Fiscal Year Ended June 30, 2005
Annual Financial Report
2004- 2005
City of Palo Alto, California
Comprehensive
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
City of Palo Alto
California
Prepared by: Administrative Services Department
Comprehensive
Annual Financial
Report
For the fiscal year ended
June 30, 2005
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
􀁺
This page is intentionally left blank.
Table of Contents 􀂄
Table of Contents…………………………………
INTRODUCTION
Letter of Transmittal .............................................................................................................. v
City Officials ......................................................................................................................... ix
Organizational Structure........................................................................................................ x
Administrative Services Department Organization .............................................................. xi
GFOA Certificate of Achievement for Excellence in Financial Reporting ......................... xii
CSMFO Certificate of Award for Outstanding Financial Reporting ................................. xiii
FINANCIAL SECTION
Independent Auditor’s Report on Basic Financial Statement.............................................. xv
M D & A
Management’s Discussion and Analysis................................................................................. 1
BASIC FINANCIAL STATEMENTS
Citywide Financial Statements
Statement of Net Assets .............................................................................................. 25
Statement of Activities................................................................................................ 26
Fund Financial Statements
Major Governmental Funds:
Balance Sheet........................................................................................................... .. 29
Reconciliation of Fund Balances to Governmental Activities Net Assets............... .. 30
Statement of Revenues, Expenditures, and Changes in Fund Balance ..................... 31
Reconciliation of the Statement of Revenues, Expenditures and Changes
in Fund Balances of Governmental Funds to the Statement of Activities................. 32
Statement of Revenues, Expenditures, and Changes in Fund Balances –
Budget and Actual: ..................................................................................................... 33
……….…………………………………………………………………………………………….
City of Palo Alto i
􀂄 Table of Contents
BASIC FINANCIAL STATEMENTS ( Continued)
Major Proprietary Funds:
Statement of Net Assets ........................................................................................ 36
Statements of Revenues, Expenses and Changes in Net Assets ........................... 38
Statement of Cash Flows....................................................................................... 40
Fiduciary Funds:
Statement of Fiduciary Net Assets ........................................................................ 45
Notes to Financial Statements
Index to the Notes to the Basic Financial Statements .......................................... 47
Notes to Basic Financial Statements..................................................................... 49
SUPPLEMENTAL INFORMATION
Non- major Governmental Funds
Combining Balance Sheets ................................................................................. 102
Combining Statements of Revenues, Expenditures,
and Changes in Fund Balances........................................................................... 106
Combining Schedule of Revenues, Expenditures, and Changes
in Fund Balance— Budget and Actual.................................................................. 110
Internal Service Funds
Combining Statements of Net Assets ................................................................. 118
Combining Statements of Revenues, Expenses and Changes in Net Assets...... 119
Combining Statements of Cash Flows................................................................ 120
Fiduciary Funds
Statement of Changes in Assets and Liabilities - All Agency Funds................... 122
………………………………………………………………………………………………  …
ii City of Palo Alto
Table of Contents 􀂄
STATISTICAL SECTION
General Governmental Revenues by Source - Last Ten Fiscal Years..................... 125
General Governmental Expenditures by Function - Last Ten Fiscal Years........... 126
General Fund Tax Revenues by Source - Last Ten Fiscal Years ............................ 127
Property Tax Levies and Collections - Last Ten Fiscal Years ................................. 128
Assessed Value of Taxable Property - Last Ten Fiscal Years .................................. 129
Property Tax Rates - All Overlapping Governments
- Last Ten Fiscal Years ............................................................................................. 130
Taxable Transactions by Type of Business - Last Ten Fiscal Years
and Sales Tax Rates................................................................................................ 131
Special Assessment Billings and Collections - Last Ten Fiscal Years..................... 132
Ratio of Net Certificates of Participation Bonded Debt to Assessed Value and
Net Certificates of Participation Bonded Debt per Capita –
Last Ten Fiscal Years.............................................................................................. 133
Computation of Legal Debt Margin ...................................................................... 134
Computation of Direct and Overlapping Bonded Debt ....................................... 135
Ratio of Annual Debt Service Expenditures for General Bonded
Debt to Total General Expenditures - Last Ten Fiscal Years................................. 136
Revenue Bond Coverage - Water, Electric, Gas, Wastewater Collection,
Wastewater Treatment, Storm Drainage Funds and External Service Funds –
Last Ten Fiscal Years.............................................................................................. 137
Demographic Statistics - Last Ten Fiscal Years ...................................................... 138
Construction Activity - Last Ten Fiscal Years ........................................................ 139
Insurance Coverage................................................................................................ 140
Top Ten Property Taxpayers.................................................................................. 141
Miscellaneous Statistics.......................................................................................... 142
……….…………………………………………………………………………………………….
City of Palo Alto iii
􀂄 Table of Contents
SINGLE AUDIT SECTION
Summary of Audit Results..................................................................................... 147
Schedule of Expenditures of Federal Awards........................................................ 149
Notes to the Schedule of Expenditures of Federal Awards................................... 151
Report on Internal Control Over Financial
Reporting and on Compliance and Other Matters
Based on an Audit of Financial Statements Performed
in Accordance with Government Auditing Standards.......................................... 153
Report on Compliance with Requirements Applicable
to Each Major Program and on Internal Control Over
Compliance in Accordance with OMB Circular A- 133........................................ 154
………………………………………………………………………………………………  …
iv City of Palo Alto
Introduction 􀁊
City of Palo Alto
Office of the City Manager
Transmittal Letter…………………………………
December 13, 2005
THE HONORABLE CITY COUNCIL
Palo Alto, California
Attention: Finance Committee
COMPREHENSIVE ANNUAL FINANCIAL REPORT
YEAR ENDED JUNE 30, 2005
Members of the Council and Citizens of Palo Alto:
Transmittal: The Comprehensive Annual Financial Report ( CAFR) for the fiscal year ended June
30, 2005, is submitted for Council review in accordance with Article IV, Section 13 of the City of Palo
Alto Charter and published as a matter of public record for interested citizens. This transmittal letter
provides information regarding the economy and the governing structure in Palo Alto. An overview
of the City’s financial activities for the fiscal year is discussed in detail in the Management’s
Discussion and Analysis section of the CAFR. While the independent auditor has expressed an
opinion on the financial statements contained in this report, management takes sole responsibility for
the contents of the CAFR. To the best of its knowledge, staff believes the CAFR information is
accurate in all material respects.
INDEPENDENT AUDIT
The City of Palo Alto’s financial statements have been audited by Maze and Associates, a firm of
licensed certified public accountants. The goal of the audit is to obtain reasonable assurance that the
financial statements are free of material misstatement. Maze and Associates concluded, based on the
audit, that there was a reasonable basis for rendering an unqualified opinion for the fiscal year ended
June 30, 2005, and that the financial statements are fairly presented in conformity with generally
accepted accounting principals ( GAAP). The independent auditor’s report is presented as the first
component of the financial section of this report.
In addition, Maze and Associates also conducts the federally mandated “ Single Audit” designed to
meet the special needs of federal grantor agencies. The standards governing the Single Audit require
the independent auditor to report on the fair presentation of the financial statements, government’s
internal controls and compliance with legal requirements. These reports are available in the Single
Audit section of the CAFR.
……….…………………………………………………………………………………………….
City of Palo Alto v
􀁊 Introduction
THE PALO ALTO ECONOMY
Local Trends: The City of Palo Alto, population 61,674, is a largely “ built- out” community in the
heart of Silicon Valley and the greater San Francisco and San Jose areas. The adjacent Stanford
University, one of the premier institutions of higher education in the nation, has produced much of the
talent that founded many successful high- tech companies in Palo Alto and Silicon Valley. With varied
and relatively stable employers such as Stanford University, the Stanford Medical Center, the Palo
Alto Medical Foundation, the Palo Alto Unified School District, and businesses such as the Stanford
Shopping Center, Hewlett- Packard/ Compaq, and Roche Pharmaceuticals, Palo Alto has enjoyed a
diverse employment and revenue base. The City, however, was not immune from the pervasive
economic downturn that began in January 2001.
This downturn, manifested by layoffs in the technology sector, lack of capital investment, curtailed
venture capital activity, and weaker consumer spending persisted into 2003- 04. In 2004- 05, the
Silicon Valley economy finally saw signs of a longer- term recovery. Unemployment rates in the last
year declined from 3.4 percent to 2.7 percent in Palo Alto and from 6.8 percent to 5.5 percent in Santa
Clara County. Economically sensitive revenue sources such as sales and transient occupancy tax
revenues began to rebound slowly after years of declines. Since January 2001, the City has engaged in
a series of “ Strengthening the Bottom Line” efforts whereby expenses were brought into alignment
with available revenues, and therefore has not had to rely on General Fund reserves to meet its
commitments.
The City continues to face fiscal challenges, including rising employee benefit costs, strong
competition from neighboring City retail outlets, high commercial vacancy rates, and the closing of
several revenue generators – a hotel and automobile dealership. These factors make it unlikely the
City’s fiscal condition will improve dramatically in the near future, and the City will vigilantly
monitor expenditures in the next year. For example, as part of the 2005- 06 budget, the City enacted a
layoff of 14.5 FTEs, for a savings of about $ 1.5 million needed to balance the budget.
Employment Trends: Palo Alto is home to a strong mix of large, medium and small firms. The
number of jobs in Palo Alto total around 79,250 ( jurisdictional boundary). With a local workforce
around 33,000, commuters hold over 60 percent of Palo Alto jobs. Palo Alto employment
opportunities are much sought after and include: education at Stanford University, high technology at
the Stanford Research Park, and health care at two medical facilities of national stature. Numerous
institutions that have more than 1,000 employees include: the University, the Veterans Affairs Palo
Health Care facility, the Palo Alto Medical Foundation, Agilent Technologies, Hewlett
Packard/ Compaq, and the City of Palo Alto.
However, over the last few years, a number of local and regional technology companies have
implemented layoffs, including Agilent, Apple, Sun Microsystems, Oracle, Hewlett Packard/ Compaq
and other businesses. Consequently, Palo Alto’s unemployment rate rose from 2.3 percent in 2000 to
4.4 percent in July 2003. During the same period, the Santa Clara County unemployment rate went
from 2.0 percent to 8.4 percent. More recently, as the economy has slowly rebounded, so have
unemployment rates. By July 2004 unemployment rates in the City and County fell to 3.2 percent and
6.3 percent, respectively. In July of 2005, Palo Alto unemployment had fallen to 2.7 percent; County
unemployment was at 5.5 percent.
… ………………………………………………………………………………………………
City of Palo Alto
vi Introduction 􀁊
Real Estate Market: Assessed property valuation in Santa Clara County experienced an anemic
growth rate of 2.23 percent in 2004- 05. This was the slowest rate of growth in the last decade. This is
due to a continued trend of declining commercial and industrial property values, while residential
values remain fairly stable. According to the County Assessor, “ the collapse of [ the] commercial and
industrial market has been unprecedented.” Furthermore, business personal property ( computers,
machinery, equipment and fixtures) experienced a significant reduction.
In Palo Alto assessed valuation increased by 5.74 percent, compared to a 2.61 percent increase from
2002- 03 to 2003- 04. This is due to the fact that a greater percentage of Palo Alto’s assessment roll is
residential, compared to other cities like Sunnyvale, Milpitas, and Santa Clara. Secured property
( property subject to a lien) values were 8.2 percent higher in 2004- 05 than in 2003- 04, but unsecured
property values fell by 13.6 percent.
Cash and Investments: The City of Palo Alto invests funds prudently and has adopted an
investment policy as prescribed by State law that restricts the City to investments emphasizing, in the
following priority order, safety, liquidity and yield. Staff provides a quarterly report of investments
for Council and Finance Committee review. The City’s investment practice is to buy securities and
hold them to maturity to avoid potential losses from a sale. During 2004- 05, staff complied with all
aspects of the investment policy.
THE PALO ALTO GOVERNMENT
As a charter city delivering a full range of municipal services and public utilities under the council-manager
form of government, Palo Alto offers an outstanding quality of life for its residents. The
independent Palo Alto Unified School District ( PAUSD) has achieved state and national recognition
for the excellence of its programs. The City has dedicated 4,000 acres of open space to parks and
wildlife preserves. Public facilities include five libraries, four community centers, a cultural arts
center, adult and children’s theater, a junior museum and zoo, and a golf course. The City provides a
diversity of human services for seniors and youths, an extensive continuing education program,
concerts, exhibits, team sports and special events.
City Council: The Council consists of nine members elected at- large for four- year, staggered terms.
At the first meeting of each calendar year, the Council elects a Mayor and Vice- Mayor from its
membership, with the Mayor having the duty of presiding over Council meetings. The Council is the
appointing authority for the City Manager and three other officials, the City Attorney, City Clerk, and
City Auditor, who all report directly to it.
Finance Committee: While retaining the authority to approve all actions, the City Council has
established a subcommittee to review financial matters. Staff provides the CAFR, the results of
external and internal audits, periodic budget- versus- actual, investment and performance measure
reports to the Finance Committee and Council to assist in their evaluation of the City’s financial
performance.
City Manager: The City Manager directs administrative services, human resources, libraries, public
works, planning and community environment, public safety, community services departments and also
the municipal electric, water, gas, wastewater collection, wastewater treatment, storm drainage, and
refuse utilities ( the utilities represent almost two- thirds of the City’s revenues).
……….…………………………………………………………………………………………….
