CITY OF GROVER BEACH
CITY COUNCIL STAFF REPORT
Agenda Item No. 7
Placement: Business
Meeting Date: February 10, 2026
TO: Honorable Mayor and City Council
FROM: Matthew Bronson, City Manager
PREPARED BY: Nick Szamet, Administrative Services Director SUBJECT: FY 2025-26 Mid-Year Budget Review, Mid-year Budget Augmentation Requests and General Fund Financial Forecast
RECOMMENDATION
Receive FY 2025-26 Mid-Year Budget Review and updated General Fund Financial Forecast; and approve mid-year budget appropriation requests.
BACKGROUND
Consistent with the Council’s adopted financial policies, this report provides an update on the City’s financial condition for FY 2025-26 and General Fund financial projections over the next five years. The forecast uses current budget data and economic indicators from national and local sources to establish projections for revenue and expenditures as well as illuminate any long-term challenges in balancing council priorities with available resources. The City presently has healthy reserves and a strong “AA” credit rating largely owing to Council’s commitment to prudent fiscal management and limited growth of City expenditures. While revenue growth continues to be steady despite an uncertain economy, the City faces persistent escalation of costs in operating City services due to factors outside of the City’s control which lead to tight budgetary conditions.
FY 2025-26 Mid-Year Financial Report
The General Fund is the City’s primary fund with taxes and major user fees funding basic public services. The Council adopted a FY 2025-26 General Fund budget of $21.4 million as shown below in Table 1 along with revenue and expenditure estimates as of the end of January:
Table 1
General Fund Summary Budget Estimated
Beginning Reserves 6,822,667 6,822,667
Revenues/Transfers In 21,428,114 21,729,473
Expenditures/Transfers Out 21,201,506 21,701,118
Surplus/(Deficit) 226,608 28,355
CIP Carryover (1,171,000) (1,171,000)
Wastewater Fund Repayment (368,252) (368,252)
Ending Reserves 5,574,877 5,311,770
Percent of Operating Expenses 31% 28%
Staff Report: FY 2025-26 Mid-Year Budget Review and General Fund Financial Forecast Page 2 February 10, 2026
General Fund Revenues
For FY 2025-26, the City’s top five revenues (property tax, sales tax, transient occupancy tax, cannabis tax, and franchise fees) comprise approximately 74% of total revenue. Total General Fund revenues are projected to end the fiscal year at approximately $21.7 million compared to $21.4 million budgeted. Total revenues are projected to be $300,000 more than budgeted with increased property, sales, and cannabis tax revenues from budgeted amounts. Projections are determined by historical trends, revenue received to date in the current year, and anticipated business growth, as well as consultation with outside experts in economic trends.
The City’s diverse revenue composition has continued to reinforce the City’s financial position in a period of economic uncertainty and cost escalation. Sales tax revenues reported modest gains of 2.58% over the prior year and cannabis tax revenues are projected to increase this year for the first time in several years. However, future growth in cannabis tax revenues could be challenged by other communities allowing commercial cannabis businesses. Arroyo Grande is considering a measure for the November 2026 ballot to establish a cannabis tax in conjunction with regulations to allow commercial cannabis retailers which would likely affect both the City’s cannabis and sales tax revenues. Staff would note that one of the City’s cannabis retailers has recently submitted an application for an onsite consumption lounge which would add to cannabis tax revenues if opened.
Table 2 highlights the General Fund’s top five budgeted revenues for the FY 2025-26 budget compared to estimated revenues at year-end:
Table 2
Budget Estimated Over/(Under) Percent of
Budget
Property Tax 6,459,000 6,524,000 65,000 101%
Sales Tax 5,863,000 6,028,025 165,025 103%
Cannabis Tax 1,070,000 1,125,965 55,965 105%
Transient Occupancy Tax 1,331,000 1,331,000 - 100%
Franchise Fees 965,000 965,000 - 100%
Total 15,688,000 15,973,990 285,990 102%
The City’s largest tax revenue source, property tax, is estimated to be higher than budgeted by 1% from the prior year. Sales tax revenue as noted above is estimated to be higher by 3% compared to the FY 2025-26 budgeted amount and cannabis tax is estimated to be 5% higher than budget based on improvement in retail sales. Transient occupancy tax (TOT) and franchise fee revenues have not been changed from budgeted amounts, however, the City has recently learned that the SpringHill Suites hotel project at 950 El Camino Real nearing completion has been delayed which will affect the final estimate of TOT revenues this year. Franchise fee revenues include payments to the City for the easements related to the two new transoceanic fiber optic cables which commenced operation this fiscal year.
