City Council
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Administrative Services
Meeting Date: June 16, 2025
Report #:2503-4250
TITLE
PUBLIC HEARING: Presentation on Status of Vacancies and Recruitment and Retention Efforts and Adoption of Budget Ordinance for Fiscal Year 2026, Including the Operating and Capital Budgets and Municipal Fee Schedule; Adoption of a Resolution determining the Appropriations Limit for Fiscal Year 2026; Vacancies and Recruitment Update (AB2561 Compliance); and Approval of FY 2026 Non-Profit Workplan Phase I Awards as Recommended by the Policy & Services Committee; CEQA Status – Not a Project
RECOMMENDATION
The Finance Committee and Staff recommend that the City Council hold a public hearing to:
1. Adopt the Fiscal Year 2026 Budget Ordinance (Attachment A), which includes:
a. City Manager’s Fiscal Year 2026 Proposed Operating and Capital Budgets, previously distributed at the May 5 City Council Meeting (Attachment A, Exhibit 1) b. Amendments to the City Manager’s Fiscal Year 2026 Proposed Operating Budget (Attachment A, Exhibit 2)
c. Amendments to the City Manager’s Fiscal Year 2026 Proposed Capital Budget (Attachment A, Exhibit 3)
d. Fiscal Year 2026 City Table of Organization (Attachment A, Exhibit 4) e. Fiscal Year 2026 Municipal Fee Changes (Attachment A, Exhibit 5) f. Planning and Development Services Cost of Service Study and Municipal Fee Adjustments (Attachment A, Exhibit 6)
g. Citywide Cost of Services Study and Municipal Fee Adjustments (Attachment A, Exhibit 7)
2. Accept the Fiscal Year 2026 – 2030 Capital Improvement Plan
3. Adopt a Resolution determining the Appropriations Limit for Fiscal Year 2026 (Attachment B)
4. Comply with Assembly Bill 2561 / Government Code § 3502.3 regarding vacancies and recruitment efforts (Attachment D).
5. Approval of FY 2026 Non-Profit Workplan Phase I Awards (To be released as a supplemental memorandum after the June 4, 2025 Policy & Services Committee.)
EXECUTIVE SUMMARY
The FY 2026 Adopted Budget will be $1.0 billion including the General Fund Budget of $313.4 million and capital budget across all funds of $312.9 million. The five-year 2026-2030 Capital Improvement Plan (CIP) is $1.1 billion. Compared to the proposed budget, General Fund expenses overall increased by $0.9 million, offset by the recognition of estimated new revenues of equal value. This small net adjustment reflects the combined actions including restoration of $6 million to the Uncertainty Reserve and a reduction of General Fund expenses of $5.1 million to $307.4 million. The capital budget across all funds had a net decrease of $3.3 million compared to the proposed budget.
This budget recommends citywide staffing levels of 1,110.35 FTE in FY 2026. This is a net increase of 6.00 full-time FTE and five 0.20 FTE part-time positions from the proposed budget to implement a new non-sworn, Single Role Division in the Fire Department.
This memorandum provides all necessary documents and transactions for the City Council adoption of the Fiscal Year (FY) 2026 Operating Budget, Capital Budget, and Municipal Fee schedule effective July 1, 2025, unless otherwise regulated. This action reflects two months of public dialogue by the Council and Finance Committee and provides a summary of all changes to the City Manager’s FY 2026 Proposed Budget received by the Council on May 5, 2025. The necessary supporting documents for formal adoption by the City Council include the FY 2026 Budget Ordinance and the Table of Organization, and Resolution for Appropriations Limit for FY 2026.
On May 20 the Finance Committee “Committee” (CMR 2505-46451) unanimously recommended the City Council adopt the FY 2026 budget inclusive of the Final Recommended Changes section of this memorandum. All changes to the Proposed Budget recommended by the Finance Committee are detailed for the FY 2026 Operating Budget, by fund and by department, in Attachment A, Exhibits 2 through 7.
Through the recommended budget actions, the community can expect continued high quality of services in Fiscal Year 2026, with a focus on maintaining services throughout the City. However, this budget also recognizes the need to proactively plan for economic uncertainty and recommends savings of $6.0 million in FY2026 to retain Uncertainty Reserve for future budget planning. To address longer term deficits, of the $6.0 million savings, at least $2.0 million will be ongoing. As part of the budget adoption, staff recommends a placeholder of $2.7 million in operating savings, with $1.0 million ongoing, and will return in August 2025 with specific 1 May 20, 2025, Finance Committee, Discussion on the Fiscal Year (FY) 2026 Budget Wrap-Up and Recommended FY 2026 Budget including the FY 2026 Municipal Fee Schedule for City Council Adoption; https://www.paloalto.gov/files/assets/public/v/1/administrative-services/city-budgets/fy-2026-city- budget/proposed/may-20/fy2026-budget-wrap-up-and-recommended-fy-2026-budget-including-fy-2026- municipal.pdf
reduction actions across the General Fund for Finance Committee review and ultimately City Council approval.