City of Palo Alto vii
􀁊 Introduction
SUMMARY
Awards: During the past year, the City received two awards for the prior fiscal year CAFR, one from
the Government Finance Officers Association ( GFOA) for “ excellence in financial reporting” and one
from the California Society of Municipal Finance Officers ( CSMFO) for “ outstanding financial
reporting”. This is the eleventh consecutive year the City has received both of these awards and the
current certificates appear immediately after the end of this transmittal letter. The 2004- 05 CAFR also
has been submitted to the GFOA and CSMFO award programs and management believes that, once
again, it will meet the criteria for these distinguished financial reporting awards.
Acknowledgment: This CAFR reflects the hard work, talent and commitment of the staff members
of the Administrative Services Department. This document could not have been accomplished without
their efforts and each contributor deserves sincere appreciation. Management wishes to acknowledge
the support of Trudy Eikenberry, Accounting Manager, and the Senior Accountants, Staff
Accountants, Payroll Analysts and Accounting Specialists for the high level of professionalism and
dedication they bring to the City of Palo Alto. Management would also like to express its appreciation
to Maze & Associates, the City’s independent auditors, who assisted and contributed to the preparation
of this Comprehensive Annual Financial Report.
Special acknowledgment must be given to the City Council Finance Committee for its support and
interest in directing the financial affairs of the City in a responsible, professional and progressive
manner.
Respectfully submitted,
CARL YEATS, FRANK BENEST,
Administrative Services Director City Manager
………………………………………………………………………………………………  …
viii City of Palo Alto
Introduction 􀁊
City of Palo Alto City Officials ………………..
Victor Ojakian
Hillary Freeman
Yoriko Kishimoto
Jack Morton
City Council
Jim Burch, Mayor
Judy Kleinberg, Vice- Mayor
Dena Mossar
Bern Beecham
LaDoris Cordell
Policy and Services Committee
Hillary Freeman, Chair
Bern Beecham
LaDoris Cordell
Judy Kleinberg
Finance Committee
Victor Ojakian, Chair
Yoriko Kishimoto
Jack Morton
Dena Mossar
Council- Appointed Officers
City Manager
Frank Benest
City Attorney
Gary Baum
City Clerk
Donna Rogers
City Auditor
Sharon Winslow Erickson
……….…………………………………………………………………………………………….
City of Palo Alto ix
􀁊 Introduction
City of Palo Alto Organization ………………
Community Services Department
Richard James, Director
City Council
Palo Alto Residents
City Clerk
Donna Rogers
City Auditor
Sharon Winslow Erickson
City Manager
Frank Benest
City Attorney
Gary Baum
Assistant City Manager
Emily Harrison
Administrative Services Department
Carl Yeats, Director
Fire Department
Nick Marinaro, Chief
Human Resources Department
Russ Carlsen, Director
Police Department
Lynne Johnson, Chief
Planning & Community Environment Dept
Steve Emslie, Director
Utilities Department
John Ulrich, Director
Public Works Department
Glenn Roberts, Director
… ………………………………………………………………………………………………
City of Palo Alto
x Introduction 􀁊
Administrative Services Organization ………
Administrative Services Department
Administrative Division Money Management Division
Financial Support Services Division Financial Planning & Analysis Division
Information Technology Division Property Management Division
Mission Statement
To provide proactive administrative and technical support to
City departments and decision makers, and to safeguard and
facilitate the optimal use of City resources.
……….…………………………………………………………………………………………….
City of Palo Alto xi
􀁊 Introduction
Government Finance Officers Association of
the United States and Canada – Award …….
………………………………………………………………………………………………  …
xii City of Palo Alto
Introduction 􀁊
California Society of Municipal Finance
Officers – Award …………………………………
……….…………………………………………………………………………………………….
City of Palo Alto xiii
􀁊 Introduction
This page is intentionally left blank.
………………………………………………………………………………………………  …………………………………………………………………………
City of Palo Alto
xiv ……….…………………………………………………………………………………………….
City of Palo Alto xv
Scan in Independent Auditors Report on Basic Financial Statements
This page is intentionally left blank.
………………………………………………………………………………………………  ………………………………………………………………………………
xvi City of Palo Alto
Management Discussion and Analysis 􀂄
Management’s Discussion and Analysis
With the 2004- 05 Comprehensive Annual Financial Report ( CAFR), the City will have complied
with the provisions of Government Accounting Standards Board Statement 34 ( GASB 34), “ Basic
Financial Statements— and Management’s Discussion & Analysis— for State and Local
Governments” for four consecutive years. GASB 34 required municipalities to make fundamental
changes in accounting and reporting in an effort to make government financial performance clearer
and more understandable to readers. GASB 34 has required the City to make substantial changes to
its financial statement format. Moreover, the City must provide more detailed discussion and
analysis of its financial activities, particularly in comparing results to the prior fiscal year and to the
2004- 05 fiscal year budget. Other required changes will be described in the financial statements
below. To obtain a complete picture of the City’s financial condition, this document should be read
in conjunction with the accompanying Transmittal Letter and Basic Financial Statements.
OVERVIEW OF THE COMPREHENSIVE ANNUAL FINANCIAL REPORT
The CAFR is presented in six sections:
􀂃 An introductory section which includes the Transmittal Letter and general information;
􀂃 Management’s Discussion and Analysis;
􀂃 The Basic Financial Statements which include the Citywide and Fund Financial
Statements, along with the Notes to these statements;
􀂃 Supplemental Information;
􀂃 Statistical information; and
􀂃 Single Audit
Basic Financial Statements
The Basic Financial Statements contain the Citywide Financial Statements and the Fund Financial
Statements. These statements provide long and short- term views of the City’s financial activities
and financial position.
The Citywide Financial Statements provide a longer- term view of the City’s activities as a whole.
They include the Statement of Net Assets and the Statement of Activities. The Statement of Net
Assets includes the City’s capital assets and long- term liabilities on a full accrual basis of
accounting similar to that used by private- sector companies. The Statement of Activities provides
information about the City’s revenues and expenses on a full accrual basis, with an emphasis on
……….…………………………………………………………………………………………....
City of Palo Alto 1
􀂄 Management Discussion and Analysis
measuring net revenues or expenses for each of the City’s programs. The Statement of Activities
explains in detail the change in net assets for the year. The amounts in the Statement of Net Assets
and the Statement of Activities are separated into Governmental and Business- type Activities in
order to provide a summary of these activities for the City.
The Fund Financial Statements display the City’s operations in more detail than the Citywide
statements. They focus primarily on the short- term activities of the City’s General Fund and other
major funds such as the Capital Projects Fund, Water Services Fund, Electric Services Fund, Gas
Services Fund, Wastewater Collection Fund, Wastewater Treatment Fund, Refuse Services Fund,
Storm Drainage Services Fund and External Services Fund.
For certain entities and funds, the City acts solely as a depository agent. For example, the City has
several Assessment Districts for which it provides fiduciary statements showing the cash balances
and activities of these districts. These statements are separate from, and their balances are excluded
from, the City’s financial statements.
Together, all these statements are called Basic Financial Statements.
Citywide Financial Statements
Governmental Activities - All of the City’s basic services are considered to be governmental
activities. These include the City Council, City Manager, City Attorney, City Clerk, City Auditor,
Administrative Services, Human Resources, Public Works, Planning and Community
Development, Police, Fire, Community Services, Libraries and non- departmental services. These
services are supported by general City revenues such as taxes and by specific program revenues
such as fees.
The City’s governmental activities include the activities of the Palo Alto Public Improvement
Corporation and Redevelopment Agency, separate legal entities financially accountable to the City.
Business- Type Activities - All of the City’s enterprise activities are reported here, including Water,
Electric, Gas, Wastewater Collection, Wastewater Treatment, Refuse, Storm Drainage, and External
services. Unlike governmental services, these services are supported by charges paid by users
based on services used.
Citywide Financial Statements are prepared on the accrual basis of accounting, which means they
measure the flow of all economic resources of the City as a whole.
Fund Financial Statements
The Fund Financial Statements provide detailed information about each of the City’s most
significant funds, called Major Funds. The concept of Major Funds, and the determination of which
are Major Funds, was established by GASB 34 and replaces the concept of combining like funds and
presenting them in total. Instead, each Major Fund is presented individually, with all Non- major
Funds combined in a single column on each fund statement. Subordinate schedules present the
detail of these Non- major Funds. Major Funds present the major activities of the City for the year.
……….…………………....……………………………………………………………………….......
2 City of Palo Alto
Management Discussion and Analysis 􀂄
The General Fund is always a Major Fund, but other funds may change from year to year as a result
of changes in the pattern of City activities.
Fund Financial Statements include Governmental, Enterprise and Internal Service Funds.
Governmental Fund financial statements are prepared on the modified accrual basis of accounting,
which means they measure only current financial resources and uses. Capital assets and other
long- lived assets, along with long- term liabilities, are presented only in the Citywide Financial
Statements. In 2004- 05, the City has two Major Governmental Funds, the General Fund and the
Capital Projects Fund.
Enterprise and Internal Service Fund financial statements are prepared on the full accrual basis of
accounting, as in the past, and include all their assets and liabilities, current and long- term.
Since the City’s Internal Service Funds provide goods and services only to the City’s Governmental
and Business- type activities, their activities are reported only in total at the Fund level. Internal
Service Funds, such as Printing and Mailing services, may not be considered Major Funds because
their revenues are derived from other City Funds. These revenues are eliminated in the Citywide
Financial Statements and any related profits or losses are returned to the activities that created
them, along with any residual net assets of the Internal Service Funds.
Comparisons of Budget and Actual financial information are presented only for the General Fund
and any Major Special Revenue Funds.
Fiduciary Statements
The City is the agent for certain assessment districts, holding amounts collected from property
owners which await transfer to these Districts’ bond trustees. The City’s fiduciary activities are
reported in the separate Statements of Fiduciary Net Assets and the Agency Funds Statement of
Changes in Assets and Liabilities. These activities are excluded from the City’s other financial
statements because the City cannot use these assets to finance its own operations.
FINANCIAL HIGHLIGHTS
Economic Background
The economic downturn that began in Spring 2000 and persisted into 2004 showed signs of
stabilizing and reversal in the latter half of fiscal year 2004- 05. Adverse events and trends in the
downturn such as layoffs in the technology sector, lack of capital investment, curtailed venture
capital activity, and weaker consumer spending began to turn around in the Silicon Valley
economy toward the end of 2004- 05. Unemployment rates over the last year declined from 3.4
percent to 2.7 percent in Palo Alto and from 6.8 percent to 5.5 percent in Santa Clara County.
Statistics on job growth on the Peninsula indicated growth of a little over 1 percent over the prior
year – a modest, but welcomed trend. Nationally, firms that had reduced computer purchases
began to reinvest in technology and boosted the bottom line of Silicon Valley companies.
Economically sensitive revenue sources such as sales and transient occupancy tax revenues began
to rebound slowly after years of declines. This movement indicated that consumers and businesses
felt confident to spend more money on goods and services which reinvigorated City resources.
……….…………………………………………………………………………………………....
City of Palo Alto 3
􀂄 Management Discussion and Analysis
Since January 2001, the City has engaged in a series of “ Strengthening the Bottom Line” efforts
whereby expenses were brought into alignment with available revenues. This effort continued into
2004- 05 resulting in a modest General Fund surplus at year- end. To achieve this, and to balance its
budgets, the City engaged in significant and difficult cost reduction measures. These included
reducing the workforce by 70 positions since the beginning of the recession. An important
consequence of the expense reduction program was that the City did not draw down reserves to
solve the numerous financial tests it faced.
The City does face expense and revenue challenges in the future. These include: funding rising
employee benefit costs and existing and new infrastructure needs; warding off strong competition
from neighboring City retail outlets for sales tax dollars; and preventing the potential exodus of
automobile dealerships generating high sales tax receipts. To counter these challenges the City has
initiated changes in health benefit plans, launched new efforts to maintain and attract businesses,
and to explore new revenue sources. Based on its efforts to date, the City is well positioned to meet
future economic challenges.
The comparisons in the discussion and analysis below are between 2004- 05 and 2003- 04. All
increases and decreases are expressed relative to 2003- 04 results. Fiscal year 2004- 05 financial
highlights include the following:
Citywide
􀂃 The City’s total net assets decreased to $ 970.2 million, a $ 3.3 million decrease.
􀂃 The City’s total capital assets, net of related debt, increased to $ 608.7 million, a $ 17.4
million increase.
􀂃 The City’s total restricted net assets decreased to $ 29.0 million, a $ 3.2 million reduction.
􀂃 The City’s total unrestricted net assets decreased to $ 332.4 million, a $ 17.6 million
decrease.
􀂃 Citywide revenues totaled $ 284.5 million, a decrease of $ 1.1 million from the prior year.
This total consists of $ 225.4 million in program revenues and $ 59.1 million in general
revenues. Program revenues increased by $ 3.7 million while general revenues decreased
by $ 4.8 million.
􀂃 Total Citywide expenses were $ 287.9 million, a $ 19.0 million increase.
􀂃 Citywide total assets decreased to $ 1,080.3 million, a $ 3.1 million decrease.
􀂃 Citywide capital assets, increased by $ 26.3 million to $ 665.4 million.
􀂃 Citywide other assets decreased $ 29.4 million to $ 414.9 million.
􀂃 Citywide total liabilities were $ 110.2 million, an increase of $ 0.3 million.
􀂃 Citywide long- term debt decreased $ 3.0 million to $ 54.5 million.
􀂃 Citywide other liabilities were $ 55.7 million, an increase of $ 3.3 million.
