CITY OF PACIFICA
COUNCIL AGENDA SUMMARY REPORT
5/11/2026
1 SUBJECT:
Fiscal Year 2026-27 Base Budget and Introduction of the 2026-31 Capital Improvement Program
RECOMMENDED ACTION:
Accept the report and provide feedback and direction on the proposed Fiscal Year 2026-27 Base Budget, and introduction of the FY 2026-31 Capital Improvement Program.
STAFF CONTACT:
Yulia Carter, Assistant City Manager
650-501-6004
[email protected]
Marisol Gómez
Finance and Administrative Services Director
[email protected]
BACKGROUND:
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 updated Strategic Plan will be presented for the Council’s adoption on May 11, 2026, in a separate agenda item, with the departmental workplans to follow on June 8th.
As part of this year’s outreach the City conducted a community survey to receive feedback on City service needs and priorities. In our tradition of transparency and engagement around the City’s budget process, the City is launching The Pacifica Discussion 2026 to ensure all residents have an opportunity to voice their priorities. Residents have identified community priorities such as maintaining public safety services, maintaining 911 police, fire and emergency medical response times, attracting and retaining experienced medical responders, preventing further deterioration of streets and roads by paving those in the worst conditions and qualifying for Pacifica’s fair share of matching funds from state and federal governments.
The City continues to work hard to ensure resident priorities are addressed but given the current structural budget deficit the City is facing, core city services will need to be reduced.
Without a new sustainable revenue source, Pacifica will be forced to reduce necessary city services, including public safety, public works, and community services. This could lead to fewer police officers and firefighters keeping our neighborhoods safe, popular community services, public works staff.
Despite the City’s best efforts, Pacifica still has among the worst rated roads in the entire Bay Area, with only 28% of the City’s streets rated as at least “good” and 27% rated as “failed” to “very poor.” Pacifica has a backlog of $84 million in needed street and road repairs and maintenance needs, and without additional locally controlled funding, more than one-third of Pacifica City Council 2
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Pacifica’s streets will be rated as “failed” to “very poor” in five years, with repair costs becoming even more expensive and pushing the backlog up to $123 million in five years.
As for the City’s 911 emergency response and fire services, the current fire stations have no dedicated space for firefighters returning from calls to decontaminate and store personal protection equipment, which increases risk of exposure to carcinogens. Pacifica seeks to provide firefighters facilities that can reduce their risk of exposure to hazardous materials.
The City appreciates the community members who took the time to participate and share their perspectives thus far. 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.
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. Then, at mid-year, staff revisits the projections and reports to the Council any changes needed to reflect new information and keep the City on track. These revised budget estimates help shape the development of the budget assumptions for the following year’s budget. The FY 2025-26 Mid-Year adjustments were presented to the Council on March 9, 2026.
The City’s Long-Term Financial Forecast (LTFF) was developed based on the FY 2025-26 midyear review and presented to Council on March 7, 2026, as part of the Strategic Planning Study Session. 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. Without corrective action, the forecast showed that the City’s reserves could fall below the GFOA-recommended two months of operating expenditures reserves as early as FY 2027- 28 and could be fully depleted by FY 2031-32.
The forecast reflects several ongoing fiscal pressures, including softening sales tax and cannabis revenues, reductions in Transient Occupancy Tax (TOT), business license and permit revenues associated with Short-Term Rental (STR) ordinance changes, and continued uncertainty surrounding Vehicle License Fee (VLF) in-lieu backfill payments from the State in the upcoming years. While the forecast included 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 proposed budget. The City is continuing to engage in coordinated, countywide advocacy efforts to secure this funding.
The preliminary forecast represented a “status quo” scenario at the current level of services, and did not assume ongoing General Fund contributions to the Capital Improvement Program (CIP). Even without additional CIP funding, the General Fund was projected to remain structurally imbalanced, underscoring the magnitude of the City’s fiscal challenges.
The City Council held study sessions on November 10, 2025 and November 24, 2025 to review Pacifica’s long term fiscal sustainability challenges and explore potential short and long-term strategies to address structural budget deficits, limited staffing capacity, and significant unfunded capital needs. These discussions established a shared understanding of the City’s fiscal baseline and identified a range of tools to address structural deficits, limited staffing capacity, and significant unfunded capital needs.
Consistent with the City’s multi-layered Fiscal Sustainability Framework, presented as a fivepiece puzzle requiring multiple strategies working together rather than a single solution, the Pacifica City Council 3
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discussion focused on a comprehensive set of interconnected short- and long-term approaches, including strengthening and diversifying revenue streams, maintaining appropriate organizational investment 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.
The Budget Study Session 1 was held on April 13, 2026, and staff presented the Narrative Budget report outlining the Budget planning process, methodology, timeline, and preliminary budget strategies. The Council reviewed and supported incorporating the following budget strategies into the budget development process:
1. Continue the allocation of Excess Educational Revenue Augmentation Funding (ERAF) to ensure they remain in the General Fund to help address the projected budget deficit.
The Council may provide further direction on whether a portion of these revenues should continue to be allocated to the Disaster Accounting and Housing Action funds.
