Receive a 2023-24 Budget Development update including proposed strategies to balance the recommended budget. (No general fund impact) (Rinde/Liddicoet) (Est. Time: 10 minutes)

Receive a 2023-24 Budget Development update from the Department of Financial Services including proposed strategies to balance the recommended budget.

The Department of Financial Services (DFS) and County Administrator first updated the Board at the January 24, 2023, meeting on a preliminary assessment of the 2023-24 Budget and adopted the Budget Principles. At that meeting, the Board was briefed on the challenging nature of the budget process. While the County is expecting to see continued growth in discretionary revenues, the impact of cost increases and the uncertain economic outlook are taking a toll. The Board adopted as its top principle to adapt the budget to the revised compensation philosophy and the impacts of inflation to protect core county services.

Under this backdrop, departments submitted their budget requests through the Sherpa budget system at the end of February. As part of the Board of Supervisors Budget Workshops on March 13 and 14, DFS presented revenue projections to the Board, which reflected growth in many areas, but these revenues continue to fall short of the growth in County expenses.

Despite growth of general-purpose revenues of 3.8%, public safety sales tax growth of 4.0%, public safety realignment growth of 2.0%, initial base budget requests exceed revenue projections by $22.8 million. As presented at the Budget Workshops, base budget salary and benefit increases were approximately 7%, and general liability and workers compensation insurances were up 20% and 10%, respectively, outpacing our revenue growth considerably.

It should be noted that the increase in base budget costs is not only due to anticipated increases in expenses. There were several revenue reductions that occurred, including significant declines in Health and Human Services realignment, further described in a separate paragraph below, and sharp reductions in Cannabis taxes reducing the potential to fund previously aided programs. Further, General Fund departments are anticipating sizable reductions in revenues. While this is not a complete list, this shows some of the departments experiencing reductions: 

Financial Services staff are closely examining these revenue declines to ensure they are appropriate estimates or if revenue adjustments are required. Further, where appropriate, staff are exploring what fees may need to be adjusted to increase revenues.

Another factor in the budget is that several programs have been augmented or expanded in the past year and now are transitioned from one-time or non-general funds to need on-going funding. These include expansions to the Climate Sustainability, Diversity Equity and Inclusion, and Agricultural Worker programs.

HHSA is projecting a sizeable increase, approximately $8 million, in its net county cost in the 2023-24 budget, which is further complicating the balancing of the budget. While some of these items may be able to be reduced or deferred, much of the request pertains to mandated services the County must provide to eligible individuals. Due to a combination of rising expenses and revenue reductions in realignment ($3.2 million), HHSA areas such as Social Services Assistance, Core Mental Health, Homeless Services, and Substance Use Disorder, among other HHSA units, have requested sizeable increases in general fund. Some of the key causes include:

In considering solutions to balance the budget, DFS completed a projection and has determined that $12.5 million in additional fund balance will be available at the end of the 2022-23 fiscal year. When added to available general-purpose revenues of $97.5 million, the initial base budget deficit was $13.7 million, prior to funding any contingencies or reserves.

For the past month, DFS and CAO have met with departments to review their budget requests. Through those meetings, staff have been able to reduce base budget requests from $123.6 million to $110.7 million, a reduction of $12.9 million. However, despite these reductions, additional work is required between now and the budget hearing to bring the budget to balance.

This reduction in base budget thus far has been achieved in the following ways:

Due to difficulties in balancing the base budget, staff are proposing minimal contingencies be included with the Recommended budget and potentially deferring contribution to the Reserve until the Adopted budget or unless other sources can be determined to make a reserve contribution. Likewise, almost all department augmentation requests, unless funded by special revenue funds or grants, are being deferred to the Adopted budget process.

Since the last budget update, DFS staff have been asked by Board members about certain focus areas that may be desired to come back to the Board before the budget hearing. This update has been structured as a general update however, staff can dive deeper into budget focus areas at the May 9 Board meeting. The two possible focus areas that have been brought up thus far are as follows:

Looking Forward
County staff have concerns that upcoming regulatory and legislative changes could continue to affect and increase budget challenges over the upcoming year. The State has added a new program for Care Court which will require the County to provide expanded housing and treatment to a target population as well as provide legal services through a new Court process. The County will need to launch this program in late 2024; however, no ongoing state funding has been provided yet to meet this mandate. In addition, the County has significant changes coming July 1 associated with changes to behavioral health billing through the CalAIM program, however the budgetary impacts of these changes are not known and will need to be addressed through the adopted budget. As a result of these and other pressures, staff plan to continue with the core budget principle adopted by the Board in January to focus on adapting the budget to reflect current cost pressures and focus on sustaining core services.

The Department of Financial Services has collaborated with the County Administrator's Office on the preparation of this budget update. Financial Services also reviewed this material with the Budget Ad-hoc Subcommittee on April 14, 2023.