Agenda packet — Palo Alto City Council, January 20, 2026 (part 4 of 4)

AMENDMENT NO. 3 TO CONTRACT NO. C23183770

BETWEEN THE CITY OF PALO ALTO AND
TOWNSEND PUBLIC AFFAIRS, INC.

This Amendment No. 3 (this “Amendment”) to Contract No. C23183770 (the “Contract” as defined below ) is entered into as of December 15, 2025, by and between the CITY OF PALO ALTO, a California chartered municipal corporation ( “CITY”), and TOWNSEND PUBLIC AFFAIRS , INC, a California Corporation , located at 1401 Dove Street, Ste. 330, Newport Beach, California, 92660 (“CONSULTANT”). CITY and CONSULTANT are referred to collectively as the “Parties” in this Amendment.

R E C I T A L S

A. The Contract (as defined below) was entered into by and between the Parties hereto for the provision of representing CITY in all federal and state legislative advocacy matters including grant seeking and funding advocacy, as detailed therein. The Contract as first approved the not-to-exceed amount for the first three years but only approved the term for the first year.

B. The Parties entered into Amendment No.1 in order to update the scope of services, revise the compensation schedule, and extend the contract term by twelve months through December 31, 2024, without any additional cost to the CITY, as detailed therein.

C. The Parties entered into A mendment No. 2 in order to (1) extend the contract term by an additional twelve -month period through December 31, 2025, and (2) revise the compensation schedule to reflect the extension, at no additional cost to the CITY, as detailed therein.

D. The Parties now wish to amend the Contract in order to (1) extend the contract term by an additional twelve -month period through December 31, 2026, (2) increase not to exceed by One Hundred Eighty -Six Thousand Dollars ($ 186,000) from Five Hundred Fifty -Eight Thousand Dollars ($558,000) to Seven Hundred and Forty-Four Thousand Dollars ($744,000) and (3) revise the compensation schedule to reflect the extension, and as detailed herein. This will authorize the not-to-exceed amount through 2026.

NOW, THEREFORE, in consideration of the covenants, terms, conditions, and provisions of this Amendment, the Parties agree:

SECTION 1. Definitions. The following definitions shall apply to this Amendment:

a. Contract. The term “Contract” shall mean C ontract No. C23183770 between CONSULTANT and CITY, dated January 1, 2023, as amended by:

Docusign Envelope ID: 3D5284C5-27BD-4343-81F7-3EB62D46D49D Item 9
Attachment A - Amendment
3 to Contract C23183770
with Townsend Public
Affairs, Inc.

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Amendment No.1, dated November 2, 2023
Amendment No.2, dated December 24, 2024

b. Other Terms. Capitalized terms used and not defined in this Amendment shall have the meanings assigned to such terms in the Contract.

SECTION 2. Section 2, Entitled “TERM” of the Contract is hereby amended to read as follows:
“The term of this Agreement shall be from the date of its full execution through December 31, 2026, with the option to extend for one (1) more periods of one (1) year each, unless terminated earlier pursuant to Section 19 (Termination) of this Agreement. CITY shall notify CONSULTANT of its intent to exercise its option to renew in writing no later than ninety (90) days before the end of the term of this Agreement.”

SECTION 3. Section 4, Entitled “ NOT TO EXCEED COMPENSATION ” of the Contract is hereby amended to read as follows:

The compensation to be paid to CONSULTANT for performance of the Services shall be based on the compensation structure detailed in Exhibit C, entitled “COMPENSATION,” including any reimbursable expenses specified therein, and the maximum total compensation shall not exceed Seven Hundred Forty-Four Thousand Dollars ($744,000.00) . The hourly schedule of rates, if applicable, is set out in Exhibit C -1, entitled “SCHEDULE OF RATES.” Any work performed or expenses incurred for which payment would result in a total exceeding the maximum compensation set forth in this Section 4 shall be at no cost to the CITY.

Optional Additional Services Provision (This provision applies only if checked and a not-to-exceed compensation amount for Additional Services is allocated below under this Section 4.) In addition to the not- to-exceed compensation specified above, CITY has set aside the not- to- exceed compensation amount of zero Dollars ($0) for the performance of Additional Services (as defined below). The total compensation for performance of the Services, Additional Services and any reimbursable expenses specified in Exhibit C, shall not exceed Seven Hundred Forty-Four Thousand Dollars ($744,000.00), as detailed in Exhibit C.

“Additional Services” means any work that is determined by CITY to be necessary for the proper completion of the Project, but which is not included within the Scope of Services described at Exhibit A. CITY may elect to, but is not required to, authorize Ad ditional Services up to the maximum amount of compensation set forth for Additional Services in this Section 4.

CONSULTANT shall provide Additional Services only by advanced, written authorization from CITY as detailed in this Section. Additional Services, if any, shall be authorized by CITY with a Task Order assigned and authorized by CITY’s Project Manager, as identified in Section 13 (Project Management). Each Task Order shall be in substantially the same form as Exhibit A- 1, entitled “PROFESSIONAL SERVI CES TASK ORDER”. Each Task Order shall contain a specific scope of services, schedule of performance and maximum compensation amount, in accordance with the provisions of this Agreement. Compensation for Additional Services shall be specified by CITY in Docusign Envelope ID: 3D5284C5-27BD-4343-81F7-3EB62D46D49D Item 9
Attachment A - Amendment
3 to Contract C23183770
with Townsend Public
Affairs, Inc.

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the Task Order, based on whichever is lowest: the compensation structure set forth in Exhibit C, the hourly rates set forth in Exhibit C-1, or a negotiated lump sum.

To accept a Task Order, CONSULTANT shall sign the Task Order and return it to CITY’s Project Manager within the time specified by the Project Manager, and upon authorization by CITY (defined as counter-signature by the CITY Project Manager), the fully exec uted Task Order shall become part of this Agreement. The cumulative total compensation to CONSULTANT for all Task Orders authorized under this Agreement shall not exceed the amount of compensation set forth for Additional Services in this Section 4. CONSUL TANT shall only be compensated for Additional Services performed under an authorized Task Order and only up to the maximum amount of compensation set forth for Additional Services in this Section 4. Performance of and payment for any Additional Services are subject to all requirements and restrictions in this Agreement.

SECTION 4. The following exhibit(s) to the Contract is/are hereby amended or added, as indicated below, to read as set forth in the attachment(s) to this Amendment, which is/ are hereby incorporated in full into this Amendment and into the Contract by this reference:

a. Exhibit “C” entitled “ COMPENSATION, AMENDMENT NO. 2 ”, AMENDED, REPLACES PREVIOUS.

SECTION 5. Legal Effect. Except as modified by this Amendment, all other provisions of the Contract, including any exhibits thereto, shall remain in full force and effect.

SECTION 6. Incorporation of Recitals . The recitals set forth above are terms of this Amendment and are fully incorporated herein by this reference.

(SIGNATURE BLOCK FOLLOWS ON THE NEXT PAGE.)

Docusign Envelope ID: 3D5284C5-27BD-4343-81F7-3EB62D46D49D Item 9
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3 to Contract C23183770
with Townsend Public
Affairs, Inc.

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SIGNATURES OF THE PARTIES

IN WITNESS WHEREOF, the P arties have by their duly authorized representatives executed this Amendment effective as of the date first above written.

CITY OF PALO ALTO

City Manager

APPROVED AS TO FORM:

City Attorney or designee

TOWNSEND PUBLIC AFFAIRS, INC.

Officer 1

By:

Name: Christopher Townsend

Title: President

Officer 2

By:

Name: Christopher Townsend

Title: Secretary

Attachments:

EXHIBIT C: “COMPENSATION, AMENDMENT NO. 3” (AMENDED, REPLACES PREVIOUS)

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3 to Contract C23183770
with Townsend Public
Affairs, Inc.

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EXHIBIT C
COMPENSATION, AMENDMENT NO. 3
(AMENDED, REPLACES PREVIOUS)

CITY agrees to compensate CONSULTANT for Services performed in accordance with the terms and conditions of this Agreement, and as set forth in the budget schedule below. Compensation shall be calculated based on the rate schedule attached as Exhibit C -1 up to the not to exceed budget amount for each task set forth below.

CITY’s Project Manager may approve in writing the transfer of budget amounts between any of the tasks or categories listed below, provided that the total compensation for the Services, including any specified reimbursable expenses, and the total compensation for Additional Services (if any, per Section 4 of the Agreement) do not exceed the amounts set forth in Section 4 of this Agreement.

CONSULTANT agrees to complete all Services, any specified reimbursable expenses, and Additional Services (if any, per Section 4), within this/these amount(s). Any work performed or expenses incurred for which payment would result in a total exceeding the maximum amount of compensation set forth in this Agreement shall be at no cost to the CITY.

BUDGET SCHEDULE – Annually and Total
TASK Year 1
(2023)
Year 2
(2024)
Year 3
(2025)
Year 4
(2026)
NOT TO
EXCEED
AMOUNT
Year 5 (2027 –
If approved)
Task 1
(Grant Consulting and
Compliance Services)
$48,000
($4,000/mo) $48,000 $48,000 $48,000 $192,000 $48,000 Task 2
(Federal Legislative
Advocacy Services)
$72,000
($6,000/mo)
$72,000 $72,000 $72,000 $288,000 $72,000
Task 3
(State Legislative
Advocacy Services)
$114,000
($9,500/mo)
$114,000 $114,000 $114,000 $456,000 $114,000
Less: Discount for
Bundled Cost Structure
(Tasks 1, 2, and 3)
($48,000)
($4,000/mo)
($48,000) ($48,000) ($48,000) ($192,000.00) ($48,000)
Sub-total for Services $186,000 $186,000 $186,000 $186,000 $744,000.00 $186,000 Reimbursable Expenses
(if any) $0 $0 $0 $0 $0.00 $0
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Attachment A - Amendment
3 to Contract C23183770
with Townsend Public
Affairs, Inc.

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Total for Services and
Reimbursable
Expenses
$186,000 $186,000 $186,000 $186,000 $744,000.00 $186,000 Additional Services (if
any, per Section 4) $0 $0 $0 $0 $0.00 $0
Maximum Total
Compensation $186,000 $186,000 $186,000 $186,000 $744,000.00 $186,000

REIMBURSABLE EXPENSES

CONSULTANT’S ordinary business expenses, such as administrative, overhead, administrative support time/overtime, information systems, software and hardware, photocopying, telecommunications (telephone, internet), in -house printing, insurance and other ordinary business expenses, are included within the scope of payment for Services and are not reimbursable expenses hereunder.

Reimbursable expenses, if any are specified as reimbursable under this section, will be reimbursed at actual cost. The expenses (by type, e.g. travel) for which CONSULTANT will be reimbursed are: NONE up to the not-to-exceed amount of: $0.00.

Docusign Envelope ID: 3D5284C5-27BD-4343-81F7-3EB62D46D49D Item 9
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City Council
Staff Report
Report Type: CONSENT CALENDAR
Lead Department: City Manager
Meeting Date: January 20, 2026
Report #:2601-5795
TITLE
SECOND READING: Ordinance of the Council of the City of Palo Alto Repealing and Replacing Section 18.40.250 (Lighting) of Chapter 18.40 (General Standards and Exceptions) and Amending Chapters 18.10, 18.12, 18.28 and Section 18.40.230 of Title 18 (Zoning) of the Palo Alto Municipal Code to Adopt New Outdoor Lighting Regulations (REINTRODUCED FIRST READING: December 8, 2025; PASSED:6-1, Lythcott-Haims, no)

BACKGROUND
The City Council heard this item on December 8, 2025 for a reintroduced first reading and approved the below motion on a 6-1, Lythcott-Haims, no vote.

MOTION: Councilmember Stone moved, seconded by Councilmember Reckdahl to adopt the proposed ordinance with staff’s recommended changes and include the following changes:
1) Amend Section 18.40.250(e)(4)(A), removing the curfew start time of 12:00 a.m. and adding a curfew start time of 11:00 p.m.
2) Amend Section 18.40.250(c)(3) to remove the phrase “If a building permit is required” to apply the ordinance to all new installation, replacement, or modification of outdoor luminaires.
3) Amend Section 18.40.250(L)(1), removing the words “two years” and replacing it with the words “one year”, shortening the compliance period for adjustable existing lighting fixtures to one year.
4) Amend Section L(2)(A) and (B) and L(3) to remove the retrofit requirement. 5) Refer to the Utilities Department to evaluate electric efficiency incentives related to voluntary retrofits of existing fixtures.
6) Request staff to evaluate objective standards as an alternate to cost of the lighting study. 7) Under the business curfew, retain the 2-hour-after closure and limit the after-vacancy to one hour.
8) Outdoor space above ground floor Section F(4)(B) revised to be consistent to other curfews in this ordinance.

MOTION PASSED: 6-1, Lythcott-Haims no
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The ordinance was updated to reflect the City Council’s direction and is now before the City Council for a second reading.

ATTACHMENTS
Attachment A: Ordinance of the Council of the City of Palo Alto Repealing and Replacing Section

18.40.250 (Lighting) of Chapter 18.40 (General Standards and Exceptions) and Amending Chapters 18.10, 18.12, 18.28 and Section 18.40.230 of Title 18 (Zoning) of the Palo Alto Municipal Code to Adopt New Outdoor Lighting Regulations
APPROVED BY:

Mahealani Ah Yun, City Clerk
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Ordinance No. _____
Ordinance of the Council of the City of Palo Alto Repealing and Replacing Section

The Council of the City of Palo Alto ORDAINS as follows:

SECTION 1. Findings and Declarations. The City Council finds and declares as follows:

A. The term “dark sky” generally refers to achievement of signiﬁcant reducƟon in light polluƟon so that the sky returns or becomes closer to its natural nighƫme darkness.

B. Adhering to Dark Sky principles, which promote responsible outdoor lighƟng pracƟces, can signiﬁcantly reduce light polluƟon and miƟgate its harmful eﬀects. These principles emphasize using light only if it is needed, direcƟng so that it falls only where it is needed, having lighƟng only when it is necessary and no brighter than necessary, and using warmer lights.

C. On January 29, 2024, the City Council selected four City Council prioriƟes, one of which is the Climate Change & Natural Environment – ProtecƟon & AdaptaƟon, and included an objecƟve to “approve a bird safe glass and wildlife light polluƟon protecƟons ordinance.”
D. On February 14, 2024, and July 18, 2024, the Architectural Review Board conducted study sessions and provided feedback on the concepts of the DarkSky regulaƟons and draŌ ordinance.

E. On August 14, 2024, the Planning and TransportaƟon Commission reviewed the draŌ ordinance, provided feedback and recommended that staﬀ return with more informaƟon, conƟnuing the hearing to a date uncertain.

F. On October 30, 2024, the Planning and TransportaƟon Commission recommended that City Council adopt the ordinance.

G. The ordinance aligns with Dark Sky principles and is intended to reduce light polluƟon at night, protecƟng wildlife and supporƟng a sustainable and resilient community.

//
Item 10
Attachment A - Ordinance
of the Council of the City of
Palo Alto Repealing and
Replacing Section 18.40.250
(Lighting) of Chapter 18.40
(General Standards and
Exceptions) and Amending
Chapters 18.10, 18.12,

18.28 and Section

18.40.230 of Title 18
(Zoning) of the Palo Alto
Municipal Code to Adopt
New Outdoor Lighting
Regulations

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SECTION 2. Section 18.40.250 (Lighting) of Chapter 18.40 (General Standards and Exceptions) of Title 18 (Zoning) of the Palo Alto Municipal Code is repealed in its entirety and replaced with a new Section 18.40.250 (Lighting) to read as follows:

18.40.250 Lighting
(a) Purpose. The intent of this section is to establish exterior lighting standards to reduce light pollution. Exterior lighting of parking areas, pathways, and common open spaces, including fixtures on building facades and free-standing lighting should aim to:
(1) Reduce light pollution and its adverse effects on the environment, wildlife habitat, and human health through implementing Dark Sky Principles of responsible outdoor lighting that are useful, targeted, low level, controlled, and warm colored; (2) Minimize the visual impacts of lighting on abutting or nearby properties and from adjacent roadways;
(3) Provide safe and secure access on a site and adjacent pedestrian routes; (4) Achieve maximum energy efficiency; and
(5) Complement the architectural design of the project. (b) Definitions. For purposes of this chapter, the following words and phrases are defined as follows:
(1) “Correlated Color Temperature” or “Color Temperature” means a specification of the color appearance of the light emitted by a light source, measured in Kelvin (K).

Warmer color temperatures are a lower number, and cooler color temperatures are a higher number.
(2) “Fully Shielded” means a luminaire constructed and installed in such a manner that all light emitted, either directly from the lamp or a diffusing element, or indirectly by reflection or refraction from any part of the luminaire, is projected below the horizontal plane extending from the bottom of the lamp. (3) “Glare” means light entering the eye directly from a luminaire or indirectly from reflective surfaces that causes visual discomfort or reduced visibility to a person. (4) “Lamp” means, in generic terms, a source light, often called a “bulb” or “tube.” Examples include incandescent, fluorescent, high-intensity discharge (HID) lamps, and low-pressure sodium (LPS) lamps, as well as light-emitting diode (LED) modules and arrays.
(5) “Light pollution” means the material adverse effect of artificial light, including, but not limited to, glare, light trespass, sky glow, energy waste, compromised safety and security, and impacts on the nocturnal environment, including light sources that are left on when they no longer serve a useful function.

Item 10
Attachment A - Ordinance
of the Council of the City of
Palo Alto Repealing and
Replacing Section 18.40.250
(Lighting) of Chapter 18.40
(General Standards and
Exceptions) and Amending
Chapters 18.10, 18.12,

18.28 and Section

18.40.230 of Title 18
(Zoning) of the Palo Alto
Municipal Code to Adopt
New Outdoor Lighting
Regulations

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(6) “Lumen” means the common unit of measure used to quantify the amount of visible light produced by a lamp or emitted from a luminaire (as distinct from “Watt,” a measure of power consumption).
(7) “Luminaire” means outdoor illuminating devices, lamps, and similar devices, including solar powered lights, and all parts used to distribute the light and/or protect the lamp, permanently installed or portable.
(8) “Seasonal lighƟng” means lighƟng installed and operated in connecƟon with holidays or tradiƟons within the Ɵme period speciﬁed in SecƟon 18.40.250(d)(4). String lighƟng used outside these periods is not considered seasonal lighƟng and shall be subject to requirements in SecƟon 18.40.250(f)(6).
(9) “String lighting” means light sources connected by free-strung wires or inside of tubing resulting in several or many points of light.
(c) Applicability. Except as otherwise provided in subsections (d) and (e)(4)(A) below, the outdoor lighting standards and guidelines set forth in this Section shall apply to the following projects:
(1) All newly constructed structures and buildings; or
(2) Structures or buildings proposing a Substantial Remodel, as defined in Section

16.14.070; or
(3) New installation of outdoor luminaires, replacement of existing outdoor luminaires, or modifications to the lighting type or system.
(4) All existing outdoor light fixtures installed prior to the effective date of this ordinance shall conform to the provisions of this ordinance according to the compliance schedule set forth in Section 18.40.250(l).
(d) Exemptions.
(1) Full Exemptions. The following are fully exempt:
(A) Lighting for emergency personnel;
(B) Lighting authorized by a special event permit, special or temporary use permit, or construction permit;
(C) Lighting for Airport Operations. Nothing in this section shall be interpreted to restrict, limit, or otherwise regulate lighting that, in the reasonable judgment of the Airport Manager, is prudent or necessary for airport operations, airport safety, or air navigation in connection with operations at the Palo Alto Municipal Airport; (D) Lighting for streets, roadways, and public walkways and bikeways. (E) Lighting for Public Facilities Operations. Nothing in this section shall be interpreted to restrict, limit, or otherwise regulate lighting that, in the reasonable judgment of Item 10
Attachment A - Ordinance
of the Council of the City of
Palo Alto Repealing and
Replacing Section 18.40.250
(Lighting) of Chapter 18.40
(General Standards and
Exceptions) and Amending
Chapters 18.10, 18.12,

18.28 and Section

18.40.230 of Title 18
(Zoning) of the Palo Alto
Municipal Code to Adopt
New Outdoor Lighting
Regulations

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the City Manager, is prudent or necessary for operations or safety of public facilities that operate on a 24 hours per day, 7 days a week basis. (2) Conditional Exemptions. The following are exempt subject to specific conditions:
(A) Illuminated street numbers, subject to Section 18.40.250(g); (B) Seasonal lighting during the period of October 15 through January 15 of each year, subject to extinguishment at 12:00 a.m.;
(C) Single family residential sites adjacent to San Francisquito Creek and fronting on Edgewood Drive, subject to Sections 18.40.250(g) and 18.40.250(e)(4)(A). (D) Lighting for emergency shelters, subject to PAMC 18.14.060. (e) Lighting Standards.
(1) Shielding
(A) All outdoor lighting shall be fully shielded and directed to avoid light trespass. No lighting shall trespass more than 0.1-foot candle as measured at the property line.
(B) Exceptions for shielding requirements shall be applied to the following types of lighting:
(i) Low voltage landscape uplighting used to illuminate fountains, shrubbery, trees, and walkways, outdoor art or public monuments provided that they use no more than a 10-watt incandescent bulb or LED equivalent or emit no more than 150 lumens. These luminaires may not direct light towards the public right-of-way;
(ii) Sidewalk-facing lighƟng for zero lot line developments, provided the luminaires are motion-activated and automatically extinguish within five minutes without further activation; or
(iii) String lighting pursuant to Section 18.40.250(f)(5). (2) Parking Lot Lighting Height.
(A) Exterior lighting fixtures shall be mounted less than or equal to 15 feet from grade to top of fixture in parking lots in residential development and 20 feet in parking lots with commercial and mixed-use development. (3) Illumination Level and Color Temperature
(A) All light sources shall have a correlated color temperature of 2,700 Kelvin or less. (B) The maximum outdoor light intensity on a site shall not exceed an average value of 5 foot-candles.

