Annual Financial Report
2003- 2004
City of Palo Alto, California
Fiscal Year Ended June 30, 2004
Comprehensive
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City of Palo Alto
California
Comprehensive
Annual Financial
Report
For the fiscal year ended
June 30, 2004
Prepared by: Administrative Services Department
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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 Statements ......................................…… xv
M D & A
Management’s Discussion and Analysis................................................................................. 1
BASIC FINANCIAL STATEMENTS
Citywide Financial Statements
Statement of Net Assets .............................................................................................. 21
Statement of Activities................................................................................................ 24
Fund Financial Statements
Major Governmental Funds:
Balance Sheet........................................................................................................... .. 27
Reconciliation of Fund Balances to Governmental Activities Net Assets............... .. 28
Statement of Revenues, Expenditures, and Changes in Fund Balance ..................... 29
Reconciliation of the Statement of Revenues, Expenditures and Changes
in Fund Balances of Governmental Funds to the Statement of Activities................ 30
Statement of Revenues, Expenditures, and Changes in Fund Balances –
Budget and Actual: ..................................................................................................... 31
Housing In- Lieu Special Revenue Fund, Statement of Revenues, Expenditures
and Changes in Fund Balance – Budget and Actual.................................................. 32
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City of Palo Alto i
􀁑 Table of Contents
BASIC FINANCIAL STATEMENTS ( Continued)
Major Proprietary Funds:
Statement of Net Assets ........................................................................................ 34
Statements of Revenues, Expenses and Changes in Net Assets ........................... 36
Statement of Cash Flows....................................................................................... 38
Fiduciary Funds:
Statement of Fiduciary Net Assets ........................................................................ 43
NOTES TO FINANCIAL STATEMENTS
Index to the Notes to the Financial Statements ................................................... 45
Notes to Basic Financial Statements..................................................................... 47
SUPPLEMENTAL INFORMATION
Non- major Governmental Funds
Combining Balance Sheets .................................................................................... 98
Combining Statements of Revenues, Expenditures,
and Changes in Fund Balances........................................................................... 102
Combining Schedule of Revenues, Expenditures, and Changes
in Fund Balance— Budget and Actual.................................................................. 106
Internal Service Funds
Combining Statements of Net Assets ................................................................. 114
Combining Statements of Revenues, Expenses and Changes in Net Assets...... 115
Combining Statements of Cash Flows................................................................ 116
Fiduciary Funds
Statement of Changes in Assets and Liabilities – All Agency Funds.................. 118
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ii City of Palo Alto
Table of Contents 􀁑
STATISTICAL SECTION
General Governmental Revenues by Source - Last Ten Fiscal Years..................... 121
General Governmental Expenditures by Function - Last Ten Fiscal Years........... 122
General Fund Tax Revenues by Source – Last Ten Fiscal Years ........................... 123
Property Tax Levies and Collections - Last Ten Fiscal Years ................................. 124
Assessed Value of Taxable Property - Last Ten Fiscal Years .................................. 125
Property Tax Rates - All Overlapping Governments
- Last Ten Fiscal Years ............................................................................................. 126
Taxable Transactions by Type of Business – Last Ten Fiscal Years
and Sales Tax Rates................................................................................................ 127
Special Assessment Billings and Collections – Last Ten Fiscal Years ................... 128
Ratio of Net Certificates of Participation Bonded Debt to Assessed Value and
Net Certificates of Participation Bonded Debt per Capita –
Last Ten Fiscal Years.............................................................................................. 129
Computation of Legal Debt Margin ...................................................................... 130
Computation of Direct and Overlapping Bonded Debt ....................................... 131
Ratio of Annual Debt Service Expenditures for General Bonded
Debt to Total General Expenditures – Last Ten Fiscal Years................................ 132
Revenue Bond Coverage - Water, Electric, Gas, Wastewater Collection,
Wastewater Treatment, Storm Drainage Funds and External Service Funds –
Last Ten Fiscal Years.............................................................................................. 133
Demographic Statistics - Last Ten Fiscal Years ...................................................... 134
Construction Activity - Last Ten Fiscal Years ........................................................ 135
Insurance Coverage................................................................................................ 136
Top Ten Property Taxpayers.................................................................................. 137
Miscellaneous Statistics.......................................................................................... 138
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City of Palo Alto iii
􀁑 Table of Contents
SINGLE AUDIT SECTION
Summary of Findings and Questioned Costs........................................................ 143
Schedule of Expenditures of Federal Awards........................................................ 145
Notes to the Schedule of Expenditures of Federal Awards................................... 147
Report on Compliance and on Internal Control
Over Financial Reporting Based on an Audit of
Financial Statements Performed in Accordance
with Government Auditing Standards .................................................................. 149
Report on Compliance and Internal Control
Over Compliance Applicable to Each Major
Federal Award Program......................................................................................... 150
… ………………………………………………………………………………………………
iv City of Palo Alto
Introduction
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Introduction 􀁑
City of Palo Alto
Office of the City Manager
Transmittal Letter…………………………………
December 14, 2004
THE HONORABLE CITY COUNCIL
Palo Alto, California
Attention: Finance Committee
COMPREHENSIVE ANNUAL FINANCIAL REPORT
YEAR ENDED JUNE 30, 2004
Members of the Council and Citizens of Palo Alto:
Transmittal: The Comprehensive Annual Financial Report ( CAFR) for the fiscal year ended June
30, 2004, 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, 2004, 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.
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City of Palo Alto v
􀁑 Introduction
THE PALO ALTO ECONOMY
Local Trends: The City of Palo Alto, population 60,246, 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. While unemployment
rates soared in Santa Clara County and in Palo Alto, economically sensitive revenue sources such as
sales and transient occupancy tax revenues declined. 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. Because of its budget discipline, the City is fortunate to report that it has not relied
on General Fund reserves to meet its commitments.
Toward the latter part of 2003- 04, the economic downturn appears to have abated somewhat. Sales
and transient occupancy tax revenues appeared to have stopped declining and county and local
unemployment levels decreased. While these are positive signs, they do not provide evidence of a
resurgent local economy. In fact, State financial difficulties causing local revenue “ take- backs,”
strong competition from neighboring City retail outlets, high commercial vacancy rates, rising
employee benefit costs, and higher oil prices make it unlikely the Palo Alto economy will improve
dramatically in the near future. As a consequence of continued pressure on revenue sources, the City
anticipates taking additional measures to control expenditures in the next year.
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 100,000. With a local workforce somewhat over 35,000,
commuters hold almost two- thirds 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
Medical Foundation, Agilent Technologies, Hewlett Packard/ Compaq, and the City of Palo Alto.
Even with this employment base, Palo Alto’s unemployment rate increased 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. Layoffs occurred at technology firms such as Agilent, Apple, Sun
Microsystems, Oracle, Hewlett Packard/ Compaq and other businesses. The trend of outsourcing high-paying
technology jobs to India and China is also of growing concern. Being a regional destination
point because of its vibrant downtown and state of the art Shopping Center, Palo Alto’s economy and
revenues were adversely affected by lost jobs. Some improvement in the employment picture was
seen in late 2003- 04 as unemployment rates in the City and County fell to 3.2 percent and 6.3 percent,
respectively.
Real Estate Market: Assessed property valuation in Santa Clara County experienced an anemic
growth rate of 2.28 percent in 2003- 04. This was the slowest rate of growth in the last decade. A
significant decline in real estate values occurred in office buildings, industrial property, and research
and development campuses. Residential property remained relatively stable. In Palo Alto actual
secured property receipts came in 2.5 percent over 2002- 03 levels, but unsecured receipts ( based on
machinery, equipment and computers) fell by 13.2 percent. Secured valuations in Palo Alto for 2004-
… ………………………………………………………………………………………………
vi City of Palo Alto
Introduction 􀁑
05 will improve, primarily as a consequence of a long- term lease transaction for the Stanford
Shopping Center.
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 2003- 04, 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, 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).
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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 tenth consecutive year the City has received both of these awards and the
current certificates appear immediately after the end of this transmittal letter. The 2003- 04 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, 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
Bern Beecham, Mayor
Jim Burch, Vice- Mayor
Dena Mossar
Judy Kleinberg
LaDoris Cordell
Policy and Services Committee
Yoriko Kishimoto, Chair
Jim Burch
LaDoris Cordell
Jack Morton
Finance Committee
Judy Kleinberg, Chair
Hillary Freeman
Dena Mossar
Vic Ojakian
Council- Appointed Officers
City Manager
Frank Benest
City Attorney
Gary Baum
City Clerk
Donna Rogers
City Auditor
Sharon Winslow Erickson
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City of Palo Alto ix
􀁑 Introduction
City of Palo Alto Organization ………………
Community Services Department
Richard James, Director
City Clerk
Donna Rogers
Assistant City Manager
Emily Harrison
City Attorney
Gary Baum
City Manager
Frank Benest
City Auditor
Sharon Winslow Erickson
City Council
Palo Alto Residents
Administrative Services Department
Carl Yeats, Director
Fire Department
Ruben Grijalva, Chief
Human Resources Department
Leslie Loomis, Director
Police Department
Lynne Johnson, Chief
Planning & Community Environment Dept
Steve Emslie, Director
Utilities Department
John Ulrich, Director
Public Works Department
Glenn Roberts, Director
… ………………………………………………………………………………………………
x City of Palo Alto
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.
