Palo Alto and the Stanford University Medical Center reached a breakthrough Wednesday on a financial agreement that could pave the way for Stanford's massive expansion of its hospital facilities -- the largest construction project in the city's history.

After weeks of intense negotiations, city and Stanford officials have tentatively agreed on a deal that effectively resolves the thorniest component of the parties' "development agreement" -- a document that would grant Stanford the right to exceed local zoning regulations in exchange for a set of "community benefits."

The agreement is one of two major documents, along with the Final Environmental Impact Report, that the city must approve before Stanford can proceed with the hospital project.

Though the two sides had reached accord earlier this year on most aspects of the document, they remained split over "cost neutrality." Palo Alto has consistently demanded that Stanford include in the development agreement a guarantee that the hospital expansion would not drive up the city's operating costs. Stanford had offered an upfront payment of $1.7 million -- an operating deficit that was projected by the city's economic consultant. The city considered this offer insufficient.

But on Wednesday, Stanford submitted a new offer that includes an upfront payment along with a guarantee that the city will receive at least $8.1 million in construction-use-tax revenue by the year 2025. Stanford will do that by requiring its major contractors to obtain onsite use tax licenses that would direct construction-use taxes to the city.

Michael Peterson, Stanford's vice president for special project, outlined the offer in a Wednesday memo to City Manager James Keene.

Keene outlined the proposed agreement at the Wednesday night meeting of the City Council's Policy and Services Committee. He told the committee that the new offer addresses the city's major concerns about the project's impacts on the city's bottom line.

"I think we can represent to the council that we have a means to manage the fiscal impact of the project that really does not put a cost directly on the city services and threaten other operating costs to the city," Keene told the committee.

The committee voted 2-1, with Councilwoman Karen Holman dissenting, to recommend approval, in concept, of the latest draft of the development agreement. Councilman Larry Klein did not participate in the discussion because his wife is on Stanford faculty. Committee Chair Gail Price and Councilman Pat Burt both said they support the proposed document.

"I'm glad to see that we'd been able to have a proposal come before us that appears to really for the most part address our concerns and I think that Stanford is to be commended for the goodwill they have shown in attempting to resolve a complex issue that, once again, did not have a single perspective," Burt said.

The full council would still have to approve the proposed development agreement before it can take effect.

In addition to the "cost neutrality" assurance, Stanford has offered a package of "benefits" that includes Caltrain Go Passes for all hospital employees and payments to the city for community health programs ($4 million), patient benefits for low-income residents ($3 million), affordable housing programs ($23 million) and climate-change efforts ($12 million). The hospitals estimate the total value package to equal about $173 million.

City officials estimate the benefit package at about $43.6 million and claim that the Go Passes actually constitute "mitigations" that Stanford is required to provide to get environmental clearance for the hospital project, which will bring 1.3 million square feet of new development and 2,242 new employees to the city. But City Keene on Tuesday downplayed the difference in these estimates and acknowledged that the Caltrain program could easily be considered a benefit.

Holman argued that Stanford should be asked to provide more benefits, including extending of the city's lease of El Camino Park, giving the city a right-of-way bike path near Gunn High School and provision of an upstream retention basin to protect the city and its neighbors against flooding from the San Francisquito Creek. Norm Beamer, a resident of the Crescent Park neighborhood near the flood-prone creek, also urged the council to require Stanford to provide an upstream basin.

"The bottom line would be doubled to Palo Alto by avoiding the potential liability of flooding, but it would add zero to the actual cost for Stanford," Beamer said. "It would seem to me to be a lost opportunity."

The city had earlier considered many of these proposed benefits, including the upstream basin, but ultimately discarded them because they are not directly related to the hospital and its impacts. Peterson's letter also notes that Stanford's agreement on cost neutrality is contingent on the city not hitting the hospitals with new requests.

"The SUMC parties are willing to compromise on these issues based on the assumption that this is the last outstanding issue and the understanding that we can withdraw this offer if new demands are made by the City," Peterson wrote.

Burt said it's easy for individual council members to come up with issues that they think should be added to the list, but said he's comfortable with the latest proposal.

"There's simply no way on God's green earth that we would have something that a whole group of people would say, 'This is perfect,'" Burt said.

Price agreed and said the new proposal "makes sense." She praised city and Stanford staff for reaching the new agreement through a "deliberative process."

"The issue of cost neutrality has been critical to this debate," Price said. "I'm comfortable with the comments and the proposals being brought forward by Stanford in conjunction with the city manager."

Stanford still faces several hurdles before it gets the final approval. The full council must approve both the development agreement and the Final EIR. The city's Planning and Transportation Commission is scheduled to hold its own review of the EIR on May 11, while the Architectural Review Board is in the process of signing off on the proposed designs of the new buildings.

The full council is scheduled to discuss the development agreement in June.

Peterson acknowledged after the meeting that Stanford has not yet cleared the approval process, but said he was "very pleased" about the new agreement on "cost neutrality."

"This was the biggest issue that we worked with the city on -- probably the most significant point," Peterson said. "We both agreed to this and stretched ourselves."

The hospital expansion includes a new Stanford Hospital & Clinics Building, an expanded Lucile Packard Children's Hospital and renovations to the Stanford University School of Medicine.

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