Is PAUSD the City’s Single Top Revenue Source?

Palo Alto Matters – Guest Commentary by Eric Filseth / June 11, 2017

Palo Alto City Council Member, Finance Committee Chair

Outlandish as it sounds, there’s actually a line of thinking for this.

Sales taxes are many cities’ largest revenue source, and they’re a major contributor in Palo Alto as well: normally about 15% of our General Fund, with the Stanford Shopping Center usually being our largest single contributor, last year about $5.5 million.

But in Palo Alto, our lead revenue source is actually property taxes, at about 20% of our General Fund. Most of our property tax revenue – about 75%, or $30 million for FY2018 – is residential. This is partly because our commercial base stays low (basically loopholes in Prop 13), but mostly because Palo Alto residential property values are high; and residential property values are influenced by school districts.


FY2018 budget

Source: FY2018 Proposed Operating Budget, May 2017 (General Fund)

Obviously high property values are the root of our housing affordability issue, a major problem. Yet while some drivers of our property demand are things most people would consider negative – the onerousness of commuting here from the East Bay, for example – others are things most of us would consider positive. Prime among these is the quality of our public school system.

Accurately assessing the relationship of our PAUSD reputation to property values is tricky; yet we all know people who moved here or even just stayed here because of our schools. Former PAUSD analyst Ann Dunkin estimated a couple of years ago that being just inside the PAUSD district line added an average of $500,000 to the price of a Palo Alto home, compared to next door cities. If you consider a typical Palo Alto home to be worth around $2M (more for single family homes, less for multi-units), then that’s about 25% of the home’s value. Local residential real-estate agents will tell you that’s probably the right ballpark.

Anecdotal evidence is consistent with this. I live on the very north edge of Palo Alto; houses in Menlo Park are less than 200 feet away. So why does Zillow say the houses on my side are worth more than the houses across the creek? They all look pretty similar to me, and it certainly doesn’t look like our lot sizes are bigger. It can’t be just proximity to University Avenue, because I see plenty of downtown employees parking in Menlo Park (no RPPP there!) and walking the extra minute across the bridge. But on one side your kids go to Addison, Jordan and Paly; on the other side, they go elsewhere.

Eric's Zillow image

Source: Zillow

Actual MLS data supports the Zillow estimates. Home prices in Palo Alto have recently been running 40% higher per square foot than Mountain View, 30% higher per square foot than Menlo Park, 23% higher per square foot than Los Altos, and 75% higher per square foot than Redwood City.

Eric's DeLeon Image

Source: DeLeon Realty, 2017

Obviously there’s more going on here than just school reputations; but school attraction is clearly a sizeable factor. The scale of the differences suggests that a 20-30% school impact is indeed within reason, with space left over for other factors.

If you accept that PAUSD’s attraction accounts for 20-30% of Palo Alto property values, then it’s not illogical to map PAUSD’s reputation to 20-30% x $30M = $6-9 million in annual city property tax revenue – 3-5% of the General Fund, and ahead of the second-place Stanford Shopping Center. PAUSD wins!

With a healthy grain of salt, obviously. All this is something of a hand-wave, and I don’t believe anybody in town would suddenly want to start looking at PAUSD as a profit center for the City. It’s more like just a bit more food for thought as we consider what makes Palo Alto the unique place we are – and maybe also as a bit of context when those PiE emails arrive in our In Box.

To me it’s a reminder that even though we organize our public school governance and our public safety, libraries and street-sweeping governance separately, it’s still all public services; and not simply because they all rely on our property taxes. No matter how we divide the revenues and expenses, it’s one community. So we should expect to find dependencies and interconnectedness, and probably more and more complicated ones as our population grows and therefore intensifies its use of our physical resources: land, street infrastructure, water, recreational facilities, dog parks, the future of the Caltrain corridor, and so forth.

We need to understand, anticipate and manage this proactively and not just on a “when-we- have-to” basis. It’s important that the School Board is looking at its long-term enrollment and geographical dependencies on the City Comprehensive Plan; City Hall needs to consider this too. It’s important that City Hall and PAUSD develop a joint plan for Cubberley, even though one agency holds title to one parcel and the other to another; to the community it’s still one big publicly-owned asset. Above all it’s important that we think both short and long term, not just a couple of years at a time. We’re our own largest customer, and that will endure independent of accountancy.

Eric Filseth

Eric’s kids attended Addison, Jordan and Paly, and have not as yet been suspended from College

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