OFFICE OF THE COUNTY ADMINISTRATOR

July 23, 1995

Honorable Rodney S. Melville, Presiding Judge

Santa Barbara Superior Court

312 East Cook Street

Santa Maria, CA 93454

Subject: County Administrator's Response to the Grand Jury's Interim Final Report on Santa Barbara County Budget Planning and Control

Dear Judge Melville:

My response to the above referenced Grand Jury Report is enclosed. It includes comments on portions of the report's narrative as well as responses to the Findings and Recommendations as required by statute.

I am pleased to see the Grand Jury take the time to review the County budget. I appreciate their feedback about how to improve the understandability and clarity of the budget process and in particular about how to improve the presentation of the annual Proposed Budget. We will utilize the Grand Jury's suggestions to help enhance the readability, comprehensives and clarity of future Proposed Budgets.

I found myself agreeing with each of the Grand Jury's recommendations. What was difficult for me and my budget staff to accept was some of the wording in the findings and narrative of the report For example, phrases like, "has no meaning," "hiding of expenditures," "easy to conceal funds" and 'grossly misleading to the public" were used in reference to the 1994-95 Proposed Budget. These statements imply that the 1994-95 Proposed Budget is a less than professionally prepared document. This is not the case and hopefully it is not the overall impression that the Grand Jury was left with.

No budget document is perfect and last year's Proposed Budget is no exception. However, for perspective there are some positive aspects of that budget on which the Grand Jury did not focus. For example, the following is true with respect to the 1994-95 Proposed Budget:

Note to Readers:

We have attempted to enhance readability and continuity of thought by reproducing the Grand Jury's report verbatim and inserting pertinent County Administrator's comments and responses where appropriate. The County Administrator's comments are in bold type, while the Grand Jury's text is in regular type.

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.

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 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 Budget Authorized AMW Repiar Actual,inc 9
Authorization Employees at Employees at Extra & Contract
E@ve Date Effective Date at Eff@ Daft

4/23/95 3935 4133 3753 4111

7/3/94 3867 3994 3672 4028

B/l/93 3897 3928 3551 3913

FY end 1992 3970 Not Avail. 3565 4017

FY end 1991 3882 Not Avail. 3521 3900

Santa Barbara Payrotl/Personnel System, Biweekly Staffing Repofts

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· 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's that the coding of the budget input would allow the "extra help" and 41 contractors on payroll" to be shown in both the Proposed and Final Budgets.

Testimony was that many positions were included but left unfunded to avoid having to later rejustify 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

AU 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.

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County Administrator's Comment:

We agree with the Grand Jury that the footnote to the pie chart on Page IV (copy attached) is in error. The amount indicated is $371.96 million; it should have been $372.79 million. In addition, if the named exclusions in the footnote had included "new reserves and designation increases" the footnote would have tied directly to the total on the Auditor's "Schedule #1" on Page I of the Proposed Budget.

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.

County Administrator's Comment:

The Grand Jury remarked to me that they had difficulty comparing our Proposed Budget prepared by the County Administrator with the Final Budget prepared by the Auditor Controller. I acknowledged that they are different in format. Also, I noted that San Luis Obispo County has a practice of resolving this issue by having the Final Budget produced in the same format as the Proposed Budget including a narrative description of the actions taken by the Board of Supervisors during budget hearings. Using San Luis Obispo County's approach would require the concurrence of the Auditor-Controller. If the Board of Supervisors wishes to pursue this approach, we would be happy to work with the Auditor-Controller.

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.

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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.

County Administrator's Comment:

I should have been clearer in my comments to the Grand Jury on this point. The Grand Jury asked me why we did not show the compounding effect of salary increases over time. I advised that we had done so in the 1993-94 forecast but did not do so in the 1994-95 forecast in order to simplify and improve the readability of the forecast.

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.

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operations also is reflected In the Vehicle Operations Budget.) We win provide additional clarity and technical accuracy in future Proposed Budget summaries. Further, we will attempt to better describe how various costs roll up Into the total expenditure plan.

(Under State Law, Final Budgets are compiled by the Auditor-Controller, and therefore, it would be up to him as to whether to include the recommended information in them).

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.

County Administrator's Response:

We agree with the Grand Jury that a multi-year financial projection should be part of every Proposed Budget. The 1994-95 Proposed Budget contained such a projection as did the 1992-93 and 1993-94 Proposed Budgets. The Five Year Forecast (copy attached) in the 1994-95 Proposed Budget compares the previous year's net cost/revenues to the then current and future years' projected net costs/revenues. The projection includes new (additional) salary and benefit costs for each year forecasted. We believe the forecast is consistent with the rest of the budget document.

