a presentation regarding FY27 Budget Planning Amid Economic Headwinds

CITY OF CAMBRIDGE FY27 Budget Planning Amid Economic Headwinds November 10, 2025 City Council & School Committee Roundtable

CITY OF CAMBRIDGE 2 Executive summary ▪ After over a decade of growth, the City faces a multi-year downturn with falling commercial values, weak economic trends, & slower development ̶ Between Jan. 1 2024 and Jan 1 2025, commercial values fell 12.5%, new growth declined over 40%, and excess levy capacity decreased by 8.6% ▪ These negative trends have serious implications for the City’s financial health, including (a) stagnating/declining non-property tax revenue, (b) an erosion of our excess property tax levy capacity, and (c) an increasing likelihood that there will be a shift of tax burden from commercial to residential properties ▪ Last year, we established multiyear budget and tax levy growth targets to ensure sustainability and achieved the FY26 target; Since then, uncertainty has continued to grow, driven by federal actions and deteriorating macroeconomic indicators ▪ Amid this situation, the most critical action we can take to protect the City’s financial stability and taxpayer impact is moderating budget growth ̶ We recommend that the City Council include budget growth and tax levy targets of less than 5% and 7%, respectively, as a budget priority for FY27 and acknowledge the potential for lower targets in future years ▪ Achieving under 5% FY27 budget growth will be difficult due to rising salary, health benefit, and contract costs and potential federal grant cuts ▪ We are working with departments to identify $12M in budget savings for FY27 and will determine actions based on City’s values and priorities ▪ We are also shifting toward a resource-constrained capital planning approach to moderate debt service

CITY OF CAMBRIDGE 3 Meeting overview and agenda Agenda Meeting overview A joint roundtable/working meeting with the City Council and School Committee to discuss macroeconomic trends in Cambridge and the City’s FY27 budget ▪Opening and Introductions ▪Presentation from the City ▪Discussion with the City Council and School Committee

CITY OF CAMBRIDGE 4 Presentation from the City ▪ Macroeconomic trends ▪ FY27 budget

CITY OF CAMBRIDGE After over a decade of growth, the City faces a multi-year downturn with falling commercial values, weak economic trends, & slower development 5

CITY OF CAMBRIDGE Between Jan. 1 2024 and Jan 1 2025, commercial values fell 12.5%, new growth declined over 40%, and excess levy capacity decreased by 8.6% 6 We anticipate that these negative trends will persist over the next several years Commercial real property values fell by 12.5% New growth added to the tax base dropped by over 40% Excess levy capacity decreased by 8.6% In billion $ In million $ In million $ FY25 FY26 189 173 -8.6% 24.2 13.8 FY25 (based on Jan 1, 2024 values) FY26 (based on Jan 1, 2025 values) -43.0% 33.6 29.4 FY25 (based on Jan 1, 2024 values) FY26 (based on Jan 1, 2025 values) -12.5%

CITY OF CAMBRIDGE These negative trends have serious implications for the City’s financial health 7 Stagnating or declining non-property tax revenue, resulting in a greater dependence on property taxes to fund our budget An erosion of our excess property tax levy capacity, which will impact the City’s overall financial flexibility. 1 2 3 An increasing likelihood that there will be a shift of tax burden from commercial properties to residential properties

CITY OF CAMBRIDGE Stagnating or declining non-property tax revenue, resulting in a greater dependence on property taxes to fund our budget 8 1 0 200 400 600 800 1,000 1,200 1,400 36% FY19 64% 36% FY20 66% 34% FY21 65% 35% FY22 66% 34% FY23 65% 35% FY24 65% 35% FY25 68% 32% FY26 69% 31% FY27 (Proj.) 70% 30% FY28 (Proj.) 71% 29% FY29 (Proj.) 73% 64% FY30 (Proj.) 643 683 721 756 806 27% 962 1,001 1,049 1,109 1,165 1,227 890 Property Tax Levy non-property tax revenues Operating budget at recap, FY19-FY30 In million $ (share of revenue sources in %) FY27-FY30 projections show stagnating non-property tax revenue growth; therefore, property tax levy increases will be needed to offset rising costs and declining non-property tax revenues

