Fiscal Sustainability Conversations: Investing in the Community’s Future

Learn more about recent actions on next year’s budget and furthering potential revenue measures to invest in the community’s future and help enhance services as the community grows

A core City value has been to maintain a high quality of City services in a fiscally sustainable way, with many ongoing community conversations dedicated to the topic. This blog provides recent updates on two ballot measure proposals under review that can help invest in the community’s future, enhance priority services to the community, and help build on Palo Alto’s services as the community evolves and grows.

Recent FY 2022–2023 Proposed Budget Released

The City Manager recently submitted a proposed budget for Fiscal Year 2022–2023 (beginning July 1, 2022). As recognized in the FY 2021 and FY 2022 budgets, the service reductions necessary to address the significant financial disruptions of the pandemic and other challenges were operationally unsustainable for the long-term health of Palo Alto. These prior budgets reflected the proactive organizational repositioning needed for emergency conditions. Since then, however, additional forces have continued to challenge the City’s recovery. Supply chain delays, as well as the significant employee vacancies, institutional knowledge loss and disruption of the Great Resignation, have significantly impacted the capacity of the organization and its ability to deliver priority services and projects. The lasting effects of remote work, online buying, and other economic shifts significantly factor into City revenues.

These challenges were highlighted in the Q1 Preliminary Financial Status report discussed by the Council in October 2021 and reiterated in the FY 2022 Mid-Year Budget Report in February 2022. Although the City’s fiscal recovery outlook remains cautiously optimistic, the City’s long-term fiscal health requires additional sustainable revenue to meet community service priorities. With the rising cost of services in a period of significant inflation and workforce competition, coupled with the services reduced over the prior two years, long-term sustainability is not achieved with existing revenue sources alone. The proposed budget reflects a transitional budget as Council contemplates major changes for funding of programs and services such as affordable housing and grade separating train crossings.

There is some good news, however, as the proposed budget recommends ongoing reinvestments for urgent, critical needs for health, safety, and prior council direction ($2.6 million, including $1 million for Project Homekey) and also recommends approximately $4 million in reinvestment in services previously reduced with the use of one-time funds.

Building on fiscal reports reviewed thus far — FY 2022 Preliminary Q1 Financial Status, FY 2022 Mid-Year Budget Review, and FY 2023–2032 Long Range Financial Report, revenues are expected to exceed budgeted estimates by approximately $14 million (previously reported as $10.6 million). These one-time funds are therefore recommended in part to assist in the restoration of services for a two year, or 24-month period. This approach allows the City to continue its ambitious plans to rebuild community services. However, to sustain these reinvestments beyond the limited term, ongoing revenues will be needed. The potential revenue ballot measure to affirm the current transfer of natural gas proceeds would provide the ongoing funding needed to sustain these reinvestments in services.

For budget materials, go to www.cityofpaloalto.org/budget.

Two Potential Revenue Ballot Measures Under Review

With a focus on fiscal sustainability for the long-term, the City Council began community conversations on potential revenue ballot measures in the spring of 2021 and deliberations continue to evolve based on stakeholder (resident and business) feedback is received. The two potential revenue ballot measures are: affirmation of the current natural gas utility transfer and establishing a new Business Tax.

Affirmation of the Current Natural Gas Utility Transfer

The first proposal will affirm the decades long practice of City gas ratepayers funded contributions to general City services to support a variety of City programs and services, including police services, fire and emergency medical services, local parks, community centers and libraries. Most municipal utilities in California make similar transfers to support these services. Affirmation by the voters through this potential ballot measure is necessary to reinvest in community services.

Establishing a New Business Tax

The second proposal is a Business Tax which if passed by voters, will generate revenue that will be allocated towards unfunded needs as identified by the community and Council. Staff and the Council are actively engaging with the community through Fiscal Sustainability: A Community Conversation, that includes online and mail-in surveys, community and business focus groups, and a community listening session. If you were one of the hundreds of residents who took the time to respond, thank you! Notably, more than 1,200 residents have responded to two phases of survey research online and by phone, and another 400+ have shared their feedback through the mail or on the City’s website. Your feedback allows us to continue to make well-informed decisions that reflect our community’s views on how best to maintain our quality of life for years to come.

