This report provides a preliminary assessment of the upcoming 2018-19 budget, and highlights some of the key factors that will need to be considered as part of the budget development process. Overall, the preliminary outlook for the 2018-19 budget is stable but cautious. The County is expected to see modest growth in major countywide revenues such as property tax, Proposition 172 sales tax, and realignment. Local real estate markets remain strong, and the national economy is entering a record ninth straight year of growth.
However, continued cost pressures are likely to offset the anticipated revenue growth. Required annual PERS contributions continue to increase sharply, and the impact of the In-Home Supportive Services (IHSS) cost shift will continue to increase as temporary state support is phased out. Despite these challenges, it is expected that the 2018-19 budget will continue to make investments toward achieving the 2016-2019 Strategic Plan goals and Priority Focus Areas. A key element of the proposed 2018-19 Budget Principles, included as Attachment A, is that priority shall be given to funding requests that support the Board’s Strategic Plan goals.
Staff recommends that the items discussed below be considered in order to guide the 2018-19 budget process.
State Budget Impacts: While the Governor’s proposed 2018-19 State Budget does not include any significant new impact to county finances, the IHSS cost shift that was enacted as part of the 2017-18 State budget will continue to present fiscal challenges. According to estimates from the California State Association of Counties (CSAC), counties will be responsible for an additional $592 million in IHSS costs in 2017-18. This obligation will increase by 5% in 2018-19, and 7% annually thereafter. To assist in transitioning this cost burden to counties, the State is providing $1.1 billion in General Fund contributions over four years. However, this contribution will decline each year as it is phased out, resulting in higher net cost to counties. Staff is continuing to evaluate the estimated impact of the IHSS cost shift to Yolo County for 2018-19 and future years.
Pension: The CalPERS actuarial valuation report as of June 30, 2016 reflects an aggregate unfunded liability for Yolo County miscellaneous and safety plans of approximately $298 million, an increase of $54 million or approximately 22% over the prior year. This follows a 20% increase in the unfunded liability as reflected in the June 30, 2015 valuation report. These significant increases are being driven by changes in demographic assumptions and the CalPERS Board of Administration’s December 2016 decision to gradually lower the discount rate from 7.50% to 7.0%. The table below shows the projected required contributions over the next five years as a percentage of payroll.
| Fiscal Year |
Misc. Plan |
Safety Plan |
| 2017-18 |
23.1% |
34.0% |
| 2018-19 |
25.3% |
36.0% |
| 2019-20 |
28.0% |
39.4% |
| 2020-21 |
30.4% |
43.1% |
| 2021-22 |
32.4% |
45.3% |
| 2022-23 |
33.9% |
47.2% |
In addition, on February 14 the CalPERS Board of Administration voted to approve a proposal to shorten the amortization period of any gains or losses from 30 to 20 years, which will put further upward pressure on the County’s required contributions, effective in 2019 for the contribution due in 2021.
In December 2016, the Board received a presentation on options to address the unfunded pension liability, including establishment of a dedicated pension reserve or trust. In 2017-18 a funding strategy was implemented to begin prepaying the annual unfunded liability payment to PERS, and directing the resulting savings to the pension reserve. In addition, the 2017-18 Adopted Budget includes a one-time $800,000 contribution to the pension reserve. Staff is currently developing a pension funding policy that will be brought to the Board in March, which will guide future efforts to reduce the unfunded liability.
Labor Costs: Increases in required CalPERS employer contributions and negotiated salary increases are projected to significantly increase labor costs in 2018-19. In addition, progress continues to be made on the OPEB prefunding plan, where rates are approaching the full Actuarially Determined Contribution (ADC). It is anticipated that OPEB rates for 2018-19 will be at least 8% of payroll, with the goal of achieving the full ADC payment within two years. Finally, as mentioned above, a pension funding policy will be brought for Board consideration next month, which may include a proposal to implement a supplemental pension charge to more proactively address the County’s unfunded pension liability. To ensure sufficient budget capacity for this supplemental charge, or an increase in OPEB rates, the budget will include an additional incremental payroll charge for the purpose of addressing unfunded liabilities.
