workload more sustainably across the
workforce.
Financial Oversight and Budget Integration
Public safety agencies should regularly analyze OT expenditures alongside staffing
levels to determine whether OT is being used for short-term operational needs or to
compensate for persistent staffing gaps. Guidance from the DOJ Office of Community
Oriented Policing Services (COPS Office)15 notes that agencies should evaluate
whether sustained OT usage indicates the need to adjust staffing levels, deployment
models, or recruitment strategies.
By analyzing OT trends in relation to vacancies, service demand, and staffing
availability, agencies can better determine whether continued reliance on OT is
operationally sustainable or whether additional staffing or alternative staffing models
may be necessary.
Performance Alignment and National Benchmarking
Staffing models should support established performance goals. NFPA 1710 16 provides
benchmarks for fire department deployment and response configuration. The ICMA 17
emphasizes periodic reassessment of staffing standards to ensure they align with
evolving service demands, crime trends, and community expectations.
Failure to reassess minimum staffing levels for extended periods is inconsistent with
data-driven governance practices.
Recruitment Pipeline and Training Metrics
Effective workforce planning requires tracking academy enrollment, completion rates,
attrition, probationary success, and time-to-deployment. Workforce analytics and
public administration literature emphasize that hiring pipeline metrics are critical inputs
into staffing projections and vacancy forecasting 18.
Without structured tracking of academy outcomes, departments may underestimate
attrition-driven staffing gaps.
AUDIT RESULTS
Audit Results
Palo Alto Police Department
19 https://www.paloalto.gov/Departments/Administrative-Services/City-Budget/Archived-Budget-Documents
20 City of Palo Alto Operating Budget.book
Police may
not have
sufficient
sworn staffing
to meet
operational
demands.
The department has not returned to pre-pandemic sworn staffing levels, at any given
moment several employees are not deployable due to injury or enrollment in the
training academy or in the field training program, and minimum staffing standards have
not been reassessed in more than two decades.
PAPD has not returned to pre-pandemic staffing levels.
Our review of City budget documents 19 shows that PAPD has not returned to pre-
pandemic staffing levels. From FY 2015 - FY 2019, actual full-time equivalents (FTEs)
averaged 155. In FY2020, the department eliminating six positions shifting service
delivery for animal services to an external vendor 20. Between Fy2021 and FY2022,
FTEs dropped from 149 to 125. In recent years, staffing has increased to 139 FTES.
While actual FTE counts are not available for FY25 and FY26 in the City’s budget
documents, budgeted FTEs for these years were 141, still 8 FTE’s short of pre-
pandemic levels.
Exhibit 1: Number of Police Actual Full-Time Equivalents 2015 through 2024
*OCA analysis September 2025
155 155 155 155 155 149 149
125 134 140
0
40
80
120
160
200
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
PALO ALTO POLICE DEPARTMENT
During FY2025 and the beginning of FY2026 approximately 20 employees were
not deployable.
Although the PAPD appeared fully staffed based on its budgeted 141 FTEs,
discussions with department personnel and review of staffing data indicate that in the
fall of 2025, approximately 20 employees were not deployable. Of these, 10 employees
were on leave due to injury or workers’ compensation claims and 10 employees were
assigned to the police academy for training. As a result, the number of officers available
for field deployment was lower than authorized staffing levels, which placed additional
strain on operational capacity.
Investigations have gone without resolution due to staffing constraints.
Interviews with key PAPD personnel revealed that budgeted staffing in the
investigations division has led to an increase in cases going uninvestigated, compared
to the period pre-pandemic. While quantitative data is limited, qualitative feedback
indicates that cases are often left unresolved due to insufficient detective staffing. Due
to the department’s minimum Patrol staff requirements, staff are often pulled from other
functions such as investigations to ensure the safety of officers in the field and
compliance with requirements. This gap in investigative capacity results in some cases
involving misdemeanors and non-violent crimes are often left unresolved.
Minimum staffing standards have not been re-evaluated in over two decades.
The PAPD Policy Manual and the PAPOA Memorandum of Understanding outline
minimum staffing requirements for the Patrol Division across three time blocks:
• 0700–2400 hours: 1 Watch Commander, 1 Supervisor, and 6 Officers/Agents
• 0001–0300 hours: 1 Watch Commander, 1 Supervisor, and 5 Officers/Agents
• 0300–0700 hours: 1 Supervisor and 5 Officers/Agents
PAPD consistently meets minimum staffing levels with only rare instances when the
department falls below minimum staffing. PAPD did not experience any fully unstaffed
shifts in FY 2023 or FY 2024. Our review of staffing data confirmed only minor gaps
totaling 266 open hours in FY 2023 and 218 open hours in FY 2024, representing just
0.40% and 0.33% of total shift hours, respectively. This indicates that PAPD has been
effective in maintaining minimum staffing coverage, with only minimal disruptions.
Exhibit 2: Percentage of Open or Understaffed Shifts
PAPD Openings FY 2023 FY 2024
*OCA analysis September 2025
Despite consistent coverage, staff were unable to confirm when the last formal study
was conducted to determine appropriate minimum staffing levels. Current standards,
which are also a component of the collective bargaining agreement with the police
officers’ associations, have remained unchanged for at least 20 years, raising concerns
PALO ALTO POLICE DEPARTMENT
21 https://icma.org/sites/default/files/305747_Analysis%20of%20Police%20Department%20Staffing%20_%20McCabe.pdf
Police staffing models typically fall into five categories:
1. Crime Trends
2. Per-Capita Ratios (e.g., officers per 1,000 residents)
3. Authorized/Budgeted Levels
4. Minimum Manning Levels
5. Workload-Based Models (e.g., calls for service, response times, discretionary
time)
According to the ICMA Center for Public Safety Management, departments should use
data-driven benchmarks to evaluate staffing needs. These include:
• Number of officers assigned to patrol
• Workload levels of patrol officers
• Time spent handling calls for service 21
While the City tracks this data, it has not conducted a formal analysis to assess whether
current staffing levels are adequate.
PAPD has not met response time goals but response times also have not
worsened despite being understaffed.
The OCA reviewed PAPD’s performance metrics as outlined in the City’s annual budget
documents. PAPD tracks response times to emergency and urgent calls for service,
with a goal of responding to:
• Emergency calls within 6 minutes, 90% of the time
• Urgent calls within 10 minutes, 90% of the time.
Emergency and urgent calls require the most timely police response because they are
generally life-threatening or represent higher danger crimes in progress.
While PAPD has not met the 90% budgeted goal during the years reviewed of FY 2015
- FY2024 as shown in the Exhibit below, response times have trended somewhat
positive despite staffing being reduced. Factors that influence response times include,
but are not limited to, time of day, number of officers available to take a call or staffing
levels, location of officers relative to the service call, existing demand for services, and
the ability of officers to get through traffic - which can be impacted by commute time
and weather, among other factors.
PALO ALTO POLICE DEPARTMENT
Exhibit 4: PAPD Performance Compared to KPI Goal
*OCA analysis February 2025
Recommend
the City:
1. Over-Hiring for Long-Term Leave Positions and/or Improve Workforce
Availability Management
To strengthen PAPD’s hiring pipeline and ensure operational efficiency, we
recommend that the City consider over-hiring for roles where staff are on long-
term disability leave or workers’ compensation. This approach would help
maintain adequate staffing levels and reduce reliance on OT to cover long-term
absences. Additionally, increasing the number of new hires could help alleviate
ongoing staffing shortages.
However, given the City’s current and projected budget deficits, Police, with
support from the City’s Human Resources and Administrative Services
Departments, should evaluate policies and practices related to long-term leave,
light-duty assignments, and training scheduling to identify opportunities to
improve workforce availability. Proactively managing these factors could help
minimize staffing gaps and reduce operational strain without increasing staffing
levels.
