Palo Alto Matters – June 25, 2017
City Council will review and approve Palo Alto’s fiscal year 2018 Budget on June 27, before adjourning for a six week summer recess.
Most City decisions involve trade-offs that affect future opportunities, but in deliberating over specific issues throughout the year, it can be difficult to see the forest through the trees. The city Budget shines light on the intersection of those decisions and their cumulative effect as well as the overarching liabilities that constrain them.
This special Budget edition of Palo Alto Matters draws your attention to big picture questions about where we’re headed, explains the bottom line numbers and points to some specific issues of concern in the alignment of values and strategies.
The Big Picture
From a high level view, expenses are growing faster than revenues and the City is heavily burdened by unfunded pension and retiree health care liabilities (UAAL or Unfunded Actuarial Accrued Liabilities). With required payments toward unfunded pension liabilities alone growing at more than twice the rate of City revenues, annual UAAL payments will increasingly crowd out spending on city services and programs, traffic and parking mitigations, and infrastructure and capital improvement projects.
Add to that rising construction costs, service and infrastructure demands resulting from anticipated jobs and housing growth, and looming, big ticket future expenses (such as Cubberley redevelopment and grade separation at rail crossings) and it is clear that Palo Alto cannot have it all. The City and community must prioritize spending carefully.
The FY2018 budget holds staffing basically flat to avoid exacerbating the UAAL problem. Yet as the City’s to-do list grows, so do associated demands on staff capacity. Going forward, should the community reduce our ambitions and service expectations? Support more hiring (or outsourcing) to fill gaps in services? Shift more costs to non-resident beneficiaries of City services?
Getting down to specifics, it is informative to look not only at what is funded, but also what the City has opted not to fund. And to take note of who’s paying for what. How well do City expenditures and department allocations reflect community needs and values? Is the City targeting sufficient and appropriate alternatives for revenue generation? Is it making the most of less visible, but nonetheless substantial public subsidies associated with zoning, code exemptions, transportation management programs, parking and the like?
The answers to such questions should reflect community sentiment and inform City decisions throughout the year.
The Bottom Line
Revenues and Expenses
Palo Alto’s expenses are growing faster than revenues. The proposed General Fund Budget for FY2018 shows expected revenues at $206 million, a 6 percent increase over FY 2017. Expenses are pegged at $210 million, an 8 percent increase over FY2017.
The gap will be filled primarily by drawing down funds from the Budget Stabilization Reserve (BSR). The BSR is currently over its target balance by about $3.5 million. So if Council approves the proposed budget, the Reserve will not drop below its target level. This does not solve the City’s structural revenue vs. expense growth-rate problem, but it covers it for this year. In future years, relying on the BSR may become more problematic.
Unfunded Liabilities (UAAL)
The City currently owes more in pension and other retiree benefits to current and future retirees than it has money saved to pay for those benefits. The difference between what we have saved and what we would need to have saved is called the “Unfunded Actuarial Accrued Liability” or UAAL.
The UAAL exists because (1) CalPERS, which manages our pension system, bases payment requirements (i.e., saving for future benefits) on an estimated return on investment from the pension and retiree benefits fund; and (2) like most California cities, Palo Alto grants retirement benefits to its employees based on CalPERS investment expectations, not actual returns. When those investment returns don’t appear, the City still owes the benefits based on that higher rate of return.
The difference each year doesn’t actually appear in our operating budget, but instead is added onto our existing UAAL. It’s like spending $100 on your credit card each month, but only making the minimum payment of $25; over time, your debt can grow very large, even though you can still keep spending money.
The gap between CalPERS’ return on investment projections and its reality is only a percent or two, but it is enough that using the most generous assumptions about future returns, Palo Alto has run up a UAAL of at least $500M since 2001 (when there was actually a slight pension surplus).
The $500M number is so big that just servicing it, which does appear in our operating budget, has now become significant. Like a credit card minimum payment, CalPERS requires the City to make a regular minimum payment toward the UAAL. These payments have increased as our UAAL has increased, and in FY2018 amount to about $17M from the General Fund for pensions alone. Retiree medical benefits add close to another 50% to pension liabilities. By itself, the UAAL payment now compares to the budget of one of the City’s larger departments.
