Earlier this month, as Palo Alto's planning commissioners delved into the irksome problem of downtown parking, Commissioner Michael Alcheck made a keen observation: As far as problems go, a wildly popular downtown isn't such a bad problem to have.

"I think we can approach this problem with some level of pride, with some level of appreciation that we've accomplished a success story that other Peninsula cities haven't," Alcheck said at the Dec. 12 meeting.

His comment in many ways encapsulated 2012 in Palo Alto. If 2011 was the year in which the city was washing off the cobwebs from the Great Recession, 2012 was the year in which the city completed its economic rebound and began dealing with the problems of its own success. It was the year in which giant developments began targeting Palo Alto, enraging downtown residents who recall with a mix of nostalgia and anger the good old days when there were ample parking spots outside their homes. It was the year in which high-speed rail -- an issue that has been enraging the community and engaging the council since 2009 -- finally receded into the background after state legislators approved in July funding for the line's first segment in Central Valley. And it was also the year in which the city completed its long-awaited Bike and Pedestrian Master Plan and secured enough funding to ensure that the ambitious plan will not lay dormant, like its predecessor.

The city had its share of problems, from residential burglaries to outdated infrastructure, from pension costs that have increased tenfold over the past decade to medical spending that continues to surge. And the City Council had to stifle its usual share of controversies, from animal lovers opposing City Manager James Keene's unpopular proposal to shutter the local animal shelter and a controversial plan to ban vehicle habitation to a community uproar over insufficient parking and the city's back-door negotiations with billionaire developer John Arrillaga over the latter's plan to build a giant office-and-theater complex near the downtown train station.

But aside from the pockets of issue-specific discontents, the mood has generally been bright in Palo Alto. When respondents to the 2012 National Citizen Survey were asked in September to rate the overall "quality of life" in the city, 94 percent gave the city a "good" or "excellent" grade and 88 percent gave the two highest grades to the city's "quality of services."

As Keene noted in his annual wrap-up presentation, the impact has been particularly significant when it comes to economic development and emergency preparedness. In the former category, 67 percent gave the city a "good" or "excellent" rating, up from 52 percent in 2011. In the latter category, the number went up from 64 percent to 73 percent. Keene said it was gratifying to see residents recognize the city's improvement in areas that have seen a particular council focus in recent years.

"We're a small city and we have a medium-size staff, but the volunteer efforts of the council and community and the work of our staff stacks up with anybody, really," Keene said.

While some fiscal challenges remain, it was the topic of growth that dominated City Council meetings in 2012 -- not the worst subject to deal with at a time when the rest of the nation is still experiencing a sluggish economic recovery, a fragile real estate market and stubborn unemployment rate that hovered at around 7.6 percent near the year's end. In Palo Alto, sales-tax revenues have risen for the third straight year (going from $18 million in fiscal year 2010 to a projected $23.4 in 2013, which began on July 1), housing prices are near an all-time high and the unemployment rate is 4.2 percent. Other revenue sources are also booming. Hotel-tax revenues in Palo Alto have risen from $6.9 million in 2010 to $9.7 million in 2012. Office vacancies dropped from 5.5 percent in fiscal year 2011 to 2.9 percent in 2012.

The year's most passionate debates stemmed directly from this success. Spring saw a series of tense public hearings over the four-story "Lytton Gateway" building that was proposed for the prominent corner of Alma Street and Lytton Avenue -- a project the City Council approved in May. In the summer, the council debated an offer from commercial developer Jay Paul to build a large office complex and a new police headquarters near the AOL building on Page Mill Road -- a proposal that is set to undergo further transformation in 2013. And the biggest proposal of all came in the fall, when the city consultants unveiled Arrillaga's "concept" for transforming a central but long neglected section of downtown into what the city dubbed an "arts and innovation district."