General Fund Expenditures
Table 3 on the following page shows General Fund expenditures by major categories. For FY 2025-26, the General Fund is estimated to end the year with almost $500,000 more in Salaries and Benefits expenditures driven by costs outside the City’s direct control. These include higher costs for health insurance benefits, CalPERS pension costs for the City’s unfunded accrued liability, and worker’s compensation claims in the shared pool for the City’s insurance agency (California Joint Powers Insurance Agency). These additional costs do not include budgeted cost- Staff Report: FY 2025-26 Mid-Year Budget Review and General Fund Financial Forecast Page 3 February 10, 2026
of-living compensation adjustments for City employees pursuant to approved agreements which are reflected in the City’s budget and do not include any new City positions or services.
Supplies and Services costs are also projecting to be higher related to contract engineering services given vacant positions as well as increased electrical utility costs. Engineering costs will likely abate once a new Senior Engineer is hired and services are back to being conducted by inhouse Public Works staff. Council’s approval last fall of adjusted development review fees for Public Works services given increased costs will also help offset these costs by year-end.
Table 3
Budget Estimated Variance
Salaries and Benefits 9,921,855 10,229,000 307,145
Supplies and Services 8,117,533 8,310,000 192,467
Minor Capital 87,500 87,500 -
Debt Service 25,618 25,618 -
CIP/ERF Transfers Out 3,049,000 3,049,000 -
Total 21,201,506 21,701,118 499,612
Water Fund
As in past years, the Water Fund is projected to run a deficit in FY 2025-26 as water system costs continue to outpace revenues with the current water rate structure adopted in 2021. Although many capital projects have been paused to maintain the Water Fund’s fiscal solvency, the City is now incurring additional costs for the City’s share of Lopez Lake litigation costs. As the Council is aware, there is pending federal litigation against the County of San Luis Obispo by environmental groups claiming the County’s operation of Lopez Lake including the level of downstream releases harms endangered steelhead trout. Although final litigation amounts are unknown as the case is still pending, the City can expect to pay approximately 17% of litigation expenses including potentially plaintiff fees depending on the outcome of the case given the City’s contractual amount of Lopez Lake water.
To date, the City has incurred nearly $500,000 in anticipated legal costs paid to the County for attorney services in defense of this case. These costs are expected to continue given the pace of legal proceedings and the City’s total costs for legal fees may ultimately reach $2 million. Given the cost of this litigation to the Water Fund, staff anticipates the Fund will end the year with a deficit of $1.2 million which will further reduce reserves. Depending on expenses incurred, staff may recommend a short-term bridge loan from the Water Conservation Fund to the Water Fund which could help stabilize the Water Fund’s cash position in the short run until a new rate structure can be adopted. Below in Table 4 is further financial information about the Water Fund:
Table 4
Revenue Budget Estimated
Transfers In 25,000 25,000
Use of Money and Property 100,000 75,000
Revenue from Other Agencies - -
Charges for Services 4,359,800 4,359,800
Total 4,484,800 4,459,800
Expense
Transfers Out 525,000 525,000
Salaries and Benefits 798,110 800,000
Supplies and Services 2,580,602 3,580,602
Minor Capital 84,950 68,970
Staff Report: FY 2025-26 Mid-Year Budget Review and General Fund Financial Forecast Page 4 February 10, 2026
Major Capital 400,000 400,000
Debt Service 281,542 281,542
Total 4,670,204 5,656,113
Under/(Over) Budget (185,404) (1,196,313)
Beginning Balance 3,815,123 3,815,123
Estimated Ending Balance 3,629,719 2,618,810
Wastewater Fund
Given the new five-year sewer rate structure that went into effect on July 1, 2025, there is now sufficient funding for long-awaited upgrades to major sewer lines along with operation and maintenance of the sewer system. Below in Table 5 is further financial information about the Wastewater Fund:
Table 5
Revenue Budget Estimated
Transfers In - -
Use of Money and Property 84,256 84,256
Revenue from Other Agencies - -
Charges for Services 1,562,935 1,562,935
Revenue Bond 4,800,000 4,800,000
Total 6,447,191 6,447,191
Expense
