JANUARY 20, 2026 www.cityofpaloalto.org
FY 2027 – FY 2036
LONG RANGE
FINANCIAL FORECAST
City Council Item #12
FINANCIAL PLANNING CYCLES & CONVERSATIONS
2025 Sept
• CalPERS Actuarial
Valuation Update
2025 Nov
• Major Tax Revenue Update
• Retiree Benefit Funding Update
2025 Dec/Jan (CC)
• Long-Range Financial Forecast
• Q1 FY2026 Fiscal Status
• FY2025 Audited Financials
• Council Priorities/Objectives
2026 Feb (CC)
• FY2026 Mid-Year Budget
(Q2 FY2026 Fiscal Status)
2026 Feb - Apr
• Staff Budget Development
• Utility Financial Forecast &
Rates
• Fee Updates
2026 May
• Proposed Budget
• Q3 FY2026 Fiscal Status
2026 June
• Budget
Adoption
2025 June
• FY2026 Budget Adoption
2026 Oct
• ALM
Update
At the prior Finance Committee meeting, staff provided updates on Major Tax Revenues and Retiree Benefits. Today’s presentation continues the discussion with the Long-Range Financial Forecast.
1 2
SUMMARY OVERVIEW
1. Finance Committee review and recommendation
2. The Economy
3. FY 2027 - 2036 Long-Range Financial Forecast (LRFF)
4. Budget Balancing Strategies
5. Budget Stabilization Reserve (BSR)
6. FY 2027 Budget Development Guidelines
7. Recommendation
Finance Committee & Staff recommend that the City Council review and approve the FY 2027 – 2036 Long-Range Financial Forecast (LRFF) and forward to the City Council and FY 2027 Annual Budget Development Guidelines and Using the LRFF as the Baseline for developing the FY2027 Budget.
3 FINANCE COMMITTEE REVIEW & RECOMMENDATION
December 2, 2025, Finance Committee reviewed and recommends the LRFF for Council approval, with additional consideration:
1. Services/Programs and Council Priorities – funding limitations
2. Property Tax & Sales Tax Projections – reduced revenues
3. TOT – primary drivers
4. Vacancy Rate
5. Historical trends 2019 onwards – Attachment B historical staffing
6. Known Unknowns – alternative funding sources
4 1. ECONOMY
While the national economy shows strength
(GDP growth to 4.0%), the local Bay Area
economy is projected to experience a sluggish
recovery, indicating specific softness in the
regional tech sector .
• Palo Alto’s economy's recovery is projected to be
sluggish, lagging national growth due to regional
tech labor market softness,
• The Fall 2025 UCLA Anderson Outlook that expects
a structural upturn for California only starting late
2026 and accelerating in 2027.
5 2. FY 2027 – 2036 LONG RANGE FINANCIAL FORECAST (LRFF) • Projected deficit from FY 26 – FY 32
• FY26 Revenue declines + slow recovery
• BSR reserve management
Highlights
The forecast shows a structural deficit beginning with a $14.9 million gap in FY 2027, driven by revenues that are structurally outpaced by rising expenditure costs.
6 2A. LRFF REVENUES
The LRFF projects total revenues of $305.1M in FY 2027, representing a $1.9M reduction from the FY 2026 Adopted Budget ($307.0M). This decline is primarily driven by the $5.1M reduction in Sales Taxes, which necessitates advancing budget balancing strategies. *Property Tax (6.9% CAGR) projects moderated 1.8% growth to $74.9M (from $73.6M adopted). This $74.9M projection is based on a 4.8% increase from the revised $72.3M FY 2026 baseline (per County Tax Roll) and assumes mid-4% in the long-term projections.
