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New hotels could sustain city programs

Original post made by Karen White, Duveneck/St. Francis, on May 31, 2006

As a longtime Palo Alto resident who for years has been active in civic life, I fear for our collective ability to sustain into the future our highly valued city and community services, parks and buildings.

Anyone who looks at the numbers will understand the fiscal crisis that is upon us. One can ask why this has happened, but pointing fingers only blocks progress.

Working with other community leaders, I have decided to respond to my concerns with action, to be assertive in urging a focused action plan to halt and reverse serious drops in city revenue.

In recent months we have looked into retaining or attracting businesses that provide sales tax and other revenues. Now we are exploring ways to bring more folks to Palo Alto or keep visitors around a bit longer.

The "Destination Palo Alto" task force (of which I'm honored to be a member) is taking a proactive look at Palo Alto as the crown jewel of the Peninsula that we believe it to be.

The question seems simple: Does the family who visits to watch a Stanford football game or the business person who travels here to meet with clients know all there is to see and do in Palo Alto if they stay an extra day or two?

But the critical underlying question is: Why should Palo Altans be asked to tolerate draconian service cuts when, by being proactive, we can uncover revenue sources that do not harm our quality of life?

Looking at the big picture, hotels can play a central role in bringing vital new revenue to the city. As residents, we can no longer take for granted that our community services — covering everything from police to parks to library services and more — can be sustained, not with the city's infrastructure reserve leaking as badly as it is.

How bad are the leaks? Our sales tax revenues plunged from $25.6 million in fiscal year 2000-01 to $18 million in the 2002-03 "bust" year. They have climbed back to a projected $20 million or so this year, ending June 30, but are still millions shy of where they were.

In addition, our hotel-based transit-occupancy tax (TOT) has fallen off a cliff, plummeting from $9.4 million in 2001 to $5.7 million in 2005.

We must do something now to reverse that. Every penny of the 10 percent TOT we take in funnels straight into city coffers to support what we need as a community. Hotels are high revenue producers for the city and bring minimal negative community impacts on schools, roads, libraries and other civic facilities.

Further, studies show that hotels are low trip-generators — unlike residents, hotel guests generally drive during non-peak hours.

And visitors from out of town eat at our restaurants and shop at our stores, so we get a sales tax bonus at the same time.

The need is real. In 1998 we learned that we were $100 million behind in taking care of our city's libraries, community centers and virtually every civic building in town. This estimated backlog has almost doubled since then.

We're facing a $28 million backlog for street repairs alone.

We need to spend $10 million to $14 million per year just to keep up with ongoing deterioration to our community facilities. In recent years, we have been spending at the low end of this range, but only by severely depleting our infrastructure savings account.

This account is currently draining so quickly that it will be completely dry by mid-2010 if we don't do more right now to refill it.

Doing the math: Palo Alto needs to bring in an additional $3 million per year to cover infrastructure needs or we'll continue to face ever harder (and more controversial) choices about which service cuts we should suffer. Slash library hours? Suffer delays in emergency response times? Sacrifice the Junior Museum and Zoo? Close library branches? Close the Art Center?

Or can we find new sources of revenue to support the services we both need and rely on as vital strands in our community fabric?

Here are two steps the city can take now to jump-start new revenue from hotels:

1) Adopt land-use incentives to spark the development of new hotels along El Camino Real — at or near Stanford Shopping Center, in Stanford Research Park or other locations where hotels make sense. Hotel incentives can be set at a level to match the economic benefit to developers from building housing, now the most profitable use for sites being redeveloped.

But housing brings ongoing costs and impacts — new pressures on our schools (students are being "overflowed" from some schools even now), libraries, parks, streets — that hotels do not.ݼP>

2) Adopt land-use policies to protect hotels where they are currently located, to help protect today's hotel sites from being converted to housing. Had land-use incentives been in place to bringݥconomic benefits into closer alignment, we could potentially have kept the Rickey's site for a hotel — a revenue producer of $1 million to $2 million every year — instead of watching it flip to housing, a revenue drain on the city.

