9 5
6 7
City Council
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Administrative Services
Meeting Date: September 14, 2026
Report #:2603-6100
TITLE
Refinancing of the 2009A Water Revenue Bonds, Series A; Adoption of a Resolution Authorizing the Issuance and Sale of Tax-Exempt Water Revenue Refunding Bonds in a Principal Amount Not-to-Exceed $20,000,000, Approval of the Official Notice of Sale, Indenture of Trust, Official Statement, Irrevocable Refunding Instructions, and Related Documents; CEQA Status - Not a Project
RECOMMENDATION
The Finance Committee recommends that the City Council:
1. Authorize staff to refinance the outstanding City of Palo Alto Water Revenue Bonds, 2009 Series A through the issuance of Water Revenue Refunding Bonds in a principal amount not to exceed $20,000,000; and
2. Approve the Official Notice of Sale, Indenture of Trust, Official Statement, Irrevocable Refunding Instructions, and authorize official actions and related documents thereto.
EXECUTIVE SUMMARY
Approve the refinancing of the outstanding Water Revenue Bonds, 2009 Series A (“2009 Bonds”) through the issuance of Water Revenue Refunding Bonds, 2026 Series A (“2026 Refunding Bonds”) as recommended by the Finance Committee. Refunding the2009 Bonds achieves three objectives. Refinancing the 2009 Bonds delivers three strategic benefits: it eliminates the Availability Reserve requirement that obligates the Water, Gas, and Electric Funds; it provides significantly greater flexibility for the Electric Fund to finance future capital needs; and it removes the City’s exposure to ongoing federal interest subsidy sequestration risk.
First, refinancing the 2009 Bonds removes the 2009 Bonds’ Available Reserve requirement, which currently obligates the Water, Gas, and Electric Funds to collectively maintain reserve levels that are atypically high for modern utility financing structures. Refunding this debt realigns the security to be pledged with the Water Utility only.
9 5
6 7
Second, this covenant constrains the Electric Fund’s ability to issue new debt—particularly limiting the City’s capacity to move forward with the Electric Grid Modernization project.
Refinancing the 2009 Bonds will eliminate this restrictive Available Reserves covenant and provide the Electric Fund with the flexibility to issue future revenue bonds without being subject to burdensome reserve funding requirement.
Third, the 2026 Refunding Bonds will be issued as tax-exempt bonds and will be sold on a competitive basis. The 2009 Bonds are Direct Payment Build America Bonds (“BABs”) with a federal interest subsidy; the interest subsidy is currently subject to Federal sequestration. This refinancing eliminates the City’s exposure to future sequestration. Estimated savings and refunding results incorporate the value of the federal interest subsidy.
Based on market conditions as of August 24, 2026, this refinancing is projected to meet City’s typical minimum threshold for refunding of at least 3% net present value savings1. However fluctuating interest rates may drive the net present value savings percentage below 3%. When applying a 15-basis point cushion, the net present value savings decreases to 2.42%. The savings guideline may be waived by the Chief Financial Officer if the restructuring is in the City’s overall best financial interest. The advantages position the City for stronger long-term financial management. The Finance Committee recommends this refinancing action to the City Council, including authorization to issue the 2026 Refunding Bonds (in a principal not-to-exceed $20,000,000), approve the Official Notice of Sale, Irrevocable Refunding Instructions, and direct related actions.
Distribution of the Official Statement by the City is subject to federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require the Official Statement to include all facts that would be material to an investor in the 2026 Refunding Bonds.
BACKGROUND
On July 27, 20092, the City Council authorized the issuance of 2009 Bonds to construct a 2.5- million-gallon underground water reservoir and pump station to meet emergency water supply and storage needs. In addition to the water reservoir, the project included the construction of several emergency supply wells, and the upgrade of five existing wells and the Mayfield Pump Station.
