Financial Summary

Published April 30, 2023

Proposed FY 2023-24 Budget

The austere budget supports Board and community priorities despite financial challenges

The Proposed 2023-24 Budget supports the Board’s priorities for the coming year based on the adopted Strategic Plan and the two-year Operational Plan. This budget also continues the strong and prudent financial practices that have allowed the County to achieve our AAA bond rating and maintain minimum level of budget reserves to help assure the continuity of public services during economic downturns. More details are available on the total budget within the Department Budget pages or in the financial summary, expenditure summary or description of changes schedules in the Document Library.

The budget has three phases: April Proposed, May Supplemental, and September Adopted. Chart A shows the total and will show all the current phases of the budge. The proposed and supplemental budgets are developed by the County Administrative Office and formally approved by the Board of Supervisors to serve as the basis for public hearings and deliberations prior to the determination of the adopted budget. The supplemental budget is presented during departmental budget hearings and adds items to the proposed budget that did not meet the schedule constraints of the proposed budget (delays from storm disasters, grant awards or impacts from the State budget May revision are examples). The adopted budget is the County’s annual budget as formally adopted by the Board of Supervisors for a specific fiscal year.

Chart A: The FY 2023-24 Budget is austere, supporting Board priorities despite financial challenges.

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Beginning with the 2023-24 Proposed Budget, the budget includes a starting “Base” budget that when compared to the proposed budget more clearly identifies departmental requested changes. The Base budget begins with the prior year adopted budget and for expenditures adds all previous board approved salary and benefit changes that extend into 2023-24 and for revenue generally removes significant one-time Federal and State funding sources or significant changes in revenue.

General Fund

The County is systemically underfunded, and revenue strategies are required to close a projected deficit. 

The County remains systematically underfunded as compared to our peers and statewide county averages. We serve a greater percent of the population (50.5%) than our peers (avg 15.9%), which requires us to spread fewer tax dollars over a greater portion of our population. The County is further constrained by our lower 13% property tax share we receive following 1978's Proposition 13, and our preference to preserve natural resources and remain a community of residents, as opposed to chasing tax base through large commercial campuses. By way of example, our peers per-capita property tax revenue averages nearly $4,000 per resident while the County receives just under $500 per resident. You can learn more about General County Revenues here: Your Tax Dollars at Work 

Chart B summarizes the results of our expanded General Fund forecast, demonstrating how much greater the structural deficit would be if the County’s General Fund reserve were adequately set at 15% of expenditures by FY 2027-28. The County should restore economic and disaster reserves to provide greater ability to respond to increasing climate disasters, and other uncertainties. 

Chart B: General Fund projected net deficit and shortfall to reach 15 percent reserve by FY 2027-28.  
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Major assumptions in balancing the FY 2023-24 proposed budget include a 1% decline in sales tax, a slow-down in growth in certain property tax transfer revenues, and collection of up to $14.5 million of the $67 million in outstanding FEMA obligations that would be used to restore and strengthen reserves. The budget assumes normalized cost increases for wages and benefits, increasing facility capital investments towards a recommended long-range target of approximately 1% of total General Fund expenditures, and budgetary reliance on available fund balance of $12.2 million.

In additional to normal revenue and cost growth, the long-range forecast includes allowances for certain programmatic cost mandates such as the Community Assistance, Recovery and Empowerment (CARE) Act in FY 2024-25 and increases in health care costs for those residing in detention centers. It also assumes that future FEMA obligations will be prioritized to restore and strengthen reserves levels across the General Fund and to reduce the cost of large unfunded retiree obligations. 

The County faces additional unfunded challenges including addressing significant deferred maintenance across county roads, infrastructure, parks and buildings likely to exceed $400 million, providing a strategy to finance over $50 million in 2023 storm disaster response and recovery costs, and financing a needed $30 million first responder emergency communications next generation radio system (cost to be shared with other county agencies).

