Federal cuts could rock ‘every social safety net program’ in Santa Cruz County

Carlos Palacios has been worrying about and girding for the Trump 2.0 effect since November. Two weeks after Donald Trump’s Election Night victory, Palacios, the Santa Cruz County government’s chief executive, warned the county’s elected officials that the impact of the incoming president’s plans could be “big.”

“It could impact every social safety net program that we have,” Palacios said.

Three months later, those early fears and concerns are evolving into something more palpable. The Trump administration has already attempted to freeze most federal aid (that plan was temporarily blocked by a judge) and a flurry of executive orders to bolster a deportation agenda and diminish diversity, equity and inclusion (DEI) programs. These orders appear to place new conditions on the federal grants and aid that the county, like so many jurisdictions across the country, depends on. And in the past week, Republicans in Congress are floating budget proposals that could slash spending on Medicaid, food stamps and welfare programs.

About 50% of the county’s budget is sourced through federal dollars, Palacios said. Most of that funding sustains the local social safety net, he said, and almost none of it feels guaranteed amid D.C.’s rhetoric of major cuts. 

For Palacios, budgetary challenges have marked his career as the county’s top executive. 

In his time overseeing the county government, Santa Cruz County has absorbed a series of costly natural disasters, whose fiscal challenges have been exacerbated by slow and continually delayed reimbursements from the Federal Emergency Management Agency (FEMA). 

In 2020, Palacios also had to steer the government through COVID, which forced the county to dip into its reserves and furlough employees. Just last year, after a budget briefing that laid out how the county couldn’t afford certain road repairs or even basic fixes on county facilities, then-supervisor Bruce McPherson said he had “never seen anything so dire” in his 12 years on the board.

Yet, even with the perspective of a county executive who has overcome natural disasters and the upside-down experience of a global pandemic, Palacios told Lookout he has never dealt with this level of financial uncertainty.

“It’s an unprecedented time,” Palacios said. “I have never seen this level of potential cuts in my career.”

This interview has been edited for length and clarity.

Lookout: Last year, the big story was how FEMA owed the county big money, and how, without those dollars, the county couldn’t afford certain services. What is the latest on FEMA – how much does it still owe?

Carlos Palacios: According to the last count I saw, we’re still owed over $91 million. There’s been very little movement on our FEMA claims from the 2023 and 2024 winter storms. We’ve seen that there has been a great slowdown in federal reimbursements so we’re unsure when we’re going to get any money.

Lookout: Is that a Trump administration issue, or more of a focus issue for FEMA? A lot of the federal disaster priority is in Los Angeles after the January fires.

Palacios: It’s both. The administration has laid off about a thousand FEMA employees. If they were already struggling before the Los Angeles fires, and now they’re losing staff, how is that going to impact us? FEMA was an issue for us last year, and I think it’s even more of an issue this year because of the new administration’s staffing changes.

Lookout: Last year’s budget process was one of the more challenging in recent memory because of the lack of federal disaster reimbursements. How would you describe the financial planning mood heading into this year?

Palacios: This year, we’re seeing FEMA continue to be an issue, but there’s also this big threat to our social safety net programs. If Congress does do those major cuts, it would have a big impact not only, of course, on the community of people receiving those services, but also on our staff, too.

Lookout: As in people could potentially lose their jobs?

Palacios: Potentially. I mean, if the administration is going to go through with the major cuts, then, yeah, the community would receive fewer benefits, and we would have less ability to maintain the same staffing levels because those programs would be significantly reduced.

Lookout: I think many people have some broad idea of what the social safety net means, but when you talk about “social safety net programs,” precisely what programs are you thinking about?

Palacios: The biggest program is Medi-Cal, which is known nationally as Medicaid. It helps fund our health clinics, some nonprofit agencies and hospitals. We use that money for health care for vulnerable populations and behavioral health care. The new administration has talked about major reductions to Medicaid nationally, reducing the number of people who are eligible for Medicaid, and the types of services that are allowed to be billed under Medicaid. All of those changes pose a big threat as that’s our biggest program.

We also have programs like CalWORKS, which used to be called welfare, and CalFresh, which used to be called food stamps. Money for all of those programs flow from the federal government, through the state and down to us. We also have specific federal grants for helping to shelter and care for the unhoused that are also vulnerable.

We’re extremely worried, as every county in the country is probably worried.

Lookout: I know you’ve called this an unprecedented time. The most recent unprecedented time of chaos for local governments was the pandemic. How do you distinguish the uncertainty of the pandemic from what we’re experiencing now?

Palacios:  During COVID, we had to respond very quickly to a loss of revenue because the economy had such a quick downturn. We were able to cover that mostly through the combination of staff furloughs and using budget reserves. What we’re talking about now, with the threat to the safety net, is far beyond what we could cover with furloughs or with our reserves. Some of these huge grants for the safety net, there’s just no way we could backfill those on our own. We’re talking about hundreds of millions of dollars. If the administration were to make those budget cuts, we’d have to stop those programs pretty rapidly. The dollars are just too big to sustain those big safety net programs without federal dollars.

Lookout: The Trump administration has placed DEI programs in its crosshairs, threatening to withhold federal dollars from institutions that sustain these types of polities around diversity and inclusion. Does the county foresee any impacts from this?

Palacios: Yes. We’ve received some of the letters from the administration, and know a number of nonprofits have received them, too, and so we’re doing an analysis right now about which programs and grants might be vulnerable and which ones can be changed. We haven’t had to directly cancel any programs like some universities have; we’ve received some letters that we’re concerned about.

(Palacios said some of the grants he is worried about deal with public health, and that his staff will present its analysis to the public and the board of supervisors once it’s finished.)

Lookout: Even if Congress doesn’t pass the federal funding cuts, does this atmosphere of confusion and uncertainty and fear have its own effect on the budget process and how the budget is constructed?

Palacios: Oh, yes, absolutely. This is an ongoing threat to the safety net programs and to our FEMA reimbursement dollars to individual grants. It’s not going to go away. So we have to take a very cautious, conservative approach to our budgeting. I will be opposing adding any new programs or any new major expenditures this year and the foreseeable future. Even if Congress is unable to get these cuts approved in the way they want this year, I don’t think that they will give up. I think they will keep coming back. So I think at least for the next few years, there’s going to be a lot of uncertainty, and therefore governments are having to be very, very cautious. 

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