Agenda packet — Palo Alto City Council, January 22, 2024 (part 2 of 3)

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*P3a. Description (Continued)

Figure 1: Aerial view of 949 Scott Street. Subject property outlined in red. Google Maps, 2023.

Figure 2: North half of southwest facade.

Figure 3: South half of southwest facade.

Northwest Façade
The northwest façade fronts a narrow gravel pathway and a concrete property wall, accessible by a wood picket gate to the south.

The north (left) side includes two double-hung wood windows (Figure 4). At the center of the façade is a six-over-one double-hung wood window, slightly higher than the others on the façade plane. The south (right) side includes two double-hung wood windows (Figure 5).

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Figure 4: Northwest facade, looking southeast.

Figure 5: Northwest façade, looking northeast.

Northeast Façade
The northeast (rear) façade fronts a narrow graveled space next to a concrete property wall. The east (left) side has two concrete steps leading up a 10-lite wood door behind a screen door (Figure 6). A small rectangular wood vent sits west of the door. At the center of the façade is projecting vinyl garden window (Figure 7). The west (right) side has a projecting wood shed and a double- hung wood window (Figure 8).

Figure 6: Northeast façade, looking west.

Figure 7: Northeast facade, looking west.

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Figure 8: Northeast facade, looking east.

Southeast Façade
The southeast façade fronts a gravel walkway and tall hedge, accessible by a wood picket gate to the south. The south (left) corner of the façade contains a square nine-lite fixed wood window (Figure 9). The center has a second square nine-lite fixed wood window. Two double-hung wood windows sit on either side of a square fixed wood window. The rest of the north (right) portion of the façade contains no fenestration (Figure 10).

Figure 9: Southeast façade, looking northeast.

Figure 10: Southeast façade, looking southwest.

Surrounding Neighborhood
The immediate surrounding area is primarily residential. Scott Street dead-ends at small public park called Scott Park, which contains picnic tables, a half-court basketball court, a bocce ball court, toddler swings, and lawn. The area showcases a mix of residential styles, including Craftsman, Contemporary, and Spanish Revival. The homes were built starting in 1902 to 2011 (Figure 11-Figure 14).

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Figure 11: 353 Addison Avenue.

Figure 12: 327 Addison Avenue.

Figure 13: 935 Scott Street.

Figure 14: 943 and 936 Scott Street.

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DPR 523B (9/2013) *Required information
State of California ⎯ The Resources Agency Primary #__________________________________________ DEPARTMENT OF PARKS AND RECREATION HRI#______________________________________________

BUILDING, STRUCTURE, AND OBJECT RECORD

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*Resource Name or # 949 Scott Street
B1. Historic name:

B2. Common name: 949 Scott Street
B3. Original Use: Residence
B4. Present use: Residence
*B5. Architectural Style: Craftsman

*B6. Construction History: (Construction date, alterations, and date of alterations) Prior to construction in 1922, the site was previously undeveloped. (Refer to continuation sheet, page 7)

*B7. Moved? No Yes Unknown Date: Original Location: ____________________________ *B8. Related Features: None

B9a. Architect: Unknown b. Builder: Unknown
*B10. Significance: Theme N/A Area University South, Palo Alto Period of Significance N/A Property Type Residential Applicable Criteria N/A

Historic Context:

Palo Alto History
The earliest known settlement of the Palo Alto area was by the Ohlone people. The region was colonized in 1769 as part of Alta California. The Spanish and Mexican governments carved the area into large ranchos which contained portions of land that became Palo Alto including Rancho Corte Madera, Rancho Pastoria de las Borregas, Rancho Rincon de San Francisquito, and Rancho Riconada del Arroyo de San Francisquito.1 These land grants were honored in the cession of California to the United States, but parcels were subdivided and sold throughout the nineteenth century. The current city of Palo Alto contains the former township of Mayfield, which was located just southwest of Alma Street. In 1882, railroad magnate and California politician Leland Stanford purchased 1,000 acres adjacent to Mayfield to add to his larger estate. Stanford’s vast holdings became known as the Palo Alto Stock Farm. On March 9, 1885, Stanford University was founded on land of the Palo Alto Stock Farm through an endowment act by the California Assembly and Senate.

Originally looking to connect Stanford University as a part of the already established town of Mayfield, Stanford asked residents of Mayfield to make the town a temperance town. Their refusal in 1886 caused Stanford to found the town of Palo Alto with aid from his friend, Timothy Hopkins of the Southern Pacific Railroad. Hopkins purchased and subdivided 740 acres of private land, that was known initially as University Park (or the Hopkins Tract).2 This land was bounded by the San Francisquito Creek to the north and the railroad tracks and Stanford University campus to the south. A new train stop was created along University Avenue and the new town flourished in its close connection with the university. University Park, under its new name of Palo Alto, was incorporated in 1894. (Refer to continuation sheet, page 9)

B11. Additional Resource Attributes: N/A

*B12. References: Refer to footnotes
B13. Remarks: N/A
*B14. Evaluator: Page & Turnbull, Inc.
*Date of Evaluation: March 29, 2023

1 Ward Winslow and the Palo Alto Historical Association, Palo Alto: A Centennial History, (Palo Alto: Palo Alto Historical Association,1993), 12-17. 2 City of Palo Alto, Comprehensive Plan 2030 (adopted by City Council, November 13, 2017), 16, accessed January 2, 2019, https://www.cityofpaloalto.org/civicax/filebank/documents/62915.

Source: City of Palo Alto, Online Parcel Reports, 2023. Subject Parcel shown outlined in blue.

(This space reserved for official comments.)

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*B6. Construction History (continued):
949 Scott Street was constructed in 1922 as a residence in the University South Neighborhood. No known architect or contractor was identified in the course of historic research. The house is visible on a 1924 Sanborn Map then later in a 1941 aerial photo (Figure 15 and Figure 16). The footprint of the house has been the same from 1924 to present. The house was reroofed in 1979, first completed as an unpermitted project, but later corrected that same year. In 1983, a permit was issued to “rebuild fire damaged residence as was existing with new electrical service.” It is not explicitly stated what portion of the residence suffered the damage, and no photos of the house were found from this period. Given that the aerial photos from 1941 and present show the same footprint, as well as wood windows throughout each facade, it could be presumed that the fire damage was on the interior, or the house did not suffer much damage. Other interior improvements were made in 1998, according to permit records. Upon visual inspection, there do not appear to be unpermitted changes to the house.

Figure 15: Sanborn Map Company Fire Insurance Map, 1924. 949 Scott Street outlined in red. Source: San Francisco Public Library.

Figure 16: Aerial photograph of 949 Scott Street, 1941. Subject property outlined in red. Flight C-7065, Frame 43. Source:

University of Santa Barbara.

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The following table includes known construction and alterations undertaken at the subject property based on the permits on file at Palo Alto Development Services.

*B10. Significance:

Historic Context (continued)
In its early years, Palo Alto was a temperance town where no alcohol could be served. The residents were mostly middle and working class, with a pocket of university professors clustered in the neighborhood deemed Professorville. The development of a local streetcar in 1906 and the interurban railway to San Jose in 1910 facilitated access to jobs outside the city. They also increased access to Stanford University and encouraged more people to move to Palo Alto.3 In July 1925, Mayfield was officially annexed and consolidated into the City of Palo Alto.4

Like the rest of the nation, Palo Alto suffered through the Great Depression in the 1930s and did not grow substantially. World War II brought an influx of military personnel and their families to the Peninsula; accordingly, Palo Alto saw rapid growth following the war as many families who had been stationed on the Peninsula by the military or who worked in associated industries chose to stay. Palo Alto’s population more than doubled from 16,774 in 1940 to 33,753 in 1960.5

Palo Alto’s city center greatly expanded in the late 1940s and 1950s, gathering parcels that would house new offices and light industrial uses and lead the city away from its “college town” reputation. Palo Alto annexed a vast area of mostly undeveloped land between 1959 and 1968. This area, west of the Foothill Expressway, has remained protected open space. Small annexations continued into the 1970s, contributing to the discontinuous footprint of the city today. Palo Alto remains closely tied to Stanford University; it is the largest employer in the city. The technology industry dominates other sectors of business, as is the case with most cities within Silicon Valley. Palo Alto consciously maintains its high proportion of open space to development and the suburban feeling and scale of its architecture.6

University South Neighborhood History
The current University South neighborhood was located in the southern portion of the original University Park track platted by Timothy Hopkins. It was the core part of the early city, along with today’s Downtown North neighborhood (located northwest of University Avenue, the main commercial corridor within the original core of Palo Alto). The neighborhood contains the residential and commercial areas that lay southeast of University Avenue, although does not encompass Professorville, the residential neighborhood closely associated with early Stanford faculty members and their families. As a result, the neighborhood is U- shaped, bounded by University Avenue at the northwest, Alma Street and the railroad tracks at the south, and Middlefield Road at the northeast. The southeast boundary follows Embarcadero Road but steps northwest to Addison Avenue, so as to exclude Professorville.

The 1895 Sanborn Fire Insurance Company map illustrates that stores were located along University Avenue, and were particularly concentrated at its southwestern end, where a large lumberyard stood near the railroad. Residences were scattered along the street just east and west of University Avenue on Hamilton and Lytton Avenues. A few churches, hotels, and boarding houses also stood among many vacant lots. Contemporary newspapers called the homes that housed artisans and merchants in this area “neat cottages”—which stood in contrast to the houses occupied by Stanford faculty members, located to the southeast in what is today the Professorville neighborhood. Some grander homes for more affluent residents were sprinkled throughout the current-day University South neighborhood.7

3 Dames & Moore (Michael Corbett and Denise Bradley), Final Survey Report – Palo Alto Historical Survey Update: August 1997-August 2000 prepared for the City of Palo Alto Planning Division (February 2001), 1-4. 4 City of Palo Alto, Comprehensive Plan 2030, 16.
5 “Depression, War, and the Population Boom,” Palo Alto Medical Foundation - Sutter Health, accessed January 2, 2019, http://www.pamf.org/about/pamfhistory/depression.html.
6 City of Palo Alto, Comprehensive Plan 2030, 11-20.
7 Palo Alto AAUW, …Gone Tomorrow? “Neat Cottages” and “Handsome Residences” (Palo Alto: American Association of University Women, 1971, revised 1986) 5.

Permit # Date Owner Architect/Contractor Description
Unknown 6/6/1979 Dennis Lovett Unknown Reroof (noted that the roof was replaced without a permit in May 1979)
B-83-86 2/8/1983 Dennis Lovett Keith Ahhen Rebuild fire damaged residence as was existing with new electrical service
983815 12/17/1998 Jeanne Anne Breen Unknown Heater replaced. Built in shelves and mantel added on the interior
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By 1901, Palo Alto had grown, and the Sanborn map showed more than just the original core. Houses were filling in the lots on the blocks around the railroad while scattered residential development extended up to and beyond Middlefield Road. Additional institutions had been built in the area, including a public school and high school.

Ownership and Occupancy Summary
The following table outlines the ownership and occupancy history of 949 Scott Street. This information was compiled from Palo Alto City Directories, Santa Clara Assessor records, building permit applications, newspaper articles, and public records available through Ancestry.com.

Year of
Occupancy
Known Occupants (known
owners in bold) Occupation
1924-1947
Elizabeth Fu Son
Josephine Fu Son (1931-1947)
Frances Sims (1924-1927)
Teacher
Christian Science Practitioner
Pastry Maker/Christian Science
1950 Vacant
1953-1955 James H Swezy
Isabel Swezy
Salesman

1961 Charles E. Stollenwerk
Carolyn Stollenwerk
Engineer at Lockheed
1962 John J. Bosley Psychologist
1965 William W. Bromund Student
1969 Vacant
1972 No Return
1974 Cheryl Romner Unknown
1976 Andrea Burris Unknown
1979-1983 Dennis Lovett Unknown
1984 Alan L. Svec
Jennifer M. Svec
Unknown
1986 Robert Leon Baer Technician
1993-1998 Jeanne Anne Heilig Breen
Patrick R. Heilig
James L. Heilig Jr.

David Breen
Unknown
2012 Anita Coutts Unknown
2023-Present Simon Tong
Shamim Tong
Unknown

Elizabeth Fu Son, Owner and Occupant 1924-1947
If an owner or occupant resided at 949 Scott Street from its construction in 1922 to 1924, that person is not documented in city directories.

Elizabeth Fu Son (spelled Fuson in the U.S. Census records of 1920, 1930, and 1940) lived at 949 Scott Street starting in 1924, according to Palo Alto city directories.8 Originally from Goshen, Indiana and born about 1871, she was a member of the Daughters of the American Revolution and the Presbyterian Church of Palo Alto.9 Elizabeth was a longtime teacher at Miss Harker’s School and lived at the school (addressed 118 Greenwood Avenue) with Catherine Harker and other teacher/lodgers in 1920. She appears to have also owned a property in Goshen, Indiana, as she also appears in a 1920 U.S. Census there with her friend, Frances Sims.10 She lived at 949 Scott Street with Frances Sims from 1924 to 1927, then with her sister Josephine Fu Son from 1931 until 1947. Elizabeth Fu Son lived in the home until her death in 1947. Research did not find Elizabeth Fu Son significant to the overall development of Palo Alto.

8 Note: while the name Fu Son appears to potentially indicate an Asian surname, Ms. Fu Son was white according to U.S. Census records. 9 “Elizabeth Fu Son dies; funeral set for Monday,” The Peninsula Times Tribune, July 5, 1947, Accessed March 7, 2023, https://www.newspapers.com/image/838649384/?article=0935b9d8-feb8-487d-8070- 029a999e1046&focus=0.3694026,0.65429586,0.48802704,0.76918787&xid=3355&_gl=1*g9pkxt*_ga*MTU2MTA4MzQ1OC4xNjUyODkxMzA5*_g a_4QT8FMEX30*MTY3ODIyNjE5Mi4xNjAuMS4xNjc4MjI2NDMwLjYwLjAuMA..*_ga_B2YGR3SSMB*ODM4MzdkZTEtZGNjOC00MzZlLWExY2ItZTI 4YTRmYTk1MjFkLjgwLjEuMTY3ODIyNjQzMS42MC4wLjA.&_ga=2.115031559.1615584679.1678220685-1561083458.1652891309. 10 U.S. Federal Census, 1920 for Elizabeth Fuson. Accessed March 27, 2023 from ancestry.com.

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All other owners and occupants lived at 949 Scott Street for a relatively short period of time.

Design of 949 Scott Street
949 Scott Street is designed in a simple Craftsman style, which was popular in California from the 1900s to the 1930s. The Craftsman style was utilized predominantly in residential properties and evolved from the English Arts and Crafts Movement and later, the work of innovative American architects working in the Midwest and California, in particular Frank Lloyd Wright and Greene & Greene. The style was strongly associated with the graphic designs and furnishings of William Morris and the architecture of M.H. Baillie Scott and Charles F. A. Voysey. The Craftsman magazine, published in America from 1901 to 1917, further disseminated the ideals of the Movement, such as anti-industrialism and emphasis on handcrafted products in North America. The Craftsman style took off in California during the first decade of the twentieth century in response to the work of Greene & Greene in Southern California and the Bay Area. Additional influences included Japanese architecture and the native- grown Bay Region Tradition of Northern California. Ranging from the elaborate one-off homes of the wealthy in Pasadena and the Berkeley hills to the rows of bungalows of Oakland, Los Angeles and San Jose, Craftsman dwellings are typically characterized low-pitched gabled roofs with wide, unenclosed eave overhangs, decorative beams or braces, tapered square columns or pedestals and extending porch elements. In Palo Alto, as in many contemporary smaller California communities, the Craftsman style is the dominant residential style present within many neighborhoods in the city. 949 Scott Street characteristics of Craftsman style include overhanging eaves, a centered dormer window, and a projecting porch supported by square columns.

Statement of Significance:

In order for a property to be considered eligible for the California Register of Historical Resources (California Register), the property must possess significance and retain integrity to convey that significance. The criteria for significance are:

Criterion 1 (Events): Associated with events that have made a significant contribution to the broad patterns of local or regional history or the cultural heritage of California or the United States. 949 Scott Street does not appear to be individually eligible for listing in the California Register under Criterion 1 (Events), as the subject building does not appear to have contributed to the broad patterns of history in Palo Alto, the state, or the nation. The property was constructed in 1922 in the University South neighborhood of Palo Alto. At the time of the subject building’s construction, the subdivision was one of several in the area undergoing increasing development and infill, and the property is not significant to the development of University South neighborhood. No significant events were known to have occurred at 949 Scott Street, such that it would be individually eligible under Criterion 1. The house at 949 Scott Street does not appear to be individually eligible for listing in the California Register under Criterion 1.

Criterion 2 (Persons): Associated with the lives of persons important to local, California or national history. 949 Scott Street does not appear to be individually eligible for listing in the California Register under Criterion 2 (Persons). Since its construction in 1922, the subject property has had one long term owner and many short-term owners and occupants. Elizabeth Fu Son owned and lived at 949 Scott Street from 1924 to 1947. Research was unable to uncover significant professional or personal achievements by Elizabeth Fu Son that would make the subject building individually eligible for listing on the California Register.

Therefore, 949 Scott Street does not appear to be individually eligible for the California Register under Criterion 2 (Persons).

Criterion 3 (Architecture): Embodies the distinctive characteristics of a type, period, region or method of construction or represents the work of a master or possesses high artistic values. 949 Scott Street does not appear to be individually eligible for listing in the California Register under Criterion 3 (Architecture). The residence was constructed in 1922 by an unknown architect or builder. The house was designed in a simple Craftsman style, which was common in the 1920s in Palo Alto. The design is without exposed rafters, patterned windowpanes, or other details often seen in the Craftsman style, and does not possess high artistic values. Therefore, 949 Scott Street does not appear to rise to a level of individual significance under Criterion 3. The property does not appear to be eligible as a contributor to a historic district, as the subject block features a variety of architectural styles. However, the evaluation of a potential district is outside the scope of this report. The house at 949 Scott Street does not appear to be individually eligible for listing in the California Register under Criterion

3. Criterion 4 (Information Potential): Has yielded, or has the potential to yield, information important to the prehistory or history of the local area, California or the nation.

The property at 949 Scott Street does not appear to be individually eligible for listing in the California Register under Criterion 4 as a building or property that has the potential to provide information important to the prehistory or history of the City of Palo Alto, state, or nation. It does not feature construction or material types, or embody engineering practices that would, with additional study, provide important information. Evaluation of this property was limited to age-eligible resources above ground and did not involve survey or evaluation of the subject property for the purposes of archaeological information.

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Conclusion
The property at 949 Scott Street does not appear to be individually eligible for listing in the California Register of Historical Resources under any criteria. The California Historical Resource Status Code (CHRSC) of “6Z” has been assigned to the property, meaning “Found ineligible for National Register, California Register, or Local Designation through survey evaluation.”11

Resources
California State Office of Historic Preservation Department of Parks and Recreation. Technical Assistance Bulletin #8: User’s Guide to the California Historical Resource Status Codes & Historical Resource Inventory Directory. Sacramento November 2004.

City of Palo Alto. Comprehensive Plan 2030 (adopted by City Council, November 13, 2017). Accessed March 21, 2023. https://www.cityofpaloalto.org/civicax/filebank/documents/62915.

Dames & Moore (Michael Corbett and Denise Bradley). Final Survey Report – Palo Alto Historical Survey Update: August 1997- August 2000. Prepared for the City of Palo Alto Planning Division. February 2001.

“Depression, War, and the Population Boom.” Palo Alto Medical Foundation - Sutter Health. Accessed March 21, 2023. http://www.pamf.org/about/pamfhistory/depression.html.

“Elizabeth Fu Son dies; funeral set for Monday.” The Peninsula Times Tribune. July 5, 1947. Accessed March 7, 2023. https://www.newspapers.com/image/838649384/?article=0935b9d8-feb8-487d-8070- 029a999e1046&focus=0.3694026,0.65429586,0.48802704,0.76918787&xid=3355&_gl=1*g9pkxt*_ga*MTU2MTA4MzQ1 OC4xNjUyODkxMzA5*_ga_4QT8FMEX30*MTY3ODIyNjE5Mi4xNjAuMS4xNjc4MjI2NDMwLjYwLjAuMA..*_ga_B2YGR3S SMB*ODM4MzdkZTEtZGNjOC00MzZlLWExY2ItZTI4YTRmYTk1MjFkLjgwLjEuMTY3ODIyNjQzMS42MC4wLjA.&_ga=2.1 1503155 9.1615584679.1678220685-1561083458.1652891309.

Palo Alto AAUW. …Gone Tomorrow? “Neat Cottages” and “Handsome Residences.” Palo Alto: American Association of University Women.1971, revised 1986.

Palo Alto City Directories. 1920-2002. Ancestry.com.

Sanborn Fire Insurance Maps. San Francisco Public Library.

The Peninsula Times Tribune. “Community Calendar.” May 18, 1928. Accessed January 6, 2023. https://www.newspapers.com/image/838344054/?terms=%22240%20Rinconada%20Avenue%22&match=1.

United States Federal Census for 1920, 1930, 1940. Accessed March 27, 2023 from Ancestry.com.

Winslow, Ward and the Palo Alto Historical Association. Palo Alto: A Centennial History. Palo Alto Historical Association. 1993.

11 California State Office of Historic Preservation Department of Parks and Recreation, Technical Assistance Bulletin #8: User’s Guide to the California Historical Resource Status Codes & Historical Resource Inventory Directory, Sacramento, November 2004.

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If you need assistance reviewing the above documents, please contact the Project Planner or call the Planner-on-Duty at 650-617-3117 or email [email protected]
Attachment G
Project Plans
In order to reduce paper consumption, a limited number of hard copy project plans are provided to Council members for their review. The same plans are available to the public, at all hours of the day, via the following online resources.

Directions to review project plans and environmental documents online:

1. Go to: bit.ly/PApendingprojects

2. Scroll down to find or search for “949 Scott” and click the address link

3. On this project-specific webpage you will find a link to the project plans and other important information
Direct Link to Project Webpage:
https://www.cityofpaloalto.org/Departments/Planning-Development-Services/Current- Planning/Projects/949-Scott-Street
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City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: Planning and Development Services
Meeting Date: January 22, 2024
Report #:2312-2391
TITLE
QUASI-JUDICIAL. 420 Acacia [23PLN-00059]: Request for Approval of a Vesting Tentative Map to Allow for a Condominium Subdivision to Create 16 Units on a Single 35,573 Square Foot Parcel.

The Subdivision map Would Facilitate Construction of the Previously Approved 33,833 Square Foot Mixed-use Development Project (23PLN-00058). Environmental Assessment: Exempt from the Provisions of the California Environmental Quality Act in Accordance with CEQA Guidelines Section 15332 (In-fill Development) and 15315 (Minor land Divisions). Zoning District: Split Zoning Designation of RM-30 and R-1 (Multi-Family and Single-Family Residential).

RECOMMENDATION
Staff recommends that the City Council take the following action(s):

1. Find the project exempt from the California Environmental Quality Act (CEQA) in accordance with CEQA Guidelines Section 15332 (infill) and 15315 (Minor Land Divisions); and

2. Approve the Vesting Tentative Map based on findings and subject to conditions of approval in the Draft Record of Land Use Action (RLUA) in Attachment B.

EXECUTIVE SUMMARY
The applicant requests approval of a Vesting Tentative Map to allow 16 residential condominium units on a single, existing, 35,573 square foot (sf) parcel located at 420 Acacia Avenue. Through a separate, Streamlined Housing Development entitlement process, the applicant proposed, and the Director of Planning and Development Services approved, construction of a 16-unit residential townhome project, two units of which would be provided at below market rate. This is the City’s first approved Streamlined Housing Development entitlement.

The Vesting Tentative Map also includes the necessary utility easements and dedication of private streets, in accordance with the City’s Municipal Code and City of Palo Alto Utilities standards, which would be formally accepted by the City as part of the Final Map process. The project also includes a request for a waiver in accordance with State Density Bonus Law to Item 7
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reduce the private street width, as detailed further in this report. An identical waiver request was approved as part of the housing development entitlement.

A location map is included in Attachment A. The proposed Vesting Tentative Map is linked in Attachment C.

BACKGROUND
On March 8, 2023, Acacia El Camino Investors, LLC filed a Vesting Tentative Map application concurrently with a Streamlined Housing Development review application. In accordance with the Vesting Tentative Map Code Sections 21.13, the map application was deferred until all other entitlements were approved. Here, the associated entitlements for the proposed improvements were previously approved on December 6, 2023 following a study session with the Architectural Review Board on October 5, 2023.

The project includes a request for approval of a Vesting Tentative Map to create 16 condominium units (on a single parcel totaling 35,573 sf [0.8 acres]). Approval of the map also includes acceptance of proposed utility easements on the parcel, which are required per City of Palo Alto Utility standards, as well as a request for a waiver in accordance with State Density Bonus Law to reduce the private street width, as detailed further in this report.

The process for evaluating this type of application is set forth in Title 21 of the Palo Alto Municipal Code (PAMC) and California Government Code 66474. The process for approval of a Vesting Tentative Map for a condominium subdivision is outlined in PAMC Sections 21.12.010 and 21.13.020. Vesting Tentative Maps require Planning and Transportation Commission (PTC) review. The PTC and Council review whether the amended subdivision is consistent with the Subdivision Map Act (in particular, Government Code 66474), Title 21 of the Palo Alto Municipal Code, the Palo Alto Comprehensive Plan, and other applicable provisions of the Palo Alto Municipal Code and State Law. The PTC’s recommendation is forwarded to the City Council for final approval.

The PTC reviewed the proposed project on December 13, 2023 and recommended approval of the proposed project (6-0; Reckdahl absent). Commissioners requested clarity on specific aspects of the improvements during the hearing, which are summarized in the analysis below.

Following the completion of this Vesting Tentative Map, the applicant is required to file for a Vesting Final Map. This would be placed on the Council consent agenda and must be in substantial conformance with the Vesting Tentative Map.

ANALYSIS
The proposed project and relevant discussion and findings herein reflect the Vesting Tentative Map. The Director of Planning and Development Services previously approved the proposed site improvements associated with this condominium subdivision.

Neighborhood Setting and Character
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The project is located within the North Ventura neighborhood within 0.5 mile of the California Avenue Caltrain Station and adjacent a high-quality transit corridor on El Camino Real. The site abuts single-family residences to the north along Olive Avenue and commercial uses (e.g. retail and commercial recreation (Equinox gym) across Acacia Avenue. To the east, the Sobrato property (200-404 Portage) has been approved for redevelopment in accordance with a recently approved Development Agreement. Under the Development Agreement the portion of the former cannery building adjacent to 420 Acacia, part of which is currently occupied by Playground Global, would remain and continue to be occupied with the existing R&D tenants on the site. A parking structure would be developed adjacent to 420 Acacia, the ramp to which would connect to the shared driveway access at the east end of the site. To the west, a 129-unit affordable housing project has been approved to replace the surface parking lot between the subject property and El Camino Real.

Consistency with the Comprehensive Plan, Area Plans, and Guidelines1 The proposed Vesting Tentative Map is consistent with the Comprehensive Plan, in that the site is designated primarily as “Multifamily” land use category and will be developed as a multifamily development on that portion of the site. The map facilitates the redevelopment of a parcel within the City’s urban service area which is consistent Policy L-1.2 of the Comprehensive Plan. The associated development to be constructed on the lot would add new residential units that contribute to the housing inventory including two affordable housing units, consistent with Goal 2 of the Housing Element, which states “assist in the provision of safe, attainable, and sustainable housing, especially affordable housing, to meet the needs of all economic segments of the community.” A Consistency analysis with other Comprehensive Plan policies are included in Attachment B of this report.

Zoning Compliance2
The site is zoned primarily as RM-30 (multi-family residential) with a small portion of the parcel zoned as R-1 (single-family residential). The proposed units are all located within the area of the site zoned R-30, while private and common open space is located within the area zoned R-1.

The proposed multi-family development is a permitted use within the RM-30 Zone. The size of the parcel would not change and is consistent with code requirements for the RM-30 Zone District, which has a minimum lot size of 8,500 sf and minimum dimensions of 70 feet in width by 100 feet in depth. Staff finds that the proposed Vesting Tentative Map complies with these code requirements for parcels.

Private Street Width
The proposed project includes new private streets that do not meet the minimum width of 32 feet set forth in PAMC 21.20.240. The applicant requested a waiver from this development standard in accordance with State Density Bonus Law to allow for a private street that is 22 feet in width. Approval of this waiver was granted as part of the approval of the proposed 1 The Palo Alto Comprehensive Plan is available online: bit.ly/PACompPlan2030 2 The Palo Alto Zoning Code is available online: bit.ly/PAZoningCode Item 7
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development under the Streamlined Housing Development Project review. The waiver also applies to the subdivision map process. The proposed improvements, including the street width, were reviewed by all departments as part of the Streamlined Housing Development review process. Reviewers included, but were not limited to, City of Palo Alto Fire Department, Public Works Engineering, Office of Transportation and the Building Department. The proposed project, with the proposed 22-foot street width, meets all safety requirements, including, but not limited to, fire safety and traffic safety.

Findings for Approval
The necessary findings for approval of the Vesting Tentative Map are contained in State law and incorporated into Title 21 of the Municipal Code. Under the Subdivision Map Act, Council must make a series of “reverse” findings to justify approval. If the findings cannot be made, the subdivision must be approved. In particular, under Government Code Section 66474, Council shall recommend denying a Tentative Map if it makes any of the following findings:
a) That the proposed map is not consistent with applicable general and specific plans. b) That the design or improvement of the proposed subdivision is not consistent with applicable general and specific plans.
c) That the site is not physically suitable for the type of development. d) That the site is not physically suitable for the proposed density of development. e) That the designs of the subdivision or the proposed improvements are likely to cause substantial environmental damage or substantially and avoidably injure fish or wildlife or their habitat.
f) That the design of the subdivision or type of improvements is likely to cause serious public health problems.
g) That the design of the subdivision or the type of improvements will conflict with easements, acquired by the public at large, for access through or use of, property within the proposed subdivision.

A detailed review of the proposed project’s consistency with applicable Title 21/Subdivision Map Act findings is included in Attachment B.

FISCAL/RESOURCE IMPACT
The developer would be required to pay all applicable development impact fees, currently estimated to total $1,093,305 for the subdivision and the proposed improvements, plus the applicable public art fees, as documented in Condition of Approval #6 in Attachment B and detailed further in Condition of Approval #15 in the Approval Letter for the Streamlined Housing Development Project Review Approval.

STAKEHOLDER ENGAGEMENT
The Palo Alto Municipal Code requires notice of this public hearing be published in a local paper and mailed to owners and occupants of property within 600 feet of the subject property at least ten days in advance. Notice of a public hearing for this project was published in the Daily Item 7
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Post on January 12, 2023, which is 10 days in advance of the meeting. Postcard mailing occurred on January 9, 2023.

Public Comments
One member of the public provided a comment during the PTC hearing. The resident, whose family owns several of the lots along Olive Avenue, expressed that the project generally fits into the neighborhood and they appreciated the developer’s efforts to reach out to residents during the process.

Comments received on the proposed Streamlined Housing Review application are outlined in the Architectural Review staff report.3 Key comments from nearby residents included:
• Concerns about the placement of the trash enclosure due to noise/smell • Request from one resident to meet directly with the landscape architect to discuss plantings along the rear of the property
• Request to resolve the drainage issue on neighboring properties and to remove the soil berm along the rear of the property for drainage and security • Request to extend the 8-foot-high concrete block wall from the Sobrato property along the rear of this property as well
Modifications were made based on feedback from the ARB as well as neighboring residents to improve the design and address these comments. The landscape architect made several attempts to connect with the adjacent resident who requested a meeting but did not receive a response. However, modifications to the final landscaping along the rear of the property were made in response to general feedback from adjacent residents in order to provide better screening of the trash enclosure. The soil berm is being removed as part of the proposed project and the drainage is designed to ensure that the historic drainage pattern is maintained.

ENVIRONMENTAL REVIEW
The subject project has been assessed in accordance with the authority and criteria contained in the California Environmental Quality Act (CEQA), the State CEQA Guidelines, and the environmental regulations of the City. Specifically, the proposed Vesting Tentative Map is exempt from CEQA in accordance with CEQA Guidelines Section 15315 (Minor Lands Division) and 15332 (in-fill development). A link to the relevant documentation to support the findings for this exemption are included in Attachment C.
3 The staff report for the October 5, 2023 hearing is available online at:
https://www.cityofpaloalto.org/files/assets/public/v/3/agendas-minutes-reports/agendas-minutes/architectural- review-board/2023/arb-10.05-public-agenda-2.pdf
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ATTACHMENTS
Attachment A: Location Map
Attachment B: Draft Record of Land Use Action
Attachment C: Project Plans and Environmental
APPROVED BY:

Jonathan Lait, Planning and Development Services Director Item 7
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2 ATTACHMENT B
ACTION NO. 2024-__

RECORD OF THE COUNCIL OF THE CITY OF PALO ALTO LAND USE ACTION FOR 420 ACACIA AVENUE: VESTING TENTATIVE MAP, 23PLN-00059 At its meeting on ______, 2024, the City Council of the City of Palo Alto (“City Council”) approved the Vesting Tentative Map for the development of a one-lot subdivision to create 16 residential condominium units, including a density bonus waiver from street width requirements making the following findings, determinations and declarations:

SECTION 1.Background.

A. On March 8, 2023, Dividend Homes applied for a Vesting Tentative Map for the development of a one (1) parcel, 16-unit condominium subdivision project, including a density bonus waiver from street width requirements to permit a 22-foot wide private street. (“The Project”).

B. The project site is comprised of one existing lot (APN No. 132-38-042) of approximately 35,573 square feet. The site contains an existing paved surface level parking lot.

Single family residential uses abut the site to the north. Commercial land uses are located adjacent to the lot to the east and south. A five-story 129-unit affordable housing project has been approved to the west, replacing a surface level parking lot along El Camino Real.

C. Following staff review, the Planning and Transportation Commission reviewed the project and recommended approval on December 13, 2023, subject to conditions of approval.

D. On _________ the City Council held a duly noticed public hearing, at which evidence was considered and all persons were afforded an opportunity to be heard in accordance with the City Council’s policies and procedures.

SECTION 2. Environmental Review. The City, as the lead agency for the Project, has determined that the project is exempt from the California Environmental Quality Act (CEQA) in accordance with CEQA Guideline section 15132, which provides an exemption for infill development projects. Documentation to support the exemption is available as part of the public record on file with the Planning and Development Services Division.

SECTION 3. Vesting Tentative Map Findings. A legislative body of a city shall deny approval of a Parcel Map, if it makes any of the following findings (California Government Code Section 66474). The City Council cannot make these findings for the following reasons:

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2 1.That the proposed map is not consistent with applicable general and specific plans as specified in Section 65451:

The site is consistent with the Comprehensive Plan as described below.

2.That the design or improvement of the proposed subdivision is not consistent with applicable general and specific plans:

There is no adopted specific plan for this project site. The proposed vesting tentative map and related improvements is consistent with the Comprehensive Plan in that it facilitates housing development on a site designated for multi-family use and in a transit-oriented location within the urban services area, consistent with Goal 2 of the Housing Element and Goal L1.2 of the Land Use Element. The proposed density (20 DU/AC) is consistent with the allowable density (16 to 30 DU/AC) in the multi-family land use designation as outlined in the Land Use Element.

The project replaces paved surface level parking with housing in a transit-oriented area and improves the city’s jobs housing imbalance consistent with the Transportation Element’s goals and policies to reduce vehicle miles traveled.

3. That the site is not physically suitable for the type of development:

The Project site is suitable for multi-family residential development in that it’s located within the multi-family zone district on a site designated on the City’s Land Use Map for multi-family use.

The existing parcel meets the minimum code requirements for the RM-30 zone district with respect to lot area, width and depth. The parcel would not change with approval of this condominium subdivision. The proposed number of condominium units complies with the applicable densities set forth in the land use element and zone district.

4.That the site is not physically suitable for the proposed density of development:

The project would create a total of sixteen multi-family residential units which is 20 dwelling units (DU) per acre. This density complies with the maximum allowable residential density as calculated for the total site area (30 DU/acre = 24 DU). Building, Palo Alto Fire Department, Planning, Transportation, and Public Works Engineering have reviewed the requested density bonus waiver to permit a 22-foot street width to ensure that all necessary requirements for safety, including but not limited to, fire safety and traffic safety (e.g. curb cut location, back-up space, turning radius, etc.) have been met.

5. That the design of the subdivision or the proposed improvements are likely to cause substantial environmental damage or substantially and avoidably injure fish or wildlife or their habitat:

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2 The project is located within the built environment that does not contain quality habitat for fish or other wildlife on the site or within the vicinity of the site. The nearest stream is approximately 700 feet south east from the project site. The adopted Palo Alto 2030 Comprehensive Plan includes Map N-1, which identified sensitive animal and plant species within the Palo Alto quadrangle, a large geographic area that includes the urban portions along the bay and within the foothills, based on information in the California natural Diversity Database (CNDDB). Based on this map, and the urban nature of the site, the subject property does not contain any habitat for endangered, rare, or threatened species and has not historically supported any of these species.

6. That the design of the subdivision or type of improvements is likely to cause serious public health problems:

The subdivision of this parcel and associated improvements would not have the potential to result in serious health problems. The proposed multi-family use would not include use or storage of hazardous materials and the use is located within the urban environment adjacent to other residential uses. The site is not located on a hazardous waste site pursuant to government code 65962.5.

7. That the design of the subdivision or the type of improvements will conflict with easements, acquired by the public at large, for access through or use of, property within the proposed subdivision. In this connection, the governing body may approve a map if it finds that alternate easements, for access or for use, will be provided, and that these will be substantially equivalent to ones previously acquired by the public. This subsection shall apply only to easements of record or to easements established by judgment of a court of competent jurisdiction and no authority is hereby granted to a legislative body to determine that the public at large has acquired easements for access through or use of property within the proposed subdivision.

There are no public access easements over the property currently. Therefore, the design of the subdivision will not conflict with any public easements for access through, or use of, the property. An existing shared private access easement with the neighboring property to the east is maintained. New public utility easements will be provided to existing and proposed electrical utilities as part of this subdivision map as required in accordance with City of Palo Alto Utilities standards.

SECTION 4. Vesting Tentative Map Approval Granted. Vesting Tentative Map Approval is filed and processed in accordance to PAMC Section 21.13.020 and granted by the City Council under PAMC Sections 21.12 and 21.20 and the California Government Code Section 66474, subject to the conditions of approval in Section 6 of this Record of Land Use Action.

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2 SECTION 5. Final Map. The Final Map submitted for review and approval by the City Council shall be in substantial conformance with the Vesting Tentative Map prepared by BKF Engineers titled “Vesting Tentative Map Acacia Avenue at El Camino Real For Condominium Purposes City of Palo Alto, California,” consisting of seven (7) pages, stamped as received November 16, 2023, except as modified to incorporate the conditions of approval in Section 6. A copy of the Vesting Tentative Map is on file in the Department of Planning and Development Services, Current Planning Division. Prior to the expiration of the Vesting Tentative Map approval, the subdivider shall cause the subdivision or any part thereof to be surveyed, and a Final Map, as specified in Chapter 21.08, to be prepared in conformance with the Vesting Tentative Map as conditionally approved, and in compliance with the provisions of the Subdivision Map Act and PAMC Title 21 and submitted to the City Engineer (PAMC Section 21.16.010[a]).

