Downtown landowners may be asked to pay for new garages

As Palo Alto marches toward a 2014 vote to raise funds for infrastructure repairs, officials are backing away from the kind of all-or-nothing bond that voters passed in 2008 to pay for library renovations. Instead officials are pursuing a series of more-modest proposals with more wiggle room and a greater chance of winning support.

Chief among the options are an increase in hotel taxes and a creation of Mello-Roos districts in downtown and around California Avenue. Both options received on Tuesday the tentative blessing of the City Council’s Infrastructure Committee, which is tasked with making a recommendation to the full council about a 2014 ballot measure.

Though the committee did not vote on an actual recommendation, members made clear during the discussion that they now favor a series of different tax increases, each targeting a particular taxpayer segment and a particular infrastructure need. This would be radically different from November 2008, when more than two-thirds of the city’s voters approved a $76 million bond to renovate two libraries and to construct the new Mitchell Park Library and Community Center.

Unlike with the library bond, the council’s current effort centers on a wide range of infrastructure items that were identified as in need of repair or replacement by a specially appointed citizens’ Infrastructure Blue Ribbon Commission. These include a new police headquarters, replacement of two obsolete fire stations, various biking improvements, new parking facilities and a host of “catch up” repairs relating to city streets, sidewalks and parks.

Councilman Larry Klein, who chairs the committee, said Tuesday he expects to send to the full council three different funding alternatives, all of which could be discussed separately and would target different items. One proposal would create Mello-Roos districts, which would effectively require certain portions of the city to pay a tax that would be used to fund facilities in their area. In this case, the boundaries would encompass the business districts in downtown and around California Avenue, with the proceeds going to pay for garages in the two areas.

According to a report from the city’s Administrative Services Department, Mello-Roos districts are typically used to build schools, streets and other types of infrastructure. Recently, San Francisco used them to fund street improvements and underground infrastructure near Rincon Point and to pay for garages and various waterfront improvements at the Port of San Francisco.

Mayor Greg Scharff was among those who favored setting up such districts downtown, arguing that it would force the businesses who contributed to downtown’s notorious parking shortage to help solve the problem. He requested that staff come back with more information about Mello-Roos districts and a plan for creating them via the 2014 ballot.

In the coming weeks, staff will analyze options for district boundaries and consider possible methodologies for the new tax, which could be based on types of land use or on square footage. Staff will also consider the potential interplay between the new districts and downtown’s existing parking-assessment district, which paid for existing garages.

“Traditionally, we’ve had the people that create the impacts pay for it,” Scharff said.

Vice Mayor Nancy Shepherd agreed, though her enthusiasm was more measured. She recommended more analysis and outreach to those property owners who would be affected by the creation of a new district.

“I think we need to have enough information to see if it’s a go,” Shepherd said. “We need to make sure the public knows that we’re taking this into consideration so that we can start hearing from the people who might be impacted.”

Formation of the new districts would still require approval of two-thirds of the voters, a threshold that officials feel can be more easily reached with this proposal than with an earlier plan to float a bond that would pay for a new police building. Though that bond idea remains in the air, council members agreed that they cannot seriously weigh it until they get more information about the one major wild card in the infrastructure debate — a development proposed by Jay Paul Company.

The proposal, which is currently winding its way through the city’s environmental-review process, would include the police building as a “public benefit” in exchange for the city’s permission to construct two buildings with 311,000 square feet of commercial space at 395 Page Mill Road. The council is scheduled to get its first look later this month at a preliminary traffic analysis for the Jay Paul project, a report that could shed some light on whether the development is feasible.

If the city determines that the impact of Jay Paul’s development would be negligible, approval would effectively resolve the police-building dilemma. Otherwise, the council may look to hotels for help.

On Tuesday, committee members reiterated their support for raising the city’s hotel tax, also known as a “transient occupancy tax,” to pay for infrastructure needs. Unlike a bond, this tax increase would require the support of only 50 percent of the voters, plus one. By staff’s estimate, raising the hotel tax from 12 percent to 14 percent would bring in an additional $4.6 million annually, which includes $2.8 million from hotels that are now under construction. Raising it to 15 percent would yield $5.7 million in additional revenues.

Councilman Marc Berman, who had sat on the citizens’ infrastructure commission before joining the council, argued the new hotel taxes could help the city fund the police building. The latest city estimate pegs the price of a new police building, including land costs, at $57 million.

Most notably, Berman said, the tax increase, which would require support from only a simple majority of the voters, would be easier to pass than a general-obligation bond, which would require two-thirds majority. A recent survey by the city indicated that support for the police building would fall just shy of this threshold.

“It seems it would make more sense to tie that resource to the least popular infrastructure item, which of the big items is the public-safety building,” Berman said, referring to hotel taxes.

Currently, Palo Alto is in the middle of the regional pack when it comes to its hotel-tax rate. Menlo Park, Redwood City and East Palo Alto have a 12 percent rate, while Oakland and San Francisco have a rate of 14 percent. San Jose and Mountain View each have a 10 percent rate, while Anaheim is at the upper end of the scale with 15 percent.

Staff estimates that each $1 million in new hotel taxes can generate $14 million in project funds through the issuance of bonds known as certificates of participation. Thus, a 2 percent increase in hotel taxes coupled with revenues from new hotels could net $64.4 million in infrastructure funds while a 3 percent increase would bring in $79.8 million.

Klein said he would like staff to give some thought as to what the tax increase would look like and argued that a 3 percent hike would be “one percent too far.”

“I don’t want to see us a state leader or tied for state lead for this,” Klein said.