FY 2019-20 Budget Balancing Strategies and Approaches
The foundations of the Budget Balancing Strategies and Approaches are the County’s adopted Budget Goals and Policies, and Board priorities and direction. The Budget Goals and Policies and Board priorities are subject to annual review and approval. The approach is for the Board to provide its priorities and other direction to staff early in the annual budget process so that staff can utilize this direction when developing the Proposed Budget for the coming year. In accordance with the State Budget Act (Government Code 29000-29144), the Board reviews and sets the budget for the upcoming fiscal year during budget hearings in June of each year. Along the way, the Board is provided regular updates regarding the status of the budget.
Different problems require different strategies. One of the overarching objectives of the County’s Budget Balancing Strategies and Approaches is to strike a balance between maintaining fiscal health and continuing to provide programs and services to the County’s many and varied customers. In order to maintain the County’s fiscal health, this balance is important in both times of financial difficulty and financial growth.
This section provides an overview of the County’s Budget Balancing Strategies and Approaches, which outlines some of the budget planning processes that the County employs to maintain its fiscal health while continuing to provide programs and services to County residents. The section is divided into two parts outlining the County’s preferred strategies and approaches in times of (1) financial difficulty and (2) financial recovery and growth.
In Times of Financial Difficulty
When faced with financial difficulty, the County should identify budget balancing strategies that address both short and long-term budget gaps, while also minimizing the impact of budget reductions to the community and employees.
Depending on the financial difficulty being experienced, short and long-term budget balancing strategies may be needed over multiples years. An important consideration in developing and implementing budget balancing strategies is identifying the timeframe for fixing the problem and bringing about structural balance. Utilizing reserves and other short-term budget balancing solutions can soften the impact of reductions to programs and services. However, it is imperative that these short-term solutions be used judiciously in order to maintain the County’s overall fiscal health. Should short term solutions be over-utilized, the magnitude of reductions required later would be amplified.
Following is an outline of the County’s preferred budget balancing strategies and approaches in times of financial difficulty:
Long term budget balancing strategies:
- Priority Driven- One of the starting points of the budget process is to identify Board priorities so staff can craft budget proposals that align with these priorities. The Board’s current priorities are as follows (in order):
- Meet legal obligations, including legal mandates and debt service requirements
- Short-term priorities for FY 2019-20:
- The Stepping Up Initiative and jail medical care
- Affordable housing
- Cannabis code enforcement
- Groundwater sustainability plans
- Economic development activities and plans
- Long-term priorities for FY 2019-20 and beyond:
- Public Safety- defined as:
- County Fire (fund center 140)
- Probation (fund center 139)
- District Attorney (fund center 13201)
- Sheriff-Coroner (fund center 136)
- All Departments Participate- While departments receive different levels of funding due to priorities, departmental revenue sources, and program designs (amongst many other variables); all departments should participate in the closing of a budget gap. More specifically, no department should be exempt from budget reductions.
- Proportional Reductions- Instead of cutting all operations by the same amount across the board, proportional growth and reductions should be taken into consideration. More specifically, staff could pursue reductions by department in relation to the amount of growth during times of financial growth. The rationale is that when in times of financial stability, some departments experience significant growth in expenditures and staffing due to increases in demand and revenues. In times when demand and corresponding revenues have slowed, expenditures should be scaled back accordingly. Conversely, some departments grow very little over time, and as a result they may not be scaled back to the same extent as other departments.
- Detailed Budget Reduction Lists (i.e. cut lists)- The County Administrative Office should require departments to incorporate a prioritized list of resource/expenditure reductions into their annual budget submittals. Reductions with the least impact upon programs and services should be the first in line for reduction per Board approved Budget Policy #19- Reductions. The concept is that departments are the experts in their respective fields and are in the best position to recommend budget reductions in line with the Budget Goals and Policies, Board priorities and direction, and detailed budget instructions. If reductions are necessary, targeted reduction amounts are included as part of the detailed budget instructions provided to departments.
- Mid-Year Budget Reductions- Mid-year reductions may be necessary in any given fiscal year depending upon the fiscal climate or action at other levels of government at any particular point in time. The intent of the mid-year reductions is to help keep the current year budget in balance and to create additional Fund Balance Available (FBA) at year-end for use as a funding source in the subsequent budget year.
- Reduce “Over Match”- Many County administered programs are mandated by the State. Funding provided by the State for these types of programs does not always keep pace with the corresponding expenditures. During times of financial stability, the County may utilize some of its local, discretionary revenue to help offset the difference in order to keep many of these important programs intact. However, the County’s ability to continue to provide this “over match” is limited during times of economic difficulty, and can be scaled back.