2. Address Financial Uncertainties Related to Vehicle License Fee In-Lieu Backfill Payments from the State by assigning a portion of the General Fund reserves as assigned fund balance designation to offset the potential loss.
3. Prioritize Revenue-Generating Development to Strengthen the City's Long-Term Financial Base and address the ongoing structural deficit.
4. Complete the Citywide Cost Allocation Plan (CAP) to establish fully burdened service costs, improve transparency in how administrative and overhead costs are allocated across departments, and support more accurate cost recovery and long-term fiscal sustainability.
5. Update the City’s Development Impact Fees and User Fee Schedule to better align fees with the actual cost of services and growth-related impacts, while providing the City Council with policy options related to cost recovery levels and General Fund subsidies.
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 address only part of the challenge.
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Even with successful implementation, the City is likely to continue facing structural imbalance that will require broader evaluation of service levels and alignment of ongoing operating expenditures with available revenues. This process will require a thoughtful, measured, and transparent approach and will inevitably involve difficult choices.
As part of these discussions, the City Council also provided direction in November to further evaluate long-term funding strategies, including the potential feasibility of future revenue measures related to public safety and infrastructure funding, and to engage professional services to support community outreach, public education, and community opinion research efforts.
The goal of this work is to better understand community priorities, service expectations, and community perspectives regarding long-term fiscal sustainability and service priorities.
In response to that direction, the City initiated a community survey effort designed to provide additional insight into community priorities and service expectations. The survey results have since been published on the City’s website and shared through the City’s community newsletter.
The City appreciates the residents who took the time to participate and provide thoughtful feedback, which will continue to help inform ongoing fiscal sustainability and service-level discussions.
As part of the FY 2026-27 budget development process, the City also plans to launch the “Pacifica Discussion” community engagement initiative to continue gathering resident input regarding City service needs, priorities, and potential tradeoffs. The outreach effort is intended to foster continued community dialogue during a challenging economic environment facing both the City and residents alike, while ensuring that future policy and budget discussions remain informed by community values and priorities.
Initial outreach and survey feedback has highlighted strong community interest in maintaining public safety services, preserving police, fire, and emergency medical response times, attracting and retaining experienced emergency responders, and addressing the City’s significant infrastructure needs, particularly the condition of local streets and roads.
As the City moves forward through this year’s budget process, it will continue to prioritize transparency, public engagement, and ongoing communication with the community regarding long-term fiscal sustainability challenges, service priorities, and potential future funding strategies.
DISCUSSION:
This report presents the FY 2026-27 Base Budget reflecting the current level of services and operations and the Introduction of recommended non-discretionary FY 2026-27 Capital Improvement Plan projects included with the Base Budget.
Specific budget options and recommendations will be presented as part of the Recommended Budget at the next budget meeting on June 8th, preceding the final Budget adoption hearing on June 22nd.
A summary of the FY 2026-27 budget schedule is as follows:
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FY 2026-27 BASE BUDGET
The goal of the budget process is to develop a sustainable City Budget through a comprehensive analysis of the City's revenue and service level expenditures to identify necessary service enhancements and/or reduction options, which, when combined, will maintain a balanced budget and ensure fiscal responsibility and alignment with the Council’s strategic priorities.
Staff formulated various revenue and expenditure assumptions to construct the base budget for FY 2026-27. These assumptions were based on known projections and economic conditions and reflect the budget adjustments made by the Council during the mid-year budget review.
The resulting structural surplus or deficit at the base budget level is critical, as it informs discussions about departmental or other program funding beyond the baseline to accomplish identified priorities for the upcoming year.
The General Fund is the City's primary operating fund and is used to account for most day-today activities. It receives unrestricted revenues, and the City's general administrative services, public safety, and community development-related activities such as planning, building, and engineering are budgeted in the General Fund. Revenue sources include but are not limited to property tax, sales tax, transient occupancy tax (TOT), business license tax, and current fees for services. The FY 2026-27 General Fund Base Revenue budget is developed based on the current economic conditions and current projections of the City’s revenue base.
The City's FY 2026-27 General Fund Base Expenditure budget reflects 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 notably, because of the FY 2026-27 budget assumptions used to develop the base budget further described below.
This report presents the FY 2026-27 General Fund Base Revenue Budget of $53.2 million and Base Expenditure Budget of $57.1 million, resulting in an updated structural deficit of approximately $3.8 million between operating revenues and expenditures.
Consistent with previously approved Council direction provided during labor negotiations, the Base Budget also incorporates a projected 5% salary savings assumption, effectively reducing Pacifica City Council 6
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the projected net General Fund deficit to approximately $2.3 million at the current level of services.
This estimate reflects updated revenue and expenditure assumptions since the preliminary Long-Term Financial Forecast presented during Budget Study Session #1, including revised projections related to workers’ compensation premiums and CalPERS Unfunded Accrued Liability (UAL) costs.
The summaries of the General Fund Base Budget Revenues and Expenditures are provided in Attachments 1 and 2. In coordination with other city departments, Finance developed the FY 2026-27 Base Budget assumptions to include all strategies previously approved by the City Council and factor in inflationary conditions.
Below are some key assumptions applied to the FY 2026-27 Base Budget.
