Coronavirus

Severe Budget Cuts Loom for Santa Cruz County Cities

Small tourism-based towns, like Capitola, will be hit hardest

In the midst of the coronavirus pandemic, Capitola’s retail and tourism sectors have taken a hit. The city’s leaders say the community will get through this time by sticking together.

Jamie Goldstein started as city manager of Capitola in 2010, just as local governments started trying to climb out of the Great Recession.

It was shortly before a huge storm caused a massive pipe failure, wreaking financial hardship on the tourism-oriented town—the smallest in Santa Cruz County.  

One of the lessons Goldstein took from those difficult times was about the value of financial reserves. In the intervening decade, Goldstein pushed the city to boost its resiliency by increasing reserves from 15% of expenditures to 25% and creating a new fund to pay for future pension costs.

Then the coronavirus hit.

“Three months ago, I would have said the city of Capitola is well-positioned to weather a fiscal emergency,” Goldstein says. “Given the severity of this now, I think, ‘I wish we could’ve done more.’”

Less than two months into government shelter-in-place orders aimed at slowing the COVID-19 pandemic, revenue streams at local governments have slowed down tremendously. Capitola was already looking at a projected $400,000 budget shortfall to close out the fiscal year, which ends in June. But because hotel and sales taxes have seen such a big drop this season, that projected shortfall quickly ballooned to more than $2.1 million, 12.9% of the city’s projected revenue for the year, as outlined in its adopted budget. Capitola is looking at cuts for the next fiscal year, and they will be severe.

“Unfortunately, the severity of this downturn shocked me a bit,” Goldstein says.

Meanwhile, pension costs keep climbing due to the state’s pension crisis. Goldstein predicts that Capitola will be the hardest hit local government in Santa Cruz County, given the way its budget is structured around revenues from retail and tourism. But the issues that Capitola is facing are hardly unique. Cities and states around the country would need huge bailouts to avoid deep losses. Scotts Valley, another small city that relies on tourism and sales tax dollars, has a budget item on the agenda at its Wednesday night City Council meeting. The city of Santa Cruz—where leaders expect revenues to drop 10%, compared to earlier projections—discussed its budget situation at a meeting late last month. Watsonville has rolled out a plan to reduce payroll costs and let employees retire early. 

Goldstein says Capitola will pay its utility bills to keep the lights on at City Hall and maintain essential government functions. 

Other than that, he predicts Capitola is pretty much “going to cut out everything the city does that it’s not legally obligated to do,” he says. “If there’s something the city does that’s an added thing, we’re going to be taking it out of the budget. The City Council can review that, and obviously, the City Council adopts the budget.”

Mayor Kristen Petersen says that level of budget slashing will certainly be on the table. Capitola has a budget review session Wednesday, May 6, at 6pm. 

“We’re going to have to take a really hard look at all our discretionary spending and how we move forward,” Petersen says. “It’s daunting to think about.”

LOSS OF QUESTIONS

Retail and tourism both changed because of the coronavirus and shelter-in-place orders.

The Capitola Mall, for instance, is closed indefinitely. Capitola Village is eerily quiet. Hotels are virtually empty. 

One of Capitola’s main cash flows has been transient occupancy taxes (TOT), which get collected after visitors stay at hotels, motels and vacation rentals.

In the current fiscal year, Capitola expected to bring in $1.6 million in TOT, good for 10% of its projected revenue. 

Those revenues were steadily growing every year. The taxes were pegged as so reliable that, when Capitola tied some social services to a TOT increase two years ago, councilmembers sold the growing revenue stream as a sure thing. It isn’t looking that way now.

For the month of March, Goldstein says Capitola pulled in half the revenue that it normally does, and half of the TOT for the month of March compared to March of 2019. Because the shelter-in-place orders took effect in the middle of the month, Goldstein’s hypothesis is that Capitola was on track to pull in the normal amount from lodging taxes, but then the shelter-in-place order started, and TOT revenues were at virtually zero for the rest of the month.

Goldstein says the city structured its economy around tourism decades ago, partly because the city sees relatively little property tax revenue as a result of arcane state laws and also because of the language of Proposition 13, which passed in 1978. Capitola’s retail- and tourism-oriented approach gave Capitola a larger daytime population, which in turn necessitated a larger police force, Goldstein says.

Longtime Capitola Councilmember Ed Bottorff says sales tax has always been Capitola’s bread and butter. “We live on sales tax. We don’t make anything in Capitola, other than sunshine and good times,” he says.

But the impact of the pandemic will be, in a word, “devastating,” he says.

“We’ve all been in budget cycles, and we usually have some adjustments dip into our reserves or we try to rob Peter to pay Paul,” Bottorff says. The magnitude here is totally different, he says—with the expectation of widespread losses across the community, no matter what.

WHAT COUNTS

Petersen and Bottorff have already begun sweating the downstream effects of deep looming cuts. What happens, for instance, when the planning department doesn’t have enough employees to process building permits?

Also, Bottorff notes that, because Capitola is a small city, many employees already fill multiple roles, making it harder to cut positions.

Petersen is hopeful that Capitola will qualify for some federal stimulus money, although it isn’t a sure bet. 

Scotts Valley Mayor Randy Johnson wrote in a Press Banner op-ed that he’s been reaching out to multiple state and federal officials to explain the need for relief in smaller communities. He worries that any stimulus that does come through will focus on bigger cities.

Goldstein anticipates that, even if small cities do get some funding, it won’t be enough to “keep Capitola whole,” or operate at a level that’s anywhere close to normal.

In the meantime, local city managers and mayors have been working together in collaborative discussions.

“Going through the Great Recession taught me you can’t leave any stone unturned,” Goldstein says. “There’s a lot of different ways cities can work through this. It’s when you want to put all the cards on the table, and you want to give it everything you can.”

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