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By Paul Losch

About this blog: I was a "corporate brat" growing up and lived in different parts of the country, ending in Houston, Texas for high school. After attending college at UC Davis, and getting an MBA at Harvard, I embarked on a marketing career, mai...  (More)

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PA Needs a Revenue Strategy

Uploaded: Apr 18, 2009
When Will We Have a Revenue Strategy in Town?

I am by background and professionally a marketing guy, so this is something I deal with daily.

Where is the thinking in City Hall about how to generate more revenue strategically? As best as I can tell, there needs to be more.

The company I own and run is based in Fremont, and we pay some stipends each year to the City of Fremont for the privilege of doing business there. Less than a hundred bucks a year. It has no bearing whatsoever on my choosing to operate in Fremont, there are other more important factors that went into my choosing to be there. Will companies in Palo Alto leave if such a tax is assessed?. I doubt it.

I view that matter as a distraction from a larger question around what Palo Alto is doing to generate revenue.

We should instead be putting our thinking into how to attract more revenue in town. For too long, Palo Alto has not taken into account the changing environment on the Peninsula, which has made our fair city a less attractive place to do business or shop. When, if ever, has there been an exercise or program by the City to assess how it generates revenue and what it needs to do going forward to be successful in doing so? Lots of projects, I see no strategy for revenue generation, be it the Stanford Shopping Center or elsewhere around town.

What I do see is reactive behavior around proposals that Stanford offers up, which mainly come across to this observer as running counter to a well thought out revenue strategy. Just the other day, Stanford announced they are suspending any contemplated expansion of the shopping center, which means one potential incremental source of revenue for Palo Alto is off the table.

What I do see is the local utility fees getting increased in order to maintain services that people who live here enjoy. I am of mixed opinions about this particular revenue stream, but it has become a default tactic for revenue generation since we lack a revenue strategy.

I also see hotel and automobile dealerships leaving town. I see absurdly long processes to get retail centers at Edgewood and Alma Plaza thriving again.

The City of Palo Alto is undertaking a 10 Year Plan for the second decade of the new century. I suggest that the first section of the plan address how the City will generate revenue in those ten years.

And if resources are needed to generate those revenues, let's allocate them. My business allocates resources to sales and marketing because it generates revenue far beyond the costs of those resources. Let's get people working in the City who are focused on the revenue line, not just the expenditure lines.
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Posted by Tim, a resident of ,
on Apr 18, 2009 at 7:47 am

I could not agree more! Be honest, who shops in Palo Alto anymore- not me. Every city around us is building up their tax base except us. Hotels, auto dealerships, bigger supermarkets, box retail have been going in around us for years, while we "beat" everything to death. Look at the Stanford shopping expansion, Rickys Haytt or the two Lucky store sites.

Posted by stephen levy, a resident of ,
on Apr 18, 2009 at 10:25 am

Hi Paul,

This is a great topic. Thanks for bringing it up.

There are some challenges raised in developing a city revenue strategy when viewed from a broader geographic perspective.

Many people could interpret your blog as saying that Palo Alto?s revenue strategy should be a land use strategy?development equals revenue. I don?t know whether that is what you intended. Everyone I know who looks at this professionally wants to uncouple land use decisions from fiscal decisions and reduce what is called the fiscalization of land use. So there has been active discussion of sharing sales tax revenue or even property tax revenues among cities in a county so we stop fights among cities for the limited number of hotels, shopping centers, etc.

All the current revenue structures push cities to look at the fiscal impact of developments rather than focus on what makes good land use planning.

So one part of what Palo Alto could look at to follow up on your thoughts is how new revenue strategies could be developed in cooperation with, not in competition with, our neighbors.

As a resident I favored the Stanford hospital and shopping center proposals and also proposals to bring housing and new retail to the Edgewood and Alma project areas. But my main reason is that they will serve broad community goals and give some respect to the rights of property owners to develop within a set of rules that don?t get fought over every time they are applied. The money to the City from these projects was a secondary consideration for me. And I certainly don?t favor endless fights over whether individual housing projects help City revenues.

All readers know the second challenge well. Palo Altans are conflicted about development. I got dumped on the last time I tried to poke fun at our conflicts about who ?owned? the City Council but I will try again. It seems to me that some residents have the Star Trek theory of development and city finance. It is the shopping without traffic theory. We want active shopping areas without traffic. I guess folks go the transporter room and Captain Kirk says ?Beam them up, Scotty? and shoppers appear all over Palo Alto without creating traffic.

