The purpose of this report is to provide the Board of Supervisors an update on the 2018-19 budget development process, and receive Board feedback and direction on proposed budget balancing strategies prior to finalizing the 2018-19 Recommended Budget.
In February, the Board approved the 2018-19 Budget Principles, which serve to guide budget planning and development for the upcoming year (Attachment A). In summary, the Budget Principles establish that the budget shall be developed in accordance with best practices, efforts shall be made to continue increasing the General Reserve, strategies to mitigate the impact of the IHSS cost shift shall be prioritized, and the County’s unfunded pension liability shall continue to be addressed through establishment of a Section 115 Trust.
At the outset of the budget process, all departments were provided with an initial target for net county cost based on estimated labor cost increases and projected general purpose revenues for 2018-19. Each department submitted a requested budget, and in several cases the requests exceeded initial targets. In total, department expenditure requests exceed initial targets by $7.5 million, which is typical at this point in the process due to the inclusion of new funding requests.
Budget Strategies
Budget meetings have been held with each department to review budget requests and, if needed, discuss options for balancing any resulting shortfall. As in prior years, strategies to balance department budgets in most cases involve removing new position requests, new vehicle purchases or replacements, and other capital or equipment expenditures. These requests will be revisited with the 2018-19 Adopted Budget in September, once current-year fund balances and assessed valuation growth are known. Attachment B provides a summary of the deficits resulting from department budget requests, and the potential strategies identified to close the gap. With these strategies in place, the 2018-19 Recommended Budget will be balanced.
However, throughout the department budget meetings, several key themes have emerged that warrant closer consideration.
Pension Cost Increases
As discussed with the Board at the February 20 meeting, annual required PERS contributions are projected to increase significantly over the next five years. For 2018-19, contribution rates are 25.3% for the Miscellaneous plan and 36.0% for the Safety plan, reflecting a 7.8% increase in pension costs over the prior year. These costs are increasing at a faster rate than the County’s general purpose revenues. As a result, budget strategies for 2018-19 include not only removing most new position requests, but in some cases unfunding current vacant positions in order to adequately fund currently filled positions.
In-Home Supportive Services (IHSS) Cost Shift
As part of the IHSS cost shift enacted by the State in 2017, counties are responsible for a new IHSS Maintenance of Effort (MOE) requirement that represents a significant cost increase over the prior MOE. Under the current agreement, the State will make $1.1 billion in General Fund contributions over four years to partially offset the increased IHSS cost. In addition, 1991 realignment growth from Health, Mental Health and CMSP will be redirected to Social Services for several years.
In 2017-18, these funding offsets were sufficient to largely offset the additional cost of the IHSS MOE. For 2018-19, the County’s IHSS obligation is increasing by approximately $2.3 million due to a 5% increase in the MOE and a statewide reduction in State General Fund support from $400 million to $330 million. While it appears that this increased can again be absorbed through increases in Social Services realignment and reductions in other areas, the IHSS cost increases will become significantly more burdensome in future years. In addition, the redirection of realignment growth to offset IHSS costs will reduce funding that would otherwise be available to address needs within Public Health and Mental Health.
Neighborhood Court Justice Assistance Grant (JAG)
For the past several years, the District Attorney’s Neighborhood Court program has been partially funded by a Justice Assistance Grant from the federal government. In 2017-18, this grant contributed approximately $657,000 in funding to the program. However, the solicitation for grant application has not yet been made available for 2018-19, which has raised concern that this funding may be discontinued, possibly as a result of litigation between the State of California and the federal government. Should this grant funding fail to materialize, significant additional budget balancing strategies will need to be identified.
Reserves and Contingencies
The current budget scenario allocates additional funding to maintain the General Reserve at 5.5%. Due to increasing expenditures in both the General Fund and the Public Safety Fund, which increases the calculation base for the General Reserve, an additional $575,000 is required to maintain the current percentage. Should funding be available, additional contributions may be recommended in the Adopted Budget to increase the General Reserve percentage to a more optimal level in accordance with the Budget Principles.
