Proposed 2025-26 Budget

Overall Budget Summary

The HSA budget reflects a difficult balance between constrained State and federal revenue sources and cost increases to negotiated salaries and benefits, services and supplies, and health services. The budget proposes reductions in staffing and services, primarily in the Behavioral Health, Health Centers, and Public Health divisions, to ensure that mandated services are provided, grant requirements are met, and patient and community safety is preserved. These reductions do not include potential impacts from federal policy changes.

Financial challenges result from changes in reimbursement calculations and restrictions on billable activities under CalAIM (California Advancing and Innovating Medi-Cal) Behavioral Health Payment Reform. The Behavioral Health Division’s reimbursement rates are notably lower than those in neighboring counties, making it difficult to remain competitive in recruiting and retaining staff and contract services. The County continues to advocate for increased reimbursement rates for behavioral health services from the State. A substantial reduction in Mental Health Services Act (MHSA) revenue – driven by a decline in the 1% tax on individuals earning over $1 million and the diversion of MHSA funds – has intensified these financial pressures.

The Proposed Budget accounts for significant revenue declines due to CalAIM Behavioral Health Payment Reform, lower Medi-Cal reimbursement rates, and reduced MHSA funding. With limited funding for discretionary behavioral health services, the budget includes significant decreases to professional services, including the Gemma House, Mental Health Client Action Network (MHCAN), and Downtown Outreach Workers, funding eliminations for discretionary psychiatric inpatient and treatment services for indigent and uninsured individuals, and reduced room and board funding for mental health and substance use disorder (SUD) residential treatment.

In addition, the Health Centers Division is experiencing rising personnel costs and inflationary pressures on the cost of services and supplies. The division is actively working to mitigate these increased costs by decreasing costs of services and supplies and improving clinical provider productivity. The budget transitions the Health Centers Division laboratory and radiology services to community providers to reduce costs while maintaining patient access through referrals.

The Budget recommends staffing of 658.85 full-time equivalent (FTE) positions, including negotiated salary and benefit increases. Appropriations total $304,142,241, funded by revenues of $283,018,306, a General Fund contribution of $20,723,935, a District Sales Tax contribution of $400,000, and an Other Funds contribution of $11,703.

The recommended staffing of 658.85 FTE positions is a net reduction of 74.4 FTE positions, including the deletion of 11.60 FTE filled positions, 8.0 FTE vacant limited term positions, and 55.3 FTE vacant positions, which is partially offset by the addition of 0.50 FTE position. Changes by division are summarized below and detailed in the Major Changes section:

• Administration: Delete 2.0 FTE vacant positions and transfer 1.0 FTE position from Behavioral Health.
• Public Health: Delete 11.0 FTE vacant positions and transfer 1.0 FTE position from Behavioral Health Substance Use Disorder Services.
• Behavioral Health: Delete 4.0 FTE filled positions, delete 37.0 FTE vacant positions, add 0.5 FTE positions, and transfer 3.0 FTE positions to Administration, Public Health, and Health Centers.
• Health Centers: Delete 7.6 FTE filled positions, 13.30 FTE vacant positions, and transfer 1.0 FTE position from Behavioral Health.

The Budget includes a decrease in total revenues of $11,098,942 resulting from a $5,763,559 decrease in charges for services mainly due to reduced outpatient clinic fees, partially offset by increases in patient revenue, $4,718,817 decrease in intergovernmental revenues mainly due to decreases in Mental Health Services Act (MHSA) and federal grants revenue, partially offset by increases in Drug Medi-Cal (DMC) and CalAIM Providing Access and Transforming Health (PATH CITED), and $802,771 decrease of miscellaneous revenue mainly due to the reduction of Tobacco Industry Settlement funds. The decrease is partially offset by a $119,333 increase from Environmental Health Division licenses, permits, and franchise fees, $65,000 increase from property taxes, and $1,872 increase from fines, forfeitures, and assessments.

Total expenditures decreased by $8,977,942 largely from a net $114,664,811 decrease in intrafund transfers due to the change in facility charges to properly reflect the cost of facility services and utilities and transfers from the Intergovernmental Transfer (IGT) Trust Fund, $5,492,563 decrease in salaries and benefits, $2,051,951decrease in other financing uses mainly due to reduced transfers to the Capital Fund and $1,111,100 decrease in fixed assets, predominantly as a result of completion of the heating, ventilation, and air conditioning (HVAC) project at the Homeless Persons Health Project. The decrease is partially offset by a $12,133,058 increase in services and supplies, predominantly from increases to professional services, custodial services, facility improvements and medical supplies, which is partially offset by a $1,869,397 decrease to outside hospital services, and $2,209,425 increase in other charges.