Importantly, the UAAL pension payment alone has been growing at around 15% per year – much faster than other City expenses as well as City revenues. Add to that the retiree medical portion of the UAAL servicing and the imbalance is even greater. As the UAAL grows, we can expect it to further crowd out city services and programs and become a more and more significant consideration during budget planning.
Where the Rubber Hits the Road
Aligning specifics with the big picture – Who Pays?
Transportation Management and Paid Parking highlight hidden subsidies and raise questions about who should bear the burden of funding transportation solutions.
The City is currently studying putting an end to free parking in the downtown area. Visitors, shoppers, diners, and workers would pay to park in public garages, parking lots and on the streets by some manner of parking meters. In addition, the FY2018 Budget proposes a sizable fee increase for employee parking permits in city garages and Residential Permit Parking (RPP) zones. Resulting revenues would eventually be used to support the Downtown Transportation Management Association (TMA) charged with reducing single-occupancy vehicle use.
Last year, the City began consideration of a business transit tax to support the TMA, but that effort was recently put on hold. The contemplated business tax would have assessed a fee based on number of employees. According to one possible scenario, an employer would pay a “tax” for every employee over what the zoning for the subject site allows.
An obvious difference between the revenue mechanisms is who pays. Under a metered parking strategy, the general public bears the burden of funding the TMA. Permit parking fees spread the pain to local employees (who may or may not get help from their employer). A business transit tax would put the financial burden on the primary generators of downtown traffic and parking congestion (just compare the daytime traffic and parking conditions on a weekday vs. on a weekend).
On a positive note for future City budgets, both the imposition of paid parking and consideration of a business transit tax indicate efforts to generate new revenue streams as well as growing recognition that public parking (both the land use and its maintenance and management) and City funding of TMA efforts are public subsidies with significant impacts on the City’s bottom line that can not long be sustained at previous levels.
On the other hand, the business transit tax was allegedly put on hold due to planning capacity constraints, yet the proposed budget allocation for the Planning and Transportation Department includes a 3% cut and no contingency funding for additional projects. With no budget to proceed on studying the transit tax, it seems unlikely to move forward, creating the appearance of a tacit decision to let businesses off the hook for the TMA while calling on individual members of the public to foot the bill for commuter traffic and parking impacts.
What are we not paying for?
Is expediency in staff allocations and line item funding leading us to neglect quality of life concerns, our vulnerable populations, and cherished community assets?
The Department also lacks funding for a Coordinated Area Plan to guide future development in and around the Fry’s Electronics site. The multi-acre, single-owner Fry’s site is likely to be redeveloped in the near future, defining the area for generations to come. Without such a plan, the City will be forced to react to whatever plans the owner puts forth, without the benefit of well-vetted, community serving priorities.
Successful efforts by the Department are vital to public trust and citizen participation in managing Palo Alto’s long-term quality of life; constraints on Department capacity may well prove a short-sighted strategy.
In addition to concern about the adequacy of funding for Planning and Transportation, the City’s choices about investments, revenues and the use of hidden subsidies raise questions about the City’s priorities as related to vulnerable populations and valued community assets.
As noted in the Guest Commentary, human services allocations that support organizations like La Comida, Abilities United, InnVision and Project Safety Net partners, remain close to 2003 funding levels. This year’s essentially flat budget allocation will determine funding availability for the next two years, extending the impacts of long-term underfunding.
On the housing front, prospects for future revenues to support housing affordability are dimmer due to City Council’s recent reduction in required developer funding for below-market rate units. In addition, the City is contemplating giving up a public facility zoning designation, not for affordable housing, but to allow unprecedented market-rate unit density on the former VTA lot at Page Mill and El Camino.
With such actions (or inaction) the City neglects our vulnerably populations, lets developers off the hook and fails to leverage zoning for greatly needed affordable housing.
Furthermore, as the budget gets tighter, the City is targeting investment in the long term sustainability of Palo Alto’s signature natural resources for cuts:
This year’s budget process revealed a funding gap in the City’s five-year Capital Improvement Program that staff plans to fill with deferral or delay of Comprehensive Conservation Plans for Foothills Park, Pearson Arastradero Preserve and Esther Clark Open Space. Those Plans are vital to ensuring that future use, maintenance or development in our Open Space is ecologically sound, appropriate and sustainable.