The 2009 Bonds were issued on October 28, 2009, in the principal amount of $35,015,000 and are secured by net revenues generated by the Water Fund. The 2009 Bonds were not issued as tax-exempt bonds; instead, they were issued as federally taxable “Direct Payment Build 1 City of Palo Alto Debt Policy, Adopted April 11, 2017:
https://www.paloalto.gov/files/assets/public/v/1/administrative-services/adopted-debt-policy-2017-04-11.pdf 2 City Council, July 27, 2009, Staff Report ID: 328:09:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=69894&dbid=0&repo=PaloAlto&searchid=bb59c57b -3fc4-403b-a39f-a6fd9690fa51
9 5
6 7
America Bonds” (“BABs”) under the provisions of the American Recovery and Reinvestment Act of 2009 (“Act”). The Act entitles the City to receive a cash subsidy payment from the United States Treasury equal to 35% of the interest payment on the 2009 Bonds.
The 2009 Bonds are payable only from Net Revenues of the Water System. In addition, the City covenanted to maintain balances in the rate stabilization reserves for the Water System, Electric System, and Gas System in the aggregate equal to five times the maximum annual debt service on all outstanding bonded indebtedness secured by net revenues of the Water, Electric, and Gas Funds. If either the Water, Gas, or Electric Fund were to issue bonds, the Availability Reserve requirement would apply to all three funds. Consequently, the Water, Gas, and Electric Funds are obligated to maintain debt service reserves totaling approximately $12.9 million based on current outstanding debt. Assuming that $206 million for the electric grid modernization project is debt financed, the debt service reserve requirement would increase to approximately $75 million across the Water, Gas, and Electric Funds. The 2009 Bonds mature on June 1, 2035. Detailed discussion regarding consistency with regulatory reserve margin requirements can be found in the City of Palo Alto Utility Reserves Advisory Report5.
On August 18, 20266, staff presented this refinancing proposal to the Finance Committee; the Committee supports this refinancing proposal (2-0-1 Council member Burt absent).
ANALYSIS
The primary purpose of refinancing the 2009 Bonds is to eliminate the bonds’ Available Reserve requirement, which currently obligates the Water, Gas, and Electric Funds. It is not typical to use the reserves of one utility to secure the bonds of another utility; the Available Reserve requirement found in the 2009 Bonds is not a standard in today’s market. As discussed in the Executive Summary section of this report, the Water, Electric and Gas Funds must maintain balances in the rate stabilization reserves that total five times the maximum annual debt service on all outstanding bonded indebtedness secured by the Water, Electric, and Gas Funds.
This requirement restricts the other utilities’ ability to issue new debt at a time when they are undertaking significant capital improvements. Refinancing the 2009 Bonds, the City would relieve the Water and Gas Funds of this fiscal constraint, provide capacity to issue debt for the Electric Grid Modernization project.
Debt Structure, Policy, and Administration
The interest rates on the 2026 Refunding Bonds will not be determined until the day of the competitive sale and will reflect prevailing market conditions at that time. A competitive sale is 5 Policy & Services Committee, April 14, 2026, Staff Report ID: 2509-5177:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=87357&dbid=0&repo=PaloAlto&searchid=ac21168e -fd89-4dc5-a105-b765951405b5
6 Finance Committee, August 18, 2026, Staff Report ID: 2603-6099:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=897180&dbid=0&repo=PaloAlto 9 5
6 7
a public auction process where an issuer advertises its bonds, accepts electronic bids from multiple underwriting firms, and awards the issue to the bidder offering the lowest true interest cost.
Staff and the City’s financial advisor, PFM Financial Advisors LLC (“PFM”), estimate the following refunding results summarized in Table 1, based on rates as of July 30, 2026; the estimated refunding results incorporate the value of the BABs federal tax credit.
Table 1: Estimated Refunding Results (rates as of August 24, 2026) Refunding Par
(principal amt. of new bonds)
$14,590,000
Refunded Par
(principal amt. of 2009A Water Bonds)
$17,540,000
$ Est. Net Present Value Savings $547,708
% Est. Net Present Value Savings 3.12%
True Interest Cost (TIC) 3.07%
First Maturity June 1, 2027
Final Maturity June 1, 2035
The City’s Debt Policy requires that a net present value savings of at least 3% be achieved and that is a standard guideline for initiating a refunding. In addition, the City’s Debt Policy1 stipulates that the savings guideline may be waived by the Chief Financial Officer upon determining that such a restructuring is in the City’s overall best financial interest. Based on rates as of August 24, 2026, this transaction does satisfy the minimum threshold for refunding transactions, however changes in market conditions between Council approval and final sale may change the estimated net present value savings. As discussed in the Executive Summary section of this report, there are significant benefits to the City to removing the bond reserve covenants especially for the Electric Utility and staff highly recommends pursuing this refunding.