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(Zoning) of the Palo Alto
Municipal Code to Adopt
New Outdoor Lighting
Regulations

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(4) Lighting Control.
(A) Lighting Curfew. Unlike other provisions in this section, the Lighting Curfew shall apply to all outdoor luminaires for new and existing buildings and structures, unless otherwise approved. All outdoor lighting shall be fully extinguished or be motion sensor operated by 11:00 p.m., two hours after the close of business, or one hour after when people are no longer present in exterior areas, whichever is later.
(B) All lighting activated by motion sensor shall be set up to extinguish after no more than five minutes without further activation.
(C) All lighting shall be automatically extinguished using a control device or system when there is sufficient daylight available, except for lighting under canopies or lighting for tunnels, parking garages, or garage entrances. (D) Exceptions for Lighting Control.
(i) Any lighting at building entrances, parking areas, walkways, and driveways area;
(ii) Outdoor pathway lights that emit 25 lumens or less; or (iii) Lighting that illuminates a pedestrian pathway (examples include bollard, in-place step, or building mounted), provided that such lighting is a maximum height of four (4) feet above the pathway and fully shielded. (f) Special Purpose Lighting. The standards in this section shall prevail over any conflicting standard in subsection (e).
(1) Low Density Residential Lighting. In addition to the lighting standards in the section, the following lighting requirements shall be applicable to projects in R-1, R-2, RE, RMD, NV- R1, or NV-R2.
(F) When abutting any residential use, no spillover of lighting to adjacent properties shall be allowed.
(G) A maximum of 1,260 lumens shall be allowed for each fully shielded outdoor lighting. No more than 420 lumens shall be allowed for permitted non-shielded outdoor lighting.
(H) Skylights shall limit illuminance and glare during night hours. Glare shall be mitigated through the use of translucent glass, shading systems, and interior light placement.

Skylights shall not use white glass.
(I) Height for Recreational and Security Lighting. Free-standing lighting shall be a maximum of twelve feet (12’) in height for those that were installed on or after March 11, 1991.

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18.40.230 of Title 18
(Zoning) of the Palo Alto
Municipal Code to Adopt
New Outdoor Lighting
Regulations

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(2) Athletic Facilities Lighting. Outdoor athletic facilities shall conform to the following standards:
(A) Field lighting is provided exclusively for illumination of the surface of play and viewing stands, and adjacent proximity areas for public safety. (B) Illumination levels shall be adjustable based on the task (e.g., active play vs. field maintenance).
(C) Off-site impacts of the lighting will be limited to the greatest practical extent possible.
(D) Lights shall be extinguished by 10:30 p.m. except when the facilities are being used for active play and maintenance before or after permitted events, and the lights are equipped with a timer.
(E) Timers that automatically extinguish lights shall be installed to prevent lights being left on accidentally overnight.
(3) Automobile Service Station Lighting
(A) Lighting fixtures in the ceiling of canopies shall be fully recessed or mounted directly to the underside of the canopy. All luminaires shall be located so that no lighting is directed towards the adjoining property or public rights-of-way. (B) Luminaires are not permitted on top of the canopy fascia. (C) The maximum light intensity under the canopy shall not exceed an average foot- candle of 12.5, when measured at finished grade.
(D) No free-standing lighting shall be higher than 15 feet above finished grade. (E) The canopy fascia shall not be illuminated.
(4) Outdoor Space Above Ground Floor. These requirements apply to all outdoor spaces located above ground level, including, but not limited to, rooŌop gardens, rooŌop restaurants or bars, balconies, and decks.
(A) Any lighting shall be shielded from public views and any luminaires shall be fully shielded and no uplighting shall be permitted.
(B) Lights shall be dimmable to control glare and placed on timers to turn off after 11:00 p.m. or as permitted pursuant to Section 18.40.250(e)(4)(A) (C) No light trespass shall be allowed more than 0.1 foot-candle as measured beyond the perimeter of the roof deck or other outdoor space above the ground floor. (5) String Lighting.

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(Zoning) of the Palo Alto
Municipal Code to Adopt
New Outdoor Lighting
Regulations

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(A) String lighting color temperature shall not exceed 2,700 Kelvin and no individual lamp that is part of a string lighting installation shall exceed a rating of 42 lumens.

No string lighting shall be blinking, flashing, or chasing. (B) For commercial and mixed-use areas, string lighting shall be limited to designated outside dining or display areas or common open space (i.e. courtyard or patio). (6) Parklets. Lighting for any parklets shall comply with the lighting standards established in the Permanent Parklet Program.
(g) Prohibited Lighting. The following types of lighting are prohibited except when used by emergency service personnel during an emergency:
(1) Outdoor lighting that blinks, flashes, or rotates; or (2) Searchlights, aerial lasers, or spotlights.
(h) Lighting for Signs. See Chapter 16.20 for lighting requirements for signs. (i) Additional Provisions and Conflict Precedence. Lighting required by the Building Code, Fire Code, or state or federal law shall additionally comply with the requirements of this section, unless these requirements necessarily conflict with the aforementioned Codes and laws. In the event of a conflict, the standards in the applicable Codes and laws shall prevail. (j) Hardship Exceptions. The Director may grant an exception from the requirements in Section

18.40.250, if a project applicant provides evidence demonstrating one of the following hardships:
(1) Implementation of the lighting requirements in this ordinance would impair the historical integrity and character-defining features of the building and create an adverse impact to the building’s historical, architectural, and cultural significance; or (2) Implementation of the lighting requirements in this ordinance would more than double the cost of the project. This exception shall apply only for replacement of existing outdoor luminaires or changing the lighting type or system that requires a building permit.
(k) Public Facilities. Unless exempt under Section 18.40.250(d), Public Facilities, including City- owned and operated facilities, shall comply with the outdoor lighting standards of this Section to the extent feasible. The Director may grant adjustments to any applicable lighting standards for such facilities if the adjustment is necessary for the efficient operation, maintenance, or safety of the facility, or to ensure public safety and security; and is consistent with the overall intent and purpose of this Section. A written request for an adjustment, including supporting documentation, shall be submitted and shall be reviewed according to the applicable review procedures in PAMC Section 18.77 associated with the proposed development.
(l) Existing Nonconforming Lighting. Within one year of [the effective date of this ordinance]:

Where existing outdoor luminaires have the ability to adjust (through existing dimmers, Item 10
Attachment A - Ordinance
of the Council of the City of
Palo Alto Repealing and
Replacing Section 18.40.250
(Lighting) of Chapter 18.40
(General Standards and
Exceptions) and Amending
Chapters 18.10, 18.12,

18.28 and Section

18.40.230 of Title 18
(Zoning) of the Palo Alto
Municipal Code to Adopt
New Outdoor Lighting
Regulations

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directional adjustability, timers, etc.), the requirements under Section 18.40.140(e), except for the shielding requirements under the subsection 18.40.140(e)(1), shall apply.

SECTION 3. Subsection (e) of Section 18.40.230 (Rooftop Gardens) of Chapter 18.40 (General Standards and Exceptions) of Title 18 (Zoning) of the Palo Alto Municipal Code is amended to read as follows (additions underlined; deletions struck-through):
(e) Any lighting shall be shielded from public views and have full cutoff fixtures that cast downward-facing light, or consist of low-level string lights; no up-lighting is permitted. Lights shall be dimmable to control glare and placed on timers to turn off after 10:00 p.m.

Photometric diagrams must be submitted by the applicant to ensure there are no spillover impacts into windows or openings of adjacent properties.For lighting requirements, refer to Section 18.40.250.

SECTION 4. Subsection (g) of Section 18.10.040 (Development Standards) of Chapter

18.10 (Low Density Residential (RE, R-2 and RMD) Districts) of Title 18 (Zoning) of the Palo Alto Municipal Code is amended to read as follows (additions underlined; deletions struck-through):
(g) Lighting in R-2 District
In the R-2 district, recreational and security lighting shall be permitted only so long as the lighting is shielded so that the direct light does not extend beyond the property where it is located. Free- standing recreational and security lighting installed on or later than March 11, 1991, shall be restricted to twelve feet (12') in height. For lighting requirements, refer to Section 18.40.250.

SECTION 5. Subsection (k) of Section 18.12.040 (Site Development Standards) of Chapter 18.12 (R-1 Single-Family Residential District) of Title 18 (Zoning) of the Palo Alto Municipal Code is amended to read as follows (additions underlined; deletions struck-through):
(k) Lighting
Recreational and security lighting shall be permitted only so long as the lighting is shielded so that the direct light does not extend beyond the property where it is located. Free-standing recreational and security lighting installed on or later than March 11, 1991 shall be restricted to twelve feet (12') in height. Direct light from outdoor fixtures shall only fall on the walls, eaves, and yard areas of the site on which it is located. Outdoor fixtures shall have lens covers or reflectors that direct the light away from the neighboring properties. For lighting requirements, refer to Section 18.40.250.

SECTION 6. Subsection (n) of Section 18.28.270 (Additional OS District Regulations) of Chapter 18.28 (Special Purpose Districts) of Title 18 (Zoning) of the Palo Alto Municipal Code is amended to read as follows (additions underlined; deletions struck-through):
(n) Light and Glare
Exterior lighting should be low-intensity and shielded from view so it is not directly visible from off-site. The light emitted from skylights shall be minimal during the night hours. Utilizing treatments such as translucent glass, shading systems, and interior light placement can reduce Item 10
Attachment A - Ordinance
of the Council of the City of
Palo Alto Repealing and
Replacing Section 18.40.250
(Lighting) of Chapter 18.40
(General Standards and
Exceptions) and Amending
Chapters 18.10, 18.12,

18.28 and Section

18.40.230 of Title 18
(Zoning) of the Palo Alto
Municipal Code to Adopt
New Outdoor Lighting
Regulations

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the night glare. Skylights shall not use white glass. For lighting requirements, refer to Section

18.40.250.

SECTION 7. If any section, subsection, clause or phrase of this Ordinance is for any reason held to be invalid, such decision shall not affect the validity of the remaining portion or sections of the Ordinance. The Council hereby declares that it should have adopted the Ordinance and each section, subsection, sentence, clause or phrase thereof irrespective of the fact that any one or more sections, subsections, sentences, clauses or phrases be declared invalid.

SECTION 8. The Council finds that this project is exempt from the provisions of the California Environmental Quality Act (“CEQA”), pursuant to Section 15061 of the CEQA Guidelines, because it can be seen with certainty that there is no possibility that the ordinance will have a significant effect on the environment and Section 15308, as an action by a regulatory agency to protect the environment.

SECTION 9. This ordinance shall be effective on the thirty-first day following its adoption.
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Item 10
Attachment A - Ordinance
of the Council of the City of
Palo Alto Repealing and
Replacing Section 18.40.250
(Lighting) of Chapter 18.40
(General Standards and
Exceptions) and Amending
Chapters 18.10, 18.12,

18.28 and Section

18.40.230 of Title 18
(Zoning) of the Palo Alto
Municipal Code to Adopt
New Outdoor Lighting
Regulations

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SECTION 10. This Ordinance shall not apply to any project application deemed complete prior to the effective date of this Ordinance.

INTRODUCED:

PASSED:

AYES:

NOES:

ABSENT:

ABSTENTIONS:

NOT PARTICIPATING:

ATTEST:

____________________________                     ____________________________ City Clerk                                                             Mayor

APPROVED AS TO FORM:                                    APPROVED:

____________________________                     ____________________________ Assistant City Attorney                                    City Manager

____________________________
Director of Planning & Development
Services
Item 10
Attachment A - Ordinance
of the Council of the City of
Palo Alto Repealing and
Replacing Section 18.40.250
(Lighting) of Chapter 18.40
(General Standards and
Exceptions) and Amending
Chapters 18.10, 18.12,

18.28 and Section

18.40.230 of Title 18
(Zoning) of the Palo Alto
Municipal Code to Adopt
New Outdoor Lighting
Regulations

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City Council
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: City Clerk
Meeting Date: January 20, 2026
Report #:2511-5559
TITLE
Policy and Services Committee Recommendation to Adopt the 2026 State and Federal State Legislative Guidelines and 2026 Utility Policy Guidelines, and Receive an Update on State and Federal Legislative Advocacy; CEQA Status – Not a Project

RECOMMENDATION
The Policy and Services Committee recommends the City Council adopt the 2026 State and Federal Legislative Guidelines and 2026 Utility Policy Guidelines and receive an update on State and Federal Legislative Advocacy.

BACKGROUND
As part of the City’s legislative advocacy program, staff and City legislative advocates at Townsend Public Affairs (TPA), work to identify and analyze potentially impactful legislation and communicate the City’s interests to legislators. The program is guided by the Advocacy Process Manual1 and a set of City Council-approved Citywide Legislative Guidelines. These guidelines provide direction to staff and TPA on emerging legislative issues and other issues important to the City Council. In consultation with the Mayor and the Policy and Services Committee Chair, staff use the citywide legislative guidelines to respond to legislative affairs throughout the year.

These guidelines allow for flexible and prompt responses to emerging issues in the fast-paced legislative environment without returning to the City Council each time an issue arises. The City Council reviews and updates the citywide guidelines each January and reviews the utilities guidelines as necessary.

Due to the highly regulated nature of utilities, Utilities Legislative Guidelines have been used to enable effective staff advocacy in line with the Advocacy Process Manual. The broad and technical scope of the dozens of bills introduced annually requires frequent communication with utility associations and often direct staff advocacy to advance and protect the City of Palo Alto 1 Advocacy Process Manual: https://www.paloalto.gov/files/assets/public/v/2/intergovernmental- affairs/advocacy-process-manual-2025.pdf
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Utilities (CPAU) and customers‘ interests. The Utilities Legislative Guidelines were created to guide these activities. These guidelines originated in 2009 3 and the review process, which requires annual staff review and City Council approval of proposed changes (only when there are changes to review), was formally adopted in 2017. 4 The current guidelines format was established in 2018.5
This year, staff is bringing both the State and Federal Legislative Guidelines and the Utilities Legislative Policy Guidelines to City Council to show the entire portfolio of the City’s legislative advocacy programs.

Both sets of guidelines were reviewed by the Policy and Services Committee on November 19, 2025. The Utilities Guidelines were also reviewed by the Utilities Advisory Commission (UAC) on November 5, 2025.

ANALYSIS
Federal and State Legislative Guidelines
The draft 2026 Federal and State Legislative Guidelines are included as Attachment A. Changes reflect topics the City Council has expressed interest in, updates from City staff, and issues expected to be prominent in the upcoming legislative cycle. The Policy & Services Committee revised the draft guidelines at its November 19, 2025 meeting and recommended the City Council adopt the guidelines. In addition to changes made during the meeting, the Committee also requested that staff study possible guidelines relating to homelessness and CEQA reform for public infrastructure and bring language to the City Council for consideration. Staff incorporated language on homelessness. Staff did further research with applicable departments on this topic after the Policy & Services Committee and do not recommend further advocacy regarding broader CEQA exemptions. Instead, if the City Council would like to pursue this topic, staff recommends advocating only for narrow CEQA exemptions specific to the type of infrastructure project of interest. Without further information on the specific types of projects of interest, staff does not have recommended language at this time to add to the guidelines.

Also, the Finance Committee at its October 21, 2025 meeting recommended that the City Council add support for any legislation that may arise related to tort reform to the legislative guidelines.

Cities throughout the state are facing rising insurance premiums due in part to increased jury 3 Utilities Advisory Commission, November 4, 2009: https://www.paloalto.gov/files/assets/public/v/1/agendas- minutes-reports/agendas-minutes/utilities-advisory-commission/archived-agenda-and-minutes/agendas-and- minutes-2009/11-04-2009-meeting/item-4_-util-legislative-policy-guidelines-2010.pdf 4 City Council, February 13, 2017, Resolution 9668:
https://portal.laserfiche.com/Portal/DocView.aspx?id=10407&repo=r-704298fc&searchid=aaa20151-e7c8-4a4f- b599-c57ead9a1530
5 City Council, January 22, 2018, SR 8750: https://www.paloalto.gov/files/assets/public/v/1/agendas-minutes- reports/reports/city-manager-reports-cmrs/year-archive/2018/final-staff-report-id-8750_2018-city-and-utilities- legislative-guidelines.pdf
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verdicts in claims against public entities. Balanced tort reform would preserve funding for City services and help stabilize annual insurance premiums, long-range financial planning and future liability exposures. This topic is included in the draft Citywide Legislative Guidelines as approved by the Committee.

Utilities Legislative Policy Guidelines
The Draft 2026 Utility Legislative Policy Guidelines are included as Attachment B. These guidelines are intended to be evergreen and subject to annual staff review. When there are recommended changes, the guidelines are brought to the UAC for review and recommendation to the City Council for approval of any changes. The most recent guidelines were approved by the City Council on April 3, 2023. 9 Updates in 2024 and 2025 did not occur since the guidelines are evergreen and staff did not seek any updates. On November 5, 2025, staff presented the proposed guidelines to the UAC with only minor grammatical adjustments for discussion and recommendation to the Policy & Services Committee.10 The 2023 guidelines were almost entirely unchanged going back to the version approved in 2018, 11 as City Council direction has been consistent on issues pertaining to Utilities.

The UAC unanimously approved a slightly revised version of the guidelines and the adjustments are reflected in redline in Attachment B. The discussion expressed the UAC’s interest in legislative advocacy, impacts to the City of the Federal shutdown, and a greater understanding of how the guidelines empower staff to advocate on behalf of the City. The UAC approved an amendment to add the language to Utilities guideline #8, “while maintaining flexibility to support rate designs and policies that advance beneficial electrification and decarbonization in the public interest” to reflect their recommendation to enable staff to advocate for legislative revisions to cost allocation principles currently governed by Proposition 26 and Proposition 218 related to rate- making publicly owned utilities. On November 19, 2025, staff presented the UAC-amended guidelines to the Policy & Services Committee. The Policy & Services Committee unanimously approved the guidelines with the suggestion that, where appropriate, language be added that incorporates a “just decarbonization transition and equitable access.” The redlines in Attachment B show the changes made as suggested by Policy & Services Committee as well as the UAC.

Legislative Update
At the City Council meeting, Townsend Public Affairs will provide an advocacy update and preview issues expected to arise in the upcoming legislative cycle. An overview memo is included 9 City Council, April 3, 2023, SR 2301-0895: https://portal.laserfiche.com/Portal/DocView.aspx?id=65844&repo=r- 704298fc&searchid=d8930ab6-2c7f-46eb-afe0-d2d7d0f22149
10 Utilities Advisory Commission Meeting, November 5, 2025, Item #3:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=17466 11 City Council, January 22, 2018, SR 8750: https://www.paloalto.gov/files/assets/public/v/1/agendas-minutes- reports/reports/city-manager-reports-cmrs/year-archive/2018/final-staff-report-id-8750_2018-city-and-utilities- legislative-guidelines.pdf
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as Attachment C. In addition to the topics that will likely arise next session, and subsequent to the Policy & Services Committee discussion, staff became aware of several topics on which the City may be interested in supporting or sponsoring legislation. The topics relate to existing City services or programs that would benefit or require legislative amendments to advance the City‘s goals; they include:
-Raising the cap for local sales tax increments
-Preserving publicly owned utilities’ investment in flexible hydropower -Regulating the use of e-bikes and e-motos
-Streamlining the process for developing affordable housing on City-owned land -Preserving local permitting and zoning requirements for telecommunications infrastructure
Staff will keep the City Council informed as conversations progress and stay in communication with the Mayor and Policy & Services Chair about advocacy efforts. If bill sponsorship is needed, staff will seek City Council approval before attaching the City’s name as a bill sponsor.

FISCAL/RESOURCE IMPACT
There is no fiscal impact associated with this action of approving the citywide legislative guidelines and utilities legislative policy guidelines. The City Council budgets annually for citywide legislative advocacy services, and these efforts are led by staff in the City Clerk and City Manager’s Offices, with stakeholder engagement across other City departments on key issues. The Utilities Department budgets for legislative and regulatory advocacy services separately linked to the respective Utilities.

STAKEHOLDER ENGAGEMENT
Staff from multiple departments meet regularly with Townsend Public Affairs to discuss legislative actions and advocacy on issues that could impact the City. Specifically related to the Utilities Department, Utilities staff meet directly with lobbyists, legislators, legislative staff, and regulators as well as leveraging advocacy staff at energy and water joint powers agencies.

ENVIRONMENTAL REVIEW
The City’s legislative advocacy activities are not a project under section 15378(b)(5) of the California Environmental Quality Act Guidelines (administrative activities that will not result in direct or indirect physical changes in the environment).

