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Redwood City projects annual shortfalls ranging from $14.1 million to $19.7 million beginning in fiscal year 2028-29, which is at least $6.3 million more than what was expected in June 2025, prompting the city to tap into reserves earlier than planned.
“A very sobering presentation,” Council member Jeff Gee said at Monday’s meeting, “but I think it’s really, really critical, because while potholes are really important to our community, so is financial viability.”
The city’s unassigned fund balance for fiscal year 2024-25 is projected to be about $2.6 million lower than forecast in June.
State funding loss deepens deficit
City staff attributed much of the shortfall to the state’s failure to provide Redwood City with Vehicle License Fee backfill, as it did in years past, the staff report stated. With litigation pending, the city has revised its backfill assumption from $4.8 million in June to $0.
The General Fund is now projected to end fiscal year 2025-26 with a negative unassigned fund balance of $1.2 million. Last summer, city staff expected the term would end in the green.
City officials this week emphasized that no immediate service reductions are proposed and that the city remains financially stable in its day-to-day operations, though long-term planning will be required if revenue trends do not improve.
To help close the gap, council members authorized releasing the city’s $2.8 million Economic Stability Reserve in fiscal year 2025-26.
“We have the resources to sustain us over the next couple of fiscal years, but we’re digging into our reserves earlier than anticipated,” said Beth Goldberg, the city’s finance director, “and certainly the out-year numbers are looking a little bit more bleak than what we had anticipated.”
Business license tax revenue is also projected to drop from $7.4 million to $5.8 million based on lower than predicted collections from Measure BB, which voters approved in November of 2024 to update the city’s system for this tax. The city has upped its Business License Tax collection compliance efforts, which it reports have improved collection rates and could prompt revenue increases later this year.
City officials said inflation has also eroded the city’s financial flexibility. Despite general fund revenues increasing by an average of 3% since the spring of 2022, the average annual inflation rate during this period was 3.2%.
The city council agreed to draw down the balance in the Section 115 Trust one year earlier than previously planned. The trust was established to offset future CalPERS pension costs and was originally expected to remain untouched until fiscal year 2027-28.
Long-term outlook worsens
This will exhaust the trust balance one year earlier, in fiscal year 2028-29—when annual shortfalls are projected to range between $14.1 million and $19.7 million—triggering the need for budget reductions and/or new revenue sources.
Several council members expressed concern over tapping into the trust early.
Council members Marcella Padilla and Chris Sturken worried that taking from the trust would only delay the problem.
Council member Jeff Gee said that while he is excited about the upgrades to projects like the Veterans Memorial Senior Center, “we’re not doing a good job of planning for these things financially.” He’s concerned that there are no capital reserves set aside to maintain buildings like this, which he used to justify his reservations about emptying the Section 115 Trust one year early.
The city is prepared to minimize new funding requests to address this problem but does not anticipate reducing the budget for fiscal year 2026-27 unless current trends continue.
Sales tax revenues are also forecast to drop by $2 million due to the closure or departure of businesses based in Redwood City. However, actual sales tax receipts through November 2025 are generally on pace with those for the same period in 2024-25, at nearly $38 million.
Some revenues show improvement
Despite the worsening outlook, some revenues are performing better than expected.
The Transient Occupancy Tax continues to recover slowly from the COVID-19 pandemic, with revenue projected to increase from $5.1 million to $5.2 million in the fiscal year 2025-26 midyear forecast.
Revenue from licenses and permits also increased by $500,000 through November, compared to the $3 million collected for the same period last year. Recreation revenues also went up, finishing fiscal year 2024-25 at $3.4 million, exceeding the budget.
Downtown Redwood City saw a 25% drop in vacancy rates in the final quarter of 2025, leaving 29% of buildings unoccupied. Moreover, in recent weeks, several companies have signed large leases in previously vacant office buildings, according to the staff report.
Jennifer Yamaguma, the deputy city manager, said that almost three-quarters of the city’s goals were completed by mid-fiscal year 2025-26, versus the expectation that just 33% would be finished. Only 4% of goals have been delayed, which comes down to only a few projects, such as the Tree Preservation Ordinance, she added.
To address the city’s budgetary challenges, the new city manager, Patrick Heisinger, intends to prioritize core services — like public safety; modernization — like streamlining permit processes; future preparation — like focusing on infrastructure planning; economic development; and learning from other governments.
Council debates priorities and future risks
City staff and council members acknowledged broader economic forces at play behind the city’s underwhelming financial performance. President Trump’s global tariffs, the recent federal shutdown and rising layoffs were noted as challenges in the local economic landscape.
Sturken raised concerns about artificial intelligence and its potential impact on the Redwood City workforce. He called for the city to develop a policy governing the use of AI in city operations and to help residents adapt to emerging technologies.
Council members like Diane Howard and Vice Mayor Kaia Eakin cited positive feedback in the recently published community survey as evidence that the city is doing a good job, whereas Sturken noted that only 800 community members participated and that it shouldn’t be given too much weight.
Sturken also flagged a proposal to reallocate $1.5 million in unspent salary savings to help fund police body-worn cameras, saying such decisions warrant community engagement.
Goldberg said the trust was never intended to sustain the city’s budget over time and was designed to collect interest during the peak years when unfunded pension liabilities were higher.
“We are headed into a lot of uncertainty,” Council member Isabella Chu said.
The council approved a budget timeline for the upcoming fiscal year, which includes a Capital Improvement Program study session on April 13, a Community Development and Block Grant and HOME study session on May 11, a presentation of the recommended budget on June 8 and a public hearing and adoption scheduled for June 22.
