TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: Justin Clifton, City Manager
PREPARED BY: Javier Carcamo, Finance Director
SUBJECT:
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Capital Improvement Plan Project Prioritization and Available Financial Resources
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ABSTRACT
This report presents to City Council an updated Capital Improvement Plan (CIP) prioritization and updated financial analysis, including newly identified potential sources of revenue to fund capital projects. Staff is seeking direction from City Council on the accuracy and completeness of the draft Tier 1 list of priority projects, any further context on specific projects and feedback on potential funding sources. Staff has revised the analysis of potential funding sources to include potential bond financing, use of unassigned fund balance, use of reserve balances in excess of reasonable needs, and potential external sources such as grants and federal/ state appropriations.
RECOMMENDATION
recommendation
Provide feedback and direction on the completeness and accuracy of the City Council Tier 1 CIP Project Priorities and add, remove, and provide additional project context as necessary; and
Provide feedback and direction on the available financial resources for CIP projects.
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PRIOR ACTION/VOTE
On February 26, 2026, a workshop was held to provide a status update and discussion on City Council Priorities.
On June 23, 2026, a budget workshop was held to discuss and provide direction on the FY 2026/27 Capital Improvement Plan Project.
On August 18, 2026, staff delivered a report providing a status update on the implementation of City Council priorities.
STRATEGIC ALIGNMENT
This item aligns with the City Council goal to maintain a high performing organization that values fiscal sustainability, transparency, accountability and organizational efficiency relating to priority Tier 1 projects.
DISCUSSION
Capital Improvement Plan Project Prioritization
On February 26, 2026, the City Council held a workshop to conduct a comprehensive review of the City’s top priorities, organized through a three-tiered system. While the City Council Priorities includes numerous capital projects, the broader CIP contains many additional projects that had not previously been prioritized. Staff presented to City Council a similar three-tiered system for prioritizing the entire CIP. Staff organized the three-tired CIP list by department to provide additional context for the staffing resource burden associated with the projects but did not present detailed financial analysis. City Council provided direction to staff on changes to make within the three tiers and directed staff to complete the financial analysis necessary to refine priorities.
The CIP list reflects a mix of high-profile City Council priority projects and recurring annual projects (e.g., street resurfacing, citywide slurry seal).
During the FY 2026/27 Capital Improvement Plan Budget Workshop on June 23, 2026, staff presented the first financial analysis that established a likely significant deficit in funding all Tier 1 priority projects. With that in mind, the City Council requested staff to bring back a report to assist the City Council in further narrowing down the Tier 1 high-priority projects and to refine the financial analysis, identifying potential future funds to support those projects. The objective of this report is to provide the City Council with the current list of Tier 1 CIP projects (Attachment 1) and a revised financial analysis and take direction on any further changes, Attachment 1 identifies the estimated cost of the CIP projects, committed funding sources to-date, and the unfunded portion. Staff is seeking direction from City Council on whether the list of CIP projects is accurate, complete, and reflects the City Council’s CIP project priorities and any direction on the financial analysis outlining potential funding sources.
Staff Recommendation
Staff is seeking high-level direction on the current draft of Tiered CIP projects and the potential funding sources provided in this report. However, it is important to note that estimated expenses and revenue sources are very rough. Many projects have not yet entered into a planning phase, let alone a design phase that would provide greater accuracy. Similarly, estimated funding sources could change significantly over years depending on economic conditions, success in seeking grants and other external sources, surpluses or deficits from the annual operating budget and the like. For that reason, staff is not asking City Council to refine analyses to perfectly balance expenses and revenues or to perfectly rank projects in priority order. Rather, staff recommends that the Tier 1 designation be used as a strategic framework for identifying the City's highest-priority capital investments rather than as a fixed sequence in which projects must be funded or constructed. Accordingly, staff recommends that the City Council direct staff to:
• Establish a Financial Commitment for Tier 1 Priorities
Establish a reserve using the local funds and financial resources identified in this report to demonstrate the City's commitment to advancing the City Council's highest-priority CIP projects. Funds in the reserve would be available for future appropriation as individual projects are phased through planning, design and construction. Establishing the reserve would provide a financial commitment toward the City Council's priorities while maintaining flexibility to determine the appropriate timing and amount of each project appropriation. Placement of funds into the reserve would not constitute an appropriation or authorization to proceed with any specific project.
