Agenda Packet — Hercules City Council, January 25, 2022 (part 3 of 3)

2 Emphasis of Matter

As described in Note 1 to the basic financial statements , these financial statements present only the Hercules Public Financing Authority and do not purport to and do not present fairly the financial position of the City as of June 30, 2021, the changes in its fina ncial position, or where applicable, its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter.

Other Matters

Required Supplementary Information

Management has omitted the Management ’s Discussion and Analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financia l statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of the financial reporting for placing the basic financial statements in an appropriate operati onal, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.

Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued our re port dated January 19, 2022 on our consideration of the Authority's intern al control over financial reporting a nd on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is solely to describe the scope of our testing of internal control over financia l reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Authority’s internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Authority’s internal control over financial reporting and compliance.

Santa Ana, California
January 19, 2022

363

REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND

OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN

ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS

Independent Auditors’ Report

To the Board of Directors
of the Hercules Public Financing Authority
Hercules, California

We have audited, in accordance with the auditing standa rds generally accepted in the United States of America and the standards applicable to fi nancial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activities and each major fund of the Hercules Public Financing Authority (the “Authority”), a component unit of the City of Hercules, California (the “City”), as of and for the year ended June 30, 2021, and the related notes to the basic financial statements, which collectively comprise the Authority’s basic financial st atements, and have issued our report thereon dated January 19, 2022.

Internal Control Over Financial Reporting

In planning and performing our audit of the financial statements, we considered the Authority's internal control over financial reporting (“internal control”) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opini on on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Au thority's internal control. Accordingl y, we do not express an opinion on the effectiveness of the Authority's internal control.

A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assi gned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

Our consideration of internal control was for the limited pur pose described in the first paragraph of this section and was not designed to identify all defici encies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, duri ng our audit we did not identify any defi ciencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.

Compliance and Other Matters

As part of obtaining reasonable assurance about whether th e Authority's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on co mpliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opi nion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. 200 E. Sandpointe Ave., Suite 600, Santa Ana, California 92707 Tel: 949-777-8800 • Fax: 949-777-8850
www.pungroup.cpa
3939352 Pun & McGeady_L_final.pdf 2 1/14/14 3:48 PM 364
To the Board of Directors
of the Hercules Public Financing Authority
Hercules, California

Page 2 ends

4 Purpose of this Report

The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity's internal control and co mpliance. Accordingly, this communication is not suitable for any other purpose.

Santa Ana, California
January 19, 2022
365

BASIC FINANCIAL STATEMENTS
5 366
This page intentionally left blank.
6 367
ASSETS
Cash with fiscal agents 9,893,085$
Lease receivable 13,618,758
Interest receivable 593,432
Advances to Successor Agency 6,703,250
Total assets 30,808,525

LIABILITIES
Interest payable 546,009
Bonds payable, due within one year 515,000
Bonds payable, due in more than one year 22,564,646
Total liabilities 23,625,655

NET POSITION
Restricted for debt service 7,182,870
Total Net Position 7,182,870$
Hercules Public Financing Authority
Statement of Net Position
June 30, 2021
See accompanying Notes to the Basic Financial Statements. 7 368
EXPENSES:

Interest and fiscal agent charges 7,322,599$
PROGRAM REVENUES:

Lease revenues 6,832,101
(EXPENSES) OVER REVENUES (490,498)

GENERAL REVENUES
Investment earnings 945,549
CHANGES IN NET POSITION 455,051
NET POSITION:

Beginning of year 6,727,819
End of year 7,182,870$
Hercules Public Financing Authority
Statement of Activities
For the Year Ended June 30, 2021
See accompanying Notes to the Basic Financial Statements. 8 369

GOVERNMENTAL FUND FINANCIAL STATEMENTS
9 370
This page intentionally left blank.
10 371
2003B PFA 2009 PFA 2010 PFA 2020 PFA
Lease Taxable Lease Wastewater Lease Revenue
Revenue Bonds Revenue Bonds Revenue Bonds Refunding Bonds Total ASSETS
Cash with fiscal agents - $ 1,923,294$ 7,679,725 $ 290,066 $ 9,893,085 $ Lease receivable - 6,461,706 1,570,275 5,586,777 13,618,758 Interest receivable - 350,018 185,078 58,336 593,432 Advances to Successor Agency - - - 6,703,250 6,703,250 Total assets - 8,735,018 9,435,078 12,638,429 30,808,525

DEFERRED INFLOWS OF RESOURCES
Unavailable revenues - 6,811,724 1,755,353 5,645,113 14,212,190 Total deferred inflows of resources - 6,811,724 1,755,353 5,645,113 14,212,190

FUND BALANCES
Restricted for debt service - 1,923,294 7,679,725 6,993,316 16,596,335 Total fund balances - 1,923,294 7,679,725 6,993,316 16,596,335 Total deferred inflows of resources
and fund balances -$ 8,735,018$ 9,435,078$ 12,638,429$ 30,808,525$ Hercules Public Financing Authority
Balance Sheet
June 30, 2021
See accompanying Notes to the Basic Financial Statements. 11 372
Total Fund Balances - Governmental Funds 16,596,335$
14,212,190
Bonds outstanding (23,511,843)
Unamortized discount on bonds outstanding 432,197
Accrued interest on long-term debt (546,009)
Total Net Position - Governmental Activities 7,182,870$ June 30, 2021
Amounts reported for governmental activities in the statement of net position are different from those reported in the governmental funds because of the following:

Long-term liabilities are to use and payable in the current period and, therefore are not reported in the governmental funds. Interest on long-term debt is not accrued in governmental funds, but rather is recognized as an expenditure when due. All liabilities are reported in the statement of net position:

Lease receivables and related interest receivable are not available to pay for current period expenditures and, therefore, are deferred in the governmental funds.

Hercules Public Financing Authority
Reconciliation of the Governmental Funds Balance Sheet
to the Government-Wide Statement of Net Position
See accompanying Notes to the Basic Financial Statements. 12 373
2003B PFA 2009 PFA 2010 PFA 2020 PFA
Lease Taxable Lease Wastewater Lease Revenue
Revenue Bonds Revenue Bonds Revenue Bonds Refunding Bonds Total REVENUES:

Lease revenues 5,773,379 $ 897 $ 739,176$ 103,455 $ 6,616,907 $ Use of money and property - 837,889 722 106,938 945,549 Total revenue 5,773,379 838,786 739,898 210,393 7,562,456 EXPENDITURES:

Debt services:

Principal 5,705,000 200,000 285,000 - 6,190,000 Interest and fiscal charges 68,379 709,715 449,175 377,365 1,604,634 Total expenditures 5,773,379 909,715 734,175 377,365 7,794,634

EXCESS (DEFICIENCY) OF REVENUES
OVER (UNDER) EXPENDITURES - (70,929) 5,723 (166,972) (232,178)

OTHER FINANCING SOURCES (USES)
Proceeds from bond issuance - - - 5,876,843 5,876,843 Payment to the escrow agent - - - (5,705,000) (5,705,000) Transfers in - - - 6,988,445 6,988,445 Transfers out (6,988,445) - - - (6,988,445) Total other financing sources (uses) (6,988,445) 7,160,288 171,843 NET CHANGE IN FUND BALANCES (6,988,445) (70,929) 5,723 6,993,316 (60,335) FUND BALANCES:

Beginning of year 6,988,445 1,994,223 7,674,002 - 16,656,670 End of year -$ 1,923,294$ 7,679,725$ 6,993,316$ 16,596,335$ Hercules Public Financing Authority
Statement of Revenues, Expenditures, and Changes in Fund Balances For the Year Ended June 30, 2021
See accompanying Notes to the Basic Financial Statements. 13 374
Net Change in Fund Balances - Governmental Funds (60,335)$ Amounts reported for governmental activities in the statement of activities are different because:
215,194
Change in Accrued Interest on Long-Term Debt 11,604
Principal repayments on Long-Term Debt 485,000
Payment to the escrow agent for retirement of Long-Term Debt 5,705,000 Proceeds from the issuance of Long-Term Debt (5,876,843) Amortization of Discounts (24,569)
Change in Net Position - Governmental Activities 455,051$ Long-term debt proceeds provide current financial resources for governmental funds, but issuing debt increases long-term liabilities in the statement of net position. Payment of debt principal is an ex
penditure in the governmental funds but repayment reduces long-term liabilities in the statement of Hercules Public Financing Authority
Reconciliation of the Governmental Fund Statement of Revenues, Expenses and Changes in Fund Balances to Government-Wide Statement of Net Position June 30, 2021
Some expenses reported in the statement of activities do not require the use of current financial resources and, therefore, are to be reported as expenditures in governmental funds. In addition, interest on lon
g-term debt is not accrued in governmental funds.

Lease receivables are reported as financial resources in the fund statements; however these amounts represent the change in the long-term investment in leases to the Hercules Public Financing Authority and decrease net position.

See accompanying Notes to the Basic Financial Statements. 14 375

15 NOTES TO THE BASIC FINANCIAL STATEMENTS
376

16 This page intentionally left blank.
377
Hercules Public Financing Authority
Index to the Notes to the Basic Financial Statements
For the Year Ended June 30, 2021

17 Note 1 – Summary of Significant Accounting Policies ........................................................................................... 19

A. Financial Reporting Entity. ............................................................................................................................ 19 B. Basis of Accounting and Measurement Focus ............................................................................................... 19 C. Cash and Investments ..................................................................................................................................... 20 D. Long-Term Debt ............................................................................................................................................ 20 E. Fund Balances ................................................................................................................................................ 21 F. Net Position .................................................................................................................................................... 21 G. Spending Policy ............................................................................................................................................. 21 H. Use of Estimates............................................................................................................... .............................. 22

Note 2 – Cash and Investments ................................................................................................................................ 22

A. Investments Authorized by Debt Agreement. ................................................................................................ 22 B. Risk Disclosures ............................................................................................................................................. 23

Note 3 – Lease Receivable......................................................................................................................................... 25

Note 4 – Capital Lease – Sales Type ........................................................................................................................ 25

Note 5 – Advances to the Former Hercules Redevelopment Agency .................................................................... 26

Note 6 – Long-Term Debt ......................................................................................................................................... 26

A. 2003B PFA Lease Revenue Bonds. ............................................................................................................... 26 B. 2009 PFA Taxable Lease Revenue Bonds ..................................................................................................... 27 C. 2010 PFA Wastewater Revenue Bonds ......................................................................................................... 28 D. 2020 PFA Lease Revenue Refunding Bonds ................................................................................................. 29

Note 7 – Contingencies .............................................................................................................................................. 29

A. Lawsuits. ........................................................................................................................................................ 29

378

18 This page intentionally left blank.
379
Hercules Public Financing Authority
Notes to the Basic Financial Statements
For the Year Ended June 30, 2021

19 Note 1 – Summary of Significant Accounting Policies

The basic financial statements of the Hercules Public Fina ncing Authority (the “Authority”) have been prepared in conformity with accounting principles generally accepte d in the United States (“U.S. GAAP”) as applied to governmental agencies. The Governmental Accounting Standards Board (“GASB”) is the accepted standard setting body for establishing governmental accounting and financial re porting principles. The following is a summary of the Authority’s significant policies:

A. Financial Reporting Entity

The Authority is a joint powers authority organized by the City of Hercules, California (the “City”) and the former Hercules Redevelopment Agency (Agency) on July 24, 2001 under the laws of the State of California.

The Authority was organized to provide financing for public capital improvements and working capital for the City and the Agency through lease, acquisition, or construction of such public capital improvements.

Administrative and related normal business expenses incurre d in the day-to-day operati ons of the Authority are provided by the City and are not included in the accompa nying basic financial statements. Management believes that such expenses are insignificant to the Authority’s operations.

The funds of the Authority have been included within the scope of the financ ial statements of the City because the City Council of the City is the governing board and has financial accountability over the operations of the Authority. Only the financial activity of the Authority is included herein and these financial statements, therefore, do not purport to represent the financial position or results of operations of the City.

B. Basis of Accounting and Measurement Focus

The accounts of the Authority are organized on the basis of funds, each of which is considered a separate accounting entity. The operations of each fund are account ed for by providing a separate set of self-balancing accounts that comprise its assets, deferred outflows of r esources, liabilities, deferred inflows of resources, fund balance, revenues and expenditures. These funds are established for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations.

Government-Wide Financial Statements

The government-wide financial statements are presented on an “economic resources” measurement focus and the accrual basis of accounting. Accordingly, all of the City ’s assets, deferred outflows of resources, liabilities, and deferred inflows of resources, including capital assets, as well as infrastructure assets, and long-term liabilities, are included in the accompanying statement of net position. The statement of activiti es presents changes in net position. Under the accrual basis of accounting, revenues are recognized in the period in which they are earned while expenses are recognized in the period in which the liability is incurred.

Governmental Fund Financial Statements

All governmental funds are accounted for on a spending or “current financial resources” measurement focus and the modified accrual basis of accounting. Accordingly, only current assets, current liabilities, and deferred inflows of resources are included on the balance sheet. Th e statement of revenues, expenditures and changes in fund balances presents increases (revenue and other fi nancing sources) and decreases (expenditures and other financing uses) in fund balances. Under the modified accrual basis of accounting, revenues are recognized in the accounting period in which they become both measurable and available to finance expenditures of the current period.
380
Hercules Public Financing Authority
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

20 Note 1 – Summary of Significant Accounting Policies (Continued)

B. Basis of Accounting and Measurement Focus (Continued)

Governmental Fund Financial Statements (Continued)

Reconciliations of the fund financial statements to the government-wide fi nancial statements are provided to explain the differences.

The Authority reports the following major Governmental Funds:

2003B PFA Lease Revenue Bonds Debt Service Fund only the debt component of the City fund, accounts for the accumulation of resources used for the payment a nd principal interest on the bond issued to cover the financing of the original City Hall debt issue and to ge nerate additional resources to assist in the construction of a new library building.

2009 PFA Taxable Lease Revenue Bonds Debt Service Fund only the debt component of the City fund, accounts for the accumulation of resources used for the pa yment and principal interest on the bond issued to cover the financing of the acquisition of certain commercial condominium properties, consisting of approximately 96,847 square feet located at 203-295 Linus Pauling Drive within the City.

2010 PFA Wastewater Revenue Bonds Debt Service Fund only the debt component of the City fund, accounts for the accumulation of resources used for the pa yment and principal interest on the bond issued to cover capital improvements to the City of Hercules wastewater system.

2020 PFA Lease Revenue Refunding Bonds Debt Service Fund only the debt component of the City fund, accounts for the accumulation of resources used for the pa yment and principal interest on the bond issued to cover the financing of the original City Hall debt issu e and to generate additional resources to assist in the construction of a new library building.

C. Cash and Investments

The Authority’s cash and investments are held by a fiscal agent for the redemption of bonded debt and maintaining required reserves. Investments have b een made only as permitted by specific State Statutes governing their investments or applicable Authority resolution or bond indenture.

D. Long-Term Debt

In the government-wide financial stat ements, long-term debt and other l ong-term obligations are reported as liabilities in the Statement of Net Position. Bond premiums and discounts are deferred and amortized over the life of the bonds using the effective interest method. Bonds payable are reported net of the applicable bond premium or discount.

In the governmental fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuance are reported as other financing sources while discounts on debt issuance are reported as other financing uses. I ssuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. 381
Hercules Public Financing Authority
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

21 Note 1 – Summary of Significant Accounting Policies (Continued)

E. Fund Balances

In the governmental fund financial statements, fund balances are classified as follows:

Nonspendable – Nonspendable fund balances include amounts th at cannot be spent because they are not in a spendable form, such as loans receivable or inventory, or because resources legally or contractually must remain intact.

Restricted – Restricted fund balances are the portion of fund balance that have externally enforceable limitations on their usage through legislation or limitations imposed by creditors, grantor, laws and regulations of other governments or enabling legislation.

Committed – Committed fund balances are self-imposed limita tions by the highest level of decision-making authority, namely the Board of Directors, prior to the end of the reporting period. The Board adoption of a resolution is required to commit resources or to rescind the commitment.

Assigned – Assigned fund balances are limitations imposed by management based on the intended use of the funds. Modifications or rescissions of the constraints can be removed by the same type of action that limited the use of the funds. Assignment of resources can be done by the highest level of decision making or by a committee or official designated for that purpose. The Authority has authorized the Executive Director for that purpose.

Unassigned – Unassigned fund balances represent the r esidual net resources in excess of the other classifications.

F. Net Position

In the government-wide financial statements, net position is classified as follows:

Investment in Capital Assets – This component of net position consists of capital assets, net of accumulated depreciation, related debt, and deferred inflows of resources.

Restricted – This component of net positi on consists of restricted assets reduced by liabilities and deferred inflows of resources related to those assets.

Unrestricted – This component of net positi on is the amount of the assets, deferred outflows of resources, liabilities, and deferred inflows of resources that are not included in the determination of net investment in capital assets or the restricted component of net position.

G. Spending Policy

Government-Wide Financial Statements

When expenses are incurred for purpo ses for which both restricted and unrestricted components of net position are available, the Authority’s policy is to apply the restricted component of net position first, then the unrestricted component of net position as needed.
382
Hercules Public Financing Authority
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

22 Note 1 – Summary of Significant Accounting Policies (Continued)

G. Spending Policy (Continued)

Governmental Fund Financial Statements (Continued)

When expenditures are incurred for purposes for which both restricted and unrestricted fund balances are available, the Authority’s policy is to apply restricted fund balances first, then unrestricted fund balances as needed.

When expenditures are incurred for pur poses where only unrestricted fund ba lances are available, the Authority uses the unrestricted resources in the following orde r of committed, assigned and unassigned, except for instances wherein an ordinance specifies the fund balance.

H. Use of Estimates

The preparation of financial statements in conformi ty with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures.

Accordingly, actual results could differ from those estimates.

Note 2 – Cash and Investments

At June 30, 2021, the Authority’s cash and investments are held by fiscal agents totali ng $9,893,085. Fiscal agents are mandated by bond indentures as to the types of investments in which debt proceeds can be invested.

A. Investments Authorized by Debt Agreements

Investments of debt proceeds held by bond trustee are governed by provisions of the debt agreements, rather than the general provisions of the Californi a Government Code or the investment policy of the City. The table below identifies the investment types that are authorized for inv estments held by bond trustee. The table also identifies certain provisions of these debt agreements that address interest rate risk and concentration of credit risk.

Maximum Maximum
Maximum Percentage Investment
Authorized Investment Type Maturity of Portfolio in One Issuer Local Agency Investment Fund (State Pool) N/A $50 Million $50 Million U.S. Treasury Obligations 30 Years 20% None
U.S. Government Agency Issues 30 Years 20% None
Insured Deposits with Banks and Savings and Loans N/A None None Bankers Acceptance (Must be Dollar Denominated) 6 Months 40% 30% Commercial Paper 6 Months 15% 10%
Negotiable Time Certificates of Deposits 5 Years 30% $100,000 Nonnegotiable Time Certificates of Deposits 5 Years 30% $100,000 Federally Issued Time Deposits 1 Years 20% None
Repurchase Agreements 30 Days None None
Reverse Repurchase Agreements 92 Days 20% None
Medium-Term Notes 5 Years 30% 15%
Mutual Funds N/A 20% None
Money Market Funds N/A None None
Insured or Passbook Savings Accounts N/A None $100,000
Guaranteed Investment Contract N/A None None
383
Hercules Public Financing Authority
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

23 Note 2 – Cash and Investments (Continued)

B. Risk Disclosures

Interest Rate Risk

Interest rate risk is the risk that changes in market interest rates will a dversely affect the fair value of an investment. Generally, the longer the maturity of an inv estment, the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that the Authority manages its exposure to interest rate risk is by purchasing a combination of shorter term and l onger term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations.

Information about the sensitivity of the fair values of the Authority's investments held by bond trustee to market interest rate fluctuations is provi ded by the following table that shows the distribution of these investments by maturity:

Maturity
12 Months
Investment Type Total or Less
Investments with fiscal agents:

Money Market Mutual Funds 9,893,085 $ 9,893,085 $ Total 9,893,085$ 9,893,085 $

Investments with Fair Values Highly Sensitive to Interest Rate Fluctuations

Interest rate risk is the market value fluctuation due to overall changes in the interest rates. It is mitigated by limiting the average maturity of the Authority’s portfolio, not to exceed three years.

As a means of maintaining liquidity and minimizing inter est rate risk, the City’s investment policy limits are as follows:

Percentage
Maturity of Portfolio
Up to One Year 10% Minimum
One Year to Five Years 60% Maximum
More Than Five Years 30% Maximum

384
Hercules Public Financing Authority
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

24 Note 2 – Cash and Investments (Continued)

B. Risk Disclosures (Continued)

Credit Risk

Generally, credit risk is the risk that an issuer of an i nvestment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. Presented below is the minimum rating required by (where applicable) the California Government Code, the City of Palm Springs, or debt agreements, and the actual rati ng as of year-end for each investment type. The U.S. treasury securities are not analyzed since they are not deemed to have credit risk.

Minimum
Legal Not
Investment Type Total Rating AAA Rated
Investments with fiscal agents:

Money Market Mutual Funds 9,893,085$ N/A 9,893,085$ -$ Total 9,893,085$ 9,893,085$ -$ S&P Rating as of Fiscal Year Ended

Concentration of Credit Risk

The investment policy of the City contains no limitation on the amount that can be invested in any one issuer beyond that stipulated by the California Government Code. There were no investments in any one issuer that represent 5% or more of the total Authority investment or 10% of its net investment for mutual funds.

Issuer Type Amount
U.S. Treasury Obligation Mutual Funds 9,893,085$

Custodial Credit Risk

Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposit or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the ri sk that, in the event of the failure of the counterparty (e.g., broker-dealer) to a transaction, a go vernment will not be able to recover the value of its investment or collateral securities that are in the po ssession of another party. The California Government Code and the City's investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposit or investments, other than the following provision for deposits: The California Government Code requires that a financial institution secu re deposits made by state or local governmental units by pledging securities in an undivide d collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of th e pledged securities in the collateral pool must equal at least 110% of the total amount deposited by the public agen cies. California law also allows financial institutions to secure City deposits by pledging first trust deed mo rtgage notes having a value of 150% of the secured public deposits.

