HomeMy WebLinkAboutItem 6b. FY 2026-27 Budget Supplement Preview and Discussion of Operational Initiatives Item 6b
Department: Finance
Cost Center: 2002
For Agenda of: 3/3/2025
Placement: Business
Estimated Time: 180 minutes
FROM: Whitney McDonald, City Manager
Prepared By: Scott Collins, Assistant City Manager; Greg Hermann, Deputy City Manager;
Emily Jackson, Finance Director; Natalie Harnett, Policy and Project Manager; Riley
Kuhn, Principal Budget Analyst
SUBJECT: FY 2026-27 BUDGET SUPPLEMENT PREVIEW AND DISCUSSION OF
OPERATIONAL INITIATIVES
RECOMMENDATION
1. Review and discuss the FY 2026-27 Budget Supplement Preview; and
2. Provide direction to staff regarding the draft expenditure reductions to be
recommended as part of the FY 2026-27 Budget Supplement in June 2026; and
3. Provide direction to staff on funding of the City’s Section 115 Pension Pre-Funding
Trust or an alternate use of the funding currently assigned for this purpose
POLICY CONTEXT
The City’s Budget Policies that are reviewed and adopted every two years with adoption
with the bi-annual Financial Plan require that the City maintain a balanced budget over
the two-year period of the Financial Plan. Specifically, policy requires the City Council to
pass a balanced budget where operating revenues fully cover operating expenditures. As
demonstrated by the long-term forecast for the General Fund, expenditure reductions will
be necessary to achieve a balanced budget in FY 2026-27. Pursuant to Section 804 of
the City Charter, the City Council must adopt the FY 2026-27 Budget by June 30, 2026,
for the appropriations to be in place when the next fiscal year begins.
Development of the 2025-27 Financial Plan was guided by the City’s Fiscal Policies and
Budget Balancing Strategies, both of which were reviewed by the City Council as part of
the Budget Foundation item in January 2025 and formally approved with adoption of the
2025-27 Financial Plan in June 2025.
DISCUSSION
Background
The report is organized in the following sections:
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Item 6b
Overview
This section provides a high-level summary of the report, including important contextual
information. It includes a discussion of the relevant actions taken with development and
adoption of the 2025-27 Financial Plan, a preview of the actions to be recommended with
the FY 2026-27 budget, and an updated long-term forecast for the General Fund. It also
includes discussion of upcoming initiatives which will require additional investments from
the General Fund. Some of these initiatives, like the opening of a fifth fire station, have
been discussed at length and are factored into the long-term forecast. Others are new,
and will have cost implications for the General Fund, like the use of dwindling opioid
settlement agreement funds to pay for Licensed Psychiatric Technicians.
Recommendations
This section includes and seeks City Council input on the draft budget reductions
recommended by the City Manager which were carefully crafted to minimize impacts to
service levels, the community, and the organization. This section also includes discussion
on the Fiscal Health Contingency Plans currently in place, as well as discussion on the
$2 million in funding set aside for deposit into the City’s 115 Pension Pre-Funding Trust,
the City’s pension funded status, and certain improvements to the budget process and
document which are intended to increase transparency for readers.
Operational Initiatives
In order to adjust to slower revenue growth while continuing to meet emerging needs,
staff recommend a multi-pronged approach. This section includes discussion of how the
City can support its workforce and modernize operations, balancing workload and
exploring new initiatives, and alignment through a longer-term strategic framework.
Next Steps
This item serves as a preview of recommendations to be included in the FY 2026-27
Budget Supplement. Any input provided by the City Council as a part of this item will be
incorporated into staff’s formal recommendations for consideration at the FY 2026 -27
budget hearing on June 2, 2026.
Previous Council or Advisory Body Action
With adoption of the 2025-27 Financial Plan, the City Council adopted a set of Budget
Balancing Strategies. The recommendations in this report operationalize those Council
adopted strategies.
During the April 2025 Special Meeting, the City Council discussed the need to better align
the City’s long-term commitments, shorter-term goals, emergent priorities, and essential
“core” services. This item is responsive to that request.
Public Engagement
Public comment on this item can be provided to the City Council through written
correspondence prior to the meeting and through public testimony at the meeting.
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Item 6b
CONCURRENCE
All departments participated in development of the draft budget reductions and concur
with the recommendations.
ENVIRONMENTAL REVIEW
The California Environmental Quality Act (CEQA) does not apply to the recommended
actions in this report because the actions do not constitute a “Project” under CEQA
Guidelines Sec. 15378.
FISCAL IMPACT
Budgeted: N/A Budget Year: 2025-26 and 2026-27
Funding Identified: N/A
Fiscal Analysis:
Funding
Sources
Total Budget
Available
Current
Funding
Request
Remaining
Balance
Annual
Ongoing
Cost
General Fund $0 $0 $0 $0
State
Federal
Fees
Other:
Total $0 $0 $0 $0
There is no direct fiscal impact associated with staff’s recommendations to receive,
discuss, and provide staff with direction. Council direction on this item will be incorporated
into future budgets at which point there will be a fiscal impact.
ALTERNATIVES
Council could direct staff to modify the budget reduction recommendations. The
purpose of this item is to seek direction from Council and requested changes to the
recommendation will be incorporated with the FY 2025-26 supplemental budget.
ATTACHMENTS
A - Budget Update
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Introductfon
The primary purpose of this item is to provide a comprehensive update on the City’s General Fund
budget in advance of formal budget adoptfon in June 2026. As noted during development of the
2025-27 Financial Plan, the June 2025 Long-Term Forecast for the General Fund identffied a deficit
in future years due to general economic conditfons which have caused a slowing to the revenue
growth and known future costs (partfcularly, the need to staff a new fire statfon). Actfon was taken
with development of the 2025-27 Financial Plan to address the immediate revenue/expenditure
imbalance, but additfonal changes are needed in order to balance the budget for FY 2026-27 and
the 2027-29 Financial Plan period. This item provides an overview of the budgetary positfon of
the General Fund, including an updated Long-Term Forecast for the General Fund, and a preview
of staff recommendatfons for modest expenditure reductfons to be considered with adoptfon of
the FY 2026-27 Budget Supplement in June 2026.
While expenditure reductfons are necessary to maintain a balanced budget in the current and
next Financial Plan, staff are taking a more holistfc approach to balancing the budget to ensure
the overall fiscal and organizatfonal health of the City and contfnued pursuit of community goals
in the long-term. In additfon to presentfng draft expenditure reductfons for the City Council’s
input in advance of the June 2026 Budget Hearing, this item also includes an overview of changes
that staff are making to the budget to improve transparency and other work being done to ensure
that the organizatfon is well positfoned to address evolving community needs. Lastly, staff are
seeking Council input on funding of the Sectfon 115 Trust and consideratfon of terminatfon of the
Fiscal Health Contfngency Plans actfvated in 2023 and 2025. Additfonal informatfon for each item
follows.
Overview
Development of the 2025-27 Financial Plan and General Fund Long-Term
Forecast
2025-2027 Financial Plan Development
The 2025-27 Financial Plan includes a balanced budget of $117.6 million in expenditures for the
General Fund despite slowing revenue growth, rising costs, and rapid shifts in federal policy with
significant expected impacts on economic conditfons. Achieving a balanced Financial Plan
required changes to how the City develops its budget, both in terms of how revenues were
forecasted and expenditure budgets were developed. Revenue forecastfng methodology was
changed, especially in property taxes, to more accurately predict results. Salary savings
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assumptfons were slightly increased to better align with recently observed trends. Departments
were asked to submit base budgets that constrained non-staffing costs to FY 2024-25 adopted
levels, requiring staff to more accurately forecast expenditures and, in some cases, to reduce
funding for discretfonary items. Notably, this constrained base was also applied to the second
year of the 2025-27 Financial Plan despite contfnued observed cost increases. These changes in
the City’s budgetfng methodology should be expected to result in lower end of year unassigned
fund balance, while increasing the risks that revenue targets may not be attained and expenditure
budgets may be exceeded if unantfcipated expenses arise during the year.
