Palo Alto council approves FY2026 midyear technical adjustments and $10M Section 115 pension disbursement
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Summary
Council approved staff's midyear budget adjustments recognizing a $9M sales-tax reduction and consolidating reserves; the council authorized a $10 million disbursement from the Section 115 trust toward pension liabilities and asked staff to develop FY27 efficiency options to address a projected structural gap.
The Palo Alto City Council received the FY2026 midyear budget report and unanimously approved a set of technical adjustments and reserve actions recommended by staff.
CFO Lauren Lai and budget staff said the general fund is tracking within expenditure levels but staff recommended recognizing a $9,000,000 reduction in sales-tax revenue and a $1,300,000 reduction in property taxes. To offset these adjustments, staff recommended using the budget stabilization reserve (BSR) and consolidating the $6,000,000 uncertainty reserve into the BSR. Staff said those changes produce a net-zero midyear impact to the general fund and a projected BSR ending balance of approximately $54.7 million (about 17.8% of policy range).
On pension liability management, staff recommended a $10,000,000 disbursement from the Section 115 trust to CalPERS, paired with ongoing actuarial-driven annual payments, to accelerate progress toward a 90% funded status and to reduce long-term employer costs. "We're recommending a proactive $10,000,000 disbursement from our Section 115 trust this evening," the budget presentation stated.
Staff cautioned that fiscal year 2027 has a projected structural gap of roughly $14.9 million and identified government-efficiency efforts and revenue enhancements as priorities during the budget-development process. Council members sought and received details on vacancy management, overtime reimbursements, sales-tax drivers and the differences between ADC and ADP pension terms.
The council approved the revised Attachment A and the staff recommendations, including the reserve consolidation and the Section 115 disbursement, by unanimous roll-call vote.
What happens next: staff will incorporate the approved technical adjustments into city accounting, continue long-range forecasting for FY2027 budget development, and return with efficiency and revenue options as part of the FY27 budget process.
