Palo Alto and Stanford University remain at odds over whether Stanford should guarantee that its massive hospital expansion doesn't hurt the city's bottom line.

The question of "revenue guarantee" is the lone obstacle standing in the way of a development agreement that would pave the way for Stanford's proposal to add 1.3 million square feet of development space to the city. Because the project far exceeds the city's zoning regulations, Stanford is expected to provide a variety of community benefits to get the green light. The university has already agreed to provide $4 million for community health programs, $12 million for programs relating to sustainability and $11 million for various transportation improvements.

The university also agreed to buy Caltrain Go Passes for all hospital employees -- an offer that Stanford says raises its "community benefits" package to $173 million. Some city officials see the Go Pass benefit as a mitigation Stanford is required to provide to get the environmental clearance for the project rather than a benefit that needs to be included in the development agreement.

At Tuesday night's (March 15) discussion of the City Council's Finance Committee, both sides said that they have reached an agreement on everything but revenue guarantee. Stanford has offered a $1.7 million upfront payment to cover the operating deficit projected by the city's economic consultant, ADE.

The school had previously offered a $1.1 million payment. Mike Peterson, Stanford's vice president for special projects, said the university will also make sure that the permits, use-tax direct payments and sales-tax payments "maximize to the city the tax revenues that it needs."

The Finance Committee also heard from several city residents who urged city officials to green-light the project, which includes a new Stanford Hospital & Clinics building, an expansion of the Lucile Packard Children's Hospital and renovations to several Stanford School of Medicine buildings.

Environmentalist Walt Hays, co-chair of the group Friends of Stanford Hospital and Clinics, argued that Stanford has offered more than enough benefits to merit approval for the project.

"Here's Stanford now offering to pay upfront the worst case, even though the worst case may never occur," Hays said. "It seems to me they're being generous."

Developer Charles "Chop" Keenen went a step further and said the city is trying to "shake down the university for guaranteeing this theoretical deficit."

Palo Alto City Manager James Keene stressed that the city isn't looking to make money but merely to recover the potential costs of the project. He said staff remains open to exploring other models for guaranteeing these costs.

"The city staff has absolutely no interest in profiting through the fiscal-impact analysis," Keene said. "We just need to ensure that if there's a cost generated by the project on the city that they're offset by revenues, however it is we're calculating them, over the life of the project."

Committee members agreed that the development agreement should include provisions for guaranteeing the project's potential costs. Vice Mayor Yiaway Yeh said he is open to considering various alternatives to achieving cost neutrality. Chair Greg Scharff said Stanford should at least offer to "share the risk" of these costs with the city and asked university and city officials to go back to the negotiating table.

"I would look forward to you coming up with something together that you can recommend to us, where you're all on the same page," Scharff said. "I'm sure you guys can do it."