City collects an extra $112 million

(Read the audited financial report, known as the AFCR.)

BY ELAINE GOODMAN
Daily Post Correspondent

The city of Palo Alto’s citywide revenues exceeded expenses by $112 million last fiscal year, and $24 million in utility revenue was used to bolster the city general fund that pays for day-to-day operations.

Those figures are in the city’s Annual Comprehensive Financial Report, or ACFR, for fiscal year 2025, which ended June 30. The City Council Finance Committee reviewed the ACFR during a meeting last week — where some council members questioned the amount of administrative costs associated with the city’s business tax.

The city collected $5.7 million in business tax revenue last fiscal year, and spent $700,000 of that on administrative costs. In fiscal year 2024, the business tax raised $5.4 million, of which $600,000 went to administrative expenses.

During the Finance Committee meeting, council member Keith Reckdahl questioned why administrative costs were that high.

“That’s a big chunk of the business tax,” he said. Lauren Lai, the city’s chief financial officer, said the city contracts with Fresno-based HdL Companies to administer the tax. Their services include tracking down businesses that haven’t paid the tax, for which HdL receives a collection fee.

While collection fees were relatively high in the first two years of the tax, the city expects the fees to decrease over time, Lai said.

“We’re hoping that’s going to taper off,” she said.

Tax approved by voters

Voters approved the business tax through Measure K on the November 2022 ballot. The tax, which is based on the square footage of a business, went into effect in January 2023.

The tax was 3.75 cents per square foot per month through 2024. Starting in January 2025, the tax increased to 7.5 cents per square foot per month. The tax is capped at $500,000 per business each year.

The tax revenue is divided equally to cover three types of expenses: public safety; affordable housing and homeless services; and transportation and grade separation projects.

Through fiscal year 2025, $400,000 of the business tax revenue was spent on separating the street from the Caltrain tracks at Churchill Avenue, and $700,000 went toward grade separations at Meadow Drive and Charleston Road.

For housing affordability and homeless services, $500,000 of the business tax revenue went to modular homeless shelters known as Homekey; $100,000 went to a safe parking program for vehicle dwellers; and $200,000 went to a city plan for the San Antonio Road area.

All of the business tax revenue earmarked for public safety — $1.8 million in fiscal year 2024 and $1.9 million in fiscal year 2025 — was spent. The expenses included additional dispatchers and traffic team members, and staffing a fire engine at Station 2.

As of June 30, the housing category of the city’s business tax revenue had a $2.5 million balance. The balance for transportation and safe train crossings was $2.2 million. Public safety had a zero balance.

City’s net position is $1.6 billion

The $112 million excess in revenues compared to expenses last fiscal year is what the city calls an increase in net position. Officials described the city’s net position — the difference between assets and liabilities — as being similar to an individual’s net worth. With the $112 million increase, the city’s net position grew to $1.6 billion.

The ACFR breaks down revenues and expenses in two categories: governmental activities, such as police, libraries, planning and parks; and business-type activities, which include the city utilities.

For governmental activities, revenues exceeded expenses by $35 million last fiscal year, as the city saw revenue increases from property tax, hotel tax and utility user tax.

For business-type activities, revenues exceeded expenses by $111 million. But the city then transferred $24.7 million of that excess to the general fund, which covers day-to-day operations. 

Utilities contribute to excess

The transfer of funds from the city’s natural gas utility to the general fund is allowed by Measure L, which Palo Alto voters approved in November 2022. The latest transfer follows council’s approval in June of a package of utility rate hikes, including a 5% increase for natural gas.

Of the $112 million increase in net worth last year, $47 million was the city’s net investment in capital assets, such as buildings and land. Work continued last year on the city’s new police station, Boulware Park and street and sidewalk projects.

The growth in net worth also includes a $22 million increase in “restricted” funds, which includes money with strings attached such as grant funding.

The city’s unrestricted funds grew by about $43 million last year, to $117 million. Although those funds don’t have strings attached, the city might have policies that direct the money to various reserve funds or for paying for employee pensions, finance officials said.