Financial Summary

The $1.126 billion Proposed Budget includes a balanced $754.2 million General Fund that prioritizes sustaining existing commitments and capacity, with no General Fund capital, and modest growth only where it could be financed by new revenue sources.

Despite a balanced budget, we face immediate and future challenges. These include financing up to $85 million in new debt to backfill cash spent on 2023 storm disasters and 2020 fire disaster costs, while the County waits for Federal reimbursement, and absorbing the subsequent 30-year annual debt services costs.

This budget continues the strong and prudent financial practices that have allowed the County to achieve our AAA bond rating including maintaining reserves at a 10.5% funded level. The General Fund reserve of $79.4 million is insufficient to respond to increasingly frequent climate natural disasters.

The County’s budget has been constrained by the $144 million in unreimbursed natural disaster costs, which has limited our ability to address new and emerging challenges and requires us to borrow an estimated $85 million to assure the continuity of services to the community. This would be the County’s largest ever capital project debt issuance.  Unfortunately, it will be used to finance a reduced scope of projects that would repair only a portion of the County’s damaged infrastructure.

Following are the notable operational and financial changes included in the Proposed 2024-25 Budget that would:

• Implement strategies to support the local rollout of CalAIM (California’s transformation of the Medi-Cal system) to provide help to individuals with behavioral health issues including substance use disorders.
• Support services and related staffing at the new South County Government Center at 500 Westridge Drive in Watsonville.
• Transition General Services from a General Fund department to an Internal Service Fund, and transfer the Capital Projects and Real Property teams from Community Development and Infrastructure to General Services.
• Reduce County staffing by a net 34.10 full-time equivalent (FTE) s or a 1.2% decrease. This includes:
  • Reducing Health Services Agency (HSA) staffing by a net 42.35 FTE positions due to reduction in COVID-19 pandemic funding;
  • Converting 3.0 FTE positions in the Public Defender Office from contractors to employees, which will generate revenue from Medi-Cal Administrative Activities (MAA) claiming;
  • Adding 1.0 FTE position in Parks, Open Space, and Cultural Services for Rail Trail support and 2.0 FTE positions in Sheriff-Coroner for the DNA Lab, with all three positions supported by dedicated funding;
  • Funding 1.0 FTE position in the Assessor-Recorder for Proposition 19 for appraisals, which will generate General Fund revenue; and
  • Adding 1.0 FTE position in General Services to support the transfer of the Capital Projects and Real Property teams).
• Reduce the General Fund 1% contingency from $7.54 million to $1.5 million.
• Exclude any new Measure K sales tax revenue until election results are certified and the July 1, 2024, start date is confirmed.
• Unfund any new capital projects requiring General Fund contributions.

Additional discussion of budget changes is included in the Proposed 2024-25 Budget under each department “Budget Summary of Changes” and discussed further under each departments services section for operating and expense changes, for revenue and funding changes, and for personnel and staffing changes.

As shown in Table 1, total County Proposed 2024-25 Budget for expenditures decreased by $161.4 million from the 2023-24 Adopted Budget.

 

The largest changes in the Proposed 2024-25 Budget from the 2023-24 Adopted Budget are:

• $74.1 million reduction in current year General Fund Capital Projects, which are currently zero for 2024-25.
• $28.7 million reduction from regular Road Projects (currently $61.3 million).
• $23.5 million reduction for 2017 storms disasters (currently $32.7 million).
• $13.6 million reduction for 2023 storms disasters (currently $27.9 million). Note that additional 2023-24 appropriations for the 2023 storms will be required and presented to the Board on May 14, 2024.

The 2023-24 general capital, road and natural disaster projects that are not completed by June 30, 2024, would be carried over into the final 2024-25 Budget that will be presented for adoption on September 24, 2024.

Table 2 provides similar information by department and includes the proposed positions to add or fund. Additional detail is available in each department’s budget page.

 

As noted earlier, and as a sign of the changing State funding model for County Services and Pandemic support, the Health Services Agency includes a net reduction of 42.35 FTE positions of which 36.80 FTE positions are in Public Health and largely related to the end of COVID-19 funding. Also included above is the transfer of 10.0 FTE positions from Community Development and Infrastructure Public Works Division to General Services for the Real Property and Capital Projects teams.

Table 3 illustrates the net contribution required from each fund type (or the amount revenues are below total expenditures).

 

Total fund contributions for the Proposed 2024-25 budget represents the amount that the maximum budget authority exceeds available revenues and would be funded from prior year fund balances. The Proposed 2024-25 amount of $73.5 million is equivalent to the $73.9 million included in the 2023-24 Adopted Budget.

Excluding the General Fund, the budget would require fund contributions of $67.3 million largely to continue multi-year capital projects whose funding has already been received (like Public Works Internal Service or Special District fund projects) or to budget for various types of liabilities and claims (such as Risk Internal Service Fund claims) that may take years to be realized.

As shown above in Table 3, the budget would allow for $6.25 million of previous year’s General Fund carry-over fund balance to be used if the maximum budget authority was consumed. The $21.6 million decrease in contributions is the result of one-time 2023-24 expenditures of $5 million for General Fund Capital Projects (none proposed in 2024-25), $1.15 million loan to the Road Fund for initial 2023 storms disasters, and an advance payment of $8.8 million to the Property and Liability Funds to fund claims exposures.

