1 City of Palo Alto
Office of the City Auditor
City of Palo Alto Utility Reserves Advisory Report
March 27, 2026
Contents
Baker Tilly Advisory Group, LP and Baker Tilly US, LLP, trading as Baker Tilly, operate under an alternative practice structure and are members of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. Baker Tilly US, LLP is a licensed CPA firm that provides assurance services to its clients. Baker Tilly Advisory Group, LP and its subsidiary entities provide tax and consulting services to their clients and are not licensed CPA firms.
EXECUTIVE SUMMARY .................................................................................................. 1 PURPOSE OF THE ASSESSMENT ........................................................................................................ 1 REPORT HIGHLIGHTS ............................................................................................................................... 1 INTRODUCTION ............................................................................................................... 7 OBJECTIVE ................................................................................................................................................... 7 OVERVIEW .................................................................................................................................................... 7 SCOPE AND PROCEDURES ................................................................................................................... 7 DETAILED ANALYSIS ..................................................................................................... 8
1 Executive Summary
Purpose of the Assessment
Baker Tilly Advisory Group, LP (Baker Tilly), in its capacity serving as the Office of the City Auditor (OCA) for the City of Palo Alto (the City or Palo Alto ), conducted a City of Palo Alto Utilities (CPAU) Advisory Project based on approved Task Order 4.38 as part of the City’s Fiscal Year (FY) 2026 Audit Plan. The purpose of this project was to assess CPAU's Reserve policies and benchmark them against peer agencies.
Report Highlights
Overview of
Current
Reserves:
(Page 9)
Consistency
w/ Regulatory
Reserve
Margin
Requirements:
(Page 16)
Overview of Current Reserve Funds and Reserve Policies
Utility reserve funds provide a safety net for municipal utilities and can help agencies stabilize rates, respond to emergencies and plan for capital improvements, while ensuring the utility remains credit worthy and financially healthy.
• Current reserve policies contain multiple prescribed transfer rules that require the tracking of reserve funds to minimum, target, and maximum levels resulting in significant administrative burden.
• Reserve funds and policies for the Wastewater Treatment Utility, Refuse Utility, and Stormwater Utility date back to the early 1990s and are no longer aligned with other utilities reserve policies which were updated in June 16, 2025.
The Electric Special Projects Reserve appears to serve similar purposes with the CIP Reserves. As such, additional clarity on the intended use of these funds may be necessary.
Consistency with Regulatory Reserve Margin Requirements Policies
The City’s bond covenants contain specific reserve requirements for the outstanding Water Revenue Bonds, 2009 Series A (2009 Bonds) and the Utility Revenue Refunding Bonds, 2011 Series A (2011 Bonds)(collectively, Utility Bonds). Relevant cash reserve credit rating targets from S&P and Moody’s are also discussed in this section of the report.
• Both the Rate Covenant and Available Reserves Covenants are monitored and tracked by the Administrative Services Department. Current utility reserve policies do not specifically address the Rate Covenants or Available Reserve Covenants made by the City in the official statements and legal documents for the outstanding 2009 and 2011 bonds. According to the latest Ratings Affirmation from S&P on the outstanding 2011 and 2009 bonds, Palo Alto is in compliance with the Rate and Available Reserves Covenants. The City could consider referencing these documents in its reserve policies.
2 EXECUTIVE SUMMARY
Operational /
Industry Best
Practices:
(Page 20)
• When determining credit ratings, rating agencies ultimately rate a utility based on a holistic financial profile. Rating agencies outline cash reserve targets as a guideline and is one of the many differing levels of creditworthiness. While the current reserve policies do not include cash reserve targets that correspond to the amounts laid out in credit agency rating guidelines, an important factor to consider is maintaining sufficient cash reserves to maintain credit ratings for the City’s utilities. • The outstanding 2009 and 2011 Bonds contain an overly burdensome reserve requirement covenant that is not a market standard, particularly for high-grade utility credits. The reserve requirement for the 2009 and 2011 Bonds require that the Electric Fund, the Gas Fund, and the Water Fund be combined for an Available Reserves Test. With future issuances, City Utilities can remove this Available Reserves Test form its covenants.
The 2011 Bonds mature in June 2026. Refunding the 2009 Bonds is being evaluated by the City. Once both Utility Bonds are defeased, City Utilities will no longer have to consider compliance to the Available Reserves Test separate from its reserve policies.
Operational / Industry Best Practices
This section of the report includes information on common best practices for operational reserves and capital improvement reserves from the Government Finance Officers Association (GFOA) and best practices that Baker Tilly employs when working with Utility clients.
• Current operations reserve fund policies are in alignment with the GFOA’s recommendations for operating reserves, however, the Wastewater Treatment Utility, Refuse Utility and Stormwater Utility do not currently have operations reserve funds. Wastewater Treatment Utility is currently working with a consultant to review their reserves.
• Current reserve policies for the City’s CIP reserve funds specify a maximum reserve guideline level that is equivalent to one-year of average capital improvements. In Baker Tilly’s experience, one-year of average capital improvements is the amount most frequently used as a target level of reserves in a CIP reserve fund. We consider this a best practice as setting aside one-year worth of capital improvement expenditures allows for the ongoing replacement of necessary infrastructure. It should be noted that when determining the one-year average capital improvement amount, Baker Tilly recommends that reappropriations and commitments (and the funds set aside for them) should not be considered. • While Baker Tilly considers one-year of average capital improvements a best practice CIP reserve level, GFOA recommends that capital reserve level development should be designed to best serve the particular needs of a given organization. As such, an amount less than our
3 EXECUTIVE SUMMARY
Benchmarked
Comparables:
(Page 22)
recommendation could be considered. Alternatively, another approach to determining a CIP reserve fund guideline level could be to maintain one- year or a percentage of one-year of depreciation expense in reserve balances.
• The current CIP reserve fund policy does not make a distinction between budgeted CIP expenses to be funded by cash or CIP expenses to be funded by Bonds or other funding sources. The best practice for this reserve policy would be to separate those two types of CIP expenses, and craft reserve guideline levels based on CIP expenses to be funded by cash. This ensures that reserve fund amounts in a given year are not artificially inflated due to large projects that will be funded through other funding sources.
Local Economy Specific Reserves Through Benchmarking Comparables
This assessment benchmarked reserve policies from the Roseville, Santa Clara, Healdsburg and Pasadena cities, as well as, San Jose Energy CCA (collectively, the “benchmarked communities”) and compares their policies to CPAU’s reserve policies.
• Rate stabilization reserve funds for the City’s Electric, Water, and Wastewater Collection Utilities do not contain formally established guideline reserve levels while most benchmarked communities specify varying target levels.
• Operation and maintenance reserve funds for the City’s Electric, Water, and Wastewater Collection Utilities have more prescriptive guidelines reserve levels through the establishment of minimum, target, and maximum guideline levels compared to the benchmarked communities.
The benchmark communities, with just one exception used only minimum guideline levels for the operation and maintenance reserve funds. The minimum guideline levels were most typically based on a specified amount of days operating expenses.
• Note that when analyzing operating reserves vs. rate stabilization reserves, Baker Tilly specifically compared Palo Alto’s rate stabilization reserve fund policies to only rate stabilization reserve fund policies for the Benchmark Communities, and Palo Alto’s operation reserve fund policies to operation reserve fund policies for the Benchmark Communities. • The Benchmark Communities typically have some or all of the three commonly established reserve funds that Palo Alto Utilities with updated reserve policies have, which are the rate stabilization reserve, the operations and maintenance reserve, and the CIP reserve. • The City’s Electric, Water, and Wastewater Collection Utilities have set minimum and maximum guideline levels for the capital replacement and improvement reserve funds, while all other benchmark communities with
4 EXECUTIVE SUMMARY
Reserve
Tracking:
(Page 35)
capital replacement and improvement reserve funds only had target guideline levels.
• In general, the reserve policies for CPAU are more detailed and cumbersome than the policies of the benchmarked communities. CPAU has more funds established to hold cash reserves and its policies are more detailed in terms of guideline levels and sources and uses of those reserve funds when compared to others.
Reserve Tracking – Key Observations
This section of the report examines the current requirements and processes for tracking reserves.
• Utility Management tracks reserves on an annual basis in conjunction with the development of each individual Utility’s Financial Plan. A reserve tracking policy with guidance included to report instances when reserve fund balances do not meet guideline levels to Council may provide more assurance that reserve targets are being met throughout the year and equip the Council with better information to make financial decisions than the current reporting process.