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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 …………………………………
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City of Palo Alto xiii
􀁑 Introduction
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xiv City of Palo Alto
Financial Section
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Management’s
Discussion & Analysis
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Management Discussion and Analysis 􀁑
Management’s Discussion and Analysis
With the 2003- 04 Comprehensive Annual Financial Report ( CAFR), the City will have implemented
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 three 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
2003- 04 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
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.
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City of Palo Alto 1
􀁑 Management Discussion and Analysis
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, Housing In- Lieu 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, 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.
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
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2 City of Palo Alto
Management Discussion and Analysis 􀁑
Statements. In 2003- 04, the City has three Major Governmental Funds, the General Fund, Housing
In- Lieu 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 significant decline in the local and State economy experienced in the past three years appeared
to have abated somewhat toward the end of 2003- 04. Unemployment levels have decreased
slightly. At the beginning of 2003- 04, the unemployment rates were 4.2 percent and 6.7 percent for
the City and State, respectively. At the end of 2003- 04, these rates were 3.2 percent and 6.4 percent,
respectively. In the latter months of 2003- 04, economically sensitive revenue sources such as sales
and transient occupancy taxes stopped declining and appeared to plateau at their recent lows.
Mirroring the national and state economies, there is evidence, however, that an expected economic
“ turnaround” is running into resistance.
Local job and economic growth has been slow to materialize as technology firms have been
reluctant to hire new employees and appear to prefer outsourcing highly skilled and high paying
jobs. Corporate demand for new technology such as computers, servers, and telecommunications
equipment has slowed causing major regional businesses such as Intel and Cisco to lower profit
forecasts. These outcomes have led, in turn, to lower City revenues. The State’s financial
dilemmas have compounded pressures on the City’s resources as the State reduced vehicle license
fee revenue in 2003- 04 by $ 1.1 million to solve its budget problems. Over the next two years, the
State will take away another $ 3.1 million in City revenues.
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City of Palo Alto 3
􀁑 Management Discussion and Analysis
Other pressures on the City’s budget include:
􀂃 Competition from surrounding city “ big- box” stores and upscale malls reducing sales
tax revenues.
􀂃 The potential departure of major revenue generating businesses such as auto
dealerships.
􀂃 Weakening property tax revenues due to commercial and office vacancies
􀂃 Rising employee benefit costs such as health and retirement expenses.
􀂃 These pressures, along with the tentative economy and State fiscal woes, will compel the
City to maintain its “ Strengthening The Bottom Line” balanced budget program into
2004- 05 and beyond.
The comparisons in the discussion and analysis below are between 2003- 04 and 2002- 03. All
increases and decreases are expressed relative to 2002- 03 results. Fiscal year 2003- 04 financial
highlights include the following:
Citywide
􀂃 The City’s total net assets increased to $ 973.5 million, a $ 16.7 million increase.
􀂃 The City’s total capital assets, net of related debt, increased to $ 591.3 million, a $ 32.1
million increase.
􀂃 The City’s total restricted net assets decreased to $ 32.2 million, a $ 6.6 million drop.
􀂃 The City’s total unrestricted net assets decreased to $ 350.0 million, a $ 8.7 million
decrease.
􀂃 Citywide revenues totaled $ 291.5 million, a decrease of $ 17.5 from the prior year. This
total consists of $ 227.6 million in program revenues and $ 63.9 million in general
revenues. Program revenues increased by $ 9.4 million while general revenues decreased
by $ 26.9 million.
􀂃 Total Citywide expenses were $ 268.9 million, a $ 7.3 million increase.
􀂃 Citywide total assets increased to $ 1,083.4 million, a $ 23.3 million increase.
􀂃 Citywide capital assets, net of depreciation, increased by $ 30.9 million to $ 639.1 million.
􀂃 Citywide other assets decreased $ 7.6 million to $ 444.3 million.
􀂃 Citywide total liabilities were $ 109.9 million, an increase of $ 6.6 million.
􀂃 Citywide long- term debt decreased $ 2.0 million to $ 57.5 million.
􀂃 Citywide other liabilities were $ 52.4 million, an increase of $ 8.6 million.
Fund Level – Governmental Funds
􀂃 Governmental Fund balances decreased to $ 109.9, a $ 15.7 million change.
􀂃 Governmental Fund revenues decreased to $ 93.6 million, a $ 10.3 million drop.
􀂃 Governmental Fund expenditures were $ 118.8, a $ 14.1 million decrease.
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4 City of Palo Alto
Management Discussion and Analysis 􀁑
􀂃 General Fund revenues came in at $ 86.2 million, a drop of $ 10.1 million over prior year
levels.
􀂃 General Fund expenditures are $ 94.4 million, a drop of $ 4.5 million.
􀂃 The General Fund balance of $ 66.8 million at June 30, 2004 was an increase of $ 0.5
million from the prior year.
Fund Level – Enterprise Funds
􀂃 Enterprise Fund net assets increased to $ 522.7 million, a $ 12.6 million increase.
􀂃 Enterprise Fund revenues increased to $ 191.5 million, a $ 3.8 million increase over prior
year revenues.
􀂃 Enterprise Fund expenses increased to $ 158.2 million, a $ 6.7 million decrease.
…………………………………………………………………………………………………………………………
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.
2004 2003
Increase/
( Decrease)
from 2003
Cash and investments $ 157.6 $ 173.7 ($ 16.1)
Other assets 26.8 23.5 3.3
Capital assets 310.0 293.0 17.0
Total Assets 494.4 490.2 4.2
Long- term debt outstanding 12.7 13.4 ( 0.7)
Other liabilities 30.4 29.9 0.5
Total Liabilities 43.1 43.3 ( 0.2)
Net Assets:
Invested in capital assets, net of debt 297.1 279.3 17.8
Restricted 30.4 37.2 ( 6.8)
Unrestricted 123.8 130.4 ( 6.6)
Total Net Assets $ 451.3 $ 446.9 $ 4.4
GOVERNMENTAL ACTIVITIES
Net Assets at June 30
( in Millions)
The City’s governmental net assets increased $ 4.4 million to $ 451.3 million in 2003- 04. This change
results from the following:
􀂃 Cash and investments decreased by $ 16.1 million. This consists of cash outlays from
fiscal agent cash of $ 11.4 million to complete construction of two new parking garages
and cash outlays of $ 5.7 million to continue other capital projects such as streets and
sidewalks and Homer Avenue Under- Crossing project.
􀂃 Capital assets increased $ 17.0 million net of depreciation. $ 8.6 million is a result of
garage construction in the University Avenue Parking Assessment District.
􀂃 Net assets invested in capital assets net of related debt increased $ 17.8 million as the City
completed two parking garages and other General Fund infrastructure assets as
discussed under the Capital Assets sections below.
􀂃 Restricted net assets decreased $ 6.8 million, primarily due to the completion of the
parking garages.
…………………………………………………………………………………………………………………………
6 City of Palo Alto
Management Discussion and Analysis 􀁑
􀂃 Unrestricted net assets of $ 123.8 million, a decrease of $ 6.6 million, represent current net
assets available to finance subsequent year operations and other expenditures approved
by City Council.
2004 2003
Increase/
( Decrease)
from 2003
Program Revenues:
Charges for services $ 24.0 $ 25.4 ($ 1.4)
Operating contributions & grants 4.2 4.5 ( 0.3)
Capital contributions & grants 2.0 0.6 1.4
Total Program Revenues 30.2 30.5 ( 0.3)
General Revenues:
Property Taxes 13.7 13.9 ( 0.2)
Sales Taxes 18.2 18.0 0.2
Utility User's Taxes 7.2 7.1 0.1
Transient Occupancy Tax 5.5 5.3 0.2
Other Taxes and Fines 8.5 7.3 1.2
Investment Earnings 0.1 10.2 ( 10.1)
Rents and Miscellaneous 10.2 15.3 ( 5.1)
Transfers 15.0 14.7 0.3
Total General Revenues 78.4 91.8 ( 13.4)
Total Revenues $ 108.6 $ 122.3 ($ 13.7)
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 $ 114.5 million in 2003- 04, a decrease of
$ 7.8 million compared to prior year revenues of $ 122.3 million. The change primarily results from a
$ 10.1 million decrease in investments earnings. This decrease is a result of the year- end adjustment
to carrying value for investments. Prior year adjustment to carrying value was a gain, whereas this
year’s adjustment is a loss. The adjustment to carrying value is netted against actual investment
income.