Online County sales taxes are being diverted to other cities and counties

The County receives less tax and serves more people than its peer counties. Increasing that disparity is State policy on sales tax, which diverts local sales taxes paid in the unincorporated area to other governments, increasingly to governments outside Santa Cruz County. As shown in Chart C, the County normally receives 19.4% of the 9.0% sales tax from items that are purchased at a local retailer in Felton or Corralitos (of $1.75 out of the $9 in sales tax paid on $100 purchase). However, when that same item is purchased by someone online from Felton or Corralitos, they pay the same sales tax rate, but the State reduces the County's share to approximately 5.4% (or $0.49 out of the $9 in sales tax paid on $100 purchase), and the remaining tax flows either to cities in the County who have proportionally a greater share of brick and mortar local retail or, as is becoming more frequent with recent expansion of online retailer owned fulfillment centers across the State, the County’s base 1.0% and 0.25% transportation funding rates are lost and redistributed to other counties where the shipping warehouse is located. We estimate that the County is now losing at least $5 million annually in local sales taxes that are being shifted by the State to other agencies.

Chart C: As more purchases move online, the County faces a structural inequity, with 72% of taxes meant for County services diverted to other cities and counties.   
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The County is advocating for State policy changes that eliminate this disparity, and remit all sales tax to the jurisdiction where the order was delivered. This change would return taxes intended for our community to our community. However, similar changes that have been explored over the past decade have ended with no change in State allocation methods. 

State Proposed Budget

The State budget is expected to shift costs to future years to close its budget gap

On January 10th, Governor Gavin Newsom released his Proposed Budget. The Governor’s budget estimated a deficit of $22.5 billion. Fortunately for County services, it appears current State funding commitments would continue in FY 2023-24 rather than imposing funding reductions. Instead, the State has indicated that they would offset their budget deficit with spending delays and reversals of certain pilot programs. County staff will closely monitor proposals in the May Revision to the State's proposed FY 2023-24 budget for changes that would negatively impact County services. 

The financial challenge the State is facing is from steep declines in personal income tax, corporate tax, and state Sales tax revenues.

After several years of strong stock market growth, 2022 saw declines of 20 percent and 35 percent in the S&P, and tech heavy Nasdaq, respectively. This created large fluctuations among high earners, highlighting the risk from the State basing a sizable portion of revenue growth on extremely volatile high-earners and corporate taxes.

General Fund Revenues

The County's primary General Fund revenues showing vulnerability

The County’s primary General Fund revenues are generally meeting our budget expectations, except for two which are expected to fall short this year. The FY 2022-23 budget for Sales Tax has been reduced by $1.1 million and for Cannabis Business Taxes by $1.5 million. Chart D provides a 5-year review of the General Fund major general purpose revenue and the Cannabis Business taxes.

Chart D: Structural limitations to County funding persist, and major general purpose revenues continue to meet budget expectations.
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Property Tax

Property tax is one of the most stable and dependable revenue bases. The upside of the 1978 cap on annual growth is that rarely do property values decline below their current market value, as assessed value can only grow at a max of 2% per year. As shown in Chart D, our Property Tax revenues have grown steadily within the constitutional 2% annual growth cap plus the amount of supplemental reassessment triggered by property renovations or transfers. Since 2017-18, this collection of revenues has grown from $66.4 million to a preliminary projection of $85.1 million for FY 2023-24.

Sales Tax

Sales tax for our County is the general revenue source with the most variability, as it is immediately impacted by economic impacts and/or changes in consumer behavior. Of the unincorporated county’s 9.0% rate, the County is allocated 1.0% as the base rate, 0.25% for transportation funding, and 0.50% from the Measure G local sales tax measure (2018).

Inflation and locally high housing costs have impacted retail spending in our community. Year to date sales tax revenue is falling short of budget by $1,150,000. Factoring in this slowdown and our projection for an economic slowdown in FY 2023-24, we are currently projecting that sales tax will drop by approximately 1%.

