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CC Resolution 13307 - Establishing Appropriations Limit for FY 2026RESOLUTION NO. 13307 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CAMPBELL ESTABLISHING THE APPROPRIATIONS LIMIT FOR FISCAL YEAR 2026 PURSUANT TO ARTICLE XIIIB OF THE CALIFORNIA ST ATE CONSTITUTION WHEREAS, Proposition 4 was adopted by the voters of the State of California on November 6, 1979, adding Article XIII B of the California State Constitution.; and WHEREAS, Proposition. 111 was adopted by the voters of the State of California on June 5, 1990, amending Article XIII B of the California State Constitution; and WHEREAS, pursuant to Section 8 of Article XIII B of the California State Constitution, the City Council determines that the change in the cost of living shall be measured by the percentage change in Per Capita Personal Income as provided by the State of California Department of Finance from the preceding year and the change in population shall be measured by the change in the County of Santa Clara's population growth, and WHEREAS, the City Council of the City of Campbell wishes to establish this appropriations limit for the Fiscal Year 2026 pursuant to Article XIII B of the California State Constitution-, NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Campbell hereby finds and determines that the appropriations limit for Fiscal Year 2026 is $99,596,588. PASSED AND ADOPTED this day 17th of June, 2025, by the following roll call vote: AYES: Councilmembers: Bybee, Hines, Scozzola, Furtado, Lopez NOES. Councilmembers: None ABSENT: Councilmembers: None APPROVE,�,> Sergio Lopez, Mayor ATTEST: /� wvvc Andrea Sanders, Piy Clerk June 17, 2025 Honorable Mayor, Vice -Mayor, and City Councilmembers: I am pleased to present to you for formal consideration and adoption the Proposed Fiscal Year (FY) 2026 Operating Budget and 2026 - 2030 Five -Year Capital Improvement Plan (CIP). The Operating Budget and CIP serve as a policy document, a financial plan, a communication's device, and an operation's guide; reflecting the policies, goals, programs, and service priorities and values of the City Council and the Campbell community. Specifically, the current budget and CIP process continues to emphasize a Priority -Based Budgeting approach to link City resources with the strategic priorities of the City Council and community, while also seeking to maintain fiscal prudence. To accomplish this, several meetings with the City Council and the community were held on the following dates: • March 6 Special Meeting — Strategic Priorities Discussion • March 13 ReQular Meeting — Strategic Priorities Adoption • May 6 Budget Study Session — Preliminary Workplans, Operating Budget, and CIP • June 3 Regular Meeting — Introduction of Budget and CIP The budget development process though continues to be an iterative process and there will be additional opportunities for Council feedback as well as community input on June 17 (Budget Adoption). Any further Council feedback that reaches majority consensus at the June 17 Budget Adoption will be incorporated into the final Adopted Budget and CIP if it is fiscally feasible. In preparation for those meetings and so as to provide a high-level overview of the proposed budget and CIP, this transmittal letter will address the following items: • A — Significant Changes since June 3 Introduction • B — Financial Summary • C — Economic Update and Outlook • D — Long -Range Forecast • E — Budget Awards • F — Conclusions and Acknowledgments • Exhibit A - FY 2026 Adopted City Council Priorities • Exhibit B — FY 2026 Proposed Workplans A — SIGNIFICANT CHANGES SINCE JUNE 3rd INTRODUCTION The following section details significant changes to the Proposed FY 2026 Operating Budget and 2026 — 2030 CIP since the June 3 Budget Introduction. All changes shown below are built into the proposed budget numbers and schedules before Council: Publication of Legal Notices (Community Development Department Acct # 101.550.7422) — Based on further analysis of need, this expenditure account has been increased by $2,500 in the FY 2026 Proposed Budget. Cities Association Planning Collaborative (Community Development Department Acct # 101.550.7427) — Based on further analysis of need, this expenditure account has been decreased by $2,500 in the FY 2026 Proposed Budget. The revisions proposed above offset each other fully and there have been no other changes made to the Proposed Budget or CIP since the June 3 Introduction. B - FINANCIAL SUMMARY General Fund — Financial Summary Table 1— General Fund Summary FUND BALANCE REPORT 101 FY 23 Actual FY 24 Actual FY 25 Est. FY 26 Prop. %Chg* Beginning Fund Balance July1(A) $ 16,907,710 $ 17,124,190 $ 15,945,340 $ 15,945,340 (A) - Econ Fluctuations + Emergency+ Unassigned + PERS Revenues Total Revenues $ 63,029,077 $ 64,774,966 $ 70,581,193 $ 69,023,160 -2.2% Expenditures FY 23 Actual FY 24 Actual FY 25 Est. FY 26 Prop. %Chg* Total Expenditures by Type $ 62,812,598 $ 65,953,816 $ 70,581,192 $ 69,023,160 -2.2% Revenues vs Expenditures $ 216,479 $ (1,178,850) $ - $ - Ending Fund Balance June 30 $ 17,124,190 $ 15,945,340 $ 15,945,340 $ 15,945,340 *% Change from FY 2025 Estimated to FY 2026 Proposed Budget For a more detailed Fund Balance Report, please see the Fund Summaries section of the Budget book Currently Proposed FY 2026 Operating and Capital expenditures for the General Fund equal $69.0 million. This proposal results in General Fund expenditures being fully balanced against estimated General Fund revenues in FY 2026. The General Fund, expenditures for FY 2026 show a 2.2% decrease when compared to FY 2025 Year -End Estimates of $70.6 million. General Fund revenues for FY 2026 also show a 2.2% decrease when compared to FY 2025 Year -End Estimates of $70.6 million. The proposed budget includes: All current City operations remain largely status quo, but FY 2026 budget requests account for inflation, contractually agreed to increases to vendors, and other costs to meet high priority Workplan objectives, No Cost of Living Adjustments (COLAs) for any bargaining unit or employee, with all Memorandums of Understanding (MOUs) expiring either June 30, 2025 (CMEA, CPCEA, CARP, Confidential, MGMT, UNREP) or December 30, 2025 (CPOA). 