Key Recommendations
1. Update Dated Policies - the Wastewater Treatment, Refuse, and Stormwater Utilities’ operations, rate stabilization, and CIP reserve funds policies should be updated to align with similar reserve policy guidelines in other CPAU utilities. When updating, management should consider the need for the existing reserve funds in these Utilities that are not common across other CPAU utilities, including the Emergency Plant Replacement Reserve Fund, the Notes and Loans Reserve Fund for the Wastewater Treatment Utility, and the Landfill Corrective Action and Geng Road Reserve funds for the Refuse Utility. If no longer necessary, these funds should be closed out and the money transferred to other funds in place.
2. Do not eliminate any of the current reserve funds in place – With the exception of the utilities with dated policies mentioned above, all City Utilities have in common three reserve funds: operations, rate stabilization, and CIP reserve funds. Baker Tilly views maintaining each of these reserve funds as a best practice. Additionally, as shown in the Benchmarking Comparables section of the report, many of the Benchmark Communities share these same common reserve funds in their utilities. Specifically, the City of Roseville Water and wastewater utilities, the City of Santa Clara electric utility, and the San Jose clean energy electric utility all have both rate stabilization and operation
5 EXECUTIVE SUMMARY
and maintenance reserve funds. The City of Healdsburg water and wastewater utilities have operation and maintenance, rate stabilization, and capital improvement reserve funds. What’s more, all Benchmark communities utilities that were reviewed had at least one of the three of these reserve funds.
Palo Alto Utilities reserve funds separate from the three commonly shared reserve funds are in place for specifically defined and valid purposes and should remain in place until those purposes are accomplished or are no longer applicable.
3. Clarify CIP Reserve Fund Language – the Electric Special Project Reserve within the Electric Utility is distinct from the CIP Reserve Fund. While both of these funds are purposed for capital projects clarity on intended use of funds is recommended.
4. Consider adjustment to CIP Reserve Fund Guideline Levels – Consider adjustment to CIP Reserve guideline levels to align with Baker Tilly’s recommendation to maintain in the CIP reserve fund 20% of 60 months of budgeted CIP expenses or alternatively, one-year of depreciation expense in the CIP reserve fund. CIP expenses should only include those intended to be funded by Utility cash and not those projects intended to be funded by bonds or other outside sources of funding.
5. Adjust Rate Stabilization Reserve Policy to align with Bond Covenants and Benchmark Communities – Consider establishing:
• Minimum guideline levels in the Rate Stabilization Reserve Funds for the Electric, Gas, and Water Utilities to ensure reserve balances meet or exceed the current Available Reserves Bond Covenants. Note: Staff is evaluating refunding of the 2009 Bonds and a normal payoff of the 2011 Bonds in June 2026, which would eliminate the need to make a change to these minimum guideline levels due to this Bond Covenant. • Target guideline levels for these funds for the Electric, Gas and Water Utilities should be at the higher of the minimum guideline level required by the Available Reserve Bond Covenants or a specified percentage of the total operating revenues or operating expenses in the current fiscal year so that the Rate Stabilization Reserve could hold funds in excess of the amount dictated by bond covenants to be used for its defined purposes. • The rate stabilization fund for Utilities without the Available Reserve Bond Covenants in place (Wastewater Collection, Wastewater Treatment, Refuse, and Stormwater) should have a target guideline level based on a specified percentage of total operating revenues or operating expenses in the current fiscal year.
6 EXECUTIVE SUMMARY
• For reference, the benchmarked community rate stabilization fund targets varied between 10 to 65% of either revenues or expenses. The larger the percentage selected, the more reserve funds would be available to stabilize future rate increases. The percentage of operating revenues or expenses to be used as a target guideline level should be determined by Utility Management based on the amount desired to be held in the fund to help stabilize future rate increases.
• Revising wording in the policy from “If there are funds in the Rate Stabilization Reserve at the end of any fiscal year, any subsequent Utility Financial Plan must result in withdrawal of all funds from this Reserve by the end of the Financial Planning Period.” to “If a Utility Financial Plan proposes a rate increase, the funds in the Rate Stabilization Reserve Fund in excess of the target amounts must be drawn down to offset the proposed rate increase.”
6. Formalize Reserve Tracking – Develop a reserve tracking policy with reporting requirements to City Council on a regular basis. The policy could include a schedule prepared for each Utility showing the current reserve fund balances compared to the amount that should be held in those funds based on established guideline levels, as well as an explanation of how those guideline levels are calculated and the reserve funds are used based on the relevant Utility’s reserve policies.
7 Introduction
Objective The purpose of this assessment was to assess and benchmark the City’s current Utilities Reserves Policies.
Overview The detailed report includes five sections: Overview of Current Reserve Funds and Reserve Policies, Compliance with Regulatory Reserve Margin Requirements, Operational/Industry Best Practices, Local Economy Specific Reserves Through Benchmarking Comparables, and Reserve Tracking. These sections include the information obtained through our research and outline our thought process in developing the proposed recommendations for adjustments to the City's current Utility Reserve Policies.
Scope and
Procedures
The OCA performed the following procedures:
• Gathered all relevant information on the Utility Reserve Policies currently in place; • Interviewed Utility personnel to gain a comprehensive understanding of these policies;
• Researched applicable information on Utility reserve policies, operational & industry best practices;
• Researched reserve policies for comparable communities to provide benchmarking information regarding the reserve funds;
• Analyzed and outlined observations regarding the current Utility Reserve Policies against best practices, and
• Developed recommendations for decision makers to consider for updating the current Utility Reserve Policies.
The OCA greatly appreciates the support of the CPAU and Administrative Services Department in conducting this assessment.
Thank you!
8 DETAILED ANALYSIS
Detailed Analysis
Overview of Current Reserve Funds and Reserve Policies
Utility reserve funds provide a safety net for municipal utilities and can help an agency stabilize rates, respond to emergencies and plan for capital improvements, while ensuring the utility remains credit worthy and financially healthy. This section of the report to provides a detailed overview of the current reserve funds and reserve policies for each of the City’s Utilities. Below is a chart that provides a listing of all the reserve funds in place and whether those reserve funds are in place in the individual utility listed at the top of each column. Utilities not listed in this chart were not analyzed as a part of this engagement. The remainder of this section provides the details of these reserve funds and their associated policies categorized by the reserve funds that are common across all utilities and the reserve funds that are unique to specific utilities.
Current Reserve Funds in Place for the Utility?
Electric Gas Wastewater
Collection Water Wastewater
Treatment Refuse Stormwater
Operations Yes Yes Yes Yes No No No
Rate Stabilization Yes Yes Yes Yes Yes Yes Yes
CIP Reserves Yes Yes Yes Yes No No No
Electric Special Projects Yes No No No No No No
Underground Loan Yes No No No No No No
Hydroelectric Stabilization Yes No No No No No No
Electrification Reserve Yes No No No No No No
Public Benefits Yes No No No No No No
Low Carbon Fuel Standard Yes No No No No No No
Cap and Trade Program Yes Yes No No No No No
Emergency Plant Replacement No No No No Yes No No
Landfill Corrective Action Reserve No No No No No Yes No Geng Road Reserve No No No No No Yes No
Notes and Loans No No No No Yes No No
Reserve Funds included in all Utilities
Unless otherwise noted, guideline levels for reserve funds are based on the reserves management practices document for each utility.
Rate Stabilization
The purpose of the Rate Stabilization Reserve Fund is to manage the trajectory of future year rate increases. Withdrawal of funds from Rate Stabilization Reserves requires action by the City Council. If there are funds at the end of any fiscal year, any subsequent Financial Plan must result in the withdrawal of all funds from the Reserves by the end of the Financial Planning Period. The Council may approve exceptions to this requirement, when proposed by staff to provide greater rate stabilization to customers.
City of Palo Alto ACFR FYE June 30, 2025 (Page 112)
9 DETAILED ANALYSIS
Rate Stabilization Reserves for Wastewater Treatment and Refuse have set Minimum, Target, and Maximum Levels, which are defined as a % of sales revenue. There is only a Target Level for Stormwater.
Guideline Levels
Wastewater
Treatment (1)
Refuse (1)
Stormwater (2)
Minimum 15% 10% N/A
Target 22.5% 15% $500,000
Maximum 30% 20% N/A
(1) % of sales revenue. Levels found in City Council CMR:263:3 from May 6, 1993
(2) Target Level found in City Council CMR:320:0 from May 24, 1990
Rate Stabilization Reserves for Electric, Gas, Wastewater Collection and Water do not have set Minimum, Target and Maximum Levels.
Reserve Funds unique to specific utilities
Operations
The purpose of the Operations Reserve Fund is to manage normal variations in costs and as a reserve for contingencies. The Operations Reserve Fund is found within the Electric Utility, Gas Utility, Wastewater Collection Utility, and Water Utility.
