Receive update on the budget outlook for fiscal year 2026-27, review the Five-Year Forecast and provide staff direction. (No general fund impact) (Haynes/Liddicoet) (Est. Staff Presentation: 10 min)

Receive update on the budget outlook for fiscal year 2026-27, review the Five-Year Forecast and provide staff direction.

As discussed throughout the fiscal year 2025-26 budget process, Yolo County is facing a structural budget deficit, whereby ongoing expenditures exceed and are outpacing ongoing revenues.  It was noted that in order to resolve the structural deficit, structural solutions will be required through some combination of reduced expenditures and increased revenues.  In addition, it was recognized that the structural deficit would not be resolved in a single year. The deficit is the result of long-term trends that have compounded over many years, and it will likely take several years to correct.

With these dynamics in mind, staff initiated a two-pronged approach to balancing the County’s budget. The first prong had a more immediate focus on meeting statutory requirements to begin the 2025-26 fiscal year with a balanced budget. The second prong had a longer-term focus on thoughtfully and deliberately addressing the structural deficit.  While the 2025-26 budget did begin to incorporate some structural solutions, the budget was largely balanced through one-time or short-term measures, including use of fund balance, vacancy savings, reserves, and a myriad of other one-time funding sources.

As staff begin to work on the 2026-27 budget, we must now begin to focus on the second part of the two-pronged approach and determine a pathway forward to resolving the County’s structural budget deficit. While it is anticipated that additional one-time solutions will be needed to achieve a balanced budget for 2026-27, it is paramount that the County begin to make meaningful progress toward aligning ongoing revenues and expenditures.  The preliminary budget outlook presentation on January 13 aims to initiate this process by reviewing the County’s Five-Year General Fund Forecast and beginning to discuss potential scenarios for addressing the structural budget deficit.

Five-Year Forecast
The Five-Year Forecast for the General Fund, as presented in Attachment A, has been updated based on the 2025-26 Adopted Budget. The Five-Year Forecast is a projection of General Fund revenues and expenditures based on historical trends and a number of other assumptions. Absent corrective action, the forecast projects a general fund deficit of approximately $27 million in fiscal year 2026- 27, increasing to more than $47 million by 2030-31.  

The Five-Year Forecast includes a series of notable assumptions, related to both future revenues and expenditures.

Revenue Assumptions
The Five-Year Forecast includes baseline assumptions regarding General Purpose and departmental revenue growth over the next five years.  Property Tax is assumed to grow at 4% per year, which is  a slight reduction from the 4.5% growth included in the 2025-26 Adopted Budget but in line with expected trends. The forecast also assumes Sales Tax growth of 3% annually and a 7% annual growth in Redevelopment Agency pass-through funding, consistent with recent trends. Interest rates are assumed to continue to decrease over the forecast period, leading to decreased interest earnings. Charges for services are projected to grow by 3% annually, reflecting continued incremental fee increases to keep pace with rising costs.

In the Public Safety Fund, both 1991 and 2011 Realignment revenues continue to grow, but at a more conservative rate (2% annually) than seen in more recent years (approximately 5%), reflecting initial messaging from the Governor’s Office related to the California State Budget for the same period. Prop. 172 Sales Tax is projected to grow by 3% annually, consistent with the General Fund Sales Tax projection. The forecast also includes the conclusion of current phases of various grant or special state funding, such as Cal-AIM.  Staff acknowledge that many of these grant funding streams may become available again, but as they are not currently awarded, they have been omitted from the forecast.

In addition, the forecast includes an assumption of available fund balances in each of the next five years. While each year of the forecast reflects a projected deficit, it is assumed that solutions will be identified to balance the budget in each year, and some level of natural savings will occur (such as through employee turnover) that will result in a modest level of fund balance for the subsequent year.

Expenditure Assumptions   
The Five-Year forecast assumes that all positions funded in the 2025-26 Adopted Budget continue to be funded in future fiscal years; however, it does not include any assumptions regarding salary or vacancy saving factors.  An assumption of 4.5% average salary growth has been included in addition to 5% growth in employee health benefits. Pension rates were updated based on the most recent actuarial valuation report and reflect a small reduction from what was previously anticipated.  The forecast assumes a 4% increase in General Fund support to the Health and Human Services Agency, but does not assume any General Fund cost shift or backfill to HHSA or other departments resulting from federal policy changes or cost sharing associated with HR 1. Staff acknowledge that given the volatility of federal funding this may be a conservative assumption.  

Based on prior Board action, staff have preemptively removed the 2.5% Pension Supplemental charge from the forecast, as this expense was removed from both the 2024-25 and 2025-26 budgets as a balancing solution and is unlikely to be reinstituted in the near future. Further, the baseline forecast does not include any funding for contingencies or contributions to the General Reserve.  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.

Addressing the Structural Budget Deficit
As mentioned above, the County’s structural budget deficit can only be resolved through some combination of revenue increases and expenditure reductions. Based on the General Fund Forecast discussed above, the County will need to identify $47 million in combined revenue increases and expenditure reductions over the next five years in order to close the structural imbalance.

On November 18, 2025, following several discussions with the Budget Ad Hoc Subcommittee, staff presented a preliminary listing of potential revenue options to the Board.  That listing of revenue options is provided as Attachment B.  While the presentation in November was intended to be just the initial revenue discussion, the Board is encouraged to again consider the various revenue options in light of the deficits the County is facing.  Whatever portion of the structural deficit that cannot be resolved through new revenues will need to be solved through expenditure reductions. It should also be noted that given the magnitude of the projected deficits, even a combination of multiple new revenue sources will likely be insufficient to balance the budget. 

As noted previously, many of the revenue options require voter approval and thus cannot be implemented immediately. As a result, expenditure reductions will be required in 2026-27 in order to make progress toward addressing the structural deficit. The magnitude of the reductions will depend on the assumptions of future revenue increases and how aggressive the Board wishes to be in resolving the structural deficit.  Ultimately, staff are seeking feedback from the Board on these two points to guide the budget development process for 2026-27.

Next Steps
Staff will return to the Board on January 27 to continue the discussion on the County’s structural budget deficit, and to seek approval of the 2026-27 Budget Principles.  Any feedback provided by the Board on January 13 will be incorporated into the draft Budget Principles to be considered on January 27.  To the extent possible, at that time staff will also be seeking direction on the magnitude of budget reductions that the Board feels are necessary in 2026-27 to begin addressing the structural budget deficit.

The Department of Financial Services has worked closely with the County Administrator's Office, Board Budget Ad Hoc, and Structural Deficit Department Head Working Group on issues related to the 2026-27 Budget and County's structural deficit.