We should revise our zoning ordinance now to encourage hotel development. Neighboring cities are not waiting for us to catch up. Menlo Park is considering a major conference center at Sand Hill Road and Highway 280. The impressive new Four Seasons has just opened in East Palo Alto.

So let's not allow a discussion about hotel incentives in Palo Alto to become mired in complex and protracted discussions about Pedestrian-Transit Oriented Development being considered for certain parts of town.

As has been said, "the future is now."

Land-use incentives could bring from one to three hotels during the next few years, as market demand allows. With adequate incentives in place, a developer can reasonably consider building a hotel instead of other uses when it's time to redevelop a site.

New hotels near shopping districts will maximize revenue from both hotel tax and sales tax. What's important is this: Putting adequate land-use incentives in place at common-sense locations can mean developers will deliver hotels instead of more housing, more residents, more costly community impacts.

Palo Alto civic leaders should be commended for beginning a conversation about tourism, and for launching efforts to preserve the city's sales-tax base and, now, its even more lucrative (and threatened) transient-occupancy tax.

Let's take a strategic view and seize today's opportunity to bring in new revenue while minimizing community costs and impacts — a kind of "Smart Revenue." Taking steps now to encourage hotel development where it makes sense would be a good way to start the ball rolling. — Encouraging our civic leaders to move ahead, and quickly, will be in the best interests of us all.
(First published in the Palo Alto Weekly on May 31, 2006)

Comments (3)

Posted by Fred Balin
a resident of College Terrace
on May 31, 2006 at 11:08 pm

Let's step "out of the box" with our revenue enhancement options.

Karen White accurately covers the problem and presents a perfectly reasonable solution: inducements for new hotels and protections for existing ones.

But Palo Alto desperately needs to go beyond the conventional.

Kudos to the "Weekly for its latest pioneering effort to engage civic dialogue and for this opportunity to add the following thought process and resultant idea to the mix.

Initial Disclaimer: The following discussion divorces itself from any constraints of current zoning, land-use, unforeseen impacts, immediate objections, and anything that diverts from its seminal thought process. Breakthroughs start with what is engaging and viable, not with what may seem to stand in the way.

Basic Premise:
Palo Alto desperately needs to increase sales tax revenues. [Does any individual in this city dispute this? If so, please explain.]

Key Question:
Now think carefully. What brings people FROM OUTSIDE Palo Alto to spend their hard-earned dollars within Palo Alto? In other words, what is special about Palo Alto from a sales-tax generation perspective?

Possible Answers:
Stanford Shopping Center. University Avenue restaurants. Various specialty stores? .... Anything else?

Process: From Confusion to Light:
I attended the March informational meeting in Council Chambers on a proposed new pedestrian and mass-transit oriented zoning to encourage high-density housing within a wide swath in the California Avenue area between the tracks and El Camino.

Despite planners' best intentions, travel was arduous: a dozen existing zones, a new overlay zone, and the usual arcana of acronyms, abbreviations, and planning minutia.

Two hours into the evening, someone asked about the future of Fry's and a light went on.

Fry's ... narrow access routes; unremarkable structure; potential blight in the city's eyes.

Oh, ... and with a large parking lot, jammed with cars, 7 days a week, up to 13 hours a day, with people from all over, madly shopping ...

Fry's ... a retail magnet

Fry's ... abutting Park Boulevard with its many undeveloped or vacant lots, sitting on the city-owned fiber optic loop and extending north toward Keeble and Shuchat, another magnet.

We've endured an arduous debate over the merits of fiber-to-the-home. But fiber for commercial use is a no-brainer: a few grand to hook up a business.

If Palo Alto is the birthplace and nexus of Silicon Valley, let's show it.

Why not create a walkable environment, a boulevard, that displays the most innovative and viable technology products people will buy now: environmental, automotive, consumer, home, and business. Attract companies that will employ the fiber to showcase its potential and sell their wares.

Incorporate a central meeting site: auditorium for presentations and lectures, broadcasts and screenings, meeting rooms.

