Debt Overview

Federal Disaster Reimbursement Delays. The 2024 financing required the issuance of $80.345 million in new debt to address delays in federal disaster reimbursements for the CZU Lightning Complex fires and 2023 storm disasters, continuing costs and reimbursable expenditures relating to such disasters. The 2024 financing was structured with a conservative estimate of the timing for federal reimbursements from the Federal Emergency Management Agency (FEMA) and the Federal Highway Administration (FHWA), anticipating that by 2026-27, these reimbursements would be used to begin debt repayment, thereby reducing annual debt service costs. However, due to ongoing uncertainty in the federal budget for FEMA and potential for extended delays in federal reimbursements, the County faces the risk, starting in 2026-27, of incurring an additional $6.5 million in debt service to repay the Internal Service Fund Loan at its latest due date, with an average annual increase of $4.2 million.

Limited Options for Future Disaster Recovery. With the increasing frequency of federally or locally declared disasters, the deferred maintenance needs of County capital and infrastructure, and the issuance of 2024 disaster financing, the County has limited options to continue advance-funding disaster recovery efforts. The 2024 financing was made possible through a lease-leaseback arrangement involving County properties, which are now restricted for use in future financing. These properties include the 701 Ocean Street buildings, Live Oak and Aptos libraries, County Behavioral Health Center on the Emeline campus, and newly acquired 150 Westridge facility. Until these bonds are paid off, these assets will remain unavailable. To the extent that there is greater value in these assets than in the outstanding debt secured by them, the County may be able to access additional bonding capacity in the future.

CalPERS Investment Performance Risk. The costs of County employee retirement benefits through the California Public Employees Retirement System (CalPERS) are funded through a combination of employee payroll deductions and County contributions. The County’s costs fluctuate annually based on CalPERS actuarial valuations, which compare total costs to payments and factor in CalPERS' required target investment earnings rate of 6.8%. Over the past 10 years, CalPERS has failed to meet this target in six years, contributing significantly to an annual increase of $45,977,853 in total County costs. Until CalPERS can achieve its required investment performance, the County is at risk to devoting more limited financial resources to its contractually obligated retirement payments.

Disinvestment Impact on Future Debt Needs. The County has remained in a state of disinvestment dating back to the Great Recession and its subsequent fiscal impacts as well as the dissolution of redevelopment, compounded by the need to redirect capital investments toward unfunded state mandates and prioritize available resources for disaster response. This has resulted in a backlog of necessary investments to modernize aging capital and facilities, including the County’s emergency radio communication systems, Freedom Campus providing health services in Watsonville, and Buena Vista Recycling and Solid Waste Facility transfer station, as well as to finance investments in housing, including affordable and workforce housing and permanent supportive housing for unhoused persons (which previously could be funded with 20% of the redevelopment agency tax increment). The County will continue to face challenges in prioritizing staffing resources to develop long-term capital investment strategies and may have limited capacity to leverage County assets for future bond issuances, creating a higher risk of potential failures and unexpected costs.

Tax and Revenue Anticipation Notes (TRANs). During the course of the fiscal year, the County may experience a temporary shortfall in cash because of the unequal timing of expenditures and the receipt of revenues. The biggest factor is that the majority of property taxes for the fiscal year are collected in December and April while expenditures such as payroll occur throughout the year. To mitigate these cash flow imbalances, the County borrows cash through the issuance of TRANs. These notes mature within twelve months after date of issuance and are therefore considered short‐term obligations. The County borrows and repays the TRAN within each fiscal year. The chart shows the total annual TRAN borrowing authorized over the last ten years.

Lease Revenue Bonds (LRBs) and Certificates of Participation (COPs)

The County issues LRBs and COPs to fund a variety of capital projects. Debt service on LRBs and COPs is secured by lease payments from the County General Fund associated with a lease of a County asset/facility. The LRBs may be issued by the Santa Cruz County Capital Financing Authority (formed in 2014 by the County and the Santa Cruz County Flood Control and Water Conservation District) but the County is the ultimate obligor. In some cases, special funds are used to reimburse the General Fund if the equipment or improvement funded relates to such special fund. The Project Summary table below includes information for of each outstanding LRB and COP issue, as well as non-bonded lease obligations incurred to finance equipment and property acquisitions.