ATTACHMENTS
Attachment A: Draft 2026 Federal and State Legislative Guidelines Attachment B: Draft 2026 Utility Legislative Policy Guidelines Item 11
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Attachment C: Townsend Public Affairs Overview Memo
APPROVED BY:

Ed Shikada, City Manager
Mahealani Ah Yun, City Clerk
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The City of Palo Alto’s 20256 Federal and State Legislative Guidelines

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These Guidelines reflect and activate the City Council’s priorities; they do not supplant them.

They work to guide staff and the City’s legislative advocates on issues that are important to the City Council, and likely to become a legislative issue. These Guidelines are not rank-ordered and are meant to allow for a flexible and quick response by staff and advocates, without the need to return to the City Council to seek guidance. Th e Guidelines work in conjunction with the City Council-approved Advocacy Process Manual and the City Council action to do “Strategic Weighing in on Issues of Interest”

1. The City Council’s annual priorities are also guidance for the City’s legislative platform.

The below Foundational Principles represent the ideals that form the core of the City’s policy agenda. The Legislative Guidelines all rise from and strengthen four foundational principles:

1. Promote Local Fiscal Sustainability:

Support measures that promote fiscal stability, predictability, financial independence, and preserve the City’s revenue base and maximum control over local government budgeting.

Also protect local revenue sources and prevent unfunded mandates.

2. Support Funding Opportunities:

Protect, seek, and increase funding for programs, projects, and services. Seek opportunities that allow the City to compet e for regional, state and federa l funding. Support funding for programs including, but not limited to, climate action, economic development, infrastructure investment, housing, transporta tion projects (such as road improvements, rail grade separations, bicycle and pedestrian safety, multi-modal transportation systems and transit-oriented development), air quality, water quality and lo cal water reliability, parks and recreation, historic preservation, natural resources, hazard mitigation, public safety and public health.

3. Preserve Local Control:

Preserve and protect the City’s powers, duties, and discretion to enact and engage in local processes and policy making co ncerning local affairs and o ppose efforts and legislation from state and regional bodies that preempt local authority and do not align with City priorities. Advocate for longer lead times for implementation of new legislation that adversely impacts Palo Alto. Oppose items th at preempt or reduce the authority or ability of local government to determine how to e ffectively operate local programs, services, activities, and governance.

4. Protect the health and safety of the community:

Support policies and funding that enrich the quality of life for the Palo Alto community with services that provide for a safe, fulfilling, a nd vibrant life. Support policies that promote equity.

1 City Council, June 22, 2021; Agenda Item # 7; Staff Report # 12344 https://portal.laserfiche.com/Portal/DocView.aspx?id=99035&repo=r-704298fc& Item 11
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Federal and State Legislative
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The Legislative Guidelines create the framework for organizing the City’s policy interests, while guiding staff and contracted legislative advocates in their advocacy efforts on behalf of the City.

The items below provide direction for the Ci ty’s efforts when addressing reasonable government actions.

Transportation

The City supports government action that:

• Deters single occupancy drivers and alleviates local traffic congestion and promotes active transportation safety infrastructure
• Reduces the likelihood of crashes, remo ves barriers to use of proven safety countermeasures, and discontinues efforts that perpetuate safety risks • Supports local and regional public transportation
• Regulates technology that diverts traffic into residential neighborhoods • Provides funding for rail grade separations, rail efficiency improvements, and other means of reducing the local impacts of regional transportation systems • Streamlines funding between the state, federa l, and local governments that help reduce the amount of time and resources it takes to fund and complete transportation projects. • Sustains local, regional, and state funding sources for the develo pment and maintenance of transportation and does not condition rece ipt of funds on non-transportation related factors
• Supports expansion and operations of public transit options throughout Palo Alto, especially funding for transit
• Supports state legislation that maximizes loca l control related to land use requirements near transit (especially if it impacts the City’s approach to planning for complete communities)
• Supports local, regional, state, and federal po licies that would reduce aviation noise and emissions impacts over communi ties, including passing nois e ordinances and creating incentives for reducing impacts
• Supports coordination among transportation agencies regionally • Regulates electric bicycles and similar modes of transportation to promote safety

Climate and Environment

The City supports government action that:

• Reduces GHG emissions and sSupports an equitable and just transition toward GHG reduction, and carbon neutrality goals, and electrification goals including by maintaining or expanding funding resources for local government implementation strategies • Maintains or expands funding resources for local governments to reduce GHG emissions • Reduces airplane noise, health impacts, and/or airplane emissions Item 11
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• Promotes residential, commercial, and vehicle electrification programs • Promotes workforce development to provide increased workforce needed for electrification and grid modernization
• Promotes the use of renewable resources, wa ter conservation, and the flexible use of existing resources
• Continues support for a statewide ban on polystyrene containers and packaging materials
• Provides opportunities for staff, in partne rship with the San Francisquito Creek Joint Powers Authority and other regional stakeh olders, to advance efforts to improve the creek’s watershed and floodplain (especially related to local bridges) • Supports efforts to protect local communities from sea level rise and other impacts of climate change
• Supports responsible processing of recyclable s once removed from Palo Alto and other communities, including promoting processing facilities and recyclables markets within the United States
• Strengthens and modernizes the State and Local electric grids and grid capacity • Supports the protection of ou r natural environment, including open space, trees/tree canopy, and biodiversity

Financial

The City supports government action that:

• Supports the long-term stability of CalPERS and the ability of local governments to mitigate and manage with flexibility its pension obligations
• Protects the funding sources for the sustainable delivery of City services • Supports the continued deductibility of tax-exempt municipal bonds and the restoration of Advance Refunding of Tax-Exempt Municipal Bonds
• Supports the continuance of tax credits available at the federal level to support low- income individuals in achieving housing affordability and financial stability • Supports the lowering or maintaining of voter thresholds for local revenue measures • Supports maximum flexibility for local gove rnment in contracting and contract negotiations
• Supports reforms to local revenue financin g tools for the purpose of supporting the development of affordable housing and public infrastructure • Supports efforts to attract and retain resources for current and future smaller businesses in Palo Alto
• Preserves local discretion in the assessment, collection, and usage of development fees • Supports tort reform to limit the City’s financial risk and liability exposure • Supports maintaining local discretion and auth ority over transfer taxes and other locally approved revenue measures, opposing any state or federal efforts to preempt, delay, or undermine their implementation.
• Preserves local fiscal autonomy necessary to fund essential community services, infrastructure, and housing initiatives approved by their voters.

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Governance, Transparency, and Human Resources

The City supports government action that:

• Preserves local government’s ability to manage its own employment issues, including, but not limited to hiring, evaluating, disciplining, and/or terminating and negotiating collective bargaining agreements with employees’ representatives
• Supports reasonable regulatory efforts surr ounding policies regarding cybersecurity, drones, shared mobility services, returning to Obama-era net neutrality regulations, and smart city initiatives
• Provides for the incremental and thoughtful integration of artificial intelligence technologies
• Protects individual privacy and allows the City to safeguard customer information • Maintain existing records collection and retention requirements • Promote teleconferencing flexibilities under the Ralph M. Brown Act • Allows the City to support the collaborative work of regional partners, trade associations, other local governments and organizations, and Joint Powers Authorities • Provides for the equal treatment of all individuals
• Protects funding for safety net services provided by the County

Housing

The City supports government action that:

• Supports reasonable housing policies that reco gnize local autonomy to maintain the local public process and preserve local government ’s ability to determine land use policies and development standards
•
Provides flexible, ongoing funding for (a) affordab le housing, (b) homelessness, and (c) infrastructure (such as parks, utilities, roads, and transit) re quired to support the increased housing production and keep pace with local development goals • Promotes the development a nd enhancement of safe a nd affordable housing and accessible housing within the City for all economic segments of the population • Promotes funding and tax ince ntives for the identification , acquisition, maintenance, adaptive reuse, and restoration of historic sites and vacant structures • Fosters reasonable ratios between jobs and housing
• Supports the development and implementati on of efficient and environmentally sustainable land use and building practices
• Supports the provision of greate r lead times for Palo Alto to implement state legislation when necessary to comply with new land us e and housing requireme nts within the local context
• Support property insurance availability and affordability initiatives • Support RHNA reforms to promote fact-based standards that would further support goals of social and economic housing balance
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• Supports evidence-based approaches to addressing homelessness

Public Safety

The City supports government action that:

• Supports efforts which seek to modify policing services, including but not limited to alternative public safety models and fundi ng to address community mental health issues, expansion of requirements regardin g police data and rules regarding prior employment information transparency, a nd expansion of data and communications including radio encryption
• Provides for greater public safety support resources especially related to organized retail theft operations
• Reduces weapons-related violence via the enactment of common-sense firearm reforms • Enhances fire and emergency training and re sponse capabilities. Mitigate fire safety risks. Advocate for funding and policy to mi tigate wildfire risks and funding for fire services in general as well as funding for emergency services. • Updates, implements, and refines processes, services, and programs affecting the City.

This includes, but is not limited to, public safety reform efforts and streamlining reporting mandates
• Support legislation that would address ongoing safety concerns and help prevent acts of violence motivated by hate, including improving data collection and reporting • Support legislation for increased resources for crime victims including victim support services and victim compensation processes
• Support measures that protect immigrants from unlawful or inhumane deportation efforts
• Support measures that allow peace officers to enforce traffic safety violations by autonomous vehicles, including failure to obey traffic lights and stop signs • Support measures that allow for automated enforcement of speed violations Item 11
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UTILITIES LEGISLATIVE POLICY GUIDELINES: 2026 UPDATE
City of Palo Alto Utilities Department (CPAU) staff will use the below guidelines as well as the City’s guidelines to help determine any advocacy position or action on Utilities- related issues. Formal advocacy, such as submitting written letters or comments and meeting with policymakers and/or staff, requires the approval of the Utilities Director or their designee.

1. Seek to preserve local government flexibility, discretion, accountability, and oversight of matters impacting utility programs, services, activities, and rates.

Oppose action that could hamper or minimize this flexibility or discretion.

2. Where possible, seek funding and program incentives.

3. Advocate for reasonable government action with minimal customer impact that allows for flexibility, and implementation feasibility, and equitable access.

4. Advocate for locally-designed conservation or efficiency programs. Support reasonable State conservation or efficiency requirements that consider local populations, environment, and resources.

5. Inform state and federal policymakers about CPAU’s current programs, services, goals, and reporting requirements.

6. Oppose unnecessary, unreasonable, impractical, or costly rates or mandates.

7. Collaborate with and support the efforts of regional agencies and associations whose goals align with ours.

8. Advocate for fair cost allocation and support the principle of beneficiary pays, while maintaining flexibility to support just and equitable rate designs and policies that advance beneficial electrification and decarbonization in the public interest.

9. Support efforts to maintain or improve the security and reliability of our infrastructure.

10.Support government action that cost effectively reduces greenhouse gas emissions in a just and equitable manner..

11.Promote locally-designed residential and commercial electrification programs that support a just and equitable decarbonization transition.

12.Support government action allowing CPAU to maintain customer confidentiality.

13.Support government action to expand the workforce in trades and technical disciplines necessary to support building and vehicle electrification and grid modernization.

Approved as amended by the Utilities Advisory Commission on November 5, 2025 and the Policy and Services Committee on November 19, 2025.

Approved by City Council on_____________ ,2025 2026
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1 M E M O R A N D U M
To: The Honorable Ed Lauing and Members of the Palo Alto City Council CC:Ed Shikada, City Manager
Chantal Cotton Gaines, Deputy City Manager
Christine Prior, Assistant City Clerk
From: Townsend Public Affairs
Niccolo De Luca, Vice President
Alex Gibbs, Grants Director
Carlin Shelby, Deputy Director
Joseph Melo, Federal Advocacy Manager
Date: January 5, 2026
Subject: State and Federal Legislative Updates
Townsend Public Affairs, Inc. (TPA) has prepared this report for the City of Palo Alto to provide a summary of State, Federal, and funding efforts and highlight the current status of the legislative process.

STATE LEGISLATIVE UPDATES
Legislature Reconvenes 2025-26 Legislative Session
On January 5, the California State Assembly and Senate reconvened to begin the second year of the 2025–26 two-year legislative session. With the bill introduction period largely complete, the Legislature is now operating under compressed timelines focused on advancing measures that were introduced during the first year of the session. Several hundred two-year bills that were introduced in 2025 but held over remain eligible for consideration and must begin moving through policy committees by the end of January to remain viable. As a result, early January committee hearings are expected to focus heavily on these pending measures, alongside budget oversight and implementation issues.

February 20 marks the final deadline for the introduction of new bill vehicles for the remainder of the session. After that date, legislative activity will shift almost entirely to policy and fiscal deliberations, budget negotiations, and amendments to existing measures rather than the introduction of new proposals.

Key changes influencing the beginning of the new Legislative Session include new Senate Leadership, with Monique Limón (D-Santa Barbara) assuming the role of Senate President pro Tempore. Senator Limón has emphasized budget discipline, implementation of recently enacted laws, and increased oversight of state programs, themes that are expected to shape both committee agendas and floor priorities in 2026. Several committee chair assignments of particular importance to local governments took effect immediately or will take effect by February 1.

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2 The Senate Local Government Committee is chaired by Maria Elena Durazo, with jurisdiction over Brown Act compliance, local government authority, municipal finance tools, and special district governance. This committee will play a central role in any legislation affecting local operational flexibility, governance structures, or liability exposure.

Fiscal matters will be shaped primarily by the Senate Budget Committee, chaired by John Laird, and the Senate Appropriations Committee, chaired by Sabrina Cervantes. These committees control the fiscal trajectory of both policy bills and the annual budget, including transportation funding, housing programs, and local assistance allocations.

Housing policy continues to be overseen by the Senate Housing Committee, chaired by Senator Jesse Arreguín, while transportation issues affecting transit funding, grade separations, and local infrastructure delivery fall under the Senate Transportation Committee, chaired by Senator Dave Cortese. Energy, utility regulation, and communications policy, including issues affecting municipal utilities, are handled by the Senate Energy, Utilities, and Communications Committee, chaired by Senator Benjamin Allen.

Key issues TPA looks forward to advocating on behalf of the City during the 2025 Legislative Session include:
Advancing statewide electric bicycle safety reforms: Electric bicycle safety continues to emerge as a significant transportation and public safety issue for cities, particularly given the proliferation of overpowered and illegally modified devices that do not align with California’s existing three-class e-bike framework. Prior to the start of the second year of the legislative session, the City of Palo Alto signed onto a coalition letter requesting an informational hearing on SB 381, which commissioned a statewide study examining electric bicycle safety performance data, enforcement challenges, and policy options. The letter was submitted to the Legislature before the new year and calls for a formal legislative discussion of the study’s findings, including potential statutory reforms related to device classification, manufacturing standards, and enforcement authority. TPA will continue coordinating with coalition partners and legislative offices to support an informational hearing and to position the City for engagement on any follow-on legislation informed by the study’s recommendations.
Sales tax cap exemption authority: TPA is working with Senator Arreguín to incorporate the City of Palo Alto into SB 762, which authorizes specified cities to exceed the statewide sales and use tax rate cap under defined circumstances. Inclusion in SB 762 would allow Palo Alto to pursue up to a one-half cent sales tax adjustment, subject to local voter approval, providing the City with additional fiscal capacity to address structural budget pressures, maintain core services, and invest in long-term priorities.

This authority would give the City access to a locally controlled revenue tool without altering existing tax structures unless approved by voters, ensuring local accountability and transparency. TPA is supporting this effort through amendment strategy, coordination with the California Department of Tax and Fee Administration, and engagement with the City’s legislative delegation to ensure the City’s inclusion is administratively feasible, legally defensible, and consistent with statewide sales tax administration requirements. Housing and land use implementation reforms: Housing and land use policy will continue to dominate the second year of the legislative session, with growing legislative interest in Item 11
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3 refining how existing housing laws are implemented at the local level. TPA will engage on streamlining processes for development of affordable housing on City-owned land, proposals addressing challenges related to the use of housing overlays, enforcement of RHNA compliance, and the application of the Builder’s Remedy. Particular emphasis will be placed on remedying unintended consequences that have arisen for jurisdictions with certified housing elements, including reduced planning certainty and constraints on locally tailored zoning strategies. Advocacy will focus on restoring balance between state housing production goals and local implementation feasibility.
Statewide housing bond: Legislative actions are underway regarding a potential $10 billion statewide housing bond that could be placed before voters in a future statewide election.

TPA will monitor the development of this proposal and engage to ensure that bond allocations meaningfully support local governments through funding for affordable housing production, preservation, infrastructure, and site preparation. Particular emphasis will be placed on structuring bond programs to complement and leverage local housing finance trusts and other locally controlled funding sources, allowing eligible jurisdictions to align state bond proceeds with existing local investments. For jurisdictions like Palo Alto that have adopted certified housing elements and are actively advancing housing projects, advocacy will focus on ensuring equitable access to bond resources, eligibility criteria that recognize local readiness, and sufficient flexibility to braid state bond funds with local trust funds, impact fees, and other financing tools.
Liability reforms affecting local governments: TPA will engage on legislative efforts to address the growing public liability crisis facing cities and other public agencies following changes enacted under AB 218 (Gonzalez, 2019). While intended to expand access to the courts, AB 218 and related litigation trends have significantly increased public entity exposure, destabilized the liability insurance market, and driven sharp growth in high-cost claims and verdicts against local governments. TPA will work with legislative offices and local government coalitions to pursue targeted statutory reforms that restore balance to public liability standards, improve predictability for public agencies acting in good faith, and reduce pressure on local budgets while maintaining access to the judicial system.

State Budget Update
With the Legislature’s return from winter recess on January 5, budget activity for the 2026–27 fiscal year will begin to accelerate. According to the Legislative Analyst’s Office (LAO), the state is facing an estimated $18 billion budget shortfall driven by a combination of continued revenue volatility, slower-than-anticipated recovery in personal income tax receipts, and elevated baseline expenditure commitments adopted in prior budget cycles. The LAO has emphasized that the state’s heavy reliance on high-income earners for General Fund revenues has amplified year- over-year fluctuations, while recent declines in capital gains and stock-related income have reduced revenue growth projections.

At the same time, the LAO has noted that the state has limited remaining one-time resources available to address ongoing obligations. While reserves remain historically strong, including the Budget Stabilization Account, the LAO has cautioned against overreliance on reserves to backfill structural gaps, warning that doing so would weaken the state’s ability to respond to future economic downturns. As a result, early budget discussions are expected to focus on a mix of expenditure restraint, programmatic delays or reductions, fund shifts, and limited use of reserves, rather than broad-based program expansions.

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4 The Governor’s proposed budget is expected to be released before January 10 and will provide the first comprehensive snapshot of the Administration’s assessment of the state’s fiscal condition heading into 2026–27. The proposal will outline the administration’s approach to addressing the projected deficit, including assumptions related to revenue growth, caseload adjustments, and discretionary spending. The LAO has indicated that differences between administration revenue assumptions and independent forecasts are likely to be a focal point of legislative scrutiny, particularly given recent volatility in income tax collections.

From a legislative process standpoint, the constrained fiscal environment is expected to heighten scrutiny of both new policy proposals and existing programs with ongoing General Fund impacts.

The LAO has advised the Legislature to prioritize program effectiveness and sustainability, particularly for initiatives launched with one-time funding that now face pressure to convert to ongoing support. This dynamic is likely to affect programs of interest to local governments, including housing, homelessness, transportation, and climate-related investments.

Key legislative and funding issues anticipated this year include the transition of voter-approved Proposition 4 climate bond funding from statutory authorization into program implementation. As agencies begin developing guidelines and competitive grant criteria, the LAO has underscored the importance of aligning bond-funded programs with clear outcomes, administrative capacity, and readiness to deploy funds efficiently. For local governments, this phase will be critical in determining eligibility, match requirements, and the timing of grant opportunities.

In addition, policymakers are expected to continue discussions around a potential statewide housing bond in the range of $10 billion. The LAO has noted that housing bonds are increasingly being viewed as a tool to sustain housing investment in the face of constrained General Fund resources, particularly for capital-intensive activities such as affordable housing production, preservation, and infrastructure. Any bond proposal is expected to be shaped by lessons learned from prior housing bonds, including the need for program flexibility, coordination with local funding sources, and realistic assumptions about delivery capacity under current market conditions.

FEDERAL UPDATES
Congressionally Directed Spending Submittal
As part of the Fiscal Year 2026 federal appropriations process, the City of Palo Alto, in coordination with TPA, prepared and submitted a Congressionally Directed Spending request for the Fire Station No. 4 Replacement Project. The project meets key eligibility criteria for Community Project Funding, including its advanced design status, readiness to proceed, and demonstrated local and state funding commitments. The project also builds on prior federal advocacy support led by Anna Eshoo.

The Fire Station No. 4 Replacement Project was selected for advancement and formally submitted by Representative Liccardo as a $3,000,000 CDS request on the City’s behalf.

Following that submission, and subsequent engagement with House Appropriations Committee staff, the House Transportation, Housing and Urban Development Appropriations Subcommittee included the project in its FY 2026 draft bill at a funding level of $850,000. The reduced amount reflects constrained discretionary spending allocations, the overall volume of CDS requests nationwide, and the need to balance funding across all states and districts.