……….…………………....……………………………………………………………………….......
4 City of Palo Alto
Management Discussion and Analysis 􀂄
Fund Level – Governmental Funds
􀂃 Governmental Fund balances decreased to $ 98.2 million, an $ 11.7 million change.
􀂃 Governmental Fund revenues increased to $ 100.3 million, a $ 6.7 million increase.
􀂃 Governmental Fund expenditures were $ 124.8 million, a $ 6.0 million increase.
􀂃 General Fund revenues came in at $ 92.9 million, an increase of $ 6.7 million over prior
year levels.
􀂃 General Fund expenditures are $ 100.7 million, an increase of $ 6.3 million.
􀂃 The General Fund balance of $ 31.8 million at June 30, 2005 was a decrease of $ 35.0
million from the prior year ( refer to Performance of Governmental Funds – General
Fund, Page # 14).
Fund Level – Enterprise Funds
􀂃 Enterprise Fund net assets decreased to $ 521.8 million, a $ 0.9 million decrease.
􀂃 Enterprise Fund revenues increased to $ 195.6 million, a $ 4.1 million increase over prior
year revenues.
􀂃 Enterprise Fund expenses increased to $ 162.5 million, a $ 4.3 million increase.
……….…………………………………………………………………………………………....
City of Palo Alto 5
􀂄 Management Discussion and Analysis
FINANCIAL PERFORMANCE
Citywide Financial Statements – Governmental Activities
The following analysis focuses on the net assets and changes in net assets of the City’s
Governmental Activities, presented in the Citywide Statement of Net Assets and Statement of
Activities.
2005 2004
Increase/
( Decrease)
from 2004
Cash and investments $ 149.8 $ 157.6 ($ 7.8)
Other assets 27.6 26.8 0.8
Capital assets 318.5 310.0 8.5
Total Assets 495.9 494.4 1.5
Long- term debt outstanding 11.0 12.7 ( 1.7)
Other liabilities 35.1 30.4 4.7
Total Liabilities 46.1 43.1 3.0
Net Assets:
Invested in capital assets, net of debt 305.2 297.1 8.1
Restricted 27.3 30.4 ( 3.1)
Unrestricted 117.3 123.8 ( 6.5)
Total Net Assets $ 449.8 $ 451.3 ($ 1.5)
GOVERNMENTAL ACTIVITIES
Net Assets at June 30
( in Millions)
The City’s governmental net assets decreased $ 1.5 million to $ 449.8 million in 2004- 05. This change
results from the following:
􀂃 Cash and investments decreased by $ 7.8 million. This consists of cash outlays from fiscal
agent for bond defeasance.
􀂃 Capital assets increased $ 8.5 million net of depreciation; $ 4.8 million is a result of roadway
network and $ 2.4 million of recreation and open space network capital improvement
projects.
􀂃 Other liabilities increased by $ 4.7 million, primarily from a $ 3.4 million increase in claims
payable.
……….…………………....……………………………………………………………………….......
6 City of Palo Alto
Management Discussion and Analysis 􀂄
􀂃 Net assets invested in capital assets net of related debt increased $ 8.1 as the City added
General Fund infrastructure assets as discussed in the Capital Assets section.
􀂃 Unrestricted net assets decreased $ 6.5 million for a total of $ 117.3 million; this represents
current net assets available to finance subsequent year operations and other expenditures
approved by City Council.
2005 2004
Increase/
( Decrease)
from 2004
Program Revenues:
Charges for services $ 25.2 $ 24.0 $ 1.2
Operating contributions & grants 3.7 4.2 ( 0.5)
Capital contributions & grants 0.8 2.0 ( 1.2)
Total Program Revenues 29.7 30.2 ( 0.5)
General Revenues:
Property Taxes 16.7 13.7 3.0
Sales Taxes 19.3 18.2 1.1
Utility User's Taxes 7.3 7.2 0.1
Transient Occupancy Tax 5.7 5.5 0.2
Other Taxes and Fines 5.6 8.5 ( 2.9)
Investment Earnings 5.0 0.1 4.9
Rents and Miscellaneous 13.0 10.2 2.8
Transfers 14.1 15.0 ( 0.9)
Total General Revenues 86.7 78.4 8.3
Total Revenues $ 116.4 $ 108.6 $ 7.8
Revenues by Source
GOVERNMENTAL ACTIVITIES
Revenues for the Year ended June 30
( in Millions)
Governmental Activities – Revenues
The table above shows that governmental revenues totaled $ 116.4 million in 2004- 05, an increase of
$ 7.8 million compared to prior year revenues of $ 108.6 million.
Property Taxes had an increase of $ 3.0 million, other taxes and fines decreased by $ 2.9 million.
These variances are primarily due to State mandated payment changes designed to solve its budget
problems. Vehicle License Fees ( VLF) were paid through a shift or increase in property taxes to the
City and the VLF payments were consequently reduced. The net effect is that the changes in these
two revenues offset one another. Investment earnings increased by $ 4.9 million. The increase is a
result of the year- end adjustment to carrying value for investments and reflects the year to year
change in carrying value.
……….…………………………………………………………………………………………....
City of Palo Alto 7
􀂄 Management Discussion and Analysis
Program revenues such as charges for services; operating grants and contributions; and capital
grants and contributions are generated from or restricted to each activity. Program revenues
include contributions from the University Avenue Off- Street Parking Assessment District as well as
recurring resources.
Sources of Revenues
Transient
Occupancy Tax
5%
Other Taxes &
Fines
Investment 5%
Earnings
4%
Rents and
Miscellaneous
11%
Utility User's
Taxes
6%
Sales Taxes
17%
Transfers
12%
Program
Revenues
26%
Property Taxes
14%
General revenues are composed of taxes and other revenues not specifically generated by or
restricted to individual activities. All tax revenues, investment earnings, rents for governmental
facilities, and fees for services are included in general revenues.
……….…………………....……………………………………………………………………….......
8 City of Palo Alto
Management Discussion and Analysis 􀂄
Governmental Activities – Expenses
The table below presents a comparison of 2004- 05 and 2003- 04 expenses ( does not include
encumbrances and reappropriations) by Governmental Activities and interest on long- term debt.
Total Governmental Activities expense was $ 117.8 million in 2004- 05, an increase of $ 13.6 million.
Activities 2005 2004
Increase/
( Decrease)
from 2004
City Council $ 0.1 $ 0.2 ($ 0.1)
City Manager 1.7 1.7 0.0
City Attorney 2.7 2.3 0.4
City Clerk 0.8 0.8 0.0
City Auditor 0.8 0.7 0.1
Administrative Services 7.0 6.3 0.7
Human Resources 2.4 2.1 0.3
Public Works 16.4 14.4 2.0
Planning and Community Environment 10.2 8.9 1.3
Police 22.4 20.4 2.0
Fire 18.1 17.3 0.8
Community Services 17.2 20.9 ( 3.7)
* Libraries 4.8 0.0 4.8
Non- Departmental 12.5 7.6 4.9
Interest on long- term debt 0.7 0.6 0.1
Total Functional Expense $ 117.8 $ 104.2 $ 13.6
Transfers in $ 14.1 $ 15.0 ($ 0.9)
Change in Net Assets ($ 1.5) $ 4.4 ($ 5.9)
Net Assets- Beginning 451.3 446.9 4.4
Net Assets- Ending $ 449.8 $ 451.3 ($ 1.5)
* Libraries were part of Community Services in 2004
GOVERNMENTAL ACTIVITIES
Expenses for the Year ended June 30
( in Millions)
……….…………………………………………………………………………………………....
City of Palo Alto 9
􀂄 Management Discussion and Analysis
The Functional Expenses Chart below includes only current year expenses. It does not include
capital outlays, which are now added to the City’s capital assets. In 2004- 05, the City added $ 8.5
million in capital assets. The composition of 2004- 05 additions is shown in detail in the Capital
Asset section of the Management’s Discussion and Analysis
Functional Expense
Community
Services
15%
Fire
15%
Libraries
5%
Police
19%
Planning &
Community
Environment
9%
Public
Works
14%
non-
Departmental
11%
Human
Resources
2%
Adminstrative
Services
6%
City
Auditor
less than 1%
City
Clerk
less
than 1%
City
Attorney
2%
City
Manager
1%
City
Council
Less
than 1%
Interest on
long- term
debt 1%
……….…………………....……………………………………………………………………….......
10 City of Palo Alto
Management Discussion and Analysis 􀂄
Citywide Financial Statements – Business- Type Activities
The following analysis focuses on the net assets and changes in net assets of the City’s Business-
Type Activities presented in the Citywide Statement of Net Assets and Statement of Activities.
2005 2004
Increase/
( Decrease)
from 2004
Cash and investments $ 209.7 $ 238.2 ($ 28.5)
Other assets 27.8 21.7 6.1
Capital assets 346.9 329.1 17.8
Total Assets 584.4 589.0 ( 4.6)
Long- term debt outstanding 43.6 44.9 ( 1.3)
Other liabilities 20.4 21.9 ( 1.5)
Total Liabilities 64.0 66.8 ( 2.8)
Net assets:
Invested in capital assets, net of debt 303.5 294.2 9.3
Restricted 1.8 1.8 ( 0.1)
Unrestricted 215.1 226.2 ( 11.1)
Total Net Assets $ 520.4 $ 522.2 ($ 1.8)
( in Millions)
BUSINESS- TYPE ACTIVITIES
Net Assets at June 30
The City’s Business- type net assets decreased $ 1.8 million to $ 520.4 million in 2004- 05.
􀂃 Cash and investments decreased $ 28.5 million as a result of operations. Other assets
increased $ 6.1 million to $ 27.8 million as a result of Electric Fund accounts receivable
increase of $ 7.4 million.
􀂃 Capital assets increased $ 17.8 million to $ 346.9 million in 2004- 05. This increase is
primarily a result of water, electric and gas infrastructure improvements totaling $ 15.5
million.
􀂃 Repayments reduced long- term debt $ 1.3 million to $ 43.6 million. No debt was issued in
2004- 05.
􀂃 Net assets invested in capital assets net of related debt increased $ 9.3 million to $ 303.5
million. The increase was due to $ 4.8 million of improvements in the Electric Fund, $ 1.0
……….…………………………………………………………………………………………....
City of Palo Alto 11
􀂄 Management Discussion and Analysis
million in the Gas Fund improvements and $ 3.4 million in the Wastewater Collection
Fund.
􀂃 Unrestricted net assets of $ 215.1 million, a decrease of $ 11.1 million over the prior year,
represent liquid assets available to finance day- to- day operations and other
expenditures approved by the City Council. This amount includes such Council
designated reserves as rate stabilization reserves of $ 81.7 million, the Calaveras reserve
for stranded costs of $ 72.9 million and the emergency plant replacement reserve of $ 7.0
million.
Revenues by Source 2005 2004
Increase/
( Decrease)
from 2004
Program Revenues:
Water $ 21.0 $ 22.0 ($ 1.0)
Electric 88.7 92.6 ( 3.9)
Gas 31.2 24.8 6.4
Wastewater Collection 12.0 12.6 ( 0.6)
Wastewater Treatment 16.0 14.7 1.3
Refuse 23.4 21.9 1.5
Storm Drainage 2.5 2.2 0.3
External Services 0.8 0.6 0.2
Total Program Revenues 195.6 191.4 4.2
General Revenues:
Investment Earnings 8.1 0.4 7.7
Total General Revenues 8.1 0.4 7.7
Total Revenues $ 203.7 $ 191.8 $ 11.9
BUSINESS- TYPE ACTIVITIES
( in Millions)
Revenues for the Year ended June 30
The table above presents the revenues for of each of the City’s Business- type Activities or
Enterprise Funds. The City operates the Water, Electric, Gas, Wastewater Collection, Wastewater
Treatment, Refuse, Storm Drainage and External Services Enterprise Funds, which are major funds
and are presented in the Basic Financial Statements.
Business- type Activity revenues totaled $ 203.7 million, an increase of $ 11.9 million from prior year.
Revenues were significantly affected by the following events:
􀂃 Program Revenues for the Electric fund decreased $ 3.9 million primarily due to the
termination of excess capacity revenue contracts.
……….…………………....……………………………………………………………………….......
12 City of Palo Alto
Management Discussion and Analysis 􀂄
􀂃 Program Revenues for the Gas fund increased $ 6.4 million primarily due to two rate
increases during the year; 9.9 percent effective July 2004 and 15 percent effective January
2005.
􀂃 Investment earnings increased $ 7.7 million due to the year- end adjustment to the
carrying value for investments.
Activities 2005 2004
Increase/
( Decrease)
from 2004
Water $ 15.0 $ 16.0 ($ 1.0)
Electric 73.1 73.5 ( 0.4)
Gas 26.7 23.0 3.7
Wastewater Collection 8.9 9.2 ( 0.3)
Wastewater Treatment 17.5 14.9 2.6
Refuse 25.0 24.3 0.7
Storm Drainage 3.3 3.0 0.3
External Services 0.8 0.7 0.1
Transfers/ Special Items
Special Item 21.5 0.0 21.5
Transfers out 14.1 15.0 ( 0.9)
Total Expense $ 205.7 $ 179.6 $ 26.1
Change in Net Assets ($ 1.9) $ 12.4 ($ 14.3)
Net Assets- Beginning 522.3 509.9 12.4
Net Assets- Ending $ 520.4 $ 522.3 ($ 1.9)
BUSINESS- TYPE ACTIVITIES
( in Millions)
Expenses for the Year ended June 30
The table above presents a comparison of the 2004- 05 and 2003- 04 expenses for the City’s Business-type
Activities. Encumbrances and reappropriations are not included.