CITY OF CAMBRIDGE 9 Excess levy capacity, FY07-FY26 In million $ 5 10 15 20 25 30 35 0 20 40 60 80 100 120 140 160 180 200 220 FY07 08 09 10 11 12 13 14 15 16 17 30% 18 19 20 21 22 23 19% 20% 25 17% 26 24 201 199 189 173 74 Excess levy capacity as a % of operating budget Excess levy capacity Excess levy capacity as a % of operating budget, FY07-FY26 % 24 27 27 27 26 26 25 26 28 30 31 32 32 30 28 28 27 26 23 20 Excess levy as a % of levy limit An erosion of our excess property tax levy capacity, which will impact the City’s overall financial flexibility. 2

CITY OF CAMBRIDGE 10 Illustration if the City were at the Prop 2 1/2 levy limit in FY26 (zero excess levy capacity) FY26 FY25 Property Tax Levy (hypothetically at the limit) $628.4M Plus 2.5% growth of levy limit ($628.4M x 2.5%) + $15.7M Plus new growth factor + $13.8M Equals FY26 hypothetical levy limit = $657.9M Actual FY26 Tax Levy $678.9M Unsupported Budget – $21.0M To solve this shortfall, the City would need to reduce its budget or get an override passed A healthy excess levy capacity provides financial flexibility The City has used this flexibility to support community priorities, i.e.: ▪ Affordable housing ▪ Community Safety Department ▪ Debt service for public investments ▪ Extended hours in Cambridge Public Schools ▪ Universal Pre-Kindergarten Excess levy capacity is a significant contributor to our financial health & stability. Things would be very different if we were at levy limit 2

CITY OF CAMBRIDGE An increasing likelihood that there will be a shift of tax burden from commercial properties to residential properties in FY28 … 11 9.3 8.0 7.0 10.7 9.7 6.7 9.3 8.0 7.0 5.1 5.5 7.2 FY25 FY26 FY27 (proj.) FY28 (proj.) FY29 (proj.) FY30 (proj.) Scenario 1: “Base Value Case” FY27-FY30 Levy Increases (in %) Key assumptions for the base value case: ▪ Overall levy increases by 7% in FY27-FY30 (we need to reexamine FY28-FY30 targets) ▪ Modest appreciation and growth are assumed for residential properties throughout ▪ Commercial values decline in FY27 as they did in FY26, then the rate of decline moderates in FY28 Residential levy Increase Commercial levy Increase 3 We have modeled two potential scenarios: 9.3 8.0 7.0 7.0 7.0 7.0 Assumed overall levy increase Residential/commercial split xx 34% 66% 34% 66% 34% 66% 35% 65% 36% 64% 36% 64%

CITY OF CAMBRIDGE … with an even higher residential levy increase if commercial values decline at a similar rate to FY26 in both FY27 and FY28 12 Key assumptions for the pessimistic value case: ▪ Overall levy increases by 7% in FY27-FY30 (we need to reexamine FY28-FY30 targets) ▪ Modest appreciation and growth are assumed for residential properties throughout ▪ Commercial values decline at a similar rate to FY26 in both FY27 and FY28 3 9.3 8.0 7.0 7.0 7.0 7.0 Scenario 2: “Pessimistic Value Case” FY27-FY30 Levy Increases (in %) Assumed overall levy increase 9.3 8.0 7.0 17.0 11.4 6.7 9.3 8.0 7.0 1.9 6.4 7.2 FY25 FY26 FY27 (proj.) FY28 (proj.) FY29 (proj.) FY30 (proj.) Residential levy Increase Commercial levy Increase Residential/commercial split xx 34% 66% 34% 66% 34% 66% 37% 63% 38% 62% 39% 61%

CITY OF CAMBRIDGE In FY26, declining commercial values shifted the tax impact across commercial property types. We anticipate a similar shift in FY27 13 Commercial property type Count Median value change Median tax bill change at proposed rate Hotel/inn 24 3% 26% Lab/research 131 -12% 8% Office 444 -15% 4% Others* 289 -13% 6% Retail/restaurant 295 -10% 10% FY26 median change by commercial property type As lab/research and office values are likely to decline, hotels, retail, and restaurants may once again experience a similar tax impact as in FY26 *Includes warehouses, gas stations, public utility properties, telecom properties, vacant commercial land, parking lots, service garages, and an electric power plant

CITY OF CAMBRIDGE 14 Presentation from the City ▪ Macroeconomic trends ▪ FY27 budget

CITY OF CAMBRIDGE 15 The FY26 budget totals nearly $1B, an 82% increase over the past decade, with $280M allocated for Cambridge Public Schools FY16 FY26 546 992 +82% Operating budget, FY16 vs. FY26 In million $ $280M (28%) $712M (72%) FY26 operating budget breakdown % (total: $992M) All other City departments Cambridge Public Schools