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5 At the federal level, Congress is continuing to operate under short-term funding measures while advancing full-year FY 2026 appropriations bills through a series of bipartisan “minibus” packages. The House has begun releasing and voting on these minibus packages, which bundle several appropriations bills together to facilitate floor action and bicameral negotiations. The Senate is expected to take up corresponding packages on a parallel timeline as leaders work toward avoiding further continuing resolutions and finalizing full-year funding levels.

Because CDS projects are embedded within these broader appropriations negotiations, TPA is coordinating with congressional offices and national coalitions to ensure that approved Community Project Funding requests, including Palo Alto’s Fire Station No. 4 project, are retained in any final appropriations package or extended funding vehicle.

TPA continues to work closely with the City to support retention of Fire Station No. 4 funding through final negotiations, including ongoing engagement with House and Senate appropriations staff and coordination with the City’s congressional delegation. These efforts are also intended to position Palo Alto favorably for future federal capital funding opportunities as Congress resumes a more regular appropriations process.

GRANT FUNDING UPDATES
The TPA team works closely with City staff and department heads to identify priority funding needs and align them with state, regional, and federal grant opportunities. On a monthly basis, TPA provides the City with a targeted grant opportunities memorandum highlighting near-term and upcoming funding programs, with a focus on transportation and infrastructure, climate and environmental sustainability, public safety, emergency preparedness, community services, and clean energy investments. TPA also convenes regular coordination meetings with City staff to discuss project readiness, competitiveness, and alignment with program criteria, as well as to assess opportunities under local and regional funding programs.

In addition to opportunity tracking and strategic positioning, TPA supports the City in the development, drafting, refinement, and submission of competitive grant applications. These efforts include coordination across departments, narrative development, budget review, and alignment with program scoring priorities.

Program Request
Amount
Status Description
Federal Emergency
Management Agency –
Assistance to Firefighters
Grant (AFG)
$139,688 Not
Awarded
Replacement of chest compression
equipment to support emergency
medical response capabilities.

Metropolitan Transportation
Commission – Transit Oriented
Communities Implementation
Grant
$2,885,000 Awarded Palo Alto EV Charging
Infrastructure Project to expand
publicly accessible electric vehicle
charging stations near transit and
activity centers.

Federal Emergency
Management Agency – Staffing
for Adequate Fire and
Emergency Response (SAFER)
$4,011,929 Pending Personnel funding to support fire
and emergency response staffing
levels and service capacity.

CalFire – Wildfire Prevention
Grant Program
$850,000 Not
Awarded
Fuels management and ecosystem
protection activities to reduce
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6 wildfire risk and improve
community resilience.

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6 Board of State and
Community Corrections –
Organized Retail Theft Grant
$5,176,812 Awarded Funding to strengthen regional
coordination and public safety
strategies to combat organized retail
theft.

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City Council
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Administrative Services
Meeting Date: January 20, 2026
Report #:2512-5601
TITLE
Review the FY 2027-FY 2036 Long Range Financial Forecast (LRFF) and FY 2027 Budget Development Guidelines using the LRFF as the Baseline for Developing the FY 2027 Budget as Recommended by the Finance Committee, CEQA Status – Not a Project

RECOMMENDATION
The Finance Committee and staff recommend the City Council accept the Long Range Financial Forecast (LRFF) for Fiscal Year 2027-2036 (Attachment A) and the FY 2027 annual Budget Development Guidelines (Attachment B) and direct staff to use this forecast as the baseline for developing the FY 2027 budget.

EXECUTIVE SUMMARY
On December 2, 2025 the Finance Committee reviewed the FY 2027-2036 Long Range Financial Forecast (LRFF) (Attachment A) along with the annual Budget Development Guidelines (Attachment B) and unanimously recommended that it be forwarded to the City Council for acceptance1. The Committee also reviewed major tax revenues and Section 115 Pension Trust on November 18, 2025 which were incorporated into this LRFF2.

This preliminary forecast is based on the most current information available, actual revenues and expenses for FY 2025, and projected results through FY 2026 at the report was released.

General Fund expenditures are based on current City Council approved service levels, including the recent expense reductions approved by the City Council on September 8, 2025. 3The current outlook anticipates continued economic stagnation and uncertainty, which is reflected in this forecast.
1 Finance Committee, December 2, 2025; Agenda Item #3; SR #2511-5473, https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=16338 2 Finance Committee, November 18, 2025; Agenda Item #2; SR # 2511-5392, https://portal.laserfiche.com/Portal/DocView.aspx?id=236317&repo=r-704298fc&searchid=a6cdeee1-f142-41c5- be56-9a6a512108b3
3 City Council, September 8, 2025; Agenda Item #3; SR #2506-4818, https://portal.laserfiche.com/Portal/DocView.aspx?id=221264&repo=r-704298fc&searchid=95735611-6c94-45fd- 9e08-5713bd4b0286
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The base case LRFF projects a shortfall of $14.9 million in FY 2027, followed by shortfalls ranging from $15.1 million in FY 2029 down to $6.2 million in FY 2032. FY 2033 has a projected surplus of $1.0 million which continues to grow through FY 2036. This forecast maintains current service levels approved in FY 2026 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 represent a larger than previously projected deficit. The projected $14.9 million shortfall for FY 2027 is $6.8 million greater than the $8.1 million deficit forecasted for FY 2027 just seven months ago (May 2025) and $7.0 million greater than the $7.9 million projected in the December 2024 LRFF. This change is driven by a combination of lower projected revenue (most notably Property Tax and Sales Tax) and higher-than-anticipated expenditure growth (detailed in Attachments C and D). City staff will continue to review and refine these projections to establish the FY 2027 budget. Individual fiscal years will vary from this forecast as changes in revenue estimates or operating transfers occur.

Instead of modeling alternative budget scenarios, staff developed a menu of budget balancing strategies for the Council’s consideration. This framework provides budget-balancing options, including revenue enhancements, expenditure reductions, and adjustments to pension and capital funding. The strategies are designed to facilitate a discussion on the trade-offs required to close the budget deficit in FY 2027 as well as the structural deficit in the out-years.

While the projections in the FY 2026 Adopted Budget included deficits in the LRFF, this revised LRFF reflects larger deficits in the near term primarily due to reduced property and sales tax revenue. The FY 2026 budget process addressed the projected shortfall with some ongoing budget cuts and dedicated one-time reserves. The City now faces the challenge of developing the FY 2027 budget and planning for the subsequent years, which will require strategic work over the next several months to balance the community's desired service levels with the financial resources projected.

BACKGROUND
Annually, the Office of Management and Budget produces a ten-year General Fund Long Range Financial Forecast (LRFF). The LRFF reflects 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 LRFF is 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, and these assumptions are revised and refined as more information becomes available through the budget development process.

The LRFF contains a high-level comprehensive review of revenues and expenditures, especially costs to provide current City Council-approved service levels, including current contracts, updates to salaries and benefits based on the current employee population, and current labor contracts. This Forecast provides short-term and long-term financial status of current service Item 12
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levels to inform policy decisions and evaluate long-term goals. The City Council last accepted the FY 2027-2036 Long Range Financial Forecast on January 13, 2025.7 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 to acknowledge the importance for financial planning.

ANALYSIS
Finance Committee Review
The Finance Committee reviewed the FY 2027-2036 Long Range Financial Forecast (LRFF) on December 2, 2025. Following this review, staff updated the attached LRFF (Attachment A) to ensure the data aligns with the final presentation materials delivered to the Committee.

These revisions specifically make minor adjustments in Table 1 Base Case and Table 5 Revenues. For the City Council's immediate reference, the updated Table 1: FY 2027-2036 Long Range Financial Forecast (Base Case) is provided below.

Revised Table 1: FY 2027-2036 Long Range Financial Forecast (Base Case) (All figures in millions)
FY 26
Adopted
FY 26
Projected FY 27 FY 28 FY 29 FY 30 FY 31 FY 32 FY 33 FY 34 FY 35 FY 36 TOTAL

REVENUE
Revenues
Uncert Reserve
$307.2
$301.2
$5.8
$298.0
$292.2
$5.8
$305.1 $316.9 $327.2 $340.4 $353.0 $365.2 $378.4 $390.3 $404.6 $418.8 TOTAL
EXPENDITURES $307.0 $307.0 $320.0 $329.7 $342.5 $354.6 $363.7 $371.6 $377.4 $386.0 $393.3 $405.6

SURPLUS/
(DEFICIT) $0 ($9.0) ($14.9) ($12.8) ($15.3) ($14.2) ($10.7) ($6.4) $1.0 $4.3 $11.3 $13.2 Revised Table 2: FY 2027-2032 Budget Balancing Strategies (All figures in millions)
FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032
Revenues:

Explore new/updated fees and other revenues $0.8 $0.8 $0.8 $0.9 $0.9 $0.9 Budget Stabilization Reserve (BSR) $2.0 $0.0 $0.0 $0.0 $0.0 $0.0 Budget Reductions:

FY 26 Approved Reductions thru FY 32
($6 m w/$3.4 m on-going ~ $2.4m GF + $1 m CIP)
$3.4
in base
$3.4
in base
$3.4 $3.4 $3.4 $3.4
FY 27 Additional Reductions thru FY 32
(to be determined during FY 2027 budget development)
$7.0 $7.0 $7.0 $5.8 $2.3 $2.1
7 City Council, January 13, 2025, Agenda Item #12, SR #2412-3846, https://portal.laserfiche.com/Portal/DocView.aspx?id=125154&repo=r-704298fc&searchid=414f71d9-32af-44ed- a9e5-7e982f57164e
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FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032
CIP Reductions:

FY 2027 Additional Reduction to Capital
(to be determined during FY 2027 budget development)
$1.0 $1.0 $0.0 $0.0 $0.0 $0.0
Pension Cost:

Reduce Additional Discretionary Payment (ADC) $3.6 $3.6 $3.6 $3.6 $3.6 $0.0 Reduce Additional Discretionary Payment (ADP) $0.5 $0.5 $0.5 $0.5 $0.5 $0.0 BUDGET STRATEGY TOTAL: $14.9 $12.9 $15.3 $14.2 $10.7 $6.4 Remaining Surplus/(Deficit) $0.0 $0.1 $0.0 $0.0 $0.0 $0.0 As part of the Committee’s review of the LRFF, several topics were discussed more in depth and staff has provided additional information for context and/or additional data points for reference to the City Council.
•Services/Programs and Council Priorities – Committee acknowledged that given the General Fund deficit the Council would need to consider suspending or discontinuing City services/programs. The General Fund deficit would also impact funding for Council priorities and objectives. The budget balancing strategies include $7 million in General Fund budget cuts and $1 million in capital cuts (i.e. defer/reduce projects and/or fund balance). Staff will work with the Finance Committee and Council through the FY27 budget process; staff will continue identifying service efficiencies before reductions to minimize impacts to the community.
•Property Tax and Sales Tax Projections – Committee discussed the downward projections for property tax and sales tax revenues. The reduced property tax revenue is based on a true-up to actual FY 2026 tax roll, which was lower than estimated and revised outlook to mid-4% growth from low-6% growth assumed in prior LRFF. This incorporates the current economic outlook and HdL property tax guidance. However, the forecast does not consider future housing growth (or its associated increased cost of city services), as timing and fiscal impacts are speculative. The City’s property tax, based on property value, mix is approximately 70% residential and 30% non- residential. As of the most recent County reporting for 2025 countywide property tax appeals, there were 5,659 appeals filed, of which 1,486 are active, totaling $5.8 billion at risk countywide. 9 This is an increase from the same period in 2024, with 4,582 appeals filed. For FY 2026, the county projects tax roll reduction correction totaling $43.3 million (relative to Countywide total tax levy of $6.9 billion) of which the City’s proportionate share is 0.7% (0.007) or $0.3 million. The tax roll corrections are incorporated into the FY 2026 property tax projections and LRFF. The Committee was supportive of the revised property tax assumptions and forecast. 9 Cities Meeting, November 12, 2025,
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The City continues to monitor pending litigation between Marin County and the California State Controller regarding the methodology used to calculate excess Educational Revenue Augmentation Fund (ERAF) distributions, which may affect Santa Clara County. A court hearing on this matter is expected to continue in March 2026. To mitigate potential impacts, the City has retained at-risk amounts in reserve and will update assumptions as new information becomes available.

The Finance Committee also discussed reduced expected sales tax revenue (previously reviewed by the Finance Committee on November 18) resulting from modified regulations used by the California Department of Tax and Fee Administration (CDTFA) in apportioning sales tax revenue from the leasing and new auto sectors. Staff continues to work with the State and business community on this matter.

Furthermore, the Committee emphasized the importance of explaining that property tax and sales tax challenges worsened the City’s finances. •Transient Occupancy Tax (TOT) – Committee requested in-depth information regarding TOT drivers of trends and projections. TOT projections are based on historical revenue performance and hotel operating metrics, including average daily room rates and occupancy. The Q1 FY 2026 results reviewed by the Committee on December 2 were based on information available at the time of reporting and have since been updated. For the completed quarter, hotels reported an average daily room rate of $272.19 and occupancy of 84.19% in Q1 FY 2026, compared to $291.33 and 72.52% in Q1 FY 2025. While average room rates declined year over year, higher occupancy supported Q1 FY 2026 revenues of $7.5 million, an increase of $0.4 million or 5.5%, from the prior year.

Over the longer term, TOT has grown at a Compound Annual Growth Rate of 9.3% (five years) and 5.7% (10 years), respectively. This growth reflects the addition of three new hotels and approximately 400 hotel rooms since 2021, bringing total citywide inventory to approximately 2,500 rooms. The LRFF assumes ongoing TOT growth of approximately 4-5% annually over the forecast period, aligning more closely with long-term growth trends.
Vacancy Rate – The LRFF includes 5% vacancy assumption, which Committee concurred after further review of current data. Available vacancy data reviewed:
- October vacancy: 11.6% ~ as of Q1 FY 2026
- General Fund vacancy rate: 9.6%
- Enterprise Fund vacancy rate: 15%
- General Fund vacancy rate (no public safety vacancies): 6.3% •2019 to current Trends – Where multi-year trends are presented, Committee requested 2019 be included to reference pre-pandemic levels as baseline. Staff completed the historical summary of General Fund staffing by department since 2019 Item 12
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(Attachment B). Also, Staff will gradually incorporate with key charts with historical trends.
•Known Unknowns – Committee clarified that while the LRFF does not include funding from the General Fund for the projects/priorities within the Known Unknown listing, these projects may be funded by other funding source(s) (i.e. Measure B, Measure K, impact fees, etc).

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 2027 budget. Upcoming milestones related to the City’s fiscal standing and the FY 2027 Budget Process include:
• February (Council) – FY 2026 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 2026 Utility Rate Recommendations • April/May (Finance Committee) – Citywide Cost Allocation Plan and Municipal Fee Study
• May (Council) – FY 2027 Proposed Operating and Capital Budgets Published • May (Finance Committee) – FY 2027 Proposed Budget Hearings, including Utility Rates, Municipal Fees, and Five-Year Capital Improvement Plan • June (Finance Committee) – FY 2026 Third Quarter Financial Report • June (Council) – Adoption of the FY 2027 Operating and Capital Budgets, Utility Rates, and Municipal Fees.

STAKEHOLDER ENGAGEMENT
The preliminary forecast for FY 2026 represents the beginning of the fiscal year 2026 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 2026, according to the standard budget adoption process. The community can track previous and upcoming FY 2027 budget discussions and information at www.cityofpaloalto.org/budget.

ENVIRONMENTAL REVIEW
Council action on this item is not a project as defined by the California Environmental Quality Act (CEQA) because accepting the LRFF and budget guidelines is 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).

ATTACHMENTS
Attachment A: FY 2027-2036 Long Range Financial Report (LRFF), CMR 2511-5473 Attachment B: Historical Staffing by Department – General Fund (adopted vs vacant) APPROVED BY:

Lauren Lai, Administrative Services Director
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Finance Committee
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Administrative Services

Meeting Date: December 2, 2025
Revised Report #:2511-5473

TITLE
Review and Recommend the City Council Accept the FY 2027- 2036 Long Range Financial Forecast and FY 2027 Annual Budget Development Guidelines. CEQA Status—Not a Project.

RECOMMENDATION
Staff recommends that the Finance Committee review and recommend that the City Council accept the General Fund Long Range Financial Forecast (LRFF) for Fiscal Years 2027-2036 and the FY 2027 annual Budget Development Guidelines (Attachment A) and direct staff to use this forecast as the starting point for the FY 2027 budget process.

EXECUTIVE SUMMARY
Annually in December, the City presents a ten -year General Fund Long Range Financial Forecast (LRFF) that marks the beginning of the budget process. This preliminary forecast is based on the most current information available, actual revenues and expenses for FY 2025, and projected results through FY 2026. General Fund expenditures are based on current City Council-approved service levels. The current outlook anticipates continued economic stagnation and challenges.

The LRFF is a tool to model financial forecasting assuming resources and services are operating at the current authorized levels. City staff will continue to review and refine these projections to establish the FY 2027 budget. Individual fiscal years will vary from this forecast as changes in revenue estimates or operating transfers occur.

The Base Case LRFF projects a deficit of $14.9 million in FY 2027, followed by deficits ranging from $15.3 million in FY 2029 down to $6.4 million in FY 2032. These deficits have doubled compared to prior forecasts, primarily due to the State's reallocation of local sales tax revenues. FY 2033 has a projected surplus of $1.0 million which continues to grow through FY 2036.

These amounts represent a larger projected deficit than in prior projections. The projected $14.9 million deficit for FY 2027 is $6.8 million higher than the $8.1 million deficit forecasted for FY 2027 just seven months ago (May 2025) and $7.0 million higher than the $7.9 million projected in the December 2024 LRFF. This change is primarily driven by a combination of lower revenues (most notably Sales Tax) and to a lesser extent, higher-than-anticipated expenditure growth. This Item 12
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forecast (detailed in Attachments C and D) maintains current service levels approved in FY 2026 and should be used for planning purposes to assist in gauging the effects of major policy interventions.

Instead of modeling alternative scenarios for this LRFF, staff has developed a "Budget Balancing Sandbox" for Committee and Council consideration. This "Sandbox" provides a menu of potential budget-balancing options, including revenue enhancements, expenditure reductions, and adjustments to pension and capital funding. This framework is designed to facilitate a strategic discussion on the trade -offs required to close the budget deficit in FY 2027 as well as the structural deficit in the out-years. The Finance Committee reviewed major tax revenues and the retiree benefit funding policy, specifically for the Section 115 pension trust on November 18, 20251. The Finance Committee supported the Section 115 pension recommendations, and the sandbox incorporates that among its options for budget balancing.

Consistent with the projections in the FY 2026 Adopted Budget, this LRFF reflects deficits as revenues are outpaced by expenses. As part of the FY 2026 budget process, the projected deficit was addressed with budget reductions of $6 million (approximately 2%) and using one -time reserves. In developing the FY 2027 budget and planning for the subsequent years, staff will continue the strategy of balancing increasingly constrained projected financial resources and the community's desired service levels.

Included in this report and subsequent attachments are the following:
• The Economy: discussion of the current financial climate (Attachment B) • Summary Long Range Financial Forecast including Revenue and Expense assumptions in FY 2027-2036 (Attachments C and D)
• FY 2027 Budget Development Guidelines to inform the budget process (Attachment A) • A summary of Assumptions Not Included in Forecast (Attachment E)

BACKGROUND
Annually, the Office of Management and Budget produces a ten -year General Fund Long Range Financial Forecast (LRFF). The LRFF reflects 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 LRFF is 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, and these assumptions are revised and refined as more information becomes available through the budget development process.

The LRFF contains a high-level comprehensive review of the costs to provide current City Council- approved service levels, including current contracts, updates to salaries and benefits based on the current employee population, and current labor contracts. This Forecast allows staff and the Finance Committee to look at both the short-term and long-term financial status of current

1 City Council, November 18, 2025; Agenda Item # 2:
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service levels to inform policy decisions and evaluate long -term goals. The City Council last accepted the FY 2026-2035 Long Range Financial Forecast on January 13, 2025.3 The Economy
At the national level, economic growth has shown significant strength through the third quarter of calendar year 2025, led by robust GDP (gross domestic product) growth. Consumer spending has remained resilient despite inflation rates that have ticked up from the prior year. As of September 2025, the Consumer Price Index (CPI), which measures changes in the prices paid by consumers for a basket of goods and services, was 3.0%. This is higher than the 2.6% CPI from a year ago. Assumptions in the LRFF report for general cost increases are using a CPI of 3% in FY 2026 and FY 2027 and 4% for FY 2028 and beyond. The national unemployment rate, as of August 2025, is 4.3%, a modest increase from 4.1% in October of the prior year, suggesting a labor market that is cooling but not contracting. This slowdown is consistent with the Federal Reserve's monetary policy intended to curb inflation without initiating a recession. Key factors to monitor include future Federal Reserve policy, ongoing geopolitical events, and the impact of tariffs on inflation.

The local economy, in contrast, is projected to experience a more sluggish recovery. The latest Fall 2025 UCLA Anderson outlook states that while the U.S. economic recovery may begin in mid- 2026, "the California recovery will begin later, getting underway late next year and accelerating in 2027." The forecast notes that a rebound in the technology and aerospace sectors will be critical for this recovery, though this has yet to fully materialize. Locally, the unemployment rate for Santa Clara County was 4.7% in August 2025, tracking higher than the national average and indicating specific softness in the regional tech labor market. This in turn impacts local economic activity impacting major revenues, including property and sales taxes.

