Receive preliminary assessment of the 2025-26 budget and approve the 2025-26 Budget Principles and Budget Development Calendar. (No general fund impact) (Haynes/Liddicoet) (Est. Time: 10 min)

Staff provided a preliminary outlook of the County’s fiscal and budgetary conditions at the January 14, 2025, Board meeting. This report builds on information previously provided and highlights some of the key factors that will need to be considered as part of the 2025-26 budget development process.  

As shared on January 14, the 2025-26 budget process is projected to be very challenging.  One of the contributing factors to the challenging budget outlook comes from property tax, which is the County’s largest source of discretionary revenue.  Aggressive actions by the Federal Reserve to control inflation have caused mortgage rates to increase dramatically, resulting in declines in both housing sales and prices. As a result, growth in property tax revenues has slowed over recent fiscal years, and is projected to continue to slow in 2025-26:
 

2021-22 Actual	22-23 Actual	2023-24 Actual	2024-25 Actual	2025-26 Estimated
4.45%	7.06%	6.80%	5.00%	4.00%

While revenue growth is projected to be moderate, labor cost pressures continue to increase significantly. Phased-in equity increases, as negotiated with three bargaining units including the General Unit, will continue to be implemented in the coming fiscal year.  Labor negotiations for several small bargaining units are scheduled to begin this year, and while the results of those negotiations are currently unknown, staff anticipates similar equity increases in those units in order to maintain 100% of market. Furthermore, required CalPERS contributions continue to be at historically high levels, and the county continues to experience increased costs of supplies, materials and capital assets.  

In addition to the factors described above, staff recommend that the items discussed below be considered as part of the 2025-26 budget process.

Pension:  Following an increase in required CalPERS contributions for both the Miscellaneous and Safety plans in 2024-25, a small net increase in contributions will be incurred in 2025-26. The contribution for Safety plan is increasing approximately 0.91%, while Miscellaneous is decreasing 0.45%. As a budget balancing solution in 2024-25, the County’s discretionary supplemental pension charge was paused; however, preliminary budget projections for 2025-26 reflect reinstatement of the supplemental charge at 2.25% pending further budgetary decisions.

Required CalPERS Employer Contributions

Plan	2024-25	2025-26	Change
Miscellaneous	33.67%	33.22%	-0.45%
Safety	50.00%	50.91%	0.91%

Total Pension Charge w/Supplemental

Plan	2024-25	2025-26	Change
Miscellaneous	35.92%	35.47%	-0.45%
Safety	52.25%	53.16%	0.91%

It should also be noted that the increase in required contribution rates is expected to continue over the next several fiscal years. In fiscal year 2023-24 the pension system achieved a net investment return of 9.3%, which exceeds the long-term expected rate of return of 6.8%. However, in accordance with the CalPERS Funding Risk Mitigation Policy, the high rate of return in 2023-24 may result in a reduction to the assumed rate of return, which will result in higher member contributions in future years.

OPEB: The Other Post-Employment Benefits (OPEB) rate for 2025-26 will be 6.9% of payroll, the same amount it was in 2024-25. In accordance with the County’s OPEB Policy, an actuarial valuation study was completed as of June 30, 2022. Per policy, this study shall be performed at minimum every two years in order to determine the actuarial accrued liability, the actuarially determined contribution (ADC) and to measure progress of funding status. The report for June 30, 2024, has not yet been finalized.

General Reserve: The County policy on Fund Balance and Reserves establishes a General Reserve target of 10%. The 2024-25 Adopted Budget included a contribution of approximately $1.48 million, maintaining the reserve balance at 8.5%. The County should strive to continue making contributions to the General Reserve to meet the policy target of 10%.

Insurance Premiums: Over the past several years, insurance premiums for Worker’s Compensation and General Liability insurance have gone up significantly, reflecting an average increase of 18% over the last three years. While premiums for 2025-26 are not yet available from YCPARMIA, staff anticipate another significant increase for the upcoming year.

State and Federal Impacts: The Governor’s proposed 2025-2026 budget proposes spending of $322.2 billion, consisting of $228.9 billion from the General Fund, $86.8 billion from special funds, and $6.5 billion from bond funds. Staff have identified the following issues as being pertinent to the County:

• The Governor proposes an allocation of $2.7 billion of the $10 billion bond approved by voters in November, about 20-30% from each of the eight major categories. Some specific proposals include:
  • $183.2 million for water quality and safe drinking water.
  • $173.5 million to improve water storage, replenish groundwater, improve conditions in streams and rivers, and various water resilience projects.
  • $173.1 million for flood control projects.
  • $153.4 million for water reuse and recycling projects.
  • $100.5 million for extreme heat projects, including urban greening, fairground upgrades to enhance emergency preparedness capabilities, and extreme heat and community resilience programs.
  • $93.4 million for climate smart agriculture investments.
  • $190 million to create new parks and improve existing parks.
  • $285.7 million for various wildfire and forest resilience programs, including reducing fuels, forest collaborative projects, local fire prevention grants, and home hardening and defensible space activities. (Outside of bond funds, the January Budget also maintains funding for CAL FIRE’s infrastructure projects, including a new training center necessary for the implementation of the 66-hour work week.)
• The budget proposals include implementation of the CalWORKs Work and Family Well-Being Pilot, which will test alternative performance measures intended to measure successful program outcomes more holistically.
• CalWORKs grants are projected to increase 0.2% in October 2025, in addition to the 0.3% increase in October 2024
• $94.5 million to reimburse local governments for costs incurred to implement state-mandated programs in 2025-26
• The budget does not identify any specific funding related to implementation of Prop 36 at this time.

Of particular note regarding the Governor’s proposed budget is that it was released as the State continues to battle wildfires in Southern California.  CSAC cites estimates that the damage caused by these wildfires will yield the highest amount of insured losses in the nation’s history, estimating the insurance losses at over $20 billion.  This does not include estimated costs for “emergency response, clean-up, and reconstruction or lost property tax revenue for local governments.”  CSAC warns that “the fiscal fallout of this catastrophe will create intense pressure on California’s already struggling insurance market.”  While the Federal government has authorized 100% coverage of California’s fire management and debris removal costs for 180 days, the likelihood of the next administration continuing this coverage is unknown. As such, the state’s fiscal future will be “further complicated by the rippling effects of bureaucratic actions.”

Budget Principles: Staff recommends approval of the 2025-26 Budget Principles, as reflected in Attachment A. The Budget Principles serve to highlight and reinforce best practices and to guide the budget development process for the upcoming year.  A few notable provisions from the 2025-26 Budget Principles include:

• The budget shall be developed in accordance with best practices and principles as established in County financial policies while reflecting an organizational commitment to achieving a structurally balanced budget.
• The budget shall seek to strengthen financial sustainability by continuing to fund liabilities  and considering the long-term impact of policy and funding decisions.
• The budget will seek out all opportunities for ongoing revenue enhancements, long-term cost savings, and consider all options to minimize program reductions and service impacts.

Budget Timeline: The proposed 2025-26 budget calendar is provided as Attachment B. Key dates in the budget process include:

               Jan. 29                 Budget instructions released to department

               Mar.  11               Budget Development Update to Board

               Apr. 29                 Budget Development Update to Board

               Jun. 2                   2025-26 Recommended Budget Book and Staff Report released

               Jun. 10                 2025-26 Recommended Budget Hearing

The Department of Financial Services has worked closely with the County Administrator's Office in developing the 2025-26 Budget Principles and Budget Development calendar.  These items were discussed with the Budget Ad-Hoc Subcommittee on January 14, 2025.