Forecast shows tax revenues on the rise in Palo Alto

New document projects steady sales tax growth but raises questions about hotels, infrastructure

Despite mounting infrastructure costs and colossal pension obligations, Palo Alto is banking on good times ahead when it comes to the city budget, according to a new economic forecast released by the city.

The Long Range Financial Forecast, which covers the years 2021 to 2030, sets the stage for what portends to be a relatively calm and drama-free budget-setting season, with revenues rising in most categories. On the other hand, it puts a damper on the City Council's infrastructure ambitions and suggests that the city's hotel tax revenues, which have been on an upward trajectory in recent years, may be in for a rocky period.

Overall, however, the news is largely positive. The forecast, which the council's Finance Committee discussed Tuesday night, shows the city's revenues rising by 7%, or $9.8 million, between the current fiscal year and the next one. This is driven largely by strong growth in sales and property taxes. The forecast shows sales taxes going up from $34.35 million in fiscal year 2020 (which began on July 1) to $37.6 million in 2021.

The forecast also predicts that the trend will continue, and even accelerate, over the next decade. Sales tax receipts are expected to climb by about 4% every year and reach $51.8 million in 2030.

"The sales tax revenue forecast is driven by strong personal income and spending growth and a larger share of consumer spending online," the forecast states. "New and innovative retail formats have helped revive physical retail presence. Stores that were once strictly online are now finding physical presence within communities."

Property taxes, which make up general fund's largest revenue source, are expected to show even greater growth. The forecast projects that the city's property tax revenues will go from the current level of $48.6 million to $52.9 million in 2021. Revenues in this category are then projected to grow by about 5.8% annually and reach $85.7 million by the end of the decade.

The one area where the committee has some cause for concern is hotel taxes. In the last two quarters, the occupancy rate at local hotels has dipped. While transient-occupancy tax revenues this year are expected to reach $27.2 million, about 6% higher than in fiscal year 2019, it is about $2.1 million, or 7.2%, below the estimate in the city budget for fiscal year 2020.

The trend isn't limited to Palo Alto. According to a survey by the consulting firm CBRE Hotels, hotels in northern California had experienced an average 1.4% decline in occupancy rate in September. In Palo Alto, the decrease was 4.7%.

Even so, city officials expect this revenue source to recover and increase in the coming years. With two Marriott hotels slated to open in the next year or two, the forecast projects that revenues from hotel taxes will go up by $4.3 million, or 15%, between the current fiscal year and the next.

Councilwoman Alison Cormack said the trend with hotel-tax revenues is something that the council needs to pay attention to, particularly as the city considers changing its relationship with the San Mateo County/Silicon Valley Convention and Visitors Bureau, a regional organization that markets hotels and other destination. On Monday night, the council considered a request from nearly 20 local hotels to leave the organization, but agreed to delay its decision until next fall.

Citing the numbers in other cities, Cormack noted that the dip in hotel occupancy can be attributed to "macroeconomic trends, as opposed to something happening in our own city." Hotel executives have pointed to government policies such as recent travel bans and the trade dispute with China as reasons for a slow-down in hotel bookings.

Committee Chairman Tom DuBois also suggested that the data on hotel bookings may be somewhat skewed by the presence of Airbnb.

"The hotel scene is changed and it's more complicated," DuBois said. "Maybe this doesn't capture what's happening."

Another area where the forecast warns of troubling signs is infrastructure. When the council adopted its infrastructure plan in 2014, it estimated that the projects in the plan would cost about $125.8 million. Since then, costs have jumped to $280.6 million.

The figures, Cormack said, suggest that the council may not be able to complete all the projects on its wish list.

"This is just math," Cormack said. "And as I look at this scenario and think about the fact that we're a service-driven organization, it's not clear to me that we'll be able to sustain the increase in construction costs and all the projects that are in the pipeline."

The forecast also doesn't account for several large infrastructure projects that the city is planning to pursue in the coming years, including the redevelopment of Cubberley Community Center and "grade separation," the re-alignment of rail crossings so that trains and cars would no longer intersect. Even as the city is counting on healthy revenue growth from sales and property taxes, it is also preparing to ask voters next year to approve a business tax that would pay for transportation improvements such as grade separation.

Staff and committee members also noted that the numbers could change significantly, whether because of a recession or labor agreements that result in higher than projected expenditures.