FY 2026-27 Base Budget General Fund Revenues Assumptions Revenue estimates have been modified based on the most current information available from department feedback, external sources, and further analysis.
The following revenues are projected to reflect significant changes over FY 2026-27:
• Property Tax is the City's largest revenue source. Historically, Pacifica's property tax base has shown slower growth compared to some other Bay Area cities. For the FY 2026-27 Budget, property taxes comprise approximately 35% of City General Fund revenues. Both secured and unsecured property taxes are levied based on the assessed real property valuation (the basis for property tax levy) as of January 1, 2026.
The FY 2026-27 property tax revenues are conservatively projected at $18.4 million or $0.6 million (3.7%) above the FY 2025-26 Mid-Year Revised Budget of $17.7 million based on the information provided by the County and HdL, the City's property tax consultant.
• Charges for Services are the second largest revenue category, comprising about 17% of the total General Fund revenue budget. They include building, planning, other permits, recreation revenues, rentals, fines, and reimbursements. This revenue category reflects an increase of $1.3 million or 18%. Approximately $0.9 million of that increase is due to incorporating the updated Wastewater Enterprise administrative service charge, derived from the updated cost allocation plan. The remaining charges received a modest increase of 1%. No additional revenue assumptions related to the comprehensive User Fee Study currently underway have been incorporated into the FY 2026-27 Base Budget at this time. The User Fee Study is expected to be presented to the City Council in early FY 2026-27; However, given the magnitude of the City’s projected structural deficit, staff may present preliminary fee adjustment assumptions as part of future balancing strategies for Council consideration during the next Budget Study Session, prior to completion of the full policy review and fiscal impact analysis associated with the study.
• Excess Educational Revenue Augmentation Fund (ERAF) is the third largest revenue category, comprising about 7.3% of the General Fund revenue budget. While Excess ERAF has remained stable in recent years, thus it’s continued use as a Budget Strategy, it was traditionally categorized as one-time funding, it is not considered a reliable revenue source in terms of amount from year to year. The City has seen firsthand how the State’s shifting fiscal policies, such as un-funding the VLF backfill Pacifica City Council 7
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obligations, can impact local revenues. Excess ERAF remains vulnerable to similar policy changes, particularly as the State faces its own ongoing budget challenges.
Consistent with the prior fiscal year budget strategy, the FY 2026-27 Base Budget assumes that Excess ERAF revenues will remain in the General Fund rather than being split between the General Fund, Housing Fund, and Disaster Accounting Fund under the City’s previous allocation methodology. While this approach provides additional support for ongoing General Fund operations and helps address immediate structural budget pressures, it also leaves the Housing and Disaster-related functions without an ongoing recurring revenue source at this time.
• Utility Users Tax (UUT) is now the fourth largest revenue category, comprising about 7% of the General Fund revenue budget. UUT Is projected to increase by 3.5%, based on trends reviewed at the mid-year, or $0.9 million to $3.7 million. The City collects UUT on Gas and Electric at 6.5%, but does not have authority over the utility rates charged by service providers. In recent years, PG&E customers in San Mateo County and throughout Northern California have experienced significant volatility and increases in utility costs associated with wildfire mitigation, infrastructure modernization, and statewide energy reliability investments, all of which directly influence the taxable utility base and resulting UUT revenues.
• Vehicle License Fee (VLF) in Lieu is the fifth largest revenue category that accounts for 6.6% of the General Fund revenues, down from third largest in the prior year. The challenges around the VLF in Lieu revenues have been discussed at length during the mid-year budget review. There has been insufficient ERAF to fund the VLF in Lieu allocation for the past six years, resulting in a ongoing revenue shortfall that are projected to continue.
In the past, the State has backfilled the VLF shortfall, but the State's payment lagged two years behind the shortfall year. The City’s FY 2026-27 gross VLF allocation is estimated at approximately $6.3 million. However, after accounting for the projected current-year shortfall of approximately ($3.9 million) and adding the anticipated FY 2024-25 State backfill payment of approximately $1.06 million expected to be received in FY 2026-27, the City’s net VLF revenue is projected at approximately $3.5 million.
This represents a decrease of approximately $1.1 million, or 24.6%, from the prior year’s net VLF revenue. County projections also indicate that the annual VLF shortfall is expected to continue increasing over time.
As indicated with budget strategy #2, staff will continue designating a portion of the General Fund reserves as assigned fund balance to temporarily offset the potential loss of the backfill if the State does not follow through on its obligations in FY 2026-27.
However, as previously discussed, 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.
• Sales Tax is the City's sixth largest revenue category. At the midyear budget review, staff reported that the sales tax revenues were down, resulting in just over $0.1 million Pacifica City Council 8
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reduction. Based on the most recent discussions with HdL, the City's sales tax advisor, and their sales tax projections, the local sales activities forecast is expected to slightly increase, projecting only a 1.5% or $47k increase over the already reduced FY 2025-26 Budget, leaving the sales tax revenues of $3.1 million essentially at the same level as the Revised FY 2025-26 Budget.
