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Capital costs drive Palo Alto's budget increase

City Manager James Keene proposes a 4.8 percent increase in expenses in fiscal year 2019

As Palo Alto's infrastructure costs continue to snowball, city officials are expecting to increase the city's capital budget by more than $30 million in the next year to help pay for some of the big-ticket items.

The increase in capital spending is the most striking feature in City Manager James Keene's proposed budget for fiscal year 2019, a document that he presented to the council Monday night and which the council plans to review and then adopt in June. If approved as presented, the $704.5 million budget would represent a $32.2 million increase, or 4.8 percent, over the current year.

Most of this increase is on the capital side, a reflection of the sizzling construction climate and the City Council's recent push to advance its infrastructure plans. The list of projects includes various items from the council's 2014 infrastructure plan -- a new public-safety building, two garages, a bike bridge over U.S. Highway 101, two rebuilt fire stations and an assortment of bike projects. It also includes upgrades to the Regional Water Quality Control Plant, improvements to the storm-management system and reconstruction of an apron at Palo Alto Airport, a project that is largely funded by the Federal Aviation Administration (the city is paying for 10 percent of the costs).

While capital expenditures continue to rise, the city's operating costs would remain fairly flat under Keene's proposed budget. The general fund, which pays for most city services not related to utilities, would go up by $3.6 million, from $210.4 million to $214 million.

While the costs of pensions and benefits continue to rise, the new budget proposes to eliminate 17.6 full-time-equivalent positions. This includes 11 vacant positions that would be eliminated from the Fire Department as part of a new service-delivery model that the city adopted last year. Other vacant positions now on the chopping block are a cement finisher, an equipment operator and a building serviceperson in Public Works; a legal secretary in the Office of the City Attorney; a library specialist; and part-time positions in the Office of City Clerk and the Office of Management and Budget.

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In presenting the budget to the council Monday, Keene said the city is reducing staffing through restructuring and vacancies, rather than layoffs. He also noted that the budget "still maintains existing services and allows us to respond to council priorities."

Keene's presentation kicks off a budget-review process that will include multiple meetings by the council's Finance Committee before the document is adopted in mid-June.

The proposed budget strikes an optimistic tone when it comes to revenues. As the local economy continues to hum along, staff projects an increase of $6.7 million, or 3.2 percent, in general fund revenues in the coming fiscal year. Receipts from major tax categories are projected to go up by $5.8 million, or 4.9 percent, from $119.3 million in the current fiscal year to $125.2 million in 2019.

"This budget reflects a strong local economy that continues to provide stable revenues that support the vast array of programs and initiatives this organization provides to our citizens," the budget states. "This budget maintains the high quality of services and facilities that our community values, with a focus on the priorities of the City Council."

The budget also highlights some of the challenges on the horizon, including the need to find additional funding for infrastructure and for traffic-fighting efforts; the difficulty of retaining and recruiting a quality staff at a time of gridlock and "out-of-reach" housing costs; and rising pension costs.

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Councilman Eric Filseth zeroed in on pensions as a topic of particular concern and noted that the city's obligation in the next year would increase significantly if CalPERS were to revise the expected rate of return (known as "discount rate") on its investments. CalPERS, the giant state fund that administers Palo Alto's pension program, has already revised its rate of return from 7.5 percent to 7 percent. Last year, the Finance Committee commissioned a study to consider the impact of going down to a 6.2 percent rate, which CalPERS staff calculated to be the more realistic long-term rate.

Filseth, who serves on the Finance Committee, argued that because CalPERS "lies about their investment returns," it enables the city to do that as well by effectively deferring to pay the higher fees. That does not, however, mean that doing so would be wise. If the city were to assume a 6.2 percent rate, pension costs would escalate, necessitating an additional contribution of $8.2 million from the general fund.

"This budget runs an $8 million operating loss in 2019," Filseth said. "What we do with this piece of information is up to us."

The only other council member who expressed concerns about the proposed budget was Councilman Greg Tanaka, who also serves on the Finance Committee. He took issue with staff's proposal to withdraw $276,000 from its Budget Stabilization Reserve to close a projected $2.6 million budget gap (the remaining $2.3-million hole would be closed through permanent structural adjustments).