• Continue Pursuing External Funding Opportunities
Direct staff and the City’s consultants to continue actively pursuing external funding opportunities, including federal and State grants, appropriations, regional funding programs, and other applicable funding sources.
• Reevaluate the Number of Tier 1 Projects
Consider reducing the number of projects currently designated as Tier 1 and moving projects that are less time-sensitive, less developed, or not sufficiently funded to Tiers 2 or 3. A more focused Tier 1 list would represent the City Council’s highest priorities and allow staff resources and available funding to be concentrated on projects with the greatest likelihood of advancing.
• Add Any Additional Context
Consider adding additional notes to certain projects that will provide helpful context when projects are considered for funding in future years. For instance, City Council may wish to identify some projects as appropriate for a constrained budget, contingent on external funding sources or projects that may be deferred if necessary,
Under this approach, the City Council would establish the local financial commitment and overall strategic direction, while individual project appropriations would be brought forward for City Council consideration as projects become ready to proceed. When significant projects are brought forward, the Tiered framework would be reviewed to provide helpful context. Additionally, over the years, substantial new information would be available that would help City Council make decisions on individual projects. For instance, over time, the City could know if previously completed projects were under or over budget, whether the City was successful getting grant awards and other external sources, whether the City had surpluses or deficits in annual operating budgets etc. In this way, the Tiered framework serves more as a helpful and flexible guide than a rigid plan.
City Council Tier 1 CIP Projects
The list of City Council Tier 1 CIP projects includes 26 projects with an estimated total cost of $257.0 million. Of this amount, $113.5 million has been committed from already identified internal and external funding sources, including $2.0 million of pending grant funds. Of the 26 projects, seven are fully funded, while the remaining 19 are partially funded and require approximately $143.6 million in additional funding. The table below summarizes the projects' estimated costs, committed funds, and unfunded amounts.
City Council Tier 2 and 3 projects include 15 projects with an estimated total cost of $83.6 million. Of this amount, $3.1 million has been committed from internal and external funding sources. The estimated financial resources required to fully fund these projects are approximately $80.5 million.
This report also identifies numerous existing and projected additional funding sources to help close the gap for Tier 1 projects as outlined below.
Financial Resources
Based on the City’s financial position today, the City has the following financial resources available for CIP projects:
• Unassigned fund balance
• Operating and economic contingency reserve in excess of the balance requirement;
• Potential Bond Financing
• Future grants, federal/state appropriations and private fundraising
• Public/private partnerships
Financial Resources - Unassigned Fund Balance
The available or unassigned fund balance is the residual positive net financial resources at the end of each fiscal year that are spendable, legally unconstrained, and completely uncommitted to any specific purpose. Based on the FY2025/26 revenue and expenditure financial activities and the FY 2026/27 amended budget, the estimated unassigned fund balance as of the end of FY 2026/27 is approximately $44 million - $25.3 million for the General Fund and $18.6 million for the Measure T Fund. Staff recommends committing approximately $40 million of the $44 million towards a reserve balance for CIP projects. Based on the City Council’s direction, staff can incorporate the reserve reallocation during a future operating budget update report.
Financial Resources - Operating and Economic Contingency Reserve
The City’s Fund Balance and Reserve Policy establishes an operating reserve and an economic contingency reserve balance requirement of 25% and 5%, respectively, of the City’s annual operating expenses, for a total 30% reserve balance requirement to address unexpected revenue shortfalls as a result of changes in the economic environment. In an effort to recommend an appropriate operating reserve balance to address a revenue shortfall resulting from a recession, staff analyzed historical revenue data to identify the percentage loss of revenue during the most recent recession in 2009. The data show that the City’s revenue loss over a three-year period was approximately 23%. This analysis also demonstrates that it took eight years to return to the revenue level prior to the recession. The full analysis is provided in Attachment 2 of this report.
Based on this analysis, and assuming a recession with an impact similar to the 2009 recession, the City could experience an estimated revenue loss of approximately $37.0 million over a three-year period. For comparison, the City’s current operating and economic reserve balances of $55.1 million exceed the estimated revenue loss, indicating that the City currently has sufficient reserves to offset the hypothetical three-year revenue reduction under this scenario.
The City’s current operating and economic contingency balances are shown below, and the full list of reserves can be found in Attachment 3 of this report.
Based on this analysis, staff recommends maintaining the operating reserve at $40.7, with no additional contribution in future years, until this balance represents 25% of the operating budget. The $40.7 million is approximately 29% of the operating budget. Staff also recommends that the City Council reallocate the $14.3 million from the economic contingency reserve to a reserve balance for CIP projects. Based on the City Council’s directions, staff can incorporate the reserve reallocation during a future operating budget update report.
