CITY OF PACIFICA
COUNCIL AGENDA SUMMARY REPORT
4/14/2025
1 SUBJECT:
Fiscal Year 2025-26 Budget Planning Process, Timeline and Preliminary Budget Strategies RECOMMENDED ACTION:
Accept the report and provide additional policy direction for the preparation of the FY2025-26 Budget.
STAFF CONTACT:
Kevin Woodhouse, City Manager
(650) 738-7409
[email protected]
Yulia Carter, Assistant City Manager
(650) 501-6004
[email protected]
Marisol Gomez, Finance and Administrative Services Director [email protected]
BACKGROUND:
Each year, the City of Pacifica adopts an annual operating budget that reflects the planned activities for the next fiscal year based on the best information available to the City Council and staff at the time of adoption. This narrative report is the first step in the new budget development process. It is not yet intended to provide detailed budgetary information for FY2025-26, but rather intended to describe the process and timeline, and receive early input from the City Council on several preliminary budget strategies recommended by the City Manager.
This preliminary report is presented in parallel with the Council’s adoption of the updated strategic plan priorities, which will inform the next steps in the budget development process.
Following Budget Session 1, the budget process will continue with a detailed Base Budget presentation and Budget study sessions, followed by public hearings and budget adoption.
Again, this report provides the Council with a general outline of the budget development process, including the timeline, methodology, and preliminary budget strategies for the upcoming year.
Budget Calendar
The annual budget cycle begins each year with the development of budget instructions, including policy directives and a budget calendar in January-February, and is completed with the budget adoption by the City Council in June of each year.
A summary of the tentative FY 2025-26 budget schedule is as follows:
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PUBLIC
MEETING
BUDGET STEP TIME FRAME
1 Council Strategic Planning Workshop: FY2025-26 Strategic Plan Update and Priority Setting
March 1, 2025
2 FY 2024-25 Mid-Year Budget Review to Council March 24, 2025 3 Budget Session 1: Budget Methodology, Budget Calendar, Long-Term Financial Outlook and Preliminary Budget Strategies.
April 14, 2025
4 Council Adoption of the Strategic Plan and Priorities April 14, 2025 5 Budget Session 2: FY 2025-26 Base Budget and FY 2025-30 CIP Budget Review
May 12, 2025
6 Planning Commission: Review of the Proposed FY2025-30 CIP Plan for Conformity with General Plan
June 2, 2025
7 Budget Session 3: City Council Review and Approval of Proposed FY 2025-26 Budget Recommendations
June 9, 2025
8 City Council Budget Hearing: Formal Adoption of the FY 2025- 26 Operating and Capital Budget and Master Fee Schedule June 23, 2025
This year's budget cycle launched on March 1, 2025, with the Council’s review of the City’s Strategic Plan and Priority-Setting workshop. The Strategic Plan and priorities update will be presented for the Council’s adoption on April 14, 2025 in a separate agenda item. On March 24, 2025, the Council completed a mid-year review of the FY2024-25 Budget. At that time, the Council reviewed revenues and expenditures and made adjustments that will be factored into the development of the FY2025-26 Base Budget, scheduled to be presented to the Council on May 12, 2025.
Budget Methodology
The Adopted Budget is achieved after an inclusive and interactive budget development process, which aims to reach a balanced and sustainable budget. Three years ago, staff modified the City's budget process to apply a modified zero-based budget methodology, a systematic financial management strategy commonly used by local governments to help achieve more cost-effective delivery of public services. The upcoming FY 2025-26 budget development process will follow the same methodology.
The purpose of the Base Budget is to reflect the current level of services and operations. The Base Budget is not an exact duplication of the prior year's adopted Budget because of actions that the Council may have taken that modified the Budget over the course of the year and, most importantly, because of the FY2025-26 Budget assumptions that will be presented to Council at the next budget study session, which will be held on May 12th.
The Base Budget will reflect the current economic conditions at the existing service level. Once the Base Budget is developed, each department will be given an opportunity to request prioritized program changes for service enhancements or reductions (when needed) and to identify any necessary or desirable service increase or reduction options while maintaining a balanced and sustainable budget.
The City Manager will then review department requests and formulate budget recommendations for service-level changes for the Council's consideration. These Pacifica City Council 3
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recommendations will be based on many factors, including the Council's strategic vision, staffing capacity, and potential impact on the overall City operation and services provided to the Community.
The final proposed budget document will incorporate the City Manager’s final recommendations based on the City Council's priorities and input. Throughout the upcoming budget meetings, the Council will have an opportunity to review and consider budget options and provide direction to the City Manager regarding any changes.
The City's goal is to achieve a balanced budget with operating revenue equal to or greater than operating expenditures, including debt obligations and any reimbursements from other funds for services. Under this policy, total expenditures can exceed revenue in a given year to fund capital improvement plan projects or other "one-time" non-recurring expenditures. The City's financial position and the resources in each fund will determine the level of services and the projects that the City will be able to deliver to the community in the upcoming fiscal year.