SECTION 6. Conditions of Approval.

Planning

1.PROJECT PLANS. The Vesting Tentative Map submitted for review and approval by the City Council shall be in substantial conformance with the Vesting Tentative Map titled “Vesting Tentative Map Acacia Avenue at El Camino Real for Condominium Purposes, City of Palo Alto, California”, prepared by BKF Engineers and submitted November 16, 2023, except as modified to incorporate the conditions of this approval.

2. DENSITY BONUS UNITS. The project seeks a waiver of the minimum street width requirements to permit a 22-foot wide private street. In order to qualify for a waiver from this development standard the project shall provide a minimum of two (2) dwelling units at rates affordable to moderate-income households, as defined in Section 50093 of the Health and Safety Code.

3. FINAL MAP COVER PAGE. At such time as the Final Map is filed, the cover page shall include the name and title of the Director of Planning and Development Services.

4. STANDARD CC&R REQUIREMENTS. Section 16.38 of Palo Alto’s Municipal Code provides that all condominium and other “community housing projects” shall submit Covenants, Conditions and Restrictions (CC&R’s) to the City Attorney for approval before issuance of the Final Map. The City Attorney has developed the following standard covenants which shall be included in all CC&R’s.
a. PROPERTY SHALL COMPLY WITH CITY ZONING ORDINANCES. The property, including all common areas, private streets and, parks within the property, shall at all times comply with the City’s Zoning Code and shall not be used for any purpose other than as permitted in the City Zoning Code. b. MODIFICATIONS TO PROPERTY. Any alterations, modifications, or other improvements to the property shall comply with all applicable City Codes.

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2 c. MAINTENANACE AND LANDSCAPING OF COMMON AREAS. The Association is responsible for maintenance and landscaping of all parts of the community housing project which are held in common and such maintenance shall be performed to the standard of maintenance prevalent in the neighborhood. (See PAMC Section 16.38.030(a)).
d. TERMINATION OF MANAGER OR MAINTENANCE CONTRACTS. The association may terminate the contract of any person or organization engaged by the developer to perform management or maintenance duties three months after the association assumes control of the community housing project or any time thereafter. (See PAMC Section 16.38.030(b).)
e. PROTECTION OF STORM WATER FACILITIES. Neither the association, its residents, nor their agents, employees, representatives, invitees, licensees, customers, or contractors shall alter or modify any storm water facilities in any way including but not limited to placing, maintaining, constructing, or planting any improvements, landscaping or other items, including without limitation decks, stairs, walls, irrigation systems, trees, or any vegetation on any storm water facilities.
f. TRASH DISPOSAL AND RECYCLING AREAS SHALL COMPLY WITH CITY ORDINANCES. All trash disposal and recycling areas shall be kept in a clean and sanitary condition and shall comply with all applicable City Ordinances. g. PROHIBITION AGAINST AIR AND WATER POLLUTION. Neither the association, its residents, nor their agents, employees, representatives, invitees, licensees, customers, or contractors shall use the property in any way which emits pollution into the atmosphere in excess of environmental standards set forth by City, State, and Federal laws, ordinances, and regulations. Neither the association, its residents, nor their agents, employees, representatives, invitees, licensees, customers, or contractors shall discharge garbage, trash, waste, or any other substance or materials of any kind into any private or public sewer or waterway on the property in violation of any regulations of any private or public body having jurisdiction over such matters.
h. AMENDMENTS TO ORGANIZATION DOCUMENTS REQUIRE CITY APPROVAL. Any amendments or modifications to the organizational documents shall be submitted to the city attorney for approval. No amendment or modification to the organizational documents shall be effective without prior written consent of the city attorney.
i. CITY’S RIGHT TO ENFORCE COVENANTS AND RESTRICTIONS. The City is hereby granted the right, but in no event the duty, to enforce the covenants and restrictions set forth in this section of the organizational documents. The association shall recognize that it has the primary responsibility for enforcement Item 7
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2 of the organizational documents and unequivocally guarantees to institute and expeditiously prosecute any required legal action to obtain compliance with all provisions set forth in the organizational documents.
j. NO WAIVER OF CITY’S RIGHTS. No failure of the City to enforce any of the covenants or restrictions contained in the organizational documents will in any event render them ineffective.
k. CITY’S REMEDIES TO CURE A BREACH OR VIOLATION. Remedies available to the City to cure any breach or violation of the organizational documents shall be cumulative to any other provisions of law. The City’s failure to exercise any remedy provided for in the organizational documents shall not, under any circumstances, be construed as a waiver of the remedy.
l. SEVERABILITY. Invalidation of any one of the City’s required covenants or restrictions by judgment or court order shall in no way affect any other provisions which shall remain in full force and effect.

5. ADDITIONAL CC&R REQUIREMENT. The CC&Rs shall also include a provision that dictates the responsibilities of tenants and maintenance staff for the trash pickup for the townhomes as shown in the approved plan set.

6. FINAL MAP EXPIRATION. A Final Map, in conformance with the approved Vesting Tentative Map, all requirements of the Subdivision Ordinance (PAMC Section 21.16), and to the satisfaction of the City of Palo Alto and its representatives, shall be filed with the Planning Division and the Public Works Engineering Division within two years of the Vesting Tentative Map approval date or this approval will expire. A one-year extension may be granted in accordance with the allowances set forth in the municipal code.

7. DEVELOPMENT IMPACT FEES. The Property Owner or their designee shall pay all applicable development impact fees associated with the proposed development and subdivision prior to issuance of the building permit(s), as detailed in the Streamlined Housing Development Review Approval.

8. INDEMNITY. To the extent permitted by law, the Applicant shall indemnify and hold harmless the City, its City Council, its officers, employees and agents (the “indemnified parties”) from and against any claim, action, or proceeding brought by a third party against the indemnified parties and the applicant to attack, set aside or void, any permit or approval authorized hereby for the Project, including (without limitation) reimbursing the City for its actual attorneys’ fees and costs incurred in defense of the litigation. The City may, in its sole discretion, elect to defend any such action with attorneys of its own choice.

Public Works Engineering

9. PUBLIC WORKS APPLICATIONS, FORMS, AND DOCUMENTS. Applicant shall be advised Item 7
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2 that most forms, applications, and informational documents related to Public Works Engineering conditions can be found at the following link:
https://www.cityofpaloalto.org/Departments/Public-Works/Engineering-Services/Forms-and- Permits

10. MAP THIRD-PARTY REVIEW. The City contracts with a third-party surveyor that will review and provide approval of the map’s technical correctness as the City Surveyor, as permitted by the Subdivision Map Act. The Public Works Department will forward a Scope & Fee Letter from the third-party surveyor and the applicant will be responsible for payment of the fee’s indicated therein, which is based on the complexity of the map.

11. STREETWORK PERMIT. The applicant shall obtain a Streetwork Permit from the Department of Public Works for all public improvements.

12. GRADING AND EXCAVATION PERMIT. A Grading Permit is required per PAMC Chapter

16.28. The permit application and all applicable documents (see Section H of application) shall be submitted to Public Works Engineering. Add the following note:
“THIS GRADING PERMIT WILL ONLY AUTHORIZE GENERAL GRADING AND INSTALLATION OF THE STORM DRAIN SYSTEM. OTHER BUILDING AND UTILITY IMPROVEMENTS ARE

SHOWN FOR REFERENCE INFORMATION ONLY AND ARE SUBJECT TO SEPARATE BUILDING PERMIT APPROVAL.”

13. ENCROACHMENT PERMIT. Prior to any work in the public right-of-way, the applicant shall obtain an encroachment permit from the Public Works Department for any work that encroaches onto the City right-of-way.

14. STORMWATER POLLUTION PREVENTION. All improvement plan sets shall include the “Pollution Prevention – It’s Part of the Plan” sheet.

15. C.3 THIRD-PARTY CERTIFICATION. Applicant shall provide certification from a qualified third-party reviewer that the proposed permanent storm water pollution prevention measures comply with the requirements of Provision C.3 and Palo Alto Municipal Code Chapter 16.11.

16. Submit the following:
a. Stamped and signed C.3 data form (April 2023 version) from SCVURPPP. https://scvurppp.org/wp-content/uploads/2023/04/SCVURPPP-C.3-Data-Form-_- updated__4-12-2023_clean_fillable.pdf

b. Final stamped and signed letter confirming which documents were reviewed and that the project complies with Provision C.3 and PAMC 16.11.

17. C.3 STORMWATER AGREEMENT. The applicant shall enter into a Stormwater Maintenance Agreement with the City to guarantee the ongoing maintenance of the Item 7
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2 permanent storm water pollution prevention measures. The City will inspect the treatment measures yearly and charge an inspection fee. The agreement shall be executed by the applicant team prior to building permit final.

18. C.3 FINAL THIRD-PARTY CERTIFICATION PRIOR TO OCCUPANCY. Within 45 days of the installation of the required storm water treatment measures and prior to the issuance of an occupancy permit for the building, the third-party reviewer shall submit to the City a certification verifying that all the
Utilities Electric Engineering

19. Overhead lines along the project frontage on Acacia shall be undergrounded as shown in the approved plans.

20. Public Utility Easements to proposed transformers, as shown on the Vesting Tentative Map and in conformance with city of Palo Alto standards, shall be dedicated to the City prior to final occupancy.

Waste-gas-water Engineering

21. METER LAYOUT. Domestic water meter layout: The applicant needs to provide an estimated domestic water load in G.P.M. to design the water service and meter size. A 3" or 4” water meter will require a 4'x8' water meter set with a 2" by-pass per DWG. NO.

WD-04. The vault shall be located on private property inside a public utility easement. The applicant's engineer shall obtain, prepare, and record with the county of Santa Clara, and provide the utility engineering section with copies of the public utilities easement on the front of the property adjacent to the City right of way at the water point of service if a 3” or 4” water meter is provided.

SECTION 7. Term of Approval. Vesting Tentative Map. All conditions of approval of the Vesting Tentative Map shall be fulfilled prior to approval of a Final Map (PAMC Section 21.16.010[c]).

Unless a Final Map is filed, and all conditions of approval are fulfilled within a two-year period from the date of Vesting Tentative Map approval, the Vesting Tentative Map shall expire and all proceedings shall terminate. An extension of time may be granted by the city council after recommendation of the planning commission, upon the written application of the subdivider, prior to the expiration of the Vesting Tentative Map approval, or any previous extension granted. Such extension(s) shall be subject to the maximum limitations set forth in the Subdivision Map Act.

PASSED:

AYES:

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2 NOES:

ABSENT:

ABSTENTIONS:

ATTEST: APPROVED:
_________________________ ____________________________
City Clerk Mayor
APPROVED AS TO FORM:
___________________________
Deputy City Attorney
PLANS AND DRAWINGS REFERENCED:

Those plans prepared by BKF Engineers titled “Vesting Tentative Map Acacia Avenue at El Camino Real for Condominium Purposes, City of Palo Alto, California,” consisting of seven pages, dated November 8, 2023 and submitted November 16, 2023.

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Attachment C
Project Plans
Project plans are only available to the public online. Hardcopies of the plans have been provided to Board members.

Environmental Document
The City, acting as the lead agency, prepared documentation to support a Class 32 (infill development) categorical exemption for the proposed project.

Directions to review Project plans online:

1. Go to: bit.ly/PApendingprojects

2. Scroll down to find “420 Acacia Avenue” and click the address link

3. On this project specific webpage you will find a link to the project plans, the documented exemption and other important information
Direct Link to Project Webpage:
https://www.cityofpaloalto.org/Departments/Planning-Development-Services/Current- Planning/Projects/420-Acacia-Avenue
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City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: City Auditor
Meeting Date: January 22, 2024
Report #:2312-2401
TITLE
Approval of the Office of the City Auditor's Wastewater Treatment Plant Agreement Audit Report as Recommended by Policy & Services Committee (CEQA Status - Not a Project)

RECOMMENDATION
The Policy and Services Committee and the City Auditor recommend that the City Council approve the Wastewater Treatment Plant Agreement Report.

BACKGROUND
Baker Tilly, in its capacity serving as the Office of the City Auditor (OCA), performed a citywide risk assessment that assessed a wide range of risk areas, including strategic, financial, operational, compliance, technological, and reputation risks. The purpose of the assessment was to identify and prioritize risks to develop the annual audit plan.

During the FY2022 risk assessment (CMR #13914) 1, the OCA identified risks associated with wastewater treatment plant operations.

The committee members approved the attached Wastewater Treatment Plant Agreement Audit Report at the Policy and Services Committee meeting on December 12, 20232.

MOTION: Mayor Kou moved, seconded by Chair Tanaka, to approve the Wastewater Treatment Plant Agreement Audit Report and recommend the City Council accept the report.

MOTION PASSED: 2-0

1 City Council, April 4, 2022; Agenda Item #7; SR #13914, https://portal.laserfiche.com/Portal/DocView.aspx?id=59414&repo=r-704298fc&searchid=19b80104-3ced-4de0- a251-f79f84662303
2 Policy & Services Committee, December 12, 2023, Agenda Item #4, SR #2310-2182, https://cityofpaloalto.primegov.com/meetings/ItemWithTemplateType?id=3774&meetingTemplateType=2&comp iledMeetingDocumentId=8676
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ANALYSIS
The objectives of this review were to:
1) Determine whether adequate controls are in place and working effectively to ensure that costs related to the wastewater treatment plant are properly accounted for and allocated.
2) Determine whether adequate controls are in place and working effectively to ensure the compliance with contracts and regulations.

The OCA interviewed City employees and reviewed 39 Regional Water Quality Control Plant (RWQCP) contracts and amendments the City manages. The OCA also reviewed the transactions and documents in the audit period (from July 1, 2020, to May 30, 2022) for control testing, such as billing and compliance monitoring activities.

The attached report summarizes the analysis, audit findings, and recommendations.

FISCAL/RESOURCE IMPACT
The timeline and resource needs for implementation of management’s corrective action plans are identified by management within the attached report.

STAKEHOLDER ENGAGEMENT
The OCA worked primarily with the Public Works Department and the Administrative Services Department and engaged with additional stakeholders, including the City Manager’s Office and the City Attorney’s Office, as necessary.

ENVIRONMENTAL REVIEW
Environmental review is not applicable to this activity.

ATTACHMENTS
Attachment A: OCA - Wastewater Treatment Plant Agreement APPROVED BY:

Adriane D. McCoy, City Auditor
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1 December 12, 2023
City of Palo Alto
Office of the City Auditor
Wastewater Treatment Plant Agreement Audit
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Contents
Baker Tilly US, LLP, trading as Baker Tilly, is an independent member of Baker Tilly International. Baker Tilly International Limited is an English company. Baker Tilly International provides no professional services to clients. Each member firm is a separate and independent legal entity, and each describes itself as such.

Baker Tilly US, LLP is not Baker Tilly International’s agent and does not have the authority to bind Baker Tilly International or act on Baker Tilly International’s behalf. None of Baker Tilly International, Baker Tilly US, LLP nor any of the other member firms of Baker Tilly International has any liability for each other’s acts or omissions. The name Baker Tilly and its associated logo is used under license from Baker Tilly International Limited.

EXECUTIVE SUMMARY ................................................................................................. 1 INTRODUCTION ............................................................................................................. 3 DETAILED ANALYSIS ................................................................................................... 6 AUDIT RESULTS ............................................................................................................ 8 APPENDICES ............................................................................................................... 12

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1 Executive Summary
Purpose of the Audit
Baker Tilly US, LLP (Baker Tilly), in its capacity serving as the Office of the City Auditor (OCA) for the City of Palo Alto (the City), conducted a Wastewater Treatment Plant Agreement Audit based on the approved Task Order 4.15. The objectives of this review were to:
1) Determine whether adequate controls are in place and working effectively to ensure that costs related to the wastewater treatment plant are properly accounted for and allocated. 2) Determine whether adequate controls are in place and working effectively to ensure the compliance with contracts and regulations.

Report Highlights
Finding 1: Invoice and Payment Due Dates
(Page 8) The OCA judgmentally selected eight invoices from the FY21 and FY22 quarterly/annual invoices sent to five partner agencies to include diverse samples and reconciled the invoices and supporting documents as well as the payment information against the billing and payment requirements in the agreements. Six invoices were sent to the partner agencies eight days to two and a half months late, and one payment was received more than 100 days late due to incomplete supporting documents sent to the partner agency.

Each agreement with a partner agency includes billing and payment requirements as summarized in Table 1 in the Detailed Analysis section. The languages and requirements differ among the Regional Water Quality Control Plant (RWQCP) agreements, especially for amendments including additional capital project costs. The variety and inconsistency of billing and payment requirements among multiple agreements may cause the agencies to be susceptible to noncompliance, errors, slower cash inflows, and inefficiency.

Key Recommendations
The City’s management should evaluate all billing and payment requirements in the existing contracts to determine whether there is any reason preventing the agencies from making the requirements and language in the RWQCP contracts more consistent. .

If there is no reason, management should standardize billing and payment requirements for all RWQCP contracts in order to improve the efficiency of billing and monitoring of payments and ensure compliance with the requirements.

Additionally, the City’s management should formalize the internal controls and processes to ensure timely submission of invoices with adequate supporting documents and partner agencies’ compliance with payment requirements.

Finding 2: Industrial Waste Surveys
(Page 9) The City has the Industrial Waste Pretreatment Program (IWPP) in which the City’s staff members perform permitting, monitoring, and enforcing Industrial Waste Discharge Permits for the entire RWQCP service area (except for the City of Mountain View operating portion of the IWPP). The agreements require the partner agencies to update the industrial waste survey (IWS) and provide the update annually to the City. However, the City currently does not receive the surveys. The surveys are updated informally by discussing new facilities during quarterly coordination meetings or receiving e-mail Item 8
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2 EXECUTIVE SUMMARY
updates on auto and dental facility lists. For some partner agencies, the IWS is not routinely requested or required in the agreement. As the City’s RWQCP management meets with partner agencies periodically to discuss the IWS-related items, this process is being used in place of requiring formal IWS updates from each partner agency.

Without submitting annual IWS updates to the City, the partner agencies are non- compliant with this requirement in the agreements.

Key Recommendations
The City’s Public Works management should obtain the necessary IWS updates from all partner agencies to ensure compliance with pretreatment laws, regulations, and discharge permits until the contracts are amended. Management should evaluate the adequacy of the current informal survey update practice for effective administration and operation of the IWPP and either enforce the current agreement requirements or amend the language in the contract as necessary to refine the partner agencies’ responsibilities.

Finding 3: Compliance Monitoring
(Page 10) The OCA noted that the timeliness of payments from the partner agencies is not being monitored even though some contracts include a delinquent payment clause that requires interest to be accrued on the unpaid balance. For other requirements in contracts, individual requirements are monitored and performed by different individuals.

However, there are currently no policies and procedures to formalize the compliance monitoring processes for RWQCP contracts and no centralized monitoring mechanism to ensure all contract requirements are executed as intended.

As listed in the Scope section of this report, RWQCP has 39 contracts and amendments with several partner agencies. Keeping track of agreement requirements and monitoring compliance with them are necessary for successful construction, operation, and maintenance of RWQCP due to various reasons such as:
 The billing and payment requirements differing among agreements and vary based on the type of costs.
 An addendum being added for a new project with different debt service billing and payment requirements.
 Compliance with regulations and permits that is essential to carry out RWQCP’s mission.
 Cost allocation depending on capacity rights, certain cost and wastewater data, debt service schedules, and other allocation methods that are described and updated in the contracts for each type of cost and revenue.

It is important to identify compliance issues and resolve them in a timely manner.

Without policies and procedures and a formal monitoring mechanism, the City cannot ensure that all contract requirements are met to successfully construct, operate, and maintain RWQCP or collect interest penalties that are due to the City.

Key Recommendations
The City’s management should establish RWQCP policies and procedures to implement a formal monitoring mechanism that will ensure contract requirements are met. Roles and responsibilities and the expectations of various City departments should be clearly defined.

When an issue or a potential issue is identified, appropriate actions should be taken in a timely manner. The policies and procedures should provide guidelines for appropriate actions such as communication/escalation and contract amendments.

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3 Introduction

1 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance- committee/2022/20221129/20221129pfcsm-linked.pdf
Objective The objectives of this review were to:
1) Determine whether adequate controls are in place and working effectively to ensure that costs related to the wastewater treatment plant are properly accounted for and allocated.
2) Determine whether adequate controls are in place and working effectively to ensure the compliance with contracts and regulations.

Background The “Basic Agreement Between the City of Palo Alto, the City of Mountain View and the City of Los Altos for Acquisition, Construction and Maintenance of a Joint Sewer System” (Basic Agreement) was executed in 1968. As the City of Palo Alto (the City) is the owner of the joint sewer system and the Administrator of the Basic Agreement, its Public Works department is responsible for operations and capital projects of the Regional Water Quality Control Plant (RWQCP) that treats wastewater before it is discharged to San Francisco Bay. The Basic Agreement has been amended in the following years, which included the Addendum No.

Eight to the Basic Agreement that extended the contract term to December 31, 2060.

These three communities are entitled to use the proportion of the capacity of the joint sewer system based on the capacity rights defined in the contracts. The costs of acquisition, construction, maintenance, and operations as well as revenue from services and sales are shared in proportion as specifically described for each cost category and each project in the contracts.

The City also entered into separate agreements with the East Palo Alto Sanitary District, the Town of Los Altos Hills, and Stanford to share the City’s proportionate share of the cost and use. The costs of operating and maintenance and major capital improvement projects are paid by each community based on allocation formula and schedules described in the contracts.

As the Administrator of the Basic Agreement as well as three separate agreements, the City sends bills to the five communities noted above in advance on a quarterly basis. The billing amount is based on the estimated annual costs of the operation and maintenance. The City adjusts one of the quarterly bills in the subsequent year to offset the difference between the billed amounts and actual costs.

The Basic Agreement requires that the City’s independent auditor conduct an audit of the RWQCP financial statements each year to express an opinion on the fair presentation of the net expenditures and quarterly billings in accordance with the financial reporting provisions of the Basic Agreement. The audited RWQCP Financial Statements for the year ended June 30, 20221, shows the following percentages used to allocate costs and revenues:

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The agreements and subsequent amendments include the following to be used for allocation of the costs of capital improvement projects:

Scope The OCA reviewed the following 39 RWQCP contracts and amendments the City manages:
 Basic Agreement, Supplementals, and subsequent Addendums No. One through No. Ten
 First Amended and Restated Contract No. C059999 Between the City of Palo Alto and the City of Mountain View for Implementation and Operation of the SWRCB Water Recycling Project (June 18, 2007) and subsequent Amendment No. 1
 Agreement Between the City of Palo Alto and the Town of Los Altos Hills for Sewage Transportation, Treatment and Disposal (March 18, 1968) and subsequent Amendments No. 1 through No. 7
 Contract No. C869 Between the City of Palo Alto and the Board of Trustees of the Leland Stanford Junior University (November 30, 1956) and subsequent Amendments No. One through No. Seven
 Second Amended and Restated Agreement Between the City of Palo Alto and the East Palo Alto Sanitary District for Wastewater Treatment and District Outfall (May 17, 2021)

City of Mountain View 40.22%
City of Los Altos 11.58%
City of Palo Alto 32.37% 48.20%
East Palo Alto Sanitary District 7.29%
Stanford University 6.19%
Town of Los Altos Hills 2.35%
Maintenance and Operation Costs &
Joint System Revenue
Source: Note 2 - Summary of Significant Accounting Policies City of Palo Alto Regional Water Quality Control Plant
Independent Auditor's Report and Financial Statements
For the Year Ended June 30, 2022

City of Mountain View 37.89%
City of Los Altos 9.47%
City of Palo Alto 38.16% 52.64%
East Palo Alto Sanitary District 7.64%
Stanford University 5.26%
Town of Los Altos Hills 1.58%
Debt Services Expenditures
This table does not apply to the Refunding 1990 Series A Bonds Source: EXHIBIT H - Annual Average Flow Capacity Rights Second Restated and Amended Agreement Betw een the City of Palo Alto and the East Palo Alto Sanitary District for Wastew ater Treatment and District Outfall Item 8
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5 INTRODUCTION

2 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 from October 2020 through June 2022 with Baker Tilly US, LLP (Baker Tilly) and appointed Kyle O’Rourke, Senior Consulting Manager in Baker Tilly's Public Sector practice, as City Auditor. Given the transition in the City Audit office, a peer review was not conducted in 2020 and will be conducted after the third year of Baker Tilly’s contract.  Partnership Agreement to Advance Resilient Water Reuse Programs in Santa Clara County between the City of Palo Alto, the City of Mountain View, and the Santa Clara Valley Water District (Valley Water Agreement) (December 10, 2019)
 Effluent Transfer Agreement Between the City of Palo Alto and City of Los Altos (June 7, 2021)
The OCA reviewed the transactions and documents in our audit period (from July 1, 2020, to May 30, 2022) for control testing.

Methodology To achieve the audit objectives, the OCA performed the following procedures:
 Interviewed the appropriate City employees to understand the roles and responsibilities and processes related to the contract administration.  Reviewed the contracts to identify the contract requirements to be tested for the City’s compliance monitoring activities.
 Reviewed the documents (such as supporting documents for billing, reports, and meeting minutes) showing cost allocations and compliance monitoring activities.

Compliance
Statement
This audit activity was conducted from June 2022 to October 2022 in accordance with generally accepted government auditing standards, except for the requirement of an external peer review2. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives.

We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Organizational
Strengths
During this audit activity, we observed that invoices to partner agencies are itemized and accompanied by cost allocation calculations based on a flow report and schedules, which makes it easier for each partner agency to confirm the rates.

The Office of the City Auditor greatly appreciates the support of the Public Works Department and Administrative Services Department in conducting this audit activity.

Thank you!
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6 Detailed Analysis
RWQCP
Contracts
The Basic Agreement was
originally signed in October
1968 and has been amended
10 times (as of June 2022). It
requires that the City act as the
Administrator to administer the
contract.

The significant sections of the
Basic Agreement include:
 Design, ownership, and
capacity rights of the
joint system
 Acquisition and
construction of the joint
system
 Sharing of the costs of
acquisition and
construction,
reconstruction, and
maintenance and
operation
 Payment of the costs
 Revenue from services
and sales of wastewater for reuse
The Supplementals to the Basic Agreement and separate agreements with other partner agencies include the requirements pertaining to:
 Pretreatment program to comply with federal, state, or local regulations and applicable discharge permits
 Capital projects and financing (The major projects planned are listed in Appendix A.) The audited RWQCP Financial Statements for the year ended June 30, 2022¹, lists the following bonds and loans financing RWQCP capital projects:
o 1999 Utility Revenue Refunding Bonds (1999 Wastewater Treatment New Project & Refunding of 1990 Series A Bonds) o 2009 State Water Resource Loan
o 2017 State Water Resource Loan

The OCA reviewed the requirements in 39 RWQCP agreements and amendments within the audit scope (see the Scope section of this report) and summarized the various requirements related to billings and payments in Table 1 in the following page.

Power and Duties of the Administrator*

a) Supervise and administer the contract
between the parties for the operation and
maintenance of the Joint System.
b) Maintain and operate the Joint System
and preserve it is good repair and working
order, all in accordance with recognized
sound engineering practice.
c) Maintain records of all revenues and
expenditures incurred in connection with
operation and maintenance of the Joint
System. The accounting system shall be
based on “Uniform System of Accounts for
Waste Water Utilities” as published by the
Water Pollution Control Federation.
d) Arrange for an independent annual audit
of the accounts of the Joint System.
e) Measure and keep accurate records of the
measurements of sewage flow.

* Paragraph 11, “Basic Agreement Between the
City of Palo Alto, the City of Mountain View and
the City of Los Altos for Acquisition,
Construction and Maintenance of a Joint Sewer
System” executed October 10, 1968
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7 DETAILED ANALYSIS

Table 1: Requirements for Billing and Payments
Partner
Agency
Contract Requirements
Bill Amount Billing Due Date Payment Due De
Ture-up* Billing
(*Offset of the
difference between the
billed amounts and
actual costs
Interest on
the
excess/deficit
payments
over/under
actual costs
Interest
on
delinquent
payments
City of
Mountain
View
One-fourth of
proportionate
share of the
cost of
maintenance
and operation
as estimated by
February 15th
July
October (debt payment)
January
April (debt payment)

[Dates are not specified]
Maintenance and Operation
• August 15
• November 15
• February 14
• May 15
Project Costs
• 30 business days of receipt of
the quarterly billing statement
• 10 business days of receipt of
the quarterly billing statement for
Ultra-Violet Treatment Project
October Yes No
City of
Los Altos
One-fourth of
proportionate
share of the
cost of
maintenance
and operation
as estimated by
February 15th
July
October (debt payment)
January
April (debt payment)

[Dates are not specified]
Maintenance and Operation
• August 15
• November 15
• February 15
• May 15
Project Costs
• 30 business days of receipt of a
quarterly billing statement
• 10 business days of receipt of a
quarterly billing statement for
Ultra-Violet Treatment Project
October Yes No
East Palo
Alto
Sanitary
District
One-fourth of
proportionate
share of the
cost of
maintenance
and operation
as estimated by
July 1
July 31
October 31
January 31
May 1

[“Not later than thirty
(30) days after July 1,
October 1, January 1,
and April 1, of each
year”]
Maintenance and Operation
Later of:
• August 15 /November 15
/February 15 /May 16, or
• 25 business days of receipt of a
quarterly billing statement
Project Costs
• 30 business days of receipt of a
quarterly billing statement
• 10 business days of receipt of
the quarterly billing statement for
Ultraviolet Disinfection Facility
Project
• October to reflect the
actual costs for
immediately prior fiscal
year
• April to reflect the
estimated costs to be
incurred between April 1
and July adjusted the
actual costs for the first
three quarters of fiscal
year prior to April 1
Yes Yes
Stanford
University
Based on the
schedule of
payments
August 1st
Bond
• December 1
Project Costs
• 30 business days of receipt of
an annual billing statement for
Ultra-Violet Treatment Project
and Outfall Project and the
Primary Sedimentation Tank
Rehabilitation Project
• 10 business days of receipt of
an annual billing statement
Upon completion of the
project and certification of
the costs
No Yes
Town of
Los Altos
Hills
Based on the
schedule of
payments
August 1st
Bond
• December 1
Project Costs
• 30 business days of receipt of
an annual billing statement for
Ultra-Violet Treatment Project
and Outfall Project and the
Primary Sedimentation Tank
Rehabilitation Project
• 10 business days of receipt of
an annual billing statement
Upon completion of the
project and certification of
the costs
No Yes

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8 Audit Results
Finding 1:

Invoice and
Payment Due
Dates
The City sends invoices on a quarterly basis to three partner agencies (City of Mountain View, City of Los Altos, and the East Palo Alto Sanitary District) and on an annual basis to two partner agencies (Stanford University and Town of Los Altos Hills). Out of 26 invoices the City sent to these five partner agencies, The OCA judgmentally selected eight invoices to include at least one invoice prepared for each quarter in our audit period and at least one invoice for each partner agency and reviewed the invoices and supporting documents as well as the payment information against the billing and payment requirements in the agreements.

The review of eight invoices revealed the following:
 Two invoices that are required to be sent annually on or before August 1st were dated October 15, 2021, and October 16, 2022, respectively.
 Two quarterly invoices were sent in January and another two quarterly invoices were sent in July as required by the Basic Agreement. However, they were dated about eight to nineteen days later than management’s intended invoice dates, January 1st and July 1st respectively. The agreements require payments by February 14th and August 15th for a January invoice and a July invoice, respectively.
 One payment that was required to be deposited by August 15th was received on October 28th, which was over 100 days late due to incomplete supporting documents sent to the partner agency.

Each agreement with a partner agency includes billing and payment requirements as summarized in Table 1 in the Detailed Analysis section.

The languages and requirements differ among RWQCP’s agreements, especially for amendments including additional capital project costs. Some agreements require a payment within 30 business days of receipt of an invoice while others require a payment within 10 business days. Billing due dates also differ among the agreements. Billing for three partner agencies is due quarterly in January, April, July, and October while billing for two partner agencies is due once a year in August.

The variety and inconsistency of billing and payment requirements among multiple agreements may cause the agencies to be susceptible to noncompliance, errors, slower cash inflows, and inefficiency.

Recommendation The City’s management should evaluate all billing and payment requirements in the existing contracts to determine whether there is any reason preventing the agencies from making the requirements and language in the RWQCP contracts more consistent. If there is no reason, management should standardize billing and payment requirements for all RWQCP contracts in order to improve the efficiency of billing and monitoring of payments and ensure compliance with the requirements.

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9 AUDIT RESULTS
Additionally, the City’s management should formalize the internal controls and processes to ensure timely submission of invoices with adequate supporting documents and partner agencies’ compliance with payment requirements.

Management
Response
Responsible Department(s): Public Works Department; Administrative Services Department
Concurrence: Agree
Target Date: July 25, 2025
Action Plan:

The City agrees that it would be beneficial to make billing practices consistent between agencies. The City has made changes to improve the clarity of quarterly and annual bills by including the due date and potential late fees. The City will modify existing partner agreements as other updates are made to clarify the billing frequency and ensure standardization amongst all the partners, with a target date of July 2025 based on current capital project schedules.

Finding 2:

Industrial Waste
Surveys
The City has the Industrial Waste Pretreatment Program (IWPP) in which the City’s staff members perform permitting, monitoring, and enforcing Industrial Waste Discharge Permits for the entire RWQCP service area (except for the City of Mountain View operating portion of the IWPP). The contracts with partner agencies describe the Sewer Use Ordinance that is as stringent as the Federal Pretreatment Regulations and enforced via permits.

The costs of the program are shared among the partner agencies and included in their quarterly or annual invoices.

The contracts require the partner agencies to update the industrial waste survey (IWS) and provide the update annually to the City. However, the City currently does not receive the surveys. The RWQCP management explains that the City does not have all FY21 survey updates because the Pretreatment Program Manager in the beginning of FY21 who would have requested and received the survey updates via email is no longer employed by the City. Currently, the surveys are updated informally as follows:
 For two partner agencies, new facilities are discussed during quarterly coordination meetings.
 For one partner agency, e-mail updates on auto and dental facility lists are received.
 For one partner agency, the IWS is not currently routinely requested although the staff is working on improving the practice.  One partner agency is not required to update the IWS in the agreement.

As the City’s RWQCP management meets with partner agencies periodically to discuss the IWS-related items, this process is being used in place of requiring formal IWS updates from each partner agency.

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10 AUDIT RESULTS
Without submitting annual IWS updates to the City, the partner agencies are non-compliant with this requirement in the agreements.

Recommendation The City’s Public Works management should obtain the necessary IWS updates from all partner agencies to ensure compliance with pretreatment laws, regulations, and discharge permits until the contracts are amended.

Management should evaluate the adequacy of the current informal survey update practice for effective administration and operation of the IWPP and either enforce the current agreement requirements or amend the language in the contract as necessary to refine the partner agencies’ responsibilities.

Management
Response
Responsible Department(s): Public Works Department
Concurrence: Agree
Target Date: September 2024
Action Plan:

The City agrees that the City should obtain necessary Industrial Waste Survey updates from all partner agencies in a more formalized way. Starting in FY25, the City will send out formal requests to all Partner Agencies to review and approve/edit the Industrial Waste Surveys for their jurisdictions.

This requirement will be evaluated for any needed revisions whenever as the Partner Agreements are reopened for other reasons.

Finding 3:

Compliance
Monitoring
The OCA noted that the timeliness of payments from the partner agencies is not being monitored even though some contracts include a delinquent payment clause that requires interest to be accrued on the unpaid balance. For other requirements in contracts, individual requirements are monitored and performed by different individuals.

The RWQCP operations, finances, and staff (over 55 staff members) are overseen by the Water Quality Control Plant Manager in the Water Quality Control Plant group of the City’s Public Works Department who also works with the Industrial Waste Pretreatment Program (IWPP) staff members and the accounting team of the Administrative Services Department.

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11 AUDIT RESULTS

3 “The mission of the Regional Water Quality Control Plant (RWQCP) is to protect San Francisco Bay by cleaning and treating wastewater before it is discharged to San Francisco Bay.” https://cleanbay.org/our-programs/regional-water-quality- control-plant/#RWQCP

 The billing and payment requirements differ among agreements and vary based on the type of costs.
 An addendum continues to be added for a new project with different debt service billing and payment requirements.  Compliance with regulations and permits as described in the agreements is essential to carry out RWQCP’s mission3.
 Cost allocation depends on capacity rights, certain cost and wastewater data, debt service schedules, and other allocation methods described and updated in the agreements for each type of costs and revenue.

It is important to identify compliance issues and resolve them in a timely manner. Without policies and procedure and a formal monitoring mechanism, the City cannot ensure that all contract requirements are met to successfully construct, operate, and maintain RWQCP or collect interest penalties that are due to the City.

Recommendation The City’s management should establish RWQCP policies and procedures to implement a formal monitoring mechanism that will ensure contract requirements are met. Roles and responsibilities of various City departments, functions, and employees and the expectations should be clearly defined.

To implement a monitoring mechanism, the City’s Public Works management should assign specific requirements to be monitored or performed to the appropriate staff members or teams, if necessary, and have an individual responsible for overall compliance verify compliance with all requirements periodically.

Management
Response
Responsible Department(s): Public Works Department
Concurrence: Agree
Target Date: December 31, 2023
Action Plan:

The City has drafted an internal Standard Operating Procedure to formally monitor tracking and receipt of payments from partner agencies and will complete reviews and distribution.

