Now, as the City Council is looking toward the next year's budget and COVID-19 continues to cast a dark cloud over the local economy, those seemingly dire projections have proven to be optimistic. With revenues falling beneath expectations, the council is preparing to cut the budget by another $7 million, a move that will likely include additional service cuts and delays to numerous infrastructure projects.
The debate over which programs to cut and which projects to delay will take center stage this Monday, when the council considers a series of budget adjustments and weighs further strategies for supporting businesses and nonprofit groups. As part of the discussion, the council will consider waiving rent for the tenants who lease space at city-owned properties and spending about $150,000 to modify the streetscape at University Avenue so that the city can more easily open and close the road to traffic to support local businesses.
One significant action that the council plans to take on Monday is to formally eliminate the 83 full-time positions and 107 part-time positions that were frozen and defunded when the council adopted the fiscal year 2021 budget last June. The eliminated positions make up 18% of the city's workforce, according to a new report from the Administrative Services Department.
Further staff cuts may follow in the months ahead. During a Feb. 8 discussion of Palo Alto's long-term financial forecast, council members acknowledged that the city will need to identify additional expense reductions, whether in services, infrastructure projects or both.
"I think it's safe to say there's no safe harbor, so to speak," Chief Financial Officer Kiely Nose said during the Feb. 8 discussion. "We'll have to look across the organization."
Given the bleak financial outlook, the council agreed at that meeting that one of its strategies should be slowing down infrastructure spending. Vice Mayor Pat Burt was among those who pushed for the staff to reconsider the city's capital projects.
"We need to look objectively on how aggressive a capital plan we need to have during an economic crisis and whether all these things need to be continued at a record pace in the middle of an emergency," Burt said at the Feb. 8 discussion.
On Monday, members will have a chance to identify specific projects that could be delayed or canceled. According to staff, the list that the city is currently scheduled to approve before the end of June includes $8 million for the latest phase of the Charleston-Arastradero Road streetscape improvements, which includes enhanced bike lanes, traffic signal improvements and landscaped median islands; $2.5 million for improvements at Rinconada Park, including new playground equipment and upgrades to irrigation and drainage; $2.4 million to help renovate the Palo Alto Junior Museum and Zoo; $2.7 million for new automated parking-guidance systems at downtown garages; and $8.7 for replacing the roofs and aged mechanical, electrical and lighting systems at the Municipal Services Center.
The city also plans to approve a $950,000 design contract for the replacement of Fire Station 4 at Mitchell Park. The current station, which was constructed in 1953, has been deemed seismically unsafe and insufficient in size to provide space for emergency supplies and to separate living quarters from fumes of engines. A report from the city's 2011 Infrastructure Blue Ribbon Committee also noted that the station can "barely hold the two engines" given that equipment has grown in size and capacity over the years.
Like other projects on the council's 2014 list of infrastructure priorities, the replacement project was banking on transient-occupancy taxes for funding. But with local hotels either shuttered or operating well below capacity, the funding source has shrunk considerably over the past year. In the last three months of 2020, the city collected just $1.57 million in hotel tax receipts, a decrease of 85.7% from the same period in 2019, when the city collected $10.94 million.
According to the Administrative Services Department report, occupancy rates last December were 38.4% with an average room rate of $117 per day, down from $279 per day over the same period in the prior year. As a result, the council is preparing to adjust its 2021 budget to reduce its revenue projection from hotel taxes from the budgeted level of $14.9 million to $4.8 million, a 67.7% drop.
Sales tax revenues, by contrast, are doing better than the city had expected. Staff projects that the city will receive about $25 million in sales taxes by the end of June, which exceeds the budgeted amount by $4.5 million, or 22.1%, according to the staff report.
Council members also recognized earlier this month that the community has yet to absorb the full magnitude of last year's cuts — which included the elimination of the city's shuttle program, 33 positions in the city's public safety departments and 16 full-time positions in the Library and Community Services departments, among other measures. That's because most residents remain constrained by the county's public health orders.
"People think this is all going to come back when COVID is over, and it's not," council member Alison Cormack said at the meeting.
Even as it considers additional cuts, the council is also weighing a measure that would further eat into this year's budget: give tenants at city-owned properties rent relief.
During normal times, the city generates about $278,000 per month from 67 tenants, according to the staff report. But since public health orders kicked in last March, many of these tenants have been forced to shutter and have requested assistance.
The city had allowed about 20 tenants at Palo Alto Airport and Cubberley Community Center to defer its rent payments in the first three months of the pandemic, costing the city $250,000 in uncollected rent by the end of last June. In addition, the city is reporting about $149,000 in delinquencies from tenants who did not apply or qualify for relief in the first three months of the health crisis.
Since then, the city has been fielding more requests for rent forgiveness, according to staff. On Monday, the council will consider how far it should go in providing it.
The most ambitious option on the table would result in three months of rent forgiveness for all 67 tenants, which includes nonprofits and businesses of various sizes. That option would cost the city about $875,000 in lost revenues, according to staff. Another idea is to exclude large businesses from the forgiveness program, which would limit the number of tenants who receive forgiveness to 57 and cost the city $751,000. The third option presented by staff would limit rent forgiveness to the 17 nonprofit tenants, which would cost $203,000.
Despite the ongoing budget woes, city staff is recommending moving ahead with rent relief, provided that the tenant receiving assistance meets numerous conditions: The tenant should have no outstanding delinquencies for payments due prior to April 2020; have had gross revenues of less than $2.5 million in 2019; be able to show proof that its operations have been impacted by the county's public health orders; and have experienced a gross revenue decline by at least 50% between the first half of 2019 and the first half of 2020.
"While the rent forgiveness program will impact the city's budget, it is believed to be necessary to assist vital community businesses through an unprecedented pandemic," the staff report states.