Analysis: The Great Recession’s silver lining

A jaunt through Palo Alto City Hall these days can make visitors feel like they’re on the set of “Extreme Makeover: Home Edition,” with plastic sheets covering hallway floors, streaks of primer stretching along walls and curly wires dangling from circular holes in the ceiling.

While the employees inside the run-down eight-story building are facing salary freezes and heavier workloads in the aftermath of the Great Recession, the building itself is going through a rebirth of sorts. For most of the past two years, construction workers have been replacing the building’s mechanical systems, painting the hallways, remodeling bathrooms and upgrading everything from the plumbing to fire sprinklers.

The repairs are part of a plan the city adopted in 2003 to patch up the 40-year-old structure, and they couldn’t have come at a better time. With the region still climbing out of the economic pit of the Great Recession, construction costs for the building’s renovation have fallen more than $2 million below the engineers’ initial estimate, prompting city officials to expand the to-do list for the project. Earlier this month, the City Council voted to add more than $700,000 to the City Hall renovation to take advantage of the buyer’s market. The bulk of these repairs is scheduled to be completed this fall.

Next year, city officials plan to replace the stained carpet in the Council Chambers and renovate the dingy Council Conference Room, whose cramped conditions and acoustic deficiencies have been a running joke among council members.

Interim Public Works Director Michael Sartor said the repairs have been on the city’s radar for many years.

“We were planning to do it over time, but we figured that while we’re in the middle of the project and we’re already disrupting people, we might as well take care of all the disruptions at the same time,” Sartor said. “Plus, it costs less because we’re taking advantage of the construction climate.”

The economic downturn’s cheaper labor has been a boon to other Palo Alto construction work as well. The city’s most ambitious capital project — the bond-funded reconstruction of local libraries — is proceeding at a brisk pace and is nearly $10 million under its $76 million budget. Public Works engineers have also revised their estimates for the more ho-hum capital projects such as maintenance of city streets. The actual cost for annual street maintenance came within 1 percent of the estimate but only because estimates were reduced to account for the lower bids, Sartor told the Planning and Transportation Commission last week.

At the commission’s discussion of the 2012 capital-improvement plan, Commissioner Arthur Keller asked if the city is taking advantage of the climate by “frontloading construction in the next few years.”

“We’re doing as much as we possibly can with the staff we have and the money we have,” Sartor said.

Infrastructure spending isn’t the only arena in which the bleak economy has helped Palo Alto get its house in order, both literally and figuratively. Slumping tax revenues and spiraling costs of employee benefits have forced Palo Alto officials to confront deeper problems that were largely overlooked during flusher times. Over the past two years, City Manager James Keene and the council have explored and implemented changes sure to impact the city for decades to come, possibly outliving the economic slump. Popular budget-balancing buzzwords like “outsourcing” and “consolidating” have grown teeth over the past year, with contractors now maintaining local parks and the Palo Alto Police Department working with its counterparts in Mountain View and Los Altos to create mutually compatible dispatch systems that officials say will both improve service and lower costs.

Palo Alto is also paring down the size of its staff and restructuring departments to reduce red tape and costs. Since 2008, the city has eliminated about 10 percent of its positions supported by the General Fund, Keene said.

To be sure, no one inside City Hall is popping champagne to celebrate Palo Alto’s still-anemic tax revenues. But at the same time, officials recognize that the economic climate is enabling the city to finally address its chronically thorny staffing issues and sagging infrastructure. In short, the Great Recession has created great opportunities. It has spurred the city to tackle such problems as the city’s ballooning pension obligations, public-safety costs and steeply rising health care expenditures. Keene said the city, much like the greater community, is going through a “period where we have to acknowledge full costs.”

“It’s a very interesting time to be managing a city,” Keene recently told the Weekly. “I think there’s a convergence of both historical decisions and future trends and factors in play that are requiring a fundamental rethink of how we do things and how we engage with our citizens.

“Fundamentally, in the way we look at some things, it was never possible to go on forever,” Keene added. “We’re just in a moment where it’s all being revealed to us.”

—

Perhaps the most daunting and complicated task on the city’s post-Great Recession to-do list is tackling the city’s backlog of infrastructure repairs — a $500-million elephant in the room that has been perplexing the council for years.

Last year, the council awarded the arduous task of evaluating the city’s infrastructure problems to one of the largest and wonkiest citizen commissions in Palo Alto’s recent history — a 17-member panel of economists, planners and civic volunteers. They have been meeting several times a month since December to assess the cost of fixing crumbling streets, rebuilding obsolete buildings and brainstorming future needs. In recent weeks, the commission has been surveying neighboring cities, including Mountain View, Menlo Park and Redwood City, to see if there are any lessons to be learned. Most importantly, the commission is exploring ways to pay for the needed repairs during a time of stagnant revenues.