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12 AUDIT RESULTS

Appendix A: Resumes

Appendices

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13 Appendix A: Summary of FY23-FY27 Capital Budget in Wastewater Treatment Fund

According to the City of Palo Alto Fiscal Year 2023 Adopted Capital Budget4,

 Six agencies using RWQCP serve 250,000 residents.
 Expenditures of approximately $289.0M are programmed for the Wastewater Treatment Fund, which is 53 % of the City’s 2023-2027 Capital Improvement Program Projects ($193.2M are allocated in FY2023).
 The costs are recovered from the Palo Alto Wastewater Collection Fund and five partner agencies.  Total ten projects are programmed:

A. Buildings and Facilities

1. New Laboratory and Environmental Services Building (Fiscal Year 2023: $2.6 million; 5- Year CIP: $23.7 million).

2. Plant Master Plan (Fiscal Year 2023: $0.2 million; 5-Year CIP: $2.1 million) B. System Improvements

1. Plant Repair, Retrofit, and Equipment Replacement (Fiscal Year 2023: $ 10.5million; 5- Year CIP: $26.2 million)

2. Advanced Water Purification Facility (Fiscal Year 2023: $17.1 million; 5-Year CIP: $17.1 million)

3. Headworks Facility Replacement (Fiscal Year 2023: $4.8 million; 5-Year CIP: $48.8 million)

4. Horizontal Levee Pilot (Fiscal Year 2023: $0.2 million; 5-Year CIP $0.7 million)

5. Joint Intercepting Sewer Rehabilitation (5-year CIP $12.6 million)

6. Outfall Line Construction (Fiscal Year 2023: $10.6 million; 5-Year CIP: $10.6 million)

7. Primary Sedimentation Tank Rehabilitation (Fiscal Year 2023: $2.6 million; 5-Year CIP:
$2.6 million)

8. Secondary Treatment Upgrades (Fiscal Year 2023: $144.7 million; 5-Year CIP: $144.7 million)

4 https://www.cityofpaloalto.org/files/assets/public/administrative-services/city-budgets/fy2023-city-budget/adopted- fy23/capital-budget_final-4-online-version.pdf
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14 Appendix B: Management Response

Findings and Recommendation Responsible
Department(s)
Agree, Partially Agree, or Do Not Agree and Target Date and Corrective Action Plan
Finding 1: Invoice and Payment Due Dates
The City’s management should evaluate all billing and payment requirements in the existing contracts to determine whether there is any reason preventing the agencies from making the requirements and language in the RWQCP contracts more consistent. If there is no reason, management should standardize billing and payment requirements for all RWQCP contracts in order to improve the efficiency of billing and monitoring of payments and ensure compliance with the requirements.

Finding 2: Industrial Waste Surveys
The City’s Public Works management should obtain the necessary IWS updates from all partner agencies to ensure compliance with pretreatment laws, regulations, and discharge permits until the contracts are amended. Management should evaluate the adequacy of the current informal survey update practice for effective administration and operation of the IWPP and either enforce the current agreement requirements or amend the language in the contract as necessary to refine the partner agencies’ responsibilities.

Public Works Concurrence: Agree
Target Date: September 2024
Action Plan:

Finding 3: Compliance Monitoring
The City’s management should establish RWQCP policies and procedures to implement a formal monitoring mechanism that will ensure contract requirements are met. Roles and responsibilities of various City departments, functions, and employees and the expectations should be clearly defined.

To implement a monitoring mechanism, the City’s Public Works management should assign specific requirements to be monitored or Public Works Concurrence: Agree
Target Date: December 31, 2023
Action Plan:

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15 Findings and Recommendation Responsible
Department(s)
Agree, Partially Agree, or Do Not Agree and Target Date and Corrective Action Plan
performed to the appropriate staff members or teams, if necessary, and have an individual responsible for overall compliance verify compliance with all requirements periodically.

The City has drafted an internal Standard Operating Procedure to formally monitor tracking and receipt of payments from partner agencies and will complete reviews and distribution.

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City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: City Auditor
Meeting Date: January 22, 2024
Report #:2311-2304
TITLE
Approval of Office of City Auditor Risk Assessment and Audit Plan (CEQA Status - Not a Project)

RECOMMENDATION
The Policy and Services Committee and City Auditor recommend that City Council approve the following reports:
1) Fiscal Year 2023/24 Risk Assessment Report
2) Fiscal Year 2023/24 Audit Plan Report
3) Task Orders identified in the Audit Plan Report
oTASK ORDER FY24-4.21 Purchasing Card Program
oTASK ORDER FY24-4.22 ADA Compliance Review
oTASK ORDER FY24-5 Various Reporting & City Hotline (Modified)

EXECUTIVE SUMMARY
Baker Tilly interviewed City Council members and executive leadership across 14 departments within the City. In addition, selected directors and managers were asked to complete a survey that provided their view of top risk areas to their departments and the City as a whole. Baker Tilly analyzed the results of the survey and other data and information gathered.

The risk assessment involved scoring and ranking the 97 auditable units to identify the audit areas with high to moderate risks. The FY2023/24 Audit Plan was prepared based on the results of the risk assessment, conversations with leadership, and other matters.

BACKGROUND
The Palo Alto Municipal Code (Section 2.08.1301) requires the City Auditor to prepare and submit an annual audit plan to the City Council for review and approval. In its capacity serving 1 https://codelibrary.amlegal.com/codes/paloalto/latest/paloalto_ca/0-0-0-60361 Item 9
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as the City Auditor function, and in accordance with Baker Tilly’s agreement with the City2, Baker Tilly performed a citywide risk assessment (Task 2 of the agreement). The purpose of the assessment was to identify and prioritize risks in order to develop the annual audit plan (Task 1). During the risk assessment, Baker Tilly assessed a wide range of risk areas, including strategic, financial, technology, human capital, operational, reputational, economic, and compliance risk categories.

During the Policy and Services Committee meeting on December 12, 20233, the council members approved the attached Risk Assessment Report and Audit Plan Report.

MOTION: Chair Tanaka moved, seconded by Mayor Kou, to approve the Office of the City Auditor Risk Assessment Report and FY2024 Audit Plan Report and recommend the City Council accept the following reports:
1) Fiscal Year 2023/24 Risk Assessment Report
2) Fiscal Year 2023/24 Audit Plan Report
3) Task Orders identified in the Audit Plan Report
o TASK ORDER FY24-4.21 Purchasing Card Program
o TASK ORDER FY24-4.22 ADA Compliance Review
o TASK ORDER FY24-5 Various Reporting & City Hotline (Modified) MOTION PASSED: 2-0

ANALYSIS
For Baker Tilly to execute the approved audit plan, the Task Orders will need to be signed by the Policy & Services Committee Chair upon approval of the audit plan by City Council. Per the contract with Baker Tilly, the P&S Chair is authorized to sign task orders that follow the approved annual audit workplan.

Furthermore, one of the OCA’s responsibilities is to follow up on management’s corrective actions. The follow-up activities require periodic inquiries with management on outstanding corrective actions and verifying implementation of the corrective actions as well as testing of the effectiveness of the implemented controls. As Task 5 of Baker Tilly’s agreement with the City includes the OCA’s annual report on the status of recommendations made in completed audits, the estimated costs for the follow-up activities on recommendations need to be allocated to the Task 5 budget. Therefore, modified TASK ORDER FY24-5 Various Reporting & City Hotline has been prepared to transfer the amount for the estimated costs of $30,592 for the follow-up activities (as shown as a line item in the Proposed Audit Plan for FY2024) from Task 4 to Task 5.

2 https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes-reports/reports/city-manager-reports- cmrs/year-archive/2020-2/id-11624.pdf?t=64761.15
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FISCAL/RESOURCE IMPACT
The timeline for risk assessment and the audit plan is to complete within FY2024. The proposed audits in the audit plan are within the contract amount for FY2024. Specifically, below is a summary of the task orders seeking approval financial impacts, all estimated to be completed by June 30, 2024:
•TASK ORDER FY24-4.21 Purchasing Card Program in the amount of $76,540 •TASK ORDER FY24-4.22 ADA Compliance Review in the amount of $73,110 •TASK ORDER FY24-5 Various Reporting & City Hotline (Modified) revise from $90,000 to a total not to exceed of $120,592

STAKEHOLDER ENGAGEMENT
The Office of the City Auditor worked with Executive Leaders from 14 departments across the City and engaged the City Council.

ENVIRONMENTAL REVIEW
Environmental review is not applicable to this activity.

ATTACHMENTS
Attachment A: OCA – FY2023/24 Risk Assessment Report
Attachment B: OCA – FY2023/24 Annual Audit Plan Report
APPROVED BY:

Adriane D. McCoy, City Auditor
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1 December 12, 2023
City of Palo Alto
Office of the City Auditor
FY2023 Annual Risk Assessment
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INTRODUCTION ............................................................................................................. 1 RISK ASSESSMENT APPROACH ................................................................................. 2 SURVEY RESULTS ........................................................................................................ 3 RISK ASSESSMENT RESULTS ..................................................................................... 5 APPENDICES ................................................................................................................. 9

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1 Introduction
Overview
According to City Ordinance of the City of Palo Alto (the City), the mission of the Office of the City Auditor (OCA) is to promote honest, efficient, effective, economical, and fully accountable and transparent city government. To fulfill this mission, the OCA conducts performance audits and performs financial/operational analyses of city departments, programs, services, or activities as approved by the City Council. (Section 2.08.130). In its capacity serving as the City Auditor function, and in accordance with Baker Tilly’s agreement with the City (Task #1 of the agreement), Baker Tilly US, LLP (Baker Tilly) conducted the fiscal year(FY) 2023 citywide risk assessment in order to develop the FY2024 annual audit plan (Task #2).

The California Government Code Section 1236 requires all cities that conduct audit activities to conduct their work under the general and specified standards prescribed by the Institute of Internal Auditors (IIA) or the Government Auditing Standards (GAO) issued by the Comptroller General of the United States, as appropriate.

According to the IIA Standard 2010, the head of internal audit function “must establish a risk-based plan to determine the priorities of the internal audit activity, consistent with the organization’s goals” and consider the input of senior management and a governing board.

The purpose of the risk assessment is to develop an internal audit plan that assigns internal audit resources to the activities that add the most value to the City. The risk assessment process involves identifying, measuring, and prioritizing risks associated with the audit universe (list of specific departments, functions, processes, programs, etc. that can be subject to an audit). Risk is defined as “the possibility of an event or condition occurring that will have an impact on the ability of an organization to achieve its objectives.”1 Our risk assessment involved collaboration with City Council and executive leadership from 14 main departments across the organization. This report summarizes our risk assessment methodology, analysis, and results. The FY2024 annual audit plan is based on the results of this risk assessment.

Through the risk assessment, we observed certain strengths of the City. Key strengths include:
Commitment to public service
High value on efficient and effective government
Focus on long term strategy
Dedicated and highly professional management and staff Demonstrated history of innovation and commitment to sustainability

Risk Assessment Process Considerations
The starting point of the internal auditing is to conduct a risk assessment that is the basis for determining the internal audit activities. However, it is not a one-size-fits-all process. The scope and complexity of risk assessment are affected by various factors such as the maturity level of the internal audit function’s products and services, the organization’s enterprise risk management efforts, coordination with other monitoring and risk management functions, and the stakeholders’ expectations. As every organization is subject to changing environment, the results of the annual risk assessment represent the information considered at the time of the assessment.

In addition to the annual macro-level risk assessment, the internal audit function is required to perform an engagement-level risk assessment when starting each audit listed in the approved audit plan. The IIA Standard 2200 states, “Internal auditors must develop and document a plan for each engagement, including the engagement’s objectives, scope, timing, and resource allocations. The plan must consider the organization’s strategies, objectives, and risks relevant to the engagement.”

1 Rick A. Wright Jr., CIA, “The Internal Auditor’s Guide to Risk Assessment” The Institute of Internal Auditors Research Foundation (IIARF), 2018
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2 Risk Assessment Approach
Baker Tilly’s risk assessment approach consisted of four phases as illustrated in the graphic below.

2023 RISK ASSESSMENT PHASES
Planning
 Prepared risk assessment survey questions and the online survey tool.  Scheduled the interviews with City Council members and Executive Leadership Team (ELT) members.

Information
Gathering
 Reviewed the key documents such as City Council Priorities and the progress report, the budget documents, the annual comprehensive financial report, departmental strategic plans, employee turnover, the information on the City’s website and other relevant documents.  Distributed a link to the online survey to the selected 51 managers. The survey responses were downloaded in Excel spreadsheet.
 Interviewed all City Council Members and ELT members (25 individuals) to identify the events and conditions that may affect the achievement of objectives.  Updated the risk assessment matrix with the information gathered.

Analysis
 Analyzed the survey responses.
 Scored the auditable units (listed in Appendix A) in the risk assessment matrix based on the likelihood and the impact2 of potential adverse events. o Each of the auditable units received scores for various risk factors related to the likelihood or impact (defined in Appendix B).
o Risk factor scores were summed to create a single score for the auditable unit.  Identified potential internal audit activities for the auditable units with high risk scores.

Reporting  Summarized the approach and results of the risk assessment

Baker Tilly conducted an initial comprehensive risk assessment in FY2021 by interviewing all Council Members and Executive Leadership Team (ELT) members to create a risk assessment matrix. For the FY2022 risk assessment, surveyed all ELT members and some additional members of management and conducted interviews with available Council Members as well as key ELT members representing areas of perceived high risk (e.g., Information Technology, Human Resources). For the third year risk assessment, all Council Members and ELT members were interviewed, the selected 51 managers were surveyed, and the risk assessment matrix was redeveloped for a comprehensive picture of the risk landscape, which will be continuously improved.

Our risk assessment primarily measured inherent risk (the risk without mitigating controls/factors) for each risk factor although we also considered specific risks based on the City’s processes, controls, and other factors we learned through internal audit activities. Using the information gathered, we identified risks and determined the likelihood and impact of the risks.

2 Likelihood is the possibility that an event will occur. Impact is the extent to which an event might affect an organization.

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3 Survey Results
Baker Tilly team conducted an online risk assessment survey to gather management’s insights for all City departments and received 47 responses (92% response rate). The survey questions are listed in Appendix C.

Changes over the past 12 months
All organizations are subject to changing environments that can influence risk to organizations. The COSO3 Internal Control – Integrated Framework4 highlights the influence of change in one of the 17 principles. Principle 9 states, “the organization identifies and assesses changes that could significantly impact the system of internal control.” The survey participants were asked to select all significant changes for their team or department during last 12 months.

Policies and Procedures
Policies and procedures provide a
roadmap for daily operations to ensure
compliance with laws and regulations,
give guidance for decision-making, and
establish the standards and internal
controls.

The survey participants were also asked
to select the current state of the policies
and procedures necessary to perform
their job responsibilities.

3 The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is sponsored jointly by five major professional associations headquartered in the United States: the American Accounting Association (AAA), the American Institute of Certified Public Accountants (AICPA), Financial Executives International (FEI), the Institute of Internal Auditors (IIA), and Institute of Management Accountants (IMA). https://www.coso.org/
4 Internal Control – Integrated Framework provides principles-based guidance for designing and implementing effective internal controls.

This framework has become the most widely used internal control framework in the U.S. https://www.coso.org/guidance-on-ic Changes for team or department # of ResponseNew/additional staff 33Unfilled positions 28Change in workload 23New software 19Change in organizational structure 17New workflows or business processes 13New or significant changes in information technology systems 13Change in compliance requirements (due to changes in policies/contracts/laws/regulations) 11New vendors and contractors 11Significant changes in processes or controls 7Workforce reduction 7Increased undesirable performance or instances (such as injuries/complaints/customer dissatisfaction/etc.) 6Change in goals/objectives/performance measures 6Change in culture 3Other 4 Item 9
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4 SURVEY RESULTS
Barriers to meeting goals and objectives in FY2024
The COSO Enterprise Risk Management—Integrating with Strategy and Performance5 provides insight into the links between strategy, risk, and performance through 20 principles. Principle 10 states, “the organization identifies risk that impacts the performance of strategy and business objectives.”
The survey participants were asked about their team/department’s periodic reporting on significant goals and compliance requirements to monitor the performance. The pie chart shows the results.

The survey participants were also asked what can possibly prevent their team/department from meeting its goals and objectives in 2024. The results are summarized below.

Top risk areas selected by the survey participants
The survey participants were asked to select and rank the top five risk areas from 31 risk areas listed in the survey. Based on the number of selection and the ranking given by them, the top 15 risk areas were identified.

For the risks they selected:
 59.6% of the participants think the City management is aware of the risk, but more efforts are needed to help mitigate the risks.  34.0% of the participants think the City management is aware of the risks and has implemented activities to help mitigate the risks.
 6.4% of the participants think the City management is either not aware of the risks or have not developed sufficient activities to help mitigate the risks.

5 Enterprise Risk Management—Integrating with Strategy and Performance addresses the need for organizations to improve their approach to managing risk to meet the demands of an evolving business environment. https://www.coso.org/guidance-erm Rank Risk Area1 Citizen Demands2 Succession Planning3 Economy4 Human Capital Management5 Human Resources6 Procurement/Sourcing7 Security8 Regulatory9 Reputation10 Resource Allocation11 Efficiency12 Document Retention13 Leadership and Authority14 Technologies15 Strategic Change Item 9
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5 RISK ASSESSMENT RESULTS
Risk Assessment Results
Department Descriptions and Key Risk Areas
When identifying risk areas throughout the City, Baker Tilly considered each department and associated risks.

Based on the concerns described by interviewees and survey respondents, departments’ functions, and their inherent risks, Baker Tilly identified the auditable risk areas for each department. Below is an overview of the City’s departments and their key risk areas.

Administrative Services
The Administrative Services Department provides financial and analytical support to the City. Departmental functions include finance and accounting, purchasing, administration, budget, real estate, and others.

Key Risk Areas
Purchasing card program
Vendor master file
Property management
Grant management
City Attorney’s Office
The City Attorney’s Office provides legal services to the City, including providing legal advice and training to City leaders, negotiating on behalf of the City, drafting contracts and other legal documents, investigating claims, and defending the City in litigation

Key Risk Areas
Identification of legal risks
Contracts and legal documents

City Clerk’s Office
The City Clerk serves as a liaison between the public and City Council. Office functions include Public Records Act requests, public hearings, local elections, board and commission
recruitments, record management, and others.

Key Risk Areas
Election administration
Record management
Council meeting management
City Manager’s Office
The City Manager’s Office provides leadership to the City departments and is responsible for facilitating City Council legislative actions, managing special interdepartmental projects, and more. The Communications Office is housed under the City Manager’s Office and is the primary correspondent between the City and the public.

Key Risk Areas
Citywide risk management
Economic development
Office of Transportation
The Office of Transportation works to enhance quality of life and improve the safety of the users of all modes of transportation.

The Office is responsible for sustainable transportation systems, manage parking, and oversees the City’s traffic and
transportation capital improvement projects.

Key Risk Areas
Intersection safety improvements
Federal Railroad Administration (FRA)
Quiet Zone
Parking permit revenue

Community Services Department
The Community Services Departments offers a variety of
services administered through the following three divisions and the Office of Human Services: Arts and Sciences; Open Spaces, Parks, and Golf; and Recreation.

Key Risk Areas
Human Services Resource Allocation
Process (HSRAP)
Junior Museum and Zoo (JMZ)
Operation
Contract management
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Fire
The Fire Department oversees emergency response such as ambulance transports and fire response/rescue, emergency protection services such as fire prevention, and hazardous materials planning. The department highlights safeguarding the community and compassionate care.

Key Risk Areas
Emergency Preparedness (Foothills
Fire Master Plan)
Safety and Wellness
Human Resources
The Human Resources Department is responsible for recruiting, developing, and retaining a well-qualified and professional workforce. The Department ensures compliance with relevant labor laws, adheres to record keeping practices, and serves as a strategic partner for executive decision making.

Key Risk Areas
Recruitment
Succession Planning
HR Strategy & Risk Management
Workplace Safety
Information Technology
The Information Technology Department's provides innovative technology solutions that support City departments. The department oversees IT project management, operations,
enterprise systems, and security services.

Key Risk Areas
- PCI/DSS Compliance
- AMI Implementation
- ERP Upgrade
Library
The Library Department operates five libraries throughout the City, each offering unique resources. The Library provides educational programming, multi-cultural events, and large and diverse book, information and technology resources.

Key Risk Areas
Operations
Events and Programming
Office of Emergency Services
The Office of Emergency Services is designed to prevent, prepare for, and recover from various hazards. The Office is responsible for overseeing various risk management programs.

Key Risk Areas
Emergency preparedness (Foothills Fire
Mitigation Program)
Planning and Development Services
The Planning Department supports the City in land use
development, planning, transportation, housing and
environmental policies, and plans and programs that “maintain and enhance the City as a safe, vital, and attractive community”.

Key Risk Areas
Building Permit & Inspection
Zoning Ordinance
Code Enforcement
Long Range Planning
Police
Palo Alto’s Police Department oversees technical services such as dispatch and record management, field services such as patrol and emergency response, and animal control. The Police Department also places a high value on community relations.

Key Risk Areas
Crime Reduction
Psychiatric Emergency Response Team
(PERT) Program
Safety and Wellness
Training
Public Works
The Public Works Department is broken into four divisions:

Engineering, Airport, Public Services, and Environmental Services. The Divisions are responsible for a variety of tasks

Key Risk Areas
Wastewater treatment capital program
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7 RISK ASSESSMENT RESULTS

Overall Risk Scoring Distribution
Baker Tilly structured the audit universe based on the department/division/program from the budget document and management’s feedback, which resulted in 96 auditable units (Appendix A). We scored them based on the information gathered for each risk factor related to the likelihood, impact, or fraud. Appendix B lists the risk factors, definitions, and scoring method. The maximum score for an auditable unit is 30. The following chart shows the distribution of overall risk scoring.

Baker Tilly rated the auditable units as follows:
 High Risk – Scores 14 and above
 Moderate Risk – Scores more than 9 and less than 14
 Low Risk – Scores below 9
Listed in the following page are the auditable units with a score over 13 (out of 30) based on our scoring. The list includes 27 functions rated as high risk (with a score between 14 and 30) and 13 functions rated as moderate risk (with a score between 13 and 14). In determining the audit activities to be performed in FY2024, we further review specific risks and functional areas and consider risk-based priorities as well as other factors such as requirements by law or regulation, timing of activities, special projects, and requests from City Council and management. The proposed audit plan will be included in a separate FY2024 Annual Audit Plan Report.

72643164SCORE ≤ 5 5 - 10 10 - 15 15 - 20 > 20
including design and implementation of capital projects, maintenance of City-owned and leased structures, and
management of the solid waste programs.
The Americans with Disabilities Act
(ADA) compliance
Flood protection capital project
Airport Operations
Utilities
The Utilities Department owns and operates electric, gas, water, wastewater and fiber optic services to the City. The City purchases all their power from external sources. The mission of the Department is to “provide safe, reliable, environmentally sustainable and cost effective services.”

Key Risk Areas
Power Purchase Agreements
Utility Billing
Rate Setting and Adjustment
Utility Asset Management
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8 Department Function Risk Area Total Risk ScorePlanning and Development Services Building Building Permit & Inspection Process 22.8Public Works Wastewater Treatment Wasterwater Treatment Capital Program 22.4Planning and Development Services Development Services Building Permit & Inspection Process 20.5Public Works Structures and Grounds ADA Compliance / Flood protection capital project 20.0Administrative Services Purchasing Purchasing Card Program / Vendor Master File 18.6Police Field Services Psychiatric Emergency Response Team (PERT) Program 18.2Utilities Electric Administration Power Purchase Agreement 18.2Community Services Administration and Human Services Human Services Resource Allocation Process (HSRAP) 18.0Community Services Arts and Sciences Junior Museum and Zoo (JMZ) Operation 18.0Community Services Recreation and Cubberley Contract Management 18.0Police Technical Services 911 Operations 17.2Community Services Animal Shelter Contract Management 16.9Fire Emergency Response Emergency Preparedness (Foothills Fire Master Plan) 15.8City Manager Administration and City Management Citywide Risk Management 15.6Fire Administration Safety and Wellness 15.6Planning and Development Services Planning and Transportation Code Enforcement 15.4Office of Transportation Programs Intersection safety improvements 15.4Utilities Electric Engineering (Operating) Utility Asset Management 15.3Public Works Airport Airport Operations 15.1Human Resources Administration, Employee Org Development and HR Systems HR Strategy / Succession Planning 15.1Police Police Personnel Selection Recruitment and retention 14.9Administrative Services Treasury / Revenue Collection / Warehouse Investment Management 14.9Administrative Services Real Estate Property Management 14.7Public Works Engineering Services Animal Shelter Renovation 14.3Community Services Open Space, Parks and Golf Emergency Preparedness (Foothills Fire Master Plan) 14.1Information Technology Operations PCI/DSS Compliance 14.1Administrative Services Accounting Grant Management 14.0Office of Emergency Services Emergency Services Emergency preparedness (Foothills Fire Mitigation Program) 13.9Utilities Electric Customer Service Utility Billing 13.9Information Technology Project Services AMI Implementation 13.8Library AdministrationBusiness Operations (Donations and grants; Inventory Management; Fines, Purchasing, etc.)13.8Human Resources Risk Mgmt., Safety, Workers' Compensation HR Risk Management / Workplace Safety 13.8Police Law Enforcement Services Evidence 13.8Utilities Water Customer Service Utility Billing 13.6City Manager Economic Development Economic Development 13.4Human Resources Recruitment Recruitment Process 13.3Utilities Electric Resource Management Rate setting and adjustments 13.2Public Works Administration Safety and Wellness 13.0Utilities Gas Customer Service Utility Billing 13.0Utilities Fiber Optics Customer Service Utility Billing 13.0 Item 9
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9 Appendix A: Resumes

Appendices

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10 Appendix A: Audit Universe
City Attorney’s Office
Administration
Consultation and Advisory
Litigation and Dispute Resolution
Official and Administration Duties
City Clerk’s Office
Administration
Administrative Citations
Council Support Services
Election/Conflict of Interest
Legislative Records Management
City Manager’s Office
Administration and City Management
Economic Development
Public Communication
Administrative Services Department
Accounting
Administration
Office of Management and Budget
Printing and Mailing
Purchasing
Real Estate
Treasury/Revenue Collection/Warehouse
Community Services Department
Administration and Human Services
Animal Shelter
Aquatics
Arts and Sciences
Open Space, Parks and Golf
Recreation and Cubberley
Fire Department
Administration
Emergency Response
Environmental Safety Management
Records and Information Management
Training and Personnel
Human Resources Department
Administration, Employee Org Development and HR Systems Benefits and Compensation
Employee and Labor Relations
Recruitment
Risk Management, Safety, Workers’ Compensation
Information Technology Department
Enterprise Systems
Office of the CIO
Operations
Project Services
Library Department
Administration
Collection and Technical Services
Public Services
Office of Emergency Services
Emergency Services
Office of Transportation
Administration
Parking Districts
Programs
Special Revenue Funds
Planning and Development Services Department
Administration
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11 Building
Development Services
Planning and Transportation
Special Districts
Police Department
Administration
Animal Control
Field Services
Investigations and Crime Prevention Services
Law Enforcement Services
Parking Services
Police Personnel Selection
Technical Services
Traffic Services
Department of Public Works
Administration
Airport
Engineering Services
Refuse
Storm Drainage
Streets
Structures and Grounds
Sustainability
Trees
Vehicle Replacement and Maintenance
Wastewater Treatment
Utilities Department
Electric Administration
Electric Customer Service
Electric Demand Side Management
Electric Engineering (Operating)
Electric Operations and Maintenance
Electric Resource Management
Fiber Optics Administration
Fiber Optics Customer Service
Fiber Optic Operations and Maintenance
Gas Administration
Gas Customer Service
Gas Demand Side Management
Gas Engineering (Operating)
Gas Operations and Maintenance
Gas Resource Management
Wastewater Collection Administration
Wastewater Collection Customer Service
Wastewater Collection Engineering (Operating)
Wastewater Collection Operations and Maintenance
Water Administration
Water Customer Service
Water Engineering (Operating)
Water Operations and Maintenance
Water Resource Management
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12 Appendix B: Risk Factor Definition

Factor Definition WeightMagnitudeA measure of materiality based on pervasiveness or volume of dollars or transactions; Scores based on the budgeted expenditure amountExtreme - 5: $50M or moreMaterial - 4: $10M or more; Less than $50MSignificant - 3: $3M or more; Less than $10MModerate - 2: $1M or more; Less than 3M30%Customer / Resident ExperienceNegative experience by customers and residents, such as perceived or actual safety concerns and unsatisfactory services, impacts negatively on the reputation / credibility of the organizationExtreme - 5: Direct impact on health and safetyMaterial - 4: Direct impact on transparencySignificant - 3: Direct impact on customer satisfaction/City's reputationModerate - 2: Indirect impact on customer satisfaction/City's reputationInconsequential - 1: Immaterial impact on reputation / credibility35%Achievement of Organizational GoalsThe greater the effect that a department or process has on the organization meeting strategic objectives and goals, the greater the related risksExtreme - 5: Directly relates to the City Council PrioritiesMaterial - 4: Supports the function/process directly related to the City Council Priorities Significant - 3: Has performance/workload measures related to City Council Priorities Moderate - 2: Somewhat relates to the City Council PrioritiesInconsequential - 1: Does not relate to City's City Council Priorities35%100%ComplexityA measure of the difficulty in performing a process or function. As a process or function becomes more complex, the greater the opportunity for errors5 - Very high complexity4 - High complexity3 - Medium complexity2 - Low complexity1 - Very low complexity25%Policies and ProceduresPolicies and Procedures are a complete set of written instructions that guide personnel in the successful execution of their duties and the duties of the office for which they work. If the policies and procedures are adequate and up-to-date, a risk is lower5 - No or little written P&P4 - Some written P&P3 - Basic P&P requiring improvements2 - Adequate but outdated P&P10%Regulatory ComplianceMeasures the existence of and potential noncompliance with, government regulations and other applicable laws, standards, and policies/procedures5 - Requirements to meet more than a few laws/regulations and professional standards specific to the division's responsibilities 25%MonitoringConsider the existence of monitoring activities, including the results of last audits by Internal Auditor, External Auditor, Regulators, etc. and other known deficiencies5 - Overall, there is no mechanism to monitor the status of performance goals/compliance requirements 3 - For only some of significant performance goals/compliance requirements, there is a periodic reporting process to ensure performance goals/compliance requirements are met1 - For all significant performance goals/compliance requirements, there is a periodic reporting process to ensure performance goals/compliance requirements are met10%Specific RisksConsider the existence of specific risk events/conditions and their significance5 - Identified risk event(s)/condition(s) seem to significantly affect the likelihood3 - Identified risk event(s)/condition(s) seem to have some impact on the likelihood1 - No or very minor risk event(s)/condition(s) have been identified30%100%Fraud SchemesConsider the susceptibility to fraud, which is the opportunity for employees/vendors/customers/fraudsters to misappropriate resources or defraud the organization*5 - High Risk3 - Moderate Risk1 - Low Risk100%100%HIGHEST TOTAL SCORE 30* Considered fraud schemes listed in the Fraud Tree provided in the “Occupational Fraud 2022: A report to the Nations” by Association of Certified Fraud Examiners. Also considered are cyber fraud schemes.

Impact Factors (the effect on the organization) HIGHEST TOTAL SCORE FOR IMPACT: 5Likelihood Factors (the probability of the risk occurring) HIGHEST TOTAL SCORE FOR LIKELIHOOD: 5Other Risk FactorHIGHEST TOTAL SCORE FOR OTHER: 5 Item 9
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13 Appendix C: Survey Questions
The Office of City Auditor is conducting the 2023 Risk Assessment to identify and prioritize risks in order to update the annual audit plan. As part of our 2023 Risk Assessment, we are conducting a survey. This survey is used primarily to collect information related to changes in operations, emerging issues and risks the City faces, and to gather your perspective on key risks faced by your department. Your candid responses would be greatly appreciated to assess the risks that prevent the City of Palo Alto from achieving its mission, goals, and objectives.

Questions 1-7 remain the same for both options.

1. Please provide your name, title, department, and email address:
 Name
 Title
 Department
o City Council
o City Attorney
o City Manager’s Office – Other than Transportation
o City Manager’s Office – Transportation
o Administrative Services
o City Clerk’s Office
o Community Services
o Emergency Services
o Fire
o Human Resources
o Information Technology
o Library
o Planning
o Police
o Public works
o Utilities
 Email address

2. Describe any significant changes for your team or department during last 12 months. Select all that apply.
 New software
 New workflows or business processes
 Significant changes in processes or controls
 New or significant changes in information technology systems  Change in organizational structure
 Change in culture
 Workforce reduction
 Unfilled positions
 New/additional staff
 New vendors and contractors
 Change in workload
 Change in compliance requirements (due to changes in policies, contracts, laws, or regulations)  Change in goals, objectives, or performance measures
 Increased undesirable performance or instances (such as injuries, complaints, customer dissatisfaction, etc.)
 Change in any risks previously identified for your team/department Item 9
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14  Other (please specify)

3. Describe the complexity of the key processes in your team or department:

Complexity is a measure of the difficulty in performing a process or function. As a process or function becomes more complex, the greater the opportunity for errors.  Very high complexity
 High complexity
 Medium complexity
 Low complexity
 Very low complexity
Please provide any comment related to complexity, if any.

4. Are there adequate and up-to-date documented policies and procedures to perform your job responsibilities?
 Yes, documented policies and procedures are adequate and up-to-date  Documented policies and procedures are adequate but not updated regularly  Documented policies and procedures need improvement
No – Please describe how the responsibilities and requirements are communicated in a clear and consistent manner.

5. Please select the compliance requirements with applicable Federal/State/Local laws and regulations and professional standards (e.g. CEQA, NERC, OSHA, EMT licensure/certification) for each of divisions/functions of your department listed below:
 More than a few laws/regulations and/or professional standards specific to the division's responsibilities need to be met
 One or two laws/regulations and/or professional standards specific to the division's responsibilities need to be met
 No requirement to meet any laws/regulations or professional standards specific to the division's responsibilities

6. Describe what can possibly prevent your team/department from meeting its goals and objectives in 2024. Select all that apply.
 Financial constraints
 Staffing constraints
 Limited skills, knowledge, experience, training
 Technology issue
 Inefficiency in process and/or communication
 Ambiguity in roles and responsibilities
 Lack of, or ineffective, internal controls
 Community pressure
 State/Federal regulations
 Other (please specify)

7. Describe the activities to monitor the achievement of the goals in your team or department:

Example – Periodic reporting, periodic meetings, spot checks by management, periodic audits by external organizations such as consultants and the Federal government, etc.  For all significant performance goals/compliance requirements, there is a periodic reporting process to ensure performance goals/compliance requirements are met  For only some of significant performance goals/compliance requirements, there is a periodic reporting process to ensure performance goals/compliance requirements are met  Overall, there is no mechanism to monitor the status of performance goals/compliance requirements Item 9
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15 Please provide comments related to monitoring the achievement of your department’s goals, if any.

To help us identify potential risks, please list your team/department’s Strengths, Weaknesses, Opportunities, and Threats (SWOT) for achieving its missions, goals, and objectives. Typically, strengths and weaknesses are internal aspects of team/department/organization, while opportunities and threats are found externally.

8. Describe up to three STRENGTHS of your team or department:

Strengths refer to the resources or capabilities that help the team/department accomplish its mission and serve the public. These can be things like competitive advantages, available resources, engaged community, strong balance sheet, utilized technology and so on.

9. Describe up to three WEAKNESSES of your team or department:

Weaknesses refer to the areas where the team/department needs to improve to accomplish its mission.

These can include things like deficiencies in resources and capabilities, inefficient use of available technologies, barriers or inability to collaborate among different departments, lack of effective communication, mission or direction, high levels of debt, financial or human resources constraints and so on.

10. Describe up to three OPPORTUNITIES for your team or department:

Opportunities are any area where the team/department can grow. They are often related to the organization’s strengths. Outside factors that affect the organization in a favorable way can include things like; offering more products or services to citizens, lower costs through new technology and so on.

11. Describe up to three THREATS for your team or department:

Threats include the local or national economy, laws and regulations and any other external issue that can harm or affect the team/department successfully meeting goals. Common threats include things like rising costs for housing/living, increasing competition, tight labor supply, billing rates and so on.

12. Using the bulleted list within the risk framework below, please select what you consider to be the top five enterprise risks to the City of Palo Alto.

Environmental (factors external to the organization)
• Reputation - The opinions and perceptions of the public and customers toward the organization. • Regulatory - Laws and standards, which the organization must comply with in its operations. • Citizen Demands - The effect that current citizens demands have on the decisions made by management for aligning tactical plans with the business strategy and the allocation of resources. • Economy - The effect that current external conditions have on the decisions made by management for aligning tactical plans with the business strategy and the allocation of resources. • Legal - The potential for an unforeseen event to cause civil or criminal litigation for the organization or its elected leaders, directors, officers, and employees.
• Technologies - The evolution of technology both within and outside of the organization’s industry.

Strategy (planning and decision-making)
• Strategic Change - The ability of the organization to modify its processes in order to either align with its current strategy and business model or to achieve a different strategic goal. • Investments - The portfolio of both intangible and tangible investments held by the organization, and the implications of these assets on the resources, financial viability, and operations of the organization. The effect on liquidity the ability of current assets to meet current liabilities when due.
• Planning and Budgeting - Details of the organization’s goals and the financial management necessary to achieving those goals.
• Financial - The goals of the organization in terms of the structure of its assets and liabilities, including the financing capability based on its credit worthiness, the ability to receive credit and the use of credit lines to achieve its business objectives. • Inter-government Relations - The relationship of the organization with other government agencies that have regulatory and oversight responsibilities and shared services or citizens.

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16 • Compliance Management - The continuous monitoring of the organization’s ability to operate within regulatory requirements and community standards.
• Resource Allocation – The process for assigning and managing assets that support the organizations strategic goals.

Organization (attributes of departments)
• Governance - The role, composition, and major activities of the governing body of the organization in providing direction and oversight for the organization
• Empowerment and Values - The ability of senior members of the organization to effectively delegate power or authority to other members of the organization.
• Communication - The methods of communication commonly used in the organization and the effectiveness of this communication on the operations of the organization.
• Ethics and Code of Conduct - The set of rules outlining the ethical practices expected of management and employees of the organization.
• Leadership and Authority - The members of the organization who hold power and their ability to exercise this power effectively.
• Organizational Structure - The configuration of units and workflows to align the behavior of the units to the higher-level goals of the organization.
• Succession Planning - The planning and processes to ensure that there are highly qualified people in key leadership positions today and in the future.
• Human Capital Management - The set of practices an organization uses for recruiting, managing, developing, and optimizing employees, including performance management (The process of creating expectations for performance, monitoring progress, and measuring the results) and training (The ability for employees to gain and develop necessary tools to ensure effective operations).
• Safety - The organization strives to provide a safe working environment by effectively mitigating the risks to the safety of its employees.

Process and Operations (functional effectiveness and policies and procedures) Externa • Contracts - Contracts are adequately structured to address and mitigate risks. • Efficiency - Processes are up-to-date and efficient, resulting in efficient operations and output. • Accounting - The timely and accurate tracking of the financial position of the organization. • Payroll - The policies, processes, and systems in place to ensure that employee compensation is reliable, timely, and accurate.
• Fraud - The organization uses internal controls to prevent and/or detect fraud. • Procurement/Sourcing – The ability to acquire the necessary goods and services for operation and the process of vetting, selecting and managing supplier, vendors and contractors. • Human Resources - The knowledge, skills and experiences, and resources among personnel, which allow for the execution of the organization’s business plan and achievement of its critical success factors. • Information Systems - The facilities, systems, and connectivity in place to support data processing. • Vendor Management - The need for the organization to continuously monitor the quality and reliability of vendors it uses in the course of its business.
• Change Management - Management adapts appropriately to the evolution of the processes and operations of the organization.

