ADMINISTRATIVE SERVICES DEPARTMENT
CITY HALL
10300 TORRE AVENUE • CUPERTINO, CA 95014-3255
TELEPHONE: (408) 777-3220
CUPERTINO.GOV
CITY COUNCIL STAFF REPORT
Meeting: March 3, 2026
Subject
Acceptance of City Manager’s Mid-Year Financial Report for Fiscal Year 2025-26; Approval of Budget Modification increasing appropriations by $663,616 and revenues by $149,578
Recommended Action
1. Accept the City Manager’s Mid-Year Financial Report for Fiscal Year 2025-26
2. Adopt Resolution No. 2 6-XXX approving Budget Modification No. 2526-433, increasing appropriations by $663,616 and revenues by $149,578
Executive Summary
The Mid-Year Financial Report for Fiscal Year (FY) 2025 -26 provides an update on the City’s financial status as of December 31, 2025. The City has updated its 10-Year Financial Forecast to reflect revised revenue and expenditure assumptions, establishing a new baseline projection as well as a second scenario incorporating the proposed 36% increase to the Sheriff’s contract. Under the revised scenario, the City anticipates ongoing structural deficits beginning in FY 20 26-27. Additional details are provided l ater in this report.
The FY 202 5-26 Amended Budget across all funds as of Mid-Year is $228.9 million, increasing from an adopted budget of $136.1 million due to carryovers and encumbrances from the last fiscal year, in addition to Council-approved budget adjustments in the first two quarters of the fiscal year.
As of Mid-Year FY 2025-26, General Fund revenue was $0.8 million, or 2%, higher than Mid-Year FY 2024-25, primarily due to the receipt of a $3.7 million transportation grant from Apple . The increase is also attributed to the timing of tax sharing agreement payments which led to higher sales taxes in the first half of the year; the first two quarters of sales tax rebates will be paid and reflected in third quarter report. These increases are offset by a decrease in Other Financing Sources primarily due to revenues received from the sale of the Byrne property in the prior mid-year period. Mid-Year expenditures were $4.1 million, or 7% lower than last year, primarily due to a City Council approved one -
2 time Additional Discretionary Payment to CalPERS to address the City’s Unfunded Accrued Liability retirement costs in the prior mid-year period. This decrease is offset by increases in the following areas: restart annual Capital Reserve funding transfer , legal services, law enforcement contract costs, and community shuttle rate increases/increased ridership.
Key recommendations from the report include the following proposed budget adjustments:
• Legal Services costs due to the emergence of new and unforeseen legal matters • Control Room Build - Fund Transfer from General Fund to Internal Service Fund (PEG Funded)
Reasons for Recommendation
Background
On June 3, 202 5, the City Council adopted the FY 2025 -26 Adopted Budget, a $136.1 million spending plan funded by $133.7 million in revenue and $ 2.4 million in fund balance. The adopted budget reflected a $ 68,966 increase from the proposed budget as illustrated below.
Budget Actions Amount
Proposed Budget & Capital Improvement Program (Including Transfers) 135,997,435$
Final Budget Hearing & Adoption
Operating Changes 68,966
FY 2025-26 Adopted Budget 136,066,401$
3 As described in the City Manager’s First Quarter Financial Report, the budget was revised to account for encumbrances and carryover appropriations . As part of the FY 2024 -25 year-end close, additional funds were carried forward to FY 2025-26, amounting to $18.2 million in encumbrances and $68.3 million in budget carryovers. 1 The largest encumbrances were for Capital Projects ($8.2 million), and the largest carryovers were for General Fund ($28.1 million). Furthermore, the FY 20 25-26 Amended Budget includes Council-approved budget adjustments from July 1 to December 31 , 202 5, totaling $228,948,923 across all fund s primarily due to negotiated increases for all bargaining groups. Please refer to Attachment C for details on the carryovers.
The amended budget at the end of mid-year is $228.9 million, funded with $186.2 million in revenue and $42.7 million in fund balance. The amended budget is the adopted budget, plus encumbrances, carryovers, and Council -approved budget adjustments . The reflection of carryovers and encumbrances in the amended budget is a standard practice in municipal budgeting and aligns with the amounts in previous years, which have been approximately $80 million. Carryovers and encumbrances are appropriations approved in prior years but have not yet been spent and are still required for ongoing projects or obligations.
Mid-Year Summary of Budget Adjustments by Fund
1 Encumbrances are outstanding commitments tied to unfilled purchase orders or contracts, which are rolled over to the following fiscal year until those obligations are fulfilled or terminated. Budget carryovers are unencumbered funds for unfinished projects carried over to the following fiscal year to be spent for the same purpose for which they were approved.
