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.
In the special Budget Edition of the Palo Alto Matters Newsletter, we drew your attention to some big picture questions about where we’re headed, explained the bottom line numbers, and pointed to some specific issues of concern in the alignment of values and strategies.
Below, you’ll find relevant data to help put the City Budget and the impacts of local growth into context.
- General Fund Revenues – Who’s Paying?
- The Big Picture – Revenues, Expenses, and Unfunded Liabilities
For more detail and analysis, follow these links to the City website:
- Proposed fiscal year 2018 Operating Budget
- Proposed fiscal year 2018 Capital Budget
- General Fund Long-Range Financial Forecast 2015-2016
- Fiscal Analysis of the City of Palo Alto 2030 Comprehensive Plan Draft Report February 16, 2017
General Fund revenues – “whose paying?”
Residents have a greater net fiscal benefit to the City budget than local employees
“This result is attributable to the greater revenue potential of residents. In particular, property tax revenue from residential uses is two to three times that of employment uses on a per-capita basis (reflective of value, space efficiency, and turnover). This residential property-related revenue outweighs the higher per-capita sales tax revenue and transient occupancy tax revenue generated by local employment. However, new residents are expected to generate a higher marginal cost burden for the City General Fund, as compared with local workers. Overall, though, residents’ greater revenue potential relative to workers outweighs the cost of services differential between residents and workers, resulting in greater per-capita net benefits attributable to new residents.” (Fiscal Analysis of the City of Palo Alto 2030 Comprehensive Plan Draft Report February 2017, p. 7)
The two largest sources of General Fund revenues are:
- Property Tax, anticipated at $41.7 million in FY2018 (22.5 percent of General Fund revenue);
- Sales Tax, pegged at $31.5 million in FY2018 (16.9 percent of General Fund revenue).
The Transient Occupancy Tax (also known as the hotel tax or TOT) has shown the steepest growth due to a 2014 ballot measure that increased the Transient Occupancy Tax rate as well as recent hotel development. The General Fund budget anticipates $25.1 million in TOT revenue in FY2018, a 51 percent increase over FY2012.

Property Tax
Property tax revenue is on the rise, up 23 percent since Fiscal Year 2015. For FY2018, property taxes are expected to produce upwards of $41.7 million, representing 22.5 percent of all General Fund revenues.
Property Tax – 75 percent comes from residential properties
A large and increasing share of the City’s property tax revenue comes from residential properties – about 75 percent, or $31 million for FY2018. This is partly because the tax basis for commercial property assessments stays low (basically loopholes in Prop 13), but mostly because Palo Alto residential property values are high.
Property Tax – Commercial properties and new construction offer only modest property tax benefit
Growth in the City’s property tax revenue is driven by increases in the assessed value of properties due to new construction or change of ownership. But as shown in the chart below, the vast majority of new assessed value in Palo Alto comes from changes in ownership.
“With residential properties being more numerous, more valuable in aggregate, and turning over more frequently in Palo Alto, it is probable that residential turnover in Palo Alto is adding assessed value to the City roll at a greater rate than commercial turnover. And while new construction does contribute to increases in assessed value, the contribution of these new developments is relatively modest and unlikely to dramatically affect aggregate assessed value.” (Fiscal Analysis of the City of Palo Alto 2030 Comprehensive Plan Draft Report February 16, 2017, p. 16)
Sales Tax
Details about specific sources and amounts of sales tax are kept confidential, however the City’s Sales Tax Digest Summary Fourth Quarter Sales (October – December 2015) offers some insights into this critical source of revenue.

“Net Pools and Adjustments” includes Palo Alto’s share of sales and use taxes collected from out-of-state sellers who ship goods directly to consumers in the state from inventory located outside the state and California sellers who ship goods directly to consumers in the state from inventory located outside the state.
A breakdown of sales and use tax by geographical area shows Stanford Shopping Center generates the highest individual area sales and use tax revenue at $5.7 million. Palo Alto’s three Neighborhood centers and the El Camino Real corridor (included in the “All Other Areas” category) produced $1.6 million. (Sales Tax Digest Summary Fourth Quarter 2015, pp. 6-7)

Sales Tax – Visitors spend the most on sales tax, followed by local employees, businesses and households.

Transient Occupancy Tax
The Transient Occupancy Tax (TOT) is a 14 percent tax on local hotel room revenue. The analysis below assumes that 90 percent of the locally-generated hospitality demand is supplied locally in Palo Alto.
Transient Occupancy Tax – Business demand generates 44 percent of TOT revenue
In 2015 about nine percent of the City’s transient occupancy tax revenue is attributable to resident households, while about 44 percent is attributable to local businesses. The remaining 47 percent of TOT revenue is attributable to visitors to the region, including those who come for leisure but are not visiting friends and relatives, and visitors to Stanford University

Here’s the big picture:
The City’s General Fund is the primary fund used to account for all general revenues of the City (e.g. property, sales, transient occupancy and utility user taxes). In general, these funds are allocated at the discretion of the City Council. This revenue is used to support citywide services such as public safety, community services, planning and community environment, and administrative support services.
Palo Alto’s General Fund revenues are growing, but expenses are growing faster. 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.
Unfunded Liabilities
Despite a healthy revenue outlook, the City is heavily burdened by unfunded pension and retiree health care liabilities (Unfunded Actuarial Accrued Liabilities or UAAL).
The UAAL for pensions alone is growing at 15 percent per year (more than twice the growth rate of City revenues) – servicing that unfunded liability will cost the General Fund $17 million FY2018.
Add to that similar liabilities for unfunded retiree health care, and annual UAAL payments will increasingly crowd out spending on city services and programs, traffic and parking mitigations, and infrastructure and capital improvement projects.
Putting that into perspective, the $17 million annually in “minimum payments” toward the UAAL for pensions (not counting unfunded retiree health care) compares with the entire operating budget of a large city department.

City efforts to manage these liabilities through labor negotiations will bear fruit over time. But until those long term adjustments come into play, the drain on the City’s budget will be significant.