Therefore, these services and projects will be included in the adopted Budget.
FY 2025-26 Preliminary Long-Term Financial Forecast
The initial Long-term Financial Forecast (Attachment A) is based on the preliminary FY2025-26 base budget, and indicates that the City of Pacifica is facing an ongoing structural deficit at the current level of services. If this deficit remains unaddressed, the forecast shows that the City’s reserves could fall below the GFOA-recommended two months of operating expenditures reserves as early as FY2026-27, with full depletion of reserves projected by FY2028-29.
A more detailed discussion of revenue assumptions will be provided at the next budget study session. However, this preliminary forecast already reflects the key challenges in the current revenue trends, including declines in Sales Tax (including Measure Y) and Cannabis revenues, which are expected to continue in the future years, reductions in Transient Occupancy Tax (TOT), Business License and Permit Fees due to the amendments to the Short-Term Rental (STR) Ordinance, and the Vehicle License Shortfall and uncertainty around the VLF backfill in the upcoming years. While the forecast includes the $2.3 million VLF backfill that is due to the City in FY2025-26, this amount is currently not included in the State’s budget. As a precaution, the forecast includes a General Fund balance designation to allocate a portion of reserves to cover the potential loss, should the State fail to follow through on its VLF obligations, as further outlined in the preliminary budget strategies section.
The preliminary forecast represents the status quo and does not assume any ongoing future general fund contributions toward the capital improvement program because even with zero CIP contributions, the General Fund is projected to remain structurally imbalanced at the current baseline level of services. The forecast also does not include any assumptions for labor cost increases, although the City is currently in negotiations with all bargaining groups.
It is important to note that this forecast only projects forward the current level of services and does not take into account any future potential revenue measures, service enhancements, or reductions that may be reflected in the final FY2025-26 Budget once it is developed and adopted, as well as future years.
As we progress though the budget development process the financial forecast will be updated accordingly and will be updated for the FY 2025-26 Proposed Budget.
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FY 2025-26 Preliminary Budget Strategies
The comprehensive update to the Strategic Plan and Priorities is scheduled for presentation and adoption by the Council on April 14, 2025. However, the overarching City goals remained unchanged from the City Council’s March 1, 2025, Strategic Planning workshop. During the workshop, the City Council confirmed the following five Pacifica goals for the Strategic Plan:
1. Enhance organizational and fiscal stability.
2. Improve and steward City infrastructure, streets, and facilities.
3. Prioritize protection and development of affordable housing.
4. Pursue climate change adaptation and mitigation.
5. Broaden public communications and collaboration.
The Council's input on the following recommended preliminary budget strategies related to these goals will help guide the development of budget recommendations for FY2025-26 that achieve the Council's Strategic Plan Goals and Strategies and continue providing high-quality City services to the Pacifica community.
Strategy #1: Change Allocation of Excess Educational Revenue Augmentation Funding (Excess ERAF) for these revenues to stay in the General Fund. (Supports Goal #1).
Excess ERAF has been traditionally treated as a one-time revenue source due to potential unpredictability and dependence on complex property tax calculations by the State. As a result, the City has historically allocated these revenues to special purposes outside of the General Fund, following the following Council-approved policy direction:
• $100,000 toward the Pacifica Resource Center
• $10,000 toward the Pacific Beach Coalition
• 50% of the remaining balance toward Fund 38 (Disaster Accounting Fund) • 50% of the remaining balance toward Fund 24 (Housing Action Fund) However, for FY 2025-26, the City is facing a growing structural deficit and increased financial pressure on the General Fund. In light of these challenges, the City Manager recommends deviating from the current policy and retaining as much of the Excess ERAF revenue as needed in the General Fund to balance the budget and maintain essential services.
Although Excess ERAF is not considered a long-term stable, ongoing revenue source, Pacifica has consistently received these funds over the past decade. Additionally, staff surveyed other San Mateo County cities and found that many of them routinely budget Excess ERAF directly in their General Funds to support core services.
While this approach offers critical financial relief, it is not without related impacts:
• Disaster Accounting Fund: Although the Disaster Accounting Fund (Fund 38) currently has a healthy balance (approximately $7 million), the balance will not grow for FY2025- 26 if Excess ERAF is not allocated to this fund. As a coastal community vulnerable to annual flooding, winter storms, and infrastructure failures, maintaining an adequate dedicated reserve for disaster response is a prudent and fiscally responsible practice. • Affordable Housing Development: The Housing Action Fund (Fund 24) currently has more than $2 million, but will not grow for FY2025-26 if Excess ERAF is not allocated to this fund.
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This proposed strategy reflects the need for short-term fiscal flexibility and responsible stewardship of available resources. It is both necessary and prudent; without it, the City would need to significantly reduce services to balance the budget. Should the City’s fiscal outlook improve or an alternative revenue source be identified, the Council may consider returning to the prior allocation model, to continue funding long-term community resiliency and housing priorities. Staff will continue to monitor revenue projections and may bring forward an updated recommendation during a future budget session.
