Overview

Message as of the May 5, 2026, Proposed Budget publication date. The local economy continues to function but is absorbing pressure from three directions at once — slowing national growth, state fiscal tightening, and federal policy changes that reduce funding for programs on which thousands of County residents depend.

National

Moderate growth with renewed inflation pressure from energy

The U.S. economy continues to expand at a moderate pace but faces growing headwinds. Inflation has cooled significantly from its post-pandemic peak, though rising energy prices driven by geopolitical disruption are creating renewed upward pressure. Job growth has stabilized but is slowing, and the Federal Reserve is expected to hold rates steady in the near term, keeping borrowing costs elevated for households, businesses, and the County.

State

Structural deficit likely to constrain county allocations

Governor Newsom's upcoming May Revision will need to account for significant new uncertainties since his January proposal. While revenues have run ahead of early forecasts, rising energy prices from the Iran conflict are creating downward pressure on consumer spending and corporate profits, and by extension, state tax revenues. Combined with record Medi-Cal costs and reduced federal reimbursements, the State faces a structural multi-year deficit likely to constrain allocations to counties.

Local

Federal eligibility changes threaten coverage for ~30,000 residents

The federal administration is pursuing changes to eligibility requirements for Medi-Cal, CalWORKs, and CalFresh that would have significant negative impacts on Santa Cruz County residents. Nearly 90,000 County residents are on Medi-Cal, and the County estimates at least a third of these individuals — many of whom are unhoused — could lose coverage.

Real GDP Growth
+3.4%
2024, after a 2022-23 contraction
Inflation (Bay Area CPI)
2.2%
2025; energy pressure rebuilding in 2026
Unemployment Rate
7.2%
February 2026
Medi-Cal Enrollees at Risk
~30,000
Of ~90,000 local enrollees
What this means for the budget. The indicators in this outlook are not directional curiosities — they translate directly into revenue assumptions (property tax, sales tax, TOT) and cost pressures (inflation, wages, social service caseload) in the Proposed FY 2026-27 Budget. Every section below closes with an Implication note identifying the specific budget linkage for the Board's reference.

Economy

Real Gross Domestic Product

Real Gross Domestic Product (GDP) measures the total value of goods and services produced in Santa Cruz County and is a key indicator of local economic health. After a sharp drop during the pandemic, real GDP rebounded strongly in 2021 with a 7.6 percent increase but has since been uneven, contracting slightly in 2022, dipping again in 2023, and recovering in 2024 with growth of 3.4 percent. National GDP growth is projected to moderate through 2026, weighed down by elevated energy prices, cooling consumer spending, and ongoing uncertainty — conditions likely to limit upside for local job growth, discretionary spending, and future tax revenues.

Real GDP and Year-Over-Year Change — Santa Cruz County
Chained 2017 dollars. Bars show real GDP; line shows YOY percent change. Hover any year for detail. Click legend to toggle series.
Source: U.S. Bureau of Economic Analysis. Analysis by County of Santa Cruz. Published 5/05/26.

Consumer Price Index

The Consumer Price Index (CPI) tracks changes in the cost of living by measuring prices for everyday goods and services. For much of the past decade, the Bay Area experienced higher inflation than the national average, driven largely by housing and energy costs. Inflation spiked to 5.6 percent in 2022 but has since cooled steadily, reaching 2.2 percent in 2025. While this progress has eased some pressure on household budgets and public service delivery costs, rising energy prices and ongoing geopolitical uncertainty are creating renewed upward pressure on inflation in 2026.

Annual Inflation Rate (CPI-U) — Bay Area vs. U.S.
Year-over-year percent change in the Consumer Price Index for All Urban Consumers. Hover any point for detail.
Source: U.S. Bureau of Labor Statistics. Analysis by County of Santa Cruz. Published 5/05/26.
Implication for the budget. Cooling inflation eases some pressure on services-and-supplies line items, but the 2026 energy-driven rebound reintroduces cost risk for utilities, fleet, and construction-heavy programs. Combined with negotiated COLAs, overall expense growth is still projected to outpace revenue growth in FY 2026-27.

Labor Market

Job growth and unemployment rates are key indicators of the local labor market's health. As of February 2026, Santa Cruz County's unemployment rate stands at 7.2 percent, while year-over-year nonfarm job growth remains modest at 1.2 percent. This reflects a labor market that has stabilized after years of post-pandemic volatility, with unemployment settling into a range consistent with the County's historical norms. The modest pace of job growth continues to drive demand for workforce development programs, job training, and employment services.

