Palo Alto's Financial Outlook
By Ying Shi
PALO ALTO, Feb. 16 -Palo Alto's financial experts have found out that local economic and economically sensitive revenue sources are improving slowly after the city has eliminated its structural deficit, but bumps and challenges still lie ahead.
"The local economy, as well as the national economy, is likely to continue a slow, bumpy ascent towards stability." That is the conclusion of the 37-page "Long Range Financial Plan" prepared by the city's finance department in January. This annual report takes a 10-year forward look at the city's revenue and expenditures, and discusses future financial issues.
But now the new forecast predicts a 2.8 % overall revenue growth rate, and anticipates operating surpluses through the next decade. But salaries and benefits are projected to grow to 69 % of the general fund budget by 2015, sending out a signal that the city needs to do course correction to fight the exploding employee costs, which will crowd out both services and infrastructure spending.
"It is a rather conservative projection of the city's economic well-being," said Steve Levy, Director and Senior Economist of the Center for Continuing Study of the California Economy (CCSCE) in Palo Alto.
Economically sensitive revenue sources such as sales and transient occupancy taxes in 2004-05 were 6.4 and 3.6 % higher than prior years respectively. The two together contribute to a quarter of the city's revenue, and are expected to rise 2.7 and 3.7 % respectively over the next 10 years.
The city's top 25 sales tax generators yield half or $9 million in sales tax. The Stanford Shopping Center department stores and a major electronic retail outlet like Fry's generate around 21 % or $4 million of the sales tax revenue, according to the report.
Mayor Judy Kleinberg hopes to refurbish the city's retail centers, including small malls on Edgewood Plaza, Alma Plaza and California Avenue. "I want the retail centers to be beautiful, offering great variety of services, contributing not only to our quality of life but our tax base," she said in a recent interview.
"The trend is definitely going upwards in California Ave, on El Camino Real, near the Fry's area, downtown, Stanford Shopping Center," said Susan Arpan, the city's Manager of Economic Resources Planning, "But it is a very slow growth pattern now."
Palo Alto allows residential housing in every zone, limiting business opportunities because residents often come out to oppose development that would bring traffic and noise to their neighborhood. Early data for 2005-06 indicate sales tax revenues increases for this year will be in the range of 3 to 4 %.
The city has been seeking additional opportunities to increase its revenue base, like an "auto row" located at the city's municipal service yard, which could generate up to $6 million a year, or moving Fry's Electronics from Park Boulevard to El Camino Real, which could increase sales tax revenues by as much as $1 million.
While the city can only keep 12% of the sale tax dollars, it gets to keep 100% of the hotel occupancy tax. In an effort to generate more hotel tax revenue, the City Council has voted to move forward to seek the possibility of increasing the transient occupancy tax by 2 % last month.
Right now, the city has 29 hotel and motels in town. They contributed $5.8 million in tax revenue to the city in 2004-05, and are estimated to generate $6.1 million in the coming fiscal year, according to the city's Administrative Service Office.
The dot-com bust combined with the trend that doing more business on-line after the 9/11 terrorist attacks resulted in a 40% drop of hotel tax revenue in the Bay Area. However, the situation has improved recently. During the first quarter of 2005-06, transient occupancy tax ran $0.09 million or 6.1 % higher than last year.
Last year, the city lost its biggest conference hotel and a major transient occupancy tax generator when Hyatt Rickeys closed. Now with the Four Seasons Hotel in East Palo Alto and the Rosewood Hotel on Sand Hill Road in Menlo Park opening up, Palo Alto's hotels are facing more competition.
Right now, the city is in the process of forming a committee called "Destination Palo Alto" to help hotel and hospitality industry to attract more tourists. The groups, which also include the Four Seasons in East Palo Alto, will hold its first meeting in March.
"We don't see ourselves in a vacuum. We are really recognizing the fact that our city is part of a region." said Arpan.
The good news is that a robust residential market and a few high-worth Commercial transactions contributed to healthy property tax revenues, which stand at $17 million for 2005-06 and are projected to exceed $19 million in the next fiscal year, both double-digit higher than the previous fiscal year respectively.
Many economists expect a housing bubble in the Bay Area, but Joe Saccio, Deputy Director of Administrative Service, thinks there are no indications to back that up. "Property prices, especially in Palo Alto, appear to be holding steady. We expect there to be growth in property taxes next year, but at a lower level than last year," he said.
Over all, the report tempers a somewhat bright positive outlook for the city, but financial challenges still lie ahead. The report projected a 3.4% overall expense growth in the next decade. Salaries are expected to grow at 2.9 % annual rate and remain at 45 % of the city's total expense, while benefits are expected to grow at
4.7 %, and grow from 20 to 24 % by 2016.
The City Auditor's report of April 20, 2004 shows that Palo Alto has more than twice as many managers than the amount recommended for government agencies by a Clinton Administration study. The city is one of the few jurisdictions that completely fund health-care plans and a retiree medical plan for its employees, paying approximately twice as much as the private sector.
Council member Larry Klein thinks the staff is getting an "incredibly rich" benefits package and clearly there is room for improvement. "Escalating employee benefits are a major problem," he said during his campaign last November, "Some of the difference can be justified, particularly for public safety workers. The remainder should not just be accepted as a given. Through tough but fair negotiations with our unions, we must get a better handle on these costs."
The City also faces a challenge to identify new funding sources to build new and replace old facilities. The council recently appointed a blue-ribbon task force to gauge voter support for a possible bond measure to fund a new police station.
Contact Ying Shi at yingshi@stanford.edu