Strategy #2: Addressing Financial Uncertainties Related to Vehicle License Fee In-Lieu Backfill Payments from the State (Supports Goal #1).
The uncertainty surrounding Vehicle License Fee (VLF) In-Lieu payments from the State has been a recurring fiscal concern over the last several years now. Despite the City's continued reliance on these revenues and budgeting for that, the State’s continuing threat to fulfilling its obligations have made long-term financial planning increasingly difficult.
For FY 2025-26, the City is anticipating a $2.3 million backfill under the State’s established twoyear delay in disbursing these funds. However, this payment is not currently reflected in the State’s draft budget, creating a risk that the City may not receive these funds as expected.
The San Mateo County Mayors, City Managers, and Finance Officers have worked together on a unified response to this economic stability threat and the status of the upcoming year’s backfill is still evolving. However, to proactively mitigate this risk, the City Manager recommends incorporating a portion of the General Fund reserves as assigned fund balance designation to temporarily offset the potential loss. This measure allows the City to maintain core services while safeguarding financial stability in the event that the State fails to follow through on its obligations.
Staff will continue to work with regional partners on lobbying efforts and will continue monitoring this issue closely, and will provide the City Council with updates on this issue throughout the FY 2025-26 budget development process as new information becomes available.
Strategy #3: Prioritize Revenue-Generating Development to Strengthen the City's LongTerm Financial Base (Supports Goals #1 and #3) In light of the City's ongoing structural deficit and limited discretionary revenue sources, the City must laser focus its community development and economic development efforts on projects that grow the long-term revenue base. Pacifica needs to begin investing in larger-scale, revenuegenerating initiatives that will provide a sustainable fiscal foundation through increased property tax, transient occupancy tax (TOT), and sales tax revenues.
Some of these areas of focus may include:
• New Housing Development: Advancing housing production, particularly mixed-use and multifamily developments, helps meet the City’s Regional Housing Needs Allocation (RHNA) targets while increasing the property tax base and utility user tax revenues.
Expanding housing also supports the local economy by increasing the customer base and improving workforce availability.
• Hotel Development: A new hotel would significantly increase TOT, which is a locally controlled General revenue stream. With Pacifica’s strong coastal identity and visitor appeal, a hotel project would drive visitor spending, support jobs, and diversify the tax Pacifica City Council 6
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base, which would eventually (once open and operating) help mitigate the projected $1.5 million revenue losses over the next three years due to STR ordinance changes.
Over the past decade, many neighboring cities in San Mateo County have invested heavily in these types of strategies, including new hotel developments, innovation zones, and mixed-use business improvement districts. These cities are now seeing the benefits in the form of higher assessed property values, expanded lodging tax revenues, and stronger fiscal stability. Although Pacifica has been making progress in this direction through fundamental steps such as the General Plan Update, Local Coastal Land Use Plan Update, and Sharp Park Specific Plan, it is essential that the City continue to prioritize and focus its limited staff resources on revenuegenerating development.
Pacifica’s Strategic Plan and Economic Opportunity Study already identify several medium and long-term initiatives that align with this approach, including advancing the Surplus Land Act (SLA) process for key sites like 2212 Beach Boulevard, followed by hotel development. These are the types of strategic projects that can lay the groundwork for future economic sustainability.
While these initiatives are long-term in nature and will not resolve the City’s immediate budget shortfall, it is critical to emphasize this continuing direction as a budget strategy for FY2025-26..
Major development projects typically require several years to move through land use planning, entitlements, and funding phases. Continuing this proactive planning is critical for the City to be able to build a more resilient and self-sustaining future, while maintaining its values and community character.
NEXT STEPS
Staff will factor in the Council’s feedback on the preliminary budget strategies presented in this report in the budget development process. On April 14, 2025, the City Council will also consider the adoption of updates to the Strategic Plan and priorities. This strategic framework serves as a critical roadmap for the organization, outlining the City’s short and longer-term priorities and objectives, that also directly translate into the workplan and budget recommendations for the upcoming FY 2025-26 Budget.
On May 12, 2025, staff will present the FY 2025-26 Base Budget and the recommended funding for the FY 2025-26 Capital Improvement Plan. In subsequent budget sessions, more defined budget options and recommendations will be brought forward before the final adoption of the FY 2025-26 Budget in June.
FISCAL IMPACT:
There is no action or fiscal impact associated with this item. This is an informational presentation seeking the Council’s initial input to help guide the further development of budget recommendations. As reflected in the budget calendar above, staff will be bringing forward the FY2025-26 Base Budget and more in-depth recommendations for budget strategies, policy options, and service change recommendations at future meetings.
ORIGINATED BY:
City Manager's Office
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ATTACHMENT LIST:
Attachment 1 Long-Term Financial Forecast (LTFF)(PDF)