CITY COUNCIL STAFF REPORT
Meeting Date: October 5, 2026
TO: THE HONORABLE MAYOR AND CITY COUNCILMEMBERS
TITLE: City Debt Financing Options
SYNOPSIS
On June 15, 2026, the City Council Adopted the Biennial Budget for Fiscal Years 2026/2027 through 2027/2028. The City Council understood that an adopted budget was required before the beginning of the new fiscal year but also acknowledged that the budget deficits are not sustainable, which was also reflected in the City Manager’s Summary in the Adopted 1. The City Council, as recommended by the Budget Committee, directed staff to bring back options to address the budget deficits. Staff has prepared various financing scenarios for the City Council’s consideration and discussion. This information was provided to the Budget Committee on September 9, 2026, and September 30, 2026.
BACKGROUND
Adopted Biennial Budget Fiscal Years 2026-2027 - 2027-2028 The Adopted Biennial Budget for Fiscal Years 2026/2027 through 2027/2028 (FY 26/27 & FY 27/28) assumes maintaining service and programs at current levels. The adopted budget incorporates moderate increases for revenues and expenditures based on our consultants, service providers, and consistent with the Updated Long Term Financial Plan FY24/25 through FY28/29.
This could result in budget deficits of $4.1 million in FY 26/27 and $4.7 million in FY27/28, and the budget forecast shows the General Fund declining below $10 million reserve policy threshold by the end of the adopted biennial budget and turning negative by FY 29/30. Staff will continue to review existing funding and expenditure reduction options, but based on the projected budgeted deficits, and in the absence of a new revenue source, reducing the budget deficit would most likely require City Council to consider significant service reductions. 1 Biennial Budget Fiscal Years 2026/2027 – 2027/2028 – Pages ii-vi Financial History
Over the last 10 years, City revenues have grown 4.4% on average. The City Council and staff have managed costs over the last decade with an average increase in expenditures of 4.3%.
However, the costs that continue to rise significantly are CalPERS Unfunded Actuarial Liability (UAL) and insurance premiums, which are both costs beyond City control other than authorizing their payments. The CalPERS UAL and insurance premium payments have an annual average growth of 26% and 27%, respectively, over the last decade.
Adopted Biennial Budget Fiscal Years 2026-2027 - 2027-2028 – Expenditures Reductions The Adopted Biennial Budget incorporated costs reductions that occurred during the budget process from reducing preliminary appropriations to maintaining frozen positions throughout the City, as described below:
Changes from Preliminary Biennial Budget – $294K Reduction:
a. Reduced $155 thousand – reduction for CORE Homeless Program b. Reduced $100 thousand – reduced the transfer for vehicle replacement from $200 thousand annually to $100 thousand per year for both fiscal years c. Reduced $47 thousand – adjusted maintenance staff allocations to other eligible funds d. Reduced $15 thousand – reduced IT services for building software no longer needed e. Increased $23 thousand – MPA increased the insurance premiums for general liability and workers compensation
Frozen or Modified Positions – $1.1M Reduction:
Frozen2:
Police Department:
a. Police Officer - $174K
b. Community Service Officer - $122K
Planning Division:
c. Associate Planner - $147K
Public Works Department:
d. City Engineer - $225K
e. Maintenance Supervisor - $189K
f. Maintenance Worker II - $121K
g. Maintenance Worker I - $92K
Modified Positions:
h. City Treasurer – voters elected to make this position appointed and duties have been added to Finance Division - $6K
i. Senior Civil Engineer position was adjusted to Associate Engineer - $15K to $30K
2 Biennial Budget Fiscal Years 2026/2027 – 2027/2028 – Pages 165-169 Staffing Levels
In comparison to the Biennial Budget for FY 12/13 - FY13/14, authorized budgeted positions in the FY 26/27 Biennial Budget have been reduced in almost every department/division:
City Staff FTE
FY26/27
% FTE
FY26/27
FTE
FY12/13