Generally Accepted Accounting Principals ( GAAP) require adjustments of investments to market
value at year- end. In FY 03- 04 the Federal Reserve Board began raising interest rates in an effort to
stimulate the economy. As overall market interest rates increase the market value of investments
with fixed interest rates decreases. This decrease represents an unrealized loss in market value.
…………………………………………………………………………………………………………………………
City of Palo Alto 7
􀁑 Management Discussion and Analysis
It is the City’s policy to hold investments to maturity. As an investment approaches its maturity
date the investment loss decreases to zero. For a detailed discussion of investments, please refer to
Note 3.
Rents and miscellaneous had a decrease of $ 5.1 million from prior year due to a decrease of $ 1.7
million in facilities rent charged to Enterprise Funds and a decrease of $ 3.2 million of technology
support charges, a result of moving the IT division of ASD to the Technology Fund.
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
7%
Rents and
Miscellaneous
9%
Utility User's
Taxes
6%
Sales Taxes
16%
Transfers
13%
Program
Revenues
32%
Property Taxes
12%
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 2003- 04 and 2002- 03 expenses ( does not include
encumbrances and reappropriations) by Governmental Activities and interest on long- term debt.
Total Governmental Activities expense was $ 104.2 million in 2003- 04, an increase of $ 2.6 million.
Activities 2004 2003
Increase/
( Decrease)
from 2003
City Council $ 0.2 $ 0.2
City Manager 1.7 1.5 $ 0.2
City Attorney 2.3 2.0 0.3
City Clerk 0.8 0.6 0.2
City Auditor 0.7 0.6 0.1
Adminstrative Services 6.3 9.7 ( 3.4)
Human Resources 2.1 1.7 0.4
Public Works 14.4 13.7 0.7
Planning and Community Environment 8.9 7.5 1.4
Police 20.4 19.3 1.1
Fire 17.3 16.9 0.4
Community Services 20.9 19.7 1.2
non- Departmental 7.6 7.5 0.1
Interest on long- term debt 0.6 0.7 ( 0.1)
Total Revenues $ 104.2 $ 101.6 $ 2.6
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 2003- 04, the City added $ 17.0
million in capital assets. The composition of 2003- 04 additions is shown in detail in the Capital
Asset section of the Management’s Discussion and Analysis
Functional Expense
City Council
Less
than 1% City
Manager
2%
City
Attorney
2%
City
Clerk
1%
City Auditor
1%
Adminstrative
Services
6% Human
Resources
2%
Interest on long- term
debt
1%
Public Works
Planning & 14%
Community
Environment
9%
Police
19%
non-
Departmental
7%
Fire
17%
Community Services
19%
…………………………………………………………………………………………………………………………
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.
2004 2003
Increase/
( Decrease)
from 2003
Cash and investments $ 238.2 $ 233.5 $ 4.7
Other assets 21.7 21.2 0.5
Capital assets 329.1 315.2 13.9
Total Assets 589.0 569.9 19.1
Long- term debt outstanding 44.9 46.1 ( 1.2)
Other liabilities 21.9 13.9 8.0
Total Liabilities 66.8 60.0 6.8
Net assets:
Invested in capital assets, net of debt 294.2 279.9 14.3
Restricted 1.8 1.7 0.1
Unrestricted 226.2 228.3 ( 2.1)
Total Net Assets $ 522.2 $ 509.9 $ 12.3
( in Millions)
BUSINESS- TYPE ACTIVITIES
Net Assets at June 30
The City’s Business- type net assets increased $ 12.3 million to $ 522.2 million in 2003- 04.
􀂃 Cash and investments increased $ 4.7 million as a result of operations. Other assets
increased $ 0.5 million to $ 21.7 million as a result of Wastewater Treatment Fund
accounts receivable increase of $ 1.7 million.
􀂃 Capital assets increased $ 13.9 million to $ 329.1 million in 2003- 04. This increase is
primarily a result of electric and gas infrastructure improvements totaling $ 10.1 million.
􀂃 Repayments reduced long- term debt $ 1.2 million to $ 44.9 million. No debt was issued in
2003- 04.
􀂃 Net assets invested in capital assets net of related debt increased $ 14.3 million to $ 294.2
million. $ 5.0 million of improvements in the Electric Fund and $ 5.1 million in Gas Fund
improvements caused this rise in assets.
􀂃 Unrestricted net assets of $ 226.2 million, a decrease of $ 2.1 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
…………………………………………………………………………………………………………………………
City of Palo Alto 11
􀁑 Management Discussion and Analysis
designated reserves as rate stabilization reserves of $ 99.6 million, the Calaveras reserve
for stranded costs of $ 70.4 million and the emergency plant replacement reserve of $ 6.7
million.
2004 2003
Increase/
( Decrease)
from 2003
Water $ 5.9 $ 4.4 $ 1.5
Electric 19.1 17.9 1.2
Gas 1.8 7.4 ( 5.6)
Wastewater Collection 3.4 2.0 1.4
Wastewater Treatment ( 0.1) ( 0.8) 0.7
Refuse ( 2.3) ( 2.9) 0.6
Storm Drainage ( 0.8) ( 0.3) ( 0.5)
External Services ( 0.1) 0.0 0
Totals $ 26.9 $ 27.7 ($ 0.8)
From Services
BUSINESS- TYPE ACTIVITIES
( in Millions)
Net ( Expense) Revenue
For the Year Ended June 30
The table above presents the net cost 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. Net cost is defined as total program cost less the
revenues generated by those specific activities.
Business- type Activities showing a total decrease of $ 0.8 million from 2002- 03 were significantly
affected by the following events:
􀂃 Net revenues in the Water activity increased by $ 1.5 million. This resulted from a rate
increase to consumers for water service and an increase of wholesale water purchases.
􀂃 Net revenues in the Gas activity decreased by $ 5.6 million in 2003- 04 primarily due to a
15 percent rate decrease beginning July 1, 2003.
…………………………………………………………………………………………………………………………
12 City of Palo Alto
Management Discussion and Analysis 􀁑
FUND FINANCIAL STATEMENTS
Performance of Governmental Funds
At June 30, 2004, the City’s Governmental Funds reported combined fund balances of $ 109.9
million, a decrease of $ 15.7 million or 12.5 percent compared with the prior year
Governmental Fund revenues and other financing sources decreased $ 13.5 million for a total of
$ 122.2 million. Revenues and other financing sources in the General Fund decreased $ 8.3 million;
Capital Project Fund decreased $ 2.4 million as a result of a decrease of operating transfers from the
General Fund of $ 3.9 million. Non- major Fund revenues and other financing sources decreased by
$ 2.3 million.
Governmental Fund expenditures and other uses decreased $ 11.6 million this year to $ 137.9 million.
General Fund expenditures decreased $ 5.9 million. Capital Projects Fund expenditures decreased
by $ 5.0 million; and non- major fund expenditures and other uses dropped by $ 0.7 million.
General Fund – The General Fund ended the year with a $ 0.5 million addition to fund balance,
compared to $ 2.9 million in the prior year. The $ 0.5 million excess of revenues over expense is due
mainly to the $ 0.8 million Utilities payment to an Equity Transfer Stabilization Reserve. During this
period of slow economic recovery, the City has continued to closely monitor its expenditures.
Palo Alto’s General Fund revenues and other financing sources reached $ 104.1 million in 2003- 04, a
decline of $ 8.3 million.
Sales tax, the City’s largest revenue source, totaled $ 18.2 million in 2003- 04 compared to $ 18.0
million in 2002- 03. After controlling for prior year one- time adjustments in both years, actual
revenues were $ 17.6 and $ 17.4 million, respectively. From an economic perspective, this data
appears to indicate a more stable local economy compared to the past three years. From a
structural perspective, however, there are challenges to this revenues source from competition from
new malls and big box stores, and the potential exodus of additional auto dealerships. Compared
to the adopted budget, which was based on an economic rebound in 2003- 04, sales tax revenue
growth did not materialize. This caused a downward adjustment in budget at midyear from $ 19.3
million to $ 17.4 million. Sales tax at year- end came in $ 0.7 million or 4.3 percent above the adjusted
budget. The increase is attributable to one- time payment in the electronics sector. The City saw
modest growth in sectors such as general consumer goods and restaurants. This growth was
somewhat offset by declines in auto sales and leases and from office equipment.
Documentary transfer tax revenues performed well in 2003- 04, increasing by $ 2.1 million or 59.4
percent from 2002- 03. The City received a sizeable, one- time transfer tax from a transaction
whereby Stanford University entered into a long- term lease with a private party to manage the
Stanford Shopping Center. In addition, a moderation in home prices and a low interest rate
environment boosted residential sales.
