Capitola voters could see a sales tax hike on the November ballot. (Stephen Baxter — Santa Cruz Local file)

CAPITOLA >> The Capitola City Council on Thursday adopted a balanced budget for the fiscal year that starts July 1, but city staff warned of growing pension costs and long-term budget shortfalls.

The approved budget includes $19 million in General Fund spending, down about $1.3 million from the prior year. 

“The last couple of years, we’ve had one-time funding going to specific projects. This year, we don’t have that,” said Capitola Finance Director Jim Malberg at a May 16 city council meeting.

The General Fund balance is above the city’s $500,000 target, but its reserves are below its goal of 25% of operating costs. Reserves should stabilize once the city receives the remaining disaster reimbursements for 2023 storm damage, Malberg said. 

Saving money for pension payouts is “our biggest challenge,” Malberg said. State estimates of how much the city should save have varied widely over the past several years, he added. “It makes forecasting into the future incredibly challenging,” Malberg said. The city’s unfunded pension liability is estimated at $33 million. 

The city may also face financial difficulties upon the 2027 sunset of Measure F, a quarter-cent sales tax approved by Capitola voters in 2016. The city council in April discussed placing a measure on the Nov. 5 ballot to extend the quarter-cent sales tax or replace it with a half-cent sales tax. 

The approved budget includes:

• $30,000 to pave the McGregor Pump Track. The city hopes to pay $15,000 and attract a matching donation. The project already has $50,000 in city funding and donations. The dirt track constructed in 2016 requires frequent maintenance, said Capitola Public Works Director Jessica Kahn.
• $15,000 for a study of the city’s boundaries and possible annexation of land within the city’s sphere of influence, including part of 41st Avenue. The money comes from the Santa Cruz Local Agency Formation Commission, which regulates city and district boundaries in Santa Cruz County. 
• $621,000 for street repair from county Measure D and state SB 1 funds. Without heavy spending, city streets are set to deteriorate and require increasingly costly repairs, Kahn said. Capitola City Councilmember Joe Clarke said the city should prioritize street repair and maintenance. “It looks like we’re not in a good position,” he said.
• $5,000 for the Eviction Defense Collaborative, a group of nonprofits headed by Community Bridges that offer legal help to tenants facing illegal evictions. “I think that’s another important way of addressing housing and homelessness issues, is by preventing people from becoming displaced in the first place,” said Capitola Mayor Kristen Brown.

In January, the city council plans to consider allocating $67,000 for a study on the possible replacement of the Capitola City Hall. 

Replacement could cost $20 million, said Capitola City Manager Jamie Goldstein. The study would help determine whether the council should continue repairing the existing building, or invest in a new one. 

The decision “is going to be controversial,” Goldstein said. “Some people will throw rocks at us about whatever decisions we make.”

Capitola City Hall was built in 1949 and expanded in 1976. (Stephen Baxter — Santa Cruz Local file)

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