For investments identified herein as held by bond trust ee. the bond trustee selects the investment under the terms of the applicable trust agreement, acquires the investme nt, and holds the investments on behalf of the reporting government.

385
Hercules Public Financing Authority
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

25 Note 3 – Lease Receivable

The Authority has entered into several noncancelable lease agreements with the City as part of its issuances of debt.

These agreements call for the Authority to receive lease amount s that are structured to be sufficient in timing and amount to meet the Authority’s related debt service payments. Interest earned on these lease payment account and other monies held by trustee are applied to the lease payments made by the City.

Future estimated minimum lease payments to be received are as follows:

Year Ending June 30,
2009 PFA
Taxable Lease
Revenue Bonds
2010 PFA
Wastewater
Revenue Bonds
2020 PFA Lease
Revenue Refunding
Bonds Total
2022 911,140 $ 733,288 $ 129,878 $ 1,774,306 $ 2023 907,371 731,288 512,269 2,150,928 2024 907,159 728,691 564,937 2,200,787 2025 905,296 730,181 563,430 2,198,907 2026 906,578 730,622 561,212 2,198,412 2027-2031 4,511,491 3,634,749 2,814,035 10,960,275 2032-2036 4,241,500 3,626,375 1,679,498 9,547,373 2037-2041 2,875,880 3,598,875 - 6,474,755 Total 16,166,415 14,514,069 6,825,259 37,505,743 Less: amount representing interest (7,781,415) (5,264,069) (948,416) (13,993,900) Less: fiscal agent cash (1,923,294) (7,679,725) (290,066) (9,893,085) Total principal outstanding 6,461,706$ 1,570,275 $ 5,586,777 $ 13,618,758 $

Note 4 – Capital Lease – Sales Type

On August 14, 2008, the City of Hercules and Bio-Rad Laboratories, Inc. entered in to a lease agreement, which Bio- Rad agreed to lease from the City of Hercules, the premises, consisting of the land located in the City of Hercules, County of Contra Costa, state of California, commonly known as the Venture Commerce Center located at 203-295 Linus Pauling Drive, including five (5) buildings consisting of approximately 96,847 rentable square feet, together with the parking lot and associated improvements serving the buildings.

The term of this lease shall be for thirty (30) years, commencing on September 15, 2008 and ending on September 14, 2038, or terminated sooner pursuant to the te rms of this lease. Bio-Rad Laboratories, Inc. has the option to terminate this lease anytime on or after the fifteenth (15 th) anniversary date as to a portion or the entire
premises by delivering to the City not later than three (3) months prior to said fifteenth (15th) anniversary date or any applicable later termination date, a notice of such election.

The City granted to Bio-Rad Laboratories, Inc. the optio n to purchase the premises, Bio-Rad Laboratories, Inc. may elect to exercise the Purchase Option by delivering to the City of Hercules writte n notice of such election within 30 days prior to either of the following dates: (i) the fifteenth (15th) anniversary date; (ii) the twentieth (20th) anniversary date; or (iii) the twenty-fifth (25 th) anniversary date, If Bio-Rad Laboratories, Inc. has not elected to exercise the Purchase Option during the time period said above, then the Purchase Option shall automatically be deemed elected by Bio-Rad Laboratories, Inc. as of the expiration date unless Bio-Rad Laboratories, Inc., provides prior written notice to the City of Hercules within fifteen (15) days prio r to the expiration date electing not to pursue the Purchase Option, If Bio-Rad Laboratories, Inc. elects to exerci se the Purchase Option on the expiration date, the purchase price for the premises shall be one dollar ($1.00).
386
Hercules Public Financing Authority
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

26 Note 4 – Capital Lease – Sales Type (Continued)

Total lease revenue of $26,723,100 will be received from the Bio-Rad Laboratories, Inc. during the term of lease.

The interest rate on the lease payments is 8.0381%. M onthly lease payments vary from $55,300 to $83,699 will be received on the first day of each month without notice, off set, deduction, or demand, in advance, during the lease term.

Note 5 – Advances to the Former Hercules Redevelopment Agency

The Authority has advanced funds to the former Redevelopm ent Agency (Agency) of the City. At June 30, 2021, the balance was $6,703,250. There was no set repayment schedule as of June 30, 2021.

With the dissolution of the Agency on February 1, 2012, th ere is uncertainty as to whether the Fund will be repaid the balance in the amount of $6,703,250 loan owed by the Agen cy and the Authority to fund costs on behalf of the Agency was signed within two years of the creation of the Agency. The City is currently working with the California Department of Finance to determine the outcome of these loans. The possible outcome of this matter cannot presently be determined. Accordingly, no provision for any allowance for doubtful accounts has been made in the financial statements for possible forgiveness of these loans.

Note 6 – Long-Term Debt

The following is summary of changes in long-term liabilities for the year ended June 30, 2021:

Balance Balance Due within Due in More
July 1, 2020 Additions Deletions June 30, 2021 One Year Than One Year Publicly Offered:
2003B PFA Lease Revenue Bonds 5,705,000$ -$ (5,705,000)$ -$ -$ -$ 2009 PFA Taxable Lease Revenue Bonds 8,585,000 - (200,000) 8,385,000 220,000 8,165,000 Less: Discount on issuance (311,332) - 17,297 (294,035) - (294,035) 2010 PFA Wastewater Revenue Bonds 9,535,000 - (285,000) 9,250,000 295,000 8,955,000 Less: Discount on issuance (145,434) - 7,272 (138,162) - (138,162) 2020 PFA Library Construction - 5,876,843 - 5,876,843 - 5,876,843 Total 23,368,234$ 5,876,843$ (6,165,431)$ 23,079,646$ 515,000$ 22,564,646$

A. 2003B PFA Lease Revenue Bonds

The Public Financing Authority issued lease revenu e bonds, series 2003B, dated October 15, 2003, totaling $9,150,000. The purpose of the bonds was to refinance th e 1994 Refunding Certificates of Participation and to finance a portion of the construction for a public library. The interest rate on the bonds ranges from 2.00% to

5.00%. The interest is payable semia nnually on June 1 and December 1, commencing December 1, 2003. The bonds are subject to optional and mandatory early re demption provisions. The bonds are payable from and secured by revenues consisting primarily of the base rental payments of the facility lease. Principal is due annually beginning on December 1, 2005, in amounts ranging from $170,000 to $2,480,000. The bonds mature on December 1, 2033.

387
Hercules Public Financing Authority
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

27 Note 6 – Long-Term Debt (Continued)

A. 2003B PFA Lease Revenue Bonds (Continued)

The City is obligated to pay only its Base Rental Pa yments and Additional Paymen ts under the Lease. The obligation of the City to pay Base Re ntal Payments or Additional Payments does not constitute an obligation of the city for which the City is obligated to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation.

On August 1, 2020, outstanding balance was ref unded with the proceeds from the 2020 PFA Library Construction bonds.

B. 2009 PFA Taxable Lease Revenue Bonds

The Authority issued taxable lease revenue bonds, series 2009, dated July 29, 2009, totaling $10,080,000. The purpose of the bonds was to finance the acquisition of cer tain commercial condominium properties, consisting of approximately 96,847 square feet located at 203-295 Linus Pauling Drive within the City from the City, funding a reserve fund for the Bonds and to paying the costs of issuance of the Bonds. The interest rates on the bonds range from 6.00% to 8.40%. The interest is payable semiannually on January 1 and July 1, commencing January 1, 2010. The bonds are subject to optional special mandatory redemption, and mandatory sinking account redemption provisions. The bonds are payable fro m and secured by revenues consisting primarily of the base rental payments of the property lease, Principal is due annually beginning on July 1, 2010, in amounts ranging from$165,000 to $845,000. The bonds mature on July 1, 2038. The balance at June 30, 2021 is $8,385,000.

The Bonds constitute limited obligations of the Authority payable solely from Revenues. The Authority has no taxing power. The obligation of the City to make City Advances does not constitute an obligation of the City which the City is obligated to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation.

Future debt service requirements on the 2009 Public Financing Authority Taxable Lease Revenue bonds are as follows:

Year Ending
June 30, Principal Interest Total
2022 220,000 $ 691,140 $ 911,140 $ 2023 235,000 672,371 907,371 2024 255,000 652,159 907,159 2025 275,000 630,296 905,296 2026 300,000 606,578 906,578 2027-2031 1,910,000 2,601,491 4,511,491 2032-2036 2,845,000 1,396,500 4,241,500 2037-2039 2,345,000 530,880 2,875,880 Total 8,385,000 $ 7,781,415 $ 16,166,415 $

388
Hercules Public Financing Authority
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

28 Note 6 – Long-Term Debt (Continued)

C. 2010 PFA Wastewater Revenue Bonds

The Authority issued revenue bonds, series 2010, date d August 1, 2010, totaling $11,765,000. The purpose of the bonds was to finance improvements to the City’s wast ewater system, fund a reserve fund for the bonds, and pay the costs of issuances of the bonds. The interest rates on the bonds range from 2.00% to 5.130%. Principal and interest payment are due a nnually beginning August 1, 2011, in amounts ranging from $230,000 to $700,000. The bonds mature on August 1, 2040. The balance at June 30, 2021 is $9,250,000.

The Bonds are limited obligations of the Authority and are not secured by a legal or equitable pledge of, or charge or lien upon, any property of the Authority or a ny of its income or receipts, except the Revenues. The full faith and credit of the Authority and the Agency and the City, which are parties to the agreement creating the Authority, are not pledged for the payment of the princi pal of, or interest on, the Bonds and no tax or other source of funds, other than the Revenues, is pledged to pay the principal and interest on the Bonds.

The annual debt service requirements to maturity for the 2010 PFA Wastewater Revenue Bonds as of June 30, 2021 are as follows:

Year Ending
June 30, Principal Interest Total
2022 295,000 $ 438,288 $ 733,288 $ 2023 305,000 426,288 731,288 2024 315,000 413,691 728,691 2025 330,000 400,181 730,181 2026 345,000 385,622 730,622 2027-2031 1,970,000 1,664,749 3,634,749 2032-2036 2,505,000 1,121,375 3,626,375 2037-2041 3,185,000 413,875 3,598,875 Total 9,250,000 $ 5,264,069 $ 14,514,069 $

389
Hercules Public Financing Authority
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

29 Note 6 – Long-Term Debt (Continued)

D. 2020 Hercules Public Financing Authority 2020 Lease Revenue Refunding Bonds

The Hercules Public Financing Authority issued Lease Revenue Refunding Bond series 2020, dated August 1, 2020, totaling $5,876,843. The purpose of the bonds was to finance and to refinance the acquisition and or construction of certain real property and public capital improvements of the City. The issuance of the 2020 Lease Revenue Refunding Bond (the “2020 Refunding Bond”) resulted in cash flow savings of $947,702 over the life of the Bond. The City has structured the refinancing to achieve nearly all of the cash flow savings in the first three fiscal years: $458,377 in FY 2021, $435,857 in FY 2022, and $53,463 in FY 2023.

The annual debt service requirements to maturity for the 2020 Hercules Public Financing Authority 2020 lease Revenue Refunding Bonds as of June 30, 2021 are as follows:

Year Ending
June 30, Principal Interest Total
2022 - $ 129,878$ 129,878 $ 2023 386,663 125,606 512,269 2024 448,561 116,376 564,937 2025 457,061 106,369 563,430 2026 465,032 96,180 561,212 2027-2031 2,494,386 319,649 2,814,035 2032-2033 1,625,140 54,358 1,679,498 Total 5,876,843$ 948,416$ 6,825,259$

Note 7 – Contingencies

A. Lawsuits

The Authority is not involved in any matters of litigati on that have arisen in the normal course of conducting Authority business. Additionally, Authority management believes that the Authority’s insurance programs are sufficient to cover any potential losses should an unfavorable outcome materialize.

390

30 This page intentionally left blank.
391

Hercules Wastewater Fund
(An Enterprise Fund of the City of Hercules, California)

Hercules, California

Independent Auditors’ Report and
Basic Financial Statements

For the Year Ended June 30, 2021
392

393
Hercules Wastewater Fund
(An Enterprise Fund of the City of Hercules, California) Basic Financial Statements
For the Year Ended June 30, 2021

Table of Contents

Page

Independent Auditors’ Reports:

Report on the Financial Statements................................................................................................................. 1

Report on Internal Control Over Fi nancial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards ............................................................................... 3

Basic Financial Statements:

Statement of Net Position .................................................................................................................................... 7 Statement of Revenues, Expenses, and Changes in Net Position ........................................................................ 8 Statement of Cash Flows ..................................................................................................................................... 9 Notes to the Basic Financial Statements ........................................................................................................... 11

Required Supplementary Information

Schedules of the Proportionate Share of the Plan’s Net Pension Liability ....................................................... 37 Schedules of Contributions to the Pension Plan ................................................................................................ 38 Schedule of the Proportionate Share of the Plan's Net OPEB Liability (Asset) (PEHMCA) ........................... 39 Schedules of Contributions to the OPEB Plan (PEHMCA) .............................................................................. 40 Schedule of the Proportionate Share of the Plan's Net OPEB Liability (Asset) (SOMAR) .............................. 41 Schedule of Contributions to the OPEB Plan (SOMAR) .................................................................................. 42

394

This page intentionally left blank.
395

INDEPENDENT AUDITORS’ REPORT

To the Honorable Mayor and Members of the City Council
of the City of Hercules
Hercules, California

Report on the Financial Statements

We have audited the accompanying fi nancial statements of the Hercules Wastewater Fund (the “Fund”), an enterprise fund of the City of Hercules, California (the “C ity”), as of and for the year ended June 30, 2021, and the related notes to the financial statements, which collectivel y comprise the Fund’s basic financial statements as listed in the table of contents.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepte d in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards , issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers intern al control relevant to the Fund’s preparation and fair presentation of the financial statements in order to design audit procedures th at are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of th e Fund’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates ma de by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all mate rial respects, the financial position of the Fund as of June 30, 2021 , and the changes in financial position and cash flows, thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. 200 E. Sandpointe Ave., Suite 600, Santa Ana, California 92707 Tel: 949-777-8800 • Fax: 949-777-8850
www.pungroup.cpa
3939352 Pun & McGeady_L_final.pdf 2 1/14/14 3:48 PM 396
To the Honorable Mayor and Members of the City Council
of the City of Hercules
Hercules, California

Page 2 ends

2 Emphasis of Matter

As described in Note 1 to the basic financial statements, these financial statements present only the Hercules Wastewater Fund and do not purport to and do not pr esent fairly the financial position of the City as of June 30, 2021, the changes in its fina ncial position, or where applicable, its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter.

Other Matters

Required Supplementary Information

Accounting principles generally accepted in the Unite d States of America require that the Schedules of Proportionate Share of the Plan’s Net Pension Liability, th e Schedules of Contributions to the Pension Plan, the Schedule of Proportionate Share of the Plan’s Net Ot her Postemployment Benefits Liability (Asset) - PEHMCA, the Schedules of Contributions to the OPEB Plan – PEHMC A, the Schedule of Proportionate Share of the Plan’s Net OPEB Liability (Asset) – SOMAR, and the Schedule of C ontributions to the OPEB Plan - SOMAR as listed in the table of contents be presented to supplement the basic financial statemen ts. Such information, although not a part of the basic financial statements, is required by th e Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placi ng the basic financial statements in an appropriate operational, economic, or historical context. We ha ve applied certain limited procedures to the Required supplementary Information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consis tency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our a udit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued our re port dated January 19, 2022 on our consideration of the Fund's internal control over financia l reporting and on our tests of its compliance with certain provisions of laws, regulations, contra cts, and grant agreements and other matters. The purpose of that report is solely to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Fund’s internal control over financial reporting or on compliance. That report is an integr al part of an audit performed in accordance with Government Auditing Standards in considering the Fund’s internal control over financial reporting and compliance.

Santa Ana, California
January 19, 2022

397

REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND

OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN

ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS

Independent Auditors’ Report

To the Honorable Mayor and Members of the City Council
of the City of Hercules
Hercules, California

We have audited, in accordance with the auditing standa rds generally accepted in the United States of America and the standards applicable to fi nancial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the Hercules Wastewater Fund (the “Fund”), an enterprise fund of the City of Hercules, California (the “City”), as of and for the year ended J une 30, 2021, and the related notes to the basic financial statements, which collectively comprise the Fund’s basic financial statements, and have issued our report thereon dated January 19, 2022.

Internal Control Over Financial Reporting

In planning and performing our audit of the financial stat ements, we considered the City’s internal control over financial reporting (“internal control”) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opini on on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control. Accordingly, we do not express an opinion on the effectiveness of the Fund's internal control.

Compliance and Other Matters

As part of obtaining reasonable assurance about whether the City’s Fund financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on co mpliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opi nion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. 200 E. Sandpointe Ave., Suite 600, Santa Ana, California 92707 Tel: 949-777-8800 • Fax: 949-777-8850
www.pungroup.cpa
3939352 Pun & McGeady_L_final.pdf 2 1/14/14 3:48 PM 398
To the Honorable Mayor and Members of the City Council
of the City of Hercules
Hercules, California

Page 2 ends

4 Purpose of this Report

Santa Ana, California
January 19, 2022

399

BASIC FINANCIAL STATEMENTS
5 400
This page intentionally left blank.
6 401
ASSETS
Current assets:

Cash and investments 21,611,402$
Cash and investments with fiscal agent 7,679,725
Accounts receivable 10,822
Total current assets 29,301,949
Noncurrent assets:

Advances to Private Purpose Trust Fund (Note 5) 10,587,627 Net OPEB asset (PEHMCA) 28,052
Capital assets:

Nondepreciable 1,160,287
Depreciable, net 38,827,505
Total noncurrent assets 50,603,471
Total assets 79,905,420

DEFERRED OUTFLOWS OF RESOURCES
Pensions-related deferred outflows of resources 180,108 OPEB-related deferred outflows of resources (PEHMCA) 15,581 OPEB-related deferred outflows of resources (SOMAR) 16,614 Total deferred outflows of resources 212,303

LIABILITIES
Current liabilities:

Accounts payable 674,700
Salaries and benefits payable 30,880
Accrued interest payable 529,166
Long-term debt - due within one year 1,438,960
Total current liabilities 2,673,706
Noncurrent liabilities:

Long-term debt - due in more than one year 32,076,356
Net pension liability 779,817
Net OPEB liability (SOMAR) 86,665
Total noncurrent liabilities 32,942,838
Total liabilities 35,616,544

DEFERRED INFLOWS OF RESOURCES
Pensions-related deferred outflows of resources 6,347
OPEB-related deferred outflows of resources (PEHMCA) 90,361 OPEB-related deferred outflows of resources (SOMAR) 19,465 Total deferred inflows of resources 116,173

NET POSITION
Net investment in capital assets 7,230,469
Restricted for debt services 7,679,725
Unrestricted 29,474,812
Total net position 44,385,006$
Hercules Wastewater Fund
Statement of Net Position
June 30, 2021
See accompanying Notes to the Basic Financial Statements. 7 402
OPERATING REVENUES:

Charges for services 5,769,396$
Total operating revenues 5,769,396
OPERATING EXPENSES:

Salaries and benefits 741,239
Services and supplies 927,703
Depreciation 1,023,383
Total operating expenses 2,692,325
Operating income 3,077,071
NONOPERATING REVENUES (EXPENSES):

Interest income 4,537
Interest (expense) (1,202,095)
Total nonoperating revenues (expenses), net (1,197,558) CHANGES IN NET POSITION 1,879,513
NET POSITION:

Beginning of year 42,505,493
End of year 44,385,006$
Hercules Wastewater Fund
Statement of Revenues, Expenses, and Changes in Net Position For the Year Ended June 30, 2021
See accompanying Notes to the Basic Financial Statements. 8 403
CASH FLOWS FROM OPERATING ACTIVITIES:

Cash receipts from customers 5,758,574$
Cash paid to suppliers for goods and services (4,214,704) Cash paid to employees for services (655,087)
Net cash provided by operating activities 888,783

CASH FLOWS FROM CAPITAL AND RELATED
FINANCING ACTIVITIES:

Payments related to the acquisition of capital assets (968,587) Principal repayments related to capital purposes (1,386,397) Interest repayments related to capital purposes (858,615) Net cash (used in) capital and related
financing activities (3,213,599)
CASH FLOWS FROM INVESTING ACTIVITIES:

Interest received 4,537
Net cash provided by investing activities 4,537
NET CHANGES IN CASH AND CASH EQUIVALENTS (2,320,279)
CASH AND CASH EQUIVALENTS:

Beginning of year 31,611,406
End of year 29,291,127$

RECONCILIATION OF CASH AND CASH EQUIVALENTS
TO STATEMENT OF NET POSITION:

Cash and investments 21,611,402$
Cash and investments with fiscal agent 7,679,725
Total cash and cash equivalents 29,291,127$

RECONCILIATION OF OPERATING INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:

Operating income 3,077,071$
Adjustments to reconcile operating income
to net cash provided by operating activities:

Depreciation 1,023,383
(Increase) decrease in assets and deferred outflows
Pensions-related deferred outflows 13,495
OPEB-related deferred outflows 1,766
Increase (decrease) in liabilities and deferred inflows Accounts receivable (10,822)
Accounts payable (2,127,780)
Retentions payable (1,159,221)
Salaries and benefits payable 6,056
Net pension liability 85,090
Net OPEB liability (29,570)
Pensions-related deferred inflows (28,403)
OPEB-related deferred inflows 36,789
Compensated absences 929
Total adjustments (2,188,288)
Net cash provided by operating activities 888,783$
Hercules Wastewater Fund
Statement of Cash Flows
For the Year Ended June 30, 2021
See accompanying Notes to the Basic Financial Statements. 9 404
This page intentionally left blank.
10 405
Hercules Wastewater Fund
Notes to the Basic Financial Statements
For the Year Ended June 30, 2021

11 Note 1 – Summary of Significant Accounting Policies

The financial statements of the Hercules Wastewater Fund (“Fund”), an enterprise fund of the City of Hercules, California (the “City”), have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) as applied to governmental ag encies. The Governmental Accounting Standards Board (“GASB”) is the accepted standard setting body for establishing governmental accounting and financial reporting principles. The following is a summary of the City’s significant policies relating to the Fund:

A. Reporting Entities

The Hercules Wastewater Fund is an enterprise fund of the City’s financial statements. This Fund accounts for wastewater treatment to the cities of Hercules and Pinole and for the maintenance of the City’s sewer lines and related facilities. It is a self-supporting activity which provides services on a user charge basis to residences and businesses.

