COUNCIL AGENDA REPORT
TO: Mayor and City Council
FROM: Rebecca Campbell, Director of Finance
DATE: January 20, 2026
SUBJECT: Fiscal Year 2025 -26 Budget Rebalancing Analysis and Adoption of a Resolution Approving Budget Amendments
Description:
The City Council will consider receiving the Fiscal Year 2025-26 Budget Rebalancing Analysis and adoption of a Resolution approving proposed budget amendments.
Environmental Notice: The activity is not a “Project” as defined under Section 15378 of the California Environmental Quality Act State Guidelines; therefore, pursuant to State Guidelines Section 15060(c)(3) no environmental review is required.
RECOMMENDATION:
1. Receive and file the Fiscal Year 2025-26 Budget Rebalancing Analysis; and
2. Adopt a Resolution approving First Quarter Budget Amendments to the F iscal Year 2025-26 Budget for personnel, operational , and capital changes, and delegating the City Manager to implement the same.
BACKGROUND:
On June 18, 2024, the City Council adopted two one-year budgets covering the period from July 1, 2024, to June 30, 2026. The Fiscal Year (FY) 2024 -25 budget was adopted as a balanced budget , closing a very significant $21.3 million structural deficit for the General Fund (including Measure U) with a short-term strategy of drawing on reserves.
During the City Council’s deliberations on June 18, 2024, staff was directed to return with long-term budget strategy recommendations to close the ongoing budget deficit and avoid relying on the use of one-time reserves.
FUND ANALYSIS – GENERAL FUND & MEASURE U
(in thousands)
FY 2024-25
Adopted
FY 2025-26
Adopted
Beginning Fund Balances $ 12,984 $ -
Cancelled Reserves
Unfunded Pensions - -
Local Econ. Aug. Fund (LEAF) 8,336 -
Revenues 118,529 120,307
Total Financing Sources $ 139,849 $ 120,307
Expenditures (139,849) (140,545)
Ending Fund Balances $ - $ (20,238)
2 Throughout FY 2024-25 a significant effort went into reviewing and engaging in budget rebalancing initiatives for all departments , and the City Manager implemented a hiring chill that was put into place in FY 2024-25. The history of staff’s engagement in a budget rebalancing initiative is enclosed in Attachment B.
DISCUSSION:
The Mid-Cycle Budget Review of the FY 2024-2026 Biennial Budget, encompassing FY 2024-25 and FY 2025 -26, began in earnest by engaging City staff in January through March 2025 in a thorough review of year -end estimates for expenditures and revenues, development of revenue estimates for FY 20 25-26, and assessment of their operational needs. The financial planning cycle conclude d with staff laying out a plan to evaluate vacant position s, especially persistent vacancies and chilled positions; reviewing all revenues and expenses for each departme nt; continue reviewing potential revenue - generation initiatives; develop short - and long-term rebalancing initiatives to resolve the structural deficit ; and, the City Council’s adoption of proposed amendments to the previously adopted FY 2025 -26 Budget. Th ose amendments d id not include ongoing long-term reductions previously identified by departments in the budget rebalancing initiative. Rather, the budget maintained services and reflects the City Council’s goals and priorities, which are as follows:
Goals:
Long-term financial sustainability
Community quality of life
Planning and infrastructure
Organizational well-being
Priorities:
New approach to economic
development
Provide youth opportunities
Provide public safety resources
Establish a staffing plan
Following the Mid -Cycle Budget Review and the soft -close of FY 2024 -25, an updated structural deficit of $25.1 million in Ge neral Fund and Measure U was identified. To meaningfully address th is deficit, at this time, Departments were once again asked to reevaluate their operations and submit proposals to reduce expenses and/or increase revenues of their Net General Fund/Measure U appropriations. A summary of the status of department budget amendment submissions is shown in the following table:
DEPARTMENTAL BUDGET AMENDMENTS
Dept
Net General
Fund/Measure U
Submissions Amended Percent
Change One Time Ongoing Total Net GF/MU
CAO $ 1,975,752 $ - $ (405,346) $ (405,346) $ 1,570,406 -20.5% CMO 10,913,452 - (2,827,920) (2,827,920) 8,085,532 -25.9% CD 3,072,405 - (1,640,986) (1,640,986) 1,431,419 -53.4% FIN 3,592,917 - (711,773) (711,773) 2,881,144 -19.8% FD 25,412,574 (4,163,118) (1,450,582) (5,613,700) 19,798,874 -22.1% LIB 3,379,558 (25,600) (631,549) (657,149) 2,722,409 -19.4% PD 58,834,755 - (3,884,087) (3,884,087) 54,950,668 -6.6% PW 4,611,338 (896,649) (896,649) 3,714,689 -19.4% RP 15,084,085 (3,336,223) (3,336,223) 11,747,862 -22.1% TOTAL $ 126,876,836 $ (4,188,718) $ (15,785,115) $ (19,973,833) $ 106,903,003 -15.7% 3 Every submission was carefully reviewed by the Department of Finance and the City Manager’s Office with the submitting department . Upon review, it has been determined that $12.5 million of the departments’ proposed amendments can be implemented now (refer to the FY 2025-26 line in the table below) to address the $25.1 million deficit for FY 2025-26. The table below illustrate s that out of the $12.5 million proposed for FY 2025- 26, only $8.7 million of long -term reductions contribute towards the structural deficit ongoing, of which $ 7.6 is made up of vacant chilled positions (see Attachment C for details).
