COUNCIL AGENDA REPORT
TO: Mayor and City Council
FROM: Rebecca Campbell, Director of Finance
DATE: June 16, 2026
SUBJECT: Adoption of a Resolution for Proposed FY 2026-28 Budget
Description:
The City Council will receive an update on the Fiscal Year (FY) 2026-28 Budget, including a General Fund and Measure U overview and will consider adopting a Resolution adopting the FY 2026-28 Biennial Budget.
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 a presentation on the Fiscal Year (FY) 2026 -28 Biennial Budget and, following discussion and consideration;
2. Adopt a Resolution adopting the budget for Fiscal Years 2026 – 2027 and 2027-2028, and delegating the City Manager to implement the same.
BACKGROUND:
City staff kicked off the financial plan ning of the F Y 2026-28 Biennial Budget, encompassing FY 2026 -27 and FY 2027 -28, in October 2025 . Internal review of departments’ preliminary budget proposals concluded in May and staff received feedback from the City Council and public at -large during a public hearing on June 2 , 2026. The City Council provided feedback and direction to staff, which has been factored into the Proposed FY 2026-28 Biennial Budget presented for adoption.
By State law, the City must adopt a balanced budget by June 30 th. The City Manager’s proposed budget is aligned with the City Council’s adopted goals and priorities. Long - term fiscal sustainability will be essential to achieve financial stability, preserve service levels, and maintain adequate reserves for future needs and emergencies. This proposed budget, like many before it, uses a variety of strategies to close a very significant multi - million-dollar structural deficit between revenues and expenditures in both fiscal years.
DISCUSSION:
Structural Budget Balance:
The Government Finance Officers’ Association’s best practice on achieving a structurally balanced budget summarizes the principle, as follows:
2 Most state and local governments are required to pass a balanced budget; however, a budget that may fit the statutory definition of a “balanced budget” may not, in fact, be financially sustainable. For example, it could include non-recurring resources such as asset sales or reserves to fund ongoing expenditures, and therefore not be in structural balance. A true structurally balanced budget is one that supports its financial sustainability for multiple years into the future. A government needs to make sure it’s aware of the distinction between satisfying the statutory definition and achieving a true structurally balanced budget.
Budget Estimates and Assumptions: Unlike most other financial documents produced by the City, the budget is forward looking and, t herefore, based entirely on estimates. Staff takes practical steps to improve reliability and reduce the risk of budget estimates.
Starting with Revenues : The City’s budget process starts with objectively determining the best estimate of revenue that will be available. Staff seeks to use the best data available to analyze a variety of major revenue sources, some of which are considered volatile and subject to economic pressures. Property taxes are generally the most stable, although subject to limitation s and other provisions imposed by state law that complicates the estimating process. Sales taxes are more directly and immediately tied to broad economic conditions, so a reasonable economic forecast needs to underlie the estimates for those taxes. The City enlisted the support of HdL to serve as a consultant on these revenue streams.
Trends and assumptions for other sources of revenue such as fees, contractual revenue, and intergovernmental support are also carefully examined by each department. It’s import ant to consider how risks across revenue sources are correlated. For example, a reduction in contractual revenue, such as the agreement with the high schools for the use of the Paul Nelson Aquatic Center or the Airfact Rescue Fire Fighting (ARFF) services provided at the Santa Maria Public Airport, can negatively affect services and programs offered by the City.
In the context of building a structurally balanced budget, revenue estimates for the City’s ongoing operations exclude one -time revenue sources su ch as beginning fund balanced, one-time payments and other windfalls. HdL helps the City identify extraordinary spikes in volatile taxes by separating the ongoing base from the one- time components of prior-year major revenue collections.
The Other Side of the Ledger: Estimating expenditures has its own nuances. For the City, employee compensation is the largest category of expenditures in the General Fund and Measure U Fund. This spending is technically complex, with varying compensation and benefit plans among employee bargaining units and classifications. The use of archaic tools and methods increase s the manual effort needed to forecast compensation . This will be improved through implementation of modern financial software that will help eva luate assumpt ions and make the forecast as reliable as possible.
