STAFF REPORT TO THE CITY COUNCIL
DATE: Regular Meeting of May 10, 2022
TO: Members of the City Council
SUBMITTED BY: Dante Hall, City Manager
Edwin Gato, Director of Finance
SUBJECT: Introduction of FY 22-23 City of Hercules General Fund and Other Restricted Funds Proposed Budget RECOMMENDED ACTION:
Receive an Introduction of FY 22-23 City of Hercules General Fund and Other Special Revenue Funds Proposed Budget. No action is required at this time. It is recommended that the City Council discuss and provide direction to staff regarding the proposed Fiscal Year (FY) 22-23 budget and policies. The first public hearing for the budget has been set for June 14, 2022. City Council will consider adopting the proposed FY 22-23 Budget after the second public hearing scheduled for June 28, 2022.
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 FY 22-23 General Fund and Other Restricted Funds Budget.
BACKGROUND:
This is the second phase of the budget introduction. The proposed FY 22-23 General Fund budget provides a thoughtful balance between one-time and ongoing investments which would best meet the community’s needs within the city’s financial resources, and long-term financial stability strategies. Going forward, staff is recommending a process where the budget reflects the community’s long-term vision, strategic plans, and established priorities. Not only will this adjustment to the budget process allow our City to make better short-term resource allocation decisions (based on the relative priority of the programs and services), it also provides a new way to link budget decisions to the strategic results and outcomes that the City wishes to achieve for the long-term.
Budget Process
The proposed budget is introduced in May when the City Manager’s recommended annual budget is presented to the Council and made available to the public. Budget deliberations begin shortly thereafter with a City Council Budget Public Hearing, and adoption of the recommended annual budget in June.
DISCUSSION:
This year, the City’s goal is to responsibly set the course to fiscal stability. Due to the impacts of COVID, the City reduced services, specifically to Parks & Recreation. Fortunately, the economy is beginning to rebound from the financial impacts of the pandemic, and the receipt of one-time American Rescue Plan Act (ARPA) funds, in the amount of $6.2 million will help back-fill some pandemic-related revenue losses, thereby avoiding reductions in service. However, one-time funding does not support long-term planning for adequate levels of ongoing services. A portion of ARPA Funding was allocated mid-year to address some community needs related to COVID impacts. A list of ARPA expenditures previously approved can be found on Attachment 2.
While the FY 21-22 budget was a relatively flat budget due to the economic uncertainty facing effects of the COVID-19 pandemic, the proposed FY 22-23 budget reflects the cautious projections for recovery of the local economy, and incorporates the opportunities presented by ARPA.
The City Manager’s proposed operating budget remains consistent with the Council’s commitment to long-term solvency. The revenue estimates and expenditure appropriation in the budget are for the General Fund and other restricted funds. They include general operations, debt, capital and internal transfers (for all programs and support functions of the City), fund summaries and financial schedules (showing prior year actual results), and the FY 22-23 proposed budget compared to last year’s adopted budget.
A fund is grouping of related accounts, which are used to maintain control over resources that have been segregated for specific activities or objectives. The discussion section of this report provides information for the following sections:
:
General Fund Revenue Estimates
General Fund Expenditures Projections
General Fund Projected Net Annual Results
ARPA Fund
Non-General Fund Programs
Proposed Additions to the Financial Principles and Policy General Fund
The General Fund is the chief operating fund of the City. This fund is used to record all resource inflows and outflows that are not associated with special-purpose funds. The activities being paid for through the general fund constitute the core administrative and operational tasks of the City.
General Fund Revenue Estimates
As shown in the graph and as detailed in attachment 1, General Fund revenues in FY 22-23 are projected to increase by approximately 8% compared to FY 20-21 actual receipts. The revenue increase is substantially driven by proceeds from sales tax and the program fees from the re-opening of the Parks & Recreation programs. The bulk of General Fund revenues come from taxes (Utility User’s Tax (UUT), Sales Tax, Property Tax, Real Property Transfer Tax (RPTT), Transient Occupancy Tax (TOT) and other taxes).
