In The Public Interest

Release of the Proposed FY 2021–22 Operating & Capital Budget

By Ed Shikada, Palo Alto City Manager

Today, in accordance with the City Charter, I released the City of Palo Alto’s Fiscal Year 2022 Proposed Operating Budget and Fiscal Year 2022 Proposed Capital Budget along with the 2022–2026 Capital Improvement Plan (CIP). The following blog post summarizes aspects of my Budget Message, which shares details about the upcoming budget process, provides more on the recommended balancing strategies and service reductions, and other fiscal elements associated with another year of challenging budget deliberations ahead.

The Proposed Budget balancing strategy addresses the community’s immediate service needs, while positioning Palo Alto to restore services and evolve as recovery takes shape. The proposed budgets are based on City Council direction to use the Long-Range Financial Forecast (LRFF) Scenario B for financial planning, which outlines a conservative financial balancing approach assuming an extended community recovery from the current pandemic over a three to five-year period.

To be clear, the proposed Operating Budget and Capital Budget balancing strategies to address the City’s continued fiscal challenges, following an extremely difficult year, are neither recommended nor sustainable for the fiscal health of Palo Alto in the long-term. The Proposed Budget reflects our current fiscal reality as a result of the ongoing, extended pandemic, related economic challenges and continued resource limitations.

As the hopeful signs for recovery continue, this Proposed Budget positions Palo Alto well to respond quickly and adapt should more moderate growth occur than forecasted. However, the City’s long-term fiscal health must be addressed through more sustainable approaches to maintain the community’s service priorities into the future. Overall, more sustainable budget approaches are needed as we look to recover from the pandemic such as exploring use of non-profit partners to provide services, evaluate current core services and changing service delivery, and diversifying the City’s revenue mix and/or increasing revenues to fund services.

The budget process proposed provides an opportunity to advance public discussions on how to most effectively use resources and fund services that have the greatest impact on the community. To that end, there are a series of conversations planned with the Finance Committee, City Council and community coming up and I encourage you to share your input through this iterative process. Dates and times are listed below.

Council Directed Budget Approach & Difficult Service Reductions Proposed

In February 2021, Council adopted the Long-Range Financial Forecast (LRFF) and the financial balancing Scenario B for staff to use in development of this budget. This proposed budget assumes this conservative forecast and also does not assume restoration of the approximately $20 million in service level reductions experienced in the prior year that addressed the nearly $40 million loss in General Fund revenues.

The operating budget totals $690.1 million and the capital budget totals $152.9 million in FY 2022 and $726.8 million over the five-year CIP. To balance the FY 2022 $13 million gap, the Proposed Budget includes $7.7 million in net service and capital improvement investment reductions, $1.0 million use of program specific reserves (e.g. Development Center), an assumed $1.6 million in labor concessions, and use of $3.1 million in ARPA funds.

The Proposed Budget includes difficult service reductions to address the budget gap including impacts to all areas of City service delivery, and more detail on specific impacts are noted below in Department Specific Strategies.

A summary chart noting the proposed budget balancing strategy:

This budget reflects a continuance of the significant service reductions taken in the first year of the pandemic and further aligns service levels with resources that continue to be dampened by the pandemic. Overall, the City’s General Fund is estimated to collect $205.6 million in revenues and $205.6 million in expense, a balanced budget for FY 2022. These funding levels reflect an $8.6 million, or 4.4 percent, increase compared to the FY 2021 Adopted Budget due to the pending Utility Transfer litigation. The City’s Capital Improvement Plan reflects a $152.9 million FY 2022 budget, and a $729.8 million plan over the 2022–2026 five-year CIP. Of this, the General Capital Improvement Fund reflects expected expenses of $51.5 million in the FY 2022 budget and $177.5 million over the five-year CIP.

This year’s budget continues the City Council’s hard work accomplished in FY 2020 to address the loss of $39 million in revenue in the General Fund in FY 2021. It is important to note that in FY 2021, the organization has experienced an overall reduction in service in the General Fund totaling $20 million as a result of the fiscal constraints experienced last year that are not restored in this proposed budget. Overall, including both FY 2021 and FY 2022, this reflects a net reduction of 104 full-time staff (equivalent of 96.0 FTE) and 129 part-time staff (equivalent of 31.04 FTE) resulting in a workforce of 938.85 FTE full-time positions and 75.28 FTE part-time positions.

The proposed budget balancing strategy seeks to navigate through this difficult time by focusing limited resources on funding services with the greatest community impact, maintaining core City services, and mitigating vulnerabilities and risk associated with a shrinking organization. The balancing strategy also uses the opportunity of one-time Federal funding to mitigate further and more steep service reductions in the long-term. The Proposed Budget also outlines $4.3 million in additional “Tier 2” service reductions should the City be faced with additional economic uncertainties, not gain labor concessions, or should the Council choose to not use the American Rescue Program Act funds to balance the budget or change current recommended balancing strategies.