Information (data governance)
• Data Integrity - Data used for making management decisions, recording information, and reporting financial activity is accurate, complete, and reliable.
• Access - The right to view or manipulate data is carefully granted and monitored to prevent the mishandling of data • Retention - The policies used by the organization to determine document retention in terms of the form of documents, how these documents are stored, and for how long these should be maintained. • Availability - Relevant critical information is available when needed in order to maintain the organization’s critical operations and processes, including when a disaster or unplanned disruption occurs • Privacy - Organization policies are in place to ensure the correct treatment of sensitive information held by the organization. • Security – Any event that could result in the compromise of organizational data. (I.e. unauthorized use, loss, damage, disclosure or modification of organizational data).

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17 13. Please use the click and drag feature to rank the five enterprise risks that you selected into a priority order, with #1 being the highest.

14. Please describe why you selected them as the top five risks.

15. How well does the City of Palo Alto manage activities to mitigate these risks?  Well – the City management is aware of the risk and has implemented activities to help mitigate this risk  Somewhat well – the City management is aware of this risk, but more effort/activities are needed to help mitigate this risk
 Not well – the City management is either not aware of this risk or hasn’t developed sufficient activities to help mitigate this risk

16. Are there any other risks that could affect operations that were not included in the risk framework?

17. Please list any potential internal audit activities you recommend based on the risks you identified.

The projects can be consultative/advisory in nature, or provide assurance:
 Internal Audit – an objective examination of evidence for the purpose of providing an independent assessment on governance, risk management, and control processes for the organization.  Advisory and related client service activities, the nature and scope of which are intended to add value and improve an organization’s governance, risk management, and control processes without the internal auditor assuming management responsibility.

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1 December 12, 2023
City of Palo Alto
Office of the City Auditor
FY2024 Annual Audit Plan
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INTRODUCTION ............................................................................................................. 1 RISK ASSESSMENT RESULTS ..................................................................................... 3 PROPOSED AUDIT PROJECTS FOR FY2024 .............................................................. 4 APPENDICES ................................................................................................................. 6

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1 Introduction
Introduction
The purpose of the audit activities performed by the Office of the City Auditor (OCA) for the City of Palo Alto (the City) is “to ensure that city management is using its financial, physical, and informational resources effectively, efficiently, economically, ethically, and equitably, and in compliance with laws, regulations, contract and grant requirements, and city policies and procedures”, according to the Palo Alto Municipal Code (Section 2.08.130).

It requires the City Auditor prepare an annual audit plan for the City Council’s approval at the beginning of each fiscal year.

In accordance with the Task #1 and Task #2 of the Baker Tilly agreement (City of Palo Alto Contract No, C21179340), Baker Tilly US, LLP (Baker Tilly) performed the initial risk assessment after having started to serve as the OCA in October 2020 and submitted in early 2021 the FY21-FY22 annual audit plan. For the second year, the OCA updated the initial risk assessment and submitted the FY22-FY23 audit plan. This report includes the proposed FY23-FY24 audit plan.

The Task #4 of the agreement requires execution of the approved annual audit plans and preparation of a task order for each project listed in the plan. The OCA will seek approval of contract task orders iteratively during FY24 in order to remain agile and accommodate changes to the plan as time passes.

Conformance with Local Ordinances and Standards
Section 2.08.130 of the Palo Alto Municipal Code defines that the mission of the OCA is to promote honest, efficient, effective, economical, and fully accountable and transparent city government. Audits are to be conducted and nonaudit services provided in accordance with Government Auditing Standards, as established by the Comptroller General of the United States, Governmental Accountability Office.

The following duties of the City Auditor exist regarding the plan and scope of internal audits.

Palo Alto City Charter
Article IV Sec. 12 requires the City Auditor to perform the following:
– Conduct audits in accordance with a schedule approved by the City Council and may conduct unscheduled audits from time to time.
– Conducts internal audits of all the fiscal transactions of the City.

Title 2 Administrative Code
Section 2.08.130 requires the City Auditor to perform the following:
– Prepare an annual audit plan for city council approval. – Identify the preliminary objectives of each audit to be performed, reflecting the purpose of the engagement and a preliminary description of the areas that may be addressed. – Conduct performance audits and perform nonaudit services of any city department, program, service, or activity as approved by the city council.

California Government Code
Section 1236 requires all cities that conduct audit activities to conduct their work under the general and specified standards prescribed by the Institute of Internal Auditors (IIA) or the Government Auditing Standards (GAO) issued by the Comptroller General of the United States, as appropriate.

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2 INTRODUCTION
Audit Activity Type
The OCA will conduct performance audits and perform financial/operational analyses of any City department, program, service, or activity as approved by the City Council in accordance with the Baker Tilly agreement.

Performance Audits
According to the Government Auditing Standards (GAO-18-568G, Section 1.21 and 1.22, page 10-12), performance audits provide objective analysis, findings, and conclusions to assist management and those charged with governance and oversight with, among other things, improving program performance and operations, reducing costs, facilitating decision making by parties responsible for overseeing or initiating corrective action, and contributing to public accountability. Performance audits may include the following four (4) audit objectives:
– Program effectiveness and results
– Internal control design and effectiveness
– Compliance with laws, regulations, and policies
– Prospective analysis

Audit Planning Considerations
While maintaining its independence and objectivity in accordance with standards, the City Auditor considers a variety of matters when developing the Annual Audit Plan, including but not limited to:
– Risk assessment – the OCA performed a risk assessment and summarized the results in a separate report (Task #2). Generally speaking, audit activities target high(er) risk areas. The results are shown the following page.
– Ability to add value – audit seeks to add value through independent and objective analysis. – City Council – the City Auditor reports to the City Council and seeks input on audit priorities. – Coverage and Prior Audits – the City Auditor considers prior audits conducted by the OCA, the financial audit, and other audit and consulting reports recently issued. – “Ripeness” and On-Going Initiatives – certain risk areas may be addressed through operational activities, which could mean they are not be ripe for audit to add value. – Scheduling – the City Auditor takes into consideration the timing of an audit and other on-going initiatives that directly relate. Putting an undue burden on City staff may exacerbate the risk at hand or other interrelated risks.

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3 Risk Assessment Results
The OCA performed a citywide risk assessment to plan for FY2024 audit activities and documented the methodology and the detailed results in a separate Risk Assessment Report. In summary, we identified the following areas rated as High or Moderate risks. In determining the audit activities to be performed in FY2024, we further reviewed these risks and functional areas and considered the matters listed in the previous page.

Department Function Risk AreaTotal Risk ScorePlanning and Development ServicesBuilding Building Permit & Inspection Process 22.8Public Works Wastewater Treatment Wasterwater Treatment Capital Program 22.4Planning and Development ServicesDevelopment Services Building Permit & Inspection Process 20.5Public Works Structures and Grounds ADA Compliance / Flood protection capital project 20.0Administrative Services Purchasing Purchasing Card Program / Vendor Master File 18.6Police Field Services Psychiatric Emergency Response Team (PERT) Program 18.2Utilities Electric Administration Power Purchase Agreement 18.2Community Services Administration and Human Services Human Services Resource Allocation Process (HSRAP) 18.0Community Services Arts and Sciences Junior Museum and Zoo (JMZ) Operation 18.0Community Services Recreation and Cubberley Contract Management 18.0Police Technical Services 911 Operations 17.2Community Services Animal Shelter Contract Management 16.9Fire Emergency Response Emergency Preparedness (Foothills Fire Master Plan) 15.8City Manager Administration and City Management Citywide Risk Management 15.6Fire Administration Safety and Wellness 15.6Planning and Development ServicesPlanning and Transportation Code Enforcement 15.4Office of Transportation Programs Intersection safety improvements 15.4Utilities Electric Engineering (Operating) Utility Asset Management 15.3Public Works Airport Airport Operations 15.1Human ResourcesAdministration, Employee Org Development and HR SystemsHR Strategy / Succession Planning 15.1Police Police Personnel Selection Recruitment and retention 14.9Administrative ServicesTreasury / Revenue Collection / WarehouseInvestment Management 14.9Administrative Services Real Estate Property Management 14.7Public Works Engineering Services Animal Shelter Renovation 14.3Community Services Open Space, Parks and Golf Emergency Preparedness (Foothills Fire Master Plan) 14.1Information Technology Operations PCI/DSS Compliance 14.1Administrative Services Accounting Grant Management 14.0Office of Emergency Services Emergency Services Emergency preparedness (Foothills Fire Mitigation Program) 13.9Utilities Electric Customer Service Utility Billing 13.9Information Technology Project Services AMI Implementation 13.8Library AdministrationBusiness Operations (Donations and grants; Inventory Management; Fines, Purchasing, etc.)13.8Human ResourcesRisk Mgmt., Safety, Workers' CompensationHR Risk Management / Workplace Safety 13.8Police Law Enforcement Services Evidence 13.8Utilities Water Customer Service Utility Billing 13.6City Manager Economic Development Economic Development 13.4Human Resources Recruitment Recruitment Process 13.3Utilities Electric Resource Management Rate setting and adjustments 13.2Public Works Administration Safety and Wellness 13.0Utilities Gas Customer Service Utility Billing 13.0Utilities Fiber Optics Customer Service Utility Billing 13.0 Item 9
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4 PROPOSED AUDIT PROJECTS FOR FY2024

Proposed Audit Projects for FY2024
Summary
The proposed audits and follow-up project for FY2024 are listed in the next page. The projects were selected from the auditable units that were rated as High or Moderate in the results of our risk assessment and selected based on some factors such as risk rating, the pervasiveness of the process or control, the audit coverage, the timing of projects, and the value-adding activities that help the City enhance the ability to manage risks, strengthen accountability, and improve efficiency and effectiveness.

The preliminary audit objectives are described for each audit listed. These objectives and scope will be further defined based on the result of the engagement level risk assessment performed at the beginning of each audit.

Amendments to this audit plans may need to be proposed during FY2024 in response to changes in the City’s environment such as organizational structure, operations, risks, systems, and controls.

For each audit, a task order is submitted to the City Council for approval before an audit is commenced. We prepared three task orders which are included in Appendix. The OCA is seeking approval from the City Council for three project that are projected to start in January 2024. Those audits are marked “X” in the Seeking Approval column.

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5 Proposed Audit Plan for FY2024

Seeking
Approval Function Project Title Audit Objectives Timeline FY24
Estimated
Hours
FY24 Cost
Public Works
Public Safety Building -
Construction Audit
(Task Order 4.8)
? Monthly invoice review
? Change order testing
? Contingency and allowance testing
? Lien waiver control
? Compliance with insurance requirements
? Closeout testing
? Verify the City’s implementation and adherence to documented project controls
March 2021 -
March 2024 87 $19,734
X Administrative
Services Purchasing Card Program
? Determine whether procurement cards are used appropriately in compliance with the City's policy and pertinent laws and regulations ? Evaluate the administration of the Purchasing Card Program for adequate internal controls to safeguard the City from fraud, waste, and abuse
January - June
2024 415 $76,540
X Public Works ADA Compliance
Determine whether improvements have been made to make facilities, programs, and services accessible in accordance with the Transition Plan and Self-Evaluation Final Study to ensure compliance with the Americans with Disabilities Act (ADA) of 1990
January - June
2024 385 $73,110
Human ResourcesRecruitment and Succession
Planning
? Determine the efficiency and effectiveness of the recruitment and hiring process
? Determine whether a formal succession plan and related policies proceudres are in place
January - June
2024 290 $58,890
Citywide Grant Management Determine whether the City has adequate interal controls to efficiently and effectively manage the grant lifecycle
January - June
2024 315 $60,330
Multiple departments Emergency PreparednessDetermine whether the City if working to prevent wildfire and adequately prepared to respond to wildfire
January - June
2024 385 $73,110
Utilities Utility Billing
? Determine whether the internal controls over the utility billing process are adequate and working effectively to ensure billing is accurate and in compliance with the City's policy and regulations.
? Determine whether billing adjustments are properly supported and approved
January - June
2024 385 $72,010
Information
Technology
Payment Card Industry Data
Security Standard (PCI DSS)
Determine whether the internal controls over the payment card processing are adequate and working effectively for the City and any thrid party service providor
January - June
2024 370 $69,680
X Citywide Follow-up on Corrective
Actions
Follow up on previous OCA audit reports to ensure corrective actions included in management responses in each audit report are completed [This activity will be performed under Task 5 (an annual report on the status of recommendations made in completed audits)]
December 2023
- June 2024 140 $30,592
TBD Ad Hoc Requests TBD TBD TBD $0
2,772 $533,996
$534,250
$254
FY23 - FY24 Budget
FY24 Ad Hoc / Contingency
FY24
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6 Appendix A: Resumes

Appendices

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7 PROFESSIONAL SERVICES TASK ORDER
TASK ORDER FY24-4.21 Purchasing Card Program
Consultant shall perform the Services detailed below in accordance with all the terms and conditions of the Agreement referenced in Item 1A below. All exhibits referencedFY24 in Item 8 below are incorporated into this Task Order by this reference. The Consultant shall furnish the necessary facilities, professional, technical and supporting personnel required by this Task Order as described below.

CONTRACT NO. C21179340
OR PURCHASE ORDER REQUISITION NO. (AS APPLICABLE)

1A. MASTER AGREEMENT NO. (MAY BE SAME AS CONTRACT / P.O. NO. ABOVE): C21179340 1B. TASK O RDER NO.: FY23-4.22

2. CONSULTANT NAME: Baker Tilly US, LLP

3. PERIOD OF PERFORMANCE: START: January 1, 2024 COMPLETION: June 30, 2024 4 TOTAL TASK ORDER PRICE: $69,940

BALANCE REMAINING IN MASTER AGREEMENT/CONTRACT TBD

5. BUDGET CODE_______________
COST CENTER________________
COST ELEMENT______________
WBS/CIP__________
PHASE__________

6. CITY PROJECT MANAGER’S NAME & DEPARTMENT:

Greg Tanaka, Chair of the City Council’s Policy and Services Committee

7. DESCRIPTION OF SCOPE OF SERVICES (Attachment A)
MUST INCLUDE:
 SERVICES AND DELIVERABLES TO BE PROVIDED
 SCHEDULE OF PERFORMANCE
 MAXIMUM COMPENSATION AMOUNT AND RATE SCHEDULE (as applicable)  REIMBURSABLE EXPENSES, if any (with “not to exceed” amount)

8. ATTACHMENTS: A: Task Order Scope of Services B (if any): N/A

I hereby authorize the performance of the
work described in this Task Order.

APPROVED:

CITY OF PALO ALTO

BY:____________________________________
Name __________________________________
Title___________________________________
Date ___________________________________

I hereby acknowledge receipt and acceptance of
this Task Order and warrant that I have authority to
sign on behalf of Consultant.

APPROVED:

COMPANY NAME: ______________________

BY:____________________________________
Name __________________________________
Title___________________________________
Date ___________________________________

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8 Attachment A

DESCRIPTION OF SCOPE OF SERVICES

Introduction

Attachment A, the Description of Scope of Services, contains the following four (4) elements:

 Services and Deliverables To Be Provided
 Schedule of Performance
 Maximum Compensation Amount and Rate Schedule (As Applicable)  Reimbursable Expenses, if any (With “Not To Exceed” Amount) Services & Deliverables

Baker Tilly’s approach to conducting an internal audit of Purchasing Card Program involves three (3) primary steps:

 Step 1: Audit Planning
 Step 2: Control Review and Testing
 Step 3: Reporting

Step 1 – Audit Planning
This step consists of the tasks performed to adequately plan the work necessary to address the overall audit objective and to solidify mutual understanding of the audit scope, objectives, audit process, and timing between stakeholders and auditors. Tasks include:
 Gather information to understand the environment under review o Understand the organizational structure and objectives o Review the City code, regulations, and other standards and expectations o Review prior audit results, as applicable
o Review additional documentation and conduct interviews as necessary  Assess the audit risk
 Write an audit planning memo and audit program
o Refine audit objectives and scope
o Identify the audit procedures to be performed and the evidence to be obtained and examined
 Announce the initiation of the audit and conduct kick-off meeting with key stakeholders
o Discuss audit objectives, scope, audit process, timing, resources, and expectations
o Discuss documentation and interview requests for the audit

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9 Step 2 – Control Review and Testing
This step involves executing the procedures in the audit program to gather information, interview individuals, and analyze the data and information to obtain sufficient evidence to address the audit objectives. The preliminary audit objective is to determine whether (1) Determine whether procurement cards are used appropriately in compliance with the City's policy and pertinent laws and regulations; (2) Evaluate the administration of the Purchasing Card Program for adequate internal controls to safeguard the City from fraud, waste, and abuse. Procedures include, but not limited to:

 Interview the appropriate individuals to gain an understanding of the organizational structure, processes, and controls related to the Purchasing Card Program.  Review policies and procedures as well as the legislative and regulatory requirements to identify the criteria to be used for evaluation of control design and effectiveness.  Select a sample of the P-Card transactions
 Compare the process and controls against the best practices.

Step 3 – Reporting
In Step 3, the project team will perform tasks necessary to finalize audit working papers, prepare and review a draft report with the stakeholders, and submit a final audit report. Tasks include:
 Develop findings, conclusions, and recommendations based on the supporting evidence gathered
 Validate findings with the appropriate individuals and discuss the root cause of the identified findings
 Complete supervisory review of working papers and a draft audit report  Distribute a draft audit report and conduct a closing meeting with key stakeholders o Discuss the audit results, finings, conclusions, and recommendations o Discuss management responses
 Obtain written management responses and finalize a report  Review report with members of City Council and/or the appropriate Council Committee

Deliverables:

The following deliverable will be prepared as part of this engagement:
 Audit Report
Schedule of Performance

Anticipated Start Date: January 1, 2024
Anticipated End Date: June 30, 2024

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10 Maximum Compensation Amount and Rate Schedule
The not-to-exceed maximum, inclusive of reimbursable expenses (as summarized below) for this Task is $69,940. The not-to-exceed budget is based on an estimate of 375 total project hours, of which 15 are estimated to be completed by the City Auditor.

Reimbursable Expenses
We plan to complete all work remote including all interviews and documentation review.

However, during the planning and fieldwork phases of this audit, the City and Baker Tilly may mutually determine it will be beneficial to perform a portion of the work on-site. Given this possibility, Baker Tilly could incur reimbursable expenses for this Task.

The not-to-exceed maximum for reimbursable expenses for this Task is $6,500.

The following summarizes anticipated reimbursable expenses:
 Round-trip Airfare – $2,000 (1 round trip flights x 2 auditors)  Ground Transportation (car rental or Uber/taxi) - $800  Hotel accommodation - $3,000 (2 rooms x 4 nights)
 Food and incidentals – $2,100

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11 PROFESSIONAL SERVICES TASK ORDER
TASK ORDER FY24-4.22 ADA Compliance Review
Consultant shall perform the Services detailed below in accordance with all the terms and conditions of the Agreement referenced in Item 1A below. All exhibits referenced FY24 in Item 8 below are incorporated into this Task Order by this reference. The Consultant shall furnish the necessary facilities, professional, technical and supporting personnel required by this Task Order as described below.

CONTRACT NO. C21179340
OR PURCHASE ORDER REQUISITION NO. (AS APPLICABLE)

1A. MASTER AGREEMENT NO. (MAY BE SAME AS CONTRACT / P.O. NO. ABOVE): C21179340 1B. TASK O RDER NO.: FY23-4.23

2. CONSULTANT NAME: Baker Tilly US, LLP

3. PERIOD OF PERFORMANCE: START: January 1, 2024 COMPLETION: June 30, 2024 4 TOTAL TASK ORDER PRICE: $73,110

BALANCE REMAINING IN MASTER AGREEMENT/CONTRACT TBD

5. BUDGET CODE_______________
COST CENTER________________
COST ELEMENT______________
WBS/CIP__________
PHASE__________

6. CITY PROJECT MANAGER’S NAME & DEPARTMENT:

Greg Tanaka, Chair of the City Council’s Policy and Services Committee

8. ATTACHMENTS: A: Task Order Scope of Services B (if any): N/A

I hereby authorize the performance of the
work described in this Task Order.

APPROVED:

CITY OF PALO ALTO

BY:____________________________________
Name __________________________________
Title___________________________________
Date ___________________________________

I hereby acknowledge receipt and acceptance of
this Task Order and warrant that I have authority to
sign on behalf of Consultant.

APPROVED:

COMPANY NAME: ______________________

BY:____________________________________
Name __________________________________
Title___________________________________
Date ___________________________________

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12 Attachment A

DESCRIPTION OF SCOPE OF SERVICES

Introduction

Attachment A, the Description of Scope of Services, contains the following four (4) elements:

Baker Tilly’s approach to conducting an internal audit of ADA (Americans Disabilities Act) Compliance involves three (3) primary steps:

 Step 1: Audit Planning
 Step 2: Control Review and Testing
 Step 3: Reporting

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13 Step 2 – Control Review and Testing
This step involves executing the procedures in the audit program to gather information, interview individuals, and analyze the data and information to obtain sufficient evidence to address the audit objectives. The preliminary audit objective is to determine whether improvements have been made to make facilities, programs, and services accessible in accordance with the Transition Plan and Self-Evaluation Final Study to ensure compliance with the Americans with Disabilities Act (ADA) of 1990. Specifically, we will determine whether (1) necessary remediation work, projects, or programs are included in the annual capital budget to meet the ADA Transition Plan Schedules; (2) the progress of the remediation efforts and any change in laws and regulations are assessed periodically to ensure continued improvements in ADA compliance; (3) the City monitors the contractor’s compliance with the contractual requirements to ensure that the City receives necessary services. Procedures include, but not limited to:

 Interview the appropriate individuals to gain an understanding of the organizational structure, processes, and controls related to the ADA compliance efforts.  Review policies and procedures as well as the legislative and regulatory requirements to identify the criteria to be used for evaluation of control design and effectiveness.  Review the relevant documents such as ADA Transition Plan, ADA Self-Evaluation Report, the Transition Plan Schedule, progress assessment reports, and the contract with the consultants.
 Compare the process and controls against the best practices.

Deliverables:

The following deliverable will be prepared as part of this engagement:
 Audit Report
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14 Schedule of Performance

Anticipated Start Date: January 1, 2024
Anticipated End Date: June 30, 2024

Maximum Compensation Amount and Rate Schedule
The not-to-exceed maximum, inclusive of reimbursable expenses (as summarized below) for this Task is $73,110. The not-to-exceed budget is based on an estimate of 385 total project hours, of which 15 are estimated to be completed by the City Auditor.

Reimbursable Expenses
We plan to complete all work remote including all interviews and documentation review.

The not-to-exceed maximum for reimbursable expenses for this Task is $6,500.

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15 PROFESSIONAL SERVICES TASK ORDER
TASK ORDER FY24-05 Various Reporting & City Hotline (Modified) Consultant shall perform the Services detailed below in accordance with all the terms and conditions of the Agreement referenced in Item 1A below. All exhibits referenced in Item 8 below are incorporated into this Task Order by this reference. The Consultant shall furnish the necessary facilities, professional, technical and supporting personnel required by this Task Order as described below.

CONTRACT NO. C21179340
OR PURCHASE ORDER REQUISITION NO. (AS APPLICABLE)

1A. MASTER AGREEMENT NO. (MAY BE SAME AS CONTRACT / P.O. NO. ABOVE): C21179340 1B. TASK O RDER NO.: FY24-05

2. CONSULTANT NAME: Baker Tilly US, LLP

3. PERIOD OF PERFORMANCE: START: July 1, 2023 COMPLETION: June 30, 2024 4 TOTAL TASK ORDER PRICE: $120,592 90,000

BALANCE REMAINING IN MASTER AGREEMENT/CONTRACT TBD

5. BUDGET CODE_______________
COST CENTER________________
COST ELEMENT______________
WBS/CIP__________
PHASE__________

6. CITY PROJECT MANAGER’S NAME & DEPARTMENT:

Greg Tanaka, Chair of the City Council’s Policy and Services Committee

8. ATTACHMENTS: A: Task Order Scope of Services B (if any): N/A

I hereby authorize the performance of the
work described in this Task Order.

APPROVED:

CITY OF PALO ALTO

BY:____________________________________
Name __________________________________
Title___________________________________
Date ___________________________________

I hereby acknowledge receipt and acceptance of
this Task Order and warrant that I have authority to
sign on behalf of Consultant.

APPROVED:

COMPANY NAME: ______________________

BY:____________________________________
Name __________________________________
Title___________________________________
Date ___________________________________

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16 Attachment A

DESCRIPTION OF SCOPE OF SERVICES

Introduction

Attachment A, the Description of Scope of Services, contains the following four (4) elements:

Baker Tilly will provide the following services in Task 5:

 Quarterly Reports
 Annual Status Report
 Provision of the City Hotline
 Office Administrative Functions, including quarterly follow-up activities and testing of corrective actions for the completed audits

Deliverables:

Legislative documents will be prepared to present the financial statements and reports prepared by an external auditor to the Finance Committee  Quarterly Reports (4 in FY24)
 Annual Status Report
Schedule of Performance

Anticipated Start Date: July 1, 2023
Anticipated End Date: June 30, 2024
Maximum Compensation Amount and Rate Schedule
The not-to-exceed maximum, inclusive of reimbursable expenses (as summarized below) for this Task is $120,592 90,000. The not-to-exceed budget is based on an estimate of 440 300 total project hours, of which 170 are estimated to be completed by the City Auditor.

Reimbursable Expenses
Baker Tilly anticipates several site visits by the City Auditor throughout FY2024 planning one on-site fieldwork week. Given this possibility, Baker Tilly could incur reimbursable expenses for this Task.

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17 The not-to-exceed maximum for reimbursable expenses for this Task is $19,500 19,000.

The following summarizes anticipated reimbursable expenses:
 Round-trip Airfare – $6,000 (6 round trip flights)
 Ground Transportation (car rental or Uber/taxi) - $2,400  Hotel accommodation - $9,000 (24 nights)
 Food and incidentals – $2,100 1,600

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City Council
Staff Report
From: CAO Committee
Report Type: ACTION ITEMS
Lead Department: Human Resources
Meeting Date: January 22, 2024
Report #:2401-2482
TITLE
Approval of an Employment Agreement and Approval of Resolution to Appoint Mahealani Ah Yun to the Position of City Clerk at an Annual Salary of $165,000. CEQA Status – Not a Project

RECOMMENDATION
The Council Appointed Officers Committee recommends the City Council approve of an employment agreement and adopt a resolution to appoint Mahealani Ah Yun to the position of City Clerk at an annual salary of $165,000.

BACKGROUND
The City Council makes appointments to council-appointed officer positions. The appointment of the City Clerk position is subject to the approval of the Council.

The duties of the City Clerk are outlined in the Charter of the City of Palo Alto and Palo Alto Municipal Code section 2.08.110. The City Clerk proactively supports the City Council and works collaboratively with other Council Appointed Officers (CAOs) and City departments to facilitate the Council’s vision, while upholding the duties and role of the City Clerk’s Office with confidence and independence. The City Clerk must apply accuracy, attention to detail, timely communication and responsiveness, and ensure high-quality work products. The City Clerk is responsible for providing clear communications and maintaining strict standards of accountability.

The former City Clerk Lesley Milton resigned in May 2023, to take a new opportunity at another California city. On May 1, 2023, the Council Appointed Officers (CAO) Committee met to discuss a recommendation to the City Council regarding the City Clerk vacancy. The CAO Committee motion which passed 3-0 recommended that Council authorize the following:

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1. Invite letters of interest and a resume from interested internal applicants for the interim City Clerk position, have HR review for qualifications, and schedule a closed session interview of candidates with the full Council pending a full recruitment process.

2. Contract with the recruitment firm Peckham & McKinney who conducted the previous City Clerk recruitment, and the literature previously used be included in a late packet report on the next meeting agenda.

The City Council approved the CAO Committee recommendation on May 8, 2023 (Report #2305-1405).

On June 5, 2023, the City Council appointed Mahealani Ah Yun as the interim City Clerk, as recommended by the CAO Committee.

ANALYSIS
As requested and authorized by Council, the executive recruitment firm Peckham & McKenney conducted an extensive search for the City of Palo Alto’s next City Clerk. Qualified applicants were evaluated for the position, and Mahealani Ah Yun was selected by the City Council as the top candidate.

Mahealani Ah Yun has served as Deputy City Clerk for the City of Palo Alto beginning in November 2021. She has served as Interim City Clerk from June 5, 2023 to the present. Under the direction of the former City Clerk, Ms. Ah Yun closely supported Council members and assisted in supporting five Council standing committees and nine boards and commissions, preparing minutes, and facilitating the agenda production process. In addition, Ms. Ah Yun administered public records requests and played a key role in launching the new agenda management system. As Interim City Clerk, Ms. Ah Yun served as a team leader and championed the adoption of new technology and procedures to promote access to public meetings and records. Ms. Ah Yun has over 5 years of experience working for a non-profit agency, the Service League of San Mateo, working closely with the San Mateo County Sheriff’s Office staff overseeing correctional programs and services.

Ms. Ah Yun holds a Master’s Degree of Public Administration from Notre Dame de Namur University and a Bachelor of Science Degree in Psychology, Community and Criminal Justice, and Political Science. She is a Notary Public and holds several other industry certifications and related Clerk training.

FISCAL/RESOURCE IMPACT
The City Clerk position is budgeted within the City Clerk’s Office and is included in the FY 2024 Adopted Budget. Ms. Ah Yun will be paid an annual salary of $165,000 and will receive standard Item 10
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management benefits consistent with the Compensation Plan for Unrepresented Management and Professional employees.

STAKEHOLDER ENGAGEMENT
Staff, in coordination with the Council Appointed Officers Committee, City Council, and the executive recruitment firm, completed the interview process to bring forward this action.

ATTACHMENTS
Attachment A: Employment Agreement City Clerk Mahealani Ah Yun Attachment B: Resolution Appointing Mahealani Ah Yun City Clerk APPROVED BY:

Sandra Blanch, Human Resources Director
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1 EMPLOYMENT AGREEMENT

BETWEEN CITY OF PALO ALTO
AND
Mahealani Ah Yun
THIS AGREEMENT is between the City of Palo Alto, a municipal corporation and chartered city ("City") and Mahealani Ah Yun (“Ah Yun”). It is effective on the latest date next to the signatures on the last page.

This Agreement is entered into on the basis of the following facts:

A. City, acting by and through its City Council, wishes to employ Ah Yun as its City Clerk, subject to the terms and conditions set forth in this Agreement, the Palo Alto Municipal Code and the Charter of the City of Palo Alto (the "Charter").

B. Under the Charter, the City Clerk is appointed by the City Council. Notwithstanding any provision of the City of Palo Alto Merit System Rules and Regulations, the City Clerk serves on an at-will basis, with no expectation of continued employment, and with no right to pre-or post- separation due process or appeal.

C. Ah Yun desires to be employed by the City as its City Clerk, subject to the terms and conditions in this Agreement, the Palo Alto Municipal Code, the Charter, the Palo Alto Merit System Rules and Regulations, and all other applicable laws, resolutions, and policies.

D. The City and Ah Yun wish to establish specific terms and conditions relating to compensation and benefits and related matters.

BASED UPON THE FOREGOING, THE CITY AND AH YUN AGREE AS FOLLOWS:

1.Employment. The City appoints Ah Yun as its City Clerk for an indefinite term to begin on January 23, 2024. Except as otherwise provided herein, Ah Yun's employment with the City shall be governed by the City Council adopted Compensation Plan for Management and Professional Personnel and Council Appointees, as it currently exists and may be changed from time to time.

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2 2.Duties of the City Clerk. Ah Yun will perform the duties established for the City Clerk by the Palo Alto City Charter, by the Palo Alto Municipal Code, by direction given by the City Council, and as otherwise provided by law, ordinance, or regulation. Ah Yun agrees to comply with all federal, state and local laws, ordinances, rules and regulations applicable to or associated with these duties.

2.1.Full Energy and Skill. Ah Yun will devote her full energy, skill, ability, and productive time to the performance of her duties.

2.2.No Conflict. Ah Yun will not engage in any employment, activity, consulting service, or other enterprise, for compensation or otherwise, which is actually or potentially in conflict with or which interferes with the performance of her duties. Ah Yun acknowledges that she is subject to the various conflict of interest requirements found in the California Government Code and state and local policies and regulations.

2.3.Permission Required for Outside Activities. Ah Yun will not engage in any employment, activity, consulting service, or other enterprise, for compensation or not, without written permission of the City Council.

3.Salary. While performing the duties of City Clerk, Ah Yun will receive a base salary within the range provided in the City Council-approved Compensation Plan for Management and Professional Personnel and Council Appointees, as it currently exists and may be changed from time to time. Ah Yun will receive an initial gross base annual salary of one hundred sixty-five thousand dollars ($165,000.00), beginning on the Employment Start Date. This amount is subject to authorized or required deductions and withholding, prorated, and paid on the City's regular paydays. Ah Yun is an exempt employee under applicable wage and hour law and her base salary shall be compensation for all hours worked. The City agrees that the amount of Ah Yun's base annual salary will not decrease, except as part of a permanent decrease that is consistent with the Fair Labor Standards Act.

4.Benefits and Allowances. Ah Yun will be eligible for, and shall receive, all regular benefits (i.e., health insurance, PERS contributions to the extent paid by the City, etc.) and vacation, sick leave, and management leave, as are generally provided to management employees under the City Council approved Compensation Plan for Management and Professional Personnel and Council Appointees, as it currently exists and may be changed from time to time.

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3 5.Additional Benefits and Allowances. In addition to the benefits specified in section 4, Ah Yun will receive the following additional benefits and allowances:

5.1.Severance. If Ah Yun is terminated or asked to resign she shall, upon execution of a release of all claims against the City, be eligible for a severance payment according to the City Council-adopted Compensation Plan for Management and Professional Personnel and Council Appointees, as it currently exists and may be changed from time to time, currently equivalent to a maximum of twelve (12) weeks of salary and benefits. No severance shall be paid if Ah Yun is terminated for serious misconduct involving abuse of her office or position, including but not limited to waste, fraud, violation of the law under color of authority, misappropriation of public resources, violence, harassment or discrimination. If Ah Yun is later convicted of a crime involving such abuse of her position, she shall fully reimburse the City as set forth in Government Code section 53243.3.

6.Additional Expenses of Employment. The City shall pay the cost of any fidelity or other bonds required by law for the City Clerk.

7.Duration of Employment. Ah Yun understands and agrees that she has no constitutionally protected property or other interest in her employment as City Clerk. Ah Yun waives any and all rights, if any, under the Merit System Rules and Regulations, including without limitation, the right to pre-or post-disciplinary due process. Ah Yun understands and agrees that she works at the will and pleasure of the City Council and that she may be terminated or asked to resign at any time,
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4 with or without cause. Ah Yun may terminate this agreement (terminating all employment) upon 30 days written notice to the Mayor.

8. Miscellaneous.

8.1.Notices. Notices given under this Agreement shall be in writing and shall be either: a) served personally; or b) sent by facsimile (provided a hard copy is mailed within one (1) business day); or c) delivered by first-class United States mail, certified, with postage prepaid and a return receipt requested; or d) sent by Federal Express, or some equivalent private mail delivery service. Notices shall be deemed received at the earlier of actual receipt or three (3) days following deposit in the United States mail, postage prepaid. Notices shall be directed to the addresses shown below, provided that a party may change such party's address for notice by giving written notice to the other party in accordance with this subsection.

CITY: Attn: Mayor, City Council
250 Hamilton Avenue, Palo Alto CA 94301
Phone (650) 329-2226
AH YUN: Mahealani Ah Yun
250 Hamilton Avenue, Palo Alto CA 94301
Phone (650) 329-2630

8.2.Entire Agreement/ Amendment. This Agreement constitutes the entire understanding and agreement between the parties as to those matters contained in it, and supersedes any and all prior or contemporaneous agreements, representations and understandings of the parties. This Agreement may be amended at any time by mutual agreement of the parties, but any such amendment must be in writing, dated, and signed by the parties and attached hereto.

8.3.Applicable Law and Venue. This Agreement shall be interpreted according to the laws of the State of California. Venue of any action regarding this Agreement shall be in the proper court in Santa Clara County.

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5 8.4.Severability. In the event any portion of this Agreement is declared void, such portion shall be severed from this Agreement and the remaining provisions shall remain in effect, unless the result of such severance would be to substantially alter this Agreement or the obligations of the parties, in which case this Agreement shall be immediately terminated.

8.5.Waiver. Any failure of a party to insist upon strict compliance with any term, undertaking, or condition of this Agreement shall not be deemed to be a waiver of such term, undertaking, or condition. To be effective, a waiver must be in writing, signed and dated by the parties.

8.6.Representation by Counsel. Ah Yun and the City acknowledge that they each did, or had the opportunity to, consult with legal counsel of their respective choices with respect to the matters that are the subject of this Agreement prior to executing it.

8.7.Section Headings. The headings on each of the sections and subsections of this Agreement are for the convenience of the parties only and do not limit or expand the contents of any such section or subsection.

Ah Yun City of Palo Alto
Mahealani Ah Yun Mayor
Approved as to Form:

City Attorney’s Office
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NOT YET APPROVED
Resolution No.

A Resolution of the City Council for the City of Palo Alto appointing Mahealani Ah Yun as the Palo Alto City Clerk.

R E C I T A L S
A. The Palo Alto City Charter specifies the duties and functions of the City Clerk for the City of Palo Alto;
B. The Charter further specifies that the City Council shall appoint the City Clerk; C. The Council received notification that City Clerk Lesley Milton was resigning effective May 19, 2023;
D. The Council Appointed Officers Committee recommended and the full City Council authorized staff to conduct a nationwide search through Peckham and McKenney, an executive search firm specializing in Public Sector recruitment.

E. On December 19, 2023 Council interviewed highly qualified candidates identified through this search and selected Mahealani Ah Yun as the next City Clerk of the City of Palo alto; NOW, THEREFORE, the Council of the City of Palo Alto RESOLVES as follows:

SECTION 1. The Council hereby appoints Mahealani Ah Yun as City Clerk for the City of Palo Alto;
SECTION 2. Mahealani Ah Yun shall serve as City Clerk at the will of the Council as provided by the Charter, and shall further serve according to all of the terms and provisions of the Charter and the Municipal Code; and
SECTION 3. The Council hereby appoints and employs Mahealani Ah Yun for an indefinite term that begins January 23, 2024.

INTRODUCED AND PASSED:

AYES:

NOES:

ABSENT:

ABSTENTIONS:

ATTEST:

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City Council
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Administrative Services
Meeting Date: January 22, 2024
Report #:2312-2470
TITLE
Adoption of a Resolution and Approving an Easement Relocation Agreement Relocating and Vacating a 25 Foot Public Service Easement at the Castilleja School at 1263 Emerson Street and 220 Embarcadero Road (also commonly known as 1310 Bryant Street), Assessor Parcel Numbers 124-12-033 & 124-12-034; CEQA status – categorically exempt.

RECOMMENDATION
Staff recommends that Council:

1. Approve and authorize the City Manager or designee to execute the Easement Relocation Agreement relocating a public service easement on the Castilleja School located at 1263 Emerson Street and 220 Embarcadero Road (also commonly known as 1310 Bryant Street); and

2. Adopt a resolution summarily vacating a public service easement on the Castilleja School located at 1263 Emerson Street and 220 Embarcadero Road (also commonly known as 1310 Bryant Street) after the relocated easement has been recorded.

