Budget Forecast

The City of Cupertino’s budget is split into various funds, which is called fund accounting. The General Fund is the City’s largest fund and is mostly funded with tax dollars. The General Fund supports essential services such as public works, parks and recreation, law enforcement, and community development.

In the General Fund, 69% of total revenue comes from taxes. These taxes include property tax (39% of total General Fund revenue), sales tax (14%), and transient occupancy tax (9%).

The City is expected to experience an ongoing 73% or $30 million decline in sales tax revenue, equivalent to an overall reduction in total revenue of 28%.

These challenges require corresponding expense reductions to ensure a balanced budget.

For more information on the City's budget, please refer to the links provided in the left-hand column. Additionally, the remainder of this page will explain the reasons behind the current revenue reduction.

The California Department of Tax and Fee Administration (CDTFA) is a state agency responsible for administering the collection and administration of sales and use taxes, which is a major revenue source for the state and local governments. For more information, please visit their website.

Businesses collect sales tax from customers and forward it to the CDTFA, which then distributes the revenue to local agencies, including the City. The City uses its share of this sales tax revenue to fund its services and programs. The CDTFA also conducts audits to ensure tax compliance.

In December 2021, the CDTFA notified the City that they were auditing one of the taxpayers in the City.In October 2023, the City received an audit decision from the CDTFA.

Despite facing challenging times, the City of Cupertino maintains a strong financial position with significant advantages. These include an unassigned General Fund balance exceeding $20 million, a fully funded retiree healthcare program, and a Section 115 Pension Trust to mitigate revenue losses. These resources provide a buffer and flexibility in managing finances effectively. With prudent planning, the City is poised to navigate uncertainties while upholding its commitment to staff and community.

The impact of this loss on the budget is significant, and as a result, the City is actively exploring various strategies to balance the shortfall. It's worth noting that these strategies will lead to service level reductions for the community, and the impacts will be shared across all expenditure categories. In addition to cutting expenses, the City is also evaluating various revenue-generating strategies to help alleviate the budget shortfalls caused by the audit. By taking a proactive approach and considering multiple options, the City hopes to minimize the impact on its staff and residents.

The Council has taken the following steps to address the revenue loss.

Regular reports on the City’s budget will communicate progress on the CDTFA audit and strategy to balance the budget.

To encourage community involvement, interactive town hall meetings in February and April will engage residents, businesses, and stakeholders. These sessions aim to enhance transparency and collaboration, fostering inclusive decision-making processes.

Businesses that collect sales tax are responsible for telling the state where those taxes should be distributed.

The state reviewed the taxes of one of our local businesses and told them it was doing it wrong.

This results in an ongoing change in the way the sales tax is distributed. Instead of coming to Cupertino, a large portion of this business’ sales tax now gets distributed to other locations, resulting in an ongoing $31M reduction to Cupertino.

The reduction in sales tax revenue, which is currently estimated to be $31 million (73%), is ongoing and will continue to impact the City's budget. The City is actively seeking ways to mitigate this impact and has plans to use its fund balance and reserves to provide a soft landing. The City will continue to monitor the situation and provide updates as necessary.

We cannot provide specific details on the source of the issue due to confidentiality reasons.

The identity of the taxpayer under review is confidential and cannot be disclosed.

At this time, we do not have information on whether other cities are impacted by this taxpayer's actions. The information we have received from the CDTFA pertains specifically to the City of Cupertino.

The City is currently conducting a review of all contracts for the upcoming fiscal year. As part of this review, departments are considering potential reductions or cancellations in accordance with the terms outlined in each contract.

The forecast has eliminated transfers from the General Fund to the Capital Reserve. Funding for new CIP projects will depend on the need and availability of funding.

Attrition refers to the natural reduction in staff that occurs over time due to factors such as retirement or resignation. The City expects to achieve its position reduction goals primarilythrough attrition. Whenever an employee leaves the City, the City must evaluate whether to replace the employee or eliminate the position altogether.

We cannot provide specific details on the source of the issue due to confidentiality reasons.