But it is a real problem even without bringing in revenues. We want to create attractive and vital centers within the City that apparently only people who walk or bike should come to. I have never been able to drive a car so this doesn?t bother me as a potential driver but it does seem a little disrespectful to people who want to drive to where they shop.

Finally, and I will leave this mostly to another day. Palo Alto?s revenue strategy needs to take account of trends that suggest that the current sales tax and property tax bases are in for a period of slow growth. This is a statewide problem facing nearly all local governments in California and has nothing to do with fights over development. I will write about this on my blog at a later time.

Paul, thanks again for being brave enough to bring this up and sign your name to your ideas.

Posted by Paul Losch, a resident of ,
on Apr 18, 2009 at 12:04 pm

Paul Losch is a registered user.

Hi Steve,

Good perspective from a different vantage point.

A good revenue strategy accounts for the greater environment in which a local entity operates. I think there still exists in Palo Alto some denial about the rules of engagement around how revenues are generated. What worked here for a long time is no longer what it takes to make things a success going forward.

Your insight about those factors that are part of the State of California law and policy point out how we here locally need to adapt our game plan to the rules as they are presented. I am not convinced that Palo Alto has adapted adequately.

I do hope others weigh in. And I have a request that those that do post on this blog focus on revenue issues, not spending issues. I really want to have a discussion about revenue generation, and not change the subject to matters around how the spending side of the equation works. Spending is a valid topic, but not the topic for this blog.

Posted by John, a resident of ,
on Apr 18, 2009 at 12:49 pm

In a sense, we already have too much revenue, because we overspend on 'services' that are too expensive, and indulgent. We have created an artificial fiscal crisis. Sorry, Paul, but your typical metric does not pencil, if you remove the expenditure side.

A quick way to generate more revenue is to stop buying expensive alternative energy. We should be buying the cheapest sources of energy (coal, gas, nuclear) not boutique energy (solar, wind).

We need to support Stanford development, because Stanford is the economic engine of PA. Stanford should not be held to blackmail threats from PA. There is no way that Stanford should be required to provid housing for its workers, who do not want to live in those sardine cans, anyway.

Posted by Marvin, a resident of ,
on Apr 18, 2009 at 1:08 pm

Very well written, Paul.
You state:
"I also see hotel and automobile dealerships leaving town. I see absurdly long processes to get retail centers at Edgewood and Alma Plaza thriving again."

Why is that? Because of lack of leadership from our city council who are too busy with their own selfish priorities and pipe dreams and lack of desire to upset people--they feel it more important to play nice and waste time figuring out how to get civic engagement to work than dealing with our sinking tax revenues.

They let the Hyatt get away because they were afraid to upset certain residents. They lost Alma Plaza as a neighborhood retail center because they were afraid of upsetting some people and we will see a repeat now with edgewood plaza. Car dealers have threatened to leave town and I do not see the council addressing that issue. What I do see is our money used for subsidizing more framer's markets and bans of bags.

Yes, the city needs a revenue strategy, but also needs elected officials to implement that strategy. Our current council is not made up of people who can deal with that issue,.

Posted by Anna, a resident of ,
on Apr 18, 2009 at 1:21 pm

John is right: Palo Alto does not have a revenue problem. Palo Alto has a spending problem. Palo Alto spends, I believe, around twice as much per resident as other California cities its size (including neighboring Mountain View), and has twice as many employees per resident as these other cities. Do we get twice as much value? Our streets are in worse shape. We can't seem to come up with money for decent library buildings without special taxes (Mountain View built a new, state of the art library WITHOUT new taxes a couple of years ago). Any resident can come up with more such comparisons on which other cities have it better in terms of what are normally are thought of as government provided services.

What do we get for the huge amount of extra money our city spends? Well, we do have the Children's theater, scandal plagued though it is. We have a Children's Zoo too. I am not sure how many extra employees it takes to run that. There are a few other actual amenities that we have that others don't that perhaps are greater in value than those things other cities have that we don't. But it's hard to imagine any credible accounting would account for the difference in spending between us and them.

