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PRELIMINARY OFFICIAL STATEMENT DATED ________, 2026
NEW ISSUE – BOOK-ENTRY-ONLY RATING: S&P: “AAA”
(See “RATING” herein.)
In the opinion of Jones Hall LLP, San Mateo, California, Bond Counsel, subject, however to certain qualifications described herein, under existing law, the interest on the 2026 Bonds is excluded from gross income for federal income tax purposes and such interest is not an item of tax preference for purposes of the federal alternative minimum tax. Interest on the 2026 Bonds may be subject to the corporate alternative minimum tax. In the further opinion of Bond Counsel, such interest is exempt from California personal income taxes. See “TAX MATTERS.”
$14,500,000 *
City of Palo Alto
Water Revenue Refunding Bonds, 2026
Series A
Dated: Date of Delivery Due: As shown on inside front cover The City of Palo Alto, a chartered city and municipal cor poration (the “City”), is issuing its Water Revenue Refunding Bonds, 2026 Series A (the “2026 Bonds”), pursuant to an Indenture of Trust, dated as of October 1, 2026 (the “Indenture”), by and between the City and U.S. Bank Trust Company, National Association, as trustee (the “Trustee”), Articles 10 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code, and a resolution of the City Council, adopted on [September 14], 2026, authorizing the issuance of the 2026 Bonds.
The 2026 Bonds are being issued to (i) refund and defease all of the outstanding City of Palo Alto Water Revenue Bonds, 2009 Series A (the “Prior Bonds”) and (ii) pay the costs of issuing the 2026 Bonds. See “REFUNDING PLAN.” The 2026 Bonds are special obligations of the City and are se cured by, subject to certain restrictions set forth in the Indenture, a pledge of and lien on certain net revenues (the “Net Revenue s”) generated by the existi ng water system of the City (the “Water System”), which is operated by the City through the C ity’s Utilities Department (the “Utilities Department”). See “SECURITY FOR THE 2026 BONDS” herein.
The 2026 Bonds will be issued in fully registered form only an d, when executed and delivered, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company (“DTC”). DTC will act as securities depository for the 2026 Bonds. Beneficial ownership interests in the 2026 Bonds may be purchased in book-entr y form only. Payments of principal and interest (and premium, if any) will be paid by the Trustee to DTC for subsequent disbursements to DTC Participants who will remit such payments to the beneficial owners of the 2026 B onds. See “DESCRIPTION OF THE 2026 BONDS—Book-Entry-Only System” herein. The 2026 Bonds will be issued as fully registered bonds in denominations of $5,000 or any integral multiple of $5,000. Interest is payable on each June 1 and December 1, commencing December 1, 2026.
The 2026 Bonds are subject to mandatory redemption as described herein. S ee “DESCRIPTION OF THE 2026 BONDS—Redemption Provisions.”
Additional indebtedness payable from Ne t Revenues may be issued on a parity with the 2026 Bonds, subject to the conditions contained in the Indenture. See “SECURITY FOR THE 2026 BONDS—P arity and Subordinate Debt” herein.
NONE OF THE PROPERTIES OF THE WATER SYSTEM ARE SUBJECT TO ANY MORTGAGE OR OTHER LIEN FOR THE BENEFIT OF THE OWNERS OF THE 2026 BONDS AND NEITHER THE FULL FAITH AND
CREDIT NOR THE TAXING POWER OF THE CITY, THE STATE OF CALIFORNIA OR ANY POLITICAL
SUBDIVISION OR AGENCY OF THE STATE OF CALI FORNIA IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR INTEREST ON THE 2026 BONDS. NEITHER THE 2026 BONDS NOR THE OBLIGATION TO
PAY THE PRINCIPAL OF OR INTEREST THEREON CO NSTITUTES A DEBT OF THE CITY, THE STATE OF
CALIFORNIA OR ANY OF ITS POLITICAL SUBDIVISIONS WITHIN THE MEANING OF ANY CONSTITUTIONAL LIMIT ON INDEBTEDNESS.
This cover page is not intended to be a summary of the terms of, or the security for, the 2026 Bonds. Investors are advised to read this Official Statement in its en tirety to obtain information essential to the making of an informed investment decisio n, giving particular attention to the matters discussed under “CERTAIN INVESTMENT CONSIDERATIONS” herein. Capitalized terms used on this cover page and not otherwise defined have the meanings set forth herein.
The 2026 Bonds are offered, when, as and if issued by the Ci ty, subject to the approval of validity by Jones Hall LLP, Bond Counsel to the City, and to certain other conditions. Cert ain legal matters will be passed upon for the City by the Offic e of the City Attorney of the City. Certain legal matters will be passed upon for the City by Stradling Yocca Carlson & Rauth LLP, as Disclosure Counsel. It is expected that the 2026 Bonds in book-entry form will be available for delivery through the facilitie s of DTC on or about ______, 2026.
Date of Official Statement: _______, 2026
* Preliminary, subject to change.
This Preliminary Official Statement and the information contained herein are subject to completion or amendment. These securities may not be sold, nor may offers to buy them be accepted, prior to the time the Official Statement is delivered in final form. Under no circumstances shall this Preliminary Official Statement constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of, these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful.
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MATURITY SCHEDULE
$14,500,000*
City of Palo Alto
Water Revenue Refunding Bonds,
2026 Series A
Maturity Date
(June 1)
Principal
Amount
Interest
Rate Yield Price
CUSIP
Numbers†
2027 1,205,000
2028 1,285,000
2029 1,375,000
2030 1,480,000
2031 1,585,000
2032 1,695,000
2033 1,820,000
2034 1,955,000
2035 2,100,000
$_______ – ______% Term Bonds due June 1, 20__; Yield: ____%; Price ____; CUSIP No. †: _______
* Preliminary, subject to change.
† CUSIP® is a registered trademark of the American Bankers A ssociation. CUSIP Global Services (CGS) is managed on behalf of the American Bankers Association by FactSet Research Systems, Inc. All rights reserved. CUSIP® data herein is provided by CUSIP Global Services. This data is not intended to create a database and does not serve in any way as a substitute for the CG S database. CUSIP® numbers are provided for convenience of reference only. None of the City, the Underwriter, or their agents or counsel assumes responsibility for the accuracy of such numbers.
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CITY OF PALO ALTO
CITY COUNCIL MEMBERS
Vicki Veenker, Mayor
Greer Stone, Vice Mayor
Patrick Burt, Council Member
Ed Lauing, Council Member
George Lu, Council Member
Julie Lythcott-Haims, Council Member
Keith Reckdahl, Council Member
CITY STAFF
Ed Shikada, City Manager
Kiely Nose, Assistant City Manager
Lauren Lai, Director of Administrative Services
Christine Paras, Assistant Director of Administrative Services Jessie Deschamps, Senior Management Analyst
Christopher Jensen, City Attorney
Aylin Bilir, Assistant City Attorney
Mahealani Ah Yun, City Clerk
Utilities Department
Alan Kurotori, Director of Utilities
Lisa Bilir, Assistant Director of Utilities, Resource Management Utilities
PROFESSIONAL SERVICES
Jones Hall LLP
Bond Counsel
Stradling Yocca Carlson & Rauth LLP
Disclosure Counsel
PFM Financial Advisors LLC
Municipal Advisor
U.S. Bank Trust Company, National Association
Trustee
Causey Public Finance, LLC
Verification Agent
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GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT
No dealer, broker, salesperson or other person has been authorized by the City to give any information or to make any representations with respect to the offer or sale of the 2026 Bonds other than as set forth in this Official Statement and, if given or made, such other information or representation must not be relied upon as having been authorized by the City. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor will there be any sale of the 2026 Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale.
This Official Statement is not to be construed as a contract with the purchasers of the 2026 Bonds.
Statements contained in this Official Statement that involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of facts.
The information set forth in this Official Statement has been obtained from official sources and other sources that are believed to be reliable, but it is not guar anteed as to accuracy or completeness, and is not to be construed as a representation of the City. The inform ation and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder will under any circumstances create any implication that there has been no change in the affairs of the City or the Utilities Department since the date hereof. This Official Statem ent is submitted in connection with the sale of the 2026 Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose.
The Underwriter has provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information.
Certain statements included or incorporated by reference in this Official Statement constitute “forward- looking statements” within the meaning of the United St ates Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such stat ements are generally identifiable by the terminology used such as “plan,” “expect,” “estimate,” “budget” or other similar words. The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward- looking statements. No assurance is given that actual resu lts will meet the City’s or the Utilities Department’s forecasts in any way, regardless of the level of optimism communicated in the information. The City is not obligated to issue any updates or revisions to the forward-looking statements if or when its expectations, or events, conditions or circumstances on which such statements are based occur. See “CONTINUING DISCLOSURE.”
The Underwriter may offer and sell the 2026 Bo nds to certain dealers, dealer banks and banks acting as agent at prices lower than the public offering prices stated on the inside cover page of this Official Statement, and those public offering prices may be changed from time to time by the Underwriter.
The 2026 Bonds have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon an exemption fr om the registration requi rements contained in the Securities Act. The 2026 Bonds have not been registered or qualifie d under the securities laws of any state.
The City and the Utilities Department maintain websites and certain social media accounts. However, the information presented on such websites and such accounts is not a part of this Official Statement and should not be relied on in making an investment decision with respect to the 2026 Bonds.
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TABLE OF CONTENTS
INTRODUCTION ................................................ 2 The City ............................................................ 2 Authority for Issuance ...................................... 2 Purpose of 2026 Bonds ..................................... 2 Security for the 2026 Bonds ............................. 2 No Reserve Fund .............................................. 3 The Water System ............................................. 3 Continuing Disclosure ...................................... 3 Forward-Looking Statements ........................... 3 Additional Information ..................................... 3 REFUNDING PLAN ............................................ 4 Refunding of Prior Bonds ................................. 4 Verification ....................................................... 5
ESTIMATED SOURCES AND USES OF
FUNDS ................................................................. 5 DESCRIPTION OF THE 2026 BONDS .............. 5
Bond Terms ....................................................... 5 Transfer and Exchange ..................................... 6 2026 Bonds Mutilated, Destroyed, Stolen or
Lost ................................................................... 6 Redemption Provisions ..................................... 6 Book-Entry-Only System ................................. 7 SECURITY FOR THE 2026 BONDS .................. 8
Pledge of Net Revenues .................................... 8 Flow of Funds ................................................... 8 Rate Stabilization Fund ..................................... 9 Rate Covenant ................................................. 10 Parity and Subordinate Debt ........................... 10 DEBT SERVICE REQUIREMENTS ................. 11
THE CITY AND CITY UTILITIES ................... 11
The City ........................................................... 11 City Utilities ................................................... 12 Management of the Utilities Department ........ 12
Enterprise Staffing and Technology ................ 13
Enterprise Management Policy ....................... 14 Rates and Billing............................................. 14 Annual Financial Statements and
Significant Accounting Policies ...................... 14 THE WATER SYSTEM ..................................... 15 History ............................................................ 15 Service Area .................................................... 16 Water Storage and Distribution System .......... 16
Sources of Water Supply ................................. 16 Water Conservation Policies and Procedures .. 20
Historical Production and Deliveries .............. 21
Capital Improvement Program Summary ....... 22
Water Rates, Fees and Charges ....................... 23 Water Demand and Customer Base ................ 27
Management Discussion of Operations .......... 28
Statement of Net Position ............................... 29 Historical Operating Results ........................... 31 Reserves for the Water System ........................ 33 Projected Operating Results and Debt
Service Coverage ............................................. 35 Retiree Benefit Funding Policy ....................... 37 Retirement System .......................................... 37 Pension Trust ................................................... 43 Other Post-Employment Benefits .................... 43
CONSTITUTIONAL LIMITATIONS ON
TAXES AND WATER RATES AND
CHARGES .......................................................... 43
Article XIIIA ................................................... 43 Article XIIIB ................................................... 44 Articles XIIIC and XIIID; Proposition 218 ..... 44
Future Initiatives ............................................. 46
CERTAIN INVESTMENT
CONSIDERATIONS .......................................... 46 Special Obligations ......................................... 46 Reliance on Projections ................................... 47 Increasing Water Rates .................................... 47 Rate-Setting Process Under Proposition 218 .. 47
Statutory and Regulatory Compliance ............ 48
Risks Relating to the Water Supply ................. 48 Costs of Capital Improvement Program .......... 50
Cybersecurity .................................................. 50 Limitations on Remedies ................................. 50 LITIGATION ...................................................... 51 Absence of Litigation ...................................... 51 CERTAIN LEGAL MATTERS .......................... 51
TAX MATTERS ................................................. 51 Federal Tax Status ........................................... 51 Tax Treatment of Original Issue Discount
and Premium ................................................... 51 California Tax Status ....................................... 52 Other Tax Considerations ................................ 52 RATING .............................................................. 53 CONTINUING DISCLOSURE .......................... 53
UNDERWRITING .............................................. 53 MUNICIPAL ADVISOR .................................... 53 INDEPENDENT AUDITORS ............................ 53
MISCELLANEOUS ............................................ 55
APPENDIX A ANNUAL COMPREHENSIVE
FINANCIAL REPORT OF THE
CITY FOR THE FISCAL YEAR
ENDED JUNE 30, 2025
APPENDIX B DEMOGRAPHIC AND
ECONOMIC INFORMATION
ABOUT THE CITY
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APPENDIX C SUMMARY OF CERTAIN
PROVISIONS OF THE
INDENTURE OF TRUST
APPENDIX D PROPOSED FORM OF BOND
COUNSEL OPINION
APPENDIX E DTC AND THE BOOK-ENTRY-
ONLY SYSTEM
APPENDIX F FORM OF CONTINUING
DISCLOSURE
CERTIFICATE
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OFFICIAL STATEMENT
$14,500,000*
City of Palo Alto
Water Revenue Refunding Bonds,
2026 Series A
INTRODUCTION
The purpose of this Official Statement, which includ es the cover page and appendices hereto, is to set forth certain information in connection with the sale by the City of Palo Alto (the “City”) of its $14,500,000 * Water Revenue Refunding Bonds, 2026 Series A (the “2026 Bonds”).
Certain capitalized terms used in this Official Statement and not otherwise defined have the meanings set forth under APPENDIX C—“SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE OF TRUST.” All references to and summaries of provisions of the Indenture are qualified in their entirety by reference to the full Indenture, copies of which are available for inspection at the offices of the City.
The City
The City is located in northern Santa Clara County (the “County”), approximately 35 miles south of the City of San Francisco. The City has a population of approximately 69,004 as of January 1, 2026. It is part of the San Francisco Bay metropolitan area. Partly due to th e presence of Stanford University, which is adjacent to the City, the City is considered the birthplace of the high technology industry that has made the County famous worldwide as Silicon Valley. The City was incorporated in 1894. Its first Charter was granted by the State of California in 1909, and the City continues to operate as a charter city. Municipal operations are conducted under the Council-Manager form of government. The seven City Council Members are elected at large for four-year, staggered terms. For more information regarding the City, see “THE CITY AND CITY UTILITIES” and APPENDIX B—“DEMOGRAPHIC AND ECONOMIC INFORMATION ABOUT THE CITY.” Authority for Issuance
The 2026 Bonds are being issued pursuant to (a) Articles 10 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code, all as in effect on the Closing Date (the “Refunding Law”), (b) the terms and conditions of an Indenture of Trust, dated as of October 1, 2026 (the “Indenture”), by and between the City and U.S. Bank Trust Company, National Association, as trustee (the “Trustee”), and (c) a resolution of the City Council, adopted on [September 14], 2026, authorizing the issuance of the 2026 Bonds.
Purpose of 2026 Bonds
The 2026 Bonds are being issued to (i) refund and defease all of the City’s outstanding City of Palo Alto Water Revenue Bonds, 2009 Series A (the “Prior Bonds”) and (ii) pay the costs of issuing the 2026 Bonds.
See “REFUNDING PLAN.”
Security for the 2026 Bonds
Pledge of Net Revenues. The 2026 Bonds are special obligations of the City and are secured by, subject to certain restrictions set forth in the Indenture, a pledge of and lien on the Net Revenues generated by the Water System. See “SECURITY FOR THE 2026 BONDS—Pledge of Ne t Revenues.” None of the properties of the Water System are subject to any mortgage or other lien for the benefit of the owners of the 2026 Bonds and
* Preliminary, subject to change.
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neither the full faith and credit nor the taxing power of the City, the State or any political subdivision or agency of the State is pledged to the payment of the principal of or interest on the 2026 Bonds. Neither the 2026 Bonds nor the obligation to pay principal of or interest thereon constitutes a debt of the City, the State or any of its political subdivisions within the meaning of any Constitutional limitation on indebtedness. See “SECURITY FOR THE 2026 BONDS.”
Parity and Subordinate Debt . Additional bonds and other indebtedness payable from Net Revenues may be issued on a parity with the 2026 Bonds subject to the conditions of the Indenture (“Parity Debt”). Nothing in the Indenture prohibits the City from incurring obligations secured by Net Revenues on a basis subordinate to the 2026 Bonds. See “SECURITY FOR THE 2026 BONDS—Parity and Subordinate Debt.” No Reserve Fund
The City will not establish or maintain a debt service reserve fund for the 2026 Bonds. See “SECURITY FOR THE 2026 BONDS.”
The Water System
The “Water System” includes the existing water system of the City, comprising all facilities for the obtaining, conserving, treating, distributing, storing and supplying of water for domestic use, irrigation, sanitation, industrial use, fire protection, recreation, or any other public or private uses. The Water System does not include any facilities, properties or improvements constituting any portion of the City’s gas system (the “Gas System”), the City’s storm and surface water drainage system (the “Storm Drain System”), the City’s sanitary sewer system (the “Sewer System”), the City’s electric utility (the “Electric System”), the City’s fiber optics system (the “Fiber Optics System”), or the City’s refuse utility (the “Refuse System”). For more information on the Water System, see “THE WATER SYSTEM” herein.
Continuing Disclosure
In connection with the issuance of the 2026 Bonds, th e City Council will agree to provide, or to cause to be provided, to the Municipal Securities Rulemaking Board (“MSRB”) through its Electronic Municipal Market Access system (“EMMA”), for purposes of Rule 15c2-12(b)(5) (“Rule 15c2-12”) adopted by the U.S.
Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended, certain annual financial information and operating data relating to the City and the Water System, and notice of certain enumerated events. These covenants will be made in order to assist the Underwriter (as defined herein) in complying with Rule 15c2-12. See “CONTIN UING DISCLOSURE” and “APPENDIX F—FORM OF CONTINUING DISCLOSURE CERTIFICATE.”
Forward-Looking Statements
This Official Statement contains statements rela ting to future results that are forward-looking statements. When used in this Official Statement, th e words “estimate,” “anticipate,” “forecast,” “project,” “intend,” “propose,” “plan,” “expect” and similar ex pressions identify forward-looking statements. Such statements are subject to risks and uncertainties that co uld cause actual results to differ materially from those contemplated in such forward-looking statements. Any forecast is subject to such uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there are likely to be differe nces between forecasts and actual results, and those differences may be material.
Additional Information
Brief descriptions of the 2026 Bonds, the Indenture and certain other documents are included in this Official Statement and the appendices hereto. Such descriptions do not purport to be comprehensive or 4931-0398-6599v16/202059-0002 4
definitive. All references herein to such documents and any other documents, statutes, laws, reports or other instruments described herein are qualified in their entirety by reference to each such document, statute, law, report or other instrument. Information contained herein has been obtained from officers, employees and records of the City, the Utilities Department and from other sources believed to be reliable. The information herein is subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder will under any circumstances create any implication that there has been no change in the affairs of the City, the Utilities Department or the Water System since the date he reof. This Official Statement is not to be construed as a contract or agreement between the City and the purchasers or owners of any of the 2026 Bonds. The City and the Utilities Department maintain certain websites and social media accounts, the information on which is not part of this Official Statement, has not and is not incorporated by reference herein, and should not be relied upon in deciding whether to invest in the 2026 Bonds.
REFUNDING PLAN
The proceeds of the 2026 Bonds will be used to (i) refund and defease the Prior Bonds and (ii) pay the costs of issuing the 2026 Bonds.
Refunding of Prior Bonds*
The Prior Bonds were issued pursuant to an Indenture of Trust, dated as of October 1, 2009 (the “2009 Indenture”), by and between the City and U.S. Bank Trust Company, National Association, as successor in interest to U.S. Bank National Association, as truste e (the “2009 Trustee”). A por tion of the proceeds of the 2026 Bonds will be used to refund and defease the Prior Bonds. All of the Prior Bonds will be redeemed on [October 23], 2026 (the “Redemption Date”), at a redemption price equal to 100% of the principal amount thereof, plus accrued interest to the date of redempti on (the “Redemption Price”). Certain information with respect to the Prior Bonds is set forth in the table below.
City of Palo Alto
Water Revenue Bonds,
2009 Series A
(Taxable Direct Payment Build America Bonds)
Maturity Date
(September 1) Principal Amount Interest Rate
CUSIP
Numbers
*
2027 $1,555,000 4.700% 697388 AK2
2030 5,170,000 5.650 697388 AL0
2035 10,815,000 5.950 697388 AM8
* CUSIP® numbers are provided for convenience of reference only. None of the City, the Utilities Department, the Underwriter or their agents or counsel assumes responsibility for the accuracy of such numbers.
Pursuant to Irrevocable Refunding Instructions to be given by th e City to the 2009 Trustee (the “Instructions”), concurrently with delivery of the 2026 Bonds, the City will cause a portion of the proceeds of 2026 Bonds to be transferred to the 2009 Trustee, which amount the 2009 Trustee will then deposit in the Debt Service Fund maintained under the 2009 Indenture (the “2009 Debt Service Fund”). The 2009 Trustee will apply amounts deposited to the 2009 Debt Service Fund, along with other available moneys under the 2009 Indenture, to pay the Redemption Price of the Prior Bonds on the Redemption Date. Amounts in the 2009 Debt Service Fund are pledged to secure payment of the Prior Bonds and are not pledged to, or available for, payment of the 2026 Bonds.
* Preliminary, subject to change.
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Verification
Prior to the delivery of the 2026 Bonds, Causey Publ ic Finance, LLC (the “Verification Agent”), will deliver a report on the mathematical accuracy of certa in computations based upon certain information and assertions provided to them by the Underwriter relating to the adequacy of the moneys on deposit with the 2009 Trustee to pay the Redemption Price of the Prior Bonds on the Redemption Date.
ESTIMATED SOURCES AND USES OF FUNDS
The proceeds of the 2026 Bonds will be used for the following purposes:
Sources of Funds
Principal Amount of 2026 Bonds
[Plus/Less]: Original Issue [Premium/Discount]
Plus Funds on Hand
(1)
Total Sources
Uses of Funds
Redemption of Prior Bonds
Costs of Issuance
(2)
Total Uses
(1) Moneys on deposit in the debt service re serve fund maintained for the Prior Bonds. (2) Includes Underwriter’s discount, fees of Trustee, Municipal Advisor, Bond Counse l, Disclosure Counsel, and Verification Agent, printing expenses and miscellaneous fees and expenses.
DESCRIPTION OF THE 2026 BONDS
Bond Terms
General. The 2026 Bonds will be issued in the original principal amount of $14,500,000 *. The 2026 Bonds will be dated their date of delivery and are to be issued in the aggregate principal amount, bear interest at the rate per annum and mature on the dates set forth on th e inside front cover page of this Official Statement.
Interest on the 2026 Bonds is payable on each June 1 and December 1, commencing December 1, 2026 (each, an “Interest Payment Date”).
Registered Form. The 2026 Bonds are deliverable in fully registered form in the denomination of $5,000 each or any integral multiple of $5,000, and when issued will be registered in the name of Cede & Co. as nominee of The Depository Trust Company (“DTC”). Beneficial owners of the 2026 Bonds will not receive physical certificates representing the 2026 Bonds purchas ed, but will receive a credit balance on the books of the nominees of such beneficial owners. So long as Ce de & Co. is the registered holder of the 2026 Bonds, principal of and premium, if any, and interest evidenced and represented by the 2026 Bonds will be paid the Trustee directly to DTC, which will in turn remit such principal, premium, if any, and interest to its participants for subsequent disbursement to the beneficial owners of the 2026 Bonds. See “DESCRIPTION OF THE 2026 BONDS—Book-Entry-Only System.” Princi pal of and premium, if any, on the 2026 Bonds will be payable at maturity or prepayment upon surrender thereof at the principal corporate trust office of the Trustee.
Manner of Payment. Interest on the 2026 Bonds is payable on each Interest Payment Date to the person whose name appears on the Bond Registration Books as of the Record Date immediately preceding the applicable Interest Payment Date, such interest to be paid by check or draft of the Trustee mailed by first class mail to the Owner or, at the option of any Owner of at least $1,000,000 aggregate principal amount of the 2026 Bonds with respect to which written instructions have been filed with the Trustee prior to the Record Date, by wire transfer,
* Preliminary, subject to change.