These financial statements present only the Wastewater Fund and do not purport to and do not present fairly the financial position of the City as of June 30, 2021, the changes in its financial position, or where applicable, its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

B. Measurement Focus and Basis of Accounting

Financial Statements include a Statement of Net Position, a Statement of Revenues, Expenses and Changes in Net Position, and a Statement of Cash Flows.

The Statement of Net Position reports separate sections for Deferred Outflows of Resources, and Deferred Inflows of Resources, when applicable.

Deferred Outflows of Resources represent outflows of resources (consumption of net position) that apply to future periods and that, therefore, will not be recognized as an expense until that time.

Deferred Inflows of Resources represent inflows of resources (acquisition of net position) that apply to future periods and that, therefore, are not recognized as revenue until that time.

Proprietary funds are accounted for using the "economic resources" measurement focus and the accrual basis of accounting. Accordingly, all assets, deferred outflows of reso urces, liabilities (whether current or noncurrent), and deferred inflows of resources are included on the Statement of Net Position. The Statement of Revenues, Expenses and Changes in Fund Net Position presents increases (revenues) and decreases (expenses) in total Net Position.

Under the accrual basis of accounting, revenues are recognized in the period in which they are earned while expenses are recognized in the period in which the liability is incurred. In these funds, receivables have been recorded as revenue and provisions have been made for uncollectible amounts.

Operating revenues are those revenues that are generated from the primary operations of the fund. All other revenues are reported as non-operating revenues. Operating expenses are those expenses that are essential to the primary operations of the fund. All other expenses are reported as non-operating expenses.

C. Cash and Investments

All cash and investments of the Fund are held in the City’s investment pool. These cash pools have the general characteristics of a demand deposit account, therefore, all cash and investments in the Fund are considered cash and cash equivalents for statement of cash flows purposes.

Investments are stated at fair value (quoted market price or best available estimate thereof). 406
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

12 Note 1 – Summary of Significant Accounting Policies (Continued)

D. Cash and Investments with Fiscal Agents

Cash and investments are held by fiscal agents for the redemption of bonded debt and maintaining required reserves.

E. Revenues

Wastewater revenues (wastewater disposal services) are recorded as billed to customers on a cyclical basis. All wastewater customers are billed annually by the Contra Costa County Treasurer-Tax Collector Office.

F. Capital Assets

Capital assets are recorded at historical cost or estima ted historical if purchased or constructed. Donated capital assets are valued at their estimated acquisition value on the date donated. City policy has set the capitalization threshold for reporting capital assets with an initial, individual cost of more than $2,500 for general capital assets and $5,000 for infrastructure capital assets, and an estimated useful life of one year or more.

Major outlays for capital assets and improvements are capitalized as projects are constructed. Interest incurred during the construction phase of capital assets is included as part of the capitalized value of the assets constructed.

The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized
.

Capital assets used in operations are depreciated over their estimated useful lives using the straight-line method.

The estimated useful lives used for depreciation purposes are as follows:

Wastewater structure 30 Years
Machinery and equipment 5-20 Years
Infrastructure 15-50 Years

G. Accounts Payable

Accounts payable consists of general administration costs incurred and construction services performed during the fiscal year, but paid after the fiscal year.

H. Long-Term Debt

Long-term debt and other long-term obligations are reported as liabilities in the Statement of Net Position. Bond premiums and discounts are deferred and amortized over the life of the bonds using the effective interest method.

Bonds payable are reported net of the applicable bond premium or discount.

I. Compensated Absences

City employees have vested interest in varying levels of vacation, sick leave and compensatory time based on their length of employment. It is the policy of the City to pay all accumulated vacation pay and all or a portion of sick pay when an employee retires or terminates. Compensated absences are expensed in the period they are earned, and the unpaid liability is recorded as a long-term liability. 407
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

13 Note 1 – Summary of Significant Accounting Policies (Continued)

J. Pensions

For purposes of measuring the aggregate net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, info rmation about the fiduciary net position of the plans and additions to/deductions from the plans’ fiduciary net position have been determined on the same basis as they are reported by the plans (Note 7). For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with benefit terms. Investments are reported at fair value.

The following timeframes are used for pension reporting:

CalPERS
Valuation Date June 30, 2019
M easurement Date June 30, 2020
Measurement Period July 1, 2019 - June 30, 2020

Gains and losses related to changes in total pension liability and fiduciary net position are recognized in pension expense systematically over time. The first amortized amounts are recognized in pension expense for the year the gain or loss occurs. The remaining amounts are categorized as deferre d outflows and deferred inflows of resources related to pensions and are to be recognized in future pension expense. The amortization period differs depending on the source of the gain or loss. The difference between projected and actual earnings is amortized straight-line over 5 years. All other amounts are amortized straight-line over the average expected remaining service lives of all members that are provided with benefits (active, inactive, and retired) as of the beginning of the measurement period.

Pension benefits are expensed to the various funds in the period they are earned, and the unpaid liability is recorded as a long-term liability.

K. Other Postemployment Benefits (“OPEB”)

For purposes of measuring the net OPEB liability, deferred outflows of resources and deferred inflows of resources related to OPEB, and OPEB expense, information about the fiduciary net position of the plans and additions to/deductions from OPEB Plan's fiduciary net position have been determined on the same basis as they are reported by the plan (Note 8). For this purpose, the OPEB plan recognizes benefit payments when due and payable in accordance with the benefit terms. Investments are reported at fair value.

The following timeframes are used for OPEB reporting for PEMHCA and SOMAR:

OPE B - PE MHCA a nd S OMAR
Valuation Date June 30, 2021
M easurement Date June 30, 2021
Measurement Period July 1, 2020 - June 30, 2021

Gains and losses related to changes in total OPEB liability and fiduciary net position are recognized in OPEB expense systematically over time. The first amortized amounts are recognized in OPEB expense for the year the gain or loss occurs. The remaining amounts are categorized as deferred outflows and deferred inflows of resources related to OPEB and are to be recognized in future OPEB expense. The amortization period differs depending on the source of gain or loss. The difference between projected and actual earnings is amortized on a straight-line basis over 5 years. All other amounts are amortized on a straight-line basis over the average expected remaining service lives of all members that are provided with benefits (active, inactive, and retired) at the beginning of the measurement period.
408
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

14 Note 1 – Summary of Significant Accounting Policies (Continued)

L. Net Position

Net position is classified as follows:

Investment in Capital Assets – This component of net position consists of capital assets, net of accumulated depreciation, related debt, and deferred inflows of resources.

Restricted – This component of net position consists of restricted assets reduced by liabilities and deferred inflows of resources related to those assets.

Unrestricted – This component of net position is the amount of the assets, deferred outflows of resources, liabilities, and deferred inflows of resources that are not included in the determination of net investment in capital assets or the restricted component of net position.

When expenses are incurred for purposes for which both restricted and unrestricted components of net position are available, the City’s policy is to apply the restricted component of net position first, then the unrestricted component of net position as needed.

M. Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Note 2 – Cash and Investments

Cash and investments at June 30, 2021 consisted of the following:

Cash and investments pooled with City 21,611,402$
Cash and investments with fiscal agents 7,679,725
Total 29,291,127$

A. Cash and Investments Pooled with City

The Fund pools its cash and investments with the City in order to achieve a higher return on investment. Certain funds which are held and invested by independent outside custodians through contractual agreements, are not pooled. Interest earned on investments is allocated using the LAIF factor and average quarterly balances.

Required disclosure information regarding investments and other deposit, and related risk disclosures can be found in the City’s financial statements. The City’s financial statements may be obtained by contacting the City’s Finance Department’s office at 111 Civic Drive, Hercules, California.

At June 30, 2021, the Fund has deposited $21,611,402 in the City’s investment pool. Investments held in the City’s investment pool are available on demand and are stated at cost plus accrued interest, which approximates fair value.

409
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

15 Note 2 – Cash and Investments (Continued)

B. Investments Authorized by the California Government Code and the City's Investment Policy

The table below identifies the investment types that are authorized by the City's investment policy and the California Government Code. The table also identifies certain provisions of the California Government Code (or the City's investment policy, if more restrictive) that address interest rate risk, credit risk, and concentration of credit risk. This table does not address investments of debt proceeds held by bond trustee that are governed by the provisions of debt agreements of the City, rather than the general provisions of the California Government Code or the City's investment policy.

Ma x i m um Ma x i m um
M aximum Percentage Investment
Authorized Investment Type Maturity of Portfolio in One Issuer Local Agency Investment Fund (State Pool) N/A $50 M illion $50 M illion U.S. Treasury Obligations 5 Years None None
U.S. Government Agency Issues 5 Years None None
Insured Deposits with Banks and Savings and Loans N/A None None Bankers Acceptance (Must be Dollar Denominated) 180 Days 40% 30% Commercial Paper 270 Days 15% 10%
Negotiable Time Certificates of Deposits 5 Years 30% $100,000 Nonnegotiable Time Certificates of Deposits 5 Years 30% $100,000 Federally Issued Time Deposits 5 Years None $100,000
Repurchase Agreements 30 Days None 10%
Reverse Repurchase Agreements 92 Days 20% None
M edium-Term Notes 5 Years 30% 15%
Mone y Ma rke t Mutua l Funds N/ A 20% 10%
Insured or Passbook Savings Accounts N/A None $100,000

*The table is based on state law requirements or investment policy requirements, whichever is more restrictive. 410
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

16 Note 2 – Cash and Investments (Continued)

C. Investments Authorized by Debt Agreements

Investments of debt proceeds held by bond trustee are governed by provisions of the debt agreements, rather than the general provisions of the California Government Code or the investment policy of the City. The table below identifies the investment types that are authorized for investments held by bond trustee. The table also identifies certain provisions of these debt agreements that address interest rate risk and concentration of credit risk.

Ma x i m um Ma x i m um
M aximum Percentage Investment
Authorized Investment Type Maturity of Portfolio in One Issuer Local Agency Investment Fund (State Pool) N/A $50 M illion $50 M illion U.S. Treasury Obligations 30 Years 20% None
U.S. Government Agency Issues 30 Years 20% None
Insured Deposits with Banks and Savings and Loans N/A None None Bankers Acceptance (Must be Dollar Denominated) 6 Months 40% 30% Commercial Paper 6 M onths 15% 10%
Negotiable Time Certificates of Deposits 5 Years 30% $100,000 Nonnegotiable Time Certificates of Deposits 5 Years 30% $100,000 Federally Issued Time Deposits 1 Years 20% None
Repurchase Agreements 30 Days None None
Reverse Repurchase Agreements 92 Days 20% None
M edium-Term Notes 5 Years 30% 15%
Mutual Funds N/A 20% None
Mone y Ma rke t Funds N/ A None None
Insured or Passbook Savings Accounts N/A None $100,000
Guaranteed Investment Contract N/A None None

D. Fair Value Measurement

At June 30, 2021, the Fund’s investment consisted of $21,611,402 invested in the State of California Local Agency Investment fund and $7,679,725 invested in money market mutual funds, which is valued at amortized cost and “uncategorized” under the fair value hierarchy.

411
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

17 Note 2 – Cash and Investments (Continued)

E. Risk Disclosures

Disclosures Relating to Interest Rate Risk

Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment is, the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that the Fund manages its exposure to interest rate risk is by purchasing a combination of shorter term and longer term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations.

Information about the sensitivity of the fair values of the Fund’s investments (including investments held by bond trustees) to market interest rate fluctuations is provide d by the following table that shows the distribution of the Fund's investments by maturity:

Maturity
12 Months
Investment Type Total or Less
Cash and investments pooled with City 21,611,402$ 21,611,402 $ Investments with fiscal agents:

Mone y Ma rke t Mutua l Funds 7,679,725 7,679,725 Total 29,291,127$ 29,291,127 $

Investments with Fair Values Highly Sensitive to Interest Rate Fluctuations

Interest rate risk is the market value fluctuation due to overall changes in the interest rates. It is mitigated by limiting the average maturity of the City’s portfolio, not to exceed three years.

As a means of maintaining liquidity and minimizing interest rate risk, the City’s investment policy limits are as follows:

Percentage
Maturity of Portfolio
Up to One Year 10% Minimum
One Year to Five Years 60% M aximum
More Than Five Years 30% Maximum

412
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

18 Note 2 – Cash and Investments (Continued)

E. Risk Disclosures (Continued)

Disclosures Relating to Credit Risk

Generally, credit risk is the risk that an issuer of an i nvestment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. Presented below is the minimum rating requir ed by (where applicable) the California Government Code or the City's investment policy, or debt agreements, and the actual rating as of fiscal year end for each investment type.

Mi ni m um
Legal Not
Investment Type Total Rating AAA Rated
Cash and investments pooled with City 21,611,402$ N/A - $ 21,611,402$ Investments with fiscal agents:

Mone y Ma rke t Mutua l Funds 7, 679,725 N/A 7,679,725 - Total 29,291,127$ 7,679,725 $ 21,611,402 $ S&P Rating as of Fiscal Year Ended

Concentration of Credit Risk

The investment policy of the City contains no limitations on the amount that can be invested in any one issuer beyond that stipulated by the California Government Code. The Fund has 100% of its cash and investments pooled with the City.

Custodial Credit Risk

Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will no t be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that in the event of the failure of the counterparty (e.g., broker dealer) to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The California Government Code and the City's investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits or investments, other than the provision for deposits as disclosed in Note 2A.

413
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

19 Note 3 – Capital Assets

Summary of changes in capital assets for the year ended June 30, 2021, was as follows:

Balance Reclassification/ Balance
July 1, 2020 Additions Transfers June 30, 2021
Nondepreciable assets:

Land 191,700$ -$ -$ 191,700$ Constrution in progress - 968,587 - 968,587 Total nondepreciable assets 191,700 968,587 - 1,160,287 Depreciable assets:

Structures and improvements 11,335,201 - - 11,335,201 M achinery and equipment 250,345 - - 250,345 Infrastructure 41,847,553 - - 41,847,553 Subtotal 53,433,099 - - 53,433,099 Less: accumulated depreciation:

Structures and improvements (10,718,869) (150,678) - (10,869,547) Machinery and equipment (197,354) (13,353) - (210,707) Infrastructure (2,665,988) (859,352) - (3,525,340) Subtotal (13,582,211) (1,023,383) - (14,605,594) Total de preciable assets, ne t 39,850,888 (1,023,383) - 38,827,505 Total capital assets, net 40,042,588$ (54,796)$ -$ 39,987,792$

Depreciation expense in the amount of $1,023,382 was charged to the Fund for the year ended June 30, 2021.

Note 4 – Long-Term Debt

Summary of changes in long-term debt for the year ended June 30, 2021, was as follows:

Balance Balance Due within Due in M ore
July 1, 2020 Additions Deletions June 30, 2021 One Year Than One Year Publicly Offered:
2010 PFA Wastewater Revenue Bonds 9,535,000$ -$ (285,000)$ 9,250,000$ 295,000$ 8,955,000$ Less: Discount on issuance (145,434) - 7,272 (138,162) - (138,162) Publicly Owned Treatment Works
Construction Loan 25,457,695 - (1,101,397) 24,356,298 1,096,780 23,259,518 Compensated Absences 46,251 29,704 (28,775) 47,180 47,180 - Total 34,893,512$ 29,704 $ (1,407,900)$ 33,515,316$ 1,438,960 $ 32,076,356$

A. 2010 PFA Wastewater Revenue Bonds

The Public Financing Authority issued revenue bonds, series 2010, dated August 1, 2010, totaling $11,765,000.

The purpose of the bonds was to finance improvements to the City’s wastewater system, fund a reserve fund for the bonds, and pay the costs of issuances of the bonds. The interest rates on the bonds range from 2.00% to

5.130%. Principal and interest payment are due annually beginning August 1, 2011, in amounts ranging from $230,000 to $700,000. The bonds mature on August 1, 2040. The balance at June 30, 2021 is $9,250,000. 414
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

20 Note 4 – Long-Term Debt (Continued)

A. 2010 PFA Wastewater Revenue Bonds (Continued)

The Bonds are limited obligations of the Authority and are not secured by a legal or equitable pledge of, or charge or lien upon, any property of the Authority or any of its income or receipts, except the Revenues. The full faith and credit of the Authority and the Agency and the City, which are parties to the agreement creating the Authority, are not pledged for the payment of the principal of, or interest on, the Bonds and no tax or other source of funds, other than the Revenues, is pledged to pay the principal and interest on the Bonds.

The annual debt service requirements to maturity for the 2010 PFA Wastewater Revenue Bonds as of June 30, 2021 are as follows:

B. Publicly Owned Treatment Work Construction Loan

In June 2016, the City entered into an installment sale agreement with the California State Water Resources Control Board in the amount of $26,500,000. The funds ar e for construction costs for the Pinole-Hercules Wastewater Pollution Control Plant Improvement Project. The interest rate on the loan is 1.7%. The first principal and interest payment are due August 31, 2019, and is con tingent on the total drawdowns at project completion.

The loan matures on August 31, 2038. The City has drawn down $25,457,695 of the loan principal including construction loan interest as of June 30, 2021. The outstanding balance as of June 30, 2021 was $24,356,298.

The annual debt service requirements to maturity for the Publicly Owned Treatment Works Construction Loan as of June 30, 2021 are as follows:

Year Ending
June 30, Principal Interest Total
2022 1,096,780$ 414,057 $ 1,510,837 $ 2023 1,115,425 395,412 1,510,837 2024 1,134,388 376,450 1,510,838 2025 1,153,672 357,165 1,510,837 2026 1,173,285 337,553 1,510,838 2027-2031 6,172,479 1,381,706 7,554,185 2032-2036 6,715,284 838,901 7,554,185 2037-2040 5,794,985 248,363 6,043,348 Total 24,356,298$ 4,349,607$ 28,705,906$ 415
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

21 Note 5 – Advances to the Former Hercules Redevelopment Agency

The Fund has advanced funds to the former Redevelopment Agency (Agency) of the City. At June 30, 2021, the balance was $10,587,627. There was no set repayment schedule as of June 30, 2021.

With the dissolution of the Agency on February 1, 2012, there is uncertainty as to whether the Fund will be repaid the balance in the amount of $10,587,627 loan owed by the Agency and the City to fund costs on behalf of the Agency was signed within two years of the creation of the Agency. The City is currently working with the California Department of Finance to determine the outcome of these loans. The possible outcome of this matter cannot presently be determined. Accordingly, no provision for any allowance for doubtful accounts has been made in the financial statements for possible forgiveness of these loans.

Note 6 – Risk Management

The Fund is exposed to various risks of loss related to tort s, theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disaster. The Fund participates in the City’s insurance programs to insure against these losses.

General Liability Insurance

Coverage is maintained with the Municipal Pooling Aut hority (MPA) with coverage limits of $1,000,000 with self- insured retention of $10,000 and $1,000,001 to $29,000,000 covered by California Affiliated Risk Management Authority (CARMA).

Workers’ Compensation

The City has coverage limits for the following without a deductible:

MPA $0 to $500,000
PRISM $500,000 TO $50,000,000
Liberty Insurance Corporation Statuatory excess of $50,000,000

Miscellaneous Coverages

The MPA provides additional coverage for the following risks incurred by the City:

Coverage
Type Deductibles Limits
Auto - Physical Damage:

Police Vehicles 3,000 $ 250,000 $
All Other Vehicles 2,000 250,000
All Risk Fire & Property 25,000 No limit Cyber Liability 50,000 3,000,000
Pollution Liability 100,000 25,000,000
Crime Coverage 2,500 5,000,000
Boiler and M achinery 5,000 100% of primary $75,000,000; 100% of $25,000,000 excess of $75,000,000

The MPA is governed by a board consisting of representatives from member municipalities. The board controls the operations of the MPA, including selection of management and approval of operating budgets, independent of any influence by member municipalities beyond their representation on the board. 416
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

22 Note 6 – Risk Management (Continued)

Miscellaneous Coverages (Continued)

The City’s deposits with the MPA are in accordance with formulas established by the MPA. Actual surpluses or losses are shared according to a formula developed from overall loss costs and spread to member entities on a percentage basis after a retrospective rating. Audited financial statements can be obtained from the Municipal Pooling Authority, 1911 San Miguel Drive, #200, Walnut Creek, California 94596.

Note 7 – Public Employee Retirement System

A. General Information About the Pension Plans

Plan Descriptions

All qualified permanent and probationary employees are eligible to participate in the City’s Miscellaneous Employee Pension Plans, cost-sharing multiple employer defined benefit pension plans administered by the California Public Employees’ Retirement System (CalPERS). Benefit provisions under the Plans are established by state statute and City resolution. CalPERS issues publicly available reports that include a full description of the pension plans regarding benefit provisions, assumptions and membership information that can be found on the CalPERS website.

Benefits Provided

CalPERS provides service retirement and disability benefits, annual cost of living adjustments and death benefits to plan members, who must be public employees and beneficiaries. Benefits are based on years of credited service, equal to one year of full-time employment. Members with five years of total service are eligible to retire at age 50 with statutorily reduced benefits. All members are eligible for nonduty disability benefits after 10 years of service.

The death benefit is one of the following: the Basic D eath Benefit, the 1957 Survivor Benefit, or the Optional Settlement 2W Death Benefit. The cost of living adjustments for each plan are applied as specified by the Public Employees’ Retirement Law.

