Cotati City Council
Agenda Staff Report
Item type: REGULAR AGENDA (ACTION)
To: City Council
Subject: MID-CYCLE BUDGET UPDATE AND PROPOSED
AMENDMENTS TO THE FISCAL YEARS 2025/26 AND 2026/27
ADOPTED BIENNIAL BUDGET
Date: June 9, 2026
Written by: Angela Courter – Director of Administrative Services Recommendation
Receive and file the Fiscal Years 2025/26-2026/27 - Mid-Cycle Budget Update Report, adopt a Resolution approving amendments to the Fiscal Years 2025/26 and 2026/27 Biennial Budget, and authorize the Administrative Services Director to make any necessary technical and administrative adjustments to implement the approved budget amendments.
Background
On June 10, 2025, the City Council adopted the City’s first Biennial Budget covering Fiscal Years 2025/26 and 2026/27. The biennial budget was developed to provide greater long-term planning, improve operational efficiency, and align financial resources with the City's Strategic Plan goals and objectives.
Consistent with best practices for biennial budgeting, staff have completed a comprehensive review at the midpoint of the two-year budget cycle to evaluate:
• Revenue performance and trends;
• Expenditure activity and projected year-end results;
• Capital project status and funding needs;
• Staffing and operational requirements;
• Economic conditions affecting City finances; and
• Long-term fiscal sustainability.
The review identified several areas where budget amendments are necessary to reflect updated information and operational requirements.
Analysis/Discussion
Fiscal Year 2025/26 Financial Update
Staff reviewed current year’s revenues and expenditures using year-to-date activity, historical trends, and projected year-end results.
General Fund
Overall General Fund revenues are projected to be above the adopted budget estimates due primarily to:
• Property tax performance slight increase of $22K;
• License and Franchise Fees improved with increased garbage franchise fees; • Development activity improved with increased building and encroachment permit activity
General Fund expenditures are projected to be below the adopted appropriations primarily due to:
• Personnel vacancies;
• Repair and Maintenance Contributions for Vehicle Replacements which were deferred to FY 2026/27
• General fund transfers for capital projects have been postponed or canceled due to a combination of:
o Increased bid estimates for street projects causing redesign to break out projects into smaller more affordable phases.
o The trash implementation plan was no longer required
o Delayed implementation on the Veronda Falletti Ranch barn progress due to evaluation of the appropriate funding plan.
o No B projects were moved forward to keep funding as conservative as possible due to economic uncertainty.
With these changes to revenues and expenditures staff have also included the assumed adjustments to reserve projections.
Other significant budget development or assumption changes include:
Fund and Department Changes:
To better present and account for different activities, Staff have reclassified activities related to the Veronda Faletti Ranch to a new General Fund Department number 26. With this separation, staff and the City Council can better track revenues to expenses as activities continue to expand.
Additionally, Fund 212 was previously used to show the police department’s K-9 activities. Historically, this was because the K-9 expenditures were grant funded, so they were segregated into Fund 212. However, as directed by the City Council following voter approval of the local sales tax, this activity has more recently been funded with direct transfers from the General Fund. Having these expenditures outside of normal operating expenditure for the Police Department often makes management of the expenses more difficult. Therefore, these accounts have been reintroduced back into the General Fund within the Police Department (Department 23) and now have a project account extension of “CANINE”. Having this separation of account structure will still enable management to evaluate the total cost of the K-9 program.
Water Enterprise Fund
The Water Fund was reviewed to evaluate operating revenues, water production costs, purchased water expenses, capital improvement needs, and reserve levels.
Proposed amendments include:
• Adjustments to water revenue projections for connection fees received; • Increased investment earnings as the proportional fund balances have increased; • Decreased personnel services due to vacancies during the year; • Removal of capital outlay expenses related to contributions for vehicle & equipment replacements as they were moved to FY 2026/27;
• Capital project budget revisions due to postponed non-emergency projects to future years (Interior coating on the West Sierra Tank was identified as in good condition and not needing to be replaced, which was previously budgeted); and • Adjustments to reserve projections.
