Town Square

Utilities Department is City's Slush Fund

Original post made by Chris, Palo Alto Hills, on May 2, 2007

It has been common knowledge for years that the Utilities Department is a cash cow for the city - enabling our Council to spend much more per capita than other cities.

Diana Diamond's recent column (Web Link) reveals more details about just what a slush fund the utilities revenues are for our government.

It's been previously noted how the city gets around legal spending restrictions by transferring inherently municipal functions, like street light maintenance to the Utilities Department. The accounting shenanigans uncovered by Diamond, and the justifications for them proffered by city officials, show just how intellectually dishonest the whole "Utilities" enterprise has become.

Diamond's piece notes that 25% or so of the city's general fund budget comes from the various Utility transfer schemes. This is money that comes out of the pockets of all Utility users - who (for the most part) are residents and taxpayers of the city. That is, this 25% of city revenues is functionally equivalent to a tax - of upwards of $30 million per year.

We should remember this the next time city officials plead poverty when asking for even more taxes for bonds and the like.


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Posted by Don
a resident of Leland Manor/Garland Drive
on May 2, 2007 at 2:08 pm

The Utility Department, which used to be a shining example of how well Palo Alto is run, has become an embarrassment on many levels - and an example of how flabby city fiscal management has become.

We all know well the huge management lapses that resulted in numerous firings as utility employees stole from the city and performed private jobs while on city timeclocks.

Now the extent of financial mischief that is part and parcel of the city's ownership of its utility department is also becoming visible.

Many at city hall know there is significant potential legal jeopardy (under proposition 13 and its follow-on measures) as a result of the large money transfers from the utility department into general revenues.

We've been fortunate that some anti-tax group hasn't taken us on because the city's legal case is very problematical. The bigger problem however is that like some dot-com start up, the city has been awash in money for so long that its lost the habits of sound fiscal management.

And so rather than be in a better financial position than neighboring cities that have had to budget for capital projects (see Mountain View and it's new library), we've spent money on all kinds of frills, on exorbitant employee benefits and the like, in part because the utility revenue seemed like a bottomless money well. And so now we wake up and see that despite our money gusher, we can't fix our infrastructure without (it is claimed) significant new taxes.

The dotcoms that took all their employees on Hawaii vacations are now mostly bankrupt. That's not an option for us. It's time for somebody to inject some discipline into the processes at City Hall. An honest accounting of the Utility Department and the way it interacts with the rest of the city would be a good place to start.

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Posted by Walt
a resident of Midtown
on May 2, 2007 at 2:22 pm

Don's comparison to dotcoms seems like a good one to me. I am amazed at how easily the city throws money around for consultants, studies, polls and lawsuits and similar things that it seems more appropriate for the city's staff to do (or that should not be done at all.) That's just the little stuff.

There's big stuff too. A few years ago, the city spent $6 or $7 million on the tunnel under the railroad tracks that almost nobody uses because it was poorly designed and thought out. That would have covered 1/4 of the money the Auditor indicates we need for street repair.

I had no idea the city got an extra $30 million/year from the Utility fees. No wonder they don't have any spending discipline, or seem to know the value of a dollar.

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Posted by Walter_E_Wallis
a resident of Midtown
on May 2, 2007 at 5:41 pm

For years the city had a giveaway deal for Federal power that allowed low rates and also subsidies to a profligate city life style.
They failed to plan for the end of that deal, and instead went gaga for green.
Sell the utilities and put the proceeds into funding retirement, then go pay as you go.

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Posted by common sense
a resident of Midtown
on May 2, 2007 at 9:28 pm

There also another downside to this scam - if the $30,000,000 were a tax, the residents could deduct it from their income taxes. Since its a "utility bill" they cannot.

What really is bad, is this $30,000,000 per year transfer is not enough! Some of our council members now want to put in place a per employee tax on businesses, and pass additional taxes to fund a bond issue for library upgrades & the new public safety building. Yet they can find the money to fund a new "environmental staff position".

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Posted by 14k/yr
a resident of Jordan Middle School
on May 2, 2007 at 10:29 pm

How did 14 million/yr transferred to the General fund become 30 million?
On the whole, I'm quite happy with utilities transfer to the General Fund. It's the fairest tax I pay! I'm tired of subsidizing seniors and Boomers

By the way, deductions for local tax mean nothing to us living in AMT land.

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Posted by RS
a resident of Duveneck/St. Francis
on May 2, 2007 at 10:35 pm

So if we had PG&E we would be paying even more.
My wallet is very happy with PA Utilities.

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Posted by Dave
a resident of Professorville
on May 2, 2007 at 11:00 pm

RS and 14k, the issue is not whether the utility rates in PA are lower than PG&E. (They are for electricity because in the fairly distant past, more insightful city leaders than we apparently have now, made some good choices. For gas, we pay more than PG&E.)

The issue is that the city is using shady accounting and subterfuge to transfer money (in a questionably legal fashion) from utility rate payers to the general fund. Even apart from the legality of the practice, it's wrong for the city to be doing this in a manner that's largely hidden from voters - as it has been doing for years.

Maybe most people feel like you guys and don't mind that part of your utility bills really are a tax - but let's do it openly and vote on it if appropriate.