The Plans’ provisions and benefits in effect at June 30, 2021, are summarized below:

Miscellaneous
Miscellaneous Tier 2
Benefit formula 2.0% @ 55 2.0% @ 62
Benefit vesting schedule 5 years service 5 years service Benefit payments monthly for life monthly for life
Retirement age 50-63 52 - 67
Monthly benefits, as a % of
eligible compensation 1.426 - 2.148% 1.0 - 2.5%
Required employee contribution rate 7.0% 6.25%
Required employer contribution rate 9.680% 6.985%

417
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

23 Note 7 – Public Employee Retirement System (Continued)

A. General Information About the Pension Plans (Continued)

Employees Covered

At June 30, 2020, the measurement date, the following employees were covered by the Plan’s provisions:

Miscellaneous
Miscellaneous PE PRA
Active employees 35 17
Transferred employees 47 10
S eparated empl oyees 95 14
Retired employees and beneficiaries 87 - Total 264 41

Contributions

Section 20814(c) of the California Public Employees’ Retirement Law (PERL) requires that the employer contribution rates for all public employers are determined on an annual basis by the actuary and shall be effective on the July 1 following notice of a change in the rate. The total plan contributions are determined through CalPERS’ annual actuarial valuation process. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The employer is required to contribute the difference between the actuarially determined rate and the contribution rate of employees. Employer contribution rates may change if plan contracts are amended. Payments made by the employer to satisfy contribution requirements that are identified by the pension plan terms as plan member contribution requirements are classified as plan member contributions.

The City contributed $102,423 towards the Fund’s share of the Miscellaneous Pension Plan during the year ended June 30, 2021.

B. Net Pension Liability

Actuarial Methods and Assumptions Used to Determine Total Pension Liability

The June 30, 2019 valuation was rolled forward to determine the June 30, 2020 total pension liability, based on the following actuarial methods and assumptions:

Actuarial Cost M ethod Entry Age Normal in accordance with the requirements of GASB 68 Actuarial Assumptions:

Discount Rate
Inflation
Salary Increases
Morta l i ty Ra te Ta bl e
1 Post Retirement Benefit Increase

7.15%

2.50%
Varies by Entry Age and Service
Derived using CalPERS’ M embership Data for all Funds.

The lesser of contract COLA or 2.50% until Purchasing Power Protection Allowance floor on purchasing power applies, 2.50% thereafter.

1The mortality table used was developed based on CalPERS-specific data. The probabilities of mortality are based on the 2017 CalPERS Experience Study for the period from 1997 to 2015. Pre-retirement and Post-retirement mortality rates include 15 years of projected mortality improvement using 90% of Scale MP-2016 published by the Society of Actuaries. For more details on this table, please refer to the CalPERS Experience Study and Review of Actuarial Assumptions report from December 2017 that can be found on the CalPERS website. 418
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

24 Note 7 – Public Employee Retirement System (Continued)

B. Net Pension Liability (Continued)

Long-term Expected Rate of Return

The long-term expected rate of return on pension plan investments was determined using a building-block method in which expected future real rates of return (expecte d returns, net of pension plan investment expense and inflation) are developed for each major asset class.

In determining the long-term expected rate of return, CalPERS took into account both short-term and long-term market return expectations as well as the expected pension fund cash flows. Using historical returns of all of the funds’ asset classes, expected compound (geometric) returns were calculated over the short-term (first 10 years) and the long-term (11+ years) using a building-block approach. Using the expected nominal returns for both short- term and long-term, the present value of benefits was calculated for each fund. The expected rate of return was set by calculating the rounded single equivalent expected return that arrived at the same present value of benefits for cash flows as the one calculated using both short-term and long-term returns. The expected rate of return was then set equal to the single equivalent rate calculated above and adjusted to account for assumed administrative expenses. The expected real rates of return by asset class are as followed:

Asset Class
1 New Strategic
Allocation
Real Return Years
1 - 10
1 Real Return Years
11 +
2 Global equity 50.0% 4.80% 5.98%
Fixed income 28.0% 1.00% 2.62%
Inflation assets 0.0% 0.77% 1.81%
Private equity 8.0% 6.30% 7.23%
Real assets 13.0% 3.75% 4.93%
Liquidity 1.0% 0.00% -0.92%
1 An expected inflation of 2.00% was used for this period. 2 An expected inflation of 2.92% was used for this period. 1In the System's ACFR, Fixed Income is included in Global Debt Securities; Liquidity is included in Short-term Investments; Inflation Assets are included in both Global Equity; Securities and Global Debt Securities.

Discount Rate

The discount rate used to measure the total pension liability was 7.15%. The projection of cash flows used to determine the discount rate assumed that contributions from plan members will be made at the current member contribution rates and that contributions from employers will be made at statutorily required rates, actuarially determined. Based on those assumptions, the Plan’s fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on plan investments was applied to all periods of projected benefit payments to determine the total pension liability. 419
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

25 Note 7 – Public Employee Retirement System (Continued)

C. Proportionate Share of Net Pension Liability

The following table shows the plan’s proportionate share of the risk pool collective net pension liability over the measurement period:

Plan Total Pension Plan Fiduciary Net Pension
L iability Net Position L iability/(Asset)
Miscellaneous
Balance at: 6/30/19 (Valuation date) 2,786,680$ 2,091,953 $ 694,727 $ Balance at: 6/30/20 (Measurement date) 2,956,801 2,176,984 779,817 Net changes during 2019-2020 170,121 $ 85,031 $ 85,090 $

The Fund’s proportionate share of the City’s net pension liability for the retirement plans is measured as the proportionate share of the net pension liability. The net pension liability of the retirement plans is measured as of June 30, 2020, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of June 30, 2019 rolled forward to June 30, 2020 using standard update procedures. The Fund’s proportion of the net pension liability was based on a projection of the Fund’s long-term share of contributions to the pension plans relative to the projected contributions of all participating employers, actuarially determined. The Fund’s proportionate share of the net pension liability as of the June 30, 2019 measurement date (June 30, 2020 reporting date) and 2020 measurement date (June 30, 2021 reporting date) was as follows:

Fund's Proportion
to City's Share
M easurement date Pool
Proportion - June 30, 2019 0.00678%
Proportion - June 30, 2020 0.00717%
Change - Increase/(Decrease) 0.00039%

Sensitivity of the Proportionate Share of the Net Pension Liability to Changes in the Discount Rate

The following presents the Fund’s proportionate share of the net position liability for the Plan, calculated using the discount rate, as well as what the Fund’s proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1-percentage point lower or 1-percentage point higher than the current rate:

Discount Rate - 1% Current Discount Discount Rate + 1%
(6.15%) Rate (7.15%) (8.15%)
Miscellaneous 1,245,305$ 779,817 $ 395,200 $ Plan's Net Pension L iability

Pension Plan Fiduciary Net Position

Detailed information about the pension plan’s fiduciary net position is available in the separately issued CalPERS financial reports.

420
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

26 Note 7 – Public Employee Retirement System (Continued)

D. Pension Expense and Deferred Outflows and Deferred Inflows of Resources Related to Pension

For the year ended June 30, 2021, the Fund recognized pension expense of $167,719. At June 30, 2021, the Fund reported deferred outflows of resources and deferred infl ows of resources related to pensions from the following sources:

Deferred Outflows Deferred Inflows
of Resources of Resources
Contribution made after the measurement date 30,105$ - $ Changes of assumptions - (1,101) Net difference between projected and actual
earnings on pension plan investments 31,283 - Difference between expected and actual
experience 54,270 -
Employer contributions in excess/(under)
proportionate share of contributions - (1,918) Adjustments due to difference in proportions 64,450 (3,328) Total 180,108$ (6,347)$
Miscellaneous Plan

$30,105 was reported as deferred outflows of resources related to pensions resulting from Fund’s contributions subsequent to the measurement date and will be recognized as a reduction of the net pension liability in the year ended June 30, 2021. Other amounts reported as deferred outfl ows of resources and deferred inflows of resources related to pensions will be recognized in pension expense as follows:

M easurement Period
Ended June 30 Miscellaneous Plan
2021 20,322 $
2022 71,713
2023 31,417
2024 20,204
2025 -
Thereafter -
Total 143,656$

E. Payable to the CalPERS Pension Plans

At June 30, 2021, the Fund had no outstanding amounts owed to the CalPERS pension plans for contributions for the year ended June 30, 2021.

421
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

27 Note 8 – Other Postemployment Benefits (“OPEB”)

A. Retiree Healthcare Plan (PEHMCA)

Plan Description and Administration

The City Retiree Healthcare Plan (Plan) is a single-employer benefit healthcare plan administered by the City. The Plan provides healthcare benefits to eligible retirees and their dependents. The Plan does not issue a financial report.

The City has prefunded a portion of its OPEB benefits in a Public Agency Retirement Services (PARS) trust. The PARS Trust is a tax qualified irrevocable trusts, orga nized under Internal Revenue Code (IRC) Section 115, established to pre -fund OPEB as described in GASB Statement 75. PARS issues annual audited financial statements for each participating agency of the Trust. PARS is considered an agency agent multiple -employer plan, required to provide financial statements and required supplementary information (Schedule of Changes in Fiduciary Net Position by Plan) that are prepared in conformance with GASB statement 75.

These reports may be obtained by writing the plan at the following address: PARS 4350 Von Karman Ave., Suite 100, Newport Beach, CA 92660-2043.

Employees become eligible to retire and receive City-paid healthcare benefits upon attainment of age 50 and 5 years of service. The City contribution towards retiree health benefits is determined under the "Equal Contribution Method" under PEHMCA under which the City's nominal contribution to PEMHCA is the same for active employees and retirees ($139/month for 2020 and $143/month for 2021).

Proportionate share of the City’s postemployment benefits liabilities and related deferred outflows and inflows have been allocated to the Fund.

Contributions

The contributions are based on pay-go for premiums an d contributions to the PARS OPEB trust. The pay-go amount is the actual amount of retiree premiums. Total contributions (pay-go and trust contributions) for the year ended June 30, 2021 were $11,571.

Actuarial Assumptions

The net OPEB liability of the Plan was determined using an actuarial valuation as of July 1, 2020 using the following actuarial assumptions:

Actuarial Assumptions:

Discount Rate 5.15%
Inflation 2.50%
Aggregate payroll increases 2.75%
Expected long-term investment rate of return n/a
M ortality, Termination, and Disability CalPERS 1997-2014 M ortality Improvement Scale
Healthcare Trend Rate 4%
RP-2014 Employee and Healthy
Annuitant Mortality Tables for males
and females.

422
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

28 Note 8 – Other Postemployment Benefits (“OPEB”) (Continued)

A. Retiree Healthcare Plan (PEHMCA) (Continued)

Actuarial Assumptions (Continued)

Mortality rates were based on the RP-2014 Employee and Healthy Annuitant Mortality Tables for Males or Females, as appropriate, projected using a generational projection based on 100% of scale MP-2016 for years 2014 through 2029, 50% of MP-2016 for years 2030 through 2049, and 20% of MP-2016 for 2050 and thereafter.

Discount Rate

The discount rate used to measure the total Plan’s OPEB liability was 5.4%. The projection of cash flows used to determine the discount rate assumed that City contributions will be made at rates equal to the actuarially determined contribution rates. Based on those assumptions, the City plan's fiduciary net position was projected to be available to make all projected OPEB payments for current active and inactive employees. Therefore, the long- term expected rate of return on OPEB plan investments was applied to all periods of projected benefit payments to determine the total OPEB liability.

The expected long-term rate of return on OPEB plan investments of 5.4%, gross of expenses, was determined by Highmark Capital Management using a building-block met hod in which best-estimate ranges of expected future real rates of return, net of inflation, are developed for each major asset class. These ranges are combined to produce the term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. The target allocation and best estimates of arithmetic real rates of return for each major asset class are summarized in the following table:

Asset Class
New Strategic
Allocation
Long-Term
Expected
Real Rate of
Return
All Domestic Equities 30.00% 7.25%
All Fixed Income 65.00% 4.25%
Short-Term Gov't Fixed 5.00% 3.00%
100.00%

Proportionate Share of Net OPEB Liability and OPEB Expense

The following table shows the plan’s proportionate share of the risk pool collective net pension liability (asset) over the measurement period:

Total OPEB Plan Fiduciary Net OPEB
L iability Net Position L iability (Asset)
Balance at: 6/30/19 (Valuation date) (169,423) $ (181,141) $ (11,718) $ Balance at: 6/30/20 (Measurement date) (142,774) (170,826) (28,052) Net changes during 2019-2020 (26,649) $ (10,315) $ 16,334 $

The Fund’s proportionate share of the City’s net OPEB lia bility (asset) for the OPEB plan is measured as the proportionate share of the net OPEB liability (asset). The net OPEB liability (asset) of the OPEB plans is measured as of June 30, 2020, and the total OPEB liability (asset) used to calculate the net OPEB liability (asset) was determined by an actuarial valuation as of June 30, 2019 rolled forward to June 30, 2020 using standard update procedures.
423
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

29 Note 8 – Other Postemployment Benefits (“OPEB”) (Continued)

A. Retiree Healthcare Plan (PEHMCA) (Continued)

Proportionate Share of Net OPEB Liability and OPEB Expense (Continued)

The Fund’s proportion of the net OPEB liability (asset) was based on a projection of the Fund’s long-term share of contributions to the OPEB plans relative to the projected contributions of all participating employers, actuarially determined. The Fund’s proportionate share of the net OPEB liability as of the June 30, 2019 measurement date (June 30, 2020 reporting date) and 2020 measurement date (June 30, 2021 reporting date) was as follows:

Fund's Proportion
to City's Share
Pool
Proportion - June 30, 2020 -6.79809%
Proportion - June 30, 2021 -5.87750%
Change - Increase/(Decrease) 0.92059%

Sensitivity of the Net OPEB Liability (Asset) to Changes in the Discount Rate

The following presents the net OPEB liability (asset) of the Plan, as well as what the City’s net OPEB liability (asset) would be if it were calculated using a discount rate 1% lower or 1% higher than the current discount rate:

Discount Rate - 1% Current Discount Discount Rate + 1 % (3.4%) Rate (5.4%) (5.4%)
(10,992)$ (28,052) $ (42,445) $ Net OPEB Liability (Asset)

Sensitivity of the Net OPEB Liability (Asset) to Changes in the Healthcare Trend Rate

The following presents the net OPEB liability (asset) of the Plan, as well as what the Plan’s net OPEB liability (asset) would be if it were calculated using healthcare cost trend rates that 1% lower or 1% higher than the current healthcare cost trend rate:

Healthcare Cost Healthcare Cost Healthcare Cost
Trend Rates Trend Rates Trend Rates
3% 4% 5%
(46,019)$ (28,052)$ (5,861)$
Net OPE B L iability (A sset)

424
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

30 Note 8 – Other Postemployment Benefits (“OPEB”) (Continued)

A. Retiree Healthcare Plan (PEHMCA) (Continued)

OPEB Expense and Deferred Outflows of Resources and Deferred Inflows of Resources Relate to OPEB

For the year ended June 30, 2021, the Fund recognized OPEB expense of $5,521 for the Plan. OPEB expense represents the change in the net OPEB liability during the measurement period, adjusted for actual contributions and the deferred recognition of changes in investment gain/loss, and actuarial assumptions or method. At June 30, 2021, the Fund reported deferred outflows of resources and deferred inflows of resources related to OPEB from the following sources:

Deferred Outflows Deferred Inflows
of Resources of Resources
Difference between expected and actual experience 1,227 $ (68,059) $ Changes of assumptions 13,213 (12,917) Net difference between projected and actual earning on
OPEB plan investments 1,141 (9,385)
Total 15,581 $ (90,361) $

Amounts reported as deferred outflows of resources and deferred inflows of resources related to OPEB will be recognized in OPEB expense as follows:

Measurement
Period Deferred Outflows/
Ending June 30 (Inflows) of Resources
2022 (6,522) $
2023 (6,540)
2024 (7,075)
2025 (10,444)
2026 (8,404)
Thereafter (35,795)
Total (74,780) $

B. Retiree Cash Benefit Plan (SOMAR Plan)

Plan Description

The City provide an optional monetary allowance with an annual three (3%) adjustment each year to Public Safety and Executive employees who retire as regulated by the Public Employee’s Retirement System. To be eligible for the optional monies, an employee must retire as follows:

1. Service Retirement: Employees who have served the City for at least ten (10) consecutive years immediately prior to retirement and are at least fifty (50) years old when they separate service from the City.

2. Disability Retirement: Employees who retire with a disability retirement are not required to be a certain age, but must have at least twenty (20) years of service with the City. 425
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

31 Note 8 – Other Postemployment Benefits (“OPEB”) (Continued)

B. Retiree Cash Benefit Plan (SOMAR Plan) (Continued)

Plan Description (Continued)

Employees must have the minimum amount of sick leave on the books, as outlined in the chart below. If an employee has below the amount of sick leave required for their years of service, then they will only be eligible for the percentage paid equivalent to the amount of sick leave they do have on the books.

Years of
Ser v ic e
Sic k L eav e
Balance
% of Optional
Money
Av ailable
10 480 50
11 528 55
12 576 60
13 624 65
14 672 70
15 720 75
16 768 80
17 846 85
18 864 90
19 912 95
20-24 960 100
25 No M inimum
amount required 100

Employees must retire within one hundred twenty (120) days. In addition, employees who separate service but do not retire as a PERS annuitant, shall not be eligible under for SOMAR benefits.

The City will pay a portion of the optional money to a retiree until the retiree reaches age sixty-five (65), upon which they are required to enroll in Medicare. At that time, the optional money will drop to an amount equivalent to the Kaiser Supplemental to Medicare rate through PERS.

The SOMAR benefit is expected to last into perpetuity. Payments are made on a bi-annual basis.

Benefits Provided

The SOMAR plan’s provisions and benefits in effect at June 30, 2021, are summarized below:

Exe cuti ve s
Duration of benefits Lifetime
Required service 50% at 10 years
grading t o 100% at
20 years
M inimum age Retirement
Amount $263 per month pre-
65; based on Kaiser
premium post-65

426
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

32 Note 8 – Other Postemployment Benefits (“OPEB”) (Continued)

B. Retiree Cash Benefit Plan (SOMAR Plan) (Continued)

Contributions

For the year ended June 30, 2021, the Fund contributions recognized as part of OPEB expense for the SOMAR plan were $9,791.

Actuarial Assumptions

The net pension liability of the SOMAR Plan was determined using an actuarial valuation as of July 1, 2020 using the following actuarial assumptions:

Cost method Entry age normal
Discount Rate 2.20%
Inflation 2.75%
Aggregate payroll increases 2.75%
Mortality, retirement, and turnover 2017 CalPERS tables Mortality Improvement Scale RP-2014 Employee and Healthy Annuitant Mortality Tables for males
and females.

Discount Rate

The discount rate used to measure the total OPEB liability for the SOMAR plan was 2.2%. This discount rate estimates investment earnings for assets earmarked to cover retiree cash benefit liabilities. Since the SOMAR plan is an unfunded plan, the discount rate is based on an index of 20-year General Obligation municipal bonds.

Proportionate Share of Net OPEB Liability and OPEB Expense

The Fund proportionate share of the net OPEB liability as of June 30, 2021, measurement date, is as follows:

Plan's Proportion
to Total Plan at
June 30, 2021
Proportionate
Share of Net
OPEB Liability

5.357% 86,665$

Sensitivity of the Net OPEB Liability to Changes in the Discount Rate

The following presents the net pension liability of the SOMAR Plan, as well as what the SOMAR Plan’s net pension liability (asset) would be if it were calculated using a discount rate 1% lower or 1% higher than the current discount rate:

Discount Rate - 1% Current Discount Discount Rate + 1 % (1.2%) Rate (2.2%) (3.2%)
118,691$ 86,665 $ 84,165 $
SOMAR Plan's Total OPE B L iability

427
Hercules Wastewater Fund
Notes to the Basic Financial Statements (Continued)
For the Year Ended June 30, 2021

33 Note 8 – Other Postemployment Benefits (“OPEB”) (Continued)

B. Retiree Cash Benefit Plan (SOMAR Plan) (Continued)

OPEB Expense and Deferred Outflows of Resources and Deferred Inflows of Resources Relate to Pension

For the year ended June 30, 2021, the City recognized pension expense of $9,739 for the SOMAR plan. OPEB expense represents the change in the net pension liability during the measurement period, adjusted for actual contributions and the deferred recognition of changes in investment gain/loss, and actuarial assumptions or method. At June 30, 2021, the City reported deferred out flows of resources and deferred inflows of resources related to pension from the following sources for the SOMAR plan:

Deferred Outflows Deferred Inflows
of Resources of Resources
Difference between expected and actual experience - $ (19,465)$ Changes of assumptions 16,614 -
Total 16,614 $ (19,465) $
S OMAR Plan

Amounts reported as deferred outflows of resources and deferred inflows of resources related to OPEB will be recognized in pension expense as follows:

Measurement SOMAR Plan
Period Deferred Outflows/
Ending June 30 (Inflows) of Resources
2022 (69) $
2023 (69)
2024 (69)
2025 (69)
2026 (69)
Thereafter (2,506)
Total (2,851) $

Payable to the OPEB Plan

At June 30, 2021, the Fund had no outstanding amounts owed to the SOMAR OPEB plan for contributions for the year ended June 30, 2021.

Note 9 – Contingencies

A. Lawsuits

The Fund is not involved in any matters of litigation that have arisen in the normal course of conducting business.

Additionally, management believes that the City’s insurance programs are sufficient to cover any potential losses should an unfavorable outcome materialize.

428

34 This page intentionally left blank.
429

REQUIRED SUPPLEMENTARY INFORMATION
35 430
This page intentionally left blank.
36 431
Measurement Date: June 30, 20201 June 30, 20191 June 30, 20181 June 30, 20171 June 30, 20161 June 30, 20151 June 30, 20141 Proportion of the Net Pension
Liability 0.0072% 0.0068% 0.0066% 0.0067% 0.0065% 0.0070% 0.0057% Proportionate Share of the Net
Pension Liability 779,817$ 694,727 $ 637,000 $ 659,623 $ 562,902 $ 481,238 $ 462,583 $ Covered Payroll 335,827 $ 331,260 $ 321,063 $ 301,916 $ 251,715 $ 265,380 $ 319,046 $ Proportionate Share of the Net
Pension Liability as a Percentage of
Covered Payroll 232.21% 209.72% 198.40% 218.48% 223.63% 181.34% 144.99% Fiduciary Net Position as a
Percentage of the Plan's Total
Pension Liability 73.63% 75.07% 77.69% 75.39% 75.87% 78.32% 78.10% 1 Historical information is presented only for measurement periods for which GASB No. 68 is applicable.

