10. Impact Fees collected for ADU’s permitted for the year. Years 2015 -2016 data point not available.
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Report Data
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# of
Apps Dwelling Type Project Location Zoning Date Filed Application Status Building Permit Issued? Attached Detached Attached2 Detached2 Garage Other Accessory Structure/Space
# of
Bedrooms ADU Size
1 ADU SOUTH R-1 (7000)(S) 01/03/2022 Pending Resubmittal N x 1 436 2 JADU SOUTH R-1 01/10/2022 Permit Issued Y x 1 386
3 ADU SOUTH R-1 01/12/2022 Finaled Y x x 1 736
4 ADU NORTH R-1 01/18/2022 Permit Issued Y x x 0 457
5 JADU NORTH R-1 01/19/2022 Permit Issued Y x 1 497
6 ADU NORTH RM-30 01/22/2022 Pending Resubmittal N x 1 643 7 ADU SOUTH R-1 (8000) 01/24/2022 Permit Issued Y x 2 370 8 ADU NORTH R-1 (10000) 01/25/2022 Permit Issued Y x 1 608 9 ADU NORTH R-2 01/25/2022 Permit Issued Y x x 1 436
10 ADU NORTH R-1 01/26/2022 Permit Issued Y x 1 700
11 ADU SOUTH R-1 01/27/2022 Pending Resubmittal N x 2 749 12 JADU SOUTH R-1 01/31/2022 Incomplete N x x 3 734
13 ADU SOUTH R-1 01/31/2022 Permit Issued Y x 2 900
14 ADU NORTH R-1 02/02/2022 Finaled Y x x 1 379
15 ADU NORTH R-1 02/02/2022 Pending Resubmittal N x 0 288 16 ADU SOUTH R-1 02/09/2022 Finaled Y x 1 405
17 ADU NORTH R-1 02/09/2022 Pending Resubmittal N x 1 590 18 ADU NORTH R-1 02/11/2022 Permit Issued Y x x 1 630
19 ADU SOUTH R-1 (8000) 02/14/2022 Permit Issued Y x 1 790 20 JADU SOUTH R-1 02/15/2022 Permit Issued Y x x 1 229 21 ADU NORTH R-1 02/16/2022 Permit Issued Y x 1 790
22 ADU NORTH R-1 02/17/2022 Pending Resubmittal N x 1 800 23 ADU SOUTH R-1 02/18/2022 Permit Issued Y x 2 1,000
24 ADU NORTH R-1 02/23/2022 Pending Resubmittal N x 2 750 25 ADU SOUTH RE 02/24/2022 Pending Resubmittal N x 2 872 26 ADU NORTH RE 02/24/2022 Incomplete N x 1 995
27 ADU SOUTH R-1 02/25/2022 Permit Issued Y x 1 364
28 ADU SOUTH R-1 03/01/2022 Finaled Y x x 1 519
29 ADU NORTH R-1 03/01/2022 Permit Issued Y x 0 424
30 ADU NORTH R-1 03/03/2022 Pending Resubmittal N x 1 697 31 ADU SOUTH R-1 03/07/2022 Permit Issued Y x 1 576
32 ADU NORTH R-1 03/10/2022 Permit Issued Y x 1 529
33 ADU NORTH R-1 03/10/2022 Permit Issued Y x 1 726
34 ADU SOUTH R-1 03/11/2022 Pending Resubmittal N x 1 364 35 ADU SOUTH R-1 03/14/2022 Permit Issued Y x x 1 375
36 ADU NORTH R-1 03/15/2022 Permit Issued Y x 2 807
37 ADU NORTH R-1 03/21/2022 Permit Issued Y x 1 510
38 ADU NORTH R-1 03/21/2022 Permit Issued Y x 1 240
39 JADU NORTH RM-30 03/22/2022 Permit Issued Y x x 1 298 40 JADU SOUTH R-1 (8000) 03/22/2022 Permit Issued Y x x 0 445 41 ADU SOUTH R-1 03/23/2022 Permit Issued Y x 1 528
42 ADU SOUTH R-1 04/01/2022 Permit Issued Y x 2 862
43 ADU SOUTH R-1 04/12/2022 Permit Issued Y x 2 749
44 ADU NORTH R-1 04/13/2022 Permit Issued Y x 2 750
45 ADU NORTH R-1 04/14/2022 Permit Issued Y x x 1 2,217 46 JADU SOUTH R-1 04/19/2022 In Plan Check N x 1 332
47 ADU SOUTH R-1 (10000) 04/19/2022 Permit Issued Y x 1 192 48 ADU SOUTH R-1 04/19/2022 Permit Issued Y x 1 486
49 ADU SOUTH R-1 04/20/2022 Permit Issued Y x x 1 555
50 ADU NORTH R-1 04/26/2022 Permit Issued Y x x 1 660
51 ADU SOUTH R-1 04/27/2022 Pending Resubmittal N x 2 749 52 ADU SOUTH R-1 (8000) 04/29/2022 Permit Issued Y x 1 476 53 ADU NORTH R-1 05/03/2022 Permit Issued Y x 1 796
54 ADU SOUTH R-1 05/05/2022 Pending Resubmittal N x x 1 425 55 ADU SOUTH R-1 05/06/2022 Pending Resubmittal N x x 2 875 56 ADU SOUTH R-1 (8000) 05/09/2022 Permit Issued Y x 1 215 57 ADU NORTH R-2 05/10/2022 Permit Issued Y x 1 755
58 ADU NORTH R-1 05/12/2022 Pending Resubmittal N x 1 428 59 JADU SOUTH R-1 05/18/2022 In Plan Check N x 1 499
60 ADU NORTH R-1 05/27/2022 Permit Issued Y x 1 633
Building Permits Submitted in 2022
Type of ConversionConversionNew Construction
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61 ADU SOUTH R-1 (20000) 05/31/2022 Pending Resubmittal N x x 1 544 62 ADU NORTH R-1 05/31/2022 Permit Issued Y x 2 799
63 ADU SOUTH R-1 (7000) 06/01/2022 Pending Resubmittal N x 1 450 64 ADU NORTH R-1 06/01/2022 Permit Issued Y x 1 683
65 JADU SOUTH R-1 06/07/2022 Permit Issued Y x 1 496
66 ADU NORTH R-1 06/09/2022 Permit Issued Y x x 1 800
67 ADU SOUTH R-1 06/14/2022 Permit Issued Y x x 1 363
68 JADU SOUTH R-1 06/16/2022 Permit Issued Y x 1 452
69 ADU NORTH R-1 06/17/2022 Permit Issued Y x 1 512
70 ADU NORTH R-1 06/22/2022 Pending Resubmittal N x 1 350 71 ADU NORTH R-1 06/23/2022 Permit Issued Y x 1 747
72 ADU NORTH RMD (NP) 06/28/2022 Pending Resubmittal N x x 1 226 73 JADU SOUTH R-1 06/29/2022 Permit Issued Y x x 1 253 74 ADU NORTH R-1 06/29/2022 Permit Issued Y x 0 208
75 ADU SOUTH R-1 (10000) 06/29/2022 Permit Issued Y x 1 470 76 ADU SOUTH R-1 06/30/2022 Pending Resubmittal N x 1 466 77 ADU NORTH R-2 06/30/2022 Pending Resubmittal N x 1 730 78 ADU NORTH R-1 07/05/2022 Permit Issued Y x 2 981
79 ADU SOUTH R-1 07/07/2022 Pending Resubmittal N x x 1 659 80 ADU SOUTH R-1 07/08/2022 In Plan Check N x 1 407
81 ADU NORTH R-1 07/14/2022 Permit Issued Y x x 2 390
82 ADU NORTH RM-15 07/20/2022 Permit Issued Y x 1 617
83 ADU SOUTH R-1 07/27/2022 Permit Issued Y x 2 679
84 ADU SOUTH R-1 07/27/2022 Permit Issued Y x 1 749
85 ADU SOUTH R-1 07/28/2022 Permit Issued Y x 2 834
86 JADU NORTH R-1 08/01/2022 Permit Issued Y x 1 221
87 ADU SOUTH R-1 08/02/2022 Permit Issued Y x 1 520
88 ADU NORTH R-1 (10000) 08/02/2022 Pending Resubmittal N x 1 371 89 ADU NORTH R-1 08/02/2022 Permit Issued Y x x 1 404
90 ADU NORTH R-1 08/04/2022 Pending Resubmittal N x x 1 400 91 JADU NORTH R-1 08/17/2022 Pending Resubmittal N x 1 246 92 ADU NORTH R-1 08/17/2022 Pending Resubmittal N x x 1 542 93 ADU NORTH R-1 08/17/2022 Pending Resubmittal N x 1 798 94 ADU NORTH R-1 08/18/2022 In Plan Check N x 1 750
95 JADU SOUTH R-1 (S) 08/22/2022 Permit Issued Y x 1 446 96 ADU NORTH RM-30 08/23/2022 Pending Resubmittal N x x 2 1,388 97 ADU SOUTH R-1 (8000) 08/24/2022 Permit Issued Y x 1 800 98 ADU NORTH R-1 08/24/2022 Pending Resubmittal N x 2 710 99 JADU SOUTH R-1 08/26/2022 Pending Resubmittal N x x 1 273 100 ADU NORTH R-1 08/29/2022 Pending Resubmittal N x 1 463 101 ADU NORTH R-1 (10000) 08/31/2022 Pending Resubmittal N x 2 799 102 ADU SOUTH R-1 09/08/2022 Pending Resubmittal N x 1 771 103 JADU SOUTH R-1 09/13/2022 In Plan Check N x 1 354
104 ADU SOUTH R-1 09/14/2022 In Plan Check N x 1 750
105 ADU SOUTH R-1 09/16/2022 Pending Resubmittal N x 1 563 106 ADU SOUTH R-1 09/19/2022 Pending Resubmittal N x 1 526 107 ADU NORTH R-1 09/21/2022 Pending Resubmittal N x 1 360 108 ADU SOUTH R-1 09/27/2022 Pending Resubmittal N x 1 579 109 ADU NORTH R-1 09/28/2022 Pending Resubmittal N x x 1 575 110 ADU SOUTH R-1 (7000)(S) 10/03/2022 Pending Resubmittal N x x 1 327 111 JADU SOUTH RE 10/05/2022 Pending Resubmittal N x 1 495 112 ADU NORTH R-1 (S) 10/07/2022 Pending Resubmittal N x x 1 436 113 JADU NORTH R-1 10/14/2022 In Plan Check N x 1 498
114 JADU NORTH R-1 10/18/2022 In Plan Check N x 1 499
115 ADU SOUTH R-1 10/20/2022 In Plan Check N x 1 587
116 JADU NORTH R-1 10/21/2022 Pending Resubmittal N x x 1 360 117 JADU SOUTH R-1 (8000) 10/24/2022 Pending Resubmittal N x x 1 479 118 JADU SOUTH R-1 10/27/2022 Pending Resubmittal N x 1 500 119 ADU SOUTH R-1 10/27/2022 Pending Resubmittal N x 1 540 120 ADU SOUTH R-1 11/02/2022 Pending Resubmittal N x 1 871 121 ADU NORTH R-1 11/02/2022 In Plan Check N x x 1 406 122 ADU NORTH R-1 11/03/2022 Pending Resubmittal N x x 1 401 123 ADU SOUTH R-1 (S) 11/03/2022 Pending Resubmittal N x 1 215 124 ADU SOUTH R-1 11/04/2022 Pending Resubmittal N x x x 1 515 Item 11
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125 ADU NORTH R-1 (10000) 11/08/2022 Pending Resubmittal N 0 1,506 126 JADU SOUTH R-1 11/09/2022 Pending Resubmittal N x 1 500 127 ADU SOUTH R-1 11/14/2022 In Plan Check N x 0 592
128 ADU NORTH R-2 11/16/2022 Pending Resubmittal N x 1 345 129 ADU SOUTH R-1 11/16/2022 In Plan Check N x 0 750
130 ADU NORTH R-1 11/18/2022 Pending Resubmittal N x 2 865 131 JADU NORTH R-1 11/18/2022 In Plan Check N x x 0 332 132 ADU SOUTH R-1 (20000) 11/21/2022 Pending Resubmittal N x 2 750 133 ADU SOUTH R-1 12/02/2022 Pending Resubmittal N x 1 797 134 ADU NORTH R-1 12/02/2022 Pending Resubmittal N x x 3 996 135 ADU SOUTH R-1 12/06/2022 In Plan Check N x 0 499
136 ADU SOUTH R-1 12/06/2022 In Plan Check N x 0 800
137 JADU NORTH R-1 (10000) 12/08/2022 In Plan Check N x 0 744 138 ADU SOUTH R-1 (8000) 12/09/2022 In Plan Check N x 2 750 139 JADU NORTH R-1 12/09/2022 Submitted N x x 0 497
140 ADU NORTH RM-20 12/12/2022 In Plan Check N x 0 748 141 ADU NORTH R-1 12/13/2022 In Plan Check N x x 0 323 142 ADU NORTH R-1 12/13/2022 In Plan Check N x 0 410
143 ADU NORTH R-1 12/16/2022 In Plan Check N x 0 891
144 ADU NORTH R-1 12/19/2022 In Plan Check N x x 0 485 145 ADU NORTH OS 12/19/2022 In Plan Check N x 0 895
146 ADU SOUTH R-1 (10000) 12/20/2022 In Plan Check N x 0 999 147 ADU NORTH RM-15 12/20/2022 In Plan Check N x 0 649 148 ADU NORTH R-1 12/20/2022 In Plan Check N x 0 750
149 ADU SOUTH R-1 12/21/2022 In Plan Check N x x 0 373 150 ADU NORTH R-1 12/22/2022 In Plan Check N x x 1 360 151 ADU NORTH R-1 (10000) 12/23/2022 In Plan Check N x 0 566 152 JADU NORTH R-1 12/23/2022 In Plan Check N x 0 500
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CITY COUNCIL
STAFF REPORT
From: City Manager
Report Type: ACTION ITEMS
Lead Department: City Manager
Meeting Date: February 6, 2023
TITLE
Objectives to advance the 2023 City Council Priorities
RECOMMENDATION
Council approval of objectives to advance the 2023 Council Priorities.
BACKGROUND
On January 28, 2022, the Council held its annual retreat to approve the 2023 Council Priorities 1.
The Priority Setting Guidelines define a priority as a topic that will receive unusual and significant attention during the year. At the conclusion of the retreat, the City Council approved the following priorities:
•Economic Recovery and Transition
•Climate Change and the Natural Environment: Protection and Adaptation •Housing for Social and Economic Balance
•Community Health and Safety
The City Council then directed that staff return on February 6th with suggested objectives derived from Council comments at the annual retreat to achieve the strategic priorities.
ANALYSIS
Council Priorities guide resource allocation and staff workplans for the coming year. In recent years, staff has then identified major projects associated with each priority to be tracked and reported on. Successful completion of projects, programs and services is dependent on the work that follows, balancing among these and other priorities, needs and resource capacity. 1 City Council Retreat 1/28/23 https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=1492 Item AA1.
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Following the City Council’s work on January 28, staff compiled a summary of topics suggested by Councilmembers for discussion on February 6. In addition, staff quickly developed a listing of objectives that reflect actions that will be needed by Council in order to advance the priorities identified for 2023.
For each Council priority, staff tried to develop objectives that align with a Priority purpose, time-bound and measurable. Staff referred to SMARTIE principles: Specific, Measurable, Achievable, Relevant, Timely, Inclusive, and Equitable to outline the list of objectives for the coming 12 months.
For each Council Priority, staff has provided the following: (1) Councilmember feedback from Saturday January 28, 2023 Retreat, (2) Potential focus areas, and (3) “Objectives” largely defined as Council actions and engagement needed during calendar year 2023 advance the stated priorities. Council engagement may include a variety of forms, such as Council approval, committee/council ad hoc review and recommendations, legislative advocacy, regional board/committee representation, and budgetary actions. Should Council approve the objectives that follow, staff will use this list for tracking and reporting through 2023.
This is a very ambitious workplan. Staff have estimated that several objectives will require additional resource allocation in order to complete it in full as outlined. As noted in other financial reports, allocation of additional funding (contract or staffing) is not always a complete solution to overcome obstacles for completion. Timelines to procure consultant support, or the process to recruit, onboard, and train new staff delay the City’s ability to begin or maintain the pace of work on these projects, especially within the 12-month timeframe outlined.
Each objective has a few identifying characteristics, below is a guide to help understand the lists:
•“New:” reflects an action or project that is new to 2023 and was not on the 2022 workplan
•“(ERT#), (CHS#), (CCPA#), or (HSEB#)” reflects a reference to the project priority and project number as identified on the Council approved 2022 workplan. Not all numbers will be present as some projects were complete, or consolidated, or dropped •“$” reflects a project that requires additional resources to achieve and complete •“Q#” reflects the 2023 calendar year quarter estimated completion and/or to be completed by timeframe. Q1 is January-March, Q2 is April-June, Q3 is July-September, and Q4 is October-December.
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ECONOMIC RECOVERY AND TRANSITION
City Council retreat discussion: Areas of focus and priority discussed by Councilmembers included:
•Parklets
•Permitting
•A focus on retail and small business recovery locally
•Treatment of vacant property (reference to Oakland and San Francisco) Council actions/approvals anticipated in 2023:
Support economic recovery and business transition
CY
a) Adopt a Comprehensive Economic Development Strategy (ERT 2) $ Q2 b) Implement or upgrade electronic plan review software without interruption to the permitting process (ERT 9)
- Q3
c)New: Implement recommendations in Building and Permit Review Report conducted by the City Auditor
- Q3
d)New: Begin stakeholder engagement and implementation of new business tax (Measure K)
$ Q4
Focus on commercial corridors, Downtown and California Ave e)New: Begin implementation of next phase of parklet regulations to the community
$ Q1
f) Evaluate opportunities for New Parking Facilities in the University Ave Downtown and direct next steps (ERT 10)
- Q2
g) Align Business Improvement District (BID) priorities and investments to the Comprehensive Economic Development Strategy (ERT 1)
Q3/4
h) Advance development of a permanent car-free streets ordinance (selection of consultant support) (ERT 6 & 7)
$ Q3
i) Approve concept plan for University Ave streetscape and provide direction on capital project funding (ERT 5)
- Q4
j) Extend temporary closure for car free streets (ERT 6 & 7) - Q4 k) Provide direction on citywide retail zoning code changes (specifically retail preservation and neighborhood commercial district specific regulations and CUP thresholds) (ERT 4, 12, 13; expected 2024 Q2)
$ 2024
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CLIMATE CHANGE & THE NATURAL ENVIRONMENT
City Council retreat discussion:
Areas of focus and priority discussed by Councilmembers included:
•Flood protection
•Natural environment and biodiversity; adapt natural ways of protecting natural habitats (examples: bird safe glass, light pollution protection of critters and wildlife) •Naturalize Matadero Creek, protection and setbacks
•Youth engagement in initiatives, objectives, and goals Council actions/approvals anticipated in 2023:
Climate Change Protection
l) Implement Advanced Metering Infrastructure (AMI) through purchase of meters/equipment in February 2023 for installation(CCPA7) - Q1
m)New: Approve consultant to update Bike and Pedestrian Transportation Plan (Additional Bike/Ped Grade Crossings will be included in network discussions, schedule pending consultant selection)
- Q2
n) Approve municipal code amendments for advancing S/Cap goals (specifically facilitate photovoltaic, energy storage system, electric vehicle charging station, and heat pump (water/furnace) installations) (CCPA1)
- Q2
o) Approve S/CAP Update and 3-year workplan (CCPA4) - Q2 p)New: Begin first phase construction for grid modernization in summer 2023 (if needed) and consultant resources to plan for gas transition - Q4
q)New: Install first 1,000 heat pump water heaters through the advanced pilot program and approve expanded full-scale program
- Q4
r)New: Approve advanced pilot program for whole residential home electrification by the end of 2023 (targeted areas)
- Q4
s)New: Approve commercial rooftop HVAC electrification advanced pilot program
- Q4
t)New: Accept Electric Vehicle Strategic Plan $ Q4
u)New: Accept Reliability and Resiliency Strategic Plan $ Q4 v)New: Review preliminary draft S/CAP study discussing workplan resource needs and project funding opportunities
$ Q4
Climate Change Adaptation: flood protection
w)New: Advance the San Francisquito Creek Flood Protection capital project (Reach 2) as close to approval as possible by the end of 2023, through Council’s JPA representation and any Council approvals involved. (focus on securing funding, finalizing CEQA review, approval of project entitlements, and obtaining required construction easements)
- Q1
Q4
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x) Secure funding and approve construction for the Newell Bridge replacement project; advocacy with State legislators educating on project funding needs (previously CHS10)
$ Q4
Note: Wildfire safety and protection are referenced under the Community Health and Safety priority.
Natural Environment
y) Approve agreements with Valley Water purified water facility at LATP Area B (operations and maintenance) (CCPA3)
- Q3
z)New: Adopt appropriate changes to the revised Tree Protection Ordinance (to follow a review of impacts of the revised ordinance by PTC and PRC) - Q4
HOUSING FOR SOCIAL AND ECONOMIC BALANCE
City Council retreat discussion:
Areas of focus and priority discussed by Councilmembers included:
•Support housing needs as identified by the community (as opposed to following RHNA) •Focus on lower income housing units
•Intentional on where new housing units are developed
•Establish a housing committee
Council actions/approvals anticipated in 2023:
Advance Renter Protection Policies
aa)New: Approve access to rental units by establishing security deposit limits - Q2 bb) Provide protections to renters by considering expansion of the just cause eviction ordinance (HSEB16)
- Q3
cc) Implement a rental registry to inform future renter protection policies (timeline estimate, calendar year 2024 Q1) (HSEB15)
$ 2024
Advance Housing Plans
dd) Expand housing opportunities through the initiation of a Downtown Housing Plan: includes approval of project funding and a consultant contract (HSEB10)
$ Q2
ee) Advance local and state housing interests through a HCD-compliant Housing Element (iterative work process to start Q2) (HSEB5)
- Q4
ff) Advance vision for North Ventura Coordinated Area by adopting a coordinated area plan (financial impacts if not approved, $800,000 impact) (HSEB4)
- Q4
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gg) Create new affordable housing opportunities through funding such as a housing land trust, in particular, CalCHA (City Council referral) $ TBD
hh) Explore opportunities to regulate short term-rentals with Council committee (Council colleague’s memo)
$ TBD
Implement Housing Production Policies
ii) Codify permanent standards related to the City local SB9 implementation ordinance (HSEB 14)
- Q1
jj) Approve adjusted Accessory Dwelling Unit (ADU) regulations to facilitate production and meet HCD requirements (HSEB9)
- Q2
kk) Respond to various Grand Jury recommendations related to Housing 2 (HSEB 6, 17, 24)
- Q3
ll) Refine implementation of City’s SB9 objective development and urban lot split standards (HSEB 14)
- Q4
mm)New: Adopt an ordinance amending the development standards for Stanford-owned housing opportunity sites
- Q4
nn)New: Rezone carryover housing opportunity sites for by-right development when developed with 20% lower income affordable housing units - Q4
oo)New: Adopt an ordinance to implement revised development standards for certain properties located in the GM/ROLM to allow for densities up to 90 units/acre
- Q4
Support Unhoused Service Initiatives
pp) Begin construction in partnership with LifeMoves for Palo Alto Homekey project to provide transitional housing and services for unhoused residents (HSEB13)
- Q2
qq)New: Develop a citywide strategy to connect unhoused residents to housing and services
$ Q3
2 Grand Jury recommendations include:
Recommendation 12b: Santa Clara County MOU on Measure A monies for affordable housing.
Recommendation 4: NVCAP lessons learned process.
Recommendation 8: Improve readability and format of Housing Element Annual update and cover memos.
Recommendation 3: Research other cities affordable housing communication strategies, provide recommended strategy for Palo Alto, and update affordable housing info on City website Item AA1.
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COMMUNITY HEALTH AND SAFETY
City Council retreat discussion:
Areas of focus and priority discussed by Councilmembers included:
•Flood protection
•HSRAP funding increase
•Maintain a diverse definition of ‘health” (included but not limited to physical and mental)
•Airplane noise (establish airplane noise committee)
•Police presence in downtown cores (specifically on foot or bike presence) Council actions/approvals anticipated in 2023:
Mental & physical health and belonging
rr) Complete reopening libraries to budgeted level (remains below pre-pandemic levels) (CHS5)
- Q2
ss) Approval of multi-year agreement for provisions of animal shelter services (CHS1)
$ Q3
tt)New: Expand and enhance community special events with focus on inclusion (linked to activities in ERT)
$ Q3
uu) Approve agreement with PAUSD on long term use of the Cubberley property (CHS2)
- Q4
vv) Recreation Wellness Center Feasibility: Agreement on location, general design and features of a recreation wellness center and finalize an agreement with a new nonprofit responsible for raising funds for design and construction. (CHS14)
$ Q4
Invest in reliable safety infrastructure and systems
ww) Support visible police presence by ensuring stable staffing (recruiting and retention) through hiring ahead program (CHS6)
$ Q1 -
Q4
xx)New: Support a diverse community through extension of the Psychiatric Emergency Response Team (PERT) program services to the community through affirmation of continued City financial support $ Q2
yy) Update without interruption 911 dispatch system (CAD provider) once selected through procurement process (CHS4)
- Q3
zz)New: Begin construction of the Gas Main Replacement Project 24B - Q3/4 aaa) Approve updated Local Hazard Mitigation Plan and Community Wildfire Protection Plan to ensure safety of the community (CHS15) - Q4
bbb) Implement Foothills Fire Management Plan (includes fuel reduction, early detection system, community awareness application rollout) (CHS3) - Q4
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ccc) Approve actions needed to advance final construction phase of Public Safety Building and begin preparations for move-in (estimated move Q4 2023) (CHS9)
- Q4
ddd) Approve next steps for the rebuild of Fire Station No. 4 project (specifically design and entitlements) (CHS17)
- Q4
eee) Approve resources and consultant to study and develop seismic and resiliency ordinance (CHS20)
$ TBD
Reduction of noise and air quality pollution
fff) Update gas-powered leaf blower ordinance and enforcement plan (CHS16) - Q1 ggg) Implement a strategy for the provision and promotion of unleaded fuel at Palo Alto Airport (CHS12)
- Q4
hhh)New: Approval of quiet zone implementation (rail/train crossings) - Q4 iii)New: Engage with the SFO Roundtable on SFO's Ground Based Augmentation System (GBAS) project and other potential opportunities to decrease SFO noise impacts on Palo Alto (previous project was CHS11) $ TBD
Note: Flood protection activities including Newell Road bridge improvements are referenced under the Climate Change & Natural Environment - Protection & Adaptation priority
FISCAL/RESOURCE IMPACT
Council approval of Priority areas does not have an immediate fiscal impact. Resources will need to be allocated to non-resourced projects to implement Council Priorities. Opportunities to resource projects include Long Range Financial Forecast on February 6, 2023, Mid-Year Budget Review on February 13, 2023, and FY 2024 Budget Adoption in June 2023.