Transfers Out 298,150 298,150
Salaries and Benefits 676,732 715,000
Supplies and Services 447,754 447,754
Minor Capital 243,750 243,750
Major Capital 4,650,000 3,000,000
Debt Service 160,000 160,000
Total 6,476,387 4,864,654
Under/(Over) Budget - 1,582,537
Beginning Balance 3,513,761 3,513,761
Estimated Ending Balance 3,513,761 5,096,298
Carryover of Capital Project Funding and Authorized Appropriations Per Council’s adopted financial policies, any unused appropriations at the end of FY 2024-25 in active capital improvement projects and multi-year programs are reappropriated for continued use in FY 2025-26. The City’s current Capital Improvement Program (CIP) has nearly $1.2 million in General Fund CIP carryover funding, approximately $1.1 million of which has been allocated for CIP Project 2285 for improvements to North 4th Street (the remaining $80,000 is for a train station stormwater project and sidewalk infill work). The North 4th Street project is estimated to cost approximately $2 million and is also funded by Gas Tax and Local Transportation Funds along with the General Fund.
Public Works is currently carrying out two significant capital improvement projects in the sewer upgrade project and Ramona Garden Park rehabilitation project with the next Measure K-14 local street repair project scheduled to begin this summer. Given this workload, staff is not able to carry out the North 4th Street project during the remainder of this fiscal year and thus would recommend carrying over this $1.2 million in CIP funding to FY 2026-27 for the North 4th Street project and the two other smaller projects. Carrying out the North 4th Street project in FY 2026-27 would still be timely in order to do a less intensive grind and overlay improvement project before the street Staff Report: FY 2025-26 Mid-Year Budget Review and General Fund Financial Forecast Page 5 February 10, 2026
degrades to the level where a more costly and involved rehabilitation project is needed. Staff would suggest this specific project carryover to be consistent with the original appropriation of these funds rather than with a general category of use.
Requested Mid-Year Budget Appropriations and General Fund Impact Given tight budget conditions in this fiscal year, only two mid-year budget appropriations are recommended by staff with both covered by outside revenues. The Police Department has requested increases to $53,002 for additional overtime to be repaid by State grants dedicated for additional law enforcement patrols for DUI and cannabis enforcement. Additionally, the Police Department requested $17,000 in additional training and education funds for a teambuilding workshop fully reimbursed by California Commission on Peace Officer Standards and Training.
Staff are requesting the Council’s approval of mid-year budget appropriation changes for the General Fund totaling $70,002 with additional detail provided in Attachment 1.
General Fund Financial Forecast
Economic Trends
The General Fund financial forecast is intended to be a tool which provides a rational forecast of the City’s financial position over a five-year period. Staff annually updates the five-year General Fund financial forecast to evaluate the City’s financial condition and help develop the City’s budget.
The consensus for the national economic outlook has been generally positive moving into 2026.
On the one hand, the Federal Reserve has lowered interest rates. However, the pace of the rate decreases is already moderating as inflation persists. United States Gross Domestic Product for the last quarter of 2025 grew at a pace of 1.1%. Mortgage rates also remain high relative to previous years and are unlikely to abate given levels of federal debt. As with most of California, the small inventory of available housing keeps asset prices high in Grover Beach.
Based on the latest sales tax forecast ending September 30, 2025, statewide taxable sales are up by 2.1% overall compared to the previous year and the Central Coast is seeing a higher growth rate of 6.3% annually. Grover Beach saw an increase of 2.5% for the past quarter with sales tax for food products and transportation up 3.2% and 3.8%, respectively. However, general retail and construction saw quarterly drops of 4.7%, and 10.1% which illustrates a continued mix of gains and losses by sector. According to the California Association of Realtors, statewide housing sales jumped by 3.1% in 2025. On the Central Coast, sales increased by slightly higher margin of 12.8%.