As detailed above, staff also continue to be concerned with how the State administers sales tax allocation under pre-internet methodologies, now including removing sales tax from the County for certain online purchases by unincorporated county residents and sending them to other counties across the state. This partially counteracts the historic 2019 implementation (AB 147) of new online sales tax reporting requirements following the 2018 US Supreme Court decision (South Dakota v. Wayfair). AB 147 required remote sellers (like third party sellers on Amazon) to remit sales taxes into county pools across the State.

Transient Occupancy Tax (TOT). 

While not subject to the same risks as Sales Tax, TOT can equally be impacted quickly in sudden market or consumer trends.  Fortunately, for our region, our tax base is diversified between long-destination trips and weekend travel where visitors can drive from their home location.

As shown in Chart D, TOT revenue has recovered to its pre-pandemic levels and will be improved with the increase effective January 1, 2023, raising rates from the prior 11% to 12% for hotel like stays and 14% for vacation rental like stays. Staff expects our FY 2023-24 revenue to be increased by $2.3 million, which, as the revenue was proposed, has helped reduce the size of the County's projected structural deficit.

Visit California’s September 2022 lodging forecast indicated that the “Central Coast” hotel and travel industry has fully recovered from the pandemic and by 2024 will reach hotel occupancy levels of 74% (over the 49% and 64% in 2020 and 2021) and revenue per room (RevPAR) of $183.30 (up from the $80.60 and $140.10 in 2020 and 2021). This projection and our local trends have strengthened our outlook on TOT revenue growth.

FEMA Reimbursement. 

As discussed in depth on February 14, 2023, the County has experienced significant, multi-year delays in COVID and CZU fire reimbursements. Following months of FEMA outreach and support from our Congressional representatives and Board of Supervisors, staff expect that a portion of our $67 million of outstanding claims will be received this year and over the next few years. Our forecast includes the assumption that we would receive up to another $4.5 million this year to reach $5 million, and $14.5 million before the end of FY 2023-24. In our forecast, these first payments would restore our depleted reserves and be used to convert our primary General Fund reserve to be based on expenditure rather than revenue. And, because it is clear we need to continue to anticipate more climate based disaster events, staff will return in June 2023 with policies to strengthen our reserve policies. 

County Staff

Salaries and benefits are the County's largest expenditure, increasing 7-9% per year

County expenses are driven primarily by the personnel costs required to deliver the programs and provide the services our community needs. The Proposed Budget includes nearly $12 million in previously agreed upon contractual increases in salary and benefits. Because the County prioritized investing in staff retention and sustaining current services, this budget increases funded staffing by only 36.45 positions for a total of 2,793.66 positions, or less than a 1.3% increase. The modest increases are primarily funded through State, Federal, or external grant resources, and increase the County's capacity to serve the County's most vulnerable residents. 

Chart E shows the increase in salaries and benefits over time, increasing between 7-9% per year. These increases are driven by the growing costs of healthcare and pensions, in addition to the County’s current memoranda of understanding with employee bargaining units that include general wage increases.

Chart E: With minimal new staffing, the County’s increasing salary and benefit costs provide mostly for existing staff.
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Transparency Portal

Through a partnership with OpenGov, the County has moved to a primarily web-based budget presentation. The charts on this page, and throughout this website, provide targeted views of the County’s budget. The public can create almost any view of the County’s budget through the County’s new transparency portal.  

Previously, the County relied on separate and manual systems and countless spreadsheets and publishing tools to develop the Proposed, Supplementals, and Last Day budget information. The County also lacked an adequate system to track the evolution of the Proposed Budget and has identified the need to modernize the budgetary tools for monitoring the status and life cycle of each Capital Project. Chart I below provides access and a small guided tour through the transparency portal.

Chart I: Explore the entire County budget through the OpenGov Transparency Portal.
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