STAKEHOLDER ENGAGEMENT
Staff anticipates returning to the City Council in March 2023 with community engagement plans based on the selected 2023 Council priorities, adopted objectives to achieve these priorities and projects identified within each area. There are various levels of community engagement and communications to support each project.
ENVIRONMENTAL REVIEW
Council action on this item is not a project as defined by CEQA because the Council discussion on 2023 Priority Objectives is a continuing administrative or maintenance activity. CEQA Guidelines section 15378 (b)(2).
APPROVED BY:
Ed Shikada, City Manager
Report #:
2302-0910
Item AA1.
AA1 Staff Report
Item AA1.: Staff Report
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Item No. 2.. Page 1 of 1
1 6
9 8
City Council
Supplemental Report
From: Ed Shikada, City Manager
Meeting Date: February 13, 2023
Item Number: 2
TITLE
Comprehensive Economic Development Strategy Update and Study Session - Supplement
RECOMMENDATION
Comprehensive Economic Development Strategy Update and Study Session - Supplement
BACKGROUND
Staff inadvertently transmitted a draft version of the Streetsense diagnostic that was intended for internal review only as part of the City Council packet last week.
The correct version of the diagnostic prepared by Streetsense is attached here for the Monday, February 13 City Council Study Session.
ATTACHMENTS
Attachment A: Streetsense Diagnostic - Final
APPROVED BY:
Ed Shikada, City Manager
Item 2.
Item 2 Supplemental
Report
Item 2.: Staff Report
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PALO ALTO, CA —————————— ECONOMIC DEVELOPMENT STRATEGIC PLAN
PALO ALTO
ECONOMIC DEVELOPMENT
STRATEGY
DIAGNOSTIC
PHASE 2 DELIVERABLE
PREPARED FOR PALO ALTO, CA
FEBRUARY 13, 2023
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 2 v
TABLE OF CONTENTS
01 PROJECT OVERVIEW
02 STUDY AREAS
03 MARKET ASSESSMENT
04 BUSINESS ENVIRONMENT
05 ADMINISTRATIVE ASSESSMENT
06 PHYSICAL ASSESSMENT
07 GUIDING PRINCIPLES
CONTACT
Larisa Ortiz
Managing Director
Streetsense
[email protected]
641 S ST NW
WASHINGTON, DC 20001
STREETSENSE.COM
@REALSTREETSENSE
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA —————————— ECONOMIC DEVELOPMENT STRATEGIC PLAN 3 01
PROJECT
OVERVIEW
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 4 PROJECT TIMELINE
We are here
IMMERSION & DISCOVERY
• Kick off session
• Field work
• Stakeholder engagement
• Focus groups and interviews with business
owners, hotel operators, residents, City Staff
• Council presentation
DIAGNOSTIC
• Retail market analysis
• Administrative capacity assessment
• Business environment assessment
• Physical assessment
• Coordination with California Ave/Ramona St
Consultant
• Council presentation
ECONOMIC DEVELOPMENT
STRATEGY
• Draft work plan development
• Final work plan development
Before advancing to a discussion of strategic interventions, the Diagnostic phase of this exercise ensures that we share a collective understanding of the challenges at hand. This milestone is important to establish consensus for action and precedes a discussion of recommendations that will be led or supported by public sector investments, policies and programs.
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 5 PHYSICAL ENVIRONMENT
→ City-Wide Connectivity & Accessibility
→ District SWOT Analysis
Phase 1–2:
IMMERSION & DISCOVERY/DIAGNOSTIC
STUDY PURPOSE
• To develop a market-informed economic
development strategy that will ensure
Palo Alto's post-COVID competitiveness
by identifying impactful public sector
interventions, policies and investments
for which there is both need and
consensus for action.
TODAY’S PURPOSE
• Present and Discuss Diagnostic Findings
• Confirm alignment on key take aways and
guiding principles before advancing to
recommendations
BUSINESS ENVIRONMENT
→ Sales Tax Analysis
→ Hospitality/ Tourism Assessment
ADMINISTRATIVE CAPACITY
→ Regulatory Framework
→ Organizational Capacity & Stewardship
MARKET ASSESSMENT
→ Competition Assessment
→ Retail Demand Assessment
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 6 Phase 1–2:
IMMERSION & DISCOVERY/DIAGNOSTIC
A FRAMEWORK FOR SUCCESSFUL RETAIL PLACES
MANAGED
…with leadership
and capacity to
engage merchants
and property
owners and
implement
improvements
SAFE
…but more
importantly
perceived as safe
ACCESSIBLE
…to a customer base
…with little friction
for arrival/departure
regardless of mode
VISIBLE
…by potential
customers either
as they drive,
bike or walk by
CHAMPIONED
…with demonstrated
signs of maintenance
and investment
ANCHORED
…by retail
destination driver(s)
… by culture,
institutional or
entertainment uses
PEDESTRIAN
FRIENDLY
…co-located
businesses that
encourage cross
shopping
…walkable and
with few
disruptions in
continuity
BRAND
RESONANCE
…with clear
branding strategy
and identity
Beloved, "best-in-class" streets share characteristics that correlate to successful economic development outcomes, including but not limited to community satisfaction, business profitability, and contribution to the municipal tax base. Based on the over three decades of research, these characteristics include:
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 7 Phase 1–2:
IMMERSION & DISCOVERY/DIAGNOSTIC
THE RETAIL ECOSYSTEM
• Perspectives range among key stakeholders
• Priorities unique from one another
• Highly symbiotic relationship structure
Retail viability deteriorates when a given stakeholder's priorities and needs are not being met.
TENANT
Confidence in Sales
Rent Commensurate with
Sales
Co-tenancy
Brand Alignment
LANDLORD/
MANAGEMENT
Return on Investment
Tenant Stability
Risk Mitigation
CONSUMER
Sense of Place
Tenants
Events | Community
Safety | Cleanliness
Accessibility | Convenience
Value (Money & Time)
Item 2.
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Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 8 Phase 1–2:
IMMERSION & DISCOVERY/DIAGNOSTIC
THE RETAIL ECOSYSTEM
Where does the public sector play a role in influencing or directing the actions of key stakeholders?
PUBLIC SECTOR TOOLS
• Regulatory framework influences co-tenancy
• Financial incentives can help mitigate risk
• Funding and coordination of events to build community • Investments in enhanced safety/cleanliness
• Improvements to access/convenience
• District marketing & branding campaigns
• Investments in public realm to improve sense of place TENANT
Confidence in Sales
Rent Commensurate with
Sales
Co-tenancy
Brand Alignment
LANDLORD/
MANAGEMENT
Return on Investment
Tenant Stability
Risk Mitigation
CONSUMER
Sense of Place
Tenants
Events | Community
Safety | Cleanliness
Accessibility | Convenience
Value (Money & Time)
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 9 SMALL STORE FOOTPRINTS BUY ONLINE, PICK-UP IN STORE (BOPIS)
GUIDESHOP MODEL MICRO-FULFILLMENT COMPONENTS
• Changing retail footprints
• Changing spending patterns
• Tenants are in the driver's seat
• Implications of hybrid work
GLOBAL AND NATIONAL
TRENDS
Item 2.
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Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA —————————— ECONOMIC DEVELOPMENT STRATEGIC PLAN 10 02
STUDY AREAS
Item 2.
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Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 11 MAP
All 6 districts
The diagnostic focuses on areas within Palo Alto where
this is an existing concentration of retail activity.
STUDY
AREAS
Item 2.
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Item 2.: Staff Report
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 12 Using shopping center industry classifications, Palo Alto has three (3) categories of shopping districts as follows:
REGIONAL/SUPER-REGIONAL CENTERS
• most significant tax base contributors
• face the greatest competition for visitors within the region • must maintain "best-in-class" status to remain competitive
COMMUNITY-SERVING CENTERS
• moderate tax base impacts
• local promotion and marketing strategies, if any
• tend to benefit from activations that meet community
interests and needs
NEIGHBORHOOD-SERVING
• minimal tax base impacts
• least affected by COVID pandemic, typically the most
stable asset class
• local customer base with little need for promotion
DEFINING PALO ALTO'S
"SHOPPING DISTRICTS"
DISTRICT
DESTINATION
DRIVERS
ICSC
CATEGORIZATION RETAIL SF
NO. SALES
TAX
PRODUCING
BUSINESSES
TRADE
AREA
Downtown/
University
Ave
F&B,
Entertainment,
Fashion &
Apparel
Regional
(400k – 800k) 916,400 432
Primary,
Secondary
Tertiary
Stanford
Shopping
Center
Department
Stores, Fashion &
Apparel
Super Regional Mall
(800+ sf) 1,348,000 151
Primary,
Secondary
Tertiary
California
Ave
Specialty Grocer,
F&B, Farmer's
Market, Fitness
Community/
Neighborhood
Center
(125k – 400k sf)
202,500 99 Primary,
Secondary
Town &
Country
Village
Grocery,
Pharmacy, F&B
Community Center
(125k – 400k sf) 171,000 59 Primary,
Secondary
Midtown
Grocery,
Pharmacy, Quick
Service F&B
Neighborhood
Center
(30k – 125k sf)
52,000 42 Primary
Charleston
Shopping
Center
Specialty Grocer
Neighborhood
Center
(30k – 125k sf)
46,000 10 Primary
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA —————————— ECONOMIC DEVELOPMENT STRATEGIC PLAN 13 → METHODOLOGY & APPROACH
→ COMPETITION ASSESSMENT
→ RETAIL DEMAND ASSESSMENT
03 RETAIL MARKET
ASSESSMENT
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 14 Retail market assessment:
INDUSTRY TERMINOLOGY
Given their extraordinary nuance,
ancillary tenants (e.g. financial,
educational, religious, governmental
institutions, etc.) and entertainment
establishments (e.g. arcades, movie
theaters, bowling alleys, escape
rooms, etc.) are considered to be
non-retail uses and are not factored
into the retail demand model or
included in retail demand
calculations.
Neighborhood
goods &
services
(NG&S)
Food & beverage
(F&B)
General
merchandise,
apparel, furniture,
and other
(GAFO)
• Grocery store
• Neighborhood market
• Pharmacy/drug store
• Dry cleaner/laundromat
• Tailor/seamstress
• Nail/hair salon
• Barber shop
• Spa
• Fitness
• Gyms
• Sit-down restaurant
• Full-service restaurant
• Fast-casual restaurant
• Fast food restaurant
• Carry-out restaurant
• Ice cream shop
• Coffee shop
• Café
• Apparel store
• Clothing store
• Electronics store
• Furniture store
• Pet store
• Sports store
• Book store
• Music store
Non Retail Uses
Retail Uses
Item 2.
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Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA —————————— ECONOMIC DEVELOPMENT STRATEGIC PLAN 15 COMPETITION
ASSESSMENT
Given the urban-suburban typology of the Palo Alto market, retail competition for the site is measured on two levels – locally-serving neighborhood centers for convenience-based trips and regionally-serving destination hubs for experience-based trips. Retail customer behaviors are rooted in convenience, access, and visibility as well as tenant quality and variety of offerings. These factors are considered when assessing the market influence of each retail competitor.
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 16 Retail market assessment:
REGIONAL RETAIL COMPETITION
TAKEAWAYS
• Downtown retail environments are highly
competitive.
• Two competing downtown environments
within Palo Alto, Downtown/University Ave
and California Ave, spreading retail thin.
• Traditional malls are less prevalent to the
west. There are five regional malls of varying
quality closer to San Jose. Hillsdale Shopping
Center is the only traditional mall to the
west. The top performing mall in the
region is Stanford Shopping Center.
Source: Streetsense analysis Q4 2022.
Regionally-serving, experience-based retail
centers are characterized by a dominant mix of
good-based retail, including malls, power centers,
and walkable downtowns and lifestyle centers.
These retail centers attract customers from a larger
regional trade area and feature a cluster of full-
service restaurants and entertainment.
Item 2.
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Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 17 Retail market assessment:
LOCALLY-SERVING RETAIL
COMPETITION
TAKEAWAYS
• Grocery competition is strong throughout the
region.
• Big box retailers are not allowed in Palo Alto
by regulation. However, they are concentrated
along the periphery of Palo Alto,
cannibalizing the retail offering within the
city.
• Target and Costco are particularly prevalent in
the region, with nine and seven stores,
respectively within the examined area.
Neighborhood serving retail centers are characteriz
ed by a dominant mix of Neighborhood Goods &
Services tenants, often grocery-anchored. These
retail centers primarily meet the need for
convenience-based shopping trips, competing on a
geographically smaller scale.
Source: Streetsense analysis Q4 2022.
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 18 Retail market assessment:
PALO ALTO RETAIL DISTRICT STACKUP – ASKING RENTS
Retail rents in the region are high. The average asking rent in Palo Alto is $63.52 per SF – 80% higher than the national average of $27.55 per SF.*
Stanford Shopping Center has the highest average asking rents in Palo Alto. However, average asking rents within Town & Country Village and Downtown/University Ave are comparable, with rentsin Downtown reaching up to $99.00 per SF.
Disparity between average asking rents of the two downtown environments in Palo Alto, is a reflection of the higher quality environment and regional pull of Downtown/University Ave.
Source – REIS, Loopnet, Michael Baker, CoStar 2022
* National average asking rent for malls and other retail environments, not including strip centers, neighborhood serving centers, and power centers as of Q4 2022.
TAKEAWAYS
• According to local brokers, there is a perception that asking rents in Downtown/University Ave are highly elevated and do not reflect the state of the retail market, which greatly favors tenants over landlords Item 2.
Attachment A - Streetsense
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Item 2.: Staff Report
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 19 Retail market assessment:
RETAIL VACANCY
Source: Loopnet, REIS, Michael Baker
*Q4 2022 Moody's Analytics
TAKEAWAYS
• Retail is being spread thin by a finite consumer base within Palo Alto • Stanford Shopping Center cannibalizes retail in other districts within Palo Alto, offering attractive co-tenancy opportunities and retail-appropriate spaces. Vacancies are exacerbated by Downtown/University Avenue’s high rents and less desirable retail spaces, often in need of tenant improvement investments.
Vacancy among the six retail districts totals 243,000 SF, or about 8% vacancy rate as of year-end 2022.
• Majority of vacant space is concentrated in Downtown/University Avenue, accounting for about 88,000 SF.
• California Avenue has the highest vacancy rate among all districts at 15%, accounting for 31,000 SF.
• There is about 57,000 SF currently vacant within Stanford Shopping Center, which equates to a very low vacancy of 4%, due to the mall's large size. This vacancy is caused by smaller tenants inside the mall rather than by the loss of any major anchors.
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA —————————— ECONOMIC DEVELOPMENT STRATEGIC PLAN 20 RETAIL DEMAND
ASSESSMENT
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 21 Retail market assessment:
TRADE AREAS
Based on the competitive landscape, natural and
psychological boundaries, travel patterns, and
population trends, Streetsense defined the following
trade areas:
PRIMARY TRADE AREA
Users: Palo Alto residents, employees, students,
overnight guests, and daytime visitors
Frequency: High - at least once or twice per week
Purpose: Convenience-based shopping and dining
SECONDARY TRADE AREAS
Users: Nearby residents (Mountain View, Los Altos,
Melo Park, Redwood City)
Frequency: Modest - once or twice every two
weeks
Purpose: Change up from options closer to home,
work, or school
TERTIARY TRADE AREAS
Users: Regional residents (San Mateo, San Bruno,
Burlingame, Sunnyvale, Santa Clara/Western San
Jose, Fremont, Newark)
Frequency: Low - once or twice every month
Purpose: Experience-based shopping and dining
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 22 Retail market assessment:
SHIFTS IN DEMAND POST-COVID
114,826
Total employees working within Palo Alto
69,889
Non-office-based employees working within Palo Alto
44,937
Office-based employees working within Palo Alto
37% of office-based employees are going into an office (San Jose metro area) In Palo Alto, hybrid work has reduced the demand for retail by over 100,000 SF, roughly equivalent to the amount of retail space at Midtown Shopping Center and Charleston Shopping Center combined.
Resident -generated
demand
697,275 SF
Resident-generated
demand
697,275 SF
Visitor-generated
demand
147,605 SF
Visitor-generated
demand
147,605 SF
Employee-generated
demand
452,085 SF Employee-generated
demand
340,620 SF
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
PTA Demand - No Remote Work PTA Demand - Adjusted for Work from Home PTA Retail Demand Hybrid Work Scenario - 2022
- 111,465
SF of lost
retail
demand
TAKEAWAYS
• Palo Alto's daytime population can no longer support the same level of retail it did pre-covid, with fewer on shoppers coming from Stanford Research Park and other office-centric areas to generate foot traffic during the work week
• Shifts in daytime population and the balance between residents and employees require a right-sizing of retail
Source: Sitewise, 2022; Bureau of Labor Statistics 2022; Kastle Systems 2022.
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 23 Retail market assessment:
DEVELOPMENT PIPELINE
Significant development pipeline in the
surrounding markets.
At full build out, these projects will add:
17,700 residential units
15.8 million SF of office/life science space
2,300+ hotel keys
* Map shows multi-family residential developments over 50 units and office/life sciences developments over 25,000 SF
TAKEAWAYS
• Menlo Park, Redwood City, and Mountain
View have robust office/life science pipelines,
growing density and building future daytime
populations.
• Fueling the retail ecosystem - density and
daytime populations drive retail spending,
thereby growing retail demand.
• Retail in districts like California Ave would
benefit from increased density and daytime
populations
Source: Moody's Analytics, 2022.
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 24 Retail market assessment:
RETAIL DEMAND PROJECTIONS
Based on resident, employee, overnight guest, and daytime visitor spending, local and regional competition, and projected population growth, the site can support the following:
2,571,970 SF
Total retail demand in 2022
2,627,980 SF
Total retail demand in 2027
2,687,030 SF
Total retail demand in 2032
3,032,900 SF
2,571,970 SF 2,627,980 SF 2,687,030 SF
Supply 2022 Demand 2027 Demand 2032 Demand
Retail Supply and Demand Projections
460,930 SF
oversupply
TAKEAWAYS
• Retail needs to be right-sized -- Retail demand will steadily increase however, without intervention, demand will not reach parity with the existing retail supply over the next 10 years
• Oversupply > vacancy, indicating that vacancy will continue to rise among lower quality or poorly positioned space
• Potential interventions to the retail ecosystem –
• Broadening the mix of uses to increase daytime customer base with office and residential uses
• Supplementing with non-traditional retail uses like
entertainment, civic, and cultural uses to activate the ground plane Source: Michael Baker; Streetsense analysis 2022.
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 25 Retail market assessment:
DEMAND BREAKDOWN
By 2032, total retail demand can be broken out into the three major retail categories :
• Neighborhood goods & services (NG&S) – 15% of total
retail demand
• Food & Beverage (F&B) – 22% of total retail demand
• General merchandise, apparel, furniture, and other (GAFO) – 63% of total retail demand
TAKEAWAYS
• General merchandise uses makes-up more than half of demand, driven by Stanford Shopping Center, which consumes 80%
of that demand, with a remaining 321,730 SF of general
merchandise demand to be distributed among the other districts • Neighborhood-serving retail demand is constrained by the presence of big box retailers, considered ”category killers” in the region. However, given the population density and high spending levels, the market may be able to support additional neighborhood-serving retail on a small scale.
• Healthy demand for food & beverage, both fast casual serving student and employee populations, as well as full-service Source: Streetsense Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA —————————— ECONOMIC DEVELOPMENT STRATEGIC PLAN 26 04
BUSINESS
ENVIRONMENT
→ SALES TAX ANALYSIS
→ HOSPITALITY/ TOURISM ASSESSMENT
Item 2.
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Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA —————————— ECONOMIC DEVELOPMENT STRATEGIC PLAN 27 SALES TAX
ANALYSIS
→ NATIONAL AND LOCAL SALES TAX REVENUE TRENDS
→ FOCUS AREA SALES TAX REVENUES
→ COMPETING CITIES
→ KEY TAKEWAYS
Item 2.
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Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 28 Business environment:
LOCAL SALES TAX REVENUE TRENDS
*The graphic above is representative of sales tax revenues by Fiscal Year for all sales tax producing businesses in Palo Alto. Sources: HdL Companies; bls.gov Small, locally owned businesses were the hardest hit during the COVID-19 Pandemic, particularly restaurants, retailers and personal service providers.
Common economic influences/conditions include:
• Inflation and increasing costs of doing business
• Supply chain and manufacturing disruptions
• Employment/ labor shortages
• Shift to online shopping
• COVID-19 safety protocols and compliance
• Interest rates rising
Palo Alto’s total FY 2021-22 sales tax revenues increased by 20% from FY 2020-21. FY 2021-22 revenues were still 6% below pre-pandemic sales tax in FY 2018-19. CPI-U for the San Francisco Area increased by 4.9% from the 12 months prior to December 2022.
Note: The dollar amount listed for sales tax revenue here forward represent the 1% sales tax revenue issued to the City of Pa lo Alto
TAKEAWAYS
While sales tax recovery is important, it's not a true reflection of recovery and profitability of small businesses. Sales Tax revenues are mostly back to pre-pandemic (FY 2018-19) numbers by the end of FY 2021-22, but many small, locally owned businesses are not back to pre-pandemic cash flow and required revenue margins.
$24.52
$25.59
$28.83
$24.17
$22.50
$27.06
$0
$5
$10
$15
$20
$25
$30
$35
FY 2016-17 FY 2017-18 FY 2018-19 FY 2019-20 FY 2020-21 FY 2021-22 Millions
City of Palo Alto Sales Tax Revenue by Fiscal Year*
4.4%
12.6%
-16.2%
-6.9%
20.3%
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 29 Business environment:
FOCUS AREA SALES TAX REVENUES BY FISCAL YEAR
Neighborhood focused areas produce a low amount of sales tax relative to the other shopping areas and there is a higher volume of essential stores like grocery stores, markets, pharmacies, etc. Combined, Charleston and Midtowns made up about 1% of the City's total sales tax revenue in FY 2021-22.
Downtown Palo Alto, which makes up 12% of total sales tax revenue in the City, has been the slowest to recover from the Pandemic. Downtown FY 2021-22 sales tax revenues are 25% below pre-Pandemic FY 2016-17 sales.
California Avenue makes up 2.2% of total sales tax in the City. Sales tax on California Avenue is 12.8% below pre-Pandemic sales in FY 2018-19, and 9% below FY 2016-17.
Town & Country Village experienced a 21% decrease in sales tax in FY 2019-20, though the shopping area is recovering from the Pandemic. Town & Country Village sales tax make up 3% of the total sales tax revenue in Palo Alto for FY 2021-22.
Stanford Shopping Center FY 2021-22 sales were 25% above pre-Pandemic FY 2016-17 sales tax revenues. Stanford Shopping Center makes up 25% of total sales tax revenue, mainly from retail sales.
Source: HdL Companies
TAKEAWAYS
• Total sales tax revenues are bouncing back from the Pandemic, but recovery from the COVID-19 Pandemic is uneven across key tax generating districts and the local economy is not fully recovered.
• Sales tax revenues in the neighborhood shopping areas, Charleston Shopping Center and Midtown, were the least impacted during the Pandemic. • Downtown sales tax has been in a decline since before the Pandemic, but the Pandemic exacerbated the situation.
$0
$1
$2
$3
$4
$5
$6
$7
FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022
Millions
Sales Tax Revenues for Fiscal Years 2016-17 to 2021-22
Charleston Shopping Center Midtown California Ave
Town & Country Village Downtown Palo Alto Stanford Shopping Center Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
30 Packet Pg. 307 of 393
PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 30 Business environment:
Neighborhood Goods & Services (NG&S)
NG&S makes up 4% of total sales tax revenue for the six focus districts (2% of total sales tax for the City of Palo Alto). Most NG&S businesses are not big sales tax producers (I.e., personal services, grocery stores, gyms). For example, Grocery Store taxable sales are roughly 25-30% of their total sales.
Food & Beverage (F&B)
F&B makes up 27% of total sales tax revenue for the six focus districts (11.4% of total sales tax for the City).
General Merchandise, Apparel, Furniture & Other (GAFO)
GAFO makes up 58% of the total sales tax revenue for the six focus districts (24% of total sales tax for the City).
Non-Retail
Non-retail sales tax revenue in the six focus areas include automotive sales, automotive rentals and repairs, business services, medical/biotech, and textile / furnishings. Non-retail makes up 11.4% of total sales tax revenue for the six focus districts (4.8% of total sales tax for the City).
FOCUS AREA SALES TAX REVENUES BY RETAIL CATEGORY FISCAL YEAR 2021-22 District Number of
Businesses* NG&S F&B GAFO Non Retail Totals
Charleston
Shopping Center 10 $36,161 $23,525 $30,590 - $90,276 Midtown 42 $109,320 $74,929 $6,305 $11,397 $201,951 California Ave 99 $56,322 $437,306 $38,449 $58,149 $590,226 Town & Country
Village 59 $87,101 $328,968 $274,874 $3,237 $694,180 Downtown Palo
Alto 432 $147,868 $1,640,977 $1,118,451 $291,371 $3,198,667 Stanford Shopping
Center 151 $5,980 $574,954 $5,063,008 $934,975 $6,578,917 District Total Sales by Category $442,752 $3,092,536 $6,531,677 $1,299,129 $11,354,217 Palo Alto Total Sales by Category $579,284 $4,036,817 $7,254,645 $15,190,166 $27,060,912 *Number of businesses is only representative of those that are sales tax producing. Non sales tax producing businesses not accounted for in this table may include offices, medical centers, certain business and personal services, and certain fitness centers or gyms.
Source: HdL Companies
TAKEAWAYS
• Charleston Shopping Center and Midtown show the highest percentage of NG&S relative to the total sales tax revenue in those shopping districts (40% and 54%, respectively).
• Downtown Palo Alto produces the highest value of F&B sales tax revenue • Stanford Shopping Center and Downtown combined make up 95% up GAFO sales tax for the six focus areas ($5.1M and $1.1M, respectively).
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
31 Packet Pg. 308 of 393
PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 31 Business environment:
Palo Alto’s GAFO and non-retail sales are
significantly higher than competing cities.
• GAFO dominated by Stanford Shopping
Center's sales tax revenue, which makes up
90% of total GAFO sales at $6.6 million for
FY 2021-22.
• Non-retail-sales mostly come from auto and
transportation related businesses (12 of which
are in the top 100 sales tax producing
businesses in the City).
COMPETING CITIES: TOTAL SALES TAX REVENUE FISCAL YEAR 2021-22 $27,060,912
$19,778,575
$18,795,098
$11,780,240
$5,390,935
$2,458,455
Source: HdL Companies
TAKEAWAYS
• Palo Alto is the largest sales tax producer
compared to the competing cities identified
here, largely due to GAFO and Non-Retail
sales tax revenues.
• Despite being the largest sales tax producer,
the city is lacking in neighborhood goods
and service businesses
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
32 Packet Pg. 309 of 393
PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 32 Business environment:
Neighborhood Goods & Services (NG&S)
Palo Alto has the lowest NG&S SDPC, even lower than Burlingame and Los Altos who bring in less NG&S sales tax revenue compared to Palo Alto. Menlo Park has the highest SDPC in the NG&S category even though Redwood City and Mountain View receive a significantly higher amount of NG&S sales tax revenue.
