CITY OF SAN MATEO
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CITY OF SAN MATEO
Agenda Report
City Hall
330 W. 20th Avenue
San Mateo CA 94403
www.cityofsanmateo.org
Agenda Number: 22 Section Name: {{section.name}} Account Number: 10-2021 File ID: {{item.tracking_number}} TO: City Council
FROM: Alex Khojikian, City Manager
PREPARED BY: Finance Department
MEETING DATE: June 02, 2025
SUBJECT:
Fiscal Year 2025-26 Proposed Budget and 2025-30 Capital Improvement Program – Review RECOMMENDATION:
Review the fiscal year 2025-26 Proposed Budget and the 2025-30 Capital Improvement Program and conduct a public hearing prior to the scheduled adoption at the June 16, 2025 City Council meeting.
BACKGROUND:
Prior to the Council’s scheduled adoption of the fiscal year (FY) 2025-26 budget, two public hearings are held to invite community input on the proposed operating and capital budgets.
FY 2025-26 is the second year of the City’s two-year 2024-26 business plan, which focuses on developing the capital budget. Although the operating budget is not the primary focus during this budget cycle, staff conducted a thorough review of the City‘s tax revenues and adjusted budget assumptions to reflect current economic uncertainty. The proposed budget also reflects the implementation of the initial phase of the City’s Financial Sustainability Plan, which include cost recovery enhancement, refined cost allocation, and expenditure controls.
On April 7, 2025, the Council reviewed proposed updates to the General Fund Reserve Policy. On April 21, 2025, Council received a preview of the FY 2025-26 General Fund operating budget and the 2025-30 Five-Year CIP. Staff has since incorporated Council feedback into this proposed budget, which was published on the City’s website on May 29, 2025.
The FY 2025-26 city-wide budget (for all funds) totals $333.5 million, which includes an operating budget of $272.0 million and a capital budget of $61.5 million. The General Fund budget (including transfers) is proposed at $187.5 million. Key budget highlights are summarized in the City Manager’s Letter of Transmittal, included in the opening section of the proposed budget book (Attachment 1).
PERSONNEL BUDGET
Proposed personnel changes are included for Human Resources, Information Technology, City Attorney Office, and Parks and Recreation departments. Details are provided in the Appendix section of the budget book (Attachment 1).
Proposed changes include the reallocation of two existing positions and the addition of one limited-term position:
Reallocate 1.0 FTE Assistant City Attorney to 1.0 FTE Senior Assistant City Attorney. Reallocate 1.0 FTE System Analyst I/II to 1.0 FTE Senior System Analyst. Add 1.0 FTE Human Resources Technician (two-year limited term) to support recruitment, onboarding, training and benefit administration for the new Wastewater Treatment Plant (funded by the Sewer Fund).
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BUDGET HIGHLIGHTS
This agenda report provides a high-level summary of the FY 2025-26 proposed budget of the City’s two major operating funds: the General Fund and the Sewer Fund, as well as an executive summary of the 2025-30 five-year capital improvement program (CIP).
General Fund
The General Fund is the City's primary operating fund. The proposed FY2025-26 General Fund budget totals $187.7 million, which includes $175.4 million for operating expenditures and $12.4 million in transfers out, including $3.0 million transfers to Debt Service Funds and $8.9 million for capital improvement projects (CIP).
Total General Fund revenues are budgeted at $172.5 million, an increase of $2.6 million (1.5%) compared to the FY 2024- 25 adopted budget. With expenditures exceeding revenues, the projected budget deficit before contributions to capital improvements is $6.3 million (Table 1, Row E). After including $8.9 million in contributions to the Capital Improvement Program (CIP), the deficit increases to $15.2 million in FY 2025-26 (Table 1, Row G).
Table 1: General Fund Proposed Budget FY 2025-26
To account for current economic uncertainty and risks related to the Property Tax In-Lieu of Vehicle License Fee (VLF) backfill, the City has adopted conservative revenue assumptions. Key assumptions include:
Property tax: $86.0 million, assuming 4.0% assessed value growth. Sales tax (including the ¼ cent Measure S): remaining flat at $27.6 million. Real Property Transfer Tax (RPTT): $8.6 million, returning to baseline after one-time spikes in FY 2024-25 Transient Occupancy Tax (TOT): $4.0 million, down from the normal $7.0 million due to the closure of a major hotel in May 2023 – a significant revenue loss of $3.0 million. Other revenues are expected to remain flat or grow moderately.
On the expenditure side, the proposed budget includes $175.3 million in operating expenditures, key components include $80.7 million in personnel costs, reflecting projected increases in salaries and wages, healthcare, and pension costs; $13.6 million is the General Fund’s share of the required payment for unfunded pension liability; $42.3 million in other non- personnel operating costs; and $38.8 million for Fire Services provided by the San Mateo Consolidated Fire Department (SMC Fire).
