The City of Santa Clara faces a budget deficit that’s likely unprecedented in its history, driven by an unprecedented revenue shortfall, according to the City’s Finance Director Kenn Lee.
“All of the change is on the revenue side,” he said.
Even before the pandemic — in the original 2019/2020-2021/2022 budget — Santa Clara faced a $13 million deficit for 2020/21, according to Lee. In May 2020 revenue was projected to decline another $23 million, with the anticipation that the economy would open up in the summer.
When things got worse instead of better as the year progressed and hopes for re-opening dimmed, the deficit gained momentum and now is predicted to be nearly $42 million, driven by reduced revenues directly attributable to the pandemic.
The biggest culprit is an 88 percent decline in Santa Clara’s hotel tax — Transient Occupancy Tax, TOT — according to Lee. That’s about $9 million, down from about $23 million predicted for the current fiscal year (2020/21). Impact: $14 million.
To put that in perspective, Santa Clara will collect 30 percent less in hotel tax than it did in 1996, adjusted for inflation.
Sales tax also took a sizable hit, dropping to about $62 million from a forecast of $58 million.
While 40 percent of Santa Clara’s sales tax comes from technology business-to-business sales, the remaining 60 percent comes from retail and restaurant sales, which have been devastated by the pandemic. Sales tax from internet sales and takeout food don’t come close to closing the gap. Impact: $4 million.
Even property tax revenue — Santa Clara’s largest single revenue source — took a hit this year despite increasing real estate values. The decline is due to a change in the way the county calculates a complex school funding adjustment*. Impact: $3 million.
Other significant revenue shortfalls include a $3 million drop in rent income as a result of the Related project delay. The City’s investments earned $4 million less as a result of near-zero federal interest rates. And with the cancellation of Parks and Recreation programs the City lost another nearly $3 million worth of fees. Impact: $10 million.
The forecast also includes some reductions in cost since the original 2021/22 forecast in made in June 2019. Salary and pension costs are down $1.4 million, and there is also about $1 million in other adjustments that reduced spending for the coming year.
It’s important to understand that budgeting is an ongoing forecasting activity, said Lee. “Forecasting is our planning tool. We use it, given what we know today, to see what we have coming up.
“In our 10-year forecast we focus on the first two years,” he continued. “Even after the budget is approved we are constantly monitoring it every month.”
Santa Clara’s second largest budget deficit in the last 20 years was $9.3 million in 2004/05 — $12.5 million in 2021 dollars — when the local economy was slowly recovering from the dot-com bust and the September 11 attacks.
That represented 7 percent of the City’s general fund. The current deficit, largely the result of an economic depression caused by a public health catastrophe, represents 14 percent of the general fund.
You can find the annual budget and monthly City financial reports on the finance department’s page at santaclaraca.gov.
* Educational Revenue Augmentation Funds (ERAF), a property tax revenue shift enacted in the 1990s to compensate school districts for property taxes that were diverted from schools by redevelopment projects and their associated debt.