Keene noted that the city's reserve, even after the withdrawal, would remain above the council's target level: 18.5 percent of the general fund. Tanaka didn't buy the explanation.

"We're in a booming economy, so it's counterintuitive," Tanaka said. "If we can't balance our budget now, when can we balance it?"

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Capital costs drive Palo Alto's budget increase

City Manager James Keene proposes a 4.8 percent increase in expenses in fiscal year 2019

by / Palo Alto Weekly

Uploaded: Tue, May 1, 2018, 3:14 pm

As Palo Alto's infrastructure costs continue to snowball, city officials are expecting to increase the city's capital budget by more than $30 million in the next year to help pay for some of the big-ticket items.

The increase in capital spending is the most striking feature in City Manager James Keene's proposed budget for fiscal year 2019, a document that he presented to the council Monday night and which the council plans to review and then adopt in June. If approved as presented, the $704.5 million budget would represent a $32.2 million increase, or 4.8 percent, over the current year.

Most of this increase is on the capital side, a reflection of the sizzling construction climate and the City Council's recent push to advance its infrastructure plans. The list of projects includes various items from the council's 2014 infrastructure plan -- a new public-safety building, two garages, a bike bridge over U.S. Highway 101, two rebuilt fire stations and an assortment of bike projects. It also includes upgrades to the Regional Water Quality Control Plant, improvements to the storm-management system and reconstruction of an apron at Palo Alto Airport, a project that is largely funded by the Federal Aviation Administration (the city is paying for 10 percent of the costs).

While capital expenditures continue to rise, the city's operating costs would remain fairly flat under Keene's proposed budget. The general fund, which pays for most city services not related to utilities, would go up by $3.6 million, from $210.4 million to $214 million.

While the costs of pensions and benefits continue to rise, the new budget proposes to eliminate 17.6 full-time-equivalent positions. This includes 11 vacant positions that would be eliminated from the Fire Department as part of a new service-delivery model that the city adopted last year. Other vacant positions now on the chopping block are a cement finisher, an equipment operator and a building serviceperson in Public Works; a legal secretary in the Office of the City Attorney; a library specialist; and part-time positions in the Office of City Clerk and the Office of Management and Budget.

In presenting the budget to the council Monday, Keene said the city is reducing staffing through restructuring and vacancies, rather than layoffs. He also noted that the budget "still maintains existing services and allows us to respond to council priorities."

Keene's presentation kicks off a budget-review process that will include multiple meetings by the council's Finance Committee before the document is adopted in mid-June.

The proposed budget strikes an optimistic tone when it comes to revenues. As the local economy continues to hum along, staff projects an increase of $6.7 million, or 3.2 percent, in general fund revenues in the coming fiscal year. Receipts from major tax categories are projected to go up by $5.8 million, or 4.9 percent, from $119.3 million in the current fiscal year to $125.2 million in 2019.

"This budget reflects a strong local economy that continues to provide stable revenues that support the vast array of programs and initiatives this organization provides to our citizens," the budget states. "This budget maintains the high quality of services and facilities that our community values, with a focus on the priorities of the City Council."

The budget also highlights some of the challenges on the horizon, including the need to find additional funding for infrastructure and for traffic-fighting efforts; the difficulty of retaining and recruiting a quality staff at a time of gridlock and "out-of-reach" housing costs; and rising pension costs.

Councilman Eric Filseth zeroed in on pensions as a topic of particular concern and noted that the city's obligation in the next year would increase significantly if CalPERS were to revise the expected rate of return (known as "discount rate") on its investments. CalPERS, the giant state fund that administers Palo Alto's pension program, has already revised its rate of return from 7.5 percent to 7 percent. Last year, the Finance Committee commissioned a study to consider the impact of going down to a 6.2 percent rate, which CalPERS staff calculated to be the more realistic long-term rate.

Filseth, who serves on the Finance Committee, argued that because CalPERS "lies about their investment returns," it enables the city to do that as well by effectively deferring to pay the higher fees. That does not, however, mean that doing so would be wise. If the city were to assume a 6.2 percent rate, pension costs would escalate, necessitating an additional contribution of $8.2 million from the general fund.

"This budget runs an $8 million operating loss in 2019," Filseth said. "What we do with this piece of information is up to us."

