STAFF REPORT TO THE CITY COUNCIL
DATE: Regular Meeting of February 14, 2023
TO: Mayor and Members of the City Council
VIA: Dante Hall, City Manager
SUBMITTED BY: Edwin Gato, Director of Finance
SUBJECT: FY 22-23 Midyear Budget Review and Recommended Midyear Budget Appropriations and Adjustments RECOMMENDATION ACTION:
Receive a report on the FY 22-23 midyear budget review and adopt a resolution approving various midyear budget appropriations and adjustments, as summarized and detailed in attachment 2 and 3, respectively.
EXECUTIVE SUMMARY:
The Midyear Budget review allows the City to adjust the current fiscal year budget (FY 22-23) for changes in projected revenues and expenditures levels that may have occurred since the adoption of the Annual Budget on June 28, 2022. Those changes are contained in this report along with a detailed justification for each recommended change.
BACKGROUND:
This report updates the Fiscal Year 22-23 financial projections and proposes current year budget amendments for various City funds to reflect and respond to the City’s current financial condition. Also, this report provides the City Council with updates on the financial status of the City’s General Fund by comparing budget projections for revenues and expenditures to actual receipts and expenses as of December 31, 2022.
The discussion below is presented in the following sections:
General Fund Revenues
General Fund Expenditures
General Fund Net Annual Results
General Fund Operating Reserve
American Rescue Plan Act (ARPA) Fund
Non-General Fund Programs
ANALYSIS:
As part of the budget process, the City staff must report to the City Council at midyear, examining revenues and expenditures and adjustments if necessary. The process provides an opportunity to review the status of the Budget at midyear to make adjustments to the City’s planned operations and Budget. This year’s report is attached and includes the following:
A summary of recommendations.
Assessments of both operating and capital budgets.
A schedule showing the recommended midyear budget adjustments for each fund.
The Midyear Budget Review begins with the good news that at the six-month mark (December 31, 2022), most of the General Fund revenues are above 50%. Expenditures are slightly higher than the original budget due to the outcome of labor negotiations being 1.5% higher COLA than budgeted and upfront payments on insurance and debt service.
General Fund
In accordance with the City’s Financial Policies, the annual operating budget was conservative when adopted. This was particularly true as we faced the many uncertainties created by the COVID-19 pandemic. The Policies also call for one-time, non-operating expenditures to be funded from one-time revenues. The City’s practice of budgeting conservatively and living within our means remains effective at ensuring that we maintain good fiscal health, and the recommended changes in this Midyear Budget Review remain true to these practices.
General Fund Revenues
As of December 31, 2022, the General Fund operating revenues were $8.4 million or 50% of the FY 22-23 adopted budget. Revenues from business licenses, franchise fees, and other taxes are received bi-annually and towards the end of the fiscal year. This accounts for why revenues are below 50% as of December 31, 2022. Also, the revenues received from program fees fluctuate each year. However, these revenues are offset by expenditures incurred by fees. The chart below represents revenue by source compared to the same period last year as of December 31 and how much was collected compared to the budget.
The following are the proposed midyear budget adjustments for the General Fund revenues:
Sales Tax: The pandemic did lead to very conservative estimates for Sales Tax revenues with the adopted Budget. Sales Tax revenues continue to rebound in major tax groups. An annual reduction in general retail (-2%) is offset by growth in all other sectors, especially in Business to Business (22.9%) and Food Products (161%) based on the first quarter review of sales tax activities. Hercules's sales tax revenue is projected to increase by 38.3%. Based on the data analysis and conservatively estimated, based on the current economic climate, Sales Tax revenue is projected to exceed the original annual Budget by $400,000.
General Fund Expenditures
A summary and year-to-date status of General Fund expenditures are presented in Attachment 3, as shown in the following graph. Payments on the insurance premium and debt service payment on equipment leases are due at the beginning of the fiscal year and due to the outcome of labor negotiation being 1.5% higher COLA than budgeted, which accounts for why expenditures are higher than 50% as of December 31, 2022. (In Millions)
Typically, the mid-year budget review and adjustments recommended are to make corrections to the adopted budget and to address required modifications. New initiatives or programs are not often contemplated unless necessary.
General Fund revenue and expenditure budget amendments are proposed to reflect the following adjustments and summarized and detailed in attachment 2 and 3, respectively:
General Fund Net Annual Results
The General Fund ended last fiscal year (FY21-22) with $3.9 million in available cash, $2.9 million better than projections. With the better-than-expected revenue at the end of the FY 21-22, staff is assigning the available cash balance as follows based on the reserve policy, as amended by the City Council last fiscal year:
$977,256 – 25% to Pension Liability
$1,954,511 – 50% to Capital Reserve
This will reduce the beginning available cash balance to $977,255.
The General Fund, excluding ARPA funds, Midyear review is projected to end FY 22-23 with a positive ending available balance of a little over $900,000, which is $180,000 better than projected in the adopted FY 22-23 budget. Most of the increase was attributed to the actual financial result of the audited FY 21-22 Financial Statements.
General Fund Operating Reserve
Fiscal stability is an essential factor for all cities. Sound financial management includes the practice and discipline of maintaining adequate reserve funds for known and unknown contingencies. The City’s operating reserve policy equals 16.66% of total operating expenditures, or two months equivalent. The General Fund operating reserve exceeded that requirement and maintained a $4.2 million (including interest income earned) operating reserve equal to 26% of the total operating budget.
American Recovery 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 was received on August 5, 2021. The second half was received on September 1, 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.
Currently, the following summary represents the ending balance on ARPA funds:
A budget workshop is scheduled in mid-March to discuss Capital Improvement Plan and project priorities. Subsequently, staff will present a proposed ARPA spending plan to the Council for consideration during the FY 23-24 Budget.
Non-General Fund Programs
These funds are driven by grants or other funding sources and are used for specific purposes, such as transportation, gas tax, Measure C “Street Fund,” 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 to complete current projects or programs and fund the following proposed mid-year adjustments as summarized and detailed in attachment 2 and 3, respectively.
Next Step
Staff is currently in the process of preparing the FY 23-24 budget which will be introduced to the City Council on May 9, 2023.
The table below outlines key Council meeting dates at which budget information will be provided.
Budget Award
The City of Hercules FY 21-22 Budget was awarded the Distinguished Budget Presentation Award from the Government Finance Officers Association (GFOA) for the third time. This award is the highest form of recognition in government budgeting. Its attainment represents a significant achievement by the organization. Staff submitted the FY 22-23 Budget documents for award consideration.
FISCAL IMPACT:
The proposed budget amendment to the FY 22-23 Budget, as summarized and detailed in Attachment 2 and 3, respectively, will increase the General Fund revenue by $400,000 on sales tax after the adoption of the FY 22-23 Budget and will increase General Fund expenditures by $154,500. The General Fund also updated its beginning fund balance based on the year-end results to $3.9 million and implemented the reserve policy adopted by the City Council last year. Also, as summarized and detailed in Attachments 2 and 3, the net impact of the proposed amendments on all other funds is a reduction in the available fund balance of $117,000.
The following summarizes the Midyear Budget Adjustments:
ATTACHMENTS:
Budget Resolution
Proposed Budget Amendment
Budget Request Detail
General Fund Summary
Non-General Fund Summary
4