The list of needs is long and wide-ranging. It includes a new headquarters for the Palo Alto Police Department (estimated price tag: $60 million), which continues to be housed in a small and seismically unsafe wing inside City Hall; the Municipal Services Center ($90 million), which was built in 1966 with features that the city now describes as “well beyond their design life”; and two fire stations that are considered outdated and too small for the vehicles they house (about $7 million each).

Last week, the commission met at Lucie Stern Community Center to explore the topic of roads, sidewalks and parks. Palo Alto’s roads tend to be older than its neighbors’, particularly in the north part of town.

“The older parts of the city have more concrete streets. As they got eroded, asphalt was put over the concrete,” said James Schmidt, who chairs the infrastructure commission’s Surface Committee. “What happens is concrete and asphalt don’t get along.

“The new parts of the city — i.e., the south — has fewer concrete streets and more asphalt.”

Examining the 470 lane miles of streets, 285 lane miles of sidewalks, 157 acres of parks and 82 parking lots, city staff and the commission concluded that it would take about $9.3 million to repair all the potholes and cracks and to bring all the problematic streets up to par.

The commission’s duties don’t, however, stop at evaluating Palo Alto’s existing infrastructure needs. The council also directed the group earlier this year to brainstorm future needs — what Councilman Larry Klein called “blue-sky” ideas.

Should the city, for example, consider creating more parks or a performance-arts center, Klein asked. Should the Municipal Services Center property be used for additional operations, including an auto dealership? Should some land be carved out from the Palo Alto Municipal Golf Course and used for a new park or some other purpose?

The commission is preparing to draft its report in the fall and complete the final version in December of this year. At that point, the council would begin to think about asking voters to pass another bond measure.

The difficulty in funding massive infrastructure work in the wake of a recession might seem to work against — rather than for — the city’s plans. But even here there could be a silver lining.

City officials know a bond measure for infrastructure repairs would be a tough sell. While residents have supported bond measures for schools and libraries, infrastructure is a cause that many residents don’t understand or value, Planning and Transportation Commission Chair Samir Tuma said during a March meeting.

Ray Bacchetti, who co-chairs the infrastructure group, made a similar point March 31, noting that a survey of residents had showed two-thirds supportive of passing bonds for new libraries, but fewer than that said they would endorse a measure to fund a public-safety building (one of the city’s top infrastructural priorities).

“We have discovered that infrastructure is not the sexiest topic around,” Bacchetti said.

To hedge the city’s bets, the infrastructure commission is considering a wide range of alternative financing options, many of them potentially controversial. These include renting out space at City Hall to private companies and moving some city departments away from downtown Palo Alto to sections of the city where rent is cheaper.

Former Mayor Leland Levy, who co-chars the commission, said another idea worth exploring is linking Cubberley Community Center to the adjacent Charleston Shopping Center and rezoning the community center to allow retail space.

The hunt for revenue could mean open season on the city’s “sacred cows,” including Palo Alto’s famous opposition to big-box stores. Councilman Pat Burt suggested at a March 14 joint meeting with the infrastructure group that the light-industrial area around San Antonio Road and Charleston Road could be considered a potential site for such stores, given its proximity to the boxy retailers across the town line, in Mountain View. City planners are preparing a “concept plan” for this neighborhood, which will propose new zoning designations. Big-box stores could be in the picture.

Mark Harris, a member of the infrastructure commission who chairs its Finance Subcommittee, said at a joint meeting with the council that his group is looking at all sorts of non-traditional financing approaches.

“The city has been very traditional,” Harris said. “We want to look at some private-public partnerships; we’re talking about possible sale of assets.

“We don’t want to preclude anything at this point.”

Even if the infrastructure backlog doesn’t get solved, the commission’s report will succeed in at least one other respect: It would present the city with radical new options for raising revenues at a time when traditional revenue sources are running dry. If nothing else, it will re-examine Palo Alto’s values and consider whether these values are still appropriate in a new era.

The conversation, in that sense, isn’t just about Palo Alto’s cracked streets and seismically deficient buildings. It’s also about big-box stores, golf courses and shopping districts. Given the importance of the commission’s task and the growing problem of decaying infrastructure, council members have high hopes that the commission’s report will offer the first glint of a solution.