And then we have the other stuff familiar to readers of this forum that we spend money on: Senior Games contributions, bonuses for our workers who actually do their jobs, a $6 Million bike tunnel that duplicates one a couple hundred yards away that is only lightly used because the designers forgot it comes out facing a one way street, real estate taxes paid on behalf of our city manager, an environmental coordinator (along with paid trips for our politicians to various "green" events and photo-ops).... and on and on.

Losch is half-right when he describes the reactive ineffective panics our bureaucrats and politicians experience when faced with another business leaving town or some other hit to the revenue stream. But the real problem is that our hyperactive city government has been systematically adding to the burdens of doing business in town (through the Palo Alto process among other myriad roadblocks). If we had fewer employees and climate change coordinators dreaming up ways to justify themselves, we wouldn't need a revenue strategy. Businesses would locate here for the same reason they used to come here: because apart from the artificial city created roadblocks, it's a great place to do business.

We don't need a revenue strategy. We need a spending reduction strategy. Revenue will flow from that.

Posted by stephen levy, a resident of ,
on Apr 18, 2009 at 2:48 pm

stephen levy is a registered user.

The "we don't have a revenue problem, we have a spending problem" refrain is heard at all levels of government, especially in California related to the state budget. But that debate isn't relevant to what Paul wants to explore. Whatever level of revene is deemed best for Palo Alto, it is good to have a strategy and explore options.

Perhaps readers will be more comfortable if the question were "how do development choices and policies affect Palo Alto's revenue over time". This certainly seems to be of interest on a project by project basis but as I understand Paul, he is suggesting we approach development related revenue from a strategy perspective and not reactive to each project as it comes along.

"Anna" and "John" can note with interest that their complaint came up with a different twist in the commission formed by the governor and legislature to discuss a revenue strategy for California.

There many commissioners argued that we cannot separate revenue choices from spending choices. But they mean this argument to allow for the commission to look at higher revenue options becasue they believe we are not spending enough to create a great and competitive state.

Here, Paul hasn't said whether he thinks we are spending too much, too little or just right. All he is asking is that we approach city revenues from a strategic perspective.

Posted by John, a resident of ,
on Apr 18, 2009 at 3:24 pm

"...becasue they believe we are not spending enough to create a great and competitive state."

It doesn't really matter if it is at the state or local level, Stephen. The principle is the same, although addressed at the local political level.

If we are buying expensive boutique electric energy, we are committing economic suicide. Why are we deciding to kill ourselves? Stephen and Paul, do you support nuclear power or not? Do you support drilling off our continental shelf for oil? If not, why not? Do you buy into the global warming green hysteria? Do you buy into the transit/resident corridors that make almost no sense, unless there is some kind of blood oath among the residents that they agree to work locally, or take public transit? Do you buy into the BMR housing extortion, that charges a hidden tax to market rate buyers? Did you support the Opportuniety Center that is a magnet for even more homeless?

It is time for both of you to get real and lay it on the line. It is way past the time for metrics. We need decisions and stands. Think Alamo.

Posted by Resident, a resident of ,
on Apr 18, 2009 at 4:54 pm

I agree with you, Paul.

I think that what the city is forgetting is that for the majority of Palo Alto residents, we spend much of our money outside Palo Alto instead of in our own city. Whether it is purchases from Amazon, buying grocery related items (detergent and toilet paper), to big ticket items like household appliances and cars, we are shopping outside Palo Alto. In my own household we rarely spend sales tax dollars anywhere in Palo Alto.

Apart from the items we buy, we are spending money outside Palo Alto as a result. In other words, if we need to do a shopping trip to Target, we will probably buy groceries, gas, fast food in Mountain View too since we are already there.

When basic necessities are not available in our own town and we have to travel to get to them and the Council can't see it, then they are obviously more concerned with something on a different plane than the welfare of their own residents.

Posted by Anna, a resident of ,
on Apr 18, 2009 at 7:25 pm

As so often is the case, Stephen Levy misses the point.

Spending and Revenue in Palo Alto are inextricably intertwined, and it makes no sense to consider either in isolation from the other.

We have oodles of money in Palo Alto compared to other cities, and yet we find ourselves in a budget hole that is every bit as big as these other cities, and worse than many. (I believe Cupertino has a surplus.) And we find ourselves losing revenue-generating businesses that are fleeing to neighboring jurisdictions.

My contention is that we got fat and lazy over the past several decades hiring employees and throwing money at all kinds of non-essential nonsense. Having so much money made successive councils and staff leaders insensitive to the need to operate efficiently as well as the need to protect revenue generating businesses.

