CITY OF PACIFICA
COUNCIL AGENDA SUMMARY REPORT
4/13/2026
1 SUBJECT:
Fiscal Year 2026-27 Budget Planning Process, Timeline and Preliminary Budget Strategies (1 hr)
RECOMMENDED ACTION:
Accept the report and provide additional policy direction for the preparation of the FY 2026-27 Budget.
STAFF CONTACT:
Yulia Carter, Interim City Manager
650-501-6004
[email protected]
Marisol Gomez, Finance and Administrative Services Director [email protected]
BACKGROUND/DISCUSSION:
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 FY 2026-27, but rather describe the process, timeline, and receive early input from the City Council on several preliminary budget strategies recommended by the City Manager.
The budget process will continue with a detailed Base Budget presentation, followed by Budget study sessions, Council adoption of the updated strategic plan priorities, and will conclude with the public hearing 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.
The City Council held study sessions on November 10, 2025 and November 24, 2025 to review Pacifica’s long-term financial sustainability challenges and to explore potential revenue generation strategies to address structural budget deficits, limited staffing capacity, and significant unfunded capital needs. The purpose of these meetings was to establish a shared understanding of the City’s fiscal baseline, identify structural gaps between revenues and service demands, and evaluate a range of tools to secure and diversify the City’s revenue base and strengthen long-term fiscal health.
Consistent with the City’s multi-layered Fiscal Sustainability Framework, the discussion focused on a comprehensive set of five interconnected strategies (short and long-term), including strengthening and diversifying revenue streams, maintaining appropriate organizational Pacifica City Council 2
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investments and staffing capacity, advancing economic development to revitalize commercial areas and opportunity sites, recognizing housing development as an economic driver, and leveraging community partnerships, grants, and financing tools to supplement local resources.
As a result of this study session, the City Council provided direction to the City Manager to further assess the feasibility of placing revenue measures on a future ballot, including a potential public safety parcel tax and an infrastructure funding measure, and to engage professional services to support community outreach, education, and polling efforts to better inform future policy decisions. The survey results have since been released on the City’s website and shared through the City’s community newsletter. The City appreciates the community members who took the time to participate and share their perspectives. This input is an important part of the City’s ongoing engagement efforts. As we move into this year’s budget process, the City will continue to keep the community informed and involved as discussions about long-term fiscal sustainability and potential funding options move forward.
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 2026-27 budget schedule is as follows:
This year's budget cycle launched on March 7, 2026, 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 May 11, 2026 in a separate agenda item. On March 9, 2026, the Council completed a mid-year review of the FY 2025-26 Budget. At that time, the Council reviewed revenues and expenditures and made adjustments that will be factored into the development of the FY 2026-27 Base Budget, scheduled to be presented to the Council on May 11, 2026.
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 Pacifica City Council 3
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financial management strategy commonly used by local governments to help achieve more cost-effective delivery of public services. The upcoming FY 2026-27 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 as well as updated assumptions made at mid-year budget review. The Base Budget and updated assumptions will be presented to the City Council at the 2nd Budget Study Session on May 11th.
The Base Budget will reflect the current economic conditions at the existing service level. Once the Base Budget is developed, each department will be asked to submit prioritized program changes for service enhancements and reductions, and to identify any necessary or desirable service increase or reduction options to maintain 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 recommendations will be based on many factors, including long-term fiscal sustainability and existing fiscal constraints, the Council's strategic vision and priorities, staffing capacity, and potential impact on overall City operations 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 2026-27 Preliminary Long-Term Financial Forecast
The City’s Long-Term Financial Forecast (LTFF) was most recently presented to the City Council on March 7, 2026, as part of the Strategic Planning Study Session and is based on the FY 2025-26 mid-year review. At that time, the LTFF indicated that the City of Pacifica was facing an ongoing structural deficit at the current level of services, projected at $3.4 million for the upcoming FY 2026-27. 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 FY 2027-28, with full depletion of reserves projected by FY 2031-32.
While a more detailed discussion of revenue assumptions will be provided at the upcoming budget study session, the preliminary forecast already reflects several key pressures impacting the City’s financial outlook. These include softening Sales Tax 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 $1.06 million VLF backfill that is due to the City in FY 2026-27, this amount is currently not included in the State’s budget.
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The preliminary forecast represented a “status quo” scenario and did not assume ongoing General Fund contributions to the Capital Improvement Program (CIP). Even with no additional CIP funding, the General Fund is projected to remain structurally imbalanced, underscoring the magnitude of the City’s fiscal challenges.
