Atascadero city leaders face a tough choice Tuesday: Shoot down two much- debated shopping center plans and risk losing millions in tax revenue or approve the shopping centers and front city funds to help pay for needed road work.

“You have to see what degree of risk you’re willing to take,” Mayor Bob Kelley said. “And I think that’s where we’re at right now.”

Ultimately, Tuesday’s decision will give a glimpse into what the financial future might look like for Atascadero, which has mostly seen declining sales tax revenues during the recession and a shrinking general fund, which pays for essential services such as police, roads and parks.

The meeting will be a landmark in the nearly seven-year debate over proposals to build a Walmart shopping center and an adjacent shopping center called The Annex at Del Rio Road and El Camino Real on the north end of town. Highlights include: multiple redesigns, a failed ballot measure banning big-box stores, an impasse between the two developers on funding, two traffic impact studies and a foreclosure on The Annex property.

Most recently, a last-minute change in ownership of The Annex from the original developer to its bank created uncertainty about the project, because the bank plans to sell the land to a developer.

The impacts of the separate projects — which include shopping, dining and housing — were studied together; as a result, the City Council will consider them for approval at the same time. The city’s Planning Commission recommended 4-1 that the projects go forward at its June 5 meeting, but, as a land-use board, the commission doesn’t decide cost-sharing plans.

Regardless of the outcome, City Council members have said the Walmart proposal would be the largest decision in Atascadero in recent history.

“The reality is we have to find some kind of way to support our city without raising taxes for residents. And sales tax is huge for the city. It’s a tough decision,” Councilwoman Roberta Fonzi said.

Dipping into the city’s sewer fund to pay for some roadwork brings an added twist to the already complicated proposals.

Furthermore, Caltrans hasn’t yet approved the estimated $4.5 million roundabouts on the Del Rio Road overpass, but the city is basing all of its cost projections on the belief that they will be approved. If Caltrans doesn’t approve the roundabouts, the city must come up with another plan. Some fear that could mean widening the overpass bridge, which is twice as expensive.

Cost sharing

The cost-sharing plan for an estimated $4.5 million worth of roadwork on the overpass has Wal-Mart Stores Inc. paying about $2.2 million, with the city fronting the rest. “Those mitigations have to be paid for either way — and there’s the rub. … It’s deciding do we not do anything and not approve Walmart; or do we, but how? It’s a sticky situation,” Fonzi said.

Consultants say builders of future developments in the area, as defined by city growth estimates through 2025, would reimburse Atascadero with the fees they pay.

Part of that future development includes elements in the current project that will come later. The Annex, plus two other spots for commercial businesses in the Walmart shopping center and some housing at both sites, would bring an additional $2.6 million in traffic fees when they are eventually built. That would be used to pay back the city.

The Annex can’t be built until after the roundabouts are constructed because the current roadway cannot handle the expected new traffic from anything more than the Walmart store.

Atascadero would front the money, and staff proposes to do it by borrowing between city departments, something that’s common practice within cities, City Manager Wade McKinney said.

The sewer loan idea isn’t part of Tuesday’s approval but foreshadows what city planners would propose to a future City Council as a way to front the roadwork costs.

When the sewer loan idea was first discussed June 5 at the city’s Planning Commission hearing, staff proposed borrowing up to $1.5 million.

The terms of the loan would be determined by the City Council at a future meeting, Community Development Director Warren Frace said. The city wouldn’t need to borrow the funds for about two years, Frace added.

The city has enough money now — about $800,000 — from a pool of unallocated traffic fees other developments have paid over the years. That, paired with an additional $800,000 that Wal-Mart Stores Inc. would pay from land entitlements and grading permits, would fund Caltrans’ design and approval process for the roundabouts.

To use the existing pool of traffic fees, the City Council must move the overpass to the top of a list of improvements those fees are historically intended for.

The Planning Commission recommended passing the projects on a 4-1 vote with Len Colamarino dissenting because he said approving them as is poses financial and legal risks.

“There’s an obvious red flag,” he said Friday.

Describing the sewer-loan idea as “very suspect … and irregular at best,” Colamarino still questions what would happen if the city can’t pay the money back or if a natural disaster occurred during the pay-back period.

Staff is recommending the move because the sewer fund has approximately $10 million for expansion of a wastewater treatment plant. The money in the sewer fund comes from one-time sewer connection fees that developers pay.

The city would borrow up to 15 percent for roadwork, leaving $8.5 million. Frace said that “should be able to cover any unforeseen emergencies.”

The city has borrowed from the sewer account before because it’s typically the fund that holds the largest pot of money. In the early 1990s, the city borrowed sewer money to boost its general fund budget to stave off layoffs during an economic downturn. McKinney didn’t know how much money was involved because the move took place before he started working with the city, but he said the money was paid back within about five years.

City losing money

The potential benefits that the shopping centers could bring to the city are bigger than the risks, proponents say.

A city study in 2009 found that about $79 million in total spending is slipping away from Atascadero each year when residents shop out of town. Because Atascadero would get 1 percent of spending from sales tax, the city is losing out on about $790,000 a year.

The study recommended the Del Rio Road corner of town should be developed into a commercial hub to help recover those lost dollars. Establishing a secure local revenue base and the construction of a regional shopping center at the north end of town is also mapped out in the city’s growth plan.

Both shopping centers together, once built, are expected to increase city sales tax revenues by about $580,000. The Walmart store alone would generate $299,000 in sales tax each year, with $281,000 annually expected from the other shops in the centers, Frace said. Ultimately, the city needs more income, Councilman Jerry Clay said.

“What I do have a concern about, and I have for a while, is what happens when we run out of our reserves?” he said.

Atascadero has been using a portion of general fund reserves since at least fiscal year 2008 to buffer shortfalls during the recession. In fact, the reserves are projected to continue to fall until fiscal year 2014 — the earliest year the city projects Walmart could open should it be approved.

“The opening of a Walmart store is part of those assumptions,” Frace said of the forecasted revenue gains. “It’s not the only factor, but it is a key factor, in terms of getting us out of the black and out of burning down reserves.”

A Walmart store would also bring 246 retail jobs, while The Annex plus the other shops in the Walmart center would bring 261 retail jobs, plus hundreds of temporary construction jobs.

Caltrans steps in

The shopping centers would bring something else to the city’s north end — traffic. A Walmart store alone doesn’t prompt the traffic fixes, but the requirements kick in as soon as one more development builds around it.

The Del Rio Road overpass isn’t wide enough for an extra turn lane.

“So as soon as one car stops and wants to make a left, it backs everyone up. And that’s the issue,” public works director Russ Thompson said.

Under current projections, Caltrans could either widen the overpass or build roundabouts to manage the added traffic the shopping centers would bring.

But because of the time and money involved in Caltrans’ design and approval process, the agency typically approves concepts after developments are given the go-ahead.

That’s a problem for some, including Atascadero resident Ron Rothman, because it places too much uncertainty on cost. That concern is compounded because the city would wait to be reimbursed by development that’s not guaranteed to come, he said.

“It places all the risk on the city,” Rothman said.

Roundabouts are estimated at $4.5 million, but widening a bridge costs about twice as much.

“We’re not going into it blind with Caltrans,” Thompson said. “We’ve met with them several times, and they have been receptive to roundabouts.”

The environmental report that recommends how to deal with the added traffic didn’t study a bridge widening as an option. A 2007 city study found roundabouts were less expensive for the same effectiveness as bridge widening, Thompson said.

The city would also require Walmart to pay a contingency fee of up to $200,000 more should the roundabouts exceed the $4.5 million estimate.

Rothman and others say they think that contingency fee shouldn’t be capped.