The County has maintained a Fund Balances and Reserves Policy since at least 2014 and this was a critical component of the long-term financial plan developed in 2011. The Fund Balances and Reserves Policy defines the County's reserve targets and criteria for the General Reserve, Enterprise Funds, as well as several other special reserves. The policy requires that each specific or special reserve have the following reserve elements: (1) Background/Authority, (2) Purpose, (3) Target Balance, (4) Funding Plan, (5) Timing of Drawdown, (6) Authorization to Drawdown, and (7) Replenishment plan.
The County Health & Human Services Agency (HHSA) has had a goal in order to adopt specific reserves for the agency and this concept goes back to the integration of the agency around 2015. The goal is also included in the 2020-21 fiscal year as follows: Build Financial Strength: Program Revenues are maximized and financial performance is effectively managed. Thus, the proposed amendments to the Reserve policy are intended to formalize reserves that either already exist by law or that have been contemplated for some time and are prudent in light of experience this last year as part of the pandemic. While the County is still in the midst of the pandemic, it is important as the County exits the pandemic-induced recession to set reserve targets that help to provide service continuity and sustain services for times in the future where there are significant economic shocks. These shocks to Health and Human Services Agency revenues (such as in the last year) may be timed at the same time that the General Fund experiences a downturn and, in addition, the relative size of the agency to the General Fund makes it difficult for the General Fund to provide substantial additional investment while managing its own financial challenges. Thus, the three proposed reserves are as follows:
- MHSA Reserve - The Mental Health Services Act (MHSA) allows for Counties to have a prudent reserve. By law that prudent reserve can be between 5 - 33% of the past five-year allocation of Community Support Services (CSS) funds. The County has had a prudent reserve, however, this formalizes policy related to the prudent reserve. This was also included as a part of the HHSA's recent update to the MHSA 3-year plan. The prudent reserve is predominantly intended to support continuing programs in times of a substantial decline in revenue. This revenue source for MHSA is received based on a 1% income tax at the state level on those with earnings over $1 million. The tax is then apportioned to Counties by the state. As a result, this revenue source is closely linked to the economic success of a small wealthy group of citizens in California and thus can be volatile. Thus the prudent reserve is needed to sustain essential community services during periods of substantial revenue decline. The reserve target would be 10% (comparable to General reserve) with a maximum of 33% allowed by law.
- HHSA 1991 & 2011 Realignment - The state has performed two realignments of services to Counties twenty years apart. These realignments give the County the obligation to provide critical Health and Human Services and provided a sales tax and vehicle license fee revenue source to provide these services. These services include but are not limited to Mental Health, Public Health, and Social Services (including In-Home Supportive Services, Foster Care, Adoptions, Temporary Assistance of Needy Families, etc.). Typically, demand for these services increases during recessions while the fiscal structure of being reliant primarily on sales taxes results in a decrease in County revenues to be able to sustain these critical services. Going into the Coronavirus-induced pandemic, the County had little fund balance and reserves in many of these funds due to years of cost pressures in these funds. The policy sets a target reserve of 10% (similar to general fund reserve) with a maximum of 33%. This initial reserve target is expected to take several years to achieve. At one point in this past recession, State estimates of sales tax declines were as high as 26% showing the volatility. The County has been fortunate that state level realignment backfill and CARES funding at the Federal level has mitigated large reductions in these services during the pandemic, but it is appropriate to begin building reserves slowly coming out of the recession.
- Intergovernmental Transfer Funds - The IGT fund is derived from reimbursement from MediCal related costs and then is utilized to provide services that benefit the MediCal population. The fund already has a reserve policy separately approved by the Budget Ad-Hoc committee, however, it does not appear to have made it to the full board. That policy set a target of 10% in line with the General Reserve. Thus, HHSA desired to formalize that policy as part of the Fund Balances and Reserves policy but to further accumulate funds. The reason was that the IGT funds in the past year were used as a critical reserve buffer in the COVID-19 related pandemic and all available funds were appropriated to support a variety of critical programs and operations of HHSA including increased Foster Care costs, IHSS costs, and Mental Health Services, amongst others. This dependency for critical operations means that it should develop a reserve on parity with other funds for critical operations. The reserve target is again set at 10% (similar to General Fund) with a maximum of 33%.
Reserve balances will be updated annually per the policy and would be developed during the Annual Budget development process. The reserve targets included are large and like the general fund reserve would require several years of disciplined savings to achieve, however, should the Board adopt the amended policy, this would provide the framework for HHSA to move toward that objective. As with the general fund, accumulation of reserves are balanced against program needs. |