The City also reallocated $1.0 million of Local Revenue Measure (LRM) funding from the capital
budget to the operatfng budget to maintain funding for ongoing operatfons. This
recommendatfon was made because the City has had difficulty delivering on a very ambitfous
Capital Improvement Plan since the passage of Measure G-20 due to ongoing staffing challenges
as a result of a natfonal shortage of engineers and competftfon with neighboring agencies for
engineers and project managers. The Capital Improvement Plan (CIP) included in the 2025-27
Financial Plan was adjusted to more accurately reflect the City’s current capacity to deliver
projects, and minimal impact is expected as a result of the modest reductfons in CIP funding.
The table below provides a high level view of the General Fund Long-Term Forecast included in
the 2025-27 Financial Plan:
Table 1. Financial Plan Long-term Forecast
Planning for 2027-29 Financial Plan
While these changes were sufficient to deliver a balanced budget for the current Financial Plan
period, the Long-Term Forecast for the General Fund stfll indicated a deficit beginning in FY 2027-
28. This deficit was largely driven by the additfon of the projected costs to open and operate a
fifth fire statfon at the south end of the City. The requirement for a new fire statfon (Fire Statfon
5) comes from the development agreement for Avila Ranch which the City entered into in 2017
and obligates the City to open the statfon once the development is more than 50% complete,
antfcipated to occur in the second half of FY 2027-28.
The City typically updates its Long-Term Forecast every six months. Table 2 below provides a
revised Long-Term Forecast for the General Fund and includes many of the changes incorporated
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with the 2025-27 Financial Plan, in additfon to new items that reflect current understanding of
the City’s economic outlook. The 2025-27 Financial Plan assumed that the $1.0 million reductfon
in capital expenditures would be temporary, and that this funding would be restored to the capital
budget in FY 2027-28. Based on the fact that the $1.0 million decrease to CIP funding has resulted
in minimal impact to City projects, and in order to avoid significant impacts to City services
through deeper reductfons to the operatfng budget, staff recommend contfnuing to fund capital
expenditures at this lower level going forward. The CIP has been built to accommodate this
funding shift, so no impacts are antfcipated to the funding levels or projects included in the
current CIP.
The revised Long-Term Forecast also reflects lower than previously forecasted City payments to
CalPERS thanks to strong investment returns in recent years. For each year that CalPERS generates
investment returns in excess of its target rate, the City should see savings relatfve to the projected
annual increases. It is important to note that the converse is true when CalPERS experiences poor
investment returns which cause City contributfons to increase more quickly than projected. Other
updates to the Forecast include increased Transient Occupancy Tax revenue based on recent
strength in tourism, increased development fee revenue based on an uptfck in permitting actfvity
in the last twelve months, increased franchise fee revenue based on recently implemented
changes to solid waste fees, and a reductfon in cannabis tax revenue based on a sharp downturn
observed in FY 2024-25.
This revised Forecast also reflects modest changes to the tfmeline for the opening of the fifth fire
statfon. Previous versions of the forecast assumed that all operatfng costs for the statfon would
be incurred for the entfrety of FY 2027-28 but based on the buildout of Avila Ranch to date , staff
now expect only a partfal year of operatfng costs will be necessary.
The net impact of these changes is a significant improvement to the forecasted deficit, decreasing
from the June 2025 forecast of $3.0 million in FY 2027-28 down to $1.2 million and effectfvely
eliminatfng the forecasted $1.9 million FY 2028-29 deficit, as detailed below:
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Table 2. Updated Long-term Forecast
The forecasted deficit shown above is projected to be reduced over tfme as revenue eventually
grows more quickly than expenditures, as has typically been the case for the City. This assumes
contfnued growth in consumer spending, tourism, and property values, and also assumes no new
programs or other costs outside of those identffied below. The forecast above stf ll indicates a
need for expenditure reductfons, and those reductfons will be factored in with the development
of the FY 2026-27 Supplemental Budget (identffied below in the recommendatfons sectfon).
Consistent with historic forecast methodology, the Long-Term Forecast for the General Fund
reflects known expenditure changes from the current year, most notably the additfon of $2.0
Actuals Financial Plan Forecast
FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29
Tax & Franchise Revenue
Sales Tax 54,357,111$ 55,470,441$ 55,766,497$ 57,439,492$ 59,593,473$
Property Tax 24,923,847 25,944,966 27,112,490 27,925,865 28,973,085
Transient Occupancy Tax 11,417,888 11,099,705 11,495,652 11,830,022 12,310,522
Utility User Tax 7,501,436 6,605,306 6,671,359 6,871,500 7,129,181
Business Tax 3,138,271 3,230,170 3,262,472 3,360,346 3,486,359
Franchise Fees 2,622,351 2,242,429 2,793,556 2,862,363 3,050,951
Cannabis Tax 814,502 1,000,000 800,000 850,000 900,000
Total Tax & Franchise Revenue 104,775,406 105,593,017 107,902,026 111,139,587 115,443,571
User Fees
Development Review 5,697,332 4,606,812 5,806,435 6,047,628 6,317,295
Parks & Recreation 2,643,907 2,280,283 2,320,590 2,390,207 2,473,865
Fire 3,331,998 1,759,183 1,774,654 1,827,894 1,891,870
Police 834,584 690,200 690,200 710,906 735,788
Business Licenses 792,548 632,470 732,469 754,443 780,849
Total User Fees 13,300,370 9,968,947 11,324,348 11,731,078 12,199,666
General Government 7,778,702 1,669,077 1,778,568 1,703,801 1,739,494
2023 Storm Reimbursement 909,090 - - - -
Total Fees & Other Revenue 21,079,071 11,638,024 13,102,916 13,434,879 13,939,160
Total Revenue 126,763,568 117,231,041 121,004,942 124,574,466 129,382,731
Operating Expenditures
Staffing 75,489,526 76,242,202 80,215,937 84,661,616 87,655,863
Other Operating Expenditures 18,291,470 24,124,355 18,222,995 18,385,360 18,757,109
Cost Allocation (5,367,608) (5,671,069) (5,552,675) (5,830,309) (6,121,824)
Total Operating Expenditures 88,413,388 94,695,488 92,886,257 97,216,667 100,291,148
Debt Service 1,757,889 1,724,965 1,512,468 1,515,354 1,513,783
Financing Activity - - - - -
Capital 26,010,000 25,523,604 25,574,676 26,602,020 27,154,060
Other Transfers 7,231,653 1,132,074 792,339 429,911 466,671
Total Expenditures 123,412,930 123,076,132 120,765,740 125,763,952 129,425,662
Revenue - Expenditures 3,350,638 (5,845,090) 239,202 (1,189,486) (42,931)
Use of Fund Balance 9,167,831 5,845,090 246,000 - -
Surplus / (Deficit)12,518,469$ -$ 485,202$ (1,189,486)$ (42,931)$
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million in operatfng costs related to Fire Statfon 5 coming online in the out years. In additfon to
costs that have been factored into the forecast, it is also important look ahead to upcoming
known initfatfves that will require an investment of staff tfme and/or financial resources. This
exercise provides important context for the budgetary decisions made on an annual basis, as it is
important that the budget will be able to support new initfatfves in the coming years.