ANALYSIS
On April 20, 1992, the City Council introduced and passed a resolution ordering the vacation of a street easement on a portion of Melville Avenue between Bryant and Emerson Streets, while reserving a 25-foot easement benefitting the City for underground and overhead public utilities purposes.1 This Public Utility Easement (“PUE”) is associated with the property owned by the Castilleja School Foundation (“Castilleja”).2 The property’s Assessor Parcel Numbers are 124-12- 033 & 124-12-034 and is commonly known as 1310 Bryant Street, but a Preliminary Report prepared by Chicago Title Company, dated November 1, 2023, and referenced as Order No. 60605270-606-TEO-JM, identifies the property address for Assessor Parcel Number 124-12-033 1 General Vacation, Resolution No. 7086, recorded as Recording Number 11386298, Book M218, Page 0593 of Official Records of Santa Clara County.
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as 1263 Emerson Street and a separate Preliminary Report dated November 9, 2023, and referenced as Order No. 60604321-606-TEO-JM, identifies the property address for Assessor Parcel Number 124-12-034 as 220 Embarcadero Road. This item was originally scheduled on August 14, 2023. To maintain clear visibility on items related to the Castilleja School development, the item was reagendized to the December 18, 2023 agenda and revised with a clearer title to reference the school by name and the commonly known address, in addition to the addresses and parcel numbers found in title reports. Staff also notified individuals that requested to be notified of actions related to the school. At the December 18, 2023 meeting, Mayor Kou, Council Member Burt, and Council Member Lauing requested to pull Agenda Item Number 11. The item is now again reagendized, but as an action item.

On June 6, 2022, the City Council approved Castilleja’s applications for Architectural Review with Parking Adjustment, Conditional Use Permit, and Variance, and made several findings, determination and declarations.3 In connection with those applications, the City Council made it a Condition of Approval that Castilleja relocate the existing 25-foot PUE to be within the boundaries of the driveway that is proposed near the Emerson Street and Melville Avenue intersection. Castilleja has agreed to relocate the existing 25-foot public utility easement. To relocate the easement, the City will execute an Easement Relocation Agreement creating a 25- foot PUE within the proposed new driveway and adopt a resolution to vacate the existing easement in accordance with Section 8333 of the California Streets and Highways Code.

STAKEHOLDER ENGAGEMENT
This item has been coordinated with Jorgenson, Sigel, McClure & Flegel, LLP, legal counsel to Castilleja School. Planning staff will notify individuals that have previously provided emails to receive notice related to the school’s Council-approved planning entitlement project.

FISCAL/RESOURCE IMPACT
The property owner paid the summary easement vacation fee in FY 2023, which amounts to $1,842, as set forth in the FY 2023 Municipal Fee Schedule.

ENVIRONMENTAL REVIEW
Council action to relocate the public service easement is within the scope of the Environmental Impact Report prepared for the Castilleja School Project and adopted by the Council on June 6, 2022 (SCH #2017012052).

ATTACHMENTS
Attachment A: Summary Vacation Resolution & Easement Relocation Agreement - Castilleja School at 1263 Emerson Street and 220 Embarcadero Road (also commonly known as 1310 Bryant Street)
APPROVED BY: Kiely Nose, Assistant City Manager
3 https://www.cityofpaloalto.org/files/f65eb77d-4d17-41a6-8158-44f1df3b649f/Casti-Signed-ROLUA-and- Exhibit.pdf
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ATTACHMENT A

SUMMARY VACATION & EASEMENT RELOCATION AGREEMENT
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Vacation Resolution &
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School at 1263 Emerson
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Embarcadero Road (also
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Recorded at no charge in accordance with
Streets & Highways Code Section 8336 at
the request of and when recorded return to:

City of Palo Alto
Real Estate Division
250 Hamilton Avenue
Palo Alto, CA 94301

SPACE ABOVE LINE FOR RECORDER’S USE

APN: 124-12-034
Address: Castilleja School
1263 Emerson Street and
220 Embarcadero Road
(a.k.a. 1310 Bryant Street)
Palo Alto, CA 94301

SUMMARY VACATION
RESOLUTION NO. _____

RESOLUTION OF THE COUNCIL OF THE CITY OF PALO ALTO

SUMMARILY VACATING AND RELOCATING A PUBLIC SERVICE EASEMENT

AT THE CASTILLEJA SCHOOL,
1263 EMERSON STREET AND 220 EMBARCADERO ROAD
(A.K.A. 1310 BRYANT STREET), PALO ALTO, CA

WHEREAS, Section 8333 of the Streets and Highways Code authorizes the City Council to summarily vacate a public service easement in any of the following cases:
(a) the
easement has not been used for the purpose for which it was dedicated or acquired for five consecutive years immediately preceding the proposed vacation, (b) the date of dedication or acquisition is less than five years, and more than one year, immediately preceding the proposed vacation, and the easement was not used continuously since that date , (c) the easement has been superseded by relocation, or determined to be excess by the easement holder, and there are no other public facilities located within the easement; and

WHEREAS, under that certain General Vacation, Resolution No. 7086, recorded as Recording Number 11386298, Book M218, Page 0593 of Official Records of Santa Clara County, the City of Palo Alto reserved a 25-foot easement for public utilities purposes benefitting the City, and any right necessary to construct, maintain, operate, replace, remove, renew or enlarge any underground public utility facilities , existing overhead public utility facilities, sanitary sewers, storm drains and appurtenant structures in, upon, over, under or across the easement area; and

WHEREAS, in connection with that certai n A CTION NO. 2022 -02 RECORD OF THE COUNCIL OF THE CITY OF PALO ALTO LAND USE ACTION 1310 BRYANT STREET (CASTILLEJA) ARCHITECTURAL REVIEW 19PLN -00116 WITH PARKING ADJUSTMENT CONDITIONAL USE PERMIT AND VARIANCE 16PLN- 00238, the City imposed Condition 28 (EASEMENT RELOCATION): “Applicant shall relocate the existing 25- Item 11
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Vacation Resolution &
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foot Public Utility Easement (PUE) to be within the boundaries of the driveway that is proposed near the Emerson Street and Melville Avenue intersection”; and

WHEREAS, the City Council of the City of Palo Alto intends to approve the Easement Relocation Agreement in Attachment “A” attached to this resolution to accept the relocated easement and summarily vacate the existing easement as more particularly described and depicted in the exhibits of that agreement; and

NOW, THEREFORE, the City Council does hereby RESOLVE as follows:

SECTION 1 . This vacation is made under the authority of California Streets and Highways Code Chapter 4 of part 3 of Division 9, commencing at Section 8330 et. seq.

1. The public service easement described on Exhibit “A” and depicted on the plat map as Exhibit “B” of Attachment “A” (Easement Relocation Agreement) will be superseded by relocation as described on Exhibit “C” and depicted on the plat map as Exhibit “D”; and

SECTION 2. Based upon the findings made in Section 1 of this Resolution and the provisions of Section 8333 of the Streets and Highways Code, the City Council does hereby order that public service easement as shown on the said Exhibits “A” and “B” of Attachment “A” shall be summarily vacated and relocated as shown on the said Exhibits “C” and “D” of Attachment “A”.

SECTION 3. The City Clerk , acting by and through the Real Property Manager, is hereby directed to record at the Santa Clara County Clerk -Recorder’s Office a certified copy of this Resolution, including the Maps.

SECTION 4 . The public service easement for utilities and incidental purposes described in Exhibit “A” and depicted in the plat map as Exhibit “B” in Attachment “A” will be relocated to the area described in Exhibit “C” and depicted in the plat map as Exhibit “D” in Attachment “A” from and after the date of recordation of the documents identified in Section 3 of this Resolution.

SECTION 5. Council action to relocate the public service easement is within the scope of the Environmental Impact Report prepared for the Castilleja School Project and adopted by the Council on June 6, 2022 (SCH #2017012052).

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Vacation Resolution &
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Bryant Street)

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Vacation Resolution &
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Agreement - Castilleja
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Embarcadero Road (also
commonly known as 1310
Bryant Street)

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Attachment A - Summary
Vacation Resolution &
Easement Relocation
Agreement - Castilleja
School at 1263 Emerson
Street and 220
Embarcadero Road (also
commonly known as 1310
Bryant Street)

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Attachment A - Summary
Vacation Resolution &
Easement Relocation
Agreement - Castilleja
School at 1263 Emerson
Street and 220
Embarcadero Road (also
commonly known as 1310
Bryant Street)

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Attachment A - Summary
Vacation Resolution &
Easement Relocation
Agreement - Castilleja
School at 1263 Emerson
Street and 220
Embarcadero Road (also
commonly known as 1310
Bryant Street)

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Vacation Resolution &
Easement Relocation
Agreement - Castilleja
School at 1263 Emerson
Street and 220
Embarcadero Road (also
commonly known as 1310
Bryant Street)

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Vacation Resolution &
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Agreement - Castilleja
School at 1263 Emerson
Street and 220
Embarcadero Road (also
commonly known as 1310
Bryant Street)

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Attachment A - Summary
Vacation Resolution &
Easement Relocation
Agreement - Castilleja
School at 1263 Emerson
Street and 220
Embarcadero Road (also
commonly known as 1310
Bryant Street)

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Attachment A - Summary
Vacation Resolution &
Easement Relocation
Agreement - Castilleja
School at 1263 Emerson
Street and 220
Embarcadero Road (also
commonly known as 1310
Bryant Street)

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City Council
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Administrative Services
Meeting Date: January 22, 2024
Report #:2311-2226
TITLE
Review and Accept the FY 2025 - FY 2034 Long Range Financial Forecast (LRFF) and FY 2025 Budget Development Guidelines as Recommended by the Finance Committee, CEQA Status – Not a Project

RECOMMENDATION
The Finance Committee and Staff recommend the City Council accept the General Fund Long Range Financial Forecast (LRFF) for Fiscal Year 2025-2034 (Attachment I) and the FY 2025 annual Budget Development Guidelines (Attachment II) and direct staff to use this forecast as the starting point for the initiation of the FY 2025 budget process.

EXECUTIVE SUMMARY
The FY 2025 - 2034 Long Range Financial Forecast (LRFF) was reviewed with the Finance Committee on December 5, 2023 (Attachment I) along with the annual Budget Development Guidelines (Attachment II) and were unanimously approved by the Committee. Base Case Long Range General Fund forecast projects a shortfall of $6.0 million in FY 2025, followed by shortfalls ranging from $5.4 million in FY 2026 down to $0.5 million in FY 2029. These amounts are consistent with previous projections used as part of the two-year budget balancing strategy when adopting the FY 2024 Budget and a reserve was adopted by Council to provide funding for the FY 2025 projected gap. This report summarizes the key discussion points with the Finance Committee and includes additional information requested by the Finance Committee to provide context and/or additional data points of reference to the City Council.

Per City Council policy, items that are unanimously approved by the Finance Committee are placed as a consent agenda item for the City Council. Though this report was approved unanimously, staff and the Committee have placed this item on the City Council’s action agenda for deliberation of the full Council in acknowledgement of the importance for financial planning in the continued varied economic conditions.

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BACKGROUND/ANALYSIS
The LRFF is a preliminary ten-year forecast based on the most current information available, actual revenues for FY 2023, and projected results through FY 2024 at the point in time of release (December 2023). General Fund expenditures are based on current City Council approved service levels (Base Case) compared to projected revenues over the next ten years. This Forecast allows staff and City Council to look at both the short-term and long-term financial status of current service levels in the General Fund to inform daily policy decisions and evaluate long-term goals and ongoing challenges. The Committee and staff recommend use of the Base Case for the FY 2025 Budget planning.
•Base Case Long Range General Fund forecast projects a shortfall of $6.0 million in FY 2025, followed by shortfalls ranging from $5.4 million in FY 2026 down to $0.5 million in FY 2029. FY 2030 has a surplus of $6.6 million which continues to grow through FY 2034. This forecast maintains current service levels approved in FY 2024 and should be used for planning purposes to assist in gauging effects of major policy interventions against a likely “status quo” version of the future. These amounts are consistent with previous projections used as part of the two-year budget balancing strategy when adopting the FY 2024 Budget.
•Alternate forecast scenario that reflects a 1% loss in economically sensitive revenue.

Compared to the Base Case, this scenario reduces revenues by $2.1 million in FY 2025 and maintains and increases the projected shortfalls over the next ten years, ranging from $8.1 million in FY 2025 to $3.0 million in FY 2029. FY 2030 begins a surplus of $3.9 million which continues to grow through FY 2034.
•Alternate forecast that reflects a 1% compensation adjustment (1%) in FY 2026. Compared to the Base Case, this scenario increases expenses by $1.2 million in FY 2026 and maintains and increases projected shortfalls over the next ten years, ranging from $6.7 million in FY 2026 to $1.9 million in FY 2029. FY 2030 begins a surplus of $5.2 million which continues to grow through FY 2034.

These alternate forecasts were done separately to show the impacts of each scenario in isolation; however, aspects of both alternate forecasts may occur in conjunction in the future.

The economy continues to demonstrate resiliency to a formal recession and this forecast reflects a continued level of stagnation offset by inflation. Risks remain due to world conflicts and potential local economy impacts. Several persistent issues across the City are improving but continue to impact the ability to provide fully authorized service levels. These include staff turnover, recruitment and retention, and supply chain issues and inflation that continue to increase costs across all aspects of the City. All of these factors lead to heightened intensity of financial forecasting and the budget development process. These forecast figures present staff Item 12
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with the challenge of prioritizing the growing needs of the City with the fiscal sustainability of these needs.

Based on this forecast, ensuring ongoing financial stability will require continued prioritization of spending and utilization of one-time surplus funding or the Uncertainty Reserve to address short- term deficits in the next few years. More detailed guidelines and policies to inform the development of the FY 2025 budget are discussed in Attachment II.

As directed by the City Council, staff will include recommendations for addition of key resources and appropriation of funds as part of the FY 2024 Midyear process, including a review of objectives deferred in the development of the FY 2024 Adopted Budget. The Mid-Year Review report is scheduled for Council review in February 2024.

Finance Committee Review
As part of the Finance Committee’s review of the LRFF, several requests were made to provide context and/or additional data points of reference. Staff has compiled a summary of these items below and details in Attachment III.

Vacancy Analysis
The current vacancy rate is approximately 13.5% in the General Fund, excluding public safety.

This preliminary vacancy rate is point in time and does not consider actions currently in progress for recruitments, promotions, and other staffing shifts. To better align with the status of vacancies, this forecast increases the vacancy estimate from previously assumed rate of 3% to 5% in all years. This results in additional savings of approximately $2 million annually, or a projected $5 million in total vacancy savings each year. This additional funding fully forecasts the vacancy savings the City has seen in recent years of $1.7 million as shown in Table 1.

Table 1 provides a historical summary of budget to actuals variance in the Salary and Benefits category for General Fund departments. The budget includes the budgeted vacancy factor assumption, therefore this savings is what has been achieved beyond planned levels. The table includes the annual vacancy rate and the percentage difference from budgeted funding levels.

As shown below, the vacancy savings from the previous year have varied from -$1.7 million to +$1.7 million over the last five years from the budgeted vacancy assumption, reflecting a variance of less than 1.5% as compared to the budgeted.

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TABLE 1: Historical General Fund Vacancy Savings ($’s in Millions) 2019 2020** 2021** 2022 2023
Total General Fund Vacancy Savings $1.3M $1.3M -$1.7M $1.6M $1.7M Annual Vacancy Rate 12% 12% 15% 12% 13%
General Fund Adjusted Budget* $123.3M $134.7M 124.1M $134.3M $148.4M Variance to Budget 1.1% 1.0% -1.4% 1.2% 1.2%
* The annual budget reflects salaries and benefits net of the forecasted vacancy factor each year. ** FY 2020 and FY 2021 are anomaly years as they were significantly impacted by adjustments made due to the COVID-19 pandemic where a number of factors are impacting these rates including but not limited to a hiring freeze as well as eventual position reductions citywide.

Operating - General Fund
2019 2020 2021 2022 2023
Funding by Fiscal Year (in Millions) $0.8 $0.8 $1.1 $8.8 $12.1 Notable funding includes but is not limited to, the Federal Transportation Agency (FTA) contributed to transportation-related projects along with the Santa Clara County Measure B 1 City Council, April 11, 2022; Staff Report # 13915,
https://portal.laserfiche.com/Portal/DocView.aspx?id=59425&repo=r-704298fc&searchid=4fe0b40a-9941-44aa- 8e0d-6479fb037f48
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Transportation Improvement Program, and Stanford University supporting the PA Link program, Federal Health and Human Services (HHS) funding was appropriated for mental health services, COVID-19 relief through CARES and American Rescue Plan Act (ARPA) funds, fire fighter staffing funding via Staffing for Adequate Fire and Emergency Response (SAFER), and investments in safety equipment through the Santa Clara County Office of Emergency Services (SCC OES).

Capital Improvement Fund
External revenues supporting capital improvement projects fall into three broad categories:
local/regional grants (including Measure B), state grants, and federal grants. The table below summarizes the amounts, sources, and uses of these revenues by fiscal year from FY 2019-FY 2023. The amounts in each fiscal year, which total $50.5 million, do not include reappropriations.
2019 2020 2021 2022 2023
Funding by Fiscal Year (in Millions) $12.4 $4.3 $12.6 $4.0 $17.0 Turning to currently budgeted revenues in the Capital Improvement Fund, the table below shows how Measure K, the City of Palo Alto’s business tax, and Measure B, a Santa Clara sales tax that benefits transportation projects, are currently planned to be allocated across capital improvement projects based on the 2024-2028 Capital Improvement Plan (CIP). These allocations may change during the FY 2025 budget and 2025-2029 CIP development cycle. 2024 2025 2026 2027 2028
Measure K - City of Palo Alto Business Tax $0.75 $1.5 $3.0 $3.0 $3.0 PL-24000 - Meadow Dr./ Charleston Rd. Rail Grade
Separation and Safety Improvements
$0.43 $0.75 $2.0 $2.0 $2.0
PL-24001 - Churchill Avenue Rail Grade Separation
and Safety Improvements
$0.32 $0.75 $1.0 $1.0 $1.0
Measure B - Santa Clara County Sales Tax $10.5 $7.8 $27.3 $27.3 $20.3 PL-05030 - Traffic Signal and Intelligent
Transportation Systems
$0.6 $0.3 $0.3 $0.3 $0.3
PL-12000 - Transportation and Parking
Improvements
$0.5 - - - -
PL-17001 - Railroad Grade Separation and Safety
Improvements
$1.9 $1.0 $2.0 $2.0 $1.0
PL-24000 - Meadow Dr./Charleston Rd. Rail Grade
Separation and Safety Improvements
$4.5 $4.5 $15.0 $15.0 $15.0
PL-24001 - Churchill Avenue Rail Grade Separation
and Safety Improvements
$3.0 $2.0 $10.0 $10.0 $4.0
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Human Services Resource Allocation Process (HSRAP)
As part of the LRFF, staff provided additional details to facilitate the City Council's review of a referral to consider pegging HSRAP budget allocations to a benchmark, such as a percentage of General Fund budgeted expenditures. Staff confirmed that funding levels in prior years were not tied to a percentage of the General Fund budgeted expenditures. As part of the LRFF review, the Finance Committee elected to continue the discussion on this referral in February 2024 with any recommended changes forwarded to the City Council for consideration as part of the FY 2025 budget process. The status of the referral has been updated from 'complete' to 'in progress', as indicated in the status update completed on December 5, 2023 (CMR 2307-17942).

FISCAL/RESOURCE IMPACT
Financial implications from this report and input from the City Council will be considered in the City Manager’s development of the Fiscal Year 2025 budget. Upcoming milestones related to the City’s fiscal standing and the FY 2025 Budget Process include:
•February (Council) – FY 2024 Mid-Year Budget Review and Second Quarter Financial Report
•March/April (Finance Committee and Utilities Advisory Commission or UAC) – Five Year Utility Financial Plans and FY 2025 Utility Rate Recommendations •May (Council) – FY 2025 Proposed Operating and Capital Budgets Published •May (Finance Committee) – FY 2025 Proposed Budget Hearings, including Utility Rates, Municipal Fees, and Five-Year Capital Improvement Plan
•June (Finance Committee) – FY 2024 Third Quarter Financial Report •June (Council) – Adoption of the FY 2025 Operating and Capital Budgets, Utility Rates, and Municipal Fees.

STAKEHOLDER ENGAGEMENT
The preliminary forecast for FY 2025 represents the beginning of the fiscal year 2025 budget development process. As in previous years, City Council discussion of the LRFF will provide guidance to staff in the budget development process. It is anticipated that conversations with City Council and the community will occur through public budget hearings in Spring 2024, according to the standard budget adoption process.

ENVIRONMENTAL REVIEW
This report is not a project for the purposes of the California Environmental Quality Act.

Environmental review is not required.
2 Finance Committee, December 5, 2023; Staff Report # 2307-1794, https://portal.laserfiche.com/Portal/DocView.aspx?id=69142&repo=r-704298fc&searchid=b316cc0f-f843-4290- 8390-b2abbc3f61d4
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ATTACHMENTS
Attachment A: FY 2025-2034 Long Range Financial Report (LRFF), CMR 2307-1773 Attachment B: FY 2025 Budget Development Guidelines
Attachment C: Additional Information as Requested by Finance Committee APPROVED BY:

Kiely Nose, Assistant City Manager
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FinanceCommittee
Staff Report
From: City Manager
Report Type: ACTIONITEMS
LeadDepartment: Administrative Services
Meeting Date: December 5, 2023
Report #:2307-1773
TITLE
Review and Recommend the City Council Accept the FY2025- 2034 Long RangeFinancial Forecast and FY2025 Annual Budget Development Guidelines

RECOMMENDATION
Staff recommends that the Finance Committee review and recommend that the City Council accept the General Fund Long RangeFinancial Forecast (LRFF) for FiscalYear2025-2034 and the FY 2025 annual Budget Development Guidelines (Attachment A) and direct staff to use this forecast as the starting point for the initiation of the FY2025 budget process.

EXECUTIVESUMMARY
Annually, the City presents a ten-year General Fund Long Range Financial Forecast (LRFF) in December that marks the beginning of the annual budget process. This preliminary forecast is based on the most current information available, actual revenues for FY 2023, and projected results through FY2024 at the point in time of release. General Fund expenditures are based on current City Council approved service levels compared to projected revenues over the next year.

The Base CaseLong Range General Fund forecast projects a $6.0 million shortfall in FY 2025, followed by shortfalls ranging from $5.4 million in FY2026 down to $0.5 million in FY2029. FY2030 has a surplus of $6.6 million which continues to grow through FY2034.

This forecast maintains current service levels approved in FY2024 and should be used for planning purposes to assistin gaugingeffects of major policy interventions against a likely status quo” version of the future. These amounts are consistent with previous projections used aspart of the two- year budget balancing strategy when adopting the FY 2024 Budget.

Staff modeled an alternate forecast scenario that reflects a 1% loss in economically sensitive revenue and the impact on the General Fund over the forecast period.

Compared to the BaseCase, this scenario reduces revenues by $2.1 million in FY2025 and maintains and increases the projected shortfalls over the next ten years, ranging from Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
Attachment A - FY 2025-
2034 Long Range
Financial Report (LRFF),
CMR 2307-1773

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8.1 million in FY2025 to $3.0 million in FY2029. FY2030 begins a surplus of $3.9 million which continues to grow through FY2034.

Staff modeled an alternate forecast that reflects a one-time compensation adjustment 1%) in FY2026 and the impacts on the General Fund over the forecast period. Compared to the Base Case, this scenario increases expenses by $ 1.2 million in FY 2026 and maintains and increases projected shortfalls over the next ten years, ranging from $ 6.7 million in FY2026 to $1.9 million in FY2029. FY2030 beginsa surplus of $5.2 million which continues to grow through FY2034.

Thesealternate forecasts were done separately to show the impacts of each scenario in isolation; however, aspects of both alternate forecasts may occur in conjunction in the future.

The economy continues to demonstrate resiliency to a formal recessionand this forecast reflects a continued level of stagnation offset by inflation. Risks remain due to world conflicts and potential local economy impacts. At the national level, economic growth through the third quarter of calendar year 2023, was led by robust consumer (retail) spending despite a persistently high inflation rate and high borrowing costs with interest rates at their highest level in 22 years.

Monetary policy tightening actions by the USFederalReservecontinue to achievea “soft landing” whereby there’s a slowdown in economic growth that avoids recession for the purpose of stopping the economy from overheating and continuing to experience higher inflation. Economic uncertainty continues; however, the current outlook projects a weak economy in 2024 followed by a return to trend growth rates by 2025. Other risks that will continue to be monitored are a future protracted ( U.S.) government shutdown, geopolitical events, and election resulting in changing national economic policies in 2025. All of these factors lead to heightened intensity of financial forecasting and the budget development process. These forecast figures present staff with the challenge of prioritizing the growing needs of the City with the fiscal sustainability of these needs.

Consistent with the projections in the FY2024 Adopted Budget, this LRFFreflects deficits in the near term with revenues falling below expenses. Aspreviously recommended, the shortfall in FY 2025 will be addressedby the Uncertainty reserve, that was proactively set aside during the prior year for this purpose. Also, this LRFFassumes support from both local ballot Measures K Business Tax) and L (Gas Utility Fund Equity Transfer) that were approved by the voters in November 2022. As discussedlater in this report, funding from the GasEquity Transfer will be incrementally increased to the voter approved 18% of gasrevenue by FY2027 to support general fund activities, and BusinessTaxfunding has been programmed towards three Council approved priorities for investments in public safety, transportation and train crossingsafety, and affordable housing and unhoused support.

Several persistent issues across the City are improving but continue to impact the ability to provide fully authorized service levels. These include staff turnover, recruitment and retention, and supply chain issuesand inflation that continue to increase costsacrossall aspectsof the City.

Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
Attachment A - FY 2025-
2034 Long Range
Financial Report (LRFF),
CMR 2307-1773

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Development of the FY 2025 budget and planning for the subsequent years outlined in the forecast will need to be done strategically over the next several months in order to balance the increased service level needs of the community with the financial resources currently projected.

With these variables, ongoing revenues are unable to keep pace with expensesin the short term.

The LRFFis a tool to model financial forecasting assuming resources and services are operating at authorized levels. City staff will continue to review and refine these projections to establish the FY 2025 budget and use this forecast to begin internal planning for budget balancing solutions. Individual fiscal yearswill vary from this forecast suchashigher vacancyrates in staffing or changes in revenue estimates. These circumstances, specific to a given year, typically represent one-time resources that are factored into the annual budget planning process. More detailed guidelines or Budget Policies to inform the development of the FY 2025 budget are discussedat the end of this document (Attachment A).

Included in this report and subsequent documents are the following:

The Economy: discussionof the current financial climate of the United Statesto the local economy of the City of Palo Alto (details can be found in Attachment B) Summary Long RangeFinancial Forecast including Revenue and Expenseassumptions in FY2025- 2034 (details can be found in Attachments Cand D) o Financial status of the General Fund as of the FY2024 Adopted Budget o Brief discussionof FY2023 surplus funding
o Updated FY2024 revenue assumptions based on current projections FY2025 Budget Development Guidelines to inform the Budget process (Attachment A) Alternate scenariosto the basecaseforecast to demonstrate financial impacts to the City from:
o Impacts from a moderate recession
o Impacts from a citywide 1% increase of salariesand benefits Responseto the Human ServicesResourceAllocation Process (HSRAP) Funding Referral from the FY2024 Adopted Budget process (Attachment E)

BACKGROUND
Annually the Office of Management and Budget produces a ten-year General Fund Long Range Financial Forecast (LRFF). The LRFFreflects staff’s best estimates on the projected revenues and expenditures over the next ten years based on the information that is currently available. It is important to note that the LRFFis a planning document and is separate and distinct from the development of the City’s annual Operating and Capital Budgets. There are assumptions and parameters modeled in the LRFF, but these assumptions are revised and refined as more information becomes available through the budget development process.

The LRFFcontains a comprehensive review of the costs to provide current City Council approved service levels, including current contracts, updates to salariesand benefits based on the current population of employees, and the current labor contracts in effect. The LRFFalso reviews the status of the current economy and various economically sensitive revenues such as SalesTax, Documentary Transfer Tax, Property Tax, and Transient OccupancyTax to explain key trends in those areas. This Forecast allows staff and City Council to look at both the short-term and long- Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
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term financial status of current service levels in the General Fund to inform daily policy decisions and evaluate long-term goals and ongoing challenges.

The Economy
Nationally, as of October 2023, the consumer price index (CPI) which measures changes in the prices paid by consumers for a basket of goods and services, was 3.2%. This is lower than the

7.7% CPI from a year ago, but still indicates increasing costs. The unemployment rate, as of October 2023, is 3.9% which is up from 3.4% at the beginning of the 2023 calendar year and may indicate an economic slowdown in the coming quarters. Despite these factors, economic growth through the third quarter of calendar year 2023, was led by robust consumer (retail) spending, and the gross domestic product ( GDP), a measure of all goods and services produced in the economy, increased at an annualized rate of 4.9%. The UCLAAnderson outlook is “The oft- predicted but never seen ‘recessionnext quarter’ hasnow faded in the face of expansionary fiscal policy, a new national industrial policy, and a consumer who is happy to continue spending.” This outlook projects a weak economy in 2024 followed by a return to trend growth rates by 2025.

This weaker outlook translates into 1% to 2% GDPgrowth for the remainder of 2023 with the expectation this will gradually increase to a 2% to 3% growth through 2024.

The local economy continues to show strong performance in the first half of calendar year 2023.

The UCLAAnderson outlook for California does not forecast a recession based on the state’s strong employment and economic growth, although real personal income is forecasted to remain flat in 2023 and grow between 1% to 2% through 2025. California’s unemployment rate, similar to the national trend, has risen in calendar year 2023 and is expected to be in the mid to high 4% through 2025. Additional details on economic statistics such as GrossDomestic Product (GDP), unemployment, and Consumer Price Index (CPI) can be found in Attachment B in greater length.

ANALYSIS
Palo Alto serves a diverse community with a broad range of unique services that adds to the complexity of managing a balanced budget and healthy fiscal outlook. Thisannual General Fund LongRangeFinancialForecastis being developed at a time of perceived economic stagnation and geo-political unrest. Theeconomy iscurrently not trending into recessionaryperiod that hasbeen predicted for the past several quarters; however, continued economic uncertainty heightens the intensity of financial forecasting and the budget development process. The rigor previously demonstrated by the Counciland staff to tackle the challengesof the pandemic continues asstaff works to prioritize the growing needs of the City with the fiscal sustainability of these needs.

The FY2025-2034 ‘BaseCase’ revenue and expense assumptions include updates on the status of the general fund as of the FY2024 Adopted Budget, the FY2023 fiscal year end, and current FY2024 projected assumptions. Aswith all forecasts, there is uncertainty regarding the revenue and expenditure estimates contained in this document. Instead of a recession, this forecast assumes economic stagnation at the beginning of the ten-year period, in line with current projections from UCLAAnderson. Major tax revenues have rebounded from impacts of the Covid- 19 pandemic and projected to be at or above pre-pandemic levels through the ten-year forecast.

Expensesare programmed to maintain servicelevelsbasedon Councilapproval. Asa result, some Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
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limited term programs are not extended through the entire ten-year forecast, but discussedin this report to indicate that continuing the programs would require additional resources.

Investments in Capitalprojects are consistent with the 2024-2028 Capital Improvement Planwith continued focus on completing the Council approved 2014 Infrastructure Planprojects aswell as maintaining and upkeeping the City’s current facilities and infrastructure. The Uncertainty Reservethat was established aspart of the FY2023 Mid-YearReview was used to balance the FY 2024 Adopted Budget, but asplanned and approved by Council, still hasfunding available to solve the projected shortfall in FY2025. A strategic plan will be needed to solve the estimated shortfalls in the subsequent years of the forecast.

BaseCase
Table 1 displays the projected General Fund revenues and expenditures over ten years and the cumulative net operating margin.

Theoperating margin reflects the variance between the projected GeneralFund revenues and expenditures for each year of the forecast or the annual surplus or shortfall.

The net operating margin is presented on a one-time basis, as the annual surplus or shortfall for a given year, and on an incremental basis.

The incremental forecast assumes that each shortfall is addressed completely with ongoing solutions in the year it appears and that each surplus is completely expended with ongoing expenditures. It is the City’s goal to remain in balance on an ongoing basis, so the incremental figure is useful to illustrate the additional surplus and/ or shortfall attributed to a particular fiscal year. To the extent a shortfall is not resolved, or a surplus is not expended on an ongoing basis, it is important to understand that the remaining budget shortfall or surplus will remain and be pushed to the following year.

The Base Case financial forecast projects a shortfall of $ 6.0 million in FY 2025, followed by shortfalls ranging from $ 5.4 million in FY2026 down to $ 0.5 million in FY2029. FY2030 has a surplus of $6.6 million which continues to grow through FY2034. Basedon these assumptions, the cumulative net operating margin, or ongoing surplus, during the forecast period is a surplus of $36.5 million.

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TABLE2: FY2025 – 2034 Long RangeFinancial Forecast Net Operating Margin ( BaseCase) Revenue Assumptions
TheFY2023 Annual ComprehensiveFinancialReport (ACFR), scheduled for review by the Finance Committee on November 28, 2023, reported higher annual earnings for General Fund revenues as compared to the prior year; most major tax revenues experienced growth back to pre- pandemic levels due to the improved local economy, high price trends, and inflation ( CMR2308- 18571). This increased major tax revenue trend has continued through the first quarter ( Q1) of FY2024 with several categories tracking higher than the FY2024 Adopted Budget levels. In FY 2024, staff estimates an overall increase in total revenues of $ 3.1 million from the Adopted 279.6 million to $282.7 million. Further discussionof changesto specific categories canbe found in Attachment C, but increases are anticipated in SalesTax, Property Tax, and Utility Users Tax and slightly offset by decreases in Transient Occupancy Tax and Documentary Transfer Tax. If these additional revenues continue to materialize in FY 2024, Staff anticipates returning to Council as part of the as part of the FY2024 Mid- Year Budget Review to recommend using this funding to increase the uncertainty reserve to help mitigate impacts from a recession as well as smooth the near-term shortfalls seen in the first few years of this LRFF.

A summary of revenue assumptions are discussed here, extensive information regarding each revenue category can be found in Attachment C.

Tax revenues constitute approximately 60% of General Fund resources. In FY2025, the forecast projects a $7.8 million or 5.0% increase from FY2024 projected levels ($156.8 1 Finance Committee, November 28, 2023, CMR2308-1857:
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million to $ 164.6 million). This increase is primarily attributed to higher anticipated receipts for SalesTax, Property Tax, and Transient OccupancyTax (TOT) categories. o SalesTaxesis anticipated to increase $1.9 million or 5.1% from FY2024 ($ 37.7 million to $39.6 million). Revenuein this category continue to experience growth as consumer spending continues despite high inflation and perceptions of a looming recession.
o Property Taxes make up the largest source of the General Fund’s revenue, approximately 25%. In FY2025, this revenue is anticipated to increase $3.3 million or 5.1% from FY 2024 ($ 64.6 million to $ 67.9 million). Robust residential and commercial property sales are anticipated to continue to grow this source annually.
o Transient Occupancy Taxes are impacted by business and other leisure/ non- leisure travel and experienced significant reductions in the past few years due to a number of factors resulting from the pandemic. However, this revenue was able to return to pre-pandemic levels in FY2023. In FY2025, this revenue is anticipated to increase $1.2 million or 4.6% from FY2024 ($25.5 million to $26.7 million).

The forecast for non-tax revenues projects a $1.6 million or 3.2% increasein FY2025 from FY2024 adopted levels. Thisincreaseis primarily attributable to the alignment of revenue estimates for the Stanford agreement to provide Fireand Dispatch services, and increased rental revenue from other funds and departments that use General Fund maintained City facilities. These increases are partially offset by decreases in limited term revenue through the Staffing for Adequate Fire and EmergencyResponse (SAFER) Grant Program and decreased reimbursement revenue from other funds for administrative services.

The changesby revenue category can be seen in Tables3 and 4 below. Major tax revenue trends are shown in Table 5 and discussedin greater detail in Attachment C.

TABLE3: General Fund Revenue Forecast
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TABLE4: General Fund Revenue Forecast Year to Year Percentage Change TABLE5: City of Palo Alto Major General Fund Revenues
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ExpenseAssumptions
As part of developing the FY2025-2034 Forecastexpenditure budget, the General Fund expense categories have been adjusted by removing FY 2024 Adopted Budget one-time expenses and updating major cost elements such as salary and benefits costs. The table below displays the expense forecast and when compared to the FY 2024 Adopted Budget, growth of 0.9% is expected in FY2025. The small overall annual growth is due to the elimination of large one-time reserves in FY2023 that offset the increase in expensesin other categories such as Salary and Benefits, Allocated Charges, and Transfers to Other Funds.

A summary of expense assumptions is discussed here, extensive information regarding each expense category can be found in Attachment D.

Salary and Benefits are projected to increase $7.1 million or 4.3% from the FY 2024 166.9 million to $ 174.0 million). This is primarily attributable to increases in salaries

2.9 million or 3.1%) and pension costs ($4.5 million or 10.2%). o A general wage adjustment of 2% is included for all employees starting in either January 2025 or July 2025 for all years of the forecast once negotiated contracts sunset.
o A reserve is included for potential changesto future labor costsincluding, changes in vacancyrates, labor and benefit rate variability, and inflation assumptions.

Long Term contributions to pension and other post-employment benefits reflect increasesover the prior year and capital investments are being phased through the first three to five years of the forecast:
o Pension 115 Trust contributions are calculated using a lower 5.3% discount rate for normal cost ascompared to CalPERS6.8%. Through FY2024, it is expected that

67.6 million ($ 44.6 million in the General Fund) in supplemental principal contributions will be made to the Pension Trust. Staff expects to reach sufficient balancesin the PensionTrust to begin paying down CalPERSunfunded liabilities in the next 1-2 years, consistent with the Retiree Benefit Funding Policy. TheFY2025 budget estimates $13.8 million ($ 8.3 million in the General Fund) in supplemental contributions, a $0.5 million or 4.1% increase from FY 2024 Adopted levels of

13.2 million.
o California Employers’ Retiree Benefit Trust (CERBT) Fund contributions for Retiree medical costs are calculated using a lower 5.75% discount rate as compared to a

6.25% assumption. Through FY 2024, it is expected that $ 11.1 million in supplemental principal contributions will be made to the CERBTTrust. TheFY2025 Budget estimates $16.9 million ($ 10.8 million in the General Fund) for ADC, an approximate $0.5 million or 2.9% increase from FY2024 levels of $16.4 million. o Capital Infrastructure transfers reflect the goal established as part of the 2022- 2026 Capital Improvement Plan (CIP) to restore the base portion of this transfer to pre-pandemic levels by FY2026. The local economy has recovered from the COVID-19 pandemic, and estimated transfers from TOTrevenues in FY2025 are currently projected to increase to $12.3 million and the base transfer to increase to $12.4 million for a total $24.7 million transfer to the Capital Improvement Fund.

