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TO: BOARD OF SUPERVISORS
Cot
PI3
FROM: JOHN CULLEN, County Administrator x.
. :IN.4 County- - -
DATE: JULY 26, 2006 c°S
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SUBJECT: RESPONSE TO GRAND JURY REPORT NO. 0607, ENTITLED
"COUNTY OUTSPENDS INCOME FOUR YEARS IN A ROW"
SPECIFIC REQUEST(S)OR RECOMMENDATION(S)&BACKGROUND AND JUSTIFICATION
RECOMMENDATION:
APPROVE response to Grand Jury Report No. 0607, entitled "COUNTY OUTSPENDS INCOME
FOUR YEARS IN A ROW: Have the Supervisors finally kicked the habit?", and DIRECT the
Clerk of the Board to forward the response to the Superior Court no later than August 18, 2006.
BACKGROUND:
On June 6, 2006, the 2005/2006 Grand Jury filed the above-referenced report, which was reviewed by
the Board of Supervisors and subsequently referred to the County Administrator and Capital Facilities
Committee, who jointly prepared the attached response that clearly specifies:
A. Whether a finding or recommendation is accepted or will be implemented;
B. If a recommendation is accepted, a statement as to who will be responsible for
implementation and by what definite target date;
C. A delineation of the constraints if a recommendation is accepted but cannot be implemented
within a six-month period; and
D. The reason for not accepting or adopting a findingorrecommendation.
CONTINUED ON ATTACHMENT: YES J SIGNATURE:
--------------------------------------- -- ----------------------------------------- ------ ----------- ------
,-1fECOMMENDATION OF COUNTY ADMINISTRATOR RECOMM ND TION OF BOARD COMMITTEE
✓PIPPROV _OTHER
SIGNATURE(S): r
- — — = - -- -- - - -- ----------- -- —
ACTION OF BO D N r®♦ j (d APPRO/V�E AS RECOMMENDED_� OTHER
VOTE OF SUPERVISORS I HEREBY CERTIFY THAT THIS IS A TRUE
AND CORRECT COPY OF AN ACTION TAKEN
_UNANIMOUS(ABSENT ) AND ENTERED ON THE MINUTES OF THE
BOARD OF SUPERVISORS ON THE DATE
AYES: NOES: SHOWN.
ABSENT: ABSTAIN:
ATTESTED: AUGUST 1,2006
CONTACT: JULIE ENEA(925)335-1077 JOHN CULLEN,CLERK OF THE BOARD OF
SUPERVISORS AND COUNTY ADMINISTRATOR
CC: PRESIDING JUDGE OF THE GRAND JURY
GRAND JURY FOREMAN \
COUNTY ADMINISTRATOR
SENIOR DEPUTY CAO(FINANCE) BY DEPUTY
BOARD OF SUPERVISORS RESPONSE TO
GRAND JURY REPORT NO. 0607:
COUNTY OUTSPENDS INCOME FOUR YEARS IN A ROW
Have the Supervisors finally kicked the habit?
FINDINGS
1. As shown in the table below, in each of the last three years the County's expenditures
exceeded revenue by amounts ranging from $17 million to $22 million.
Contra Costa County General Fund Data For Years Ended June 30
(In millions)
2003 2004 2005
Total Revenue $1,001.5 $1,044.2 $1,063.5
Expenditures/Transfers 1.019.2 1.065.8 1.080.7
Deficit $(18.2) $(21.6) $(17.2)
Response: Agree.
2. These annual deficits have occurred despite relatively strong economic and demographic
fundamentals in the County and a$62.0 million growth in revenue from 2003 to 2005.
Employment is high, sales taxes, property taxes, and special taxes are up, and there have not
been any large non-recurring problems requiring County funds.
Response: Partially disagree. The $61.5 million growth between 2003 and 2005 included
transfers from other funds and was neither all new revenue growth nor necessarily recurring.
3. As shown in the table below,the unreserved fund balance in the County's General Fund
decreased from $115.7 million on June 30, 2002, to $58.7 million on June 30, 2005, an
average decrease of almost $20 million per year.
