Financial Summary

A balanced budget that protects services and the County's workforce while confronting a challenging fiscal environment.

The Proposed Fiscal Year (FY) 2026-27 Budget totals $1.29 billion across all funds, including an $844.1 million General Fund. It is a balanced budget that protects the County's 2,682.28 full-time equivalent (FTE) workforce, maintains essential services, and continues targeted investments in housing, roads, homelessness reduction, and organizational modernization all while confronting the most challenging fiscal environment the County has faced in over a decade.

This budget arrives at a difficult moment. Unprecedented federal policy changes under H.R. 1 are reducing funding for programs that thousands of Santa Cruz County families depend on, and those reductions will deepen in the years ahead. At the same time, the County faces a structural imbalance between its ongoing costs, driven primarily by labor, benefits, and inflation and the revenues available to support them. That gap, which was projected at $23.2 million when budget development began, is forecast to exceed $67 million in subsequent years absent corrective action.

The Proposed FY 2026-27 Budget achieves balance through shared restraint across every department, combined with $43.0 million in one-time funding from General Fund reserves and department trust funds. This approach allows the County to avoid layoffs, preserve core services, and maintain investments in community priorities. It buys time — but it is not a long-term solution. The one-time resources used to balance this budget will not be available next year, and the structural work ahead will require sustained effort from the Board of Supervisors, County staff, community partners, and the public.

The General Fund is the County's primary operating fund. It supports the broadest range of County services, from public safety and health and human services to land use, parks, and general government operations.

The $31.2 million gap between General Fund revenues and expenses is closed through the planned use of one-time fund balance, department trust funds, and assigned reserves. This is not deficit spending in the traditional sense — it is a deliberate, Board-authorized strategy to use available resources to bridge the gap while longer-term solutions are developed. However, it reduces the County's reserve position and cannot be repeated at this scale.

The County entered the FY 2026-27 budget development cycle facing a projected General Fund deficit of $23.2 million. Through a combination of departmental restraint, targeted revenue increases, and the strategic use of one-time resources, the budget before the Board is balanced.

Departmental Restraint

Every County department contributed to closing the gap. Key actions include:

• Countywide hiring freeze on vacant General Fund positions
• Elimination of a net total 57.88 vacant positions across departments, reducing the County's funded workforce from 2,743.16 to 2,682.28 full-time equivalent (FTE) positions — a reduction of 2.1 percent
• Targeted line-item reductions in services and supplies, professional services, and operating costs
• Increased salary savings rates in departments with higher-than-average vacancy rates

The largest staffing impacts fall in the Health Services Agency (23.1 FTE reduced) and the Human Services Department (25.5 FTE reduced), reflecting both the scale of those departments and the disproportionate fiscal pressure created by federal funding reductions. No employees are laid off.

Revenue Actions

• Reimbursment rate increase at County Health Centers, aligning reimbursement rates for clinical services with actual costs and improving revenue recovery
• Parking fee pilot at County Parks, creating a new, modest revenue source while managing visitor demand
• Enhanced revenue projections where supported by current-year performance, including intergovernmental revenue adjustments and updated fee schedules

One-Time Resources

The most significant balancing action is the use of $30.8 million in one-time funding from General Fund reserves, combined with $12.2 million from department trust funds and other non-recurring sources — $43.0 million in one-time resources in total. The overwhelming share of one-time funds is directed at preserving safety net services in Health and Human Services — programs facing the most acute pressure from H.R. 1 impacts.

General Fund reserves are the County's principal fiscal cushion against economic downturns, natural disasters, and unanticipated expenses. The Board of Supervisors has established a 15 percent reserve target — a level the County has not yet achieved. The Proposed FY 2026-27 Budget draws reserves down from 12.5 percent to 10.4 percent of General Fund expenses — a level below the Board-adopted 15 percent target and significantly below the 28 percent California peer county average.

1. FY 2025-26 adopted balances reflect post-ACFR adjustments from the FY 2024-25 year-end true-up.
2. Reflects projected FY 2026-27 deposits to the Federally Qualified Health Center (FQHC) program reserve.
3. Department trust funds are non-General Fund balances tracked at the department level; they are not consolidated as General Fund reserves but are used as one-time funding sources to support General Fund activities.

Why Reserves Matter

Reserves serve three functions: cash flow management within the fiscal year, absorption of unexpected costs (disasters, FEMA reimbursement delays, mid-year federal or State actions), and a signal to credit rating agencies and financial partners that the County is managing for sustainability. The gap between the County's projected reserve level and both the Board-adopted target and California peer county average constrains all three of these functions and reduces the County's flexibility to respond to future fiscal shocks.

The Path Back to Target

Rebuilding reserves to the 15 percent target will require a combination of revenue growth, cost restraint, and structural fiscal alignment in FY 2027-28 and beyond. The County Executive Office is developing a multi-year plan to restore reserves to the Board-adopted target while managing the concurrent structural imbalance discussed in the Risks section below.

General Fund revenues are budgeted at $812.9 million in the Proposed FY 2026-27 Budget. The revenue forecast reflects an economy that is still functioning but growing more slowly, with limited upside and increasing sensitivity to downside risk.