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Inflationary assumptions in this long range reflect the record inflation being seen at present with an assumption that the interest rate adjustments by the Federal Reservewill eventually level off inflationary increases. A 4% annual inflation is assumed throughout the ten- year forecast to estimate cost increasesfor non-salary servicesand equipment.

Expensesare programmed to maintain service levels based on Council approval. As a result, some limited term programs are not extended through the entire ten-year forecast, but discussedlater in this report to indicate that continuing the programs would require additional resources. A couple examples of these programs are the Psychiatric Emergency Response Team (PERT), and the PA Link on demand transit service. Both programs have partial funding in the LRFFbut would need additional resources to continue them through the entire ten-year period. This LRFFalso includes the City’s committed investment of $ 7.0 million in operating expenses for the partnership with LifeMoves and Project Homekey site services ($1.0 million starting in FY 2025 and is programmed through FY2031). The timing of the funding was shifted as a result of $2.0 million from FY 2023 and FY 2024 being approved by the Council to be used to fund expensesrelated to the Homekey Facilities capital project (PE-24005).

TABLE6: General Fund ExpenseForecast and Year to Year Percentage Change Budget Stabilization Reserve
The City's Budget Stabilization Reserve (BSR) serves as the primary General Fund reserve. By policy, the BSRis maintained in the range of 15 to 20% of General Fund operating expenditures, with a target of 18.5%. Aspart of the FY2024 Adopted Budget, the Council approved keeping the BSRat the 20% level to mitigate risks associatedwith economic uncertainty. Maintaining the BSR at this higher level through FY 2025 is a policy decision to be determined as part of the development of the FY 2025 budget. Any reduction to the reserve below 15% requires City Council approval.

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The BSRis used to fund unanticipated one-time costs as opposed to ongoing or recurring operating expenditures; ongoing revenue or expense trends are updated as part of the annual budget process to adjust ongoing needs. The City's intent is to fund ongoing programs and serviceswith ongoing dollars. Maintaining the BSRat 18.5% or higher provides flexibility for the City to deal with unforeseen issues that may arise. Furthermore, establishing, and following, sound fiscal reserve policies has been a strong factor in the City being rated AAA by rating agencies.

Based on information reported in the FY2023 Annual Comprehensive Financial Report (ACFR) CMR 2308-18572, the City’s current BSRbalance is $57.2 million, approximately $ 3.3 million above the 20% target of $ 53.9 million for FY 2024. Staff anticipates returning to Council in February 2024 with the FY2024 Mid- Year Review and recommendations in alignment with the allocation below for the appropriation of BSRfunds above the 20% level. Theseactions will leave the BSRat $53.7 million or $0.2 million below the 20% Council recommended level.

TABLE7: Budget Stabilization Reserve (BSR) Summary (in millions) General Fund BSRBalance, June 30, 2023 $ 61.5
FY2024 Approved Adjustments to the BSRBalance ($ 4.3)
Subtotal: BSRBalance, After Approved Adjustments $ 57.2 FY2024 RECOMMENDEDAdjustments to the BSRBalance
to be considered in FY2024 Mid- Year Budget Review, 115 Trust and Infrastructure Reservecontribution)

3.5)
Current Projected FY2024 BSRLevel, (June 30, 2024)$ 53.7 As mentioned previously, the increased major tax revenue trend has continued through the first quarter (Q1) of FY2024 with several categories tracking higher than the FY2024 Adopted Budget levels. In FY2024, staff estimates an overall increase in total revenues of $3.1 million from the Adopted $279.6 million to $282.7 million. Further discussionof changesto specific categories can be found in Attachment C, but increases are anticipated in SalesTax, Property Tax, and Utility UsersTaxand slightly offset by decreasesin Transient OccupancyTaxand Documentary Transfer Tax. If these additional revenues continue to materialize in FY2024, Staff will return to Council aspart of the FY2024 Mid- YearBudget Reviewto recommend adjustments to the FY2024 budget to recognize this one-time revenue to increase the uncertainty reserve to continue to bridge the near-term shortfalls seen in the first few years of this LRFF.

In addition to the BSR, funding of approximately $10.1 million remains in an Uncertainty Reserve that was established aspart of the FY2023 Mid- YearReviewto fund the two- year budget strategy for FY2024 and FY2025. The $10.1 million was assumedto be used to fund items deferred from 2 Finance Committee, November 28, 2023, CMR2308-1857:
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the FY 2024 Adopted Budget as part of the FY 2024 Mid- Year Review ($1.1 million) and any potential shortfalls in FY2025 ($9.0 million). Thesefunds are one-time in nature so once they are spent, they are not available for ongoing needs.

Assumptions NOTIncluded in Forecast
It should be noted that this forecast does not include several potential impacts to the FY2025- 2034 LRFFthat are outlined below. Theseitems are known projects or areas of investment that are priorities but have not been fully developed in terms of costs and timelines. This is not intended to be a comprehensive list nor in any priority order.

Sustainability and Climate Action Plan (S/CAP): In early 2020, the City launched an update of the Sustainability and Climate Action Plan (S/CAP) Framework to determine the goalsand key actions needed to meet its sustainability goals, including the goal of reducing greenhouse gas (GHG) emissions to 80 percent below 1990 levels by 2030 (the “80x30” goal). Investments have been made across various City funds related to S/CAP including: a new Grid Modernization for Electrification capital project ( EL-24000), realignment of staff to manage infrastructure improvement projects; scaling existing successful energy efficiency programs; performing and analyzing research in alternative energy sources, sustainable water supplies, carbon sequestration options; and increasing incentives for voluntary electrification programs. The S/CAPThree-YearWork PlanReport was approved by Councilin Spring2023; however, continued implementation will require significant resources, including internal staffing and consultant expertise.

Labor negotiations: As of the timing of this report, all labor agreements for full-time employees are scheduled to expire by June2025 except for the ServiceEmployeesInternational Union (SEIU) agreement, which expires January2025. Consistent with Council direction in previous LRFF’s, a general 2% assumption is included for all employees starting in either Januaryor July2025 for all years of the forecast sincenegotiated wage rates are not yet available for that time; this is not as a commitment to future negotiations and is for forecasting purposes. Additionally, this forecast includes a level of reserve for potential changesin employee compensation in future agreements for competitive wages and other terms of employment. Actual funding needs may differ, depending on outcomes of future labor negotiations. Additional information on salary and benefit assumptions and reservesfor future agreements is included in Attachment D.

Capital Infrastructure 2014 Plan: The2014 Councilapproved Infrastructure Planof $125.8 million in project costs was based on construction and design costs with data from 2012. The Infrastructure Plan’s funding status hasshifted, asconstruction costshave increased and the City is required to pay prevailing wages. The FY2024 Adopted Capital Budget anticipated that these projects would cost $270.7 million. Staff is working to maintain these projects within the current budget; however, project costs can fluctuate based on market conditions at the time of construction award.

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Grade Separation: The grade separation project consists of four at-grade crossings along the Caltrain corridor in the City of Palo Alto located at Palo Alto Avenue, Churchill Avenue, Meadow Drive, and Charleston Road. As part of the FY2024 Capital budget, the Council approved two capital projects to separate them, specifying the funding sources and costs associated with Churchill Avenue (PL-24001) and Meadow Drive and Charleston Road (PL-24000) which are being designed together. Currently, the RailCommittee is reviewing alternatives for these crossingsto further narrow and select the preferred alternative( s) for recommendation to the City Council.

Studieswere completed to refine underpassalternatives by seekinginput from stakeholders such asthe Pedestrian and BicycleAdvisory Committee, PaloAlto Unified SchoolDistrict, and Stanford University to assistin narrowing down grade separation alternatives.

Following locally preferred alternative selection, the next phase will include preparing preliminary engineering and environmental documents for the three crossings. The Valley Transportation Authority ( VTA) 2016 Measure B Caltrain Grade Separation funding is available to the City for additional studies and the next phases of the project which include preliminary engineering and environmental review, right-of-way, design, and construction. In addition to this, the City Council adopted advisory spending guidelines stating its intention to expend a portion of the revenues from the Business Tax on the rail grade separation project ( Supplemental Memorandum AA13).

Thefull funding needed to complete the grade crossingsproject is estimated aspart of the capital projects that were established; however, funding necessaryto complete this work will exceed funding currently identified for this project through the VTA and Business Tax revenue.

Therefore, additional resources will need to be explored to plan and fund these grade separations, including City staff pursuing additional funding through grant opportunities as they become available and other financing mechanisms. Staff hasbeen successfulin grant applications and received notifications of grant awards for $ 6 million for Preliminary Engineering and Environmental work from the Federal Rail Administration and $23.8 million for final design of Churchill Avenue from the State.

Parks Master Plan: The Parks Master Plan4was finalized in 2017; however, when approved it identified a need to develop a funding strategy and this is still in process. As such, this forecast does not yet contemplate the necessaryinvestments to fully execute this plan.

City owned assets operated by non-profit organizations: This Forecast does not include any additional capital or operating investments for partners of the City such asbut not limited to the AvenidasSenior Center, the Ventura Child CareCenter, PaloAlto Animal Shelter facility, PaloAlto History museum (300 Homer Avenue Roth facility), Project Homekey, or the SeaScout Building.

Many of these have estimates or current projected liabilities, however, as projects evolve and 3 City Council, August 10, 2022, Supplemental Memorandum # AA1:
https:// www. cityofpaloalto. org/ files/ assets/public/ agendas-minutes- reports/ at-places- memo/ 20220810apmccsm.pdf
4 Palo Alto Parks, Trails, Natural Open Space & Recreation Master Plan:
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costs change these are not included. As costs around potential capital or operating investments for these assetssolidify, staff will return to City Council to address them as appropriate. As part of the FY 2023 Adopted Capital Budget the City Council established the Roth Building Rehabilitation Phase1 capital project ( PF-23001) and directed a funding strategy for the Roth Building Rehabilitation Project, which consists of utilizing $ 5.4 million from a variety of funding sources.

CubberleyCommunity Center Redevelopment: A new lease between the City and PAUSDfor the school district owned portion of Cubberley commenced on July1, 2020 and reduced the amount of building spaceleased to the City (discussedin the General Expense - Cubberley Leasesection of this report). On March 13, 2023 the PAUSDBoard of Education provided a letter to the City Council inviting the City to submit one or more proposals to transfer a portion of PAUSD-owned land at Cubberley to the City. This could be through a land swap, acquisition or ground lease.

Basedon discussionswith Council (CMR2380-19495) an Ad Hoc of the City Council and staff are developing the proposal. Staff is working on next steps for repair of Cubberley Gyms A and B, which have been closed since February 2022 due to damage caused by water line breaks.

Remediation work of damaged areas has started, and the final phase of the repair work is scheduled to begin in February 2024. Replacement of the gym’s heating system is not included in the scope of the remediation project.

Loans for special projects: From time to time the City’s General Fund will assist other City operations with modest cash flow loans to bridge fiscal years. Additions and other initiatives funded in other funds may need financial support from the General Fund to ensure they are fully implemented, examples include cashflow needs for the Regional Water Quality Control Plant upgrades, or major capital investments in which financing could be secured at a later time (e.g. a loan for the airport fund was established to ensure matching grant funds for major capital improvements).

Legislative Updates: Various actions at the state and federal level that could impact the City of Palo Alto have not been incorporated into this forecast due to the changing context and uncertainty of the quantitative impacts of potential legislative changes. As the potential impacts of various legislative initiatives are clarified, appropriate adjustments will be identified and brought forward as part of future budget development cycles.

Tax revenue alignment with updated ComprehensivePlan: The 2030 Comprehensive Plan was adopted in FY2018, including the potential fiscal impact of various land use scenarios. The fiscal impact of this plan and various land use scenariosare not factored into this forecast.

Aging or Noncompliant Infrastructure: The City maintains indoor and outdoor facilities, many of which have been identified in the City’sADAtransition plan and by the Infrastructure Blue Ribbon Commission as requiring capital project work to bring them up to full ADA compliance and/ or 5 City Council, October 16, 2023, CMR2308-1949:
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sufficient conditions. Facilities of concern include Cubberley Community Center, Foothills Park Restrooms, and Lucie Stern Community Theatre restrooms. Staff continues to program work needed in this area as part of the Americans with Disabilities Act Compliance capital project (PF- 93009); however, the entire scope of work needed in this area exceedscurrent resources.

GeneralLiability Umbrella ExcessPremiums: TheCity’sGeneralLiability Program provides funding to cover various insurance policies for City-owned equipment and machinery. The City is self- insured for the first $ 1.0 million in losses per occurrence and participates in a Joint Powers Authority for coverageup to $55 million per occurrence. Theseexpensesare allocated to citywide departments. General Liability Umbrella ExcessPremiums are anticipated to increase in future years due to significant national events and natural disasters such as claim costs for Hurricane Ian. Staff will bring forward adjustments for these costs as part of future budget cycles as they become available.

Significant Projects or Changing Operational Needs:

Updates to several significant programs, codes and ordinances are expected to be necessaryin the near future asstaff work to implement programs and investments to major plans such asthe City’s housing element, fee and organizational studies for services such as planning and development services, and new facility needs under review such as a fire training center. Many of these projects and organizational needs are under way or being studies for further planning and will likely have financial impacts that are unknown at this time.

Limited Term Programs: There are several programs currently in progress that are funded on a limited term basisper Councilapproval. If these programs are recommended to continue through the ten- year forecast period additional resources would be needed.

ThePsychiatricEmergencyResponseTeam (PERT) program in the PoliceDepartment pairs a police officer in plain clothes and a mental health clinician to respond to callsfor mental health emergencies. PERTis recommended to be supported with Stanford University Medical Center (SUMC) funding through FY2027. To continue the program in FY2027, an additional $ 0.2 million would be needed, with an ongoing cost of $0.4 million annually starting in FY2028.

PALink, the on-demand transit service, is currently being administered asa pilot program with grant funding from the VTA. The program is partially funded in FY 2025, but an additional $0.7 million would be needed to fully fund the program with an ongoing annual need of approximately $ 1.8 million starting in FY2026.

The Downtown Streets Team that provides cleaning services in the University Avenue area was previously funded through the Community Development Block Grant (CDBG); however, in FY2023 this funding source was determined to be ineligible for these services and costs were shifted to the General Fund on a one-time basis. Funding for the program hasbeen programmed through FY2025; however, $0.2 million would be needed annually to maintain this program.

Vehicle Fleet Electrification: Currently the City’s policy is to consider electric vehicles and then other alternative fuel vehicles when replacing existing vehicles. Transitioning the vehicle fleet to Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
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full Electric Vehicles (EVs) is part of the City’s sustainability goals. As part of the FY2024 budget process, it was estimated that approximately $6.0 million acrossall funds will be needed annually

2.6 million above the FY2024 budget) in order to replace all City vehicles with EVs.

FY2025 Budget Development Guidelines
As discussedearlier in this document, this preliminary forecast represents the initial steps of the FY 2025 budget development process. Due to the clear overlap of projecting the City’s fiscal condition and the need to shape service level expectations, staff recommends that the inclusion of Budget Development Guidelines be incorporated into the discussionsat the beginning of an annual budget process. The FY 2025 Budget Development Guidelines, which are detailed in Attachment A, are meant to reflect the anticipated fiscal condition of the City and to provide high-level budgetary direction to the organization. These guidelines will shape and inform the annual financial planning and the allocation of resources across the organization, especially in the General Fund.

Pairing Budget Development Guidelines with the forecast at the beginning of the budget process links the anticipated fiscal condition of the organization with the necessary context regarding service delivery prioritization and resource allocation that will be further explored through the process. This also ensures that the City is able to proactively address anticipated changesin its fiscal condition through the budget process.

Human ServicesResourceAllocation Process (HSRAP) Funding Referral As part of the FY2024 Adopted Budget, the Council directed staff to follow- up with additional work to, “Consider pegging HSRAPbudget allocations to a benchmark, such as percentage of General Fund budgeted expenditures.” In prior years funding has not been tied to a percentage of the General Fund budgeted expenditures, and the last time this was reviewed by the Policy and ServicesCommittee (CMR72896) there were four options for augmenting the HSRAPfunding, but ultimately none of them were approved for recommendation to the Council. The status quo of increasing the funding by the Consumer Price Index (CPI) as funding was available in the General Fund continued. Attachment Econtains additional historical data and analysisregarding the impacts on the LRFFbase casefor FY2025 through FY2027. 6 November 29, 2016 Policy and ServicesCMR7289:
https:// www. cityofpaloalto. org/ files/ assets/public/ v/ 1/ agendas-minutes- reports/ reports/ city-manager-reports- cmrs/ year-archive/ 2016/ id-7289-hsrap.pdf
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Conclusion
This forecast maintains current service levels approved in FY 2024 and should be used for planning purposes to assistin gaugingeffects of major policy interventions againsta likely “status quo” version of the future. The level of uncertainty in this forecast is similar to where it was a year ago in terms of impacts from economic and geo-political uncertainty and evaluating potential impacts on the local economy. Positive trends in major tax revenue categories that occurred in FY 2023 caused a one-time surplus of $ 3.3 million. These trends continue in the forecast, although increasesin the near term may be flattened due to economic stagnation. Staff will return to Council in February 2024 with the FY 2024 Mid- Year Review to recommend, in alignment with Council policy specifying that the City Manager may direct amounts exceeding the BSRtarget, that the $3.3 million surplus be allocated to the Infrastructure Reserve (IR) in the Capital Improvement Fund ($1.65 million) and the City's Section 115 Pension Trust Fund ($1.65 million), as outlined in the Retirement Benefit Funding Policy.

The LRFFBaseCaseassumesa weak economy in 2024, followed by a return to trend growth rates by 2025 and through the remaining ten-year forecast period. Revenue growth is anticipated to stagnate through the end of FY2025 as a result of monetary policy tightening actions by the US Federal Reserve continuing in an effort to achieve a “soft landing”, whereby a slowdown in economic growth avoids recession by stopping the economy from overheating and higher inflation. Asa result, the LRFFprojects a shortfall of $6.0 million in FY2025, followed by shortfalls ranging from $ 5.4 million in FY2026 down to $ 0.5 million in FY2029. FY2030 has a surplus of

6.6 million which continues to grow through FY 2034. These amounts are consistent with previous projections used as part of the two- year budget balancing strategy when adopting the FY 2024 Budget. Additionally, this LRFFprojects $ 282.7 million in total revenues in FY 2024, reflecting $ 3.1 million or 1.1% above adopted budget levels. If these additional revenues materialize in FY 2024, staff anticipates returning to Council as part of the FY 2024 Mid- Year Budget Review to recommend using this funding to increase the uncertainty reserve to help mitigate impacts from a recessionaswell assmooth the near-term shortfalls seenin the first few years of this LRFF.

Funding of approximately $ 10.1 million remains in an Uncertainty Reservethat was established as part of the FY2023 Mid- YearReview to fund the two- year budget strategy for FY2024 and FY 2025. The $10.1 million was assumed to be used to fund items deferred from the FY 2024 Adopted Budget aspart of the FY2024 Mid-YearReview ($1.1 million) and any potential shortfall in FY2025 ($9.0 million). Thesefunds are one-time in nature so once they are spent, they are not available for ongoing needs.

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In addition to the Base CaseForecast, staff modeled an alternate forecast scenarios that are discussedbelow. The first alternative reflects a 1% loss in economically sensitive revenue in FY 2025 compared to the Base Case, and increases the General Fund shortfall over the next ten years. FY2025 increases from a shortfall of $6.0 million to $ 8.1 million, and revenues are not anticipated to be able to fund the annual expenditures until FY 2030. Staff also modeled an alternate forecast that reflects a 1% compensation adjustment and the impacts on the General Fund over the next ten years. The surplus in FY2024 increasesto $1.1 million, the shortfall in FY 2025 reduces to $ 1.9 million, and FY2026 changes from a shortfall to a small surplus. These alternate forecasts were done separately to show the impacts of each scenario in isolation; however, aspectsof both alternate forecasts may occur in conjunction in the future.

Alternative Scenariosfor Consideration
Alternative Forecast Scenario A: Economically Sensitive RevenueLoss This alternative forecast models the impact of a 1% revenue loss on economically sensitive revenue. Sinceit is difficult to predict the timing of a recession, this scenario shows the cost of a revenue lossin FY2025 and how it would impact the subsequent yearsof the forecast. Themajor taxes, charges for services, and permits and licenses revenue categories are typically impacted by economic changes, so the impact has been calculated on these revenue sources. The 1% loss from these revenue sources would reduce the overall revenue in FY2025 by $2.1 million. The Base Case projected that by FY 2030, the City would begin to have a positive surplus; this alternative forecast increasesthe operating shortfalls from $0.5 million to $3.0 million in FY2030.

In this alternative, the General Fund would have a shortfall of approximately $ 8.1 million in the first year of the forecast. The summary table for this alternative forecast and the Net Operating Margin graph for this alternative forecast are below.

TABLE8: FY2025 – FY2034 Long RangeFinancial Forecast
Alternative Forecast A
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TABLE9: FY2025 –2034 Long RangeFinancial Forecast Net Operating Margin Alternative Forecast A
Alternative Forecast Scenario B: One-time Compensation Adjustment, Additional 1% Consistent with City Council direction and past practice, the Base Caseassumes a 2% general wage adjustment in the yearsbeyond the terms of existing Memorandum of Agreements (MOAs) since negotiated wage rates do not yet exist for that time. Asof the timing of this forecast, MOAs are in effect through January2025 (ServiceEmployeesInternational Union) (SEIU) and June2025 all other full-time labor groups). To support ongoing efforts for competitive wages and other terms of employment, the BaseCaseforecast includes a reserve for potential changesto future labor costs including, changes in vacancy rates, labor and benefit rate variability, and inflation assumptions. Offering competitive compensation plans aligns with industry standards for attracting and retaining a skilled and motivated workforce and better positions the City of Palo Alto as an employer of choice. This level of funding is intended to offset potential future costs and may differ from actual outcomes. Negotiations for new labor agreements are anticipated to occur in the next year for new terms beginning in FY2025-26.

This alternative scenario models the impact of a one-time adjustment in FY2026 to increase compensation by an additional 1% above assumptions in the BaseCase; this is the first full fiscal year for new MOA terms with all labor groups. Aswith other assumptions in the LRFF, this model is for forecasting purposes and does not reflect future commitment.

The one-time compensation adjustment would increase expenditures in FY2026 by $1.2 million.

The BaseCaseprojected that by FY2030, the City would begin to have a positive surplus; this alternative forecast increasesthe operating shortfalls in the near-term, resulting in lossesranging from $ 6.0 million in FY2026 to $ 1.9 million in FY2029. Basedon this scenario, the cumulative net operating margin, or ongoing surplus, during the forecast period is a surplus of $35.0 million.

The summary table for this alternative forecast and the Net Operating Margin graph for this alternative forecast are below.

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TABLE10: FY2025 – FY2034 Long RangeFinancial Forecast
Alternative Forecast B
TABLE11: FY2025 – 2034Long RangeFinancial Forecast Net Operating Margin Alternative Forecast B

FISCAL/RESOURCEIMPACT
Financial implications from this report and input from the FinanceCommittee will be considered in the City Manager’s development of the FiscalYear2025 budget.

STAKEHOLDERENGAGEMENT
The preliminary forecast for 2025-2034 represents the beginning of the fiscal year 2025 budget development process. Information provided in this report will be discussedwith the City Council after the Finance Committee reviews and provides recommendations. Those conversations will provide direction to staff in the budget development process. It is anticipated that conversations with City Council and the community will occur through public budget hearings in Spring 2024, according to the standard budget adoption process.

ENVIRONMENTALREVIEW
This report is not a project for the purposes of the California Environmental Quality Act.

Environmental review is not required.

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ATTACHMENTS
Attachment A: FY2025 Budget Policy Guidelines
Attachment B: The Economy
Attachment C: General Fund BaseCaseRevenueAssumptions
Attachment D: General Fund BaseCaseExpenseAssumptions
Attachment E: Human ServicesResourceAllocation Process (HSRAP) Funding Referral APPROVEDBY:

Kiely Nose, Assistant City Manager
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AttachmentA – FY2025BudgetDevelopmentGuidelines
1) Developa structurallybalancedbudgetthat bringsongoingrevenuesandexpensesinto alignment. Developa planfor anystructuralimbalanceto ensurethat the Citymaintains fiscalsustainabilityoverthe short, medium, andlong-term. 2) Allocate one-time resourcesfor one-time needs rather than committing one-time resourcesto ongoing services. Examineappropriate uses of revenue surplusesthat exceedforecastedlevelssuchas planningfor recessionneeds, restoration needs, and strategicinvestments.
3) Review resource allocation for City Council’s existing priorities and identify priority fundingneeds.
4) Focuson businessprocessredesignto enhancequality, flexibility, andcost-effectiveness of servicedelivery (includeexaminingopportunitiesto streamline, simplify, reorganize, andreallocateresourcesto avoidduplicationof effort).
5) Explorealternative servicedelivery models (such as partnershipswith non-profits or other public/private sector groups) to minimize overlap, maximize cost share, and effectivelyuseresources.
6) Continueto thoroughlyanalyzenon-personnel/equipment/other costs, suchascontract services, for costsavingsopportunitiesor realignmentwith currentneeds. 7) Explorethe expansionof existing revenue sourcesor the addition of new revenue sources, includingthe alignmentof existingchargesfor servicesand the opportunity to establishnewfees, whenappropriate.
8) Continue to analyze and prioritize resource augmentations, seeking to offset augmentationswith reductionselsewherefor net-zeroimpactsto the budgetwhenever possible; however, ensuringwhenresourceaugmentationsare added, it is in alignment with one-time andongoingforecastedsources.
9) Continueto prioritize proactivelyfunding long term liabilities includingbut not limited to debt obligations, pensionobligations, and capital infrastructure in accordancewith Citypoliciesasapprovedby Council.

FY 2025 Budget DevelopmentGuidelines
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ATTACHMENTB
TheEconomy
At the nationallevel, economicgrowth throughthe third quarterof calendaryear2023, wasled by robustconsumer (retail) spendingdespitea persistenthighinflation rate andhighborrowing costswith interest rates at their highestlevel in 22 years, 5.25% to 5.5%. Thegrossdomestic product (GDP), a measureof all goodsand servicesproducedin the economy, increasedat an annualizedrate of 4.9%, well above the 2% range in the prior quarters and above the 2% expectation. Asof October2023, the consumerpriceindex (CPI) whichmeasureschangesin the pricespaid by consumersfor a basketof goodsand services, was3.2%. Thisis lower than the

7.7% CPIfrom a year ago, but still indicatesincreasingcosts. The unemploymentrate, as of October2023, is3.9% whichisup from 3.4% at the beginningof the 2023calendaryearandmay indicate an economicslowdown in the coming quarters. The unemploymentrate has been rangingbetween 3% to 4% as the economiccoolingdown is expectedto bring the elevated inflation closerto the 2% federal reservetarget goal. Theaboveoutlook is predicatedon the federalreserveachievinga “soft landing” wherebythere’sa slowdownin economicgrowth that avoidsrecessionfor the purposeof stoppingthe economyfrom overheatingand continuingto experiencehigher inflation. TheUCLAAndersonoutlook is “Theoft-predictedbut never seen recessionnext quarter’ hasnow fadedin the faceof expansionaryfiscalpolicy, a new national industrialpolicy, and a consumerwho is happyto continuespending.” Thisoutlook projectsa weakeconomyin 2024followedby a return to trend growth ratesby 2025. Thisweakeroutlook translatesinto 1% to 2% GDPgrowth for the remainderof 2023with the expectationthis will graduallyincreaseto a2% to 3% growththrough2024. Theelevatedcoreinflation isexpectedto comedown slowlywith lower GDPgrowth which couldallow the federalreserveto mildly cut rates in mid to late 2024. Thereare risksto monitor that could changethe expectedgrowth pattern such as a future protracted (U.S.) government shutdown, geopolitical events, and electionresultingin changingnationaleconomicpoliciesin 2025.

Thelocaleconomycontinuesto showstrongperformancein the first half of calendaryear2023.

TheUCLAAndersonoutlook for Californiadoesnot forecasta recessionbasedon the state’s strongemploymentandeconomicgrowththrough, “theonshoringof technicalactivitiesandnew investmentsin greentechnologyandAIthat shouldkeepCaliforniagrowingfasterthanthe U.S”.

The “continueddemandfor a limited housingstock, coupledwith state policiesinducingnew home building” is expectedto facilitate economicrecoveryfor the next few years. The real personalincomeisforecastedto remainflat in 2023andgrowbetween1% to 2% through2025.

California’sunemploymentrate, similarto the nationaltrend, hasrisenin calendaryear2023and isexpectedto be in the mid to high4% through2025.

Accordingto the U.S. Bureauof EconomicAnalysis (BEA), the “advance” estimateof the U.S. economy’s real grossdomesticproduct (GDP) percentagechange, from the precedingquarter, changedin the secondandthird (calendar) quartersof 2023at anannualrate of 2.1% and4.9%, respectively. RealGDPis an inflation-adjustedmeasurethat reflectsthe valueof all goodsand servicesproducedby aneconomyin a givenyear. Accordingto the BEA, in the third quarter the Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
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increasein real GDPreflected increasesin consumerspending, private inventory investment, exports, state and local governmentspending, federal governmentspending, and residential fixedinvestmentthat werepartlyoffsetby a decreasein nonresidentialfixedinvestment. Ofthe third quarter 4.9% increase, consumerspendingrepresentsrose 4%, led by consumptionof housing and utilities, health care, financial services and insurance, food services and accommodationsand nondurablegoods (led by prescription drugs), recreationalgoodsand vehicles. Imports, whicharea subtractionin the calculationof GDP, increased.

Table1: NationalGrossDomesticProduct (GDP)
RealGDP: PercentChangefrom PrecedingQuarter
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Thenationalinflationrateremainedsteadybut still highcomparedto the 2% ratetargetedbythe federal reserveat 3.2% in October2023, asasofterdeclinein energypricesoffsetslowinginflationarypressures in other categories. Energycostsfell by 4.5% versus -0.5% in Septemberwith gasolinedeclining5.3%, utility gasservicefalling15.8%, andfuel oil singing21.4%. Additionally, pricesincreasedat softer rates for food (3.3%), new vehicles (1.9%), apparel (2.6%), medicalcarecommodities (4.7%), shelter (6.7%), andtransportationservices (9.2%).

Table2: NationalInflation Rate (akaConsumerPriceIndex (CPI)) Thenation’sunemploymentrateis3.9% asof October2023, comparedto arecordhighof 14.7% at the heightof the pandemicin April2020. Accordingto UCLAAndersonoutlook, the recentrise in unemploymentis due to new entrants to the labor market rather than layoffs which is at historicallow level. It isexpected, by the U.S. Bureauof LaborStatistics, that the unemployment rate will risedue actionsby the FederalOpenMarket Committee (FOMCor federalreserve) to further bring down the elevatedinflation rate aswell asmore the new entrantsinto the labor market. Per the State of California's Employment Development Department, the state’s unemploymentrate asof September2023is 4.7% with the prior yearbeing4% andthe County of SantaClarais3.2%. Historically, the BayAreajob growth hasbeenledbythe Peninsulafor the pastseveralyears. Theunemploymentrate for the SanFranciscoPeninsulaandPaloAlto is 3% and2.8% respectivelyasof September2023; lastyearit was2.3% and1.9%, respectively.

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Table3: U.S. UnemploymentRate
Theelevatedinflation rate hasresultedin the continuederosionof purchasingpower; however, there is still growthin U.S. consumerspending. Personalconsumptionexpenditures (PCE) arethe primarymeasure of consumerspendingon goodsand servicesin the U.S. economy. It accountsfor about two-thirds of domesticfinal spending, and thus it is one of the main factors that indicatesfuture economicgrowth.

Strengthin PCEspendingtends to prompt additional businessspending. National personalspending increasedby 0.7% and0.4% overthe prior monthsin AugustandSeptember2023, respectively. Services spendingroseby 0.8% andspendingon goodsroseby 0.7%. Servicesspendingwasup for international travel, housingandutilities (mainlyhousingexpenses), healthcare, and transportation. Goodsspending wasled by prescriptiondrugs, motor vehiclesandparts, andnewmotor vehicles.

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Table4: PersonalConsumptionSpendingGrowth
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ATTACHMENTC
Table1: GeneralFundBaseCaseRevenueAssumptions
SalesTax
Comparedto FY2019pre-pandemicactualsof $36.5 million, salestax revenuedeclinedby $7.4 million, or 20.2%, duringthe pandemicin FY2021. Therecovery, whichbeganin the lastquarter of FY2021, resultedin the FY2022andFY2023receiptsincreasingby $3.6million or 12.3% and

4.2 million or 12.9%, respectively. Thisrecoverygrowth hasslowedin the first quarter of FY 2024, with the City’s salestax consultantforecastinga modestincreaseoverthe prior year. The general retail, food products (includesrestaurants), and businessto business (includescar leasing) categoriesexperiencedincreases. Thiseconomictrend wasmixedin the SanFrancisco BayAreaandin California. A few municipalitieshaddoubledigit increasesin the FY2023while mosthadsingledigit gainsor decreases.

TheFY2024AdoptedBudgetfor SalesTaxis $36.3 million, a $0.6 million or 1.8% declinefrom FY 2023actualsof $36.9 million. However, in the revisedforecast, FY2024isexpectedto earn $37.7 million, a 2.2% increaseoverFY2023actuals. In FY2025, this revenueisanticipatedto increase to $39.7 million, a $2.0million or 5.3% increaseoverthe FY2024revisedforecast. TheBaseCase assumes3.2 to 5.1% growth over the length of the forecastwith a 10-year compoundannual growth rate (CAGR) of 3.4%.

30.0 $ 29.9 $ 31.1

36.5 30.6 $ 29.1

32.7 36.9 $

36.3 39.6 $ 41.2 $ 42.8 $ 44.4 $ 45.9 $ 47.5

36.6 $

39.4 42.8

47.3 51.1

56.6 $

59.4 $

63.1 $ 63.8

67.9 72.1

76.6 81.4

86.3 92.5

15.2 $

15.7 $ 16.7 $ 17.0

11.6 2.8

8.8 13.5 $ 14.4 $ 14.1 $ 14.9 $ 15.9 $ 16.6 $ 17.5 $ 18.3

12. 5

14.2 $ 15.4 $ 16.4 $

16.1 14.6 $ 15.6

18.8 $

18.5 $ 20.0 $ 20.6 $ 21.5 $ 22.5 $ 23.1 $ 24.7

6.3 $ 7.5 $ 9.2 $

6.9 $ 6.9

10.6 12.0

5.8 $ 5.9 $ 6.2 $ 6.5 $ 6.8 $ 7.1 $ 7.3 $ 7.6$7.2

7.7 $ 8.2 $ 8.7 $ 7.0

2.4 8.1 $

12.0 $ 12.4 $ 12.7 $ 13.4 $ 14.3 $ 15.0 $ 15.7 $ 16.5
0 5
10 15
20 25
30 35
40 45
50 55
60 65
70 75
80 85
90 95
Millions
Fiscal Year
Major General Fund Revenues
Sales Tax
Property Tax
TOT - General Fund
Utility User's Tax
Doc. Transfer Tax
TOT - Infrastructure
Forecast
Property Tax
Sales Tax
Utility User' s Tax
TOT -GeneralFund
TOT - Infrastructure
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TABLE2: Cityof PaloAlto SalesTaxRevenuesthrough FY2034 PropertyTax
Propertytaxrevenueisthe GeneralFund’slargestrevenuesourceandrepresentsapproximately 25% of the total revenues. Historically, the 10-yearcompoundannualgrowth rate (CAGR) was

8.2% with a low of 4.9% in FY2022anda highof 11.5% in FY2015. Duringeconomicdownturns, impactsto propertytaxoccura yearlater, asa result, the $2.8 million or 4.9% growth in FY2022 wasthe lowest in the past decade. Thiscategoryalsoincludesreceiptsfor excessEducational RevenueAugmentationFund (ERAF) distributionsfrom the Countyof SantaClara. ERAFis the fund usedto collectanddisbursepropertytaxesthat areshiftedto/from cities, the County, and specialdistrictsprior to their reallocationto K-14 schoolagencies. Whenthe state shiftsmore local property tax than required to support schools, these funds are returned and known as excessERAF. Asa resultof the volatility of ERAF, it is not considereda permanentlocalrevenue sourceeventhoughit hasperformedstronglyin the pastdecade.

ERAFReserve: SinceFY2021, the Cityhasengagedin severaldisputesover the calculationand disbursementof excessERAFFunds. In response, the City establishedreservesfor potential estimatedlossesat 25% of total ExcessERAFreceipts. Therewerefavorableresolutionswith the StateandSantaClaraCounty, followedby the StateandCaliforniaSchoolBoardAssociation, for two prior disputes. The associatedreserveshave been releasedto the Budget Stabilization Reserve (BSR) or consolidatedfor potentialfuture at-riskamounts.

Asof the timing of this LRFF, the StateController’sOfficeissueda negativeaudit findingagainst Marin County. Thestateassertsthat former RedevelopmentAgencyfunds, whicharenow part of the regularpropertytaxes, shouldbeexcludedfrom theexcessERAFcalculation. MarinCounty ischallengingthisfinding, andit isnot knownif thiswill beelevatedto acourtcase. Theestimate is, if this audit findingis sustained, 22% of excessERAFis at riskfor fiscalyears2021, 2022, and 2023. If the findingholds, the Countyof SantaClara, aswell asother ExcessERAFcounties, could facesimilaraudit findingslikelystartingin FY2025. In FY2023, $4.1million wassetasidefor the Reserveof excessERAFfor the at-riskamount. In addition, 22% or $1.5million in FY2024budget

25.6 29.4

29.7 30.0

29. 9

31.1 36.5

30.6 29.1

32.7 36.9

36.3 39.6

41.2 42.8

44.4 45.9

47.5 49.1

50.7 52.9

55. 1
15 18
21 24
27 30
33 36
39 42
45 48
51 54
57 60Millions
Fiscal Year
Sales Tax
Forecast
Adopted
Budget
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hasbeenreducedby this amount. Staffwill continueto monitor the statusof this audit finding andreport on anysignificantdevelopments.

TABLE3: Cityof PaloAlto PropertyTaxActualsandForecastthrough FY2034 Transferof ownershiphasbeenasignificantdriverof pastgrowth; however, that growthisexpected to moderatein FY2024dueto the expectedeconomicslowdownandthe highermortgagerates. For example, the mediansalespriceof singlefamilyresidentialin the first (fiscalyear) quarterof FY2024 declinedby 3% overthe prior quarter.