Sales Tax
The largest revenue source for the City’s General Fund is remitted to the City from the State monthly. Sales Tax revenues are conservatively estimated to increase by 5% compared to FY 20-21 actual receipts based on the quarter three analysis generated from the Board of Equalization (BOE) data. Total sales tax revenues are highly concentrated within a few major operators. Hercules sales tax revenue is substantially generated from business-to-business sources. Its top 3 producers generate over 50% of the City’s sales tax. However, the City continues to benefit from the ongoing implementation of the Wayfair decision regarding online sales and the more significant number of purchases made online due to the Pandemic. These trends are part of the City’s share of the County pool. The following chart depicts the source of the City’s sales tax revenues by industry group.
Annual Per Capital Sales Tax
(Based on Actual Receipts)
Utility User’s Tax
Utility User’s 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 tax rate and the use of its revenues. UUT revenues are estimated to stay relatively flat compared to FY 20-21 actual receipts. 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.
Annual Per Capita UUT
(Based on Actual Receipts)
On June 4, 2013, the voters approved Ordinance #475, increasing the 6% to 8%. The Utility User’s Tax will automatically sunset, and its provisions shall become ineffective on January 1, 2025, unless extended by a vote of the electorate. The City’s UUT revenue makes up $3.6 Million or approximately 20% of the general fund budget. If the UUT we’re not renewed, this would cause a significant decrease in general fund revenue needed to continue to provide vital services to the community.
Property Tax
The City of Hercules has been classified as a low-to-no property tax jurisdiction. The City's share of the base 1% property tax rate is lower than most other jurisdictions at just a little over 5% of Hercules's total base property taxes. This year the Assessor's office applied a CPI factor of 2% to non-Prop 8 parcels. It is estimated that the City share of 1% assessed property value tax is calculated to be $1.5 million for FY 22-23.
Transient Occupancy Tax (TOT) – For the privilege of occupancy, each transient is subject to a 10% of the rent charged by operator. The TOT is a general tax which is deposited into the City’s General Fund. TOT revenue is expected to increase by approximately $100,000 in FY 22-23 due to new development.
Parks & Recreation Program Revenues
During the COVID-19 pandemic and mandatory closure, the Parks & Recreation program was heavily impacted. The revenues from this program were significantly reduced in the prior year due to the suspension of programs and offerings and facility rentals. The FY 22-23 revenue estimates reflect the re-opening of suspended programs, and revenues are projected conservatively equal to approximately 75% of total pre-pandemic actual receipts ($1.1 million).
Fees for Service - The City charges fees to the community based on the costs of services provided. These fees are documented in the City’s Master Fees & Charges Schedule. The Master Fees & Charges schedule is approved periodically by the City Council, and individual fees may be amended from time to time during a fiscal year. However, there must be a nexus to the costs of the provision of those services. The following is the summary of fees projected to be collected by the General Fund:
Parks & Recreation: $1.1 million
Building Permits: $145,000
Police Fees: $139,000
Encroachment, Grading and Subdivision Fees: $38,000
Cell Tower Leases – The revenue collected from the leases on cell towers is projected to increase by 4%.
General Fund Expenditure Projections
The graph and as detailed in attachment 1 shows that General Fund expenditures are projected to increase by 7% compared to the prior year's budget. The following categories explain the assumption used to arrive at the estimated cost:
Salaries and Benefits
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:
Regular Salaries – Unless directed otherwise, for the preliminary budget, personnel services costs will include a 3% wage increase placeholder pending the results of labor negotiations of the City's employee groups.
PERS Miscellaneous and Public Safety Normal Cost and Unfunded Actuarial Liability (UAL) rates applied are projected as follows and is based on CalPERS actuarial assumptions:
Health care costs, including medical, dental and vision, are projected to increase by 3% from the FY 21-22 Kaiser rate. 1% of employee salaries will be contributed towards IRS Section 115 Pension Trust per policy direction established by the City Council.
Overall expenditures were estimated to increase by 5% within the Bay Area Consumer Price Index CPI from February to February of 5.2%.
One-time expenditures include the Department of Finance (DOF) settlement, and other capital projects.
General Fund Projected Net Annual Results
The General Fund is projected to end the year with approximately $750K, of which $600K is ongoing and about $167K is one-time, and $4.3 million in operating reserve. The reserve balance is equivalent to 25% of the General Fund budget. This balance is $1.5 million above the Council’s reserve target goal of 16%. Staff will propose fiscal policies for Council to review and approve on the level of unrestricted fund balance maintained in the general fund for GAAP and budgetary purposes and allocation of net General Fund revenues.
