News

New projections show city faces a nearly $7M budget shortfall

Palo Alto City Council prepares for budget cuts in coming fiscal year as revenue slump continues

A new economic forecast predicts Palo Alto will receive $30 million and $10 million in hotel and sales tax revenues, respectively, next year. Embarcadero Media file photo.

As the COVID-19 pandemic continues to batter the local economy, the Palo Alto City Council is preparing for a fresh round of budget cuts in the coming months to account for a sharp drop in sales and hotel tax revenues.

The council is expecting to see a budget shortfall of nearly $7 million in fiscal year 2022, which begins on July 1. The estimate is based on an admittedly uncertain assumption by city staff that the economic recovery will proceed at a moderate pace over the next few years and that the recession will stretch until 2027.

In its first major discussion of the city's budget, the council agreed on Monday night to adopt this "moderate" scenario for planning purposes and to take a fresh look at the city's list of infrastructure projects to see which can be deferred or scrapped. By a 6-1 vote, with council member Greg Tanaka dissenting, the council adopted the economic forecast from the Administrative Service Department, which assumes a $6.8 million shortfall in 2022.

The scenario estimates that the city will see about $30 million in sales tax revenues and $10 million in transient occupancy tax revenues in 2022. That would be up from the current year, in which the city is projecting $25 million and $4.8 million in these two categories, respectively.

Even with the uptick, however, both revenue sources are expected to remain well below historic levels. In 2019, the city's sales tax revenues totaled $36.5 million and its hotel tax revenues were $24.9 million, according to a report from the Administrative Services Department.

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The report notes that while federal stimulus packages have contributed to positive economic indicators, two more months have passed without a new stimulus package and some programs that focus on income and business support will expire by the end of the year.

"More restaurants and other small businesses in Palo Alto have closed either temporarily or permanently," the report states. "While there has been positive news in the last few months regarding a coronavirus vaccine, major benefits seen from the vaccine administration are not expected until the next fiscal year when distribution is widespread."

In discussing the latest economic projections and the city's budget strategy, the council agreed Monday that it will have to pay special attention to infrastructure. Even as the council cut about $40 million from its budget last year and eliminated nearly 70 positions, the city has advanced numerous capital projects that had been in the planning stages for years and, in some cases, decades.

The city completed last year the construction of a new fire station near Rinconada Park and a six-level parking garage near California Avenue, projects that were listed on the council's 2014 list of infrastructure priorities. Another project on the list — a bike bridge over U.S. Highway 101 — is currently in the works, with plans afoot to install the main span between Feb. 13 and Feb. 14.

And in the coming months, the city will break ground on its most expensive and highest priority project: a $118 million public safety building on Sherman Avenue. Construction of the new building, which will serve as headquarters for the Police and Fire departments and for the Office of Emergency Services, is set to conclude in 2023.

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Vice Mayor Pat Burt suggested Monday that given the severe financial downturn, the council needs to reconsider its infrastructure plan. Burt, who unsuccessfully lobbied his colleagues last week to scale down the proposed public safety building by possibly eliminating one of the garage levels, argued Monday that the city is no longer living in the era where it can fund every project on its list. He suggested stretching out the city's five-year capital plan to seven and eight years to save money in the near term.

"We have to realize that the capital plan has to be adjusted," Burt said. "That doesn't mean we have to give up all of it but it has to be adjusted and come down to earth."

While the council didn't discuss specific projects that would be deferred, it directed staff to return with some options for dropping or deferring capital expenditures.

The council's 2014 list — which also includes improvements to Byxbee Park, completion of streetscape improvements in the Charleston/Arastradero corridor and the replacement of the Mitchell Park fire station — represents just a portion of the city's ambitious plans. The city's capital budget in the current year is $288.7 million and its five-year plan includes $793.4 million in capital spending.

While about $461 million of the total figure is devoted to utility projects, Palo Alto's budget also includes a $331.5 million "capital improvement fund" with 86 projects in categories such as buildings, parks, technology upgrades, streets and sidewalks (the public safety building is by far the largest project on this list).

These projects include everything from routine playground maintenance and new bikeways to technology upgrades at the downtown parking garage and the renovation of the Palo Alto Junior Museum and Zoo.

