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About this blog: Growing up in Brooklyn, NY I lived in high-density housing and experienced transit-oriented services first hand. During high school and college summers I worked in Manhattan drafting tenant floor plans for high-rise office buildi...  (More)

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The MP Financial Report for 2016: (Are we now a company town?)

Uploaded: Mar 2, 2017
Ahhh! It’s that time of year - slightly delayed. Menlo Park’s annual accounting of all financial things (limited to those things required to be disclosed) is now available Online Here.

The CAFR (pronounced kaffer) the Comprehensive Annual Financial Report,) I look forward to is as prior generations looked forward to the Sears Catalog showing up on the doorstep. The CAFR is a mere 200 pages.

I’ve reviewed CAFR’s for years, especially when I was on the Finance Audit Committee. Every municipality and special district in California needs to produce a CAFR. All CAFR’s follow a common ordering of content information. Basically, it’s a P&L for municipalities, and a balance sheet showing where individual funds balances live. The main fund is the General Fund… the most dynamic as it reflects the major inflows (tax revenues) and outflows (salaries).

In general, the numbers for 2016 look good. Good, but the financial increases of this past year are not necessarily repeatable. The big economic risk are unfunded pension liabilities. The current net pension liability is $38,880,957.


What are the implications of being a ‘company town’?

During the past 10 years the composition of the top 10 employers has changed. (CAFR Page 185). Today, 56% of employees work for two leading firms: Facebook and Intuit. Six of the 2007 top 10 firms are no longer here. I don’t see Facebook going anywhere for a while, but I do see them expanding elsewhere. Intuit can easily move. Intuit is somewhat of an aging financial company dependent on annual renewals and not necessarily deriving new products.

Facebook is such a huge component of employees, property tax and future construction in Menlo Park. Are we using them as ‘The Bank of Facebook’ and not questioning whether they assert undue influence on items on approval of projects?

A recent example is a proposal to subsidize the hiring up to 17 additional police officers to service the east side. Ray Mueller - the lone dissenter - is correct in deferring this decision.

If and when the city cannot say no a major major employer and tax generator, we have become a company town, not Tree City.

Principal employers

The proposed police funding by Facebook is a suspect idea because it creates long term liability obligation for the city, and its need has yet to be demonstrated. I agree with Councilmember Ray Mueller. It is unfortunate that he couldn’t persuade at least one more council member.

Considering the top property tax payers in the city (CAFR Page 179): Facebook is currently the largest property tax payer (The top ten payers has changed over 10 years). Ten years ago the top property tax payer was Sun, who coincidentally occupied the current Facebook campus, whose value at the time was almost $100,000,000 more than the current property (That results in about $1,000,000 in property tax).

It would help if the city identified the parcel locations and parcel numbers of the top 10 payers so that we're comparing like properties on the 10-year comparison.

Principal property tax payers


Another important trend is the evaporation of significant sales tax generators. Our Hotel Occupancy Taxes has supplanted sales tax as a revenue source and indicator of economic health. Anemic sales tax growth, or just basic decline, is not good. The CAFR comments:

“Property taxes, sales tax, transient occupancy tax, licenses and permits, and intergovernmental led the way, accounting for the vast majority of the revenue growth. Sales tax revenues continued to decline with the loss of a major sales tax generator in mid-2015.” (CAFR Page 18). This is bit of a misstatement. You can’t say that ‘sales tax’ accounts for revenue growth when it declined over $1,000,000. Period. There’s no pretty way to say we are hosed on sales tax component, and our zoning plans haven’t made sales tax … either though retail sale or by domiciling sales tax producing corporate headquarters here, are achievable. We have are losing that battle.

“While in an enviable financial position, the City cannot rest on its laurels.” The image of Menlo Park staff, and council, sitting on their collective laurels is indeed a poetic image.


Tax Trends

There should be a side document to the CAFR supplementing information excluded from the CAFR. Additional information is available, and should be made public in perhaps a parallel document. This could include changes in traffic delay “Level of Service” metrics; Employee salaries; total hours sick and or absent; and employment agreement (along with expiration dates).

Update: 3/6/2017: I just located data on the city web site enumerating contracts (other than employee) on the city web site. However, it hasn't been updated since January 2016.
See it here.

