After previously anticipating a $14.6 million deficit for next year’s Santa Barbara general fund budget, the city is now projecting a smaller $3.6 million deficit after making internal cost reductions. 

City Administrator Kelly McAdoo called the general fund budget “precariously in balance.”

However, that balance does come with tradeoffs, including reducing the capital paving budget for the next two years by 50% and putting less money into reserves. The proposed rent stabilization ordinance and short-term rental ordinance also leave the city with some budget uncertainties. 

“While we’re balanced, relatively speaking, for this coming fiscal year in what we’re proposing today, there’s still a lot of work to be done,” McAdoo said.

On Thursday, the Santa Barbara City Council held a budget work session in the Faulkner Gallery at the Santa Barbara Library.

City staff recommended $7.4 million in mostly temporary funding reductions, including waiting to replace city vehicles and using Measure C funds to support street maintenance while utility tax revenue stays in the city’s general fund. 

Staff also recommended delaying hiring new people for vacant positions and temporarily deferring $1 million from the local housing trust fund, rather than contributing the normal $2 million.

The council already amended employer agreements with McAdoo and City Attorney John Doimas to reduce the amount of money the city contributes to their retirement funds for the next year. That change is expected to save the city $51,404, according to a staff report.

Real Property Transfer Tax Measure

One option the city was considering to help balance the budget was putting a real property transfer tax on the November ballot.

However, after uncertain polling data, city staff are recommending that the council not move forward with the ballot measure. 

While conducting polling, voters were asked how they felt about a tax from 55 cents per $1,000 to $9.50 per $1,000 for properties that were sold at $3 million or more. 

If the measure were to go through, the city projected it would bring in $2.9 million in fiscal year 2026-27 and $5 million in revenue the following year, the first full year of implementation.

Keith DeMartini, the city’s finance director, explained that they received mixed feedback, with most voters feeling uncertain about the measure, indicating that voters would need significant public outreach before making a decision. 

“Our runway to do that heavy lift of communication and public outreach is very limited to just about two months,” DeMartini said. 

Additionally, the city could run into legal issues as the Howard Jarvis Association is pursuing a state ballot measure challenging local property transfer taxes. 

“​​That would be very confusing for voters with a statewide measure limiting this and a potential local measure asking for it,” DeMartini said.

Through conversations with the local real estate community, DeMartini said they believe the measure could affect the number of property sales and for how much a property is put on the market. 

DeMartini also acknowledged that no one from the council nor the public appeared to “be a champion” for the measure, a comment that led to a few council members chuckling and nodding in agreement. 

Thanks to the other cost-saving strategies, DeMartini said the city is close to a balanced budget without the tax measure. 

However, there’s still a lot of unknowns in the city’s budget, such as how much the proposed rent stabilization ordinance will cost the city to implement and the impact that the short-term rental ordinance will have on transient occupancy tax revenues.

Another concern is that the city isn’t putting enough money into its reserves.

The city has a reserve policy of 25%, which represents three months of expenditures. At 25%, the city should have $57.2 million in its reserves, but because of deficits, the city expects to have $22 million in reserves for fiscal year 2026-27, DeMartini explained.

With the staff’s recommended budget solutions, the city won’t have to take any money out of its reserves, meaning while it’s not at the target amount, it won’t be depleting any further — for now. 

The city’s general fund budget will be released on Thursday, and the council is expected to have the budget introduction hearing on April 21.