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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: 18 Section Name: PUBLIC HEARING Account Number: 10-2021 File ID: 26-11252 TO: City Council
FROM: Alex Khojikian, City Manager
PREPARED BY: Finance Department
MEETING DATE: June 01, 2026
SUBJECT:
Fiscal Year 2026-27 Proposed Budget and 2026-31 Capital Improvement Program — Review RECOMMENDATION:
Review the fiscal year 2026-27 proposed budget and the 2026-31 Capital Improvement Program budget and conduct a public hearing prior to the scheduled adoption at the June 15, 2026, City Council meeting.
BACKGROUND:
Prior to the City Council’s scheduled adoption of the fiscal year (FY) 2026-27 budget, it holds two public hearings to receive public comment on the proposed operating and capital budgets. This review of the budget is the first of those two public hearings.
FY 2026-27 is the first year of the City’s two-year 2026-28 business plan and the focus is on developing the City‘s operating budget. As part of developing the budget, each Department reviewed their operating budgets in detail and proposed two- year budgets within the parameters set by the Finance Department. For the FY 2026-28 Business Plan, Finance staff directed Departments to maintain their baseline budgets which included making no new requests and working to maintain cost increases. The proposed budget also reflects the implementation of parts of the City’s Financial Sustainability Plan, including cost recovery enhancements and expenditure controls. In addition, although the CIP is not typically emphasized during this budget cycle, staff did conduct a thorough review of the CIP given the completion of the facilities assessment and the need to prioritize facility improvements and funding within the newly established Capital Investment Reserve.
On April 20, 2026, Finance staff presented the City Council with a preview of the FY 2026-27 General Fund operating budget and the 2026-31 Five-Year CIP. Additionally, staff provided four scenarios for the General Fund ten-year forecast to illustrate potential fiscal outcomes based on property tax in-lieu of vehicle license fees (VLF) shortfalls and a potential elimination of Real Property Transfer Tax (RPTT). Following this meeting and the feedback provided by the City Council, staff worked to finalize the proposed budget. In addition, on May 21, 2026, the Measure S Oversight Committee met to review the proposed budget and CIP for the Measure S funds. At the meeting, the Committee voted to recommend the proposed budgets to the City Council and the Committee expressed their interest in prioritizing projects that fund pedestrian and bicycle safety.
The proposed FY 2026-27 citywide budget (for all funds) totals $356.5 million, which includes an operating budget of $290.3 million, and a capital budget of $66.3 million. The General Fund budget (including transfers) is proposed at $190.9 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), which was published on the City’s website on May 28, 2026. Additional details on all the City's revenues and expenditures are also included throughout the budget book.
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CITYWIDE PERSONNEL BUDGET
As part of the FY 2026-27 budget, proposed personnel cost increases have been incorporated into the budget. Personnel costs, including salaries, benefits and pension costs; increased about 9% as a whole due to previously negotiated COLA and equity increases as well as anticipated increases in health care and pension expenses. In addition, proposed personnel updates have been incorporated in the budget for the following departments: the City Manager’s Office, Finance Department and Community Development. Upon approval, these classification changes will become effective as part of the adoption of the FY 2026-27 budget. Additional details on personnel changes are included in the Appendix section of the budget document.
Proposed changes include the reallocation of three existing positions and the addition of three unfunded positions:
Reallocate 1.0 FTE Sustainability Analyst to 1.0 FTE Business Manager. Reallocate 1.0 FTE Business Systems Analyst to 1.0 FTE Management Analyst I/II. Reallocate 1.0 FTE Payroll Technician I/II to 1.0 FTE Payroll Analyst. Add 3.0 FTE Fellows, unfunded, to address strategic plan priority initiatives as one-time funding is available.
These proposed changes will have limited impact on the General Fund since the three new positions are unfunded, and most of the reallocated positions are funded by some General Fund as well as other funding sources. The anticipated net fiscal impact of all these changes is a savings of about $30,000 across funding sources.
CITYWIDE OPERATING BUDGET
The proposed budget for FY 2026-27 shows an increase of about 5% to Citywide operating costs. The increase is mostly due to inflationary cost increases of about 4% for outside goods and services and increases between 9-20% for utilities and insurance throughout the City. In addition, a few one-time purchases for equipment and vehicles are included in this year’s budget to support storm and sewer maintenance.
FUND HIGHLIGHTS
The two most important funds to highlight for this budget are the two major operating funds: the General Fund and the Sewer Fund. This next section provides a high-level summary of the proposed FY 2026-27 budgets for these two funds and an executive summary of the 2026-31 five-year capital improvement plan.
General Fund
The General Fund is the City's primary operating fund and includes all the General Fund sub-funds; Measure S, Downtown Services, Recreation Services and Golf funds. The proposed FY 2026-27 General Fund budget totals $190.9 million, which includes $183.8 million for operating expenditures and $7.1 million in transfers out, including $2.5 million transfers to Debt Service Funds and $3.95 million for capital improvement projects (CIP). Below is a table summarizing the General Fund revenue and expenditures budget.