3 The minimum goal is to ensure that all costs of providing current service levels, including known inflationary pressures, required to operate each department and its programs can be reasonably anticipate d and included in the budget up front.
This approach, as opposed to simply assuming the prior year’s budget will be sufficient, will help avoid midyear budget increases that could shift the budget deeper into structural deficit.
Conversely, budgeting for the estimated cost of current services, rather than assuming the prior year’s budget should be replicated, will also help minimize excessive “padding” in department budgets. Departments will insist they need that flexibility for unanticipated costs; however, the City could use a central contingency for such costs instead , with clear guidelines for determining that a cost is truly unavoidable and that all other resources available to a department have been used.
Finally, a key assumption on the expenditure side of the budget is how unspent funds resulting from vacancies, spending delays, or cost savings at year -end are treated. The City does not assume any year-end savings in its structural budget calculation. Savings from previously approved one-time operating projects (such as the General Plan Update), tied to purchase orders, grants, and/or capital projects are allowed to be carried forward to the next fiscal year where all other operating savings fall back to fund balance.
Capital Investment Needs: The City needs to regularly asse ss its capital assets, build realistic capital improvement plans for major capital projects, and just as importantly, in clude an appropriate amount of annual funding for routine maintenance projects that don’t rise to the level of capital investment. For buildings, this means periodically evaluating facility conditions as comprehensively as possible and using industry standards based on dollars per square foot to establish an ongoing funding pool for building mainte nance and upgrades, with clear processes for spending the funds as effectively as possible to prevent higher renovation or construction costs in later years.
The City’s pavement network is one of its most valuable assets and protecting that investment requires a consistent focus on preservation. Current pavement management analysis identifies approximately $131 million in pavement needs across the network (refer to Attachment E) . While that number is significant, the larger c hallenge is the ongoing deterioration that occurs each year as streets continue to age and traffic volumes increase. The City’s strategy is to apply the right treatment at the right time, preserving streets before they require more costly rehabilitation or reconstruction. City crews perform neighborhood overlays, patching, and other pavement repairs in house, while the City utilizes contracted dig out operations and chip seal treatments on arterial roadways to maximize the value of available funding and extend the life of existing pavement. By combining in-house resources with targeted contract work, the City is able to address more roadway needs each year, improve overall network condition s, reduce long-term infrastructure costs while making the most of every transportation dollar invested.
4 Transparency About the Bottom Line: Just as there is a major distinction between a balanced budget that is based on the use of one-time resources and a structurally balanced budget, there’s also a distinction to be drawn between a budget that’s structurally balanced on paper at the start of the fiscal year and a budget that’s likely to result in actual structural balance at the close of the fiscal year.
The City’s budget book has historically included a clear and easily understood analysis of the structural deficit in the General Fund . Refer to Attachment D that provides information on historical deficit budget reports for the City.
The City Manager’s proposed budget reports that the FY 2024 -25 actual results for the General Fund and Measure U Fund resulted in shortfalls and required use of one-time reserves to resolve the situation. Attachment F provides an updated Fund Analysis for FYs 2024 -25 (results updated in the table below) through FY 2027-28. The General Fund req uired the use of $ 284,000 to pay for ongoing operations. The Measure U Fund required the use of $2.8 million for ongoing operations and $1.1 million for one-time capital expenditures.
FY 2024-25 ACTUAL
General Fund Measure U Fund
Revenues & Transfers In $ 101,076,763 $ 25,946,336
Expenditures* & Transfers Out 101,361,162 28,779,448
Structural Surplus/(Deficit) $ (284,399) $ (2,833,112)
Beginning Fund Balance $ 10,071,920 $ 12,257,230
Use of Pension Reserve - -
Use of Fund Balance – Oper. 284,399 2,833,112
Use of Fund Balance – Cap. - 1,095,851
Transfer from LEAF - -
Ending Fund Balance $ 9,787,521 $ 8,328,267
*Measure U Expenditures exclude Capital Projects.
