COUNTY OF SAN MATEO

Inter-Departmental Correspondence

County Manager’s Office

DATE:

November 28, 2007

BOARD MEETING DATE:

December 4, 2007

SPECIAL NOTICE:

None

VOTE REQUIRED:

Majority

TO:

Honorable Board of Supervisors

FROM:

John L. Maltbie, County Manager

SUBJECT:

Budget Study Session on Structural Budget Deficit

Recommendation

1. Accept the report on the County's Structural Budget Deficit

2. Review key revenue and expenditure assumptions and policy issues

3. Provide direction on a multi-year approach for eliminating the structural deficit by FY 2013

4. Provide direction on deficit reduction strategies to set Net County Cost targets for departments

VISION ALIGNMENT:

Commitment: Responsive, effective and collaborative government.

Goal 20: Government decisions are based on careful consideration of future impact, rather than temporary relief or immediate gain.

This activity contributes to the goal by providing a public forum for the Board of Supervisors to review the County’s structural deficit and provide direction to the County Manager’s Office and operating departments on a multi-year approach for eliminating the structural deficit by FY 2013.

Background

At the conclusion of June 2007 budget hearings, the Board requested a study session in the Fall to discuss and plan for the elimination of the structural budget deficit. The objectives of this study session will be to provide an overview of the County’s structural budget deficit; review assumptions for revenue and expenditure projections for FY 2009–2013; review Board policy issues in the context of enhancing revenues, cutting costs, and controlling growth in costs; obtain direction from the Board on a multi-year approach for eliminating the structural deficit by FY 2013; and obtain direction on deficit reduction strategies.

A draft slide presentation was presented to Executive Council and the Board Finance and Operations Committee for comment, and input has been incorporated into this updated version.

Discussion

By the end of this fiscal year, the County’s structural deficit will reach $25 million. The single most significant factor contributing to the deficit is the growth in salaries and benefits, which has outpaced growth in discretionary revenues such as property and sales tax. For General Fund departments, salaries and benefits have grown by $32.8 million or 8.4% annually over the past five years, primarily due to negotiated salary increases, retirement enhancements and actuarial adjustments, additional positions and annual double-digit health benefit increases. Other factors contributing to the current deficit include opening the Youth Services Center, additional contributions to the San Mateo Medical Center, capital and technology infrastructure needs, creating the Sheriff’s relief pool, implementation of the Alcohol and Other Drugs (AOD) Strategic Plan, ongoing deficits in the Structural Fire and Solid Waste Funds, and cost-of-business increases for community-based organizations.

In recent years, the County has used “excess” Education Revenue Augmentation Funds (ERAF) to balance its budgets. Excess ERAF exists when property tax revenues remain in the ERAF fund after required allocations are made to school districts, community college districts and the County Office of Education. The excess funds are primarily due to high property values in San Mateo County and declining enrollments in some school districts, which result in lower levels of local property tax revenue needed to meet school funding requirements. Declining property values, increased enrollments, and legislative changes could adversely impact future revenues. Excess ERAF funds currently exist in only three counties in the state (Marin and Napa are the others). The State Controller’s Office was asked by the legislature this year to conduct a review of these funds. The report was issued in early November and described excess ERAF as a “take-away from K-12 schools and community colleges.” Given the continued level of scrutiny by the state, it is recommended that the County continue to use these funds for capital and technology needs, and/or a reduction of the County’s unfunded liability costs.

If the County were to continue on its current course and not include excess ERAF in its ongoing revenue projections, the structural deficit could reach $86 million by FY 2013. Eliminating the deficit by FY 2013 will require tough decisions in three areas: 1) reducing costs, 2) controlling cost growth and/or 3) increasing revenues (e.g., fees for services, taxes). The purpose of the study session will be to define the problem for the Board, provide the Board with budget reduction strategies, and seek direction from the Board for setting budget targets over the next five fiscal years.

Fiscal Impact

None. Direction provided by the Board at the study session will be used to prepare budget targets for the upcoming FY 2008-09/2009-10 budget cycle.