Financial Summary

The Proposed 2025-26 Budget provides for expenditures of $1.23 billion offset by revenues of $1.15 billion and $78.1 million in direct fund contributions. The largest fund included in the County budget is the General Fund. The Proposed 2025-26 General Fund Budget is balanced with $793.5 million in expenditures and revenues. The budget reduces by 74.40 FTE positions to a total of 2,724.16 FTE positions while maintaining General Fund reserves at 12.7% or $98.1 million.

New in the Proposed Budget is the County’s five year, 2025-2030 Capital Improvement Plan and richer details within each department’s budget, including discussions on emerging issues, highlighting key accomplishments in addition to progress on operational objectives, and discussion of the major changes across all divisions. The budget also includes a new Debt Overview intended to summarize the County’s debt including information on liabilities like pensions and claims liabilities.

The Budget was published on April 24, 2025 to begin the budget hearings starting on April 29, 2025. While the County has much to celebrate over the past year as seen within the hundreds of departmental accomplishments and completion of operational plan objectives, we are facing headwinds in the form of reduced health care funding, delayed disaster reimbursements, state budget uncertainty stemming from larger worldwide economic uncertainty, and uncertainty over shifting priorities in Washington, D.C. and threats to federal funding.

In response, this budget prioritizes mandated services, protects essential programs, and makes strategic investments in our future. And although it is presented amid headwinds in the form of reduced health care funding, delayed disaster reimbursements, State budget uncertainty stemming from larger worldwide economic uncertainty, and uncertainty over shifting priorities in Washington, D.C. and threats to federal funding, it does not yet reflect any budget impacts from changes in federal policy. The County’s exposure to federal funding and policy risk is significant. Continued engagement with state and federal partners, local scenario planning, and strategic reserve management will be critical to navigating this uncertain environment. Absent action, federal policy changes could result in multi-million dollar funding losses, operational disruptions, and negative impacts on the health, safety, well-being, and civic participation of tens of thousands of County residents. The County would return to the Board at such a time when a response is required in alignment with development of the Federal budget, and possibly as soon as July or August 2025.

Some of the major changes in the Proposed 2025-26 Budget would:

• Reduce Health Services Agency staffing by 74.40 FTE positions, representing approximately 10% of the agency’s workforce, while prioritizing and maintaining mandated services. As of the date of this report, this would include 11.60 FTE filled positions for potential layoffs effective June 30, 2025.
• Reduce by $8.98 million total Health Services Agency budget, across the Behavioral Health, Health Centers, and Public Health divisions, primarily due to low behavioral health reimbursement rates, reduced health center visits, increased costs, and the financial impacts of new mandates.
• Provide $5.3 million in net costs for operating the new Children’s Crisis Center, which has a Children’s Crisis Stabilization Unit (8 chairs) and Children’s Crisis Residential Program (up to 16 beds).
• Underfund the General Fund 1% contingency by $1.2 million, resulting in a balance of $6.9 million.
• Maintain General Fund reserves at $98.1 million, or 12.7% of expenditures—below the 28.1% average reserve in 2024-25 of county peers.
• Increase Measure K unincorporated area sales tax revenue by $3 million to reflect a full year of receipts.
• Allocate $6 million from the General Fund for capital investments, including:
  • $4 million for road and drainage infrastructure maintenance, including $2 million from Measure K District Sales Tax;
  • $1 million for environmental and parks capital projects ($200,000 for each district), including $100,000 allocated by District 3 for the Davenport Sanitation District and Shark Fin Cove Parking Study, from Measure K District Sales Tax; and
  • $1 million for repairs and improvements to aging County facilities.
• Maintain Measure K District Sales Tax contributions of $1 million for homelessness services and $1 million for housing-related uses, including $400,000 for behavioral health room and board at licensed residential facilities.
• Maintain Measure K District Sales Tax restricted contingency of $1,000,000 to respond to new disasters or any shortfalls of General Fund disaster claims.
• Return all CZU Fire rebuild-related services to the Community Development and Infrastructure building permit center.
• Provide $24.2 million for ongoing road and bridge investments, including Buena Vista Road, Soquel Drive/San Jose Road/Porter Street, San Lorenzo Way Bridge replacement, culvert rehabilitation, signal maintenance, vegetation control, and transportation grant matching funds.
• Recognize receipt of a $5 million National Oceanic and Atmospheric Administration (NOAA) grant to serve as the County’s match for the Watsonville Slough Ecosystem Restoration Project.
• Reflect completion of prior-year road projects, including:
  • $25.5 million in roadway improvements (e.g., Soquel Drive, Green Valley Drive, Holohan Road);
  • $13.8 million in storm damage recovery projects; and
  • $5.6 million in pavement management projects.
• Reduce sanitation capital project funding following completion of Phase 2 of the Freedom Sewer Rehabilitation and the Davenport Storage Tanks Projects.
• Apply $6.6 million in anticipated federal reimbursements to service and reduce 2024 disaster-related debt.
• Provide $4.5 million for enhanced fire services in the Pajaro Dunes County Services Area (CSA) 4, including three new fire suppression vehicles.
• Increase funding by $2.7 million to address rising liability and property claims and insurance costs.
• Allocate funding for the implementation of the Human Capital Management (HCM) and Payroll System, targeted for completion by Summer 2026.
• Budget negotiated salary and benefit costs based on new agreements with the County’s labor partners.

