Title
Fiscal Year (FY) 2025/26 Budget Update and Proposed Adjustments
End
FileID
File ID: 2026-00409
End
Location
Location: Citywide
End
Recommendation
Recommendation: 1) Review the proposed budgetary adjustments and commitment; 2) review the proposed authority adjustment; 3) discuss updates to the development of a two-year budget process; and 4) pass a Motion forwarding to the City Council for approval.
End
Contact
Contact: Peter Coletto, Director, (916) 808-5416, pcoletto@cityofsacramento.org; Mirthala Santizo, Budget Manager, (916) 808-5078, msantizo@cityofsacramento.org, Department of Finance
End
Presenter
Presenter: Peter Coletto, Director, (916) 808-5416, pcoletto@cityofsacramento.org; Mirthala Santizo, Budget Manager, (916) 808-5078, msantizo@cityofsacramento.org, Department of Finance
End
Attachments
Attachments:
1-Description/Analysis
2-Resolution
3-Citywide Revenue Adjustment Details
4-Prior Year Savings Policy
End
Description/Analysis
IssueDetail
Issue Detail: As the City prepares for the upcoming budget cycle, the mid-year forecast shows the City continues to be in a structural deficit with a budget gap of $66.2 million projected for FY2026/27 that continues to grow in the future years of the forecast. This is not due to an economic downturn but is a fundamental imbalance between City expense growth and revenues. While the current fiscal year remains balanced, the proposed budget commitment of remaining resources will support financing potential additional current year costs associated with labor negotiations as well as closing the FY2026/27 projected budget gap.
Fiscal Year 2025/26 Update
Based on citywide revenue performance throughout the first five months of FY2025/26, staff are recommending several revenue adjustments resulting in a net increase of $2.9 million, as reflected below:
The General Fund will also have $0.9 million in reduced expenses associated with lower Cannabis Business Operations Tax revenues as the Measure L contribution to the Children’s Fund will be lower. Overall, this results in $3.8 million in additional projected General Fund balance for the current fiscal year. Detailed information on the citywide revenue General Fund adjustments is included in Attachment 3. The five-year forecast has been updated to reflect the citywide General Fund revenue and expenditure adjustments specified above.
While these projections are positive, the City is also currently in active negotiations with most of its bargaining units. Since the City has made formal proposals, staff are including the cost of City proposals to labor unions in the forecast. The cost of those proposals is approximately $3.6 million in the current fiscal year.
In addition to the proposed General Fund changes, staff are recommending an increase of $801,867 to the Community Center Fund revenue budget from $53.2 million to $54.0 million. This increase is based on revenue performance throughout the first five months of FY2025/26.
General Fund Updated Forecast
The updated FY2025/26 forecast below includes projected changes to revenues and expenditures. While FY2025/26 is balanced, the City continues to face a structural budget deficit with expense growth outpacing revenues growth over the term of the forecast. The budget gap for FY2026/27 is projected to be $66.2 million and grows to $81.8 million in FY2027/28.
The forecast includes costs associated with formal proposals the City has made to labor unions. The forecast excludes potential State funding from the seventh round of the Homeless Housing, Assistance and Prevention (HHAP) program. Staff are waiting for more information from the State regarding the timing and potential additional requirements to receive funding.
It is important to note that the updated forecast also does not project a recession; if a recession were to occur the projected deficits would become much larger. The updated forecast also does not include potential losses of federal funds, changes in legislation, or directives of Federal agencies. Losses of federal funds would also worsen the City’s projected deficits.
A detailed forecast is included in the Financial Considerations section below.
Prior Year Savings
As presented in the FY2024/25 Annual Comprehensive Financial Report (ACFR), year-end net results (revenues less expenditures) resulted in one-time General Fund budgetary resources of $14.8 million, with $2.8 million from revenues and City operations and $12.0 million due to the repayment of unrealized investment losses on the treasury pool from prior years.
From the $14.8 million result, $7.1 million was used to fund the costs associated with an arbitration decision related to the Sacramento Police Officers Association (SPOA) labor agreement that expired on January 24, 2025. The City and SPOA engaged in negotiations but reached impasse on July 10, 2025. Pursuant to City Charter § 503 Impasse Resolution Procedures, the dispute was submitted to an Arbitration Board. The decision of the Arbitration Board is final and binding for both the City and SPOA. On September 9, 2025, Council passed a resolution (Resolution No. 2025-0248) to reflect those binding changes in the Citywide Salary Schedule. As stated in the staff report (File No. 2025-01382), the funding for FY2025/26 would be paid with the year-end balance. Due to this action, the final year-end result is $7.7 million.
