STAFF REPORT TO THE CITY COUNCIL
DATE: Meeting of February 22, 2022
TO: Members of the City Council
VIA: Dante Hall, City Manager
SUBMITTED BY: Edwin Gato, Director of Finance
SUBJECT: FY 21-22 Mid-Year Budget Review and Miscellaneous Mid-Year Budget Appropriations and Adjustments RECOMMENDED ACTION:
Receive a report on the FY 21-22 mid-year budget review and adopt a resolution approving various mid-year budget appropriations and adjustments.
FINANCE COMMISSION AND RECOMMENDATION:
The FY 21-22 mid-year review will be presented to the Finance Commission as an informational item on their regular meeting on March 16, 2021.
FISCAL IMPACT OF RECOMMENDATION:
Authorization of the budget amendments described in this report and detailed in attachment 2 update the previous allocation of City resources for the FY 21-22 fiscal year, reflecting changes in economic conditions due to COVID and fiscal year-to-date performance. The proposed amendments to the FY 2021-22 Budget, as detailed in Attachment 2, will decrease General Fund revenue by approximately $1 million and reduce its operating expenditures by $955K. In addition, the General Fund available balance will be adjusted by $896K based on the positive result of the FY 20-21 audited financial statements. Also, the City Council is requested to consider approval of the priority projects, as summarized below and detailed in Attachment 6, recommended by the City Manager to use some of the first tranches of money received from ARPA funds that include suggestions from the Councilmembers and staff.
Given the uncertain times in which we are operating, it is recommended that barring the minimal changes outlined below, no other mid-year budget adjustments are considered. All other possible budget changes, ongoing or one-time, should be regarded as part of the FY 22-23 budget adoption process.
BACKGROUND:
This report updates the Fiscal Year 21-22 financial projections for the General Fund and proposes current year budget amendments for various City funds to reflect and respond to the City’s current financial condition. Also, this report provides the City Council with updates on the financial status of the City’s General Fund by comparing budget projections for revenues and expenditures to actual receipts and expenses as of the most current closed period of January 31, 2022 (seven months or 58% of the fiscal year).
The discussion below is presented in the following sections:
General Fund Revenues
General Fund Expenditures
General Fund Net Annual Results
General Fund Operating Reserve
General Fund Five-Year Forecast
American Rescue Plan Act (ARPA) Fund
Non-General Fund Programs
Master Fee Schedule
DISCUSSION:
The City Council adopted the FY 21-22 budget on June 22, 2021. Since adoption, the budget has been selectively amended for specific programs, primarily for capital project activity. At this time, staff recommends approving changes and amendments to the FY 21-22 Budget based upon year-to-date activity, the effect of mandatory closure due to pandemic, primarily to the Parks & Recreation program, and allocation of the American Rescue Plan Act (ARPA) funds for selected projects based upon the guiding principles adopted by the City Council on January 11, 2022.
As presented in the FY 20-21 Annual Comprehensive Financial Report (ACFR), revenues and expenditures during fiscal year ending June 30, 2021, resulted in one-time General Fund budgetary available resources of approximately $2.1 million, and $897,000 better than projections. As detailed in the ACFR report, the primary reason for the positive budgetary results is departmental expenditures savings, debt service savings on the refunding of the library bonds, and the receipt of revenues above budget. It is important to note that since significant revenue included in the Approved Budget, staff is recommending minor changes in this report.
General Fund
General Fund Revenues
As of January 31, 2022, the General Fund operating revenues were $8.5 million or 51% of the FY 21-22 adopted budget. Revenues from business licenses, franchise fees, and other taxes are received either bi-annually or towards the end of the fiscal year, which accounts for why revenues are below 58% as of January 31, 2022. As shown in the following graph and as detailed in Attachment 3, General Fund's ongoing revenues in FY 21-22 are projected to decrease by $1 million. Fortunately, the City of Hercules's general tax revenues, most notably sales tax, were not impacted by the economic shutdown resulting from COVID-19 and shelter-in-place directives imposed on the second quarter of 2020 compared to other municipalities.
