CAT5 means you paid $60 for a USAC license. CAT4 means you've done that, plus started in 10 CAT5 mass start events (or you were so awesome that they bumped you up early). CAT3 means you have a certain number of points from CAT4 and upgraded, etc all the way down to CAT1. It's a way to break races up so that in theory the fast guys aren't racing with the slower new guys as much.
Races cost money. The USAC license is $60 a year, or you can buy a one day license for $5 or $10 depending on the event. On top of that, there's usually some fee for the actual event ($20-$40 seems common).
I'm not familiar with what is available in San Diego as far as racing goes, so others can chime in there.