Departments proposed an additional $ 7.5 million of amendments that will be further reviewed and considered for implementation in FY 2026-27 (refer to the FY 2026-27 and Follow-up lines in the table below), of which $5.7 million addresses the ongoing structural deficit and $1.4 million requires additional follow -up. Staff plans to refine and present those amendments during the City Council’s deliberations of the FY 2026 -28 Budget in the upcoming months.
SUMMARY
Targeted
Timing FTE LS
Revenue Increase
Revenue
Total
Expenditure Reduction
Expenditure
Total Total Impact
One-
Time On-going One-Time Ongoing
FY 2025-26 (24.00) (4.80) $ - $1,000,000 $1,000,000 $3,795,098 $7,699,300 $11,494,398 $12,494,398 FY 2026-27 (17.20) (0.48) - 841,147 841,147 393,620 4,847,521 5,241,141 6,082,288 Follow-up (9.00) (1.92) - - - - 1,397,147 1,397,147 1,397,147 (50.20) (7.20) $ - $1,841,147 $1,841,147 $4,188,718 $13,943,968 $18,132,686 $ 19,973,833
The following table breaks down the $12.5 million in FY 2025-26 proposed amendments submitted by department. Additional detail is shown in Attachment C.
PROPOSED DEPARTMENTAL BUDGET AMENDMENTS
FY 2025-26 Submissions Structural
Dept One-Time Ongoing Total Deficit
Structural Deficit $ 25,134,880 $ 25,134,880
City Attorney’s Office $ - $ (147,468) $ (147,468) $ (147,468) City Manager’s Office - (1,275,657) (1,275,657) (1,275,657) Community Development - (1,192,330) (1,192,330) (1,192,330) Finance - - - -
Fire (3,795,098) (1,450,582) (5,245,680) (1,450,582) Library - (494,480) (494,480) (494,480)
Police - (2,486,940) (2,486,940) (2,486,940)
Public Works - (380,662) (380,662) (380,662)
Recreation & Parks - (1,271,181) (1,271,181) (1,271,181) Total Submission $ (3,795,098) $ (8,699,300) $ (12,494,398) $ (8,699,300) Deficit Remaining $ 12,640,482 $ 16,435,580
Ongoing budget amendments proposed to be implemented now (FY 2025-26) will reduce the structural deficit by $8.7 million, as follows:
4 Decrease regular and part-time salaries and benefits by $3.0 million. This includes the reduction of 24.00 FTE positions, comprised of 20 vacant full-time (1.0 FTE) non-safety positions, totaling $2.7 million and 5 vacant part-time (0.8 FTE) non- safety positions, totaling $286,000;
Decrease limited-service salaries and benefits by $657,000. This equates to the reduction of approximately 39,000 limited-service hours; Decrease salaries and benefits by $3.9 million. This ensures 8 vacant full-time (1.0 FTE) positions in the Fire Department and 10 vacant full -time (1.0 FTE) positions in the Police Department will continue to be held vacant, totaling $1.451 million and $2.487 million, respectively. It is important to note the FTE count will not be reduced;
Decrease operating budget reductions total $128,000;
Increase revenue for building permits by $1.0 million , which is anticipated to be sustainable; and
It is important to note that it is anticipated that the elimination of these positions will not result in any layoffs.
One-time budget reductions proposed to be implemented now (FY 2025-26) include the Fire Department’s proposal to cancel three projects, totaling $3.795 million funded by Measure U in FY 2024-25, as follows:
Fire Station 1 Expansion: $3.629 million;
Parking Lot Maintenance: $159,000; and
Training Center: $7,000.
