Pacific Grove council approves first reading of two-year budget plan, outlines reserves and sewer investments

The Pacific Grove City Council on June 4 introduced and held the first reading of an ordinance to adopt a two-year operating and capital budget for fiscal years 2025–26 and 2026–27, approving the measure unanimously on a voice vote.

City finance staff said the two-year budget covers about $48 million in the first year across all funds and rises to about $55 million in year two, driven largely by an approximately $7 million sewer capital program tied to the city’s sewer master plan. Finance Director Fred Marsh told the council the general fund is roughly two-thirds of total spending and that the five-year forecast projects persistent deficits without policy or revenue changes.

The budget proposal revises the city’s reserve policy: it reduces the operating reserve target from 35% to 25% of operations, creates dedicated capital and pension reserves with $1 million targets, and directs year-end surpluses to be split in thirds among capital reserve, pension reserve and operating reserve buildup. Marsh said the plan expects to meet the 25% operating-reserve target in the near term while making “about 50% progress” toward the new pension reserve target over two years.

Council members pressed staff on vacancy-driven savings, police staffing and the timing of planned capital projects. City Manager Matt Mogensen and Marsh said the budget assumes fully funded positions for planning purposes but that vacancies will provide some contingency; departments may still face overtime or contract costs that reduce net savings.

Marsh said enterprise funds will be used to finance major capital work: the sewer fund balance will fall as the city undertakes planned replacements; a sewer rate study will follow to align rates with the capital plan. Golf and cemetery funds are forecast to run smaller deficits over the next two years; staff said the cemetery fund will be monitored and may require operational or revenue adjustments.

Council members and staff noted the budget does not assume revenue from the new Kimpton hotel, which is expected to produce future revenue but was not included in the baseline. The council adopted the first reading and directed staff to publish the ordinance summary as allowed by law; the council will return for a second reading and final adoption at a later meeting.

The council’s initial vote to introduce the ordinance was unanimous, 6–0 (one member absent). City staff said they will finalize the budget document and return for the second reading and final adoption later this month.