Despite tax growth, Palo Alto braces for deficits | March 2, 2012 | Palo Alto Weekly | Palo Alto Online |

Palo Alto Weekly

News - March 2, 2012

Despite tax growth, Palo Alto braces for deficits

City's new Long Range Financial Forecast shows sales taxes rising, employee expenditures spiking

by Gennady Sheyner

After a two-year slump, Palo Alto is finally seeing some sunny news on the revenue front, though officials predict that the rapidly rising cost of employee benefits will continue to saddle the city with years of budget deficits.

The two trends — rising revenues and spiking expenditures — are both detailed in the new Long Range Financial Forecast, which the City Council Finance Committee reviewed Tuesday night.

The document is not so much a prediction as a "snapshot" based on various current assumptions, city staff said, but it shows a picture of changing finances following the 2008 recession.

Palo Alto sales-tax revenues for fiscal year 2012 (which ends on June 30) are estimated at $21.6 million, exceeding the city's adopted budget by $1.4 million.

Hotel taxes rebounded last year after two years of declines, increasing by 17.8 percent between 2010 and 2011. This year, the numbers are expected to be even stronger. Tax revenues in the first quarter of 2012 exceeded those in 2011 by a whopping 26.2 percent and for the year are expected to be 7.3 percent higher than last year.

The forecast states that the transient occupancy and per diem rates in Palo Alto "have moved up appreciably as they have along the entire Peninsula, due to increased business activity." Sales tax, meanwhile, "has been on an upward trend with strong department store and electronic-equipment sales."

But while revenues are projected to grow, they are not expected to keep pace with expenditures, particularly the sharply rising cost of employee health care and pension benefits. The forecast pegs the total cost of benefits in fiscal year 2012 at $36.8 million. By 2017, the number could gradually balloon to $51.2 million because of the two trends.

The city's health care expenditures, according to the forecast, have grown by 126 percent over the past decade, going from $6.6 million in 2002 to $14.9 million this year. The trend is expected to continue and to swallow up a greater chunk of the city's General Fund. The pension costs are following a similar trend, having jumped from $15.6 million in 2005 to $23.9 million in 2012.

The rising expenditures carry bleak implications for the city's General Fund. While the forecast shows a balanced budget this year, it projects a $2.1 million deficit in 2013, a $3.7 million deficit in 2014 and a $4.1 million deficit in 2015. The forecast notes that while city revenues are improving, expense increases "continue to outpace the growth in revenue."

"The city-revenue projections are rosier than they have looked for a couple of years, but benefit costs continue their relentless upward climb — outpacing the rate of revenue growth," the forecast states.

The report also notes that a recent actuarial valuation of Palo Alto's unfunded retiree medical liability indicated that the city needs to set aside an additional $2.7 million in 2012 and $3.5 million in 2013 to cover the backlog.

"The city clearly still has its work cut out for it in addressing its structural deficit," the forecast states.

While the forecast is a forward-looking, big-picture document, its implications are already being felt in the city's negotiations with its labor groups. For the past three years, the city has been aggressively pressuring labor groups to cover a greater share of employees' health care and pension expenditures (both of which have been entirely paid by the city). Most labor groups have already agreed (or, in some cases, have been forced to accept) less generous benefits, including a new requirement for them to chip in for medical costs and a two-tiered pension system under which newly hired employees get fewer benefits.

The sharp rise in health care and pension costs is also one of the prime justifications for the city's decision to declare an impasse last week in its negotiations with the Palo Alto Police Officers Association after six months of meetings (see sidebar). The city's negotiator, Darrell Murray, highlighted the two trends in his declaration of the impasse. The city's medical insurance premium payments per employee have gone up by 21.1 percent since 2008, rising from $10,500 to $12,713. Furthermore, the city's pension contribution for police employees was 23.6 percent of earnable compensation in 2008, a rate that has gone up to 30.1 percent.

"Clearly, public agencies have reason for concern that pension costs will continue to consume increasing shares of their budgets," Murray wrote.


Posted by health care, a resident of Adobe-Meadow
on Feb 28, 2012 at 10:06 am

We need a national solution to the health care crisis. Soaring health care costs are squeezing cities, businesses, employees, and families. Why aren't the candidates talking about health care in this year's presidential election?

Posted by Furious is Midtown, a resident of Midtown
on Feb 28, 2012 at 10:17 am

Why is it that the "genius" liberals who run this city didn't see something this obvious coming? The taxpayers of this city are being brutalized by out-of-control government health care and pension costs-- the products of the same idiot Democrats running our state. And yet, the citizens of Palo Alto keep voting for these same clowns who rob from Palo Alto's tax base and services to pay for featherbedded pensions and healthcare benefits like I will certainly never see. Its absolute madness.

Posted by Can't be Too bad, a resident of Community Center
on Feb 28, 2012 at 10:22 am

Budget cant't be too bad if the city BUDGET DIRECTOR is about to get a massive raise!!!!!!!!!!!!!!!!!!