Sprinkle in a good dose of interesting places to meet, chat, and relax.

Tech Row, Palo Alto?
Pipe dream or an idea with legs.

The Test: Bring together a group of tech visionaries, entrepreneurs, and established business players into a series of effectively moderated brainstorming sessions. If the idea resonates, you will find out here.

Thank you for reading.
-Fred Balin, 5/31/06

Posted by Bill Chapman
a resident of Palo Verde
on Jun 1, 2006 at 6:12 am

A truly GREAT letter and concept. Soon everyone will see that JOBS (as in the
"jobs-housing imbalance" call for less commercial activioty) is not the problem,
but the solution to Palo Alto's woes.
To you and Karen White, profound thanks.

Posted by Ted Mulvaney
a resident of Barron Park
on Jun 1, 2006 at 4:44 pm

I’m new to political goings-on, but I’m going to have to disagree with Ms. White. I think part of the problem is the basis on which she begins: that the quality of life in Palo Alto is inextricably linked to the services that the City provides. This assumption would lead to the conclusion that Palo Alto would be no different from any other town were it not for things like single-container recycling or a speedy emergency response.

This, of course, is not the case. Palo Alto’s competitive advantage, as it were, is reliant on a remarkable climate and Stanford University. Fortunately, there is little that other towns can do to re-create either.

But always the fascination with our beloved services. Any reduction is a “sacrifice” or a “slash,” and any attempt to balance the budget by spending less is described as “draconian.” Again, I’m no expert in the way a city works, but the City’s published budget for the general fund and the enterprise fund come to roughly $382 million. Assuming something like 58,000 people in Palo Alto, that means the city spends over $6,500 each year on every man, woman, and child. I have to wonder if we’re getting value for our money.

So I decided to take a quick look at the City’s budget information. I was happy to find that the City says that it did manage to cut $2.1 million from the General Fund for 06-07. A good start. I’m not sure how much my standard of living will be reduced by not giving the City Manager a secretary, by the elimination of contract agency funding, or by the loss of the City’s cable TV show. Somehow my family and I will endure.

My optimism was short-lived, however, because the City apparently has an odd way of cutting its budget. “Total General Fund expense is projected to be $127.4 million in 2006-07, a $2.1 million increase from 2005-06 adjusted budget figures.” Which means that any reductions were offset (at least) by increases in spending elsewhere. This doesn’t much sound to me like a business that knows how to make good or tough decisions.

Which is why I find it puzzling to read opinions like Ms. White’s where the focus of the local government is on trying to micro-manage business decisions for our city. Simply because hotels (or, for that matter, car dealerships) provide large revenue potential does not imply that hotels or car dealerships will want to locate themselves here. And with the recent departure of both, one might reasonably conclude that there is something inherently unattractive about our city to these kinds of businesses. I very much doubt if incentives will be the answer to the problem. If Palo Alto has discovered that hotels can provide revenues, what is to prevent other cities from offering the same incentives?

Why not instead promote business in general and let the businesses decide if Palo Alto - on the merits - is where they should locate? Ms. White wants people to spend money in Palo Alto. I’d love to spend more money in Palo Alto. Unfortunately, each month, I drive across city (and county) lines to buy groceries and other household products. Why are these stores not in Palo Alto? It’s not for a lack of demand or space. Palo Alto simply doesn’t allow it.

Ms. White speaks extensively of the benefits of hotels -- people who stay in them also eat at our restaurants and frequent the PA shops. This cannot be denied. But the real benefit, as described by Ms. White, is that these people don’t actually live here. I used to joke with my wife that the quaint signs that greet you when entering our town should read “Welcome to Palo, go home” -- I never seriously thought this would be accurate, but apparently I was wrong.

Palo Alto should focus on the things it can control: good streets, good fire and police services, and a healthy relationship with local businesses (including, of course, Stanford). It is a great place to live and work, and it’s not surprising that others want to come here. We should look at that as a compliment and not a threat or a burden to our infrastructure.

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