City Council 5.13 4.1% 5.33
City Manager 5.82 4.6% 5.57
City Attorney 0.20 0.4% 0.60
IT Division 2.10 1.7% 1.50
Finance Division 5.80 4.6% 9.0
HR Division 2.70 2.2% 5.90
Building Division 5.00 4.0% 4.25
Planning Division 6.65 5.3% 8.75
PW – Maintenance Division 18.57 14.8% 21.25
PW – Engineering Division 7.50 6.0% 10.25
Police Department 61.60 49.1% 69.00
Other Funding - Not General
Fund
3.95 3.2%
Total 125.5 100% 141.40
Revenue Options
On September 14, 2026, staff presented the City Council various revenue options for consideration to address the budget deficits. The revenue options provided to the City Council included a sales tax, property taxes, and transient occupancy taxes. Each of them had different assumptions on how the taxes could be determined, voting requirements, possible change in City structure, and the amount of estimated revenue. The following is a summary of those revenue options:
Option Tax Assumption Vote
Requirement
Estimated Revenue
Sales Tax 0.5% Majority or twothirds, depending
on use
$5.5 million
Property Tax -
Parcel Tax
$100 Two-thirds $1.1 million
Property Tax -
Real Property
Transfer Tax
$12 per $1,000 of
Assessed Value and Sale
of 308 homes
Two-thirds plus a
majority vote to
become Charter
City
$3.9 million
Transient
Occupancy Tax
1.0% Majority or twothirds, depending
on use
$0.2 million
Transient
Occupancy Tax -
vacation rental
homes
Current TOT rate of 10% City Council
approval
Presently unknown
DISCUSSION
Measure K
Pleasant Hill voters adopted Measure K, a 20-year, one-half-cent transactions and general use tax (TUT), in November 2016. The tax became effective on April 1, 2017, and will be sunset on March 31, 2037, unless extended by Pleasant Hill voters.
The Measure K revenue has been and will be used for important City services and projects as approved by City Council which include:
o Repaving and maintaining neighborhood streets
o Maintaining and upgrading the City’s storm drains
o Adding new sidewalks, and walking and bike paths
o Construction of a new community library; and
o Funding other city projects and services identified as key priorities.
In August 2020, the City financed the construction of a new library and infrastructure improvements for $26.4 million through a lease financing private placement loan with BMO Bank. The interest rate on the private placement debt is 1.75% per annum and matures in June 2032, with an annual debt service payment of $2.5 million. As of June 30, 2026, the principal balance is $14.1 million.
Financing Options
On September 9, 2026, the Budget Committee reviewed financing options to help address the General Fund deficits in the Adopted Biennial Budget. The City’s consultants NHA Advisors (NHA) completed an analysis considering capacity in Measure K with the final payment of the 2020 Library Private Placement Debt (2020 Library Debt) in June 2032 and the measure continuing to March 2037. NHA provided the following scenarios:
A. Restructure the tax-exempt 2020 Library Debt loan and issuing a new series of taxable debt (structured as lease revenue bonds), both with a final maturity in FY 36/37.
B. Leaving the 2020 loan outstanding and filling the back-end capacity with capital appreciation bonds (CABs; structured as pension obligation bonds) with a final maturity in FY 36/37.
Each of these options would use the City’s debt capacity by extending the $2.5 million annual debt service through the entire period of Measure K, generating approximately $7.0 million in upfront bond proceeds, and depending on use, could create cash flow assistance over 5 to 10 years. For the purposes of its analysis, NHA assumed that the proceeds would be used to alleviate CalPERS pension costs (either through leveraging the City’s Section 115 Trust or through a direct pay down of unfunded liability to CalPERS). The budget relief generated by this approach represents 20 to 25 percent (~$1.2 million) of the City’s total structural deficit (~$5 million) on an annual basis for five years. It is also important to note that none of these options provide any interest savings on the library bonds or pension expenses, but will create additional interest expenses.