American Rescue Plan Act (ARPA)
To further assist government entities with the pandemic response and recovery, on March 11, 2021, the American Rescue Plan Act of 2021 (ARPA) was signed into law, making funding available through the State and Local Fiscal Recovery Funds (SLFRF) to assist states, tribal governments, and local governments. On May 10, 2021, the United States Department of Treasury released regulations and updated the local government allocation. As part of the 1.9 trillion relief package, the City of Hercules became eligible for $6,285,778 to be paid in two installments. The City received the first payment equal to one-half of the City of Hercules’ allocation for $3,142,889 in mid-July 2021. The second half will be distributed in July 2022. The following is the summary for the use of Fiscal Recovery Funds:
General Fund Revenue Loss Incurred by the City - ARPA recipients may use payments from the Fiscal Recovery Funds for the provision of 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. This is envisioned to enable local governments to continue to provide valuable services and ensure that budget deficits, tax increases, and reductions in public expenditures do not continue to delay a city’s broader economic recovery. Based on the Department of the Treasury’s revenue loss formula which includes all sources of revenue, the City of Hercules experienced a $2,918,338 shortfall in general revenues for the period ending December 31, 2020, due to the COVID–19 public health emergency. This total amount, or any portion thereof, is an eligible expense under ARPA funding rules.
The American Rescue Plan Act provides that Fiscal Recovery Funds may also be used for the following:
To respond to the public health emergency or its negative economic impacts, including assistance to households, small businesses, and nonprofits, or aid to impacted industries such as tourism, travel, and hospitality; To respond to workers performing essential work during the COVID‐19 public health emergency by providing premium pay to eligible workers; To make necessary investments in water, sewer, or broadband infrastructure.
On October 20, 2020, the City distributed the Business and Community needs survey to better understand the impact of the COVID-19 pandemic on Hercules’ businesses. On January 11, 2022, the City Council approved the set of principles to assist staff in developing the plan for the use of the ARPA funds. On February 22, 2022, the City Council approved, as part of the FY 21-22 Midyear Update, several priority projects as summarized in attachment 2 (ARPA – Eligible Expense List), including the assistance from HdL for the administration of the ARPA programs that aligned with the adopted set of guiding principles.
FY 22-23 proposed the following projects and programs are summarized in attachment 3 (the detailed list of ARPA proposed projects and programs). Should the City council wish to amend this list of projects and programs, staff requests additional direction. Staff will return to the City Council with a complete list of proposals at the full introduction of the budget on May 24, 2022. This gives the City Council ample time to review the proposals for approval and adoption of the budget in June. Does the City Council desire to set aside ARPA funding for one-time non-profit grants? If so, how much funding should be set aside for the one-time grant program? Non-General Fund Programs
Special Revenue funds
The Special Revenue Funds are driven by grants or other specific funding sources used for particular purposes, such as transportation, building permit counter activity, other restricted programs, 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 for the completion of current projects or programs, but the addition of any new programs or projects is dependent on the availability of future funding sources. The following are funds under Special Revenue:
Asset Seizure (Fund #101) – The City maintains a forfeited assets fund to account for monies received from Police confiscated drug money and property. Funds are held until the final court disposition is received. The funds are restricted to police-related activities only. FY 22-23 projected ending available balance is $42K.
AB 3229 COPS Program (Fund #201) – California State Legislature created the Citizens Options for Public Safety (COPS) program. The funds are restricted to front-line law enforcement services. The City receives approximately $150K a year transferred to General Fund to offset police services.
