STAFF REPORT TO THE CITY COUNCIL
DATE: Regular Meeting of January 10, 2023
TO: Members of the City Council
VIA: Dante Hall, City Manager
SUBMITTED BY: Edwin Gato, Director of Finance
SUBJECT: Review of Preliminary Fiscal Year (FY) 21-22 Unaudited General Fund Year-End Result RECOMMENDED ACTION:
Receive the report on Preliminary General Fund FY 21-22 Unaudited Year-End Result FISCAL IMPACT OF RECOMMENDATION:
The review of the preliminary FY 21-22 Unaudited General Fund Year-End Result is an informational report only with no fiscal impact at this time. The FY 21-22 Preliminary General Fund Unaudited Year-End Result includes information detailing the variances between the year-end projections and actual revenues and expenditures.
EXECUTIVE SUMMARY:
The General Fund is the chief operating fund of the City. This financial report provides an overview of the General Fund unaudited financial position as of June 30, 2022. The report summarizes the activities of the City’s General Fund to provide an overview of the City’s general fiscal condition and is not meant to be inclusive of all financial accounting transactions.
DISCUSSION:
We are pleased to present the Preliminary General Fund Year-End Result for FY 21-22. This report was prepared without the final audit results and is subject to change depending on the audit results in progress. It is anticipated that the final audit results will be concluded by the end of January.
Note on the differences between GAAP and “cash plus encumbrances”. It should be noted that the basis of accounting used for financial reporting purposes in accordance with Generally Accepted Accounting Principles (GAAP) is not necessarily the same basis used in preparing budget documents. For example, while governmental funds are required to use the modified accrual basis of accounting in GAAP financial statements, the cash basis of accounting or the "cash plus encumbrances" basis of accounting may be used in those same funds for budgetary purposes. Disparities between GAAP and the budgetary basis of accounting often occur because regulations governing budgeting (e.g., laws or ordinances of the state, county, City, or other jurisdiction) differ from GAAP. Thus, the City adopts its budgets each fiscal year on a cash plus encumbrances basis of accounting, which results in some items budgeted as expenditures, such as transfers to reserves, being reflected in the audit as balance sheet adjustments/designation of fund balance.
When the City Council developed and adopted the FY 2022-23 Budget on June 28, 2022, the estimated beginning fund balance (the estimated ending fund balance for FY 21-22) was based on the information available at the time. Most activities are not received until after June 30 and are thus accrued back into the prior fiscal year. While much effort went into developing the projections, we estimated conservatively. We did so with the uncertainty of the economic climate and the recession in mind. In addition, we actively managed our expenditures to minimize costs with even greater scrutiny as we ended the year. Fortunately, we did finish the FY 21-22 better than anticipated.
Overall, the total FY 21-22 General Fund revenues were higher than the estimate, and expenditures came in slightly lower than the budget. In March 2020, due to a pandemic event with the coronavirus disease (COVID-19), President Biden declared a National State of Emergency. As a result, the City followed the County’s stay-at-home order which required social distancing and business closures to reduce the virus's spread. These historic efforts around the COVID-19 pandemic have caused significant downward trends to most City's revenues in California since mid-March. Fortunately, the City has not been as fiscally impacted by the pandemic as initially anticipated, and tax revenues are holding steady overall.
General Fund Revenue Analysis
General Fund Revenues
About 83% of the General Fund revenues comes from taxes in the following categories:
Utility Users Tax
Sales Tax
Property Taxes
Vehicle License Fees (VLF)
Business License Fees
Document Transfer Tax
Franchise Fees
Transient Occupancy Tax
The chart below shows the comparison of General Fund ongoing revenues compared to prior years:
Utility Users Tax (UUT)
The Utility Users Tax (UUT) is imposed by the City on the consumption of utility services, including (but not limited to) electricity, gas, water, sewer, telephone, and cable television. The City determines the tax rate and the use of its revenues. This tax fluctuates with consumer consumption and is assessed based on a percentage of gross receipts. As of June 30, 2022, the City has collected $3.8 million, which is $300K higher than projected in the forecast.
The UUT would have expired on January 1, 2025, unless extended by a vote of the electorate. This would have caused a significant decrease in general fund revenue needed to continue to provide vital services to the community.