Citywide Cost Containment: Continuing a hiring freeze and freezing all nonessential travel, eliminating current vacancies and reducing future vacancies through attrition, and service reductions such as reduced walk-in office hours. The FY 2022 Proposed Budget includes potential labor concessions for the City’s represented groups which totals $2.5 million Citywide and $1.6 million in the General Fund.

City General Capital Infrastructure Fund Transfer Suspension: The City’s General Fund transfers total $9.7 in the Proposed Budget, a 67.7 percent decrease of over $30 million annually to the General Capital Improvement Fund prior to the economic impacts of the pandemic. The transfer to the City’s General Capital Fund consists of a baseline transfer ($2.6 million) as well as the allocation of Transient Occupancy Tax (TOT) receipts ($5.9 million) as designated by the City Council, and estimated interest earnings ($1.2 million). The 2022–2026 CIP prioritizes investments in essential capital investments, the Public Safety Building, 2014 City Council approved Infrastructure Plan projects, and various transportation projects including, but not limited to, grade separations. From a Capital infrastructure standpoint, the level of reductions seen and included in the Proposed Budget will require the City to play ‘catch up’ in future years.

Use of American Rescue Program Act (ARPA) Funding: The newly signed American Rescue Plan Act of 2021 signed into law in March provides over $350 billion of relief funds to state and local governments. As of the printing of this document, specific guidance for the State and Local Fiscal Recovery Fund component of ARPA, including metrics, requirements, and restrictions, is under development by the U.S. Department of the Treasury. The City expects to receive $12.5 million in funds and represent what may be the largest fiscal “jolt” to the City’s budget in decades. Funding is expected to be received in two allocations over 24 months.

Of the first allocation of $6.25 million, this Proposed Budget recommends use of $3.1 million in ARPA funds to balance this FY 2022 budget, which has allowed the City to abate potential additional budget reductions as outlined in General Fund Tier 2 Potential Reductions. In addition, it holds $3.2 million ARPA funds intended for Council / Finance Committee to use as options to adjust the proposed balancing strategy and/or to be available to address additional economic and labor concession uncertainties. It sets aside the remaining second year ARPA funds as formal guidance from the federal government on timing and restrictions of funding remains pending and the likely need for these funds to assist in a two-year bridge in FY 2022 and FY 2023 as the economy recovers.

Department Specific Strategies

· Public Safety: Suspended 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. Limit crossing guards at schools to high-traffic streets. Brown out Fire Station №2 where the station is staffed without mandatory call back.

· Community & Library Services: Neighborhood library (Children’s, Downtown, and College Terrace) closures with contactless distribution services. Full-service branches (Mitchell Park and Rinconada) open six days per week. Reduction in library programming. Reduction of operating hours, programming, and services for facilities such as the Art Center, the Baylands Interpretive Center, the Teen Center, and the Children’s Theatre.

· Planning, Transportation & Infrastructure: Understanding that this could delay services to our development community, reduction of current planning will result in protracted application processing timelines and delays in permit issuance. Reduced bicycle program and increased response time to transportation related 311 notifications due to reduction of traffic data services. Implementing license plate recognition for efficiencies in parking enforcement and initiating a paid parking program to increase revenues. Reduced capital plan investment via the General Fund annual base transfer.

· Citywide Internal Support, Administration, and Council Appointed Officers: Administrative support functions in 7 departments have been reduced and these functions will be shifted to other department staff, resulting in service delays across the organization. Reductions in these areas in line with the changes in services, increasing timeframes for assistance and review in areas such as recruitments, procurements, and overall increase in risk due to minimal support and oversight. Technology solutions will be constrained to only essential system and equipment needs.

Join the Budget Conversations

· May 3: Budget Overview with City Council

· May 4: Budget Overview with Finance Committee

· May 6: Open Townhall and Community Survey

· May 11–12: Budget Hearings with Finance Committee

· May 17: Finance Committee Budget Overview with the City Council

· May 25: Budget Wrap-up with Finance Committee

· June 21: City Council Budget Adoption

Once again, we must recognize that many of these budget balancing strategies are not sustainable over the long term. However, these, or similar solutions, are necessary to bridge the gap created by a steep economic downturn, contain costs, and support our economic recovery.

To engage with the community and the City Council, over the next several weeks we will conduct a series of public meetings to discuss the budget. In addition, staff is hosting an online survey to gain input and inform the City Council’s budget deliberations involve the community in this dialog through Open Townhall, our online platform for community engagement.

I encourage everyone to join the City Council deliberations by sharing input through email, online survey, or by attending an upcoming Town Hall or other public hearings on this important issue facing the city.

To view my Transmittal Letter/Budget Message, go here. To view the Proposed Operating Budget, the Proposed Capital Budget and to gain more details about the City’s budget process, go here: www.cityofpaloalto.org/budget

In Service,

Ed