The following are the proposed midyear budget adjustments for the General Fund revenues:
Parks & Recreation Program Revenues: The FY 21-22 Adopted Budget on June 22, 2021, assumed that all programs would be restored to normal. However, the continued effect of COVID-19 mandatory closures to the Parks & Recreation program resulted in a reduction of approximately $1 million of program revenues based on the actual first seven months of activities. Childcare programs, contract classes, sports programs, and facility rentals have been suspended since March 2020, with minimal offerings underway.
General Fund Expenditures
A summary and year-to-date status of General Fund expenditures are presented in Attachment 3 and as shown in the following graph. Payments on insurance premium and debt service payment on equipment leases are due at the beginning of the fiscal year, which accounts for why expenditures are higher than 58% as of January 31, 2022. Operating expenses in total, both by category and by department, are on target or below 58% of the annual budget through the seven-month January fiscal period.
Typically, the mid-year budget review and adjustments recommended are to make corrections to adopted budget and to address required modifications. New initiatives or programs are not often contemplated unless it’s necessary.
Operating expenditure budget amendments are proposed to reflect the following adjustments:
Parks & Recreation – Reduce budget by $1 million.
Heading into the budget process for FY 21-22, all indications were that programs were in the process of being restored with the arrival of a vaccine for COVID-19. Therefore, the adopted FY 21-22 budget assumed that all programs would be restored to normal. Parks and Recreation Department developed a robust Summer Activities Guide with lots of in-person and virtual offerings. Participant numbers for our in-house traditional summer camps came in on par with pre-COVID participation numbers. The same holds for the start of the school year. The Parks and Recreation Department was able to get a variety of programs up and running, including Preschool, Breakfast Club (morning care), RAP (afterschool recreation programs), and Teens. Unfortunately, many programs have been disrupted with new variants of COVID, and the numbers have begun to drop. The programs have been a success in many ways, especially for those community members who rely on our programs. While the revenue numbers don’t show the entire picture, it is safe to say Parks and Recreation have been positively impacting the community.
Additionally, at the onset of the pandemic, many families opted to place payments on to a household credit. Since the start of programs in the summer and fall, most of these families have applied their credit to current programs or asked for refunds. On the one hand, this is good news because it reduces the liability of money left on household accounts, but on the other, it doesn’t show in the overall revenues.
Staff is recommending a budget reduction for the Parks & Recreation due to the continued impact of the COVID-19 pandemic. Most Parks and Recreation programs were continued to be suspended due to mandatory closures. As a result of the programs being suspended, some of the Parks & Recreation part-time staff continue to be furloughed.
City Manager Office – Add appropriation of $45,000.
The City Manager's responsibility is to continuously evaluate the organization to assure that its structure provides for the delivery of services to the community in the most efficiently and effectively way possible and that the City Council's projects, programs, and initiatives can be accomplished. As a result of this evaluation, the City Manager is recommending certain changes to the current organizational structure, which will take advantage of some vacant positions and better position the City to address the City Council's work program and several unmet issues and needs.
One of the proposed changes is upgrading (1) Part-time Administrative Secretary to a full-time Administrative Specialist Position. The budget impact is approximately $45,000. In addition, the City Manager also proposes to move the Information Technology and Human Resources unit, currently under Administrative Services Department, to the City Manager's Office. The proposed changes will have no budgetary impact, but they will update the City's organizational structure. The organizational chart will be updated accordingly to reflect these changes.
General Fund Net Annual Results
The General Fund, excluding ARPA funds, Mid-Year review is projected to end FY 21-22 with a positive ending available balance of $1 million, which is $852K better than projected in the adopted FY 21-22 budget. Most of the increase was attributed to the actual financial result of the audited FY 20-21 Financial Statements.
General Fund Operating Reserve
Fiscal stability is an essential factor for all cities. Sound financial management includes the practice and discipline of maintaining adequate reserve funds for known and unknown contingencies. The City’s operating reserve policy equals 16.66% of total operating expenditures or two months. The General Fund operating reserve exceeded that requirement and maintained a $4.2 million (including interest income earned) operating reserve equal to 28% of the total operating budget.