What We’ve Heard So Far

Priorities identified by Palo Altans in our 2022 visioning outreach so far include:

• Improving police response to violent crimes
• Funding affordable housing
• Maintaining the City’s ability to fund basic services
• Increasing fire staffing/improving emergency medical response
• Supporting individuals experiencing homelessness
• Advancing local efforts to reduce carbon emissions

The community has also expressed strong interest in voter-approved, locally controlled revenue options to maintain our services, and support residents and businesses alike.

Recent City Council Refinements to the Business Tax Proposal

The City Council recently has refined and narrowed the tax amount related to the business tax proposal and revised the intended spending plan based on community feedback. At this time, the proposed Business Tax structure being considered by Council is at a monthly rate of $0.10 or $0.12 per square foot, with a two-year phase in provision. The first 5,000 square foot of a business would be exempt, along with grocery stores and seasonal businesses.

While the current proposed tax structure does not sunset, potential tax offsets for hotel tax and sales tax remittance are being explored. Based on the proposed tax rate and once the tax is fully implemented after two-years, the estimated generated gross revenue will be between $22 — $26 million.

The City Council also discussed potential uses for the funding generated including general government purposes and potential business tax revenue uses such as grade separation and rail safety, affordable housing and homeless programs, public safety, and improvements to University and California Avenue business districts.

A working draft outline of likely sections for a potential tax ordinance is linked below and is being provided to allow stakeholders an opportunity to offer comments on specific elements of a potential tax. Each section includes bullets with information regarding what the section would address consistent with Council direction as of April 25, 2022.

In particular, the City hopes that conferring on a detailed outline will promote clarity and administrability of a business tax, should one be proposed by Council. All elements of the potential tax are subject to change by Council at any time up to final submission to the County Registrar.

The working draft outline for a potential tax ordinance can be found here.

For other updates related to the potential revenue measures, including a current status summary and what’s new and ongoing fiscal sustainability conversations, go to www.cityofpaloalto.org/fiscalsustainability.

Join the Conversation, Upcoming Discussions Planned

As the City plans for the future, we invite you to join the conversation and engage in this effort about how the City can maintain and deliver the services you need and expect.

Upcoming meetings for additional feedback include:

May 2022: FY2023 Budget Conversations begin and Finance Committee Budget hearings have begun. Helpful documents include: FY2023 Proposed Operating Budget and FY2023 Proposed Capital Budget. In addition, a third round of polling will take place to engage the community on this topic.

June 2022: Council adoption of FY 2023 budget is planned as well as decisions regarding placement of potential ballot measures on November 2022 ballot. For upcoming Council meeting agendas and other meeting materials, go to www.cityofpaloalto.org/councilagendas

Learn more and sign up for updates at www.cityofpaloalto.org/fiscalsustainability.

More Online Resources

For the City’s budget documents, go to www.cityofpaloalto.org/budget

To learn about the City’s fiscal sustainability, go to www.cityofpaloalto.org/fiscalsustainability

To sign up for the City’s Uplift Local newsletter sharing community updates, events and family and be well resources, go to www.cityofpaloalto.org/newslettersignup

To learn about the City’s new Palo Alto FireMed membership, a way to support the Palo Alto Fire Department and gain peace of mind with future medical emergencies, go to www.cityofpaloalto.org/paloaltofiremed

Sign Up for ongoing online surveys to share input on a variety of City programs and services by clicking here: Open Town Hall

For the City Calendar of Events and City Meetings: CityofPaloAlto.org/Calendar

For all other updates, check out the City of Palo Alto Website: CityofPaloAlto.org