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Gilroy staff present balanced two‑year budget but flag pension, workers' comp and ERAF risks
Summary
City staff presented a recommended FY 2026–27 budget that keeps a 30% general‑fund reserve but relies on ongoing excess ERAF, a Section 115 pension trust and conservative sales‑tax forecasts; workers’ compensation claims and CalPERS liabilities remain key downside risks.
City Administrator Jimmy Forbus presented the Gilroy City Council with a recommended two‑year budget for fiscal years 2026–27 on May 12, outlining a plan that maintains the council’s 30% general‑fund reserve while using targeted fund balances and trust assets to balance operations.
Forbus said the recommended budget reflects council priorities including economic development and increased investment in parks and recreation, while limiting new ongoing staffing because a previously modeled $1.5 million deficit had to be closed. “The budget is in a recommended status. We have plenty of opportunities to discuss and to deliberate and to make adjustments as necessary,” Forbus said.
Finance Director Harjot Sengham detailed the citywide financial picture. The recommended budget shows roughly $178.6 million in revenues for FY26 and uses about $28.6 million of fund balances across all funds to support roughly $207.2 million in total appropriations. Sengham said the city is budgeting conservatively for sales tax (expected to remain near current levels) and is projecting property tax growth of about 4–5% annually.
Sengham cautioned that three financial items present the largest risks to the plan. First, workers’ compensation claim costs have risen sharply: average annual claims were about $700,000 a few years ago, rose to about $1.4 million in the current year, and are forecast to reach roughly $1.6–1.7 million by the end of FY27. He said the city will pursue work‑plan items to contain those costs.
Second, Gilroy carries an unfunded accrued pension liability to CalPERS. Sengham said the city’s UAL was about $117 million as of the June 30, 2024 actuarial report and is projected to decline to about $111 million assuming CalPERS achieves its expected returns. The recommended budget continues contributions to a Section 115 pension trust intended to help offset higher CalPERS payments beginning in later years.
Third, the budget relies in part on “excess ERAF” (excess Educational Revenue Augmentation Fund) property‑tax allocations that the city currently receives; staff said only a handful of counties receive this allocation and it has been subject to state‑level litigation. Sengham estimated the city’s at‑risk amount from changes to excess ERAF is roughly 18% of that line, or about $600,000 in ongoing revenue. He described the county as leading efforts to defend the allocation and said the trial is deferred until later this fall.
Sengham emphasized the budget maintains the council’s reserve policy. “The council has a minimum fund balance policy of 30% of annual expenditures to be set aside. The recommended budget for the next two years maintains that,” he said, while noting that required reserves rise as expenditures increase.
Council members asked staff for more detail on sales tax drivers (including the effect of outlet‑store vacancies and auto dealers) and the history of sales‑tax volatility since 2017. Sengham said sales tax peaked at about $22 million in FY22 following stimulus‑era spending and is now roughly $20 million, with near‑flat expectations for the next two years.
Why it matters: The recommended FY26–27 budget keeps reserves intact and funds near‑term capital and service needs, but relies on revenue sources and trust assets that staff flagged as contingent. The council will receive further materials before final adoption planned for June 2 and will continue strategic‑planning deliberations on May 19.
