HomeMy WebLinkAboutStaff Report 2511-5475, Staff Report 2412-3921CITY OF PALO ALTO
Finance Committee
Regular Meeting
Tuesday, December 02, 2025
Agenda Item
4.Accept the Fiscal Year 2026 First Quarter Financial Status Report Late Packet Report
Finance Committee
Staff Report
Report Type: ACTION ITEMS
Lead Department: City Clerk
Meeting Date: December 2, 2025
Report #:2511-5475
TITLE
Accept the Fiscal Year 2026 First Quarter Financial Status Report
This will be a late packet report published on November 26, 2025.
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Finance Committee
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Administrative Services
Meeting Date: December 2, 2025
Report #:2412-3921
TITLE
Accept the Fiscal Year 2026 First Quarter Financial Status Report
RECOMMENDATION
Staff recommend the Committee review and accept the Fiscal Year 2026 First Quarter Financial
Status Report.
EXECUTIVE SUMMARY
The purpose of this report is to provide the City Council with information on the financial status
of the City’s General Fund and Enterprise Funds as of the end of the first quarter of Fiscal Year
(FY) 2026 (July 1, 2025, through September 30, 2025). The figures presented in this report are
unaudited.
For the first quarter, General Fund revenues totaled $33.5 million, or 7.9% higher than the
same period of the prior fiscal year. First quarter General Fund receipts are not indicative of the
annual expected receipts in FY 2026 due to the timing of major revenues received over the
fiscal year. Expenditures totaled $65.3 million, 1.5% higher than the prior year and tracks 22.7%
of the Adjusted Budget.
All Enterprise Funds, except Airport Fund, resulted in a positive change in net position. The total
change in position increased by $0.7 million, or 2.0%, higher than the same period of the prior
fiscal year.
BACKGROUND
This report summarizes the financial information of the General and Enterprise Funds for the
first quarter ending September 30, 2025, of FY 2026 and compares those amounts to the same
period of the prior fiscal year and to the FY 2026 Adjusted Budget.
Attachment A provides a breakdown of revenues by source and expenses by function, with
separate columns for Adopted Budget and Adjusted Budget. The Adjusted Budget column
includes prior year commitments that were carried forward into this fiscal year and
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amendments to the FY 2026 Adopted Budget through September 30, if any. Encumbrances and
actual expenditure for the three months are also reported.
ANALYSIS
GENERAL FUND
th. Although sales tax increased by close to 9% in the first quarter
compared to the same period in prior year, the City has experienced an overall sales tax decline
over the past twelve months. In the quarter ending June 30, 2025, leasing, which represents
12.7% of the City’s total sales tax, decreased by 41.6%. As discussed with the Finance
Committee on November 18, 20251 and in the FY 2027 to 2036 Long Range Financial Forecast,
sales tax is projected to decline by approximately $8 million to $9 million in FY 2026.
Revenue Highlights for First Quarter FY 2026
2.
1 Finance Committee, November 18, 2025, Item #2:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=16320
2 November 18, 2025 Finance Committee Action Minutes
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Table 1
Sales Tax cash receipts totaled $2.8 million for the first quarter. This represents one month’s
sales tax activity due to the two-month delay between sales tax collection by the State and
remittance to the City. The FY 2026 Sales Tax performance is expected to decline and fall below
budgeted levels. The FY 2025 actual sales tax revenue was $35.2 million, $2.3 million or 6.5%
higher than FY 2024.
The FY 2026 budget amount is $36.4 million, 3.4% higher than the prior year’s actual revenue.
Sales tax performance is expected to decrease in the current year with several key sectors
showing year-over-year declines. The business-to-business and transportation sectors are the
primary drivers of this downturn, reflecting changes in local activity and broader shifts in the
State’s allocation methodology. These conditions indicate that FY 2026 revenues will fall below
the adopted budget, with an estimated one-time reduction of $8.0 to $9.0 million, followed by
an approximate ongoing $5.0 million decrease in the underlying base.
