Santa Cruz County is going to need to smoke lots of marijuana, to forget the massive local city government deficits.
“Santa Cruz, Watsonville, Scotts Valley and Capitola all face mounting budget pressures, with several cities predicting budget deficits now and into the future. The cities are pinning their hopes on development projects, from luxury hotels to new downtown construction, as pension costs rise and sales tax revenues plateau.
The cities of Santa Cruz, Scotts Valley, Capitola and Watsonville are each forecasting deficits in the coming years, as cities’ spending is projected to outpace existing revenue streams.
Here is a simple answer—stop the wasteful spending. End projects meant to buy votes, that are not in the public welfare. You will see city government discuss ways of raising fees and taxes—not cut spending. Those are the people that need to be Recalled, or defeated for re-election—they are the cause of the problem. Or you can smoke pot and go down the toilet.
Cities across Santa Cruz County confront looming budget deficits as costs rise and revenues slow
by Christopher Neely, Santa Cruz Lookout, 6/3/25 https://lookout.co/cities-across-santa-cruz-county-confront-looming-budget-deficits-as-costs-rise-and-revenues-slow/story?utm_medium=email&utm_campaign=Morning%20Lookout%20060225&utm_source=ActiveCampaign
Quick Take
Santa Cruz, Watsonville, Scotts Valley and Capitola all face mounting budget pressures, with several cities predicting budget deficits now and into the future. The cities are pinning their hopes on development projects, from luxury hotels to new downtown construction, as pension costs rise and sales tax revenues plateau.
The cities of Santa Cruz, Scotts Valley, Capitola and Watsonville are each forecasting deficits in the coming years, as cities’ spending is projected to outpace existing revenue streams.
None of the cities has claimed any fiscal crisis ahead, but they will each have to find ways in the coming years to address their budget imbalances, as state law prohibits local jurisdictions from operating at a deficit. It’s common to see city expenses rise year to year as the cost of labor and disbursing services increases. There are ultimately two options in balancing municipal money: spend less or raise more.
In Santa Cruz, Scotts Valley and Capitola, officials are explicitly staking their city’s financial hopes on significant future development to help buoy revenues, while Watsonville, facing flattened sales tax forecasts, is on the hunt for new sources of revenue.
Santa Cruz
In Santa Cruz, where voters approved a sales tax increase just last year, the general fund deficit is forecast to reach $6 million in 2026-27 and $3 million in 2027-28. City staff has recommended relying on reserves to bridge the gap because the deficit is expected to be only a short-term issue. By 2028-29, the city expects revenue to exceed costs thanks to new hotels coming online that will boost the city’s income from transit-occupancy taxes, which are levied on hotel stays.
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The luxurious, 155-room La Bahia Hotel & Spa at 215 Beach St. has been years in development and is expected to open in September. The other major hotel project coming down the pipeline is the 232-room Cruz Hotel set for 324 Front St., which is expected to begin construction this year.
The city’s budget proposal does note, however, that it will be looking to “find efficiencies” and reduce spending so it can replenish the savings accounts it expects to rely on over the next two years.
Scotts Valley
In Scotts Valley, the city is projected to have deficits for nine of the next 10 years. The city projects to be in the black for only 2027-28, when it expects to receive a $2.2 million reimbursement from the Federal Emergency Management Agency for emergency road repairs from last year’s winter storms.
“A decade of deferred maintenance on the city’s streets, parks and buildings has left the city in a difficult and costly game of catch up,” City Manager Mali LaGoe wrote in her budget message presented to the city council on May 21. “The city will need additional revenue sources if it is going to be able to meet the expectations of the community in the areas of street conditions, park amenities, recreation programming, and modernization of our facilities.”
LaGoe pointed to property taxes providing only $2.1 million per year, or 8% of the city’s overall revenue. For comparison, 2020’s Measure Z, a sales tax increase, provides $4.3 million per year, or 18% of city revenue. The city is heavily dependent on sales tax income, and LaGoe pointed to the potential of the Town Center, the city’s new downtown vision, as a way to bolster sales tax and property tax revenues into the future.
According to LaGoe, the 2025-26 fiscal year is expected to be the year the Town Center “all comes together,” as she predicts the city will sign a development agreement on the project that has been decades in the making.
“With market forces on our side, in the near future we will see the Town Center constructed,” LaGoe wrote in her budget message.
Capitola
Capitola has forecast a slim deficit of roughly $49,000 starting in FY 2028-29, but it jumps dramatically to $403,000 by 2031-32.
City officials have pointed to one specific pain point in the city’s financial future: unfunded pension liability, or the money and benefits it owes to now-retired city employees. The city’s pension fund fluctuates based on the success of its investments, and those investment returns have been underwhelming, leading the city to have to cover an estimated $2.6 million shortfall this past year.
Similar to Scotts Valley and Santa Cruz, Capitola relies heavily on sales tax revenue. The city pulled that lever just last fall when voters approved a quarter-cent sales tax hike to bring in an additional $2.2 million in revenue for the city. The city projects that almost half of its $21 million general fund revenue, $9.7 million, will come through sales taxes in this next fiscal year.
Similar to Santa Cruz’s expanded hotel base and Scotts Valley’s vision for the Town Center, Capitola is also staking some of its hopes on the long-sought redevelopment and expansion of the Capitola Mall, a project without a clear path, or vision, as talks between the city and property owner have grown quiet in recent years.
Watsonville
In the biennial budget proposed by City Manager Tamara Vides last month, Watsonville could see budget deficits beginning with roughly $320,000 in fiscal year 2027-28 and growing to more than $1.1 million by 2029-30.
Watsonville has navigated tight budgets in recent years and 2025-26 appears no different, as Vides ordered all of the city’s general fund departments — those funded by public tax dollars — to shrink their operational budgets by 1% so the city could avoid a deficit or dipping into its reserves this year.
Like the other cities in the county, sales tax is Watsonville’s largest revenue source; however, officials are forecasting meager sales tax growth over the next five years, while the city’s growing pension liability will “remain a long-term concern.” Watsonville is expected to see a boost in property taxes as homeowner turnover increases assessed property values.
“To remain financially healthy, the city will need to continually monitor economic conditions, explore new revenue sources, and pursue grants and partnerships,” Vides wrote in her budget message. The city council will have its first budget hearing on June 10.