Pension Obligation Bonds (POBs)

POBs are Bonds that were issued by the County to pay down the amount owed to the California Public Employees' Retirement System (CalPERS) for the County’s Safety and Safety Sherriff pension plans’ unfunded actuarial liability. In 2021, the County issued $124.2 million in POBs with interest rates between 2.16% to 2.91%. At the time of the issuance, the County’s liability for these plans was $168 million with a 6.8% interest rate charged by CalPERS on the outstanding balance. The projected savings from the POBs due to the interest rate differential between the POBs and the rate charged by CalPERS was $61.3 million. The savings may change depending on the investment results of the CalPERS investment pool and any changes in the CalPERS discount rate.

General Obligation Bonds (GO Bonds)

GO Bonds are debt instruments issued by local governments to raise funds for the acquisition or improvement of real property. GO bonds can be backed by the full faith and credit of the issuing entity or by an ad valorem property tax, both of which require supermajority (two-thirds) voter approval. The County has no outstanding General Obligation Bonds.

Sanitation District Obligations

The Santa Cruz County Sanitation District and the Freedom Sanitation District have incurred obligations secured by net revenues of the respective system. The obligations were issued to fund wastewater improvement projects.

Land Secured Bonds

At the request of certain property owners, the County has formed assessment districts and community facilities districts to fund improvements related to such properties. Any bonds issued for the assessment districts and community facilities districts are secured only by a special property tax or assessment levied on such properties.

Tax Allocation Bonds

The former Santa Cruz County Redevelopment Agency issued tax allocation bonds to fund various capital improvements and low-and-moderate income housing projects in the Live Oak/Soquel Project Area. As a result of dissolution of redevelopment agencies statewide, the obligations of the Santa Cruz County Redevelopment Agency, and any refinancing thereof, are now administered by the Santa Cruz County Redevelopment Successor Agency. All obligations are secured by the tax increment revenues that are deposited in the Redevelopment Property Tax Trust Fund.

Conduit Issuer

The Santa Cruz County Public Financing Authority (formed in 1990 by the County and the Santa Cruz County Redevelopment Agency) assisted the Santa Cruz Consolidated Emergency Communications Center (known as Santa Cruz Regional 9-1-1) in financing capital improvements and equipment needed for the facility. The payments on the bonds are paid from the members of Santa Cruz Regional 9-1-1 (County, Capitola, Santa Cruz, Watsonville).

Pension Unfunded Liabilities

The County provides defined benefit retirement benefits through the California Public Employees Retirement System (CALPERS) to all qualified employees through three separate retirement plans: Safety, Safety Sheriff, and Miscellaneous. CalPERS acts as a common investment and administrative agent for the County and it’s other participating member agencies. Benefit provisions are established by State statute and by County contracts with employee bargaining groups.

The retirement plans cost is paid by employee contributions and County employer charges. The County’s charges are determined by CalPERS actuarial valuations performed annually and comprise of two components: a normal cost and unfunded accrued liability (UAL). The normal cost is the total value of the retirement benefits for the upcoming year.

CalPERS amortizes the UAL created each year over different time periods depending on what created the particular UAL. A UAL can result from:

The UAL cost is substantially the repayment to CalPERS for when their investment experience is lower than the actuarial determined investment rate of return (the Discount Rate), such as the investment losses incurred during the Great Recession when the CalPERS entire pension system went from being overfunded at 101% at June 2007 to funded only at 61% by June 2009 (a system wide 39% unfunded liability). Another source for the UAL cost is when CalPERS periodically determines future costs may be higher than previously assumed (such as the 2021 study that increased life expectancy of members). The UAL is calculated annually by CalPERS, is treated as a new unique debt layer, and is ultimately the difference between the projected future pension costs and the current market value of assets held on behalf of the County.