The 2026 Refunding Bonds will be competitively sold; PFM estimates that the underwriter’s compensation (or “underwriter’s discount”) will be approximately $73,000, which equates to
0.5% of the estimated principal amount of the 2026 Refunding Bonds. Other issuance costs are estimated to total $212,650, including fees and expenses of PFM, bond counsel (Jones Hall LLP), disclosure counsel (Stradling Yocca Carlson & Rauth LLP), U.S. Bank Trust Company, National Association, as trustee for the 2026 Refunding Bonds (“Trustee”), and the cost of the rating to be received from Standard & Poor’s (S&P). Precise costs for the underwriter will not be known until the day of sale.
9 5
6 7
Rating Agency Presentation
The City Manager’s Office, Administrative Services Department, Utilities Department, and PFM delivered a ratings presentation to S&P on July 28, 2026. S&P Global Ratings assigned its highest "AAA" rating and stable outlook to the City's Series 2026A Water Revenue Refunding Bonds9. In addition to enabling the lowest possible borrowing costs, the rating reflects the City’s disciplined financial and operational management throughout the year – including prudent oversight of pension obligations, long-range capital planning, and consistent clean financial statement audit opinions – all of which contribute to strong market confidence. S&P also highlighted the City’s exceptional economic base and low debt levels and robust liquidity in the Water Fund.
S&P’s rating report also stated the agency could lower the rating over the next two years if the Water Utility’s debt service coverage (reserves) or liquidity materially decline to levels observed in the past few years, either due to insufficient rate adjustments or unexpected capital needs that require additional debt or significant cash draws. This underscores the importances of timely, adequate rate adjustments and infrastructure management.
Refinancing Mechanics
Council approval is required10 to sell the 2026 Refunding Bonds. The settlement or closing of the bond sale is expected to occur in early October 2026. PFM will assist the City in receiving and evaluating bids from underwriters for the bonds and in selecting the optimal bid.
Underwriters are investment-banking firms, and the underwriter selected will resell the bonds to investors, including mutual funds, insurance companies, and high net worth individuals. The underwriter with a bid resulting in the lowest true interest cost (“TIC”) to the City will be selected on the sale date. TIC is based on the present value of future debt service payments of the 2026 Refunding Bonds and considers the proposed interest rates and underwriting costs.
To issue the 2026 Refunding Bonds, the Council will need to adopt the attached resolution (Attachment A) which:
1. Authorizes the issuance and sale of up to $20,000,000 in bond principal for the 2026 Refunding Bonds, and
2. Approves the required legal documents (including Attachments B through D and linked).
Approving the resolution would confer formal acceptance of the following documents:
9 S&P Global, August 17, 2026: Palo Alto, CA Series 2026A Water Revenue Refunding Bonds Rated ‘AAA’; Outlook Stable: https://www.spglobal.com/ratings/en/regulatory/article/-/view/sourceId/101702163 10 See California Government Code, section 53635.7: https://codes.findlaw.com/ca/government-code/gov-sect- 53635-7/
9 5
6 7
1.Official Notice of Sale (Attachment B): this document will be distributed to investors along with the Preliminary Official Statement described below, and it details the bond sale parameters and bid requirements.
2.Indenture of Trust (Attachment C): outlines the responsibilities of the City and the Trustee with respect to the receipt of the 2026 Refunding Bond proceeds from the underwriter, disbursement of proceeds of the 2026 Refunding Bonds to refinance the 2009 Bonds, and payment of debt service on the 2026 Refunding Bond. The Indenture of Trust will be executed at bond closing which is expected to occur on October 6, 2026.
3.Preliminary Official Statement (POS) (Attachment D): the City will distribute a disclosure document – called an Official Statement – that describes the terms and security (most notably the revenues, expenses, and net revenues of the Water Utility) of the 2026 Refunding Bonds.
