City Budget Strategies for 2026 and Beyond

The City is faced with a $10 million structural deficit that started in FY 2025-26 which will continue to grow unless the City increases ongoing revenue and/or reduces ongoing expenditures. A Study Session with the City Council on August 27, 2025 was a first step towards identifying solutions to address this fiscal challenge. There is no direct cost to the City for discussing deficit reduction strategies.

Summary of Fiscal Challenges

• The City of Monterey faces a $10 million annual structural budget deficit starting in FY 2025-26; growth in City expenditures are outpacing growth in revenues.
• Maintaining the status quo is not viable. The City requires sustainable solutions to address the budget deficit maintain current service levels.
• Proposed solutions include increasing ongoing revenue (e.g., new taxes, fees, property sales) and reducing ongoing expenditures (e.g., program cuts, operational optimizations).
• City Councilmembers and the public had an opportunity to complete an index card exercise in August 2025 to prioritize deficit reduction strategies, with results shared at the September 2, 2025 meeting to guide further public engagement and decision-making. Additionally, Council has held discussions on the City’s deficits during other Council meetings over the past several years.

More Background on How We Got Here (from the August 27. 2025 City Council Meeting Agenda)

Rising Costs and the City’s $10 million Structural Deficit

The current fiscal year’s budget (FY 2025-26) projects a General Fund total of $110,205,573 (an increase of 4% above the FY 2024-25 Adopted Budget). The City’s expense growth is outpacing the City’s revenue generation. For FY 2025-26, the City is projecting a total of $120,663,607 in expenses for the General Fund (11% above the FY 2024-25 Adopted Budget). Although the budget has been balanced for the current fiscal year, the City’s projected expenditures, or the cost of providing services, outpaced projected revenues by an estimated $10 million.

This year’s City Manager’s Budget Message explained:

“This is a result of the City’s rising costs, some of which can be controlled by the City, yet many of which are outside the City’s control. For any municipal organization, salary and benefits are one of the largest drivers of costs and the City’s budget is no exception. Costs continue to rise for health insurance and other benefits provided to employees, and this is the case in the private sector as well.” City Manager’s Budget Message within the Online Budget Book can be found at monterey.gov/budget

Concrete examples of increased costs include the City’s liability and property insurance premiums by $3.2 million since FY 2019-20 (a 375% jump) and costs for salary, health and insurance benefits for employees, which is typical for any municipal organization and the private sector as well. Revenues are not increasing rapidly enough to cover the substantial increase in expenditures.

Solving the Structural Deficit

This $10M structural deficit cannot be solved with one-time solutions; it is by definition a structural deficit because, without action by Council and City staff, the deficit will continue to grow in future fiscal years. Any solution must be sustainable and able to continue year-over-year. A one-time $10M fix, such as the sale of properties and/or other assets or the utilization of the City’s Economic Reserve Fund only delay the problem to the future.. The only true options are as follows:

a) increase ongoing revenue, and/or

b) reduce ongoing expenditures

Collectively, the combined revenue increases and/or expenditure reductions must add up to $10 million annually to balance the budget.

Deficit Reduction Strategies

Staff have developed a wide range of deficit reduction strategies for the City Council and residents to consider. These types of strategies are placed into three categories:

1. Direct impacts on the General Fund
2. Indirect impacts on the General Fund
3. One-time or other revenue supporting the General Fund

Direct impact strategies:

• Reappropriate some or all NCIP Funds to General Fund
• Potential New Taxes
  • Sales Tax Increase of 0.375%
  • Admissions Tax
  • Vacancy Tax (as permitted under the State Constitution)
  • Parking Tax (on privately owned parking lots)
  • Streaming Tax(as permitted under the State Constitution)
  • Update Real Property Transfer Tax
• Changing the Way We Do Business
  • First Responder Fee Program
  • Pause or Eliminate Programs
  • Optimize Veterans Park Campground
  • Changing Government Access Providers
  • Reduce Property Maintenance Costs (Through the Sale of City Property)
  • Discontinue Mills Act Approvals
  • Partnerships & Contracts for Service
  • Payments in Lieu of Taxes (PILOTs)
• Use Existing Attrition to Gain Salary Savings
• Reduce Maintenance Costs (Through Sale of Underutilized Property)

Indirect relief of General Fund. Strategies that would not directly reduce the $10M structural deficit, but help stabilize resources in the General Fund and other funds, decreasing the likelihood that the General Fund will need to support operational areas:

• Central Public Safety Facility Bond Measure (reduce need for General Fund to cover financing or direct cost of facility)
• Renew Measure P/S (reduce need for General Fund to cover cost of projects)
• Renew Measure G (maintaining sales tax increase initially passed in 2020)
• Update Stormwater Fees
• Implement Parking Fee Strategy (strategy could be combined with merging Parking Fund and General Fund)
• Increase Rent on the Aquarium Lease (revenues would support Tidelands Fund)

One-time or other revenue:

• Defund Non-Priority NCIP Projects (one-time revenue)
• Sell Underutilized Property (revenue from one-time sale of property but may result in lower ongoing maintenance costs in specific circumstances)
• Charter Amendment for Visitor Accommodation Facilities (Economic Development effort)