City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: Planning and Development Services
Meeting Date: March 11, 2024
Report #:2312-2463
TITLE
Stanford University Medical Center (SUMC) Annual Report to Council for Fiscal Year 2022-2023
RECOMMENDATION
Staff recommends that the City Council:
1. Review the Stanford University Medical Center (SUMC) Annual Report for Fiscal Year 2022-2023, and find that Stanford Hospitals & Clinics, Lucile Packard Children’s Hospital, and Stanford University (SUMC Parties) have complied in good faith with the terms and conditions of the SUMC Development Agreement;
2. Find that the SUMC Parties are not in default with the terms and conditions of the Agreement in all sections; and
3. Accept the City of Palo Alto’s (City) Annual Report Supplements regarding the funds received from the SUMC Parties, as required under Section 12(d) of the Development Agreement (Attachment E).
EXECUTIVE SUMMARY
The City Council is required to annually review the SUMC Development Agreement (“Agreement”) to confirm compliance with the Agreement’s terms. The Agreement is between Stanford Hospital and Clinics, Lucile Packard Children’s Hospital, Stanford University (SUMC Parties or SUMC), and the City of Palo Alto. SUMC prepared their SUMC Annual Report for Fiscal Year (FY) 2022-2023 to discuss how they met their compliance obligations during the reporting time period (Attachment A). The City prepared this Annual Report to Council to discuss both SUMC’s and the City’s compliance activities during the FY 2022-2023 reporting period, as well as disseminate the City’s required Supplement to the Annual Report. The Supplement contains an accounting of the funds received from SUMC and expenditures of those funds during the reporting period.
As documented in this Annual Report to Council, both SUMC and the City are in compliance with the terms of the Agreement for the reporting period FY 2022-2023.
BACKGROUND
On June 6, 2011, the Council approved Comprehensive Plan amendments, zoning changes, a conditional use permit, SUMC design guidelines, annexation, and architectural review applications for the Stanford University Medical Center Facilities Renewal and Replacement Project (the “Projects”). The Projects include the construction of the new Stanford Hospital and Clinics buildings, an expansion of the Lucile Packard Children’s Hospital (LPCH), construction of new School of Medicine (SOM) buildings, renovation of the existing Hoover Pavilion, construction of a new medical office building and parking garage at Hoover Pavilion, and roadway improvements along Welch Road and Durand Way. The Agreement, vesting these approvals, became effective on June 6, 2011 and continues for 30 years from the effective date.
This Annual Report to Council is for the FY 2022-2023 reporting period, which is the 12th year of the Agreement. The FY 2021-2022 annual report found SUMC and the City to be in compliance with the Agreement.1 Previous annual reports and compliance documentation can be found via the weblinks in Attachment B.
ANALYSIS
Agreement Section 12, “Periodic Review of Compliance,” requires City Council to confirm SUMC Parties’ compliance with the terms of the Agreement. Discussion items in this report are intended to guide City Council through the many aspects that SUMC and City staff monitor and track throughout the year to ensure compliance.
The SUMC Annual Report for FY 2022-2023 (Attachment A) describes the activities related to Agreement implementation and ongoing annual progress toward meeting the following obligations in Section 5 of the Agreement, “SUMC Parties’ Promises:” •Health Care Benefits;
•Fiscal Benefits;
•Traffic Mitigation and Reduced Vehicle Trips;
•Linkages (Pedestrian, Bicycle, and Transit);
•Infrastructure, Sustainable Neighborhoods & Communities, Affordable Housing; and •Climate Change.
Staff prepared a summary of the Section 5 obligations and the compliance status (Attachment C).
Agreement Section 12 also includes the requirement for demonstration of good faith compliance with the Agreement. Toward this end, SUMC timely submitted all the reports required of the SUMC Parties for FY 2022-2023.
Construction Activities and Net New Square Footage
1 The SUMC Annual Report to Council Fiscal Year 2021-2022 went before City Council at their April 17, 2023 meeting, see Consent Calendar Item 6 at the following meeting weblink:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=1115.
SUMC discusses their construction activities for FY 2022-2023 in the SUMC Annual Report (Attachment A). City staff reviewed the information regarding SUMC net new square footage in the report and determined this information is complete and correct. A summary of construction activities and tracking of square footage demolished and added can be found in Attachment D.
Traffic Mitigation and Reduced Vehicle Trips
SUMC implemented all required transportation demand management (TDM) obligations in FY 2022-2023, such as purchasing Caltrain Go Passes, funding the AC Transit U-Line, and administering other activities. Summaries of these activities can be found in Attachments A and C.
Despite continuing to implement all TDM programs, as well as enhancing communications and promotions, SUMC found that they did not meet the alternative mode share milestone targets outlined in the Agreement for FY 2022-2023. However, the SUMC alternative mode share rate had increased to 25.6% from 19.9% in FY 2021-2022.