4931-0398-6599v16/202059-0002 6
at the address of the owner as it appears on the Bond Registration Books. Principal of and premium (if any) on any 2026 Bond will be paid upon presentation and surrender thereof at the corporate trust office of the Trustee.
Both the principal of and interest and premium (if any) on the 2026 Bonds will be payable in lawful money of the United States of America.
So long as Cede & Co., is the registered holder of the 2026 Bonds, references to the holders or owners or registered holders or owners of the 2026 Bonds means Cede & Co. and not the beneficial owners of the 2026 Bonds.
Transfer and Exchange
Any 2026 Bond may, in accordance with its terms, be transferred upon the Bond Registration Books by the person in whose name it is registered, in person or by his duly authorized attorney, upon surrender of the 2026 Bond for cancellation, accompanied by delivery of a written instrument of transfer in a form approved by the Trustee, duly executed. Whenever any 2026 Bond is so surrendered for transfer, the City will execute and the Trustee will authenticate and deliver to the transferee a new 2026 Bond or 2026 Bonds of like tenor, maturity and aggregate principal amount. If a notice of redemption of any 2026 Bonds has been mailed pursuant to the redemption provisions of the Indenture, those 2026 Bonds will not be subject to transfer.
The 2026 Bonds may be exchanged at the Trust Office of the Trustee, for 2026 Bonds of the same tenor and maturity and of other authorized denominations.
2026 Bonds Mutilated, Destroyed, Stolen or Lost
If any 2026 Bond becomes mutilated, the City, at the expense of the Owner of that 2026 Bond, will execute, and the Trustee will authenticate and deliver, a new 2026 Bond of like maturity and principal amount in exchange and substitution for the 2026 Bonds so mutilated, but only upon surrender to the Trustee of the 2026 Bond so mutilated. The Trustee will cancel every mu tilated 2026 Bond so surrendered, and will deliver those canceled 2026 Bonds to, or upon the order of, the City.
If any 2026 Bond is lost, destroyed or stolen, evidence of such loss, destruction or theft may be submitted to the City and the Trustee. If such evidence is satisfactory to them, and indemnity satisfactory to them is given, the City, at the expense of the Owner, will execute, a nd the Trustee will authenticate and deliver, a new 2026 Bond of like maturity and principal amount in lieu of and in substitution for the 2026 Bond so lost, destroyed or stolen. (If any such 2026 Bond matures or is called for redemption, instead of issuing a substitute 2026 Bond the Trustee may pay the same without surrender thereof upon receipt of indemnity satisfactory to the Trustee).
The City may require payment of a reasonable fee for each new 2026 Bond issued and the reimbursement of any expenses incurred by the City or the Trustee. Any 2026 Bond issued in lieu of any 2026 Bond alleged to be lost, destroyed or stolen will constitute an original contractual obligation on the part of the City whether or not the 2026 Bond alleged to be lost, destroyed or stolen is at any time enforceable by anyone, and will be equally and proportionately entitled to the benefits of the Indenture with all other 2026 Bonds secured by the Indenture.
Redemption Provisions
*
No Optional Redemption. The 2026 Bonds are not subject to optional redemption prior to their stated maturity date.
Mandatory Sinking Fund Redemption . The 2026 Bonds maturing on June 1, 20__ are subject to mandatory redemption in part from sinking fund payments to be made by the City on June 1, 20__, and on each
* Preliminary, subject to change.
4931-0398-6599v16/202059-0002 7
June 1 thereafter up to and including June 1, 20__, at a redemption price equal to 100% of the principal amount thereof plus accrued interest, if any, to the redemption date without premium, as follows:
2026 Bonds Maturing June 1, 20__
June 1 of the Year Principal Amount
* Final Maturity Date.
Special Mandatory Redemption from Insurance or Condemnation Proceeds . The 2026 Bonds are subject to redemption as a whole or in part on any date, in inverse order of maturity and by lot within a maturity, to the extent of the Net Proceeds of hazard insurance not used to repair or rebuild the Water System or the Net Proceeds of condemnation awards receiv ed with respect to the Water System to be used for such purpose, at a Redemption Price equal to the principal amount of the 2026 Bonds plus interest accrued thereon to the date fixed for redemption, without premium.
Notice of Redemption . Unless waived by any Owner of 2026 Bonds to be redeemed, notice of any redemption of Bonds will be given, at the expense of the City, by the Trustee by mailing a copy of a redemption notice by first class mail at least 20 days and not more than 60 days prior to the date fixed for redemption to the Owner of the 2026 Bond or 2026 Bonds to be redeemed at the address shown on the Bond Registration Books; provided, that neither the failure to receive such notice nor any immaterial defect in any notice will affect the sufficiency of the proceedings for the redemption of the 2026 Bonds.
All notices of redemption must be dated and state the following: (i) the redemption date, (ii) the Redemption Price, (iii) if fewer than all Outstanding 2026 Bonds are to be redeemed, the identification (and, in the case of partial redemption, the respective principal amounts) of the 2026 Bonds to be redeemed, (iv) that on the redemption date the Redemption Price will become due and payable with respect to each such 2026 Bond or portion thereof called for redemption, and that interest w ith respect thereto will cease to accrue from and after the redemption date, and (v) the place or places where such 2026 Bonds are to be surrendered for payment of the Redemption Price, which places of payment may includ e the corporate trust office of the Trustee. On or prior to any redemption date, the City must deposit with the Trustee an amount of money sufficient to pay the Redemption Price of all the 2026 Bonds or portions of 2026 Bonds which are to be redeemed on that date.
So long as the 2026 Bonds are held only in the book-entry system of DTC, notice of redemption will be sent to Cede & Co., as nominee for DTC, and will not be sent to the beneficial owners of the 2026 Bonds.
Purchase in Lieu of Redemption. In lieu of mandatory redemption as described under “— Mandatory Sinking Fund Redemption” above, amounts in the Redemption Account of the Debt Service Fund may be used for the purchase of 2026 Bonds at public or private sale as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Debt Service Fund) as the City may determine, but not to exceed the principal amount of such 2026 Bonds.
Book-Entry-Only System
While the 2026 Bonds are subject to the book-entry system, the principal, interest and any redemption premium with respect to a 2026 Bond will be paid by the Trustee to The Depository Trust Company (“DTC”), which in turn is obligated to remit such payment to its DTC Participants for subsequent disbursement to 4931-0398-6599v16/202059-0002 8
Beneficial Owners of the 2026 Bonds, as described in APPENDIX E—“DTC AND THE BOOK-ENTRY- ONLY SYSTEM.”
SECURITY FOR THE 2026 BONDS
Pledge of Net Revenues
General. The 2026 Bonds are special obligations of the City payable solely from and secured by a pledge of Net Revenues in accordance with the Indenture. “Net Revenues” are defined in the Indenture to mean, with respect to the Water System, for any period of computation, the amount of the Gross Revenues received from the Water System during such period, less the amount of Maintenance and Operation Costs of the Water System becoming payable during that period. “Gross Revenues” are defined in the Indenture to mean for any period of computation, all gross charges received for, and all other gross income and revenues de rived by the City from, the ownership or operation of the Water System or otherwise arising from the Water Sy stem during that period, including but not limited to (a) all Charges received by the City for use of the Water System, (b) all receipts derived from the investment of funds held by the City or the Trustee under the Indenture, (c) transfers from any Rate Stabilization Fund into the Water Revenue Fund, and (d) all moneys received by the City from other public entities whose inhabitants are served pursuant to contracts with the City. Gross Revenues for a period of computation shall not include amounts deposited into the Rate Stabilization Fund during such period of computation, but only to the extent such deposits are made from amounts that would othe rwise constitute Gross Revenues that were received by the City during such period of computation.
“Maintenance and Operation Costs” are defined in the Indenture to mean the reasonable and necessary costs spent or incurred by the City for maintaining and operating the Water System, calculated in accordance with sound accounting principles. Maintenance and Operation Costs include the cost of supply of water, gas and electric energy under contracts or otherwise, the funding of reasonable operating reserves, and all reasonable and necessary expenses of management and repair and other expenses to maintain and preserve the Water System in good repair and working order. Maintenance and Operation Costs further include all reasonable and necessary administrative costs of the City attributable to the Water System and the 2026 Bonds, such as salaries and wages and the necessary contribution to retirement of employees, overhead, insurance, taxes (if any), expenses, compensation and indemnification of the Trustee, and fees of auditors, accountants, attorneys or engineers, and all other reasonable and necessary costs of the City or charges required to be paid by it to comply with the terms of the Indenture or any Parity Debt Instrument. Maintenance and Operation Costs do not include depreciation, replacement and obsolescence charges or reserves therefor and amortization of intangibles or other bookkeeping entries of a similar nature.
“Charges” is defined in the Indenture to mean fees, to lls, assessments, rates and rentals prescribed by the City Council for the services and facilities of the Water System furnished by the City.
Flow of Funds
The City covenants and agrees in the Indenture that all Gross Revenues will be received and held by the City in trust and will be deposited by the City in the Water Revenue Fund which exists in the City Treasury. The Gross Revenues will be accounted for separately and apart from all other money, funds, accounts or other resources of the City.
The Indenture provides that all Gross Revenues in the Water Revenue Fund will be applied, transferred, used and withdrawn in the order listed:
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(i) Operating Costs. The City will first apply Gross Revenues on deposit in the Water Revenue Fund to the payment of the budgeted Maintenance and Operation Costs when due and payable. (ii) Debt Service. On or before the third day other than a Saturday, Sunday or a day on which the Trustee is authorized by law to remain closed (“Business Day”) prior to each Interest Payment Date, the City will transfer from the Water Revenue Fund to the Trustee for deposit in the Debt Service Fund (created as a special fund for the 2026 Bond s under the Indenture) (i) an amount equal to the aggregate amount of interest to become due and payable on all Outstanding 2026 Bonds on the next succeeding Interest Payment Date, plus (ii) beginning on the third Business Day prior to the initial Sinking Fund Installment set forth in the Indenture, an amount equal to the aggregate amount of Principal Installments (including any Sinking Fund Installments) becoming due and payable on all Outstanding 2026 Bonds on the next succeeding date on which Principal Installments are required to be made pursuant to the Indenture (“Principal Installment Date”). All interest earnings and profits or losses on the investment of amounts in the Debt Service Fund will be deposited in or charged to the Debt Service Fund and applied to the purposes thereof. No transfer and deposit need be made into the Debt Service Fund if the amount contained therein, taking into account investment earnings and profits, is at least equal to the Interest Requirement or Principal Installments to become due on the next Interest Payment Date or Principal Installment Date upon all Outstanding 2026 Bonds.
Following the issuance of Parity Debt, if any, moneys will be transferred from the Water Revenue Fund to the Debt Service Fund and the debt service fund for any Parity Debt without preference or priority and, in the event of any insufficiency of such moneys, will be transferred on a pro rata basis based on the amount due on the 2026 Bonds and any Parity Debt on such Interest Payment Date and without regard to moneys available in a debt service reserve account. (iii) Debt Service Reserve Accounts. After making the payments, allocations and transfers provided for in subsection (ii) above, if the balance in a debt service reserve account for any Parity Debt is less than the required level, the deficiency will be restored by transfers from the first amounts which become available in the Water Revenue Fund. In the event of any insufficiency of such amounts, amounts will be transferred on a pro rata basis to the debt service reserve accounts for any Parity Debt based on the amount required to be deposited into the debt service reserve account. (iv) Surplus. As long as all of the foregoing payments, allocations and transfers are made at the times and in the manner set forth above, any amounts remaining in the Water Revenue Fund may at any time be treated as surplus and may be applied by the City in accordance with applicable laws.
Rate Stabilization Fund
The Indenture permits but does not require the City to establish and maintain a Rate Stabilization Fund, to be held by the City and administered in accordance with the Indenture, for the purpose of stabilizing the rates and charges imposed by the City with respect to the Water System. From time to time the City may deposit amounts in the Rate Stabilization Fund, from any source of legally available funds, including but not limited to Net Revenues which are released from the pledge and li en which secures the 2026 Bonds and any Parity Debt, as the City may determine. The City may, but is not required to, withdraw from any amounts on deposit in a Rate Stabilization Fund and deposit such amounts in the Water Revenue Fund in any Fiscal Year for the purpose of paying principal and interest coming due and payable in such Fiscal Year. Amounts so transferred from a Rate Stabilization Fund to the Water Revenue Fund will be applied for the purposes of the Water Revenue Fund.
Amounts on deposit in a Rate Stabilization Fund will not be pledged to or otherwise secure the 2026 Bonds or any Parity Debt. The City has the right at any time to withdraw any or all amounts on deposit in a Rate Stabilization Fund and apply such amounts for any lawful purposes of the City.
The Rate Stabilization Fund, if established by the City, would be a separate and distinct fund from the City’s Rate Stabilization Reserve (the “RSR”). (See the caption “THE WATER SYSTEM—Reserves for the 4931-0398-6599v16/202059-0002 10
Water System” for information regarding the City’s Water System reserve funds.) At this time, the City has not established a Rate Stabilization Fund.
Rate Covenant
The City has covenanted in the Indenture to fix and prescribe, at the commencement of each Fiscal Year, Charges for the Water System which are reasonably expected to be at least sufficient to yield during each Fiscal Year Net Revenues (including amounts transferred from the Rate Stabilization Fund to the Water Revenue Fund during such Fiscal Year) equal to one hundred twenty-five percent (125%) of Debt Service on the 2026 Bonds and all Parity Debt payable in such Fiscal Year.
The City may make adjustments fro m time to time in such rates and charges and may make such classification of such rates and charges as it deems necessary, but the City will not reduce the rates and charges then in effect unless the Net Revenues, from such redu ced rates and charges are reasonably expected to be sufficient to meet the requirements of the Indenture.
As long as the City has complied with its obligations set forth in above, the failure of Net Revenues to equal one hundred twenty-five percent (125%) of Debt Se rvice at the end of a Fiscal Year will not constitute a default or an Event of Default under the Indenture.
Parity and Subordinate Debt
In addition to the 2026 Bonds, the City may issue or incur Parity Debt pursuant to a Parity Debt Instrument subject to the following conditions precedent:
(a) The City must be in compliance with all covenants set forth in the Indenture. (b) The Net Revenues for the last audited Fiscal Year of the City, or for any consecutive twelve calendar month period during the eighteen calendar month period preceding the date of adoption by the City Council of the resolution authorizing the issuance of such Parity Debt or the date of the execution of such Parity Debt (the “Test Year”), must produce a sum equal to at least 125% of the Debt Service on the 2026 Bonds and outstanding Parity Debt for such Test Year.
(c) The Net Revenues for the Test Year, including adju stments to give effect as of the first day of such Test Year to increases or decreases in Charges for the service provided by the Water System approved and in effect as of the date of calculation, must produce a sum equal to at least 125% of: (i) the Debt Service on the 2026 Bonds and any Parity Debt outstanding in such Test Year; plus (ii) the Debt Service which would have accrued on any Parity Debt issued since the end of such Test Year, assuming that such Parity Debt had been executed or issued at the beginning of such Test Year; plus (iii) the Debt Service which would have accrued had such proposed additional Parity Debt been issued at the beginning of such Test Year.
Notwithstanding the foregoing, Parity Debt issued to refund the 2026 Bonds or any outstanding Parity Debt may be delivered without satisfying the conditions set forth above if total Debt Service on the 2026 Bonds or any outstanding Parity Debt after the issuance of such refunding Parity Debt is not greater than total Debt Service would have been prior to the issuance of such refunding Parity Debt. (d) The Parity Debt Inst rument providing for the issuance of such Parity Debt must provide that the proceeds of such Parity Debt will be applied to the acquisition, construction, improvement, financing or refinancing of additional facilities, improvements or extensions of existing facilities within the Water System, or otherwise for facilities, improvements or property which the City determines are of benefit to the Water System, or for the purpose of refunding any Bonds or Parity Debt in whole or in part, including all costs (including costs of issuing such Parity Debt and including capitalized interest on such Parity Debt during any period which the City deems necessary or advisable) relating thereto.
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See “APPENDIX C - Summary of Certain Provisions of the Indenture of Trust” for the definition of Debt Service.
Subordinate Debt. The Indenture authorizes the City to issue Bonds or other obligations secured by Net Revenues of the Water System on a basis subordinate to the pledge of Net Revenues to the 2026 Bonds, upon such terms and in such principal amounts as the City may determine.
DEBT SERVICE REQUIREMENTS
The following table sets forth the debt service funding requirements for the 2026 Bonds, assuming no redemptions prior to maturity.
Year Ended
June 1 Principal * Interest Total
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
Total
* Includes mandatory sinking fund installments.
THE CITY AND CITY UTILITIES
The City
The City is located in northern Santa Clara County (the “County”), approximately 35 miles south of the City of San Francisco. The City has a current population of approximately 69,004. It is part of the San Francisco Bay metropolitan area. Partly due to the presence of Stanford University, which is adjacent to the City, the City is considered the birthplace of the high technology industry that has made the County famous worldwide as Silicon Valley. The 700-acre Stanford Research Park includes prestigious and innovative high-tech leaders such as Hewlett-Packard, Rivian, Tesla, Google and the Electri c Power Research Institute. The City is also a major employment center, that includes Stan ford University, Stanford Hospital and Clinic, Hewlett Packard, U.S.
Department of Veterans Administration Hospital, Broadcom, Simon Property Group, Stanford Shopping Center, and the law offices of Wilson Sonsini Goodrich and Rosati.
The City was incorporated in 1894. Its first Charter was granted by the State of California in 1909, and the City continues to operate as a charter city. Municipal operations are conducted under the Council-Manager form of government. The seven City Council Members are elected at large for four-year, staggered terms. The Mayor and Vice Mayor are elected annually at the first City Council meeting in January. The Mayor presides over all City Council meetings. The City Manager is responsible for the operation of all municipal functions, except the offices of the City Attorney, City Clerk, an d City Auditor. These officials are appointed by, and report directly to, the City Council. For general, economic and demographic information regarding the City, see APPENDIX B—GENERAL AND ECONOMIC INFORMATION ABOUT THE CITY. 4931-0398-6599v16/202059-0002 12
City Utilities
The City operates the following utility systems:
the Water System,
the Sewer System and the Regional Water Quality Control Plant, the Electric System,
the Gas System,
the Storm Drain System,
the Refuse System, and
the Fiber Optics System.
The City’s Utilities Department is in charge of the operation of the Electric System, the Fiber Optics System, the Gas System, the Water System and the Wastew ater Collection System (which comprises a portion of the Sewer System) and the City’s Public Works Department is in charge of the operation of the Storm Drain System, the Refuse System and the Wastewater Treatme nt System (which comprises the remaining portion of the Sewer System).
As described more completely above (see “SECURITY FOR THE 2026 BONDS”), the 2026 Bonds will be secured by a pledge of, and lien on, the Net Revenues of the Water System. The 2026 Bonds are not secured by revenues of any other City utility.
Management of the Utilities Department
The Utilities Department is responsible for the operation of five utility systems (the Electric System, the commercial Fiber Optics System, the Gas System, the Water System and the Wastewater Collection System) that serve the City. The City, through its Utilities Department, services customer accounts for all of the City’s utilities (including the Storm Drain System and the Refuse System).
The Utilities Department is currently staffed by the following individuals, among others:
Alan Kurotori, Director of Utilities. Alan Kurotori was selected as Utilities Director for the City in May 2025, bringing over 30 years of executive leadership experience in municipal utilities and city government. Prior to his appointment, he served as the City’s Utilities Chief Operating Officer, where he advanced key strategic initiatives, including the Foothill Fire Mitigation Project electrical undergrounding and the development of a new 115kV transmission line serving the City. Before joining the City, Mr. Kurotori held several senior leadership roles with the City of Santa Clara, including Water & Sewer Utilities Director, Assistant City Manager during the construction of Levi’s Stadium, and Assistant Director of Electric Utility (Silicon Valley Power). He has also held executive positions with Valley Water and the City of Mountain View, as well as private sector experience as an engineering consultant in water suppl y, wastewater, recycled water, and public works.
Mr. Kurotori currently serves on the Board of Governors of the California Municipal Utilities Association and is a registered professional civil engineer in California. He holds a bachelor’s degree in civil engineering from the University of California, Berkeley.
Terry Crowley, Chief Operating Officer. Terry Crowley is the Utilities Chief Operating Officer. Prior to his current position, Mr. Crowley served for 14 years as the Utilities Director for the City of Healdsburg, where he oversaw the electric, water, and wastewater uti lities. He previously held engineering and operational roles with the City of Redding and Pacific Gas and Electric Company. Mr. Crowley holds a Bachelor of Science degree in Electrical Engineering from Washington State University and is a licensed Professional Electrical Engineer in the State of California.
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Tom Auzenne, Assistant Director of Utilities, Customer Support Services. Tom Auzenne is the Assistant Director of Utilities for Customer Support Services for the City. He has served in this role for more than 20 years, overseeing customer service, credit, and collections. Prior to joining the City, Mr. Auzenne held management, supervisory, and field positions at Pacific Gas and Electric Company in program marketing, energy efficiency, customer service, quality control, governmental affairs, pipeline operations, and communications.
Mr. Auzenne holds a Bachelor of Arts in Sociology from San Francisco State University.
Rekha Ippagunta, Assistant Director of Utilities, Water, Gas, and Wastewater Engineering and Operations. Rekha Ippagunta serves as the Utilities Assistant Director of Engineering and Operations for Water, Gas, and Wastewater for the City. Ms. Ippagunta has mo re than 20 years of experi ence in the utility sector, spanning municipal, public and investor-owned utilities, and private consulting. She held leadership roles at the Alameda County Water District, wher e she was responsible for development and execution of a $1.7 billion capital improvement plan. Previously, at California Water Service Company, she was responsible for capital program planning and delivery including managing and delivering capital projects across 23 water districts, notably completing high-priority water infrastructure projects and innovative treatment plant installations. She also worked as an engineering consultant and contributed to the design of water and wastewater infrastructure.
Ms. Ippagunta holds a Bachelor of Science degree in Civil Engineering and a Master of Science in Civil and Environmental Engineering from S.V. University, India. She is a registered Civil Engineer and a member of American Water Works Association.
Lisa Bilir, Assistant Director of Utilities, Resource Management . Lisa Bilir serves as the Assistant Director of Utilities of Resource Management for the City. Since joining the City in 2017, Ms. Bilir has overseen water supply planning and led financial forecasting and rate development across the electric, gas, water, and wastewater utilities. Her background includes 13 years of leadership in utility resource management and ratepayer advocacy at the California Public Utilities Commission. Ms. Bilir holds a Bachelor of Science degree in Biology from Stanford University and Master of Public Policy degree from the University of California, Berkeley.
Enterprise Staffing and Technology
The City employs approximately 44 full-time equiva lent employees to operate its water utility.
Thirty four employees are represented by Service Em ployees International Union (“SEIU”) in all matters pertaining to wages, benefits and working conditions. The current two-year agreement with this union, which is in the form of a memorandum of understanding, expires on December 31, 2027. Management employees receive substantially the same fringe benefit package as the SEIU members, and are represented by the Utilities Management and Professional Association of Palo Alto (“UMPAPA”). UMPAPA was originally established in 2009 and currently represents approximately 10 manage ment employees. Their current two-and-a-half-year contract is set to expire June 30, 2028. The City’s wa ge and fringe benefits are ge nerally comparable to those offered by other local public agencies.
The City covers substantially all of its permanen t employees under the California Public Employees Retirement System (“CalPERS”). Pension costs are funded by monthly contributions to CalPERS. Employees of the Department of Utilities participate in the Miscellaneous Plan, which is part of the Public Agency portions of CalPERS. In addition to providing pension benefits, the City participates in the California Public Employees Medical and Health Care Act to provide certain health care benefits for retired employees (“OPEB”), including employees of the Department of Utilities. Employees who retire directly from the City are eligible for benefits if they retire on or after age 50 with 5 years of service and are receiving a monthly pension from CalPERS. In fiscal year 2007-08, the City implemented the provisions of Governmental Accounting Standards Board Statement No. 45, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions (“OPEB”), and elected to participate in an irrevocabl e trust to provide a funding mechanism for its OPEB liability. As a result, the City maintains a Net OPEB Asset for funds placed in irrevocable trust in excess of its actuarially required contribution. See “WATER SYSTEM FINANCIAL INFORMATION – Other Post- Employment Benefits” below.
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Enterprise Management Policy
Treated as enterprise funds, the Electric, Gas, Re fuse, Water, Fiber Optics, Sewer and Storm Drain, Wastewater Collection, and Wastewater Treatment Systems are financed and operated in a manner comparable to private business enterprises. The City prepares a Five-Year Financial Forecast in connection with the development of its annual budget to identify and record progress in meeting benchmark goals and objectives. In addition, business plans are developed on an annual basis for the Water, Gas, Electric and Wastewater Collection Systems.
The City uses the accrual basis of accounting with respect to the enterprise funds. Revenues are recognized when earned, and expenses are recognized when incurred. Utility revenues are used to pay operating costs, bond debt service, most capital expenditures, and reserve accumulations. In accordance with City policy, the cost of providing utility services to the general public continues to be funded predominately through user charges.
