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Preliminary FY 2026 2nd Quarter Financial Status
General Fund
Overall, the General Fund is tracking below the adopted revenue estimates and within the adopted expenditure levels. Actual FY 2026 total revenues and expenditures increased by 9.0% and 2.9% respectively compared to the same period in FY 2025. General Fund revenues increased overall compared to the prior year, with growth observed in property tax, charges for services, transient occupancy tax, utility user tax, permits and licenses, documentary transfer tax, and business tax.
Sales tax remained relatively flat. The adopted FY 2026 revenue budget expected even higher revenue trends, and so a budget amendment is recommended to adjust the budget estimates to a lower level. As previously discussed with Finance Committee and Council in the long range financial forecast (LRFF), this FY 2026 Mid-Year recommend adjustments that are measured and aligned with the City’s overall financial outlook.
Revenues
The FY 2026 Adjusted revenue budget, prior to changes recommended in the Mid-Year Review, totals $270.3 million (excluding Operating Transfers‐in), of which $107.0 million or 39.6% of the budget, has been collected as of the end of the 2nd quarter compared to 37.8% collected in prior year. Revenue receipt is seasonal with non-linear collection. Business Tax is included in totals and used for specific programs related to public safety, affordable housing and homeless services, and transportation and grade separation projects, per Council direction. A Reserve for Business Tax Revenue is used to ensure that business tax revenue is accounted separately from the Budget Stabilization Reserve (BSR) to be used in accordance with approved programs in the previously mentioned areas.
Adjustments to align revenue estimates based on current experience through the first half of FY 2026 and forecasted through year-end are recommended in this Mid‐Year Budget Review, including adjustments to reduce revenues by $10.3 million for Sales Tax ($9.0 million decrease) and Property Tax ($1.3 million decrease).
Table 1 below outlines General Fund revenue performance, as of the end of the 2nd quarter, December 31, 2025, compared to the adjusted budget. The adjusted budget does not assume staff’s recommended adjustments presented in this Mid‐Year report as these changes have not been approved by the City Council.
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Table 1
Property Tax
The FY 2026 Budget is $73.6 million, a $4.2 million or 6.1% increase from the FY 2025 actual receipts of $69.4 million. Property Tax revenues are collected and allocated by the County and are received by the City in two periods during the fiscal year, generally beginning in late November and again in the Spring. The County’s November forecast is consistent with assumptions included in the Long Range Financial Forecast, which was developed using County data available as of September. At this stage, the County has published the tax roll and Staff recommends aligning the City budget revenues accordingly thereby reducing FY 2026 Property Tax estimates by $1.3 million, from $73.6 million to $72.3 million. With this adjustment, Property Tax revenues are still projected to increase year over year, though at a more moderate level than the adopted budget.
Educational Revenue Augmentation Fund (ERAF) - The City has set aside $7.1 million in reserves to address ongoing uncertainty related to the calculation of ERAF distributions. This includes pending litigation between Marin County and the California State Controller regarding the methodology used to calculate excess ERAF, which could have broader implications for counties statewide. A court hearing on this matter is expected to continue in March 2026. Staff will continue to monitor developments and update assumptions as additional information becomes available.
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Sales Tax
The FY 2026 Adopted Budget is $36.4 million, an increase of 3.29% compared to the actual Sales Tax receipts of $35.2 million in FY 2025. As of the 2nd quarter, actual receipts are 30.7% compared to 28.2% of budget; however, this Midyear report includes a decrease of $9.0 million in Sales Tax revenue, consistent with the assumptions previously presented to the Finance Committee on November 18, 20251, and incorporated into the FY 2027-36 Long Range Financial Forecast.
The adjustment reflects updated sales tax projections indicating a decline of approximately $9.0 million in FY 2026, or more than 20%, driven by potential one-time adjustments and lower ongoing allocations to the City. Beginning in FY 2027, sales tax revenue is projected to remain approximately $5.0 million lower annually, or over 10%, compared to prior estimates. These changes are primarily due to revised regulations used by the California Department of Tax and Fee Administration (CDTFA) in apportioning sales tax revenue from the leasing and new auto sectors. Sales Tax performance continues to evolve based on consumer activity and state allocation methodology, and staff continues to coordinate with the State and business community to better understand these impacts.
Transient Occupancy Tax (TOT)
The FY 2026 Budget is $29.1 million in TOT revenue, consistent with FY 2025 actual receipts of $29.0 million and above pre‐pandemic collections of $25.7 million in FY 2019. TOT performance is primarily driven by hotel operating metrics, including average daily room rates and occupancy.
December TOT revenue is not included in the Mid-Year report due to timing of collections. From July to November, the average occupancy rate is 85.5% (compared to 71.4% the prior fiscal year), and the average room rate is $274 (down from $290 the prior fiscal year). Year-to-date collections represent approximately 43% of the annual budget compared to prior year of 41%, given current trends TOT is projected to meet or exceed current FY 2026 budget estimate. This is an improvement from the current long-range financial forecast estimate.