2. Expand Recruitment and Retention Efforts
Increasing the number of Public Safety new hires can help address persistent
staffing shortages and support long-term workforce sustainability. Enhanced
recruitment strategies may include targeted outreach, accelerated onboarding,
and partnerships with local academies. The City can also consider further
investment in retention incentives such as career development programs,
wellness initiatives, and competitive compensation packages.
3. Conduct Staffing Analysis
PAPD should conduct a comprehensive staffing analysis to assess whether
current staffing levels are sufficient to meet operational demands and service
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Percent of emergency calls responded to
within 6 minutes
Percent of urgent calls responded to within
10 minutes
KPI Goal
PALO ALTO POLICE DEPARTMENT
operational priorities. This analysis should incorporate factors such as calls for
service, officer workload, response time goals, crime trends and the number of
deployable personnel. The results will help the department evaluate whether
existing staffing levels and deployment strategies remain appropriate and to
inform future staffing, hiring, and budgeting decisions. Leveraging existing data
tracked by the City (e.g., number of patrol officers, call volumes, response times,
and time spent per call) can aid in staffing assessments.
PAPD should review current staffing deployment across units to ensure
personnel resources are aligned with operational priorities. This review should
consider whether staffing assigned to specialized units, administrative roles, or
other assignments could be adjusted to better support patrol and investigative
functions when staffing shortages occur.
4. Reassess Minimum Staffing Standards
PAPD should initiate a formal review of minimum staffing standards, which have
remained unchanged for over two decades. This study should incorporate
workload-based analysis, crime trends, and officer availability to determine
whether current minimums are appropriate and sustainable.
Management
Response
Responsible Department(s):
Concurrence: Partial Agreement
Target Date: Varies
Action Plan:
1. Partially agree. Although City Council has previously authorized over-hire
positions, this approach was deprioritized due to persistent recruitment
challenges and budget constraints. PAPD will reassess the feasibility of over-
hire positions if recruitment conditions improve sufficiently as part of future
staffing strategies, as feasible.
2. Agree. PAPD has taken a number of steps to expand recruiting, including
assigning dedicated recruitment staff, updating recruiting materials on the City
website, hosting local testing events at PAPD facilities, while also maintaining
high hiring standards. PAPD has worked with the Palo Alto Police Foundation to
implement several initiatives aimed at communicating to prospective and current
employees that they are valued. The Department will continue to prioritize
recruitment and retention efforts build a more consistent pipeline.
3. & 4. Partially agree. Completion of such analysis will take time and resources
from PAPD, Human Resources and Administrative Services that are not
currently allocated – staff will assess the scope and resource requirements to
inform resource restraints and feasibility. An updated staffing analysis and
assessment of minimum staffing standards should be based on a clearly defined
expected level of service. Any proposed changes to service delivery should
include structured public engagement.
Unlike many peer agencies, PAPD continues to respond to a broad range of
calls, including alarms, non-injury traffic collisions, and quality-of-life issues.
These service commitments have staffing implications that may not be fully
PALO ALTO POLICE DEPARTMENT
22 https://www.paloalto.gov/Departments/Administrative-Services/City-Budget/Archived-Budget-Documents
Police relies
heavily on OT
to maintain
minimum
staffing levels
Due to staffing shortages and vacancy levels, Police relies heavily on overtime to
maintain patrol minimum staffing levels. Overtime expenditures have exceeded the
budget for several years and more recently actual expenditures have been more than
twice of what was budgeted. Overtime expenditures are primarily used to backfill
vacancies.
Vacancies are driving most of overtime use.
The City’s Office of Management & Budget (OMB) produces a Quarterly OT Report that
shows budgeted vs. actual OT expense incurred by public safety departments. This
report also tracks the department’s number of vacancy days or the cumulative number
of days positions are vacant each year. A trend analysis of the Quarterly OT Reports
from FY2015 – FY 2024 shows a peak in the number of vacancy days in FY2019 and a
significant dip in FY2021. Vacancy days steadily began climbing again over the next
several years. These vacancies have created staffing gaps in patrol staffing, leading to
a growing reliance on OT to maintain service levels. Based on the City’s budget
documents 22 and as shown in the graph below, as the number of vacancy days
increases, so does the use of OT. We also see the opposite, that when vacancy days
decrease, so does the use of OT suggesting these metrics are related. As noted in the
Best Practices section of this report, DOJ guidance is for police departments to
evaluate whether sustained OT usage indicates the need to adjust staffing levels.
Exhibit 5: Police Vacancy Days vs. OT Expenses
*OCA analysis September 2025
In addition, while PAPD’s OT expenses have exceeded the budget since 2015, in
recent years actual expenses have far exceeded the budget as shown in the Exhibit
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
$-
$500,000.00
$1,000,000.00
$1,500,000.00
$2,000,000.00
$2,500,000.00
$3,000,000.00
$3,500,000.00
$4,000,000.00
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24
Nu
m
b
e
r
o
f
V
a
c
a
n
c
y
D
a
y
s
Ov
e
r
t
i
m
e
E
x
p
e
n
s
e
s
Axis Title
Overtime Expenses Vacancy Days
PALO ALTO POLICE DEPARTMENT
Exhibit 6: Police OT Budgeted vs. Actual Expenditures
*OCA analysis September 2025
The correlation between rising vacancies and increased OT expenditures suggests the
department is compensating for reduced headcount by extending the workload of
existing staff. For example, in the chart above you can see that OT expenses reduced
by $1,135,871 from FY2020 to FY2021 which coincides with the Police Department’s
significant drop in vacancy days in FY2021.This approach, while necessary in the short
term, may not be sustainable and could contribute to employee fatigue, reduced
morale, and operational inefficiencies. The following sections take a closer look at
staffing challenges.
Overtime use in 2024 was largely driven by meeting minimum staffing levels.
The Police Department uses informal reporting of monthly OT at the employee/position
level by way of matching hours worked from the enterprise accounting system to
published pay rates on the city website. Using this reporting method, our analysis
shows that in CY2024, 81% of Police Patrol OT costs were attributed to the
“minimums/back-fill/early-in/hold-over” category. This indicates that maintaining
minimum staffing for Patrol was a primary driver of OT for PAPD. Police management
stated that meeting minimum staffing requirements remains a significant portion of OT
use as of the writing of this report.
$-
$500,000.00
$1,000,000.00
$1,500,000.00
$2,000,000.00
$2,500,000.00
$3,000,000.00
$3,500,000.00
$4,000,000.00
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Budgeted Overtime Expense Actual Overtime Expense
PALO ALTO POLICE DEPARTMENT
23 palo-alto-employee-survey-report-2024.pdf
Exhibit 7: PAPD Patrol – Largest Categories of OT Use in CY2024
*OCA analysis September 2025
OT concentration suggests potential workload imbalances and burnout.
Police policy, collective bargaining agreements, and the Fair Labor Standards Act limit
the amount of consecutive hours certain employees can work to 16 hours. Then, the
employee must take an 8-hour break before beginning another shift or working OT.
Analysis of sworn employee overtime use based on the FY2024 Police internal OT
Report shows that 69 out of 93 sworn employees (74%) logged OT hours. The highest
individual OT recorded was 1,019 hours. Notably, the top 10 sworn employees working
OT accounted for over 35% of the department’s total sworn OT hours.
