Palo Alto finance committee sets $6 million holdback, votes to delay gas rate overhaul and tentatively trims budget items

The Palo Alto City Council finance committee on May 7 moved to preserve at least $6 million of the city’s uncertainty reserve and directed staff to pursue a mix of one‑time and ongoing budget reductions and funding swaps while continuing the multiweek budget review. The committee also voted to approve an alternative approach to a disputed gas cost‑of‑service (COSA) proposal and gave tentative approval to multiple operating budgets, while asking staff to return with detailed plans on capital project cuts and staffing changes.

The committee’s core financial instruction was to identify ways to reduce the proposed use of reserves by $6 million: about $4 million in one‑time reductions and roughly $2 million in ongoing savings. The intent is to leave the city with a stronger buffer going into fiscal 2027 while still buying staff time to prepare longer‑term structural reductions. Finance staff said the $6 million target is a minimum, and scope includes deferring or reprioritizing capital projects, reallocating funding sources and tightening consultant spending.

Why it matters: committee members repeatedly raised the risk that the city will rely heavily on reserves under the proposed budget and urged early action to avoid ‘‘kicking the can’’ to later years. Several members said they want to prioritize ongoing savings that reduce structural budget pressure rather than one‑time fixes only.

Pension and reserves: CFO Lauren Lai and budget manager Paul Harper briefed the committee on pension prefunding and other long‑term liabilities. The proposed budget continues a supplemental contribution to the Section 115 pension trust intended to move the plan toward a 90% funding goal within about 15 years; staff said the city’s funding policy uses a conservative assumed return and prefunding target designed to smooth volatility from CalPERS. Committee members asked staff to model a downside scenario and to return forecasts showing the projected funding path under alternative contribution rates.

Gas rates and climate credits: The committee spent significant time on a new 2025 gas COSA prepared by consultants and the utilities team. The study would reallocate distribution costs among residential (G‑1) and commercial/multiunit (G‑2/G‑3) classes and, as drafted, raised concern among commissioners and public commenters that small commercial and landlord master‑meter customers would see increases while heavy users would see cuts. After public comment and robust debate, the committee voted to adopt staff’s alternative: implement a more gradual approach to rate changes, provide a one‑time climate credit to mitigate near‑term bill impacts for the affected customers, and send the COSA back to the Utilities Advisory Commission for additional review before full implementation. The committee instructed staff to use a combination of available gas cap‑and‑trade funds and available interest/non‑rate revenues to fund the one‑time credit rather than shifting the burden entirely onto residents.

What was voted: the committee approved the staff alternative to (a) pause full implementation of the COSA for FY 2026, (b) provide a one‑time climate credit funded primarily from gas cap‑and‑trade reserves (with partial use of interest and internal nonrate funds if needed) to protect small commercial customers, and (c) remand the COSA to the Utilities Advisory Commission for further public vetting and technical review. The motion passed unanimously.

Public safety and EMS: The committee reviewed options for Fire Department ambulance staffing and the impact of a proposed transport fee increase. Staff said an across‑the‑board increase in transport fees is projected to raise about $700,000 in FY 2026 (a figure not yet baked into the proposed budget) and that adding a fourth ambulance under different staffing models would bring additional revenue but also material ongoing cost. The committee signaled support for beginning a single‑role ambulance program but asked staff to delay hiring expensive firefighter overtime to backfill a new 12‑hour peak ambulance until the single‑role staffing plan is fully designed and costed.

Capital projects and CIP reductions: Committee members asked staff to prepare scenarios that would defer or re‑time capital projects by broad buckets — 5%, 10% and 15% of CIP transfers — and to prioritize projects for deferral using clear criteria: (1) projects that are aesthetic rather than functionally required; (2) projects whose delay will not cause structural deterioration or cascading rework; (3) projects that do not create dependencies that force later expensive redesigns; and (4) projects where short‑term cost inflation risk is relatively low. Staff said early candidates for timing changes include smaller park or noncritical items, and that large system projects (grid modernization, wastewater upgrades) are less desirable to postpone because lead times, contract commitments and permitting create cost or reliability risk.

Nonprofits and community grants: The committee heard a staff recommendation to fund a structured ‘‘nonprofit work plan’’ and to add additional one‑time and ongoing allocations for community events. Committee members expressed concern that the scheduling and language around the city’s new nonprofit process had unintentionally left some long‑standing city partners out of the draft funding package. The committee asked staff to present a clearer two‑bucket approach to council — (1) a small set of established, ongoing partner contracts the city will continue to fund; and (2) a separate competitive pool for new or one‑time nonprofit grants — and to return with clarified language and amounts.

Tentative approvals: The committee gave tentative approval to a broad set of operating budgets (utilities operating funds, public works operating funds, wastewater treatment, municipal fees changes, planning and transportation operating items, and central internal support departments) and asked staff to return with the detailed recommended cut list tied to the $6 million target and the CIP reduction scenarios.

Nut‑graf: The May 7 workshop was a working session: no final appropriations were adopted. Instead the committee issued specific guidance — retain at least $6 million of uncertainty reserves, pursue a mix of one‑time and ongoing savings, protect vulnerable customers while remanding technical rate work for further review, and tighten the nonprofit funding process — and asked staff to return with the concrete lists that will let the council act in the remaining budget hearings.

What’s next: Staff will model the CIP reductions by 5/10/15% scenarios, return a prioritized cut list tied to the $6 million minimum holdback, and draft the revised nonprofit funding approach for council review. Utilities staff will bring the COSA back to the UAC for more technical vetting before final FY 2027 rate changes are adopted. The finance committee will forward these recommendations and staff reports to the full council at Monday’s budget update session.

Ending: The committee’s direction preserves near‑term flexibility — and places the onus on staff to produce transparent, comparable scenarios so the full council can weigh trade‑offs between services, projects and long‑term financial stability.