By focusing on infrastructure projects, the council is hoping to avoid making major cuts to programs and services this year. Last June, in response to plummeting revenues, the council voted to discontinue the city's shuttle program, cut staffing in Police and Fire departments and dramatically slash funding for libraries and art programs. Council member Alison Cormack said she does not believe the community has yet "felt the impact of the cuts we made because so many programs and services are closed."

"I think people think this is all going to come back when COVID is over and it's not," Cormack said.

While the council agreed that the economic news is largely gloomy, Tanaka suggested that the staff projection is in fact too optimistic. He said he has spoken to people in the hotel business in recent weeks. None of them are expecting a recovery any time soon, he said.

"If the people operating these businesses aren't thinking this, I don't know how we can think this. To me it's incredibly wishful thinking," Tanaka said.

But while Tanaka favored more conservative assumptions, others cautioned against cutting too much. Mayor Tom DuBois suggested that the council consider tapping into the city's budget stabilization reserve to cover projected revenue shortage. The reserve, which functions like a rainy day fund, is made for situations like this, he said.

"This is not a normal recession. None of us really know how the world is going to recover, whether things will permanently change or if we'll go back to where we were before," DuBois said.

Find comprehensive coverage on the Midpeninsula's response to the new coronavirus by Palo Alto Online, the Mountain View Voice and the Almanac here.

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New projections show city faces a nearly $7M budget shortfall

Palo Alto City Council prepares for budget cuts in coming fiscal year as revenue slump continues

by / Palo Alto Weekly

Uploaded: Tue, Feb 9, 2021, 4:38 pm

As the COVID-19 pandemic continues to batter the local economy, the Palo Alto City Council is preparing for a fresh round of budget cuts in the coming months to account for a sharp drop in sales and hotel tax revenues.

The council is expecting to see a budget shortfall of nearly $7 million in fiscal year 2022, which begins on July 1. The estimate is based on an admittedly uncertain assumption by city staff that the economic recovery will proceed at a moderate pace over the next few years and that the recession will stretch until 2027.

In its first major discussion of the city's budget, the council agreed on Monday night to adopt this "moderate" scenario for planning purposes and to take a fresh look at the city's list of infrastructure projects to see which can be deferred or scrapped. By a 6-1 vote, with council member Greg Tanaka dissenting, the council adopted the economic forecast from the Administrative Service Department, which assumes a $6.8 million shortfall in 2022.

The scenario estimates that the city will see about $30 million in sales tax revenues and $10 million in transient occupancy tax revenues in 2022. That would be up from the current year, in which the city is projecting $25 million and $4.8 million in these two categories, respectively.

Even with the uptick, however, both revenue sources are expected to remain well below historic levels. In 2019, the city's sales tax revenues totaled $36.5 million and its hotel tax revenues were $24.9 million, according to a report from the Administrative Services Department.

The report notes that while federal stimulus packages have contributed to positive economic indicators, two more months have passed without a new stimulus package and some programs that focus on income and business support will expire by the end of the year.

"More restaurants and other small businesses in Palo Alto have closed either temporarily or permanently," the report states. "While there has been positive news in the last few months regarding a coronavirus vaccine, major benefits seen from the vaccine administration are not expected until the next fiscal year when distribution is widespread."

In discussing the latest economic projections and the city's budget strategy, the council agreed Monday that it will have to pay special attention to infrastructure. Even as the council cut about $40 million from its budget last year and eliminated nearly 70 positions, the city has advanced numerous capital projects that had been in the planning stages for years and, in some cases, decades.

The city completed last year the construction of a new fire station near Rinconada Park and a six-level parking garage near California Avenue, projects that were listed on the council's 2014 list of infrastructure priorities. Another project on the list — a bike bridge over U.S. Highway 101 — is currently in the works, with plans afoot to install the main span between Feb. 13 and Feb. 14.

And in the coming months, the city will break ground on its most expensive and highest priority project: a $118 million public safety building on Sherman Avenue. Construction of the new building, which will serve as headquarters for the Police and Fire departments and for the Office of Emergency Services, is set to conclude in 2023.

Vice Mayor Pat Burt suggested Monday that given the severe financial downturn, the council needs to reconsider its infrastructure plan. Burt, who unsuccessfully lobbied his colleagues last week to scale down the proposed public safety building by possibly eliminating one of the garage levels, argued Monday that the city is no longer living in the era where it can fund every project on its list. He suggested stretching out the city's five-year capital plan to seven and eight years to save money in the near term.