The City continues to make infrastructure a priority through capital project investments in FY 2026 and through the 2026-2030 Capital Improvement Plan (CIP). The FY 2026 budget includes projects to maintain current infrastructure such as streets, sidewalks, and facilities as well as enterprise funded capital needs such as electric, gas, and water distribution networks and substantial improvements at the Wastewater Quality Control Plant. The 2026-2030 CIP also includes projects to upgrade the City’s infrastructure such as electric vehicle charging, electric grid modernization, and upgrading the fiber network to allow for Fiber to the Premises (FTTP).
Similar to the Operating budget, as part of the budget adoption, staff recommends a placeholder of $3.2 million to reduce the transfer from the General Fund to the Capital Improvement Fund, with $1.0 million ongoing, and will return in August 2025 with specific reduction/deferral actions across projects in the Capital Improvement Fund for Finance Committee review and ultimately City Council approval.
In addition, during the Budget Hearings, certain items did not require additional funding at the time of budget adoption but were recommended as part of staff’s workplan for FY 2026. These Referrals are listed later in the report and if the City Council agrees, these will be included in the FY 2026 workplan.
FY 2026 Appropriation Limit
Also included in this staff report is the approval of the FY 2026 Appropriations (GANN) Limit that is required under Article XIIIB to the California State Constitution, as amended by proposition 98 in 1988 and Proposition 111 in 1990 (Attachment B). The appropriations limit for Fiscal Year 2026 is $234.62 million for funds subject to the appropriation limits. The City's Fiscal Year 2026 budgeted appropriations are estimated to be $56.61 million under the limit (Attachment B, Exhibit 1).
Vacancies and Recruitment Update (AB2561 Compliance)
Assembly Bill 2561 (Government Code § 3502.3) that passed in 2024 requires public agencies to present the status of vacancies and recruitment and retention efforts during a public hearing before the governing body at least once per fiscal year. This requirement is intended to improve transparency around staffing levels and workforce challenges in the public sector. The law also allows recognized labor groups to make a presentation on this topic during the same hearing.
Additional information is discussed later in this report and displayed in Attachment D.
Links to the meetings with the Finance Committee and the City Council, as well as the memoranda, presentations, and additional information provided for discussion can be found on the City’s website, www.paloalto.gov/budget, under the FY 2026 Budget Process section.
BACKGROUND
Per the Municipal Code, the City Manager is charged with proposing a budget that provides a clear and complete financial plan for all City activities proposed for the coming budget cycle, or fiscal year. The FY 2026 Proposed Operating and Capital Budgets were released April 25, 2025 and transmitted to the City Council at their meeting on May 5, 2025. These documents represent the planned expenditures and revenues for FY 2026 for the various fund types that constitute the City’s Budget: General Funds, Capital Funds, Enterprise Funds, Internal Service Funds, Special Revenue Funds, and Debt Service Funds. The budget documents contain an overview section with descriptions of each of these fund types and detailed information of the revenues and expenses for each fund as well as for each individual department.
The FY 2026 Proposed Operating and Capital Budgets May 5, 2025 Council Study Session presentation provided an overview of the budget for review and discussion, including Citywide budget strategies, assumptions used in budget development, and a summary of service investments. As part of this discussion, the City Council provided guidance to the Finance Committee for their review of the budget documents during hearings on May 6, 7, and 20. The Finance Committee review of operating and capital budgets is structured around public hearings conducted prior to the City Council adoption to complete a detailed review of the budget documents and to incorporate opportunities for community input into the decision- making process. These meeting proceedings are organized by service area and include department presentations to highlight areas of emphasis for their respective department and fund(s). Department by department, the Finance Committee reviews individual budget sections for tentative approval of the budget, potential amendments, and requests for additional information to aid in their review. At the conclusion of these hearings (Budget Wrap-up), the Finance Committee is ultimately tasked to provide recommendations to amend the Proposed Operating and Capital Budgets and Municipal Fee Schedule for City Council consideration. These amendments, and additional information recommended for City Council review, are included in this adoption memorandum. In addition, staff held an additional study session on May 12 to check-in with the City Council for their feedback before the final budget wrap meeting on May
20. The City Council adoption of the City Manager’s FY 2026 Proposed Operating and Capital Budgets and FY 2026 Municipal Fee Schedule, including the amendments summarized in the Budget Wrap-up Memorandum on May 20, 2025 (CMR 2505-4645), will represent the ratification of the amendments that were approved by vote through the budget hearings. These amendments include all changes to the Municipal Fee Schedule and the Table of Organization. A comprehensive list of meeting materials issued during Finance Committee budget hearings is available on the City website, www.paloalto.gov/budget.