Moreover, all these employees, and the bureaucratic processes they naturally entail, rather than enhancing Palo Alto's desirability as a business destination have inhibited it. If we were a leaner city, we'd likely forgo a lot of the plastic bag banning, over-managed, over-planned aspects of city governance that have done so much to make us a laughing stock, and have made us anathema to many retail businesses.

I also object to Losch's approach because it fosters the illusion that we can continue to operate more or less as usual in town if only we find the magic revenue solution. This is demonstrably false.

The best way to become conducive to new revenue generation is not to try to force it in the ways Losch suggests. If we restrain spending along with all the bureaucratic excesses and the desire to manage every aspect of commercial growth that come with it, we'll regain our desirability as a place to do business.

It's not surprising that Levy does not agree with this - or even likely understand it - since he's spent his whole career advising governments on how to manage growth. Perhaps he should read a little more Hayek and a little less Marx.

Posted by Sun and Sand, a resident of ,
on Apr 18, 2009 at 11:15 pm

Here are some ideas:

1) Complete a proper diligence on PAU. PAU is a quasi-private business. Why don't we know what that business is worth, not only in raw asset value, but in private equity value? Why don't we have an analysis done that takes into consideration whether PAU is ripe for sale now, while PAU is still able to out-price PG&E? We do ourselves a fiscal disservice by not understanding PAU's market value, and not thinking about ways that we can leverage that value by selling PAU. With respect, PAU has become a sacred cow; this is a big mistake. PAU is a wonderful institution, with good people, but so have been many, many divisions of various companies that have been sold or otherwise leveraged as peripheral divisions for more cash and forward advantage than they could otherwise deliver. Perhaps it's a bad idea to sell PAU, but why aren't we looking into whether it's a good idea, or a bad idea? Why are we letting an asset of this size lie unvalued?

2) We have no pro-active business development in Palo Alto. We rest on laurels. Palo Alto IS a destination for many businesses, and services, but does that mean we shouldn't be working to make it even more desirable, in proactive ways. (btw, the current "promotional campaign" being run by the city is well-intended, but ineffective). We need to find ways to reach out to business AND other municipalities.

3) Encourage more housing. Citizens are not burdens. Anyone who says they are isn't looking at the revenue side of the balance sheet.

4) Create effective partnerships with Stanford. We have lost massive opportunity because we have been reactive in the Stanford relationship. This is already a tragedy of major proportions; we need to fix this.

5) Shrink the City Council. There are too many decision makers for the turn-on-a-dime reactions necessary inn fast-changing and challenging times.

6) At least consider the election of a mayor. Where does the buck stop in Palo Alto? It doesn't. Instead, it floats form one City Council member to another, gets handed off to the city manager, etc. etc. Nobody is in charge, really. This is not a criticism of the current Council or the City Manager. They are trying to do the right thing, and are doing well in many areas, but there are *structural* administrative and policy reasons why constraints are continue to pinch, with the future showing more serious challenges on the horizon. We need pointed leadership, form some *one* who can articulate a future vision, with enough separation of power to carry that vision forward (or be "unelected" if s/he fails). We must adapt to these changes.

That's it for now. Some other good ideas appear above. All of what I've written could fall under the rubric of Paul's revenue strategy, in a way that enables whatever strategy we come up with.

Posted by common sense, a resident of ,
on Apr 19, 2009 at 7:16 am

The city does have a revenue strategy:

1) Retail is bad, especially those big box retailers; let the neighboring cities build the big box retailing shopping centers next to Palo Alto borders so that Palo Alto residents can get the lower prices, without having to commute too far

2) Keep raising utility rates to make up for the erosion of retail; pile on as many charges from the general budget onto the utility so that they don't have to ask the residents to vote for additonal taxes.

3) Conversion of commercial land to higher density mixed use residential to provide for subsidized housing that doesn't pay property taxes (yet consumes services). Use the PC Zoning to evade density restrictions to achieve these goals.

Recently walked downtown, and saw the vacant stores where Magnolia Electronics, Z-Gallery, and other retailers used to be...

Posted by resident, a resident of ,
on Apr 19, 2009 at 8:34 am

I agree with Anna. The city has a serious spending issue.