• Measure Y is a ½ cent Transaction & Use Tax that was passed by the voters in the City of Pacifica in November 2022 and went into effect April 1, 2023. Differentiating from the sales tax category above, HdL projects this revenue to increase slightly more over the reduced mid-year level by 2%, or to $2.6 million in FY 2026-27. Measure Y projections are slightly different, as they rely on the countywide pool allocation methodology for certain transactions, including online and out-of-area sales, which can fluctuate based on broader regional and statewide consumer spending trends rather than just local point-of-sale activity.
• Other Taxes have been reviewed for historical averages, economic trends, and the prior year's returns. This includes the following:
➢ Transient Occupancy Tax (TOT) revenue is projected to decline slightly anticipating the additional effects of the Short-Term Rental (STR) Ordinance implementation. At the mid-year the TOT category had shown an increase largely due to STR one-time tax catchup payments from previous cycles. TOT for hotels also showed favorable increases due to newly implemented voluntary compliance agreement with VRBO (HomeAway). STR amounts for the current cycle are trending closer to the projected decrease incorporated with the ordinance change. The FY 2026-27 TOT revenues are projecting a decrease of $0.2 million or 7.8%;
➢ Cannabis Operations Tax is estimated to stay flat at this time. However, staff will be closely monitoring this assumption due to reported decreases in cannabis sales tax revenues by HdL and potential changes to cannabis operators; ➢ Business License Tax is projecting a 2.6% increase to a total of $0.6 million based on continuing compliance efforts provided by HdL; ➢ Franchise Tax is estimated to stay flat with marginal increase of 1.8%, or $20k, to $1.1 million.
• Intergovernmental revenues comprise state and federal government reimbursements for the City’s childcare program, estimated at $2.4 million. However, this category is always reviewed at the midyear budget review following the completion of the audit and reimbursement filings.
• Operating Transfers In this year only includes a transfer from the Measure A Fund to cover a portion of the Public Works street maintenance staff budgeted in the General Fund. The transfer allocation was reduced by approx. $1m from prior years following a review of available Streets and NPDES funding sources as part of the cost allocation plan. Measure A and Measure W revenues allocated by the County have continued to trend downward due in part to population declines, reducing the availability of these restricted revenues to sustain prior-year transfer levels to the General Fund.
FY 2026-27 Base Budget General Fund Expenditures Assumptions Total General Fund Base Budget expenditures are projected at $57.1 million at the Base Budget level, $1.9 million, or 3.5% more than the FY 2025-26 Revised Budget.
Operating expenses are set to remain consistent with the prior year's actuals and mid-year Pacifica City Council 9
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revised budget adjustments. This includes removing one-time budget allocations from last year and accounting for expected inflationary increases.
Attachment 2 demonstrates the General Fund expenditure estimates for FY 2026-27 at the Base Budget level. Below are the key base budget expenditure assumptions:
• Salary and Benefits projections include funding for 202.25 full-time equivalent (FTE) positions citywide and include all current MOU provisions. Funding for overtime and part-time positions remains consistent with the prior year's allocation. • Vacant positions are budgeted at the top step with the "employee family" cafeteria plan assumption for health benefits. Projections also incorporate all current Memorandum of Understanding (MOU) provisions, including merit increases for eligible staff members on their performance anniversary dates.
• FY 2026-27 PERS retirement rates are budgeted as provided by CalPERS for classic miscellaneous and safety members and Public Employees' Pension Reform Act (PEPRA) rates for miscellaneous and safety employees without prior municipal experience or those who have had a break in public service.
Employer Plan FY 2026-27
Miscellaneous 11.86%
PEPRA Safety Fire 13.91%
PEPRA Safety Police 13.91%
CLASSIC Safety Fire 24.43%
CLASSIC Safety Police 27.42%
• PERS Unfunded Accrued Liability (UAL) payment is budgeted at $7.1 million for Safety and Miscellaneous employees, which is a $0.8 million or 13% increase from FY 2025-26. The Base Budget continues to align with the Pension Funding Policy adopted last year, which commits the City to making an additional annual contribution to the Section 115 Trust administered by Public Agency Retirement Services (PARS). The goal is to accumulate reserves equal to 1.5% of the accrued pension liability by FY 2044-45. In compliance with this policy, the FY 2026-27 contribution to the trust was reinstated at $236,000 to support long-term pension obligations. The Base Budget also includes a continuing contribution to PARS in the amount of $283,750, which represents the funding of the Actuarily Determined Contribution (ADC) per the most recent Actuarial Valuation to fund Other Post Employment Benefits (OPEB) unfunded liability, consistent with the Council funding strategy approved in 2022. Attachment 6 provides additional insight into the City’s funding policy. • Most Professional Services contractual obligations were increased by 1.5% over the FY 2025-26 Revised Budget to account for modest inflationary increases unless further cost increases were noted and factored into the Base Budget by operating departments. The 1.5% assumption remains below recent inflationary trends and reflects and effort constrain baseline expenditure growth where feasible. The category also shows a reduction of approx. $1.0 million or (-10.5)%, primarily due to the removal of previously approved one-time requests that are not part of the ongoing base budget assumptions.