ANALYSIS
The report is organized by the following sections:
•Background and Discussion: Summary of FY 2026 budget process and overall balancing strategies organized by fund type, including funding of Council Priorities and Objectives. •FY 2026 Final Recommended Changes: A summary of final direction given by the Finance Committee on May 20 and additional recommended technical and staff adjustments organized by fund type.
•Table of Organization: A summary of additional changes to the Table of Organization because of adjustments made to the proposed budget that was released on May 5, 2025. •Municipal Fee Schedule: A summary of the changes in the review and recommendations to Council for the FY 2026 Municipal Fee Schedule for incorporation in the FY 2026 Proposed Budget (CMR 2504-45912).
•FY 2026 Utility Rate Changes: A brief overview of the rate changes reviewed by the Utilities Advisory Commission and Finance Committee and the final decision the City Council will make on June 16, 2025 (CMR 2411-3776); each of these rate changes are included in the FY 2026 budget assumptions.
•FY 2026 Appropriation Limit Resolution: Review and approval of a resolution based on California Article XIIIB to the State Constitution, as amended by Proposition 98 in 1988 and Proposition 111 in 1990. The provisions of this article place limits on the amount of revenue that can be appropriated by all entities of government. •Vacancies, Recruitment, and Retention update (AB2561 Compliance): Public hearing and review of the status of vacancies and recruitment and retention efforts during a public hearing to comply with Assembly Bill 2561 (Government Code § 3502.3) that passed in 2024.
•Attachments: Attached to this report are several documents as outlined and referenced throughout the recommendation language and the report. In addition, links to all the materials presented throughout the budget process to the City Council such as staff reports, At Places Memorandums, presentations made during the budget hearings, and transcripts from City Council Budget Hearings are included. 2 May 7, 2025, Finance Committee, FY 2026 Proposed Municipal Fee Schedule; https://www.paloalto.gov/files/assets/public/v/1/administrative-services/city- budgets/fy-2026-city-budget/proposed/may-7/finance-committee-5.25-supp-report- fy-2026-proposed-municipal-fee-schedule.pdf
Although Council only adopts the budget for the upcoming Fiscal Year, the FY 2026 Proposed Budget continues the practice to outline a two-year budget balancing strategy, bringing financial planning through June 30, 2027 and recommends using one-time surpluses to bridge near-term shortfalls in FY 2026 and partially offset shortfalls in FY 2027 while investing in priority services, infrastructure, and saving for long-term liabilities. In addition, the strategy also recommends limiting ongoing costs and looking for ongoing expense savings to mitigate the potential for greater future deficits.
Overall, the enhancements reflected in this FY 2026 Budget will maintain services throughout the City, support continued workforce recruitment and retention efforts, and advance City Council priority initiatives. While there are continued unknowns and uncertainties ahead, the FY 2026 Budget offers the Council, community, and staff the ability to address community priorities while beginning a process of expense reductions to develop an ongoing balanced financial strategy.
FY 2026 FINAL RECOMMENDED CHANGES
This section reviews amendments to the FY 2026 Proposed Operating and Capital Budgets presented to the City Council on May 5, including final adjustments recommended by the Finance Committee and technical adjustments recommended by staff. A comprehensive list of these adjustments by Fund Type, Fund, and Department is included in Attachment A, Exhibit 2 for changes to the FY 2026 Operating Budget, and Attachment A, Exhibit 3 for funding recommended to be reappropriated from FY 2025 to FY 2026 to continue work on capital projects. Changes to the Table of Organization are discussed later in this memorandum, and an updated Table of Organization is included in Attachment A, Exhibit 4.
Overall, this reflects a $12.3 million, or 1.2%, increase compared to the FY 2026 Proposed Budget across all funds. This includes an increase from the FY 2026 Proposed Budget of 6.00 FTE full-time staff and an increase of five 0.20 FTE part-time staff, all within the Fire Department for the new single role peak medic unit in the General Fund, resulting in an overall workforce of 1,110.35 full-time positions (613.97 FTE in the General Fund).
OPERATING BUDGET
OPERATING BUDGET – General Fund
Overall, the City’s General Fund is recommended to have $301.5 million in revenues and $313.4 million in expenses. To balance the budget for FY 2026, one-time funding of $6.0 million from the Council appropriated Uncertainty Reserve will be used to fund service priorities. In addition, to balance the General Fund, staff recommends placeholders of $2.7 million in operating savings and a $3.2 million reduction in the transfer to the Capital Improvement Fund, with at least $2.0 million of ongoing savings. Staff will return in August 2025 with reduction actions to allow time to constructively develop more specific recommendations. A total of $0.9 million in expenditures has been added to FY 2026 proposed funding levels to support several Council priority programs that are listed below in Table 1; however, excluding the Uncertainty Reserve that was restored to $6.0 million, the General Fund expenditures will decrease by $5.1 million to $307.4 million once the placeholders noted above are replace with specific actions in August and approve by the City Council.