New Initiatives (Forecasted and Not Forecasted)
Forecasted Initfatfve. In additfon to Fire Statfon 5 operatfng costs which were included in the
forecast presented with the 2025-27 Financial Plan, staff has also added a “one-tfme” cost
estfmated at $375,000 in FY 2027-28 to support an update to the City’s Housing Element of the
General Plan, to maintain compliance with State law (California Government Code §65585
requires that local governments update their housing elements every eight years; the City last
updated the housing element in 2020).
Non-Forecasted Initfatfves. Other upcoming changes and new initfatfves that are currently NOT
factored into the revised General Fund forecast include, but are not limited to following:
Decrease to Opioid Settlement Funds currently supporting County Licensed Psychiatric
Technicians assigned to Community Action Team and Mobile Crisis Unit. Licensed
Psychiatric Technicians (LPT) from the County that support the Community Action Team
and Mobile Crisis Unit are currently paid for with Opioid Settlement Agreement funds.
The annual allotment of settlement funds is less than the annual cost of the LPT contracts,
and this shortfall has been offset with prior year Opioid Settlement balances which are
forecasted to run out in FY 2027-28. Absent additional settlements, the General Fund
would need to subsidize or fully support the cost of the contracts if the City determines
that they should continue absent an identified alternative funding source. The City’s
current cost for both positions is $235,063 and increases by 2.5% - 7.5% annually per the
contracts with the County. The table below details the projected revenues and
expenditures:
Table 3. Opioid Fund Balance
Development Impact Fee Study. Per Government Code 66016.5(a)(8), Development
Impact Fee studies are required to be updated at least every eight years, from the period
FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28
Settlement Revenue 333,073$ 183,212$ 129,808$ 121,188$
LPT Contracts 127,303 235,063 246,816 259,157
Surplus / (Deficit)205,770 (51,851) (117,008) (137,968)
Opioid Fund Balance 205,770$ 153,920$ 36,911$ (101,057)$
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beginning on January 1, 2022. The City initiated a Development Impact Fee Study in FY
2023-24, but that effort was tabled due to turnover in staff leading the effort and some
identified issues with fee policy and program administration that needed to be addressed
before the study could be finalized. Work is underway to address some of the identified
issues, but the City will need to move forward with a new Impact Fee Study to be adopted
by 2030 in order to comply with State law. In FY 2025-26, the City Council approved a
Significant Operating Budget Change (SOBC) in the amount of $190,136 for consultant
expense to conduct an impact fee and Infrastructure Finance program analysis and Impact
Fee Study. Staff is using a portion of the funding currently through work with a consultant
to develop a funding plan for the construction of the Hwy. 101/Prado Road Interchange
project. That effort in part will also support the future impact fee study. In addition, staff
is working to identify a consultant to assess and make recommendations for
administration of the fee program. It is expected that these efforts will fully utilize the
available funding and that an additional $100,000 may be needed in the 2027-29 Financial
Plan timeframe to support the Impact Fee Study.
User Fee Study. Per the City Council's adopted policy related to User Fee Cost Recovery,
the City should conduct a User Fee Study every three years. The last User Fee Study was
accepted by the Council on July 2, 2024. Staff will need to initiate the next User Fee Study
in FY 2026-27 for adoption by the City Council in Spring 2027 to comply with the User Fee
Cost Recovery policy. Based on the cost of the last User Fee Study, staff estimates a
$50,000 cost for consultant support for this effort in FY 2026-27.
Additional potential future costs. Beyond the items noted above, the forecast also does
not include:
o The potential addition of staff positions as recommended in the Police
Department Staffing Study and Public Works Maintenance Division Staffing Study
(both presented to the City Council on January 14 , 2025). The cost to add all of
the positions recommended in the Police Department’s staffing study is estimated
at over $2.8 million a year, based on current position costs (note that with
adoption of the 2025-27 Financial Plan, the City Council approved the addition of
2.00 FTE Police Officers at a total cost of $324,282, which was partially supported
by COPS Hiring Program funding which covers up to 75% of the entry-level salary
and benefits for each position for a three year period). The cost to add all of the
positions recommended in the Public Works Maintenance Division staffing study
is estimated at $727,996 annually, based on current position costs. To date, the
City Council has approved three of the positions recommended in the staffing
study; the annual cost for the remaining positions is estimated at $259,522 based
on current position costs. Although not included in the staffing study
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recommendations, it is also worth noting that development of new facilities will
require additional staff resources to maintain those assets.
o The potential creation and administration of a Rental Housing Registry program
(to be discussed during the upcoming Rental Housing Registry Study Session on
February 24, 2026).
o Cal Poly on campus fire service needs.
o Ongoing implementation of new fire hazard severity zone maps.
o Additional investments in Downtown including economic development funding
set to expire at the end of the current financial plan.
o Ongoing work to address Oracle ERP related issues identified as part of an
upcoming system “health check” that is designed to ensure that business
processes are stable and that the City can maximize use of the system.
While the costs of these upcoming efforts are only estfmated at this tfme, staff are tracking these
important initfatfves to ensure proper planning so that the budget is well positfoned to support
these costs when or if the City will incur them.
The Path Forward: Summary of Next Steps
In order to address the forecasted deficit, staff plan to recommend budget reductfons with the FY
2026-27 Budget Supplement. These reductfons have been carefully selected to minimize
community and organizatfonal impacts, but some impact is inevitable. In additfon to these
reductfons, staff also plan to implement several operatfonal improvements to maximize
transparency and service delivery in a constrained funding environment. This multf-pronged
approach will both address the structural deficit and set the organizatfon on a course for future
success.
First, staff have identffied several improvements to the budget process that should help achieve
greater efficiency and transparency goals. The potentfal changes, which may require additfonal
funding and take multfple years to accomplish, are detailed in additfonal sectfons below and are
summarized as follows:
Ensuring that the budget and the long-term forecast for the General Fund are consistent
and utflize the same methodology, contfnuing improvements implemented in the 2025 -
27 Financial Plan.
Revising and more clearly communicatfng the City’s revenue forecastfng methodology.
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Clearly communicatfng that the ability to make additfonal discretfonary payments (ADPs)1
to CalPERS relies upon the availability of unassigned fund balance at year-end, which is
largely generated through salary savings and conservatfve revenue forecasts.
Potentfally changing the General Fund’s reserve calculatfon methodology. Historically, the
City has excluded the City’s annual Unfunded Accrued Liability (UAL2) payments to
CalPERS from its calculatfon of overall General Fund operatfng reserve amounts. The
assumptfon has been that an amount equivalent to a 20% reserve for the UAL payments
has been held in assigned fund balance and therefore excluded from operatfng
expenditures for purposes of calculatfng the reserve requirement. The amount held as
assigned fund balance for this purpose has been steady at $2.0 million for the past several
years. As the annual UAL payment for the General Fund will be $15.3 million in FY 2026-
27, this methodology does not provide a true 20% General Fund reserve. A General Fund
reserve that incorporates current UAL payments would be approximately $3.1 million
higher in FY 2026-27.
More accurately budgetfng for Public Safety overtfme, which has been underfunded for
years. Typically, overtfme budget exceedances have been absorbed within the Fire and
Police Department budgets by staffing vacancies, but increased service demands, such as
increased police presence at special events and mutual aid support requests, have put
additfonal strain on these budgets. As a result, staff plan to recommend that all public
safety budget reductfons discussed below are re-allocated to overtfme to more closely
reflect actual expenses.