It is important to note that this preliminary forecast does not incorporate potential future actions, including revenue measures, service level adjustments, or other policy decisions that the Council may consider as part of the FY 2026-27 Proposed Budget and beyond.
Finance staff are currently working on developing the Base Budget for the FY 2026-27 and once all assumptions are built in, the LTFF will be refined and updated throughout the FY 2026- 27 budget development process to reflect updated assumptions, Council direction, and any adopted strategies to address the structural imbalance.
FY 2026-27 Preliminary Budget Strategies
The comprehensive update to the Strategic Plan and Priorities is scheduled for presentation and adoption by the Council on April 13, 2026. However, the overarching City goals remained unchanged from the City Council’s March 7th Strategic Planning workshop. During the workshop, the City Council confirmed the following five Pacifica goals for the next five years:
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 FY 2026-27 that support the Council's Strategic Plan Goals and Strategies and continue providing high-quality City services to the Pacifica community.
Strategy #1: Keep Full Allocation of Excess Educational Revenue Augmentation Funding (Excess ERAF) revenue in the General Fund. (Supports Goal #1).
Excess ERAF has been traditionally treated as a one-time, unreliable revenue source due to 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, with 50/50% allocation between the Disaster Accounting Fund (fund 238) and Housing Action Fund (Fund 224).
However, the Council changed this policy direction in FY 2025-26, by retaining the Excess ERAF revenue in the General Fund to be able to balance the budget and maintain essential services. Although Excess ERAF is not considered a 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 municipalities routinely budget Excess ERAF directly in their General Funds to support core services.
While this approach offers critical financial relief, it also presents longer-term risks:
• Disaster Preparedness: Although the Disaster Accounting Fund (Fund 238) currently has ample reserves ($9.9 million), permanently reallocating these funds may leave the City less prepared to respond to emergencies in the long term. As a coastal community Pacifica City Council 5
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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: Redirecting funds from the Housing Action Fund (Fund 224) would further limit the City's ability to make progress on affordable housing initiatives, which is one of the City’s key strategic goals. These funds help meet the City’s Regional Housing Needs Allocation (RHNA) obligations and support local housing strategies aligned with the Climate Action and Adaptation Plan (CAAP) and General Plan. Notably, Excess ERAF represents the only dedicated revenue source for the Housing Action Fund in the City’s budget, and even at current levels, it is insufficient to advance significant housing projects.
Continuation of this proposed strategy reflects the need for near-term fiscal flexibility and responsible stewardship of available resources. 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 the 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. 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.
In FY 2025-26, the City anticipated a $2.3 million backfill under the State’s established two-year delay in disbursing these funds. However, the State only delivered 2/3 of the payment, and the City did not receive $771k due that year. Since the Council adopted this budget strategy last year, the City was able to backfill the under-funded portion from reserves in order to avoid reducing services in the short-term. The City subsequently joined a lawsuit against the State for the remaining funds.
Unfortunately, the same concerns have emerged again, as the State is not planning to repay its backfill obligation to cities in 2026-27. The VLF backfill repayment is not currently reflected in the State’s draft budget, creating a risk that the City may not receive these funds.
The San Mateo County Mayors, City Managers, and Finance Officers have coordinated a unified regional advocacy effort to address this issue. Through this collaboration, San Mateo County and its cities have engaged in direct outreach to State leadership, submitted formal budget requests, and provided clear, quantifiable examples of how the loss of VLF revenues would affect local communities. These efforts emphasize that VLF In-Lieu payments are not discretionary funding, but rather a legally required backfill intended to support core municipal services.
For the City of Pacifica, the potential loss of approximately $1.06 million in VLF revenue would have meaningful operational impacts. This funding is equivalent to multiple full-time staff positions and could result in reduced capacity in public safety and public works services, deferred infrastructure maintenance, and scaled-back community programs. As outlined in the City’s advocacy materials, these impacts represent the level of service reductions that could be required if the State does not fulfill its obligation.
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To proactively mitigate this risk, the City Manager recommends continue designating a portion of the General Fund reserves as assigned fund balance to temporarily offset the potential loss of VLF revenues. This approach would allow the City to maintain core services while protecting overall financial stability should the State again fail to deliver the anticipated funding. However, this strategy is inherently short-term in nature. Utilizing fund balance to address an ongoing revenue shortfall does not resolve the City’s structural imbalance and would effectively serve as a temporary patch. If the City permanently loses this revenue source, a sustainable, ongoing solution will be required, which may include identifying alternative renewable revenue sources, implementing cost containment measures, or reducing service levels to align expenditures with available revenues.