This concentration of OT among a small group of employees suggests potential
workload imbalances and may be indicative of broader staffing challenges. While OT is
often seen as a way to increase salaries, especially in an area of the country where
living expenses are high, employees at all levels of the PAPD stated that some
employees are working more OT than desired. Police management stated they have
only mandated sworn OT a handful of times in the past several years. Sustained high
OT levels can contribute to employee fatigue, reduced morale, and increased risk of
burnout. While not necessarily attributable to OT, in the most recent City of Palo Alto
Employee Survey, 202423 employees in the Police and Fire departments were “less
likely than their counterparts to have positive ratings for overall staff morale in the work
group” with only 54% of Police and 57% of Fire employees rating overall staff morale as
“excellent” or “good”. PAPD and PAFD employees were also less likely than employees
6%
81%
1%12%
PAPD Patrol Largest Categories of Overtime in 2024
Patrol FSD - Follow-up/Case work/Court or Court prep/Warrant Service/Evidence Processing/Etc
Patrol FSD - Patrol incl minimums/back-fill/early-in/hold-over
Patrol FTO - Trainee
Patrol FTO- Training Officer
PALO ALTO POLICE DEPARTMENT
OT is not assessed as part of reviewing Workers’ Compensation cases, police
vehicle crashes, or use-of-force incidents.
OCA was unable to obtain employee files to evaluate contributing factors in police
workers’ compensation cases and vehicle accidents. Based on our review of the
Independent Police Auditors Reports, it does not appear that OT is formally considered
as a factor in use-of-force incidents either. It appears that workers’ compensation cases
have been trending upwards since 2020. Such cases often mean that staff are out on
leave requiring other staff to fill in to meet minimum staffing requirements. It is unclear if
increased OT is contributing to workers’ compensation claims. For example,
management observed that since the pandemic they have seen an increase in workers’
compensation cases for mental health issues compared to other medical conditions.
Alternatively, increased OT may merely be a result of more individuals being on
workers’ compensation leave requiring remaining staff to cover their shifts. Determining
whether excessive OT is contributing to an increase in workers’ compensation cases
may not be possible given the complexity and numerous variables in such cases.
However, considering OT as a factor when reviewing workers’ compensation cases
may help the City determine if there is a relationship and if it something they will need
to better manage in the future.
While staff reported that it is less expensive to fill hours with OT than the cost of
budgeting an additional FTE given the benefits and pension costs of adding an FTE,
there may be other less easily measured costs associated with increasing OT. As noted
in the background section of this report, some studies have found increasing OT can
lead to overly fatiguing officers which can increase the risks of vehicle crashes or use of
force incidents occurring. These added risks may outweigh the cost of adding more
FTEs.
Exhibit 8: Workers’ Compensation Cases from FY2015 – FY2024
*OCA analysis September 2025
OCA also analyzed vehicle crashes and use of force Incidents from FY2020 through
FY2024. It is unclear if there is a relationship between increased OT and increased
0
5
10
15
20
25
30
35
FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024
Police Workers' Compensation Cases
PALO ALTO POLICE DEPARTMENT
24 https://www.paloalto.gov/Departments/Police/Accountability/Independent-Police-Auditor
25 https://www.nyc.gov/assets/doi/press-releases/2023/May/21OIGNYPD.OT.Rpt.Release.05.03.2023.pdf
26 https://www.kingcounty.gov/~/media/depts/auditor/new-web-docs/2017/kcao-overtime-2017/kcao-overtime-2017.ashx?la=en
areas of concern when considering the balance of FTEs and OT use.
Exhibit 9: Police Vehicle Crashes and Use-of-Force Incidents
CY2020 – CY2024
*OCA analysis October 2025
The City has an Independent Police Auditor (IPA)24 which reviews all use of force cases
including those involving specific weapons or injuries. While most incidents are found to
be within policy, the IPA has identified areas for improvement in documentation,
communication, and tactical decision-making. Based on OCA’s review of the IPA’s
report, it does not appear that IPA analyzes whether officers involved in use-of-force
incidents were working OT and it does not appear this analysis is performed by the
City. Analyzing potential links between officer OT and use of force could provide an
opportunity for deeper data-driven oversight.
OCA’s review of recent OT audits conducted by other larger cities found that extended
work hours and fatigue impair officer alertness and decision-making. In a report of the
New York City Police Department Inspector General 25 they found that for an officer who
works the average amount of OT—four hours and twelve minutes consecutively—the
odds that they will be the subject of a substantiated NYC Civilian Complaint Review
Board complaint the next day increased by 36.8%, the odds they will be named in a
lawsuit for an incident occurring the next day increased by 36.5%, the odds that they
will be involved in an incident the next day resulting in a Threat, Resistance, or Injury
Interaction Report increase by 20.5%, and the odds that they would suffer a workplace
injury the next day increased by 18.8%. The King County Auditor 26 found that every
additional OT hour raised the likelihood of force by 2.7 percent. It also found that
workers’ compensation claims are significantly correlated with OT. If an individual
worked one additional hour of OT in the prior week, the odds of a workers’
8 8
6
8
5
10
11
5
4
11
0
2
4
6
8
10
12
CY2020 CY2021 CY2022 CY2023 CY2024
Vehicle Crashes Use of Force Incidents
PALO ALTO POLICE DEPARTMENT
these findings suggest that OT can contribute to fatigue, which in turn raises the risk of
officer errors, use-of-force incidents, and an increase in workers compensation claims.
Per discussions with Police staff, the department maintains a relatively low number of
use-of-force incidents annually (around eight) and uses software to track instances of
recommend
the City:
The City should evaluate PAPD’s budget to ensure it more accurately reflects
operational staffing needs. OT expenditures have exceeded the budget in
recent years, largely due to staffing shortages and the need to maintain
minimum staffing levels. Establishing a more realistic OT budget based on
historical trends and operational requirements would improve financial planning
and provide greater transparency regarding the resources required to sustain
current service levels.
2. Evaluate staffing versus OT balance
PAPD, in coordination with the City’s budget and human resources offices,
should periodically evaluate the balance between authorized staffing levels and
OT usage. This analysis should consider factors such as vacancy rates, non-
deployable personnel, workload demands, and response time goals. A
comprehensive review would help determine whether current staffing levels are
sufficient or whether adjustments to hiring levels, staffing allocations, or OT
practices are needed to support sustainable operations.
3. Explore civilianization opportunities
PAPD should assess whether certain administrative, technical, or support
functions currently performed by sworn personnel could be reassigned to civilian
staff where appropriate. Expanding the use of civilian positions, such as
community service officers or other support roles, may help reduce the workload
on sworn officers and allow them to focus on core law enforcement duties.
Civilianization may also provide a more cost-effective staffing model in some
cases and reduce reliance on OT to meet operational needs.
Management
Response
Responsible Department(s):
Concurrence: Partially Agree
Target Date: FY 2028 Budget
Action Plan:
1. Agree. The overtime budget has not kept pace with operating demands and the
variance however, the gap between budgeted and actual overtime is not a
failure of cost control. PAPD will work with the Office of Management and
Budget to develop a historically informed overtime budget baseline while
continuing the current practice of using vacancy savings as an offset. It is worth
noting that the City's existing practice of reallocating vacancy savings to offset
OT expenditure effectively acknowledges this structural relationship and
PALO ALTO POLICE DEPARTMENT
2. Agree. Regularly evaluating the balance between authorized staffing and
overtime usage is a sound management practice. Overtime has become a
routinized staffing tool, creating financial and workforce sustainability risks.
PAPD will seek to establish a regular review process using existing data to help
inform budget development and staffing allocations – likely this work would align
with the Finding 1 staffing assessment and would align with time and resources
for that. In the meantime, the department will use existing records to conduct
baseline assessments.
3. Partially Agree. The Police Department will review current sworn assignments
to identify functions where civilian classifications may be feasible, cost-effective,
and operationally appropriate. This is routinely part of the budget development
over decades and part of the management of workload and costs. Any
reclassification must account for operational requirements and existing labor
agreements, with Human Resources and labor relations staff engaged early in
the process.
