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The Department of Financial Services, in coordination with the County Administrator’s Office, has begun work on the 2025-26 budget development process. This report provides a preliminary assessment of the County’s fiscal condition and budgetary outlook as we move into the next fiscal year.

On several occasions throughout the 2024-25 budget process, staff informed the Board that the 2025-26 budget was expected to be very challenging, as cost pressures continue to outpace revenue growth. As staff have begun to analyze revenue and expenditure trends leading into the 2025-26 fiscal year, that assessment continues to hold true.

Budget Indicators
There are a number of indicators that highlight the increasing budgetary strain over the past several years, as illustrated in Attachment A.  First, as reflected in Figure 1, the initial base budget gap has increased steadily in each of the past three years. The initial base budget gap reflects the difference between projected revenues and baseline expenditures that reflect status quo operations (i.e. not including new positions, programs, or services). Staff expect that the initial base budget gap in 2025-26 will again increase from the prior year.

Second, as illustrated in Figure 2, over the past several years the County has increasingly relied on salary savings in order to balance the budget. While much of this salary savings has been made possible by the County’s abnormally high vacancy rate since the COVID-19 pandemic, the practice of balancing the budget on such high salary savings is not sustainable. Furthermore, the increasing use of salary savings has begun to erode the County’s fund balance, which peaked in 2023-24.

Finally, over the past several years, the County has balanced the recommended budget with an increasing amount of fund balance. This is significant because the recommended budget does not include many one-time expenditures, which means that ongoing operating costs have been increasingly funded with abnormally high fund balances. As mentioned above, this is problematic because fund balances have peaked and are projected to decline in coming years. In 2024-25, actual fund balances did not meet the projection included in the recommended budget, so additional balancing actions were necessary in the adopted budget.

Five-Year Forecast
As another indicator of the County’s fiscal condition, staff have updated the Five-Year Forecast for the General Fund, as presented in Attachment B. The Five-Year Forecast is a projection of General Fund trends based on actual revenues and expenditures and is based on a number of assumptions.  Based on these assumptions, and absent corrective action, the forecast projects a general fund deficit of between $8 million - $15 million in fiscal year 2025-26, with increasing deficits in future years. This projected deficit is consistent with prior versions of the Five-Year Forecast; however, high vacancy rates and the influx of Federal COVID-19 emergency response funding in recent years delayed the impact for several years longer than originally forecast.

It should be noted that the Five-Year Forecast is considered to be “fully loaded,” meaning that it assumes continuation of current policies and budgetary trends. For example, the forecast includes contingency appropriations, contributions to the General Reserve, and continuation of the supplemental pension charge. Staff recognize that in a deficit environment it is likely that the County will suspend or reduce the funding that is allocated for these purposes; however, even if some of those factors were removed from the forecast, significant deficits are still projected.

A notable aspect about the projected deficits is that they are not the result of an anticipated economic recession or temporary declines in general purpose revenues. If that were the case, the County could leverage one-time or short-term measures to bridge the gap until revenues caught back up. Rather, the projected deficits are due to a long-term trend of expenditures growing at a faster pace than revenues. Much of this is due to increases in salary and benefits costs, including pension, OPEB, and employee salaries. Other factors, such as insurance costs and general inflationary cost increases, have also contributed.  This has resulted in what is known as a structural budget deficit, where expenditures are fundamentally on a higher trajectory than available revenues. As such, long-term, structural solutions will be required to resolve this imbalance.

Next Steps
Staff will return to the Board on January 28th for approval of the 2025-26 budget development calendar and budget principles, followed by the Board’s budget workshop in early March. Given the challenging fiscal environment in the upcoming year, it is anticipated that the format of the budget workshop may be different than in prior years. Various options are currently being considered and will be vetted with the Board Chair and Vice Chair.

In addition, the Department of Financial Services and County Administrator’s Office have communicated with all department heads the seriousness of the County’s fiscal situation and have begun a budget reduction exercise in which all departments have been asked to identify potential options to reduce their net county cost by 7%. It should be noted that the purpose of this exercise is to begin developing and evaluating options should they be necessary; no specific department reductions or budget strategies have been implemented or assumed at this point.

Finally, it is important to recognize that the County’s structural budget deficit will not be resolved in a single year. It is the result of long-term trends that have compounded over many years, and thus will likely take several years to correct.  Attachment C is a draft document that begins to set out a roadmap for addressing the County’s structural budget deficit. While this is anticipated to be a living document, a few of the notable elements include the following:

• Organizational commitment to achieving a structurally balanced budget
• Immediate implementation of a hiring freeze or review
• Continue to identify one-time solutions to minimize program reductions and service impacts
• Evaluate options for long-term cost savings
• Evaluate options for ongoing revenue enhancements

In conclusion, Yolo County is facing significant fiscal challenges over the next several years. However, staff are committed to working collaboratively with County departments and the Board of Supervisors to ensure that the County achieves financial sustainability while continuing to provide critical programs and services to the community.