Palo Alto council and finance committee sketch $6M buffer, ambulance changes and nonprofit funding as budget work continues

City finance staff and the Finance Committee presented a reworked draft of Palo Alto's proposed fiscal 2026 operating and capital budgets Wednesday, advising the full City Council to use about half of the $12 million uncertainty reserve originally planned and to return with specific savings to preserve a $6 million buffer.

Lauren Lai, chief financial officer, told the council the budget transmitted May 5 reflects a multi-year forecast and that the Finance Committee recommended reducing the 2026 draw on the uncertainty reserve to $6 million, finding roughly $5.9 million of adjustments to avoid spending the full reserve in 2026. The committee also recommended deferring or reprioritizing capital projects in 5% increments (about $1.5 million per 5%) and asked staff to identify one-time and ongoing savings that would be adopted as a placeholder in the June budget with a final allocation to follow this summer.

The Finance Committee's approach is a hybrid: identify near-term savings to reduce reliance on the reserve, and keep a portion of the reserve available for 2027. Lai said staff will return to the committee on May 20 with candidate reductions and to the council in June 16's adoption packet with a placeholder for the remaining amount; the committee expects to finalize recommendations later in the summer.

Why it matters

City leaders said keeping a larger uncertainty reserve gives the city more runway through an uncertain economic outlook while leaving options to preserve services. The work also affects the capital program cash flow, fire and ambulance staffing decisions, nonprofit grants and utility-rate choices discussed in the same sessions.

Most significant items presented

- Uncertainty reserve: Finance Committee recommended using $6 million of the $12 million currently planned for FY26 and carrying the remainder into FY27 for contingency. Staff framed the $6 million as a mix of one-time and ongoing savings to be identified by May 20 and finalized later.

- Capital projects: Staff proposed prioritizing and deferring projects in 5%, 10% and 15% bundles to produce one-time savings and to manage a tight capital cash flow over the next three years. Prioritization criteria include functional need versus aesthetics, cost escalation risk, interdependencies and risk of deterioration if deferred.

- Fire/ambulance staffing: The Finance Committee recommended phasing in a single-role paramedic model with a 12-hour peak ambulance (seven days a week) beginning April 2026. Fire Chief Geo Blackshire and staff said the phased single-role approach would increase ambulance availability during peak hours without imposing overtime on the existing firefighter workforce; the committee recommended that portion be funded in part by increasing paramedic transport fees, estimated to raise about $700,000 in FY26 and offset roughly half of the new ongoing cost.

- Nonprofit partnerships: The committee recommended increasing the nonprofit partnership allocation by $211,000 (raising total funding to about $546,000) and proposed direct allocations for some long-standing partners (Magical Bridge, Third Thursday, UNAF and the Environmental Volunteers foothill program) while leaving $100,000 available for competitive awards through the Policy & Services (P&S) committee. Staff reported 19 applications had been received by the funding deadline totaling roughly $747,000 (plus three late applications), and asked council to confirm how much P&S should allocate for awards on June 10.

- Gas utility rates and climate credit: Utilities staff and the Finance Committee returned the city's 2025 cost-of-service analysis (COSA) to the Utilities Advisory Commission (UAC) for further review and discussed using non-rate revenues to soften rate impacts. The UAC had recommended a roughly $1.6 million climate credit to residential customers tied to the COSA; the Finance Committee suggested instead retaining the current rate structure for FY26 and using about $1.1 million to provide a climate credit to small and medium commercial customers (G2 subclass) who would otherwise be disadvantaged by the proposed COSA changes. Staff said interest income on cap-and-trade reserves could partially fund a credit but will likely not cover the full amount; the remainder would come from gas cap-and-trade reserves if council chooses to proceed. Members of the public and UAC commissioners urged reserving cap-and-trade funds for greenhouse-gas reduction programs and electrification rather than credits.

What council asked staff to do

Council members pressed staff on details and on a timeline. The Finance Committee and city manager proposed adopting a budget in June that leaves a $6 million placeholder to be identified by August and finalized in September, giving staff time to develop targeted reductions and capital-prioritization recommendations. The council also asked staff to provide more detail on which capital projects could be deferred without triggering greater long-term costs and to bring back more detailed scenarios on revenue sensitivity.

Public comment and stakeholder concerns

Public commenters and utilities commissioners warned against using cap-and-trade or other climate-dedicated fund sources to subsidize fossil-fuel use. Several nonprofit applicants urged transparency and clarity about the new nonprofit partnership process; council members asked staff to provide P&S with a clear list of applicants and which organizations already receive multiyear funding so those requests can be considered in context.

Next steps and schedule

- Finance Committee will review identified savings May 20 and conduct a formal budget wrap-up on May 27. - P&S will review nonprofit grant recommendations June 10. - City Council adoption is scheduled for June 16; staff will carry a placeholder reflecting the $6 million target and return later this summer with concrete allocations and adjustments.

Ending note

Council members repeatedly emphasized the need for specificity about what will be reduced, delayed or reallocated before the June adoption, and asked staff to prioritize transparency on impacts to services, employees and capital projects.