Additional discussion of budget changes is included in within each department “Budget Summary of Changes” and “Major Changes” section.

As shown in Table 1, the total County Proposed 2025-26 Budget for expenditures decreased by $176.2 million from the 2024-25 Adopted Budget.

The largest changes in the Proposed 2025-26 Budget from the 2024-25 Adopted Budget are the result of:

• Decrease of $90.0 million in other financing sources due to the completion of $89.1 million in 2024 disaster-related financing.
• Decrease of $86.9 million in intergovernmental revenues primarily due to lower expected federal disaster reimbursements, the completion of state-funded transportation projects, and reduced Housing for Health funding.
• Increase of $11.3 million in tax revenues from a full year of Measure K sales tax receipts, normal growth in property taxes, and higher revenue from the Pajaro Dunes CSA 4.
• Decrease of $8.5 million in miscellaneous revenues due to the completion of the Phase 2 Freedom Sewer Rehabilitation Project.
• Decrease of $76.1 million in fixed assets due to timing differences; the Adopted Budget includes carryover of 2023-24 appropriations, while 2024-25 carryover will be incorporated in the Adopted 2025-26 Budget on September 30, 2025.
• Decrease of $37.8 million in other financing uses resulting from the completion of $11.1 million in Debt Service funding for at-risk federal disaster reimbursements and a $10 million General Fund loan to the liability and property internal service fund.
• Decrease of $36.1 million in services and supplies primarily due to $30.2 million in completed public works contracts for transportation, storm, and infrastructure projects.
• Decrease of $19.3 million in intrafund transfers due to administrative changes replacing cost plan transfers with direct charges for facilities and utilities, along with reductions in the Health Services Agency.
• Decrease of $7.4 million in other charges due to reduced Housing for Health program costs related to funding changes.

As noted, the 2024-25 general capital, road and other capital projects that are not completed by June 30, 2025 will be carried over and added to the Adopted 2025-26 Budget.

Table 2 presents the Proposed 2025-26 Budget by departments illustrating their total revenues, total expenditures and the contributions required to fully finance their community services and staffing levels. The contribution amounts are presented as information and are not shown as revenue within each department. Accordingly, they are shown as a negative amount to represent a credit against the total expenditures. The District Sales Tax contribution reflects the share of General County Revenues from Measure G and K that is allocated for use within and benefiting the unincorporated areas of the County. This amount is part of the total General Fund contribution.

The Health Services Agency includes a net reduction of 74.40 FTE positions, of which 43.5 FTE positions are in the Behavioral Health Division, 19.90 FTE positions are in the Health Centers Division,10.0 FTE positions are in the Public Health Division, and 1.0 FTE positions provide support across all health services. These reductions reflect the difficult balance between substantial constraints on State and federal revenue sources, including low reimbursement rates and reduced and diverted revenue, combined with cost increases that require protecting the ability to meet mandated services, grant requirements, and patient and community safety. See the Health Services Agency budget for more about these reductions.

Table 3 illustrates the net contribution required from each fund type (or the amount revenues are below total expenditures).

Total fund contributions in the Proposed 2025-26 Budget represent the amount by which maximum budget authority exceeds available revenues and must be funded from prior year fund balances. The Proposed 2025-26 amount of $78.09 million is a decrease of $12.98 million from the inclusion in the adopted of $28.05 million transfers out of prior year fund balance including $21.17 million for reserves against loss of federal disaster reimbursements and a loan to the liability and property internal service fund.

