STAFF REPORT TO THE CITY COUNCIL
DATE: Regular Meeting of November 14, 2023
TO: Members of the City Council
VIA: Dante Hall, City Manager
SUBMITTED BY: Edwin Gato, Director of Finance
SUBJECT: FY 23-24 1st Quarter Budget Report
RECOMMENDED ACTION:
Receive the reports on the FY 23-24 1st Quarter Budget Report for the period ending September 30, 2023, and the Preliminary FY 22-23 General Fund Annual Results (Unaudited) for June 30, 2023.
COMMISSION/SUBCOMMITTEE ACTION AND RECOMMENDATION:
This report will be presented to the Finance Commission at their regular meeting on November 15, 2023.
EXECUTIVE SUMMARY:
Quarterly financial reporting is being prepared by the City staff as a means of providing the community, Council, and the organization with an overview of financial information for the General Government Funds. The primary information provided in the quarterly report is a comparison of the annual budget amounts to actual revenues and expenditures for operating departments. All financial information is based on preliminary, unaudited information reported from the municipal financial system as of the report date. Seasonal variations or special occurrences in municipal operations may affect the proportion of revenues achieved or expenditures incurred to date.
DISCUSSION:
FY 21-22 General Fund Preliminary Year End Results
This report was prepared without the final audit results and is subject to change depending upon the results of the audit in progress. The audit will not be completed until January at the earliest.
The following is the preliminary unaudited summary of the year-end annual budget results as of June 30, 2023:
Preliminarily, in FY 22-23, revenues were higher than anticipated, and expenditures were slightly over budget due to some unforeseen activities. As a result, the net General Fund ended the year with a positive $2.4 million available cash balance, $1.9 million better than the projected FY 22-23 Budget.
The City Council amended the financial policy that the General Fund surplus or available cash balance will be allocated as follows:
25% to Pension (Section 115 Trust).
25% to operating reserve until it reaches 25% of total operating expenses. 50% to fund unmet/deferred infrastructure and maintenance needs.
Staff will apply this policy after the year-end audit is concluded.
FY 23-24 1st Quarter Budget Report
This report summarizes the City’s financial performance for the three months ended September 30, 2023. Financial analysis for this report is provided for the General Fund, Capital Improvement Program, and combined information for other City funds on a cash basis. Cash basis means that revenues are recognized at the time revenues are received and expenditures are recognized at the time payment is processed.
The expenditure budgets include adjustments for encumbrances, carryovers and any supplemental appropriations made by the City Council as of September 30, 2023.
GENERAL FUND
The General Fund is the chief operating fund for the City and includes multiple programs that provide direct programs, activities, and services to the citizens of Hercules.
The Fiscal Year FY 23-24 annual budget for the General Fund projected revenues is $18.5 million. As of September 30, 2023, the General Fund's actual revenues were $3.6 million, or 20% of the FY 23-24 estimated revenues.
The FY 23-24 expenditure appropriations for the General Fund are $19.5 million. As of September 30, 2023, actual expenditures were $5.4 million, or 28% of the FY 23-24 budget. As is typical with the General Fund, the first quarter information is insufficient to make projections on how the fiscal year might track. The primary purpose of this report is to highlight what significant deviances, positive and negative, we have seen thus far in comparison to a typical first quarter and to highlight areas that might require focus in the future.
General Fund Revenue Analysis
General Fund
Revenues
About 84% 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 City derives a significant portion of its General Fund revenues from economically sensitive sources such as property taxes, sales taxes and utility users’ taxes. When one or more of these key revenue sources deviate from projections, funding for future programs and services may be affected.
Sales Taxes, the largest revenue source for the City’s General Fund, are remitted to the City from the State on an ongoing basis. Sales Tax revenues are higher by 3% compared to the same quarter last year. This revenue source is highly concentrated within a few major operators. Over 70% of the City’s sales tax is generated by its top three producers. The following chart depicts the source of the City’s sales revenues by industry group compared to the same quarter in previous years:
The Utility User’s Tax (UUT) is imposed by the City on the consumption of utility services, including (but not limited to) electricity, gas, water, sewer, telephone, sanitation, and cable television. The City determines the rate of the tax and the use of its revenues. As of September 30, 2023, $962,744 or 26% of the estimated revenues have been collected.