The Utilities and Public Works Departments are expected to continue meeting all of their financial obligations while charging retail rates to their customer s that are comparable to th ose charged in neighboring cities. Careful budgeting and sound financial planning have been and will continue to be important factors in maintaining competitive rates. The Utilities Department recognizes the importance of minimizing wholesale commodity costs which is the largest expenditure category. Much time and effort are spent in dealing with the various commodity suppliers, regulatory agencies and commissions to help ensure reasonable and economical wholesale commodity costs.
Rates and Billing
The City Council has the authority to set utility rates for the Water System. The City sets rates to recover costs consistent with sound financial planning, while promoting efficient resource utilization and customer satisfaction. To achieve an appropriate balance between these objectives, the City forecasts all financial obligations and funding sources over a five year planning horizon. In this manner, timely rate adjustments for the Water System and the City’s other utilities are coordinated to assure adequate funding, minimize consumer impacts, and promote rate stability. To provide for rate stability and to ensure funds are available to cover any unforeseen cost contingencies, the City funds an Operating Reserve for the Water System. The City also funds a Rate Stabilization Reserve for the Water System (t he “RSR”) from surplus ne t water sales revenues and withdraws money from the RSR in subsequent periods to supplement retail water sales revenue as needed. The RSR is a separate and distinct fund from the “Rate Stabilization Fund” authorized under the Indenture.
The City collects utility charges by means of a single monthly bill to each customer, listing charges for each service provided. Uncollectible accounts for all utilities average approximately 0.32% of the amount billed.
In 2007, the City Council approved a project to implement a new utilities customer information system using SAP, the City’s core business system , also known as their Enterprise Re source Planning (ERP) system. The system was successfully implemented in May 2009, and it al lows for the billing of utilities customers. It also provides customer service staff with secure online access to customer information and gives customers the choice to pay their bill online. The City has improved the system over the years including continual upgrades of the system and additional features that allow for extended support hours.
Annual Financial Statements and Significant Accounting Policies The City’s annual financial statements will be audited by Macias Gini & O’Connell LLP (“MGO”), Sacramento, California, in accordance with generally accepted auditing standards and the standards for financial audits issued by the Comptroller General of the United States. The MGO audit report will contain opinions that the financial statements present fairly the financial position of the various funds maintained by the City. The annual financial statements include certain notes which may not be fully described in this Official Statement, but which constitute an integral part of the audited financial statements. 4931-0398-6599v16/202059-0002 15
The City’s most recent annual financial statement is attached as APPENDIX C—COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2025. Copies of prior reports are available on the City’s website (https://www.paloalto.gov/D epartments/Administrative- Services/Financial-Reporting) or upon request to the Administrative Services Department, City of Palo Alto, 250 Hamilton Avenue, Palo Alto, CA 94301.
Governmental accounting systems are organized and operated on a fund basis. A fund is defined as an independent fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein. Funds are segregated for the purpose of carrying on specific activitie s or attaining certain objectives in accordance with special regulations and restrictions.
As indicated above, the various Systems are accounted for as enterprise funds. Enterprise funds are used to account for operations (i) that are financed and operated in a manner similar to private business enterprises (where the intent of the governing body is that the co sts and expenses, including depreciation, of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges), or (ii) where the governing body has decided that periodic determination of revenues earned, expenses incurred or net income is appropriate for capital maintenance, public policy, management control, accountability or other purposes.
The City’s enterprise funds are accounted for usin g the accrual basis of accounting. Each fund’s revenues are recognized when they are earned, and their expenses are recognized when they are incurred, except for revenues from utility customers, which are recognized based on cycle billings. Revenues for services provided but not billed at the end of a fiscal period are not material and are not accrued.
The City has not requested nor did the City obtain permission from MGO to include the audited financial statements as an appendix to this Official Statement. Accordingly MGO has not performed any post-audit review of the financial condition or operations of the City.
THE WATER SYSTEM
History
When the City was incorporated in 1894, the majority of its population was served by private water companies that drew their supply from relatively shallow wells. In 1896, a bond issue was approved for purchase by the City of these private water companies. In succeeding years, additional purchases completed the acquisition of privately owned facilities. Deep wells provided water to the gradually increasing population until 1938, when the decline of the groundwater table necessitated the purchase of imported water. Thereafter, the City’s growing demand was met with increasing water supplies from the Public Utilities Commission of the City and County of San Francisco (the “SFPUC”), through a 36- inch pipeline. In 1962, in order to provide a very high quality of water to its customers, the City began supplying 100% of its potable water from the SFPUC.
Approximately 85% of the SFPUC s upply is derived from snowfield run-off to the Hetch Hetchy Reservoir in Yosemite National Park, and the remaining 15% is derived from rainfall run-off stored in San Francisco’s East Bay and Peninsula Reservoirs. The City also uses some recycled water produced at the City- operated Regional Water Quality Control Plant (“RWQCP”). Over the years, the City has added four additional SFPUC pipeline connections. Additionally, in 2019 the City signed a 76-year agreement with Santa Clara Valley Water (“Valley Water”) and the City of Mountain View (“Mounta in View”). The agreement includes Valley Water funding for a salt-removal facility at the RWQCP which will improve the quality of the recycled water.
The recycled water is used in the City of Palo Alto for the irrigation of the municipal golf course, a park, and other minor applications.
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Service Area
The City is the primary provider of water service within its incorporated limits and on other land owned or leased by the City. The City’s service area encompasses approximately 26 square miles.
Water Storage and Distribution System
The City’s water distribution system distributes potable water throughout the City to meet residential, commercial, industrial, irrigation and other water demands. The City operates five water supply connections or turnouts from the SFPUC’s Hetch Hetchy system. The distribution system average pressure is 72 pounds per square inch, with the maximum and minimum pressures being experienced at the lower and higher elevations of the distribution system. The City’s water system is presently comprised of 231 miles of main ranging in pipe diameter sizes from 4” to 30” serving nine pressure zones spanning 26 square miles. The City also operates five turnouts with SFPUC, seven booster pump stations a nd seven storage reservoirs ranging from 1.0 MG to 4.0 MG (with a total storage capacity of 13 MG). City water is distributed to approximately 24,000 metered connections.
Sources of Water Supply
The City’s current potable water supply consists entirely of purchased water from the SFPUC’s Hetch Hetchy system. The City also maintains interconnections with four neighboring water distribution systems (the City of East Palo Alto, Mountain View, Stanford, and Purissima Hills Water District). The City maintains eight groundwater wells, made up of 1 active well and 7 stand-by wells, with a 15.05 MGD capacity to provide near- normal water supply in case of SFPUC wate r supply interruption. The City also operates several tanks used to moderate pressure and deal with peaks in flow and demand (due to fire suppression, heavy usage times, etc.).
The sources of the City’s water supply are further described below.
SFPUC’s Hetch Hetchy System. The SFPUC’s water supply originates in the Hetch Hetchy reservoir and surrounding watersheds located in and around Yosemite National Park. Water flows by gravity across the California central valley to Sunol, where it is blended with water from local reser voirs, and is then pumped across the Hayward fault a nd through the Irvington Tunnel. Ther e the SFPUC’s Bay Di vision pipelines Number 1 and 2 carry water across the San Francisco Bay to Redwood City and to the Palo Alto Pipeline, which carries water south to three of the City’s water turnouts at Sand Hill Road, Lytton Avenue and California Avenue.
SFPUC Bay Division Pipelines Number 3 and 4 carry water around and below the southern end of San Francisco Bay to the City’s other two connecti ons to the SFPUC system at Arastrader o Road and Page Mill Road. The resulting blend of water represents approximately 85% Hetch Hetchy water and 15% local reservoir water.
The City has two 25-year water delivery contracts with the SFPUC, both of which were executed in June 2009: (i) a “Water Supply Agreement” (“WSA”), which is a master agreement between the City and County of San Francisco and the 26 Wholesale Customers (the “Wholesale Customers”), and (ii) an Individual “Water Sales Contract.” The contracts contain provisions for adjusting wholesale water rates to match changing wholesale revenue requirements of the SFPUC on a periodic basis.
The Water Supply Agreement guarantees a maximum supply of 184 million gallons per day (the “Supply Assurance”) collectively to all of the SFPUC’s 24 permanent Wholesale Customers. The SFPUC has agreed to deliver water to the Wholesale Customers up to the amount of the Supply Assurance, and this agreement is perpetual and survives the expiration of th e WSA. The Supply Assurance is, however, subject to reduction due to water shortage, drought, scheduled regional water system (“RWS”) maintenance activities, and emergencies. In 2009, the SFPUC a nd the Wholesale Customers agreed to maintain the ex isting allocation methodology that divides the Supply Assurance among th e individual Wholesale Customers. Twenty-three of the 24 permanent Wholesale Customers have an “Individ ual Supply Guarantee” (ISG), which represents their dedicated individual share of the 184 mgd Supply Assura nce. The ISGs are also perpetual and survive the expiration of the WSA. Palo Alto’s ISG is 16.575 million gallons per day, or 8,333,000 hundred cubic feet 4931-0398-6599v16/202059-0002 17
(CCF) per year (1). In May 2018, the City’s ISG was lowered to 16.575 million gallons per day from 17.075 million gallons per day upon City Council approval of a permanent ISG transfer of 0.5 million gallons per day to the City of East Palo Alto. In Fiscal Year 2024-25, the SFPUC deli vered an average of approximately
9.327 million gallons per day to the City, or a total of 4,543,561 hundred cubic feet.
On October 30, 2008, the SFPUC approved the Water System Improvement Program (“WSIP”), a long- range financial plan and capital improvement plan to address capital improvement needs and priorities for its water enterprise, which are intended to replace old systems or upgr ade systems to improve reliability and meet future customer needs. The WSIP is debt funded. Th e total estimated cost of the WSIP, which includes the SFPUC infrastructure to serve the City of San Francisco and its wholesale customers, including inflation and contingencies, is approximately $4.8 billion. The Water Supply Agreement specifies the repayment method and the amount that is to be borne by the wholesale customers (including the City). As of June 30, 2025, 99.3% of the WSIP regional construction cont racts are complete. The currently estimated WSIP completion date is June 2032.
The City anticipates that purchased water costs will continue to increase due to inflationary increases in operating costs and a gradual increase in debt service. SFPUC wholesale water rates for Fiscal Year 2025-26 were $5.80 per hundred cubic feet. SFPUC held a public hearing on April 28, 2026 and adopted the Fiscal Year 2026-27 Wholesale Water Rate of $6.23 per hundred cubic feet.
The SFPUC continues to evaluate its aging system for other needed infrastructure improvements; future major improvements include dam safety and Mountain Tunn el repairs. The wholesal e water rates for the past five years are as follows:
Fiscal Year Rate per CCF
2021 $4.10
2022 4.10
2023 4.75
2024 5.21
2025 5.67
2026 5.80
The latest forecast of wholesale water prices from the SFPUC incorporates the expected cost, schedule, and debt payment for the WSIP. San Francisco’s Utilities Advisory Commission voted in April 2026 to pass the recommended 7% increase in water rates, which take effect July 1, 2026. The price forecast is as follows:
Fiscal Year Rate per CCF
2027 $6.23
2028 6.70
2029 6.93
2030 7.09
2031 7.41
Interconnections with Neighboring Systems . The City maintains interconnections with four neighboring water distribution systems: Mountain View, the Stanford University campus, Purissima Hills Water District, and the City of East Palo Alto (“East Palo Alto”). These interconnections are available for use in cases of water distribution system emergencies. The City has the following interties with the other agencies: 1 intertie with East Palo Alto 6 inches in diameter, 2 interties w ith the City of Mountain View 6 inches in diameter, 2
(1) 1 CCF equals 748 gallons.
4931-0398-6599v16/202059-0002 18
interties with Stanford University campus 8 inches in diameter, and 2 interties with Purissima Hills Water District that are 8 and 12 inches in diameter.
Water Allocation Plan . The Water Supply Agreement includes a Water Shortage Allocation Plan (“WSAP”, also known as the “Tier 1 Shortage Plan”). The Tier 1 Shortage Plan describes the method for allocating water from the RWS betwee n the SFPUC’s Retail Customers, on the one hand, and the Wholesale Customers collectively, on the other, during system-wid e shortages caused by drought. The Tier 1 Shortage Plan applies only when the SFPUC dete rmines that a system-wide water shor tage due to drought exists, as set forth in a declaration of water s hortage emergency by the SFPUC Commissi on. In the absence of such a declaration, the SFPUC also may opt to request voluntary cutbacks from its Retail and Wholesale Customers to achieve water use reductions. The SFPUC and the Wholesale Cu stomers most recently amended the Tier 1 Shortage Plan in 2025.
Tier 1 Shortage Plan. The SFPUC allocates water under the Tier 1 Shortage Plan when it determines that the projected available water supply is less than projected system-wide water purchases for the upcoming Supply Year, defined as the period from July 1 through June 30. The following table shows the Retail Customers’ share and the Wholesale Cu stomers’ share of the annual water supply available during shortages depending on the level of system-wide reduction in water use that is required. If the SFPUC determines that the level of system-wide reductio n required during a shortage is greater than 20 percent, the SFPUC and the Wholesale Customers will meet to discuss the appropriate Retail and Wholesale Customers’ shares of available water. The Retail and Wholesale Customers’ shares of available water are also known as the Retail and Wholesale Customers’ Tier 1 Allocations. The Wholesal e Customers’ Tier 1 Allocation will be apportioned among the individual Wholesale Customers based on a separate methodology, known as the Tier 2 Drought Response Implementation Plan (“Tier 2 Plan”), which is separately adopted by all the Wholesale Customers without the SFPUC’s involvement as discussed further below.
Level of System‐Wide
Reduction in Water Use
Required
Share of Available Water
SFPUC Share Wholesale Customers Share
5% or less 35.5% 64.5%
6% through 10% 36.0% 64.0%
11% through 15% 37.0% 63.0%
16% through 20% 37.5% 62.5%
The Tier 1 Shortage Plan allows for voluntary transfers of shortage allocations between the SFPUC and any Wholesale Customer as well as between Wholesale Customers themselves. In addition, voluntary transfers of water “banked” by the SFPUC or a Wholesale Customer, through reductions in usage greater than required, may occur.
Under the Tier 1 Shortage Plan, if the Retail Cu stomers’ Tier 1 Allocation results in the Retail Customers receiving a “positive allocation” (i.e., a supply of additional water rather than a required reduction in water use), then the excess percentage for Retail is re-allocated to the Wholesale Customers’ Tier 1 Allocation.
The Retail Customers are also required to conserve a minimum of 5% for any level of reduction in system-wide water use. The additional water conserved by Retail Customers up to the minimum 5% level is deemed as remaining in RWS storage for inclusion in the calculation of projected available water in future successive dry years. The Tier 1 Shortage Plan wi ll expire at the end of the term of the WSA in 2034, unless the SFPUC and the Wholesale Customers mutually agree to revise or terminate it prior to that date.
Tier 2 Drought Allocations . The Wholesale Customers negotiated and adopted the latest Tier 2 Plan in 2025, which allocates the Wholesale Customers’ Tier 1 Allocations from the Tier 1 Shortage Plan among each of the 26 Wholesale Customers. These Tier 2 Allocations are based on a formula that takes into account multiple 4931-0398-6599v16/202059-0002 19
factors for each Wholesale Customer including residential population, non-residential “base” (i.e., indoor) use, seasonal uses, total RWS purchases in recent non-drought years, and ISG.
The Tier 2 Plan employs a structured, sequential, five-step method to allocate water to each Wholesale Customer. The allocations are constrained by minimum and maximum cutbacks, which establish the maximum final allocation and minimum guaranteed final allocation, respectively. No agency's final allocation can fall outside of these bounds. The allocation prioritizes indoor uses then allocates the remaining available water based on different customer demands. First focusing on indoor demand, water is allocated based on an agency’s residential population and the State residential efficient indoor standard (47 gallons per person per day (GPCD) in 2025), followed by an allocation based on non-residential “base” (i.e., indoor) use. A limited amount of water is allocated based on seasonal use (e.g., cooling towers and irrigation). Finally, the remaining supply is allocated based on a weighted share of two-thirds RWS purchases in the recent non-drought years and one-third ISG.
Upon implementation of the Tier 2 Plan, each Wholesal e Customers’ proportion would be expressed as a percentage of the available Tier 1 Allocation (the “Allocation Factor”).
The Tier 2 Plan requires that the Allocation Factors be calculated each year in preparation for a potential water shortage emergency. As the Wholesale Customers change their water use characteristics (e.g., increases or decreases in RWS purchases and use of other water sources, changes in monthly water use patterns, or changes in population), the Allocation Factor for each Wholesale Customer will also change. For long-term planning purposes, each Wholesale Customer may use the value identified in the Tier 2 Plan as its Allocation Factor.
Emergency Wells . Due to the critical need to ensure sufficient water supplie s are provided under emergency conditions, in accordance with City Council dire ction, the City accelerated the construction of the projects recommended in the Water Wells, Regional Storage and Distribution System Study, completed in 1999.
This study identified system deficiencies and recommended capital improvements to improve the operation and reliability of the City’s water distribution system, particularly during emergency situations. The City maintains five existing deep wells, three new wells, a 2.5 million gallon storage reservoir and associated pump station were constructed between 2009 and 2013 as part of an Em ergency Water Supply and Storage Project. The primary goal was to correct the deficiency in the City’s emer gency water supply. The well system can now support a minimum of eight hours of normal water use at the maximum day demand level and four hours of fire suppression at the design fire duration level. The groundwater system may also be used to a limited extent for water supply during drought conditions (up to 1,500 acre feet per year) and is capable of providing normal wintertime supply needs during extended shutdowns of the SFPUC system. Up to 11,000 gpm of reliable well capacity is available for emergency use as well as 13 million gallons of storage.
PFAS. Per- and poly-fluoroalkyl substances (“PFAS”) refers to a group of thousands of human-made chemicals that resist heat, oils, stains and water. They have been widely used in consumer products like nonstick cookware, stain resistant carpets and fabrics, waterproofing clothing, and food packaging. They have also been used in industrial processes and firefighting foams. PFA S are often called “forever chemicals” because they break down very slowly and can accumulate in humans, animals and the environment. PFAS have been found in water, air, and soil worldwide. Perfluorooctanoic acid (“PFOA”) and perfluorooctane sulfonic acid (“PFOS”) are two common PFAS chemicals.
The Utilities Department monitors and tests its water supply sources to ensure full compliance with state and federal regulations. The City’s primary source of water is imported from the SFPUC Hetch Hetchy system.
SFPUC conducts comprehensive testi ng for PFAS and other regulated c onstituents on the drinking water supplied to the City before it enters the local distribution system. The City maintains groundwater wells intended primarily for emergency back-up supply. The Utilities Department actively monitors and samples water from the City’s groundwater wells in accordance with California Division of Drinking Water (DDW) General Order DW-2022-0001-DDW. No PFAS contaminants have been detected in either the primary imported water supply from SFPUC or the City’s supp lemental groundwater supp ly. The water provided by the City fully complies with federal Maximum Contaminant Levels (MCLs) as well as state reporting requirements. Because testing confirms no detectable levels or levels within allo wable limits for different PFAS constituents, no additional 4931-0398-6599v16/202059-0002 20
treatment or infrastructure modifications for PFAS mitigatio n are required at this time. The City will continue to monitor to verify ongoing compliance with all evolving state and federal standards.
Bay Area Water Supply and Conservation Agency (BAWSCA) . The City is a member of a regional water district with 26 other entities, the Bay Area Water Supply and Conservation Agency (“BAWSCA”).
BAWSCA was created on May 27, 2003 to represent the interests of 24 cities and water districts and two private utilities in Alameda, Santa Clara and San Mateo counties that purchase water on a wholesale basis from the San Francisco regional water system. It has the power to issue debt and plan, finance, construct, and operate water supply, transmission, reclamation, and conservation proj ects on behalf of its members. BAWSCA’s financial statements can be obtained from BAWSCA, 155 Bovet Road, Suite 650, San Mateo, California 94402.
In 2013 the City participated in a debt issuance by BAWSCA. The debt was issued to repay certain long-term costs associated with the SFPUC water supply contract. The City’s share of BAWSCA’s annual debt service was $1.6 million in Fiscal Year 2024-25 and $1.5 million in Fiscal Year 2025-26; the City’s annual financial obligation to BAWSCA varies based on the City’s annual water purchases compared to other BAWSCA agencies.
Water Conservation Policies and Procedures
The City Council adopts an Urban Water Management Plan (“UWMP”) every five years. The latest update to the UWMP was adopted in June 2026 (the “2025 UWMP”). The 2025 UWMP contains the Urban Water Shortage Contingency Plan, which describes what the City would do in case of a water supply shortage.
The plan describes a set of activities that would need to be undertaken during various stages of a water supply shortage. There are six water shortage stages culminating in Stage VI, which is a critical water shortage where water supplies are reduced by more than 50%. Actions taken to respond to water shortage stages include outreach campaigns, water audit programs, expanded incentive programs for customers to install water efficient appliances, implementation of water use restrictions, a nd modifications of water rate structures or rationing programs. In a water shortage situation, the City would select the appropriate mix of actions to respond to the severity of the water shortage. The City has had extensive experience implementing programs to reduce customer use of water in water shortage situations. In the drought that occurred between 2012 and 2016, the City implemented mandatory restrictions and residents reduced water usage by 30%. This was followed by the drought that occurred in 2020-2023 during which the City reduced water use by 15% in response to voluntary water reductions measures. The most recent droughts have led to sustained reductions in water demand, and the City believes that additional reductions during future drou ghts are unlikely to be as dramatic as those achieved during the 2015 drought.
Water conservation programs are primarily admini stered by Valley Water. They include landscape audits for both residents and businesses, rebates and workshops for efficient landscape and irrigation equipment, as well as a custom program for businesses to encourage the innovative use of water conservation methods in business processes. AMI meters and customer portals provide customers with timely leak alerts and high-usage notifications to reduce water loss.
Water Supply Reliability. Since the City relies on the SFPUC RW S for its potable water supplies, the City’s water supply reliability mirrors that of the RWS. During a water supply shortage, contractually agreed upon allocation methods apply in limited circumstances. The amount of water available to San Francisco’s Retail Customers (the residential and commercial customers in the City of San Francisco) and wholesale customers will be impacted by the outcome of the Water Quality Control Plan for the San Francisco Bay/Sacramento-San Joaquin Delta Estuary (Bay Delta Plan Amendment or Bay Delta Plan). The 2025 UWMP assumes the Bay Delta Plan and associated unimpaired flow requirements for the Tuolumne River will be implemented as adopted by the state.
Given the City’s forecasted water demand and projections of water supply availability provided by the SFPUC, the City anticipates the need to implement water use reductions of up to 38% in the first dry year post 4931-0398-6599v16/202059-0002 21
Bay Delta Plan implementation. During the drought that occurred in 2012-16 (the “2015 Drought”), the City was able to reduce water use by 30% by restricting landscape irrigation to two times per week as well as a number of other measures. This was followed by the drought that occurred in 2020-23 (the “2021 Drought”) during which the City reduced water use by 15% in response to voluntary water reduction measures. The City’s proposed Water Shortage Contingency Plan includes actions to achieve water use reductions above 50%, but the City does not have actual experience in implementing su ch drastic measures. With each progressive stage, enforcement, rate strategies, and water use restrictions will be increased while putting in place mitigation measures to maintain the health of the City’s tree canopy.
In 2020, the City completed the One Water Plan, which presents a framework for evaluating water supply and water conservation alternative portfolios that may mitigate the impact of future water supply uncertainties such as severe multi-year drought, chan ges in climate, water demand, and regulations. The One Water Plan takes into consideration long-term reliability and dry year needs as well as cost, quality, and public acceptance.
Short-term emergency water needs will be met with the City’s groundwater wells and storage system, which was recently renovated to provide adequate fire protection following a disaster such as a major earthquake.
See “ — Sources of Water Supply — Emergency Wells.”
Historical Production and Deliveries
The following table sets forth a five-year history of water purchased from the SFPUC and delivered to customers in the Water System’s service area.
Table 1
WATER SYSTEM
WATER PURCHASES AND SALES
(in hundreds of cubic feet)
Fiscal Years 2020-21 through 2026-27
2020-21 2021-22 2022-23 2023-24 2024-25
2025-26
Est.
2026-27
Adopted
Budget
Wholesale Water Purchases 4, 785,384 4,709,184 4,210,399 4,319,814 4,543,561 4,466,055 4,510,198 Retail Water Sales 4,770,866 4,458,568 3,866,568 4,146, 710 4,284,538 4,193,496 4,203,938
Source: City of Palo Alto, Utilities Department.
4931-0398-6599v16/202059-0002 22
Capital Improvement Program Summary
The City currently projects that it will undertake capital improvements to the Water System for the current and the next five f iscal years in the aggregate amount of approximately $73 million. The following ta ble displays these projects. The City is currently evaluating whether to rehabilitate or replace two of its reservoir tanks. Rehabilitation of both tanks would cost approximately $5.5 million. Replacement of both tanks would cost approximately $17 million. In the event that the City decides to replace one or both tanks, it may consider bond financing for all or a portion of the project costs.