County Policy on Fund Balance and Reserves states that contingency appropriations shall be recommended during the budget process for major funds, usually 1% - 3% of total budgeted expenditures. These funds provide the first line of defense against uncertainty and to cover unanticipated needs that may arise throughout the year. The current budget scenario includes a General Fund contingency of $2.5 million, or approximately 2.2% of General Fund expenditures. In addition, a contingency of $1.5 million has been set aside for Health & Human Services, or approximately 1% of expenditures within the major operating funds. Other contingencies, such as for the Public Safety fund, will be addressed in the Adopted Budget.
Pension & OPEB
The 2018-19 budget scenario continues to make progress in addressing unfunded liabilities. The OPEB rate is maintained at 8% of payroll, which is nearing the full Actuarially Determined Contribution (ADC). Once the next OPEB valuation is completed in the fall of 2018, staff will evaluate the possibility of moving to the full ADC in the 2019-20 budget, well in advance of the 15-year ramp up originally envisioned as part of the pre-funding plan.
The 2018-19 budget also includes funding for the required PERS contributions, as detailed above. In addition to funding the annual required contributions, the current budget scenario includes a 1% supplemental pension charge on payroll for the purpose of funding a Section 115 Pension Trust as recommended in the proposed Pension Funding Policy, which is presented in a separate agenda item. If approved, establishment of a dedicated Pension Trust will allow the County to set aside reserve funds to support future pension payments and possibly reduce the accrued unfunded liability.
Other Considerations
In addition to the issues discussed above, the 2018-19 budget also includes provisions for the following items.
Cannabis
The 2018-19 budget scenario does not currently include any funding from the cannabis tax measure that will appear on the June 5 ballot. Should the tax measure pass, staff will seek Board guidance to develop an expenditure plan for review by the Citizen Oversight Committee, and ultimately Board approval. The Department of Financial Services is currently evaluating additional resources that may be necessary for cannabis tax collection and compliance, and may submit a supplemental funding request depending on the outcome of the ballot measure.
Further complicating this issue is a state ballot measure which, if passed in November, would retroactively change voting requirements for general taxes to a 2/3 majority. If the County’s tax measure were to pass with less than a 2/3 majority, funding could not be allocated until the outcome of the November state ballot measure is known.
Gibson House
In December 2017 the Board received an update on options for the future operation and management of the Gibson House, and directed staff to move forward with an operational partnership between YoloArts and the Yolo County Historical Museum Corporation (YCHM). Under the operational plan, the County would fund a full-time museum curator position for two years, and provide $200,000 toward ADA improvements at the property. These items are included in the 2018-19 budget scenario in order to provide necessary funding July 1 should the Board approve the plans on June 26.
External Funding Requests
Funding requests from external community-based organizations total $401,000 for 2018-19. Attachment C provides a summary of the funding requests, as well as data on the allocations that have been approved in prior years. As previously discussed with the Board, de-allocations from the Ceres Endowment Fund have been lower than expected over the past few years, which has resulted in reduced funding available to the Pomona fund. Under the current scenario, the Pomona fund would receive just $225,000 in 2018-19, resulting in a funding gap of $176,000 for the external funding requests. Staff will be developing a recommendation that would allow for the ongoing needs identified in the funding requests to be funded through department budgets.
At the April 10 Board Governance session, a new approach to funding external organizations was discussed that involved establishing an annual Health & Human Services contingency for allocation by the Board throughout the year. Staff is working to develop policies and procedures for this new approach, with the goal of implementing it in 2019-20.
Capital Improvement Projects
The 2018-19 budget will include funding for ongoing capital projects, including the Monroe and Leinberger jail expansions, remodel of the Library archives building, and historic courthouse re-occupancy. These projects are partially funded with proceeds from CIP bonds issued in July 2017. However, there are additional priority projects on the horizon for which funding still needs to be identified, including the Yolo library, Adult Day Health Center, new animal shelter and purchase of the Gonzales building. Staff continues to evaluate funding options and will present an updated financing plan to the Board as part of the upcoming 2019-2023 Capital Improvement Plan. |