Santa Cruz County foresees a future of budget deficits and slimmed services

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As Santa Cruz County begins building out its budget for 2023-24, leaders warn that the county might have to tighten its belt in coming years to stave off a potential deficit fueled by a possible recession, disappointing income from cannabis and disposable-cup taxes and expenses related to natural disasters.

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Despite proposing a balanced budget this year, pressure from unpaid disaster expenses, slowing tax revenue and changing consumer behavior could put Santa Cruz County in the red by millions — possibly growing to tens of millions — in the coming years. Belt-tightening could be ahead, county leaders warned this week.

“[In the past] we’ve had to make really painful cuts and the employees have also [gone through] furloughs, we’ve done layoffs,” District 2 County Supervisor Zach Friend said Tuesday. “We’ve been through lots of challenges here and I see a lot of that coming down the pike.”

The Federal Reserve said last month that it is predicting a “mild” recession to hit later this year, followed by a two-year recovery. Similarly, last month, new projections showed that California could face a $30 billion deficit for fiscal year 2023-24, a dramatic reversal of fate for a state that, only a year ago, enjoyed a roughly $100 billion surplus.

Although federal and state financial projections can feel remote, these gloomy projections reverberate at the local level and have put Santa Cruz County on wobbly ground as it begins building out its own budget for fiscal year 2023-24.

If the county wanted to provide the same level of government services in 2024-25 as it does today, it would not only run out of money but would end up $8.4 million short. That deficit could grow to $10.2 million by 2027-28, or more than $24 million if the county wanted to bump its emergency reserves to the recommended level.

Marcus Pimentel, the county’s budget officer, says when a deficit looms, most governments begin by shaving off vacant positions across departments and deferring infrastructure improvements. Pimentel says the deficit projections are the result of what his team believes will be the economic impacts of a recession, which include drops in tax revenue and scarce federal and state dollars that, this coming year, will finance more than two-thirds of the county’s $731 million general fund.

“I’m concerned,” said Pimentel, who has been forecasting a bleak financial picture for the county since the winter storms began in January. “It’s a delicate position we’re in. We have limited reserves, we’re underfunded, and we’re a community that has a lot of needs. We’re not painted into the corner just yet, but we’re being pushed into it.”

Among the budget’s prominent pressure points is a bureaucratic strangle by the Federal Emergency Management Agency. The county says it is owed about $117 million in reimbursements from the county’s response to three presidentially declared disasters —the pandemic, CZU fires and the latest pummeling of atmospheric rivers. That number represents more than half of the $222.6 million the county plans to collect and spend in tax revenue for FY 2023-24.

The proposed budget counts, as revenue, $14.1 million in FEMA reimbursements, which Pimentel said he is “reasonably confident” the county will receive, thanks largely to what he says is an organized push from local congressional representatives Jimmy Panetta and Zoe Lofgren. However, a looming recession and the continuing battle over the debt ceiling could cut down that hope, Pimentel says, driving the county further into economic uncertainty.

Other signposts of murky economic waters include steadily declining income from cannabis taxes, a revenue stream that brought in over $6 million in 2020-21 but is projected to be worth only $2 million in 2023-24, driven largely by a drop in cannabis wholesale value. And though it was not projected to be a cash cow, the county’s new 25-cent disposable cup tax is projected to bring in only $100,000 in its first year, an ocean of difference from the $750,000 projection.

The county will have another round of budget hearings on May 30 and 31 before the supervisors take a final vote on June 13.

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