Finding 3:
Police does
not fully use
workforce
data to
monitor staff
sustainability
and risk
The Police Department does not consistently collect or analyze workforce data needed
to evaluate staffing sustainability, recruitment effectiveness, and potential operational
risks associated with overtime.
Police academy success rates are not currently tracked.
Upon review of success rates for the Police and Fire academy the OCA found that rates
are not tracked for the police academy. The City does not run its own police academy
but rather recruits attend academies in neighboring cities and counties. Management
said they could obtain records if needed but do not formally track how many recruits are
successful and graduate from the academy each year or how many graduates make it
through the field training program and subsequent probation period to become non-
probationary sworn officers.
Tracking and analyzing police academy performance metrics—such as recruitment
levels, completion rates, attrition rates, and reasons for separation—could benefit the
department in several ways. First, this data could help inform recruitment and selection
practices by identifying factors that contribute to recruit attrition or unsuccessful
completion of the academy or probationary period. Second, analyzing outcomes across
different academy cohorts, training programs, or probationary supervision practices
may help the department identify approaches that are more effective in preparing and
retaining recruits. Finally, understanding typical completion and retention rates would
allow the department to more accurately plan hiring targets and budget for anticipated
staffing levels. For example, if historical data show that only a certain percentage of
recruits successfully complete the academy and probationary period, the department
could adjust recruitment levels accordingly to ensure that desired staffing levels are
achieved.
Management noted that one of the more recent cohorts hired had a higher than
anticipated attrition rate. As a result, a full analysis of the cohort is being conducted and
the results will be used in future recruitments. PAPD should continue to work to improve
the collection, analysis and use of workforce-related data to guide staffing, scheduling and risk
management decisions in order to more proactively manage resources.
PALO ALTO POLICE DEPARTMENT
Effects of OT not considered in safety-related incidents.
As noted in Finding 2, overtime is not currently analyzed as a contributing factor in
safety-related incidents. Management indicated that there is no formal review process
to evaluate whether OT hours may be associated with employee injuries, mental health
concerns, or other workers’ compensation claims. Similarly, OT is not considered when
reviewing officer-involved vehicle crashes or use-of-force incidents. Given the
sometimes substantial amount of OT worked by employees, analyzing whether
extended work hours may affect officers’ performance, decision-making, or overall well-
being could provide valuable insight for protecting officer health and promoting public
safety.
recommend
the City:
1. Formally track Police Academy Field Training Program and probationary
period outcomes
PAPD should implement a formal process to track and monitor police academy
outcomes, including recruitment levels, completion rates, probationary success
rates, and reasons for separation. Regular analysis of these metrics would help
the department evaluate the effectiveness of its recruitment and training
processes, identify factors contributing to recruit attrition, and make data-
informed adjustments to hiring strategies and training practices.
2. Analyze OT in safety incidents
PAPD should incorporate OT hours into its review of safety-related incidents,
including worker’s compensation claims, vehicle crashes, and use-of-force
incidents. Evaluating whether extended work hours may be associated with
these events could help the department better understand potential fatigue-
related risks and inform policies or scheduling practices designed to protect
officer health and public safety.
Response
Responsible Department(s):
Concurrence: Partially Agree
Target Date: Q1 CY 2027
Action Plan:
1. Agree. PAPD agrees with the recommendation to implement formal tracking of
academy and probationary outcomes and has already prompted a review of the
recent cohort that reinforced the value of consistent data collection in identifying
trends and refining hiring projections. PAPD will establish a formal tracking
process to capture key metrics. HR can provide a report including Police
Trainee date of hire, promotion date to Police Officer (upon Academy
graduation) probationary end date and separation date and reason. This data
will be reviewed regularly to inform recruitment trends and strategy, hiring
targets, and budget planning.
2. Partially Agree. Permissible officer work hours are governed by the Fair Labor
Standards Act and applicable labor agreements. PAPD adheres to these
standards. With that, PAPD acknowledges that extended work hours can result
in fatigue, which may impact officer performance. PAPD staff are unaware of
PALO ALTO POLICE DEPARTMENT
fatigue, and it will nonetheless formally incorporate an assessment of fatigue
into its administrative investigations and tracked in the supervisor injury report
with goal to prevent injuries.
PAPD leadership is committed to balancing the regional shortage of qualified
officer candidates against the sustained operational expectations of our
community — while remaining one of the most transparent departments in the
region.
Finding 4:
Inconsistent
and manual
overtime
tracking may
cause the City
to make
staffing
decisions
based on
inaccurate
data.
The City’s internal processes for tracking and reporting OT are inconsistent and
largely manual, which may result in inaccurate data being used to inform staffing
and budgetary decisions.
Police management and administrative teams meet monthly to review OT usage and
identify trends. However, the Police’s monthly OT reporting process relies heavily on
manual data entry, with values hardcoded into spreadsheets and not linked to formulas.
Descriptions of OT hours worked are not consistently documented, and categorization
is performed manually by staff. This lack of automation and standardization increases
the risk of data entry errors and incomplete reporting, potentially undermining the
accuracy of OT analysis.
During testing of Police OT data, OCA found that two systems are used for time
tracking: SAP, the primary City-wide timekeeping system, which records total hours
worked but not specific hours of the day; and PlanIt, which tracks the exact hours
officers work. OCA found instances where total shift hours exceeded the allowable 16-
hour limit. Management explained that these exceptions sometimes occurred in
connection with high-profile incidents and are permitted with authorization. However, in
some cases, management was unable to provide details regarding why hours were
coded in a particular manner without first consulting the officer involved.
Discrepancies exist between some internal reports.
The Quarterly Public Safety OT Analysis, produced by OMB, reports OT costs for both
Police and Fire. However, our review found that the figures in this report do not
reconcile with the Police informal monthly analysis. This discrepancy exists in part
because the Police monthly report is built through a highly manual process, pulling
timecard data from SAP, merging it with hourly pay information, and manually
categorizing OT usage, which means pieces of information can be missed on the back
end due to disconnected systems. The Police Budget Analyst expressed concerns
about the accuracy of the monthly internal report.
Additionally, the quarterly report does not include OT hours or specific drivers of
overtime (e.g., minimum staffing requirements, vacancy coverage) beyond backfilling
open shifts. Staff indicated that including OT hours worked and the underlying drivers of
OT would improve the report's usefulness and transparency and would reduce the
burden of re-explaining the same budget dynamics each reporting cycle.
OCA noted in its review of Fire’s OT tracking system, Telestaff, that it was designed for
all public safety departments including police and dispatch. The City may be able to
PALO ALTO POLICE DEPARTMENT
Previous audit findings remain unaddressed.
An audit was conducted by the OCA in 2017, entitled Continuous Monitoring Audit: OT,
which recommended implementing automated tracking through the planned
procurement of a new Enterprise Resource Planning (ERP) system to improve resource
allocation and utilization. The audit identified issues such as limited data capture in
SAP, non-standardized notes, and inconsistent departmental tracking methods, many
of which still persist today. Because SAP does not capture work start and end times,
the specific reasons for OT in meaningful categories, and because employee timecard
notes are not standardized, analysts cannot systematically extract or analyze the root
causes of OT. This forces departments to maintain separate manual workarounds, such
as the PAPD Budget Analyst's Microsoft Access-based process, which are highly
dependent on individual employees and more prone to errors or omissions when staff
turns over. These same underlying data limitations may also contribute to the
reconciliation gap between the monthly and quarterly reports noted above.
