Narrowing Belmont deficit remains dependent on state reimbursement

The reimbursement is related to vehicle license fees paid by residents, which are directed to the state and then subsequently paid back to cities, typically by the following fiscal year.

But the payback process is not straightforward. Instead of simply giving cities and counties back the amount of fee revenue collected in their respective jurisdictions, the state uses a reimbursement formula based on jurisdictions’ nonbasic aid school districts, or those that don’t generate enough property taxes to meet their state-mandated minimum school funding needs.

That works out for most counties, which mostly have nonbasic aid schools. And even though San Mateo County has only a few nonbasic aid schools — meaning most of the districts are fully funded via the area’s property taxes — the money from the property-tax-in-lieu-of-VLF is still critical for cities’ general funds, which help pay for numerous projects and services, ranging from housing to police services and infrastructure needs.

“If the state is to fulfill their funding obligation and pay us back $1.7 million, then we won’t need to be in this situation of needing to draw on reserves,” Belmont Finance Director Grace Castaneda said. “But as of the state’s latest May revised budget, they're still refusing to pay us back on the VLF shortfall.”

As the state deals with its own deficit, it has remained noncommittal during budget discussions on whether it plans to pay back cities and counties. Last year, the county, including all of the cities in its jurisdiction, were owed more than $100 million and about $70 million the year prior.

While the state eventually agreed to reimburse them, some jurisdictions have decided to hold off on including it in their subsequent budget projections due to the ongoing certainty. Belmont anticipates a $1.7 million loss for the 2025-26 fiscal year if the payment doesn't come through.

Mayor Julia Mates said the last-minute reimbursements are better than no payment, but it still disrupts cities’ finances.

“The fact that it happens at the eleventh hour is also scary because we just get by on the skin of our teeth,” Mates said. “We’ve been OK the last few years, but I’m not exaggerating to say that this would be a significant loss not just for our city but for our county as well.”

If the state stops the reimbursements altogether, Belmont could lose $30 million over the next decade and dip below the target reserve balance by 2030, according to the staff report.

The challenge also comes as the city deals with development slowdowns. Four of the six major development projects have either withdrawn or are on pause, with no new commercial construction anticipated to start in at least three years, according to a staff report. That could put a dent in property tax revenue in the near future, which comprises about 40% of the city’s general fund revenue.

A public hearing over the proposed 2025-26 budget will be June 10.