General Fund Long-Term Forecast
If the UUT is discontinued, there will be a projected ongoing deficit starting FY 25-26.If the UUT is discontinued, there will be a projected ongoing deficit starting FY 25-26.
If the UUT is discontinued, there will be a projected ongoing deficit starting FY 25-26.
If the UUT is discontinued, there will be a projected ongoing deficit starting FY 25-26.
Looking forward into the General Fund Long-Term Forecast, a budget deficit between revenues and expenditures for existing service level is projected to start in FY 25-26 if the Utility User’s Tax (UUT) is not renewed and the accelerated payments on CalHFA loans are not negotiated. As the City plans its ongoing programs and services, it will need to balance its increasing cash flow requirements for legacy pension/OPEB obligations with a commitment to maintain and enhance City services. The following graph updates revenue projections based on the current property, sales, and general tax revenue trends. Expenditure in this graph repeats projections from the last Council meeting on February 8, 2022, Long-Term Forecast presentation. This Long-term forecast will be further updated and refined in the FY 22-23 budget adoption in June 2022.
American Recovery Plan Act (ARPA)
The American Rescue Plan Act of 2021 ("ARPA") included the Coronavirus Local Fiscal Recovery Fund to provide $1.9 trillion in funding for states, municipalities, counties, tribes, and territories to assist with pandemic-related response activities. Under ARPA guidelines, cities with a population of less than 50,000 are considered "non-entitlement units of local government ("NEUs"), and the U.S Department of the Treasury will distribute funding to States and then to NEUs. Funding will be made available in two tranches, with the first occurring in Summer 2021 and the second occurring twelve (12) months afterward.
ARPA recipients may use payments from the Fiscal Recovery Funds to provide government services to the extent of the reduction in revenue experienced due to the COVID‐19 public health emergency. Section 603(c)(1)(C) of the ARPA allows recipients facing budget shortfalls to use payments from the Fiscal Recovery Funds to avoid cuts to government services. ARPA funds enable local governments to continue providing valuable services and ensure that budget deficits, tax increases, and reductions in public expenditures do not delay a city's broader economic recovery. Based on the Department of the Treasury's revenue loss formula, Hercules will receive a total ARPA funding allocation of $6,285,778 in two tranches. The first payment, equal to one-half of the City’s s' distribution, for $3,142,889 was received in mid-July 2021. The second half will be distributed in mid-July 2022. The funds must be obligated by December 2024 and fully expended by the end of 2026. Hercules experienced a $2,918,338 shortfall in general revenues for the period ending December 31, 2020, due to the COVID–19 impacts to the local economy. Staff recommends transferring the $2.9 million to the General Fund to provide governmental services and offset one-time expenditures.
Based on the results of the Business and Community needs survey, the City Council adopted a set of guiding principles on January 11, 2022, to assist in developing a funding plan for ARPA funds as follows:
The ARPA funds are a one‐time source of monies so ongoing costs need to be considered before allocating funds for any projects or programs.
The City should use other dedicated grants and funding programs first, whenever possible, and save ARPA funds for priorities not eligible for other federal and state assistance programs (such as federal infrastructure bills) With the first three bullet points in mind, ARPA funds will be allocated in the following order of priority:
To ensure that the City will have the resources to continue to provide high-quality services by replacing the City’s general revenue losses To support the economic recovery of households and small businesses To solve immediate specific problems raised by the pandemic for the City To make investments that will strengthen and hasten the economic recovery of the City and its businesses.
Mid-Year Priority Project Appropriation – In consultation with the City Council, City staff identified several ARPA priority items as part of the mid-year budget adjustment. These priority projects, summarized below and detailed in Attachment 6, align with the adopted set of Guiding Principles, and can begin quickly.
Staff requests Council’s authorization to proceed with these priority projects in the current fiscal year. Should the City Council desire to amend this list of projects, staff requests additional direction. Staff will return to the City Council with a complete analysis for any projects added at a future meeting for consideration.