A Preliminary Official Statement (“POS”) will be approved by Council in “nearly final” form; it will be substantially complete, except for the interest rates and amount of final numbers which will result from the sale of the 2026 Refunding Bonds. The POS will be circulated to the potential investors prior to the pricing of the 2026 Refunding Bonds
After the 2026 Refunding Bonds have been sold to the underwriter, the City will distribute a final Official Statement that will include final pricing information, including principal amount, interest rate, and pre-payment terms. Appendix F to the POS is the Continuing Disclosure Certificate, under which the City will agree to provide certain financial and operating data of the type included in the POS to owners of the 2026 Refunding Bonds on an annual basis, and information about certain enumerated events when they occur.
4.Irrevocable Refunding Instructions Agreement (Attachment E): this document directs U.S. Bank Trust Company, National Association, as trustee for the 2009 Bonds (“2009 Trustee”) to apply amounts held by the 2009 Trustee (including proceeds of the 2026 Refunding Bonds and moneys held in the debt service reserve fund for 2009 Bonds) to redeem the 2009 Bonds and to send related notices to the owners of the 2009 Bonds.
Preliminary Official Statement Federal Regulations
Distribution of the Official Statement by the City is subject to federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require the Official Statement to include all facts that would be material to an investor in the 2026 Refunding Bonds.
9 5
6 7
Material information is information that there is a substantial likelihood would have actual significance in the deliberations of the reasonable investor when deciding whether to buy or sell the 2026 Refunding Bonds. If the Council concludes that the POS includes all facts that would be material to an investor in the Bonds, it must adopt a resolution that authorizes staff to execute a certificate to the effect that the Preliminary Official Statement has been “deemed final.”
The Securities and Exchange Commission (the “SEC”), the agency with regulatory authority over the City’s compliance with the federal securities laws, has issued guidance as to the duties of the Council with respect to its approval of the POS. In its “Report of Investigation in the Matter of County of Orange, California as it Relates to the Conduct of the Members of the Board of Supervisors” (Release No. 36761 / January 24, 1996) (the “Release”), the SEC stated that, if a member of the Council has knowledge of any facts or circumstances that an investor would want to know about prior to investing in the 2026 Refunding Bonds, whether relating to their repayment, tax-exempt status (if applicable), undisclosed conflicts of interest with interested parties, or otherwise, they should endeavor to discover whether such facts are adequately disclosed in the POS. In the Release, the SEC stated that the steps that a member of the Council could take include becoming familiar with the POS and questioning staff and consultants about the disclosure of such facts.
FISCAL/RESOURCE IMPACT
Assuming rates as of July 30, 2026, refinancing the 2009 Bonds is estimated to reduce the debt service payment in the Water Fund by approximately $0.3 million annually through FY 2035.
The expenses associated with issuing the 2026 Refunding Bonds are estimated to be $0.2 million and will be paid with proceeds of the 2026 Refunding Bonds. The final debt service schedule for the 2026 Refunding Bonds will not be known until the sale date, when competitive bids are received from the underwriting firms.
STAKEHOLDER ENGAGEMENT
The Administrative Services Department, Utilities Department, and City Attorney’s Office worked collaboratively to develop this debt financing strategy and on the required documents for this bond refinancing.
ENVIRONMENTAL REVIEW
Council action on this item is not a project as defined by CEQA because issuing a bond is a government funding mechanism or fiscal activity which does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment. CEQA Guidelines section 15378(b)(4).
9 5
6 7
ATTACHMENTS
Attachment A: Resolution of the Council of the City of Palo Alto Authorizing the Issuance and Sale of Water Revenue Refunding Bonds in a Principal Amount Not to Exceed $20,000,000, Approving an Indenture of Trust, Official Notice of Sale, Notice of Intention, Refunding Instructions, and Official Statement, and Authorizing Official Actions and Documents Attachment B: Official Notice of Sale, Water Revenue Refunding Bonds, 2026 Series A Attachment C: Indenture of Trust by and between the City and U.S. Bank Trust Company, National Association, as Trustee
Attachment D: Preliminary Official Statement (POS)
Attachment E: Irrevocable Refunding Instructions
APPROVED BY:
Lauren Lai, Administrative Services Director