The only other council member who expressed concerns about the proposed budget was Councilman Greg Tanaka, who also serves on the Finance Committee. He took issue with staff's proposal to withdraw $276,000 from its Budget Stabilization Reserve to close a projected $2.6 million budget gap (the remaining $2.3-million hole would be closed through permanent structural adjustments).

Keene noted that the city's reserve, even after the withdrawal, would remain above the council's target level: 18.5 percent of the general fund. Tanaka didn't buy the explanation.

"We're in a booming economy, so it's counterintuitive," Tanaka said. "If we can't balance our budget now, when can we balance it?"

Comments

Resident
Another Palo Alto neighborhood
on May 1, 2018 at 5:57 pm
Resident, Another Palo Alto neighborhood
on May 1, 2018 at 5:57 pm

If they hadn't wasted all that money on Ross Road, bike lanes on Middlefield outside Jordan, whatever they are doing on Louis, they might have had enough money to build a much more important year round bike bridge to replace the tunnel under 101.

I can't believe they are still talking about this bridge and not doing. Bridges appear over 101 in a matter of months, everywhere it seems except Palo Alto.


Phil
Another Palo Alto neighborhood
on May 1, 2018 at 7:42 pm
Phil, Another Palo Alto neighborhood
on May 1, 2018 at 7:42 pm

I’m wondering, when will employee pensions finally push most cities to bankruptcy? Paying employees 90% of their pay when they retired can’t last.


Wayne Martin
Professorville
on May 2, 2018 at 11:07 am
Wayne Martin, Professorville
on May 2, 2018 at 11:07 am

There are two pension categories, where payouts are concerned: effectively 90% at thirty years for public safety personnel (police and fire) and 82% at thirty years for the other employees (called "Miscellaneous).

There are now about 1100 former employees drawing against Palo Alto's CalPERs account. One hundred and ten (110), or so, are receiving payouts of $100K to $200K. With about 480 current employees making more than $100K yearly, the number of former employees drawing pensions will grow by 100-200 over the next 10-15 years. Most of those will be receiving payouts greater than $100K a year.

The costs to the City will grow unless some drastic actions are taken.

One of those drastic actions would be to recognize that City employees are overpaid, and to begin to throttle back on the frequent pay increases that seem to be forced on the City by the various unions. There is a lot of data available to advance this topic, but not in this venue.

In 2012, the State passed a pension cap bill call PEPRA (California Public Employees' Pension Reform Act). This bill limits pensions to an amount that is not linked to employees’ highest salaries in many cases. The current cap is about $147,000. However, the cap seems to be increased by about 1.1% a year, so that by 2033 (when the first PEPRA employees will be retiring), the cap will be about $187,000.

Salaries and benefits will be growing yearly, unless there is a recognition that the cost of very high salaries, and the lavish pension payouts—which are really deferred salaries—will break the bank many times over. For instance, using data provided by the City, the costs of compensation for a public safety employee will be about $550,000 in 2033, growing to about $800,000 in 2045.

So, PEPRA will reduce the pension obligations for Palo Alto in the coming decades, but the current situation has Palo Alto on the hook for about $50M a year. CalPERs is supposed to pay this the bulk of this amount, but the failure of CalPERs to live up to its promises leaves the taxpayers of Palo Alto responsible for the difference between CalPERs' claims and the reality of their actions.

It is going to take a lot of education for people of the State, and Palo Alto, to realize how much money their former elected officials have promised to employees, without having a clue as to where this money is to come from.


Tax the businesses
Downtown North
on May 2, 2018 at 11:56 pm
Tax the businesses, Downtown North
on May 2, 2018 at 11:56 pm

It is past time to have a business tax in this city! These businesses are luring workers here, paying them large wages and driving up the cost of everything around them. The likes of Apple, Google and Facebook are directly responsible for the overpopulation of this area, the lack of affordable housing, the overcrowded roads, schools and facilities.

Too much development is destroying the quality of life here and the massive business development is the cause. If we want to fix some of the problems of too many people and not enough revenue to pay for what they need we need to go after the cause. That means taxing the businesses that are the cause of it all.

Tax them A LOT!! Maybe if we are lucky some of them will go elsewhere and take their people with them and we can all breath a little as some of the pressure is taken off.


