Palo Alto sees good news on financial horizon
High tax revenues, low unemployment numbers point to city's strong rebound from recession
Strong local sales, a sizzling housing market and recent labor concessions from City Hall employees have given Palo Alto's elected leaders plenty of reasons to cheer as they head into the holiday season.
The city's newly released long-range financial forecast offers local budget watchers cause for optimism, with significant increases in tax revenues and gradual concessions from labor groups. And while spiking pension and health care costs continue to put a cloud of uncertainty on the city's financial horizon, the city's economic health appears to be robust after several years in a post-recessionary funk.
The forecast, which the City Council's Finance Committee discussed Tuesday evening, indicates that sales-tax revenues have exceeded what the council had projected for the year by $2.4 million and are now higher than they were before the Great Recession. After dipping to a low of $18 million in fiscal year 2010, they rose to $20.7 million in 2011 and to $22.1 in 2012. According to the forecast, the number is expected to jump to $23.4 million in the current fiscal year, which ends on June 30.
The past few months have been particularly promising. In the first quarter of fiscal year 2013, revenues have been 6.7 percent above the prior year's first quarter.
"Tax revenues in Palo Alto have improved markedly since the beginning of the Great Recession and are expected to continue their upward trend in the near future," the forecast states, projecting an annual growth of up to 4 percent for the next 10 years.
The tax numbers are just one of many positive signs that the city is seeing on the economic front. The city's unemployment rate has dropped from 5.1 percent in September 2011 to 4.2 percent in September 2012, well below the Santa Clara County rate of 7.9 percent and the statewide rate of 7.6 percent.
The predictions in the new report are far from certain, resting as they are on a number of unpredictable factors, including the demands from CalPERS (the colossal state fund that administers the city's pension system), employee retirements and the general health of the economy. But the report represents the best available guess from the Administrative Services Department about what the city's financial future holds if the department's current assumptions hold.
The forecast model in the report assumes a 10 percent annual increase in medical costs, an increase of 3 percent in pension costs and a 2 percent salary increase for the two largest labor groups, the Service Employees International Union and the non-unionized group of management and professionals, starting in 2014. The other labor groups would get a similar raise in 2015.
In discussing the forecast, council members suggested the news in the document might be a little too good to be true, particularly the staff projection that revenues will grow by 3.1 percent every year between 2013 and 2023. Vice Mayor Greg Scharff suggested that staff isn't taking a long-enough view in making its predictions. Its projection that revenues will grow by 3.1 percent every year is based on three successful years, he said, and fails to account for possible down years over the next decade.
The past decade has been a strong one for Palo Alto, even with the 2008 recession, but Scharff nonetheless voiced reservations about staff's prediction.
"My concern is I think we're being much more aggressive in sales revenues," Scharff said. "I don't think it's sustainable."
The council directed staff by a 3-0 vote to revise the forecast and consider the revenue trends for the past 20 years.
Even with the long-term uncertainty, the numbers offer good news on the immediate financial front, indicating that Palo Alto has emerged from the 2008 economic slump much faster than much of California and the nation at large. Councilwoman Nancy Shepherd suggested that the national foreclosure crisis, which has troubled local economies elsewhere but which has not made a dent in Palo Alto, is a major reason for the city's bounce back. In fact, the city's property-tax revenues have gone up from $25.7 million to $26.5 million between 2011 and 2012.
But the council hedged its enthusiasm, noting that the local economy may face its own hurdles down the line. Councilman Pat Burt said that Palo Alto's "microeconomy" could suffer downturns that the rest of the nation may not see.
"We're tied to the tech economy, which is more volatile," Burt said. "We were hit harder by the dotcom bust than the rest of the country."
The city also continues to struggle with the high cost of employee benefits, which have been taking up a greater share of the General Fund budget every year. Between 2003 and 2013, the city's expenditures on salaries and benefits have gone up by 24 percent, despite a major reduction in staffing levels. Pensions alone have increased nearly tenfold, from about $2.4 million in 2003 to more than $24 million this year. Medical costs are also rising fast, going from $6.8 million in 2011 to a projected level of $9.1 million in fiscal year 2014.
Meanwhile, the city has been slashing the number of positions supported by the General Fund, which pays for most basic city services (not including utilities). Between 2003 and 2013, the number of positions has been reduced from 758 to 578, said Christine Paras, principal analyst at the Administrative Services Department.
Overall, the new numbers represent a stunning turnaround from last year's forecast, which predicted an $88 million budget gap over 10 years. The new document, meanwhile, projects a $4.2 million surplus over the next decade if the assumptions in its forecast model hold. Paras called the difference between the two forecasts a "180 degree shift."
Even so, the council is looking to continue its effort to curb the steeply growing costs of employee benefits. The council plans to hold a meeting next month to discuss potential health care and pension reforms.
Staff Writer Gennady Sheyner can be emailed at email@example.com.