Another area is the number of claims against the city, and outstanding litigation. The CFAR merely mentions:

“20. LITIGATION
The City is a defendant in a number of lawsuits which have arisen in the normal course of business. While substantial damages are alleged in some of these actions, their outcome cannot be predicted with certainty. In the opinion of the City Attorney, most of these actions, when finally adjudicated, will not have a material adverse effect on the financial condition of the City.“

That’s generally a true statement, but there are occasionally significant cases arising from city council policies that have potential significant costs and or consequences. Corporate annual financial reports identify important cases. This is public information such as open case of East Palo Alto suit for approving office growth without sufficient low income housing. In a recent similar case the City had to pay the plaintiff’s expenses, in addition to any housing contributions make the problem go away. Does the city paying off such cases encourage their filing?

Comments

 +   3 people like this
Posted by Peter Carpenter, a resident of Atherton: Lindenwood,
on Mar 2, 2017 at 5:54 pm

Peter Carpenter is a registered user.

Stu - Thank you for your thoughtful analysis of the Menlo Park CAFR.


 +   1 person likes this
Posted by Equity Windfall Sharing, a resident of another community,
on Mar 2, 2017 at 6:47 pm

Here's a revenue diversification idea- how about the city sharing in a small percentage of the insane home value appreciation that has occurred as a result of the Peninsula's multi-decade anti-growth policies? For example, when someone who bought a home in Linfield Oaks in 1994 sells it at some point for a mind-boggling profit, maybe Menlo Park gets, say, a 5% share of the undeserved appreciation? That doesn't force grandma out of her home, but it taps into a windfall. No way that doesn't help! Who would possibly oppose such an initiative?


 +   1 person likes this
Posted by charles reilly , a resident of another community,
on Mar 2, 2017 at 6:51 pm


Redwood City is looking to hire dozens of additional personnel to support the massive amount of Commercial and MFR development that's occured. Over the years, this means $100's of Millions in overhead: salaries, benefits, pensions etc. Anyone who complains is labeled "anti-development" as if they were some sort of communist ...


 +  Like this comment
Posted by KN, a resident of Menlo Park: Downtown,
on Mar 3, 2017 at 3:26 pm

Yea, brilliant analysis - now lets hire more all those extra police officers so they can write more parking tickets and then we can use that money to fund all of those exorbitant "unfunded" city pensions.


 +   1 person likes this
Posted by Concerned taxpayer, a resident of Menlo Park: Allied Arts/Stanford Park,
on Mar 3, 2017 at 3:57 pm

The lack of revenue diversification is irresponsile on the council's part, and frightening to us resident taxpayers.
Too much of future revenue depends on one property taxpayer (facebook), and that revenue will be "gaited" by Prop 13 that grows more slowly than city costs. Too much revenue depends on hotel taxes that fluctuate with the economic cycles. .
The city needs a viable longterm financial plan with diverse revenue sources and firm control of costs.
With the shift by this council to "jobs center", they must find ways to obtain ongoing tax revenue from organizations like facebook and other socisl media firms, incubators, professional services, VC's, snd real estate transactions that dominate our town. A very tiny tax on such revenue should be considered. .


 +   3 people like this
Posted by Peter Carpenter, a resident of Atherton: Lindenwood,
on Mar 4, 2017 at 7:09 am

Peter Carpenter is a registered user.

"Too much of future revenue depends on one property taxpayer (facebook), and that revenue will be "gaited" by Prop 13 that grows more slowly than city costs."

The city is getting a huge increase in property taxes from Facebook now - the challenge is to use that increase wisely and not just soak it up in added personnel costs.

" Too much revenue depends on hotel taxes that fluctuate with the economic cycles."

Everything swings on economic cycles - property taxes, HOT, sales taxes - learning to manage the swings is the challenge because there is no structural alternative,


 +   1 person likes this
Posted by Q, a resident of Menlo Park: Belle Haven,
on Mar 4, 2017 at 11:14 pm

Peter, did you read the chart? The city is getting less property tax from Facebook (far less) than it did when Sun occupied the property. A big loss to the government, and I'd love to know how that happened.


 +   1 person likes this
Posted by Cmon , a resident of Menlo Park: Central Menlo Park,
on Mar 5, 2017 at 6:05 am

Stu: some interesting observations, and it is great for your to point out the report. The key question becomes what the implications are and, more importantly, decisions that can be made to create less financial vulnerability over time. Lots of focus on Facebook but would we be better off without them? Of course not. Take Facebook out of the equation -- what are your suggestions? Yes, they may add employees elsewhere. That is because they are a vibrant and growing business, which is terrific. The point regarding police funding is a different matter from the financial ones your raise through the slides from the public document. Thanks for providing a summary though.


