Adopted 2025-26 Budget

Adopted Budget Summary

The Adopted Budget included total direct appropriations of $10,799,118 with indirect expense allowance of $22,900,000, funded by revenues of $225,223,417 that included District Sales Taxes of $5,101,381, and the use of Other Fund Contributions of $7,916,917.

Budget Summary

The budget decreased expenses by $22,483,709 largely from the one-time, prior year operating transfers out of $18,000,000 to the Disaster Debt Service Fund to hedge against the risk of a loss of FEMA disaster reimbursements (amount was subsequently decreased to $11,125,538 on September 24, 2024) and the $10,046,728 advance payment loan to the Liability and Property Fund. This was offset by a $4,709,492 increase for General Fund departments' insurance costs, which were incorrectly reflected in the past as a single cost of the Human Resources Department but are largely attributed to public safety departments and funded by a District Sales Tax Contribution. Expenses were also increased by $3,715,000 to allocate up to $5,000,000 in capital project funding for infrastructure and capital projects, with $4,000,000 for road and drainage infrastructure maintenance, funded by a $2,000,000 General Fund Contribution and $2,000,000 District Sales Tax Contribution. The budget included an expense allowance of $22,900,000 in anticipated liquidations of encumbrances for contracts that expire at the end of the fiscal year.

The budget decreased revenues by $5,180,115 due to a $11,775,156 decrease from the end of Federal Emergency Management Agency (FEMA) COVID-19 related reimbursements, a $926,030 decrease in State revenues for the Public Defender's Office that was included in the prior year budget, a $1,318,025 decrease in sales tax attributed to the 1% share of the statewide sales tax, a $1,577,383 decrease from the end of tobacco settlement funding, and a $246,686 decrease in cannabis business tax. These declines were tempered by a $3,202,000 increase in the recognition of the first full year of Measure K district sales tax revenue, a $2,509,701 increase in total property tax revenue, a $1,959,104 increase in redemption penalties and recovery of delinquent property taxes, a $1,904,775 increase in In Lieu Vehicle License Fee revenue, a $630,550 increase in deed transfer tax, a $457,500 increase in transient occupancy tax, along with smaller gains across remaining revenues.

Last Day Budget Summary

The Last Day Budget reduced $20,000 in expenses from the elimination of a $500,000 transfer out to the flood control district for the rehabilitation of a major culvert on Capitola Road to provide resources to restore community health services in the Health Service Agency and funding for a contract with the Mental Health Client Action Network (MHCAN). This decrease was offset by the addition of transfers out of $480,000 from Board Directed uses of District Sales Tax Contributions. This budget also added $160,000 in revenue for a repayment of a short term loan to the Parks department for Measure Q administrative work before Measure Q funds began collection.

Final Budget Summary

The Final Budget added $9,731,761 in expenses from an increase of $10,000,000 resulting from a reduction in expected salary saving cost offsets and a decrease of $268,239 in expenses no longer needed in 2025-26. The budget added $1,814,844 in revenue for disaster reimbursements from FEMA expected in the prior year but received in 2025-26, with the net increase of expenses over revenue funded by the carryover of prior year fund balance.

Economic Instability and Uncertainty May Erode Revenue: The County faces growing economic risks that could worsen its 2025-26 financial forecast. National economic instability, rising consumer prices, and declining consumer confidence, coupled with reduced personal savings, are driving these concerns. Two of the County’s largest revenue sources, sales tax and transient occupancy tax, are reliant on consumer spending and already projected to fall $2.2 million short of 2024-25 estimates, reflecting weakening consumer purchasing power. Since nearly 70% of the nation’s Gross Domestic Product (GDP) is driven by consumer spending, any further decline in consumer confidence could trigger a reduction in national and local spending, prompting businesses to lay off workers to offset declining revenues. Given the County’s limited reserves and the structural challenges of being systematically underfunded, a recessionary environment could rapidly erode the projected $35.7 million in sales taxes and $14.6 million in transient occupancy tax needed to sustain mandated county operations funded through General Fund and District Sales Tax Contributions.

Risk of Interest Rate and Revenue Reductions: The Auditor-Controller-Treasurer-Tax-Collector oversees the Santa Cruz County Investment Pool (“the Pool”), which manages deposits ranging between $1 billion and $1.6 billion annually. These deposits come from 10 public school districts, Cabrillo College, cities, public agencies, and special districts within the County. In accordance with California Government Code Section 53600.5, the primary investment objective is the preservation of principal, resulting in United State Treasury and Agency bonds comprising 42% of the portfolio (Quarterly Investment Report for the Quarter Ended December 31, 2024). As a result, fluctuations in the target interest rate range set by the Federal Open Market Committee (FOMC) directly affect bond yields. The 2025-26 Budget projects the General Fund’s share of interest earnings to remain stable at $9.7 million, assuming an average interest rate slightly above 4%, a substantial recovery from historically low interest earnings of just $760,243 in 2021-22. However, if the FOMC proceeds with anticipated rate cuts, projected General Fund interest earnings may decline. For example, a 1%-point decrease in interest rates could reduce the County’s yield to just over 3%, resulting in an annualized revenue loss of approximately $2.4 million. This potential decline would adversely impact the General Fund Contribution target.