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City projects multi‑year deficits as ARPA funds wind down and VLF shortfalls remain unresolved
Summary
Assistant City Manager Tim Nevin reported a modest FY2025 surplus but warned of projected deficits starting in FY2026 driven by labor costs, mid‑year adjustments and the impending exhaustion of ARPA funds; the city has joined county litigation seeking payment of vehicle license fee shortfalls from the state.
Assistant City Manager Tim Nevin delivered the City’s FY2025 year‑end review to the council on March 23, reporting a roughly $350,000 general fund surplus after higher‑than‑budget revenues and one‑time ARPA use. The briefing also reviewed revenue trends: Measure Q generated $8,919,190 in FY2025 and short‑term rental and cannabis revenue streams were monitored as potential growth areas.
Nevin cautioned that the city faces persistent structural pressure: the adopted FY2026 budget showed an $7.9 million deficit that, after bargaining and mid‑year changes, grew to an adjusted $17.8 million. Staff currently estimates the year will close with a roughly $6.6 million deficit; reserves are projected to decline from about 6.1 months to roughly 3.5 months over the next two fiscal years if revenue and expense assumptions hold.
On the vehicle license fee (VLF) shortfall, Nevin said Daily City and other county jurisdictions are pursuing recovery from the state; the city received two‑thirds of a recent $6.1M shortfall payment and expects a roughly $230,000 reduction of its fall 2026 property tax allocation to reconcile a prior judgment for part of the county claim.
Council members pressed Nevin for specifics on revenue drivers, the role of ARPA funds (one‑time only), and the potential for fee increases (master fee schedule updates) and midcycle budget adjustments. Nevin said staff will return with midcycle recommendations in May–June and continue negotiations with remaining bargaining units.
What it means: The city’s finances are close to break‑even for the recently closed year but face a multi‑year gap driven largely by labor costs and diminishing one‑time federal support; council members signaled interest in midcycle adjustments and exploring revenue options such as fee updates and communicating transit/ballot outreach to residents.