City’s Five-Year Forecast
Grover Beach’s diversified revenue base has made it well suited to weather the challenging economic conditions. New developments that are opening along with existing businesses are helping improve economic conditions overall. Staff anticipates that property, sales, and transient occupancy tax will all see moderate growth in 2026. Table 8 on the following page shows a summary of this updated five-year forecast with a more detailed version shown in Attachment 2.
Staff Report: FY 2025-26 Mid-Year Budget Review and General Fund Financial Forecast Page 6 February 10, 2026
Table 8
Overall, the forecast indicates the General Fund is in a positive position for the next FY 2026-27 which is the second year of the current two-year budget cycle. Looking ahead, FY 2027-28 is also projected to have a small surplus with small deficits subsequently projected in FY 2028-29 and FY 2029-30 before a small surplus is again projected in FY 2030-31. This trend indicates the City is generally running a break-even budget between revenues and expenditures with continuity and stability in services and personnel. Despite this relative stability, the City faces challenges in containing employment costs outside of the City’s control along with meeting new and emerging community needs that increase the City’s costs. Below are some points regarding major revenue sources and guiding assumptions around the forecast:
• Sales Tax. For FY 2025-26, the forecast assumes that general sales tax revenues will increase by 2.5% with subsequent growth steady at 2% in 2027 through 2031. Significant increases in revenue in prior years have leveled off with the reduction in inflation and fiscal stimulus.
• Property Tax. Using prior year revenue estimates, this year’s forecast assumes that the City’s property tax revenues will increase by 5.8% year-over-year. Fiscal years 2026-27 and beyond assume consistent growth of 5% per year.
• Cannabis Tax. The forecast revises cannabis tax revenue up to $1.1 million in FY 2025-26, a slight increase from in FY 2024-25. This forecast shows moderate growth estimating additional revenues for 2027-31 at 2% per year.
• Transient Occupancy Tax (TOT). In FY 2024-25, TOT revenues were slightly more than $1 million. However, potential delays in the new hotel project at 950 El Camino Real would affect final TOT revenue estimates as noted earlier. Additional approved hotel projects including the Grover Beach Lodge and 1598 El Camino Real are not included in the forecast as they have not started construction and would be added when construction begins. Overall, TOT is projected to increase 3% in FY 2026-27 and 2% each year, beginning in FY 2027-28 to FY 2030-31.
The presentation of the projected General Fund forecast represents the beginning of Council’s review and deliberation on the City’s budget which culminates in the Council’s adoption of the budget in June. Prior to then, staff will provide another budget update to the Council on May 11.
Overall, projected General Fund revenues and projected expenses indicate that the City is able to meet operational and service needs while keeping sufficient reserves consistent with the City’s reserves policy of at least 25% of operating expenditures through FY 2027-28 before dropping down to 23% by FY 2030-31. However, there are factors that could impact the use of reserves such as the final amount for the local contribution towards the Ramona Garden Park rehabilitation project costs. Staff intends to provide an update to the Council on the park project and the related funding on April 13.
Staff Report: Click or tap here to enter text. Page 7
March 10, 2025
Multi-Year Goals
☐ Public Safety and Community Services ☐ Economic Development and Housing ☐ Community Infrastructure ☒ Financial and Organization Sustainability Council Priorities
☐ Water & Wastewater Infrastructure ☐ Community Engagement
FISCAL IMPACT
If approved, staff will execute a budget adjustment to increase Police department budget by amount identified in Attachment 1 ($70,002).
ALTERNATIVES
The Council has the following alternatives to consider:
1. Receive the mid-year and five-year general fund forecast presentation; approve requested mid-year budget augmentation requests; or
2. Provide alternative direction to staff.
PUBLIC NOTIFICATION
The agenda was posted in accordance with the Brown Act.