The erosion of purchasing power from inflation remains a key watch item; however, consumer spending remains resilient. Personal consumption expenditures (PCE) are the primary measure of consumer spending. According to the U.S. Bureau of Economic Analysis (BEA), the headline PCE price index rose 2.7% year-over-year as of August 2025. A key component, the core PCE price index (which excludes food and energy), rose 2.9% year -over-year. This core measure is the Federal Reserve's preferred inflation gauge, and its persistence well above the 2% target adds leeway for the Federal Reserve to hold interest rates at a restrictive level. Also, the United States consumer confidence for November 2025 dropped to 51, hovering near one of the lowest levels in the poll’s history. This economic environment creates heightened complexity in financial forecasting. It is important to recognize that while the local economy within the City may exhibit trends similar to those at the state or national levels, its unique economic makeup will result in distinct variations. Staff is using the current available information to inform this forecast, which will change as new information becomes available and adjustments may be necessary to reflect evolving conditions. Additional details on economic statistics can be found in Attachment B.

3 City Council, January 13, 2025; Agenda Item #12;
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ANALYSIS
As with all forecasts, there is uncertainty regarding the revenue and expenditure estimates. This report is a continuation of the financial review presented to the Finance Committee on November 18, 2025, and provides the full ten-year forecast based on the updated revenue figures discussed at that meeting5. As noted in the Executive Summary, the Base Case forecast projects a structural deficit from FY 2027 through FY 2032. This deficit is primarily driven by the revenue projections, particularly for sales tax, that were reviewed on November 18. This is combined with a 4.3% expenditure growth (approximately $13.1 million) from the FY 2026 Adopted Budget ($306.9 million), driven by contractual and inflationary increases in salaries, benefits, and services.

Base Case
Table 1 displays the projected General Fund revenues and expenditures over ten years and the cumulative net operating margin. The operating margin reflects the variance between the projected General Fund revenues and expenditures for each year of the forecast or the annual surplus or deficit. The net operating margin is presented on a one -time basis (the "Surplus/(Deficit)" line). An incremental forecast (not shown in the table) assumes that each deficit 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. To the extent a deficit is not resolved, or a surplus is not expended on an ongoing basis, the remaining budget deficit or surplus will be pushed to the following year.

The Base Case financial forecast projects a deficit of $14.9 million in FY 2027, followed by deficits ranging from $6. 4 million to $15. 3 million through FY 2032. A surplus is not projected until FY 2033.

Revised Table 1: FY 2027-2036 Long Range Financial Forecast (Base Case) (All figures in millions)
FY 26
Adopted
FY 26
Projected

FY 27

FY 28

FY 29

FY 30

FY 31

FY 32

FY 33

FY 34

FY 35

FY 36
TOTAL

REVENUE
Revenues
Uncert Reserve

$307.2
$301.2
$5.8

$298.0
$292.2
$5.8

$305.1

$316.9

$327.2

$340.4

$353.0

$365.2

$378.4

$390.3

$404.6

$418.8
TOTAL
EXPENDITURES $307.0 $307.0 $320.0 $329.7 $342.5 $354.6 $363.7 $371.6 $377.4 $386.0 $393.3 $405.6

SURPLUS/
(DEFICIT) $0 ($9.0) ($14.9) ($12.8) ($15.3) ($14.2) ($10.7) ($6.4) $1.0 $4.3 $11.3 $13.2

5 Finance Committee, November 18, 2025; Agenda Item #2; https://portal.laserfiche.com/Portal/DocView.aspx?id=236317&repo=r-704298fc&searchid=fdc8782f-774d-4982- 895c-a706c1bdb6a9
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Staff has developed a comprehensive Budget Balancing Sandbox as a critical step to proactively address the projected structural deficit, offering a menu of financial strategies that close a gap of $14.9 million in FY 2027. These options illustrate the opportunities and trade -offs necessary to achieve immediate budget balance and systematically contribute to closing the structural deficit extending through FY 2032. The fundamental challenge remains in creating a responsible and strategic mix of one-time tools to fix the immediate FY 2027 problem and ongoing solutions required to address the structural imbalance over the next five years to achieve long-term fiscal stability.

Revised Table 2: FY 2027-2032 Balancing "Sandbox" Options (All figures in millions)

FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032
Revenues
$0.8 $0.8 $0.8 $0.9 $0.9 $0.9 Explore new/updated fees and other revenues
Budget Stabilization Reserve (BSR) $2.0 $0.0 $0.0 $0.0 $0.0 $0.0 Budget Reductions $3.4M in
base
$3.4M in
base $3.4 $3.4 $3.4 $3.4 FY 26 Approved Reductions thru FY 32 ($6 m w/$3.4 m on-going ~ $2.4m GF + $1 m CIP)
Budget Reductions
$7.0 $7.0 $7.0 $5.8 $2.3 $2.1 FY 27 Additional Reductions thru FY 32 CIP Reductions
$1.0 $1.0 $0.0 $0.0 $0.0 $0.0
FY 2027 Additional Reduction to Capital
Pension Cost
$3.6 $3.6 $3.6 $3.6 $3.6 $0.0 Reduce Additional Discretionary Payment (ADC)
Pension Cost
$0.5 $0.5 $0.5 $0.5 $0.5 $0.0 Reduce Additional Discretionary Payment (ADP)
BUDGET STRATEGY TOTAL: $14.9 $12.9 $15.3 $14.2 $10.7 $6.4 Remaining Surplus/(Deficit) $0.0 $0.1 $0.0 $0.0 $0.0 $0.0

Budget Balancing Sandbox for Consideration
The Budget Balancing Sandbox outlines a multifaceted and multi-year budget balancing strategy, includes reductions on top of FY 2026 reductions of $6 million (or 2%), explores revenues, and service delivery efficiencies. It also charts a path forward for continued planning for reductions in pension liabilities, reinforcing the adopted Retiree Benefits Policy. Lastly, Staff strive to maintain the budget stabilization reserve at the 18.5% Council directed level. Together, these strategies will serve as a foundation for several Council actions coming to you soon including the Long-Range Financial Forecast, FY 2026 Mid -Year budget actions and the proposed FY 2027 budget.

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Achieving structural balance requires a combination of options. A key challenge is distinguishing between one -time tools (i.e. BSR) that tackle the immediate FY 2027 problem, and ongoing solutions (i.e. revenues, cost reductions, and pension option 1 “ADC”) that address the structural imbalance over the next five years. An approximate balance of one-time and ongoing strategies is essential. A brief summary of each option follows the table.

Revised Table 3: FY 2027 Budget Balancing "Sandbox" Options (All figures in millions. Projected FY 2027 Deficit: $14.9M)

Option Category Item Strategy
Potential
FY 2027 Impact
Revenue Enhancement
(Ongoing)
Additional Revenue Increase fees and/or other revenues
$0.8
One-Time Funding BSR Contribution Utilize funds available above the

18.5% target $2.0
Ongoing Expenditure Reduction General Fund
Reductions
Target for permanent budget base
reductions (ongoing) $7.0
Ongoing Expenditure Reduction Reduction in Capital
Contribution
Reduce General Fund Base Transfer
to Capital Improvement Fund (CIF) $1.0
Long-term Cost & Liability
Reductions
Pension Option 1 -
NC/UAL
Reduce required payment to ADC
level (for five years) $3.6
Long-Term Cost & Liability
Reductions
Pension Option 2 -
ADP
Reduce Additional Discretionary
Payment (ADP) to Trust $0.5
Subtotal (Potential Solutions) $14.9
Remaining (Against $14.9M Deficit) $0

Revenue enhancement – ($800,000) – explore new or updated fees and other revenues.

Ongoing expenditure reductions ($8.0 million) - further reduce the General Fund operating budget and capital investments for the next five years, while exploring service efficiencies and aiming to minimize service impact to the community.

Long-term cost & liability reductions ($4.1 million) – continue to implement the Retiree Benefit Funding Policy and make transfers from Section 115 pension trust to CalPERS to reduce employer costs (ADC) and unfunded liability (ADP). Funding the ADC over the next 5 years and ADP on -going will reduce the budget operating and capital cuts necessary to balance the budget. As reviewed with the Committee on November 18, the Section 115 pension trust funding transfers scenarios were financially analyzed, consistent with the City policy and the projected outcomes would achieve the City policy key objectives. This balances the City’s financial position, policy objectives and desirable service level of the community.

Budget Stabilization Reserve (BSR)
The City's Budget Stabilization Reserve (BSR) serves as the primary General Fund reserve. By policy, the BSR is maintained in the range of 15% to 20% of General Fund operating expenditures, with a target of 18.5%. Any reduction to the reserve below 15% requires City Council approval.

At the discretion of the City Manager, any BSR balance above 18.5% may be transferred to the Item 12
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Infrastructure Reserve (IR) in the Capital Improvement Fund and the City's Section 115 Pension Trust Fund, as outlined in the Retiree Benefit Policy. The BSR is used to fund unanticipated one - time costs as opposed to ongoing or recurring operating expenditures; the City's intent is to fund ongoing programs and services with ongoing dollars. Maintaining the BSR at or above the 18.5% target provides financial flexibility and has been a strong factor in the City maintaining a AAA credit rating.

The current BSR balance is projected to be above the 18.5% target for FY 2026. However, the projected $14.9 million deficit in FY 2027 means that the BSR could be drawn upon or funds currently above the target could be allocated to bridge the gap. Utilizing a portion of the BSR (or transfers from above -target BSR funds) is presented as a potential one -time tool to solve the immediate operating deficit. Staff's approach prioritizes maintaining the target 18.5% BSR level for long -term fiscal stability, but the structural deficit requires consideration of all available strategic resources and as such, only $6 million of the $9 million projected FY 2026 incremental deficit is illustrated in this summary.

Table 4: Budget Stabilization Reserve (BSR) Summary (in millions) Budgeted FY 2025 Ending BSR $54.00
FY 2025 BSR Surplus Compared to Budget $4.9
Actual FY 2025 Ending BSR $58.9
Additional BSR (Included in FY 2026 Adopted Budget) $0.2 Use of BSR for FY 2026 Budget Amendments (BAOs) -$0.3
FY 2026 BSR Adjusted Balance $58.8
FY 2026 BSR 18.5% Target Level $56.8
Estimated Available BSR Above 18.5% Level $2.0

BSR Policy Analysis (PROJECTIONS):

Table 4: Budget Stabilization Reserve (BSR) Summary (in millions) Recommend Roll Uncertainty Reserve/FY25 Surplus into BSR $6.0 BSR, FY 2026 Projected Ending Balance (before revenue decline) $64.8 Projected FY 2026 BSR Target Level 21.1%
Projected BSR Above FY 2026 18.5% Target $8.0
Projected Use of BSR:

FY 2026 projected revenue decline (partial offset with BSR, while contingency one-time redistribution of sales tax may be funded by other resources, including Section 115 trust) -$6.0 FY 2026 Projected BSR, ending (minus revenue declines) $58.8 FY 2027 Projected BSR, use -$2.0
FY 2027 Projected BSR, ending $56.8
BSR as % of projected FY 2027 expenditures 18.5%
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Revenue Assumptions

The FY 2025 Annual Comprehensive Financial Report (ACFR), scheduled for review by the Finance Committee, will report General Fund revenues as compared to the prior year. Major tax revenues have shown mixed results through the first quarter of FY 2026, indicating current fiscal volatility.

Total General Fund revenues are projected to be $305.1 million in FY 2027. As noted in the variance analysis provided to the Committee, this is approximately $5.8 million lower than the forecast presented during the FY 2026 budget process. This significant downward revision is the primary driver of the structural deficit, highlighting the immediate need for budget balancing strategies. The change is largely attributable to a $5.0 million reduction in the Sales Tax forecast, reflecting the steep decline in new auto sales and leasing sectors, with more detail in Attachment B. Property Tax was also revised down by $1.5 million, to reflect the 10 -year compound annual growth rate (CAGR) is projected at approximately 4.5%, which is a moderation from historical trends. Staff will continue to monitor revenues and provide an update during the FY 2026 Mid - Year Budget Review. A summary of key revenue assumptions are below; extensive information regarding each revenue category can be found in Attachment C.

Revised Table 5: General Fund Revenue Forecast (Base Case) (All figures in millions)
Revenue &
Other Sources
FY
2027
FY
2028
FY
2029
FY
2030
FY
2031
FY
2032
FY
2033
FY
2034
FY
2035
FY
2036

Sales Taxes $32.3 $33.3 $34.3 $35.3 $36.1 $37.0 $37.8 $38.5 $39.3 $40.1 Property Taxes $74.9 $78.1 $81.4 $84.9 $88.6 $92.5 $96.6 $100.9 $105.5 $110.3 Transient Occupancy Tax $31.0 $32.3 $33.8 $35.4 $37.1 $39.1 $41.1 $43.3 $45.5 $47.9 Documentary Transfer Tax $9.0 $9.3 $9.5 $9.8 $10.2 $10.5 $10.9 $11.3 $11.7 $12.1 Utility Users Tax $23.0 $24.7 $25.4 $27.9 $29.5 $30.5 $31.7 $32.9 $34.4 $35.8 Business Tax $6.7 $6.8 $7.0 $7.2 $7.4 $7.6 $7.8 $8.0 $8.2 $8.4 Other Taxes and Fines $0.8 $0.8 $0.8 $0.8 $0.8 $0.8 $0.8 $0.8 $0.8 $0.8 Subtotal: Taxes $177.7 $185.3 $192.2 $201.3 $209.7 $218.0 $226.7 $235.7 $245.4 $255.4 Charges for Services $45.1 $46.2 $46.9 $47.7 $48.3 $48.7 $49.0 $49.3 $49.6 $49.9 Permits and Licenses $11.8 $12.0 $12.1 $12.3 $12.5 $12.7 $12.7 $12.8 $13.0 $13.1 Return on Investments $3.7 $3.8 $3.9 $4.1 $4.2 $4.4 $4.6 $4.8 $5.0 $5.2 Rental Income $17.0 $17.5 $18.1 $18.8 $19.4 $20.1 $20.8 $21.5 $22.3 $23.1 From Other Agencies $1.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 Charges to Other Funds $15.8 $16.2 $16.7 $17.0 $17.4 $17.5 $17.8 $17.9 $18.0 $18.0 Other Revenue $2.5 $2.6 $2.6 $2.6 $2.6 $2.6 $2.7 $2.7 $2.7 $1.9

Subtotal: Non-Tax $97.0 $98.3 $100.5 $102.6 $104.5 $106.1 $107.7 $109.1 $110.6 $111.3 Operating Transfers-In $30.4 $33.2 $34.6 $36.7 $38.8 $41.2 $44.1 $45.7 $48.6 $51.4 TOTAL REVENUE $305.1 $316.9 $327.2 $340.4 $353.0 $365.2 $378.4 $390.3 $404.6 $418.8

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Graph 1: Major General Fund Revenues ($ million)

Sales Tax: The FY 2026 Adopted Budget for Sales Tax was $36.4 million. The new FY 2027 forecast is $32.3 million. This represents a $4.1 million (11.3%) decrease from the prior year's adopted budget and a significant $5.1 million downward revision from the FY 2027 forecast included in the FY 2026 Adopted Budget. This structural reduction is the single largest driver of the projected deficit, as was discussed with the Committee on November 18, 2025.

This revision is based on current receipts and outlook for business -to-business sales (leasing) and new auto sales, reflecting local economic drivers. The "soft -landing" of the national economy has not fully translated to the Bay Area, which is projected to lag the U.S. recovery (Attachment B). The forecast assumes modest 2-3% growth in the out-years. Staff continues to monitor this critical revenue source.

Property Tax: Property tax revenue is the General Fund's largest revenue source, projected at $74.9 million for FY 2027. This is a modest 1.8% increase over the FY 2026 Adopted Budget of $73.6 million and a $1.5 million reduction from the forecast included in the FY 2026 Adopted Budget. While the FY 2027 growth rate appears low at 1.8% due to technical re -baselining of FY 2026 actuals, the underlying assessed value growth assumption remains at approximately 4.4% to 4.8%. This reduction reflects a cooling in the real estate market and lower -than-anticipated assessed valuation (AV) growth. The 10-year compound annual growth rate (CAGR) is projected at approximately 4.5%, which is a moderation from historical trends.

This category also includes receipts for excess Educational Revenue Augmentation Fund (ERAF) distributions from the County of Santa Clara. ERAF is the fund used to collect and disburse Item 12
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property taxes that are shifted to/from cities, the County, and special districts prior to their reallocation to K -14 school agencies. When the state shifts more local property tax than required to support schools, these funds are returned and known as excess ERAF. Staff continues to monitor potential legislative and legal challenges to the ERAF calculation and reserves funding in accordance with County guidance.

Utility Users Tax (UUT): The UUT is levied on electric, gas, and water consumption, as well as on telephone usage. Revenue in this category is projected at $23.0 million for FY 2027, a 7.5% increase over the FY 2026 Adopted Budget. This is based on updated financial plans from the Utilities department, reflecting anticipated consumption and approved rate adjustments.

Revenue in this category is expected to show steady growth over the forecast period, aligned with the Utilities' long-range financial plans.

Charges for Services and Permits and Licenses : Revenues in the Charges for Services and the Permits and Licenses categories are anticipated to be $45.1 million and $11.8 million, respectively, in FY 2027. Together, these amounts total $56.9 million. These revenue sources are primarily driven by the cost of staff to provide services to the community. To ensure alignment with target cost recovery levels, the City has engaged a consulting firm to assist with a comprehensive cost allocation plan and municipal fee study during FY 2026, with implementation anticipated in FY 2027. Staff will evaluate and bring forward recommendations to align fees with target cost recovery levels to cover general salary and benefits increases and CPI trends. One exception to this is Development Services activities and related revenue.

Development Services fees are intended to be fully cost -recoverable, and the department has been modeled as cost-neutral in this forecast. To the extent Council wishes to provide subsidies to development service permit fees to encourage activities such as electrification to reach sustainability goals, these subsidies would add to the forecasted General Fund deficit unless an alternative funding source is identified.

Expense Assumptions
As part of developing the FY 2027-2036 Forecast expenditure budget, the General Fund expense categories have been adjusted by removing one-time expenses from the prior year and updating major cost elements such as salary and benefits. Total General Fund expenditures are projected to be $320.0 million in FY 2027. This represents a moderate 4.3% increase from the FY 2026 Adopted Budget of $306.9 million. The overall annual growth is due mainly to increases in Salary and Benefits, Contractual Services, and Allocated Charges. A summary of expense assumptions is discussed here; extensive information regarding each expense category can be found in Attachment D.

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Table 6: General Fund Expense Forecast
All figures in millions

Expenditures & Other
Uses
FY
2027
FY
2028
FY
2029
FY
2030
FY
2031
FY
2032
FY
2033
FY
2034
FY
2035
FY
2036
Salary & Benefits $198.9 $203.6 $209.9 $216.2 $220.1 $223.7 $225.5 $228.7 $230.2 $232.3

Contract Services $32.1 $33.1 $35.2 $36.6 $38.0 $39.6 $41.1 $42.8 $44.5 $46.3 Supplies & Material $4.0 $4.1 $4.2 $4.3 $4.5 $4.7 $4.9 $5.1 $5.3 $5.5 General Expense $10.5 $10.8 $11.1 $11.5 $11.9 $12.3 $12.7 $13.1 $13.6 $14.6 Rents & Leases $1.5 $1.6 $1.7 $1.7 $1.8 $1.8 $1.8 $1.9 $1.9 $0.2 Facilities & Equipment $0.7 $0.7 $0.7 $0.7 $0.7 $0.7 $0.7 $0.7 $0.7 $0.7 Allocated Charges $32.4 $33.7 $35.2 $36.7 $38.2 $38.8 $38.9 $40.0 $41.4 $50.0

Subtotal: Non S&B $81.2 $84.0 $88.1 $91.5 $95.1 $97.9 $100.1 $103.6 $107.4 $117.3 Operating Transfers-Out $6.3 $6.3 $6.4 $6.4 $6.7 $6.6 $6.8 $7.0 $7.2 $5.6 Transfer to Infrastructure $33.6 $35.8 $38.1 $40.5 $41.8 $43.4 $45.0 $46.7 $48.5 $50.4 TOTAL EXPENDITURES $320.0 $329.7 $342.5 $354.6 $363.7 $371.6 $377.4 $386.0 $393.3 $405.6

Salary and Benefits: Consistent with prior years, the FY 2027 salaries and benefits costs represent approximately 62% of the General Fund budget expenditures. Salary and Benefits are projected to increase $8.2 million or 4.3% from the prior year, from $190.7 million (FY 2026 Adopted) to $198.9 million (FY 2027 Forecast). Discussed in the following sections, this is primarily attributable to contractual increases in salaries, retiree healthcare costs, and pension costs.
- Salary costs are updated in accordance with Memorandum of Agreements (MOA’s) between the City and its labor groups for contracts in effect. Then, 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 since no MOA’s would be in effect at that time. A staff vacancy assumption of 5% is assumed, which is an increase from 3% assumption most recently a few years ago, creating a tighter budget forecast as the City continues to improve its actual vacancy rate through successful recruitment and retention programs.