Lost revenue
Mayfield
on May 3, 2018 at 9:24 am
Lost revenue, Mayfield
on May 3, 2018 at 9:24 am

The problem is that Apple, Google and Facebook aren't in Palo Alto. We get traffic from all of their workers, but we get none of the revenue. Apple gives ~$40M to Cupertino, Google gives about $30M to Mountain View and Facebook gives about $25M to Menlo Park. Palo Alto gets zero... even though we get much of their traffic. As soon as the companies get big enough to give additional fund to the city, we kick them out to neighboring cities, however we are still left all the traffic. How messed up is that!


Online Name
Registered user
Embarcadero Oaks/Leland
on May 3, 2018 at 10:05 am
Online Name, Embarcadero Oaks/Leland
Registered user
on May 3, 2018 at 10:05 am

"As soon as the companies get big enough to give additional fund to the city, we kick them out to neighboring cities"

Kicking them out?? Where would you put companies the size of Google or FB or Apple? They can't even fit in a single city now! Have you ever visited the Google campus?


Mary
Old Palo Alto
on May 3, 2018 at 10:36 am
Mary, Old Palo Alto
on May 3, 2018 at 10:36 am

Actually, we have plenty of space to put a FB, Google or Apple. We have just decided to put it to other uses. Both FB and Google sit on land similar to Palo Alto's Baylands. But instead of corporate campuses, we have a Nature Preserve, an airport, and a Municipal Golf Course. And in the foothills, Palo Alto has much more land that theoretically could be developed into large corporate sites than any other neighboring city. But we have Foothills Park. None of this is to suggest that Palo Alto made the wrong choices when it shut down development that could have housed a FB, a Google or an Apple: there is strong support for the city amenities built instead. Mt.View and Menlo Park made different choices = and are reaping he financial benefits. We suffer by comparison (even though we do have a very rich corporate tax base even without the giants).

Whatever one thinks of the choices Palo Alto made, it's incorrect to say that the reason is lack of space for more corporate development.


Bike "safety" money means no new infrastructure tax
Registered user
Duveneck/St. Francis
on May 3, 2018 at 12:00 pm
Bike "safety" money means no new infrastructure tax, Duveneck/St. Francis
Registered user
on May 3, 2018 at 12:00 pm

Anyone who drives on Middlefield, Ross, Louis and Arastradero is going to vote NO on any additional funding since Palo Alto and Mello seem to live in world where cars and pedestrians don't exist - only bikes. Much of our traffic is commuters, they are not going to bike to Palo Alto from Fremont or Dublin or Morgan Hill or Portola Valley or Santa Cruz...

Until the City shows that they can be trusted to make good decisions with our money, they don't deserve any more.


Water rate hike
Adobe-Meadow
on May 4, 2018 at 12:28 pm
Water rate hike, Adobe-Meadow
on May 4, 2018 at 12:28 pm

I just got a notice that the City is raising the water rates by 10%. What is this that I am hearing that the City is giving away our water to East Palo Alto? Why am I having to pay for East Palo Alto's water?


Online Name
Registered user
Embarcadero Oaks/Leland
on May 4, 2018 at 12:57 pm
Online Name, Embarcadero Oaks/Leland
Registered user
on May 4, 2018 at 12:57 pm

At the CC meeting Monday, a chart was presented showing that every project had an extra 30% budgeted for expected increase in construction costs because of all the competition. That's just one more reason to limit the construction of more office buildings.

As for the water rate increase where the more we conserve, the more it costs us because we're not consuming enough, remember that the city charged us all an extra $25 a month for 6 months AFTER the drought officially ended. No $150 refunds were granted when that "error" was discovered

26,000 household x 6 months x $25 = $3,900,000.

Vote BO on any and all new taxes until the city learns some fiscal responsibility.


Paly Grad
Leland Manor/Garland Drive
on May 14, 2018 at 3:42 pm
Paly Grad, Leland Manor/Garland Drive
on May 14, 2018 at 3:42 pm

Save some money by:

1) stopping the so called "Neighborhood Safety and Bicycle Boulevard Project" before Bryant Street is ruined with completely unnecessary roundabouts, speed bumps and a ridiculous amount of white markings on the pavement!

2) start collecting the 14% hotel tax on the airbnbs in the city!


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