The budget for these projects will not be carried over from FY 2024-25-to-FY 2025-26, thereby resulting in additional fund balance available to balance Measure U in FY 2025 -
26. The details of the FY 2025-26 revenue increases and expenditure reductions, including a list of positions submitted for deletion, are enclosed as Attachment C.
FY 2024-26 Capital, Maintenance and Equipment Projects:
The purpose of the Capital, Maintenance, and Equipment Plan is to systematically plan, schedule, budget, and finance capital projects to ensure cost effectiveness and efficiency of construction. The General Fund’s CMEP is budgeted in the Capital Projects – General Fund. Capita l, Maintenance and Equipment Projects (CMEPs) range from road maintenance or construction to the renovation of municipal buildings, recreation centers and ball fields.
The City Manager’s Office, in consultation with the Public Works and Finance departments, reviewed 29 General Fund CMEPs, of which 26 were approved to be budgeted for a total of $9.3 million. The following tables shows that in order to deliver $9.3
5 million of projects the Capital Projects – General Fund required a transfer in from the Local Economic Augmentation Fun d (LEAF) of $3.4 million in addition to the estimated beginning fund balance of $3.0 million and recurring transfers in of $2.9 million:
FUND ANALYSIS – CAPITAL PROJECTS - GENERAL
FUND
(in thousands)
FY 2025-26
Adopted
Beginning Fund Balances $ 2,982
Cancelled Reserves
Local Econ. Aug. Fund (LEAF) 3,443
Revenues 2,875
Total Financing Sources $ 9,300
Expenditures (9,300)
Ending Fund Balances $ -
Staff from the City Manager’s Office, Finance Department, Public Works, and Recreation & Parks departments evaluated and identified projects approved for funding in FY 2025- 26 that can be delayed, cancelled, or funded with another source. The projects and associated budget proposed to be amended are shown in the table below:
CANCELLED / DELAYED FY 2025-26 CAPITAL PROJECTS
FY 2025-26
Leisure & Cultural Services Adopted Amendment Amended
Pocket Parks $ 1,000,000 $ (1,000,000) $ -
Preisker Park Pond Liner
Rehabilitation
600,000 (600,000) -
ADA Access Installation at Simas Field 600,000 (600,000) - Fletcher Park Irrigation Upgrades 100,000 (100,000) - Pool House Rehabilitation 351,200 (351,200) -
Replace Aging Shades & Sun Screens at
City Parks
30,000 (30,000) -
RV Hookup for Park Hosts 350,000 (250,000) 100,000
Sign/Façade Restoration Program 150,000 (150,000) -
Elks Field Lighting 1,500,000 (1,300,000) 200,000
Total $ 4,681,200 $ (4,381,200) $ 300,000
The balance remaining for the RV Hookup for Parks Hosts project will be used to evaluate ways to augment staff and deter vandalism at Pioneer Park and that for the Elks Field Lighting project will be used to evaluate replacement of poles and underground co nduit at Elks and Hagerman fields.
6 All projects that are fully cancelled in FY 2025-26 will be re-assessed during the FY 2026- 28 Full-Cycle Budget Process, with staff prepared to specifically evaluate the following:
Fund balances in the Growth Mitigation Fund to fund the Pocket Parks project; Re-assess the Preisker Park Pond Liner Rehabilitation to be able to fund design ; and
Americans with Disabilities Act (ADA) Access Installation at Simas Field.
Next Steps
Today’s proposal is a result of thorough plannin g and cooperation from all departments.
As discussed, departments proposed $12.5 million in amendments to be implemented in FY 2025-26 and $6.1 million in amendments to be considered for implementation in FY 2026-27. Of the proposed amendments for FY 2025 -26 and FY 2026 -27, only $14.4 million addresses the ongoing structural deficit. Therefore, there remains $10.7 million of amendments that have yet to be identified to address the structural deficit. Additional planning and coordination to addre ss this budget gap will occur during the FY 2026 -28 Full-Cycle Budget Process.
FY 2026-28 Full-Cycle Budget Process:
Looking ahead to the FY 2026 -28 Full-Cycle Budget Process, t here are several large items that will affect the size of the structural defic it in FY 2026-27. Personnel costs are the first largest spending category and include salaries, benefits, workers’ compensation insurance, general liability insurance, health insurance, and retirement costs, including the California Public Employees Retire ment System Unfunded Accrued Liability (CalPERS UAL).
