STAFF REPORT TO THE CITY COUNCIL
DATE: Regular Meeting of February 13, 2024
TO: Mayors and Members of the City Council
VIA: Dante Hall, City Manager
SUBMITTED BY: Edwin Gato, Director of Finance
SUBJECT: Review of Fiscal Year (FY) 22-23 Unaudited Year-End Result RECOMMENDED ACTION:
Receive the report on FY 22-23 Unaudited Year-End Result EXECUTIVE SUMMARY:
This financial report provides an overview of the General Fund's unaudited financial position and a summary of non-general funds as of June 30, 2023. The General Fund is the primary focus as it is the chief operating fund of the City. The report summarizes the activities of the City's General Fund to provide an overview of the City's general fiscal condition and also a snapshot of non-general funds.
DISCUSSION:
We are pleased to present the Unaudited General Fund and a summary of other funds Year-End Result for FY 22-23. 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 February.
Note 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 the budget document. For example, governmental funds are required to use the modified accrual basis of accounting in GAAP financial statements. In contrast, 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 2023-24 Budget, the estimated beginning fund balance (the estimated ending fund balance for FY 22-23) was based on the information we knew then. Most activities are not received until after June 30 and are 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 our minds then. In addition, we actively managed our expenditure to minimize costs with even greater scrutiny as we ended the year. Fortunately, we did finish FY 22-23 better than anticipated.
General Fund
Overall, the total FY 22-23 General Fund revenues were significantly higher than the estimate, and expenditures came slightly higher than the budget. Below is the summary of the General Fund net annual results:
Hercules has experienced strong economic recovery after the challenging financial environment caused by the COVID-19 pandemic, which resulted in the closure of most of the Parks & Recreation programs, significantly impacting the department’s program revenues. As consumer demand increased and services returned to normal, the City ended the fiscal year in a positive financial position.
General Fund Revenue Analysis
About 82% 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
These general tax revenues levied to fund general government purposes go into the General Fund. Voters must approve general taxes imposed by local governments.
General Fund Revenues by Category
The chart below shows the comparison of General Fund ongoing revenues compared to prior years:
The chart above shows that overall general fund revenues have increased by 21% compared to FY 20-21 during the pandemic. The significant increases are due to sales tax, UUT and reopening of Parks & Recreation programs. Much of the credit is attributable to the diverse local economy, talented workforce, mild climate, and outstanding quality of life, making Hercules an ideal business location.
Sales Tax
Sales Taxes, the largest revenue source for the City’s General Fund, are remitted to the City from the State monthly. This tax exceeded the revenue projections by $794K or 15%. The 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 three producers. The following depicts the summary history of the City’s sales tax revenues by business category:
The City’s sales tax base has proven to be more resilient than many other communities’ given its concentration in the business-to-business and home improvement categories. Hercules’s total sales tax revenues grew significantly over the period between 2019 to 2023 as shown in the chart above.
Utility Users Tax (UUT)
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, 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, 2023, the City has collected close to $4 million, which is about $400K or 11% higher than projected in the forecast. On November 8, 2022, Measure N was approved extending the term of the UUT at the existing rate until it is ended by the voters or repealed by the City Council.
The following is the history of total revenues from UUT collected by each fiscal year:
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, 2023, which are the current year secured and unsecured, were slightly higher compared to the budget.
The information below is based on FY 22-23 Weighted Average Shares by Agency:
Parks and Recreation Program Revenues
The Parks & Recreation program was closed during the pandemic, and the programs were fully reopened these couple of years and are steadily returning to normal. The actual program receipts showed $267K or 23% higher than the forecast, meaning the program reopening was overwhelmingly more successful than anticipated.
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 obligations in the form of purchase orders or contracts chargeable to the budget for which a part of the budget is reserved. The total FY 22-23 budget, as revised, was $18.8 million, of which $17.1 million was ongoing and $1.1 million was one-time. Operating expenses in total are tracking slightly higher than the budget figure due to Parks & Recreation reopening of programs and some emergency services caused by the storm. A summary of the year-to-date status of General Fund expenditures is presented in Attachment 1.
The Parks & Recreation expenditures were about $290K higher than the budget. The variance, however, was offset by higher program fee revenues due to fully reopened programs.
General Fund – Net Annual Results and Available Fund Balance As a result, the net General Fund ended the year with a positive $1.8 million of available cash balance, $1.7 million better than the FY 22-23 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 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. Over the years, it has built up because of revenues exceeding expenditures, primarily due to one-time savings and higher revenues as anticipated. As of June 30, 2023, the General Fund Operating Reserve is $4.3 million or 25% of total expenditures, which is at the reserve policy.
Non-General Funds
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 ending available fund balance as of June 30, 2023, is $11.5 million.
SPECIAL REVENUE FUNDS
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, requiring revenues and expenditures to be tracked differently from the City’s primary operating fund, the General Fund. On June 30, 2023, there is sufficient funding for the completion of current projects or programs except for Victoria by the Bay Lighting and Landscaping Assessment District (LLAD) and the Stormwater fund, which has negative fund balances of $437K and $157K, respectively. Staff are working on raising tax revenues to address the deficits. The addition of new programs or projects depends on the availability of future funding sources. The Special Revenue Funds has a collective balance of $5.3 million as of June 30, 2023.
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 $52 million through June 30, 2023, as illustrated in Attachment 3. 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 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 $2 million as of June 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). The responsibility of the successor agency is to wind down the affairs of the former Redevelopment Agency and pay off any debt obligations incurred by the Redevelopment Agency.
FISCAL IMPACT OF RECOMMENDATION:
The review of the FY 22-23 Unaudited Year-End Result is an informational report only with no fiscal impact currently.
ATTACHMENTS:
Unaudited General Fund Year End Results Summary as of June 30, 2023 Unaudited All Funds Year End Results Summary as of June 30, 2023 Unaudited Capital Projects to date Summary as of June 30, 2023 Presentation
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