Another indication of a slightly more stable economy in late 2003- 04, was the performance of
transient occupancy tax. It increased by $ 0.2 million or 2.9 percent compared to 2002- 03. The City
was forced, however, to adjust its $ 6.3 million budget downward by $ 0.75 million due to a sluggish
…………………………………………………………………………………………………………………………
City of Palo Alto 13
􀁑 Management Discussion and Analysis
hotel market. With a modest occupancy rate increase toward the end of 2003- 04, revenues totaled a
$ 5.5 million, a modest $ 0.06 million or 1.1 percent below the adjusted budget. Average vacancy
rates increased from 54.2 percent in 2002- 03 to 56.8 percent in 2003- 04. More significantly, average
daily rates fell from $ 122 to $ 114 during the same period.
Motor vehicle in- lieu license fees ( VLF) came in $ 0.4 million or 16.7 percent above the adjusted
budget. This positive variance was primarily due to consumers postponing car purchases until the
Governor indicated he would not raise VLF fees. It is important to note that the adjusted budget
included a $ 1.1 million downward adjustment due to a state take away. Without the $ 1.1 million
State reduction, VLF revenues would have exceeded prior year receipts.
Offsetting the positive variances described above were declines in property taxes and interest
income. Due to a high volume of appeals and assessed value reductions, property taxes fell well
below budget in 2003- 04. These adjustments primarily came from commercial properties that
sought to adjust their secured and unsecured ( personal) property values downward. The high level
of commercial vacancy rates had a negative influence on commercial values. Revenues were $ 0.36
million or 2.5 percent under budget and were $ 0.01 million or 0.7 percent below the prior year.
Interest Income was $ 0.1 million or 3.7 percent below the adjusted budget and $ 0.5 million or 11.4
percent below the prior year. The decline is primarily due to reinvestment of older, maturing
securities in a low interest rate environment.
At June 30, 2004, the General Fund Balance totaled $ 66.8 million. This represents 70.8 percent of
direct General Fund expenditures, providing a buffer against unexpected financial events. Of this,
$ 6.7 million is reserved and $ 60.1 is unreserved. A substantial portion of the unreserved amount is
designated by the Council for budget stabilization, $ 21.5 million at year- end; and infrastructure
improvements, $ 35.9 million at year- end. The equity transfer stabilization designation, established
in 2001- 02, totaled $ 2.3 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.
The City has continued to closely monitor revenues and expenditures, making adjustments as
needed to maintain a balanced budget. In addition, the City has continued to make efforts to
reduce expenditures without impacting services to the public. This proactive approach was
established with the ongoing “ Strengthening the Bottom Line” ( SBL) efforts established in 2001- 02.
Continued maintenance of these service levels will be jeopardized if the economy continues to have
a slow recovery , State financial problems continue, and employee benefit costs rise significantly.
The City continues to maintain a strong position of liquidity or cash flow to cover expenditures.
General Fund expenditures and other uses totaled $ 103.6 million, a decrease of $ 5.9 million from
prior year. This decline was primarily from the $ 4.1 million decrease in ASD ( due to reclassification
of Information Technology division to the Technology Fund) and a decrease in Public Works
expenditures of $ 1.9 million. Nearly all City departments had savings compared to the adjusted
budget, Community Services ($ 1.4 million primarily from contract expenditures), Police ($ 1.7
million primarily from salary expenditures), Public Works ($ 1.1 million primarily from salaries and
expenditures being recognized in the Capital Fund).
Housing In- Lieu Fund – The Housing In- Lieu Fund met the criteria for a major fund in 2003- 04
primarily due to the loan of $ 5.874 million and $ 1.96 million to Palo Alto Housing Corporation for
the purchase of land and construction of the Oak Court Apartments ( for details refer to Note 5).
…………………………………………………………………………………………………………………………
14 City of Palo Alto
Management Discussion and Analysis 􀁑
Housing In- Lieu revenues were $ 0.4 million, a decline of $ 0.7 from prior year. Expenditures were
$ 0.3 an increase of $ 0.1 from prior year. Housing In- Lieu Fund balance totaled $ 10.9 million, an
increase of $ 0.1 million from the prior year.
Capital Projects Fund – Capital Projects Fund expenditures and other uses were $ 28.2 million in
2003- 04, which is a decrease of $ 5.0 million from the prior year. This level of expenditure is
consistent with the City’s effort to rehabilitate and maintain its existing infrastructure and to
complete the construction of two new downtown parking structures. Capital expenditures include
$ 8.6 million on the garages, $ 4.3 million on streets and sidewalks, and $ 2.5 million on the Homer
Avenue Under- Crossing project. Other important expenditures include, for example, park and
facility improvements, library master planning efforts, traffic calming and bike lane improvements.
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, 2004, the City’s Enterprise Funds reported total net assets of $ 522.7 million, an increase
of $ 12.6 million or 2.5 percent compared with last year. The Electric and Gas Funds contributed net
assets of $ 291.4 million and $ 60.8, respectively, to total net assets. These assets constitute 67.4
percent of the Enterprise Funds’ total net assets. Unrestricted net assets for these two funds total
$ 173.5 million, a $ 0.6 million or .3 percent decrease over 2002- 03.
Water Fund – Revenue increased by $ 4.3 million in 2003- 04. The Water Fund ended the year with
net income of $ 3.2 million, compared to $ 3.0 million in the prior year, a $. 2 million or 5.8 percent
increase. The rise in net income is primarily due to a 15 percent rate increase effective July 1, 2003.
There will be a series of rate increases to consumers in coming years as commodity costs rise to pay
for major capital improvements related to the Hetch- Hetchy distribution system
Electric Fund – Operating revenues increased to $ 92.6 million, a $ 1.0 million rise from 2002- 03. This
slight increase resulted from relatively flat price and volume as compared to 2002- 03. A $ 2.0 million
increase in excess capacity ( surplus energy) sales due to market price increases offset a $ 1.5 million
decrease in other operating revenue. Central Valley Project loan repayments and a one- time only
legal settlement affected other operating revenue in the prior year.
Operating expenses increased from $ 67.1 million in 2002- 03 to $ 68.7 in 2003- 04, an increase of $ 1.6
million. The retail purchase of utilities increased $ 4.2 million; this was mainly due to an $ 8.5
million accrual for SCS Tariff charge backs to be paid in 2004- 05. Due to lower legal expenses in
2003- 04, resource management expenses declined by $ 2.1 million.
The Electric Fund ended the year with a net gain of $ 10.9 million compared to a net gain of $ 18.4
million in 2002- 03.
Gas Fund – A 15 percent rate decrease for 2003- 04 caused revenues to decrease by $ 4.9 million
compared to the prior year. In June 2001, Gas Fund rates increased 67 percent to cover dramatically
increased commodity prices; the 2003- 04- rate decrease is the second phase of rate adjustments that
began in 2002- 03 as commodity prices fell. Natural gas prices were higher than expected in 2003- 04
…………………………………………………………………………………………………………………………
City of Palo Alto 15
􀁑 Management Discussion and Analysis
and commodity expenditure increased $. 6 million. Year- end results show net loss of $ 1.4 million in
2003- 04 compared to net income of $ 5.4 million in 2002- 03.
Wastewater Collection Fund - In 2003- 04 collection rates increased by 15 percent. Compared to the
prior year, revenues rose by $ 2.0 million or 18.5 percent. Operating costs rose by $ 0.6 million due
to higher utility costs. Utility costs in this Fund increased by $. 4 million or 7.9 percent. Net income
increased to $ 3.3 million, a rise of $ 0.8 million over 2002- 03.
Wastewater Treatment Fund – Revenues increased by $ 1.2 million in 2003- 04, while operating
expenses increased by $ 0.2 million. This increase was due to higher salary and benefit increases.
The Fund ended the year with net income of $ 0.1 million, compared to a net loss of $ 0.2 million in
the prior year. Total net assets at year- end totaled a solid $ 33.7 million.
Refuse Fund – Refuse operating revenues increased $. 2 million in 2003- 04. Greenwaste charges to
the General Fund were restored in 2003- 04. Operating and maintenance expenses rose by $. 8
million due to $ 1.0 million transfer to the General Fund for interest on deferred rent. Rent
decreased by $ 1.0 million because of a payment for deferred rent made in the prior year. The fund
ended the year with a net loss of $ 3.0 million, compared to a $ 1.9 million loss in the prior year. Total
net assets at year- end totaled $ 13.7 million.
Storm Drainage Fund - The Storm Drainage Fund continues to experience a net loss before transfers
due to insufficient revenue from existing fees. Supplemental funding from the General Fund is
required in order to maintain the current level of service. In 2003- 04, operating revenues remained
stable at $ 2.2 million. The Fund required a transfer of $. 3 million from the General Fund to
continue basic services and maintain water quality standards.
External Services Fund - Created in 2001- 02, this Fund provides information technology and
training services to neighboring municipalities and other community organizations. As part of the
City’s effort to enhance revenues, the Fund added three outside contracts in 2003- 04. The Fund had
an operating loss of $ 0.1 million in 2003- 04 as it positions itself to expand services.