California Public Employees' Retirement System (CalPERS) Miscellaneous Plans
Hercules Wastewater Fund
Required Supplementary Information (Unaudited)
Schedule of the Proportionate Share of the Plan's Net Pension Liability For the Year Ended June 30, 2021
Last Ten Fiscal Years 1
37 432
Fiscal Year: 2020-211 2019-201 2018-191 2017-181 2016-171 2015-161 2014-151 Actuarially Determined Contribution2
102,423$ 95,532 $ 91,514 $ 63,159 $ 52,105 $ 52,884 $ 34,760 $ Contribution in Relation to the
Actuarially Determined
Contribution2
(102,423) (95,532) (91,514) (63,159) (52,105) (52,884) (34,760) Contribution Deficiency (Excess) - $ - $ - $ - $ - $ - $ - $ Covered Payroll3
345,902$ 335,827 $ 331,260 $ 321,063 $ 301,916 $ 251,715 $ 265,380 $ Contributions as a Percentage of
Covered Payroll 29.61% 28.45% 27.63% 19.67% 17.26% 21.01% 13.10% Notes to the Schedule:

Change in Benefit Terms: The figures above do not include any liability impact that may have resulted from plan changes which occurred after June 30, 2013 as they have minimal cost impact. This applies for voluntary benefit changes as well as any offers of the Two Years Additional Service Credit (a.k.a. Golden Handshakes).

California Public Employees' Retirement System (CalPERS) 1 Historical information is presented only for measurement periods for which GASB No. 68 is applicable. 2 Employers are assumed to make contributions equal to the actuarially determined contributions (which is the actuarially determined contribution). However, some employers may choose to make additional contributions towards their side-fund or their unfunded liability. Employer contributions for such plan exceed the actuarial determined contributions. CalPERS has determined that employer obligations referred to as side-funds are not considered separately financed specific liabilities. 3 Covered-Employee Payroll represented above is based on pensionable earnings provided by the employer. However, GASB No. 68 defines covered-employee payroll as the total payroll of employees that are provided pensions through the pension plan. Accordingly, if pensionable earnings are different than total earnings for covered-employees, the employer should display in the disclosure footnotes the payroll based on total earnings for the covered group and recalculate the required payroll-related ratios.

Last Ten Fiscal Years
1 Hercules Wastewater Fund
Required Supplementary Information (Unaudited)
Schedule of Contributions to the Pension Plan
For the Year Ended June 30, 2021
38 433
Measurement Date: June 30, 20201 June 30, 20191 June 30, 20181 June 30, 20171 Proportion of the Net OPEB Liability
(Asset) -5.88% -6.80% 5.16% 5.19%
Proportionate Share of the Net OPEB
Liability (Asset) (28,052)$ (11,718) $ 66,474 $ 75,521 $ Covered Payroll 335,827 $ 331,260 $ 321,063 $ 301,916 $ Proportionate Share of the Net OPEB
Liability (Asset) as a Percentage of
Covered Payroll -8.35% -3.54% 20.70% 25.01%
Fiduciary Net Position as a Percentage
of the Plan's Total Pension Liability 119.65% 106.92% 65.60% 59.11% 1 Historical information is presented only for measurement periods for which GASB No. 75 is applicable.

Last Ten Fiscal Years 1
Hercules Wastewater Fund
Required Supplementary Information (Unaudited)
Schedule of the Proportionate Share of the Plan's Net OPEB Liability (Asset) - PEHMCA For the Year Ended June 30, 2021
39 434
Fiscal Year: 2020-212 2019-202
2018-19 2017-18
Actuarially Determined Contribution 1,179$ 11,571$ 18,642$ 10,641$ Contribution in Relation to the
Actuarially Determined Contribution (1,179) (11,571) (18,642) (10,641) Contribution Deficiency (Excess) -$ -$ -$ -$ Covered Payroll 345,902$ 335,827$ 331,260$ 321,063$ Contributions as a Percentage of
Covered Payroll 0.34% 3.45% 5.63% 3.31%
1 Historical information is presented only for measurement periods for which GASB No. 75 is applicable. 2 Effective for the year ended June 30, 2020, PEHMCA Plan is valued separately.

Hercules Wastewater Fund
Required Supplementary Information (Unaudited)
Schedule of Contributions to the OPEB Plan - PEHMCA
For the Year Ended June 30, 2021
Last Ten Fiscal Years 1
40 435
Measurement Date: June 30, 20211 2 June 30, 20201 2
Proportion of the Net OPEB Liability
(Asset) 5.36% 5.36%
Proportionate Share of the Net OPEB
Liability (Asset) 86,665$ 99,901 $
Covered Payroll 345,902$ 335,827 $
Proportionate Share of the Net OPEB
Liability (Asset) as a Percentage of
Covered Payroll 25.05% 29.75%
Fiduciary Net Position as a Percentage
of the Plan's Total Pension Liability 0.00% 0.00%
1 Historical information is presented only for periods for which GASB 73 is applicable. 2 SOMAR Plan is now valued separately from PEHMCA Plan effective June 30, 2020.

Last Ten Fiscal Years 1
Hercules Wastewater Fund
Required Supplementary Information (Unaudited)
Schedule of the Proportionate Share of the Plan's Net OPEB Liability (Asset) - SOMAR For the Year Ended June 30, 2021
41 436
Fiscal Year: 2020-212 2019-202
Actuarially Determined Contribution 2,332$ 2,182 $ Contribution in Relation to the
Actuarially Determined Contribution (2,332) (2,182) Contribution Deficiency (Excess) -$ - $ Covered Payroll 345,902$ 335,827 $
Contributions as a Percentage of
Covered Payroll 0.67% 0.65%
1 Historical information is presented only for measurement periods for which GASB No. 73 is applicable. 2 Effective for the year ended June 30, 2020, SOMAR Plan is valued separately.

Hercules Wastewater Fund
Required Supplementary Information (Unaudited)
Schedule of Contributions to the OPEB Plan - SOMAR
For the Year Ended June 30, 2021
Last Ten Fiscal Years 1
42 437

City of Hercules

Hercules, California

Independent Accountants’ Report on
Applying Agreed-Upon Procedures
on Measures B Transactions and Use Tax Revenues

For the Year Ended June 30, 2021
438

439

INDEPENDENT ACCOUNTANTS’ REPORT ON APPLYING AGREED-UPON PROCEDURES

To the Honorable Mayor and Members of City Council
of the City of Hercules
Hercules, California

We have performed the procedures enumerated below on the City of Hercules (t he “City”) in evaluating whether the Measure B – Transactions and Use Tax revenues is in accordan ce with the provisions of this measure for the year ended June 30, 2021. The City is responsible for compliance with the Measure B – Transactions and Use Tax.

The City has agreed to and acknowledged that the procedures performed are appropriate to meet the intended purpose of evaluating whether the Measure B – Transactions and Use Tax revenues is in accordance with the provisions of this measure. The City is responsible for receipt of Measure B - Transactions and Use Tax revenues and deposit of such proceeds into the City's General Fund. This report may not be suitable for any other purpose. The procedures performed may not address all the items of interest to a user of this report and may not meet the ends of all users of this report and, as such, users are responsible for determining whether the procedures performed are appropriate for their purposes.

This agreed-upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of those parties specified in this report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose.

The procedures and associated findings are as follows:

1. We confirmed Measure B payments with the California State Board of Equalization and calculated variances to the receipts summarized per the general ledger of the City for the year ended June 30, 2021.

Findings:

Date Posted to G /L R eceipts per G /L Paym ents per B OE V ariance 08/12/20* $ 96,448 $ 96,448 - 09/02/20* 163,339 163,339 -
09/29/20 161,872 161,872 -
11/03/20 148,173 148,173 -
12/09/20 88,609 88,609 -
01/07/21 162,702 162,702 -
02/03/21 104,996 104,996 -
03/02/21 137,028 137,028 -
03/31/21 151,328 151,328 -
05/04/21 112,439 112,439 -
06/03/21 112,397 112,397 -
06/30/21 164,427 164,427 -
06/30/21** 243,990 243,990 -
1,847,749$ 1,847,749 $

*The City accrued $408,288 for the fiscal year ended June 30, 2020. These payments apply to part of that accrual.

**California Department of Tax and Fee Administration (CDTFA) confirmed that $190,077 was paid towards accrual in July and $53,913 in August, subsequent to the yearend.
200 E. Sandpointe Ave., Suite 600, Santa Ana, California 92707 Tel: 949-777-8800 • Fax: 949-777-8850
www.pungroup.cpa
3939352 Pun & McGeady_L_final.pdf 2 1/14/14 3:48 PM 440
To the Honorable Mayor and Members of City Council
of the City of Hercules

Page 2 ends

2. We traced the proceeds of the tax levied and confirmed at procedure 1 to the City's General Fund for use by the City, in accordance with Ordinance 470 Sec 8-9. 12 Use of Tax Proceeds and Ordinance 481 Sec 8-9.12 Use of Tax Proceeds (amends ordinance 470).

Findings: Proceeds of taxes levied and confirmed under Measure B were paid into the City’s General Fund for use by the City with no exceptions.

We were engaged by the City to perfo rm this agreed-upon procedures engagement and conducted our engagement in accordance with attestation standards established by the American Institute of Certified Public Accountants. We were not engaged to and did not conduct an examination or review engagement, the objective of which would be the expression of an opinion or conclusion, respectively, on the revenue received by the City from Measure B – Transactions and Use Tax. Accordingly, we do not express such an opinion or conclusion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you.

We are required to be independent of the City and to m eet our other ethical responsibilities, in accordance with the relevant ethical requirements related to our agreed-upon procedures engagement.

This report is intended solely for the information and use of the City Council and the management of the City of Hercules and is not intended to be and should not be used by anyone other than these specified parties.

Santa Ana, California
January 19, 2022

441

City of Hercules

Hercules, California

Independent Accountants’ Report on
Applying Agreed-Upon Procedures
on Measures C Utility Users Tax Rate Revenues

For the Year Ended June 30, 2021
442

443

INDEPENDENT ACCOUNTANTS’ REPORT

ON APPLYING AGREED-UPON PROCEDURES

To the Honorable Mayor and Members of City Council
of the City of Hercules
Hercules, California

We have performed the procedures enumerated below on assi sting the City of Hercules (the “City”) in evaluating whether the Measure C Utility Users Tax Ra te Revenues is in accordance with th e provisions of this measure for the year ended June 30, 2021. The City of Hercules' management is responsible for the receipt of Measure C - Utility Users Tax Rate Revenues and deposit of such proceeds into the City's General Fund. The City is responsible for compliance with Measure C Utility Users Tax Rate Revenues.

The City has agreed to and acknowledged that the procedures performed are appropriate to meet the intended purpose of evaluating whether the Measure C U tility Users Tax Rate Revenues is in acco rdance with the provisions of this measure. This report may not be suitable for any other purpose. The procedures performed may not address all the items of interest to a user of this report and may not meet the needs of all users of this report and, as such, users are responsible for determining whether the procedures performed are appropriate for their purposes.

The procedures and associated findings are as follows:

1. We agreed the actual UUT to the receipts recorded in the City's general ledger and recalculated the mathematical accuracy of the following schedules provided by the City:

a) FY 2020/21 - Expected UUT VS Actual UUT
b) FY 2020/21 - Increase in Revenues Generated by Measure C

Findings:

a) Actual UUT agreed to receipts recorded in the City’s general ledger with no exceptions. Schedule recalculated for mathematical accuracy with no exceptions.

Type of Utility
Estimated Utility
Billings
(FY 20/21
Utility Billings
as a Base) Ex pected UUT*
Actual
UUT V ariance % V ariance
Electricity 15,800,000$ 1,264,000 $ 1,258,342 $ (5,658) $ -0.45% Telephone 8,850,000 708,000 528,509 (179,491) -33.96% Gas 5,212,500 417,000 530,463 113,463 21.39% Water 7,212,500 577,000 753,301 176,301 23.40% Cable 6,525,000 522,000 520,034 (1,967) -0.38% Totals UUT 43,600,000$ 3,488,000$ 3,590,649$ 102,649$ 2.86% FY 2020/21 - Expected UUT vs Actual UUT
* Based on UUT of 8% of est imat ed ut ilit y billings 200 E. Sandpointe Ave., Suite 600, Santa Ana, California 92707 Tel: 949-777-8800 • Fax: 949-777-8850
www.pungroup.cpa
3939352 Pun & McGeady_L_final.pdf 2 1/14/14 3:48 PM 444
To the Honorable Mayor and Members of the City Council
of the City of Hercules

Page 2 ends

b) Schedule recalculated for mathematical accuracy with no exceptions.

Type of Utility
Actual UUT
with Measure
A*
Estimated UUT
without
Measure A**
Increase in
Revenue due to
Measure A
Increase/
Decrease in
Revenue per Staff
Report*** V ariance % V ariance
Electricity 1,258,342$ 943,757$ 314,586$ 306,351$ (8,234)$ -2.69% Telephone 528,509 396,382 132,127 111,992 (20,135) -17.98% Gas 530,463 397,847 132,616 149,728 17,112 11.43% Water 753,301 564,976 188,325 200,096 11,770 5.88% Cable 520,034 - 520,034 519,279 (754) -0.15% Totals 3,590,649$ 2,302,961$ 1,287,687$ 1,287,446$ (241)$ -0.02% * Based on the actual UUT collected for FY 2020/2021 at a rate of 8% for the entire year. ** Based on a rate of 8% UUT on electricity, telephone, gas and water, and no UUT on cable. *** Based on the Adopted Budget for FY 19/20 & FY 20/21.

FY 2020/21 - Increase in Revenue Generated by Measure C

2. We traced the proceeds of the Measure C tax, as listed in procedure 1.a) schedule to the City's General Fund for use by the City, in accordance with Ordinance 475 Sec 8-8.402 Use of Tax Proceeds and Ordinance 481 Sec 8-8.402 Use of Tax Proceeds (amends ordinance 475).

Findings: Proceeds of taxes as listed in schedule presented at 1.a) were paid into the City's General Fund for use by the City, with no exceptions.

We were engaged by the City to perfo rm this agreed-upon procedures engagement and conducted our engagement in accordance with attestation standards established by the American Institute of Certified Public Accountants. We were not engaged to and did not conduct an examination or review engagement, the objective of which would be the expression of an opinion or conclusion, respectively, on the Measure C Utility Users Tax Rate Revenues of the City for the year ended June 30, 2021. Accordingly, we do not express such an opinion or conclusion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you.

We are required to be independent of the City and to m eet our other ethical responsibilities, in accordance with the relevant ethical requirements related to our agreed-upon procedures engagement.

Santa Ana, California
January 19, 2022

445

City of Hercules

Hercules, California

Independent Accountants’ Report on
Applying Agreed-Upon Procedures to
Appropriations Limit Schedule

For the Year Ended June 30, 2021
446

INDEPENDENT ACCOUNTANTS’ REPORT ON

APPLYING AGREED-UPON PROCEDURES

To the Honorable Mayor and Members of City Council
of the City of Hercules
Hercules, California

We have performed the procedures enumerated below on the accompanying Appropriations Limit Schedule of the City of Hercules, California (the “City”) for the year ending June 30, 2021. The City is responsible for the Appropriations Limit Schedule
The City has agreed to and acknowledged that the procedures performed are appropriate to meet the intended purpose of meeting the requirements of Section 1.5 of Artic le XIII-B of the California C onstitution. The League of California Cities (as presented in the publication entitled Agreed-upon Procedures Applied to the Appropriations Limitation Prescribed by Article XIII- B of the California Constitution ) has agreed to and acknowledged that the procedures performed are appropriate for its purposes. This report may not be suitable for any other purpose. The procedures performed may not address all the items of interest to a user of this report and may not meet the needs of all users of this report and, as such, users are respons ible for determining whether the procedures performed are appropriate for their purposes.

The procedures performed and associated findings are as follows:

1. We obtained the completed worksheets used by the City to calculate its appropriations limit for the year ended June 30, 2021, and determined that the lim it and annual calculation factors were adopted by resolution of the City Council. We also determined that the population and infl ation options were selected by a recorded vote of the City Council.

Finding: No exceptions were noted as a result of our procedures.

2. For the accompanying Appropriations Limit Schedule, we added the prior year’s limit to the total adjustments, and agreed the resulting amount to the current year’s limit.

Finding: No exceptions were noted as a result of our procedures. However, we noted that the City is not maximizing its calculation by using the City population factor for the year ended June 30, 2021 that will benefit the City th e most. There is no impact as the City’s appropriations for 2020-21 are below the limit.

3. We agreed the current year information presented in the accompanying Appropriations Limit Schedule to corresponding information in worksheets used by the City.

Finding: No exceptions were noted as a result of our procedures.

4. We agreed the appropriations limit presented in th e accompanying Appropriations Limit Schedule to the appropriations limit adopted by the City Council.

Finding: No exceptions were noted as a result of our procedures. 200 E. Sandpointe Ave., Suite 600, Santa Ana, California 92707 Tel: 949-777-8800 • Fax: 949-777-8850
www.pungroup.cpa
3939352 Pun & McGeady_L_final.pdf 2 1/14/14 3:48 PM 447
To the Honorable Mayor and Members of City Council
of the City of Hercules
Hercules, California

Page 2 ends

2 We were engaged by the City to perform this agreed- upon procedures engagement and conducted our engagement in accordance with attestation standards established by the American Institute of Certified Public Accountants. We were not engaged to and did not conduct an examination or review engagement, the objective of which would be the expression of an opinion or conclusion, respec tive on the accompanying Appropriation Limit Schedule.

Accordingly, we do not express such an opinion or conclusion. Had we pe rformed additional procedures, other matters might have come to our attention that would have been reported to you.

We are required to be independent of the City and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements related to our agreed-upon procedures engagement.

This report is intended solely for the information and use of the City Council and management of the City and is not intended to be and should not be used by anyone other than these specified parties.

Santa Ana, California
January 19
, 2022
448
City of Hercules
Appropriations Limit Schedule
For the Year Ended June 30, 2021
3 Amount Source
A. Appropriations Limit FY 2019-2020 440,442,779$ Prior year appropriation limit adopted by the City
B. Calculation Factors:
1) Population increase % 1.0016 California Department of Finance 2) Inflation increase % 1.0051 Contra Costa County Assesor 3) Total adjustment % 1.0067 (B1 x B2)
C. Annual Adjustment Increase 2,954,561 {(B3-1) x A}
D. Other Adjustments:
1) Loss responsibility (-) - N/A
2) Transfer to private (-) - N/A
3) Transfer to fees (-) - N/A
4) Assumed responsibility (+) - N/A
E. Total Adjustments 2,954,561 (C+D)
F. Appropriations Limit FY 2020-2021 443,397,340$ (A+E) See Acco
mpanying Notes to Appropriations Limit Schedule.
449
City of Hercules
Notes to Appropriations Limit Schedule
For the Year Ended June 30, 2021

4 Note 1 – Purpose of Limited Procedures Review

Under Article XIIIB of the California Constitution (the Ga nn Spending Limitation Initiative), California governmental agencies are restricted as to the amount of annual appropria tions from proceeds of taxes. Effective for years beginning on or after July 1, 1990, under Section 1.5 of Article XIIIB, the annual calculation of the appropriations limit is subject to the agreed-upon procedures in connection with the annual audit.

Note 2 – Method of Calculation

Under Section 10.5 of Article XIIIB, for fiscal years begi nning on or after July 1, 1990, the appropriations limit is required to be calculated based on the limit for the fiscal year 1986-87, adjusted for the inflation and population factors discussed in Notes 3 and 4 below.

Note 3 – Population Factors

A California governmental agency may use as its population factor either the annual percentage change of the jurisdiction’s own population or the annual percentage change in population of the county where the jurisdiction is located. The factor adopted by the City for the year ended June 30, 2021, represents the annual percentage change in population for the County of Contra Costa.

Note 4 – Inflation factors

A California governmental agency may use as its inflation factor either the annual percentage change in the 4 th quarter
per capita personal income (which percen tage is supplied by the California Depart ment of Finance) or the percentage change in the local assessment roll from th e preceding year due to the change of local nonresidential construction. The factor adopted by the City for the year ended June 30, 2021, represents the percentage ch ange in the local assessment roll from the preceding year due to the change of local nonresidential construction.

