By Jon Chown
Scotts Valley officials are projecting a difficult financial road ahead as city leaders have adopted a $32.8 million budget for fiscal year 2026-27 that relies on reserve spending and more deficits in the future before it turns around.
City Manager Mail LaGoe presented the proposed budget and long-range financial forecast to the Scotts Valley City Council on May 20. The budget includes funding for city operations, infrastructure projects, recreation programs and community investments through the upcoming fiscal year.
According to the staff report, total city revenues are projected at about $32.8 million, including about $16.6 million in tax revenues from sales tax, property tax, Measure Z and Measure X. Total expenditures are projected at about $38 million. That includes $27.3 million in operating costs, about $9.4 million in capital improvement projects and remaining costs tied to special revenue funds.
To balance the budget, the city plans to use about $900,000 in General Fund reserves along with about $4.3 million from other city funds for capital projects, recreation programs and restricted activities.
LaGoe said that a lot of money used from reserves will be for maintenance projects that have been delayed. “So the city is definitely trying to get caught up on a lot of different deferred maintenance,” she said. “So it definitely is a good use of the reserves we have there.”
LeGoe said the actual impact could end up lower because of project delays, vacant positions and operational savings during the year.
The budget includes one new full-time engineering technician position to help manage the city’s growing list of capital projects. It also converts a temporary part-time administrative support position in the Police Department into a permanent part-time job.
A major focus of the report was the city’s long-range financial outlook.
According to the forecast, Measure Z sales tax revenues continue to be essential for Scotts Valley, but overall revenue growth is expected to remain mostly flat because of economic uncertainty and inflation pressures.
Measure X business license tax revenues are projected to generate about $1.2 million during their first full year in fiscal year 2026-27.
Despite those revenue sources, the report warns that rising labor costs, pension obligations, debt payments and infrastructure maintenance are expected to push expenditures higher than revenues in future years. Under current projections, the city’s General Fund reserve balance could fall below the city’s minimum reserve target during fiscal year 2027-28. Without additional revenue or spending changes, forecasts show reserves could eventually be depleted within the next decade.
LeGoe said the city is continuing to review staffing levels and funding opportunities to improve the long-term outlook. The report outlined several strategies the city is considering to address future deficits. Those include monitoring Measure X revenues, studying a future hotel tax increase, reviewing vacant positions before refilling them and refining how special revenue funds are used to reduce pressure on the General Fund.
LeGoe said the city is mulling over the idea of a 2026 ballot measure that would increase the transient occupancy tax, or hotel tax, from 11% to 12%, with an option to raise it as high as 13%. The staff report said the increase would align Scotts Valley with nearby cities in Santa Cruz County.
However, the projected deficits do eventually turn around, according to the analysis. Council Member Steve Clarke pointed this out, as well the fact that when more housing is built, as well as more commercial space, tax revenues are going to increase even more.
“So there’s reason for sunshine coming over the horizon at some point,” Clarke said.
The budget also continues the city’s emphasis on infrastructure investment through the proposed Capital Improvement Program, which totals about $9.4 million for fiscal year 2026-27.
During fiscal year 2025-26, the city expects to complete about $4.5 million in capital projects, including roughly $1.8 million in roadway resurfacing that covered 15 lane miles across the city.
The city also completed the new Skypark playground project, a $750,000 improvement that staff said was fully funded through grants.
Planned projects for 2026-27 include roadway rehabilitation, improvements along Scotts Valley Drive and early phases of the Shugart Park buildout. The city also plans to continue work on the Wastewater Master Plan and Skypark Facility Master Plan.
The proposed budget also includes funding for community programs and youth activities. The city plans to provide $50,000 from the General Fund for the Community Grant Program, which supports local organizations and services.
The budget also includes funding for two participants in the Pathways to Possibility Youth City Liaison Program and partial funding support for the O’Neill Sea Odyssey educational program.
TOP PHOTO: Scotts Valley wastewater treatment plant is in line for major improvements.