Food & Beverage (F&B)
Palo Alto is doing better than most competing cities in bringing people to the City for F&B.
General Merchandise, Apparel, Furniture & Other (GAFO)
Palo Alto has the highest SDPC in the GAFO category, largely due to the Stanford Shopping Center.
Non-Retail
Burlingame has the highest SDPC in non-retail sales, which likely comes from the auto and transportation industry (new and used car sales, rentals, repairs, etc.).
COMPETING CITIES: RETAIL SALES DOLLAR PER CAPITA (SDPC) FISCAL YEAR 2021-22 SDPC is a macro approach to identify possible trends within a city or region regarding to spending habits. Average SDPC is derived by multiplying out the 1% total point of sales tax dollars and then dividing them by the population size of their community. • Below Average: Suggests resident do some shopping outside of the area; lack of local supply by preferred retailer and restaurant concepts
• Above Average: Suggest consumers from outside the area are attracted to the local retail market; have preferred retailer and restaurant concepts.
Source: HdL Companies
TAKEAWAYS
• Palo Alto residents are likely shopping for neighborhood goods and services in competing areas.
• Palo Alto is likely bringing consumers from outside the area to shop for non-retail sales tax producing goods and services, like auto and transportation, as well as from the Stanford Research Park.
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
33 Packet Pg. 310 of 393
PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 33 Business environment:
$0.65 $0.65
$1.26
$1.55
$1.95
$2.21
$4.25
$0.68 $0.72
$1.32
$1.67
$3.12
$2.49
$3.90
$0.59
$0.80
$1.38
$1.42
$2.32
$2.72
$3.20
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
Palo Alto
California Ave
Downtown Los
Altos
Downtown
Menlo Park
Downtown
Mountain View
(Castro Street)
Downtown
Redwood City
Downtown
Burlingame
Downtown Palo
Alto
Millions
Sales Tax Revenues for Competing Downtowns
Fiscal Years 2016-17, 2018-19, and 2021-22
FY 2016-17 FY 2018-19 FY 2021-22
COMPETING DOWNTOWNS: SALES TAX REVENUES
Source: HdL Companies
TAKEAWAYS
• Downtown Palo Alto and California Ave are not
recovered and back to pre-Pandemic FY 2016-17
sales tax revenues.
• Despite the slow recovery, Downtown produces the
most sales tax revenue compared to competing
downtowns.
• California Ave sales tax revenue is more comparable
to Los Altos Downtown in terms of sales tax revenue
• (Note: While sales tax may be comparable, there is a clear difference in terms of ownership and management when
comparing California Avenue to Downtown Los Altos).
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
34 Packet Pg. 311 of 393
PALO ALTO, CA —————————— ECONOMIC DEVELOPMENT STRATEGIC PLAN 34 HOSPITALITY/
TOURISM
ASSESSMENT
→ LODGING
→ VISITORS
→ OPPORTUNITIES
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
35 Packet Pg. 312 of 393
PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 35 Business environment:
HOSPITALITY/TOURISM: LODGING
BARRING RECESSION, FULL RECOVERY BY 2023*
Palo Alto’s lodging industry is recovering at the national pace and is currently approaching 2019 levels. Palo Alto’s Occupancy Rate is highest mid-week, slightly lower than either U.S. or California Average.
STABLE BUSINESS TRAVELER BASE
Palo Alto’s largest contributors to occupancy are medical, education and business travelers who fill approximately 2,200 hotel rooms, including about 300 via the two new Marriott properties.
RECESSION CONCERNS
Oxford Economics expects the US to enter a recession in the first half of 2023. This is an ominous prospect as travel spending falls by roughly twice the rate of the economy in a typical recession.
Source: STR
Source: Tourism Economics
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
36 Packet Pg. 313 of 393
PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 36 Business environment:
HOSPITALITY/TOURISM: VISITORS
INTERNATIONAL
Lag in recovery from international
travelers will continue to impact Palo
Alto more than most cities.
Of particular note, Chinese visitors had
been the largest source of international
visitors to Palo Alto, and that nation’s
slow recovery lags all other major
inbound traveler sources to California.
BUSINESS
Less business travel as virtual meetings
grow. The transition to virtual meetings, caused
by the pandemic, generally worked well and
contributes to California's (and the U.S.') slower
business travel recovery. Cost savings
to businesses was meaningful, and lower
company carbon footprints was and remains
important to many.
Business travel and the related impact on Palo
Alto’s economy will eventually recover to pre
pandemic levels, but it will likely be different
than in the past, and in ways yet to be confirmed.
DOMESTIC LEISURE
Palo Alto is not a typical, overnight
tourist destination as it lacks
major destination attractions. However, there are
unique local destinations to be celebrate.
Palo Alto’s largest audience sector for
hospitality spending (restaurants, attractions,
shopping) and tax revenues is a combination of
residents and workforce. Its next largest
includes residents and workforces from neighboring
Bay Area communities, such as Mountain View,
Menlo Park, Sunnyvale, Redwood
City, Burlingame and Los Altos.
OPPORTUNITIES
• Incentivize longer business travel or “Bleisure”
travel
• Grow weekend occupancy rates with non-business
travel
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
37 Packet Pg. 314 of 393
PALO ALTO, CA —————————— ECONOMIC DEVELOPMENT STRATEGIC PLAN 37 05
ADMINISTRATIVE
ASSESSMENT
→ REGULATORY ASSESSMENT
→ ORGANIZATIONAL CAPACITY & STEWARDSHIP
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
38 Packet Pg. 315 of 393
PALO ALTO, CA —————————— ECONOMIC DEVELOPMENT STRATEGIC PLAN 38 REGULATORY
ASSESSMENT
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
39 Packet Pg. 316 of 393
PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 39 Administrative Capacity:
TAKING OUR CUE FROM THE COMPREHENSIVE PLAN
The existing 2030 Comprehensive Plan is the primary tool for guiding preservation and development of Palo Alto.
There are three sections in the plan which provide economic development directives...
• Business & Economics – "business friendly and thriving" • Land Use – Updates to the municipal code that support a "diversification of land uses", including "retail that caters to daily needs of residents"; "stimulates housing near
retail"; and allows for the "conversion of non-retail
commercial FAR to residential FAR, where appropriate"
• Transportation – Improve Walkability & Bikability by
"improving connectivity between businesses, parking and transit stops", including "public art in alleyways" to
encourage walking
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
40 Packet Pg. 317 of 393
PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 40 Administrative Capacity:
Municipal codes are often an accumulation of general
controls that were used to solve specific problems in
specific places including:
• Concerns over rising retail rents from use groups (i.e. office, chain stores, storage facilities, etc.) perceived as contributing to rent inflation for "more desirable" uses • Conflicts between residents and industrial or
entertainment uses
• Rules that restrict uses with a low-income or
transient customer base, like laundromats
• Concerns over “bad actors”, like bars and dance clubs
ZONING CODE BASICS
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
41 Packet Pg. 318 of 393
PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 41 Administrative Capacity:
ZONING CODE BASICS
GROWTH IN ON-LINE
SHOPPING
Retailers are using stores for local distribution, which may be restricted as “warehousing & distribution”
TECHNOLOGICAL
ADVANCES
Breweries, specialty food manufacturing and maker
spaces are restricted as “Manufacturing & Processing”
DEMOGRAPHICS AND
LIFESTYLE
Wellness and medical services are restricted as
“Medical Office”
Recent trends in retail and changing work patterns can render some sections of the Zoning Code outdates, E.G.
Customer Pick-Up/Returns within Store
Urgent Care, Adams Morgan, Washington, DC
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
42 Packet Pg. 319 of 393
PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 42 Administrative Capacity:
OVERVIEW OF APPLICABLE ZONING CONTROLS GOVERNING USES
Each overlay delineates separate permitting and use requirements and can make it difficult for an applicant to determine what rules apply.
DISTRICT BASE DISTRICT OVERLAY 1 OVERLAY 2 OVERLAY 3 OVERLAY 4 OVERLAY 5
CALIFORNIA
AVE
CC – Community
Commercial
Retail
Preservation
R – Retail
Shopping
P – Pedestrian
Shopping
PTOD – Cal Ave
Pedestrian and
Transit Oriented
Cal Ave Parking
Assessment
District
MIDTOWN &
CHARLESTON
SHOPPING
CENTER
CN – Neighborhood
Commercial
Retail
Preservation
GF – Ground
Floor
P – Pedestrian
Shopping
Special Regulations
governing proximity
to Residential
DOWNTOWN
(University Ave)
CD – Downtown
Commercial
Retail
Preservation
GF – Ground
Floor
P – Pedestrian
Shopping
DOWNTOWN
(Lytton)
CD – Downtown
Commercial
Retail
Preservation
P – Pedestrian
Shopping
TOWN &
COUNTRY
VILLAGE
CC – Community
Commercial
Retail
Preservation
STANFORD
SHOPPING
CENTER
CC – Community
Commercial
Retail
Preservation
Highly Regulated
Environments
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
43 Packet Pg. 320 of 393
PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 43 Administrative Capacity:
ZONING OVERVIEW: CALIFORNIA AVENUE
CrossFit – Restricted due to size. Typical SF 2k
– 2,500k sf
Pottery Making – Restricted under Learning
Centers and/or Industrial
Drybar – Restricted under both Salon and Formula Ordinance Pediatrician – Restricted under Medical Office
C C ( 2 )( R )( P )
Along California Avenue, many Retail and “Retail-Like” uses face regulatory barriers to entry, including businesses with 10 or more locations nationwide
CONDITIONAL USE PERMITS REQUIRED FOR:
• Beauty Salons exceeding 1,800 SF
• Nail Salons exceeding 1,800 SF
• Barber Shops exceeding 1,800 SF
• Fitness or Exercise exceeding 1,800 sf
• Learning Centers for Individual or Small Group Settings • Laundry & Dry Cleaning
• Financial Services (Except Drive-In) on ground floor
• Medical Offices up to 5k only when fronting Cal Ave.
• Commercial Recreation Uses up to 5k only when fronting Cal Ave • Formula retail (with more than 10 stores nationally)
UNMENTIONED AND THEREFOR NOT ALLOWED
• Light Industrial as accessory uses (i.e., maker spaces)
RESTRICTED GROUND FLOOR USE
• Residential
Fitness – Restricted by Square Footage
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
44 Packet Pg. 321 of 393
PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 44 Administrative Capacity:
OPPORTUNITY
Right-size the Retail Preservation Ordinance to focus on targeted areas of concentrated retail activity
CITY-WIDE RETAIL PRESERVATION ORDINANCE
Source: Kastle Systems Back to Work Barometer
In 2015, zoning protections were passed to restrict ground floor retail conversions to non-retail uses in the face of significant competition for space from higher paying office tenants. 2015 MARKET CONDITIONS
• At the time, Palo Alto was experiencing “record high
commercial rental rates” (average $61.44 psf) and “low office vacancy rates” (2.83%)
2021-2022 MARKET CONDITIONS
• 2022 Q3 Silicon Valley Office Vacancy: 17.7% (Source:JLL); 2021 Palo Alto Office vacancy rates 13.64%
(Source: CommercialCafe, 2021)
• 2021 office average asking rents: $93.75 (Class A
Space); $37.04 (Class B Space)
• Office occupancy rates for San Jose metro are between 27.3% -
41.7%, the lowest of the top ten metro area measured by Kastle Systems nationwide.
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
45 Packet Pg. 322 of 393
PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 45 Administrative Capacity:
ADDITIONAL REGULATIONS AND POLICIES
FORMULA ORDINANCE
Formula Retail Businesses have 10 or more business
locations in the United States that maintain uniformity across merchandise, décor, scheme, trademark, etc.
OPPORTUNITY
Consider a cap (i.e. Arcata, CA), a focus on restaurants (i.e. Carmel-by-the-Sea) a restriction by size (i.e.
Coronado)
SANDWICH & A-FRAME SIGNS
The Palo Alto Municipal Code defines dictates that these signs must be located on private property. This effectively renders nearly all signs along University Avenue and
California Avenue non-compliant.
OPPORTUNITY
Allow as-of-right merchandising, benches, and signage
within 2' of storefront (i.e. NYC)
ARB ARCHITECTURAL REVIEW
ARB provides aesthetic controls and design approval,
required for the issuance of building permits, to address the visual impact of projects on adjacent properties and public streets.
OPPORTUNITY
Clarify role of ARB and provide illustrative or plain
language design guidelines to offer businesses
predictability in the approval process
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
46 Packet Pg. 323 of 393
PALO ALTO, CA —————————— ECONOMIC DEVELOPMENT STRATEGIC PLAN 46 ORGANIZATIONAL
CAPACITY &
STEWARDSHIP
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
47 Packet Pg. 324 of 393
PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 47 Administrative Capacity:
Arts, Culture & Entertainment
Palo Alto is well served by Arts, Culture &
Entertainment at both the City and District
Level.
Palo Alto's Economic Development service
delivery mechanisms are limited to the City
and the Palo Alto Chamber, which is a city-
wide membership organization.
At this time neither University
Ave/Downtown nor California Avenue have
active stewards to lead marketing, promotion,
event coordination, enhanced sanitation and
security (above and beyond what a city
provides).
ORGANIZATIONAL LANDSCAPE
Palo Alto
Chamber of
Commerce
District City
Economic Development
City of
Palo Alto
Palo Alto Art
Center/
Foundation
Palo Alto
Junior
Museum
and Zoo
Lucie Stern
Community
Center/ Palo
Alto's
Children'
Theatre
Albert &
Janet
Schultz
Cultural Arts
Hall
Elizabeth F.
Gamble
Gardens
Downtown
Library
Pacific Art
League of
Palo Alto
Cal Avenue
Merchants
Association
(Defunct)
The
Museum of
American
Heritage
Downtown
Palo Alto
BID
(Suspended)
University Ave
Parking
Committee
(overseen by
Chamber)
(Defunct)
Destination
Palo Alto
(Terminated)
OPPORTUNITY
Reactivate and support improvements to
stewardship along University and Cal Ave
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
48 Packet Pg. 325 of 393
PALO ALTO, CA —————————— ECONOMIC DEVELOPMENT STRATEGIC PLAN 48 → PUBLIC AND PRIVATE REALM ELEMENTS
→ ACCESSIBILITY & CONNECTIVITY
→ FOCUS AREA SWOT ANALYSIS
06 PHYSICAL
ASSESSMENT
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
49 Packet Pg. 326 of 393
PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 49 Physical environment:
SIDEWALKS
TRANSPORTATION
NETWORKS
WAYFINDING/
SIGNAGE
ALLEYS
GATHERING
SPACES
BUILDINGS
PARKING
ELEMENTS INFORMING CHARACTERISTICS OF
BEST-IN-CLASS RETAIL PLACES
MANAGED
…with leadership
and capacity to
engage merchants
and property
owners and
implement
improvements
SAFE
…but more
importantly
perceived as safe
ACCESSIBLE
…to a customer base
…with little friction
for arrival/departure
regardless of mode
VISIBLE
…by potential
customers either
as they drive,
bike or walk by
CHAMPIONED
…with demonstrated
signs of maintenance
and investment
PEDESTRIAN
FRIENDLY
…co-located
businesses that
encourage cross
shopping
…walkable and
with few
disruptions in
continuity
BRAND
RESONANCE
…with clear
branding strategy
and identity
ANCHORED
…by retail
destination driver(s)
… by culture,
institutional or
entertainment uses
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
50 Packet Pg. 327 of 393
PALO ALTO, CA —————————— ECONOMIC DEVELOPMENT STRATEGIC PLAN 50 CITY-WIDE
ELEMENTS
→ ACCESSIBILITY & CONNECTVITY
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
51 Packet Pg. 328 of 393
PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 51 Physical environment:
CITY-WIDE ACCESSIBILITY & CONNECTIVITY: CONCEPTS
Regional and local transportation systems
will be relied upon by consumers within the
trade areas, near and far.
01 Regional Systems should be accompanied by
last-mile options (i.e. shuttles, bicycle,
scooters, delineated infrastructure)
02 Last-mile options are often first (and only)
options for local residents, workers, and
students.
03 Are there any physical barriers to overcome?
Are there accessibility gaps?
Is navigation made easy?
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
52 Packet Pg. 329 of 393
PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 52 Physical environment:
CITY-WIDE ACCESSIBILITY & CONNECTIVITY:
ROADWAY & TRANSIT NETWORKS
KEY TAKEAWAYS
• Road Network:
• Robust road network, which provides good regional
and local connectivity - Around 90% of households
own at least one vehicle.
• Network hindered by lack of grade separated
railway crossings, but there are Comprehensive
Plan policies to implement more in the future.
• Transit Network:
• Low to moderate (30 to 57) transit scores for all
districts.
• Line redundancy (mostly regionally serving) for
regional and community centers while neighborhood
centers have no service redundancy.
• Most of Palo Alto, from a geographic standpoint,
does not have access to transit within a ¼ mile
walk, including areas with lower median income
and higher existing and planned density.
• Future shuttles will provide last mile options in
places with limited transit access.
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
53 Packet Pg. 330 of 393
PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 53 Physical environment:
CITY-WIDE ACCESSIBILITY & CONNECTIVITY:
PEDESTRIAN & CYCLING NETWORKS
AREAS LACKING
SIGNAGE/ MARKINGS*
* Focuses on key locations
relevant to focus areas
KEY TAKEAWAYS
• Pedestrian Network:
• While overall robust with walk scores from 77 to
97, some areas lack sidewalks of proportionate
scale to adjacent roadway, adequate pedestrian
crossings and median refuges, or (well-maintained)
planted buffer areas.
• Bicycle Network:
• Cycling infrastructure is robust with more planned
connectivity (bike score of 97 to 100) but
navigating by signage/markings is difficult as it is
lacking in key locations.
• Currently no micromobility programs in place.
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
54 Packet Pg. 331 of 393
PALO ALTO, CA —————————— ECONOMIC DEVELOPMENT STRATEGIC PLAN 54 FOCUS AREA
SWOT ANALYSIS
→ STRENGTHS: characteristics that give an advantage over others → WEAKNESSES: characteristics that create a disadvantage relative to others → OPPORTUNITIES: elements that could be exploited to its advantage → THREATS: elements that could cause trouble if unaddressed Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
55 Packet Pg. 332 of 393
PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 55 Physical environment:
DOWNTOWN: KEY FINDINGS
ELEMENTS STRENGTHS WEAKNESSES
Access/
Connectivity
Good transit access and
redundancy
Generally good pedestrian
connectivity throughout
Unsupported pedestrian access/desire
lines from Caltrain Station
Biking navigation hindered by lack of
signage/markings
Parking Large amount and underutilized Complicated for all and cost prohibitive for certain populations
Wayfinding/
Signage Ample signage throughout No cohesive branding or gateway features
Sidewalks &
Street
Furniture
Adjacent parklets increase
sidewalk space for more use
Poorly maintained and/or mismatch
furniture and bike racks
Gathering
Spaces
Good amount of public and private
gathering spaces with private
spaces being well designed
Expansive public gathering spaces with
little programming or defining
features
Alleys
Mostly around 20 ft wide with
exposure to main streets
Several blank walls
Mostly utilitarian for trash pick-up
with inconsistent lighting sources
Buildings
Good mix of eclectic architecture
Room for more bulk and density
Several existing narrow buildings with
100 ft + depth
Inconsistent treatments of storefront
vacancies
Narrow on side with angled parking
Good mix of eclectic architecture
Opportunities
Threats
Item 2.
Attachment A - Streetsense
Diagnostic - Final
Item 2.: Staff Report
Pg.
56 Packet Pg. 333 of 393
PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 56 Physical environment:
CALIFORNIA AVE: KEY FINDINGS
ELEMENTS STRENGTHS WEAKNESSES
Access/
Connectivity
Good transit access & redundancy
Planned BRT with improvements
Good bicycle connectivity
Multi-jurisdictional coordination
required for BRT/stop improvements
Parking
Large amount and underutilized
Digital wayfinding in new garage
Surface parking and structures take up
large portions of developable blocks
Wayfinding/
Signage
Public art consistently provided
along the street
No cohesive branding or memorable
gateway features
Sidewalks &
Street
Furniture
Wide sidewalks along California
Avenue with well-maintained
landscaping and street furniture
Sidewalks along El Camino Real out of
proportion with street
Gathering
Spaces
Nicely designed/ maintained
station plaza
Closed street and bulb outs provide
additional public gathering space
Closed street looks and feels
temporary
Alleys
Mostly around 20 ft wide with
access to/from main streets
Heavily used rear access
Mostly utilitarian for trash pick-up
with inconsistent lighting sources
Buildings
Building facades consistently align
California Avenue with most
providing uncovered/ transparent
windows
Unremarkable architecture – some
with limited permeability
Large gap of engaging building facades
from station plaza
120 ft ROW
Opportunities
Threats
El Camino Real hostile biking/ pedestrian
experience - no median refuge for crossing
20 ft ROW
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 57 Physical environment:
STANFORD SHOPPING CENTER: KEY FINDINGS
ELEMENTS STRENGTHS WEAKNESSES
Access/
Connectivity
Good transit access and redundancy
Good pedestrian and bicycle access
to/from the district Limited bicycle connectivity once
inside the district
Parking
Large amount, well maintained with
mature landscaping and high visibility
"Park once and walk" environment
Expansive parking lots and
structures located on the periphery
creating an island effect
Wayfinding/
Signage
Ample amount of
Diverse, yet cohesive, types (including
digital)
N/A
Sidewalks &
Street
Furniture
Wide, well-maintained with generous
landscaping within district
Adequately sized along exterior roads
with planted buffers
Exterior sidewalks between
roadway and parking areas –
passthrough environment
Limited bus shelters/ seating
Gathering
Spaces
Variety of nicely designed and
maintained spaces with plush
landscaping, shade, seating, and
lighting
No gathering spaces along the
periphery
Buildings
High-quality, engaging storefronts
throughout the district, some with
spill-over
Storefronts mostly insular -
Outwardly facing storefronts are
100 - 450 feet from street
Opportunities
Threats
Most direct pedestrian Caltrain
connection could use maintenance
Wide, well-maintained with generous
landscaping within district
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 58 Physical environment:
TOWN & COUNTRY VILLAGE: KEY FINDINGS
ELEMENTS STRENGTHS WEAKNESSES
Access/
Connectivity
Robust vehicular access & adequate transit
access
Well-connected, reasonably sized
sidewalks, including delineated crossings,
and bike parking within district
Two separated north/south ped/bike paths
El Camino Real hostile
biking/ pedestrian experience -
no median refuge for crossing
No east/west bicycle
connection
Parking
Ample, highly visible parking with
generous, well-maintained landscaping/
shade
"Park once and walk" environment
Expansive parking along
exterior roads detracts from
visibility of the buildings
Wayfinding/
Signage
Ample signage/wayfinding with consistent
branding
Charming signage under arcades
Not every store provides
signage on exterior of building,
limiting awareness
Sidewalks &
Street
Furniture
Comfortable sidewalk dimensions within
the district
Tree-lined sidewalks along exterior roads
Limited bus shelters/ seating
Gathering
Spaces
Utilitarian/passthrough spaces thoughtfully
design to be used as publicly accessible
gathering spaces
Lacks central gathering space
Buildings
Regionally responsive architectural style –
large arcade
Curated vacant storefronts
Subtle scale
Opportunities
Threats
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 59 Physical environment:
MIDTOWN: KEY FINDINGS
ELEMENTS STRENGTHS WEAKNESSES
Access/
Connectivity
Good access for all modes
Comfortable sidewalks for
walking/waiting with bus seating
Good surrounding bicycle
connectivity
Lacks transit redundancy and bus
shelters
Several curb cuts along Middlefield
disrupting pedestrian connectivity
Inconsistently placed bicycle parking
Parking
Adequate parking provided with
connected parking across
independent parcels
Good visibility
Weak "Park once and walk"
environment
Minimal parking lot
landscaping/shade
Wayfinding/
Signage Eclectic mix of business signage No gateway signage/ features Sidewalks &
Street
Furniture
Adequately sized and maintained
sidewalks along Middlefield Road
with space for landscape buffers
Planted areas along Middlefield could
be improved
Buildings set back from the road lack
delineated pedestrian paths through
parking lots
Gathering
Spaces
A few privately owned gathering
spaces seamlessly connect to public
sidewalk
Lacks a central gathering space
No publicly owned/maintained
gathering spaces
Buildings
Eclectic mix of buildings styles,
materials, and colors – authenticity
Most storefronts permeable along
Middlefield Rd.
Unremarkable and
outdated/tired architecture
Inconsistent building wall along
Middlefield Rd.
Opportunities
Threats
Planted areas along Middlefield need
improvement
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 60 Physical environment:
CHARLESTON SHOPPING CENTER: KEY FINDINGS
ELEMENTS STRENGTHS WEAKNESSES
Access/
Connectivity
Good vehicular access
Some transit access
Colorado Rd has good bicycle and
pedestrian infrastructure
Limited bus access – no redundancy
Lacks adequate bicycle and pedestrian
infrastructure along Middlefield Rd
Parking
Ample, underutilized parking with
high visibility
"Park once and walk" environment
Majority of lot used for parking/
maneuvering
Lightly landscaped with little shade
Wayfinding/
Signage
Consistent, well-maintained
signage Outdated shopping center signage
Sidewalks &
Street
Furniture
Adequately sized and maintained
sidewalks along Charleston Rd.
Sidewalks along Middlefield out of
scale with size of street with no
vegetated buffer
Narrow pedestrian space along
storefronts in some areas
Gathering
Spaces
Underutilized space repurposed to
gathering space
Arcade along building provides
intimate seating option
Few gathering spaces, overall - Limited
space around coffee shop
Repurposed space feels exposed/ lacks
shade - Places where shade exists not
suited for gathering
Buildings Buildings well maintained with
consistent treatments
Insignificant, outdated architecture
Suburban form/scale not conducive to
longer durations of stay
Opportunities
Threats
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PALO ALTO, CA —————————— ECONOMIC DEVELOPMENT STRATEGIC PLAN 61 07
GUIDING
PRINCIPLES
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PALO ALTO, CA ——————————ECONOMIC DEVELOPMENT STRATEGIC PLAN 62 Administrative Capacity:
REINFORCE HIERARCHY OF PLACE
• Stabilize and reinforce Downtown as a destination through improvements and stewardship
• Embrace California Avenue as a community and neighborhood serving place by increasing opportunities for new businesses and support for existing businesses
IMPROVE ACCESSIBILITY
• Embrace walking and biking solutions by fixing broken links and reinforcing walkability to/from all of the City's commercial districts • Address parking policies and systems that add complexity and cost burden on low-wage, part-time workers
ADOPT POLICIES THAT REFLECT CHANGING MARKET CONDITIONS
• Ease the regulatory burden for businesses and revise outdated restrictions that create hurdles to tenancy
• Focus retail and retail-like uses in places where they are market-supported
GUIDING PRINCIPLES
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PALO ALTO, CA —————————— ECONOMIC DEVELOPMENT STRATEGIC PLAN 63 THANK YOU
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City Council
Supplemental Report
From: Kiely Nose, Assistant City Manager
Meeting Date: February 13, 2023
Item Number: 8
Report #:2302-0962
TITLE Supplemental Report to Action Item #8, FY 2023 Mid-Year Budget Review: Revised Budget Stabilization Reserve (BSR) Calculation
This supplemental report addresses a correction necessary to the Budget Stabilization Reserve in the FY 2023 Mid-Year Report.