Contra Costa County Unreserved Fund Balance as of June 30
(In millions)
2002 2003 2004 2005
Unreserved Fund Balance $115.7 $97.5 $75.9 $58.7
Total Revenue 986.1 1,001.5 1,044.2 1,063.5
Fund Balance as % of Revenue 11.7% 9.7% 7.3% 5.5%
Response: Agree.
County Outspends Income Four Years in a Row July 26,2006
County Response to Grand Jury Report No.0607 Page 2
4. On June 28, 2005, the Board of Supervisors ("BOS") approved the fiscal year("FY")
2005/2006 budget with another$20 million deficit, without analyzing its impact on the
unreserved fund balance or on credit ratings. (At this rate of deficit spending, the unreserved
fund balance will be approIximately 3.5% of revenue on June 30, 2006).
Response: Partially disagree. The County did not continue the budgeted rate of deficit
spending and, now, at year-end the unreserved fund balance is expected to approximate the S%
minimum level recently establlished by the Board of Supervisors.
5. At the County's rate of deficit spending over the past four years, the unreserved fund balance
will be exhausted before June 30, 2008.
Response: Disagree,see response to Finding No. 4.
6. Bond rating agencies (e.g., Standard& Poor's and Moody's) evaluate and rate the County's
credit worthiness. A lower rating means additional costs to the County and less money
available to provide services for County residents.
Response: Partially disagree. A lower credit rating could result in additional costs only if the
County were to borrow additional money. It would have no impact on the debt service for
existing bonds.
7. On November 30, 2005, Standard & Poor's revised its long-term rating outlook on the County
to negative from stable, "based on a significant deterioration in the County's reserves."
Response: Agree.
8. On December 1, 2005, Moody's downgraded the County's long-term credit rating one notch
(level), noting that the outlook remained negative and that"the County has taken no concrete
steps to stem the erosion of the financial position." The new rating of Aa3 places the County
at the lowest of Moody's three high quality ratings. A negative outlook indicates that the
County's trends point to another downgrade in the next year or so, moving the County from
the high quality category to upper medium grade.
Response: Partially disagree. A negative outlook with no improvement may lead to another
downgrade. However, the County's implementation of a plan to increase reserves and
revenues and decrease the growth of expenditures has significantly improved the County's
fiscal outlook.
9. Credit rating downgrades have both tangible and intangible (reputation) costs. It is estimated
that the December downgrade could cost the County an additional $225,000 if the County
were to borrow$25 million, and that a second downgrade could double this additional cost.
Response: Agree.
2
County Outspends Income Four Years in a Row July 26,2006
County Response to Grand Jury Report No.0607 Page 3
10. At its October 25, 2004 and December 20, 2004 meetings,the BOS Finance Committee
discussed establishing a Reerve Policy.
Response: Agree, with the clarification that the Finance Committee discussed establishing a
Reserve Policy on October 25,12004 and December S, 2005..
11. On December 20, 2005, thel BOS adopted a Reserve Policy, which resolved, in part, that:
a. "Effective immediately, Contra Costa County shall strive to achieve a minimum
unreserved General Fund balance of 5% of budgeted General Fund revenues."
b. "Until such time as the County has an unreserved General Fund balance equal to at least
5% of budgeted General Fund revenues, no less than $2 million of year-end fund balance
in any fiscal year shall be added to the appropriation for Contingency Reserve."
C. "Reserves may be drawn below the minimum level in order to address an unforeseen
emergency, to fund a non-recurring expense, or to fund a one-time capital cost; but only
following the adoption, by a four-fifths vote, of a resolution of the BOS specifying the
circumstances that justify the invasion of the minimum reserve level."
d. "Should reserves fall below the established minimum levels, a request to utilize reserve
funds must be accompanied by recommendations for restoring, within three years,
minimum reserve levels (fiscal stabilization plan)."
Response: Agree.
12. The Reserve Policy sets the minimum reserve level at the bottom of the 5%to 15%range
recommended by the Government Finance Officers' Association.
