A surging economy and an expected influx of revenue from new hotels have prompted Palo Alto officials to predict a decade of budget surpluses, provided things like labor negotiations and another economic downturn don't get in the way, according to a financial forecast the city released Wednesday.
The new Long Range Financial Forecast further underscores the dramatic turnaround Palo Alto has undergone since the economic downturn of late 2008 and 2009. The forecast, which covers the years between 2015 and 2024, predicts that the tax revenue over this decade will exceed that of the prior forecast (which covered 2014 to 2023) by $106.7 million. It assumes improvements in almost all tax categories, including sales, hotel and property taxes.
The forecast predicts good news both in the near and the long term. In fiscal year 2014, which ends on June 30, the staff has revised its revenue projections from $83.8 million to $90.8 million, with the greatest upward shift coming in the sales-tax category. Overall, revenues are then expected to grow moderately every year (by around 4 percent), reaching $133.7 million in 2024.
Hotel taxes are expected to contribute mightily to the new bounty, with newcomers such as the Epiphany Hotel on Hamilton Avenue and Hilton Homewood Suites (at the site of the former Palo Alto Bowl along El Camino Real) expected to inject fresh revenues into the city's coffers. The city is predicting a 14.1 percent growth in transient-occupancy tax (hotel tax) revenues in 2014, a 15 percent growth in 2015 and 16 percent growth in 2016. After that, hotel-tax revenues are expected to grow at a more moderate rate, slightly above 5 percent per year.
Sales tax revenues have also seen a major upward shift since the recession, going from $17.9 million in fiscal year 2010 to a projected total of $27.4 million in 2014. In the last two years, however, growth has been more modest and staff warns in the new forecast that "marked year-over-year increases in this category are not sustainable." It notes that revenues from electronics firms and auto dealerships have "fallen significantly," though restaurants and apparel stores have shown increases.
Though the report offers plenty of good news, it also doesn't take into account numerous factors that could cloud the financial picture. Financial wildcards that are not being considered in the projections include labor negotiations; changes in how much the city has to spend on retiree health care; potential dedication of hotel taxes to an infrastructure project such as a new public-safety building; and changes in the local, regional and national economy.
Even with these unknowns, the forecast assumes "a continued, gradual growth of the national economy with positive impacts to the local economy."
"The positive impacts from an improving national and state economy, as outlined above, have been especially apparent at the local level," a report from the Administrative Services Department states. "Silicon Valley employment is robust, with unemployment rates in the region lower than both the national and state averages."
The report notes that the city's employment rates "significantly outperform" both San Jose and San Francisco. In October 2013, Palo Alto's unemployment rate was 3.4 percent, compared to San Jose's 7.1 percent and San Francisco's 5.4 percent. Barring changes related to labor negotiations, city staff projects $5.9 million in excess revenues and expenditure savings in the general fund for fiscal year 2014.