The proposed amendments ensure sufficient appropriations are available to maintain water system reliability and support planned infrastructure investments.
Sewer Enterprise Fund
The Sewer Fund review included analysis of user fee revenues, collection system costs, capital project requirements, and reserve balances.
Proposed amendments include:
• Updated sewer service revenues for connection fees received; • Increased one-time reimbursement revenues of $250K related to the return of excess reserves held by Santa Rosa. These one-time funds are programmed to cover the cost of purchasing and installing the sewer lift station generators; • Revised treatment costs as the previously budgeted values were slightly overstated for FY 2025-26;
• Removal of capital outlay expenses related to contributions for vehicle & equipment replacements as they were moved to FY 2026/27;
• Increased other expenses primarily due to increased RRWA fees included in dues and subscriptions and continued equipment rentals for the generator at the Quail Hollow lift station. However, this rental will be removed once the permanent generator is installed. • Capital project adjustments with the advancement of the purchase of the generators for the lift stations and delay in the completion of the Renewal & Replacement Master Plan making it bridge both fiscal years; and
• To preserve fund balance, no additional capital projects are budgeted; and • Adjustments to reserve projections, with limited capital projects, results in a budget that now is approaching the minimum reserve goal of 33%.
The proposed amendments support the continued maintenance and operation of the City's wastewater collection systems.
Special Revenue Funds
Special Revenue Funds account for revenues that are legally restricted or committed for specific purposes.
The proposed amendments for revenues and expenses primarily reflect:
• Closure of K-9 Fund 212 as revenues and expenditures were moved to the General Fund as outlined above;
• Minor adjustments for estimated revenues including allocation of investment earnings • Increased development impact fees based on actual receipts. These fees are budgeted at $0 unless there is confirmation a development project is certain to proceed; • Increased utilization of the In-Lieu Tree Replacement Fund to replace trees throughout Cotati Parks and Landscape; and
• Reduction of revenue expectations for the Veterans Building rental income thus also decreasing the revenue sharing after expenses back to the General Fund and back to Sonoma County.
The proposed amendments ensure appropriations remain consistent with funding requirements and planned program activities.
Capital Project Funds
Staff reviewed all active and planned capital improvement projects to evaluate project status, available funding, grant reimbursements, and anticipated construction schedules.
Proposed amendments include:
• Grants adjusting transfers, pending timing of receipt of grant reimbursements for projects or expenditures;
• Carryforward appropriations for projects which are still in process in FY 2025/26 and rolling forward into FY 2025/26 due to revised project schedules; • Receipt of new grant award for the CHP Cannabis Tax Fund; • Removal of Trash Implementation Project, as the City was found to be compliant with existing infrastructure. Staff will need to increase other trash mitigation measures around street sweeping and public information efforts; and
• Increased construction cost adjustments for street projects.
These adjustments align project budgets with current implementation schedules and funding availability.
City-Wide
Summary level amendments are provided in Attachment A.
The proposed current-year amendments include adjustments to revenues and expenditures necessary to align the budget with actual operations and anticipated year-end results based on projections outlined above.
Proposed Fiscal Year 2026/27 Budget Amendments
The second year of the biennial budget was adopted based upon assumptions available at the time of adoption. Staff have updated those assumptions using current economic data, project schedules, and operational requirements.
Key proposed amendments include:
• Revenue Adjustments
o Revised sales tax and other economically sensitive revenues. o Reduced other taxes related to cannabis business tax due to the closure of one distribution facility within the City.
o Decreased estimates of franchise fees for Cable TV and Gas Services as residents transition to obtain media and utility services in a different manner. o Slight increase in revenues related to charges for services as we support expansion of programs at the Veronda Falletti Ranch.
o Investment earnings adjustments.