Response: Agree.
13. On December 27, 2005, the County Administrator instituted a hiring freeze on positions
funded by General Fund revenue effective January 1, 2006.
Response: Agree.
14. On February 14, 2006,the BOS declared"the Board's intent to adopt a FY 2006/2007
General Fund budget that balances annual expense and revenues, and that strengthens General
Fund Reserves."
Response: Agree.
3
County Outspends Income Four Years in a Row July 26,2006
County Response to Grand Jury Report No. 0607 Page 4
15. On February 28, 2006, the BOS received its first report on retiree healthcare costs and
liabilities. This report estimated the County's unfunded liability for retiree healthcare costs in
the$1 to 2 billion range.
Response: Agree.
16. On May 2, 2006, the BOS adopted a balanced budget consistent with the resolution of
February 14, 2006.
Response: Agree.
17. On May 5, 2006, the BOS Finance Committee discussed a recently completed actuarial
analysis that estimated the County's unfunded liability for retiree healthcare costs at between
$1.4 and $2.6 billion.
Response: Agree, with the clarification that the Finance Committee met on May 4, 2006.
18. A number of important financial management practices common in the private sector are very
limited or absent in the County as follows:
a. Multi-year financial projections developed by top management, department heads, and
the BOS.
b. Rigorous capital projectjustifications (See Contra Costa County Grand Jury Report 0602
issued earlier.)
c. Regular management reviews of departmental revenues, costs, and performance by top
management, department heads, and the BOS.
Response: Partially disagree. While management practices can always be improved or
expanded, none of the practices described in the Finding are absent. The County
Administrator's Office performs multi.year financial projections, which are largely dependent
on federal and state budget allocations and so are of limited value. Capital projects currently
go through a rigorous just fcation process that includes review and approval by the County
Administrator, Capital Facilities Committee, and the Board of Supervisors, and is described in
detail in the County's response to Grand Jury Report No. 0602. In the absence of regular
management audits, which have been temporarily suspended due to budget constraints, the
County Administrator annually conducts several performance and fiscal audits targeted at
specific problems or issues, and has focused limited staff resources on Countywide policies and
procedures that affect all County departments and programs. All County department revenues,
costs, and fiscal controls are reviewed on a regular basis under the County Administrator's
budget reporting and the Auditor-Controller's internal audit programs.
4
County Outspends Income Four Years in a Row July 26,2006
County Response to Grand Jury Report No.0607 Page 5
RECOMMENDATIONS ��
The 2005-2006 Contra Costa County Grand Jury recommends that the BOS do the following:
1. Assure that in FY 2006/2007 expenses do not exceed revenue.
Response: Has been implemented The Fiscal Year 2006/2007 Adopted Budget balances
annual expenditures and revenues. In the last six years, actual General Fund net County cost
has been between $37.4 and$103.6 million less than the budgeted amount. Barring a natural
disaster, the County's current fiscal review practices assure that actual General Fund net
County cost will not exceed budgeted levels.
2. Bring reserves to the minimum level specified by the Reserve Policy by June 30, 2008.
Response: Has not been implemented, but will be implemented by June 30, 2007, if not
sooner.
3. Strengthen the Reserve Policy:
a. To require actions that are much more aggressive than simply adding a minimum of$2
million to the contingency reserve, when reserves are below the minimum level_
b. To increase the minimum level to an amount greater than the minimum suggested by the
Government Finance I Officers' Association and in line with that of peer counties in
California
Response: Has not yet been implemented, but will be implemented in the future. The County
expects to achieve the 5% minimum reserve balance within the next 12 months. At the end of
that time, and in conjunction with service needs and a Facility Life-Cycle Investment Program,
the County will re-evaluate increasing the minimum level to an amount greater than the
minimum level suggested by the Government Finance Officers'Association.
4. Adopt an action plan to mitigate costs and fund the liability for retiree healthcare.
Response: Has been partially implemented and will require further analysis to be fully
implemented. The Finance Committee has directed County staff to collaborate with California
State Association of Counties to prepare an analysis of alternative changes to healthcare
benefits, alternative funding approaches, and potential state and federal cost reimbursement.
