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City Council
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Administrative Services
Meeting Date: August 10, 2026
Report #:2605-6413
TITLE
Adoption of a Resolution Authorizing the Borrowing of Funds on an Interim Basis for Improvements to the City's Regional Water Quality Control Plant and Authorizing the Execution and Delivery of a Revolving Credit Agreement, Fee Letter and Related Note; CEQA Status - Not a Project
RECOMMENDATION
Staff recommend that the City Council adopt the attached resolution (Attachment A) authorizing the borrowing of funds on an interim basis for improvements to the City's Regional Water Quality Control Plant and authorize the execution and delivery of a Revolving Credit Agreement and related Note for a total not to exceed $31 million for five years and a Fee Letter.
EXECUTIVE SUMMARY
The City of Palo Alto and its partner agencies are advancing more than $460 million in essential capital improvements at the Regional Water Quality Control Plant, and staff recommend approval of a $31 million Line of Credit (LOC) agreement with US Bank National Association (US Bank) to ensure efficient project delivery and maintain flexible cash flow. Debt service obligations have been incorporated into the City’s financial forecast and upcoming utility rate planning, with all partner agencies—except the City of Mountain View, which will cash-fund its portion—participating in the LOC. The LOC is secured by net revenues of the City’s Wastewater Treatment Fund and the Wastewater Collection Fund.
BACKGROUND
The Regional Water Quality Control Plant (RWQCP), originally constructed in 1934 and substantially expanded in 1972 with funding from the Federal Clean Water Act, is an advanced tertiary treatment facility that provides wastewater treatment for Palo Alto, Mountain View, Los Altos, Los Altos Hills, East Palo Alto Sanitary District, and Stanford University. Palo Alto owns the RWQCP infrastructure and administers the Wastewater Treatment Fund on behalf of all the
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partner agencies under the Basic Agreement between the Cities of Palo Alto, Mountain View, and Los Altos executed in 1968 and subsequent agreements with the minor partner agencies (hereby collectively referred to as the “partner agreements”). Payments received from all partner agencies are deposited in the Wastewater Treatment Fund, including payments received from the City of Palo Alto.
The Wastewater Collection Fund is Palo Alto’s partner to the RWQCP. The Wastewater Collection Fund develops the wastewater rate proposals based on Palo Alto’s share of the treatment plus the expenses that include operating and maintenance (O&M) and capital costs for the collection system.
The RWQCP is currently implementing over $460 million in capital improvements identified in the 2012 Long Range Facilities Plan (LRFP), including major projects such as the Secondary Treasury Upgrades (WQ-190001), Advanced Water Purification System (WQ-19003), and Headworks Facility Replacement (WQ-16002). These projects are in various stages of design and construction and are funded through a combination of State Revolving Fund (SRF) loans, grants, and debt financing.
Staff initiated a comprehensive update to the LRFP in 20241. The LRFP Update, currently underway, will reassess and reprioritize capital improvement needs over the next 50 years, incorporating consideration of updated regulatory requirements, emerging contaminants, and the current condition and performance of existing RWQCP infrastructure. The update will refine project scopes and cost estimates for remaining projects from the 2012 LRFP and identify additional capital improvements necessary to maintain reliable and compliant plant operations.
The LRFP Update is expected to significantly increase RWQCP’s overall capital needs, highlighting the importance of flexible financing tools such as the proposed LOC.
On November 4, 2025, the Finance Committee received an update of the capital improvement program, LRFP Update, capital and O&M cost allocations, program funding strategies and reserve policy2. Staff’s funding strategies include the following sources:
State Revolving Fund (SRF) loans administered by the State Water Resources Control Board
U.S. Environmental Protection Agency Water Infrastructure Finance and Innovation Act (WIFIA) loans
Utility revenue bonds issued through capital markets
Line of Credit (LOC)
Capital budget for smaller or shorter-term projects.
1 City Council, June 10, 2024; Agenda Item #6; SR# 2405-2993, https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=82887&dbid=0&repo=PaloAlto 2 Finance Committee, November 4, 2025:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=83790&dbid=0&repo=PaloAlto 9 4
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The selection of the funding source for each project depends on program eligibility (for SRF and WIFIA), prevailing interest rates at the time of the loan or bond issuance, repayment terms, and cash flow needs. Annual debt service payments are shared among all RWQCP partner agencies, with the exception of the City of Mountain View, through amendments to their partner agreements. Partner amendments are scheduled to be presented to the City Council in the fall.
Palo Alto is responsible for 38.16% share of debt-financed costs. These obligations directly affect the City’s Wastewater Collection Fund and are the primary driver for projected rate adjustments.
The LOC provides flexibility that is critical for project delivery by smoothing cash flow requirements and accommodating uncertainty in the timing and scale of capital expenditures.
The November 2025 Finance Committee report2 includes an LOC cost analysis. In June 2024, Council authorized staff to obtain a $31 million Line of Credit for the Wastewater Treatment Fund5; this authority allows the City Manager to negotiate and execute the LOC however per Palo Alto Municipal Code (PAMC) section 12.28, the LOCs must be approved by Council via resolution (Attachment A).