Note 5 – Other Adjustments

A California government agency may be required to adjust its appropriations limit when cer tain events occur, such as the transfer of responsibility for municipal services to, or from, another government agency or private entity. The City had no such adjustments for the year ended June 30, 2021. 450
City of Hercules
AU-C 260 Communication With
Those Charged With Governance
For the Year Ended June 30, 2021
January 25, 2022
451
2 CONTENTS
• Scope of Work
• Required Communications (AU-C 260)
• Overview of Financial Statements
• Audit Results
• Thank You!
12/2/2020
452
3 SCOPE OF WORK
12/2/2020
453
4 SCOPE OF WORK
• Audit of the Annual Comprehensive Financial Report
• Audit of the Hercules Wastewater Fund
• Audit of the Hercules Public Financing Authority
• Report on internal control over financial reporting and on compliance in accordance with Government Auditing Standards
•
Agreed Upon Procedures:
• GANN Limit
• Measure B – Transactions and Use Tax Revenues
• Measure C – Utility Users Tax Rate Revenues
• Communication with Those Charged with Governance
12/2/2020
454
5 OUR RESPONSIBITY IN ACCORDANCE WITH

PROFESSIONAL STANDARDS
• Form and express an opinion about whether the financial statements that have been prepared by management with your oversight are presented fairly, in all material respects, in accordance with accounting principles generally accepted in the United States of America
• Our responsibility is to plan and perform the audit to obtain “reasonable” assurance (not “absolute” assurance) about whether the financial statements are free of material misstatements.
• We considered internal control over financial reporting. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control.
1/20/20
22 455
6 Required Communications (AU-C 260)
(Report to the City Council)
12/2/2020
456
7 Required Communications (AU-C 260)
12/2/2020
• Ethics and Independence
• Complied with ALL relevant ethical requirements regarding independence • Significant Accounting Policies
• The City disclosed all significant accounting policies in Note 1 to the financial statements. • The City implemented GASB Statement No. 84, Fiduciary Activities • Significant Estimates
• Fair Value on Investments
• Depreciation on Capital Assets
• Net Pension Liability
• Net OPEB Liability
457
8 Required Communications (AU-C 260)
12/2/2020
• Sensitive Disclosures
• Note 1 – Summary of Significant Accounting Policies
• Note 8 – Retirement Plans
• Note 10 – Other Postemployment Benefits
• Note 12 – Commitments and Contingencies
• Note 14 – Stewardship, Compliance, and Accountability • Note 16 – Special Items – Settlement payable to Department of Finance • Note 17 – Prior Period Adjustments
458
9 Required Communications (AU-C 260)
12/2/2020
• Misstatements
• There were no uncorrected misstatement reported.
• Consultation with Other Accountants
• Management informed us that, and to our knowledge, there were no consultations with other accountants regarding auditing and other matters. • Significant Difficulties
• We encountered no significant difficulties in dealing with management. • Disagreement with Management
• We did not have any disagreement with management in terms of accounting treatments nor audit procedures performed.
459
10 OVERVIEW OF THE FINANCIAL

STATEMENTS
12/2/2020
460
11 Net Position @ June 30, 2021
12/2/2020
Governmental Business-type
Activities Activities Total
Assets 161,776,202$ 79,905,420$ 241,681,622$
Deferred Outflows of Resources 3,279,583 212,303 3,491,886 Liabilities 47,891,300 35,616,544 83,507,844 Deferred Inflows of Resources 3,282,136 116,173 3,398,309 Net Position:

Net investment in capital asset 69,628,982 7,230,469 76,859,451 Restricted 20,047,707 7,679,725 27,727,432 Unrestricted 24,205,660 29,474,812 53,680,472 Total net position 113,882,349$ 44,385,006$ 158,267,355$ 461
12 Changes in Net Position
1/20/20
22 Governmental Business-type
Activities Activities Total
Expenses 25,406,445$ 3,894,420$ 29,300,865$ Program Revenues:

Charges for services 2,461,704 5,769,396 8,231,100 Operating grants and contributions 4,566,850 - 4,566,850 Capital grants and contributions - - - Total program revenues 7,028,554 5,769,396 12,797,950 Net cost of services (18,377,891) 1,874,976 (16,502,915) General Revenues 15,078,532 4,537 (3,704,965) Changes in net position (3,299,359)$ 1,879,513$ (20,207,880)$ 462
13 General Fund Balance @ June 30, 2021
1/20/20
22 Nonspendable
Prepaid 10,112$
Section 115 trust for pension stablization 2,237,248
Advances 27,787,637
Total nonspendable 30,034,997
Assigned:

Earthquake insurance deductible 500,000
Fiscal neutrality reserve 4,034,517
Capital projects 450,000
Planning and building 846,800
Reusable bags 13,930
Public, education and government (PEG) 70,000
Total assigned 5,915,247
Unassigned 10,008,178
Total Fund Balance 45,958,422$
463
14 Net Pension Liability
1/20/20
22 Discount Rate - 1% Current Discount Discount Rate + 1% (6.15%) Rate (7.15%) (8.15%)
Miscellaneous 12,521,141$ 7,840,808$ 3,973,605$ Safety 14,938,674$ 9,924,963$ 5,810,759$ Total 27,459,815$ 17,765,771$ 9,784,364$ Plan's Net Pension Liability
464
15 Net OPEB Liability (Asset)
1/20/20
22 Discount Rate - 1% Current Discount Discount Rate + 1% PEHMCA (5.4%) (187,026)$ (477,278)$ (722,165)$ SOMAR (2.2%) 1,942,727$ 1,617,718$ 1,365,073$ Total 1,755,701$ 1,140,440$ 642,908$ Plan's Net OPEB Liability (Asset)
465
16 AUDIT RESULTS
12/2/2020
466
17 Audit Results
12/2/2020
• Financial Statements
• Unmodified Opinions
•
Financial Statements are fairly presented in all material respects • Significant accounting policies have been consistently applied • Estimates are reasonable
• Disclosures are properly reflected in the financial statements • Agreed Upon Procedures – GANN, Measure B, and Measure C • No exceptions were noted
• AU-C 265, Communicating Internal Control Related Matters Identified in an Audit
• None Reported
467

HQ - ORANGE COUNTY
200 E. Sandpointe Avenue
Suite 600
Santa Ana, CA 92707

SAN DIEGO
4365 Executive Drive
Suite 710
San Diego, CA 92121

BAY AREA
2121 North California Blvd.

Suite 290
Walnut Creek, CA 94596

LAS VEGAS
1050 Indigo Drive
Suite 110
Las Vegas, NV 89145

PHOENIX
4742 North 24th Street
Suite 300
Phoenix, AZ 85016
468

STAFF REPORT TO THE CITY COUNCIL

DATE: Regular Meeting of January 25, 2022

TO: Members of the City Council

VIA: Dante Hall, City Manager

SUBMITTED BY: Edwin Gato, Finance Director

SUBJECT: Long-Term Financial Projection for the General Fund and Approval of a Resolution to unanimously declare a fiscal emergency in the City of Hercules

RECOMMENDATION: Review and discuss the long -term financial projection for the General Fund, and approval of a resolution to unanimously declare a fiscal emergency in the City of Hercules related to the expiration of the City’s Utility Users Tax on January 1, 2025.

FISCAL IMPACT OF RECOMMENDATION
There is no direct impact from the preparation and review of an updated long-term forecast. It is a planning tool that can be used to guide future fiscal decisions.

BACKGROUND AND DISCUSSION
The City’s finances are managed through four major efforts each year. The development and adoption of a budget for each fiscal year which starts July 1st is generally considered the first point in the annual cycle. This is generally followed by the completion and the acceptance of the audit for the prior fiscal year, with the goal of having that completed by December 31st or earlier.

The completion of the annual audit typically sets the stage for the mid-year budget review in February or March and can include some adjustments or additional appropriations or designations of reserves.

The preparation of an update to the long-term forecast would typically be received by the Council in March/April timeframe to set the stage for the development of the budget for the next fiscal year.

However, this year due to the Utility Users Tax, which will sunset in January 2025, staff prepared the long-term financial projections early to show the fiscal impact of the discontinuance of the UUT to the City’s bottom line and to start the voter approval process to continue its UUT.

With the audit being received by the City Council tonight, it is time to review an updated Long-Term Financial Projection. The forecast has been updated to reflect the FY 20-21 audit results with the FY 21-22 Adopted Budget and the preliminary look of the FY 22-23 projections. A long-term forecast was prepared for the General Fund for the time period from FY 23-24 through FY 27-28. 469

The five-year forecast is an essential tool that reflects the City’s commitment to fiscal health and sustainability. This model is used to evaluate the immediate impact of budgetary decisions and the costs of decisions over multiple years. The tool is updated based on current revenue and expenditure information. Though individual variables and assumptions may change over time, the fiv e-year forecast provides a consistent model to realistically forecast the City’s fiscal performance. The five- year forecast includes all aspects of the General Fund. It models and forecasts all General Fund revenues (property tax, sales tax, utility users tax, etc.) and expenditures in detail. The City updates the five-year forecast as part of the regular budget update to the Council. These updates are part of developing the budget for the upcoming fiscal year, as explained above.

The five-year forecast (FY 22-23 through 26-27) marks the first look at the FY 22-23 annual budget.

It includes projected General Fund financials over the next five years based on current service levels and information on revenues.

SIGNIFICANT CHANGES FROM PRIOR YEAR

The COVID-19 Pandemic began to directly impact City operations in mid -March 2020 when the initial County Health Order resulted in a stay-home order for all but essential services workers.

Now, nearly two years later, we continue to operate under a County Health Order, which has been updated and revised. Over time, we have also had to comply with the Governor's Executive Orders as they have evolved. Also, the City Manager declared a local emergency in response to the COVID- 19 Pandemic initially on March 15, 2020. That local emergency declaration was ratified by the City Council and extended by the City Council's action every 60 days after that.

Also, we would like to acknowledge that the City of Hercules is the only City Hall in the county that did not close during the COVID event. As essential services workers, City employees continued to work unless they had COVID-related health or childcare issues. We were fortunate that our physical facilities and level of staffing lent themselves to operate on-site in a safe manner with all reasonable and required precautions taken to protect our employees and customers. Of course, we could not continue in-person City Council and other public meetings and transitioned to the Zoom platform.

We continue to utilize this platform in compliance with the Governor’s Executive Order.

REVENUE PROJECTION AND ASSUMPTIONS USED: The General Fund major revenue categories are summarized on Attachment 2. The City derives a significant portion of its General Fund revenues from economically sensitive sources such as property taxes, sales taxes (1% Bradley-Burns and Measure B), and utility users’ taxes. When one or more of these key revenue sources deviates from projections, funding for future programs and services may be affected.

As shown in the following graph, General Fund revenues are projected to increase at the rate of 2% a year and include estimated revenues from new development . Revenue projections for a 5 -year forecast period through 2027 range from $17.5 to $16.7 million. The following explains the major revenue assumptions used to estimate General Fund revenues.

470

 Utility Users Tax (UUT) are revenues collected from the consumption of utility services, including (but not limited to) electric, gas, water, sewer, telephone (including cell phone and long-distance), sanitation, and cable television. The City determines the rate of the tax and the use of its revenues. Based on the trend and its consumption rate, the City continues to see erosion in Wireless Telecom’s UUT revenues due to the update in allocations of the bundled packages from the respective providers. These updated allocations shifted a more significant percentage towards data, which is not taxable.

On June 4, 2013, the voters approved Ordinance #475, increasing the tax rate from 6% to 8%. The Utility Users Tax will automatically sunset, and its provisions shall become ineffective on January 1, 2025. The five-year forecast assumes that the tax will sunset in mid FY 24-25. To avoid catastrophic impacts to City services due to a severe and sudden loss of revenue, Staff recommends going back to the voters to extend the tax imposed on utilities.

 Total Sales Tax revenue is highly concentrated with two producers generating over 50% of the City's sales tax. Based on the report received from MuniServices, Hercules’s sales tax revenue is substantially generated from business and industry sources. However, the City continues to benefit from the ongoing implementation of the Wayfair decision regarding online sales and the more significant amount of purchases being made online due to the Pandemic, with these trends being found as part of the City's share in the County pool. It should also be noted that the Wayfair decision's full effect is anticipated to have occurred by the end of the FY 20/21 fiscal year. After that, any increases from the County pool will be driven primarily by the underlying economic trends.

 The City is realizing a stable property tax-related revenue growth and assumed the following: The California Consumer Price Index (CCPI) for FY 2021-22 that has been approved by the State is 1.036%. In year two of the forecast, the CIP growth is estimated -
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
18,000,000
20,000,000
FY 22-23
Forecast
FY 23-24
Forecast
FY 24-25
Forecast
FY 25-26
Forecast
FY 26-27
Forecast
General Fund
5-Year Forecast - Operating Revenues
Taxes
Taxes on New Development
Intergovernmental
Program Revenues
Use of Money & Property/Other
Admin Cost Allocation
Transfers In
471

at 1.5% and in years 3 -5 of the forecast, the CCPI has been forecast at the maximum allowable rate of 2%.

This year the Assessors applied the CCPI factor of 1.036%. It is important to note that all properties that have been granted Proposition 8 reductions between 2008 and 2012, and in some counties in 2020 due to lower sale price trends in 2019, are required to be reviewed each year outside of the CCPI adjustment and any positive adjustment to those properties will likely exceed the 1.036% if properties are granted value restorations.

 The new general tax revenues that will be generated from new developments, such as Muir Pointe, Bayfront, Sycamore Crossing, Willow Auto Site, and Hilltown are estimated based on residential unit impact, assuming an average of 2.5 people per unit using FY 19- 20 projected tax revenues as a base.

 The effect of COVID-19 mandatory closures to the Parks & Recreation program resulted in a reduction of $1.1 million of program revenues in FY 20-21 as adjusted at Midyear.

Childcare programs, contract classes, sports programs, and facility rentals were all suspended since March 2020, with very limited offerings underway now. The five-year projections assumed that all programs would be restored starting FY 21-22.

EXPENDITURE PROJECTION AND ASSUMPTIONS USED: As shown in the following graph, General Fund expenditures are projected to increase at the estimated rate of 3% a year.

Expenditure projections for a 5-year forecast period through 2027 range from $16.8 to $18.6 million assuming the same service level. The following chart shows the growth in General Fund expenditures.

1. The most significant cost in the General Fund is driven by its labor. Labor accounts for almost 60% of total expenditures. Below are significant assumptions used to estimate the cost of salaries and benefits:
-
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
18,000,000
20,000,000
FY 22-23
Forecast
FY 23-24
Forecast
FY 24-25
Forecast
FY 25-26
Forecast
FY 26-27
Forecast
General Fund
5-Year Forecast - Operating Expenditures
Non-Department/Transfers
Workers Comp/General Liability
Administration
Parks and Recreation
Community Development
Public Works
Police
472

a. Regular Salaries – Cost of living (COLA) increase by 3% per year.

b. PERS Miscellaneous and Public Safety Normal Cost rate applied are projected as follows based on CalPERS actuarial assumptions:

c. PERS Unfunded Accrued Liability (UAL) contribution amounts are projected as follows based on CalPERS actuarial assumptions.

2. Parks & Recreation programs have been suspended since March 2020. The five -year forecast assumed that programs would be restored starting FY 21-22.

3. The City of Hercules has been navigating a series of financial difficulties dating back to the Great Recession in FY 2007-08, the elimination of redevelopment in 2011, in addition to financial mismanagement which occurred under a former City Manager who resigned in 2011. While much progress has been made and the City has been able to build up its reserves by making financially prudent decisions and adopting balanced budgets which also use one -time monies for strategic purposes, ensuring the ongoing financial sustainability of the City, and lingering issues associated with the State dissolution of redevelopment in 2011 have not been fully resolved.

On April 8, 2020, the City entered into a settlement agreement implementing an installment payment plan for the Other Funds Due Diligence Review payment. The outstanding $3.6 million payment will be made by the City and Successor Agency to the Contra Costa County Auditor-Controller according to the following schedule, which the initial payment was made on May 1, 2020:

FY 22-23 FY 23-24 FY 24-25 FY 25-26 FY 26-27
Police Classic 23.70% 23.70% 23.70% 23.70% 23.70%
Police 2nd-Tier 21.80% 21.80% 21.80% 21.80% 21.80%
Police PEPRA 13.10% 13.10% 13.10% 13.10% 13.10%
Miscellaneous Classic 10.30% 10.30% 10.30% 10.30% 10.30% Miscellaneous PEPRA 7.60% 7.60% 7.60% 7.60% 7.60%
FY 22-23 FY 23-24 FY 24-25 FY 25-26 FY 26-27
Police Classic 747,000 $ 797,000 $ 847,000 $ 873,000 $ 896,000 $ Police 2nd-Tier 2,000 2,100 2,200 400 400 Police PEPRA 6,200 4,900 5,800 6,000 6,200 Miscellaneous Classic 614,000 651,000 691,000 711,000 730,000 Miscellaneous PEPRA 3,400 4,200 4,800 5,000 5,100 1,372,600 $ 1,459,200 $ 1,550,800 $ 1,595,400 $ 1,637,700 $ 473

This $3.6 million are funds advanced by the City in 2011 to the Redevelopment Agency to make a bond payment in order to avoid a default on the Redevelopment Agency’s bonds due to the dramatic decline in property values as a result of the Great Recession. The City advanced these funds in April 2011, and the Redevelopment Dissolution Act approved by the State Legislature and signed by then Governor Brown, made this type of transfer illegal after the fact later in 2011. The DDR completed in 2015 identified that this amount needed to be returned to the former Redevelopment Agency by the City.

The City is working with Senator Skinner regarding a bill which, if passed by the State Legislature and signed by the Governor, would make the City eligible for a Finding of Completion which would allow for the repayment of City loans made by the former Redeployment Agency. While more than $50 million in City loans are reflected as being outstanding, it is anticipated that the State Department of Finance will not find the supporting documentation acceptable for loans beyond an estimated $ 3 to $4 million.

Once that determination is made, any remaining accounts receivable related to loans from the City to the former Redevelopment Agency will have to be reduced by the loans disallowed, and that will be done once a final determination is made.

4. In August 2020, the City refinanced the proceeds of the Library Lease Revenue Bonds, Series 2003B. The City structured the refinancing to achieve all of the cash flow savings in the first three years which is reflected in the forecast.

5. On October 18, 2013, the City agreed with CalHFA to extend the term of the loan on Housing Enabled by Local Partnership (HELP) and Residential Development Loan Program (RDLP) through April 11, 2027, and August 15, 2026, respectively. At that time, payments of the remaining loan balance s are due in full. Prior to the end of the loan term, the City will work with CalHFA to negotiate a further extension to repay the remaining loan balance.

NET ANNUAL RESULTS
Based on the current information known, the General Fund will end the fiscal years with a positive net revenue until year three. On January 1, 2025, the Utility Users Tax (UUT) will sunset. Also, per our agreement with the California Housing Finance Agency (CalHFA), the remaining loan balances are due no later than April 11, 2027, and August 15, 2026, for HELP and RDLP loans, respectively.

Therefore, a structural deficit will start in FY 24-25 assuming the same service level, the UUT is not renewed, and the accelerated payments on CalHFA loans are not renegotiated. The FY 2 2-23 projections will be further updated and refined during the adoption of the budget in June 2022.

RECOMMENDATION
Staff recommends going back to the voters (a separate agenda item in the future ) to extend the UUT, a tax imposed on utilities. In order to be submitted on the ballot for a state primary election, the City must first adopt a declaration of a fiscal emergency by unanimous vote of the Council. 474

The California Constitution requires the election for a general tax measure such as this to be held on a regularly scheduled general municipal election, except in cases of emergency declared by a unanimous vote of the City Council . Declaring a fiscal emergency allows flexibility on when to place the renewal on the ballot. Placing the UUT tax renewal on a n upcoming ballot before the tax expires will allow for an uninterrupted collection of the UUT and a seamless funding of critical city services.

ATTACHMENTS:

1. Resolution

2. General Fund Long-Term Financial Forecast
475
RESOLUTION NO. 22-_____

RESOLUTION OF THE CITY COUNCIL OF THE CITY OF HERCULES

UNANIMOUSLY DECLARING A FISCAL EMERGENCY IN THE CITY OF

HERCULES

WHEREAS, the City of Hercules has demonstrated excellent fiscal stewardship by balancing the budget, increasing reserves, and providing basic services despite limited revenues; and

WHEREAS, the City’s excellent fiscal management continues to be recognized with budgeting and audit awards, including the Governmental Finance Officers Association’s (GFOA) Certificate of Achievement for Excellence in Financial Reporting for the City’s Comprehensive Annual Financial Report and the Distinguished Budget Presentation Award in the fiscal year ending June 30, 2020; and

WHEREAS, despite exemplary fiscal management, the effects of the pandemic, the impact of unfunded state mandates on the budget, and the effects of being a low property tax jurisdiction have taken a significant toll on the City’s ability to continue providing a satisfactory level of vital services to Hercules residents that protect the public peace, health, safety and welfare of the community; and

WHEREAS, in response to the effects of the Great Recession, the City slashed its budget by cutting service positions, purchased essentials with grant fundi ng, and participated in purchasing pools with other cities to lower expenses; and

WHEREAS, many of the staff positions that were eliminated and many of the services that were suspended as a result of the Great Recession have still not been restored, including curtailment of a number of civic activities popular with residents including suspension of 4 th of July activities, the Cultural Festival, and other popular events; and

WHEREAS, due to budgetary constraints, the City has been forced to defer maintenance on various City facilities; and

476
WHEREAS, the City has had to freeze positions from public safety as well as other City departments, cut code enforcement positions, and has been unable to fill other vital staff positions due to budgetary constraints, and

WHEREAS, the frequency and amount of emergency repairs to aging infrastructure is expected to increase, depleting reserves and requiring additional funding; and

WHEREAS, although the City is currently able to provide one -time funding to meet foreseeable emergency needs, the City does not have the capacity to provide such relief in a sustainable, recurring manner, and is at risk of significant impact to the budget an d city services during the next recessionary economic cycle should the need for emergency repairs continue to grow; and

WHEREAS, while City budgets have stabilized after a prolonged and unprecedented recessionary economy and repeated state takeaways, cu rrent and projected city revenues are insufficient to prevent further decline in the City’s street, sidewalk, public facilities, recreational, and storm drain infrastructure. The City has been implementing cost saving strategies for several years, includin g service innovation, fiscal discipline, improved revenue collection, and employee collaboration on achieving sustainable benefits in order stabilize its operational costs; however, the magnitude of the infrastructure deficit will in all likelihood greatly exceed any additional savings that could practically be achieved through further cost cutting measures; and

WHEREAS, the City Council finds additional revenues will be needed to restore city infrastructure to an adequate and sustainable level of maintenance; and

WHEREAS, the City relies on its existing Utility Users Tax (UUT), a tax imposed on the use of certain specified utilities including electricity, water, telecommunications, gas, video programming and telephonic services, to support the provision of basic municipal services to City residents, receiving on average $3. 6 million in revenue per year, which comprises a substantial portion of the City’s general fund budget; and

WHEREAS, the UUT, adopted by the voters in 2004, is set to expire January 1, 2025; and

WHEREAS, the Finance Director has projected a significant General Fund operating deficit, with operating reserves likely to be depleted, should the UUT be allowed to expire or otherwise not be renewed by January 1, 2025; and
477
WHEREAS, cost saving measures the City might employ to address the budget crisis that would result from the loss of UUT revenues would not be sufficient to avoid significant service disruptions which would have a negative impact upon the public peace, health, safety and welfare of the community; and

WHEREAS, in beginning to plan for the City’s forthcoming fiscal year budgets the City Council wants to ensure that the public is aware of the fiscal emergency that would result if the UUT were allowed to expire or otherwise not be renewed.

NOW, THEREFORE, be it resolved by the City Council of the City of Hercules as follows:

Section 1. That the City Council unanimously finds and declares the existence of a fiscal emergency within the City.

Section 2. That the City Clerk shall certify to the passage of this resolution and enter it into the book of original resolutions.