We
Recommend
the City:
1. Revisit and assess audit recommendations
According to the 2017 OT Audit, it was recommended that the City explore the
potential of developing a continuous monitoring process to provide more detailed
information on OT usage so that management can better manage and control OT
costs. A continuous monitoring system could include data analytics to extract data
on service demands, absences and vacancies, and elements of city policies and
contractual requirement that could be useful in identifying opportunities to reduce
OT costs.
The City should consider the benefits of automating data collection and having drill-
down reporting capabilities for more accurate data capture and reporting.
2. Enhance internal data collection, system integration and reporting of OT
The City should explore the current contract and Telestaff services in use by the
Fire Department for expanded use with the Police Department. In the interim,
Police should ensure alignment across reports and regularly validate data to
support better staffing and budget decisions. Reconciling internal reports will
ensure consistency across reporting periods and improve confidence in the data
used.
Additionally, the OMB should consider revising the Quarterly Public Safety OT
Analysis to include not only OT costs but also OT hours and drivers of OT. This will
provide a more complete picture of OT usage and support better decision-making.
Response
Responsible Department(s):
Technology
Concurrence: Agree
Target Date: FY 2028
Action Plan:
1. & 2. Police will consult with Fire Department staff regarding it’s success with
their scheduling platform with the goal of reducing manual entry, improve
system integration, and improve reliability of information. The Department will
also consult with the SAP functional team and Administrative Services to see if
enhancements can be achieved in the system to include moving information
between systems rather than manually. The City’s Enterprise Resource
Planning system is undergoing an upgrade and as part of the Phase 2, which is
estimated to begin in FY 2028, this will be added to consider if any new
functionality is cost effective and efficient to support this effort.
PALO ALTO FIRE DEPARTMENT
Palo Alto Fire Department
Finding 5:
Fire has made
progress in
restoring
deployed
resources but
hiring process
constraints
result in
continued
overuse of OT
to fill
operational
gaps.
Deployed Resources and Minimum Staffing Backfill
The Palo Alto Fire Department has experienced chronic minimum staffing backfill
shortages. From FY2015 to FY2025 the Department held an average of 9.6 FTE
positions vacant, with some years as high as 14 FTE. Fire personnel indicated that the
department has rarely operated at full staffing levels in recent years. In addition to these
vacant FTEs, a significant number of staff are consistently out due to injury or disability
leave, reducing the number of deployable firefighters.
In the last year, the City has made significant investments in increasing deployed
resources.
Over the last one to two years, the department has made significant efforts to increase
deployed resources and restore services to all six fire stations. In FY2025, 3.0 FTE
were added to restore Fire Engine 62 from a two-person squad. In FY2026, 3.0 FTE
Fire Captains were added to cross-staff Medic 64 with Fire Engine 64. In FY2026, 7.0
FTE were added to create a new Single Role Ambulance response division, by adding
a 12-HR Peak Ambulance to the deployed resources.
Although deployed resources resemble similar pre-pandemic levels, service demands
have increased. In CY2025 the Department responded to over 10,000 calls for service
for the first time in its history. This is part of why the Department still struggles to meet
key performance measures, particularly with response times, despite adding resources
over the last two years.
Management and staff both reported that the department has focused efforts on
recruitment and retention. One recruitment and hiring challenge Fire experiences,
similar to Police, is the significant time it takes from hire to deployment. According to
management, firefighters have some of the longest hiring-to-full-productivity timelines in
the public sector Once hired, a recruit goes through a lengthy, but necessary training
academy. Upon completion of the academy, the recruit is assigned to a unit while still
under a probationary period. This entire process takes between 18 to 24 months.
In addition, there are instances where the new recruits do not successfully complete
training or probation. OCA’s analysis of Fire records of academy recruitment groups
from 2020 to 2025 showed that on average, 7.8 individuals were recruited per group. Of
these individuals, the average separation during the academy was 1.2 or 15% with
another 1.2 or 15% separating during probation. The average retention rate for these 5
years was 64%. While one recruitment class had no separations, another had 5 of the
11 recruits separate during the academy and probation period. When this happens, the
department is forced to begin the process again to fill these now vacant positions.
Tracking academy performance has provided the department with valuable information
and helped in approaching staffing challenges.
According to management, an effort was made in FY2023 to establish hire-ahead
Firefighter Trainee positions to support long-term staffing stability; however,
implementation was not realized due to internal concerns and administrative
complexity. Key challenges included uncertainty around managing potential short-term
staffing surpluses, as well as labor considerations related to establishing a lower initial
PALO ALTO FIRE DEPARTMENT
vacancy-driven overtime pressures have continued under the current staffing model.
Those positions have recently been included in budget reduction strategies.
Currently, Fire management has been able to gain internal approval to use city-wide
“over-strength” positions to hire ahead. However, the Department has still struggled to
achieve full staffing. As a general rule, the City does not encourage over-strength hiring
and departments need to get special approval before proceeding. Exhibit 10, below,
shows Fire operational deployment positions from FY2015 to FY2019, showing that
Fire has been understaffed for much of the past 7 years.
Exhibit 10: Number of Operational Deployment Positions for Fire
FY2015 through FY2024
*OCA analysis October 2025
In October 2023, the Local Agency Formation Commission (LAFCO) municipal service
review found that Fire deployed resources are below the county average relative to
peer jurisdictions. LAFCO also reported that Fire was not consistently meeting its eight-
minute response-time standard and identified the need for additional resources. Despite
comparatively strong staffing ratios, response performance has been constrained by
deployment configuration and a high volume of medical calls. In response, the FY 2025
Adopted Budget includes funding to up-staff Fire Station 2’s Engine 62 to a full three-
person crew and implement deployment adjustments, including a new Station 4
apparatus plan.
Overall, the LAFCO review confirms that while Palo Alto’s public safety services are
regarded as high quality and deployed resource levels are generally competitive, fire
operations have faced challenges in achieving performance targets under existing
96 95 95 95
84 84 84
78
83 83
0
20
40
60
80
100
120
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
PALO ALTO FIRE DEPARTMENT
27 https://www.iaff.org/wp-content/uploads/English_Version_-_NFPA_1710_standards_DFSR_Summary_2022_new.pdf
OCA also noted that while Fire does not have required minimum staffing levels, the
National Fire Protection Association (NFPA) Standard 1710 provides widely accepted
benchmarks for fire and emergency medical services staffing. Specifically:
• Engine companies should be staffed with four firefighters.
• Advanced Life Support (ALS) units should include two paramedics and two
EMTs, all arriving on scene within the prescribed travel time standards.27
Currently, Palo Alto falls short of the recommended crew size as they staff three
firefighters per engine. Fire management stated that NFPA’s standard is a
recommendation that provides enough people to immediately begin the step towards
fighting a fire. Fire sends two units to every call in order to meet the number of required
people at the scene to complete those steps. This follows CalOSHA Title 8 standards
requiring staffing be sufficient to perform fire response safely. Fire has a written
procedure to ensure firefighter safety and effective fire operations. This has been a
sufficient practice given Palo Alto’s size and resource mix. However, when engines
leave the City to provide mutual aid or respond to State or Federal emergency
response calls, they do send four firefighters per engine.
The City’s recent Fire investments, staffing augmentations, and strategic deployment
adjustments are intended to address these gaps and improve alignment between
resource levels and service demand.
Current “floating” positions may not provide adequate coverage
The Fire Department operates nine units to provide service coverage to the City 24
hours per day, seven days per week. This coverage is broken into three shifts per day.
According to management, 25 positions are required to staff each shift and with three
shifts each day, the City requires 75 positions. Currently, Fire has 86 budgeted
positions for these shifts leaving 11 “floaters” to cover for sick leave, vacation, training,
etc. Floater positions are a standard staffing practice in fire service operations,
consisting of personnel who are not assigned to a specific apparatus or shift but are
deployed to fill daily staffing gaps caused by vacancies, leave usage, training, and other
absences, reducing the need for overtime backfill. According to Fire management,
maintaining an adequate number of floaters allows Fire to preserve minimum staffing
levels, limit fatigue associated with excessive overtime, and support consistent
emergency response performance.