Uncertainty Reserve
As part of the FY 2026 Proposed Budget, Staff recommended using the remaining $12.0 million of the Uncertainty Reserve to balance FY 2026. As a result of actions taken by the Finance Committee, only $6.0 million of the Uncertainty Reserve will be used to balance FY 2026, leaving $6.0 million for future budget planning needs.
Budget Stabilization Reserve
The FY 2026 Proposed Budget recommended leaving the BSR at $54.0 million or 17.3% of General Fund Expenditures for FY 2026. As part of the budget actions recommended for adoption by the Finance Committee, the BSR will remain at $54.0 million; however, due to the decreased expenditure budget of $307.4 million, excluding the $6.0 million in the Uncertainty Reserve, the BSR is at 17.6%. This is still below the 18.5% target level, but within the Council’s recommended range of 15-20% of General Fund Expenditures. The BSR calculation excludes reserves such as the Uncertainty Reserve and the Utility Transfer Legal Cost Reserve to avoid unintentional inflation of BSR needs.
As part of the Finance Committee discussion, recommendations were made to increase the BSR in FY 2027 and combine the Uncertainty Reserve with the BSR. Moving $4.0 million of the Uncertainty Reserve into the BSR in FY 2027 would bring the BSR up to $58.0 million or 18.2% of the estimated FY 2027 expenses. This would leave $2.0 million in the Uncertainty Reserve to partially offset the projected $8.0 million deficit in FY 2027.
Finance Committee Recommended Adjustments
Throughout budget hearings in May, the Finance Committee engaged in several meetings to review proposed budget documents and recommend tentative adjustments. Table 1 provides an overview of these adjustments at various touchpoints in the budget process.
TABLE 1: FY 2026 General Fund Recommended Adjustments
Dept
FY 2026 General Fund
Recommended Adjustments
FY 2026
Revenue or
Savings/
(Cost)
FY 2027
Revenue or
Savings/
(Cost)
General Fund Beginning Balance – Surplus/(Deficit) $- ($9,600,000) NON Use of Uncertainty Reserve (from FY 2026) - 4,000,000 FIR Paramedic transport fee revenue update 700,000 700,000 FIR First responder fee new revenue 100,000 200,000
CSD Rental and reservation fee revenue 100,000 100,000
Subtotal Sources or Revenues $900,000 $5,000,000
NON Restore Uncertainty Reserve (6,000,000) -
FIR Single role ambulance model (600,000) (1,200,000)
NON Nonprofit Workplan Phase I (From $235k to $346k) (111,000) (111,000) CSD Grants community events program (50,000) (50,000)
CSD Youth Community Services YCI funding (50,000) (50,000) NON Defer capital projects and reduce General Fund
transfer to Capital Fund (Placeholder)
3,200,000 1,000,000
NON General Fund expense savings (Placeholder) 2,711,000 1,011,000 Subtotal Uses or Expenses ($900,000) $600,000
General Fund Ending Balance – Surplus/(Deficit) $- ($4,000,000) Uncertainty Reserve Balance $6.0M $2.0M
Budget Stabilization Reserve (BSR) Balance
BSR % of General Fund Expenses
$54.0M
17.6%
$54.0M
17.0%
While the City adopts an annual budget, Finance Committee made recommendations for FY 2027 in consideration of our multi-year budget balancing strategy:
1) Combine Uncertainty Reserve with Budget Stabilization Reserve 2) Achieve 18.5% BSR level and reach $60.0 million (combined balance) 3) Reduce ongoing budget deficit
Nonprofit Partnership Workplan Phase I
Funding for the Nonprofit Partnership Workplan Phase I is recommended to increase by $111,000 plus $50,000 for Youth Connectedness Initiative (YCI) from the FY 2026 Proposed Budget amount of $235,000 to $396,000. While Finance Committee recommended direct allocations to previously funded nonprofits including: UNAFF, YCI, Environmental Volunteers, Magical Bridge, and 3rd Thursday (via the Palo Alto Chamber of Commerce), during the May 12, 2025 Study Session on the FY 2026 Budget, the City Council discussed including the recommended direct allocations, move through the Policy & Services Committee review and award process for all. On June 4, 2025, the Policy & Services Committee reviewed the 22 proposals received from registered 501c(3) nonprofit organizations totaling $819,089 in funding requests (Staff Report #2504-44653). Recommendations from this meeting will be summarized in a supplemental memo to the City Council for this agenda item, with recommendations for award as part of the adopted budget.
Mental Health Direct Funding - Highlights
Direct funding for mental health is included within the FY 2026 budget, as summarized below.
Programming and special events in CSD and Library Departments and other HSRAP grantees and City efforts also support community mental health.
* Contract funded in FY25 and will extend into FY26. Staff will evaluate the contract along with other mental health initiatives to determine a path forward.
