The City of East Palo Alto (City of EPA) and its component unit for financial reporting purposes, the East Palo Alto Redevelopment Agency (EPA Redevelopment Agency), operate with significant cash flow inadequacies. Audited financial statements for the three years ended June 30, 1997, and testimony of City of EPA officials, confirm that the City of EPA cannot fund the depth, breadth and quality of services commonly provided by cities with larger per capita tax revenues.

The City of EPA is substantially and increasingly dependent upon federal and local grant revenue, which account for:

As a perceived practical necessity, the City of EPA has from time to time under-funded its 401K retirement plan, resulting in under-funded balances of:

Cash flow inadequacies have been aggravated by the strategic decision to financially support EPA Redevelopment Agency activities. Historically, these activities have generated losses as follows:

Liabilities and potential liabilities associated with obligations of the EPA Redevelopment Agency, general long-term debt, and claims and contingencies raise doubt about the City of EPA’s ability to service its debts.

The EPA Redevelopment Agency borrowed from the City of EPA in order to purchase City of EPA-owned land within the Gateway 101 Retail Center real estate redevelopment project. The EPA Redevelopment Agency’s administrative costs, and interest thereon, have been paid by and are repayable to the City of EPA. In addition, the EPA Redevelopment Agency had loans payable as of fiscal year-end June 1997 of:

Because of a judgement against the City of EPA ordering the refund of excise tax and interest thereon, the potential exposure of the City of EPA as of fiscal year-end June 1997 is from $1.5 million to $2.7 million.

The City of EPA anticipates that the Gateway 101 Retail Center project will be completed and generate substantial additional cash, significantly improving the EPA Redevelopment Agency’s and the City of EPA’s financial position. Similar expectations, although longer-term and less specifically defined, are held for the University Circle project and the Ravenswood Industrial project.

Annually, the City Manager of the City EPA prepares budgets for the City of EPA and the EPA Redevelopment Agency. The budgets include proposed expenditures for all funds and the means for financing them. A budget for the next fiscal year is adopted prior to the end of the current fiscal year. For fiscal year 1996-1997, the City of EPA’s actual adopted combined expenditures were $11.2 million, although adopted appropriated total expenditures were $28.0 million.

The EPA Redevelopment Agency was formed in 1984 under the California Community Redevelopment Law to aid in the prevention and elimination of blight within its project areas through:

Because most communities enjoy reasonably predictable, adequate cash flows, and are financially viable, these communities may not find the preceding projections and plans necessary.

However, the future financial viability, and therefore future political viability, of the City of EPA is uncertain. The City of EPA has not estimated which elements of which redevelopment projects must be realized at which times to produce which cash proceeds and permit which cash applications. The City of EPA continues to rely upon the hope that the largely unquantified benefits of redevelopment will arrive sometime soon and produce a largely unquantified, but significantly improved, financial position. The City of EPA does not have plans that address the possibility that the benefits of redevelopment may be too little, too late, or completely unrealized.