8% increase to City's Healthcare Contribution Levels (effective January 1, 2026) for all bargaining unit and employees at a cost of $120,000 in FY 2026. This increase was not previously included in the preliminary budget presented at the May 6 Budget Study Session, • Reclassifications of several positions due to evolving operational needs including the upgrade of one (1) IT Administrator to Sr. IT Administrator at a cost of $14,800, the upgrade of one (1) Environmental Programs Specialist (Public Works) to Environmental Programs Coordinator (Public Works) at a cost of $29,900, the upgrade of one (1) Police Records Specialist to Crime Analyst at a cost of $10,300, the upgrade of one (1) Executive Assistant (Police) to Executive Assistant to the Police Chief at a cost of $6,800, the downgrade of one (1) Sr. Building Inspector to Building Inspector at a savings of $13,500, and the downgrade of one (1) Principal Planner to Sr. Planner at a savings of $13,500. All reclassifications are newly added items since the May 6 Budget Study Session, • Extension of a Limited -Term Environmental Program Specialist in Community Development for six (6) months through June 30, 2026 at a cost of $69,400, • $2.4 million in interfund operating transfers out to support operations in other funds; including $1.1 million to support the Lighting and Landscaping District Fund, $561,006 to support the IT Fund, and $766,000 to pay for 2016 Lease Revenue Bond (LRB) debt service, • $1.3 million in interfund capital transfers out to support Capital Improvement Plan Reserve (CI PR) projects; with $550,000 set aside as the General Fund's annual Cl PR contribution towards new projects and $697,245 for carryover CIPR projects previously approved • $25,000 in interfund capital transfers out to support Construction Tax projects; with the entire amount proposed to be offset by a drawdown of Construction Tax reserves, • Incorporation of several short-term corrective budget strategies on the expenditure side which will be discussed below. Related General Fund revenue sources also total $69.0 million and include: • $581,000 million in interfund operating transfers in to support General Fund operations; including an approximately $377,000 proposed transfer from ARPA fund excess accumulated interest earnings to support various General Fund operations and extension of the Limited -Term Environmental Programs Specialist in Community Development through at least June 30, 2026, a normal $148,000 transfer from the Community Facilities District (CFD) #1 fund to support Police and Fire services, $6,000 from the CFD #2 fund to support Land Development, and $50,000 from the Motor Vehicle Pool fund to support Administrative and Fiscal Oversight of the division, • $697,245 draw from the accumulated CIPR funds to support $697,245 in carryover CIPR projects previously approved, • $25,000 draw from Construction Tax reserve to support capital projects as previously discussed, • $229,000 downward revision of Sales and Use Tax revenue estimates from the May 6 Budget Study Session based on further analysis of the impact of a large sales tax generator leaving Campbell in October 2026 as well as updated forecasts for all sales tax generators within Campbell, • Incorporation of short-term corrective budget strategies on the revenue side which will be discussed below. Short -Term Corrective Budget Strategies Based on City Council feedback at the May 6 Budget Study Session staff incorporated several short-term budget corrections strategies to fully close the budget gap in FY 2026. At the May 6 Budget Study Session, staff presented Council with an estimated $3.17 million structural operating deficit within the FY 2026 Preliminary General Fund Operating Budget. Without further corrective action, the Geneal Fund operating deficit would have increased to $3.75 million in FY 2026. However, the following corrective measures have been proposed that result in a balanced budget proposal. Based on Council feedback received at the June 3 Budget Introduction, these measures have not changed and are summarized in Table 2 below and detailed further immediately following the table: Table 2 — FY 2026 General Fund Budget Correction Strategies Incorporated Correction Strategy FY 2026 Impact Temporary Hiring Freeze $1,242,599 Limited to No Use of Temporary Staffing in FY 2026 $284,750 Misc. Expend. Reductions or Revenue Enhancements $530,000 Utilization of Unexpected FEMA Reimbursement for COVID Expenses $259,000 Utilization of All Realized and Estimated Excess ARPA Interest Earnings $229,730 Utilization of a portion of the Cit 's CalPERS Pension Reserve $558,000 Liquidating Duplicative General Fund Reserves $641,000 TOTAL $3,745,079 Temporary Hiring Freeze (Estimated Savings of $1.77 million across all City Funds and $1.24 million within the General Fund) — At the May 6 Budget Study Session, staff identified 23 vacant positions equaling $4.17 million in FY 2026 and proposed that some be frozen for all or part of FY 2026; resulting in potential savings of $1.67 million across all City Funds and $1.19 million within the General Fund in FY 2026. Since that time, in a strategic and targeted manner and taking into account operational, Workplan, and service needs, the Executive Team further reviewed the vacancy list and established recommended hire by dates for each currently vacant position shown in Table 3 below. Adjustments to any dates shown could have additional savings or costs depending on whether hired later or sooner: Table 3 — Vacant Positions Department JobTitleI Full Year FY26Cost iHireByDatel Prorated Y26Cost �SavingsFY26 City Manager HR ANALYST $ 190,164 7/1/2026 $ - $ (190,164) City Manager HR REP $ 160,371 6/1/2025 $ 160,371 $ - City Manager IT MANAGER $ 260,971 9/1/2025 $ 216,642 $ (44,329) Comm Dev BLDG INSPECTOR $ 198,069 7/1/2026 $ - $ (198,069) Finance EXECUTIVE ASST (FN) $ 154,764 7/1/2026 $ $ (154,764) Police COMM SERV OFFICER $ 162,709 7/1/2026 $ $ (162,709) Police EM ERG SVCS COORD $ 119,865 7/1/2026 $ $ (119,865) Police PS DISPATCHER $ 192,305 7/1/2025 $ 192,305 $ Police PS DISPATCHER $ 192,305 7/1/2025 $ 192,305 $ Public Works BLDG MNT WKR $ 165,112 7/1/2026 $ - $ (165,112) Public Works ENGR TECH I $ 167,629 7/1/2026 $ - $ (167,629) Public Works ENVIRO PRGMS SPEC $ 151,534 10/1/2025 $ 113,339 $ (38,195) Public Works EQUIP MNT SPVSR $ 188,573 7/1/2026 $ - $ (188,573) Public Works LGT/TRF SIG SPVSR $ 213,546 7/1/2025 $ 213,546 $ Public Works MAINT WORKER I (Parks) $ 132,992 7/1/2025 $ 132,992 $ Public Works MAINT WORKER I (Parks) $ 132,992 7/1/2025 $ 132,992 $ Public Works PARK MNT SPVSR $ 219,482 7/1/2026 $ - $ (219,482) Public Works PUBLIC WORK DIR $ 338,522 7/1/2025 $ 338,522 $ Public Works SR CIVIL ENGR $ 247,042 7/1/2025 $ 247,042 $ Public Works STR MNT LEAD WKR $ 155,670 7/1/2025 $ 155,670 $ Public Works STREET MNT SUPERVISOR $ 211,720 9/1/2025 $ 175,757 $ (35,963) Rec & Comm REC SPECIALIST (PPT) $ 84,287 7/1/2026 $ - $ (84,287) Rec&Comm REC SPEC FACI LITI ES $ 