"We have to realize that the capital plan has to be adjusted," Burt said. "That doesn't mean we have to give up all of it but it has to be adjusted and come down to earth."

While the council didn't discuss specific projects that would be deferred, it directed staff to return with some options for dropping or deferring capital expenditures.

The council's 2014 list — which also includes improvements to Byxbee Park, completion of streetscape improvements in the Charleston/Arastradero corridor and the replacement of the Mitchell Park fire station — represents just a portion of the city's ambitious plans. The city's capital budget in the current year is $288.7 million and its five-year plan includes $793.4 million in capital spending.

While about $461 million of the total figure is devoted to utility projects, Palo Alto's budget also includes a $331.5 million "capital improvement fund" with 86 projects in categories such as buildings, parks, technology upgrades, streets and sidewalks (the public safety building is by far the largest project on this list).

These projects include everything from routine playground maintenance and new bikeways to technology upgrades at the downtown parking garage and the renovation of the Palo Alto Junior Museum and Zoo.

By focusing on infrastructure projects, the council is hoping to avoid making major cuts to programs and services this year. Last June, in response to plummeting revenues, the council voted to discontinue the city's shuttle program, cut staffing in Police and Fire departments and dramatically slash funding for libraries and art programs. Council member Alison Cormack said she does not believe the community has yet "felt the impact of the cuts we made because so many programs and services are closed."

"I think people think this is all going to come back when COVID is over and it's not," Cormack said.

While the council agreed that the economic news is largely gloomy, Tanaka suggested that the staff projection is in fact too optimistic. He said he has spoken to people in the hotel business in recent weeks. None of them are expecting a recovery any time soon, he said.

"If the people operating these businesses aren't thinking this, I don't know how we can think this. To me it's incredibly wishful thinking," Tanaka said.

But while Tanaka favored more conservative assumptions, others cautioned against cutting too much. Mayor Tom DuBois suggested that the council consider tapping into the city's budget stabilization reserve to cover projected revenue shortage. The reserve, which functions like a rainy day fund, is made for situations like this, he said.

"This is not a normal recession. None of us really know how the world is going to recover, whether things will permanently change or if we'll go back to where we were before," DuBois said.

Find comprehensive coverage on the Midpeninsula's response to the new coronavirus by Palo Alto Online, the Mountain View Voice and the Almanac here.

Comments

Resident
Registered user
Another Palo Alto neighborhood
on Feb 10, 2021 at 10:33 am
Resident, Another Palo Alto neighborhood
Registered user
on Feb 10, 2021 at 10:33 am

$7million--about the amount that extra, unneeded level of auto parking under the recently approved public safety building will cost. Cut that.

In fact, delay the project for six months to see if construction costs will drop as the economy enters recovery--as usually happens.


Resident8
Registered user
Duveneck/St. Francis
on Feb 10, 2021 at 10:45 am
Resident8, Duveneck/St. Francis
Registered user
on Feb 10, 2021 at 10:45 am

So the city has not yet tapped into its budget stabilization fund...? Seems like an obvious solution along with deferring some maintenance.


commonsense
Registered user
Professorville
on Feb 10, 2021 at 11:10 am
commonsense, Professorville
Registered user
on Feb 10, 2021 at 11:10 am

Perfect time for a new $100,000,000 public safety building. Maybe pause?


Taylor Greene
Registered user
another community
on Feb 10, 2021 at 2:36 pm
Taylor Greene, another community
Registered user
on Feb 10, 2021 at 2:36 pm

Tough times call for certain austerity measures and alternative billings.

Libraries are not that important as everything is online now and art programs for children are a luxury expenditure at best.

Since Palo Alto is considered one of the more wealthier California communities, increasing the utility rates for both commercial and residential customers could parlay the lost tax revenue.

Cutting the police force budget also makes sense as Palo Alto has a very low crime rate to begin with and defending law enforcement is the modern political buzzword anyway.

The rainy day fund should be depleted before any of these suggested changes are implemented. That is what a slush fund is for.