- Pension are budgeted based on CalPERS determined rates as of the June 30, 2024, valuation for the City's miscellaneous and safety plans and additional contributions to Section 115 trust. In the General Fund, it is anticipated the City will spend a total of $62.5 million on total pension costs in FY 2027, which includes $53.7 million for the primary CalPERS contribution and $8.8 million in supplemental Pension Trust (PARS) contributions. This total is approximately $3.0 million higher than the prior year. These combined expenses represent approximately 19.5% of the General Fund's total expenses. This forecast does not reflect any strategies in the sandbox to transfer funds from Section 115 trust to CalPERS.

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- Retiree Healthcare/Other Post -Employment Benefits (OPEB) - Retiree Medical is based on the June 30, 2024, actuarial study, which is completed every two years to inform the development of the FY 2027 and FY 2028 operating budgets. Consistent with City Council direction and the Retiree Benefit Funding Policy, this forecast continues the practice to budget the full payment of the Actuarial Determined Contribution (ADC) for retiree healthcare and the City Retiree Benefits Funding Policy prefunding to California Employers’ Retiree Benefit Trust (CERBT) Fund.

Inflationary assumption in this long range is generally 3% annual inflation, with limited exception during the ten-year forecast to estimate cost increases for non-salary services and equipment.

Assumptions NOT Included in Forecast
It should be noted that the Base Case LRFF does not include several potential future impacts to the FY 2027 -2036 General Fund outlook that are outlined in Attachment E . These items represent known priority projects or areas of planned investment that have not yet been fully developed in terms of costs, definitive funding sources, or finalized timelines. This is not intended to be a comprehensive list nor is it in any priority order.

FY 2027 Budget Development Guidelines
As discussed earlier in this document, this preliminary forecast represents the initial steps of the FY 2027 budget development process. Due to the clear overlap of projecting the City's fiscal condition and the need to shape service level expectations, the FY 2027 Budget Development Guidelines are incorporated into this discussion ( Attachment A). These guidelines provide high- level budgetary direction to the entire organization.

Pairing the Budget Development Guidelines with the forecast at this time links the anticipated future fiscal condition of the organization with the necessary context regarding service delivery prioritization and resource allocation. This proactive linkage ensures that the City can address anticipated structural deficits, such as the $14.9 million gap in FY 2027, using a comprehensive framework. The guidelines provide the financial mandate necessary to vet proposals against the structurally imbalanced General Fund, requiring staff to design budget solutions that not only solve the immediate deficit but also contribute to long -term alignment. This ensures that resource allocation is strategic, disciplined, and focused on maintaining financial sustainability rather than simply relying on one -time measures. The policy demands staff explore alternative revenue streams, optimize expenditures, and ensure all augmentations contribute positively to the overall structural balance.

Conclusion
This forecast maintains current service levels approved in FY 2026 but projects a structural deficit from FY 2027 through FY 2032. The primary driver of this imbalance is the $14.9 million deficit in FY 2027, driven largely by downward revisions to Sales Tax projections. The Base Case assumes Item 12
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a sluggish economic recovery, leading to continued revenue stagnation that is unable to keep pace with growth in expenditures. The Budget Balancing Sandbox offers a framework for the Committee to recommend ongoing solutions, such as $8.0 million in structural General Fund reductions (operating and CIP) or adjustments to long -term liability payments, while leveraging one-time resources to bridge the immediate gap. Strategic planning and fiscal discipline are essential to maintain service levels and ensure long-term fiscal stability.

FISCAL/RESOURCE IMPACT
Financial implications from this report and input from the Finance Committee and City Council will be considered in the City Manager’s development of the Fiscal Year 2027 budget.

STAKEHOLDER ENGAGEMENT
The preliminary forecast for FY 2027-2036 represents the beginning of the fiscal year 2027 budget development process. Information provided in this report will be discussed with 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 2026, according to the standard budget adoption process. The community can track previous and upcoming FY 2027 budget discussions and information at www. paloalto.gov/budget.

ENVIRONMENTAL REVIEW
This report is not a project for as defined by the California Environmental Quality Act because the review of the LRFF and budget policy guidelines are a 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)

ATTACHMENTS
Attachment A: FY 2027 Budget Policy Guidelines
Attachment B: The Economy
Attachment C: General Fund Base Case Revenue Assumptions Attachment D: General Fund Base Case Expense Assumptions Attachment E: Assumptions Not Included in Forecast
APPROVED BY: Lauren Lai, Administrative Services Director

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Attachment A – FY 2026 Budget Development Guidelines

FY 2027 Budget Development Guidelines

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ATTACHMENT B
The Economy
At the national level, economic growth has shown significant strength through the third quarter of calendar year 2025, led by robust GDP (gross domestic product) growth. Consumer spending has remained resilient despite inflation rates that have ticked up from the prior year. As of September 2025, the consumer price index (CPI), which measures changes in the prices paid by consumers for a basket of goods and services, was 3.0%. This is higher than the 2.6% CPI from a year ago. Assumptions in the LRFF report for general cost increases are using a CPI of 3% in FY 2026 and FY 2027 and 4% for FY20 28 and beyond. The national unemployment rate, as of August 2025, is 4.3%, a modest increase from 4.1% in October of the prior year, suggesting a labor market that is cooling but not contracting. This slowdown is consistent with the Federal Reserve's monetary policy intended to curb inflation without initiating a recession. Key factors to monitor include future Federal Reserve policy, ongoing geopolitical events, and the impact of tariffs on inflation.

The local economy, in contrast, is projected to experience a more sluggish recovery. The latest Fall 2025 UCLA Anderson outlook states that while the U.S. economic recovery may begin in mid-2026, "the California recovery will begin later, getting underway late next year and accelerating in 2027." The forecast notes that a rebound in the technology and aerospace sectors will be necessary for California to resume its accustomed pace of growth. The risks to this forecast remain on the downside, tied to the performance of the tech sector, international trade, and the high cost of capital.

Table 1: National Gross Domestic Product (GDP)

According to the U.S. Bureau of Economic Analysis (BEA), the US economy is estimated to have expanded at an annualized 4.0% in the third (calendar) quarter of 2025 (latest estimate), a significant acceleration from the growth seen in 2024. This robust growth was supported by a significant increase in personal spending, which increased at its fastest pace since 2023, boosted by consumption of both goods and services. Consumers showed strong spending on services related to travel, entertainment, and healthcare. Government consumption also rose, Item 12
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led by defense and state and local infrastructure spending. Business investment in equipment and intellectual property showed strength, offsetting a continued slowdown in fixed residential investment, which has struggled under higher interest rates. The contribution from net trade was positive, as exports of capital goods increased while imports held steady. This strong performance at the national level provides a crucial buffer against regional weaknesses and suggests underlying momentum in the economy.

The national inflation rate, as measured by the U.S. Bureau of Labor Statistics, rose to 3.0% (year-over-year) in September 2025, the highest rate since January 2025. This marks a continued upward trend from 2.9% in August. The increase was driven largely by a rise in energy prices, which rose 2.8% on the year, led by gasoline. Inflation for shelter, a major component of the index, also remained steady and elevated at 3.6%, continuing to pressure household budgets. On the other hand, a slowdown was seen in other areas, such as food (3.1%, down from 3.2% prior) and used cars and trucks (5.1%). On a monthly basis, the CPI increased 0.3%, which was below some market expectations. Core inflation (all items less food and energy), which is closely watched by the Federal Reserve, slowed slightly to 3.0% from 3.1% in the prior month, suggesting that underlying price pressures, while persistent, may be gradually easing.

Table 2: National Inflation Rate (CPI)

The nation's unemployment rate was 4.3% as of August 2025, with the number of unemployed persons at 7.4 million; these measures have changed little over the year. This rate, while low by historical standards, is slightly elevated from the beginning of the calendar year. Among those without employment, the number of long -term unemployed (those jobless for 27 weeks or more) was 1.9 million in August, accounting for 25.7% of all unemployed persons. In the meantime, the labor force participation rate held steady at 62.3%, which has declined by 0.4 percentage points over the year. Per the State of California's Employment Development Department (EDD), the state's unadjusted unemployment rate as of August 2025 is 5.8%, a notable increase from 5.3% in September of the prior year. The local region reflects this cooling trend. The unemployment rate for the San Jose -Sunnyvale-Santa Clara MSA was 4.7% in August 2025, with Santa Clara County at 4.6%. This is a measurable increase from the 4.1% county rate

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seen a year prior, reflecting the sluggishness in the technology sector referenced by the UCLA forecast.

Table 3: U.S. Unemployment Rate

The erosion of purchasing power from inflation remains a key watch item; however, consumer spending remains resilient. Personal consumption expenditures (PCE) are the primary measure of consumer spending on goods and services in the U.S. economy. It accounts for about two - thirds of domestic final spending, and thus it is one of the main factors that indicates future economic growth. Strength in PCE spending tends to prompt additional business spending.

According to the U.S. Bureau of Economic Analysis (BEA), the headline PCE price index rose

2.7% year -over-year as of August 2025. A key component, the core PCE price index (which excludes food and energy), rose 2.9% year -over-year. This core measure is the Federal Reserve's preferred inflation gauge, and while it is an improvement from previous highs, its persistence well above the 2% target adds leeway for the Federal Reserve to hold interest rates at a restrictive level. This resilience in spending, particularly on services, continues to support economic growth but also poses a challenge to fully taming inflation.

Table 4: Unemployment Rate Comparison (August 2025)

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ATTACHMENT C

General Fund Bace Case Revenue Assumptions

Chart 1: General Fund Major Tax Revenue Actuals and Forecast through FY 2036

Property Tax
Property tax revenue is the General Fund’s largest revenue source and represents over 25% of the total General Fund revenues. Growth in this category has been steady over time, with the secured property tax 10-year compound annual growth rate (CAGR) ranging from a low of 5.8% in FY 2019 to a high of 7.25% in FY 2010, with the current 10 -year CAGR of 6.9%. Although the City has realized a 10 -year compound annual growth rate of 6.9% in property tax revenues, the FY 2027 forecast projects a moderated 1.8% growth rate , with revenues anticipated to increase from $73.6 million in FY 2026 (adopted) to $74.9 million in FY 2027 (projected). However, in FY 2026 it is likely that property taxes will be revised down to $72.3 million which aligns with the County Tax roll for FY 2026. We therefore estimated a 4.8% increase from this revised FY 2026 property tax to project FY 2027, by using the actual assessed valuation growth from 2025.

Property tax performance typically lags economic conditions by about a year due to the assessment and collection timeline. This category also includes receipts for excess Educational Revenue Augmentation Fund (ERAF) distributions from the County of Santa Clara. ERAF is the fund used to collect and disburse property taxes that are shifted to/from cities, the County, and special districts prior to their reallocation to K -14 school agencies. When the state shifts more local property tax than required to support schools, these funds are returned and known as excess ERAF. As a result of the volatility of ERAF, it is not considered a permanent local revenue source even though it has performed strongly in the past decade.

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ERAF Reserve: The City maintains an ERAF Reserve to address ongoing disputes related to the calculation of excess ERAF. Earlier challenges with the State and Santa Clara County, and with the State and California School Board Association, were resolved favorably, allowing the related reserves to be released. Currently, a State Controller’s Office audit finding against Marin County challenges the inclusion of former Redevelopment Agency funds in the excess ERAF calculation and remains under litigation. Approximately 18 -22% of excess ERAF is considered at risk under this finding. Separately, there have been statewide discussions about extending ERAF eligibility to charter schools. Although no changes have been adopted at this time, this could introduce additional risk in the future.

To reflect this potential exposure, the City budgets excess ERAF on a net basis and reserves at - risk amounts when received. To date, a total of $7.1 million has been set aside for prior -year at- risk amounts, with an additional contribution planned for FY 2026 once final amounts are known.

Chart 2: Property Tax Actuals and Forecast through FY 2036

Transfer of ownership is a significant driver of growth; however, that growth moderated in FY 2024 and is expected to continue in FY 2025 due to a higher interest rate environment and overall economic slowdown. Overall, median sales price of single family residential home increased 4.7%, where in the significantly low interest rate environment of 2021, the median price of a single family residential home increased by 18.26%.

The FY 2026 Adopted Budget for Property Tax is $73.6 million, a $5.0 million or 7.3% increase over the FY 2025 adopted revenue of $68.6 million. In FY 2027, this revenue is anticipated to increase to $74.9 million, a $1.3 million or 1.8% increase over the FY 2026 Adopted Budget amount. The Base Case assumes approximately 2.0% to 4.5% growth over the length of the forecast.

Sales Tax
Sales Tax is the City’s second largest General Fund revenue source and represents approximately 13.5% of the total revenues. This revenue category continues to evolve based on Item 12
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changes in consumer activity, including the growing influence of online purchasing and the modernization of retail operations. In the near term, these dynamics have been coupled with declines in the business-to-business (including car leases) and transportation sectors, consistent with trends in recent financial reporting and sales tax digests. These conditions, along with CDTFA adjustments and changes in the state’s allocation methodology, have resulted in lower receipts.

As a result, FY 2026 revenue is expected to fall by up to $9.0 million below the adopted budget, decreasing from $36.4 million to a projected $27.3 million, due to a combination of potential one-time adjustments by the California Department of Tax and Fee Administration (CDTFA) and lower allocations to the City. The LRFF base case incorporates this lower starting point, with FY 2027 sales tax projected at $32.3 million, roughly 11% below prior expectations due to an ongoing annual reduction of about $5.1 million. In the out -years, sales tax is assumed to stabilize at this reduced level, with modest growth beginning in FY 2028 and returning to current budget levels by FY 2032.

Chart 3: Sales Tax Actuals and Forecast through FY 2036

Utility User’s Tax (UUT)
The UUT is levied on electric, gas, and water consumption, as well as on telephone usage.

Revenue in this category is impacted by consumption levels and has experienced reductions in prior periods due to water conservation programs and reduced workforces and business closures during the pandemic. This revenue has recovered as the local economy recovered and workers returned to the office in FY 2023. In addition, higher utility commodity costs and capital costs resulted in sizable utility rate increases and higher UUT revenues. The FY 2026 Adopted Budget for UUT is $21.4 million, $1.0 million or 5.1% higher than the FY 2025 actuals of $20.4 million. In FY 2027, this revenue is anticipated to increase to $23.0 million, a $1.6 million or 7.5% increase over the FY 2026 budgeted amount. Revenue in this category is expected to grow between 3% to 10% over the length of the forecast, or a 10 -year CAGR of

5.0%.

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Chart 4: Utility Users Tax Actuals and Forecast through FY 2036

Transient Occupancy Tax (TOT)
The City’s TOT is applied at a rate of 15.5% on hotel and other short -term lodging stays and is impacted by business and other leisure travel activity. Consistent with policy, a portion of TOT receipts from new hotel developments is allocated to support infrastructure needs. In recent years, this has resulted in an overall distribution that is roughly split between the General Fund and Capital Improvement Fund. TOT revenues were significantly affected in FY 2020 and FY 2021 during the pandemic and have since stabilized as hotel activity recovered and new hotels added capacity.

The FY 2026 Adopted Budget for TOT revenue is $29.1 million, a $0.2 million or 0.6% increase over FY 2025 actuals of $28.9 million. In FY 2027, this revenue is anticipated to increase to $31.0 million. Of this amount, approximately $16.7 million is allocated for general fund purposes and $14.3 million is used to support capital infrastructure projects. This aligns with Council policy to direct a portion of TOT toward infrastructure investments.

During the first two months of the fiscal year, hotels reported an average daily room rate of $225.86 and an occupancy rate of 82.3%, compared to $238.76 and 70.2% in the same period in the prior fiscal year. TOT receipts have grown at a CAGR of 9.3% over the past five years and

5.7% over the past ten years, reflecting a rebound from pandemic lows and overall sustained recovery in the local hotel market. This LRFF assumes growth rates ranging from 1.3% to 5.3% over the forecast period.

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Chart 4: Transient Occupancy Tax Actuals and Forecast through FY 2036

Note: January 2015, TOT Rate went from 12% to 14% April 2019, TOT Rate went from 14% to 15.5%

Documentary Transfer Tax (DTT)
Revenue in this category is highly volatile and depends on sales volume and the mix of commercial and residential sales. Activity can vary significantly year to year, making this a challenging category to forecast. Over the past 10 years, DTT receipts have averaged approximately $8.0 million annually, with occasional spikes driven by large commercial transactions. FY 2021 and FY 2022 generated a record revenue of $10.6 million and $12.0 million due to several high -value commercial transactions, while lower activity contributed to a decline in receipts in FY 2023.

The FY 2026 Adopted Budget for DTT is $8.5 million, a $1.2 million or 16.4% increase from the FY 2025 adopted revenue of $7.3 million. FY 2027 is forecast at $9.0 million, with growth ranging from approximately 2.0% to 3.5% over the period.

The number of transactions through October 2025 (75) is 18.0% higher than the same period in the prior year, with the total revenue from these transactions increasing by 22.6%. Data from the first six months of the calendar year indicates that single family residential homes are selling for 1.5% less than in the previous calendar year, with number of sales being relatively flat. The median price for single family properties is $3.3 million.

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Chart 6: Documentary Transfer Tax Actuals and Forecast through FY 2036

Business Tax (BT)
In November 2022, voters approved Measure K (Business Tax) to provide additional funding for critical public safety needs, transportation safety improvements and grade separations, and affordable housing and unhoused services. The tax applies to non -exempt businesses above 10,000 square feet with an annual single business cap of $500,000. The initial collection was based on a BT rate of 3.75 cents per square foot which increased to 7.5 per square foot starting on January 1, 2025. FY 2026 is the first fiscal year in which the full rate will be assessed. Both the rate and the cap will be increased annually by 2.5% beginning in FY 2027.

The FY 2026 Adopted Budget for BT is $6.5 million, a $1.0 million or 18.4% increase over the FY 2025 actuals of $5.7 million. This increase reflects the first full fiscal year at the fully phased -in rate and continued registration activity from non-exempt businesses. In FY 2027, this revenue is projected to increase to $6.7 million, supported by steady participation and the scheduled annual rate increase.

The BT program is still in its early stages and will continue to evolve as participation stabilizes and year-over-year data becomes more consistent. Staff will continue to monitor performance and will provide updated analysis and recommendations in future financial updates as more data becomes available.

Return on Investment
Investment income reflects interest earned on the City’s investment portfolio and liquid balances. In FY 2026, the City transitioned from managing its investment portfolio in -house to partnering with Chandler Asset Management for professional investment management services. The City’s current earnings reflect a combination of legacy holdings and new investments purchased under the revised portfolio strategy. As of the first quarter of FY 2026, the portfolio’s market yield was 4.01%.

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gradually to about $5.2 million by FY 2036. The forecast assumes annual growth of roughly

2.0% to 4.0% over the forecast period, reflecting expected reinvestment of maturing securities and current market conditions. Staff continues to work with Chandler on developing forecasts that reflect the new strategy and expects to incorporate more refined projections in future financial updates.

Rental Income
Rental Income of $16.4 million in FY 2026 primarily reflects rent paid to the General Fund from the City’s Enterprise Funds and tenants at the Cubberley Community Center. Rental income is projected to remain flat compared to the FY 2025 Adopted Budget. This revenue category will be further reviewed and revised subsequent to this forecast, typically based on the December - to-December California Consumer Price Index (CCPI) in the San Francisco Bay Area.

Charges for Services and Permits and Licenses
Revenues in the Charges for Services and the Permits and Licenses categories are anticipated to be $43.6 million and $11.4 million, respectively, in FY 2026. Together, these amounts total $55.0 million and are approximately $5.7 million higher than the FY 2025 Adopted Budget of $49.3 million. Increases in these categories are primarily due to revenue adjustments for the agreement with Stanford to provide Fire and Dispatch services, and higher forecasts for permit and plan review services processed through the Development Center.

The revenue estimates in these categories are based on current activity levels, and these revenue sources are primarily driven by the cost of staff to provide services to the community.

To ensure alignment with target cost recovery levels, the City has engaged a consulting firm to assist with comprehensive cost allocation plan and municipal fee study during FY 2025, with implementation anticipated in FY 2026. Staff will evaluate and bring forward recommendations to align fees with target cost recovery levels to cover general salary and benefits increases and CPI trends. These efforts aim to improve fee transparency and ensure equitable cost distribution across City services. One exception to this is Development Services activities and related revenue. Development Services fees are fully cost -recoverable, and the department has been modeled as cost-neutral in this forecast.

Charges for Service – Stanford Fire and Dispatch Services The City and Stanford have two separate agreements for the provision of fire response and emergency dispatch services. The fire response services agreement became effective in July 2018 and outlines service level terms and a new cost allocation methodology as the baseline for agreement costs. The term extended through June 2023, with annual renewals in effect through June 2028 unless otherwise terminated. The agreement includes a staffing deployment model for suppression and medical services, which was approved by The City Council in October 2017 and deployed in January 2018. This forecast aligns with the new staffing model; and, in accordance with the agreement, adjustments to revenue from Stanford have been aligned with the year-over-year changes to the operating expenses in the Fire Department over the forecast period. Similarly, changes to the revenue received for dispatching services have been aligned with the operating expenses in the Technical Services Division of the Police Department where the costs to provide these services are budgeted. The agreements for both fire and dispatch Item 12
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services have termination dates that fall within the forecast period, and while the revenue forecast assumes continuation of the current agreement terms, new contracts will need to be executed. For fire and police revenue, additional adjustments may be applicable if new labor agreements are negotiated for the forecast period. Revenues for these services are based on current anticipated changes in salary and benefits costs within the Fire Department and Police Department Dispatch Unit.