Utility User Tax (UUT)
The FY 2026 Budget is $21.4 million, a $1.0 million or 5.11% increase compared to $20.4 million in FY 2025 actual receipts. UUT is calculated as a percentage of utility charges billed to customers for services and is primarily driven by customer usage and utility rates. As of the 2nd quarter, actual receipts are $10.0 million, which is $0.6 million or 6.2% higher than the same period of the prior year at $9.4 million. This increase reflects FY 2026 adopted utility rate increases, normal fluctuation in utility consumption and billing cycles. Based on current trends, staff does not recommend adjustments to the adopted budget and will continue to monitor collections throughout the remainder of the fiscal year.
Documentary Transfer Tax (DTT)
1 Finance Committee, November 18, 2025, Item #2
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The FY 2026 Budget totals $8.5 million, representing a $0.1 million, or 1.8%, increase over FY 2025 actual receipts of $8.4 million. Through the second quarter, cash receipts total $5.0 million, which is 58.8% of the FY 2026 adjusted budget and $1.0 million, or 24.2%, higher than receipts through the second quarter of FY 2025. DTT revenues are highly variable, as collections depend on both the number and value of property transactions. Staff continues to monitor these receipts closely due to significant fluctuations that can occur from changing market conditions. Based on receipts reported to date, staff recommends maintaining DTT revenue at the FY 2026 Adopted Budget level and continue to monitor collections throughout the remainder of the fiscal year.
Return on Investments
The FY 2026 Budget is $3.7 million, a $0.2 million or 0.56% increase from FY 2025 actual receipts which were also $3.7 million. As of the 2nd quarter, cash receipts total $1.98 million, or 53% of the FY 2026 budget. Beginning in August 2025, the City transitioned from managing investments in- house to Chandler Asset Management to provide active investment management2, cash flow forecasting, and investment advisory services. While this transition is expected to increase the City’s return on investments over time, the benefits will occur gradually as existing holdings mature, and the portfolio is repositioned to the new strategy. Investment revenues in the current year are tracking in line with the adopted budget, and no material change is expected in FY 2026.
Higher investment earnings are anticipated beginning in FY 2027 and will be incorporated into the FY 2027 Proposed Budget. Staff will continue to monitor investment performance through quarterly reporting.
Business Tax
The FY 2026 Adopted Budget includes $6.7 million for Business Tax revenue. As of the 2nd quarter, collections total $1.8 million or 27.1% of the FY2026 budget. This is consistent with historical collection patterns and reflects the timing of quarterly Business Tax payments, which are received in arrears. Early fiscal year receipts are mostly attributable to prior-year activity, as taxes due June 30 are payable beginning July 1 with a 30-day grace period through July 30. Based on payments received to date and expected upcoming filings, staff anticipates revenues will align with adopted budget levels and will continue to monitor collection trends.
Measure K (Business Tax) was approved by voters in November 2022 to provide additional funding for critical public safety needs; transportation safety improvements and grade separations; and affordable housing and unhoused services. The first Business Tax payment was due on January 1, 2024, for the calendar year of 2023, with quarterly payments thereafter. Measure K included a multi-year phase-in of the tax rate, with incremental increases applied annually. FY 2026 represents the full fiscal year in which the Business Tax is fully phased in at the voter-approved rate of $0.075 per square foot.
2 Finance Committee, October 21, 2025, Item #2:
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Charges for Services
The FY 2026 Budget assumes $44.2 million in Charges for Services, an increase of $5.0 million, or
12.8%, compared to FY 2025 actual receipts of $39.2 million. Current year-to-date receipt is 42% compared to 39% in the prior year. The primary drivers for higher year-over-year increase include zoning and plan check ($1.8 million), paramedic service fee ($1.4 million) reflecting new first responder fee and increased number of transports, and recreation programming and drop-in admissions ($0.6 million). Based on current receipt trends and due to unpredictable nature of some revenues (i.e. permit and medical transport), revenues are projected to meet the FY 2026 budget estimate.
Permit & License
The FY 2026 Budget assumes an estimate of $11.1 million in permit and license revenue, which aligns with the $10.6 million FY 2025 actual receipts. Permits and Licenses revenue totaled $5.65 million in Q2 FY 2026, an increase of $1.11 million (24%) compared to Q2 FY 2025. The increase is driven almost entirely by Building New Construction Permit revenue, which rose by $1.13 million due to the timing and scale of development activity. Several smaller permit categories declined year over year, partially offsetting gains. Overall, growth reflects concentrated new construction activity. Given current permits and license receipts and unpredictable nature of such revenues, it is projected to meet current FY 2026 budget estimate.
Expenditures
Overall General Fund expenditures are currently expected to remain within the FY 2026 Adjusted budget levels of $287.5 million (excluding transfers to infrastructure or other funds). General Fund expenditures (excluding operating transfers) for second quarter are 2.9% higher than the prior fiscal year and are tracking at 45.9% of the Adjusted Budget (excluding encumbrances). This trend exceeds prior fiscal year expenditure levels which were at 44.8% at the end of the 2nd quarter in FY 2025. This is still below the 50% par level that is expected halfway through the fiscal year, and staff will continue to monitor expense trends and inform Council regarding anticipated savings or overages compared to budgeted levels.