Revised General Fund Budget Stabilization Reserve (BSR) Calculation In final preparation for City Council discussion of the FY 2023 Midyear Budget Review (staff report #2212-0515), staff identified an error and understatement of the General Fund Budget Stabilization Reserve (BSR) balance by $3.7 million. After accounting for use of the BSR to balance the FY 2023 Adopted Budget, the reserve established in the FY 2023 Adopted Budget for FY 2023 Service Reinvestments (2-year limited term) was miscalculated when reconciling and accounting for three fiscal years (FY 2022, FY 2023, and FY 2024) with the audited June 30, 2022 BSR balance of $72.8 million.
This correction does not impact recommended budget adjustments included in the FY 2023 Mid- Year report; these adjustments and the attachments of the staff report remain complete and accurate. However, this does impact the projected ending fund balance as of June 30, 2023. As a result, approval of the amendments outlined in the FY 2023 Mid-Year report will result in a projected BSR balance of $51.8 million as of the end of FY 2023. This is within the target range of 15% to 20% of the General Fund Budget expense and is above the City Council target level of
18.5%, or $45.6 million, by $6.2 million.
Table 1 provides a red-lined correction outlining the status of the Budget Stabilization Reserve based on the adjustments described above.
Table 1: REVISED Budget Stabilization Reserve Funding Status Mid-Year
Staff Report
Revised as
of 2/9/2023
General Fund BSR Balance, June 30, 2022 (includes FY22 surplus) $72,835 $72,835 FY 2023 Approved Adjustments
FY 2023 Adopted Budget & FY 2023 Service Reinvestments (yr 2)
($12,772) ($9,072)
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Council Approved Items (Downtown Streets Team,
Reappropriations)
($267) ($267)
Subtotal: BSR Balance, After Approved Adjustments $59,796 $63,496
FY 2023 Mid-year Adjustments ($11,686) ($11,686)
Projected FY 2023 BSR Balance, June 30, 2023 $48,110 $51,810 BSR (%) 19.4% 20.9%
BSR ($) above/(below target) $2,509 $6,209
Based on Council adopted policy to allocate BSR funds in excess of the 18.5% level at the end of a fiscal year, surpluses are typically split between the Capital Improvement Fund Infrastructure Reserve (IR) and the City’s Pension 115 Trust Fund at the direction of the City Manager. The remaining funds above the BSR target of 18.5%, including the $3.7 million may remain in the BSR, or may be allocated. As uncommitted funds, the Council may provide direction on the use of them.
CONCLUSION
The information in this report does not change the recommendations being made in the FY 2023 Mid-Year Report. This report clarifies the estimated General Fund BSR balance based on a correction in accounting for a reserve to fund ongoing services in FY 2024. This clarification ensures the Council has the most up to date information when considering the ability to fund actions in FY 2023 as well as planning for the FY 2024 Budget and beyond.
APPROVED BY:
Kiely Nose, Assistant City Manager
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CITY COUNCIL
STAFF REPORT
From: City Manager
Report Type: Action
Lead Department: Administrative Services
Meeting Date: January 23, 2023
TITLE
Review and Accept the FY 2024 - FY 2033 Long Range Financial Forecast (LRFF) and FY 2023 Budget Development Guidelines
RECOMMENDATION
The Finance Committee and staff recommend that the City Council accept the Fiscal Year (FY) 2024 to 2033 General Fund Long Range Financial Forecast (Attachment A) and annual Budget Development Guidelines (Attachment B) and direct staff to use this forecast as the starting point for the initiation of the FY 2024 budget process.
EXECUTIVE SUMMARY
The FY 2024 - 2033 Long Range Financial Forecast (LRFF) was reviewed with the Finance Committee on December 6, 2022 (Attachment A) along with the annual Budget Development Guidelines (Attachment B). This report summarizes the key discussion points with the Finance Committee and includes additional information regarding Utility rates that was not available at the time the LRFF was presented to the Finance Committee and may impact development of the FY 2024 Budget. Per City Council policy, items that are unanimously approved by the Finance Committee are placed as a consent agenda item for the City Council. However, staff and the Committee have placed this item on the City Council’s action agenda for deliberation of the full Council in acknowledgement of the importance for financial planning in the continued varied economic conditions.
BACKGROUND
The LRFF is a preliminary ten-year forecast based on the most current information available, actual revenues for FY 2022, and projected results through FY 2023 at the point in time of release.
General Fund expenditures are based on current City Council approved service levels (Base Case) compared to projected revenues over the next ten years. This Forecast allows staff and City Council to look at both the short-term and long-term financial status of current service levels in Item AA2
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the General Fund to inform daily policy decisions and evaluate long-term goals and ongoing challenges.
The Base Case Long Range General Fund forecast projects a surplus of $0.4 million in FY 2024, followed by a $3.4 million gap in FY 2025 and a $2.6 million gap in FY 2026, with small but increasing surpluses in FY 2027 through FY 2033. This forecast maintains current service levels approved in FY 2023 and should be used for planning purposes to assist in gauging effects of major policy interventions against a likely “status quo” version of the future.
Staff modeled an alternate forecast scenario that reflects a more severe recession. Compared to the Base Case, this scenario increases the General Fund gap over the next ten years. FY 2024 changes from a surplus to a gap of $3.5 million, and revenues are not anticipated to be able to fund the annual expenditures until FY 2029.
Staff modeled an alternate forecast that reflects estimated funding from Measure K (new business tax) and the impacts on the General Fund over the next ten years reflects a surplus in FY 2024 of $1.1 million, a gap in FY 2025 of $1.9 million, and surpluses in FY 2026 through FY 2033. These alternate forecasts were done separately to show the impacts of each scenario in isolation; however, aspects of both alternate forecasts may occur in conjunction in the future.
As the COVID-19 pandemic is waning, economic uncertainty has heightened the intensity of financial forecasting and the budget development process including the need for complex problem-solving within an engaged public process across a wide range of issues. There are also several issues across the City continuing to impact the ability to transition beyond impacts of the pandemic including staff turnover, recruitment and retention, and supply chain issues and inflation that continue to increase costs across all aspects of the City. Development of the FY 2024 budget and planning for the subsequent years outlined in the forecast will need to be done strategically over the next several months in order to balance the increased service level needs of the community with the financial resources currently projected. With these variables, ongoing revenues are unable to keep pace with expenses in the short term.
City staff will continue to review and refine these projections to establish the FY 2024 budget and use this forecast to begin internal planning for budget balancing solutions. Based on this forecast, it is anticipated that the prioritization of spending and the use of one-time surplus funding from FY 2022 to cover short-term gaps over the next several years will be necessary to ensure continued financial stability. More detailed guidelines or Budget Policies to inform the development of the FY 2024 budget are discussed in Attachment B.
ANALYSIS
Finance Committee Review and Discussion
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As part of the Finance Committee’s review of the LRFF, there were no requests for additional information or changes to the report for the Council’s review; however, a few topics were highlighted as part of the discussion. Staff has compiled these items below.
Economic Development:
-Potential for ongoing remote work and reduced office occupancy to impact major tax revenues, and lead to an extended local recession rather than a short term “blip”. -Permanent parklet program should be evaluated as a revenue source, or at minimum, cost neutral.
-Evaluate the potential for revenue from a new Fiber Utility.
Major Projects/Council Priorities:
-Repair of the Cubberley Gym should be prioritized as it impacts a lot of children citywide. -A majority of work related to the Sustainability and Climate Action Plan (S/CAP) is currently funded in the Utility Funds; however, as work continues to expand, this will become a shared responsibility across other funds.
Labor Costs and Staffing Analysis:
-As the biggest source of costs to the City, ensure that salaries and benefits such as pensions and medical plans are managed carefully, as outlined in the pension and retiree medical policies recently reviewed and updated by the Finance Committee. -Quantifying service reinvestments should be evaluated in a manner other than just comparing headcount pre and post pandemic.
Additional Information for Council Review
Utility Rates: Current economic uncertainty is causing the potential for increases to the utility rates. New information that was not available when the LRFF was published in late November is being presented to Council in this report for review and incorporation into the development of the FY 2024 budget. This information can be seen in Attachment C.
FISCAL/RESOURCE IMPACT
Financial implications from this report and input from the City Council will be considered in the City Manager’s development of the Fiscal Year 2024 budget.
STAKEHOLDER ENGAGEMENT
The preliminary forecast for FY 2024 represents the beginning of the fiscal year 2024 budget development process. As in previous years, the City Council discussion of LRFF will provide guidance to staff in the budget development process. It is anticipated that conversations with City Council and the community will occur through public budget hearings in Spring 2023, according to the standard budget adoption process.
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CITY COUNCIL
STAFF REPORT
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Administrative Services
Meeting Date: February 6, 2023
TITLE
Review and Accept the FY 2024 - FY 2033 Long Range Financial Forecast (LRFF) and FY 2024 Budget Development Guidelines
RECOMMENDATION
The Finance Committee and staff recommend that the City Council accept the Fiscal Year (FY) 2024 to 2033 General Fund Long Range Financial Forecast Revised Base Case and annual Budget Development Guidelines (Attachment B) and direct staff to use this forecast as the starting point for the initiation of the FY 2024 budget process.
EXECUTIVE SUMMARY
The FY 2024 - 2033 Long Range Financial Forecast (LRFF) was reviewed with the Finance Committee on December 6, 2022 (Attachment A) along with the annual Budget Development Guidelines (Attachment B) and were unanimously approved by the Committee. This report 1) summarizes the key discussion points with the Finance Committee, 2) provides a revised Base Case Forecast in alignment with cost estimates of City and labor group positions on economic proposals1, and 3) provides preliminary information regarding Utility rates which may impact development of the FY 2024 Budget.
The Revised Base Case General Fund forecast reflects projected gaps in the first four years (FY 2024-FY 2027) with expenses out pacing revenues resulting in deficits ranging between $500,000 to $5.8 million annually. Staff expect that a combination of one-time funds and the eventual collection of new Business tax revenues from the passage of Measure K will assist in resolving these deficits.
Per City Council policy, items that are unanimously approved by the Finance Committee are placed as a consent agenda item for the City Council. However, staff and the Committee have placed this item on the City Council’s action agenda for deliberation of the full Council in 1 Subsequent to the Finance Committee review in December 2022, the City has reached tentative agreement with two labor groups, on this same February 6, 2023 agenda for approval, and adopted a new management and professional compensation plan.
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acknowledgement of the importance for financial planning in the continued varied economic conditions.
BACKGROUND
The LRFF is a preliminary ten-year forecast based on the most current information available, actual revenues for FY 2022, and projected results through FY 2023 at the point in time of release.
General Fund expenditures are based on current City Council approved service levels (Base Case) compared to projected revenues over the next ten years. This Forecast allows staff and City Council to look at both the short-term and long-term financial status of current service levels in the General Fund to inform daily policy decisions and evaluate long-term goals and ongoing challenges.
•Base Case Long Range General Fund forecast (as of December 2022) projects a surplus of $0.4 million in FY 2024, followed by a $3.4 million gap in FY 2025 and a $2.6 million gap in FY 2026, with small but increasing surpluses in FY 2027 through FY 2033. This forecast maintains current service levels approved in FY 2023 and should be used for planning purposes to assist in gauging effects of major policy interventions against a likely “status quo” version of the future.
•Alternate forecast scenario that reflects a more severe recession. Compared to the Base Case, this scenario increases the General Fund gap over the next ten years. FY 2024 changes from a surplus to a gap of $3.5 million, and revenues are not anticipated to be able to fund the annual expenditures until FY 2029.
•Alternate forecast that reflects estimated funding from Measure K (new business tax) and the impacts on the General Fund over the next ten years reflects a surplus in FY 2024 of $1.1 million, a gap in FY 2025 of $1.9 million, and surpluses in FY 2026 through FY 2033.
These alternate forecasts were done separately to show the impacts of each scenario in isolation; however, aspects of both alternate forecasts may occur in conjunction in the future.
As the COVID-19 pandemic is waning, economic uncertainty has heightened the intensity of financial forecasting and the budget development process including the need for complex problem-solving within an engaged public process across a wide range of issues. There are also several issues across the City continuing to impact the ability to transition beyond impacts of the pandemic including staff turnover, recruitment and retention, supply chain issues, and inflation that continue to increase costs across all aspects of the City. Development of the FY 2024 budget and planning for the subsequent years will balance the increased service level needs of the community with the financial resources projected. Ongoing revenues are unable to keep pace with expenses in the short term.
Based on this forecast, it is anticipated that the prioritization of spending and the use of one-time surplus funding from FY 2022 to cover short-term gaps over the next several years will be necessary to ensure continued financial stability. More detailed guidelines or Budget Policies to inform the development of the FY 2024 budget are discussed in Attachment B.
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ANALYSIS
This report
1) Summarizes the key discussion points with the Finance Committee, 2) Provides a revised Base Case Forecast in alignment with cost estimates of City and labor group positions on economic proposals, and
3) Provides preliminary information regarding Utility rates which may impact development of the FY 2024 Budget.
Finance Committee December 2022 Review and Discussion
As part of the Finance Committee’s review of the LRFF, there were no requests for additional information or changes to the report for the Council’s review; however, a few topics were highlighted as part of the discussion. Staff has compiled these items below.
Economic Development:
Potential for ongoing remote work and reduced office occupancy to impact major tax revenues, and lead to an extended local economic shift rather than a short term “blip”. Permanent parklet program should be evaluated as a revenue source, or at minimum, cost neutral.
Evaluate the potential for revenue from a new Fiber Utility.
Major Projects/Council Priorities:
Repair of the Cubberley Gym should be prioritized as it impacts many children citywide. A majority of work related to the Sustainability and Climate Action Plan (S/CAP) is currently funded in the Utility Funds; however, as work continues to expand, this will become a shared responsibility across other funds.
Labor Costs and Staffing Analysis:
As the biggest source of costs to the City, ensure that salaries and benefits such as pensions and medical plans are managed carefully, as outlined in the pension and retiree medical policies recently reviewed and updated by the Finance Committee. Quantifying service reinvestments should be evaluated in a manner other than just comparing headcount pre and post pandemic.
Revised Base Case Fiscal Year (FY) 2024 to 2033 General Fund Long Range Financial Forecast Subsequent to the Finance Committees review of the LRFF, a new agreement with Management Employees has been approved by the City Council at the December 19, 2022 meeting, and agreements with the International Association of Fire Fighters (IAFF) and Service Employees International Union (SEIU) are scheduled for City Council approval on February 6, 2023. This report includes a revised LRFF forecast that aligns cost estimates with this updated status of City and labor group positions on economic proposals.
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Consistent with prior Council direction in previous long range financial forecasts, a general wage adjustment of 2.0% was included for all years of the forecast along with a level of reserve to reach a target market placement for employee compensation in new labor agreements as a forecasting assumption, not as a commitment to future negotiations.
Staff will continue to refine these estimates during the FY 2024 annual budget process as labor agreements are finalized and more information is gathered on revenue trends. This revised Base Case, revises the LRFF reflecting gaps in the first four years, FY 2024 through FY 2027.
Table 1: Summary of Net One-Time Surplus/(Gap) – Base Case vs. Revised Net Surplus/(Gap) FY23 (Est.) FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Base Case $0-6.0M $0.4M ($3.4M) ($2.6M) $1.5M $2.9M
REVISED Base Case $0-4.7M ($0.5M) ($5.8M) ($5.1M) ($1.0M) $0.3M Table 2: REVISED Base Case, FY 2024 -2033 Long Range Financial Forecast Preliminary Utility Rate Forecasts
Current economic uncertainty and commodity prices are expected to result in recommended increases to the utility rates for FY 2024. New information, not available when the LRFF was published in late November, is being provided for review and a preliminary preview of rates expected to be discussed as part of the FY 2024 budget process. These rates will impact customers residential and commercial, including the City itself as a consumer of these commodities. This information can be seen in Attachment C. At the time of this preliminary review of estimated rate forecasts, the state of California has seen unprecedented rainfall and flooding. Staff are reviewing the impacts of this storm on rate forecasts and will ensure this is factored into the recommended rate changes for FY 2024. These recommendations are scheduled to be reviewed in March – May 2023 by the Finance Committee and adopted the City Council in June 2023.
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FISCAL/RESOURCE IMPACT
Financial implications from this report and input from the City Council will be considered in the City Manager’s development of the Fiscal Year 2024 budget.
Upcoming milestones related to the City’s fiscal standing and the FY 2024 Budget Process include:
February 13 Council Meeting – FY 2023 Mid-Year Budget Review and Second Quarter Fiscal Analysis Report
March/April Utilities Advisory Commission (UAC) and Finance Committee Meetings – Five Year Utility Financial Plans and FY 2024 Rate Recommendations May 1 Council Meeting – FY 2024 Proposed Operating and Capital Budgets Published May Finance Committee Hearings – FY 2024 Proposed Budget Review, including Utility Rates, Municipal Fees, and Five-Year Capital Improvement Plan June Finance Committee Meeting – FY 2023 Third Quarter Fiscal Analysis Report June 19 Council Meeting – Adoption of the FY 2024 Operating and Capital Budgets, the Utility Rates, and Municipal Fees
STAKEHOLDER ENGAGEMENT
The preliminary forecast for FY 2024 represents the beginning of the fiscal year 2024 budget development process. As in previous years, the City Council discussion of LRFF will provide guidance to staff in the budget development process. It is anticipated that conversations with City Council and the community will occur through public budget hearings in Spring 2023, according to the standard budget adoption process.
ENVIRONMENTAL REVIEW
This report is not a project for the purposes of the California Environmental Quality Act.
Environmental review is not required.
ATTACHMENTS
Attachment A: FY 2024-2033 Long Range Financial Report (LRFF), CMR 14629 Attachment B: FY 2024 Budget Development Guidelines
Attachment C: Preliminary Utility Rates Forecast
APPROVED BY:
Kiely Nose, Assistant City Manager
Report #: 2301-0753
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City of Palo Alto (ID # 14629)
Finance Committee Staff Report
Meeting Date: 12/6/2022 Report Type: Action Items
City of Palo Alto Page 1
Title: Review and Forward the FY 2024 - 2033 Long Range Financial Forecast From: City Manager
Lead Department: Administrative Services
Recommendation
Staff recommends that the Finance Committee review and recommend that the City Council accept the General Fund Long Range Financial Forecast (LRFF) for Fiscal Year 2024-2033 and the FY 2024 annual Budget Development Guiding Principles (Attachment A) and direct staff to use this forecast as the starting point for the initiation of the FY 2024 budget process.
Executive Summary
Annually, the City presents a ten -year General Fund Long Range Financial Forecast (LRFF) in December that marks the beginning of the annual budget process. This preliminary forecast is based on the most current information available, act ual revenues for FY 2022, and projected results through FY 2023 at the point in time of release. General Fund expenditures are based on current City Council approved service levels compared to projected revenues over the next year.
The Base Case Long Range General Fund forecast projects a surplus of $0.4 million in FY 2024, followed by a $3.4 million gap in FY 2025 and a $2.6 million gap in FY 2026, with small but increasing surpluses in FY 2027 through FY 2033. This forecast maintains current service levels approved in FY 2023 and should be used for planning purposes to assist in gauging effects of major policy interventions against a likely “status quo” version of the future.
Staff modeled an alternate forecast scenario that reflects a more severe reces sion.
Compared to the Base Case, this scenario increases the General Fund gap over the next ten years. FY 2024 changes from a surplus to a gap of $3.5 million, and revenues are not anticipated to be able to fund the annual expenditures until FY 2029.
Staff modeled an alternate forecast that reflects estimated funding from Measure K and the impacts on the General Fund over the next ten years reflects a surplus in FY 2024 of $1.1 million, a gap in FY 2025 of $1.9 million, and surpluses in FY 2026 through FY 2033. These alternate forecasts were done separately to show the impacts of each Item AA2
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scenario in isolation; however, aspects of both alternate forecasts may occur in conjunction in the future.
As the COVID-19 pandemic is waning, new economic challenges are emerging such as monetary policy tightening actions by the US Federal Reserve to tame persistently high inflation and increasing geopolitical risks which may lead the United States into a recessionary period. This economic uncertainty has heightened the int ensity of financial forecasting and budget development process. New analyses and data generation demands require deep dives into complex problem-solving within an engaged public process across a wide range of issues. These forecast figures present staff wi th the challenge of prioritizing the growing needs of the City with the fiscal sustainability of these needs.
Locally, based on current election data, staff anticipate that both Measure L and K will be successful in gaining voter approval. Measure L, affi rming the ongoing Equity Transfer from the Gas Utility Fund is included in the Base Case scenario. Measure K, approval of a new Business Tax, is not assumed in this LRFF as part of the Base Case scenario; a resolution for intended use of funding has been e armarked for investments in public safety, transportation and train crossing safety, and affordable housing and unhoused support.
There are several issues across the City continuing to impact the ability to transition beyond impacts of the pandemic includ ing staff turnover, recruitment and retention, and supply chain issues and inflation that continue to increase costs across all aspects of the City. Development of the FY 2024 budget and planning for the subsequent years outlined in the forecast will need to be done strategically over the next several months in order to balance the increased service level needs of the community with the financial resources currently projected. With these variables, ongoing revenues are unable to keep pace with expenses in the short term.
City staff will continue to review and refine these projections to establish the FY 2024 budget and use this forecast to begin internal planning for budget balancing solutions. Based on this forecast, it is anticipated that the prioritizat ion of spending and the use of one -time surplus funding from FY 2022 to cover short -term gaps over the next several years will be necessary to ensure continued financial stability. More detailed guidelines or Budget Policies to inform the development of the FY 2024 budget are discussed at the end of this document (Attachment A).
Included in this report and subsequent documents are the following:
- The Economy: discussion of the current financial climate of the United States to the local economy of the City of Palo Alto (details can be found in Attachment B) - Summary Long Range Financial Forecast including Revenue and Expense assumptions in FY 2024-2033 (details can be found in attachment C and D) o Financial status of the General Fund as of the FY 2023 Adopted Budget o Brief discussion of FY 2022 surplus funding
o Updated FY 2023 revenue assumptions based on current projections - FY 2024 Budget Development Policies to inform the Budget process (Attachment A) Item AA2
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- Alternate scenarios to the base case forecast to demonstrate financial impacts to the City from:
o Impacts from a moderate recession
o Impacts from the passage of Measure K
Background
Annually the Office of Management and Budget produces a ten -year General Fund Long Range Financial Forecast (LRFF). The LRFF reflects staff’s best estimates on the projected revenues and expenditures over the next ten years based on the information that is currently available. It is important to note that the LRFF is a planning document and is separate and distinct from the development o f the City’s annual Operating and Capital Budgets. There are assumptions and parameters modeled in the LRFF, but these assumptions are revised and refined as more information becomes available through the budget development process.
The LRFF contains a comprehensive review of the costs to provide current City Council approved service levels, including current contracts, updates to salaries and benefits based on the current population of employees, and the current labor contracts in effect. The LRFF also reviews the status of the current economy and various economically sensitive revenues such as Sales Tax, Documentary Transfer Tax, Property Tax, and Transient Occupancy Tax to explain key trends in those areas. This Forecast allows staff and City Council to look at both the short -term and long -term financial status of current service levels in the General Fund to inform daily policy decisions and evaluate long-term goals and ongoing challenges.
The Economy
U.S. workers and consumers have shown great resiliency throughout the pandemic, energy cost spikes, geopolitical uncertainty, and high inflation. National, state, regional, and local economic indicators are in transition; the economy exited 2021 in overdrive, but that growth combined with global supply c hain constraints has pushed inflation higher than expected. The federal reserve began raising the fed funds interest rate in March 2022 and is expected to continue in 2023 which is intended to tame inflation, but as of the writing of this report, progress is slower than desired. This has begun to and is predicted to cool the economy and result in a rise in unemployment. The federal reserve’s ability to balance the objectives of fighting inflation while maintaining employment and GDP growth will be challenging.
The local economy continues to show strong performance in the latter half of the calendar year 2022 though signs of “headwinds” are growing that are likely to stem economic growth.
Additional details on economic statistics such as Gross Domestic Product (GDP) and Consumer Price Index (CPI) can be found in Attachment B in greater length.
Discussion
Palo Alto serves a diverse community with a broad range of unique services that adds to the complexity of managing a balanced budget and healthy fiscal ou tlook. This annual General Fund Long Range Financial Forecast is coupled with annual rate forecasts for the City’s various Item AA2
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enterprise activities such as electric, gas, and water utility services provided to the community.
As the COVID -19 pandemic is wanin g, new economic challenges are emerging which may lead the United States into a recessionary period. This economic uncertainty has heightened the intensity of financial forecasting and budget development process and continues the rigger previously demonstr ated by the Council and staff through the challenges of the pandemic.
These forecast figures present staff with the challenge of prioritizing the growing needs of the City with the fiscal sustainability of these needs.
The FY 2024-2033 ‘Base Case’ revenue and expense assumptions include updates on the status of the general fund as of the FY 2023 Adopted Budget, the FY 2022 fiscal year end, and current FY 2023 projected assumptions. As with all forecasts, there is uncertainty regarding the revenue and expenditure estimates contained in this document. This forecast assumes a mild 18 -month recession at the beginning of the ten -year period. Major tax revenues continue to rebound from prior year levels, reserves for economically sensitive revenues have been elim inated as programs modified or canceled during the pandemic have returned, and investments in Capital projects are restored to pre -pandemic levels. One -time resources that have boosted the City’s financial outlook in prior years: Coronavirus Aid, Relief, and Economic Securities Act (CARES Act) and American Rescue Plan Act (ARPA) have been allocated in full with no funds included in FY 2024.
Base Case
Table 1 displays the projected General Fund revenues and expenditures over ten years and the cumulative net operating margin.
- The operating margin reflects the variance between the projected General Fund revenues and expenditures for each year of the forecast or the annual surplus or shortfall.
- The net operating margin is presented on a one -time basis, as the annual surplus or shortfall for a given year, and on an incremental basis.
The incremental forecast assumes that each shortfall is addressed completely with ongoing solutions in the year it appears and that each surplus is completely expended with ongoin g expenditures. It is the City’s goal to remain in balance on an ongoing basis, so the incremental figure is useful to illustrate the additional surplus and/or shortfall attributed to a particular fiscal year. To the extent a shortfall is not resolved, or a surplus is not expended on an ongoing basis, it is important to understand that the remaining budget gap or surplus will remain and be pushed to the following year.
The Base Case financial forecast projects a surplus of $0.4 million in FY 2024, followed by a $3.4 million shortfall in FY 2025, a $2.6 million shortfall in FY 2026, and increasing surpluses thereafter. Based on these assumptions, the cumulative net operating margin, or ongoing surplus, during the forecast period is a surplus of $33.9 million.