Fund
FY 2025-26
Adopted
Budget Carryovers Encumbrances
Adjustments
Approved in 1st
and 2nd Quarters
FY 2025-26 Amended
Budget as of
December 31, 2025
General 99,189,741 28,105,391 7,162,543 3,261,850 137,719,525 Special Revenue 10,810,122 17,269,837 1,604,982 135,181 29,820,122 Debt Service 2,676,600 - - - 2,676,600 Capital Projects 4,225,000 22,691,140 8,198,536 2,538,284 37,652,960 Enterprise 9,153,170 181,612 535,558 123,005 9,993,345 Internal Service 10,011,768 96,963 712,952 264,688 11,086,371 Total All Funds 136,066,401$ 68,344,943$ 18,214,571$ 6,323,008$ 228,948,923$ 4 General Fund
Forecast
The updated General Fund forecast, reflecting carryovers from the prior fiscal year and Council-approved appropriations through the end of the second quarter, remains largely consistent with the FY 2025 -26 Adopted Budget’s forecast. Major appropriation changes are summarized in Attachment C and discussed in greater detail in the Background section of this report.
5 Under the updated baseline assumptions, the City’s 10-year forecast (FY 2025-26 through FY 2034-35) reflects a structurally balanced budget for eight years, through FY 2032 -33.
However, the final three years of the forecast now reflect structural deficits, compared to the prior forecast which showed deficits only in the last two years.
The updated forecast does not include the following:
- Additional projected costs associated with the City Hall project - Extension of the Utility Users Tax (UUT), which is set to sunset in FY 2030-31 - Potential revenue measures currently under Council discussion (next scheduled discussion: March 17)
- The proposed 36% increase to the Sheriff’s contract
- Potential business license revenue increase as a result from the City’s amnesty program
Although sales tax revenues are trending stronger than budgeted, staff recommends waiting until the third quarter, when additional disbursement data has been received from the California Department of Tax and Fee Administration (CDTFA) , before proposing any formal revenue adjustments.
This updated forecast reflects the City’s ongoing efforts to align expenditures with sustainable revenue levels following the $30 million CDTFA settlement. Over the past two fiscal years, the City implemented approximately $23.8 million in ongoing reductio ns, including staffing realignments, materials and contract reductions, transfer adjustments, and capital reserve deferrals. Additional structural refinements — including updated
6 vacancy assumptions, property tax trends, franchise fee projections, water lease revenue, and the $10 million CalPERS Additional Discretionary Payment (ADP) — have stabilized near-term fiscal conditions.
However, even with these efforts, structural pressure reemerges in the later years of the forecast. The scheduled sunset of the UUT in FY 2030-31 and the absence of new ongoing revenues create long-term fiscal vulnerability. As the City moves forward in th e budget process, continued focus on controlling ongoing expenditures and prioritizing one -time uses of surplus funds will be critical to maintaining fiscal stability.
Forecast - Sheriff’s Contract Scenario
A second forecast scenario is provided below incorporating the proposed 36% increase to the Sheriff’s contract beginning in FY 2026-27.
Under this scenario, the City would experience structural deficits across all forecast years.
Because the proposed increase represents an ongoing expenditure adjustment rather than a one-time cost, it would immediately shift the City from near-term structural balance into sustained deficits absent offsetting reductions or new revenue.
Staff continues to coordinate regionally with Saratoga and Los Altos Hills and engage Santa Clara County to better understand the methodology changes contributing to the increase, including reallocation of Records and Investigative Services, adjustments to productive hour assumptions, updated sworn compensation costs, and expanded overhead allocations.
7 If implemented as proposed, the contract increase would significantly accelerate the City’s structural imbalance and require difficult policy decisions related to service levels, expenditure reductions, or revenue enhancements. Staff will continue refining long-term projections, evaluating cost containment options, and returning to Council with updated financial scenarios as negotiations and policy discussions evolve.
General Fund at Mid-Year
4-Year Comparison of Revenues, Expenditures, and Changes to Fund Balance ($ in millions)
FY 2025-26 General Fund Mid-Year Update
The General Fund's year-end actuals show that the City’s revenues have historically exceeded expenditures, leading to the increase in fund balance. In addition, the City's encumbrance and budget carryover process typically led to increases in year-end fund balance. Historically, when this was not the case, it was not due to a structural deficit but the transfer of excess fund balance from the General Fund to the Capital Reserve per the City's Fund Balance policy. By continuing to monitor and manage its financial resources effectively, the City can ensure that it maintains a healthy fund balance in the General Fund.
Revenue
8 General Fund revenue is $0.8 million, or 2%, higher than the same time last year due to changes in the City’s revenue sources as shown in the following table.
Comparison of FY 2024-25 and FY 2025-26 Mid-Year Revenues General Fund
Sales Tax revenue as of mid-year totals $7.8 million, representing a 24% increase compared to the second quarter of the prior fiscal year. This increase is primarily attributable to the timing of payments related to the City’s tax sharing agreements. While the agree ments were in effect in the prior year, associated rebates had not yet been paid during the comparable period. The rebates for the current fiscal year will be paid and reflected in the third quarter.
Property Tax revenue is slightly higher than last year by approximately $142,000, or 1%.
According to the HdL, the City’s property tax consultant, the citywide growth in value in the 2025-26 assessment roll is $1.21 billion, an increase of 3.6%. With the first 7 months of sales data processed for 2025, Single Family Residentials are selling for 4.57% less than in the previous calendar year. Prices for the full calendar year 2023 increased 10.24%. Prices are still being driven by higher interest rates and fewer properties being offered for sale.
Staff will continue to monitor this top revenue source and may recommend adjustments as part of the Third Quarter Financial Report.