Landscaping and Lighting Assessment Districts (LLADs) – This Funding is restricted to landscaping and lighting maintenance and capital improvements in City parks, major roads, and each of the 5 LLADs. The 5 LLADs include approximately 8,500 parcels that are projected to generate $3.07M in assessments in FY 22-23. The following are the projected FY 22-23 ending available fund balances:
LLAD 83-2 (Zones 1-10): $633,959
LLAD 2002-1, Victoria by the Bay: Negative Balance of $244,709 LLAD 2002-2, Hercules Village: $115,028
LLAD 2004-1, Baywood: $93,093
LLAD 2005-1, Bayside: $181,071
Stormwater (Fund #231) – This fund accounts for the activities associated with the acquisition, construction, maintenance, and operation of stormwater facilities to comply with the State stormwater permit requirements. FY 22-23 projected ending available balance is negative $177,445 Development Impact Fees (DIF) – Under California Mitigation Fee Act (AB 1600) cities and counties have the authority to implement DIFs. This allows cities and counties to collect funds from new development projects to cover public infrastructure, facilities, improvements, service, and community amenity costs related to the new development’s proportionate share of impact on those facilities. DIFs are prohibited from funding operation and maintenance and cannot be collected or used to cover existing capital or infrastructure deficiencies. The City DIF funds are categorized as follows and their respective available fund balance projected in FY 22-23:
Public Facilities: $335,776
Police Facilities: $107,047
Fire Facilities: $0 (Revenues remitted to the Fire District) Parks & Recreation: $136,960
Public Benefit Fee: $496,323
Transportation Facilities: $67,474
Sub-regional Transportation Mitigation Program (STMP): $0 (Revenues collected are remitted to West Contra Costa Transportation Advisory Committee (WCCTAC) in accordance with the Master Cooperative Agreement) State Gas Tax (Fund #262) - The Gas Tax is a special revenue fund used to account for the revenue received from the State of California derived from gasoline taxes. These funds may only be used for street purposes as specified in the State Streets and Highways Code, so they have always been an important revenue source for the City’s Streets Capital Improvement Program. The revenue estimate for FY 22-23 is a little under $760K and the proposed budget is approximately $700K. The projected FY 22-23 ending available balance is $169,589.
Measure J Street Fund (Fund #263) – The Measure J Fund is a special revenue fund used to account for the revenue received from the County’s ½ cent sales tax measure and can only be used for street purposes per F. above, similar to the Gas Tax. The revenue estimate for FY 22-23 is $450K and the estimated ending available balance is $368,039.
Solid Waste and Recycling (Fund #291) – This special revenue fund is used to comply with recycling and diversion programs required by State legislation (AB 939). Qualifying expenditures include street repair to mitigate damage from garbage trucks, street sweeping, trash removal from the stormwater system, and enforcing the plastic bag ban. FY 22-23 estimated ending available balance is $750,734.
Regional Water Quality (Fund #521) - This fund accounts for the Regional Water Quality. Created by the State Legislature in 1967, the Board protects water quality by setting statewide policy, coordinating, and supporting the Regional Water Board efforts, and reviewing petitions that contest Regional Board actions. There are nine regional water quality control boards that exercise rulemaking and regulatory activities by basins. FY 22-23 ending available balance is $51,569.
BART Park & Ride (Fund #266) – This fund is to account for BART Park & Ride fees. The revenue is restricted to the maintenance of the parking lot. The ending available balance projected in FY 22-23 is $280,737.
Debt Service Funds
The Debt Service Fund is used to account for the accumulation of financial resources for the payment of principal, interest, and related costs for general long-term debt paid primarily from taxes levied by the City. Debt is issued as needed to provide for infrastructure improvements. The following is the summary of the City’s long-term debt and FY 22-23 debt service payment obligations:
Proposed Policies
Hercules recently obtained a strong rating from credit agencies that track the City’s credit. These high ratings reflect a variety of factors, including the strength and diversity of the regional economy, moderate City debt levels, and current strong fiscal management, including the provision of adequate reserves. The City is committed to implementing and maintaining strong financial policies and fiscal stewardship. The City last prepared an update of its financial policies in December 2015. Since 2015, the City has established a Fiscal Neutrality Fund (or Operating Reserve), financial principles, and policies.
Although the City’s finances are stable today, expenses continue to grow, and future challenges associated with pension costs, workforce retention and attraction, and aging infrastructure also loom. The Fund Balance Reserve Policy specifies annual reserve levels that provide the City with the flexibility to adapt to local, regional, and state-wide economic changes and to stabilize the delivery of City services during periods of economic recession or disaster response. Staff is recommending adding the following to the Statement of Financial Principles and Policies adopted on December 16, 2015.