Business- type Activity expenses increased $ 26.1 million for a total of $ 205.7 million. Changes to
expenses were significantly affected by the following events:
􀂃 Commodity expenses increased $ 2.9 million in the Gas Fund.
􀂃 Operation and Maintenance expenses increased $ 1.6 million in the Wastewater
Treatment Fund. The increase was primarily due to increased costs for salary, benefits
and supplies.
􀂃 The $ 21.5 million increase in Special Items is due to a legal settlement with Enron
Corporation.
……….…………………………………………………………………………………………....
City of Palo Alto 13
􀂄 Management Discussion and Analysis
FUND FINANCIAL STATEMENTS
Performance of Governmental Funds
At June 30, 2005, the City’s Governmental Funds reported combined fund balances of $ 98.2 million,
a decrease of $ 11.7 million or 10.6 percent compared with the prior year
Governmental Fund revenues and other financing sources increased $ 38.6 million for a total of
$ 160.8 million. Revenues and other financing sources in the General Fund increased $ 4.2 million;
Capital Project Fund increased $ 32.4 million as a result of an increase of operating transfers from
the General Fund of $ 33.1 million. Non- major Fund revenues and other financing sources
increased by $ 2.0 million.
Governmental Fund expenditures and other uses increased $ 34.6 million this year to $ 172.5 million.
General Fund expenditures increased $ 39.7 million, Capital Projects Fund expenditures decreased
by $ 5.6 million; and non- major fund expenditures and other uses increased by $ 0.5 million.
General Fund – The General Fund ended the year with a $ 35.0 million decrease to fund balance,
compared to $ 0.5 million increase in the prior year. The $ 35.0 million decrease is due mainly to the
$ 35.9 million operating transfer to move the infrastructure reserve to the Capital fund. The City
Auditor recommended a simplification of infrastructure funding by: ( 1) moving the Infrastructure
Reserve from the General Fund to the Capital Projects fund; and ( 2) retaining unspent project funds
in the Capital Projects Fund. The City Council approved this recommendation with the adoption of
the 2004- 05 budget. This operating transfer complies with City Council direction. During this
period of slow economic recovery, the City has continued to closely monitor its expenditures.
Palo Alto’s General Fund revenues totaled $ 92.9 million in 2004- 05. This represents an increase of
$ 6.7 million or 7.8 percent compared to the prior year. Since economically sensitive revenue
sources such as sales and transient occupancy taxes began their steep decline in 2000- 02, it appears
that these revenues have begun to stabilize in 2004- 05. In fact, there is preliminary evidence that
receipts from these sources are slowly and gradually turning upward. There are, however,
numerous issues that could derail this emerging trend. These include: little employment growth in
Silicon Valley, the impacts of high oil prices on consumer spending, and a potential housing bubble
that could severely affect consumer confidence and the local economy.
Sales tax, the City’s largest revenue source, totaled $ 19.3 million in 2004- 05 rising $ 1.1 million above
budgeted and prior year revenues. This increase, along with other revenue data, supports the
perspective of a measured turnaround. Economic segments contributing to the positive results
include: department and apparel stores, service stations, and miscellaneous retail. Those segments
turning in lackluster performances include: automobile, food market, and business service sales.
Although retail sales tax receipts have risen, the City is facing stiff competition from nearby big box
stores and surrounding malls, and the potential exodus of automobile dealers. Currently, the City
is in the process of identifying suitable off- freeway sites to maintain its dealerships.
Further indication of improvement in revenue streams comes from Transient Occupancy Tax ( TOT)
performance. TOT revenues rose to $ 5.7 million in 2004- 05, a 4.0 percent or $ 0.2 million
improvement over the prior year. Although revenues were a slight $ 0.2 million under budget,
underlying performance statistics are showing some strength. Average occupancy rates increased
……….…………………....……………………………………………………………………….......
14 City of Palo Alto
Management Discussion and Analysis 􀂄
from 56.8 percent in 2003- 04 to 61.1 percent in 2004- 05. The rise in occupancy rates was
accompanied by a slight 1.7 percent increase in average daily rates that went from $ 117.03 in the
prior year to $ 119.22 in 2004- 05. On the downside, the loss of significant Hyatt Rickey’s revenue in
2005- 06 and competition from new hotels in neighboring cities will present challenges in 2005- 06.
As in 2003- 04, documentary transfer tax revenues ( reported as part of Other Taxes and Fines)
performed well in 2004- 05, totaling $ 5.1 million. These revenues were $ 0.5 million below those in
2003- 04 ( due to a sizeable transaction in prior year), but $ 1.4 million above budget. This positive
variance results from significant appreciation in residential home values and a low interest rate
environment that has fueled sales. As the residential housing market cools, it is anticipated this
revenue source will revert to historical revenue levels.
Because of State takeaways ( ERAF III) of local revenues in 2004- 05, property taxes came in $ 0.3
million below prior year levels. Controlling for the ERAF takeaway, which will be restored in 2006-
07, property taxes performed nicely in 2004- 05 at $ 14.9 million. This represents an increase of $ 1.5
million in the City’s revenue base. A thriving residential market and a rebound in the purchase of
fixed and moveable equipment by businesses are responsible for higher property taxes. It is
important to note that if a housing bubble does emerge and residential values decline, positive
movement in this revenue source will be undermined.
Planning and Building fees were below expectations by $ 0.5 million due to a recent slump in
commercial Planning and Building applications. In 2005- 06, we are projecting a resurgence of
commercial building activity, and fee revenue is increased accordingly. Paramedic revenues were
below forecast by $ 0.4 million due to delays in implementation of the Basic Life Support program
and inter- facility transports. Green fees also fell below expectations by $ 0.2 million due to a heavy
rainy season. Finally, street cut fees were $ 0.7 million below forecast due to lower than anticipated
street cut activities. In 2005- 06, we will review the forecast for street cut fees and update it
accordingly.
At June 30, 2005, the General Fund Balance totaled $ 31.8 million. This represents 31.6 percent of
direct General Fund expenditures, providing a buffer against unexpected financial events. Of this,
$ 7.3 million is reserved and $ 24.5 million is unreserved. A substantial portion of the unreserved
amount is designated by the Council for budget stabilization, $ 21.1 million at year- end. The equity
transfer stabilization designation, established in 2001- 02, totaled $ 3.2 million at year- end. This
reserve would be used in the event that the Electric or Gas Fund was unable to make its required
equity transfer to the General Fund.
General Fund expenditures and other uses totaled $ 143.3 million, an increase of $ 39.7 million from
prior year. This increase was primarily from the $ 35.9 million operating transfer to move the
infrastructure reserve to the Capital fund. The increase without the operating transfer totals $ 3.8
million.
Capital Projects Fund – Capital Projects Fund expenditures and other uses were $ 22.5 million in
2004- 05, which is a decrease of $ 5.6 million from the prior year. This level of expenditure is
consistent with the City’s effort to rehabilitate and maintain its existing infrastructure. Capital
expenditures include $ 4.8 million on streets and sidewalks, $ 1.9 million on Homer Avenue under-crossing
project and $ 1.2 million on fire station improvements project.
……….…………………………………………………………………………………………....
City of Palo Alto 15
􀂄 Management Discussion and Analysis
Non- major Funds - These funds are not presented separately in the Basic Financial statements, but
are individually presented as Supplemental Information.
Performance of Enterprise Funds
At June 30, 2005, the City’s Enterprise Funds reported total net assets of $ 521.8 million, a decrease
of $ 0.9 million or .2 percent compared with last year. The Electric and Gas Funds contributed net
assets of $ 285.8 million and $ 59.2 million, respectively, to total net assets. These assets constitute
66.1 percent of the Enterprise Funds’ total net assets. Unrestricted net assets for these two funds
total $ 160.3 million, a $ 13.2 million or 7.6 percent decrease over 2003- 04.
Water Fund – Revenues decreased by $ 1.0 million in 2004- 05. This decrease is mainly the result of
reduced sales due to weather conditions. The Water Fund ended the year with net income of $ 3.7
million, compared to $ 3.2 million in the prior year, a $ 0.5 million or 15.6 percent increase. The rise
in net income is primarily due to a decrease in commodity purchases of $ 0.7 million and an increase
in investment income of $ 0.7 million.
Electric Fund – Operating revenues decreased to $ 88.7 million, a $ 3.9 million decrease from 2003- 04.
This decrease is primarily due to the cancellation of excess capacity revenue contracts mid- year.
Operating expenses decreased from $ 68.7 million in 2003- 04 to $ 68.0 million in 2004- 05, a decrease
of $ 0.7 million. The Electric Fund ended the year with a net loss of $ 5.6 million compared to a net
gain of $ 10.9 million in 2003- 04. The decrease in net income was mainly the result of legal
settlement of $ 19.0 million.
Gas Fund – A 9.9 percent rate increase effective July 2004 and a 15 percent rate increase effective
January 2005 increased revenue $ 6.4 million over 2003- 04. Operating expenses increased to $ 26.7
million in 2004- 05 as compared to $ 23.0 million in 2003- 04. An increase of $ 3.7 million or 16.0
percent increase. The Gas Fund ended the year with a net loss of $ 1.7 million, compared to a $ 1.4
million net loss in 2003- 04.
Wastewater Collection Fund - Operating revenues decreased to $ 12.0 million, a $ 0.6 million
decrease from 2003- 04. A decrease in contributed capital and installation service contributed to the
reduction. Operating expenses decreased to $ 8.9 million, a $ 0.3 million decrease from 2003- 04. the
Wastewater Collection Fund ended the year with a net income of $ 3.4 million, an increase of $ 0.1
million over 2003- 04.
Wastewater Treatment Fund – Revenues increased in 2004- 05 by $ 1.2 million, while operating
expenses increased by $ 1.8 million. Expense increases were primarily due to increases in salary,
benefit and supply costs. The Wastewater Treatment Fund ended the year with a net income of
$ 0.7 million, compared to a net income of $ 0.1 million in 2003- 04.
Refuse Fund – Refuse Fund revenues increased to $ 23.4 million in 2004- 05, an increase of $ 1.5
million or 6.8 percent from 2003- 04. A 10 percent rate increase effective July 2004 contributed to the
rise in revenue. Operating expenses increased $ 0.4 million to $ 24.5 million in 2004- 05. The Refuse
Fund ended the year with a net loss of $ 1.2 million, compared to a $ 3.0 million net loss in 2003- 04.
The decrease in net loss is primarily due to the increase in revenue and return on investments.
……….…………………....……………………………………………………………………….......
16 City of Palo Alto
Management Discussion and Analysis 􀂄
Storm Drainage Fund – A voter approved ballot measure passed in 2004- 05 raised Storm Drainage
fees from $ 4.25 to $ 10.00 per residential unit. This increase was effective June 2005, and affected
operating revenues as they increased $ 0.3 million in 2004- 05. Operating expenses increased $ 0.2
million and the supplemental funding from the General Fund increased $ 0.1 million. The
supplement funding from the General Fund may not be needed in future years due to the voter
approved fee increase. The Storm Drainage Fund ended the year with a net loss of $ 0.2 million, as
compared to a net loss of $ 0.5 million in 2003- 04.
External Services Fund - Created in 2001- 02, this Fund provides information technology and
training services to neighboring municipalities and other community organizations. Revenues
increased to $ 0.8 million in 2004- 05 from $ 0.6 million in 2003- 04. This increase is primarily due to
one additional outside contract and increased fees for four existing contracts. The External Services
Fund ended the year with a net income of $ 0.1 million as compared to a net loss of $ 0.1 million in
2003- 04.
……….…………………………………………………………………………………………....
City of Palo Alto 17
􀂄 Management Discussion and Analysis
CAPITAL ASSETS
GASB 34 requires the City to record all its capital assets including infrastructure. Infrastructure
includes roads, bridges, signals and similar assets used by the entire population. Although GASB
34 allowed the City four years to record all its infrastructure assets in its financial statements, as of
June 30, 2002 all assets were included in the financial statements. The table below shows capital
assets and the amount of accumulated depreciation for these assets for Governmental and Business-type
Activities ( further detail may be found in Note 6 to the financial statements).
2005 2004
Increase/
( Decrease)
from 2004
Capital Assets
Land and improvements $ 67.8 $ 67.8 $ 0.0
Street trees 15.4 15.7 ( 0.3)
Construction in progress 55.5 46.3 9.2
Buildings and improvements 54.6 54.3 0.3
Equipment 8.2 8.1 0.1
Roadway network 225.1 220.3 4.8
Recreation & open space network 11.2 8.8 2.4
Less accumulated depreciation ( 133.8) ( 127.3) ( 6.5)
Internal Service Fund Assets
Construction in progress 2.1 1.9 0.2
Equipment 31.8 31.0 0.8
Less accumulated depreciation ( 19.4) ( 16.9) ( 2.5)
Total Governmental $ 318.5 $ 310.0 $ 8.5
Land $ 2.0 $ 1.5 $ 0.5
Construction in progress 91.4 72.1 19.3
Buildings and improvements 16.9 16.9 0.0
Transmission, Distribution & Treatment Systems 425.4 416.4 9.0
Less accumulated depreciation ( 188.7) ( 177.8) ( 10.9)
Total Business- type $ 346.9 $ 329.1 $ 17.8
CAPITAL ASSETS AT JUNE 30
( in Millions)
Governmental Activities
Business- type Activities
……….…………………....……………………………………………………………………….......