The City’s property tax base remains strong , and HdL is currently projecting growth in property taxes over the next five years, as shown in the table below.
Revenue Category
Mid-Year
2025
Mid-Year
2026 Variance ($) Variance (%)
05 - Sales tax 6,253,234 7,771,677 1,518,444 24% 10 - Property tax 9,533,057 9,675,458 142,401 1% 15 - Transient occupancy 2,517,307 2,643,176 125,869 5% 20 - Utility tax 1,747,222 1,671,264 (75,958) -4% 25 - Franchise fees 828,043 1,024,238 196,196 24% 30 - Other taxes 903,132 592,468 (310,663) -34% 35 - Licenses and permits 2,704,260 3,174,439 470,179 17% 40 - Use of money and property 5,620,126 4,274,815 (1,345,311) -24% 45 - Intergovernmental revenue 1,593,094 4,285,139 2,692,045 169% 50 - Charges for services 7,219,090 7,013,364 (205,726) -3% 55 - Fines and forfeitures 157,093 99,778 (57,315) -36% 60 - Miscellaneous 1,445,733 390,653 (1,055,080) -73% 65 - Transfers in 15,000 15,000 - 0%
70 - Other financing sources 1,331,275 77,921 (1,253,355) -94% Total 41,867,665$ 42,709,392$ 841,726$ 2% FY 2023-24 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28
31,223,141 32,324,317 33,606,651 35,024,886 36,531,087 9 Transient Occupancy Tax (TOT) revenue increased by $126,000, or 5%, compared to the prior mid-year period, primarily due to higher average daily room rates. The chart below illustrates recent trends in both average daily rates and occupancy levels. While occupancy experienced a slight decline in 2025 compared to 2024, the increase in room rates more than offset the decrease, resulting in overall revenue growth.
Average Daily Rates and Occupancy Rates by Month
Hotels in Cupertino
Utility Tax (UUT) decreased by approximately $76,000, or 4%, primarily due to the timing of payments recorded.
Franchise Fees increased by approximately $196,000, or 24%, due to fluctuations in construction activity and billing cadence.
Other Taxes decreased by approximately $311,000, or 34%, primarily due to the transition of business license administration to HdL and the timing of remittances being received and recorded by the City. This decrease is timing-related rather than structural. Staff will continue to closely monitor this revenue cat egory to ensure collections are aligned with expectations in future quarters.
Licenses and Permits increased by approximately $470,000, or 17%, due to an increase in the number of permits received this mid-year period.
10 Use of Money and Property decreased by approximately $1.3 million, or 24%, largely due to the reversal of the $2.8 million mark -to-market adjustment recorded as a year -end entry in FY 2023 -24, resulting in a temporary positive revenue impact in the prior mid -year period FY 2024-25.
Intergovernmental Revenue increased by $2.7 million, or 169%, over the same period last year primarily due to the receipt of a $3.7 million transportation grant from Apple, offset by less monies received for state grants this mid-year period.
Charges for Services decreased by $206,000, or 3%, driven mainly by decreases in costs for general service fees related to library maintenance, offset by an increase in planning fees and cost allocation plan methodology.
Fines and Forfeitures decreased by $57,000, or 32%, due to an increase in revenues related to parking fines compared to the same period last year.
Miscellaneous Revenue decreased by approximately $1.1 million, or 73%, primarily due to the timing of the Apple donation for sheriff services.
Transfers In remained consistent with the prior mid-year period.
Other Financing Sources decreased by $1.3 million, or 94%, due to revenues received from the sale of the Byrne property in the prior mid-year period.
Expenditures
Expenditures in the General Fund decreased by $4.1 million, or 7%, when compared to the same time last year. The following table shows the differences between General Fund expenditures as of the mid-year in the current fiscal year and the prior fiscal year:
Comparison of FY 2024-25 and FY 2025-26 Mid-Year Expenditures General Fund
11 Salary increased by approximately $0.6 million, or 6%, from the previous mid-year period due to contract negotiation increases in the current mid-year period.
Benefits decreased by approximately $10.5 million, or 69%, primarily due to a City Council approved one-time Additional Discretionary Payment to CalPERS to address the City’s Unfunded Accrued Liability retirement costs in the prior mid-year period.
Materials remained relatively consistent with the prior mid-year period.
Contract Services increased by approximately $1.4 million, or 10%, primarily driven by outsourcing legal services, law enforcement contract costs, and community shuttle rate increases and increased ridership.
Cost Allocation remained relatively consistent with the prior mid-year period.
Capital Outlay increased by approximately $48,000, or 149%, due to a building maintenance project at the service center.
Special Projects increased by approximately $620,000, or 100%, due to fluctuations in one- time expenditures. It’s important to note that staff has not adjusted projects in this category to align with the Special Project policy thus expenses in this category include all special projects, including development and City Work Program items.
Contingencies increased by $4,000, or 144%. As of December 31, 2025, the City Manager’s Discretionary Fund has been used for Property Appraisal Services for 10480 Finch Avenue.
Transfers Out increased by approximately $ 3.2 million , or 43%, primarily due to an increase in transfers to restart annual Capital Reserve funding transfer. Interfund transfers are the movement of cash between one or more funds. As part of the Adopted Budget process, transfers from the General Fund to other City funds serve as operating subsidies to ensure each fund has a positive fund balance at the end of the fiscal year.
