Santa Barbara Budget, Planning and Control

INTRODUCTION

As a result of the 1993-94 Grand Jury Audit Report questions were raised concerning both the understandability of the Santa Barbara County budget and the process by which it is developed.

OBJECTIVE

The objective of this report is to:

* Review and understand the process by which the budget is prepared and approved

* Determine why it is difficult for the public, and possibly even some County officials, to understand the budget

* Make suggestions regarding any parts of the process, presentation, or accountability which the Grand Jury believes could be improved.

APPROACH

The Grand Jury met with the County Administrator, a Deputy County Administrator, the Auditor-Controller, the Assistant Auditor-Controller, the Auditor-Controller Division Chief, a County Administrator's Analyst, and representatives of several major departments. The Grand Jury also studied the 1994-95 Proposed Budget, County of Santa Barbara, the Final Budget, 1994-1995 Fiscal Year, County of Santa Barbara and the Comprehensive Annual Financial Report for the fiscal year ended June 30, 1994, various Auditor-Controller statements and payroll records, and additional documents indicated in the References Consulted Section.

OBSERVATIONS

Budget Process

Testimony was unanimous that the process of budget preparation and approval has improved significantly in the past three years.

The process is initiated by a Board Agenda item prepared by the County Administrator, usually in January, with copies to all department heads, which outlines the current year's budget status, the fiscal environment which will affect the budget, political impacts, various forecasts and directions for procedures and time schedules in which the Proposed Budget will be prepared.

The departments prepare their individual budgets of both income and expenses over a staggered six week period for submission to the County Administrator. Many departments coordinate closely with their assigned budget analyst from the County Administrator's office during this process. There are approximately 150 to 175 "budget units" (many departments have several budgets called "budget units" due to varying functions and types of expenditures), of which 50 to 75 are considered significant by the County Administrator. Budget units ranged in size from $4,000 to over $55 million.

The Auditor-Controller is responsible for reviewing, evaluating and approving all income projections. The County Administrator's office reviews all details of the expense side of each budget and the reasons and justifications therefore, and may make alternate recommendations. This process usually lasts for six to eight weeks.

The County Administrator's office then compiles the departmental budgets into the Proposed Budget, provides supplementary reasons for any new program or significant difference from the prior year, and the notes process by which each estimate was made. A series of summary schedules are prepared by the Auditor-Controller and an explanatory introductory memorandum is prepared by the County Administrator.

Each line item in the Proposed Budget shows the prior year's approved budget amount, the prior year's actual amount (usually partially estimated when prepared), the original departmental recommendation, and the County Administrator's recommendation. The actual prior year's costs are issued by the Auditor-Controller's office before compilation of the Proposed Budget, so it is not clear to the Grand Jury why the primary comparison for each proposed budget line is not made to the prior year's actual cost, rather than the prior year's budget.

After the Proposed Budget document is assembled, distributed and made available to the public, the Board of Supervisors schedules public hearings over a one to two week period. Just prior to the public hearings a supplemental document is submitted to the Board by the County Administrator modifying his recommendations to reflect updated information. The Board then adopts the budget with any modifications they desire to make. The Auditor-Controller, in coordination with the County Administrator, makes a detailed record of all changes made by the Board from the Proposed Budget recommendations and then prepares the Final Budget. The format of this document is basically dictated by the State of California.

The Grand Jury recognizes that the preparation of the budget is made extremely difficult by the loss of funds to the State, and the uncertainty of the amount of this loss, that exists well into the budget period. It is further complicated by the fact that the State, which has the same fiscal year as the County, has been historically late in meeting its schedule obligations, and the Federal government, which also provides funds for County services, has a different fiscal year.

There has been a difference of opinion between the Auditor-Controller and the County Administrator as to whether, in light of the problems with State and Federal funding information, the County's budget should be accelerated so that the hearings could occur in June rather than August. Due to the current financial shortfall, the hearings will be held at the end June for the 1995-96 year.

