City Council
Staff Report
From: City Manager
Report Type: INFORMATION ITEM
Lead Department: Administrative Services
Meeting Date: June 9, 2025
Report #:2412-3916
TITLE
Fiscal Year 2025 Third Quarter Financial Status Report
RECOMMENDATION
This report transmits information regarding the City of Palo Alto’s Fiscal Year 2025 Third Quarter Financial Status Report. CEQA Status -- Not a project.
EXECUTIVE SUMMARY
The purpose of this report is to provide the City Council with information on the financial status of the City’s General Fund and Enterprise Funds. This report is as of the end of the Third (3rd) Quarter of Fiscal Year (FY) 2025 (January 1, 2025, through March 31, 2025). The figures presented in this report are unaudited.
Third quarter results for the General Fund are fairly consistent with historical trends and it is expected that the fund will meet the adjusted budget. Staff will continue to review revenues and expenditures compared to the budget and bring forward information when available regarding budget to actual variances. As of the end of March, 63.5% of the revenue adjusted budget (before operating transfers) was received and 69.2% of the adjusted expenditure budget (before operating transfers) was spent. Seasonality of the City’s major tax revenues, specifically property tax and sales tax, are reasons why revenue received this time of year trends lower than 75%.
The Budget Stabilization Reserve (BSR) is $54.0 million at the end of the 3rd quarter and is projected to remain at this level through the year-end, which is 18.4% compared to the Adopted Budget. This level is slightly below Council’s 18.5% target, but it is within the policy’s 15-20% range.
All Enterprise Funds reported a positive change in net position through the 3rd quarter of FY 2025 except for the Airport Fund. The combined increase totaled $16.1 million, or 31.5%, higher than the same period of the prior fiscal year. The increase is primarily driven by the Electric Fund.
BACKGROUND
Staff provide quarterly financial reports to ensure visibility of the City’s financial status. Staff provided the Mid-Year Budget Review to report on the financial status of major funds and the Capital Improvement Program as of the second quarter (Q2) of the current fiscal year and recommended adjustments to the Adopted Budget in February 20251. This 3rd Quarter Financial Report covers financial activity from July 1, 2024 to March 31, 2025 and compares those amounts to the same period of the prior fiscal year and to the FY 2025 Adjusted Budget. This report serves as a financial status update and does not include any budgetary adjustments for FY 2025.
In the discussion of the major tax revenue categories below, staff indicates generally how each category is trending compared to the adjusted budget from the FY 2025 Mid-Year Review.
ANALYSIS
General Fund
The General Fund 3rd Quarter Financial Report (Attachment A) contains a summary of major General Fund revenues by source and expenditures by department and the comparison between the FY 2025 Adopted Budget and Adjusted Budget. The Adjusted Budget column includes prior year commitments that were carried forward into FY 2025 and the City Council approved amendments to the FY 2025 Adopted Budget Year-to-Date (YTD).
The Adjusted Budget - Revenue and Sources (excluding Operating Transfers-in) includes a $2.5 million increase, a 1.0% increase over the FY 2025 Adopted Budget. Expenditures (excluding Operating Transfers-out) were also adjusted from $268.0 million to $293.8 million, an increase of 9.6% over the FY 2025 Adopted Budget. This increase includes reappropriations, encumbrances, and budget amendments. These changes can be viewed on City’s website2. 1 February 24, 2025 Council Meeting Item #9, Report # 2412-386:
https://portal.laserfiche.com/Portal/DocView.aspx?id=143359&repo=r-704298fc&searchid=8e6d8e8b-b20c-4fe0- a363-cfed4e064b50
2 Budget Adjustments and Monitoring
https://www.cityofpaloalto.org/Departments/Administrative-Services/Budget-Adjustments-and-Monitoring Revenue Highlights for FY 2025 3rd Quarter YTD
The General Fund FY 2025 Adjusted revenue budget is $260.8 million (excluding Operating Transfers-in). The FY 2025 Adjusted Budget reflects a 5.4% increase in estimated revenues from the prior fiscal year. As of the end of the 3rd quarter, $165.5 million has been collected, or
63.5% of the adjusted budget. This percentage is not fully indicative of the expected full fiscal year receipts mainly due to timing of sales tax, property tax, transient occupancy tax and business tax received over the fiscal year. This level of revenue compared to budget is slightly lower than the 66.2% reported for the 3rd quarter of FY 2024 mainly due to the lower percentage of Charge for Services, attributable to a $2.5 million timing difference in billing for Stanford services and lower of Documentary Transfer Tax collections. As of the end of the 3rd quarter, major tax revenues total $104.1 million, or 62.1%, of the $167.5 million adjusted budget for these revenues.