CITY OF CAMBRIDGE 16 We continue to invest in City Council priorities, over $250 million in FY26, even with slower budget growth Climate Net Zero 18.0 Climate Resilience 20.9 Open Space 21.0 Homelessness & Housing Stability 15.6 Universal Pre-K 34.7 Vision Zero Programs & Planning 10.9 Vision Zero Infrastructure Projects 39.0 Economic Equity and Opportunity 17.3 Zero Waste 8.2 Urban Forestry 4.8 Affordable Housing 48.8 Early Childhood 5.0 AEI Training & Programs 7.7 FY26 Consolidated Spending (in $M) Represents expenditures across multiple departments. Does not represent the entire City Budget* *Figures show the total resources dedicated to each City priority, including City and grant funds, capital funds, Free Cash, and staff time as a percentage of salaries and benefits

CITY OF CAMBRIDGE 17 • In June 2025, the Council approved our proposal to allocate $5M of free cash to a Federal Grant Stabilization Fund • $1M was allocated to support housing for mixed- status families • $250K was allocated to mitigate food insecurity related to the federal government shut down’s impact on SNAP benefits $5M was allocated to the Federal Grant Stabilization Fund To date, $1.25M has been appropriated We anticipate building in ongoing spending in the FY27 budget • We anticipate that some spending from the $5M allocation may need to be absorbed in FY27 budget and beyond • We also committed to continue working with the City Council on prioritizing new programs Due to the uncertainty about potential federal grant reductions, we established a $5M Federal Stabilization Fund in June 2025

CITY OF CAMBRIDGE Since then, uncertainty has continued to grow, fueled by federal actions and mounting macroeconomic headwinds 18

CITY OF CAMBRIDGE 19 Amid this situation, the most critical action we can take to protect the City’s financial stability and taxpayer impact is moderating budget growth We recommend that the City Council include budget growth and tax levy targets of less than 5% and 7%, respectively, as a budget priority for FY27 and acknowledge the potential for lower targets in future years Preliminary FY28-FY30 Targets* FY27 Budget Property Tax Levy Growth Targets Less than 7% increase Less than 7% increase Operating Budget Targets Less than 5% increase Less than 5% increase *We will continually reassess future year targets based on projected residential taxpayer impacts for FY28–FY30

CITY OF CAMBRIDGE 20 Achieving under 5% FY27 budget growth will be difficult due to rising salary, health benefit, and contract costs and potential federal grant cuts 30 Salaries, Wages, & Benefits 11 Supplies & Contractual Services 14 Debt & Extraordinary Expenditures Fed. Funding Stabilization Fund 6% budget growth FY27 Projected Op. Budget 8 FY27 Target Op. Budget 4.8% budget growth Needed savings/ additional revenue FY26 Recap Op. Budget FY26-FY27 adopted, projected, and target budgets In million $ 997 1,057 +6.0% ($60M) -1.2% 1,045 The $1M has been used for mixed family housing (an ongoing program) We need to find $8M and an additional $4M ($12M total) if we make ongoing commitments with FY26 Fed. Grant Stabilization Fund 5 12 4 1 4 Projected increase (with COLA*, inflation, etc.) *COLA: Cost-of-Living Adjustment

CITY OF CAMBRIDGE 21 We are working with departments to identify $12M in budget savings for FY27 and will determine actions based on City’s values and priorities We’re working with departments to find $12M in FY27 savings … … and will determine actions based on City’s values and priorities ▪ Alignment with the City’s strategic priorities ▪ Cost-effectiveness ▪ Impact on equity ▪ Legal/mandate risk ▪ Must-haves vs. nice-to-haves ▪ Program impact ▪ Proximity to residents and businesses (e.g., core services, safety-related) ▪ Citywide effort (potential impact: $4M) Examples: Eliminating out-of- state travel (with exceptions), reducing debt service, increase non-property tax revenues ▪ Savings to be identified by each department – 2.1% of the budget (target impact: $8M) Include consultant contracts, overtime, temporary salaries, etc.

