STAFF REPORT TO THE CITY COUNCIL
DATE: Regular Meeting of June 28, 2022
TO: Members of the City Council
SUBMITTED BY: Dante Hall, City Manager
Edwin Gato, Director of Finance
SUBJECT: Public Hearing on Proposed FY 2022-23 City of Hercules Budget Plan including the First Year of the Five Year 2022–2027 Capital Improvement Budget RECOMMENDED ACTION:
Open the Continued Public Hearing, Receive a Staff Report, Take Public Testimony, Close the Public Hearing, and adopt the following resolutions (Attachments 1-3):
Approving the FY 2022-23 City of Hercules Budget Plan which includes the First Year (2022-23 Fiscal Year) of the Five-Year (2022-2027 Fiscal Years) Capital Improvement Budget and making certain designations and fund balance adjustments, approving (29) annual contracts for services in a total amount of $4,720,936.
Approving the FY 2022-23 Hercules Public Financing Authority Budget Plan Consisting of Debt Service in the amount of $1,971,526.
Establishing the Appropriations Limit for the FY 2022-23 in accordance with Proposition 111 and Article XIII B.
Amending the Statement of Financial Principles and Policies.
COMMISSION/SUBCOMMITTEE ACTION AND RECOMMENDATION:
The Finance Commission reviewed the proposed FY 2022-23 Budget at their regular meeting on May 18, 2022, and special meeting on June 8, 2022, and expressed full support of the budget.
FISCAL IMPACT OF RECOMMENDATION:
The proposed FY 2022-23 Citywide Budget appropriates expenditures of $37 million, of which General Fund is $17 million, Special Revenue Funds is $11 million, Sewer Enterprise Fund is $7 million, and Internal Service Funds is $2 million.
The City’s General Fund is projected to end the year with an available fund balance of $760K, of which $542K is from operation, $167K is one-time, $1.6 million of American Rescue Plan (ARPA) Funds in the revenue loss category, and $4 million in operating reserve, which is equivalent to 25% of the General Fund budget.
DISCUSSION:
The City Council received an introduction of the proposed Five-Year Capital Improvement Plan (CIP) and FY 2022-23 Enterprise and Internal Service Fund Budget at its April 26, 2022, City Council meeting, and on May 10, 2022, the second phase of the budget introduction was presented for the proposed FY 22-23 General Fund and other restricted funds budget. The first public hearing of the entire recommended budget was conducted on July 14, 2022, and the public hearing is continued tonight for adoption.
The proposed FY 2022-23 Budget including the City Manager’s Budget Message is available on-line on the City’s website (www.ci.hercules.ca.us) and through the following link: https://www.ci.hercules.ca.us/government/finance/budgets The budget proposal incorporates an overall increase of 3%, an increase to account for inflation and a few other adjustments to address gaps in organizational efficiency and effectiveness. The chart below describes the notable changes, along with the economic impact associated with each adjustment.
General Fund changes:
Other funds:
The following list of changes to the budget since it was presented to the Council at its first public hearing on June 14, 2022, is as follows:
General Fund additional changes
Special Event: $50,000 (On-going)
A series of special events that would be agreed upon in an arrangement with the Bayfront Chamber.
Other Funds
2022 Annual Street Rehabilitation – Sycamore Avenue
Gas Tax: $1,026,827
Measure J (Return to Source): $184,889
OBAG Grant: $492,000
Hercules, like all cities, is facing very uncertain times, given a number of factors including the continued effect of COVID-19 pandemic, significant cost increases for goods and services as a result of high inflation, and market disruptions from the war in Ukraine. Additionally, Hercules relies on UUT proceeds to fund a wide range of services including maintenance of public properties, staffing, and providing for public safety. If the UUT is allowed to expire in January 2025 without being continued, the loss of approximately $3.5 million a year in revenue would drastically impair the City’s ability to provide even a minimal level of service. If we are required to make budget cuts that may include police and neighborhood patrols, street maintenance, parks, senior services, youth programs, and economic development, we risk a decline in our quality of life. Given these concerns, the FY 2022-23 Operational Budget is focused on modest to net-neutral operational adjustments to better align public demand with available resources.
Following the close of the public hearing this evening, the City Council is requested to consider approval of the budget recommended by the City Manager with whatever changes the City Council may desire.
