HomeMy WebLinkAboutStaff Report 2605-6413CITY OF PALO ALTO
CITY COUNCIL
Special Meeting
Monday, August 10, 2026
Council Chambers & Hybrid
5:30 PM
Agenda Item
21.Adoption of a Resolution Authorizing the Borrowing of Funds on an Interim Basis for
Improvements to the City's Regional Water Quality Control Plant and Authorizing the
Execution and Delivery of a Revolving Credit Agreement, Fee Letter and Related Note;
CEQA Status - Not a Project Staff Presentation
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City Council
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Administrative Services
Meeting Date: August 10, 2026
Report #:2605-6413
TITLE
Adoption of a Resolution Authorizing the Borrowing of Funds on an Interim Basis for
Improvements to the City's Regional Water Quality Control Plant and Authorizing the Execution
and Delivery of a Revolving Credit Agreement, Fee Letter and Related Note; CEQA Status - Not a
Project
RECOMMENDATION
Staff recommend that the City Council adopt the attached resolution (Attachment A)
authorizing the borrowing of funds on an interim basis for improvements to the City's Regional
Water Quality Control Plant and authorize the execution and delivery of a Revolving Credit
Agreement and related Note for a total not to exceed $31 million for five years and a Fee
Letter.
EXECUTIVE SUMMARY
The City of Palo Alto and its partner agencies are advancing more than $460 million in essential
capital improvements at the Regional Water Quality Control Plant, and staff recommend
approval of a $31 million Line of Credit (LOC) agreement with US Bank National Association (US
Bank) to ensure efficient project delivery and maintain flexible cash flow. Debt service
obligations have been incorporated into the City’s financial forecast and upcoming utility rate
planning, with all partner agencies—except the City of Mountain View, which will cash-fund its
portion—participating in the LOC. The LOC is secured by net revenues of the City’s Wastewater
Treatment Fund and the Wastewater Collection Fund.
BACKGROUND
The Regional Water Quality Control Plant (RWQCP), originally constructed in 1934 and
substantially expanded in 1972 with funding from the Federal Clean Water Act, is an advanced
tertiary treatment facility that provides wastewater treatment for Palo Alto, Mountain View,
Los Altos, Los Altos Hills, East Palo Alto Sanitary District, and Stanford University. Palo Alto owns
the RWQCP infrastructure and administers the Wastewater Treatment Fund on behalf of all the
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partner agencies under the Basic Agreement between the Cities of Palo Alto, Mountain View,
and Los Altos executed in 1968 and subsequent agreements with the minor partner agencies
(hereby collectively referred to as the “partner agreements”). Payments received from all
partner agencies are deposited in the Wastewater Treatment Fund, including payments
received from the City of Palo Alto.
1. The LRFP Update, currently
underway, will reassess and reprioritize capital improvement needs over the next 50 years,
incorporating consideration of updated regulatory requirements, emerging contaminants, and
the current condition and performance of existing RWQCP infrastructure. The update will refine
project scopes and cost estimates for remaining projects from the 2012 LRFP and identify
additional capital improvements necessary to maintain reliable and compliant plant operations.
The LRFP Update is expected to significantly increase RWQCP’s overall capital needs,
highlighting the importance of flexible financing tools such as the proposed LOC.
2. Staff’s funding strategies include the following sources:
State Revolving Fund (SRF) loans administered by the State Water Resources Control
Board
U.S. Environmental Protection Agency Water Infrastructure Finance and Innovation Act
(WIFIA) loans
Utility revenue bonds issued through capital markets
Line of Credit (LOC)
Capital budget for smaller or shorter-term projects.
1 City Council, June 10, 2024; Agenda Item #6; SR# 2405-2993,
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=82887&dbid=0&repo=PaloAlto
2 Finance Committee, November 4, 2025:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=83790&dbid=0&repo=PaloAlto
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The selection of the funding source for each project depends on program eligibility (for SRF and
WIFIA), prevailing interest rates at the time of the loan or bond issuance, repayment terms, and
cash flow needs. Annual debt service payments are shared among all RWQCP partner agencies,
with the exception of the City of Mountain View, through amendments to their partner
agreements. Partner amendments are scheduled to be presented to the City Council in the fall.
Palo Alto is responsible for 38.16% share of debt-financed costs. These obligations directly
affect the City’s Wastewater Collection Fund and are the primary driver for projected rate
adjustments.
2 includes an LOC cost analysis. In June 2024,
Council authorized staff to obtain a $31 million Line of Credit for the Wastewater Treatment
Fund5; this authority allows the City Manager to negotiate and execute the LOC however per
Palo Alto Municipal Code (PAMC) section 12.28, the LOCs must be approved by Council via
resolution (Attachment A).