 +   1 person likes this
Posted by Peter Carpenter, a resident of Atherton: Lindenwood,
on Mar 5, 2017 at 8:18 am

Peter Carpenter is a registered user.

"The city is getting less property tax from Facebook (far less) than it did when Sun occupied the property. A big loss to the government, and I'd love to know how that happened."

That is because during this period Facebook was still leasing this property from Oracle. Facebook has since purchased the property and the property taxes have gone way up plus the new Facebook facility is now on the property tax roll -bigger increase from that. And more Facebook properties are under construction and more properties have been bought by them - even more property tax increases.


 +  Like this comment
Posted by Stu Soffer, a resident of Menlo Park: Linfield Oaks,
on Mar 5, 2017 at 1:32 pm

@Peter...

To be sure, FB is an extremely prestigious addition to MP. So prestigious that there a new side industry emerged called "Startup Tourism" And remember FB relocated here because Palo Alto did not encourage their expansion in Stanford Technology Park. (This latter a consequence of edges of zoning jurisdictions connecting nearby: Santa Clara County, San Mateo County, Stanford's General Use Permit in Santa Clara County. It's strategically better to push development to San Mateo County than keep it across the creek.) Admittedly, the east side is a much better location for FB with growth opportunities and major roadways.

"and I'd love to know how that happened."


Me too. In addition to what you cite regarding Oracle, who purchased Sun. Subsequently that property was purchased by the Wisconsin State Teachers Retirement System, from whom FB purchased 'Sun Quentin'. So one needs the year-by-year ownership and assessments to trace events. Regardless, a 100,000,000 difference in assessment can't be explained by the 2007-2008 financial downturn. (Remember the Countrywide meltdown.)

City staff owns the CAFR; should be able to explain it.


@cmon

"Lots of focus on Facebook but would we be better off without them?"
Of course not. I Agree. Not only are they ubiquitous in worldwide and intergalactic communication; they innovate in office design."

"...Take Facebook out of the equation -- what are your suggestions?"

Well, we used implement a 'sales tax in-lieu' fee based on square footage to cover ground floor retail converted to office.

The east side is a work in flux and is a work in progress. I predict that the housing mix and demographics will change - it appears to me that the houses are bought by investors. We'll know in 10 years. (Even Madame Tinkerbell the Card Reader couldn't predict her urban renewal. The good news is that the City no longer has Madame Tinkerbell to do their traffic EIR's).




 +  Like this comment
Posted by Stu Soffer, a resident of Menlo Park: Linfield Oaks,
on Mar 5, 2017 at 1:43 pm

@cmon...

"what are your suggestions? "

At some point in the past it became fashionable to take issues that would need some public review - say at the planning commission - and replace it with over-the-counter 'administrative review' by city staff. Sounds good, but there is a risk of administrative zoning feature creep over time.

Perhaps it's a legitimate question to ask today - should there be a review of administrative review?


 +   1 person likes this
Posted by Peter Carpenter, a resident of Atherton: Lindenwood,
on Mar 5, 2017 at 2:52 pm

Peter Carpenter is a registered user.

Re Administrative Review - In my opinion staff be implementing policy not making policy.

If Administrative Review allows things to occur that are inconsistent with the Council established policies then it is time to question the leadership and stewardship of the City Manager.


 +   1 person likes this
Posted by Stuart Soffer, a Almanac Online blogger,
on Mar 6, 2017 at 2:02 pm

Stuart Soffer is a registered user.

Update: 3/6/2017: I just located data on the city web site enumerating contracts (other than employee) on the city web site. However, it hasn't been updated since January 2016.
See it here.


 +   2 people like this
Posted by concerned tax payer, a resident of Menlo Park: Menlo Oaks,
on Mar 7, 2017 at 8:39 am

Stu,
Can you , or someone, explain WHY on earth Facebooks PROPERTY value on Willow Rd is NOW worth $100,000,000 LESS than it was 10 years LATER!! Its worth LESS than when Sun owned the same land??? WTH??
This makes NO sense!!!
THAT is something that the City Manager should investigate!!


 +   2 people like this
Posted by concerned tax payer, a resident of Menlo Park: Menlo Oaks,
on Mar 7, 2017 at 8:40 am

"Ten years ago the top property tax payer was Sun, who coincidentally occupied the current Facebook campus, whose value at the time was almost $100,000,000 more than the current property (That results in about $1,000,000 in property tax). "

HUH??????????


Sorry, but further commenting on this topic has been closed.

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