All the major taxes except sales tax are higher compared to the same period of the prior fiscal year, indicating continued economic activity. The decline in sales tax primarily driven by auto sales and leasing reflects similar trends amongst other municipalities. The budget for sales tax was adjusted downward at FY 2025 mid-year, with offsetting higher revenues in other categories. Although most major tax revenue collection is trending higher than the prior year, ongoing economic uncertainty remains a concern that Staff continues to monitor The following table highlights the City’s major revenue sources for the 3rd Quarter Year-To-Date (YTD), compared to the same period of the prior fiscal year. Revenues are expressed as a percentage of the Adjusted Budget.
Table 1: General Fund Revenue
Revenues FY 2025 Inc / (Dec)% change FY 2025 % FY 2024 % Property Tax $43,926 $1,777 4.2% $68,319 64.3%$64,578 65.3%Charges for Services 24,837 (1,586) -6.0% 39,112 63.5%35,181 75.1%Sales Tax 20,611 (1,058) -4.9% 35,588 57.9%37,887 57.2%Transient Occupancy Tax 17,309 866 5.3% 28,345 61.1%25,547 64.4%Utility User Tax 14,166 1,125 8.6% 21,489 65.9%19,674 66.3%Permits, Licenses and Other Fees 6,689 (479) -6.7% 10,877 61.5%10,402 68.9%Documentary Transfer Tax 5,414 1,186 28.1% 8,550 63.3% 5,808 72.8%Business Tax 2,689 69 - 5,250 51.2% 2,451 0.0%All Other Revenue Sources 29,864 (362) -1.2% 43,259 69.0%46,017 65.7% Total Revenue $165,505 1,538 0.9%$260,789 63.5%$247,545 66.2% 3rd Quarter Actuals Adjusted BudgetFY 2024
FY 2025 3rd Quarter YTD(000's)
26,423
16,44313,041
$42,149
21,669
$163,967
7,1684,228
30,2262,620
Property Tax
At the close of the 3rd quarter, property tax revenue receipts were $43.9 million, or 64.3% of the adjusted budget, and an increase of 4.2% over the same period in the prior fiscal year.
Property tax revenues are received from the County of Santa Clara during second, third, and fourth quarters of the calendar year. The compounded annual growth rate (CAGR) over the 5 years and 10 years for this revenue source has been 7.0% and 8.1%, respectively. For FY 2025, the certified secured and unsecured property tax assessed values (AV) growth rates are 4.78% and 5.58%, respectively, with a combined rate of 4.82%.
At the FY 2025 Mid-Year review, the property tax budget was revised downward by $0.3 million to $68.3 million. However, a February 2025 forecast from the County of Santa Clara’s Finance Agency and Office of the Assessor, the entities responsible for property tax billing, collection, processing adjustments such as sales and assessment appeals, projects FY 2025 revenue of $69.4 million. This represents a $1.1 million (1.6%) increase over the adjusted budget. Staff will continue to monitor property tax projections and update the Finance Committee and Council with any new information when it becomes available.
Excess Educational Revenue Augmentation Fund (ERAF) distributions from the County of Santa Clara in fiscal years 2021, 2022, 2023 and 2024 receipts were $5.6 million, $6.6 million, $6.4 million, and $7.0 million, respectively. Approximately 22% of Excess ERAF is from fiscal years 2021 to 2024 and 20% in FY 2025 is considered at risk due to the State Controller’s Office audit finding on Marin County Excess ERAF calculation methodology, which also applies to Santa Clara County. The County of Santa Clara has filed a lawsuit against the State Controller’s Office on this matter. As of June 30, 2024, the total excess ERAF reserve balance totaled $5.6 million for the at-risk amounts for fiscal years 2021 to 2024. The updated FY 2025 forecast assumes $1.5 million additional reserves for a potential loss based on the County’s recommendation.