The following are staff’s recommended additions:
Service Level Expectations - Defining the types and levels of services expected in a given year includes a process of public engagement, understanding current services, identifying the City’s mission, long-term vision, and goals of the community. Based on the goals established by the City Council, the City Manager identifies the resources required to deliver services, how best to organize those resources to achieve the City Council’s vision for the community, and presents those recommendations in the proposed Budget for the City Council review, consideration, and direction. In a service-oriented organization such as a city, it takes a combination of staff and consultants to provide services. As important as it is for a city to invest in its physical capital, it is just as important for a city to ensure it is investing appropriately in its human capital and to determine what is the proper level of staffing and the necessary skill sets required to deliver on the city’s mission. City staff is currently evaluating potential needs for additional personnel and resources necessary to accomplish tasks related to the established priorities.
In FY 2021-2022, services are being provided by 58 FTE (Full-Time Equivalent) City employees and equivalent to 28 part-time/seasonal staff. For the FY 2022-2023 Budget, the City Manager is proposing upgrading one part-time position to a full-time Senior Clerk I position for general administration support managed by the City Clerk’s Office. The proposed change is cost neutral and comparable to the salary of the part-time position paid at a higher class pay. Furthermore, the City will evaluate the current level of staffing to meet City Council’s strategic directives identified during its strategic planning workshop held on April 30, 2022.
Reserve Policy - The current general fund reserve policy calls for a 16% limit (equal to two months of the general fund operating budget) to be available in a fiscal emergency. Staff is recommending increasing the general fund reserve policy limit from 16% to 25% (equal to three months of the General Fund Operating Budget) to protect the City from fluctuations in the economy or other significant unplanned needs. Once a 25% funding level is reached, available surplus funds would be directed to other Council priorities. Does the City Council agree that the reserve policy should be increased from 16% to 25%? Long-Term Capital Improvement Project Funding – As staff mentioned during the April 26, 2022, Budget Workshop, the current funding strategy for capital projects entails a detailed analysis of the long-term capital improvement project funding needs based on a 5-year forecast. This strategy assumes a “pay as you go” philosophy that does not anticipate the use of debt financing. Does the City Council agree that a funding model be employed that proactively funds long-term capital improvement projects from existing resources and operating transfers into capital improvement reserves? General Fund Surplus Allocation – A surplus occurs when income exceeds expenditures. The term is often referred to in government as savings. A surplus is an indication that the City's finances are being effectively managed. Staff recommends that Available resources as determined annually through the closing of the financial records will be used as a basis for the following allocation:
25% to Contribution to Pension/OPEB - The City has established an Internal Revenue Service Code Section 115 irrevocable trust which achieves a higher rate of return on investments than that earned on the pooled investment portfolio, LAIF. Staff recommends that 25% of the available fund balance shall be put into a Trust Fund or directly into paying off the CalPERS unfunded liability for either pensions or post-employment benefits. Does the City Council agree that 25% of any available general fund surplus should be put into a Trust Fund or directly into paying off the CalPERS unfunded liability? 25% to Operating Reserve – As mentioned above, staff recommends increasing the general fund reserve policy limit to 25%. As a means to maintain this limit, staff recommends that 25% of the available fund balance be put into operating reserves up to the 25% policy limit. Does the City Council agree that 25% of the available general fund surplus should be put into Operating Reserves up to 25% of the General Fund? 50% to Contribution to unmet/deferred infrastructure and maintenance needs – A funding mechanism to fund projects included in the Long-Term Capital Improvement Project Funding, as described in section c above. Does the City Council agree that 50% of the available general fund surplus should be put into Long-Term Capital Improvement Project Funding? These available resources or available fund balances are generally one-time in nature as derived from one-time revenues or one-time expenditure savings. The actual amounts to be allocated will be based upon the prior year’s financial statements from the most recent audit.
ATTACHMENTS:
FY 22-23 Proposed General Fund Budget and Balancing Spreadsheet FY 22-23 Proposed Special Revenue Budget - Fund Summaries FY 22-23 Proposed Debt Service Budget - Fund Summaries
FY 22-23 Proposed ARPA Programs and Projects
ARPA Funds Expenditure Summary and Remaining Balance
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