…………………………………………………………………………………………………………………………
16 City of Palo Alto
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).
2004 2003
Increase/
( Decrease)
from 2003
Capital Assets
Land and improvements $ 67.8 $ 67.8
Street trees 15.7 15.8 ($ 0.1)
Construction in progress 46.3 33.2 13.1
Buildings and improvements 54.3 54.0 0.3
Equipment 8.1 7.9 0.2
Roadway network 220.3 216.9 3.4
Recreation & open space network 8.8 7.8 1.0
Less accumulated depreciation ( 127.3) ( 120.8) ( 6.5)
Internal Service Fund Assets
Construction in progress 1.9 0.7 1.2
Equipment 31.0 26.0 5.0
Less accumulated depreciation ( 16.9) ( 16.3) ( 0.6)
Total Governmental $ 310.0 $ 293.0 $ 17.0
Land $ 1.5 $ 1.5
Construction in progress 72.1 57.9 $ 14.2
Buildings and improvements 16.9 16.6 0.3
Transmission, Distribution & Treatment Systems 416.4 406.1 10.3
Less accumulated depreciation ( 177.8) ( 166.9) ( 10.9)
Total Business- type $ 329.1 $ 315.2 $ 13.9
CAPITAL ASSETS AT JUNE 30
( in Millions)
Governmental Activities
Business- type Activities
…………………………………………………………………………………………………………………………
City of Palo Alto 17
􀁑 Management Discussion and Analysis
Governmental Activities capital assets net of depreciation, increased by $ 17.0 million compared to
2002- 03. Significant increases occurred in construction in progress ($ 13.1 million) and in the
roadway network ($ 3.4 million). Construction activity is due to the two new downtown parking
structures and roadway improvements as a consequence of the City’s enhanced infrastructure
efforts and additional State funding. Total Business- type activities capital assets net of
depreciation, increased by $ 13.9 million. Areas of increase included construction in progress and
equipment. The increase of $ 14.2 million in construction in progress mainly consisted of $ 3.2
million in the Water Enterprise Fund, $ 2.9 million in the Electric Enterprise Fund, $ 4.8 million in the
Gas Enterprise Fund and $ 2.7 million in the Wastewater Enterprise Collection Fund. The change in
transmission, distribution and treatment systems of $ 10.3 million is comprised mostly of $ 7.4
million in the Electric Enterprise Fund, $ 0.8 million in the Wastewater Treatment Enterprise Fund
and $ 0.8 million in the Gas Enterprise Fund.
During 2003- 04, Palo Alto’s capital improvement projects focused on the completion of the
downtown parking structures as well as continued work on the rehabilitation and replacement of
the City’s General Fund infrastructure. 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.
…………………………………………………………………………………………………………………………
18 City of Palo Alto
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, 2004, the City’s debt comprised:
2004 2003
Increase/
( Decrease)
from 2003
General Long Term Obligations:
1998 Golf Course Certificates of Participation $ 6.0 $ 6.2 ($ 0.2)
2002A Civic Center Refinancing
Certificates of Participation 2.9 3.2 ( 0.3)
2002B Downtown Parking Improvements
Certificates of Participation 3.3 3.4 ( 0.1)
Special Assessment Debt with City Commitment
1978 California Avenue Parking Bonds 0.4 0.5 ( 0.1)
Sub- Total 12.6 13.3 ( 0.7)
Internal Service Long- Term Obligations:
Information Systems Capital Lease Obligations 0.0 0.1 ($ 0.1)
Total Governmental Activity Debt $ 12.6 $ 13.4 ($ 0.8)
Enterprise Long Term Obligations:
Utility Revenue Bonds
1995 Series A $ 6.8 $ 7.1 ($ 0.3)
1999 Refunding 16.0 16.3 ( 0.3)
2002 Series A 23.3 24.0 ( 0.7)
Less: unamortized discount/ issuance cost ( 1.2) ( 1.3) 0.1
Total Business- type Activity $ 44.9 $ 46.1 ($ 1.2)
Governmental Activity Debt:
Business- Type Activity Debt:
LONG- TERM DEBT AT JUNE 30
( in Millions)
The City did not issue new debt in 2003- 04. 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.
…………………………………………………………………………………………………………………………
City of Palo Alto 19
􀁑 Management Discussion and Analysis
In 2001- 02, Standard & Poors ( S& P) reaffirmed the City’s overall AAA rating ( a rating based on
issuing General Obligation bond debt), the highest general city credit rating possible. The City also
received an AA+ rating from S& P Investor Services for its 2002 COPs. The AA+ rating, one notch
below the highest possible AAA rating is considered “ high- quality grade” and works to lower
interest rate and other debt issuance costs. Finally, S& P and Moody’s have given an AA- and Aa3
rating, respectively, to the City’s 2002 Utility Revenue bonds. While at the lower end of the “ high-quality
grade” rating, the rating received is excellent given the volatile utility markets. The rating
agencies are recognizing the City’s strong reserves, solid revenues, and sound management in the
light of significant upheaval in the commodity markets.
Although the past two 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, 2004, a total of $ 0.4
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.
Throughout this analysis, references have been made to two new parking garages funded by
University Avenue Off- Street Parking Assessment District Improvement Bonds. These bonds were
issued in 2000- 01 and in 2001- 02 and the resulting debt is secured only by special assessments on
the real property in the district issuing the debt. The debt is not the City’s responsibility, although
the City does act as these Districts’ agent in the collection and remittance of assessments and
mangers the two parking garages that were opened in 2003.
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).
…………………………………………………………………………………………………………………………
20 City of Palo Alto
Financial Statements
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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.
Both these Statements include the financial activities of the City and the Public Improvement
Corporation, which is a legally separate component unit of the City because it is 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.
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City of Palo Alto 21
􀁑 Basic Financial Statements
……………………………………………………………………………………………………………
22 City of Palo Alto
This page is intentionally left blank.
Basic Financial Statements 􀁑
City of Palo Alto - Statement of Net Assets ……………………
June 30, 2004
( In thousands of dollars)
Governmental Business- type
Activities Activities Totals
ASSETS
Cash and investments ( Note 3) $ 150,155 $ 226,451 $ 376,606
Cash and investments with fiscal agents ( Note 3) 7,447 11,758 19,205
Receivables:
Accounts and intergovernmental 7,947 19,659 27,606
Interest receivable 2,067 2,796 4,863
Loans receivable ( Note 5) 13,235 13,235
Internal balances ( Note 4) 705 ( 705)
Inventory of materials and supplies 2,809 2,809
Capital assets, net of depreciation ( Note 6) 310,016 329,099 639,115
Total assets 494,381 589,058 1,083,439
LIABILITIES
Accounts payable and accrued liabilities 3,729 14,010 17,739
Accrued salaries and benefits 4,136 1,358 5,494
Accrued compensated absences 12,004 12,004
Claims payable ( Note 14) 10,548 10,548
Accrued landfill closure liability ( Note 9) 6,555 6,555
Long- term debt ( Notes 7 and 8)
Due in one year 840 1,367 2,207
Due in more than one year 11,820 43,495 55,315
Total liabilities 43,077 66,785 109,862
NET ASSETS ( Note 10)
Invested in capital assets, net of related debt 297,125 294,197 591,322
Restricted for:
Special revenue programs 17,854 17,854
Capital projects:
Downtown parking structure 1,300 1,300
Other capital projects 9,315 9,315
Debt service 1,948 1,798 3,746
Restricted 30,417 1,798 32,215
Unrestricted net assets 123,762 226,278 350,040
Total net assets $ 451,304 $ 522,273 $ 973,577
See accompanying notes to financial statements
……………….……….…………………………………………………………………………………………….