18 City of Palo Alto
Management Discussion and Analysis 􀂄
Governmental Activities capital assets net of depreciation, increased by $ 8.5 million compared to
2003- 04. Significant increases occurred in the roadway network, $ 4.8 million and recreation and
open space network, $ 2.4 million.
Work on the City’s infrastructure is a continuation of the ten- year plan, costing $ 100 million,
developed to address the needs of the City’s aging infrastructure. The ten- year plan included an
assessment and prioritization of work needed on buildings, facilities, streets, sidewalks, medians,
bikeways, parks and open space. Key infrastructure projects include improvements to streets and
sidewalks, refurbishing of park playgrounds and irrigation systems, upgrading athletic fields, open
space and trail improvements, and facility renovations.
The City depreciates all its capital assets over their estimated useful lives, as required by GASB 34.
The purpose of depreciation is to spread the cost of a capital asset over the years of its useful life so
that an allocable portion of the cost of the asset is borne by all users. Additional information on
capital assets and depreciable lives may be found in Note 6.
……….…………………………………………………………………………………………....
City of Palo Alto 19
􀂄 Management Discussion and Analysis
DEBT ADMINISTRATION
Each of the City’s debt issues is discussed in detail in Notes 7 and 8 to the financial statements. At
June 30, 2005, the City’s debt comprised:
2005 2004
Increase/
( Decrease)
from 2004
General Long Term Obligations:
1998 Golf Course Certificates of Participation $ 5.7 $ 6.0 ($ 0.3)
2002A Civic Center Refinancing
Certificates of Participation 2.6 2.9 ( 0.3)
2002B Downtown Parking Improvements
Certificates of Participation 2.4 3.3 ( 0.9)
Special Assessment Debt with City Commitment
1987 California Avenue Parking Bonds 0.3 0.4 ( 0.1)
Sub- Total 11.0 12.6 ( 1.6)
Internal Service Long- Term Obligations:
Information Systems Capital Lease Obligations 0.0 0.0 $ 0.0
Total Governmental Activity Debt $ 11.0 $ 12.6 ($ 1.6)
Enterprise Long Term Obligations:
Utility Revenue Bonds
1995 Series A $ 6.5 $ 6.8 ($ 0.3)
1999 Refunding 15.5 16.0 ( 0.5)
2002 Series A 22.7 23.3 ( 0.6)
Less: unamortized discount/ issuance cost ( 1.1) ( 1.2) 0.1
Total Business- type Activity $ 43.6 $ 44.9 ($ 1.3)
Governmental Activity Debt:
Business- Type Activity Debt:
LONG- TERM DEBT AT JUNE 30
( in Millions)
The City did not issue new debt in 2004- 05. A partial redemption was done by placing excess
construction and debt service reserve funds into an escrow account to defease $ 0.9 million of 2002B
Downtown Parking Improvements Certification of Participation. Although there are discussions
about long- term projects that may require debt financing, there are no immediate plans or needs to
issue debt. As stated in the Statistical Section of the CAFR, the combined direct debt ratio to
assessed valuation for the General Fund is a low 0.1 percent compared to the allowable, legal debt
margin of 15 percent.
……….…………………....……………………………………………………………………….......
20 City of Palo Alto
Management Discussion and Analysis 􀂄
Although the past three years have brought significant revenue challenges to the City’s General
Fund, it has made the necessary alignments in its cost structures to maintain solid reserves and
sound financial management of its resources.
SPECIAL ASSESSMENT DISTRICT DEBT
Special assessment districts in different parts of the City have also issued debt to finance
infrastructure and facilities construction entirely in those districts. At June 30, 2005, a total of $ 0.3
million in special assessment district debt was outstanding, issued by the California Avenue
Parking Special Assessment District. The City is contingently obligated for this debt and it has been
included in the City’s governmental long- term debt.
ECONOMIC OUTLOOK
The economy of the City is discussed in the accompanying Transmittal Letter and in this Discussion
and Analysis.
CONTACTING THE CITY’S FINANCIAL MANAGEMENT
The CAFR is intended to provide citizens, taxpayers, investors, and creditors with a general
overview of the City’s finances. Questions about this report should be directed to the
Administrative Services Department, at 250 Hamilton Avenue, 4th Floor, Palo Alto, California. This
report and other financial reports can be viewed on the City of Palo website at:
www. cityofpaloalto. org. On the home page, under “ Browse by Topic” select City Departments,
select Administrative Services. Within Administrative Services there are reports under “ Finance”
and there are links to reports by division ( such as Purchasing or Budget).
……….…………………………………………………………………………………………....
City of Palo Alto 21
􀂄 Management Discussion and Analysis
This page is intentionally left blank.
……….…………………....……………………………………………………………………….......
22 City of Palo Alto
Basic Financial Statements 􀂄
Citywide Statement of Net Assets and
Statement of Activities…………………………..
The Citywide Statement of Net Assets and the Statement of Activities purpose is to summarize the entire
City’s financial activities and financial position. They are prepared on the same basis as is used by most
businesses, which means they include all the City’s assets and all its liabilities, as well as all its revenues
and expenses. This is known as the full accrual basis— the effect of all the City’s transactions is taken
into account, regardless of whether or when cash changes hands. All material internal transactions
between City funds have been eliminated.
The Statement of Net Assets reports the difference between the City’s total assets and the City’s total
liabilities, including all the City’s capital assets and all its long- term debt. The Statement of Net Assets
focuses the reader on the composition of the City’s net assets, by subtracting total liabilities from total
assets.
The Statement of Net Assets summarizes the financial position of all the City’s Governmental Activities
in a single column, and the financial position of all the City’s Business- type Activities in a single column;
these columns are followed by a Total column that presents the financial position of the entire City.
The City’s Governmental and Business- type Activities include the activities of its General Fund, along
with all its Special Revenue, Capital Projects, Debt Service Funds, and Enterprise Funds. Since the
City’s Internal Service Funds service these Funds, their activities are consolidated with Governmental
and Business- type Activities, after eliminating inter- fund transactions and balances.
The Statement of Activities reports increases and decreases in the City’s net assets. It is also prepared on
the full accrual basis, which means it includes all the City’s revenues and all its expenses, regardless of
when cash changes hands. This differs from the “ modified accrual” basis used in the Fund financial
statements, which reflect only current assets, current liabilities, available revenues and measurable
expenditures.
The format of the Statement of Activities presents the City’s expenses first, listed by program, and
follows these with the expenses of its Business- type Activities. Program revenues— that is, revenues which
are generated directly by these programs— are then deducted from program expenses to arrive at the net
expense of each governmental and Business- type program. The City’s general revenues are then listed in
the Governmental Activities or Business- type Activities column, as appropriate, and the Change in Net
Assets is computed and reconciled with the Statement of Net Assets.
These Statements include the financial activities of the City Public Improvement Corporation and
Redevelopment Agency, which are legally separate component units of the City because they are
controlled by the City, which is financially accountable for its activities.
These financial statements along with the fund financial statements and footnotes are called Basic
Financial Statements.
……………….……….…………………………………………………………………………………………….
City of Palo Alto 23
􀂄 Basic Financial Statements
……………………………………………………………………………………………………………
24 City of Palo Alto
This page is intentionally left blank.
Basic Financial Statements 􀂄
City of Palo Alto - Statement of Net Assets ……………………
June 30, 2005
( In thousands of dollars)
Governmental Business- type
Activities Activities Totals
ASSETS
Cash and investments ( Note 3) $ 147,039 $ 207,844 $ 354,883
Cash and investments with fiscal agents ( Note 3) 2,781 1,890 4,671
Receivables:
Accounts and intergovernmental 6,903 26,975 33,878
Interest receivable 1,856 2,447 4,303
Notes and loans receivable ( Note 5) 14,011 14,011
Internal balances ( Note 4) 1,864 ( 1,864)
Prepaid items 203 203
Inventory of materials and supplies 2,931 2,931
Capital assets, nondepreciable ( Note 6) 140,895 93,329 234,224
Capital assets, net of depreciation ( Note 6) 177,614 253,602 431,216
Total assets 495,894 584,426 1,080,320
LIABILITIES
Accounts payable and accrued liabilities 4,585 12,093 16,678
Accrued salaries and benefits 4,893 1,692 6,585
Accrued compensated absences
Due within one year 11,784 11,784
Claims payable ( Note 14)
Due within one year 4,084 4,084
Due in more than one year 9,799 9,799
Accrued landfill closure liability ( Note 9) 6,692 6,692
Long- term debt ( Notes 7 and 8)
Due within one year 810 1,411 2,221
Due in more than one year 10,140 42,187 52,327
Total liabilities 46,095 64,075 110,170
NET ASSETS ( Note 10)
Invested in capital assets, net of related debt 305,225 303,473 608,698
Restricted for:
Special revenue programs 20,822 20,822
Capital projects:
Downtown parking structure 130 130
Other capital projects 4,535 4,535
Debt service 1,786 1,750 3,536
Total Restricted 27,273 1,750 29,023
Unrestricted net assets 117,301 215,128 332,429
Total net assets $ 449,799 $ 520,351 $ 970,150
See accompanying notes to financial statements
……………….……….…………………………………………………………………………………………….
City of Palo Alto 25
􀂄 Basic Financial Statements
City of Palo Alto - Statement of Activities ………………………………………………………
For the Year Ended June 30, 2005
( In thousands of dollars)
Net ( Expense) Revenue and
Program Revenues Change in Net Assets
Operating Capital
Total Charges for Grants and Grants and Governmental Business- type
Functions/ Programs Expenses Services Contributions Contributions Activities Activities Total
Governmental Activities:
City Council $ 130 ($ 130) ($ 130)
City Manager 1,725 ( 1,725) ( 1,725)
City Attorney 2,653 $ 22 ( 2,631) ( 2,631)
City Clerk 770 ( 770) ( 770)
City Auditor 764 ( 764) ( 764)
Administrative Services 6,982 480 ( 6,502) ( 6,502)
Human Resources 2,410 ( 2,410) ( 2,410)
Public Works 16,400 573 $ 1,907 $ 625 ( 13,295) ( 13,295)
Planning and Community Environment 10,162 4,090 1,377 ( 4,695) ( 4,695)
Police 22,416 3,801 353 ( 18,262) ( 18,262)
Fire 18,127 8,555 9 ( 9,563) ( 9,563)
Community Services 17,240 7,592 179 ( 9,469) ( 9,469)
Library 4,835 133 31 ( 4,671) ( 4,671)
Non- Departmental 12,474 ( 12,474) ( 12,474)
Interest on long- term debt 693 ( 693) ( 693)
Total Governmental Activities 117,781 25,246 3,677 804 ( 88,054) ( 88,054)
Business- type Activities:
Water 14,969 21,041 $ 6,072 6,072
Electric 73,051 88,737 15,686 15,686
Gas 26,656 31,206 4,550 4,550
Wastewater Collection 8,907 12,041 3,134 3,134
Wastewater Treatment 17,457 15,982 ( 1,475) ( 1,475)
Refuse 24,959 23,387 ( 1,572) ( 1,572)
Storm Drainage 3,336 2,484 ( 852) ( 852)
External Services 760 766 6 6
Total Business- type Activities 170,095 195,644 25,549 25,549
Total $ 287,876 $ 220,890 $ 3,677 $ 804 ( 88,054) 25,549 ( 62,505)
General revenues:
Taxes:
Property taxes 16,657 16,657
Sales taxes 19,308 19,308
Utility user's taxes 7,269 7,269
Transient occupancy tax 5,686 5,686
Other taxes 5,580 5,580
Investment earnings 4,988 8,093 13,081
Rents and miscellaneous 12,997 12,997
Special item ( Note 16) ( 21,500) ( 21,500)
Transfers 14,064 ( 14,064)
Total general revenues, special item
and transfers 86,549 ( 27,471) 59,078
Change in Net Assets ( 1,505) ( 1,922) ( 3,427)
Net Assets- Beginning 451,304 522,273 973,577
Net Assets- Ending $ 449,799 $ 520,351 $ 970,150
See accompanying notes to financial statements
…………………………………………………………………………………………………………  …
26 City of Palo Alto
Basic Financial Statements 􀂄
Fund Financial Statements……………………
Introduction
The Fund Financial Statements are presented by individual major funds, while non- major
funds are combined in a single column. Major funds are defined generally as having
significant activities or balances in the current year.
Major Governmental Funds
The funds described below were determined to be Major Funds by the City in fiscal year
2004- 05. Individual non- major funds may be found in the Supplemental section.
General Fund
The General Fund is used for all the general revenues of the City not specifically levied or
collected for other City funds, and related expenditures.
Capital Projects Fund
The Capital Projects Fund is utilized to account for resources used for the acquisition and
construction of capital facilities by the City, with the exception of those assets financed by
proprietary funds.
……………….……….…………………………………………………………………………………………….
City of Palo Alto 27
􀂄 Basic Financial Statements
……………………………………………………………………………………………………………
28 City of Palo Alto
This page is intentionally left blank.
