CITY COUNCIL REGULAR MEETING AGENDA PACKET 2-17-26

Page 1 of 13 Item #5 CITY COUNCIL AGENDA REPORT February 17, 2026 Finance TITLE: ACCEPT THE FY 2025/26 MID-YEAR BUDGET UPDATE REPORT INCLUDING A PRESENTATION ON THE GENERAL FUND FORECAST, AND ADOPT A RESOLUTION APPROVING FY 2025/26 BUDGET AMENDMENTS SUMMARY The Mid-Year Budget Report provides an update on the City’s financial projections for FY 2025/26 and the next nine years. Revenue and expenditure projections are developed using historical information, projected program activities, economic forecasts, estimates from revenue consultants, and local information. The report details proposed budget adjustments across the General Fund, Enterprise Funds, Internal Service Funds, Special Revenue Funds, and Capital Projects Funds. Updated Long-Term Financial Forecast This report also provides an update on the General Fund Long-Term Financial Forecast. Four scenarios are presented: baseline (most likely), recession (pessimistic), hotel tax measure (optimistic), and new development projects (very optimistic). Overall, economic indicators suggest the U.S. economy will soften through the first part of 2026, driven by policy uncertainty, inflationary pressure, and a cooling labor market. Growth is expected to resume later in 2026 and 2027, driven by artificial intelligence (AI) investment, tax incentives, and additional Fed Reserve rate cuts. However, risks remain due to potential tariffs/trade tensions, as well as persistent inflation. Other factors and assumptions influencing the City’s financial outlook include: • The economy remains resilient. However, the labor market has shown signs of slowdown. Consumers have been focusing more on essentials and value while awaiting a more stable, predictable economy. This is reflected in the lower sales tax revenue projection for FY 2025/26 and the next several years. • Property tax increased by less than 3.0% in FY 2024/25 due to a cooling real estate market. While modest growth is projected in FY 2025/26, the increase for FY 2026/27 is expected to be lower if the resolved appeals related to assessed value reduction (e.g., commercial and office buildings) are enrolled in the tax roll, along with Proposition 8 temporary reductions due to a property’s market value falling below the factor-based year value. If these reductions are deferred to future years, the growth rate in FY 2026/27 is expected to be higher, and the increases in future years are expected to be lower. Due to a lower base- year assessed value from FY 2024/25 and potential reductions, the updated property tax projection during the financial forecast period is lower than previously estimated. • Business license tax experienced a significant growth in FY 2024/25, driven by higher gross receipts, new businesses such as Costco, and the relocation of Kaiser's workers to Pleasanton. The FY 2025/26 and forecast period revenues have been updated to a higher Page 70 of 144