126,624 6/1/2025 $ 126,624 $ - TOTALS $ 4,167,248 $ 2,398,106 $(1,769,142) Fund Full Year FY26 Cost Prorated FY26 Cost I Savings FY26 101-General Fund $ 2,499,768 $ 1,257,169 $(1,242,599) 204-Gas Tax $ 367,390 $ 331,427 $ (35,963) 207-Lightingand Landscape $ 699,012 $ 479,530 $ (219,482) 209-Environmental $ 151,534 $ 113,339 $ (38,195) 641-Motor Vehicle Pool $ 188,573 $ - $ (188,573) 647-MIS Pool $ 260,971 $ 216,642 $ (44,329) Fund Totals $ 4,167,248 $ 2,398,106 $(1,769,142) • Limited to No Use of Temporary Staffing in FY 2026 (285 000) - Due to previous hiring freezes, delayed recruitments, operational needs, and high -priority Workplan items, the City has utilized the services of temporary employees in various departments (Community Development, HR, and IT) that come from staffing agencies and other professional services firms. In FY 2025 alone, these costs are estimated to reach $605,000. Given the potential of a temporary hiring freeze for permanent staffing and the City's ongoing fiscal constraints, limiting the use of temporary staffing in FY 2026 would be a consistent and appropriate action. • Misc. Expenditure Reductions or Revenue Enhancements (Estimated Expenditure Savings or Revenue Enhancements of $597,000 across all City Funds and $530,000 within the General Fund) - Since the May 6 Budget Study Session, the Executive Team has re-examined FY 2026 Budget Requests within their departments and reduced costs or enhanced revenues in the following areas: Table 4 — Misc. Expenditure Reductions or Revenue Enhancements By Object SAVINGS ADULT SERVICES- CLASSES (Revenue)* $ (7,716) RENTS/LEASES (REAL& PER) (Revenue)* $ (26,000) PERSONNEL -OVERTIME $ (102,000) ADVERTISING $ (13,800) OFFICE EXPENSE $ (36,500) SPECIAL DEPARTMENTAL $ (33,000) MAINT-BLDGS/STRUC/GROUNDS $ (23,000) MAINT & OPER OF EQUIP $ (7,550) PROF & SPECIAL SERVICES $ (116,713) OTHER CONTRACTUAL SERVICE $ (70,570) MEMBERSHIPS/DUES/BOOKS $ (1,800) PROF DEVELOPMENT & MTGS $ (40,900) STAFF DEVELOPMENT $ (3,000) SPECCOMMUNITY SERVICES $ (2,000) MACHINERY& EQUIPMENT $ (112,500) TOTAL COST REDUCT OR REV ENHANCEMENT $ 597,049 *Negative revenue amounts are actually increases to revenue estimates, butshown as negative to represent their impact on any budgetary deficits. By Fund SAVINGS 101-General Fund $ (530,151) 204-Gas Tax Fund $ (34,000) 207- Lighting and Landscape Fund $ (8,900) 209- Environmental Services Fund $ 24,402 641- Motor Vehicle Pool Fund $ (31,500) 647-MIS Pool Fund $ (16,900) TOTAL COST REDUCT OR REV ENHANCEMENT $ (597,049) Utilization of Unexpected FEMA Reimbursement for COVID Expenses ( 259 000) — Since the May 6 Budget Study Session, the City has received $246,000 from the Federal Emergency Management Agency (FEMA) for COVID-19 expense reimbursements submitted several years ago; with a final $13,000 expected shortly. Staff was cautiously optimistic that the City would receive these funds at some point, but had not placed them in any budgets or revenue estimates as of yet since the FEMA reimbursement process can be lengthy. Now that the City is finally seeing these funds, staff recommends utilizing them in full to offset the budgetary deficit in FY 2026. Utilization of All Realized and Estimated Excess ARPA Interest Earnings ($229,730) - As of the ARPA Utilization U date provided to City Council on October 15, 2024, the City had earned $383,767 in interest from its ARPA funds and appropriated all of it towards operational expenses such as the Limited -Term Environmental Programs Specialist. And as of March 31, 2025, the City has earned an additional $172,073 in interest from its ARPA funds and is expected to earn a total of $229,730 additional through the end of FY 2025. Thus, staff recommends using this full amount to both extend a Limited -Term Environmental Programs Specialist in Community Development six (6) months through at least June 30, 2026 and support broad General Fund personnel expenses in FY 2026. Utilization of the City's CalPERS Pension Reserve ( 558 000) — As discussed at the May 6 Budget Study Session, the City wisely established a CalPERS Pension Reserve with an initial deposit of $2.252 million. Given a significant spike in the required UAL payment to CalPERS in FY 2025, Council approved utilizing $1.252 million of the City's Pension Reserve to offset these costs; thereby leaving a balance of $1.0 million. Consistent with last fiscal year's actions and to offset a $558,000 increase in required UAL payment for FY 2026, staff recommends utilizing only 558 000 of the reserve in FY 2026; down from a proposed draw of $1.0 million at the May 6 Study Session. While the draw down of any reserve is never ideal, staff recommends building up this reserve in the future should the City's financial condition allow it (e.g., receiving a positive outcome on Measure K litigation). As such, one of staff's proposed FY 2026 Workplan items is to continue developing plans to pay down the City's UAL and reduce overall pension costs over time. Part of that plan will include the development of a Council policy regarding the acceptable use of the City's CalPERS Pension Reserve and how to build it up to an adequate level over time. Liquidating Duplicative General Fund Reserves (641 000) — Within the City's General Fund there are reserves for Liability Insurance ($158,000), Unemployment Insurance ($90,000), and Other Post Employment Benefits (OPEB) ($393,000). However, while these reserves have been in place for many years, the purposes for which they support are also budgeted for annually within the operating budget and having an additional reserve for each is unnecessary and duplicative. There is also no fiscal policy describing their establishment, purpose, use, or replenishment. Thus, staff recommends liquidating them in FY 2026 and using their balances to bridge the General Fund budget deficit. These items are again already included within the operating budget and have their utilization does not negatively impact the City's fiscal stability. All City Funds — Financial Summary Table 5 — All Funds Summary ALL FUNDS SUMMARY Beginning Fund Balance July 1 Revenues FUND BALANCE REPORT FY 23 Actual FY 24 Actual FY 25 Est. $ 96,862,053 $ 100,898,194 $ 86,522,095 FY 26 Prop. $ 28,764,930 %Chg* Total Revenues $ 94,060,104 $ 95,685,217 $ 108,369,674 $ 100,472,721 -7.3% Expenditures FY 23 Actual FY 24 Actual FY 25 Est. FY 26 Prop. %Chg* Total Expenditures by Type $ 90,023,963 $ 110,061,315 $ 166,126,839 $ 106,743,724 -35.7% Revenues vs Expenditures $ 4,036,141 $ (14,376,099) $ (57,757,165) $ (6,271,003) Ending Fund Balance June 30 $ 100,898,194 $ 86,522,095 *% Change from FY 2025 