Expenditure Category
Mid-Year
2025
Mid-Year
2026 Variance ($) Variance (%)
05 - Employee compensation 10,566,467 11,165,494 599,026 6% 10 - Employee benefits 15,264,471 4,799,606 (10,464,865) -69% 15 - Materials 2,813,766 2,963,067 149,300 5% 20 - Contract services 14,256,813 15,613,313 1,356,499 10% 25 - Cost allocation 5,319,290 5,549,229 229,939 4% 30 - Capital outlays 32,349 80,484 48,135 149% 31 - Special projects 623,226 1,243,515 620,290 100% 35 - Contingencies 3,035 7,400 4,365 144% 45 - Transfer out 7,403,168 10,594,653 3,191,485 43% 50 - Other financing uses 247,521 467,509 219,988 89% Total 56,530,107$ 52,484,270$ (4,045,837)$ -7% 12 Other Financing Uses increased by approximately $220,000, or 89%, due to a higher volume of on-call contracts in the Community Development Department for plan reviews and inspections, and an increase in special contracts for current planning. Special contracts are for vendors that do not have on -call master agreements, typically for larger projects and for contracts with larger dollar amounts.
Special Revenue Funds
Revenue
Special Revenue Funds revenue is $0.6 million, or 9%, lower than the same time last year primarily due to a decrease in use of money and property and transfers in.
Comparison of FY 2024-25 and FY 2025-26 Mid-Year Revenues Special Revenue Funds
Other Taxes increased by approximately $90,000, or 104%, primarily due to an increase in storm drain fees and park dedication fees received compared to the prior mid-year period.
Use of Money and Property decreased by approximately $665,000, or 60%, primarily due to no mark-to-market adjustment, mirroring the impact seen in the General Fund.
Intergovernmental Revenue increased by approximately $441,000, or 13%, due primarily to Measure B Transportation fund street pavement maintenance.
Charges for services increased by approximately $ 11,000, or 20%, primarily due to engineering fees revenues received for traffic impact and tree funds citywide.
Fines and forfeitures were relatively unchanged from last year.
Miscellaneous revenues increased by $787 or 394% primarily due to increase i n miscellaneous revenue and admin fees.
Transfers In decreased by approximately $0.5 million, or 20%, due to decreased transfers in from general fund for roadway safety improvements, Bollinger Road corridors and non departmental for Bridge rehab minor.
Revenue Category
Mid-Year
2025
Mid-Year
2026 Variance ($) Variance (%)
30 - Other taxes 86,517 176,480 89,963 104% 40 - Use of money and property 1,116,291 451,563 (664,728) -60% 45 - Intergovernmental revenue 3,527,541 3,968,843 441,302 13% 50 - Charges for services 54,491 65,439 10,948 20% 55 - Fines and forfeitures 0 208 208 N/A 60 - Miscellaneous 200 987 787 394%
65 - Transfers in 2,595,150 2,067,000 (528,150) -20% Total 7,380,189$ 6,730,519$ (649,670)$ -9% 13 Expenditures
Special Revenue Funds expenditures are $0.2 million, or 4%, higher than the same time last year due primarily to increases in contract services, capital outlays and transfers out.
Comparison of FY 2024-25 and FY 2025-26 Mid-Year Expenditures Special Revenue Funds
Salary decreased by approximately $15,000, or 2%, due to vacancy savings.
Benefits decreased by $62,000 or 14%, from last year due to decreases in retirement costs.
Materials decreased by $5,000, or 2%, due to decreases in small tools and equipment and general supplies expenditures compared to the same period last year.
Contract Service s increased by approximately $ 24,000, or 11%, primarily due to environmental storm drain maintenance and BMR housing services.
Cost Allocation decreased by approximately $10,000, or 1%, primarily due to decrease in City Manager, Finance and Human Resources CAP Charges.
Capital Outlays increased by approximately $74,000, or 6%, largely attributed to SB1 Road expenditures.
Special Projects decreased by approximately $ 31,000, or 6%, due to decreases in the rainwater capture, CUSD joint use cost share, and annual asphalt project.
Transfers Out increased by $206,032, or 1,374%, due to transfers for McClellan Road Separated Bike Ph3 and Bollinger Road Corridor CIP projects.
Debt Service Funds
Revenue
Debt Service Funds revenue is similar to last year.
14 Comparison of FY 2024-25 and FY 2025-26 Mid-Year Revenues Debt Service Funds
Expenditures
Debt Service Funds expenditures are similar to last year.
Comparison of FY 2024-25 and FY 2025-26 Mid-Year Expenditures Debt Service Funds
Capital Projects Funds
Revenue
Capital Projects Funds revenue is lower than last year primarily due to decreases in use of money and property and transfers in from the general fund.
Comparison of FY 2024-25 and FY 2025-26 Mid-Year Revenues Capital Projects Funds
Capital Projects funds differ from year to year based on projects that have been approved or worked on in a given fiscal year.
Expenditures
Capital Projects Funds expenditures are $6.8 million, or 64%, lower than last year due to a decrease in transfers to the capital reserve to fund capital projects.
