Rocked by fire and COVID, county projects $4 million budget shortfall, continued furloughs

Still reeling from last summer’s fires and the economic downturn tied to the coronavirus pandemic, Santa Cruz County is projecting a $4 million shortfall for its next budget cycle, even with county employees continuing unpaid furloughs.

During a preliminary forecast Tuesday, county officials painted a rough road ahead with local sales and hotel tax revenues having taken a hit, fixed costs increasing and the county needing to dip into its reserves.

But they also pointed to glimpses of hope, including potentially more financial aid from the federal government with a changing president and Congress.

In the future, the county could also explore other revenue options, like raising hotel or sales taxes, to make up for the expected budget shortfalls.

‘Very challenging time’

“This is a very challenging time for county government at a time when we have great needs in the community for our safety net programs and our response to the emergency, we also have decreased revenues,” County Administrative Officer Carlos Palacios told the Board of Supervisors.

Like a lot of local governments, the county operates on a “fiscal year” that runs July 1 through June 30. Effectively, the county projects its expenses in the 2021-2022 fiscal year to exceed revenues by $4 million.

One looming question for the county will be how to handle its furloughs, which are set to expire at the end of this fiscal year and will have to be renegotiated with unions representing county workers. Furloughs of some kind will likely have to continue; without them, the county would be facing a $15 million budget gap.

Although the county, Palacios said, is doing “slightly better” than officials had projected, it still has not recovered to pre-pandemic financial health.

In addition to savings losses and increased costs, the county had anticipated general and department revenue declines of up to $23 million for 2021, which was offset by department reductions, including layoffs — some 90 positions were eliminated, though a good portion of those were already vacated and in many other cases county employees were transferred to other jobs within county government.

Furloughs for county employees, instituted last summer, saved about $12 million, according to Christina Mowrey, the county’s budget manager, whose presentation focused on the county’s general fund — which draws on property, sales and hotel taxes, among other state and federal sources, and can be spent on a multitude of purposes, from public safety to health care to parks and recreation. The general fund makes up $622 million of the roughly $1 billion budget.

The county also drew on its reserves to make up for the losses, reducing those by $13.4 million to about $44 million, or 7% of the county’s total revenues. That’s the minimum for reserves, per the county’s policy, with the goal set at 10%.

But there are some signs of modest improvement. Current fiscal year estimates show about $3.3 million in unanticipated revenue growth, which is about 2% more than the county’s original estimates.

The majority of that is made up from sales tax revenues, where growth has been a little better than anticipated, “primarily due to the increase in online sales,” Mowrey said. Hotel tax — while down — is also doing better than originally thought.

And looking ahead to next fiscal year, county officials are projecting property tax growth. The current year had about 5% in growth, Mowrey said; next year is estimated to have about 4%, generating about $2.6 million.

But even though county officials anticipate modest upticks in overall revenue growth, the county will still be about $5 million away from returning to its pre-COVID-19 estimates. “So through next fiscal year, we’re only anticipating to get about halfway there,” Mowrey said.

The furlough question

The last time the county had furloughs for its employees was during the Great Recession. Back then it took “at least 3 years” to get off furloughs and the county did it in steps, according to Mowrey.

Moving away from furloughs in full would cost the county an additional $11-$12 million, she said, amounting to a $15 million budget shortfall. Even restoring half of those hours would still lead to about a $10 million deficit.

That’s why county officials believe some continued furloughs will be necessary.

“We believe that it’s unlikely that we can restore 100% of the furlough, that the impacts will be too great, but we are hopeful and believe that it is possibly manageable to restore 50% of the furlough and still minimize the impacts on staffing, programs and services, but more information will tell us soon.” Mowrey said.

Individual departments are expected to submit their budgets and requests by mid-February.

To balance the county’s future gaps in financing, officials will most likely have to further cut expenses and look for other revenue options. Those could include a one-percent increase in the hotel tax, which would generate about a million in revenue, and/or a quarter-cent sales tax measure, which generates about $3.5 million, Mowrey said.

“We are going to continue to look at those options in the future and your board will receive more information,” she told supervisors.

With Democrats now controlling Congress and the White House, county officials also have hope for additional stimulus funding after the latest relief bill that passed did not have any direct general funding for local governments.

“Some good news coming from Sacramento and Washington regarding various future supports related to COVID and homelessness and fire recovery and other needs,” Chairperson Bruce McPherson said.

He and others on the board also lauded county employees for taking the furloughs to help avoid an even more dire financial situation.

“Without the sacrifices of our workforce, and our strong reserves going into this crisis, we would be slashing services and making deep layoffs and gambling with our future stability in county government,” McPherson said. “So I’m very pleased we were in as good a position as we were.”