Estimated to FY 2026 Proposed Budget $ 28,764,930 $ 22,493,927 For a more detailed Fund Balance Report, please see the Fund Summaries section of the Budget book Currently Proposed FY 2026 Operating and Capital expenditures across all City funds equal $106.7 million and include: • $3.3 million in interfund operating transfers out to support operations, • $9.6 million in interfund capital transfers out to support capital projects, • $2.6 million in scheduled Measure O debt service payments, and • All items referenced within the General Fund section of this report. Related revenue sources total $100.5 million and include: • $3.3 million in interfund operating transfers in to support operations, • $9.6 million in interfund capital transfers in to support capital projects, and • All items referenced within the General Fund section of this report. This results in an annual deficit of approximately $6.3 million across all City funds. However, this deficit is largely due to grant funded projects which receive reimbursement after expenditures have been incurred, further spend down of Measure O bond proceeds as both the Public Safety building and Library projects near completion. In summary, across all City funds, expenditures for FY 2025 show a 35.7% decrease when compared to FY 2025 Year -End Estimates of $166.1 million. This decrease is largely due to most Measure O bond proceeds being spent in FY 2025 to complete the associated Library and Police building projects. Operating Expenses though only show a 7.4% decrease when compared to FY 2025 Year -End Estimates of $97.4 million. Conversely, across all City funds, revenues for FY 2025 show a 7.3% decrease when compared to FY 2025 Year -End Estimates of $108.4 million. This decrease is largely due to slowed growth in several revenue categories and the full recognizing of grant and other misc. one-time revenue related to Measure O projects in FY 2025. General Fund and Citywide revenue estimates and proposed expenditures by type and department are shown in the Fund Summaries and Departments sections of the Budget Book. And for more information on the assumptions used to estimate key revenues and other significant items of note, please see the Funding Sources sections of the Budget Book. C - ECONOMIC UPDATE AND OUTLOOK With the ever -constant tariff policy news as a backdrop, investors turned their attention to a robust amount of employment data released the week ending June 6. Job growth moderated in May with nonfarm payrolls increasing 139,000, above the consensus estimate of 126,000, however, the prior two months were revised down by a combined 95,000. The US unemployment rate was unchanged at 4.2%, the underemployment remained at 7.8%, and the labor force participation rate declined to a three month low of 62.4%. Earlier in the week, the Job Openings and Labor Turnover Survey (JOLTS) unexpectantly rose in April to 7.39 million but the details of the report reflected underlying labor -market weakness. Layoffs increased and the quits rate dropped, indicating workers found it harder to get new jobs. The ratio of vacancies to unemployed workers moved up slightly to 1.03, from 1.01 in March. The ADP National Employment Report released on Wednesday showed hiring decelerating to the slowest pace in two years. Private -sector payrolls increased by only 37,000 vs. survey expectations of 114,000. Despite the slowdown, pay gains remained strong, with workers who changed jobs seeing a 7% pay increase and individuals who remained with their current employer seeing a 4.5% gain. Initial jobless claims rose to the highest level since October, increasing to 247,000, and pushed the four -week moving average up to 235,000. Continuing claims declined slightly to 1.9 million in the week ending May 24. Other economic indicators the week ending June 6 reflected contraction in both the services and manufacturing sectors. The Institute of Supply Management (ISM) index of services dropped 1.7 points in May to 49.9, a reading below 50 indicates contraction. The drop was primarily due to lower business demand and a significant drop in new orders. The ISM Manufacturing index contracted for the third consecutive month, dropping to 48.5. Notably, the report reflected a 16-year low in imports and the gauge of exports fell to the lowest level in 5 years. After the release of the better than expected employment report on Friday June 6, treasury yields moved higher. As of June 6, the 2-year note was trading at 4.04%, the 5-year note at 4.12%, and the 10-year yield at 4.49%. Although the staff does not expect the Fed to lower rates at their upcoming meeting on June 18th, staff does believe the Fed will move forward with rate reductions later this year. The week ending May 30 featured a variety of key data points measuring the health of the US economy along with some tariff -related headlines. The market responded positively after a 50% tariff on EU goods was delayed until July 9 and faced legal challenges. In the wake of the temporary reduction of tariffs on Chinese goods, consumer confidence rebounded to 98.0 as of mid -May, above the previous reading of 85.7 and the long -run average of 96. Survey participants' overall economic outlook improved along with increases in plans to purchase appliances, cars, homes, travel, dining and entertainment. Meanwhile, personal income rose 0.8% in April while personal spending slowed to 0.2% as consumers pulled back on purchases, causing the US savings rate to rise to 4.9% last month. The Fed's preferred inflation gauge, personal consumption expenditures (PCE), was subdued in the month of April, increasing by only 0.1 % month -over -month. Headline PCE decelerated to 2.1 % and core PCE was up 2.5% versus the previous year but are still hovering above the Fed's 2% target. The second estimate of first quarter GDP improved slightly to -0.2% as businesses pulled forward investments in inventory and equipment. Second quarter GDP is expected to improve as import activity is anticipated to slow; Imports of goods in April plummeted by a record 20% due to tariffs. Durable goods declined -6.3% in April on a steep drop in aircraft orders and a pullback in business investment after a surge in the first quarter of the year. The Atlanta Fed GDP Now is calling for 3.8% growth in Q2, while the Bloomberg consensus estimate is projecting growth of 1.4% for both the second quarter and the full year 2025. The Federal Open Market Committee (FOMC) minutes from their May meeting indicate that the Fed is willing to be patient with future rate cuts as the implications of US trade policies unfold later this year. The federal