** Funding for YCS and other nonprofits will be discussed at the June P&S Committee meeting.
OPERATING BUDGET – Enterprise Funds
Gas Fund – Cost of Services Study (COSA), Rate Adjustments, and Climate Credits The Finance Committee voted for the Utilities Advisory Commission to further review the 2025 Gas Cost of Service and Rate Study assumptions (COSA) and principles while retaining the current FY 2025 rate structure with rate increases of 5% to meet the revenue requirement of the gas utility in FY 2026. The impact on individual customers and customer classes will differ 3 June 4, 2025 Policy and Services Committee Meeting, Staff Report #2504-4465, Item #1:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=17737
depending on whether the 2025 Gas Cost of Service and Rate Study is implemented.
In addition, the Committee recommended a climate credit of $1.1 million using Gas Cap and Trade and/or interest income to G-2 customers (small and medium meter capacities). The $1.1 million will be sufficient if review and adoption of alternative rates are completed by January 2026; however, a total of $2.2 million would be needed if review of the COSA goes beyond January 2026.
OPERATING BUDGET – Other Funds
Community Development Block Grant (CDBG) Fund – Transfer Adjustment A $62,646 increase in the transfer to the Capital Improvement Fund is recommended to align with the award of funds to the Fire Station 4 Replacement capital project (PE-18004) for work on ADA ramp improvement.
Gas Tax Fund – Gas Tax Revenue Adjustment
This action is a technical update to increase Gas Tax revenue estimates for Palo Alto based on the California Department of Finance’s May 2025 updates for estimated Highway Users Tax Account (HUTA) and Road Maintenance and Rehabilitation Account (RMRA) taxes for FY 2026. This also increases the transfer to the Street Maintenance capital project (PE-86070), which is discussed below in the Capital Budget section of this report.
Parkland Dedication Fee Fund – Transfer Adjustment
A $371,165 increase in the transfer to the Capital Improvement Fund is recommended to align with recommended adjustments to capital project reappropriations from FY 2025 to FY 2026 to continue work on the Rinconada Pool Family Changing Room capital project (PE-24004).
University Avenue In-Lieu Parking Fund – Transfer Adjustment A $13,106,958 increase in the transfer to the Capital Improvement Fund is recommended to align with recommended adjustments to capital project reappropriations from FY 2025 to FY 2026 continue work on the New Downtown Parking Garage capital project (PE-15007).
CAPITAL BUDGET
The City’s Capital Improvement Plan reflects a $312.9 million FY 2026 budget, and a $1.1 billion plan over the 2026-2030 five-year Capital Improvement Plan (CIP). Of this, the Capital Improvement Fund FY 2026 budget reflects expected expense of $92.2 million and $331.4 million over the five-year CIP.
Capital Reappropriations
The Municipal Code requires City Council authorization to reappropriate funds for capital projects from one fiscal year to the next. The FY 2026 budget process continues this procedure, and the FY 2026 Proposed Capital Budget included approximately $140.6 million in reappropriated funds for project expenditures across all funds. In the time since the FY 2026 Proposed Budget figures, Staff refined the FY 2025 estimated project activity levels and provided further updates to increase the reappropriations by $0.3 million, to $140.9 million across all funds. The additional reappropriation adjustments are summarized in Attachment A, Exhibit 3.
Other Capital Project Adjustments
In addition to the reappropriations from FY 2025 to FY 2026, several capital projects need to be adjusted based on updated information that became available after the release of the FY 2026 Proposed Capital Budget or as a result of actions recommended in this memorandum. These adjustments are discussed below and summarized in Attachment A, Exhibit 2.
Capital Improvement Fund
-Capital Improvement Fund Administration (AS-10000) – Staff will return in August 2025 with specific recommendations to defer capital projects in order to define the target totals needed to balance the budget. Until then, a placeholder reduction of $3.2 million is recommended to be reflected in the Capital Improvement Fund Administration capital project.
-Fire Station 4 Replacement (PE-18004) – The project’s budget is recommended to be increased by $62,646 in both expense and revenue to align with the awarding of Community Development Block Grant (CDBG) funds for work on ADA ramp improvement.
-Street Maintenance (PE-86070) – The budget is recommended to be increased by $94,910 annually to align with the California Department of Finance’s May 2025 estimates for FY 2025-26 Gas Tax revenue.
Water Fund
-Water Main Replacement – Project 30 (WS-16001) – The FY 2026 Proposed Budget for this project included a reduction of $4.0 million but it should have been a reduction $4.6 million. The recommended action will correct the clerical error by reducing the budget by an additional $0.6 million.
Vehicle Replacement Fund
-Scheduled Vehicle and Equipment Replacement – Fiscal Year 2024 (VR-24000) – The FY 2026 Proposed Budget for this project included $85,000 for replacement of a police patrol vehicle. The recommended action will increase the cost by $10,000 due to a higher-than- anticipated quote received after the development of the 2026 Proposed Budget.
