The City of Santa Barbara is bracing for a “tough” budget year as it faces dwindling reserves and significant deficits, and the City Council will consider putting tax increase measures on the November ballot.

Last week, staff gave the council a midyear budget update and ideas to create more revenue, and council members discussed their concerns and priorities for the upcoming budget planning season.

The current fiscal year, which started July 1, 2025, has projected revenues of $242 million, projected expenses of $250 million and a $8.7 million deficit. 

Expenses are expected to continue to increase, with the gap between revenue and expenditures expected to widen each year for the next few years, according to Keith DeMartini, the city’s finance director.

For the next fiscal year, which will start July 1, the city staff is projecting a revenue of $250 million, expenditures of $264 million and a $14.6 million budget deficit. 

When that happens, the city has to dip into its reserves to help cover spending. DeMartini said they are projecting to fully deplete general fund reserves by the end of fiscal year 2027-28. 

“We do have challenges. We are actively working on a number of expenditure control and reduction options as well as revenue generating options to help us balance our budget, not just right now but also for multiple years to come,” DeMartini said.

Most of the city’s revenue comes from property tax, sales tax and transient occupancy tax. The city is starting to see flat revenue from sales and transient occupancy tax, meaning that while expenditures grow, revenue isn’t growing enough to keep up, according to Natalija Glusac, the city’s budget manager.

“If our revenue is leveling off, this is an issue because our expenditures are still going to increase,” Glusac said. “That is one of the things that we are trying to grapple with, is how to deal with a flat revenue while our expenditures are increasing.”

To generate more revenue, the City Council is exploring increasing the cannabis retail tax, the property transfer tax and the transient occupancy tax.

City Considering Tax Increases

On Tuesday, the council is set to vote on adding two ballot measures for the Nov. 3 election — an increase on the city’s transient occupancy tax by 2% and increasing property transfer taxes for properties worth more than $3 million.

The TOT increase is projected to bring in $2.9 million in fiscal year 2026-27 and $5.8 million in fiscal year 2027-28, the first full year the increase would be in effect. 

The increase on property transfer tax is expected to generate $5 million in revenue after the first full year of implementation.

The council also is expected to consider raising cannabis retail tax by 2%, which is expected to produce an additional $200,000 to $400,000 in revenue. 

At last week’s meeting, Councilman Mike Jordan said he believes the city’s definition of a full-service city will “drastically” change in the next decade as reserves and revenue dwindle. 

“There’s not enough taxing and not enough revenue out there that we can put on people in this community to remedy that,” Jordan said. “We’re going to have some hard choices to make on what that looks like — whether it’s doing more with less, whether it’s just doing less, whatever that may be — but it’s clear to me that we can’t continue on this track of needing to spend money leading to needing to go raise revenues.”

A full-service city is typically referred to as a city that funds its own services, including police, water, fire and sewage. 

Cities such as Goleta contract through the Santa Barbara County Sheriff’s Office for policing and the Santa Barbara County Fire Department for fire services, while Santa Barbara has its own police and fire departments.

Besides increasing taxes, DeMartini said the city is working on cost savings by consolidating resources, negotiating for better prices on contracts and is recommending temporarily delaying hiring new people for currently vacant positions, which would save about $1 million. 

After the budget review, the City Council discussed expectations for the upcoming budget planning season, which will take place in the coming months.

Councilwoman Kristen Sneddon said a high budget priority for her is maintaining services that prioritize community safety and belonging.

“Some that we traditionally think of and some that we might not traditionally be thinking of in terms of a community that’s particularly intimidated and under target right now for that sense of belonging,” Sneddon said. “I think it’s time to really think about in our budget priorities how we adjust for that and adjust for those who are most impacted.”

Sneddon added that she didn’t want any local dollars going to collaborating with immigration enforcement agents, including access to parking and buildings.

Mayor Randy Rowse said the city needs to “stay in our lane” and focus on funding basic city needs such as public safety, parks and recreation, and maintenance.

“We cannot afford to go and fund outside sources and social programs — in some cases maybe we can, but it’s not something we’re able to do,” Rowse said. “If we go outside our normal general fund budget parameters, we’re going to end up in the situations like we are in today.”

He added that there’s more the city can do to bring in revenue, such as enhancing business opportunities. 

A full budget overview for the next fiscal year is set for April 21. The Finance Committee is set to review the recommended budget on May 5, and department budget hearings are set for May 12 and May 19 before the council deliberates the budget on June 9.