With cost estimates rising dramatically, Palo Alto is considering scaling back its plans for the California Avenue area parking garage by removing one of the two planned underground levels.

The revision, which is proposed in a new report from the Public Works Department, would reduce the cost of the garage by between $6 million and $8 million at a time when the city's overall infrastructure plan is facing a funding gap of about $50 million.

If the council approves this proposal on Monday the city will move ahead with a five-story garage that would have one basement, four above-ground levels and 542 parking spots.

The prior design, which the City Council approved on April 3, included two basement levels and 636 parking spots. At the time, staff had pegged the garage cost at $34.8 million. Now, the estimate is $40.4 million, according to the report.

The garage, which is planned for Sherman Avenue, is neither the first nor the last infrastructure project to fall victim to the vagaries of Bay Area's construction market, which continues to sizzle.

Last year, the council reluctantly agreed to simplify the design of a proposed bike bridge over U.S. Highway 101, largely in response to escalating costs. Even with the revised design, the cost of the project is now estimated at $16 million, well above the $10 million that officials had initially intended to spend.

Similar issues are almost certain to emerge in the coming year as the city moves ahead with other big-ticket infrastructure projects, including a new public-safety building, a new garage on Hamilton Avenue and replacement of outdated fire stations near Rinconada and Mitchell parks.

For the public-safety building, the costs are rising particularly rapidly, fueled by both the construction market and the project's expanded scope. In 2012, when the council was putting together its infrastructure plan, officials were expecting to spend $47 million on construction and another $10 million for land acquisition.

Now, city engineers believe the new police headquarters could cost as much $91 million. Using a projection of construction-cost escalations, Public Works staff believes the price tag would rise to $74 million by 2021, when construction would take place. The remaining $17 million balance would result from policy choices, including the decision to build two underground levels to accommodate parking and program space, according to the report.

The council's decision on the California Avenue garage could have a significant impact on the police building, and vice versa. The two projects are being designed in tandem and, once completed, they will occupy lots on 350 and 250 Sherman Ave., respectively.

Two parking lots that the structures would replace currently have 310 spaces between them. To limit the loss of parking spaces during construction, the city plans to complete the garage before commencing work on the public-safety building.

The symbiotic relationship between the garage and the police building is underscored in the environmental analysis that the city released last week for the two projects.

The Environmental Impact Report analyzes four alternative scenarios, two of which involve building the police headquarters elsewhere and one that would feature a smaller garage, with 300 parking spaces (the fourth would leave things as they are today). The document determined that an alternative with a 300-space garage would be the "environmentally superior option." The report also concluded, however, that the project would not cause any "significant and unavoidable" impacts even with the larger structure.

The proposal to eliminate one of the underground levels brings the project garage closer to the council and staff's original vision. A year ago, staff and consulting architect Michael Ross presented to the community three different options; two of them included retail on the ground floor and two levels of underground parking; the third didn't have any retail and had one level of parking. During the public outreach process, area merchants lobbied for the city to scrap the retail component and create as many parking spots as possible.

Owners of businesses, including La Bodeguita del Medio, The Counter, Molly Stone's and Izzy's Bagels, also submitted a letter, calling for the city to go big. While they acknowledged in the letter the significant cost of the new structure, they called the project a "one-time opportunity to help alleviate the parking demand and make a forward-thinking capital investment in the future and continued success of our community and business district."

The council largely agreed, resulting in the four-story garage with no retail and with two levels of underground parking. Then-Mayor Greg Scharff said that building a larger garage addressed the concerns of the merchants and residents in nearby neighborhoods.

Councilman Eric Filseth agreed, saying that even if digging the added basement level would cost $4 million more, "In the long run, we'll find that (it's) money that's spent well."

The idea of eliminating an underground level isn't sitting well with some area merchants, a group of whom attended the Thursday meeting of Architectural Review Board to express their discontent (the board discussed and generally lauded the design, though it deferred its decision until March 1).

Former Councilman Jack Morton, president of the California Avenue Business Association, lauded the latest design of the garage but said the new proposal to reduce the parking capacity isn't sitting well with area businesses.

"From merchants' point of view, this project now looks beautiful above ground, but it sorely underperforms what the expectation of the community was," Morton said.