HSA is nearing the completion of a new 8-chair Children’s Crisis Stabilization Center, with an additional 16-bed residential program, and developing a new 34-bed Low-Barrier Navigation Center for behavioral health clients. Operational costs to support the new crisis center for youth are included in the budget. The budget also provides for the rising costs of mandated behavioral health services, including expenses for locked care due to Senate Bill (SB) 43 and a growing older adult population, and the purchase and implementation of a new Electronic Health Record system.

Behavioral Health

The Proposed Budget provides for a decrease of $6,967,044 in revenues, a decrease of $5,420,332 in expenditures, and an increase of $1,546,712 in General Fund contribution. Staffing changes include a net reduction of 8.0 FTE positions in Access and Crisis, 9.0 FTE positions in Adult Mental Health, 6.0 FTE positions in Behavioral Health Support, 11.0 FTE positions in Children’s Mental Health, 3.5 FTE positions in Specialty Mental Health, and 6.0 FTE positions in Substance Use Disorder services.

The Budget includes a decrease in total revenues of $6,967,044 due to a $6,928,763 decrease from intergovernmental revenues, and $116,230 decrease in charges for services, which is partially offset by a $77,949 increase in miscellaneous revenue. Total expenditures decreased by $5,420,332 largely from a $8,143,841 decrease in intrafund transfers, a $4,032,144 decrease in salaries and benefits, and a $146,951 decrease in other financing uses, which is partially offset by increases of $4,063,524 in services and supplies and $2,839,080 in other charges.

The Behavioral Health Division budget includes a District Sales Tax contribution of $400,000 for behavioral health room and board expenses at licensed residential facilities in unincorporated areas. This is a continuation of the District Sales Tax contribution transferred from Contingencies in 2024-25.

As detailed in the Emerging Issues section, significant financial constraints are forcing Behavioral Health Division to focus exclusively on the State-mandated entitlement services that the division is responsible for, limiting capacity to offer services outside of these requirements.

Health Centers

The Proposed Budget provides for a decrease of $6,434,040 in revenues, a decrease of $5,921,402 in expenditures, and a decrease of $512,638 in General Fund contribution. Staffing changes include a net reduction of 1.0 FTE position in Health Center Administration, 6.25 FTE positions in Emeline Health Center, 6.0 FTE positions in Homeless Persons Health Project, 0.2 FTE in Juvenile Hall Medical, and 6.45 FTE positions in Watsonville Health Center.

The Budget includes a decrease in total revenues of $6,434,040 due to a $6,203,759 decrease in charges for services, $115,693 decrease in intergovernmental revenues, and $114,588 decrease in miscellaneous revenue. Total expenditures decreased by $5,921,402 primarily from a $2,839,789 decrease in intrafund transfers, a $1,658,274 decrease in salaries and benefits, a $1,111,100 decrease in fixed assets, and a $312,239 decrease in services and supplies.

The Health Centers Division proposes transitioning laboratory and radiology services to community providers to reduce costs by approximately $2 million, effective July 1, 2025. Further details are provided in the Major Changes section.

Public Health

The Proposed Budget provides for a decrease of $1,006,397 in revenues, a decrease of $753,624 in expenditures, and an increase of $252,773 in General Fund contribution. Staffing changes include a net reduction of 4.0 FTE positions in Infectious Disease, 4.0 FTE positions in Population Health and Vital Statistics, and 2.0 FTE in Public Health Administration.

The Budget includes a decrease in total revenues of $1,006,397 due to a $1,212,238 decrease in intergovernmental revenues, mostly from the decrease in the COVID-19 Epidemiology and Laboratory Capacity (ELC) Enhancing Detection Grant and Medi-Cal Administrative Activities (MAA) Program, offset by the increase of the California Work Opportunity and Responsibility to Kids (CalWORKs) Home Visiting Program (HVP) Allocation, and the Childhood Lead Poisoning Prevention Program (CLPPP). The decrease is partially offset by a $107,775 increase in charges for services and a $98,066 increase in miscellaneous revenue. Total expenditures decreased by $753,624 due to decreases of $986,713 in intrafund transfers and $479,842 in salaries and benefits, which is partially offset by a $712,931 increase in services and supplies.

The Public Health Division will collaborate with community partners to develop the 2025 Community Health Improvement Plan and implement a division-wide Quality Improvement Plan, incorporating Results-Based Accountability as a performance measurement and management system. Additional key initiatives include expanding the Nurse-Family Partnership to serve Indigenous language-speaking families and increasing the use of Community Health Workers to enhance outreach and service connections.