• Expenditure Adjustments
o Updated personnel cost projections.
Historically, the City has budgeted for full employment. However, this has always overestimated actual staffing costs, which are somewhat lower due to vacancies that naturally occur throughout the year. To better estimate personnel costs, staff have taken steps to evaluate historical vacancies within each department in the General Fund. Positions that were identified include:
▪ City Managers Department - One half time intern position due to desire to hold this position, but lack of desk space within office to facilitate position ▪ Administrative Services - Reducing a half time intern to 0.3 time due to turnover and allowance for class schedules.
▪ Community Development - ½ of a ⅝ time planning tech as this position may be shifting to provide for other work demands.
▪ Engineering - reducing ½ time intern to ¼ time due to turnover and allowance for adjusted class schedules.
▪ Police Department - Reduction equivalent to one dispatcher, one officer and one reserve position due to continued vacancy.
▪ Recreation Department – reducing one ½ time recreation leader to ¼ time due to meeting school schedules and position turnover.
For budget estimating only, the total adjustments for this allocation are approximately $547K for FY 2026/27. This adjustment, applied to the full staffing model, used prorata costs including any assumed salaries, benefits, and taxes. Staff believe this adjustment will better represent the expected actual personnel costs over the course of the fiscal year.
o Capital improvement project timing adjustments rolled forward from FY 2025/26 or delayed to future years based on funding constraints. The City continued to utilize A and B budgeting for capital projects. Projects which were placed on hold for the fiscal year pending identification of future funding include:
▪ Veronda-Faletti Ranch Barns - Estimated cost $2M
▪ Traffic Signal at William/George – Estimated cost $1.37M ▪ 2027 Street Reconstruction – Estimated cost $1.5M
▪ Putnam Park Improvements Phase 2 – Estimated cost $3.4M The Hwy 116/W. Cotati Ave. Intersection Safety Improvements project design is budgeted to move this project to ”construction ready“ by the first half of 2027.
However, staff are continuing to seek funds and participation from developers on adjacent properties. Depending on the success obtaining additional funding and participation, construction may need to be phased. The construction approach will be re-evaluated by early 2027 to determine the path forward. o Investments in vehicle and equipment replacements, including the proposed first electric vehicle for the public works department. Additional appropriations for strategic initiatives and Council priorities.
o Reduced sewer treatment charges from Santa Rosa based on reduced rates compared to prior years' estimates.
o Adjustments related to inflationary impacts and contractual obligations.
These revisions are intended to improve budget accuracy and ensure resources are aligned with anticipated service demands and organizational priorities.
Fund Reserve Impacts
Following incorporation of the proposed budget amendments, the General Fund and Water Fund are projected to maintain reserve levels consistent with City Council policy and prudent fiscal management practices. The Sewer Fund continues to lag the required reserve; however, we are seeing improvements in the reserve as a percent of operating expenses compared to prior budgets, budgeted to approach the minimum reserve goal of 33%. Based on the most recent sewer rate study, FY 2025/26 should be the bottom of the net income losses before the fund begins to turn positive.
The proposed amendments continue to support the City's long-term fiscal sustainability while maintaining flexibility to address economic uncertainty and future operational needs.
Additional reserve and fund balance projections are included in the Mid-Cycle Budget Update Report (Attachment A).
Financial Considerations
The proposed amendments revise appropriations and revenue estimates within the General Fund, Water Fund, Sewer Fund, Special Revenue Funds, and Capital Project Funds.
Detailed schedules identifying all proposed revenue and expenditure amendments are included as an Attachment. Following adoption of the proposed amendments, all funds are projected to maintain sufficient resources to support planned operations and capital activities.
Environmental Issues
The proposed action is not a project pursuant to the California Environmental Quality Act (CEQA) because it involves organizational and fiscal activities that will not result in a direct or reasonably foreseeable indirect physical change in the environment pursuant to CEQA Guidelines Section 15378(b).