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: 39 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 16, 2025
SUBJECT:
Fiscal Year 2025-26 Budget, Capital Improvement Program, Gann Limit, and Capital Reserve Contribution – Approval RECOMMENDATION:
Adopt Resolutions to approve the fiscal year 2025-26 operating and capital budgets, the 2025-30 Capital Improvement Program, the fiscal year 2025-26 Gann appropriations limit, and a contribution to the Capital Investment Reserve.
BACKGROUND:
Prior to the Council’s adoption of the fiscal year (FY) 2025-26 budget on June 16, 2025, it holds two public hearings to receive public comment on the proposed budget and Capital Improvement Program (CIP). On April 7, 2025, the Council reviewed proposed updates to the General Fund Reserve Policy and directed staff to incorporate the changes to the FY 2025-26 budget. A preview of the 2025-26 General Fund budget and the 2025–2030 CIP was presented on April 21, 2025, followed by the first public hearing of the FY 2025-26 proposed budget and five-year CIP on June 2, 2025. In addition, the Measure S Oversight Committee recommended that the City Council approve the Measure S-funded programs and capital improvement projects at its meeting on May 27, 2025.
Overall, the Citywide budget for FY 2025-26 totals $333.5 million, which includes an operating budget of $272.0 million and a capital budget of $61.5 million. The proposed FY 2025-26 General Fund budget, including transfers, is $187.7 million.
Key budget highlights are summarized in the City Manager’s Letter of Transmittal, included in the opening section of the proposed budget. Additional details on all the City's revenues and expenditures are also included through the budget book (Attachment 5).
PERSONNEL BUDGET
Proposed personnel changes are included for City Attorney’s Office, Human Resources, and Information Technology departments. Details are provided in the Appendix section of the budget book (Attachment 5).
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).
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 CIP.
General Fund
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The General Fund is the City's primary operating fund. The proposed FY 2025-26 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.
The proposed FY 2025-26 General Fund revenue budget has been revised to $175.8 million, an increase of $3.3 million from the previous estimate of $172.5 million. This adjustment reflects positive developments at the State level, where one-time State General Fund allocations may be used to fully backfill the FY 2023-24 Vehicle License Fee (VLF) shortfall for San Mateo County and its cities. As a result, staff has updated the budget assumption to include the full $6.6 million in VLF backfill, up from the previously assumed 50 percent.
This adjustment strengthens the City’s near-term revenue outlook but does not fully offset the structural imbalance between ongoing revenues and expenditures. With the revision, the projected General Fund deficit before contributions to CIP is still at $3.0 million (Table 1, Row E). After including $8.9 million in CIP contributions, the deficit increases to $11.9 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 percent 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 2024 – a significant revenue loss of $3.0 million. Other revenues are expected to remain flat or grow moderately.
On the expenditure side, the budget includes $175.4 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).
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 percent Hotel Tax Fund to ensure the fund has sufficient funding for debt service. $410,000 to the Equipment Replacement Fund to address building maintenance needs.
General Fund (in millions) 2024-25Adopted Budget
2025-26O riginal Proposed Budget
2025-26R evised Proposed Budget
FY 25 vs. FY26 Change in $ FY 25 vs. FY26 Change in %
Total Revenues A 169.9$ 172.5$ 175.8$ 5.9$ 3.5%Expenditures:Personnel Costs 79.7 80.7 80.7 1.0 1.3%Pension Unfunded Liability (UAL)13.0 13.6 13.6 0.6 4.6%Other Operating Expenditures40.1 42.3 42.3 2.2 5.5%SMC Fire and Legacy Costs36.1 38.8 38.8 2.7 7.5%Total Operating ExpendituresB 168.9 175.4 175.4 6.5 3.8%Transfer for Debt Service C 3.0 3.0 3.0 - 0.0%Transfer to Other FundsD 0.4 0.4 0.4 - 0.0%Surplus / (Deficit) before Contribution to CIPE = A - (B+C+D)(2.4) (6.3) (3.0) (0.6)Less: Transfer to Capital Projects FundF 8.1 8.9 8.9 0.8 9.9%Surplus / (Deficit) G = E - F (10.5)$ (15.2)$ (11.9)$ (1.4)$
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General Fund Deficit and Financial Sustainability Plan
As shown in Table 1, the revised FY 2025-26 General Fund proposed budget reflects a $3.0 million deficit before contributions to capital improvement projects (Row E), a gap that can be managed 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 deficit widens to $11.9 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 $95.7 million in revenues, principally comprised of sewer service fees of $86.2 million. The projected revenues reflect the approved annual rate increase of 3.0 percent 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 5).
Table 2: FY 2025-26 Capital Budget and the 2025-30 Capital Improvement Plan by Function
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General Fund Reserve Policy and Initial Contribution to the Capital Investment Reserve The City reviewed and updated its General Fund Reserve Policy to improve transparency, follow best practices, and support long-term financial stability. The revised policy, presented to Council on April 7, 2025, separates reserves into clearer categories and creates a new Capital Investment Reserve under the Capital Projects Fund as “seed money” for critical, unfunded infrastructure improvements. As part of this update, staff recommends a $25 million initial contribution to the Capital Investment Reserve. This funding comes from General Fund reserves released through the restructuring.
Council supported this approach in April and directed staff to reflect the changes in the FY 2025-26 budget. The $25 million transfer is included in the proposed budget.
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 $145,665,000. Therefore, the City is well below its appropriations limit for FY 2025-26.
BUDGET IMPACT:
The overall proposed FY 2025-26 budget is $333.5 million, comprised of $272.0 million for the operating budget and $61.5 million for the capital budget.
The General Fund is projected to account for $175.8 million in revenues and $187.7 million in expenditures and transfers out, reflecting an anticipated draw on the Budget Stabilization Reserve due to increases in costs of providing City services, and contributions to capital improvement projects. Another major fund, the Sewer Fund, is expected to account for $95.7 million in revenues and $93.6 million in expenditures.
ENVIRONMENTAL DETERMINATION:
This budget adoption 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 – Proposed Resolution: Fiscal Year 2025-26 Operating and Capital Budgets Att 2 – Proposed Resolution: Fiscal Years 2025-30 Capital Improvement Program Att 3 – Proposed Resolution: Fiscal Year 2025-26 Gann Appropriations Limit Att 4 – Proposed Resolution: Initial Contribution to the Capital Investment Reserve Att 5 – Proposed FY 2025-26 Budget Book
STAFF CONTACT
Karen Huang, Finance Director
[email protected]
(650) 522-7110