Forecast predicts years of budget surpluses

Sales and hotel taxes driving revisions in city's revenue projections

A surging economy and an expected influx of revenue from new hotels have prompted Palo Alto officials to predict a decade of budget surpluses, provided things like labor negotiations and another economic downturn don't get in the way, according to a financial forecast the city released Wednesday.

The new Long Range Financial Forecast further underscores the dramatic turnaround Palo Alto has undergone since the economic downturn of late 2008 and 2009. The forecast, which covers the years between 2015 and 2024, predicts that the tax revenue over this decade will exceed that of the prior forecast (which covered 2014 to 2023) by $106.7 million. It assumes improvements in almost all tax categories, including sales, hotel and property taxes.

The forecast predicts good news both in the near and the long term. In fiscal year 2014, which ends on June 30, the staff has revised its revenue projections from $83.8 million to $90.8 million, with the greatest upward shift coming in the sales-tax category. Overall, revenues are then expected to grow moderately every year (by around 4 percent), reaching $133.7 million in 2024.

Hotel taxes are expected to contribute mightily to the new bounty, with newcomers such as the Epiphany Hotel on Hamilton Avenue and Hilton Homewood Suites (at the site of the former Palo Alto Bowl along El Camino Real) expected to inject fresh revenues into the city's coffers. The city is predicting a 14.1 percent growth in transient-occupancy tax (hotel tax) revenues in 2014, a 15 percent growth in 2015 and 16 percent growth in 2016. After that, hotel-tax revenues are expected to grow at a more moderate rate, slightly above 5 percent per year.

Sales tax revenues have also seen a major upward shift since the recession, going from $17.9 million in fiscal year 2010 to a projected total of $27.4 million in 2014. In the last two years, however, growth has been more modest and staff warns in the new forecast that "marked year-over-year increases in this category are not sustainable." It notes that revenues from electronics firms and auto dealerships have "fallen significantly," though restaurants and apparel stores have shown increases.

Though the report offers plenty of good news, it also doesn't take into account numerous factors that could cloud the financial picture. Financial wildcards that are not being considered in the projections include labor negotiations; changes in how much the city has to spend on retiree health care; potential dedication of hotel taxes to an infrastructure project such as a new public-safety building; and changes in the local, regional and national economy.

Even with these unknowns, the forecast assumes "a continued, gradual growth of the national economy with positive impacts to the local economy."

"The positive impacts from an improving national and state economy, as outlined above, have been especially apparent at the local level," a report from the Administrative Services Department states. "Silicon Valley employment is robust, with unemployment rates in the region lower than both the national and state averages."

The report notes that the city's employment rates "significantly outperform" both San Jose and San Francisco. In October 2013, Palo Alto's unemployment rate was 3.4 percent, compared to San Jose's 7.1 percent and San Francisco's 5.4 percent. Barring changes related to labor negotiations, city staff projects $5.9 million in excess revenues and expenditure savings in the general fund for fiscal year 2014.


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Posted by CVarol Gilbert
a resident of University South
on Feb 14, 2014 at 10:41 am

Surplus is great! Now let's put it safely away to attempt to cover the pension shortfalls looming in our future.

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Posted by Resident
a resident of Another Palo Alto neighborhood
on Feb 14, 2014 at 11:38 am

So why do they want to increase our taxes to pay for a police building and infrastructure?

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Posted by musical
a resident of Palo Verde
on Feb 14, 2014 at 11:47 am

Always easier to raise taxes when times are good.

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Posted by Annette
a resident of College Terrace
on Feb 14, 2014 at 12:13 pm

Are the projections for hotel tax revenue based on the current TOT or the increased TOT that CC may put to the voters? And if we're so flush, why pursue that?

Who is auditing Palo Alto's books these days? I believe there was a long time auditor who left but I don't think she's been replaced. Can someone confirm or correct? I doubt the resource-gobbling pension issue has gone away so we really should be informed as to what percentage of the forecast surplus will be absorbed by that; the number is sure to be high. Where can one get a current report about that? I'd like more data so that I can cast an informed vote at the next election.

In the meanwhile, it's probably good fiscal policy to not spend money that is not real.

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Posted by Budget watcher.
a resident of Another Palo Alto neighborhood
on Feb 14, 2014 at 12:27 pm

This report does not cover the part of the conversation where they talked about the probability of future recession. It makes the picture sound rosy and staff deliriously optimistic. In fact, that is NOT the situation and discussions that I have followed in these budget forums have been far less optimistic than this report indicates.

Budget planning has been pretty conservative. An increased TOT is being discussed, and that is part of the equation that is being considered.

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Posted by stephen levy
a resident of University South
on Feb 14, 2014 at 12:29 pm

stephen levy is a registered user.

The revenue forecast does include revenue from the new hotels.

Last year and this year surplus revenues are transferred to a fund to pay for infrastructure.

Existing revenues can support some infrastructure investments, for example, the public safety building.

The proposed tax is to extend the amount of infrastructure projects that can be completed in the near future.