7 2A. REVENUE GROUPINGS – MAJOR TAX ($ MILLION)
8 2A. LRFF REVENUE DETAILS ($ MILLION)
Revenue & Other Sources FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034 FY 2035 FY 2036 Sales Taxes $32.3 $33.3 $34.3 $35.3 $36.1 $37.0 $37.8 $38.5 $39.3 $40.1 Property Taxes $74.9 $78.1 $81.4 $84.9 $88.6 $92.5 $96.6 $100.9 $105.5 $110.3 Transient Occupancy Tax $31.0 $32.3 $33.8 $35.4 $37.1 $39.1 $41.1 $43.3 $45.5 $47.9 Documentary Transfer Tax $9.0 $9.3 $9.5 $9.8 $10.2 $10.5 $10.9 $11.3 $11.7 $12.1 Utility Users Tax $23.0 $24.7 $25.4 $27.9 $29.5 $30.5 $31.7 $32.9 $34.4 $35.8 Business Tax $6.7 $6.8 $7.0 $7.2 $7.4 $7.6 $7.8 $8.0 $8.2 $8.4 Other Taxes and Fines $0.8 $0.8 $0.8 $0.8 $0.8 $0.8 $0.8 $0.8 $0.8 $0.8 Subtotal: Taxes $177.7 $185.3 $192.2 $201.3 $209.7 $218.0 $226.7 $235.7 $245.4 $255.4 Charges for Services $45.1 $46.2 $46.9 $47.7 $48.3 $48.7 $49.0 $49.3 $49.6 $49.9 Permits and Licenses $11.8 $12.0 $12.1 $12.3 $12.5 $12.7 $12.7 $12.8 $13.0 $13.1 Return on Investments $3.7 $3.8 $3.9 $4.1 $4.2 $4.4 $4.6 $4.8 $5.0 $5.2 Rental Income $17.0 $17.5 $18.1 $18.8 $19.4 $20.1 $20.8 $21.5 $22.3 $23.1 From Other Agencies $1.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 Charges to Other Funds $15.8 $16.2 $16.7 $17.0 $17.4 $17.5 $17.8 $17.9 $18.0 $18.0 Other Revenue $2.5 $2.6 $2.6 $2.6 $2.6 $2.6 $2.7 $2.7 $2.7 $1.9 Subtotal: Non-Tax $97.0 $98.3 $100.5 $102.6 $104.5 $106.1 $107.7 $109.1 $110.6 $111.3 Operating Transfers-In $30.4 $33.2 $34.6 $36.7 $38.8 $41.2 $44.1 $45.7 $48.6 $51.4 TOTAL REVENUE $305.1 $316.9 $327.2 $340.4 $353.0 $365.2 $378.4 $390.3 $404.6 $418.8 9 2B. LRFF EXPENDITURES
Total expenditures are projected to grow 4.3% to $320.0M in FY 2027. This growth rate, driven by personnel costs and long-term liabilities, structurally outpaces the projected 1.3% revenue growth, leading to the projected deficit. Includes $6m reduction in FY 26 - 28. *Assumptions NOT INCLUDED in the expenditure forecast are included as Attachment E.
10 2B. LRFF EXPENDITURE DETAIL ($ MILLION)
Expenditures & Other Uses FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034 FY 2035 FY 2036 Salary & Benefits $198.9 $203.6 $209.9 $216.2 $220.1 $223.7 $225.5 $228.7 $230.2 $232.3 Contract Services $32.1 $33.1 $35.2 $36.6 $38.0 $39.6 $41.1 $42.8 $44.5 $46.3 Supplies & Material $4.0 $4.1 $4.2 $4.3 $4.5 $4.7 $4.9 $5.1 $5.3 $5.5 General Expense $10.5 $10.8 $11.1 $11.5 $11.9 $12.3 $12.7 $13.1 $13.6 $14.6 Rents & Leases $1.5 $1.6 $1.7 $1.7 $1.8 $1.8 $1.8 $1.9 $1.9 $0.2 Facilities & Equipment $0.7 $0.7 $0.7 $0.7 $0.7 $0.7 $0.7 $0.7 $0.7 $0.7 Allocated Charges $32.4 $33.7 $35.2 $36.7 $38.2 $38.8 $38.9 $40.0 $41.4 $50.0 Subtotal: Non S&B $81.2 $84.0 $88.1 $91.5 $95.1 $97.9 $100.1 $103.6 $107.4 $117.3 Operating Transfers-Out $6.3 $6.3 $6.4 $6.4 $6.7 $6.6 $6.8 $7.0 $7.2 $5.6 Transfer to Infrastructure $33.6 $35.8 $38.1 $40.5 $41.8 $43.4 $45.0 $46.7 $48.5 $50.4 TOTAL EXPENDITURES $320.0 $329.7 $342.5 $354.6 $363.7 $371.6 $377.4 $386.0 $393.3 $405.6 11 3. BALANCING STRATEGY($ MILLION)