funds futures market is currently pricing in two 0.25% interest rate cuts in the latter half of 2025, which is consistent with staff's view. The US Treasury yield curve steepened in the month of May, with the 2-year note trading at 3.91 %, the 5-year at 3.97%, and the 10-year yield at 4.41 % as of this writing. Economic data releases were sparse the week ending May 23, but that did not impede the fixed income markets from remaining volatile on a week -over -week basis. The benchmark ten-year Treasury note traded in a 19-basis point range week over week (4.43% to 4.62%) with the peak in yields occurring after the passage of US House of Representative Budget Bill in a narrow 215 to 214 votes. Although there are some provisions in the House version of the bill to mitigate the rate of growth of the US deficit, the US Senate still needs to weigh in, and overall, the US deficit outlook is forecasted to remain onerous. And on Friday, May 16th, after the market close, Moody's lowered the US credit rating to Aa1 from AAA primarily related to the fiscal outlook, the last of the three major national recognized statistical rating organizations to downgrade the US debt below the AAA tier. The deteriorating fiscal outlook is one of the catalysts for staff's core view that investors will seek additional yield compensation to invest in longer maturity Treasury securities. In our team's view, the Treasury curve shape will continue to normalize and steepen, with the two-year / ten-year Treasury curve spread moving higher from the current 54 basis points (two-year 3.98%, ten-year 4.52% as of the time of this writing) towards the long-term average of 100 basis points over the course of 2025. The outcome of negotiations between the U.S. and China in Geneva, Switzerland, established the tone for markets the week of May 16. The progress made by the two largest economies was a pleasant surprise for market participants with more negotiations planned in the coming weeks. Each country will cut tariffs by 115%, with the U.S. cutting imports from 145% to 30%, and China cutting tariffs on U.S. imports from 125% to 10% for a period of 90 days. In other news for the week of May 16, U.S. inflation rose less than forecasted in April with the consumer price index increasing 0.2% month -over -month and 2.3% year -over -year. The headline inflation rate of 2.3% is the lowest since the spring of 2021. Core CPI, excluding food and energy, rose 0.2% month -over -month and 2.8% year -over -year. Consistent with recent reports, shelter costs accounted for more than half of the overall monthly gain. U.S. producer prices unexpectantly fell in April by 0.5% but on a year -over -year basis were up 2.4%. April final demand prices excluding food and energy were down 0.4% month -over - month and up 3.1 % year -over -year. Although the inflation data this week was constructive, Walmart warned Thursday that price increases look certain, and it remains likely that prices for consumers and businesses will move higher in the coming months. U.S. Retail Sales slowed in April, with a 0.1 % increase in retail purchases, with seven of the thirteen report categories posting decreases. Consumers cut back spending on cars, sporting goods, and other imported goods. Control -group sales, which feed into gross domestic product, declined by 0.2% month -over -month, missing expectations of a 0.34% increase. The surprise decline in the control group suggests a cautious consumer influenced by concerns over tariffs leading to inflation. While overall consumption remains strong, the slowdown could indicate challenges ahead. The preliminary University of Michigan Sentiment Index fell in May to 50.8 down from a final reading of 52.2 in April. The May number is the second lowest reading on record with U.S. consumers becoming increasingly worried that tariffs will lead to higher inflation. Consumers expect inflation to rise 7.3% over the next year, the highest since 1981 and 4.6% over the next five to ten years. Of note, the survey was conducted between Aprill 22 and May 13, a period that ended just after the U.S. and China agreed to temporarily reduce tariffs while they attempt to negotiate a long-term trade deal. Despite concerns generated by the weak consumer sentiment report, the overall market tone remained positive the week of May 16, with Treasury yields moving slightly higher and equities as represented by the S&P 500 now in positive territory for the year. In this uncertain economic and market environment, we still expect the Fed to engage in a modest amount of easing this year which should support front end rates and a steeper yield curve. On the trade front, the first deal was announced with the United Kingdom on the 80th anniversary of Victory in Europe Day. The UK will lower tariff and non -tariff barriers on US products, most notably beef and ethanol, and buy more airplanes from Boeing, while the US will lower tariffs on autos and steel while keeping a 10% baseline rate on UK imports. The deal is more symbolic for the US as the UK accounts for just 4% of exports, but a positive development, nonetheless. The S&P Case-Shiller 20-City Home Price Index showed house price inflation eased slightly to 4.5% in February on an annual basis, down from 4.7% in January. Limited inventory, elevated mortgage rates, and lack of affordability continue to weigh on the housing market. The ISM Manufacturing Index fell to 48.7 in April from 49.0 in March, indicating a continuation of slow contraction in the sector. In California, total nonfarm employment in the state increased by 17,700 jobs over the month of April 2025. Additionally, statewide unemployment equaled 5.3% in April 2025; unchanged from March 2025 and up slightly from a rate of 5.2% in April 2024. In Santa Clara County, the rate decreased to 3.8% in April 2025; down from 4.0% in March 2025, but up from 3.7% in April 2024. And in Campbell, the rate decreased to 3.8% in April 2025; down from 4.0% in March 2025 and from 3.9% in April 2024. Thus, the County and City have seen some impacts due to recent layoffs in the technology sector, but it has not had a significant impact to unemployment numbers. At its pandemic high point in April 2020, the Campbell unemployment rate reached 11.7%. D - LONG-RANGE FORECAST The Second Update of the Seven -Year Financial Forecast is shown and discussed in more detail in a separate section of this Budget book called "'Long -Ran a Financial Forecast". The forecast is meant to assist Council and staff in determining whether current expenditure decisions made in FY 2026 can be supported over the long-term over through FY 2032. While