.
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.
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.
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
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
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$
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.
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