STAFF REPORT TO THE CITY COUNCIL
DATE: Regular Meeting of April 26, 2022
TO: Members of the City Council
VIA: Dante Hall, City Manager
SUBMITTED BY: Edwin Gato, Director of Finance
Mike Roberts, Director of Public Works
SUBJECT: Introduction of the Proposed Five-Year Capital Improvement Program (CIP), and FY 22-23 Sewer Enterprise and Internal Service funds budgets RECOMMENDED ACTION:
Receive an Introduction on the Proposed Five-Year CIP and FY 22-23 Sewer Enterprise and Internal Service funds budgets.
COMMISSION/SUBCOMMITTEE ACTION AND RECOMMENDATION:
The Finance Commission will receive a presentation on the proposed FY 22-23 Budget at their next regular meeting on May 18, 2022. Their comments, if any, will be incorporated into the first public hearing on June 14, 2022.
FISCAL IMPACT OF RECOMMENDATION:
There is no impact from the introduction of the proposed Five-Year CIP and FY 22-23 Sewer and Internal Service funds budgets.
BACKGROUND:
The City of Hercules has worked hard to maintain quality services to the public we serve—in these trying times. Hercules remains a place where people want to lay down roots and raise their families. For continued success, it’s important to plan for the City’s long-term financial stability and preserve the essential services and critical infrastructure we all rely on. We recently asked residents to provide their input on their service priorities. The input from many residents included the following:
Keeping our community safe
Planning for long term financial sustainability
Improving and maintaining public facilities and infrastructure Keeping public areas and parks safe and clean
Expanding public transit systems
Keeping funds local
Retaining/attracting local businesses
With these priorities in mind, this report provides financial planning recommendations for the FY 22-27 Five-Year CIP, and the FY 22-23 Sewer and Internal Service Funds budgets to manage costs over time. The proposed CIP is a five-year capital improvement plan which identifies projects to construct and maintain the City’s infrastructure in a way that is sustainable.
DISCUSSION:
Five-Year CIP
Hercules’ CIP aims to maintain and improve the City’s aging public infrastructure. This capital budget emphasizes:
The unusually large amount of capital work completed and proposed, especially in light of the Regional Intermodal Transit Center (RITC) project solely funded by grants and locally matched transportation projects; A “fix it first” approach where proper maintenance of Hercules’ existing infrastructure is prioritized above requests for “new” infrastructure; and The need for additional revenue to adequately maintain our existing infrastructure.
Public infrastructure includes the City’s streets, sewers, storm drains, transportation, streetlights, trees, buildings, and parks. While this budget plans for five years, the City Council will only appropriate funds for one year or FY 22-23. This CIP and budget will be proposed, along with the City’s operating budget, for adoption by the City Council on June 28, 2022.
The past decade has been a very challenging financial period for the City. Consistent with the “fix it first” approach, many key capital improvement projects were delivered, and the very most has been made of available funding. However, it has become increasingly clear a pay-as-you-go approach and deferring preventative maintenance work are no longer sustainable.
With the City’s finances improving, FY 22-23 looks to reintroduce capital planning and a more robust preventative maintenance program. With these goals in mind, a modest Parks Master Plan and Building Facilities Maintenance Plan are recommended to be funded. These plans will capture and prioritize deferred maintenance needs based upon a comprehensive assessment and identified desires of the community. Both plans will include an ADA (American Disability Act) assessment component. A 10-year study window will allow this capital improvement work to be planned and budgeted well ahead of time. Undertaking these studies in FY 22-23 will place the City in a strong position to allocate ARPA (American Rescue Plan Act) funding in FY 23-24.
The major capital endeavor in FY 22-23 is the advancement of the Regional Intermodal Transit Center (RITC); specifically, the final design of the Utility Relocation Phase and soliciting for grant funding. Also programmed is the construction of the Lower Sycamore Sewer Trunk Main Replacement. This $13.5M project is a carryover from the current year as it has not yet received permits from the environmental agencies. A $60K study is proposed to evaluate and potentially design new modular buildings to replace the existing ones in front of City Hall. They will house lockers, bathrooms, and showers for the Police Department using Police Development Impact Fee funds, given they have outgrown their current facilities. A training room and/or workout area may also be included. Primary consideration will be given to expanding the facilities and enhancing equity and inclusion. Lastly, Beechnut Park is scheduled to be designed and constructed using grant funding.
Sewer Enterprise Fund
On January 23, 2001, the cities of Hercules and Pinole entered into a joint power agreement for the operation and ownership of the Pinole/Hercules Wastewater Treatment Plant. The City has an undivided fifty percent ownership interest in the Plant, and the City of Pinole has the right and responsibility to manage and operate the Plant. The City retains responsibility for operating and maintaining its wastewater collection system. Also, the City of Pinole maintains the records and accounts for all the wastewater treatment plant transactions.
The City owns and operates the collection system in Hercules, which includes over 60 miles of underground piping and five lift stations. The effluent is treated at the Hercules-Pinole Wastewater Treatment Plant (WWTP), located and operated by the City of Pinole. Hercules owns half of the WWTP.
The City collects approximately $6 million a year in service charges from over 8,400 connections charged through the County tax roll. Developers also pay impact fees to provide capacity for the wastewater their project generates. The estimated revenue for FY 22-23 is $6 million.
The Sewer Enterprise Fund pays for the sewer system's operations, maintenance, and capital improvement and is restricted. The revenues collected from sewer fees cannot be used for non-sewer-related purposes. FY 22-23 proposed operating budget is estimated to be $3.4 million; Capital improvements of $2 million, and debt obligation annual payment of $2 million.