TABLE OF ORGANIZATION
During budget hearings, the Finance Committee recommended staffing adjustments of 7.00 FTE, 6.00 FTE full-time positions and five 0.20 FTE part-time positions. Additionally, Staff Report 2505-4737, transmitted to the City Council June 16, 2025, further adjusts the Table of Organization. A more detailed description of these actions is included in Attachment A, Exhibit 2, and an updated Table of Organization is included in Attachment A, Exhibit 4:
•Add 1.00 Administrative Associate III, 1.00 Manager, EMS, 2.00 Single Role EMT (Non- sworn), 2.00 Single Role Paramedic (Non-sworn) and five 0.20 FTE Hourly Paramedic positions to the Fire Department
•Add 1.00 Principal Transportation Engineer to the Office of Transportation •Eliminate 1.00 Senior Engineer in the Office of Transportation
MUNICIPAL FEE SCHEDULE
On May 7, 2025, the Finance Committee reviewed the FY 2026 Proposed Municipal Fee Schedule and recommended approval as outlined in CMR 2504-4591,4 included in Attachment A, Exhibit
5., provides a revised listing of fees from the Planning and Development Services fee study.
In addition, on April 29, 2025, the Finance Committee reviewed the Citywide Cost of Services Study as presented in CMR 2503-4351.5 The full results of that study are included in Attachment A, Exhibit 7, which informed several of the updates reflected in the FY 2026 fee schedule.
Rental Registry Program Registration Fee
Starting in FY 2026, the City will begin collecting the Rental Registry Program Registration Fee to recover costs associated with administering the Palo Alto Rental Registry, which was implemented in FY 2025.
In coordination with Planning and Development Services, it was determined that two categories of units will be required to register but exempt from paying the fee. Specifically, owner- occupied units in multi-family buildings will be exempt in recognition of the City’s desire to encourage property owners to live within the community and to avoid burdening small 4 May 7, 2025, Finance Committee, Staff Report # 2504-4591 FY 2026 Proposed Municipal Fee Schedule:
https://www.paloalto.gov/files/assets/public/v/1/administrative-services/city-budgets/fy-2026-city- budget/proposed/may-7/finance-committee-5.25-supp-report-fy-2026-proposed-municipal-fee-schedule.pdf 5 April 29, 2025, Finance Committee, Staff Report # 2503-4351 City Council Adopt Citywide Cost of Services Study and Proposed FY 2026 Municipal Fee Adjustments:
https://portal.laserfiche.com/Portal/DocView.aspx?id=167215&repo=r-704298fc&searchid=318171dd-69f2-4f86- 833e-ddef14c4101d
property owners with a fee for units from which they do not generate income. Additionally, units located within 100% affordable housing properties will be exempt, reflecting the City’s commitment to supporting not-for-profit organizations providing essential housing services to community members. The fiscal impact of this exemption will be fully offset through the use of Measure K funds dedicated for affordable housing and homeless services.
Technical Update:
Due to a technical error during the translation of fees from the Planning and Development Fee Study consultant report to the proposed fee listing, an updated version in Attachment A, Exhibit 6 has been included to accurately reflect all fees as outlined in the final consultant report. Previously, 136 fees were inadvertently omitted from the ordinance but were included in the full report presented to Finance Committee on March 4th, 20256. As noted in the consultant report, the fee tables intentionally excluded the Technology and Reserve fees to allow for a clearer comparison between fee and City costs. These two components have now been added back to the fees and are recommended to be approved and as part of the FY 2026 Municipal Fee Schedule.
FISCAL YEAR 2026 RATE CHANGES
An overview of the rate changes was reviewed and approved by the Utilities Advisory Commission (UAC) and Finance Committee in April 2025. These rate changes are included in the FY 2026 budget assumptions. This section references those changes for informational purposes only; a separate report recommending final rate changes will be considered by the City Council on June 16, 2025 (CMR 2411-3776).
•6.0% rate change for Electric
•2.4% CPI increase for pre-2006 Dark Fiber customers (New Broadband Fiber rates are addressed in CMR 2411-3776 recommending final rate changes on June 16, 2025 and discussed with the Finance Committee on June 3, 20257)
•5.0% rate increase for Gas
•0.0% rate change for Refuse
•2.4% CPI increase for Stormwater
•20.0% rate change for Wastewater
•10.0% rate change for Water
6 March 4, 2025, Finance Committee, Staff Report # 2501-4019 Recommend City Council Adopt Planning and Development Services Cost of Services Study and Proposed Municipal Fee Adjustments:
https://portal.laserfiche.com/Portal/DocView.aspx?id=146000&repo=r-704298fc&searchid=5be6710f- cd35-47bf-ba99-b88c5eb1b6ce
7 June 3, 2025 Finance Committee Meeting, Staff Report #2502-4159, Item #2:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=16128 The proposed rate changes will allow Palo Alto to invest in utility infrastructure, gradually increase reserves to guideline levels, and to support community goals. As utility infrastructure ages, investment is needed to maintain the reliability of the electric, gas, stormwater, wastewater, and water utilities. These rate increases will support the maintenance and replacement of infrastructure including rebuilding Palo Alto’s wastewater treatment plant (Regional Water Quality Control Plant). Investment in modernizing the electric grid will allow the City to achieve the Council’s Sustainability and Climate Action goals.
