Fremont City Council Meeting: 03/03/26 07:00 PM
3300 Capitol Avenue Div/Dept: Finance Department
Fremont, CA 94538 Category: Budget
SCHEDULED
Sponsors:
COUNCIL STAFF REPORT (ID # 5639) DOC ID: 5639
Updated: 2/27/2026 4:33 AM by Dina Lewis Page 1
FISCAL YEAR 2025/26 MID-YEAR BUDGET REPORT - Update on the Status of the FY 2025/26 General Fund Operating Budget and Preliminary Three-Year Forecast; Approve Budget Adjustments; Make Findings of CEQA Exemption Contact Persons:
Name: David Persselin
Title: Finance Director
Div/Dept: Finance Department
Phone: 510-494-4631
E-Mail: [email protected]
EXECUTIVE SUMMARY: The Mid-Year Budget Report is an opportunity for staff to update the City Council on current-year budget performance based on actual operating results.
Staff will present a brief review of economic trends, discuss revised General Fund revenue and expenditure projections for the current year, provide a preliminary General Fund forecast for the next three years, and present recommendations for mid-year budget adjustments.
BACKGROUND: The Fiscal Year 2025/26 operating budget was adopted by the City Council on June 10, 2025. The adopted budget addressed an anticipated slowdown in City revenue growth brought about by the federal government’s imposition of unusually high tariffs on imported goods. Consistent with the City Council’s foundational principal of fiscal sustainability, General Fund budgeted expenditures of $277.8 million were limited to fit within the projected ongoing resources without the use of reserves.
As labor negotiations were under way when the 2025/26 operating budget was prepared, the adopted budget included no compensation increases. The new labor agreements, completed over the last six months, provide for compensation and benefit increases of approximately $3.1 million in the General Fund. Those increases, along with offsetting ongoing reductions, were incorporated into the adjusted budget by the City Council on February 10, 2026.
DISCUSSION AND ANALYSIS:
Economic Trends: Calendar year 2025 saw the national economy expand at a moderate
2.2% annual rate, down from 2.8% in calendar year 2024. Over the past year, the labor market has remained relatively stable, with the national unemployment rate rising only slightly to 4.3% in January 2026, from 4.0% in January 2025. Inflation has remained somewhat elevated, with the Federal Reserve’s preferred measure showing 3.0% in January compared with its 2.0% target.
In February, consumer confidence rose but remained well below heights reached in late 2024. Despite persistently low levels of reported confidence over the past year, consumer purchasing activity has acted as a consistent counterweight to reductions in exports, business investment, and government spending.
Council Staff Report (ID # 5639) Meeting of March 3, 2026 Updated: 2/27/2026 4:33 AM by Dina Lewis Page 2
Although short-term interest rates have come down over the past year, 30-year mortgage rates have stayed above 6%, discouraging homebuyers. While the average transaction value has remained in the $1.9-$2.1 million range over the past five years, the number of transactions has plummeted from over 3,000 in calendar year 2021 to about 1,500 in 2025.
The City’s preliminary revenue forecast assumes the economy will continue to grow at a moderate pace, but that continued high mortgage rates will suppress property sales at least through the end of 2026.
FY 2025/26 General Fund Revenue and Expenditure Estimates: Overall, General Fund revenues and transfers in are estimated to increase $3.4 million from the adopted budget level. The General Fund’s largest source of revenue, property tax, is performing at about $0.3 million below the budget estimate, with expected growth of 4.8%.
Sales taxes, constituting the General Fund’s second largest source of revenue, are projected to increase by 17.9%, which reflects $11.9 million reallocated in FY 2024/25 by the State to offset an overpayment in FY 2022/23. Without that prior-year reallocation, FY 2025/26 revenue would be projected to decrease by 2.1%.
The current sales tax estimate is based on two quarters of data. Consistent with the forecast discussion in the adopted budget document, revenue spiked in the first quarter and then dropped in the second quarter. The total receipts over these two quarters are higher than anticipated, and a portion of that could be one-time in nature due not only to the tariff impact but also to the expiration of electric vehicle tax credits at the end of September.
Also, as noted in the FY 2024/25 Year-End Budget Report, the State is in the process of investigating suspected misallocations which could be temporarily inflating the City’s revenue numbers.
Deducting an estimate for potentially misallocated revenue, and assuming we experience the slowdown we anticipated over the next two quarters, we’re recommending an increase to our FY 2025/26 sales tax revenue estimate, on a one-time basis, of $3 million. City staff continue to work with the California Department of Tax Administration, as well our sales tax consultant, to get more clarity on the amount and timing of any reallocations and to update our ongoing revenue projection as we develop the FY 2026/27 proposed operating budget.
