Unfunded pension liabilities, labor costs, and the possibility of a recession are looming over the City of Santa Barbara’s $667 million overall budget for 2024-25.

The city released the budget document on Tuesday. It is facing a $1.1 million budget deficit in its $220 million general fund in 2024 and a $4.8 million shortfall in 2025.

The increased deficit jumps because of expected pension liability, labor costs and inflation.

“We have rising pension costs,” said Keith DeMartini, the city’s finance director. “Unfunded actual liability on the city’s balance sheet is one of the largest on our balance sheet so dedicating resources to address that over time is critical.”

The city’s total unfunded pension liability was $344.5 million in 2021. DeMartini said on Tuesday that he would “pull that data tomorrow morning” and give it to Noozhawk.

Other challenges for the city going forward include deferred maintenance, inflation, labor costs, and hiring employees.

“We have recruitment and retention challenges,” DeMartini said. “We had a rather high vacancy rate the last couple of years, which was exacerbated during COVID.”

He added, “We have a challenge of affording labor wage increases.”

About $130 million, or nearly two-thirds of the city’s general fund budget, is devoted to employee salary and benefits.

The city is expecting to take in $30.7 million in sales tax revenues in 2024 and $31.7 million in sales taxes in 2025. For transient occupancy taxes, the city estimated taking in $27.5 million in 2024 and $29.2 in 2025. However, nothing is certain.

“It has been volatile over the years,” DeMartini said. “There are signs of economic instability and a possible recession.”

Each department has been asked to cut about 2% of its budget in 2024 and 3% in 2025.

The city plans a series of budget workshops over the course of the next month before final approval of the budget in June.