Sales Tax
Due to the timing of sales tax collection and distribution by the California Department Tax and Fee Administration (CDTFA), third quarter sales tax only reflects seven months of sales activity (through January) and does not represent the full three quarters of the fiscal year. Actual year- end performance will not be known until August.
As of the third quarter, sales tax revenue totaled $20.6 million, 57.9% of the adjusted budget, and a $1.1 million or 4.9% decrease, compared to the same period in the prior fiscal year. This decline is primarily due to lower auto sales and leasing. FY 2024 experienced elevated auto sales and leasing due to post-pandemic pent up demand and attractive pricing for electric cars, resulted in higher sales tax collections; FY 2025 activity is expected to normalize to FY 2023 levels. However, federal policy actions may further negatively impact sales. In FY 2024, elevated car sales, driven by pent-up demand and attractive pricing for electric cars, resulted in higher sales tax collections. To align the budget with current trends, particularly weaker auto sales and leasing, staff recommended a $3.9 million or 11.2% reduction in the FY 2025 sales tax revenue budget in the Mid-Year Budget Review, revising the budget to $35.6 million. Staff expect that actual revenue for the year will meet or slightly exceed the adjusted budget.
Transient Occupancy Tax (TOT)
TOT revenues reached $17.3 million at the end of the 3rd quarter, a 5.3% increase over the prior fiscal year and representing 61.1% of the adjusted budget. Although TOT trends for the first half of the year were mixed, cumulative year-to-date results have normalized, and staff expect year-end to close above the adjusted budget levels. The 3rd quarter results represent 7.5 months of TOT receipts due to up to 1.5-month timing delay in receipts.
As part of the FY 2025 Mid-Year Budget Review, the TOT budget was modestly increased by $0.5 million with a corresponding $0.2 million increase in the transfer to the Capital Fund for capital improvements. The revised total budget is $28.3 million, a 1.8% increase from the adopted budget, based on year-to-date performance. Of this amount, $14.5 million is anticipated to fund General Fund Expenses, while $13.8 million will be transferred to the Capital Improvement Fund to fund 2014 Council Infrastructure Plan capital projects and associated debt service costs.
Staff continue to monitor trends and conservatively estimate TOT levels based on recent trends and the economic outlook. As of writing this report, receipts for the full third quarter are 4.5% higher than the same period in the prior fiscal year. Average occupancy is 76.6%, a 1.5% increase, while the average daily room rate is $246.0, a 3.3% increase.
If current trends continue, receipts are likely to meet or potentially exceed the adjusted budget.
However, due to the consumer sensitivity of this revenue source, staff maintains the adjusted budget as an achievable target.
Utility User Tax (UUT)
UUT revenues total $14.2 million at the end of the 3rd quarter, an 8.6% increase over the prior fiscal year and 65.9% of the FY 2025 adjusted budget. The increase between current year and prior year collections is primarily driven by utility rate increases. The FY2025 Adjusted Budget revenue was revised to $21.5 million, an increase of $1.5 million, or 7.2% as part of the Mid- Year Budget Review. However, actual receipts are now expected to be lower than this projection due to the incorrect adjustment made at mid-year.
Documentary Transfer Tax
Cash receipts totaled $5.4 million, 63.3% of the FY 2025 Adjusted Budget and $1.2 million higher than prior fiscal year receipts for the same period. The number of transactions increased by 15.3% compared to the prior fiscal year’s 3rd quarter. The average median single residential home price, based on City’s property tax consultant HdL Coren & Cone, increased 20.2% to $4.2 million in the first calendar quarter of 2025 compared to the same quarter of the prior year.
