CITY OF SAN MATEO
CITY OF SAN MATEO
Agenda Report
City Hall
330 W. 20th Avenue
San Mateo CA 94403
www.cityofsanmateo.org
Agenda Number: 26 Section Name: PUBLIC HEARING Account Number: 10-2021 File ID: 26-11320 TO: City Council
FROM: Alex Khojikian, City Manager
PREPARED BY: Finance Department
MEETING DATE: June 15, 2026
SUBJECT:
Fiscal Year 2026-27 Budget, Capital Improvement Program, Gann Limit, and FY 25-26 Budget Adjustments – Approval RECOMMENDATION:
Adopt Resolutions to approve the fiscal year 2026-27 operating and capital budgets, the 2026-31 Capital Improvement Program, the fiscal year 2026-27 Gann appropriations limit, and to approve fiscal year 2025-26 year-end supplemental budget adjustments.
BACKGROUND:
Prior to the City Council’s adoption of the fiscal year (FY) 2026-27 budget, it holds two public hearings to receive public comment on the proposed operating budget and Capital Improvement Program (CIP) budget. This review of the budgets is the second of those two public hearings.
Staff presented a preview of the 2026-27 General Fund budget and the 2026–2031 CIP on April 20, 2026, and provided the final proposed budget at the first public hearing on the FY 2026-27 proposed budget and five-year CIP on June 1, 2026. 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 21, 2026.
Overall, the Citywide budget for FY 2026-27 totals $356.3 million, which includes an operating budget of $290.0 million and a capital budget of $66.3 million. The proposed FY 2026-27 General Fund budget, including transfers, is $190.6 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).
CITYWIDE PERSONNEL BUDGET
Proposed personnel updates have been incorporated into 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.
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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.
Pension Contributions
A key component of the cost of employee compensation is the unfunded accrued liability (UAL) with the California Public Employees’ Retirement System (CalPERS). The UAL is the amortized cost of CalPERS’ investment gains/losses as well as changes in actuarial assumptions as they impact the funding available and needed for the City’s pension obligations.
Citywide UAL pension costs are expected to continue to go up in FY 2026-27 as they did in FY 2025-26. For FY 2025-26, the Citywide pension total increased $1.0 million while an increase of $1.7 million is expected in FY 2026-27 to $25.5 million.
Given the current state of the pension fund, the City’s overall UAL pension costs are estimated to gradually keep increasing through FY 2030-31, after which they are expected to gradually ramp down, provided CalPERS can achieve its 6.8% annual investment return target for future years and there are no major changes to actuarial assumptions.
CITYWIDE OPERATING BUDGET
The proposed operating budget for FY 2026-27 includes cost increases for existing expenditures and some new one- time expenditures. The new one-time cost increases include equipment and vehicles to support storm and sewer maintenance and an increase of $15,000 to the Senior Nutrition Meal Program within the General Fund as requested by the City Council at the June 1, 2026, meeting. Additional details on the new one-time expenditures are included in the Appendix section of the budget document.
FUND HIGHLIGHTS
This agenda report provides a high-level summary of the FY 2026-27 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 2026-31 five-year CIP.
General Fund
The General Fund is the City's primary operating fund. The proposed FY 2026-27 General Fund budget totals $190.6 million, which includes $183.6 million for operating expenditures and $7.1 million in transfers out, including $3.1 million transfers to Debt Service Funds and $4.0 million for capital improvement projects.
The proposed FY 2026-27 General Fund expenditure budget has been revised slightly to $183.6 million, a decrease of $.2 million from the previous estimate of $183.8 million due to some small budget adjustments. The estimated General Fund revenues remain the same at $173.9 million. With the revision, the projected General Fund deficit before contributions to CIP is $12.8 million. After including $4.0 million in CIP contributions, the deficit increases to $16.8 million in FY 2026-27.