The Minimum, Target, and Maximum level of reserves for the Electric, Gas, Wastewater Collection, and Water Utilities are defined by the number of days of expenses that should be covered. Based on the current reserve policies, these guideline levels are as follows:
Guideline Levels
Electric
Supply (1)
Electric
Distribution (2)
Gas (3)
Wastewater
Collection (4)
Water (5)
Minimum 60 60 60 60 60
Target 90 90 90 105 90
Maximum 120 120 120 150 120
(1) Days of Electric Supply Fund O&M and Commodity Expense (2) Days of Electric Distribution Fund O&M Expense
(3) Days of Gas O&M and Commodity Expense
(4) Days of Wastewater Collection O&M and Commodity Expense (5) Days of Water O&M and Commodity Expense
Electric Utility Reserves Management Practices, Gas Utility Reserves Management Practices, Wastewater Collection Utility Reserves Management Practices, Water Utility Reserves Management Practices, City Council CMR:320:0, City Council CMR:263:3
10 DETAILED ANALYSIS
Based upon policy, it should be noted that if, at the end of any fiscal year, the funds remaining in the Operations Reserves are lower than the minimum level set forth above, staff shall present a plan to the City Council to replenish the reserve. The plan shall be delivered within six months of the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its minimum level by the end of the following fiscal year. In addition, staff may present an alternative plan that takes longer than one year to replenish the reserve.
The policy also states that if, at the end of any fiscal year, either Operations Reserve is higher or lower than the target level, any Financial Plan for a Utility shall be designed to return Operations Reserves to their target levels by the end of the forecast period considered in the Financial Plan.
Also, based upon policy, if at any time the Operations Reserve reaches its maximum level, no funds may be added to this Reserve. Any further increase in that fund's Fund Balance shall be automatically included in the Unassigned Reserves.
CIP Reserves
The purpose of the CIP Reserve Fund is to manage cash flow for capital projects and to act as a reserve for capital contingencies such as overage amounts for a project. The CIP Reserve Fund is found within the Electric Utility, Gas Utility, Wastewater Collection Utility, and Water Utility.
The Minimum and Maximum Level guidelines are the same for Electric, Gas, Wastewater Collection, and Water for the CIP Reserves Fund.
Guideline Levels
Minimum 20% of the maximum CIP Reserve guideline level
Maximum Average annual (12 month) CIP budget, for 48 months of budgeted CIP expenses
These guideline levels are calculated for each fiscal year of the Financial Planning Period and approved by Council resolution.
Based upon policy, it should be noted that if, at the end of any fiscal year, the minimum guideline is not met, staff shall present a plan to the City Council to replenish the reserve. The plan shall be delivered by the end of the following fiscal year, and shall, at a minimum result in the reserve reaching its minimum level by the end of the next fiscal year.
Electric Utility Reserves Management Practices, Gas Utility Reserves Management Practices, Wastewater Collection Utility Reserves Management Practices, Water Utility Reserves Management Practices, City Council CMR:320:0, City Council CMR:263:3
11 DETAILED ANALYSIS
Also, based upon policy, it should be noted that if, at any time, the CIP Reserve reaches its maximum level, no funds may be added to this reserve. If there are funds in this reserve in excess of the maximum level staff must propose to transfer these funds to another reserve or return them to ratepayers in the next Financial Plan. Staff may also seek Council approval to hold funds in this reserve in excess of the maximum level, if they are held for a specific future purpose related to the CIP.
Electric Special Projects
The purpose of the Electric Special Projects (ESP) Reserve Fund is to fund projects that benefit electric rate payers. The Electric Special Projects Reserve Fund is found within the Electric Utility.
The Electric Special Projects Reserve Fund will be managed in accordance with the policies set forth in Resolution 9206 (Resolution of the Council of the City of Palo Alto Approving Renaming the Calaveras Reserve to the Electric Special Project Reserve and Adoption of Electric Special Project Reserve Guidelines) which was passed in 2011.
Below are the Electric Special Projects (ESP) Reserve Fund guidelines set forth in Resolution 9206:
• The purpose of the ESP Reserve is to fund projects that benefit electric ratepayers.
• The ESP Reserve Funds must be used for projects of significant impact. • Projects proposed for funding must demonstrate a need and value to electric ratepayers. The projects must have verifiable value and must not be speculative, or high-risk in nature.
• Projects proposed for funding must be substantial in size, requiring funding of at least $1 million.
• Set a goal to commit funds by the end of FY 2025.
• Any uncommitted funds remaining at the end of FY 2030 will be transferred to the Electric Supply Operations Reserve and the ESP Reserve will be closed.
Underground Loan
The purpose of the Underground Loan Reserve Fund is to fund a reserve for principal payments of outstanding Underground Loan(s). The Underground Loan Reserve Fund is found within the Electric Utility.
Based upon policy, it should be noted that, at the end of each fiscal year, the Underground Loan Reserve will be adjusted by the principal payments made against outstanding underground loans. There are no set Minimum, Target and Maximum Levels.
Electric Utility Reserves Management Practices
12 DETAILED ANALYSIS
Hydroelectric Stabilization Reserve
The purpose of the Hydroelectric Stabilization Reserve Fund is to manage the supply cost impacts with variations in generation from hydroelectric resources. The Hydroelectric Stabilization Reserve Fund is found within the Electric Utility.
Based upon policy, it should be noted that, near the end of each fiscal year, staff will determine the actual and expected hydro output for that fiscal year, compare that to the long-term average annual output level, and multiply the difference by the average of the monthly round-the-clock forward market prices for each month of the current fiscal year for the projected hydro output.
Staff is authorized to transfer the amount calculated for the projected hydro output (described above) from the Operations Reserve to the Hydroelectric Stabilization Reserve for hydro output deviations above long-term average levels, or transfer this amount from the Hydroelectric Stabilization Reserve to the Operations Reserve for hydro output deviations below long-term average levels.
The level of the Hydroelectric Stabilization Reserve after the transfers described above shall be the basis for staff's determination, with Council approval, of whether to implement the Hydro Rate Adjuster (Electric Rate E-HRA) for the following fiscal year.
For the Hydroelectric Stabilization Reserve Fund there are set Minimum, Target and Maximum Levels.
Guideline
Levels
Minimum $3 million
Target $19 million
Maximum $35 million
Electrification Reserve
The purpose of the Electrification Reserve Fund is to track funding of City buildings, appliance and vehicle electrification projects and programs, including development and implementation costs and associated financial incentives, loans and rebates for participating customers. The Electrification Reserve Fund is found within the Electric Utility.
Electric Utility Reserves Management Practices
13 DETAILED ANALYSIS
Based upon policy, the Electrification Reserve may be funded by any lawful source of funds available for such programs, including new or ongoing utility revenues derived from customer participation. The Electrification Reserve balance shall be annually adjusted based on the net of revenues and expenses associated with the City's building appliance and vehicle electrification projects and programs using this reserve.
Public Benefits
The purpose of the Public Benefits Reserve Fund is to track unspent Public Benefits Revenues. The Public Benefits Reserve Fund is found within the Electric Utility.
Based upon policy, the Public Benefits Reserve Fund will be increased by the amount of unspent Public Benefits Revenues remaining at the end of each fiscal year. Expenditure of these funds requires actions by the City Council.
Low Carbon Fuel Standard
The purpose of the Low Carbon Fuel Standard (LCFS) Reserve Fund is to track the revenues earned via the sale of Low Carbon Fuel Credits allocated by the California Air Resources Board to the City, as well as expenses incurred, in accordance with California's Low Carbon Fuel Standard Program. The Low Carbon Fuel Standard Reserve Fund is found within the Electric Utility.
Based upon policy, at the end of each fiscal year, the Low Carbon Fuel Standard Reserve will be adjusted by the net of revenues and expenses associated with California's Low Carbon Fuel Standard program
Cap and Trade Program
The purpose of the Cap-and-Trade Program Reserve Fund is to track unspent or unallocated revenues from the sale of carbon allowances freely allocated by the California Air Resources Board to the Electric Utility and Gas Utility, under the State's Cap and Trade Program. The Cap-and-Trade Program Reserve Fund is found within the Electric Utility and Gas Utility.
Based upon policy, funds in this reserve are managed in accordance with the City's Policy on the Use of Freely Allocated Allowances under the State's Cap and Trade Program, adopted by Council Resolution 9487 in January 2015. At the end of each fiscal year, the Cap-and-Trade Program Reserve will be adjusted by the net of revenues and expenses associated with the Cap-and-Trade program.
Electric Utility Reserves Management Practices, Gas Utility Reserves Management Practices
14 DETAILED ANALYSIS
Emergency Plant Replacement
The purpose of the Emergency Plant Replacement Reserve Fund is to manage cash flow for replacement or emergency repairs of damaged equipment. Reserves in this fund are to be used on the most expensive pieces of equipment which, if lost, would interrupt Wastewater Treatment activity. The Emergency Plant Replacement Reserve Fund is found within the Wastewater Treatment Utility.
