Palo Alto proposes 10% water rate increase for fiscal year 26 funding

Palo Alto's Finance Committee has proposed a 10% water rate increase for fiscal year 2026, translating to an additional $11.40 per month for residential customers. This decision comes after extensive discussions and feedback from both the Finance Committee and the Utilities Advisory Commission (UAC), which unanimously supported the proposal.

The increase is driven by rising labor costs and reduced sales due to ongoing drought conditions, with operational costs climbing by 4% to 6% annually, while revenues have only seen a modest increase of 1.3% since 2019. The city has strategically utilized $25 million from reserves over the past three years to maintain stable rates, averaging a 4% increase despite significant wholesale rate hikes from the San Francisco Public Utilities Commission.

In response to earlier concerns about a proposed 14% increase, the city has adjusted its plans by deferring $4.6 million in capital improvement projects to keep the increase at a more manageable level. The proposed rate structure includes a 17% increase in distribution rates and a 2% increase in commodity rates.

The Finance Committee also discussed alternative funding strategies, including the potential issuance of debt for future tank replacements, which could lower rate increases to 7% in subsequent years. Current comparisons show that Palo Alto's water bills are approximately in line with the average among other agencies relying on the same water supply.

As the city continues to navigate financial challenges, the proposed rate increase aims to ensure the reliability and quality of water service while gradually rebuilding reserves over the next five years. The Finance Committee's next steps will involve further discussions and final approvals as they work to balance fiscal responsibility with community needs.