- Engage Employees and Employee Associations- Labor costs make up approximately 48% of the total County budget (and approximately 60% of the General Fund budget). As a result, salary and benefit costs have the most significant influence upon expenditures. County staff and negotiators should continue to work with employees and employee associations in order to create opportunities to curtail labor costs. Specifically, the goal is to negotiate labor agreements that are consistent with the Board’s direction that:
- The cost of pension rate increases be shared 50/50 by the County and employees.
- Prevailing wage adjustments should be negotiated, consistent with the County’s Prevailing Wage Ordinance.
- A tiered pension plan be implemented for all new hires. The County has effectively implemented pension reform, which created second and third tier pension plans for all newly hired employees.
Short-term solutions that do not address a long-term structural budget gap:
- Hiring “Chill”- The purpose of a hiring “chill” is two-fold: to save money in the current year so that additional FBA would be available for the subsequent budget year and to allow for attrition with respect to the reduction of positions (i.e. reduce layoffs). It is important to emphasize that reductions should be based upon priorities, not vacant positions. Attrition is a helpful tactic but should not be the driving strategy in reducing costs.
- Reduce General Fund Contingency- Budget Policy #26- Funding of Contingencies and Reserves states that a minimum of 5% of available funds should be placed into General Fund contingencies. A reduction in General Fund contingencies can be utilized in difficult budget years as part of the budget balancing strategies. If this strategy is used, it is recommended that the contingency not be reduced below 3% in any given year as this would impair the County’s ability to deal with unplanned issues and costs that occur mid-year. Additionally, it is important to note that reducing the contingency reduces the amount of FBA by an equal amount for fiscal year-end (unspent contingency is the largest component of FBA), hence deferring a portion of the budget gap to the subsequent year.
- Defer capital improvement and automation projects that require General Fund support- This option saves money in the near-term but if these types of projects are continuously deferred, County facilities and systems may deteriorate and the cost of repairs may increase over time.
- Minimize building maintenance expenditures- Similar to deferring capital improvement and automation projects that require General Fund support, this option saves General Fund in the near-term but over time if maintenance is deferred, County facilities may deteriorate, leading to higher repair costs.
- Reduce or eliminate the General Fund contribution to the Organizational Development program- The Organizational Development program typically receives an annual General Fund contribution to pay for the Learning and Development Center, Citizen’s Opinion Surveys, Employee Opinion Surveys, and departmental organizational assessments and training. In difficult budget years, reserves and designations can be used to fund these operations; however, in the longer term, some or all of these programs may have to be reduced or eliminated if the General Fund contribution were reduced or discontinued.
- Reduce or eliminate the amount of depreciation set aside for Countywide Automation projects- As part of the Countywide Cost Plan, the Auditor-Controller-Treasurer-Tax Collector-Public Administrator’s Office calculates the amount of depreciation associated with automation equipment. The standard practice has been to allocate this money to the Countywide Automation fund center in order to help pay for replacement automation projects. In times of financial difficulty, some or all of this money could be redirected to the General Fund. The impact is that over time, the County may not have sufficient funds to replace outdated or obsolete equipment and systems.
- Reduce or eliminate the amount of depreciation set aside for Building Replacement- As part of the Countywide Cost Plan, the Auditor-Controller-Treasurer-Tax Collector-Public Administrator’s Office calculates the amount of depreciation associated with County owned facilities. The standard practice has been to allocate this money to the Building Replacement fund center in order to help pay for the repair and replacement of County facilities. In times of financial difficulty, some or all of this money could be redirected to the General Fund. The impact is that over time, there may not be sufficient funds to repair or replace County owned facilities.
- Voluntary Time Off (VTO), otherwise known as voluntary furloughs- County employees may take up to 160 hours of VTO in any given year. Individuals that elect to use VTO are not paid, but continue to receive benefits and time and service credits. As a result, VTO helps to defray salary and benefit costs. This option is short-term in nature, given that employees cannot be required to participate in this program (hence the name Voluntary Time Off) and it is not reasonable to expect employees to utilize VTO perpetually.
- Early Retirement- Early retirement programs may be offered on a case-by-case basis. The intent is to reduce the number of layoffs by enticing individuals who are considering retirement to retire sooner rather than later in order to create attrition opportunities. Depending upon the specifics, an early retirement program may or may not provide cost savings. In instances where the program does not provide a cost savings (or is cost neutral), the sole benefit would be to reduce layoffs.
- Use of one-time reserves- The County has set aside money in reserves, some of which is not designated for a specific purpose. This money has been accumulated over a number of years and has historically been used to help pay for unexpected costs or to help fund new projects or programs.
Some of these reserves are available to help address a budget gap. However, since reserves are one-time in nature, the use of reserves to fund ongoing operational expenditures should be limited and not considered to be a long term operational funding source.
