From: Utsav Gupta
To: Council, City
Cc: Tucher, Chris; Clerk, City
Subject: Remove the Utility Reserves Advisory Report (Baker Tilly) from the June 8 Consent Calendar (Item 5) Date: Sunday, June 7, 2026 11:26:09 AM
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Dear Mayor and Members of the City Council,
In short: we ask you to pull Item 5 from the June 8 Consent Calendar and refer it to the Utilities Advisory Commission for review first. Accepting the report now commits the City to reserve policies that staff acknowledge will raise utility rates.
We respectfully ask that the Baker Tilly utility reserve management report [Item 5 on the June 8 agenda] be
removed from the Consent Calendar
and
referred to the Utilities Advisory
Commission (UAC) for review and a recommendation
before Council takes action. Because
accepting this report sets a reserve policy with substantial downstream effects on utility rates, it should not be adopted without the independent, public vetting the UAC exists to provide.
Below we explain why this item should be pulled from the Consent Calendar and reviewed by the UAC first.
1. Staff’s own analysis says this will raise rates, and it isn’t in the packet.
The June 8 action is to accept the results of the Utility Reserves Advisory Report, which staff describe as the start of a year-long process to revise reserve policies ahead of FY 2028 rate setting.
Staff are explicit that this will affect rates. Their report to the Policy & Services Committee states that “implementation to change reserve levels would have rate impacts,” 1 and their management response
puts a number on it:
“After a general review of the recommendations to assess order of magnitude of financial impacts, staff estimate individual utility rate increases could range from increases of approximately 2% to 8% at the low range and between 20–26% at the high range of the recommendations (this assumes implementation over a five-year period). These increases would be significantly impactful to Palo Alto’s residents and businesses.” 2 Staff’s own plan, moreover, would have that year-long review done “with the assistance of the Utility Advisory Commission and the Finance Committee,” but only “remaining within the range of recommendations from Baker Tilly.”2That puts the steps in the wrong order. The rate impact flows from the reserve policies themselves, so the UAC should review those policies before Council accepts the report, not afterward, inside a process already boxed into Baker Tilly’s range. Council is not voting on the increases here, but it would be endorsing the policy that will necessarily produce them.
2. The rate impact is large, and it stacks on an already steep trajectory.
Reserve policy is one of the most powerful levers the City has over what customers pay. The roughly 5× spread between Baker Tilly’s low and high scenarios (an added $5 to $115 per month per household, or $60 to $1,380 per year) is itself a sign that more analysis is needed before these targets become a rate path. That impact also lands on top of an already steep five-year forecast that does not yet include it. The combined median residential utility bill is projected to rise from $442.60/month in
FY 2026 to ~$638/month by FY 2031, about +44% (~$195/month, ~$2,340/year) :
CPAU Forecasted Rate Increases
Utility FY26 FY27 FY28 FY29 FY30 FY31 5yr Cumulative
Electric 6% 6% 6% 7% 7% 5% ~34%
Gas 5% 9% 7% 6% 6% 6% ~38%
Water (system avg) 10% 10% 10% 10% 7% 6% ~52%
Wastewater Collection 20% 16% 14% 6% 6% 6% ~57%
Refuse / Stormwater /
Fiber 0–3% 0–3% 2–3% 2–3% 2–3% 2–3% ~10–13%
Combined median bill
(+$/mo) +$33 +$40 +$43 +$37 +$39 +$36 ~+44%
Combined median bill
($/mo level) ~$443 ~$483 ~$526 ~$563 ~$602 ~$638 $443 → ~$638 (+44%) Combined bill + Baker
Tilly, low (5% midpt) ~$443 ~$488 ~$537 ~$580 ~$626 ~$670 $443 → ~$670 (+51%) Combined bill + Baker
Tilly, high (23% midpt) ~$443 ~$505 ~$574 ~$641 ~$713 ~$785 $443 → ~$785 (+77%) Sources: FY 2027 Operating Budget Book p. 22; March 4, 2026 rate reports (Water, Wastewater); March 31, 2026 Gas packet; November 5, 2025 combined-bill report. The Baker Tilly rows phase the 5% (low) and 23% (high) midpoint reserve adders in over five years, reaching full effect in FY31; the cumulative column compares today’s combined bill (~$443) to the fully loaded FY31 figure.
That ~$638 figure is itself before the Baker Tilly reserve changes (up to ~$115/month once phased in). It also excludes two further likely and material pressures, the cost of a gas decommissioning program and an unplanned SFPUC water pass-through. Layering a possible 20–26% reserve-driven
increase on top of the planned ~44%
is exactly the kind of cumulative, household-level
consequence that warrants deliberate UAC and public review before adoption.