TheFY2024AdoptedBudgetfor PropertyTaxis $63.8 million, a $0.7 million or 1.1% increaseover the FY2023actualsof $63.1 million. However, in the revisedforecast, FY2024is expectedto earn

64.6 million or 1.3% increaseover the FY2024 adopted amount. In FY2025, this revenue is anticipatedto increaseto $67.9 million, a $3.3 million or 5.1% increaseover the FY2024revised forecastlevel. TheBaseCaseassumes5.1to 7.1% growth overthe lengthof the forecastwith a 10- yearCAGRof 5.4%.

TransientOccupancyTax (TOT)
Revenuein this category is impacted by businessand other leisure/non-leisure travel and experiencedsignificantreductionsin FY2020and FY2021due to public health orders, travel restrictions, anddiminishingbusinessandpersonaltravelplansresultingfrom the pandemic. TOT revenue declinedby $20.5 million or 79.8% in FY2021, when comparingthe FY2019 pre- pandemicactualsof $25.6million. Aspublichealthconditionsimprovedandtravelresumed, this revenuebeganto recover, significantlygrewin FY2022, andin FY2023, this revenuerecovered to pre-pandemiclevels. Theopeningof the two Marriott hotelsin mid andlate FY2021andthe re-openingof multiple hotelsin FY2021and FY2022were positivedevelopmentsthat helped driverecoveryfor this taxrevenue.

TheFY2024AdoptedBudgetfor TOTrevenueis $26.8 million, a $1.3 million or 5.3% increase overFY2023actualsof $25.5 million. In the revisedforecast, FY2024isexpectedto earn $25.5

8. 5

6. 4

11. 5

7. 3

7. 6

8. 8

10. 5

7. 9

10. 7

4. 9

6. 4

7. 5

6. 4

6. 2

6. 3

6. 2

6. 1

7. 1

5. 9

5. 3

5. 6

5. 8

28.7 $30.6 $ 34.1 $ 36.6 $ 39.4 $ 42.8 $

47.3 $

51.1 56.6 $ 59.4 $

63.1 $ 63.8 $

67.9 $

72.1 $

76.6 $

81.4 $

86.3 92.5

98.0 $
103.1
108.9
115.2
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
0$
5$
10$
15$
20$
25$
30$
35$
40$
45$
50$
55$
60$
65$
70$
75$
80$
85$
90$
95$
100$
105$
110$
115
Total % Chg.MIllions
FiscalYears
Cityof PaloAlto PropertyTaxActualsand Forecast
Forecast
Forecast
Adopted
Budget
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million, whichmatchesthe FY2023actuals. In FY2025, thisrevenueisanticipatedto continueto plateau as the economyslowsdown to $26.7 million. Year-to-date (as of August2023), daily averageroom ratesdeclinedby 11.4% from $252per dayto $223per daywhile occupancyrate decreasedby 9.6% from 74.3% to 67.1%. Revenuein this categoryis experiencinga near term stagnation; however, it’santicipatedto continuegrowth in FY2026andbeyondwith 4.6to 6.5% growth overthe lengthof the forecastwith a 10-yearCAGRof 4.8%.

TABLE4: Cityof PaloAlto TransientOccupancyTaxActualsandForecastthrough FY2034 Note: January2015, TOTRatewent from 12% to 14%
April2019, TOTRatewent from 14% to 15.5%
Utility User’sTax (UUT)
The UUTis levied on electric, gas, and water consumption, as well as on telephone usage.

Revenuein this categoryis impactedby consumptionlevelsandhasexperiencedreductionsin prior periodsdueto waterconservationprogramsandreducedworkforcesandbusinessclosures duringthe pandemic. Thisrevenuehasrecoveredasthe localeconomyrecoveredandworkers returned to the office in FY2023. In addition, higherutility commoditycostsresultedin sizable utility rate increasesand higherUUTrevenues. TheFY2024AdoptedBudgetfor UUTis $18.5 million, similarto the FY2023actualsof $18.8 million., however, the updatedforecastedamount for FY24isanticipatedto beto be $19.7 million. InFY2025, thisrevenueisanticipatedto increase to $20.0 million, a $0.3million or 1.5% increaseoverthe FY2024forecastedamount. Revenuein thiscategoryisexpectedto experiencegrowthat 2.6to 6.6% overthe lengthof the forecastwith a 10-yearCAGRof 3.5%.

79. 6

79. 0

78. 1

77. 0

78. 3

78. 8

77. 3

60. 9

40. 3

63. 5

68. 8

10.8 12.3

16.7 22.4 $ 23.5

24.9 25.6

18.6 5.2

16.9 $

25.5 26.8

26.7 28.3

30.2 31.6

33.2 34.8

36.6 38.5

40. 5

42.6 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0 3
6 9
12 15
18 21
24 27
30 33
36 39
42 45
Occupancy %Millions
Fiscal Year
Transient Occupancy Tax Actuals and Forecast
264$208$182 $ 280$274$262
Avg.DailyRoomRates
237
265
116
Forecast
Forecast
Adopted
Budget$
195
257
ActualOccupancy %
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TABLE5: Cityof PaloAlto Utility UsersTaxActualsandForecastthrough FY2034 DocumentaryTransferTax (DTT)
Revenuein this categoryis highly volatile and dependent on salesvolume and the mix of commercialand residentialsales. DTTexperiencedrecord receiptsin FY2021and FY2022at

10.6 million and $12.0 million, respectivelywhichwasfollowedby a sharpdeclinein FY2023at

5.8 million. In both recordyearsreceipts, thesemilestoneswere a result of largecommercial transactions, six in FY2021 and nine in FY2022, and robust residentialsales. FY2023, sales activitiesnormalized. TheFY2024AdoptedBudgetfor DTTis $5.9 million, $0.2 million or 2.9% lower than FY2023actualsof $5.8million. In FY2025, this revenueisanticipatedto increaseto

6.2 million, a $0.4million or 5.3% increase, from the FY2024forecastlevelof $5.8million.

Asin pastyears, this revenuesourceischallengingto forecastandcanfluctuatemonthto month dependingon real estatetransactions. Thenumberof transactionsthroughOctober2023 (190) isthe sameasOctober2022with the total revenuefrom thesetransactionsincreasingby15.1%.

Thoughthe PaloAlto housingmarketremainsstrong, asdiscussedin the PropertyTaxessection, singlefamilyresidentialmediansalespricein PaloAltohasslightlydeclined, whichisanexpected occurrenceasthe predicatedeconomicdownturnandhighermortgageratewill impactproperty salesactivityin FY2024.

10.9 11.0

10.9 12.5

14.2 15.4

16.4 16.1

14.6 15.6

18.8 18.5

20.0 20.6

21.5 22.5

23.1 24.7

25.5 26.4

27.3 28.2
8 10
12 14
16 18
20 22
24 26
28 30Millions
Fiscal Year
Utility Users Tax
Forecast
Adopted
Budget
Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
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TABLE6: Cityof PaloAlto DocumentaryTransferTaxActualsandForecastthrough FY2034 Returnon Investment
The return-on-investment category reflects the interest earningson the City’s investment portfolio. Thiscategoryisacombinationof pastinvestments, newinvestmentsat currentmarket rates, andavailableinvestablecashwhichfluctuatesseasonallyandannually. Asof the timing of thisLRFF, the FederalOpenMarketCommittee (FOMC) hasraisedthefederalfundsrate11times, from 0.25% to 5.55% (525basispoints) sinceit begantighteningmoneypolicyin March2022. It is expectedthat interest rateswill be held steady, asinflation is expectedto return to the 2% target in the economicoutlookoverthe mediumterm.

Theaverageportfolio rate of return for the first quarter of FY2024was 2.20%, and a 2.31% averageyield asof the fourth quarter of FY2023. Theadoptedbudget GeneralFundFY2024 interest earning is $1.8 million. This is below the FY2023 actual of $2.5 million, but the expectationisthe actualsin FY2024will comein higherat $2.9million. In FY2025, the forecast reflectsa 3.3% increasein interest earningsto $3.1 million with 3.0 to 4.2% increasesthrough the ten-yearperiod.

6.8 8.1

10.1 6.3

7.5 9.2

6.9 $ 6.9

10.6 12.0

5.8 $ 5.9

6.2 6.5

6.8 7.1

7.3 7.6

7.9 8.2

8.5 8.8
3 4
5 6
7 8
9 10
11 12
13Millions
Fiscal Year
Documentary Transfer Tax
Forecast
Adopted
Budget
Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
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2034 Long Range
Financial Report (LRFF),
CMR 2307-1773

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TABLE7: PaloAlto HistoricalInvestmentPortfolio YieldsandCitywideInterest Earnings RentalIncome
RentalIncomeof $16.9million in FY2025primarilyreflectsrent paidto the GeneralFundfrom the City’sEnterpriseFundsandtenantsat the CubberleyCommunityCenter. Thereisanincrease in rental incomeof $1.0 million comparedto the FY2024AdoptedBudget. Theincreasecanbe attributed to a review of the changesin the CaliforniaConsumerPriceIndex (CCPI) in the San FranciscoBayAreafrom the August-to-Augustperiod, and it is expectedthat revenueswill be reviewedand revisedsubsequentto this forecastbasedon updatedinformation, typicallythe December-to-Decemberchangein the CCPI.

TheCityis no longerreceivingrental incomefrom the former LosAltosTreatmentPlant (LATP) site, becausethe site is no longeravailablefor traditional rental asa laydownyard. Thesite is planned for two uses: 1) an interim housing project with Project Homekey to provide opportunitiesfor homelessindividualsandfamilies, and2) a joint waterpurificationprojectwith the SantaClaraValleyWater District. Pleaseseethe ExpenseAssumptionsGeneralExpenses sectionof thisreport for additionalinformationregardingProjectHomekeydevelopmentsat the former LATPsite. Thewater purification project is beingfunded in the WastewaterTreatment Fund, soit is not part of the GeneralFundLRFF; however, fundingneedsfor the project will be discussedin the developmentof the FY2025budgetfor the WastewaterTreatmentFund.

Chargesfor ServicesandPermitsandLicenses
Revenuesin the ‘Chargesfor Services’ andthe ‘PermitsandLicenses’ categoriesareanticipated to be $36.9 million and $11.5 million, respectively, in FY2025. Together, theseamountstotal

5.88%

5.00%

4.17%

4.54%
Cityof PaloAlto

2.71%

1.80% 1.93% 1.66%

2.20%

3.65%

1.41%

0.81% 0.25%
2 Yr. Treasury

4.39%

4.92%

4.43%4.39%

4.98%

1.10%
5-Yr. Treasury

2.88%

2.47%

0.27%

3.23%

4.00%

4.31%

1.44%

5.25%

0.23%
LAIF

1.29%

2.63%

3.42%

0.0 0.5

1.0 1.5

2.0 2.5

3.0 3.5

4.0 4.5

5.0 0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%
Int. Earnings (Millions)Yields
FiscalYearQuarters
InvestmentPortfolio YieldsandInterestEarnings
Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
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48.4 million and are approximately $3.1 million higher than the FY2024AdoptedBudgetof

45.3 million. Increasesin thesecategoriesare primarily due to revenueadjustmentsfor the agreementwith Stanfordto provideFireandDispatchservicesandadjustmentsto development centerrevenues.

Therevenueestimatesin thesecategoriesare basedon current activity levels. Theserevenue sourcesareprimarilydrivenby the costof staffto provideservicesto the community. Therefore, as part of the FY 2025 Municipal Fee process, staff will evaluate and bring forward recommendationsto align fees with target cost recoverylevels to cover generalsalaryand benefitsincreasesandCPItrends. Oneexceptionto this is DevelopmentServicesactivitiesand relatedrevenue. DevelopmentServicesfeesarefully cost-recoverable, andthe departmenthas beenmodeledascost-neutralin this forecast. Staffwill analyzemunicipalfeerevenueactivityas part of the FY2025Budgetdevelopmentprocessandbringforward adjustmentsasappropriate.

Chargesfor Service - StanfordFireandDispatchServices: TheCityandStanfordhavetwo separate agreementsfor the provisionof fire responseandemergencydispatchservices. Thefire response servicesagreementbecameeffectivein July2018andoutlinesserviceleveltermsandanewcost allocationmethodologyasthe baselinefor agreementcosts. Theterm extendedthrough June 2023, with annual renewalsin effect through June2028 unlessotherwise terminated. The agreementincludesa staffingdeploymentmodel for suppressionand medicalservices, which wasapprovedby the CityCouncilin October2017anddeployedin January2018. Thisforecast alignswith the new staffing model and, in accordancewith the agreement, adjustmentsto revenuefrom Stanfordhave been alignedwith the year-over-year changesto the operating expensesin the Fire Departmentover the forecastperiod. Similarly, changesto the revenue receivedfor dispatchingserviceshavebeenalignedwith the operatingexpensesin the Technical ServicesDivision of the Police Department where the costs to provide these servicesare budgeted. For fire and policerevenue, additionaladjustmentsmay be applicableif new labor agreementsare negotiatedfor the forecastperiod. Revenuesfor theseservicesare basedon current anticipatedchangesin salaryand benefitscostswithin the FireDepartmentand Police DepartmentDispatchUnit.

Chargesto OtherFunds
Themainsourceof revenuesin this categoryisGeneralFundadministrativecostallocationplan chargesto the Enterpriseand Internal ServiceFunds. Internal support departmentssuch as AdministrativeServices, HumanResources, and CouncilAppointedOfficesprovide servicesto Enterpriseand Internal ServiceFunds. Thecostsfor theseservicesare recoveredthrough the administrativecostallocationplancharges. TheFY2025estimatefor Chargesto OtherFundsof

13.2 million reflectsa decreaseof $2.3 million or 15.0% from the FY2024Adoptedamountof

15.9million. Thisisprimarilyattributedto adjustingthe proportionof the allocatedchargessplit betweenthe GeneralFundand other fundsto accountfor largecapitalprojects, mainlyin the enterprisefunds. Thisadjustmentwill accountfor the portion of projectsthat aresupportedby internal supportdepartments, but excludethe largerconstructioncostportions to better align the costplanmethodology.

Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
Attachment A - FY 2025-
2034 Long Range
Financial Report (LRFF),
CMR 2307-1773

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OperatingTransfers-in
OperatingTransfers-in materializeas expensesin other funds throughout the City and as a revenuein the GeneralFund. Thisbudgetcategoryincludesrepaymentof a previousloanfrom the GeneralFundto the Airport Fund, fundingfor policepatrol in the downtown area, and the equitytransferfrom the ElectricandGasfunds. Overall, the OperatingTransfers-in areestimated to be $26.1 million, a $2.2 million increasefrom the FY2024level of $23.9 million due to the increasefrom the GasFund.

In accordancewith the methodologyapprovedby the CityCouncilin June2009, the electricto generalfund equitytransferhasbeencalculatedby applyinga rate of return on the capitalasset baseof the ElectricFund. Thisrate of return is basedon PG&E’s rate of return on equity as approvedby the CaliforniaPublicUtilities Commission (CPUC). Thegasto generalfund equity transfer calculationwas updatedbasedon the passageof MeasureL on the November2022 ballot. Asoutlinedin the ballot measurelanguage, the gasto generalfundequitytransfercanbe up to 18% of annualgrossgasretail revenue. In orderto maintainsteadygasrateprojectionsand avoida spikein the gasequitytransfer, this LRFFincreasesthe transferto 16% in FY2025andFY 2026andup to 18% by FY2027throughFY2034.

OtherRevenueandRevenuefrom OtherAgencies
Fundingin thesetwo categoriesisexpectedto be $3.8 million in FY2025, whichisslightlydown by $0.2 million from $4.0 million in FY2024. Thesetwo revenuecategoriesmainlyaccountfor grantsor reimbursementsfrom the federaland state governmentsor other localjurisdictions.

Other Revenueincreasesslightlyby $0.1 million in FY2025asa result of limited time funding from LifeMovesfor reimbursementrelated to the HomekeyFacility; however, this funding is removedin FY2026throughthe endof the LRFFperiod. Revenuefrom OtherAgenciesdecreases by $0.3 million in FY2025andthen by another $0.8 million in FY2026, becauseFY2025is the last year of the Staffingfor AdequateFire and EmergencyResponse (SAFER) grant funding awardedto the Cityin FY2022.

Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
Attachment A - FY 2025-
2034 Long Range
Financial Report (LRFF),
CMR 2307-1773

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ATTACHMENTD
GeneralFundBaseCaseExpenseAssumptions
SalaryandBenefits
Consistentwith prior years, the FY2025salariesandbenefitscostsrepresentapproximately62% of the GeneralFundbudget expenditures. Salaryand Benefitsare projected to increase $7.1 million or 4.3% from the prior year, from $166.9 million to $174.0 million. Discussedin the followingsections, this isprimarilyattributableto increasesin salaries ($2.9million or 3.1%) and pension costs ($4.5 million or 10.2%). Theseincreasesare partially offset by reductions in departmentallocationsfor Workers’ Compensationexpense (-$0.3million or -5.3%).

Salary
Consistentwith the City’ssalarybudgetmethodologyfor recentbudgets, positionsarebudgeted at the actual rate of pay of employeesincludingbenefit selectionsas of Fall 2023. Then, by position, salarycostsare updatedin accordancewith applicableMemorandumof Agreements MOA’s) betweenthe Cityandits laborgroupsandthe ManagementandProfessionalPersonnel andCouncilAppointeesCompensationPlan(s).

In FY2023, the CityCouncilengagedwith laborgroupsto negotiatenew agreementsfor wages, benefits, and other terms and conditionsof employment. Theseagreementsextend through January2025 (SEIU) andJune2025 (allotherlaborgroups) for full-time staffingandincludetarget marketadjustmentsto alignsalarieswith benchmarkstudies, Costof LivingAdjustments (COLAs), andother benefitssuchasa flexiblecompensationbenefit.

The forecastassumesstep increasesfor employeesin applicablepositions, includingService EmployeesInternationalUnion (SEIU), InternationalAssociationof FireFighters (IAFF), andPalo Alto PeaceOfficers’ Association (PAPOA), andmerit increasesfor ManagementandProfessional employeesincludingUtilitiesManagement & ProfessionalAssociationof PaloAlto (UMPAPA). A generalwageadjustmentof 2% is includedfor all employeesstartingin either January2025or July2025for all yearsof the forecastsinceno MOA’s would be in effect at that time. Thisis consistentwith prior Councildirection in previousLRFFreporting to usethe 2% increaseas a forecastingassumption, not as a commitment to future negotiations. The FY2025 Budget includesMOAterms for a 4% COLAadjustment (all labor groups), 2% marketalignment (Safety only), and increasein flexible compensationpaymentfrom $100 to $200 per month (all labor groupsexceptSEIU).

A reserveis includedfor potential changesto future labor costsincludingchangesin vacancy rates, labor and benefit rate variability, and inflation assumptions. Offering competitive compensationplans alignswith industry standardsfor attracting and retaining a skilled and motivated workforceand better positionsthe Cityof PaloAlto asan employerof choice. This levelof fundingdoesnot reflectacommitmentto future negotiationsandmaydiffer from actual outcomes. Negotiationsfor new labor agreementsare anticipatedto occurin the next yearfor Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
Attachment A - FY 2025-
2034 Long Range
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CMR 2307-1773

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newtermsbeginningin FY2025-26. Analternativescenarioisincludedin thisreport for increases beyondthe assumptionsdescribedabove.

Additionally, the budgetincludesvacancysavingsthat are expectedto materializeaspositions arevacatedandnewemployeesarehiredthroughthe normalcourseof business. Asof the timing of thisLRFF, the vacancyrateisapproximately13.5% in the GeneralFund, excludingpublicsafety.

Thispreliminaryvacancyrate ispoint in time anddoesnot consideractionscurrentlyin progress for recruitments, promotions, and other staffing shifts. Vacancysavingsfrom public safety positionsaretypicallyexhaustedby usessuchasbackfill, hire aheadprograms, andovertime. To better align with the status of vacancies, this forecast increasesthe vacancyestimate from previously assumedrate of 3% to 5% in all years. This results in additional savingsof approximately $2.5millionannually, or $5-6milliontotal eachyear. Consistentwith pastpractice, the vacancyassumptionislowerthanthe actualvacancyrateto allowdepartmentaluseof those savingsfor other staffingstrategies, suchasfilling staffinggapsby contractingfor professional services, hiring aheadto allow overlap and smooth transitions, piloting new technologiesto increaseefficiencyin the absenceof staff, andsupportinga summerinternshipprogram.

Benefits
Pension: Pensionsare budgetedbasedon CalPERSdeterminedrates as of the June30, 2022 valuationfor the City’s miscellaneousand safetyplans (CMR2308-18601). CalPERSdetermines the City’s total contributionsfor a givenFiscalYearasthe sumof two factors: NormalCost (NC) andUnfundedAccruedLiability (UAL). Togetherthe NCandthe UALexpressedasa percentage of payrollisthe ‘blendedrate’ andisusedto representtotal costsin the discussionbelow.

TheNormalCost (NC) isexpressedasa percentageof payrolland is paid aspart of the payroll reporting processof active employees. Commonlyreferred to as the ‘pay-go’ cost, the NCis variableand increasesor decreasesdirectly with the salarylevelsof the City. It representsthe necessaryfundingfor the Cityto payfor employeespresumingthat CalPERSmeetsthe current setof assumptions.

In a yearthat CalPERSdoesnot meet assumptions, due to plan changes, assumptionchanges, methodchanges, or planexperience (includinginvestmentgains/losses), there is anincreaseor decreaseto the UnfundedAccruedLiability (UAL). Commonlyreferred to asthe ‘catch-up’ cost, the UALisexpressedasa dollaramountandiscalculatedoveranamortizedperiodwith defined annualpayments, similar to a mortgage. The contributionsfor UALare billed as a flat dollar amount asopposedto a percentageof payrolldue to potential fundingissuesthat couldarise from adecliningpayrollor numberof activemembersin the plan. However, CalPERSprovidesan estimatedpercentageof payrollfor UALto allowa consistentcomparisonof total costs. 1 FinanceCommittee, September19, 2023, CMR2308-1860:
https:// cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=13152 Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
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In the miscellaneousplan, total costsareprojectedto increasefrom the current44.8% in FY2024 to 47.4% in FY2025. In the safetyplan, total costsare projectedto increasefrom the current

74.0% in FY2024to 83.1% in FY2025. Theseratesdo not considerthe employeepick-up of the employershare; that pick-up materializesassavingsin the City’s pensioncosts. Consistentwith applicableMOAs, the LRFFpresumesthat the miscellaneousplan will pick up 1 to 2% of the employerpensioncostandthat safetyplanmemberswill pickup 3 to 4%.

TheFY2024and FY2025budgetsare impactedby significantswingsin investmentgainsand lossesearnedby CalPERSin the periodsendingJune30, 2021and 2022. TheFY2024budget reflectssignificantinvestmentreturns of +21.3% (+6.8% target) and changesto economicand demographicassumptionsresultingfrom the CalPERSAssetLiabilityManagement (ALM) process and ExperienceStudycompletedin November2021. As part of the ALM, the CalPERSboard approvedareductionto thediscountrate (from 7.0to 6.8%), revisedactuarialassumptions (price inflation from 2.5 to 2.3%), anda newassetallocationtargeting1/3 investmentin privateassets, 5% leverage, andreducedpublicequityexposure. FY2025in the LRFFreflectsaninvestmentloss of -6.1% (+6.8% target), nearlyoffsetting the positiveimpactsexperiencedin the prior year’s investmentgains.

Sincethe issuanceof the currentvaluation, CalPERSannounceda preliminaryinvestmentreturn of +5.8% (+6.8% target) for the period endingJune30, 20232. Theseresultswill be includedin the CalPERSvaluationreport issuedin Fall2024to inform the developmentof the 2026-2035 LRFFandFY2026budget. Theresultingliability from investmentreturnsthat did not meettarget levelswill be amortizedover 20 yearswith a 5-yearramp-up period. To inform this LRFF, staff usedthe CalPERSPensionOutlookToolto calculatethe estimatedimpacts, resultingin additional costsof $0.2 million ($0.1 million in the GeneralFund) in FY2026, andincreasingto $1.2 million

0.5million in the GeneralFund) at the peakof the 5-yearrampin FY2030.

In the GeneralFund, it isanticipatedthe Citywill spenda total of $49.0 million on total pension costsin FY2025, includingboth CalPERScontributionsand supplementalPensionTrust Fund contributions. Thisisapproximately $4.6 million higherthanthe prior yearcostsof $44.4 million, or a 10.2% increase. Theseexpensesrepresentapproximately17% of the GeneralFund’s total expenses.

TABLE1: CalPERS’ ProjectedFY2024-2034BlendedRetirementRates percentageof payroll)
FY
2024
FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
FY
2030
FY
2031
FY
2032
FY
2033
FY
2034
Miscellaneous 44.8 47.4 45.5 42. 0 42.4 44.6 44.1 43.4 39.7 38.1 35.2 Safety 74.0 83.1 84.5 85. 7 86.2 89.5 88.5 86.8 82.6 79.9 74.8 2 CalPERSReportsPreliminary5.8% InvestmentReturnfor 2022-23FiscalYear:
https:// www.calpers.ca.gov/page/newsroom/calpers-news/2023/calpers-preliminary-investment-return-fiscal- year-2022-23?utm_source=esubscriptions&utm_medium=email&utm_campaign=CalPERS-News Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
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RetireeHealthcare/OtherPost-EmploymentBenefits (OPEB): RetireeMedicalisbasedonthe June 30, 2021 actuarialstudy preparedby Foster & Foster (previouslyBartel Associates), which is completedeverytwo years. Themost recent studywascompletedin June2022to inform the developmentof the FY2023and FY2024operatingbudgets (CMR14112asamendedby CMR 145023). Anupdatedvaluationasof June30, 2023to inform FY2025andFY2026isexpectedto be transmitted in June2024. Consistentwith City Councildirection and the RetireeBenefit FundingPolicy, this forecastcontinuesthe practiceto budgetthe full paymentof the Actuarial DeterminedContribution (ADC) for retiree healthcareandusesalternativeassumptions, suchas a more conservative5.75% discountrate (6.25% assumption), to transmit amountsabovethe recommendedpaymentasan additionaldiscretionarypayment (“prefunding”) to the California Employers’ RetireeBenefitTrust (CERBT) Fund.

CalPERSblendsactive employeeswith pre-Medicareretirees and chargesthe samemedical premium, even though youngeremployeeson averageconsumelesshealthcare. The higher premium to younger employeesthereby subsidizesolder employeesand retirees who, on average, havehigherclaimsandpremiums. TheLRFFestimates $16.9million ($10.8 millionin the GeneralFund) in FY2025for ADC, an approximate $0.5 million or 2.9% increasefrom FY2024 levelsof $16.4 million ($10.5 million in the GeneralFund). Theimpliedsubsidyis $3.3million in FY2025andeffectivelylowersthe fundingnecessaryto meetthe ADC.

TABLE2: RetireeMedicalGeneralFundContributions
FY
2024
FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
FY
2030
FY
2031
FY
2032
FY
2033
FY
2034

10.5 $ 10.8 $ 11.1 $ 11.4 $ 11.8 $ 12.1 $ 12.5 $ 12.9 $ 13.4 $ 13.8 $ 14.2 RetireeBenefitFundingPolicy (formerly “PensionFundingPolicy”): TheCity hastaken several proactivestepsto addressrisingpensioncostsandlong-term liabilities, includingcost-sharingin labor agreements, establishingan irrevocableSection115 PensionTrust (“PensionTrust”) and CaliforniaEmployers’ RetireeBenefit Trust (CERBT) Fund, and adopting a policy that guides financialplanningof thesebenefits (CMR11722asmodifiedby 2212-05134).

TheCityinitially contributedto the PensionTrustin FY2017on an ad-hocbasis, usingone-time savingsor excessrevenues. Beginningin FY2019, the CityCouncildirectedstaff to usea more conservativediscountrate as comparedto CalPERSfor the Normal Cost (NC) portion of the 3 FinanceCommittee, June7, 2023, CMR14112asamendedby CMR14502:
https:// www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance- committee/2022/ 20220607/20220607pfcsm-final.pdf
4 CityCouncil, November30, 2020, CMR11722:
https:// www.cityofpaloalto.org/files/assets/public/agendasminutes-reports/ reports/city-manager-reports- cmrs/year-archive/2020-2/id-11722.pdf
CityCouncil, February6, 2023, CMR2212-0513:
https:// cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=1067 Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
Attachment A - FY 2025-
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CMR 2307-1773

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payment and transferring the supplemental funding beyond CalPERSrequired employer contributionsto the PensionTrust. Thispracticewas reinforcedwith Councilapprovalof the RetireeBenefitFundingPolicy, andasof FY2024the City’sNCdiscountrateis5.3% ascompared to CalPERS6.8%. Additionally, one-time contributionscontinueto be madeeachyearif excess revenuesor unspentsavingsareavailable, subjectto CityCouncilapproval. Aspartof policygoals, the Cityseeksto reacha 90% fundedstatusby FY2036.

Everyfour years, the City’s RetireeBenefit FundingPolicyrequiresthat staff consult with an actuaryto inform the CityCouncilof progressthe Cityhasmadetowardsachievinga90% funded statusgoaland assessand respondto changesimpactingthe City’s retiree benefit plans. This comprehensivereview wasmost recentlycompletedin FY2023and resultedin severalpolicy revisions, mostnotablyreducingthe discountrate usedto calculatesupplementalcontributions to the PensionTrustfrom 6.2% to 5.3% andextendingactuaryreportingfrom 3to 4 yearsto align with the CalPERSALMStudy. Additionally, the title of the policy wasrevisedfrom the Pension Policy to the Retiree Benefit Policy to recognizeactions approved by the City Council to proactivelyplanfor retiree healthcareplansin a similarmannerto pensions, includingthe useof a lower 5.75% discountrate (CMR2212-05135). Themost recent actuaryanalysisprojectsthat the Citywill meet a 90% fundedgoalfor pensionplansby FY2034 (miscellaneousplan) and FY 2036-37 (safetyplan); the City’s practiceof transmittingexcessone-time savingswill helpreach thesegoalssooner.

In this forecast, approximately $13.8 million ($8.3million in the GeneralFund) in supplemental contributionsto the City’sPensionTrustisassumedin FY2025. Thisreflectsa $0.5 million ($0.4 million in the GeneralFund) increaseover the prior year, primarily due to the addition of new staff. ThroughFY2024, a total of $67.6 million ($44.6 million in the GeneralFund) in principal contributionsare expectedto be madeto the PensionTrustfor pensionbenefits. ThroughFY 2024, it isexpectedthat $11.1 million in principalcontributionswill be madeto the CERBTFund for retiree healthcarebenefits.

Healthcare: Consistentwith the most recent labor agreementsbetween the City and its bargainingunits, the City’scontributionamountstowardsmedicalcostsfor employeesarebased on a flat rate contributionfrom the City, with the employeecontributingtowardsthe remaining medicalplanpremium. Likesalaries, healthcarecostsareupdatedin accordancewith applicable Memorandumof Agreements (MOA) betweenthe Cityandits laborgroupsandthe Management andProfessionalPersonnelandCouncilAppointeesCompensationPlan(s).

Workers’ Compensation: The budget appropriation for workers' compensationincludes an estimatefor claimsincurredandreservesfor currentfilingsat an85% confidencelevel, basedon actuarialstudiescompletedby Bickmore. In FY2023, programexpendituresdecreasedby $3.0 million or 50%, from $6.0 million to $3.0 million from the prior year. Thelower yearover year claimsisreflectiveof delaysfor claimsincurredbut not yet reported, andtrend of decliningtotal 5 CityCouncil, February6,2023, CMR2212-0513:
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claims, alongwith risingcost on a per claimbasis, and reductionof claimswith high costsand severity. This forecast uses savingsaccumulated in fund balance to reduce department allocationsby $0.4 million ($0.3 million in the GeneralFund) in FY2025andmaintainsallocations at the samelevel through FY2027. Actuarialestimatescompletedin August2022informed FY 2024budgetlevelsof $7.3 million (approximately65% in the GeneralFund). More recentactuary estimatescompletedin August2023project expenselevelsconsistentwith current budgeted levels. Staffwill continueto monitor expendituresin the fund andbringforward adjustmentsas necessary. Claimestimatesandreservesfor FY2025are $7.6 million, representinga $0.3million or 4.0% increasefrom the FY2024 Adopted Budget. Estimatesfor workers' compensation increasein the forecastat ratesconsistentwith generalCPIincreases.

ContractServices
Thisforecastassumescontractservicesof $29.3 million in FY2025, a 2.0% increasefrom the FY 2024 Adopted budget of $28.8 million. This increaseis driven primarily by new negotiated contractsfor citywide servicessuchascustodial, landscaping, and managementof the animal shelter partially offset by the removalof one-time costsadoptedin FY2024for S/CAPstudies and Plan CheckReview. The increaseis also supported by a general4.0% CPIcost increase through the ten-year forecast period on smaller contractsthat do not have defined annual increases, basedon a reviewof the changesin the CaliforniaConsumerPriceIndex (CCPI) in the SanFranciscoBayAreafrom the August-to-Augustperiod. It isexpectedthat the estimatedCPI increaseswill be substitutedwith departmentbasebudgetrequeststo adjustcontractfunding needsaspart of the FY2025budgetprocess.

ContractServices - CommittedAdditions
The Committed Additions included in this forecast account for anticipated operating and maintenance (O&M) costsin the GeneralFundfor capitalprojectsanticipatedto comeonline within the ten-year forecastperiod. Costsfor projectsthat cameonline in FY2024havebeen annualizedinto the ongoingGeneralFundoperatingbudgetaspart of the LRFF. Thepreliminary total estimateis $44,500 for costsassociatedwith the following projectsanticipatedto come online in FY2025: DogParkInstallation (PG-18001), LibraryAutomatedMaterialsHandling (LB- 21000), andParkRestroomInstallation (PG-19000). Also, estimatedoperatingimpactsfrom the FireStation4 (PE-18004) project are includedstarting in FY2026. Additionalcost increasesof

4.0% annuallyareincludedthroughoutthe ten-yearforecastbasedon areviewof the changesin the CaliforniaConsumerPriceIndex (CCPI) in the SanFranciscoBayAreafrom the August-to- Augustperiod. Timingandanalysisof the fundingneedsfor theseprojectswill be evaluatedas part of the FY2025Budgetprocessanddevelopmentof the 2025-2029CapitalImprovementPlan CIP).

TABLE3: FY2024 – FY2033CommittedAdditions (Millions)
FY2025 FY2026 FY2027 FY2028 FY2029 FY2030 FY2031 FY2032 FY2033 FY2034

0.04 $ 0.07 $ 0.07 $ 0.08 $ 0.09 $ 0.10 $ 0.11 $ 0.12 $ 0.13 $ 0.14 Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
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SuppliesandMaterials
The FY2024 Adopted Budget for the GeneralFund included $3.3 million for Suppliesand Materials, whichisanticipatedto increaseby a 4.0% CPIcostincreasein FY2025to $3.5 million basedon a review of the changesin the CaliforniaConsumerPrice Index (CCPI) in the San FranciscoBayAreafrom the August-to-Augustperiod. Thisannualincreaseiscontinuedthrough the ten-yearforecastperiod. It is expectedthat the estimatedCPIincreaseswill be substituted with departmentbasebudgetrequeststo adjustfundingfor suppliesandmaterialsaspart of the FY2025budgetprocess.

GeneralExpense
Thiscategoryincludescostsfor travelandmeetings, telephoneandnon-cityutilities, contingency accountsandreserves, bankcardservicecharges, andsubsidiesandgrantsprovidedthroughthe HumanServicesResourceAllocationProgram (HSRAP). TheFY2024AdoptedBudgetof $19.1 million isexpectedto decreaseto $9.3 million in FY2025, primarilydueto the anticipateduseof the BudgetUncertaintyReserveto balancethe FY2025budget. This $14.0 million reservewas partiallyusedto balancethe FY2024AdoptedBudget ($3.9million), leavingapproximately $10.1 million to fund one-time needsin the FY2024Mid-YearBudgetReview ($1.1 million) and an anticipatedgapin FY2025 ($9.0 million). Thereductionis partially offset by a 4.0% annualCPI cost increaseon smalleritems that do not havea set annualbudget, basedon a reviewof the changesin the CaliforniaConsumerPriceIndex (CCPI) in the SanFranciscoBayAreafrom the August-to-Augustperiod. It isexpectedthat the estimatedCPIincreaseswill besubstitutedwith departmentbasebudgetrequeststo adjustfundingfor generalexpenseitemsaspart of the FY 2025budgetprocess.

GeneralExpense – ProjectHomekey: On September27, 2021the CityCouncildirectedstaff to applyfor ProjectHomekeyfundingin conjunctionwith LifeMovesto build anemergencyshelter at the former Los Altos Treatment Plant (LATP) site (CMR135956). This project will deploy modularhousingto provideinterim housingopportunitiesfor homelessindividualsandfamilies in the City of Palo Alto. Project Homekeyis a program, funded by the State of California Departmentof Housingand CommunityDevelopment, intended to provide grant funding and facilitateapartnershipwith the Stateto quicklyacquire, rehabilitate, or masterleasea varietyof housingtypes. Oncedeveloped, theseprojectsprovideinterim or permanenthousingoptionsfor personsexperiencinghomelessnessandwho arealsoat riskof healthconcerns. Thesite will be operatedfor at leastfifteen yearsasinterim housingper the program’sdurationalrequirement.

Thisprojectwill utilizeacombinationof fundingsourcesincludingthe ProjectHomekeyProgram for capital expensesand donations, grant funds, and City support for ongoing operations expenses. This LRFFincludesthe City’s committed investment of $7.0 million in operating expenses ($1.0 million annually FY 2025 through FY 2031). This funding was previously programmedfrom FY2023throughFY2029; however, the first two yearsof operatingfunding was redirectedto the HomekeyFacilitiescapital project (PE-24005) in order to completethe 6 CityCouncil, September27,2021, CMR13595: https:// www.cityofpaloalto.org/files/assets/public/agendas- minutes-reports/agendas-minutes/city-council-agendas-minutes/2021/09-september/20210927/210927accsm- amended-final.pdf
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housinginfrastructure. ThisLRFFmaintainsthe original $7.0million commitmentfrom the City.

Someoperatingfundingsupportisexpectedfrom ProjectHomekeyaswellastheCountyof Santa Clara. Any remaining gapsin funding will need to be closedby fundraising, operating cost containmentstrategies, and/or grantfunds.

GeneralExpense - CubberleyLease: In FY2015, the City and PaloAlto Unified SchoolDistrict PAUSD) agreedto a five–yearextensionof the Cubberleyleasefrom January2015to December 2019. In October2019, the City Councildirected staff to negotiatewith PAUSDto extendthe lease agreement an additional five years, through December2024 (CMR 107307). A new Cubberleyleasewas approvedby the City Councilin June2020 (CMR114608) for a smaller portion of the Cubberleysitewith a correspondinglylower baserent payment (CMR113869). As part of the original lease agreement, the City Councilapproved creation of the Cubberley InfrastructureImprovementsFundsupportedbyanannual $1.9milliontransferfrom the General Fund, which is classifiedas an OperatingTransfer-Out and discussedin further detail in that sectionof this report below. With the CubberleyInfrastructurefundssetaside, the annualbase rent for the Cubberleypremisesis $2.6 million plusan additional $0.8 million for child daycare sitesandutilities. A pendingfactor at the Cubberleysite that is part of ongoingdiscussions, but not includedin the LRFFestimates, is a proposalto leasethe Cubberleysite from PAUSD (CMR 2308-194910) in order to facilitatethe developmentof a new communitycenterfacility.

