In order to have a “precariously balanced” budget, the City of Santa Barbara is grappling with low reserves and budget tradeoffs. 

After originally fearing a $14.6 million deficit, the city is now projecting a $3.6 million shortfall for the upcoming fiscal year, which starts in July. 

The Santa Barbara City Council held a brief budget discussion on Tuesday, and unanimously approved the schedule for the rest of the budget season. 

On May 5, the city’s Finance Committee will review the budget and proposed fee changes.

Starting May 12, the council will have sessions to discuss each department’s operating budget and projects before beginning deliberations on June 9 and adopting the spending plan on June 16. 

The city is facing a deficit because of growing expenditures and slowing revenues.

City Finance Director Keith DeMartini noted that revenue from the sales tax is growing, but not enough year to year to keep up with increasing expenses.

“There’s just been a lot of pressure on sales activity in the city, really around the state. This is a statewide phenomenon, not just in the city of Santa Barbara,” DeMartini said. “It just hasn’t grown that significantly.”

The property tax has remained the city’s most stable revenue source while transient occupancy tax growth is slowing down, DeMartini said.

In order to bring down the deficit, the city plans to delay hiring for vacant positions, put off purchasing new non-essential vehicles, keep $2 million from the utility user tax that funds street maintenance in the general fund and partially defer $1 million from the local housing trust fund. 

The housing trust fund is used to help support the development of affordable housing and provide housing assistance. The fund can also receive financial contributions from the state and private entities.

Councilwomen Kristen Sneddon, Meagan Harmon and Wendy Santamaria all raised concerns about the $1 million deferral.

“Depending on that to balance the budget could perhaps set a dangerous precedent,” Santamaria said. “I just want us to be very careful, really analyze everything and make sure that we’re looking under every couch cushion to see if we could close the gap in another way because we’re not necessarily seeing the dollars coming in from the federal government.”

Sneddon raised the idea of a residential vacancy tax, not for revenue but to discourage vacancy. Santamaria said she also supported that idea and expressed interest in exploring a commercial vacancy tax. 

“Every single time the budget is even mentioned, that’s the feedback I get from constituents,” Santamaria said. “These vacant storefronts and vacant households are sitting there, and if you only tax them when they’re vacant, that would change the behavior.”

The city’s budget challenges are also depleting its reserves, also known as the city’s savings. 

The city’s reserves have been steadily declining since fiscal year 2022-23. DeMartini explained that the city has already depleted its contingency reserves and is now faced with using emergency reserves. 

Per the city’s target reserve policy, the city should have $57.2 million in its reserves. However, for the next fiscal year, it is projected at roughly $28 million.

DeMartini said that before the cost reductions, the reserves were projected closer to $22 million.

Councilman Eric Friedman said reserves will be a critical issue this budget season. 

“We do have to have a way to replenish them,” Friedman said. “If we put an additional $3 million a year back into reserves, it would take us over a decade to get to where we need to be, and that is going to be difficult with other priorities that we are trying to get to.”

There are some unknown financial issues that staff couldn’t factor into the budget, such as the cost of litigation for the lawsuit regarding the temporary rent freeze; the cost of implementing the proposed rent stabilization plan; and a potential loss in TOT revenue if the proposed short-term rental ordinance is implemented, according to DeMartini. 

However, depending on pending litigation with Disney, the city could start collecting utility tax revenue from digital streaming services. 

In 2022, the city decided to bill Disney, which also owns Hulu, for back taxes related to a video utility-users tax approved in 2008. Disney claims it was never informed that the city was applying a 5.75% tax to its streaming services until it received a bill in the mail.

Disney, according to public documents, claimed that it didn’t owe the city any money because video utility-user taxes don’t apply to streaming services, only cable and traditional television channel services.

DeMartini said the case is currently before the California Supreme Court, and the city should know in the next few weeks whether the court will hear the case. If it doesn’t, the city will be allowed to start collecting the utility tax, bringing in new revenue. 

The full recommended budget for fiscal year 2027 can be reviewed here.