FEBRUARY 23, 2026 www. paloalto.gov
FY 2026
Mid-Year Budget
Update
City Council Item #8
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
In January, staff provided updates to the City Council on the FY 2027 Long Range Financial Forecast. Today’s presentation continues the discussion with the Mid-Year Budget Update.
2 3
SUMMARY OVERVIEW
1. Fiscal Overview & Technical Adjustments
➢ General Fund Revenue Realignment, Reserve Management
& Expenditure Status
➢ Enterprise and Other Fund Adjustments
2. Pension Liability Management (Section 115 Trust)
3. FY 2027 Efficiency & Multi-Year Outlook
Staff recommends the City Council receive the FY 2026 Mid-Year Review and various budget amendments.
4 1. FISCAL OVERVIEW & TECHNICAL ADJUSTMENTS
Overall, the General Fund is tracking
below adopted revenues and within
expenditure levels, consistent with
prior updates to Finance Committee
and City Council.
Both use of reserves and technical
realignments effectively closes the
mid-year revenue gap.
The $0 net impact to the General
Fund, after use of the Budget
Stabilization Reserve (BSR).
5 1. GENERAL FUND: REVENUES, RESERVES & EXPENDITURES
Navigating a $9.0 million sales tax decline through disciplined reserve management to preserve fiscal stability.
6 1. GENERAL FUND EXPENDITURE STATUS
Cost-containment
across departments
is resulting in total
citywide
expenditures
remaining below
the 50% par level at
mid-year.
7 1. ENTERPRISE AND OTHER FUND ADJUSTMENTS
Technical adjustments to other funds:
Finance Committee – (Nov 18, 2025) Review and Recommendation:
• Continue to implement Retiree Benefit Policy
• Attain 90% funded status (all funds) before 15-year Policy goal; • Reduces pension liability and employer costs
• Data-driven modeling and actuarial reports
• Section 115 Trust Disbursements:
• FY26 Mid-Year – disburse $10M of the estimated $130M balance • ADC for FY27 – FY 31 ($6M to $10/year)
• ADP Annually (Incorporated in budget development)
2. PENSION LIABILITY MANGEMENT (115 TRUST)
8 9
Reporting
Every 4 years, progress update
Annual report during budget
development – balance,
contribution & transmission
Service Delivery Outcome
If contributions impacts service
delivery, Staff to identify
impacts & mitigations through
budget process.
Fiscal Impacts
If General Fund’s revenues are
projected to decline more than
7.5% year-over-year, Staff to
return to Council on
recommendation.
Funding Goals &
Timeline
Reach 90% within 15
years (2036)
Funding Components
City Normal Cost at 5.3% vs
CalPERS Discount Rate 6.8%
Excess BSR contribution
Use of Funds
Transmit excess of 1 year REC
Requires Council Authority
CMO to identify impacts on funding goals &
timeframe to modify transmission to PARS
2. RETIREE BENEFIT FUNDING POLICY – GOALS & PRINCIPLES
2. PARS PENSION TRUST – CONTRIBUTIONS & ACCRUED SAVINGS • FY25-26 One-Year Required Employer Cost (REC) is $70M. PARS balance $109.9M (6/30/25) exceeds REC by $40M.
• Performance: 1/1/26 Balance $127M ($95M contributions, $33M earnings)
• Performance %: 1yr: 14.2%, 3yrs: 12.9%, 5yrs: 5.67%
• Per policy, Section 115 disbursement would have occurred back in FY24
10 11
3. FUTURE OUTLOOK & GOVERNMENT EFFICIENCY
Increased government efficiency to solve projected multi-year structural gap.
FISCAL OUTLOOK
• FY26 deficit partially solved with further budget cuts ($6M cut Sept 2025, $3.4M on-going ($2.4M GF, $1M CIP)
• FY27 outlook $14.9M structural deficit and continues through FY32 • Requires continued fiscal discipline and more solutions previewed in LRFF.
GOVERNMENT EFFICIENCY
• Alignment with Council Priority & Objectives; CMO Budget Transmittal and Budget Deliberation & Approvals
• Streamline operations
• Reduce professional service costs & improve contract management • Increase revenues
• Improve facility utilization
12 RECOMMENDATION
Staff recommends that the City Council receive the FY 2026 mid-year budget review and:
• Approve amendments to the Fiscal Year 2026 Budget Appropriation for the funds and capital projects identified in Attachment A, Exhibits 1 and 2 (requires 2/3 approval);
• Consolidate the remaining $6.0 million in the Uncertainty Reserve with the Budget Stabilization Reserve (BSR) to streamline reserve administration, closing the Uncertainty Reserve; and
• Authorize the City Manager or their designee to transmit $10.0 million from the City's PARS Pension Trust to CalPERS as an Additional Discretionary Payment (ADP)
Next Steps
Annual Budget
Process
Feb-April 2026:
Budget
development, Rate
& Fee Updates
May 2026:
FY 2027 Proposed
Budget
Jonathan Rewers
Budget Manager
[email protected]
Robert Valentukonis
Budget Manager
[email protected]