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TABLE 1: FY 2024 – 2033 Long Range Financial Forecast (Base Case)
TABLE 2: FY 2024 – 2033 Long Range Financial Forecast Net Operating Margin (Base Case)
Revenue Assumptions
The FY 2022 Annual Comprehensive Financial Report (ACFR), scheduled for review by the Finance Committee on November 29, 2022, reported higher annual earnings for general fund revenues as compared to the prior year; major tax revenues experienced faster recovery paces in the last two quarters of the fiscal year (CMR 14632 1). Major tax revenues generated $137.5 million in FY 2022, an increase of $20.7 million or 17.7% over the FY 2021 levels of $116.8 million. Staff and the Council anticipated a portion of this increase in revenues and discussed $14 million during the May 2022 bu dget discussions for allocation in FY 2023. This recovery trend may continue as discussed in the First Quarter (Q1) FY 2023 Financial Report, scheduled for review by the Finance Committee on December 6, 2022; several categories appear to be tracking simila rly in FY 2023 to FY 2022 (CMR 14630). The current timing and potential for recession makes it difficult to determine if these trends will continue in the near term. In FY 2023, Staff estimates a range of $238 to $244 million in total revenues, reflecting up to $6
1 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance- committee/2022/20221129/20221129pfcsm-linked.pdf
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million or 2.5% above adopted budget levels. The higher end of this projection assumes that revenues will continue a similar positive trend as recent quarters. However, actual results will vary depending on the timing and magnitude of recessionary impacts in the near term.
A summary of revenue assumptions are discussed here, extensive information regarding each revenue category can be found in Attachment C.
- Tax revenues constitute nearly 60% of General Fund resources. In FY 2024, the forecast projects an $11.4 million or 8.4% increase from FY 2023 adopted levels ($135.1 million to $146.5 million). This increase is primarily attributed to higher anticipated receipts for Sales Tax, Property Tax, and Transient Occupancy Tax (TOT) categories. o Sales Taxes is anticipated to increase $0.7 million or 2.2% from FY 2023 ($32.6 million to $33.3 million). Revenue in this category is experiencing growth; however, is not anticipated to reach pre-pandemic levels until FY 2026. o Property Taxes make up the largest source of the General Fund’s revenue, approximately 25%. In FY 2024, this revenue is anticipated to increase $3.9 million or 6.5% from FY 2023 ($58.9 million to $63.7 million). During economic downturns, impacts to property tax occur a year later, however , due to robust residential and commercial property sales this source has continued to grow annually.
o Transient Occupancy Taxes are impacted by business and other leisure/non - leisure travel and experienced significant reductions in the past few years due t o a number of factors resulting from the pandemic. Though this revenue remains below pre-pandemic actuals, the opening of the two Marriott hotels in FY 2021 and the re -opening of multiple hotels in FY 2021 and FY 2022 were positive developments for this ta x revenue. In FY 2024, this revenue is anticipated to increase $6.8 million or 37.3% from FY 2023 ($18.2 million to $25.0 million); however, this category is not anticipated to reach pre -pandemic levels until FY 2026.
- The forecast for non -tax revenues pro jects a $1.0 million or 1.2% increase in FY 2024 from FY 2023 adopted levels. This increase is primarily attributable to the alignment of revenue estimates for the Stanford agreement to provide Fire and Dispatch services, and the restoration of several pro grams and services that were modified due to public health orders, mainly in public safety and community services.
- One-time resources that have boosted the City’s financial outlook in prior years have been eliminated:
o The City received $13.7 million in A merican Rescue Plan Act (ARPA) funding that the Council, per the legislation, designated to address the significant revenue loss resulting from the pandemic;
o $294,000 in Coronavirus Aid, Relief, and Economic Securities Act (CARES Act) funding to provide r ental assistance and support safe parking and COVID -19 Item AA2
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testing programs; and
o $3.5 million in federal funds in FY 2022 through the Staffing For Adequate Fire and Emergency Response (SAFER) Grant Program. This funding offset the hiring costs of 5.0 firefighters for a three-year period and is fully expended in FY 2025.
The changes by revenue category, including dates in which revenues are anticipated to reach pre-pandemic levels, are discussed in greater detail below.
TABLE 3: General Fund Revenue Forecast
Revenue & Other Sources
Actual
2022
Adopted
2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
CAGR 10
Years
CAGR 5
Years
Sales Taxes 32,705 32,580 33,288 34,953 37,085 39,570 41,292 43,080 45,096 47,301 49,628 52,085 4.6% 2.2% Property Taxes 59,353 59,770 63,669 67,305 71,224 75,448 79,950 84,570 89,238 94,334 99,937 106,164 5.2% 2.3% Transient Occupancy Tax
General Purpose 8,828 8,472 14,429 15,255 16,059 16,549 17,181 17,894 18,766 19,710 20,740 21,829 4.2% 1.8% Infrastructure 8,118 9,727 10,567 11,173 11,762 12,121 12,583 13,106 13,744 14,435 15,190 15,987 4.2% 1.8% Documentary Transfer Tax 11,990 7,217 6,867 7,029 7,200 7,381 7,574 7,849 8,152 8,452 8,755 9,066 2.8% 1.0% Utility Users Tax 15,599 15,579 15,878 16,967 18,359 19,133 18,460 20,488 21,215 21,943 22,706 23,498 4.0% 1.5% Other Taxes and Fines 893 1,784 1,784 1,784 1,784 1,784 1,784 1,784 1,784 1,784 1,784 1,784 0.0% 0.0% Subtotal: Taxes 137,486 135,129 146,483 154,467 163,473 171,986 178,824 188,771 197,995 207,959 218,740 230,413 4.6% 2.0% Charges for Services 28,671 30,271 33,355 33,648 33,847 33,952 34,040 34,225 34,379 34,563 34,622 34,744 0.4% 0.2% Permits and Licenses 9,111 9,764 11,454 11,928 12,154 12,266 12,456 12,743 13,020 13,316 13,161 13,274 1.5% 0.8% Return on Investments 1,325 1,066 1,492 1,528 1,574 1,622 1,671 1,734 1,805 1,881 1,960 2,043 3.2% 1.1% Rental Income 13,681 15,572 16,447 17,303 18,034 18,635 19,151 19,682 20,228 20,792 21,372 21,968 2.9% 1.5% From Other Agencies 9,232 7,526 1,281 998 266 266 266 266 266 266 266 266 -14.5% -14.5% Charges to Other Funds 13,980 13,690 14,460 14,810 14,989 15,091 15,398 15,668 15,963 16,261 16,330 16,411 1.3% 0.6% Other Revenue 2,447 2,201 2,592 2,615 2,630 2,646 2,662 2,679 2,696 2,712 2,730 2,748 0.6% 0.3% Total Non-Tax Revenue 78,447 80,090 81,080 82,830 83,495 84,477 85,643 86,996 88,357 89,791 90,441 91,454 1.2% 0.5% Operating Transfers-In 22,802 22,532 23,614 24,374 25,097 25,740 26,204 26,709 27,143 27,802 28,508 29,233 2.2% 1.0% BSR Contribution (One-Time) 9,670
Total Source of Funds $238,735 $247,421 $251,177 $261,671 $272,065 $282,203 $290,671 $302,477 $313,495 $325,552 $337,689 $351,101
TABLE 4: General Fund Revenue Forecast Year to Year Percentage Change Revenue & Other Sources
Actual
2022
Adopted
2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Sales Taxes -0.4% 2.2% 5.0% 6.1% 6.7% 4.4% 4.3% 4.7% 4.9% 4.9% 5.0% Property Taxes 0.7% 6.5% 5.7% 5.8% 5.9% 6.0% 5.8% 5.5% 5.7% 5.9% 6.2% Transient Occupancy Tax
General Purpose -4.0% 70.3% 5.7% 5.3% 3.1% 3.8% 4.1% 4.9% 5.0% 5.2% 5.3% Infrastructure 19.8% 8.6% 5.7% 5.3% 3.1% 3.8% 4.2% 4.9% 5.0% 5.2% 5.2% Documentary Transfer Tax -39.8% -4.8% 2.4% 2.4% 2.5% 2.6% 3.6% 3.9% 3.7% 3.6% 3.6% Utility Users Tax -0.1% 1.9% 6.9% 8.2% 4.2% -3.5% 11.0% 3.5% 3.4% 3.5% 3.5% Other Taxes and Fines 99.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Subtotal: Taxes -1.7% 8.4% 5.5% 5.8% 5.2% 4.0% 5.6% 4.9% 5.0% 5.2% 5.3% Charges for Services 5.6% 10.2% 0.9% 0.6% 0.3% 0.3% 0.5% 0.4% 0.5% 0.2% 0.4% Permits and Licenses 7.2% 17.3% 4.1% 1.9% 0.9% 1.6% 2.3% 2.2% 2.3% -1.2% 0.9% Return on Investments -19.6% 39.9% 2.4% 3.0% 3.0% 3.0% 3.8% 4.1% 4.2% 4.2% 4.2% Rental Income 13.8% 5.6% 5.2% 4.2% 3.3% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8% From Other Agencies -18.5% -83.0% -22.1% -73.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Charges to Other Funds -2.1% 5.6% 2.4% 1.2% 0.7% 2.0% 1.8% 1.9% 1.9% 0.4% 0.5% Other Revenue -10.1% 17.8% 0.9% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.7% 0.7% Total Non-Tax Revenue 2.1% 1.2% 2.2% 0.8% 1.2% 1.4% 1.6% 1.6% 1.6% 0.7% 1.1% Operating Transfers-In -1.2% 4.8% 3.2% 3.0% 2.6% 1.8% 1.9% 1.6% 2.4% 2.5% 2.5% BSR Contribution (One-Time) -100.0%
Total Source of Funds 3.6% 1.5% 4.2% 4.0% 3.7% 3.0% 4.1% 3.6% 3.8% 3.7% 4.0%
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TABLE 5: City of Palo Alto Major General Fund Revenues
Expense Assumptions
As part of developing the FY 2024 -2033 Forecast expenditure budget, the General Fund expense catego ries have been adjusted by removing FY 2023 Adopted Budget one -time expenses and updating major cost elements such as salary and benefits costs. The table below displays the expense forecast and when compared to the FY 2023 Adopted Budget, growth of
1.4% is expected in FY 2024. The small overall annual growth is due to the elimination of large one-time reserves in FY 2023 that offset the increase in expenses in other categories such as Salary and Benefits and Transfers to Infrastructure.
A summary of expen se assumptions are discussed here, extensive information regarding each expense category can be found in Attachment D.
- Salary and Benefits are projected to increase $11.3 million or 7.6% from the FY 2023 ($148.4 million to $159.7 million). This is primari ly attributable to increases in salaries ($6.1 million or 7.7%) and pension costs ($4.1 million or 10.5%). A general wage adjustment of 2.0% is included for all employees starting in either January 2023 or July 2023 for all years of the forecast since no M OA’s would be in effect at that time. A level of reserve to reach a target market placement for employee compensation in new labor agreements, as directed by the City Council is also assumed beginning in FY 2023.
- Long Term contributions to pension and oth er post -employment benefits and capital investments are being phased through the first three to five years of the forecast:
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o Pension 115 Trust contributions reflect City Council approved discount rate from
6.2% to 5.3% over two years; FY 2023 is a transitional year in which six months or the equivalent of approximately 5.8% is budgeted and the full transition in FY 2024 ($12.2 million ($7.2 million in the General Fund) in supplemental contributions is assumed in FY 2024).
o California Employers’ Retiree Benefi t Trust (CERBT) Fund for Retiree medical liabilities contributions reflect a 5.75% discount rate (6.25% assumption), and shortened amortization (from 22 to 15 years). Through FY 2023, it is expected that $8.0 million in supplemental principal contributions will be made to the CERBT Trust. The FY 2024 Budget estimates $16.4 million ($10.5 million in the General Fund) for ADC, an approximate $0.5 million or 2.9% increase from FY 2023 levels of $15.9 million ($9.9 million in the General Fund). o Capital Infrastructure transfers reflect the goal established as part of the 2022 - 2026 Capital Improvement Plan (CIP) to restore the base portion of this transfer to pre -pandemic levels by FY 2026. As the local economy continues to recover from the COVID-19 pandemic, estimated transfers from TOT revenues in FY 2024 are currently projected to increase to $10.5 million and the base transfer to increase to $10.8 million for a total $21.3 million transfer to the Capital Improvement Fund.
- Inflationary assumptions in this long range reflect the record inflation being seen at present, in FY 2024 and F Y 2025, a 5% annual inflation is assumed, while in the outer years FY 2026 ongoing it is brought to the historical average of 3%.
- Previously committed investments are included in th is forecast including but not limited to the continuation of the two year restoration of key services as adopted in the FY 2023 Budget. These services are assumed to be ongoing in this forecast in alignment with the expected voter approval of measure L an d affirmation of current revenues to the General Fund. This LRFF includes the City’s committed investment of $7.0 million in operating expenses for the partnership with LifeMoves and Project Homekey site services ($1.0 million annually which started in FY 2023 and is programmed through FY 2029).
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TABLE 6: General Fund Expense Forecast and Year to Year Percentage Change Expenditures & Other Uses
Actual
2022
Adopted
2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
CAGR
10 Years
CAGR 5
Years
Salary 71,145 79,732 85,869 90,166 92,806 95,320 97,394 99,341 101,269 103,198 105,127 107,056 3.0% 1.3% Benefits 61,531 68,636 73,780 77,229 79,099 80,111 82,477 86,269 87,134 88,371 87,251 87,425 2.4% 1.1% Subtotal: Salary & Benefits 132,676 148,368 159,649 167,395 171,905 175,431 179,871 185,610 188,403 191,569 192,378 194,481 2.7% 1.2% Contract Services 20,844 24,194 23,921 25,375 25,863 26,555 27,106 27,931 28,461 29,330 29,834 30,688 2.4% 1.3% Supplies & Material 2,508 3,205 3,270 3,426 3,519 3,612 3,705 3,798 3,891 3,984 4,077 4,170 2.7% 1.3% General Expense 3,174 21,765 8,561 8,745 8,835 8,938 9,042 9,161 8,252 8,357 8,463 8,576 -8.9% 0.5% Rents & Leases 453 1,333 1,368 1,405 1,443 1,482 1,522 1,564 1,606 1,649 1,694 1,741 2.7% 1.1% Facilities & Equipment 538 480 450 471 484 497 510 523 536 549 562 575 1.8% 1.3% Allocated Charges 19,647 22,714 24,744 25,741 26,454 27,121 27,860 28,623 29,403 30,227 31,072 31,939 3.5% 1.2% Total Non Sal/Ben Before Transfers 47,164 73,691 62,314 65,163 66,598 68,205 69,746 71,600 72,149 74,097 75,701 77,689 0.5% 1.1% Operating Transfers-Out 5,498 4,962 4,643 4,745 4,854 4,959 5,072 5,188 5,302 5,423 5,547 5,699 1.4% 0.9% Transfer to Infrastructure - Base 4,506 10,673 13,640 16,607 19,575 20,009 20,523 21,053 21,599 22,161 22,740 23,336 8.1% 4.2% Transfer to Infrastructure - TOT 8,118 9,727 10,567 11,173 11,762 12,121 12,583 13,106 13,744 14,435 15,190 15,987 5.1% 1.8% Total Use of Funds 197,963 247,421 250,814 265,083 274,694 280,726 287,794 296,558 301,197 307,685 311,557 317,193 2.5% 1.4% Expenditures & Other Uses
Actual
2022
Adopted
2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Salary 12.1% 7.7% 5.0% 2.9% 2.7% 2.2% 2.0% 1.9% 1.9% 1.9% 1.8% Benefits 11.5% 7.5% 4.7% 2.4% 1.3% 3.0% 4.6% 1.0% 1.4% -1.3% 0.2% Subtotal: Salary & Benefits 11.8% 7.6% 4.9% 2.7% 2.1% 2.5% 3.2% 1.5% 1.7% 0.4% 1.1% Contract Services 16.1% -1.1% 6.1% 1.9% 2.7% 2.1% 3.0% 1.9% 3.1% 1.7% 2.9% Supplies & Material 27.8% 2.0% 4.8% 2.7% 2.6% 2.6% 2.5% 2.4% 2.4% 2.3% 2.3% General Expense 585.8% -60.7% 2.2% 1.0% 1.2% 1.2% 1.3% -9.9% 1.3% 1.3% 1.3% Rents & Leases 194.1% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7% 2.8% Facilities & Equipment -10.7% -6.2% 4.7% 2.8% 2.7% 2.6% 2.5% 2.5% 2.4% 2.4% 2.3% Allocated Charges 15.6% 8.9% 4.0% 2.8% 2.5% 2.7% 2.7% 2.7% 2.8% 2.8% 2.8% Total Non Sal/Ben Before Transfers 56.2% -15.4% 4.6% 2.2% 2.4% 2.3% 2.7% 0.8% 2.7% 2.2% 2.6% Operating Transfers-Out -9.7% -6.4% 2.2% 2.3% 2.2% 2.3% 2.3% 2.2% 2.3% 2.3% 2.7% Transfer to Infrastructure - Base 136.8% 27.8% 21.8% 17.9% 2.2% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% Transfer to Infrastructure - TOT 19.8% 8.6% 5.7% 5.3% 3.1% 3.8% 4.2% 4.9% 5.0% 5.2% 5.2% Total Use of Funds 25.0% 1.4% 5.7% 3.6% 2.2% 2.5% 3.0% 1.6% 2.2% 1.3% 1.8%
Budget Stabilization Reserve
The City's Budget Stabilization Reserve (BSR) serves as the primary General Fund reserve. By policy, the BSR is maintained in the range of 15 to 20% of General Fund operating expenditures, with a target of 18.5%. Any reduction to the reserve below 15% requires City Council approval.
At the discretion of the City Manager, any BSR balance above 18.5% may be tran sferred to the Infrastructure Reserve (IR) in the Capital Improvement Fund, and/or the City's Section 115 Pension Trust Fund, as outlined in the Pension Funding Policy. The BSR is used to fund unanticipated one -time costs as opposed to ongoing or recurring operating expenditures; ongoing revenue or expense trends are updated as part of the annual budget process to adjust ongoing needs. The City's intent is to fund ongoing programs and services with ongoing dollars.
Maintaining the BSR at 18.5% also provides flexibility for the City to deal with unforeseen issues that may arise. Furthermore, establishing, and following, sound fiscal reserve policies has been a strong factor in the City being rated AAA by rating agencies.
Based on information reported in the FY 2022 Annual Comprehensive Financial Report (ACFR) CMR 146322, the City’s current BSR balance is $59.8 million, approximately $14.2 million above the 18.5% target of $45.6 million for FY 2023. Micro and macro -economic conditions are adjusting daily, with rising inflation, changes in jobs, and recessionary trends creating significant uncertainty. As the State of California Legislative Analyst Office (LAO) wrote in their annual Fiscal Outlooks for California “Economic Conditions Weigh on Revenues, [the] bo oming
2 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance- committee/2022/20221129/20221129pfcsm-linked.pdf
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economy has led to high inflation…efforts to tame inflation are slowing the economy…inflation pressures remain, raising risk of recession…fiscal outlooks revenues balance competing risks. 3” As shown in the table below, there are recommended adjustmen ts in line with the City Manager’s authority for transfer of excess BSR, adjusted for a recommendation to reserve funds to safeguard the stability the City has strived to achieve in the recent year by re - establishing an economic uncertainty reserve. Staff anticipates returning to Council in February 2023 with the FY 2023 Mid -Year Review and recommendations in alignment with the allocation below for the appropriation of BSR funds above the 18.5% level. Staff do recommend a transfer to the Infrastructure Rese rve as inflationary costs are impacting capital project needs including anticipated significant price increases in the Automated Parking Guidance Project, as well as a need to provide safety improvements to critical assets such as the artificial turf playi ng fields.
These actions will leave the BSR at $45.8 million or $0.2 million above the 18.5% Council recommended level.
TABLE 7: Budget Stabilization Reserve (BSR) Summary (in millions) General Fund BSR Balance, June 30, 2022 $72,835
FY 2023 Approved Adjustments to the BSR Balance
FY 2023 Adopted Budget ($9,072)
FY 2023 Services Reinvestment ($3,700)
Downtown Streets Team (CMR 14526) ($167)
Reappropriations (CMR 14728) ($100)
Subtotal: Approved Adjustments to the BSR Balance ($13,039)
Subtotal: BSR Balance, After Approved Adjustments $59,796
Uses of the FY 2022 Surplus
FY 2023 RECOMMENDED Adjustments to the BSR Balance
(to be considered in FY 2023 Mid-Year Budget Review)
Reserve for Economic Uncertainty ($5,000)
Transfer to Section 115 Pension Trust Fund ($5,000)
Transfer to Infrastructure Reserve (IR) in the Capital Improvement Fund
($4,000)
Subtotal: RECOMMENDED Adjustments to the BSR Balance ($14,000)
Current Projected FY 2022 BSR Level, (June 30, 2023) $45,796
This trend may continue as discussed in the First Quarter (Q1) FY 2023 Financial Report, scheduled for review by the Finance Committee on December 6, 2022, in which several categories appear to be exceeding budgeted levels in FY 2023 similar to FY 202 2 (CMR 14630).
3 The 2023-24 Budget California’s Fiscal Outlook, California Legislative Analyst’s Office (LAO), November 16, 2022, https://lao.ca.gov/Publications/Report/4646
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Although revenues have experienced growth in recent periods, the potential for recession makes it difficult to determine if these trends will continue in the near term. This LRFF assumes a mild 18-month recession at the beginning of the ten -year period and projects a range of $238 to $244 million in total revenues in FY 2023, reflecting up to $6 million or 2.5% above adopted budget levels. The higher end of this projection assumes that revenues will continue a similar positive trend as the su mmer period. Although staff may complete the 115 Pension Trust Fund and Infrastructure Reserve transfer, staff recommend waiting until more data is available on current trends to ensure staff and the Council are making an informed decision on how best to position the city to ensure stability during these uncertain times. Staff expect that one -time funding such as these will be critical to continue to mitigate impacts from a recession and bridge the near term gaps seen in the first few years of this LRFF.
Assumptions NOT Included in Forecast
It should be noted that this forecast does not include several potential impacts to the FY 2024 - 2033 LRFF that are outlined below. These items are known projects or areas of investment that are a priorities, but have not been fully developed in terms of costs and timelines. This is not intended to be a comprehensive list nor in any priority order.
Project Homekey: On September 27, 2021 the City Council directed staff to apply for Project Homekey funding in conjunction w ith LifeMoves to build an emergency shelter at the former Los Altos Treatment Plant (LATP) site (CMR 13595 4). This project will rapidly deploy modular housing to provide interim housing opportunities for homeless individuals and families in the City of Pa lo Alto. The grant was awarded in Summer 2022 and the City is currently in negotiations with local partners on operational roles to leverage local expertise and ensure high quality services. This LRFF includes the City’s committed investment of $7.0 millio n in operating expenses ($1.0 million annually which started in FY 2023 and is programmed through FY 2029); however, with the actual timing of the funding still to be determined, and commitments from other local partners negotiated, City costs for this pro ject could fluctuate throughout the ten year period.
Sustainability and Climate Action Plan (S/CAP): In early 2020, the City launched an update of the Sustainability and Climate Action Plan (S/CAP) Framework to determine the goals and key actions needed to meet its sustainability goals, including the goal of reducing greenhouse gas (GHG) emissions to 80 percent below 1990 levels by 2030 (the “80x30” goal). As part of the FY 2022 Mid -Year Review (CMR 13801 5) and the 2023 Adopted Operating Budget 6, Council approved several actions to increase resources to support S/CAP needs. In October 2022 (CMR
4 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-council- agendas-minutes/2021/09-september/20210927/210927accsm-amended-final.pdf 5 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-council- agendas-minutes/2022/20220207/20220207pccsm-revised-final.pdf 6 https://www.cityofpaloalto.org/files/assets/public/administrative-services/city-budgets/fy2023-city- budget/adopted-fy23/operating-budget_final-4.pdf
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147207), City Council accepted the updated S/CAP Goals and Key Actions and adopted a goal to make the City carbon neutral by 2030. Staff commenced California Envir onmental Quality Act (CEQA) evaluation of the S/CAP upon Council’s acceptance of the proposed S/CAP Goals and Key Actions. The City is currently in the process of finalizing the Three -Year Work Plan, which will be brought to Council for review and discussi on in December 2022. The final S/CAP Report will be brought to Council for acceptance in Spring 2023. As the S/CAP Work Plan and final report are still in development, cost projections are not yet contemplated in the forecast.
Implementation is anticipated to require significant resources, including internal staffing and consultant expertise.
Service reductions not restored to pre-pandemic levels:
The City made significant service reductions in FY 2021 and FY 2022 Adopted Budgets to align expenses with lo sses of nearly $40 million in General Fund tax revenues due to economic impacts resulting from the COVID -19 pandemic. During this time, many services were reduced or eliminated across the organization and essential services were prioritized. Ultimately, th e City’s General Fund workforce was reduced by 83 full -time staffing positions (76.50 FTE) and 107 part -time positions (26.18 FTE). In FY 2022, the City began to see gradual signs of improvement and a positive economic outlook that supported initial reinve stments in the first quarter (Q1) FY 2022 financial report (CMR 13439 8), FY 2022 Mid -Year Budget Review (CMR 138019), and the Staffing for Adequate Fire and Emergency Response (SAFER) grant (CMR 1364310). Further reinvestments were made in the FY 2023 Adopt ed Budget 11 to restore services that were previously reduced and provide resources to support priority initiatives. In total, full -time staffing levels have increased by 61.85 FTE, from the pandemic low of 956.00 FTE to 1,017.85 FTE. This level of staffing remains below pre -pandemic levels of 1,034.85 FTE.
As of this LRFF, some services remain below pre -pandemic levels or have new and evolving changes to meet community needs. These services will continue to be evaluated and proposals brought forward in future budget processes for City Council consideration.
Significant code and ordinance updates: Updates to several significant programs, codes and ordinances are expected to be necessary in the near future; some of these updates include:
Seismic Inventory Ordi nance and Program Development, Historic Building Survey and Ordinance Development, and Zoning Code Updates. Depending on future Council direction, program implementation is anticipated to require significant resources, including internal staff and outside consultant expertise.
7 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-council- agendas-minutes/2022/20221003/20221003accsm-amended-presentations.pdf 8 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-council- agendas-minutes/2021/10-october/20211025/20211025pccsm-linked-w-times.pdf 9 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-council- agendas-minutes/2022/20220207/20220207pccsm-revised-final.pdf 10 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-council- agendas-minutes/2021/11-november/20211101pccs-amended.pdf 11 https://www.cityofpaloalto.org/files/assets/public/administrative-services/city-budgets/fy2023-city- budget/adopted-fy23/operating-budget_final-4.pdf
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Fee and Organizational Studies: The Planning and Development Services (PDS) Department is in the process of completing two studies, a fee study and an organizational study on the Fire Prevention group. The purpose of the fee study is to align fees and revenues based on the updated department structure to continue to meet Council approved cost recovery levels.