Business tax is projected to increase by $1.4 million above the budget estimate due primarily to increased activity in the construction business tax component, but also because of a delayed $0.3 million general business tax payment from the prior year. Based on collections through January, hotel tax is estimated to come in at about $0.4 million above the adopted budget, but we may see a one-time spike in February revenue related to the Super Bowl. Charges for services are expected to fall $0.9 million below the budget estimate due to lower levels of fee-generating activity. The City’s revenue stream most sensitive to changes in interest rates, investment earnings, is currently projected to bring in $0.3 million less than the adopted budget estimate.
This report includes recommended adjustments to bring the budgeted revenue estimates for property tax, sales tax, business tax, hotel tax, franchise fees, charges for services, and investment earnings in line with the current projections.
Council Staff Report (ID # 5639) Meeting of March 3, 2026 Updated: 2/27/2026 4:33 AM by Dina Lewis Page 3
General Fund expenditures and transfers out for FY 2025/26 are currently projected to end the year above their budgeted levels. Although increases due to MOU salary adjustments have been offset by expenditure reductions, we’re experiencing a combination of fewer vacancies and higher overtime costs suggesting that the citywide savings estimate of $20.0 million should be reduced by $3.0 million.
The adjusted budget assumed that the General Fund would end the year with approximately $4.3 million in the Budget Uncertainty Reserve and $0.2 million of unreserved fund balance.
The estimated revenue increase of $3.4, partially offset by the $3.0 million reduction in the citywide savings estimate, would increase the projected ending unreserved fund balance to $0.6 million.
Staff will return to the City Council on May 12, 2026, with updated estimates for FY 2025/26 incorporated into the FY 2026/27 Proposed Operating Budget.
The following table presents a comparison of FY 2024/25 actual results with the FY 2025/26 adjusted budget and staff’s FY 2025/26 mid-year estimate.
Preliminary General Fund Forecast: Revenue projections for the next three fiscal years are based on the most current information available and take into account historical trends, current-year performance through mid-year, projected development activity, and scheduled changes in various fees and rates.
The FY 2026/27 and subsequent year expenditure projections include estimated citywide savings and adjustments to reflect CalPERS pension contributions, retiree healthcare contributions, scheduled debt service payments, and contractual obligations. It is important Council Staff Report (ID # 5639) Meeting of March 3, 2026 Updated: 2/27/2026 4:33 AM by Dina Lewis Page 4
to note that the City’s labor agreements expire on June 30, 2026, and no compensation increases have been assumed in the FY 2026/27 through FY 2028/29 expenditure projections.
As this forecast is preliminary, the expenditures shown represent a “base budget” that delivers the existing level of services with no assumed compensation or staffing increases.
These expenditure levels may change as the FY 2026/27 Proposed Operating Budget is developed with the benefit of additional information, including any recommendations for service level reductions or enhancements.
Budget Adjustments: As discussed above, the current revenue projections are exceeding their budgeted estimates by a net amount of $3.4 million, partially offset by a $3.0 million decrease to the citywide savings estimate. Staff recommends that the City Council amend the budget estimates for revenues and citywide expenditure savings to match the current projections.
FISCAL IMPACT: The recommended budget adjustments will align General Fund revenue and citywide savings estimates with the current projections. Staff will return to the City Council on May 12, 2026, with the FY 2026/27 Proposed Operating Budget and a revised General Fund forecast.
ENVIRONMENTAL REVIEW: Action on this item is exempt from the requirements of the California Environmental Quality Act (CEQA), per CEQA Guidelines Section 15378(b), as an
Council Staff Report (ID # 5639) Meeting of March 3, 2026 Updated: 2/27/2026 4:33 AM by Dina Lewis Page 5
administrative and/or fiscal activity that does not involve commitment to a specific project that will result in any significant physical impact on the environment.
ATTACHMENTS:
• 2025-26 Mid-Year Budget Report Presentation
RECOMMENDATIONS:
1. Increase the following General Fund revenue estimates by the indicated amounts:
a. Sales tax - $3.0 million
b. Business tax - $1.4 million
c. Franchise fees - $0.1 million
d. Hotel tax - $0.4 million
2. Decrease the following General Fund revenue estimates by the indicated amounts:
a. Property tax - $0.3 million
b. Charges for services - $0.9 million
c. Investment earnings - $0.3 million
3. Decrease the General Fund citywide savings estimate by $3.0 million.
4. Find the action is exempt from CEQA review, per CEQA Guidelines Section 15378(b).