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How to fix our $5 million budget deficit

Original post made by Bern Beecham, Downtown North, on Jun 10, 2006

Three major budget problems will take $7 million or more from our 2007-08 general fund budget. Our "surplus" for the coming year is $1.7 million. But next year's budget will be deep in the red. We can cut staff and services again – this time more severely than in the past -- or we can increase our revenue base.

Last November, based on recommendations from task forces on retail retention and enhancement, we proposed a three-year multi-element plan to enhance city revenues. We need this plan now more than ever to avoid further, deeper budget cuts.

Here's what we need to do:

1. Work with Stanford Shopping Center, now managed by Simon Property Group, to increase their total taxable sales by 30% or more.
2. Ensure that our auto dealers stay in town and successfully compete with larger franchises. The right solution could double our $2 million in auto sales taxes. With no solution, we will lose our dealerships over time, for a negative budget swing of $4 million a year.
3. Provide incentives to attract one or more hotels, partially offsetting the loss of revenue and services from the closure of Rickey's Hyatt.
4. Open discussions with Fry's to ensure they stay. Our Palo Alto store is their oldest and smallest. A reasonable reinvestment in this keystone operation could increase sales tax revenues by up to 50%.
5. Create new revenue opportunities in collaboration with major corporations in Stanford Research Park. Few of them maintain sales offices here so they provide negligible revenue to us. Our business-to-business sales tax revenues significantly lag those in other cities.
6. Focus new energy on our two downtowns, especially California Avenue. Upgraded streetscapes can enhance these shopping and dining centers. We need to ensure the prosperity of both.

We've already initiated work on most of these items. On budget night this Monday, it will be time to take strong, positive control of our revenue future. We must develop a comprehensive revenue strategy that addresses the magnitude of our growing revenue shortfall and establishes a series of specific objectives for potential increases. Finally, we must prepare a clear, actionable and measurable implementation plan, dedicating sufficient resources for this purpose to meet our long-term revenue needs.

(Editor's Note: Bern Beecham is a member of the Palo Alto City Council)

Comments (5)

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Posted by Al
a resident of Crescent Park
on Jun 10, 2006 at 11:28 pm

I could not agree more with Mr. Beecham's comments on fixing the city budget! We need to attract more retail to Palo Alto. Look at the cities around us. Take a drive to Morgan Hill or Gilroy. They still have that "bedroom community feel", but have built up their freeway areas with big retail, hotels, auto dealers. Palo Alto is a great city, but it needs to change it's way of doing business before it is to late.


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Posted by Ted Mulvaney
a resident of Barron Park
on Jun 12, 2006 at 8:08 am

I don't want to belittle Mr. Beecham's suggestions for increasing city revenues (though I don't agree with all of them), but I am concerned at the short shrift he gives to reducing expenditures. Here's what he has to say:

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I'm not entirely certain why the $1.7 million surplus is enclosed in quotation marks -- perhaps it is an imaginary pile of money. Setting that aside, Mr. Beecham suggests that cutting staff and services is akin to getting blood from a stone, and anything along those lines would be "severe." Out of curiosity, I downloaded some of the recent budgets to find out exactly how draconian we had been in our previous cuts. Here's what I found:
In the 2006-07 budget (General Fund Expenditures): "Total General Fun expense is projected to be $127.4 million [...] a $2.1 million increase from 2005-2006 adjusted budget figures. The main elements of these changes include: [...] $2.0 million increase for salary and benefit-related expenses..."

Which is to say that we cut so severely in the past that we only increased the budget by $2 million! Thank heavens for thrift.

I was also struck by the "adjusted budget" reference. Looking at the initial (I suppose, unadjusted) budget, the plan called for $120.8 million in General Fund expenditures. Which means that the 2006-07 budget is actually $6.6 million more than the original 2005 budget (not the $2.1 mentioned). And this is just in the General Fund -- I won't pretend to understand all the odd shuffling that goes on between the General and Operating funds.

Before we let the City Council get into the business of choosing business models (i.e., hotels and car dealerships) to support (read: benefit from tax money), I suggest we ask them to set some spending limits like population growth + inflation. Perhaps we already have such limits?