The required analysis and collaboration must occur before the next logical steps can be
developed. An implementation timeline is dependent on the information obtained in the
investigative stage. The Finance Committee directed staff to make progress reports to the
Committee on a quarterly basis.
5. Establish or strengthen routine financial management practices to mirror more closely
those in the private sector by implementing the following:
5
County Outspends Income Four Years in a Row July 26,2006
County Response to Grand Jury Report No.0607 Page 6
a. Multi-year financial projections developed by top management, department heads, and
the BOS.
b. Rigorous capital project justifications. (See Contra Costa County Grand Jury Report
No. 0602 issued earlier.)
c. Meaningful action]oriented reviews of departmental revenues, costs, and performance
by top management, department heads, and the BOS.
Response: Has substantially been implemented.
a. The County already performs multi year financial projections and will continue to
perform and refine them.
b. Capital projects already go through a rigorous justification process that includes review
and approval by the County Administrator, Capital Facilities Committee, and the Board
of Supervisors (See response to Contra Costa County Grand Jury Report No. 0602).
c. Meaningful action-oriented reviews of departmental revenues, costs, and performance
already take place. Regular performance auditing will resume when fiscal and staff
resources permit.
6
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BOARD OF SUPERVISORS RESPONSE TO
GRAND JURY REPORT NO. 0607:
COUNTY OUTSPENDS INCOME FOUR YEARS IN A ROW
Have the Supervisors finally kicked the habit?
FINDINGS
1. As shown in the table below,in each of the last three years the County's expenditures
exceeded revenue by amounts ranging from$17 million to$22 million.
Contra Costa County General Fund Data For Years Ended June 30
(In
millions)
2004 2005
Total Revenue $1,001.5 $1,044.2 $1,063.5
Expenditures/Transfers 1.019.2 1065.8 1080.7
Deficit $(21.6) $(17.2)
Response: Agree.
2. These annual deficits have occurred despite relatively strong economic and demographic
fundamentals in the County and a$62.0 million growth in revenue from 2003 to 2005.
Employment is high,sales taxes,property taxes,and special taxes are up,and there have not
been any large non-recurring problems,requiring County funds.
Response: Partially disagree. The$61.5 million growth between 2003 and 2005 included
transfers from other funds and was neither all new revenue growth nor necessarily recurring.
3. As shown in the table below,the unrelervcd fund balance in the County's General Fund
decreased from$115.7 million on June 30,2002,to$58.7 million on June 30,2005,an
average decrease of almost$20 million per year.
Contra Costa County Un leserved Fund Balance as of June 30
(In millions)
12002 2003 2004 2005
Unreserved Fund Balance115.7 $97.5 $75.9 $58.7
Total Revenue 986.1 1,001.5 1,044.2 1,063.5
Fund Balance as%of Revenue 11.7% 9.7% 7.3% 5.5%
Response: Agree.
County Outspends Income Four Years in a Row July 26,2006
County Response to Grand Jury Report No.0607 Page 2
4, On June 28,2005,the Board of Supervisors(`BOS")approved the fiscal year("FY")
2005/2006 budget with another$20 million deficit,without analyzing its impact on the
unreserved fund balance or on credit ratings. (At this rate of deficit spending,the unreserved
fund balance will be approximately 3.5%of revenue on June 30,2006).
Response: Partially disagree. The County did not continue the budgeted rate of deficit
spending and,now,at year-end the unreserved fund balance is expected to approximate the 5%
minimum level recently established by the Board of Supervisors.
5. At the County's rate of deficit spending over the past four years,the unreserved fund balance
will be exhausted before June 30,20081
Response: Disagree;see response to Finding No. 4.
6. Bond rating agencies(e.g.,Standard&Poor's and Moody's)evaluate and rate the County's
credit worthiness. A lower rating means additional costs to the County and less money
available to provide services for County residents.
