June 15, 2005

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Palo Alto Online

Editorial: Palo Alto's 'Year of Hard Choices' is here

We don't much like everything we see on the chopping block for next year's budget. And we're even less enthusiastic about some of the fees to increase revenues.

We question whether a $5 user/parking fee for Foothills Park and other traditionally free -- or free to residents -- open-space areas will bring in anything like the $60,000 (without the baylands) the Community Services staff projects.

We're concerned about the cumulative impact of many small cuts. (Erosions in city services from this year's budget were outlined in our May 25 cover story, "Cracks in the community," available via www.PaloAltoOnline.com.)

We think Community Services and other large departments could benefit from a thorough "efficiency" examination by City Auditor Sharon Erickson, as proposed by some council members a year and a half ago.

But that won't save the City Council from having to make hard choices next Monday, when it confronts a "structural" gap of $5.2 million in the city's $120.8 million 2005-06 General Fund budget -- excluding utilities and capital improvement projects. As of this week, the gap will be closed by $3.4 million in cuts and $1.8 million in new revenues, largely from fees.

"Structural" means both making cuts and adding revenue -- new or higher user fees -- that will stick from year to year. Without such adjustments now, projections show a continuing deficit each year for the next decade.

The city staff and council deserve full credit for cutting $14.5 million in the past four years, including 40 full-time-equivalent positions through attrition. Most cuts have been from administrative areas less visible to residents than the direct services and high-profile programs on the block this year -- when another 30 FTE positions need to be eliminated in one way or another, including 15 probable layoffs at last count.

And anyone who looks through a quarter-inch "Fee Schedule" budget document may be in for sticker shock from some brand-new fees and increases in others, especially steep in the planning and building department areas.

Some incessant critics claim the city staff is bloated, with too many employees for a city of Palo Alto's size. Possible exaggerations notwithstanding, clearly there are areas where Palo Alto -- in the euphoric 1990s dot-com boom -- over allocated and under-saved in terms of reserves.

But that's now history, and most of those in leadership positions today were not around eight or 10 years ago. Today Palo Alto must bring its budget into line with current revenue/cost realities -- the $5.2 million challenge to which the council's Finance Committee dedicated nine long meetings in May.

Here are some basics to help residents understand the "Why?"

1) City property and sales tax revenues have dropped significantly, with no sign of an early recovery. Commercial vacancy rates are high -- some non-residential areas look like tilt-up ghost towns left over from the Great 1990s Silicon Rush.

2) Since the early 1990s, the state has siphoned off approximately $42 million in property tax and other revenues from Palo Alto.

3) As a recession side effect, CalPERS, the state public-employee retirement system, saw its once-lucrative investment portfolio shrivel and has billed cities and counties for the difference. Palo Alto's CalPERS share jumped from $5.7 million to $10.7 million in the past two years.

4) Health care costs climbed by 50 percent in the past four years to $10.8 million annually -- projected to double by 2015.

5) Declining local sales and transient-occupancy tax revenues are about to drop further with the closure of Rickey's Hyatt hotel. And will city, business and neighborhood leaders win their race with time to try to keep the city's eight remaining auto dealerships in town? A healthy dealership is worth about $2 million a year in sales tax revenues. Things could get worse, in other words.

Could city officials have predicted this circumstantial "perfect storm"? Perhaps. But even savvy venture capitalists and experienced economic forecasters were stunned by the precipitous bursting in 2001 of the dot-com bubble and lingering side-effects.

Specific concerns aside, we think the city staff and Finance Committee members have done a commendable job overall on the tedious, often depressing task of budget balancing in tough times. The full council on Monday should do as well.

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