Aaron Wiseman
Registered user
Stanford
on Feb 10, 2021 at 3:02 pm
Aaron Wiseman, Stanford
Registered user
on Feb 10, 2021 at 3:02 pm

@Taylor Greene

Did you mean to say or write...'defund' the police rather than 'defending' law enforcement?

Many progressives are in favor of of the former as it would save federal funds that could be utilized far more productively.


Online Name
Registered user
Embarcadero Oaks/Leland
on Feb 10, 2021 at 3:05 pm
Online Name, Embarcadero Oaks/Leland
Registered user
on Feb 10, 2021 at 3:05 pm

Sorry, but libraries are VERY important and our librarians are incredibly competent. They also provide info for the covid newsletter which.

Not all of us are wealthy, especially after paying our utility bills.

As for utility rates, the city already overcharges us by $20,000,000 and we are STILL waiting for the refunds from the lawsuit they lost. Still grateful to the citizen who filed to stop this egregious practice which has gone on for many many years netting the city $100,000,000 over 5 years.

Re the police force, the city's already cut traffic enforcement and community policing. Read the police blotter if you think crime is low. Not a day passes without bikes and catalytic converters being stolen.

Cut the police BUILDING and use the money for POLICING.


Bystander
Registered user
Another Palo Alto neighborhood
on Feb 10, 2021 at 4:54 pm
Bystander, Another Palo Alto neighborhood
Registered user
on Feb 10, 2021 at 4:54 pm

For once, I would say that Alison Cormack has it right. People do think that things like the shuttle will automatically return when the pandemic is over but it will not.

In fact, the shuttle is a big issue. It is the sole reason why VTA has removed and reduced service in Palo Alto (as well as Mountain View).

When children have to get to school, whenever that will be, the lack of shuttles will put more traffic on the roads. Investing money into public transport is very necessary, particularly if all the building of homes goes through bringing more people who need to get to wherever they need to go. People will not go grocery shopping on bicycles in the main.

If we are talking about refraining from city expenditures, then more senior staff positions will be necessary. Any type of new bicycle promoting road changes should also be eliminated. Anything other than quality of life for Palo Alto present residents, rather than potential residents should be priority rather than anything that may cause an influx of new residents. As it is, the workforce are in the main working from home and we have no idea if this is something that will continue post-pandemic.

And of course, it goes without saying that the Foothills Park fiasco is costing the City money. Unless a large fee is put on Preserve visitors, then this will continue to be a money pit. The mistakes made here are very expensive.


Anonymous
Registered user
Duveneck/St. Francis
on Feb 10, 2021 at 11:25 pm
Anonymous, Duveneck/St. Francis
Registered user
on Feb 10, 2021 at 11:25 pm

Do not cut Library budgets.
Do not cut Police/Public Safety.
Do focus on fundamental city operations/services to current residents.


Annette
Registered user
College Terrace
on Feb 11, 2021 at 6:45 am
Annette, College Terrace
Registered user
on Feb 11, 2021 at 6:45 am

Burt asked the right questions last week.

This should have been agendized before CC reviewed and voted on the public service building. It's pretty clear that the City Manager teed this up as he did so that the PSB would be approved despite the now fully public fact that the City cannot rely on the revenue stream, TOT, that was used to justify the recommendation that Council approve the contracts. If the City Manager didn't rush out and ink those contracts, or if the closing date has not yet passed, it would be prudent to pause those contracts. And I'll bet there's a seismically safe, vacant commercial space that could be repurposed as an interim home for the EOC until the City's coffers are full. Maybe relocate the EOC to one of the periodically browned out fire stations.

City Council: the tail wagging the dog dynamic has got to stop so that essential services aren't further eroded. The City Manager is, obviously, not elected. The person in that position should be acting at Council’s direction, not the other way around. CC has ceded too much power and influence to the City Manager. This started several city managers ago and got well out of hand under Shikada’s predecessor. When issues are agendized is critical. Ditto the use of the Consent Calendar. Ditto how many items are on any given agenda. It’s ludicrous that public participation is limited to 1 or 2 minutes b/c Council has an impossibly packed agenda to get through. It’s time to clean house.


Annette
Registered user
College Terrace
on Feb 11, 2021 at 6:50 am
Annette, College Terrace
Registered user
on Feb 11, 2021 at 6:50 am

Question for @Bystander who wrote:

"If we are talking about refraining from city expenditures, then more senior staff positions will be necessary."

