With the local economy shaken and city revenues on a steep decline, Palo Alto is preparing to reconsider its most ambitious infrastructure project: the new public safety building that is slated to go up in the California Avenue business district.
The city has recently gone out to bid on the project, which has an estimated price tag of $115 million. City Manager Ed Shikada said Monday that the city expects to get the bids back in the coming weeks, giving the council a chance to approve construction work for the project before the end of the year.
The council's infrastructure plan had envisioned breaking ground on the long-awaited project at 250 Sherman Ave. immediately after the city completes construction of the adjacent parking garage at 350 Sherman Ave. Work on the garage is now nearing conclusion.
A bleak budget picture could upend the plan. On Monday night, Shikada and the city's Chief Financial Officer Kiely Nose presented a financial update that offered a decidedly mixed and somewhat fuzzy picture of the city's current financial predicament.
There are some hopeful signs. With Santa Clara County easing its business restrictions in recent months, staff have seen sales tax revenues inch back up after a precipitous drop in March, when shelter-in-place orders began. The city budget that the council passed in June estimated $20.5 million in sales tax revenues, a 40% drop from the prior year. Now, staff believe the actual figure could exceed the budgeted revenue by between $2 million and $9 million.
That positive trend, however, is offset by massive losses of hotel revenues. With some hotels shutting down and others seeing their occupancy rates plummet from above 80% before the COVID-19 pandemic to single digits in March, the council had expected to see its hotel revenues drop to $14.9 million, roughly half of what it was in the prior year. But with the health crisis now expected to languish well into 2021, staff's prior hopes of a steady recovery at the end of the year have largely dissipated. Hotel revenues are now expected to fall short of the budgeted estimate by $11 million in the most dire scenario, or by $5.5 million in a more optimistic one, according to staff.
The city's prognosis, however, is obscured by the virus. A major wild card is the risk of a "second wave" of COVID-19 cases that would further damage the local economy.
"Ultimately, as we think about what's happening to our city, both economically and financially, it's all being driven by the virus, one way or another — and how it's in control or not, and ultimately the efforts underway in addressing that public health emergency," Nose said.
The hotel slump could prematurely end Palo Alto's ongoing building spree. Following a plan that the City Council approved in 2014, the city completed the construction of a new fire station at Rinconada Park in March and moved ahead with the 636-space garage in the California Avenue district, a project that is now nearing completion. Crews also recently broke ground on the new bike bridge over U.S. Highway 101.
The most ambitious project in the plan is the public safety building, which has been in Palo Alto's planning pipeline for decades. The $115 million structure, as envisioned, would serve as the new headquarters of the Palo Alto Police Department, which has been currently housed in a City Hall wing since 1970. Over the years, various councils and citizen commissions had deemed the existing police headquarters as cramped, seismically unsafe and noncompliant with accessibility codes. The new building at 250 Sherman Ave. would give the police ample space while also housing the city's 911 emergency dispatch center, the Emergency Operations Center, the Office of Emergency Services and Fire Department administration.
But with the city's finances on a downswing, the calls for pausing and deferring the project are getting louder. Almost all candidates who are running for a council seat this year, including incumbent council members Lydia Kou and Greg Tanaka, have suggested delaying the project until after the economy recovers. But while their arguments didn't carry the day in June, when the council adopted a budget with full funding for the project, some of their colleagues have indicated on Monday that it's time to adjust the infrastructure plan.
Council members Liz Kniss and Alison Cormack both suggested that the city needs to take a fresh look at its capital spending in light of plummeting revenues, a struggling economy and recent cuts to city services, including Fire Department positions.
"The perception in the community is, 'Why are we putting up big buildings?'" Kniss said. "Why don't we cut back on some of our infrastructure and put more back into the services that are going into the community? I think we should really listen to that. I think that's really valid."
Kniss also said the city should be more mindful of how the council's push to build large new structures looks to the community at a time of the economic crisis.
"When you're at a restaurant at Cal. Ave. and you look over and see this high-rise garage … people are saying, 'Come on! Are you really going to put up another enormous building right next to that when the restaurants are struggling on the street below?'"
Cormack suggested that the council have a broader discussion about reprioritizing infrastructure projects to account for the hotel tax trends. When she asked when the council would have an opportunity to change the plan, Shikada indicated that this could happen at the end of this year, when the city receives bids for the new public safety building. He suggested moving ahead with the bidding process despite the council's reservations about the project.
"Currently having the project up for bids would not be the time to say, 'Halt.' Let's see what the bids come back at, as one data point," Shikada said.
Tanaka disagreed and recommended acting sooner, rather than later, to halt the project.
"Why not stop it tonight?" Tanaka asked. "Why wait longer? It's not like we're seeing hotels roaring back. Business travel still hasn't happened. Stanford has not opened. We have a lot of needs like fire and other services in the community."
While the council didn't approve any budget changes on Monday, it asked staff to explore adding resources to the Fire Department, which saw significant cuts as part of the council's effort to remove $39 million from the budget. To obviate the need for layoffs and preserve recently hired and trained employees in the Police and Fire departments, the council offered bonuses to public-safety veterans who are willing to retire early. While the Police Department achieved its newly reduced staffing levels through attrition, the Fire Department was still set to lose three positions, according to Nose.
Kniss strongly advocated for retaining these three positions, potentially by dipping into the $744,000 reserve that the council created to address unforeseen needs relating to COVID-19. Her colleagues agreed and the council voted 6-0 to extend the "attrition ramp" until the end of March. Mayor Adrian Fine, whose son was born Sunday, was absent.
Kniss noted that Palo Alto firefighters have been responding to wildfires all throughout the region in recent months. Fire Chief Geo Blackshire said the department has participated in seven deployments, each involving four firefighters.
"This has been a terrible year for fire," Kniss said. "I'd be embarrassed if we said, 'We have to let three firefighters go,' when we've been sending firefighters to other places to fight fires."