Property Tax in the first quarter of the fiscal year is the typical nominal amount, as property tax
receipts are mostly paid by the County over three months beginning in the month of November
and then again beginning in March. FY2025 actuals are $3 million or 4.6% over the prior fiscal
year, primarily driven by a change in assessed values due to ownership change in FY 2025, plus
the expected 2% Proposition 13 overall annual increase in FY 2026.
The FY 2026 Adopted Budget is $73.6 million, $4.2 million higher than the prior year’s actual
revenue and $5 million higher than the FY 2025 adjusted budget. The FY 2026 updated forecast
anticipates a $1.3 million or 1.7% decrease and reflects the County’s most recent estimates.
Receipts for November will be reviewed; staff will recommend adjustments to this revenue, if
needed, during year Mid-Year Budget Review.
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Educational Revenue Augmentation Fund (ERAF) distributions from the County of Santa Clara
were $5.6 million, $6.6 million, $6.4 million, $7 million, and $7.1 million in fiscal years 2021
through 2025, respectively. In November 2021, Santa Clara County informed cities that the
California School Boards Association had sued the State Controller over the distribution of ERAF
funds. The case was resolved favorably; however, two new risks have emerged. The first stems
from the State Controller’s audit on Marin County’s ERAF methodology, which also applies to
Santa Clara County, and asserts that former Redevelopment Agency funds, now part of regular
property taxes, should be excluded from the excess ERAF calculation. Both Marin and Santa
Clara counties have filed lawsuits challenging this finding. If upheld, an estimated 18% to 22% of
excess ERAF from FY 2021 through FY 2025, and potentially future years, may be at risk. To
mitigate this risk, the City established a reserve for potential ERAF losses, with a balance of $7.1
million as of June 30, 2025. The City continues to monitor these developments and will update
financial assumptions as new information becomes available.
Transient Occupancy Tax (TOT) cash receipts for about one and a half months totaled $3.2
million, or 10.9% of the FY 2026 Adopted Budget, and are $0.8 million, or 19.9%, decrease from
prior fiscal year receipts for the same period. This decrease is primarily due to the timing of hotel
remittances rather than underlying economic changes. During the first two months of the fiscal
year, hotels reported an average daily room rate of $225.86 and an occupancy rate of 82.3%,
compared to $238.76 and 70.2% in the prior fiscal year. TOT receipts have grown at a compound
annual growth rate (CAGR) of 9.3% over the past five years and 5.7% over the past ten years,
reflecting a rebound from pandemic lows and overall sustained recovery in the local hotel
market.
Documentary Transfer Tax cash receipts for two-and-a-half months total $2.1 million, or 25.1%
of the FY 2026 Adjusted Budget, and are $0.6 million, or 43.3%, increase over prior year
receipts for the same period due to the higher total property sales value. The number of
transactions is 2.0% higher compared to the prior fiscal year's first quarter. This revenue source
is volatile; it is highly dependent on sales volume and the mix of commercial and residential
sales. Staff continue to monitor these receipts closely due to significant fluctuations that can
occur anytime, depending on the real estate sales activity. The budgeted amount of $8.5
million, which is 1.8% higher than the actual receipts of the prior year, is still expected to be
realized.
Utility User Tax (UUT) revenue totals $4.5 million, or 21.3% of the FY 2026 adjusted budget and
is $1 million, or 5.1% than the prior year’s actuals. This is $0.1 million, or 1.8%, consistent with
the prior fiscal year’s receipts.
Business Tax revenue in the first quarter of the fiscal year is a nominal amount as businesses
are required to file business tax quarterly, but it is due on the first day of the following at the
end of each quarter. For example, the quarterly tax for the July-September period is due
October 1st and is delinquent 30 days later. The FY 2026 Adjusted Budget includes $6.7 million
for business tax revenue. The tax became effective in January 2023 at half of the full rate, or
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3.75 cents per square foot per month. The full rate of 7.5 cents per square foot per month
became effective in January 2025, making FY 2026 the first fiscal year reflecting the full rate.
The tax has an annual cap of $0.5 million per business, and both the rate and the cap are
increased by 2.5% annually beginning FY 2027.