ANALYSIS
Table 1: Pricing and Fee Comparison
BMO
US Bank
(Recommended)
Pricing Tax-Exempt Rate: 82% 1M SOFR + 1.45%
Taxable Rate: 1M SOFR + 1.20%
Undrawn Fee: 0.30% of unutilized amount
5 Year
Tax-Exempt Rate: 80% 1M SOFR + 1.19%
Taxable Rate: 1M SOFR + 1.19%
Undrawn Fee: 0.25% of unutilized amount
Terms & Conditions Rate Covenant - 125% of Debt Service
Additional Bonds Test - 125% of Debt Service
Rate Covenant - 125% of Maximum Annual Debt
Service*
Additional Bonds Test - 125% of Debt Service
Minimum Ratings of A3/A- for City's GO Debt
5 City Council, June 17, 2024:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=82897&dbid=0&repo=PaloAlto&searchid=a71833e6
-80d5-4688-8ab4-cd9a7edc4503 and Supplemental Memo:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=82929&dbid=0&repo=PaloAlto&searchid=a71833e6
-80d5-4688-8ab4-cd9a7edc4503
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Table 1: Pricing and Fee Comparison
BMO
US Bank
(Recommended)
Bank Ratings Long-Term (S/M/F): A+/A1/AA-
Short-Term (S/M/F): A-1/P-1/F1+
Outlook (S/M/F): Stable/Stable/Stable
Long-Term (S/M/F): A+/A2/A+
Short-Term (S/M/F): A-1/P-1/F1
Term Out Provisions Base Rate + 2.00% fixed for 3 years Base Rate + 3.00% fixed for 3 years
Relevant Experience Los Angeles County Metropolitan Transportation
Authority, City of Pasadena, City of Modesto,
Chicago Housing Authority, and Citizens Energy
Group
Santa Clara Valley Water District, SFPUC - Water
Enterprise, SFPUC Wastewater Enterprise,
Gainesville Regional Utilities, CO, Lower
Colorado River Authority
Fees
Legal Expenses Capped at $35,000 Estimated at $45,000; Capped at $50,000
Upfront Fee $0 $0
Termination Fee $0 One-year make whole termination provision
*The Wastewater Treatment Fund compiles with the 125% of Maximum Annual Debt Service.
Under both proposals, security for the LOC is net revenues of the Wastewater Collection Fund
and Wastewater Treatment Fund, on parity with the existing State Revolving Fund (SRF)
installment sale agreements.
Regarding the City’s Debt Policy7, the Enterprise Funds have a debt service limit of 15% of
operating expense. The estimated debt service limit for FY 2026 is 7.6%. Conservatively
assuming a fixed $21 million drawn amount, with $10 million unutilized, issuance of a $31
million LOC would increase the fund’s debt service limit by approximately 2.2 to 2.6 percentage
points between FY 2027 and FY 2028. The City Council approved an exception to the debt limit
on December 5, 2022 upon approving the budget amendment to fund the Secondary
Treatment Upgrade (STU) project using the 2022 SRF loan. Based on the estimated interest and
cost forecast budget, the WWT Fund is estimated to exceed the 15% debt limit due in FY 2028
due to repayment of the 2022 SRF loan.
FISCAL/RESOURCE IMPACT
Amendments to the agreements with partner agencies to incorporate fiscal impacts of this LOC
are scheduled for Palo Alto City Council consideration in fall 2026. The annual partner cost is
approximately $0.8 to $1.0 million, which is lower than the $1.3 to $1.5 million range previously
communicated to the City Council and partners in fall 2025.
7 City Debt Policy, Adopted by City Council on April 11, 2017:
https://www.paloalto.gov/files/assets/public/v/1/administrative-services/adopted-debt-policy-2017-04-11.pdf
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The City of Palo Alto, as a partner to the RWQCP, has assumed the impact of the LOC in its
Financial Forecast and utility rates for FY 2027, as presented to the Finance Committee on
March 17, 20269.
