Agenda 04-16-2026; 2 - Operating Budget Model Update

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2 The new living wage will drive increases in temporary and seasonal budgets for departments like Environment, Agriculture, Parks and Recreation (DEAPR) and Library and will impact the first four (4) salary grades on the pay scale for permanent employees. Adjusting to the new living wage rate is estimated to cost $500,000 for both temporary and permanent employees. The increase in the wage scale for permanent employees does cause some wage compression within the impacted salary grades, but the Recommended Budget will likely not include sufficient funding to correct that compression. Recommended Capital Investment Plan: The Recommended Capital Investment Plan changed the planned phase-in of pay-go for the school capital plan. The retreat presentation assumed that pay-go would be funded at $6 million in FY 2026-27. Due to operating budget constraints, the Recommended pay-go amount was reduced to $3.5 million in FY 2026-27. Debt Model: Between the time of the Retreat and the introduction of the Manager's Recommended Budget, County staff assess the progress of School and County capital projects and determine which projects are ready to recommend for financing. The amount of projects that are included in the financing package influences the amount of debt service required in the subsequent year's operating budget. Based on the set of projects that are ready for financing in FY 2025-26, the tax rate equivalent to fund debt service in FY 2026-27 decreases from 2.53 cents discussed during the Retreat presentation to 2.01 cents to fund impending debt obligations. Strategies: The County Manager is reviewing several strategies to reduce the gap between expected revenues and expenditures. Some of those strategies include increasing user fees to more fully represent the cost of providing services, reducing operating costs through service modifications, and reducing funding to partner agencies that may be duplicating services to residents. The County Manager is also carefully reviewing all vacant positions in an effort to reduce employee headcount and long term cost pressures. FINANCIAL IMPACT: There is no immediate financial impact associated with discussion of the Operating Model. The financial impact will ultimately come from the presentation of the Manager's Recommended Operating Budget. ALIGNMENT WITH STRATEGIC PLAN: This item supports: • MISSION STATEMENT — Orange County is a visionary leader in providing governmental services valued by our community, beyond those required by law, in an equitable, sustainable, innovative and efficient way. RECOMMENDATION(S): The Manager recommends the Board receive the updated operating model presentation.