Table 2
WATER SYSTEM
WATER SYSTEM CAPITAL IMPROVEMENT PROGRAM SUMMARY
Project
Adopted
2026-27
Adopted
2027-28
Adopted
2028-29
Adopted
2029-30
Adopted
2030-31 Total
Use of Funds
Water Fund Administration $ 1,694,824 $ 1,733,372 $ 1,759,453 $ 1,790,832 $ 1,820,056 $ 8,798,537 Water System Customer Connections 1,240,000 1, 280,000 1,320,000 1,360,000 1,390,000 6,590,000 Water Main Replacement - Project 30 4,366,839 0 0 0 0 4,366,839 Water Main Replacement - Project 31 0 5,450,000 0 0 0 5,450,000 Water Main Replacement - Project 32 0 0 530,000 11,060,000 0 11,590,000 Water Main Replacement - Project 33 0 0 0 0 590,000 590,000 Main Replacements Total $ 4, 366,839 $ 5,450,000 $ 530,000 $ 11,060,000 $ 590,000 $ 21,996,839
Water Distribution System Improvements $ 370,000 $ 520,000 $ 250,000 $ 250,000 $ 260,000 $ 1,650,000 Water General Equipment/Tools 50,000 50,000 50, 000 50,000 50,000 250,000 Water Line Replacement at Arastradero Creek 683,186 800,000 1,400,000 0 0 2,883,186 Water Meters 500,000 500,000 280,000 450,000 475,000 2,205,000 Water Service and Hydrant Replacement 420,290 399,270 308, 270 300,000 300,000 1,727,830 Water System Master Plan 150,000 600,000 0 0 0 750,000
Water System Supply Improvements 1,380,990 2,489,000 1,000,000 800, 000 840,000 6,509,990 Water Tank Seismic Upgrade and Rehabilitation 100,000 550,000 8,780,000 0 7,780,000 17,210,000 Water, Gas, Wastewater Utility GIS Data 474,520 520,000 400,000 630,000 660,000 2,684,520 System Improvements Total 4,128,986 6,428,270 12,468,270 2,480,000 10,365,000 35,870,526
TOTAL USES $ 11,430,649 $ 14,891,642 $ 16, 077,723 $ 16,690,832 $ 14,165,056 $ 73,255,902
Source of Funds
Water System Customer Connections $ 1,573,940 $ 3,101,600 $ 3,141,600 $ 3,181,600 $ 3,211,600 $ 14,210,340 Transfer from Gas Fund 186,400 194,000 200,000 210,800 222,183 1,013,383 Transfer from Wastewater Collection Fund 186,400 194,000 200,000 210,800 222,183 1,013,383 Ratepayer Revenue 9,483,909 11,402,042 12,536,123 13,087,632 10,509,090 57,018,796 TOTAL SOURCES $ 11,430,649 $ 14,891,642 $ 16, 077,723 $ 16,690,832 $ 14,165,056 $ 73,255,902
Source: City of Palo Alto Utilities Department.
4931-0398-6599v16/202059-0002 23
Water Rates, Fees and Charges
Rate Setting Process . Water rates are based entirely on the City’s costs of purchased water and operating and maintaining the Water System. Purchased water costs comprise about 55% of the Water System’s budget. The City receives annual cost projections from its water wholesaler, SFPUC. To establish retail rates, these supply costs are added to other expense requirements related to operation of the water distribution system, including the payment of any outstanding debt and the funding of reserves.
Historical and Current Rate Increases. The City has historically adjusted water rates as necessary for each customer class. The most recent proposed rate increase was implemented on July 1, 2026. The City’s rate structure consists of distribution rates and a commodity rate. The distribution rates are based on the water utility’s cost of service, which are reviewed and approved by the City on an annual basis. The commodity rate is a pass-through of the SFPU C’s wholesale rate. The City has a pr actice of approving 5-year pass-through provisions for the SFPUC wholesale rate. As previously discussed, SFPUC is projecting annual rate increases for the next five years. Adjustments to the City’s water rates are subject to the noticing and public hearing requirements of Proposition 218. See “C ONSTITUTIONAL LIMITATIONS ON TAXES AND WATER RATES AND CHARGES — Articles XIIIC and XIIID; Prop osition 218.” Approxim ately 15% of the Water System’s total revenues come from fixed charges. The following table sets forth proposed and projected water rate increases.
Table 3
WATER SYSTEM
HISTORIC AND PROPOSED WATER RATE INCREASES FOR ALL CUSTOMER CLASSES (1)
Year Increase
2020-21 0%
2021-22 0
2022-23 5
2023-24 5
2024-25 10
2025-26 10
2026-27 8
2027-28 9
2028-29 9
(1) The percentages in this table represent overall average rate increases, which include both the City’s distribution rates and the SFPUC wholesale commodity rate.
Source: City of Palo Alto, Utilities Department.
Water Rate Structure . The City has five rate schedules: separately metered residential customers (W-1), commercial and master-metered multi-family residential customers (W-4), irrigation-only services (W-7), services to fire sprinkler sy stems in buildings and private hydrants (W-3), and service to fire hydrant rental meters used for construction (W-2). All customers pay a monthly service charge based on the size of their inlet meter. This charge represents meter reading, billing, and other customer service costs, and also the cost of maintaining the capability to deliver a peak flow for that customer based on their meter size.
All customers are also charged for each CCF (one hundred cubic feet) of water used. Separately metered residential customers are charged on a tiered basis, with the first 0.2 CCF per day (6 CCF for a 30-day billing period) charged at the first-tier price per CCF, and all ad ditional units charged a high er tier price per CCF.
Commercial customers, including most multi-family customers, pay a uniform price for each CCF used. A separate rate per CCF exists for separately metered irrigation service.
4931-0398-6599v16/202059-0002 24
The following tables set forth the Water System rates for the following: General Residential Water Service, Residential Master-Metered and General Non-Residential Water Service, and Non-Residential Irrigation Water Services. Water Rate Structure (1) monthly service charges, (2) commodity rate, (3) distribution rate and (4) drought surcharges. The rates shown below are per CCF of water usage.
General Residential Water Service. The schedule below applies to separately metered single-family residential dwellings receiving water service from the City.
Table 4
WATER SYSTEM
GENERAL RESIDENTIAL WATER SERVICE
In Effect Since July 1, 2026
Monthly Customer Charge
(by Meter Size)
Per Meter
Per Month
Residential:
5/8-inch to 1 inch $ 29.92
1 ½ inch 96.69
2-inch meter 149.57
3-inch meter 317.04
4-inch meter 563.87
6-inch meter 1,154.44
8-inch meter 2,124.06
10-inch meter 3,358.10
12-inch meter 4,415.87
Volumetric Rates
Per Hundred
Cubic Feet
Per Month
Commodity Rate:
Water delivery charge from SFPUC $ 6.23
Distribution Rate:
Tier 1 Usage 3.77
Tier 2 Usage 8.81
Source: City of Palo Alto, Utilities Department.
A drought surcharge will be added to the customer’s applicable commodity rate for Tier 1 and Tier 2 Water usage when the City Council has determined that a water reduction level is in effect for the City. The drought surcharges in the table below are measured in dollars per CCF.
Water Usage
Reduction level
Level 1
(10/15%)
Level 2
(20%)
Level 3
(25%)
Tier 1 0.20 0.43 0.64
Tier 2 0.58 1.21 1.85
Source: City of Palo Alto, Utilities Department.
Temporary unmetered service to residential
subdivision developers, per connection $6.00
Source: City of Palo Alto, Utilities Department.
4931-0398-6599v16/202059-0002 25
Residential Master-Metered and General Non-Residential Water Service. The schedule below applies to Water Services to non-residential buildings, and multi-family residential dwellings served through a Master- Meter.
Table 5
WATER SYSTEM
RESIDENTIAL MASTER-METERED AND GENERAL
NON-RESIDENTIAL WATER SERVICE
In Effect Since July 1, 2026
Monthly Customer Charge
(by Meter Size)
Per Meter
Per Month
5/8-inch meter $ 26.16
¾-inch meter 34.99
1-inch meter 52.62
1½-inch meter 96.69
2-inch meter 149.57
3-inch meter 317.04
4-inch meter 563.87
6-inch meter 1,154.44
8-inch meter 2,124.06
10-inch meter 3,358.10
12-inch meter 4,415.87
Volumetric Rates
Per Hundred
Cubic Feet
Per Month
Commodity Rate:
Water delivery charge from SFPUC $6.23
Distribution Rate: 5.32
A drought surcharge will be added to the customer’s applicable commodity rate when the City Council has determined that a water reduction level is in effect for the City. The drought surcharges in the table below are measured in dollars per CCF.
Water Usage
Reduction level
Level 1
(10/15%)
Level 2
(20%)
Level 3
(25%)
Surcharge 0.26 0.53 0.77
Source: City of Palo Alto, Utilities Department.
Non-Residential Irriga tion Water Services . The schedule below applies to non-residential Water Service supplying dedicated irrigation meters.
4931-0398-6599v16/202059-0002 26
Table 6
WATER SYSTEM
NON-RESIDENTIAL IRRIGATION WATER SERVICES
In Effect Since July 1, 2026
Monthly Customer Charge
(by Meter Size)
5/8-inch meter $ 26.16
¾-inch meter 34.99
1-inch meter 52.62
1½-inch meter 96.69
2-inch meter 149.57
3-inch meter 317.04
4-inch meter 563.87
6-inch meter 1,154.44
8-inch meter 2,124.06
10-inch meter 3,358.10
12-inch meter 4,415.87
Volumetric Rates
Per Hundred
Cubic Feet
Per Month
Commodity Rate:
Water delivery charge from SFPUC $6.23
Distribution Rate: 8.11
A drought surcharge will be added to the customer’s applicable commodity rate when the City Council has determined that a water reduction level is in effect for the City. The drought surcharges in the table below are measured in dollars per CCF.
Water Usage
Reduction level
Level 1
(10/15%)
Level 2
(20%)
Level 3
(25%)
Surcharge 0.53 1.25 2.02
Source: City of Palo Alto, Utilities Department.
Projected Rates. Beginning in Fiscal Year 2027-28, rates are projected to increase by 9%, 9%, 7% and 6% per year for each of the next four years, respectively. These projected rate increases could change depending on the future projections, and will largely depend on capital projects and restoration of reserves, as well as the future cost of purchased water and the volume of water sales.
Comparative Monthly Water Rates . The table below shows comparative monthly residential water bills for a usage rate of 9 hundred cubic feet by water suppliers serving neighboring communities for fiscal year 2025-26.
4931-0398-6599v16/202059-0002 27
Table 7
WATER SYSTEM
COMPARATIVE RATES FOR A VERAGE MONTHLY RESIDENTIAL SERVICE Fiscal Year 2025-26
Water Provider
Average
Monthly Rate (1)
Mountain View $101.14
Menlo Park $102.57
Palo Alto $125.19
Redwood City $128.81
Burlingame $134.48
Millbrae $161.79
Average excluding Palo Alto $126.76
(1) Represents rate for typical residential users based on cons umption of 9 CCF plus a service charge for a 5/8” meter.
Source: City of Palo Alto, Utilities Department.
Water Demand and Customer Base
On average, the City’s water customers consume 8.8 million gallons of water per day. However, demand rises and falls depending on the season, with the summer months showing high consumption and the fall and winter months having lower consumption. In fiscal year 2024-25, the Water System sold approximately 428.45 million cubic feet of water to approximately 20,600 users. (This amount is lower than water purchased from the SFPUC due to water losses in the storage and transmission system s, billing period differences and unmetered water uses.)
The following table sets forth a five-year history of the number of accounts for the Water System and the estimated number of accounts as of June 30, 2026.
Table 8
WATER SYSTEM
NUMBER OF ACCOUNTS
As of June 30, 2021 through 2025
Fiscal
Year
Number of
Accounts
2020-21 22,393
2021-22 22,414
2022-23 22,499
2023-24 22,631
2024-25 20,579
2025-26
(1) 20,621
(1) Estimated.
Source: City of Palo Alto, Utilities Department.
The following table shows billing amounts, water consumption in hundred cubic feet by customer type, and water consumption as a percentage of total consumption by type of customer for active water accounts during fiscal year 2024-25.
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Table 9
WATER SYSTEM
SUMMARY OF WATER ACCOUNTS AND USAGE BY USER TYPE
Fiscal Year 2024-25
User Type
Number of
Accounts Billings
Consumption
(in CCF)
Consumption
as Percent
of Total
Single Family Residences 15,589 $24,745,884 1,893,605 44% Multifamily 1,983 6,901,156 583,773 14
Commercial/Industrial 1,606 11,341,499 991,595 23
Other 1,401
10,701,272 815,565 19
Total 20,579 53,689,812 4,284,538 100
Source: City of Palo Alto, Utilities Department.
Largest Water Customers. For Fiscal Year 2024-25, total consumption was 4,284,538 CCF, and total operating revenues were $56.5 million. The ten largest customers accounted for approximately 21.32% of total consumption and 20.09% of to tal operating revenue. The largest cust omer (other than the City) accounted for
4.24% of total consumption and 2.12% of total operati ng revenue. Residential customers make up 58% of the Water System consumption.
The following table lists the ten largest customers of the Water System for fiscal year 2024-25, in alphabetical order:
Table 10
WATER SYSTEM
TEN LARGEST CUSTOMERS
Fiscal Year 2024-25
Primary
Business Activity Name
Government City of Palo Alto
High Tech Hewlett Packard
Financial Services OCA Holdings LLC
Recreation Palo Alto Hills Golf & Country Club
Education Palo Alto Unified School District
Real Estate Simon Property Group
Medical Stanford Hospital & Clinic
Apartment/Hotel Stanford West Management
Medical Veterans Administration Hospital
Technology VMware Inc./Broadcom Inc.
Source: City of Palo Alto, Utilities Department.
Management Discussion of Operations
Utilities Strategic Plan. The City continues to focus on providing a high quality and reliable source of water for its residents. The Palo Alto City Council approved the 2018 Utilities Strategic Plan on March 19, 2018. The Strategic Plan provides a road map to guide the CPAU efforts. The four priority focus areas are workforce, collaboration, technology and financial and resource optimization.
4931-0398-6599v16/202059-0002 29
Water Supply. With regard to water suppl y, the City’s wholesale supplier, the SFPUC, has provided rate projections indicating that the City’s wholesale costs will steadily increase over the next six years. This is due to the construction of seismic upgrades to the SFPUC water delivery system. These costs will be borne by the City and County of San Francisco as well as the SFPUC’s wholesale customers, including the City.
Sales Revenues. Water sales revenue during the past five years grew from $46.7 million in fiscal year 2020-21 to $53.5 million in fiscal year 2024-25. This represents a compound annual growth rate of 3.4% over this period. Annual change in water rates is provided in Table 3. In fiscal years 2025-26 and 2026-27, adopted water rates were of 10% and 8%, respectively, to recover rising wholesale purchase costs and distribution operating and capital costs. Between fiscal year 20 27-28 and fiscal year 2030-31, average water rates are projected to increase by 9%, 9%, 7% and 6% annually to fund capital projects and offset rising wholesale water purchase costs.
Capital Improvements. To improve the operation and reliability of the City’s water distribution system, the City’s Capital Improvement Program includes both ongoing maintenance and infrastructure upgrades as well as seismic upgrades. See “THE WATER SYSTEM—Cap ital Improvement Program Summary” above. This includes water main replacements, water tank seismic upgrades and rehabilitation, water system supply improvements, and other critical infrastructure maintenance.
Statement of Net Position
The following table sets forth the balance sheets of the Water System for fiscal years 2020-21 through 2024-25. These numbers are excerpted from the audited financial statements of the City which were prepared in accordance with generally accepted accounting principles.
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Table 11
WATER SYSTEM
STATEMENT OF NET POSITION
Fiscal Years Ended June 30, 2021 through 2025
(Dollars in Thousands)
2020-21 2021-22 2022-23 2023-24 2024-25
ASSETS
CURRENT ASSETS:
Cash and Investments $ 46,602 $ 43,523 $ 34,369 $ 26,263 $ 23,789 Accounts Receivable (Net) 6,636 6,142 6,178 7,277 7,920 Interest Receivable 228 239 247 194 173
Prepaid expense - 58 50 42 33
Restricted cash and investments with fiscal agents
and trustees 2,906 2,906 2,813 2,678 2,553
TOTAL CURRENT ASSETS $ 56,372 $ 52,868 $ 43,657 $ 36,454 $ 34,468
NON-CURRENT ASSETS:
Prepaid expense 67 - - - -
Capital assets - - - - -
Nondepreciable 17,926 17,644 24,400 22,570 25,279 Depreciable, net 115,588 120,209 118,378 127,244 127,826 Total noncurrent assets 133,581 137,853 142,778 149,814 143,105 TOTAL ASSETS $ 189,953 $ 190,721 $ 186,435 $ 186,268 $ 187,575
DEFERRED OUTFLOWS OF RESOURCES:
Unamortized loss from refunding $ 65 $ 52 $ 39 $ 26 $ 13 Pension related 2,660 2,434 4,178 3,905 3,090
OPEB related 757 905 1,248 1,631 1,262
TOTAL DEFERRED OUTFLOWS OF
RESOURCES
$ 3,482
$ 3,391 $ 5,465 $ 5,562 $ 4,365
LIABILITIES
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 2,175 $ 5,288 $ 4,306 $ 6,024 $ 1,755 Accrued Salaries and Benefits 176 217 230 265 294 Current portion of long term debt 1,852 1,930 - - - Current portion of lease liabilities - 124 158 40 149 Current portion of SBITA liabilities - - 37 - 15 Current portion of long term debt - - 2,008 2,087 2,172 Accrued claims payable - - - - -
TOTAL LIABILITIES $ 4,203 $ 7,559 $ 6,739 $ 8,416 $ 4,385
NONCURRENT LIABILITIES:
Net pension liabilities $ 16,803 $ 11,564 $ 16,962 $ 17,115 $ 16,242 Net OPEB liabilities 4,009 2,346 3,357 3,820 3,451
Lease liabilities - 201 56 16 648
SBITA liabilities - - - - 15
Long term debt, net of unamortized
discounts/premiums
26,051 24,083 22,038 19,917 17,707
Total noncurrent liabilities 46,863 38,194 42,413 40,868 38,063 TOTAL LIABILITIES $ 51,066 $ 45,753 $ 49,152 $ 49,284 $ 42,448
DEFERRED INFLOWS OF RESOURCES:
Pension related - 4,072 207 92 -
OPEB related 802 1,987 859 509 228
TOTAL DEFERRED INFLOWS OF RESOURCES - 6,059 1,066 601 -
NET POSITION
Net Investment in capital assets $ 105,676 $ 111,567 $ 118,520 $ 127,780 $ 132,412 Restricted for:
Debt service 2,906 2,906 2,813 2,678 2,553
Unrestricted (deficit) 32,985 27,827 20,349 11,487 14,297 TOTAL NET POSITION $ 141,657 $ 142,300 $ 141,682 $ 141,945 $ 149,262
Source: City of Palo Alto Comprehensive Annual Financial Statements, 2021-25.
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Historical Operating Results
The following table is a summary of operating results and debt service coverage of the Water System for the last five fiscal years. These results have been derived from the audited financial statements of the City for fiscal years 2020-21 through 2024-25. See APPENDIX C—COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2025.
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Table 12
WATER SYSTEM
SUMMARY STATEMENT OF HISTORICAL REVENUES, EXPENSES
AND CHANGES IN FUND NET POSITIONS
Fiscal Years 2020-21 through 2024-25
(Dollars in Thousands)
2020-21 2021-22 2022-23 2023-24 2024-25
OPERATING REVENUES:
Sales of Utilities:
Customers $ 44,154 $ 40,587 $ 39,823 $ 44,824 $ 51,167 City Departments 2,532 2,476 1,979 2,608 2,370
Service Connection Charge & Miscellaneous 1,239 951 1,005 1,661 1,489 Other Operating Revenues 887 878 915 1,046 1,482 Total Operating Revenues $ 48,812 $ 44,892 $ 43,722 $ 50,139 $ 56,508
OPERATING EXPENSES:
Purchase of Utilities $ 21,935 $ 21,249 $ 21,744 $ 24,651 (2) $ 27,856 (2) Administration and General 5, 771 4,671 5,779 7,844 6,689 Engineering (Operating) 663 492 468 638 652
Resource Management 1,215 1,262 1,591 1,428 1,105
Operations and Maintenance 7, 401 7,189 7,531 9,121 8,615 Rent 2,225 2,270 2,364 2,483 2,244
Depreciation and Amortization 3,127 3,570 3,753 3,930 3,959 Total Operating Expenses $ 42,338 $ 40,703 $ 43,230 $ 50,095 $ 51,120
Operating Income (Loss) $ 6,474 $ 4,189 $ 492 $ 44 $ 5,388
NON-OPERATING REVENUES
(EXPENSES):
Investment earnings $ 366 $ (2,915) $ 435 $ 2,460 $ 2,009 Interest Expense (1,476) (1,453) (1,332) (1,251) (1,210) Capacity F e e s
Loss on Disposal of Capital Assets (8) (72) (43) (168) (57) Other nonoperating revenues 462 676 421 403 395 Total Non-operating Revenues (Expenses) $ (656) $ (3,764) $ (519) $ 1,444 $ 1,137
INCOME (LOSS) BEFORE OPERATING
TRANSFERS $ 5,818 $ 425 $ (27) $ 1,488 $ 6,525
Capital contributions 533 (3) 123 131 255 (3) 333 (3)
Operating Transfers In 557 323 - 342 526
Operating Transfers (Out)(4) (268) (138) (722) (1,822) (67) Change in net position $ 6,640 $ 733 $ (618) $ 263 $ 7,317
Net Revenues Available for Debt Service
(1) $ 11,251 $ 5,828 $ 4,510 $ 5,612 $ 12,543
2009 Water Revenue Bonds $ 2,563 $ 2,563 $ 2,565 $ 2,564 $ 2,565 2011 Utility Revenue Refunding Bonds (Water
System Portion) 656 657 658 656 654
Total Debt Service $ 3,219 $ 3, 220 $ 3,223 $ 3,220 $ 3,219
Debt Service Coverage 3.50x 1.81x 1.40x 1.74x 3.90x
NET POSITION, BEGINNING OF YEAR, AS
PREVIOUSLY REPORTED $141,945
NET POSITION, BEGINNING OF YEAR $134, 927 $141,567 $142,300 $141,682 $141,945 NET POSITION, END OF YEAR $141,567 $142,300 $141,682 $141,945 $149,262 [Footnotes appear on following page]
4931-0398-6599v16/202059-0002 33
[Footnotes to Table 12]
(1) Depreciation and amortization, unrealized gain and loss on inves tments, loss on disposal of fi xed asset and Interest Expense have been added back.
(2) Significant increases due to SFPUC wholesale water rates incr easing by 10% in Fiscal Year 2023-24 and 9% in and Fiscal Year 2024-25. Furthermore, water sales increased post-drought, contributing to increased purchase costs. (3) Capital contributions represent capacity fees for new services. For these years, there were larger developments and connections.
(4) In general, Operating Transfers (Out) are for (i) centralized costs and (ii) the Water System's cost share of projects led by another utility. The large transfers out in Fiscal Year 2023-24 were due to overcollection and repayment of contribution for the Water, Gas, Wastewater Utility GIS Data project from the Water System to the Gas Utility and Wastewater Utility for Fiscal Years 2017-2018 to Fiscal Year 2021-2022. The proj ect is budgeted under the Water CIP. The Gas Utility and Wastewater Utility were making annual contributions or transfers to the Water Fund for such project but there were less GIS (Geographic Information System) activities performed than budgeted.
Source: City of Palo Alto.
Reserves for the Water System
The City uses reserves to protect against contingencies and to manage other aspects of its operations and regularly assesses the adequacy of these reserves and the management practices governing their operation.
The City’s formal reserve management practices for its Water Utility consist of the following:
The Reserve for Commitments is set to an amount equal to the total remaining spending authority for all contracts in force for the Water Utility at the end of each fiscal year.
The Reserve for Re-appropriations is set to an amount equal to the amount of all remaining capital and non-capital budgets, if any, that will be re-appropriated to the following fiscal year in accordance with Palo Alto Municipal Code Section 2.28.090.
The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for capital contingencies. Staff manages the CIP Reserve according to the following practices:
a) The following guideline levels are set forth fo r the CIP Reserve. These guideline levels are calculated for each fiscal year of the Financ ial Planning Period and approved by Council resolution.
