Hemet staff warn of $1 million shortfall, insurance shock and pension pressure in FY26–27 budget workshop

City financial staff told the Hemet City Council on March 24 that the city faces a narrow but real budget gap for fiscal year 2026–27 and sharply rising insurance and pension costs that may force use of reserves unless revenue or spending changes are adopted.

Administrative Services Director Tiffany said the California Municipal Financial Health Diagnostic — which looks at the current fiscal year, two prior years and a three‑year forecast — flags a near‑term operating deficit and a likely draw on unassigned fund balance. "Right now, we're projecting about $1,000,000 short," Tiffany said, adding that the city would otherwise have to draw from reserves or defer planned capital projects.

City Manager outlined broader trends, including essentially flat sales-tax receipts over the past five years and a recent $7 million market compensation adjustment. He said insurance-market changes have driven "a very dramatic, steep increase in our liability premium," with modeling that assumes a 15% premium rise for FY26–27 and higher litigation budgets. The manager described the city’s CalPERS unfunded liability as roughly $40.1 million at a 6.8% discount rate and warned that a 1‑percentage‑point drop in that rate would add about $20 million to the city’s unfunded liability.

Staff emphasized options to avoid depleting the 40% general‑fund reserve: pursue near‑term revenue measures (including short‑term rental reporting and enforcement, anticipated cannabis payments from newly opened dispensaries, billboard lease revenue and a pending land sale north of Sanderson and Stetson), and examine expenditure reductions such as a hiring freeze and tighter approval for conference or travel spending.

The presentation noted timing and implementation details for enterprise software upgrades: the finance system went live July 2025, HR and payroll are targeted to go live in the first full pay period in October, and permitting/licensing updates are planned for July 2026.

On pensions, staff said employer CalPERS rates have risen substantially in recent years and that smoothing approaches from prior years pushed some amortization out decades, creating a long‑term cliff that needs monitoring. "As they reduce that return, it transitions more costs to the city," the city manager said.

Council members asked for clarifying numbers and ways to reduce risk exposure. Tiffany and the city manager pointed to several immediate steps already in place — hiring freezes, stricter approval of nonessential expenses, quarterly outreach to the insurer to highlight risk‑reduction measures — and to a longer list of revenue actions being developed.

The council voted to direct staff to conduct statistically valid polling (estimated cost $35,000–$40,000) to test voter appetite for revenue measures that could fund streets and fire‑station capacity. The city manager recommended both general‑obligation bonds (infrastructure only; requires a two‑thirds vote) and additional local sales‑tax options (a general half‑cent requires majority approval; a dedicated/ special tax would require two‑thirds) be included in the polling.

Next steps: staff will produce the detailed fiscal scenarios and return with polling results and refined recommendations ahead of any ballot decision.