Basic Financial Statements 􀂄
Balance Sheet - June 30, 2005
( In thousands of dollars)
Capital Other Total
Projects Governmental Governmental
General Fund Funds Funds
Cash and investments ( Note 3):
Available for operations $ 26,035 $ 43,362 $ 8,178 $ 77,575
Cash and investments with fiscal agent 1,441 1,340 2,781
Receivables
Accounts and intergovernmental 6,026 148 323 6,497
Special assessment 325 325
Interest receivable 965 4 117 1,086
Notes and loans receivable ( Note 5) 1,234 12,777 14,011
Interfund receivables and advances ( Note 4) 491 491
Inventory of materials and supplies 2,697 2,697
Total Assets $ 37,448 $ 44,955 $ 23,060 $ 105,463
Accounts payable and accrued liabilities $ 2,071 $ 763 $ 256 $ 3,090
Accrued salaries and benefits 3,429 96 3,525
Deferred revenue 118 325 443
Interfund payable and advances ( Note 4) 196 196
Total Liabilities 5,618 859 777 7,254
Reserved for: ( Note 10):
Encumbrances 3,401 4,535 471 8,407
Downtown parking structure 130 130
Notes and loans 1,234 12,777 14,011
Inventory of materials and supplies 2,697 2,697
Debt service 1,392 1,392
Unreserved, designated for:
Special revenue projects 6,405 6,405
Equity transfer stabilization 3,165 3,165
Reappropriations 267 14,265 122 14,654
Budget stabilization 21,066 21,066
Infrastructure 25,166 25,166
Undesignated, reported in
Special Revenue Funds 1,116 1,116
Total Fund Balances 31,830 44,096 22,283 98,209
Total Liabilities and Fund Balances $ 37,448 $ 44,955 $ 23,060 $ 105,463
LIABILITIES
ASSETS
City of Palo Alto - Governmental Funds ............................................................
FUND BALANCES
See accompanying notes to financial statements
……………….……….…………………………………………………………………………………………….
City of Palo Alto 29
􀂄 Basic Financial Statements
City of Palo Alto - Governmental Funds ............................................................
Reconciliation of Fund Balances to Governmental Activities Net Assets
Governmental Fund fund balances from prior page $ 98,209
Amounts reported for governmental activities in the statement of
net assets are different because:
Capital assets used in governmental activities are not
financial resources and therefore are not reported in
the funds ( Note 6) 318,509
Internal service funds are used by management to charge
the costs of certain activities, such as insurance and
central services and maintenance, to individual funds. The
assets and liabilities of the internal service funds are included
in governmental activities in the statement of net assets. 43,883
( Excludes capital assets reported above and debt reported below)
Accrual adjustment to remove deferred revenue from the balance
sheet 325
Some liabilities, including bonds payable, are not due and
payable in the current period and therefore are not
reported in the funds ( Notes 7 & 8) ( 11,127)
Net assets of governmental activities $ 449,799
See accompanying notes to financial statements
June 30, 2005
( In thousands of dollars)
…………………………………………………………………………………………………………  …
30 City of Palo Alto
Basic Financial Statements 􀂄
City of Palo Alto - Governmental Funds ………………………………...………..
Statement of Revenues, Expenditures and
Changes in Fund Balance - For the Year Ended June 30, 2005
( In thousands of dollars)
Capital Other Total
Projects Governmental Governmental
General Fund Funds Funds
REVENUES
Property taxes $ 16,657 $ 16,657
Special assessments $ 260 260
Sales taxes 19,308 19,308
Utility users' tax 7,269 7,269
Transient occupancy tax 5,686 5,686
Other taxes and fines 7,678 1,144 8,822
Charges for services 17,159 17,159
From other agencies 465 $ 1,552 740 2,757
Permits and licenses 3,183 3,183
Investment earnings 1,625 1,023 371 3,019
Rental income 11,943 6 11,949
Other revenue 1,948 226 2,095 4,269
Total Revenues 92,921 2,801 4,616 100,338
EXPENDITURES
Current operations:
City Council 130 130
City Manager 1,668 1,668
City Attorney 2,571 2,571
City Clerk 743 743
City Auditor 764 764
Administrative Services 6,342 6,342
Human Resources 2,291 2,291
Public Works 9,060 9,060
Planning and Community Environment 8,769 923 9,692
Police 21,059 58 21,117
Fire 17,615 17,615
Community Services 16,298 16,298
Library 4,800 4,800
Non- Departmental 8,603 425 9,028
Capital outlay 21,317 21,317
Debt service:
Principal payments 785 785
Interest and fiscal fees 583 583
Total Expenditures 100,713 21,317 2,774 124,804
( 7,792) ( 18,516) 1,842 ( 24,466)
OTHER FINANCING SOURCES ( USES)
Payment to bond escrow agent ( Note 7) ( 1,038) ( 1,038)
Transfers in ( Note 4) 15,384 42,756 2,289 60,429
Transfers ( out) ( Note 4) ( 42,584) ( 1,177) ( 2,861) ( 46,622)
Total Other Financing Sources ( Uses) ( 27,200) 41,579 ( 1,610) 12,769
Net change in fund balances ( 34,992) 23,063 232 ( 11,697)
Fund balances at beginning of year 66,822 21,033 22,051 109,906
Fund balances at end of year $ 31,830 $ 44,096 $ 22,283 $ 98,209
EXCESS ( DEFICIENCY) OF REVENUES OVER
EXPENDITURES
See accompanying notes to financial statements
……………….……….…………………………………………………………………………………………….
City of Palo Alto 31
􀂄 Basic Financial Statements
City of Palo Alto - Reconciliation of the
Statement of Revenues, Expenditures and
Changes in Fund Balances of
Governmental Funds to the Statement of Activities…………………
For the Year Ended June 30, 2005
( In thousands of dollars)
Net change in fund balances- total governmental funds ($ 11,697)
16,264
( 6,410)
Fund balance is increased by the amount of debt repayment 785
Principal on defeasance of 2002B Downtown Parking Improvements 900
Issuance cost on defeasance of 2002B Downtown Parking Improvements 138
Interest payable ( 110)
Deferred revenue ( 95)
( 1,280)
Change in net assets of Governmental Activities ($ 1,505)
Amounts reported for Governmental Activities in the Statement of
Activities are different because:
Some amounts reported in the Statement of Activities do not require
the use of current financial resources and therefore are not reported
as expenditures in Governmental Funds.
See accompanying notes to financial statements
Governmental Funds report capital outlays as expenditures.
However, in the Statement of Activities the cost of those assets is
allocated over their estimated useful lives and reported as
depreciation expense. The capital outlay expenditures are therefore
added back to fund balance
Depreciation expense is deducted from fund balance
( Depreciation expense is net of Internal Service Fund depreciation
$ 3,093 which has already been allocated to serviced funds.)
Bond proceeds provide current financial resources to Governmental
Funds, but issuing debt increases long- term liabilities in the
Statement of Net Assets. Repayment of bond principal is an
expenditure in the Governmental Funds, but in the Statement of Net
Assets the repayment reduces long- term liabilities.
Internal Service Funds are used by management to charge the costs
of certain activities, such as equipment acquisition, maintenance,
and insurance to individual funds. The net revenue ( expense) of all
Internal Service Funds is reported with Governmental Activities.
The capital outlay, net of retirements, are therefore deducted from
fund balance
…………………………………………………………………………………………………………  …
32 City of Palo Alto
Basic Financial Statements 􀂄
City of Palo Alto - General Fund ................................................................................
Statement of Revenues, Expenditures and Changes in Fund Balance
Budget and Actual - For the Year Ended June 30, 2005
( In thousands of dollars)
Variance from
Budgeted Amount Final Budget
Actual Amount Positive
Adopted Adjusted Budgetary Basis ( Negative)
REVENUES
Property taxes $ 13,600 $ 16,093 $ 16,700 $ 607
Sales taxes 18,335 18,100 19,308 1,208
Utility users' tax 7,392 7,226 7,270 44
Transient occupancy tax 5,800 6,000 5,686 ( 314)
Other taxes, fines & penalties 9,526 6,382 7,634 1,252
Charges for services 18,296 18,324 17,154 ( 1,170)
Permits and licenses 4,397 3,137 3,179 42
Charges to other funds 9,309 10,054 10,105 51
Rental income 11,776 11,845 12,016 171
Other revenues 3,742 3,938 3,069 ( 869)
Transfers in 14,619 14,682 15,425 743
Prior year encumbrance and reappropriations 3,244 3,244
Total Revenues 116,792 119,025 120,790 1,765
EXPENDITURES
Current operations:
Administrative Departments 15,222 16,803 16,344 459
Community Services 19,618 20,167 19,807 360
Fire 18,837 19,278 19,264 14
Library 5,251 5,229 5,218 11
Planning and Community Environment 8,839 10,101 10,056 45
Police 22,421 22,821 22,706 115
Public Works 11,262 11,526 11,417 109
Non- Departmental 8,063 6,520 8,677 ( 2,157)
Transfers out 42,383 42,809 42,584 225
Total Use of Funds 151,896 155,254 156,073 ( 819)
EXCESS OF REVENUES OR EXPENDITURES ($ 35,104) ($ 36,229) ( 35,283) $ 946
BUDGETARY BASIS
Adjustments to Budgetary Basis:
Current year encumbrance/ reappropriations 3,569
Prior year encumbrance/ reappropriations ( 3,244)
Current year stores adjustment, net ( 48)
Prior year stores adjustment 14
( 34,992)
Fund balances at beginning of year 66,822
Fund balances at end of year, GAAP basis $ 31,830
See accompanying notes to financial statements
EXCESS OF REVENUES OVER
EXPENDITURES - GAAP BASIS
……………….……….…………………………………………………………………………………………….
City of Palo Alto 33
􀂄 Basic Financial Statements
……………………………………………………………………………………………………………
34 City of Palo Alto
This page is intentionally left blank.
Basic Financial Statements 􀂄
Proprietary Funds……………………………………..
Introduction
Proprietary Funds account for City operations financed and operated in a manner similar to
a private business enterprise. The intent of the City is that the cost of providing goods and
services be financed primarily through user charges.
The City has elected to treat all of its Enterprise Funds as Major Funds in fiscal year 2004- 05.
Proprietary Funds do not provide for the disclosure of budget versus actual comparisons.
Water Services Fund
This fund accounts for all financial transactions relating to the City’s Water service. Services
are on a user charge basis to residents and business owners located in Palo Alto.
Electric Services Fund
This fund accounts for all financial transactions relating to the City’s Electric service. Services
are on a user charge basis to residents and business owners located in Palo Alto.
Gas Services Fund
This fund accounts for all financial transactions relating to the City’s Gas service. Services are
on a user charge basis to residents and business owners located in Palo Alto.
Wastewater Collection Fund
This fund accounts for all financial transactions relating to the City’s Wastewater Collection
service. Collections are on a user charge basis to residents and business owners located in
Palo Alto.
Wastewater Treatment Fund
This fund accounts for all financial transactions relating to the City’s Wastewater Treatment.
Services are on a user charge basis to residents and business owners located in Palo Alto.
Refuse Services Fund
This fund accounts for all financial transactions relating to the City’s Refuse service. Services
are on a user charge basis to residents and business owners located in Palo Alto.
Storm Drainage Services Fund
This fund accounts for all financial transactions relating to the City’s Storm Drain service.
Services are on a user charge basis to residents and business owners located in Palo Alto.
External Service Fund
This fund accounts for all financial transactions relating to the City’s External Services
provided to surrounding communities. Service charges are established on a case- by- case
basis.
……………….……….…………………………………………………………………………………………….
City of Palo Alto 35
􀂄 Basic Financial Statements
City of Palo Alto - Proprietary Funds …………………………
Statement of Net Assets - June 30, 2005
( In thousands of dollars)
Wastewater
Water Electric Gas Collection
Current Assets:
Cash and investments ( Note 3):
Available for operations $ 20,080 $ 137,613 $ 12,969 $ 12,249
Cash and investments with fiscal agent 788 962
Accounts receivable, net 3,112 16,357 2,184 1,504
Interest receivable 239 1,623 152 143
Prepaid items 203
Inventory of materials and supplies
Total Current Assets 24,219 155,796 16,267 13,896
Noncurrent Assets:
Interfund receivable ( Note 4)
Capital assets, nondepreciable ( Note 6) 16,006 22,112 24,996 26,092
Capital assets, depreciable ( Note 6) 32,679 115,719 33,156 24,866
Total Noncurrent Assets 48,685 137,831 58,152 50,958
Current Total Assets 72,904 293,627 74,419 64,854
Current Liabilities:
Accounts payable and accrued liabilities 1,540 7,194 2,753 111
Accrued salaries and benefits 207 596 242 112
Interfund payable ( Note 4)
Current portion of revenue bonds ( Note 7) 320 391 52
Accrued claims payable - current ( Note 14)
Total Current Liabilities 2,067 7,790 3,386 275
Noncurrent liabilities:
Interfund payable ( Note 4)
Accrued compensated absences - noncurrent ( Note 1)
Accrued claims payable - noncurrent ( Note 14)
Landfill closure and postclosure care ( Note 9)
Utility revenue bonds, net of unamortized issuance
costs and discounts ( Note 7) 9,723 11,861 1,437
Total Noncurrent Liabilities 9,723 11,861 1,437
Total Liabilities 11,790 7,790 15,247 1,712
Invested in capital assets, net of related debt 38,642 137,831 45,900 49,469
Restricted for debt service 788 962
Unrestricted 21,684 148,006 12,310 13,673
Total Net Assets $ 61,114 $ 285,837 $ 59,172 $ 63,142
Net Business- type Activities
Business- type Activities- Enterprise Funds
Some amounts reported for Business- type Activities in the Statement of Net Assets are different because
certain Internal Service Fund assets and liabilities are included with Business- type Activities
See accompanying notes to financial statements
ASSETS
LIABILITIES
NET ASSETS
…………………………………………………………………………………………………………  …
36 City of Palo Alto
Basic Financial Statements 􀂄
………………………………………………………………
Governmental
Activities -
Wastewater Storm External Internal Service
Treatment Refuse Drainage Service TOTALS Funds
$ 12,916 $ 11,609 $ 408 $ 207,844 $ 69,464
140 1,890
197 2,513 675 $ 433 26,975 81
153 137 2,447 770
203
234
13,406 14,259 1,083 433 239,359 70,549
75
1,861 2,254 8 93,329 2,157
29,020 3,009 15,153 253,602 12,352
30,881 5,263 15,161 346,931 14,584
44,287 19,522 16,244 433 586,290 85,133
160 194 141 12,093 1,200
310 147 45 33 1,692 1,368
295 295
323 325 1,411
4,084
793 341 511 328 15,491 6,652
75 75
11,784
9,799
6,692 6,692
9,122 10,044 42,187
9,122 6,692 10,044 75 48,954 21,583
9,915 7,033 10,555 403 64,445 28,235
21,576 5,263 4,792 303,473 12,352
1,750
12,796 7,226 897 30 216,622 44,546
$ 34,372 $ 12,489 $ 5,689 $ 30 521,845 $ 56,898
( 1,494)
$ 520,351
Business- type Activities- Enterprise funds
……………….……….…………………………………………………………………………………………….