Personnel Count-Cause for Confusion

The tables below show the number of employees authorized in the final budgets for 1990-91 through the third quarter of 1994-95 fiscal years, the number authorized at fiscal year end and the actual number, both with and without "extra help" and "contractors on payroll." There were minor discrepancies between the two reports on which Table A and Table B, prepared by the Grand Jury, were based.

                           TABLE   A REGULAR EMPLOYEES                                          

Effective Date    Fiscal Year     Authorized        Actual Regular    Actual,including  

                     Budget       Employees at      Employees at      Extra &           

                 Authorization    Effective Date    Effective Date    Contract at       

                                                                      Effective Date    

   4/23/95            3935        4133              3753              4111              

    7/3/94            3867        3994              3672              4028              

    8/1/93            3897        3928              3551              3913              

 FY end 1992          3870        Not Avail.        3565              4017              

 FY end 1991          3882        Not Avail.        3521              3900              


Santa Barbara Payroll/Personnel System, Biweekly Staffing Reports

                     TABLE   B FULL TIME EQUIVALENTS (FTE's)                                    

Effective Date    Fiscal Year     Authorized        Actual Regular    Actual,including  

                     Budget       Employees at      Employees at      Extra &           

                 Authorization    Effective Date    Effective Date    Contract at       

                                                                      Effective Date    

   4/23/95            3797        4022              3629              3876              

    7/3/94            3654        3888              3552              3821              

   7/13/93            3741        3843              3529              3714              

 FY end 1992          3712        Not Avail.        3408              3764              

 FY end 1991          3739        Not Avail.        3453              3664              


Source: Santa Barbara County, FTE Summary Totals

The difference of 300 to 400 between the budgeted and authorized employee positions in the tables above and the actual number of employees was difficult to understand. The temporary vacancies caused by employee turnover do not explain this difference as it would be only a small percentage of the approximately 300 hired annually. The Personnel Department could not provide records to verify this vacancy rate.

The Final Budget provides a list of authorized number of regular employee positions, both in total and in Full Time Equivalents (FTE's). FTE's are the effective number of employees, adjusted for part time employees, employees budgeted for a partial year, and unfunded positions. After the Final Budget is approved, any changes in authorized positions must be submitted to the Board of Supervisors for its approval. Approved changes are authorized on a Personnel Resolution form.

In addition to regular employees there are "extra help" and "contractors on payroll." "Extra help" are short term employees, usually for very temporary or seasonal work. They can not be employed more than 1000 hours in any one year without the approval of the Civil Service Board. The extra help may be employed without specific Board approval if there are sufficient funds in the budget. Contractors on payroll, whose contracts are approved by the Board of Supervisors, are primarily professional employees under contract due to:

* Work on programs which may be terminated on short notice by the funding agency

* A work requirement too short to merit employment as a regular employee

* A desire for payment on the basis of units of production

* A lack of agreement with the Personnel Department regarding the classification or appropriate salary for the employee

* The ability to avoid Civil Service Rules

It was noteworthy that nowhere in the Proposed or Final Budget can the number of "extra help" or "contractors on payroll" be found. A review of a recent pay period found 176 and 293 of such staff respectively, and the numbers at different periods can be found in the tables above. The budgeting of this cost is concealed in various line items, with no explanation available. The total funds paid to "extra help" and "contractors on payroll" was $6.9 million in 1993 and $7.5 million in 1994. Testimony is that the coding of the budget input would allow the "extra help" and "contractors on payroll" to be shown in both theProposed and Final Budgets.

Testimony was that many positions were included but left unfunded to avoid having to later re-justify the positions when needed. Some problems of timeliness working with the Personnel Department on classification revisions makes it prudent for a department to leave them in the budget during transition periods where job descriptions are anticipated to change.

Testimony was also conflicting as to whether positions that are unfunded in the budget can be, and frequently are, converted to funded positions during the year without the necessity of Board approval. The Grand Jury could not ascertain which was correct. There is testimony that it is not unusual for unbudgeted special projects to be paid for with funds that were budgeted originally for personnel but not used for that purpose.