Based upon policy, uses of funds in this reserve require special appropriation by the Council.
For the Emergency Plant Replacement Reserve Fund there are set Minimum and Maximum Levels.
Guideline Levels (1)
Minimum 5% of annual increase in the net book value of fixed assets Maximum 5% of total net book value of fixed assets
(1) Levels are found in City Council CMR:320:0 from May 24, 1990
Notes and Loans
The purpose of the Notes and Loans Reserve Fund is to manage cash flow reserves for any outstanding Notes and Loans. The Notes and Loans Reserve Fund is found within the Wastewater Treatment Utility. There are no set Minimum, Target, and Maximum Levels explicitly stated in the policies as required amounts are established in the respective loan agreements.
Landfill Corrective Action Reserve
The purpose of the Landfill Corrective Action Reserve Fund is to manage cash flow reserves for any costs of closure/post closure maintenance and corrective action for the respective facilities to protect the environment. The Landfill Corrective Action Reserve is found within the Refuse Utility. There are no set Minimum, Target, and Maximum Levels.
Geng Road Reserve
The purpose of the Geng Road Reserve is to manage cash flow reserves for any costs associated with Geng Road. The Geng Road Reserve is found within the Refuse Utility. There are no set Minimum, Target, and Maximum Levels.
City Council CMR:320:0, City Council CMR:263:3
15 DETAILED ANALYSIS
Overview of Current Reserve Funds and Reserve Policies Observations
Observation #1
Based on the information discussed within the Reserve Funds included in all Utilities category, and the Reserve Funds that are unique to specific Utilities category, current reserve policies result in significant administrative burden through multiple prescribed transfer rules and the necessary tracking of reserve funds to minimum, target, and maximum levels. The policies for many reserve funds dictate that reserve funds money must be transferred into the fund if below the minimum level or out of the fund if above the maximum level. For example, this is a requirement for the Operations and Maintenance Reserve, CIP Reserve, and Hydroelectric Stabilization Reserve for the Electric Utility. This requirement necessitates tracking reserve funds to the specific minimum and maximum amounts and transferring funds accordingly.
Observation #2
The current reserve funds and policies for the Wastewater Treatment Utility, Refuse Utility, and Stormwater Utility are from May 24, 1990 and May 6, 1993 and are not up to date compared to the other Utilities. Reserve policies for the other utilities were updated June 16, 2025.
Observation #3
The purpose of the Electric Special Projects Reserve appears to be similar to the CIP Reserves, and the combination of the two reserves into just one, could assist in relieving the administrative burden of having two reserve funds within the Electric Utility that are for similar purposes.
Consistency With Regulatory Reserve Margin Requirements
Outstanding Bond Requirements
There are two series of publicly-sold utility bonds outstanding:
• $35,015,000 City of Palo Alto Water Revenue Bonds, 2009 Series A (Taxable Direct Payment Build America Bonds), which mature on June 1, 2035
• $17,225,000 City of Palo Alto Utility Revenue Refunding Bonds 2011 Series A, which mature on June 1, 2026
The 2009 Bonds are payable only from Net Revenues of the Water System. Proceeds of the 2009 Bonds funded a debt service reserve fund for the 2009 Bonds in the amount of $2,567,280. The City is required to maintain the debt service reserve fund while the 2009 Bonds remain outstanding.
Water Revenue Bonds, 2009 Series A, OS, Utility Revenue Refunding Bonds, 2011 Series A, OS
16 DETAILED ANALYSIS
The 2011 Bonds were separated into sub-series, with 45% ($7,751,250) allocated to the Water System and 55% ($9,473,750) allocated to the Gas System. The Water System’s 2011 sub-series is payable only from Net Revenues of the Water System on a parity basis with the 2009 Bonds. The Gas System 2011 sub-series is payable only from Net Revenues of the Gas System. Proceeds of the 2011 Bonds funded a debt service reserve fund for the 2009 Bonds in the amount of $1,462,600. The City is required to maintain the debt service reserve fund the 2011 Bonds remain outstanding.
Rate Covenant
2009 Bonds. In the Indenture for the 2009 Bonds, the City covenanted to fix, prescribe, revise and collect Charges for the Water System during each Fiscal Year which (together with other funds transferred from stabilization reserve funds for the Water System, and which are lawfully available to the City for payment of any of the following amounts during such Fiscal Year) are at least sufficient, after making allowances for contingencies and error in the estimates, to pay the following amounts in the following order:
• All Maintenance and Operation Costs of the Water System estimated by the City to become due and payable in such Fiscal Year;
• the Debt Service;
• All other payments required for compliance with the Indenture and the instruments pursuant to which any Parity Bonds relating to the Water System shall have been issued; and
• All payments required to meet any other obligations of the City which are charges, liens, encumbrances upon or payable from the Gross Revenues of the Water System or the Net Revenues of the Water System.
In addition, the City covenanted to fix, prescribe, revise and collect Charges for the Water System during each Fiscal Year which, when added to the balance then on hand in Available Reserves for the Water System, are sufficient to yield Net Revenues of the Water System at least equal to one hundred twenty-five percent (125%) of the amounts payable under the preceding clause (a)(2) in such Fiscal Year for Bonds which have a lien on such Net Revenues.
2011 Bonds. In the Indenture for the 2011 Bonds, the City covenanted, separately for each of the Water System and the Gas System, to fix, prescribe, revise, and collect Charges for each System during each Fiscal Year which (together with other funds transferred from stabilization reserve funds for such System, and which are lawfully available to the City for payment of any of the following amounts during such Fiscal Year) are at least sufficient, after making allowances for contingencies and error in the estimates, to pay the following amounts in the following order:
• All Maintenance and Operation Costs of Such System estimated by the City to become due and payable in such Fiscal Year;
• The Debt Service on the Sub-Series of the 2011 Bonds issued for such System;
Water Revenue Bonds, 2009 Series A, OS, Utility Revenue Refunding Bonds, 2011 Series A, OS
17 DETAILED ANALYSIS
• All other payments required for compliance with this Indenture and the instruments pursuant to which any Parity Bonds relating to such System shall have been issued; and
• All payments required to meet any other obligations of the City which are charges, liens, encumbrances upon or payable from the Gross Revenues of such System or the Net Revenues of such System.
In addition, the City covenanted for each of the Water System and the Gas System to fix, prescribe, revise, and collect Charges for such System during each Fiscal Year which, when added to the balance then on hand in Available Reserves for such System, are sufficient to yield Net Revenues of such System at least equal to one hundred twenty-five percent (125%) of Debt Service that is payable from Net Revenues of the such System.
Available Reserves
2009 Bonds. In the Indenture for the 2009 Bonds, the City covenanted to maintain the funds on hand in Available Reserves in an aggregate amount at least equal to five (5.0) times maximum annual debt service on all outstanding bonded indebtedness secured by Net Revenues of the Water, Gas or Electric Systems.
In addition, the City covenanted to transfer from Available Reserves, to the Water Revenue Fund, as needed, amounts sufficient to enable the City to pay all maintenance and operation costs of the Water System, and all debt service on the Bonds, when and as the same become due and payable.
The 2009 Indenture defines “Available Reserves” to mean funds held in the City’s:
(i) Rate Stabilization Reserve for the Water System,
(ii) Distribution Rate Stabilization Reserve for the Electric System, (iii) Distribution Rate Stabilization Reserve for the Gas System, (iv) Supply Rate Stabilization Reserve for the Electric System, (v) Supply Rate Stabilization Reserve for the Gas System, and (vi) the Electric System’s Calaveras-Stranded Costs Reserve. 2011 Bonds. In the Indenture for the 2011 Bonds, the City covenanted to maintain the funds on hand in Available Reserves (as defined above) in an aggregate amount at least equal to five (5.0) times maximum annual debt service on all outstanding bonded indebtedness secured by Net Revenues of the Water System and the Gas System.
Water Revenue Bonds, 2009 Series A, OS, Utility Revenue Refunding Bonds, 2011 Series A, OS
18 DETAILED ANALYSIS
In addition, the City covenanted to transfer from Available Reserves, to the Revenue Fund, as needed, amounts sufficient to enable the City to pay all Maintenance and Operation Costs of the applicable Water System or Gas System, and all Debt Service, when and as the same become due and payable.
The City covenanted in the 2011 Indenture that any depletion of the Available Reserves which causes the balance therein to fall below the required level shall be restored from Net Revenues of the System which caused such depletion to take place.
Application of the Available Reserves Requirement
As described above, the City covenanted in the Indentures for the 2009 Bonds and the 2011 Bonds to maintain in the Available Reserves an aggregate amount at least equal to five (5.0) times maximum annual debt service on all outstanding bonded indebtedness secured by Net Revenues of the Water, Gas or Electric Systems.