Revenue by Major Source (General Fund)

Property tax revenues, the County's most stable discretionary revenue source, are expected to grow modestly, supported by high assessed values and limited housing supply in the local market. The median home price in Santa Cruz County ended 2025 at $1.3 million, sustaining assessed value growth even as transaction volume remains constrained. Growth is driven more by assessments than by new sales activity.

Sales tax performance has softened as consumer spending moderates. Elevated living costs, cautious household behavior, and a growing reliance on higher-income consumers for retail activity introduce greater volatility risk. Growth is expected to remain positive but restrained.

Intergovernmental revenues — the General Fund's single largest source — decline modestly, reflecting reduced federal funding flows through State programs. This is a direct consequence of H.R. 1 policy changes and is expected to deepen in future years.

Transient occupancy tax (TOT) revenues continue to benefit from resilient visitor demand but remain sensitive to broader economic and discretionary spending trends.

General Fund expenses total $844.1 million in the Proposed FY 2026-27 Budget, an increase of $19.8 million — or 2.4 percent — over the FY 2025-26 Adopted Budget.

Expenses by Major Category (General Fund)

Salaries and Employee Benefits are the dominant cost driver, accounting for 52.9 percent of total General Fund expenses. Growth of $32.9 million — or 8.0 percent — reflects negotiated cost-of-living adjustments across all bargaining units ($9.5 million in General Fund COLA costs), step increases for eligible employees, rising health insurance premiums, and increased retirement contribution rates. While CalPERS investment returns have improved — reporting a preliminary 11.6 percent return in FY 2024-25 — the effect on employer contribution rates lags by several years, providing modest relief in the near term but not enough to offset the pace of total compensation growth.

This is the core of the County's structural challenge. Labor costs are growing faster than the County's revenue base can sustainably support, and this dynamic will not reverse without deliberate intervention.

Internal Service Fund (ISF) charges increase significantly as County departments absorb higher costs for centralized services including facilities, fleet, technology, and risk management. Some of this increase reflects cost allocations for new county-wide systems such as Workday and OpenGov, expansion of county owned office spaces, and the ongoing transition of functions into the General Services Department and updated cost allocation methodologies.

Contingencies are budgeted at $11.0 million, representing 1.3 percent of General Fund expenses. This includes the standard 1 percent operational contingency, Measure K reserves designated for Board priorities (environment and parks, housing, disaster response), and a Board allocation for vacation rental impacts and district-level allocations.

The General Fund supports four major service areas, plus County financing and debt service operations.

Health and Human Services accounts for 62.4 percent of all General Fund expenses and is the area most directly affected by federal policy changes. The Health Services Agency and Human Services Department together absorb the greatest share of H.R. 1 impacts, as reduced federal funding flows into programs that serve the County's most vulnerable residents — including Medi-Cal, public health, behavioral health, and social services. Nearly all of the one-time reserve use in this budget is directed at sustaining these programs.

Public Safety and Justice expenses are essentially flat year-over-year, reflecting the combined effects of position reductions, line-item restraint, and the establishment of the Alternate Defender Division within the Public Defender's Office — a structural change expected to reduce reliance on costly outside counsel over time.

The Proposed FY 2026-27 Budget funds 2,682.28 full-time equivalent (FTE) positions — a net reduction of 57.88 positions, or 2.1 percent, from the current year.

All position eliminations target vacant positions. No employees are laid off. The budget also implements a countywide hiring freeze for vacant General Fund positions, with limited exceptions for critical public safety and direct-service roles.

The staffing reductions are concentrated in Health and Human Services, where the Health Services Agency eliminates 23.1 vacant FTE and the Human Services Department eliminates 26.2 FTE, with all filled positions absorbed through attrition, reassignment, or program restructuring.

Despite the fiscal constraints, this budget preserves and advances several key priorities:

Artificial Intelligence and Organizational Modernization

The budget funds the County's AI Elevation and Standardization Workplan 2026, including enterprise licensing, staff training, technical support, and pilot projects designed to improve efficiency and service delivery — making the best and highest use of County staff to solve problems and improve services. The Streamline Santa Cruz County initiative continues permitting process improvements, including a major update to the Santa Cruz County Code to implement objective standards and reduce peer reviews. The creation of the Alternate Public Defender's Office also contributes to long-term sustainability by improving service delivery while managing costs.

Roads, Infrastructure, and Economic Development

The budget maintains the Measure K investment of $2.0 million in road paving, culvert repair, and striping — essential quality-of-life services for residents in the unincorporated area. Board-directed Measure K investments in the environment and parks also continue, with $1.0 million allocated across the five supervisorial districts ($200,000 per district). Formation of an Enhanced Infrastructure Financing District (EIFD) moves forward, providing the County a long-term mechanism to capture value from growth and direct it toward public infrastructure and economic development.

Housing, Homelessness, and Essential Services

The 701 Ocean Street Housing Viability Study, funded by $1.0 million in Measure K, advances work on one of the County's most significant affordable housing sites. The budget continues the $1.0 million Measure K investment in homelessness reduction programs, which has contributed to a significant reduction in the number of unhoused individuals. Collective of Results and Evidence-Based (CORE) Investments contracts are preserved, maintaining the County's commitment to data-driven community services.