Santa Cruz County
CA

Agenda Item
DOC-2017-184

Consider Mid-Year financial update for fiscal year 2016-17, and conduct a study session on the 2017-18 County Proposed Budget, as outlined in the memorandum of the Auditor-Controller-Treasurer-Tax Collector and County Administrative Officer

Information

Department:County Administrative OfficeSponsors:County Administrative Officer Susan A. Mauriello
Category:RSA - Board LetterFunctions:General Government

Board Letter

MID-YEAR FINANCIAL UPDATE AND BUDGET PROJECTION

 

 

This Mid-Year Financial Update by the Auditor-Controller-Treasurer-Tax Collector and by the Assistant County Administrative Officer represents an overview of the 2016-17 County Budget compared to actual expenditures and provides information which will impact the 2017-18 County Budget. The Update includes highlights from the 2017-18 Governor’s Proposed State Budget, information on possible major policy changes at the Federal level and current economic indicators which reveal many challenges in future years. The County Administrative Office has prepared a study session for the Board allowing Departments with significant changes and challenges to show how those issues could impact their budget and operations.  

 

Highlights of the Governor’s Proposed 2017-18 State Budget

 

Governor Brown released his proposal for the 2017-18 State Budget on January 10, 2017. The Governor’s primary message was positive despite a sharp focus on an inevitable economic recession in the future.  The economy is in its eighth year of expansion, three full years beyond the historical average of five years.  The Governor’s proposal focuses on increasing reserves and on fiscal restraint regarding new, ongoing commitments.  The State budget includes increased funding for education, health care, and state infrastructure, with additional funding dedicated to the State’s Rainy Day Fund and paying down State debt and liabilities.  

 

Significant details of the Governor’s 2017-18 State Budget include:

 

·              Keeping the budget balanced by proposing $3.2 billion in spending reductions to ensure a balanced budget and keep General Fund spending flat compared to 2016-17.

·              Bolstering State reserves, which are at 6 percent of tax revenues.

·              Increasing education funding.

·              Continuing health care expansion under the optional expansion provisions of the Affordable Care Act.

·              Counteracting poverty by increasing the minimum wage to $11 per hour in 2018.

·              Strengthening transportation infrastructure by providing funding for maintenance and repairs of highways, roads and bridges.

·              Combating climate change by providing funding to reduce greenhouse gas emissions.

 

County staff, in concert with their statewide associations, continue to analyze budget impacts and further information will be provided as it becomes available.

 

Planning for the Next Recession

 

The fiscal stability from a balanced State budget and improved economy has been a welcome reprieve from prior years, when short periods of balanced State budgets were often followed by massive budget shortfalls. However, the State is beginning to see a lag in revenue growth, and this year’s revenues are falling short of projections. As a result, the State still plans to increase its Rainy Day Fund while recognizing that it will not eliminate the need for spending reductions in the event of a recession. Saving now allows the State to soften the magnitude and length of any necessary cuts in the future. 

 

2017-18 Economic Outlook

 

As the economy nears full employment, growth has begun to slow in both the nation and California. Jobs were added at a slower pace in 2016 than in 2015, and more people were drawn into the labor force in the nation and in California.  Inflation for the U.S. and California trended higher in 2016 due in part to housing costs, although the inflation rate is still relatively low. Inflation is expected to rise gradually. The US economy grew slowly in 2016, with consumption compensating somewhat for low investment and exports.  Annual real Gross Domestic Product (GDP) growth is expected to be 1.5 percent in 2016 and expected to increase at a moderate pace beginning in 2017.

 

At this slow marginal rate of economic growth, jobs are being added and unemployment rates continue to fall gradually.  Santa Cruz County’s unemployment rate was 6.1 percent in November 2016, down from prior years but still above the State and national average. Locally, various economic indicators are expected to improve, though job growth is expected to be less than 1 percent per year.  Average salaries are expected to rise by 3 percent.  Employment growth is expected to be broad-based, with the largest gains in education and healthcare, leisure and hospitality, and government.  The population is expected to increase by 0.8% per year and real income per capita is forecast to increase 3.0% per year through 2021.

             

2016-17 General Fund Budget Compared to Actual Expenditures

 

FY 2017-18 budget development is underway.  County departments have submitted their estimated FY 2016-17 revenues and expenditures based on actual expenditures to date and estimates for the remainder of the year. These estimates will be updated monthly, and at this time are projected to be slightly better than estimated expenditures.  General Purpose Revenue is above estimates primarily from the increases in taxes. 

 

Assumptions and Risk Factors 

 

The FY 2017-18 budget will be impacted by the following assumptions and risks:

 

·              Continued general revenue growth from property taxes, sales tax, and transient occupancy tax.

·              Continued State and Federal funds to be allocated to the County for mandated programs and services at the current year levels.

·              Allocating any remaining fund balance for financing operations.

·              An additional $4.5 million is needed to bring reserves up to the desired level of 10% by FY 2020-21.

·              Estimated average staff turnover and reduced budgeted salaries and benefits (commonly known as salary savings).

·              Estimated that other increases in cost of doing business.

·              Projected that PERS costs will continue to rise by over 12% by FY2018-19 resulting in increased costs of $5 million.

·              General funds for capital improvements or major infrastructure repairs may not be available.

·              Funds may not be available for replacing aging equipment like voting equipment systems.

·              New local initiatives will be constrained without funding options.

·              Funding needs for road improvements will be significant.  

 

Emerging Issues

We have asked the following departments to provide the Board with a presentation on emerging issues which have the potential to significantly impact future year budgets and operations.  Theses departments are:

·              Public Works

·              Sheriff

·              County Fire

·              Human Services Department

·              Health Services Agency

 

 

 

 

 

 

 

 

 

Looking Ahead and Preparing for the Future

 

New Budget Framework

 

The CAO’s Office is embarking on a new framework for presenting the County Budget in FY 2017-18.   This will include significantly streamlined summary narratives and data for every department, greater graphical presentation of budget information, and more robust electronic delivery of the budget.  A key change includes a focus on departments overall budget, rather than on separate budget units.  The structure of the book will be centered on functional groups such as public safety and health and human services.  Portions of this framework were rolled out to Departments with the December budget instructions and then presented again at the Department Head meeting on February 16, 2017.   As described in the report, there will be greater structure within each Department presentation using twelve core elements.  The goal of this transformation is not only to provide greater depth of information but also greater clarity.  

 

County Strategic Plan 

 

The CAO’s Office will be proposing in the budget a framework, time frame and budget for a County strategic planning initiative in the new fiscal year.  The purpose of strategic planning is to establish a long-term vision for our county and set a course of action through overarching focus areas and specific goals and objectives. This will require assessing the current landscape and trends, engaging internal and external stakeholders, and drafting and adopting a multi-year strategic plan and a shorter-term operational plan which would then inform the development of the county budget.

 

Continuous Process Improvement Initiative

 

The CAO’s Office will be proposing a Continuous Process Improvement initiative in the new fiscal year.  Continuous Process Improvement focuses on involving our employees in the improvement of the delivery of County services.  It is a bottom-up process as opposed to a top down process and has been used by many organizations in the private and public sectors to improve organizational performance and service delivery.  More details on this initiative will be provided in the proposed budget.

 

Conclusion

 

The current year expenditures and revenues will be monitored and the FY 2017-18 Budget requests will be reviewed and refined, and economic indicators will be tracked in order to present a balanced budget to your Board in May.

 

It is, therefore, RECOMMENDED that your Board accept and file the 2016-17 Mid-Year Financial Update and conduct a study session on the 2017-18 County Budget.

 

 

 

 

Discussion