CITY OF CAMBRIDGE 22 We are also shifting toward a resource-constrained capital planning approach to moderate debt service going forward Available debt service capacity Capital Plan ▪School ▪Municipal Facilities Improvement Plan ▪Street & Sidewalk Construction Plan ▪Open Space and Recreation Plan ▪Other capital needs, e.g., BEUDO Capital plan and debt service Our debt service and capital plan have been driven largely by project plans … … Going forward, available debt service capacity will determine project prioritization Street & Sidewalk Construction Plan Open Space and Recreation Plan Other capital needs, e.g., BEUDO Municipal Facilities Improvement Plan School 3-year avg. annual increase in tax- supported (‘net’) debt service: 11.4% Match net debt service growth with operating budget growth *The net debt service in FY26 is $83.1M or 8.38% of the operating budget. Debt service related to water and sewer capital investment is supported by water and sewer revenue We aim to limit tax supported (‘net’) debt service growth to less than 5% in the FY27 budget

CITY OF CAMBRIDGE We follow a well-defined 12-month Annual Budget Cycle, which is critical to planning the effective use of public funds and ensuring transparency 23 Annual Budget Cycle (12-Month Process) Budget analysis and planning Operating and capital budgets preparation and submission Jan Apr Jul Oct Nov Dec Feb Mar May Jun Aug Sep Council budget hearings & adoption Property value certification by the State This step includes: ▪The City Council and School Committee Joint Roundtable ▪Finance Committee meetings ▪Budget kick-off with City staff Tax rate setting This step includes: ▪Budget priorities setting by the City Council New fiscal year begins

CITY OF CAMBRIDGE Key takeaways and recommendations 24 Recommendations ▪ For FY27, we recommend setting a budget growth target of less than 5% and a tax levy increase of less 7% ▪ For future years, we recommend further moderation of budget growth and annual tax levy increases to minimize impact on taxpayers and to preserve financial stability Key takeaways ▪ The City is experiencing a multi-year economic slowdown, with declining commercial values and a slowdown in development impacting our taxbase ▪ These negative trends have serious implications for the City’s financial health, from erosion of our excess property tax levy capacity to increasing burden on taxpayers ▪ The most critical action we can take to protect the City’s financial stability and taxpayer impact is moderating budget growth

CITY OF CAMBRIDGE 25 Appendix ▪Glossary of terms related to tax levy ̶ Explanation of Proposition 2½ ̶ Explanation of excess levy capacity ̶ Explanation of tax classification ▪Glossary of other terms ▪Additional information on certified free cash (“unexpended fund balance”)

CITY OF CAMBRIDGE 26 Glossary of terms related to tax levy The maximum amount of tax a community can levy in a given year under Proposition 2½. This limit can increase each year by 2.5% of the prior year’s levy limit, plus new growth and any overrides. Levy limit The difference between the levy limit and actual taxes levied. Excess levy capacity Additions to community’s tax base in the prior year (does NOT include higher market values; must result from a change in physical condition, taxable status, or taxable unit of a property). New growth helps support community improvements and infrastructure. New tax base growth (“new growth)” A MA law that limits how much cities and towns can raise property taxes each year. It does two main things: (1) Caps the total amount a community can collect from property taxes at 2.5% of the community’s total property value. (2) Limits how much the total tax levy can increase each year to no more than 2.5% + new growth (such as new construction). Proposition 2½ (“Prop 2½”) The value of land and buildings based on what the property would likely sell for on the open market. In MA, it is set each January 1 for property tax calculation Real property values A community vote that allows a city or town to raise property taxes above the normal annual limit set by Proposition 2½. If approved by voters, the new amount becomes part of the tax base going forward. Budget override (“override”) Revenue raised through real and personal property taxes; is the largest source of revenue for City of Cambridge budget (68% of the City’s total revenue in FY26) Tax levy

CITY OF CAMBRIDGE 27 MA Proposition 2.5 sets a tax levy limit and an annual levy limit increase for each city, to prevent large annual property tax rate increases ▪ The most important Prop 2.5 metric is the Levy Limit, which is the maximum allowable tax levy each year (without an override), originally set as % of a municipality's total assessed value ▪ Prop 2.5 restricts the annual increase to the Levy Limit to include two factors: an automatic 2.5% increase from the prior year levy limit AND new growth. What is MA Prop 2.5? Enacted in 1980 by state-wide voter initiative, Prop 2.5 is a piece of MA state legislation that restricts a municipality’s maximum potential tax levy, without needing an override. The legislation had two main measures, targeted at protecting tax-payers from significant tax increases from year- to-year: 1. Established an annual Levy Ceiling of 2.5% of the municipality’s total taxable assessed value. 2. Established an annual levy limit.