The Maximum Annual Debt Service on the 2009 and 2011 Bonds is $4,025,221.26.
There is no outstanding bonded indebtedness payable from the Electric System.
Five times the Maximum Annual Debt Service is $20,126,106.30. Consequently, the City is obligated to maintain $20,126,106.30 in the Available Reserves as long as the 2009 Bonds and the 2011 Bonds are outstanding.
The 2011 Bonds mature in 2026. The City intends to refinance the 2009 Bonds, if market conditions permit.
Water Revenue Bonds, 2009 Series A, OS, Utility Revenue Refunding Bonds, 2011 Series A, OS
19 DETAILED ANALYSIS
Credit Rating Reserve Targets
Standard & Poor's
Standard & Poor’s (S&P) has a methodology known as “S&P Criteria for U.S.
Municipal Water Sewer, and Solid Waste Utilities” that S&P applies for rating any water, sewer or solid waste utility nationally. S&P also has a methodology known as “S&P Criteria for U.S. Municipal Retail Electric and Gas Utilities” that S&P applies for rating any electric or gas utility nationally. More information about the S&P methodologies are provided below.
Standard & Poor's (S&P) issued a Global Ratings Affirmation for the outstanding Utility Revenue Refunding Bonds, 2011 Series A and Water Revenue Bonds, 2009 Series A, and affirmed its 'AAA' rating on the outstanding bonds and determined that the outlook is stable.
The outstanding bonds fall under the S&P Criteria for U.S. Municipal Water, Sewer, and Solid Waste Utilities, since they are backed by multiple Utility revenues.
For the S&P Criteria for U.S. Municipal Water, Sewer, and Solid Waste Utilities, Liquidity and Reserves have a 40% weighting when it comes to a rating.
Due to the significant weight of liquidity and the reserves on the overall rating criteria, An important factor in maintaining the City’s 'AAA' Rating is ensuring that their Water, Sewer, and Solid Waste Liquidity and Reserves meet the reserve balance category of Extremely Strong. Below is a table that lists the Liquidity and Reserves S&P criteria for U.S. Municipal Water, Sewer, and Solid Waste Utilities.
Days' Cash Available Reserves
Extremely Strong >150 >$75 million
Very Strong 90-150 $20 million - $75 million
Strong 60-90 $5 million - $20 million
Adequate 30-60 $1 million - $5 million
Vulnerable 15-30 $500,000 - $1 million
Highly Vulnerable <15 <$500,000
Water Revenue Bonds, 2009 Series A, OS
, Utility Revenue Refunding Bonds, 2011 Series A, OS, S&P Ratings Report from April 7, 2025, S&P Criteria | Governments | U.S. Public Finance: U.S. Municipal Water, Sewer, And Solid Waste Utilities: Methodology And Assumptions
20 DETAILED ANALYSIS
For the S&P Criteria for U.S. Municipal Retail Electric and Gas Utilities, Liquidity and Reserves have a 25% weighting when it comes to a rating. The City does not currently have outstanding debt that is rated using this criteria. Below is a table that lists the Liquidity and Reserves S&P Criteria for U.S. Municipal Retail Electric and Gas Utilities. The following table measures liquidity through a Days' Liquidity metric, which measures how many days the Utility can continue to operate and pay for its expenses using only its currently available cash on hand. If the City intends to issue rated electric or gas utility debt in the future, the available reserves for those utilities would be considered against the amounts listed in the table below to help determine the liquidity and reserves scoring component for a bond rating.
Total Days'
Liquidity
Available
Reserves
(million)
Extremely Strong =>270 =>$250
Very Strong 150-270 $100-$250
Strong 90-150 $50-$100
Adequate 45-90 $10-$50
Vulnerable 15-45 $2-$10
Highly Vulnerable <=15 <=$2
Moody's
Moody's issued a credit opinion on December 16, 2024 for the City of Palo Alto, the water system, and water and gas as a combined utility. The City's rating of 'Aaa' was determined to be stable, the water system's rating of 'Aa1' was determined to be stable, and the water and gas combined utility's rating of 'Aa2' was determined to stable.
The criteria Moody's utilizes for their ratings from the credit opinion is their rating methodology over US Municipal Utility Revenue Debt.
For Moody's US Municipal Utility Revenue Debt, Financial Strength has a 40% weighting when it comes to a rating. Of the 40% weighting, Annual Debt Service Coverage is 15%, Days Cash on Hand is 15%, and Debt to Operating Revenues is 10%. Below is a table that lists the Financial Strengths Moody's criteria for US Municipal Utility Revenue Debt.
S&P Criteria | Governments | U.S. Public Finance: U.S. Municipal Retail Electric And Gas Utilities:
Methodology And Assumptions, Moody's Rating Methodology: US Municipal Utility Revenue Debt
21 DETAILED ANALYSIS
Annual Debt
Service
Coverage
Days Cash
on Hand
Debt to Operating
Revenues
Aaa >2.00x >250 days <2.00x
Aa 2.00x > n >
1.70x
250 > n >
150
2.00x < n <
4.00x
A 1.70x > n >
1.25x
150 > n >
35 4.00x < n <
7.00x
Baa 1.25x > n >
1.00x 35 > n > 15 7.00x < n < 8.00x
Ba 1.00x > n >
0.70x 15 > n > 7 8.00x < n < 9.00x
B and
Below <0.70x <7 days >9.00x
Compliance With Regulatory Reserve Margin Requirements Observations
Observation #1
Current reserve policies do not specifically address the Rate Covenants or Available Reserve Covenants listed above as Outstanding Bond Requirements. These covenants were made by the City in the official statements and legal documents for the outstanding 2009 and 2011 bonds. The City could consider referencing these documents in its reserve policies.
• It is important to note that aaccording to the latest Ratings Affirmation from S&P on the outstanding 2011 and 2009 bonds, Palo Alto is in compliance with the Rate and Available Reserves Covenants
Observation #2
Current reserve policies do not specifically address relevant credit rating reserve targets. By formulating reserve policies that specify guideline levels for reserve funds with these credit rating reserve targets in mind, the City can better position itself to maintain its strong bond ratings.
Moody's Rating Methodology: US Municipal Utility Revenue Debt
22 DETAILED ANALYSIS
Operational/Industry Best Practices
Government Finance Officers Association (GFOA)
Operating Reserves
GFOA recommends, at a minimum, regardless of a governments size, to maintain operating reserves at no less than two months of regular operating revenues or regular operating expenditures. The choice of revenues or expenditures as a basis of comparison may be dictated by what is more predictable for the government's particular circumstances. GFOA also states that a government's particular situation often may require a level of operating reserves to be significantly in excess of the recommended minimum level of no less than two months of regular operating revenues or regular operating expenditures. An example of a particular situation could be a government that knows it is exposed to certain economical or climate risks with complex potential effects of them in the future.
GFOA also recommends that if the reserve balance falls below the government's policy level, there should be a solid plan to replenish it, and governments should seek to replenish the reserve balance within one to three years.
Capital Improvement Program Reserves
GFOA states that Capital Improvement Program Reserves may be used to proactively manage capital assets, for instance by annually setting aside 20% of a five-year asset's replacement costs so that funding is available when replacement is necessary.
Furthermore, the GFOA provides two examples of annual funding allocations/levels for a Capital Improvement Program Reserves, which are listed below.
• Maintain an ending balance equal to a dollar amount or a percentage of the five-year average of the entity's annual capital budget. (The actual dollar amount or percentage should be set based on the particular entity's capital needs and financial capabilities.)
• Baker Tilly considers maintaining 20%, which is the equivalent of one- year of average capital improvements, of the total capital anticipated to be funded with cash on hand in the five-year capital budget in CIP reserves as a best practice.
GFOA Fund Balance Guidelines for the General Fund, GFOA Strategies for Establishing Capital Asset Renewal and Replacement Reserve Policies
23 DETAILED ANALYSIS
• Annually contribute an amount based on a percentage of the annual depreciation of the entity's assets. Funding sources will vary and may includes transfers from the Operations Fund or one-time revenues. An entity may wish to consider initial funding levels for the first one to five years with a plan for increasing funding thereafter until the target funding level is achieved. In addition, organizations should consider the pros and cons of the level of reliance on one-time versus recurring revenues based upon the financial conditions of the jurisdiction and the goals of the reserve.
Additional Industry Best Practices
Capital Improvement Program Reserves
An additional best practice for the Capital Improvement Program Reserves it to have at least one year worth of depreciation expense in a fund for capital improvements. Note that a reserve target for a CIP fund would typically be based on either a percentage of average annual capital spending based on a CIP plan or based on depreciation expense amounts.
