With revenues bouncing back after a pandemic slump, the Palo Alto City Council approved on Monday a budget that restores many of the services and positions that it had cut over the past two years.
But even as council members celebrated the city's brightening financial outlook, they warned that the new spending plan represents a temporary reprieve rather than a full restoration. While recent increases to sales-tax and hotel-tax revenues are providing a healthy boost to the city coffers, officials are also banking on one-time sources to balance the books and bring back positions in Police and Fire departments, expand library hours and boost spending on community services. This includes $8.9 million from the budget stabilization reserve and $5.5 million in federal funding from the American Rescue Plan Act of 2021.
The council voted 6-1, with council member Greg Tanaka dissenting, to adopt the budget, which city officials have been reviewing and refining since late April. In doing so, council members acknowledged this year's relatively benign budget season after two turbulent years in which they had instituted about $40 million in cuts. They cautioned, however, that the relief is temporary.
"Once the federal stimulus money runs out after this year, we either need new sources of revenue or else we face a return to the class of cuts we faced during the pandemic not so long ago," said council member Eric Filseth, who serves on the Finance Committee. "And nobody should be mistaken about this. This budget works this year and works well, but after this year, there is a fiscal cliff coming. It is real and it has significant implications for the future of the services that we're restoring with this budget this year."
The budget for fiscal year 2023, which begins on July 1, consists of $965.7 million in total expenditures, which includes utilities. It also includes a $247.2 million general fund, which includes most basic city services aside from utilities. That's up from $209.2 million in the current fiscal year and $200.7 million in 2021.
The plan represents a rebound from 2020 and 2021, when the city eliminated 79 full-time-equivalent positions and 102 part-time positions, resulting in a workforce of 956 full-time and 81.6 part-time positions. The council restored 20 of these positions earlier this year. The new budget goes even further and brings the total authorized staffing level to 1,015 positions.
The list of new positions includes three firefighter trainees and a deputy fire chief who will manage recruitment and succession planning; four new police officers and two public safety dispatchers; six full-time positions in the Library Department, including an assistant director and a coordinator of library programs; and an analyst at the City Manager's Office who will serve as the city's equity and inclusion official. It also includes various new positions in Utilities, Planning and Development Services and Community Services departments.
"This is a recovery budget," said council member Tom DuBois, who chairs the Finance Committee. "And while the Finance Committee vetted it thoroughly, it's a much easier task when you're looking at restoring funds than cutting funds as we did in the last couple of years."
Council member Alison Cormack said she appreciated the fact that this year's budget is so much less controversial than the spending plans that the council grappled with over the past two years. She also observed, however, that the city will need to come up with additional revenue sources to sustain the services. Kiely Nose, director of the Administrative Services Department, characterized the 2023 budget as a "bridge" that will cover the next two years, after which time the city will need additional revenue sources.
"I think I'd call it more of a transition budget rather than a recovery budget given that so much of it is two-year funding and we're going to need to get to a different place in order to be able to recover," Cormack said.
Most council members agreed Monday that the most promising way to get a more sustainable revenue source is to adopt a new business tax and to reaffirm the city's historic practice of transferring funds from its gas utility to the general fund. The city recently halted the practice as a result of a lawsuit from resident Miriam Green and a subsequent court determination that the transfer amounts to an illegal tax.
"We're struggling to restore services that were cut two years ago from the pandemic," Mayor Pat Burt said. "We have funds to be able to carry us over and begin those restorations at this time but we can't, based on current projections, continue them unless we have those additional revenue streams."
The council is currently considering placing both a business tax and the gas-transfer policy on the November ballot. But with some members having second thoughts about the details of the business tax and the viability of presenting both measures on the same ballot, the council deferred its final decision on these measures until Aug. 1, the council's first meeting after its summer recess.
Shortly after adopting the budget, the council directed staff by a 5-2 vote, with Cormack and council member Greg Tanaka dissenting, to return in August with both a gas tax and a slightly modified version of a business tax, which would be based on square footage. Much like the prior version, it would exempt grocery stores, hotels and the first 5,000 square feet from taxation. But while the prior version would have taxed all square footage beyond 5,000 square feet at a rate of either 10 cents or 12 cents per square foot per month, the revised version would create a lower rate of 6 cents per square foot for businesses between 5,000 and 20,000 square feet and a 12-cent rate for all square footage beyond the 12,000-square-foot threshold.
While the modification was made to address the concerns of the business community, Cormack suggested that even the revised rate is too high and suggested going to a rate of 5 cents per square foot for the lower tier. After her suggestion was rejected, she voted against the revised plan.
She cited the heavy opposition from the business community, the turnover in landlords and the high number of vacancies in business districts.
"My risk tolerance for going forward in the face of clear and convincing danger … in terms of the opposition is not high," Cormack said.
Tanaka had broader concerns both with the proposed taxes and the new budget. Over the years, he has consistently opposed adopting a business tax and has routinely voted against the annual budget. Once again, he argued that the city needs to be more cautious when it comes to spending and more conservative when it comes to revenue projections.
"If we tempered it a bit and had more for a financial buffer, we wouldn't be pushed against this wall as much as we are next year, if the revenues do not come in," Tanaka said.
In addition to restoring positions, the approved budget also includes about $82 million in spending on capital projects in 2023, the first year of a five-year, $198.8-million capital improvement plan. The list of items in the plan includes $11 million on repairs to Roth Building at 300 Homer Ave.; $60.1 million on repairs to streets and sidewalks; and $40 million for transportation projects.
The enterprise fund, meanwhile, includes $525 million in capital spending over five years. The biggest project is an upgrade to the Regional Water Quality Control Plant, which will cost $282.5 million. The plant is used by Palo Alto, the East Palo Alto Sanitary District, Mountain View, Los Altos, Los Altos Hills and Stanford University and the costs will be spread out among the partner organizations.