City faces red ink again City faces red ink again (November 28, 2001)

Budget deficits forecast while city waits for economic ship to come in

by Don Kazak

The slowing economy is an inconvenience for many people and a problem for retailers, but it may result in some serious red ink in East Palo Alto.

City staff and consultants last week gave a grim picture of the city's immediate fiscal future, predicting a deficit of $182,000 for the fiscal year that ends June 30, and a staggering $2 million deficit for the 2002-03 fiscal year.

A $2 million deficit is especially significant for a city with a budget of just $13 million.

The City Council will begin dealing with the projected deficits at a council retreat Dec. 4.

"I'm convinced we're in a dire situation, and it's about to get worse," said Mayor Duane Bay.

The city's fiscal problems have several causes. First, beginning next year, it must pay back property owners $1 million a year for three years after a court found that the city had imposed an illegal parcel tax.

Second, while sales tax revenue has been up, generated by the stores at the Ravenswood 101 Retail Center, it hasn't been enough. Sales tax revenues for the city are up about $1 million, thanks to the shopping center, but the city also lost some $400,000 a year in sales tax it used to get from the now-demolished Whiskey Gulch stores that were replaced by the University Circle development.

The other grim news is that the state, which was flush with a budget surplus before the electricity shortage earlier this year, is looking at large deficits. The state had been projecting a $2.6 billion cash surplus for the current fiscal year, but that is turning into a projected $4.5 billion deficit, with an added shortfall of $12.6 billion to $14 billion for the 2002-03 fiscal year, said Jerry Peeler, a fiscal consultant for the city.

The state deficit could hurt East Palo Alto and more than 500 other California cities because the state could take away the motor vehicle in-lieu fees it now provides to the cities -- $1.3 million alone to East Palo Alto this year.

"We want to make sure that problem is not solved on our backs," City Manager Monika Hudson told the City Council last week.

The city is already taking steps to reduce costs. "We anticipate we would not fill certain positions," Hudson said. "We are more or less in a hiring freeze."

The city, ironically, did much better than projected for the fiscal year that ended last June 30. That led to a cash reserve of $1.1 million (including past reserves) which will be used to keep the current year's fiscal deficit to $182,000. "We are in a situation where we will use all of our reserves," Hudson said.

How the state's looming budget problems will affect cities is not clear yet, said Peeler. "There is political in-fighting in the state government now," he said.

The city's projected budget deficits do not factor in the possibility of an IKEA furniture store being built, which is projected to generate up to $1.8 million a year in sales tax revenue.

IKEA would also do something else for the city, Peeler said -- namely cut the city's current unemployment rate in half. Now, there are 1,140 unemployed in East Palo Alto, or a rate of 8.9 percent. But adding 550 IKEA jobs -- assuming local people are hired -- would greatly reduce that.

One bit of bright news on the horizon is that the city will get financial help from the 220-room hotel planned for University Circle. By the 2003-04 fiscal year, when the hotel is projected to open its doors, the city will get $1.6 million in hotel taxes (called transient occupancy tax). By the next year, that will increase to almost $2.4 million.

So with the addition of the hotel taxes and the end of repaying the parcel tax refunds after 2004, the city's budget situation should look much better.

"We are waiting for our ship to come in," Hudson said of the hotel.

Between now and then, though, things could be grim. "We are looking at freezing our expenditures," Hudson said. "For three years, it is a treading water scenario."

Bay noted that the city has already been "in a belt-tightening mode for some time."

E-mail Don Kazak at dkazak@paweekly.com