Operational/Industry Best Practices Observations
Observation #1
The City of Palo Alto's current reserve policies for its operations reserve funds are in alignment with the GFOA's recommendations for operating reserves. However, the Wastewater Treatment Utility, Refuse Utility, and Stormwater Utility do not currently have operations reserve funds.
Observation #2
The City of Palo Alto's current reserve policy for its CIP reserve funds outlines a maximum reserve guideline level that aligns with Baker Tilly’s recommendation for a target ending balance for a CIP reserve fund (approximately one-year of average capital improvement spending held in reserve). Current reserve policy outlines a minimum reserve guideline level that is 20% of this amount.
While Baker Tilly considers one-year of average capital improvements a best practice CIP reserve level, GFOA recommends that capital reserve level development should be designed to best serve the particular needs of a given organization. As such, an amount less than our recommendation could be considered. Alternatively, another approach to determining a CIP reserve fund guideline level could be to maintain one-year or a percentage of one-year of depreciation expense in reserve balances.
24 DETAILED ANALYSIS
Local Economy Specific Reserves Through Benchmarking Comparables
The purpose of this section is to provide an overview of the local economy specific reserves by benchmarking the reserve funds and reserve policies of communities comparable to the City of Palo Alto ("benchmark communities"). The benchmark communities that we researched are City of Roseville, City of Santa Clara, City of Healdsburg, City of Pasadena, and San Jose Clean Energy. Within this section, we list the reserve funds and the guideline cash reserve levels for the reserve funds from the benchmark communities and compare them to the City of Palo Alto's Utility reserve funds and reserve policies guidelines. This information is broken down into two sections; Reserve Funds Palo Alto Utilities Have and Reserve Funds Palo Alto Utilities Do Not Have. The chart below indicates for each comparable community what reserve funds they have (indicated by “Yes”) and do not have (indicated by “No”) for each of their utilities.
Benchmarking Comparables
City of Roseville City of Santa
Clara City of Healdsburg City of
Pasadena
San
Jose
Clean
Energy
Electric Water Waste
Water
Solid
Waste Electric Water Electric Water Waste
Water Electric Electric
Reserve Funds Palo Alto Utilities Have:
Rate
Stabilization Yes Yes Yes No Yes No No Yes Yes No Yes
Operations
and Maintenance No Yes Yes Yes Yes No Yes Yes Yes Yes Yes Capital
Replacement &
Improvement
No No No No No Yes Yes Yes Yes Yes No
System
Critical Failure No Yes Yes No No No No No No No No
Debt Service
Reserve Yes No No No No No No No No Yes No
Reserve Funds Palo Alto Utilities Do Not Have:
Debt Service
Coverage Ratio Yes No No No No No No No No No No
Days Cash on
Hand Yes No No No No No No No No No No
Fixed Cost
Coverage Yes No No No No No No No No No No
General Fund
Transfer No No No No No No No No No Yes No
Energy
Services Charge No No No No No No No No No Yes No
Transmission
Services Charge No No No No No No No No No Yes No
Contingency
Reserve No No No No No No No No No Yes No
25 DETAILED ANALYSIS
Reserve Funds Palo Alto Utilities Have
Rate Stabilization
As noted in the overview of current reserve funds and reserve policies section, the City of Palo Alto has a rate stabilization reserve fund for each of its utilities. The current City reserve policies outline the guideline levels for rate stabilization reserves as follows:
Table 1 - Palo Alto Rate Stabilization Fund
Guideline Levels
Wastewater
Treatment (1)
Refuse (1)
Stormwater (2)
Minimum 15% 10% N/A
Target 22.5% 15% $500,000
Maximum 30% 20% N/A
(1) % of sales revenue. Levels found in City Council CMR:263:3 from May 6, 1993
(2) Target Level found in City Council CMR:320:0 from May 24, 1990
Rate Stabilization Reserves for Electric, Gas, Wastewater Collection and Water do not have set Minimum, Target and Maximum Levels.
Similar to Palo Alto, many of the benchmark communities researched had rate stabilization reserve funds for their utilities. The guideline levels of reserves outlined in the benchmark communities reserve policies for the rate stabilization reserve funds were as follows:
City of Roseville Electric
Table 2 - Roseville Electric Rate Stabilization Fund
Guideline Levels
Minimum 40% of operating expenses
Target 65% of operating expenses
Maximum 90% of operating expenses
City of Roseville Water and Wastewater
Table 3 - Roseville Water and Wastewater Rate Stabilization Fund
City of Roseville Financial Policies (Pages 106-108 and 118-120)
50% of operating expenses or roughly 180 Days' Cash
Target
Guideline Level
26 DETAILED ANALYSIS
City of Santa Clara Electric
Based upon research, it is determined that the City of Santa Clara Electric Utility has an Electric Rate Stabilization Reserve Fund with a balance as of May 31, 2025 of $70,000,000; however, we were unable to track down guideline levels for their Electric Rate Stabilization Reserve Fund. When calculating $70,000,000 divided by the City of Santa Clara's Electric Utility Fiscal Year 2024-2025 adopted budget for Electric Utility Operating Expenses of $649,513,582, the reserve balance comes out to approximately 10.78% of budgeted Electric Utility Operating Expenses.
City of Healdsburg Water and Wastewater
Table 4 - Healdsburg Water and Wastewater Rate Stabilization Fund
San Jose Clean Energy
Table 5 - San Jose Clean Energy Rate Stabilization Fund
Comparison to City of Palo Alto Electric
Table 6 - Electric Rate Stabilization Fund Guideline Reserve Levels Comparison Guideline Levels
City of
Palo Alto
Electric
City of Roseville
Electric
City of
Santa Clara
Electric (1)
San Jose Clean Energy
Minimum N/A 40% of operating
expenses N/A N/A
Target N/A 65% of operating
expenses
10.78% of
operating
expenses
25% of total operating and
non-operating revenues
in the current fiscal year.
Maximum N/A 90% of operating
expenses N/A N/A
(1) Based on current reserve balance as no reserve policy was found.
There are no set Minimum, Target and Maximum Levels for City of Palo Alto Electric.
City of Santa Clara Financial Status Report as of May 31, 2025 (Pages 23-24), City of Healdsburg Ordinance No. 1240, San Jose Clean Energy Financial Reserves Policy $1,000,000
Target
Guideline Level
25% of the total operating and non-operating revenues in the current fiscal year.
Target
Guideline Level
27 DETAILED ANALYSIS
Comparison to City of Palo Alto Water
Table 7 - Water Rate Stabilization Fund Guideline Reserve Levels Comparison
Guideline Levels
City of Palo
Alto Water City of Roseville Water
City of
Healdsburg
Water
Minimum N/A N/A N/A
Target N/A 50% of operating expenses or
roughly 180 Days' Cash $1,000,000
Maximum N/A N/A N/A
There are no set Minimum, Target and Maximum Levels for City of Palo Alto Water.
Comparison to City of Palo Alto Wastewater
Table 8 - Wastewater Rate Stabilization Fund Guideline Reserve Levels Comparison Guideline Levels
City of
Palo Alto
Wastewater
Collection
City of
Palo Alto
Wastewater
Treatment (1)
City of
Roseville
Wastewater
City of
Healdsburg
Wastewater
Minimum N/A 15% N/A N/A
Target N/A 22.5% 50% of operating
expenses or roughly
180 Days' Cash
$1,000,000
Maximum N/A 30% N/A N/A
(1) % of sales revenue. Levels found in City Council CMR:263:3 from May 6, 1993
There are no set Minimum, Target and Maximum Levels for City of Palo Alto Wastewater Collection.
Also, it should be noted that the Gas, Refuse and Stormwater Systems for the City of Palo Alto all had rate stabilization reserve funds as well, but as none of the benchmark communities had rate stabilization reserve funds for these utilities, no charts are shown for them.
Rate Stabilization Observations
Observation #1
The City of Palo Alto Electric Utility does not have a set minimum, target, or maximum guideline level. For the benchmark communities, the City of Roseville Electric has a minimum, target, or maximum guideline level found in Table 2, our calculation for City of Santa Clara Electric of 10.78% of operating expenses is assumed to be the target guideline level, and San Jose Clean Energy only has a target guideline level found in Table 5. Table 6 shows these benchmark communities reserve guideline levels compared to the City of Palo Alto's Electric Utility.
28 DETAILED ANALYSIS
Observation #2
The City of Palo Alto Water Utility does not have a set minimum, target, or maximum guideline level, while the City of Roseville Water and City of Healdsburg Water both have target guideline levels found in Table 3 and Table 4. Table 7 shows these benchmark communities reserve guideline levels compared to the City of Palo Alto's Water Utility.