ATTACHMENTS
1. Mid-Year Budget Appropriations Requests
2. General Fund Five-Year Financial Forecast
Id Department Request Type Describe the request. Requested amount? 1 Police OTS Grant Award OT;
$36,286 in overtime money for
DUI/traffic enforcement tied to grant
funding. 36,286.00
2 Police
Cannabis Grant Award
for OT;
$16,716 in grant funding for cannabisrelated overtime patrols. 16,716.00 3 Police
POST reimbursement
for training;
$17,000 for department team-building
workshop reimbursed by grant funding
from POST. 17,000.00
Total 70,002.00
Attachment 1
FY 2026-2031 General Fund Financial Forecast
BUDGET ESTIMATED FORECAST FORECAST FORECAST FORECAST FORECAST FY2025-26 FY2025-26 FY2026-27 FY2027-28 FY2028-29 FY2029-30 FY2030-31 6,459,000 6,524,000 6,850,200 7,192,710 7,552,346 7,929,963 8,326,461
4.79% 5.84% 5.00% 5.00% 5.00% 5.00% 5.00%
5,863,000 6,028,025 6,178,726 6,302,300 6,428,346 6,556,913 6,688,051 -0.31% 2.50% 2.50% 2.00% 2.00% 2.00% 2.00%
1,070,000 1,125,965 1,159,744 1,182,939 1,206,598 1,230,730 1,255,344 -2.12% 3.00% 3.00% 2.00% 2.00% 2.00% 2.00%
1,331,000 1,331,000 1,371,000 1,398,420 1,426,388.40 1,454,916 1,484,014.49
29.42% 29.42% 3.01% 2.00% 2.00% 2.00% 2.00%
965,000 965,000 1,023,000 1,043,460 1,064,329 1,085,616 1,107,328
14.02% 14.02% 6.01% 2.00% 2.00% 2.00% 2.00%
207,000 233,000 239,990 247,190 254,605 262,244 270,111 -8.41% 3.10% 3.00% 3.00% 3.00% 3.00% 3.00%
546,000 546,000 562,380 579,251 596,629 614,528 632,964
0.65% 0.65% 3.00% 3.00% 3.00% 3.00% 3.00%
35,153 35,153 38,000 39,140 40,314 41,524 42,769
15.22% 15.22% 8.10% 3.00% 3.00% 3.00% 3.00%
506,000 409,569 421,856 434,512 447,547 460,973 474,803
33.60% 8.14% 3.00% 3.00% 3.00% 3.00% 3.00%
Revenue from Other Agencies 2,952,603 2,952,603 167,195 168,867 170,556 172,261 173,984 Charges for Services 770,063 896,008 922,888 940,972 969,202 998,278 1,028,226 Transfers In 683,150 683,150 703,000 724,090 745,813 768,187 791,233 TOTAL REVENUES 21,428,114 21,729,473 19,637,979 20,253,851 20,902,672 21,576,132 22,275,288 Transfers Out 3,049,000 3,049,000 280,000 348,853 537,819 547,053 556,565 9,921,855 10,229,000 10,833,000 11,101,000 11,434,000 11,777,000 12,130,635
0.04% 3.14% 5.90% 2.47% 3.00% 3.00% 3.00%
8,117,533 8,310,000 8,437,000 8,690,000 8,950,594 9,219,000 9,496,000
0.58% 2.96% 3.94% 3.00% 3.00% 3.00% 3.00%
Minor Capital 87,500 87,500 - -
Debt Service 25,618 25,618 25,620 37,339 41,734 48,693 55,559 TOTAL EXPENSES 21,201,506 21,701,118 19,575,620 20,177,192 20,964,147 21,591,746 22,238,759 Under/(Over) Budget 226,608 28,355 62,359 76,659 (61,474) (15,614) 36,529 Beginning Reserves 6,822,667 6,822,667 5,311,770 5,005,876 5,082,536 5,021,061 5,005,447 CIP Carryover (1,171,000) (1,171,000)
Wastewater Fund Repayment (368,252) (368,252) (368,252) Ending Reserves 5,604,877 5,311,770 5,005,876 5,082,536 5,021,061 5,005,447 5,041,976 Percent of Operating Expenses 30.88% 28.48% 25.94% 25.63% 24.58% 23.78% 23.25% Salaries and Benefits
Supplies and Services
Use of Money and Property
Fines and Penalities
License and Permits
Utility Users Tax
Sales Tax
Property Tax
Transient Occupancy Tax
Cannabis Tax
Franchise Fees
Attachment 2