The purpose of this report is to provide the Board of Supervisors a midyear update on the 2016-17 budget, and a preliminary forecast and assessment of the 2017-18 budget development process.
2016-17 Midyear Budget Monitoring
As part of the midyear budget monitoring process, year-end revenue and expenditure projections were developed by each department and reviewed by the Department of Financial Services. Overall, most departments are projected to end the year in balance. The sections below provide additional information on departments and program areas that are projecting significant variances or that require careful monitoring. A detailed summary of the midyear projections for each department is provided in Attachment A. A budget resolution is presented in Attachment B to appropriate fee revenues associated with the medical marijuana cultivation program, as further described below.
Community Services: The Community Services department is projecting a $1.5 million surplus in the Road Fund due to the construction phase of the pavement preservation project not starting until the next fiscal year. The Integrated Waste Management division is projecting a $760,336 surplus, primarily due to higher than anticipated revenues as a result of increased disposal tonnage, particularly liquid wastes. Any surplus remaining at year-end will offset the budgeted use of fund balance.
District Attorney: The department is projecting a surplus in most of their divisions, primarily due to vacant positions, prior year revenue being received in the current year, and discontinuing the use of outside labs for DUI testing. However, the department is projecting a $281,535 deficit in the Consumer Fraud/Environmental Protection division due to the timing of settlement revenue payouts. The department intends to use additional fund balance to offset this deficit.
General Services: The department is projecting a deficit of $203,202. Almost all of the deficit is in the Facilities division. Greater administrative charges, unanticipated project related work and a reduction in billable costs are all attributing to the deficit. Working groups have been convened in FY16-17 to find solutions to on-going fiscal issues and additional analysis will be prepared for the 3rd Quarter Monitor.
Health and Human Services Agency: As discussed with the Board during the presentation of the 2016-17 Adopted Budget, the Health & Human Services Agency is operating with a structural deficit, particularly in the Behavioral Health and Social Services division. The budget was balanced largely through a combination of reducing vacant positions, cutting back on contracts and other non-personnel costs, utilizing fund balances, and employing an aggressive 8% vacancy factor. Since that time, Agency staff have worked diligently to identify additional long-term solutions in order to achieve financial sustainability. The sections below highlight the current budget status and the actions being taken by the divisions facing the most significant challenges.
Behavioral Health – The Behavioral Health division is projecting to end the year with a $4.5 million deficit at this time in the core Mental Health budget unit. This overage is primarily due to an unanticipated spike in the need for acute mental health services, including significant increases in hospitalization and Institutions for Mental Diseases (IMD) facility costs. In addition, costs associated with Psychiatrist services have been increasing due to the need to contract for these services and the limited supply of service providers. Finally, the projected revenue was overstated in anticipation of increased ability to bill for more services than in prior years. This mid-year projection more accurately reflects anticipated revenue based on billed services.
To mitigate the impact of acute mental health needs, the department is working to establish an internal crisis management program with the aim of reducing costly or non-reimbursable hospital placements. The department is also working to contract with Psychiatric Health Facilities (PHFs), which will allow for increased federal reimbursement. In addition, improvements in Medi-Cal billing have increased projected revenues above budget estimates. These efforts will not only begin to address the budget deficit in the current year, but are also critical components in achieving long-term fiscal sustainability.
The department will re-evaluate the 2016-17 budget impact in the 3rd Quarter Budget Monitor and if projections continue to show a deficit then additional funding from 1991 and/or 2011 Realignment fund balance may be requested.
Social Services – While the Social Services division is projecting to end the year in balance, the 2016-17 Adopted Budget for DESS relied on approximately $3.5 million in fund balance, primarily due to a deficit in the CalWORKS program. In addition, the budget assumed that the Agency would be able to receive “redistribution” revenues for a number of programs, a process whereby counties that overspend their allocations can request additional funding from counties that have savings. While this process has been successful in generating additional funding in the past, the County was recently informed that redistribution funds would no longer be available for the programs that had budgeted to receive them.
The division has taken a number of actions through the first six months of the year to reduce this deficit, including holding positions vacant, shifting positions to programs that are more fully funded, and identifying contract savings. In addition, the department has postponed a planned remodel of the service center. These actions are anticipated to result in significant budgetary savings in the current year, and to reduce the division’s draw on fund balance. However, additional actions will likely be needed to fully bring the division into long-term structural balance. The projected impact of the actions taken year-to-date as well any additional actions will be more fully detailed in the 3rd Quarter Monitor.