Ahead of the completion of the Department -wide study, an organizational study of the Fire Prevention program will be completed t o inform the fee study. Because the Fire Prevention Program is currently housed in both the Fire and Planning and Development Services departments, recommendations may be made to realign the program and resources. The Library Department is also in the process of completing an organization study to assess staffing, resource, and service levels with the goal of increasing open hours and providing additional services to the community. Lastly, a citywide fee study needs to be completed periodically by an outsid e consultant to ensure the City’s fees are in line with its cost recovery policies. This study will be scheduled to be completed by FY 2024 and could update fees and associated revenue assumptions in future year LRFF reports.
Labor negotiations: As of the timing of this report, all labor agreements are scheduled to expire on December 31, 2022, with the exception of the Service Employees International Union Hourly Unit (SEIU-H) agreement, which is extended through June 30, 2023. A general wage adjustment of 2.0% is included for all years of the forecast since no agreements would be in effect at that time. This is consistent with prior Council direction in previous long range financial forecasts to use the 2.0% increase as a forecasting assumption, not as a commitment to future negotiations.
Additionally, this forecast includes a level of reserve to reach a target market placement for employee compensation in new labor agreements, as directed by the City Council. Staff expects to adjust these costs throughout the budget development process in accordance with market studies and final contract terms.
Capital Infrastructure Plan: As referenced earlier, the June 2014 Council approved Infrastructure Plan of $125.8 million in projects was based on construction and d esign costs with data from 2012. As construction costs have increased and the City is required to pay prevailing wages, the Infrastructure Plan’s funding status has shifted. The FY 2023 Adopted Capital Budget anticipated that these projects would cost $261 .8 million. Staff is working to maintain these projects within the current budget; however, project costs can fluctuate based on market conditions at the time of construction award.
Grade Separation: The grade separation project consists of the four at-grade crossings along the Caltrain corridor in the City of Palo Alto located at Palo Alto Avenue, Churchill Drive, Meadow Avenue, and Charleston Road. The City is working on conceptual alternative plans for the selection of the preferred alternative at Churc hill Avenue, Meadow Drive, and Charleston Avenue crossings. In November of 2021, after performing a detailed review of the alternative plans under consideration, Council selected the Partial Underpass Alternative as the preferred alternative and designated Closure with Mitigation as a backup alternative for the Churchill Avenue crossing. Council also directed staff to conduct additional studies and to refine underpass alternatives by seeking input from stakeholders (Pedestrian and Bicycle Advisory Item AA2
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Committee, Palo Alto Unified School District, and Stanford University). Such input could further assist in narrowing down grade separation alternatives. On May 23, 2022 (CMR 14341 12), the City Council authorized an amendment to the consultant contract for performing these additional tasks
Once preferred alternatives are selected, the next phase will include preparing preliminary engineering and environmental documents for the three crossings. The Valley Transportation Authority (VTA) 2016 Measure B Caltrain Grade S eparation funding is available to the City for additional studies and the next phases of the project which include preliminary engineering and environmental review, right-of-way, design, and construction. In addition to this, on August 10, 2022 (Supplement al Memorandum AA1 13) the City Council adopted advisory spending guidelines stating its intention to expend a portion of the revenues from Measure K on the rail grade separation project.
The 2016 Measure B program tax revenue amounts to a total of $700 mil lion in 2017 dollars for all at-grade crossings in Santa Clara County, and the City anticipates allocation of 50% of said funding. The VTA is currently programming these funds in two -year increments. Grade Separation 2016 Measure B funding requires matchin g local funds as a result, additional funding sources will need to be identified to perform this work in upcoming years (FY 2024 – FY 2033). The full funding needed to complete the grade crossings project is unknown at this time; however, it is expected, t hat funding necessary to complete this work will exceed funding currently identified for this project. Therefore, additional resources will need to be explored to plan and fund these grade separations, including City staff pursuing additional funding throu gh grant opportunities as they become available.
Parks Master Plan: The Parks Master Plan 14 was finalized in 2017; however, when approved it identified a need to develop a funding strategy and this is still in process. As such, this forecast does not yet contemplate the necessary investments to fully execute this plan.
Racial Equity Work: The Race & Equity Framework and action plan was approved in June 2020 (CMR 1144115) and remaining funding of $0.5 million has been reappropriated to be available in FY 2023. Staff is in the process of procuring consultants to assist with the City’s diversity, equity, and inclusion efforts in engaging staff, the City Council, and Boards/Commissions. After this initial work, further recommendations are anticipated to be for thcoming and will likely require additional resources either for more consultant assistance and/or an ongoing in -house Equity Officer position (discussed during the 2020 Ad Hoc Committee meetings). These
12 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-council- agendas-minutes/2022/20220523/20220523pccsm-revised.pdf 13 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/at-places- memo/20220810apmccsm.pdf
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recommendations are anticipated to be brought forwar d in FY 2023 or as part of the FY 2024 budget process.
Palo Alto Animal Shelter operations and rebuild
In early 2019, the City entered into a public private partnership with Pets In Need (PIN) to support the operation of the City’s animal shelter. Part of PIN’s operating proposal included robust fundraising to rebuild the current shelter into a state -of-the-art animal shelter for the City, with costs shared between the City and PIN. Since the initial agreement, PIN has indicated that additional constructio n projects are required, which will increase capital project costs significantly. Preliminary estimates are $3.0 to $4.0 million over existing commitments, and no funding is identified for these costs. The City and PIN both have an interest in continuing t he partnership and on February 14, 2022 City Council directed staff to proceed with negotiations to update the service agreement (CMR 1395216).
City owned assets operated by non -profit organizations: This Forecast does not include any additional capital or operating investments for the Avenidas Senior Center, the Ventura Child Care Center, nor the Sea Scout Building. As costs around potential capital or operating investments for these assets solidify, staff will return to City Council to address them as appropriate. As part of the FY 2023 Adopted Capital Budget 17 the City Council established the Roth Building Rehabilitation Phase 1 capital project (PF -23001) directed a funding strategy for the Roth Building Rehabilitation Project, which consists of utilizing $5.4 million from a variety of funding sources including the Stanford University Medical Center (SUMC) Fund; library, parks, and community center impact fees; grants from Santa Clara County; and donations from the Palo Alto Museum. This funding strategy is included in the LRFF; however, if costs for rehabilitating the Roth building increase, additional sources of funding would need to be identified.
Cubberley Community Center Concept Plan: The City and PAUSD completed a co -design process for a Cubberley C ommunity Center Concept Plan in 2019; however, costs to implement the concept plan are not assumed in this LRFF in excess of the dedicated Cubberley infrastructure funding included in the existing agreement between the PAUSD and the City (discussed in the Transfer to Infrastructure section of this report). The Concept Plan may require revision before implementation as operational changes have occurred since its completion including execution of a new lease between the City and PAUSD for the school district owned portion of Cubberley, which commenced on July 1, 2020, and reduced the amount of building space leased to the City (discussed in the General Expense - Cubberley Lease section of this report) . On February 14, 2022 the Council directed Staff to pause p reparation of the Cubberley Concept Plan CEQA and return with a work plan to include: i. exploring a land swap at Fletcher or financial framework for acquiring available land; and ii. scoping the design process for Cubberley Community Center
16 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-council- agendas-minutes/2022/20220214/20220214pccsm-amended-linked-final.pdf 17 https://www.cityofpaloalto.org/files/assets/public/administrative-services/city-budgets/fy2023-city- budget/adopted-fy23/capital-budget_final-4-online-version.pdf Item AA2
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that is City o wned once the acreage is determined. Staff is communicating with PAUSD on the potential to acquire additional land at Cubberley, including acreage amount. This could be through a land swap, acquisition, or ground lease. Staff is also determining next steps for repair of Cubberley Gyms A and B, which have been closed since February 2022 due to damage caused by water line breaks.
Loans for special projects: From time to time the City’s General Fund will assist other City operations with modest cash flow loan s to bridge fiscal years. For example, the City provided over $3 million in loans to the Airport Fund as it worked to secure significant grant funding from the Federal Aviation Administration (FAA) for capital improvement costs. As of FY 2020, the Airport Fund began paying back the loan to the General Fund. Additions and other initiatives funded in other funds may need financial support from the General Fund to ensure they are fully implemented. In FY 2023 the Residential Preferential Parking (RPP) Fund rec eived a one - time $0.4 million General Fund loan to remain solvent while continuing operations given the sustained drop in parking demand during the pandemic. Additional loans from the General Fund are not assumed in this forecast.
Legislative Updates: Various actions at the state and federal level that could impact the City of Palo Alto have not been incorporated into this forecast due to the changing context and uncertainty of the quantitative impacts of potential legislative changes. As the potential impacts of various legislative initiatives are clarified, appropriate adjustments will be identified and brought forward as part of future budget development cycles.
Tax revenue alignment with updated Comprehensive Plan: The 2030 Comprehensive Plan was adopted in FY 2018, including the potential fiscal impact of various land use scenarios. The fiscal impact of this plan and various land use scenarios are not factored into this forecast.
Aging or Noncompliant Infrastructure: The City maintains indoor and outdoor facilities, many of which have been identified in the City’s ADA transition plan and by the Infrastructure Blue Ribbon Commission as requiring capital project work to bring them up to full ADA compliance and/or sufficient conditions. Facilities of con cern include Cubberley Community Center, Foothills Park Restrooms, Lucie Stern Community Theatre restrooms, and Rinconada Pool locker rooms. Staff continues to program work needed in this area as part of the Americans with Disabilities Act Compliance capit al project (PF -93009); however, the entire scope of work needed in this area exceeds current resources.
Parks Trash Removal: The City currently does not have weekend trash removal services at most urban parks. Prior to the COVID-19 pandemic, Rinconada and Mitchell Parks had weekend trash removal, because those parks had picnic tables that could be reserved by residents. Staff have noted that garbage cans can become overfilled on the weekends and are looking into how to fund and operationalize adjustments t o mitigate this issue. Possible solutions under consideration include an increase in collection frequency, enhanced signage, and educational Item AA2
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materials on waste reduction options such as reusable picnicware. Staff will bring forward needs for reinvestment in this area in FY 2023 or as part of the FY 2024 budget process.
Permanent Parklet Program: On June 23, 2020 the City Council adopted an emergency ordinance to temporarily permit businesses to operate outdoors on both public and private property, referred to as the pilot parklet program (CMR 11439 18). On April 19, 2021 the Council directed staff to develop a permanent parklet program (CMR 12041 19). The current pilot program was extended most recently on October 24, 2022 (CMR 14692 20) to extend the temporary p arklet program to June 30, 2023 and allow the other on -street and parking lot dining and retail programs through December 31, 2023. Staff are developing a permanent program which will include staffing and maintenance resources funded by new municipal fees and associated revenues. This program is anticipated to be brought forward for Council consideration in December 2022 and resources adjusted in FY 2023 or as part of the FY 2024 budget process.
General Liability Umbrella Excess Premiums: The City’s Gener al Liability Program provides funding to cover various insurance policies for City -owned equipment and machinery. The City is self -insured for the first $1.0 million in losses per occurrence and participates in a Joint Powers Authority for coverage up to $ 55 million per occurrence. These expenses are allocated to citywide departments. General Liability Umbrella Excess Premiums are anticipated to increase in future years due to significant national events and natural disasters such as claim costs for Hurrica ne Ian. Staff will bring forward adjustments for these costs as part of future budget cycles as they become available.
Fire Training Center: As part of the FY 2023 Adopted Capital Budget 21 the City Council approved the Fire Training Facility Replacement ca pital project (FD-24000) to identify an appropriate site and construct a new fire training facility in Palo Alto. Funding was only appropriated for the feasibility study portion of the project, and additional resources will need to be appropriated in future budget cycles based on the results of the study. In addition, the Fire Department is also evaluating opportunities to partner with other local jurisdictions for training needs, instead of building a permanent facility in Palo Alto.
FY 2023 Budget Development Guidelines
When the Fiscal Sustainability Workplan (CMR 10267 22) was approved by the City Council on April 22, 2019 drafting a budget development policy was listed as part of the “Newly proposed
18 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city-manager-reports- cmrs/year-archive/2020/id-11439.pdf
19 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city-manager-reports- cmrs/year-archive/2021/id-12041.pdf
20 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-council- agendas-minutes/2022/20221024/20221024pccsm-amended.pdf 21 https://www.cityofpaloalto.org/files/assets/public/administrative-services/city-budgets/fy2023-city- budget/adopted-fy23/capital-budget_final-4-online-version.pdf 22 https://www.cityofpaloalto.org/civicax/filebank/documents/70506 Item AA2
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or potential activities proposed to be completed”. The i nclusion of Budget Development Guidelines in with this forecast represents staff’s recommended method of addressing this referral. Pairing Budget Development Guidelines with the forecast at the beginning of the budget process links the anticipated fiscal c ondition of the organization with the necessary context regarding service delivery prioritization and resource allocation that will be further explored through the process. This also ensures that the City is able to proactively address anticipated changes in its fiscal condition through the budget process.
As discussed earlier in this document, this preliminary forecast represents the initial steps of the FY 2024 budget development process. Due to the clear overlap of projecting the City’s fiscal condition and the need to shape service level expectations, staff recommends that the inclusion of Budget Development Guidelines be incorporated into the discussions at the beginning of an annual budget process. The FY 2024 Budget Development Guidelines, which are detailed in Attachment A, are meant to reflect the anticipated fiscal condition of the City and to provide high-level budgetary direction to the organization. These guidelines will shape and inform the annual financial planning and the allocation of resour ces across the organization, especially in the General Fund.
Conclusion
This forecast maintains current service levels approved in FY 2023 and should be used for planning purposes to assist in gauging effects of major policy interventions against a likely “status quo” version of the future. The level of uncertainty in this forecast is reduced from where it was a year ago in terms of impacts from the COVID -19 Pandemic; however, the City is continuing to manage through current economic uncertainty and evalua ting potential impacts on the local economy. Positive trends in major tax revenue categories that occurred in FY 2022 caused a one -time surplus of $14.2 million that Staff anticipates returning to Council in February 2023 with the FY 2023 Mid -Year Review and recommendations in alignment with the allocation for the appropriation of BSR funds above the 18.5% level. This includes transfers to the Infrastructure Reserve (IR) in the Capital Improvement Fund ($4.0 million) and the City's Section 115 Pension Trust Fund ($5.0 million), as outlined in the Pension Funding Policy, and a recommendation to reserve funds to safeguard the stability the City has strived to achieve in the recent year by re -establishing an economic uncertainty reserve ($5.0 million). Although revenues have experienced growth in recent periods, the potential for recession makes it difficult to determine if these trends will continue in the near term.
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The LRFF Base Case assumes a mild 18 -month recession at the beginning of the ten -year period in which revenue growth is anticipated to slow through the end of FY 2024. As a result, the LRFF projects a surplus of $0.4 million in FY 2024, followed by a $3.4 million gap in FY 2025, and a $2.6 million gap in FY 2026, with small but increasing surpluses in FY 2027 through FY 2033.
Additionally, this LRFF projects a range of $238 to $244 million in total revenues in FY 2023, reflecting up to $6 million or 2.5% above adopted budget levels. The higher end of this projection assumes that revenues will contin ue a similar positive trend as recent quarters.
However, actual results will vary depending on the timing and magnitude of recessionary impacts in the near term. If these additional revenues continue to materialize in FY 2023, Staff anticipates returning to Council as part of the FY 2023 Mid -Year Budget Review to recommend using this funding to increase the economic uncertainty reserve to help mitigate impacts from a recession as well as smooth the near-term gaps seen in the first few years of this LRFF.
In addition to the Base Case Forecast, staff modeled an alternate forecast scenarios that are discussed below. The first alternative reflects a more severe recession compared to the Base Case and increases the General Fund gap over the next ten years. FY 202 4 changes from a surplus to a gap of $3.5 million, and revenues are not anticipated to be able to fund the annual expenditures until FY 2029. Staff also modeled an alternate forecast that reflects estimated funding from Measure K and the impacts on the Gen eral Fund over the next ten years. The surplus in FY 2024 increases to $1.1 million, the gap in FY 2025 reduces to $1.9 million, and FY 2026 changes from a gap to a small surplus. These alternate forecasts were done separately to show the impacts of each s cenario in isolation; however, aspects of both alternate forecasts may occur in conjunction in the future.
Alternative Scenarios for Consideration
Alternative Forecast Scenario A: Moderate Recession
This alternative forecast models the impact of a moderat e recession that assumes slower growth of major tax revenues as compared to the base case. In this alternative, the range for excess revenues in FY 2023 is reduced from an upper estimate of $6 million to $3 million.
Additionally, growth rates in FY 2024 an d beyond are slowed, reducing net earnings by approximately $4 to $6 million in the forecast and extending the timeframe to recover to pre - pandemic levels by one to three years. The summary table for this alternative forecast and the Net Operating Margin g raph for this alternative forecast are below. Additional discussion for this alternative follows these figures.
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TABLE 8: FY 2024 – FY 2033 Long Range Financial Forecast Alternative Forecast A
TABLE 9: FY 2024 –2033 Long Range Financial Forecast Net Operating Margin Alternative Forecast A
The Base Case projected that by FY 2027, the City would begin to have a positive surplus; this alternative forecast extends the operating gap to FY 2029. In this alternative, the General Fund would have a gap of app roximately $3.5 million in the first year of the forecast. This gap increases to a peak of $7.2 million in FY 2025 and begins to taper in the two years following. FY 2029 is the first-year revenues would reach levels sufficient to support expenses.
Alternative Forecast B: Measure K Funding
This alternative forecast assumes the use of approximately 30 percent of revenues generated from Measure K to offset known eligible expenses that contribute to funding gaps in the base case. Measure K was presented on the November 8, 2022 ballot to establish a tax on businesses operating in Palo Alto. This measure levies a tax on businesses based on a monthly rate of 7.5 cents per square foot of occupancy, subject to exclusions, with initial payments due January 2024. For the first two years, the tax would be imposed at half the rate. The tax rate and cap would be increased by 2.5% annually to account for general inflation, beginning July 2026. The tax would terminate January 1, 2058, unless extended by voters. The propose d tax is estimated Item AA2
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to raise approximately $9.6 million each year for 35 years. The City Council has adopted advisory spending guidelines stating its intention to expend revenues on long -term stable funding for public safety, affordable housing and homeless services, and grade separated train crossings that maintain safety and mobility for vehicles, bicyclists, and pedestrians, and to annually report on tax revenues and expenditures. The summary table for this alternative forecast and the Net Operating Margi n graph for this alternative forecast are below. Additional discussion for this alternative follows these figures.
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TABLE 10: FY 2024 – FY 2033 Long Range Financial Forecast Alternative Forecast B
TABLE 11: FY 2024 – 2033 Long Range Financial Forecast Net Operating Margin Alternative Forecast B
In this alternative, the eligible funds for Measure K are phased -in over three years, in alignment with the anticipated implementation of the tax. As mentioned above, approximately 30 percent of the total ant icipated receipts are used to offset eligible costs. These additional resources result in a higher surplus of $1.1 million in FY 2024 as compared to the base case. Additionally, the gaps in forecast years are significantly reduced or eliminated. In this sc enario, the City has a one-time gap of $1.9 million in FY 2025 followed by continued surplus throughout the forecast.
STAKEHOLDER ENGAGEMENT
The preliminary forecast for FY 2024 represents the beginning of the fiscal year 2024 budget development process. Information provided in this report will be discussed with the City Council after Finance Committee and those conversations will provide direction to staff in the budget development process. It is anticipated that conversations with City Council and the Item AA2
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community will occur through public budget hearings in Spring 2023, according to the standard budget adoption process.
RESOURCE IMPACT
Financial implications from this report and input from the Finance Committee will be considered in the City Manager’s development of the Fiscal Year 2024 budget.
ENVIRONMENTAL IMPACT
This report is not a project for the purposes of the California Environmental Quality Act.
Environmental review is not required.
Attachments:
• Attachment A - FY 2024 Budget Policy Guidelines
• Attachment B - The Economy
• Attachment C - General Fund Base Case Revenue Assumptions • Attachment D - General Fund Base Case Expense Assumptions Item AA2
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Attachment A – FY 2024 Budget Development Guidelines
1) Develop a structurally balanced budget that brings ongoing revenues and expenses into alignment. Develop a plan for any structural imbalance to ensure that the City maintains fiscal sustainability over the short, medium, and long-term.
2) Allocate one -time resources for one -time needs rather than committing one -time resources to ongoing services. Examine appropriate uses of revenue surpluses that exceed forecasted levels such as planning for recession needs, restoration needs, and strategic investments.
3) Ensure appropriate resource allocation for City Council’s existing priorities.
4) Focus on business process redesign to enhance quality, flexibility, and cost- effectiveness of service delivery (include examining opportunities to streamline, simplify, reorganize, and reallocate resources to avoid duplication of effort).
5) Explore alternative service delivery models (such as partnerships with non -profits or other public/private sector groups) to minimize overlap, maximize cost share, and effectively use resources.
6) Continue to thoroughly analyze non- personnel/equipment/other costs, such as contract services, for cost savings opportunities or realignment with current needs.
7) Explore the expansion of existing revenue sources or the addition of new revenue sources, including the alignment of existing charges for services and the opportunity to establish new fees, when appropriate.
8) Continue to analyze and prioritize resource augmentations, seeking to offset augmentations with reductions elsewhere for net- zero impacts to the budget whenever possible; however, ensuring when resource augmentations are added, it is in alignment with one-time and ongoing forecasted sources.
9) Continue to prioritize proactively funding long term liabilities including but not limited to debt obligations, pension obligations, and capital infrastructure in accordance with City policies as approved by Council.
FY 2024 Budget Development Guidelines
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ATTACHMENT B
The Economy
The economy closed 2021 with GDP growing 6.9% by the end of this calendar year with inflation increasing, year-over-year by 7%, a level not seen since the early 1980s. As of October 2022, the consumer price index (CPI) was below 8%. The unemployment rate at the end of 2021 was 3.9% which was down from 6.4% at the beginning of this year. At the pandemic peak, unemployment rate was at 14.7% when significant portions of the economy were shut down. The GDP growth in 2022 is expected to be below 3% then drop to low 2% in 2023. The unemployment rate hovers around the mid 3% but is likely to go up as the economy cools down. The above outlook is predicated on the federal reserve achieving a “soft landing” whereby there’s a slowdown in economic growth that avoids recession for the purpose of stopping the economy from overheating and continue to experience high inflation.
The local economy continues to show strong performance in the latter half of the calendar year 2022 though signs of “headwinds” are growing that are likely to stem economic growth. The UCLA Anderson Forecast for California paints a generally positive picture for the state as compared to national economic concerns, citing continued gains in gross domestic product. The outlook reports that increases in defense spending and the continued demand for tech will likely keep the economy growing, albeit at a slower pace. The outlook is that the world has become more unstable so the expectation is that federal defense spending over the next few years will increase.
There have been broad-based hiring with leisure and hospitality, health care and social services, and technology. However, the “mixed -signals” in economic data and headline news such as technology sector layoffs are a concerning trend and a potential early indicator of an economic slowdown. Another concerning trend, which California and the local economy are sensitive to, is that the world economy seems to be worse than the U.S. With U.S. rising interest rates and global instability, investors have been putting their money in the U.S. causing the dollar to rise against other currencies. This causes U.S. exports to be more expensive around the world. The growing home inventory, higher mortgage rates, and low and diminishi ng affordability are expected to negatively impact the national and local housing market though demand for Palo Alto housing has always been and is expected to remain strong.
According to the US Bureau of Economic Analysis (BEA), the “advance” estimate of the U.S. economy’s real gross domestic product (GDP) percentage change, from the preceding quarter, changed in the second and third (calendar) quarters of 2022 by a decline of .06% and an increase of 2.6%, respectively. Real GDP is an inflation -adjusted measure that reflects the value of all goods and services produced by an economy in a given year. According to the BEA, in the third quarter the increase in real GDP reflected increases in exports, consumer spending, nonresidential fixed investment, federal government spending, and state and local government spending, that were partly offset by decreases in residential fixed investment and private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.
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Table 1: National Gross Domestic Product (GDP)
The national Consumer Price Index (CPI), as of the second calendar quarter peaked at 8.6% and is expected to steadily decline in the coming quarters. In the third quarter, actuals in July, September and October 2022 were 8.2%, 8.2% and 7.7%. This is slightly better than shown in the Table 2 third quarter forecast of 8.3% which bodes well for the forecasted declining trend.
Table 2: National Consumer Price Index
The nation’s unemployment rate is 3.7% as of October 2022, compared to a record high of 14.7% at the height of the pandemic in April 2020. It is expected, by the U.S. Bureau of Labor Statistics, that the unemployment rate will rise due to the Federal Open Market Committee (FOMC or aka federal reserve) raising the f ederal funds (interest) rate in order to bring down the elevated inflation rate. Per the State of California's Employment Development Department, the state’s unemployment rate as of September 2022 is 4.1% with the prior year being 7% and the County of Santa Clara is 2.3%. Nationally, the improved unemployment rates are driven by job gains in the leisure and hospitality; trade, transportation and utilities; professional and business services; education and health services; manufacturing, and construction. Hi storically, the Bay Area job Item AA2
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growth has been led by the Peninsula for the past several years. The unemployment rate for the San Francisco Peninsula was also in the low 2%.
Table 3: U.S. Unemployment Rate
The high inflation rate has resulted in the continued erosion of purchasing power, however, this has not substantially deterred the U.S. consumer from spending. Real personal spending climbed 0.3% in September. This was driven by a 0.6% increase in services spending with goods spending declining by 0.1%, a tread reflected in the prior few months. As the pandemic restrictions have been removed, the trend reflects consumers are shifting their activity to services and away from goods. Though there’s net monthly solid growth, as reflected in the below graph, the year over year shows a slight decline
Table 4: Real Personal Spending Growth
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ATTACHMENT C
General Fund Base Case Revenue Assumptions
Sales Tax
Compared to FY 2019 pre-pandemic actuals of $36.5 million, sales tax revenue declined by $7.4 million, or 20.2%, during the pandemic in FY 2021. The recovery, which began in the last quarter of FY 2021, resulted in the FY 2022 receipts increasing by $3.6 million or 12.3%. Though this trend has continued in the first quarter of FY 2023, the rate of recovery is expected to decline. The general retail, food products (includes restaurants), business to business (includes car leasing), and transportation (includes auto sales) categories experienced significant increases. This economic trend also occurred in municipalities in the San Francisco Bay Area and in California.
These significant upward trends were partially offset by construction activity, which has been declining.
The FY 2023 Adopted Budget for Sales Tax is $32.6 million, a $0.1 million or 0.4% decline over FY 2022 actuals of $32.7 million. In FY 2024, this revenue is anticipated to increase to $33.3 million, a $0.7 million or 2.2% increase over the FY 2023 Adopted Budget. Revenue in this category is experiencing growth; however, is not anticipated to reach pre-pandemic levels until FY 2026. The Base Case assumes 4.3 to 6.7% growth over the length of the forecast.
