CITY COUNCIL REGULAR MEETING AGENDA PACKET 2-17-26

Page 9 of 13 General Fund Ten-Year Financial Forecast The General Fund long-term financial forecast projects the future financial outcome and serves as a fiscal management tool to guide policy and decision-making. It helps the City to assess sustainability and develop strategies to identify resources to support essential community services. Taxes account for over 80.0 percent of the General Fund revenue, with the top sources including property tax, sales tax, business license tax, and transient occupancy tax. Property tax represents over 50.0 percent of the General Fund revenue. Compared to some agencies, the City’s revenue stream is less diversified, with greater reliance on property taxes. As a service organization, the City’s key cost drivers are personnel costs and materials, supplies, and services, accounting for over 90.0% of the General Fund expenditure. Due to the economic factors stated earlier, overall, revenues have decreased compared to the prior financial forecast, mainly due to lower property tax and sales tax projections, partially offset by an increase in business license tax. Expenditures also decreased mainly due to the incorporation of a 3.0 percent vacancy factor instead of 2.0 percent starting in FY 2026/27, reductions in pension contributions, and lower general liability insurance-related costs. The General Fund structural deficit remains close to the projection from the prior financial forecast, ranging mostly from $6.00 million to $10.0 million. Based on the revised projection, the annual reduction for property tax ranges from $1.2 million to $3.8 million. For sales tax, the reduction ranges from $0.2 million to $0.8 million, but its growth is expected to outpace the prior projection towards the end of the forecast period due to higher annual estimated growth rates. The increase in business license tax ranges from $0.5 million to $1.3 million. Overall, these changes, along with other revenue adjustments such as increases in franchise fees, will result in an average annual decrease of approximately $1.9 million in revenues over the forecast period. With a higher vacancy rate and expected reductions in pension contributions due to CalPERS investment gains, net of other salary and benefit adjustments, personnel costs are expected to decrease by approximately $0.9 million annually on average over the forecast period. The lower projection for general liability-related expenses is expected to reduce costs by approximately $0.7 million annually on average. The combined reduction in expenditures averages about $1.6 million annually. For the Ten-Year Financial Forecast, staff has prepared four forecast scenarios. The first scenario assumes the City’s revenues will continue to grow at a measured pace to maintain the current level of service, with the local economy experiencing no major downturn during the ten-year period. The second scenario assumes a recession in FY 2027/28, impacting the City’s major revenue categories. The third scenario assumes an increase in Transient Occupancy Tax rates. The fourth scenario considers all of the known development projects in various stages, makes assumptions on when they will be completed, and estimates what type of impact they would have in terms of additional revenues. Please note that for the FY 2026/27 projection, updates to revenue and expenditure projections focus mainly on the key categories mentioned above, as specific adjustments to the adopted budget will be proposed by departments as part of the mid-term budget update. Page 78 of 144