Staff will continue working with regional partners on advocacy efforts, closely monitor developments in the State budget, and provide updates to the City Council throughout the FY 2026-27 budget development process as additional information becomes available.
Strategy #3: Prioritize Revenue-Generating Development to Strengthen the City's LongTerm Financial Base (Supports Goals #1 and #3) The City recently presented a comprehensive Economic Development Workplan that outlines a strategic and phased approach to strengthening Pacifica’s economic base and supporting longterm fiscal sustainability. This workplan recognizes that economic development must address both short-term revenue opportunities and longer-term, catalytic projects that expand the City’s tax base. Given the City’s ongoing structural deficit and limited discretionary revenue sources, prioritizing implementation of this workplan is a key component of building a more financially resilient future.
In the near term, the Economic Development Workplan focuses on revenue-generating strategies such as filling commercial vacancies, supporting business retention and expansion, and attracting new businesses to Pacifica’s commercial corridors. These efforts are designed to increase sales tax revenue, stabilize the local business environment, and improve overall economic activity. This includes proactive outreach to property owners and brokers, improving permitting and development processes, and implementing targeted placemaking and corridor revitalization efforts that make Pacifica more attractive to businesses and visitors. These shorter-term actions can help stabilize and incrementally grow revenues while larger initiatives move forward.
At the same time, the City is advancing longer-term, high-impact development opportunities that have the potential to significantly expand the City’s revenue base. This includes advancing housing development projects that increase assessed property values, support local businesses, and help meet the City’s Regional Housing Needs Allocation (RHNA) obligations. In addition, the City continues to make progress on hotel development opportunities, including the City-owned site at 2212 Beach Boulevard, which represents a significant opportunity to generate locally controlled Transient Occupancy Tax (TOT) revenue, increase visitor spending, and diversify the City’s tax base.
Many neighboring cities in San Mateo County have successfully implemented similar strategies, including new hotel developments, mixed-use projects, and commercial revitalization efforts, resulting in increased property values, expanded tax revenues, and improved fiscal stability.
Pacifica now has the opportunity to pursue a similar path while maintaining its community character and coastal identity.
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Strategy #4: Cost Allocation Plan (CAP) (Supports Goal #1) The City is currently working with a consultant to develop a comprehensive Cost Allocation Plan (CAP) as part of a broader effort to improve financial transparency, strengthen cost recovery practices, and ensure long-term fiscal sustainability. The CAP identifies central service and administrative costs, such as Finance, Human Resources, and Facilities, and allocates those costs across departments based on how services are utilized. This process ensures that the full cost of service delivery is accurately understood and consistently applied across the organization. The CAP uses a structured methodology that reviews the City’s budget, organizational structure, and service delivery model to determine appropriate cost allocations and develop fully burdened rates for City services.
The development of fully burdened rates is a critical component of this effort, as it incorporates not only direct personnel costs, but also departmental and central service overhead. This provides a more complete and accurate representation of what it truly costs the City to deliver services. These rates will serve as the foundation for evaluating user fees and internal service charges, ensuring that fees are based on defensible and transparent cost methodologies. In many cases, local governments have historically under-allocated these indirect costs, resulting in a greater reliance on the General Fund to subsidize services that could otherwise be more adequately recovered.
As the CAP is finalized, staff will work with the consultant to quantify the fiscal impact to the General Fund, including identifying areas where costs are currently subsidized and where adjustments could improve cost recovery. While the final results are still being developed, the CAP is expected to provide a range of impacts and policy options that will be incorporated into the FY 2026-27 Base Budget. This will allow the City Council to consider how best to balance cost recovery, service accessibility, and community priorities, while ensuring that the City’s financial structure more accurately reflects the true cost of operations.
Strategy #5: Development Impact and User Fees (Supports Goals #1 and #3) In conjunction with the Cost Allocation Plan, the City is undertaking a comprehensive update to its Development Impact Fees and User Fee Schedule, which have not been comprehensively reviewed in several years. This effort is intended to ensure that fees charged for City services and development-related impacts are aligned with the actual cost of providing those services, consistent with legal requirements and best practices. The consultant’s scope includes a full evaluation of direct and indirect service costs, benchmarking against peer agencies, and developing updated fee schedules that are transparent, defensible, and policy-driven.