• Similarly, most of the Material, Supplies, and Maintenance category assumes a modest 1.5% inflationary increase from the FY 2025-26 Mid-Year Revised Budget, which remains below recent inflationary trends and reflects efforts to constrain baseline expenditure growth where feasible. This category also removes one-time requests that are not part of ongoing base budget assumptions and keeps training and membership Pacifica City Council 10 May 11, 2026
expenditures category flat. As a result, the FY 2026-27 Base Budget allocation for this category is approximately $4.7 million, representing a (-6.6)% decrease over the FY 2025-26 Mid-Year Revised budget.
• Risk Management Premium Increase. The FY 2026-27 general liability and worker’s compensation premiums both increased substantially. The 4% or $100k increase in General liability is due to a combination of a challenging insurance market, particularly in property coverage, and the City’s past claims history. After a few favorable years when the City experienced a reduction in the workers’ compensation premium, the coming year’s early estimate shows a significant increase of nearly $0.4 million or 25% primarily driven by a spike in claims involving extended injury-related leaves that remain open. These open claims have adversely affected the City’s claims history and renewal rates. Staff will continue to closely monitor active claims to bring them to resolution and will continue implementation of the Injury and Illness Prevention Program (IIPP) and other risk mitigation efforts citywide to help prevent future exposure. • The FY 2026-27 Base Budget includes a “status quo” continuing funding for funding of non-profit organizations as directed by Council last year for PRC ($100,000) Pacific Beach Coalition ($10,000) and removed the one-time allocations for Fog Fest and Pride.
• The Utilities expenditure assumptions for Phone/Cable, Water, and Gas & Electric services were increased by 1.5%. Although utility rates can fluctuate from year to year, gas and electric rates should see less volatile spikes in the coming years. Facilities staff continue to monitor these accounts closely and will evaluate usage trends, rate adjustments, and operational impacts throughout the fiscal year to identify any necessary budgetary adjustments.
• The Operating Transfers Out Category accounts for a transfer to the Debt Service Fund to fund Pension Obligation Bonds and other debt service obligations, as well as transfers to the Internal Service Funds for Risk Management programs, Motor Pool operations, and Fire Equipment replacements, totaling $4.3 million. This category reflected a $0.7 million increase over the prior year’s partial one-time reduction in debt service transfers. Last year, the Debt Fund was able to cover a portion of the debt obligations from the fund balance; this year shows a return to the normal debt service level supported by a transfer from the General Fund.
• The Capital Transfers Out Category includes an allocation of $50,000 for the Economic Development project, which is further described in the Capital Improvement Program section of this report. This project is consistent with the placemaking and commercial area revitalization strategies identified in the recently developed Economic Development Work Plan and is intended to support smaller-scale repair, replacement, beautification, and activation improvements that immediately enhance visitor-serving areas and support local businesses. This is the only CIP project receiving General Fund support in FY 2026-27. Although, capital transfers are not considered ongoing operating expenditures and therefore are not included in the calculation of the City’s structural deficit, as previously demonstrated in the Long-Term Financial Forecast, the General Fund does not currently have the capacity to sustain an ongoing General Fundsupported CIP program. This is the only CIP project that the General Fund contributed to this year and is consistent with the prior-year’s General Fund contribution towards CIP.
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Projected Fund Balance Structure - General Fund
After removing one-time expenditures, factoring in the preliminary Budget Strategies, and applying the Base Budget assumptions, the FY 2026-27 Base budget would have a projected deficit of approximately $2.3 million or about 4% of General Fund expenditures.
As noted in the Government Finance Officers Association (GFOA) best practices, “there is a major distinction between a balanced budget that is balanced on the uses of one-time resources and a structurally balanced budget.” Without addressing the City’s ongoing structural deficit, the annual shortfalls may eventually exceed the capacity of internal resource reallocations or reserves, requiring the Council to consider reductions in services and/or staffing levels.
The FY 2025-26 budget was referenced as a tipping point, a year in which Pacifica largely maintained existing service levels and avoided deeper cuts, but only through a combination of one-time or unsustainable strategies, including the use of Excess ERAF or temporary reductions in planned pension or OPEB trust contributions, among other non-structural reductions. However, the FY 2026-27 Base Budget now reflects a projected deficit even after incorporating previously identified balancing assumptions and strategies.
Departmental Service-Level Review & Budget Reduction Process As part of the FY 2026-27 budget development process, departments were asked to review their base budgets and identify potential service reduction options for City Manager review and future Council consideration during Budget Study Session #3.
The current projected General Fund deficit of approximately $2.3 million represents roughly 4% of General Fund operating expenditures. Departments have been asked to identify reduction options totaling approximately $2.8 million, or approximately 5% of General Fund operating expenditures, to provide flexibility as the budget is refined, account for ongoing fiscal uncertainty, and help establish a structural buffer against future projected imbalances identified in the Long-Term Financial Forecast.
This process will also provide the City Manager and City Council with a range of options to make informed policy decisions regarding service levels, organizational priorities, and longterm fiscal sustainability.
The General Fund Budget Target Reduction by Department is listed in the table below, the target amount to about 5% of each department’s base budget:
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The goal of this process is to develop a range of service-level options, both reductions and enhancements-aligned with Council’s strategic goals and service priorities, to achieve a balanced and sustainable budget. The City Manager will evaluate these inputs and present a recommended package for Council consideration. Not all identified reductions may necessarily be implemented; rather, this process is intended to provide a comprehensive set of options for evaluation.
