ARTICLE
June gloom and cool days before the summer season gets into high gear later this month. For the Chamber, we can’t wait for warmer weather. But for now, the June gloom also provides the gray sky where the local government turns to the annual ritual of producing the fiscal year 2024 annual budget. A couple of weeks ago, we noted that the Governor and State Legislature are in the same predicament of producing a budget with less revenue than in past years. While state government leaders grapple with meeting a June 15 deadline to enact a budget, local governments must follow a similar queue to align their budget with intending fund projections from the state and federal governments. The Santa Cruz City Council and the city department executives began that discussion last week in a special council session. The budget can be reviewed here: Santa Cruz City Budget 2023-2024. There is no question that running a city is like running a business where every expense and each revenue collected must be documented to support the public services necessary to serve the city residents and the taxpayers. We know in practical terms that the city’s coffers are very dependent on a steady revenue stream. That revenue stream has been in pandemic mode for nearly two plus years. Now it seems to be trending in an upper direction. The City’s Annual budget report highlights the direction the city council and city staff took to move forward through the pandemic years: “The Re-Envision Santa Cruz recovery plan squarely focused on our community’s collective recovery and ongoing resilience. Over the last 12-18 months, we executed a bold vision centered on sustainability, equity, community engagement and essential service delivery. We injected our local economy with new jobs, green businesses, affordable housing, and resilient green infrastructure. We bolstered what makes Santa Cruz special by supporting our businesses, advocating for new and improved funding sources, and reinvesting in the Downtown and infrastructure from roads and water to parks, facilities, and open spaces. We worked to not leave anyone behind. Through Re-Envision Santa Cruz, we built back a future for everyone, together.” The primary focus was on a strategy: Fiscal Sustainability, Downtown and Business Revitalization and Infrastructure. We know that the financial model to produce revenue for local government is a ‘downstream’ flow of funds from federal and state resources and then they find the funds through local means: sales taxes (27,874,000), property tax, ($25,967,500), miscellaneous resources ($21,532,553), services fees [development and recreational fees] ($14,903,430), Hotel Occupancy Tax ($12,943,948), Utility Taxes ($12,493,500), other taxes ($10,811,600), and investments and rents ($5,560,017): We learn a few areas of consistency, that the fair share of how these taxes are spread; local government comes up short. Take property tax: for every $100 collected the city receives $16.20. The other percentages of property taxes go to city high schools at $16.20, city schools at $25.40, County of Santa Cruz at $14.30, Cabrillo College at $6.90, and County of Santa Cruz School at $3.00. The sales tax is also split where the state collects $.55 on every $1.00 received and the city receives $.19 of every $1.00 collected. We have known for decades that California’s tax system creates winners and losers — and the small cities seem to be on the losing end unless they get creative collecting local funds for services. What is the City’s General Fund outlook? According to the report, “As the city embarks upon the tactical development of our Fiscal Year 2024 (FY 2024) budget, they are using a broader lens of sound, accountable investments today that can be used to inform our long-term sustainability tomorrow. “In FY 2016, the Finance Department, in partnership with the City Manager’s Office and other City leaders, developed the Fiscal Year 2023 Sustainability Plan. The objective was to develop a roadmap to proactively restructure the General Fund’s fiscal outlook with a goal of eliminating the deficits projected through FY 2023. Despite the global COVID-19 pandemic, we are pleased to report that our FY 2022 audited financials reflect the following General Fund reserve balances.” The report continues to spell out the significant differences between GFY 2020 and today: “After ending FY 2020 in a $4.1M deficit, the city ended the last two fiscal years with a combined surplus of $23.1M. This is due in large part to $8.5M in one-time American Rescue Plan Act (ARPA) funding received in the General Fund to cover prior year revenue losses. In addition, as we came out of the pandemic, consumer spending, travel and tourism increased significantly - resulting in sharp increases in sales tax revenue ($4 million greater than the FY 2022 budget) and Transient Occupancy Tax (TOT) revenue ($3 million greater than the FY 2022 budget). As we look at the possibility of a recession, increasing interest rates, and high inflation, we do not expect tax increases to continue at this rate. In addition to Sales Tax and TOT, Admissions Tax and Parking revenues returned to pre-pandemic levels in FY 2022, but we expect all tourism/visitor – related taxes to level out in FY 2023 and FY 2024.” “General Fund expenditures have not experienced the same volatility as revenues and, after slight decreases in FY 2020 and FY 2021, they increased by $8M between FY 2019 and FY 2022. We expect increases in personnel costs to continue in FY 2023 and beyond due to higher pension costs as well as our continued efforts to invest in our personnel, address staffing vacancy challenges, and invest in staff safety needs.” However, the projection trends show a positive direction for 2021 ($8m) and 2022 ($15m) but will show negative numbers for 2023 (-$5m), 2024 (-$1m), 2025 (-$7m), 2026 (-$5m) and 2027 (-$4m). In 2028 the city projects +$2m). The outlying years of 2029-2032 show a negative trend. According to the Finance Director, “We have begun the development of a long-range financial plan that will provide a framework for evaluating investment strategies and pension cost financing, as well as a plan for citywide capital needs, prioritization, and financing. The City Council’s Budget and Revenue Ad Hoc Committee continue to explore new revenue resources, and staff continue to work on greater cost recovery. The City must actively pursue new revenue streams to keep up with the growing service needs of our community. The City will work with the community on key initiatives such as aligning fees to more fully recover city costs, bond measure, sales tax, and long-term capital funding.” What does that mean to the residents and business community going forward in the short term (2023-2025) and longer term (2026-2032)? There will be belt-tightening as well as targeted programs that deserve funding, and in some cases, additional funding. Where those decisions fall is on a city council that will be under a Mayor for the next three years and city council members who will have to get up-to-speed to understand the nuisance of city government in a coastal town that is in the throes of potential growth or a slowing economy. Let’s keep an eye on programs, projects and policies that are sustainable and run with efficiency.
June gloom and cool days before the summer season gets into high gear later this month. For the Chamber, we can’t wait for warmer weather. But for now, the June gloom also provides the gray sky where the local government turns to the annual ritual of producing the fiscal year 2024 annual budget. A couple of weeks ago, we noted that the Governor and State Legislature are in the same predicament of producing a budget with less revenue than in past years. While state government leaders grapple with meeting a June 15 deadline to enact a budget, local governments must follow a similar queue to align their budget with intending fund projections from the state and federal governments.
The Santa Cruz City Council and the city department executives began that discussion last week in a special council session. The budget can be reviewed here: Santa Cruz City Budget 2023-2024. There is no question that running a city is like running a business where every expense and each revenue collected must be documented to support the public services necessary to serve the city residents and the taxpayers. We know in practical terms that the city’s coffers are very dependent on a steady revenue stream. That revenue stream has been in pandemic mode for nearly two plus years. Now it seems to be trending in an upper direction.
The City’s Annual budget report highlights the direction the city council and city staff took to move forward through the pandemic years: “The Re-Envision Santa Cruz recovery plan squarely focused on our community’s collective recovery and ongoing resilience. Over the last 12-18 months, we executed a bold vision centered on sustainability, equity, community engagement and essential service delivery. We injected our local economy with new jobs, green businesses, affordable housing, and resilient green infrastructure. We bolstered what makes Santa Cruz special by supporting our businesses, advocating for new and improved funding sources, and reinvesting in the Downtown and infrastructure from roads and water to parks, facilities, and open spaces. We worked to not leave anyone behind. Through Re-Envision Santa Cruz, we built back a future for everyone, together.”