Minimum Level: 20% of the maximum CIP Reserve guideline level Maximum Level: Average annual (12 month) CIP budget, for 48 months of budgeted CIP expenses
b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and the Reserve for Commitments when funds are added to or removed from that reserve as a result of a change in contractual commitments related to CIP projects. Any other additions to or withdrawals from the CIP reserve require Council action. c) Minimum Level: 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. In addition, staff may present, and the Council may adopt, an alternative plan th at takes longer than one year to replenish the reserve, or that does so in a shorter period of time.
d) Maximum Level: If there are funds in this re serve in excess of the maximum level staff must propose in the next Financial Plan to transfer these funds to another reserve, return the funds to
4931-0398-6599v16/202059-0002 34
ratepayers, or designate a specific use of the funds for CIP investments that will be made by the end of the next Financial Planning Period. Staff may also seek City Council to approve holding funds in this reserve in excess of the maximum level if they are held for a specific future purpose related to the CIP.
The RSR may be funded by action of the City Council and is intended to help manage the trajectory of future year rate increases. Withdrawal of funds from the RSR requires Council action. If there are funds in the RSR at the end of any fiscal year, any subsequent Water Utility Financial Plan must result in the withdrawal of all funds from this RSR by the end of the next Financial Planning Period. The Council may approve exceptions to this requirement, when proposed by staff to provide greater rate stabilization to customers. The RSR is a separate and distinct fund from the “Rate Stabilization Fund” authorized under the Indenture.
The Operations Reserve is used to manage normal variations in costs and as a reserve for contingencies.
Any portion of the Water Utility’s Fund Balance not included in the reserves described above will be included in the Operations Reserve unless this reserve has reached its maximum level as set forth below. Staff manages the Operations Reserve according to the following practices:
a) The following guideline levels are set forth for the Operations Reserve. These guideline levels are calculated for each fiscal year of the Financial Planning Period based on the levels of Operations and Maintenance (O&M) and commodity expense forecasted for that year in the Financial Plan.
Minimum Level: 60 days of O&M and commodity expense
Target Level: 90 days of O&M and commodity expense
Maximum Level: 120 days of O&M and commodity expense
b) Minimum Level: If, at the end of any fisc al year, the funds remaining in the Operations Reserve 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, and the Council may adopt, an alternative plan that takes longer than one year to replenish the reserve. c) Target Level: If, at the end of any fiscal year , the Operations Reserve is higher or lower than the target level, any Financial Plan created for the Water Utility shall be designed to return the Operations Reserve to its target level within four years. d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no funds may be added to this reserve. Any further increase in the Water Utility’s Fund Balance shall be automatically included in the Unassigned Reserve described below.
The Unassigned Reserve holds any further additions to the Water Utility’s Fund Balance once the Operations Reserve has reached its maximum level. If there are any funds in the Unassigned Reserve at the end of any fiscal year, the next Financial Plan presented to the City Council must include a plan to assign them to a specific purpose or return them to the Water Utility ratepayers by the end of the first fiscal year of the next Financial Planning Period. For example, if there were funds in the Unassigned Reserves at the end of Fiscal Year 2014-15, and the next Financial Planning Period is Fiscal Year 2015-16 through Fiscal Year 2020-21, the Financial Plan shall include a plan to return or assign any funds in the Unassigned Reserve by the end of Fiscal Year 2015-16. Staff may present an alternative plan that retains these funds or returns them over a longer period of time.
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Approximately $9.1 million was spent on capital projec ts in Fiscal Year 2023-24, excluding customer connection projects funded by connection fees, the largest of which were water main replacements, AMI water meters, and water regulation station improvements. Additionally, the water fund had large one-time expenses to comply with the federal lead and copper rule and pay for vehicle replacement costs, which reduced net operating cash flow for Fiscal Year 2023-24 and contributed to additional draws on reserves.
The table below sets forth actual levels of the Water System Fund Reserves as of June 30 for the last five fiscal years.
Table 13
WATER SYSTEM FUND RESERVES
Fiscal Years 2020-21 to 2024-25
(Dollars in Thousands)
2020-21 2021-22 2022-23 2023-24 2024-25
CIP $ 10,707 $ 10,707 $ 6,961 $ 3,500 $ 3,500
RSR 9,070 9,069 6,069 4,000 4,000
Operations & Unassigned 20,773
14,420 7,958 7,077 16,350
Total Reserves(1) $ 40,550 $ 34,196 $ 20,988 $ 14,577 $ 23,850
(1) Excludes Reserve for Commitments and Reserve for Re-appropriations.
Source: City of Palo Alto.
See also APPENDIX C—“COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2025.”
As of June 30, 2025, the System had approximately $23.8 million in unrestricted reserve (185 days cash at hand). Additionally, in December 2025, the City engaged Baker Tilly to perform a Utility Reserve Assessment. The assessment was reviewed by City Council on June 15, 2026 and the City anticipates that it will update the Water System’s reserve policies based on recommendations made in the Baker Tilly Utility Reserve Assessment.
Projected Operating Results and Debt Service Coverage
The following table is a summary of the projected op erating results of the Water System for the fiscal years ending June 30, 2026, through June 30, 2031. The financial forecas t represents the City’s estimate of projected financial results based upon its judgment of the most probable occurrence of certain important future events. The City assessed major cost drivers and expe cted costs, the short-term risks, reviewed reserve guidelines, and determined the revenue requirements for the next five y ears. The forecast reflects growing revenue to fund the expected operating and capital expenses over the next five years. Actual operating results achieved during the projection period may vary from those presented in the forecast and such variations may be material.
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Table 14
WATER SYSTEM
ESTIMATED AND PROJECTED REVENUES, EXPENSES AND NET REVENUES Fiscal Years 2025-26 through 2030-31
(Dollars in Thousands)
2025-26(1) 2026-27 (2) 2027-28 2028-29 2029-30 2030-31
OPERATING REVENUES:
Sales of Water(3) $ 57,398 $ 62,364 $ 68,227 $ 73,819 $ 78,264 $ 82,250 Service Connection Charge & Capacity Fees(4) 1,324 1,335 2,484 2,510 2,536 2,563 Other Operating Revenues and Transfers In(5) 398 408 418 428 439 450 Total Operating Revenues $ 59,119 $ 64,107 $ 71,129 $ 76,757 $ 81,239 $ 85,263
NON-OPERATING REVENUES
Interest Revenue $ 1,056 $ 1,077 $ 1,098 $ 1,120 $ 1,143 $ 1,165 Federal Government Interest Subsidy(6) 377 - - - - -
Other Transfers In(7) 345 266 422 444 455 467
Total Non-operating Revenues 1,778 1,342 1,520 1,565 1,598 1,632 Total Revenues $ 60,897 $ 65,449 $ 72,649 $ 78,322 $ 82,837 $ 86,896
OPERATING EXPENSES
Purchase of Water(8) $ 27,610 $ 29,938 $ 32,054 $ 32,788 $ 33,382 $ 34,523 Administration and General/Engineering/ Resource Mgmt/O&M(9) 20,502 21,207 22,094 22,756 23,439 24,142 Rent 2,311 2,410 2,482 2,557 2,634 2,713
Transfers Out(10) 390 525 538 426 562 513
NON-OPERATING EXPENSES
Other Transfers Out(11) 943 960 610 610 610 610 Total Expenses $ 51,756 $ 55,040 $ 57,778 $ 59,137 $ 60,626 $ 62,501
Net Revenues Available for Debt Service $ 9,141 $ 10,410 $ 14,871 $ 19,185 $ 22,211 $ 24,395
2009 Water Revenue Bonds $ 2,563 350 - - - -
2011 Utility Revenue Refunding Bonds (Water System Portion) 656 - - - - - 2026 Water Revenue Refunding Bonds -
1,678 1,950 1,975 2,012 2,043
Total Debt Service $ 3,219 $ 2,028 $ 1,950 $ 1,975 $ 2,012 $ 2,043
Debt Service Coverage 2.8x 5.1x 7.6x 9.7x 11.0x 11.9x
Net Revenues After Debt Service $ 5,922 $ 8,382 $ 12,921 $ 17,210 $ 20,199 $ 22,352
Reserve Balance As of Year En
d(12)
Capital Reserve $ 9,000 $ 11,000 $ 11,000 $ 11,000 $ 11,000 $ 13,500 Operations Reserve 12,175 12, 305 9,546 9,830 12,323 15,811 RSR 4,000 3,000 2,000 1,000 - -
Total Reserve Balance $ 25,176 $ 26,306 $ 22,547 $ 21,830 $ 23,324 $ 29,312 [Footnotes appear on following page]
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[Footnotes to Table 14]
(1) [Estimated actual.][to come]
(2) [Budgeted.]
(3) Sales of water for Fiscal Years 2027-28 through 2030-31 are assu med to increase as a result of rate increases described under the captions “—Water Rates, Fees and Charges— Projected Rates” and “—Management Discussion of Operations— Sales Revenues.” [Is consumption projected to remain constant?] (4) Service Connection Charge and Capacity Fees for Fi scal Years 2027-28 through 2030-31 are assumed to _________. (5) Other Operating Revenues and Transfers In includes _____________________. (6) Series 2009 Water Revenue Build Am erica Bonds interest subsidy. (7) Other Transfers In includes _____________________.
(8) Purchase of Water for Fiscal Years 2027-28 through 2030-31 is assumed to increase by _____ annually due to _________. (9) Administration and General/Engineering/ Resource Mgmt/O&M for Fiscal Years 2027-28 through 2030-31 is assumed to increase by _____ annually due to _________.
(10) Transfers Out includes _____________________.
(11) Other Transfers Out includes _____________________. (12) See the caption “—Reserves for the Water System.”
Source: City of Palo Alto.
Retiree Benefit Funding Policy
The City has taken strategic steps to address rising pension costs and long-term liabilities; including cost-sharing in labor agreements, implementing State Public Employees’ Pension Reform Act (PEPRA) lower benefit plans; establishing an irrevocable Section 115 Pension Trust (“Pension Trust”); and adopting the Retiree Benefit funding Policy.
The Retiree Benefit Funding Policy is an evergreen policy that automatically renews until goals are complete, subject to modification at the City Council’s di rection. The policy identifies a path forward for the City to address its pension obligations on an ongoing basis, ensures prudent and proactive financial planning, and avoids significant impacts to service delivery. The Retiree Benefit Funding Policy sets the goals of reaching a 90% funded status level of CalPERS determined liabilit y Fiscal Year 2036 and budgets ‘pay go’ costs, also known as Normal Cost (NC), of annual pension costs at discount rate of 5.3%, more conservative than the CalPERS rate of 6.8%.
Retirement System
This caption contains certain information relating to the California Public Employees Retirement System (“CalPERS”). The information is primarily derived from information produced by CalPERS, its independent accountants and actuaries. The City has not independently verified the information provided by CalPERS and makes no representations nor expresses any opinion as to the accuracy of the information provided by CalPERS.
The annual comprehensive financial reports of CalPERS are available on its Internet website at www.calpers.ca.gov. CalPERS makes its actuarial valuation reports and other information concerning benefits and other matters available on its website. Such information is not incorporated by reference herein. The City cannot guarantee the accuracy of such information. Actuarial assessments are “forward-looking” statements that reflect the judgment of the fiduciaries of the pension plans, and are based upon a variety of assumptions, one or more of which may not materialize or be changed in the future. Actuarial assessments will change with the future experience of the pension plans.
Plan Description. Substantially all qualified permanent and probationary employees are eligible to participate in the Public Agency Cost-Sharing Multip le-Employer Defined Benefit Pension Plan (the “Plan”) administered by the California Public Employees’ Retir ement System (the “CalPERS”). The Plan consists of individual rate plans (benefit tiers) within a safety risk pool (police and fire) and a miscellaneous risk pool (all others). Plan assets may be used to pay benefits for any employer rate plan of the safety and miscellaneous pools. Accordingly, rate plans within the safety or miscellaneous pools are not separate plans under GASB
4931-0398-6599v16/202059-0002 38
Statement No. 68. Individual employers may sponsor more than one rate plan in the miscellaneous or safety risk pools. The City of Palo Alto sponsors 10 rate plans (three miscellaneous and seven safety). Benefit provisions under the Plan are established by State statute and City of Palo Alto resolution. CalPERS issues publicly available reports that include a full description of the pension plan regarding benefit provisions, assumptions, and membership information that can be found on the CalPERS’ website at www.calpers.ca.gov.
On September 12, 2012, the California Governor signed the California Public Employees’ Pension Reform Act of 2013 (“PEPRA”) into law. PEPRA took effect January 1, 2013. Among other things, PEPRA:
(1) established PEPRA which applies to all public employers and public pension plans on and after January 1, 2013 (except specific exemptions); (2) established new retirement tiers/benefits for new public employees; (3) prohibited certain cash payment from being counted as compensation; and (4) increased retirement age for all new public employees.
For fiscal year 2026-27, the estimated total employer contribution, as a percent of projected payroll is
82.41% for all employees under the Safety Plan and 37.63% for all employees under the Miscellaneous Plan.
Benefits provided. CalPERS provides service retirement and disability benefits, annual cost of living adjustments and death benefits to plan members, who must be public employees and beneficiaries. Benefits are based on years of credited service, equal to a fixed percentage of their highest annual salary formula as determined by the benefit program they participate in. Members with five years of total service are eligible to retire at age 50 with statutorily reduced benefits. All members are eligible for non-duty disability benefits after 10 years of service. The death benefit is one of the following: the Basic Death Benefit, the 1957 Survivor Benefit, or the Optional Settlement 2W Death Benefit.
The Plans’ provisions and benefits in effect as of June 30, 2026, are summarized in the following table.
Contribution rates are based on the Actuarial Valuation Report as of June 30, 2025.
Safety Plan
Fire Fighters,
Fire Chief
Association,
Police Officers
Fire Fighters,
Fire Chief Association
Police Officers,
Police Management
Fire Fighters,
Fire Chief
Association,
Police Officers
Hire Date Prior to June 8, 2012 On or after June 8, 2012 On or after Dec. 8, 2012 On or after Jan 1, 2013 Benefit formula(1) 3% at 55 3% at 55 3% at 50 2.7% at 57 Benefit vesting schedule 5 years service 5 y ears service 5 years service 5 years service Benefit payment monthly for life monthly for life monthly for life monthly for life Retirement age 50 55 (1) 55 (1) 57 (1)
Monthly benefit as % of eligible compensation 3% 3% 3% 2.7% Employee contribution rate 9% 9% 9% 11.75%
Employer contribution rate as a % of payroll 82.41% 82.41% 82.41% 82.41%
Miscellaneous Plan
Hire Date Prior to July 17, 2010 On or af ter July 17, 2010 On or after Jan 1, 2013 Benefit formula 2.7% at 55 (2) 2% at 60(2) 2% at 62 (3) Benefit vesting schedule 5 years servic e 5 years service 5 years service Benefit payments monthly for life monthly for life monthly for life Retirement age 55 (2) 60(2) 62 (3)
Monthly benefit as % of eligible
compensation
(2)
2.70% 2.0% - 2.418% 2%
Employee contribution rate 8% 7% 6.25%
Employer contribution rate as a % of payroll 37.63% 37.63% 37.63%
(1) Employees can retire at age 50 with reduced benefits of 2.4% - 2.88% if hired before Jan 1, 2013, or 2.0% - 2.6% if hired on o r after Jan 1, 2013.
(2) Employees can retire at age 50 with reduced benefits of 2.0% - 2.56% if hired before July 17, 2010, or 1.092% - 1.874% if hire d on or after July 17, 2010.
(3) Employees can retire at age 52 with reduced benefits of 1.0% - 1.9%.
Source: CalPERS Miscellaneous Plan and Safety Plan for the City of Palo Alto Annual Valuation Report as of June 30, 2025.
4931-0398-6599v16/202059-0002 39
Employees Covered. As of the June 30, 2025 actuarial valuation date, the following employees were covered by the benefit terms:
Description Miscellaneous Safety Plan
Active members 833 172
Inactive employees or beneficiaries currently receiving benefits 1,393 464 Inactive employees entitled to but not yet receiving benefits 927 133
Total 3,153 769
Source: CalPERS Miscellaneous Plan and Safety Plan for the City of Palo Alto Annual Valuation Report as of June 30, 2025.
Contributions. Section 20814(c) of the California Public Employees’ Retirement Law requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and shall be effective on the July 1 following notice of a change in the rate. Funding contributions for the Plan is determined annually on an actuarial basis as of June 30 by CalPERS. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability . The City is required to contribute the difference between the actuarially determined rate and the contribution rate of the employees. For the year ending in June 30, 2025, the City’s actuarial determined contributions were $38.3 million and $19.6 million for the Miscellaneous Plan and Safety Plan, respectively.
The required employer contribution is comprised of a Normal Cost component and a component equal to an amortized amount of the unfunded liability or annual Unfunded Accrued Liability (“UAL”) Payment. The Normal Cost is the annual cost of service earned by active employees for the upcoming fiscal year, which is expressed as a percentage of payroll. Employer Normal Cost contribution rates may change if plan contracts are amended. PEPRA employees contribute 50% of the base total normal cost established by the plan. The annual UAL Payment is the amortized dollar amount needed to fund past service credit earned (or accrued) for members who are currently receiving benefits, active members, and for members entitled to deferred benefits, as of the valuation date. The UAL Payment is a fixed dollar annual payment that is either billed monthly or at the option of each agency may be paid in a lump sum at the beginning of each fiscal year to achieve a cost savings. The City has historically paid the annual UAL in a lump sum at the beginning of each year.
Beginning in fiscal year 2016 for pooled plans, CalPERS began collecting employer contributions for the Plan as a percentage of payroll for the normal cost portion and as a dollar amount for contributions toward the unfunded liability and side fund. According to CalPERS, this change was designed to improve long-term funding stability.
For the year ended June 30, 2025, the City’s total required UAL contributions were $31,148,575 for the Miscellaneous Plan and $16,015,933 for the Safety Plan. The City’s required UAL contributions in fiscal year 2025-26 were $31,719,724 for the Miscellaneous Plan and $17,945,551 for the Safety Plan, and the City has made such UAL payments. The City’s required UAL co ntributions in fiscal year 2026-27 are estimated by CalPERS to be $30,430,626 for the Miscellaneous Plans and $19,668,377 for the Safety Plans.
Water System Share of CalPERS Plan. Salary and benefit costs of the Water System include funding of retirement benefits for employees assigned to the Wate r System who, as City employees, participate in the City’s Miscellaneous CalPERS Plan. City employees assigned to the Water System constitute approximately
4.3% of all City employees and payments made by the City to CalPERS from Revenues amounted to approximately $2,240,089 in Fiscal Year 2024-25, or approximately 3.5% of the City’s total payments to CalPERS in 2024-25. The information under this ca ption “—Employees’ Retirement Plan – CalPERS” describes the City’s overall Safety and Miscellaneous CalPERS plans; however, only the portion of the Miscellaneous CalPERS plan attributable to City employees assigned to the Water System is payable from Net Revenues.
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The tables below are derived from the City’s Annual Valuation Reports with valuation dates as of June 30, 2025 and delivered in August 2026 (the “2026 Reports”) and show the required and projected employer contributions for the next six fiscal ye ars. Such projections also assume th at all actuarial assumptions will be realized and that no further changes to assumptions, contributions, benefits, or funding will occur during the projection period. The projected normal cost percentages in the projections below does not reflect that the normal cost will decline over time as new employees are hired into PEPRA or other lower cost benefit tiers.
The projections set forth below assume the investment return for fiscal year 2025-26 and beyond would be 6.8%. CalPERS announced a preliminary investment re turn of 14.8% for fiscal y ear 2025-26. As a result, the actual contribution requirements for the following fiscal years shown below may differ from such projections.
No assurance can be provided that the City’s CalPERS plan expenses will not increase significantly in the future.
Miscellaneous Risk Pool
Projected Employer Contribution
Required
Contribution
Projected Future Employer Contributions
(Assumes 6.80% Return for fiscal year 2026-27 and Beyond) 2027-28 2028-29 2029-2030 2030-31 2031-32 2032-33
Normal Cost % 10.36% 10.1% 9.9% 9.6% 9.4% 9.2%
UAL Payment $31,091,460 $33,033,000 $32,426,000 $31,716,000 $29,607,000 $29,134,000 Total as a % of Payroll 35.65% 36. 2% 34.7% 33.3% 30.8% 29.7% Projected Payroll $122,931,042 $126,618,973 $130,417, 542 $134,330,069 $138,359,971 $142,510,771
Source: CalPERS Miscellaneous Plan for the City of Palo Alto Annual Valuation Report as of June 30, 2025.
Safety Risk Pool
Projected Employer Contribution
Required
Contribution
Projected Future Employer Contributions
(Assumes 6.80% Return for fiscal year 2026-27 and Beyond) 2027-28 2028-29 2029-30 2030-31 2031-30 2032-33
Normal Cost % 19.65% 19.0% 18.4% 17.8% 17.2% 16.7%
UAL Payment $20,286,655 $21,356,000 $21, 181,000 $20,959,000 $20,966,000 $20,888,000 Total as a % of Payroll 75.48% 76.1% 73.3% 70.6% 68.5% 66.3% Projected Payroll $36,338,610 $37,428,768 $38,551,630 $39,706,180 $40,899,425 $42,126,408
Source: CalPERS Safety Risk Pool Plan for the City of Palo Alto Annual Valuation Report as of June 30, 2025.
Net Pension Liability . The City’s net pension liability for th e Plan is measured as the proportionate share of the net pension liability. The net pension liability of the Plan is measured as of June 30, 2024, and the total pension liability for the Plan used to calculate the net pension liability was determined by an actuarial valuation as of June 30, 2023, rolled forward to June 30, 2024, using standard update procedures. The City’s proportion of the net pension liability was based on a pr ojection of the City’s long-term share of contributions to the pension plan relative to other projected contributions of all participating employers, actuarially determined.
Sensitivity of Proportionate Share of the Net Pension Liability to Changes in the Discount Rate. The following presents the City’s proportionate share of th e net pension liability for the Plan, calculated using the discount rate for the Plan, as well as what the City’s proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1 percentage point lower or 1 percentage point higher than the current rate:
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City’s Proportionate Share of
the Net Pension Unfunded
Liability
(in thousands)
1%
Decrease
(5.90%)
Current
Discount Rate
(6.90%)
1%
Increase
(7.90%)
Miscellaneous plan $ 437,682 $ 294,630 $ 176,130
Safety plan 287,167 209,856 146,120
Totals $ 724,849 $ 504,486 $ 322,250
Source: CalPERS Miscellaneous Plan and Safety Plan for the City of Palo Alto Annual Valuation Report as of June 30, 2025.
Pension Expenses and Deferred Outflows/Inf lows of Resources Related to Pensions . On June 25, 2012, the Governmental Accounting Standards Board approved GASB Statement No. 68 (“GASB 68”) with respect to pension accounting and financial reporting standards for state and local governments and pension plans. GASB 68 states that, for pensions within the scope of the statement, a cost-sharing employer that does not have a special funding situation is required to recognize a net pension liability, deferred outflows of resources, deferred inflows of resources related to pe nsions, and pension expense based on its proportionate share of the net pension liability for benefits provided through the pension plan. While the accounting standard changed financial statement reporting requirements, they do not impact funding policies of the pension systems.
The audited financial statements of the City for fiscal year 2024-25 attached hereto as Appendix C reflect the application of the GASB 68.
At June 30, 2025, the City reported deferred outflo ws of resources and deferred inflows of resources related to pensions for the combined Plans from the following resources:
Miscellaneous Plan
Deferred Outflows
of Resources
(in thousand)
Pension contribution subsequent to measurement date $ 42,293 Difference between expected and actual experience 10,304 Net difference between projected and actual earnings on plan investments 9,925
Balance reported as of June 30, 2025 $ 62,522
Safety Plan
Deferred Outflows
of Resources
(in thousand)
Pension contribution subsequent to measurement date $ 22,118 Difference between expected and actual experience 8,117 Net difference between projected and actual earnings on plan investments 4,883
Balance reported as of June 30, 2025 $ 35,118
Source: The City of Palo Alto Audited Financial Statements for Fiscal Years 2024-25.
The $64.4 million reported as deferred outflows of resources related to contributions paid by the City from the year ended June 30, 2025, which is subsequent to the measurement date of June 30, 2024 for both the Miscellaneous and Safety Plans. This amount will be recognized as a reduction of the net pension liability in the year ending June 30, 2026.
The net differences reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized in future pension expenses as follows:
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Year
Ending June 30,
Deferred Outflows
(Inflows) of Resources
(in thousands)
2026 $ 10,721
2027 32,766
2028 (4,539)
2029 (5,719)
Total: $ 32,229
Source: The City of Palo Alto Audited Financial Statements for Fiscal Years 2024-25.
Funded Status. The tables below are derived from the 2025 Reports and show the recent history of the actuarial accrued liability, share of the pools’ market value of assets, unfunded accrued liability, funded ratio, and annual covered payroll of the City’s defined benefit pension plan as of the valuation dates shown.
