Palo Alto's economic recovery may be in full bloom, but city leaders offered plenty of reasons for caution Monday, including uncertainties over labor negotiations, infrastructure needs and lease negotiations over Cubberley Community Center.
Each of these wildcards clouds an otherwise bright picture in the city's latest Long Term Financial Forecast, an annual report that presents a snapshot of the city's economic health. The report, which covers the period of 2014-24, estimates that the city will have a surplus in each of these years and that these surpluses will range from $1.9 million to $8.9 million. This will result in a cumulative surplus of $47.5 million, according to the forecast.
The optimistic assumptions are based on positive trends in just about every major revenue category, including sales, property and hotel taxes. The forecast shows the city's revenues gradually increasing from $166.3 million in the current fiscal year to $225.5 million. Hotel taxes are expected to grow particularly fast in the next two years thanks to new hotels such as the Epiphany on Hamilton Avenue and the Hilton at the former site of Palo Alto Bowl. The forecast shows transient-occupancy taxes growing by 14.1 percent this year, by 14.9 percent in 2015 and by 16.5 percent in 2016 before the numbers begin tapering off toward a more moderate increase of about 5 percent. Projections show the revenues from hotel taxes growing from $11.5 million this year to $25.7 million in 2024.
Property taxes are also expected to continue their upward march. The new forecast shows them increasing by more than 5 percent annually over the next decade, going from $29.6 million this year to $51.1 million in 2024. Sales taxes are expected to rise over the same period from $23.8 million to $31.8 million.
Yet the good news comes with a long list of caveats and qualifiers. Expenditures on employee salaries and benefits are expected to steadily rise in the General Fund, going from $99.6 million in 2014 to $141.3 million. This does not even take into account the city's new agreement with its largest union, the Service Employees International Union, Local 521. The contract grants the workers a 4.5 percent increase over two years (2 percent in the first and 2.5 percent in the second), along with additional raises for hundreds of workers based on the median market rates for their positions. Some employees in the Utilities and Public Works departments received raises of more than 14 percent, reflecting the city's difficulty in retaining and recruiting workers for specialized positions.
The forecast shows salaries increasing by 8.2 percent this year before settling into modest increases ranging from 0.26 percent in 2015 to 1.9 percent each year between 2016 and 2024. Overall, the total the city expects to spend on salaries in the General Fund (which does not include utilities) is projected to go up from $62.7 million in 2014 to $74.7 million in 2024.
The report acknowledges that future negotiations with labor unions can significantly shift these figures. It notes that any additional cost beyond the 2 percent projected increase in salary and benefits, unless offset with other savings, will result in additional costs to the General Fund. Other factors that could cut into Palo Alto's economic prosperity include the rising costs of retiree health care; costs relating to the city's takeover of the Palo Alto Airport from Santa Clara County; possible changes to the city's fire-protection agreement with Stanford University; lease negotiations with the school district over Cubberley Community Center and broader changes in the local, state and regional economies.
At the same time, the council is looking at a long list of infrastructure projects it hopes to build in the coming years, including new police headquarters, two fire stations and a host of bike improvements.
Given these uncertainties and obligations, the council was tempered in its celebration of the city's financial upswing during its Monday meeting discussion.
"The report looks very positive, which is great, but there's still a lot of things that we want to get accomplished that we haven't found the funding sources for," said Councilman Marc Berman, who chairs the council's Finance Committee.
His colleagues agreed. Councilman Larry Klein noted that as recently as 2009, the city's long-term financial projections showed a decade of deficits. Happily, those projections didn't bear out, but they further underscored the difficulty of predicting the future beyond a year or two.
"If it changed one way, it can change the other way," Klein said. "I feel good about where we are but it's really with several grains of salt, because that's the way this goes."
City Manager James Keene agreed and said that while a 10-year forecast is a valuable tool for planning, he doesn't have much confidence in it beyond two or three years.
"All we need is a couple of swings and the whole line tips," Keene said.