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Gilroy staff presents midyear budget update; general fund forecast shows narrowing operating margin
Summary
City finance staff presented a midyear FY 2024–25 update and a five‑year general fund forecast showing a manageable but narrowing operating margin and projected structural pressures beginning in FY26; council received the report and staff identified reserves, pension liabilities and revenue assumptions to inform budget development.
City staff presented the midyear fiscal year 2024–25 budget update and the general fund five‑year forecast, outlining revenue assumptions, expenditure drivers and long‑term liabilities.
Finance Director Herjil Seng told the council the city ended FY24 with approximately $36 million in general fund balance and currently projects to end FY25 with about $27.4 million, representing roughly 35% in excess of the adopted reserve policy. The city’s largest general fund expenses are personnel costs (about 65% of the general fund) driven largely by police and fire public safety staffing.
Seng said sales tax — the city’s historically largest general fund tax source — is projected to remain flat in coming years and property tax is expected to show stable growth. The forecast assumes moderate growth in utility‑related taxes and continued cautious assumptions for TOT (hotel tax). The city’s user fees were adjusted in 2022 and include CPI indexing; building permit and development revenues have shown some upward trends. Investment income has benefited from the elevated interest‑rate environment.
Staff projected a small, manageable structural deficit beginning in FY26 under current assumptions and said the council should consider a range of tools during the upcoming budget cycle, including expense reductions, revenue adjustments, cost‑recovery changes, and one‑time reserve use. Seng emphasized the council’s adopted financial policies: ongoing revenues should fund ongoing expenditures, while one‑time monies should be used for one‑time investments.
On liabilities, staff said the city’s unfunded pension liability (CalPERS) remained material (roughly $111 million after FY24 actuarial gains were factored in) and recommended continuing contributions to the city’s pension prefunding trust; the trust balance was reported at about $4.5 million and earning above‑market returns in recent months. The city also has an OPEB (other post‑employment benefits) liability and smaller workers’ compensation and general liability exposures.
The forecast illustrated the city has about $4 million in fund balance in excess of the 30% reserve requirement that could be used for one‑time strategic investments. Staff recommended the council continue to evaluate the forecast during budget development and noted the need to address the projected negative operating margin in out years. The council received the report; no action was taken at this meeting.