3. This belongs before the UAC first.
The UAC has raised concerns about CPAU’s reserves for months, most recently while reviewing this year’s rate increases, when commissioners proposed modifications to reserve policies to smooth increases and understood that the forthcoming Baker Tilly report would be the commission’s opportunity to examine CPAU’s many, often overlapping reserve funds. That report is now final, and reserve policy sits squarely within the commission’s charge. The UAC has not yet taken it up, and the right course is for the commission to review it before Council accepts it rather than to learn its conclusions afterward. In fact, the commission adopted review of CPAU’s reserve policies as a priority in its FY 2026–27 work plan, approved 5–0 on June 3. At that meeting, the Vice Chair also noted that the UAC had agreed to take up reserve policy in July, though that review is not yet on the calendar. Accepting the report on the June 8 consent calendar would settle the policy direction before any such review can happen.
4. The report puts no numbers behind its recommendations, and the UAC has caught flawed consultant reports before.
We cannot say whether the report’s methods and findings are sound, because the commission has not reviewed it. The UAC has identified issues in earlier consultant work, including the One Water Plan
and the original gas cost-of-service study (COSA)
. Several features make a UAC review especially
warranted:
• It does not quantify its own cost. The report never states Palo Alto’s current reserve balances, and it never computes how many dollars its recommendations would add to those reserves. It then never estimates the effect on rates at all. The recommendation that drives nearly all of the projected increase, resetting rate-stabilization targets to a percentage of revenues or expenses, does not even specify the percentage; it cites a benchmark range of 10% to 65% and leaves the choice to staff.
3 Staff were left to fill that gap, and the only rate figure anywhere, the 2–26% range, appears in their one-paragraph Management Response with no supporting math.2 • The recommendations skew toward higher reserves on thin support. The high end of the rate impact tracks the very top of that 10–65% range, a single peer’s target, rather than any analysis of Palo Alto’s needs. The report also proposes returning only funds “in excess of the target” to ratepayers, replacing today’s rule that all such funds be drawn down to soften rate increases, a direct path to higher net rates. Yet the report itself calls one large existing requirement, the roughly $20 million bond-covenant reserve, “overly burdensome” and removable once the 2011 bonds mature in June 2026, which points toward lower reserves even as the package nets higher. 3 • A Palo Alto–specific gap. The report says CIP-reserve targets should exclude bond-funded projects but never quantifies Palo Alto’s cash-versus-bond split, even though the City is about to bond-fund the $375–$450 million grid modernization, by far its largest capital program. The utility with the biggest capital plan gets the least clarity on how the new target would apply.3 Multiple commissioners have said they want to review this report before the policies take effect, so that the UAC can review the findings and recommend any changes to Council.
5. A UAC review would sharpen this, not just slow it down.
That staff project a rate impact anywhere from 2% to 26% shows how imprecise the current basis is; a range that wide reflects how much analysis is still missing. A thoughtful review would prioritize which reserve accounts, for which utilities, most need adjusting and how soon, and conversely which of Baker Tilly’s recommendations are excessive. It would also ask which overlapping reserves should be merged rather than grown. The report itself notes, for example, that the Electric utility’s Special Projects Reserve, which funds capital projects, serves much the same purpose as its CIP Reserve and could be combined, yet it recommends only “clarifying” the distinction. 3 The same question applies
to a single utility holding both an operations reserve and a separate rate-stabilization reserve.
Working through these questions is exactly what a UAC review would do, returning to Council a recommendation with a far more precise estimate of the rate impact, so Council acts on a defined policy rather than a wide range.
Our request
Remove the item from the Consent Calendar and direct staff to bring the Baker Tilly reserve management report to the UAC
as a discussion item, consistent with the previously agreed July review, returning to Council with the UAC’s recommendation thereafter. If any piece is time- sensitive, staff can identify that narrow element for separate handling while the policy questions receive proper review. At the very least, a policy decision of this magnitude should not be adopted on consent.
Thank you for your service to Palo Alto and for your consideration of this request.
Respectfully,
Utsav Gupta
Chris Tucher
Commissioners, Utilities Advisory Commission, in their personal capacities NOTES
1 City of Palo Alto, Policy & Services Committee Staff Report, “Office of the City Auditor Presentation of the City of Palo Alto Utility Reserves Advisory Report,” April 14, 2026 (Report 2509-5177; Lead Department: City Auditor, Kate Murdock), Fiscal/Resource Impact section.
2 City of Palo Alto, “Management Response to the Utilities Reserves Advisory Report” (Attachment B to the April 14, 2026 Policy & Services Committee item), April 2, 2026. This management response is not included in the June 8 City Council packet.
3 City of Palo Alto / Baker Tilly Advisory Group, LP (Office of the City Auditor), “City of Palo Alto Utility Reserves Advisory Report” (Attachment A to the April 14, 2026 Policy & Services Committee item), March 27, 2026. See pp. 5– 6 (rate-stabilization targets and 10–65% benchmark range; drawdown-language change), pp. 2 and 18 (Available Reserves bond covenant), and pp. 3 and 5 (CIP-reserve treatment of bond-funded projects).