With the local economy in free fall, the Palo Alto City Council decided on Monday to cut nearly $40 million from next year's budget, a move that is expected to put a dent in City Hall's staffing level and require eliminating of popular programs and services.
Now, it is preparing to tackle a trickier question: What exactly should the city cut?
That painful conversation will begin to unfold on May 11, when Administrative Services Department staff returns with possible options for achieving the expense reductions. The projected shortfall presumes that social-distancing measures will remain for some time; that people will remain reluctant to — or prohibited from — traveling and attending major events; and that the recovery will take many months.
Staff presented the grim budget scenario to the council as the most dire of the three options, with the most optimistic scenario depicting a speedy recovery and the middle scenario projecting a $21.3 million revenue drop. But the council agreed that a speedy recovery is at this point an impossible alternative and the more moderate option is a highly unlikely one. Staff's worst-case scenario, which includes a $38.8-million revenue drop, is actually the most likely one, the council agreed by a unanimous vote.
"Everything is going to be on the cutting floor," Mayor Adrian Fine told his colleagues during the Monday discussion. "I hope you're ready for that."
Councilwoman Liz Kniss said the list of services that could be cut will include library programs, recreation offerings, public safety services, planning efforts and other things "that we really prize."
"When we start hearing from police and fire about the protection we provide in the city, that's going to be tough," Kniss said. "But that which involves kids and outdoor activities — that's going to be even harder."
The Monday discussion was a preamble of sorts for a series of meetings that will begin on May 11, when City Manager Ed Shikada presents options for reducing expenses, and end on June 22, when the council officially adopts the budget. Unlike in prior years, when the council's Finance Committee reviewed the budgets of each department, the task will fall to the full council.
Given the deep level of uncertainty about the duration of the pandemic and what the recovery will look like, Chief Financial Officer Kiely Nose said numbers will almost certainly change in the months ahead.
"We continue to not know the length or depth of this emergency and how it will ripple through our social lives as well as our economic drivers," Nose said.
She noted, however, that almost half of the city's revenues come from sources that are "extraordinarily impacted by the COVID-19 situation," including sales- and hotel-tax revenues. Tarun Narayan, the city's manager of treasury, debt and investment, said 11 of the hotels in Palo Alto, representing about 30% of total rooms within the city, are completely closed. The rest are either at 5% occupancy or are heading toward that level, he said, citing information from the San Mateo County/Silicon Valley Convention & Visitors Bureau.
Even though the state and Santa Clara County are now easing some of the shelter-at-home restrictions that had been in effect since March, the council agreed that the devastating effects of the pandemic will linger for many months even after businesses are allowed to reopen. Some businesses will close down, Councilman Greg Tanaka said. Others will have restricted capacity because of physical-distancing rules or find themselves hurting for customers because of the economic downturn, Tanaka said.
He noted that one of the city's major revenue generators is Stanford Shopping Center, an upscale mall.
"Who's going to go out and spend $5,000 on a handbag?" Tanaka asked. It's probably not going to happen."
The biggest challenge, he said, is the persistence of social distancing even after businesses are allowed to reopen.
"The economy is seizing up and it's tough for businesses to get the business they had before," Tanaka said.
Councilman Eric Filseth called the projections in the most drastic scenario proposed by staff "appalling." They are also realistic, he said. Given the precipitous decline of hotel revenues, it's realistic to see a major drop in transit-occupancy-taxes throughout the next year, particularly if traveling doesn't return to pre-pandemic levels.
Vice Mayor Tom DuBois agreed.
"I don't see it as an extremely conservative scenario, but a pragmatic one in terms of what we've been hearing and reading about," DuBois said. "No one is talking about large events coming back in the fall, unless you have a rented out a private island or all of Las Vegas."
To deal with the massive shortfall, DuBois said the city will need take a deep look at its management structure at City Hall, including the ratio of employees per manager. Given that the largest part of the city's expenses is staffing, a major portion of the $38.8-million reduction will have to come from staffing costs.
"The public needs to understand that it's likely going to be across the board — it's going to be management, it's going to be unionized staff," DuBois said.
Councilwoman Alison Cormack predicted that the coming week will be "very difficult" and "really hard for all of us, and for our employees and for the people who live here."
"I want us all to take a deep breath as we make this decision tonight because the impacts will be felt starting next week," Cormack said.
Fine also suggested that Palo Alto's land use policies have contributed to the financial pains that the city is now feeling, with its top sources of revenues on a sharp decline. He compared the city's plight with Redwood City and Mountain View, which have been more enthusiastic about approving new development.
"One of the reasons those cities aren't facing such serious budget cuts is because they've been building commercial and residential space over the past few years and they've been expanding their property tax bases. That's the situation we're in in Palo Alto, where we haven't done that."
The city is gathering public feedback on its budget priorities through an online survey, which can be found here.
Find comprehensive coverage on the Midpeninsula's response to the new coronavirus by Palo Alto Online, the Mountain View Voice and the Almanac here.