As shown in Table 4, the General Fund’s Proposed 2024-25 Budget revenues would increase by $9.5 million. The single largest change is an increase of $8.4 million in higher interest earnings within the County’s investment portfolio. The General Fund expenditures will increase by $12.1 million from the 2023-24 Adopted Budget, largely from the $9.8 million in salary and benefits.

The General Fund budget is largely an operational status quo budget. The biggest operational impacts are the reduction of Public Health salary and benefit costs as COVID-19 funding ends. The budget includes the expansion of the General Services Internal Service Fund to support new facility operations such as the new South County Government Center and to receive the Capital Projects and Real Property teams from the Community Development and Infrastructure Public Work’s Division.

There are several financing impacts facing the General Fund, beginning with the ongoing development of a financing plan for a portion of the outstanding climate based natural disasters damages to county roadways and infrastructure from the 2017 storms, 2023 storms and 2020 fires.  As discussed extensively in the mid-year report on February 13, 2024, of the $250.4 million in County paid natural disaster damages eligible for FEMA reimbursement, $144 million remains unpaid.  The County is unable to cover this cash shortfall and staff will be presenting financing options from internal and external loans on May 14, 2024. This action will include approval of financing resolutions authorizing the sale of lease revenue bonds by the Santa Cruz County Capital Financing Authority.

Another reduction is the General Fund Contingency from $7.54 million to $1.5 million, far below the 1% annual target. This reduction is necessary to bring the General Fund to a level where there is sufficient prior year available fund balance.  In addition, the General Fund budget, as discussed previously, does not yet include any partial year sales tax revenue from Measure K that voters appear to have approved on March 5, 2024. Staff expect to bring the acceptance of this revenue with the Last Day actions on June 4, 2024, and would recommend restoring the General Fund Contingency along with other strategic investments.

Additional detail is available in each department’s budget page.

As shown in Chart 1, the General Fund Forecasted Actuals projects a decreased structural deficit since our February 2024 mid-year report due to the inclusion of Measure K’s likely new sales tax inflow and a reduction in projected debt service costs.

Natural disaster financing. Staff’s current model for new natural disaster debt service attributed to the seven climate based natural disasters since 2017 has been updated to include one of several financing structures. This scenario could defer a portion of the debt service and assumes the ability to paydown some debt by 2027-28. This lowers the debt service from the initial $6.9 million annually within the February 2024 forecast to $1.5 million in 2025-26 and increasing to the annual $5.5 million by 2027-28. The 2030-31 forecast shows that by 2030-31, $2.7 million of the total $5.5 million in debt service could be financed by General Fund revenue sources, leaving a smaller $2.8 million deficit for 2030-31. The debt issuance and annual debt service costs are still under development and will be presented to the Board on May 14, 2024.

State mandated services. Service level increases include implementation of the State’s Community Assistance, Recovery, and Empowerment (CARE) Act, CalAIM, as well as supporting behavioral and medical services at the County's probation and jail facilities. We currently project an ongoing increase of $6.9 million by 2028-29 that is likely to increase by 2% to 4% annually. However, by 2029-30, $5.8 million of that year’s projected $7.1 million increase would be covered by General Fund revenue sources, leaving a smaller $1.1 million unfunded.  And, by 2030-31, that year’s project $7.4 million could be entirely financed by General Fund revenue sources.

The remaining deficit amount show in Chart 1, which peaks at $12.0 million in 2026-27,  includes an unfunded amount of new capital project financing to partially restore and extend the life of county’s aging facilities, along with other on-going operational service cost increases that currently exceed the General Fund’s revenue capacity.

Table 5 below summarizes the key assumptions included in our forecast.

Table 5 General Fund Forecast Primary Assumptions
Factor	Assumption		Factor	Assumption
Property Tax	Growth from 4.5% to 6.5%		Operating costs (3)	3% to 7.5%
Vehicle License Fees (1)	Growth from 4.25% to 6.25%		Existing facility capital maintenance and investments	$7.9 mm to $9mm
Sales Tax (2)	Growth from 3% to 6%		State public safety mandated increases	$3.7mm annually in 2024-25
Federal COVID Disaster Recovery 2023-24 through 2025-26	$15mm to $18mm		Natural disaster financing costs(4)	$1.5mm to $5.5mm
Sales Tax- Measure K	$7.5mm to $10.0mm
Vehicle License Fees are received through State Property Tax payments from the State of California’s 2004 “Triple Flip” tax swap NEW: Adds potential tax proceeds from 2024 Measure K ballot measure with prorated $7.5mm in year one Operating cost increases vary between personnel, contract, and equipment and maintenance costs NEW: Natural disaster financing costs have been refined based on preliminary debt financing options. Plan will be presented on May 14, 2024.

The Proposed 2024-25 General Fund Budget maintains the current year’s $79.4 million reserve, or 10.5%. Chart 2 General Fund Reserves summarizes the total “Committed” and “Assigned” reserves. The Chart illustrates that if the $40.7 million in reserves intended to finance services or near term capital projects that serve Medi-Cal and Medicare populations were used or removed, the amount readily available for

responding to immediate economic downturns, natural disasters or other urgent financing needs declines to 5.1% or $38.7 million. And, by comparison, this would only finance 2.5 payroll cycles.