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The city of Menlo Park faces a greater deficit after the state of California appears set to pass its updated budget without fully reimbursing the city for in-lieu Vehicle Licensing Fees for the first time since a complicated budget compromise was set up 20 years ago.
While San Mateo County was worried the state would not reimburse the county and affected cities last year, the appropriation was added to the state’s budget at the last minute. City staff do not believe that will be the case this year, and the City Council had to decide how to move forward at the June 24 council meeting.
The city will now have a $1.8 million deficit in fiscal year 2025-26 due to the decision by the state.
“We’re probably all feeling that it’s a little sobering that we have flipped from a surplus to a deficit and now a deeper deficit with the VLF shortfall,” Vice Mayor Betsy Nash said at the meeting.
Due to this shortfall, the city’s already underfunded capital improvement project fund will lose an additional $1 million, which could delay some projects. If the state refuses to reimburse VLF in the future, the city’s deficits could be exacerbated.
The city’s budget was also impacted by a tech error that led to medical premium expenses being undercounted by over $2 million in the 2026 budget.
City staff plan to revisit budget adjustments during a mid-year review in February 2026, at which point further changes could be made based on updated financial information and conditions. The city will also need to fund an anti-displacement strategy the city has been planning as part of its environmental justice element.
Since the state-level developments happened the same day as the council meeting, city staff did not have time to update forecasts with the impact. Even without the VLF shortfall, Menlo Park’s Emergency Contingency Reserve will be fully drained by fiscal year 2029-30 and its Economic Stabilization Reserve will no longer be fully funded the same year.