Internal Service Funds (ISF)
City operations require the use of buildings, vehicles, equipment, and information technology equipment/infrastructure. The expenditures for these areas are not consistent and fluctuate from year to year. As a result, it is very difficult and not recommended to budget these costs through the normal operating budget.
Instead, the standard for municipal governments is to establish internal service funds to accumulate capital and address these periodic and sometimes large expenditures.
For example, a City building may require a new roof every 15 to 20 years. In order to plan for this replacement and gather the funds necessary for the repair when it becomes necessary, an internal service fund can be used to collect the resources needed to cover the costs at the time it is required.
As an additional example, the City will need to purchase vehicles and expensive equipment to replace existing inventory. Vehicles and equipment often have useful lives from 5 to 10 years. An internal service fund can be used to gather the resources necessary to purchase these items when the replacement is required.
The use of internal service funds provides for a smoothing of the costs over the asset's useful life. This is a better budgeting process because it does not require large allocations in one year and smaller allocations in other years. Instead, the estimate for repairs or replacement is calculated, and allocations are made from the operating budget into internal service funds so that resources are available when required.
The process is as follows:
Staff identify the costs associated with replacing assets or maintaining facilities, The costs are spread over the useful life of the asset, An annual contribution to the internal service fund is identified, The use of assets by various departments is estimated,
Departments are charged their respective portions of the annual cost estimate as revenue to the internal service fund, and Replacement purchases or major maintenance is funded directly from the internal service fund rather than the individual department budgets.
The City currently has three internal service funds, Vehicle replacement, Information Technology (IT) operating and replacement, and Facility Maintenance:
FY 22-23 Planned Expenditures from the Internal Service Funds Vehicle Replacement ISF
The City will be developing a replacement cycle plan. The model that the City is developing will provide for the replacement of vehicles on a schedule based on age and mileage. There will typically be some vehicles that need to be replaced before the targeted age and mileage threshold and others that can be extended beyond the established schedule. All vehicles will be evaluated using these criteria and assessing the maintenance and gas consumption cost to determine the appropriate replacement time frame. Currently, the City replacement is on a “pay-as-you-go” basis. For FY 22-23, the budget provides for replacing the following:
Replace the existing three patrol vehicles that exceeded the dependable service life of a Police patrol vehicle. (Estimated cost: $176,000) Replace existing two Public Works vehicles, 2008 Ford F250 pick-up trucks (Estimated cost: $100,000) Information Technology Operations and Replacement ISF
The fund accounts for Information Technology, which provides various technology-related services for the city, including networking and infrastructure technology, including servers, switching, security, cyber protection, internet connectivity, service desk, disaster recovery, and other data communication technologies. FY 22-23 proposed IT operating Budget is estimated to be $955,986 and Equipment Replacement of $316,000. Resources are from administrative charges to departments based upon their proportional share of program costs.
Facilities Maintenance ISF
The fund accounts for Facility Maintenance and provides and manages maintenance and emergency structural repair services for all City facilities. The source of revenue is reimbursement from departments for the cost of providing facility maintenance services. This interservice fund pays for the maintenance and repair of the City’s facilities which include:
City Hall (including the Police Department)
Senior Center
Library
Lupin & Hanna Kids Center
Teen Center
Community Center
Ohlone & Foxboro Community Center
Activities include contract janitorial, HVAC, plumbing and other miscellaneous activities; various repairs and improvements performed by City staff, and utilities. FY 22-23 proposed Facilities Maintenance Budget is estimated to be $$786,992. Resources are from charges to departments based upon their proportional share of program costs using the square footage of the building they occupied.
Staff is recommending adding the creation of the following internal service funds:
Facility Replacement ISF
This fund will be used to cover the major replacement of City buildings and facilities. There is a significant backlog of large maintenance projects at City Hall, the Police Department, etc. For FY 22-23, the City will be conducting a Citywide Facility study to address some of these backlogs.
IT Equipment Replacement ISF
Separating the IT Equipment Replacement Fund - this fund will be used to replace infrastructure and equipment used to support City technology needs (servers, switches, data security, etc.). This model has not yet been developed, and expenditures are currently charged together with IT Operations as “pay-as-you-go.” Another essential value to creating these internal service funds is that funds will be available to ensure facilities are maintained and equipment replaced during challenging financial years when allocations to the funds from the various departments may be reduced.
The City has accumulated a cash balance for IT operations and replacement ($1.3 million) and facilities maintenance funds ($676K). Staff recommends allocating approximately 50% of these funds to fund the newly created internal service funds.
The staff will develop vehicles and IT equipment replacement models to identify the needs projected for the next 5-10 years. In addition, staff will be conducting a facilities maintenance study that looks forward 30 years to identify expected maintenance needs and improvements. This analysis will allow the staff to calculate and program funds sufficient to ensure they are adequately capitalized. The recommendation to allocate approximately 50% of the accumulated fund balance in the Internal Service funds will ensure the funds have adequate balances to provide a reserve if financial challenges require a pause in contributions to the funds.
An annual allocation to the internal service funds for FY 22-23 is calculated to be as follows:
Fund #450 – Vehicle Replacement: $148,300
Fund #460 – IT Operations and Equipment Replacement: $1,271,986 Fund #470 – Facility Maintenance: $786,992
Fund #TBD – Newly created IT Equipment Replacement: Pending the outcome of the study Fund #TBD – Newly created Facility Replacement: Pending the outcome of the study These contributions will come from the various department budgets and will be reassessed annually based on actual expenditures and re-evaluation of projected future expenditures.
ATTACHMENTS:
Introduction of a Five-Year CIP
Introduction of Sewer Enterprise Fund FY 22-23 Proposed Budget Introduction of Internal Service Funds FY 22-23 Proposed Budget Date Page 1