As Santa Barbara faces depleting emergency funds, the City Council will consider cutting itself off from using the reserves.

The Santa Barbara Finance Committee met Tuesday and recommended that the full council explore a new policy to limit their own access to emergency reserves.

Santa Barbara is meant to have 25% of its general fund budget in reserves, representing three months of operating expenses to cover one-time expenses or support the city in case of an emergency.

This means the city should have $56.7 million in reserves right now, but it actually only has $27 million in reserves, according to Finance Director Keith DeMartini.

If the city keeps spending these funds and doesn’t replenish them, disaster reserves will be fully depleted by the end of fiscal year 2028-29, DiMartini said.

“Obviously we cannot allow this to occur,” DeMartini said. “We won’t. We have to make additional revenue decisions and also decisions that will control and reduce expenses to not allow this to occur.”

The reserves can be broken down into two categories, contingency reserves and disaster reserves. Per city policy, 10% of the operating budget is meant to go into contingency reserves while 15% is meant to go into disaster reserves. 

The city has already fully depleted its contingency reserves and is now left with disaster reserves, which is $6 million below what it should be, according to DeMartini.

Councilwoman Meagan Harmon shared her discomfort with the current reserve policy, voicing her preference for a revised target policy that the city can actually meet.

With just four months left on the council before she reaches the end of her term, Harmon proposed two ideas she admitted were “controversial.” 

She proposed changing the target reserve level from 25% to 15%, completely removing the contingency reserve category, and removing the council’s ability to use emergency reserves, except for state or federally recognized emergencies or other specific scenarios. 

“I think we’ve gone too many years of sort of dipping in and being really flexible and truthfully it’s just not working and the proof is in the pudding,” Harmon said. “We’re into our emergency reserves right now and it’s not sustainable and it’s not safe.”

Her colleagues on the finance committee, Eric Friedman and Wendy Santamaria, were hesitant to change the reserve target policy but were supportive of restricting the council’s ability to use reserves.

Friedman said he wanted the whole council to recommit to keeping reserve levels at 25%, believing the city will be better off having fully funded 15% disaster and 10% contingency reserves. 

“There are things that will come up throughout the year that we need to be able to use that for and then quickly replenish them,” Friedman said. 

New language with strict rules around the use of reserves will go to the full council for consideration at a later date, along with a policy on how to best utilize any budget surpluses.

Ongoing Funding for Housing Trust

The Finance Committee also discussed how to find an ongoing funding source for the Local Housing Trust Fund, which is used to help support the development of affordable housing and provide housing assistance.

Funding was a point of contention earlier this year during budget discussions, and the year before. 

Without a steady funding source, the council voted to use $1 million from Measure C revenues to meet the $2-million contribution that they committed to when the fund was established. 

On Tuesday, city staff listed a number of possible funding sources, including using Measure C, which is used to fund infrastructure projects, Measure I, which is used to fund essential city services, in-lieu fees collected from development projects, or a vacancy tax, which would require voter approval.

The council could also consider increasing the transient occupancy tax, raising real property transfer taxes or finding external fundraising. 

Harmon said she believes that the only way to have a sustainable source for the fund is to have a transient occupancy tax increase that’s specifically dedicated to it.

Santamaria said a transient occupancy tax increase was “worth considering” but proposed a commercial vacancy tax, rather than a residential vacancy tax. 

“Commercial vacancies are the ones that we see see the most, the ones that have a bigger impact on economic vitality downtown and in other areas of the town,” Santamaria said. “Of course we know its not going to necessarily generate a ton of revenue, but the idea is to encourage property owners to place tenants in these.”

Friedman said he wasn’t in favor of new taxes right now, arguing that the city needs to prove it can handle its own budget and fix reserves. He did advocate for more discussions with philanthropists and outside contributors.

City Administrator Kelly McAdoo said this is just the beginning of the conversation to finding ongoing funding for the Local Housing Trust Fund and that city staff will return to the Finance Committee regularly as they start budget preparation for next year.