CITY COUNCIL SPECIAL MEETING AGENDA PACKET 2

CITY COUNCIL AGENDA REPORT April 8, 2025 Finance TITLE: RECEIVE A REPORT ON THE FISCAL YEARS 2025/26 - 2026/27 PRELIMINARY BUDGET REDUCTION RECOMMENDATIONS AND PROVIDE DIRECTION TO INFORM DEVELOPMENT OF THE TWO-YEAR GENERAL FUND OPERATING BUDGET SUMMARY The City faces an ongoing structural fiscal deficit. To begin to address this challenge, the City identified a need for approximately $10 to12 million in ongoing General Fund reductions in each of the next two fiscal years. Over the last decade or more, revenues were not keeping pace with expenses and the City’s historical financial practices “were lacking in a number of areas relative to long- term financial planning” (Eide Bailly Report, Feb. 2025). While certain actions were taken, like establishing a Section 115 pension trust (a budget stabilization tool to prefund pension liabilities), over time, these challenges left the City with an operating budget that is not sustainable. In addition to the operating budget issues, there is inadequate funding for the City’s vehicles, buildings, facilities, parks, streetlights, other capital assets, and pension liability (even with the Section 115 Pension Trust). After diligent work to understand the scope of the financial challenges in 2022 and 2023, the City placed Measure PP, a proposed ½ percent sales tax increase that was projected to generate approximately $10 million of new General Fund revenue each year for 10 years, on the November 2024 ballot. Based on the City’s financial forecast, some spending reductions would have been necessary even with the passage of Measure PP. However, the failure of Measure PP necessitates deeper cuts to the City’s spending or more use of one-time funding/emergency reserves to achieve a balanced budget. This agenda report presents the Fiscal Year (FY) 2025/26 and FY 2026/27 Preliminary Budget Reduction recommendations (see Attachment 1 for a Summary of the Potential Reductions). Direction from this workshop will be used to prepare the City Manager’s proposed two-year budget which will be presented to the City Council on May 20, 2025. Any final direction from the City Council at that meeting will be incorporated into the budget, so it can be recommended for adoption in June. RECOMMENDATION Receive a report on the FY 2025/26 and FY 2026/27 preliminary budget reduction recommendations and provide direction to inform the development of the two-year operating budget. Item #2 Page 3 of 40