TABLE 1: City of Palo Alto Sales Tax Revenues through FY 2033
Property Tax
Property tax revenue is the General Fund’s largest revenue source and represents approximately 25% of the total revenues. Historically, the 10 -year compound annual growth rate (CAGR) was
8.4% with a low of 3.1% in FY 2012 and a high of 11.5% in FY 2015. During economic downturns, impacts to property tax occur a year later, however, due to robust residential and commercial property sales and significant Educational Revenue Augmentation Fund (ERAF) growth, the FY 2022 actual growth was 4.9%. In addition, fiscal years 2019, 2020, 2021, and 2022 included receipts of $2.7 million, $3.9 million, $5.5 million, and $6.6 million, respectively, for excess ERAF Item AA2
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distributions from the County of Santa Clara. The FY 2022 budget included $4.9 million for excess ERAF, however, actual receipts were $6.6 million, or $1.7 million higher which is explained further below. ERAF is the fund used to collect and disburse property taxes that are shifted to/from cities, the County, and special districts prior to their reallocation to K -14 school agencies. When the state shifts more local property tax than required to support schools, these funds are returned and known as excess ERAF. As a result of the volatility of ERAF, it is not considered a p ermanent local revenue source.
In FY 2021, five counties including Santa Clara County, and the State were in a dispute over the calculation and disbursement of excess ERAF funds. In a claim by the State, calculations for excess ERAF incorrectly shifted t oo much property tax from schools to local agencies. The City set established a reserve for the potential litigation amounts that was later released to the Budget Stabilization Reserve (BSR) upon reaching a favorable resolution. In November 2021, the County of Santa Clara notified the cities that the California School Boards Association and its Education Legal Alliance filed a lawsuit against the Controller of the State of California arguing that the settlement reached with the counties is unlawful. The County estimates a range between 20 to 30% of Excess ERAF is at -risk. The FY 2023 Budget assumes 25% or $1.5 million for a potential loss starting in the current year and extending into forecast years. The FY 2022 amount at risk, $1.7 million, was sent to the City since the lawsuit wasn’t settled in FY 2022; these funds were recognized as property tax receipts in FY 2022 and are reserved, pending the settlement of the lawsuit. Staff will continue to monitor the status of this dispute and report on any signific ant developments.
Transfer of ownership has been a significant driver of past growth; however, that growth is expected to moderate in FY 2023 due to the expected economic slowdown and the higher mortgage rate. For example, the median sales price of single family residential in the fourth (fiscal year) quarter of FY 2022 declined by 5.3% over the prior quarter.
TABLE 2: City of Palo Alto Property Tax Actuals and Forecast through FY 2033
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The FY 2023 Adopted Budget for Property Tax is $59.8 million, a $0.4 million or 0.7% increase over the FY 2022 actuals of $59.4 million. In FY 2024, this revenue is anticipated to increase to $63.7 million, a $3.9 million or 6.5% increase over FY 2023 Adopted Budget level.
Transient Occupancy Tax (TOT)
Revenue in this category is impacted by business and other leisure/non -leisure travel and has experienced significant reductions in FY 2020 and FY 2021 due to public health orders, travel restrictions, and diminishing business and personal travel plans resulting from the pandemic. TOT revenue declined by $20.5 million or 79.8%, when comparing the FY 2019 pre -pandemic actuals of $25.6 million to the pande mic FY 2021. As public health conditions improved and travel resumed, this revenue began to recover and significantly grew in FY 2022. Though this revenue remains below pre-pandemic actuals, strong growth was realized in the FY 2021 fourth quarter and in F Y 2022. In FY 2022, actual receipts were $16.9 million, an increase of $11.8 million, or 227.2% higher. The opening of the two Marriott hotels in mid and late FY 2021 and the re-opening of multiple hotels in FY 2021 and FY 2022 were positive developments t hat help drive recovery for this tax revenue.
The FY 2023 Adopted Budget for TOT adopted is $18.2 million, a $1.3 million or 7.4% increase over FY 2022 actuals of $16.9 million. In FY 2024, this revenue is anticipated to increase to $25.0 million, a $6.8 million or 37.3% increase over the FY 2023 Adopted Budget. Year- to-date (as of August 2022), daily average room rates increased by 61.2% from $155.73 per day to $251.04 per day while occupancy rate increased by 24.4% from 60.2% to 75%. Revenue in this category is experiencing growth; however, is not anticipated to reach pre-pandemic levels until FY 2026.
TABLE 3: City of Palo Alto Transient Occupancy Tax Actuals and Forecast through FY 2033
Note: January 2015, TOT Rate went from 12% to 14%
April 2019, TOT Rate went from 14% to 15.5%
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Utility User’s Tax (UUT)
The UUT is levied on electric, gas, and water consumption, as well as on telephone usage.
Revenue in this category is impacted by consumption levels and has experienced reductions in prior periods due to water conservation programs and reduced workforces and business closures due to the pandemic. This revenue is expected to recover as the local economy recovers and workers partially return to the office. The FY 2023 Adopted Budget for UUT is $15. 6 million, consistent with FY 2022 actuals. In FY 2024, this revenue is anticipated to increase to $15.9 million, a $0.3 million or 1.9% increase over the FY 2023 Adopted Budget. Revenue in this category is experiencing growth; however, is not anticipated to reach pre-pandemic levels until FY 2025.
TABLE 4: City of Palo Alto Utility Users Tax Actuals and Forecast through FY 2033
Documentary Transfer Tax (DTT)
Revenue in this category is highly volatile and dependent on sales volume and the mix of commercial and residential sales. DTT experienced record receipts in FY 2021 and FY 2022 at $10.6 million and $12 million, respectively. In both years, these milestones were a result of large commercial transactions, six in FY 2021 and nine in FY 2022, and robust residential sales. Revenue from July through October in FY 2022 is running 37.9% below the same period in FY 2021 which is expected, however, this is around 25 % below the average normal year’s receipt. The FY 2023 Adopted Budget for DTT is $7.2 million, $4.8 million or 39.8% lower than FY 2022 actuals of $12 million. In FY 2024, this revenue is anticipated to decrease to $6.9 million, a $0.3 million or 4.8% decrease from FY 2023 levels.
As in past years, this revenue source is challenging to forecast and can fluctuate month to month depending on real estate transactions. The number of transactions through September 2022 (136) are running lower than those through September 2021 (215) with the total value of these transactions decreasing by 37%. Though the Palo Alto housing market remains strong, as discussed in the Property Taxes section, single family residential median sales price in Palo Alto has slightly declined, which is an expected occurrence as the predicated economic downturn and higher mortgage rate will impact property sales activity in FY 2023.
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TABLE 5: City of Palo Alto Documentary Transfer Tax Actuals and Forecast through FY 2033
Rental Income
Rental Income of $16.4 million in FY 2024 primarily reflects rent paid to the General Fund from the City’s Enterprise Funds and the Cubberley Community Center. Th ere is a slight increase in rental income of $0.8 million compared to the FY 2023 Adopted Budget. The increase can be attributed to a review of the changes in the California Consumer Price Index (CCPI) in the San Francisco Bay Area from the August -to-August period, and it is expected that revenues will be reviewed and revised subsequent to this forecast based on updated information, typically the December-to-December change in the CCPI.
The City is no longer receiving rental income from the former Los Altos Treatment Plant (LATP) site. T he site is no longer av ailable for traditional rental as a laydown yard , although the contractors of the planned projects may need to use portions of the site for this use . The site is planned for two uses: 1) an interim housing project with Project Homekey to provide opportunities for homeless individuals and families, and 2) a joint water purification project with the Santa Clara Valley Water District . Please see the Expense Assumptions General Expenses section of this report for additional information regarding Project Homekey developments at the former LATP site. The water purification project is being funded in the Wastewater Treatment Fund, so it is not part of the General Fund LRFF; however, funding needs for the project will be discussed in the development of the FY 2024 budget for the Wastewater Treatment Fund.
Charges for Services and Permits and Licenses
Revenues in the ‘Charges for Services’ an d the ‘Permits and Licenses’ categories are anticipated to be $33.4 million and $11.5 million, respectively, in FY 2024. Together, these amounts total $44.8 million and are approximately $4.8 million higher than the FY 2023 Adopted Budget of $40.0 million. Increases in this category are primarily due to revenue adjustments for the agreement with Stanford to provide Fire and Dispatch services, the elimination of the Economically Sensitive Department Revenue Reserve, and adjustments to development center revenues.
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Revenues in these categories were impacted by changes in FY 2024, such as increasing golf revenue estimates in alignment with the last two fiscal years of operation. These budget categories also include revenues associated with two fee-based programs in the Fire Department:
a first responder fee (assessed on commercial insurance companies), to cover the cost for initial response for first due engine; and an ambulance subscription fee (FireMed program), to secure co-pay free ambulance transport. These fees were implemented in 2022 with revenue expected to continue growing as advertising campaigns develop.
Additionally, revenues in these categories were impacted by a phase -out of the Economically Sensitive Department Revenue Reserve. This reserve was established to mitigate unexpected losses from services impacted by the COVID -19 pandemic, such as the suspension of parking enforcement, delays in opening the Junior Museum and Zoo, and limited operations at community centers, recreational facilities, an d the Children's Theatre. In total, $2.5 million was set aside for this purpose in the prior year. This forecast assumes gradual overall improvements in the return of canceled or modified services by phasing out this reserve in its entirety in FY 2024.
The revenue estimates in these categories are based on current activity levels. These revenue sources are primarily driven by the cost of staff to provide services to the community. Therefore, as part of the FY 2024 Municipal Fee process, staff will evalua te and bring forward recommendations to align fees with target cost recovery levels, and general salary and benefits and CPI trends. One exception to this is for Development Services activities and related revenue.
Development Services fees are fully cost-recoverable, and the department has been modeled as cost-neutral in this forecast. staff will analyze municipal fee revenue activity as part of the FY 2024 Budget development process and bring forward adjustments as appropriate.
Charges for Service - Stanford Fire and Dispatch Services: The City and Stanford have two separate agreements for the provision of fire response and emergency dispatch services. The fire response services agreement became effective in July 2018 and outlines service level terms and a new cost allocation methodology as the baseline for agreement costs. The term extends through June 2023, with renewals through 2028 unless otherwise terminated. The agreement included a new staffing deployment model for suppression and medical services, which was approved by the City Council in October 2017 and deployed in January 2018. This forecast aligns with the new staffing model and, in accordance with the agreement, adjustments to revenue from Stanford have been aligned with the year-over-year changes to the operating expenses in the Fire Department for FY 2023. Similarly, changes to the revenue received for dispatching services have been aligned with the FY 2023 adjustments to the operating expenses in the Technical Services Division of the Police Department where the costs to provide these services are budgeted. For fire and police revenue, additional adjustments may be applicable if new labor agreements are negotiated. Revenues for these services are based on anticipated changes in salary and bene fits costs within the Fire Department and Police Department Dispatch Unit.
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Charges to Other Funds
The main source of revenues in this category is General Fund administrative cost allocation plan charges to the Enterprise and Internal Service Funds. Internal support departments such as Administrative Services, Human Resources, and Council Appointed Offices provide services to Enterprise and Internal Service Funds. The costs for these services are recovered through the administrative cost allocation plan charges. The FY 2024 estimate for Charges to Other Funds of $14.5 million reflects a slight increase of 5.6% from the FY 2023 Adopted amount of $13.7 million; this is primarily attributed to fully adjusting the costs associated with the allocated charges in the Internal Support Departments to the adjustments made as part of the FY 2023 Budget as well as a technical adjustment to better align the cost plan methodology with the system calculations.
Return on Investment
The return- on-investment category re flects the interest earnings on the City’s investment portfolio. This category is a combination of past investments, new investments at current market rates, and available investable cash which fluctuates seasonally and annually. As of the timing of this LRFF, the Federal Open Market Committee (FOMC) has raised the federal funds rate six times totaling 3.75% and may increase this rate further to bring down the inflation rate between 2 to 3%. As a result, an increase in interest earnings is forecasted; earnings on new portfolio investments have increased from 0.5 to 2% to 4.5 to 6%.
The average portfolio rate of return for the first quarter of FY 2023 was 1.66%, and a 1.62% average yield as of the fourth quarter of FY 2022. The adopted budget General Fund FY 2023 interest earning is $1.1 million. Though this is below the FY 2022 actual of $1.3 million, the expectation is the actuals in FY 2023 will be higher. In FY 2024, the forecast reflects a relatively high interest rate environment with increased interest earnings through the ten-year period.
TABLE 6: Palo Alto Historical Investment Portfolio Yields and Citywide Interest Earnings
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Operating Transfers-in
Operating Transfers -in materialize as expenses in other funds throughout the City and as a revenue in the General Fund. This budget category includes repayment of a previous loan from the General Fund to the Airport Fund, funding for police patrol in the downtown area, and the equity transfer from the Electric and Gas funds. Overall, the Operating Transfers-in are estimated to be $23.6 million, a $1.1 million increase from the FY 2023 level of $22.5 million due to a $0.5 million increase from the Electric Fund and a $0.6 million increase from the Gas Fund.
In accordance with the methodology approved by the City Council in June 2009, the electric to general fund equity transfer has been calculated by applying a rate of return on the capital asset base of th e Electric Fund. This rate of return is based on PG&E's rate of return on equity as approved by the California Public Utilities Commission (CPUC). This LRFF also assumed the passage of Measure L on the November 2022 ballot to seek voter approval of the Cit y’s gas to general fund equity transfer going forward. As outlined in the ballot measure language, Staff calculated the gas to general fund equity transfer as 18% of annual gross gas retail revenue.
This LRFF also considers the trial court’s decision in Green v. City of Palo Alto (Santa Clara Superior Court Case No. 16CV300760), a class action lawsuit which challenged the City’s gas and electric rates under Proposition 26, one of many such cases following a 2015 decision involving the City of Redding. In Green, the trial court judge found the City’s electric rates valid, but held that the City’s gas rates were taxes requiring voter approval under California’s Proposition 26, because they were set at a level sufficient to fund an annual transfer to the City’ s general fund. On June 24, 2021, the trial court entered judgment partially against the City and ordered the City to pay $12.6 million to a common fund to refund gas ratepayers and for payment of incurred litigation costs.
The City and the plaintiffs appealed the trial court’s judgment. Payment of refunds due to gas ratepayers under the trial court judgment are stayed pending a decision by the Court of Appeal (expected in 2023) on the parties’ respective appeals. While the ultimate outcome of the claim is uncertain, the City set aside funding in the General Fund for the potential financial impacts.
Specifically, the City recorded a claim payable of $17.5 million, which includes the trial court judgment covering claims for 2015-2019, plus an amount covering refunds for 3 additional years of plaintiff’s claims that were tolled (paused) during active litigation. While the process for calculating the equity transfer from the Electric and Gas Funds has not changed, the City has placed the funds in a Litigation Reserve. This action continues the City’s proactive actions to address known liabilities with the best information available at the time and sets these funds aside pending final resolution of this dispute.
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ATTACHMENT D
General Fund Base Case Expense Assumptions
Salary and Benefits
The table above depicts the estimated General Fund salaries and benefits costs. Consistent with prior years, the FY 2024 salaries and benefits costs represent approximately 60% of the General Fund budget expenditures.
Salary and Benefits are projected to increase $11.3 million or 7.6% from the prior year, from $148.4 million to $159.7 million. Discussed in the following sections, this is primarily attributable to increases in salaries ($6.1 million or 7.7%) and pension costs ($4.1 million or 10.5%).
Salary
Consistent with the City’s salary budget methodology for recent budgets, positions are budgeted at the actual rate of pay of employees including be nefit selections as of Fall 2022. Then, by position, salary costs are updated in accordance with applicable Memorandum of Agreements (MOA’s) between the City and its labor groups and the Management and Professional Personnel and Council Appointees Compensation Plan(s). It is important to note that as of this forecast, all bargaining groups are near the end of their agreement terms and the City is actively engaged in negotiations with the various labor groups. The forecast assumes step increases for employee s in applicable positions, including SEIU, IAFF, and PAPOA, and merit increases for Management and Professional employees including UMPAPA. A general wage adjustment of 2.0% is included for all employees starting in either January 2023 or July 2023 for all years of the forecast since no MOA’s would be in effect at that time. This is consistent with prior Council direction in previous long range financial forecasts to use the 2.0% increase as a forecasting assumption, not as a commitment to future negotiations. Additionally, this forecast includes a level of reserve to reach a target market placement for employee compensation in new labor agreements, as directed by the City Council. Staff expects to adjust these costs throughout the budget development process in accordance with final contract terms.
Benefits
Pension: Pensions are budgeted based on CalPERS determined rates as of the June 30, 2021 valuation (CMR 14628
1) for the City’s Miscellaneous and Safety plans. CalPERS determines the City’s total contributions for a given Fiscal Year as the sum of two factors: Normal Cost (NC) and Unfunded Accrued Liability (UAL). Together the NC and the UAL expressed as a percentage of payroll is the ‘blended rate’ and is used to represent total costs in the discussion below.
The Normal Cost (NC) is expressed as a percentage of payroll and is paid as part of the payroll reporting process of active employees. Commonly referred to as the ‘pay -go’ cost, the NC is variable and increases or decreases directly with the salary levels of the City. It represents the
1 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance- committee/2022/20220920/20220920pfcs.pdf
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necessary funding for the City to pay for employees presuming that CalPERS meets the current set of assumptions.
In a year that CalPERS does not meet assumptions, due to plan changes, assumption changes, method changes, or plan experience (including investment gains/losses), there is an increase or decrease to the Unfunded Accrued Liability (UAL) . Commonly referred to as the ‘catch -up’ cost, the UAL is expressed as a dollar amount and is calculated over an amortized period with defined annual payments, similar to a mortgage. The contributions for UAL are billed as a flat dollar amount as opposed to a percentage of payroll due to potential funding issues that could arise from a declining payroll or number of active members in the plan. However, CalPERS provides an estimated percentage of payroll for UAL to allow a consistent comparison of total costs.
In the miscellaneous plan, total costs are projected to increase from the current 42.9 percent in FY 2023 to the 44.8% in FY 2024. In the safety plan, total costs are projected to increase from the current 71.1% in FY 2023 to 74.0% in FY 2024. These rates do not consider the employee pick-up of the employer share; that pick-up materializes as savings in the City’s pension costs. Consistent with applicable MOAs, the FY 2023 forecast presumes that the miscellaneous plan will pick up 1 to 2% of the employer pension cost and that safety plan members will pick up 3 to 4%.
The FY 2024 budget was impacted by significant favorable investment returns of 21.3% (6.8% assumption) earned in the most recent June 30, 2021 valuation and changes to economic and demographic assumptions resulting from the CalPERS Asset Liability Management (ALM) process and Experience Stu dy completed in November 2021. As part of the ALM, the CalPERS board approved a reduction to the discount rate (from 7.0 to 6.8%), revised actuarial assumptions (price inflation from 2.5 to 2.3%), and a new asset allocation targeting 1/3 investment in private assets, 5% leverage, and reduced public equity exposure.
Since the issuance of the current valuation, CalPERS announced a preliminary investment loss of
6.1% for the period ending June 30, 2022. These results will be included in the CalPERS valuation report issued in Fall 2023 to inform the development of the FY 2025 budget. The resulting liability of the investment loss will be amortized over 20 years with a 5 -year ramp-up period. To inform this LRFF, staff used the CalPERS Pension Outlook Tool to ca lculate the estimated impacts, resulting in additional costs of $3.4 million ($2.6 million in the General Fund) in FY 2025, and increasing to $16.8 million ($12.9 million in the General Fund) at the peak of the 5 -year ramp in FY 2029.
TABLE 1: CalPERS’ Projected FY 2023-2033 Blended Retirement Rates (percentage of payroll)
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
FY
2030
FY
2031
FY
2032
FY
2033
Miscellaneous 42.9 44.8 43.6 38.9 32.9 30.9 30.7 30.3 30.1 26.7 25.4 Safety 71.1 74.0 72.3 69.5 66.8 63.6 63.2 61.9 61.4 57.9 55.8
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The City has taken several proactive steps to address rising pension costs and long-term liabilities, including cost-sharing in labor agreements, establishing an irrevocable Section 115 Pension Trust (“Pension Trust”) (CMR 75532), and adopting a Pension Funding Policy ( CMR 117223). As part of policy goals, the City seeks to reach a 90% funded status by FY 2036. This policy is subject to modification at City Council discretion and requires that staff report the status of the funding goal every three years. Consistent with the Pension Policy, staff continues to include the NC of pension at a more conservative discount rate than CalPERS in budget assumptions and transmits amounts above required payments (“supplemental contributions”) to the Pension Trust.
Beginning in FY 2023, the City Council approved to reduce the discount rate for supple mental contributions from the previously approved rate of 6.2% to 5.3% over two years; FY 2023 is a transitional year in which six months or the equivalent of approximately 5.8% is budgeted.
Additional one-time contributions continue to be made each year if excess revenues or unspent savings are available, subject to City Council approval.
In accordance with Pension Policy reporting requirements, staff is engaged in a series of meetings with the Finance Committee in Fall 2022 to review the status of the C ity’s pension and retiree healthcare plans, and Pension Policy. Staff expects as part of this review to memorialize any practices adjusted since the adoption of this policy, review progress towards policy goals, and recommend potential modifications to the Pension Policy or budgetary practices used to inform the financial planning of these benefits. This series of reports includes: 1) Review of the most current actuarial analysis as distributed by CalPERS (CMR 146284), 2) Review of the current status of both the Pension and Other Post- Employment Benefits (OPEB)/retiree healthcare liabilities including the proactive contributions and discussion with plan providers ( CMR 148295), and 3) Review of actuarial analysis based on alternative assumptions as defined in the Pension Funding Policy and recommended revisions to the Pension Funding Policy for City Council consideration and adoption (tentatively scheduled December 6, 2022).
In this forecast, approximately $12.2 million ($7.2 million in the General Fun d) in supplemental contributions is assumed in FY 2024. This reflects a $4.0 million ($2.7 million in the General Fund) increase over the prior year, primarily due to the transition to a lower discount rate. Through FY 2023, a total of $49.4 million (31.8 million in the General Fund) in principal contributions are expected to be made to the Pension Trust.
In the General Fund, it is anticipated the City will spend a total of $43.1 million on total pension costs in FY 2024, including both CalPERS contrib utions and supplemental Pension Trust Fund contributions. This is approximately $4.1 million higher than the prior year costs of $39.0 million, or a 10.5% increase. These expenses represent approximately 17% of the General Fund’s total expenses.
2 http://cityofpaloalto.org/civicax/filebank/documents/55487 3 http://cityofpaloalto.org/civicax/filebank/documents/79256 4 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance- committee/2022/20220920/20220920pfcs.pdf
5 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance- committee/2022/20221018/20221018pfcs.pdf
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Healthcare: Consistent with the most recent labor agreements between the City and its bargaining units in the General Fund, the City’s contribution amounts towards medical costs for employees are based on a flat rate contribution from the City, with the employee co ntributing towards the remaining medical plan premium. Like salaries, healthcare costs are updated in accordance with applicable Memorandum of Agreements (MOA) between the City and its labor groups and the Management and Professional Personnel and Council Appointees Compensation Plan(s).
Retiree Healthcare/Other Post-Employment Benefits (OPEB): Retiree Medical is based on the June 30, 2021 actuarial study prepared by Bartel Associates, which is completed every two years. The most recent study was completed in June 2022 to inform the development of the FY 2023 and FY 2024 operating budgets (CMR 14112 as amended by CMR 14502 6). Consistent with City Council direction, this forecast continues the practice to budget for the full payment of the Actuarial Determined Contribution (ADC) for retiree healthcare, using a more conservative discount rate to transmit amounts above the recommended payment as an additional discretionary payment (“prefunding”) to the California Employers’ Retiree Benefit Trust (CERBT) Fund.
The results of the recent valuation benefited from significant favorable investment returns of
27.5% (6.25% assumption) and lower than anticipated healthcare premiums. The City Council further adjusted funding to continue alignment with the proactive pension funding assumptions as well as known variable such as June 30, 2022 market returns. Budgetary assumptions in LRFF include a zero percent return in 2021 -22 (one-time), a 5.75% discount rate (6.25% assumption), and shortened amortization (from 22 to 15 years). Through FY 2023, it is expected that $8.0 million in supplemental principal contributions will be made to the CERBT Trust.
CalPERS blends active employees with pre -Medicare retirees and charges the same medical premium, even though younger employees on average consume less healthcare. The higher premium to younger employees thereby subsidizes older employees and retirees who, on average, have higher claims and premiums. The FY 2024 Budget est imates $16.4 million ($10.5 million in the General Fund) for ADC, an approximate $0.5 million or 2.9% increase from FY 2023 levels of $15.9 million ($9.9 million in the General Fund). The implied subsidy is $3.1 million in FY 2024 and effectively lowers the funding necessary to meet the ADC.
TABLE 2: Retiree Medical General Fund Contributions
FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 $10.2 $10.5 $10.9 $11.2 $11.5 $11.9 $12.3 $12.7 $13.1 $13.5
Workers’ Compensation: The budget appropriation for workers' compensation includes an estimate for claims incurred and reserves for current filings at an 85% confidence level, based on actuarial studies completed by Bickmore. In FY 2022, claims expenditure s decreased slightly by $39,000 or 0.6% from $6.07 million to $6.04 million from the prior year. Actuarial estimates
6 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance- committee/2022/20220607/20220607pfcsm-final.pdf
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completed in August 2021 informed FY 2023 budget levels of $6.5 million (approximately 65% in the General Fund). More recent actuary estimates completed in August 2022 project higher than expected levels for FY 2023 at $6.9 million. Staff will continue to monitor expenditures in the fund and bring forward adjustments as necessary. Estimates for FY 2024 are $ 7.3 million, representing a $0.8 million or 12.9% increase over the Adopted FY 2023 Budget. Estimates for workers' compensation increase in the forecast at rates consistent with general CPI increases.
Contract Services
This forecast assumes contract services of $23.9 million in FY 2024, a 1.1% decrease from the FY 2023 Adopted budget of $24.2 million. This decrease is driven primarily by the removal of one - time costs adopted in FY 2023 including funding to address continued COVID-19 recovery efforts across the City. These decreases are partially offset by service contract increases as well as a 5.0% CPI cost increase in FY 2024 based on a review of the changes in the California Consumer Price Index (CCPI) in the San Francisco Bay Area from the August-to-August period. It is expected that the estimated CPI increases will be substituted with department base budget requests to adjust contract funding needs as part of the FY 2024 budget process.
Contract Services - Committed Additions
The Committed Additions included in this forecast account for anticipated operating and maintenance (O&M) costs in the General Fund for capital projects anticipated to come online within the ten- year forecast period. A preliminary total estimate of $0.3 million for costs associated with the following projects anticipated to come online in FY 2024: Boulware Park Improvements (PE -17500), Dog Park Installation (PG -18001), Library Automated Materials Handling (LB-21000), Park Restroom Installation (PG -19000), Public Safety Building (PE -15001), and Rinconada Park Improvements (PE -08001). The Public Safety Building is anticipated to be complete in Fall 2023, so the full O&M cost for the facility is anticipated to be realized in FY 2025.
Additional cost increases are included throughout the ten-year forecast based on a review of the changes in the California Consumer Price Index (CCPI) in the San Francisco Bay Area from the August-to-August period . Timing and analysis of the funding needs for these proj ects will be evaluated as part of the FY 2024 Budget process. Also, estimated operating impacts from the Fire Station 4 (PE-18004) project are included starting in FY 2026.