“This is one of the most important tasks our community will have for a long time,” Burt told the commission at the joint meeting. “You’re one of the most important bodies our community will have for a long time.”

—

While the infrastructure group is hunting for revenue opportunities, Keene and his staff are adjusting to the post-recession world by slashing expenditures, both in the short and the long term.

Balancing the books has been a delicate exercise over the past three years, with revenues falling but services generally remaining unchanged. Though sales-tax figures have edged up in recent months, they are still projected to be lower in the fiscal year 2011 than they were in 2006. The city’s latest Long-term Financial Forecast for 2011-2020 projects “slow growth assumptions in all revenue categories.”

At the same time, the anemic growth is not without potential benefits.

“It’s like any sort of crisis,” Keene said. “It forces us to confront issues that have been around for a long time.

“As they say, necessity is the mother of invention. The downturn clearly pushed governments to revaluate their assumptions — in some ways, that’s a good thing. There are profound changes in the works that have been forced upon us.”

Though the budget deficit is much smaller this year than in the previous two, closing the gap remains a challenge given that most low-hanging fruit had already been picked. In fiscal years 2010 and 2011, the city made more than $14 million in permanent “structural” cuts in the General Fund. Vacant positions went unfilled, salaries were frozen and 58 positions were eliminated. Park maintenance, once the domain of the Community Services Department, was contracted out to private landscaping companies. The city’s print shop, once overseen by the Administrative Services Department, has been scrapped and its duties outsourced.

The adjustments have put Palo Alto in a relatively enviable position when compared with nearby communities, which are also struggling with weaker revenues. As Administrative Services Director Lalo Perez noted at a recent council meeting, San Jose is now in its 10th year of budget deficits.

Perez said many agencies have been closing their budget deficits by making one-time budget adjustments — measures that address the immediate deficit but don’t address the structural gap between revenues in expenses.

Palo Alto, Perez noted, has been addressing its deficits with “structural changes,” which leaves it in a “more fortunate situation.”

Though it’s impossible to predict if and when the former levels of revenues will return, city officials assume many years of austerity ahead. The latest long-range forecast projects that under a “business-as-usual” scenario, the city’s budget deficits over the next 10 years would add up to close to $100 million, including gaps of about $7 million in fiscal years 2013 and 2014. As in previous years, Keene’s proposed budget for 2012 advocates long-term changes over quick one-time fixes.

“The impacts on the City of what has been termed the ‘Great Recession’ will be felt for many years. Many believe the economy has entered a ‘new normal’ where former levels of revenue cannot be expected to return,” Keene wrote in the introduction to the 2012 budget proposal.

The city is “in the process of realigning and recalibrating our organization to match available staff and financial resources.

“This includes looking at alternate ways to provide services, including contracting out functions, potential partnering with neighboring communities to provide various programs, evaluating delivery of services through a regional model versus local model such as regional dispatch, and much more.”

Some of these efforts could result in a stronger, leaner and more efficient Palo Alto. The ongoing effort by Palo Alto, Mountain View and Los Altos to synchronize their respective dispatch systems is expected to both improve service and save money. The “virtual consolidation” project, which is slated for completion in fall of 2012, will allow the public-safety agencies from the three cities to communicate seamlessly through their dispatch systems and back each other up with greater ease. Charles Cullen, the director of technical services at the Palo Alto Police Department, said the shared system could reduce response times, enable staffing reductions at each of the partnering agencies and offer other heretofore unforeseen opportunities.

“I think there’s a lot of benefits that we haven’t seen yet or thought of that this project will provide,” Cullen told the council earlier this month.

—

Perhaps the most visible example of the Great Recession’s effect on Palo Alto is the number of new faces in City Hall. Keene, who took over as city manager in August 2008, is a grizzled veteran compared to most department heads.

The economic downturn didn’t force the issue all by itself. The fact that many of the city’s top managers were Baby Boomers who happened to reach retirement age at the same time played a role. But the city’s recent changes to the compensation of non-public safety workers — salary freezes, elimination of the managers’ bonus program, requirements for employee contributions toward health care — have certainly added fuel to the “brain drain” trend, which was detailed in a Weekly cover story in December 2010.

The changes have left Palo Alto with a leaner and younger organization (the most seasoned department head, Utilities Director Valerie Fong, has been on the job for five years). Palo Alto’s newly hired City Attorney Molly Stump, who replaced retired City Attorney Gary Baum, began her job in April. The city’s new Library Director Monique le Conge (who is replacing retired Director Diane Jennings) will start May 31.

