Two years after Palo Alto approved a dramatic expansion of Stanford University Medical Center, city officials find themselves in a pleasant quandary as they look for ways to spend the cash that Stanford had contributed as part of the development deal.

In exchange for getting the city's permission to expand its hospital facilities in what officials often call the largest construction project in Palo Alto's history, Stanford had agreed to contribute $44.2 million to the city. While some of these funds are earmarked for particular categories -- health, infrastructure and affordable housing and sustainability -- most of the money falls under the City Council's discretion. On Monday night, the council kicked off the process for figuring out how to spend the funds by directing its Policy and Services Committee to hammer out the city's guiding principles for using the money.

So far, Palo Alto has received about $32.5 million from Stanford, with another $11.7 million due around 2016, said David Ramberg, assistant director of the Administrative Services Department. The city has already spent or loaned $4.9 million of Stanford funds, with the lion's share ($4.3 million) going to affordable housing.

The city had made a $1 million long-term loan to Stevenson House for rehabilitation and two loans totaling $3.3 million to the Palo Alto Housing Corporation for its proposed senior-housing development on Maybell Ave., a project that also includes 15 single-family homes.

Palo Alto has also spent $524,124 from Stanford's contribution on design work relating to 27 University Ave., a proposal by developer John Arrillaga to build office towers and a theater at a site currently occupied by the MacArthur Park restaurant. Another $139,389 was allocated to Project Safety Net -- a broad community effort to promote youth wellbeing (staff is recommending adding another $2 million to Project Safety Net).

This still leaves the council with more than $25 million to distribute and plenty of decisions to make. On Monday night, the council reiterated that they would like to see much of this money spent on long-term infrastructure projects, with the proposed bike bridge over U.S. Highway 101 at the top of the list. Officials have already received a $4 million grant in Stanford University funds from Santa Clara County for this project and are optimistic about landing some state funds for the bridge from the One Bay Area Grant program. The funds from the Stanford Hospital development agreement could potentially close the gap and help fully fund the proposed bridge at Adobe Creek.

Council members agreed Monday that the funds should not be saved as an endowment but rather spent on "transformative projects" that would be enjoyed by multiple generations. Vice Mayor Nancy Shepherd advocating using the funds to mitigate the traffic impacts of the expanded hospitals. Transit programs, she said, should be a priority.

"I look at these funds as time for us to prepare ourselves for a number of more trips that are going to be made to our community because of the global hospital being built right now," Shepherd said.

Councilman Pat Burt also voiced support for bolstering the city's transportation services and advocated expanding the city's shuttle system, potentially in partnership with the school district.

Staff had also proposed a set of guiding principles that included using the funds as an endowment, with accrued revenues saved for future generations. That idea proved decidedly unpopular Monday, with council members proving far more eager to spend the money than to save it.

"I think the endowment concept doesn't fly," Councilman Larry Klein said. "I feel very strongly about that. I think it's just inconsistent logically with what the city wants to do, what the staff wants to do, which is to spend the money over time on impactful projects."

Klein proposed having the council's Policy and Services Committee come up with a set of guiding principles that the council would then approve, an idea that the council adopted by an 8-0 vote, with Liz Kniss absent. Councilwoman Karen Holman echoed many of her colleagues when she advocated taking the time to set up a proper process.

"How we spend the money should be a reflection of our values and principles," Holman said. "Not how we spend our money determining what our values and principles are."

Stanford's development agreement, which the council approved in April 2011 after extensive negotiations, enabled the hospital to proceed with what officials dubbed "Project Renewal" -- a $5 billion effort that includes reconstruction of Stanford Hospital & Clinics, an expansion of the Lucile Packard Children's Center and renovations to Stanford University School of Medicine.