RentsandLeases
TheRentsand Leasesexpensecategoryfor FY2025is estimatedto increasefrom the FY2024 AdoptedBudgetlevelbyapproximately2.7% to $1.4 million. Thisisbasedon currentleaseterms that includepreviouslynegotiatedleaseincreasesThiscategoryincludesthe leaseagreementfor DevelopmentServicesstaff at locationsoutsideCityHall (285Hamiltonand526Bryant) aswell asleasewith Stanfordfor ElCaminoPark. A new leaseagreementwasexecutedin December 2020for the DevelopmentServicesofficelocationat 526BryantStreet, limiting the spaceto the basementlevel (CMR1142611). Theleasewasamendedin September2022to extendthe term initially for 12 months with the right to automaticallyextend for four successive12-month periods, potentiallythroughJanuary31, 2028 (CMR14713). In June2021, the Cityenteredinto a seventhamendmentfor theDevelopmentServicesofficeleaseat 285HamiltonAvenueto extend the term from February 2022 to January2025 (CMR 1233412). As expensesfor rent for DevelopmentServicesareadjusted, acorrespondingrevenueadjustmentwill bemadeto ensure DevelopmentServicesmaintainscostrecoverylevels.
7 CityCouncil, October7, 2019, CMR10730: https:// www.cityofpaloalto.org/civicax/filebank/documents/73558 8 CityCouncil, June23, 2020, CMR11460: http:// cityofpaloalto.org/civicax/filebank/documents/77365 9 CityCouncil, June15, 2020, CMR11386: http:// cityofpaloalto.org/civicax/filebank/documents/77073 10 CityCouncil, October16, 2023, CMR2308-1949:
https:// cityofpaloalto.primegov.com/portal/viewer?id=9323&type=3 11 CityCouncil, December14, 2020, CMR11426: https:// www.cityofpaloalto.org/files/assets/public/agendas- minutes-reports/ reports/city-manager-reports-cmrs/year-archive/2020-2/id-11426.pdf?t=59979.32 12 CityCouncil, June21, 2021, CMR12334: https:// www.cityofpaloalto.org/files/assets/public/agendas-minutes- reports/reports/city-manager-reports-cmrs/2021/id-12334.pdf Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
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FacilitiesandEquipment
Along with funding for various equipment needsacrossdepartments, this budget category includes subscription payments for equipment like public safety radios. The Facilitiesand Equipmentexpensecategoryisexpectedto increasefrom the FY2024Adoptedlevelof $460,000 to $480,000due to a 4.0% CPIcostincreasebasedon a reviewof the changesin the California ConsumerPriceIndex (CCPI) in the SanFranciscoBayAreafrom the August-to-Augustperiod. It is expectedthat the estimatedCPIincreaseswill be substitutedwith departmentbasebudget requeststo adjustfundingfor equipmentneedsaspart of the FY2025budgetprocess.

AllocatedCharges
AllocatedChargesrepresentexpenseallocationsby the City’s Enterpriseand Internal Service Fundsfor servicesandproductstheyprovideto other departments. TheFY2024AdoptedBudget for the GeneralFundincluded $25.8 million for theseexpenses, includingutilities usage, general liability insurance, technologycosts, vehicleequipmentmaintenanceandreplacementcosts, and other chargesfor servicesprovidedby other Citydepartmentsandfunds. TheFY2025allocated chargesin the LRFFupdatethe revenuesandexpensesfor thesevariousallocationsbasedon the informationavailableat the time of the LRFFdevelopment. FY2025isanticipatedto experience anincreaseof 7.2% to atotal of $27.7 million. Thisincreaseisprimarilydueto anticipatedhigher costsassociatedwith technologyservicesandutilities for Cityfacilitiessuchaswater, electricity, andgas.

OperatingTransfersOut
OperatingTransfersOut include transfersfrom the GeneralFundto Debt ServiceFunds, the TechnologyFund, and variousother funds but excludestransfersto the CapitalImprovement Fund, whicharedetailedin the followingTransferto Infrastructuresection. TheFY2024Adopted BudgetincludedOperatingTransfersOutof $5.0million. In FY2025, OperatingTransfersOutare anticipatedto increaseto $6.5 milliondueto anticipatedfundingneedsin the UniversityAvenue, CaliforniaAvenue, and ResidentialPermit ParkingFunds. One-time loans of $ 450,000 and 50,000 to the CaliforniaAvenueand ResidentialPermit ParkingFunds, respectively, were approvedin FY2024; however, a total of $2.0 million acrossall three fundsis factoredinto this LRFF. Staffwill continueevaluatingthesefundsaspart of the FY2025budgetdevelopmentand will bringforward recommendationsasneededto keepthe parkingpermit fundssolvent.

Transferto Infrastructure
Recoveryfrom the COVID-19 pandemicis reflectedin improvedrevenuelevelsin the FY2024 budget compared to the FY 2023 budget. The total General Fund transfer to the Capital Improvement Fund budgeted in FY 2024 is $24.7 million compared to the $ 22.9 million transferred in FY2023. This is comprisedof a $12.3 million basetransfer includinginterest earnings, and $12.4 million from TOTrevenuegeneratedthroughvoter-approvedrate increases andnew hotelsthat is dedicatedto the CapitalImprovementFundto supportthe 2014Council InfrastructurePlan, consistentwith CityCouncildirection. Estimatedtransfersfrom TOTrevenues in FY2025arecurrentlyprojectedto increaseto $13.0 million andthe basetransferto increase to $15.2 million for a total $28.2 million transferto the CapitalImprovementFund. Thisforecast Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
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continuesthegoalestablishedaspartof the 2022-2026CapitalImprovementPlan (CIP) to restore the baseportion of this transferto pre-pandemiclevelsby FY2026. Thisbudgetcategoryalso includesthe separate $1.9 million transfer to the CubberleyPropertyInfrastructureFund. This transfer to the CubberleyPropertyInfrastructureFundsupportsfacility systemsmaintenance needsat the CubberleyCommunityCenterfacility as well as capital improvementprojectsto maintainandupkeepthe facility.

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ATTACHMENT E
Human Services Resource Alloca on Process HSRAP) Funding Referral As part of the FY 2024 Adopted Budget, the Council directed sta to follow up with addi onal work to, Consider pegging HSRAP budget alloca ons to a benchmark, such as percentage of General Fund budgeted expenditures.” Sta researched previous discussion of this item and found a reference of a recommenda on for increasing HSRAP funding as part of a Policy and Services mee ng on November 29, 2016 CMR 72891). There were four op ons for augmen ng the HSRAP funding, but ul mately none of them were approved for recommenda on to the Council. The status quo of increasing the funding by the Consumer Price Index CPI) as funding was available in the General Fund con nued.

Sta also compiled historical data back to FY 2001 to determine the percentage of funding for human services programs compared to the General Fund expenditures budget in each year, and what amount of funding would be needed if funding for human services programs was pegged to 1% of the General Fund expenditures budget in the future using the base case LRFF numbers.

Prior to FY 2016 funding for Avenidas and Palo Alto Community Childcare PACCC) was determined as part of the HSRAP process; however, star ng in FY 2016 these two programs were funded through a direct funding alloca on and separated from the HSRAP process. Table 1 below shows the total funding for human services programs with funding projec ons through FY 2027, the rst three years of the LRFF.

Table 1
1 November 29, 2016 Policy and Services CMR 7289:
h ps:// www. cityofpaloalto. org/ les/ assets/ public/ v/ 1/ agendas minutes reports/ reports/ city manager reports cmrs/ year archive/ 2016/ id 7289 hsrap. pdf
Fiscal
Year
HSRAP
Funding
Avenidas
PACCC
Funding
Total Human
Services
Funding
General Fund
Adopted
Budget
of GF Budget
HSRAP Total Human
Services Funding
FY 2001 386, 245 845, 716 1, 231, 961 108,778, 000 0. 36% 1. 13% FY 2002 433, 254 871, 088 1, 304, 342 125,766, 000 0. 34% 1. 04% FY 2003 444, 862 897, 221 1, 342, 083 125,908, 000 0. 35% 1. 07% FY 2004 335, 835 870, 220 1, 206, 055 116,686, 000 0. 29% 1. 03% FY 2005 375, 835 870, 220 1, 246, 055 116,015, 000 0. 32% 1. 07% FY 2006 331, 453 845, 936 1, 177, 389 120,692, 000 0. 27% 0. 98% FY 2007 331, 453 845, 936 1, 177, 389 125,074, 000 0. 27% 0. 94% Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
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FY 2016 was the rst year Avenidas and Palo Alto Community Childcare PACCC) were funded through separate human service contracts
For HSRAP funding, the average percentage of funding compared to the General Fund budgeted expenditures is 0. 26% from FY 2001 through FY 2024. Comparing total funding for human services programs from FY 2001 through FY 2024, including HSRAP, Avenidas, and PACCC, to the General Fund budgeted expenditures shows that the percentage has ranged from over 1% down to 0.68% with an average of 0.83%.

For FY 2025 through FY 2027, numbers from the base case LRFF indicate that human services funding will be approximately 0. 74% of the General Fund budgeted expenditures. To increase human services funding to 1% of the General Fund budgeted expenditures in the future, an addi onal 0. 8 million would need to be allocated for human services programs annually. This would increase the current projected decits in FY 2025 through FY 2027 to 6. 8 million, 6.2 million, and 4. 2 million respec vely.

Fiscal
Year
HSRAP
Funding
Avenidas
PACCC
Funding
Total Human
Services
Funding
General Fund
Adopted
Budget
of GF Budget
HSRAP
Total Human
Services Funding
FY 2008 300, 453 860, 941 1, 161, 394 139,185, 000 0. 22% 0. 83% FY 2009 300, 453 860, 941 1, 161, 394 145,308, 000 0. 21% 0. 80% FY 2010 285, 430 817, 894 1, 103, 324 142,089, 000 0. 20% 0. 78% FY 2011 285, 430 817, 894 1, 103, 324 146,711, 000 0. 19% 0. 75% FY 2012 300, 737 809, 715 1, 110, 452 146,360, 000 0. 21% 0. 76% FY 2013 300, 737 809, 715 1, 110, 452 152,800, 000 0. 20% 0. 73% FY 2014 348, 163 881, 950 1, 230, 113 159,700, 000 0. 22% 0. 77% FY 2015 425, 594 890, 583 1, 316, 177 171,100, 000 0. 25% 0. 77% FY 2016* 436, 660 913, 738 1, 350, 398 185,700, 000 0. 24% 0. 73% FY 2017 448, 013 937, 495 1, 385, 508 194,200, 000 0. 23% 0. 71% FY 2018 503, 213 960, 933 1, 464, 146 210,400, 000 0. 24% 0. 70% FY 2019 515, 793 984, 956 1, 500, 749 210,700, 000 0. 24% 0. 71% FY 2020 535, 908 1, 023, 369 1, 559, 277 230,800, 000 0. 23% 0. 68% FY 2021 549, 306 1, 048, 953 1, 598, 259 196,900, 000 0. 28% 0. 81% FY 2022 549, 306 1, 048, 953 1, 598, 259 209,200, 000 0. 26% 0. 76% FY 2023 622, 377 1, 093, 009 1, 715, 386 247,400, 000 0. 25% 0. 69% FY 2024 851, 035 1, 147, 660 1, 998, 695 279,581, 000 0. 30% 0. 71% FY 2025 885, 076 1, 193, 566 2, 078, 643 281,887, 000 0. 31% 0. 74% FY 2026 920, 479 1, 241, 309 2, 161, 789 294,473, 000 0. 31% 0. 73% FY 2027 957, 299 1, 290, 961 2, 248, 260 304,465, 000 0. 31% 0. 74% Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
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DECEMBER5, 2023 www.cityofpaloalto.org
FY2025 –FY
2034LONGRANGE

FINANCIALFORECAST
FinanceCommitteeItem #1
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2 OVERVIEW
Economycontinuestodemonstrateresiliencytoformalrecession Forecastreflectsstagnationoffsetbyinflation
LRFFconsistentwithFY24AdoptedBudget, reflectsnear-termdeficits FY2025shortfallsresolvedwithUncertaintyReserve
ConsistentwithFY2024AdoptedBudgettwo-yearstrategy
MeasureK (BusinessTax) includedforapprovedprojects
MeasureL (EquityTransfer) phasedto18% byFY2027
Expenseprojectionsbasedoncurrentapprovedservicelevels
Assumes20% BSRtomitigateuncertainty (typicaltarget = 18.5%) Costoflabor, inflation, andvacanciesarekeyfactors
EstimatedsurplusinFY2024 ($3.4M) fromMajorTaxRevenue; tobe reviewedatMid-Year
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3 THEECONOMY
Localeconomycontinuestoshowstrongperformanceinthefirsthalfofcalendaryear 2023andindicatorsreflectstrongemploymentandeconomicgrowth UCLAAndersonforecastinginlinewithPaloAltothatarecessionisunlikely; thisLRFF assumeseconomicstagnationatthebeginningofthe10-yearperiod NationalGrossDomesticProduct (GDP)
RealGDP: PercentChangefromPrecedingQuarter
NationalInflationRate /
ConsumerPriceIndex (CPI)
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4 FISCALYEAR2025 -2034BASECASEFORECAST
RevenuescatchuptoExpensesinFY2030
MildeconomicstagnationthroughendofFY2025
UncertaintyReserveoffsetsFY2025shortfall,
consistentwith2-yrbalancingstrategyinprioryear
Actual
2023
Adopted
2024
Projected
2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
TotalRevenue $ 254,799 $ 261,141 $ 264,281 275, 889 $ 289,060 $ 301,025 $ 312,564 $ 325,208 $ 339,684 $ 353, 085 $ 365,820 $ 379,944 $ 394,026 BSRContribution (One-Time)-$ 3,440 $ 3,440 ----------
ReappropriatedFunds (One-Time)-$ 15,000 $ 15, 000 ---------- TotalSourceofFunds $ 254,799 $ 279,581 $ 282,722 $ 275, 889 $ 289,060 $ 301,025 $ 312,564 $ 325,208 $ 339,684 $ 353, 085 $ 365,820 $ 379,944 $ 394,026 YearoverYearincrease (revenueonly) 5.6% 4.8% 4.1% 3.8% 4.0% 4.5% 3.9% 3.6% 3.9% 3.7% TotalExpenditures $ 243,695 $ 279,581 $ 279,282 $ 281,887 $ 294,473 $ 304,465 $ 314,253 $ 325,708 $ 333,099 $ 341,030 $ 344,933 $351,721 $ 357,516 TotalUseofFunds $ 243,695 $ 279,581 $ 279,282 $ 281, 887 $ 294,473 $ 304,465 $ 314,253 $ 325,708 $ 333,099 $ 341, 030 $ 344,933 $ 351,721 $ 357,516 YearoverYearincrease 0.8% 4.5% 3.4% 3.2% 3.6% 2.3% 2.4% 1.1% 2.0% 1.6% NetOne-TimeSurplus/(Gap)$ 11,104 ($ 0)$ 3,440 ($ 5,998)($ 5,414)($ 3,440)($ 1, 689)($ 500)$ 6,585 $ 12,055 $ 20,887 $ 28,223 $ 36,511 CumulativeNetOperatingMargin
One-Time)$ 87,220
NetOperatingMargin ($ 5,998)$ 585 $ 1,974 $ 1,751 $ 1,189 $ 7,085 $ 5,470 $ 8,832 $ 7,336 $ 8,288 ForecastedOne-TimeGapafterUseofUncertaintyReserve ($ 0) CumulativeNetOperatingMargin $ 36,511
Assumesthattheannualshortfallsaresolvedwithongoingsolutionsandannualsurplusesarespentforongoingexpenditures Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
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6 MAJORTAXREVENUEPROJECTIONS
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7 ASSUMPTIONSNOTINCLUDEDINFORECAST
LaborNegotiations (contractsexpireinJan/Jun2025);
LRFFincludesanestimatedreserveforchangesinvacancyrates, laborand benefitvariability, andinflation
CapitalImprovements: ParksMasterPlan,RailroadGrade
Separation, VehicleFleetElectrification
CubberleyCommunityCenterRedevelopment
LimitedTermPrograms:

PsychiatricEmergencyResponseTeam (PERT)
PALink
DowntownStreetsTeam
ProjectHomekey
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8 ALTSCENARIOA: ECONOMICALLYSENSITIVEREVENUEINFY25
Modelstheimpactofa1% lossinrevenue
frommajortaxes, chargesforservices, and
permitsandlicenses
Revenuesdecreaseby $2.1MinFY2025and
increaseprojectedshortfalls
Actual
2023
Adopted
2024
Projected
2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
TotalRevenue $ 254,799 $ 261,141 $ 264, 281 273,760 286,825 298,692 310,138 322,682 337,041 350,335 362,971 376,979 390,943 BSRContribution (One-Time)-$ 3,440 $ 3,440 ----------
ReappropriatedFunds (One-Time)-$ 15,000 $ 15,000 ---------- TotalSourceofFunds $ 254,799 $ 279,581 $ 282,722 $ 273,760 $ 286,825 $ 298,692 $ 310,138 $ 322,682 $ 337,041 $ 350,335 $ 362,971 $ 376,979 $ 390,943 YearoverYearincrease (revenueonly) 4.8% 4.8% 4.1% 3.8% 4.0% 4.4% 3.9% 3.6% 3.9% 3.7% TotalExpenditures 243,695 279,581 279, 282 281,887 294,471 304,463 314,251 325,705 333,097 341,028 344,930 351,718 357,513 TotalUseofFunds $ 243,695 $ 279,581 $ 279,282 $ 281,887 $ 294,471 $ 304,463 $ 314,251 $ 325,705 $ 333,097 $ 341,028 $ 344,930 $ 351,718 $ 357,513 YearoverYearincrease 0.8% 4.5% 3.4% 3.2% 3.6% 2.3% 2.4% 1.1% 2.0% 1.6% NetOne-TimeSurplus/(Gap)$ 11,104 ($ 0)$ 3, 440 ( 8,128)($ 7,646)($ 5,771)($ 4,112)($ 3,023)$ 3,944 $ 9,307 $ 18,041 $ 25,261 $ 33,431 CumulativeNetOperatingMargin
One-Time)$ 61,304
NetOperatingMargin ($ 8,128)$ 481 $ 1,876 $ 1,658 $ 1,089 $ 6,968 $ 5,363 $ 8,733 $ 7,221 $ 8,169 CumulativeNetOperatingMargin $ 33,431
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9 Modelstheimpactofa1% compensation
adjustmentoncenegotiatedagreementssunset
Expensesincreaseby $1.2MinFY2026and
increaseprojectedshortfalls
ALTSCENARIOB: COMPENSATIONADJUSTMENTINFY26
Actual
2023
Adopted
2024
Projected
2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
TotalRevenue $ 254,799 $ 261,141 $ 264,281 275,889 $ 289,060 $ 301,025 $ 312,564 $ 325,208 $ 339,684 $ 353,085 $ 365,820 $ 379,944 $ 394,026 BSRContribution (One-Time)-$ 3,440 $ 3, 440 ----------
ReappropriatedFunds (One-Time)-$ 15,000 $ 15,000 ---------- TotalSourceofFunds $ 254,799 $ 279,581 $ 282,722 $ 275,889 $ 289,060 $ 301,025 $ 312,564 $ 325,208 $ 339,684 $ 353,085 $ 365,820 $ 379,944 $ 394,026 YearoverYearincrease (revenueonly) 5.6% 4.8% 4.1% 3.8% 4.0% 4.5% 3.9% 3.6% 3.9% 3.7% TotalExpenditures 243,695 279, 581 279,282 281,887 295,719 305, 761 315,587 327,082 334, 501 342,460 346, 392 353, 208 359,033 TotalUseofFunds $ 243,695 $ 279,581 $ 279,282 $ 281,887 $295,719 $ 305,761 $ 315,587 $ 327,082 $ 334,501 $ 342,460 $ 346,392 $ 353,208 $ 359,033 YearoverYearincrease 0.8% 4.9% 3.4% 3.2% 3.6% 2.3% 2.4% 1.1% 2.0% 1.6% NetOne-TimeSurplus/(Gap)$ 11,104 ($ 0)$ 3,440 ( 5,998)($ 6,659)($ 4,735)($ 3,023)($ 1,874)$ 5,183 $ 10,625 $ 19,429 $ 26,736 $ 34,993 CumulativeNetOperatingMargin
One-Time)$ 74,676
NetOperatingMargin ($ 5,998)($ 661)$ 1,924 $ 1,712 $ 1,149 $ 7,057 $ 5,442 $ 8,804 $ 7,307 $ 8,258 CumulativeNetOperatingMargin $ 34,993
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7 FY2025BUDGETDEVELOPMENTGUIDELINES (AttachmentA)
Developastructurallybalancedbudgettomaintainfiscalsustainability Examineappropriateuseofsurpluses
ReviewresourceallocationforCityCouncil’sidentifiedpriorities Focusonbusinessprocessredesignandexplorealternativeservice deliverymodels
Exploreexpansionofexistingrevenuesourcesortheadditionofnew revenuesources
Continuetoprioritizeproactivelyfundinglongtermliabilities 10 Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
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7 HSRAPFUNDINGREFERRAL (AttachmentE)
CouncilReferral: ConsiderpeggingtheHumanServicesResourceAllocationProcess (HSRAP) budgetallocationstoabenchmark, suchaspercentageofGeneralFundbudgeted expenditures.

HSRAPfundingaveraged0.26% oftheGeneralFundbudgetfromFY2001 –FY2024 Totalhumanservicesfundingaveraged0.83%

0.8Mneededannuallytoincreasetotalhumanservicesfundingto1% oftheGeneral FundbudgetinFY2025 –FY2027oftheLRFFbasecase
HumanservicesfundingneverapprovedtobetiedtotheGeneralFundbudget PriortoFY2016HSRAPincludedAvenidas & PaloAltoCommunityChildcare (PACCC), afterFY2016theseprogramswerefundedthroughdirectallocationseparatefromHSRAP 10 Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
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NextStepsAnnualBudgetProcess
Jan2024: CouncilreviewLRFF
Feb2024: FY2024Mid-YearBudget
May2024:FY2025ProposedBudget
7 CONCLUSIONANDNEXTSTEPS
Revenuetrendsindicateneartermeconomicstagnationfollowedbyreturntogrowth 2025-2034LRFFconsistentwithFY2024AdoptedBudgettwo-yearstrategy Focusoninvestingonlyinkeyareasofpriorityorurgentneeds
Alternativescenariosincreaseprojectedshortfalls
UncertaintyReserveandone-timesurplusesarecriticaltomanagethenear-term fiscalstabilityandinvestmentsinpriorityinitiatives
FY2024Mid-Yearwillincluderecommendationsforadditionofkeyresourcesand appropriationoffundsasdirectedbyCouncil
Reviewofobjectivesdeferredasoutlinedin
FY2024AdoptedBudget
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12 RECOMMENDEDACTION
StaffrecommendsthattheFinanceCommittee:

ReviewandrecommendthattheCityCouncilaccepttheFiscal
Year2025 –2034LongRangeFinancialForecastBaseCaseand
theFY2025BudgetDevelopmentGuidelines (AttachmentA).

DirectstafftousethisforecastasastartingpointfortheFY
2025budgetprocess.

Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
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PaulHarper
BudgetManager
[email protected]
JessieDeschamps
BudgetManager
[email protected]
Attachment I - General Fund Long Range Financial Forecast Staff Report Item 12
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Attachment II – FY 2025 Budget Development Guidelines
1) Develop a structurally balanced budget that brings ongoing revenues and expenses into alignment. Develop a plan for any structural imbalance to ensure that the City maintains fiscal sustainability over the short, medium, and long-term. 2) Allocate one -time resources for one -time needs rather than committing one -time resources to ongoing services. Examine appropriate uses of revenue surpluses that exceed forecasted levels such as planning for recession needs, restoration needs, and strategic investments.
3) Review resource allocation for City Council’s existing priorities and identify priority funding needs.
4) Focus on business process redesign to enhance quality, flexibility, and cost -effectiveness of service delivery (include examining opportunities to streamline, simplify, reorganize, and reallocate resources to avoid duplication of effort). 5) Explore alternative service delivery models (such as partnerships with non -profits or other public/private sector groups) to minimize overlap, maximize cost share, and effectively use resources.
6) Continue to thoroughly analyze non-personnel/equipment/other costs, such as contract services, for cost savings opportunities or realignment with current needs. 7) Explore the expansion of existing revenue sources or the addition of new revenue sources, including the alignment of existing charges for services and the opportunity to establish new fees, when appropriate.
8) Continue to analyze and prioritize resource augmentations, seeking to offset augmentations with reductions elsewhere for net -zero impacts to the budget whenever possible; however, ensuring when resource augmentations are added, it is in alignment with one-time and ongoing forecasted sources.
9) Continue to prioritize proactively funding long term liabilities including but not limited to debt obligations, pension obligations, and capital infrastructure in accordance with City policies as approved by Council.

FY 2025 Budget Development Guidelines
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ATTACHMENT C
Additional information as Requested by Finance Committee Vacancy Analysis
The current vacancy rate is approximately 13.5% in the General Fund, excluding public safety.

This additional funding fully forecasts the savings the City has seen in recent years of $1.7 million as shown in Table 1.

Consistent with past practice, the vacancy assumption is lower than the actual vacancy rate to allow departmental use of those savings for other staffing strategies, such as filling staffing gaps by contracting for professional services, hiring ahead to allow overlap and smooth transitions, piloting new technologies to increase efficiency in the absence of staff, and supporting a summer internship program. For example, vacancy savings have been used to hire on-call inspectors and planners on a limited-term basis to meet changing demands. Additionally, these savings have bridged changes in employee compensation when labor terms are completed outside of the regular budget cycle, and they support professional recruitment services for hard to fill positions.

Lastly, these savings give flexibility to start or expand projects and programs during the fiscal year, ahead of the formal budget process. A recent example is the Planning and Development Services Department’s use of vacancy savings to hire consultancy services to advance work related to the North Ventura Coordinated Area Plan (NVCAP). This approach facilitates continuity of the project while the department continues efforts to fill staffing vacancies in the Long-Range Planning division.

TABLE 1: Historical General Fund Vacancy Savings ($’s in Millions) 2019 2020** 2021** 2022 2023
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ATTACHMENT C
Additional information as Requested by Finance Committee Total General Fund Vacancy Savings $1.3M $1.3M -$1.7M $1.6M $1.7M Annual Vacancy Rate 12% 12% 15% 12% 13%
General Fund Adjusted Budget* $123.3M $134.7M 124.1M $134.3M $148.4M Variance to Budget 1.1% 1.0% -1.4% 1.2% 1.2%
* The annual budget reflects salaries and benefits net of the forecasted vacancy factor each year. ** FY 2020 and FY 2021 are anomaly years as they were significantly impacted by adjustments made due to the COVID-19 pandemic where a number of factors are impacting these rates including but not limited to a hiring freeze as well as eventual position reductions citywide.

Economic Recovery Advisory Report
During the LRFF review, the Finance Committee raised questions regarding the processes to develop LRFF assumptions and variability in actual results. As a follow up to this discussion, this report includes references to an audit completed by the Office of the City Auditor (OCA) in April 2022 to review the City’s long-term financial planning models and inputs (CMR 13915 1). The purpose of this audit was to offer recommendations for improvement, identify and evaluate key revenue source categories that present long term risk to the City's financial sustainability and perform scenario analysis. The OCA conducted analysis of major revenue sources, including historical trends, the distribution of revenue by type, identification of major payors and their geographic locations, historical relationships between economic factors and revenue, sensitivity analysis based on relevant drivers, and a comparison of per-capita revenues by type to those of similar cities. The analysis also involved evaluating economic factors affecting each revenue source and assessing the use of relevant factors for predictive purposes. The OCA results indicated that the City’s was able to forecast revenues at no more than a 9% difference from original estimates over a five-year period, from FY 2016 to FY 2020. Further, the results indicated that the City has a robust process for forecasting and uses reliable information for assumptions.

Overall, the OCA determined that the City's long-term financial planning models and inputs align with the OCA's considerations and best practices.

Historical Grant Funding and Funding from Other Agencies From FY 2019 through FY 2023, various federal, state, local, and other agencies allocated funds for programs and initiatives across the General Fund and the Capital Improvement Fund. The City’s practice is to recommend allocation of these funds after formal agreements are in place with the granting agency or jurisdiction. In addition, since these funds are designated for specific needs, staff strives to use these funding sources first in order to maximize resources. 1 City Council, April 11, 2022; Staff Report # 13915,
https://portal.laserfiche.com/Portal/DocView.aspx?id=59425&repo=r-704298fc&searchid=4fe0b40a-9941-44aa- 8e0d-6479fb037f48
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ATTACHMENT C
Additional information as Requested by Finance Committee Operating - General Fund
2019 2020 2021 2022 2023
Funding by Fiscal Year (in Millions) $0.8 $0.8 $1.1 $8.8 $12.1 Notably, the Federal Transportation Agency (FTA) contributed to transportation-related projects along with the Santa Clara County Measure B Transportation Improvement Program, and Stanford University supporting the PA Link program. The Institute of Museum and Library Services (IMLS) and Pacific Library Partnership (PLP) supported library partnerships and initiatives and Federal Health and Human Services (HHS) funding was appropriated for mental health services. The funding landscape also encompassed grants for housing and planning awarded by the Metropolitan Transportation Commission (MTC) and California Senate Bill 2 (CA SB2), COVID- 19 relief through CARES and American Rescue Plan Act (ARPA) funds, fire fighter staffing funding via Staffing for Adequate Fire and Emergency Response (SAFER), and investments in safety equipment through the Santa Clara County Office of Emergency Services (SCC OES). Significant sources of funding in each year are as follows:
•2019: FTA and PLP
•2020: FTA, SCC OES, CA SB2, and IMLS
•2021: CARES Act and IMLS
•2022: ARPA, SAFER, and MTC
•2023: ARPA, Measure B, Federal HHS, SAFER, MTC, and Stanford (via transit revenue sharing)
Capital Improvement Fund
External revenues supporting capital improvement projects fall into three broad categories:
local/regional grants (including Measure B), state grants, and federal grants. The table below summarizes the amounts, sources, and uses of these revenues by fiscal year from FY 2019-FY 2023. The amounts in each fiscal year, which total $50.5 million, do not include reappropriations.
2019 2020 2021 2022 2023
Funding by Fiscal Year (in Millions) $12.4 $4.3 $12.6 $4.0 $17.0 Details of funding sources and capital projects supported are discussed below. •2019: Local/regional grants comprised $8.4M
▪$7M supporting the Highway 101 pedestrian/bicycle overpass ▪$1.4M of Measure B supporting transportation projects
oState grants of $3M for the Newell Road/San Francisquito Creek bridge replacement
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ATTACHMENT C
Additional information as Requested by Finance Committee o$1M of federal grants supported street maintenance
•2020: Local/regional grants comprised $3.4M
▪$2M supporting the Highway 101 pedestrian/bicycle overpass ▪$1.4M of Measure B supporting transportation projects. o$0.5M of federal grants supported Churchill Avenue/Alma Street railroad crossing safety improvements
o$0.4M of state grants supported street maintenance
•2021: State grants comprised $5.1M
▪$4.6M supporting the Newell Road/San Francisquito Creek bridge replacement
▪$0.5M supporting street maintenance
oFederal funding comprised $4.3M
▪$4.0M for Churchill Avenue/Alma Street railroad crossing safety improvements,
▪$0.3M was given in support of JMZ renovation.
oLocal/regional grants comprised $3.3M
▪$1.5M went to the Highway 101 pedestrian/bicycle overpass ▪$1.3M of Measure B for transportation projects and street maintenance ▪0.5M supported Safe Routes to School and JMZ renovation •2022: Local/regional grants comprised $2.6M
▪$2M of Measure B supporting transportation projects and street maintenance
▪$0.6M of other grants supporting the Highway 101 pedestrian/bicycle overpass and the Civic Center electrical upgrade & EV charger installation o$1M of state grants supported the Newell Road/San Francisquito Creek bridge replacement and street maintenance
o$0.3M of federal grants supported JMZ renovation
•2023: State grants comprised $13.3M
▪$12.5M for the Newell Road/San Francisquito Creek bridge replacement, ▪$0.5M for street maintenance
▪$0.3M for Boulware Park improvements and the Charleston/Arastradero Corridor
oLocal/regional grants comprised $4.8M,
▪$2.5M supported Roth Building rehabilitation
▪$1.3M of Measure B supported transportation projects.

Turning to currently budgeted revenues in the Capital Improvement Fund, the table below shows how Measure K, the City of Palo Alto’s business tax, and Measure B, a Santa Clara sales tax that benefits transportation projects, are currently planned to be allocated across capital Item 12
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ATTACHMENT C
Additional information as Requested by Finance Committee improvement projects based on the 2024-2028 Capital Improvement Plan (CIP). These allocations may change based on staff recommendations and Council direction during the FY 2025 budget and 2025-2029 CIP development cycle.
2024 2025 2026 2027 2028
Measure K - City of Palo Alto Business Tax $0.75 $1.5 $3.0 $3.0 $3.0 PL-24000 - Meadow Dr./ Charleston Rd. Rail
Grade Separation and Safety Improvements
$0.43 $0.75 $2.0 $2.0 $2.0
PL-24001 - Churchill Avenue Rail Grade
Separation and Safety Improvements
$0.32 $0.75 $1.0 $1.0 $1.0
Measure B - Santa Clara County Sales Tax $10.5 $7.8 $27.3 $27.3 $20.3 PL-05030 - Traffic Signal and Intelligent
Transportation Systems
$0.6 $0.3 $0.3 $0.3 $0.3
PL-12000 - Transportation and Parking
Improvements
$0.5 - - - -
PL-17001 - Railroad Grade Separation and
Safety Improvements
$1.9 $1.0 $2.0 $2.0 $1.0
PL-24000 - Meadow Dr./Charleston Rd. Rail
Grade Separation and Safety Improvements
$4.5 $4.5 $15.0 $15.0 $15.0
PL-24001 - Churchill Avenue Rail Grade
Separation and Safety Improvements
$3.0 $2.0 $10.0 $10.0 $4.0
Human Services Resource Allocation Process (HSRAP)
As part of the LRFF, staff provided additional details to facilitate the City Council's review of a referral to consider pegging HSRAP budget allocations to a benchmark, such as a percentage of General Fund budgeted expenditures. Staff confirmed that funding levels in prior years were not tied to a percentage of the General Fund budgeted expenditures. The Policy and Services Committee's previous review (CMR 7289 2) presented four options for augmenting HSRAP funding, but none were approved for recommendation to the City Council. Instead, funding has been adjusted based on the Consumer Price Index (CPI) as funds were available in the General Fund. As part of the LRFF review, the Finance Committee elected to continue the discussion on this referral in February 2024 with any recommended changes forwarded to the City Council for consideration as part of the FY 2025 budget process. The status of the referral has been updated from 'complete' to 'in progress', as indicated in the status update completed on December 5, 2023 (CMR 2307-17943).
2 Policy and Services Committee, November 29, 2016; Staff Report # 7289, https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes-reports/reports/city-manager-reports- cmrs/year-archive/2016/id-7289-hsrap.pdf
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ATTACHMENT C
Additional information as Requested by Finance Committee https://portal.laserfiche.com/Portal/DocView.aspx?id=69142&repo=r-704298fc&searchid=b316cc0f-f843-4290- 8390-b2abbc3f61d4
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City Council
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: City Manager
Meeting Date: January 22, 2024
Report #:2309-2063
TITLE
Update regarding State and Federal Legislation and Approval of the Annual Legislative Guidelines and Legislative Platform as Recommended by the Policy & Service Committee. CEQA Status – Not a Project

RECOMMENDATION
The Policy & Services Committee recommends that the City Council approve the 2024 Federal and State Legislative Guidelines / Legislative Platform (Attachment A) and accept a legislative update.

BACKGROUND
The Policy and Services Committee heard this item at the December 12, 2023 Committee meeting and voted to advance it to the full City Council for adoption. Information about the upcoming months in Sacramento and Washington, D.C. will be provided by Townsend Public Affairs as a supplemental memo and will include information about the Governor’s budget (budget release is January 10, 2024).

ANALYSIS
As part of the City’s state and federal legislative advocacy program, staff and the City’s contracted federal and state advocates work to identify and analyze potentially impactful legislation and communicate the City’s public advocacy positions to legislators. The program is guided by the Advocacy Process Manual, last approved by City Council on January 13, 2020 (CMR #10772). In addition to the Manual, the City maintains a City Council-approved set of legislative guidelines that provide additional City Council policy direction to staff and the City’s state and federal legislative advocates. The legislative guidelines are used by staff in consultation with the Mayor to respond to bills and other issues that emerge throughout the year. They allow for efficiency in the fast-paced legislative environment.

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The 2024 draft guidelines were first discussed at the Legislative Matters Ad Hoc Committee in November 2023 and then at the December 12, 2023 Policy & Services Committee. The 2023 adopted guidelines were discussed in October 2022 at Policy and Services Committee and subsequently at City Council during discussions of the contract for federal and state advocacy.

Legislative Guidelines
The Legislative Guidelines enhance and add content to the City Council’s overarching priorities; they do not supplant them. The guidelines provide direction to staff and the City’s legislative advocates on issues that are both (a) important to the City Council, and (b) likely to become a legislative issue in 2024. The guidelines are not rank ordered and are intentionally reasonably broad rather than specifically narrow to allow for a flexible and quick response. Further, the guidelines are not proactive instructions; they act as a means by which staff and advocates can respond to federal and state government action, without returning to the City Council each time a bill is introduced or amended. The draft 2024 guidelines are a compilation of the current, approved guidelines, City Council’s 2023 priorities, and policy issues staff and the City’s legislative advocates have heard interest in. Attachment A is an updated Legislative Guidelines with feedback from the City Council Legislative Matters Ad Hoc Committee and the Policy and Services Committee. The recommendation from the Policy and Services Committee is for the full City Council to discuss and adopt the guidelines.

Legislative Update
The City’s legislative advocates in Sacramento and Washington, D.C. (Townsend Public Affairs) will be present to provide advocacy updates and information about the coming weeks and months in Sacramento and D.C. if there are questions from the Committee.

FISCAL/RESOURCE IMPACT
There is no additional funding needed for this report. The City Council budgets annually for the legislative advocacy services and these efforts are led by staff in the City Manager’s Office with stakeholder support across departments on key issues.

ENVIRONMENTAL REVIEW
The City’s legislative advocacy activities are not a project under section 15378(b)(25) of the California Environmental Quality Act Guidelines (administrative activities that will not result in direct or indirect physical changes in the environment).

Palo Alto City CouncilJanuary 22, 2024

Palo Alto City Council
January 22, 2024