Council backs “Scenario C” after a five-hour meeting, but delays final adoption to August; members eye reserve funds to soften the blow

Facing a $3.8 million deficit, the City Council chose the most austere of three paths forward, directing staff to build a spending plan that balances the books over three years rather than one — even as members openly searched for ways to spare city jobs and services from the chopping block.

The Council voted to adopt “Scenario C,” a plan that would unfund 32 vacant positions and stretch one-time revenues and spending reductions across the 2026/27, 2027/28 and 2028/29 fiscal years. Councilmember Dr. Shana Charles cast a dissenting vote, saying she could not stomach deep service cuts while the city sits on millions in reserves.

Rather than adopt the budget outright, the Council continued the public hearing and set final adoption for its August 18 meeting, buying time to examine whether an additional $1 million or more could be pulled from the city’s insurance reserves to reduce the reliance on cuts.

Deficit reduced from $13.7 million to $3.8 million

Interim Finance Director Steven Avalos told the Council the city had already whittled down a shortfall that stood at $13.7 million in March to $3.8 million — the second installment of a budget discussion that began at a July 14 study session.

The gap was closed, Avalos said, through roughly $4.1 million in additional revenue and transfers and $5.8 million in spending reductions. Those reductions include unfunding nine vacant full-time positions, cutting community programming — among them a fireworks-only Fourth of July and reductions to First Night — and trimming graffiti-removal and security services.

Avalos described the city’s problem as structural, meaning recurring costs are outpacing recurring revenue. He pointed to rising salaries, climbing CalPERS pension costs and unfunded liability that grows each year, while sales tax and other revenues stay flat. Property tax, the city’s largest revenue source, remains stable, he said, but cannot keep pace on its own.

Under Scenario C, the city would hold its reserve level near 10 percent, compared with a drop to roughly 3 percent under the least aggressive option.

Staff and departments padding the books

Zahra zeroed in on the workers’ compensation and liability reserves. Finally, staff said they hold roughly $29 million combined, including about $10 million above what is set aside for anticipated claims.

The city manager acknowledged that “at least a million” could likely be tapped from those funds for a one-year period, calling it preferable to “defunding positions and actual services from something that we’re just holding on for anything anticipated.”

Charles said she favored the least severe option paired with additional revenue. “I find it so galling to have money in reserves, millions of dollars in reserves, when we have horrible city services and not enough police,” she said.

Zahra likened the decision to treating a patient. “You start with the most conservative approach,” he said. “You don’t go straight gutting their entire organs.”

Mayor Pro Tem Nicholas Dunlap seconded the motion for Scenario C but was sharply critical of the process that led there, saying an effort that began as an expected audit had become “a dumpster fire.” He argued the option was “really the only choice tonight” because it buys the city a few years to work out of its deficit.

Residents weigh in

Residents used the public comment period to press for long-term fixes. Several called for a dedicated grant writer, an experienced Chief of Financial Officer, and a stronger economic business development effort, arguing the city needs new revenue rather than only cuts.

Karen Lloreda of District 2 endorsed Scenario C but said the budget item should have come before a proposed tax measure. “The city is in big trouble financially,” she said. “There is no putting it any other way.”

Others urged the Council to protect public safety. “Please don’t cut fire or police positions, whether they’re vacant or not,” said former district resident Dominic Moonhart. “Those positions are absolutely needed.”

Before moving on, Mayor Fred Jung directed staff to take a closer look at the liability fund option ahead of the August hearing — a move Dunlap called “a good idea.”