General Fund (in millions) 2024-25Adopted Budget
2025-26Proposed Budget Change in $ Change in % Total Revenues A 169.9$ 172.5$ 2.6$ 1.5%Expenditures:Personnel Costs 79.7 80.7 1.0 1.3%Pension Unfunded Liability (UAL)13.0 13.6 0.6 4.6%Other Operating Expenditures 40.1 42.3 2.2 5.5%SMC Fire and Legacy Costs 36.1 38.8 2.7 7.5%Total Operating ExpendituresB 168.9 175.4 6.5 3.8%Transfer for Debt Service C 3.0 3.0 - 0.0%Transfer to Other Funds D 0.4 0.4 - 0.0%Surplus / (Deficit) before Contribution to CIPE = A - (B+C+D)(2.4) (6.3) (3.9)Less: Transfer to Capital Projects FundF 8.1 8.9 0.8 9.9%Surplus / (Deficit) G = E - F (10.5)$ (15.2)$ (4.7)$
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Total transfers out from the General Fund are projected to be $12.4 million, allocated as follows:
$8.9 million for capital improvements, including $3.0 million from Measure S and $875,000 from Measure CC funds (both sub-funds of the General Fund);
$2.69 million from Measure S funds for debt service related to flood control and street reconstruction projects; $350,000 to the 2% Hotel Tax Fund to ensure the fund has sufficient funding for debt service; and $410,000 to the Equipment Replacement Fund to address building maintenance needs.
This proposed budget also reflects Council direction by incorporating updates to the General Fund Reserve Policy, which are included in the Appendix section of the budget book (Attachment 1).
General Fund Deficit and Financial Sustainability Plan
The FY 2025-26 proposed budget includes a projected General Fund deficit of $15.2 million, based on the assumption that the State will provide a 50% (or $3.3 million) backfill for the FY 2023-24 VLF shortfall of $6.6 million. If the State does not provide any backfill, the deficit could widen to $18.5 million. Conversely, if the City receives a full backfill, the deficit would improve to $11.9 million. In all scenarios, the City will need to draw from its Budget Stabilization Reserve to maintain core services and continue investing in critical infrastructure projects.
The General Fund ended FY 2023-24 with a deficit1 and is projecting a $6.4 million deficit in the current FY 2024-25. With the FY 2025-26 proposed budget, this marks the third consecutive year of General Fund operating in deficit. As shown in Table 1, the projected deficit before contributions to capital improvement projects (Row E) is $6.3 million, a gap that is manageable through budget savings and targeted cost control. However, once the $8.9 million contribution to the Capital Improvement Program (Row F) is included, the total shortfall widens to $15.2 million (Row G).
This trend signals a structural issue: the City’s current revenue base is no longer sufficient to support both ongoing operations and the long-term investments needed for critical infrastructure. Addressing this imbalance require a sustained, strategic response over multiple years.
To that end, staff has begun implementing the Financial Sustainability Plan, which focuses on improving cost recovery, managing expenditures, and aligning service levels with available resources. Fortunately, the City enters this period of fiscal tightening from a position of strength thanks to the long-standing financial discipline of both the City Council and administrations, we have healthy reserves that provide us with a runway to take deliberate, long-term actions to balance the budget and restore fiscal stability.
Sewer Fund
The FY 2025-26 proposed budget projects $92.7 million in revenues, principally comprised of sewer service fees of $86.6 million. The projected revenues reflect the approved annual rate increase of 3.0% for FY 2025-26 to support the capital improvements and maintain ongoing services. Total expenses are projected to be $93.6 million, comprised of $36.6 million in operating expenses, $29.1 million in CIP, and $27.8 million in debt service. CIP expenses will largely be funded by the low-interest loans from the state and federal government and primarily reflects the commitment to complete the Clean Water Program, a comprehensive plan to update the wastewater collection system and wastewater treatment plant (WWTP).
Capital Budget and Five-Year CIP
The 2025-30 Five-Year CIP demonstrates the City’s commitment to investing in the community, with a total of $270.0 million allocated to the CIP for the next five years. Each fiscal year, the City Council appropriates new funding for Year One of the five-year CIP. The proposed FY 2025-26 capital budget is $61.5 million as summarized in the table below, as well as in detail in the proposed budget book (Attachment 1). 1 If excluding the unrealized gain from investment.
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Table 2: FY 2025-26 Capital Budget and the 2025-30 Capital Improvement Plan by Function
GANN LIMIT
In addition to the adoption of the FY 2025-26 budget and capital improvement program, there will be one other action requested of Council as part of the overall budget adoption process on June 16th. This action is to establish the City’s appropriations limit for FY 2025-26. The appropriations limit, which was originally established in 1979 by Proposition 4, places a maximum limit of the appropriation of tax proceeds that can be made by the state, school districts, and local governments in California. California Government Code requires that the City annually adopt an appropriations limit for the upcoming fiscal year. The appropriations limit for the City for FY 2025-26 is $286,074,454, while the proceeds of taxes subject to the appropriations limit is $142,338,000. Therefore, the City is well below its appropriations limit for FY 2025-26.
BUDGET IMPACT:
There is no direct budgetary impact resulting from this report. The proposed 2025-26 budget contains a consolidated summary of proposed appropriations for 2025-26 in the Budget Overview section of the document, with comprehensive financial information at the fund level (Fund Information section) and the department level (Departments section) included as well.
ENVIRONMENTAL DETERMINATION:
This proposed FY 2025-26 budget is not a project subject to CEQA, because it is a government fiscal activity which does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment. (CEQA Guidelines Section 15378(b)(4).)
NOTICE PROVIDED
All meeting noticing requirements were met.
ATTACHMENTS
Att 1 - FY 2025-26 Proposed Budget
STAFF CONTACT
Karen Huang, Finance Director
[email protected]
(650) 522-7110