Why would more senior staff be needed? Is the word "not" missing?

I fully agree with your observation that the mistakes are expensive; Palo Alto should be managed better.


JuJu Wang
Registered user
Old Palo Alto
on Feb 11, 2021 at 6:57 am
JuJu Wang, Old Palo Alto
Registered user
on Feb 11, 2021 at 6:57 am

It would be a shame to close the libraries or reduce fire stations.

The police department is another story. Defunding of police departments has become a nationwide topic because the police often costs cities more money in lawsuits than in actual crime prevention.

Systemic racism in police departments accounts for many of the lawsuits.

A neighbor told me that the Palo Alto police used to use racial profiling to harass African American non-residents.

This illustrates the racism within the city that some equality advocates speak of.

As a recent and newly arrived Palo Alto
resident, I sometimes sense the prejudice from older Palo Alto residents who are resentful of my family's wealth.


Bystander
Registered user
Another Palo Alto neighborhood
on Feb 11, 2021 at 7:40 am
Bystander, Another Palo Alto neighborhood
Registered user
on Feb 11, 2021 at 7:40 am

@Annette. Thank you for pointing out my error in that rambling sentence. Obviously not well edited on my part.

I think you and I are on the same page about this.


Elinore Rosenstein
Registered user
Atherton
on Feb 11, 2021 at 8:41 am
Elinore Rosenstein, Atherton
Registered user
on Feb 11, 2021 at 8:41 am

The City of Palo Alto apparently cannot live within it's means.

An expensive new police station was an unnecessary expenditure.

And the city relied too much on its hotel/motel tax base. When the coronavirus stifled these anticipated revenues, fiscal problems further ensued.

Some call it getting too big for one's britches or living within one's means.


Online Name
Registered user
Embarcadero Oaks/Leland
on Feb 11, 2021 at 8:41 am
Online Name, Embarcadero Oaks/Leland
Registered user
on Feb 11, 2021 at 8:41 am

To amplify Annette's points, not only is the City Manager not elected, but he was the only candidate interviewed and was granted a huge compensation package that includes an extra year's worth of salary and benefits if he's fired for cause. When Ms. Kniss pushed his candidacy, she said the city had to rush to grab him up and didn't need to interview anyone else AND deserved his comp package that puts him in the top 5 for ALL local officials.

His office keeps growing with very highly paid assistant city managers and communications/pr staff who've notably failed in their outreach efforts.

Why are his 2 big projects improving City Hall's heating/air conditioning systems -- jokes here deleted -- and building a new police station while cutting community services like traffic enforcement that would benefit us all?

High time for the City Council to rein him in.


Resident 1-Adobe Meadows
Registered user
Adobe-Meadow
on Feb 11, 2021 at 9:42 am
Resident 1-Adobe Meadows, Adobe-Meadow
Registered user
on Feb 11, 2021 at 9:42 am

I always thought that that the property on Fabian Way would be the perfect place for a new police/fire/administrative station. Why did the city let that get away? It has a huge parking lot, existing buildings that could be refreshed, and could house both the police, fire, utility, and administrative office of the city that are currently in the Palo Alto Business park on Elwell Court. The zoning is correct for that location. Also access to 101 and the Utility property across the freeway. I am talking about the location that now houses a drug company. And the area that is now planned for housing would be associated with those services. That is lost opportunity. Possibly the property on the corner of Charleston and Fabian can be built for some of those services. We have established a priority for those services so politically a less costly opportunity.


Jacob Tseglin
Registered user
Menlo Park
on Feb 11, 2021 at 10:08 am
Jacob Tseglin, Menlo Park
Registered user
on Feb 11, 2021 at 10:08 am

The area you speak of is best suited for providing additional cost-effective housing...to accommodate those of color with less financial resources.

Time for Palo Alto to step up to the plate and do the right thing.

The new police department building is already underway so there is no need to allocate this particular area for frivolous municipal services.

Palo Alto creates its own problems and must deal with them accordingly.

Maybe even look at how other cities successgully address their civic issues.

Palo Alto just hires consultants at tax-payer expense to point out the obvious or to find more ways of spending money that isn't there.

How inept.


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