The Budget Resolution sets forth designations necessary to ensure they are appropriately shown in the annual audit. Finally, the resolution approving the Budget also approves a number of multi-year annual contracts for services for which funding is included in the Budget.
The contracts being approved are set forth in the following table:
The revenue estimates and expenditure appropriations in the budget are for all City funds and include operations, capital and internal transfers for all programs and support functions of the City. Fund summaries and financial schedules showing two prior years actual results, FY 2021-22 projections, and FY 2022-23 proposed budget are presented for each City budgetary unit in the budget document.
In addition to the proposed budget, the following related items are presented for Council approval:
Hercules Public Financing Authority (PFA) Budget
The Hercules Public Financing Authority (PFA) budget plan for FY 2022-23 consists of debt service in the amount of $1,971,526. The PFA Debt Service Funds include the following:
2020 Public Financing Authority (PFA) Lease Revenue Refunding Bonds – This bond issue helped pay for the Hercules Community Library construction and is paid for solely out of the General Fund. Debt Service payment for FY 2022-23 is $512,269. 2009 Public Financing Authority (PFA) Taxable Lease Revenue Bonds – Bio-Rad/Venture – This bond was issued to pay for the Venture Building on Linus Pauling Drive and is fully paid for by lease revenue and a guaranteed investment contract (GIC). Debt Service payment for FY 2022-23 is $907,371. 2021 Public Financing Authority (PFA) Wastewater Revenue Bonds – This bond issue was to finance improvements to the City’s wastewater system and is paid for solely out of the wastewater fund. Debt Service payment for FY 2022-23 is $551,886.
Successor Agency to the former Hercules Redevelopment Agency The Successor Agency depends on the receipt of property tax increment revenue to pay obligations of the former Hercules’ Redevelopment Agency. To receive the tax increment, the Successor Agency submits a Recognized Obligation Payment Schedule (ROPS) annually to an Oversight Board and the State Department of Finance. After approval by the Oversight Board, tax increment funds are distributed to the Successor Agency by the Contra Costa Auditor Controller’s Office. The use of tax increment is restricted, and the Successor Agency does not receive excess tax increment. Excess tax increment after payment of debt and administrative costs are distributed to other taxing entities such as the City of Hercules, Cities within Contra Costa County, the State of California (for schools), and special districts.
Successor Agency revenue is expected to be sufficient for all debt and enforceable obligations in FY 2022-23. The total FY 2022-23 Successor Agency budget of loan repayments and other obligations is about $10.8 million. As property values increase and more tax increment becomes available, there is sufficient funding for administration, and pass-through payments approved by the State Department of Finance.
Appropriation (GANN) Limit
The California Constitution limits growth in local government spending and establishes a maximum limit for expenditures from general taxes. The law, commonly known as the Gann Limit, requires that the limit is recalculated and approved annually by the City Council at the beginning of each fiscal year. The Gann Limit is indexed to specified growth factors approved by the Legislature and applied to revenue appropriations. The annual Appropriation (GANN) Limit establishes the maximum amount that can be appropriated to the General Fund.
Article XIII B of the California Constitution was approved by California voters in 1979 and has been amended several times since its adoption. Article XIII B creates a restriction on the amount of revenue that can be appropriated in any fiscal year.
Article XIII B requires all local government entities to establish an annual appropriation limit. The appropriation subject to limitation is to be based on the 1978-79 appropriation adjusted for changes in cost of living and population.
California Government Code Section 7910 requires each local government to establish its appropriation limit by resolution. Adoption of the attached resolution will approve the FY 2022-23 annual Appropriations Limit. For FY 2022-23, the Appropriations Limit has been determined to be $506,343,344.
Proposed Policy Additions
At the first public hearing on July 14, 2022, the City Council approved adding the following to the Statement of Financial Principles and Policies adopted on December 16, 2015.
The following are the additions to the policy:
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.
Reserve Policy - 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.
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.
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. Available resources as determined annually through the closing of the financial records will be used as a basis for the following allocation:
25% 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. 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. 25% to Operating Reserve – 25% of the available fund balance be put into operating reserves up to the 25% policy limit. 50% 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.
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 2022-23 City Budget Resolution
FY 2022-23 PFA Resolution
FY 2022-23 GANN Resolution
Resolution amending the Statement of Financial Principles and Policies 1 Date Page 1