However, as of the writing of this report, the City currently only has two functional
floaters due to having thee employees on “light duty” (meaning they are assigned to
less strenuous tasks) and six employees on workers compensation leave. The
department’s policy allows for up to four employees per shift to take vacation and
employees can take other types of leave (sick, bereavement, parental, etc.) as needed.
With a lack of adequate floaters to cover for these various absences, the department is
forced to use more overtime.
PALO ALTO FIRE DEPARTMENT
While Fire was meeting some KPIs, deployed resource levels may have impacted
other response times and violation follow-up.
According to the City’s annual budget documents, Fire has established Key
Performance Measures (KPMs) for emergency response:
• Fire and EMS response within 8 minutes, 90% of the time.
• Advanced Life Support Ambulance (ALS) response within 12 minutes, 90% of
the time.
Fire met its goals for EMS and ALS response times in most years from FY 2019 - FY
2024. However, the department consistently fell short of its goal for fire emergency
responses within 8 minutes during the same period as shown below.
Exhibit 11: Fire Performance Compared to KPI Goals FY2015 – FY2024
*OCA analysis October 2025
Beginning in FY 2026, the department plans to revise its KPMs to reflect:
• Emergency response within 8 minutes, and
• Ambulance arrival within 12 minutes, 90% of the time.
Violations have gone without resolution due to deployed resource and financial
constraints.
Discussions with the Fire Marshal revealed that the department has faced challenges in
conducting timely follow-up after issuing fire code violations. These delays are
attributed to staffing constraints and may impact enforcement effectiveness and public
safety.
0%
20%
40%
60%
80%
100%
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Percent of responses to EMS calls within 8 minutes
Percent of responses to fire emergencies
within 8 minutesPercent of responses to paramedic calls
within 12 minutesKPI Goal for EMS Calls & Fire Emergencies
PALO ALTO FIRE DEPARTMENT
Most OT is used to meet minimum staffing requirements.
Fire relies on overtime to meet minimum staffing requirements when they have
experienced vacant FTEs. Management and union representatives reported that most
OT is driven by backfilling vacancies, sick leave, vacation, workers’ compensation,
training, and seasonal staffing needs. As shown in the graph below the number of
vacancy days and the amount of OT expenses seems to generally trend together.
Years with the highest number of vacancy days also have the highest OT expenditures.
As mentioned in the Police section of this report, compensating for reduced headcount
by extending workload of existing staff may be necessary in the short term but is not a
sustainable model and can contribute to employee fatigue, reduced morale and
operational inefficiencies.
Guidance from the National Fire Protection Association and the International
Association of Fire Chiefs identifies heavy reliance on overtime as a structural driver of
firefighter fatigue that directly impacts EMS patient outcomes. Extended shifts and
insufficient recovery time degrade cognitive performance, increase medical error rates,
and reduce effectiveness in critical interventions such as CPR and airway
management. In time-sensitive emergencies—including cardiac arrest, stroke, and
respiratory failure—this fatigue-driven decline in performance can delay care, reduce
survival rates, and increase the likelihood of adverse patient outcomes.
Exhibit 12: Fire Vacancy Days vs. Overtime Expenses
*OCA analysis October 2025
Fire has routinely spent significantly more on OT than it has budgeted with actual OT
expenses exceeding budgeted by more than 100% in some years. The budget has
remained relatively flat during a 10-year period, assuming the Department will be fully
staffed. As discussed in the section on PAFD staffing, the department has made
significant efforts to keep up with turnover and is currently nearly fully staffed after
hiring for a Spring Academy.
0
1,000
2,000
3,000
4,000
5,000
6,000
$-
$500,000.00
$1,000,000.00
$1,500,000.00
$2,000,000.00
$2,500,000.00
$3,000,000.00
$3,500,000.00
$4,000,000.00
$4,500,000.00
$5,000,000.00
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24
Nu
m
b
e
r
o
f
V
a
c
a
n
c
y
D
a
y
s
Ov
e
r
t
i
m
e
E
x
p
e
n
s
e
s
Axis Title
OvertimeExpenses Vacancy Days
PALO ALTO FIRE DEPARTMENT
Exhibit 13: Fire OT Budgeted vs. Actual Expenditures
*OCA analysis October 2025
OT and Workers’ Compensation Cases
In comparing Exhibit 13 of OT Expenditures with Exhibit 14, Fire Workers’
Compensation Cases, there appears to be similar trends with workers’ compensation
cases seeming to rise when there is greater use of OT. Determining whether the
amount of OT worked is a factor in workers’ compensation cases is important for the
City to understand the full cost of using OT as a means for supporting systemic staffing
issues.
Exhibit 14 : Fire Workers’ Compensation Cases
*OCA analysis October 2025
$-
$500,000.00
$1,000,000.00
$1,500,000.00
$2,000,000.00
$2,500,000.00
$3,000,000.00
$3,500,000.00
$4,000,000.00
$4,500,000.00
$5,000,000.00
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Budgeted Overtime Expense Actual Overtime Expense
0
5
10
15
20
25
30
35
40
FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024
PALO ALTO FIRE DEPARTMENT
Fire implemented structural changes to reduce forced or mandatory OT with
positive feedback from staff.
In order to maintain minimum staffing levels, PAFD has relied on “Force In” or
mandatory OT. Analysis of OT data over the past 10 fiscal years provided from
Telestaff software records in the PAFD shows that:
• 62% of OT hours were voluntary
• 34% were due to Force In/Mandatory OT
• 4% were related to State Strike Team Deployment (reimbursed by OES)
Exhibit 15: Fire Categories of OT FY2015 – FY2025
*OCA analysis October 2025
Mandatory OT is typically used when staffing levels are insufficient to cover shifts
through voluntary means and firefighters are required to work OT shifts. The high
proportion of “Force In/Mandatory OT” indicates persistent staffing challenges and can
lead to staff dissatisfaction and burn-out.
Fire implemented operational changes in 2023 to merge voluntary and mandatory OT
lists. The department also adopted a system that prioritizes the last day worked for OT
assignments. Staff feedback suggests these changes have improved fairness in shift
distribution. The graph below shows that mandatory OT hours have decreased since
FY 2022.
62%
34%
4%
Regular Overtime Force In/Mandatory Overtime State Strike Team Deployment
PALO ALTO FIRE DEPARTMENT
Exhibit 16: Fire “Force In/Mandatory” OT Hours FY2015-FY2024
*OCA analysis October 2025
We
Recommend
the City:
1. Strengthen workforce planning and hiring pipeline management
Fire should continue to strengthen its workforce planning efforts by maintaining a
consistent hiring pipeline that accounts for the department’s lengthy training and
onboarding process incorporating attrition, academy separation rates, retirements,
and long-term leave into its hiring projections. Developing a more proactive hiring
plan will help ensure staffing levels remain stable and reduce the need for overtime
to cover vacancies.
The Department should consider reestablishing a structured hire-ahead Firefighter
Trainee program to create a continuous staffing pipeline aligned with anticipated
vacancies, reducing reliance on overtime to maintain minimum staffing. By
proactively filling positions and maintaining adequate staffing levels, the Department
can improve service reliability, control overtime costs, and mitigate fatigue-related
performance risks identified
2. Consider best ratio of floater positions
Fire should reassess the current ratio of floater positions to total suppression staffing
and adjust it based on historical leave usage, vacancy rates, and workload demands
to ensure sufficient baseline coverage without overreliance on overtime.