Child Welfare Services - On February 14, the Child Welfare Services Ad-Hoc Subcommittee approved a plan to add two Mental Health Clinicians and two Social Worker Practitioner positions to support the County's Child Welfare program. The Mental Health Clinicians will be funded through Mental Health Services Act (MHSA) funds, while the Social Worker positions will be funded by the County's allocation of State Commercially Sexually Exploited Children (CSEC) program funds. A position resolution to add these positions will be brought to the full Board on March 7.
Marijuana Cultivation: In November 2016 the Board approved a series of regulatory fees designed to recover the cost of administering and enforcing the interim ordinance regulating the cultivation of medical marijuana. Permit applications have started coming in, and departments are incurring staff costs and other expenses associated with application review and program administration. A budget adjustment is now required to appropriate the estimated fee revenues and associated expenses to ensure that all applicable county costs are appropriately allocated to this program and funded by the regulatory fees. Staff recommends approving the budget resolution reflected in Attachment B to increase fee revenues and associated expenses by $2.9 million.
Probation: The department is projecting an overall surplus of $423,047, primarily due to salary savings from vacant positions, a reduction in contracted services due to a lower number of youth placements, and additional unbudgeted Juvenile Justice Crime Prevention growth funds. The department is projected a deficit of $94,117 in the Juvenile Detention Facility due to budgeted revenues not materializing. However, this deficit is currently offset by surpluses in other Public Safety Fund units.
Sheriff: The Sheriff’s Office is currently projecting an overall surplus of $476,618, primarily due to lower-than anticipated expenditures in the Detention unit. A slight deficit of $66,247 is projected in the Patrol unit, which will be offset by the surplus in Detention. A significant change in the current year budget was the elimination of a 5% vacancy factor that was budgeted in 2015-16 but did not materialize. In addition, overtime costs are continuing to trend slightly above budgeted estimates, but are significantly below year-to-date amounts from last fiscal year. Staff will continue to closely monitor the Sheriff's Office budget for any material changes in projected year-end revenues and expenditures.
Public Safety and Realignment Revenue
A 2-month delay exists in sales tax revenue receipts; therefore about five months of data (July thru November) was utilized to project the Public Safety and Realignment Revenues. The synopsis of the revenues is as follows:
- 1991 Realignment: The year-to-date 1991 Realignment revenues are 6% ($595,665) above current estimates. Growth payments received this fiscal year were about 3.5 times the budgeted amount of $144,171. Therefore, we are projecting that we will end the year about 5% ($595,665) over our estimates.
- 2011 Realignment Health and Human Services: The current year-to-date revenues are 6% ($339,664) above budget due to the amount of growth funds ($716,619) received in the first half of the fiscal year. Per our year-to-date revenue trends (excluding growth), we are projecting that this revenue stream will be about 1% ($161,974) below budget at the end of the fiscal year.
- 2011 Realignment Public Safety: The current year-to-date revenues are 2% ($100,770) over budget. We expect to end the year about 1% ($100,770) above budget.
- Public Safety Sales Tax (Proposition 172): To date, our revenues received are 6.1% ($502,770) below budget. On average, our monthly budget has been about 2% higher than our actual receipts. Thus, at this time, we are expecting to end the year about 2% ($477,113) below budget.
Contingencies:
General Fund Contingency: The current balance of General Fund contingency is $1,937,340, as reflected in the table below. It is recommended that the balance remain unallocated at this time to provide an available resources for balancing the 2016-17 budget if necessary. Any amounts that are unspent at year-end will be carried forward to be allocated as part of the 2017-18 budget.
| Contingency Designation |
Original Allocation |
Amount Remaining as of 1/31/17 |
| General |
$2,000,000 |
$1,937,340 |
| Safety & Security |
$ 100,000 |
$ 85,775 |
| IT Innovation |
$ 100,000 |
$ 43,668 |
| Public Safety |
$ 425,000 |
$ 425,000 |
| Total |
$2,625,000 |
$2,491,783 |
Health Contingency: The current balance is $1,504,216, which will carry forward as contingency for the upcoming fiscal year 2017-18 if unspent in the current fiscal year.
