Palo Alto is preparing to ask voters to reaffirm in November its historic and legally shaky practice of transferring money from its gas utility to the general fund to pay for basic city services such as public safety, library and recreation programs.

The measure, which the City Council is looking to place on the November ballot, is the city's response to a 2020 court ruling in a lawsuit that was filed against the city by resident Miriam Green. In his ruling, Santa Clara County Superior Court Judge Brian Walsh concluded that the city's transfers in the years 2012, 2016 and 2018 were improper and excessive.

The court likened the transfer to an imposition tax in violation of Proposition 26, which the state adopted in 2010 and which prohibits municipalities from characterizing taxes as "fees." The proposition makes an exception for funding that the city collects for specific government services, though the law specifies that these funds cannot "exceed the reasonable costs to the local government of providing the service or product."

While the court confirmed that the city's transfers from its electric utility to the general fund are legal, it took issue with the gas transfers and ordered Palo Alto to refund a total of about $12 million to its gas customers. Both the city and Green's attorney are now appealing the ruling.

Now, the city is looking to the voters for help in restoring the practice to fill the hole that the ruling had left in the general fund. In recent months, it has been exploring two different measures: one that would ask the voters to affirm the historic practice of transferring, which is now on hold, and another that would raise the utility users tax for the gas and electric utilities to raise the equivalent amount of funds.

A recent survey of more than 800 likely voters by the city's polling firm, FM3, concluded that while support for either measure remains shaky, asking voters to affirm the historic practice currently offers a more promising path forward than hiking the utility users fee by 5%.

About 60% of the respondents indicated that they may support such a measure, though only 17% said "definitely yes." Another 34% said they would "probably" support the measure, while 9% said they are leaning toward supporting it but are undecided.

Meanwhile, about 24% of the survey respondents took a negative view of the tax, with 10% saying they would definitely not support such a measure, 8% saying "probably no" and 5% leaning against it. The remaining 16% indicated they were undecided.

While the numbers offered some encouraging news for the council, which is also exploring a separate measure that would institute a business license tax, FM3 president Dave Metz warned that the support is "extremely soft."

"The vast majority of voters were either hesitant in picking which side of the issue they were on or acknowledged they were undecided," Metz told the council. "This is not surprising for measures like this, which involve a fair amount of financial complexity on an issue that voters probably had not thought about before."

The idea of raising the utilities users tax proved less popular, with 46% of the respondents in the "yes" camp and "36% in the "no" camp. The support is tenuous, however, with only 13% indicating that they would definitely support the measure and 17% saying they would definitely oppose it, according to the survey. Relatively few voters, Metz said, are committed to their position.

"In our judgment, this measure does not appear to be viable," Metz said. "Given the contrast between the two approaches, there certainly seems to be a greater likelihood that a city would win a majority support for confirmation of its existing practice as opposed to an increase in the UUT."

The council agreed and voted to eliminate from consideration the prospect of increasing the utilities users tax. By a 6-1 vote, with council member Greg Tanaka dissenting, the council also agreed to move ahead with further surveys to explore public attitudes about both the business tax and the ratification of the city's practice of transferring gas funds.

Council member Eric Filseth, who serves on the Finance Committee, which has been analyzing and narrowing down the city's options for revenue measures, suggested that asking voters to confirm the transfer practice makes more sense than increasing utilities taxes. The city, he said, would basically be bringing back a practice that the voters approved decades ago and that has only recently been taking away.

"It's a whole issue of restoring what was there before, and it's clean," Filseth said.

He also noted that limiting the transfers in the measure to the gas utility is consistent with the city's ongoing effort to reduce gas usage and encourage residents' conversion to electricity.

In addition to advancing the measure on utility transfers, the council also concurred with its Finance Committee on the proposed structure of the business tax, which will also likely appear on the November ballot. The committee last week agreed that the tax should be based on square footage and exclude hotels and grocery stores. It also favored an approach in which companies with less than 5,000 square feet of less of space would only pay a $50 annual fee. Larger companies would pay a per-square-foot tax for space beyond the 5,000-square-foot threshold, though the council has yet to determine what the rate would be.

To date, the council has been exploring rates ranging from 5 cents per square foot to 20 cents per square foot, which would cause the average rents to increase by between 0.7% and 2.9%.

Council member Alison Cormack, who chairs the Finance Committee, lobbied for eliminating the 20-cent alternative, arguing that it's not feasible based on survey results. Only Tanaka, who has consistently opposed every tax alternative under consideration, supported that proposal.

The council also agreed that the city should conduct two more surveys, one to gauge voter support for the more refined versions of the two measures and another to help the council finalize the ballot language. They did not, however, support a request from several business leaders to conduct an economic impact study before introducing a new tax.

Tiffany Griego, manager director of Stanford Research Park, was among those who requested such an analysis, though only Tanaka voiced support for conducting it.

"Adding a new tax to the mix, especially in perpetuity (and) escalating into perpetuity, increases the tax burden substantially to our businesses and it will no doubt have an impact on their decision to stay or locate in Palo Alto," Griego said Monday.