City of Palo Alto 37
􀂄 Basic Financial Statements
City of Palo Alto - Proprietary Funds …………………………………………………
For the Year Ended June 30, 2005
( In thousands of dollars)
Wastewater
Water Electric Gas Collection
OPERATING REVENUES
Sales of utilities:
Customers $ 19,630 $ 70,070 $ 28,910 $ 11,524
City departments 1,017 2,222 980 225
Wholesale 3,320
Excess capacity 4,894
Wastewater treatment
Service connection charges and miscellaneous 154 1,692 450 35
Charges for services
Other operating revenues 240 6,539 866 257
Total Operating Revenues 21,041 88,737 31,206 12,041
OPERATING EXPENSES
Purchase of utilities
Retail 6,719 36,593 18,783 5,906
Excess capacity 4,417
Administration and general 2,362 5,076 2,920 350
Engineering ( operating) 189 932 228 157
Resource management and energy efficiency programs 372 5,039 1,192
Operations and maintenance 3,080 7,480 2,324 1,308
Rent 1,368 3,123 128 66
Depreciation and amortization 916 5,409 1,160 1,096
Claims payments and changes in
estimated self- insurance liability
Compensated absences and other benefits
Total Operating Expenses 15,006 68,069 26,735 8,883
Operating Income 6,035 20,668 4,471 3,158
NONOPERATING REVENUES ( EXPENSES)
Return on investment 740 5,475 543 423
Interest ( expense) ( 2) ( 2) ( 79)
Joint venture debt service ( Note 15) ( 4,928)
Gain ( loss) on disposal of fixed assets ( 15) ( 250) ( 6)
Other
Net Nonoperating Revenues ( Expenses) 723 297 535 344
Income ( Loss) Before Transfers and Special Item 6,758 20,965 5,006 3,502
Transfers in ( Note 4) 29 692 55 5
Transfers ( out) ( Note 4) ( 3,111) ( 9,155) ( 3,299) ( 87)
Special item ( Note 16) ( 18,060) ( 3,440)
Change in Net Assets 3,676 ( 5,558) ( 1,678) 3,420
Total net assets at beginning of year 57,438 291,395 60,850 59,722
Total net assets at end of year $ 61,114 $ 285,837 $ 59,172 $ 63,142
Change in Net Assets of Business- type Activities
See accompanying notes to financial statements
Statements of Revenues, Expenses and Changes in Net Assets
Business- type Activities - Enterprise Funds
Some amounts reported for Business- type Activities in the Statement of Net Assets are different because certain Internal
Service Fund assets and liabilities are included with Business- type Activities
…………………………………………………………………………………………………………  …
38 City of Palo Alto
Basic Financial Statements 􀂄
……….………….……………………………………………………
Governmental
Activities -
Wastewater Storm External Internal Service
Treatment Refuse Drainage Service TOTALS Funds
$ 18,950 $ 2,336 $ 151,420
$ 5,957 955 126 11,482
3,320
4,894
9,866 9,866
2,331
$ 48,362
159 3,482 22 $ 766 12,331
15,982 23,387 2,484 766 195,644 48,362
7,941 75,942
4,417
1,737 1,564 563 14,572 11,712
1,064 367 578 3,515
78 6,681
10,708 10,148 791 726 36,565 2,570
4,289 8,974
2,567 234 520 11,902 3,093
7,564
28,040
16,076 24,543 2,530 726 162,568 52,979
( 94) ( 1,156) ( 46) 40 33,076 ( 4,617)
473 437 15 ( 13) 8,093 1,969
( 192) ( 395) ( 641) ( 1,311)
( 4,928)
( 271) 45
49
281 42 ( 626) ( 13) 1,583 2,063
187 ( 1,114) ( 672) 27 34,659 ( 2,554)
505 154 457 1,897 587
( 37) ( 259) ( 13) ( 15,961) ( 330)
( 21,500)
655 ( 1,219) ( 228) 27 ( 905) ( 2,297)
33,717 13,708 5,917 3 59,195
$ 34,372 $ 12,489 $ 5,689 $ 30 $ 56,898
( 1,017)
($ 1,922)
Business- type Activities - Enterprise Funds
……………….……….…………………………………………………………………………………………….
City of Palo Alto 39
􀂄 Basic Financial Statements
City of Palo Alto - Proprietary Funds ………………………………………………
Statement of Cash Flows -
For the Year Ended June 30, 2005
( In thousands of dollars)
Wastewater
Water Electric Gas Collection
CASH FLOWS FROM OPERATING ACTIVITIES:
Receipts from customers $ 19,857 $ 79,141 $ 28,884 $ 11,490
Payments to suppliers ( 11,835) ( 60,898) ( 21,062) ( 7,816)
Payments to employees ( 2,327) ( 4,996) ( 2,869) ( 321)
Internal activity - receipts from other funds 1,017 2,222 980 225
Claims paid
Other receipts 240 866 257
Net Cash From Operating Activities 6,952 15,469 6,799 3,835
CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES:
Interfund receipts
Special item ( 18,060) ( 3,440)
Transfers in 29 692 55 5
Transfers ( out) ( 3,111) ( 9,155) ( 3,299) ( 87)
Net Cash From Noncapital Financing Activities ( 3,082) ( 26,523) ( 6,684) ( 82)
CASH FLOWS FROM CAPITAL FINANCING ACTIVITIES:
Acquisition and construction of fixed assets ( 6,013) ( 10,541) ( 6,726) ( 4,458)
Proceeds from sale of capital assets
Principal paid on long- term debt ( 304) ( 372) ( 36)
Interest paid on long- term debt ( 2) ( 4,928) ( 2) ( 79)
Cash Flows From Capital Financing Activities ( 6,319) ( 15,469) ( 7,100) ( 4,573)
CASH FLOWS FROM INVESTING ACTIVITIES:
Interest on investments 708 5,811 579 426
Net Cash Flows ( 1,741) ( 20,712) ( 6,406) ( 394)
Cash and cash equivalents at beginning of year 22,609 158,325 20,337 12,643
Cash and cash equivalents at end of year $ 20,868 $ 137,613 $ 13,931 $ 12,249
FINANCIAL STATEMENT PRESENTATION:
Cash and investments available for operations $ 20,080 $ 137,613 $ 12,969 $ 12,249
Cash and investments with fiscal agent 788 962
Cash and cash equivalents at end of year $ 20,868 $ 137,613 $ 13,931 $ 12,249
Operating income ( loss) $ 6,035 $ 20,668 $ 4,471 $ 3,158
Depreciation and amortization 916 5,409 1,160 1,096
Other
Changes in assets and liabilities:
Accounts receivable 73 ( 7,374) ( 476) ( 69)
Prepaid items ( 203)
Inventory of materials and supplies
Accounts and other payables ( 72) ( 3,031) 1,644 ( 350)
Accrued claims payable and other liabilities
Net Cash From Operating Activities $ 6,952 $ 15,469 $ 6,799 $ 3,835
Business- type Activities - Enterprise Funds
Adjustments to reconcile operating income ( loss) to cash
flows from operating activities:
See accompanying notes to financial statements
Reconciliation of operating income ( loss) to Cash Flows from
Operating Activities
…………………………………………………………………………………………………………  …
40 City of Palo Alto
Basic Financial Statements 􀂄
……………………………………………………………………
Governmental
Activities -
Wastewater Storm External Internal Service
Treatment Refuse Drainage Service TOTALS Funds
$ 11,374 $ 18,585 $ 1,921 $ 171,252 $ 48,289
( 11,710) ( 22,784) ( 1,383) ( 137,488) ( 3,015)
( 1,645) ( 1,533) ( 557) ($ 716) ( 14,964) ( 38,472)
5,957 955 126 11,482
( 4,229)
159 3,619 22 568 5,731 49
4,135 ( 1,158) 129 ( 148) 36,013 2,622
142 142 57
( 21,500)
505 154 457 1,897 587
( 37) ( 259) ( 13) ( 15,961) ( 330)
468 ( 105) 444 142 ( 35,422) 314
( 1,925) ( 297) ( 45) ( 30,005) ( 1,732)
45
( 278) ( 274) ( 1,264) ( 25)
( 192) ( 395) ( 641) ( 6,239)
( 2,395) ( 692) ( 960) ( 37,508) ( 1,712)
454 461 20 ( 17) 8,442 1,906
2,662 ( 1,494) ( 367) ( 23) ( 28,475) 3,130
10,394 13,103 775 23 238,209 66,334
$ 13,056 $ 11,609 $ 408 $ 209,734 $ 69,464
$ 12,916 $ 11,609 $ 408 $ 207,844 $ 69,464
140 1,890
$ 13,056 $ 11,609 $ 408 $ 209,734 $ 69,464
($ 94) ($ 1,156) ($ 46) $ 40 $ 33,076 ($ 4,617)
2,567 234 520 11,902 3,093
49
1,508 ( 365) ( 415) ( 198) ( 7,316) ( 73)
( 203)
69
154 ( 8) 70 10 ( 1,583) 766
137 137 3,335
$ 4,135 ($ 1,158) $ 129 ($ 148) $ 36,013 $ 2,622
Business- type Activities - Enterprise Funds
……………….……….…………………………………………………………………………………………….
City of Palo Alto 41
􀂄 Basic Financial Statements
This page is intentionally left blank.
…………………………………………………………………………………………………………  ………………………………………………………………………………………
42 City of Palo Alto
Basic Financial Statements 􀂄
Fiduciary Funds ……………………………………
Introduction
These funds account for assets held by the City in trust or as an agent for various assessment
and community facilities districts. The financial activities of these funds are excluded from
the Citywide financial statements, but are presented in separate Fiduciary Fund financial
statements.
……………….……….…………………………………………………………………………………………….
City of Palo Alto 43
􀂄 Basic Financial Statements
……………………………………………………………………………………………………………
44 City of Palo Alto
This page is intentionally left blank.
Basic Financial Statements 􀂄
City of Palo Alto - Fiduciary Funds ……………………
Statement of Fiduciary Net Assets - June 30, 2005
( In thousands of dollars)
Agency
Funds
ASSETS
Cash and investments available for operations ( Note 3) $ 1,561
Cash and investments with fiscal agents ( Note 3) 6,213
Interest receivable 79
Total Assets $ 7,853
LIABILITIES
Due to bondholders $ 6,570
Due to other governments 1,283
Total Liabilities $ 7,853
See accompanying notes to financial statements
……………….……….…………………………………………………………………………………………….
City of Palo Alto 45
􀂄 Basic Financial Statements
This page is intentionally left blank.
…………………………………………………………………………………………………………  ………………………………………………………………………………………
46 City of Palo Alto
Notes to Basic Financial Statements 􀂄
Index………………………………………………
Page
1. Summary of Significant Accounting Policies 49
2. Budgets and Budgetary Accounting 54
3. Cash and Investments 55
4. Interfund Transactions 60
5. Notes and Loans Receivable 63
6. Capital Assets 67
7. General Long- Term Obligations 73
8. Special Assessment Debt 77
9. Landfill Closure and Post- closure Care 79
10. Net Assets and Fund Balances 80
11. Pension Plans 83
12. Retiree Health Benefits 86
13. Deferred Compensation Plan 87
14. Risk Management 87
15. Joint Ventures 89
16. Commitments and Contingencies 93
Notes are essential to present fairly the information contained in the overview level of basic financial
statements. Narrative explanations are intended to communicate information that is not readily apparent
or cannot be included in the statements and schedules themselves, and to provide additional disclosures as
required by the Governmental Accounting Standards Board.
……….…………………………………………………………………………………………….
City of Palo Alto 47
􀂄 Notes to Basic Financial Statements
This page is intentionally left blank.
………………………………………………………………………………………………  …
48 City of Palo Alto
Notes to Basic Financial Statements – Note 1 􀂄
Note 1………………………………………………
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The City of Palo Alto was incorporated in 1894 and operates as a charter city, having had its first charter
granted by the State of California in 1909. The City operates under the Council- Manager form of
government and provides the following services: public safety ( police and fire), public works, electric,
water, gas, wastewater, storm drain, refuse, golf course, planning and zoning, general administration
services, library, open space and science, recreational and human services.
