Proposed 2026-27 Budget

Overall Budget Summary

The Proposed Budget recommends total direct appropriations of $3,365,326 with an expense offset of $5,637,121, funded by revenues of $229,567,000 that includes a District Sales Taxes Contribution of $5,369,000.

Total direct expenses decreased by $9,119,551 largely from a correction that allocated $4,709,492 of departmental specific liability and property costs that previously were held in this budget. Other decreases included a reduction of $2,000,000 in infrastructure investments, a reduction of $955,248 from prior year completed capital projects, a reduction of $929,250 from year-end rebudget transfers for capital projects, a reduction of $480,000 for environmental and parks capital projects now held in General Fund Contingencies pending board direction. The expense offset of $5,637,121 reflects budgeted professional services that are not expected to be fully used during the year. The expense offset of $5,637,121 decreases by $17,262,879 from the prior year, primarily due to reduced contracts in 2026–27. Total expenses also decrease by $2,028,790 due to additional Cost Allocation Plan (CAP) revenue recorded as a negative expense offset.

Total revenues increased by $4,343,583 led by an increase of $8,857,000 in property taxes, an increase of $996,000 of tobacco settlements, a decrease of $204,000 in total sales tax impacted by slowing economic growth and lost allocations to other agencies with online fulfillment centers, a decrease of $4,131,805 in lowered portfolio investment earnings due to projected economic pressures, a decrease of $1,814,844 from the end of FEMA COVID-Pandemic and CZU complex lightening fire claim reimbursements.

Limited Revenue Growth: The County’s general revenue growth does not keep pace with increasing cost pressures and broader economic uncertainty. Ongoing economic instability, rising costs to recruit and retain employees in a high-cost region, and structural limitations in tax systems constrain the County’s ability to generate sufficient discretionary revenues. These challenges are reflected in the Proposed Budget’s planned use of $42.6 million in one-time funding that includes a $30.8 million reduction in General Fund reserves to maintain current service levels[EB1.1][MP1.2]. The County continues efforts to modernize revenues, including updates to charges for services; however, these changes have not fully offset structural revenue limitations. As cost growth continues to outpace sustainable revenue growth, the County faces increasing pressure on its long-range financial outlook. Without additional revenue alignment or expenditure adjustments, the conditions may limit the County’s ability to maintain service levels and respond to future needs.

Outdated State Tax Allocation Models: The County faces increasing revenue erosion risk of its discretionary revenues due to structural limitations in State tax allocation models and shifting consumer behavior. Approximately $10 million in locally generated sales tax is allocated annually to other cities and counties based on outdated State formulas that do not reflect the growth in online purchasing and direct-to-consumer delivery. In addition, changes in consumer preferences—such as the shift from taxable goods and services to non-taxable digital subscriptions—continue to erode traditional revenue sources, including franchise fees. This ongoing erosion reduces the County’s General Fund revenues and weakens long-range financial projections and will continue without increased advocacy or administrative remedies at the State level to modernize tax allocation methodologies and stabilize revenues.

Economic Instability and Uncertainty May Erode Revenue: Growing economic risk increases the probability of negative General Fund impacts in the County’s long range financial forecast[EB2.1][MP2.2] National economic instability, rising consumer prices including recent increases in fuel, and declining consumer confidence, coupled with reduced personal savings are driving these concerns. Coupled with the ongoing erosion of county tax basis, two of the County’s larger revenue sources, sales tax and transient occupancy tax, are reliant on consumer spending. With 70% of the nation’s Gross Domestic Product (GDP) driven by consumer spending, and recent trends of declining consumer confidence, the 2026 economic stability is a concern while balancing the potential for reductions in interest rates from a new FOMC chair. Given the County’s reduced reserves and the structural challenges of being systematically underfunded, a recessionary environment could rapidly erode the projected $34.3 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”) and 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 Purpose Revenue’s share of interest earnings to be reduced by $4.1 million to $5.6 million, assuming a lower average interest near 4%, a substantial recovery from historically low interest earnings of just $760,243 in 2021-22. However, if the FOMC proceeds with more anticipated rate cuts in 2026 or 2027, projected General Fund interest earnings may decline. This potential decline would adversely impact the General Fund contribution target.