This revenue source is considered volatile since it is highly dependent on both the sales volume and the mix of commercial and residential sales. Due to strong performance year-to-date, the FY 2025 Mid-Year Budget Review revised the projected documentary tax revenue upward by $1.3 million to $8.5 million. Staff continues to monitor these receipts closely due to significant fluctuations that can occur at any time, depending on real estate sales activity.
Business Tax
Cash receipts totaled $2.7 million, 51.2% of the FY 2025 Adjusted Budget. The 3rd quarter results represent two quarters of business tax collections, due to a timing delay of up to one quarter in receipts. Businesses are required to file business tax quarterly, but it is due the first day of the following quarter and is delinquent 30 days later. The expectation is that the adjusted budget will be realized.
The tax was effective in January 2023, with the rate through January 2025 being 50% or 3.75- cents per square foot per month. The full rate was assessed starting January 2025 at 7.5-cents per square foot per month. The tax has an annual cap of $0.5 million per business and both the rate and the cap are increased by 2.5% annually beginning FY 2027. While tax began January 1, 2023, the first due date is January 2024 for the calendar year of 2023. After the initial first payment, filings shall be submitted on a quarterly basis.
Charges for Services
This revenue category includes charges to Stanford for fire services, the paramedic services, as well as fees related to the City’s golf course, class program, plan check, and street cut fees. As of the 3rd quarter of FY 2025, the revenues totaled $24.8 million, down by $1.6 million or 6.0% compared to the same period in the prior fiscal year. The year-over-year decline is primarily due to a $2.5 million timing difference in billing for Stanford fire services, which were invoiced in April 2025 instead of during the 3rd quarter as in prior fiscal year. Additionally, paramedic fees decreased by $0.3 million, driven by lower transport volumes and a higher allowance for uncollectible accounts. These decreases were partially offset by revenue increases in other areas. Programs, classes, and admission fees increased by $0.7 million, mainly due to higher demand for camps, middle school athletics, youth specialty classes, and children’s theatre programs. Golf course fees are also higher by $0.4 million as a result of increased usage. At the FY 2025 Mid-Year review, the revenue budget was revised upward by $0.6 million from $38.5 million to $39.1 million. Staff expect that actual revenue for the year to achieve adjusted budget.
Expense Highlights for FY 2025 3rd Quarter YTD
The General Fund FY 2025 Adjusted Operating expenditures budget is $293.8 million (excluding Operating Transfers-out). As of the end of the 3rd quarter, $203.2 million has been spent, or
69.2% of the Adjusted Budget. This spending level is 12.9% higher than the same quarter in FY 2024, primarily due to increased salaries and benefits (related to timing of pension accrual accounting) and contract services.
Table 2 highlights General Fund expenditures by department for the 3rd quarter of FY 2025, compared to the same period in the prior fiscal year. Year-to-date expenditures are presented as a percentage of the respective fiscal year’s Adjusted Budget.
Table 2: General Fund Expenditures
As of the end of March 2025, with three-quarters of the fiscal year complete, total expenditures represent 69.2% of the adjusted budget. This is higher than the 63.1% recorded at the same period in the prior fiscal year primarily due to pension accruals that will be reconciled at year- end and reduced vacancy levels. Overall General Fund projected expense for FY 2025 is anticipated to come within or under the adjusted budget.
Given the organization’s service-driven nature, salaries and benefits comprise the largest portion of expenditures. Through the first nine months of FY 2025, salaries and benefits accounted for approximately 80.7% of the total adjusted budget in this category. This amount trends higher than three-quarters of the adjusted budget due to the above-mentioned pension accrual which will be reconciled in the fourth quarter. Projected salary and benefit costs are anticipated to come within or under the adjusted budget.
General Fund expenditures for salaries and benefits totaled approximately $146.0 million through March 2025, compared to $125.0 million for the same period in FY 2024. Key contributors to this increase include: an increase in regular salaries ($5.6 million), overtime ($2.2 million), pension contribution ($6.8 million, discussed above), and other benefits ($2.7 million).
In addition to salaries and benefits, the following departments experienced material variances.
Departments not explained below such as Library and Administrative Services had increases primarily due to higher salaries and benefits.