STAFF REFERRALS
During the Budget Hearings, certain items did not require additional funding at the time of budget adoption but were recommended to Council for consideration as Referrals and Finance Committee FY 2026 workplan:
- Cost Recovery Policy
Update the City Cost Recovery Policy to include a new 100% cost recovery category. - Update Fee Cost Recovery Category
Summarize the current fee cost recovery category by fee type and update to reflect current policy direction on cost recovery and revenue enhancement objectives.
APPROPRIATIONS LIMIT FOR FISCAL YEAR 2026
California voters approved an initiative on November 6, 1979 that added Article XIIIB to the State Constitution, as amended by Proposition 98 in 1988 and Proposition 111 in 1990. The provisions of this article place limits on the amount of revenue that can be appropriated by all entities of government. The appropriation limit is adjusted annually on the basis of population and per capita income changes provided annually by the California Department of Finance. Based on Article XIIIB, the City of Palo Alto can use the larger of two measurements of population growth, (county or city population growth) in the appropriations limit calculation. For Fiscal Year 2026, the City is using the 2024-2025 percent change in population growth of the City of Palo Alto in the calculation. The City typically uses the highest factor in order to provide maximum appropriation flexibility.
The appropriations limit for Fiscal Year 2026 is $234.62 million for funds subject to the appropriation limits. The City's Fiscal Year 2026 budgeted appropriations are estimated to be $56.61 million under the limit (Attachment B, Exhibit 1). As required by State law, documentation used to compute the appropriations limit has been made available to the public at least fifteen days prior to the Council meeting at which the appropriations limit is being adopted, and notice was published of the availability of these materials.
VACANCIES AND RECRUITMENT UPDATE (AB 2561 COMPLIANCE)
Assembly Bill 2561 (Government Code § 3502.3) that passed in 2024 requires public agencies to present the status of vacancies and recruitment and retention efforts during a public hearing before the governing body at least once per fiscal year. This requirement is intended to improve transparency around staffing levels and workforce challenges in the public sector. The law also allows recognized labor groups to make a presentation on this topic during the same hearing.
This data was initially presented to the City Council during the FY 2025 Mid-Year Budget Review in February 20258; however, it is being provided during the budget adoption process to ensure the City’s labor groups have the ability to address this topic. As a part of AB2561 any of the City’s recognized bargaining groups are welcome to request to present to Council at the same time as this data is received, staff recommends that any labor groups present be allowed a certain amount of time for presentations per the Mayor’s discretion and time for questions from Council as needed.
For the past three years, the City has invested in strengthening its compensation and benefits structure in order to attract top talent and retain staffing necessary to achieve Council goals and community needs. These targeted improvements, in alignment with the City’s continued commitment to positive work environment initiatives and strategic staffing goals, have positively resulted in decreasing vacancies and employee turnover. The Human Resources Department has included updated data on citywide vacancy and recruitment efforts (Attachment D). The information reflects positions budgeted and vacant by labor group.
Under AB2561, Local agencies are required to provide further details regarding recruitment processes if there is a vacancy rate of greater than 20% within a single bargaining unit. The new law further requires the identification of policies, procedures and recruitment activities that lead to obstacles to the hiring process. The City proactively and aggressively initiated recruitment process reviews and improvements throughout the pandemic and in 2023 through partnership with Municipal Resource Group “MRG” developed a Recruitment Strategic Plan,9 which has led to substantial reductions in vacancies and no bargaining unit being near the 20% threshold mentioned above. The comprehensive recruitment strategic plan developed an overall strategy for elevating the City’s recruitment model to reduce the citywide vacancy rate.
This was then followed by a City Auditor’s review of recruitment practices and succession planning Audit,10 focused on determining the efficiency and effectiveness of the recruitment 8 February 24, 2025 City Council Meeting, Staff Report #2412-3865:
https://portal.laserfiche.com/Portal/DocView.aspx?id=143359&repo=r-704298fc&searchid=5674f11a-a033-46b6-bdff- 3c312e8762d2
9 May 6, 2024 City Council Meeting, Staff Report 2404-2890:
https://portal.laserfiche.com/Portal/DocView.aspx?id=72031&repo=r-704298fc&searchid=ae20a5b0-a735-4764-9e79- 5d269287eac3
10 December 10, 2024 Policy & Services Committee, Report #2410-3633:
https://portal.laserfiche.com/Portal/DocView.aspx?id=115905&repo=r-704298fc&searchid=43aef858-a059-42d4-b70d- and hiring process. All of these steps have aided in positioning the City exceptionally well as it is related to recruiting practices streamlining processes, improving data reporting and is considered ahead of comparator agencies within this realm. This advantage stems from the City’s use of advanced cloud based and on demand interview platforms, a modern government focused applicant tracking system (NEOGOV), and extensive job boards providing access to millions of job seekers every month. While the competition for top talent remains heightened, the City through endeavors like these is well positioned to compete.
