By Jondi Gumz
With lagging revenue from local sales tax and federal disaster reimbursement and uncertainty about future federal funding as the new Trump administration seeks to downsize government to get the federal deficit under control, the one bright spot for the County of Santa Cruz budget is Measure K.
Carlos Palacios
Approved by voters in March 2024 to raise the sales tax in unincorporated areas from 9% to 9.5%, the measure is expected to raise $10.1 million in 2025-26 and can be used for any county purpose.
The spending plan for this year projected $7.5 million of revenue:
- $1 million for environmental and parks capital projects, with $200,000 set aside for each district;
- $1 million for homelessness services;
- $1 million to housing-related uses:
- $1 million for emergency road projects this winter;
- $3.5 million to restore the General Fund contingency budget due to the threat of climate-driven disasters.
For 2025-26 staff recommend:
- $1 million for environmental and parks capital projects, with $200,000 set aside for each district;
- $1 million for homelessness services;
- $1 million for housing-related uses;
- $2 million for unincorporated area road maintenance and repair.
County staff say its Road Fund has declined due to reduced gas tax revenues, increased storm damage and debt service, so this allocation would increase road maintenance and resurfacing and major culvert repair and replacement.
The debt service is because in May 2024, the County borrowed $89.1 million — close to the amount of County reserves — to cover expenses from the 2020 CZU fires and 2023 storms that officials had expected to be reimbursed by the Federal Emergency Management Agency, which ran out of money and halted reimbursements.
At that time, the County had $125.3 million in unpaid claims from FEMA and Federal Highway Administration.
FEMA has denied $5.1 million requested by the County for COVID-19 expenses, and it’s unclear how much money might be forthcoming.
Given the magnitude and frequency of disasters in recent years, the uncertainty about future federal reimbursements, and the historic size of the 2024 debt financing that pledged most of the County’s remaining facility assets, such financing will not be an option in the future, according to county staff’s midyear budget update as of Feb. 25
Should the County find itself in another disaster, staff say, “the County will be limited in its recovery unless future debt is supported by voter-approved property tax initiative(s).”
The midyear budget update does allow for up to $10 million in lost federal funding for 2025-26.
Another possible sign, and this is also due to Measure K and the debt financing: Projected deficits for 2025-26 and 2026-27 expected to reach $23.5 million and $35.2 million, are now projected at $1.9 million and $15 million.
County supervisors will see the proposed 2025-26 budget at their meeting April 29.
Budget hearings are set for June 3, June 4, and June 10.
Given the constraints, the County Administrative Office directed departments not to request additional funding.
However, the county Health Services Agency is projecting a budget gap of $11 million to $17 million for 2025-26, not considering federal policy changes. The reasons: Lower reimbursement rates and restrictions on billable activities under CalAIM (California Advancing and Innovating Medi-Cal) reform, new mandates such as the CARE Act for those on the schizophrenia spectrum, and low health center medical visits.
Because reimbursement rates are notably lower than those in neighboring counties, county staff say it is difficult to remain competitive in recruiting and retaining staff and contracted services.
Staff requested that Board chair (Felipe Hernandez) send a letter to the State delegation regarding the County’s low reimbursement rates for behavioral health services.
Another factor, staff say, is a reduction in Mental Health Services Act revenue—driven by a decline in the 1% tax on individuals earning over $1 million and the diversion of MHSA funds. This led behavioral health staff to prioritize state-mandated entitlement services, rather than non-mandated programs.
The Health Centers Division is projecting a funding shortfall of $4 million to $7 million in the 2025-26 due to rising personnel costs and inflation. County staff say the division aims to mitigate these increased costs with improvements in clinical provider productivity.
One rare new project is to develop an alternate emergency only egress out of Lompico Valley, identified as a need after the 2018 Camp Fire destroyed the mountain town of Paradise.
The county’s Office of Response, Recovery, and Resilience, with Real Property is looking at obtaining easements over an existing road and private property connecting to county roads for an evacuation route.
Up to $233,495 in funding is necessary to finance planning, negotiation, and related costs. This does not include construction.
One more factor to monitor: Rising pension liabilities due to the California Public Employees’ Retirement System’s underperforming investment portfolio.
As of the most recent valuation, the County’s Unfunded Accrued Liability stands at $657.2 million.
County staff say this primarily reflects repayments to CalPERS when its investment returns fall below the actuarial discount rate. For example, during the Great Recession, the CalPERS system dropped from being overfunded at 101% in June 2007 to just 61% funded by June 2009.
As for revenues, property tax is one of the most stable but the County receives only 13.4 cents from every dollar of property tax paid. This is because the amount was fixed by Proposition 13 in 1978 when the County was a low property tax county.
For 2024-25, property tax is estimated to be $85 million, which county staff says is not enough to fund current operations, facility needs, 607 miles of unincorporated area roads, and almost annual disaster response. Property tax is expected to grow by 5.23% by 2027-28 from an expected improving housing market.
Tourism is a major industry but the revenue from the Transient Occupancy Tax is highly variable. For 2025-26, it’s projected to be down $661,000, based on collections. However, Visit Santa Cruz expects growth.
Despite the challenges, the County can tout several accomplishments, and Chief Executive Officer Carlos Palacios did when he spoke March 20 to the Aptos Chamber of Commerce.
These include the opening of the South County Government Center in the former West Marine headquarters in Watsonville, launch of Age Well Santa Cruz County Master Plan on Aging, a 22% reduction in those experiencing homelessness, reopening of the Sobering Center, where people under the influence of drugs or alcohol can get connected to treatment by Janus of Santa Cruz instead of being taken to jail, and establishment of the County’s first DNA laboratory.