Davis narrows budget deficit, but more cuts and revenue fixes are needed by 2027
Davis made progress toward reducing its biennial budget deficit this year, according to a update presented to the City Council on Tuesday.
The update marked the first revision to the second year of the city’s first two-year budget, which the council adopted almost a year ago. The proposed spending cuts would narrow the deficit, but the city still faces a projected multiyear budget shortfall. City staff said they would return to the council in February with recommendations to fully balance the budget, which runs through June 2027.
Davis spent roughly $5 million more than it brought in last year and the city projected a $3 million budget deficit this year. Revenue for the city’s general fund remains about $2 million lower than annual spending.
City staff proposed cutting about $1.4 million in spending. They limited midyear spending requests, but changes to the 2026-27 budget will absorb most of those savings. The city anticipates about $600,000 in reduced spending next year, a 0.6% reduction.
City policy seeks a reserve fund equal to at least 15% of annual spending, but the budget deficit has left the city with only about 9% set aside as of March, according to the report. The revised budget would increase the reserve to about $13.3 million, or 13.7% of city spending. The savings would come from limiting midyear budget requests and delaying some capital projects.
The city set aside $3 million to repair streets and bike paths, but a growing repaving backlog and other deferred maintenance continue to threaten the city’s fiscal health. Repair costs rise when maintenance is delayed, and the backlog will not fit within the city budget unless Davis generates more revenue, said Councilmember Bapu Vaitla, who represnts the residents west of Highway 113.
“There’s no way to ‘general fund’ our way out of this pavement problem,” he said.
The city now expects revenue to come in 0.2% lower than projected, or about $200,000.
City staff lowered their forecast for next year’s sales tax revenue by $500,000. The revision reflected a clearer estimate of revenue from Measure Q, a 1-cent sales tax renewed by voters in 2024. The city has also earned more than expected from investments and property taxes, according to the staff presentation.
Another factor contributing to lower-than-expected sales tax revenue is reduced consumer spending caused by “economic uncertainty and continued hostilities in the Middle East causing sustained increases to gasoline prices and disruption of supply chains,” according to a staff report.
That slowdown could also reduce revenue from the city’s hotel tax as travel demand sags.
The city also found cannabis tax revenue declined more than expected. Cannabis tax revenue is now projected to generate $500,000 less than originally forecast next year.
City staff said they would present a plan in nine months that eliminates the deficit entirely. According to a staff report, the plan would include reorganizing city staff after anticipated retirements.
As the city has taken steps to reduce spending, it has also approved labor contracts that offset some of those savings, said Dan Carson, a former Davis councilmember and former member of the city’s Finance and Budget Commission.
“The first steps to address the city’s budget shortfalls being proposed by city management are reasonable but will fall far short of what is needed to address a severe funding gap,” Carson wrote in a letter to the City Council. Of particular concern to Carson is a sharp increase in payroll spending.
Davis spent about $71 million on employee salaries and benefits in fiscal year 2022-23. It expects to spend about $93 million this year, an increase of roughly 30%. Over the same period, city revenue grew by just 13%.
“Ultimately we’re not going to make our way out of this fiscal situation we are in long-term until we really fix the revenue side of things,” Davis Mayor Donna Neville said. “We just have to fix it.”