The foregoing Resolution was duly and regularly adopted at the City Council meeting of the City of Hercules held on the 25th of January 2022, by the following vote of the Council:

AYES:

NOES:

ABSENT:
____________________________
Dion Bailey, Mayor
ATTEST:

___________________________________
Lori Martin
Administrative Services Director/City Clerk

478
General Fund
Five-Year Financial Forecast
Year 1 Year 2 Year 3 Year 4 Year 5
FY 19-20 FY 20-21 FY 21-22 FY 22-23 FY 23-24 FY 24-25 FY 25-26 FY 26-27 Audited
Actuals
Audited
Actuals Adopted Forecast Forecast Forecast Forecast Forecast Beginning Available Balance $ 2,412,068 $ 1,847,112 2,138,983$ 1,071,458 1,317,948 2,636,463 2,698,978$ -$ Revenues
Taxes
Utility User Tax 3,483,843 3,590,649 3,509,000 3,618,000 3,644,000 1,833,000 Sales Tax 4,212,285 4,775,496 4,654,675 4,962,649 5,059,649 5,158,649 5,258,649 5,360,649 Property Taxes 1,415,995 1,451,716 1,520,000 1,433,000 1,462,000 1,492,000 1,522,000 1,553,000 Franchise Fees 948,503 862,104 896,000 897,000 915,000 933,000 951,000 969,000 Business Licenses 251,418 268,697 198,000 279,000 284,000 290,000 296,000 302,000 Transfer Tax 142,850 126,488 132,000 130,000 133,000 136,000 139,000 142,000 Transient Occupancy Tax 6,179 7,635 5,000 8,000 8,000 8,000 8,000 8,000 Intergovernmental 2,151,433 2,285,392 2,418,000 2,394,866 2,471,866 2,555,866 2,642,866 2,695,000 Fines & Forefeitures 62,582 36,586 37,000 38,000 39,000 40,000 41,000 42,000 Revenues from New Developments 302,000 924,000 1,428,000 1,662,000 1,851,000 Program Revenues
Community Development 675,556 824,891 242,000 540,000 552,000 564,000 576,000 588,000 Parks and Recreation 1,020,758 396,290 1,753,000 1,789,000 1,826,000 1,863,000 1,900,000 1,938,000 Police 483,110 48,958 219,000 123,000 125,000 127,000 129,000 131,000 Public Works 28,588 46,908 68,000 48,000 49,000 50,000 51,000 52,000 Other 6,770 10,571 11,000 11,000 11,000 11,000 11,000 11,000 Use of Money & Property 600,707 511,191 244,000 249,000 254,000 260,000 266,000 272,000 Cost allocated to other funds 534,992 619,634 719,325 616,000 629,000 642,000 655,000 669,000 Transfers In 227,335 150,000 150,000 150,000 150,000 150,000 150,000 150,000 16,252,904 16,013,206 16,776,000 17,588,515 18,536,515 17,541,515 16,258,515 16,733,649 Expenditures
Police 7,564,927 7,549,028 7,545,685 8,019,000 8,284,000 8,558,000 8,810,000 9,068,000 Public Works 305,464 292,525 374,592 310,000 317,000 325,000 333,000 342,000 Community Development 611,297 792,456 725,810 820,000 845,000 870,000 895,000 922,000 Parks and Recreation 2,165,547 1,434,988 2,787,803 2,761,000 2,843,000 2,925,000 3,005,000 3,085,000 City Council 376,082 407,588 331,114 420,000 430,000 441,000 452,000 463,000 City Manager 385,675 360,115 409,908 368,000 378,000 389,000 400,000 411,000 Legal 284,709 154,562 265,000 164,000 169,000 174,000 179,000 184,000 Administrative Services 700,608 679,926 718,643 659,000 678,000 698,000 717,000 736,000 Finance 1,044,931 1,106,024 1,155,608 1,178,000 1,215,000 1,253,000 1,290,000 1,327,000 Workers Comp/General Liability 1,084,650 1,080,572 1,235,837 1,138,000 1,172,000 1,207,000 1,241,000 1,276,000 Non-Department 766,112 375,912 260,000 712,000 765,000 763,000 561,000 563,000 Transfers Out 205,099 214,819 423,000 330,000 236,000 236,000 245,000 256,000 15,495,101 14,448,515 16,233,000 16,879,000 17,332,000 17,839,000 18,128,000 18,633,000 Net Annual Activity
Baseline Operations 757,803$ 1,564,691$ 543,000 709,515 1,204,515 (297,485) (1,869,485) (1,899,351) One-Time Revenues 1,723,486 600,747 1,056,000 141,000 114,000 360,000 416,000 438,000 One-Time Expenditures (1,234,170) (2,062,500)
DOF Settlement (1,812,075) (604,025) (604,025) (604,025) CalHFA Loan Repayments (3,900,000) (1,300,000)
Draw/(Return) from Reserve (1,269,542) 2,654,507 1,380,010 Ending Available Balance 1,847,112$ 2,138,983$ 1,071,458$ 1,317,948 2,636,463 2,698,978 - (1,381,341)$ Operating Reserve:

Beginning Balance 3,797,650$ 2,764,975$ 4,034,517$ 4,034,517 4,034,517 4,034,517 4,034,517$ 1,380,010$ Current Year Contribution 236,867
Return/(Draw) - reserve (1,269,542) 1,269,542 (2,654,507) (1,380,010) Ending Balance 2,764,975$ 4,034,517$ 4,034,517$ 4,034,517 4,034,517 4,034,517 1,380,010$ -$ % of Projected Operating
Expenditures 18% 28% 25% 24% 23% 23% 8% 0%
* Assumed discontinuation of Utility User Tax starting January 1, 2025 per ordinance. 479

STAFF REPORT TO THE CITY COUNCIL

DATE: Regular Council Meeting of January 25, 2022

TO: Mayor Bailey and Members of the City Council

VIA: Dante Hall, City Manager

SUBMITTED BY: Patrick Tang, City Attorney
Christopher Roke, Parks and Recreation Director

SUBJECT: Consideration of an Updated Library Services Agreement between the City of Hercules and Contra Costa County

RECOMMENDATION:

Receive staff report, discuss, and consider adopting a resolution authorizing the City Manager to execute the Agreement as described in the Staff Report.

EXECUTIVE SUMMARY:

The Contra Costa County Library system supports the operation of 26 libraries countywide.

Operating as a branch library of a larger system has advantages in providing library-related services. The proposed agreement would replace the existing 2007 Agreement. It modifies some of the past practices, more clearly specifies the responsibilities of the parties, and clarifies cost- sharing requirements. The new format is consistent with effor ts by the County Library System to standardize cost-sharing throughout the system.

COMMISSION ACTION:

The Community and Library Services Commission reviewed and discussed the proposed revised Agreement at their meeting of November 8, 2021. The Commission approved a resolution recommending that the City Council adopt the revised Agreement, see Attachment 1.

BACKGROUND:

The City of Hercules obtains Library Services from Contra Costa County, which operates the Hercules facility as a Branch Library, within the County Library System. The Library operates as a partnership between the City of Hercules and the Contra Costa Count y Library System. The existing Agreement dates back t o July 1, 2007 and is provided as Attachment 2. Over the years 480
there have been chan ges in the operating arrangements due to technological and other developments that have not been updated in the Agreement.

Beginning in 2007 the County Library reached out to the Public Manager’s Association to discuss changes in the responsibility for facility-related costs. County -wide there were discrepancies in the lease terms with multiple cities since the leases had been negotiated over time, as far back as 1940. In 2010, the final report including a Master Library Lease and Service Agreement was su bmitted to the County Board of Supervisors. Hercules never executed the updated form of the Lease Agreement. On or about June 8, 2021, Interim City Manager Steven Falk was contacted by Stacey Sinclair, the County’s Senior Real Property Agent, requesting that a revised Agreement be reviewed and approved by the City; the propos ed Agreement is included as Attachment 3 to this staff report.

Pursuant to the existing Agreement, the Hercules Library building is owned by the City and leased to the County for a forty-year lease term, which terminates March 31, 2047. The lease does not require the payment of rent by the County; the sole consideration for the use of the premises is the County’s provision of public library services to the residents of the Hercules community. The existing Agreement requires th e City and County to undertake a range of obligations to allow for the operation of the library . The proposed revised Agreement retains the requirements for the City and County to fulfill certain specified obliga tions but is more specific regarding the allocation of responsibilities.

The recommendation is that the City Manag er be authorized to execute an A greement substantially in the form presented. This would allow the City Manager flexibility to authorize approval of minor changes to the proposed agreement, its exhibits, and/or supplements that will address issues as they arise.

Key Provisions In The Proposed Agreement . The proposed A greement addresses both the operation of the facility as well as provisio n of Library Services. Key elements of the proposed agreement are highlighted below.

Recurring Annual Agreement . The form of the proposed A greement establishes an automatic annual renewal of the lease. Termination by either party requires a minimum one-year notice.

Assignment of Responsibilities. Consistent with the provision of services throughout the county library system, the Agreement defines certain terms which ar e given special meaning in the Agreement including: Base Hours; Components; Data Commu nication Equipment; Data Communication Services; Library Services; Specialized Equipment; etc. When assigning the responsibilities for these items the Agreement is referring to the specific definition contained on pages 1 and 2 of the Proposed Agreement (See Attachment 3).

Use of Facility . Section 6 identifies the process to authorize use of the Library for its services and programs. This includes the use of meeting rooms and parking lot. Parks and Recreation Staff are responsible for schedulin g the use of facilities; this is consistent with the current practice.

481
Maintenance, Repairs, Improvements, Alterations – Sections 7-9 of the Agreement require the City to provide maintenance and repairs that keep the Building in good order. There is language that provides for coordination between the two agencies in the event that major improvements are proposed.

Operating Hours and Provision of Additional Hours of Service – Section 10 addresses the Library’s minimum hours of operation.

Operations: Technology and Equipment Costs - Section 12 of the Agreement adds specificity to what the City had previously identified as its responsibility for Library costs. Providing more clearly identified responsibilities will help to better define what each party pays under p articular circumstances. The following summarizes the specific areas of responsibility:

“Components” - What is Included : Computers, charging stations (e.g., laptop kiosks), mobile devices, printers, scanners, monitors, keyboards, and related equipment an d software used in the Library by the public and staff. The County provided the City with a schedule, which anticipates that the County will incur costs totaling $37,260 over the next three years for the replacement of component items. Responsible Party: County will specify, acquire and maintain.

“Voice Communication” - What is Included: Telephone system and services. Responsible Party:

City.

“Data Communication System” - What is Included : means routers, switches, servers, uninterrupted power supply (UP S) and wireless access points. Responsible Parties: County will acquire and configure the equipment, while the City will pay for the equipment. The County will provide estimates for the expected replacements and will receive City approval prior to the purchase. The City is responsible for the network wiring. Monthly costs for the data services are paid for by the County.

“Miscellaneous Equipment”

1. Specialized Equipment – Fixtures. What is Included: Equipment used for library operations that is not otherwise defined in this Lease, including, but not limited to, book security gates, self - check machines, remote lockers, self -service library access system (e.g., Open+) and any automated material handling equipment used at the Library. Responsible Parties: County will acquire and configure the equipment, while the City will pay for the equipment. The County will provide estimates for the expected replacements and will receive City approval prior to the purchase. City staff note : These expenses would be subje ct to Council approval via the City’s budget adoption process; the time required for this should be factored into any plans by the County to acquire or upgrade equipment falling in this category. City staff also questions why some costs, for example self -check machines, which were previously the responsibility of the County, are under this proposed agreement shifted to the City.

2. Copiers. What is Included: Public and Staff copy machines. Responsible Parties: County will provide and maintain at their sole cost and expense.

482

3. Audio-Visual Equipment . What is Included : Television(s), projector(s); screens; etc.

Responsible Parties: City will provide and maintain at their sole cost and expense.

Ownership of Contents – Section 13 of Agreement. This sect ion specifies that books, materials, and equipment purchased by the County remain under their ownership. The section also identifies that there will be communication between the two parties in the event that the City - owned furnishings and/or equipment are in need of repair and/or replacement. The remainder of the Agreement includes discussion of various business terms including, insurance, indemnification and other matters.

NEXT STEPS: Provided the draft resolution authorizing the City Manager to enter in to the proposed Agreement is approved by the City Council, the Agreement will be subject to final approval by the Board of Supervisors.

ATTACHMENTS:

1. Resolution of the Community and Library Services Commission

2. Existing Lease and Operating Agreement

3. Proposed Lease and Operating Agreement

4. Resolution Approving An Agreement With Contra Costa County For Library Operations

483

HERCULES COMMUNITY AND LIBRARY SERVICES COMMISSION
RESOLUTION 21-001

RESOLUTION OF THE CITY OF HERCULES COMMUNITY AND LIBRARY

SERVICES COMMISSION RECOMMENDING THAT THE HERCULES CITY

COUNCIL APPROVE ADOPTION OF A REVISED LIBRARY LEASE AND SERVICES

AGREEMENT WITH CONTRA COSTA COUNTY

WHEREAS, the Contra Costa County Library system supports the operation of 26 libraries countywide; and
WHEREAS, the City of Hercules owns its library building and obtains Library Services from Contra Costa County, which operates the Hercules facility as a Branch Library, within the County Library System; and
WHEREAS, the Library operates as a partnership between the City of Hercules and the Contra Costa County Library System, and the relationship is governed by an existing agreement dating back to 2007; and
WHEREAS, County-wide there have been discrepancies in the lease terms with various cities since they had been negotiated over time, and in 2010 a Master Library Lease and Service Agreement was approved by the County Board of Supervisors; and WHEREAS, while many cities within the County have revised their library lease agreements with the County to conform with the Master Library Lease and Service Agreement, Hercules has to date not executed the updated form of the Lease Agreement; and WHEREAS, the Proposed Agreement would replace the existing 2007 Agreement and would modify some of the past practices, more clearly specify the responsibilities of the parties, and clarify cost sharing requirements; and
WHEREAS, the new format is consistent with efforts by the County Library System to standardize cost sharing throughout the system.

NOW THEREFORE BE IT RESOLVED:

1. That after review of the relevant documents, discussion at an agendized regular meeting, and taking into account any and all public comment, the Community and Library Services Commission hereby recommends to the City Council that the proposed revised Library Lease and Service Agreement be approved for adoption.

The foregoing Resolution was duly adopted at a regular meeting of the Community and Library Services Commission of the City of Hercules held on the 8 th day of November, 2021, by the following vote of the Commission:

484
AYES: COMMISSIONERS: D. Yamamoto, B. Campbell-Miller, H. Chen, E. Ward-Jackson, M.

Lavitoria.

NOES: None.

ABSTAIN: None.

ABSENT: None.

__________________________________
Christopher Roke, Commission Staff Liaison

485
486
487
488
489
490
491
492
493
494

LIBRARY LEASE

and

SERVICE AGREEMENT

Between

COUNTY OF CONTRA COSTA

and

THE CITY OF HERCULES

JULY 1, 2021

495
1 LIBRARY LEASE AND SERVICE AGREEMENT

BETWEEN

COUNTY OF CONTRA COSTA AND THE CITY OF HERCULES

1. DEFINITIONS ........................................................................................................... 3

2. EFFECTIVENESS ..................................................................................................... 4

3. LEASE OF LIBRARY .............................................................................................. 4

4. CONSIDERATION ................................................................................................... 4

5. TERM ........................................................................................................................ 4 A. Automatic Renewal .......................................................................................... 5 B. Termination ...................................................................................................... 5

6. USE ............................................................................................................................ 5 A. County’s Use of Library ................................................................................... 5 B. City’s Use of Library ....................................................................................... 5 C. County’s Use of Meeting Rooms ..................................................................... 5 D. County’s Use of Parking Lot ............................................................................ 5

7. MAINTENANCE AND REPAIRS ........................................................................... 5 A. Exterior ............................................................................................................. 6 B. Interior .............................................................................................................. 6 C. Fixtures and Furnishings .................................................................................. 6 D. Custodial services ............................................................................................. 6

8. CAPITAL IMPROVEMENTS .................................................................................. 6

9. ALTERATIONS; FIXTURES; SIGNS ..................................................................... 6

10. OPERATIONS: HOURS; COSTS ............................................................................ 6 A. Initial Period ..................................................................................................... 6 B. Annual Modifications ....................................................................................... 6 C. City Election: Extra Hours ............................................................................... 7 D. Invoices; Payment ............................................................................................ 7

11. OPERATIONS: COST OF UTILITIES .................................................................... 7

12. OP ERATIONS: TECHNOLOGY AND EQUPIMENT; COSTS ............................. 7 A. Components ...................................................................................................... 7 B. Voice Communication ..................................................................................... 7 C. Data Communication System ........................................................................... 8 D. Miscellaneous Equipment……………………………………………...…......8 496
2 E. Obsolescence Avoidance …...…………………………….……….………….8

13. OWNERSHIP OF CONTENTS ................................................................................ 9 A. County ............................................................................................................... 9 B. City .................................................................................................................... 9 C. Replacement of FF&E……………………………………………………..…..9
D. Public Art ……………………………………………………………………9

14. INSURANCE ............................................................................................................. 9 A. Liability Insurance……......…………………………………………..………..9 B. Property Insurance ………………………………………………………...….10
C. Workers Compensation and Employers Insurance…………………………...10

15. INDEMIFICATION ................................................................................................ 10 A. By County ...................................................................................................... 10 B. By City ........................................................................................................... 10

16. HAZARDOUS MATERIALS………………………………………………..……11

17. DEFAULT ............................................................................................................... 11 A. By County ...................................................................................................... 11 B. By City ........................................................................................................... 11

18. REMEDIES ……………………………………………………………...…….…..11
A. By County………………………………………………………………...... 11
B. By County…………………………………………………………………...11

19. MISCELLANEOUS ................................................................................................ 11 A. Use of Volunteers ........................................................................................... 12 B. Assignment and Sublease ............................................................................... 12 C. Quiet Enjoyment ............................................................................................ 12 D. Waste .............................................................................................................. 12 E. Surrender of Premises .................................................................................... 12 F. Holding Over .................................................................................................. 12 G. N
otices ............................................................................................................ 12 H. Time is of the Essence .................................................................................... 13 I. Governing Law ............................................................................................... 13 J. Severability .................................................................................................... 13 K. Entire Agreement; Construction; Modification.............................................. 14

EXHIBITS

Exhibit A Library Floor Plan
Exhibit B Form of Lease Supplement
497
3 LIBRARY LEASE
And

SERVICE AGREEMENT

This lease and service agreement (“Lease”) is dated ____________________ ( the “Effective Date”), and is between the City of Hercules, California, a municipal corporation (the “City”), and the County of Contra Costa, a political subdivision of the State of California (the “County”).

Recitals

A. The City owns that certain property located at 109 Civic Drive in Hercules, California (the “Property”). The Property has been improved with a 21,500 square foot building (the “Building”), a parking lot, and landscaping. The Building i s used to provide Library Services, as defined below, and is shown on the floor plan to the Building that is attached as Exhibit A – Library Floor Plan (and is the “Library” or the “Premises”).

B. The City and County are parties to a lease dated June 26, 2007 under which the County leased from the City the building located at 109 Civic Drive in Hercules, California , as a library (the “2007 Lease”). City and County desire to replace the 2007 Lease with this lease. Upon the commencement of this lease, the 2007 Lease will terminate.

C. The City and the County agree that the presence of a public library in a community enhances the quality of life in that community. The City and the County therefore desire to work cooperatively to permit the County to operate the Library as a public library. Toward this end, the City desires to lease the Library to the County and the County desires to lease the Library from the City on the terms set forth herein.

The parties therefore agree as follows:

AGREEMENT

1. DEFINITIONS. The following terms have the following meanings:

“ Actual Hours ” means the number of hours of Library S ervices that the County will provide each week in a Fiscal year at the Library and is the sum of Base Hours and Extra Hours.

“ Base Hours” means the number of hours of Library Services that the County will provide each week in a Fiscal Year to all County-operated libraries. The County is responsible for the cost of providing Library Services during Base Hours.

“ Community Library Manager” means the person designated as the on-site manager by the Librarian.

498
4 “ Components” means computers, charging stations (e.g., laptop kiosks), mobile devices, printers, scanners, monitors, keyboards, and related equipment and software used in the Library by the public and staff.

“ Data Communication Equipment” means routers, switches, servers, uninterrupted power supply (UPS) and wireless access points.

“ Data Communication Services” means broadband and wireless access.

“ Extra Hours” means the number of hours of Library Services that the City elects to obtain from the County each week at the Library that are in excess of Base Hours. The City is responsible for the cost of Extra Hours.

“ Fiscal Year” means a twelve-month period beginning July 1.

“ Lease Supplement” means a supplement to this Lease in substantially the form of Exhibit B – Form of Lease Supplement.

“ Librarian” means the person designated by the County as the County Librarian.

“ Library Services” includes lending books and other media to the public, offering programs to the public, and providing collection management and technical services in the course of operating a library . Except as otherwise provided herein, Library Services does not include maintenance of the Building.

“ Meeting Rooms ” are rooms in the Library that are used for meetings and/or events .

Meeting R ooms may be used for library and other City business; and may be reserved by community groups in accordance with City guidelines.

“ Specialized Equipment” means equipment that supports library operations that is not otherwise defined in this Lease, including, but not limited to, book security gates, self -check machines, remote lockers, self -service library access system (e.g., Open+) and any automated material handling equipment used at the Library.

2. EFFECTIVENESS. This lease supersedes and replaces the 2007 Lease.

3. LEASE OF LIBRARY . The City hereby leases to the County and the County hereby leases from the City, the Library.

4. CONSIDERATION. In exchange for the use of the Library , the County shall perform Library Services and related activities at the Library during the Term of this Lease. No rent is due or payable from the County to the City during the Term of this Lease.

5. TERM. The “Initial Term” of this lease begins on July 1, 2021 and ends on June 30, 2022.

499
5 A. Automatic Renewal . The Lease will automatically renew on a yearly basis unless written notice is given by either party of their intent to terminate the Lease at least one year in advance in accordance with Section 5.B., Termination, below. Each annual renewal period is a “Renewal Term.” Each Renewal Term will automatically commence on the day following the last day of the prior Term. Upon commencement of a Renewal Term, the “ Term” of this Lease will be deemed to mean the Initial Term and each Renewal Term.