Posted by David Pepperdine, a resident of Another Palo Alto neighborhood
on Feb 28, 2012 at 10:30 am

Time to get some grown ups to run this place. Fiscal responsibility is so far removed from the brain trust that "manages" the city's finances.

There won't be a change until Palo Alto changes the City Charter to be run for the direct benefit of its residents, not its employees. At the moment, the employees are better off than the people paying their salaries (and overly generous retirement benefits).

Posted by Toady, a resident of Old Palo Alto
on Feb 28, 2012 at 10:34 am

"We need a national solution to the health care crisis"

Yes - we need to have individuals take control of their own healthcare instead of relying on employers to give it to them.

It still amazes me that anyone thinks the same government that pays thousands of dollars for toilet seat covers can actually deliver efficient, cost-effective healthcare.

Posted by David Pepperdine, a resident of Another Palo Alto neighborhood
on Feb 28, 2012 at 10:37 am

The current system of defined benefits is unsustainable.

We need to move from a system of defined future benefits (at unknown future cost) to one of defined contribution (where we set aside a known sum of money now for whatever benefit it provides in the future). Rather than pay pensions for an unknown number of years, for people who can retire too early, it would be far better to make 401-K style contributions for healthcare and retirement.

Very few residents in this town, most of whom work in the private sector, have retirement benefits approaching what city employees have.

We demand parity.

The City Council better move quickly on this before we follow in the footsteps of Vallejo and declare bankruptcy.

Posted by Nahla, a resident of Barron Park
on Feb 28, 2012 at 10:57 am

City council members get free lifetime healthcare!!!

Posted by marty, a resident of Palo Verde
on Feb 28, 2012 at 11:01 am

if kodak can reduce its liability, why should palo alto not consider doing the same. times have changed and we need to build for the future, our children, and not be slowed down because of the desire to old onto benefits that were not reasonable.
The unions themselves should do what is right, based on the facts in front of them and stop racketeering the tax payers.

Posted by anon, a resident of another community
on Feb 28, 2012 at 11:37 am

Nice example Marty, in February Kodak announced:

ROCHESTER (AP) — The Eastman Kodak Company said on Thursday that it would stop making digital cameras, pocket video cameras and digital picture frames, signifying the end of an era for the company that brought photography to the masses more than a century ago.

Sooooo . . . . just curious . . . . exactly what services shall PA start cutting to emmulate Kodak? Libraries? Utilities? Art Programs? Children's theatre? Children's Zoo?

Kodak will have to cut some jobs, which the City has already done. I know my office is over 15% smaller, so PA is doing that.

The CEO at Kodak did indeed take a serious 66% pay cut, which the city manager has not. Wow that's huge. Of course the CEO's new salary is 3.5 million - which would take Keene a good 12 years to earn one year of CEO level salary.

I'm not saying the City is all good because it isn't. Just quit spouting the same old rhetoric - or at least back it up with solutions.

Posted by Furious in Midtown, a resident of Midtown
on Feb 28, 2012 at 11:48 am

Why is it that the "genius" conservatives won't admit that as long as healthcare is run as a for profit service then it will be used to make a profit, at the expense of those who have to pay for it, whether it's a public entity, corporation, or individual. Healthcare is a spiraling cost because the "genius" MBAs have figured out how to maximize profit, and got the "genius" Republicans to go along with it.

Posted by musical, a resident of Palo Verde
on Feb 28, 2012 at 12:12 pm

Last I heard, Stanford Hospitals, Lucille Packard, and Palo Alto Medical Foundation were all non-profits. Where is this for-profit service that you go to? Can I get better care there?

Posted by Dan, a resident of Southgate
on Feb 28, 2012 at 12:26 pm

The US tradition of employer paid health insurance has insulated many Americans from the pain of rapidly rising health care costs. Instead of complaining about health insurance company profits and admin costs, drug costs, expensive procedures, or the mentality of extraordinary measures to briefly extend the lives of the terminally ill, they blame employers: "big corporations" or "government employee benefits". Whether health care is paid by you, your employer, or the local, State, of Federal government, it simply costs too much. Unless we're willing to accept cheaper health care that probably won't be as good, the budgets of Palo Alto, California, the Federal government, and many individuals may never be balanced again.

Posted by lazlo, a resident of Old Palo Alto
on Feb 28, 2012 at 12:34 pm

Too bad the City of Palo Alto forgot to fund the benefits and health care that they promised employees upon retirement. Instead, these financial wizards who continuously produce deficit budgets, thought that the necessary funds would magically appear when needed. Oh well, lets just blame the employees and claim ignorance to our decision to spend uncontrollably while stashing millions of taxpayers dollars away in dozens of reserve fund accounts instead of using those funds to balance the budget or fund city infrastructure. Too bad the general Palo Alto population is so gullible. What a pity.