The topic of new developments, particularly downtown, has literally hit close to home for the frustrated residents of Downtown North and Professorville, where residents often talk about a diminishing quality of life. The issue came to a boil with Arrillaga's proposal, which has been negotiated largely out of public view, much to the consternation of local land-use watchdogs and council watchers. On Dec. 3, more than a hundred residents attended a council meeting and dozens blasted the council for taking shortcuts. The council responded by nixing its previous plan to bring the Arrillaga project to the voters and directed staff and consultants to evaluate two other alternatives (in addition to Arrillaga's) as part of a "master plan" for the site at 27 University Ave. By a 7-0 vote (with Larry Klein and Yiaway Yeh not participating), the council agreed that the plan is a bit too ambitious for the community and that it's time to take a step back.

"The best way for us to move toward something that both has a good chance for community support and good design outcomes is to go ahead and invest in this open Palo Alto process," Burt said at the hearing.

The debate over 27 University Ave. carries some shades of the age-old feud between the city's pro-growth "establishment" forces and its slow-growth "residentialists" -- a conflict that reached its zenith during the 1960s and 1970s. But while the City Council in those days was deeply polarized, today's group speaks largely in unison as it tries to find a sweet spot for downtown growth and strike a perfect balance between protecting the quality of life and encouraging economic growth. In September, Burt was one of several council members to voice enthusiasm for Arrillaga's proposal, which includes a new theater for the award-winning company TheatreWorks and a host of circulation improvements around the downtown transit hub. But even as he supported breaking the 50-foot height barrier for this project, he called on his colleagues to reaffirm the city's general commitment to the height restriction -- a bedrock provision for those who think the city is growing too fast.

The debate over growth is sure to provoke further debates and disagreements in the years ahead. But even with the issues of parking, traffic and infrastructure high on the agenda, council members were generally sanguine about the past year, with many echoing Alcheck's view that in the grand scheme of things, this is a good time to be Palo Alto. When the City Council convened on Dec. 17 for its final meeting of 2012 and heard City Manager James Keene's "year in review" presentation, the discussion felt like a victory lap.

"I think we did a lot of impactful things this year that are going to make Palo Alto a much better place," Vice Mayor Greg Scharff said after the presentation.

His colleagues agreed, with Greg Schmid (who was re-elected this year) calling Keene's presentation a "great way to end the year" and Pat Burt (who was also re-elected) praising city staff for accomplishing "a great deal in a year." Councilman Sid Espinosa and Mayor Yiaway Yeh, each of whom concluded his fifth and final year on the council, also voiced enthusiasm about the city's recent progress.

"It's exciting to know that as a city, there's immense strength that exists at all levels," Yeh said.

Scharff, who in accordance with local tradition is set to become mayor in January, pointed to several projects that advanced in 2012 and that will impact the city for decades to come. These include the streetscape project on California Avenue, which will reduce lanes and add new plazas, street furniture and outdoor seating to the commercial thoroughfare -- all part of the city's effort to make the street more like University Avenue or Castro Street in Mountain View. He also cited the dramatic renovation of the Palo Alto Municipal Golf Course, which the council approved in November as part of a regional plan to improve flood protection around San Francisquito Creek. As part of the project, which includes rebuilt levees, a widened channel and an expanded bridge between Palo Alto and East Palo Alto, the golf course will be entirely reconfigured and 10 acres of space will be made available for three athletic fields. More importantly, the project will protect residents in the most vulnerable area downstream of the creek from the type of damage they experienced in February 1998, when flood water drenched neighborhoods in Palo Alto, East Palo Alto and Menlo Park.

A less visible, but no less important, accomplishment touted by Scharff in the final meeting of the year was the council's ability to respond to the economic recession by cutting about $9 million in annual costs between 2009 and 2012 without really impacting the level of services.

"That's really the big win here," Scharff said. "We haven't degraded what we offered to the community in terms of services."

With the city's pension and health care obligations still on the rise, the problem of cutting costs hasn't completely faded away. The council's decision to keep the local animal shelter running places much of the onus for raising funds for the animal operation on a new advocates group, Friends of Palo Alto Animal Shelter. The number of full-time positions in the city's General Fund has dropped by 20 percent over the past decade and the council plans to continue in 2013 its long and painful effort to extract benefit concessions from the city's labor unions.

Even with these challenges on the horizon, 2012 marked a turning point for Palo Alto as the city pivoted from problems of austerity to problems of growth. The latter loomed large as the year came to an end and are likely to tower over other issues as the new year begins.