My guess is that a lot of people are upset to find that the city seems like it's running a sleazy grifting operation in the way it accounts for utility costs. The phony land lease charges detailed by Diamond are enough to make me sick. When added to the rest of the nonsense that's come out, I think it's time to reassess the whole department and shine some light on these matters.

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Posted by Walter_E_Wallis
a resident of Midtown
on May 3, 2007 at 6:40 am

After we sell our utilities to PG&E and pay off our debts and fund our generous pensions, PG&E will pay taxes on their system to help the city go pay as we go.
We might even, then, consider the advice I gave 30 years ago and devolve the city into a municipal service disrict with enumerated powers.

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Posted by RS
a resident of Duveneck/St. Francis
on May 3, 2007 at 9:06 am


My last gas bill was 108.55, using PG&E rate structure, it would have been 107.25. Pretty much the same result.

Anyway that was my point, I was trying to characterize the accounting practice, I'll leave that to others.

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Posted by Dave
a resident of Professorville
on May 3, 2007 at 10:57 am

RS, Obviously, if utility rates in Palo Alto are inflated over their costs by 30% to fund transfers into general revenues, then the rates you pay as a utility user will reflect that.

Whatever your bill is, and whether it's lower than PG&E or not, you'd be paying much less if the phony accounting at city hall had not artificially raised utility "costs" and your bill.

At city hall, they seem to think that if they negotiate a bargain for energy or for real estate, that the benefit of that bargain belongs to the government wastrels, and not to the residents. If Stanford charges the city $1/yr to rent land used for utility purposes, then that's the amount that should go on the books for computing utility rates. Instead, they put a larger "market rate" on the books, charge us utility customers more and use the money to fund lavish city pensions, pay for unneeded consultants and otherwise fritter away the money. That's wrong.

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Posted by Lydia
a resident of Midtown
on May 4, 2007 at 10:01 am

Our Utility rates have just gone up AGAIN. Unfortunately, the tax payers of Palo Alto are unorganized. When these increases are presented to Council there is very little or no protests from the public, and that is when we, as Utility users, have the opportunity to object.

Also, the public obviously approves of rate increases because they voted for an increase in the storm drain fee.

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Posted by Paul Losch
a resident of Community Center
on May 4, 2007 at 3:52 pm

Let's try to separate spending decisions from funding decisions. It is common to spend if the funds are there, and spend differently if funds are not there, but spending and funding are different matters.

It happens that the city owned utlity has been a source of funds for Palo Alto for some time. As other funding sources have adjusted over time, up, flat and more recently down in the case of sales and hotel taxes, utilities have been a relatively convenient way to either save residents on the cost of power when times were better on other fronts, and to cover the spending when sources from elsewhere were not sufficient to cover these things.

I suspect there are many other municipalities that would love to have as flexible a funding mechanism as the Palo Alto utility system. The real question to my mind is a policy one--what is the Utility's role as a source of funding for Palo Alto and the rate payers? There clearly is some confusion about that, and a clear statement of policy that policy makers, city management, and rate payers all understand could be helpful.

At one extreme could be a policy that the utility is to run as a stand-alone entity, paying fair market prices for its operations, retaining earnings as needed to keep a vital and efficient operation running, charging rate payers accordingly, and the utility would not "dividend" money to the Palo Alto general fund for purposes of using the money elsewhere in the community.

This likely would result in rate payers being charged considerably less than comparable PG&E rate payers, and in the past, the utility may have operated more or less this way. I don't know the history, but the lower rates from times past suggest that the utility to a great degree did operate this way at an earlier time.

At the other extreme, the Utility could be viewed as a mechanism to fund other spending priorities that our elected officials choose to include in the city's budgets. In times like we currently find ourselves, the Utility is used to cover expenses for services, infrastructure and other aspects of City operations that either would not get done or would have to be paid for some other way in order to get done. It seems like we have gradually drifted to this state of affairs with the utility, and the obvious question becomes whether that is the role the utility should have for the community or if its role is something else.

If we hadn't had the utility, clearly some things on which spending has occurred, particularly in various services, would be not as substantial as they currently are, unless they were getting paid for some other ways, which I would suspect could not come close to matching what the utility has been used to fund in recent times.

I think that at the end of the day, it comes down once again to how does the community want to spend the revenues available to it. We currently have a very services oriented budget, and matters such as infrastructure are not sufficiently funded with the current revenue sources. We need to decide if we have the right mix of services and infrastructure spending, and what level of spending we think is appropriate for the community overall, in light of the character we want the community to have.

Underlying that includes what that means for utility rates or what utility rates mean for spending available. Rate payers could be paying something that compares with PG&E, and any surpluses could continue to "dividend" to the city to pay for other things deemed important. The rates could be based on a cost recovery plus depreciation model, and instead of having money available for the city to use elsewhere for services or infrastructure, the community benefits from lower rates.

I actually think we are fortunate to have the utility as a potential funding source, one that other communities do not. But, it may be contributing to avoiding getting a firm answer to the larger spending question of how much the city should be spending and on what mix services and infrastructure. That question has to be answered on its own merits, without regard to the potential availability of any particular revenue or funding source.