As the COVID-19 pandemic continues to batter the local economy, the Palo Alto City Council is preparing for a fresh round of budget cuts in the coming months to account for a sharp drop in sales and hotel tax revenues.

The council is expecting to see a budget shortfall of nearly $7 million in fiscal year 2022, which begins on July 1. The estimate is based on an admittedly uncertain assumption by city staff that the economic recovery will proceed at a moderate pace over the next few years and that the recession will stretch until 2027.

In its first major discussion of the city's budget, the council agreed on Monday night to adopt this "moderate" scenario for planning purposes and to take a fresh look at the city's list of infrastructure projects to see which can be deferred or scrapped. By a 6-1 vote, with council member Greg Tanaka dissenting, the council adopted the economic forecast from the Administrative Service Department, which assumes a $6.8 million shortfall in 2022.

The scenario estimates that the city will see about $30 million in sales tax revenues and $10 million in transient occupancy tax revenues in 2022. That would be up from the current year, in which the city is projecting $25 million and $4.8 million in these two categories, respectively.

Even with the uptick, however, both revenue sources are expected to remain well below historic levels. In 2019, the city's sales tax revenues totaled $36.5 million and its hotel tax revenues were $24.9 million, according to a report from the Administrative Services Department.

The report notes that while federal stimulus packages have contributed to positive economic indicators, two more months have passed without a new stimulus package and some programs that focus on income and business support will expire by the end of the year.

"More restaurants and other small businesses in Palo Alto have closed either temporarily or permanently," the report states. "While there has been positive news in the last few months regarding a coronavirus vaccine, major benefits seen from the vaccine administration are not expected until the next fiscal year when distribution is widespread."

In discussing the latest economic projections and the city's budget strategy, the council agreed Monday that it will have to pay special attention to infrastructure. Even as the council cut about $40 million from its budget last year and eliminated nearly 70 positions, the city has advanced numerous capital projects that had been in the planning stages for years and, in some cases, decades.

The city completed last year the construction of a new fire station near Rinconada Park and a six-level parking garage near California Avenue, projects that were listed on the council's 2014 list of infrastructure priorities. Another project on the list — a bike bridge over U.S. Highway 101 — is currently in the works, with plans afoot to install the main span between Feb. 13 and Feb. 14.

And in the coming months, the city will break ground on its most expensive and highest priority project: a $118 million public safety building on Sherman Avenue. Construction of the new building, which will serve as headquarters for the Police and Fire departments and for the Office of Emergency Services, is set to conclude in 2023.

Vice Mayor Pat Burt suggested Monday that given the severe financial downturn, the council needs to reconsider its infrastructure plan. Burt, who unsuccessfully lobbied his colleagues last week to scale down the proposed public safety building by possibly eliminating one of the garage levels, argued Monday that the city is no longer living in the era where it can fund every project on its list. He suggested stretching out the city's five-year capital plan to seven and eight years to save money in the near term.

"We have to realize that the capital plan has to be adjusted," Burt said. "That doesn't mean we have to give up all of it but it has to be adjusted and come down to earth."

While the council didn't discuss specific projects that would be deferred, it directed staff to return with some options for dropping or deferring capital expenditures.

The council's 2014 list — which also includes improvements to Byxbee Park, completion of streetscape improvements in the Charleston/Arastradero corridor and the replacement of the Mitchell Park fire station — represents just a portion of the city's ambitious plans. The city's capital budget in the current year is $288.7 million and its five-year plan includes $793.4 million in capital spending.

While about $461 million of the total figure is devoted to utility projects, Palo Alto's budget also includes a $331.5 million "capital improvement fund" with 86 projects in categories such as buildings, parks, technology upgrades, streets and sidewalks (the public safety building is by far the largest project on this list).

These projects include everything from routine playground maintenance and new bikeways to technology upgrades at the downtown parking garage and the renovation of the Palo Alto Junior Museum and Zoo.

By focusing on infrastructure projects, the council is hoping to avoid making major cuts to programs and services this year. Last June, in response to plummeting revenues, the council voted to discontinue the city's shuttle program, cut staffing in Police and Fire departments and dramatically slash funding for libraries and art programs. Council member Alison Cormack said she does not believe the community has yet "felt the impact of the cuts we made because so many programs and services are closed."

"I think people think this is all going to come back when COVID is over and it's not," Cormack said.

While the council agreed that the economic news is largely gloomy, Tanaka suggested that the staff projection is in fact too optimistic. He said he has spoken to people in the hotel business in recent weeks. None of them are expecting a recovery any time soon, he said.

"If the people operating these businesses aren't thinking this, I don't know how we can think this. To me it's incredibly wishful thinking," Tanaka said.

But while Tanaka favored more conservative assumptions, others cautioned against cutting too much. Mayor Tom DuBois suggested that the council consider tapping into the city's budget stabilization reserve to cover projected revenue shortage. The reserve, which functions like a rainy day fund, is made for situations like this, he said.

"This is not a normal recession. None of us really know how the world is going to recover, whether things will permanently change or if we'll go back to where we were before," DuBois said.

Find comprehensive coverage on the Midpeninsula's response to the new coronavirus by Palo Alto Online, the Mountain View Voice and the Almanac here.