The primary focus was on a strategy: Fiscal Sustainability, Downtown and Business Revitalization and Infrastructure. We know that the financial model to produce revenue for local government is a ‘downstream’ flow of funds from federal and state resources and then they find the funds through local means: sales taxes (27,874,000), property tax, ($25,967,500), miscellaneous resources ($21,532,553), services fees [development and recreational fees] ($14,903,430), Hotel Occupancy Tax ($12,943,948), Utility Taxes ($12,493,500), other taxes ($10,811,600), and investments and rents ($5,560,017):
We learn a few areas of consistency, that the fair share of how these taxes are spread; local government comes up short. Take property tax: for every $100 collected the city receives $16.20. The other percentages of property taxes go to city high schools at $16.20, city schools at $25.40, County of Santa Cruz at $14.30, Cabrillo College at $6.90, and County of Santa Cruz School at $3.00.
The sales tax is also split where the state collects $.55 on every $1.00 received and the city receives $.19 of every $1.00 collected.
We have known for decades that California’s tax system creates winners and losers — and the small cities seem to be on the losing end unless they get creative collecting local funds for services.
What is the City’s General Fund outlook? According to the report, “As the city embarks upon the tactical development of our Fiscal Year 2024 (FY 2024) budget, they are using a broader lens of sound, accountable investments today that can be used to inform our long-term sustainability tomorrow.
“In FY 2016, the Finance Department, in partnership with the City Manager’s Office and other City leaders, developed the Fiscal Year 2023 Sustainability Plan. The objective was to develop a roadmap to proactively restructure the General Fund’s fiscal outlook with a goal of eliminating the deficits projected through FY 2023. Despite the global COVID-19 pandemic, we are pleased to report that our FY 2022 audited financials reflect the following General Fund reserve balances.”
The report continues to spell out the significant differences between GFY 2020 and today: “After ending FY 2020 in a $4.1M deficit, the city ended the last two fiscal years with a combined surplus of $23.1M. This is due in large part to $8.5M in one-time American Rescue Plan Act (ARPA) funding received in the General Fund to cover prior year revenue losses. In addition, as we came out of the pandemic, consumer spending, travel and tourism increased significantly - resulting in sharp increases in sales tax revenue ($4 million greater than the FY 2022 budget) and Transient Occupancy Tax (TOT) revenue ($3 million greater than the FY 2022 budget). As we look at the possibility of a recession, increasing interest rates, and high inflation, we do not expect tax increases to continue at this rate. In addition to Sales Tax and TOT, Admissions Tax and Parking revenues returned to pre-pandemic levels in FY 2022, but we expect all tourism/visitor – related taxes to level out in FY 2023 and FY 2024.”
“General Fund expenditures have not experienced the same volatility as revenues and, after slight decreases in FY 2020 and FY 2021, they increased by $8M between FY 2019 and FY 2022. We expect increases in personnel costs to continue in FY 2023 and beyond due to higher pension costs as well as our continued efforts to invest in our personnel, address staffing vacancy challenges, and invest in staff safety needs.”
However, the projection trends show a positive direction for 2021 ($8m) and 2022 ($15m) but will show negative numbers for 2023 (-$5m), 2024 (-$1m), 2025 (-$7m), 2026 (-$5m) and 2027 (-$4m). In 2028 the city projects +$2m). The outlying years of 2029-2032 show a negative trend.
According to the Finance Director, “We have begun the development of a long-range financial plan that will provide a framework for evaluating investment strategies and pension cost financing, as well as a plan for citywide capital needs, prioritization, and financing. The City Council’s Budget and Revenue Ad Hoc Committee continue to explore new revenue resources, and staff continue to work on greater cost recovery. The City must actively pursue new revenue streams to keep up with the growing service needs of our community. The City will work with the community on key initiatives such as aligning fees to more fully recover city costs, bond measure, sales tax, and long-term capital funding.”
What does that mean to the residents and business community going forward in the short term (2023-2025) and longer term (2026-2032)? There will be belt-tightening as well as targeted programs that deserve funding, and in some cases, additional funding. Where those decisions fall is on a city council that will be under a Mayor for the next three years and city council members who will have to get up-to-speed to understand the nuisance of city government in a coastal town that is in the throes of potential growth or a slowing economy. Let’s keep an eye on programs, projects and policies that are sustainable and run with efficiency.