In this context, the City’s focus on economic development initiatives that prioritize revenuegenerating development (Budget Strategy #3) to achieve additional ongoing revenue becomes even more critical. Expanding the City’s ongoing revenue base is essential to achieving long term fiscal sustainability and advancing Strategic Plan priorities without compromising core services.
Again, the numbers presented in this report only reflect the current Base Budget level of services and include funding for non-discretionary capital projects. It does not consider all budget strategies and other recommendations by the City Manager that will be brought forward at future budget meetings for a more in-depth discussion of the proposed budget and the Council's direction on how to reach a balanced and sustainable budget at the desirable level of services.
Service Categorization by Departments
As discussed throughout this report, 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 regarding service priorities, organizational capacity, and community expectations.
To support this effort, all departments were 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.
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The initial results of this citywide exercise are summarized in Attachment 7 and are intended to serve as a foundational planning and policy discussion tool for the next study session and development of the FY 2026-27 budget options. The exercise is also intended to support future discussions regarding service levels, organizational priorities, operational sustainability, and long-term fiscal planning.
The Attachment 7 and below table summarize the initial results of this exercise. The analysis reflects approximately 358 identified departmental services supported by approximately 165.78 General Fund FTEs citywide. Based on the current departmental assessments, approximately 27% of identified services were categorized as mandated or directly related to public health and safety functions, approximately 35% were categorized as core or essential operational services, and approximately 39% were categorized as discretionary or service enhancement activities.
It is important to note, however, that the percentage breakdown of identified services by category does not directly correlate to the percentage of the City’s budget allocated to those services. Many mandated and core operational functions, particularly in public safety, infrastructure maintenance, regulatory compliance, and essential operations are significantly more resource-intensive and personnel-driven than smaller-scale discretionary programs, initiatives, or community enhancement activities. Accordingly, while discretionary or enhancement activities may represent a larger number of individual service entries in the inventory, they may account for a comparatively smaller portion of overall operating expenditures, when core and mandated services continue to comprise the substantial majority of the City’s ongoing budget and staffing commitments.
The exercise also highlights meaningful differences in service composition across departments.
Departments such as Fire, Public Works, Community Development, and Administrative Services contain a comparatively higher concentration of legally mandated or regulatory functions, while departments such as Parks, Beaches & Recreation and Economic & Housing Development contain a larger proportion of discretionary and community enhancement activities that largely contribute to the quality of life, community identity, visitor experience, and long-term sustainability efforts.
This initial effort represents a first internal evaluation intended to encourage broader organizational discussion and strategic thinking regarding how staff time, operational capacity, and financial resources are allocated across the organization. The exercise reflects a combination of ongoing operational services, regulatory responsibilities, community programs, one-time initiatives, and special projects that require ongoing staff capacity and resources on a Pacifica City Council 14 May 11, 2026
day-to-day basis. It is not intended to represent a comprehensive, fully standardized, or exhaustive analysis of every individual service, task, or activity currently performed by City departments.
As departments continue refining services, evaluating operational nuances associated with service levels, staffing requirements, and costs, the categorizations and descriptions may continue to evolve. Accordingly, this initial effort should not be viewed as a final or exhaustive inventory of all City services, but rather as the first phase of an ongoing organizational and fiscal sustainability evaluation process. This analysis is a foundational step and planning framework to help inform the development of departmental service adjustment recommendations that will be presented for Council consideration at Budget Study Session #3 in June.
CAPITAL IMPROVEMENT PROGRAM
As reported previously, the City does not have a designated funding source to fund the robust Capital Improvement Program at the desired level. Due to the City's financial limitations and limited staff capacity to manage major capital projects, the FY 2026-27 CIP Program recommendations are only limited to projects with available grant funding sources, legally mandated projects, or projects that pose an immediate threat to public health and safety. These projects are considered non-discretionary.
Below is a preliminary list of NEW non-discretionary projects proposed for FY 2026-27 funding included with the Base Budget:
General Capital Projects (Fund 322 funded by General Fund):
1. Economic Development Infrastructure Improvements Project ($50k) - Consistent with the recently approved Economic Development Work Plan, this project supports smaller-scale repairs, replacements, upgrades and beautification improvements to utilities, streetscapes, pedestrian access, and other improvements to enhance visitorserving areas, support local businesses and strengthen commercial vitality in key business districts citywide.
General Capital Projects (Other Funds):
2. Terra Nova Blvd and Oddstad Blvd Pedestrian Crossing Improvements (Fund 213 $50k) - install rectangular rapid flashing beacons (RRFB) and speed humps to increase visibility for pedestrians
3. FY 2026-27 Pavement Resurfacing Project ($1.6M > Fund 210 $950k, Fund 211 $100k, Fund 213 $620k) - rehabilitate the pavement along roads designated in the 5- year paving plan. This project will also include base repair as well as installation of thermoplastic traffic striping, markings and pavement markers
4. FY 2026-27 Sidewalk, Curbs, and ADA Ramps Improvement Project (Fund 211 $495k) - repair and replace damaged sidewalks, curbs, and gutters at priority locations throughout the city in compliance with ADA, federal and state standards
5. Oceana Bike Lanes ($92k > Fund 211 $9k, SCMTA Grant $83k) - new dedicated Class II bicycle lanes along Oceana Boulevard to improve safety, accessibility, and multimodal connectivity. The SCMTA Grant funds the feasibility study for the bike lanes.
