Palo Alto Weekly

News - February 19, 2010

Palo Alto braces for ballooning budget gaps

Flagging sales figures, slumping state economy blamed for city's bleak financial future

by Gennady Sheyner

Palo Alto's annual budget deficit will more than triple over the next decade if the city doesn't slash its services or find significant new revenue sources, a financial forecast shows.

The new document, which the City Council's Finance Committee discussed Tuesday night, projects that the deficit in Palo Alto's general fund will balloon from $6.4 million in fiscal year 2011 to $19.6 million in 2020 if the city doesn't reduce costs or find new revenue sources.

The general fund, which pays for most basic city services, also faces a $6.3 million shortage in the fiscal year 2010, which ends June 30. City officials raised the projected 2010 budget deficit from $5.4 million to $6.3 million this month because of continuing decline in sales-tax revenues.

On Tuesday, city officials proposed to close the 2010 gap through a combination of fund transfers, savings from vacant positions and one-time cost reductions. This allows the city to postpone making major "structural" (more permanent) cuts until the next year.

But council members also agreed that bigger structural changes would need to be made in future years to contain Palo Alto's spiraling deficit. Councilman Greg Scharff was one of several committee members to argue Tuesday that program cuts alone won't achieve the balanced budgets — new revenue sources will be equally critical.

"The cuts you're making in 2012, 2013 through 2020 — you can't make those kinds of cuts every year and survive as a city," Scharff said. "You can't tax your way out of this. You need some growth in sales tax and property tax."

The projections assume scant economic growth in the next few years. A report from the city's Administrative Services Department restates that California's slumping economy and high unemployment rate have walloped the local economy.

In 2009, Palo Alto's sales revenues dropped by $2.9 million, or 14 percent, while hotel-tax revenues dropped by $500,000, or 7 percent. On the upside, the city's share of property-tax revenues rose by $300,000 and its documentary-transfer taxes went up by $200,000 (increases of 1.3 percent and 5 percent, respectively).

Even if Palo Alto's financial fortunes improve city officials will need to rethink its services and employee-compensation packages, the report stated.

"Furthermore, even when the local recovery takes hold, the traditional revenue sources will not sustain the current array of city services, employee salaries and benefits, and extensive infrastructure," Senior Financial Analyst Nancy Nagel wrote in the report.

"Thus the city will need to trim its service offerings, find new sources of revenue, or continue to prune the benefits packages offered to its employees in an equitable manner."

Councilman Larry Klein challenged some of the numbers in the long-term forecast, particularly its assumptions that salaries will continue to climb by about 4 percent even during a dismal economy. Klein said the city should only assume salary growth if it has an accompanying growth in revenues.

"I don't think any City Council will allow those increases at the same time they cut programs," Klein said. "It's much more reasonable to assume if revenues go down significantly, the (salary) payments will go down significantly."

The new long-term forecast shows the city's infrastructure backlog swelling to $510 million. This includes a $302 million backlog in maintenance for existing city structures and $208 million backlog for replacing and updating facilities.

The full council will discuss the long-term budget projections on March 29, at which time staff plans to lay out a list of possible cost-saving measures. City officials also plan to hold a series of community meetings in late March and April to assess community feeling about the city's financial outlook and possible cutbacks or fee increases in services and programs.

City Manager James Keene said he plans to talk to local neighborhood associations in the coming months about possible cuts. The council's Policy and Services Committee also plans to participate in the process of prioritizing the city's programs and services.

Keene is scheduled to present what he called a "trial budget" for fiscal year 2010 to the council on April 26. The budget would then be revised and adopted by the council on June 28.

"It's clear that there's no escape from difficult long-term choices," Keene said.

"That's the whole point of this."

Staff Writer Gennady Sheyner can be e-mailed at gsheyner@paweekly.com.

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