Financial Resources - Lease Revenue Bond Financing
Lease Revenue Bonds are debt instruments used to finance public capital projects and do not require voter approval. The bonds are secured by a lease or other contractual interest in a City-owned asset or infrastructure, which serves as the underlying collateral. Debt service is repaid from the City’s ongoing revenue resources, such as General Fund revenues, Measure T Fund, or other legally available revenues, rather than through a dedicated property tax levy.
Based on the City’s current budget, the Measure T Fund is the only fund with ongoing financial resources that can support a debt service payment of approximately $1.5 million per fiscal year. Assuming a Lease Revenue Bond scenario with a five percent (5%) interest rate and a level debt service payment of approximately $1.5 million per year for 30 years, the bond capacity will be approximately $22.9 million. The total interest expense for the 30-year term is approximately $21.3 million, resulting in a total payment of $44.2 million. This bond scenario and analysis can be found in Attachment 4 of this report.
Financial Resources - General Obligations Bonds
General Obligation (GO) Bonds are voter-approved debt used to finance public capital projects. Debt service is repaid through a dedicated property tax levy imposed on taxable property within the issuing jurisdiction, rather than from the City’s ongoing operating revenues. This provides the City with an additional financing resource for capital projects without directly impacting the City’s operating revenues or existing debt service commitments. City Council has already provided direction that GO Bonds are a very unlikely revenue source. For this reason, staff has not included any GO Bond proceeds as a source of revenue for CIP projects.
Other External Sources
The City likely has other opportunities to identify external sources including grants, state and federal appropriations, fundraising and public/ private partnerships. These sources will likely have a very big impact on the City’s ability to fund the Tier 1 projects. For instance, major infrastructure projects like Keller Rd are very unlikely to proceed without major external revenue sources. Similarly, the Library Children’s Expansion would not have been possible without private donations and the City is already exploring public/ private partnerships for projects like sports field improvements. Staff has not incorporated specific other external sources into the financial analysis, but recommends factoring these potential sources in when providing overall direction on project prioritization.
Conclusion
In summary, the City Council Tier 1 CIP projects have an estimated total cost of $257.0 million. Of the 26 projects, 19 are partially funded, with an estimated unfunded amount of $143.6 million.
The City Council has approximately $54.3 million in local funds (Economic Contingency Reserve and the unassigned fund balances of the General Fund and Measure T Fund) available to commit to Tier 1 CIP projects, and potentially up to $57.9 million in funding mechanisms that use external funds, including bond financing, grants, and private/public financing. Total financial resources are estimated to be $112.2 million.
When considering the $143.6 million in unfunded costs for City Council Tier 1 CIP projects, and the $112.3 million in total financial resources, including bond financing, potential external grants, and private/public financing mechanisms, a minimum of approximately $31.3 million in additional funding would be required to fully fund all Tier 1 CIP projects, as summarized below.
Staff recommends that the City Council designate the excess in Economic Contingency Reserve, the General Fund, and Measure T Fund unassigned fund balance as a reserve for Tier 1 CIP projects, with appropriations to be made as individual projects are ready to move forward. Staff also seeks any other direction from City Council to refine the CIP Priority Projects List so that it has maximum value in helping to make future project decisions.
PUBLIC NOTICING
The agenda item has been noticed according to the Brown Act (72 hours in advance of the meeting at which the City Council considers the item).
CEQA AND REGULATORY OVERVIEW
This action is exempt from the California Environmental Quality Act (CEQA) pursuant to Sections 15060(c)(2) and 15060(c)(3) of the CEQA Guidelines because this action will not result in a physical change to the environment, directly or indirectly.
FISCAL IMPACT
If the City Council directs staff to establish a reserve for Tier 1 CIP projects using a combined total of $54.3 million from the excess Economic Contingency Reserve and the unassigned fund balances of the General Fund and Measure T Fund, staff will incorporate this direction into a future operating budget update report.
ATTACHMENTS
ATT 1 - Capital Improvement Plan - Tier 1 Projects
ATT 2 - Recession - Loss of Revenue Analysis
ATT 3 - Operating and Sustainability Reserve
ATT 4 - Bond Financing Analysis
ATT 5 - Council Priorities Tiers 1, 2, and 3 Organized by City Council Goals