The Proposed FY 2026 -28 Biennial Budget Book’s Six-Year Financial Plans for General Fund & Measure U section on pp. 61-68 discuss the structural deficit that persists in the General Fund and Measure U Fund. The following table shows ongoing expenditures in the General Fund exceed the ongoing revenues b y $7.3 million in FY 2026 -27 and $7.9 million in FY 2027 -28. It also shows t he City Manager’s proposed budget includes a recommendation to balance FY 2026 -27 with a transfer in from Local Economic Augmentation Fund’s ( LEAF) one-time savings of $7.3 million.
CITYWIDE BUDGET SUMMARY – GENERAL FUND
FY 2026-27 FY 2027-28
Revenues & Transfers In $ 100,340,777 $ 101,375,206
Expenditures & Transfers Out 107,616,815 109,226,765
Structural Surplus/(Deficit) $ (7,276,038) $ (7,851,559) Use of Pension Reserve - -
Use of Fund Balance - -
Transfer from LEAF 7,276,038 -
5 Net Budget Surplus/(Deficit) $ - $ (7,851,559)
The following table shows ongoing expenditures in the Measure U Fund exceed the ongoing revenues by $ 1.5 million in FY 2026-27 and $1.6 million in FY 2027-
28. It also shows the City Manager’s proposed budget includes a recommendation to balance FY 2026 -27 with $1.5 million of one-time fund balance, and FY 2027- 28 is projected to be unbalanced that will need to be addressed at a later date.
CITYWIDE BUDGET SUMMARY – MEASURE U FUND
FY 2026-27 FY 2027-28
Revenues & Transfers In $ 26,808,674 $ 27,170,066
Expenditures & Transfers Out 28,279,990 28,922,230
Structural Surplus/(Deficit) $ (1,471,316) $ (1,580,810) Use of Fund Balance 1,471,316 1,152,419
Transfer from LEAF - -
Net Budget Surplus/(Deficit) $ - $ (428,391)
Fiscal Year 2026-28 Biennial Budget Investments:
Once revenue estimates are established, the Budget Team guides the remainder of the budget development process, balancing available resources through its evaluation of Supplemental Budget Requests (SBRs) and Capital, Maintenance, and Equipment Project (CMEP) proposals. The goal was to offset choices to increase ongoing spending in one area with decreases in ongoin g spending in another. This discipline is critical to building sustainable, structurally balanced budgets. The benefits of structural budget balance are manifold. A government that has a structurally balanced budget:
Won’t reduce its reserves in a haphazard manner.
Will maintain the ability to adjust its budget from year -to-year in a deliberative manner.
Will be able to plan over a multiyear period.
Will be more nimble in responding to an economic downturn or other major fiscal shock.
Further, those who rely on the City’s budget, including residents who receive services and external entities that receive ongoing payments will be subject to fewer unnecessary fluctuations in service or funding levels.
Personnel:
In total, the proposed FY 2026 -28 budget includes 713 positions (703.80 FTE), which is a decrease of 39 positions (37.80 FTE) from the FY 2025-26 Mid-Cycle Adopted Budget.
The budget indicates the deletion of 38 positions in the General Fund and 2 positions (2.00 FTE) in the Library Fund, the addition of 2 positions (2.00 FTE) in the Enterprise Funds, and the shift of 4 positions from the General Fund to the Assessment Districts, and the shift of a portion of 4 positions from the General Fund to the General Liability Fund. There are no employee layoffs anticipated.
6 Supplemental Budget Requests:
Departments assessed their operational needs and requested the addition, consolidation, or deletion of positions and/or operating budget through Supplemental Budget Requests (SBRs) that have a nexus to support and align with the City Council’s goals. There were 78 SBRs submitted, of which 63 are incorporated into the Proposed Budget. Some of the SBRs are revenue-backed through the User Fee Study Update, such as the addition of limited-service staff for the Community Development and Police Departments, others are necessary to fund contractual obligations, such as the Animal Services Contract and software maintenance agreements. The fiscal impact for the General Fund and Measure U totals $1.30 million in FY 2026-27 and $1.57 million in FY 2027-28. Other SBRs ensure the budget is sufficient to replace the City’s business equipment, e.g., laptops, computers, etc., and pay for General Liability and Workers’ Compensation insurance premiums and claims. Approved SBRs by fund and department are summarized in Attachment C. Many of these are also highlighted in the Department Budget Detail section of the City of Santa Maria Proposed FY 2026-28 Biennial Budget Book.