Response: Partially disagree. A lower credit rating could result in additional costs only if the
County were to borrow additional money. /t would have no impact on the debt service for
existing bonds.
7. On November 30,2005,Standard&Poor's revised its long-term rating outlook on the County
to negative from stable,"based on a significant deteriorationinthe County's reserves."
Response: Agree.
8. On December 1,2005,Moody's downgraded the County's long-term credit rating one notch
(level),noting that the outlook remained negative and that"the County has taken no concrete
steps to stem the erosion of the financial position." The new rating of Aa3 places the County
at the lowest of Moody's three high quality ratings. A negative outlook indicates that the
County's trends point to another downgrade in the next year or so,moving the County from
the high quality category to upper medium grade.
Response: Partially disagree. A negative utlook with no improvement may lead to another
downgrade. However,the County's implementation of a plan to increase reserves and
revenues and decrease the growth of expenditures has significantly improved the County's
fiscal outlook.
9. Credit rating downgrades have both tangible and intangible(reputation)costs. It is estimated
that the December downgrade could cost the County an additional$225,000 if the County
were to borrow$25 million,and that a second downgrade could double this additional cost.
Response: Agree.
2
County Outspends Income Four Years in a Row July 26,2006
County Response to Grand Jury Report No.0607 Page 3
10. At its October 25,2004 and December 20,2004 meetings,the BOS Finance Committee
discussed establishing a Reserve Policy.
Res onset Agree,with the clarification that the Finance Committee discussed establishing a
Reserve Policy on October 25,2004 and December 5,2005.
11. On December 20,2005,the BOS adopt)d a Reserve Policy,which resolved,in part,that:
a. "Effective immediately,Contra Costa County shall strive to achieve a minimum
unreserved General Fund balance of 5%of budgeted General Fund revenues."
b. "Until such time as the County has an unreserved General Fund balance equal to at least
5%of budgeted General Fund revenues,no less than $2 million of year-end fund balance
in any fiscal year shall be added to the appropriation for Contingency Reserve."
c. "Reserves may be drawn below the minimum level in order to address an unforeseen
emergency,to fund a non-recurring expense,or to fund a one-time capital cost;but only
following the adoption,by a four-fifths vote,of a resolution of the BOS specifying the
circumstances that justify the invasion of the minimum reserve level."
d. "Should reserves fall below the esti blished minimum levels,a request to utilize reserve
funds must be accompanied by recommendations for restoring,within three years,
minimum reserve levels(fiscal stabilization plan)."
Response: Agree.
12. The Reserve Policy sets the minimum reserve level at the bottom of the 5%to 15%range
recommended by the Government Finance Officers'Association.
Response: Agree.
13. On December 27,2005,the County Administrator instituted a hiring freeze on positions
funded by General Fund revenue effective January 1,2006.
Response: Agree.
14. On February 14,2006,the BOS declared"the Board's intent to adopt a FY 2006/2007
General Fund budget that balances annual expense and revenues,and that strengthens General
Fund Reserves."
Response: Agree.
3
County Outspends Income Four Years in a Row July 26,2006
County Response to Grand Jury Report No.0607 Page 4
15. On February 28,2006,the BOS received its first report on retiree healthcare costs and
liabilities. This report estimated the County's unfunded liability for retiree healthcare costs in
the$1 to 2 billion range.
Response: Agree.
16. On May 2,2006,the BOS adopted a balanced budget consistent with the resolution of
February 14,2006.
Response: Agree.
17. On May 5,2006,the BOS Finance Committee discussed a recently completed actuarial
analysis that estimated the County's unfunded liability for retiree healthcare costs at between
$1.4 and$2.6 billion.
Response: Agree,with the clarification that the Finance Committee met on May 4,2006.
18. A number of important financial management practices common in the private sector are very
limited or absent in the County as follows:
a. Multi-year financial projections developed by top management,department heads,and
the BOS.
b. Rigorous capital project justifications(See Contra Costa County Grand Jury Report 0602
issued earlier.)
c. Regular management reviews of departmental revenues,costs,and performance by top
management,department heads,and the BOS.