Charges for Services increased by $2.1 million, or 34.2% compared to the same period of the
prior fiscal year. The growth was primarily driven by a timing difference in the recognition of Golf
Course revenue in the prior year, the introduction of the new First Responder Fee in FY 2026,
higher Paramedic fee rates and transport volumes, and greater demand for zoning plan check
services related to new construction projects across the City- including the multifamily apartment
development at 3150 El Camino Real, as well as the higher community program drop-in
admission.
All Other Revenue Sources increased primarily due to timing differences, including the earlier
receipt of the Motor Vehicle In-Lieu Tax, which in FY 2025 was received in December 2024, the
Stanford billing for Silicon Valley Regional interoperable communications for public safety, and
the higher rental income resulting from annual rate adjustments
Expenditure Highlights for First Quarter FY 2026
Table 2
Expenditures FY 2026 FY 2025 Inc/(Dec) % change FY 2026 % FY 2025 %
Police 15,108$ 15,500$ (392)$ -2.5% 57,713$ 26.2% 56,365$ 27.5%
Fire 14,867 14,550 317 2.2% 59,504 25.0% 55,441 26.2%
Community Services 10,086 10,136 (50) -0.5% 44,786 22.5% 42,300 24.0%
Public Works 6,596 5,977 619 10.4% 28,753 22.9% 27,190 22.0%
Planning and Development Services 5,686 5,425 261 4.8% 29,336 19.4% 29,009 18.7%
Library 3,370 3,230 140 4.3% 13,085 25.8% 12,840 25.2%
Administrative Services 2,716 2,843 (127) -4.5% 12,039 22.6% 12,154 23.4%
All Other Departments 6,838 6,649 189 2.8% 42,176 16.2% 45,417 14.6%
Total Expenditures 65,267$ 64,310$ 957$ 1.5% 287,392$ 22.7% 280,716$ 22.9%
General Fund Expenditures
FY 2026 1st Quarter YTD
(000's)
1st Quarter Actuals Adjusted Budget
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For the first quarter, total expenses increased modestly by $0.9 million, or 1.5%, compared to
the same quarter in the prior year, consistent with the adjusted budget at 22.7%. This increase
primarily reflects higher salary and benefit costs, including the 2.5-3.0% cost-of-living
adjustment for all labor groups effective July 1, 2025; flexible compensation options; rising
health premium costs; and the filling of previously vacant positions. These increases were
partially offset by lower employer pension and medical costs resulting from actuarial
adjustments in the June 30, 2023, CalPERS valuation, which reduced the City’s required FY 2026
contributions. Lower pension costs reflect the shift to expensing only Normal Costs to
departments and allocating flat-dollar Unfunded Actuarial Liability (UAL) on a quarterly, actuals
basis rather than in a single adjustment at year-end. Also, the lower medical cost reflects the FY
2025 year-end reclassification of the employee portion ($1 million) back to the departments.
Public Works expenditures increased $0.6 million, or 10.4%, primarily due to higher contract
services costs. The increase in contract services is attributable to the expanded tree
maintenance work and the interim security services at the Municipal Service Center (MSC).
Police and Fire accounted for 45.9% of total General Fund expenditure in the first quarter,
consistent with the prior year.
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Table 3
Police overtime remains consistent with the prior year and accounts for 23.7% of the adjusted
budget due to improved recruitment efforts. As of the end of the first quarter of FY 2026, the
Department had 13 vacancies, representing 9% of its 139 authorized FTEs- 11 police officer
positions and 2 dispatchers. The Police Department utilizes overtime to cover staffing gaps
resulting from vacancies, training, leaves of absence, and to meet infrequent increases in
demand, such as major incidents or accidents. Most overtime is attributed to staffing police
officer positions. Currently, 60 non-management police officers are available for duty,
representing 71% of the authorized 84 positions. In addition to the vacancies noted above, 9
officers are unavailable due to long-term injuries or approved leaves, and 4 are attending the
police academy or field training. An analysis is included in Attachment B.