ANALYSIS
In late February 2026, the City’s municipal advisor, Public Financial Management (PFM) released a request for proposal (RFP) for an LOC. To provide the City with flexibility and distinct rates, the RFP requested proposals for both taxable and tax-exempt draws. The RFP was distributed to 19 banks and the City received two proposals, BMO and US Bank. Staff evaluated and discussed both proposals with the City’s financial advisor, PFM. Pricing for both proposals is comparable to other proposals received for other agencies of similar facility size and projects (i.e. water or water treatment). Staff recommend and has negotiated a five-year LOC with US Bank. Table 1 summarizes the pricing and fees received from BMO and US Bank. As of July 23, 2026, the one-month SOFR rate is 3.62%.
Table 1: Pricing and Fee Comparison
BMO
US Bank
(Recommended)
Pricing Tax-Exempt Rate: 82% 1M SOFR + 1.45%
Taxable Rate: 1M SOFR + 1.20%
Undrawn Fee: 0.30% of unutilized amount
5 Year
Tax-Exempt Rate: 80% 1M SOFR + 1.19%
Taxable Rate: 1M SOFR + 1.19%
Undrawn Fee: 0.25% of unutilized amount
Terms & Conditions Rate Covenant - 125% of Debt Service Additional Bonds Test - 125% of Debt Service
Rate Covenant - 125% of Maximum Annual Debt
Service*
Additional Bonds Test - 125% of Debt Service
Minimum Ratings of A3/A- for City's GO Debt
5 City Council, June 17, 2024:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=82897&dbid=0&repo=PaloAlto&searchid=a71833e6 -80d5-4688-8ab4-cd9a7edc4503 and Supplemental Memo:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=82929&dbid=0&repo=PaloAlto&searchid=a71833e6 -80d5-4688-8ab4-cd9a7edc4503
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Table 1: Pricing and Fee Comparison
BMO
US Bank
(Recommended)
Bank Ratings Long-Term (S/M/F): A+/A1/AA-
Short-Term (S/M/F): A-1/P-1/F1+
Outlook (S/M/F): Stable/Stable/Stable
Long-Term (S/M/F): A+/A2/A+
Short-Term (S/M/F): A-1/P-1/F1
Term Out Provisions Base Rate + 2.00% fixed for 3 years Base Rate + 3.00% fixed for 3 years Relevant Experience Los Angeles County Metropolitan Transportation Authority, City of Pasadena, City of Modesto,
Chicago Housing Authority, and Citizens Energy
Group
Santa Clara Valley Water District, SFPUC - Water
Enterprise, SFPUC Wastewater Enterprise,
Gainesville Regional Utilities, CO, Lower
Colorado River Authority
Fees
Legal Expenses Capped at $35,000 Estimated at $45,000; Capped at $50,000 Upfront Fee $0 $0
Termination Fee $0 One-year make whole termination provision *The Wastewater Treatment Fund compiles with the 125% of Maximum Annual Debt Service.
Under both proposals, security for the LOC is net revenues of the Wastewater Collection Fund and Wastewater Treatment Fund, on parity with the existing State Revolving Fund (SRF) installment sale agreements.
Regarding the City’s Debt Policy7, the Enterprise Funds have a debt service limit of 15% of operating expense. The estimated debt service limit for FY 2026 is 7.6%. Conservatively assuming a fixed $21 million drawn amount, with $10 million unutilized, issuance of a $31 million LOC would increase the fund’s debt service limit by approximately 2.2 to 2.6 percentage points between FY 2027 and FY 2028. The City Council approved an exception to the debt limit on December 5, 2022 upon approving the budget amendment to fund the Secondary Treatment Upgrade (STU) project using the 2022 SRF loan. Based on the estimated interest and cost forecast budget, the WWT Fund is estimated to exceed the 15% debt limit due in FY 2028 due to repayment of the 2022 SRF loan.
FISCAL/RESOURCE IMPACT
Amendments to the agreements with partner agencies to incorporate fiscal impacts of this LOC are scheduled for Palo Alto City Council consideration in fall 2026. The annual partner cost is approximately $0.8 to $1.0 million, which is lower than the $1.3 to $1.5 million range previously communicated to the City Council and partners in fall 2025. 7 City Debt Policy, Adopted by City Council on April 11, 2017:
https://www.paloalto.gov/files/assets/public/v/1/administrative-services/adopted-debt-policy-2017-04-11.pdf 9 4
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The City of Palo Alto, as a partner to the RWQCP, has assumed the impact of the LOC in its Financial Forecast and utility rates for FY 2027, as presented to the Finance Committee on March 17, 20269.
STAKEHOLDER ENGAGEMENT
The Administrative Services Department (ASD) and Public Works Department (PWD) work in close collaboration on the RWQCP capital improvement plan and its financing strategy. Staff in the ASD and PWD have also been meeting regularly with partner agencies to review financing needs, explain the structure of the LOC, and discuss repayment obligations.
ENVIRONMENTAL REVIEW
The proposed LOC is not a project as defined by the California Environmental Quality Act (CEQA) because approval of a LOC is a government funding mechanisms or fiscal activity which does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment. CEQA Guidelines section 15378(b)(4). The Individual capital improvement projects described in this report are exempt from CEQA review under section 15301 of the CEQA Guidelines because they involve the operation, repair, maintenance, permitting, or minor alteration to an existing facility with negligible or no expansion in use.
ATTACHMENTS
Attachment A: Resolution Authorizing the Borrowing of Funds on an Interim Basis for the RWQCP
APPROVED BY:
Lauren Lai, Administrative Services Director
9 Finance Committee, March 17, 2026:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=86854&dbid=0&repo=PaloAlto&searchid=da736b0 9-2d2f-4bc1-ac2c-38a18f34577e