Miscellaneous Plan
Funding History
Valuation Date
Accrued
Liability
(AL)
Fair Value
of Assets (FVA)
Unfunded
Accrued Liability
(UAL)
Funded
Ratio
Annual
Covered
Payroll
06/30/2016 $ 730,382,476 $ 468,702,245 $ 261,680,231 64.2% $ 75,345,962 06/30/2017 772,526,669 511,805,893 260,720,776 66.3% 78,476,098 06/30/2018 831,958,865 547,102,617 284,856,248 65.8% 80,363,405 06/30/2019 868,716,440 574,012,871 294,703,569 66.1% 78,848,216 06/30/2020 909,429,635 592,313,289 317,116,346 65.1% 84,892,137 06/30/2021 956,179,582 720,145,626 236,033,956 75.3% 79,718,988 06/30/2022 996,201,108 655,682,370 340,518,738 65.8% 82,193,044 06/30/2023 1,037,247,281 687,419,176 349,828,105 66.3% 91,956,169 06/30/2024 1,085,448,984 745,630,783 339,818,201 68.7% 107,807,296 06/30/2025 1,126,070,057 831,439,428 294,630,629 73.8% 112,499,318
Source: CalPERS Miscellaneous Plan of the City of Palto Alto Annual Valuation Report as of June 30, 2025.
Safety Plan
Funding History
Valuation
Date
Accrued
Liability
(AL)
Fair Value
of Assets
(FVA)
Unfunded
Accrued Liability
(UAL)
Funded
Ratio
Annual
Covered
Payroll
06/30/2016 $392,911,774 $249,886,581 $ 143,025,193 63.6% $ 21,268,028 06/30/2017 422,062,152 267,871,162 154,190,990 63.5% 23,485,510 06/30/2018 451,111,924 280,399,741 170,712,183 62.2% 23,613,222 06/30/2019 471,338,133 289,117,004 182,221,129 61.3% 25,488,331 06/30/2020 487,159,688 293,857,975 193,301,713 60.3% 27,097,526 06/30/2021 509,225,515 353,339,674 155,885,841 69.4% 25,745,571 06/30/2022 513,613,942 318,801,170 212,812,772 60.0% 25,004,764 06/30/2023 555,403,195 331,696,065 223,707,130 59.7% 27,941,899 06/30/2024 582,389,782 355,816,276 226,573,506 61.1% 30,132,343 06/30/2025 603,047,994 393,191,715 209,856,279 65.2% 33,254,975
Source: CalPERS Safety Risk Pool Plan for the City of Palo Alto Annual Valuation Report as of June 30, 2024.
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Pension Trust
In 2017, the City established a Section 115 Pension Trust (“Pension Trust”) to help address the long- term costs of its pension obligations to CalPERS. City Council approved the creation of the Pension Trust following a review of rising employer contribution rates and volatility of CalPERS investment returns, which were expected to increase the City’s unfunded actuarial liability over time. The Pension Trust is administered by Public Agency Retirement Services (PARS). The City elected the PARS Pension trust Balance Index Strategy with an asset mix of equity (50%-70%), fixed income (10% to 30%) and cash (0-20%). For the year ended June 30, 2025, the City’s total contributions to the Pension Trust were $87.4 million. Of this amount, $2.9 million or 3.2% was contributed by the Water Fund.
Under the City’s Retiree Benefit Policy, the Pension Trust is intended to maintain a balance equal to approximately one year of required employer contributions, with amounts above that threshold available for transmission to CalPERS to help manage pension costs, reduce unfunded liability, and mitigate future spikes in employer contribution rates. As of June 30, 2025, the Pension Trust balance was approximately $100 million, compared to the fiscal year 2026 requ ired employer contribution of about $70 million, placing the trust above the policy target. Consistent with policy, Council ap proved use of excess trust funds for transmission to CalPERS, beginning with a $10.0 million Additional Discretionary Payment in fiscal year 2026. Continued implementation of this policy is reflected in the fiscal year 2027 Adopted Budget through a $20.0 million Additional Discretionary Payment and use of the $6.0 million in trust funds to offset the Actuarially Determined Contribution. Savings resulting from these actions are allocated across departments and funds in proportion to their respective contributions to the Pension Trust.
Other Post-Employment Benefits
Post-Retirement Health Benefits. In addition to providing pension benefits, the City participates in the California Public Employees’ Medical and Healthcare Act program to provide certain health care benefits for retired employees: The City’s Other Post-Employment Benefit plan is an agent multiple-employer defined benefit plan. Employees who retire directly from the City are eligible for retiree health benefits if they retire on or after age 50 with 5 years of serv ice are receiving a monthly pension from CalPERS. Details of benefits to retirees are noted in the following table:
The employees covered by the benefit term as of June 30, 2025 includes: 1,047 inactive employees or beneficiaries currently receiving benefits; 94 inactive employees entitled to but not yet receiving benefits; and 94 active employees. The City made benefit payments of $19.4 million in fiscal year 2024-25, $16.8 million in fiscal year 2023-24, $16.3 million in fiscal year 2022-23, and $17.8 million in fiscal year 2021-22.
Water System Share of OPEB Plan. Salary and benefit costs of the Water System include funding of other post-employment benefits for employees assigned to the Water System who, as City employees, participate in the City’s OPEB Plan. City employees assigned to the Water System constitute approximately 4.3% of all City employees and payments made by the City pursuant to the OPEB Plan from Revenues amounted to $647,278 in fiscal year 2024-25, or approximately 3.9% of the City’s total OPEB Plan payments in 2024-25.
The information under this caption “—Other Post-Employment Benefits” describes the City’s overall OPEB Plan; however, only the portion of the OPEB Plan attributable to City employees assigned to the Water System is payable from Net Revenues.
CONSTITUTIONAL LIMITATIONS ON TAXES AND WATER RATES AND CHARGES Article XIIIA
Article XIIIA of the State Consti tution provides that the maximum ad valorem tax on real property cannot exceed 1% of the “full cash value,” which is defined as “the county assessor’s valuation of real property as shown on the 1975-76 tax bill under ‘full cash value’ or, thereafter, the appraised value of real property when
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purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment,” subject to exceptions for certain circumstances of transfer or reconstr uction and except with respect to certain voter approved debt. The “full cash value” is subject to annual adjustment to reflect increases, not to exceed 2% per year, or decreases in the consumer price index or comparable local data, or to reflect reduction in property value caused by damage, destruction or other factors.
Article XIIIA requires a vote of two-thirds of the qualified electorate to im pose special taxes, while generally precluding the imposition of any additional ad valorem, sales or transaction tax on real property. As amended, Article XIIIA exempts from th e 1% tax limitation any taxes above that level requir ed to pay debt service on certain voter-approved general obligation bonds for the acquisition or improvement of real property.
In addition, Article XIIIA requires the approval of two-thirds of all members of the State Legislature to change any State laws resulting in increased tax revenues.
Under California law, any fee which exceeds the reasonable cost of providing the service for which the fee is charged is a “special tax,” wh ich under Article XIIIA must be authorized by a two-thirds vote of the electorate. Accordingly, if a portion of the City’s wa ter or wastewater user rates or Capacity Fees were determined by a court to exceed the re asonable cost of provid ing service, the City would not be permitted to continue to collect that portion unless it were authorized to do so by a two-thirds majority of the votes cast in an election to authorize the collection of that portion of the rates or fees. The reasonable cost of providing wastewater services has been determined by the State C ontroller to include depreciation and allowance for the cost of capital improvements. In addition, the California courts have determined that fees such as capacity fees will not be special taxes if they approximate the reasonable cost of constructing the water or wastewater capital improvements contemplated by the local agency imposing the fee. See “THE WATER SYSTEM—Water Rates, Fees and Charges.”
Article XIIIB
Article XIIIB of the State Constitu tion limits the annual appropriations of proceeds of taxes by State and local government entities to the amount of appropriati ons of the entity for the prior fiscal year, as adjusted for changes in the cost of living, changes in population and changes in services rendered by the entity. User fees and charges are considered proceeds of taxes only to th e extent they exceed the reasonable costs incurred by a governmental entity in supplying the goods and services for which such fees and charges are imposed.
To the extent that assessments, fee and charges collected by the City are used to pay the costs of maintaining and operating the Water System and payments due on the 2026 Bonds, the City believes that such moneys are not subject to the annual appropriations limit of Article XIIIB.
Articles XIIIC and XIIID; Proposition 218
On November 5, 1996, the voters of the State approved Proposition 218, known as the “Right to Vote on Taxes Act” (“Proposition 218”). Proposition 218 added Articles XIIIC and XIIID to the State Constitution, which contain a number of provisions affecting the ability of the local governments to levy and collect both existing and future taxes, assessments, fees, and charges. The City is a local government within the meaning of Articles XIIIC and XIIID.
Section 3 of Article XIIIC expressly extended the initiative power to give voters the power to reduce or repeal local taxes, assessments, fees and charges, regardless of the date such taxes, assessments, fees or charges were imposed. Section 3 expanded the initiative power to include reducing or repealing assessments, fees and charges, which had previously been considered administ rative rather than legislative matters and therefore beyond the initiative power. This extension of the initiative power was not limited by the terms of Article XIIIC to fees imposed after November 6, 1996, the effective date of Proposition 218, and absent other legal authority could result in the reduction in any taxes, assessments or fees and charges imposed prior to November 6, 1996. “Fees” and “charges” were not expressly defined in Article XIIIC or in Senate Bill 919, the Proposition 218
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Omnibus Implementation Act (“SB 919” ), which was enacted in 1997 to prescribe specific procedures and parameters for local jurisdic tions in complying wi th Article XIIIC and Article X IIID. However, on July 24, 2006, the California Supreme Court ruled in Bighorn-Desert View Water Agency v. Verjil (the “Bighorn Decision”) that charges for ongoing water delivery are property-related fees and charges within the meaning of Article XIIID and are also fees or charges within the meanin g of Section 3 of Article XIIIC. The California Supreme Court held that such water service charges may, therefore, be reduced or repealed through a local voter initiative pursuant to Sec tion 3 of Article XIIIC, alth ough the water agency’s governing board may then raise other fees or impose new fees without prior voter approval.
In the Bighorn Decision, the California Supreme Court stated that nothing in Section 3 of Article XIIIC authorized initiative measures that impose voter-approval requirements for future incr eases in fees or charges for water delivery. The California Supreme Court stated that water providers may determine rates and charges upon proper action of the governing body and that the governing body may increase a charge which was not affected by a prior initiative or impose an entirely new charge. The California Supreme Court further stated in the Bighorn Decision that it was not holding that the initiative power is free of all limitations and was not determining whether the initiative power is subject to the statutory provision requiring that water service charges be set at a level that will pay debt service on bonded debt and operating expenses. Such initiative power could be subject to the limitations imposed on the impairment of contracts under the contract clause of the United States Constitution. Additionally, SB 919 provided that the initiative power provided for in Proposition 218 “will not be construed to mean that any owner or beneficial owner of a municipal security, purchased before or after (the effective date of Proposition 218) assumes the risk of, or in any way consents to, any action by initiative measure that constitutes an impairment of contractual rights” protected by the United States Constitution.
However, no assurance can be given that the City’s voters will not, in the future, approve an initiative which reduces or repeals local taxes, assessments, fees or charges.
Article XIIID defines a “fee” or “c harge” as any levy other than an ad valorem tax, special tax, or assessment imposed upon a parcel or upon a person as an incident of property ownership, including a user fee or charge for a property-related servic e. A “property-related se rvice” is defined as “a public service having a direct relationship to a property ownership.” In the Bighorn Decision, the California Supreme Court held that a public water agency’s charges for ongoing water deli very are fees and charge s within the meaning of Article XIIID. Article XIIID requires that any agency imposing or increasing any property-related fee or charge must provide written notice thereof to the record owner of each identified parcel upon which such fee or charge is to be imposed and must conduct a public hearing with respect thereto. The proposed fee or charge may not be imposed or increased if a majority of owners of the identified parcels file written protests against it. As a result, the local government’s ability to increase such fee or charge may be limited by a majority protest.
In addition, Article XIIID also includes a number of limitations applicable to existing fees and charges including provisions to the effect that (i) revenues derived from the fee or charge will not exceed the funds required to provide the property-related service; (ii) such revenues will not be used for any purpose other than that for which the fee or charge was imposed; (iii) the amount of a fee or charge imposed upon any parcel or person as an incident of property ownership will not exceed the proportional cost of the service attributable to the parcel; and (iv) no such fee or charge may be imposed for a service unless that service is actually used by, or immediately available to, the owner of the property in question. Prope rty-related fees or charges based on potential or future use of a service are not permitted.
The City believes that it has complied with the requirements of Proposition 218 with respect to the charges that it currently imposes. Such compliance included mailing of notices to affected property owners (and separately, to ratepayers) in connection with rate changes implemented subsequent to the Bighorn Decision. The City expects to continue to comply with the requirements of Proposition 218 with respect to future proposed rate increases.
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In the event that proposed increased rates or charges cannot be imposed as a result of a majority protest or an initiative, such circumstances may adversely affect the ability of the City to generate revenues sufficient to pay the principal of or the interest on the 2026 Bonds.
As discussed above, Article XIIIC removes limitations on the initiative power in matters of local taxes, assessments, fees, and charges. In addition, a California court has held that utility rates are not subject to the same constitutional restrictions that are applied to the use of the initiative process for tax measures.
Consequently, the voters of the City could, by future initiative, repeal, reduce, or prohibit the future imposition or increase of any local tax, assessment, fee, or charge.
While no assurance can be given that the voters of the City will not, in the future, approve initiatives which repeal, reduce or prohibit the future imposition or increase of assessments, fees, or charges, or the Utilities Department’s water rates in such event, the City may set rates to service obligations payable from the Water Revenue Fund, subject to its rate adjustment procedures.
Future Initiatives
Articles XIIIA, XIIIB, XIIIC, and XIIID of the Cons titution were each adopte d as measures that qualified for the ballot pursuant to California’s initiative process. The City cannot provide any assurances as to the effect of the implementation or judicial interpretations of such measures on the fi nances of the City or the Water System. From time to time other initiative measures could be adopted, which may affect the ability of the City to levy and maintain special taxes.
CERTAIN INVESTMENT CONSIDERATIONS
The ability of the Utilities Department to pay principal of and interest on the 2026 Bonds depends primarily upon the receipt of revenues from the Water System. Some of the events which could prevent the Utilities Department from receiving a sufficient amount of revenues to enable it to pay the principal of and interest on the 2026 Bonds are summarized below. The following description of investment considerations is not intended to be an exhaustive list associated with the purchase of the 2026 Bonds and the order of the investment considerations set forth below does not necessarily reflect the relative importance of the various risks.
Special Obligations
The 2026 Bonds are special limited obligations of the City payable solely from and secured by a pledge of and lien upon Net Revenues derived by the City Council from the operations of the Water System and certain other funds pledged under the Indenture. Neither the 2026 Bonds nor the obligation to pay principal of or interest thereon constitutes a debt of the City, the State or any of its political subdivisions within the meaning of any Constitutional limitation on indebtedness, or a pledge of the full faith and credit of the City. The 2026 Bonds are not secured by a pledge of the taxing power of the City. See “SECURITY FOR THE 2026 BONDS.” No assurance can be made that revenues of the Wate r System, estimated or otherwise, will be realized by the Utilities Department in amounts sufficient to pay the principal of and interest on the 2026 Bonds. Among other matters, drought, general and local economic conditions and changes in law and government regulations (including initiatives and moratoriums on growth) could adversely affect the amount of revenues realized by the Utilities Department. In addition, the realization of future revenues is subject to, among other things, the capabilities of management of the Utilities Department, the ability of the Utilities Department to provide water to its customers, and the ability of the Utilities Department to establish, maintain and collect rates and charges sufficient to pay the Operation and Maintenance Costs of the Water System and the principal of and interest on the 2026 Bonds. See “THE WATER SYSTEM — Water Rates, Fees and Charges” herein.
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Reliance on Projections
Table 12 in this Official Statemen t contains certain assumptions an d forecasts. The notes following Table 12 should be read for a discussion of certain assumptions and rationale underlying the forecasts. Any forecast is subject to uncertainties. There will usually be differences between actual and forecast results because not all events and circumstances occur as expected, and those differences may be material.
Accordingly, the projections contained in Table 12 and elsewhere in the Official Statement, and any projections that may be contained in any future certifi cate of the City or a consultant, are not necessarily indicative of future performance, and the City does not assume any responsibility for the failure to meet such projections. In addition, certain assumptions with respect to future business and financing decisions of the City are subject to change. No representation is made or in tended, nor should any representation be inferred, with respect to the likely existence of any particular future set of facts or circumstances, and prospective purchasers of the 2026 Bonds are cautioned not to place undue reliance upon any projections or requirements for projections.
If actual results are less favorable than the results proj ected, or if the assumptions used in preparing such projections prove to be incorrect, then the amount of Net Revenues may be materially less than expected.
Consequently, the ability of the City to make timely payments of the principal of and interest on the 2026 Bonds may be materially adversely affected.
Neither the City’s independent auditors nor any other independent accountants have compiled, examined, or performed any procedures with respect to any forecasts or pr ojection contained in the Official Statement. The City’s independent auditors assume no responsibility for, and disclaim any association with, the Water System Net Revenues forecast; they have not expressed any opinion or any form of assurance on such information or its achievability, and they assume no responsibility for, and disclaim any association with, the Water System Net Revenue forecast. See “THE WATER SYSTEM — Projected Operating Results and Debt Service Coverage.”
Increasing Water Rates
Although the City has covenanted pursuant to the Indenture to fix rates, subject to the approval of the City Council, for service from the Wa ter System, and collect charges for such service, such as to provide revenues that, together with the other available funds of the Utilities Department, will be at least sufficient to pay, as the same become due, the principal of and interest on the 2026 Bonds, in addition to paying, as the same become due, the necessary expenses of operating and maintaining the Water System and all other obligations payable out of the Water Revenue Fund, there can be no assurance that such amounts will be collected in the amounts and at the times necessary to pay the principal of and interest on the 2026 Bonds.
Rate-Setting Process Under Proposition 218
The projected operating results in Table 12 assume that rates will be increased each year during the projection period. Proposition 218, which added Articles XIIIC and XIIID to the State Constitution, affects the Utilities Department’s ability to impose future rate increases, and no assurance can be given that future rate increases will not encounter majority protest opposition or be challenged by initiative action authorized under Proposition 218. In the event that future proposed rate increases cannot be imposed as a result of majority protest or initiative, the Utilities Department might thereafter be unable to generate sufficient revenues to pay the principal and interest on the 2026 Bonds. See “CONSTITUTIONAL LIMITATIONS ON TAXES AND WATER RATES AND CHARGES—Articles XIIIC and XIIID; Proposition 218” herein.
Notwithstanding the foregoing, the City has covenanted to fix rates and collect charges for water service at a level at least sufficient to meet its debt service requirements, as set forth under “SECURITY FOR THE 2026 BONDS—Rate Covenant” herein. The Projected Operati ng Results in Table 12 assume that rates will be increased each year during the projection period. The current water rates set by the City and approved by City Council have been imposed in compliance with Proposition 218.
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Statutory and Regulatory Compliance
Laws and regulations governing treatment and delivery of drinking water are enacted and promulgated by federal, state and local government agencies. Compliance with laws and regulations governing the treatment and delivery of drinking water may be costly, and, as more stringent standards may be enacted to protect the environment and water quality, these costs will likely increase. Existing conditions , as well as anticipated regulatory requirements, could require significant increases in capital and/or operating costs of the Utilities Department. See “THE WATER SYSTEM—Sources of Water Supply— PFAS.” Claims against the Water System for failure to comply with applicable laws and regulations could be significant. Such claims would be payable from the Water Revenue Fund. In addition to claims by private parties, changes in the scope and standards for public agency water systems such as the Water System also may lead to administrative orders issued by federal or State regulators. Future compliance with such orders can also impose substantial additional costs on the Water Revenue Fund. No assurance can be given that the cost of compliance with such laws, regulations and orders would not adversely affect the ability of the Water System to generate revenues sufficient to pay the principal and interest on the 2026 Bonds.
Risks Relating to the Water Supply
The Utilities Department’s water supply and the cost thereof are affected by many factors, including but not limited to annual snowpack and rainfall, population growth, water use, groundwater basin quality and recharge trends, federal and State environmental rules and regulations, environmental restoration commitments, water quality, climate change, and area of origin issues . Sustained drought conditions or continued low water levels could adversely affect the Utilities Department’s water supply, impact operational expenses of the Water System and demand for water services from the Water System. Additionally, any natural disaster or other physical calamity, including acts of terrorism, earthquake, earth movements, floods, extreme weather or gradual climate change, may have the effect of reducing water availability, quality and/or distribution capabilities of the Utilities Department, impair the financial stability of the Utilities Department, affect infrastructure and other public improvements and private improvements and the continued habitability and enjoyment of such private improvements thus affecting revenues of the Utilities Department through damage to the Water System and to the economy of the surrounding area.
Drought Risks. The ability of the Water System to operate effectively is affected by the water supply available to the Utilities Department. If the water supply decreases significantly, whether by drought, operation of mandatory supply restrictions, prohibitively high water costs or otherwise, Enterprise sales will diminish and revenues available to pay the debt service on the 2026 Bonds, may be adversely affected. See “THE WATER SYSTEM—Sources of Water Supply.”
Future droughts could again result in reduced deliveries of water to the Utilities Department and mandatorily enforced conservation measures and other mitigations, that could have a material adverse impact on the revenues of the Water System available to pay the debt service on the 2026 Bonds.
Reliance on Water Purchased from the SFPUC . Since 1962, the City began supplying 100% of its potable water from the SFPUC. In Fiscal Year 2025, water deliveries from the SFPUC constituted 100% of the Utilities Department’s total potable water supply. The Utilities Department expects to continue to purchase 100% of its potable water from the SFPUC in an average year. Material reductions in the amount of water delivered from the SFPUC to the Utilitie s Department may adversely affect th e operations and finances of the Water System. See “THE WATER SYSTEM—Sources of Water Supply” herein and “— Environmental Rules and Regulations” below.
Environmental Rules and Regulations . Various federal and State rules and regulations and court decisions have affected and will continue to affect the amount of water available to the Utilities Department.
The Utilities Department cannot predict if future federal and State rules and regulations will be enacted or if
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future court decisions will further rest rict water deliveries to the Utilities Department and what affect such reduced water deliveries may have on the operations and finances of the Water System.
Climate Change. One of the factors that may pose a risk to the future availability of water in the City is climate change. Rising temperatures could result in earlier runoff and cause California’s rivers to carry a heavier flow of water. This could possibly trigger floods which would place pressure on California levees.
Rising sea levels may further impact hydrology including, without limitation, the salinity levels in estuaries such as northern California’s Bay-Delta region. Such conditions may lead to the failure of levees and consequently the disruption of water flow throughout California’s various water systems. Rising temperatures may also result in decreased precipitation levels that could amplify the effects of drought conditions on water supply. Finally, rising temperatures may cause a reduction in the Sierra Nevada snowpack, a major source of water in California, and may result in reduced water deliveries. The Utilities Department is unable to predict whether or when any such conditions may occur or their impact on the Utilities Department. While the Utilities Department seeks to better understand the potential impact that climate change may have on its water supply, efforts are underway to develop water resources and implement efficient water ma nagement strategies that will create a sustainable source of future water supply for the City.
Above-Normal Precipitation. Just as too little water can negatively affect the revenues of the Water System, above-normal precipitation also can negatively affect the revenues of the Water System. In years where the City receives above-normal levels of precipitation, the residents of the City do not need to purchase as much water which can lead to reduced enterprise revenues.
Seismic Activity. The City, like much of California, is subj ect to seismic activity that could result in interference with operation of the Wa ter System. There are several major active fault zones transecting the County that could cause “strong ground motion” at the site of the various facilities constituting the Water System during its useful life. Those major fault zones, listed in order of proximity to the City, are the San Andreas, Hayward, Calaveras and San Gregorio faults. If there were to be an occurrence of severe seismic activity in the area of the City, there could be an interruption in the service provided by the Water System resulting in a temporary reduction in the amount of Net Revenues available to pay the principal of and interest on the 2026 Bonds when due.
Security of the Water System . Military conflicts and terrorist activities may adversely impact the operations and finances of the Water System. All critical sites are equipped with video surveillance and perimeter intrusion detection systems. These physical protection systems are monitored continuously in the Utilities Department’s control room. The Utilities Department’s emergency response plan is reviewed annually and updated as needed. The Utilities Department also re gularly participates in exer cises designed to test the ability to prepare for, respond to, recover from and mitigate the impacts of natural, man-made and technological disasters. Although the Utilities Department actively maintains these safeguards, no assurance can be given that existing or additional safety and security measures will prove adequate in the event that terrorist activities are directed against the Water System to prevent a disruption of the Utilities Department’s ability to deliver water to its customers.
SFPUC, the supplier of 100% of the City’s potable water, has also taken actions to increase the security of its water facilities. The safety of SFPUC’s water enterprise is maintained through a combination of regular inspections by SFPUC employees, electronic monitoring, and analysis of unusual incident reports. Most above- ground facilities operated a nd maintained by the SFPUC are controlled-access facilities with fencing, gates, closed circuit television systems and security officers at certain points. Smaller, above-ground and subterranean pumping stations operated and main tained by the SFPUC are locked wi th padlock or internal locking mechanisms, and most are monitored via access/intrusion al arms. Security improvements are evaluated on an ongoing basis. The electronic operations and controls have been evaluated and designed to reduce exposure using a series of technology systems enhancements and integration.
