This story originally appeared in the Daily Post on Nov. 18, 2019.
BY ELAINE GOODMAN
Daily Post Correspondent
Better-than-expected sales tax revenue and the sale of former City Manager Jim Keene’s house contributed to the city of Palo Alto’s budget surplus of $76 million for the 2019 fiscal year.
The city’s surplus for fiscal year 2019, which ended on June 30, was a 27% increase from the $59.5 million surplus for the previous fiscal year. The surplus is the difference between revenues and expenses for the year.
The $76 million surplus included $22.6 million from Palo Alto’s governmental activities, plus $53.4 million from business-type activities, such as the city’s utilities operations.
The surplus brings the city’s net position — the difference between its total assets and liabilities — to $1.2 billion. About 92% of that is tied up in land, buildings and infrastructure. Another 4.2% of the funds have restrictions on their use.
“The remaining balance of $46 million, representing 3.9% of the city’s net position, is unrestricted and may be used to meet the government’s ongoing obligations to its citizens and creditors,” according to the city’s Comprehensive Annual Financial Report, or CAFR, which was released last week. The City Council Finance Committee is scheduled to review the report tonight (Nov. 19).
Increases in tax revenue contributed to Palo Alto’s surplus
Sales tax revenue of $36.5 million was 17% higher than the previous year and about $5 million more than the city expected when preparing the fiscal year 2019 budget. Car sales and restaurants contributed to the increase.
And even though sales at brick-and-mortar retailers are decreasing due to online competition, a growing number of online retailers are now collecting sales tax, the financial report noted.
The $47 million in property tax revenue received in the fiscal year was 10% more than the previous year and about $1 million more than what the city was expecting.
Hotel occupancy down but tax revenues rise
Hotel tax, also known as transient occupancy tax, was $25 million, up about 3% from the previous fiscal year. A voter-approved increase in the hotel tax, to 15.5%, took effect on April 1. Average hotel occupancy was down 1.8% in the fiscal year but rates were up 2.6%.
The city received a one-time boost to revenue from the sale of former City Manager Jim Keene’s house at 335 Webster St. The city owned 66.2% of the home and Keene, who retired in December, owned the remainder. The house was purchased in 2010 for $1.9 million and sold in June for $3.9 million.
In the city’s business-type activities, the electric fund posted a $19 million surplus in fiscal year 2019, according to the financial report.
Vacancies, deferring projects saved money
About $7.4 million of that was due to revenue from the sale of excess hydroelectric generation. The electric fund’s expenses were lower than expected for several reasons, including the postponement of capital project deferrals, savings due to vacant positions, delays in energy and water efficiency contracts, and lower energy purchase due to decreased demand.
The gas fund had a surplus of $5.3 million, in part due to more sales revenue than expected.
The city raised residential electric rates by 6% and gas rates by 4%, effective July 1, 2018. Rates went up again this year.
Despite the budget surplus, Palo Alto is moving closer to placing a proposed business tax on the 2020 ballot to help pay for transportation and affordable housing projects.
The city is also grappling with how to pay employee pensions. As of June 2018, Palo Alto was facing a $455 million gap between how much it has saved for pensions and how much they’re expected to cost. The pension gap grew by 9.8% compared to the previous year.