Tough decisions are best made when based on clear principles. The city and council staff need to transparently lay out their economic assumptions and the fiscal implications of budget changes they're proposing. For example, which cuts are already vacant positions and which are for services that can't be provided currently due to COVID restrictions? What constraints are there under California law that may limit the city's ability to modify existing labor contracts? The council and community need clear explanations in plain language. And the current emergency should not be used to push through policy changes not related to the fiscal emergency.
Big budget impacts of capital investments
Ten years ago, the City Council appointed an Infrastructure Blue Ribbon Committee (IBRC) that recommended a substantial three-tiered solution to our decades-long problem of inadequate infrastructure investments. The council soon addressed the first two tiers: "keeping up" and "catching up" on infrastructure maintenance. The third tier addressed funding for overdue big facility projects like a new police building, parking garages, two new fire stations, restoring our Municipal Services Center and other projects. The challenge was how to fund these needs while continuing to provide our most valued services. In the next several years, the council developed and implemented a funding plan, primarily through zoning incentives and marketing to grow significantly our number of hotels and increase our hotel tax (TOT) revenue.
The plan was to stimulate new revenue to fund big capital projects. It was never intended that these projects would be built at the expense of the services we value and need. But with the COVID-related loss of TOT income, the proposed budget instead prioritizes paying for new facilities and other capital projects with unencumbered funds at the expense of vital public safety and community services. The current budget proposes to retain record capital funding for this year:
These investments meet important long-term needs, but they are not generally critical over the next couple of years. Savings can be achieved by only modestly reducing the rate of capital investments over the next two years. For example, the budget includes $102 million toward the new Public Safety Building. The project will be funded through bonds, but the debt service is $7.3M/year beginning next year and the Municipal Services Center has over $8 million budgeted for major maintenance.
These projects are budgeted to cost far more than previously estimated due to the formerly booming economy, but costs are likely to drop over the next one to two years. We saw that happen during the Great Recession: Projects that had been consistently coming in above estimates instead received bids at far lower costs, resulting in big savings.
The city also needs to avoid getting locked into big, new obligations in the coming months to retain latitude to respond if the downturn deepens. Whichever capital projects are ultimately budgeted for this fiscal year, staff should not enter into any major non-essential project contracts until after a mid-year budget review.
Nearly every resident and business is experiencing financial hardship from the COVID emergency. Our city managers have just volunteered to reduce their salaries by 15% during the city's fiscal crisis. Shortly before the current economic crash, the city completed negotiations with our employee unions for raises in response to what was then the rising cost of living in a booming economy. To now avoid layoffs and retain community support for city employees, unionized city workers should opt to forego these previously agreed upon raises.
Budget Stabilization Reserve
The current period represents the greatest economic uncertainty in decades. Consequently, the city should ensure that its Budget Stabilization Reserve is adequate to respond to the changing needs from an economy that may deteriorate further. The BSR was drastically reduced from $45 million to $25 million in the current fiscal quarter alone because the city chose to support workers during the current final quarter of its fiscal year 2020 by keeping all staff on at full payroll. Savings from labor agreements should be allocated to retaining an adequate financial reserve to contend with uncertainties.
By reducing the rate of long-term Capital Fund expenditures, re-bidding projects and curtailing salaries and raises, we can eliminate the most severe cuts to employees and critical, highly valued services.
This is a difficult time with tough decisions for our city leaders, but with smart choices, we can respond to the crisis without severely cutting the services that make Palo Alto such a safe and wonderful place to live. Now more than ever, we need a sense of community. Working together, we can get through this.
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