Fiscal commission hears midyear budget update; staff warns general fund is in a structural deficit

The City Fiscal Commission on May 19 received a midyear budget update from staff who said revenues are coming in below expectations and the general fund is facing a structural shortfall.

A staff member responsible for the presentation said the revised general fund revenue for fiscal year 2026 is about $95.6 million, with expenditures revised to roughly $102 million, leaving the general fund showing net activity that staff described as “a deficit of $19,700,000.” "The general fund is operating in a structural deficit," the staff member said, adding that the midyear reserve projection was reduced from 11.5% to 8.9% after rolling forward prior-year encumbrances.

Why it matters: lower-than-expected revenue in major categories — especially sales tax and a local decline in cannabis-based sales tax — combined with higher encumbrances has tightened the city’s near-term fiscal outlook and pushed commissioners to seek more review and recommendations before council action.

During the presentation staff explained that timing affects apparent midyear shortfalls: property tax is received in staggered distributions and a portion of sales tax and business-license receipts do not appear in December actuals because of collection timing. The presenter warned that construction and transient-occupancy taxes are volatile and that cannabis tax revenue in Davis is down from a prior projection of about $1.7 million to roughly $1.2 million, a decline staff traced in part to new dispensaries in neighboring jurisdictions and a vendor closure.

Commissioners pressed staff on assumptions and process. One commissioner recommended the commission budget on a quarterly, cash basis to better reflect seasonality; another said the commission should consider whether salary savings could be allocated to replenish reserves. After discussion, the commission agreed there was value in a focused follow-up: staff proposed, and commissioners tentatively agreed, to hold a special meeting shortly after the council’s May 19 budget introduction so the commission could review the FY27 midcycle materials and offer recommendations for the council’s June consideration.

Public comment underscored long-term concerns: a commenter noted the budget packet lists more than $200 million in unmet capital needs and urged the commission to present both what the city can afford and what the city must eventually fund.

Next steps: staff will circulate midcycle materials to the commission as soon as they are available and will propose special-meeting dates so the commission can provide feedback prior to the council’s June discussion.