The City’s property taxes are received between December and April. Therefore, there are no property taxes that have been received to date. The City continually realizes stable property tax-related revenue growth based on prior-year trends and this year’s report from the County Assessor’s Office.
General Fund - Expenditure Analysis
Operating expenses, by category and department, are tracked at approximately 28% of the annual budget through September 30, 2023. Expenditures on Worker’s Compensation and General Liability Insurance, and transfers to debt service are paid in full at the beginning of the fiscal year. Overall, there is not enough information this early to determine if expenditures will deviate significantly from the budget due to the timing of spending. Staff will revisit this budget at mid-year or as of December 31 and prepare a Mid-Year Budget adjustment as necessary based on that analysis.
SEWER ENTERPRISE FUND
The Enterprise Fund group consists of the City's Sewer Fund and requires proprietary fund balance reporting, including cash, reserves, fixed assets, and related long-term debt. Sufficient resources are maintained to ensure the completion of current projects and programs and to cover debt service. The Sewer Fund's net position on September 30, 2023, was $33 million.
SPECIAL REVENUE FUNDS
Actual revenues on September 30, 2023, were $812K, and actual expenditures were $1.2 million. The Special Revenue Funds are driven by grants or other specific funding sources for specific purposes, such as transportation, building permit counter activity, other restricted programs, etc. Such funding sources are restricted in nature, which requires revenues and expenditures to be tracked differently from the City’s primary operating fund, the General Fund. Revenues from the Landscaping and Lighting Assessment District (LLAD) are included in the property taxes. The assessment fees are received between December and April. Therefore, no assessment fees from the LLAD have been received to date. However, there is sufficient funding for the completion of current projects or programs, except for LLAD for Victoria by the Bay and Stormwater, which are already in deficit, and the addition of any new programs or projects is dependent on the availability of future funding sources.
CAPITAL PROJECT FUNDS
These funds derive their revenues from a combination of fees from new development, Gas Tax, and Regional Measure J, most of which generate revenues and expenditures in different patterns from the City’s other operating funds. Because these funds are budgeted multi-year, the project may experience some cost overruns. Typical reasons for these overruns include underestimating costs in initial project proposals and field changes required to complete a project but were unanticipated when the contract was awarded. To mitigate the risk of cost overruns, the Finance Department continues to work with the Departments to ensure processes are in place to prevent overspending, including providing project balances are kept up to date, and adequate contingencies are in place before the commencement of the project. The Capital Improvement Projects Funds had an aggregate expense of $55.4 million to date as illustrated in attachment 4. There is sufficient funding to complete the projects.
DEBT SERVICE FUNDS
The Debt Service Funds group accounts for the long-term debt of the City. As of June 30, 2023, the unaudited fund balances of all debt service funds were $2.1 million. Sufficient funds are transferred from a variety of sources to meet debt service obligations as they come due. The funding source is dependent upon the purpose of the debt.
INTERNAL SERVICE FUNDS
The Internal Service Funds group includes those funds created for the accumulation of reserves for vehicle replacement, technology and equipment replacement, and facility maintenance. Revenues for these funds are derived from administrative (cost recovery) charges to other funds, primarily the General Fund. The fund balance of the Internal Service Funds group was $1.5 million as of September 30, 2023.
FIDUCIARY FUNDS
The Fiduciary Funds group includes the assessment district bond that are not obligations of the City and a trust fund established for the Other Post-Employment Benefits (OPEB).
SUCCESSOR AGENCY
The Successor Agency is an entity separate from the City and accounted for in separate trust funds that are used to account for tax increment monies received and payments of items approved by the Oversight Board in the Required Obligation Payment Schedule (ROPS). Governmental accounting standards require that the full amount of debt outstanding be recorded as part of these funds. The unaudited deficit balance as of June 30, 2023, was $42 million, which reflects bonded indebtedness to be paid from future Redevelopment Property Transfer Tax Fund (RPTTF) revenue.
FISCAL IMPACT OF RECOMMENDATION:
The FY 23-24 1st quarter report includes information detailing the variances between budgets and actual for revenues, and expenditures, and the Preliminary FY 22-23 General Fund Annual Results (Unaudited).
ATTACHMENTS:
General Fund Year-To-date Revenue Report through September 30, 2023 General Fund Year-To-date Expenditure Report through September 30, 2023 All Funds Year-to-date Revenues and Expenditures Report through September 30, 2023 Active Capital Projects report through September 30, 2023 2