Fire overtime results from filling shift vacancies. The department requires 25 daily positions to
keep fire engines and ambulances fully staffed. Any vacancy due to open positions, injury leave,
training, or other absences must be covered to maintain operations. In the first quarter of FY
2026, there were 10 vacant positions and 7 employees on injury leave, like FY 2025 first
quarter. Overtime costs were lower mainly because there were fewer State Strike Team
deployments, compared to the 8 incidents in FY 2025 first quarter that incurred overtime pay.
An analysis is included in Attachment B.
Expenditures FY 2026 FY 2025 % change FY 2025 %
Inc (Dec)
Police - Salaries $5,568 $5,477 1.7% $24,338 23,793 23.0%
Police - Overtime 1,085 1,057 2.6% 4,574 5,868 18.0%
Total Police 6,653 6,534 1.8% 28,912 29,661 22.0%
Fire - Salaries 5,351 4,840 10.6% 22,924 21,628 22.4%
Fire - Overtime 1,373 1,716 -20.0% 3,080 2,721 63.1%
Total Fire 6,724 6,556 2.6% 26,004 24,349 26.9%
Total Public Safety
Salaries & Overtime 13,377$ 13,090$ 2.2% 54,916$ 54,010$ 24.2%24.4%
23.3%
44.6%
25.9%
22.9%
23.7%
23.0%
1st Quarter Actuals Adjusted Budget
FY 2026 %
Police and Fire
Salaries and Overtime Expense
FY 2026 1st Quarter YTD
(000's)
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The BSR ended FY 2025 at $58.9 million, but after adjusting the BSR for FY 2026 additions
approved by Council, the net BSR balance is $58.8 million or $2.0 million above Council’s 18.5%
BSR target level. The FY 2025 savings in salary & benefit, contracts services and other expenses
contributed to this higher BSR. Staff recommend that the $2.0 million above the 18.5% BSR
target level be kept in BSR for future budget balancing strategy and projected FY 2027 budget
shortfall and ensure the City maintains high quality service level. Consistent with current
practice, any budget actions to allocate the BSR funds above the 18.5% target level will be
included in the FY 2026 Mid-Year Review (February 2026).
Enterprise Funds
Table 4
Water Fund increased $1.9 million, or 38.3%, compared to the prior fiscal year. This change was
primarily due to a $1.7 million increase in operating revenues, mainly from customer sales, and
a $0.2 million decrease in operating expenses. The increase in customer sales resulted from
10.0% overall rate increase for residential and commercial customers, effective July 1, 2025.
Operating expenses decrease primarily due to lower salaries and benefits and contract services.
Increase
Funds FY 2026 FY 2025 (Decrease)% Change
Water 6,802$ 4,918$ 1,884$ 38.3%
Electric 12,437 18,077 (5,640)-31.2%
Fiber Optic 58 316 (258)-81.6%
Gas 731 (776)1,507 194.2%
Wastewater Collection 1,951 998 953 95.5%
Wastewater Treatment 8,664 6,779 1,885 27.8%
Refuse 3,265 2,926 339 11.6%
Storm Drainage 523 429 94 21.9%
Airport (280)(183)(97)-53.0%
Total Change in Net Position 34,151$ 33,484$ 667$ 2.0%
Enterprise Funds Change in Net Position
FY 2026 1st Quarter YTD
1st Quarter Actuals
(000's)
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Electric Fund decreased by $5.6 million, or 31.2%, compared to the same period in prior fiscal
year. In FY 2025, operating expenses increased by $13.4 million compared to prior year, which
was offset by a $7.5 million increase in operating revenues. The increase in operating revenues
was due to a 6.0% electric rate adjustment effective July 1, 2025 and higher commercial usage.
The operating expenses increase was due to higher commodity costs, as Resource Adequacy (RA)
purchase prices were significantly higher than in the prior year. Western Power purchase costs
also increased as the contract transitioned into a high-cost year within its multi-year power
revenue requirement cycle. In addition, Central Valley Project Improvement Act (CVPIA)
Restoration Fund charges increased from $1.7 million in FY 2025 to $3.3 million in FY 2026 under
the updated contract.