all budgetary requests can be supported by the General Fund and short-term corrective actions in FY 2026, based on staff's initial analysis and reasonable growth projections in expenditure and revenues, the out years could be a challenge given the City's structural deficit issues absent significant ongoing expenditure and service reductions, new revenue sources, and/or a positive legal outcome on the Measure K Sales Tax measure. E - BUDGET AND FINANCIAL AWARDS For the 32nd consecutive year, the City's FY 2025 budget received national recognition by earning the Government Finance Officers Association (GFOA) "Distinguished Budget Award." To receive the Distinguished Budget Presentation Award, a city must publish a budget document that serves as a policy document, a financial plan, a communications device, and an operations guide. We believe the FY 2026 budget conforms to GFOA program requirements. Additionally, FY 2025 is the 27t" year an award of "Excellence in Budgeting" has been received from the California Society of Municipal Finance Officers (CSMFO). Copies of both awards appear in the Budget "'Reference Materials" section of this document. It also should be noted that the City's Annual Financial Report has also been an award -winning document for excellence in financial reporting at both the State and national levels for many years. F - CONCLUSION AND ACKNOWLEDGMENTS The development of the Proposed Fiscal Year (FY) 2026 Operating Budget and 2026 - 2030 Five - Year Capital Improvement Plan (CIP) was made possible through the knowledge and contribution of the City's employees, input and support from our community, and direction of the City Council. Despite the economic pressures of the past few years, the City has done well to preserve core services, but as the budget and CIP before you demonstrate, the City continues to face significant fiscal challenges in the short- and long-term and remains cautious, conservative, and strategic in our operational growth to ensure long-term fiscal resilience. I wish to thank everyone who participated in the budget process this year including the City Council and members of the Executive Team. Finally, I would like to recognize the staff within the Finance Department for their dedication and hard work that went into coordinating, developing, and publishing this budget document. Respectfully submitted, Brian Loventhal, City Manager Exhibit A FY 2026 Adopted City Council Priorities 5trategiC Objectives Council Priorities Comments b c'unil Members Long -Term Land Councilmember Terry Hines Use Planning and • Housing development assistance Housing • City Hall improvements Councilmember Elliot Scozzola • Tenant rights informational survey • Housing commission • Community Center Master Plan • Responsible Construction Ordinance Vice -Mayor Dan Furtado • Hamilton Ave Precise Plan • Preservation of City history, such as Mills Act Mayor Sergio Lopez • Streamlining of CEQA • Hamilton Avenue Precise Plan • Transit Signal Priority Shared Feedback Land Use • Review of existing ordinances and creation of new ordinances, such as Beekeeping. • Preparation for 2026 Mega Events, such as World Cup, Super Bowl etc. City Infrastructure Vice -Mayor Dan Furtado • Supported removing Measure O priority • Increased focus on City infrastructure needs such as the Community Center Councilmember Elliot Scozzola • Replacement of Measure O priority due to near completion of project(s) and adding priority of "City Infrastructure/Resiliency Councilmember Terry Hines • Leave Measure O priority for one more year until projects are fully completed Councilmember Anne Bybee Strategic Council Priorities Comments b Council Members Obje+tiue • Replace "Measure O priority" with broader "City Infrastructure" priority Shared Feedback • Revise title from previous Council priority of "Measure O" so as to more fully address citywide infrastructure needs such as street maintenance, Community Center regularly scheduled maintenance, and City Hall maintenance Financial Stability Councilmember Terry Hines • Economic Development opportunities for 2026 Mega Events such as World Cup, Super Bowl, etc. Councilmember Elliot Scozzola • Investment policy review Financial Health Mayor Sergio Lopez • Measure K funding Vice -Mayor Dan Furtado • Prioritize Economic Development and supporting small businesses Shared Feedback • Review of City finances Sustainability Vice -Mayor Dan Furtado Environment • Climate Action Plan Community Health Councilmember Terry Hines and Safety • Road conditions Councilmember Elliot Scozzola • Pedestrian crossings — Campbell Technology Park Community Vice -Mayor Dan Furtado • Fire station maintenance • Weed abatement • Increased, focus on public relations Mayor Sergio Lopez * Deferred maintenance progress • Traffic safety Exhibit B FY 2026 Proposed Workplans City Manager CM Administration • Provide staff support for all City Council members [Operational Need] • Provide staff support for Legislative Subcommittee to coordinate tracking of state legislation (that may impact City) with Legislative Subcommittee [Operational Need] • Provide staff support to the Civic Improvement Commission [Operational Need] • Coordinate, plan, and provide staff support for the State of the City event, All Hands Meetings, Volunteers' Luncheon, Employee Holiday Luncheon [Operational Need] • Lead labor negotiations with CMEA, CPCEA, CPOA, Confidential, MGMT, and CARP for bargaining agreements expiring at end of FY 2025 and continue to provide guidance and support for other labor related issues arising outside of labor negotiations [Council Priority - Financial Stability] • Work with Liebert Cassidy Whitmore and RTGR Law to provide guidance and support for complex employee related claims [Operational Need] • Staff CALGOVEBA Board of Trustee meetings with Wagner Law Groups, NWPS, and Bernstein Financial Group [Operational Need] • Support City Council initiatives through new and updated City Council Policies • Promote City Council initiatives through various forms of media [Operational Need] • Develop and publish a Request for Qualifications to support Temporary Staffing needs for City Departments [Operational Need] • In coordination with Legal Services, Finance and outside counsel, provide overall guidance in the representation of the City in the Measure K litigation LEAD DEPARTMENT — CITY MANAGER'S OFFICE [Council Priority - Financial Stability] Measure O • Provide overall coordination of Measure O Police, Library, and related projects in collaboration with Public Works Department LEAD DEPARTMENTS — City Manager's Office [Council Priority — City Infrastructure] • Provide