The $59.4 million in 2024-25 Estimated Actuals contributions to balance the General Fund consist of $21.17 million transfers out from prior year fund balance, nearly $30 million of budget authority that in January 2025 were estimated to be used but no longer likely to be needed by June 30, 2025, such as General Fund contingencies and professional services, primarily in the health and human services category.

As shown in Table 4, the General Fund’s Proposed 2025-26 Budget revenues are projected to decrease by $27.8 million. The single largest change is a decrease of $30.7 million in intergovernmental revenues, including the removal of $13.6 million in federal disaster reimbursements, reductions of $5.0 million in Health Services Agency revenue, and a decrease of $4.3 million in Human Services Department child welfare revenue.

The General Fund expenditures are expected to decrease by $71.2 million from the 2024-25 Adopted Budget. This reduction is from a decrease of $25.6 million of other financing uses, attributed to the completion of the $11.1 million transfer out to the Disaster Debt Service Fund for at risk federal disaster reimbursements and the $10 million General Fund loan transfer out to the self-insured Liability and Property Internal Service Fund. Additionally, a decrease of $20.2 million in intrafund transfers is primarily from an $18.2 million reduction in health and human services categories. Reductions of $9.9 million in other charges and $9.2 million in services and supplies reflect decreases in contracts with service providers.

Although the total decrease of $0.8 million in salaries and benefits is modest, it does account for increased costs related to negotiated salaries and benefits, which is offset by a $5.5 million reduction in the Health Services Agency resulting from the elimination of 74.40 FTE positions.

As shown in Chart 1, and discussed in the February 25, 2025 Mid-Year Report, the General Fund forecasted actuals reflects a reduced structural deficit compared to our 2024 forecasts. Our models do not yet fully capture the extent of the headwinds the County faces, including reduced health care funding, delayed disaster reimbursements, state budget uncertainty linked to global economic volatility, and shifting federal priorities and potential threats to federal funding. In addition, the models do not yet account for potential impacts from significant State budget cuts anticipated in the Governor’s May Revision, as indicated in the Governor’s press release on April 16, 2025. Key drivers of the forecast include:

• Losses in federal funding are estimated to be between $5 million and $17 million over the next four years.
• Increased infrastructure and roadway investments, including costs associated with maintaining aging County buildings and facilities.
• Expanded services required by unfunded mandates such as the CARE (Community Assistance, Recovery, and Empowerment) Act, CalAIM (California Advancing and Innovating MediCal), and other recent legislation.
• Rising pension liabilities due to underperformance in the California Public Employees' Retirement System (CalPERS) investment portfolio.
• Continued stability in property tax and vehicle license fee–in-lieu property tax growth.
• owered projections for future sales tax growth.

Table 5 below summarizes the key assumptions included in our forecast.

Financial Consequences of Climate-Based Disasters. Since 2017, Santa Cruz County has experienced numerous federally-declared disasters that caused hundreds of millions of dollars in damage to County infrastructure. Barring a shift in the speed at which local governments are reimbursed for the costs of disaster response and recovery, future County response will be limited by available resources and the pace of infrastructure recovery will be slowed. In addition, recent discussions on delaying federal disaster reimbursement to California local governments may severely impact the County’s financial forecast. In May 2024, the County issued debt to finance $80.3 million in costs paid by the County for the 2020 CZU Fires and 2023 Storms that remain unreimbursed. At that time, that County had $125.3 million in unpaid claims from FEMA and the Federal Highway Administration (FHWA).

The 2024 financing was structured with a conservative estimate of the timing for federal reimbursements. Staff expected that by 2026-27, the reimbursements would be used to pay off debt to equal our planned 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 average annual increase of $4.2 million in debt service costs.

Chart 2, County of Santa Cruz Federal Disaster Claims, illustrates that $89.8 million of total disaster claims remain unpaid. As compared to January 2025, this is a decrease of $1.2 million from a downward revision of amounts previously included for estimated submissions.

The Proposed 2025-26 General Fund Budget maintains the current reserve level of $98.1 million, or 12.7%.

Chart 3: General Fund Reserves summarizes the County’s total “Committed” and “Assigned” reserves, and includes a comparison to the average reserve levels of peer counties. The chart also illustrates how reserves would decrease if the $40.7 million in reserves designated to support services and projects for Medi-Cal and Medicare populations were no longer available. Under this scenario, the reduced reserve level would be sufficient to cover only 2.9 payroll cycles.

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The impacts of the Governor’s May Revision of the California Proposed 2025-26 Budget are not yet known. This section will be relocated to the Financial Summary and updated for the budget hearings that start June 3, 2025.