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Palo Alto is one of the Bay Area’s wealthiest cities. But four years ago the City Council was forced to confront the fact that it had a major pension shortfall on its hands. If left unchecked, the cost of retirement payments for the city’s employees threatened to grow from 8% of general fund spending to 20% by 2028.
The council took the prudent action of setting aside money to get its future pension obligations under control. But then two unexpected setbacks created a sizable budget hole. First came the pandemic. Then a Santa Clara County Superior Court judge ruled that the city’s decades-long practice of transferring a portion of funds from its gas utility to its general fund constituted an illegal tax under state law.
That forced the City Council to make $40 million in cuts over a two-year period, eliminating services and dozens of full-time and part-time positions. The council was able to restore many of those services and positions in 2021, largely due to the use of federal stimulus money. But that money is running out, leaving Palo Alto with a considerable budget hole.
The City Council is putting two measures on the Nov. 8 ballot to address its budget challenges. Measure K would institute a new tax on Palo Alto businesses that is expected to raise $9.8 million annually. Measure L would enable Palo Alto to resume transfers of no more than 18% of gross revenues from the city’s natural gas utility to the general fund. That is expected to generate $7 million every year.
The measures require a majority vote to pass. Voters should approve Measures K and L to help ensure Palo Alto maintains a reasonable level of city services.
Measure K
Palo Alto is the only major Bay Area city without a business tax.
Measure K would change that, establishing a new business tax for 35 years at 90 cents per year for each square foot of space above 10,000 square feet.
The City Council indicates that it wants the money to go toward supporting public safety, affordable housing and addressing the dangerous grade-level rail crossings in the city. But given that the money goes to Palo Alto’s general fund, it could be spent for any city services.
The tax amount was the result of compromise with business leaders. The City Council considered putting a measure on the ballot in 2020 but backed away out of fears it would hurt businesses already suffering from the pandemic.
The council’s original proposal called for an annual $1.32 per square foot tax and a cap of $1 million per business. The Palo Alto Chamber of Commerce and the Silicon Valley Leadership Group threatened to oppose the tax. The two sides compromised on an annual 90 cents per square foot tax and a $500,000 cap.
Measure L
Palo Alto owns and runs its utility that provides water, electricity, natural gas and wastewater disposal for residents. It began in 1896 when the water-supply system was installed. The city added an electric power system in 1898 and a natural gas distribution system in 1917.
Voters in 1950 approved language allowing the city to use gas-utility revenues to pay for all costs associated with the utility and transfer the remainder into the general fund. But six years ago, a Palo Alto resident sued the city, saying the transfer violated Proposition 26, passed by voters in 2010, which limits utility rates to the “reasonable cost” of providing service.
The court ruled against the city. After it appealed the decision, the two sides reached a settlement calling on the city to refund $17 million to customers.
Now the City Council is asking voters to let it resume the transfers by updating the City Charter to comply with state law. It would allow the transfer of 18% of the gross revenues from the city’s natural gas utility to help fund basic city services. The alternative for Palo Alto is a future with limited services.
Voters should approve Measure K and Measure L.