The Budget Committee, after reviewing the options, requested additional analysis by restructuring the financing with additional assumptions based on an extension of Measure K, an action that would require voter approval.
On September 30, 2026, the Budget Committee reviewed NHA’s analysis assuming a voterapproved extension of Measure K of various increments of time (i.e. 10, 15, and 20 years), with debt service continuing at the same level ($2.5 million annually) consistent with the current 2020 loan through the debt term of each of these scenarios.
Use of Measure K capacity to fund bond proceeds could generate various amounts depending on the assumptions. The analysis shows that each scenario is not sufficient to address the General Fund structural deficit annually. The scenario that provides the maximum proceeds ($21 million) would require an extension of 20 years and would produce approximately $3.2 million of budget relief annually for five years (about 64% of the annual budget deficit), but an additional $33 million in costs over 30 years. Therefore, the implementation of additional measures, potentially ranging from revenue options to service reductions would still be needed in the future to address the balance of the approximate $5 million annual deficit.
Summary Financing Options
Option Description Funding
Scenario assumes no extension of Measure K (presented at September 9, 2026 Budget Committee Meeting)
Scenario 1 Restructure the 2020 Loan and deposit
the new money capacity in the City’s
Section 115 Pension Trust; withdraw
from the Trust to smooth the City’s UAL
+ debt service payments
$7 million in proceeds and $12
million in additional debt service
payments. Provides funding in first
5 years for approximately $1.2
million annually, but an additional
$3.0 million in costs over 10 years.
Scenario assumes extension of Measure K for 20 Years (presented at September 30, 2026 Budget Committee Meeting)
Scenario 2 Extend Measure K to FY 2057 (20
Years) Restructure the 2020 Loan, and
deposit the new money capacity in the
City’s Section 115 Pension Trust;
withdraw from the Trust to smooth the
City’s UAL + debt service payments
$21 million in proceeds and $62
million in additional debt service
payments. Provides funding in first
five years for approximately $3.2
million annually, but an additional
$33 million in costs over 30 years.
As stated earlier, the various financing options cannot fully address the $5 million average annual deficit and would add costs at higher interest rates attributable to current economic conditions.
NHA stated that this financing strategy could potentially have a negative reception by credit rating agencies and bond investors, since the City cannot completely address its financial issues and would be adding significant costs by restructuring the current library loan and new debt to finance operations. The strategy of financing pension costs is not new, as several agencies in the early 2020s took advantage of low borrowing rates (~2.5% - 4.0%) to refinance some or all of their CalPERS UAL. However, no agencies have executed this type of refinancing in recent years given how high interest rates are (currently 6.0% - 7.0%). Further exacerbating the “net cost” of this potential strategy for the City of Pleasant Hill is the extension of the term by 20 years, which adds significantly to overall interest paid. NHA and the Committee noted that this analysis could be reconsidered in the future, if interest rates were to decline and provide “net savings” to the City, rather than added cost.
The Budget Committee discussed the options with NHA and staff; they concluded that the additional costs outweighed the short-term relief, and additional measures would still be needed to address the City’s finances. The Committee provided direction to staff to present this information to the City Council so that they are aware of the other options under consideration and provide direction to staff, if any.
FISCAL IMPACT
Not applicable - this is an informational staff report only.
PUBLIC CONTACT
Public Contact was made through posting of the City Council agenda on the City’s official notice bulletin board, at the Pleasant Hill Senior Center, and at the Pleasant Hill Police Department. The agenda and staff report are posted on the City’s web page.
RECOMMENDED CITY COUNCIL ACTION
This is an informational item for the City Council’s consideration and discussion; staff is seeking direction, if any.
ATTACHMENT(S)
Public Comment Letters
Prepared by: Erick Cheung, Chief Financial Officer
Approved by: Ethan Bindernagel, City Manager