3. Periodically evaluate staffing levels and deployment against service demand
The City should formally assess whether current staffing levels, deployment
strategies, and apparatus configurations remain aligned with service demand and
response time goals. This evaluation should consider factors such as call volume
trends, response performance, staffing availability, and community growth.
Conducting periodic reviews will help the City determine whether current resource
levels and deployment models are sufficient to meet operational and public safety
objectives.
4. Improve OT monitoring and workforce sustainability
Fire should continue monitoring OT usage and analyzing the factors driving OT
-
10,000.00
20,000.00
30,000.00
40,000.00
50,000.00
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
PAFD "Force In/Mandatory" Overtime Hours FY 2015 -FY2025
PALO ALTO FIRE DEPARTMENT
staffing needs. The department should also periodically evaluate whether extended
OT hours are associated with employee fatigue, workers’ compensation claims, or
other workforce health and safety indicators. Strengthening this analysis will help
management identify opportunities to reduce reliance on mandatory OT while
maintaining required staffing coverage.
5. Improve budget transparency and operational efficiency.
The City should work with the Fire Department to ensure the budget more
accurately reflects operational needs and historical spending trends. Aligning the OT
budget with expected staffing realities will improve financial transparency and help
both Fire and policymakers better understand the true cost of maintaining fire
service levels. In addition, Fire should continue implementing operational
improvements—such as inspection software and scheduling adjustments—to
improve efficiency and ensure inspection and enforcement activities are completed
in a timely manner.
Response
Fire, Human Resources, Administrative Services
Concurrence: Agree
Target Date: Q4, FY 2027
Action Plan:
1. Agree. The Department will continue refining workforce planning by incorporating
known attrition factors, including retirements, academy and probationary separation
rates, and long-term leave trends, into hiring projections and will share these
projections annually to inform staffing and financial planning. Given the time
required to recruit, train, and deploy firefighters, the Department will work with
Human Resources and Administrative Services to review current hiring policies and
explore process improvements that could support earlier recruitment while
maintaining fiscal controls and oversight. These efforts are constrained by citywide
hiring policies and balancing of fiscal impacts of over hiring practices.
It should be noted that the Department recently worked to implement a structured
hire-ahead Firefighter Trainee program which encountered identified operational,
administrative, and labor-related complexities, including compensation structure and
management of temporary over-strength conditions. In FY2027, the hire-ahead
Firefighter Trainee position will be frozen and as such work on this will be paused
while the City manages financial constraints and balances investment priorities.
2. Agree. The Department agrees that floater positions are a standard and effective
strategy for managing daily staffing variability and reducing reliance on overtime
and deploys. The Department will conduct a comprehensive analysis of leave
usage, including sick leave, parental leave, workers’ compensation, vacation, and
other extended absences. This will be used to analyze a recommended number of
floater positions and bring forward resource adjustments as necessary or feasible
as part of the FY 2028 budget process.
3. Agree. The Department agrees with the importance of aligning staffing levels and
deployment models with service demands and community risks. Fire Department
Command Staff continuously monitors system performance, including response
times, unit availability, and call volume trends, and manages deployment within
allocated resources. Performance metrics and operational outcomes are regularly
PALO ALTO FIRE DEPARTMENT
To further support this work, the Department is planning an update to the Standards
of Cover report as part of the Department’s recent five-year strategic plan that
concludes in CY 2030. A Standards of Cover is a data-driven planning document
used to evaluate risk, response performance, deployment strategies, and resource
allocation, including community hazards, historical call demand, response times,
and current staffing and deployment configurations.
4. Agree. The Department agrees with the importance of monitoring overtime usage
and evaluating workforce sustainability. The Fire Department currently tracks key
overtime-related metrics, including overtime hours, expenditures, vacancy days,
and workers’ compensation cases. These metrics are reported through the City’s
Quarterly Public Safety Overtime Report and presented to the Finance Committee.
The Department will build on these practices by establishing a more formal internal
data review process in collaboration with Human Resources and Payroll to analyze
workforce trends. This process will include enhanced tracking and integration of
hours per employee, leave trends, workers’ compensation data, overtime usage,
and vacancy patterns to better understand workforce impacts. Supervisors may also
formally incorporate fatigue assessments into injury reports and monitor trends to
support injury prevention.
5. Concurs. The Department agrees with the importance of aligning budget
assumptions with operational realities and maintaining transparency in overtime
reporting. In the FY2027 budget development, the Department worked with
Administrative Services to adjust assumptions for a realistic vacancy rate and
increase the base overtime budget to better reflect align the budgeted cost of
maintaining minimum staffing and deployed resources. The Department will
continue to evaluate opportunities to improve system integration and efficiency
Item No. 5. Page 1 of 1
1
0
1
4
6
City Council
At-Places Supplemental Report
From: Ed Shikada, City Manager
Meeting Date: June 8, 2026
Item Number: 5
Report #:2606-6455
TITLE
Accept the City of Palo Alto Utility Reserves Advisory Report and Public Safety Staffing and
Overtime Audit as recommended by the Policy & Services Committee. CEQA Status: Not a
Project.
BACKGROUND
For Item 5 on this evening’s Consent Agenda, the utilities reserves Management Response
reviewed by the P&S Committee and recommended for Council approval was inadvertently
omitted from the packet. It is attached and provided here:
https://cityofpaloalto.primegov.com/api/compilemeetingattachmenthistory/historyattachment
/?historyId=a2608038-a719-421f-9700-e82d97347f2d
Staff anticipates presenting the topic for discussion by the Utilities Advisory Commission (UAC)
at its September meeting. Following a recommendation from the UAC, this item will be
calendared for the presentation and consideration to the Finance Committee.
ATTACHMENTS
Supplemental Attachment A: Utilities Reserves Management Response (labeled attachment B
on document)
APPROVED BY:
Ed Shikada, City Manager
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.
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
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.
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.
From:Utsav Gupta
To:Council, City
Cc:Tucher, Chris; Clerk, City
Subject:Remove the Utility Reserves Advisory Report (Baker Tilly) from the June 8 Consent Calendar (Item 5)
Date:Sunday, June 7, 2026 11:26:09 AM
CAUTION: This email originated from outside of the organization. Be cautious ofopening attachments and clicking on links.
Dear Mayor and Members of the City Council,
In short: we ask you to pull Item 5 from the June 8 Consent Calendar and refer it to the
Utilities Advisory Commission for review first. Accepting the report now commits the City to
reserve policies that staff acknowledge will raise utility rates.
We respectfully ask that the Baker Tilly utility reserve management report [Item 5 on the June 8
agenda] be removed from the Consent Calendar and referred to the Utilities Advisory
Commission (UAC) for review and a recommendation before Council takes action. Because
accepting this report sets a reserve policy with substantial downstream effects on utility rates, it
should not be adopted without the independent, public vetting the UAC exists to provide.
Below we explain why this item should be pulled from the Consent Calendar and reviewed by the
UAC first.
1. Staff’s own analysis says this will raise rates, and it isn’t in the packet.
The June 8 action is to accept the results of the Utility Reserves Advisory Report, which staff
describe as the start of a year-long process to revise reserve policies ahead of FY 2028 rate setting.
