City Base Budget Released for Council Consideration in May

Learn more about the City’s budget process in light of the current public health emergency

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PaloAltoConnect

9 min readApr 21, 2020

While mindful of the unprecedented circumstances in front of us as a City, the City Manager’s transmittal letter was released and reviewed by the City Council on April 20, along with the proposed FY 2020–2021 Operating and Capital Budgets. The transmittal letter includes details about the City’s upcoming budget process, reinforces Council’s adopted budget principles and the City’s continued strong fiscal management approaches. This blog shares more on the City’s fiscal situation and sets the stage for new budget priorities as tough discussions and decisions with the City Council planned for May and June.

The City Manager releases a proposed budget every April in accordance with the City’s Charter, which include both a proposed Operating Budget and a proposed Capital Budget along with a five-year Capital Improvement Plan (CIP). The City’s Operating Budget supports services such as library, recreation, art and human services, and fire and police. The City’s Capital budget is focused on capital and infrastructure project investments. The budgets released are baseline budgets, reflecting FY 2020-2021 estimates prior to the public health emergency, and serve as a benchmark from which to continue conversations with the ultimate goal of alignment of revenue and expenses and long-term fiscal sustainability in light of the global health crisis. The proposed operating budget totals $818.9 million and the proposed capital budget totals $288.7 million in FY 2021 and $793.4 million over the five-year CIP.

For the full proposed budgets, www.cityofpaloalto.org/budget

Fiscal Realities and Tough Choices Ahead

At the time of the development of the budgets, the world is grappling with the novel coronavirus (COVID-19), a global pandemic. Government and industry are responding in order to slow the spread and contain the virus in order to safeguard as many lives as possible. The financial implications of this public health emergency are significant, with regional, national and global impacts on economies in response to shelter in place orders required by the State of California and the County of Santa Clara and related social distancing restrictions. Since the Santa Clara County Ordered a Shelter in Place on March 16, 2020, Palo Alto has seen retail stores and many hotels and restaurants close their doors completely and others struggle to adapt to this extraordinary challenge. We have also seen our daytime population drop as workers and visitors shelter in place, telework, and limit their movements to slow the spread of the virus. The impacts have been stark and immediate.

As a result, staff anticipates severe impacts to many of the City’s revenue streams including transient occupancy taxes, sales tax, documentary transfer tax, and revenue from licenses, permits, and charges for services. Although anecdotal, staff expects hotel occupancy levels to be below 10% (normal occupancy rates are around 80%) and restaurants and retail establishments will remain primarily closed while the current Shelter-in-Place Order and social distancing practices are in effect. The financial outlook beyond the current environment are also unknown as unemployment claims have reached unprecedented levels and the financial markets are volatile. Further, while the current County of Santa Clara Public Health Order runs to May 3, there are indications at both the local and State levels that the public health emergency will extend for months to come.

Continuing Fiscal Sustainability Actions Previously Adopted

The FY 2020- 2021 baseline budget reflects the current service levels approved by the City Council with revenue projections prior to the COVID-19 emergency. As a balanced budget, the assumptions continue to follow conservative proactive fiscal management across all funds. In addition, the FY 2020 Adopted Budget and the FY 2021 Proposed Budget continues reductions previously approved by the City Council in a number of departments including but not limited to the Fire, Library, Information Technology, and Public Works departments, and ongoing expense reductions in the Office of the City Clerk, the City Manager’s Office, and the Office of Emergency Services.

With the revenue estimates pre-COVID-19, the proposed budget demonstrates that a $2.7 million contribution to the Budget Stabilization Reserve in the General Fund would have been made in FY 2021. This reflects the significant progress the City has made towards ongoing cost containment over the past several years and the reductions that have been made across the organization. It shows the continued proactive funding of long-term liabilities and pensions with continuing the City Council approved additional annual payments to the City’s irrevocable IRS Section 115 Pension Trust Fund.

These actions result in a baseline workforce of 1,034, a net reduction of one position from the FY 2019-2020 Adopted Budget. This is significantly less than the peak level of 1,076 in 2009. In the General Fund, positions have decreased 11.9 percent since 2009. Staff released the “City Services Guide” in December 2019 to assist in further conversations about the exceptional services provided by the City and the resources necessary to provide them.

Find the City Services Guide, here, and the appendix here.

City Manager Revised Budget Priorities

This year’s proposed budget recognizes the need to set new priorities in light of the significant uncertainty the City faces. Per direction by the City Council on March 23, 2020, these proposed operating and capital budgets include less information and documentation than normal and are effectively a carryover budget. They reflect the cost of current service levels recalculated to FY 2021 rates and limited adjustments. The capital budget has been updated for the current status and cost estimates of projects based on engineering designs and only adds limited new projects for urgent health and safety needs.

Depending on the length and depth of this current public health emergency, the severity of the financial ramifications remains unknown. In the General Fund, staff has worked to estimate the impacts on the potential loss in major tax revenues. Based on this, at the time of this transmittal, it is estimated that major General Fund taxes will decline at minimum by $20.0 million in FY 2021 compared to the estimates carried in this baseline budget. In addition, preliminary figures from CalPERS reflect that they will not meet their expected investment returns this year with significant changes expected to materialize in the City’s FY 2022–2023 retirement rates.