City of Palo Alto 23
􀁑 Basic Financial Statements
City of Palo Alto - Statement of Activities ……………………………………………………
For the Year Ended June 30, 2004
( 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 $ 269 ($ 269) ($ 269)
City Manager 1,663 ( 1,663) ( 1,663)
City Attorney 2,300 $ 64 ( 2,236) ( 2,236)
City Clerk 808 1 ( 807) ( 807)
City Auditor 668 ( 668) ( 668)
Administrative Services 6,271 815 ( 5,456) ( 5,456)
Human Resources 2,078 ( 2,078) ( 2,078)
Public Works 14,460 260 $ 2,273 $ 1,947 ( 9,980) ( 9,980)
Planning and Community Environment 8,898 3,074 1,035 15 ( 4,774) ( 4,774)
Police 20,414 4,415 315 ( 15,684) ( 15,684)
Fire 17,308 7,565 7 ( 9,736) ( 9,736)
Community Services 20,864 7,846 583 28 ( 12,407) ( 12,407)
Non- Departmental 7,618 ( 7,618) ( 7,618)
Interest on long- term debt 635 ( 635) ( 635)
Total Governmental Activities 104,254 24,040 4,213 1,990 ( 74,011) ( 74,011)
Business- type Activities:
Water 16,047 21,993 $ 5,946 5,946
Electric 73,545 92,617 19,072 19,072
Gas 22,994 24,839 1,845 1,845
Wastewater Collection 9,203 12,647 3,444 3,444
Wastewater Treatment 14,868 14,744 ( 124) ( 124)
Refuse 24,282 21,923 ( 2,359) ( 2,359)
Storm Drainage 2,975 2,170 ( 805) ( 805)
External Services 688 585 ( 103) ( 103)
Total Business- type Activities 164,602 191,518 26,916 26,916
Total $ 268,856 $ 215,558 $ 4,213 $ 1,990 ( 74,011) 26,916 ( 47,095)
General revenues:
Taxes:
Property taxes 13,707 13,707
Sales taxes 18,151 18,151
Utility user's taxes 7,152 7,152
Transient occupancy tax 5,489 5,489
Other taxes and fines 8,493 8,493
Investment earnings 326 387 713
Rents and miscellaneous 10,165 10,165
Transfers 14,951 ( 14,951)
Total general revenues and transfers 78,434 ( 14,564) 63,870
Change in Net Assets 4,423 12,352 16,775
Net Assets- Beginning 446,881 509,921 956,802
Net Assets- Ending $ 451,304 $ 522,273 $ 973,577
See accompanying notes to financial statements
… …………………………………………………………………………………………………………
24 City of Palo Alto
Basic Financial Statements 􀁑
Fund Financial Statements……………………
Introduction
GASB 34 revises the format of the Fund Financial Statements so that only individual major
funds are presented, 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. The
practice of combining like funds and presenting their totals in separate columns ( Combined
Financial Statements) has been discontinued, along with the use of the General Fixed Assets
and General Long- term Debt Groups of Accounts.
Major Governmental Funds
The funds described below were determined to be Major Funds by the City in fiscal year
2003- 04. 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.
Housing In- Lieu Special Revenue Fund
The Housing In- Lieu Special Revenue Fund is used to account for revenues from commercial
and residential developers to provide housing under the City’s Below Market Rate program.
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.
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City of Palo Alto 25
􀁑 Basic Financial Statements
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26 City of Palo Alto
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Basic Financial Statements 􀁑
Balance Sheet - June 30, 2004
( In thousands of dollars)
Housing Capital Other Total
In- Lieu Projects Governmental Governmental
General Fund Fund Funds Funds
Cash and investments ( Note 3):
Available for operations $ 59,779 $ 3,719 $ 15,299 $ 5,024 $ 83,821
Cash and investments with fiscal agent 6,034 1,413 7,447
Receivables
Accounts and intergovernmental 6,848 243 428 7,519
Special Assessment 420 420
Interest receivable 1,239 46 4 71 1,360
Notes receivable ( Note 5) 1,256 7,312 4,667 13,235
Interfund receivables and advances ( Note 4) 439 439
Inventory of materials and supplies 2,506 2,506
Total Assets $ 72,067 $ 11,077 $ 21,580 $ 12,023 $ 116,747
Accounts payable and accrued liabilities $ 1,990 $ 156 $ 478 $ 162 $ 2,786
Accrued salaries and benefits 3,086 69 3,155
Deferred revenue 137 420 557
Interfund payable and advances ( Note 4) 32 311 343
Total Liabilities 5,245 156 547 893 6,841
Reserved for: ( Note 10):
Encumbrances 2,973 940 9,314 796 14,023
Downtown parking structure 1,300 1,300
Notes 1,256 7,312 4,667 13,235
Inventory of materials and supplies 2,506 2,506
Debt service 1,461 1,461
Debt proceeds
Unreserved, designated for:
Special revenue projects 2,625 4,080 6,705
Equity transfer stabilization 2,338 2,338
Reappropriations 401 44 10,419 10,864
Budget stabilization 21,467 21,467
Infrastructure 35,881 35,881
Unreserved undesignated, reported in
Special Revenue Funds 126 126
Total Fund Balances 66,822 10,921 21,033 11,130 109,906
Total Liabilities and Fund Balances $ 72,067 $ 11,077 $ 21,580 $ 12,023 $ 116,747
LIABILITIES
ASSETS
City of Palo Alto - Governmental Funds ………………..…………………..……………
FUND BALANCES
See accompanying notes to financial statements
……………….……….…………………………………………………………………………………………….
City of Palo Alto 27
􀁑 Basic Financial Statements
City of Palo Alto - Governmental Funds ………………..………………….
Reconciliation of Fund Balances to Governmental Activities Net Assets
Governmental fund balances from prior page $ 109,906
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) 310,016
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. 43,802
( Excludes capital assets reported above and debt reported below)
Accrual adjustment to remove deferred revenue from the balance
sheet 420
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) ( 12,840)
Net assets of governmental activities $ 451,304
See accompanying notes to financial statements
June 30, 2004
( In thousands of dollars)
… …………………………………………………………………………………………………………
28 City of Palo Alto
Basic Financial Statements 􀁑
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City of Palo Alto 29
City of Palo Alto - Governmental Funds ………………………………...………..…
Statement of Revenues, Expenditures and
Changes in Fund Balance - For the Year Ended June 30, 2004
( In thousands of dollars)
Housing Capital Other Total
In- Lieu Projects Governmental Governmental
General Fund Fund Funds Funds
REVENUES
Property taxes $ 13,707 $ 13,707
Special assessments $ 196 196
Sales taxes 18,151 18,151
Utility users' tax 7,152 7,152
Transient occupancy tax 5,489 5,489
Other taxes and fines 11,328 1,146 12,474
Charges for services 16,018 16,018
From other agencies 444 $ 3,389 828 4,661
Permits and licenses 2,563 2,563
Investment earnings ( 120) $ 40 80 8 8
Rental income 11,472 8 11,480
Other revenue ( 23) 381 24 1,291 1,673
Total Revenues 86,181 429 3,493 3,469 93,572
EXPENDITURES
Current operations:
City Council 269 269
City Manager 1,643 1,643
City Attorney 2,291 2,291
City Clerk 819 819
City Auditor 668 668
Administrative Services 6,059 6,059
Human Resources 2,113 2,113
Public Works 8,031 8,031
Planning and Community Environment 8,037 175 581 8,793
Police 19,856 106 19,962
Fire 16,891 16,891
Community Services 19,934 19,934
Non- Departmental 7,573 84 ( 59) 7,598
Capital outlay 181 22,108 22,289
Debt service:
Principal payments 780 780
Interest and fiscal fees 639 639
Total Expenditures 94,365 259 22,108 2,047 118,779
( 8,184) 170 ( 18,615) 1,422 ( 25,207)
OTHER FINANCING SOURCES ( USES)
Transfers in ( Note 4) 17,888 9,670 1,074 28,632
Transfers ( out) ( Note 4) ( 9,189) ( 6,101) ( 3,843) ( 19,133)
Total Other Financing Sources ( Uses) 8,699 3,569 ( 2,769) 9,499
Net change in fund balances 515 170 ( 15,046) ( 1,347) ( 15,708)
Fund balances at beginning of year 66,307 10,751 36,079 12,477 125,614
Fund balances at end of year $ 66,822 $ 10,921 $ 21,033 $ 11,130 $ 109,906
EXCESS ( DEFICIENCY) OF REVENUES OVER
EXPENDITURES
See accompanying notes to financial statements
􀁑 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, 2004
( In thousands of dollars)
Net change in fund balances- total governmental funds ($ 15,708)
18,057
( 6,575)
Fund balance is increased by the amount of debt repayment 780
10
Deferred revenue ( 165)
8,024
Change in net assets of Governmental Activities $ 4,423
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
$ 2,234 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
… …………………………………………………………………………………………………………
30 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, 2004
( In thousands of dollars)
Variance from
Budgeted Amount Final Budget
Actual Amount Positive
Adopted Adjusted Budgetary Basis ( Negative)
REVENUES
Property taxes $ 13,556 $ 14,100 $ 13,740 ($ 360)
Sales taxes 19,335 17,400 18,151 751
Utility users' tax 7,498 7,300 7,152 ( 148)
Transient occupancy tax 6,300 5,549 5,489 ( 60)
Other taxes, fines & penalties 6,724 9,305 11,295 1,990
Charges for services 17,678 17,755 16,018 ( 1,737)
Permits and licenses 4,721 3,403 2,560 ( 843)
Charges to other funds 8,816 9,396 9,309 ( 87)
Rental income 11,658 11,658 11,472 ( 186)
Other revenues 10,462 6,967 2,225 ( 4,742)
Transfers in 14,476 14,383 17,888 3,505
Prior year encumbrance and reappropriations 4,279 4,279
Total Revenues 121,224 121,495 119,578 ( 1,917)
EXPENDITURES
Current operations:
Administrative Departments 14,738 16,595 15,902 693
Community Services 24,946 25,660 24,273 1,387
Fire 18,917 19,054 18,979 75
Planning and Community Environment 8,946 10,309 9,313 996
Police 23,609 23,999 22,282 1,717
Public Works 11,348 11,634 10,517 1,117
Non- Departmental 6,459 6,242 7,677 ( 1,435)
Transfers out 11,747 7,403 9,180 1,777
Total Use of Funds 120,710 120,896 118,123 6,327
EXCESS OF REVENUES - BUDGETARY BASIS $ 514 $ 599 1,455 $ 856
Adjustments to Budgetary Basis:
Current year encumbrance/ reappropriations 3,244
Prior year encumbrance/ reappropriations ( 4,289)
Current year stores adjustment, net ( 14)
Prior year stores adjustment 119
EXCESS OF REVENUES - GAAP BASIS 515
Fund balances at beginning of year 66,307
Fund balances at end of year, GAAP basis $ 66,822
See accompanying notes to financial statements
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City of Palo Alto 31
􀁑 Basic Financial Statements
……………………………………………………………………………………………………………
32 City of Palo Alto
City of Palo Alto - Housing In- Lieu Special Revenue Fund ………………
Statement of Revenues, Expenditures and Changes in Fund Balance
Budget and Actual - For the Year Ended June 30, 2004
( In thousands of dollars)
Variance from
Budgeted Amount Final Budget
Actual Amount Positive
Adopted Adjusted Budgetary Basis ( Negative)
REVENUES
Return on investment $ 224 $ 224 $ 40 $ 184
Rental income 9 9 8 1
Other revenues
Housing In- Lieu - residential 200 200 284 ( 84)
Housing In- Lieu - commercial 50 50 61 ( 11)
Other fees 36 ( 36)
Transfers in 150 150
Total Revenues 483 633 429 204
EXPENDITURES
Current operations:
Planning and Community Environment 99 368 175 193
Non- Departmental 241 13 84 ( 71)
Transfers out 150 ( 150)
Total Use of Funds 340 531 259 ( 28)
EXCESS OF REVENUES $ 143 $ 102 170 $ 68
Fund balances at beginning of year 10,751
Fund balances at end of year, GAAP basis $ 10,921
See accompanying notes to financial statements
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 concept of Major Funds established by GASB Statement 34 extends to Enterprise Funds.
