Proposed 2025-26 Budget

Overall Budget Summary

The Proposed Budget recommends status-quo funding of current bonds. Appropriations total $31,562,005, funded by revenues of $22,429,010, a General Fund contribution of $9,126,508, and Other Fund contributions of $6,487.

The Budget recommends a decrease in total revenues of $16,022,102 due to a $18,000,000 decrease from the one-time prior year transfer in as an allowance against federal disaster denied claims. This decrease is offset by a $1,475,375 increase from the initial transfer in from the Road Fund for the 2024 financing. Total expenditures increased by $3,077,00 largely from a $1,846,196 increase from capitalized interest for the 2024 financing and a $899,957 increase in overhead costs.

Federal Disaster Reimbursement Delays: The 2024 financing required the issuance of $80.345 million in new debt to address delays in federal disaster reimbursements for the CZU Lightning Complex fires and 2023 storm disasters, continuing costs and reimbursable expenditures relating to such disasters. The 2024 financing was structured with a conservative estimate of the timing for federal reimbursements from the Federal Emergency Management Agency (FEMA) and the Federal Highway Administration (FHWA), anticipating that by 2026-27, these reimbursements would be used to begin debt repayment, thereby reducing annual debt service costs. However, due to ongoing uncertainty in the federal budget for FEMA and potential for extended delays in federal reimbursements, the County faces the risk, starting in 2026-27, of incurring an additional $6.5 million in debt service to repay the Internal Service Fund Loan at its latest due date, with an average annual increase of $4.2 million.

Limited Options for Future Disaster Recovery: With the increasing frequency of federally or locally declared disasters, the deferred maintenance needs of County capital and infrastructure, and the issuance of 2024 disaster financing, the County has limited options to continue advance-funding disaster recovery efforts. The 2024 financing was made possible through a lease-leaseback arrangement involving County properties, which are now restricted for use in future financing. These properties include the 701 Ocean Street buildings, Live Oak and Aptos libraries, County Behavioral Health Center on the Emeline campus, and newly acquired 150 Westridge facility. Until these bonds are paid off, these assets will remain unavailable. To the extent that there is greater value in these assets than in the outstanding debt secured by them, the County may be able to access additional bonding capacity in the future.

CalPERS Investment Performance Risk: The costs of County employee retirement benefits through the California Public Employees Retirement System (CalPERS) are funded through a combination of employee payroll deductions and County contributions. The County’s costs fluctuate annually based on CalPERS actuarial valuations, which compare total costs to payments and factor in CalPERS' required target investment earnings rate of 6.8%. Over the past 10 years, CalPERS has failed to meet this target in six years, contributing significantly to an annual increase of $45,977,853 in total County costs. Until CalPERS can achieve its required investment performance, the County is at risk to devoting more limited financial resources to its contractually obligated retirement payments.

Disinvestment Impact on Future Debt Needs: The County has remained in a state of disinvestment dating back to the Great Recession and its subsequent fiscal impacts as well as the dissolution of redevelopment, compounded by the need to redirect capital investments toward unfunded state mandates and prioritize available resources for disaster response. This has resulted in a backlog of necessary investments to modernize aging capital and facilities, including the County’s emergency radio communication systems, Freedom Campus providing health services in Watsonville, and Buena Vista Recycling and Solid Waste Facility transfer station, as well as to finance investments in housing, including affordable and workforce housing and permanent supportive housing for unhoused persons (which previously could be funded with 20% of the redevelopment agency tax increment). The County will continue to face challenges in prioritizing staffing resources to develop long-term capital investment strategies and may have limited capacity to leverage County assets for future bond issuances, creating a higher risk of potential failures and unexpected costs.