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 (included as Attachment G) 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. Additional contributions approved by the Board in the 2017-18 Adopted Budget increased the General Reserve to 5.5%. Staff recommends that the General Reserve continue to be increased with a target level near the middle of the range specified in County policy in order to adequately protect the County from the impact of a severe recession.
Budget Principles: Staff recommends approval of the 2018-19 Budget Principles, as reflected in Attachment A (strikethrough version included as Attachment B). The Budget Principles, which highlight certain best practices and serve to guide budget planning for the upcoming year, are largely consistent with the 2017-18 Budget Principles. A few of the notable changes in the Principles for the upcoming year include:
- Efforts shall be made to continue increasing the General Reserve to an optimal level, as discussed in the section above;
- Current and future impacts from the IHSS cost shifts shall continue to be evaluated, and strategies for mitigating these impacts shall be prioritized;
- The County's unfunded pension liability shall continue to be addressed through establishment of a Section 115 pension trust and implementation of a pension funding policy;
- Emphasis on aligning budgets with historical spending trending trends;
- Departments shall continue to advance the Yolo Performance results-based accountability (RBA) model through development of program purpose statements and by reporting data for the RBA performance measures developed in 2017-18.
Budget Calendar: The proposed 2018-19 budget development calendar is provided as Attachment C. Key dates for the Board’s consideration are as follows:
Feb. 22: Budget instructions & worksheets provided to departments;
Mar. 20 – May 22: Department annual updates including 2016-17 operational results and 2017-18 goals and initiatives presented to the Board
Mar. 23: Funding requests from Board members and community-based organizations submitted to CAO. See section on Board and community funding requests below.
May 8: Budget development status update to Board
May 22: Board adopts 2018-19 Master Fee updates
Jun. 1: 2018-19 Recommended Budget document released
Jun. 12: Board budget hearing & approval of Recommended Budget
Financial Sustainability: As part of the County’s efforts to achieve long-term fiscal sustainability, staff has developed five-year financial projections for the General Fund and Public Safety Fund, included as Attachment D. These projections indicate that fund balances within the General Fund are expected to remain at healthy levels for the next 2-3 years, but decline significantly by the end of the forecast period. This decline is due primarily to increases in salary and benefits costs, as well as increased General Fund support to other funds including the Public Safety fund. In addition, if various potential or anticipated expenditures are realized, fund balances may turn negative.
It is important to note that the five-year financial projections are not a budget, but rather a tool to analyze potential future conditions based on various assumptions and scenarios. This long term perspective not only helps to illustrate the future impacts of current decisions, but allows staff to anticipate financial challenges and proactively begin to develop solutions. In future years the forecast will be expanded to include other major operating funds, including the Health & Human Services Agency.
Board and Community Funding Requests: During the 2017-18 Recommended Budget hearing, there was extensive discussion by the Board regarding external funding requests, previously known as the Pomona fund allocations. Several Board members expressed the desire to review the process by which funding allocations are determined, and to consider potential improvements to the process.
To address these concerns, staff has worked with the Chair and Vice Chair to develop a proposal that integrates funding requests by Board members and community-based organizations into the County’s established budget process (Attachment E). This proposed framework continues to provide community-based programs the opportunity to request County support while ensuring that all funding requests, whether internal or external, are held to the same standard. If approved, this process will replace the existing external funding request process. Staff recommends that the Board approve the proposed framework, or provide direction to staff on additional changes to the process. A summary of other options considered is provided as Attachment F.
Interim Budget Preparation Guidance: Budget instructions will be provided to departments on February 22, 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 Board Chair and Vice Chair throughout the budget development process to receive interim policy guidance on proposed budget balancing strategies. In addition, a budget development update will be provided to the full Board on May 8 to allow for review and feedback on proposed strategies prior to finalizing the 2018-19 Recommended Budget.
Budget Module: For the past several months, staff has worked diligently with the County’s consultants to implement the Infor budget module, known as Dynamic Enterprise Performance Management or d/EPM. While progress has been made, the system is not yet ready for use in the 2018-19 Recommended Budget. As a result, staff will be using the same Excel-based process as in past year, with the goal of utilizing the new budget module for the 2018-19 Adopted Budget process in August and September. |