Comparison of FY 2024-25 and FY 2025-26 Mid-Year Expenditures Revenue Category
Mid-Year
2025
Mid-Year
2026 Variance ($) Variance (%)
65 - Transfers in 2,676,200 2,676,600 400 0% Total 2,676,200$ 2,676,600$ 400$ 0% Expenditure Category
Mid-Year
2025
Mid-Year
2026 Variance ($) Variance (%)
20 - Contract services 1,500 1,500 - 0% 40 - Debt services 280,600 238,300 (42,300) -15% Total 282,100$ 239,800$ (42,300)$ -15% Revenue Category
Mid-Year
2025
Mid-Year
2026 Variance ($) Variance (%)
40 - Use of money and property 657,685 - (657,685) -100% 45 - Intergovernmental revenue 21,365 212,230 190,865 893% 65 - Transfers in 7,785,000 4,244,316 (3,540,684) -45% Grand Total 8,464,050 4,456,546 (4,007,504) -47% 15 Capital Projects Funds
Capital Projects funds differ from year to year based on projects that have been approved or worked on in a given fiscal year.
Enterprise Funds
Revenue
Enterprise Funds revenue is $593,000, or 17%, higher than the same time last year due primarily to an increase in transfer in.
Comparison of FY 2024-25 and FY 2025-26 Mid-Year Revenues Enterprise Funds
Use of Money and Property decreased by approximately $0.2 million, or 40%, primarily due to decrease in mark-to-market cash in bank . Balances will continue to flow and are anticipated to end within projections.
Charges for services increased by approximately $42,000, or 2%, primarily due to enterprise services, engineering, and other service fees.
Transfers In increased by approximately $0.7 million due to transfers from t he General Fund.
Expenditures
Enterprise Funds expenditures are $0.2 million, or 6%, lower than the same time last year due primarily to a decrease in special projects and employee salary and benefits.
Expenditure Category Mid-Year
2025
Mid-Year
2026
Variance ($) Variance (%)
20 - Contract services 9,690 5,526 (4,164) -43% 30 - Capital outlays 2,098,518 1,815,741 (282,777) -13% 45 - Transfer out 8,547,580 2,038,284 (6,509,296) -76% Grand Total 10,655,788$ 3,859,551$ (6,796,237)$ -64% Revenue Category
Mid-Year
2025
Mid-Year
2026 Variance ($) Variance (%)
40 - Use of money and property 427,282 257,253 (170,029) -40% 45 - Intergovernmental revenue - - - N/A 50 - Charges for services 2,505,137 2,547,204 42,066 2% 65 - Transfers in 514,000 1,235,000 721,000 140% Grand Total 3,446,419$ 4,039,456$ 593,037$ 17% 16 Comparison of FY 2024-25 and FY 2025-26 Mid-Year Expenditures Enterprise Funds
Salary and Benefits decreased by approximately $ 172,000, or 12%, primarily due to vacancies.
Materials increased by appr oximately $ 42,000, or 20%, prim arily due to Cal Recycle payment program administration expenses.
Contract Services decreased by approximately $14,000, or 1%, primarily due to decrease in expenses in general services for environmental programs resource recovery and bank charges.
Cost Allocation increased by approximately $35,000, or 4%, primarily due to increase IT reimbursement and Finance cost allocation.
Special Projects decreased by approximately $95,000, or 87%, due to projects that differ in scope and timing from year to year.
Internal Service Funds
Revenue
Internal Service Funds revenue is $0.5 million, or 9%, higher than the same time last year due to increased charges for services and transfers in.
Comparison of FY 2024-25 and FY 2025-26 Mid-Year Revenues Internal Service Funds
Use of Money and Property decreased by approximately $87,000, or 47%, due to decrease in mark-to-market adjustments.
Expenditure Category Mid-Year
2025
Mid-Year
2026
Variance ($) Variance (%)
05 - Employee compensation 1,008,717 895,439 (113,278) -11% 10 - Employee benefits 403,365 344,362 (59,002) -15% 15 - Materials 204,328 246,120 41,792 20% 20 - Contract services 1,208,854 1,194,547 (14,307) -1% 25 - Cost allocation 788,715 823,281 34,566 4% 31 - Special projects 110,165 14,602 (95,563) -87% Grand Total 3,724,144$ 3,518,351$ (205,792)$ -6% Revenue Category
Mid-Year
2025
Mid-Year
2026 Variance ($) Variance (%)
40 - Use of money and property 184,223 97,489 (86,733) -47% 50 - Charges for services 2,408,179 2,712,128 303,948 13% 60 - Miscellaneous - 4,295 4,295 N/A 65 - Transfers in 2,380,398 2,616,053 235,655 10% 70 - Other financing sources 251,991 276,764 24,773 10% Total 5,224,791$ 5,706,729$ 481,938$ 9% 17 Charges for Services increased by approximately $3 03,000, or 1 3%, primarily due to Innovation Technology related Cost Allocation charges.
Miscellaneous remains relatively unchanged from the prior fiscal year.
Transfers In increased by approximately $236,000, or 10%, due to increase in compensated absence and retiree medical expenses.
Other Financing Sources increased by approximately $25,000 due to workers compensation charges being billed to departments and received as revenue in this fund.