The table below summarizes the County’s allocated share of UAL over the last ten years with the calculated interest rate paid to CalPERS as part of the UAL charge. The interest rate charged by CalPERS is the Discount Rate. The table also compares the CalPERS actual rate of return against the Discount Rate CalPERS actuaries assumed will be earned. In years when the actual investment rate is under the Discount Rate, a new UAL debt is added to the County.

Pension Cost Reduction Strategies

In 2012, the County reformed and lowered its pension benefits by establishing two tiers of benefits for employees in each of the employee plans (Miscellaneous, Safety and Safety Sheriff), based on date of hire (“Tier 1” and “Tier 2”). Benefits were reduced for Tier 2 employees in the Safety and Safety Sheriff’s Plans hired on or after June 9, 2012. Benefits were reduced for employees in the Tier 2 Miscellaneous Plan hired on or after December 17, 2012.

Then, On September 12, 2012, the Governor signed into law the California Public Employees’ Pension Reform Act of 2013 (“PEPRA”), which made changes to CalPERS Plans, most substantially affecting new employees hired on or after January 1, 2013 (the “Implementation Date”). For the County, this created another benefit tier (PEPRA Tier 3). Ultimately, the County’s reforms and PEPRA will continue to reduce the County’s long-term pension obligations and normal pension costs.

The table below shows the County’s normal pension cost as a percent of payroll for each retirement plan for the last six years and projected by CalPERS for the next four years. This illustrating that due to the cumulative effect of pension reforms, the County’s normal pension costs are beginning their expected decreasing trend as the amount of members in the lower Tier 1-3 plans continues to increase.

For non-safety CalPERS participants hired on or after the Implementation Date, PEPRA changed the normal retirement age by increasing the eligibility for the 2% age factor from age 55 to 62 and increased the eligibility requirement for the maximum age factor of 2.5% to age 67. PEPRA also: (i) requires all new participants enrolled in CalPERS after the Implementation Date to contribute at least 50% of the total annual normal cost of their pension benefit each year as determined by an actuary to a maximum of 8% of salary, (ii) requires CalPERS to determine the final compensation amount for employees based upon the highest annual compensation earnable averaged over a consecutive 36-month period as the basis for calculating retirement benefits for new participants enrolled after the Implementation Date, and (iii) caps “pensionable compensation” for new participants enrolled after the Implementation Date at 100% of the federal Social Security contribution and benefit base for members participating in Social Security or 120% for members not participating in social security, while excluding previously allowed forms of compensation under the formula such as payments for unused vacation, annual leave, personal leave, sick leave, or compensatory time off.

Obligations from Self-Insurance

County has chosen to establish self‐insurance internal service funds to accumulate assets for losses up to certain limits for all general liability, workers' compensation employer’s liability, cyber liability, all property losses and other liabilities. The county mitigates and manages its self-insured risk by participating in a joint risk pool, Public Risk Innovation, Solutions, and Management (PRISM) and was a founding member in November 1979. Currently, 55 of the 58 counties are members of PRISM. The table below summarizes the actuarial determined future liabilities by program area at the end of the last ten fiscal years.

Other Post Employment Benefits Liability

Employees of the County who retire through CalPERS, their spouse, and eligible dependents may receive health plan coverage through the Public Employees’ Medical & Hospital Care Program Plan (“OPEB Plan”). The cost the OPEB Plan are determined through CalPERS’ regulations and requirements and are substantially paid for by the retiree. The County provides a contribution based on longevity schedules with fixed dollar scaling that varies by bargaining unit as negotiated by each group or bargaining unit. For Fiscal Year 2022-23, the County contributed $7,872,181 to the OPEB Plan. The County pays 100% of its annual required contributions to the OPEB Plan. Accordingly, the OPEB Liability is a calculated, non-cash liability based on the future value of the County’s contribution. Unlike with the CalPERS UAL, there are no required payments for this internal OPEB Liability.