The options below provide the City Council with a strategy to eliminate the deficit in the short and long term. FY 2027
Revenues
Explore new/updated fees and other revenues $0.8
Budget Stabilization Reserve (BSR) $2.0
Budget Reductions
FY 26 Approved Reductions thru FY 32
($6 m w/$3.4 m on-going ~ $2.4m GF + $1 m CIP)
$3.4M in base
Budget Reductions
FY 27 Additional Reductions thru FY 32 (To be determined during FY27 Budget Development) $7.0 CIP Reductions
FY 2027 Additional Reduction to Capital (To be determined during FY27 Budget Development) $1.0 Pension Cost
Reduce Additional Discretionary Payment (ADC) $3.6
Pension Cost
Reduce Additional Discretionary Payment (ADP) $0.5
BUDGET STRATEGY TOTAL: $14.9
Remaining Surplus/(Deficit) $0.0
12 3. BALANCING STRATEGY($ MILLION)
The options below provide the City Council with a strategy to eliminate the deficit in the short and long term.
FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032
Revenues
Explore new/updated fees and other revenues $0.8 $0.8 $0.8 $0.9 $0.9 $0.9 Budget Stabilization Reserve (BSR) $2.0 $0.0 $0.0 $0.0 $0.0 $0.0 Budget Reductions
FY 26 Approved Reductions thru FY 32
($6 m w/$3.4 m on-going ~ $2.4m GF + $1 m CIP)
$3.4M in
base
$3.4M in
base $3.4 $3.4 $3.4 $3.4
Budget Reductions
FY 27 Additional Reductions thru FY 32 $7.0 $7.0 $7.0 $5.8 $2.3 $2.1 CIP Reductions
FY 2027 Additional Reduction to Capital $1.0 $1.0 $0.0 $0.0 $0.0 $0.0 Pension Cost
Reduce Additional Discretionary Payment (ADC) $3.6 $3.6 $3.6 $3.6 $3.6 $0.0 Pension Cost
Reduce Additional Discretionary Payment (ADP) $0.5 $0.5 $0.5 $0.5 $0.5 $0.0 BUDGET STRATEGY TOTAL: $14.9 $12.9 $15.3 $14.2 $10.7 $6.4 Remaining Surplus/(Deficit) $0.0 $0.1 $0.0 $0.0 $0.0 $0.0 13 4. BUDGET STABILIZATION RESERVE (BSR) ($ MILLION)
BSR - Projected Ending Amount
($million)
FY 2026, Actual Ending BSR $58.9
Additional BSR (Adopted FY26 Budget) $0.2M $0.2
Use of BSR FY26 Budget Amendments -$0.3
FY 2026, Adjusted BSR $58.8
BSR – Policy Analysis (Projections):
Recommend Roll Uncertainty Reserve (UR) into BSR $6.0M
FY 2026, BSR Projected Ending Balance (before revenue decline) $64.8 Projected Use of BSR: FY 2026 revenue decline (partial offset with BSR) – one-time sales tax contingency may need other resources including Section 115 trust -$6.0
Projected use of BSR: FY 2027 -$2.0
FY 2027, Project BSR ending (June 2026) $56.8M
(18.5%)
7 5. FY 2027 BUDGET DEVELOPMENT GUIDELINES (Attachment A) 14 15
6. RECOMMENDATION
The Finance Committee and Staff recommend the City Council:
Accept the General Fund Long Range Financial Forecast (LRFF) for Fiscal Year 2027-2036 (Attachment A) and the FY 2027 annual Budget Development Guidelines (Attachment B) and direct staff to use this forecast as the starting point for the initiation of the FY 2027 budget.
Next Steps Annual Budget Process
• Feb 2026: FY 2026 Mid-Year Budget
• May 2026: FY 2027 Proposed Budget
Jonathan Rewers
Budget Manager
[email protected]
Robert Valentukonis
Budget Manager
[email protected]