The User Fee Study specifically evaluates the full cost of service delivery using the fully burdened rates developed through the CAP and compares those costs to the City’s current fee structure. In many cases, fees may not fully recover the cost of service, resulting in a subsidy from the General Fund. While some level of subsidy may be appropriate based on policy considerations, such as promoting access to services or advancing community goals - these decisions should be made intentionally by the City Council. The study will provide a range of cost recovery options, allowing the Council to determine appropriate fee levels based on policy direction, including whether to maintain, reduce, or eliminate subsidies for certain services.
Although, the study and most importantly Council’s policy determination for cost recovery level are not going to be complete before the adoption of the budget, staff would have to conservatively build-in some cost-recovery assumptions into FY 2026-27.
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Similarly, the Development Impact Fee (DIF) Study evaluates the one-time fees charged to new development to ensure that growth pays its fair share of the infrastructure and facilities needed to support it. These fees are calculated based on a legally required nexus analysis and must demonstrate a reasonable relationship between the fee charged and the impact of development, consistent with the Mitigation Fee Act. Given the timing of the budget process, staff will incorporate reasonable assumptions for fee adjustments into the FY 2026-27 Base Budget; however, final fee recommendations will be brought back to the City Council through a separate public process, including study sessions and formal adoption hearings. This ensures that the City maintains a transparent, policy-driven approach while positioning itself to improve long-term fiscal sustainability.
NEXT STEPS
Collectively, the strategies outlined above are intended to help reduce the City’s structural deficit and improve long-term fiscal sustainability. However, while these actions are important and necessary, they will only address part of the challenge. Even with successful implementation, the City is likely to continue facing structural imbalance that will require a broader evaluation of service levels to align ongoing operating expenditures with available operating revenues. This process will require a thoughtful, measured, and transparent approach, and will inevitably involve difficult choices.
To support this effort, between now and the June Budget Study Session, all departments will be asked to conduct a comprehensive review of the services they provide and categorize them into three broad groups:
Category 1: Mandated & Public Health and Safety Services Federally, state, or legally required services, and those directly tied to protecting life, property, and public safety.
Category 2: Core / Essential Services
Critical services necessary to maintain basic City operations and community functioning, but not legally mandated.
Category 3: Discretionary Services / Community Enhancements Services that enhance quality of life, community identity, and long-term vibrancy.
As part of this analysis, staff will be evaluating all current vacancies to determine their operational impact and feasibility for potential savings. This review will require coordination with Department Directors to consider service impacts, workload distribution, and long-term organizational needs, with the goal of identifying responsible opportunities to generate budgetary savings while maintaining core service levels.
It is important to recognize that all of these services are valuable and contribute meaningfully to the character and livability of Pacifica. Many discretionary and enhancement services are deeply appreciated by the community and play an important role in maintaining the quality of life residents expect and deserve.
However, this analysis is necessary to provide a clear, transparent framework for evaluating service priorities and identifying potential options to address the City’s structural deficit. This process will help inform future policy decisions and ensure that any adjustments are made thoughtfully, strategically, and in alignment with community values and long-term fiscal Pacifica City Council 9
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sustainability.
Staff will factor in the Council’s feedback on these and any other preliminary budget strategies in the budget development process. On May 11, 2026, the City Council will also consider the adoption of updates to the Strategic Plan and priorities. That strategic framework will serve as a critical roadmap for the organization, outlining the City’s short and long-term priorities and objectives, that also directly translate into the workplan and budget recommendations for the upcoming FY 2026-27 Budget.
On May 11, 2026, staff will also present the FY 2026-27 Base Budget and the recommended funding for the FY 2026-27 Capital Improvement Plan. In subsequent budget sessions, more defined budget options and recommendations will be brought forward before the final adoption of the FY 2026-27 Budget in June.
ALTERNATIVE ACTION:
This item is being presented as informational only and no action is being requested at this time.
RELATION TO CITY COUNCIL GOALS AND WORK PLAN:
The Budget development process serves all five City Council goals.
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, City Manager will be bringing forward the FY 2026-27 Base Budget and more in-depth recommendations for budget strategies, policy options, and service change recommendations at future meetings.
ORIGINATED BY:
Finance Department
ATTACHMENT LIST:
Attachment 1 - Long Term Financial Forecast (PDF)