Compensation Considerations:
Factored into compensation will be the terms related to the Memoranda of Understanding (MOUs) for members of the Santa Maria Police Officers’ Association (SMPOA) and Santa Maria City Fire Fighter’s Union Local #2020 (Local 2020). The fiscal impact for FY 2026 -27 of the two -and-a-half-year agreements with SMPOA and Local 2020 are estimated at $ 1.2 million and $818,000 respectively.
CalPERS UAL:
The minimum required contribution toward the CalPERS UAL factored into the FY 2025-26 budget totals $17.4 million. The latest actuarial increases the minimum required contribution to $18.4 million, which is an increase of $1.0 million. Health Insurance: 2026 health insurance rates increased by ten percent, which is approximately $1.0 million.
Workers’ Compensation Insurance Premium:
The City allocates the costs of its self -insured workers’ compensation program, commonly referred to as Workers’ Compensation . The total cost to be allocated for program year 2026-27 is estimated at $11.5 million. This is an increase of $2.0 million, of which $1.4 million impacts the General Fund while allocations to other funds also increase $0.6 million.
7 General Liability Insurance Premium:
The City allocates the costs of its self-insured liability program, commonly referred to as General Liability. The total cost to be allocated for program year 2026 -27 is estimated at $15.0 million. This is an increase of $2.9 million, of which $3.4 million impacts the General Fund while allocations to other funds decrease $0.5 million. Technology: Licensing and support costs for the City’s new enterprise resource planning system are anticipated to increase approximately $1.0 million to the General Fund.
Staff will continue to work together through the upcoming budget process to address the General Fund’s structural deficit.
Fiscal Considerations
Adopted FY 2025-26 General Fund appropriations (including Measure U) are $147.6 million, an increase of 5.0 percent from those previously adopted. General Fund and Measure U revenues are forecast to fall short of operational and capital expenses in each fund by $20.3 million and $6.1 million, respectively, for a combined total of $26.4 million. The draw of the projected $1.3 million of fund balance in the Measure U Fund left a gap of $25.1 million to be closed. In addition, the General Fund Capital Projects Fund was projected to have a shortfall of $3.5 million. Ultimately, the City Council adopted balancing measures for FY 2025-26, as follows:
1. Cancel additional General Fund reserves for unfunded liability pension payments in the amount of $5.9 million, thereby leaving a balance of $7.3 million in reserves for unfunded liability pension payments, and
2. Cancel the balance of LEAF reserves in the amount of $22.7 million with $14.4 million used to balance the General Fund, $4.8 million used to balance the Measure U Fund, and $3.5 million used to balance the Capital Projects – General Fund, thereby depleting LEAF reserves.
The following table outlines the General Fund and Measure U budgets adopted and amended by City Council.
FUND ANALYSIS – GENERAL FUND & MEASURE U
(in thousands)
FY 2024-25
Estimates
FY 2024-25
Actual
FY 2025-26
Adopted
FY 2025-26
Current
Beginning Fund Balances $ 22,236 $ 22,236 $ 1,319 $ 7,196 Cancelled Reserves
Unfunded Pensions - - 5,922 5,947
Local Econ. Aug. Fund (LEAF) 3,607 - 19,213 19,213
Total Cancelled Reserves $ 3,607 $ - $ 25,135 $ 25,160
Revenues 117,369 124,366 121,102 121,102
Total Financing Sources $ 143,212 $ 146,602 $ 147,556 $ 153,458 Expenditures (141,893) (139,406) (147,556) (147,581) Ending Fund Balances $ 1,319 $ 7,196 $ - $ 5,877
8 Staff’s proposed amendments will reduce the FY 2025 -26 General Fund (including Measure U) structural deficit by $12.5 million, resulting in revenues increasing to $122.1 million and appropriations decreasing to $136.1 million. This action will require the use of less one-time reserves to balance the budget and will bring ongoing appropriations more in line with ongoing revenues. Proposed budget amendments are outlined by department in Attachment C.
Impact on the Community
The proposed amendments to the FY 2025-26 Budget were thoroughly reviewed with each department and carefully selected to minimize impacts to the community. As reviewed with departments, the proposed budget will not have a significant impact on the current level of service to the community, including public safety. However, as staff moves forward to resolve the structural deficit, some programs may require re-prioritization, thereby resulting in reduced service levels.
ATTACHMENT(S)
A. Resolution
B. Background on Budget Rebalancing Initiative
C. FY2025-26 Budget Balancing Details