Observation #3
The City of Palo Alto Wastewater Collection Utility does not have a set minimum, target, or maximum guideline level, while the City of Palo Alto Wastewater Treatment Utility does as shown in Table 1. The City of Roseville Wastewater and City of Healdsburg Wastewater both have target guideline levels found in Table 3 and Table 4. Table 8 shows these benchmark communities reserve guideline levels compared to the City of Palo Alto's Wastewater Collection Utility.
Operations and Maintenance
As noted in the overview of current reserve funds and reserve policies section, the City of Palo Alto has an operations reserve fund for its Electric Utility, Gas Utility, Wastewater Collection Utility, and Water Utility. The current City reserve policies outline the guideline levels for operations reserves are found in the below table.
Table 9 - Palo Alto Operations and Maintenance Fund
Guideline Levels
Electric Electric Wastewater
Supply (1) Distribution (2) Gas (3) Collection (4) Water (5)
Minimum 60 60 60 60 60
Target 90 90 90 105 90
Maximum 120 120 120 150 120
(1) Days of Electric Supply Fund O&M and Commodity Expense (2) Days of Electric Distribution Fund O&M Expense
(3) Days of Gas O&M and Commodity Expense
(4) Days of Wastewater Collection O&M and Commodity Expense (5) Days of Water O&M and Commodity Expense
City of Roseville Water
Table 10 - Roseville Water Operations and Maintenance Fund
City of Roseville Financial Policies (Pages 118-120)
Minimum 90 days' cash worth of operating expenses.
Guideline Level
29 DETAILED ANALYSIS
City of Roseville Wastewater
Table 11 - Roseville Wastewater Operations and Maintenance Fund
City of Roseville Solid Waste
Table12 - Roseville Solid Waste Operations and Maintenance Fund
City of Santa Clara Electric
Based upon research, it is determined that the City of Santa Clara Electric Utility has an Operations and Maintenance Reserve Fund with a balance as of May 31, 2025 of $257,000,000; however, we were unable to track down guideline levels for their Electric Operations and Maintenance Reserve Fund. When calculating $257,000,000 divided by the City of Santa Clara's Electric Utility Fiscal Year 2024-2025 adopted budget for Electric Utility Operating Expenses of $649,513,582, the reserve balance comes out to approximately 39.57% of budgeted Electric Utility Operating Expenses, or 145 days of operating expenses.
City of Healdsburg Electric
Table 13 - Healdsburg Electric Operations and Maintenance Fund
City of Healdsburg Water
Table 14 - Healdsburg Water Operations and Maintenance Fund
City of Healdsburg Wastewater
Table 15 - Healdsburg Wastewater Operations and Maintenance Fund
City of Roseville Financial Policies (Pages 118-120), City of Santa Clara Financial Status Report as of May 31, 2025 (Pages 23-24), City of Healdsburg Ordinance No. 1240, City of Healdsburg Biennial Budget (Page 70) Minimum 90 days' cash worth of operating expenses.
Guideline Level
Minimum 90 days' cash worth of operating expenses.
Guideline Level
183 days of operating expenses
Minimum
Guideline Level
92 days of operating expenses
Minimu
Guideline Level
92 days of operating expenses
Minimum
Guideline Level
30 DETAILED ANALYSIS
City of Pasadena Electric
Table 16 - Pasadena Electric Operations and Maintenance Fund Guideline Levels
Minimum 60 days of operating expenses
Target 90 days of operating expenses
San Jose Clean Energy
Table 17 - San Jose Clean Energy Operations and Maintenance Fund
Comparison to City of Palo Alto Water
Table 18 - Water Operations and Maintenance Fund Guideline Reserve Levels Comparison
Guideline Levels
City of Palo Alto
Water (1)
City of Roseville
Water
City of Healdsburg
Water
Minimum 60 days of operating
expenses.
90 days' cash worth
of operating
expenses.
92 days of operating
expenses.
Target 90 days of operating
expenses.
N/A N/A
Maximum 120 days of operating
expenses.
N/A N/A
(1) Defined in the reserve policy as Water O&M and Commodity Expense
City of Pasadena Code of Ordinances 13.04.175, San Jose Clean Energy Financial Reserves Policy 180 days liquidity on hand
Minimum
Guideline Level
31 DETAILED ANALYSIS
Comparison to City of Palo Alto Wastewater Collection
Table 19 - Wastewater Operations and Maintenance Fund Guideline Reserve Levels Comparison
Guideline Levels
City of Palo Alto
Wastewater Collection
(1)
City of Roseville
Wastewater
City of Healdsburg
Wastewater
Minimum 60 days of operating
expenses.
90 days' cash worth
of operating
expenses.
92 days of operating
expenses.
Target 105 days of operating
expenses.
N/A N/A
Maximum 150 days of operating
expenses.
N/A N/A
(1) Defined in the reserve policy as Wastewater Collection O&M and Commodity Expense
Comparison to City of Palo Alto Electric
Table 20 - Electric Operations and Maintenance Fund Guideline Reserve Levels Comparison
Guideline Levels
City of Palo
Alto Electric
Supply (1)
City of Palo
Alto
Electric
Distribution (2)
City of Santa
Clara
Electric
City of
Healdsburg
Electric
City of
Pasadena
Electric
San
Jose
Clean
Energy
Minimum
60 days of
operating
expenses
60 days of
operating
expenses.
N/A
183 days of
operating
expenses
60 days of
operating
expenses
180
days
liquidity
on
hand
Target
90 days of
operating
expenses.
90 days of
operating
expenses.
145 days of
operating
expenses
N/A
90 days of
operating
expenses
N/A
Maximum
120 days of
operating
expenses
120 days of
operating
expenses
N/A N/A N/A N/A
(1) Defined in the reserve policy as Electric Supply Fund O&M and Commodity Expense (2) Defined in the reserve policy as Electric Distribution Fund O&M Expense
Also, it should be noted that the Gas System for the City of Palo Alto had operations and maintenance reserve fund as well, but as none of the benchmark communities had operations and maintenance reserve funds for Gas, no charts are shown for it.
32 DETAILED ANALYSIS
Operations and Maintenance Observations
Observation #1
As shown in Tables 18 and 19, the City of Palo Alto Water Utility and Wastewater Collection Utility both have a set minimum, target, and maximum guideline levels, while the City of Roseville and City of Healdsburg Water and Wastewater Utilities only have minimum guideline levels. While the City of Palo Alto's minimum guideline levels for both utilities are lower than the City of Roseville or the City of Healdsburg Water and Wastewater Utilities, Palo Alto's maximum guideline levels are higher than the minimum guideline levels for the City of Roseville and City of Healdsburg Water and Wastewater Utilities.
Observation #2
As shown in Table 20, the City of Palo Alto Electric Utility has set minimum, target, and maximum guideline levels for Electric Supply and Electric Distribution, while City of Healdsburg Electric and San Jose Clean Energy only have a minimum guideline level, City of Pasadena Electric has both a minimum and target guideline levels, and while the City of Santa Clara Electric does not have specified guideline levels, we have listed their current balance expressed as days operating expenses as their target guideline level.
Based on these guideline levels of reserves, the City of Palo Alto Electric Utility minimum and target guideline levels are the same as the City of Pasadena Electric, but the minimum and target guideline levels are lower than any minimum or target guideline levels for City of Santa Clara Electric, City of Healdsburg Electric, and San Jose Clean Energy. The City of Palo Alto Electric Utility maximum guideline level is lower than City of Healdsburg Electric and San Jose Clean Energy minimum guideline levels, and the Santa Clara Electric target guideline level. See Table 20.
Capital Replacement & Improvement
As noted in the overview of current reserve funds and reserve policies section, the City of Palo Alto has a CIP reserve fund for its Electric Utility, Gas Utility, Wastewater Collection Utility, and Water Utility. The current City reserve policies outline the guideline levels for CIP reserves as follows:
Table 21 - Palo Alto Capital Replacement & Improvement Fund Guideline Levels
Minimum 20% of the maximum CIP Reserve guideline level
Maximum Average annual (12 month) CIP budget, for 48 months of budgeted CIP expenses
City of Santa Clara Water
Based upon research, it is determined that the City of Santa Clara Water has a Capital Replacement & Improvement Reserve Fund with a balance as of May 31, 2025 of $303,090; however, we were unable to track down guideline levels for their Water Capital Replacement & Improvement Reserve Fund.