B. Termination. Either party may terminate this Lease at any time by giving the other party written notice at least one year prior to the proposed termination date. In the event of termination, the County shall leave the Premises and all City Materials, as defined in Section 11.B below, in good working order, and shall remove only County Materials, as defined in Section 11.A below.

6. USE.

A. County’s Use of Library. The County may use the Library for the purpose of providing Library Services for the public and related activities.

B. City’s Use of Library. The City may use the Library (including Meeting Rooms) during and outside the Library’s normal operating hours, so long as such use does not interfere directly with normal community library functions . The City is entirely responsible for any use of the Library that it schedules and shall hold harmless and indemnify the County, its officers, agents and employees for such use as provided for in Section 13, Indemnification. The City shall establish use guidelines for the use of Meeting Rooms, schedule use of the Meeting Rooms, and collect and retain any fees.

Any use of the Library scheduled by the City is subject to the City’s guidelines and the City’s rules and regulations. The City may not close the Library during its normal operating hours without the prior written consent of the Librarian.

C. County’s Use of Meeting Rooms. City staff will schedule use of the Meeting Rooms.

Library sponsored programs are to be given priority use of Meeting Rooms during library hours of operation, provided that a Library program may not displace a previously scheduled use of a Meeting Room. The County will have an opportunity to place Meeting Room reservations before the City takes general reservations. At no time will the County be charged for use of M eeting Rooms for Library programs.

D. County’s Use of Parking Lot . City may designate Library s taff parking areas.

Alternately, Library staff may park within designated library parking areas subject to the same provisions or restrictions that apply to the general public.

7. MAINTENANCE AND REPAIRS. The City shall provide the maintenance and repairs described below in order to keep and maintain the Building in good order, condition, and repair.

Maintenance and repairs are to be carried out in a manner that is at least consistent with the caliber of maintenance and repairs applied by the City to other City facilities, or as mutually agreed by the City and the County. City responsibilities for maintenance and repair include:

500
6 A. Exterior. All ext erior building maintenance including but not limited to the roof, landscaping, hardscape, grounds, pest control, lighting and parking.

B. Interior. All interior building maintenance including but not limited to mechanical and electrical systems, including ga s, electrical, water, plumbing, elevators, voice and data communication systems infrastructure, heating, ventilating, air -conditioning (HVAC) system s, pest control, and all interior lighting systems, including the replacement of all fixtures and bulbs.

C. Fixtures and Furnishings . Maintenance and replacement of Building fixtures and furnishings including shelving, lighting, furniture, carpeting, window treatments, and appliances.

D. Custodial Services. City shall notify the Community Library Manager prior to selecting a contractor to provide custodial services . Alternately, City may provide such service using City staff.

8. CAPITAL IMPROVEMENTS. If the City and County agree that capital improvements to the Building or the Property are necessary (such improvements , “Capital Improvements”), then (i) the City shall provide the Capital Improvements at its sole cost and expense, and (ii) the City shall coordinate the schedule associated with the construction of all Capital Improvements with the Librarian.

9. ALTERATIONS; FIXTURES; SIGNS . The County may make any lawful and proper minor alterations to the Library and may attach fixtures and signs in or upon the Property with the City’s prior written approval. The County is responsible for the cost of such alterations and attachments. All alterations and attachments must comply with existing code requirements.

10. OPERATIONS: HOURS; COSTS.

A. Initial Period . For t he I nitial Term (i) the number of Base Hours the County will provide, (ii) the number of Extra Hours the City elects to obtain from the County, (iii) the resulting number of Actual Hours , and (iii) the cost to the City of the Extra Hours (such cost, the “City’s Obligation”) are set forth in Lease Supplement No. 1, which supplement is substantially in the form of Exhibit B.

B. Annual Modifications . For each Renewal Term, the Librarian will provide a Lease Supplement to the City in substantially the form of Exhibit B by March 31 of each year. The Lease Supplement will set forth (i) the number of Base Hours the County will provide in the upcoming Fiscal Year, (ii) the number of Extra Hours of Library Services the County anticipates that the City will elect to obtain from the County at the Library in the upcoming Fiscal Year (in the absence of more current information from the City, the County will assume the number of Extra Hours in the upcoming Fiscal Year will be equal to the number of Extra Hours then in effect), (iii) the resulting number of Actual Hours during which Library S ervices will be conducted at the Library in the upcoming Fiscal Year, and (iv) the cost of the City’s Obligation.

C. City Election: Extra Hours . Within 60 days of receiving the Lease Supplement, the City shall notify the Librarian in writing if it intends to modify the number of Extra Hours at the 501
7 Library in the upcoming Fiscal Year . Such modification may be based on fiscal or other considerations identified by the City.

1. Change in Extra Hours from Prior Fiscal Year. If the County receives a notice modifying the number of Extra Hours desired in the upcoming Fiscal Year within the time allotted, the parties shall use good faith efforts to finalize a revised Lease Supplement for the upcoming Fiscal Year before the July 1 start of that Fiscal Year. If the City fails to make a final determination regarding the number of Extra Hours before the start of the upcoming Fiscal Year, the Lease Supplement issued by the Librarian for the upcoming Fiscal Year will be effective until the City makes its final determination and a revised Lease Sup plement for that Fiscal Year is executed.

The final, revised, Lease Supplement will be effective upon its execution by the County and the City.

2. No Change in Extra Hours from Prior Fiscal Year . If the County does not receive a notice modifying the number of Extra Hours desired in the upcoming Fiscal Year within the time allotted, the County and the City shall each execute the original Lease Supplement issued by the Librarian for the upcoming Fiscal Year, which Lease Supplement will become effective on July 1 of the Fiscal Year to which it applies.

D. Invoices; Payment. The County will invoice the City quarterly for the cost of Extra Hours incurred in the prior quarter . The City shall pay the County the amount due to the County within thirty (30) days of receipt of the invoice. In no event is the City obligated to pay an amount greater than the amount identified as the City’s Obligation in the Lease Supplement in effect for that Fiscal Year.

11. OPERATIONS: COST OF UTILITIES. The City shall pay for all utilities provided to the Premises, including gas, electricity, voice communication services, water, sewer, fire alarm, intrusion alarm, garbage, and recycling.

12. OPERATIONS: TECHNOLOGY AND EQUIPMENT; COSTS. The County and the City shall share responsibility for providing and maintaining technological equipment and services as follows:

A. Components. The County shall provide technology support at the Library, including determining the quantity, type, configuration, and location of all Components used in the Library.

The County shall acquire Components for use in the Library and maintain them in good working order. The County is responsible for the cost of obtaining and maintaining Components in the Library.

B. Voice Communication System. The City, at its expense, shall acquire and provide voice communication equipment and on-going voice services to the Library.

C. Data Communication System. The County shall acquire and configure the Data Communication Equipment and select Data Communication Services for the Library to create the Library’s data communication system. The City is responsible for the actual cost of obtaining and maintaining the Data Communication Equipment. To ensure the City is able to properly budget 502
8 for th e cost of the Data Communication Equipment, prior to placing an order for Data Communication Equipment, (i) the County will provide a written estimate of the cost of the Data Communication Equipment to the City , and (ii) must receive the City’s written con sent to the acquisition. At the parties’ discretion, such writing s may be in the form of emails. The City acknowledges that it is responsible for the actual cost of the Data Communication Equipment, even if it varies from the estimate through no fault of the County’s.

1. Connection. The County will connect the Library’s data communication system to the County Library wireless network. It is expressly understood and agreed that such wireless network is for the exclusive use of the County in providing Library Services. The City shall provide CAT5 or better Ethernet cabling throughout the Library and replace or upgrade as needed.

2. Monthly Cost. The County is responsible for the cost of the monthly usage fee for Data Communication Services.

D. Miscellaneous Equipment.

1. Specialized Equipment. The County shall acquire any Specialized Equipment used in the Library. The City is responsible for the actual cost of obtaining and maintaining any Specialized Equipment. To ensure the City is able to properly budget for the cost of any Specialized Equipment, prior to placing an order for Specialized Equipment, (i) the County will provide a written estimate of the cost of the Specialized Equipment to the City, and (ii) must receive the City’s written consent to the acquisition. At the parties’ discretion, such writings may be in the form of emails. The City acknowledges that it is responsible for the actual cost of the Specialized Equipment, even if it varies from the estimate through no fault of the County’s.

2. Copiers. The County shall provide, at its sole cost and expense, one or more copy machines for use by library staff at the Library. The County may provide, at its sole cost and expense, one or more copy machines for use by the public at the Library. The County shall also obtain, at its sole cost and expense, a maintenance contract for each such copy machine. Any revenue collected for the use of copy machines will be retained by the County.

3. Audio Visual Equipment . Should the City elect to procure any audio-visual equipment for use, either by the City or County, at the Library, the City shall provide such equipment, at its sole cost and expense. The City shall also maintain, at its sole cost and expense, any audio-visual equipment it procures. All such audio- visual equipment will be City Materials, as defined in Section 13(B) of this Lease.

E. Obsolescence Avoidance. The City and County are both responsible and shall work together in good faith to ensure that all equipment and technology services at the Library, including the voice communication system, the data communication System, Data Communication Services, and Specialized Equipment, and excluding copiers and Components, are adequate for the Library’s needs and that costs that are the responsibili ty of the City are within the City’s fiscal parameters and approved by the City in advance.

13. OWNERSHIP OF CONTENTS.
503
9 A. County. All books, furnishings, fixtures, equipment, and materials purchased by the County, or foundations or private or public fundraising efforts on behalf of the County, are owned by the County. Together, these books, materials, furnishings, fixtures, and equipment are the “County Materials.”

B. City. All books, furnishings, fixtures, equipment and materials purchased by the City, or foundations or private or public fundraising efforts on behalf of the City, are owned by the City.

Together, these books, materials, furnishings, fixtures, and equipment are the “ City Materials.” City Materials will be identified in the County’s Integrated Library System.

C. Replacement of FF&E. From time to time , City and County will jointly determine if City-owned furnishings, fixtures and equipment need repair or replacement , or, if applicable, a schedule for replacing City-owned furnishings, fixtures and equipment . The City shall carry out, and bear the cost of, such repair or replacement as soon as is practically and fiscally possible.

D. Public Art. The City is responsible for the selection, cost, maintenance, installation, and removal of, and any liability for, all interior and exterior public art displayed at the Library.

14. INSURANCE

A. Liability Insurance

1. County. Throughout the Term, the County shall maintain in full force and effect, at its sole expense, either (i) comprehensive general liability insurance in commercially reasonable amounts, but in no event in an amount less than $3,000,000 per occurrence, protecting and insuring against claims for bodily injury, death, property damage, and personal injury occurring within or resulting from use of the Property, or (ii) a general self-insurance program covering bodily injury, death, property damage, and personal injury occurring within or resulting from use of the Property.

Any policy of insurance obtained by the County must (i) name the City , its officers, agents, and employees, as additional insureds, (ii) be endorsed to provide that the insurance is primary to and non-contributory to insurance carried by the City with respect to liability imposed on the County under this agreement, and (iii) contain a severability of interest clause.

2. City. Throughout the Term, the City shall maintain in full force and effect, at its sole expense, either (i) comprehensive general liability insurance in commercially reasonable amounts, but in no event in an amount less than $3,000,000 per occurrence, protecting and insuring against claims for bodily injury, death, property damage, and personal injury occurring within or resulting from use of the Property, or (ii) a general self-insurance program covering bodily injury, death, property damage, and personal injury occurring within or resulting from use of the Property.

Any policy of insurance obtained by the City must (i) name the County, its officers, agents, and employees, as additional insureds thereunder, (ii) be endorsed to provide that the insurance is primary to and non- contributory to insurance carried by the County with respect to liability imposed on the City under this agreement, and (iii) contain a severability of interest clause.

B. Property Insurance.
504
10 1. County. Throughout the Term, the County shall maintain in full force and effect, at its sole expense, fire insurance and a standard “all risk” policy covering the County-owned property within the Library, and any other personal property owned by the County located at the Property. Such coverage must (i) contain a waiver of subrogation endorsement in favor of the City, and (ii) cover loss or damage to the County- owned property in the amount of the full replacement value. Covered perils are to include fire, all risk, vandalism, malicious mischief, and sprinkler leakage.

2. City. Throughout the Term, the City shall maintain in full force and effect, at its sole expense, fire insurance and a standard “all risk” policy covering all structures and improvements at the Property and any personal property owned by the City located at the Property.

Such coverage must contain a waiver of subrogation endorsement in favor of the County. Covered perils are to include fire, all risk, vandalism, malicious mischief and sprinkler leakage.

C. Workers Compensation and Employers Liability . Both parties shall maintain in full force and effect Workers Compensation Insurance or self -insurance, and Employers Liability Insurance or self-insurance with limits that conform to legal requirements.

15. INDEMNIFICATION

A. By County. County shall indemnify, defend and hold the City harmless from the County’s share of any and all claims, costs and liability for any damage, injury or death of or to any person or the property of any person, including attorneys’ fees, caused by the willful misconduct or the negligent acts, errors, or omissions of the County, its officers, agents or employees in using the Property pursuant to this Lease, except to the extent caused or contributed to by (i) the structural, mechanical, or other failure of buildings owned or maintained by the City, (ii) the design of the Library, (iii) City-owned fixtures in the Library, and/or (iv) the negligent acts, errors, or omissions of the City, its officers, agents or employees.

B. By City. The City shall indemnify, defend and hold the County harmless from City’s share of any and all claims, costs and liability for any damage, injury or death of or to any person or the property of any person, including attorneys’ fees, caused by the willful misconduct or the negligent acts, errors or omissions of the City, its officers, agents or employees with respect to the Property, or the City’s performance under this Lease, the City’s use of the Property, the structural, mechanical or other failure of buildings owned or maintained by the City, the design of the Library, or City-owned fixtures in the Library, except to the extent caused or contributed to by the negligent acts, errors, or omissions of the County, its officers, agents, or employees. The City is responsible for all claims that result from the design of the Library and from City owned fixtures in the Library, except for any claims resulting from a change in the design of the Library that is requested by the County and approved by the Board of Supervisors after the date of this Lease.

16. HAZARDOUS MATERIAL. The City warrants to the County that the City does not have any knowledge of the presence of Hazardous Material (as defined below) or contamination of the Building or Property in violation of environmental laws . The City shall defend, save, protect and 505
11 hold the County harmless from any loss arising out of the presence of any Hazardous Material on the Property that was not brought to the Property by or at the request of the County, its agents, contractors, invitees or employees. The City acknowledges and agrees that the County has no obligation to clean up or remediate, or contribute to the cost of clean -up or remediation, of any Hazardous Material unless such Hazardous Material is released, discharged or spilled on or about the Property by the County or by any of County’s agents, employees, contractors, invitees or other representatives. The obligations of this Section shall survive the expiration or earlier termination of this Lease.

“Hazardous Material” means any substance, material or waste, including lead based paint, asbestos and petroleum (including crude oil or any fraction thereof), that is or becomes designated as a hazardous substance, hazardous waste, hazardous material, toxic substance, or toxic material under any federal, state or local law, regulation, or ordinance.

17. DEFAULT. The occurrence of any of the following events is a default (“Default”) under this Lease:

A. By County. If the County fails to operate the Library as a public library and such failure continues for thirty (30) days after receipt of a written notice of failure from the City to the Librarian with a copy to the County Administrator; provided, however, that the County will have additional time , up to an additional one hundred twe nty (120) days, if its failure is due to circumstances beyond its reasonable control, including, without limitation, failure of the County’s Board of Supervisors to adopt a budget, work stoppages, and acts of God.

B. By City. The City’s failure to perform any of its obligations under this Lease if such failure is not remedied within thirty (30) days after receipt of a written notice of failure from the County to the City specifying the nature of the breach in reasonably sufficient detail; provided, however, if such breach cannot reasonably be remedied within such thirty (30) day period, then a Default will not be deemed to occur until the occurrence of the City’s failure to perform within the period of time that may be reasonably required to remedy the breach, up to an aggregate of one hundred twenty (120) days, provided the City commences curing such breach within thirty (30) days after receipt of the notice of the breach and thereafter diligently proceeds to cure such breach.

18. REMEDIES

A. By County. Upon the occurrence of a Default by the City, the County may (i) terminate this Lease and quit the Premises, or (ii) suspend operation of Library Services until the default is cured.

B. By City. Upon the occurrence of a Default by the County, the City may, after giving the County written notice of the Default, and in accordance with due process of law, reenter and repossess the Premises and remove all persons and property from the Premises.

19. MISCELLANEOUS.

506
12 A. Use of Volunteers. Volunteers are vital and welcome in enhancing the level of service offered in providing Library S ervices. The City’s Volunteer Coordinator shall work with the County’s library volunteer coordinator to recruit and schedule volunteers to assist with community library operation. Volunteers will be utilized to perform services as mutually agreed upon by the County and the City.

B. Assignment and Sublease. The County does not have the right to assign this Lease or sublease the Premises or any part thereof at any time during the Term.

C. Quiet Enjoyment. Provided the County is following the material terms of this Lease, the City shall warrant and defend the County in its quiet enjoyment and possession of the Premises during the Term.

D. Waste. The County shall not commit, or suffer to be committed, any waste upon the Premises.

E. Surrender of Premises. On the last day of the Term, or earlier termination of this Lease, the County shall peaceably and quietly leave and surrender the Library to the City , in good condition, ordinary wear and tear, and damage by casualty, condemnation, act s of God, and the City’s failure to make repairs required of the City excepted. Upon termination of this Lease, the County shall remove the County Materials from the Premises within one hundred eighty (180) days, unless otherwise agreed to in writing by the City.

F. Holding Over. Any holding over after the Term of this Lease is a tenancy from month to month and is subject to the terms of this Lease.

G. Notices. Any notice required or permitted under this Lease must be in writing and sent by overnight delivery service or registered or certified mail, postage prepaid and directed as follows:

To City: City of Hercules
City Manager
111 Civic Drive
Hercules, CA 94547
Phone: (925) 799-8200

To County: County Librarian
Contra Costa County
777 Arnold Drive, Suite 210,
Martinez, CA 94553
Phone: (925) 608-7700

With a copy to: Real Estate Manager
Contra Costa County
Public Works Department
255 Glacier Drive
507
13 Martinez, CA 94553
Phone: (925) 313-2000

Either party may at any time designate in writing a substitute address for that set forth above, and thereafter notices are to be directed to such substituted address . If sent in accordance with this Section, all written notices will be deemed effective (i) the next business day, if sent by overnight courier, and (ii) three days after being deposited in the United States Postal system, if sent by registered or certified mail.

H. Time is of the Essence. Time is of the essence in fulfilling all terms and conditions of this Lease.

I. Governing Law. The laws of the State of California govern all matters arising out of this Lease.

J. Severability. In the event that any provision herein contained is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining provisions of this Lease will not in any way be affected or impaired.

[Remainder of Page Intentionally Left Blank]

508
14 K. Entire Agreement; Construction; Modification. Neither party has relied on any promise or representation not contained in this Lease . All previous conversations, negotiations, an d understandings are of no further force or effect.

This Lease is not to be construed as if it has been prepared by one of the parties, but rather as if both parties have prepared it . This Lease may be modified only by a writing signed by both parties.

The parties are executing this Lease as of the date set forth in the introductory paragraph.

COUNTY CITY

COUNTY OF CONTRA COSTA, a CITY OF HERCULES, a municipal political subdivision of the State of corporation of the State of California California

By: _______________________ By: _______________________ Alison McKee Dante Hall
County Librarian City Manager

RECOMMENDED FOR APPROVAL: APPROVED AS TO FORM:

By By: _______________________
Brian M. Balbas J. Patrick Tang
Public Works Director City Attorney

By
Jessica L. Dillingham
Principal Real Property Agent

APPROVED AS TO FORM:

MARY ANN McNETT MASON, COUNTY COUNSEL

By: _______________________
Kathleen M. Andrus
Deputy County Counsel

509
15 EXHIBIT A

Library Floorplan

510
16 EXHIBIT B

Form of Lease Supplement

SUPPLEMENT No. [ ]

This Lease Supplement No. [ ] is dated ___________ and supplements the Lease dated ______________ (the “ Lease”) between the City of _________________, a municipal corporation of the State of California (the “ City”), and the County of Contra Costa, a political subdivision of the State of California (the “County”).

Unless otherwise defined herein, capitalized terms have the meanings given to such terms in the Lease.

1. The number of Base Hours to be provided by the County in the Fisca l Year beginning July 1, 20__, is __.

2. The number of Extra Hours to be provided in the Fiscal Year beginning July 1, 20__ is __.

3. The number of Actual Hours to be provided in the Fiscal Year beginning July 1, 20__ is __.

4. The City’s Obligation for the Fiscal Year beginning July 1, 20__ is $______.

5. This Lease Supplement No. [ ] is effective in accordance with the terms of the Lease.

COUNTY CITY
COUNTY OF CONTRA COSTA, a CITY OF ___________________, a political subdivision of the State of municipal corporation of the State of California California

By: _______________________ By: _______________________ Name Name
County Librarian City Manager

511

HERCULES CITY COUNCIL
RESOLUTION NO. 22-

RESOLUTION OF THE CITY COUNCIL OF THE CITY OF HERCULES

AUTHORIZING THE CITY MANAGER TO ENTER INTO A REVISED LIBRARY

LEASE AND SERVICES AGREEMENT WITH CONTRA COSTA COUNTY

NOW THEREFORE BE IT RESOLVED:

1. That after review of the relevant documents and discussion at an agendized regular City Council meeting, the Hercules City Council hereby authorizes the City Manager to execute a revised Library Lease and Service Agreement with Contra Costa County in substantially the same form as presented to Council at its regular meeting occurring on the herein referenced date.
512
The foregoing Resolution was duly adopted at a regular meeting of the City Council of the City of Hercules held on the 25th day of January, 2022, by the following vote:

AYES:

NOES:

ABSTAIN:

ABSENT:

____________________________
Dion Bailey, Mayor

ATTEST:

Lori Martin, MMC
Administrative Services Director/
City Clerk

513

Hercules City CouncilJanuary 25, 2022

Hercules City Council
January 25, 2022