Receive Fiscal Year 2026-27 Budget Development Update and provide feedback and direction on budget outlook and potential balancing options. (No general fund impact) (Haynes/Liddicoet)  (Est. Staff Presentation: 20 min)

At the January 27 Board of Supervisors meeting, the Board directed staff to begin implementing General Fund budget reductions of $15 million annually over the next three years as part of a plan to address the County’s structural deficit. Subsequently, the Board also approved the formation of the Revenue Generation Ad Hoc Subcommittee to immediately begin working with staff to formulate recommendations on revenue enhancement (discussed later in this report). 

Following the January 27 Board meeting, staff released the 2026-27 Budget Instructions to County departments, which included Departmental Budget Reduction Guidelines (Attachment A).  This document provided directions to departments on developing budget reduction options equivalent to 15% of their 2025-26 Adopted Budget Net County Cost (or General Fund allocation).  As discussed during the Board presentation, these reduction targets exceeded the required $15 million reduction with the intention of providing the Board of Supervisors the opportunity to strategically review and identify potential reduction options.  These reduction options were submitted to the DFS along with departmental 2026-27 budget requests, and are currently undergoing internal review.

FY2026-27 General Fund Base Budget Gap
At the January 27 Board meeting, the Board approved the following staff recommendations:

The table below was used in the same presentation to illustrate one possible approach to addressing the County’s structural deficit over the next several fiscal years.
  This scenario included a projected General Fund base budget gap of $26.9 million dollars in the 2026-27 fiscal year (after assuming an available fund balance of $7 million dollars), which was taken from the most recent version of the General Fund Five-Year Forecast.

Departmental budget requests were received by DFS on February 28.  Staff have been analyzing and working closely with departments in reviewing these requests over the past three weeks and have identified the following base budget gap for the 2026-27 fiscal year:
 

FY 2026-27 General Fund Base Budget Gap
General Purpose Revenues	$114,773,683
Estimated General Fund Balance	$7,000,000
Initial Base Budget Requests	($145,279,544)
General Fund Base Budget Gap	($23,505,861)

The submitted General Fund base budget gap is lower than the base budget gap projected in the Five-Year Forecast and structural deficit scenario by $3.4 million. While the base budget gap does closely align with what the forecast estimated, staff have examined the sources of the variance and have identified the following differences:

• Services and Supplies: The Five-Year Forecast assumed growth of 5% on prior year budgeted amounts (FY25/26); however, there was a reduction of 2% ($2.2 million) in anticipated expenditures based on department submitted budgets.
• Salary and Benefits: Submitted budgets for Salary and Benefits were $2.5 million lower than projected in the Five-Year forecast. This appears to be related to an increase in General Fund salaries being transferred out of the General Fund into other funds ($1.2 million) and underfilling of vacant positions with lower-cost classifications since the Adopted Budget process ($1.3 million).
• Transfers to Non-General Fund Units: Transfers to non-General Fund units were higher than the forecast by $1.3 million, partially offsetting the total variance.

Departmental 2026-27 Budget Reductions

Departmental 2026-27 Budget Reductions rendered $21.8 million in submitted General Fund budget reduction options.  Though $15 million in reductions were included in the Board direction and scenario referenced above, reductions in excess of that goal were solicited from departments to ensure the viability of options and to allow the Board flexibility in developing reduction packages.  Staff are still in the process of reviewing these draft reduction options, but can note that they potentially include the following key themes:

• Elimination of vacant positions
• Elimination of filled positions
• Revenue enhancement options
• Reduction of Extra Help budget
• Contract reduction or eliminations
• Increased salary allocations to non-General Fund sources

Staff from both Financial Services and the County Administrator's Office are currently meeting with individual departments to review these draft reduction options to better understand their viability and potential impact. Staff plans to return to the Board in April with more detail on potential reduction options, details of the anticipated impacts of such options, and potential reduction scenarios for Board review and direction.

HHSA Structural Deficit

In addition to the base budget request for General Fund support, the Health and Human Services Agency included a request for an additional $11.7 million in General Fund support to maintain status quo service levels within the department due to structural funding gaps within multiple HHSA programs.  

As HHSA has presented to the Board previously, declining state and federal revenues (such as Title IV-E, CalWORKs Single, Medi-Cal, and CalWORKs Housing Support Program) and expenditures outpacing limited growth in many of the Agency’s Realignment funding streams, have resulted in structural deficits for the 2026-27 fiscal year in multiple HHSA revenue sources including:

• 1991 Public Health Realignment - $1,536,959
• 1991 Mental Health Realignment - $1,040,261
• 2011 Behavioral Health Realignment - $726,554
• Intergovernmental Transfer Funds - $482,324

The January release of the Governor’s proposed budget, in tandem with ongoing federal challenges to multiple HHSA funding streams, has solidified many of the fiscal issues HHSA is currently facing.  The department intends to utilize the last available fund balances in all four of these funding sources in the 2026-27 budget. Further, many of these deficits are projected to continue into future fiscal years, requiring either additional General Fund support or additional non-General Fund reductions within the Agency which will likely reduce current service levels.

In order to mitigate the need for additional General Fund support, HHSA has proposed an additional $9,037,800 in non-General Fund reductions (above and beyond the 15% General Fund reduction target). The proposed non-General Fund reductions put forth by HHSA are similar to those put forth by departments to address the General Fund structural deficit, potentially including reduction of vacant and filled positions, contract reduction and elimination, and changes to ways staff bill and allocate their workloads.  Staff are still reviewing those options for validity and impact, and anticipate returning to the Board in April to provide an update on these proposals.

Base Budget Gap Reexamined  

Given the increased General Fund support that would be needed to maintain current service levels in HHSA, it is beneficial to reexamine the General Fund base budget gap with the additional funding need:
 

FY 2026-27 General Fund Base Budget Gap
General Purpose Revenues	$114,773,683
Fund Balance	$7,000,000
Initial Base Budget Requests	($145,279,544)
HHSA General Fund Backfill	($11,726,686)
General Fund Base Budget Gap	($35,232,547)

This reexamination fundamentally alters the landscape of the challenge in balancing the County’s 2026-27 Recommended Budget. It should be noted that the General Fund Five-Year Forecast that was presented to the Board in January did not assume any General Fund backfill to HHSA as a result of structural deficits, federal policy changes (HR 1 impact to CalFresh to date), or other funding shortfalls. As such, the HHSA funding gaps reflect a new fiscal challenge for the County beyond what was anticipated in the January presentations on the 2026-27 budget outlook.
 

All County departments have participated in the budget development process.