Community Services expenditures increased by $1.2 million, or 4.4%, compared to the same period in prior fiscal year, mainly due to a $1.6 million increase in salaries and benefits, and a $0.3 million increase in utility consumption costs. These increases were partially offset by a $0.7 million decrease in contract services, due to the timing of the Golf Management fee 3rd quarter payment, which was made in May 2025.
Expenditures FY 2025 FY 2024 Inc/(Dec)% change FY 2025 % FY 2024 % Police 45,946$ 40,022$ 5,924$ 14.8% 58,608$ 78.4% 52,241$ 76.6%Fire 43,900 35,545 8,355 23.5% 56,530 77.7% 47,529 74.8%Community Services 29,290 28,054 1,236 4.4% 42,821 68.4% 40,701 68.9%Public Works 17,355 15,501 1,854 12.0% 27,735 62.6% 25,763 60.2%Planning and Development Services 17,133 17,744 (611) -3.4% 29,336 58.4% 33,700 52.7%Library 9,701 8,293 1,408 17.0% 13,144 73.8% 12,599 65.8%Administrative Services 8,723 7,775 948 12.2% 12,267 71.1% 11,298 68.8%All Other Departments 31,167 27,109 4,058 15.0% 53,370 58.4% 61,492 44.1% Total Expenditures 203,215$ 180,043$ 23,172$ 12.9% 293,811$ 69.2%285,323$ 63.1% FY 2025 3rd Quarter YTD(000's)
3rd Quarter Actuals Adjusted Budget
Public Works expenditures increased by $1.9 million, or 12.0% compared to the same period in the prior fiscal year. This increase is primarily due to a $0.7 million increase in salaries and benefits, contract services, and utility costs. The increases in contract services are mainly due to higher janitorial service contact and consultant fees. The increase in janitorial service contract, effective December 2023, was due to higher new wage and benefits standards, and additional City facilities and service frequency at some facilities. These were partially offset by the reduction in tree trimming services.
All Other Departments expenditures increased $4.1 million, or 15.0% compared to the same quarter in the prior fiscal year. The majority of this increase is due to the Non-Departmental, as well as all other departments such as Human Resources and City Manager primarily due to increases in salaries and benefits.
Non-Departmental expenditures increased by $1.2 million, or 10.8 % compared to the previous fiscal year, driven by the following:
•Contract Services-legal fees increased by $1.4 million due to the settlement of Green v. City of Palo Alto (Santa Clara Court Case No. 1-16-CV-300760)3. The increase was due to the final two payments toward the total legal fees of $4.3 million. Although the remaining balance of $2.7 million was originally scheduled to be paid over two years, the full amount was paid in FY 2025.
•Contract Services-outside services increased $0.3 million mainly due to expenses related to the Registrar of Voters for the Presidential General Election in November 2024.
•General Expenses – the remaining $6.6 million in customer refunds related to Green v. City of Palo Alto were scheduled to be paid over two years. These refunds were paid in full in March 2025, ahead of the original timeline. This accelerated payment schedule was implemented to complete the refunds sooner and reduce the administrative effort required to process. As a result, all remaining refunds to active gas customers were issued one year earlier than planned. The settlement terms allow for an accelerated payment schedule without penalty. In FY 2024 payment of first set of refunds issued to active class members and a lumpsum refund to inactive class members totaling $6.3 million resulting from the Green v. City of Palo Alto (Santa Clara Superior Court, Case No. 1-16-CV-300760) settlement 3. Total customer refunds are $12.9 million to be paid over three years.
3 Green v City of Palo is a class action lawsuit filed against the City in October 2016 that challenged the City’s gas and electric rates under Proposition 26. The trial court rejected plaintiff’s challenges to the City electric rates but found that gas rates constituted unapproved taxes in violation of article XIII C of the California Constitutions. In December 2023, the court issued a final order approving the $17.3 million settlement which consists of a $12.9 million refund to class members, a $7,500 service award for the class representative, and $4.3 million in attorney’s fees for plaintiff’s counsel.
Police and Fire the total combined expenditures for the Police and Fire Departments accounted for approximately 45.0% of total General Fund expenditures through the 3rd quarter of FY 2025.
