STAFF REPORT TO THE CITY COUNCIL
DATE: Regular Meeting of February 25, 2025
TO: Mayor and Members of the City Council
VIA: Dante Hall, City Manager
SUBMITTED BY: Edwin Gato, Director of Finance
SUBJECT: FY 24-25 Midyear Budget Review
RECOMMENDED ACTION
Receive a report on the midyear budget review for Fiscal Year (FY) 2024-25.
EXECUTIVE SUMMARY
The Midyear Budget Review provides a comprehensive update on the City's financial health mid-way through the fiscal year. This allows the City to make necessary adjustments to the current FY 24-25 budget to address any shifts in anticipated revenues and expenditures that may have arisen since the Annual Budget was approved on June 11, 2024.
BACKGROUND
This report analyzes the City’s financial status halfway through the fiscal year and presents a thorough assessment of the financial health of the City's General and other non-general funds. It compares projected revenues and expenditures with actual receipts and expenses recorded as of December 31, 2024. This comparison provides a clear and insightful view of the City's fiscal performance, highlighting significant developments that have occurred halfway through the fiscal year.
ANALYSIS
As part of the budget process, the City staff must report to the City Council at midyear, examining revenues, expenditures, and adjustments if necessary. This process provides an opportunity to review the status of the budget at mid-year and adjust the City’s planned operations and Budget.
The annual operating budget has been adopted with a prudent approach, in accordance with the City’s financial policies. Given the uncertainties arising from unprecedented inflation and international instability, this approach is essential. In alignment with these policies, one-time expenditures are required to be financed by one-time revenues. The City has effectively preserved its fiscal health by adhering to moderate budgeting practices and operating within its financial means. Consequently, no adjustments are necessary, as the planned expenses correspond with actual activities at the midpoint of the fiscal year.
The following section provides an analysis of the City’s financial resources, commencing with an examination of the General Fund. The General Fund is the main operating fund of the City, facilitating the provision of critical city services, including law enforcement, public works, parks and recreation, and essential administrative functions.
General Fund
This fund is supported by a combination of taxes, fees, and various general revenue sources, which enables the city to allocate resources to a broad spectrum of expenses. Consequently, the General Fund allows for flexibility in financial planning, ensuring that funds can be directed toward pressing needs in the community rather than being restricted to specific, earmarked projects. This strategic allocation is vital for the effective management of city services and resources, reflecting the government's commitment to addressing the diverse requirements of its residents.
The Midyear Budget Review indicates that as of December 31, 2024, most General Fund revenues have reached 50% of the projected amount, while expenditure stands at 57%, slightly surpassing the original budget estimates. This modest overrun is anticipated to self-correct as the fiscal year progresses, mainly because various expenses were reconciled and paid out during the first six months. As we approach the end of the year, we expect this initial overage to balance out, demonstrating the adaptive nature of effective budget management.
General Fund Revenues
As of December 31, 2024, the operating revenues for the General Fund reached $8.4 million, which accounts for 42% of the adopted budget for fiscal year 2024-2025. It is important to note that revenue from business licenses, vehicle license fees (VLF), and interest income are typically received after this date. This pattern accounts for revenues below 50% at the end of December. Furthermore, revenues generated from program fees often exhibit annual fluctuations; however, these variations are adequately balanced by the corresponding expenditures associated with those programs.
Below is a chart of General Fund revenues, followed by an analysis of the major General Fund revenues:
Around 81% of the revenues in the General Fund are generated through various taxes. This significant funding largely relies on economically sensitive sources, such as property taxes, sales taxes, and utility users' taxes. These key revenue streams are closely linked to the overall economic climate; therefore, if any of them fall short of projections or experience fluctuations, it could have serious implications for the funding of future programs and essential services. Thus, maintaining a steady flow from these sources is crucial for the City’s financial health and its ability to meet community needs.
Utility Users Tax (UUT)
The City imposes a utility users tax (UUT) on the consumption of various utility services, including electricity, gas, water, telephone, and cable. The City determines the tax rate. Currently, the UUT rate in Hercules stands at 8%, which plays a crucial role in funding essential City services and accounts for approximately 20% of the General Fund revenues.
As of December 31, 2024, the City has collected $2 million, representing 52% of the estimated revenue for the fiscal year. These funds are remitted to the City monthly. Given the collections achieved thus far, the estimated revenue from UUT is on track to meet projected targets.
Sales Tax
A tax is collected by the City for the sale of certain goods and services. This tax is the largest source of revenue for the General Fund, accounting for about 30% of its total revenues. It is remitted to the City by the State on a monthly basis.
As of December 31, 2024, the City had collected $3 million, which represents 50% of the estimated revenue for the fiscal year. Based on this collection, the revenue from sales tax is projected to meet its targets.
Sales tax revenues are concentrated by a few major operators and are primarily generated from business-to-business transactions. The top three producers of sales tax account for over 50% of the City’s total sales tax revenues. If any of these key revenue sources fall short of projections, it could impact funding for future programs and services.