These changes aren’t limited to the top of the city’s organizational chart. In the Administrative Services Department alone, 12 employees have announced their retirements since December, Perez said at a March meeting of the planning commission.

The shifting make-up of city management, again, poses both challenges and potential opportunities — at least, according to Keene.

The trend has shrunk Palo Alto’s staff, whose members are fighting a learning curve and struggling to keep up with the growing workload. Keene outlined these challenges at January’s City Council retreat, when he equated city staff to a slice of Swiss cheese, with each hole representing a key vacancy.

On the other hand, with bureaucracy pared down, city workers now have more responsibility than before, along with greater opportunities for career advancement, Keene told the Weekly in late 2010, when asked about the turnover in City Hall. In an interview last week, he also said the staffing reductions by nature lead to more productivity — also not a bad thing.

This move toward a leaner, more productive workforce could soon extend to Palo Alto’s public-safety workers, who so far have been shielded by their contracts from the type of benefit reductions their city counterparts were forced to swallow.

The centerpiece of Keene’s plan to balance the 2012 budget is getting police and firefighters to accept the types of concessions to which other groups have agreed. Keene told the council’s Finance Committee earlier this month that he hopes to achieve $4.2 million in cost savings from the ongoing negotiations with the police and firefighter unions.

Palo Alto officials often say the changes to employees’ benefits likely would have been necessary even if the national economy weren’t derailed. But the Great Recession and its aftermath have created a sense of urgency in Palo Alto, ensuring that reforms will come sooner rather than later.

Pension and health care reforms top the City Council’s list of needed changes. In unveiling his budget to the council earlier this month, Keene noted that most of the cost increases in the proposed General Fund budget were primarily due to these factors. Over the past decade, pension expenditures went from 2 percent of the General Fund to 10 percent (the city is projected to spend a total of $23.7 million on pensions in fiscal year 2012), and costs are projected to spike further in the next two years. According to Palo Alto’s long-term financial forecast, new mandates from the California Public Employee Retirement System (CalPERS) could add an additional $18.3 million in pension costs to the city over the nine years leading up to 2021.

The rising costs are prompting the council to take a tougher stance than in the past in its negotiations with the firefighter and police unions and to revisit policies that have guided negotiations for more than 30 years.

Last week, for example, a council committee discussed potentially repealing a 1978 provision in the City Charter that requires disputes between the city and its public-safety unions to get settled by a binding-arbitration panel. The council last August considered putting the repeal of the binding-arbitration provision on the ballot but declined by a 4-5 vote, with several members saying they need more information before they could support the repeal. Councilman Greg Scharff, who proposed placing the issue on the 2010 ballot, said at the time getting rid of binding arbitration is “the single biggest thing we can do to control our runaway pension costs and to get our labor costs under control.”

Voters could have a chance to weigh in on changing or repealing this provision either this November or in 2012.

Another costly bedrock provision that could soon be abolished is the “minimum staffing” requirement in the firefighters’ contract — a clause that requires at least 29 firefighters to be on duty at all times. The firefighters’ union has vehemently (and successfully) resisted any changes to the provision and any plan to cut staffing or close fire stations, but the Great Recession and its accompanying pressure on government spending has weakened the union’s position and shifted public opinion against status quo. Last year, Palo Alto voters overwhelmingly rejected the union’s ballot measure that would have required a citywide vote before any staffing reductions or station closures could be implemented. It also doesn’t help the union’s cause that an independent analysis by the firms TriData and ICMA recommended scrapping the provision from the contract.

The repeal of binding arbitration and the elimination of minimum-staffing may not solve the city’s mounting budget problems, but at the very least they would give the City Council a greater-than-ever say over how public funds are spent. They would also give Keene and the council more flexibility in options for making the city’s public-safety departments more efficient. These include a proposal Keene is currently evaluating to combine police and firefighter operations into one Public Safety Department — a proposal that would decrease administrative costs.

These changes will most certainly be more messy, disruptive and difficult to achieve than the City Hall construction currently under way. But it’s also possible, officials have said, that in some ways the changes brought about by the Great Recession will leave Palo Alto in a stronger financial position and with more flexibility than it had before the downturn began.

At the very least, the aftermath of the Great Recession is giving the city an opportunity to talk with its citizens about unsustainable trends and necessary changes — a serious conversation that Keene said can no longer be delayed.

“This is a sea change,” Keene said. “Change is difficult. It’s necessary, but just because it’s necessary doesn’t mean it’s enjoyable.”

Related stories:

■ Will the Great Recession usher in an Era of Engagement?