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Table A – General Fund Revenue and Expenditures
Total General Fund revenues are budgeted at $173.9 million, a decrease of $1.9 million (-1.1%) compared to the FY 2025- 26 adopted budget. 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: $85.0 million, which includes 3.2% annual growth rate in secured property tax and the assumption that the State of California will not amend its FY 26-27 budget to backfill the City’s share of the FY 24-25 Property Tax In-Lieu of VLF shortfall amounting to $6.9 million. Sales tax (including the ¼ cent Measure S): remaining relatively flat at $27.9 million. Real Property Transfer Tax (RPTT): $9.0 million, returning to baseline after one-time spikes in FY 2024-25 Transient occupancy tax (TOT), franchise fees and business license tax are expected to bring in $4.1 million, $3.5 million and $8.3 million, respectively.
Other revenues are expected to maintain stable with moderate growth.
Total General Fund expenditures are budgeted at $190.9 million with key components including $83.7 million in personnel costs, reflecting projected increases in salaries and wages, healthcare, and pension costs; $14.3 million in the General Fund’s share of the required payment for unfunded pension liability; $45.1 million in other non-personnel operating costs; and $40.7 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 $7.06 million, allocated as follows:
$3.95 million for capital improvements, including $0.7 million from Measure S and $1.25 million from Measure CC funds (both sub-funds of the General Fund);
$2.5 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; Given that projected expenditures exceed projected revenues by $17 million, it is anticipated that a draw on the Budget Stabilization Reserve will be required to balance the General Fund FY 2026-27 proposed budget. This budget is developed based on the assumption that the State will not fund the VLF shortfall of $6.9 million in FY 2026-27. If this assumption does not hold, the General Fund deficit could decrease to a $10 million deficit. However, in either case, the City will need to draw on the Budget Stabilization Reserve to maintain core services and continue providing for critical facility and
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infrastructure needs.
At the same time, this budget does not assume that the proposed initiative that would eliminate the Real Property Transfer Tax passes or does not pass. Although this proposed ballot initiative poses a critical threat to the City’s third largest source of revenue, the proposed measure would go into effect two years after passage and would not impact the FY 2026-27 budget.
This year’s budget continues the trend of projecting a General Fund deficit for the City. The trend reflects the structural deficit that has been anticipated as the City’s revenue base grows more slowly than expenses and is no longer sufficient to support operating expenses and needed investments in critical infrastructure. To address this development, the City has already begun working on its financial sustainability plan which includes pursuing activities and initiatives such as additional expenditure controls, additional revenue enhancements, cost recovery and accurate cost allocation, grant opportunities and economic development. Fortunately, the City has built a strong financial position with healthy reserves due to the fiscal prudence of the current and previous City Councils and administrations. These reserves provide staff with some room to take deliberate, long-term actions to balance the budget and restore fiscal stability.
Sewer Fund
The FY 2026-27 proposed budget projects $97.2 million in revenues, principally comprised of sewer service fees of $92.2 million. The projected revenues reflect the approved annual rate increase of 3.0% for FY 2026-27 to support the capital improvements and maintain ongoing services. Total expenses are projected to be $109.5 million, comprised of $40.5 million in operating expenses, $40.6 million in CIP, and $28.3 million in debt service. CIP expenses will largely be funded by proceeds from the low-interest loans from the state and federal government and reflect both the commitment to complete the Clean Water Program, a comprehensive plan to update the wastewater collection system and wastewater treatment plant (WWTP), and new post Clean Water Program improvements that are needed to update the older solids processing infrastructure within the WWTP operation.
Capital Budget and Five-Year CIP
The 2026-31 Five-Year CIP demonstrates the City’s commitment to investing in the community, with a total of $349.2 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 2026-27 capital budget is $66.3 million as summarized in the table below, as well as in detail in the proposed budget book (Attachment 1).
Table B: FY 2026-27 Capital Budget and 2026-2031 Five Year Capital Improvement Plan by Category
GANN LIMIT
In addition to the adoption of the FY 2026-27 budget and capital improvement program, there will be one other action requested of Council as part of the overall budget adoption process on June 15th. This action is to establish the City’s appropriations limit for FY 2026-27. The appropriations limit, which was originally established in 1979 by Proposition 4,
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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 2026-27 is $304,406,300, while the proceeds of taxes subject to the appropriations limit is $145,978,000. Therefore, the City is well below its appropriations limit for FY 2026-27.
BUDGET IMPACT:
There is no direct budgetary impact resulting from this report. The proposed 2026-27 budget contains a consolidated summary of proposed appropriations for 2026-27 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 FY 2026-27 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 2026-27 Proposed Budget
STAFF CONTACT
Abby Veeser, Director, Finance
[email protected]
(650) 522-7102