The City has elected to treat all of its Enterprise Funds as Major Funds in fiscal year 2003- 04.
GASB 34 does not provide for the disclosure of budget versus actual comparisons for the
Proprietary Funds.
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.
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City of Palo Alto 33
􀁑 Basic Financial Statements
City of Palo Alto - Proprietary Funds ………………………
Statement of Net Assets - June 30, 2004
( In thousands of dollars)
Wastewater
Water Electric Gas Collection
Current Assets:
Cash and investments ( Note 3):
Available for operations $ 16,827 $ 158,325 $ 14,525 $ 12,643
Cash and investments with fiscal agent 5,782 5,812
Accounts receivable, net 3,185 8,983 1,708 1,435
Interest receivable 207 1,959 188 146
Inventory of materials and supplies
Total Current Assets 26,001 169,267 22,233 14,224
Noncurrent Assets:
Interfund receivable ( Note 4)
Capital assets ( Note 6) 43,603 132,949 52,592 47,596
Total Noncurrent Assets 43,603 132,949 52,592 47,596
Total Assets 69,604 302,216 74,825 61,820
Current Liabilities:
Accounts payable and accrued liabilities 1,647 10,305 1,160 490
Accrued salaries and benefits 172 516 191 83
Interfund payable ( Note 4)
Current portion of revenue bonds ( Note 7) 313 382 49
Current portion of capital lease ( Note 7)
Accrued claims payable - current ( Note 14)
Total Current Liabilities 2,132 10,821 1,733 622
Noncurrent liabilities:
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 10,034 12,242 1,476
Total Noncurrent Liabilities 10,034 12,242 1,476
Total Liabilities 12,166 10,821 13,975 2,098
Invested in capital assets, net of related debt 38,261 132,949 44,831 46,071
Restricted for debt service ( Note 10) 777 949
Unrestricted ( Note 10) 18,400 158,446 15,070 13,651
Total Net Assets $ 57,438 $ 291,395 $ 60,850 $ 59,722
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
…
… …………………………………………………………………………………………………………
34 City of Palo Alto
Basic Financial Statements 􀁑
………………………………………………………………
Governmental
Activities -
Wastewater Storm External Internal Service
Treatment Refuse Drainage Service TOTALS Funds
$ 10,230 $ 13,103 $ 775 $ 23 $ 226,451 $ 66,334
164 11,758
1,705 2,148 260 235 19,659 8
134 161 5 ( 4) 2,796 707
303
12,233 15,412 1,040 254 260,664 67,352
132
31,523 5,200 15,636 329,099 15,870
31,523 5,200 15,636 329,099 16,002
43,756 20,612 16,676 254 589,763 83,354
98 233 77 14,010 601
218 116 39 23 1,358 981
228 228
318 305 1,367
25
3,143
634 349 421 251 16,963 4,750
12,004
7,405
6,555 6,555
9,405 10,338 43,495
9,405 6,555 10,338 50,050 19,409
10,039 6,904 10,759 251 67,013 24,159
21,892 5,200 4,993 294,197 15,845
72 1,798
11,753 8,508 924 3 226,755 43,350
$ 33,717 $ 13,708 $ 5,917 $ 3 522,750 $ 59,195
( 477)
$ 522,273
Business- type Activities- Enterprise Funds
……………….……….…………………………………………………………………………………………….
City of Palo Alto 35
􀁑 Basic Financial Statements
City of Palo Alto - Proprietary Funds ………………………………………………
For the Year Ended June 30, 2004
( In thousands of dollars)
Wastewater
Water Electric Gas Collection
OPERATING REVENUES
Sales of utilities:
Customers $ 20,345 $ 66,739 $ 23,294 $ 11,984
City departments 1,040 2,048 868 204
Wholesale 4,424
Excess capacity 11,114
Wastewater treatment
Service connection charges and miscellaneous 179 558 347 37
Charges for services
Other operating revenues 429 7,734 330 422
Total Operating Revenues 21,993 92,617 24,839 12,647
OPERATING EXPENSES
Purchase of utilities
Retail 7,453 34,299 15,878 5,304
Excess Capacity 7,022
Administration and general 2,627 5,008 2,421 1,027
Engineering ( operating) 335 882 148 124
Resource management and energy efficiency programs 261 5,046 1,128
Operations and maintenance 3,184 8,168 2,140 1,537
Rent 1,257 3,025 138 73
Depreciation and amortization 919 5,230 1,156 1,076
Claims payments and changes in
estimated self- insurance liability
Compensated absences and other benefits
Total Operating Expenses 16,036 68,680 23,009 9,141
Operating Income 5,957 23,937 1,830 3,506
NONOPERATING REVENUES ( EXPENSES)
Return on investment 23 252 181 30
Interest ( expense) ( 2) ( 3) ( 81)
Joint venture debt service ( Note 15) ( 4,744)
Gain ( loss) on disposal of fixed assets ( 2) ( 66) ( 5)
Other
Net Nonoperating Revenues ( Expenses) 19 ( 4,558) 173 ( 51)
Income ( Loss) Before Contributions and Transfers 5,976 19,379 2,003 3,455
Contribution of assets
Transfers in ( Note 4) 19 1,020 172 1
Transfers ( out) ( Note 4) ( 2,811) ( 9,521) ( 3,534) ( 135)
Change in Net Assets 3,184 10,878 ( 1,359) 3,321
Total net assets at beginning of year 54,254 280,517 62,209 56,401
Total net assets at end of year $ 57,438 $ 291,395 $ 60,850 $ 59,722
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
… …………………………………………………………………………………………………………
36 City of Palo Alto
Basic Financial Statements 􀁑
……….………….…………………………………………………
Governmental
Activities -
Wastewater Storm External Internal Service
Treatment Refuse Drainage Service TOTALS Funds
$ 17,923 $ 2,033 $ 142,318
$ 5,363 846 121 10,490
4,424
11,114
9,114 9,114
1,121
$ 47,382
267 3,154 16 $ 585 12,937
14,744 21,923 2,170 585 191,518 47,382
8,356 71,290
7,022
1,733 1,468 513 14,797 10,191
924 473 512 3,398
89 6,524
9,113 9,289 617 657 34,705 2,676
4,289 8,782
2,515 226 555 11,677 2,234
6,951
27,113
14,285 24,101 2,286 657 158,195 49,165
459 ( 2,178) ( 116) ( 72) 33,323 ( 1,783)
( 16) ( 83) 1 ( 1) 387 318
( 196) ( 386) ( 657) ( 1,325) ( 6)
( 4,744)
( 73) 114
165
( 212) ( 469) ( 656) ( 1) ( 5,755) 591
247 ( 2,647) ( 772) ( 73) 27,568 ( 1,192)
3,498
1 91 311 45 1,660 5,553
( 120) ( 449) ( 41) ( 16,611) ( 101)
128 ( 3,005) ( 502) ( 28) 12,617 7,758
33,589 16,713 6,419 31 51,437
$ 33,717 $ 13,708 $ 5,917 $ 3 $ 59,195
( 265)
$ 12,352
Business- type Activities- Enterprise Funds
……………….……….…………………………………………………………………………………………….