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Costs of Capital Improvement Program
As described herein, the Utilities Department’s CIP with respect to the Water System includes water and recycled water projects expecting to cost approximately $73.3 million between fiscal year 2027 and 2031, with annual costs ranging from approximately $11.4 million to approximately $16.7 million. The City may finance a portion of such projects as described in Table 2 under the caption “THE WATER SYSTEM—Capital Improvement Program Summary.” The actual cost of constructing the various components of the capital improvements to the Water System will depend on a variet y of factors, including but not limited to potential rising costs or shortages of labor or materials, the discovery of unforeseen subsurface conditions, earthquake, flood or other natural disasters, severe weather conditions, access to the financial markets or other events outside of the control of the Utilities Department. There can be no assurance that costs for construction of the capital improvements to the Water System will not significantly exceed the amounts projected by the Utilities Department.
Cybersecurity
The City relies on computers and technology to conduct City operations, including operations of the Utilities Department. As with any public sector agency, the City continually faces cyber threats including, but not limited to, hacking, viruses, malware and other attack s on City technology assets . The City maintains an active cybersecurity program which provides guideline s for proper use of its network and systems by City employees. The City coordinates with the City’s IT to comply with cybersecurity protocols which includes stationing servers on-premise and an air-gapped environm ent with no internet access. The City also hires a SCADA Cyber Security Red Team. The City maintain s multi-layer VPN, DMZ, and firewalls while also limiting access to their servers. Protection protocols al so include manual override mode and disaster recovery program. The City also employes the Department of Ho meland Security to conduct third-party tests on their networks. All City employees are required to particip ate in annual cybersecurity education and awareness training. The City requires VPN and two-factor au thentication for employees. Notwithstanding the City’s cybersecurity efforts, there can be no assurances that future cybersecurity incident will not materially adversely impact the City, including the Utilities Department.
Limitations on Remedies
Upon the occurrence and continuance of an event of default under the Indenture, the owners of the 2026 Bonds have limited remedies. Enforceability of the rights and remedies of the owners of the 2026 Bonds, and the obligations incurred by the City, may become subject to the federal bankruptcy code and applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or affecting the enforcement of creditor’s rights generally, now or hereafter in effect, equity principles which may limit the specific enforcement under State law of certain remedies, the exercise by the Un ited States of America of the powers delegated to it by the Constitution, the reasonable and necessary exercise, in certain exceptional situations, of the police powers inherent in the sovereignty of the State and its governmental bodies in the interest of serving a significant and legitimate public purpose, and the limitations on remedies against counties in the State. Bankruptcy proceedings, or the exercise of powers by the Federal or State gove rnment, if initiated, could subject the owners of the 2026 Bonds to judicial discretion and interpretation of their rights in bankruptcy or otherwise and consequently may entail risks of delay, limitation, or modification of their rights.
The opinion to be delivered by Bond Counsel concurrently with the issuance of the 2026 Bonds will be subject to such limitations, and the various other legal opinions to be delivered concurrently with the issuance of the 2026 Bonds will be similarly qualified. See Appendix D.
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LITIGATION
Absence of Litigation
At the time of delivery of and payment for the 2026 Bonds, the City will certify that there is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, regulatory agency, public board or body, pending or, to the knowledge of the City, threatened against the City affecting the existence of the City or the titles of its officers to their respective offices or seeking to restrain or to enjoin the sale or delivery of the 2026 Bonds, the application of the proceeds thereof in accordance with the Indenture, or the collection or application of any Net Revenues provided for the paym ent of the 2026 Bonds, or in any way contesting or affecting the validity or enforceability of the 2026 Bonds, the Indenture, any action of the City contemplated by any of the said documents, or the collection or application of any revenues provided for the payment of the 2026 Bonds, or in any way contesting the completeness or accuracy of this Official Statement or any amendment or supplement thereto, or contesting the powers of the City or its authority with respect to the 2026 Bonds or any action of the City contemplated by any of those documents.
CERTAIN LEGAL MATTERS
The validity of the 2026 Bonds and certain other legal matters are subject to the approving opinion of Jones Hall LLP, Bond Counsel to the City. A complete copy of the proposed form of Bond Counsel’s opinion is contained in Appendix D attached hereto. Bond Counsel has not undertaken any responsibility for the accuracy, completeness or fairness of this Official Statem ent or other offering materials relating to the 2026 Bonds and expresses no opinion relating thereto. Certain legal matters in connection with the 2026 Bonds will be passed upon for the City by the Office of the City Attorney of the City. Certain legal matters in connection with this Official Statement will be passed upon for the City by Stradling Yocca Carlson & Rauth LLP, Disclosure Counsel to the City. All of the fees of B ond Counsel and Disclosure Counsel with regard to the issuance of the 2026 Bonds are contingent upon the issuance and delivery of the 2026 Bonds.
TAX MATTERS
Federal Tax Status
In the opinion of Jones Hall LLP, San Mateo, California, Bond Counsel, subject, however to the qualifications set forth below, under existing law, the interest on the 2026 Bonds is excluded from gross income for federal income tax purposes and su ch interest is not an item of tax preference for purposes of the federal alternative minimum tax. Interest on the 2026 Bonds may be subject to the corporate alternative minimum tax.
The opinions set forth in the preceding paragraph are subject to the condition that the City comply with all requirements of the Internal Revenue Code of 1986, as amended (the “Tax Code”) that must be satisfied subsequent to the issuance of the 2026 Bonds in order that the interest thereon be, and continue to be, excludable from gross income for federal income tax purposes. The City has made certain representations and covenants in order to comply with each such requirement. Inaccuracy of those representations, or failure to comply with certain of those covenants, may cause the inclusion of such interest in gross income for federal income tax purposes, which may be retroactive to the date of issuance of the 2026 Bonds.
Tax Treatment of Original Issue Discount and Premium
If the initial offering price to the public at which a 2026 Bond is sold is less than the amount payable at maturity thereof, then such difference constitutes “original issue discount” for purposes of federal income taxes and State of California personal income taxes. If the initial offering price to the public at which a 2026 Bond is sold is greater than the amount payable at maturity thereof, then such difference constitutes “bond premium” for purposes of federal income taxes and State of California personal income taxes.
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Under the Tax Code, original issue discount is treated as interest excluded from federal gross income and exempt from State of California personal income taxes to the extent properly allocable to each owner thereof subject to the limitations described in the first paragraph of this section. The original issue discount accrues over the term to maturity of the 2026 Bond on the basis of a constant interest rate compounded on each interest or principal payment date (with straight-line interpolations between compounding dates). The amount of original issue discount accruing during each period is added to the adjusted basis of such 2026 Bonds to determine taxable gain upon disposition (including sale, redemption, or payment on maturity) of such 2026 Bond. The Tax Code contains certain provisions relating to the accrual of original issue discount in the case of purchasers of the 2026 Bonds who purchase the 2026 Bonds after the initial offering of a substantial amount of such maturity. Owners of such 2026 Bonds should consult their own tax advisors with respect to the tax consequences of ownership of 2026 Bonds with original issue discount, including the treatment of purchasers who do not purchase in the original offering to the public at the first price at which a substantial amount of such 2026 Bonds is sold to the public.
Under the Tax Code, bond premium is amortized on an annual basis over the term of the 2026 Bond (said term being the shorter of the 2026 Bond’s maturity date or its call date). The amount of bond premium amortized each year reduces the adjusted basis of the owner of the 2026 Bond for purposes of determining taxable gain or loss upon disposition. The amount of bond premium on a 2026 Bond is amortized each year over the term to maturity of the 2026 Bond on the basis of a constant interest rate compounded on each interest or principal payment date (with straight-line interpolations between compounding dates). Amortized 2026 Bond premium is not deductible for federal income tax pu rposes. Owners of premium 2026 Bonds, including purchasers who do not purchase in the original offering, should consult their own tax advisors with respect to State of California personal income tax and federal income tax consequences of owning such 2026 Bonds.
California Tax Status
In the further opinion of Bond Counsel, interest on the 2026 Bonds is exempt from California personal income taxes.
Other Tax Considerations
Current and future legislative proposals, if enacted into law, clarification of the Tax Code or court decisions may cause interest on the 2026 Bonds to be subject, directly or indirectly, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent beneficial owners from realizing the full current benefit of the tax status of such interest . The introduction or enactment of any such legislative proposals, clarification of the Tax Code or court decisions may also affect the market price for, or marketability of, the 2026 Bonds. It cannot be predicted whether or in what form any such proposal might be enacted or whether, if enacted, such legislation would apply to bonds issued prior to enactment.
The opinions expressed by Bond Counsel are base d upon existing legislation and regulations as interpreted by relevant judicial and regulatory authorities as of the date of such opinion, and Bond Counsel has expressed no opinion with respect to any proposed legislation or as to the tax treatment of interest on the 2026 Bonds, or as to the consequences of owning or receiving interest on the 2026 Bonds, as of any future date.
Prospective purchasers of the 2026 Bonds should cons ult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel expresses no opinion.
Owners of the 2026 Bonds should also be aware that the ownership or disposition of, or the accrual or receipt of interest on, the 2026 Bonds may have federal or state tax consequences other than as described above.
Other than as expressly described above, Bond Counsel expresses no opinion regarding other federal or state tax consequences arising with respect to the 2026 Bonds, the ownership, sale or disposition of the 2026 Bonds, or the amount, accrual or receipt of interest on the 2026 Bonds. The form of Bond Counsel’s opinion to be delivered on the Closing Date is attached hereto as Appendix D.
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RATING
S&P Global Ratings (“S&P”), has a ssigned the 2026 Bonds a rating of “AAA.” Such credit rating reflects only the view of such organization and any desired explanation of the meaning and significance of such credit rating, including the methodology used and any outlook thereon, should be obtained from S&P. Generally, a rating agency bases its credit rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. There is no assurance that the rating will remain in effect for any given period of time or that any such rating will not be revised, either downward or upward, or withdrawn entirely, or a positive, negative or stable outlook announced, if, in its judgment, circumstances so warrant. Any downward revision or withdrawal or announcement of negative outlo ok could have an adverse effect on the market price of the 2026 Bonds. Maintenance of the rating will require periodic review of current financial data and other updating information by S&P.
CONTINUING DISCLOSURE
At the time of issuance of the 2026 Bonds, the City will execute a Continuing Disclosure Certificate (the “Continuing Disclosure Certificate”), which will provide for disclosure obligations on the part of the City.
Under the Continuing Disclosure Certificate, the City will covenant for the benefit of Owners and Beneficial Owners of the 2026 Bonds to provide certain financial in formation and operating data relating to the City and the Water System by not later than each March 31 following the end of the City’s fis cal year (which ends on June 30), commencing with the report for the 2025-26 Fiscal Year (the “Annual Reports”), and to provide notices of the occurrence of certain enumerated events (the “L isted Events”). The Annual Reports and the notices of Listed Events will be filed with the MSRB through it s EMMA System. Currently the City’s Annual Report is filed as part of the City’s required continuing disclosure filings. See “APPENDIX F—FORM OF CONTINUING DISCLOSURE CERTIFICATE.” These covenants will be made in order to assist the Underwriter for the 2026 Bonds in complying with Rule 15c2-12.
Within the last five years, the City has not failed to comply in any material respect with its continuing disclosure obligations under Rule 15c2-12.
UNDERWRITING
The 2026 Bonds were sold at a competitive sale on _________, 2026. The 2026 Bonds were awarded to __________ (the “Underwriter”). The Underwriter has agreed, subject to certain conditions, to purchase all of the 2026 Bonds at a price of $__________ (which amount represents the principal amount of the 2026 Bonds, plus a net original issue premium of $__________, le ss an underwriter’s discount of $__________). The Underwriter may offer and sell the 2026 Bonds to certain dealers and others at prices lower than the offering prices stated on the inside cover page hereof.
MUNICIPAL ADVISOR
PFM Financial Advisors LLC (the “Municipal Advisor”) has assisted the City with various matters relating to the planning, structuring and delivery of the 2026 Bonds. The Municipal Advisor has not been engaged, nor have they undertaken, to make an independent verification or assume responsibility for the accuracy, completeness or fairness of th e information contained in this Official Statement. The Municipal Advisor is an independent municipal advisory firm and is not engaged in the business of underwriting or distributing municipal securities or other public securities.
INDEPENDENT AUDITORS
The financial statements of the Water System as of June 30, 2025 are included in this Official Statement as Appendix A. These financial statements have been audited by Macias, Gini & O’Connell LLP, Certified Public Accountants (“MGO”), as stated in their report appearing therein. MGO was not requested to consent to
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the inclusion of its report in Appendix A and it has not undertaken to update its report or to take any action intended or likely to elicit information concerning the accuracy, completeness or fairness of the statements made in this Official Statement, and no opinion is expressed by MGO with respect to any event subsequent to the date of its report.
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MISCELLANEOUS
The covenants and agreements of the City for the benefit of the Owners of the 2026 Bonds are set forth in the Indenture, and reference is made to the Indenture for a statement of the rights of the Owners of the 2026 Bonds and the covenants and obligations of the City. A ll references to the 2026 Bonds are qualified in their entirety to the definitive form thereof and the information with respect thereto included in the Indenture.
This Official Statement is not a contract with the Owners of any of the 2026 Bonds.
The summaries of and references to all documents, statutes, reports and othe r instruments referred to herein do not purport to be complete, comprehensive, or definitive and each such summary and reference is qualified in its entirety by reference to each document, statute, report, or instrument. The capitalization of any word not conventionally capitalized, or otherwise defined herein, indicates that such word is defined in a particular agreement or other document and, as used herein, has the meaning given it in such agreement or document.
Any statements in this Official Statement involving matters of opinion and all estimates, whether or not expressly so stated, are intended as su ch and not as representations of facts and are not to be construed as representations that they will be realized.
The City Council of the City has authorized the execution and delivery of this Official Statement by an authorized signatory of the City.
CITY OF PALO ALTO
By
Director of Administrative Services
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APPENDIX A
ANNUAL COMPREHENSIVE FINANCIAL REPORT OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2025
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APPENDIX B
DEMOGRAPHIC AND ECONOMIC INFORMATION ABOUT THE CITY
General
The City is located in northern Santa Clara County (the “County”), approximately 35 miles south of the City of San Francisco. The City has a population of approximately 69,004 as of January 1, 2026. It is part of the San Francisco Bay metropolitan area. Partly due to th e presence of Stanford University, which is adjacent to the City, the City is considered the birthplace of the high technology industry that has made the County famous worldwide as Silicon Valley. The 700-acre Stanford Re search Park includes prestigious and innovative high- tech leaders such as Hewlett-Packard, SAP America, Varian Medical Systems, Rivian, Tesla, Google and the Electric Power Research Institute. The City is also a major employment center, including U.S. Department of Veteran Affairs’ Palo Alto Health Care System, Stanford Hospitals and Clinics, Lockheed Martin Missiles and Space, Palo Alto Medical Foundation, Stanford Shopping Center, the law offices of Wilson Sonsini Goodrich and Rosati, and the Xerox Palo Alto Research Center.
The City was incorporated in 1894. Its first Charter was granted by the State of California in 1909, and the City continues to operate as a charter city. Municipal operations are conducted under the Council-Manager form of government. The seven City Council Members are elected at large for four-year, staggered terms. The Mayor and Vice Mayor are elected annually at the first City Council meeting in January. The Mayor presides over all City Council meetings. The City Manager is responsible for the operation of all municipal functions, except the offices of the City Attorney, City Clerk, an d City Auditor. These officials are appointed by, and report directly to, the City Council.
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Population
The following table shows a historical comparison of the respective populations of the City, the County and the State of California since 1990.
CITY OF PALO ALTO, SANTA CLARA COUNTY,
AND STATE OF CALIFORNIA
Population Comparison
Year
City of
Palo Alto
Percent
Change
Santa Clara
County
Percent
Change
State of
California
Percent
Change
1990 55,900 -- 1,497,577 -- 29,758,213 --
2000 58,598 4.8 1,682,585 12.4 33,873,086 13.8
2010 64,403 9.9 1,781,642 5.9 37,253,956 10.0
2011 65,260 1.3 1,805,407 1.3 37,552,880 0.8
2012 66,172 1.4 1,833,344 1.5 37,904,303 0.9
2013 67,145 1.5 1,861,489 1.5 38,237,859 0.9
2014 67,494 0.5 1,883,691 1.2 38,513,119 0.7
2015 67,880 0.6 1,907,380 1.2 38,810,306 0.8
2016 68,526 1.0 1,923,243 0.8 39,036,749 0.6
2017 68,820 0.4 1,930,897 0.4 39,273,915 0.6
2018 68,607 -0.3 1,936,569 0.3 39,429,439 0.4
2019 68,392 -0.3 1,936,821 0.01 39,503,656 0.2
2020 68,253 -0.2 1,936,259 -0.02 39,538,223 0.1
2021 67,802 -0.7 1,911,498 -1.3 39,380,058 -0.4
2022 67,573 -0.3 1,891,556 -1.0 39,159,480 -0.6
2023 68,078 0.7 1,906,944 0.8 39,167,274 0.01
2024 68,280 0.3 1,915,448 0.4 39,446,835 0.7
2025 68,919 0.9 1,928,029 0.7 39,646,907 0.5
2026 69,004 0.1 1,932,468 0.2 39,592,978 -0.1
Sources: U.S. Department of Commerce, Bureau of the Census ( 1990 and 2000); State of California, Department of Finance, E-4 Population Estimates for Cities, Counties and the State, 2011-2020, with 2010 Benchmark; State of California, Department of Finance, E-4 Population Estimates for Cities, Counties and the State, 2021-2026, with 2020 Benchmark. Sacramento, California, May 2026.
Assessed Valuations
The following table provides a five-year record of assessed valuations for the City.
CITY OF PALO ALTO
ASSESSED VALUATIONS OF TAXABLE PROPERTY
2020-21 through 2024-25
(In Thousands)
Fiscal
Year
Secured Valuation
(Net of Exemptions)
Public
Utility
Unsecured
Valuation
Total Assessed
Value
2020-21 46,933,430 7,004 2,194,615 42,353,926
2021-22 49,086,493 7,004 2,232,482 43,983,352
2022-23 52,114,464 7,004 2,088,552 46,522,933
2023-24 55,128,970 7,004 2,331,567 49,422,898
2024-25 57,741,861 7,004 2,461,562 51,804,757
Source: City of Palo Alto, Annual Comprehensive Financial Report 2024-25.
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The following two tables set out the amounts of prop erty tax collected in the City and the ten largest property-taxpayers in the City, respectively.
CITY OF PALO ALTO
TEN LARGEST PROPERTY OWNERS
Fiscal Year ending June 30, 2025
(In Thousands)
Company
Assessed
Property Valuation
Leland Stanford Jr University $7,398,938
Google Inc. 385,453
ARE-San Francisco 80 LLC 312,011
ARE-San Francisco 69 LLC 153,668
395 Page Mill LLC 131,970
Park Village Peninsula LLC 130,744
Palo Alto Tech Center LLC 121,332
KRE El Camino Real Owner LLC 109,941
M10 Dev LLC 89,833
SI 45 LLC 89,941
Source: City of Palo Alto, Annual Comprehensive Financial Report 2024-25.
Employment
The City is home to a strong mix of large, medium and small firms. The City employment opportunities are much sought after and include the following: educat ion at Stanford University, high technology at the Stanford Research Park, and health care at two medical facilities of national stature.
The largest employers in the City of Palo Alto as of June 30, 2025, are as follows:
CITY OF PALO ALTO
TEN LARGEST EMPLOYERS
Fiscal Year ending June 30, 2025
Employer Number of Employees
Stanford (University and Healthcare) 18,000
Broadcom Inc. (VMware Inc) 2,781
Varian Medical Systems 1,710
Hewlett-Packard Company 1,632
Veteran's Affairs Palo Alto Health Care Syste
m 1,323
Wilson Sonsini Goodrich Rosati 1,100
City of Palo Alto 1,092
Roche Palo Alto 1,050
Brocade Communications Systems LLC 800
Workday, Inc. 714
Source: ReferenceUSA.com & Palo Alto Weekly, as published in C ity of Palo Alto Annual Comprehensive Financial Report 2025-25.
Due to the nature of local industry, with its he avy emphasis on electronics, aerospace and research, Santa Clara has attracted many professional people and industrial workers possessing skills well above the average.
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The Santa Clara Labor Market, as defined by the State Employment Development Department, includes all cities within Santa Clara County. This area is a highly developed industrial, research, and educational center of employment for a labor force that ranks well above th e average in educational attainment and income. The following table presents the annual average wage and sa lary employment figures by industry classification for the San Jose-Sunnyvale-Santa Clara Metropolitan Statistical Area for the years 2021 through 2025.
According to the California Employment Development Department, the County’s unemployment rate was 4.2% in 2024, down from 5.0% in 2021. The following table sets forth certain information regarding employment in the San Jose-Sunnyvale-Santa Clara MSA from calendar year 2021 through 2024, as well as certain information for calendar year 2025 as of March 2025.
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SAN JOSE-SUNNYVALE-SANTA CLARA MSA
(San Benito and Santa Clara Counties)
INDUSTRY EMPLOYMENT & LABOR FORCE - BY ANNUAL AVERAGE
March 2025 Benchmark
2021 2022 2023 2024 2025
Civilian Labor Force 1,020,000 1, 043,000 1,056,200 1,057,600 N/A Civilian Employment 969,000 1,013,300 1,018,100 1,013,100 N/A Civilian Unemployment 51,000 29,700 38,100 44,400 N/A
Unemployment Rate 5.0% 2.9% 3.6% 4.2% N/A
Total Farm 5,000 4,800 4,700 4,900 5,000
Total Nonfarm 1,097,700 1,151,000 1,154,100 1,150,600 1,158,200 Goods Producing 177,500 187,100 185,200 179,800 180,200 Mining, Logging and Construction 51,900 54,000 54,100 53,400 52,700 Construction 51,700 53,800 53,900 53,200 52,500
Manufacturing 125,700 133,200 131,100 126,400 127,500
Trade, Transportation and Utilities 117,200 119,200 119,400 117,100 117,000 Information 107,100 106,000 97,700 94,800 97,000
Financial Activities 38,400 38,100 37,800 36,700 36,700 Professional and Business Services 284,100 295,700 290,400 282,800 277,200 Private Education and Health Services 178,400 187,000 197,100 208,600 217,400 Leisure and Hospitality 79,000 96,700 101,900 103,100 103,000 Other Services 22,800 25,400 26,500 27,300 28,000
Government 93,300
95,800 98,200 100,400 101,700
Total All Industries(1) 1,102,800 1,155,800 1,158,800 1,155,500 1,163,100
(1) Totals may not add due to independent rounding.
Source: California Employment Development Department, Labor Market Information Division.
CITY OF PALO ALTO
AVERAGE ANNUAL CIVILIAN LABOR FORCE
EMPLOYMENT AND UNEMPLOYMENT
Calendar Years 2019-2023
Year
Labor Force Employment
Unemployment
Number
Rate
2019 33,800 33,000 700 2.2%
2020 32,000 30,600 1,400 4.3
2021 32,000 31,000 1,100 3.3
2022 32,900 32,200 800 2.3
2023
(1) 33,300 32,200 1,100 3.2
(1) Most recent available reported data.
Source: California Employment Development Department.
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Construction Activity
The following table reflects the history of building permit valuation for the City from 2020 to 2024.
CITY OF PALO ALTO
BUILDING PERMITS AND VALUATION
(Dollars in Thousands)
2020 2021 2022 2023 2024
Valuation
Residential $ 87,620 $ 76,007 $ 94,879 $ 172,367 $ 139,375 Non-Residential 30,278 60,811 86,166 286,698 173,286 Total $ 117,898 $ 136,818 $ 181,045 $ 459,065 $ 312,661
Units
Single Family 68 114 133 49 57
Multi Family 8
2 2 208 125
Total 76 116 135 257 182
Note: Totals may not add due to independent rounding.
Source: Construction Industry Research Board: “Building Permit Summary.” Personal Income
The following table sets forth certain yearly median household income for the City, the County, the State of California, the United States. The median residential bill representing only 0.66% of median household income.
CITY OF PALO ALTO, COUNTY OF SANTA CLARA,
STATE OF CALIFORNIA AND UNITED STATES
Median Household Income
Year Palo Alto
Santa Clara
County California United States
2020 174,003 130,890 78,672 64,994
2021 195,781 141,562 84,907 69,717
2022 179,707 150,839 91,551 74,755
2023 184,068 154,954 95,521 77,719
2024 228,517 168,154 100,149 81,604
Source: U.S. Census Bureau, American Community Survey (ACS) Commercial Activity
Taxable sales in the City of Palo Alto exceed $2.3 billion annually. The following summary shows the annual volume of taxable sales within the City since 2021. During 2025, retail sales totaled $1,806,145 and total taxable sales reached $2,610,627.