Key Highlights:
•Current vacancy rate (Citywide): 11%
•Average time-to-fill (Posting to Hire Date): 81 days
•Currently, there are no employee groups with a vacancy rate higher than 20% •Strategic recruitment initiatives: Recruitment strategic plan phase I implementation complete, Phase II currently under way, FY 2026 focus includes developing additional talent pipelines
Next Steps:
•Continuing annual public reporting of vacancies and recruitment trends alongside the Mid-Year Budget Review as well as to the Finance Committee during the annual budget process
•Continue to provide labor partners with ongoing vacancy data •Monitor and evaluate with the City Manager and Department Directors, adjusting recruitment strategies to meet organizational needs
FISCAL/RESOURCE IMPACT
This report summarizes and seeks the City Council approval of the FY 2026 Operating and Capital Budgets, the supporting fee schedules, and table of organization to support the projections and appropriations included.
The approval of the City Manager’s FY 2026 Capital and Operating Budget, as recommended to be amended in this report, would result in a projected General Fund Budget Stabilization Reserve of $54.0 million. At the recommended expense levels of $307.4 million, after adjusting for the $6.0 million remaining in the Uncertainty Reserve, the BSR is at 17.6%, slightly below the Council’s target of 18.5% and within the recommended range of 15-20% of General Fund Expenditures. Exclusion of reserve funding has been done to avoid unintentional inflation of the BSR funding needs.
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As part multi-year budget balancing strategy, Finance Committee recommended in FY 2027 to combine the Uncertainty Reserve with the BSR and increase the overall reserve. Moving $4.0 million of the Uncertainty Reserve into the BSR in FY 2027 would bring the BSR up to $58.0 million or 18.2% of the estimated FY 2027 expenses. This would leave $2.0 million in the Uncertainty Reserve to partially offset the projected $8.0 million deficit in FY 2027.
The projected changes to the fund balance for all other funds including Capital Funds, Enterprise Funds, Internal Services Funds, and Special Revenue Funds are outlined in Attachment A Exhibits 2 and 3 and impacts to fund balance summarized in Table 2 below.
TABLE 2: Resource Impact (Non-General Funds with Fund Balance Change) Fund Type Fund Name Fund Balance Change
Capital Capital Improvement Fund +$16.4M
Airport Fund +$3k
Electric Fund -$1.2M
Gas Fund -$2.1M
Stormwater Management Fund $1.2M
Enterprise
Water Fund -$0.4M
Internal Service Vehicle Fund -$10k
Community Development Block Grant Fund -$63k
Parkland Dedication Fee Fund -$0.4M
Special Revenue
University Avenue In-Lieu Parking Fund -$13.1M
STAKEHOLDER ENGAGEMENT
The budget process is structured around public hearings conducted before City Council adoption to complete a detailed review of the budget documents and incorporate opportunities for community input in the decision-making process. The community was encouraged to engage with the budget process through scheduled public meetings with the Finance Committee and City Council, a community informational session with City staff, and direct emails to the City Manager and City Council. Additionally, the City maintains a dedicated webpage for meeting materials and other budget information11
ENVIRONMENTAL REVIEW
Adoption of the City budget and associated actions is not a project under California Environmental Quality Act (CEQA) Guidelines because it is a government fiscal activity which does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment. CEQA Guidelines Section 15378(b)(4).
11 City’s Budget Website: www.cityofpaloalto.org/budget
ATTACHMENTS
Attachment A - FY 2026 Budget Adoption Ordinance
Attachment A, Exhibit 1 - City Manager's Fiscal Year 2026 Proposed Operating & Capital Budgets & Municipal Fee
Attachment A, Exhibits 2 and 3 - Amendments to the City Manager's Fiscal Year 2026 Proposed Operating and Capital Budgets
Attachment A, Exhibit 4 - Table of Organization
Attachment A, Exhibit 5 - Fiscal Year 2026 Municipal Fee Changes Attachment A, Exhibit 6 - Planning and Development Services Cost of Service Study and Municipal Fee Adjustments
Attachment A, Exhibit 7 - Citywide Cost of Services Study and Municipal Fee Adjustments Attachment B - FY 2026 City Appropriations Limit Resolution Attachment B, Exhibit 1 - Appropriations Limit Calculation Attachment C - FY 2026 Summary of Stanford Investments
Attachment D - AB2561 Reporting - Vacancy Data by Bargaining Unit APPROVED BY:
Lauren Lai, Administrative Services Director