CITY COUNCIL REGULAR MEETING AGENDA PACKET 2-17-26

Page 2 of 13 level. FY 2025/26 development revenue has also been adjusted to reflect one-time activities. • The City started applying a 2.0% staff vacancy factor in the 2023-25 budget cycle. Given the ongoing unfilled positions across various departments and savings over the last few years, the vacancy factor has been adjusted to 3.0% for the long-term financial forecast. • CalPERS’s FY 2024/25 investment return was strong at 12.1%. This will result in lower projected unfunded pension liabilities and contributions starting in FY 2027/28. The reduced contributions are reflected in the long-term financial forecast. However, normal cost rates (or service credits earned by employees) are expected to increase in some years due to other demographic factors, such as increased life expectancy and cost-of-living adjustments. The increases will vary depending on agencies’ plans. In summary, lower property and sales taxes are partially offset by increases in business license tax and one-time development revenues, anticipated savings from vacant positions, and reduced pension costs. As a result of these key changes, the FY 2025/26 General Fund budget is balanced without using the $1.0 million pension trust funds approved in the adopted budget, mainly due to vacancy savings and a recommended $0.5 million in additional transfer from the Capital Reserve Fund. Structural Deficit Beyond current budget cycle, the General Fund structural deficit during each year of the financial forecast period ranges from approximately $6.0 million to approximately $10.0 million, consistent with the gap reflected in the forecast in the 2025-27 adopted budget. Deferred Maintenance and Asset Management Needs The updated financial forecast does not reflect additional funding for deferred maintenance, as identified in the Asset Management Plan (AMP) presented to the City Council in December 2025. When staff return to the City Council for direction on the AMP funding plan and priority projects, the budget will be adjusted accordingly. Contributions to the Capital Improvement Program and deferred maintenance remain at the same level reflected in the adopted budget. As part of the mid-term budget update in May 2026, the FY 2026/27 budget and the long- term financial forecast will be updated based on a more recent economic outlook and financial data. Revenue and expenditure projections may vary from what is presented in this report. RECOMMENDATION 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. BACKGROUND The City follows a multi-step operating budget process that starts with the approval of a two- year budget, the adoption of a Mid-Term Budget after the first year, and the adoption of Mid- Year Budget adjustments during each of the two years of the budget. This report is the Mid- Year Budget report for the first year of the biennial budget that recommends adjustments to the FY 2025/26 Budget adopted by the City Council on June 17, 2025. Page 71 of 144