Budget Reduction and Revenue Generation Initiative:
The Proposed Budget incorporates additional balancing measures, that include, but are not limited to:
Citywide reduction of contract/consulting services, training, subscriptions & other operational costs: $1,451,000
Increase projections for less predictable revenues and newly proposed fees:
$1,727,000
Close P aul Nelson Aquatic Center for six (6) months (Dec -May), including the unfunding of assigned Limited Service positions, unless the City Manager identifies additional savings equal to the amount proposed to be cut, which must occur prior to October 31, 2026: $344,000
Delete vacant positions and/or reallocate filled positions to other Funds, where justifiable (8.30 FTEs): $1,167,000
Unfund Limited Service positions in Library, Recreation & Parks, Police and Public Works (impacts programs and operating hours): $446,000
Eliminate subsidies to United Way, Historical Museum, and Museum of Flight:
$70,000
Assumes that most Governmental Fees are set to full recovery level, estimating the potential revenue growth of $2.012 million, of which $1.742 million impacts the General Fund.
Includes balancing the General Fund in FY 2026 -27 with a transfer in from the LEAF reserve’s one-time savings of $7.3 million.
Presented is a two-year budget comprised of $368.0 million for FY 2026-27 and $425.3 million for FY 2027 -28, inclusive of a $50.0 million and $108.3 million capital project budget respectively. The Proposed Budget includes funding for supplemental budget requests that are necessary to attain Council Goals and to allow for the effective delivery of priority public services.
The chart below shows the General Fund fiscal forecast . The Revenues line excludes operating transfers in of $9.5 million in FY 2026-27 and $2.3 million in FYs 2027-32:
7 The chart below shows the Measure U forecast based on Measure U continuing to fund the same level of services. The forecast is unbalanced due to expenditures outpacing revenue growth, which means that Measure U sales tax revenue will be able to fund lower levels of service than in the current fiscal year.
8 Citywide Sources & Uses:
The City of Santa Maria categorizes operating revenues into six major categories, each with distinct revenue characteristics. Operating revenues and transfers in are anticipated to be $284.4 million in FY 2026-27 and $279.1 million in FY 2027-28. The year-over-year decrease is due to the one -time draw on LEAF reserves to balance FY 2026 -27.
Excluding transfers in, operating revenues are expected to total $263.6 million in FY 2026-27 and $265.6 million in FY 2027-28.
The City’s FY 2026 -28 Biennial Budget totals $ 368.0 million in FY 2026 -27 and $425.3 million in FY 2027-28, inclusive of capital, maintenance and equipment project budgets.
Proposed Policy Recommendations for Council Consideration and Policy Direction:
Staff reported on June 2nd that the City’s auditors discovered a significant issue on May 29, 2026. During the audit process, Finance staff learned that General Capital Fund and General Fund revenues were overstated in FY 2023-24 due to an incorrect transfer involving LEAF reserves. The transaction resulted in General Capital Fund and General Fund reserve balances appearing higher than were actually available, creating an unrealistic representation of available resources.
Analysis of the balances resulting from actual activity for FYs 2024 -25, projected estimates for FY 2025 -26, and the proposed budget for FY 2026 -27 now reveal that LEAF is anticipated to transfer in FY 2025-26 $7.0 million to the General Fund and $5.7 milli on to the General Capital Fund and to transfer in FY 2026 -27 $7.3 million to the General Fund and $616,000 to the General Capital Fund. As a result, LEAF is anticipated to end FY 2026-27 with a balance of $938,000. Attachment F and the chart below exhibits the level of reserves that are now being tracked. The fund balance projected to be available in FY 2027 -28 in the Measure U Fund will be insufficient to balance that year’s structural deficit and the balance for LEAF will be insufficient to balance the structural deficit in the General Fund and the balance of the structural deficit in the Measure U Fund.