TABLE 3: FY 2024 – FY 2033 Committed Additions (Millions) FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 $0.3 $0.6 $0.6 $0.6 $0.7 $0.7 $0.7 $0.7 $0.8 $0.8
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Supplies and Materials
The FY 2023 Adopted Budget for the General Fund included $3.2 million for Supplies and Materials, which is anticipated to increase by a 5.0% CPI cost increase in FY 2024 to $3.3 million based on a review of the changes in the California Consumer Price Index (CCPI) in the San Francisco Bay Area from the August- to-August period. It is expected that the estimated CPI increases will be substituted with department base budget requests to adjust funding for supplies and materials as part of the FY 2024 budget process.
General Expense
This category includes costs for travel and meetings, telephone and non-city utilities, contingency accounts and reserves, bank card service charges, and subsidies and grants provided through the Human Services Resource Allocation Program (HSRAP). The FY 2023 Adopted Budget of $21.8 million is expected to decrease to $8.6 million in FY 2024, primarily due to phasing out the Utility Ligation reserve and elimination of the one -time Budget Uncertainty Reserve. Please see the Revenue Assumptions Operating Transfers-In section of this report for further information about the Utility Transfer Litigation reserve. The reduction is partially offset by a CPI cost increase based on a review of the changes in the California Consumer Price Index (CCPI) in the San Francisco Bay Area from th e August-to-August period. It is expected that the estimated CPI increases will be substituted with department base budget requests to adjust funding for general expense items as part of the FY 2024 budget process.
General Expense – Project Homekey: On S eptember 27, 2021 the City Council directed staff to apply for Project Homekey funding in conjunction with LifeMoves to build an emergency shelter at the former Los Altos Treatment Plant (LATP) site (CMR 13595 7). This project will rapidly deploy
modular housing to provide interim housing opportunities for homeless individuals and families in the City of Palo Alto. Project Homekey is a program, funded by the State of California Department of Housing and Community Development, intended to provide grant fundi ng and facilitate a partnership with the State to quickly acquire, rehabilitate, or master lease a variety of housing types. Once developed, these projects provide interim or permanent housing options for persons experiencing homelessness and who are also at risk of health concerns. The site would be operated for at least fifteen years as interim housing per the program’s durational requirement. This project would utilize a combination of funding sources including the Project Homekey Program for capital expenses and donations, grant funds, and City support for ongoing operations expenses. This LRFF includes the City’s committed investment of $7.0 million in operating expenses ($1.0 million annually FY 2023 through FY 2029), with actual timing of the funding still to be determined. Some operating funding support is expected from Project Homekey as well as the County of Santa Clara. Any remaining gaps in funding will need to be closed by fundraising, operating cost containment strategies, and/or grant funds.
General Expense - Cubberley Lease : In FY 2015, the City and Palo Alto Unified School District (PAUSD) agreed to a five–year extension of the Cubberley lease from January 2015 to December
7 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-council- agendas-minutes/2021/09-september/20210927/210927accsm-amended-final.pdf Item AA2
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2019. In October 2019, the City Council directed staff to negotiate with PAUSD to extend the lease agreement an additional five years, through December 2024 ( CMR 10730 8). A new Cubberley lease was approved by the City Council in June 2020 ( CMR 11460 9) for a smaller portion of the Cubberley site with a correspondingly lower base rent payment (CMR 1138610). As part of the original lease agreement, the City Council approved creation of the Cubberley Infrastructure Improvements Fund. The new lease continues the $1.9 million transfer to the Cubberley Property Infrastructure Fund, which is classified as an Operating Transfer -Out and discussed in further detail in that section of this report below. With the Cubberley Infrastructure funds set aside, the annual base rent for the Cubberley premises is $2.7 million. Other pending factors at the Cubberley site that are part of ongoing discussions, but not included in the LRFF estimates are returning the S Building to PAUSD and the Community Services Department is still interested in negotiating with PAUSD to expand the Cubberley premises by renting additional space from the M Building. Separately, the City leases extended child daycare sites from PAUSD on a one-year lease from July 2022 to June 2023. The combined annual rent for the child daycare sites plus utilities amounts to $0.8 million.
Rents and Leases
The Rents and Leases expense category for FY 2024 is estimated to increase from the FY 2023 Adopted Budget level by approximately 2.7% to $1.4 million, This is based on current lease terms that include previously negotiated lease increases or CPI cost increases based on a review of the changes in the California Consumer Price Index (CCPI) in the San Francisco Bay Area from the August-to-August period. This current estimate will be updated when the December -to- December CPI information is available. This category includes the lease agreement for Development Services staff at locations outside City Hall (285 Hamilton and 526 Bryant) as well as lease with Stanford for El Camino Park. A new lease agreement was executed in December 2020 for the Development Services office location at 526 Bryant Street, limiting the space to the basement level (CMR 11426
11). The lease was amended in September 2022 to extend the term initially for 12 months with the right to automatically exte nd for four successive 12 -month periods, potentially through January 31, 2028 (CMR 14713). In June 2021, the City entered into a seventh amendment for the Development Services office lease at 285 Hamilton Avenue to extend the term from February 2022 to Jan uary 2025 ( CMR 12334 12). As expenses for rent for
Development Services are adjusted, a corresponding revenue adjustment will be made to ensure Development Services maintains cost recovery levels.
Facilities and Equipment
The Facilities and Equipment expense category is expected to decrease from the FY 2023 Adopted level of $480,000 to $450,000 due to the elimination of funding for one -time equipment
8 https://www.cityofpaloalto.org/civicax/filebank/documents/73558 9 http://cityofpaloalto.org/civicax/filebank/documents/77365 10 http://cityofpaloalto.org/civicax/filebank/documents/77073 11 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city-manager-reports- cmrs/year-archive/2020-2/id-11426.pdf?t=59979.32
12 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city-manager-reports- cmrs/2021/id-12334.pdf
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purchases in FY 2023 such as electric leaf blowers and medical gurneys. Along with funding for various equipment across departments, this budget category includes subscription payments for equipment like public safety radios. The reduction is partially offset by a CPI cost increase based on a review of the changes in the California Consumer Price Index (CCPI) in the San Francisco Bay Area from the August -to-August period. It is expected that the estimated CPI increases will be substituted with department base budget requests to adjust funding for equipment needs as part of the FY 2024 budget process.
Allocated Charges
Allocated Charges represent expense allocations by the City’s Enterprise and Internal Service Funds for services and products they provide to General Fund departments. The FY 2023 Adopted Budget for the General Fund included $22.7 million for these expenses, including utilities usage, general liability insurance, technology costs, vehicle equipment maintenance and replacement costs, and other charges for services provided by other City departments and funds. The FY 2024 allocated charges in the Forecast update the revenues and expenses for these various allocations based on the information available at the time of the Forecast development. FY 2024 is anticipated to experience an increase of 8.9% to a total of $24.7 million. This increase is primarily due to anticipated higher costs associated with technology services and utilities for City facilities such as water, electricity, and gas.
Operating Transfers Out
Operating Transfers Out include transfers from the General Fund to Debt Service Funds, the Technology Fund, and various other funds but excludes transfers to the Capital Improvement Fund, which are detailed in the following Transfer to Infrastructure section. The FY 2023 Adopted Budget included Operating Transfers Out of $5.0 million. In FY 2024, Operating Transfers Out are anticipated to decrease to $4.6 million due to the elimination of funding for a one -time loan of $0.4 million to the residential parking permit fund in FY 2023. At this time no loans to the parking permit funds are anticipated as part of the LRFF; however, staff will be evaluating these funds as part of the FY 2024 budget development and will bring forward recommendations for additional loans if needed to keep the parking permit funds solvent.
Transfer to Infrastructure
Recovery from the COVID-19 pandemic were reflected in improved revenue levels in the FY 2023 budget compared to the FY 2022 budget. The total General Fund transfer to t he Capital Improvement Fund budgeted in FY 2023 is $17.5 million compared to the $11.9 million transferred in FY 2022. This is comprised of a $7.8 million base transfer including interest earnings, and $9.7 million from TOT revenue generated through voter- approved rate increases and new hotels that is dedicated to the Capital Improvement Fund to support the 2014 Council Infrastructure Plan, consistent with City Council direction. As the local economy continues to recover from the COVID -19 pandemic, estimate d transfers from TOT revenues in FY 2024 are currently projected to increase to $10.5 million and the base transfer to increase to $10.8 million for a total $21.3 million transfer to the Capital Improvement Fund. This forecast continues the goal established as part of the 2022 -2026 Capital Improvement Plan (CIP) to restore the base portion of this transfer to pre-pandemic levels by FY 2026. This budget category also includes the Item AA2
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separate $1.9 million transfer to the Cubberley Property Infrastructure Fund. This transfer to the Cubberley Property Infrastructure Fund supports general operating and maintenance needs a the Cubberley Community Center facility as well as capital improvement projects to maintain and upkeep the facility.
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Attachment B – FY 2024 Budget Development Guidelines
2 7
2 1)Develop a structurally balanced budget that brings ongoing revenues and expenses into alignment. Develop a plan for any structural imbalance to ensure that the City maintains fiscal sustainability over the short, medium, and long-term. 2)Allocate one-time resources for one-time needs rather than committing one-time resources to ongoing services. Examine appropriate uses of revenue surpluses that exceed forecasted levels such as planning for recession needs, restoration needs, and strategic investments.
3)Ensure appropriate resource allocation for City Council’s existing priorities. 4)Focus on business process redesign to enhance quality, flexibility, and cost-effectiveness of service delivery (include examining opportunities to streamline, simplify, reorganize, and reallocate resources to avoid duplication of effort). 5)Explore alternative service delivery models (such as partnerships with non-profits or other public/private sector groups) to minimize overlap, maximize cost share, and effectively use resources.
6)Continue to thoroughly analyze non-personnel/equipment/other costs, such as contract services, for cost savings opportunities or realignment with current needs. 7)Explore the expansion of existing revenue sources or the addition of new revenue sources, including the alignment of existing charges for services and the opportunity to establish new fees, when appropriate.
8)Continue to analyze and prioritize resource augmentations, seeking to offset augmentations with reductions elsewhere for net-zero impacts to the budget whenever possible; however, ensuring when resource augmentations are added, it is in alignment with one-time and ongoing forecasted sources.
9)Continue to prioritize proactively funding long term liabilities including but not limited to debt obligations, pension obligations, and capital infrastructure in accordance with City policies as approved by Council.
FY 2024 Budget Development Guidelines
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Attachment C
Preliminary FY 2024 Utility Rate Forecast
UTILITIES DEPARTMENT
Each year the Utilities Department develops a Financial Plan for the electric, gas, water, and wastewater utilities. Analogous to the Long-Range Financial Plan for the General Fund, these plans guide utility budget development and rate setting. Normally preliminary rate projections are discussed by the Utilities Advisory Commission (UAC) and Finance Committee, followed by formal Financial Plan recommendations from staff prior to the budget process. This year no preliminary projections were made due to the sudden retirement of a key staff member. Formal Financial Plan recommendations will be made in March and April.
Preliminary ranges for July 1, 2023 rate changes are shown below. Costs in all utilities have been increasing, primarily due to the replacement of aging infrastructure and rapid construction cost inflation, which are challenges utilities and public agencies across the country are confronting. At the time of this preliminary development, the state of California has seen unprecedented rainfall and flooding. Staff are reviewing the impacts of this storm on rate forecasts and will ensure this is factored into the recommended rate changes for FY 2024. These recommendations are scheduled to be reviewed in April 2023 by the Finance Committee.
Electric Utility
Tentative July 1, 2023 Rate Change:
•Change from current total FY 2023 rates (incld. hydro rate adjuster): -1% to +1% increase •Base rate: 12% to 14% increase
At present, staff anticipates little or no change in total Electric rates in FY 2024; this is due to the decrease/elimination of in the hydroelectric rate adjuster, offset by a 12% to 14% increase in the base electric rate.
Electric supply purchase costs have risen substantially over the past three years from a combination of higher market energy prices, greater transmission costs, and lower energy generation from the electric utility’s hydro resources. Revenues have also declined from lower loads during the COVID-19 pandemic.
By the end of FY 2022 these factors had reduced operating reserve balances below minimum. A hydroelectric rate adjuster was activated in April 2022 due to decreased hydroelectric output and increased in December 2022 due to high electric market prices. This adjuster is expected to decrease in July 2023, but base rates are expected to increase due to long-term increases in electric supply costs and capital investment related to aging infrastructure and grid modernization. The net effect would be little or no change in customer bills in FY 2024.
Staff is incorporating a lower long-term forecast for hydroelectric output to stabilize rates during future droughts, minimizing the types of increases seen in 2022. Staff expects 3% to 8% base rate increases for FY 2025 to FY 2028, offset by continuing decreases in the hydroelectric rate adjuster, meaning little or no change to customer bills over the forecast period. In the longer term, load increases are expected to roughly balance increases in utility costs associated with electrification, leading to only modest increases in rates.
Gas Utility
Tentative July 1, 2023 Rate Change:
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Attachment C
Preliminary FY 2024 Utility Rate Forecast
decrease
•Distribution Rate: 7% to 9% increase
Currently, Gas rates are expected to decrease for the average customer in FY 2024. Natural gas prices are at unprecedented levels in California and other Western states; the gas utility reserves were severely depleted by an extreme spike in natural gas market prices in FY 2023, which exceeded what could be passed through to customers. Gas market prices are expected to remain elevated through the forecast period, though below FY 2023 levels. The decrease in gas commodity costs from FY 2023 to projected FY 2024 is expected to produce a net decrease in customer bills next year. The decrease in commodity costs will be partially offset by an estimated 7% to 9% increase related to rising gas utility operational and capital costs, and the need to begin to replenish reserves. Capital investment rates and how quickly to refill reserves are major variables being reviewed to finalize rate plans.
Rate increases in the 5% to 9% range are expected over the next three years, while in the longer term increases of no less than 5% are expected as the City electrifies. The City is considering strategies to protect those who are unable to take advantage of electrification from excessive gas bills as the transition proceeds.
Water Utility
Tentative July 1, 2023 Rate Change:
•7% - 14% increase
At this time, Water rates are anticipated to increase 7-14% in FY 2024 as water supply costs remain the greatest source of uncertainty, and staff will adjust the City’s water supply pass- through rate adjuster in July 2023 based on the final water supply rate from the City’s water supplier. Palo Alto residents and businesses have responded to calls for water conservation during the ongoing drought. Recovery is projected to be slow and as in prior droughts, some conservation is projected to be permanent. Water supply costs continue to increase due to continuing investment in rehabilitating and seismically strengthening the Hetch Hetchy system. These factors are leading to the need for rate increases over the next several years. Staff will use the water utility’s healthy reserve levels to spread increases over multiple years. Rate increases are expected to be around 3-4% annually long-term after FY 2024.
Wastewater Utility
Tentative July 1, 2023 Rate Change:
•5% - 9% increase
Based on current information, Wastewater rates are anticipated to increase 5-9% in FY 2024 to pay for infrastructure replacement, including replacing and maintaining sewer lines, and replacing aging equipment at the City’s Regional Water Quality Control Plant. Staff is evaluating a few rate projection scenarios, including accelerating the sewer mains replacement rate from 1 mile per year to 2.5 miles per year beginning in FY 2026 to allow the wastewater utility to replace aging mains before the end of their life expectancy. This scenario expects 8-9% rate increases over the next four years, and 3-5% in the outer years. The other scenario delays the accelerated sewer main replacement plan to begin in FY 2028 or later to mitigate the impact of rate increases on customers.
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Attachment C
Preliminary FY 2024 Utility Rate Forecast
PUBLIC WORKS DEPARTMENT
Each year the Public Works Department evaluates and analyzes the enterprise funds that provide utility services as part of the budget development and rate setting process. Applicable projections and formal recommendations are presented to UAC and Finance Committee in alignment with the process the Utilities Department follows. Preliminary rate changes for July 1, 2023 are shown below.
Stormwater Management Fee
Tentative July 1, 2023 Rate Change:
•4.9% increase
At this time, the Storm Water Management Fee is expected to increase 4.9% in FY 2024 to keep fund revenues consistent with general cost increases and to provide sufficient funds for planned storm water management capital and operating expenditures. Implementing a 4.9% increase based on the applicable Consumer Price Index is lower than the 6% maximum adjustment specified in the voter approved ballot measure.
Refuse Services
Tentative July 1, 2023 Rate Change:
•3% increase
Refuse rates are anticipated to increase 3% in FY 2024 to provide sufficient funds for increasing operating expenses and to maintain the long-term health of our Rate Stabilization Reserve. The Refuse Fund has not adjusted commercial rates since FY 2017 and residential rates since FY 2018. The anticipated 3% increase across all sectors in FY 2024 will help to mitigate future potential rate adjustment spikes when the municipal solid waste collection and processing service agreements term out in FY 2026. Staff anticipates higher operating costs when a new agreement is to be implemented in FY 2027.
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Attachment
C_Preliminary Utility Rate
Forecast FY 2024
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From: [email protected]
To: Council, City
Cc: Nose, Kiely; Guagliardo, Steven
Subject: LRFF item before council
Date: Tuesday, January 31, 2023 4:35:35 PM
Attachments: AnnualReport2022-2023.pdf
CAUTION: This email originated from outside of the organization. Be cautious of opening attachments and clicking on links.
Dear Mayor Kou and council members,
I discuss 3 topics:
1) The connection between the City's Economic Development Strategy and the budget, particularly long-term revenue trends.This is my focus in this email. 2) The short and long-term economic outlook and
3) The LRFF
and I include the latest Assessor report on assessed value increases. I call your attention to pages 9,11,13,18,20 and 40.
Short and Long Term Economic Outlook
I will write a follow up email later this week after seeing what the Fed does on Wednesday and the U.S. jobs report on Friday.
The short-term outlook should be clearer by May but probably not before then. The impact of recent layoffs on job totals will show up in
February, March. April and May EDD reports. Year over year inflation trends will decline as the 2022 comparable months were very high BUT the
real focus should be on the near term monthly gains--will they remain low as in the past 6 months.
We will have a new UCLA forecast in March.
The LRFF
As usual the staff did a comprehensive and transparent job with the forecast illustrating the assumptions but also the long list
of what is not included.
I think we will know more about both short and long term trends in May and there is no need to guess about these trends now.
The Connection Between the Economic Development Strategy and Our Budget, particularly Revenue Trends
I have met with and emailed with staff and our Streetscene consultant.
Here are some of the points I raised.
1) Both for the ED strategy and for revenue forecasts, it is important to understand the drivers of key revenues including sales tax, TOT and property tax.
Staff reports clearly show the trends and top line numbers illustrating their importance to Item AA2
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overall revenues.
But that is different from understanding the principal drivers of these revenues and how they can impact ED strategy choices.
My memory is that during the last Comp Plan, Hillary had a fiscal consultant report showing the main drivers (businesses, residents, Stanford and related visitors) of sales and TOT. 2) We have a lot of (at least DTN where I live, work and walk every day) vacant spaces mostly retail and office.
I believe that the choices made regarding these spaces will have long-term impacts on the budget so they are connected.
I hope council with advice from staff and the consultant and in collaboration with property owners can develop policies that will fill these spaces, particularly those that have been vacant a long time.
Even if the spaces are not filled with sales tax producers, they will be filled with potential customers for existing businesses.
I think there will be continuing no longer needed office space with WFH even if the economy continues to grow. What are the feasible repurposing strategies for these spaces.
The stated goal of the ED effort in the Nov council presentation is "Develop a market-informed economic development strategy that will ensure Palo Alto's post-COVID competitiveness by identifying impactful public sector interventions, policies and investments for which there is both need and consensus for action."
As an economist I focus on the phrases "market-informed", "competitiveness" and "need".
While council can provide incentives and disincentives, ultimately property owners and businesses will decide what are their feasible and best options. 3) The ED strategy diagnostic and policy recommendation work will inform council and residents on ED choices that will impact revenue growth.
Some of these are
a) what are feasible options for increasing the customers bases and attractiveness (related issues) for DTN and Cal Ave?
b) How does open/closed for these streets impact question a? c) How does parking availability and how close influence these choices? I asked the staff and consultants when they thought the perspectives of restaurants/cafes/bar businesses were aligned with or differ with those of retail, service businesses and property owners on these questions.
I look forward to the next set of information provided by staff and Streetscene on ED issues and to future council and, hopefully, Finance Committee integration of our ED strategy choices into long-term revenue forecasts and related city options.
I have lived and worked in Palo Alto for 50+ years.
Stephen Levy
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Center for Continuing Study of the California Economy
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February 6, 2023 www.cityofpaloalto.org
FY 2024 – FY 2033
LONG RANGE
FINANCIAL FORECAST
City Council Item #8
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2 OVERVIEW
• Stagnant economic growth assumed for major tax revenues • 2022 voter approved measures K & L (new business tax and natural gas transfer respectively
• Measure L: IS assumed in the Base Case
• Measure K: IS NOT assumed in Base Case, alt scenario provided • Expense projections based on current approved service levels • FY 2023 Adopted 2-year service reinvestment funded ongoing • Costs for recent labor contracts included in revised forecast • December 6th Finance Committee Highlights
• Economic Development
• Major Projects/Council Priorities
• Labor Costing and Staffing Analysis
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Actual
2022
Adopted
2023 Projected 2023 2024 2025 2026 2027 2028
Total Revenue $238,735 $237,751 $238 - 244M $251,177 $261,671 $272,065 $282,203 $290,671 BSR Contribution (One-Time) - $9,670 $9,670 - - - - - Total Source of Funds $238,735 $247,421 $247 - 253M $251,177 $261,671 $272,065 $282,203 $290,671 Year over Year increase (revenue only) 5.6% 4.2% 4.0% 3.7% 3.0% Total Expenditures $197,963 $247,421 $248,721 $251,715 $267,500 $277,159 $283,240 $290,359 Total Use of Funds $197,963 $247,421 $248,721 $251,715 $267,500 $277,159 $283,240 $290,359 Year over Year increase 1.7% 6.3% 3.6% 2.2% 2.5%
Net One-Time Surplus/(Gap) $40,772 ($0) $0 - 4.7M ($537) ($5,829) ($5,094) ($1,037) $312 Cumulative Net Operating Margin (One-Time) $0 $0 $0 $625 Net Operating Margin ($537) ($5,292) $736 $4,057 $1,349 3 FISCAL YEAR 2024 - 2028 REVISED FORECAST
• Mild 18-month stagnant growth beginning in FY 2023
• Voter Approval of Measure L (natural gas transfer)
• Includes revenue and continuation of 2-year service restorations in FY 2023 Adopted • Revised forecast reflects current estimates including recent labor contracts Item AA2
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4 FISCAL YEAR 2023 BUDGET STABILIZATION RESERVE STATUS
Year-End BSR Summary (in millions)
General Fund BSR Balance, June 30, 2022 $72,835
FY 2023 Approved Adjustments
FY 2023 Adopted Budget & FY 2023 Service Reinvestments (yr2) ($12,872) Council Approved Items (Downtown Streets Team,
Reappropriations)
($267)
Subtotal: BSR Balance, After Approved Adjustments $59,696 FY 2023 Additional Adjustments (FY 2023 Mid-Year) ($14,000) $5M to Economic Uncertainty Reserve (plan for forecasted deficits) $5M to Pension Trust Fund (per Council Policy)
$4M to Infrastructure Reserve (IR) (per Council Policy) Projected FY 2022 BSR Level, (June 30, 2023)
$45,796
FY 2022 General Fund ended with a surplus, as expected in FY 2023 Adopted Budget • $59.8 M, a surplus of $14.2M compared to the Council 18.5 percent target ($45.6M) Item AA2
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5 ASSUMPTIONS NOT INCLUDED IN FORECAST
• Service reinvestment to pre-pandemic levels
• Capital Infrastructure: Parks Master Plan, Animal Shelter Rebuild, Railroad Grade Separation, Fire Training Center
• Voter approved Measure K (new business tax) revenue or investments in three priority areas
• Labor contract terms beginning in FY 2026
• Cubberley Community Center Concept Plan and Gym Repair • Operating changes: non-profit agreements, fee studies, code/ordinance changes, legislative updates, ADA compliance • Resources for Council Priority Items: Sustainability and Climate Action Plan (S/CAP), Project Homekey, Advancing Racial Equity, Permanent Parklet Program
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7 PRELIMINARY FY 2024 UTILITY RATE FORECAST
6 UTILITY FY 2024 FY 2025-FY 2028
Electric -1% to 1% 3% to 8% annually
Gas -14% to 12% 5% to 9% annually
Refuse 3% 0% to 3%
Stormwater 4.9% Based on annual CPI
Water 7% to 14% 3% to 4% annually
Wastewater 5% to 9% 8% to 9% annually
• Utilities Advisory
Commission (UAC) to review
rates, followed by Finance
Committee (March – May),
and City Council (June)
• FY 2024 rates will be
effective July 1, 2023
• Staff actively evaluating
recent storm impacts on
rate projections (incld.
Hydro Rate Adjuster)
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7 7
BUDGET DEVELOPMENT GUIDELINES
• Guide development and
recommended adjustments for
annual budget processes
• Provide flexibility to address changing
economic situations
• Ensure consistent methodologies to
maintain balanced fiscal strategies
year over year
• Align with Council Values as
recommended by Policy & Services
Committee
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7 CONCLUSION
• Revenue trends indicate continued recovery from the pandemic • Signs of headwinds present opportunity for a recession • Strong financial discipline aids in managing the uncertain outlook • Alternative scenarios help plan for variability in assumptions • Measure L enables continued services from FY 2023
• To manage the near- and long-term fiscal sustainability and new investments Measure K and one-time surpluses are needed
• FY 2023 Mid-Year Budget:
• Focus on balancing the economic risks with service needs; maintain stability in services over the next few years
• Invest in priority areas as identified by Council and/or meet service needs 8 Item AA2
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7 NEXT STEPS
9 February City Council
• FY 2023 Mid-Year Budget
Review and 2nd Quarter
Fiscal Analysis Report
May
• FY 2024 Proposed Operating and
Capital Budgets Published
• FY 2024 Proposed Budget Review,
including Utility Rates, Municipal
Fees, and Five-Year Capital
Improvement Plan
June
• FY 2023 3
rd Quarter
Fiscal Analysis Report
• Adopt FY 2024
Operating & Capital
Budgets, utility rates,
and municipal fees
January City Council
• FY 2024-33 Long Range
Financial Forecast
(LRFF)
• FY 2022 Annual
Comprehensive
Financial Report (ACFR)
March - April
UAC & Finance Committee
• Utility Financial Plans and FY
2024 Rate Recommendation
(Gas, Electric, Water,
Wastewater, Refuse, Storm
Drain, Fiber)
January February March April May June
Staff Work: Development and production of FY 2024
Proposed Budgets
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10 RECOMMENDED ACTION
Staff recommends that the City Council:
1. Direct staff to use this revised Base Case forecast as the starting point for the FY 2024 budget process.
2. Approve the Revised Fiscal Year 2024 –2033 Long
Range Financial Forecast and the FY 2024 Budget
Development Guidelines (Attachment B).
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