Given the updated FY2025/26 General Fund five-year forecast projects a $66.2 million deficit in FY2026/27, staff recommends committing the $7.7 million for potential current year labor negotiation costs with any remainder towards FY2026/27 budget development; in compliance with the guidelines set in the Council-approved Prior Year Savings Policy (Attachment 4).
Two-Year Budget Development:
During the FY2025/26 budget process, there was a request to discuss the development of a two-year budget process. Staff discussed options with the Budget and Audit Committee on September 16, 2025, which is detailed below.
Due to the level of planning and resources required and current technology infrastructure, conducting a two-year budget for the upcoming budget cycle would be extremely difficult to achieve. However, there are several alternative options to consider if Council would like to balance the fiscal year after the Proposed Budget fiscal year:
• Option 1 - Balance the entire second-year budget: This could be achieved by approving additional reductions to be implemented in the second-year budget with unused reduction strategies from the Proposed Budget OR approve ongoing reductions in the Proposed budget to fully balance the second year.
• Option 2 - Determine a deficit percentage threshold for the second-year budget: Instead of attempting to balance the entire second-year budget, there would be a percentage threshold that the deficit must be under. For example, if the percentage threshold is 2% and the General Fund budget is $900 million, then the second-year budget cannot be in deficit by more than $18 million.
• Option 3 - Do not implement second-year budget reductions at this time.
The Committee passed a motion to move forward with Option 2 and asked staff to conduct research on the technology needed to conduct a formal two-year budget process. In addition, the Committee asked staff to bring deficit percentage threshold options. Staff discussed all options with Council on October 7, 2025., with a focus on Option 2. Council asked staff to provide updated deficit percentage threshold options when the FY2025/26 Forecast was updated.
Based on the updated FY2025/26 Forecast, the projected FY2027/28 deficit is $81.8 million. Below is a chart with deficit percentage threshold options and amounts based on the FY2027/28 expenditure amount of $931.2 million. The chart also shows the ongoing reduction amount that is required to meet the deficit threshold.
Staff will come back to the Committee with information on the cost and timeline of a financial system upgrade.
Recommended Adjustments to Current Year Authority
Authority for Community Development Department (CDD) Program
The CDD manages the Animal Care Services Capital Campaign Fund (Fund 3705). CDD receives donations throughout the fiscal year that could exceed the $250,000 authority. To ensure that CDD can budget based on donations received in Animal Care Services Capital Campaign Fund (Fund 3705), authority is needed to adjust the revenue and expenditure budgets. Similar authority language will be added to the FY2026/27 Budget Resolution.
Cost-Neutral Amendments to FY2025/26 Approved Budget
In the FY2025/26 Approved Budget, $300,000 was appropriated to the wrong project (Community Center/Fee Waiver Project [I19146000]) due to a project name/number mix-up. The $300,000 should have been appropriated to the Mayor/Council Economic Development (I19143000).
Additionally, a $166,101 cost reimbursement in the Youth, Parks and Community Enrichment department was erroneously charged to the General Fund (1001) instead of the Measure U Fund (2401).
Both cost-neutral changes do not affect the updated forecast and are corrected in the attached Resolution (Attachment 2).
End
PolicyConsiderations
Policy Considerations: This report is consistent with Council’s direction to keep the Council informed on the fiscal condition of the City.
End
EconomicImpacts
Economic Impacts: None.
End
EnvironmentalConsiderations
Environmental Considerations:
California Environmental Quality Act (CEQA): This report concerns administrative activities and government fiscal activities that do not constitute a “project” as defined by the CEQA Guidelines sections 15378 and California Public Resources Code section 21080 and are not subject to the provisions of CEQA (CEQA Guidelines section 15060(c)(3)). CEQA review for any project, which utilizes funds allocated in this report, has been or will be performed in conjunction with planning, design, and approval of each specific project as appropriate.
End
Sustainability
Sustainability: Not applicable.
End
RationaleforRecommendation
Rationale for Recommendation: The actions recommended in this report provide authority for adjustments necessary to complete the fiscal year and provide resources necessary to help close the budget gaps in future fiscal years.
End
FinancialConsiderations
Financial Considerations: The proposed budgetary commitment will help balance the FY2026/27 Proposed Budget.
Following is the five-year forecast in expanded detail:
The forecast shown above does not include $7.7 million in FY2024/25 year-end resources. Staff recommends committing the $7.7 million for any additional current year costs the City may incur during labor negotiations with any remainder committed to FY2026/27 budget development consistent with the Prior Year Savings Policy.
Ongoing reduction strategies adopted by Council during the FY2026/27 budget process will reduce the projected budget deficits in the future fiscal years of the forecasts.
End
LocalBusinessEnterprise
Local Business Enterprise (LBE): No goods or services are being purchased under this report.
End