Charges for
Service
$123.4 M…
Taxes
$96.7 M…
Revenues from
Other Agencies
$26.6 M
9.4%
Other Revenue and
Transfers, $25.9 M,
9.1%
Rev. from Use of
Money &
Property
$6.1 M
2.2%
Licenses, Permits &
Fines
$5.6 M
2.0%
FY 2026-27 Sources
Services &
Supplies
$129.2 M
42.6%
Salaries &
Benefits
$128.3 M
42.3% Capital &
Outside
Agencies
$29.9 M
9.8%Transfers
$12.3 M
4.1%
Debt Service
$3.9 M
1.3%
FY 2026-27 Uses
9 To close the projected budget gap in FY 2026 -27, staff proposes drawing on Local Economic Augmentation Fund (LEAF) reserves to the amount of $ 7.28 million and on undesignated Measure U reserves of $1.47 million. The remaining LEAF reserves at the end of FY 2026-27 are projected to be $938,000, undesignated General Fund Reserve will remain depleted, and undesignated Measure U reserves are projected to be $1.15 million. The projected balance for LEAF is not sufficient to balance the General Fund in FY 2027-28 and the balance projected for Measure U is only sufficient to balance FY 2027-28. Significant reductions will need to be implemented to balance both funds during the FY 2027-28 Mid-Cycle Budget Review process.
The Public Works Department has requested an amendment to the proposed budget to purchase asphalt equipment (asphalt paver trailer, asphalt paver, roller, broom, and traffic safety items) and vehicles (Ford F350 truck and EV truck) with $627,047 of Measure A Funds. This proposed amendment will not have a fiscal impact on the structural deficit of the General Fund or Measure U Fund.
Next Steps:
Any policy direction provided by the City Coun cil during tonight’s budget hearing will be incorporated into the Final Adopted Budget.
Alternative(s)
The City Council may provide staff with further direction to modify the Proposed Budget.
The City Council may provide direction to re -allocate unrestricted funds across City operations. The limitations to re -allocation of funds are set at the fund level where the Enterprise Funds and Special Revenue funds can only be allocated to fund those specific operations or projects.
Fiscal Considerations
There is no fiscal impact associated with the City Council recommendations included in this report. The Proposed Budget totals $303.6 million in all operating funds for FY 2026- 27 and $340.5 million for FY 2027-28. Inclusive of capital, maintenance and equipment projects the Proposed Budget totals $368.0 million for FY 2026-27 and $425.3 million in FY 2027 -28. If the City Council approves the Public Works Department requested
10 amendment, the Proposed Budget will total $368.7 million for FY 2026 -27 and $425.3 million in FY 2027-28. City Council direction will be incorporated into the Adopted Budget.
The Proposed Budget as presented complies with the City Council adopted financial policies for all funds except for General Fund and Measure U fund. The Proposed Budget for these funds does not comply with the Balanced Budget policy, which requires that ongoing revenues should meet ongoing operating expenditures. The two funds are proposed to draw on fund reserves to cover ongoing operating expenditures.
Based on the City Council’s adoption of the 2026 User Fee Schedule on June 2 nd, the Proposed Budget includes the assumption that most Governmental Fees are set to full recovery level for the potential revenue growth of $2.012 million, of which $1.742 million impacts the General Fund. The Proposed Budget assumes balancing the General Fund in FY 2026-27 with a transfer in from the LEAF reserve’s one-time savings of $7.3 million.
Impact to the Community
The City Council’s deliberation on the proposed budget provides the community with an understanding of the structural deficit affecting the General Fund and Measure U resources necessary to maintain and enhance services to the public, as well as limits on resources available to invest in infrastructure and undertake many projects that will directly benefit the community. Adoption of the Final Proposed Budget will allow City staff to provide the services desired by the community.
ATTACHMENTS
A. Resolution
B. City of Santa Maria Proposed FY 2026-28 Biennial Budget C. Proposed Supplemental Budget Requests
D. Budget Document Discussions About Structural Deficit E. Unfunded Road Work
F. Fund Analysis