City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: Administrative Services
Meeting Date: December 15, 2025
Report #:2511-5452
TITLE
Accept the City of Palo Alto’s Audited Financial Statements as of June 30, 2025, and the Macias, Gini & O’Connell Management Letter; Approve the FY 2025 Annual Comprehensive Financial Report (ACFR)and Amendments to the FY 2025 Budget in Various Funds; CEQA Status – Not a Project.
RECOMMENDATION
Finance Committee and Staff recommend the City Council:
1. Accept the City of Palo Alto’s audited financial statements for the fiscal year ended June 30, 2025, and the accompanying reports prepared by Macias Gini & O’Connell LLP (“MGO”)1 . Reports include:
a. Report to the City Council the “Management Letter”,
b. Cable TV Franchise, Independent Auditor’s Report and Statements of Franchise Revenues and Expenses for the years ended December 31, 2023, and 2024, c. Palo Alto Public Improvement Corporation (a component unit of the City of Palo Alto) Annual Financial Report for the year ended June 30, 2025, d. Regional Water Quality Control Plant, Independent Auditor’s Report and Financial Statements for the year ended June 30, 2025,
e. Independent Accountant’s Report on Applying Agreed-Upon Procedures related to Article XIII-B Appropriations (GANN) Limit for the year ended June 30, 2025, and
f. Pedestrian/Bicycles Facilities Grant Metropolitan Transportation Commission Transportation Development Act Funds, Article III, Independent Auditor’s Report and Financial Statements, and Supplementary Information for the year ended June 30, 2025
1 Finance Committee, December 2, 2025; Agenda Item #1; CMR #2510-5389, https://portal.laserfiche.com/Portal/DocView.aspx?id=239318&repo=r-704298fc
2. Approve the Fiscal Year (FY) 2025 Annual Comprehensive Financial Report (ACFR). An electronic copy is available on the City’s website3.
3. Amend the Fiscal Year 2025 Budget Appropriation Ordinance for various funds as identified Recommended Amendments to the City Manager’s FY 2025 Budget; referenced as “Attachment B – Exhibit 1 and various capital projects as identified in Attachment B – Exhibit 2”(Attachment I) in CMR #2508-50364 (Effective on first reading; five votes required).
Hard copies of these reports were provided to the City Council. If any member of the public would like, printed copies of the City’s Annual Comprehensive Financial Report (ACFR) are available from the Administrative Services Department at the rate established in the City’s Municipal Fee Schedule. Electronic copies are available on the City’s website at no cost.
BACKGROUND
Every year, the fiscal year is closed out, and the City Council publishes the City’s financial report (Palo Alto Municipal Code 2.28.200). At the December 2, 2025, Finance Committee meeting, the Committee reviewed two staff reports: one transmitted by the City Auditor’s Office and one by the City Manager’s Office via the Administrative Services Department and unanimously approved both reports for City Council consideration. The Committee also recommends further review of the formula and process for use of excess Budget Stabilization Reserve (BSR) funds5.
This referral will be considered by Council in January 2026 as a part of the Long Range Financial Forecast (LRFF) and if approved, will be affirmed in Committee Workplan. Office of the City Auditor: Discussion and Recommendation to the City Council to Accept the MGO Audit of the City of Palo Alto’s Financial Statements as of June 30, 20251. Administrative Services Department: Recommendation to Approve the Fiscal Year (FY) 2025 ACFR, Approve FY 2025 Budget Amendments in Various Funds. 3 Annual Comprehensive Financial Report, 2025; https://www.paloalto.gov/files/assets/public/v/1/administrative- services/financial-reporting/annual-comprehensive-financial-reports-acfr/current-2011-acfrs/city-of-palo-alto-acfr- fye-06.30.2025-final-secured.pdf
4 Finance Committee, December 2, 2025; Agenda Item #2 Attachment B; CMR# 2508-5036, https://portal.laserfiche.com/Portal/DocView.aspx?id=237456&repo=r-704298fc 4 December 2, 2025, Finance Committee Action Minutes:
https://cityofpaloalto.primegov.com/meetings/ItemWithTemplateType?id=8961&meetingTemplateType=2&comp iledMeetingDocumentId=17668
MGO issued a clean opinion on each audit report. The City also received the Certificate of Achievement for Excellence in Financial Reporting from the Government Finance Officers Association (GFOA) for its FY 2024 ACFR.
ANALYSIS
Government-wide
As outlined in the staff report to the Finance Committee, at the close of FY 2025, the City’s total Net Position was $1.6 billion, an increase of $112.2 million (7.7%) over the prior fiscal year. This growth primarily reflects progress on major capital projects and increases in restricted funds and investment values. Notable projects include the Public Safety Building, Roth Building Rehabilitation, Fire Station No. 4 Replacement, Boulevard Park Improvements, and Electric Distribution System Upgrades. Citywide, 83% of net position represents investment in capital assets ($1.3 billion), 10% is restricted ($155.6 million), and 7% is unrestricted ($116.9 million).
General Fund
Overall, at the end of the current fiscal year, the General Fund’s fund balance was $103.8 million, The General Fund unassigned fund balance is $53.1 million (ACFR, p.33). Staff have reconciled the accounting basis of this presentation (where non-cash activity is recorded) against budgetary activity. The main difference between the BSR balance ($58.9 million) and unassigned fund balance ($53.1 million) is the investment unrealized loss adjustment, as required by GASB 31 and discussed previously in this report.
By policy, the City maintains a General Fund Budget Stabilization Reserve (BSR) balance of 15%- 20% of the annual operating expense, with a target level of 18.5%. The BSR ended FY 2025 at $58.9 million, but after adjusting the BSR for FY 2026 additions approved by Council3, the net BSR balance is $58.8 million or $2.0 million above Council’s 18.5% BSR target level. The FY 2025 savings in salary & benefit, contracts services and other expenses contributed to this higher BSR. Staff recommend that the $2.0 million above the 18.5% BSR target level be kept in BSR for future budget balancing strategy and projected FY2027 budget shortfall and ensure the City maintains high quality service level. Consistent with current practice, any budget actions to allocate the BSR funds above the 18.5% target level will be included in the FY 2026 Mid-Year Review (February 2026).
Other Funds: Enterprise and Internal Service Activities The City’s Enterprise Funds ended FY 2025 with a net position of $987.1 million, up $86.4 million (9.6%), from the prior fiscal year. The increase in net position reflects continued investment in capital assets, along with higher unrestricted funds set aside for Council directed reserves by policy such as the utility reserve. Discussion can be found in the staff’s December 2, 2025, report to the Finance Committee4.
FISCAL/RESOURCE IMPACT
The actions recommended in CMR 2508-50363 Attachment B, Exhibits 1 and 2, recommend adjustments to the FY 2025 appropriated level of funds to align budgeted levels with year-end activities.
STAKEHOLDER ENGAGEMENT
This report has been prepared by the Administrative Service Department Accounting division and coordinated with the Office of the City Auditor and the Office of Management and Budget.
ENVIRONMENTAL REVIEW
Council action on this item is not a project as defined by CEQA because the acceptance of the audited financial reports for the fiscal year ending June 30, 2025 , approval of the ACFR for Fiscal Year 2025, and the amendment to the Fiscal Year 2025 Budget Appropriation Ordinance are fiscal activities which do 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).
ATTACHMENTS
Attachment A: FY 2025 Budget Amendments, Exhibit 1 and 2 APPROVED BY:
Lauren Lai, Administrative Services Director