Redwood City Mid-Year FY 2025-26 Budget Update Highlights Fiscal Challenges Amid State Funding Concerns, Outlines Path Forward for FY 2026-27

Redwood City, California - On February 23, Redwood City's City Council received a mid-year budget update for Fiscal Year 2025-26 that provided an overview of the City's finances, progress on strategic goals, and the framework for developing the Fiscal Year 2026-27 Recommended Budget. The update reflects continued delivery of City services and progress toward City Council priorities, alongside emerging fiscal pressures driven by uncertainty in state funding, economic conditions, and updated revenue and expenditure projections.

The most significant factor affecting the City's financial outlook is the anticipated loss of Vehicle License Fee (VLF) backfill revenue from the State. VLF is State revenue tied to vehicle registration that is distributed to cities and counties and helps fund day-to-day local services. In San Mateo County, the amount of VLF funding available to local governments has fallen short in recent years, and the State has historically provided additional funding to make up the difference so cities receive their full allocation.

Unfortunately, the Governor's recently proposed budget includes no VLF backfill funding for San Mateo County. The City's Fiscal Year 2025-26 adopted budget assumed approximately $4.8 million in VLF backfill funding based on historical trends; however, following the State's proposed elimination of VLF backfill, the City has now revised its annual VLF backfill assumption to $0.

Also at Monday evening's City Council meeting, the County of San Mateo provided an update on VLF funding and the related countywide impacts. County officials noted that the potential loss of VLF funding affects all 20 cities and the County government, and that local jurisdictions are working collaboratively to advocate for restoration of the funding through the State budget process.

"Redwood City has a strong track record of proactive financial management," said Mayor Elmer Martínez Saballos. "While we are facing new challenges, our focus remains on protecting essential services and planning responsibly for the future."

Updated projections showed that, after accounting for technical budget adjustments and mid-year changes, the Fiscal Year 2025-26 General Fund is expected to end with a projected negative unassigned fund balance of approximately $1.2 million under the no-VLF-backfill scenario. This forecast assumes use of the City's $2.8 million Economic Stability Reserve and other existing financial resources to maintain balance while the City continues planning for future years.

Several additional factors are influencing the City's financial outlook, including lower-than-expected Business License Tax revenues, modest reductions in sales tax projections, ongoing inflationary cost pressures, and continued softness in the commercial real estate market. At the same time, some revenues, such as recreation programs and certain permit-related revenues, are performing stronger than anticipated.

The report also notes that most departmental goals for Fiscal Year 2025-26 are either completed or on track, reflecting ongoing progress toward the City Council's Strategic Plan priorities. Looking ahead, staff are recommending a budget framework that prioritizes preserving existing services, addressing capital and infrastructure needs, maintaining reserves, and exploring long-term revenue strategies.

"Like many cities across California, we are navigating uncertainty in state funding and economic conditions," said City Manager Patrick Heisinger. "Our goal is to remain fiscally responsible while continuing to deliver the services our community relies on."

The City remains financially stable in terms of its day-to-day operations, and no immediate service reductions are proposed. However, long-term projections indicate that additional proactive planning will be needed in future years if revenue trends do not improve. The City Council is expected to consider the Fiscal Year 2026-27 Recommended Budget in June 2026.

More information is available in the full staff report on the City's website.

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About the City of Redwood City: The City of Redwood City is a San Francisco Bay Area community located in the heart of Silicon Valley, the technology-rich region extending from the San Francisco Peninsula to the foothills of the Santa Cruz Mountains. Redwood City is the third largest city within the County of San Mateo, with 85,992 residents. The city enjoys an average of 255 sunny days a year, which it boasts via the city slogan: "Climate Best by Government Test." Incorporated in 1867, Redwood City is home to the San Mateo County History Museum (located in the county's old courthouse) and the only active deep-water port within the south bay of San Francisco. The city's vibrant downtown, quickly becoming known as the entertainment hub of the San Francisco Peninsula, offers residents, visitors, and businesses a unique retail, entertainment, and restaurant experience.