In a recent government meeting, city officials discussed the financial challenges facing Capitola, highlighting the impact of rising pension costs and stagnant sales tax revenue on the city’s budget. Measure F, a quarter-cent sales tax, currently generates approximately $1.1 million annually, but officials noted that this revenue is insufficient to keep pace with inflation and increasing expenses.

The city’s contributions to the California Public Employees' Retirement System (CalPERS) are largely dictated by external factors, including investment performance and retroactive benefit adjustments made in 2006. These pension obligations have created a significant unfunded actuarial liability, which has grown substantially over the years, complicating budget planning.

Sales tax, which constitutes about 45% of the general fund, has seen minimal growth—approximately 2 to 2.5% annually—primarily driven by economic activity along 41st Avenue, the city’s main commercial corridor. Despite a slight increase in sales tax revenue from $5.5 million in 2006 to $6.2 million in 2024, inflation has eroded purchasing power, resulting in a loss of approximately $5 million since 2006.

City officials expressed concerns that these financial strains have led to reduced funding for essential services, including road maintenance and employee recruitment. The city retains only a small fraction of the total tax revenue generated by its residents, with the majority allocated to state and federal entities.

In response to these fiscal challenges, the city is considering a new half-cent tax measure to replace Measure F, which could generate an estimated $2.2 million annually. Preliminary polling indicates voter support for this initiative, reflecting a recognition of the need for increased revenue to sustain city services. The proposed measure aims to address the financial gap and ensure the city can continue to meet the needs of its residents.