Charges to Other Funds
The FY 2026 estimate for Charges to Other Funds of $15.5 million remains flat compared to the FY 2025 budgeted amount. To ensure alignment with target cost recovery levels, the City has engaged a consulting firm to assist with a comprehensive cost allocation plan and municipal fee study in FY 2025, with targeted implementation in FY 2026. Staff will evaluate and bring forward cost allocation recommendations.

Operating Transfers-In
Overall, the Operating Transfers -in are estimated to be $31.5 million for FY 2026. While this matches the total for FY 2025, the prior year included a one -time $2.0 million transfer from the General Benefits Fund. This transfer was a refund of allocated charges paid by General Fund departments into the General Benefits Fund in prior years, which had accumulated in fund balance. Additionally, the Electric Fund equity transfer increased from $15.1 million to $18.3 million, while the Gas Fund equity transfer decreased from $10.9 million to $9.7 million, reflecting updated revenue forecasts for each fund.

In accordance with the methodology approved by the City Council in June 2009, the Electric Fund’s equity transfer to the General Fund equity transfer has been calculated by applying a rate of return on the capital asset base of the Electric Fund. This rate of return is based on PG&E’s rate of return on equity as approved by the California Public Utilities Commission (CPUC). The Gas Fund’s equity transfer calculation was updated based on the passage of Measure L on the November 2022 ballot. As outlined in the ballot measure language, the Gas Fund equity transfer can be up to 18% of annual gross gas retail revenue. This LRFF increases the transfer to 18% in FY 2026, where it is projected to remain through 2036.

Other Revenue and Revenue from Other Agencies
Revenues in these two categories is projected at $3.6 million in FY 2027, $0.9 million lower than the FY 2025 adopted budget of $4.5 million. These two revenue categories mainly account for grants or reimbursements from the federal and state governments or other local jurisdictions.

Other Revenue decreased slightly by $0.2 million in FY 2026 as a result of limited time funding in FY 2025 from LifeMoves , for reimbursement related to the Homekey Facility. Revenue from Other Agencies decreases by $0.7 million in FY 2026, because FY 2025 is the last year of the Staffing for Adequate Fire and Emergency Response (SAFER) grant funding awarded to the City in FY 2022.

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Table 1: General Fund Revenue Forecast (Year-to-Year Percentage Change) Revenue & Other Sources FY
2027
FY
2028
FY
2029
FY
2030
FY
2031
FY
2032
FY
2033
FY
2034
FY
2035
FY
2036
Sales Taxes -11.3% 3.1% 3.0% 2.9% 2.3% 2.5% 2.2% 1.9% 2.1% 2.0% Property Taxes 1.8% 4.3% 4.2% 4.3% 4.4% 4.4% 4.4% 4.5% 4.6% 4.5% Transient Occupancy Tax 6.5% 4.2% 4.6% 4.7% 4.8% 5.4% 5.1% 5.4% 5.1% 5.3% Documentary Transfer Tax 7.5% 7.4% 2.8% 9.8% 5.7% 3.4% 3.9% 3.8% 4.6% 4.1% Utility Users Tax 5.9% 3.3% 2.2% 3.2% 4.1% 2.9% 3.8% 3.7% 3.5% 3.4% Business Tax 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other Taxes and Fines 3.1% 1.5% 2.9% 2.9% 2.8% 2.7% 2.6% 2.6% 2.5% 2.4% Subtotal: Taxes 0.2% 4.3% 3.7% 4.7% 4.2% 4.0% 4.0% 4.0% 4.1% 4.1% Charges for Services 3.4% 2.7% 1.3% 1.7% 1.3% 0.8% 0.6% 0.6% 0.6% 0.6% Permits and Licenses 3.5% 1.7% 0.8% 1.7% 1.6% 1.6% 0.0% 0.8% 1.6% 0.8% Return on Investments 0.0% 2.7% 2.6% 2.6% 5.0% 4.8% 4.5% 4.3% 4.2% 4.0% Rental Income 3.0% 2.9% 3.4% 3.9% 3.2% 3.6% 3.5% 3.4% 3.7% 3.6% From Other Agencies* 1000% -90.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Charges to Other Funds 1.9% 2.5% 3.1% 1.8% 2.4% 0.6% 1.7% 0.6% 0.6% 0.0% Other Revenue 0.0% 0.0% 4.0% -3.8% 4.0% -3.8% 4.0% -3.8% 4.0% 0.0% Subtotal: Non-Tax 4.0% 1.4% 2.0% 2.0% 2.1% 1.4% 1.5% 1.2% 1.6% 1.3% Operating Transfers-In -3.5% 9.2% 4.2% 6.1% 5.7% 6.2% 7.0% 3.6% 6.3% 5.8% TOTAL REVENUE 1.3% 3.9% 3.3% 4.0% 3.7% 3.5% 3.6% 3.1% 3.7% 3.5%

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ATTACHMENT D
General Fund Base Case Expense Assumptions

Salary and Benefits
Consistent with prior years, the FY 2027 salaries and benefits costs represent approximately 62% of the General Fund budget expenditures. Salary and Benefits are projected to increase $8.3 million or 4.4% from the prior year. Discussed in the following sections, this is primarily attributable to increases in salaries ($4.9 million), retiree healthcare costs ($12.7 million total cost), and pension costs ($45.1 million total cost).

Salary - Consistent with the City's salary budget methodology for recent budgets, positions are budgeted at the actual rate of pay of employees including benefit selections as of Fall 2025. Then, by position, salary costs are updated in accordance with applicable Memorandum of Agreements (MOA's) between the City and its labor groups and the Management and Professional Personnel and Council Appointees Compensation Plan(s).

In FY 2025, the City Council engaged with labor groups to negotiate new agreements for wages, benefits, and other terms and conditions of employment. These agreements extend through December 2027 (SEIU) and June 2028 (all other labor groups) for full- time staffing and include target market adjustments to align salaries with benchmark studies, Cost of Living Adjustments (COLAs), and other benefits such as a flexible compensation benefit.

The forecast assumes step increases for employees in applicable positions, including Service Employees International Union (SEIU), International Association of Fire Fighters (IAFF), and Palo Alto Peace Officers' Association (PAPOA), and merit increases for Management and Professional employees including Utilities Management & Professional Association of Palo Alto (UMPAPA). A general wage adjustment of 2% is included for all employees in the forecast when there is no MOA in effect. This is consistent with prior Council direction in previous LRFF reporting to use the 2% increase as a forecasting assumption, not as a commitment to future negotiations.

A reserve is included for potential changes to 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 FY 2028 for new terms beginning in FY 2028 and FY 2029.

Additionally, the budget includes vacancy savings that are expected to materialize as positions are vacated and new employees are hired through the normal course of business. As of the timing of this LRFF, the vacancy rate is approximately 11.6% (as of October 2025). Vacancy savings from public safety positions are typically exhausted by uses such as backfill, hire ahead programs, and overtime.

Consistent with changes in the previous LRFF, this forecast assumes a General Fund vacancy rate of 5% in all years. This results in savings of approximately $ $5.5 million in FY 2027 and increases annually over the forecast period in alignment with forecasted salary trends. Consistent with past practice, the vacancy assumption is lower than the actual vacancy rate to allow departmental

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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.

Benefits - Pension: Pensions are budgeted based on CalPERS determined rates as of the June 30, 2024 valuation for the City's miscellaneous and safety plans. CalPERS determines the City's total contributions for a given Fiscal Year as the sum of two factors: Normal Cost (NC) and Unfunded Accrued Liability (UAL). Together the NC and the UAL expressed as a percentage of payroll is the 'blended rate' and is used to represent total costs in the discussion below.

The Normal Cost (NC) is expressed as a percentage of payroll and is paid as part of the payroll reporting process of active employees. Commonly referred to as the 'pay -go' cost, the NC is variable and increases or decreases directly with the salary levels of the City. It represents the necessary funding for the City to pay for employees presuming that CalPERS meets the current set of assumptions.

In a year that CalPERS does not meet assumptions, due to plan changes, assumption changes, method changes, or plan experience (including investment gains/losses), there is an increase or decrease to the Unfunded Accrued Liability (UAL). Commonly referred to as the 'catch -up' cost, the UAL is expressed as a dollar amount and is calculated over an amortized period with defined annual payments, similar to a mortgage. The contributions for UAL are billed as a flat dollar amount as opposed to a percentage of payroll due to potential funding issues that could arise from a declining payroll or number of active members in the plan. However, CalPERS provides an estimated percentage of payroll for UAL to allow a consistent comparison of total costs.

In the General Fund, it is anticipated the City will spend a total of $45.1 million on total pension costs in FY 2027, including both CalPERS contributions and supplemental Pension Trust Fund contributions. This projection reflects the economic and demographic assumptions used in the annual CalPERS Valuation reports, including but not limited to investment returns. The CalPERS projected FY27 -36 blended retirement rates are as of the June 30, 2024 valuation for plans and do not reflect any impacts of pension trust to CalPERS for additional discretionary payments (ADP). Should Council authorize, such impacts will be incorporated into the budget development.

Table 1: CalPERS’ Projected FY 2027-2036 Blended Retirement Rates (percentage of payroll)

FY
2027
FY
2028
FY
2029
FY
2030
FY
2031
FY
2032
FY
2033
FY
2034
FY
2035
FY
2036*
Miscellaneous 40.6% 41.0% 43.1% 42.7% 42.2% 38.7% 37.2% 34.5% 32.7% 31.5% Safety 82.8% 83.3% 86.3% 85.4% 84.4% 80.2% 77.6% 72.3% 69.7% 67.5% *FY 2036 projected based on amortization trends.

Retiree Healthcare/Other Post-Employment Benefits (OPEB): Retiree Medical is based on the June 30, 2023 actuarial study prepared by Foster & Foster (previously Bartel Associates), which is completed every two years. The most recent study was completed in June 202 4 (CMR 2406-31401) to inform the development of the FY 202 5 and FY 202 6 operating budgets. This biannual actuarial study is anticipated to be updated in Spring 2026 and will be incorporated into FY 2027 budget development.

1 City Council, June 17, 2024; Agenda Item #28; CMR# 2406-3140; https://portal.laserfiche.com/Portal/DocView.aspx?id=73983&repo=r -704298fc&searchid=004d1d0a-4344-4816- ab2d-c044073c40cb
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Consistent with City Council direction and the Retiree Benefit Funding Policy, this forecast continues the practice to budget the full payment of the Actuarial Determined Contribution (ADC) for retiree

healthcare and uses alternative assumptions, such as a more conservative 5.75% discount rate (6.25% assumption), to transmit amounts above the recommended payment as an additional discretionary payment ("prefunding") to the California Employers' Retiree Benefit Trust (CERBT) Fund.

CalPERS blends active employees with pre-Medicare retirees and charges the same medical premium, even though younger employees on average consume less healthcare. The higher premium to younger employees thereby subsidizes older employees and retirees who, on average, have higher claims and premiums. The LRFF estimates $12.7 million in the General Fund in FY 2027 for ADC. The implied subsidy effectively lowers the funding necessary to meet the ADC.

Table 2: Retiree Medical General Fund Contributions (in millions) FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
FY
2030
FY
2031
FY
2032
FY
2033
FY
2034
FY
2035
FY
2036
$10.5 $12.4 $12.7 $13.1 $13.5 $13.8 $14.2 $14.6 $15.0 $15.4 $16.0 $16.7

Retiree Benefit Funding Policy (formerly “Pension Funding Policy”): The City has taken several proactive steps to address rising pension costs and long -term liabilities, including cost -sharing in labor agreements, establishing an irrevocable Section 115 Pension Trust (“Pension Trust”) and California Employers’ Retiree Benefit Trust (CERBT) Fund, and adopting a policy that guides financial planning of these benefits (CMR 11722 as modified by 2212-0513
2).

The City initially contributed to the Pension Trust in FY 2017 on an ad- hoc basis, using one-time savings or excess revenues. Beginning in FY 2019, the City Council directed staff to use a more conservative discount rate as compared to CalPERS for the Normal Cost (NC) portion of the payment and transferring the supplemental funding beyond CalPERS required employer contributions to the Pension Trust. This practice was reinforced with Council approval of the Retiree Benefit Funding Policy, and as of FY 2024 the City’s NC discount rate is 5.3% as compared to CalPERS 6.8%. Additionally, one -time contributions continue to be made each year if exces s revenues or unspent savings are available, subject to City Council approval. As part of policy goals, the City seeks to reach a 90% funded status by FY 2036.

Every four years, the City’s Retiree Benefit Funding Policy requires that staff consult with an actuary to inform the City Council of progress the City has made towards achieving a 90% funded status goal and assess and respond to changes impacting the City’s retiree benefit plans. This comprehensive review was most recently completed in FY 2023 and resulted in several policy revisions, most notably reducing the discount rate used to calculate supplemental contributions to the Pension Trust from 6.2% to 5.3% and extending actuary reporting from 3 to 4 years to align with the CalPERS ALM Study. Additionally, the title of the policy was revised from the Pension Policy to the Retiree Benefit Policy to recognize actions approved by the City Council to proactively plan for retiree healthcare plans in a similar manner

2 City Council, November 30, 2020; Agenda Item #7; CMR 11722; https://portal.laserfiche.com/Portal/DocView.aspx?id=105077&repo=r -704298fc City Council, February 6, 2023; Agenda Item #3; CMR 2212-0513; https://portal.laserfiche.com/Portal/DocView.aspx?id=61647&repo=r -704298fc&searchid=dfeb2c99-41c5-4b0f-87bb- b0704738eb9c
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to pensions, including the use of a lower 5.75% discount rate (CMR 2212 -05133). The most recent actuary analysis projects that the City will meet a 90% funded goal for pension plans by FY 2034 (miscellaneous plan) and FY 2036 -37 (safety plan); the City’s practice of transmitting excess one -time savings will help reach these goals sooner.

In this forecast, approximately $8. 8 million in the General Fund in supplemental contributions to the City’s Pension Trust is assumed in FY 2027. Through FY 202 6, a total of $ 101.8 million ($65.5 million in the General Fund) in principal contributions are expected to be made to the Pension Trust for pension benefits. Through FY 202 6, it is expected that $ 17.5 million in principal contributions will be made to the CERBT Fund for retiree healthcare benefits.

Healthcare: Consistent with the most recent labor agreements between the City and its bargaining units, the City’s contribution amounts towards medical costs for employees are based on a flat rate contribution from the City, with the employee contributing towards the remaining medical plan premium. Like salaries, healthcare costs are updated in accordance with applicable Memorandum of Agreements (MOA) between the City and its labor groups and the Management and Professional Personnel and Council Appointees Compensation Plan(s). For FY 2027, Healthcare costs are projected at $15.4 million.

Workers’ Compensation: The budget appropriation for workers’ compensation includes an estimate for claims incurred and reserves for current filings at an 85% confidence level, based on actuarial studies completed by Bickmore. Actuarial estimates completed in August 2024 informed FY 2027 budget levels. More recent actuary estimates completed in August 2025 project expense levels to increase, but the allocation between the General Fund and other funds to remain consistent. Staff will continue to monitor expenditures in the fund and bring forward adjustments as necessary. Estimates for workers’ compensation increase in the forecast at rates consistent with general CPI increases.

Contract Services
This forecast assumes contract services of $35.7 million in FY 2027, a 3.1% increase from the FY 2026 Adopted budget of $34.6 million. This increase for FY 2027 is driven primarily by known contractual increases and a general 3% CPI cost increase on contracts that do not have defined annual increases, based on a review of the changes in the California Consumer Price Index (CCPI) in the San Francisco Bay Area from the August -to-August period. It is expected that the estimated CPI increases will be substituted with department base budget requests to adjust contract funding needs as part of the FY 2027 budget process.

Contract Services - Committed Additions
The Committed Additions included in this forecast account for anticipated operating and maintenance (O&M) costs in the General Fund for capital projects anticipated to come online within the ten -year forecast period. Costs for projects that came online in FY 2026 have been annualized into the ongoing General Fund operating budget as part of the LRFF. The preliminary total estimate is $52,300 for costs associated with the following projects anticipated to come online in FY 2027: Dog Park Installation (PG - 18001), Fire Station 4 (PE -18004), Library Automated Materials Handling (LB -21000), and Park Restroom Installation (PG-19000). Additional cost increases of 3.0% annually are included throughout

3 City Council, February 6, 2023; Agenda Item #3; CMR 2212-0513; https://portal.laserfiche.com/Portal/DocView.aspx?id=61647&repo=r -704298fc&searchid=dfeb2c99-41c5-4b0f-87bb- b0704738eb9c
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the ten-year forecast based on a review of the changes in the California Consumer Price Index (CCPI) in the San Francisco Bay Area from the August-to-August period. Timing and analysis of the funding needs for these projects will be evaluated as part of the FY 2027 Budget process and development of the 2027-2031 Capital Improvement Plan (CIP).

TABLE 3: FY 2027 – FY 2036 Committed Additions (Millions)

FY
2027
FY
2028
FY
2029
FY
2030
FY
2031
FY
2032
FY
2033
FY
2034
FY
2035
FY
2036
$0.05 $0.05 $0.07 $0.11 $0.12 $0.12 $0.14 $0.14 $0.16 $0.17

Supplies and Materials
The FY 2026 Adopted Budget for the General Fund included $3.6 million for Supplies and Materials, which is anticipated to increase by a 3.0% CPI cost increase in FY 2027 to $3.7 million based on a review of the changes in the California Consumer Price Index (CCPI) in the San Francisco Bay Area from the August-to-August period. This annual increase is adjusted to 4% starting FY 2029 through the ten - year forecast period. It is expected that the estimated CPI increases will be substituted with department base budget requests to adjust funding for supplies and materials as part of the FY 2027 budget process.

General Expense
This category includes costs for travel and meetings, telephone and non- city utilities, contingency accounts and reserves, bank card service charges, and subsidies and grants provided through the Human Services Resource Allocation Program (HSRAP). The FY 2026 Adopted Budget of $18.4 million is expected to decrease to $15.5 million in FY 2027, primarily reflecting a planned year over year reduction in appropriations for settlement payouts and the anticipated use of the Budget Uncertainty Reserve to balance the FY 2027 budget. This reserve was partially used to balance the FY 2026 Adopted Budget ($5.9 million), leaving funding to partially fund the anticipated gap in FY 2027 ($14.9 million).

The reduction is partially offset by a 3.0% annual CPI cost increase on smaller items that do not have a set annual budget, based on a review of the changes in the California Consumer Price Index (CCPI) in the San Francisco Bay Area from the August -to-August period. It is expected that the estimated CPI increases will be substituted with department base budget requests to adjust funding for general expense items as part of the FY 2027 budget process.

General Expense – Project Homekey
On September 27, 2021 the City Council directed staff to apply for Project Homekey funding in conjunction with LifeMoves to build an emergency shelter at the former Los Altos Treatment Plant (LATP) site (CMR 13595
4). This project will deploy modular housing to provide interim housing opportunities for homeless individuals and families in the City of Palo Alto. Project Homekey is a program, funded by the State of California Department of Housing and Community Development, intended to provide grant funding and facilitate a partnership with the State to quickly acquire, rehabilitate, or master lease a variety of housing types. Once developed, these projects provide interim or permanent housing options for persons experiencing homelessness. The site will be operated for at

4 City Council, September 27, 2021; Agenda Item #10, Page 268; CMR 13595; https://www.cityofpaloalto.org/files/assets/public/v/6/agendas -minutes-reports/agendas-minutes/city-council-agendas- minutes/2021/09-september/20210927/210927accsm-amended-final.pdf#page=268

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least fifteen years as interim housing per the program’s durational requirement. This project will utilize a combination of funding sources including the Project Homekey Program for capital expenses and donations, grant funds, and City support for ongoing operations expenses. This LRFF includes the City’s committed investment of $7.0 million in operating expenses ($1.0 million annually FY 2025 through FY 2031). Some operating funding support is expected from Project Homekey as well as the County of Santa Clara. Any remaining gaps in funding will need to be closed by fundraising, operating cost containment strategies, and/or grant funds.

General Expense - Cubberley Lease
The City and PAUSD adopted a tentative agreement between the City and PAUSD for land acquisition and amends the City’s leased portion of the Cubberley site. Although this agreement still needs to be approved by the City Council, this report assumes a lease costs for Cubberley of $2.5 million , the current lease of $2.0 million increases to $2.5 million if PAUSD vacates its leases . Future lease costs and terms beyond current agreement are subject to renegotiation between the City and PAUSD.