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Posted by Paul Losch
a resident of Community Center
on Jun 12, 2006 at 10:16 am

I wish more members of our community would take a multi-year view of our budget challenges and realize that Council Member Beecham's clarion call looks at both our current finances and where they are headed in the future. Here are two cost realities that we will face for years to come:

1. Our aged infrastructure of streets, sidewalks, irrigation, medians, parks, trails, etc. is reaching the end of its useful life, and it will require increasing funds to keep it intact and in some cases upgraded when replaced. This is a 9 figure (that is, over $100 million, some estimates are as high as $200 million) issue that will require many years and many dollars to address. These things don't get done by magic, and a great deal of staff time and staff labor goes into this type of work. I am yet to hear anyone in the community advocating that we save money by delaying or curtailing upkeep and upgrade of our basic infrastructure, but that is what is happening as a result of the budget contraints we already face.

2. Like it or not, Palo Alto, like cities, counties, and state agencies all over California, are facing an increasing retirement fund obligation for those employees who put their years of service to Palo Alto, with an understanding that they would receive in retirement a certain amount of money--it was part of the compensation package they signed up for when they worked for the community. These are people who served at all job levels, most did not earn large salaries as employees. We could lay off every employee in Palo Alto tomorrow, and this retirement obligation would continue to grow for a number of years to come, until restructured compensation and retirement plans start to apply to employees whose retirement is many years away.

These two matters alone amount to tens of millions of dollars of costs Palo Alto cannot wish away. While reasonable people can have different opinions about what a million or 2 million dollars of a budget is all about, I fear it misses a much larger point, one I believe Council Member Beecham is trying to bring to the community's attention.


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Posted by Keith Ferrell
a resident of Southgate
on Jun 13, 2006 at 8:35 pm

Beecham, and the rest of council, talk all the time about retaining/attracting retail, but what happens when the city loses retail, what goes up in its place? Housing? Housing, not only brings zero money in to the city, but it also puts increased pressure and adds costs to the services and infrastructure. Are these economically smart decisions? Our parks are falling apart, our streets need repair, the police building is bursting at the seams, and the city decides to put more people in those parks, and on those roads. They say those people will buy goods in Palo Alto to increase the sales tax base. But, there are fewer places to go to buy goods. Most of the people in Palo Alto, go to Mountain View and Menlo Park to shop. Heck, the PA Fire department is at the MP Safeway all the time! Downtown is filled with rug stores and drug stores. If the city were serious about increasing revenues, then they'd allow someone to build a decent grocery store instead of these little 20,000 square foot specialty stores. Let's see what happens to the PA Whole Foods when the 50,000 sf one opens up in Los Altos later this year. I know a lot of people who will be going there because the PA one is too small.


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Posted by Pat
a resident of Midtown
on Jul 2, 2006 at 4:29 pm

Yes, Beecham is right that we have to increase revenues. But hasn't that been obvious for a long time? During the years of "negotiation" with Hyatt, didn't anyone realize that losing Rickey's would make a serious dent in the tax base? Palo Alto is not exactly business-friendly. Look at the years of haggling going over Edgewood Plaza and Alma Plaza. And how enticing to new enterprises is our "business registry fee"?

On October 14, 2004, Diana Diamond, who was then at the PA Daily, wrote a column titled, "CITY'S PLAN TO SAVE RETAIL TOO WIMPY." Obviously it was. Improved signage, the "Shop Palo Alto" campaign, and similar weak concepts don't seem to have pulled in more tax revenue.

In that column, Diamond said, "Yet what I hear some council members and neighborhood organizations say is that we don't want any more offices or employees in town. I find that perplexing, particularly since this report makes clear that offices bring in more sales tax revenue. The city for the last 10 years has gotten more sales tax dollars from the "office equipment and miscellaneous" category - far more than from auto sales or restaurants. Council and planning commission members' reaction to this important report was limited to 10 minutes, because it was presented in a study session. Council member Judy Kleinberg said she was glad we did not have big box stores in Palo Alto. 'I would not copy my neighbors (in neighboring cities) for anything. We could do with a lot more sales tax, but the stores need to fit the Palo Alto culture.'"

So, almost two years later, Mountain View has all the big box stores plus the new Charleston Center, East Palo Alto has the big hotel, and Palo Alto has culture and a new soccer field.

I agree with Ted Mulvaney that cost-cutting is every bit as important as boosting revenues. In a Weekly Guest Opinion November 17, 2004, Former Councilwoman Hillary Freeman advocated zero-based budgeting, in which each activity to be funded must be justified every time a new budget is prepared. She also pointed out the importance of department-specific "impact measures" – for example quantifying the times Public Works and Utilities departments coordinate efforts on street trenching to avoid duplication.

Maybe now is the time for Council to admit that Freeman was right and take the entire budget process more seriously. "Those who cannot learn from history are doomed to repeat it." (George Santayana)


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