Guest Opinion: What I did last summer -- pondered the cost of new housing | November 8, 2006 | Palo Alto Weekly | Palo Alto Online |

Palo Alto Weekly

Spectrum - November 8, 2006

Guest Opinion: What I did last summer -- pondered the cost of new housing

by Bern Beecham

I got into a little bit of analysis this past summer.

Everyone knows new housing "doesn't pay its way." We on the City Council have heard this many times from many people.

But I've never seen numbers describing the true impact of a new housing unit on the city's budget. At many of our public hearings on housing, citizens remind us of the unfairness of new residents moving into our great city without paying up.

I talked with top staff in City Hall, trying to find someone who might have time to look into this question. Many were sympathetic but all had workloads that would prevent them from getting into this issue without delaying other significant work. So a memo to colleagues asking for support for such an analysis was out of the question.

Still, I wanted to know more accurately how expensive the "new resident problem" is, because we hear so much about it. So I decided to analyze it myself. I drafted a "scope of work," reviewed it with staff and two colleagues, and was off and calculating.

The common wisdom is that new residents move into this community nearly for free. It is said they reap the benefits of everything we long-term residents have bought and paid for over the years without paying for it themselves.

The first objective of my analysis was to find out how long it would take for these newbies to catch up with all the payments longstanding residents have poured into the community over the past 25 or 30 years.

I was astounded at what I found.

In the first year of ownership, a new homeowner in 2005 pays to the city more than three times as much in property-related taxes as all property taxes a long-time homeowner has paid over the past 30 years ($14,000 versus $4,100 in 2005 dollars). Then every year after that the 2005 homeowner pays 14 times as much property taxes as a long-term homeowner ($1,400 versus $102 in 2006).

We all pay much more than that in property tax but remember that for every $1,000 you pay Palo Alto gets just $90 -- I'm using what the city receives in my calculations.

In any case, a new homeowner is still moving into a wonderful town with great parks, neighborhood libraries and other amenities that have required major investments over time.

I asked staff if they could tell me what the great City of Palo Alto has acquired with our taxpayers' money over the past 30 years.

Again, I was surprised. In the past 30 years, we've acquired only four assets with taxpayer money. A quarter century ago we bought the Terman and Ventura school sites. We lease Cubberley with funds generated by the utility users tax. And six years ago, we acquired the two-acre Heritage Park/Roth Building on the site of the former Palo Alto Medical Foundation.

We've since traded Terman back to the school district in return for ownership of part of Cubberley. There are other assets we've acquired (such as the Enid Pearson/Arastradero Preserve) but they've been paid for mostly with grants from other sources or, like the new downtown parking garages, by assessments our businesses have voted to charge themselves.

But what about ongoing costs of service? Don't new residents use more services than they pay for? So I looked at where money comes from in our general budget and where it goes -- or more exactly from whom it comes and to whom it goes.

The following analyses exclude user-paid revenues and services (such as building permit fees, fire service contracts and other sources, about $20 million annually).

Most of our general fund revenue comes from business. Business taxes (including sales, hotel and property taxes) provide about 60 percent of our general fund monies. The remaining 40 percent comes from residents (property and documentary transfer taxes and some sales tax).

About 78 percent of our budget is spent on residents, or nearly twice the proportion we residents pay in taxes. It's been clear for a long time that it is our retailers in town (Stanford Shopping Center, auto dealers, University Avenue stores, other businesses throughout town) that enable us to have the services we enjoy.

So business in general subsidizes residents. But many of us knew that. A remaining question is whether there's any significant difference in subsidization between long-standing residents and new.

In very broad terms, our 26,500 housing units (including rentals) pay on average about $1,275 per unit a year to our general fund through all forms of taxes. But the city spends about $2,500 per unit on average for net residential services (78 percent of our budget, excluding user-paid services). The difference is subsidized by business.

The typical Palo Alto homeowner (at the 50th percentile) pays about $375 annually in property taxes to the city. The new (2005) homeowner pays $1,000 more. While this extra $1,000 yearly from new homeowner helps cover the $1,225 subsidy, there is still an annual deficit per housing unit. (New homeowners probably pay a higher portion of sales and utility taxes but I did not find any reliable data for this.)

This column isn't meant to endorse or oppose more housing. Rather, I hope it simply provides a more accurate understanding of how housing, new or long-standing, affects our city's budget.

Former Mayor Bern Beecham has led the effort on the City Council in recent years to preserve and enhance the city's tax base, particularly in the area of sales taxes. He can be e-mailed at


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