Staff are explicit that this will affect rates. Their report to the Policy & Services Committee states that
“implementation to change reserve levels would have rate impacts,”1 and their management response
puts a number on it:
“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.”2
Staff’s own plan, moreover, would have that year-long review done “with the assistance of the Utility
Advisory Commission and the Finance Committee,” but only “remaining within the range of
recommendations from Baker Tilly.”2That puts the steps in the wrong order. The rate impact
flows from the reserve policies themselves, so the UAC should review those policies before Council
accepts the report, not afterward, inside a process already boxed into Baker Tilly’s range. Council is
not voting on the increases here, but it would be endorsing the policy that will necessarily produce
2. The rate impact is large, and it stacks on an already steep trajectory.
Reserve policy is one of the most powerful levers the City has over what customers pay. The roughly
5× spread between Baker Tilly’s low and high scenarios (an added $5 to $115 per month per
household, or $60 to $1,380 per year) is itself a sign that more analysis is needed before these targets
become a rate path. That impact also lands on top of an already steep five-year forecast that does not
yet include it. The combined median residential utility bill is projected to rise from $442.60/month in
FY 2026 to ~$638/month by FY 2031, about +44% (~$195/month, ~$2,340/year):
CPAU Forecasted Rate Increases
Utility FY26 FY27 FY28 FY29 FY30 FY31 5yr Cumulative
Electric 6% 6% 6% 7% 7% 5%~34%
Gas 5% 9% 7% 6% 6% 6%~38%
Water (system avg) 10% 10% 10% 10% 7% 6%~52%
Wastewater Collection 20% 16% 14% 6% 6% 6%~57%
Refuse / Stormwater /
Fiber 0–3% 0–3% 2–3% 2–3% 2–3% 2–3%~10–13%
Combined median bill
(+$/mo)+$33 +$40 +$43 +$37 +$39 +$36 ~+44%
Combined median bill
($/mo level)~$443 ~$483 ~$526 ~$563 ~$602 ~$638 $443 → ~$638 (+44%)
Combined bill + Baker
Tilly, low (5% midpt)~$443 ~$488 ~$537 ~$580 ~$626 ~$670 $443 → ~$670 (+51%)
Combined bill + Baker
Tilly, high (23% midpt)~$443 ~$505 ~$574 ~$641 ~$713 ~$785 $443 → ~$785 (+77%)
Sources: FY 2027 Operating Budget Book p. 22; March 4, 2026 rate reports (Water, Wastewater); March 31, 2026 Gas packet;
November 5, 2025 combined-bill report. The Baker Tilly rows phase the 5% (low) and 23% (high) midpoint reserve adders in over five
years, reaching full effect in FY31; the cumulative column compares today’s combined bill (~$443) to the fully loaded FY31 figure.
That ~$638 figure is itself before the Baker Tilly reserve changes (up to ~$115/month once phased
in). It also excludes two further likely and material pressures, the cost of a gas decommissioning
program and an unplanned SFPUC water pass-through. Layering a possible 20–26% reserve-driven
increase on top of the planned ~44% is exactly the kind of cumulative, household-level
consequence that warrants deliberate UAC and public review before adoption.
3. This belongs before the UAC first.
The UAC has raised concerns about CPAU’s reserves for months, most recently while reviewing this
year’s rate increases, when commissioners proposed modifications to reserve policies to smooth
increases and understood that the forthcoming Baker Tilly report would be the commission’s
opportunity to examine CPAU’s many, often overlapping reserve funds. That report is now final, and
reserve policy sits squarely within the commission’s charge. The UAC has not yet taken it up, and
the right course is for the commission to review it before Council accepts it rather than to learn its
conclusions afterward. In fact, the commission adopted review of CPAU’s reserve policies as a
priority in its FY 2026–27 work plan, approved 5–0 on June 3. At that meeting, the Vice Chair also
noted that the UAC had agreed to take up reserve policy in July, though that review is not yet on the
calendar. Accepting the report on the June 8 consent calendar would settle the policy direction before
any such review can happen.
4. The report puts no numbers behind its recommendations, and the UAC has caught flawed
consultant reports before.
We cannot say whether the report’s methods and findings are sound, because the commission has not
reviewed it. The UAC has identified issues in earlier consultant work, including the One Water Plan
and the original gas cost-of-service study (COSA). Several features make a UAC review especially
warranted:
• It does not quantify its own cost. The report never states Palo Alto’s current reserve balances,
and it never computes how many dollars its recommendations would add to those reserves. It
then never estimates the effect on rates at all. The recommendation that drives nearly all of the
projected increase, resetting rate-stabilization targets to a percentage of revenues or expenses,
does not even specify the percentage; it cites a benchmark range of 10% to 65% and leaves the
choice to staff.3 Staff were left to fill that gap, and the only rate figure anywhere, the 2–26%
range, appears in their one-paragraph Management Response with no supporting math.2
• The recommendations skew toward higher reserves on thin support. The high end of the rate
impact tracks the very top of that 10–65% range, a single peer’s target, rather than any analysis of
Palo Alto’s needs. The report also proposes returning only funds “in excess of the target” to
ratepayers, replacing today’s rule that all such funds be drawn down to soften rate increases, a
direct path to higher net rates. Yet the report itself calls one large existing requirement, the
roughly $20 million bond-covenant reserve, “overly burdensome” and removable once the 2011
bonds mature in June 2026, which points toward lower reserves even as the package nets higher.3
• A Palo Alto–specific gap. The report says CIP-reserve targets should exclude bond-funded
projects but never quantifies Palo Alto’s cash-versus-bond split, even though the City is about to
bond-fund the $375–$450 million grid modernization, by far its largest capital program. The
utility with the biggest capital plan gets the least clarity on how the new target would apply.3
Multiple commissioners have said they want to review this report before the policies take effect, so
that the UAC can review the findings and recommend any changes to Council.
5. A UAC review would sharpen this, not just slow it down.
That staff project a rate impact anywhere from 2% to 26% shows how imprecise the current basis
is; a range that wide reflects how much analysis is still missing. A thoughtful review would prioritize
which reserve accounts, for which utilities, most need adjusting and how soon, and conversely which
of Baker Tilly’s recommendations are excessive. It would also ask which overlapping reserves should
be merged rather than grown. The report itself notes, for example, that the Electric utility’s Special
Projects Reserve, which funds capital projects, serves much the same purpose as its CIP Reserve and
could be combined, yet it recommends only “clarifying” the distinction.3 The same question applies
to a single utility holding both an operations reserve and a separate rate-stabilization reserve.
Working through these questions is exactly what a UAC review would do, returning to Council a
recommendation with a far more precise estimate of the rate impact, so Council acts on a defined
policy rather than a wide range.
Our request
Remove the item from the Consent Calendar and direct staff to bring the Baker Tilly reserve
management report to the UAC as a discussion item, consistent with the previously agreed July
review, returning to Council with the UAC’s recommendation thereafter. If any piece is time-
sensitive, staff can identify that narrow element for separate handling while the policy questions
receive proper review. At the very least, a policy decision of this magnitude should not be adopted on
consent.
Thank you for your service to Palo Alto and for your consideration of this request.
Respectfully,
Utsav Gupta
Chris Tucher
Commissioners, Utilities Advisory Commission, in their personal capacities
NOTES
1 City of Palo Alto, Policy & Services Committee Staff Report, “Office of the City Auditor Presentation of the City of Palo
Alto Utility Reserves Advisory Report,” April 14, 2026 (Report 2509-5177; Lead Department: City Auditor, Kate
Murdock), Fiscal/Resource Impact section.
2 City of Palo Alto, “Management Response to the Utilities Reserves Advisory Report” (Attachment B to the April 14, 2026
Policy & Services Committee item), April 2, 2026. This management response is not included in the June 8 City Council
packet.
3 City of Palo Alto / Baker Tilly Advisory Group, LP (Office of the City Auditor), “City of Palo Alto Utility Reserves
Advisory Report” (Attachment A to the April 14, 2026 Policy & Services Committee item), March 27, 2026. See pp. 5–
6 (rate-stabilization targets and 10–65% benchmark range; drawdown-language change), pp. 2 and 18 (Available
Reserves bond covenant), and pp. 3 and 5 (CIP-reserve treatment of bond-funded projects).