Potential Future ARPA Appropriations
With the understanding that funds can be obligated through the end of 2024 and that the City will not receive the second half of the funds until May 2022, developing a plan with some flexibility to evaluate future needs is critical. Staff recommends that the remaining first tranche of $2.3 million and the second tranche of $3.1 million be included in the FY 22-23 Budget. The following categories will be used to create an expenditure framework to guide funding decisions and opportunities for the City to pursue.
Economic Development – Programs to address negative economic impacts caused by the public health emergency, including economic harms to workers, households, small businesses, impacted industries, and the public sector.
Community Assistance Programs - Earmarking some ARPA funds to potentially fund a locally administered programs should there continue to be a significant need after the state and federal programs have been exhausted may be valuable. Programs to support housing and other social service program needs.
Capital Improvement Pay-As-You-Go Funding - The City's Capital Improvement Program budget has a long list of necessary but unfunded projects. Within the Revenue Loss category, the City may use funding to complete capital improvement or preventative maintenance projects with pay-go funding that is not supported by bonds or other debt. A budget workshop is scheduled in mid-March to discuss Capital Improvement Plan and project priorities.
Staff will present a proposed ARPA spending plan to the Council for consideration during the FY 22-23 Budget's first public hearing in the first meeting in June and adopt a resolution to accept at the second meeting.
Non-General Fund Programs
These funds are driven by grants or other funding sources and are used for specific purposes, such as transportation, gas tax, Measure C “Street Fund,” etc. Such funding sources are restricted, requiring revenues and expenditures to be tracked differently from the City’s primary operating fund, the General Fund. There is sufficient funding and appropriation to complete current projects or programs and fund the proposed mid-year adjustments as outlined in attachment 2.
Master Fee Schedule
By way of background, a municipality is authorized to establish reasonable fees for services rendered. The City has established fees by the Municipal Code's authority, City Ordinances, City Resolutions, City development/funding agreements, and State and Federal statutes. Those fees do not exceed the estimated reasonable cost of providing the service for which the fees are charged.
In government, the difference between a fee and a tax is that an individual pays a fee for a specific good or service rendered by the government that benefits only that individual. In contrast, a tax has only a general connection to the benefits received by an individual.
To make it easier for citizens, staff, and interested parties to understand the City's various fees and provide a comprehensive list of the City's fees. , a Master Fee Schedule lists the fees in place as of July 1 of each year. Certain fees are automatically increased each year based on the change in the consumer price index (CPI) or the difference in the engineering news record construction cost index (ENR).
However, as current City fees for service have not been evaluated in many years, staff thought it was important to evaluate all service fees and address any fees for service not currently being charged. Therefore, conducting a comprehensive user fee study to ensure that the City assesses appropriate fees and rates that will allow the City to recover the actual costs incurred for fee-related services.
Staff recommends updating the fee on July 1, 2022, by automatically increasing specific fees using the change in the CPI or ENR and coming back to Council at Midyear in FY 22-23 to update certain fees in the master fee schedule based on the result of the study.
NEXT STEP
Staff is currently in the process of preparing the FY 22-23 budget which will be introduced to the City Council on April 26, 2022.
The table below outlines key Council meeting dates at which budget information will be provided.
BUDGET AWARD
The City of Hercules FY 20-21 Budget was awarded the Distinguished Budget Presentation Award from the Government Finance Officers Association (GFOA) for the first time. This award is the highest form of recognition in government budgeting. Its attainment represents a significant achievement by the organization. Staff submitted the FY 21-22 Budget documents for award consideration.
BUDGET APPROPRIATIONS
Staff is recommending that the Council adopt the following FY 21-22 budget amendments in Attachment 2 including appropriation of the City Manager’s recommended ARPA priority projects.
ATTACHMENTS
Budget Resolution
Proposed Budget Amendment
General Fund Summary
General Fund Summary of One-Time Revenues/Expenditures
General Fund FY 20-21 Available Fund Balance Calculation List of Projects Funded by ARPA funds
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