Staff also plan to invest in the organizatfon to standardize and improve operatfons. Thi s will
include thoughtiul reorganizatfons to realize operatfonal efficiencies and improve service delivery,
and the ability to implement new initfatfves, such as those discussed above, to address future
needs, and the creatfon of a long-term strategic framework that brings all of the City’s goals,
values, and services into one place, helping staff to spot overlaps, streamline work, and stay
focused on what matters most to the Council and community. Additfonal informatfon regarding
this strategic framework is included below.
1 Additional Discretionary Payments allow the City to improve its funded status more quickly than required
by CalPERS.
2 Annual UAL payments are payments required by CalPERS to pay down the City’s unfunded liabilities
over 20 years.
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Recommendatfons
Expenditure Reductfons
Following adoptfon of the 2025-2027 Financial Plan in June 2025, staff began a comprehensive
budget reductfon exercise to develop thoughtiul optfons that would address the identffied budget
deficit. All departments prepared two sets of budget reductfon optfons equal to 5% and 8% of the
departments’ respectfve ongoing operatfng budget. These targets were intentfonally set higher
than what was believed necessary to address the structural deficit and higher than staff expected
to recommend to provide flexibility for economic deterioratfon and to ensure that a sufficient
range of optfons would be developed at one tfme, rather than over and over again, to minimize
disruptfon and anxiety for the organizatfon. All departments and all major funds were included in
the exercise. The one exceptfon was Special Revenue funds, which were excluded since the City
has limited ability to control and adjust those budgets. Public Works and Utflitfes provided lists of
reductfon optfons for the City’s four Enterprise Funds (Parking, Transit, Water and Sewer), but
staff is not recommending reductfons to those programs at this tfme. The Leadership Team
carefully reviewed proposed reductfons over several days to ensure that the final
recommendatfons would generate sufficient savings while minimizing impacts to the community
and the organizatfon.
The result of this process is a list of expenditure reductfons totaling $1,663,973, of which
$576,379 is recommended to be re-allocated to public safety overtfme, for a net reduction in
spending of $1,087,594. The recommended expenditure reductfons represent significant effort
by staff and deliberatfon by the Leadership Team to identffy a means for reducing expenditures
while minimizing impacts to the community and to staff. Consistent with Council’s adopted
Budget Balancing Strategies, recommendatfons do not reflect across the board reductfons. While
all departments partfcipated in the exercise and reductfons are recommended in each
department, there is variability in the amounts and types of reductfons between departments
based on the antfcipated service level impacts, ability to address critfcal items including core
services and Major City Goal work programs, and consideratfon of the existfng constraints within
departmental budgets.
Budget balancing and reductfon exercises can cause anxiety and uncertainty for any organizatfon
if not done thoughtiully and transparently. Understanding this, City leadership has prioritfzed
communicatfon on this topic and provided regular updates to City staff through the budget
balancing exercise via all staff emails and the City Manager’s bi-monthly all employee briefings.
The City Manager and Finance Director also held a series of “Budget Balancing Listening Sessions”
at the Police Department, Fire Department, City Hall and the Corporatfon Yard through the month
of January to provide additfonal informatfon and answer staff questfons. In late January and early
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February, City leadership also met with represented employee groups to review reductfon
recommendatfons, and no significant concerns were expressed.
The proposed reductfons by department, including the relatfve size of the reductfon as a
percentage of current year budgets, and the proposed Full Time Equivalent (FTE) personnel
reductfons are detailed below:
Table 4. Expenditure Reduction Summary
Notably, all positfons recommended for eliminatfon are vacant or will become vacant3, before
they would be eliminated, and those vacant positfons will remain unfilled to ensure that they can
be eliminated without impacts to existfng employees effectfve July 1, 2026 . Recommended
reductfons do not result in the layoff of any filled positfons.
Descriptfons of the reductfons proposed for each department are included in the tables below:
3 Three Firefighter positions are recommended for elimination in the Fire Department; however, only two
are currently vacant. Staff anticipate that at least one Firefighter will pass the Fire Engineer qualification
examination before the end of FY 2025-26, which would create a third vacant position. If a third vacancy
does not occur by July 1,2026, no current employee will be adversely affected by the recommended
position eliminations.
Department FY 2025-26
Adopted Budget Reductions % of Budget FTE Reduction
Administration/IT 10,983,688$ 175,700$ 1.60%0.50
City Attorney 1,657,575 60,853 3.67%(0.15)
Community Development 7,973,537 170,125 2.13%-
Finance 2,770,356 29,935 1.08%-
Fire 18,214,320 453,246 2.49%3.00
Human Resources 2,037,833 48,200 2.37%-
Police 25,564,923 123,133 0.48%1.00
Parks & Recreation 6,141,965 90,042 1.47%-
Public Works 17,428,593 506,240 2.90%-
Utilities 1,381,664 6,500 0.47%-
Total 1,663,973$ 4.35
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Table 5. Expenditure Reduction Detail
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Improving Budgetfng Practfces to Improve Transparency
As discussed earlier in this report, development of the 2025-27 Financial Plan and June 2025
General Fund Long-Term Forecast reflected some changes to the City’s recent forecastfng and
budgetfng practfces. With the expectatfon that the budget will contfnue to be tfght in the coming
years, staff contfnue to work to refine forecastfng and budgetfng methodology to increase
accuracy and improve transparency. Following is a discussion of the work being done on
budgetfng practfces, as well as a discussion about the City’s Sectfon 115 Trust to support the City
Council in making a determinatfon about whether th e Trust should be utflized to support future
payments to CalPERS.
Sectfon 115 Pension Pre-Funding Trust
As part of the 2019-21 Financial Plan, the City Council identffied establishment of a Sectfon 115
Trust Fund as a work plan item under the Fiscal Sustainability Major City Goal. Establishment of
the Trust was to be completed by February 2020 but was delayed due to uncertainty about the
budgetary impacts of COVID-19. The Trust was eventually established in early 2023. Prior to its
establishment, $2.0 million was assigned in the General Fund reserve to be deposited to the Trust
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upon establishment. In additfon to the $2.0 million assigned for this purpose, staff had planned
to recommend allocatfon of $2.4 million of FY 2022-23 unassigned fund balance to make an initfal
contributfon to the Trust. However, staff instead recommended, and Council approved, allocatfon
of that funding to the Infrastructure Investment Fund to address significantly increased
infrastructure costs on projects in motfon due to historic inflatfonary factors.
Despite $2.0 million being designated for the 115 Trust, the City has not made an initfal
contributfon to the Trust. In other words, the Trust has been created, but there is currently no
money in it. The $2.0 million remains in the General Fund reserve and could be deposited into
the Trust, paid directly to CalPERS, or unassigned and moved into the General Fund budget or
unassigned fund balance to support capital or operatfng costs, subject to City Council directfon.
At this tfme, staff is seeking Council directfon on whether or not the City should move forward
with depositfng the $2.0 million in assigned funding into the Trust. Though the City has not made
an initfal contributfon to the Trust, it is important to note that the City has made a total of $24.8
million in Additfonal Discretfonary Payments (ADPs) to CalPERS since 2019 to paydown its pension
liability. ADPs represent payments beyond what the City is required to pay on an annual basis. In
FY 2025-26, the City will make a total of $25.6 million in payments to CalPERS, inclusive of the
ADP, assuming Council’s modified allocatfon of FY 2024-25 unassigned fund balance included in
the Second Quarter Budget Report on February 17, 2026.
