The coming year represents a "pivot point" for the city of Palo Alto's finances, according to the proposed budget for fiscal year 2024, with city staff recommending continued investment in services for residents while also contending with the impact of inflation and looming economic uncertainty.

The City Council reviewed the proposed 2024 budget during a Monday, May 1, study session. The budget will now go back to the Finance Committee for review, with final council approval expected on June 19.

"We do have cautious optimism, and we are continuing to propose investments in services," Assistant City Manager Kiely Nose told the council.

In some areas, the city has gotten back up to pre-pandemic benchmarks, while at the same time facing rising costs and the risk of an economic downturn, according to an overview letter from City Manager Ed Shikada that leads off the budget document.

"Although staff remains optimistic and continues to recommend investment, continued economic uncertainty, inflation, and predictions of a recession or economic stagnation loom ahead," Shikada wrote.

The total budget is nearly $1 billion in fiscal year 2024, shaking out to $975.3 million. Of that, $324 million represents the capital budget. The general fund budget is $274.9 million. Other budget components include funds, such as the enterprise fund, and debt servicing.

The proposed 2024 budget continues service expansions that were part of the 2023 budget, including investments in 911 dispatchers, public art, library hours and police services, Nose said.

It also spends more in certain areas. Among them are a further expansion of library hours so that small branches are open five days a week and large branches are open seven days a week. Currently, libraries are open four and six days a week, respectively.

The budget also increases resources for the Police Department, including funding two psychiatric emergency-response team clinicians and more support for traffic enforcement. The city would also provide more resources to code enforcement, historic resources and building and fire-prevention plan review.

In total, the budget proposal would increase city staffing by the equivalent of 34.75 full-time employees, for a total of 1,052.60 full-time equivalent positions citywide. That's higher than pre-pandemic staffing levels, although the positions funded through the general fund remain slightly lower, Nose said.

The budget also incorporates the cost of recent agreements that the city reached with some of its labor unions.

The budget proposal also incorporates funding from ballot Measures K and L, which voters approved in the November election. Measure K created a business tax, the proceeds of which are supposed to fund affordable housing, rail improvements and public safety. Measure L allows the city to transfer up to 18% of the gas utility's revenues to the general fund each year.

Budget balancing

Even as the city expands services in the short term, staff are also projecting a $6.2 million budget deficit in fiscal year 2026.

For the next two years, staff are proposing to use part of a $14 million "budget uncertainty reserve" that the council set aside to balance the budget. In fiscal year 2024, the city would use $3.9 million of that funding, plus another $7.3 million in 2025. That would still leave a $6.2 million shortfall in 2026.

"It is important just to remember that this forecast doesn't have a full-fledged recession in it," Nose added. "It does have low- to no-economic growth in the near term ... but as for a full-on contraction, this doesn't model that."

To mitigate risk, city staff recommended maintaining a 20% "budget stabilization reserve," which is above the council target of 18.5%. To hit that 20% figure, Nose told the council, the city would use the remaining money left over in the "uncertainty reserve."

Council-choice areas

While working to balance the budget, staff set aside $2.25 million in both 2024 and 2025 for the council to allocate towards its priority objectives. The Finance Committee will review possible funding choices and bring them back to the council, Nose said.

City staff identified $8.5 million in projects that need resources, meaning that the council would have to pick what to fund with the $4.5 million that's available. Some council members also suggested on Monday that they could reallocate additional money towards these priority projects.

The council could use some of its remaining uncertainty reserve money to expand the priority projects it could complete, rather than using that money to maintain a 20% stabilization reserve, Council member Vicki Veenker pointed out.

Council members also raised questions about the staff vacancy rate. The budget assumes a vacancy rate of 3%-5%, Nose said, though the city currently has a vacancy rate of over 10%.

Council member Pat Burt said that unless the city anticipates a drastic reduction in its vacancy rate, there will be more money available than is currently budgeted for.

"We are probably over-budgeting in terms of the salary expenses because we just won't be able to fill all of those spots," Burt said.

Capital budget

The budget also projects spending $1.2 billion on the Capital Improvement Plan over the coming five years, including a $324 million capital budget in fiscal year 2024.

Topping $1 billion over the next five years on capital projects is reflective of the "generational investments" that the city plans to make, Nose said. These include electrification and grid resiliency work, redesigning train crossings and fiber expansion.

Upcoming meetings

The Finance Committee plans to review the proposed budgets at workshops scheduled for May 5 and May 9. The public can participate via Zoom at Meeting ID: 992 2730 7235 or by phone at 669-900-6833. There will then be a community listening session on May 16 (meeting details to be announced later) before the council holds a budget study session on May 22 at Meeting ID: 362 027 238 or by phone at 669-900-6833. The Finance Committee is then slated to do a final review of the budgets on May 30 (Meeting ID: 992 2730 7235), with the council taking a final vote to adopt the budgets on June 19 (Meeting ID: 362 027 238).

To view the budget documents, visit cityofpaloalto.org/Departments/Administrative-Services/City-Budget.