To clarify, not meeting the alternative mode share targets during a reporting period is not itself a default under the Agreement, as the Agreement outlines next steps if a target was not achieved, such as the payment of fees, and contains a Force Majeure clause.
Amendment to Development Agreement
An application to amend the Agreement, submitted by SUMC on September 7, 2022,2 was approved by the City Council and executed on December 28, 2023 (Development Agreement Amendment Number 1). The amendment modified language to provide clarity on how to implement the existing alternative transportation mode share targets with respect to the SUMC claim of the applicability of Force Majeure.3 The amendment also included an updated timeline for SUMC to meet the alternative mode share targets. For more information about the amendment, please refer to the City Council reports for October 23, 2023 and November 27, 2023.4
2 Anticipating the ongoing influence of the COVID-19 pandemic on its ability to achieve the alternative transportation mode share targets, SUMC proposed an amendment to the original Development Agreement.
SUMC suggested that the amendment language would provide clarity as to how to implement the existing alternative transportation mode share targets and penalty payments as written in Section 5(c)(ix), given their claim of the applicability of Section (18)(c) Force Majeure in the Development Agreement. 3 Development Agreement Section 18(c) Force Majeure provides that performance by SUMC or the City is excused during any period of “Permitted Delay,” such as when a performance delay occurs due to circumstances beyond the reasonable control of a party to the SUMC Development Agreement. Examples of circumstances beyond reasonable control of a party include (a), acts of god, including without limitation earthquakes, floods, fire, and other natural calamities, (b) civil commotion; (c) riots or terrorist acts; (d) strikes or other forms of material labor disputes; (e) shortages of materials or supplies; and (f) vandalism. 4 The City Council October 23, 2023 Action Item 5 staff report and meeting minutes can be found online here:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=13044.
The Council November 27, 2023 Consent Calendar Item 13 staff report and meeting minutes can be found online here: https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=13307 Construction Sales and Use Tax Monitoring Report
SUMC submitted the annual Construction Sales & Use Tax Monitoring Report on June 30, 2023 for the preceding calendar year. The City sent its required response. Based upon the City’s review of the annual Construction Sales and Use Tax Monitoring Report, revenues for calendar years 2011 through 2022 have totaled $5,467,628. This annual reporting assists in the process of ensuring that the City receives no less than $8.1 million in construction sales and use tax revenue by December 31, 2025.
Section 5(b)(ii) of the Agreement discusses how SUMC and the City should address any surplus or shortfall in the amount of construction sales and use tax received by the City. Discussion and final reconciliation of any surplus or shortfall in the revenue amount that the City received would occur in and after August 2026. Given the annual decline in construction sales and use tax revenue since calendar year 2020 to present, it is possible that there might be a shortfall relative to the $8.1 million required. In that case, SUMC would make a payment to relieve that shortfall in FY 2026-2027 from the Fund for Healthcare Services, as discussed under Development Agreement Section 5(a)(ii). After this reconciliation, SUMC would commence activity in the Fund for Healthcare Services for 10 years from 2026 to 2036. This activity would be reported in the SUMC Annual Report for each fiscal year.
Supplement to the Annual Report
Section 12 of the Agreement requires the City to prepare a Supplement to the Annual Report, which is included in this report as Attachment E. This Supplement is to contain an accounting of the funds received from SUMC, including:
•Description of the account balances for each of the funds maintained by the City under Section 5 of the Agreement;
•Expenditures from each of the funds; and
•Purposes for which the expenditures were used.
Section 12 specifies preparation of the Supplement within 45-days of the June and July receipt of the annual reports by SUMC, but there is no penalty for not doing so. After the close of the Fiscal Year, the City conducts an annual audit of the funds in Fall/Winter to demonstrate good faith in implementing the Agreement.
FISCAL/RESOURCE IMPACT
There are no fiscal or resource impacts resulting from City Council review of the SUMC Agreement to confirm compliance with its terms. Planning for use of SUMC funds occurs separately during the City’s Annual budgeting process.
STAKEHOLDER ENGAGEMENT
Staff did not perform specific community outreach related to preparation of this annual report.
Community members and policy makers were extensively involved in the crafting of the Agreement and all other associated project enabling entitlements. Also, subsequent related project entitlements continue to be processed through the City’s standard review processes, as discussed in the Agreement and other entitlements.
ENVIRONMENTAL REVIEW
Reviewing and making findings regarding SUMC and City compliance with the Agreement is not a project under the California Environmental Quality Act and no environmental assessment is required for the annual compliance review. An environmental impact report for the entire SUMC project was prepared and certified by the City Council prior to approval of the Agreement.
ATTACHMENTS
Attachment A: SUMC Annual Report Fiscal Year 2022-2023
Attachment B: Weblinks to Prior SUMC Annual Reports
Attachment C: SUMC Development Agreement Section 5 Compliance Table Attachment D: SUMC Construction Activities and Net New Square Footage Summary Attachment E: Supplement to the Annual Report Fiscal Year 2022-2023 APPROVED BY:
Jonathan Lait, Planning and Development Services Director