Internal Revenue Code § 115 enables governmental entftfes to establish a pension prefunding
trust to set aside and invest money to pay for pension contributfons, unfunded accrued liabilitfes,
and other long-term retfrement costs, rather than relying solely on pay-as-you-go contributfons.
Any earnings on investment are tax exempt under Internal Revenue Code § 115. In California,
there are multfple optfons that local agencies can choose from when establishing a Sectfon 115
Trust. When the City established a Tr ust, it did so through the California Employers Pension
Prefunding Trust (CEPPT), a multfple-employer trust administered by CalPERS. According to
CalPERS, approximately 100 of 3,000 CalPERS agencies have elected to use CEPPT as their pension
contributfon prefunding trust fund; citfes make up 25 of the 100 partfcipatfng agencies.
In March 2023, staff engaged Foster & Foster, an independent natfonal actuarial consultfng firm,
to perform a review of the City’s progress in paying down unfunded liabilitfes. Based on the Foster
& Foster actuarial report, the City’s commitment to paying down its pension debt by making
additfonal ADPs has helped to make progress on improving the plan’s overall funded status.
Feedback provided by the City’s independent Actuary was that the City is taking appropriate
actfon to make progress in paying down the unfunded pension liabilitfes. A negatfve investment
return of -7.5% for CalPERS in FY 2021-22 provides a good reminder that the City’s ability to
address unfunded liabilitfes is heavily impacted by factors outside of the City’s control. The
primary recommended strategy coming out of the Foster & Foster report was to contfnue to make
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required CalPERS payments and ADPs. The City Council adopted Fiscal Policies prioritfze applying
end of year unassigned fund balance toward ADPs and the City assumes that at least the first $2.0
million of unassigned fund balance will be used to make Additfonal Discretfonary Payments
annually. Inclusive of the FY 2025-26 payments, the City has made nearly $130.0 million in ADP
and UAL payments to CalPERS since FY 2018-19 when the ADP strategy was launched, as detailed
in the chart below:
Table 6. Pension Payment History
Despite these investments, the City’s pension plan remains underfunded. As of the most recent
actuarial report date, the City’s plans were 66.2% funded with an unfunded liability of $188.4
million as detailed in the table below:
Table 7. Pension Funded Status
At this funded ratfo, the City of San Luis Obispo is behind most other CalPERS agencies. The
chart below shows the distributfon of CalPERS members as of June 30, 2024:
As of June 30, 2024
Plan Assets Accrued Liability Unfunded Liability Funded Ratio
Miscellaneous 191,435,452$ 291,293,527$ 99,858,075$ 65.7%
Safety 178,415,852 266,992,598 88,576,746 66.8%
Total 369,851,304$ 558,286,125$ 188,434,821$ 66.2%
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Table 8. CalPERS Agency Funded Status Distribution
Following is a summary of consideratfons that staff recommend the City Council make in
determining whether or not to deposit funding into the City’s 115 Trust:
1. Trusts help an agency to build a cushion, providing for some level of budget stability.
Contributfons to a trust before they are needed allow funding and investment earnings to
accumulate over tfme, which can help to offset future employer contributfons. This can serve
to reduce volatflity in annual budgets by providing a “rainy day” pension fund to support
CalPERS payments in years when payments increase or the City experiences budget strain.
2. Deposits are irrevocable and cannot be used for any other purpose. Any funds deposited
into a trust can only be used to support paydown of the City’s pension debt. If the City were
to need funding for an urgent need, funds deposited in the Trust could not be tapped for other
general uses.
3. Contributions don’t reduce the City’s unfunded accrued liability. Contributfng to the 115
Trust serves to obligate funding for future payments, but does not actually reduce the City’s
unfunded accrued liability untfl the funds are paid to CalPERS.
4. Investments of deposits into a Trust assume some level of market risk, but could potentially
yield higher returns than the City’s managed investments. Currently, the amount assigned
to the 115 Trust is invested along with the rest of the City’s cash in low risk, low yielding
securitfes. The City’s pension is managed by CalPERS, which seeks to maximize returns in the
long run by taking on additfonal market risk. A 115 Trust investment strategy would be
somewhere in between. The Trust would take on more risk than the City’s managed
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investments in order to generate higher returns, but would most likely underperform the
returns realized by the CalPERS portiolio over tfme.
5. Funding the Trust does not guarantee a decrease to long-term costs. While trusts can reduce
volatflity and bolster the ability to make payments to CalPERS, they do not guarantee lower
total costs, partfcularly if investment returns are below expectatfons.
6. Development of a policy is important to govern use of the Trust. Should Council direct that
staff deposit the $2.0 million that is currently assigned for contributfon to the Trust, staff
recommends that Council consider development of a policy framework to govern
contributfons to and use of the Trust. Policy consideratfons to be made include but are not
limited to:
a. How and when Trust should be funded
b. Use of funds held in the Trust for future payments to CalPERS
c. Roles of the City Council and staff
d. Reportfng and transparency
Staff seeks guidance from Council on whether the $2.0 million assigned for deposit into the Trust
should be used for that purpose or reallocated for another one-tfme use.
Budgetfng for Salary Savings
In evaluatfng the City’s financial plan for transparency and ease of use, staff have identffied that
one point of confusion has come from the City’s practfce related to how salary savings are
forecasted versus how they are budgeted. The long-term forecast is based on the budget and is
used to determine that the budget is balanced in the current year and that it is sustainable in the
future. The long-term forecast for the General Fund currently assumes that 4% of salaries and
benefits will be unspent at year-end4. This common practfce is based on the reality that the City
will experience staffing vacancies. However, the budget assumes all positfons are fully staffed
year-round. Historically, this forecast practfce has not been incorporated into the budget. As a
result, all departments could finish the year under budget for staffing and benefits and stfll have
spent more than the long-term forecast assumed. In order to address this issue, staff plan to
incorporate the vacancy assumptfon into the budget so that the budget and forecast are aligned.
The table below details the methodology change using FY 2025-26 numbers:
Table 9. Vacancy Assumption
4 This assumption was increased from 3% to 4% with the 2025-27 Financial Plan. Based on a 5 year
lookback, the General Fund has typically returned 4-7%. When calculating the vacancy rate, the
CalPERS UAL is excluded from staffing costs since the UAL is a fixed cost.
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Because this methodology is already used in the long-term forecast, which is used to validate
that the budget is balanced, there is no expenditure reductfon or impact on unassigned fund
balance attributable to this change in methodology. The only impact is a more accurate and
transparent budget.
Funding Additfonal Discretfonary Payments to CalPERS
The City ’s pension plans are less than 70% funded and, with the exceptfon of FY 2020-21 which
benefited from strong investment returns, have been since 2008. At this funding level, the City is
required to make annual payments towards the Unfunded Accrued Liability as calculated by
CalPERS. In order to lower these annual payments and address this pension debt over tfme, the
City has made Additfonal Discretfonary Payments (ADPs) to CalPERS since FY 2018-19. The forcing
functfon for these payments has been a policy that any unassigned fund balance at year-end be
used for ADPs to CalPERS, Infrastructure, and Emerging Health and Safety Needs. These payments
were set at $2.0 million per year for the General Fund with the 2023-25 Financial Plan, and in
development of the 2025-27 Financial Plan Council updated its policy regarding ADPs to increase
the annual payment commensurate with staffing cost increases. In the current year, the City will
make an ADP in the amount of $3.1 million ($2.5 million from the General Fund). ADPs are
entfrely discretfonary on the part of the City and are not required by CalPERS. The City’s ability
to contfnue to make these payments depends upon sufficient unassigned fund balance, which is
often a result of conservatfve budgetfng.
