Subject
title
FY 2026 Budget Worksession #2 - Operating Expenditures, Grants and Fund Balance
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Department
Finance
Recommendation
Staff recommends that the Mayor and Council review the FY 2026 Proposed Operating Budget and Capital Improvements Program, and provide direction as needed.
Discussion
This is the Mayor and Council’s second budget worksession related to the FY 2026 Proposed Operating Budget and Capital Improvements Program. During this worksession, staff would like to cover operating expenditures, community service and enrichment grant allocations, the Rockville Economic Development, Inc. funding allocation, and the proposed commitments of General Fund reserves exceeding the target. The objective of this worksession is to provide a summary of proposed funding allocations and obtain direction on any requested adjustments to the funding allocations. The presentation that accompanies this worksession is attached to this report (Attachment 1).
FY 2026 Operating Expenditures
Expenditures across all funds are proposed to total $173 million in FY 2026. This is an increase of 4.5 percent from FY 2025 Adopted expenditures. Expenditures by category are shown below in Table 1 and provide a comparison of FY 2025 Adopted expenditures and FY 2026 Proposed expenditures.
Table 1 - Operating Expenditures by Category
Personnel
This category of expenditures consists of regular employee wages, temporary employee wages, overtime, and benefits. This category increased by 7.7 percent or $6.1 million from FY 2025 to FY 2026. The FY 2026 budget equals $56.3 million for regular employee wages, a 6.0 percent increase from FY 2025. The budget includes a 2.5 percent cost of living adjustment, steps or performance-based increments for all employees, and the net addition of 13.5 full time equivalent positions. A summary of position changes can be found on pages 368-370 of the budget document.
The new positions provide capacity to better support ADA compliance across the city; enhance communications and community engagement functions; improve development review, inspections, and permitting services in support of more streamlined economic development; and provide added resources to support enhanced housing programs. The new positions also provide capacity that will support public safety service delivery, ensure compliance with the Safe Drinking Water Act, and expand programming at the Rockville Swim and Fitness Center.
The FY 2026 budget equals $4.4 million for temporary employee wages, a 9 percent increase from FY 2025. The majority of the temporary employees are in the Department of Recreation and Parks. For FY 2026, the City of Rockville will continue to follow Montgomery County's hourly minimum wage rate which will equal $17.65 on July 1, 2025. This is a 2.9 percent increase from the $17.15 hourly minimum wage in FY 2025. Funding for compression adjustments is also included in the FY 2026 proposed budget.
The overtime budget for FY 2026 equals $1.5 million, a 2.9 percent increase from FY 2025. Approximately 44 percent of overtime is allocated to Public Works for maintenance, water, sewer, and refuse operations, and approximately 41 percent of overtime is allocated to the Police Department for field services operations. When there are overtime expenses associated with vacancies, the city is able to utilize salary savings to support overtime costs.
The budgeted benefits for FY 2026 equals $15.6 million, a 5.0 percent increase from FY 2025. The most significant components of this category include the city portion of employee medical insurance and city retirement plan contributions, which are budgeted at $7.8 million and $7.2 million, respectively. City covered benefits for FY 2026 include: allowances, disability pay, retirement, health and dental insurance (including post employment benefits), life insurance, and employee leave buyback.
The personnel budget includes $1.2 million across all funds for compensation and classification implementation. This is currently included in the non-departmental budget and will be allocated to department budgets as part of the final balancing exercise.
Operating
This category is made up of contractual services and commodities. The overall operating budget decreased by 5.8 percent from $34.8 million to $32.8 million from FY 2025 to FY 2026. Citywide contractual services decreased by 14.1 percent or $3.0 million to $21.2 million in FY 2026. This category is mostly comprised of contracted services (including contracts for facilities, grounds, transportation, and other services), and consultants that support major studies, plan developments, and initiatives. The largest decrease from FY 2025 to FY 2026 is $3.4 million for the reclassification of software subscriptions to the other category following the implementation of GASB 96. This decrease is offset by increases for consultant services, professional development, the transition to a new off-site data center, and credit card transaction fees.
The overall commodities category increased by 9.1 percent to equal $11.5 million in FY 2026. This category supports utility costs at city facilities, chemicals for city pools and the Water Treatment Plant, program and maintenance supplies, new or replacement furniture and equipment, and the contingency accounts. The largest increase in this category is for furniture and equipment which is expected to increase by $452,330. This increase includes funding for CCTV security upgrades which will begin in FY 2026 and continue through FY 2027, and also includes funding for electric landscaping equipment. Also included in this category is the $350,000 General Fund contingency account. This balance will provide support for unanticipated needs during the year and complies with the city’s Financial Management Policies.