Programmatic efforts will shift toward preventing opioid misuse and youth vaping. However, the expiration of ELC, Workforce Development, Suboxone, and Community Engaged Research Initiative (CERI) funds will reduce capacity for strengthening public health infrastructure. Additionally, a projected 20% reduction in Immunization Base funding will impact immunization program services.

For details on budget changes across the other Health Divisions of Environmental Health, Health Benefits, Administration and Special Districts, see the Major Changes section.

Federal Administration Policy Changes: HSA will actively monitor policy changes under the new federal administration, including shifts in healthcare funding, Medicaid/Medi-Cal regulations, and public health priorities, as they are anticipated to significantly impact county health services. HSA remains committed to advocating for stable funding and adjusting services to align with evolving federal mandates while upholding its core responsibilities.

HSA will closely track and proactively adapt to policy developments to ensure the continued delivery of essential health services. Federal level policy impacts could include decreased federal funding for community health centers, loss of medical coverage for vulnerable populations, and uncertainty in Medicaid and Medicare funding. These factors can hinder long-term planning, limit access to health care – especially for undocumented patients – and lead to loss of coverage and reduced services and increased waiting times for patients. In Public Health, State grants and allocations account for over 60% of the Division budget, which are often pass-through from the Federal government. While funding has remained mostly flat or declined, Public Health has had three grants cancelled prior to their expiration, which means the services and staffing cannot be sustained with the State grants and allocations alone given the rising costs of salaries, benefits and overhead. Staffing and services are being reduced to focus on mandates and priority activities with highest value and impact and align Public Health Strategic priorities.

State Behavioral Health Initiatives: The Behavioral Health Division (BHD) is working to meet over 20 legislative mandates that impact community members served in multiple County Departments, including individuals who are justice-involved or incompetent to stand trial, participating in voluntary court-supported services via the CARE (Community Assistance, Recovery and Empowerment) Act, or found to be gravely disabled under a new definition that broadens the scope for Lanterman-Petris-Short (LPS) Act services and conservatorship. The County Executive Office is supporting a Behavioral Health Initiatives effort that brings cross-departmental efforts together to meet four goals, each supported by two or three objectives established to improve performance:

• Goal 1: Align County efforts with State mandates and position the County to benefit from program changes.
• Goal 2: Expand access to behavioral health care to support residents and reduce community impacts.
• Goal 3: Equip clinical, administrative, and analytic/IS personnel to operate and transform the system of care.
• Goal 4: Establish a financial sustainability plan for the County’s behavioral health system.

Behavioral Health Services Payment Reform: BHD has experienced significant earned revenue reductions due to CalAIM (California Advancing and Innovating Medi-Cal) Behavioral Health Payment Reform which changed the way rates are calculated and the types of activities that qualify as billable and reimbursable services through Medi-Cal. Furthermore, the current Medi-Cal rate structure is disproportionately low compared to the neighboring counties we compete with for staffing and contracted services, further exacerbating the funding gap.

Following the passage of Proposition 1, the Mental Health Services Act (MHSA) will be reformed as the Behavioral Health Services Act (BHSA) starting in 2026–27. BHSA revenue, derived from a 1% tax on personal income over $1 million, will be redirected—diverting approximately 30% (around $8 million) of current funding from treatment and community services to housing and capital expenditures. BHSA reforms also remove local control over prevention funding, centralize workforce investments at the State level, and eliminate the innovation funding category. As a result, BHD anticipates reductions in grants to community-based organizations and cuts to BHD-staffed programs funded under prevention, early intervention, community support services, workforce training, innovation, and treatment.

Increases in expenses for mandated services are also anticipated in the following areas: higher costs for Institutes for Mental Disease (IMD) locked care for Medi-Cal beneficiaries, driven by increased eligibility for conservatorship, particularly for those experiencing substance use disorders, as a result of SB 43, and an aging population; significant net operating expenses associated with the Children’s Crisis Center; and costs related to the purchase and implementation of a new Electronic Health Record system.

Children’s Crisis Center: In 2025–26, BHD will open a Children’s Crisis Center featuring an 8-chair Crisis Stabilization Unit and a 16-bed Crisis Residential Program licensed as a Short-Term Residential Treatment Program (STRTP). The facility is projected to incur a net operating cost of $5.3 million annually. Considering significant changes to federal and State funding, a sustainable financial plan must be developed to ensure sufficient resources are available to cover ongoing operational costs and maintain program stability.