On July 21, 2022, the Hercules City Council placed Measure N on the November 8, 2022, Municipal Election to renew the UUT at its existing rate and for the UUT to be continued until changed by the voters or reduced or eliminated by Council action. The UUT had previously been extended twice for limited periods of time by Hercules voters in two previous elections.
On November 8, 2022, Measure N was approved by a majority of the voters.
The following is the history of revenues collected from UUT by category:
Sales Tax
Sales Taxes, the largest revenue source for the City’s General Fund, is remitted to the City from the State monthly. This tax preliminarily exceeded the revenue projections by $1.6 million or 35%. Overall, California sales tax cash increased by 19% from the same quarter last year. In Hercules, sales tax cash receipts increased by 35% due to an increase of $18.7 million of taxable sales. However, total Sales Tax revenue is highly concentrated within a few major operators and is substantially generated from business-to-business sources. Over 50% of the City’s sales tax is generated by its top 3 producers. The following depicts the summary history of the City’s sales tax revenues by the type of sales and use tax:
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, see below chart. Property Tax and related taxes collected through June 30, 2022, which are the current year secured and unsecured, were slightly higher compared to the budget.
The information below is based on FY 21-22 Weighted Average Shares by Agency:
Parks and Recreation Program Revenues
The Parks & Recreation program was closed during the pandemic and was anticipated to restart the programs slowly. As a result, staff reduced the revenue by $1 million at FY 21-22 Midyear Update. The actual program receipts showed $281K higher than the revised forecast, meaning the program reopening was overwhelmingly more successful than projected.
General Fund - Expenditure Analysis
The chart below shows the comparison of General Fund ongoing expenditures compared to prior years:
This section discusses the General Fund expenditures. It includes encumbrances, which are obligation in the form of purchase orders or contracts chargeable to the budget for which a part of the budget is reserved. The FY 21-22 budget, as revised, was $18.1 million, of which $15.4 million was ongoing and $2.7 million was one-time. Operating expenses in total are all tracking slightly below the revised budget figure. A summary of the year-to-date status of General Fund expenditures is presented in attachment 2. The operating or ongoing expenses in total by the department were slightly better than projections.
The Parks & Recreation budget was reduced by $1 million due to the anticipated slow reopening of programs and was adjusted at Midyear. However, the reopening of programs was well received by the community, and expenditures were coming in about $158K higher than the budget. The variance, however, was offset by higher program fee revenues.
General Fund – Net Annual Results and Available Fund Balance As a result, the net General Fund ended the year with a positive $3.9 million available cash balance, $2.9 million better than projected the FY 21-22 Budget, as discussed above and as presented in Attachment 1.
The City Council amended the financial policy that the General Fund surplus will be allocated as follows:
25% to Pension (Section 115 Trust).
25% to General Fund Operating Reserve until it reaches 25% of total operating expenses. 50% to fund unmet/deferred infrastructure and maintenance needs.
General Fund Operating Reserve
The General Fund Operating Reserve is a measure of the financial resources available. It is like a savings account for the general fund. It has been built up over the years because of revenues exceeding expenditures, primarily due to one-time savings. As of June 30, 2022, the General Fund Operating Reserve is 27% of total expenditures, which exceeded the reserve policy by 2%.
American Recovery Plan Act
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 and the second half was received on July 31, 2022. Effective April 1, 2022, the Secretary of the Treasury adopted a final interim rule. This rule implements the Coronavirus State Fiscal Recovery Fund and the Coronavirus Local Fiscal Recovery Fund established under the American Rescue Plan Act (ARPA). The following is the summary for the use of Fiscal Recovery Funds based on the final rule:
General Fund Revenue Loss: The final rule offers a standard allowance for revenue loss of $10 million. Hercules staff selected the standard allowance as permissible under the revenue loss category and may use the total amount allocated of $6.2 million for government services.
ATTACHMENTS:
Preliminary General Fund Year-to-date Revenue Report through June 30, 2022 Preliminary General Fund Year-to-date Expenditure Report through June 30, 2022 Preliminary General Fund Summary of Revenues, Expenditures, and Changes in Available Cash Balance as of June 30, 2022 Presentation
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