A heated standoff between downtown residents and business leaders over parking spots reached its climax Tuesday afternoon, when the City Council approved a controversial policy that would gradually reduce the number of permits that would be sold to employees.

Close to 200 people -- including residents, business executives and downtown workers -- packed into the Council Chambers for a rare Tuesday meeting to weigh in on the second phase of the Residential Preferential Parking (RPP) program, which aims to relieve parking congestion in downtown's residential neighborhoods. Dozens more submitted letters to praise or slam the program, which would expand the existing boundary of the nascent parking district and establish a limit on the number of permits sold to non-residents.

Under a proposal that the business community vehemently opposed but that the council approved by a 5-0 vote (with Councilman Marc Berman, Mayor Pat Burt, Councilwoman Karen Holman and Vice Mayor Greg Scharff all recusing themselves), the city would cap the number of non-resident permits at 2,000 this year and reduce the number by about 10 percent, or 200 permits, every year thereafter. At that pace, there would be no permits sold to non-residents starting in 2026.

By approving the restriction on employee permits, the council handed a measured victory to residents who have long protested the transformation of their blocks into commuter parking lots. Some neighborhoods, including Downtown North and Professorville, saw significant relief in September, when the city launched the first phase of the program and created a two-hour time limit for cars that don't have permits. But for those neighborhoods just beyond the parking district, the situation got decidedly worse and commuters simply opted to park beyond the district's boundary, where all-day parking remains a free option.

Mary Anne Baker, who lives on Hamilton Avenue in Crescent Park, told the council Tuesday that she was both sad and angry about the damage being done to her neighborhood by the recent changes, which shifted downtown's parking woes toward her area.

"Until recently, we never had a parking problem from downtown," Baker said. "Now we do and it's a fabricated problem, caused by rampant development without adequate parking and followed by a mishandling of what was supposed to be a solution."

She and many of her neighbors called for the council to go further and create a parking program in their neighborhood similar to the one in College Terrace, where permits are only sold to residents.

Business leaders countered that limiting parking permits to employees without offering them any alternatives is short-sided and unfair. The move, they said, would penalize service workers and make it even harder for downtown businesses to attract employees.

With neither side entirely happy, the short-handed council signed off on what members agreed to be a reasonable compromise: one that would offer new protections for impacted areas of Crescent Park and add some "teeth" to the city's effort to get downtown workers to switch from cars to other modes of transportation. The five participating council members also agreed that the cap of 2,000 permits in the first year wouldn't be too burdensome to businesses, given that the city has only sold about 1,600 permits so far in the program's first phase.

Much like in the first phase, the RPP program would create a two-hour parking limit on residential streets for cars that don't have permits, and allow only downtown residents and employees to purchase permits. Residents would still be able to acquire up to four permits per household (the first for free, and up to three more for $50 each). Workers can purchase permits based on a two-tired price structure, with low-income earners paying a lower rate.

The parking district would be expanded in the second phase, with the boundary spreading further south (to Embarcadero Road) and east (to Hale Street, Forest and Lincoln avenues), to areas that have seen their situation deteriorate since last fall. Blocks that have petitioned for entry into the district would be added to the parking program. Other blocks within the newly annexed area will become eligible to easily join the parking district whenever their residents petition.

The program was created with heavy input from a stakeholders group that included downtown residents and businesses. On Tuesday, as the council considered the next phase, the group was decidedly frayed.

"The residents of Palo Alto -- your constituents -- don't want residential areas to be turned into parking lots," said Steve Hardy, a Fulton Street resident.

But Russ Cohen, president of the Palo Alto Downtown Business and Professional Association, pointed to recent surveys that indicated that many of downtown's office workers already take transit and carpool (service workers, meanwhile, are far more likely to drive alone). The business community, he added, wants to work with the city to solve the traffic problems, as evidenced by its recent participation in downtown's new Transportation Management Association, a nonprofit that aims to reduce the number of workers driving solo by 30 percent. Many business leaders, Cohen said, "are disenchanted by the local government. They feel they are not taken seriously."

"Please listen to us today," Cohen said. "Do not reduce the number of parking permits in the RPP."

Other downtown employees, including several restaurateurs, a hotel executive, and a few employees of Watercourse Way, also implored the council not to make life even more onerous for small businesses and their employees, many of whom commute from afar and have multiple jobs.

Barbara Gross, former general manager of the Garden Court hotel, addressed the council on Tuesday and also submitted a letter in which she characterized the decision to limit employee permits as a reversal that "reflects a disregard to the business community" after a period of collaboration.

"As a resident of Palo Alto I want my Council to represent issues fairly and in open public discussion," Gross wrote. "The business community is central to funding the general fund. I ask you to have that connection publicly discussed when residents are primarily thinking issues through from a personal perspective."

After hearing from more than 40 residents, the council decided to stay its course and approve an ordinance largely consistent with the one they crafted on Feb. 1.

Councilman Cory Wolbach characterized the split as a contest between "neighborhood protection" (the goal of the residents) and "shared streets" (the vision of the employers). The proposed solution, he argued, offers a compromise.

"When you have two groups so upset, it's either a sign that you're doing something wrong or that you're looking for a compromise and no one is getting everything they really want," Wolbach said.

His colleagues agreed. Councilman Eric Filseth observed that downtown's parking problems have worsened in recent years, exacerbated by new developments that offer inadequate parking. Echoing Wolbach's comment from a prior meeting, Filseth declared that "residents have waited long enough." He also rejected the argument from some in the business community that reducing the number of non-resident permits will hurt downtown's commercial core.

"It's hard for me to believe that the commercial sky is going to fall on a couple-of-percent-per-year reduction in parking capacity for a few years," Filseth said.

Councilman Greg Schmid and Councilman Tom DuBois both supported Filseth's motion, with DuBois calling the council's approach a "prudent way to move forward." By adopting the annual reductions, DuBois said, the city is putting some teeth in the Transportation Management Association and giving employers "a 10-year notice to get started" in shifting workers away from cars and to other modes of transportation.

Councilwoman Liz Kniss predicted that in the next few months, Crescent Park residents who are suffering through parking-spillover problems will see the same kind of improvements that residents in Downtown North and Professorville experienced last September.

"I think as soon as this goes into place, as uncomfortable as it may seem right now, the same relief will come," Kniss said.