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City Council accepts 10-year financial forecast, staff to use it as FY2026 budget baseline
Summary
Palo Alto staff told council the long-range financial forecast projects a $12 million general fund shortfall for fiscal 2026 and ongoing gaps that staff recommend cover with uncertainty reserves and budget discipline; council accepted the forecast and budget development guidelines unanimously.
PALO ALTO, Calif. — City staff and the Finance Committee presented a 10‑year long-range financial forecast Monday that projects a $12 million structural shortfall for fiscal year 2026 and additional gaps in subsequent years, and the City Council unanimously accepted the forecast as the baseline for budget development.
Lauren Lai, the city’s chief financial officer, and budget manager Paul Harper said the Long Range Financial Forecast (LRFF) — covering fiscal 2026 through 2035 — assumes a stagnant near-term economy and includes a base-case scenario and two sensitivity scenarios: a 1% decline in economically sensitive revenues and a 1% increase in compensation costs beyond the base assumptions. The base case projects general fund revenues of about $298.6 million in 2026 and an expense increase tied to salary and benefits, contractual services and transfers.
“Strategic planning and fiscal discipline will be needed to balance community service expectations with the financial resources projected,” Lai told the council. Harper described the forecast’s assumptions: a 5% vacancy factor, a 2% salary increase placeholder for labor groups and 3–4% inflation for non-salary items in the short term.
Finance Committee Chair Burt said the city’s multi‑year surge in revenue and the lag between restoring positions after COVID and actually filling them produced prior-year surpluses that staff recommends use partly to bridge the near-term 2026 shortfall. The committee’s proposal includes using uncertainty reserves and a one-time allocation from the fiscal 2024 surplus to cover the first-year gap, while continuing work to identify longer-term solutions.
Council members asked detailed questions about revenue assumptions, including property‑tax turnover, sales taxes and the role of vacancies in departmental budgets. Staff said property‑tax projections rely on county data and third‑party analysis and that revenue impacts from economic shifts (for example, a slow home-sale market) would make the out‑years more difficult.
The council accepted the LRFF and budget development guidelines unanimously and directed staff to use the base-case scenario as the starting point for the FY 2026 budget process.
Why it matters: The forecast frames budget choices for the coming fiscal year and identifies likely shortfalls; it shapes decisions on reserves, potential service adjustments, labor negotiations and capital funding choices.
What’s next: Staff will incorporate council direction into the FY 2026 budget work, use the uncertainty reserve to bridge near-term gaps as recommended, continue the municipal fee study, and return with further budget proposals and midyear recommendations as required.