Expenditures
Internal Service Funds expenditures are $0.9 million, or 26%, higher than the same time last year due primarily to an increase in materials, salaries, and cost allocation offset by decrease in contract services.
Comparison of FY 2024-25 and FY 2025-26 Mid-Year Expenditures Internal Service Funds
Salary and Benefits increased by approximately $288,000, or 15%, due to filling vacancies and increase in employee health insurance and retirees health insurance premiums.
Materials increased by $ 265,000, or 71%, main ly due to an increase in small tools and equipment costs, software, and conference and training expenses.
Contract Services decreased approximately $117,000, or 13%, largely due to a decrease in general service agreements.
Cost Allocation increased by approximately $284,000, or 186%, primarily due to Human Resources and Finance related CAP charges.
Special Projects increased by approximately $193,000, or 77%, primarily due to fixed asset acquisition.
Budget Adjustment Requests
Expenditure Category Mid-Year
2025
Mid-Year
2026
Variance ($) Variance
(%)
05 - Employee compensation 808,373 930,929 122,555 15% 10 - Employee benefits 1,082,838 1,248,745 165,907 15% 15 - Materials 372,637 637,516 264,880 71% 20 - Contract services 897,792 780,883 (116,909) -13% 25 - Cost allocation 152,230 435,924 283,695 186% 31 - Special projects 252,434 446,107 193,673 77% Grand Total 3,566,303$ 4,480,104$ 913,801$ 26% 18 The City's departments regularly evaluate their budget expenditures throughout the fiscal year to ensure they stay within their budget appropriations. In case of any variance, they can request budget adjustments as necessary as part of the quarterly reports.
The budget adjustment requests are summarized in the table below and are also provided in this report as Attachment D.
Administration – CAO – Contract Services
The City Attorney is appointed by the City Council to manage the legal affairs of the City.
The CAO is requesting $410,000 for Legal Services as costs have increased this year due to unique circumstances, including various personnel matters, an important interpleader case, a complicated City-sponsored affordable housing project and builder’s remedy cases.
Administration – City Attorney’s Office ( CAO) – Senior Assistant City Attorney Salary Alignment to Department Director – remainder of FY 2026 The CAO is requesting an increase to salaries and benefits for the remainder of Fiscal Year 2026 in the amount of $ 10,461 to align the salary of the Senior Assistant City Attorney .
This alignment reflects the elevation of that classification as a member of the City’s Executive Management Team and increased responsibilities including review and revision of department staff reports, review of an increasing volume of Public Records Act requests and appointment as the Board member to PLAN and its concomitant Department Revenue Expenditure
Change in Fund
Balance Proposal
Administration - City
Attorney's Office
- 410,000 (410,000) City Attorney's Office Contract Services
Administration - City
Attorney's Office
- 10,461 (10,461) Senior Assistant City Attorney salary alignment - remainder of FY
2026
Admin Services - 75,000 (75,000) Finance consulting, additional auditing and tax services pun group
Innovation & Technology - 15,000 (15,000) ADA Closed Captioning Parks & Recreation 18,478 15,944 2,534 Hidden Treasures Proceeds Public Works - 6,111 (6,111) Emergency HVAC Compressor Replacement
Non-Departmental - 131,100 (131,100) IT PEG Transfer Out TOTAL GENERAL FUND 18,478 663,616 (645,138) Innovation & Technology 131,100 - 131,100 IT PEG Transfer In
TOTAL INTERNAL
SERVICE FUND 131,100 - 131,100 TOTAL ALL FUNDS $ 149,578 $ 663,616 $ (514,038) 19 responsibilities in risk and insurance management. This alignment will result in an ongoing expense of approximately $35,000 for future fiscal years.
Admin Services – Finance consulting, additional auditing and tax services The Department is requesting a one-time increase of $75,000 for financial consulting from HdL and additional auditing and tax services from The Pun Group.
Parks & Recreation -Hidden Treasures Proceeds
The Department is requesting $18,478 in additional appropriations from the 2025 Hidden Treasures Event to reimburse the costs to run the program and continue to support the Stay Active Fund. This proposal also includes allocation of a $300 donation receive d for the Stay Active Fund, as requested by the donor. The Stay Active Fund helps members ages 50 and over remain active and engaged at the Cupertino Senior Center. This fund provides financial assistance through scholarships for members to offset the cost of a Senior Center membership and registration for classes and events. This fund is also utilized to bring in specialized speakers, secure educational films, and purchase resource materials, etc . for events and programs that promote prevention and preparedness of aging issues such as the Health Fair. If not approved, the funds will not be utilized to recoup the costs to produce the event or support the Stay Active Fund.
I&T – Closed Captioning
The Department is requesting a one-time increase of $15,000 to support closed captioning for the City’s public-facing video content and virtual meetings to meet upcoming federal accessibility requirements. Effective April 24, 2026, the Americans with Disabilities Act (ADA) Title II requires public entities serving populations of 50,000 or more to ensure digital content—including prerecorded and live videos—is accessible in accordance with WCAG 2.1 Level AA standards, which include accurate closed captioning. The requested funding will support compliant captioning services, reduce legal and compliance risk, and ensure equitable access to public information for individuals who are deaf or hard of hearing. This investment advances the City’s commitment to accessibility, inclusivity, and transparent public communication. As part of the request, an ongoing budget of $5,000 is requested.
