Santa Barbara finance staff report $8.7M FY2026 shortfall and pitch mix of spending cuts and new revenue options

Finance Director Keith Dimartini told the City of Santa Barbara Finance Committee on Feb. 24 that the city is projecting a structural general-fund deficit of about $8,700,000 for fiscal year 2026 and warned that, if unchecked, reserves could be fully depleted by the end of fiscal 2028.

"We do have a structural budget deficit,” Dimartini said, adding that wage and benefit growth, rising insurance costs and ongoing capital and maintenance needs are outpacing revenue growth. The staff presentation asked the committee to receive the interim financial statements through December 2025, accept the six-month actuals report and adopt proposed appropriation and position-salary adjustments included in the committee packet.

Controller Natalie Liccoli reviewed departmental midyear results, reporting total general-fund expenditures of $118,500,000 (about 39.9% of the revised budget) and noting several departments projecting year-end spending below budget because of vacancies and deferred purchases. Liccoli said Measure C funds continue to fund multi-year capital projects and therefore often show large carryovers.

Staff outlined three tiers of budget options collected from departments (more than 300 ideas refined to about 200): tier 1 measures that can be implemented within a year, tier 2 longer-term efficiency efforts, and tier 3 items for future consideration. Examples under active consideration included shifting some positions from the general fund to enterprise funds, modest fee increases for Parks & Recreation programs, increasing parking citation revenues, holding select vacancies, and pursuing narrowly targeted tax measures.

On the revenue side, staff presented draft ballot options intended to take effect Jan. 1, 2027 if approved by voters: a tiered real property transfer tax (staff modeled a proposal targeting sales of $3,000,000 and above yielding roughly $5,000,000/year in estimates shown to the committee) and a 2-percentage-point increase to the Transient Occupancy Tax (TOT) from 12% to 14 (projected at approximately $5.8 million/year). Staff emphasized these are modeled estimates and that outcomes depend on market activity and voter approval.

Committee members sought additional analyses before finalizing any revenue proposal. Chair Friedman asked staff to run sensitivity scenarios (e.g., thresholds of $3M vs. $5M vs. $10M) and to show the revenue trade-offs if commercial or multifamily transactions are included or exempted. The city attorney cautioned that exemptions could raise equal-protection questions and must be supported by a rational governmental interest.

Waterfront Director Mike Wilshire told the committee that harbor dredging is scheduled tentatively for mid-March and that ongoing annual dredging costs historically covered by the Army Corps and federal funds range from about $3.5 million to $4 million. He said the waterfront enterprise fund lacks identified long-term funding for recurring dredging and that the general fund would ultimately be the backstop if federal funds did not materialize.

After discussion, Member Harmon moved and Member Santa Maria seconded staff’s recommendation to forward the Q2 financial report, the interim statements, the proposed budget amendments and the position/salary resolution language to the full City Council; the committee voted unanimously to send the package to council.

What happens next: the Finance Committee’s package will go to the City Council for consideration, with staff returning to provide more granular sensitivity analyses on suggested ballot thresholds and an annual review of fee and cost-recovery policies.