Budget commission: midyear report shows mixed revenues, rising insurance and pension costs; staff flags $1.3M year-end cushion

City finance staff on March 12 told the Budget & Finance Commission that midyear adjustments for FY26 leave the general fund showing mixed results versus the adopted budget and that several cost pressures will shrink the city’s year‑end cushion.

"Including all of these adjustments, we are projecting about $2.4 million ahead of what we had budgeted," Finance presenter Stephanie said at the start of the midyear presentation, framing that total alongside a series of offsetting expenditure increases. After accounting for internal service fund adjustments, authority‑funded reserve contributions and decision packages, staff projected roughly $1.3 million would remain at the end of the fiscal year.

Why it matters: the midyear report is a checkpoint used to set priorities for next year’s budget. Commissioners said the figures raise questions about long‑running service choices and reserves as staff begin preparing the FY27 budget.

Staff walked the commission through revenue and expenditure detail. On revenues, staff reported an aggregate tax shortfall of about $600,000 versus budget; property tax receipts were slightly better than expected, but sales tax—especially restaurant and hotel receipts—and transient occupancy tax were weaker than projected. Staff said hotels’ receipts through December were about 5% below prior projections, consistent with other South Bay jurisdictions.

On the upside, staff said some categories are outperforming: ambulance fees have already reached 100% of their annual budget midyear, parking meters have generated stronger revenue than anticipated, and development‑related fees were high because of ongoing permitting activity. Staff also noted one‑time receipts, including a settlement reimbursement and a signing bonus from a Google agreement, that boosted midyear revenue.

Expenditures presented the larger near‑term concerns. Staff reported a roughly $2.9 million (about 10%) increase for the general fund driven mainly by internal‑service fund adjustments—chiefly a jump in self‑insurance costs tied to a high claims year—and a citywide internal‑service increase of roughly $5.7 million (about 14% over the prior year) when all funds are included. "The specific issue with this year is actually related to 23/24: we had a very high year for liability and workers’ compensation claims," Stephanie said.

Staff also described a roughly $2.3 million estimated contribution this year to an authority‑funded reserve tied to a site‑specific tax agreement with three hotels; the contribution depends on those hotels’ revenues and could change if tourism rebounds.

Policy options and budget tradeoffs highlighted by staff included reconsidering funding for the city’s roughly 27 crossing‑guard posts (estimated annual cost about $600,000), trimming earthquake insurance coverage (staff estimated a potential annual premium reduction of about $500,000 by excluding some buildings), and further evaluating pension strategies. Staff reported CalPERS projections that lowered the plan’s total unfunded liability to about $18.8 million but projected annual unfunded liability payments of about $3 to $4 million over the next several years. Stephanie said a large one‑time discretionary payment could eliminate the liability, but absent that the city would still owe annual amounts under CalPERS rules.

Commissioners asked for follow‑up work on the pension projections and on the hotel reserve calculation and asked staff to share the planning materials underpinning a separate $93 million bond project. Staff said the midyear report would go to city council the next day and that the commission’s April meeting will be rescheduled for April 23 to allow further budget input.

Public comments during the budget item raised related concerns. Gillescrius, a resident who identified himself during public comment, urged a formal independent audit of homeless‑program expenditures and asked the commission to seek receipts and clearer reporting. Staff replied that many homelessness expenditures are grant funded and that grantors audit those expenditures, and that the city also has an annual independent financial audit that reviews grants.

The commission voted to receive and file the midyear report and identified follow‑up requests for additional detail to inform the FY27 budget.

What’s next: staff will forward the midyear report to city council and prepare follow‑up materials requested by commissioners, including slides and a high‑level timeline of the $93 million bond project and additional CalPERS projection detail.