The table below provides a summary of salary and overtime expenditure for this period. A detailed analysis of net overtime costs for both departments is provided in Attachment B.
Table 3: Police and Fire
Police overtime is primarily driven by staffing shortages due to unfilled positions, absences and fluctuating service demands, such as major accidents. As of the end of the 3rd quarter, the department had nine vacancies (seven officers and two dispatchers). Of the 78 authorized Palo Alto Peace Officers’ Association (PAPOA) positions, 71 are currently filled. However, 10 officers (14%) are in training, eight (11%) are on long-term leave, leaving 53 (74%) available for duty.
Currently, 16 officers are assigned to specialized units: eight to investigations, three to traffic enforcement, two to personnel/training, two to special problems and one to the Psychiatric Emergency Response Team. This leaves 37 officers on patrol duties. These officers handle approximately 110 calls per day, conduct enforcement stops and engage in community outreach initiatives. The Department operates five patrol teams, each consisting of four to five members.
As a result of these staffing challenges, the Department is trending above budget for total salary and overtime, but Staff is working to bring the Department expenditures within budget by the end of FY 2025. The Department’s net overtime cost is $1.8 million after deducting the reimbursements and salary savings due to vacancies. Analysis is included in Attachment B.
Expenditures FY 2025 FY 2024 % change FY 2024 %Inc (Dec) Police - Salaries $16,454 $14,593 11.28% $23,194 21,956 66.5%Police - Overtime 2,678 2,421 11.06% 1,099 1,028 235.5%Total Police 19,132 17,014 11.24% 24,293 22,984 74.0% Fire - Salaries 15,079 12,387 12.17% 19,731 18,417 67.3%Fire - Overtime 4,449 2,991 14.87% 5,217 2,146 139.4%Total Fire 19,528 15,378 12.70% 24,948 20,563 74.8% Total Public SafetySalaries & Overtime 38,660$ 32,392$ 19.4% 49,241$ 43,547$ 74.4% FY 2024 Police salaries and overtime were restated to align classification with FY 2025. Total amounts are unchanged.
78.5%
76.4%85.3%78.3%
70.9%243.7%78.8%
3rd Quarter Actuals Adjusted BudgetFY 2025 %
Salaries and Overtime ExpenseFY 2025 3rd Quarter YTD(000's) Fire overtime is mainly driven by the need to backfill vacancies to maintain the required staffing levels of 24 staffed positions daily to keep Fire Engines and Ambulances fully operational.
These vacancies caused by unfilled positions, injury leave, probationary training, or scheduled time off must be covered by overtime. During the 3rd quarter of FY 2025, six positions were vacant, and six employees were on injury leave, driving higher overtime. Additionally, the Fire Department deployed staff on 12 strike teams during the fiscal year, including for the Palisades fire. The Mid-Year Budget Review recognized $0.4 million in revenue to cover the overtime costs associated with these deployments.
Overtime costs also increased due to wage increases under the International Association of Fire Fighters (IAFF) agreement, which provided a 4% wage increase effective July 2024 followed by an additional 2% increase in January 2025. To address staffing needs, the Department hired 10 entry-level positions in the summer and sent them to the Fire Academy in October 2024. The academy lasts at least 20 weeks, and overtime is needed to cover daily staffing until the new hires are trained or authorized for assignments. These recruits were assigned in April 2025, with overtime for their backfill expected to decrease in the fourth (4th) quarter.
As a result of reimbursement funding for Strike Teams, and the shift of salary savings within the Department to overtime as part of the Mid-Year Budget Review, overtime is tracking higher and exceeded adjusted budget. Overall, the Department is trending above the budget for total salary and overtime but Staff is working to bring the expenditures within budget by the end of FY 2025. The Department’s net overtime cost is $3.5 million after deducting the reimbursements and salary savings due to vacancies. Analysis is included in Attachment B.
