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?"