Pacifica City Council 15 May 11, 2026
Wastewater Projects (funded by Enterprise Sewer Utility Fund 518):
6. Pump Station Flowmeter Project ($550k) - Flowmeters at the Linda Mar and Rockaway Sewer Pump Stations are no longer working. Flow monitoring is critical for the operation of the wastewater collection system and the Calera Creek Water Recycling Plant.
The following continuing non-discretionary Projects that are currently underway and will require additional funding in FY 2026-27:
General Capital Projects (funded by the General Fund): None at this time General Capital Projects (Other Funds):
7. Manor Drive O/P Improvements (Fund 312 $5.5M) - widen the vehicular overcrossing over Highway 1 at Manor Drive, install traffic signals to better facilitate traffic, install pedestrian and bicycle improvements
8. Annual Pavement Striping & Marking Refresh Project - (Fund 213 $75k) - refresh centerlines, bicycle lanes, edgelines, crosswalks, stop bars and more striping on City roads
Wastewater Projects (funded by Enterprise Sewer Utility Fund 518):
9. Anza and Linda Mar Storm Water Pump Station SCADA Connection and Improvements $100k - Connecting the Anza and Linda Mar Stormwater Pump Stations to the Wastewater SCADA System.
10. Calera Creek and Wetlands Maintenance $150k - On-going maintenance and monitoring requirements for the restored Calera Creek wetlands.
11. Calera Creek Water Recycling Plant Permit Update $20k - Updating the CCWRP’s National Pollutant Discharge Elimination System (NPDES) permit.
12. Calera Creek Water Recycling Plant Piping Improvements Project $100k - Various piping systems around the Calera Creek Water Recycling Plant are nearing the end of their useful lives.
13. CCWRP Blower Replacement $100k - On-going purchases to replace aging blowers and motors for the Calera Creek Water Recycling Plant.
14. CCWRP Electrical Condition Assessment Project $300k - Continuous electrical improvements at Calera Creek Water Recycling Plant.
15. CCWRP Environmental Compliance Project $50k - On-going needs to address environmental compliance related issues.
16. CCWRP Headworks Feasibility and Improvements $2.4M - The CCWRP design was based on screenings at the major pump stations. This Project will evaluate adding bar screening facilities at the Plant, addressing headworks channel lining degradation, and installing new grit equipment.
17. CCWRP Photovoltaic System Improvement Project- $1M - Replacing aging solar panels and identifying areas for additional panel coverage.
18. CCWRP Process Optimization Projects $50k - Projects to improve the efficiency and effectiveness of wastewater treatment operations.
19. Calera Creek Water Recycling Plant (CCWRP) Pump Replacement $50k - On-going purchases to replace aging pumps and supporting equipment at the Calera Creek Water Recycling Plant.
20. CCWRP R&R Project $250k - Ongoing Operations and Maintenance Projects to ensure reliable wastewater treatment operations.
21. Collection System Projects $300k - Projects to repair and/or replace the aging sewer mainlines and pump stations around the City. Projects will be evaluated and selected Pacifica City Council 16 May 11, 2026
annually.
22. Collection System Rehabilitation & Replacement Projects: Vallemar and Rockaway Beach Avenue $12.4M - Work includes the replacement of approximately 26,000 LF sewer main and appurtenant work in the Vallemar neighborhood. This project is intended to be funded by a USEPA WIFIA Loan.
23. Crespi to Anza Sewer Replacement Project $500k - Rehabilitation and repair of the 12 inch sewer main along Pacifica State Beach and Highway 1.
24. Digesters - ATAD Modification Phase 3 $200k - This project will continue to make necessary improvements to ensure safe and reliable operations of the autothermal thermophilic aerobic digesters.
25. Easements R&R Project $200k - Replacing sanitary sewer lines in private utilities easements will improve system reliability and reduce the cost of system maintenance.
26. Lateral Grant Assistance $200k - The City provides a voluntary private service lateral replacement program to reduce the addition of I&I from defective private service laterals.
27. Linda Mar Pump Station Rehabilitation and Repair Project $1M - Completing engine pump, electrical and controls improvements to the Linda Mar Pump Station.
28. Sewer System Master Plan Update Phase 2 (New Development Data) $50k - Updating the existing Sewer System Master Plan and incorporating new development data.
29. Sharp Park Pump Station R&R Project $1M - The Sharp Park Pump Station's odor control system is at the end of it's useful life. The pump station wetwell does not meet current design standards. This project will improve odor management around the pump station and improve reliable operations.
Staff have identified probable funding sources for these projects as listed in Attachment 4.