Table 2
Salaries and Benefits
Expenditures FY 2026 FY 2025 Inc/(Dec) % change FY 2026 % FY 2025 % Police 30,155$ 30,414$ (259)$ -0.9% 59,899$ 50.3% 56,388$ 53.9% Fire 30,000 28,688 1,312 4.6% 59,504 50.4% 55,441 51.7% Community Services 21,491 20,325 1,166 5.7% 44,815 48.0% 42,553 47.8% Public Works 12,818 11,541 1,277 11.1% 28,813 44.5% 27,805 41.5% Planning and Development Services 11,582 11,081 501 4.5% 29,782 38.9% 29,336 37.8% Library 6,613 6,496 117 1.8% 13,085 50.5% 12,840 50.6%
Administrative Services 5,756 5,650 106 1.9% 12,039 47.8% 12,154 46.5% All Other Departments 13,462 13,973 (511) -3.7% 39,541 34.0% 49,605 28.2%
Total Expenditures 131,877$ 128,168$ 3,709$ 2.9% 287,478$ 45.9% 286,122$ 44.8% General Fund Expenditures
FY 2026 2nd Quarter YTD
(000's)
2nd Quarter Actuals Adjusted Budget
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As a service driven organization, the largest expenditure is salaries and benefits. Preliminary salaries and benefits expenditures through December 2025 are approximately $95.8 million, or
50.7% of the $189.0 million FY 2026 Budget, compared to $99.0 million or 54.4% in the same period in the prior fiscal year. As of February 2026, the citywide vacancy was 126 positions or
11.5% vacancy rate. See Table 3 below for more detailed information regarding citywide vacancies by department and bargaining unit as of the beginning of February. Given the fiscal condition of the City, all recruitments are subject to review and approval by the Hiring Review Committee and further consideration of governmental efficiencies.
Table 3
Citywide Vacancies by Department
Public Safety Overtime
Table 4
Department General Fund Other Funds Grand Total
Administrative Services Department 6.00 1.50 7.50
City Attorney's Office 1.00 1.00
City Clerk's Office 1.00 1.00
Community Services Department 5.75 5.75
Fire Department 9.00 9.00
Human Resources Department 0.00 1.00 1.00
Information Technology Department 2.00 2.00
Library Services Department 5.00 5.00
Office of Transportation 3.00 3.00
Planning and Development Services 6.00 1.00 7.00
Police Department 15.00 15.00
Public Works Department 5.00 18.50 23.50
Utilities Department 46.00 46.00
Grand Total 56.75 70.00 126.75
Vacancy % 9.4% 14.2% 11.5%
Vacancy % (w/o Public Safety) 6.9%
Police and Fire
Salaries and Overtime Expense
FY 2026 2nd Quarter YTD
(000's)
FY 2026 FY 2025 % change FY 2026 % FY 2025 %
Inc (Dec)
Police - Salaries 10,536$ 10,562$ -0.2% 23,037$ 46% 22,548$ 46.8% Police - Overtime 2,225 2,162 2.9% 4,574 49% 5,903 36.6% Total Police 12,761 12,724 0.3% 27,611 46% 28,451 44.7% Fire - Salaries 10,947 9,808 11.6% 22,924 48% 21,628 45.3% Fire - Overtime 2,310 3,010 -23.3% 3,080 75% 2,721 110.6% Total Fire 13,257 12,818 3.4% 26,004 51% 24,349 52.6% Total Public Safety
Salaries & Overtime 26,018$ 25,542$ 1.9% 53,615$ 48.5% 52,800$ 48.4% 2nd Quarter YTD Actuals Adjusted Budget
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Police Department overtime is 3% higher than prior fiscal year and represents 49% of the adjusted budget. As of first quarter of FY 2026, the Department had 15 vacancies, or 11% of 139 FTE positions (12 officers and 3 dispatchers). Overtime is used to cover vacancies, training, leave and major incidents, with most costs driven by police officer staffing. For example, in January 2026 only 57 of 84 authorized non-management officers (68%) were available for duty; the remainder were vacant, on long-term leave, in training, or at the academy. Additional information regarding public safety overtime tracking is included in Attachment C.
Fire Department overtime is generated to backfill vacancies on shift. Each day, 25 positions are required to keep Fire Engines and Ambulances operational. Any vacancy must be filled to keep the unit in service. Vacancies result from open positions, injuries, employees in training, and approved leave. In the second quarter of FY 2026, 10 new firefighters entered the Fire Academy; overtime is required to cover their shifts until they graduate in February 2026. All Strike Team deployments are paid at overtime and reimbursed by the State. There have been six deployments in FY 2026 that are pending reimbursement. Additional information regarding public safety overtime tracking is included in Attachment C.