Further Cause for Confusion

All comments that immediately follow refer to the 1994-95 Proposed Budget. This is the document that was the basis of the budget hearings and the basic source of information to both the Board and the public.

The County Administrator's introductory memo to the Board of Supervisors at the front of the budget book presents confusion to a careful reader. For example:

* On Page I of the County Administrator's memo there was a simple summary which added up to almost $509 million, but this included significant double counting, particularly funds for Internal Services and Special Districts. The total cost as shown has no meaning.

* There is a pie chart on Page III which depicts the makeup of the "Net County Cost." Testimony indicated that some items excluded from the chart include parts of the "Net County Cost" (possibly only the contingencies) that are not in the total depicted. If is this true, the total of "Net County Cost" cannot be readily determined.

* There is a pie chart on Page IV which shows the usage of funds. A literal reading of the chart and its notes indicates that there is a $22 million contingency, while testimony and a closer reading of the budget indicates the contingency is probably $1.43 million. This clearly appears to be an error.

Nowhere in the Proposed Budget can the Grand Jury ascertain with certainty the total amount of funds proposed to be appropriated by the Board, and nowhere can the Grand Jury find a clear description of how the various costs roll into the total expenditure plan. The Comprehensive Annual Financial Report and the quarterly Financial Status Report prepared by the Auditor-Controller show a clearer picture of County expenditures.

Testimony by the County Administrator was that San Luis Obispo County has a much more comprehensive and clearer explanation of their budget process and recommendations. There was no explanation as to why Santa Barbara does not adopt some of the better features of that budget report.

The Grand Jury reviewed the Performance and Budget Summary for the City of Sunnyvale California for Fiscal Years 1991-1992 and a Projection to 2001-2002. This document has a much clearer presentation than the Santa Barbara Proposed or Final Budget, and an apparently much more valuable long term projection. In addition, it tied the budget together with performance measurements.

General Comments on the Current 1994-95 Proposed Budget

This document indicates that the year starts with a $13.4 million balance in the general fund balances, and is projected to be either $ 0.65 million per Schedule I of the Auditor's Summary, or zero according to testimony of the County Administrator. The Proposed Budget submitted to the Board appears to be either deliberately over-budgeted or intended to use up all of the available funds in this year alone.

The Auditor-Controller reported that over estimating of revenue muddles the financial picture and hinders pinpointing of problem accounts. He has also reported that the County has over-appropriated the general fund by 4% over the last four years, partially as a result of comparing the new budget to the prior budget rather than to the actual costs and revenues.

"Net County Cost" is used as a basis for a large number of decisions and/or judgments. "Net County Cost" as used is a distorted number. Departments that receive State and Federal funds collect and budget income for overhead costs that are actually expended by other County departments. Some departments have their Net County Cost artificially high and some artificially low. Testimony is that the Auditor-Controller and the County Administrator have discussed rectifying this issue.

The Transformation Study recommended the County consider adoption of a zero based budgeting system.[1] Testimony was that zero based budgeting had been thought about, but was considered too labor intensive for its anticipated value by the County Administrator.

The Grand Jury heard testimony from the County Administrator that during budget hearings very few questions were asked about program amounts - either by the Board or the public. It seemed probable to the Grand Jury that the only thing that would be clearly understood would be the absolute amounts proposed for given programs, or their relative changes from prior years.

There is an attempt at a five year financial projection in the County Administrator's memorandum, which is more misleading than helpful. The 1994-95 fiscal year is projected to end with an undesignated fund balance of either $0.65 million or zero as discussed above, and yet the 1995-96 fiscal year is shown starting with a $10 million general fund balance. It also shows employee salary increases each year, but they were not compounded. The County Administrator advised that this was probably because nobody looked at the projection anyway. The County Administrator later provided the Grand Jury with a copy of the Five Year Budget Forecast from the 1993-94 Proposed Budget in which the projected wage increases are compounded. The format for the 1994-95 Five Year Forecast was altered to delete the compounding effect in order to simplify it.

