Supervisors OK reserves policy overhaul, in move to free up hundreds of millions of dollars. The first spending may be bonuses.

The San Diego County Board of Supervisors voted Tuesday to overhaul rules on how the county keeps hundreds of millions of dollars in reserves, its new Democratic majority knocking down a key pillar of fiscal conservatism that defined the county for decades under previous Republican leadership.

A rewrite of how the county taps and classifies money in its rainy day fund has been a longtime priority of board Chair Terra Lawson-Remer, and comes after the board previously deadlocked on the same policy change in May.

Lawson-Remer and other Democrats view using the county’s reserves as a way to keep social services going in the short term.

Under legislation passed by President Donald Trump and Republicans earlier this year, programs like food stamps and Medicaid are set to undergo budget cuts, work requirements and new local cost-sharing. The potential new costs for the county have yet to be determined, but early staff estimates show it could reach $300 million a year.

“The county has hoarded money for decades,” Lawson-Remer said at Tuesday’s meeting. “We’ve taken a really careful look at our reserves policy to figure out how we can unlock some of those reserves for the crisis that we now face, but do it in a way that is fiscally responsible and fiscally sustainable.”

The revamped reserves policy came with warnings from the board’s two Republicans, Supervisors Joel Anderson and Jim Desmond, who both voted against the change.

The two Republicans argued spending reserves could limit how the county responds to natural disasters, or put the county budget in the position of using one-time funds for ongoing expenses.

“While your heart’s in the right place, I don’t agree with your decision,” Anderson said. “I don’t want to ever look at our constituents and say, while you’re a flood victim, fire victim, earthquake victim, that we don’t have the means to maintain your community,” he said.

Even with the change, the county will continue to have in the bank hundreds of millions of dollars in discretionary reserves. As of June, the county had $744 million in its rainy day fund.

Under the new policy, supervisors estimate that $380 million in reserves will be freed up for potential spending.

Lawson-Remer has acknowledged that changing how the county calculates how much it needs to keep in the reserves is not a panacea for its long-term budget outlook.

Even if some reserves were spent to cover new social services costs, the county would need new sources of revenue to plug those and other holes in its budgets in the long term.

To bring in more revenue, Democrats could put a tax referendum on the ballot. But for now, elected officials have been noncommittal on that and the county’s long-term revenue plans.

Bonuses?

When Lawson-Remer first proposed the policy in April, she emphasized that the use of reserves would be limited to offsetting state and federal budget cuts or the impact of economic downturns.

Those limits still exist in the proposal passed Tuesday, but newly inked contracts with labor unions will see reserve funds go to something else at first: bonuses for county employees.

Contracts previously agreed to with six county worker unions include provisions that trigger three years of lump-sum bonuses for their members if the reserves policy were ultimately passed.

This year, the cost of $1,000 bonuses for union members will remove about $25 million from the reserves. A bonus of $500 will go to members next year at the cost of about $12 million in reserve funds. A final $250 bonus will cost about $6 million.

Under the new policy, only 25% of reserves in excess of what the county’s new formula requires it keep in the bank can be spent in a single year. After paying out the bonuses, the county could still potentially appropriate tens of millions of dollars from the reserves in the current fiscal year.

Democrats won’t be able to vote unilaterally on specific plans to spend money kept in reserves for now, either. The policy requires four votes to approve any particular effort to spend it — meaning that one of the board’s Republicans will have to support the spending unless Democrats win more seats in future elections.

With the bonuses, four supervisors will have to vote to appropriate the money in the coming weeks.

How reserves work

The county keeps billions of dollars in reserves, but only a fraction of that money will be impacted by the new policy.

The new policy affects what are called “assigned” and “unassigned” reserves, which total about $1.3 billion, according to the most recent estimates.

Under the framework for how the county calculates reserves, at least two months of expenses must be kept as unassigned reserves.

Previously, that figure included both operating expenses and capital expenses — spending on things like infrastructure and equipment — in an approach Democrats saw as antiquated and out of sync with recommended budgeting standards.

Under the new policy, the county will have to keep in reserve the equivalent of two months of operating expenses only.

In addition, the old policy didn’t include assigned reserves in the formula for calculating its rainy day fund. Assigned reserves are money that has already been pledged to services or projects, but that supervisors have the discretion to reallocate as they see fit.

Even before Tuesday’s vote, the county was not complying with its longtime reserves policy. To comply with the rule of keeping two months of operating and capital expenses in reserve, it would have needed to have $974 million in reserve in June. It had $744 million.

With the new policy, county staff estimate $380 million can now be spent without dipping below the threshold of two months of operating expenses in the bank.

What’s next

County staff are now tasked with reporting back to supervisors by February on how that money should be spent. Staff must identify how the money can offset state and federal budget cuts or a formally recognized recession.

For Democrats, what’s happening in Washington with the Trump administration is top of mind when it comes to ways they might spend some of what’s now kept in reserves.

Under H.R. 1, county staff will have to perform new work and income checks for people receiving social services like food assistance and Medicaid, administered in California as CalFresh and Medi-Cal.

Making sure SNAP recipients are employed could cost the county between $4.6 million and $27.8 million. It remains unclear how often recipients will have to verify their employment, which will influence how many new county staffers will be needed to perform the work.

The federal government previously covered the cost of food stamp benefits, but new cost-sharing measures passed by Republicans could cost the county $150 million annually if the state doesn’t step in to absorb some of that cost.

With Medi-Cal, verifying work requirements could cost between $21 million and $63 million to hire new county staff, depending on how frequently employment will need to be reported.