STAKEHOLDER ENGAGEMENT
ENVIRONMENTAL REVIEW
ATTACHMENTS
APPROVED BY:
9 Finance Committee, March 17, 2026:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=86854&dbid=0&repo=PaloAlto&searchid=da736b0
9-2d2f-4bc1-ac2c-38a18f34577e
Resolution No. __
Resolution of the Council of the City of Palo Alto Authorizing the Borrowing of Funds Pursuant
to Chapter 12.28 of the Palo Alto Municipal Code to Finance on an Interim Basis Improvements
that Benefit the City’s Wastewater Treatment Enterprise and Wastewater Collection Enterprise,
Authorizing the Execution and Delivery of a Revolving Credit Agreement, a Fee Letter and
Related Notes, Authorizing and Ratifying Execution and Delivery of Related Documents, and
Authorizing Related Actions
RECITALS
A. The City of Palo Alto (the "City"), acting under and pursuant to the powers reserved
to the City under Sections 3, 5 and 7 of Article XI of the Constitution of the State of California
and Article II of the Charter of the City, operates and maintains facilities for the collection,
pumping, transport, treatment, storage and disposal of wastewater (the "Wastewater System")
B. The City is empowered pursuant to Chapter 12.28 of the Palo Alto Municipal Code
to issue bonds, notes and other obligations, to provide funds for the acquisition, construction,
improvement or financing of the Wastewater System.
C. Chapter 12.28 authorizes the City Council to exercise all of the powers set forth in
the Revenue Bond Law of 1941, being Chapter 6, commencing with Section 54300, of Part 1 of
Division 2 of Title 5 of the California Government Code, subject to the restrictions set forth
therein, except as provided in Chapter 12.28.
D. The City previously issued or incurred the following outstanding obligations for the
purpose of financing and refinancing, as applicable, certain improvements to the Wastewater
System (the “Outstanding Obligations”):
(i) a Project Finance Agreement No. 07-814-550-0 between the City and the
California State Water Resources Control Board (“State Water Board”), as
amended,
(ii) a Project Finance Agreement No. 09-814-550 between the City and the State
Water Board, as amended,
(iii) an Installment Sale Agreement No. D16-01034, dated as of March 20, 2017 by
and between the City and the State Water Board, as amended,
(iv) an Installment Sale Agreement No. SWRCB0000000000D2001009, executed as
of July 12, 2021 by and between the City and the State Water Board, as
amended,
(v) an Installment Sale Agreement No. D2101050, executed as of May 9, 2022 by
and between the City and the State Water Board, as amended, and
(vi) an Installment Sale Agreement No. D2401001, executed as of March 27, 2025
by and between the City and the State Water Board.
E. The Outstanding Obligations are secured by a first priority pledge of and payable
from net revenues of the City’s Wastewater Treatment enterprise and its Wastewater Collection
enterprise.
F. The City has determined that it is a necessary and proper municipal affair to finance
on an interim basis certain additions, betterments, extensions and improvements to the City’s
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Regional Water Quality Control Plant and other improvements that benefit the City’s
Wastewater Treatment enterprise and its Wastewater Collection enterprise (the “Project”).
G. The City wishes to secure such financing by a first priority pledge of net revenues of
the City’s Wastewater Treatment enterprise and its Wastewater Collection enterprise.
H. Pursuant to Government Code Section 5852.1, certain information relating to the
revenue bonds is set forth in Appendix A attached to this Resolution, and such information is
hereby disclosed and made public.
I. United States Income Tax Regulations section 1.150-2 provides generally that
proceeds of tax-exempt debt are not deemed to be expended when such proceeds are used for
reimbursement of expenditures made prior to the date of issuance of such debt unless certain
procedures are followed, one of which is a requirement that (with certain exceptions), prior to
the payment of any such expenditure, the issuer declares an intention to reimburse such
expenditure.
NOW, THEREFORE, the Council of the City of Palo Alto RESOLVES, as follows:
SECTION 1. Findings and Determinations. The City Council hereby finds, determines
and declares that the Recitals are true and correct.
SECTION 2. Approval of Credit Agreement, Fee Letter and Notes; Terms of the Credit
Agreement, Fee Letter and Notes; Security. The Council is adopting this resolution under the
powers reserved to the City under Sections 3, 5 and 7 of Article XI of the Constitution and
Article II of the Charter. Pursuant to Chapter 12.28, and for the purpose of financing the
Projecton an interim basis, the City Council hereby approves the borrowing of funds by the City
in the form of a revolving credit agreement (the “Credit Agreement”), a letter confirming certain
terms related to the calculation of the interest rate payable by the City under the Credit
Agreement and related fees (the “Fee Letter”) and one or more notes to evidence the City’s
obligations under the Credit Agreement (the “Notes”).
The maximum principal amount outstanding under each of the Credit Agreement and the
Notes at any time shall not exceed $31,000,000.