Job Growth and Unemployment Rate — Santa Cruz County
Year-over-year nonfarm job growth (left axis) vs. unemployment rate (right axis), not seasonally adjusted. Hover for monthly detail.
Source: California Employment Development Department, LMID. Analysis by County of Santa Cruz. Published 5/05/26.

Job Trends by Industry

Total nonfarm employment in Santa Cruz County increased by 0.3 percent in 2025, equivalent to 300 new jobs. Gains have been strongest in Private Education and Health Services (+3.8 percent), with modest growth in Government, Leisure and Hospitality, and Professional and Business Services. Sectors including Information, Transportation, and Manufacturing experienced declines, reflecting softness in goods-producing and technology-adjacent industries.

Employment Change by Industry — 2025
Year-over-year percent change in nonfarm employment by industry. Green = growth, red = decline. Sorted by performance.
Source: California Employment Development Department, LMID. Analysis by County of Santa Cruz. Published 5/05/26.
Implication for the budget. An unemployment rate of 7.2 percent combined with job losses concentrated in higher-wage sectors (Information, Manufacturing, Transportation) sustains demand for workforce development, social services, and safety-net programs — precisely the programs facing the greatest federal funding risk. Sales tax growth is expected to remain positive but restrained as household budgets stay cautious.

Demographics

Population and Net Migration

While the County's population grew through the mid-2010s, it has declined by more than 13,000 residents from its 2016 peak, with the steepest single-year drop — over 8,300 residents — occurring in 2021. This decline has been driven primarily by net out-migration, as residents sought more affordable housing or relocated due to remote work flexibility. The pattern highlights ongoing affordability challenges and signals potential shifts in tax revenues, school enrollment, and infrastructure planning.

Total Population and Net Migration — Santa Cruz County
Line shows total population (left axis); bars show annual net migration (right axis). Hover any year for detail.
Source: California Department of Finance. Analysis by County of Santa Cruz. Published 5/05/26.

Age Distribution

Santa Cruz County has a relatively balanced age distribution, with nearly half the population (44 percent) aged 45 and over. Children under age 15 make up about 14 percent, reflecting a smaller younger population relative to the working-age and older cohorts.

Population by Age Group
American Community Survey 2023.
Source: U.S. Census Bureau, ACS 2023.

Racial and Ethnic Composition

The County's population remains majority White, but the number of White residents has declined by more than 16,000 since 2010. Meanwhile, the Latino population has grown steadily and now represents approximately one-third of the county.

Population by Race and Ethnicity Over Time
American Community Survey, annual data.
Source: U.S. Census Bureau, ACS, 2010–2023.
Implication for the budget. An aging population combined with continued out-migration points to sustained demand for health, senior, and behavioral health services, alongside a slower-growing tax base. Demographic shifts also reinforce the importance of culturally responsive services, language access, and equity in education, health, and housing — all of which are structural obligations embedded across County programs.

Housing

Single-Family Market

Single-family home prices and inventory levels help illustrate the balance between housing supply and demand. In Santa Cruz County, the median home price reached $1.42 million in April 2024, nearly triple the $495,000 recorded in January 2010, while the Unsold Inventory Index — last reliably tracked at approximately 4 percent through 2019 — has historically remained far below a balanced market. This persistent mismatch between supply and demand has made homeownership increasingly out of reach and continues to push more households into the rental market, adding pressure to multifamily housing and overall affordability.

Single-Family Homes — Price vs. Inventory
Median home price (left axis) and Unsold Inventory Index (right axis). An index below 4-6 indicates a tight, seller-favoring market. UII series unavailable in source from Jan 2020 onward.
Source: California Association of REALTORS. Analysis by County of Santa Cruz. Published 5/05/26.

Multifamily Market

Tracking new apartment construction alongside rent trends helps illustrate housing supply and affordability pressures. Rents surged in 2021 and early 2022, with three consecutive quarters of annual growth above 8 percent, while new deliveries remained limited. Since mid-2024, 827 new units have been delivered to the market, reflecting projects initiated during the post-COVID low-interest rate period. This lag between rent spikes and supply underscores how delayed development can exacerbate affordability challenges.

