It's no secret that the pandemic has been brutal for Palo Alto businesses, with hotels hollowing out, retailers struggling, commuters staying home and restaurants scrambling to stay alive amid shifting health restrictions.
Like in other cities, the struggles of the business community trickled down to City Hall, which banks on hotel and sales taxes to pay for basic services like firefighters, police and libraries. But because the city has long depended on its huge daytime population of employees to spend money at its businesses, the shift to remote work has had a particularly devastating effect on Palo Alto. A new report indicates that while most cities took a hit over the course of the pandemic, Palo Alto took a severe beating.
According to the analysis from the city's consultant, Avenu Insights & Analytics, the city's sales tax revenues in 2020 declined by 27.3% from the prior year, with losses particularly steep in the downtown area and in commercial corridors along El Camino Real and in Midtown. The drop in Palo Alto far exceeded the declines experienced by other jurisdictions, according to the report. Statewide, receipts dipped by 7.2% between the final quarters of 2019 and 2020. In northern California, the decline was 5.1%, while in southern California it was 8.6%.
The analysis by Avenu showed a drop in every sales tax category, with particularly poor showings among department stores, furniture and appliance businesses and restaurants.
In many cases, the declines in Palo Alto far exceed those in nearby jurisdictions. In the category of "general retail," the city saw a dwindling of 33.5% between the final quarters of 2019 and 2020. Mountain View and Los Altos saw decreases of 11.2% and 16.8%, respectively, over the same period, while Cupertino experienced a drop of 18.5%. Among the surveyed jurisdictions, only Milpitas saw a bigger drop in this category than Palo Alto, with receipts dipping by 35.5% between the fourth quarters of 2019 and 2020.
Palo Alto also had by far the worst showing in the "food products" category, with a drop of 42% in sales tax receipts between the final quarters of 2019 and 2020. Mountain View and Los Altos, by contrast, saw sales taxes diminish by 21% and 28.2% over the same period. None of the jurisdictions surveyed by Avenu showed a steeper decline in the food segment than Palo Alto.
The news, while gloomy, isn't entirely dire. Some segments of the local economy started to rebound in the final three months of 2020, according to the report. The restaurant segment, which traditionally generated about $1.1 million per quarter in sales tax receipts, brought in only about $339,414 in the quarter that spanned between April and June 2020. The number moved up to $543,111 in the third quarter of the year and to $600,427 in the final three months.
Department stores also had a particularly dismal 2020, with the segment generating only $29,823 in sales tax receipts between April, May and June (down from $453,439 in the same period in 2019). Sales have since picked up, however, with sales tax receipts rising to $186,208 in the third quarter of 2020 and to $315,453 in the fourth.
Not every commercial area in Palo Alto faced the same level of decline. Stanford Shopping Center — a regional destination that includes major sales-tax generators such as Tesla, Apple and Hermès — saw its sales tax receipts drop by 17.7% between the fourth quarter of 2019 and the same period in 2020, going from $1.7 million to $1.4 million. California Avenue also weathered the storm reasonably well, despite a 26% drop in restaurant receipts. Spurred by an increase in receipts from the "general retail" segment, Palo Alto's "second downtown" showed a decline of 19.9% in total receipts, which fell from $123,009 in the fourth quarter of 2019 to $98,543 in the same period of 2020.
In downtown Palo Alto and the commercial areas along El Camino Real and in Midtown, the drop was far more precipitous, with each of these areas seeing a drop of more than 50% in sales taxes generated. Food products, which account for the greatest share of sales tax receipts in the downtown area, fell off by 48.6% between the last quarter of 2019 and the last quarter of 2020. The next two largest categories — general retail and business-to-business — showed declines of 54.8% and 62.2%, respectively. El Camino and Midtown had a combined drop of 47.7% in the "food products category" over the same period.
The Town & Country Village shopping center did marginally better in 2020, with its sales tax receipts falling by 36.4% between the final quarters of 2019 and 2020. Numerous shops and restaurants at the shopping center — including Patrick James and Mayfield Bakery & Café — have recently shuttered, bringing the center's vacancy rate to about 21% as of June, Dean Rubinson, director of development for Ellis Partners, which owns the center, told the council at a recent hearing.
Hotel taxes also have plummeted over the course of the pandemic. With business travel grinding to a halt over the course of the pandemic and Stanford University operating in remote mode, Palo Alto's hotel tax revenues plummeted from $25.6 million in 2019, to $18.6 million in 2020, to just $4.8 million in 2021.
The sobering report from Avenu is already shifting some of the conversions at City Hall. On Monday night, council member Greg Tanaka cited its findings in explaining his opposition to increasing the construction contract for the city's new public safety building. Tanaka called the decrease in Palo Alto's sales tax revenues "pretty striking."
"It's something for us to keep in mind, in terms of our budget for our city, and to make sure our resources are very well allocated," Tanaka said.
John Shenk, CEO of Thoits Brothers, a major commercial property owner in downtown Palo Alto, also cited the new report during Monday's discussion of homelessness. He urged the council to fund a police unit to provide outreach services to downtown's homeless population, which he argued is hurting downtown's already struggling business community. Shenk noted that while Stanford Shopping Center has done reasonably well, the "community-serving retail areas have really suffered."
"The retailers who have multiple stores on the Peninsula report that Palo Alto is by far the worst retail environment," Shenk told the council, which subsequently directed staff to come up with an outreach plan for homelessness that involves police officers.
The dismal economic trend has eaten into the city's general fund, which went from $225.8 million in fiscal year 2019 to $209.7 million in fiscal year 2020 and to $188.9 million in fiscal year 2021, which ended on June 30.
While the council has already made some adjustments, including freezing or eliminating more than 70 positions, the city's financial pain was somewhat ameliorated by federal assistance — namely, the roughly $13.5 million that the city was allotted through the American Rescue Plan — and by a withdrawal from the city's budget stabilization reserve.
Some council members, most notably Vice Mayor Pat Burt, have suggested that the best way to fill the budget gap in future years is through a business tax, a funding mechanism that the council had previously considered for major infrastructure priorities such as "grade separation" at rail crossings and construction of affordable housing.
Last month, the council reaffirmed its intent to place a business tax on the 2022 ballot, with most members favoring a tax based on square footage. During the Aug. 16 discussion, Burt suggested that the decision on how to spend the business tax will be "somewhat dependent on the status of economic recovery."
He suggested that a business tax would allow the city to address problems like traffic gridlock, insufficient housing and deterioration of services, thus helping to sustain the city's historically dynamic business climate.
"We've had drastic service cuts to police and fire, code enforcement, libraries, parks and other services — every place across the board — and the community is just starting to understand how deep those cuts are," Burt said. "We don't yet have a projection that allows us to restore ourselves to the services that this community has had for decades and decades."