Options not included in the budget balancing strategies and approaches:
- Mandatory Time Off (mandatory furloughs)- This approach has not historically been included in the budget balancing strategies because it is challenging to implement, has not been shown to save more money than the voluntary furlough program (VTO), and is short-term in nature.
- Eliminate training- Maintaining a skilled workforce is important for every organization, especially one as labor intensive as the County. This approach has not historically been included in the budget balancing strategies because in times of budget reductions, additional demands are placed upon employees and it is more important than ever to maintain and enhance the performance of the workforce in order to successfully manage an increased workload. While training plans and expenditures may be cut back in times of financial difficulty, they should not be eliminated.
- Revenue (tax) increases- In the past, tax increases such as sales taxes, transient occupancy taxes, business license taxes, and utility users taxes have been discussed but not supported by the Board.
In Times of Financial Recovery and Growth
The goal of the recovery process is to assure that the County remains adaptable to changing conditions and able to regenerate in the face of setbacks. Recovery from financial downturn is a journey that requires leadership, skill, and the ability to strike an appropriate balance in spending priority areas. To ensure long-term fiscal stability, the County carefully evaluates increases to contingencies, reserves, and designations while paying close attention to additional expenditures for programs and employee wages in times of recovery. Continued compliance with the Board-adopted Budget Goals and Policies is crucial to assuring the ongoing fiscal health of the County.
In times of financial recovery and growth, the County aims to strike a balance in the following areas:
- Financial security
- Programs and services
- Salaries and benefits
Following is an outline of the County’s approach:
Budget Policy #14- Funding of Reserves/Contingencies/Designations states that in times when the County has adequate discretionary funds, there should be a balance between the restoration of programs and services and the funding of the reserves, contingencies and designations that have been reduced to balance the budget in prior years. The County aims to maintain healthy reserves, designations, contingencies, and low debt levels in order to allow for future organizational stability and continuity of services. Consideration of financial security includes a review of the following:
- Ratio of total contingencies and reserves to the County’s General Fund operating budget- The County’s goal is to maintain a prudent level of savings that allows the County to plan for future needs and “weather” economic downturns. The industry standard target is to have a 20% reserve/contingency as a percent of the operating budget. Board adopted Budget Policy # 26 - Funding of Contingencies and Reserves requires that the County place a minimum of 5% of available funds in contingencies for the General Fund and place up to 15% of available funds into contingencies or reserves and any additional unrestricted funds into reserves, after departments' operational needs are funded.
- Ratio of General Fund backed annual debt service to the annual General Fund budget- The County’s goal is to keep the ratio below 5%. A ratio under 5% is considered to be favorable by bond rating agencies.
- Credit Ratings- The County’s goal is to maintain a high credit rating. Credit ratings are an objective measure of the County’s ability to pay its financial obligations as well as meet safety and liquidity goals for the County Treasury investment pool.
Programs and Services
This spending area represents expenditures for the services that the County provides to its many and varied customers. Additions to programs and services are based on a thorough evaluation of need and expected results. During the budget preparation process, if a department believes that additional resources are required in order to meet the needs of its customers, a Budget Augmentation Request (BAR) will be submitted to the County Administrative Office as part of the budget process. The BAR provides the Administrative Office with a written proposal for adding resources to a department’s budget. The written proposal must include:
- An explanation of the problem or need that the resources being requested will address, including a description of significant background or important historical information.
- A description of how additional resources will address a high priority service need.
- An analysis of other feasible alternative solutions to the problem with an explanation for why the request represents the best solution to the problem.
- The expected timeline for implementing the request, including major milestones along the way.
- The measurable results that will be achieved through the implementation of the request in terms of efficiency, quality of service, or outcome performance measures.
Board adopted Budget Policy #4- Departmental Goals and Performance Measures requires that requests for resource augmentations must be accompanied by a description of the meaningful, measurable results that will be attained. For new programs, the expected results should include a timeframe for achieving those results. Requests to augment funding for existing programs must include information about actual results the program has achieved to date as well as the intended results of the augmentation. As part of the measurable results, departments should consider the following questions:
- Are program/proposal objectives set forth in quantifiable terms?
- How will services improve and what measures will be used to track and identify the improvement?
- What improvements in cost effectiveness or future cost savings result from the proposal?
- How does the proposal improve customer service and how will this be measured?
BARs that are recommended by the Administrative Office are dependent upon Board priorities, the availability of funding and the anticipated results or outcomes that will be achieved by adding the resources.
Salaries and Benefits
The County takes a strategic approach to managing salary and benefit expense. County staff and negotiators work with employees and employee associations in order to manage salary and benefit expense to make sure that labor agreements are sustainable in the long-term. Employee prevailing wage adjustments are negotiated with the intent to strike a balance between what the County is able to afford, while still providing competitive salary and benefits for employees so that the recruitment and retention of employees is not compromised.