I&T - Video - Fund transfer between different funds
As part of Q1, The Department received $131,100 in additional appropriations to cover expenses for the new Control Room build. This funding was used for infrastructure replacements—specifically, servers and network equipment that had reached end of life.
The expenses were required to complete implementation, testing, and transition to the new system. The replacements are funded through PEG-allocated project expenses.
Since the funds were allocated to the Internal Services Fund 610 -34-310, Council must authorize the transfer of $131,000 from the General Fund to the Internal Services Fund (610) for the expenses to be reimbursed via PEG funds at end of FY2026. 20 Public Works - HVAC System Compressor Replacement
The Department is requesting a one -time increase of
$6,111.00 in additional appropriations for HVAC System Compressor Replacement for Quinlan Community Center (QCC). The compressor failed and reached the end of its useful life. If this is not approved, the QCC will continue to experience inconsistent temperature control, ongoing equipment failures and higher energy and maintenance costs. System performance will remain suboptimal, increasing user complaints and the likelihood of unplanned repairs.
Fund Balance
The General Fund’s audited ending fund balance for FY 2024 -25 is $181.8 million, a 15.7 million increase from FY 2023 -24 actuals primarily due to the prior year ending with expenditure savings that outpaced revenue decreases. Expenditure savings were primarily because of salary and contract savings along with increased revenues across almost all revenue categories, primarily due to increased investment earnings.
As of mid-year, staff anticipate the General Fund will end FY 2025-26 with $178.7 million in fund balance, an increase of $ 22.7 million from the FY 2025 -26 Adopted Budget fund balance projection. The increase from the Adopted Budget is a result of both year -end revenues exceeding expenditures and budget savings achieved in the prior fiscal year. It’s important to note that the on ly portion available for use, according to City policy, is unassigned funds. Committed funds are set aside for specific purposes determined by City Council resolution. Restricted funds, such as the Section 115 Pension Trust, are allocated for specific purposes stipulated by external resource providers. Assigned funds are reserved for encumbrances. Of the total fund balance, $62.7 million is unassigned and available to be used.
Approximately $10.7 million of unassigned fund balance is attributed to Vallco Town Center plan check and building inspection revenues that were carried over. These revenues will continue to be carried over each year until the services are rendered, and the revenues are recognized.
General Fund Classification of Fund Balance ($ in millions)
*Mid-Year Year-End Projections assume budgeted revenues and expenditures are fully collected and incurred. Fund balances do not consider City Council actions after December 31, 2025. Adjustments to Committed fund balance are made as part of the year- end closing process.
Classification
Actual
2023-24
Actual
2024-25
Adopted Budget
2025-26
1st Quarter Projection
2025-26
Mid-Year Year End
Projection
2025-26
Non Spendable 3.4$ 4.0$ 3.5$ 4.0$ 4.0$ Restricted 23.3 25.8 22.1 24.8 25.8 Committed 108.6 88.6 87.2 88.6 86.1 Assigned 4.7 7.3 - - - Unassigned 26.0 56.1 43.3 65.5 62.7 TOTAL FUND BALANCE 166.1$ 181.8$ 156.0$ 183.0$ 178.7$ 21 Per the City’s Fund Balance Policy, unassigned fund balance over $500,000 is to be used in the following order to replenish committed/restricted fund balances with any remaining balances to be placed in the Capital Reserve:
1. Economic Uncertainty Reserve
2. CalPERS Reserve (Section 115 Pension Trust)
3. Sustainability Reserve
4. Unassigned
As of mid-year, all priority areas are fully funded.
Staffing
As of December 31, 2025, the FY 2025-26 Amended Budget includes a total of 211 full-time equivalent (FTE) positions. No additional full-time equivalent positions are requested as part of mid-year.
Performance Measures
The Mid-Year Financial Report includes updated performance measures that are in line with the best practices of both government and private industry . Workload indicators were removed as part of Baker Tilly’s, the City’s internal auditor, recommendation. These measures have been designed to provide a comprehensive understanding of the City's performance and progress toward achieving its goals and objectives. Attachment F provides an overview of the status of the performance measures as of mid-year. This information is critical to effective decision -making and ensures that resources are being used in the most efficient and effective way possible.
City Manager Discretionary Fund
In the FY 2025-26 Adopted Budget, City Council approved $50,000 in funding for the City Manager Discretionary Fund. The quarterly financial reports will detail the City Manager’s use of the discretionary fund and may include recommendations to replenish depending on the extent and nature of use. As of December 31, 2025, the City Manager’s Discretionary Fund has been used for Property Appraisal Services for 10480 Finch Avenue at a cost of $7,400.
Carryovers and Budget Adjustments
The quarterly financial reports provide details on carryovers and budget adjustments.
Encumbrances are outstanding commitments tied to unfilled purchase orders or contracts, which are rolled over to the following fiscal year until those obligations are fulfilled or terminated. Budget carryovers are unencumbered funds for unfinished projects carried over to the following fiscal year to be spent for the same purpose for which they were approved. Budget adjustments are amendments to the budget that are approved by Council via resolution. The amended budget is the adopted budget, plus encumbrances, budget carryovers, and Council -approved budget adjustments. Revenue 22 and expenditure carryover processes are handled similarly. See Attachment C for details on carryovers and budget adjustments.