Gas Fund increased by $1.5 million or 194.2%, compared to the same period in the prior fiscal
year. Operating revenues increased, driven primarily by higher customer sales. This reflects the
5.0% gas rate adjustment effective July 1, 2025, coupled with increased consumption. In
addition, the rate of return payment to the General Fund decreased by $0.3 million, which
further contributed to the net increase in the fund balance for the period. Operating expenses
increased by $0.3 million, reflecting higher contract services and commodity purchases
associated with the rise in commercial usage.
Wastewater Collection Fund increased by $1.0 million or 95.5%, compared to the same period
in the prior fiscal year. Operating revenues increased by $1.4 million, driven primarily by higher
customer sales resulting from the 20.0% rate adjustment for residential and commercial
customers effective July 1, 2025. Operating expenses increased by $0.3 million, reflecting the
fund’s higher allocated share of wastewater treatment costs paid to the Regional Water Quality
Control Plant (RWQCP). These costs include RWQCP’s operating requirements, debt service
obligations, capital improvement project funding, and depreciation.
Wastewater Treatment Fund increased by $1.9 million or 27.8%, compared to the same period
in the prior fiscal year. Operating revenues increased by $2.5 million, driven primarily by the
recovery of rising operating and maintenance costs from partner agencies and the timing of
billings. This includes a $7.1 million advance billing to the City of Mountain View for the
Advanced Water Purification Project and a $1.1 million billing to Valley Water for first-quarter
expenses. The increase in revenues also reflects standard cost-recovery allocations across the
six partner agencies, with Mountain View representing the largest share. Operating revenues
were impacted in this period relative to FY 2025 due to timing differences related to the Joint
Intercepting Rehabilitation Project advance billing and accelerated second-quarter billings that
were recognized in the prior fiscal year. Operating expenses increased by $0.7 million, reflecting
higher contract services, increased supplies and materials, and higher indirect charges.
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FISCAL/RESOURCE IMPACT
STAKEHOLDER ENGAGEMENT
ENVIRONMENTAL REVIEW
ATTACHMENTS
APPROVED BY:
CITY OF PALO ALTO
GENERAL FUND FIRST QUARTER FINANCIAL REPORT
FISCAL YEAR ENDING JUNE 30, 2026
(in thousands)
BUDGET ACTUALS (as of 9/30/2025)
Adopted Adjusted Pre % of Adj
Categories Budget Budget Encumbr Encumbr Actual Budget*
Revenues & Other Sources
Sales Tax 36,377 36,377 - - 2,809 7.7%
Property Tax 73,627 73,627 - - 87 0.1%
Transient Occupancy Tax 29,139 29,139 - - 3,162 10.9%
Documentary Transfer Tax 8,542 8,542 - - 2,148 25.2%
Utility Users Tax 21,437 21,437 - - 4,565 21.3%
Business Tax 6,488 6,738 - - 138 2.1%
Other Taxes and Fines 780 780 - - 275 35.3%
Charges for Services 44,293 44,209 - - 8,277 18.7%
Permits & Licenses 10,671 10,705 - - 2,557 23.9%
Return on Investment 3,742 3,742 - - 857 22.9%
Rental Income 16,448 16,448 - - 3,789 23.0%
From Other Agencies 1,830 1,921 - - 756 39.4%
Charges To Other Funds 15,547 15,547 - - 3,919 25.2%
Other Revenues 785 785 - - 131 16.7%
Total Revenues 269,706 269,997 - - 33,473 12.4%
Operating Transfers-In 31,459 31,459 - - 7,865 25.0%
Encumbrances and Reappropriation 12,203 25,934 - - - 0.0%