2017-18 Preliminary Forecast and Budget Assessment
The preliminary outlook for the 2017-18 budget reflects potentially significant headwinds emerging. While the County is expected to see modest growth in general purpose revenues, overall economic growth remains sluggish, and the risk of a near-term recession or market disruption has increased. In addition, for the first time in several years, the Governor’s proposed 2017-18 State Budget includes a major cost shift to counties, described in greater detail below. This shift, combined with increases in annual PERS contributions and negotiated salary increases, will likely consume any growth in discretionary revenues. Departments have been asked to begin looking at cost saving strategies should expenditure reductions be needed to maintain a balanced budget.
Staff recommends that the following items be considered in order to guide the 2017-18 budget process:
State Budget Impacts: The Governor’s 2017-18 State Budget proposal is anticipated to have a significant impact on county finances as a result of the unwinding of the Coordinated Care Initiative (CCI) and elimination of the In-Home Supportive Services (IHSS) maintenance of effort. These actions would result in a shift of 35 percent of all IHSS costs to counties from the state, including additional state-enacted costs related to minimum wage increases and sick leave pay, as well as overtime pay required by the federal government. The California State Association of Counties (CSAC) estimates the statewide impact of this shift to be $625 million in new county costs in 2017-18 and at least $4.4 billion over the next six years. Initial estimates indicate the 2017-18 impact to Yolo County may be as high as $4 million.
Pension: The CalPERS actuarial valuation report as of June 30, 2015 reflects an aggregate unfunded liability for Yolo County miscellaneous and safety plans of approximately $244 million, an increase of nearly 20% over the prior year. In addition, the recent decision by CalPERS to lower the discount rate from 7.50% to 7.0% over three years will further increase the pension liability in future years. In December 2016, the Board received a presentation on options to begin addressing the pension liability. A priority for the 2017-18 budget will be to establish a pension reserve or trust fund, similar to the approach that was used to address the OPEB liability.
Labor Costs: Increases in required CaPERS employer contribution rates and negotiated salary increases are projected to increase labor costs by approximately $3.9 million. OPEB rates will remain unchanged at 8% of payroll due to a decline in the total OPEB liability as reflected in the recent June 30, 2016 actuarial valuation report, and the County's desire to continue aggressively paying down the unfunded liability.
General Reserve: Over the past several years, the Board has shown fiscal prudence by steadily increasing the General Reserve. The County Policy on Fund Balance and Reserves establishes a target reserve level of 5% to 15% of General Fund expenditures. Beginning in 2016-17, the definition of General Fund was expanded to include the Public Safety Fund in order to more accurately assess the County’s financial risk. With this change, the General Reserve has a current balance of just 5%, the minimum level specified in County policy. Additional contributions to the General Reserve are advisable to further mitigate risk in light of a worsening economic outlook.
Budget Principles: Staff recommends approval of the 2017-18 Budget Principles, as reflected in Attachment C. The Budget Principles serve to highlight some of the best practices that underlie 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 established in County financial policies;
- Solutions to mitigate state budget impacts shall be prioritized before considering new funding requests;
- Strategies to begin addressing the County's unfunded pension liability shall be evaluated and implemented;
- Priority shall be given to new funding requests that support the Board's 2016-2019 Strategic Plan Goals and priority focus areas, or use technology to provide online access to County services and reduce workload.
Budget Calendar: The proposed 2017-18 budget process calendar is provided as Attachment D. Key dates for the Board’s consideration are as follows:
Mar. 24 Budget instructions & worksheets provided to departments
Mar. 7 – May 24 Department annual updates including 2016-17 operational results and 2017-18 goals and initiatives presented to the Board
Apr. 14 External funding requests submitted to CAO
May 9 Budget development status update to Board
Board adopts 2017-18 Master Fee updates
Jun. 2 2017-18 Recommended Budget document released
Jun. 13 Board budget hearing & approval of Recommended Budget
Budget System: The County is still awaiting release of the Infor budget module software. It was previously anticipated that the budget module would be implemented in time for use on the 2017-18 budget. In October, staff participated in an initial system design and discovery session with the Infor consultant, but continued delays in the software release will make implementation for the upcoming budget process infeasible. The 2017-18 budget will again be developed using the interim, spreadsheet-based process that was used in 2016-17.
Interim Budget Preparation Guidance: Budget instructions will be provided to departments on February 24, which will include net county cost targets for each department that take into account the budget and policy issues described above. 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 May 9 to allow for review and feedback on proposed strategies prior to finalizing the 2017-18 Recommended Budget. |