When the City began making ADPs to CalPERS, they were made with unassigned fund balance
and not budgeted. With the 2023-25 Financial Plan, $2.0 million each year was set aside in the
General Fund Long-Term Forecast for ADPs. This funding was removed from the 2025-27 Financial
Plan in order to achieve a balanced budget.
Revenue Forecastfng Methodology
The City’s operatfng budgets are generally funded by antfcipated revenue, not previously
collected sums. Staff must accurately forecast the amounts reasonably expected to be collected.
If this forecast is too conservatfve, programs will be denied funding unnecessarily and the excess
funds will instead be used for one-tfme purposes only. If revenue is forecasted too aggressively,
the City risks inadvertently dipping into its reserves and creatfng an immediate need for budget
reductfons.
Budget Forecast
Staffing 78,762,988$ 78,762,988$
(Vacancy Assumption)- (2,520,785)
Net Staffing 78,762,988$ 76,242,202$
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On balance, the City has generally erred on the side of conservatfsm in revenue forecastfng. With
the 2025-27 Financial Plan and the updated long-term forecast shown above, staff have
developed more granular revenue forecasts intended to accurately predict year-end results. The
expected result of this change should be lower unassigned fund balance in good years, or, if
economic conditfons deteriorate, revenue may underperform against budget.
Staff plan to provide additfonal commentary in future budget reports to better communicate
these consideratfons.
More Accurately Budgetfng for Public Safety Overtfme to Increase Accountability
The Police and Fire departments’ operatfons incur a significant amount of overtfme pay , but their
budgets do not reflect this. Public Safety is required to staff certain positfons daily to ensure the
ability to respond to the community needs. When these positfons are not filled with regular staff,
they are backfilled at overtfme rates. Overtfme needs include coverage of shifts due to vacancies,
work related injury absences and illnesses as well as special assignments. In the absence of
realistfc overtfme budgets, service levels have only increased. New overtfme assignments have
been added for special events like Farmer’s Market and City Council meetfngs.
In recent years, the two departments combined have exceeded their overtfme budgets by
approximately $2.0 million per year. Both departments have also experienced vacancies in recent
years, and the savings from those vacancies has offset their overtfme spending as detailed in the
table below:
Table 10. Public Safety Staffing
In FY 2025-26, both departments are on track to modestly exceed their overall staffing budgets.
Without additfonal funding, the departments will likely exceed their staffing budgets each year
with impacts on year-end fund balance. As an initfal step towards rectffying this issue, staff
recommend that all budget reductfons from Police and Fire are re-allocated towards their
respectfve overtfme budgets. This results in zero net savings from the public safety departments
as detailed in the table below:
Table 11. Public Safety Re-allocations
Public Safety FY 2022-23 FY 2023-24 FY 2024-25
Overtime Variance (1,870,837)$ (1,695,569)$ (2,016,962)$
Salary Savings 2,327,107 1,706,406 2,058,789
Net Staffing Variance 456,270$ 10,837$ 41,827$
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Fiscal Health Contfngency Plans
In October 2001, the City created a Fiscal Health Contfngency Plan (FHCP) to establish a
framework and general approach to respond to adverse fiscal circumstances such as economic
downturns or unforeseen impactiul events. Actfvatfon of the FHCP does not signal a dire financial
conditfon but is a proactfve measure to keep the City’s budget in balance without significant
operatfonal consequences. The FHCP has been actfvated several tfmes in recent years, including
in 2020 in response to the COIVD-19 Pandemic, in 2023 in response to the 2023 Winter Storms,
and most recently in April 2025 in response to a projected imbalance in General Fund revenues
and expenditures. At this tfme, both the 2023 and 2025 FHCPs remain in effect and staff is seeking
Council’s input on next steps on each.
Actfvatfon of the FHCP in 2023 was driven largely by the significant antfcipated and unbudgeted
costs to respond to the damages caused by the significant storm events in January and March of
that year. At the tfme that the FHCP was actfvated, staff estfmated that the impacts of the storms
would add about $9.0 million of unantfcipated costs to the budget over two years. Actfvatfon of
the 2023 FHCP included the following components:
1. A hiring chill requiring City Manager approval prior to filling all regular and supplemental
positfons, as well as hiring consultant services.
2. A purchasing chill which limited purchases to those necessary to support daily operatfons
of essentfal City services, or related to storm response.
3. Capital Improvement Project deferrals for projects that were not already in constructfon
or design, in order to provide flexibility for adjustments to the Capital Improvement Plan
to address cost escalatfon and emergent projects related to the storms.
At tfme of actfvatfon, the City Manager’s intent was to terminate the FHCP upon having additfonal
clarity about how the unbudgeted storm costs would impact the budget overall, and the tfmeline
for cost reimbursement from the Federal Emergency Management Agency (FEMA). In August
2023, the FHCP was modified to remove the requirement for departments to obtain City Manager
approval to fill vacant positfons, but the purchasing chill remained in place, focusing purchases to
those intended to support operatfons of essentfal services, storm response and Major City Goal
tasks; limitfng food purchases only to circumstances where staff is required to work over the lunch
hour or outside or normal business hours; and focusing travel and training expenditure on training
needed to maintain required certfficatfons, support public health and safety or other high priority
Reduction Re-allocation Net Savings
Fire 453,246$ (453,246)$ -$
Police 123,133 (123,133) -
Public Safety Total 576,379$ (576,379)$ -$
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service needs. To date, the 2023 FHCP has not been terminated and is stfll in place due to
uncertainty about the tfming of project cost reimbursements from FEMA.
Actfvatfon of the FHCP in 2025 was driven by a forecasted flattening in the City’s revenues and
increasing expenditures, driven largely by the requirement to bring a fifth fire statfon online. As
noted earlier in the report, actfvatfon of the FHCP was accompanied by development of the 2025-
27 Financial Plan which constrained non-staffing operatfng budgets to FY 2024-25 adopted
amounts. Actfvatfon of the 2025 FHCP included the following components:
1. A hiring chill requiring City Manager approval prior to filling all positfons.
2. A travel chill requiring City Manager approval of all travel authorizatfons. An exceptfon is
made for travel for trainings necessary to maintain job-required certfficatfons, which can
be authorized by department heads.
Over the last several months, staff have been working to update the General Fund Long-Term
Forecast to reflect more current fiscal informatfon (discussed earlier in this report). As a result of
the improved forecast and the preparatfon of proposed budget reductfons that will address the
updated deficit amount, the 2025 FHCP was modified in early January to: remove the
requirement for City Manager approval for travel consistent with the City’s Travel Policy; and
streamline the process for obtaining City Manager approval to fill vacant positfons by reduci ng
the amount of informatfon that departments are required to provide (though the hiring chill
remains in place for all positfons).
At this tfme, the City Manager is planning to terminate the 2023 FHCP, due to the significant
progress made on high priority storm-related projects. At this point, the FEMA process is well
underway, with all of the City’s projects having been submitted to FEMA for review and
consideratfon of reimbursement. While the City has made good progress in navigatfng FEMA
regulatfons and obtaining a nominal amount of reimbursement, it is unlikely that the City will
achieve complete clarity on the amount of total reimbursement or when those amounts will be
received given ongoing discussions at the Federal level about budgetary and polic y issues. While
staff initfally expected that reimbursement would be necessary to replenish the operatfng
reserve, strong results in FY 2024-25 replenished the reserve instead.