Rents and Leases
The Rents and Leases expense category for FY 2027 is estimated to increase from the FY 2026 Adopted Budget level by approximately 2.7% to $1.5 million. This is based on current lease terms that include previously negotiated lease increases. This category includes the lease agreement for Development Services staff at locations outside City Hall (285 Hamilton and 526 Bryant) as well as the lease with Stanford for El Camino Park. A new lease agreement was executed in December 2020 for the Development Services office location at 526 Bryant Street, limiting the space to the basement level (CMR 11426
5). The lease was amended in September 2022 to extend the term initially for 12 months with the right to automatically extend for four successive 12 -month periods, potentially through January 31, 2028 (CMR 14713 6). In June 2021, the City entered into a seventh amendment for the Development Services office lease at 285 Hamilton Avenue to extend the term through January 2026 (CMR 12334
7). As expenses for rent for Development Services are adjusted, a corresponding revenue adjustment will be made to ensure Development Services maintains cost recovery levels.

Facilities and Equipment
Along with funding for various equipment needs across departments, this budget category includes subscription payments for equipment like public safety radios. The Facilities and Equipment expense category is expected to increase from the FY 2026 Adopted level of $536,000 to $552,000 due to standard inflationary adjustments. It is expected that the estimated CPI increases will be substituted with department base budget requests to adjust funding for equipment needs as part of the FY 2027 budget process.

Allocated Charges
Allocated Charges represent expense allocations by the City’s Enterprise and Internal Service Funds for

5 City Council, December 14, 2020; Agenda Item #5; CMR 11426; https://www.cityofpaloalto.org/files/assets/public/v/1/agendas -minutes-reports/reports/city-manager-reports-cmrs/year- archive/2020-2/id-11426.pdf?t=59979.32
6 City Council, September 27, 2022; Agenda Item #7; CMR 14713; https://portal.laserfiche.com/Portal/DocView.aspx?id=59256&repo=r -704298fc&searchid=583219cb-f413-40e9-9c79- 1e429984be88
7 City Council, June 21, 2021; Agenda Item #15; CMR 12334; https://www.cityofpaloalto.org/files/assets/public/v/1/agendas -minutes-reports/reports/city-manager-reports-cmrs/year- archive/2021/id-12334.pdf
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services and products they provide to other departments. The FY 2026 Adopted Budget for the General Fund included $30.7 million for these expenses, including utilities usage, general liability insurance, technology costs, vehicle equipment maintenance and replacement costs, and other charges for services provided by other City departments and funds. The FY 2027 allocated charges in the LRFF update the revenues and expenses for these various allocations based on the information available at the time of the LRFF development. FY 2027 is anticipated to experience an increase of 3.8 % to a total of $32.4 million. This increase is primarily due to anticipated higher costs associated with technology services and utilities for City facilities such as water, electricity, and gas.

Operating Transfers Out
Operating Transfers Out include transfers from the General Fund to Debt Service Funds, the Technology Fund, and various other funds but excludes transfers to the Capital Improvement Fund, which are detailed in the following Transfer to Infrastructure section. The FY 2026 Adopted Budget included Operating Transfers Out of $6.4 million. In FY 2027, Operating Transfers Out are anticipated to remain relatively flat of $6.3 million to maintain the same service levels. Consistent with the FY 2026 Adopted Budget, a total of $2.0 million across the University Avenue, California Avenue, and Residential Permit Parking Funds is factored into this LRFF.

Transfer to Infrastructure
The total General Fund transfer to the Capital Improvement Fund budgeted in FY 2026 is $ 32.3 million compared to the $30.2 million transferred in FY 2025. This is comprised of a $ 14.0 million base transfer, interest earnings of $ 1.1 million, $14.3 million from TOT revenue generated through voter - approved rate increases and new hotels that is dedicated to the Capital Improvement Fund to support the 2014 Council Infrastructure Plan, and $2.9 million of Utility User Tax (UUT) and Measure K Business Tax transferred directly in to specific capital projects, consistent with City Council direction. Looking ahead, estimated transfers from TOT revenues in FY 2027 are projected to increase to $14. 9 million and the base transfer to increase to $ 16.1 million, along with estimated interest earnings of $ 1.1 million, and $2.5 million of UUT and Measure K Business Tax transferred directly into specific capital projects, for a total $34.7 million transfer to the Capital Improvement Fund. This forecast continues 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. This budget category also includes the separate $1.9 million transfer to the Cubberley Property Infrastructure Fund. This transfer to the Cubberley Property Infrastructure Fund supports facility systems maintenance needs at the Cubberley Community Center facility as well as capital improvement projects to maintain and upkeep the facility.

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ATTACHMENT E
Assumptions Not Included in Forecast
It should be noted that this forecast does not include several potential impacts to the FY 2027 - 2036 LRFF that are outlined below. These items 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.

Project Homekey : Homekey Palo Alto, a modular interim housing shelter for unhoused individuals and families codeveloped by the City of Palo Alto and LifeMoves, continues to operate at the former Los Altos Treatment Plant (LATP) site. This LRFF incorporates the City’s ongoing committed investment of $7.0 million in operating expenses ($1.0 million annually for seven years). While the City's direct costs for this project are currently programmed, future fluctuations could occur over the ten- year period. Potential offsets may be available through business tax revenue specifically designated for affordable housing and homeless services that has not yet been fully allocated. Upon the completion of the initial 7 -year term, the source and structure of ongoing funding remain to be determined and will be evaluated in future forecast cycles.

Housing Growth Impacts : The City’s certified FY 2023 -31 Housing Element 1 outlines the
condition of the City’s current housing and future needs of its residents through citywide housing goals, objectives, and policies. The City is required to ensure adequate planning for its “fair share” of affordable and market rate housing, defined by its RHNA allocation of an additional 6,086 total units. The financial implications of this housing growth continue to evolve, increasing potential costs for land acquisition, planning and design, and construction, with potential offsets from new revenues such as sales tax and other economic benefits derived from more affordable housing. While significant planning has occurred, the full financial impacts, especially to the General Fund over the long term, have yet to be fully determined and incorporated into the LRFF.

Geng Road Safe Parking Program : The Geng Road program, launched in early 2021 in partnership with Santa Clara County, offers recreational vehicle (RV) dwellers a safe place to park, case management, and assistance with finding permanent homes. Following the City Council's approval to expand the site at 2000 Geng Road, the program’s capacity has increased (CMR 2407 -3274
2). Staff continues to work on securing funding for operations through the California Department of Housing and Community Development’s (HCD) Permanent Local Housing Allocation Program (PLHA). Even with grant funding, PLHA is not expected to fully fund the ongoing operations, and any balance of the costs may be funded by business tax revenue for affordable housing and homeless services that has not yet been fully allocated, or other sources as may be identified during the budget process.

Sustainability and Climate Action Plan (S/CAP) : The City continues to implement its Sustainability and Climate Action Plan (S/CAP) to meet the goal of reducing greenhouse gas (GHG) emissions to 80 percent below 1990 levels by 2030 (the “80x30” goal). Investments

1 City of Palo Alto FY 2023-31 Housing Element, https://paloaltohousingelement.com/wp- content/uploads/2024/08/Palo-Alto-Housing-Element.pdf
2 City Council, August 19, 2024; Agenda Item #10; Staff Report #2407-3274, https://portal.laserfiche.com/Portal/DocView.aspx?id=88920&repo=r -704298fc&searchid=1196faea-adb3-49fd-9006- dfb863754685
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continue across various City funds related to S/CAP, including grid modernization, infrastructure improvements, and electrification incentives. The S/CAP Work Plan provides a roadmap for these efforts, and the City has accounted for known capital projects and programmatic needs in its forecasts. However, uncertainties related to external factors, technological advancements, and the pace of adoption could impact the scope and scale of work needed to achieve the City’s long-term sustainability goals. These unknowns are not fully reflected in this forecast.

Significant Code and Ordinance Updates : Updates to several significant programs, codes, and ordinances continue to be necessary. Key initiatives include Seismic Inventory Ordinance and Program Development, Historic Building Survey and Ordinance Development, Zoning Code Updates, and the implementation of the 2040 Comprehensive Plan. While some costs associated with these updates were included in the forecast, additional resources may be required depending on future Council direction and the extent and pace of implementation efforts.

Fee and Organizational Studies: The City regularly conducts comprehensive cost allocation plans and municipal fee studies to ensure fees align with cost recovery policies. Following the implementation of recommendations from the FY 2025 study, staff continues to evaluate and bring forward adjustments to align fees with target cost recovery levels to cover general salary and benefits increases and CPI trends. These efforts aim to improve fee transparency and ensure equitable cost distribution across City services. Future adjustments based on subsequent studies are not fully factored into the outer years of this forecast.

Labor Negotiations : In FY 2025, the City successfully negotiated new labor agreements with most bargaining units, extending terms through December 2027 (SEIU) and June 2028 (IAFF, UMPAPA). Consistent with Council direction in previous LRFFs, a general 2% assumption is included for all employees in the years following the expiration of these agreements for forecasting purposes; this is not a commitment to future negotiations. Additionally, this forecast includes a level of reserve for potential changes in 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.

Grade Separation: The grade separation project consists of at-grade crossings along the Caltrain corridor in the City of Palo Alto. The City continues to advance the project through the Preliminary Engineering and Environmental Documentation (PE&ED) Phase (CMR 2404-2861 3).

Currently, staff is working with the Valley Transportation Authority (VTA) and Caltrain to allocate Measure B funding. As Grade Separation funding requires matching local funds, additional funding sources will need to be identified to perform this work in upcoming years.

Additional resources will need to be explored to plan and fund these grade separations, including City staff pursuing additional funding through grant opportunities and other financing mechanisms.

Parks Master Plan: The Parks, Trails, Natural Open Space and Recreation Master Plan 4 presents
a long-term vision for the system. While potential funding mechanisms have been identified for several high -priority projects and programs, a strategy to fund implementation of the entire

3 City Council, June 17, 2024; Staff Report #2404-2861, https://portal.laserfiche.com/Portal/DocView.aspx?id=73967&repo=r -704298fc&searchid=948efea6-f77f-4463-a371- dabd04cd097d
4 The Parks, Trails, Natural Open Space and Recreation Master Plan, 2017; https://www.cityofpaloalto.org/files/assets/public/public-works/palo-alto-parks-master-plan.pdf Item 12
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plan has not been completed. As such, this forecast does not yet contemplate the necessary investments 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 the Avenidas Senior Center, the Ventura Childcare Center, nor the Sea Scout Building. As costs around potential capital or operating investments for these assets solidify, staff will return to City Council to address them as appropriate. The Roth Building Rehabilitation continues to proceed under its funding strategy; however, if costs for rehabilitating the facility further increase, additional sources of funding would need to be identified.

Cubberley Community Center Redevelopment: Following the City Council's approval (CMR 2409 - 35005) of the MOU with PAUSD for the Cubberley Site purchase and lease, the LRFF includes the revised lease financial terms and maintains the Real Estate Investment Reserve. This reserve funds critical professional service contracts (i.e., master plan, community outreach) and serves as a placeholder for future real estate investment appropriations. However, the LRFF does not reflect any potential General Obligation bond cashflow or future operating costs and repairs for a redeveloped site, as these fiscal impacts will be informed by the ongoing development of operational and financial models.

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. As parking continues to be impacted by long -term shifts in demand, additional support or loans from the General Fund to the parking funds may be required. This LRFF assumes repayment revenue to the General Fund from previous parking loans in the outer years of the forecast. Staff will continue to review costs in the parking funds and revise funding needs and evaluate support as a loan or subsidy from the General Fund as part of the annual budget process.

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.

Aging or Noncompliant Infrastructure: The City maintains indoor and outdoor facilities, many of which have been identified in the City’s ADA transition plan and by the Infrastructure Blue Ribbon Commission as requiring capital project work to bring them up to full ADA compliance and/or sufficient conditions. Staff continues the program work needed in this area as part of the Americans with Disabilities Act Compliance capital project; however, the entire scope of work needed in this area exceeds current resources.

General Liability Umbrella Excess Premiums: The City’s General Liability Program provides funding to cover various insurance policies for City -owned equipment and machinery. General Liability Umbrella Excess Premiums are anticipated to increase in future years due to significant national events and natural disasters. Staff will bring forward adjustments for these costs as part of future budget cycles as they become available.

Fire and Ambulance Service Expansion: Staff continues to analyze options for fire and

5 City Council, October 7, 2024; Agenda Item #AA1; Staff Report #2409-3500, https://portal.laserfiche.com/Portal/DocView.aspx?id=98620&repo=r -704298fc&searchid=d8e93928-24cc-47b6-b45b- 978951b272c4
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ambulance service expansion. Any funding, appropriation, and labor negotiation related to such expansion will be guided by future City Council direction, and as such is not incorporated into the LRFF at this time.

Fire Training Center : The City continues to evaluate options for the Fire Training Facility Replacement capital project, including identifying an appropriate site or partnering with other local jurisdictions. Funding for construction has not been fully appropriated, and additional resources will need to be identified in future budget cycles based on the results of ongoing studies and consultant engagements.

Limited Term Programs: There are several programs currently in progress that are funded on a limited term basis per Council approval. If these programs are recommended to continue through the ten-year forecast period, additional resources would be needed. These include the Psychiatric Emergency Response Team (PERT) program and the Palo Alto Link on -demand transit service, which rely on a mix of City funding, grants, and partner contributions that may require renewal or backfill in future years.

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 full Electric Vehicles (EVs) is part of the City’s sustainability goals. It has been estimated that significant additional funding across all funds will be needed annually in order to replace all City vehicles with EVs.

Green Storm Infrastructure (GSI) Maintenance : The City is subject to the requirements of the Municipal Regional Stormwater National Pollutant Discharge Elimination System Permit. The City expects to have significantly more Green Stormwater Infrastructure (GSI) and associated maintenance in the coming years to comply with permit provisions. The long -term cost of this maintenance is still being quantified and is not fully reflected in this forecast.

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Summary of Positions & Vacancy by Department Attachment B Department Fiscal Year Adopted FTE Filled FTE Total Footnote City Attorney
2019 11.00                    9.00            2.00
2020 11.00                    11.00          ‐
2021 11.00                    10.00          1.00
2022 11.00                    11.00          ‐
2023 11.00                    11.00          ‐
2024 13.00                    11.00          2.00
2025 13.00                    13.00          ‐
City Auditor
2019 6.00                      6.00            ‐
2020 5.00                      4.00            1.00
2021 4.00                      4.00            ‐
2022 1
2023
2024
2025
City Clerk
2019 5.00                      5.00            ‐
2020 5.00                      4.00            1.00
2021 5.00                      4.00            1.00
2022 5.00                      5.00            ‐
2023 5.00                      4.00            1.00
2024 5.00                      3.00            2.00
2025 5.00

5.00            ‐
City Manager
2019 12.00                    10.00          2.00
2020 10.75                    7.75            3.00
2021 10.00                    7.00            3.00
2022 9.00                      4.00            5.00
2023 12.00                    11.00          1.00
2024 13.00                    12.25          0.75
2025 14.00                    14.00          ‐
Administrative Services
2019 58.50                    54.30          4.20
2020 58.50                    50.00          8.50
2021 59.50                    52.00          7.50
2022 53.50                    46.50          7.00
2023 55.50                    46.50          9.00
2024 57.00                    51.50          5.50
2025 60.00                    51.50          8.50
Community Services
2019 78.60                    73.53          5.07
2020 78.60                    74.60          4.00
Source: FY 2019 ‐2025 Adopted Operating Budget Books ‐ De pt Org Charts, At Place Memos ‐ Vacancy Reports as of April of that Calendar Year Vacant FTE
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Staffing by Department -
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Department Fiscal Year Adopted FTE Filled FTE Total Footnote Vacant FTE
2021 78.60                    74.95          3.65
2022 71.25                    63.25          8.00
2023 74.35                    70.60          3.75
2024 82.25                    79.50          2.75                      2 2025 82.25                    77.25          5.00
Development Services
2019 20.00                    20.00          ‐
2020 3
2021
2022
2023
2024
2025
Fire
2019 103.70                96.70          7.00
2020 103.50                99.50          4.00
2021 105.50                103.50       2.00
2022 94.50                    89.50          5.00
2023 107.50                99.50          8.00
2024 110.50                92.50          18.00                    4 2025 113.50                103.50       10.00
Human Resources
2019 17.00                    16.00          1.00
2020 17.00                    16.00          1.00
2021 17.00                    16.25          0.75
2022 16.00                    12.00          4.00
2023 17.00                    14.00          3.00
2024 19.75                    17.75          2.00
2025 19.75                    18.75          1.00
Infor mation Technology
2019 33.00                    31.00          2.00
2020 33.00                    31.00          2.00
2021 33.00                    33.00          ‐
2022 29.00                    24.00          5.00
2023 31.00                    29.00          2.00
2024 34.00                    32.00          2.00
2025 35.00                    31.00          4.00
Library
2019 47.50                    44.50          3.00
2020 46.50                    43.50          3.00
2021 47.50                    43.50          4.00
2022 40.50                    32.00          8.50
2023 46.50                    35.50          11.00
2024 49.00                    39.00          10.00
2025 49.00                    43.00          6.00
Office of Emergency Services
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Department Fiscal Year Adopted FTE Filled FTE Total Footnote Vacant FTE
2019 3.00                      3.00            ‐
2020 3.00                      3.00            ‐
2021 3.00                      3.00            ‐
2022 2.00                      2.00            ‐
2023 2.00                      2.00            ‐
2024 3.00                      3.00            ‐
2025 3.00                      3.00            ‐
Office of Transportation
2019 6
2020 15.00                    15.00          ‐
2021 15.00                    15.00          ‐
2022 15.00                    13.00          2.00
2023 15.00                    15.00          ‐
2024 17.00                    15.00          2.00
2025 18.00                    16.00          2.00
Planning & Development Services
2019 42.46 28.96           13.50                    7
2020 51.00                    33.50          17.50
2021 51.00                    46.00          5.00
2022 45.00                    41.00          4.00
2023 52.00                    39.00          13.00
2024 56.00                    47.00          9.00
2025 61.00                    50.00          11.00                    8 Police
2019 156.50                133.50       23.00
2020 150.50                128.50       22.00
2021 148.50                144.50       4.00
2022 125.50                116.50       9.00
2023 134.50                120.50       14.00
2024 140.50                124.50       16.00                    9 2025 140.50                131.50       9.00
Public Works
2019 202.00                186.12       15.88
2020 199.50                181.50       18.00
2021 198.25                176.00       22.25
2022 193.25                158.00       35.25
2023 200.50                177.00       23.50
2024 207.00                179.00       28.00
2025 208.00                185.00       23.00
Utilities
2019 244.50                206.40       38.10
2020 245.00                215.00       30.00
2021 245.00                212.00       33.00
2022 245.00                198.00       47.00
2023 253.50                199.50       54.00
2024 257.00                219.00       38.00
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Department Fiscal Year Adopted FTE Filled FTE Total Footnote Vacant FTE
2025 267.00                225.00       42.00
Reconciling Difference (org chart vs total FTE)
2019 (0.59)
2020 (2.00)
2021 (3.00)
2022 (0.50)
2023 (0.50)
2024 0.90
2025 (3.10)
Total for 2019 1,041.35            924.01       116.75
Total for 2020 1,034.85            917.85       115.00
Total for 2021 1,034.85            944.70       87.15
Total for 2022 956.00                815.75       139.75 Total for 2023 1,017.85            874.10       143.25                 10 Total for 2024 1,063.10            926.00       138.00                 11 Total for 2025 1,092.10            967.50       121.50
Grand Total 7,240.10            6,369.91   861.40
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Department Footnote Description
City Auditor 1 After conducting a competitive process Council selected Baker Tilly as the City's Auditing firm. This function remains with Baker Tilly through the writing of this report.

Community Services
2 FY23 and FY24 CSD had significant position restorations including Assistant Director and Division Manager level classifications frozen during the pandemic. FY24 also saw small increases in services/positions within Art Center, JMZ, and Theaters.

Development
Services 3 The Development Services Department was combined with the Planning and Community Environment Department in FY 2020 to form the Planning and Development Services Department.

Fire 4 The vacancy number reflects 18 vacancies but 8 of those were newly hired firefighters in the onboarding process and not yet reflected in the report. We typically hire more than 8 firefighters at a time.

Fire
5 Addition of 7.0 FTE positions to create the initial/pilot Single Role EMS Division of the Fire Department and 3.0 FTE Fire Captain positions to permanently cross staff Engine 64 and Medic 64 (per council directive in FY25).

Office of
Transportation 6 In FY 2020 Office of Transportation was created within the City Manager's office, these positions were transferred from Planning and Community Environment.

Planning and
Development
Services
7 See footnote 3.

Planning and
Development
Services
8 In FY23 Planning underwent an organizational structure review and analysis resulting in changes to the structure and needed classification to meet increasing planning demands in long term planning and development services. These changes were implemented in FY24 consistent with this review and the recommendations.

Police
9 Restored various positions including 2.00 Public Safety Dispatchers to the Dispatching Servicing Team due to the high volume of calls for service and restored 2.00 Police Officers to the Traffic Enforcement Division due to increasing community concern regarding traffic safety around the City.

Total for 2023
10 FY 2022, the City Council approved amendments to realign the budget with a more optimistic economic outlook and proactively reinvest in activities that addressed the most immediate needs of the City and its residents into FY2023.

Total for 2024 11 FY 2024 Budget continues to invest in staffing resources that support City services and Council priorities.

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Staffing by Department -
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Palo Alto City CouncilJanuary 20, 2026

Palo Alto City Council
January 20, 2026