The forecast argues that the city "must continue to exercise diligence to remain fiscally sustainable and balance the ecosystem of resources, the cost of doing business, and service delivery level."

"A continued scrutiny of the expansion and enhancement of existing services, the addition of new services, and the priorities of the community will be necessary, especially as a slowing of the economy is anticipated in the coming years," the forecast states.


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15 people like this
Posted by Garden Gnome
a resident of Crescent Park
on Dec 4, 2019 at 12:03 pm

So long as we spend $$$ on salaries and pensions, all is well.

If there's anything remaing, we can always support additional artworks.

Whatever else, let's not even begin to consider that the good times will ever end.

17 people like this
Posted by Online Name
a resident of Embarcadero Oaks/Leland
on Dec 4, 2019 at 12:07 pm

Online Name is a registered user.

Great. So that means with PA Utilities again running an almost $20,000,000 "surplus" for yet another year that we'll be getting a rate cut, right? Or that PA's going to channel that money into reducing its unfunded pension liabilities?

21 people like this
Posted by Oh Well
a resident of Crescent Park
on Dec 4, 2019 at 12:13 pm

Burgeoning tax revenues will allow/permit the city of Palo Alto to continue it's high-falutin' ways...more outside consultants, overpaid administrators, increases in CALPERS expenditures, department fiscal surpluses that serve no benefit to residents...need we go on?

The elevated property taxes on overvalued/overpriced PA homes will also provide a nice cushion for these civic endeavors.

So let's welcome all of the newcomers to PA who are willing to pay CASH for a $7-25M home along with the corresponding tax revenues.

We need them!

4 people like this
Posted by Mark Weiss
a resident of Downtown North
on Dec 4, 2019 at 12:28 pm

Mark Weiss is a registered user.

Stanford reopened the Frost amphitheater and has done maybe $10 million worth of business there with names like Bob Dylan and Willie Nelson.
I guess for that matter come to think of it the football and basketball teams do a fair amount of business.
Can we tax that the way we tax the shopping center?

Or I’d like to see a breakdown of that $51 million you say is sales tax here

10 people like this
Posted by Resident
a resident of Another Palo Alto neighborhood
on Dec 4, 2019 at 12:46 pm

Perhaps any surplus should be put into a rainy day fund. Or used for improving traffic flow at some of our busy intersections (Middlefield/LomaVerde anybody?).

Saying that, it will probably disappear and provide us, the taxpayers, nothing other than more tax bills in the future.

18 people like this
Posted by Anon
a resident of Another Palo Alto neighborhood
on Dec 4, 2019 at 1:04 pm

Budget-wise, these are boom times. Please, put surplus money towards fully funding future retiree costs.

3 people like this
Posted by Fred
a resident of University South
on Dec 4, 2019 at 1:06 pm

A bond issue is needed to rebuild Cubberley.

Palo Alto has no jurisdiction over Frost. Stanford Shopping Center and Research Park were annexed to Palo Alto.

Like this comment
Posted by Mark Weiss
a resident of Downtown North
on Dec 4, 2019 at 3:39 pm

Mark Weiss is a registered user.

aha: maybe Stanford Live or AEG would put a ticket surcharge on their shows at Frost to pay for our Music in The Parks here....part of the mix of negotiating their CUP.

4 people like this
Posted by Mark Weiss
a resident of Downtown North
on Dec 4, 2019 at 11:32 pm

Mark Weiss is a registered user.

True or false: the land under Castilleja is zoned R-1 and if we build 50 single family homes there, it would generate $3.5m in property taxes each year. ???

3 people like this
Posted by musical
a resident of Palo Verde
on Dec 5, 2019 at 8:29 am

One: 50 single family homes won't fit.
Two: If that tiny, they would not sell for $6M each.
Three: A tax-exempt entity would buy them anyway.

1 person likes this
Posted by Rebecca Eisenberg
a resident of Old Palo Alto
on Dec 5, 2019 at 3:21 pm

Rebecca Eisenberg is a registered user.

@Mark, if you look at the original plans of Palo Alto, you will see the 51 lots where Castilleja sits.

Here is how it stands now. When comparing to Emerson and Melville homes, you see that we could fit far more than 51 homes in this space. Recall, Melville was a cul de sac.