Yes, future retirement obligations and other expenses need to be factored into spending plans and surplus projections as the City Manager said.

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Posted by stephen levy
a resident of University South
on Feb 14, 2014 at 12:32 pm

stephen levy is a registered user.

Staff has been fairly and appropriately conservative in recent revenue forecasts which is one reason the city has seen surpluses recently.

The staff did consider a recession but these are ten year projections that include the possibility of higher or lower individual years.

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Posted by Kate
a resident of Duveneck/St. Francis
on Feb 14, 2014 at 2:02 pm

I have a long list of streets north of the Oregon Expressway that are a hazard to health and safety - of people and autos. Some streets badly damaged in the '98 flood haven't been touched.But there's enough money to grossly deface our streets with traffic markings that can probably been seen by our astronauts from outer space!! Garish and a pox on the neighborhoods. How about fixing up what we have instead of new projects: fix the boardwalk into the Baylands before someone falls into the Bay; fix the roads in the Baylands. Fix High Street - PLEASE. Pay for what has been done. Stop hiring more employees. More efficiently use employees. How can the city 'estimate' utility usage by claiming it doesn't have enough meter readers. Oh, YES, it does. The problem is inefficient scheduling. I"ll pay for what I use -not what the city THINKS I use. Next time I'll fight this big time.I"ll bet Keene's home meter isn't 'estimated'.

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Posted by Richard C. Placone
a resident of Barron Park
on Feb 14, 2014 at 2:16 pm

I don't suppose anyone on the Utilities Commission, the Utility Department staff, the city manager's office, the Planning Department staff, and certainly not not the council members, have given a thought to lowering the utility rates so that us seniors who are not in the 10% and above income brackets can continue to afford to live here.

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Posted by bick
a resident of University South
on Feb 14, 2014 at 4:03 pm

For your reference on salaries and pensions of city public employees:

Web Link

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Posted by OldAlum
a resident of Adobe-Meadow
on Feb 14, 2014 at 4:49 pm

Oh please. This projection is just an excuse for our gov to spend more money they don't have on things we don't want/need. Spare us.

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Posted by resident
a resident of Another Palo Alto neighborhood
on Feb 14, 2014 at 6:39 pm

"there's enough money to grossly deface our streets with street markings"

The sign clutter and heavily-marked crosswalks are spreading all over the City. Some residential areas are being substantially degraded. And from a safety standpoint,studies in San Diego found that heavily marked crosswalks proved in fact to be statistically more dangerous because the pedestrian assumes it is safer and pays less attention to what is going on. Also consistency in crosswalk markings along a corridor or in a neighborhood is safer. When you have a heavily-marked intersection the others are in effect downgraded and the driver is likely to pay less attention to them.

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Posted by Domadiful
a resident of Barron Park
on Feb 14, 2014 at 7:39 pm

Great! Maybe now they can hire a competent urban planner and get rid of Jaime.

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Posted by common sense
a resident of Midtown
on Feb 15, 2014 at 11:46 am

Steven Levy,

The long range forecast does not include any recession for the next 10 years. The last recession was in 2009, so that would make at least a 14 year period without decreasing revenue for the city.

I don't recall a period that long where there has not been a recession, or where the city did not have at least one down year in revenues in a 10 year time range.

Can anyone?

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Posted by stephen levy
a resident of University South
on Feb 15, 2014 at 12:22 pm

stephen levy is a registered user.

The forecast does not forecast the timing of a recession in the sense that revenues go up or down dramatically in any specific year..

But the long range forecast does assume that the next ten years will have a mixture of revenue growth years.

It is a ten year average annual growth rate.

If staff wants to anticipate a specific good or bad year, they would do so in the current budget forecast,

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Posted by Marcos
a resident of Another Palo Alto neighborhood
on Feb 15, 2014 at 2:06 pm

This is awesome, now we can give city employees a sizable raise and increase their pension benefits, why waste this surplus on infrastructure and other city services.

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Posted by stephen levy
a resident of University South
on Feb 15, 2014 at 2:14 pm

stephen levy is a registered user.

Well Marcus too bad you won't get your sarcastic wish,. The proposed budget allocates the extra revenue to infrastructure.

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Posted by resident
a resident of Another Palo Alto neighborhood
on Feb 15, 2014 at 3:43 pm

You have to put an asterisk next to any forecast- *Drought impact unknown.

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Posted by observer
a resident of Charleston Meadows
on Feb 15, 2014 at 7:29 pm

Sadly, I expect as many new idiotic 'new' initiatives from City 'Staff' to squander any surplus that may develop. I also predict that all those boring infrastructure projects that the same 'staff' and city council have been wondering how to pay for will be forgotten until budget deficits return. Once deficits return, it's safe to complain about them because there is no money to pay for them.

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Posted by Marrol
a resident of Embarcadero Oaks/Leland
on Feb 16, 2014 at 12:28 pm

And should this projection play out, then I see no reason why our public safety building and other vital infrastructure needs could not be funded through the existing budget. Our residents should not hear even a hint of a bond measure and tax hike.

Sorry, but further commenting on this topic has been closed.

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