Property Taxes
As of December 31, 2024, the City has successfully collected approximately $1 million, representing 59% of the projected revenue. It is important to highlight that property tax revenue is collected in two phases: 60% is received in December, while the remaining 40% is collected in April. Furthermore, the City's share of the base 1% property tax rate is relatively low compared to many other jurisdictions, comprising just over 5% of Hercules's total base property taxes.
Vehicle License Fee (VLF)
Cities and counties receive property tax revenues as a replacement for Vehicle License Fees (VLF) within the standard allocation of property taxes. In 2004, the Legislature permanently reduced the VLF rate from 2 percent to 0.65 percent. To mitigate the revenue loss experienced by Cities and Counties, this change was accompanied by an equivalent increase in property tax allocations on a dollar-for-dollar basis. Each agency's property tax allocation, substituting for the VLF, is reviewed and adjusted annually in accordance with the growth in gross assessed valuation for that specific City or County.
The City receives this allocation from the County biannually in February and June. According to estimates provided by the County, the City is expected to receive approximately $2.6 million by the conclusion of this fiscal year.
Other taxes and revenues
The summary indicates that several revenue streams are currently collecting less than 50% of expected amounts, mainly due to the timing of receipts. However, a review of month-to-month trends from the previous year shows that overall revenues for the General Fund are on track with our fiscal targets for this year. This outcome suggests a positive trajectory and reflects a stable financial outlook despite some areas underperforming at the midpoint of the year.
General Fund Expenditures
The attached summary provides a year-to-date status of General Fund expenditures. As of the midpoint of the fiscal year, expenditures from the General Fund constitute approximately 57% of the total annual budget, indicating careful alignment with expected spending patterns.
It is important to note that insurance premium payments are due at the beginning of the fiscal year. This timing accounts for the higher-than-50% expenditure in this category as of December 31, 2024.
The mid-year budget review serves as an opportunity to propose necessary adjustments to the adopted budget and to make any required modifications. Typically, new initiatives or programs are not introduced during this review unless essential, thereby ensuring prudent use of resources.
The City’s financial position remains consistent due to effective fiscal management and a commitment to sound financial practices. After a thorough analysis of the variances between budgeted amounts and actual expenditures through December 31, no adjustments to the General Fund budget are recommended at this time.
General Fund Operating Reserve
Fiscal stability is a fundamental aspect of effective management. Responsible financial stewardship requires the maintenance of adequate reserve funds to address both anticipated and unforeseen challenges. To this end, the City has established a policy that mandates operating reserves at 25% of total operating expenditure. Accordingly, the General Fund is structured to meet this standard, ensuring that the operating reserve consistently constitutes 25% of the total operating budget.
General Fund Available Cash Balance at the conclusion of FY 23-24 At the end of June 30, 2024, the General Fund concluded the fiscal year with a cash balance of $30 million. After accounting for current liabilities, set asides, and reserves, the available cash balance stands at $1.8 million. This available balance can be utilized to cover potential future cost increases driven by inflation, cost of living adjustments, debt obligations and rising expenses for goods, services, and utilities. This strategic allocation of funds will help ensure financial stability and responsiveness to the changing economic landscape.
Non-General Fund Programs
Funding for essential initiatives, such as transportation improvements, the gas tax, and the Measure C "Street Fund," is secured through various grants and dedicated funding streams. Each funding source comes with specific restrictions that require careful tracking of revenues and expenditures, ensuring they are kept separate from the City's main operating fund, the General Fund. Please refer to Attachment 4 for a summary of non-general fund financials as of December 31, 2024.
Currently, there are funds and appropriations available to support the continued progress of ongoing projects and programs. However, it is important to note that two specific areas—the Victoria by the Bay Lighting and Landscaping Assessment District (LLAD) and the Stormwater fund—are projected to end the fiscal year with significant deficits. As of December 31, 2024, the reported accumulated deficits are $533,294 for Victoria by the Bay LLAD and $105,144 for the Stormwater fund.
On a more positive note, the activities within the Stormwater fund are showing a favorable trend and are expected to self-correct as the year progresses. Additionally, City staff are actively working on developing a comprehensive strategy to address the deficit in the Victoria by the Bay LLAD, in accordance with the Council's direction.
Next Step
Staff are preparing the FY 25-26 budget with a series of recommended budget workshops. The table below outlines key Council tentative meeting dates on which budget information will be provided.
Budget Award
The City of Hercules is proud to announce that its Fiscal Year 2023-2024 Budget has received the Distinguished Budget Presentation Award from the Government Finance Officers Association (GFOA) for the fifth consecutive year. This prestigious award signifies the highest level of recognition in government budgeting and underscores the City’s commitment to transparency, accountability, and excellence in financial planning. This achievement is a testament to the hard work and dedication of the entire organization. Additionally, the City’s staff have prepared and submitted the Fiscal Year 2024-2025 budget documents for consideration, aiming to uphold this tradition of recognition and excellence.
FISCAL IMPACT
After thoroughly examining the projected financial figures and the actual revenues and expenditures recorded through December 31, 2024, staff has determined that there is no need to adjust the current budget.
ATTACHMENTS
General Fund Summary
Non-General Fund Summary
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