Cotati City Council
Agenda Staff Report
Item type: REGULAR AGENDA (ACTION)
To: City Council
Subject: FISCAL YEAR 2025/26 - THIRD QUARTER - FINANCIAL UPDATE
Date: April 28, 2026
Written by: Angela Courter, Director of Administrative Services Recommendation
It is recommended that the City Council receive the presentation on the un-audited financial position for the City as of the Third Quarter Fiscal Year 2025/26 including the investment report, and fiscal resilience report for the quarter ended March 31, 2026.
Background
The quarterly financial updates are an opportunity for staff to update the City Council on current year budget performance based on actual operating results through March 31, 2026. This report's intent is to update the Council on how major revenue sources and operating expenditures are trending compared to the approved budget and propose any amendments to the budget if needed. Emphasis is placed on an analysis of the City’s major General Fund revenues, as the overall health of those revenues is instrumental to the City’s ability to fund, and potentially enhance, services in the future. In addition to the General Fund revenues, staff also evaluated the General Fund expenditures and the Water Fund, Sewer Fund, and Cash and Investments.
The City hired Optimized Investment Partners (OIP) in May 2023 to help improve the investment returns for the city and to ensure compliance with California Government Code by ensuring safety of principal and sufficient liquidity for operations. The independently generated investment report for the quarter ended March 31, 2026, is attached along with the Quarterly Financial Report and Fiscal Resilience Report for consistency with prior quarters and compliance. This report is provided to meet the reporting requirements in the California Government Code Sections 53600 et seq. and the City of Cotati Investment Policy and Guidelines.
Analysis/Discussion
General Fund
General Fund revenues through the third quarter are tracking at 63.1% of budget, slightly below the 75% benchmark used at this point in the fiscal year, which largely due to timing differences in major revenue streams such as sales and property taxes. On a prior period comparison, overall revenues are modestly higher than the prior year by approximately 2.5%. Property tax revenues have increased due to higher assessed valuations and are expected to meet annual projections, while sales tax revenues remain consistent with expectations despite a mid-year downward adjustment. Other revenues, including cannabis business taxes, may experience future declines due to the anticipated closure of a distribution facility.
General Fund expenditures are generally aligned with budget expectations, with operating departments averaging 66.5% of budget utilization. While total expenditures increased compared to the prior year, much of this is attributable to capital and reimbursable costs. Core operating expenditures increased modestly by 3.1%. Notable increases are seen in contract services and regulatory-related expenses, particularly in Community Development, where higher permit activity and associated costs are offset by corresponding fee revenues. Overall, the General Fund remains stable, with revenues and expenditures performing within anticipated ranges.
Flags for fiscal resilience include the following:
- Cash coverage ratio lags at 16.85% with the goal of 25% of Cash to Operating Expense. This difference is due to timing for both expenditures related to capital projects and revenues, primarily Property Taxes. Adjusting for the April property tax receipts, the coverage ratio is back above the 25% goal.
- Staff received confirmation a cannabis distribution center will be closing at the end of April.
The expected ongoing impact is approximately $120K a year, which the City has received since Q2 2023/24.
- Operating Revenues to Operating Expenditures continue to lag at 96% compared to the goal of 110%, and is comparable to the prior year, which was at 97%. This is aligned with budget but will continue to be monitored for increased risk.
Enterprise Funds
Enterprise Fund performance for both Water and Wastewater operations remains strong and consistent with budget expectations. Water Fund revenues exceed budget projections and prior year performance, driven primarily by adopted rate changes, higher connection fee activity, and stable investment earnings. Expenditures remain below budget at this stage but are expected to increase seasonally, particularly due to higher water usage in the summer months.
Sewer Fund revenues are performing as expected, slightly exceeding the proportional budget benchmark and showing solid growth over the prior year. Expenditures have increased modestly, primarily due to wastewater treatment costs, which represent the majority of expenses in this fund. Despite these increases, overall expenditures remain within budget expectations. Both enterprise funds continue to demonstrate financial stability, with no immediate need for budget adjustments.
Flags for fiscal resilience include the following for the Sewer Fund:
- Operating Revenues to Operating Expenditures continue to lag at 97% compared to the goal of 110%, however they have improved over the prior year, which was at 94%. This area will continue to be monitored with expectations of improvement.
Cash and Investments
The City’s cash and investment balances remain consistent with the adopted investment policy and are sufficient to meet operational and capital obligations through the remainder of the fiscal year. While investment earnings have decreased in the General Fund due to reduced balances from ongoing capital project expenditures, overall liquidity remains strong. The City continues to maintain a diversified and policy-compliant investment portfolio, ensuring both safety and adequate returns.
Fiscal Resilience
Overall, the City’s financial position through the third quarter reflects continued fiscal stability and prudent financial management. Revenues and expenditures across major funds are generally tracked in line with expectations, with variances largely attributable to timing differences or planned activities such as capital projects.
The City’s ability to absorb fluctuations—such as minor revenue adjustments, increased service costs, and capital spending—demonstrates resilience within its financial structure. Ongoing monitoring of key revenue sources, particularly sales tax and cannabis-related revenues, and evaluations of one-time capital expenditures will be important as staff prepares estimated yearend projections and amendments for the next fiscal year 2026/27 budget.
Financial Considerations
There is no immediate fiscal impact or budget action necessary. City Staff will continue to report to Council and the community quarterly.
Environmental Issues
This action is exempt from the California Environmental Quality Act (CEQA) because it is not a project which has a potential for resulting in either a direct physical change in the environment, or a reasonably foreseeable indirect physical change in the environment, pursuant to CEQA Guideline section 15378.