Response: Partially disagree. While maul gement practices can always be improved or
expanded,none of the practices described)in the Finding are absent. The County
Administrator's Office performs multi-yet rfinancial projections,which are largely dependent
on federal and state budget allocations and so are of limited value. Capital projects currently
go through a rigorous justification process that includes review and approval by the County
Administrator, Capital Facilities Committee,and the Board of Supervisors,and is described in
detail in the County's response to Grand Jury Report No. 0602. In the absence of regular
management audits,which have been temporarily suspended due to budget constraints,the
County Administrator annually conducts several performance and fiscal audits targeted at
specific problems or issues,and has focused limited staff resources on Countywide policies and
procedures that affect all County departments and programs. All County department revenues,
costs,and fiscal controls are reviewed on a regular basis under the County Administrator's
budget reporting and the Auditor-Controller's internal audit programs.
4
County Outspends Income Four Years in a Rowl July 26,2006
County Response to Grand Jury Report No.0607 Page 5
RECOMMENDATIONS
The 2005-2006 Contra Costa County Grand J ry recommends that the BOS do the following:
1. Assure that in FY 2006/2007 expenses do not exceed revenue.
Response: Has been implemented The Fiscal Year 2006/2007 Adopted Budget balances
annual expenditures and revenues. In the last six years,actual General Fund net County cost
has been between$37.4 and$103.6 million less than the budgeted amount. Barring a natural
disaster,the County's current fiscal review practices assure that actual General Fund net
County cost will not exceed budgeted levels.
2. Bring reserves to the minimum level s Lified by the Reserve Policy by June 30,2008.
Response: Has,been implemented The County initiated strateyes to build the reserve and _ __.- ne�eted:nor
anticipates reaching the minimum specified leve(by June 30,2007,f not sooner------ ____3. Strengthen the Reserve Policy:
a. To require actions that are much more aggressive than simply adding a minimum of$2
million to the contingency reserve,i when reserves are below the minimum level.
b. To increase the minimum level to an amount greater than the minimum suggested by the
Government Finance Officers' Association and in line with that of peer counties in
California
Response: Has not yet been implemented;but will be implemented in the future. The County
expects to achieve the 5%minimum reserve balance within the next 12 months. At the end of
that time,and in conjunction with service ineeds and a Facility Life-Cycle Investment Program,
the County will re-evaluate increasing the,minimum level to an amount greater than the
minimum level suggested by the Government Finance Officers'Association.
4. Adopt an action plan to mitigate costs d fund the liability for retiree healthcare.
Response: Has been partially implement d and will require further analysis to be fully
implemented The Finance Committee has directed County staff to collaborate with California
State Association of Counties to prepare an analysis of alternative changes to healthcare
benefits,alternative funding approaches,and potential state and federal cost reimbursement.
The required analysis and collaboration must occur before the next logical steps can be
developed An implementation timeline isl dependent on the information obtained in the
investigative stage. The Finance Committee directed staff to make progress reports to the
Committee on a quarterly basis.
5. Establish or strengthen routine financial management practices to mirror more closely
those in the private sector by implementing the following:
5
County Outspends Income Four Years in a Rowl July 26,2006
County Response to Grand Jury Report No.0607 Page 6
1
a. Multi-year financial projection�developed by top management,department heads,and
the BOS.
b. Rigorous capital project justifica tions. (See Contra Costa County Grand Jury Report
No.0602 issued earlier.)
c. Meaningful action-oriented reviews of departmental revenues,costs,and performance
by top management,department heads,and the BOS.
Response: Has substantially been impleV ented.
a. The County already performs mul i year financial projections and will continue to
perform and refine them
b. Capital projects already go through a rigorous justification process that includes review
and approval by the County Administrator, Capital Facilities Committee,and the Board
of Supervisors(See response to Contra Costa County Grand Jury Report No. 0602).
c. Meaningful action-oriented reviews of departmental revenues,costs,and performance
already take place. Regular performance auditing will resume when fiscal and staff
resources permit.
6