CITY OF SAN MATEO
Table 1: General Fund Proposed Budget FY 2026-27
Revenues
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, assuming 3.2% assessed value growth. Sales tax (including the ¼ cent Measure S): remaining fairly flat at $28.0 million. Real Property Transfer Tax (RPTT): $9.0 million, returning to baseline after FY 24-25 spikes Transient Occupancy Tax (TOT): $4.1 million.
Other revenues are expected to grow modestly.
Expenditures
On the expenditure side, the budget includes $183.6 million in operating expenditures. Key components include $80.7 million in personnel costs, reflecting projected increases in salaries and wages, healthcare, and pension costs; $14.3 million is the General Fund’s share of the required payment for unfunded pension liability; $44.9 million in other non-personnel operating costs; and $40.7 million for Fire Services provided by the San Mateo Consolidated Fire Department (SMC Fire).
Transfers Out | Investment in Infrastructure and Capital Improvements Total transfers out from the General Fund are projected to be $7.1 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. $200,000 to the 2% 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 Deficit and Financial Sustainability Plan
As shown in Table 1, the revised FY 2026-27 General Fund proposed budget reflects a $16.8 million deficit, including $4 million in contributions to capital improvement projects. Given that projected expenditures exceed projected revenues, 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-
CITY OF SAN MATEO
27. If this assumption does not hold, the General Fund deficit could decrease to a $9.9 million deficit. However, even if this happens, the City will still need to draw on the Budget Stabilization Reserve to maintain core services and continue providing for critical facility and 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 $108.8 million, comprised of $40.5 million in operating expenses, $39.9 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 5).
Table 2: FY 2026-27 Capital Budget and the 2026-31 Capital Improvement Plan by Function In addition, as part of this review of the proposed FY 26-27 Capital Budget, the City is complying with Government Code Sections 65400, 65401, and 65403 that require the City’s governing body to review public works projects proposed for the fiscal year to determine conformity with the adopted General Plan.
CITY OF SAN MATEO
GANN LIMIT
In addition to the adoption of the FY 2026-27 budget and capital improvement program, there is another 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, 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 $300,145,069, while the proceeds of taxes subject to the appropriations limit is $145,976,000. Therefore, the City is well below its appropriations limit for FY 2026-27.
FISCAL YEAR 25-26 YEAR-END BUDGET ADJUSTMENTS
In preparation to close the fiscal year 2025-26, staff reviewed all funds and identified any budget adjustments needed to align budget appropriations with actual expenditures. The one operating adjustment needed is within the Comprehensive General Liability Internal Service Fund. Due to higher costs related to legal claims, litigation activities and insurance premiums; this fund needs an additional budget appropriation for fiscal year 2025-26 of $650,000. At the same time, staff identified several capital projects that needed an appropriation or transfer to update project funding sources. The attached resolution (Attachment 4) summarizes the recommended appropriation and capital project transfers. All the proposed capital project transfers and appropriation are also listed in Exhibit A of the resolution.
BUDGET IMPACT:
The overall proposed FY 2026-27 budget is $356.3 million, comprised of $290.0 million for the operating budget and $66.3 million for the capital budget. The General Fund is projected to account for $173.9 million in revenues and $190.6 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 $97.2 million in revenues and $108.8 million in expenditures.
The proposed FY 25-26 budget adjustment includes an appropriation of $650,000 of unassigned fund balance from the General Fund (Fund 100 - $552,500), the Sewer Fund (Fund 720 - $84,500) and the Construction Services Fund (Fund 230 - $13,000) to increase transfers out to the Comprehensive General Liability Fund (Fund 880). There is sufficient unassigned fund balance in the foregoing funds for this appropriation.
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 2026-27 Operating and Capital Budgets Att 2 – Proposed Resolution: Fiscal Years 2026-31 Capital Improvement Program Att 3 – Proposed Resolution: Fiscal Year 2026-27 Gann Appropriations Limit Att 4 – Proposed Resolution: Fiscal Year 2025-26 Year-End Budget Adjustments Att 5 – Fiscal Year 2026-27 Budget Book
STAFF CONTACT
Abby Veeser, Director, Finance
[email protected]
(650) 522-7102