5-Year General Fund Operating Budget Discussion

Receive and file the General Fund Five-Year Financial Forecast and provide policy direction regarding the preferred mix of expenditure reductions, operational efficiencies, and revenue enhancement strategies to achieve long-term sustainability. 

Background

Financial forecasting is an important fiscal management tool that allows the City to assess long-term financial trends and identify emerging budgetary challenges before they become critical. Unlike the annual budget, which focuses on a single fiscal year, the five-year forecast incorporates assumptions regarding:

• Property tax growth
• Sales tax performance
• Development activity
• Inflationary impacts
• Labor and benefit cost increases
• Public safety contract costs
• Retirement and OPEB obligations
• Operating expenditures

The forecast serves as a planning document designed to support informed policy decisions and maintain the City's long-term financial health.

Expenditure Trends

General Fund expenditures are projected to increase from approximately $34.2 million in FY 2026-27 to $39.8 million by FY 2031-32, representing growth of approximately 16.4% over the forecast period.

The largest expenditure categories include:

Sheriff Contract

The Sheriff Contract is the City's largest expenditure and is projected to increase from approximately $10.5 million to nearly $13.0 million during the forecast period, an increase of approximately $2.5 million. This projection does not assume any additional sworn personnel and reflects only inflationary cost increases associated with maintaining current service levels. Total 

Personnel Costs

Personne-related costs include salaries, benefits, CalPERS retirement contributions, and Other Post Employment Benefit (OPEB) contributions.

Combined personnel costs increase significantly over the forecast period due to:

• Cost-of-living adjustments
• Step increases
• Health insurance cost growth
• Retirement and OPEB contribution increases

Supplies and Services

Supplies and services remain relatively stable but continue to represent a significant operating expenditure, exceeding $9 million by the end of the forecast period.

Revenue Trends

General Fund revenues are projected to increase from approximately $34.2 million in FY 2026-27 to $38.4 million by FY 2031-32, representing growth of approximately 12.5% over the forecast period.

The City's primary revenue sources include:

• Property Tax
• Sales Tax
• Transient Occupancy Tax (TOT)
• Charges for Services
• Franchise Fees
• Interfund Transfers

Property tax remains the largest revenue source, accounting for approximately 49 percent of General Fund revenues.

Positive revenue trends include:

• Continued grown in assessed valuation and property tax receipts
• Steady growth in sales tax revenue
• Growth in transient occupancy tax revenue
• Modest increases in franchise fees

However, several revenue sources are projects to remain flat or decline, including:

• Charges for services
• Investment earnings
• Certain transfer revenues

As a result, overall revenue growth is insufficient to offset projected expenditure increases.

Fiscal Impact

The Fiscal Year 2026-27 budget is structurally balanced.

However, projected operating deficits will emerge beginning in FY 2027-28 and continue throughout the forecast period. Continued deficits may result in the City eventually experiencing:

• Declining General Fund reserves
• Reduced flexibility to respond to emergencies
• Increased pressure on service levels
• Reduced ability to fund future priorities

The forecast does not currently assume significant service reductions, new taxes, or major organizational restructuring.

Options for Addressing Future Budget Deficits

The following considerations include both expenditure management and revenue enhancement strategies.

Expenditure Strategies

• Personnel Management - this includes vacancy management, strategic hiring delays, and position reviews upon vacancy
• Operating Efficiencies - this includes giving departments expenditure reduction targets, evaluating process improvements and leveraging technology, and service delivery evaluations.
• Public Safety Cost Review - evaluation of service level alternatives

Revenue Strategies

• Fee and Cost Recovery Study - of development fees, planning and building fees, recreation fees, and service charges
• Transient Occupancy Tax Review - evaluate competitiveness with neighboring jurisdictions, consider future rate adjustments
• Sales Tax Enhancement - evaluate economic development initiatives to attract businesses with greater sales tax potential and local revenue measure

Strategic Approach

Staff recommends implementing a phased strategy:

Phase 1: Immediate Actions (FY 2026-27) - Target Savings $200,000 - $400,000

Immediate actions we can take in the current fiscal year would be: 

• Vacancy management
• Department operating reductions
• Comprehensive fee review

Phase 2: Medium-Term Actions (FY 2027-28 through FY 2029-30) - Target Impact: $500,000 to $1.0 million

• Sales tax and TOT review
• Expanded cost recovery

Phase 3: Long-Term Sustainability

• Economic development initiatives
• Ongoing forecast updates
• Service delivery optimization
• Preservation of General Fund reserves

Conclusion

The Five-Year Financial Forecast indicates that the City's financial position remains stable in the near term; however, expenditure growth is projected to exceed revenue growth throughout most of the forecast period. Early implementation of corrective strategies will allow the City to address the anticipated structural deficit gradually and strategically, minimizing impacts to service while preserving long-term sustainability.