A bottoms up approach to deficit reduction: Palo Alto's Strengthening the Bottom Line initiative.

• Author: Benest, Frank

Located on the peninsula between San Jose and San Francisco, the City of Palo Alto has a nighttime population of 60,000 that balloons to 150,000 during the weekday. The "birthplace of Silicon Valley," Palo Alto is home to Stanford University and many high-tech firms, including the global headquarters of Hewlett-Packard. While the city is closely identified with information technology, Palo Alto boasts a diversified economy composed of retail, manufacturing, business services (e.g., legal, financial), hospitality, and entertainment.

Palo Alto is a council-manager government that employs approximately 1,200 workers. A full-service city, Palo Alto provides all major utilities (electricity, gas, water, wastewater, refuse, storm drainage, fiber optics) and delivers a number of regional programs (wastewater treatment, animal control services, IT on contract to other cities, and fire services to Stanford).

When the Silicon Valley's dot-coin bubble burst in early 2001, Palo Alto's revenue plummeted. In California, local government revenues are economy-driven. Consequently, when Palo Alto's sales tax revenue declined by 22 percent and transient occupancy tax (hotel bed tax) fell 30 percent, the effect on the city's bottom line was direct and immediate. Adding to the problem, the property tax is not as significant a revenue source as it once was. As a result of California's Proposition 13 and ongoing state takeaways, Palo Alto only receives 9 cents on the dollar for property taxes paid by residential and business property owners within city limits.

Because of the recession, Palo Alto's revenue declined by more than $11.5 million in fiscal 2002 (on total general fund revenue of $127 million). Early on, the city manager and administrative services director decided not to rely on across-the-board cuts to close the deficit, seeking instead to develop a more creative approach to budget reduction. Branded "Strengthening the Bottom Line," the process is based on several guiding principles:

* Engage a broad range of employees in generating ideas about reducing the deficit, especially from employees closest to the customer

* Give departments choices to "mix and match" revenue enhancements and cost-cutting strategies, since departments are different from each other

* Focus on incentives and positive opportunities for employees

* Preserve and enhance organizational vitality in spite of any cutbacks and retrenchment

OUTCOMES

The "Strengthening the Bottom Line" campaign generated approximately 1,000 employee ideas and resulted in a well-balanced budget plan that eliminated the $11.5 million revenue shortfall. In addition to the usual retrenchment strategies such as freezing vacant positions, cutting operating expenses (e.g., travel, supplies, overtime, advertising, contractual services), and deferring projects, the plan incorporated a wide variety of non-traditional strategies:

* Generating new net revenue from entrepreneurial ventures, such as selling animal control services to surrounding cities

* Adjusting fees for service to market rates or full cost recovery

* Outsourcing certain functions (e.g., paramedic billing) and shifting the employees to other functions

* Using technology to enhance productivity (e.g., computerizing payroll entry and human resource forms)

* Streamlining procedures...