33 DETAILED ANALYSIS
City of Healdsburg Electric
Table 22 - Healdsburg Electric Capital Replacement & Improvement Fund
City of Healdsburg Water
Table 23 - Healdsburg Water Capital Replacement & Improvement Fund
City of Healdsburg Wastewater
Table 24 - Healdsburg Wastewater Capital Replacement & Improvement Fund
City of Pasadena Electric
Table 25 - Pasadena Electric Capital Replacement & Improvement Fund
Comparison to City of Palo Alto Electric
Table 26 - Electric Capital Replacement & Improvement Fund Guideline Reserve Levels Comparison
Guideline Levels
City of
Palo Alto
Electric
City of
Healdsburg
Electric
City of
Pasadena
Electric
Minimum 20% of the maximum CIP
Reserve guideline level
N/A N/A
Target N/A $4,000,000 One year of budgeted
capital expenditures
Maximum Average annual (12 month) CIP
budget, for 48 months of
budgeted CIP expenses
N/A N/A
City of Santa Clara Financial Status Report as of May 31, 2025 (Pages 23-24), City of Healdsburg Ordinance No. 1240, City of Healdsburg Biennial Budget (Pages 66 and 69-70) One year of budgeted capital expenditures
Target
Guideline Level
$1,000,000
Target
Guideline Level
$1,000,000
Target
Guideline Level
$4,000,000
Target
Guideline Level
34 DETAILED ANALYSIS
Comparison to City of Palo Alto Water
Table 27 - Water Capital Replacement & Improvement Fund Guideline Reserve Levels Comparison
Guideline Levels
City of
Palo Alto
Water
City of
Healdsburg
Water
Minimum 20% of the maximum CIP Reserve guideline level N/A Target N/A $1,000,000
Maximum Average annual (12 month) CIP budget, for 48
months of budgeted CIP expenses
N/A
Table 28 - Wastewater Capital Replacement & Improvement Fund Guideline Reserve Levels Comparison
Guideline Levels
City of
Palo Alto
Wastewater Collection
City of
Healdsburg
Wastewater
Minimum 20% of the maximum CIP Reserve guideline level N/A Target N/A $1,000,000
Maximum Average annual (12 month) CIP budget, for 48
months of budgeted CIP expenses
N/A
Also, it should be noted that the Gas System for the City of Palo Alto had capital replacement & improvement reserve fund as well, but as none of the benchmark communities had capital replacement & improvement reserve funds for Gas, no charts are shown for it.
Capital Replacement & Improvement Observations
Observation #1
The City of Palo Alto Electric, Water, and Wastewater Collection Utilities have set minimum and maximum guideline levels for the capital replacement & improvement reserve funds, while all other benchmark communities that had utilities with capital replacement & improvement reserve funds only had target guideline levels. See Tables 26 - 28 for the comparisons between Palo Alto and the benchmark communities for each of these Utilities.
System Critical Failure
As noted in the overview of current reserve funds and reserve policies section, the City of Palo Alto has an Emergency Plant Replacement reserve fund for its Wastewater Treatment Utility. The current City reserve policies outline the guideline levels for Emergency Plant Replacement reserves as follows:
Table 29 - Palo Alto Wastewater Treatment System Critical Failure Fund Guideline Levels (1)
Minimum 5% of annual increase in the net book value of fixed assets Maximum 5% of total net book value of fixed assets
(1) Levels are found in City Council CMR:320:0
35 DETAILED ANALYSIS
City of Roseville Water
Table 30 - Roseville Water System Critical Failure Fund
City of Roseville Wastewater
Table 31 - Roseville Wastewater System Critical Failure Fund
System Critical Failure Observations
Observation #1
The City of Palo Alto Wastewater Treatment Utility has set minimum and maximum guideline levels for the emergency plant replacement reserve, while the City of Roseville Water and Wastewater Utilities only had minimum guideline levels. See Table 29, Table 30, Table 31.
Debt Service Reserve
City of Roseville Electric
Table 35 - Roseville Electric Debt Service Reserve Fund
City of Pasadena Electric
Table 36 - Pasadena Electric Debt Service Reserve Fund
Reserve Funds Palo Alto Utilities Do Not Have
Debt Service Coverage
City of Roseville Electric
Table 32 - Roseville Electric Debt Service Coverage Ratio
City of Roseville Financial Policies (Page 118-120), City of Pasadena Code of Ordinances 13.04.175 Minimum 1% - 2% of the Capital Assets belonging to the Water Utility Guideline Level
Minimum 1% - 2% of the Capital Assets belonging to the Wastewater Utility Guideline Level
Minimum 2.0x annual debt service payments
Guideline Level
Minimum Maintain a fully funded debt service reserve as required by bond covenants.
Guideline Level
Minimum Maintain a reserve equivalent to one year of debt service payments for outstanding bond or credit obligations.
Guideline Level
36 DETAILED ANALYSIS
Days Cash on Hand
City of Roseville Electric
Table 33 - Roseville Electric Days Cash on Hand Fund
City of Roseville Electric
Table 34 - Roseville Electric Fixed Cost Coverage
General Fund Transfer
City of Pasadena Electric
Table 37 - Pasadena Electric General Fund Transfer
Energy Services Charge
City of Pasadena Electric
Table 38 - Pasadena Electric Energy Services Charge
Guideline Levels
Minimum 60 days of projected power supply costs
Target 90 days of projected power supply costs
Transmission Services Charge
City of Pasadena Electric
Table 39 - Pasadena Electric Transmission Services Charge Guideline Levels
Minimum 60 days of transmission services cost
Target 90 days of transmission services cost
City of Roseville Financial Policies (Page 106-108), City of Pasadena Code of Ordinances 13.04.175 Minimum 1.5x of annual fixed costs
Guideline Level
One year of the budgeted General Fund Transfer
Target
Guideline Level
Minimum >250 days
Guideline Level
37 DETAILED ANALYSIS
Contingency Reserve
City of Pasadena Electric
Table 40 - Pasadena Electric Contingency Reserve Fund
Guideline Levels
Minimum Sum of 60 days of operating expenses and 60 days of capital expenditures
Target Sum of 90 days of operating expenses and 90 days of capital expenditures
Local Economy Specific Reserves Through Benchmarking Comparables Observations
Observation #1
The Benchmark Communities typically have some or all of the three commonly established reserve funds that Palo Alto Utilities with updated reserve policies have, which are the rate stabilization reserve, the operations and maintenance reserve, and the CIP reserve.
Observation #2
Based upon the research of the City of Roseville, City of Santa Clara, City of Healdsburg, City of Pasadena, and San Jose Clean Energy Reserve Policies, it is determined that the City of Palo Alto's Reserve Policies are more cumbersome than the comparables identified. The City of Palo Alto Utilities Operations and Maintenance Reserve Funds include a minimum, target and maximum guideline level while the other benchmark communities only include a minimum and/or a target. The City of Palo Alto Utilities Capital Replacement and Improvement Reserve Funds also include a minimum, target, and maximum, while the other benchmark communities only include a target. Overall, the City of Palo Alto Utilities have not only more funds established to hold cash reserves, but their policies are more detailed in terms of guideline levels and sources and uses of those reserve funds compared to the other benchmark communities reserve policies.
Observation #3
While there are reserve funds that benchmark communities have in place that Palo Alto Utilities does not have in place, none of these reserve funds are vital or in line with industry best practices. In many cases, these reserve funds serve the same or a similar purpose as other reserve funds the benchmark communities and Palo Alto Utilities have in place. For example, the City of Roseville Electric days cash on hand reserve and fixed cost coverage reserve, and the City of Pasadena electric energy services charge and transmission services charge reserve funds serve a similar purpose to the operation and maintenance fund reserve for these Utilities. The City of Pasadena Contingency Reserve serves the same purpose as both the operation and maintenance reserve fund and the capital replacement and improvement reserve fund.
City of Pasadena Code of Ordinances 13.04.175
38 DETAILED ANALYSIS
Reserve Tracking
Reserve Tracking Requirements and Processes
Current Requirements for Tracking Palo Alto's Reserves
The Reserve Management Practices (policies) all state that they should be used when developing each individual Utility's Financial Plan.
Guideline levels included in the reserve policies that are not a fixed dollar amount are calculated for each fiscal year of the financial planning period for each individual Utility's Financial Plan.
Current Processes Being Performed for Tracking Palo Alto's Reserves Reserve targets are recalibrated annually to calculate the dollar amount planned to be held in reserve. The dollar amount for each reserve target calculated annually does not always represent the target outlined in the policy statement when the policy statement guideline levels are not fixed (for example, a guideline level based on number of days may not have a reserve target in a Financial Plan that matches this metric).
During the update of a Utility's Financial Plan, reserve policies are reviewed to determine if they need to be updated.
Reserve Tracking Observations
Observation #1
Reserve tracking appears to be done on an annual basis in conjunction with the development of each individual Utility's Financial Plan for Palo Alto. A reserve tracking policy with guidance included to report instances when reserve fund balances do not meet guideline levels to Council would provide more assurance that reserve targets are being met throughout the year and equip the Council with better information to make financial decisions than the current process being performed for reserve tracking.
39 40