The interest rate under the Credit Agreement, the Fee Letter and the Notes shall not
exceed the maximum rate of interest authorized by law. The interest rate under the Credit
Agreement, the Fee Letter and the Notes may be fixed, variable, exempt from federal income
taxation or subject to federal income taxation, in each case, as determined by the City Manager,
Administrative Services Director or a designee appointed in writing by any such officer (each, an
“Authorized Officer”) in consultation with Jones Hall LLP, the City’s bond counsel, and PFM
Financial Advisors LLC, the City’s municipal advisor.
The initial term of the Credit Agreement and the Notes shall not exceed five years, but
the Credit Agreement and the Notes may have a succeeding term that shall not exceed three
years.
The City’s payment obligation under the Credit Agreement, the Fee Letter and the Notes
shall be secured by a first priority pledge of and payable solely from the net revenues of the
City’s Wastewater Treatment enterprise and its Wastewater Collection enterprise. The pledge
shall be on a parity basis with the pledge securing the Outstanding Obligations, as determined
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by an Authorized Officer. To the extent the Credit Agreement is used to finance improvements
that only partially benefit the City’s Wastewater Treatment enterprise and Wastewater Collection
enterprise, the City will ensure that the financing costs are paid or reimbursed in a manner that
complies with applicable law, including Articles XIII C and D of the California Constitution. The
general fund of the City is not liable for the payment of the City’s obligations under the Credit
Agreement, the Fee Letter or the Notes. The credit or taxing power of the City is not pledged for
the payment of the City’s obligations under the Credit Agreement, the Fee Letter or the Notes.
The Lenders (as defined in the Credit Agreement) may not compel the exercise of the taxing
power of the City or the forfeiture of its property.
The City Council hereby determines that the Credit Agreement, the Fee Letter and the
Notes are conclusively deemed valid and executed, delivered and issued, as applicable, in
conformity with Chapter 12.28.
SECTION 3. Selection of U.S. Bank. The City Council hereby approves U.S. Bank
National Association as Agent (as defined in the Credit Agreement) and the initial sole Lender,
which staff has recommended following a competitive selection process.
SECTION 4. Approval of Credit Agreement, Fee Letter and Notes. The City Council
hereby approves the Credit Agreement, the Fee Letter and the Notes in substantially the forms
on file with the City Clerk, with such changes approved by an Authorized Officer, acting alone,
after consultation with City staff, bond counsel and the municipal advisor.
The Mayor or the City Manager, acting alone, is authorized and directed for and in the
name and on behalf of the City to execute and the City Clerk is hereby authorized and directed
to attest the final form of the Credit Agreement, the Fee Letter and the Notes, and the execution
of the Credit Agreement, the Fee Letter and the Notes by the Mayor or the City Manager shall
be conclusive evidence of their approval by this City Council.
SECTION 5. Authorization and Ratification of Amendments to the Outstanding
Obligations. The City Council hereby authorizes and ratifies the execution and delivery of
amendments to the Outstanding Obligations as may be required to facilitate the proposed
interim financing. The execution of such amendments by an Mayor or the City Manager shall be
conclusive evidence of such approval and ratification.
SECTION 6. Official Actions. Each Authorized Officer, the Mayor, the City Attorney, the
City Clerk and all other officers of the City are each authorized and directed in the name and on
behalf of the City to make any and all assignments, certificates, requisitions, agreements,
notices, consents, instruments of conveyance, warrants, promissory notes and other
documents, which they or any of them might deem necessary or appropriate in order to
consummate any of the transactions contemplated by the agreements and documents approved
under this Resolution. Whenever in this Resolution any officer of the City is authorized to
execute or countersign any document or take any action, such execution, countersigning or
action may be taken on behalf of such officer by any person designated by such officer to act on
his or her behalf in the case such officer is absent or unavailable.
Any and all acts of each Authorized Officer, the City Attorney, the Mayor, the City Clerk
and all other officers of the City in furtherance of the transactions contemplated by the foregoing
resolutions that were taken prior to the adoption of these resolutions, are hereby ratified,
confirmed, approved, and adopted.
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SECTION 7. Reimbursement Intent. The City hereby declares that it reasonably expects
(i) to pay certain costs of the Project prior to the execution and delivery of the Credit Agreement
and (ii) to use a portion of the proceeds of the Credit Agreement for reimbursement of
expenditures for the Project that are paid before the execution and delivery of the Credit
Agreement.
SECTION 8. California Environmental Quality Act. The foregoing resolutions and the
execution and delivery of the Credit Agreement, the Fee Letter and the Notes are not a project
for purposes of the California Environmental Quality Act because the additions, betterments,
extensions and improvements to the City’s Regional Water Quality Control Plant to be financed
as described herein are categorically exempt under CEQA Guidelines Section 15301.