The FY 2026-27 Budget Supplement will include a net of just under $1.2 million in expenditure
reductfons, pending input from the City Council as part of this item. In combinatfon with the
improved Long-Term Forecast, the expenditure reductfons serve to bring the budget into balance
over the next three fiscal years. On its face, the conditfons that triggered actfvatfon of the 2025
FHCP have been mitfgated, but it is important to acknowledge that the impacts of Federal Policy
changes, such as tariffs, on consumer spending and local economic conditfons remain uncertain.
At this tfme, the City Manager is planning to terminate the 2025 FHCP following consideratfon of
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this item on March 3, 2026, given the updated Long-Term Forecast and the planned budget
reductfons to be incorporated into the 2026-27 Supplemental Budget that are described above.
Operatfonal Initfatfves
Supportfng our Workforce and Modernizing How We Do Business
As the City addresses its current fiscal challenges, supportfng the workforce and contfnuing to
modernize internal systems remain essentfal to maintaining service levels and delivering on the
City Council’s adopted work plan. Staffing capacity, effectfve systems, and clear processes form
the foundatfon of the City’s ability to carry out its responsibilitfes in a constrained fiscal
environment.
Current efforts are focused on strengthening this foundatfon through targeted workforce
investments and process improvements. Examples include developing additfonal training and
support for City staff involved in budgetfng and purchasing to maximize opportunitfes for cost
savings, including updates to the City’s purchasing policy, ongoing investments in financial
systems that increase efficiency and reduce manual processes, contfnued refinement of capital
project delivery and work-planning practfces to better align staff tfme with Council prioritfes, and
exploring the use of artfficial intelligence (AI) to automate basic tasks and increase tfme available
for strategic work. These efforts improve long-term effectfveness, but they require sustained
attentfon and staff capacity to implement successfully. Maintaining progress on existfng
workforce and modernizatfon efforts is critfcal to ensuring organizatfonal stability and avoiding
overextension.
As the Council looks ahead to FY 2026-27, staff will be closely considering how to balance
contfnued investment in these foundatfonal efforts with interest in new initfatfves and/or existfng
workload.
Balancing Workload and Exploring New Initfatfves
The City contfnues to explore new initfatfves in response to evolving community needs and City
Council directfon, along with existfng commitments to implement the City’s plans and policies.
Moving forward, organizatfonal capacity and fiscal constraints require that any new efforts be
evaluated carefully alongside existfng commitments.
Some initfatfves can advance using existfng resources and focused sequencing. For example, work
is underway to implement a communicatfons and outreach plan related to the Citywide Single
Vote method for electfng City Councilmembers, and early planning is occurring for renter
protectfons, safe housing strategies, and neighborhood livability standards. Other initfatfves, such
as new ongoing programs or capital projects, require dedicated staff tfme, coordinatfon, and
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follow-through to be successful. Each will need to be evaluated with current resources and
existfng commitments and will likely require tradeoffs.
During the June 2026-27 Budget Supplement process, staff will return with optfons that outline
potentfal adjustments, sequencing strategies, or tradeoffs needed to ensure that existfng
prioritfes, foundatfonal work, and new initfatfves can be delivered in a realistfc and sustainable
manner. At this tfme, the recommended changes to workplans are expected to be minor to
moderate depending upon on the workgroup.
Alignment Through a Longer-Term Strategic Framework
City Councils have long navigated the challenge of balancing near-term focus areas with the City’s
ongoing services and long-term goals for the community, as well as clearly communicatfng how
these pieces fit together for the public, a tension that often surfaces during the goal-setting
process. During the February 2025 goal-setting discussions, these questfons again emerged,
leading to a decision to add the topic as an agenda item for deeper conversatfon at the April 2025
biennial Council retreat.
During the April 2025 Special Meetfng, the City Council discussed the need to better align the
City’s long-term commitments, shorter-term goals, emergent prioritfes, and essentfal “core”
services. While core services are central to the City’s role and frequently support the achievement
of Council and community goals, they are not always clearly reflected in the City’s adopted Major
City Goals and programmatfc service levels and investments have not been systematfcally
identffied for the public. To address this, Council expressed interest in developing a longer-term
strategic framework or strategic plan that brings the City’s goals, values, and core services into a
single, cohesive structure. The framework would organize existfng commitments, improve
contfnuity across City Councils, and help both Council and the community understand how City
work fits together at a high level.
To support the development of this strategic framework or plan, staff will use the efforts
completed as part of the budget reductfon exercise to prepare a list of current programs and their
respectfve service levels and/or key performance indicators, as well as the resources that the City
is currently dedicatfng to each program. This list will help inform the preparatfon of a strategic
plan, as well as any future discussions of trade-offs and prioritfes when considering new programs
or work plan items. Staff will present a proposed process for the development of a strategic plan
as part of the 2026-27 Budget Supplement staff report.
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FY 2026-27 Budget Preview and
Operational Update
March 3, 2026
City Manager’s Introduction
Why are we here?
Deficit identified beginning in 2027-29 Financial Plan
o Revenue decline due to macroeconomic trends
o Increased costs –e.g. 5th Fire Station in FY 2027-28
What did we do following 2025-27 Financial Plan adoption in June 2025?
Fiscal Health Contingency Plan
Expenditure reduction plan developed through careful analysis in each department
Long-term Financial Forecast update
City Manager’s Introduction
What can you expect from us?
•Transparency
•Responsible spending
•Thoughtful planning
Outline
1.Context – 2025-27 Financial Plan Development
2.Updated Long-Term Forecast
3.Initiatives – additional context for deficit and reinforced need for reductions
4.Recommended expenditure reductions
5.Other budget items:
a.Section 115 Pension Pre-Funding Trust
b.Improvements for FY 2026-27 document (salary savings, revenue philosophy, CalPERS
funding strategy, overtime)
c.Fiscal Health Contingency Plans
6.Operational Updates
Recommendations
Provide direction on:
•Recommended expenditure reductions
•$2,000,000 in assigned fund balance for Section
115 Pension Prefunding Trust
SEEKING COUNCIL DIRECTION
2025-27 Financial Plan Development
•Budget prep began with deficit driven by slowing revenue growth, addressed by:
•Removal of ADPs from long-term forecast ($2.0M)
•Constrained base budgets & elimination of one-time funds ($1.6M)
•Reduction of annual funding for capital expenditures ($1.0M)
•Increased staffing vacancy assumption from 3% to 4% ($0.6M)
•More aggressive revenue forecasting
•These changes are expected to result in lower unassigned fund balance at
year-end
General Fund Long-Term Forecast – Financial Plan
(June 2025)
(millions)FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29
Total Revenue $117.2 $120.6 $124.6 $128.8
Total Expenditures 117.6 120.8 127.6 130.8
Use of Fund Balance 0.4 0.2 --
Surplus / Deficit $-$-($3.0)($1.9)
Additional changes recommended to
address looming deficit
•Continue 2025-27 Financial Plan temporary reductions to Capital
Expenditures
•Operating expenditure reductions as summarized in report
General Fund Forecast (current)
(millions)FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29
Revenue $117.2 $121.0 $124.6 $129.4
Expenditures 123.1 120.8 125.8 129.4
Use of Fund Balance 5.8 0.2 --
Surplus / (Deficit)-0.5 (1.2)(0.0)
Budget Reductions -1.1 1.1 1.1
Adjusted Surplus /
(Deficit)-$1.6 ($0.1)$1.1
Open Items
•User fee & impact fee studies
•Implementation of staffing studies in Police & Public Works departments
•Implementation of a Rental Housing Registry
•Decrease to Opioid Settlement funding for Licensed Psych Techs assigned to CAT and MCU teams
•Cal Poly on campus fire service needs.