General Accountability

The Grand Jury observed that it is not unusual for items placed on the Board agenda to have a notation to the effect that there is no fiscal impact even though the item clearly involves discretionary spending. The situation is that such items are either included in the budget but not identified, or that there would be a tradeoff of funds without exposure to the Board or to the public. The County Administrator now agrees that this could be identified in a better manner.

The Proposed Budget is structured to show costs by program, but there is no method to monitor the costs by program. Testimony is that a new accounting program is being developed that will be able to monitor actual costs by program.

In fiscal year 1994-95, the County authorized an additional 225 FTE's above those approved in the budget, and net of 81 employees were actually added to the payroll since the start of the fiscal year. In addition there were wage and salary increases negotiated with various bargaining units. In January of this year, a serious budget issue was raised which may require the termination of a large number of employees. This situation appears to be a result of not having a reasonable long range financial projection to guide the decision making.

The potential exists for the County to lose funding if retroactive changes cause a failure to meet Maintenance of Effort requirements of other governmental entities. The primary responsibility to monitor this issue is with the department with a secondary responsibility by the County Administrator's office. No clear procedures were identified to monitor this issue. The County Administrator stated that he was not aware the County had ever lost such funds.

DISCUSSION AND CONCLUSIONS

The County Administrator and his staff are to be commended for streamlining and improving the budget process despite an extremely complicated budget, a very difficult economic period in which the amounts of State funding and local property tax revenues were diminishing, and the information regarding availability of State and Federal funds was delayed.

On the other hand, presentation of the Proposed Budget, particularly the introduction and summaries, could be greatly improved so that the public, and possibly even the Supervisors, could have better understanding regarding the budget. There are areas of the budget and its

preparation that appear to permit the distortion or hiding of expenditures, or do not appear to be fiscally sound, which the Grand Jury believes should be addressed.

There are many people involved in the preparation and adoption of an annual budget for the County - the Board of Supervisors, the County Administrator and his Deputies and Analysts, the Auditor-Controller and his staff, each department head along with their financial officers and analysts, and many other staff members throughout the County. Some departments prepare one budget for their department, and other departments prepare many budget units due to the size and complexity of their operations.

FINDINGS AND RECOMMENDATIONS

FINDING #1: The Grand Jury finds there is not one obvious place in the budget where the entire cost of programs under the budgetary control of the Board of Supervisors can be located.

RECOMMENDATION #1: The County Administrator or the Auditor-Controller should provide at least one summary page in both the Proposed and Final Budgets that shows the total amount of funds under the budgetary control of the Board, omits duplication, and clearly tracks how all costs roll into this total of County expenditures.

FINDING #2: There was a weak attempt to provide a multi-year financial projection which is not consistent with the budget document, and certain long range expense projections are distorted through lack of compounding.

RECOMMENDATION #2 The Board of Supervisors should require that a multi-year financial projection be submitted with the Proposed Budget to provide all available projected information so as to enhance their perspective as they make difficult policy and financial decisions.

FINDING #3: Graphs and tables are an excellent way to interpret data, but several graphs and explanations in the introduction of the 1994-95 Proposed Budget are either in error or misleading.

RECOMMENDATION #3: The County Administrator should require that graphs and tables be used generously to interpret and clarify the various explanations in the Proposed Budget, but they should correspond accurately and directly to actual numbers in the budget to enhance the opportunity for the Board of Supervisors and the public to clearly understand the projected revenues and expenses and their implications.

FINDING #4: The present budget now shows many programs with their budgeted costs, but there is no central system in place to monitor and report expenditures by program. Testimony indicates there is a new system under development that will have the capability of monitoring actual expenditures by program.

RECOMMENDATION #4: The Auditor-Controller, in cooperation with the County Administrator, should complete and implement the new accounting system as quickly as feasible to permit the central monitoring of expenditures by program, since it is programs and their costs that are more readily understood by the public.

