2021-22 Preliminary Forecast and Budget Assessment
For fiscal year 2021-22, the County’s preliminary forecast expects to see modest growth in general purpose revenues, however, certain revenue sources are not expected to reach the Pre-Covid-19 levels. After the short deep recession in March 2020 due to the Pandemic, the economy has been in a state of recovery since April 2020 however the pace of recovery has fluctuated over that period. The continuous rise in the COVID-19 number of cases has not yet allowed the full opening of the economy and restrictions are still anticipated to extend deep into calendar year 2021. The Federal Food and Drug Administration (FDA) allowed using two commercially approved vaccines as of December 2020 to enhance immunity towards COVID-19 focusing on a tiered roll-out prioritizing population groups based on their risk to the disease as well as their occupational hazard. With the continued ramp-up in the roll-out of vaccinations, there is the expectation that the virus will be contained at some point during the 2021 calendar year and that economic activity may fully reopen as the viral risk is contained. The timing however during the calendar year is not yet clear and will depend on the rate of vaccination that is possible.
The 2021-22 budget year is going to have on-going challenges related to the slower economic recovery. The economic recovery is still being held back by necessary public health restrictions as well as the high level of unemployment that still exists related to the COVID-19 caused recession. Locally for the County, cost pressures will still occur related to increases in retirement and OPEB costs, coupled with negotiated salary increases and insurance costs which are projected to absorb the majority of additional revenue and has some risk of outgrowing the additional discretionary revenues. However, the Department of Financial Services recognizes that it is challenging to forecast the speed and pace of the recovery and has tried to take a balanced view at this time (not taking a strong pessimistic or optimistic lens). Departments will be asked to continue looking at finding cost efficiencies, areas for reductions, and to limit augmentation requests. The budget could change dramatically should additional federal stimulus be adopted to respond to the economic impacts of COVID-19. At this time, staff cannot reasonably estimate whether that might occur or what form (ex. Restrictions on funds) that stimulus could take and thus do not make any assumptions for the 2021-22 budget. On the opposite side, should vaccine distribution take longer than anticipated, the recovery and economic growth may be lower than assumed.
Staff recommends that the following items be considered in order to guide the 2021-22 budget process:
State Budget & Federal Stimulus Impacts: the Governor’s 2021-22 state budget proposal and potential Federal Stimulus include one-time funding opportunities in mitigating the impact of Covid-19, housing and services for homeless, enhanced funding in public safety programs, mental health, and agricultural initiatives. The Federal Government also may make available a variety of stimulus funding to mitigate the public health and economic impacts of COVID-19. The County’s 2021-22 budget should take advantage of these funding opportunities, but also maintain focus on stabilizing core County operations, such as those dependent on realignment funding, where costs are outpacing revenue growth.
Pension: The most recent CalPERS actuarial valuation report as of June 30, 2019 reflects an aggregate unfunded liability for Yolo County miscellaneous and safety plans of approximately $350 million, an increase of nearly 4.5% over the prior year. Pension rates in fiscal year 2021-22 including the supplemental charge are increasing from 32.2% to 32.9% for miscellaneous employees and from 43.7% to 45.9% for Public Safety employees.
OPEB: The funded status of Other Post-Employment Benefits (OPEB) continues to improve due to implementation of the OPEB benefit caps and continued pre-funding of the OPEB liability. As of the June 30, 2018 valuation report, the funded ratio was 14%. In fiscal year 2020-21, OPEB rate charged to County departments is 8%, which is below the full actuarially determined contribution (ADC) rate, the rate was approved to decrease from the ADC rate of 8.8% as part of the strategies to balance the 20-21 Budget. However, it is advised that the OPEB rate in 21-22 should be determined based on the actuarial report and consistent with the OPEB funding policy.
Labor Costs: Increases in required CalPERS employer contribution rates, OPEB rate increase, negotiated cost of living adjustments, and equity adjustments are projected to increase labor costs by approximately $9 million. With this volume of cost growth, the unfunded positions in the last year’s budget process may not receive funding restoration in 21-22. Further reductions in position count are not expected to be needed to balance the budget but any restorations or increase in positions should be done judiciously due to the limited resources available.
General Reserve: Due to the unprecedented fiscal challenges caused by the Pandemic, the County was not able to contribute into the General Reserve in 2020-21 budget. Before that, the County had been steadily increasing the General Reserve. The County policy on Fund Balance and Reserves establishes a target reserve level of 10% of General Fund expenditures. The County has chosen to include Public Safety Fund along with General Fund to accurately assess financial risk. At the end of 2020-21 the General Reserve level is projected to be $14 million which is 6.1%, a decline from 6.5%. Additional contributions to the Reserve are advised to restore the fiscally prudent practice to achieve the policy target and further strengthen the fiscal foundation of the County.
Budget Principles: Staff recommends approval of the 2021-22 Budget Principles, as reflected in Attachment A. The Budget Principles serve to highlight some of the best practices that underline budget development each year, and to guide budget planning for the upcoming year. A few of the notable provisions in the Principles include:
- The budget shall be developed in accordance with key best practices and principles as established in County financial policies;
- The County should take advantage of one-time funding opportunities in the State Budget and Federal funding opportunities but continue to stabilize core County operations.
- Departments shall endeavor to purchase the most environmentally sustainable option when replacing or purchasing new vehicles, starting with electric, then electric-hybrid, hybrid and finally combustion. Hybrid or combustion vehicles will only be considered if there is a compelling business reason.
- Priority shall be given to new funding requests that support the Board’s 2020-2025 Strategic Plan Goals and priority focus areas, or use technology to provide online access to County services and reduce workload.
Budget Calendar: The proposed 2021-22 budget process calendar is provided as Attachment B. Key dates for the Board’s consideration are as follows:
- Feb. 1 : Budget instructions & Budget System open for departments
- Mar. 08 & 10: Board Budget Workshop
- Apr. 20: Budget development status update to Board
- May 28: 2020-21 Recommended Budget document released
- Jun. 15: Board budget hearing & approval of Recommended Budget
Budget System: The budgeting software SHERPA will be open for the County department fiscal staff to enter their budgets from February 1, 2021 through February 28, 2021.
Interim Budget Preparation Guidance: Budget instructions will be provided to departments on February 1, which will include information to assist departments in developing their budget requests for 2021-22. Staff will continue to work with the Budget Ad-Hoc Subcommittee throughout the budget development process to provide interim policy guidance on proposed budget balancing strategies. In addition, a budget development update will be provided to the full Board on April 20 to allow for review and feedback on proposed strategies prior to finalizing the 2021-22 Recommended Budget.