SECTION 9. Effective Date. This Resolution shall take effect immediately upon its
adoption.
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INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST: APPROVED:
City Clerk Mayor
APPROVED AS TO FORM: APPROVED
Jones Hall LLP
By:
Christopher K. Lynch, City Manager
Jones Hall LLP
Bond Counsel
Director of Administrative Services
City Attorney
APPENDIX A
Government Code Section 5852.1 Disclosure
The following information consists of estimates that have been provided by the City’s
municipal advisor which has been represented by such party to have been provided in
good faith. The information assumes that the City will borrow funds in the form of a
revolving line of credit in the principal amount not to exceed $31,000,000 at any time
with a five-year maturity date.
(A) True Interest Cost of the Financing: 3.416%
(B) Finance Charge of the Financing (Sum of all fees/charges paid to third parties):
$127,000
(C) Net Proceeds to be Received (net of finance charges, reserves and capitalized
interest, if any): $30,873,000
(D) Total Payment Amount Through Maturity: $33,943,027
The foregoing estimates constitute good faith estimates only. The principal amount, the
true interest cost, the finance charges thereof, the amount of proceeds received
therefrom and total payment amount with respect thereto may differ from such good
faith estimates due to (a) the actual date of the financing being different than the date
assumed for purposes of such estimates, (b) the actual principal amount being different
from the estimated amount used for purposes of such estimates, (c) the actual
amortization of the principal being different than the amortization assumed for purposes
of such estimates, (d) the actual interest rate being different than those estimated for
purposes of such estimates, (e) other market conditions, or (f) alterations in the City’s
financing plan (including the mix of tax-exempt and taxable obligations), or a
combination of such factors. The actual timing of the financing and the actual principal
amount of the financing will be determined by the City based on the timing of the need
for proceeds and other factors. The actual interest rates paid by the City will depend on
market interest rates and the terms of the financing. The actual amortization of the
principal will also depend, in part, on market interest rates. Market interest rates are
affected by economic and other factors beyond the control of the City.
RWQCP INTERIM FINANCING
Line of Credit (LOC)
Borrowing Authorization
Presented by:
Christine Paras, ASD Asst. Director
AUGUST 10, 2026 www.paloalto.gov
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BACKGROUND
Comprehensive List of Funding Strategies
Reviewed by Finance Committee, Nov. 2025:
•State Revolving Fund Loans (SRF)
•Water Infrastructure Finance & Innovation Act
Loans (WIFIA)
•Utility revenue bonds
•Line of Credit (LOC)
•Capital budget, “pay-go”
•Council authorized staff to obtain a
$31M Line Of Credit (LOC) in June 2024
•Advancing more than $0.5B in essential
capital improvements at the Regional
Water Quality Control Plant (RWQCP)
•Staff initiated a comprehensive update
to the Long-Range Facilities Plan (LRFP)
in 2024. Anticipated completion in
2027.
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LINE OF CREDIT
Purpose & Benefits
•Short-term liquidity
•Maintains funding flexibility
Next Steps
Approval of Partner Agency Amendments by respective City
Councils and by Palo Alto Council to enable the RWQCP to
charge partners for LOC shared cost.
RFP Was Issued
Feb 13
Proposals
Mar 6
Selection
Mar 9-13
LOC Council
Action
August 10
Initial Draw
August
Partner
Agreements
Partner amendments needed
Partners Update (Late June)
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Key Financing Assumptions
•Total of $31M over 5-Year Term Line of Credit with U.S. Bank
•LOC has flexibility for taxable or tax-exempt draws
•Rate Covenant: 125% of max. annual debt service (City already subject to via State
Revolving Loan Funds)
•Partner amendments will enable the RWQCP to charge partners for LOC shared costs.
•Scheduled for Palo Alto City Council in the fall
LINE OF CREDIT (LOC)
5-Year Pricing
•Tax-Exempt Rate: 80% 1M SOFR + 1.19%
•Taxable Rate: 1M SOFR + 1.19%
•Undrawn Fee: 0.25% of unutilized amount
Annual Cost
•Annual partner cost is approximately $0.8-$1M
•Lower than $1.3-$1.5M communicated to
Council in fall 2025.
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RECOMMENDATION & COUNCIL ACTION
1.Adopt resolution authorizing interim borrowing for RWQCP
improvements.
2.Approve execution and delivery of a revolving credit
agreement and note, not to exceed $31 million for five
years and fee letter.
CHRISTINE PARAS
ASD, Assistant Director
christine.paras@paloalto.gov
LAUREN LAI
Chief Financial Officer
lauren.lai@paloalto.gov