Special Projects
The quarterly financial reports provide a status update on special projects including the budget, amount spent, and estimated completion date. Special projects are operational projects, often one-time, that are budgeted in separate accounts for transparency and ease of tracking. If a special project is not completed by the end of a fiscal year, staff may request a carryover to the subsequent fisc al year. Fixed assets have been removed from the list as they are not one -time special projects but the purchase of a fixed asset. Fixed assets are generally items over $5,000 with a useful life of over 5 years or more. Projects included in this reporting category now align with the City Council Special Project Policy.
See Attachment G.
Grants
The quarterly financial reports provide a status update on all active grants and any completed projects for which funding is yet to be received. Active grants are those that have not yet been fully closed out with the granting agency.
Below is a high-level summary of the grant tracking document. Please refer to Attachment H for complete grant tracking updates.
Competitive Grants Non-Competitive Grants
Active Grants 15 20
Pending Results 0 0
Total Grant Dollars Awarded $28,859,428 $4,054,938
Staff will continue to provide additional updates on the status of grants as part of the quarterly financial reports.
Capital Improvement Plan
Public Works staff will bring the Capital Improvement Program FY 2026-27 proposal to City Council in March 2026, for review and later inclusion in the FY 202 6-27 Budget discussions.
CIP Project Status
The quarterly financial reports provide a revised estimate and update on Capital Improvement Program (CIP) projects. As of mid -year, the Public Works Department is not requesting any revisions to the capital budget. See Attachment I for the status of projects.
City Work Program
On December 1, 2025 , Council added six new projects to the FY 2025-27 City Work Program. These have been incorporated into the two -year CWP and any funding needs, if any, will be presented as part of proposed budget study sessions in May 2026. 23 Other Budget Items
Sheriff’s Contract Increase
The complete impact of the Sheriff contract increase is not yet known. Staff is continuing to negotiate and provide updates as additional information becomes available, as noted in the earlier forecast section of this report.
Reorganization of Insurance Administration from Human Resources to City Attorney’s Office As part of ongoing City operational alignment, the Insurance Administration Program was transferred from Administrative Services to the City Attorney’s Office. The City Attorney’s Office maintains day-to-day contact with PLAN JPA (the City’s self-insurance pool) and serves as the Board appointees to PLAN. In addition, the City Attorney’s Office oversees and manages the City’s general liability and property insurance programs. Given this existing oversight and regular coordination with PLAN JPA, consolidati ng the Insurance Administration Program within the City Attorney’s Office improves efficiency, streamlines communications, and ensures consistent management of the City’s risk mitigation and insurance functions.
Reorganization of Human Resources Division from Administrative Services to City Manager’s Office
The Human Resources Division has been reassigned from the Administrative Services Department to the City Manager’s Office. In this structure, Human Resources provides direct support to the City Manager and delivers strategic and operational services and continues to support the policy direction of the City Council. This change strengthens coordination across departments and enhances the City’s ability to address citywide priorities and workforce needs.
Development Services Division Salary Savings for 3rd Party Inspection Services Following the retirement of a Public Works Inspector, the Public Works Department expects to fill the position permanently in April, creating a 3–4 month vacancy. Because existing staff cannot fully absorb the additional workload, the Department proposes hiring temporary inspection services at an estimated cost of $73,600 which includes contingency. These costs would be covered by salary savings from the vacant position, allowing the Department to maintain service levels without exceeding the approved budget. Without using these savings, additional appropriations or service delays may occur.
Sustainability Impact
No sustainability impact.
Fiscal Impact
The Mid-Year Financial Report shows the City is positioned as anticipated . City staff recommends adjustments of $ 663,616 in new appropriations, funded by $ 149,578 in revenues and $514,038 in one-time fund balance. The City will continue to monitor its 24 revenue and expenditure trends closely to ensure it remains on track toward achieving its budgetary goals and objectives.
City Work Program (CWP) Item/Description:
None
Council Goal:
Public Engagement and Transparency, Fiscal Strategy
California Environmental Quality Act
Not applicable.
_____________________________________
Prepared by: Toni Oasay-Anderson, Acting Budget Manager Reviewed by: Jonathan Orozco, Acting Director of Administrative Services Floy Andrews, Interim City Attorney
Approved for Submission by: Tina Kapoor, City Manager
Attachments:
A – FY 2025-26 Mid-Year Financial Report
B – Draft Resolution – Budget Appropriations
C – Description of Carryovers and Adjustments as of December 31, 2025 D – Description of Budget Transfers as of December 31, 2025 E – FY 2025-26 Mid-Year Recommended Adjustments
F – Mid-Year Performance Measures
G – FY 2025-26 Mid-Year Special Projects Update as of December 31, 2025 H – FY 2025-26 Competitive and Non-Competitive Citywide Grants Tracking I – Capital Improvement Program Project Status
J - Draft Resolution – Unrepresented Agreement Update
K – Unrepresented Employees’ Compensation Program (Clean) L – Unrepresented Employees’ Compensation Program (Redline)