These include Federal and State Grants, County contributions, Gas Tax, and various other tax measures. Other projects are funded from available fund balances of various capital and special revenue funds, including Gas Tax, Measure W, Street Improvements, and Highway 1 Funds. All capital transfers and appropriations for projects referenced above and in Attachment 4 have already been included in the Base Budget. However, once the Council provides additional direction regarding this list or other CIP projects, staff will incorporate the final FY 2026-27 CIP Budget recommendations in the complete five-year CIP program.
Other Previously Approved active CIP projects that are non-discretionary ongoing projects not requesting funding, rollover projects that were not started last year due to staffing constraints, unfunded discretionary projects, and projects awaiting FEMA review are included in Attachment
4. Additionally, Attachment 5 provides information on the currently unfunded projects and estimates the funding needed to address the City’s infrastructure needs totaling over $303 million within the next five years.
OTHER FUNDS - BASE BUDGET
The Base Budget revenue and expenditure for all other funds have also been updated and are summarized in Attachment 3. This includes all the Special Revenue, Debt Service, Enterprise, and Internal Service Funds. The full budget discussion will include "All Funds," which we typically divide into the General Fund (the majority in terms of dollars and completely discretionary) and Other Funds (largely designated for specific purposes) as well as the Capital Budget (significant projects expected to begin or continue in 2026-27). The Base Budget figures include the CIP budget allocations.
Staff used the same basic assumptions for all other funds to factor in a 1.5% cost of living increase for the contract services category and for material, supplies, and maintenance.
Enterprise Funds consist of Sewer/Wastewater and Beach Parking funds. Enterprise funds Pacifica City Council 17 May 11, 2026
are used for services that are financed and operated as a private business enterprise. The FY 2026-27 total enterprise funds base expense budget is $40.3 million, which is 34% of the City's overall Budget. Sewer funds are used to account for sewage collection, treatment, major replacements, and maintenance and protection improvements to the sewer system. Sewer charges of $20.7 million are based on a 3.5% rate increase in FY 2026-27. The sewer operating expenditures include the same inflationary base budget assumptions. The Salaries and Benefits costs of approximately $6.5 million are based on 31.5 FTE allocated to the Sewer Fund and include all current MOU provisions. The Beach Parking Fund is used to account for parking services to residents and visitors. The Beach Parking revenues have declined in recent years and no longer fully cover the staffing and operating costs allocated to the fund. Staff will be conducting additional analysis of this fund as part of this budget development process to ensure the fund remains balanced and financially sustainable in future years. The combined Enterprise Funds revenues are projected at $35.4 million.
Special Revenue and Capital Funds are used to account for specific revenue sources or financial resources for which expenditures are restricted by law or administrative action for specific purposes. This Category includes Gas Tax and Streets Funds, General Capital, Drainage, Housing Action, Housing Successor, Housing in-lieu, Parking in-Lieu, Park in-Lieu, PB&R Special Revenue and Roy Davies Trust, Disaster Accounting, and other funds. The FY 2026-27 expenditures of $10.3 million for this Category represent around 9% of the City's total Budget.
Internal Service Funds serve the City’s needs and are used to account for Citywide services on a cost-reimbursement basis. These funds accommodate the motor pool, employee selfinsured dental benefits, and risk management needs of the City and are supported by the funds that receive benefits. The FY 2026-27 budget for this Category is $6.3 million, which is 5% of the City's Budget.
Debt Service Fund is used to account for long-term debt obligations. The FY 2026-27 budget for the debt service category is based on the updated debt service. The total budget for this Category is $2.9 million, representing 2.5% of the City's Budget.
NEXT STEPS
At the June 8, 2026 Budget Study Session 3, staff will present the proposed FY 2026-27 Operating Budget, including recommended balancing strategies, and service-level recommendations informed by the service categorization and budget review process described in this report.
Departments are currently developing recommendations related to service-level adjustments and operational priorities for City Manager’s review. Over the coming weeks, the City Manager will meet with each department to evaluate requests, organizational impacts, and funding constraints in order to formulate a balanced and fiscally sustainable budget recommendation.
Due to significant ongoing fiscal challenges and structural budget pressures, the proposed FY 2026-27 Budget is expected to include a number of service reductions and operational adjustments that may significantly impact service delivery levels across the organization. The City Manager’s final recommendations will be guided by the City Council’s strategic priorities, fiscal sustainability goals, and the community impacts associated with proposed service-level changes.
FISCAL IMPACT:
Pacifica City Council 18 May 11, 2026
There is no action associated with this item; this is an informational presentation only with Council comments being sought to help guide the preparation of the Proposed Budget for future Council consideration.
ORIGINATED BY:
Finance Department
ATTACHMENT LIST:
Attachment 1 – FY 2026-27 General Fund Baseline Budget Revenue Summary (PDF) Attachment 2 – FY 2026-27 General Fund Baseline Budget Expenditures Summary (PDF) Attachment 3 – FY 2026-27 Fund Balance Summary (PDF)
Attachment 4 - FY 2026-27 Discretionary Projects and List of Active (PDF) Attachment 5 - List of Unfunded CIP Projects (PDF)
Attachment 6 – Unfunded Pension and OPEB Liability Funding Strategy (PDF) Attachment 7 - Service Categories Summary and List - Mandated, Core, Enhancements (PDF)