•Ongoing implementation of new fire hazard severity zone maps.
•Investments in Downtown
•Ongoing work to address Oracle ERP related issues
High Level Recommendations – Budget Reduction
*Public safety (Police, Fire) reductions to be re-allocated to overtime for no net savings
SEEKING COUNCIL DIRECTION
Impact of Recommended Expenditure Reductions
•No layoffs recommended
•Expenditure reductions will generally result in less flexibility/ability to address
unanticipated items that arise throughout the year
•Department Highlights
•Public Works: elimination of contingencies for unexpected repairs
•Community Development: consulting budgets
•Public Safety: no net reduction
Other Recommended Changes
Budget Improvements
•Alignment of budget & long-term forecast
•Public Safety overtime
•Revenue forecasting
•Funding for additional discretionary payments to CalPERS
•Calculation of operating reserve
Budget and Forecast Alignment
Budget Long-term Forecast
1 year 5 years
Focused on operations Includes capital, debt service,
cost allocation, etc.
Assumes 100% staffing Assumes vacancies
Budgeting for the Vacancy Assumption
Budget Forecast
Staffing $78,762,988 $78,762,988
(Vacancy Assumption)-(2,520,785)
Net Staffing $78,762,988 $76,242,202
Budget & Forecast
Staffing $78,762,988
(Vacancy Assumption)(2,250,785)
Net Staffing $76,242,202
Public Safety Overtime
FY 2022-23 FY 2023-24 FY 2024-25
Overtime Variance ($1,870,837)($1,695,569)($2,016,962)
Vacancy Savings 2,327,107 1,706,406 2,058,789
Net Staffing Variance $456,270 $10,837 $41,827
•Public safety budget reductions of $576,379 to be re-allocated to overtime
Revenue Forecasting
Conservative Aggressive
Analysis lite Robust analysis & good data required
Programs are denied funding Any downturn will necessitate
immediate budget cuts
Significant year-end fund balance Minimal year-end fund balance
Funding for Additional Discretionary Payments
to CalPERS
•$28 million invested since beginning ADPs in FY 2018-19
•$188 million pension debt remaining
•Future investments depend upon unassigned fund balance
Historical ADPs
Current Pension Funded Status
As of June 30, 2024
Plan Assets Accrued Liability Unfunded Liability Funded Ratio
Miscellaneous 191,435,452$ 291,293,527$ 99,858,075$ 65.7%
Safety 178,415,852 266,992,598 88,576,746 66.8%
Total 369,851,304$ 558,286,125$ 188,434,821$ 66.2%
Operating Reserve Calculation
FY 2026-27 Estimate Current Goal
Operating expenditures $92,886,257 $92,886,257
(Annual pension payment)(15,276,634)-
Reserved expenditures 77,609,624 92,886,257
Reserve level 20%20%
Operating reserve $15,521,925 $18,577,251
Section 115 Pension Pre-Funding Trust
SEEKING COUNCIL DIRECTION
Section 115 Pension Pre-Funding Trust – Background and Context
•2019-21 Financial Plan: Council directed establishment of 115 Trust
•$2.0M was assigned in the General Fund to be deposited to the Trust
•Early 2023: 115 Trust was established
•Funding has not been deposited into the Trust. $2.0M remains in the General Fund reserve
•The City has consistently made ADPs to CalPERS, despite not funding the Trust
•City has made a total of $24.8M to CalPERS since 2019
•ADPs represent payments beyond what the City is required to pay on an annual basis.
•In FY 2025-26, the City will make a total of $25.6M in payments to CalPERS, inclusive of
the ADP
SEEKING COUNCIL DIRECTION
Section 115 Pension Pre-Funding Trust – Considerations
1.Trusts help an agency to build a cushion, providing for some level of budget stability
2.Deposits are irrevocable and cannot be used for any other purpose
3.Contributions don’t reduce the City’s unfunded accrued liability
4.Investments of deposits into a Trust assume some level of market risk, but could potentially
yield higher returns than the City’s managed investments
5.Funding the Trust does not guarantee a decrease to long-term costs
6.Development of a policy is important to govern use of the Trust
SEEKING COUNCIL DIRECTION
Seeking Council direction on use of $2M in assigned General Fund Balance
•Options:
•Fund trust as intended
•Make an additional discretionary payment or assign to future ADP
•Appropriate for other purposes (recommend allocation to Operating Reserve)
•Leave as is
Section 115 Pension Pre-Funding Trust – Background and Context
SEEKING COUNCIL DIRECTION
Investment Returns
City Managed
Investments 115 Trust CalPERS
Typical
Returns 3.8%5.2%6.8%
Higher rates of returned are achieved through higher levels of risk
SEEKING COUNCIL DIRECTION
Fiscal Health Contingency Plans (FHCP)
In October 2001, the City created a FHCP to establish a framework and general approach to respond
to adverse fiscal circumstances.
FHCP Components Termination Considerations
2023: Winter Storms •Hiring Chill (terminated)
•Purchasing Chill
•Support operations of essential services
•Support storm response
•Limiting food purchases
•Focus travel and training to:
•Maintain certifications
•Support public health and safety
•Other high priority needs
•Capital Improvement Project Deferrals
•Clarity about how
unbudgeted storm costs
would impact budget
•Clarity about FEMA
reimbursement timeline
2025: Flattening Revenues &
Increasing Expenditures
•Hiring Chill
•Travel Chill (terminated)
•Improved fiscal forecast
•Implementation of
expenditure reductions
Operational Initiatives
Operational Initiatives
Targeted workforce investments and training
Process Improvements Exploring Responsible AI
Balancing workload & realistic timelines
Alignment through a strategic plan
Align long-term goals, core services, and new priorities
Outcomes:
•Organize existing commitments
•Provide longer-term timeframe for community goals
•Make City work understandable to the public
•Foundation: List of current programs, service levels, KPIs,
strategic plans and resources
THANK YOU
APPENDIX
Departmental Detail
Administration & IT
Category Net Reduction
Staffing $40,697
Contract Services 46,760
Travel & Training 11,500
Misc. Operating 76,743
Total $175,700
City Attorney’s Office
Category Net Reduction
Staffing $32,003
Contract Services 26,000
Travel & Training -
Misc. Operating 2,850
Total $60,853
Community Development Department
Category Net Reduction
Staffing $58,450
Contract Services 101,350
Travel & Training 4,825
Misc. Operating 5,500
Total $170,125
Finance Department
Category Net Reduction
Staffing $-
Contract Services 24,335
Travel & Training 1,500
Misc. Operating 4,100
Total $29,935
Fire Department
Category Net Reduction*
Staffing $453,246
Contract Services -
Travel & Training -
Misc. Operating -
Total $453,246
*Public safety reductions to be re-allocated towards overtime budgets
Human Resources Department
Category Net Reduction
Staffing $-
Contract Services 46,200
Travel & Training -
Misc. Operating 2,000
Total $48,200
Police Department
Category Net Reduction*
Staffing $123,133
Contract Services -
Travel & Training -
Misc. Operating -
Total $123,133
*Public safety reductions to be re-allocated towards overtime budgets
Parks & Recreation Department
Category Net Reduction
Staffing $28,609
Contract Services 12,963
Travel & Training 10,200
Misc. Operating 38,270
Total $90,042
Public Works Department
Category Net Reduction
Staffing $83,981
Contract Services 238,550
Travel & Training 9,945
Misc. Operating 173,764
Total $506,240
Utilities Department (General Fund)
Category Net Reduction
Staffing $-
Contract Services 6,000
Travel & Training -
Misc. Operating 500
Total $6,500