Web Link

Also, it is important to remember that the Castilleja parcel actually includes at least 6 parcels:


211 MELVILLE AV PALO ALTO 94301-3526


235 MELVILLE AV PALO ALTO 94301-3526


1310 BRYANT ST PALO ALTO 94301-3507

It all adds up to well over 6 acres. Yet look (at the Santa Clara Assessor's Office Website) - their taxable value is ZERO. ZERO. (BTW, Castilleja paid less than $20M to buy this property in 1973.)

You can find all the details by doing a search here: Web Link

As to how many lots can fit in the area, it is extremely hard to find a historical zoning map, but I believe that someone posted one to NextDoor (I'll look). In the meantime, here is some quick math:

According to the best records I could locate, Castilleja's total ownership is approximately 375,000 square feet (this may be wrong -- again, it's VERY hard to find these numbers). This translates to approximately 51 RH-1 lots of 7500 square feet. Poking around on Zillow, 7500 square feet is a very standard size for that part of Old Palo Alto.

Personally, I don't think that 7500 square feet is anything close to "tiny," even in tony (pun!) Old Palo Alto, where land sells for anywhere between $500 and $1000 a square foot (with or without a house on it). Figuring a number on the lower end of that scale -- $600/square foot -- each 7500 lot would sell for approximately $4.5 million, which seems believable given the location.

51 lots @ $4.5 M totals $229,500,000 in taxable property tax sales. Figuring an effective 1.3% property tax, that brings in $2,983,500/year (to begin) in property tax, which would grow to bigger than $3 million by the second year.

As to the comment that a tax-exempt property would buy these parcels - NO WAY. They were originally zoned RH-1, and any buyer who wanted to use these lots for anything other than RH-1 would have to go back to the city for another conditional use permit. Hopefully by then our city government will have learned that these permits are NOT in our community's best interest! Plus, it would be very hard to convince the residents near Castilleja that anything other than residential housing belongs there, as it was, and still is, zoned.

1 person likes this
Posted by Rebecca Eisenberg
a resident of Old Palo Alto
on Dec 5, 2019 at 4:22 pm

Rebecca Eisenberg is a registered user.

Re Frost: unfortunately, Stanford, like Castilleja, is a tax-exempt organization even though it is not charitable. At least Stanford opens up many of its events to the public ... unlike Castilleja.

The tax exempt status of private schools that serve wealthy populations is a matter of controversy, with many economists and most supporters of public school and affordable housing falling strongly in the camp that private prep schools should be taxed (with some going farther, to say they should be banned altogether). A lot of the best research comes from the abundance of reports of ways in which private school vouchers destroy public school systems:

Web Link

Web Link

Banning private schools:

Web Link

this one is from the UK:

Web Link

this one is from the POV of morality:

Web Link

Public schools benefit everyone, including families who opt to send their kids to private schools. The same cannot be said for private schools, however. That said, in the context of the ever-growing negative consequences of Prop 13, it's easy to see why those who can afford private schools often opt for them. In school districts where the public schools are the best funded and supported, fewer families seek private schools.

I grew up in one of those districts -- Whitefish Bay, Wisconsin, where 4 of us out of our 1986 high school graduating class of 220 students headed to Stanford my year! This is largely attributed to the property tax rate of 2.5% -- which seems really high, but isn't in the context of community where $400,000 buys you a 4-bedroom house in an extremely safe, lovely neighborhood (my parents bought the home they still live in for $30K in 1969). I have been told that quality of life -- and cost of living -- in Palo Alto in the 60's and 70's was not that different. How nice that would be!

Like this comment
Posted by Newcomer
a resident of Mayfield
on Dec 6, 2019 at 7:19 pm

It's nice to see new development and densification in PA. I'm really tired of hearing complaints from long time residents that pay almost no taxes due to prop 13. The sooner they leave the more money we will have to support our schools and community.

Like this comment
Posted by Anon
a resident of Another Palo Alto neighborhood
on Dec 7, 2019 at 9:57 am

Posted by Newcomer, a resident of Mayfield

>> It's nice to see new development and densification in PA. I'm really tired of hearing complaints from long time residents that pay almost no taxes due to prop 13. The sooner they leave the more money we will have to support our schools and community.

Sometimes it is difficult to tell if someone is serious, or, if misdirection is at work. Web Link

Assuming that you are serious, I suggest that, as a newcomer, you read up on the history of the Fry's site. Perhaps Sobrato would like to chime in at some point explaining why that site hasn't been redeveloped with RM-30 housing. BTW, the Fry's site is useful because the situation is so glaringly obvious. I don't think Sobrato folks are any different from anybody else in their business.

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