Capital Outlay
This category increased by 9.4 percent, or $557,690 from FY 2025 and equals $6.5 million for FY 2026. The significant changes include decreased vehicle replacements (see page 379 of the proposed budget for a list of planned vehicle replacements) and increased lease inception expenditures which are offset by an equal lease inception revenue, in accordance with GASB 87. In addition to purchased vehicles, the city leases most of the light duty and Police vehicles under the other category. The capital outlay category also includes increased FY 2026 funding for hardware and equipment for the city’s planned network infrastructure upgrades.
Other
This category, which increased by $2.9 million to $48.3 million for FY 2026, primarily consists of transfers to other funds (including the CIP transfer), administrative expenses, depreciation, debt service payments, community services and enrichment grants, vehicle and equipment leases, and software subscription expenses. General Fund transfers are made annually to the Refuse Fund to support refuse services for Rockville Housing Enterprises (RHE) properties, to the Parking Fund to support ongoing debt service associated with the construction of the parking garages, to the Special Activities Fund to support various arts and need-based programs, to the Debt Service Fund for taxpayer-supported debt payments, and to the CIP to provide “paygo” support for non-enterprise capital projects. In total, transfers to other funds total $14.9 million, which includes a $9.8 million CIP transfer and a $3.3 million Debt Service Fund transfer.
Administrative charges represent centrally budgeted administrative or "overhead" costs. Six of the city's operating funds pay for their share of overhead costs through an annual transfer to the General Fund. The Sewer Fund also pays an administrative charge to the Water Fund for the utility billing functions. Transfer expenditures from administrative charges total $6.0 million in FY 2026.
The FY 2026 budget incorporates a 22.3 percent increase for community services and enrichment grants following a refreshed process that consolidated what had previously been two separate grant programs. The FY 2026 budget proposes a $1.6 million contribution to Rockville Economic Development Inc. (REDI) which includes increased funding for a new Business Development Associate, marketing costs associated with the implementation of the new life sciences branding initiative, and additional operating expenses. All community services and enrichment grants are listed in the Supplemental Information section of the budget on pages 382-383. These lists can also be seen in Attachment 2.
Debt service payments are budgeted in the Debt Service fund for taxpayer-supported debt, and within each respective enterprise fund for debt that is supported by the rates and fees generated by the enterprise fund. The current debt service schedules for each fund can be found in the budget on pages 85-95. A listing of total outstanding city debt is listed in the budget on page 276. During FY 2026 the city will retire $2.4 million in taxpayer‐supported debt and $8.0 million in enterprise debt. The city does not plan to issue new debt in FY 2026 but anticipates debt issuances in FY 2027 and FY 2029. Neither Maryland State law nor the City Charter mandates a limit on municipal debt. However, the city strives to maintain its debt at prudent levels and considers the financial impact of debt service costs on the operating budget within the forecast for each fund. A review of the city’s debt will be shared during the next worksession, alongside information on the Capital Improvements Program.
Operating Expenditures by Department
Citywide Expenditures by Department are shown in Table 2 below. The table shows total department budgets with percent changes from Adopted FY 2025 to Proposed FY 2026. The cause for the change in the FY 2026 operating expenditure budget varies by department. Details on the major changes, FY 2026 outlook, and staffing levels for each department are highlighted in the budget worksession presentation in Attachment 1 and are detailed in each department’s operating section of the budget document (pages 99-268).
Table 2 - Operating Expenditures by Department
Community Service and Enrichment Grants
Each year the city appropriates funds to support organizations that provide aid to Rockville individuals and families who are experiencing difficulty meeting one or more basic needs related to housing, food, clothing, financial resources, health care and/or family well-being, as well as to support other community organizations that provide other benefits to the Rockville community. A summary of the grants for FY 2024 through FY 2026 is attached to this report (Attachment 2).
Previously, the city had two separate community grant processes: the caregiver agency grants, for organizations that help meet basic needs, and the community organization grants, for organizations that provide other benefits to the Rockville community. These processes were consolidated for FY 2026, into the Community Services and Enrichment Grants process. Consolidating these two programs provided alignment in the timing of the grant process and due dates, and also provided consistency in the panel application review and scoring process. All such grants are now budgeted within the Department of Housing and Community Development, Community Services Division.
Additionally, for FY 2026, many organizations received increases to their grant awards, to bring their capacity in line with the needs of the community. The allocations proposed in the FY 2026 budget total $1.5 million and reflect a 22.3 percent increase over the FY 2025 funding levels. Chart 1 below shows the FY 2026 proposed grant funding level alongside the amounts provided for the last nine fiscal years.
Chart 1 - Historical Grant Awards
The FY 2026 Proposed Budget recommends a $250,000 commitment of reserves exceeding the target to provide one-time funding for an emergency response vehicle for the Rockville Volunteer Fire Department. If approved, this would bring the total grant support to $1.7 million for FY 2026. Following the grant application review process and panel recommendations, Rockville Sister Cities Corporation informed the city that plans for a FY 2026 delegation visit from officials in sister city Yilan City, Taiwan will not happen on timeline previously estimated. Rockville Sister Cities Corporation has indicated that its FY 2026 grant can be reduced by $7,000, consistent with their public testimony from March 17, 2025.