Reporting Entity
The City is governed by a nine- member council, elected by City residents. The City is legally separate
and fiscally independent which means it can issue debt, set and modify budgets and fees and sue or be
sued. The accompanying Basic Financial Statements present the financial activity of the City, which is
the primary government presented, along with the financial activities of its component units, which are
entities for which the City is financially accountable. Although they are separate legal entities, blended
component units are in substance part of the City’s operations and are reported as an integral part of the
City’s financial statements. This City’s component units, which are described below are blended.
The Palo Alto Public Improvement Corporation provides financing of public capital improvements for
the City through the issuance of Certificates of Participation ( COPs), a form of debt, which allows
investors to participate in a stream of future lease payments. Proceeds from the COPs are used to
construct projects which are leased to the City. The lease payments are sufficient in timing and amount
to meet the debt service requirements of the COPs. The Corporation is controlled by the City, which
performs all accounting and administrative functions for the Corporation. The financial activities of the
Corporation are included in the Golf Course and Civic Center Debt Service Funds and the Capital
Projects Fund.
The Palo Alto Redevelopment Agency is a separate government entity whose purpose is to prepare and
implement plans for improvement, rehabilitation, and development of certain areas within the City.
The City Council and the Redevelopment Agency Board are composed of the same individuals. Certain
administrative and accounting functions are performed by City staff. The financial activities of the
Agency have been included in these financial statements in the Redevelopment Agency Special Revenue
Fund.
Financial statements for the Palo Alto Public Improvement Corporation and Redevelopment Agency
may be obtained from the City of Palo Alto, Administrative Services Department, 250 Hamilton
Avenue, Palo Alto, CA 94301.
Basis of Presentation
The City’s Basic Financial Statements are prepared in conformity with accounting principles generally
accepted in the United States of America. The Government Accounting Standards Board is the
acknowledged standard setting body for establishing accounting and financial reporting standards
followed by governmental entities in the United States.
……….…………………………………………………………………………………………....
City of Palo Alto 49
􀂄 Notes to Basic Financial Statements – Note 1
These Standards require that the financial statements described below be presented.
Citywide Statements: The Statement of Net Assets and the Statement of Activities display information
about the primary government ( the City) and its component units. These statements include the
financial activities of the overall City government, except for fiduciary activities. Eliminations have been
made to minimize the double counting of internal activities. These statements distinguish between the
Governmental and Business- type Activities of the City. Governmental Activities generally are financed
through taxes, intergovernmental revenues, and other non- exchange transactions. Business- type
Activities are financed in whole or in part by fees charged to external parties.
The Statement of Activities presents a comparison between direct expenses and program revenues for
each segment of the Business- type Activities of the City and for each function of the City’s
Governmental Activities. Direct expenses are those that are specifically associated with a program or
function and, therefore, are clearly identifiable to a particular function. Program revenues include ( a)
charges paid by the recipients of goods or services offered by the programs, ( b) grants and contributions
that are restricted to meeting the operational needs of a particular program and ( c) fees, grants and
contributions that are restricted to financing the acquisition or construction of capital assets. Revenues
that are not classified as program revenues, including all taxes, are presented as general revenues.
Fund Financial Statements: The Fund financial statements provide information about the City's funds,
including fiduciary funds and blended component units. Separate statements for each fund category—
governmental, proprietary, and fiduciary— are presented. The emphasis of Fund financial statements is on
major individual governmental and enterprise funds, each of which is displayed in a separate column.
All remaining governmental and enterprise funds are aggregated and reported as non- major funds.
Proprietary Fund operating revenues, such as charges for services, result from exchange transactions
associated with the principal activity of the fund. Exchange transactions are those in which each party
receives and gives up essentially equal values. Non- operating revenues, such as subsidies and investment
earnings, result from non- exchange transactions or ancillary activities.
Major Funds
The City’s Major Governmental and Business- type Funds need to be identified and presented separately
in the Fund financial statements. All other funds, called Non- major Funds, are combined and reported
in a single column, regardless of their fund- type.
Major Funds are defined as funds that have either assets, liabilities, revenues or expenditures/ expenses
equal to ten percent of their fund- type total and five percent of the grand total. The General Fund is
always a Major Fund. The City may also select other funds it believes should be presented as Major
Funds.
The City reported the following Major Governmental Funds in the accompanying financial statements:
……….…………………………………………………………………………………………...
General Fund - This is the City’s primary operating fund. It accounts for all financial resources of the
general government, except those required to be accounted for in another fund.
50 City of Palo Alto
Notes to Basic Financial Statements – Note 1 􀂄
Capital Projects Fund – This fund accounts for resources used for the acquisition and construction of
capital facilities by the City, with the exception of those assets financed by Proprietary Funds.
The City reported all its Enterprise Funds as Major Funds in the accompanying financial statements:
Water Services Fund- This fund accounts for all financial transactions relating to the City’s Water service.
Services are on a user charge basis to residents and business owners located in Palo Alto.
Electric Services Fund - This fund accounts for all financial transactions relating to the City’s Electric
service. Services are on a user charge basis to residents and business owners located in Palo Alto.
Gas Services Fund- This fund accounts for all financial transactions relating to the City’s Gas service.
Services are on a user charge basis to residents and business owners located in Palo Alto.
Wastewater Collection Services Fund - This fund accounts for all financial transactions relating to the
City’s Wastewater Collection. Collections are on a user charge basis to residents and business owners
located in Palo Alto.
Wastewater Treatment Services Fund- This fund accounts for all financial transactions relating to the
City’s Wastewater Treatment. Services are on a user charge basis to residents and business owners
located in Palo Alto.
Refuse Services Fund- This fund accounts for all financial transactions relating to the City’s Refuse
service. Services are on a user charge basis to residents and business owners located in Palo Alto.
Storm Drainage Services Fund - This fund accounts for all financial transactions relating to the City’s
Storm Drain service. Services are on a user charge basis to residents and business owners located in Palo
Alto.
External Service Fund- This fund accounts for all financial transactions relating to the City’s external
services provided to surrounding communities.
The City also reports the following fund types:
Internal Service Funds - These funds account for fleet replacement and maintenance, technology, central
duplicating, printing and mailing services, administration of compensated absences and health benefits,
and the City’s self- insured workers’ compensation and general liability programs, all of which are
provided to other departments on a cost- reimbursement basis. Also included is the Retiree Health
Benefits Internal Service Fund which accounts for benefits to retirees.
Fiduciary Funds- These funds account for assets held by the City in trust or as an agent for various
assessment and community facilities districts. The financial activities of these funds are excluded from
the Citywide financial statements, but are presented in separate Fiduciary Fund financial statements.
Agency Funds - These funds are custodial in nature and do not involve measurement of results of
operations. The City maintains three agency funds.
……….…………………………………………………………………………………………....
City of Palo Alto 51
􀂄 Notes to Basic Financial Statements – Note 1
Basis of Accounting
The Citywide and Proprietary fund financial statements are reported using the economic resources
measurement focus and the full accrual basis of accounting. Revenues are recorded when earned and
expenses are recorded at the time liabilities are incurred, regardless of when the related cash flows take
place.
Governmental Funds are reported using the current financial resources measurement focus and the modified
accrual basis of accounting. Under this method, revenues are recognized when measurable and available.
The City considers all revenues reported in the Governmental Funds to be available if the revenues are
collected within ninety days after year- end. Expenditures are recorded when the related fund liability is
incurred, except for principal and interest on general long- term debt, claims and judgments, and
compensated absences, which are recognized as expenditures to the extent they have matured. General
capital asset acquisitions are reported as expenditures in Governmental Funds. Proceeds of general long-term
debt and acquisitions under capital leases are reported as other financing sources.
Those revenues susceptible to accrual include taxes, intergovernmental revenues, interest and charges for
services.
Grant revenues are recognized in the fiscal year in which all eligibility requirements are met. Under the
terms of grant agreements, the City may fund certain programs with a combination of cost-reimbursement
grants, categorical block grants, and general revenues. Thus, both restricted and
unrestricted net assets may be available to finance program expenditures. The City’s policy is to first
apply restricted grant resources to such programs, followed by general revenues if necessary.
Certain indirect costs are included in program expenses reported for individual functions and activities.
The City follows those Financial Accounting Standard Board Statements issued before November 30,
1989, which do not conflict with Governmental Accounting Standards Board Statements.
Inventory of Materials and Supplies
Materials and supplies are held for consumption and are valued at average cost. The consumption
method is used to account for inventories. Under the consumption method, inventories are recorded as
an expenditure at the time inventory items are used, rather than purchased.
……….…………………………………………………………………………………………...
52 City of Palo Alto
Notes to Basic Financial Statements – Note 1 􀂄
Compensated Absences
The liability for compensated absences includes the vested portions of vacation, sick leave, and overtime
compensation pay. The City’s liability for accrued compensated absences is recorded in the General
Benefits and Insurance Internal Service Fund. The Fund is reimbursed through payroll charges to all
other funds. Earned but unpaid vacation and overtime compensation pay is recognized as an expense or
expenditure in the Proprietary and Governmental Fund types when earned because the City has
provided financial resources for the full amount through its budgetary process. Vested accumulated sick
pay is paid in the event of termination due to disability and under certain conditions specified in
employment agreements primarily restricted to individuals with fifteen or more years of continuous
service. The City had accumulated vacation and overtime compensation pay of $ 8.166 million, and
vested accumulated sick pay of $ 3.618 million as of June 30, 2005. During fiscal 2004- 05, the City paid
$ 3.823 million against these liabilities and recorded additional accruals of $ 3.603 million.
Property Tax
Santa Clara County assesses properties and bills, collects, and distributes property taxes to the City. The
County remits the entire amount levied and handles all delinquencies, retaining interest and penalties.
Secured and unsecured property taxes are levied on January 1 of the preceding fiscal year.
Secured property tax is due in two installments, on November 1 and February 1, and becomes a lien on
those dates. It becomes delinquent on December 10 and April 10, respectively. Unsecured property tax
is due on July 1, and becomes delinquent on August 31. Collection of delinquent accounts is the
responsibility of the County, which retains all penalties.
The term “ unsecured” refers to taxes on personal property other than real estate, land and buildings.
These taxes are secured by liens on the property being taxed. Property tax revenues are recognized by the
City in the fiscal year they are assessed, provided they become available as defined above within 60 days
after year end.
Rounding
All amounts included on the basic financial statements, combining statements, fiduciary statements,
footnotes and schedules are presented to the nearest thousands in accordance with the City’s policy.
……….…………………………………………………………………………………………....
City of Palo Alto 53
􀂄 Notes to Basic Financial Statements – Note 2
Note 2………………………………………………
BUDGETS AND BUDGETARY ACCOUNTING
…………………………………………………………………..……………………………………  …
1. The City Manager submits to the City Council a proposed operating budget for the fiscal year
commencing the following July 1. The operating budget includes proposed expenditures and the
means of financing them.
2. Public hearings are conducted to obtain public comments.
3. The Adopted budget is legally enacted through passage of a budget ordinance for all funds except for
Agency Funds.
4. The City Manager is authorized to reallocate funds from a contingent account maintained in the
General Fund in conformance with the adopted policies set by the City Council. Additional
appropriations to departments in the General Fund, or to total appropriations for all other budgeted
funds, or transfers of appropriations between funds, require approval by the City Council. These
amendments are added to the Adopted budget and the resulting totals are reflected as Adjusted
budget amounts.
5. Expenditures may not legally exceed budgeted appropriations at the department level for the
General Fund, and at the fund level for Special Revenue and Debt Service Funds.
6. Formal budgetary integration is employed as a management control device during the year in all
funds except Agency Funds and the Civic Center Refinancing and Downtown Parking
Improvement Debt Service Funds.
7. Budgets for governmental funds are adopted on a basis consistent with generally accepted
accounting principles ( GAAP) for all funds, except that General Fund encumbrances are treated as
budgetary expenditures when incurred and stores ( materials, parts and supplies) transactions
included in the General Fund are not budgeted.
8. Expenditures for the Capital Projects Fund are budgeted and managed on a project length basis and
budget to actual comparisons for these expenditures have been excluded from the accompanying
financial statements.
54 City of Palo Alto
Notes to Basic Financial Statements – Note 3 􀂄
Note 3…………………………………………….
CASH AND INVESTMENTS
The City pools cash from all sources and all funds except Restricted Cash and Investments with Fiscal
Agents so that it can be invested at the maximum yield, consistent with safety and liquidity, while
individual funds can make expenditures at any time.
Policies
The City invests in individual investments and in investment pools. Individual investments are
evidenced by specific identifiable securities instruments, or by an electronic entry registering the owner in
the records of the institution issuing the security, called the book entry system. In order to increase
security, the City employs the Trust Department of a bank as the custodian of certain City managed
investments, regardless of their form.
The City’s investments are carried at fair value, as required by generally accepted accounting principles.
The City adjusts the carrying value of its investments to reflect their fair value at each fiscal year end, and
it includes the effects of these adjustments in income for that fiscal year.
Classification
Cash and investments are classified in the financial statements as shown below, based on whether or not
their use is restricted under the terms of City debt instruments or Agency agreements ( in thousands):
Cas h and inves tments available for operations $ 354,883
Cash and inves tments with fiscal agents 4,671
City cas h and inves tments 359,554
Cash and inves tments available for operations in
Fiduciary Funds ( s eparate Statement) 1,561
Cash and inves tments with fiscal agents
Fiduciary Funds ( s eparate Statement) 6,213
Total cash and inves tments $ 367,328
……….…………………………………………………………………………………………….
City of Palo Alto 55
􀂄 Notes to Basic Financial Statements – Note 3
Investments Authorized by the City’s Investment Policy & Debt Agreements
Th