The city of Palo Alto will face a projected $14.9 million deficit during the next fiscal year which has prompted City Manager Ed Shikada to reconsider funding for Phase 1, a grant program that distributed $500,000 last year to local nonprofits that did not meet requirements for more traditional funds. The potential cuts have raised concerns among businesses and nonprofits like Pathwise and Magical Bridge.

Councilmember Patrick Burt, who also serves on the finance committee, said the city’s deficit comes from both internal cost pressures and changes in state tax policy. 

“Half of that amount is rising costs and leveling off of revenues,” Burt said. “The other half is a result of the state changing rules for sales taxes which significantly reduced what the city received.” 

Palo Alto distributes more than $6 million annually to nonprofits through multiple grant programs. According to PaloAltoOnline, a majority of that funding comes from programs such as the Human Services Resource Allocation Program, which is currently not slated for cuts. But the Phase 1 grant program, which helps nonprofits that do not fit the criteria to qualify for the Human Services Resource Allocation Program, is in danger.

Lupita Alamos, assistant to City Manager Ed Shikada, said the city’s deficit is tied to economic pressures that affected city revenues which might mean less money for programs like the Phase 1 grant system.

“The city is navigating a period of adjustment in our major tax revenues,” Alamos said. “We’re seeing reduced sales tax baselines and slower growth in property tax.” 

Alamos said the city’s approach is focused on preserving essential services such as public safety, communication services, libraries, parks and utilities while making adjustments where necessary. 

“The budget is a direct reflection of the City Council’s annual priorities, investing in actionable efforts that deliver essential services today while securing a resilient fiscal future,” Alamos said. 

According to the city’s budget report, the Palo Alto city council is also prioritizing infrastructure and housing over more flexible areas like small nonprofit grants. 

Alamos said, though, that reductions are not being proposed for the city’s primary nonprofit funding programs.

“Nonprofits currently funded by established city grant programs are not recommended for reductions at this time,” Alamos said. “We’ve worked with other service providers to manage and limit impacts.”

And Burt said nonprofits are crucial to the city’s goals.

“If the city is in the business of providing services, one of the best ways to do that is to have a small portion of that budget go to supporting nonprofits,” Burt said. “They provide services that we wouldn’t have.”

Nicole Chiu-Wang, Executive Director of Pathwise, said her organization provides after-school academic support for socioeconomically disadvantaged middle school kids. Pathwise receives support from city funding that could be affected by future budget decisions.

Chiu said the organization’s impact extends beyond tutoring.

“The greatest impact we see is a sense of community, belonging and confidence,” Chiu-Wang said.

Chiu-Wang said potential reductions in funding could force the organization to scale back some programs, but she does not want to sacrifice quality.

“We may have to serve fewer students, but we’ll try not to serve them any less deeply,” Chiu-Wang said. “This could mean discontinuing a summer camp program or serving students at fewer sites.”

Chiu-Wang said Pathwise is already adjusting to financial pressures, including cuts from county funds. 

“We’re trying to do more with less by building partnerships with other non-profits and finding more cost-effective ways to support our students,” Chiu-Wang said.

Olenka Villarreal, founder of the Magical Bridge Foundation, said her organization creates inclusive playgrounds and community programs for people of all abilities. Villarreal said Magical Bridge partners with the city to provide services that were previously lacking for residents with disabilities and that recent changes could affect their budget.

“I noticed that the city did not have funds set aside for people with disabilities, so I decided to partner with them,” Villarreal said. 

Villarreal said the organization’s mission is centered on inclusion. 

“We create programs that include people with disabilities, which is every 4th person,” Villareal said. “We exist to bring people together and make them feel welcome. With the disconnect in the world today, we should try to connect more.”

Amos Mak, a teacher at Achieve Kids, a special education school serving students with emotional and behavioral needs, said the Magical Bridge playground in Mitchell Park  is important for a lot of his students. 

“The structures here are conducive for a lot of our students because they require sensory input and there are a lot of things that they can interact with,” Mak said. 

He also said the park’s location next to Achieve Kids makes it especially valuable. 

“The park’s location is really convenient,” Mak said. “If it were to become unavailable, we would have to find another place.”

Villarreal from Magical Bridge also said city-funded programs provide a cheaper way to offer services to residents.

“The programs we run in Palo Alto are 100% supported by city funds, and we’re able to do it much more efficiently than hiring full-time staff with benefits,” Villarreal said. “If the funding went away, those programs would go away. We’re serving 15,000 to 20,000 people every month across different cities, many of whom don’t have other options.”

One of these programs, Magical Tennis, brings volunteers to Mitchell Park to teach tennis to neurodiverse teens, providing these teens with a sense of community.

“These are what I call normal life experiences,” Villarreal said. “Unless you don’t have them, you don’t realize how valuable they are.

Burt said the City’s Finance Committee will negotiate funding as part of the budget process on May 5 and 6, and will allow the community to provide input before sending the recommendations back to the entire council. After a final round of recommendations, the final budget will be determined on June 15. 

Burt also encouraged residents to participate in the process, though he said the process can be difficult because residents often prioritize different services.

“People value services differently,” Burt said. “What seems like an easy solution to fix the budget to one person may come at the expense of something another person values deeply. We do not have agreement for what is most important.”