Posted by CityWorker, a resident of another community
on Feb 28, 2012 at 2:04 pm

The City of Palo Alto has actually done pretty well in keeping up with the funding of the pension and health care benefits. During the boom years, when no pension deposit was required (since the rise in the stock market brought the value up enough), the City deposited that money anyway to cover future medical benefits.

In fact, investment returns even now, are more than 60% of the pension benefit that a retiree gets.

As for nonprofit hospitals and for-profit medical coverage, the problem is in the insurance comepanies, which are, for the most part, for-profit businesses. Most people don't pay the hospital directly for services.

Posted by Nayeli, a resident of Midtown
on Feb 28, 2012 at 2:15 pm

TRANSLATION: The city is STILL spending more than it is taking in.

Posted by student, a resident of Gunn High School
on Feb 28, 2012 at 3:20 pm

I'm taking AP Economics at Gunn right now and I bet I could do a better job than these nuts and all you commenters whining for your own selfish needs.

Posted by musical, a resident of Palo Verde
on Feb 28, 2012 at 3:50 pm

Gunn student, enjoy this time of knowing everything.

Posted by Steve, a resident of Charleston Gardens
on Feb 28, 2012 at 9:47 pm

Liberals have run this city for too long. The mayor is more conservative. Chinese people are very good with money. This city needs to be run like a business.

Posted by Outsider, a resident of another community
on Feb 29, 2012 at 11:05 am

It is ironic that now Palo Alto residents seem to be waking up after the train has left the station. Palo Alto management (city manager all the way down to the least paid management position) has not saved well for it's citizens nor the future. For the past 15 years the infratstructure has been ignored for the more popular projects like building a new library. And yes "Cityworker" the City did not pay into the pension fund because CalPERS said they were so profitable the payments were waived for the year, and what did the city do with the money? They had a huge influx of management hirings, which ate up a good portion of those funds. Just another incident where the city could have socked away all that money for infrastructure (citizens), but now we will all have to sit and listen to the professional politicians whine about how the city is falling apart. P.S. Don't forget about current police negotitations and upcoming SEIU negotiations. This is politics at it's best folks.....we can't run the city because employees get too much.

Posted by David Pepperdine, a resident of Another Palo Alto neighborhood
on Feb 29, 2012 at 4:04 pm

[Post removed by Palo Alto Online staff.]

Posted by Ben, a resident of Midtown
on Feb 29, 2012 at 5:48 pm

" The mayor is more conservative"

@Steve: What kool aid you been drinkin'? Our current Mayor is full of new urbanism and high density housing and transportation loci and climate change scare tactics. He carries water for the unions. He is an uber liberal! Remarkable that you attempt to cut him slack, just because he is Asian. He will use whatever tactic necessary to spend our money to support his ideology.

Posted by Robert, a resident of Charleston Meadows
on Feb 29, 2012 at 10:34 pm

This country is based on greed. From the doctors to the police. From the city bureaucrats to the mortgage brokers.

The politicians are all crooks with neither principles or courage. The voters are feeble-minded in every way.

Posted by Fred Smith, a resident of Barron Park
on Mar 1, 2012 at 1:52 pm

How nice that the city employees have such generous benefits. However, us residents can only dream about such benefits. City employee benefits need to be aligned with those of the the people they serve.

Posted by Robert, a resident of Barron Park
on Mar 1, 2012 at 5:50 pm

The public sector has run amok. With each passing year it consumes more and more of the GDP and offers less and less in return. Palo Alto should outsource all of the union filled government jobs and let the private sector dictate what is fair pay. Until this happens, the city should not be thinking about spiking our taxes and utility rates.

Posted by benefits and cost, a resident of Charleston Meadows
on Mar 1, 2012 at 6:08 pm

Why not provide retirement and healthcare benefits to every resident in the city? Then this issue of unfairness would go away.

<time for digesting>

We can only spend what we have!

Don't miss out on the discussion!
Sign up to be notified of new comments on this topic.


Post a comment

Posting an item on Town Square is simple and requires no registration. Just complete this form and hit "submit" and your topic will appear online. Please be respectful and truthful in your postings so Town Square will continue to be a thoughtful gathering place for sharing community information and opinion. All postings are subject to our TERMS OF USE, and may be deleted if deemed inappropriate by our staff.

We prefer that you use your real name, but you may use any "member" name you wish.

Name: *

Select your neighborhood or school community: * Not sure?

Comment: *

Verification code: *
Enter the verification code exactly as shown, using capital and lowercase letters, in the multi-colored box.

*Required Fields


Save $5 when you register by Monday, July 31

Registration is now open for the 33rd annual Palo Alto Weekly Moonlight Run and Walk. This family-friendly event which benefits local nonprofits serving kids and families will take place on Friday, Oct. 6 at the Palo Alto Baylands.

Register Here