Receive preliminary assessment of the 2023-24 budget and approve the 2023-24 Budget Principles and Budget Development Calendar. (No general fund impact) (Rinde/Liddicoet)

This report provides a preliminary assessment of the 2023-24 budget, and highlights some of the key factors that will need to be considered as part of the budget development process.  Overall, 2023-24 is projected to be a challenging budget season.  While the County is expected to see continued growth in discretionary revenues, the impact of interest rate increases and an uncertain economic outlook are beginning to take a toll.

This is particularly evident in 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 widespread declines in both housing sales and prices. As a result, growth in property tax revenues is projected to slow considerably, following years of robust growth.

In contrast with the modest projected growth in revenue, cost pressures have increased significantly. The shift in compensation philosophy to 100% of market, which was approved by the Board in December 2022, will result in a 5% salary increase for most classifications beginning January 1, 2023, in addition to the regular cost of living adjustments. It is estimated that these increases will result in a $16.5 million increase in cost across all funding sources. In addition, persistent high inflation has increased the cost 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 2023-24 budget process.

Pension: For the first time in years, required CalPERS contributions for both the Miscellaneous and Safety plans will be declining in 2023-24, due primarily to unusually strong investment returns in fiscal year 2020-21 (21.3% net return on investments compared to an assumed 7.0% long-term rate of return). This investment performance served to reduce contributions for member agencies in 2023-24. In accordance with the County’s Pension Funding Policy, the County’s discretionary supplemental pension charge will increase from 1.75% to 2.0%, which will result in a small increase in total pension charges for the Miscellaneous plan, as reflected below.

It should also be noted that the decline in required contribution rates is not expected to continue. In fiscal year 2021-22, the pension system experienced a net investment return of negative 6.1%, which will result in increasing employer contributions in future years.

OPEB: The Other Post Employment Benefits (OPEB) rate for 2023-24 will be 7.7% of payroll, unchanged from 2022-23. In accordance with the County’s OPEB Policy, an actuarial valuation 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. An updated actuarial valuation study as of June 30, 2022 is currently in progress but will likely not be completed in time for the 2023-24 budget process. However, staff do not anticipate significant changes in the ADC.

General Reserve:  The County policy on Fund Balance and Reserves establishes a General Reserve target of 10%. The 2022-23 Adopted Budget included a contribution of approximately $3 million, bringing the reserve balance to 8%. 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 20.1% over the last three years. While premiums for 2023-24 are not yet available from YCPARMIA, staff anticipate another significant increase for the upcoming year.

State and Federal Impacts: The Governor’s proposed 2023-2024 budget projects a $22.5 billion deficit, which is largely closed with spending delays, clawbacks, fund transfers, and borrowing. While this is a marked departure from the budget surpluses that have been seen over the past several years, the Governor’s proposed budget aims to protect investments that have been made in prior years. A few noteworthy items include:

In addition to funding opportunities from the state, the County continues to implement the ARP expenditure plan, first approved the Board in September 2021. Additional federal funding opportunities are available through the Infrastructure Investment & Jobs Act and the Inflation Reduction Act of 2022.

 

Budget Principles: Staff recommends approval of the 2023-24 Budget Principle, 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 2023-24 Budget Principles include:

Budget Timeline: The proposed 2023-24 budget calendar is provided as Attachment B. Key dates in the budget process include:

                Jan. 27                   Budget instructions released to department

                Mar. 13/14             Board Budget Workshop

                Apr. 18                  Budget Development Update to Board

                Jun. 1                     2023-24 Recommended Budget Book and Staff Report released

                Jun. 13                  2023-24 Recommended Budget Hearing

The Department of Financial Services has worked closely with the County Administrator's Office in developing the 2023-24 budget principles and budget development calendar. These items were discussed with the Budget Ad-Hoc Subcommittee on January 19, 2023.

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