Behavioral Health Client Housing: Lack of safe, stable housing remains the greatest barrier to recovery for people with serious mental illness experiencing homelessness, leading to repeated cycles through crisis and inpatient services. In 2023–24, 20% of clients in the Mental Health Plan (MHP) and Drug Medi-Cal – Organized Delivery System (DMC-ODS) experienced homelessness. In partnership with the Human Services Department’s Housing for Health Division, BHD aims to house 100 clients engaged in County behavioral health services by June 30, 2026.

Health Centers Rising Costs Outpacing Reimbursement Rates: Federally Qualified Health Centers (FQHCs) are facing a widening gap between rising operational costs and flat reimbursement rates. While the federal Prospective Payment System (PPS) provides annual rate adjustments, these increases are not keeping pace with inflation or the growing costs of care. FQHCs primarily serve patients with complex medical and social needs, who average eight visits per year. At the same time, expenses for prescription drugs, vaccines, diagnostic equipment, and medical supplies continue to fluctuate with the market, and salaries and benefits are increasing due to competition for skilled healthcare workers. This mismatch is shrinking operating margins and threatening the long-term financial sustainability of County-operated FQHCs. Without changes to reimbursement structures or additional funding sources, reductions in services may be necessary, potentially limiting patient access and care quality.

Medi-Cal Program Integration: The California Department of Health Care Services (DHCS) plans to integrate the administration of the Medi-Cal Specialty Mental Health Plan (MHP) and Drug Medi-Cal Organized Delivery System (DMC-ODS) by 2027. This integration could impact how counties like ours manage behavioral health services. While the goal is to streamline operations and reduce redundant administrative functions, the financial implications remain unclear. There is concern that the integration may reduce reimbursement for administrative activities even if operational workload and costs remain unchanged. Until DHCS releases detailed policy guidance, the fiscal impact on County-run Health Centers is uncertain.

Managed Care Organization (MCO) Tax (Proposition 35): California voters approved Proposition 35, which seeks to make permanent the Managed Care Organization (MCO) tax that helps fund Medi-Cal programs. This revenue is critical for supporting Medi-Cal health plans, including those that contract with FQHCs such as the Central California Alliance for Health. However, this funding stream depends on federal approval of the tax structure and must be renewed for 2027. Changes in federal leadership or policy priorities could jeopardize this support, creating fiscal uncertainty for Health Centers beyond 2026.

Discounted Pharmaceutical Pricing (340B Program): The federal 340B Drug Pricing Program enables Health Centers to purchase outpatient drugs at significantly reduced prices, helping provide affordable medications to uninsured and underinsured patients. However, bipartisan reform efforts to strengthen the program stalled prior to the last federal election. Without renewed Congressional action, the future of 340B support is uncertain. Loss of 340B benefits would limit access to affordable medications, increasing financial strain on Health Centers and reducing service availability for vulnerable populations.

Medicare Telehealth Authority: Medicare currently allows Federally Qualified Health Centers to receive full reimbursement for telehealth services—both audio-only and video visits—at the PPS rate. These flexibilities have been extended through December 31, 2025. However, it is unclear whether they will become permanent. If these telehealth reimbursement policies expire, Health Centers could face revenue shortfalls and reduced service accessibility, particularly for patients in rural areas or those with limited mobility or technology access.

Public Health Emerging Issues: The Public Health Division is advancing the implementation of the 2024 Community Health Improvement Plan (CHIP), which prioritizes Access to Healthcare, Children and Adolescent Health, Housing Security, and Mental Health. These focus areas reflect community-identified needs and will guide resource allocation and program development. Implementation may require new or reallocated resources in future years, and there are opportunities to seek funding from local health care systems to support this work.

Emerging public health challenges also include rising complex communicable disease cases, particularly Tuberculosis and high-risk Syphilis, which demand intensive coordination and staffing. Concurrently, funding reductions for immunization programs are anticipated as COVID-19-related and federal pass-through funds decline. Public Health is also adopting the One Health framework to address the intersections of human, animal, and environmental health, especially as climate-related risks such as H5N1 and rabies persist. These efforts will require enhanced surveillance, epidemiology, and cross-sector collaboration.

Environmental Health Land Use Process Improvement: The Environmental Health Division (EHD) is engaged in a process improvement project for our division including our Onsite Water Treatment System (OWTS) program. A key element of the project includes implementation of a new data management system, expected to go live in December 2025, with a public facing portal where applicants can monitor the status of their applications, submit documents and fees, and communicate with staff about their project. The software also has features to improve workload distribution management. As part of this project, EHD is also continuing ongoing efforts build and retain a qualified staff after years of significant staff turnover in a competitive job market. Engaging with staff in ways that foster their professional development and improving staff retention will remain an important component of efforts to improve processes and customer experience.