CITY OF CAMBRIDGE 28 Levy limit Actual tax levy Excess levy capacity Levy limit Actual tax levy Excess levy capacity Levy limit Actual tax levy Ample excess levy capacity ▪ The gap between the levy limit and actual tax levy is called excess levy capacity; it acts as a financial cushion. ▪ It provides financial flexibility and signals fiscal restraint, helping maintain the City’s AAA bond rating. ▪ The City’s tax levy is closer to the legal limit, reducing budget flexibility. ▪ This situation leaves the City with fewer options to address unexpected costs or fund new initiatives, making it harder to meet community needs. ▪ The City is at its levy limit; future tax levy growth is capped at 2.5% annually, plus new growth. ▪ In FY26, this would mean $21M in unsupported budget, requiring either cuts or a voter-approved override. No excess levy capacity Excess levy capacity gives the City room to maneuver. When it shrinks, flexibility declines. When it’s gone, we face cuts or an override Excess levy capacity scenarios Limited excess levy capacity

CITY OF CAMBRIDGE 29 Tax classification lets cities allocate the tax levy between residential and commercial properties using different tax rates What is tax classification? State law allowed municipalities the option to allocate the tax levy between residential and commercial properties using different tax rates. However, there are limits: ▪ Max: Commercial properties may pay only up to 175% of their full, fair cash value share of the levy, known as the “maximum commercial factor.” This means that the tax rate for commercial cannot be more than 175% of what the single rate would be if the city did not choose to use a split rate ▪ Min: For Cambridge, residential properties must pay at least 34% of the levy, called the “Residential Percentage.” Once the maximum commercial factor of 175% is reached, no additional tax burden may be shifted to the commercial taxpayers. ▪ Under the formula today, Cambridge commercial taxpayers pay 66% and residential taxpayers pay 34% of the levy. ▪ In macroeconomic environments where commercial values are declining and residential values are increasing, this proportion may change and shift more of the tax burden to the residential properties. ▪ The City has not yet reached the maximum amount it may shift to commercial properties, but with current macroeconomic trends of softening commercial values and increasing residential values, there is an increasing likelihood that the City will reach the maximum commercial factor in the next several years

CITY OF CAMBRIDGE 30 Glossary of other terms (alphabetical order) A plan of financial operation embodying an estimate of proposed expenditures for a given period for regular activities and the proposed means of financing them. Operating Budget (“budget”) Additions to the City’s financial assets (such as taxes and grants) which do not in themselves increase the City’s liabilities or cancel out a previous expenditure. Revenue may also be created by cancelling liabilities, provided there is no corresponding decrease in assets or increase in other liabilities. Revenues The extent or scope of the City’s service to be provided in a given budget year. Whenever possible, service levels should be stated in precise units of measure Service level The amount of a community’s unrestricted funds that has been certified by the MA Department of Revenue’s Bureau of Accounts as available for appropriation. Certified free cash (“free cash”) All revenue coming from non-tax sources, including licenses and permits, intergovernmental revenue, charges for services, fines and forfeits, and various other miscellaneous revenue sources. Non-tax revenue The amount of tax-supported debt (principal and interest) repaid in a fiscal year, excluding debt supported by other revenue sources. Net debt service Estimated City spending and revenues for the next fiscal year, factoring in COLA, health benefits, inflation, and other expected cost changes. Projected expenditures and revenues The amount of money, cash, or checks actually paid or obligated for payment from the treasury. Expenditures are categorized in accordance with MA General Laws and the Uniform MA Accounting System. Categories are Salary and Wages, Other Ordinary Maintenance, Travel and Training, and Extraordinary Expenditures. Expenditures

CITY OF CAMBRIDGE Certified free cash (“unexpended fund balance”), another key source of financial flexibility, fell 21% between FY25-FY26, reflecting tighter budgets 31 Certified free cash, FY07-FY26 In million $ 0 5 10 15 20 25 30 35 40 0 50 100 150 200 250 300 08 09 10 11 12 13 14 15 16 17 18 36% 19 20 21 22 23 24 24% 25 19% 26 17% 68 74 92 85 89 102 116 142 FY07 193 202 211 232 247 160 214 199 192 233 184* 210 -21.0% Free cash as a % of operating budget Free cash Certified free cash as a % of operating budget, FY07-FY26 % The City’s certified free cash is nearing a 20-year low as a share of the operating budget *~$25M has been allocated to date, leaving a remaining free cash balance of $159M