City of Palo Alto 37
􀁑 Basic Financial Statements
City of Palo Alto - Proprietary Funds ………………………………………………
Statement of Cash Flows -
For the Year Ended June 30, 2004
( In thousands of dollars)
Wastewater
Water Electric Gas Collection
CASH FLOWS FROM OPERATING ACTIVITIES:
Receipts from customers $ 19,918 $ 90,604 $ 24,589 $ 11,961
Payments to suppliers ( 12,044) ( 52,272) ( 19,639) ( 6,922)
Payments to employees ( 2,455) ( 4,492) ( 2,230) ( 944)
Internal activity - receipts from other funds 1,040 2,048 868 204
Claims paid
Other receipts ( payments) 429 330 422
Net Cash From Operating Activities 6,888 35,888 3,918 4,721
CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES:
Interfund receipts ( payments)
Transfers in 19 1,020 172 1
Transfers ( out) ( 2,811) ( 9,521) ( 3,534) ( 135)
Net Cash From Noncapital Financing Activities ( 2,792) ( 8,501) ( 3,362) ( 134)
CASH FLOWS FROM CAPITAL FINANCING ACTIVITIES:
Acquisition and construction of fixed assets ( 4,076) ( 10,327) ( 6,264) ( 3,248)
Proceeds from sale of capital assets
Principal paid on long- term debt ( 296) ( 360) ( 33)
Interest paid on long- term debt ( 2) ( 4,744) ( 3) ( 81)
Cash Flows From Capital Financing Activities ( 4,374) ( 15,071) ( 6,627) ( 3,362)
CASH FLOWS FROM INVESTING ACTIVITIES:
Interest on investments 37 218 258 23
Net Cash Flows ( 241) 12,534 ( 5,813) 1,248
Cash and cash equivalents at beginning of year 22,850 145,791 26,150 11,395
Cash and cash equivalents at end of year $ 22,609 $ 158,325 $ 20,337 $ 12,643
FINANCIAL STATEMENT PRESENTATION:
Cash and investments available for operations $ 16,827 $ 158,325 $ 14,525 $ 12,643
Cash and investments with fiscal agent 5,782 5,812
Cash and cash equivalents at end of year $ 22,609 $ 158,325 $ 20,337 $ 12,643
Reconciliation of operating income ( loss) to Cash Flows from Operating Activities
Operating income ( loss) $ 5,957 $ 23,937 $ 1,830 $ 3,506
Depreciation and amortization 919 5,230 1,156 1,076
Other
Changes in assets and liabilities:
Accounts receivable ( 606) 35 948 ( 60)
Inventory of materials and supplies
Accounts and other payables 618 6,686 ( 16) 199
Accrued claims payable and other liabilities
Net Cash From Operating Activities $ 6,888 $ 35,888 $ 3,918 $ 4,721
Capital Asset contributions
Business- type Activities- Enterprise Funds
Adjustments to reconcile operating income ( loss) to cash
flows from operating activities:
See accompanying notes to financial statements
… …………………………………………………………………………………………………………
38 City of Palo Alto
Basic Financial Statements 􀁑
………………………………………………………………..
Governmental
Activities -
Wastewater Storm External Internal Service
Treatment Refuse Drainage Service TOTALS Funds
$ 7,409 $ 18,051 $ 2,074 ($ 89) $ 174,517 $ 47,380
( 10,098) ( 22,290) ( 1,218) ( 657) ( 125,140) ( 2,120)
( 1,515) ( 1,352) ( 474) 23 ( 13,439) ( 38,068)
5,363 846 121 10,490
( 5,656)
267 3,263 16 585 5,312 165
1,426 ( 1,482) 519 ( 138) 51,740 1,701
113 113 123
1 91 311 45 1,660 5,553
( 120) ( 449) ( 41) ( 16,611) ( 101)
( 119) ( 358) 270 158 ( 14,838) 5,575
( 1,602) ( 40) ( 105) ( 25,662) ( 4,219)
114
( 260) ( 258) ( 1,207) ( 32)
( 196) ( 386) ( 657) ( 6,069) ( 6)
( 2,058) ( 426) ( 1,020) ( 32,938) ( 4,143)
3 ( 43) 9 3 508 357
( 748) ( 2,309) ( 222) 23 4,472 3,490
11,142 15,412 997 233,737 62,844
$ 10,394 $ 13,103 $ 775 $ 23 $ 238,209 $ 66,334
$ 10,230 $ 13,103 $ 775 $ 23 $ 226,451 $ 66,334
164 11,758
$ 10,394 $ 13,103 $ 775 $ 23 $ 238,209 $ 66,334
$ 459 ($ 2,178) ($ 116) ($ 72) $ 33,323 ($ 1,783)
2,515 226 555 11,677 2,234
165
( 1,705) 128 41 ( 89) ( 1,308) ( 2)
61
157 233 39 23 7,939 ( 269)
109 109 1,295
$ 1,426 ($ 1,482) $ 519 ($ 138) $ 51,740 $ 1,701
$ 3,498
Business- type Activities- Enterprise Funds
……………….……….…………………………………………………………………………………………….
City of Palo Alto 39
􀁑 Basic Financial Statements
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… …………………………………………………………………………………………………………
40 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 41
􀁑 Basic Financial Statements
……………………………………………………………………………………………………………
42 City of Palo Alto
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Basic Financial Statements 􀁑
City of Palo Alto - Fiduciary Funds …………………
Statement of Fiduciary Net Assets - June 30, 2004
( In thousands of dollars)
Agency
Funds
ASSETS
Cash and investments available for operations ( Note 3) $ 1,334
Cash and investments with fiscal agents ( Note 3) 5,604
Interest receivable 72
Total Assets $ 7,010
LIABILITIES
Due to bondholders $ 5,970
Due to other governments 1,040
Total Liabilities $ 7,010
See accompanying notes to financial statements
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City of Palo Alto 43
􀁑 Basic Financial Statements
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… …………………………………………………………………………………………………………
44 City of Palo Alto
Notes
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Notes to Basic Financial Statements 􀁑
Index………………………………………………
Page
1. Summary of Significant Accounting Polices 47
2. Budgets and Budgetary Accounting 52
3. Cash and Investments 53
4. Interfund Transactions 57
5. Notes and Loans Receivable 60
6. Capital Assets 64
7. General Long- Term Obligations 69
8. Special Assessment Debt 73
9. Landfill Closure and Post- closure Care 75
10. Net Assets and Fund Balances 76
11. Pension Plans 79
12. Retiree Health Benefits 82
13. Deferred Compensation Plan 83
14. Risk Management 83
15. Joint Ventures 85
16. Commitments and Contingencies 89
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.
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City of Palo Alto 45
􀁑 Notes to Basic Financial Statements
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… ………………………………………………………………………………………………
46 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.
The accompanying financial statements are presented on the basis set forth in GASB Statements No. 34,
Basic Financial Statements— and Management’s Discussion and Analysis— for State and Local Governments, No.
36, Recipient Reporting for Certain Non- exchange Revenues, an Amendment of GASB Statement No. 33, No. 37,
Basic Financial Statements— and Management’s Discussion and Analysis— for State and Local Governments;
Omnibus, and No. 38, Certain Financial Statement Note Disclosures.
……….…………………………………………………………………………………………..
City of Palo Alto 47
􀁑 Notes to Basic Financial Statements – Note 1
These Statements 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
GASB Statement 34 defines Major Funds and requires that the City’s Major Governmental and
Business- type Funds 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.
Housing In- Lieu Fund - This fund accounts for revenues from commercial and residential developers to
provide housing under the City’s Below Market Rate program.
48 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 Services 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 when the amount of actual benefits exceed
one and one— half percent of the City’s gross payroll cost in any fiscal period.
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 four agency funds.
……….…………………………………………………………………………………………..
City of Palo Alto 49
􀁑 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.
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 $ 8.547 million, and
vested accumulated sick pay of $ 3.457 million as of June 30, 2004.
……………..…………………………………………………………………………………………..
50 City of Palo Alto
Notes to Basic Financial Statements – Note 1 􀁑
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.
New Funds
Downtown Business Improvement District Fund was established to account for the activities of the Palo
Alto Downtown Business Improvement District, which was established to enhance the viability of the
downtown business district.
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 51
􀁑 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