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The following table shows annual sales tax revenues for the City for the last five years. The latest full- year data available from the State is for calendar year 2025.
CITY OF PALO ALTO
TAXABLE TRANSACTIONS
($000s)
2021 2022 2023 2024 2025
Building Material and Garden Equipment and
Supplies Dealers
19,998 19,113 21,913 43,415 49,854
Clothing and Clothing Accessories Stores 290,294 308,260 346,577 358,174 419,057 Food and Beverage Stores 36,110 40,936 40,726 42,146 43,136 Food Services and Drinking Places 309,524 406,737 450,314 479,821 514,580 Gasoline Stations 53,667 77,684 77,981 73,701 66,383
General Merchandise Stores 108,223 122,250 128,349 141,114 151,199 Home Furnishings and Appliance Stores 74,951 74,182 63,658 70,085 78,732 Motor Vehicle and Parts Dealers 296,978 221,805 213,841 220,801 354,514 Other Retail Group 142,329
136,738 133,214 135,560 128,687
All other outlets 1,123,428 1,418,888 1,511,650 1,350,629 804,481 Total Retail and Food Services 1,332,076 1,407,710 1,476,578 1,564,822 1,806,145 Total All Outlets 2,455,505 2,826,599 2,988,228 2,915,452 2,610,627
Source: California Department of Tax and Fee Administration.
Transportation
The City is served by the Bayshore Freeway (U.S. Highway 101), which runs southeast from San Francisco to Los Angeles and is the major freeway connecting San Francisco and San Jose; Highway 84 - the Dumbarton Bridge and Highway 92, the Hayward-San Mateo Bridge; and Interstate 280, which runs north/south to San Francisco and State Highway 82. These freeways link the City to all parts of northern California.
Air transportation is available at both the San Fran cisco International Airport, approximately 40 miles to the north, and the San Jose Airport, approximately 20 miles to the south. Rail service is provided by Union Pacific Railroad, on a north/south track linking San Jose and San Francisco, and Cal Train commuter service to Gilroy and San Francisco.
Within the City, commuter rail transportation is conv eniently located and the Palo Alto stop is one of the most used in the CalTrain system. Alternative transportation options include numerous bike paths throughout the City and an internal shuttle service is also available.
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APPENDIX C
SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE OF TRUST
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APPENDIX D
PROPOSED FORM OF BOND COUNSEL OPINION
____, 2026
City of Palo Alto
250 Hamilton Ave.
Palo Alto, CA 94301
OPINION: $______ City of Palo Alto Water Revenue Refunding Bonds, 2026 Series A
Members of the Council:
We have acted as bond counsel in connection with the issuance by the City of Palo Alto (the “City”) of the captioned bonds (the “Bonds”) under (i) Articles 10 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code, (ii) an Indenture of Trust dated as of October 1, 2026, by and between the City and U.S. Bank Trust Company, National Association, as trustee (the “Indenture”), and (iii) a resolution of the City Council of the City adopted on [September 14], 20 26. In such capacity, we have examined such law and such certified proceedings, opinions, certifications and other documents as we deem necessary to render this opinion.
Regarding questions of fact material to our opinio n, we have relied on representations of the City contained in the Indenture, and in the certified proceedings and other certifications of public officials furnished to us, without undertaking to verify the same by independent investigation. Regarding certain questions of law material to our opinion, we have assumed the correctness of certain legal conclusions contained in the written opinions of the City Attorney, and others, without undertaking to verify the same by independent investigation.
Based upon the foregoing, we are of the opinion, under existing law, that:
1. The City is a duly created and validly existing municipal corporation and chartered city with the power to enter into the Indenture and to perform the agreements on its part contained therein.
2. The Indenture has been duly authorized, executed and delivered by the City, and is valid, binding and enforceable against the City in accordance with its terms.
3. The Indenture creates a valid lien on the Net Revenues of the Water System (as such terms are defined in the Indenture) and other funds pledged by the Indenture for the security of the Bonds on a parity basis with other bonds (if any) issued or to be issued in accordance with the Indenture.
4. The Bonds have been duly authorized and executed by the City and constitute valid and binding special obligations of the City, payable solely from Net Revenues of the Water System (as such terms are defined in the Indenture) and other moneys, as described in the Indenture.
5. The interest on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax. It should be noted however
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that interest on the Bonds may be subject to the corporate alternative minimum tax. The opinions set forth in the preceding sentences are subject to the condition that the City comply with all requirements of the Internal Revenue Code of 1986, as amended, that must be satisfied subsequent to the issuance of the Bonds in order that the interest thereon be, and continue to be, excludable from gross income for federal income tax purposes. The City has made certain representations and covenants in order to comply with each such requirement. Inaccuracy of those representations, or failure to comply with those covenants, may cause the inclusion of such interest in gross income for federal income tax purposes which may be retroactive to the date of issuance of the Bonds.
6. The interest on the Bonds is exempt from personal income taxation imposed by the State of California.
We express no opinion regarding any other tax consequences arising with respect to the ownership, sale or disposition of, or the amount, accrual or receipt of interest on, the Bonds.
The rights of the owners of the Bonds and the enforceability of the Bonds and the Indenture are limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights generally, and by equitable principles, whether considered at law or in equity.
This opinion is given as of the date hereof, and we assume no obligation to revise or supplement this opinion to reflect any facts or circumstances that may hereafter come to our attention, or any changes in law that may hereafter occur. Moreover, our opinions are not a guarantee of a particular result, and are not binding on the Internal Revenue Service or the courts; rather, our opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions, and any assumptions expressed herein, and in reliance upon the representations, covenants and opinions referenced above. Our engagement with respect to this matter has terminated as of the date hereof.
Respectfully submitted,
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APPENDIX E
DTC AND THE BOOK-ENTRY-ONLY SYSTEM
The description that follows of the procedures and record keeping with respect to beneficial ownership interests in the 2026 Bonds, payments of principal, premium, if any, and interest on the 2026 Bonds to DTC, its nominee, Participants, or Beneficial Owners, confirmation and transfer of beneficial ownership interests in the 2026 Bonds and other bond-related transactions by and between DTC, Participants and Beneficial Owners is based solely on information furnished by DTC. The City cannot and does not give any assurances that DTC, DTC Participants or Indirect Participants will distribute to the Beneficial Owners either (a) payments of interest, principal or premium, if any, with respect to the 2026 Bonds, or (b) certificates representing ownership interest in or other confirmation of ownership interest in the 2026 Bonds, or that they will so do on a timely basis or that DTC, DTC Participants or DTC Indirect Participants will act in the manner described in this Official Statement.
The current “Rules” applicable to DTC are on file with the Securities and Exchange Commission and the current “Procedures” of DTC to be followed in dealing with DTC Participants are on file with DTC.
The Depository Trust Company (“DTC”) will act as securities depository for the 2026 Bonds. The 2026 Bonds will be issued as fully-registered securities regi stered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered 2026 Bond certificate will be issued for each maturity of each Series of the 2026 Bonds, each in the aggregate principal amount of such Series and maturity and will be deposited with DTC.
DTC, the world’s largest securities depository, is a limited purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporati on” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities tr ansactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non U.S. securities brokers and dealers, banks, trust companies, clearing co rporations, and certain other organizations. DTC is a wholly owned subsidiary of the Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s rating of AA+.
The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. The information on such website is not incorporated into this Official Statement.
Purchases of the 2026 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for such 2026 Bonds on DTC’s records. The ownership interest of each actual purchaser of each 2026 Bond (the “Benef icial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not r eceive written confirmation from DTC of their purchase.
Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Pa rticipant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the 2026 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the 2026 Bonds, except in the event that use of the book-entry system for the 2026 Bonds is discontinued.
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To facilitate subsequent transfers, all 2026 Bo nds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of the 2026 Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not affect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the 2026 Bonds; DTC’s records reflect only the identity of the Direct Participants to whose account s such 2026 Bonds are credited, whic h may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants an d Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.
So long as a book-entry system is used for determining beneficial ownership of the 2026 Bonds, the Trustee is to send redemption notice to DTC or to Cede & Co., as partnership nominee for DTC. Any failure of DTC to advise any Participant, or of any Direct Participant or Indirect Participant to notify the actual purchaser of each 2026 Bond, or any such notice of its content or effect does not affect the validity of the redemption of the 2026 Bonds called for redemption or any other action premised on that notice. In the event of a call for optional redemption, the City’s notification to DTC initiates DTC’s standard call; and if a partial call, DTC’s practice is to determine by lot the amount of the interest of each Participant in the 2026 Bonds to be redeemed, and each such Participant then selects by lot the ownership interest in such 2026 Bonds to be redeemed. When DTC and its Participants allocate the call, the Beneficial Owners of the book-entry interests called are to be notified by the broker or other organization responsible for maintaining the records of those interests and subsequently credited by that organization with the proceeds once the 2026 Bonds are redeemed.
THE TRUSTEE, AS LONG AS A BOOK-ENTRY ONLY SYSTEM IS USED FOR THE 2026 BONDS, WILL SEND ANY NOTICE OF REDEMPTION OR OTHER NOTICES ONLY TO DTC. ANY
FAILURE OF DTC TO ADVISE ANY PARTICIPAN T, OR OF ANY PARTICIPANT TO NOTIFY ANY
BENEFICIAL OWNER OF ANY NOTICE AND OF ITS CONTENT OR EFFECT WILL NOT AFFECT THE
VALIDITY OR SUFFICIENCY OF THE PROCEEDINGS RELATING TO THE REDEMPTION OF THE 2026 BONDS CALLED FOR REDEMPTION OR OF ANY OTHER ACTION PREMISED ON SUCH NOTICE.
Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the 2026 Bonds unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the 2026 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).
Principal and interest payments on the 2026 Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from City or Trustee, on the payable date in accordance with their respective holdings s hown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instruct ions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, the Trustee, or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.
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DTC may discontinue providing its services as depository with respect to the 2026 Bonds at any time by giving reasonable notice to the City or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, 2026 Bond certificates are required to be printed and delivered.
The City may decide to discontinue use of the syst em of book-entry-only transfers through DTC (or a successor securities depository). In that event, 2026 Bond certificates will be printed and delivered to DTC.
The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the City believes to be reliable, but the City takes no responsibility for the accuracy thereof.
NEITHER THE CITY NOR THE TRUSTEE WILL HAVE ANY RESPONSIBILITY OR
OBLIGATION TO DTC PARTICIPANTS, TO INDIRECT PARTICIPANTS, OR TO ANY BENEFICIAL OWNER WITH RESPECT TO (i) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, CEDE & CO., ANY DTC PARTICIPANT, OR ANY INDIRECT PARTICIPANT; (ii) ANY NOTICE THAT IS PERMITTED OR REQUIRED TO BE GIVEN TO TH E OWNERS OF THE 2026 BONDS; (iii) THE
SELECTION BY DTC OR ANY DTC PARTICIPANT OR INDIRECT PARTICIPANT OF ANY PERSON TO RECEIVE PAYMENT IN THE EVENT OF A PARTIAL REDEMPTION OF THE 2026 BONDS; (iv) THE
PAYMENT BY DTC OR ANY DTC PARTICIPANT OR INDIRECT PARTICIPANT OF ANY AMOUNT
WITH RESPECT TO THE PRINCIPAL OR REDE MPTION PREMIUM, IF ANY, OR INTEREST DUE WITH RESPECT TO THE 2026 BONDS; (v) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC AS THE OWNER OF THE 2026 BONDS; OR (vi) ANY OTHER MATTER.
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APPENDIX F
FORM OF CONTINUING DISCLOSURE CERTIFICATE
This CONTINUING DISCLOSURE CERTIFICATE (the “Disclosure Certificate”) is executed and delivered by the CITY OF PALO ALTO, CALIFORNIA (the “City”) in connection with the issuance of its Water Revenue Refunding Bonds, 2026 Series A (the “2026 Bonds”). The 2026 Bonds will be issued pursuant to an Indenture of Trust, dated as of October 1, 2026 (the “Indenture”), by and between the City and U.S. Bank Trust Company, National Association, as trustee (the “Trustee”).
In consideration of the Participating Underwriter’s purchase of the 2026 Bonds, the City agrees as follows:
Section 1. Definitions. In addition to the definitions set forth in the Indenture, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section 1, the following capitalized terms shall have the following meanings when used in this Disclosure Certificate:
“Annual Report” shall mean any Annual Report provided by the City pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate.
“Beneficial Owner” shall mean any person who (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds (including persons holding Bonds through nominees, depositories or other intermed iaries), or (b) is treated as the ow ner of any Bonds fo r federal income tax purposes.
“Dissemination Agent” shall mean the City or any successor Dissemination Agent designated in writing by the City and which has filed with the City a written acceptance of such designation. In the absence of such a designation, the City shall act as the Dissemination Agent. “EMMA” or “Electronic Municipal Market Access ” shall mean the centralized on-line repository for documents to be filed with the MSRB, such as official statements and disclosure information relating to municipal bonds, notes and other securities as issued by state and local governments. “Financial Obligation ” shall mean a (i) debt obligation; (ii) derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or (iii) guarantee of (i) or (ii). The term Financial Obliga tion shall not include municipal securities as to which a final official statement has been provided to the MSRB consistent with the Rule. “Listed Events” shall mean any of the events listed in Section 5(a) or 5(b) of this Disclosure Certificate. “MSRB” shall mean the Municipal Securities Rulemaking Board, which has been designated by the Securities and Exchange Commission as the sole repository of disclosure information for purposes of the Rule, or any other repository of disclosure information which may be designated by the Securities and Exchange Commission as such for purposes of the Rule in the future. “Participating Underwriter” shall mean any original underwriter of the 2026 Bonds required to comply with the Rule in connection with offering of the 2026 Bonds. “Rule” shall mean Rule 15c2-12 adopted by the Se curities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time.
Section 2. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the City for the benefit of the owners and Beneficial Owners of the 2026 Bonds and in order to
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assist the Participating Underwriter in complying with Securities and Exchange Commission Rule 15c2- 12(b)(5).
Section 3. Provision of Annual Reports.
(a) Delivery of Annual Report. The City shall, or shall cause the Dissemination Agent to, not later than nine months after the end of the City’s fiscal year (which currently ends on June 30), commencing with the report for the 2025-26 Fiscal Year, which is due not later than March 31, 2027, file with EMMA, in a readable PDF or other electronic format as pr escribed by the MSRB, an Annual Re port that is consistent with the requirements of Section 4 of this Disclosure Certificate. The Annual Report may be submitted as a single document or as separate documents comprising a package and may cross-reference other information as provided in Section 4 of this Disclosure Certificate; provided that the audited financial statements of the City may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. (b) Change of Fiscal Year. If the City’s fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(c), and subsequent Annual Report filings shall be made no later than nine months after the end of such new fiscal year end. (c) Delivery of Annual Report to Dissemination Agent . Not later than fifteen (15) Business Days prior to the date specified in subsection (a) (or, if applicable, subsection (b)) of this Section 3 for providing the Annual Report to EMMA, the City shall provide the Annual Report to the Dissemination Agent (if other than the City). If by such date, the Dissemination Agent has not received a copy of the Annual Report, the Dissemination Agent shall notify the City.
(d) Report of Non-Compliance . If the City is the Dissemination Agent and is unable to file an Annual Report by the date required in subsection (a) (or, if applicable, subsection (b)) of this Section 3, the City shall send a notice to EMMA in a timely fashion substantially in the form attached hereto as Exhibit A. If the City is not the Dissemination Agent and is unable to provide an Annual Report to the Dissemination Agent by the date required in subsection (c) of this Section 3, the Dissemination Agent shall send a notice in a timely fashion to EMMA in substantially the form attached hereto as Exhibit A. (e) Annual Compliance Certification. The Dissemination Agent shall, if the Dissemination Agent is other than the City, file a report with the City certifying that the Annual Report has been filed with EMMA pursuant to Section 3 of this Disclosure Certificate, stating the date it was so provided and filed.
Section 4. Content of Annual Reports.
(a) The Annual Report for each fiscal year shall contain or incorporate by reference the following information, for the most recently completed fiscal year:
(1) Financial Statements. Audited financial statements of the City’s Water System (which may be part of the audited financial statements of the City, or the City’s Utilities Department) for the preceding fiscal year, prepared in accordance with generally accepted accounting principles. If the audited financial statements are not available by the time the Annual Report is required to be filed pursuant to Section 3(a), the Annual Report shall co ntain unaudited financial statements in a format similar to the financial statements contained in th e final Official Statemen t for the 2026 Bonds (the “OS”), and the audited financial statements shall be filed in the same manner as the Annual Report when they become available.
(2) To the extent not included in the audited financial statements or the Annual Comprehensive Financial Report (ACFR) of the City, the Annual Report shall also include operating data with respect to the City for the preceding fiscal year, as follows:
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(i) Discussion of any changes in the rate and fee structure wi th respect to the Water System in the most recently completed fiscal year which could have a material effect on the Net Revenues of the Water System, as discussed in the OS under the caption “THE WATER SYSTEM—Water Rates, Fees and Charges;”
(ii) Description of any Parity Bonds or subordinate debt issued during the most recently completed fiscal year;
(iii) Total actual Gross Revenues and Net Revenues generated by the Water System in the most recently completed fiscal year, the total debt service on the Bonds for such fiscal year, and the respective debt service coverage ratio, substantially in the form of Table 12 to the OS; and
(iv) Updated information on the collective total billings of the top ten customers of the Water System in the most rece ntly completed fiscal year, and the percentage of the total Water System billings represented thereby, as discussed in the OS under the caption “THE WATER SYSTEM—Water Demand and Customer Base—Largest Water Customers.”
(b) Cross References. Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the City or related public entities, which are available to the public on EMMA. The City shall clea rly identify each such other document so included by reference. If the document included by reference is a final official statement, it must be available from EMMA. (c) Further Information. In addition to any of the information expressly required to be provided under paragraph (b) of this Section 4, the City shall provide such further information, if any, as may be necessary to make the specifically required statements, in the li ght of the circumstances unde r which they are made, not misleading.
Section 5. Reporting of Listed Events.
(a) Reportable Events. The City shall, or shall cause the Dissemination Agent (if not the City) to, give notice of the occurrence of any of the following events with respect to the 2026 Bonds:
(1) Principal and interest payment delinquencies.
(2) Unscheduled draws on debt service reserves reflecting financial difficulties. (3) Unscheduled draws on credit enhancements reflecting financial difficulties. (4) Substitution of credit or liquidity providers, or their failure to perform. (5) Defeasances.
(6) Rating changes.
(7) Tender offers.
(8) Bankruptcy, insolvency, receivership or similar event of the obligated person. (9) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or
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other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax status of the security. (10) Default, event of acceleration, terminat ion event, modification of terms, or other similar events under the terms of a Financial Obligation, any of which reflect financial difficulties.
Note: For the purposes of the event identified in subparagraph (8), the event is considered to occur when any of the following occur: the appointment of a receiver, trustee or similar officer for an obligated person in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the obligated person, or if such jurisdiction has been assumed by leaving the existing governmental body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reor ganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the obligated person.
(a) Material Reportable Events. The City shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the 2026 Bonds, if material:
(1) Non-payment related defaults.
(2) Modifications to righ ts of security holders.
(3) Bond calls.
(4) The release, substitution, or sale of property securing repayment of the securities. (5) The consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms.
(6) Appointment of a successor or additional trustee, or the change of name of a trustee. (7) Incurrence of a Financial Obligation, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a Financial Obligation of the Obligated Person, any of which affect holders of the 2026 Bonds. (a) Time to Disclose. The City shall, or shall cause the Dissemination Agent (if not the City) to, file a notice of such occurrence with EMMA, in an elec tronic format as prescribed by the MSRB, in a timely manner not in excess of 10 business days after the o ccurrence of any Listed Even t. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(5) and (b)(3) above need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to owners of affected Bonds under the Indenture.
Section 6. Identifying Information for Filings with EMMA. All documents provided to EMMA under this Disclosure Certificate shall be accompanied by identifying information as prescribed by the MSRB.
Section 7. Termination of Reporting Obligation. The City’s obligations under this Disclosure Certificate shall terminate upon the defeasance, prior redemption or payment in full of all of the 2026 Bonds.
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Section 8. Dissemination Agent.
(a) Appointment of Dissemination Agent . The City may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate and may discharge any such agent, with or without appointing a successor Dissemination Ag ent. If the Dissemination Agent is not the City, the Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by the City pursuant to this Disclosure Certificate. It is understood and agreed that any information that the Dissemination Agent may be instructed to file with EMMA shall be prepared and provided to it by the City. The Dissemination Agent has undertaken no responsibility with respect to the content of any reports, notices or disclosures provided to it under this Disclosure Certificate and has no liability to any person, including any Bond owner, with respect to any such re ports, notices or disclosu res. The fact that the Dissemination Agent or any affiliate thereof may have any fiduciary or banking relationship with the City shall not be construed to mean that the Dissemination Agent has actual knowledge of any event or condition, except as may be provided by written notice from the City.
(b) Compensation of Dissemination Agent. The Dissemination Agent shall be paid compensation by the City for its services provided hereunder in accordance with its schedule of fees as agreed to between the Dissemination Agent and the City from time to time and all expenses, legal fees and expenses and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder. The Dissemination Agent shall not be deemed to be acting in any fiduciar y capacity for the City, owners or Beneficial Owners, or any other party. The Dissemination Agent may rely, and shall be protected in acting or refraining from acting, upon any direction from the City or an opinion of nationally recognized bond counsel. The Dissemination Agent may at any time resign by giving written notice of such resignation to the City. The Dissemination Agent shall not be liable hereunder except for its negligence or willful misconduct. (c) Responsibilities of Dissemination Agent . In addition of the filing obligations of the Dissemination Agent set forth in Sections 3(e) and 5, the Dissemination Agent shall be obligated, and hereby agrees, to provide a request to the City to compile the information required for its Annual Report at least 30 days prior to the date such information is to be provided to the Dissemination Agent pursuant to subsection (c) of Section 3. The failure to provide or receive any such request shall not affect the obligations of the City under Section 3.
Section 9. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the City may amend this Disclosure Certif icate (and the Dissemination Agent shall agree to any amendment so requested by the City that does not impose any greater duties or risk of liability on the Dissemination Agent), and any provision of this Disclosure Certificate may be waived, provided that all of the following conditions are satisfied:
(a) Change in Circumstances . If the amendment or waiver relates to the provisions of Sections 3(a), 4 or 5(a) or (b), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of an obligated person with respect to the 2026 Bonds, or the type of business conducted. (b) Compliance as of Issue Date. The undertaking, as amended or taking into account such waiver, would, in the opinion of a nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original issuan ce of the 2026 Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances. (c) Consent of Bondowners; Non-impairment Opinion . The amendment or waiver either (i) is approved by the Bond owners in the same manner as provided in the Indenture for amendments to the Indenture with the consent of Bond owners, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the Bond owners or Beneficial Owners.
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If this Disclosure Certificate is amended or any provision of this Disclosure Certificate is waived, the City shall describe such amendment or waiver in the next following Annual Report and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the City. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in the same manner as for a Listed Event under Section 5(c), and (ii) the Annual Report for the year in which the change is made should present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles.
Section 10. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the City from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in ad dition to that which is required by this Disclosure Certificate. If the City chooses to include any inform ation in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the City shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.
Section 11. Default. In the event of a failure of the City to comply with any provision of this Disclosure Certificate, the Insurer or any Certificate ow ner or Beneficial Owner may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City to comply with its obligations under this Disclosure Certificate. The sole remedy under this Disclosure Certificate in the event of any failure of the City to comply with this Disclosure Certificate shall be an action to compel performance.
Section 12. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate, and no implied covenants or obligations shall be read into this Disclosure Certificate against the Dissemination Agent, and the City agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (i ncluding attorneys’ fees and expenses) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent’s negligence or willful misconduct. The Dissemination Agent shall have the sa me rights, privileges and immunities hereunder as are afforded to the Trustee under the Inde nture. The obligations of the City under this Section 12 shall survive resignation or removal of the Dissemination Agent and payment of the 2026 Bonds.
Section 13. Beneficiaries. This Disclosure Certific ate shall inure solely to the benefit of the City, the Dissemination Agent, the Insurer, the Participating Underwriter and the Owners and Beneficial Owners from time to time of the 2026 Bonds, and shall create no rights in any other person or entity.
Date: _______, 2026
CITY OF PALO ALTO, CALIFORNIA
By:
Authorized Officer
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EXHIBIT A
NOTICE TO MSRB OF FAILURE TO FILE ANNUAL REPORT
Name of Obligor: City of Palo Alto, California
Name of Issue: Water Revenue Refunding Bonds, 2026 Series A Date of Issuance: _______, 2026
NOTICE IS HEREBY GIVEN that the Obligor has not provided an Annual Report with respect to the above- named Issue as required by the Continuing Disclosure Certificate, dated _______, 2026, furnished by the Obligor in connection with the Issue. The Obligor anticipates that the Annual Report will be filed by _________________.
Date: ________________
CITY OF PALO ALTO, CALIFORNIA,
Dissemination Agent
By:
Authorized Officer