General Fund Budget Stabilization Reserve (BSR) Balance As a result of budget amendment actions taken in FY 2025, including the FY 2025 Midyear Budget Review,4 the Budget Stabilization Reserve (BSR) was $54.0 million at the end of 3rd quarter. This amount is $0.4 million below the City Council’s recommended target of $54.4 million, which represents 18.5% of the General Fund adopted operating expenditure. Per policy, the City maintains a BSR balance within a range of 15% to 20% of annual operating expenditures, with a target level of 18.5%. The FY 2026 Proposed Budget is projected to maintain the $54.0 million BSR balance at year end, which is 17.3% of expenditures and below the City Council’s recommended target level of 18.5% by $3.8 million. This BSR level is being sustained by using the Budget Uncertainty Reserve, which was specifically established to provide one-time bridge funding for community services and to help maintain reserve levels during periods of funding shortfall.
4 City Council Special Meeting, February 24, 2025, Agenda Item 9, Staff Report# 2412-3865 https://portal.laserfiche.com/Portal/DocView.aspx?id=143359&repo=r-704298fc&searchid=2eae0419-d2d8-4e62- ad7f-15b4cc0f3a08
The Council proactively set aside funds in the FY 2023 Mid-Year Budget Review and established a Budget Uncertainty Reserve to provide bridge funding for community services in subsequent years. The FY 2025 adopted budget included a remaining Budget Uncertainty Reserve of $6.1 million and Council allocated $5.9 million as part of the FY 2025 Mid-Year Budget Review to set aside a total of $12.0 million for future budget year planning. The FY 2026 proposed budget relied on the full $12.0 million from the Budget Uncertainty Reserve, eliminating the balance and removing this one-time resource to address future deficits forecasted in the Long-Range Financial Forecast (LRFF). Subsequent discussions with the Finance Committee and City Council have revised the recommended use of the Uncertainty Reserve in FY 2026. Work continues on development of the FY 2026 Budget, scheduled for Adoption on June 16, 2025.
Enterprise Funds
The following is a summary of changes in net position for each of the Enterprise Funds for the nine months ending March 31, 2025, along with a comparison to the same period last fiscal year. Changes in net position reflect the results of operations for the period, including operating revenues, expenses, and non-operating items such as transfers and investment income.
Table 4: Enterprise Funds Change in Net Position
Water Fund increased by $4.6 million, or 153.7%, from the prior fiscal year, primarily due to higher retail revenues from customer sales and $1.2 million reduction in transfers to other funds. The increase in retail revenues was partially offset by higher commodity costs. Customer sales grew by $4.4 million, driven by a 9.5% overall rate increase effective July 1, 2024, and higher water consumption. Commodity costs are higher, as the wholesale commodity rate from IncreaseFunds FY 2025 FY 2024 (Decrease) % Inc (Dec)
Water 7,624$ 3,005$ 4,619$ 153.7%Electric 42,328 24,457 17,871 73.1%Fiber Optic 1,028 1,148 (120) -10.5%Gas 8,445 4,187 4,258 101.7%Wastewater Collection 2,762 728 2,034 279.4%Wastewater Treatment 2,754 10,112 (7,358) -72.8%Refuse 1,419 3,221 (1,802) -55.9%Storm Drainage 1,724 1,724 0 0.0%Airport (995) 2,451 (3,446) -140.6% Total Change in Net Position 67,089 51,033 16,056 31.5% FY 2025 3rd Quarter YTD
3rd Quarter Actuals
(000's)
San Francisco Public Utilities Commission (SFPUC) increased from $5.21 to $5.67 per cubic feet, reflecting an 8.8% increase.
Electric Fund increased $17.9 million, or 73.1% compared to the prior fiscal year. This increase was primarily driven by higher operating revenues, partially offset by increased operating costs.
Operating revenues increased by $22.4 million, mainly due to a $11.4 million increase in customer sales, attributed to rate adjustments depending on the type of customers and levels of consumption effective July 1, 2024, the addition of a new data center, and higher commercial consumption. In addition, other operating revenues increased by $10.6 million, mainly due to higher revenue from renewable energy credit (REC) sales and resource adequacy sales.
