Yolo County faces what may be a challenging budget season ahead as property tax revenue is impacted by higher interest rates.
The Board of Supervisors received a preliminary assessment of the 2023-24 budget on Tuesday, Jan. 24, with the county’s chief financial officer Chad Rinde saying, “the housing market has effectively entered a recession.”
“We are seeing a lot of changes in our economy from what we’ve seen over the last few years,” he said. “Interest rates are certainly increasing, especially for anyone who is looking for or planning on taking out a home loan or other type of loan — car, vehicle or otherwise. And a lot of that … is the federal reserve trying to increase interest rates to tamp down on inflation.
“We are seeing housing prices decline across the country as well as locally.”
Property taxes provide the county’s largest source of discretionary revenue, but action by the Federal Reserve to control inflation have caused mortgage rates to increase dramatically, supervisors were told, resulting in widespread declines in both housing sales and prices.
As a result, growth in property tax revenues are projected to slow considerably following years of robust growth.
During the 2019-20 budget year, that revenue grew by 5.5 percent, with subsequent years showing growth of 5.15 percent to 7.23 percent in fiscal year 2022-23.
But the estimated growth for 2023-24 is 3 percent and that estimate may change before the board’s upcoming budget workshop.
“We are fine tuning our assessment and may adjust that as we get to March and our budget hearing,” Rinde told supervisors.
Likewise, an estimated 6 percent growth rate for general sales tax revenue — which makes up a small proportion of the county’s discretionary budget — may also be adjusted downward.
This as county expenses are rising, and “our revenues are not growing as fast as our costs,” Rinde said.
Part of that is thanks to a policy shift by the county in December to bring employee compensation up to 100 percent of market rate, resulting in a 5 percent salary increase for most classifications beginning Jan. 1.
Like many jurisdictions, the county has been struggling to fill open positions.
The change, said Rinde, “has made our recruitment and retention more competitive.”
However, he said, “that is something we’ll be grappling with in the upcoming budget, where most of our labor units did see a 5 percent increase …. And we’ll also see cost-of-living adjustments coming July 1. The cumulative amount of that is on average about 7 percent.”
Meanwhile, little help may be coming from the state, which is projecting a $22 billion deficit of its own.
“They are not dipping into reserves at this time to bridge that gap,” Rinde said, “but they are pushing programs, deferring them out in the future, deferring expenditures. They’re also borrowing for things they otherwise would have planned to use cash expenditures … So we are closely monitoring that.”
More opportunity may come at the federal level, he said, “especially in infrastructure and climate, in the Infrastructure Investment and Jobs Act and the Inflation Reduction Act that we’ll be carefully monitoring as we move forward.”
What the ultimate budget status will be and how it will affect county services and programs remains to be seen.
The Board of Supervisors will receive a mid-year budget update in February and hold a budget workshop March 13 and 14.
The recommended budget hearing is scheduled for June 13.