A fair assessment of the accuracy of the forecast can be made by comparing its projections about 1995-96 what we now think 1995-96 Will be like:

1994-95
Forecast Budgeted
Item for 1995-96 1995-96 Accuracy

Fund Balance $10.00 minion S 9.43 million 94.3%
Discretionary Revenue 103.64 million 101.31 million 97.8%
Total Discretionary Financing 115.64 million 114.07 million 98.6%
New Salary and Benefit Costs 3.10 million 2.27 million 73.2%
Net Long-Term Debt 4.22 million 4.07 million 96.4%
Contingencies 1.00 million 0.50 minion 50.0%
Balance Available 107.32 million 107.23 million ".9%

Based upon its accuracy, we believe the forecast is valuable and accurate. Certainly, we will strive to continuously refine and improve it.

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.

County Administrator's Response:

We agree with the Grand Jury that applying the cost of support and overhead services in departmental budgets as well as related revenues provides a more accurate cost accounting of operating department programs and therefore a better indication of discretionary expenditures than the current system.

However, the current system also has certain advantages and has been used in Santa Barbara County for many years. Nevertheless, we are not wedded to the current system and therefore commit to working with the Auditor-Controller and the department heads to evaluate and potentially implement a revised system as recommended.

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.

County Administrator's Response:

We agree with the Grand Jury that the Proposed Budget should contain clear information about the number and cost of regular employees, extra help and contractors on payroll. We also agree that unfunded positions should be deleted unless departments can present an operational reason for maintaining them. Therefore, we will provide more information about the cost and number of unfunded, extra help and contract positions in future Proposed Budgets.

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County Administrator's Response:

We agree with the Grand Jury that our long-term goal should be to have ongoing revenues equal or exceed ongoing expenses exclusive of fund balances. We will work with the Board, the Auditor-controller and departments toward achieving that goal However, we cannot recommend excluding fund balances from financing sources at this time. For example, to do so would mean reducing appropriations beyond the recommendations included in the 1995-96 Proposed Budget by $9.4 million resulting in drastic service curtailments.

As to overestimates of revenues and expenditures, we agree with the Grand Jury that revenues and expenditures should be accurately estimated. Along these lines, our final recommendations for 1995-96 insurance expenses and the General Relief program will be reduced based on historical savings in both programs.

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.

County Administrator's Response:

We agree with the Grand Jury that we should review other City and County Budget documents. In fact, we already do review budget documents from other jurisdictions and attempt to utilize the portions that we find most useful.

The fact that members of the Grand Jury had difficulty understanding some of the charts, graphs and write-ups in the Proposed Budget is good feedback. Based upon that feedback, we will continue to improve the readability and user friendliness of future Proposed Budgets.

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.)

I . Santa Barbara County Board of Supervisors

2. Santa Barbara County Administrator

3. Santa Barbara County Auditor-Controller

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ATTACHMENT

July 21, 1994

MEMO TO: Board of Supervisors

FROM: Kent M. Taylor, county Administrator

SUBJECT: Proposed Budget for Fiscal Year 1994-95

'Me 1994-95 Proposed Budget appropriation for all funds is S508.95 million, an increase of $28.76 million or approximately 6% from the 1993-94 Adopted Budget. Dollar changes from 1993-94 by fund type and functional category are illustrated in the charts presented here and on succeeding pages.

FINANCING REQUIREMENTS BY FUND

RECOMMENDED ED CHANGE
FINANCING from PERCENT
FUND TYPE REQUIREMENTS 1993-21- CHANGE

General $335.54 $19.39 6.1%

Special Revenue (Roads,
Municipal Finance
and Others) 59.45 731 14.0

Internal Services 2730 (0.76) 2.9%)

Enterprise 21.44 2.28 11.9%

Special District
(Board-Governed) 65.22 @4 0.8%

TOTAL $508.95 $28.76 6.0%

The Proposed Budget generally maintains and, in some instances, recommends increases to current service levels. The recommended increased service levels are tied to Federal revenue increases. However, it is difficult to make meaningful comparisons between the 1993-94 budget figures and those recommended for 1994-95 because of the many budget modifications that occurred during 1993-94. These modifications are summarized briefly in this budget message and described more specifically in the individual budgets.