In this economic downturn, what else would you expect in terms of revenue? Everyone is having a revenue generating issue. Expecting people to spend more after we've just popped the largest debt bubble in recent history is absurd. So you basically can expect higher consumption, i.e. a return to shopping mentality, to not return.

Most economists know that unemployment will continue to rise into 2010 - why would we expect people to spend more if we all know unemployment will continue to rise?

I find it humorous that Levy advocates revenue generation based on the outdated 2000-2007 model that consumption equals growth when we are in a deflationary environment.

The best way to balance the decrease in revenue stream is to cut costs. Period.

Posted by Where the money goes, a resident of ,
on Apr 19, 2009 at 3:40 pm

The biggest and most invisible expenditures are made by the Public Works Department. EVERY week hundreds of thousands of dollars are authorized and the annual total is astronomical.
No doubt many of them are legitimate but I doubt that anyone on the city council or in the city, for that matter, knows where all that money goes.

Posted by stephen levy, a resident of ,
on Apr 21, 2009 at 6:46 am

stephen levy is a registered user.

Representatives of local governments throughout Southern California came before the state commission studying revenue strategies to urge proposals that would lessen the fiscalization of land use--the incenties for cities to make land use decisions for revenue uinstead of good planning.

They presented three new "revenue strategies" for local governments.

it is a long read but for those interested start on page 16 with Supervisor Norby.

Web Link

Posted by pat, a resident of ,
on Apr 24, 2009 at 9:05 pm

A good thoughtful starting point and many fine responses.

Palo Alto needs a business plan to focus council and staff on the essentials. Someone has to develop a big picture strategy to replace the current one-crisis-at-a-time model of government: HSR, fiber to the premises, ABAG, dense housing, BMR housing, utilities transfers, Stanford development, Edgewood Plaza, etc. What does this city want to be when/if it grows up? Atherton? San Jose? Vallejo?

Our city council has no sense of priorities. For too many years, council members have simply rubber-stamped the budget presented to them, e.g., "$146 million budget sails through City Council." Web Link

Meanwhile, they spend agonizing amounts of time on frivolous, money wasters like the Color of Palo Alto, civic engagement and hate-free zones. That elitist behavior was merely embarrassing when times were good, but now it?s deplorable.

WRT the downtown area, whatever happened to the manager of economic development/ redevelopment. Is that position still staffed? If so, what is that person doing?

Posted by Steve Krafft, a resident of ,
on Apr 26, 2009 at 7:15 pm

Another place to look for spending is Public Works and refuse rates. The new multi-million dollar per year garbage contract just negotiated included adding and continuing services that were already available for free in the community by for- and non-profit businesses. What do we get? Double digit refuse rate increases every year for services we do not need. For example, now we will get to recycle cell phones, computers, plastic bags in our blue carts and our rates go up double digits for redundant services.
- By law, any store that sells cell phones must take back any brand for recycling (2004 law in Ca). So when you buy a phone you just take your old one in with you for recycling. Since there is already a service, why does the City feel the need to jab the residents for an unnecessary program and raise our rates?
- Electronics & Computers. Manufacturers (HP, Sony, Dell etc) and retailers (Best Buy, Staples) have set-up mail back and drop-off recycling programs for computers and Goodwill set itself up as a collector (CA state-approved) to accept electronics that are recycled with an electronics recycling company. And Goodwill makes some money for their training programs. What does the City do? Jab the residents for an unnecessary program and raise our rates and compete with Goodwill taking away much needed money for the nonprofit.
- Plastic bags. All large grocery stores and pharmacy chains are required by law to provide plastic bag recycling drop-off (including merchandise bags, dry cleaning bags, etc). This is free and since everyone shops at these stores (that's where the bags come from!) so why can't the City just tell people to take their bags back to the store for recycling. Noooo. They start a redundant program that causes our rates to be raise double digits instead of using the one that the stores provide for free. Jab the residents for an unnecessary program, raising rates every year.
- Oil recycling. Any oil & lube place provides free drop-off of used motor oil. What does the City do? Continue to collect oil from homes and pay for hazardous waste management and disposal when it does not need to and jab the residents for an unnecessary program, raising rates every year.

There are many more examples of this type of fiscal irresponsibility and it should be stopped. Local government should provide basic services for garbage and recycling and let the private and non-profit sector handle products since the programs manufacturers create are included in the price of the product. Residents end up paying twice- once for the program funded by the manufacturer at the time of purchase and the second time when the city sets up redundant programs.

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