support to the Measure O Citizens' Oversight Committee [Council Priority — City Infrastructure] Human Resources In collaboration with the Finance Department and Information Technology (IT) Division as well as other key stakeholders, complete the implementation, testing, and training for a new Human Resources Information and Payroll System LEAD DEPARTMENTS — HR and Finance [Council Priority — Financial Stability] Continue recruitment and retention efforts to attract and retain City staff in budgeted positions [Operational Need] Coordinate and plan Benefits Fair and Volunteer Program for City staff [Operational Need] • Work with Liebert Cassidy Whitmore on meet and confer items with CMEA, CPCEA, CPOA, Confidential, MGMT, and CARP [Operational Need] • Open and continue negotiations with CMEA, CPCEA, CPOA, Confidential, MGMT, and CARP for bargaining agreements expiring at the end of FY 2025 or the middle of FY 2026 [Council Priority — Financial Stability] • Coordinate and implement City training for employee development to strengthen both technical and soft skills and encourage continued growth of staff [Operational Need] • Launch citywide mandatory training to cover essential topics such as Harassment Prevention, Ethics, Anti -bias, Workplace Violence, and Active Shooter Training [Operational Need] • Review, update, and recommend personnel policies, practices, and forms to ensure they meet the needs of the City and are compliant with current legislation [Operational Need] • Plan and implement an internal communications strategy for employee -related topics to create a consistent and helpful resource for staff to refer to [Operational Need] • In coordination with Community Development, establish a technical training plan for permit center and building inspection staff as required by state law LEAD DEPARTMENT — City Manager's Office/HR [Operational Need] Information Technology • In collaboration with the Finance Department and Human Resources (HR) Division as well as other key stakeholders, complete the implementation, testing, and training for a new Human Resources Information and Payroll System LEAD DEPARTMENTS — HR and Finance [Council Priority — Financial Stability] • Provide IT consultation regarding Measure O projects [Council Priority — City Infrastructure] • Camera Deployments throughout the City in collaboration with the Police Department and Public Works [Operational Need] • Work with the City Clerks Department to replace the Agenda Management Software and integrate with live streaming and TV broadcasting [Operational Need] • Setup Security Operation Center for the City to improve and strengthen security measures. [Operational Need] • Replace 25% of antiquated desktop computers [Operational Need] • Upgrade the City's data repository (Laserfiche) [Operational Need] • Continue public meeting recording and management [Operational Need] • Replace public meeting video and recording systems [Operational Need] • PD - Upgrades related to DOJ mandates (NIBRS) [Operational Need] Economic Development Begin Implementation of the City's 2024 Economic Development Plan, including website improvements, creating a business guide, conducting outreach with brokers, and collaborating with the business stakeholders on upcoming events [Council Priority - Financial Stability] Begin work on potential branding and promotion of Dell / McGlincy area, including outreach and survey of existing businesses [Council Priority- Financial Stability] • Work to leverage regional "mega events" such as the Super Bowl and World Cup for the benefit of Campbell business community [Council Priority- Financial Stability] City Clerk's Office • Carry -forward from prior years - Comprehensive review of citywide records; coordinating and implementing a revised records retention schedule and procedures [Operational Need] • Implement, test, and train departments for new agenda management software [Operational Need] Community Development Administration • Upgrade permit tracking system to create greater efficiencies and increase performance in permit processing including establishing and tracking metrics for permit processing and inspections [Operational Need] • Complete scanning, indexing, and migration of all Department documents and records into Laserfiche [Operational Need] • Explore and pilot Artificial Intelligence (AI) Tools to support Department operations and improve Customer Service [Operational Need] Policy Development • Continue preparation of a Citywide Climate Action Plan [Council Priority — Current Planning Building • In coordination with HR, establish a technical training plan for permit center and building inspection staff as required by state law LEAD DEPARTMENT — City Manager's Office/HR [Operational Need] • Complete integration of Code Enforcement with the Building Division processes to address violations [Operational Need] Housing Assistance Finance • In coordination with Legal Services, City Manager's Office and outside counsel, provide support in the representation of the City in the Measure K litigation LEAD DEPARTMENT — CITY MANAGER'S OFFICE [Council Priority - Financial Stability] • In partnership with the City Council and all City departments, develop and implement plans on how to most effectively and efficiently utilize Measure K funding should the City receive a favorable outcome on recent litigation challenging the measure LEAD DEPARTMENTS — City Manager's Office and Finance Department [Council Priority — Financial Stability] • Analyze and update current Reserve Policies and develop new Reserve Policies (e.g., Infrastructure/Deferred Maintenance Reserve, Technology Reserve, Equipment and Vehicle Reserve, etc.) where necessary to ensure long-term fiscal stability; discussing with and receiving input from the Finance Subcommittee and the City Council as appropriate over the course of the development process [Council Priority — Financial Stability] • Continue to develop strategies to systematically address Unfunded Pension Liabilities in the short- and long-term [Council Priority — Financial Stability] • Using results of completed facilities condition assessment, continue to collaborate with the Public Works and Recreation and Community Services Departments to prepare capital projects to address Citywide deferred maintenance issues in future Capital Improvement Plans (CIP) LEAD DEPARTMENT - Public Works [Council Priority — • Given Government Finance Officer Association (GFOA) best practices, develop and publish a Request for Proposal (RFP) for external audit services; recommending a preferred firm for Finance Subcommittee and Council consideration