Total Sources of Funds 313,369 327,390 - - 41,338 13.7%
Expenditures & Other Uses
City Attorney 5,094 5,855 15 1,081 1,288 40.7%
City Auditor 995 1,412 2 283 38 22.9%
City Clerk 1,542 1,609 18 240 373 39.2%
City Council 550 589 0 80 126 35.0%
City Manager 5,356 5,514 25 148 1,472 29.8%
Administrative Services 11,831 12,039 23 281 2,716 25.1%
Community Services 43,495 44,786 3,328 4,542 10,086 40.1%
Fire 59,966 59,504 46 693 14,867 26.2%
Human Resources 5,655 5,318 27 85 1,402 28.5%
Library 12,925 13,085 120 784 3,370 32.7%
Office of Emergency Services 1,728 2,091 - 325 403 34.8%
Office of Transporation 3,464 3,850 0 338 666 26.1%
Planning and Development Services 24,768 29,336 38 4,305 5,686 34.2%
Police 58,243 57,713 10 914 15,108 27.8%
Public Works 25,662 28,753 73 7,468 6,596 49.2%
Non-Departmental 12,173 15,678 100 413 1,068 10.1%
Total Expenditures 273,449 287,134 3,824 21,980 65,267 31.7%
Operating Transfers-Out 6,383 6,383 - - 1,596 25.0%
Transfer to Infrastructure 33,057 33,328 - - 8,264 24.8%
Total Use of Funds 312,889 326,845 3,824 21,980 75,127 30.9%
Net Change to BSR 479 545 (33,789)
BSR Balance, FY 2025 58,865 58,865
Less: Reserve for BT Transport & Housing (258) (258)
FY2026 Amendments 66
BSR Balance, FY 2026 59,086 59,152
BSR % of Adopted Total Use of Funds 19.3% 19.3%
ATTACHMENT A
Attachment C
2024 2025 2026 Q1
POLICE DEPARTMEN
Overtime Expens
Adopted Budget (A)$1,028,988 $1,098,939 $1,173,110
Modified Budget (B)1,028,988 1,098,939 1,173,110
Net Overtime Cost - see below 1,160,290 1,868,684 250,569
Variance to Budget (131,303) (769,745) 922,541
Overtime Net Cos
Actual Expense $3,467,691 $3,181,061 $1,084,887
Less Reimbursements
Other Program Reimbursements 259,747 - 310,499
California OES/FEMA (Strike Teams) - - -
Stanford Communications 99,161 109,651 23,952
Utilities Communications Reimbursement 56,429 67,170 13,801
Local Agencies (C)6,574 6,813 2,685
Police Service Fees 117,433 138,141 23,738
Total Reimbursements 539,345 321,775 374,674
Less Department Vacancies (A)1,768,057 990,602 459,644
Net Overtime Cost $1,160,290 $1,868,684 $250,569
Department Vacancies (number of days)5,419 2,733 1,101
Workers' Compensation Cases 21 13 2
Department Disabilities (number of days)381 664 265
FIRE DEPARTMEN
Overtime Expens
Adopted Budget (D)$2,146,234 $2,721,066 $3,079,691
Modified Budget (E)2,146,234 5,216,682 3,079,691
Net Overtime Cost - see below 1,734,841 3,474,470 1,166,191
Variance to Budget 411,393 1,742,212 1,913,499
Overtime Net Cos
Actual Expense $4,099,233 $5,288,738 $1,373,447
Less Reimbursements
California OES/FEMA (Strike Teams) - 957,482 107,417
Fire Station 8 Fire Services 272,267 57,315
Total Reimbursements - 1,229,749 164,732
Less Department Vacancies (D)2,364,392 584,519 42,524
Net Overtime Cost $1,734,841 $3,474,470 $1,166,191
Department Vacancies (number of days)5,297 3,401 361
Workers' Compensation Cases 8 16 6
Department Disabilities (number of days)274 395 137
NOTES:
(A)The FY 2026 Police Department budget did not include any new positions.
(B)Police Department adopted budget has not been adjusted in FY 2026.
(C)Includes Animal Control Services contract with Los Altos and Los Altos Hills.
(D)The FY 2026 Fire Department budget was increased by 3.0 Fire Captains and 7.0 Single Role EMS Division positions.
(E)Fire Department adopted budget has not been adjusted in FY 2026.
Public Safety Departments
Overtime Analysis for Fiscal Years 2024 through 2026