The overall increase in operating revenues was partially offset by a $6.0 million increase in commodity purchases, and $1.4 million salaries and benefits. These were partially offset by a $3.0 million decrease in joint agency service payments to the Northern California Power Agency (NCPA), resulting from reduced debt service costs related to the Calaveras hydroelectric project and contract services.
Based on year-to-date financial performance, the Electric Fund is projected to end the fiscal year with a positive net position. This surplus will enhance the City's Supply and Distribution Reserve and Cap-and-Trade Reserve. Additionally, $1.6 million of the surplus will be allocated to the Hydroelectric Stabilization Reserves, raising its balance from $17.4 million toward the target of $19.0 million. Reaching this target will strengthen the City's ability to avoid activating the hydroelectric rate adjuster in the event of drier-than-average winters.
Gas Fund increased by $4.3 million, or 101.7%, compared to the same period in the prior fiscal year, mainly due to higher customer retail revenue and lower commodity purchases. Customer retail revenue increased by $3.2 million mainly driven by a 12.5% gas rate increase effective July 1, 2024, partially offset by decreased consumption particularly from commercial users.
Operating expenses decreased mainly due to lower commodity purchases due to lower commodity market prices and zero Renewable Energy Certificate (REC)purchases. These decreases were partially offset by higher salaries and benefits.
Wastewater Collection Fund increased by $2.0 million, or 279.4% compared to the prior fiscal year, mainly due to higher operating revenue primarily from customer sales, partially offset by an increase in operating expenses. The customer sales increase resulted primarily from 15.0% overall rate increase for residential and commercial customers, effective July 1, 2024. The rate increase allows the highest priority sewer mains to be replaced while allowing the reserves to gradually replenish before the next major project. The increase in operating expenses was mainly due to increased share of wastewater treatment costs, due to rising operational and minor capital expenses.
Wastewater Treatment Fund decreased by $7.4 million, or 72.8%, compared to the prior fiscal year. This decrease is primarily due to the timing of 4th quarter billing to partner agencies, which was processed in March during FY2024, as opposed to April, in the current fiscal year. If billing had occurred in FY2024 in the same period as this fiscal year, the Fund would have resulted in an increase of approximately $1.6 million, or 114.0% primarily due to increased revenue from the partner agencies partially offset by higher operating expenses. The increase in revenue from partner agencies is due to several factors, including higher operating and maintenance expenses, increased salary and benefit costs, elevated permitting fees, and rising contract costs. These expenses are recovered from partner agencies, including the Wastewater Collection Fund, either quarterly or annually in accordance with their respective agreement terms. The billing is based on the FY2025 adopted budget, the prior year’s sewage flow, and each partner’s share of existing debt service. Any over or underbilling resulting from differences between the adopted budget and actual expense is reconciled at year-end, with either an additional charge or credit applied accordingly. The increase in operating expenses was mainly due to higher salaries and benefits.
Refuse Fund decreased $1.8 million, or 55.9%, primarily due to a $1.5 million increase in operating expenses driven mainly by higher salaries and benefits, as well as increase payments to GreenWaste of Palo Alto and GreenWaste Recovery resulting from payment timing and CPI adjustment.
Airport Fund decreased by $3.4 million, or 140.6%, primarily due to the $2.1 million reduction in grants received from the Federal Aviation Administration following the completion of the Airport Apron Reconstruction project in FY 2024. Operating expenses also increased by $1.1 million driven by higher salaries and benefits, cost plan charges and deprecation expenses.
FISCAL/RESOURCE IMPACT
There are no financial impacts recommended in this report. Staff will return to Council as part of the review of the FY 2025 Annual Comprehensive Financial Report with year-end budget adjustments to recommend any adjustments to align budgets with actuals.
STAKEHOLDER ENGAGEMENT
This report has been coordinated between the Treasury Division, Accounting Division, and the Office of Management and Budget in the Administrative Services Department, as well as with City departments.
ENVIRONMENTAL REVIEW
This report is for informational purposes only with no action required by the Council.
ATTACHMENTS
Attachment A: FY 2025 3rd Quarter Financial Report
Attachment B: FY 2025 3rd Quarter Public Safety Overtime Analysis APPROVED BY:
Lauren Lai, Administrative Services Director