Sharp declines in sales tax revenue over the last three years that have partly crippled Santa Rosa’s finances appear to be leveling out.
Still, projected small gains aren’t enough to catch up with rising payroll costs and other expenses despite efforts in the last 15 months to curb spending.
Santa Rosa’s general fund revenues are expected to grow by $7.8 million, or 3.6%, in the new fiscal year that starts July 1. Meanwhile, expenses are projected to grow by more than twice that amount by about $16.7 million, or 7.7%.
Overall, general fund revenues are set at $225.5 million against $243 million in spending and money transferred out of the fund to help prop up other programs, resulting in a $17.5 million deficit.
“We’ve been making progress,” Chief Financial Officer Scott Wagner said. “But the reality is we just still have not fully gotten over this snowball effect within our budget.”
Wagner and his team presented the preliminary figures to the City Council during a study session Tuesday.
Closing the delta, which is expected to widen in the coming years, will require additional measures to reduce spending, including expected workforce cuts, as well as potential new revenue streams.
Finance officials provided the council with an early look at some of the steps staff propose taking in the coming year to turn around the financial situation, including a plan to lower pension costs and vehicle fleet costs.
Details about potential service impacts weren’t discussed but the proposal is expected to allow staff to maintain services and push off deeper cuts to future years, Wagner said.
The Tuesday study session came ahead of a deeper dive into the 2026-2027 budget during a two-day workshop May 5 and 6 where Interim City Manager Lori Ann Farrell and department heads will present their proposed budgets.
The general fund, which makes up the largest chunk of the city’s overall budget at nearly 40%, supports the bulk of city staffing and services, including the police and fire departments and administrative services.
Sluggish sales tax revenues coupled with rising payroll expenses and increased costs for insurance, utilities, vehicle maintenance and goods have led to a structural imbalance that the city has sought to address through reductions and reserves.
Finance staff project that sales tax revenue, which comprises about a third of the fund’s total revenues, will grow by about $1 million, or 1.4%, from $70.5 million to $71.5 million in the new year.
That modest increase comes after city staff reduced sales tax projections by $5.5 million in the current budget after revenue came in consistently lower than anticipated the prior two years.
The decline, finance officials have said, reflects a shift in consumer spending away from goods and toward services and as people purchase more goods online rather than at brick-and-mortar stores that directly contribute to the local economy.
Veronica Conner, the city’s budget manager, said city consultants project sales tax revenue in the current year will come in right around budget and that revenues will trend upward in future years though not at the same rates as before.
“It’s not a large growth rate but it’s growth in the right direction,” she said.
Property taxes, meanwhile, continues to come in strong and are projected to grow by 5.1% from $41.4 million to $43.5 million.
Modest increases are expected in the users taxes charged on utilities such as gas, electric and landline phones, and other taxes, such as those charged to businesses and overnight hotel guests. Recreation program fees also are expected to see modest increases, which Conner attributed to high demand as well as fee increases that went into effect in January.
However, staff project that permit revenues will shrink by about 5.7% from $14.1 million to $13.3 million as fewer permits for top-dollar projects are pulled, Conner said.
Nearly three-quarters of the projected expenditure growth in the new fiscal year is attributed to rising employee salaries and benefits.
Salaries are projected to grow by about $10.4 million, or 10.5%, from $98.7 million to $109.1 million, and benefits will rise by $2.3 million, or 3.4%, from $67 million to $69.3 million.
Part of that growth is the result of expiring or declining one-time funds that currently pay for 19 positions in the city’s crisis response team and the fire department that will have to be absorbed by the general fund unless they’re eliminated, Conner said.
Most employees also will see cost of living increases as part of labor agreements reached with the city in 2024 that resulted in up to 15% wage increases over the three-year contract, she said.
Among other costs, finance staff is budgeting $3.1 million more to cover overtime costs in public safety, which Conner said have outpaced budgeted revenues, and $600,000 for the November general election, where three council seats are on the ballot.
Santa Rosa has so far taken a more measured approach to addressing the deficit rather than making across-the-board cuts that could severely impact services as other agencies, including Sonoma State University and Santa Rosa City Schools, have done.
Efforts to eliminate about 50 vacant and filled positions since last January, reallocate one-time funding to boost reserves, and increase business license and lodging taxes have helped extend the city’s runway to tackle the long-term financial deficit, projected to reach $33.6 million by fiscal year 2029-2030.
Still, tough decisions are ahead, finance officials warned Tuesday.
The anticipated $17.5 million deficit in the coming year represents about 7% of the total general fund budget and is larger than the combined budget of the city’s administrative operations, including the city manager, attorney, finance and human resources departments.
Closing the deficit in one fell swoop would result in nearly 90 positions across the city being cut, most in the police and fire departments, which are the city’s two largest, Wagner said.
“That’s the size of what we’re talking about,” he said, adding that while his team wouldn’t propose addressing the deficit solely through staff cuts, payroll expenses are the single largest cost to the city. “Ultimately if our total general fund is 77% salaries and benefits and a lot of the other costs are mandated, while this isn’t the number, I would say it’s not that far off.”
Instead, city administrators and finance staff are proposing a two-year plan to address the immediate and longer-term deficit that relies on about $4.8 million in savings from paying down pension debt and financing the purchase of costly fire apparatus.
Staff also will look at eliminating vacancies and other department reductions and will tap about $8.4 million in reserves to close the immediate gap.
Deeper service reductions would come in fiscal year 2027-2028 unless city officials find ways to increase revenues.
Polling paid for by the city and conducted earlier this year showed support for renewing the city’s general sales tax and potentially doubling the half-cent rate to shore up city finances. A one-cent measure could generate an estimated $46 million annually, if approved by voters.
Potential revenue measures weren’t discussed Tuesday and the full council has yet to weigh placing a measure on the November ballot.
Officials will provide the council with more information about potential service cuts during the May budget meetings.
You can reach Staff Writer Paulina Pineda at 707-521-5268 or [email protected]. On X (Twitter) @paulinapineda22.
