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.
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 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.
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. 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
6 wildfire risk and improve
community resilience.
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.