Rockville Economic Development, Inc.
Rockville Economic Development, Inc. (REDI) is a public-private partnership formed by the City of Rockville to strengthen and broaden the city’s economic base through business entrepreneurship, expansion, retention, and recruitment programs. The FY 2026 Proposed Budget reflects a total of $1.6 million to REDI which includes $100,000 for a new Business Development Associate, $50,000 for marketing costs associated with the implementation of the new life sciences branding initiative, and an additional $48,920 for operating expenses. The proposed funding level continues the city’s support of the incentive program, small business impact grants, and the Maryland Women’s Business Center. The full amount requested by REDI is included in the FY 2026 Proposed Budget, a 10.8 percent increase from the funding levels in the FY 2025 adopted budget. A schedule of funding by category is provided in Table 3 and Chart 2 shows the proposed FY 2026 REDI allocation alongside the amounts provided for the last nine fiscal years.
Table 3 - REDI Funding by Category
Chart 2 - Historical REDI Allocations
Proposed Commitments of Reserves
The FY 2026 Proposed Budget recommends commitments of reserves totaling $2,080,000 for the following purposes:
• $750,000 for a subsidy to the Housing Opportunities Fund,
• $280,000 for a Green Space Management Plan,
• $250,000 for a contribution to the Rockville Volunteer Fire Department for the purchase of an emergency response vehicle, and
• $800,000 for a transfer to the Capital Projects Fund to fund the construction of the Senior Center Entrance (TA24) CIP project
The city’s Financial Management Policies include specific reserves policies which are put in place to alleviate significant unanticipated budget shortfalls and to ensure the orderly provisions of services to residents. The policy requires that the city maintain an unassigned General Fund fund balance at a level not less than 20 percent of annual adopted General Fund revenue. This is the minimum level necessary to maintain the city’s creditworthiness and maintain adequate cash flows.
To the extent that the General Fund unassigned fund balance exceeds the target, the city may draw upon the fund balance to provide paygo financing for capital projects, for other significant one-time items, or for additional contributions to reduce the OPEB or Pension unfunded liabilities. In addition, Mayor and Council or the City Manager may commit or assign the fund balance that exceeds the target, respectively.
The FY 2026 Proposed Budget projects that FY 2026 will end with $3.7 million in reserves exceeding the target. This projection accounts for the uses of reserves made with FY 2025 budget amendments to date, and also accounts for the commitments of reserves recommended with the FY 2026 Proposed Budget. Staff recommend that the city maintain at least $3 million in reserves above the target to address potential economic issues associated with the actions of the federal administration. This provides the city with a funding source if there are emerging community needs and/or revenue reductions impacting the budget.
Prior to FY 2016 the city’s reserve target was 15 percent of annual adopted General Fund revenue, but this target has been 20 percent since that time. The city budgets conservatively to maintain its reserve levels and mitigate risks associated with less predictable revenue sources. This approach supports the city’s AAA bond rating, provides financial protections from economic uncertainties, and provides resources that have historically been used to meet one-time needs. Over the last ten years the city has always ended the fiscal year with General Fund reserves exceeding the target. This has ranged from $3.2 million to $10.9 million. Chart 3 shows a ten year history of reserve balances compared to the reserve targets.
Chart 3 - Historical Reserve Balances
Mayor and Council Considerations
The Mayor and Council routinely submit questions on the proposed budget document. A listing of questions and staff responses can be found at <https://rockvillemd.gov/DocumentCenter/View/57771/Mayor-and-Council-FY26-Budget-QA>
Mayor and Council History
|
Date |
Action Item |
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October 28, 2024 |
Public Hearing #1 |
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March 17, 2024 |
Public Hearing #2 Introduction of Budget Ordinance M&C Worksession #1 - Strategic Initiatives, Reorganization, Revenues |
Public Notification and Engagement
The final public hearing related to the FY 2026 budget will be held the night of this worksession (March 24). In addition to public hearings, the public can submit written comments directly to the Mayor and Council via the City Clerk/Director of Council Operations.
The Rockville community is also encouraged to submit an online budget survey to communicate their budget priorities for FY 2026. This form is available in three languages (English, Spanish, and Simplified (Mandarin) Chinese) and will be posted until April 7, 2025. The survey can be found at www.rockvillemd.gov/budget <http://www.rockvillemd.gov/budget>.
The FY 2026 budget public record closes on April 7, 2025.
Fiscal Impact
The FY 2026 proposed operating budget appropriation by category and fund can be found in the Financial Summaries section of the budget document. The FY 2026 proposed CIP budget appropriation by fund, program area, and department can be found in the CIP Overview section of the budget document.
Next Steps
|
Date |
Action Item |
|
April 7, 2025 |
Close of the community budget priorities survey and public record M&C Worksession #3 - CIP, Debt Review, and Final Balancing |
|
May 5, 2025 |
Budget Adoption |