FINDING #5: The budget process addresses information and approvals largely on the concept of "Net County Cost." Certain overhead reimbursements are budgeted as revenue and credited to operating departments whose cost structure does not reflect the cost of services received from other departments. The concept of "Net County Cost" as currently applied misleads the public, and possibly even the Board of Supervisors, as to how and where discretionary funds are to be spent. Budgeting revenues to match expenses will provide a better indication and control of the use of discretionary funds by the operating departments.

RECOMMENDATION #5: The County Administrator, in conjunction with the Auditor-Controller, should revise the accounting for internal services to reflect the cost of all necessary support services as expenses to the operating departments, particularly those who recover overhead from other governmental entities.

FINDING #6: It is impossible to determine from the budget documents how many unfunded employee positions are in the Proposed and Final Budgets, and there is no indication as to the number of "extra help" or "contractors on payroll." Approximately $200 million of the County budget is consumed by employee costs. Lack of accurate information provides an easy way to conceal funds for unbudgeted projects or other expenditures.

RECOMMENDATION #6: The County Administrator should eliminate any unfunded positions from the budgets and clearly show regular County employees, as well as extra help and contractors on payroll, both on a total and FTE basis, in both the Proposed and Final Budgets.

FINDING #7: It is current practice for the Board of Supervisors agenda to include items that require the expenditure of funds that are not specifically budgeted, with an explanation by staff that in effect states the proposal has no fiscal impact. While this may be technically correct, since it may not have an impact on the bottom line of the budget, it is grossly misleading to the public, and may even be misleading to the Board of Supervisors.

RECOMMENDATION #7: The Board of Supervisors should require that for any Board Agenda item requiring an expenditure of funds, the amount of the projected expenditure should be specifically stated and the source of the funds be specified, such as it is (a) included in a certain budget line, (b) transferred from a specific fund, or (c) taken from a contingency account.

FINDING #8: Current budget practice is to include all of the anticipated initial fund balances as revenue sources to fund desired expenditures, as well as to over-estimate revenues with an equivalent over-estimation of expenses.

RECOMMENDATION #8: The Board of Supervisors should preclude the practice of utilizing all or most of the undesignated fund balances to balance the budget. The Board should establish the amount of fund balances that are considered prudent on a long term basis and exclude use of such funds as annual revenue sources. The Board should also require that anticipated revenues and related expenses be accurately estimated.

FINDING #9: The Proposed Budget is not sufficiently clear to the general public.

RECOMMENDATION #9: The County Administrator should evaluate budget documents of other entities such as San Luis Obispo County and the City of Sunnyvale, and improve the descriptive format for the Santa Barbara County Budget.

AFFECTED AGENCIES (California Penal Code Section 933c requires that comments to Findings and Recommendations be made in writing within 60 days by all affected agencies except governing bodies, which are allowed 90 days.)

1. Santa Barbara County Board of Supervisors - response

2. Santa Barbara County Administrator -response

3. Santa Barbara County Auditor-Controller - response

REFERENCES CONSULTED

1994-95 Proposed Budget, County of Santa Barbara

Final Budget, 1994-1995 Fiscal Year, County of Santa Barbara

Comprehensive Annual Financial Report, Fiscal Year Ended June 30, 1994, Santa Barbara County prepared by the Auditor-Controller

Santa Barbara County Agenda Board Letter, for February 7, 1995 re Report of Current Year Budget Status and Direction for Budget Preparation for Fiscal Year 1995-96

Santa Barbara County Agenda Board Letter, for February 14, 1995 re December 31, 1994 Financial Status Report, prepared by the Auditor-Controller

Performance and Budget Summary, City of Sunnyvale, California, Fiscal Years 1991-1992 to 2001-2002

Santa Barbara County Administrative Office Management Review/Strategic Plan, draft June 25, 1990 (commonly called the "Transformation Study"), by an outside consultant, CMSI

County Administrator letter of May 2, 1995 transmitting an August 12 memorandum to the Board of Supervisors regarding "Recommended Final Adjustments to the 1994-95 Proposed Budget"