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June 08, 2005

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Palo Alto Online

Publication Date: Wednesday, June 08, 2005

The cost of housing The cost of housing (June 08, 2005)

When talk turns to housing in Palo Alto, the question usually revolves around one thing: the price tag.

But "price" carries another meaning, one that's been giving people pause. What is the cost to the city's bottom line of providing services for new residents?

With Palo Alto's population expected to grow by thousands in the coming years and the city struggling to operate on a shrinking budget, the question of whether new housing will pay for itself is hardly a trivial one.

The answer is not entirely clear.

Property taxes contribute only a fraction to the general fund -- 13 percent for the 2003-04 fiscal year. That means police, firefighters, libraries, parks, utilities, schools, community centers, and other services are primarily paid for by a combination of other taxes (sales, hotel, utility), rental income, fees for service and more.

The city does charge developers "impact fees" to pay for some -- but not all -- of the effects of construction. That discrepancy was part of Councilmember LaDoris Cordell election platform in 2003.

It's not as though the city is laissez faire . It requires a study of future impacts for each proposed major development. To compensate for the increased demand on services, the developer must devise solutions -- such as creating mini-parks so residents have open space.

Some solutions skirt the true costs, though. The study for the Hyatt Rickey's property, which is turning into housing, proposed that the increased need for police services could be met by having the city deploy more officers to the area -- with no mention of where the additional funds would come from to do so.

But Planning Director Steve Emslie said that adding residents won't put as much strain on services as people think.

"Generally it takes quite a bit more housing than we're thinking about to make an appreciable change (in service needs)," Emslie said.

Some people don't believe that asking new residents or developers to pay full-cost for services is fair. Councilmember Bern Beecham says long-time residents are the ones who are using services but not paying for them, due to Proposition 13's limit on property-tax rates in 1978. A family of two who bought a median-priced home before Prop. 13 went into effect, for example, has paid only about $2,500 in property taxes towards city services in the past 25 years, Beecham said.

From strictly a revenue standpoint, housing is not the most profitable use of land for city's revenue stream, said Joe Saccio, the city's deputy director of administrative services.

"Would we prefer a new hotel to a new housing development? The answer is yes, from a financial point of view -- because you generate a lot more revenue," he said.

In the long run, the best funding solution may be not to charge developers or new residents more but to stop the state from drawing money away from the city. Since 1992, various state takeaways have reduced the city's property-tax revenues by $38 million, Saccio said. --Jocelyn Dong

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