Multifamily Supply vs. Rent Growth
Bars show annual deliveries (new units); line shows year-over-year rent change. Hover any quarter for detail.
Source: CoStar. Analysis by County of Santa Cruz. Published 5/05/26.
Implication for the budget. Persistent housing affordability pressure is the structural backdrop for the County's continuing Measure K investments in housing, homelessness response, and the 701 Ocean Street Housing Viability Study. High assessed values also anchor the Proposed Budget's modest property tax growth assumption — a stability the County relies on in a year where most other revenue sources are flat or declining.

Commercial Real Estate

Composition of Commercial Space

Retail accounts for the largest share of commercial space in Santa Cruz County, with nearly 12 million square feet — roughly 38 percent of all commercial space and more than 50 percent larger than office square footage. This reflects the region's reliance on tourism, consumer services, and small business activity. Industrial and flex spaces make up smaller but significant shares.

Commercial Space by Property Type
Total square footage by use. Hover any segment for detail.
Source: CoStar. Published 5/05/26.
Property Type Square Feet Share
Retail11,924,74338%
Industrial9,481,75730%
Office7,694,94924%
Flex2,612,9108%
Total31,714,359100%

Vacancy Rates

Office vacancies have steadily risen, reaching 10.2 percent in Q1 2026 — roughly double the pre-pandemic low of 4.3 percent in 2019 — reflecting ongoing remote work trends. Industrial and retail vacancy rates remain tight at 2.2 percent and 3.7 percent respectively, signaling sustained demand. Multifamily vacancies at 4.1 percent continue to indicate limited housing supply.

Commercial Vacancy Rates by Property Type
Quarterly vacancy rate, 2011 Q1–2026 Q1. Click legend to isolate a property type. Hover for quarterly detail.
Source: CoStar. Analysis by County of Santa Cruz. Published 5/05/26.

Hospitality

Hotel occupancy and room rates help measure the strength of the local tourism and hospitality sector. Twelve-month average occupancy has climbed steadily from a pandemic low of 45.1 percent in February 2021 to 65.5 percent as of March 2026, while average daily room rates (ADR) have risen from $141 to $186 over the same period. This rebound reflects the sector's resilience and sustained visitor demand — important drivers of local employment and transient occupancy tax revenues.

Hotel Occupancy and Average Daily Room Rate
Trailing 12-month average occupancy rate (left axis) and average daily room rate (right axis).
Source: CoStar. Analysis by County of Santa Cruz. Published 5/05/26.
Implication for the budget. Office vacancy above 10 percent warrants attention for its cumulative effect on the commercial property tax base over time, though secured property tax continues to grow modestly in aggregate. Stable hotel occupancy and rising ADR support the Proposed Budget's assumption of continued TOT resilience — an important buffer given softness in sales tax and declining intergovernmental revenues.

What This Means for the Budget

The economic picture shaping the Proposed FY 2026-27 Budget is one of stability under pressure — a functioning local economy, but one increasingly sensitive to external shocks and downside risks.

Revenues: Limited Upside, Rising Downside Risk

  • Property tax remains the County's most stable discretionary revenue source, supported by high assessed values and constrained housing supply. Growth is driven more by assessments than by transaction volume.
  • Sales tax growth is expected to remain positive but restrained as elevated living costs and cautious consumer behavior introduce volatility risk.
  • Transient occupancy tax continues to benefit from resilient visitor demand but is sensitive to broader discretionary spending trends.
  • Intergovernmental revenue — the General Fund's single largest source — declines modestly, reflecting reduced federal funding flows through State programs. This is expected to deepen in future years.

Expenses: Labor, Caseload, and Inflation

  • Compensation growth from negotiated COLAs, step increases, and benefits is the dominant cost driver, running ahead of revenue growth.
  • Caseload-sensitive programs (behavioral health, public health, social services) face both rising demand from demographic and labor-market trends and reduced federal funding — a compounding problem.
  • Inflation exposure is re-emerging in 2026 via energy prices, reintroducing cost risk for utilities, fleet, and infrastructure projects.
The core message. Local economic conditions are not the source of the County's fiscal imbalance — they are its backdrop. The imbalance is structural: ongoing costs growing faster than the revenues available to support them, aggravated by federal policy changes whose full impact arrives in FY 2027-28 and beyond. This outlook supports the Board's decision to balance FY 2026-27 with one-time resources while beginning the multi-year work needed to align the County's revenue and cost trajectories.

For the revenue and expense detail, reserve position, staffing changes, and full set of balancing actions reflected in these conditions, see the Financial Summary.