Depending on the length and depth of this current public health emergency, the severity of the financial ramifications remains unknown. As we continue to grapple with these unknown effects, adding to the City Council’s adopted Budget Principles as approved in the FY 2021–2030 General Fund Long Range Financial Forecast, the City Manager is recommending establishing a set of Budget and Fiscal Recovery Priorities to help guide our work to balance this significant change and continue to evolve through these uncertain times.

These include:

· Support economic recovery through changes to our policies and programs

· Focus on resiliency over the long term while making service reductions and changes, ensuring that any services eliminated can be restored in future years

· Seek new ways to conduct our work through efficiencies and a learning environment

· Apply a broad-based approach to reductions, balancing impacts to the community

· Use temporary solutions to bridge extreme revenue losses expected in the short term

Through these new Budget and Fiscal Recovery Priorities, Departments are exploring a series of service changes and other budget themes. While the transmittal letter lists several approaches, these are not recommended at this time, but intended to demonstrate the magnitude of changes needed to address expected financial constraints.

Some of the strategies listed in the Budget Message include examples such as exploring additional cost containment through continuing a hiring freeze and freezing all nonessential travel, eliminating current vacancies and reducing future vacancies through attrition. Other approaches including suspending General Fund transfers temporarily which may impact capital investments in the short-term including projects such as Parks improvements and pausing the City’s proactive funding of long-term liabilities temporarily. In addition, the City is initiating business round tables and other programs and services to continue supporting the business community. While implementation of recommendations from the business round tables may require near-term investments, they will also assist in the long-term economic recovery of our community.

Examples of potential strategies by service area include:

Department Specific Strategies

Public Safety: We will explore the suspension or elimination of specialized police units such as the traffic enforcement unit and investigation unit to maintain minimal police patrol services and shift the priority of police services to focus on urgent calls and reduce the level of service and ability to respond to non-urgent calls for services. Reduce officer training, promotional testing, uniform purchases and eliminate or change to full cost recovery for non-essential programming such as the Parent Project community education program, crossing guards, Stanford Athletics, and school resource officers. Explore the reduced availability of at least one of five fire stations and eliminate or freeze a staff vacancy in the Office of Emergency Services.

Community & Library Services: We will explore reduced library hours, not opening select library branches, and not re-opening some community services facilities. This includes greater cost recovery through changes in service delivery, charges for services, and/or limiting operating hours, for facilities such as the new Junior Museum and Zoo (JMZ), one community center, the Children’s Theatre, or the Art Center. We will also explore reducing the number of days or hours of operation that other Community Services facilities are open such as community centers, museums, theaters or open space preserves. Explore the reduction or elimination of programming such as special events, art exhibits, and teen programs an re-evaluate the shared services between the City and Palo Alto Unified School District (PAUSD), including suspension of programs unless greater cost recovery can be achieved. Explore termination of the Cubberley lease or resetting to a shared revenue structure.

Planning & Infrastructure: Explore restrictions to use of contract inspectors, elimination of next day inspections and explore scheduled inspections, understanding that this could delay services to our development community. Defer several Council adopted planning efforts such as the housing work plan, all electric commercial buildings initiatives and other work not legally mandated. Restructure work to in-house staff only, explore amendments to the City’s municipal code to scale back on application processing requirements associated with wireless communication facilities.

Explore other amendments to reduce the number of applications requiring review by the architectural review board and elimination of the individual review program to free up resources that support the Council’s long-range planning policy interests. Explore reducing code enforcement staffing, eliminating the Crosstown and Embarcadero shuttle programs or redesigning the delivery of this service to reduce costs. Evaluate the current parking program including the Residential Preferential Parking (RPP) program to full cost recovery including implementation of license plate recognition for efficiencies in parking enforcement, and implementation of a paid parking program to increase revenues. Explore deferral or reduction in tree trimming, vehicle replacement, suspending rate changes in various utility enterprise funds for the coming year(s) and explore shifting the City’s sidewalk replacement and repairs program to cost-sharing or full property owner responsibility.

Internal Services & Council Appointed Officers: Internal Services departments include the Information Technology, Human Resources, and Administrative Services Departments as well as the Council and appointed officers (City Manager, City Attorney, City Auditor and City Clerk). We will explore reductions in these areas in line with the proposed changes in services, aligning time frames for assistance and review in areas such as recruitments, procurement, and risk management. Technology solutions would be constrained to only essential contracts and systems. The City Council may similarly review its expenses and areas for reduction.

New budget approaches to contain and reduce costs are necessary to bridge the gap created by a steep economic downturn, and plan for an economic recovery.

For details about these and other department specific approaches City staff are exploring, go here.

Budget Process Timeline

The City Manager presented his Budget Message to the City Council on Monday, April 20, 2020. City staff will return to the City Council as a whole to discuss the City’s proposed Operating and Capital budgets this May and June. As details about these meetings take shape, the City’s website here will provide additional ways for the community can share their thoughts in feedback.