Finance committee recommends 10% water rate increase, voters to receive Prop. 218 notice

Lisa Belier, senior resource planner in the City of Palo Alto Utilities Department, presented the utilities’ recommendation that the Finance Committee forward to the City Council a resolution adopting the FY2026 water utility financial forecast and amended rate schedules. Belier told the committee the recommendation includes a 10% overall rate increase for FY26 — roughly $11.40 per month for a typical residential customer — and described the factors driving the proposal: growing labor costs, drought-driven sales reductions and increases from the San Francisco Public Utilities Commission (SFPUC).

The proposal relies on reserve use and targeted capital deferrals to keep the FY26 increase at 10%. Belier told the committee staff modeled deferring about $4.6 million of capital projects in 2026 and $2.7 million in 2028 beyond the five-year forecast to reduce near-term upward pressure on rates. She said the city has drawn roughly $25 million of reserves over the last three years to stabilize rates while wholesale costs rose.

Belier explained how the 10% figure breaks down: the staff model shows a 17% projected distribution rate increase and a 2% commodity rate increase inside that overall projection. As an alternative to further rate increases in later years, staff presented the concept of issuing debt to finance two tank replacement/rehabilitation projects scheduled for 2029–2030; debt financing would lower the modeled increases in those years to about 7% but would add long-term debt service.

Matt Zuka, assistant director of utilities, and other staff answered technical questions about the risk of further deferring capital work, the life span of different pipe materials and the department’s use of CCTV and emerging AI tools for asset condition assessment (staff said AI tools currently look more promising for sewer CCTV than for pressurized water mains).

Catherine Elvert, the Utilities communications manager, outlined an outreach plan to explain the increase to residential customers and businesses, including Prop. 218 notices and a passing postcard about SFPUC charges planned for May. Elvert said staff will emphasize comparative bills that show Palo Alto near the middle of agencies that buy 100% SFPUC water, and will present programs that help customers reduce bills.

After questions from committee members, a motion to recommend adoption of the staff proposal was moved and seconded; the committee recorded a unanimous vote in favor (2–0) and will forward the recommendation to the full City Council for final action.

The committee’s discussion included repeated clarifications that staff are using reserves to cover a portion of FY26 costs and that the FY26 forecast rebuilds reserves over the subsequent five-year period. Committee members pressed staff on where outsourcing costs show in the budget detail and asked for a clearer split of contract services vs. salaries and benefits in the operations lines. Staff agreed to provide that breakout when preparing materials for the Council.

The Finance Committee also asked staff to return with additional detail on the debt-financing alternative for the two tank projects, the expected timing and lifespans for tank rehabilitations, and an updated rate impact table once the wholesale SFPUC rate decision is final.