and then onboarding the chosen firm [Operational Need] • In collaboration with the Human Resources and IT Departments, work to stabilize the NEOGOV HR and Payroll system to ensure that all installed modules are functioning properly and provide accurate and timely employee and City vendors payments. Also implement any remaining modules as needed and as staff bandwidth allows LEAD DEPARTMENT - Finance [Operational Need] Legal Services • Coordinate Measure K litigation with outside counsel [Council Priority — Financial • Provide support on implementation of Measure O [Council Priority — City Infrastructure] • Assist City Clerk with revised records retention schedule and procedures [Operational Need] • Assist Community Development with/review Citywide Climate Action Plan [Council Priority — Sustainability] • Review Hamilton Avenue Precise Plan [Council Priority — Luna -Term Land Use • Review Community Development Department's annual code updates to comply with new state laws and implement streamlining to meet the city's economic development Police Coordinate with Public Works on the completion and occupancy of the new police building, including decisions related to FF&E, public safety technology and IT infrastructure, and department -wide move -in planning to ensure operational readiness [Council Priority — City Infrastructure] Public Works Administration • Manage Measure O capital projects in collaboration with City Manager's Office; overseeing construction contracts and associated project budgets LEAD DEPARTMENTS — City Manager's Office [Council Priority — City Infrastructure] • RenresentCarnnhell in Iona range ranional tranSDortation nlannino efforts- Fnvision • Administer grant funds and associated reporting requirements [Council Priority — Transportation Engineering • Support the Community Development Department in the preparation of the Campbell Climate Action and Adaptation Plan by providing transportation expertise [Council Priority — Sustainability] • Apply for and manage grant funds as provided through VTA and other granting agencies [Council Priority — Financial Stability] Engineering • Implement the Annual Street Maintenance Program [Council Priority — Financial Stability] • Manage construction of the Hamilton Avenue Resurfacing project [Operational Need] • Manage and implement all other approved Capital Improvement Projects [Operational Need] • Continue update of City Standard Details and Technical Specifications for Public Works Construction [Operational Need] • Review applications and issue permits for wireless facilities/small-cell wireless projects in the public right-of-way [Operational Need] • Review encroachment permit applications and issue permits for construction within the public right-of-way [Operational Need] • Perform field inspections of construction operations within the public right-of-way [Operational Need] • Maintain streetlight inventory and assist with street lighting needs for projects [CIP Land Development Review and approve land development projects for compliance with City policies adopted plans, and City standard plans and details, and identify associated improvements on public rights -of -way [Operational Need] Support the Community Development Department in the preparation of the Hamilton Avenue Precise Plan / Public Improvement Plan [Operational Need] Manage East Campbell Avenue Plan Line project [Operational Need] Maintenance • Complete all approved Capital Improvement Projects for City facilities improvements including installation of new boiler for the Campbell Community Center Building A • Implement water conservation strategies including turf and irrigation controller upgrades for the Community Center and sports fields [Council Priority — Sustainability] • Support volunteer events such as Keep America Beautiful and Campbell Garage Sale [Operational Need] • Manage vehicle and equipment purchases and leasing agreements [Operational Need] • Complete replacement of one diesel -powered heavy-duty trucks with gasoline powered vehicles to meet EPA Tier 4 motor requirements [Operational Need] • Complete asphalt repairs, seal coating, and striping for the Campbell Community Center Parking Lot [Operational Need] • Complete Annual Crack Seal Project [Operational Need] • Complete installation of Calsense Irrigation Controllers for John D Morgan Park and Jack Fischer Park [Operational Need] • Create a proposed schedule of repairs and replacements for City -owned assets as outlined in the City's Asset Inventory Report [Council Priority — Financial Stability] Environmental • Support the Community Development Department in the preparation of the Campbell Climate Action and Adaptation Plan by providing solid waste, stormwater, and water conservation expertise [Council Priority - Sustainability] • Coordinate and support efforts to implement the requirements of SB 1383 [Council Priority - Sustainability] • Provide support to the Solid Waste Management Authority when implementing the new solid waste hauler agreement and associated requirements [Council Priority - Sustainability] • Coordinate and support the Planning and Building Divisions with trash enclosure plan reviews, project waste management plans, and the implementation of the newly updated construction and demolition program [Council Priority - Sustainability] Provide support to the West Valley Clean Water Authority when implementing the regional stormwater MRP 3.0 [Council Priority - Sustainability] Coordinate and support the West Valley Clean Water Authority and Campbell Street Division with the installation of full trash capture devices for State Water Board compliance [Council Priority - Sustainability] Measure O — City Manager's Office • Complete construction phase for both Police and Library buildings [Council Priority — City Infrastructure] • Manage the construction contracts for both the Library and Police Building projects, including change order management and contract administration [Council Priority — City Infrastructure] • Implement Civic Center site staging plan to accommodate City Hall customers and employee parking [Council Priority — City Infrastructure] • Provide support to the Citizens' Oversight Committee [Council Priority — City Infrastructure] • Provide Civic Center off -site improvements such as the gravel lot and surrounding sidewalks, pending available funding [Council Priority — City Infrastructure] Recreation and Community Services Administration • Develop content for a historical reference exhibit for the new Campbell Library [Operational Need] Museum • Increase accessible searchable Museum collection records by 5% [Operational Need]